CHAPTER 12

MULTIPLE CHOICE

12-1: d. This is recorded when the working fund is replenished.

12-2: c.Sales P 700,000Cost of goods sold:

Purchases P800,000Merchandise inventory, end 180,000 620,000

Gross profit P 80,000Expenses 198,000Net income (loss) P (118,000)

12-3: bSales P 70,000Cost of goods sold (P70,000 / 140%) 50,000Gross profit P 20,000Less: Samples (P8,000 – P6,000) P 2,000 Expenses 2,800 4,800Net income P 15,200

12-4: aSales P 100,000Cost of goods sold 72,000Gross profit P 28,000Expenses (P9,000 + P4,500) 13,500Net income P 14,500

12-5: a

12-6: a

12-7: c

12-8 aShipment of merchandise to home office P 80,000Equipment sent to home office 50,000Expenses assigned to branch by the home office 8,000Cash remittance to home office (40,000)Home office account balance P 98,000

12-9: d

12-10: aHome Office account balance before closing, Dec. 31, 2008 P 35,000Net income (loss)

Sales P147,000Cost of cost goods sold

Shipment to branch P135,000Inventory, 12/31 18,500 116,500

Gross profit P 30,500Expenses 13,500 17,000

Home Office account balance (Investment in Branch account balance) P 52,000

Shipment to Branch account has no beginning balance, because this was closed at the endof 2008.

12-11: b

Jan. 1, 2008 Jan. 1, 2009Petty cash fund P 6,000 P 6,000Accounts receivable 86,000 98,000Inventory 74,000 82,000

1

Home Office account balance P166,000 P186,000

12-12: d (Branch Books) (Home Office Books) Home Office Investment in Branch

Unadjusted balances, Dec. 31 P 21,320 P 38,600Remittance in transit (10,400)

Shipment in transit 7,280Cash collections of home office ( 400)Adjusted balances, Dec. 31 P 28,200 P 28,200

12-13: aUnadjusted balance – Investment in Branch account, 12/31 P430,000Charge for advances by president (5,500)Erroneous entry for merchandise allowance ( 600)Share in advertising expense (9,000)Unadjusted balance – Home Office account, 12/31 P414 , 900

12-14: a (Branch Books) (Home Office Books)

Home Office Investment in BranchUnadjusted balances, 12/31 P 97,350 P 84,000Shipment in transit 6,150Collection of HO A/R by branch 25,000Error in recording of branch profit 900Returns of merchandise in transit ( 6,400)Adjusted balances, 12/31 P103,500 P103,500

12-15: a (Branch Books) (Home Office Books) Home Office Investment in Branch

Unadjusted balances P25,550 P27,350Error in recording shipment to Cavity branch (12,000)Error in recording shipment to Tagaytay branch 15,000Branch AR collected by home office (3,000)Merchandise returns in transit ( 1,200)Error in recording branch profit ( 3,600)Adjusted balances P23,750 P23,750

12-16: cUnadjusted balance- Investment in Branch account P 85,000Remittance in transit (10,000)Shipment in transit (20,000)Expenses allocated ( 5,000)Error in recording remittance 3,000Error in recording shipments ( 9,000)Unadjusted balance – Home Office account P 44,000

( Branch Books) (HomeOffice Books) Home Office Investment in Branch

Unadjusted balances, P 44,000 P 85,000Remittance in transit (10,000)Shipment in transit 20,000Expenses allocated 5,000 Unrecorded HO collection of

AR (3,000)Error in recording shipments 9,000Adjusted balances P 75,000 P 75,000

12-17 a (Branch Books) (Home Office Books) Home Office Investment in Branch

Unadjusted balances P 440,000 P 496,000Branch AR collected by Home Office ( 8,000)Shipments in transit 32,000Acquisition of furniture (12,000)Merchandise returns (15,000)

2

Cash remittance in transit ( 5,000)Adjusted balances P 464,000 P 464,000

PROBLEMS

Problem 12-1

Home Office Books Branch Books

1. Investment in branch 30,000 Cash 30,000 Cash 30,000 Home office 30,000

2. Investment in branch 75,000 Shipment from home office 75,000 Shipment to branch 75,000 Home office 75,000

3. No entry Purchases 10,000 Accounts payable 10,000

4. No entry Accounts receivable 125,000 Sales 125,000

5. Shipment to branch 2,000 Home office 2,000 Investment in branch 2,000 Shipment from home office 2,000

6. No entry Cash 105,000 Accounts receivable 105,000

7. No entry Accounts payable 7,000 Cash 7,000

8. No entry Salaries 10,000Rent 5,000Utilities 2,000Other operating expenses 12,000 Cash 29,500

9. Investment in branch 7,500 Depreciation 1,500 Accumulated dep’n 7,500 Rent 5,000

Insurance 1,000 Home office 7,500

10. Cash 65,000 Home office 65,000 Investment in branch 65,000 Cash 65,000

11. Cash 3,000 Home office 3,000 Investment in branch 3,000 Accounts receivable 3,000

12. Investment in branch 10,000 Sales 125,000 Branch income 10,000 Inventory, end 5,000

Shipment from HO 73,000 Purchases 10,000 Salaries 10,000 Rent 10,000 Utilities 2,000 Other operating expenses 12,500 Home office 10,000

Problem 12-2

a. Books of the Branch

1. Cash 200,000Merchandise inventory 350,000

Home office 550,000

3

2. Merchandise inventory 400,000Accounts payable 400,000

3. Accounts receivable 650,000Sales 650,000

Cost of goods sold 425,000Merchandise inventory 425,000

Cash 600,000Accounts receivable 600,000

4. Advertising expense 40,000Sales commission 65,000Other expense 45,000

Cash 150,000

5. Accounts payable 370,000Home office 120,000

Cash 490,000

b. Manila Sales – Naga BranchIncome StatementYear Ended December 31, 2008

Sales P650,000Cost of goods sold 425,000Gross profit 225,000Expenses:

Advertising expense P40,000Sales commissions 65,000Other expenses 45,000 150,000

Net income P 75,000

c. Manila Sales – Naga BranchBalance SheetDecember 31, 2008

Cash P160,000 Accounts payable P 30,000Accounts receivable 50,000 Home office 505,000Merchandise inventory 325,000Total assets P535,000 Total liabilities and capital P535,000

Problem 12-3

Home Office Books Branch Books(1) Adjusting Entries

a. Investment in branch 63,750 Cash 63,750Cash 63,750 Home office 63,750

b. Investment in branch 75,300 Shipment from HO 75,300Shipment to branch 73,300 Home office 75,300

c. Accounts receivable 157,500 Accounts receivable 99,000Sales 157,500 Sales 99,000

d. Purchases 183,750 Purchases 33,750Accounts payable 183,750 Accounts payable 33,750

e. Cash 170,400 Cash 80,100Accounts receivable 170,400 Accounts receivable 80,100

Home office 80,100Cash 80,100

4

f. Accounts payable 186,000 Accounts payable 18,375Cash 186,000 Cash 18,375

g. Expenses 39,900 -Cash 39,900

Furniture & fixtures – branch 12,000 Home office 12,000Investment in branch 12,000 Cash 12,000

h. Cash 80,100 -Investment in branch 80,100

Expenses 27,000Cash 27,000

i. Retained earnings 15,000Cash 15.000

(2) Adjusting Entries

j. Expenses 1,750Acc. Depreciation 1,750

k. Investment in branch 975 Expenses 975Acc. Dep’n – Br. F & F 975 Home office 975

l. Prepaid expenses 375 Prepaid expenses 1,125Expenses 375 Expenses 1,125

m. Expenses 150 Expenses 450Accrued expenses 150 Accrued expenses 450

Closing EntriesHome Office Books Branch Books

n. Sales 157,500 Sales 99,000 Shipments to branch 75,300 Merchandise inv., 12/31 35,250 Merchandise inv., 12/31 72,750 Income summary 2,100

Merchandise inv. 1/1 60,180 Purchases 33,750Purchases 183,750 Shipment from HO 75,300 Expenses 41,445 Expenses 27,300Income summary 20,175

o. Branch loss 2,100 Home office 2,100Investment in branch 2,100 Income summary 2,100

p. Income summary 2,100Branch loss 2,100

q. Income summary 18,075Retained earnings 18,075

3. Individual Financial Statements

Cebu Company – Home OfficeIncome StatementYear Ended December 31, 2008

Sales P157,500Cost of sales

Merchandise inventory, 1/1 P 60,180Purchases 183,750Goods available for sale P243,930Shipment to branch ( 75,300)

5

Goods available for own sale P168,630Merchandise inventory, 12/31 ( 72,750) 95,880

Gross profit P 61,620Expenses 41,445Net operating income P 20,175Branch income (loss) ( 2,100)Net income P 18,075

Cebu Company – BranchIncome StatementYear Ended December 31, 2008

Sales P 99,000Cost of sales

Purchases P 33,750Shipments from home office 75,300Goods available for sale P109,050Merchandise inventory, 12/31 35,250 73,800

Gross profit P 25,200Expenses 27,300Net income (loss) P( 2,100)

Cebu Company – Home OfficeBalance SheetDecember 31, 2008

AssetsCash P 34,800Accounts receivable 28,575Merchandise inventory, 12/31 72,750Prepaid expenses 3,075Furniture and fixtures P30,000Less: Accumulated depreciation 8,370 21,630Branch furniture and fixtures P12,000Less: Accumulated depreciation 975 11,025Investment in branch 45,825Total assets P217,680

Liabilities and Stockholders’ EquityLiabilitiesAccrued expenses P 2,025Accounts payable 31,950Total liabilities P 33,975Stockholders’ EquityCapital stock P 75,000Retained earnings 108,705 183,705Total liabilities and stockholders’ equity P217,680

Cebu Company – BranchBalance SheetDecember 31, 2008

AssetsCash P 6,375Accounts receivable 18,000Merchandise inventory, 12/31 35,250Prepaid expenses 1,125Total assets P61,650

Liabilities and CapitalAccounts payable P 450Home office 15,375Total liabilities and capital P61,650

4. Combined Financial Statements

6

Cebu CompanyCombined Income StatementYear Ended December 31, 2008

Sales P256,500Cost of sales

Merchandise inventory, 1/1 P 60,180Purchases 217,500Goods available for sale P277,680Merchandise inventory, 12/31 108,000 169,680

Gross profit P 86,820Expenses 68,745Combined net income P 18,075

Cebu CompanyBalance SheetDecember 31, 2008

AssetsCash P 41,175Accounts receivable 47,475Merchandise inventory 108,000Prepaid expenses 4,200Furniture and fixtures P42,000Less: accumulated depreciation 9,345 32,655Total assets P233,505

Liabilities and Stockholders’ EquityAccrued expenses P 2,475Accounts payable 47,325Capital stock 75,000Retained earnings 108,705Total liabilities and stockholders’ equity P233,505

Problem 12-4

Branch Books Home Office Books (a) and (b) Closing Entries

Sales 145,000 Sales 560,000Inventory, 12/31 60,000 Inventory, 12/31 90,000

Inventory, 1/1 18,000 Shipments to branch 145,000Shipments from HO 145,000 Inventory, 1/1 45,000Expenses 20,000 Purchases 540,000Income summary 23,000 Expenses 90,000

Income summary 120,000

Income summary 22,000 Investment in branch 22,000Home office 22,000 Branch income 22,000

Branch income 22,000Income summary 22,000

Income summary 142,000Retained earnings 142,000

© CG CorporationCombined Statement Working PaperYear Ended December 31, 2008

EliminationsIncome

Home Statement BalanceOffice Branch Debit Credit Dr (Cr) Sheet

DebitsCash 36,000 7,000 43,000

7

Accounts receivable 54,000 29,000 83,000Inventory, 1/1 45,000 18,000 63,000Investment in branch 70,000 (2) 70,000Equipment (net) 95,000 95,000Purchases 540,000 540,000Shipments from HO 145,000 (1)145,000Expenses 90,000 20,000 110,000Total debits 930,000 219,000

Inventory 12/31 (BS) 150,000Total assets 371,000

CreditsAccounts payable 27,000 4,000 31,000Home Office 70,000 (2) 70,000Capital stock 54,000 54,000Retained earnings, 1/1 144,000 144,000Sales 560,000 145,000 (705,000)Shipments to branch 145,000 (1)145,000Total credits 930,000 219,000

Inventory, 12/31 (IS) 90,000 60,000 (150,000) 215,000 215,000

Net income 142,000 142,000

Total liabilities & equity 371,000

1. To eliminate shipments to branch and shipments from HO2. To eliminate reciprocal accounts.

Problem 12-5

(1) Oro CompanyWorking Paper for Combined StatementsYear Ended December 31, 2008

Income Home Eliminations Statements Balance

Office Branch Debit Credit Dr (CR) SheetDebitsCash 63,000 21,900 84,900Notes receivable 10,500 10,500Accounts receivable (net) 120,600 55,950 176,550Inventories 143,700 36,300 (2)135,000 45,000Furniture & fixtures (net) 72,150 72,150Investment in Branch 124,050 (1)124,050Cost of goods sold 300,750 128,700 (2)135,000 564,050Operating expenses 104,250 32,850 137,100

Totals 939,000 275,700 389,100

CreditsAccounts payable 61,500 61,500Common stock 300,000 300,000Retained earnings 37,500 37,500Home Office 124,050 (1)124,050Sales 540,000 151,650 (691,650)

Totals 939,000 275,700 289,050 289,050

Net Income 9,900 (9,900)389,100

(1) To eliminate shipments(2) To eliminate reciprocal accounts.

8

Closing Entries

2. Branch Books 3. Home Office Books

Sales 151,650Income Summary 9,900

Cost of goods sold 128,700Operating expenses 32,850

Home Office 9,900 Branch loss 9,900Income summary 9,900 Investment in Branch 9,900

Income summary 9,900Branch loss 9,900

Problem 12-6

a. Investment in Branch account (Home Office Books)Unadjusted balance P138,200Error in recording cash transfer, April 8 ( 45,000)Cash transfer recorded in subsequent year, Dec. 31 ( 15,000)Error in recording allocated depreciation, Dec. 31 6,000Adjusted balance P 84,200

Home Office account (Branch Books)Unadjusted balance P(93,000)Error in recording salary allocation, April 5 ( 200)Error in recording inventory transfer, July 6 12,000Unrecorded allocated depreciation, Dec. 31 ( 3,000)Adjusted balance P(84,200)

b. Adjusting Entries

Home Office Books Branch BooksOther income 45,000 Salary expense 200 Investment in branch – Home office 200 Rizal 45,000

Cash 15,000 Home office 12,000 Investment in branch- Shipments from HO 12,000 Rizal 15,000

Investment in branch 6,000 Depreciation expense 3,000 Accumulated dep’n 6,000 Home office 3,000

Problem 12-7

a. Investment in Branch account (Home Office Books)Unadjusted balance, Dec. 31 P166,400Cash remittance in transit (30,000)Merchandise returns in transit (12,000)Adjusted balance, Dec. 31 P124,400

Home Office account (Branch Books)Unadjusted balance, Dec. 31 P103,200Error in recording expense 7,200Shipment in transit 24,000Supplies charged to branch 8,000Collection of branch receivable ( 18,000)Adjusted balance, Dec. 31 P124,400

b. Adjusting EntriesHome Office Books Branch Books

9

Cash 30,000 Shipment from HO 24,000Shipment to branch 12,000 Supplies 8,000

Investment in branch 42,000 Expenses 7,200Accounts receivable 18,000Home office 21,200

Problem 12-8

(1) Reconciliation Statement(Home Office Books) (Branch Books)

Investment in Branch Home Office

Unadjusted balances, 1/31 P59,720 P 43,268Advertising charged to branch 480Home office AR collected by branch 600Shipment in transit ( 180)Error in recording receipt of merchandise ( 432)Understatement of depreciation (12,800)Remittance in transit, 1/31 P47,088 P 47,088

(2) Adjusting Entries

Home Office Books Branch BooksRetained earnings 432 Advertising 480Cash 12,800 Shipments from HO 3,520

Accounts receivable 600 Shipment from HO 180Investment in branch 12,632 Home office 3,820

Problem 12-9

(1) Branch Books

Adjusting Entries

Shipment from home office 57,600Operating expenses (P4,200 + P3,900) 8,100

Home office 65,700

Closing Entries

Sales 778,200Inventory, 12/31 (P64,580 + P57,600) 122,180

Inventory, 1/1 47,800Shipment from HO (P623,200 + P57,600) 680,800Operating expenses 54,790Income summary 116,990

Income summary 116,990Home office 116,900

(2) Home Office Books

Accounts receivable 470Investment in branch 330

Cash (P20,000 + P19,200) 800

Investment in branch 116,990Branch income 116,900

(3) Reconciliation Statement

Home Office Books Branch Books (Investment in Branch) (Home Office)

Unadjusted balances, 12/31 P 206,344 P 140,974

10

Error in recording remittance to branch 20,000 Shipment in transit 57,600Expenses charged to branch 8,100Branch net income 116,990 116,990Freight erroneously charged to branch ( 470)Cash remittance in transit to HO ( 19,200)Adjusted balances, 12/31 P 323,664 P 323,664

Problem 12-1111

a. P 2,000

Sales (P 27,000 + P 33,000 + P 26,000) …………………. P 86,000Cost of Goods Sold (P 36,000 + P 18,000) ………………. (54,000)Gross Profit ……………………………………………… P 32,000Rent Expense …………………………………………….. P 4,000Property Tax Expense …………………………………… 5,000 Depreciation Expense …………………………………… 4,000Miscellaneous Expense …………………………………. 11,000General Corporate Expense ……………………………… 6,000 (30,000)Net Income ……………………………………………… P 2,000

b. P 180,000

Initial Transfers …………………………………………. P 188,000June Inventory Shipment ……………………………….. 18,000Property Tax Payment ………………………………….. 5,000September Inventory Shipment ………………………… 26,000Expense Allocation …………………………………….. 6,000Cash Transfer …………………………………………... (63,000)Balance in Home Office/Branch Accounts (correct) ….. P 180,000

c. Journal Entries – Tarlac Branch

1/10/08 Cash …………………………………. 30,000 Inventory ……………………………. 36,000 Equipment …………………………… 122,000

Home Office …………………… 188,0001/20/08 Rent Expense ………………………… 4,000

Cash ……………………………. 4,0002/1/08 Cash ………………………………….. 27,000

Sales …………………………… 27,000 Cost of Goods Sold ………………….. 18,000

Inventory ………………………. 18,0004/1/08 Cash …………………………………. 33,000

Sales …………………………... 33,000 Cost of Goods Sold …………………. 18,000

Inventory ……………………… 18,0005/1/08 Miscellaneous Expenses ……………. 7,000

Cash …………………………... 7,0006/5/08 Inventory ……………………………. 18,000

Home office …………………... 18,0007/6/08 Property Tax Expense ………………. 5,000

Home Office ………………….. 5,0009/9/08 Inventory …………………………… 26,000

Home Office …………………. 26,00010/1/08 Cash ………………………………… 26,000

Sales …………………………. 26,000 Cost of Goods Sold ……………….. 18,000

Inventory …………………….. 18,00011/1/08 Miscellaneous Expenses …………... 4,000

Cash …………………………. 4,00012/22/08 Home Office ……………………… 63,000

Cash …………………………. 63,000

11

12/31/08 Depreciation Expense ……………. 4,000Accumulated depreciation ….. 4,000

12/31/08 General Corporate Expenses ……… 6,000Home Office ………………….. 6,000

d. TARLAC BRANCH Balance SheetDecember 31, 2008

AssetsCash ……………………………………………. P 38,000Inventory ………………………………………. 26,000Equipment ……………………………………... P 122,000Accumulated Depreciation ……………………. (4,000) 118,000

Total Assets …………………………… P 182,000

EquityHome Office* ………………………………….. P 182,000

*Home office balance is P 180,000 as computed in Part b plus the P 2,000 net income for the period.

12

CHAPTER 13

MULTIPLE CHOICE13-1: c

13-2: aGoods available for sale:

At billed price (P30,000 + P180,000) P210,000At cost (P210,000 / 120%) 175,000

Balance of Allowance for Overvaluation account before adjustment P 35,000

13-3: cInter-company inventory profit (IIP) before closing P 66,000Less: IIP from shipment from home office

Billed price P300,000Cost (P300,000 / 120%) 250,000 50,000

IIP from beginning inventory at billed price P 16,000Divided by ÷ 20%Cost of branch’s beginning inventory P 80,000

13-4: aBilled Price % Cost Overvaluation

Beginning inventory from HO P15,000 150% P10,000 P 5,000Shipments 110,000 150% 73,333 36,667Balance before adjustment P41.667Ending inventory from HO 5,000 150% 3,333 1,667Required adjustments P40,000

13-5: bShipment to branch, at billed price P375,000Shipping cost 2,000Total cost P377,000Sold (50%) 188,500Inventory P188,500

13-6: aShipment to branch, at cost P312,500Shipping cost 2,000Billed price P314,500Sold (50%) 157,250Inventory, at billed price P157,250

13-7: cHome office account balance after closing branch profit P765,000Less: branch profit 130,000Investment in branch account balance before closing branch profit P635,000

13-8: dBranch ending inventory, at billed price P 50,000Acquired from home office, at billed price:

Cost (P6,000 / 20%) P30,000Mark-up 6,000 36,000

Purchased from outsiders P 14,000

13-9: bCost of goods sold – Home office P590,000Cost of goods sold – Branch:

Billed price P300,000Less: overvaluation (P110,000 – P90,000) 20,000 280,000

Combined cost of goods sold P870,000

13-10: c

13-11: dOvervaluation of branch ending inventory acquired from HO:

13

Billed price P 28,600Cost (P28,600 / 130%) 22,000

Adjusted balance of allowance for overvaluation account P 6,600

13-12: bShipment from home office P 90,000Expenses 17,000Cash remittance to home office (70,000)Home Office account balance before closing P 37,000

13-13: bShipment to branch, at cost P 72,000Ending inventory, at cost (P70,000 / 30%) ( 21,600)Cost of goods sold P 50,400Freight (P6,000 x P50,400/P72,000) 4,200Total P 54,600

13-14: b (20% of P30,000)

13-15: b (P151,200 / 140%)

13-16: cSales P270,000Cost of goods sold

Shipments from home office (P151,200/140%) P108,000Inventory, 1/1 (P28,350 / 140%) 20,250Inventory, 12/31 (P25,200 / 140%) ( 18,000) 110,250

Gross profit P159,750Expenses 90,000Branch profit as far as the home office is concerned P 69,750

13-17: c

Unsold merchandise P 60,000Less: Merchandise acquired from home office, at billed price 45,000Merchandise acquired from outsiders P 15,000Merchandise acquired from home, at cost (P7,500 / 20%) 37,500Branch inventory at cost, 12/31 P 52,500

13-18: a

Branch inventory, 1/1 P 54,600Acquired from home office – at billed price: Overvaluation [P99,900 – (P390,000 – P300,000)] P 9,900 Cost (P9,900 / 30%) 33,000 42,900Purchases from outsiders P 11,700

13-19: c

Acquired from home office [(P60,000 x 80%) ÷ 120%] P 40,000Acquired from outsiders (P60,000 x 20%) 12,000Branch inventory, 12/31 – at cost P 52,000

13-20: bSales (P148,000 + P144,000) P192,000Cost of sales – at cost to home office:

Shipment from home office (P108,000 / 120%) P90,000Purchases 52,000Inventory, 12/31 (no. 19 above) (52,000) 90,000

Gross profit P102,000Expenses (P76,000 + P24,000) 100,000Branch net income (actual) P 2,000

13-21: bAllowance for overvaluation account balance P 57,500Overvaluation on the shipment (P200,000 x 25%) 50,000

14

Overvaluation on the branch beginning inventory P 7,500Cost of branch beginning inventory (P7,500 / 25%) 30,000Branch beginning inventory – at billed price P 37,500

13-22: bSales P400,000Cost of goods sold – cost to home office

Beginning inventory P 30,000Shipment from home office 200,000Ending inventory (P40,000 / 125%) ( 32,000) 198,000

Gross profit P202,000Expenses 100,000Branch net income as far as the home office is concerned P102,000

13-23: bBranch inventory, 1/1 P 20,000Acquired from home- at billed price

Overvaluation [P24,000 – (P80,000 – P60,000)] P 4,000At cost [(P4,000 ÷ (P20,000 / P60,000)] 12,000 16,000

Acquired from outsiders P 4,000

13-24: aSales P200,000Cost of sales (at cost to home office)

Inventory, 1/1 (P12,000 + P4,000) P16,000Shipments from home office 60,000Purchases 30,000Inventory, 12/31 [(P20,000÷133 1/3%) +P6,000] (21,000) 85,000

Gross profit P115,000Expenses 60,000Branch net income (actual) P 55,000

13-25: aInventory, 1/1 P 75,000Shipments from home office 360,000Overvaluation ( 72,500)Cost of goods available for sale P362,500

Percentage of mark-up (P72,500 / P362,500) 20%

13-26: b

13-27: aBilling percentage above cost (P20,000 / P80,000) 25%

Branch inventory, 6/1 – at cost (P12,000 / 125%) P 9,600Home office inventory, 6/1 40,000Purchases 160,000Goods available for sale P209,600Inventory, 6/30 – at cost:

Branch (P10,000 / 125%) P 8,000Home office 60,000 68,000

Combined cost of goods sold P141,60

13-28: dSales P450,000Cost of goods sold 141,600Gross profit P308,400Expenses 150,000Combined net income P158,400

13-29: dSales P687,500Cost of goods sold: Inventory, 1/1: Home office P57,500

Branch (P22,250 / 125%) 17,800 P 75,300

15

Purchases 410,000 Goods available for sale P 485,300 Inventory, 12/31: Home office P71,250

Branch (P29,250/120%) 24,375 95,625 389,675Gross profit P297,825Expenses 241,750Combined net income P 56,075

13-30: aSales P669,000Cost of goods sold: Inventory, 1/1:

Home office P160,000Branch [P15,000 + (P49,000 / 122.5%)] 55,000 P215,000

Purchases 460,000 Goods available for sale P675,000

Inventory, 12/31: Home office P110,000 Branch [P11,000 + (P52,000 / 133 1/3%)] 50,000 160,000 515,000

Gross profit P154,000Expenses 145,000Combined net income P 9,000

13-31: aThe entries made by the branch to record the interbranch transfer of merchandise are:Books of Branch 1:

Home office 19,500Freight in 3,500Shipment from home office 16,000

Books of Branch 3:Shipment from home office 16,000Freight in 4,000

Cash 2,500Home office 17,500

Therefore the home office would make the following entry:Investment in Branch 3 17,500Excess freight 2,000

Investment in Branch 1 19,500

13-32: a(Home office books) (Branch books)Investment in branch Home office

Unadjusted balances 77,000 61,000Error in recording shipment (10,000)Error in recording expense 5,000Unrecorded cash remittance (31,000) -Adjusted balances 46,000 46,000

13-33: c

13-34: aHome office books Cebu branch books Bacolod branch booksInv in Bacolod 25,000 Home office 25,000 Cash 25,000

Inv in Ceb 25,000 Cash 25,000 Home office 25,000

Inv in Bacolod 34,300 Home office 34,300 Cash 34,300Inv in Cebu 34,300 SD 700 Home office 34,300

AR 35,000

Inv in Bacolod 62,500 Home office 212,500 Expenses 62,500Expenses 150,000 Expenses 37,500 Home office 62,500

Inv in Cebu 212,500 Cash 250,000

16

Inv in Cebu 253,000 Freight in 3,000S to branch 200,000 S from HO 250,000Allowance 50,000 Home office 253,000 Cash 3,000

Inv in Bacolod 252,700 Home office 253,000Excess freight 300 S from H 253,000

Inv in Cebu 253,000

(Home office books) (Bacolod branch books)Investment in Cebu Branch Home Office

25,000 25,000 34,300 34,300 212,500 62,500 253,000 252,700

253,000 524,800 374,500271,800

PROBLEMSProblem 13-1

(a) Journal Entries

Home Office Books Branch Books

(1) Investment in branch 18,000 Equipment 18,000Cash 18,000 Home office 18,000

(2) Investment in branch 3,000 Rent expense 3,000Cash 3,000 Home office 3,000

(3) Investment in branch 100,000 Shipment from HO 100,000Shipment to branch 80,000 Home office 100,000Allowance for over-Valuation 20,000

(4) No entry Operating expenses 11,000Cash 11,000

Cash 105,000Sales 105,000

(5) Cash 60,000 Home office 60,000Investment in branch 60,000 Cash 60,000

(b) Working Paper Elimination Entries(1) Home office 61,000

Investment in branch 61,000To eliminate reciprocal accounts computedas follows:

Equipment purchased P 18,000Rent paid 3,000Inventory shipped 100,000Cash transfer ( 60,000)Balance P 61,000

(2) Shipment to branch 80,000Allowance for overvaluation of branch inventory 20,000

Shipment from home office 100,000To eliminate inter-company shipments

(3) Inventory, 12/31 (Income statement) 5,000Inventory, 12/31 (Balance Sheet) 5,000

To reduce inventory, 12/31 to cost.

(c) Closing Entries – Branch Books

17

Sales 105,000Inventory, 12/31 25,000

Rent expense 3,000Shipment from home office 100,000Operating expenses 11,000Income summary 16,000

Income summary 16,000Home office 16,000

Problem 13-2

a. Branch Books- Equipment 50,000

Shipment from home office 60,000Cash 10,000

Home office 120,000

- Purchases 30,000Cash or accounts payable 30,000

- Prepaid rent 10,000Home office 10,000

- Cash 40,000Accounts receivable 50,000

Sales 90,000

- Advertising expense 8,000Salary expense 5,000

Cash 13,000

- Home office 10,000Cash 10,000

- Home office 3,000Accounts receivable 3,000

- Rent expense 5,000Prepaid rent 5,000

Home Office Books- Investment in branch 120,000

Equipment 50,000Shipment to branch 40,000Allowance for overvaluation of branch inventory 20,000Cash 10,000

To record assets sent to branch

- Investment in branch 10,000Cash 10,000

To record rent expense of the branch

- Cash 10,000Investment in branch 10,000

To record cash remittance from branch

- Cash 3,000Investment in branch 3,000

To record collection of branch receivable.

b. Income Statement

18

Sales P90,000Cost of goods sold

Shipment from home office – at cost P40,000Purchases 30,000Goods available for sale 70,000Ending inventory:

From home office (1/3) P13,333From outsiders (1/4) 7,500 (20,833) 49,167

Gross profit P40,833Expenses:

Advertising expense P 8,000Salary expense 5,000Rent expense 5,000 18,000

Net income P22,833

Problem 13-3

a. Investment in Branch account – beginning balance P 86,000Cash transfer ( 32,000)Inventory transfer 34,500Rent allocated 1,000Expenses allocated 3,000Inventory transfer 46,000Transportation allocated 3,000Unadjusted balance – Investment in Branch account P141,500

b. Home Office account – beginning balance P 54,000Inventory transfer 34,500Rent allocated 1,000Expenses allocated 3,000Inventory transfer (error made) 64,000Cash transfer ( 74,000)Home Office account – unadjusted balance P 82,500

c. Reconciliation StatementInvestment in Branch Home Office

Unadjusted balances, 1/31 P141,500 P 82,500Unrecorded cash transfer ( 74,000)Error in recording transfer (overstated) 18,000Expense allocation not recorded ( 3,000)Adjusted balances, 1/31 P 67,500 P 67,500

Problem 13-4

a. Books of Branch XShipment from home office 5,000Freight-in 300

Home office 5,300

Home office 5,800Shipment from office 5,800

b. Books of Branch YShipment from home office 5,000Freight-in 600

Home office 5,600

c. Books of the Home Office\Investment in branch – X 5,300

Shipment to branch – X 5,000Cash 300

Investment in branch – Y 5,000Inter-branch freight expense 600

Investment in branch – X 5,600

19

Shipment to branch – X 5,000Shipment to branch – Y 5,000

Problem 13-5

Malakas CompanyCombination WorksheetYear Ended December 31, 2008

Adjustments and Income Retained Eliminations Statement Earnings Balance

Malakas Davao Debit Credit Dr (Cr) Dr (Cr) SheetDebitsCash 25,000 18,000 43,000Accounts receivable 108,000 25,000 133,000Inventory, 12/31Investment in branch

209,000207,000

42,000-

(4) 14,000 (5) 16,000(7)207,000

249,000

Land, bldg, and equipment 340,000 112,000 452,000Shipment from office - 96,000 (3) 14,000 (6)110,000Purchases 348,000 - 348,000Depreciation expense 25,000 8,000 33,000Advertising expense 36,000 15,000 (1) 9,000 60,000Rent expense 12,000 5,000 (1) 6,000 23,000Miscellaneous expense 40,000 20,000 (1) 2,000 62,000Inventory, 1/1 175,000 35,000 (2) 10,000 200,000Total debits 1,525,000 376,000 877,000

CreditsAccumulated depreciation 80,000 16,000 96,000Accounts payable 37,000 15,000 52,000Notes payable 220,000 - 220,000Home office - 176,000 (7)207,000 (1) 17,000 -

(3) 14,000Common stock 100,000 - 100,000Retained earnings, 1/1 240,000 - (2) 10,000 (230,000

)Sales 529,000 127,000 (655,000)Shipment to branch 110,000 - (6)110,000Inventory, 12/31 209,000 42,000 (5) 16,000 (4) 14,000 (249,000)

Combined net income (179,000) (179,000)

Combined retained earnings (409,000)

(409,000)

Totals 1,525,000 376,000 388,000 388,000 877,000

Adjustments and Elimination Entries(1) Advertising expense 9,000

Rent expense 6,000Miscellaneous expenses 2,000

Home office 17,000Unrecorded expenses allocated to the branch

(2) Retained earnings, 1/1 10,000Inventory, 1-1 10,000

To eliminate unrealized inventory profit of preceding year

(3) Shipment from home office 14,000Home office 14,000

Unrecorded shipments

(4) Inventory, 12/31 (debits) 14,000Inventory (credits) 14,000

20

Shipment not yet received by the branch

(5) Inventory, 12/31 (debits) 16,000Inventory (credits) 16,000

To reduce ending inventory to cost

(6) Shipment to branch 110,000Shipment from home office 110,000

To eliminate inter-company shipments

(7) Home office 207,000Investment in branch 207,000

To eliminate reciprocal accounts

Problem 13-6

a. Eliminating Entries(1) Home office 395,000

Investment in branch – Silver 395,000

(2) Home office 260,000Investment in branch – Opal 260,000

(3) Unrealized intra-company profit – Silver 20,000Unrealized intra-company profit – Opal 16,000

Inventory – from home office 36,000

(4) Inventory 90,000Inventory – from home office 90,000

(5) Unrealized intra-company profit – Silver 40,000Equipment 40,000

Ginto CompanyBalance Sheet Working PaperDecember 31, 2008

Home Silver Opal EliminationsOffice Branch Branch Debit Credit Combined

Cash 81,000 20,000 15,000 116,000Accounts receivable 100,000 40,000 25,000 165,000Inventory 260,000 50,000 44,000 (4) 90,000 444,000Inventory – from home office 70,000 56,000 ( 3) 36,000

(4) 90,000Land 70,000 30,000 20,000 120,000Buildings and equipment 700,000 350,000 200,000 (5) 40,000 1,210,000Investment in branch – Silver 395,000 (1)395,000Investment in branch – Opal 260,000 (2)260,000Total debits 1,866,000 560,000 360,000 2,055,000

Accumulated depreciation 280,000 120,000 80,000 480,000Accounts payable 110,000 45,000 20,000 175,000Bonds payable 400,000 400,000Common stock 300,000 300,000Retained earnings 700,000 700,000Home office - 395,000 260,000 (1)395,000

(2)260,000Unrealized intra-company profit Silver 60,000 (3) 20,000

(5) 40,000 Opal 16,000 (3) 16,000Total credits 1,866,000 560,000 360,000 821,000 821,000 2,055,000

b. Ginto CompanyCombined Balance SheetDecember 31, 2008

21

AssetsCash P 116,000Accounts receivable 165,000Inventory 444,000Land 120,000Buildings and equipment P1,210,000Less: Accumulated depreciation 480,000 730,000Total assets P1,575,000

Liabilities and Stockholders’ EquityLiabilitiesAccounts payable P 175,000Bonds payable 400,000Total liabilities P 575,000Stockholders’ EquityCommon stock P 300,000Retained earnings 700,000 1,000,000Total liabilities and stockholders’ equity P1,575,000

Problem 13-7

a. Books of Branch P

Shipment from home office 8,000Freight-in 50

Home office 8,050

Home office 8,120Shipment from home office 8,000Freight-in 50Cash 70

b. Books of Branch QShipment from home office 8,000Freight-in 80

Home office 8,080

c. Books of Home OfficeInvestment in branch – P 8,050

Shipment to branch – P 8,000Cash 50

Investment in branch – Q 8,080Inter-branch freight expense 40

Investment in branch – P 8,120

Shipment to branch - P 8,000Shipment to branch – Q 8,000

Problem 13-8

Debits:Cash = P36,000 (add the book values and include the P9,000 transfer in transit)Accounts receivable = P118,000 Inventory, 12/31 = P151,000 (branch balance would be P81,000 when the shipment in transit is included. This balance

must be adjusted to cost of P54,000 (P81,000 ÷ 150%) and then add to home office balance of P97,000.Investment in branch = 0 (eliminated)Land, buildings and equipment = P460,000Shipment from home office = 0 (eliminated)Purchases = P429,000Depreciation expense = P28,000 (add the two book values and the year-end allocation)Advertising expense = P58,000 (add the two book values and the year-end allocation)Rent expense = P30,000 (add the two book values and the year-end allocation)Miscellaneous expense = P100,000 (add the two book values and the year-end allocation)

22

Inventory, 1/1 = P145,000 (branch balance is adjusted to cost of P24,000 (P36,000 / 150%), and then added to home office balance.Total debits = P1,555,000 (add the above totals)

CreditsAccumulated depreciation = P108,000Accounts payable = P104,000Notes payable = P180,000Home office = 0 (eliminated)Common stock = P60,000 (home office balance)Retained earnings, 1/1 = P248,000 (home office balance after reduction of P12,000 unrealized profit in beginning inventory of branch.

Cost is P24,000 (P36,000 / 150%) which indicates the P12,000 unrealized.Sales = P704,000Shipment to branch = 0 (eliminated)Inventory, 12/31 = P151,000Total credits = P1,555,000 (add the above totals)

Reconciliation StatementInvestment in Branch account balance (Home office books) P177,000Unrecorded cash transfer ( 9,000)Adjusted balance P168,000

Home Office account balance (Branch books) P123,000Inventory transfer in transit 21,000Expense allocated not yet recorded 24,000Adjusted balance P168,000

Problem 13-9

Home Office Books Case A Case B Case C

(1) Investment in branch Shipment to branch Unrealized inventory profit

(2) Cash Investment in branchClosing entries:(3) Sales Inventory, 12/31 Shipment to branch Purchases Expenses Income summary(4) Investment in branch Branch income summary Branch income summary Investment in branch Unrealized inventory profit Branch income summary Income summary Income summary Retained earnings

60,000

61,200

130,000 8,000 60,000

13,000

43,800

60,000-

61,200

150,000 17,200 30,800

13,000

43,800

75,000

61,200

130,000 8,000 60,000

500

13,500

43,800

60,00015,000

61,200

150,000 17,200 30,800

500

500 13,000

43,800

90,000

61,200

130,000 8,000 60,000

14,000

27,000

43,800

60,00030,000

61,200

150,000 17,200 30,800

14,000

14,000 13,000

43,800

Ilocos Branch Books

Case A Case B Case C

(1) Shipment from home office Home office

(2) Accounts receivable Sales

60,000

81,000

60,000

81,000

75,000

81,000

75,000

81,000

90,000

81,000

90,000

81,000

23

(3) Cash Accounts receivable

(4) Expenses Cash

(5) Home office Cash

Closing entries

(6) Sales Inventory 12/31 Shipment from HO Expenses Income summary

(7) Income summary Home office

Home office Income summary

64,000

14,000

61,200

81,000 6,000

13,000

64,000

14,000

61,200

60,00014,00013,000

13,000

64,000

14,000

61,200

81,000 7,500

500

500

64,000

14,000

61,200

75,00014,000

500

64,000

14,000

61,200

81,000 9,000

14,000

14,000

64,000

14,000

61,200

90,00014,000

14,000

Working Paper for Combined Financial StatementsDecember 31, 2008

Eliminations Home Office Branch Debit Credit Combined

Income StatementSales 130,000 81,000 211,000Merchandise inventory, 12/31 8,000 9,000 (3) 3,000 14,000Shipment to branch 60,000 (2) 60,000 -Total credits 198,000 90,000 225,000

Shipment from home office 90,000 (2) 90,000 -Purchases 150,000 150,000Expenses 17,200 14,000 31,200Total debits 167,200 104,000 181,200Net income(loss) carried forward 30,800 (14,000) 43,800

Retained Earnings StatementNet income (loss) from above 30,800 (14,000) 43,800Retained earnings, 12/31 - Carried forward 30,800 (14,000) 43,800

Balance SheetCash (overdraft) 39,000 (11,200) 27,800Accounts receivable 45,000 17,000 62,000Merchandise inventory, 12/31 8,000 9,000 (3) 3,000 14,000Investment in branch 28,800 (1) 28,800 -Total debits 120,800 14,800 103,800

Accounts payable 20,000 20,000Unrealized inventory profit 30,000 (2) 30,000 -Capital stock 40,000 40,000Retained earnings, from above 30,800 (14,000) 43,800Home office 28,800 (1) 28,800 -Total credits 120,800 14,800 121,800 121,800 103,800

Problem 13-10

(1) Consolidated Working PaperHome Adj. & Elim. Income Balance

24

Office Branch A Branch B (dr) Cr Statement SheetDebitsCash 33,000 22,000 13,000 68,000Inventories 70,000 21,000 15,000 A (12,000)

B 8,000 110,000Other current assets 50,000 25,000 23,000 98,000Investment in Branch A 45,000 D 45,000Investment in Branch B 42,000 D 42,000Cost of sales * 80,000 57,000 45,000 B (8,000)

C 25,000(165,000)

Expenses 90,000 25,000 20,000 (135,000)410,000 150,000 116,000 276,000

CreditsCurrent liabilities 40,000 15,000 11,000 66,000Capital stock 100,000 100,000Retained earnings, Jan. 1 50,000 50,000Home Office 45,000 30,000 A 12,000

D (87,000)Allow. for overvaluation of Branch inv. – Branch A 13,000 C (13,000)Allow. for overvaluation of Branch inv. – Branch B 12,000 C (12,000)Sales 195,000 90,000 75,000 360,000

410,000 150,000 116,000Net income 60,000 60,000

276,000

Book value of cost of sales from home office and branchesInvestment in Investment in

Home Office Branch A Branch B

Inventory, January 1, P 80,000 P 18,000 P24,000Purchases 160,000 Shipment to branch ( 90,000)Shipment from home office 60,000 36,000Goods available for sale P150,000 P 78,000 P 60,000Inventory, Dec. 31 ( 70,000) ( 21,000) (15,000)Cost of sales P 80,000 P 57,000 P 45,000

(2) Reconciliation of Home Office and Investment in Branch accounts. Books of Home Office Books of Books of

Investment Investment Branch A Branch BIn Branch A In Branch B Home Office Home Office

Unadjusted balances, Dec.31 P 45,000 P 42,000 P 45,000 P 30,000

Shipments in transit to Branch B 12,000

Branch Profit (Schedule 1) 8,000 10,000 8,000 10,000

Adjusted balances, December 31 P 53,000 P 52,000 P 53,000 P 52,000

Schedule 1:

Branch A Branch BSales P90,000 P75,000Cost of sales: Beginning inventory P18,000 P24,000

Shipment from home office 60,000 48,000Goods available for sale 78,000 72,000Ending inventory 21,000 27,000

Cost of sales 57,000 45,000Gross profit 33,000 30,000

25

Expenses 25,000 20,000Net profit P 8,000 P10,000

CHAPTER 14

MULTIPLE CHOICE14-1: a

Purchase price (8,000 shares x P30) P240,000Direct acquisition cost 4,000Contingent consideration 5,000Acquisition cost P249,000

14-2: aPurchase price P250,000Direct acquisition cost 50,000Acquisition cost P300,000Less: Fair value of net assets acquired 180,000Goodwill P120,000

14-3: cPurchase price (100,000 shares x P36) P3,600,000Direct acquisition cost 100,000Contingent consideration 20,000Acquisition cost P3,720,000

14-4: bPurchase price (600,000 shares x P50) P30,000,000Direct acquisition cost 300,000Acquisition cost P30,300,000Less: goodwill recorded 6,120,000Fair value of net assets acquired P24,180,000

Capital stock issued (at par) P30,000,000

14-5: cPurchase price P2,550,000Legal fees 25,000Acquisition cost P2,575,000Less: Fair value of net assets acquired

Current assets P1,100,000Plant assets 2,200,000Liabilities ( 300,000) 3,000,000

Income from acquisition P( 425,000)

14-6: a (at fair value at date of acquisition)

14-7: dAbel net income, January to December (P80,000 + P1,320,000) P1,400,000Cain net income, April to December 400,000Total net income P1,800,000

14-8: aAcquisition cost P 800,000Less: Fair value of net assets acquired

Cash P 160,000Inventory 380,000Property, plant and equipment 1,120,000Liabilities ( 360,000) 1,300,000

Income from acquisition P (500,000)

14-9 aAcquisition cost P 700,000Less: Fair value of net assets acquired (P600,000 – P188,000) 412,000

26

Goodwill P 288,000Avon’s assets 2,000,000Bell’s assets at fair value 600,000Total assets P2,888,000

14-10: bDebit to Investment in StockBroker’s fee P 50,000Pre-acquisition audit fee 40,000Legal fees for the combination 32,000Total P 122,000

Debit to expenses:General administrative costs P 15,000Other indirect costs 6,000Total P 21,000

Debit to APICAudit fee for SEC registration of stock issue P 46,000SEC registration fee for stock issue 5,000Total P 51,000

14-11: dAcquisition costs: Cash P200,000 Stocks issued at fair value 330,000 Contingent liabilities 70,000Total P600,000Less: fair value of net assets acquired:

Cash P40,000Inventories 100,000Other current assets 20,000Plant assets (net) 180,000Current liabilities (30,000)Other liabilities (40,000) 270,000

Goodwill P330,000

Total assets after combination:Total assets before combination P 760,000Cash paid (200,000)Registration and issuance costs of shares issued ( 30,000)Polo’s assets after combination P 530,000Assets acquired at fair values 340,000Goodwill 330,000Total assets after combination P1,200,000

14-12: dAcquisition cost P1,400,000Less: Fair value net assets acquired 1,350,000Goodwill P 50,000

14-13: aAcquisition cost P160,000Less: Fair value of net identifiable assets acquired:

Current assets P 80,000Non-current assets 120,000Liabilities ( 20,000) 180,000

Income from acquisition P(20,000)

Non- current assets P120,000

14-14: cAcquisition cost P600,000Less: Fair value of identifiable assets acquired:

Cash P 60,000

27

Merchandise inventory 142,500Plant assets (net) 420,000Liabilities (135,000) 487,500

Goodwill P112,500

14-15: bAcquisition cost P1,000,000Less: Fair value of identifiable assets acquired 800,000Goodwill P 200,000MM’s net assets at book value 1,200,000PP’s net assets at fair value 800,000Total assets after combination P2,200,000

14-16: c, Under the purchase method assets are recorded at their fair values (P225.000)

14-17: dCapital stock issued at par (10,000 shares x P10) P100,000APIC (10,000 shares x P40) 400,000Total P500,000

14-18: d, net assets are recorded at their fair values.

14-19: aIncome from acquisition P 100,000Fair value of net assets acquired (P2,000,000 – P400,000) 1,600,000Acquisition cost 1,500,000

Shares to be issued (P1,500,000 ÷ P40) 37,500 shares

14-20: dGoodwill P 200,000Fair value of net assets acquired 1,600,000Acquisition cost P1,800,000

Shares to be issued (P1,800,000 ÷ P40) 45,000 shares

14-21:Total assets of Pablo before acquisition at book value P 700,000Total assets acquired from Siso at fair value (100,000 +440,000) 540,000Total assets 1,240,000Less: cash paid (15,000 + 25,000) 40,000Total assets after cash payment 1,200,000Goodwill to be recognized (Sched 1) 195,000Total assets after combination 1,395,000

Sched 1: Acquisition cost: Purchase price (30,000 shares x P20) 600,000Direct cost 25,000Contingent consideration 50,000 675,000

Fair value of net assets acquired (540,000 – 60,000) 480,000Goodwill 195,000

14-22:Stockholders equity before acquisition 650,000Capital stock issued at par (30,000 shares x P10) 300,000APIC (50,000 +300,000) – 15,000 335,000Stockholders equity after acquisition 1,285,000

14-23: aB Company C Company

Acquisition cost P4,400,000 P638,000Less: fair value of net assets acquired 4,150,000 370,000Goodwill P 250,000 P268,000

Total goodwill recorded (250,000 + 268,000) 518,000

28

14-24: aA Company 5,250,000B Company 6,800,000C Company 900,000Cash paid for combination expenses (30,000)Goodwill (see 14-23) 518,000Total assets after combination 13,438,000

14-25: aStockholders equity before acquisition P1,300,000Capital stock issued at par (229,000 shares x P10) 2,290,000Additional paid-in-capital [(229,000 x 12) – 10,000] 2,738,000Indirect cost (reduction from retained earnings) (20,000)Stockholders equity after acquisition 6,308,000

PROBLEMS

Problem 14-1

1. Books of Big CorporationAccounts receivable 120,000Inventories 140,000Property, plant and equipment 300,000

Current liabilities 50,000Income from acquisition 5,000Cash 505,000

To record acquisition of net assets of Small.

Computation of Income from Acquisition:Acquisition cost (P500,000 + P5,000) P505,000Less: Fair value of net identifiable assets acquired:

Accounts receivable P120,000Inventories 140,000Property, plant and equipment 300,000Current liabilities ( 50,000) 510,000

Income from acquisition P( 5,000)2. Books of Small Corporation

Cash 500,000Current liabilities 50,000

Accounts receivable 120,000Inventories 100,000Property, plant and equipment 280,000Retained earnings 50,000

To record sale of net assets to Big.

Common stock 200,000Retained earnings 300,000

Cash 500,000To record liquidation of the corporation.

Problem 14-2

Cash 50,000Inventory 150,000Building and equipment – net 300,000Patent 200,000

Accounts payable 30,000Cash 570,000Income from acquisition 100,000

To record acquisition of the net assets at fair values.

Computation of Income from AcquisitionAcquisition cost (P565,000 + P5,000) P570,000Less: Fair value of net identifiable assets acquired

Total assets P700,000

29

Accounts payable ( 30,000) 670,000Income from acquisition P(100,000)

Problem 14-3

Cash and receivables 50,000Inventory 200,000Building and equipment 300,000Goodwill 65,000

Accounts payable 50,000Common stock, P10 par value 60,000Additional paid-in capital 480,000Cash 25,000

To record acquisition of net assets acquired.

Computation of GoodwillPurchase price (6,000 shares x P90) P540,000Direct acquisition cost 25,000Acquisition cost P565,000Less: fair value of net identifiable assets acquired

Total assets P550,000Accounts payable ( 50,000) 500,000

Goodwill P 65,000

Problem 14-4

(1) Cash 60,000Accounts receivable 100,000Inventory 115,000Land 70,000Building and equipment 350,000Bond discount 20,000Goodwill 108,000

Accounts payable 10,000Bonds payable 200,000Common stock, P10 par value 120,000Additional paid-in capital 480,000Cash (P10,000 + P3,000) 13,000

To record purchase of net assets of Tan.

Computation of GoodwillPurchase price (12,000 shares x P50) P600,000Professional fees (P10,000 + P3,000) 13,000Acquisition cost P613,000Less: Fair value of net identifiable assets acquired

Total assets P695,000 Total liabilities ( 190,000) 505,000

Goodwill P108,000

(2) Additional paid-in capital 6,000Cash 6,000

To record costs of issuing and registering of shares issued(P5,000 + P1,000)

(3) Expenses 9,000Cash 9,000

To record indirect acquisition costs.

Problem 14-5

1. Common stock:: P200,000 + (8,000 shares x P10) P280,0002. Cash and receivables: P150,000 + P40,000 190,0003. Land: P100,000 + P85,000 185,0004. Building and equipment – net: P300,000 + P230,000 530,000

30

5. Goodwill: (8,000 shares x P50) - P355,000 45,0006. APIC: P20,000 + (8,000 shares x P40) 340,0007. Retained earnings 330,000

Problem 14-6

Combined Balance SheetAfter acquisition

Based on P40/share Based on P20/shareCash and receivables P 350,000 P 350,000Inventory 645,000 645,000Building and equipment 1,050,000 1,050,000Accumulated depreciation (200,000) (200,000)Goodwill 180,000 -Total assets P2,025,000 P1,845,000

Accounts payable P 140,000 P 140,000Bonds payable 485,000 485,000Common stock P10 Par value 450,000 450,000Additional paid-in capital 550,000 250,000Retained earnings(including income from acquisition) 400,000 520,000Total liabilities and stockholders’ equity P2,025,000 P1,845,000

Computation of Goodwill – Based on P40 per share:Acquisition cost (15,000 shares x P40) P600,000Less: Fair value of net identifiable assets (P545,000 – P125,000) 420,000Goodwill P180,000

Computation of Income from Acquisition – Based on P20 per share:Acquisition cost (15,000 shares x P20) P300,000Less: Fair value of net identifiable assets 420,000Income from acquisition (added to retained earnings of Red) P(120,000)

Problem 14-7

(a) Combined Balance SheetJanuary 1, 2008

ASSETSCash and receivables P 110,000Inventory 142,000Land 115,000Plant and equipment P540,000Less: Accumulated depreciation 150,000 390,000Goodwill 13,000Total assets P 770,000

LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities P 100,000Capital stock, P20 par value 214,000Capital in excess of par 216,000Retained earnings 240,000Total liabilities and stockholders’ equity P 770,000

Computation of GoodwillAcquisition cost P210,000Less: Fair value of net identifiable assets acquired

(P217,000 – P20,000) 197,000Goodwill P 13,000

(b) Stockholders’ Equity section

(1) With 1,100 shares issued

31

Capital stock: P200,000 + (1,100 shares x P20) P222,000Capital in excess of par: P20,000 + (1,100 x P280) 328,000Retained earnings 240,000Total P790,000

(2) With 1,800 shares issued

Capital stock: P200,000 + (1,800 shares x P20) P 236,000Capital in excess of par: P20,000 + (1,800 x P280) 524,000Retained earnings 240,000Total P1,000,000

(3) With 3,000 shares issued

Capital stock: P200,000 + (3,000 shares x P20) P260,000Capital in excess of par: P20,000 + (3,000 x P280) 860,000Retained earnings 240,000Total P1,360,000

Problem 14-8

2007 (a) 2008 2009Revenue P1,400,000 P1,800,000 (b) P2,100,000Net income 500,000 545,000 © 700,000Earnings per share P 5.00 P 4.84 (d) P 5.60 (e)

(a) Separate figures for Dollar Transport only.(b) P2,000,000 – P200,000(c) P620,000 - P55,000(d) P545,000 / 112,000 shares (100,000 + 125,000) ÷ 2(e) P700,000 / 125 shares

Problem 14-9

a. Books of Peter Industries

Cash 28,000Accounts receivable 258,000Inventory 395,000Long-term investments 175,000Land 100,000Rolling stock 63,000Plant and equipment 2,500,000Patents 500,000Special licenses 100,000Discount on equipment trust notes 5,000Discount on debentures 50,000Goodwill 244,700

Allowance for bad debts 6,500Current payables 137,200Mortgage payables 500,000Premium on mortgage payable 20,000Equipment trust notes 100,000Debenture payable 1,000,000Common stock 180,000APIC – common 2,298,000Cash (direct acquisition cost) 135,000

To record acquisition of assets and liabilities at fair values.

Computation of GoodwillPurchase price (180,000 shares x P14) P2,520,000Direct acquisition cost 135,000Acquisition cost P2,655,000Less: fair value of net identifiable assets acquired

Total assets P4,112,500

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Total liabilities (1,702,200) 2,410,300Goodwill P 244,700

Expenses 42,000Cash 42,000

To record indirect cost.

b. Books of HCC:

Common stock 7,500APIC – Common 4,500

Treasury stock 12,000To record retirement of treasury stock.

P7,500 = P5 x 1,500 sharesP4,500 = P12,000 – P7,500

Investment in stock - Peter 2,520,000Allowance for bad debts 6,500Accumulated depreciation 614,000Current payable 137,200Mortgage payable 500,000Equipment trust notes 100,000Debentures payable 1,000,000

Discount on bonds payable 40,000Cash 28,000Accounts receivable 258,000Inventory 381,000Long-term investments 150,000Land 55,000Rolling stock 130,000Plant and equipment 2,425,000Patents 125,000Special licenses 95,800Gain on sale of assets and liabilities 1,189,900

To record sale of assets and liabilities to Peter.

Common stock 592,500APIC – Common 495,500APIC – Retirement of preferred 22,000Retained earnings 1,410,000

Investment in stock – Peter 2,520,000To record retirement of HCC stock and distribution ofPeter Industries stock:

P592,500 = P600,000 - P7,500P495,500 = P500,000 – P4,500P1,410,000 = P220,000 + P1,189,900

Problem 14-10

a. Increase in capital stock (P240,00 – P200,000) P 40,000Increase in APIC (P420,000 – P60,000) 360,000Value of shares issued P 400,000

b. Total assets after combination P1,130,000Total assets of Subic before combination 650,000Total fair value of assets of Clark before combination P 480,000

Total liabilities after combination P220,000Total liabilities of Subic before combination (140,000) ( 80,000)Fair value of Clark’s net assets (including goodwill) P 400,000Less: Goodwill 55,000Fair value of Clark’s net assets before combination P 345,000

c. Par value of common stock after combination P 240,000Par value of common stock before combination 200,000

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Increase in par value P 40,000Divided by par value per share ÷ P5Number of shares issued 8,000 shares

d. Value of shares computed in (a) P 400,000Number of shares issued computed in © ÷ 8,000Market price per share P 50

Problem 14-11

a. Inventory reported by Son at date of combination was P70,000(325,000 – P20,000 – P55,000 – P140,000 – P40,000)

b. Fair value of total assets reported by Son:

Fair value of cash P 20,000Fair value of accounts receivable 55,000Fair value of inventory 110,000Buildings and equipment reported following purchase P570,000Buildings and equipment reported by Papa (350,000) 220,000Fair value of Son’s total assets P405,000

c. Market value of Son’s bond:

Book value reported by Son P100,000Bond premium reported following purchase 5,000Market value of bond P105,000

d. Shares issued by Papa Corporation:

Par value of stock following acquisition P190,000Par value of stock before acquisition (120,000)Increase in par value of shares outstanding P 70,000Divide by par value per share ÷ P5Number of shares issued 14,000

e. Market price per share of stock issued by Papa Corporation

Par value of stock following acquisition P190,000Additional paid-in capital following acquisition 262,000 P452,000

Par value of stock before acquisition P120,000Additional paid-in capital before acquisition 10,000 (130,000)Market value of shares issued in acquisition P322,000Divide by number of shares issued ÷ 14,000Market price per share P 23.00

f. Goodwill reported following the business combination:

Market value of shares issued by Papa P322,000Fair value of Son’s assets P405,000Fair value of Son’s liabilities:

Accounts payable P 30,000Bond payable 105,000Fair value of liabilities (135,000)

Fair value of Son’s net assets (270,000)Goodwill recorded in business combination P 52,000Goodwill previously on the books of Papa 30,000Goodwill reported P 82,000

g. Retained earnings reported by Son at date of combination was P90,000(P325,000 – P30,000 – P100,000 – P50,000 – P55,000)

h. Papa’s retained earnings of P120,000 will be reported.

i. 1. Investment account 17,000

34

Additional paid-in capital 9,800Cash 26,800

2. Goodwill previously computed P82,000Merger costs added to investment account 17,000Total goodwill reported P99,000

3. Additional paid-in capital reported following combination P262,000Stock issue costs (9,800)Total additional paid-in capital reported P252,200

CHAPTER 15

MULTIPLE CHOICE

15-1: aAcquisition cost P4,000,000Less: Book value of interest acquired (100%) 3,200,000Difference 800,000Allocation:

Property and equipment P(750,000)Other assets 150,000Long-term debt (200,000) ( 800,000)

Goodwill P -0-

15-2: cAcquisition cost P 350,000Less: Book value of interest acquired (P280,000 x 90%) 252,000Difference 98,000Allocation to plant assets (P40,000 x 90%) (36,000)Goodwill P 62,000

15-3: c Plant assets – Pall Company P 220,000Plant assets – Mall Company 180,000Consolidated P 400,000

15-4: aAcquisition cost P495,000Less: Book value of interest acquired (P560,000 – P70,000) 490,000Difference 5,000Allocation:

Inventory P 25,000Property and equipment ( 35,000) (10,000)

Income from acquisition P( 5,000)

15-5: bAcquisition cost P355,000Less: Book value of interest acquired (P320,000 x 80%) 256,000Difference P 79,000Allocation:

Inventory (P20,000 x 80%) P(16,000)Land (P10,000 x 80%) 8,000Mortgage payable (P5,000 x 80%) ( 4,000) ( 12,000)

Goodwill P 67,000

15-6: aInventory (P360,000 + P130,000) P490,000

Plant and equipment (P500,000 + P420,000) P920,000

15-7: aBuilding P180,000

Land P 90,000

35

15-8: dSon’s stockholders’ equity P400,000Minority interest proportionate share 20%Minority interest in net assets of subsidiary P 80,000

15-9: dAcquisition cost P160,000Less: Book value of interest acquired (P145,000 x 75%) 108,750Difference 51,250Allocation to accounts payable (P5,000 x 75%) 3,750Goodwill P 55,000Therefore:Total assets (P800,000 + P300,000 + P55,000) P1,155,000Total liabilities (P250,000 + P15,000 + P160,000 + P5,000) 570,000

15-10: b (P900,000 x 1%)

15-11: aControlling (Parent) interest:Shares acquired (P120,000 / P120) 1,000 sharesDivided shares outstanding (P125,000 /P100) ÷ 1,250Parent’s interest 80%

Minority interest in net assets of subsidiary (P200,000 x 20%) P40,000

15-12: aGoodwill P250,000Book value of interest acquired (P100,000 / 20%) x 80% 400,000Investment cost P650,000

15-13: bNet assets on the date of acquisition (P247,095 + P43,605) P290,700Adjustments of assets excluding goodwill:

Inventories P6,630Plant and equipment 48,450Patent 7,650 62,730

Net assets at fair value P353,430

15-14: d (P500,000 + P300,000)

15-15: bAcquisition cost P260,000Less: Book value of interest acquired (P250,000 x 80%) 200,000Difference 60,000Allocated to plant and equipment (P50,000 x 80%) (40,000)Goodwill P 20,000

15-16: a (The retained earnings of the parent only).

15-17: a (The stockholders’ equity of the parent only).

15-18: b (P50,000 + P10,000)

15-19: d (P380,000 + P150,000)

15-20: dCash and cash equivalent (P70,000 + P90,000) P 160,000Inventory (P100,000 + P60,000) 160,000Property and equipment (P500,000 + P300,000) 800,000Goodwill 20,000Total assets P1,140,000

15-21: dFair value of the reporting unit P 485,000

36

Fair value of net assets (excluding goodwill) 440,000Implied goodwill 45,000Carrying value of goodwill (P450,000 – P390,000) 60,000Impairment loss P 15,000

15-22: bFair value of the reporting unit P 540,000Fair value of the net assets (P590,000 – P100,000) 490,000Implied goodwill to be recorded 50,000Carrying value of goodwill 150,000Impairment loss P 100,000

15-23: a The amount reported is equal to Primo’s retained earnings of P567,00015-24: a 100% – [P138, 000 ÷ (P320, 000 ÷ P140, 000)]

15-25: a (340,000- 200,000)

15-26: bCash 40,000Accounts receivable 20,000Inventories (see 15-25) 140,000Equipment (800,000 - 500,000) 300,000Accounts payable (40,000)Fair value of net assets 460,000

15-27: aNet asset acquired (320,000 x 70%) 224,000Differential allocated to inventory 40,000Differential allocated to equipment 100,000Differential allocation to goodwill 10,000Minority interest (140,000 x30%) (42,000)Amount paid by Parent 332,000

PROBLEMS

Problem 15-1

a. Investment in Solo Company stock 1,080,000Cash 1,080,000

To record acquisition of 90% (90,000 / 100,000)of the outstanding shares of Solo.

b. Working paper elimination entries:

(1) Common stock – Solo 400,000Retained earnings – Solo 500,000

Investment in Solo company stock 810,000Minority interest in net assets of subsidiary 90,000

To eliminate Solo’s equity accounts at date of acquisition.

(2) Inventories 30,000Plant assets 60,000Goodwill 189,000

Investment in Solo company stock 270,000Minority interest in net assets of subsidiary 9,000

To allocate difference

Computation and allocation of difference:Acquisition cost P1,080,000Less: Book value of interest acquired

Common stock (P400,000 x90%) P360,000Retained earnings (P500,000 x 90%) 450,000 810,000

Difference P 270,000Allocation:

Inventories (30,000)Plant assets (60,000)

37

Total (90,000)Minority interest (P90,000 x10%) 9,000 ( 81,000)

Goodwill P 189,000

Problem 15-2

a. Investment in Straw stock 600,000Cash 600,000

To record acquisition of 100% of Straw stock.

b. Acquisition cost P600,000Less: Book value of interest acquired (100%) 420,000Difference 180,000Allocation (100%:

Inventories P( 40,000)Land ( 80,000)Building 150,000Equipment ( 20,000)Patents ( 20,000) ( 10,000)

Goodwill P170,000

c. Working paper elimination entries:

(1) Common stock – Straw 100,000Retained earnings – Straw 320,000

Investment in Straw stock 420,000To eliminate equity accounts of Straw atdate of acquisition.

(2) Inventories 40,000Land 80,000Equipment 20,000Patents 20,000Goodwill 170,000

Buildings 150,000Investment in Straw stock 180,000

To allocate difference.

Problem 15-3

a. Investment in Soto stock 950,000Cash 950,000

To record acquisition of 90% stock of Sotto.

b. Acquisition cost P950,000Less: Book value of interest acquired (P900,000 x 90%) 810,000Difference 140,000Allocation:

Current assets P 50,000Property and equipment (100,000)Long-term debt ( 40,000)Total P( 90,000)Minority interest (10% thereof) 9,000 (81,000)

Goodwill P 59,000

c. Working paper elimination entries:

(1) Common stock – Sotto 100,000APIC – Sotto 200,000Retained earnings – Sotto 600,000

Investment in Sotto stock 810,000Minority interest in net assets of subsidiary 90,000

To eliminate equity accounts of Sotto at date ofacquisition.

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(2) Property, plant and equipment 100,000Goodwill 59,000Long-term debt 40,000

Current assets 45,000Investment in Sotto stock 140,000Minority interest in net assets of subsidiary 14,000

To allocate difference.

Problem 15-4

Paco Company and SubsidiaryConsolidated Balance SheetJanuary 2, 2008

Current assets P475,000Property, plant and equipment 285,000Other assets 70,000Total assets P830,000

Current liabilities P280,000Mortgage payable 85,000Common stock 200,000Additional paid-in capital 65,000Retained earnings (including income from subsidiary of P20,000) 200,000Total liabilities and stockholders’ equity P830,000

Computation of income from acquisition:Investment cost (20,000 shares x P6) P120,000Less: Book value of interest acquired

Common stock P35,000Retained earnings 80,000 115,000

Difference P 5,000Allocated to property and equipment (25,000)Income from acquisition P(20,000)

Problem 15-5

Under the purchase method, the investment cost is equal to the fair value of stock issued by Palo (P250,000) plus direct acquisition cost (P10,000) or a total of P260,000. The P20,000 stock issue cost is treated as a reduction from the additional paid-in capital. The entry to record the acquisition of stock is as follows:

Investment in Solo stock 260,000Common stock, at par 100,000Additional paid-in capital 150,000Cash (direct acquisition cost) 10,000

Additional paid-in capital 20,000Cash 20,000

Palo Company and SubsidiaryConsolidated Balance SheetDecember 31, 2008

Cash P 70,000Receivables 120,000Inventory 170,000Property and equipment – net 340,000Goodwill 30,000Total assets P730,000

Current liabilities P 30,000Long-term liabilities 120,000Common stock 210,000Additional paid-in capital 150,000Retained earnings, 12/31 220,000

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Total liabilities and stockholders’ equity P730,000

Computation of goodwill:Acquisition cost P260,000Less: Book value of interest acquired (P90,000 + P100,000) 190,000Difference 70,000Allocated to equipment (40,000)Goodwill P 30,000

Problem 15-6

a. Investment in Seed Company stock 350,000Cash 350,000

To record acquisition of 100% of Seed company stock.

Allocation schedule:Acquisition cost P350,000Less: Book value of interest acquired 320,000Difference 30,000Allocation:

Inventory P(20,000)Plant assets (80,000)Long-term liabilities 40,000 (60,000)

Income from acquisition P930,000)

b. Working paper elimination entries(1) Common stock – Seed 100,000

Additional paid-in capital – Seed 40,000Retained earnings – Seed 180,000

Investment in Seed stock 320,000To eliminate equity accounts of Seed atdate of acquisition.

(2) Inventory 20,000Plant assets 80,000

Long-term debt 40,000Investment in Seed stock 30,000Retained earnings – Pill (income from acquisition) 30,000

To allocate difference.

Pill Corporation and SubsidiaryConsolidated Working PaperMay 31, 2008 – Date of Acquisition

Pill Seed Eliminations & adjustment Conso-Corporation Company Debit Credit lidated

AssetsCash 200,000 10,000 210,000Accounts receivable 700,000 60,000 760,000Inventories 1,400,000 120,000 (2) 20,000 1,540,000Investment in Seed company 350,000 (1)320,000 -

(2) 30,000Plant assets 2,850,000 610,000 (2) 80,000 3,540,000Total 5,500,000 800,000 6,050,000

Liabilities & Stockholders’EquityCurrent liabilities 500,000 80,000 580,000Long-term debt 1,000,000 400,000 (2) 40,000 1,440,000Common stock: Pill 1,500,000 1,500,000 Seed 100,000 (1)100,000Additional paid-in capital Pill 1,200,000 1,200,000 Seed 40,000 (1) 40,000Retained earnings

40

Pill 1,300,000 (2) 30,000 1,330,000 Seed 180,000 (1)180,000Total 5,500,000 800,000 420,000 420,000 6,050,000

Problem 15-7

a. Accounts Receivable 70,000Cash 70,000

b. Investment in Sea Company stock 600,000Common stock ((30,000 shares x P20) 600,000

Investment in Sea Company stock 40,000Common stock 30,000

Current liabilities 70,000

(c) Pop Corporation and SubsidiaryWorking Paper for Consolidated Balance SheetApril 30, 2008 – Date of acquisition

Pop Sea Adjustments & Eliminatio Consoli-Corporation Company Debit Credit dated

AssetsCash 50,000 80,000 130,000Accounts receivable – net 230,000 270,000 (3) 70,000 430,000Inventories 400,000 350,000 (2) 90,000 840,000Investment in Sea Company 640,000 (1)328,000 -

(2)312,000Plant assets 1,300,000 560,000 (2)220,000 2,080,000Goodwill (2) 80,000 80,000Total 2,620,000 1,260,000 3,560,000

Liabilities & Stockholders’EquityCurrent liabilities 380,000 250,000 (3) 70,000 560,000Long-term debt 800,000 600,000 (2) 20,000 1,420,000Common stock Pop 1,070,000 1,070,000 Sea 100,000 (1)100,000Additional paid-in capital 360,000 (1)360,000Retained earnings Pop 370,000 370,000 Sea (50,000) (1) 50,000Minority interest in net assetsOf subsidiary

Total 2,620,000 1,260,000 920,000

(1) 82,000(2) 58,000 920,000

140,000

3,560,000

(1) To eliminate equity accounts of Sea Company on the date of acquisition.(2) To allocate difference, computed as follows:

Acquisition cost P640,000Less: Book value of interest acquired (P410,000 x 80%) 328,000Difference 312,000Allocation:

Inventories P( 90,000)Plant assets (220,000)Long-term debt 20,000Total P(290,000)Minority interest (20% 58,000 232,000

Goodwill P 80,000(3) To eliminate intercompany receivables and payables.

Problem 15-8

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1. Acquisition cost P500,000Less: Book value of interest acquired

Common stock P100,000APIC 200,000Retained earnings 230,000 530,000

Difference ( 30,000)Allocation:

Inventory P( 20,000)Land ( 10,000)Building 50,000Equipment 60,000Bonds payable ( 50,000) 30,000

2. P Company and SubsidiaryConsolidated Working PaperJanuary 1, 2008 – Date of acquisition

P S Adjustments & Eliminations

Consoli-

Company Company Debit Credit datedDebitsCash 300,000 50,000 350,000Accounts receivable 200,000 100,000 300,000Inventory 200,000 80,000 (2) 20,000 300,000Land 100,000 50,000 (2) 10,000 160,000Building 600,000 400,000 (2) 50,000 950,000Equipment 800,000 200,000 (2) 60,000 940,000Investment in S Company 500,000 (2) 30,000 (1)530,000 -Total 2,700,000 880,000 3,000,000

CreditsAccounts payable 150,000 60,000 210,000Bonds payable 290,000 (2) 50,000 240,000Common stock – P Company 1,500,000 1,500,000Common stock – S Company 100,000 (1)100,000APIC – S Company 200,000 (1)200,000Retained earnings – P Co. 1,050,000Retained earnings – S Co. 230,000 (1)230,000 1,050,000Total 2,700,000 880,000 640,000 640,000 3,000,000

(1) To eliminate equity accounts of S Company.(2) To allocate difference.

Problem 15-9

1. Acquisition cost P500,000Less: Book value of interest acquired

Common stock (P100,000 x 80%) P 80,000APIC (P200,000 x 80%) 160,000Retained earnings (P230,000 x 80%) 184,000 424,000

Difference P 76,000Allocation

Inventory P (20,000)Land (10,000)Building 50,000Equipment 60,000Bonds payable (50,000)Total P 30,000Minority interest (20%) ( 6,000) 24,000

Goodwill P100,000

2. P Company and SubsidiaryConsolidated Working PaperJanuary 2, 2008 – Date of acquisition

P S Adjustments & Consoli-

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EliminationsCompany Company Debit Credit dated

DebitsCash 300,000 50,000 350,000Accounts receivable 200,000 100,000 300,000Inventory 200,000 80,000 (2) 20,000 300,000Land 100,000 50,000 (2) 10,000 160,000Building 600,000 400,000 (2) 50,000 950,000Equipment 800,000 200,000 (2) 60,000 940,000Investment in S Company 500,000 (1)424,000 -

(2) 76,000Goodwill (2)100,000 100,000Total 2,700,000 880,000 3,100,000

CreditsAccounts payable 150,000 60,000 210,000Bonds payable 290,000 (2) 50,000 240,000Common stock – P Co. 1,500,000 1,500,000Common stock – S Co. 100,000 (1)100,000APIC – S Co. 200,000 (1)200,000Retained earnings – P Co. 1,050,000 1,050,000Retained earnings – S Co. 230,000 (1)230,000Minority interest in net Assets of subsidiary (2) 6,000 (1)106,000 100,000Total 2,700,000 880,000 716,000 716,000 3,100,000

(1) To eliminate equity accounts of S Company(2) To allocate difference

Problem 15-10

1. Acquisition cost P542,000Less: Book value of interest acquired (100%) 670,000Difference (128,000)Allocation

Inventory P (10,000)Land (40,000)Equipment 20,000Long-term investment in MS (15,000) ( 45,000)

Income from acquisition P(173,000)2. P Company and Subsidiary

Consolidated Working PaperJanuary 2, 2008 – Date of acquisition

P S Adjustments & Eliminations

Consoli-

Company Company Debit Credit datedAssetsCash 100,000 100,000 200,000Accounts receivable 200,000 150,000 350,000Inventory 150,000 130,000 (2) 10,000 290,000Land 50,000 80,000 (2) 40,000 170,000Equipment 300,000 200,000 (2) 20,000 480,000Investment in S Company 542,000 (2)128,000 (1)670,000 -Long-term investment in MS 100,000 125,000 (2) 15,000 240,000Total 1,442,000 785,000 1,730,000

Liabilities & Stockholders’EquityAccounts payable 175,000 115,000 290,000Common Stock – P Co. 400,000 400,000Common Stock – S Co. 200,000 (1)200,000APIC – P Co. 200,000 200,000Retained earnings – P Co. 667,000 (2)173,000 840,000Retained earnings – S Co. 470,000 (1)470,000

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Total 1,442,000 785,000 863,000 863,000 1,730,000

(1) To eliminate equity accounts of S Company.(2) To allocate difference

CHAPTER 16

MULTIPLE CHOICE

16-1: d, because no impairment of goodwill is recognized.

16-2: d, consolidated net income will decrease due to amortization of the allocated difference which is not the goodwill (P60,000 / 10 years).

16-3: d, computed as follows:Subsidiary’s net income P150,000Amortization of the allocated difference ( 20,000)Minority interest in net income of subsidiary P130,000

16-4: cAcquisition cost (P500,000 + P40,000) P540,000Less: Book value of interest acquired 480,000Difference P 60,000

Cost Method Equity MethodAcquisition cost P540,000 P540,000Parent’s share of subsidiary’s net income - 120,000Dividends received from subsidiary - ( 48,000)Amortization of allocated difference (P60,000/20) - ( 3,000)Investment account balance, Dec. 31, 2008 P540,000 P609,000

16-5: aNet assets of Sol, January 2, 2008 P300,000Increase in earnings:

Net income P160,000Dividends paid (P60,000 / 75%) 80,000 80,000

Net assets of Sol, Dec. 31, 2008 P380,000

Minority interest in net assets of subsidiary (P380,000 x 25%) P 95,000

16-6: aPuno’s net income P145,000Dividend income (P40,000 x 90%) (36,000)

Salas’ net income 120,000Consolidated net income P229,000

16-7: dPeter’s net income from own operation P1,000,000Peter’s share of Seller’s net income 200,000MINIS (P200,000 x 25%) ( 50,000)Consolidated net income attributable to parent P1,150,000

16-8: a2006 2007 2008

Investment in Son, Jan. 1 P310,000 P396,200 P512,400Pop’s share of Son’s net income (100%) 150,000 180,000 200,000

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Dividends received (100%) ( 60,000) (60,000) ( 60,000)Amortization of allocated difference to Equipment (P38,000 / 10) ( 3,800) ( 3,800) ( 3,800)Investment in Son, Dec. 31 P396,200 P512,400 P648,600

16-9: aSy’s net income P300,000Amortization of allocated difference ( 60,000)Adjusted net income of Sy P240,000Minority interest in net income of subsidiary (P240,000 x 10%) P 24,000

16-10: a. Under the equity method consolidated retained earnings is equal to the retained earnings of the parent company.

16-11: cRetained earnings, Jan. 2, 2008 – Puzon P500,000Consolidated net income attributable to parent:

Net income – Puzon P200,000Net income – Suarez 40,000Dividend income (P20,000 x 80%) (16,000)MINIS (P40,000 x 20%) ( 8,000) 216,000

Dividends paid – Puzon ( 50,000)Consolidated retained earnings, Dec. 31, 2008 P666,000

16-12: cAcquisition cost P1,700,000Less: Book value of interest acquired 1,260,000Difference P 440,000Allocation due to undervaluation of net assets ( 40,000)Goodwill ( not impaired) P 400,000

16-13: dNet assets of Suazon, Jan. 2, 2008 P1,000,000Increase in earnings (P190,000 – P125,000) 65,000Net assets of Suazon, Dec. 31, 2008 P1,065,000Unamortized difference to plant assets (P100,000 – P10,000) 90,000Adjusted net assets of Suazon, Dec. 31, 2008 P1,175,000

Minority interest in net assets of subsidiary (1,175,000 x 20%) P 231,000

16-14: bPresto’s net income from own operations P140,000Presto’s share of Stork’s net income (P80,000 – P23,000) 57,000MINIS (P57,000 x 10%) ( 5,700)Consolidated net income attributable to parent P191,300

16-15: bInvestment in Siso stock (at acquisition cost) P600,000

Dividend income (P30,000 x 5%) P 1,500

16-16 dConsolidated net income:Pepe’s net income from own operations P210,000Sison’s adjusted net income:

Net income -2008 P67,000Amortization of allocated difference to equipment (P20,000 / 5) 4,000 63,000

Consolidated net income P273,000

Consolidated retained earnings:Pepe’s retained earnings, Jan.2, 2007 P701,000Consolidated net income attributable to parent– 2007 Pepe’s NI from own operations P185,000

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Sison’s adjusted NI;Net income – 2007 P40,000Amortization -2007 4,000 36,000

MINIS (P36,000 x 30%) (10,800) 210,200 Dividends paid ,2007 - Pepe ( 50,000)

Pepe’s retained earnings, Jan. 2, 2008 P861,200Consolidated net income attributable to parent– 2008: Consolidated net income (see above) P273,000 MINIS (P63,000 x 30%) ( 18,900) 254,100 Dividends paid, 2008 – Pepe ( 60,000)Consolidated retained earnings, Dec. 31, 2008 P1,055,300

16-17: bAcquisition cost P700,000Less: Book value of interest acquired 630,000Allocated to building P 70,000

Consolidated retained earningsRetained earnings, Jan. 1, 2008 – Pepe P550,000Consolidated net income attributable to parent:

Net income – Precy P275,000Adjusted net income of Susy: Net income of Susy P100,000 Amortization (P70,000 / 10) ÷ 2 ( 3,500) 96,500 MINIS (P96,500 x 30%) (28,950) 342,550

Dividends paid – Precy ( 70,000)Consolidated retained earnings, Dec. 31, 2008 P822,550

Minority interest in net assets of subsidiaryStockholders’ equity of Susy, June 30, 2008 P 900,000Increase in earnings- net income (7/1 to 12/31) 100,000Stockholders’ equity, Dec. 31, 2008 P1,000,000Unamortized difference (P70,000 – P3,500) 66,500Adjusted net assets of Susy, Dec. 31, 2008 P1,066,500

Minority interest in net assets of subsidiary (P1,066,500 x 30%) P 319,950

16-18: aGoodwillAcquisition cost P1,200,000Less: Book value of interest acquired (P1,320,000 – P320,000) 1,000,000Goodwill (not impaired) P 200,000

Consolidated retained earnings under the equity method is equal to the retained earnings of the parent company, P1,240,000.

16-19: bNet income – Pablo P130,000Dividend income (P40,000 x 70%) (28,000)Sito’s net income 70,000MINIS (P70,000 x 30%) (21,000)Consolidated net income attributable to parent P151,000

16-20: cConsolidated net income – 2008Net income – Ponce P 90,000Dividend income (P15,000 x 60%) (9,000)Solis’ net income 40,000MINIS (P40,000 x 40%) (16,000)Consolidated net income attributable to parent – 2008 P105,000

Consolidated retained earnings – 2008Retained earnings, Jan. 2, 2007- Ponce P 400,000Consolidated net income attributable to parent– 2007: Net income – Ponce P70,000 Dividend income (P30,000 x 60%) (18,000)

46

Solis’ net income 35,000 MINIS (P35,000 x 40%) ( 14,000) 75,000 Dividends paid, 2007– Ponce (25,000)Consolidated retained earnings, Dec. 31, 2007 P450,000Consolidated net income attributable to parent– 2008 105,000 Dividends paid. 2008 – Ponce (30,000)Consolidated retained earnings, Dec. 31, 2008 P525,000

16-21 aAcquisition cost P216,000Less: Book value of interest acquired (220,000 x 80%) 176,000Difference 40,000Allocated to:

Depreciable assets (30,000 ÷ 80%) (37,500)Minority interest ( 37,500 x 20%) 7,500 (30,000) = 80%

Goodwill 10,000

Polo net income from own corporation P 95,000Seed net income from own operation:

Net income 35,000Amortization (37,500 ÷ 10%) (3,750) 31,250

Total 126,250Goodwill impairment lost (8,000)Consolidated net income 118,250

16-22: aRetained earnings 1/1/08 – Polo P520,000Consolidated net income attributed to parent:

Consolidated net income 118,250MINI (35,000 – 3,750) x 20% 6,250 112,000

Total 632,000Dividends paid- Polo (46,000)Consolidated retained earnings 12/31/08 586,000

16-23: a (35,000 – 3750) x 20%

16-24: aSeed stockholders equity, January 2, 2008 (80,000 + 140,000) 220,000Undistributed earnings – 2008 (35,000 – 15,000) 20,000Unamortized difference (37,500 - 3750) 33,750Seed stockholders equity (net asset), December 31, 2008 273,750

MINAS (273,750 × 20%) 54,750

16-25: a (see no. 16-22)

16-26: aAcquisition cost 231,000Less: Book value of interest acquired (280,000 x 70%) 196,000Difference 35,000Allocation:

to depreciable assets (50,000)MINAS (30%) 15,000 35,000

Retained earnings, 1/1/08-Sisa company 230,000Retained earnings, 1/1/07-Sisa company (squeeze) 155,000Increase 75,000Amortization- prior years (50,000 ÷ 10 years) (5,000)Adjusted increase in earnings of Sisa (21,000/30% ) 70,000

16-27: aRetained earnings 1/1/08- Pepe 520,000Retained earnings 1/1/08- Sisa 230,000Adjustment and elimination:

Date of acquisition (155,000)Undistributed earnings to MINAS (21,000)

47

Amortization- prior year (5,000) 49,000Consolidated retained earnings 1/1/08 569,000

16-28: aPepe company net income 120,000Sisa company net income 25,000Dividend income (10,000 x 70%) (7,000)Amortization- 2008 (5,000)Consolidated net income 133,000

16-29: aConsolidated retained earnings 1/1/08(see 16 – 27) 569,000Consolidated net income attributable to parent:

Consolidated net income (see 16-28) 133,000MINIS (25,000 – 5,000) 30% (6,000) 127,000

Dividend paid- Pepe company (50,000)Consolidated retained earnings 12/31/08 646,000

PROBLEMS

Problem 16-1

a. Since Pasig paid more than the P240,000 fair value of Sibol’s net assets, all allocations are based on fair value with the excess of P10,000 assigned to goodwill. The amortizations of the allocated difference are as follows:

AnnualAllocated to Allocation Life Amortization

Building P 50,000 10 years P 5,000Equipment (20,000) 5 years (4,000)

Building:Allocation, Jan. 1, 2004 P 50,000Amortization during past years -2004 to 2005 (P5,000 x 2) (10,000)Amortization for the current year – 2006 ( 5,000)Allocation, Dec. 31, 2006 P 35,000

EquipmentAllocation, Jan. 1, 2004 P(20,000)Amortization during past years – 2004 to 2005 (P4,000 x 2) 8,000Amortization for the current year – 2006 4,000Allocation, Dec. 31, 2006 P( 8,000)

b. Since Pasig paid P20,000 less than the P240,000 fair value of Sibol’s net assets, a negative difference arises. Under PFRS 3 (Business combination), the allocation of the negative difference to the non-current assets, excluding long-term investments in marketable securities is no longer permitted. The negative difference is immediately amortized in profit or loss (income from acquisition). Therefore, the allocation assigned to building and equipment is the same as in (a) above.

c. Same as in (a) above. Except that the negative goodwill amortized to income is P60,000.

d. Neither allocations nor amortization are found in a pooling of interests.

Problem 16-2

a. No entry is to be recorded by Holly during 2005 under the cost method.

Allocation schedule – Date of acquisitionDifference P240,000Allocation:

Inventory P ( 5,000)Land (75,000)Equipment (60,000)Discount on notes payable (50,000)Total P(190,000)Minority interest (10%) 19,000 171,000

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Goodwill (not impaired) P 69,000Amortization of differential:

Inventory sold P 5,000Land sold 75,000Equipment (P60,000/15 years) 4,000Discount on notes payable 7,500Total P91,500

b. Working paper elimination entries

(1) Common stock – State 500,000Premium on common stock – State 100,000Retained earnings – State 120,000

Investment in State stock 648,000Minority interest in net assets of subsidiary 72,000

To eliminate equity accounts of State on the dateof acquisition.

(2) Inventory 5,000Land 75,000Equipment 60,000Discount on notes payable 50,000Goodwill 69,000

Investment in State stock 240,000Minority interest in net assets of subsidiary 19,000

To allocate difference.

(3) Cost of goods sold 5,000Gain on sale of land 75,000Operating expenses (depreciation) 4,000Interest expense 7,500

Inventory 5,000Land 75,000Equipment 4,000Discount on notes payable 7,500

To amortize allocated difference.(4) Minority interest in net asset of subsidiary 2,350

Minority interest in net income of subsidiary 2,350To recognize minority share in the net income (loss)of State.Computed as follows:Net income P 68,000Adjustments for total amortization 91,500Adjusted net income (loss) P(23,500)

Minority interest share (P23,500 x 10%) P 2,350

Problem 16-3

a. Consolidated BuildingsProfit Company (at book value) P 900,000Simon Corporation (at fair value) 560,000Amortization of differential (P120,000 / 6 years) ( 20,000)Total P1,440,000

b. Consolidated Retained Earnings, Dec. 31, 2008Retained earnings, Jan. 1 – Profit Company P 600,000Consolidated net income (per c below) 380,000Dividends paid – Profit Company (80,000)Total P 900,000

c. Consolidated net income, Dec. 31, 2008Total revenues (P700,000 + P400,000) P1,100,000Total expenses (P400,000 + P300,000) (700,000)Amortization ( 20,000)

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Total P 380,000

d. Consolidated Goodwill [(P680,000 – P480,000)- P120,000] P 80,000

Problem 16-4

Allocation ScheduleAcquisition cost P206,000Less: Book value of interest acquired 140,000Difference P 66,000Allocation:

Equipment P(40,000)Buildings 10,000 (30,000)

Goodwill (not impaired) P 36,000

a. Investment in Stag Company – 12/31/06 (at acquisition cost) P 206,000

b. Minority Interest in Net Assets of Subsidiary (MINAS) P -0-

c. Consolidated Net IncomeNet income from own operations – Pony (P310,000 – P198,000) P 112,000Net income from own operations – Stag (P104,000 – P74,000) 30,000Amortization ( 4,500)Total P 137,500

d. Consolidated EquipmentTotal book value (P320,000 + P50,000) P 370,000Allocation 40,000Amortization (P5,000 x 3 years (15,000)Total P 395,000

e. Consolidated Buildings Total book value P 288,000Allocation ( 10,000)Amortization (P500 x 3 years) 1,500Total P 279,500

f. Consolidated Goodwill (not impaired) P 36,000

g. Consolidated Common Stock (Pony) P 290,000

h. Consolidated Retained EarningsRetained earning, Dec. 31, 2008 – Pony P 410,000Add: Pony’s share of Stag’s adjusted increase in earnings

Net earnings – 2008 (P30,000 – P20,000) P10,000Amortization ( 4,500) 5,500

Total P 415,500

Problem 16-5

a. Retained Earnings, Dec. 31, 2008 – SisonStockholders’ equity, Dec. 31, 2008 – Sison (P232,000/40%) P 580,000Stockholders’ equity, Jan. 1, 2005 – Sison (500,000)Increase in earnings P 80,000Retained earnings, Jan. 1, 2005 – Sison 200,000Retained earnings, Dec. 31, 2008 – Sison P 280,000

b. Consolidated Retained Earnings – Dec. 31, 2008Retained earnings, Jan. 1, 2005 - Perez P 600,000

50

Net income – 2005 to 2008 100,000Dividends paid – 2005 to 2008 ( 45,000)Retained earnings, Dec. 31, 2008 P 655,000Add: Perez share of adjusted net increase in Sison’s Retained earnings P80,000 Amortization (P8,333 x 4) (33,332) Adjusted P46,668 Perez interest 60% 28,000Total P 683,000

Allocation ScheduleAcquisition cost P350,000Less: Book value of interest acquired (P500,000 x 60%) 300,000Difference P 50,000Allocation:

Depreciable assets (P50,000 / 60%) P(83,333)Minority interest (40%) 33,333 (50,000)

Amortization per year (P83,333/10 years) P 8,333

Problem 16-6

a. Working Paper Elimination Entries, Dec. 31, 2008

(1) Dividend income 10,000Dividends declared – Short 10,000

To eliminate intercompany dividends.

(2) Common stock – Short 100,000Retained earnings – Short 50,000

Investment in Short Company 150,000To eliminate equity accounts of Short atdate of acquisition

(3) Depreciable asset 30,000Investment in Short Company 30,000

To allocate difference.

(4) Depreciation expense 5,000Depreciable asset 5,000

To amortize allocated difference

b. Pony Corporation and Subsidiary

Consolidation Working PaperDecember 31, 2008

Pony Short Adjustments & Eliminations

Consoli-

Corporation Company Debit Credit datedIncome StatementSales 200,000 120,000 320,000Dividend income 10,000 (1) 10,000 -Total 210,000 120,000 320,000Depreciation 25,000 15,000 (3) 5,000 45,000Other expenses 105,000 75,000 180,000Total 130,000 90,000 225,000Net income carried forward 80,000 30,000 95,000

Retained EarningsRetained earnings, Jan. 1 230,000 50,000 (2) 50,000 230,000Net income from above 80,000 30,000 95,000Total 310,000 80,000 325,000Dividends declared 40,000 10,000 (1) 10,000 40,000Retained earnings, Dec. 31

51

Carried forward 270,000 70,000 285,000

Balance SheetCash 15,000 5,000 20,000Accounts receivable 30,000 40,000 70,000Inventory 70,000 60,000 130,000Depreciable asset (net) 325,000 225,000 (3) 30,000 (4) 5,000 575,000Investment in Short stock 180,000 (2)150,000 -

(3) 30,000Total 620,000 330,000 795,000

Accounts payable 50,000 40,000 90,000Notes payable 100,000 120,000 220,000Common stock Pony 200,000 200,000 Short 100,000 (2)100,000Retained earnings, Dec. 31From above 270,000 70,000 285,000Total 620,000 330,000 195,000 195,000 795,000

Problem 16-7

a. Working Paper Elimination Entries(1) Dividend income 8,000

Minority interest in net assets of subsidiary 2,000Dividends declared – Sisa 10,000

(2) Common stock – Sisa 100,000Retained earnings – Sisa 50,000

Investment in Sisa stock 120,000Minority interest in net assets of subsidiary 30,000

(3) Minority interest in net income of subsidiary 6,000Minority interest in net assets of subsidiary 6,000

b. Popo Corporation and SubsidiaryConsolidated Working PaperDecember 31, 2008

Popo Sisa Adjustments & Eliminations

Consoli-

Corporation Company Debit Credit datedIncome StatementSales 200,000 120,000 320,000Dividend income 8,000 (1) 8,000 -Total revenue 208,000 120,000 320,000Depreciation expense 25,000 15,000 40,000Other expenses 105,000 75,000 180,000Total expenses 130,000 90,000 220,000Net income 78,000 30,000 100,000MI in net income of Sub. (3) 6,000 ( 6,000)Net income carried forward 78,000 30,000 94,000

Retained EarningsRetained earnings, 1/1 230,000 50,000 (2) 50,000 230,000Net income from above 78,000 30,000 94,000Total 308,000 80,000 324,000Dividends declared 40,000 10,000 (1) 10,000 40,000Retained earnings, 12/31Carried forward 268,000 70,000 284,000

Balance SheetCurrent assets 173,000 105,000 278,000Depreciable assets 500,000 300,000 800,000Investment in Sisa stock 120,000 (2)120,000 -

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Total 793,000 405,000 1,078,000

Accumulated depreciation 175,000 75,000 250,000Current liabilities 50,000 40,000 90,000Long-term debt 100,000 120,000 220,000Common stock 200,000 100,000 (2)100,000 200,000Retained earnings , 12/31From above 268,000 70,000 284,000MI in net assets of Subsidiary (1) 2,000 (2) 30,000

(3) 6,000 34,000

Total 793,000 405,000 166,000 166,000 1,078,000

c. Consolidated Financial Statements

Popo Corporation and SubsidiaryConsolidated Balance SheetDecember 31, 2008

AssetsCurrent assets P278,000Depreciable assets P800,000Less: Accumulated depreciation 250,000 550,000Total assets P828,000

Liabilities and Stockholders’ EquityCurrent liabilities P 90,000Long-term debt 220,000Total liabilities P310,000Stockholders’ EquityCommon stock P200,000Retained earnings, 12/31 284,000Minority interest in net assets of subsidiary 34,000 518,000Total liabilities and stockholders’ equity P828,000

Popo Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 2008

Sales P320,000Expenses:

Depreciation expense P 40,000Other expenses 180,000 220,000

Consolidated net income P100,000Minority interest in net income of subsidiary 6,000Consolidated net income attributable to parent P 94,000

Popo Corporation and SubsidiaryConsolidated Retained Earnings Year Ended December 31, 2008

Retained earnings, Jan. 1 – Popo P230,000Consolidated net income attributable to parent 94,000Total P324,000Dividends paid – Popo 40,000Consolidated retained earnings, Dec. 31 P284,000

Problem 16-8

a. Palo Corporation and SubsidiaryConsolidation Working PaperDecember 31, 2008

Palo Sebo Adjustments & Consoli-

53

EliminationsCorporation Company Debit Credit dated

Income StatementSales 300,000 150,000 450,000Investment Income 19,000 (1) 19,000 -Total revenues 319,000 150,000 450,000Cost of goods sold 210,000 85,000 295,000Depreciation expense 25,000 20,000 45,000Other expenses 23,000 25,000 48,000Total cost and expenses 258,000 130,000 388,000Net income carried forward 61,000 20,000 62,000

Retained EarningsRetained earnings, Jan. 1 230,000 50,000 (2) 50,000 230,000Net income from above 61,000 20,000 62,000Total 291,000 70,000 292,000Dividends declared 20,000 10,000 (1) 10,000 20,000Retained earnings, Dec. 31carried forward 271,000 60,000 272,000

Balance SheetCash 37,000 20,000 57,000Accounts receivable 50,000 30,000 80,000InventoryBuildings and equipment

70,000300,000

60,000240,000

130,000540,000

Investment in Sebo stock 229,000 (1) 9,000 -(2)200,000(3) 20,000

Goodwill (3) 20,000 20,000Total 686,000 350,000 827,000

Accumulated depreciation 105,000 65,000 170,000Accounts payable 40,000 20,000 60,000Taxes payable 70,000 55,000 125,000Common stock 200,000 150,000 (2)150,000 200,000Retained earnings, Dec. 31from aboveTotal

271,000686,000

60,000350,000 239,000 239,000

272,000827,000

b. Consolidated Financial Statements

Palo Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 2008

Sales P450,000Cost of goods sold 295,000Gross profit 155,000Expenses:

Depreciation expenses P45,000Other expenses 48,000 93,000

Consolidated net income P 62,000

Palo Corporation and SubsidiaryConsolidated Retained EarningsYear Ended December 31, 2008

Retained earnings, January 1 – Palo P230,000Consolidated net income 62,000Total 292,000Dividends paid – Palo 20,000Retained earnings, December 31 P272,000

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Palo Corporation and SubsidiaryConsolidated Balance SheetDecember 31, 2008

AssetsCash P 57,000Accounts receivable 80,000Inventory 130,000Buildings and equipment P540,000Less: Accumulated depreciation 170,000 370,000Goodwill 20,000Total P657,000

Liabilities and Stockholders’ EquityAccounts payable P 60,000Taxes payable 125,000Common stock 200,000Retained earnings, Dec. 31 272,000Total P657,000

Problem 16-9

1. Acquisition cost P756,000Less: Book value of interest acquired (80%)

Common stock (P300,000 x 80%) P240,000Retained earnings (P400,000 x 80%) 320,000 560,000

Difference P196,000Allocation:

Inventories P( 30,000)Land ( 50,000)Building (100,000)Equipment 75,000Patents ( 40,000)Total P(145,000)Minority interest (20%) 29,000 (116,000)

Goodwill (not impaired) P 80,000

Working Paper Elimination Entries - December 31, 2006(not required)

(1) Investment income 94,800Minority interest in net assets of subsidiary 10,000

Dividends declared – S 50,000Investment in S Company 54,800

(2) Common stock – S 300,000Retained earnings, Jan. 1 – S 400,000

Investment in S Co. 560,000Minority interest in net assets of subsidiary 140,000

(3) Inventories 30,000Land 50,000Building 100,000Patents 40,000Goodwill 80,000

Equipment 75,000Investment in S Company 196,000Minority interest in net assets of subsidiary 29,000

(4) Cost of goods sold 30,000Inventory 30,000

Equipment (P75,000 / 10) 7,500Expenses (amortization) 1,500

Buildings (P100,000 / 20) 5,000Patents (P40,000 / 10) 4,000

(5) Minority interest in net income of subsidiary 23,700

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Minority interest in net assets of subsidiary 23,700To established minority share in subsidiary net income.Computed as follows:Net income – S Co. P150,000Amortization 31,500Adjusted net income P118,500MINIS (P118,500 x 20%) P 23,700

2. P Company and SubsidiaryConsolidated Working PaperYear Ended December 31, 2008

P S Adjustments & Eliminations

Consoli-

Company Company Debit Credit datedIncome StatementSales 1,000,000 500,000 1,500,000Cost of sales 400,000 150,000 (4) 30,000 580,000Gross profit 600,000 350,000 920,000Expenses 360,000 200,000 (4) 1,500 561,500Operating income 240,000 150,000 358,500Investment income 94,800 - (1) 94,800 -Net /consolidated income 334,800 150,000 358,500MI interest in net income of Subsidiary (5) 23,700 (23,700)Net income carried forward 334,800 150,000 334,800

Retained earningsRetained earnings, 1/1 600,000 400,000 (2)400,000 600,000Net income from above 334,800 150,000 334,800Total 934,800 550,000 934,800Dividends declared 100,000 50,000 (1) 50,000 100,000Retained earnings, 12/31 Carried forward 834,800 500,000 834,800

Balance SheetCash 200,000 100,000 300,000Accounts receivable 150,000 50,000 200,000Inventories 100,000 40,000 (3) 30,000 (4) 30,000 140,000Land 150,000 (3) 50,000 200,000Buildings (net) 200,000 (3)100,000 (4) 5,000 295,000Equipment (net) 298,000 450,000 (4) 7,500 (3) 75,000 680,500Patent - - (3) 40,000 (4) 4,000 36,000Investment in S Co. stock 810,800 (1) 54,800 -

(2)560,000(3)196,000

GoodwillTotal 1,558,800 1,090,000

(3) 80,000 80,0001,931,500

Accounts payable 124,000 190,000 314,000Common stock 200,000 300,000 (2)300,000 200,000Additional paid-in capital 400,000 - 400,000Retained earnings, 12/31 from above 834,800 500,000 834,800MI in net assets of subsidiary (1) 10,000 (2)140,000 182,700

(3) 29,000(5) 23,700

Total 1,558,800 1,090,000 466,200 466,200 1,931,500

Problem 16-10

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a. Investment in Sally Products Co. 160,000Cash 160,000

To record acquisition of 80% stock of Sally.

Cash 8,000Dividend income 8,000

To record dividends received from Sally (P10,000 x 80%)

b. Working Paper Eliminating Entries – Dec. 31, 2008

Allocation schedule:Acquisition cost P160,000Less: Book value of interest acquired (P150,000 x 80%) 120,000Difference 40,000Allocated to building and equipment P (50,000)Minority interest (20%) 10,000 (40,000)

(1) Dividend income 8,000Minority interest in net assets of subsidiary 2,000

Dividends declared – Sally 10,000

(2) Common stock – Sally 100,000Retained earnings, 1/1 –Sally 50,000

Investment in Sally Products 120,000Minority interest in net assets of subsidiary 30,000

(3) Building and equipment 50,000Investment in Sally Products 40,000Minority interest in net assets of subsidiary 10,000

(4) Depreciation expense 5,000Accumulated depreciation – Bldg 5,000

(5) Accounts payables 10,000Cash and receivables 10,000

(6) Minority interest in net income of subsidiary 5,000Minority interest in net assets of subsidiary 5,000

Computed as follows:Net income – Sally P30,000Amortization (5,000)Adjusted net income P25,000MINIS (P25,000 x 20%) P 5,000

c. Pilar Corporation and SubsidiaryConsolidation Working PaperDecember 31, 2008

Pilar Sally Wood Adjustments & Eliminations

Consoli-

Corporation Products Debit Credit datedIncome StatementSales 200,000 100,000 300,000Dividend income 8,000 (1) 8,000 -Total revenue 208,000 100,000 300,000

Cost of goods sold 120,000 50,000 170,000Depreciation expense 25,000 15,000 (4) 5,000 45,000Inventory losses 15,000 5,000 20,000Total cost and expenses 160,000 70,000 235,000Net /consolidated income 48,000 30,000 65,000

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MI interest in net income of subsidiary (MINIS (6) 5,000 (5,000)

Net income carried forward 48,000 30,000 60,000

Retained earnings statementRetained earnings, 1/1 298,000 90,000 (2) 50,000 338,000Net income from above 48,000 30,000 60,000Total 346,000 120,000 398,000Dividends declared 30,000 10,000 (1) 10,000 30,000Retained earnings, 12/31 carried forward 316,000 110,000 368,000

Balance SheetCash and receivables 81,000 65,000 (5) 10,000 136,000Inventory 260,000 90,000 350,000Land 80,000 80,000 160,000Buildings and equipment 500,000 150,000 (3) 50,000 700,000Investment in Sally 160,000 (2)120,000 -

(3) 40,000Total 1,081,000 385,000 1,346,000

Accumulated depreciation 205,000 105,000 (4) 5,000 315,000Accounts payableNotes payable

60,000200,000

20,000 50,000

(5) 10,000 70,000250,000

Common stock 300,000 100,000 (2)100,000 300,000Retained earnings from above 316,000 110,000 368,000MI in net assets if subsidiary (1) 2,000 (2) 30,000

(3) 10,000(6) 5,000

43,000

Total 1,081,000 385,000 230,000 230,000 1,346,000

Problem 16-11

a. Eliminating entries:

E(1) Dividend Income 20,000Dividends Declared 20,000

Eliminate dividend income from subsidiary.

E(2) Common Stock – Star Company 150,000Retained Earnings, January 1 50,000Differential 20,000

Investment in Star Company Stock 220,000Eliminate investment balance at dateof acquisition.

E(3) Goodwill 8,000Retained Earnings, January 1 12,000

Differential 20,000Assign differential at beginning of year

Porno Corporation and Star CompanyConsolidated WorkingpaperDecember 31, 2008

Light Star Eliminations _____Item_____ Corporation Company Debit Credit ConsolidatedIncome StatementSales 350,000 200,000 550,000Dividend income 20,000 - (1) 20,000 _______ Credits 370,000 200,000 550,000

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Cost of goods sold 270,000 135,000 405,000Depreciation expense 25,000 20,000 45,000Other expenses 21,000 10,000 31,000Debits (316,000) (165,000) __ - ____ (481,000)Net income, carry forward 54,000 35,000 20,000 - 69,000

Retained Earnings StatementRetained earnings, Jan. 1 262,000 60,000 (2) 50,000

(3) 12,000 260,000Net income, from above 54,000 35,000 20,000 69,000

316,000 95,000 329,000Dividends declared (20,000) (20,000) ___ - (1) 20,000 (20,000)Retained earnings, Dec. 31,

carry forward 296,000 75,000 82,000 20,000 309,000

Balance SheetCash 46,000 30,000 76,000Accounts receivable 55,000 40,000 95,000Inventory 75,000 65,000 140,000Buildings and equipment 300,000 240,000 540,000Investment in Star Company

stock 220,000 (2)220,000Differential (2) 20,000 (3) 20,000Goodwill - - (3) 8,000 8,000Debits 696,000 375,000 859,000

Accumulated depreciation 130,000 85,000 215,000Accounts payable ` 20,000 30,000 50,000Taxes payable 50,000 35,000 85,000Common stock

Light Corporation 200,000 200,000Star Company 150,000 (2)150,000

Retained earnings, from above 296,000 75,000 82,000 20,000 309,000Credits 696,000 375,000 260,000 260,000 859,000

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CHAPTER 17

MULTIPLE CHOICE17-1: B

Consolidated salesSales – Papa P 900,000Sales – San 500,000Elimination of inter-company sales ( 50,000)Consolidated sales P 1,350,000

Consolidated cost of goods soldCost of goods sold – Papa P 490,000Cost of goods sold – San 190,000Eliminations:

Realized profit in beginning inventory ( 4,000)Unrealized profit in ending inventory 10,000Intercompany purchases ( 50,000)

Consolidated cost of goods sold P 636,000

17-2: c

Net income – Sisa P 60,000Unrealized profit in ending inventory – upstream ( 10,000)Adjusted net income – Sisa P 50,000Minority interest proportionate share 20% Minority interest in net income of subsidiary P 10,000

17-3: d

Net income from own operation – Pat P 200,000Pat’s share of adjusted net income of Susan:

Net income – Susan P200,000Realized profit in beginning inventory

(P112,000 x 50%/150%) 37,500Unrealized profit in ending inventory

(P33,000 x 50%/150%) (11,000) 226,500Consolidated net income P 426,500Attributable to minority interest (P226,500 x 30%) 67,950Attributable to parent P 358,550

17-4: b

Net income from own operations- Patton P 300,000Unrealized profit in ending inventory – DS (P200,000 x .25) (50,000)Realized income 250,000

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Solis net loss (150,000)Consolidated net income P 100,000

17-5: d

Pardo’s share of Santos’ net income (P300,000 x 75%) P 225,000Unrealized profit in ending inventory – Upstream

(P200,000 x 25%/125%) x 75% ( 30,000)Realized profit in beginning inventory – Upstream

(P150,000 x 25%/125%) x 75% 22,500Investment income account balance, Dec. 31, 2008 P 217,500

17-6: dNet income from own operation – Puzon P 200,000Suazon’s adjusted net income:

Net income P110,000Unrealized profit in ending inventory- Upstream (P25,000 x 40%) ( 10,000) 100,000

Consolidated net income P 300,000MINIS (P100,000 x 25%) (25.000)Attributable to parent P 275,000

17-7: b 2008 2009

Net income from own operation – Pat P 500,000 P 550,000Unrealized profit in ending inventory:

2008 (P20,000 x .40) (8,000) 2009 (P30,000 x .50) (15,000)

Realized profit in beginning inventory 8,000Realized income 492,000 543,000Sun net income 200,000 225,000Consolidated net income P 692,000 P 768,000

17-8: a

Net income from own operation – Pip P 400,000Adjusted net income of Sol:

Net income P 250,000Realized profit in beginning inventory- Upstream (P40,000 x 40%) 16,000Unrealized profit in ending inventory- Upstream (P70,000 x 30%) ( 21,000) 245,000

Consolidated net income - 2008 P 645,000

17-9: aNet income from own operations – Popo P 500,000Unrealized profit in ending inventory – Downstream ( 15,000)Realized separate net income – Popo P 485,000Popo’s share of Sotto’s adjusted net income:

Net income P 360,000Realized profit in beginning inventory- Upstream 10,000 370,000

MINIS (P370,000 x 5%) ( 18,500)Attributable to parent P 836,500

17-10: a

Stockholders’ equity – Sands, Dec. 31, 2008 P5,500,000Unamortized difference (P1,000,000 – P200,000) 800,000Adjusted stockholders’ equity (net assets) – Sands P6,300,000Minority interest in net assets of subsidiary (P6,300,000 x 40%) P2,520,000

17-11: dGross profit rate – Short (P110,000 / P200,000) 55%

Inventories

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Inventory from outsiders – Power P 5,000Inventory from outsiders – Short 25,000Power’s inventory acquired from Short – at cost:

[P5,000 – (P5,000 x 55%)} 2,250Consolidated ending inventories P 32,250

Investment incomePower’s share of Short’s net income (P50,000 x 75%) P 37,500Unrealized profit in ending inventory – upstream

(P5,000 x 55%) x 75% ( 2,063)Realized profit in beginning inventory – upstream

(P10,000 x 55%) x 75% 4,125Investment income, Dec. 31, 2008 P 39,562

Investment in Short CompanyAcquisition cost (P80,000 x 80%) P 60,000Unrealized profit in ending inventory ( 2,063)Realized profit in beginning inventory 4,125Investment in Short Company, Dec. 31, 2008 P 62,062

Minority interest in net assets of subsidiaryStockholders’ equity, Dec. 31, 2006 – Short P 80,000Realized profit in beginning inventory (P10,000 x 55%) 5,500Unrealized profit in ending inventory (P5,000 x 55%) ( 2,750)Adjusted net assets of Short, Dec. 31, 2006 P 82,750Minority interest 25%MINAS P 20,687.50

17-12: bGross profit rate of Sit (P200,000 / P500,000) 40%Net income from own operations – Pit P 200,000Adjusted net income of Sit:

Net income P 75,000Realized profit in beginning inventory- Upstream (P40,000 x 40%) 16,000Unrealized profit in ending inventory- Upstream (P25,000 x 40%) ( 10,000) 81,000

Consolidated net income P 281,000MINIS (P281,000 x 10%) ( 8,100)Attributable to parent P 272,900

17-13: bGross profit of Sir (P120,000 / P400,000) 30%

Consolidated cost of salesCost of sales – Pig P 600,000Cost of sales – Sir 280,000Eliminations: Realized profit in beginning inventory (P70,000 x 30%) ( 21,000) Unrealized profit in ending inventory (P60,000 x 30%) 18,000 Intercompany purchases (200,000)Consolidated cost of sales P 677,000

Consolidated net incomeNet income from own operations – Pig P 200,000Pig’s share of Sir’s adjusted net income:

Net income P 80,000Realized profit in beginning inventory 21,000Unrealized profit in ending inventory (18,000) 83,000

Consolidated net income 283,000MINIS (P83,000 x 10%) (8,300)Attributable to parent P 274,700

17-14: a2006 2007 2008

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Pal Corp net income 150,000 240,000 300,000Intercompany profit in ending inventory:

2006 (14,000) 14,0002007 (21,000) 21,0002008 ( 24,000 )

Pal net income from own operation 136,000 233,000 297,000Solo net income from own operation 100,000 90,000 160,000 Consolidated net income 236,000 323,000 427,000MINIS:

2006(100,000 – 14,000) x 40% 34,400 2007(90,000 +14,000 – 21,000) 40% 33,200 2008(160,000 + 21,000 – 24,000) 40% 62,800 Consolidated NI attributable to Parent 201,600 289,800 394,200

17-15: aAcquisition cost 252,000Less: book value of interest acquired (400,000 x 60%) 240,000Difference 12,000Allocated to Equipment ( 20,000) MINAS (40%) 8,000 (12,000)

Total sales 600,000Intercompany sales (30,000 + 80,000) (110,000)Consolidated sales 490,000

17-16: cTotal cost of goods sold (250,000 +120,000) 370,000Adjustments due to intercompany sale: COGS charged for intercompany sale (20,000 + 50,000) 70,000 COGS charged by: Star (30,000 – 6,000) 24,000

Polo (80,000 – 20,000) 60,000Total 154,000Cost of goods sold for consolidated entity:

20,000 x (24,000/30,000) (16,000)50,000 x (60,000/80,000) (37,500) (100,500)

Consolidated cost of goods sold 269,500

17-17: cPolo Corp. net income from own operation (105,000 – 25,000) 80,000Unrealized profit in ending inventory-DS (6,000 x 10/30) (2,000)Adjusted Polo Corp. net income from own operation 78,000Star Corp. net income from own operation:

Net income 45,000Unrealized profit in EI-US (20,000 x 30/80) (7,500)Amortization (20,000/10 years) (2,000) 35,500

Consolidated net income 113,500MINIS (35,500 x 40%) (14,200)Attributable to Parent 99,300

17-18: aPepsi net income from own operation 160,000Sarsi net income 90,000Unrealized profit in EI (45,000 x 60/180) (15,000) 75,000Consolidated net income 235,000MINIS (75,000 x 30%) (22,500)Consolidated net income attributable to Parent-2007 212,500

17-19: aInventory-Pepsi P 30,000Less: unrealized profit in books of Sarsi: (135,000 – 90,000) x (30,000/135,000) (10,000) 20,000Inventory-Sarsi P110,000Less: unrealized profit in books of Pepsi: (280,000 – 140,000) x (110,000/280,000) (55,000) 55,000Consolidated inventory 12/31/08 75,000

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17-20: aCost of goods sold on sale of inventory on hand-1/1/08:

[45,000 x (120,000/180,000)] 30,000Cost of goods sold on purchases from Sarsi- 2008

[(135,000 – 30,000) x (90,000/135,000)] 70,000Cost of goods sold on purchases from Pepsi- 2008

[(280,000 – 110,000) x (140,000/280,000)] 85,000Consolidated cost of goods sold-2008 185,000

17-21: bPepsi net income 220,000Sarsi net income 85,000Realized profit in beginning inventory - 2008 15,000Unrealized profit in ending inventory- Sarsi (10,000)Unrealized profit in ending inventory- Pepsi (55,000)Consolidated net income 255,000

PROBLEMS

Problem 17-1

a. Consolidated Net IncomeNet income from own operations – P Company P200,000S Co. adjusted net income:

Net income – S P30,000Unrealized profit in ending inventory – Upstream (P9,000 x 50/150) (3,000)Realized profit in beginning inventory- Upstream (P6,000 x 50/150) 2,000 29,000

Consolidated net income P229,000

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b. Minority Interest in Net Income of SubsidiaryAdjusted net income - S Co. P 29,000Minority interest x 30%Minority interest in net income of subsidiary P 8,700

Problem 17-2

a. Consolidated Net IncomeNet income from own operations – P Co. P100,000Realized profit in beginning inventory – Downstream

(P10,500 x 40/140) 3,000Adjusted net income P103,000

S Company adjusted net income:Net income – S P90,000Unrealized profit in ending inventory- Upstream (P8,000 x 25%) (2,000) 88,000

Consolidated net income P191,000

b. Minority Interest in Net Income of SubsidiaryAdjusted net income – S Co. P88,000Minority interest x 20%MINIS P17,600

c. Minority Interest in Net Assets of SubsidiaryStockholder’s equity , Jan. 1, 2008 – S Company P350,000Increase in earnings – 2008 (P90,000 – P35,000) 55,000Unrealized profit in ending inventory – Upstream (2,000)Stockholder’s equity, Dec. 31, 2008 – S Company P403,000Minority interest x 20%MINAS P 80,600

Problem 17-3

a. Net Assets, Dec. 31, 2008 – S Co.Minority interest per consolidated balance sheet, 12/31 P158,560Unrealized profit in ending inventory – Upstream

(P36,000 x 25/125) x 20% 1,440Minority interest per books – S Co. P160,000Divided by ÷ 20%Net assets- S Co. P800,000

b. Price PaidNet assets – S Co., Dec. 31, 2008 P800,000Net income – S Co. (160,000)Net assets – S Co., Jan. 1, 2008 P640,000Parent’s interest x 80%Book value of interest acquired P512,000Difference 20,000Price paid P532,000

Problem 17-4

The computation of the selected consolidation balances are affected by the inter-company profit in downstream intercompany sales as computed below:

Unrealized profit in ending inventory, Dec. 31, 2007 – DownstreamIntercompany profit (P120,000 – P72,000) P 48,000Inventory left at year end x 30%Unrealized profit, Dec. 31, 20057 P 14,400

Unrealized profit in ending inventory, Dec. 31, 2008 – Downstream

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Intercompany profit (P250,000 – P200,000) P 50,000Inventory left at year end x 20%Unrealized profit, Dec. 31, 2008 P 10,000

a. Consolidated SalesApo P800,000Bicol 600,000Intercompany sales – 2008 (250,000)Total P1,150,000

b. Cost of goods soldApo’s book value P 535,000Bicol’s book value 400,000Intercompany sales-2008 (250,000)Realized profit in beginning inventory – 2008 ( 14,400)Unrealized profit in ending inventory – 2008 10,000Consolidated cost of goods sold P 680,600

c. Operating expensesApo P 100,000Bicol 100,000Total P 200,000

d. Dividend Income – 0 (eliminated)

e. Minority Interest in Net Income of Subsidiary (P100,000 x 30%) P 30,000

f. InventoryApo P 298,000Bicol 700,000Unrealized profit in ending inventory, Dec. 31, 2008 (10,000)Consolidated inventory P 988,000

g. Minority Interest in Net Assets of SubsidiaryStockholders’ equity , Jan. 1, 2008 – Bicol P 950,000Increase in earnings in 2008 (P100,000 – P50,000) 50,000Stockholders’ equity, Dec. 31, 2008 – Bicol P1,000,000Minority interest x 30%MINAS P 300,000

Problem 17-5

P Company and SubsidiaryConsolidated Income StatementYear Ended December 31, 2008

Sales (P2,000,000 + P1,000,000 – P600,000) P2,400,000Cost of goods sold (Schedule 1) 704,000Gross profit 1,696,000Expenses 600,000Income before income tax 1,096,000Provision for income tax 440,000Consolidated net income after income tax 656,000Attributable to minority interest (Schedule 2) 44,000Attributable to parent P 612,000

Schedule 1:Cost of sales – P Company P 800,000Purchases from S Company (600,000)Intercompany profit in beginning inventory (P60,000 x 25%) ( 15,000)Intercompany profit in ending inventory (P76,000 x 25%) 19,000Total P 204,000Cost of sales – S Company 500,000Consolidated cost of sales P 704,000

Schedule 2:Net income – S Company P 180,000Realized profit in beginning inventory – Upstream 15,000Unrealized profit in ending inventory – Upstream (19,000)

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Adjusted net income P 176,000Minority interest x 25%MINIS P 44,000

Problem 17-6

a. Working Paper Eliminating Entries

(1) Dividend income 32,000Minority interest in net assets of subsidiary (20%) 8,000

Dividends declared- D (P32,000 / 80%) 40,000To eliminate intercompany dividends.

(2) Common stock – S 90,000Retained earnings – S 220,000

Investment in S Co. stock 248,000Minority interest in net assets of subsidiary 62,000

To eliminate equity accounts of S on the date of acquisition.

(3) Minority interest in net assets of subsidiary 4,000Retained earnings, Jan. 1 16,000

Cost of goods sold 20,000To eliminate realized profit in beginning inventory

(4) Sales 150,000Cost of goods sold 135,000Inventory, Dec. 31 (P45,000 x 33.33%) 15,000

To eliminated intercompany sales and unrealized profit in ending inventory.

(5) Minority interest in net income of subsidiary 8,000 Minority interest in net assets of subsidiary 8,000

To establish minority interest in net income of S Co. computed as follows:Sales P200,000Cost and expenses (P140,000 +P20,000) 160,000Net income 40,000Realized profit in beginning inventory – Upstream 20,000Unrealized profit in ending inventory – Upstream (15,000)Adjusted net income P 45,000Minority interest x 20%MINIS P 9,000

b. Consolidated Net IncomeNet income from own operations (P250,000 – P205,000) P 45,000S Company adjusted net income 45,000Consolidated net income P 90,000

c. Minority Interest in Net Assets of Subsidiary (MINAS)Stockholders’ equity, Dec. 31, 2008 – S Company P 310,000Adjusted net income – 2008 45,000Adjusted net assets, Dec. 31, 2008 – S Co. P 355,000Minority interest x 20%MINAS P 71,000

Problem 17-7

a. Consolidated SalesReported total sales (P600,000 + P510,000) P1,170,000Intercompany sales (P140,000 + P240,000) (380,000)Consolidated sales P 790,000

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b. Consolidated Cost of Goods SoldCost of goods sold:

Pato (P660,000 / 140%) P 471,429Sales (P510,000 / 120% 425,000

Amount to be eliminated (P128,000 + P232,000) see entry below ( 360,000)Total P 536,429

Elimination of intercompany sales and intercompany profit in inventory:

Downstream SalesSales 140,000

Inventory (P42,000 x 40/140) 12,000Cost of goods sold 128,000

Upstream SalesSales 240,000

Inventory (P48,000 x 20/120) 8,000Cost of goods sold 232,000

c. Consolidated Net IncomeNet income from own operations – Pato P 70,000Unrealized profit in ending inventory – Downstream (12,000)Adjusted net income – Pato P 58,000Add: Adjusted net income of Sales Co.

Net income P20,000Unrealized profit in ending inventory – Upstream (8,000) 12,000

Consolidated net income P 70,000

d. Consolidated Inventory, Dec. 31, 2008Inventory reported – Pato P 48,000Inventory reported – Sales 42,000Unrealized profit in ending inventory (P8,000 + P12,000) (20,000)Consolidated inventory P 70,000

Problem 17-8

a. Unrealized Profit in Beginning InventoryBeginning inventory - Downstream P 100,000Gross profit rate (P240,000/ P400,000) x 60%Unrealized profit in beginning inventory P 60,000

Unrealized Profit in Ending InventoryEnding inventory – Downstream (P200,000 x 80%) P 160,000Gross profit rate x 60%Unrealized profit in ending inventory P 96,000

b. Intercompany SalesSales – P Company P2,000,000Sales – S Company 1,000,000Intercompany sales – 2008 (400,000)Consolidated sales P2,600,000

Intercompany Cost of SalesCost of sales – P Company P 800,000Cost of sales – S Company 600,000Intercompany purchases (400,000)

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Intercompany profit in beginning inventory ( 60,000)Intercompany profit in ending inventory 96,000Consolidated cost of sales P1,036,000

c. Parent’s interest (40,000 shares / 50,000 shares) 80%

P Company Entries – 2008:(1) Investment in S Company stock 96,000

Income from subsidiary 96,000To record P’s share of S Co. income(P120,000 x 80%)

(2) Cash 48,000Investment in S Company stock 48,000

To record dividends received from S(P60,000 x 80%)

(2) Income from subsidiary 36,000Investment in S Company stock 36,000

To adjust income from subsidiary for intercompanyprofit in :

Ending inventory (96,000)Beginning inventory 60,000Net adjustment ( 36,000)

d. Working Paper Eliminating Entries:

(1) Income from subsidiary 60,000Minority interest in net assets of subsidiary (P60,000 x 20%) 12,000

Dividends declared – S 60,000Investment in S Company stock 12,000

To eliminate intercompany dividends.

(2) Common stock – S Co. 500,000Retained earnings – S Co. 860,000

Investment in S Company stock 1,088,000Minority interest in net assets of subsidiary 272,000

To eliminate equity accounts of S Company as ofbeginning of year.

(3) Goodwill 60,000Investment in S Company stock 60,000

To allocate difference to goodwill.

(4) Retained earnings – Jan. 1 60,000Cost of sales 60,000

To eliminate realized profit in beginning inventory-Downstream.

(5) Cost of sales 96,000Inventories 96,000

To eliminate unrealized profit in ending inventory-Downstream.

(6) Sales 400,000Cost of sales 400,000

To eliminate intercompany sales.

(7) Accounts payable 50,000Accounts receivable 50,000

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To eliminate intercompany payables and receivables.

(8) Minority interest in net income of subsidiary 24,000Minority interest in net assets of subsidiary 24,000

To establish minority share of S net income(P120,000 x 20%)

e. Consolidated Net IncomeNet Income from own operations – P Company (P480,000 – P60,000) P420,000Realized profit in beginning inventory 60,000Unrealized profit in ending inventory ( 96,000)Adjusted net income – P Compay P384,000S Company net income 120,000 Consolidated net income P504,000

CHAPTER 18

MULTIPLE CHOICE

18-1: a

Equipment – at original cost P500,000

Accumulated depreciation:Time of sale P250,000Current depreciation based on Original cost (P500,000/10 years 50,000 P300,000

18-2: b

Net income – Sol P100,000Unrealized gain on sale of computer, Dec. 31 ( 30,000)Adjusted net income P 70,000Minority interest proportionate share 30%Minority interest in net income of subsidiary (MINIS) P 21,000

18-3: b 2005 2006

Net income from own operations – Prime P200,000 P250,000Unrealized gain – Downstream (30,000) __ - Realized net income – Prime P170,000 P250,000Second Company net income 100,000 150,000Consolidated net income P270,000 P400,000

18-4: c

Net income – Saw P100,000Unrealized loss-Upstream 12,000Realized loss ((P12,000 / 5) x 6/12 ( 1,200)Adjusted net income – Saw P110,800

Minority interest in net income of subsidiary (P110,800 x 25%) P 27,700

18-5: c

Equipment – at original cost P1,000,000

Accumulated depreciation:Time of sale P360,000Current depreciation (P900,000/10) 90,000 P 450,000

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18-6: a

Adjusted net income – Susie (P12,000 / 40%) P 30,000Add back: Unrealized gain – Upstream 90,000Net income of Susie – 2008 P120,000

18-7: a

Original cost P100,000Amount debited to Truck account (48,000)Selling price of the truck – Amount paid P 52,000

18-8: c

Net income – Po P200,000Unrealized gain, Dec. 31 – DS (30,000)Net income from own operation – Po 270,000Net income of So 180,000Consolidated net income, Dec. 31, 2008 P350,000MINIS (P180,000 x 20%) (36,000)Attributable to parent P314,000

18-9: b

Stockholders’ equity, Jan. 1, 2008 – Sy P1,000,000Increase in earnings – 2008 (P65,000 – P30,000) 35,000Stockholders’ equity, Dec. 31, 2008 – Sy P1,035,000

Minority interest in net assets of subsidiary (P1,035,000 x 20%) P 207,000

18-10: b

Consolidated net income attributable to parent:Net income – Pink P300,000Unrealized gain, July 1- Downstream ( 50,000)Realized gain, Dec. 31 (P50,000 / 10) x 6/12 2,500Realized net income – Pink P252,500Soda’s adjusted net loss:

Net loss P(40,000)Unrealized loss, 1/1 – Upstream 15,000Realized loss, 12/31 (P15,000/5) ( 3,000) (28,000)

Consolidated net income, Dec. 31, 2008 P224,500MI in net loss of subsidiary (P28,000 x 20%) 5,600Attributable to parent P230,100

Minority interest in net assets of subsidiaryNet assets, Jan. 1, 2008 (P1,240,000 / 80%) P1,550,000Decrease in earnings:

Net loss P40,000Dividends paid 30,000 ( 70,000)

Net assets, Dec. 31, 2008 P1,480,000Unrealized loss, Dec. 31 (Upstream) ( 12,000)Adjusted net assets, Dec. 31, 2008 P1,468,000

Minority interest in net assets of subsidiary (P1,468,000 x 20%) P 293,600

18-11: a

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Net assets, Dec. 31, 2008Minority interest, Dec. 31, 2008 P188,960Add: MI share of unrealized profit in ending inventory -Upstream

(P36,000 x 20%) x 20% 1,440 MI share of unrealized gain on sale of equipment- Upstream

(P60,000 x 20%) – (P12,000 / 5) 9,600Minority interest before adjustment P200,000

Net assets – Steve, Dec.31, 2008 (P200,000 / 20%) P1,000,000

Investment in Steve Company stock – Equity methodAcquisition cost:

Net assets, Dec. 31, 2008 P1,000,000Less: net income – steve

MINIS P36,960MI share of unrealized profit in ending Inventory – Upstream 1,440MI share of unrealized gain on sale of Equipment – Upstream 9,600MINIS per book P48,000Divided by 20% 240,000

Net assets, Jan. 1, 2008 P 760,000Parent’s proportionate share x 80%Book value of interest acquired P 608,000Add: difference 20,000Purchase price (acquisition cost) P 628,000

Add: Investment incomePeter’s share of Steve net income (P240,000 x 80%) P 192,000Unrealized profit in ending inventory – Downstream

(P24,000 x 20%/120%) x 100% ( 4,000)Unrealized profit in beginning inventory – Upstream

(P36,000 x 25/125%) x 80% ( 5,760)Unrealized gain on sale of equipment – Upstream

(P48,000 – 9,600) ( 38,400)Investment in Steve Company, Dec. 31, 2008 P 771,840

18-12: a

Net income from own operations – Pipe P400,000Pipe’s share of Smoker’s adjusted net income:

Net income P100,000Unrealized gain, July 1, 2008 – Upstream (50,000)Realized gain, Dec. 31, 2008 (P50,000/5)x ½ 5,000 55,000

Consolidated net income, Dec. 31, 2008 P455,000

18-13: d 2007 2008

Net income from operations – Parent P100,000 P120,000Parent’s share of adjusted net income of Sub:

Net income P 60,000 P 75,000Unrealized gain – Upstream ( 9,000) -Realized gain: 2007 (P9,000/3) x ¼ 750

2008 (P9,000/3) - 3,000Adjusted net income P 51,750 P 78,000

Consolidated net income P151,750 P198,000MINIS (10,350) (15,600)Attributable to parent P141,400 P182,400

18-14: d

Investment in Sili Company stock – Equity methodAcquisition cost P500,000Investment income net of dividends – 2005 to 2007: Increase in earnings (P500,000 – P200,000) x 75% 225,000

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Investment income, Dec. 31, 2007: Share of Sili’s net income (P60,000 x 75%) 45,000 Unrealized gain on sale of land – Downstream (15,000) Unrealized loss on sale of building – Downstream 10,000 Realized loss on sale of building (P10,000 / 5) x 75% ( 1,500) 38,500Investment income, Dec. 31, 2008: Share of Sili’s net income (P70,000 x 75%) 52,500 Realized loss (P10,000 / 5) (2,000) 50,500Dividends received: 2007: (P10,000 x 75%) 7,500 2008: (P20,000 x 75%) 15,000 (22,500)Investment in Sili Company stock, Dec. 31, 2008 P791,500

18-15: a

Investment in Saw Company stock, Dec. 31, 2008Acquisition cost P550,000Investment income – 2002 to 2006: Increase in earnings (P500,000 – P300,000) x 90% 180,000Investment income – 2007 (see above) 101,250Investment income – 2008: Power’s share of Saw’s net income (P120,000 x 90%) P108,000 Realized loss on sale of warehouse (P20,000/2) x 90% (9,000) 99,000Dividends received: 2007: ( P20,000 x 90%) P 18,000 2008: ( P30,000 x 90%) 27,000 (45,000)Investment in Saw Company stock account balance 12/31/08 P885,250

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PROBLEMSProblem 18-1Computation of the missing amounts in the working paper eliminations for P Corporation and S Company:

(1) P640 (P3,200 x 20%)(2) P2,560 (P3,200 x 80%)(3) P1,600 (P800 x 2)(4) P320 (P1,600 x 20%)(5) P1,280 (P1,600 x 80%)(6) P3,200 (P800 x 4)

Problem 18-2a. Consolidated Net Income

Net income from own operations – P Company P200,000Unrealized gain on sale of equipment, Dec. 31 – Downstream (30,000)Adjusted net income – P Co, P170,000S Company net income 180,000Consolidated net income P350,000

b. Minority interest in net income of subsidiary (P180,000 x 20%) P 36,000

c. Minority Interest in Net Assets of Subsidiary:Stockholders’ equity, Jan. 1, 2008 – S Company P 900,000Increase in earnings – 2008 (P180,000 – P60,000) 120,000Stockholders’ equity, Dec. 31, 2008 – S Company P1,020,000Minority interest x 20%Minority interest in net assets of subsidiary P 204,000

Problem 18-3

Pony Corporation and SubsidiaryConsolidated Income StatementYear Ended December 31, 2008

Sales (P500,000 + P300,000) P800,000Gain on sale of machinery (schedule 1) 20,000Total revenue 820,000Cost of sales P200,000 + P130,000) 330,000Gross profit 490,000Expenses:

Depreciation (P50,000 +P30,000 – P5,000) P 75,000Other expenses (P80,000 + P140,000) 220,000 295,000

Consolidated net income 785,000Attributable to minority interest (P190,000 + P5,000) +10,000) x 25% (28,750)Attributable to parent P266,250

Schedule 1:Selling price – Dec. 28, 2008 P36,000Book value (P65,000 ÷ 5) x3 26,000Gain on sale 10,000Unrealized gain (P25,000 – P15,000) 10,000Total gain P20,000

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Problem 18-4

a. Consolidated Net IncomeNet income from own operations – P Company P300,000Adjusted net income of S Company:

Net income – S P150,000Unrealized gain, 4/1/08 - Upstream ( 30,000)Realized gain, 12/31/08 (P30,000/5) x 9/12 4,500 124,500

Consolidated net income 424,500MINIS (P124,500 x 20%) (24,900) Attributable to parent P399,600

b. Minority Interest in Net Assets of SubsidiaryStockholders’ equity , Jan. 1, 2008 – S Company P800,000Increase in adjusted earnings – 2008:

Net earnings (P150,000 – P50,000) P100,000Unrealized gain – 12/31 (P30,000 – P4.500) (25,500) 74,500

Stockholders’ equity, Dec. 31, 2008 P874,500Minority interest x 20%MINAS P114,900

Problem 18-5

a. Consolidated Net Income - 2008Net income from own operations – BJ P300,000Gain on sale of machine, July 1 - Downstream (50,000)Realized gain, Dec. 31 (P50,000 / 10) x 6/12 2,500Adjusted net income – BJ P252,500Net income (loss) of DK:

Net income (loss) – DK P(40,000)Loss on sale of truck , Jan. 1 - Upstream 15,000Realized loss, Dec. 31 (P15,000 / 5) ( 3,000) (28,000)

Consolidated net income P224,500

b. Minority Interest in Net Income of SubsidiaryNet loss from own operations – DK P (40,000)Upstream loss on sale of truck 15,000Realized loss on sale of truck ( 3,000)Adjusted net loss P ( 28,000)Minority interest x 20%MI in net loss of subsidiary P ( 5,600)

c. Minority Interest in Net Assets of SubsidiaryNet assets, Jan. 1, 2006 (P1,240,000 / 80%) P1,550,000Increase in earnings (loss) -2006 (P40,000 + P30,000) (70,000)Net assets, Dec. 31, 2006 P1,480,000Unrealized loss – Upstream (P15,000 – P3,000) 12,000Adjusted net assets P1,492,000Minority interest x 20%MINAS P 298,400

Problem 18-6

Texas Company and SubsidiaryConsolidated Income StatementYear Ended December 31, 2008

Sales P1,500,000Cost of goods sold 650,000Gross profit 850,000Expenses (P200,000 + P100,000 – P8,000 ) 292,000Consolidated net income P 558,000Attributable to minority interest (P150,000 x 25%) 37,500Attributable to parent P 520,500

75

Adjustment for expenses (depreciation) = P40,000 / 5 years.

Problem 18-7

a. Leo Company and SubsidiaryConsolidated Balance Sheet Working PaperDecember 31, 2007

Leo Taurus Adjustments & Eliminations

Consoli-

Company Corporation Debit Credit datedCash and receivables 101,000 20,000 121.000Inventory 80,000 40,000 120,000Land 150,000 90,000 (2) 10,000 250,000Building and equipment 400,000 300,000 (3) 9,000 709,000Investment in stock –Taurus 141,000 (3) 15,000 (1)150,000 -

(2) 6,000Total debits 872,000 450,000 1,200,000

Accumulated depreciation 135,000 85,000 (3) 24,000 244,000Accounts payable 90,000 25,000 115,000Notes payable 200,000 90,000 290,000Common stock 100,000 200,000 (1)200,000 100,000Retained earnings 347,000 50,000 (1) 50,000 347,000

MI in net assets in Subsidiary (1)100,000(2) 4,000

104,000

Total 872,000 450,000 1,200,000

(1) To eliminate equity accounts of subsidiary(2) To intercompany gain on sale of land.(3) To eliminate intercompany gain on sale of equipment debited to Investment account and restore equipment to its original book

value.

b. Leo Company and SubsidiaryConsolidated Balance SheetDecember 31, 2008

Cash and receivables P121,000Inventory 120,000Land 250,000Building and equipment P709,000Less: Accumulated depreciation 244,000 465,000Total assets P956,000

Accounts payable P115,000Notes payable 290,000Common stock stock 100,000Retained earnings 347,000Minority interest in net assets of subsidiary 104,000Total liabilities and equity P956,000

Problem 18-8

a. Working Paper Elimination Entries – Dec. 31, 2008

(1) Dividend income 4,000Minority interest in net assets of subsidiary 1,000

Dividends declared – Jupiter 5,000To eliminate intercompany dividends

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(2) Common stock – Jupiter 100,000Retained earnings – Jupiter 50,000

Investment in Jupiter stock 120,000Minority interest in net assets of subsidiary 30,000

To eliminate equity accounts of Jupiter as of thedate of acquisition

(3) Goodwill 40,000Investment in Jupiter Stock 40,000

To allocate difference to goodwill

(4) Retained earnings – Jan. 1 8,000Minority interest in net assets of subsidiary 2,000

Land 10,000To eliminate unrealized gain on sale of land – Upstream.

(5) Gain on sale of equipment 20,000Building and equipment 5,000

Accumulated depreciation 25,000To eliminate gain on sale of equipment

(6) Accumulated depreciation 2,000Depreciation 2,000

To adjust excess depreciation

(7) Accounts payable 7,000Accounts receivable 7,000

To eliminate intercompany payables and receivables.

(8) Minority interest in net income of subsidiary 6,000Minority interest in net assets of subsidiary 6,000

(P40,000 – 10,000) x 20%

77

b. Vincent Company and SubsidiaryConsolidation Working PaperDecember 31, 2008

Vincent Jupiter Adjustments & Eliminations

Consoli-

Company Company Debit Credit datedIncome StatementSales 240,000 120,000 360,000Gain on sale of equipment 20,000 (5) 20,000 -Dividend income 4,000 (1) 4,000 -Total revenues 264,000 120,000 360,000Cost of goods sold 140,000 60,000 200,000Depreciation 25,000 15,000 (6) 2,000 38,000Other expenses 15,000 5,000 20,000Total cost and expenses 180,000 80,000 258,000Net/consolidated income 84,000 40,000 102,000MI in net income of subsidiary (8) 6,000 (6,000)Net income carried forward 84,000 40,000 96,000

Retained Earnings StatementRetained earnings, Jan.1 294,000 105,000 (2) 50,000

(4) 8,000341,000

Net income from above 84,000 40,000 96,000Total 378,000 145,000 437,000Dividends declared 30,000 5,000 (1) 5,000 30,000Retained earnings, Dec. 31 Carried forward 348,000 140,000 407,000

Balance SheetCash and receivables 113,000 35,000 (7) 7,000 141,000Inventory 260,000 90,000 350,000Land 80,000 80,000 (4) 10,000 150,000Buildings and equipment 500,000 150,000 (5) 5,000 655,000Investment in Jupiter stock 160,000 (2)120,000 -

(3) 40,000Goodwill (3) 40,000 40,000Total 1,113,000 355,000 1,336,000

Accumulated depreciation 205,000 45,000 (6) 2,000 (5) 25,000 273,000Accounts payable 60,000 20,000 (7) 7,000 73,000Bonds payable 200,000 50,000 250,000Common stock 300,000 100,000 (2)100,000 300,000Retained earnings from above 348,000 140,000 407,000MI in net assets of subsidiary

Total 1,113,000 355,000

(1) 1,000(4) 2,000

245,000

(2) 30,000(8) 6,000

245,000

33,000

1,336,000

.

c. Consolidated Financial Statements

Vincent Company and SubsidiaryConsolidated Balance Sheet

78

December 31, 2008

AssetsCash and receivables P 141,000Inventory 350,000Land 150,000Buildings and equipment P655,000Less: Accumulated depreciation 273,000 382,000Goodwill 40,000Total assets P1,063,000

Liabilities and Stockholders’ equityLiabilitiesAccounts payable P 73,000Bonds payable 250,000Total liabilities P 323,000Stockholders’ EquityCommon stock P300,000Retained earnings 407,000Minority interest in net assets of subsidiary 33,000 740,000Total liabilities and stockholders’ equity P1,063,000

Vincent Company and SubsidiaryConsolidated Income StatementYear Ended December 31, 2008

Sales P 360,000Cost of goods sold 200,000Gross profit 160,000Expenses: Depreciation P 38,000

Other expenses 20,000 58,000Consolidated net income 102,000Attributable to minority interest 6,000Attributable to parent P 96,000

Vincent Company and SubsidiaryConsolidated Retained EarningsYear Ended December 31, 2008

Retained earnings, Jan. 1 – Vincent P 294,000Retained earnings, Jan. 1 – Jupiter 47,000Total 341,000Consolidated net income attributable to parent 96,000Dividends declared – Vincent ( 30,000)Consolidated retained earnings P 407,000

Problem 18-9

(a) P100,000 (the common stock of Phantom only)

(b) P140,000

© P250,000 (P593,000 – P343,000)

(d) P100,000 (P126,000 – P35,000) + [(P25,000 + P85,000) - P101,000]

(e) 0

(f) Purchase price, Jan. 1, 2008 P105,000

79

Undistributed earnings from 1/1/05 to 1/1/08:(P80,000 – P30,000) x 60% 30,000

Undistributed income for 2008 (P30,000 – P20,000) x 60% 6,000Total P141,000Adjustments:Unrealized gain on sale of land – Downstream (g) (7,000)Unrealized gain on sale of equipment – Upstream

(P9,000 – P3,000) x 60% (3,600)Adjusted Investment account balance, Dec. 31, 2008 P 70,400

(g) P7,000 (P70,000 + P90,000) – P153,000 (h) 0

(i) P510,000 [P345,000 + P150,000 + (P60,000 – P45,000)]

(j) P278,000 = P180,000 + P80,000 + [(P60,000/5) x 4 ] Less [(P45,000 / 3) x 2 years]

(k) Retained earnings, Dec. 31, 2008 P380,000Less: Share of unrealized profit on sale of equipment:

Gain record [P45,000 – (P60,000 x 3/5)] P9,000Realized in 2008 (P9,000 / 3) 3,000Unrealized P6,000Phantoms’ interest x 60% 3,600

Consolidated retained earnings P376,400

(l) Net income – Shadow, 2008 (P250,000 – P220,000) P 30,000Realized gain on sale of building c Dec. 31, 2006 – Upstream 3,000Adjusted net income P 33,000Minority interest x 40%Minority interest in net income of subsidiary P 13,200

Problem 18-10

Supporting computations

(1) Allocation schedule (purchase price) P 372,000Less: Book value of interest acquired (P350,000 x 60%) 210,000Difference P 162,000Allocated to patents (P120,000 x 60%) ( 72,000)Goodwill P 90,000

Amortization of patents (P120,000 / 12) P 10,000

(2) Unrealized gain on intercompany sale of building – Upstream, Jan. 1, 2006:Unrealized gain at date of sale (P80,000 – P30,000) P 50,000Realized gain (P50,000 / 5) x 2 years (20,000)Unrealized gain as of Jan. 1, 2008 P 30,000

(3) Realized profit from intercompany sale of inventory – Downstream, 1/1/08:Remaining inventory as of Dec. 31, 2007 P 50,000Gross profit rate on sales – 2007 (P30,000 / P150,000) x 20%Realized profit as of Jan. 1, 2008 P 10,000

(4) Unrealized profit from intercompany sale of inventory – Downstream, 12/31/08Remaining inventory as of Dec. 31, 2008 P 40,000Gross profit rate on sales – 2008 (P48,000 / P160,000) x 30%Unrealized profit as of Dec. 31, 2008 P 12,000

Consolidated balances – 2008

80

a. Cost of goods SoldCost of goods sold – Apex P 460,000Cost of goods sold – Small 205,000Intercompany sale of inventory – 2008 (160,000)Realized profit on beginning inventory ( 10,000)Unrealized profit on ending inventory 12,000)Consolidated P 507,000

b. Operating ExpensesOperating expenses – Apex P 170,000Operating expenses – Small 70,000Amortization (No. 1 above) 10,000Excess depreciation (P50,000 / 5 years) (10,000)Consolidated P 240,000

c. Consolidated Net IncomeSales (after elimination of intercompany sales) P 840,000Cost of goods sold (a) (507,000)Operating expenses (b) (240,000)Minority interest in net income of subsidiary:

Net income – Small P25,000Realized gain on sale of building – Upstream 10,000Adjusted net income P35,000Minority interest x 40% ( 14,000)

Attributable to parent P 79,000

d. Consolidated Retained Earnings, Jan. 1, 2008Retained earnings, Jan. 1, 2008 – Apes P 690,000Amortization of patents – 2002 to 2007 (P10,000 x 6) (60,000)Unrealized profit on inventory, 2007 – Downstream (10,000)Unrealized gain on sale of building, 1/1/08 - Upstream (P30,000 x 60%) (18,000)Consolidated retained earnings, Jan. 1, 2008 P 602,000

e. Consolidated InventoryInventory – Apex P 233,000Inventory – Small 229,000Unrealized profit in inventory – Dec. 31, 2008 ( 12,000)Consolidated inventory P 450,000

f. Consolidated BuildingBuildings – Apex P 308,000Buildings – Small 202,000Unrealized gain, Jan. 1, 2006 (50,000)Realized gain, 2006 – 2008 (P10,000 x 3 ) 30,000Consolidated buildings P 490,000

g. Consolidated PatentsPatents – Small P 20,000Allocation 120,000Amortization, 2002 – 2008 (P10,000 x 7) ( 70,000)Consolidated patents (net) P 70,000

h. Consolidated Common Stock = P300,000 (Apex common stock)

i. Minority Interest in Net Assets of SubsidiaryStockholders’ equity – Small, Dec. 31, 2008 (P100,000 + P420,000) P 520,000Unrealized gain on sale of building, Dec. 31,2008 – Upstream (20,000)Adjusted net assets, Dec. 31, 2008 P 500,000

81

Minority interest x 40%Minority interest in net assets of subsidiary P 200,000

Problem 18-11

a. Working Paper Elimination Entries

(1) Retained earnings – Jan. 1 6,000Investment in Duke 6,000

To adjust Investment account for unrealized profitin inventory on Dec. 31, 2005 (P10,000 x 60%)

(2) Income from Duke Company 84,000Minority interest in net assets of subsidiary 24,000

Dividends declared – Duke 60,000Investment in Duke 48,000

To eliminate intercompany dividends.

(3) Common stock – Duke 320,000APIC – Duke 90,000Retained earnings, 1/1 – Duke 620,000

Investment in Duke (60%) 618,000Minority interest in net assets of subsidiary (40%) 412,000

To eliminate equity accounts of Duke as of beginning of year.

(4) Goodwill 100,000Investment in Duke 100,000

To allocate difference

(5) Impairment loss 5,000Goodwill 5,000

To reduce goodwill for impairment.

(6) Sales 200,000Cost of goods sold 200,000

To eliminated intercompany sales

(7) Investment in Duke 6,000Minority interest in net assets of subsidiary 4,000

Cost of goods sold 10,000To eliminate realized profit in beginning inventory – Upstream

(8) Cost of goods sold 12,000Inventory 12,000

To eliminate unrealized profit in ending inventory – Upstream

(9) Investment in Duke 40,000Land 40,000

To eliminate gain on sale of land – Downstream

(10) Liabilities 40,000Accounts receivable 40,000

To eliminate intercompany debt.

(11) Minority interest in net income of subsidiary 53,200Minority interest in net assets of subsidiary 53,200

(P140,000 + 10,000 – P12,000 – P5,000) x 40%

b. Minority Interest in Net Income of SubsidiaryNet income – Duke P140,000

82

Realized profit in beginning inventory – Upstream 10,000Unrealized profit in ending inventory – Upstream ( 12,000)Impairment loss ( 5,000)Adjusted net income – Duke P133,000Minority interest x 40%MINIS P 53,200

c. Minority Interest in Net Assets of SubsidiaryStockholders’ equity, 1/1/08 – Duke (P320,000 + P90,000 + 620,000)P1,030,000Increase in earnings – 2008 (P140,000 – P60,000) P80,000Unrealized profit in ending inventory (12,000)Realized profit in beginning inventory 10,000Goodwill impairment loss ( 5,000) 73,000 Adjusted net assets, 12/31/08 P1,103,000Minority interest x 40%MINAS P 441,200

d. Consolidated Net IncomeNet income from own operations – Baron (P284,000 – P84,000) P 200,000Unrealized gain on sale of land (10,000)Adjusted net income- Baron P 190,000Adjusted net income of Duke (P133,000 x 60%) 133,000Consolidated net income P 323,000

Problem 18 – 12

Pluto Corporation and Subsidiary Star CorporationComparative Consolidated Income StatementYears Ended December 31, 2007 and 2008

. December 31 .

. 2008 2007 .Sales P800,000 P660,000Cost of goods sold 442,000 368,000 . Gross profit 358,000 292,000Operation expenses 178,000 138,000 . Consolidated net income 180,000 154,000Minority interest in net income of subsidiary 10,000 10,000 . Attributable to equity holders of Pluto P170,000 P144,000 .

Supporting computations:. .. 2008 2007 .Consolidated sales:Combined sales P850,000 P700,000Less: intercompany sales (50,000) (40,000) . Consolidated sales P800,000 P660,000 .

Consolidated cost of goods sold:Combined costs of good sold P490,000 P400,000Intercompany sales (50,000) (40,000)Unrealized profit in ending inventory 10,000 8,000Unrealized profit in beginning inventory (8,000) . Consolidated cost of goods sold P442,000 P368,000 .

Consolidated operating expensesCombined operating expenses P180,000 P140,000Realized gain on sale of equipment (P10,000/.2) (2,000) (2,000) . Consolidated operating expenses P178,000 P138,000 .

Minority interest in net income of subsidiaryStar Company’s reported net income P65,000 P50,000Gain on upstream sale of land (5,000)Unrealized gain in upstream, inventory sales (10,000) .

83

Realized net income P50,000 P50,000Minority interest 20% 20% . Minority interest in net income of subsidiary P10,000 P10,000 .

CHAPTER 19

Multiple Choice

19-1: d.

Direct exchange rate:December 1 1 ÷ 2.22 yen = P 0.45December 31 1 ÷ 2.70 yen = 0.37

Decrease in forex rate P 0.08

Forex gain (200,000 yen x P0.08) P 16,000

19-2: c.

Forex rate, December 1 P 0.45Forex rate, December 31 0.47 Increase in forex rate P 0.02

Forex gain (1,500,000 yen x P0.02) P 30,000

19-3: d.

September 30:Forex rate, September 1 P 5.61Forex rate, September 30 5.59 Decrease in forex rate P 0.02

Forex gain (200,000 hkg.$ x P0.02) P 4,000

84

December 31:Forex rate, October 1 P 5.59Forex rate, December 30 5.62 Increase in forex rate P 0.03

Forex loss (200,000 hkg.$ x P0.03) P (6,000)

19-4: c.

Forex loss on importation of merchandise:Peso equivalent, January 10, 2004 P 600,000Peso equivalent, April 20, 2004 608,000Forex loss (increase) P (8,000)

Forex loss on notes payable:Peso equivalent, September 1, 2004 P 3,000,000Peso equivalent, December 31, 2004 3,200,000 Forex loss on principal P (200,000)Add: Forex loss on interest Based on P 3,2000,000 P 120,000 Based on P 300,000,000 (P3,000,000x10%x4/12) 100,000 20,000Forex loss P (220,000)

Total forex loss (P 8,000 + P220,000) P (228,000)

19-5: a.

Direct forex rate – Transaction date (P 1 ÷ $0.018) P 55.5555Direct forex rate – Balance sheet date (P 1 ÷ $0.017) 58.8235Direct forex rate – Settlement date (P 1 ÷ $0.020) 50.0000

Forex gain (loss), 2004Transaction date ($10,000 x P55.5555) P 555,555Balance sheet ($10,000 x P 58.8235) 588,235 Forex loss (increase) P ( 32,680)

Forex gain (loss), 2005Balance sheet date ($10,000 x P58.8235) P 588,235Settlement data ($10,000 x P 50.00) 500,000 Forex gain (decrease) P 88,235

19-6: b.

Adjusted value of accounts receivable, 6/30 P 315,000Peso equivalent, 7/27 300,000Forex loss P (15,000)

19-7: a.

2004Forex rate, 11/5/04 P 0.4295Forex rate, 12/31/04 0.4245Decrease in forex rate P 0.0050Payable in foreign currency 50,000Forex gain P 250

2005Forex rate, 12/31/04 P 0.4245Forex rate, 1/15/05 0.4345Decrease in forex rate P 0.0100Payable in foreign currency 50,000Forex loss P (500)

85

19-8: a. (1000,000 FC x P 0.85)

19-9: c. (50,000 FC x P 0.6498)

19-10: b

Forward rate, 3/31/04 P 0.25Selling spot rate, 4/30/04 0.22 Decrease

P 0.03Forward contract receivable 100,000 FCForex loss P 3,000

19-11: d. forex gain (loss) on purchase commitments is based on the changes in the forward rates.

Forward rates – December 31, 2004 P .005590-day forward rate .0055

On December 31, 2004, no changes in forward rates occurred, so no forex gains (losses) are to berecognized on December 31, 2004 under both transactions.

19-12: b.

Forward contract receivable (P100,000 Baht x P1.650) P 165,000Spot rate (100,000 Baht x P1.600) 160,000Forex loss P (5,000)

19-13: d.

Import transaction – Based on spot rates:12/31/04: Forex loss [1,000,000 Francs x (P6.01 – P6.16)] P (150,000)

Forward Contract – Based on forward rates:12/31/04: Forex gain [1,000,000 Francs x (P6.06 – P6.07)] P 10,000

Net forex loss P (140,000)19-14: b.

12/31/04: Forex gain [$5,000 x (P56.50 – P56.60)] P 5003/31/04 : Forex loss:

Forward contract receivable ($5,000 x P56.60) P 283,000 Settlement at spot rate ($5,000 x P56.32) 281,600 (1,400)

Net forex loss P (900)

19-15: a.

Increase in forward rates:Forward contract receivable, 11/1/04 (10,000 fc x P.78) P 7,800Forward contract receivable, 12/31/04 (10,000 fc x P82) 8,200Forex loss P (400)

19-16: b. Increase in forward rates [100,000 x (P.90 – P.93)]

19-17: cGain from increase in intrinsic value of put option 100Loss from decrease in fair value of available for sale securities (100)Loss from decrease in time value of the option (60)Net loss on hedging activity 12/31/07 (60)

19-18: a

86

19-19: a12/01/08: A$ 70,000/P42,000= 1.667 A$ to P1.0012/31/08: A$ 70,000/P41,700= 1.679 A$ to P1.00

19-20: a, A$70,000 x P.57 (December 31 forward rate)

19-21: a, The balance will not change, because it is denominated in Philippine peso.

19-22: aP82,000/KRW 400,000 = P.205

The P82,000 is the amount of the peso payable to bank. This amount is computed using the forward rate.

Problems

Problem 19-1

Foreign ForeignCurrency Currency

Accounts Accounts Transactions Transactions Receivable Payable Exchange Loss Exchange Gain

87

Case 1 NA P 160,000 (a) NA P 20,000 (b)

Case 2 P 38,000 © NA NA P 2,000 (d)

Case 3 NA P 13,500 (e) P 1,500 (f) NA

Case 4 P 6,250 (g) NA P 1,250 (h) NA

(a) $40,000 x P4.00(b) $40,000 x (P4.00 – P4.50)(c) $20,000 x P1.90(d) $20,000 x (P1.90 – P1.80)(e) $30,000 x P.45(f) $30,000 x (P.45 – P.40)(g) $2,500,000 x P.0025(h) $2,500,000 x (P.0025 – P.003)

Problem 19-2

a. May 1 Inventory (or purchases) 800,000Accounts payable 800,000

Foreign purchases denominated inPhilippine pesos.

June 20 Accounts payable 800,000Cash 800,000

Settlement.

July 1 Accounts receivable 500,000Sales 500,000

Foreign sales denominated inPhilippine pesos.

August 10 Cash 500,000Accounts receivable 500,000

Collections.

b. May 1 Inventory (or purchases) 800,000Accounts payable 800,000

Foreign purchases denominated in yen:P800,000 / P.40 = 2,000,000 yen

June 20 Foreign currency transaction loss 100,000Accounts payable 100,000

P900,000 = 2,000,000 yen x P.45 800,000 = 2,000,000 yen x P.40

P100,000

Accounts payable 900,000Cash or foreign currency 900,000

Settlement denominated in yen.

July 1 Accounts receivable 500,000Sales 500,000

Foreign sale denominated in Hongkong $

88

P500,000 / P5.20 = 96,154 Hkg $

August 10 Accounts receivable 1,924Foreign currency transaction gain 1,924

P501,924 = 96,154 Hkg. $ x P 5.22 500,000 = 96,154 Hkg. $ x P 5.20 P 1,924

Cash or foreign currency 501,924Accounts receivable 501,924

Collections

Problem 19-3

a. No net exposure between November 1 and March 1. Michael, Inc. has hedged its foreign currency purchase commitment with a forward contract to receive an equal number of foreign currency units.

b. November 1: Forward contract receivable 3,076,800Forward contract payable 3,076,800

To record forward contract at forward rate:240,000 Ringgit x P12.82

December 31: Forex loss 4,800Forward contract receivable 4,800

To record forex loss for the decrease inforward rate, P240,000 x P.02

December 31: Firm commitment for merchandise 4,800Forex gain 4,800

To record increase in fair value of thePurchase commitment, and resultantgain or the decrease in the forward rate.

March 1: Forward contract payable 3,076,800Cash 3,076,800

To record settlement of forward contract.

Cash (240,000 x P12.86) 3,086,400Forex loss (240,000 x P.02) 4,800

Forward contract receivable 3,091,200To record receipt of 240,000 Ringgit whenthe spot rate is P12.86.

Firm commitment for merchandise 4,800Forex gain 4,800

To record change in value of the firmcommitment.

Purchases (240,000 x P12.82)3,076,800Firm commitment for merchandise 9,600Cash 3,086,400

To record purchases of merchandise.

Problem 19-4

89

June 1: Purchases 460,000Accounts payable 460,000

To record purchases (¥ 1,000,000 x P.46).

Forward contract receivable (fc) 480,000Forward contract payable 480,000

To record purchase of ¥ 1,000,000 for deliveryin 60 days at forward rate of P.48.

June 30: Forex loss 20,000Accounts payable 20,000

To record forex loss for the increase in spotrate, ¥ 1,000,000 x (P.46 – P.48)

Forward contract receivable 20,000Forex gain 20,000

To record forex gain for the increasein forward rate, ¥ 1,000,000 x (P.48 – P.50).

August 1: Accounts payable 480,000Forex loss (¥ 1,000,000 x P.03) 30,000

Cash (¥ 1,000,000 x P.51) 510,000To record settlement.

Cash (¥ 1,000,000 x P.51) 510,000 Forex gain 10,000

Forward contract receivable 500,000To record receipt of ¥ 1,000,000 at spot rate

Forward contract payable 480,000Cash 480,000

To record settlement of forward contract.

Problem 19-5

December 1: Accounts receivable 1,280,000Sales 1,280,000

To record sale (100,000 Rial x P12.80).

Forward contract receivable 1,240,000Forward contract payable (fc) 1,240,000

To record forward contract to sell 100,000 Rialat a 90-day forward rate of P12.40.

December 31: Forex loss 10,000Accounts receivable 10,000

To adjust receivable for the decrease in spot rateand record forex loss, 100,000 Rial x (P12.80 – P 12.70).

Forex loss 20,000Forward contract payable (FC) 20,000

To record forex gain for the increase in forward rate,100,000 Rial x (P12.40 – P12.60).

March 1: Cash 1,290,000Forex gain(100,000 Rial x P.20) 20,000Accounts receivable 1,270,000

90

To record collection of accounts receivable at spot rate.

Forward contract payable (FC) 1,260,000Forex loss 30,000

Cash (100,000 Rial x P12.60) 1,290,000To record delivery of 100,000 Rial.

Cash 1,240,000Forward contract receivable 1,240,000

To record collection for forward contract.

Problem 19-6

October 1: Forward contract receivable 17,400Forward contract payable (fc) 17,400

(15,000 Baht x P1.16)

December 31: Forex loss 150Forward contract payable (fc) 150

15,000 Baht x (P1.16 – P1.17).

Firm commitment for materials 150Forex gain 150

To record increase in fair value of salescommitment.

April 1: Cash 17,400Forward contract receivable 17,400

To record collection of forward contract.

Forward contract payable 17,550Forex gain 150

Cash /fc (15,000 Baht x P1.16) 17,400To record delivery of 15,000 Baht at forward rateof P1.16.

Forex loss 150Firm commitment for materials 150

Cash/fc (15,000 Baht x P1.18) 17,700Sales 17,700

To record sales.

Problem 19-7

Contract 1:

October 1: Forward contract receivable (fc) 160,000Forward contract payable 160,000

To record forward contract to buy ¥400,000 at P40.

December 31: Forward contract receivable (fc) 4,000Forex gain 4,000

To record forex gain for the increase in forwardrate of P.01.

April 1: Cash (¥ 400,000 x P.43) 172,000Forward contract receivable (fc) 164,000Forex gain 2,000

To record receipt of ¥400,000 at spot rate of

91

P.43.

Forward contract payable 160,000Cash 160,000

To record payment of forward contract.

Contract 2:

December 1: Forward contract receivable 9,200Forward contract payable (fc) 9,200

To record forward contract to sell 2 million Rupiahat P.0046.

December 31: Forward contract payable 200Forex gain 200

To record forex gain for the decrease in forwardRate by P.0001.

March 1: Cash 9,200Forward contract receivable 9,200

To record settlement of forward contract.

Forward contract payable (fc) 9,000Forex loss 800

Cash 9,800To record payment of 2 million Rupiah at spotrate of P.0049.

Problem 19-8

1. Investment in Siam 1,920,000Cash 1,920,000

To record purchase of 40% of Siam Company.

Cash 123,200Investment in Siam 123,200

To record dividends from Siam for 20 x 1 (P308,000 x 40%)

Investment in Siam 243,200Other comprehensive income-translation adjustment 128,800

Income from Siam 372,000To record income from Siam for 20x1 computed as follows:

Share of reported income (P930,000 x 40%) P 372,000Share of equity adjustment (P322,000 x 40%) 128,800

2a. Cash (fc) 1,860,000Loans payable (fc) 1,860,000

To record loan of 1,200,000 NT dollar at P1.55.

b. Loan payable (fc) 60,000Other comprehensive income-translation adjustment 60,000

To adjust loan to current rate (P1.55 – P1.50) x 1,200,000.

c. Interest expense 91,500Interest payable (fc) 90,000Forex gain 1,500

To accrue interest expense (1,200,000 x 10% x ½ year x P1.525)And record interest payable (1,200,000 x 10% x ½ year x P 1.50).

Problem 19-9

1. Cash (fc) 168,000

92

Accounts receivable (fc) 167,000Forex gain 1,000

To record collection of 100,000 Baht from Queens Company.

Forward contract payable (fc) 167,000Forex loss 1,000

Cash (fc) 168,000To record delivery of 100,000 Baht in settlement of the forward contract denominated in Baht.

Cash 164,000Forward contract receivable 164,000

To record receipt of Phil. Pesos in settlement of theforward contract receivable.

2. Forward contract payable 76,000Cash 76,000

To record payment of forward contract payable.

Cash (fc) 75,000Forex loss 500

Forward contract receivable (fc) 75,500To record collection of forward contract receivable:(10,000,000 Rupiah x P.00750)

Accounts payable (fc) 75,500Cash (fc) 75,000Forex gain 500

To record payment of accounts payable to Indon Co. (1,000,000 Rupiah x P.00750)

Problem 19-10

1. Schedule of forward contract items at December 31, 2004 balance sheet.

Current assets:Forward contract receivable (Siam hedge: in Phil. pesos) P 168,000Forward contract receivable (Indon hedge: 10,000,000 x P.0077) 77,000Forward contract receivable (Speculation in Yen: 200,000 x P.670) 134,000Change in value of firm commitment 1,000

Current liabilities:Accounts payable (Indon account: 10,000,000 x P.0077) P 77,000Forward contract payable (Siam hedge: 100,000 Baht x P1.690) 169,000Forward contract payable (Speculation in Yen: payable in Phil. pesos) 130,000

2. Forex gain or loss for 2004:

Indon: P2,000 loss on account payable offset by P2,000 gain on Forward contract receivable P -

Siam: Forex loss is offset by the change in the value of firmcommitment -

Speculation: The speculation is accounted for at the forward ratethroughout the life of the contract. Therefore, the forwardcontract receivable is adjusted to P 134,000 (the rate for60-day futures at December 31 and the P4,000 gain is

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recognized). 4,000Forex gain for 2004 in the income statement P 4,000

Problem 19-11

a. Entry to record the purchase of the call options on November 30, 2007

November 30, 2007Call Options 20,000

Cash 20,000Purchase call options for 10,000 barrelsof oil at a premium of P2 per barrel for March 1, 2008. The options are at the moneyof P30 per barrel; therefore, the entire P20,000 is time value

b. Adjusting entry on December 31, 2007:

December 31, 2007Loss on hedge activity 14,000

Call options 14,000Record the decrease in the time valueof the options to current earnings.

Call options 10,000Other comprehensive income 10,000

Record the increase in the intrinsic valueof the options to other comprehensive income.

c. Entries to record March 1, 2008, expiration of options, the sales of option, and the purchase of oil.

March 1, 2008

Loss on hedge activity 6,000Call options 6,000

Record the decrease in the time valueof the options to current earnings.The options have expired.Call options 20,000

Other comprehensive income 20,000Record the increase in the intrinsic value of the options to other comprehensive income.

Cash 30,000Call options 30,000

Record the sale of the call options.

Oil inventory 330,000Cash 330,000

Record the purchase of 10,000 barrelsof oil at the spot price of P33 per barrel.

d. June 1, 2008, entries to record the sale of the oil and other entries:

June 1, 2008

Cash 340,000Sales 340,000

Record the sale of 10,000 barrelsof oil at P34 per barrel

Cost of goods sold 330,000Oil inventory 330,000

Recognize the cost of the oil sold.

Other comprehensive income- reclassification 30,000

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Cost of goods sold 30,000Reclassify into earnings the othercomprehensive income from the cash flow hedge.

CHAPTER 20

MULTIPLE CHOICE

20-1: b

Bad debt expense (S$ 6,000 x P28.20) P169,200Amortization of patents (S$ 4,000 x P28.20) 112,800Rent expense (S$ 10,000 x P28.20) 282,000Total P564,000Average rate (P28.20) is used to translate all expenses since this is a reasonableestimation.

20-2: b

Machinery [(24,000 Ringgit ÷ 10) x P10.42] P 25,008Equipment [(12,000 Ringgit ÷ 10) x P10.42] 12,504Total depreciation P 37,512

20-3: d

Accounts receivable P120,000Prepaid expenses 55,000Property and equipment (net) 275,000Total P450,000

20-4: a

Depreciation expense (H$ 12,000 x P5.80) P 69,600Bad debts (H$ 8,000 x P5.80) 46,400Rent (H$ 20,000 x P5.80) 116,000Total P232,000

Average rate for the year is used in translating depreciation expense because this is more reasonable estimation than the rate when the related asset was acquired (P4.80).

20-5: d

[25,000 LCU x (1 ÷ 2)]

20-6: d

95

Long-term receivable: [1,500,000 LCU x (1 ÷ 1.5 LCU)] P1,000,000

Long-term debt: [2,400,000 LCU x (1 ÷ 1.5 LCU)] P1,600,000

20-7: b (NT Dollar 10,000 x P1.70)

20-8: b

Beginning inventory 40,000 RupeePurchases 300,000Goods available for sale 340,000Ending inventory 30,000Cost of goods sold 310,000 Rupee

Translated cost of goods sold (310,000 Rupee x P.5745) P178,095

20-9: c

NZ Dollar Rate Phil PesoNet assets, 1/1/05 20,000 P15 P300,000Increase in net assets: Net income, 2005 (30,000 – 20,000) 10,000 P19 190,000Net assets 12/31/05 30,000 P490,000Net assets at current rate 30,000 P21 630,000Translation adjustment, 2005 (positive) P140,000

20-10: b

Equipment [800,000 x (1 ÷ 50)] P16,000

Accumulated depreciation [560,000 x (1 ÷ 50)] P11,200

Depreciation [80,000 x (1÷ 50)] P 1,600

20-11: a (25,000 Rupee x P1.24)

20-12: d (5,000 Rupee x P1.30)

20-13: c

Investment cost, Jan. 1, 2005 P402,000Less: Book and fair value of net assets acquired (300,000 Rp x P1.20) 360,000Goodwill P 42,000

Pesos RupeeGoodwill P42,000 35.000 (P42,000 / P1.20)Impairment 4,340 (3,500 Rp x P1.24) 3,500 Balance P37,660 31,500

Translated balance (31,500 Rp x P1.32) P41,580Less: umimpaired goodwill 37,660Translation adjustment P 3,920

20-14: b

Translation adjustment from translating the trial balance P12,000 CrTranslation adjustment from translating goodwill (per 20-13) 3,920 CrTotal translation adjustment P15,920

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20-15: b

Investment in Subsidiary account, Jan. 1, 2005 P1,600,000Share in subsidiary net income [(800,000 yen x 70%) x P.57] 319,200Translation adjustment (P25,000 x 70%) 17,500Share of subsidiary dividends [(50,000 yen x 70%) x P.59] ( 20,650)Investment in Subsidiary account, December 31, 2005 P1,916,050

20-16: d

20-17: aPhil Peso Thailand Baht

Initial inventory transfer date:Selling price P120,000÷1.60 75,000 BCost (80,000)Profit 40,000

Balance sheet date (75,000 x 1.70) 127,500 75,000 B

20-18: a (P127,500 – 40,000)

20-19: a Yen Exchange Rate Phil Peso

Net asset beginning 200,000 .44 88,000Net income 200,000 .46 92,000Net asset translated at rate:

During the year 400,000 180,000At end of year 400,000 .48 192,000

Translation adjustment (credit) (12,000)

20-20: a (70,000 rupee x P1.50)

20-21: cInvestment cost P1,210,000Book value of interest acquired (1,100,000 x 1.10) x .80 968,000Goodwill 242,000

PROBLEMS

Problem 20-1

a.Pilipino CompanyTranslation Working PaperDecember 31, 2005

Yen Exchange Rate Phil. PesosCash 40,000 .40 CR 16,000Accounts receivable 120,000 .40 CR 48,000Inventory 100,000 .40 CR 40,000Plant and equipment 700,000 .40 CR 280,000Cost of sales 360,000 .425 AR 153,000Operating expenses 140,000 .425 AR 59,500Depreciation expenses 60,000 .425 AR 25,500Total 1,520,000 622,000Accumulated Other Comprehensive Income - Translation Adjustment 25,000

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Total debits 647,000

Accumulated depreciation 240,000 .40 CR P96,000Accounts payable 80,000 .40 CR 32,000Common stock 200,000 .44 HR 88,000Retained earnings, Jan. 1 400,000 .44 HR 176,000Sales 600,000 .425 AR 255,000Total credits 1,5200,000 647,000

CR – Current RateAR – Average RateHR – Historical Rate

b. Proof of Translation Adjustment

Yen Translation Rate Phil. PesosNet assets at beginning of year 600,000 .44 264,000Adjustment for changes in net assets Position during year Net income for the year 40,000 .425 17,000Net assets translated at rates in effect For those items 281,000Net assets at end of year 640,000 .40 256,000Change in translation adjustment during year (to OCI) – net decrease (debit) 25,000

Accumulated OCI – translation adjustment,1/1 -0-

Accumulated OCI – translation adjustment, Dec. 31 (debit) 25,000

Problem 20-2

(1) Trial Balance TranslationThailand Translation Philippine

Baht Rate PesosCash 7,000 1.60 CR 11,200Accounts receivable (net) 20,000 1.60 CR 32,000Receivable from Davao 5,000 1.60 CR 8,000Inventory 25,000 1.60 CR 40,000Plant and equipment 100,000 1.60 CR 160,000Cost of goods sold 70,000 1.50 AR 105,000Depreciation expense 10,000 1.50 AR 15,000Operating expenses 30,000 1.50 AR 45,000Dividends paid 15,000 1.54 HR 23,000Total debits 282,000 439,300

Accumulated depreciation 10,000 1.60 CR 16,000Accounts payable 12,000 1.60 CR 19,200Bonds payable 50,000 1.80 CR 80,000Common stock 60,000 1.46 HR 87,600Sales 150,000 1.50 AR 225,000Total 282,.000 427,800Accumulated other comprehensive Income – Translation adj. (credit) 11,500Total credits 439,300

CR – Current RateAR – Average RateHR – Historical Rate

(2) Proof of Translation Adjustment

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Thailand Translation PhilippineBaht Rate Pesos

Net assets at beginning of year 60,000 1.46 87,600Adjustments for changes in net asset position during year: Net income for year (sch. 1) 40,000 1.50 60,000 Dividends paid (15,000) 1.54 (23,100)Net assets translated at: Rates during year 124,500 Rates at end of year 85,000 1.60 136,000Change in OCI – translation adj. during year – Net increase 11,500Accumulated OCI – translation adjustment – Jan. 1 -0-Change in OCI – translation adjustment, Dec. 31 (credit) 11,500

Schedule 1:

Sales 150,000 Thailand BahtCost of goods sold ( 70,000)Depreciation expense ( 10,000)Operating expenses ( 30,000)Net income 40,000 Thailand Baht

(b) The change in the translation adjustment of P11,500 is included as a credit in the other comprehensive income on the Statement of Comprehensive Income. The other comprehensive income is then accumulated and reported in the stockholders’ equity section of the consolidated balance sheet as presented below:

Net assets P136,000

Common stock P 87,600Retained earnings, Dec. 31 36,900Accumulated Other Comprehensive Income 11,500Total P136,000

Problem 20-3

a. Translation Work paper

Exchange PhilippineBrunei $ Rate Pesos

Cash 1.600 33 CR 52,800Accounts receivable 2,500 33 CR 82,500Inventory 4,000 33 CR 132,500Plant and equipment 35,000 33 CR 1,155,000Cost of sales 17,000 31 AR 527,000Operating expenses 7,000 31 AR 217,000Depreciation expense 3,000 31 AR 93,000Dividends 1,500 32 HR 48,000Total debits 71,600 2,307,300

Accumulated depreciation 9,000 31 AR 297,000Accounts payable 2,600 33 CR 85,800Common stock 20,000 30 HR 600,000Retained earnings, Jan. 1 10,000 30 HR 300,000Sales 30,000 31 AR 930,000Total 71,600 2,212,800Accumulated OCI – Translation AdjustmentTotal credits

94,5002,307,300

99

Proof of Translation Adjustment (not required)

Brunei $Translation rate

Philippine PesosNet assets at beginning of year 30,000 30 900,000Adjustment for net assets position during the year: Net income 3,000 31 93,000 Dividends paid (1,500) 32 (48,000)Net assets translated at rates in effect for those items 945,000Net assets at end of year 31,500 33 1,039,500Change in translation adjustment during Year to OCI – net increase (credit) 94,500Accumulated OCI – translation adj. 1/1 -0-Accumulated OCI – translation Adjustment – 12/31 (credit) 94,500

b. Parent Company entries affecting Investment in Moslem Co. (equity method)

Jan. 2: Investment in Moslem Co. 900,000Cash 900,000

To record investment cost.

Oct. 15: Cash 48,000Investment in Moslem Co. 48,000

To record dividends received

Dec. 31: Investment in Moslem Co. 93,000Investment income 93,000

To record equity in income of Moslem

Investment in Moslem Co. 94,500Other Comprehensive Income – Translationadjustment 94,500

To record parent’s share of change in translationAdjustment

Problem 20-4

UK CompanyTranslation Working PaperYear Ended December 31, 2005

Exchange InIn Pounds Rate Phil. Pesos

Income Statement

100

Sales 90,000 P67.50 (A) 6,075,000Cost of sales (80,000) 67.50 (A) (5,400,000)Depreciation expense (1,500) 67.50 (A) (101,250)Other expenses (5,750) 67.50 (A) (388,125)Net income carried forward 2,750 185,625

Retained Earnings StatementBalance, 1/1 2,500 B 119,500Net income from above 2,750 F 185,625Balance, 12/31 5,250 305,125

Balance SheetCash 2,500 67.60 (C) 169,000Accounts receivable 4,000 67.60 (C) 270,400Inventories, at cost 5,500 67.60 (C) 371,800Prepaid expenses 750 67.60 (C) 50,700Property, plant and equipment (net) 9,000 67.60 (C) 608,400Total assets 21,750 1,470,300

Accounts payable 3,500 67.60 (C) 236,600Current portion of long-term debt 500 67.60 (C) 33,800Long-term debt 7,500 67.60 (C) 507,000Capital stock 5,000 67.20 (H) 336,000Retained earnings from above 5,250 1,418,525TotalCumulative translation adjustment: Balance, 1/1 50,000 Current translation adjustment G 1,775 Balance, 12/31 51,775Total liabilities and stockholders’ equity 21,750 1,470,300

Translation Code:C = Current rateH = Historical rateA = Average rateB = Balance in Philippine pesos at the beginning of the year.F = Per Income Statement

Problem 20-5

Goodluck CorporationForeign Exchange Translation WorksheetYear Ended December 31, 2005

Trial Trial Income BalanceBalance Exchange Balance Statement Sheet

(In Pounds) Rate (In Pesos) (In Pesos) (In Pesos)Cash 15,000 0.95 C 14,250 14,250Marketable securities 25,000 0.95 C 23,750 23,750Accounts receivable 60,000 0.95 C 57,000 57,000Inventories 80,000 0.95 C 76,000 76,000Property, plant and equip-net 420,000 0.95 C 399,000 399,000Cost of goods sold 150,000 0.90 A 135,000 135,000Depreciation expense 40,000 0.90 A 36,000 36,000Other expenses 10,000 0.90 A 9,000 9,000Totals 800,000 750,000 180,000 570,000

101

Accounts payable 50,000 0.95 C 47,500 47,500Current portion of LT debt 40,000 0.95 C 38,000 38,000Long-term debt 120,000 0.95 C 114,000 114,000Sales 200,000 0.90 A 180,000 180,000Other revenues 50,000 0.90 A 45,000 45,000Capital stock 250,000 0,87 H 217,500 217,500Retained earnings, 1/1 90,000 G 70,000 70,000FC translation adjustment Balance, 1/1 G 1,500 1,500 Current year B 36,500 36,500Net income B (45,000) 45,000

Totals 800,000 750,000 180,000 570,000

Translation Code:A = Average rateB = Current rateH = Historical rateG = GivenB = Balancing amount

Problem 20-6

a. Direct and indirect exchange rates

Direct A$ Indirect January 1, 2007 P.03333=1 A$30=P1December 31, 2007 P.02857=1 A$35=P1December 31, 2008 P .025=1 A$40=P1

The peso strengthened during 2007 because the number of A$ one Phil. Peso could acquire at the end of the year (35) is greater than the number of A$ that could be acquired at the beginning of the year (30); therefore, the value of the peso has increased relative to the A$ during 2007. The peso continued to strengthen during 2008.

b. Translated December 31, 2007, balance sheet:

Subsidiary’s Direct TranslatedTrial Balance ExchangeTrial Balance _ (in A$)__ Rate ( in $)___

Cash A$ 100,000 P.02857 P 2,857Receivables 400,000 P.02857 12,857Inventory 680,000 P.02857 19,428Fixed assets 1,000,000 P.02857 28,570Total R 2,230,000 P 63,712Accumulated other comprehensive income – translated adjustment (debit)Total debits 2,903

P 66,615

Current payables A$ 260,000 P.02857 P 7,428Long-term debt 1,250,000 P.02857 35,713Common stock 500,000 P.03333 16,665Retained earnings 220,000 P.03333 6,809Total credits A$2,230,000 P 66,615

P.03333= average of beginning and ending exchange rates, rounded to 4 decimal points: P.030945= [(P.03333 + P.02856) /2]

(Not required: Proof of translation adjustment (debit) of P 2,903)

Translation___A$___ _ Rate_ _Dollars_

Net assets, 1/1/07 A$ 500,000 P.03333 P 16,665

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Adjustment for changes in net assets during year:Net income 220,000 P.03095 6,809Net assets translated at: Rates during year P 23,474 Rates at end of year A$ 720,000 P.02857 (20,570)Change in translation Adjustment during year (debit) P 2,904*

*Difference of P1 (P 2,904 – P 2,903) due to rounding of exchange rates.

c. Translated December 31, 2008, balance sheet:

Subsidiary’s Direct Translated Trial Balance Exchange Trial Balance

(in A$) __Rate (in P)__Cash A$ 80,000 P.025 P 2,000Receivables 550,000 P.025 13,750Inventory 720,000 P.025 18,000Fixed assets 900,000 P.025 22,500__Accumulated other A$ 2,250,000 P56,250 comprehensive income- translation adjustment (debit) 5,635___ Total debits P61,885

(a)The retained earnings in pesos would begin with the December 31, 2007, peso balance (P6,809) that would be carried forward. To this would be added 2008’s net income of A$90,000, which is the change in retained earnings in A$ multiplied by the 2008 exchange rate of P.02679 [(P.02857 + P.025/2)] which equals P2, 411. Therefore, translated retained earnings on December 31, 2008, is P9, 220 (P9, 220= P6, 809 + P2, 411)

(Not required: Proof of translation adjustment (debit) of P5, 635)

Australian Translation Dollar _ Rate Pesos___

Net assets, 1/1/08 A$ 720,000 P.02857 P20, 570Adjustment for changes in net assets during year:

Net income 90,000 P.02679 2,411___Net assets translated at: rates during year P22, 981Other comprehensive income- rate at end of year A$ 810,000 P.025 (20,250)__Change in other comprehensive income- translation adjustment during year (debit) P2, 731Accumulated other comprehensive income- translation adjustment, 1/1/08 2,904___Accumulated other comprehensive income- translation adjustment, 12/31/08 (debit) P5, 635

d. The P2, 731 change in the accumulated other comprehensive income- translation adjustment during 2008 would be

reported as a component of other comprehensive income on 2008 statement of other comprehensive income.

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CHAPTER 21

MULTIPLE CHOICE

21-1 b

21-2 a

21-3 a

21-4 b

21-5 b

21-6 a

21-7 c

21-8 a

21-9 a

21-10 c

21-11 d

21-12 b

21-13 b

21-14 a

21-15 a

Excess of income over expenses P 200Depreciation 70Increase in due from national government agencies ( 10)Increase in prepaid rent ( 15)Increase in accounts payable 30Cash provided by operating activities P 275

PROBLEMSProblem 21-1

1. Memo entry in the RAOPS, RAOMO, RAOCO and RAOFE.

2. Cash – National Treasury – MDS 2,000,000Subsidy Income from National Government 2,000,000

3. Memo entry in the RAOPS, RAOMO, RAOCO and RAOFE.

4. Office equipment 50,000Accounts payable 50,000

5. Cash – Disbursing Officer 40,000Cash – National Treasury – MDS 40,000

104

6. Salaries and wages – Regular 44,000Personal economic relief allowance (PERA) 3,000Additional compensation 3,000

Due to BIR 3,500Due to GSIS 5,500Due to Pag-ibig 400Due to Philhealth 600Cash – Disbursing Officer 40,000

7. Due to GSIS 5,500Due to Pag-ibig 400Due to Philhealth 600

Cash – National Treasury – MDS 6,500

8. Life and retirement contribution 5,500Pag-ibig contribution 400Philhealth contribution 600

Cash – National Treasury – MDS 6,500

9. Electricity 5,000Telephone expense – Landline 4,000Accounts payable 50,000

Due to BIR 5,000Cash – National Treasury – MDS 54,000

10. Due to BIR 4,500Subsidy income from national government 4,500

11. Cash – Collecting Officer 90,000Sales revenue 40,000Permit fees 30,000Miscellaneous income 20,000

12. Cash in Bank – Local currency – Current account 90,000Cash – Collecting Officer 90,000

Problem 21-2

Building

1. Memo entry in RAOCO.

2. Advances to contractor 240Cash – National Treasury – MDS 240

3. Construction in progress – Other Public Infrastructure 400Advances to contractor 240Accounts payable 160

4. Accounts payable 160Due to BIR 40Cash – National Treasury – MDS 120

5. Construction in progress – Other Public Infrastructure 400Accounts payable 400

6. Accounts payable 400Due to BIR 40Cash – National Treasury 360

7. Due to BIR 80Subsidy income from national government 80

8. Office Building 800Construction in progress – OPI 800

Repairs of Building

105

1. Memo entry in RAOCO.

2. Construction materials inventory 70Accounts payable 70

3. Accounts payable 70Due to BIR 7Cash – National Treasury – MDS 63

4. Construction in progress – Other Public Infrastructure 60Construction materials inventory 60

5. Memo entry in the RAOCO

6. Cash – Disbursing Officer 36Cash – National Treasury – MDS 36

7. Construction in progress – Other Public Infrastructure 40Due to BIR 4Cash – Disbursing Officer 36

8. Due to BIR 47Cash – National Treasury – MDS 47

9. Office building 100Construction in progress – OPI 100

Land:

1. Memo entry in the RAOCO, P100.

2. Land 100Accounts payable 100

3. Accounts payable 100Due to BIR 10Cash – National Treasury – MDS 90

106

Problem 21-3

(a) Journal Entries:

1. Memo entry in the Registry of Obligations and Allotments.

2. Cash – National Treasury – MDS 2,500Subsidy income from national government 2,500

3. Memo entry in Registry of Obligations and Allotments.

4. Office equipment 120Accounts payable 120

5. IT equipment and software 30Accounts payable 30

6. Prepaid rent 60Cash – National Treasury – MDS 60

7. Electricity expense 50Cash – National Treasury – MDS 50

8. Telephone expense – Landline 40Cash – National Treasury – MDS 40

9. Petty cash fund 45Cash – National Treasury – MDS 45

10. Accounts payable 120Due to BIR 12Cash – National Treasury – MDS 108

11. Accounts payable 30Cash – National Treasury – MDS 30

12. Due to BIR 12Subsidy income from national government 12

13. Cash – Collecting Officer 50Other service income 10Sales revenue 40

14. Cash in bank – LCCA 50Cash – Collecting Officer 50

(b) Pre-closing Trial Balance

Petty cash fund 45Cash – National Treasury – MDS 2,167Cash in Bank – Local Currency – Current Account 50Prepaid rent 60Office equipment 120IT equipment and software 30Other service income 10Sales revenue 40

107

Subsidy income from national government 2,512Electricity expense 50Telephone expense – landline 40Total 2,562 2,562

© Adjusting Entries

(1) Depreciation – Office equipment & software 20Depreciation – IT equipment 5

Accumulated depreciation – Office equipment 20Accumulated depreciation – IT equip & software 5

(2) Rent expense 30Prepaid rent 30

Closing Entries:

(1) Unused National Clearing Account (NCA)Subsidy income from national government 2,167

Cash – National Treasury – MDS 2,167

NCA received during the year 2,500Less: MDS check issued 333Unused NCA 2,167

(2) Income accounts:Other service income 10Sales revenue 40Subsidy income from national government 345

Income and expense summary 395

(3) Expense accounts:Income and expense summary 90

Electricity expense 50Telephone expense – landline 40

(4) Income and expense summary 305Retained operating surplus 305

(5) Retained operating surplus 305Government equity 305

Problem 21-4

Agency VVStatement of Income and ExpensesYear Ended December 31, 2008

Income:Subsidy income from national government P1,700Less: Reversion of unused NCA 800 P900

Less: ExpensesSalaries and wages – Regular P 320Personnel Economic Relief Allowance 40Additional compensation 40Life and retirement insurance contribution 60Pag-ibig contribution 10Philhealth contgribution 10Traveling expense – Local 35Office supplies expense 60Electricity expense 75Telephone expense – landline 45

108

Janitorial services 30Security services 35Repairs and maintenance – Office building 65Depreciation – Office building 15Depreciation – office equipment 10Depreciation – furniture and fixtures 5Depreciation – IT equipment and software 5 860

Net income over expenses P 40

Agency VVBalance SheetAs of December 31, 2008

ASSETSCurrent AssetsCash:

Cash in vault P 200Cash – collecting officer 500Cash – disbursing officer 1,000Petty cash fund 150Cash in bank – LCCA 350 P2,200

Receivables:Accounts receivable P 120Less: Allowance for doubtful accounts 20 100

Inventories:Office supplies inventory 30

Other current assets 15Long-term investment:

Investment in stock 400Property, Plant and Equipment:

Land 600Office building 650Less: accumulated depreciation 50 600Office equipment 250Less: accumulated depreciation 20 230Furniture and fixtures 110Less: accumulated depreciation 10 100IT equipment and software 190Less: accumulated depreciation 25 165 1,695

Total assets 4,440

LIABILITIES AND EQUITYLiabilitiesCurrent liabilities

Accounts payable 185

109

Due to BIR 50Due to GSIS 30Due to Pag-ibig 25Due to Philhealth 25Other payables 15 330

Equity:Government equity 4,110

Total liabilities and equity 4,440

CHAPTER 22

Multiple Choice

22-1: b. (P500,000 – P300,000)

22-2: d.

The total tuition fees for educational and general purposes.

22-3: d. (P1,240,000 – P160,000)

22-4: a.

Unrestricted cash contribution received from donors are to be reported as increase in net cashprovided by operation.

22-5: d.

The remaining contribution of P5,000 on December 31, 2004.

22-6: b.

Unregistered pledges from donors are treated as revenues at the time of the pledge.

22-7: d.

Patient revenues P 5,000,000 Nursing services 1,000,000Professional services 500,000Total revenues P 6,500,000Less: Staff discounts P50,000

Allowances 230,000Third party payors 800,000 1,080,000 Net revenues

P 5,420,000

Bad debts are treated in the usual manner as expense.

22-8: a.

As of July 31, 2004, all of the funds are properly includible in the Plan Funds, for a total ofP900,000.

22-9: c. (P800,000 – P110,000)

22-10: d.

Patient revenues (net of charity care) P 600,000 Less: contractual adjustments 200,000

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Net patient service revenues P 400,000

22-11: c.

22-12: c.

The contributed services are debited to Salary Expense account and credited to ContributionRevenue account.

22-13: c.

The net effect on unrestricted net assets of spending P10,000 on research is zero.

22-14: b. (P5,000,000 + P50,000)

The P1,000,000 contribution from the donor, who stipulated that the contribution be investedIndefinitely, should be reported as permanently restricted revenue.

22-15: c.

22-16: b.

Both are treated as a financing activity on the statement of cash flows.

22-17: a.

Cash flows from operating activities would include both the cash received from patient serviceRevenue of P300,000 and the cash received from gift shop sales of P25,000.

22-18: b.

Cash received from patient revenue (collection of receivables) and from tuition revenue are bothincluded in the amount reported for cash flows from operating activities. The other cash receiptswould be reported as increases in cash flows provided by financing activities.

22-19: b.

Expirations of donor restrictions on temporarily restricted net assets should be reported on theStatement of operations as net assets released from restrictions.

22-20: c.

Current funds revenues include (1) all unrestricted gifts and other unrestricted resources earnedduring the reporting period, and (2) restricted current funds to the extent that such funds wereexpended for current operating purpose. Therefore, the amount that should be included in currentfunds revenue is:

Unrestricted gifts received: Expended P600,000 Not expended 75,000

Restricted gifts received Expended 100,000

Total P775,000

Problems

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Problem 22-1

1. Pledges receivable 300,000Allowance for uncollectible pledges 10,000Contribution revenue 270,000

2. Cash 260,000Pledges receivable 260,000

3. Cash 40,000Fund raising expense 5,000

Fund raising revenue 45,000

4. Investment 35,000Cash 35,000

5. Cash 5,000Sales – public revenue 5,000

6. Salaries 90,000Employee fringe benefits 15,000Payroll taxes 16,000Supplies 7,000Telephone 1,500Utilities 6,000Rent 10,000Conference, conventions and meetings 5,000Cost of sales to public 1,000 Miscellaneous 3,000

Cash 154,500

7. Utilities 1,000Salaries 5,000

Accounts payable or accrued expense payable 6,000

8. Fund Balance - Unrestricted 10,000Fund balance – Restricted to purchases of new equipment. 10,000

Problem 22-2

(1) Accounts receivable 80,000Patient service revenues 80,000

To record gross patient service revenue for the monthat full rates.

Accounts receivable 2,500Patient service revenues 2,500

To record receivable from Social Medicare.

Contractual adjustments 6,000

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Accounts receivable 6,000To record contractual adjustments allowed.

Doubtful accounts 8,000Allowance for doubtful accounts 8,000

To provide allowances for doubtful accounts.

(2) Salaries expense 9,800Contribution revenues 9,800

To record donated services (10,000 – 200). (3) Pledges receivable 5,000

Contribution revenues 5,000To record pledges received from donors.

Cash 3,500Pledges receivable 3,500

To record pledges collected.

Provisions for doubtful pledges 800Allowance for doubtful pledges 800

To provide doubtful pledges.

(4) Cash 3,000Fund balance 3,000

To record receipt of cash from restricted fund.

Plant assets 3,000Cash 3,000

To record acquisition of new surgical equipment.

Problem 22-3

Plant Fund Ledger Account:

(1) Equivalent 50,000Fund Balance 50,000

To record acquisitions of computers from unrestricted fund.

(2) Buildings 2,000,000Cash 250,000Mortgage notes payable 1,750,000

To record construction of new building financed inpart by 5% mortgage note payable.

Quasi-Endowment Fund Ledger Account:

(3) Cash 110,000 Investments 100,000Payable to Unrestricted fund 10,000

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To record sale of investments at a gain, the use ofwhich is unrestricted.

Unrestricted Fund Ledger Account:

(1) Undesignated fund balance 50,000Cash 50,000

To record acquisitions of computers to be carried inPlant Fund.

(2) Cash 2,000,000Contribution revenues 2,000,000

To record receipt of unrestricted gift.

(3) Receivable from quasi-endowment fund 10,000Investment income 10,000

To record investment gain receivable.

Problem 22-4

Nonprofit Trade AssociationStatement of ActivitiesYear Ended June 30, 2004

Revenues and Gains:Membership dues P184,000Conferences and meetings 321,000Publications and advertising sales 143,000Special assessments 50,000Investment income, including net gains 11,000 Total P709,000

Expenses:Member services P 56,000Conferences and meetings 166,000Technical services 218,000Communications 61,000General administration 154,000Membership development 27,000 682,000

Increase in unrestricted net assets 27,000Net assets, beginning of year 285,000Net assets, end of year P312,000

Nonprofit Trade AssociationStatement of Financial PositionJune 30, 2004

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ASSETSCurrent assets Cash

P 7,000Short-term investments 217,000Accounts receivable (net) 25,000Publications inventory 61,000Total current assets 310,000

Long-term investments 120,000 Plant assets (net) 33,000Other assets 28,000Total assets P491,000

LIABILITIES AND NET ASSETSCurrent liabilities

Accounts payable and accrued liabilities P 48,000Deferred membership dues 131,000Total current liabilities 179,000

Net assets (unrestricted) 312,000Total liabilities and net assets P491,000

Problem 22-5

Children AssociationStatement of ActivitiesYear Ended December 31, 2004

Changes in unrestricted net assets:Revenues and gains:

Contributions P320,000Membership dues 25,000Program service fees 30,000 Investment income 10,000Total unrestricted revenues and gains P385,000

Expenses:Programs P270,000Management and general expenses 47,000Fund raising 8,000 325,000

Increase in unrestricted net assets P 60,000Changes in temporarily restricted net assets:Contributions P 15,000Expenses:

Management and general expenses P 4,000Fund raising expenses 1,000 5,000

Increase in temporarily restricted net assets P 10,000Increase in net assets P 70,000Net assets, beginning of year (P12,000 + P26,000 + P3,000) 41,000Net assets, end of year P111,000

Children AssociationStatement of Financial PositionDecember 31, 2004

ASSETSCash (P40,000 + P9,000) P 40,000Bequest and interest receivable (P5,000 + P1,000) 6,000Pledges receivable (net) (P12,000 – P3,000) 9,000Investments, at cost 100,000Total assets P164,000

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LIABILITIES AND NET ASSETSLiabilities P 51,000Accounts payable and accrued liabilities (P50,000 + P1,000) 2,000Deferred revenues P 53,000Total liabilitiesNet assets:Unrestricted (P38,000 + P60,000) P 98,000Temporarily restricted (P3,000 + P10,000) 13,000 Total net assets P111,000Total liabilities and net assets P164,000

Problem 22-6

San Pedro HospitalStatement of Financial PositionJune 30, 2004

ASSETSCurrent assets

Cash P 222,000Accounts receivable (net of allowance of P5,000) 20,000Inventories 50,000 Prepaid expenses 10,000

Total current assets P 302,000Investments 660,000Property, plant and equipment (net of accumulated depreciation of P140,000) 160,000Total assets P1,122,000

LIABILITIES AND NET ASSETSLIABILITIESCurrent liabilities:

Accounts payable P 45,000Accrued expenses 17,000Deferred revenues 11,000Current portion of long-term debt 24,000

Total current liabilities P 97,000Mortgage payable 125,000Total liabilities P 222,000NET ASSETS

Unrestricted P 148,000Temporarily restricted 232,000Permanently restricted 520,000

Total net assets P 900,000Total liabilities and net assets P1,122,000

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