PROBLEM 1
On January 1, 2020, P Company purchased 40,000 shares of S Company in the open market for P700,000. On that date, the net assets of S Company amounted to P800,000 and had book values that approximated their fair market values. P Company uses the equity method to account for its investment. On December 31, 2023, S Company owed P Company P50,000 on an open account from purchases made during 2023. This amount of the sales to S Company during 2023 is P400,000. P Company shipped this merchandise to S Company at its normal shipping price and had a cost of P160,000. Eighty percent of the closing inventory of S Company was purchased from P Company. The opening inventory of S Company included P100,000 of inventory acquired from P Company at the same rate of profit. Both companies use FIFO inventory costing.
Financial statements for the two corporations for the year ended December 31, 2023, are as follows:
Statement of Comprehensive Income
P COMPANY
Sales
Cost of Sales
Gross Margin
Expenses
Operating income before taxes
Income from subsidiary
Income before income taxes
Provision for income taxes
Minority interest
Net income
CI-carried forward
S COMPANY
P2,000,000
800,000
1,200,000
500,000
700,000
60,000
760,000
280,000
P COMPANY
P1,000,000
600,000
400,000
200,000
200,000
200,000
80,000
P120,000
S COMPANY
P860,000
120,000
980,000
60,000
P920,000
Statement of Financial Position
P COMPANY
Cash
Accounts receivable
Inventories
Land
Building (Net of accumulated depreciation)
Equipment (Net of accumulated depreciation)
Investment in S Company
Totals
S COMPANY
P300,000
260,000
400,000
600,000
400,000
1,311,000
1,148,000
P200,000
200,000
200,000
1,000,000
P1,600,000
P180,000
500,000
920,000
P1,600,000
1. Calculate the amount of unrealized profit in S Company's beginning and ending inventory in year 2023.
2. What are the amounts of intercompany sales and cost of goods sold for year 2023?
3. Prepare journal entries P Company would make to account for its investment in S Company in year 2023.
4. Prepare elimination entries in journal form that would be needed to complete a consolidated working paper for year 2023.
5. What is the amount of consolidated CI for year 2023?