Intercompany Investments in

Associates and Joint

Transactions Ventures
 Initial recognition

Ina Corporation was able to acquire 25% ownership of Anak Company on

January 2, 2014 at ₱1,262,500, a price equal to the NBV of its identifiable net
asset. Assume further that the NBV of the Anak’s identifiable asset is equal to
its FMV. Ina operates a national chain of bookstores. Anak is a well-known
publisher of textbooks and reference books.

Dr Cr
Investment in Associates ₱1,262,500
Cash ₱1,262,500
 Anak reported net income of ₱1,800,000 and
Share in Associate’s ₱2,500,000 at the end of 2014 and 2015,
Net Income respectively. Anak also declared and paid cash
dividends amounting to ₱200,000 in 2015.

2014 2015

Dr Cr Dr Cr
Investment in Associates 450,000 Investment in Associates 625,000
Share in Associate’s Net Income 450,000 Share in Associate’s Net Income 625,000
(₱1,800,000 X 25%) (₱2,500,000 X 25%)

Dr Cr
Cash 50,000
Investment in Associates 50,000
(₱200,000 X 25%)
 Profits and losses resulting from
‘upstream’ and ‘downstream’ transactions
between an investor (including its
consolidated subsidiaries) and an
associate are recognized in the investor’s
IAS financial statements only to the extent of
unrelated investors’ interests in the
associate. ‘Upstream’ transactions are, for
28.28 example, sales of assets from an associate
to the investor. ‘Downstream’
transactions are, for example, sales of
assets from the investor to an associate.
The investor’s share in the associate’s
profits and losses resulting from these
transactions is eliminated.
Investor Investor

Downstream
Upstream

Associate Associate
 Intercompany sale of Land

1-hectare property in Santa Rosa, Laguna was

sold between associate and investor for
₱5,000,000. The Laguna property was acquired
for only ₱4,500,000.
 Downstream sale of land
In 2014, Anak acquired Ina’s 1-hectare property in Santa Rosa, Laguna for
₱5,000,000. Anak will construct its state-of-the-art factory on this site. Ina
acquired the Laguna property for only ₱4,500,000.

2014
Transfer price of land ₱5,000,000 SIANI, Unadjusted (2014) 450,000
Book value (to intercompany seller) 4,500,000 Adjustments:
Intercompany gain 500,000 Intercompany gain on sale of land -125,000
SIANI, Adjusted (2014) 325,000
Adjusting entry Dr Cr
Share in Associate’s Net Income 125,000
Investment in Associates 125,000
(₱500,000 X 25%) eliminate intercompany gain
Stockholders’ equity, January 1, 2014 5,050,000
Net income, 2014 1,800,000
Stockholders’ equity, December 31, 2014 6,850,000
Proportionate share 25%
Proportionate share of Investor 1,712,500
Investment in associate, December 31, 2014 1,587,500
Difference – intercompany gain on sale of land 125,000
Investment in
Associate
January 1, 2014 1,262,500
2014 SIANI 450,000 325,000
Intercompany gain on sale of land 125,000 Adj SIANI, 2014

1,587,500
 Upstream sale of land
In 2014, Ina acquired Anak’s 1-hectare property in Santa Rosa, Laguna for
₱5,000,000. Anak acquired the Laguna property for only ₱4,500,000. Due to
change in intentions, Ina sold the Sta. Rosa property to Ayala Land Corporation
in 2015 for ₱7,000,000.

2014
Transfer price of land ₱5,000,000 SIANI, Unadjusted (2014) 450,000
Book value (to intercompany seller) 4,500,000 Adjustments:
Intercompany gain 500,000 Intercompany gain on sale of land -125,000
SIANI, Adjusted (2014) 325,000
Adjusting entry Dr Cr
Share in Associate’s Net Income 125,000
Investment in Associates 125,000
(₱500,000 X 25%) eliminate intercompany gain
Stockholders’ equity, January 1, 2014 5,050,000
Net income, 2014 1,800,000
Stockholders’ equity, December 31, 2014 6,850,000
Proportionate share 25%
Proportionate share of Investor 1,712,500
Investment in associate, December 31, 2014 1,587,500
Difference – intercompany gain on sale of land 125,000
Investment in
Associate
January 1, 2014 1,262,500
2014 SIANI 450,000 325,000
Intercompany gain on sale of land 125,000 Adj SIANI, 2014

1,587,500
 Upstream sale of land
In 2014, Ina acquired Anak’s 1-hectare property in Santa Rosa, Laguna for
₱5,000,000. Anak acquired the Laguna property for only ₱4,500,000. Due to
change in intentions, Ina sold the Sta. Rosa property to Ayala Land Corporation
in 2015 for ₱7,000,000.

2015
Per Ina Per Economic Entity
Selling price 7,000,000 7,000,000
Cost 5,000,000 4,500,000
Gain 2,000,000 2,500,000
Adjusting entry Dr Cr SIANI, Unadjusted (2015) 625,000
Investment in Associates 125,000 Adjustments:
Share in Associate’s Net Income 125,000 Intercompany gain on sale of land 125,000
(₱500,000 X 25%) SIANI, Adjusted (2015) 750,000
Stockholders’ equity, January 1, 2015 6,850,000
Net income, 2015 2,500,000
Cash dividends -200,000
Stockholders’ equity, December 31, 2015 9,150,000
Proportionate share 25%
Proportionate share of Investor 2,287,500
Investment in associate, December 31, 2015 2,287,500
Difference 0

Investment in Associate
January 1, 2015 1,587,500
2015 SIANI 625,000 750,000
Adj SIANI, 2015
Realization of interco gain 125,000
Cash dividends 50,000
2,287,500
 Intercompany sale of Depreciable Assets

A warehouse in Santa Rosa, Laguna was sold

between associate and investor for ₱5,000,000.
The Laguna property has a book value of
₱4,500,000 (cost of ₱6,000,000, accumulated
depreciation ₱1,500,000).
 Downstream sale of Depreciable Assets
On January 1, 2014, Anak acquired Ina’s warehouse in Santa Rosa, Laguna for
₱5,000,000. The book value of the warehouse in Ina’s books is ₱4,500,000 (cost
of ₱6,000,000, accumulated depreciation ₱1,500,000). Ina’s engineers estimated
the remaining life of the warehouse at 10 years.

2014
Transfer price of land ₱5,000,000
Book value (to intercompany seller) 4,500,000
Intercompany gain 500,000

Adjusting entry Dr Cr
Share in Associate’s Net Income 125,000
Investment in Associates 125,000
(₱500,000 X 25%) eliminate intercompany gain
 Downstream sale of Depreciable Assets

2014

Per Anak Per Economic Entity

Depreciation 500,000 450,000

Adjusting entry Dr Cr SIANI, Unadjusted (2014) 450,000

Investment in Associates 12,500 Adjustments:
Share in Associate’s Net Income 12,500 Intercompany gain on sale of PPE -125,000
(₱50,000 X 25%) adjust depreciation Adjustment for depreciation 12,500
SIANI, Adjusted (2014) 337,500
Stockholders’ equity, January 1, 2014 5,050,000
Net income, 2014 1,800,000
Stockholders’ equity, December 31, 2014 6,850,000
Proportionate share 25%
Proportionate share of Investor 1,712,500
Investment in associate, December 31, 2014 1,600,000
Difference – undepreciated intercompany gain on sale of PPE 112,500
125,000 X 9/10
Investment in
Associate
January 1, 2014 1,262,500
2014 SIANI 450,000
337,500
Intercompany gain on sale of PPE 125,000 Adj SIANI, 2014
Realization through depreciation 12,500
December 31, 2014 1,600,000
 Downstream sale of Depreciable Assets

2015

Per Anak Per Economic Entity

Depreciation 500,000 450,000

Adjusting entry Dr Cr SIANI, Unadjusted (2015) 625,000

Investment in Associates 12,500 Adjustments:
Share in Associate’s Net Income 12,500 Adjustment for depreciation 12,500
(₱50,000 X 25%) adjust depreciation SIANI, Adjusted (2015) 637,500
Stockholders’ equity, January 1, 2015 6,850,000
Net income, 2015 2,500,000
Cash dividends -200,000
Stockholders’ equity, December 31, 2015 9,150,000
Proportionate share 25%
Proportionate share of Investor 2,287,500
Investment in associate, December 31, 2015 2,187,500
Difference 100,000
125,000 X 8/10
Investment in Associate
January 1, 2015 1,600,000
2015 SIANI 625,000 637,500
Adj SIANI, 2015
Realization of interco gain 12,500
Cash dividends 50,000
December 31, 2015 2,187,500
 Upstream sale of Depreciable Assets
On January 3, 2014, Ina acquired Anak’s warehouse in Santa Rosa, Laguna for
₱5,000,000. The book value of the warehouse in Ina’s books is ₱4,500,000
(cost of ₱6,000,000, accumulated depreciation ₱1,500,000). Ina’s engineers
estimated the remaining life of the warehouse at 10 years.

2014
Transfer price of land ₱5,000,000
Book value (to intercompany seller) 4,500,000
Intercompany gain 500,000

Adjusting entry Dr Cr
Share in Associate’s Net Income 125,000
Investment in Associates 125,000
(₱500,000 X 25%) eliminate intercompany gain
 Upstream sale of Depreciable Assets

2014

Per Anak Per Economic Entity

Depreciation 500,000 450,000

Adjusting entry Dr Cr SIANI, Unadjusted (2014) 450,000

Investment in Associates 12,500 Adjustments:
Share in Associate’s Net Income 12,500 Intercompany gain on sale of land -125,000
(₱50,000 X 25%) adjust depreciation Adjustment for depreciation 12,500
SIANI, Adjusted (2014) 337,500
Stockholders’ equity, January 1, 2014 5,050,000
Net income, 2014 1,800,000
Stockholders’ equity, December 31, 2014 6,850,000
Proportionate share 25%
Proportionate share of Investor 1,712,500
Investment in associate, December 31, 2014 1,600,000
Difference – undepreciated intercompany gain on sale of PPE 112,500
125,000 X 9/10
Investment in
Associate
January 1, 2014 1,262,500
2014 SIANI 450,000
337,500
Intercompany gain on sale of PPE 125,000 Adj SIANI, 2014
Realization through depreciation 12,500
December 31, 2014 1,600,000
 Upstream sale of Depreciable Assets

2015

Per Anak Per Economic Entity

Depreciation 500,000 450,000

Adjusting entry Dr Cr SIANI, Unadjusted (2015) 625,000

Investment in Associates 12,500 Adjustments:
Share in Associate’s Net Income 12,500 Adjustment for depreciation 12,500
(₱50,000 X 25%) adjust depreciation SIANI, Adjusted (2015) 637,500
Stockholders’ equity, January 1, 2015 6,850,000
Net income, 2015 2,500,000
Cash dividends -200,000
Stockholders’ equity, December 31, 2015 9,150,000
Proportionate share 25%
Proportionate share of Investor 2,287,500
Investment in associate, December 31, 2015 2,187,500
Difference 100,000
125,000 X 8/10
Investment in Associate
January 1, 2015 1,600,000
2015 SIANI 625,000 637,500
Adj SIANI, 2015
Realization of interco gain 12,500
Cash dividends 50,000
December 31, 2015 2,187,500
 Intercompany sale of Inventory

Between the investor and associate, 10,000 and 20,000

copies of books in 2014 and 2015 respectively. 7,000 copies
were sold to 3rd parties in 2014. 2015 sales increased by
200% of 2014 levels. Cost of printing is about ₱500 per
copy. The gross profit rate for transfer pricing is 37.5% in
2014 and 50% in 2015. On the other hand, books sell retail
in the intercompany buyer’s store at ₱1,300.
 Downstream sale of Inventory
Ina sold 10,000 and 20,000 copies of books to Anak in 2004 and 2005
respectively. Anak reported 7,000 copies were sold in 2004. 2015 sales
increased by 200% of 2014 levels. Cost of printing is about P500 per copy and
gross profit rate is 37.5% in 2014 and 50% in 2015. On the other hand, the books
sells retail in Anak’s store at ₱1,300.

2014
Sales ₱8,000,000 100% Adjusting entry Dr Cr
Cost of goods sold 5,000,000 62.5% Share in Associate’s Net Income 225,000
Intercompany gain 3,000,000 37.5% Investment in Associates 225,000
Sold 2,100,000 7/10 (₱900,000 X 25%) eliminate intercompany gain

Unsold 900,000 3/10

Stockholders’ equity, January 1, 2014 5,050,000
Net income, 2014 1,800,000
Stockholders’ equity, December 31, 2014 6,850,000
Proportionate share 25%
Proportionate share of Investor 1,712,500
Investment in associate, December 31, 2014 1,487,500
Difference – intercompany gain on inventory 225,000
Investment in
Associate
January 1, 2014 1,262,500
2014 SIANI 450,000 225,000
Intercompany gain on sale of inventory 225,000 Adj SIANI, 2014

December 31, 2014 1,487,500

 Downstream sale of Inventory
2015
Sales ₱20,000,000 100% Adjusting entry Dr Cr
Cost of goods sold 10,000,000 50% Share in Associate’s Net Income 250,000
Intercompany gain 10,000,000 50% Investment in Associates 250,000
Sold 9,000,000 18/20 (₱1,000,000 X 25%) eliminate intercompany gain

Unsold 1,000,000 2/20

Adjusting entry Dr Cr
Investment in Associates 225,000
Copies sold in 2015 (increase by 200% 21,000
from 2014 levels) Share in Associate’s Net Income 225,000
From 2014 purchases 3,000 (₱900,000 X 25%) from prior year purchase
From 2015 purchases 18,000
Stockholders’ equity, January 1, 2015 6,850,000
Net income, 2015 2,500,000
Cash dividends -200,000
Stockholders’ equity, December 31, 2015 9,150,000
Proportionate share 25%
Proportionate share of Investor 2,287,500
Investment in associate, December 31, 2015 2,037,500
Difference – intercompany profit on sale of inventory 250,000

Investment in Associate
January 1, 2015 1,487,500
2015 SIANI 625,000
600,000
Realization of interco gain 225,000 Adj SIANI, 2015
Intercompany gain on inventory 250,000
Cash dividends 50,000
December 31, 2015 2,037,500
 Upstream sale of Inventory
Anak sold 10,000 and 20,000 copies of books to Ina in 2014 and 2015 respectively.
Ina reported 7,000 copies of books were sold in 2014. 2015 sales increased by
200% of 2014 levels. Cost of printing is about ₱500 per copy and gross profit rate is
37.5% in 2014 and 50% in 2015. On the other hand, the books sells retail in Ina’s
store at ₱1,300.

2014
Sales ₱8,000,000 100% Adjusting entry Dr Cr
Cost of goods sold 5,000,000 62.5% Share in Associate’s Net Income 225,000
Intercompany gain 3,000,000 37.5% Investment in Associates 225,000
Sold 2,100,000 7/10 (₱900,000 X 25%) eliminate intercompany gain

Unsold 900,000 3/10

Stockholders’ equity, January 1, 2014 5,050,000
Net income, 2014 1,800,000
Stockholders’ equity, December 31, 2014 6,850,000
Proportionate share 25%
Proportionate share of Investor 1,712,500
Investment in associate, December 31, 2014 1,487,500
Difference – intercompany gain on inventory 225,000
Investment in
Associate
January 1, 2014 1,262,500
2014 SIANI 450,000 225,000
Intercompany gain on sale of inventory 225,000 Adj SIANI, 2014

December 31, 2014 1,487,500

 Upstream sale of Inventory

2015
Sales ₱20,000,000 100% Adjusting entry Dr Cr
Cost of goods sold 10,000,000 50% Share in Associate’s Net Income 250,000
Intercompany gain 10,000,000 50% Investment in Associates 250,000
Sold 9,000,000 18/20 (₱1,000,000 X 25%) eliminate intercompany gain

Unsold 1,000,000 2/20

Adjusting entry Dr Cr
Investment in Associates 225,000
Copies sold in 2015 (increase by 200% 21,000
from 2014 levels) Share in Associate’s Net Income 225,000
From 2014 purchases 3,000 (₱900,000 X 25%) from prior year purchase
From 2015 purchases 18,000
Stockholders’ equity, January 1, 2015 6,850,000
Net income, 2015 2,500,000
Cash dividends -200,000
Stockholders’ equity, December 31, 2015 9,150,000
Proportionate share 25%
Proportionate share of Investor 2,287,500
Investment in associate, December 31, 2015 2,037,500
Difference – intercompany profit on sale of inventory 250,000

Investment in Associate
January 1, 2015 1,487,500
2015 SIANI 625,000
600,000
Realization of interco gain 225,000 Adj SIANI, 2015
Intercompany gain on inventory 250,000
Cash dividends 50,000
December 31, 2015 2,037,500