ADVANCE FINANCIAL ACCOUNTING Dean Carlo S.

Maneja, CPA

BUSINESS COMBINATIONS
(Intercompany Transactions – Fixed Assets)

1) ACCOUNTING FOR SEPARATE FINANCIAL STATEMENTS – JOURNAL ENTRIES

PARENTS BOOKS SUBSIDIARY BOOKS

Cash xx
Acc. Depre xx
P.P.E xx
DOWNSTREAM SALE Loss on Sale (if) xx
Cash xx
P.P.E (cost) xx
Gain on Sale (if) xx

Cash xx
Acc. Depre xx
P.P.E xx
UPSTREAM SALE Loss on Sale (if) xx
Cash xx
P.P.E (cost) xx
Gain on Sale (if) xx

Note: Sales Price less Book Value equals Gain or Loss on Sale

2) WORKING PAPER ELIMINATING ENTRIES – INTERCOMPANY SALE

a) To eliminate Unrealized Gain or Loss on the sale of Fixed Assets:

YEAR OF INTERCOMPANY SALE

IF GAIN ON SALE IF LOSS ON SALE

WHETHER Property, Plant & Equip xx P.P.E. xx

DOWNSTREAM OR Gain on Sale xx Acc. Depre xx
UPSTREAM SALE Accumulated Depre xx Loss on Sale xx

YEARS AFTER THE YEAR OF INTERCOMPANY SALE

IF GAIN ON SALE IF LOSS ON SALE

Property, Plant & Equip xx P.P.E. xx

DOWNSTREAM R.E Beg – Parent (CI) xx Acc. Depre xx
Accumulated Depre xx R.E Beg – Parent (CI) xx

Property, Plant & Equip xx P.P.E. xx

R.E Beg – Parent (CI) xx Acc. Depre xx
UPSTREAM
Non-Controlling Interest xx R.E Beg – Parent (CI) xx
Accumulated Depre xx N.C.I xx

Note: CI = Controlling Interest

ADVANCE FINANCIAL ACCOUNTING Dean Carlo S. Maneja, CPA

b) To realize the Gain or Loss on the sale of Land once sold to third parties:

YEAR OF INTERCOMPANY SALE

IF GAIN ON SALE IF LOSS ON SALE

WHETHER
DOWNSTREAM Accumulated Depre xx Depre Expense (C.Y) xx
OR UPSTREAM Depre Expense (C.Y) xx Accumulated Depre xx
SALE

YEARS AFTER THE YEAR OF INTERCOMPANY SALE

IF GAIN ON SALE IF LOSS ON SALE

Accumulated Depre xx Depre Expense (C.Y) xx

DOWNSTREAM Depre Expense (CY) xx R.E Beg – Parent (PY) xx
R.E Beg – Parent (PY) xx Accumulated Depre xx

Accumulated Depre xx Depre Expense (CY) xx

Depre Expense (CY) xx R.E Beg – Parent (PY - CI) xx
UPSTREAM
R.E Beg – Parent (PY - CI) xx N.C.I xx
N.C.I xx Accumulated Depre xx

Note: CY = Current Year ; PY = Prior Year

3) COMPUTATION OF CONSOLIDATED NET INCOME

CONSOLIDATED NET INCOME CI - Parent NCI - Subsidiary

Intercompany – Fixed Asset (Downstream):

a. Year of intercompany sale (eliminating
intercompany profit and realizing through
depreciation)
• Downstream – Gain (xx)
• Downstream – Depreciation on Gain (realize) xx
• Downstream – Loss xx
• Downstream – Depreciation on Loss (realize) (xx)

b. Year of sale to 3rd parties (realizing the remaining

intercompany profit)
• Downstream – Remaining Gain (realize) xx
• Downstream – Remaining Loss (realize) (xx)

Intercompany – Fixed Asset (Upstream):

a. Year of intercompany sale (eliminating
intercompany profit and realizing through
depreciation)
• Upstream – Gain (xx) (xx)
• Upstream – Depreciation on Gain (realize) xx xx
• Upstream – Loss xx xx
• Upstream – Depreciation on Loss (realize) (xx) (xx)
ADVANCE FINANCIAL ACCOUNTING Dean Carlo S. Maneja, CPA

b. Year of sale to 3rd parties (realizing the remaining

intercompany profit)
• Upstream – Remaining Gain (realize) xx xx
• Upstream – Remaining Loss (realize) (xx) (xx)

Net Income xxx xxx

PROBLEM-SOLVING

PROBLEM 1

Falcon Corporation sold equipment to its 80% owned subsidiary, Rodent Corporation on January 1, 2021.
Falcon sold the equipment for P 110,000 when its book value was P 85,000 and it had a 5-year remaining
useful life with no expected salvage value. Separate balances for Falcon and Rodent included the following
equipment and accumulated depreciation amounts on December 31, 2021:

Falcon Rodent
Equipment P 750,000 300,000
Accumulated Depreciation (200,000) (50,000)
Equipment – Net (Book Value) P 550,000 250,000

1. Consolidated Equipment and Accumulated Depreciation at December 31, 2021 will be:
a. 1,025,000 and 245,000
b. 1,025,000 and 250,000
c. 1,050,000 and 250,000
d. 1,025,000 and 250,000

2. What is the amount of the intercompany profit or loss that must be deferred on December 31, 2021?
a. Zero
b. 5,000
c. 20,000
d. 25,000

PROBLEM 2

On January 1, 2019, GG Company purchased a computer with an expected economic life of 5 years.

On January 1, 2021, GG sold the computer to TLK Corporation and recorded the following entry:

Cash 39,000
Acc. Depreciation 16,000
Computer Equipment 40,000
Gain on Sale 15,000

TLK Corporation holds 60% of GG’s voting shares. GG reported a net income of P 45,000 and TLK
reported income from its own operations of P 85,000 for 2021. There is no change in the estimated
economic life of the equipment as a result of the intercompany transfer.
ADVANCE FINANCIAL ACCOUNTING Dean Carlo S. Maneja, CPA

1. The Consolidated Net Income will be:

a. P 130,000
b. P 125,000
c. P 120,000
d. P 106,000

2. The Profit Attributable to the Parent will be:

a. P 125,000
b. P 120,000
c. P 115,000
d. P 106,000

3. The Non-controlling interest on net income will be:

a. P 12,000
b. P 14,000
c. P 18,000
d. P 20,000

PROBLEM 3

The separate incomes of Echo Corporation and Blacklist Corporation, its 75% owned subsidiary, for 2021
were determined as follows:
Echo Blacklist
Sales P 1,000,000 460,000
Loss on sale of Building (20,000)
Cost of goods sold (500,000) (260,000)
Operating Expenses (200,000) (40,000)
Depreciation Expense (100,000) (60,000)
Net Income P 180,000 100,000

Echo’s gain on sale of building relates to a building with a book value of P 60,000 and a 10-year remaining
useful life that was sold to Blacklist for P 40,000 on January 1, 2021.

1. At what amount will the loss on sale of the building appear on the consolidated income statement for
the year 2021?
a. Zero
b. P 5,000
c. P 15,000
d. P 20,000

2. The Consolidated Depreciation Expense will be:

a. P 158,000
b. P 160,000
c. P 162,000
d. P 180,000
ADVANCE FINANCIAL ACCOUNTING Dean Carlo S. Maneja, CPA

3. The Consolidated Net Income will be:

a. P 302,000
b. P 298,000
c. P 296,000
d. P 280,000

4. The Profit Attributable to the Parent will be:

a. P 280,000
b. P 277,000
c. P 275,000
d. P 273,000

5. The Non-controlling interest on net income will be:

a. Zero
b. P 23,000
c. P 25,000
d. P 27,000

PROBLEM 4

On January 1, 2014, S Company (80% owned subsidiary of P Company), sold equipment to P Company for
P 990,000. S Company’s original cost for this equipment was P 1,000,000 (accumulated depreciation of P
100,000) and has a remaining life of 9 years on the date of sale.

This equipment was sold to a third party on January 1, 2018 for P 720,000. What amount of gain should P
Company record on its books in 2018?
a. 50,000
b. 120,000
c. 170,000
d. 220,000