Solution Manual and Test Bank Advanced Accounting by Guerrero & Peralta 2 CHAPTER 17

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(1)CHAPTER 17 MULTIPLE CHOICE 17-1: B Consolidated sales Sales – Papa Sales – San Elimination of inter-company sales Consolidated sales Consolidated cost of goods sold Cost of goods sold – Papa Cost of goods sold – San Eliminations: Realized profit in beginning inventory Unrealized profit in ending inventory Intercompany purchases Consolidated cost of goods sold 17-2: ( 4,000) 10,000 ( 50,000) P 636,000 P 60,000 ( 10,000) P 50,000 20% P 10,000 d Net income from own operation – Pat Pat’s share of adjusted net income of Susan: Net income – Susan P200,000 Realized profit in beginning inventory (P112,000 x 50%/150%) 37,500 Unrealized profit in ending inventory (P33,000 x 50%/150%) (11,000) Consolidated net income Attributable to minority interest (P226,500 x 30%) Attributable to parent 17-4: P 490,000 190,000 c Net income – Sisa Unrealized profit in ending inventory – upstream Adjusted net income – Sisa Minority interest proportionate share Minority interest in net income of subsidiary 17-3: P 900,000 500,000 ( 50,000) P 1,350,000 P 200,000 226,500 P 426,500 67,950 P 358,550 b Net income from own operations- Patton Unrealized profit in ending inventory – DS (P200,000 x .25) Realized income Solis net loss Consolidated net income P 300,000 (50,000) 250,000 (150,000) P 100,000 87

(2) 17-5: d Pardo’s share of Santos’ net income (P300,000 x 75%) Unrealized profit in ending inventory – Upstream (P200,000 x 25%/125%) x 75% Realized profit in beginning inventory – Upstream (P150,000 x 25%/125%) x 75% Investment income account balance, Dec. 31, 2008 17-6: 17-7: d Net income from own operation – Puzon Suazon’s adjusted net income: Net income Unrealized profit in ending inventoryUpstream (P25,000 x 40%) Consolidated net income MINIS (P100,000 x 25%) Attributable to parent 22,500 P 217,500 P 200,000 P110,000 ( 10,000) 100,000 P 300,000 (25.000) P 275,000 2008 P 500,000 2009 P 550,000 (8,000) 492,000 200,000 P 692,000 (15,000) 8,000 543,000 225,000 P 768,000 a Net income from own operation – Pip Adjusted net income of Sol: Net income P 250,000 Realized profit in beginning inventoryUpstream (P40,000 x 40%) 16,000 Unrealized profit in ending inventoryUpstream (P70,000 x 30%) ( 21,000) Consolidated net income - 2008 17-9: ( 30,000) b Net income from own operation – Pat Unrealized profit in ending inventory: 2008 (P20,000 x .40) 2009 (P30,000 x .50) Realized profit in beginning inventory Realized income Sun net income Consolidated net income 17-8: P 225,000 a Net income from own operations – Popo Unrealized profit in ending inventory – Downstream Realized separate net income – Popo Popo’s share of Sotto’s adjusted net income: Net income P 360,000 Realized profit in beginning inventoryUpstream 10,000 MINIS (P370,000 x 5%) Attributable to parent P 400,000 245,000 P 645,000 P 500,000 ( 15,000) P 485,000 370,000 ( 18,500) P 836,500 88

(3) 17-10: a Stockholders’ equity – Sands, Dec. 31, 2008 P5,500,000 Unamortized difference (P1,000,000 – P200,000) 800,000 Adjusted stockholders’ equity (net assets) – Sands P6,300,000 Minority interest in net assets of subsidiary (P6,300,000 x 40%) P2,520,000 17-11: d Gross profit rate – Short (P110,000 / P200,000) 55% Inventories Inventory from outsiders – Power Inventory from outsiders – Short Power’s inventory acquired from Short – at cost: [P5,000 – (P5,000 x 55%)} Consolidated ending inventories Investment income Power’s share of Short’s net income (P50,000 x 75%) Unrealized profit in ending inventory – upstream (P5,000 x 55%) x 75% Realized profit in beginning inventory – upstream (P10,000 x 55%) x 75% Investment income, Dec. 31, 2008 P 5,000 25,000 2,250 P 32,250 P 37,500 ( 2,063) 4,125 P 39,562 Investment in Short Company Acquisition cost (P80,000 x 80%) Unrealized profit in ending inventory Realized profit in beginning inventory Investment in Short Company, Dec. 31, 2008 P 60,000 ( 2,063) 4,125 P 62,062 Minority interest in net assets of subsidiary Stockholders’ equity, Dec. 31, 2006 – Short Realized profit in beginning inventory (P10,000 x 55%) Unrealized profit in ending inventory (P5,000 x 55%) Adjusted net assets of Short, Dec. 31, 2006 Minority interest MINAS P 80,000 5,500 ( 2,750) P 82,750 25% P 20,687.50 17-12: b Gross profit rate of Sit (P200,000 / P500,000) Net income from own operations – Pit Adjusted net income of Sit: Net income P 75,000 Realized profit in beginning inventoryUpstream (P40,000 x 40%) 16,000 Unrealized profit in ending inventoryUpstream (P25,000 x 40%) ( 10,000) Consolidated net income MINIS (P281,000 x 10%) Attributable to parent 40% P 200,000 81,000 P 281,000 ( 8,100) P 272,900 89

(4) 17-13: b Gross profit of Sir (P120,000 / P400,000) 30% Consolidated cost of sales Cost of sales – Pig Cost of sales – Sir Eliminations: Realized profit in beginning inventory (P70,000 x 30%) Unrealized profit in ending inventory (P60,000 x 30%) Intercompany purchases Consolidated cost of sales Consolidated net income Net income from own operations – Pig Pig’s share of Sir’s adjusted net income: Net income Realized profit in beginning inventory Unrealized profit in ending inventory Consolidated net income MINIS (P83,000 x 10%) Attributable to parent P 600,000 280,000 ( 21,000) 18,000 (200,000) P 677,000 P 200,000 P 80,000 21,000 (18,000) 83,000 283,000 (8,300) P 274,700 17-14: a 2006 Pal Corp net income 150,000 Intercompany profit in ending inventory: 2006 (14,000) 2007 2008 Pal net income from own operation 136,000 Solo net income from own operation 100,000 Consolidated net income 236,000 MINIS: 2006(100,000 – 14,000) x 40% 34,400 2007(90,000 +14,000 – 21,000) 40% 2008(160,000 + 21,000 – 24,000) 40% Consolidated NI attributable to Parent 201,600 17-15: a Acquisition cost Less: book value of interest acquired (400,000 x 60%) Difference Allocated to Equipment ( 20,000) MINAS (40%) 8,000 Total sales Intercompany sales (30,000 + 80,000) Consolidated sales 2007 240,000 14,000 (21,000) 233,000 90,000 323,000 2008 300,000 21,000 ( 24,000) 297,000 160,000 427,000 33,200 289,800 62,800 394,200 252,000 240,000 12,000 (12,000) 600,000 (110,000) 490,000 90

(5) 17-16: c Total cost of goods sold (250,000 +120,000) 370,000 Adjustments 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) 60,000 Total 154,000 Cost 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: c Polo Corp. net income from own operation (105,000 – 25,000) Unrealized profit in ending inventory-DS (6,000 x 10/30) Adjusted Polo Corp. net income from own operation Star Corp. net income from own operation: Net income 45,000 Unrealized profit in EI-US (20,000 x 30/80) (7,500) Amortization (20,000/10 years) (2,000) Consolidated net income MINIS (35,500 x 40%) Attributable to Parent 17-18: a Pepsi net income from own operation Sarsi net income 90,000 Unrealized profit in EI (45,000 x 60/180) (15,000) Consolidated net income MINIS (75,000 x 30%) Consolidated net income attributable to Parent-2007 17-19: a Inventory-Pepsi P 30,000 Less: unrealized profit in books of Sarsi: (135,000 – 90,000) x (30,000/135,000) (10,000) Inventory-Sarsi P110,000 Less: unrealized profit in books of Pepsi: (280,000 – 140,000) x (110,000/280,000) (55,000) Consolidated inventory 12/31/08 17-20: a Cost of goods sold on sale of inventory on hand-1/1/08: [45,000 x (120,000/180,000)] Cost of goods sold on purchases from Sarsi- 2008 [(135,000 – 30,000) x (90,000/135,000)] Cost of goods sold on purchases from Pepsi- 2008 [(280,000 – 110,000) x (140,000/280,000)] Consolidated cost of goods sold-2008 80,000 (2,000) 78,000 35,500 113,500 (14,200) 99,300 160,000 75,000 235,000 (22,500) 212,500 20,000 55,000 75,000 30,000 70,000 85,000 185,000 91

(6) 17-21: b Pepsi net income Sarsi net income Realized profit in beginning inventory - 2008 Unrealized profit in ending inventory- Sarsi Unrealized profit in ending inventory- Pepsi Consolidated net income 220,000 85,000 15,000 (10,000) (55,000) 255,000 92

(7) PROBLEMS Problem 17-1 a. b. Consolidated Net Income Net income from own operations – P Company S Co. adjusted net income: Net income – S Unrealized profit in ending inventory – Upstream (P9,000 x 50/150) Realized profit in beginning inventoryUpstream (P6,000 x 50/150) Consolidated net income P200,000 P30,000 (3,000) 2,000 Minority Interest in Net Income of Subsidiary Adjusted net income - S Co. Minority interest Minority interest in net income of subsidiary 29,000 P229,000 P 29,000 x 30% P 8,700 Problem 17-2 a. b. c. Consolidated Net Income Net income from own operations – P Co. Realized profit in beginning inventory – Downstream (P10,500 x 40/140) Adjusted net income S Company adjusted net income: Net income – S Unrealized profit in ending inventoryUpstream (P8,000 x 25%) Consolidated net income P100,000 3,000 P103,000 P90,000 (2,000) 88,000 P191,000 Minority Interest in Net Income of Subsidiary Adjusted net income – S Co. Minority interest MINIS P88,000 x 20% P17,600 Minority Interest in Net Assets of Subsidiary Stockholder’s equity , Jan. 1, 2008 – S Company Increase in earnings – 2008 (P90,000 – P35,000) Unrealized profit in ending inventory – Upstream Stockholder’s equity, Dec. 31, 2008 – S Company Minority interest MINAS P350,000 55,000 (2,000) P403,000 x 20% P 80,600 93

(8) Problem 17-3 a. b. Net Assets, Dec. 31, 2008 – S Co. Minority interest per consolidated balance sheet, 12/31 Unrealized profit in ending inventory – Upstream (P36,000 x 25/125) x 20% Minority interest per books – S Co. Divided by Net assets- S Co. 1,440 P160,000 ÷ 20% P800,000 Price Paid Net assets – S Co., Dec. 31, 2008 Net income – S Co. Net assets – S Co., Jan. 1, 2008 Parent’s interest Book value of interest acquired Difference Price paid P800,000 (160,000) P640,000 x 80% P512,000 20,000 P532,000 P158,560 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 – Downstream Intercompany profit (P120,000 – P72,000) Inventory left at year end Unrealized profit, Dec. 31, 20057 P 48,000 x 30% P 14,400 Unrealized profit in ending inventory, Dec. 31, 2008 – Downstream Intercompany profit (P250,000 – P200,000) P 50,000 Inventory left at year end x 20% Unrealized profit, Dec. 31, 2008 P 10,000 a. b. c. Consolidated Sales Apo Bicol Intercompany sales – 2008 Total Cost of goods sold Apo’s book value Bicol’s book value Intercompany sales-2008 Realized profit in beginning inventory – 2008 Unrealized profit in ending inventory – 2008 Consolidated cost of goods sold Operating expenses Apo Bicol Total P800,000 600,000 (250,000) P1,150,000 P 535,000 400,000 (250,000) ( 14,400) 10,000 P 680,600 P 100,000 100,000 P 200,000 94

(9) d. Dividend Income – 0 (eliminated) e. Minority Interest in Net Income of Subsidiary (P100,000 x 30%) f. Inventory Apo Bicol Unrealized profit in ending inventory, Dec. 31, 2008 Consolidated inventory Minority Interest in Net Assets of Subsidiary Stockholders’ equity , Jan. 1, 2008 – Bicol Increase in earnings in 2008 (P100,000 – P50,000) Stockholders’ equity, Dec. 31, 2008 – Bicol Minority interest MINAS g. P 30,000 P 298,000 700,000 (10,000) P 988,000 P 950,000 50,000 P1,000,000 x 30% P 300,000 Problem 17-5 P Company and Subsidiary Consolidated Income Statement Year Ended December 31, 2008 Sales (P2,000,000 + P1,000,000 – P600,000) Cost of goods sold (Schedule 1) Gross profit Expenses Income before income tax Provision for income tax Consolidated net income after income tax Attributable to minority interest (Schedule 2) Attributable to parent P2,400,000 704,000 1,696,000 600,000 1,096,000 440,000 656,000 44,000 P 612,000 Schedule 1: Cost of sales – P Company Purchases from S Company Intercompany profit in beginning inventory (P60,000 x 25%) Intercompany profit in ending inventory (P76,000 x 25%) Total Cost of sales – S Company Consolidated cost of sales P 800,000 (600,000) ( 15,000) 19,000 P 204,000 500,000 P 704,000 Schedule 2: Net income – S Company Realized profit in beginning inventory – Upstream Unrealized profit in ending inventory – Upstream Adjusted net income Minority interest MINIS P 180,000 15,000 (19,000) P 176,000 x 25% P 44,000 95

(10) Problem 17-6 a. Working Paper Eliminating Entries (1) (2) (3) (4) Dividend income Minority interest in net assets of subsidiary (20%) Dividends declared- D (P32,000 / 80%) To eliminate intercompany dividends. 32,000 8,000 40,000 Common stock – S 90,000 Retained earnings – S 220,000 Investment in S Co. stock Minority interest in net assets of subsidiary To eliminate equity accounts of S on the date of acquisition. Minority interest in net assets of subsidiary Retained earnings, Jan. 1 Cost of goods sold To eliminate realized profit in beginning inventory 4,000 16,000 Sales 150,000 20,000 Cost of goods sold Inventory, Dec. 31 (P45,000 x 33.33%) To eliminated intercompany sales and unrealized profit in ending inventory. (5) b. c. Minority interest in net income of subsidiary Minority interest in net assets of subsidiary To establish minority interest in net income of S Co. computed as follows: Sales Cost and expenses (P140,000 +P20,000) Net income Realized profit in beginning inventory – Upstream Unrealized profit in ending inventory – Upstream Adjusted net income Minority interest MINIS 248,000 62,000 135,000 15,000 8,000 8,000 P200,000 160,000 40,000 20,000 (15,000) P 45,000 x 20% P 9,000 Consolidated Net Income Net income from own operations (P250,000 – P205,000) S Company adjusted net income Consolidated net income P 45,000 45,000 P 90,000 Minority Interest in Net Assets of Subsidiary (MINAS) Stockholders’ equity, Dec. 31, 2008 – S Company Adjusted net income – 2008 Adjusted net assets, Dec. 31, 2008 – S Co. Minority interest MINAS P 310,000 45,000 P 355,000 x 20% P 71,000 96

(11) Problem 17-7 a. b. Consolidated Sales Reported total sales (P600,000 + P510,000) Intercompany sales (P140,000 + P240,000) Consolidated sales P1,170,000 (380,000) P 790,000 Consolidated Cost of Goods Sold Cost of goods sold: Pato (P660,000 / 140%) Sales (P510,000 / 120% Amount to be eliminated (P128,000 + P232,000) see entry below Total P 471,429 425,000 ( 360,000) P 536,429 Elimination of intercompany sales and intercompany profit in inventory: Downstream Sales Sales Inventory (P42,000 x 40/140) Cost of goods sold Upstream Sales Sales Inventory (P48,000 x 20/120) Cost of goods sold c. d. 140,000 12,000 128,000 240,000 Consolidated Net Income Net income from own operations – Pato Unrealized profit in ending inventory – Downstream Adjusted net income – Pato Add: Adjusted net income of Sales Co. Net income P20,000 Unrealized profit in ending inventory – Upstream (8,000) Consolidated net income Consolidated Inventory, Dec. 31, 2008 Inventory reported – Pato Inventory reported – Sales Unrealized profit in ending inventory (P8,000 + P12,000) Consolidated inventory 8,000 232,000 P 70,000 (12,000) P 58,000 12,000 P 70,000 P 48,000 42,000 (20,000) P 70,000 97

(12) Problem 17-8 a. b. c. Unrealized Profit in Beginning Inventory Beginning inventory - Downstream Gross profit rate (P240,000/ P400,000) Unrealized profit in beginning inventory P 100,000 x 60% P 60,000 Unrealized Profit in Ending Inventory Ending inventory – Downstream (P200,000 x 80%) Gross profit rate Unrealized profit in ending inventory P 160,000 x 60% P 96,000 Intercompany Sales Sales – P Company Sales – S Company Intercompany sales – 2008 Consolidated sales P2,000,000 1,000,000 (400,000) P2,600,000 Intercompany Cost of Sales Cost of sales – P Company Cost of sales – S Company Intercompany purchases Intercompany profit in beginning inventory Intercompany profit in ending inventory Consolidated cost of sales P 800,000 600,000 (400,000) ( 60,000) 96,000 P1,036,000 Parent’s interest (40,000 shares / 50,000 shares) P Company Entries – 2008: (1) Investment in S Company stock Income from subsidiary To record P’s share of S Co. income (P120,000 x 80%) (2) Cash 80% 96,000 96,000 48,000 Investment in S Company stock To record dividends received from S (P60,000 x 80%) (2) Income from subsidiary 36,000 Investment in S Company stock To adjust income from subsidiary for intercompany profit in : Ending inventory (96,000) Beginning inventory 60,000 Net adjustment ( 36,000) 48,000 36,000 98

(13) d. Working Paper Eliminating Entries: (1) Income from subsidiary Minority interest in net assets of subsidiary (P60,000 x 20%) Dividends declared – S Investment in S Company stock To eliminate intercompany dividends. (2) (3) (4) (5) (6) 60,000 12,000 60,000 12,000 Common stock – S Co. 500,000 Retained earnings – S Co. 860,000 Investment in S Company stock Minority interest in net assets of subsidiary To eliminate equity accounts of S Company as of beginning of year. Goodwill Investment in S Company stock To allocate difference to goodwill. 60,000 60,000 Retained earnings – Jan. 1 60,000 Cost of sales To eliminate realized profit in beginning inventoryDownstream. Cost of sales 96,000 Inventories To eliminate unrealized profit in ending inventoryDownstream. Sales (8) e. 60,000 96,000 400,000 Cost of sales To eliminate intercompany sales. (7) 1,088,000 272,000 Accounts payable 50,000 Accounts receivable To eliminate intercompany payables and receivables. Minority interest in net income of subsidiary 24,000 Minority interest in net assets of subsidiary To establish minority share of S net income (P120,000 x 20%) Consolidated Net Income Net Income from own operations – P Company (P480,000 – P60,000) Realized profit in beginning inventory Unrealized profit in ending inventory Adjusted net income – P Compay S Company net income Consolidated net income 400,000 50,000 24,000 P420,000 60,000 ( 96,000) P384,000 120,000 P504,000 99

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