Advanced aCCOUNTING 2 SOLMAN.pdf

Chapter 12 Problem I (a)Working Fund – Agency ………………………………… …………………….. 5,000 Cash … ………………………………………………………………………. 5,000 (b)Accounts Receivable … ………………………………..................................... 50,000 Sales-Agency … ……………………………………………………………. 50,000 (c)Cash … ……………………………………………………..................................... 35,000 Accounts Receivable … ………………………………………………….. 35,000 (d)Expenses-Agency … …………………………………………………………….. Cash … ……………………………………………………………………….

4,500

(e)Expenses-Agency … …………………………………………………………….. Cash … ……………………………………………………………………….

2,250

4,500

2,250

(f)Cost of Goods Sold-Agency … ………………………………………………… 36,000 Merchandise Shipments-Agency … ……………………………………. 36,000

Problem II (a) Branch Books: (a) Cash … ……………………………………………………….. Home Office … …………………………………………

42,500

(b) Shipments from Home Office … ………………………… Home Office … ………………………………………...

50,200

(c) Accounts Receivable … …………………………………. Sales … …………………………………………………..

60,000

(d) Purchases … ………………………………………………… Accounts Payable … …………………………………

22,500

(e) Home Office … …………………………………………….. Accounts Receivable … ………………………..

53,400

(f) Accounts Payable … ……………………………………... Cash … …………………………………………………..

12,250

(g) Furniture & Fixtures … ……………………………………… Cash … …………………………………………………..

8,000

(h) Expenses … ………………………………………………….. Cash … …………………………………………………..

18,000

42,500

50,200

60,000

22,500

53,400

12,250

8,000

18,000

(b) Home Office Books: (a) Branch … ……………………………………………………. Cash … ………………………………………………….

42,500

(b) Branch … …………………………………………………… Shipments to Branch … ……………………………..

50,200

(c) Accounts Receivable … ………………………………... Sales … …………………………………………………

105,000

(d) Purchases … ………………………………………………. Accounts Payable … ……………………………….

122,500

(e) Cash … …………………………………………………….. Accounts Receivable … ……………………………

113,600

(f) Accounts Payable … ……………………………………. Cash … …………………………………………………

124,000

(g) Expenses … ………………………………………………… Cash … …………………………………………………

26,600

(h) Cash … …………………………………………………….. Branch … ……………………………………………...

53,400

(i) Retained Earnings … ……………………………………. Cash … ………………………………………………...

10,000

42,500

50,200

105,000

122,500

113,600

124,000

26,600

53,400

10,000

BARTON CO. Balance Sheet for Branch December 31, 20x4 Assets

Liabilities

Cash … ………………………… Accounts Receivable … …… Merchandise Inv… …………... Prepaid Expenses … ………… Furnitures & Fixtures … . P 8,000 Less accum. Depr … … 650 Total Assets … …………………

P 4,250 12,600 23,500 750 7,350 P48,450

Accounts Payable … ……… P 10,250 Accrued Expenses … ………… 300 Home Office … ……………….. 37,900

Total Liabilities … ……………….P48,450

BARTON CO. Income Statement for Branch For Year Ended December 31, 19X6 Sales … ………………………………………………………………………… Cost of Goods Sold: Purchases … ………………………………………………………… Shipments for home office … ……………………………………. Merchandise available for sale … ………………………………

P66,000 P22,500 50,200 P72,700

Less merchandise inv, December 31 … ……………………….. Cost of Goods Sold … …………………………………………….. Gross Profit … …………………………………………………………………. Expenses … …………………………………………………………………… Net loss … ……………………………………………………………………...

23,500 49,200 P16,800 18,200 P 1,400

BARTON CO. Income Statement for Branch For Year Ended December 31, 20x4 Assets Cash …………………………….. Accounts Receivable … …….. Merchandise Inventory… … … Prepaid Expenses … ……… …. Furniture & Fixtures … . P 20,000 Less accum. Depr… .. 5,580 Branch … ……………………… Total Assets … ………………...

Liabilities & Stockholders Equity P 23,200 19,050 48,500 2,050 14,420 37,900 P145,120

Liabilities Accounts payable … ……… P 21,300 Accrued Expenses … ………. 1,350 Stockholders Equity Capital stock, P20 par… …… P50,000 Retained Earnings … ………. 72,740 Total liabilities and stockholders’ equity … ………………

P22,650

122,470 P145,120

BARTON CO. Income Statement for Home Office For Year Ended December 31, 20x4 Sales … …………………………………………………………………………....... Cost of goods sold: Merchandise inventory, January 1 … ………………………………. Purchases … ……………………………………………………………... Merchandise available for sale … …………………………………… Less shipments to branch … …………………………………………... Merchandise available for own sale … …………………………….. Less merchandise inventory, December 31 … ……………………. Cost of Goods Sold … …………………………………………………. Gross Profit … ……………………………………………………………………… Expenses … ………………………………………………………………………… Net income from own operations … ………………………………………….. Deduct branch net loss … ………………………………………………………. Total Income … …………………………………………………………………….

P105,000 P 40,120 122,500 P162,620 50,200 P112,420 48,500 63,920 P 41,080 27,630 P 13,450 1,400 P 12,050

BARTON CO. Income Statement for Home Office For Year Ended December 31, 20x4 Sales … ………………………………………………………………………………. Cost of goods sold: Merchandise inventory, January 1 … ……………………………….. Purchases … ……………………………………………………………… Merchandise available for sale … …………………………………… Less merchandise inventory, December 31 … …………………….. Cost of goods sold … …………………………………………………….

P171,000 P 40,120 145,000 P185,120 72,000 113,120

Gross profit … ……………………………………………………………………….. Expenses … ………………………………………………………………………….. Net Income … ……………………………………………………………………….

P 57,880 45,830 P 12,050

(a) Branch Books: Expenses … ……………………………………………………………. Accumulated Depreciation – F&F… … ………………….

650

Sales …………………………………………………………………… Merchandise Inventory ……………………………………………. Income summary … ………………………………………..

66,000 23,500

Income Summary ……… …………………………………………… Shipments from Home Office …………………………… Purchases …………………………………………………… Expenses … …………………………………………………..

90,900

Home Office … ……………………………………………………… Income Summary … ………………………………………

650

89,500

50,200 22,500 18,200 1,400 1,400

(b) Home Office Books Expenses … ……………………………………………………………. Accumulated Depreciation – F&F… … ………………….

1,180

Sales …………………………………………………………………… Merchandise Inventory ……………………………………………. Shipments to Branch ……………………………………………….. Income summary … …………………………………… ….. Income Summary …………………………………………………… Merchandise Inventory … ………………………………… Purchases … …………………………………………………. Expenses … …………………………………………………..

105,000 48,500 50,200

Branch Income …………………………………… ………………… Branch … …………………………………………………….

1,400

1,180

203,700 190,250 40,120 122,500 27,630

1,400

Income Summary … ……………………………………………….. Branch Income … …………………………………………

1,400

Income Summary … ……………………………………………….. Retained Earnings … ……………………………………..

12,050

1,400

12,050

Problem III (a) Branch Books: Jan.

1

Cash … ………………………………………. Home Office … ……………………

1,500 1,500

1

1

1

1-31

1-31

1-31

1-31

1-31

Jan.

1-31

1-31

1-31

1-31

Shipments from home office … …………. Home Office … ……………………

10,200

Home Office … …………………………….. Cash … ……………………………..

900

Accts. Rec. – Home office … ……………. Home Office … ……………………

2,600

Accts. Rec.-Home Office … ……………. Sales … ……………………………..

6,200

Cash … …………………………………….. Accounts Receivable … ………..

2,600

Purchases … ………………………………. Accounts Payable … ……………

3,000

Accounts Payable … ……………………. Cash … ……………………………..

1,450

Expenses … ……………………………….. Cash … …………………………….

1,250

Cash … ……………………………………… Accts. Rec.-Home Office … … ...

1,600

10,200

900

2,600

6,200

2,600

3,000

1,450

1,250

1,600

Home Office … …………………………… Accts. Rec.-Home Office … … .

150

Shipments from Home Office … ……… Home Office … ………………….

1,250

Home Office … …………………………… Cash … ……………………………

1,000

150

1,250

1,000

(b) Home Office Books: Jan.

1 1

1

1

Branch … ………………………………….. 1,500 Cash … …………………………… Branch … ………………………………….. 10,200 Shipments to Branch … ………..

10,200

Store Furniture and Fixtures Branch … .. 3,000 Store Furniture and Fixtures … ...

3,000

1,500

Accumulated Depr. Store F&F … …….. 750 Accumulated Depr. Store Furniture And Fixtures, Branch … ……….. 750 Calculation of depreciation: 2.5years at P300, (10% of P3,000), or P750

1

1

1-31

1-31

1-31

1-31

1-31

1-31

1-31

1-31

Store Furniture and Fixtures Branch … .. Branch … …………………………

900 900

Branch … ………………………………… 2,600 Accounts Receivable … .........

2,600

Accounts Receivable … ……………… 34,600 Sales … ……................................

34,600

Cash … ……………………………………. 40,000 Accounts Receivable … ………

40,000

Purchases … ……………………………….31,600 Accounts Receivable … ……….

31,600

Accounts Payable … …………………… 36,200 Cash … …………………………...

36,200

Accrued Expenses Payable … ………. Expenses … ………………………………. Cash ……………………………..

250 8,950

Allowance for Doubtful Accounts … .. Branch … ………………………..

150

Branch ……………………………………. Shipments to Branch … ………

1,250

Cash … …………………………………… Branch … ……………………….

1,000

9,200

150

1,250

1,000

EAGLE CO. Balance Sheet January 31, 20x4 Assets

Liabilities

Cash … … … … ............................ Accounts Receivable … ……….. Accts. Rec.-home office … ……. Merchandise Inventory … ……… Merchandise in Transit … ………. Total assets … ………………

P 1,100 3,600 850 9,800 600 P37,200

Accounts Payable … … … … … … . P 2,400 Accrued expenses … ……………. 400 Home Office … …………………… 14,050

Total Liabilities … …………………. P37,200

EAGLE CO. Income Statement for Branch For Month Ended January 31, 20x4 Sales … ………………………………………………………………………………………. Cost of Goods Sold:

P 6,200

Purchases …………………………………………………… P 3,000 Shipments from home office ……………………………. 11,450 Shipments from home office in transit … ……….......... 600 Merchandise Available for Sale … …………………….. P15,050 Less merchandise inv. Dec 31, 19X9 … … ................P9,800 Merchandise in transit … ……………………….. 600 10,400 Cost of Goods Sold … …………………………………………………………. Gross Profit … ……………………………………………………………………………… Expenses … ………………………………………………………………………………… Net Loss … ………………………………………………………………………………....

4,650 P 1,550 2,110 P 560

EAGLE CO. Balance Sheet for Home Office January 31, 20x4 Assets Cash …………………………………………………………………… Accounts Receivable ………………………………………………P34,000 Less allowance for doubtful accounts … …………….. 1,050 Merchandise Inventory ……………………………………………. Store furniture and fixtures …………………………………………P12,000 Less accumulated depreciation … … …………………. 3,950 Store furniture and fixtures-branch ………………………………P 3,900 Less accumulated depreciation … …………………… 785 Branch office … ……………………………………………………... Total Assets ……………………………………………………………

P 9,100 32,950 44,500 8,050 3,315 14,050 P111,765

Liabilities Accounts Payable … ………………………………………….. P29,150 Accrued Expenses … ………………………………………….. 750 Total Liabilities … ………………………………………………..

P29,900

Stockholders Equity Capital Stock … …………………………………………………P50,000 Retained earnings … … ……………………………………….. 31,865 Total stockholder’s equity … ………………………………… Total liabilities and stockholders equity … …………………

81,865 P111,765

AGLE CO. Income Statement for Home Office For Month Ended January 31, 20x4 Sales … …………………………………………………………………………… Cost of goods sold: Merchandise inventory, January 1 … ………………….. P46,000 Purchases … ………………………………………………… 31,600 Merchandise available for sale … ……………………… 77,600 Less shipments to branch … ……………………………… 12,050 Merchandise available for own sales … ………………. P65,550 Less merchandise inventory, January 31 … … ………… 44,500

P 34,600

Cost of goods sold … ………………………………………………………… Gross Profit … ……………………………………………………………………… Expenses … ………………………………………………………………………… Net income from own operations … …………………………………………. Deduct branch net loss … ……………………………………………………… Total Income … …………………………………………………………………

21,050 P 13,650 9,325 P 4,225 560 P 3,665

EAGLE CO. Income Statement for Home Office For Month Ended January 31, 20x4 Assets Liabiities and Stockholders Equity Liabilities Cash ……………………………..… ……. P 10,200 Accounts Payable … … P30,700 Accounts receivable … …….. P38,450 Accrued Expenses … … 1,100 P 31,800 Less allow for doubtFul accounts … …….. 1,050 37,400 Merchandise Inventory ……………….. 54,900 Stockholders Equity Store furn. & fixtures … ……… P15,900 Capital Stocks … ………P50,000 Less accum depr 4,735 11,165 Retained earnings … … 31,865 81,865 Total assets … …………………………… P113,665 Total liab. And stockholders equity . P113,665

EAGLE CO. Combined Income Statement for Home Office and Branch For Month Ended January 31, 20x4 Sales … ………………………………………………………… …………………….. Cost of goods sold: Merchandise Inventory, January 1 … ……………. P46,000 Purchases … …………………………………………... 34,600 Merchandise available for sale … ………………... P80,600 Less merchandise inventory, Jan 31 … …………... 54,900 Cost of goods sold … ………………………………............................... Gross profit … ………………………………………………………………………... Expenses … …………………………………………………………………………… Net Income … ………………………………………………………………………..

P 40,800

25,700 P 15,100 11,435 P 3,665

(a) Branch Books Jan.

31

Shipments from Office-in Transit … …………… Home Office … ………………………….

600 600

31

Expenses … ………………………………………. 475 Home Office … …………………………. 31 Expenses … ……………………………………… 35 Home Office … ……………………….. 1/120 x P3,000, or P25 (depreciation for one month; Asset life, 10 years); 1/90 x P900, or P10 (depreciation For one month; asset life, 7.5 years) 31

Merchandise Inventory … …………………… Merchandise in Transit … …………………….. Income Summary … …………………

475 35

9,800 600 10,400

31

31

31

31

Expenses … …………………………………….. Accrued Expenses … ……………….

350

Sales … …………………………………………. Income Summary … ………………..

6,200

Income Summary … …………………………. Shipments from Home Office … …. Ship. From Home Office – in Trans . Purchases … ………………………… Expenses … …………………………..

17,160

Home Office … ……………………………….. Income Summary … ………………...

560

350

6,200

11,450 600 3,000 2,110

560

(b) Home Office Books: 31

31

31

31

31

31

31

31

31

31

Branch … ………………………………………. Shipments to Branch … …………….

600

Branch … ………………………………………. Expenses … …………………………...

475

Branch … ………………………………………. Accumulated Depreciation, Store Furniture and Fixtures Branch … …..

35

600

475

35

Expenses … ……………………………………. 100 Accumulated Depreciation store Furniture and Fixtures branch … … . 1/120 x P12,000, or P100 (depreciation for one Month; asset life, 10 years) Income Summary … ………………………… Merchandise Inventory … …………

46,000

Merchandise Inventory … ………………….. Income Summary … ………………..

44,500

Expenses … ……………………………………. Accrued Expenses … ……………….

750

Sales … ………………………………………… Purchases … ………………………… Expenses … …………………………..

40,925

Branch Income … ……………………………. Branch … ……………………………..

560

Income Summary … …………………………. Branch Income … …………………...

560

100

46,000

44,500

750

31,600 9,325

560

560

31

Income Summary … …………………………. Retained Earnings … ………………..

3,665 3,665

Problem IV 1. Socrates Company Home Office and Plato Branch Reconciliation of Reciprocal Ledger Accounts June 30, 20x4 Investment in Plato Branch Ledger Account (Debit) Balances prior to adjustment P85,000 Add: Merchandise shipped to branch Less: Acquisition of office equipment by branch (carried in accounting records of home office) (14,500) Collection of branch trade accounts receivable Payment of cash by branch (22,000) Adjusted balances P48,500 2.

(a)

Accounting records of home office: Office Equipment: Plato Branch Investment in Plato Branch To record acquisition of office equipment by branch. Cash in Transit Investment in Plato Branch To record cash in transit from branch.

(b)

Home Office Ledger Account (Credit) P33,500 24,000

14,500 14,500

22,000 22,000

Accounting records of branch: Home Office 9,000 Trade Accounts Receivable To record collection by home office of branch accounts receivable. Inventories in Transit Home Office To record shipment of merchandise in transit from home office.

Problem V ((a) Balances before Adjustments … …………………………………….. Adjustments: Additions: Merchandise in transit to branch … ………………. Collection of Home office receivable by Branch Understatement of branch net income for Nov..

(9,000) _______ P48,500

9,000

24,000 24,000

BRANCH ACCOUNT P 8,400

HOME OFFICE ACCOUNT… P 9,735

615 2,500 90 P10,990

P10,350

Deductions: Merchandise return to home office in transit … …………. Corrected Balances … ……………………………………………

640 P10,350

(b) Branch Books: Shipments from Home Office-in Transit … …………………. Home Office … ………………………………………...

615

Home Office Books: Branch … ………………………………………………………… Accounts Receivable … ……………………………..

2,500

P10,350

615

2,500

Branch … ………………………………………………………… Retained Earnings … ………………………………… .

90

Merchandise Returns from Branch – in Transit … …………. Branch … ………………………………………………..

640

90

640

Multiple Choice Problem 1. d Branch A Assets: Inventory, January 1 Imprest branch fund Accounts receivable, January 1 Total Assets Less: Liabilities Home Office Current Account

P 21,000 2,000 55,000 P 78,000 -0P 78,000

Branch B P 19,000 1,500 43,500 P 64,000 -0P 64,000

2. b Branch A Assets: Inventory, December 31 Imprest branch fund Accounts receivable, December 31 Total Assets Less: Liabilities Home Office Current Account

P 19,000 2,000 70,000 P 91,000 -0P 91,000

Branch B P 12,000 1,500 53,500 P 67,000 -0P 67,000

3. d – incidentally, the entry in the books of the branch would be as follows: Profit and loss summary … … … … … … … … … … … … … … … … … … … … … … xxx Home Office Current… … … … … … … … … … … … … … … … … … … … . Xxx 4. c January 1,20x4 Assets: Inventory Petty cash fund Accounts receivable Total Assets Less: Liabilities Home Office Current Account

P 37,000 3,000 43,000 P 83,000 _____-0P 83,000

January 1, 20x5 P 41,000 3,000 49,000 P 93,000 _____-0P 93,000

5. a – refer to No. 4 for computations 6. a Sales Less: Cost of goods sold: SFHO… … … … … … … … … … … … … … … … … … … … … … … Less: Inventory, ending… … … … … … … … … … … … … … … Gross profit… … … … … … … … … … … … … … … … … … … … … … … Less: Expenses – Net Loss… … … … … … … … … … … … … … … … … … … … … … … … ..

P 74,000 P67,680 9,180

58,500 P 15,500 6,820 P 8,680

7. a January 1, 20x6 Assets: Cash Inventory Accounts receivable Total Assets Less: Liabilities Home Office Current Account

P 4,200 9,180 12,800 P 26,180 _____-0P 26,180

8. a – nominal accounts have zero beginning balance. 9. d Branch Current

H. Office Current

Unadjusted balance, 6/30/20x4 P 225,770 P 226,485* Add (Deduct): Adjustments 1 Erroneous recording of branch equipment 3150 2. Insurance premium recorded twice ( 675) 3. Erroneous recording of freight ( 90) 4. Discount on merchandise ( 800) 5. Failure by the branch to record share in adv ertising 700 6. error by the home office to record remittance of Cebu 3,000 ________ Adjusted balance, 6/30/20x4 P 228,770 P 228,770 * The P226,485 is compute simply by working back with P228,770 adjusted balance as the starting point.

P2-07 10. c

Unadjusted balance Add (deduct) adjustments: In transit Remittance Returns Cash in transit Expenses - HO Expenses – branch

Home Office Books (Branch CurrentDr. balance) P518,575

Branch Books (Home Office Current – Cr. balance) P452,276 10,500

( 17,000) ( 775) 25,000 (

800) 12,000

Error Adjusted balance

________ P 500,000

_____224 P 500,000

Home Office Books (Branch CurrentDr. balance) P515,000

Branch Books (Home Office Current – Cr. balance) P495,750

11. d

Unadjusted balance Add (deduct) adjustments: Excess freight Cash in transit Returns Expenses – branch Adjusted balance 12. 13. 14. 15.

(

750)

( 11,000) ( 4,000) ________

5,000

P 500,000

P 500,000

c – refer to No. 11 for computations a – refer to No. 11 for computations No answer available – P495,750 d - No entry should be made in the books of the home office, since the freight should be chargeable to the branch and the payment of the freight was made by the branch.

16. b

Unadjusted balance Add (deduct) adjustments: Remittance Returns Error by the branch Expenses – branch Adjusted balance

Home Office Books (Branch CurrentDr. balance) P590,000

Branch Books (Home Office Current – Cr. balance) P506,700

(40,000) (15,000) ________

300 28,000

P 535,000

P 535,000

Home Office Books (Branch Current- Dr. balance) P150,000

Branch Books (Home Office Current – Cr. balance) P117,420

17. c

Unadjusted balance Add (deduct) adjustments: In transit HO A/R collected by br. Supplies returned Error in recording Br. NI Cash sent to branch to General Expense by HO Adjusted balance 18. d – refer to No. 17 for computation. 19. a

37,500 10,500 ( 4,500) ( 1,080) 25,000 P 179,920

25,000 P 179,920

Unadjusted balance Add (deduct) adjustments: In transit HO A/R collected by br. Cash in transit Error in recording Br. NI Adjusted balance

Home Office Books (Branch Current- Dr. balance) P40,000

Branch Books (Home Office Current – Cr. balance) P31,100 5,800

500 2,000 ( 3,600) P38,900

2,000 _______ P38,900

Home Office Books (Branch Current- Dr. balance) P49,600

Branch Books (Home Office Current – Cr. balance) P44,00

20. a – refer to No. 19 for computations 21. a

Unadjusted balance Add (deduct) adjustments: Collection of branch A/R In transit Purchase of furniture Return of excess merchandise Remittance Adjusted balance

( ( 1,200) ( 1,500) ( 500) P46,400

800) 3,200

_______ P46,400

22. b – refer to No. 21 for computations 23. (C) Sales (P350,000 + P100,000)… … … … … … … … … … … … … … … … … … … … … … .P 450,000 Less: Cost of goods sold: Purchases (P400,000 + P50,000)… … … … … … … … … … … . P 450,000 Less: Inventory, ending… … … … … … … … … … … … … … … 90,000 360,000 Gross profit… … … … … … … … … … … … … … … … … … … … … … … P 90,000 Less: Expenses – Salaries and commission… … … … … … … … … … … … … … .. P 70,000 Rent… … … … … … … … … … … … … … … … … … … … … … … … 20,000 Advertising supplies (P10,000 – P6,000)… … … … … … … … 4,000 Other expenses… … … … … … … … … … … … … … … … … … . 5,000 99,000 Net Loss… … … … … … … … … … … … … … … … … … … … … … … … .. P( 9,000) 24. a In adopting the imprest system for the agency working fund, the home office writes a check to the agency for the amount of the fund. Establishment of the fund is recorded on the home office books by a debit to the Agency working fund and credit cash. The agency will request fund replenishment whenever the fund runs low and at the end of each fiscal period. Such a request is normally accomplished by an itemized and authenticated statement of disbursements and the paid vouchers. Upon sending the agency a check in replenishment of the fund, the home office debits expense or other accounts for which disbursements from the fund were reported and credits cash. 25. d

Normally, transactions of the agency are recorded in the books of the home office separately identified with the appropriate agency.

Theories 1. True 2. True 3. False 4. False 5. True

6. 7. 8. 9. 10,

False False False True True

11. 12. 13. 14. 15.

False False True True True

16. 17. 18. 19. 20.

b c d a c

21. 22. 23. 24. 25.

a b b b a

26. 27. 28. 29. 30.

c b d d c

31. 32. 33. 34. 35. 36.

b b c c c d

Chapter 13 Problem I

Sales....................................................................................................................... 42,000 Shipments to Newark Branch................................................................ Unrealized Intercompany Inventory Profit........................................... Cost of merchandise shipped t branch: P42,000/1.20= P35,000. Shipments to Newark Branch............................................................................. Unrealized Intercompany Inventory Profit........................................................ Sales Returns........................................................................................... Cost of merchandise returned by branch: P750/1.20= P625. Newark Branch Income..................................................................................... Newark Branch.......................................................................................

35,000 7,000

625 125 750

2,600

Unrealized Intercompany Inventory Profit........................................................ 4,125 Newark Branch....................................................................................... Decrease in Unrealized Intercompany Inventory Profit: Balance prior to adjustment, 12/31, P7,000 – P125............... P6,875 Balance required in account, 12/31, P16,500 – (P16,500/1.20)........................................................... 2,750 Decrease.................................................................................... P4,125 Newark Branch Income...................................................................................... 1,525 Income Summary.................................................................................... Problem II

a. Unrealized Intercompany Inventory Profit has a credit balance of P9,450 before adjustment on December 31, calculated as follows:

Merchandise transferred by home office at billed price, 35% above cost (P16,200 plus P20,250)............................................. P36,450 Merchandise transferred by home office at cost, P36,450/1.35.... 27,000

2,600

4,125

1,525

Additions to unrealized profit account resulting from transfers by home office..................................................................................... P9,450 b. Unrealized Intercompany Inventory Profit.................................................. 4,550 Cash.......................................................................................................

4,550

Balance of unrealized profit account at December 31 (as calculated above).......................................................................................................... P 9,450 Required balance, December 31, to reduce inventory to cost: Ending inventory of merchandise shipped to branch by home office: At billed price................................................................................................. P 18,900 At cost (P 18,900/1.35).................................................................................. 14,000 4,900 Required decrease in unrealized profit account as a result of branch sales...................................................................................................................... P4,550

c. Branch Books: Home Office........................................................................................... 540 Shipments from Home office................................................... Home Office Books: Shipments to Branch.............................................................................. 400 Unrealized Intercompany Inventory Profit........................................... 140 Branch........................................................................................ Cost of merchandise returned: P540/1.35, or P400.

540

540

Problem III

a. The branch office inventory as of December 1 considered of: Shipments from Home Office (see below)............................................................. P 12,000 Purchases from outsiders (balance of inventory).................................................. 3,000 Total inventory........................................................................................................... P 15,000 Goods acquired from home office and included in branch inventory at billed price are calculated as follows: Balance of unrealized intercompany inventory profit, December 31.................... P 3,600 Additions to unrealized profit account during December, 20% of shipments to branch (20% x P8,000)............................................................................. 1,600 Balance of unrealized profit account, December 1.................................................. P 2,000 Balance of unrealized profit account, December 1, P2,000 / 20% markup on cost equals December 1 inventory at cost................................................................ P 10,000 Add 20% markup........................................................................................................... 2,000 Goods in branch inventory at billed price................................................................. P 12,000 b. Unrealized Intercompany Inventory Profit......................................... 2,200 Branch Income............................................................................

2,200

Calculation of reduction in Unrealized Intercompany Inventory Profit: Balance of unrealized profit account, December 31.........................P 3,600 Required balance, December 31, to reduce inventory to cost At billed price................................................................... P8,400 At cost (P8,400/1.20)....................................................... 7,000 1,400 Required decrease in unrealized profit account as a result of branch sales........................................................................................ P 2,200 Problem IV

(1) Dec.31 Selling Expenses............................................................................ 260 Store Supplies............................................................................ Supplies used: P400 – P140, or P260. 31

260

Selling Expenses............................................................................ 80 Accumulated Depreciation-Store Furniture........................ 80 Depreciation:1% of P8,000, or P80.

31 Selling Expenses............................................................................ Accrued Expenses Payable.................................................

120 120

31 Prepaid Selling Expenses............................................................. 150 Selling Expenses..................................................................... 31 Income Summary......................................................................... 16,000 Merchandise Summary......................................................... 16,000 31 Merchandise Summary................................................................. 16,950 Income Summary...................................................................... 31 Notes Payable..................................................................................1,000 Home Office...............................................................................

150

16,950 1,000

31 Sales.................................................................................................20,500 Income Summary.......................................................................

20,500

31 Income Summary........................................................................... 21,900 Purchases.................................................................................... Shipments from Home Office................................................... Selling Expenses.......................................................................... General Expenses.......................................................................

5,000 10,500 4,560 1,840

31 Home Office....................................................................................... Income Summary.......................................................................

450 450

(2) Dec.31 Branch No. 1.................................................................................... 1,000 Cash............................................................................................ Branch No. 1 Income..................................................................... Branch No. 1...............................................................................

1,000

450 450

31 Unrealized Intercompany Inventory Profit....................................... 2,200 Branch No. 1 Income.................................................................

2,200

Calculations of unrealized profit adjustment on merchandise shipped by home office: Billing to Cost Unrealized Branch (Billing/1.1 Profit /3) (Billing Price Minus Cost) Inventory, P 12,500 P 9,375 P 3,125 Dec.1............................................................ Shipments during 10,500 7,875 2,625 December...................................... Total in unrealized profit on December P 5,750 31................. Inventory, 14,200 10,650 3,550 Dec.31......................................................... Reduction in unrealized profit account- adjustment to branch profit for overstated of cost of goods sold................................................................. P 2,200 31 Branch No. 1 Income............................................................... 1,750 Income Summary.............................................................

1,750

Problems V

(1) SPENCER CO. Balance Sheet for Branch December 31,20x4 Assets Cash..................................................... P 2,650 4,200 Accounts receivable........................ 12,850 Merchandise inventory..................... 14,600 Store supplies...................................... 300 Prepaid expenses............................... 120 Furniture and fixtures.............. P 3,600 Less: Accumulated depreciation.............. 576 3,024

Liabilities____________________ Accounts payable................................... P Accrued expenses................................... 105 Home office............................................... 29,239

________

Total assets....................................... P 33,544 33,544

Total liabilities............................................ P

SPENCER CO. Income Statement for Branch For Month Ended December 31, 20x4 Sales........................................................................................................................................... P 20,000 Cost of goods sold: Merchandise inventory, December 1................................................ P 14,400 Purchases.............................................................................................. 4,100 Shipments from home office............................................................... 10,200 Merchandise available for sale.......................................................... P 28,700 Less: Merchandise Inventory, December 31..................................... 14,600 Cost of goods sold....................................................................................................... 14,100 Gross profit................................................................................................................................. P 5,900 Operating expenses: Advertising expense............................................................................. P 2,800 Salaries and commissions expense..................................................... 2,350 Store supplies expense......................................................................... 280 Miscellaneous selling expense............................................................ 1,050 Rent expense........................................................................................ 1,500 Depreciation expense – furniture and fixtures.................................. 36 Miscellaneous general expense......................................................... 905 Total operating expenses.......................................................................................... 8,921 Net loss...................................................................................................................................... P 3,021 SPENCER CO. Balance Sheet for Home Office December 31, 20x4 Liabilities and Stockholder’s

Assets Equity_______ Cash..................................................... P10,350 Cash in transit..................................... 1,500 Accounts receivable........................ 26,200 35,660 Merchandise inventory..................... 24,200 Store supplies...................................... 380 Prepaid expenses............................... 350 60,524 Furniture and fixtures.............. P 8,500 Less: Accumulated depreciation.............. 2, 585 5,915 Branch..................................... P29,239 Less: Unrealized intercompany

Liabilities Accounts payable................ P 35,400 Accrued expenses............... 260 P Stockholders’ Equity Capital Stock......................... P 65,000 Less deficit.............................. 4,476

inventory profit............ 1,950 27,289 ________ Total assets........................................ P 96,184 96,184

Total liabilities and stockholder’s equity............................... P

SPENCER CO. Income Statement for Home Office For Month Ended December 31, 20x4 Sales........................................................................................................................................... P 44,850 Cost of goods sold: Merchandise inventory, December 1................................................ P 31,500 Purchases.............................................................................................. 27,600 Merchandise available for sale.......................................................... P 59,100 Less: Shipments to branch................................................................... 8,500 Merchandise available for own sales................................................ P 50,600 Less: Merchandise Inventory, December 31..................................... 24,200 Cost of goods sold.......................................................................................... 26,400 Gross profit................................................................................................................................. P 18,450 Operating expenses: Advertising expense............................................................................. P 2,850 Salaries and commissions expense..................................................... 4,250 Store supplies expense......................................................................... 560 Miscellaneous selling expense............................................................ 1,850 Rent expense........................................................................................ 2,700 Depreciation expense – furniture and fixtures.................................. 85 Miscellaneous general expense......................................................... 2,510 Total operating expenses............................................................................. 14,805 Net income from own operations......................................................................................... P 3,645 Less: Branch net loss................................................................................................................ 1,271 Total income............................................................................................................................ P 2,374 2. WORKSHEET – refer to a separate sheet

SPENCER CO. Combined Balance Sheet for Home Office and Branch December 31, 20x4

Assets Cash … ……………………………. P 14,500 Accounts Receivable … ……… 39,050 Merchandise Inv … ……………. 36,850 Store Supplies … ……………….. 680 Prepaid Expenses … ………….. 470 Furniture & Fixtures … …… P12,100 Less accumulated Depreciation … ... 3,161 8,939 Total assets … … … … … … … … … P100,489

Liabilities and Stockholders’ Equity Liabilities Accounts Payable … …….. P39,600 Accrued Expenses … ……. 365 Stockholders’ Equity Capital Stock … …………… P65,000 Less deficit … ………………. 4,476

P 39,965

60,524

Total liabilities and stockholders’ equity … … … … … P100,489

SPENCER CO. Combined Income Statement for Home Office and Branch For Month Ended December 31, 20x4 Sales … …………………………………………………………………………………………………… … P64,850 Cost of goods sold: Merchandise Inventory, December 1 … ………………………………… P43,900 Purchases … …………………………………………………………………… 31,700 Merchandise available for sale … …………………………………………P75,600 Less merchandise inventory, December 31 … ………………………… . 36,850 Cost of goods sold … …………………………………………………… … .. 38,750 Gross profit … …………………………………………………………………………… P26,100 Operating Expenses: Advertising Expense … …………………………………………………… … P 5,650 Salaries and Commissions expense … …………………………………… 6,600 Store supplies expense … …………………………………………… … … .. 840 Miscellaneous selling expense … ………………………………… … … … 2,900 Rent expense … …………………………………………………………… … 4,200 Depreciation Expense – F&F … …………………………………………… . 121 Miscellaneous general expense … ………………………………… … … . 3,415 Total operating expense … ……………………………………………………………………. 23,726 Net Income ………………………………………………………………………………………………… P 2,374

(a) Dec

Branch Books 31

31

31

Dec.

31

31

31

31

31

Income Summary … … … … … … … … … … … … … … … … … .. 14,400 Merchandise Inventory … … … … … … … … … … … ..

14,400

Merchandise Inventory … … … … … … … … … … … … … … … 14,600 Income Summary … … … … … … … … … … … … … … .

14,600

Store Supplies Expense … … … … … … … … … … … … … … … . Store Supplies … … … … … … … … … … … … … … … … Store supplies used: P580 – P300, or P280

280 280

Prepaid Expenses … ……………………………………………… Miscellaneous General Expense … ………………….

120

Miscellaneous General Expense … …………………………… Accrued Expenses … …………………………………..

105

Depreciation Expense – F&F … ……………………………….. Accumulated Depreciation … ……………………… Depreciation: 1% of P3,600

36

Miscellaneous General Expense … ………………………….. Home Office … …………………………………………

220

Sales … …………………………………………………………… Income Summary … ………………………………….

20,000

120

105

36

220

20,000

31

31

(b) Dec

22,221

Home Office … …………………………………………………. Income Summary … …………………………………..

3,021

4,100 10,200 2,800 2,350 280 1,050 1,500 36 905

3,021

Home Office Books 31

31

31

31

31

31

31

31

Dec

Income Summary … …………………………………………… Purchases … …………………………………………… Shipments from Home Office … …………………… Advertising Expense … ………………………………. Salaries and Commissions Expense … ……………. Store Supplies Expense … …………………………… Miscellaneous Selling Expense … ………………….. Rent Expense … ………………………………………. Depreciation Expense – F&F … ……………………. Miscellaneous General Expense … ……………….

31

Income Summary … ……………………………………………. Merchandise Inventory … …………………………….

31,500

Merchandise Inventory … ……………………………………... Income Summary … ……………………………………

24,200

Store Supplies Expense … ………………………………………. Store Supplies … ………………………………………… Store supplies used: P940 – P380, or : 560

560

Prepaid Expense … ……………………………………………… Miscellaneous General Expense … …………………

350

Miscellaneous General Expense … ………………………….. Accrued Expenses … ………………………………….

260

Depreciation Expense … ……………………………………….. Accumulated Depreciation – F&F … ………………. Depreciation: 1% of P8,500, or P85 Cash in Transit … ………………………………………………. Branch … ……………………………………………… Sales … ………………………………………………………… Shipments to branch … ……………………....................... Income Summary … ……………………………….

31,500

24,200

560

350

260 85 85

1,500 1,500 44,850 8,500

Income Summary … ………… … … … … … … … … … … … … … 42,405 Purchases … ………… … … … … … … … … … … … … … Advertising Expense … … … … … … … … … … … … … . Salaries and Commissions Expense … ……………. Store Supplies Expense … …………………………… Miscellaneous Selling Expense … ………………….. Rent Expense … ………………………………………. Depreciation Expense – F&F … …………………….

53,350

27,600 2,850 4,250 560 1,850 2,700 85

Miscellaneous General Expense … ………………. 31

31

31

31

2,510

Branch Income … …………………………………………….. Branch … ………………………………………………

3,021

Unrealized Intercompany Inventory Profit … ……………. Branch Income … …………………………………… Calculation of unrealized profit adjustment: Balance of unrealized profit account, December 31 … …………………….. P3,700 Inventory merchandise received from Home office at billed price on December 31, P11,700 Inventory at cost: P11,700/ 1.20, or P9,750 Balance of unrealized profit account on December 31, P11,700 – P9,750 .... 1,950 Required decreased in unrealized profit Adjustment to branch income for Overstatement of cost of goods Sold … ………………………………….. P1,750

1,750

Income Summary … ………………………………………… Branch Income … ………………………………….

1,271

Income Summary … ……………………… ………………… Retained Earnings … ……………………………….

2,374

3,021

1,750

1,271

2,374

Problem VI 1.

Unadjusted balance, 12/31/20x4 Add (Deduct): Adjustments 1 Cash in transit 2. Merchandise in transit 3. Branch expenses paid by home office 4. Cash in transit from home office Adjusted balance, 12/31/20x4

Branch Current

P 44,000

H. Office Current

P 9,000

( 10,000)

_______ P 34,000

10,000 12,000 3,000 P34,000

2. Combined Income Statement

Sales [(P350,000 – P105,000) + P150,000)………....................................................... P395,000 Less: Cost of goods sold [(P220,000 – P84,000) + (P93,000 + P3,600 – P21,000 – P1,200)]……………………………………. 210,400 Gross profit................................................................................................................... P184,600 Operating expenses (P70,000 + P41,000 + P12,000)................................................ 123,000 Net income................................................................................................................... P 61,600 Problem VII

(1) PAXTON CO. Income Statement for Dayton Branch

For Year Ended December 31, 20x5 Sales.............................................................................................................................. P315,000 Cost of goods sold: Merchandise inventory, January 1, 20x5................................... P 44,500 Shipments from home office...................................................... 252,000 Merchandise available for sale................................................. P296,500 Less: Merchandise Inventory, December 31, 20x5.................. 58,500 238,000 Gross profit................................................................................................................. P 77,000 Operating expenses................................................................................................. 101,500 Net loss....................................................................................................................... P 24,500

PAXTON CO. Income Statement for Cincinnati Home Office For Year Ended December 31, 20x5 Sales.............................................................................................................................. P1,060,000 Cost of goods sold: Merchandise inventory, January 1, 20x5................................... P115,000 Shipments from home office...................................................... 820,000 Merchandise available for sale................................................. P935,000 Less: Shipments to branch.......................................................... 210,000 Merchandise available for own sales....................................... P725,000 Less: Merchandise Inventory, December 31, 20x5.................. 142,500 582,500 Gross profit.................................................................................................................. P477,500 Expenses...................................................................................................................... 382,000 Net income from own operations............................................................................ P 95,500 Add branch net income........................................................................................... 16,650 Total income............................................................................................................... P112,150 (2) PAXTON CO. Combined Income Statement for Home Office and Branch For Year Ended December 31, 20x5 Sales.............................................................................................................................. P1,375,000 Cost of goods sold: Merchandise inventory, January 1, 20x5...................................P 150,600 Purchases...................................................................................... 820,000 Merchandise available for sale................................................. P970,600 Less: Merchandise Inventory, December 31, 20x5.................. 191,250 779,350 Gross profit.................................................................................................................... P595,650 Operating expenses.................................................................................................... 483,500 Net income................................................................................................................... P112,150 (3) Merchandise Inventory, December 31................................................................ 58,500 Sales.......................................................................................................................... 315,000

Income Summary............................................................................................ 373,500 Income Summary......................................................................................................... 398,000 Merchandise Inventory, January 1................................................................ 44,500 Shipments from Home Office......................................................................... 252,000 Operating expenses........................................................................................ 101,500 Home Office............................................................................................................... Income Summary..........................................................................................

24,500 24,500

(4) Branch Income..................................................................................................... Branch............................................................................................................

24,500 24,500

Unrealized Intercompany Inventory Profit............................................................... 41,150 Branch Income.............................................................................................. 41,150 Calculation of unrealized profit adjustment: Branch inventory, January 1, acquired from home office at billed price...................................................................................... P 44,500 Less: Cost of inventory (P44,500/1.25)......................................................... 35,600 Unrealized Intercompany Inventory Profit Jan. 1....................................... P 8,900 Add: Increase in unrealized profit for shipments made during year, billed price of goods, P252,000, cost of goods, P210,000.................................................... 42,000 P 50,900 Deduct balance to remain in unrealized profit account: Branch inventory, December 31, acquired from home office....................................... P 58,500 Less: Cost of inventory to home office, P58,500/1.20................................................................ 48,750 Reduction in unrealized profit account- adjustment to branch income for overstatement of cost of goods sold..................................................................

9,750

41,150

Branch Income............................................................................................................. 16,650 Income Summary............................................................................................ 16,650 Merchandise Inventory, December 31...................................................................... 142,500 Sales............................................................................................................................... 1,060,000 Shipments to Branch.................................................................................................... 210,000 Income Summary............................................................................................. 1,412,500

Income Summary......................................................................................................... 1,317,000 Merchandise Inventory, January 1................................................................ 115,000 Purchases......................................................................................................... 820,000 Expenses........................................................................................................... 382,000 Income Summary.......................................................................................................... Retained Earnings............................................................................................ 112,150

112,150

Problem VIII (1) RUGGLES CO. Income Statement for Branch For Year Ended December 31, 20x4 Sales................................................................................................................................ P 78,500 Cost of goods sold: Merchandise inventory, January 1, 20x4......................................... P 32,000 Shipments from home office........................................... P 40,000 Purchases from outsiders................................................. 20,000 60,000 Merchandise available for sale....................................................... P 92,000 Less: Merchandise Inventory, December 31, 20x4........................ 31,500 Cost of goods sold............................................................................. 60,500 Gross profit.................................................................................................................... P 18,000 Operating expenses.................................................................................................... 12,500 Net income................................................................................................................... P 5,500 RUGGLES CO. Income Statement for Home Office For Year Ended December 31, 20x4 Sales.............................................................................................................................. P 256,000 Cost of goods sold: Merchandise inventory, January 1, 20x4................................... P 80,000 Purchases...................................................................................... 210,000 Merchandise available for sale................................................. P 290,000 Less: Shipments to branch.......................................................... 30,000 Merchandise available for own sales....................................... P 260,000 Less: Merchandise Inventory, December 31, 20x4.................. 55,000 Cost of goods sold............................................................................. 205,000 Gross profit................................................................................................................... P 51,000 Operating Expenses.................................................................................................... 60,000 Net loss from own operations..................................................................................... P 9,000 Add branch net income............................................................................................ 13,500 Total income................................................................................................................ P 4,500

(2) RUGGLES CO. Combined Income Statement for Home Office and Branch For Year Ended December 31, 20x4 Sales.............................................................................................................................. P 334,500 Cost of goods sold: Merchandise inventory, January 1, 20x4................................... P 107,500 Purchases...................................................................................... 230,000 Merchandise available for sale.................................................. P 337,500 Less: Merchandise Inventory, December 31, 20x4................... 80,000 Cost of goods sold............................................................................. 257,500 Gross profit.................................................................................................................... P 77,000 Operating expenses.................................................................................................... 72,500 Net income................................................................................................................... P 4,500

(3) Merchandise Inventory......................................................................................... 31,500 Sales.......................................................................................................................... 78,500 Income Summary............................................................................................ 110,000 Income Summary......................................................................................................... 104,500 Merchandise Inventory................................................................................... 32,000 Shipments from Home Office......................................................................... 40,000 Purchases......................................................................................................... 20,000 Expenses........................................................................................................... 12,500 Income Summary......................................................................................................... Home Office..................................................................................................... (4) Branch...................................................................................................................... Branch Income................................................................................................ Unrealized Intercompany Inventory Profit............................................................... Branch Income.............................................................................................. Calculation of unrealized profit adjustment: Branch inventory, January 1, acquired from home office at billed price.................................................................................... P 24,500 Less: Cost of inventory (P24,500/1.225).................................................... 20,000 Unrealized Intercompany Inventory Profit Jan. 1................................... P 4,500 Add: Increase in unrealized profit for shipments

5,500 5,500 5,500 5,500 8,000 8,000

made during year, billed price of goods, P40,000, cost of goods, P30,000.................................................... 10,000 P 14,500 Deduct balance to remain in unrealized profit account: Branch inventory, December 31, acquired from home office....................................... P 26,000 Less: Cost of inventory to home office, P26,000/1.1/3................................................................ 19,500 6,500 Reduction in unrealized profit account- adjustment to branch income for overstatement of cost of goods sold........................... 8,000 Branch Income............................................................................................................. 13,500 Income Summary............................................................................................ 13,500 Merchandise Inventory................................................................................................ 55,000 Sales............................................................................................................................... 256,000 Shipments to Branch.................................................................................................... 30,000 Income Summary............................................................................................. 341,000 Income Summary......................................................................................................... 350,000 Merchandise Inventory................................................................................... 80,000 Purchases......................................................................................................... 210,000 Expenses........................................................................................................... 60,000 Income Summary.......................................................................................................... Retained Earnings............................................................................................

4,500 4,500

Problem IX 1. Branch Current Unadjusted balance, 12/31/20x4 Add (Deduct): Adjustments 1 Remittance 2. Cash in transit 3. Shipments in transit Adjusted balance, 12/31/20x4

P 60,000

H. Office Current P 51,500

I 1,700)

P 57,300

1,800 5,800 P 57,300

2. Income Statement - Branch

Sales................................................................................................................................ P 140,000 Cost of goods sold: Merchandise inventory, January 1, 20x4 (P11,550 – P1,000)....... P 10,550 Shipments from home office (P105,000 + P5,000 – P10,000)........ 100,000 Freight-in (P5,500 + P250)…………………………………………….. 5,750

Merchandise available for sale..................................................... P116,300 Less: Merchandise Inventory, December 31, 20x4...................... 14,770 Cost of goods sold............................................................................. Gross profit.................................................................................................................... Operating expenses.................................................................................................... Net income...................................................................................................................

101,530 P 38,470 24,300 P 14,170

Income Statement – Home Office Sales.............................................................................................................................. P 155,000 Cost of goods sold: Merchandise inventory, January 1, 20x4................................... P 23,000 Purchases...................................................................................... 190,000 Merchandise available for sale................................................. P 213,000 Less: Shipments to branch.......................................................... 100,000 Merchandise available for own sales....................................... P 113,000 Less: Merchandise Inventory, December 31, 20x4.................. 30,000 Cost of goods sold........................................................................ 83,000 Gross profit................................................................................................................... P 72,000 Operating Expenses.................................................................................................... 42,000 Net loss from own operations..................................................................................... P 30,000 Add branch net income............................................................................................ 14,170 Combined net income.............................................................................................. P 44,170 3. Combined Income Statement for Home Office and Branch For Year Ended December 31, 20x4 Sales.............................................................................................................................. P 295,000 Cost of goods sold: Merchandise inventory, January 1, 20x4................................... P 33,550 Purchases...................................................................................... 190,000 Freight-in……………………………………………………………… 5,750 Merchandise available for sale.................................................. P 229,300 Less: Merchandise Inventory, December 31, 20x4................... 44,770 Cost of goods sold........................................................................ 184,530 Gross profit.................................................................................................................... P 110,470 Operating expenses.................................................................................................... 66,300 Net income................................................................................................................... P 44,170 Problem X

a. The cost of the merchandise destroyed was P30,000. Total merchandise acquired from home ofiice, at billed price: Inventory, January 1...................................................................................... P26,400 Shipments from home office, Jan. 1-17....................................................... 20,000 P46,400 Cost of goods sold, January 1-17, at billed price: Net sales, P13,000/1.25......................................................................................

10,400

Merchandise on hand, January 17, at billed price....................................... P36,000 Merchandise on hand, January 17, at cost, P36,000/1.20............................ P30,000 b. Branch Books: Loss from Fire (or Home Office)............................................................ 36,000 Merchandise Inventory............................................................ 36,000 Home Office Books: No entry needs to be made on the books of the home office until the end of the fiscal period, when the branch earnings (including the loss from fire) are recognized and when the balance of the account Unrealized Intercompany Inventory Profit is adjusted to conform to the branch ending inventory. If it is desired to recognized the loss from fire on the home office books immediately, the following entry may be made: Branch Loss from Fire (or Retained Earnings)...................................... 30,000 Unrealized Intercompany Inventory Profit........................................... 6,000 Branch......................................................................................... 36,000 Problem XI

a. Books of Branch A: Home Office........................................................................................ 1,500 Cash.........................................................................................

1,500

b. Books of branch B: Cash...................................................................................................... 1,500 Home Office............................................................................

1,500

c. Books of Home Office: Branch B............................................................................................... 1,500 Branch A..................................................................................

1,500

Problem XII a. Books of Branch No. 1 : Home Office … …………………………………………………………. Shipments from Home Office… … … …………………………….. Freight In… …………………………………………………………… b. Books of branch No. 5: Shipments from Home Office… … …………………………………… Freight In…………………………………………………………………… Home Office… … ……………………………………………………. Cash… ………………………………………………………………… c. Books of the Home Office Branch No. 5… … ……………………………………………………….. Excess Freight on Inter branch Transfer of Merchandise… … … .. Branch No. 1… ……………………………………………………… Shipments to Branch No. 1… ………………………………………….. Shipments to Branch No. 5…………………………………………

1,950 1,600 350

1,600 400 1,750 250

1,750 200 1,950 1,600 1,600

Multiple Choice Problems 1. c - P50,400, billed price x 40/140 = P 14,400 2. b Ending inventory in the combined income statement: From Home Office: (P50,000-P6,600) x 100/140 From Outsiders

P 31,000 6,600 P 37,600

3. a True Branch Net Income Branch Net Income Add (deduct): Overvaluation of cost of goods sold/realized profit from sales made by branch: Shipments from home office. P 280,000 Less: Ending inventory, at billed price (P50,000 – P6,600) 43,400 Cost of goods sold from home office at billed price P 236,600 Multiplied by: Mark-up 40/140 Unrecorded branch expenses True Branch Net Income

P

5,000

67,600 ( 2,500) P 70,100

4. c True Branch Net Income Less: branch Net Income as reported by the branch Overvaluation of CGS Less: Cost of goods sold from home office at BP Inventory, December 1 Shipment from HO COGAS Less: Inventory, December 31 CGS from home office, at cost

P156,000 60,000 P 96,000 P 70,000 350,000 P 420,000 84,000

336,000 P 240,000

Billing Price: P336,000 / P240,000 = 140%. 5. c – Allowance for overvaluation after adjustment / for December 31 inventory: (refer t o No. 4 for further computation): P84,000 x 40/140 = P24,000. 6. No answer available – P109,000 Net Income as reported by the Branch Less: Rental expense charged by the home office (P1,000 x 6 months) Adjusted NI as reported by the Branch Add: Overvaluation of CGS MI, beginning SFHO COGAS Less: MI, ending

P 20,000 6,000 P 14,000 Billed Price 0 550,000 550,000 75,000

CGS, at BP X: Mark-up ratio True/Adjusted/Real Branch Net Income

475,000 25/125

95,000 P109,000

7. d Sales (P537,500 + P300,000)… … … … … … … … … … … … … … … … … … .… … … . P 837,500 Less: Cost of goods sold Merchandise inventory, beg. [P50,000 + (P45,000 / 1.20)]P 87,500 Add: Purchases… … … … … … … … … … … … … … … … … … … . 500,000 Cost of Goods Available for Sale… … … … … … … … … … ... P 587,500 Less: MI, ending [P70,000 + (P60,000 / 1.20)]… … … … … … . 120,000 467,500 Gross profit… … … … … … … … … … … … … … … … … … … … … … … … . P 370,000 Less: Expenses (P120,000 + P50,000..… … … … … … … … … … … … . 170,000 Net Income… … … … … … … … … … … … … … … … … … … … … … … … P 200,000 8. d Overvaluation of Cost of Goods Sold: Unrealized Profit in branch inventory/ before adjustment… … … … … … .P 7,200 Less: Allowance of ending branch inventory (P20,000 x 84% = P16,800 x 20/120… … … … … … … … … … … … … … … … … … … … … … .. 2,800 Overvaluation of Cost of Goods Sold… … … … … … … … … … … … … … . … .P 4,400 Adjusted branch net income: Sales… … ………………… … … … … … … … … … … … … … … … … … … … … … … … … P60,000 Less: Cost of goods sold: Inventory, January 1, 2003… … … … … … … … … … … … .P 30,000 Add: Purchases… … … … … … … … … … … … … … … … ..... 11,000 Shipments from home office… … … … … … … … .. 19,200 Cost of Goods available for sale… … … … … … … … … P 60,200 Less: Inventory, December 31, 2003… … … … … … … . 20,000 40,200 Gross profit… …………… … … … … … … … … … … … … … … … … … … … … … … … .. P 19,200 Less: Expenses… … … … … … … … … … … … … … … … … … … … … … … … … … … … .. 12,000 Unadjusted branch net income… … … … … … … … … … … … … … … … … … … … .P 7,800 Add: Overvaluation of Cost of Goods Sold… … … … … … … … … … … … … … . 4,400 Adjusted branch net income… … … … … … … … … … … … … … … … … … … … … ..P 12,000 9. d Merchandise Inventory, 12/31/2005 Shipments Cost of goods sold

Billed Price *P 36,000 28,800

Cost P 30,000 24,000

Allowance P 6,000 4,800 P10,800

From Home at billed price: *P6,000 / 20% = P30,000 + P6,000 = P36,000. From outsiders: P45,000 – P36,000 = P9,000 10. d Billed Price Merch. Inventory, 12/31/20x4 *P12,000 Shipments 9,600 Cost of Goods Sold *P2,000 / 20% = P10,000 + P2,000 = P12,000.

Cost P10,000 8,000

Allowance P 2,000 1,600 P 3,600

Merchandise inventory, December 1, 20x4… … … … … … … … … … … … … P 15,000 Less: Shipments from home office at billed price*… … … … … … … … … … 12,000 Merchandise from outsiders… … … … … … … … … … … … … … … … … … … … P 3,000 11. d Combined Cost of Goods Sold: Merchandise Inventory, 1/1/2003: Home Office, cost… … … … … … … … … … … … … … … … … … P 3,500 Branch: Outsiders, … … … … … … … … … … … ...........................P 300 From Home Office (P2,500 – P300)/110%................. 2,000 2,300 P 5,800 Add Purchases (P240,000 + P11,000)… … … … … … … … … … … .. 251,000 COGAS… … … … … … … … … … … … … … … … … … … … … … … … … P256,800 Less: Merchandise Inventory, 12/31/2003 Home Office, cost… … … … … … … … … … … … … … … … … … . P 3,000 Branch: Outsiders… … … … … … … … … … … … … … … … … … . P 150 From Home Office (P1,800 – P150)/110%................ 1,500 1,650 4,650 Cost of Goods Sold… … … … … … … … … … … … … … … … … … … P252,150 12. d 100% Billed Price

60% Cost

40% Allowance Merchandise inventory, 1/1/x4 32,000 Shipments *60,000 36,000 *24,000 Cost of goods available for sale 56,000 Less: MI, 3/31/x4 (25,000 x 40%) 10,000 Overvaluation of CGS** 46,000 *36,000 cost / 60% = 60,000 x 40% = 24,000. (Note: Markup is based on billed price) **Realized Profit from Branch Sales 13. d Billed Price Merchandise inventory, 8/1/x4 Shipments (400,000 x 25%) Cost of goods available for sale Less: MI, 8/31/x4 (160,000 x 25%) Overvaluation of CGS/RPBSales

400,000 160,000

14. b (1) Sales Less: Cost of goods sold: Inventory, 1/1/2003 (P4,950 / 110%) Add: Shipments (P22,000 / 110%) COGAS Less: Inventory, 12/31/2003 (P6,050 / 110%) Gross profit Less: Expenses Net income from own operations

Cost

Allowance 60,000 *100,,000 160,000 40,000 120,000

P 40,000 P 4,500 20,000 P 24,500 5,500 P _ P

19,000 21,000 13,100 7,900

(2) Combined Cost of Goods Sold: Merchandise Inventory, 1/1/2003: of Home Office, cost… … … … … … … … … … … … … … … … … ..P 17,000

of Branch, cost: P4,950 / 110%… … … … … … … … … … … … … . 4,500 P 21,500 Add Purchases… … … … … … … … … … … … … … … … … … … … … … . 50,000 COGAS… … … … … … … … … … … … … … … … … … … … … … … … … .. P 71,500 Less: Merchandise Inventory, 12/31/2003 of Home Office, cost… … … … … … … … … … … … … … … … … … P 14,000 of Branch, cost: P6,050 /100%… … … … … … … … … … … … … .. 5,500 19,500 Cost of Goods Sold… … … … … … … … … … … … … … … … … … … … . P 52,000 15. a - P48,000 / 120% = P40,000 16. a – P48,000 x 20/120 = P8,000 (note: adjusted allowance refers to the allowance related to the ending inventory, so, the allowance related to the CGS, which is P10,00 in t his case is considered to be the adjustments in the books of Home Office to determine the adjusted branch net income) 120% 100% 20% Billed Price Cost Allowance Merchandise inventory, 1/1/x4 0 Shipments 108,000 Cost of goods available for sale 108,000 Less: MI, 12/31/x4 (P60,000 x 80%) 48,000 Overvaluation of CGS (60,000 x 20/120) 60,000 10,000* 17. b Sales (P148,000 + P44,000) Less: Cost of Sales Inventory, 1/1/20x4 Purchases Shipments from home office Cost of goods available for sale Less: Inventory, 12/31/20x4 Gross profit Less: Expenses (P76,000 + P24,000) Net income, unadjusted Add: Overvaluation of CGS Adjusted branch net income

P192,000 P

0 52,000 108,000 P 160,000 60,000

100,000 P 92,000 100,000 P( 8,000) 10,000 P 2,000

18. c

Merchandise inventory, 1/1/x4 Shipments Cost of goods available for sale Less: MI, 12/31/x4 (P60,000 x 80%) Overvaluation of CGS(230,000x 25/125)

19. d – P326,000 Sales (P600,000 + P300,000) Less: Cost of goods sold Merchandise inventory, beg. [P100,000 + (P40,000/1.25)]

125% Billed Price 40,000 250,000 290,000 60,000 230,000

100% Cost

25% Allowance

46,000*

P 900,000 P132,000

Add: Purchases Cost of goods available for sale Less: MI, ending [P30,000 + (P60,000/1.25)] Gross profit Less: Expenses (P120,000 + P50,000) Net Income

350,000 P482,000 78,000

404,000 P 496,000 _ 170,000 P 326,000

20. b Sales (P537,500 + P300,000) Less: Cost of goods sold Merchandise inventory, beg. [P50,000 + (P60,000/1.20)] Add: Purchases Cost of goods available for sale Less: MI, ending [P70,000 + (P60,000/1.20)] Gross profit Less: Expenses (P120,000 + P50,000) Net Income

P 837,500

P 87,500 500,000 P587,500 120,000

467,500 P 370,000 _ 170,000 P 200,000

21. c Sales (P120,000 + P60,000)… … … … … … … … … … … … … … … P 180,000 Less: Cost of goods sold: Merchandise inventory, beg. [P40,000 + P6,000 + (P24,000 / 1.2)]… … … … … … … … … … … … P 66,000 Add: Purchases (P70,000 + P11,000)… … … … … … … 81,000 Cost of Goods Available for Sale… … … … … … … … P 147,000 Less: MI, ending [P40,000 + P3,200 + (P16,800 / 1.20)] 57,200 89,800 Gross profit… … … … … … … … … … … … … … … … … … … … … P 90,200 Less: Expenses (P28,000 + P12,000)… … … … … … … … … … 40,000 Net Income… … … … … … … … … … … … … … … … … … … … . P 50,200 22. d Sales (P100,000 – P33,000 + P50,000)… … … … … … … … … … … … … … P 117,000 Less: Cost of goods sold: Inventory, beg. [P15,000 + (P5,500/110%) or (P5,500 – P500)] P20,000 Add: Purchases (P50,000 + P7,000)… … … … … … … … … … … … 57,000 COGAS… … … … … … … … … … … … … … … … … … … … … … … … .. P77,000 Less: Inventory, end [P11,000 + P1,050 + (P6,000- P1,050)/110%]… … … … … … … … … … … … … … … 16,550 60,450 Gross profit… …………………………………… … … … … … … … … … … … P 56,550 Less: Expenses (P20,000 + P6,000 + P5,000)… … … … … … … … … … … … 31,000 Combined Net income… … … … … … … … … … … … … … … … … … … … . P 25,550 23. c Sales Less: Cost of Sales Inventory, 1/1/10 Purchases Cost of goods available for sale Less: Shipment/Sales to Branch, at cost (P110,000/110%) Cost of goods available for HO

P155,000 P 23,000 190,000 P213,000 100,000

Sale Less: Inventory, 12/31/10 Gross profit Less: Expenses Net income – home office

P113,000 30,000

83,000 P 72,000 52,000 P 20,000

24. a Sales P140,000 Less: Cost of Sales Inventory, 1/1/10 P 11,550 Purchases 105,000 Freight-in 5,500 Shipment in transit (P5,000+P250) 5,250 Cost of goods available for sale P127,300 Less: Inventory, 12/31/10 (P10,400 + P520 + P5,250) 16,170 111,130 Gross profit P 28,870 Less: Expenses 28,000 Net income per branch books/unadjusted P 870 Add: Overvaluation of CGS* 9,600 Net Income of Davao Branch, adjusted P 10,470 BP

Cost

Allowance 1,000

100,000

**10,000 11,000 ****1,400 9,600

MI. 1/1/2010 Shipments 110,000 Available for sale -: MI, 12/31/10 ***15,400 CGS **110,000 x 10/110 ***10,400 + 5,000, in transit ****15,400 x 10/110 25. a

Inventory, 1/1 at billed price P165,000 Add: Shipments at billed price 110,000 Cost of goods available for sale at billed price P275,000 Less: CGS at BP: Sales P169,000 Less: Sales returns and allowances 3,750 Sales price of merchandise acquired from outsiders (P7,500 / 120%) 9,000 Net Sales of merchandise acquired from home office P156,250 x: Intercompany cost ratio 100/125 125,000 Inventory, 8/1/2008 at billed price P150,000 x: Cost ratio 100/125 Merchandise inventory at cost destroyed by fire P120,000

26. d Merchandise inventory, January 1 Shipments from home office Cost of goods available for sale

P 26,400 __20,000 P 46,400

Less: Cost of goods sold, at BP: Sales Less: Sales returns Net sales Divided by: SP based on cost Merchandise inventory, ending at BP Divided by: Billed price Merchandise inventory, ending at cost lost due to fire)

P 15,000 ___2,000 P 13,000 ____125%

__10,400 P 36,000 ____120% P 30,000

27. d Freight actually paid by: Home Office… … ………………………………………………………………P 500 Branch P… ……………………………………………………………………… 700 Total… ……………………………………………………………………………P 1,200 Less: Freight that should be recorded… … … …………………………………….. 800 Excess freight… … ………………………………………………………………………P 400 28. d – in arriving at the cost of merchandise inventory at the end of the period, freight charges are properly recognized as a part of the cost. But a branch should not be charged with excessive freight charges when, because of indirect routing, excessive costs are incurred. Under such circumstances, the branch acquiring the goods should be charged for no more than the normal freight from the usual shipping point. The office directing the inter-branch transfers are responsible for the excessive cost should absorb the excess as an expense because it represents management mistakes (or inefficiencies.) 29. c Inventory of the Branch: Shipments from home office at billed price.........................................P 37,700 X: Ending inventory %................................................................................ 60% Ending inventory at billed price… … ………………………………...……..P 22,620 Add: Freight (P1,300 x 60%)… … ………………………………………… ...... 780 P 23,400 Or, P39,000 x 60% = P23,400 30. b Inventory in the published balance sheet, at cost Shipments at cost… ………………………………..........................................P 32,500 X: Ending inventory %.................................................................................... 60% Ending inventory at billed price… … ……………………………………… ….P19,500 Add: Freight (P1,300 x 60%)… … …………………………………….......…….. 780 P 20,280 31. c Home Office Books Davao Branch… 39,000 STB, cost… … . 32,500 Unrealized profit 5,200 Cash (freight)… . 1,300 BC – Baguio… … 19,630 Excess freight… 520 BC-Davao… … . 20,150

Davao Branch SFHO… … ……….37,700 Freight-in… … …. 1,300 HOC… ……….. 39,000 HOC… … ………….20,150 SFHO(50%)… 18,850 Freight-in (50%) 650

Baguio Branch

SFHO… … … 18,850 Freight-in.. 780 HOC… … ... 19,630

Cash… ………......

650

32. d (1) Branch Inventory, 12/31/20x4: P30,000 x 60%...................................P 18,000 (2) Branch Inventory, at cost: (P25,000 + P1,000) x 60%.........................P 15,600 33. 34. 35. 36. 37. 38. 39. 40.

c – (P300,000 x ¼ = P75,000, ending inventory x (P300,000 – P250,000)/P300,000 = P12,500 d d b – refer to No. 14 b – refer to No. 14 c – refer to No. 14 c d

Theories 1. True 2. False 3. True 4. True 5. False 20. 21. 22. 23

6. 7. 8. 9. 10.

False False False True True

11. 12. 13. 14. 15.

False True False True False

16. 17. 18. 19.

True True True False

d d a d

Chapter 14 Problem I 1. Consideration transferred : FMV of shares issued by Robin (80,000 sh × P28) = P2,240,000 2. Consideration trasnferred Less: Fair value of Hope’s net assets (P2,720,000+P200,000–P1,200, 000) Goodwill

Problem II 1..

Accounts Receivable Inventory Land Building Equipment Patent Goodwill Acquisition Expense Current Liabilities Long-term Debt Cash Consideration trasnsferred : Cash P560,000 Less : Fair value of West’s net assets (P180,000 + P400,000 + P50,000 + P60,000 + P P70,000 + P20,000

P2,240,000 1,720,000 P 520,000

180,000 400,000 50,000 60,000 70,000 20,000 10,000 20,000 70,000 160,000 580,000

– P70,000 - P160,000) Goodwill 2.

550,000 P 10,000

Acquisition Expense Accounts Receivable Inventory Land Building Equipment Patent Current Liabilities Long-term Debt Cash Gain on Acquisition

20,000 180,000 400,000 50,000 60,000 70,000 20,000 70,000 160,000 520,000 50,000

Consideration trasnsferred : Cash P500,000 Less : Fair value of West’s net assets (P180,000 + P400,000 + P50,000 + P60,000 + P P70,000 + P20,000 – P70,000 - P160,000) 550,000 Bargain Purchase Gain (P 50,000)

Problem III Accounts Receivable Inventory Land Buildings and Equipment Goodwill Allowance for Uncollectible Accounts (P231,000 P198,000) Current Liabilities Bonds Payable Premium on Bonds Payable (P495,000 - P450,000) Preferred Stock (15,000 x P100) Common Stock (30,000 x P10) Other Contributed Capital (P25 - P10) x 30,000 Cash Consideration transferred: (P1,500,000 + P750,000 + P50,000)

Less: Fair value of net assets (198,000 + 330,000 + 550,000 + 1,144,000 – 275,000 – 495,000) =

Goodwill

231,000 330,000 550,000 1,144,000 848,000 33,000 275,000 450,000 45,000 1,500,000 300,000 450,000 50,000

P2,300,000 1,452,000

P 848,000

Problem IV

Current Assets Plant and Equipment Goodwill

960,000 1,440,000 336,000

Liabilities Cash

216,000 2,160,00 0 360,000

Estimated Liability for Contingent Consideration Problem V

The amount of the contingency is P500,000 (10,000 shares at P50 per share) 1. Goodwill 500,000 Paid-in-Capital for Contingent Consideration Issuable 2.

Paid-in-Capital for Contingent Consideration – Issuable Common Stock (P10 par) Paid-In-Capital in Excess of Par

500,000

500,000 100,000 400,000

Platz Company does not adjust the original amount recorded as equity. Problem VI

1. January 1, 20x4 Accounts Receivable Inventory Land Buildings Equipment Goodwill Allowance for Uncollectible Accounts Accounts Payable Note Payable Cash Estimated Liability for Contingent Consideration

72,000 99,000 162,000 450,000 288,000 54,000 7,000 83,000 180,000 720,000 135,000

Consideration transferred (P720,000 + P135,000) P855,000 Total fair value of net assets acquired (P1,064,000 - P263,000) 801,000 Goodwill P 54,000 2. January 2, 20x6 Estimated Liability for Contingent Consideration Cash

135,000

3. January 2, 20x6 Estimated Liability for Contingent Consideration Gain on Contingent Consideration

135,000

Problem VII 1. Accounts Receivable Inventory Land Buildings Goodwill

135,000

135,000 240,000 320,000 1,508,000 1,392,000 30,000

Allowance for Uncollectible Accounts Accounts Payable Note Payable Cash

20,000 270,000 600,000 2,600,000

Goodwill Estimated Liability for Contingent Consideration Consideration transferred Fair value of net assets acquired (P3,440,000 – P870,000) Goodwill 2.

200,000 200,000

P2,600,000 2,570,000 P 30,000

Estimated Liability for Contingent Consideration Gain on Contingent Consideration

200,000 200,000

Problem VIII

Current Assets Long-term Assets (P1,890,000 + P20,000) + (P98,000 + P5,000) Goodwill * Liabilities Long-term Debt Common Stock (144,000  P5) Other Contributed Capital (144,000 x P15 - P5))

362,000 2,013,000 395,000 119,000 491,000 720,000 1,440,000

* (144,000 P15) – [P362,000 + P2,013,000 – (P119,000 + P491,000)] = P395,000 Total shares issued (P700,000 / P5) + P20,000 / P5) Fair value of stock issued (144,000P15)

144,000 = P2,160,000

Problem IX Case A Consideration transferred

P130,000

Less: Fair Value of Net Assets Goodwill

120,000 P 10,000

Case B

Consideration transferred Less: Fair Value of Net Assets Goodwill

P110,000 90,000 P 20,000

Case C

Consideration transferred Less: Fair Value of Net Assets Gain

P15,000 20,000 (P 5,000)

Goodwill Case A Case B Case C

P10,000 20,000 0

Assets Current Assets

Liabilities

Retained Earnings (Gain)

Long-Lived Assets

P20,000

30,000 20,000

P130,000 80,000 40,000

P30,000

0

20,000 40,000

0 5,000

Problem X 1. Fair Value of Identifiable Net Assets Book values P500,000 – P100,000 =

P400,000

Write up of Inventory and Equipment: (P20,000 + P30,000) = Consideration transferred above which goodwill would result

2.

50,000 P450,000

Equipment would not be written down, regardless of the purchase price, unless it was reviewed and determined to be overvalued originally. 3. A gain would be shown if the purchase price was below P450,000. 4. Anything below P450,000 is technically considered a bargain. 5. Goodwill would be P50,000 at a purchase price of P500,000 or (P450,000 + P50,000).

Problem XI

Present value of maturity value, 20 periods @ 6%: 0.3118 x P600,000 = Present value of interest annuity, 20 periods @ 6%: 11.46992 x 30,000 = Total Present value Par value Discount on bonds payable Cash Accounts Receivable Inventory Land Buildings Equipment Bond Discount (P40,000 + P68,822) Current Liabilities Bonds Payable (P300,000 + P600,000) Gain on Acquisition of Stalton (ordinary)

Computation of Excess of Net Assets Received Over Cost

P187,080 344,098 531,178 600,000 P68,822 114,000 135,000 310,000 315,000 54,900 39,450 108,822 95,300 900,000 81,872

Consideration transferred (P531,178 plus liabilities assumed of P95,300 and P260,000)

Less: Total fair value of assets received Excess of fair value of net assets over cost

P886,478

P968,350 (P 81,872)

Problem XII In accounting for the combination of NT and OTG, the fair value of the acquisition is allocated to each identifiable asset and liability acquired with any remaining excess attributed to goodwill. Consideration transferred (shares issued) Fair value of net assets acquired: Cash Receivables Trademarks Record music catalog In-process R&D Equipment Accounts payable Notes payabl e Goodwill Entry by NT to record combination with OTG: Cash Receivables Trademarks Record Music Catalog Capitalized R&D Equipment Goodwill Accounts Payable Notes Payable Common Stock (NewTune par value) Additional Paid-in Capital (To record merger with OTG at fair value) Additional Paid-in Capital Cash (Stock issue costs incurred)

P750,000 P29,000 63,000 225,000 180,000 200,000 105,000 (34,000) (45,000)

723,000 P27,000

29,000 63,000 225,000 180,000 200,000 105,000 27,000 34,000 45,000 60,000 690,000

25,000 25,000

Post-Combination Balance Sheet: Assets Cash Receivables Trademarks Record music catalog Capitalized R&D Equipment Goodwill Total

P

64,000 213,000 625,000 1,020,000 200,000 425,000 27,000 P 2,574,000

Liabilities and Owners’ Equity Accounts payable Notes payabl e

Common stock Additional paid-in capital Retained earnings Total

P 144,000 415,000

460,000 695,000 860,000 P 2,574,000

Problem XIII

Stockholders’ Equity: Common Stock, P1 par Other Contributed Capital Retained Earnings Total stockholders’ Equity

P1,100,000 4,090,000 [P2,800,000 + (100,000 x P13) – P10,000] 600,000 P 5,790,000

Problem XIV Entry to record the acquisition on Pacifica’s records:

Cash Receivables and inventory PPE Trademarks IPRD

85,000 180,000 600,000 200,000 100,000

Goodwill Liabilities Common Stock (50,000 x P5) Additional Paid-In Capital (50,000 x P15) Contingent performance obligation

77,500 180,000 250,000 750,000 62,500

The goodwill is computed as:

Consideration transferred: 50,000 shares x P20 Contingent consideration:

P130,000 payment x 50% probability x 0.961538

P1,000,000 62,500

Total P1,062,500 Less: Fair value of net assets acquired (P85,000 + P180,000 + P600,000 + P200,000 + P100,000 - P180,000) 985,000 Goodwill P 77,500 Acquisition expenses Cash APIC Cash

15,000 15,000 9,000 9,000

Note: The following amounts will appear in the income statement and statement of retained earnings after business combination: PP Inc. Revenues (1,200,000) Expenses (P875,000 + P15,000) 890,000 Net income (310,000) Retained earnings, 1/1 (950,000) Net income (310,000) Dividends paid 90,000 Retained earnings, 12/31 *(1,170,000)

* or, P1,185,000 – P15,000 = P1,170,000

Problem XV Acquisition Method—Entry to record acquisition of Sampras Consideration transferred Contingent performance obligation Consideration transferred (fair value) Fair value of net identifiable assets Goodwill

P300,000 15,000 315,000 282,000 P33,000

Receivables Inventory Buildings Equipment Customer list IPRD Goodwill Current liabilities Long-term liabilities Contingent performance liability Cash

80,000 70,000 115,000 25,000 22,000 30,000 33,000 10,000 50,000 15,000 300,000

Acquisition expenses Cash

10,000

Problem XVI 1. a. The computation of goodwill is as follows: Consideration transferred; Common shares: 30,000 shares x P25 Notes payable Contingent consideration (cash contingency): P120,000 x 30% probability Total Less: Fair value of identifiable assets acquired and liabilities assumed: Cash Receivables – net Inventories Land Buildings – net Equipment – net In-process research and development

10,000

P 750,000 180,000 36,000 P 966,000

P

24,000 48,000 72,000 240,000 360,000 300,000 60,000

Accounts payable Other liabilities Positive Excess - Goodwill

( 72,000) ( 168,000)

864,000 P 102,000

b. The journal entries by Peter Corporation to record the acquisition is as follows: Cash Receivables – net Inventories Land Buildings – net Equipment – net In-process research and development Goodwill Accounts payable Other liabilities Notes payable Estimated Liability for Contingent Consideration Common stock (P10 par x 30,000 shares) Paid-in capital in excess of par [(P25 – P10) x 30,000 shares] Acquisition of Saul Company.

24,000 48,000 72,000 240,000 360,000 300,000 60,000 102,000 62,000 168,000 180,000 36,000 300,000 450,000

Acquisition-related expenses Cash Acquisition related costs – direct costs.

78,000

Paid-in capital in excess of par Cash Acquisition related costs – costs to issue and register stocks.

32,400

Acquisition-related expenses Cash Acquisition related costs – indirect costs.

27,600

78,000

32,400

27,600

c. The balance sheet of Pure Corporation immediately after the acquisition is as follows: Pure Corporation Balance Sheet December 31, 20x4 Assets

Cash Receivables – net Inventories Land Buildings – net Equipment – net In-process research and development Goodwill Total Assets

P

162,000 144,000 360,000 348,000 840,000 732,000 60,000 102,000 P2,748,000

Liabilities and Stockholders’ Equity Liabilities Accounts payable Other liabilities Notes payable Estimated liability for contingent consideration Total Liabilities Stockholders’ Equity Common stock, P10 par Paid-in capital in excess of par1 Retained earnings2 Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity 1 P240,000 + P446,400 – P32,400 2 P264,000 - P78,000 – P27,600

P 288,000 408,000 180,000 36,000 P 912,000 P 1,020,000 657,600 158,400 P1,836,000 P2,748,000

It should be noted that under PFRS 3, in-process R&D is measured and recorded at fair value as an asset on the acquisition date. This requirement does not extend to R&D in contexts other than business combinations.

2. a. Assets that have been provisionally recorded as of the acquisition date are retrospectively adjusted in value during the measurement period for new information that clarifies the acquisition-date value. The adjustments affect goodwill since the measurement period is still within one year (i.e., eight months) from the acquisition date. Therefore, the goodwill to be reported then on the acquisition should be P78,000 (P102,000 – P24,000). b. Buildings 24,000 Goodwill 24,000 Adjustment to goodwill due to measurement date.

3. a. The

goodwill to be reported then on the acquisition should be P126,000 (P102,000 + P24,000).

b. The adjustment is still within the measurement period, the entry to adjust the liability would be:

Goodwill Estimated liability for contingent consideration Adjustment to goodwill due to measurement date.

24,000 24,000

c. c.1. The goodwill remains at P126,000, since the change of estimate should be done only once (last August 31, 20x5). c.2. On November 1, 20x5, the probability value of the contingent consideration amounted to P48,000, the entry to adjust the liability would be:

Estimated liability for contingent consideration Gain on estimated contingent consideration Adjustment after measurement date. In this case, the measurement

 

12,000 12,000

period ends at the earlier of:

one year from the acquisition date, or the date when the acquirer receives needed information about facts and circumstances (or learns that the information is unobtainable) to consummate the acquisition.

c.3. c.3.1. The goodwill remains at P126,000, since the change of estimate should be done only once (last August 31, 20x5). c.3.2. On December 15, 20x5, the entry would be:

Loss on estimated liability contingent consideration Estimated liability for contingent consideration

30,000 30,000

Adjustment after measurement date.

c.3.3. c.3.3.1. P126,000. c.3.3.2. On January 1, 20x7, Saul’s average income in 20x5 is P270,000 and 20x6 is P260,000, which means that the target is met, Peter Corporation will make the following entry:

Estimated liability for contingent consideration Loss on estimated contingent consideration Cash

78,000 42,000 120,000

Settlement of contingent consideration.

4. a. The amount of goodwill on acquisition will be recomputed as follows:

Consideration transferred; Common shares: 30,000 shares x P25 Notes payable Contingent consideration (cash contingency): P120,000 x 35% probability x (1/[1 + .04]*)

P

750,000 180,000 40,385

Total Less: Fair value of identifiable assets acquired and liabilities assumed (refer to 1a above) Goodwill

P 970,385 864,000 P 106,385

b. The journal entries by Pure Corporation to record the acquisition is as follows: Cash 24,000 Receivables – net 48,000 Inventories 72,000 Land 240,000 Buildings – net 360,000 Equipment – net 300,000 In-process research and development 60,000 Goodwill 106,386 Accounts payable Other liabilities Notes payable Estimated Liability for Contingent Consideration Common stock (P10 par x 30,000 shares) Paid-in capital in excess of par [(P25 – P10) x 30,000 shares]

62,000 168,000 180,000 40,385 300,000 450,000

c. c.1. Goodwill remains at P106,385. c.2. The entry for Pure Corporation on December 31, 20x5 to record such occurrence would be:

Estimated liability for contingent consideration Gain on estimated contingent consideration

40,385 40,385

Adjustment after measurement date.

Since the contingent event does not happen, the position taken by PFRS 3 is that the conditions that prevent the target from being met occurred in a subsequent period and that Peter had the information to measure the liability at the acquisition date based on circumstances that existed at that time. Thus the adjustment will flow through income statement in the subsequent period. d. The entry by Peter Corporation on January 1, 20x7 for the payment of the contingent consideration would be:

Estimated liability for contingent consideration Loss on estimated contingent consideration Cash [(P78,000 + P84,000)/2 – P30,000] x 2

36,000 66,000

Settlement of contingent consideration.

5. a. The amount of goodwill on acquisition will be recomputed as follows:

Consideration transferred;

102,000

Common shares: 30,000 shares x P25 Notes payable Contingent consideration (cash contingency): P120,000 x 30% probability Contingent consideration (stock contingency) Total Less: Fair value of identifiable assets acquired and liabilities assumed (refer to 1a above) Positive Excess – Goodwill

P 750,000 180,000 36,000 18,000 P 984,000 864,000 P 120,000

b. The journal entries by Pure Corporation to record the acquisition is as follows: Cash 24,000 Receivables – net 48,000 Inventories 72,000 Land 240,000 Buildings – net 360,000 Equipment – net 300,000 In-process research and development 60,000 Goodwill 120,000 Accounts payable 72,000 Other liabilities 168,000 Notes payable 180,000 Estimated Liability for Contingent 36,000 Consideration Paid-in capital for Contingent Consideration 18,000 Common stock (P10 par x 30,000 shares) 300,000 Additional paid-in capital [(P25 – P10) x 30,000 450,000 shares] Acquisition of Saul Company. c. Pure Corporation will make the following entry for the issuance of 1,200 additional shares:

Paid-in capital for Contingent Consideration Common stock (P10 par x 1,200 shares) Paid-in capital in excess of par

18,000 12,000 6,000

Settlement of contingent consideration.

6. On January 1, 20x7, the average income amounted to P132,000 (the contingent event occurs). Thus, the entry record the occurrence of such event to reassign the P750,000 original consideration to 36,000 shares (30,000 original shares issued + 6,000 additional shares due to contingency) would be:

Paid-in capital in excess of par Common stock (P10 par x 6,000 shares) Settlement of contingent consideration.

60,000 60,000

7. On January 1, 20x7, the contingent event happens since the fair value per share fall below P25. Thus, the entry record the occurrence of such event to reassign the P750,000 original consideration to 37,500 shares (30,000 original shares issued + 7,500* additional shares due to contingency) would be:

Paid-in capital in excess of par Common stock (P10 par x 7,500 shares)

75,000 75,000

Settlement of contingent consideration.

* Deficiency: (P25 – P20) x 25,000 shares issued to acquire..P150,000

Divide by fair value per share on January 1, 20x7………….P Added number of shares to issue……………………………….

20

7,500

8. The amount of goodwill on acquisition will be recomputed as follows:

Consideration transferred; Common shares: 30,000 shares x P25 Notes payable Contingent consideration (stock contingency): [(P750,000 – P510,000) x 40% probability x (1/[1 + .04]*) Total Less: Fair value of identifiable assets acquired and liabilities assumed (refer to 1a above) Positive Excess – Goodwill * present value of P1 @ 4% for one period. The journal entries by Pure Corporation to record the acquisition is as follows: Cash 24,000 Receivables – net 48,000 Inventories 72,000 Land 240,000 Buildings – net 360,000 Equipment – net 300,000 In-process research and development 60,000 Goodwill 158,308 Accounts payable Other liabilities Notes payable Paid-in capital for Contingent Consideration Common stock (P10 par x 25,000 shares) Paid-in capital in excess of par [(P25 – P10) x 30,000 shares]

P 750,000 180,000

92,308 P1,022,308 864,000 P 158,308

62,000 168,000 180,000 92,308 300,000 450,000

On December 31, 20x5, the contingent event occurs, wherein Peter’s stock price had fallen to P20, thus requiring Peter to issue additional shares of stock to the former owners of Saul Corporation. The entry for Peter Corporation on December 31, 20x5 to record such occurrence such event to reassign the P750,000 original consideration to 37,500 shares (30,000 original shares issued + 7,500* additional shares due to contingency) would be:

Paid-in capital for Contingent Consideration Common stock, P10 par Paid-in capital in excess of par

92,308 75,000 17,308

Settlement of contingent consideration.

* Deficiency: (P25 – P20) x 30,000 shares issued to acquire....P150,000

Divide by fair value per share on December 31, 20x5……P Added number of shares to issue………………………………

Problem XVII 1. The computation of bargain purchase gain is as follows: Consideration transferred; Cash Common shares: 120,000 shares x P12 Costs of liquidation Patent Contingent consideration (P12,000 guarantee + P14,400 to vendors) Total Less: Fair value of identifiable assets acquired and liabilities assumed: Merchandise inventory Accounts receivable Copyrights Equipment Accounts payable Loan payable Negative Excess – Bargain Purchase Gain

20 7,500

P 1,800,000 1,440,000 12,000 240,000 26,400 P3,518,400

P1,440,000 900,000 240,000 1.380,000 ( 300,000) ( 120,000)

2. The journal entries by Ponder Corporation to record the acquisition is as follows: Merchandise inventory 1,440,000 Accounts receivable 900,000 Patent 240,000 Equipment 1,380,000 Accounts payable Loan payable Cash Common stock (P10 par x 120,000 shares) Paid-in capital in excess of par [(P12 – P10) x 120,000 shares] Gain on sale of Patent Estimated liability for contingent consideration Bargain purchase gain Problem XVIII 1. Consideration transferred:

3,540,000 P ( 21,600)

300,000 120,000 1,812,000 1,200,000 240,000 240,000 26,400 21,600

Shares: 2/3 x 60,000 x P3.20 Cash Accounts payable Mortgage and interest Debentures and premium Liquidation expenses Cash held Less: Fair value of assets and liabilities acquired: Accounts receivable Inventory Freehold land Buildings Plant and equipment Bargain Purchase Gain

128,000 45,100 44,000 52,500 2,400 144,000 (12,000)

P34,700 39,000 130,000 40,000 46,000

132,000 260,000

289,700 29,700

Homer Ltd

Accounts Receivable Inventory Freehold Land Buildings Plant and Equipment Payable to Tan Ltd Common stock, P1 par x 40,000 shares Additional paid-in capital Gain on acquisition (Acquisition of net assets of Tan Ltd and shares issued) Payable to Tan Ltd Cash (Being payment of cash consideration) Paid-in capital in excess of par Cash (Being costs of issuing shares)

34,700 39,000 130,000 40,000 46,000 132,000 40,000 88,000 29,700

132,000 132,000

1,200 1,200

2. Tan LTD

Accounts Receivable Inventory Freehold Land Buildings Plant and Equipment Goodwill Interest Payable Liquidation Expenses Premium on Debentures Accounts Payable Shareholders’ Distribution

Opening Balance Receivable from Homer Ltd

Shares in Homer Ltd

General Ledger Liquidation P 34,700 Additional paid in capital 27,600 Retained earnings 100,000 Receivable from Homer Ltd 30,000 46,000 2,000 4,000 2,400 2,500 1,600 68,000 318,800 Liquidator’s Cash P 12,000 Liquidation Expenses 132,000 Mortgage and Interest Debentures and Premium Accounts Payable 144,000 Shareholders’ Distribution P 128,000 Common stock Liquidation 128,000

Problem XIX Cash Accounts Receivable Inventory Land Plant Assets Discount on Bonds Payable Goodwill* Allowance for Uncollectible Accounts Accounts Payable Bonds Payable Deferred Income Tax Liability Cash

P 26,800 32,000 260,000

318,800

P 2,400 44,000 52,500 45,100 144,000

P 60,000 68,0000 128,000

20,000 112,000 134,000 55,000 463,000 20,000 127,200 10,000 54,000 200,000 67,200 600,000

Consideration transferred P600,000 Less: Fair value of net assets acquired (P784,000 – P10,000 – P54,000 – P180,000 - P67,200*) 472,800 Goodwill P127,200 * Increase in net assets Increase inventory, land, and plant assets to fair value P52,000 + P25,000 + P71,000) Decrease bonds payable to fair value Increase in net assets Establish deferred income tax liability (P168,000 x 40%)

P148,000 ( 20,000) P168,000 P 67,200

Multiple Choice Problems 1. c Finder’s fees…………………………………………………….P 40,000 Legal fees………………………………………………………. 13,000 Total expenses…………………………………………………. P53,000 Acquisition-related costs. Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fee; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. Under PFRS 3 (2008), the acquirer is required to recognize acquisitionrelated costs as expenses in the periods in which the costs are incurred and the services are received, with one exception, i.e. the costs to issue debt or equity securities are recognized in accordance with PAS 32 (for equity) and PAS 39 (for debt). 2. b – refer to No. 1 for further discussion. Audit fees related to stock issuance………………………………P 10,000 Stock registration fees……………………………………………...... 5,000 Stock listing fees…………………………………………………......... 4,000 P19,000 3. b Consideration transferred (fair value)…………………….. Less: Fair value of net identifiable assets acquired: Fair value of assets… …………………………………… Less: Present value/ Fair Value of liabilities………… Goodwill……………………………………………………

 

P80,000

P 98,000 23,000

75,000 P 5,000

A net identifiable asset means net assets excluding goodwill (unidentifiable asset). An acquisition-related costs are considered outright expenses.

4. a 5. b Consideration transferred (fair value) Fair value of identifiable assets Cash A/R Software In-process R&D

P800,000 P150,000 140,000 320,000 200,000

Liabilities Fair value of net identifiable assets acquired Goodwill

(130,000) 680,000 P120,000

The application of recognition measurements in business combination means that an acquirer must, in recognizing separately the acquirer’s intangible assets, recognize intangible assets that the acquiree has not recognized in its records, such as in-process research and development that cannot be recognize under PAS 38 as internally generated assets. As noted in par 34, recognition by an acquirer of an acquiree’s in-process research and development project only depends whether the project meets the definition of an intangible asset. It can be seen that intangible assets in a business combination will be able, and in fact are required, to recognize intangible assets that are not separately recognizable when acquired by other means. The costs on individual assets acquired are measured but reference to the fair value of those assets. Therefore, In-Process Research and Development is capitalized as an asset of the combination and reported as intangible assets with indefinite lives subject to impairment reviews. 6. c - [(24,000 shares x P30) – P686,400] = P33,600 7. d - [(24,000 shares x P30) – (P270,000 + P726,000 – P168,000)] = P108,000, gain 8. d – [P500,000 – (P200,000 + P220,000 – P110,000)]= P190,000 9. d 10. c A bargain purchase is a business combination in which the net fair value of the identifiable assets acquired and liabilities assumed exceeds the aggregate of the consideration transferred. It should be noted that bargain purchase gain would arise only in exceptional circumstances. Therefore, before determining that gain has arisen, the acquirer has to: 1. Reassess whether it has correctly identified all of the assets acquired and all of the liabilities assumed. The acquirer should recognize any additional assets or liabilities that are identified in that review. 2. Any balance should be recognized immediately in profit or loss. 11. d – [P1,600,000 – P1,210,000] = P390,000 12. d 13. c – [(12,000 shares x P30) – P343,200 = P16,800 14. b – (P863,000 + P363,000) = P1,226,000 15. a 16. d P215,000 = P130,000 + P85,000 17. b 1 8.

c

P23,000 P1,109,00 0

= P198,000 – (P405,000 - P265,000 + P15,000 + P20,000) = Total Assets of TT Corp. Less: Investment in SS Corp. Book value of assets of TT Corp. Book value of assets of SS Corp. Total book value Payment in excess of book value

P 844,000 (198,000) P 646,000 405,000 P1,051,000

(P198,000 - P140,000) Total assets reported

58,000 P1,109,000

19. c

P701,500

= (P61,500 + P95,000 + P280,000) + (P28,000 + P37,000 +P200,000)

20. d

P257,500

= The amount reported by TT Corporation

21. a P407,500 = The amount reported by TT Corporation 22. b – [(P47 x 12,000 shares) – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000) = P104,000 23. d APIC: P20,000 + [(P42 – P5) x12,000 = P464,000 Retained earnings: P160,000, parent only 24. b Inventory: PP230,000 + P210,000 = P440,000 Land: P280,000 + P240,000 = P520,000 25. b – [P480,000 – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000)] = P20,000 26. c – (P50,000 + P8,000 + P100,000 = P158,000) The acquirer should recognize, separately from goodwill, the identifiable assets acquired in a business combination. [PFRS 3 (2008).B31] A patent that have no useful life is not considered an asset. An intangible is separable if it capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually together with a related contract…[PFRS 3(2008).B33] The amount by which the lease terms are favorable compared with the terms of current market transactions for the same or similar items is an intangible assets that meets the contractual-legal criterion for recognition separately from goodwill, even though the acquirer cannot sell or otherwise transfer the lease contract. [PFRS 3 (2008).B32 (a)] Customer and subscriber lists are frequently licensed and thus meet the separability criterion. [PFRS 3(2008).B33]. It may seem that the terms “research” and “development”, which may be associated with such assets as patent and software development, are not applicable to all internally intangibles, such as brand names. However, it needs to be remembered that all intangible assets must meet the identifiability criterion, one part of which is separability. 27. c – [P400 + (40 shares x P10)] = P800 28. d – [P1,080 + (P280 + P10) = P1,370 29. b – [P1,260 + (P440 + P60) = P1,760 30. a – [P600 + (P360 + P40)] = P1,000 31. e – [P480 + P100] = P580 32. b – [P330 + (40 shares x P1)] = P370

33. d – [P1,080 + 40 shares x (P10 - P1)] – P15, stock issuance costs = P1,425 34. a – [P180 + P40 – P20 – P15} =P185 35. c – [(50,000 shares x P 35) + P5,000] = P1,755,000 36. d – [P1,230,000 + P580,000] = P1,810,000 37. c - [P1,800,000 + P250,000] = P2,050,000 38. e – (P1,800,000 + P650,000]= P2,450,000 39. c – [P1,755,000 – (P240,000 + P600,000 + P580,000 + P250,000 + P650,000 + P400,000 - P240,000 – P60,000 – P1,120,000)] = P455,000 40. e – [P660,000 + P400,000} = P1,060,000 41. d Retained earnings – Atwood, January 1, 20x4 P1,170,000 Add: Net income – 20-x4 Revenues P2,880,000 Less: Expenses 2,760,000 Direct costs 10,000 110,000 Retained earnings – Atwood, December 31, 20x4 P1,280,000 42. c – P2,880,000, parent only on the date of combination 43. c – (P2,760,000 + P10,000) = P2,770,000 44. d – [(P870,000 – P15,000 – P10,000) + P240,000] = P1,085,000 45. a PFRS 3 (2008 requires that, at the acquisition date, the identifiable assets acquired and liabilities assumed should be designated as necessary to apply other PFRSs subsequently. The acquirer makes those classifications or designations on the basis of contractual terms, ... as they exist at the acquisition date [PFRS 3 (2008).15] Since, the patent was not recorded separately as identifiable intangible asset on the date of acquisition, and then no amount of patent should be subsequently recognized. 46. c

AA records new shares at fair value Value of shares issued (51,000 × P3)........................................................ Par value of shares issued (51,000 × P1) .................................................. Additional paid-in capital (new shares) ................................................. Additional paid-in capital (existing shares) ............................................ Consolidated additional paid-in capital ................................................

P153,000 51,000 P102,000 90,000 P192,000

At the date of acquisition, the parent makes no change to retained earnings.

47. c Common stock – combined…………………………………………………………P 160,000 Common – Acquirer Zyxel………………………………….. …………………….… 100,000 Common stock issued………………………………………………………………...P 60,000 Divided by: Par value of common stock………………………………………….P 2 Number of Zyxel shares to acquire Globe Tattoo………………………….....… 30,000 48. d Paid-in capital books of Zyxel (P100,000 + P65,000)………………………........P 165,000 Paid-in capital in the combined balance sheet (P160,000 + P245,000)…………………………………………………….… 405,000

Paid-in capital from the shares issued to acquire Globe Tattoo…………... P 240,000 Divided by: No. of shares issued (No. 31)……………………………………..... 30,000 Fair value per share when stock was issued………………………………….... P 8

Or, Par value of common stock of Zyxel……………………………………… P Add: Share premium/APIC per share from the additional issuance of shares (P245,000 – P65,000)/30,000…………............ Fair value per share when stock was issued……………………………....... P

2 6 8

49. b Net identifiable assets of Zyxel before acquisition: (P65,000 + P72,000 + P33,000 + P400,000 – P50,000 - P250,000)……………………………………………………………………. P270,000 Net identifiable assets in the combined balance sheet: (P90,000 + P94,000 + P88,000 + P650,000 – P75,000 - P350,000)….......... 497,000 Fair value of the net identifiable assets held by Globe Tattoo at the date of acquisition..…………………………………………………….. P227,000 50. a Consideration transferred (30,000 shares x P8)………………………………… P240,000 Less: Fair value of net identifiable assets acquired (No. 49)……………….... 227,000 Goodwill……………………………………………………………………………….. P 13,000 51. c Retained earnings: Acquirer – Zyxel (at book value)……………………………………….... P105,000 Acquiree – Globe Tattoo (not acquired)……………………………… __ 0 P105,000 It should be noted that, there was no bargain purchase gain and acquisition-related costs which may affect retained earnings on the acquisition date. 52. b Consideration transferred (fair value) Less: Fair value of net assets acquired (P60,000 + P175,000 + P200,000 + P225,000 + P75,000 – P100,000) Goodwill

P400,000 385,000 P 15,000

53. a Only the subsidiary’s post-acquisition income is included in consolidated totals.

54. d Cost P180,000 Less: Accumulated depreciation (P180,000/30 years = P6,000/year x 3 yrs) 18,000 Net book value P162,000 55. c

Net Assets [P100,000 + P50,000 + P162,000 (No. 54)] Less: Shares issued at par (15,000 shares x P10 par) APIC

P312,000 150,000 P162,000

56. b PFRS No. 3 par. 62 states that: “If the initial accounting for business combination can be determined only provisionally by the end of the period in which the combination is effected because either the fair values to be assigned to the acquiree’s identifiable assets, liabilities, or contingent liabilities or the cost of the combination can be determined only provisionally, the acquirer shall account for the combination using those provisional values. The acquirer shall recognize any adjustments to those provisional values as a result of completing the initial accounting: (a) within twelve months of the acquisition date; and …” 57. c The consideration transferred should be compared with the fair value of the net assets acquired, per PFRS3 par. 32. The gain of P8 million results from a bargain purchase and should be recognized in profit or loss, per PFRS3 par. 34. 58. b The consideration transferred should be compared with the fair value of the net assets acquired, per PFRS3 par 32. When provisional fair values have been identified at the first reporting date after the acquisition, adjustments arising within the measurement period (a maximum of 12 months from the acquisition date) should be related back to the acquisition date. Subsequent adjustments are recognized in profit or loss, unless they can be classified as errors under PAS8 Accounting policies, changes in accounting estimates and errors. See PFRS 3 pars. 45 and 50. The final amount of goodwill is P160 million consideration transferred less P135 million fair values on May 31, 20x5 = P25 million. 59. c Fair value of Subsidiary - Homer Consideration transferred………………………………………………………P 200 million Add: Fair value of contingent consideration……………………………… 10 million Fair value of subsidiary………………………………………………………… P 210 million Less: Fair value of identifiable assets and liabilities of Homer...............… 116 million Goodwill…………………………………………………………………………… P 94 million Note: The consideration transferred should be compared with the fair value of the net assets acquired, per PFRS3 par. 32. The contingent consideration should be measured at its fair value at the acquisition date; any subsequent change in this cash liability comes under PAS 39 Financial instruments: recognition and measurement and should be recognized in profit or loss, even if it arises within the measurement period. See PFRS3 pars. 39, 40 and 58. 60. b 61. c 62. c

63. b 64. d Consideration transferred: Shares: (100,000 shares x P6.20)……………………… P620,000 Contingent consideration… ……………………………. 184,000 Total… …………………………………………………. P804,000 Less: Fair value of net identifiable assets acquired: Current assets… … …………………………………… P100,000 Equipment… …………………………………………… 150,000 Land … ………………………………………………… 50,000 Buildings … …………………….……………………… 300,000 Liabilities… ……………………………………………. ( 80,000) 520,000 Goodwill……………………………………………………. P284,000

The P184,000 is one classical example of contingencies is where the future income of the acquirer is regarded as uncertain; the agreement contains a clause that requires the acquirer to provide additional consideration to the acquiree if the income of the acquirer is not equal to or exceeds a specified amount over some specified period. 65. d Goodwill, 1/1/20x4……………………………………………………............ P 284,000 Less: Adjustment on contingent consideration (P184,000 – P170,000) 14,000 Goodwill, 8/1/20x4……………………………………………………............. P 270,000 Changes that are the result of the acquirer obtaining additional information about facts and circumstances that existed at the acquisition date, and that occur within the measurement period (which may be a maximum of one year from the acquisition date) are recognized as adjustments against the original accounting for the acquisition (and so may impact goodwill) – see Section 11.3.[PFRS 3 (2008) par. 58] Incidentally, the entry to record the revision of goodwill should be: Estimated liability for contingent consideration…. 14,000 Goodwill……………………………………… 14,000 66. a – refer to No. 64 and 65 for further discussion. 67. c Deficiency: (P16 – P10) x 100,000 shares issued to acquire………P 600,000 Divided by: Fair value of share……………………………………...... P 10 Added number of shares to issue…………………………………..... 60,000 68. (b) – (P520,000 – P60,000 = P460,000) Changes resulting from events after (post-combination changes) the acquisition date (e.g. meeting an earnings target, reaching a specified chare or reaching a milestone on research and development project) are not measurement period adjustments. Such changes are therefore accounted for separately from the business combination. The acquirer accounts for changes in the fair value of contingent consideration that are not measurement period adjustments as follows:

1. contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity; and 2. contingent consideration classified as an asset or liability… The problem on hand falls within No. 1, so no adjustment would be required to goodwill but accounted for within the equity section. Incidentally, the entry would be: Paid-in capital in excess of par………………………….. 60,000 Common stock, P1 par…………………………….. 60,000 69. c Par value of shares outstanding before issuance Par value of shares outstanding after issuance Par value of additional shares issued Divided by: No. of shares issued* Par value of common stock *Paid-in capital before issuance (P200,000 + P350,000) Paid-in capital after issuance (P250,000 + P550,00) Paid-in capital of share issued at the time of exchange Divided by: Fair value per share of stock Shares issued

P200,000 250,000 P 50,000 __12,500 P 4 P 550,000 800,000 P 250,000 P 20 12,500

70. a Consideration transferred: Shares – 12,500 shares Less: Goodwill Fair value of identifiable net assets acquired

P250,000 56,000 P194,000

71. c Depreciation expense: Building, at book value (P200,000 – P100,000) / 10 years Building, undervaluation (P130,000, fair value – P100,000, book value) / 10 years Equipment, at book value (P100,000 – P50,000) / 5 years Equipment, undervaluation (P75,000, fair value - P50,000, book value) / 5 years Total depreciation expense

P 10,000 3,000 10,000 5,000 P 28,000

72. d PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are measured at their acquisition-date fair values. 73. c Selling price Less: Book value of Comb (P50,000 + P80,000 + P40,000 - P30,000)

P 110,000 140,000

Loss on sale of business by the acquiree (Comb)

P( 30,000)

74. a – Blue Town: Stockholders’ equity before issuance of shares (P700,000 + P980,000) P1,680,000 Issued shares: 34,000 shares x P35 1,190,000 Consolidated SHE/Net Assets P2,870,000 75. No available answer - P115,000 Cost of Investment (100,000 shares x P1.90) Less: Market value of net assets acquired: Cash Furniture and fittings Accounts receivable Plant Accounts payable Current tax liability Liabities Goodwill

P 190,000 P 50,000 20,000 5,000 25,000 (15,000) ( 8,000) ( 2,000) 75,000 P 115,000

76. b Cost of Investment [P20,000 + (16,000 shares x P2.50) + P500, incidental costs) P 60,500 Less: Market value of net assets acquired: Plant P 30,000 Inventory 28,000 Accounts receivable 5,000 Plant 20,000 Accounts payable ( 20,000) 58,000 Goodwill P 2,500 When it liquidates, costs of liquidation paid by the acquiree should be for the liquidation account of the acquiree and will eventually be transferred to shareholders’ equity account. Any costs of liquidation paid or supplied by the acquirer should be capitalized as cost of acquisition which is consistent with the cost model under PFRS No. 3 in measuring the cost of the combination. Any direct costs of acquisition should be capitalizable under the cost model reiterated in PFRS No. 3 Phase I. This model in PFRS No. 3 will be amended under Phase II (pending implementation possibly until early 2008), wherein all direct costs will be outright expense. Costs of issuing shares will be debited to share premium or APIC account. Any costs of liquidation paid or supplied by the acquirer should be capitalized as cost of acquisition which is consistent with the cost model under PFRS No. 3 in measuring the cost of the combination.

The fair values of liabilities undertaken are best measured by the present values of future cash outflows. Intangible assets are recognized when its fair value can be measured reliably. Assets other than intangible assets must be recognized if it is probable that the future economic benefits will flow to the acquirer and its fair value can be measured reliably. 77. c Consideration transferred: Shares: 2/3 x 60,000 x P3.20 Cash Accounts payable Mortgage and interest Debentures and premium Liquidation expenses

128,000 45,100 44,000 52,500 2,400 144,000 (12,000)

Cash held Less: Fair value of assets and liabilities acquired: Accounts receivable Inventory Freehold land Buildings Plant and equipment Bargain Purchase Gain

P34,700 39,000 130,000 40,000 46,000

132,000 260,000

289,700 29,700

78. d 79. c CC_____ Total______ Assets, appraised value Add: Goodwill: Annual earnings P150,000 Less: Normal earnings 6% x Assets Excess earnings / capitalized at Goodwill Total stock to be issued

Percentage

P375,000

DD_______ P750,000

P41,250

22,500 P18,750 20% P93,750 P468,750 P468,750 1,800,000 26%

EE P375,000

P75,000

45,000 P30,000 20% _ P150,000 P900,000 P900,000 1,800,000 50%

P1,500,000 P33,750

22,500 P11,250

90,000 P60,000 20%__ 20%__ P56,250 P300,000 P431,250 P1,800,000 P431,250 431,250 24% (c)

80. a II ____ Average annual earnings P 46,080 Divided by: Capitalized at Total stock to be issued Less: Net Assets (for P/S) Goodwill (for Common Stock) Preferred stock (same with Net Assets): 864,000/P100 par

_____JJ _ P 69,120

____Total____ P 115,200 _ 10% P1,152,000 864,000 P 288,000 8,640 shares

81. c Theories 1. 2. 3. 4. 5.

a a c d d

6. 7. 8. 9. 10,

c d d d c

11. 12. 13. 14. 15,

d d b d b

16. 17. 18. 19. 20.

c c c a d

21. 22. 23. 24. 25.

d c b b b

Chapter 15 Problem I Investment in Shy Inc. [P2,500,000 + (15,000  P40)] Cash Common Stock Other Contributed Capital (P40 - P2)  15,000

Other Contributed Capital Acquisition Expense Deferred Acquisition Charges Acquisition Costs Payable

26. 27. 28. 29. 30.

d b a d a

31 32. 33. 34. 35.

c b b b b

36. 37. 38. 39. 40.

c b c c c

3,100,000 2,500,000 30,000 570,000

30,000 67,000 90,000 7,000

Problem II Cash: P74,000 = P44,000 + P30,000 Accounts receivable: P155,000 = P110,000 + P45,000 Inventory: P215,000 = [P130,000 + P70,000 + (P85,000 – P70,000)] Land: P125,000 = [P80,000 + P25,000 + (P45,000 – P25,000)] Buildings and equipment: P900,000 = P500,000 + P400,000 Accumulated depreciation: P388,000 = P223,000 + P165,000 Goodwill (full-goodwill) = P40,000* Total Assets = P1,121,000 = (P74,000 + P155,000 + P215, 000 + P125,000 + P900,000 – P388,000 + P40,000, or: Total Assets of Power Corp. P 791,500 Less: Investment in Silk Corp. (150,500) P 641,000 Book value of assets of Silk Corp. 405,000 Book value reported by Power and Silk P1,046,000 Increase in inventory (P85,000 - P70,000) 15,000

Increase in land (P45,000 - P25,000) Goodwill Total assets reported (based on fullgoodwill)

20,000 40,000 P1,121,000

Accounts payable: P89,500 = P61,500 + P28,000 Taxes payable P132,000 = P95,000 + P37,000 Bonds payable: P480,000 = P280,000 + P200,000 Total liabilities: P701,500 = P89,500 + P132,000 + P480,000 Common stock: P150,000, parent only Retained earnings: P205,000, the amount reported by parent Non-controlling interest (full-goodwill): P64,500* Stockholders’ equity: P419,500 Consolidated SHE: Common stock P150,000 Retained Earnings 205,000 Parent’s SHE or Equity Attributable to Parent P355,000 NCI (full-goodwill) 64,500 Consolidated SHE P419,500 Computation of Goodwill: Full-goodwill: Fair value of Subsidiary: Consideration transferred Add: FV of NCI Less: BV of SHE of SS (P50,000 + P90,000) x 100% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P70,000 – P85,000) x 100% Land (P25,000 – P45,000) x 100% Goodwill – full

P150,500 **64,500

P 15,000 20,000

P215,000 140,000 P 75,000

35,000 P 40,000

**given amount, but it should not be lower than the fair value of SHE – subsidiary amounting to P52,500 computed as follows : FV of SHE of SS: Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000 Adjustments to reflect fair value (P15,000 + P20,000)… 35,000 FV of SHE of SS P 175,000 Multiplied by: NCI%.......................................................... 30% FV of NCI (partial)……………………………………………..P 52,500 or, Partial Goodwill Fair value of Subsidiary: Consideration transferred Less: BV of SHE of SSD (P50,000 + P90,000) x 70% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P15,000 x 70%) Land (P20,000 x 70%) Goodwill – partial

P150,500 __98,000 P 52,500 P 10,500 14,000

24,500 P 28,000

If partial-goodwill: Total Assets = P1,109,000 = (P74,000 + P155,000 + P215,000 + P125,000 + P900,000 – P388,000 + P28,000, Non-controlling interest (partial-goodwill): P52,500 NCI

FV of SHE of SSD: Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000 Adjustments to reflect fair value (P15,000 + P20,000)… 35,000 FV of SHE of SSD P 175,000 Multiplied by: NCI%.......................................................... 30% FV of NCI (partial)……………………………………………..P 52,500 Stockholders’ equity: P419,500 Consolidated SHE: Common stock Retained Earnings Parent’s SHE or Equity Attributable to Parent NCI (partial-goodwill) Consolidated SHE Problem III 1. A. Investment in Sewell Cash B.

C.

P150,000 205,000 P355,000 52,500 P404,500

675,000 675,000

Investment in Sewell Cash

675,000

Investment in Sewell Cash

318,000

675,000

318,000

2. A. Fair value of Subsidiary: Consideration transferred Less: BV of SHE of S (P450,000 + P180,000 + P75,000)x100% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P30,000 – P20,000) x 100% Land (P50,000 – P70,000) x 100% Bargain Purchase Gain – full

P675,000 705,000 P( 30,000) (P10,000) __20,000

__10,000 (P 40,000)

B. Partial Goodwill Fair value of Subsidiary: Consideration transferred Less: BV of SHE of S (P450,000 + P180,000 + P75,000) x 90% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P30,000 – P20,000) x 90% Land (P50,000 – P70,000) x 90% Goodwill – partial Full-Goodwill

P675,000 634,500 P 40,500 (P9,000) __18,000

__9,000 P 31,500

Fair value of Subsidiary: Consideration transferred (P675,000/90%) Less: BV of SHE of S (P450,000 + P180,000 + P75,000)x100% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P30,000 – P20,000) x 100% Land (P50,000 – P70,000) x 100% Goodwill – full

P750,000 705,000 P 45,000 (P10,000) __20,000

__10,000 P 35,000

C. Partial Goodwill Fair value of Subsidiary: Consideration transferred Less: BV of SHE of S (P620,000 + P140,000 + P20,000) x 80% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P30,000 – P20,000) x 80% Land (P50,000 – P70,000) x 80% Bargain Purchase Gain – partial (parent only)

P318,000 624,000 (P306,000) (P 8,000) __16,000

Full-Goodwill Fair value of Subsidiary: Consideration transferred FV of NCI* Less: BV of SHE of S (P620,000 + P140,000 + P20,000) x 100% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P30,000 – P20,000) x 100% Land (P50,000 – P70,000) x 100% Bargain Purchase Gain – full (parent only) *BV of SHE of S Adjustments to reflect fair value FV of SHE of S x: NCI% FV of NCI

__8,000 (P314,000)

P 318,000 _158,000 P 476,000 780,000 (P304,000) (P10,000) __20,000

_10,000 (P314,000)

P780,000 10,000 P790,000 20% P158,000

3. A. Common Stock – Sewell Other Contributed Capital – Sewell Retained Earnings – Sewell Land Inventory Investment in Sewell Retained earnings (gain) – Parent (since balance sheet accounts are being examined)

450,000 180,000 75,000 20,000 10,000 675,000

40,000

B. Partial-Goodwill (Proportionate Basis) Common Stock – Sewell Other Contributed Capital – Sewell Retained Earnings – Sewell

450,000 180,000 75,000

Land Goodwill Inventory Investment in Sewell Non-controlling Interest BV – SHE of Sewell (P450,000 + P180,000 + P75,000) Adjustments to reflect fair value FV of SHE of Sewell x: NCI% FV of NCI (partial) Full-Goodwill (Fair Value Basis) Common Stock – Sewell Other Contributed Capital – Sewell Retained Earnings – Sewell Land Goodwill Inventory Investment in Sewell Non-controlling Interest BV – SHE of Sewell (P450,000 + P180,000 + P75,000) Adjustments to reflect fair value FV of SHE of Sewell x: NCI% FV of NCI (partial) NCI on Full-Goodwill (P35,000 – P31,500) FV of NCI (full)

20,000 31,500 10,000 675,000 71,500 P705,000 10,000 P715,000 10% P 71,500 450,000 180,000 75,000 20,000 35,000 10,000 675,000 75,000 P705,000 10,000 P715,000 10% P 71,500 3,500 P 75,000

C. Partial-Goodwill (Proportionate Basis) Common Stock – Sewell 620,000 Other Contributed Capital – Sewell 140,000 Retained Earnings – Sewell 20,000 Land 20,000 Inventory Investment in Sewell Retained earnings (gain)–Parent (refer to 3A) Non-controlling Interest BV – SHE of Sewell (P620,000 + P140,000 + P20,000) P780,000 Adjustments to reflect fair value 10,000 FV of SHE of Sewell P790,000 x: NCI% 20% FV of NCI (partial) P158,000 Full-Goodwill (Fair Value Basis) Common Stock – Sewell Other Contributed Capital – Sewell Retained Earnings – Sewell Land

620,000 140,000 20,000 20,000

10,000 318,000 314,000 158,000

Inventory Investment in Sewell Retained earnings (gain)–Parent (refer to 3A) Non-controlling Interest BV – SHE of Sewell (P620,000 + P140,000 + P20,000) P780,000 Adjustments to reflect fair value 10,000 FV of SHE of Sewell P790,000 x: NCI% 20% FV of NCI (full) P158,000

10,000 318,000 314,000 158,000

Problem IV 1. January 1, 20x4

Investment in S Company……………………………………………

408,000 408,000

Cash…………………………………………………………………….. 2. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (100%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 100%)………………….. Paid-in capital in excess of par (P24,000 x 100%)... Retained earnings (P96,000 x 100%)………………... Allocated excess (excess of cost over book value)…… Less: Over/under valuation of assets and liabilities: Increase in inventory (P18,000 x 100%)…………….. Increase in land (P72,000 x 100%)…………………… Decrease in buildings and equipment (P12,000 x 100%)……………………………………... Increase in bonds payable (P42,000 x 100%)……..

P 408,000 P 240,000 24,000 96,000 360,000 P 48,000

P 18,000 72,000 ( 12,000) ( 42,000)

36,000

Positive excess: Goodwill (excess of cost over fair P 12,000

value)…………………………………………………….. 3.

(E1) Common stock – S Co………………………………………………. Additional paid-in capital – S Co…………………………………. Retained earnings – S Co…………………………………………... Investment in S Co…………………………………………………

240,000 24,000 96.000 360,000

Eliminate investment against stockholders’ equity of S Co.

(E2) 18,000 Inventory…………………………………………………………………. 72,000 Land………………………………………………………………………. 12,000 Goodwill…………………………………………………………………. Buildings and 12,000 equipment………………………………………….. Premium on bonds 42,000 payable……………………………………… Investment in S 48,000 Co……………………………………………….. Eliminate investment against allocated excess.

4. Eliminations Assets Cash* …………………………. Accounts receiv able……..

P

P Co.

S Co.

12,000

P 60,000

Dr.

Consolidated P

90,000

60,000

Inv entory………………….

120,000

72,000

(2) 18,000

Land…………………………….

210,000

48,000

(2) 72,000

Buildings and equipment (net)

480,000

360,000

Goodwill…………………… Inv estment in S Co………….

408,000

Total Assets

Cr.

72,000 150,000 210,000 330,000

(2)

12,000

(2) 12,000

828,000 12,000

(1) 360,000 (2) 48,000

-

P1,320,000

P600,000

P1,602,000

Accounts payable……………

P 120,000

P120,000

P 240,000

Bonds payable…………………

240,000

120,000

360,000

Liabilities and Stockholders’ Equity

Premium on bonds payable Common stock, P10 par………

(3) 600,000

42,000

42,000 600,000

Common stock, P10 par……… Paid in capital in excess of par.

240,000

(1) 240,000

60,000

Paid in capital in excess of par.

60,000 24,000

(1) 24,000

Retained earnings…………… _________ 96,000 Total Liabilities and Stockholders’ Equity P1,320,000 P600,000 (1) Eliminat e invest ment agai nst st ockholders’ equit y of S Co. (2) Eliminat e invest ment against allocat ed excess. * P420,000 – P408,000 = P12,000.

(1) 96,000

__________

_________

P 462,000

P 462,000

P1,602,000

Retained earnings……………

300,000

300,000

5. Assets Cash Accounts receiv ables Inv entories Land Buildings and equipment (net) Goodwill Total Assets Liabilities and Stockholders’ Equity Liabilities Accounts payable Bonds payable Premium on bonds payable Total Liabilities Stockholders’ Equity Common stock, P10 par Paid-in capital in excess of par Retained earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

P

72,000 150,000 210,000 330,000 828,000 12,000 P1,602,000

P 240,000 P 360,000 42,000

402,000 P 642,000 P 600,000 60,000 300,000 P 960,000 P1,602,000

Problem V 1. January 1, 20x4

(1) Investment in S Company……………………………………………

432,000 288,000

Cash…………………………………………………………………….. Common stock, P10 par…………………………………………….. Paid-in capital in excess of par……………………………………. (2) Retained earnings (acquisition-related expense - close to retained earnings since only balance sheets are being examined)……………………………………………………………

120,000 24,000

12,000

12,000 Cash……………………………………………………………………. Acquisition- related costs.

(3) Paid-in capital in excess of par………………………………………..

8,400 8,400

Cash……………………………………………………………………. Cost s t o issue and register stocks.

2. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (100%) Consideration transferred Cash………………………………………………………. Common stock: 12,000 shares x P12 per share….. Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 100%)………………….. Paid-in capital in excess of par (P96,000 x 100%).. Retained earnings (P24,000 x 100%)………………... Allocated excess (excess of cost over book value)…… Add: Existing Goodwill of Sky Co. (P6,000 x 100%)……… Adjusted allocated excess…………………………………. Less: Over/under valuation of assets and liabilities: Increase in inventory (P18,000 x 100%)…………….. Increase in land (P72,000 x 100%)…………………… Decrease in buildings and equipment (P12,000 x 100%)……………………………………... Increase in bonds payable (P42,000 x 100%)…….. Positive excess: Goodwill (excess of cost over fair

P 288,000 P 144,000 432,000 P 240,000 96,000 24,000 360,000 P 72,000 6,000 P 78,000

P 18,000 72,000 ( 12,000) ( 42,000)

36,000 P

42,000 value)…………………………………………………….. Alternatively, the unrecorded goodwill may also be comput ed by ignoring the existing goodwill in the books of the subsidiary, thus: Date of Acquisition – January 1, 20x4 (refer to previous table for details of computation)

Fair value of Subsidiary (100%) Consideration transferred……………………………………………………… Less: Book value of stockholders’ equity of S……………………………….. Allocated excess (excess of cost over book value)…………………………. Less: Over/under valuation of assets and liabilities…………………………… Positive excess: Goodwill (excess of cost over fair value)…………………... Add: Existing Goodwill……………………………………………………………… Positive excess: Goodwill (excess of cost over fair

P 432,000 360,000 P 72,000 36,000 P 36,000 6,000

value)……………………………………………………………………………

P 42,000

3. Eliminations P Co.

S Co.

111,600

P 54,000

P 165,600

90,000

60,000

150,000

Inv entory………………….

120,000

72,000

(2) 18,000

210,000

Land…………………………….

210,000

48,000

(2) 72,000

330,000

Buildings and equipment (net)

480,000

360,000

Assets Cash* ………………………….. Accounts receiv able……..

Goodwill…………………… Inv estment in S Co…………. Total Assets

P

6,000

Dr.

Cr.

(2)

12,000

(2) 36,000

432,000

Consolidated

828,000 42,000

(4) 360,000 (5) 72,000

-

P1,443,600

P600,000

P1,725,600

Accounts payable……………

P 120,000

P120,000

P 240,000

Bonds payable…………………

240,000

120,000

360,000

Liabilities and Stockholders’ Equity

Premium on bonds payable Common stock, P10 par* *…..…

(6) 720,000

Common stock, P10 par……… Additional paid in capital***

Retained earnings……………

(1) 240,000

75,600

75,600 24,000

(1) 24,000

96,000

(1) 96,000

288,000 _________

42,000 720,000

240,000

Additional paid in capital…… Retained earnings****

42,000

288,000 __________

_________

Total Liabilities and Stockholders’ Equity P1,443,600 P600,000 (1) Eliminat e invest ment against st ockholders’ equit y of Sky Co. (2) Eliminat e invest ment against allocat ed excess. * P420,000 – P288,000 – P12,000 – P8,400 = P111,600. * * P600,000 + P120,000 (12,000 shares x p10 par) = P720,000. * * * P50,000 + P20,000 – P7,000 = P63,000. * * * * P300,000 – P12,000 = P288,000.

P 486,000

P 486,000

P1,725,600

4. Assets Cash Accounts receiv ables Inv entories Land Buildings and equipment (net) Goodwill Total Assets Liabilities and Stockholders’ Equity Liabilities Accounts payable Bonds payable Premium on bonds payable Total Liabilities Stockholders’ Equity Common stock, P10 par Additional paid-in capital in excess of par Retained earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

P

165,600 150,000 210,000 330,000 828,000 42,000 P1,725,600

P 360,000 42,000

P 240,000 402,000 P 642,000 P 720,000 75,600 288,000 P 1083,600 P1,725,600

Problem VI 1. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (100%) Consideration transferred (P408,000 – P6,000)…….. Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 100%)………………….. Paid-in capital in excess of par (P96,000 x 100%)... Retained earnings (P24,000 x 100%)………………... Allocated excess (excess of cost over book value)…… Less: Over/under valuation of assets and liabilities: Increase in inventory (P18,000 x 100%)……………..

P 402,000 P 240,000 96,000 24,000 360,000 P 42,000

P 18,000

Increase in land (P72,000 x 100%)…………………… Decrease in buildings and equipment (P12,000 x 100%)……………………………………... Increase in bonds payable (P42,000 x 100%)…….. Positive excess: Goodwill (excess of cost over fair

72,000 ( 12,000) ( 42,000)

value)……………………………………………………..

36,000 P 6,000

2. Goodwill, P6,000 Problem VII 1. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (100%) Consideration transferred: Common stock: 24,000 shares x P14 per share Less: Book value of stockholders’ equity of Sky: Common stock (P240,000 x 100%)………………….. Paid-in capital in excess of par (P96,000 x 100%)... Retained earnings (P24,000 x 100%)………………... Allocated excess (excess of book value over cost)…… Less: Over/under valuation of assets and liabilities: Increase in inventory (P18,000 x 100%)…………….. Increase in land (P72,000 x 100%)…………………… Decrease in buildings and equipment (P12,000 x 100%)……………………………………... Increase in patent (P24,000 x 100%)………………... Increase in contingent liability

P 336,000

P 240,000 96,000 24,000

360,000 (P 24,000)

P 18,000 72,000

( 12,000) 24,000 ( 18,000)

(P18,000 x 100%)…. Increase in bonds payable (P42,000 x 100%)…….. Negative excess: Bargain Purchase Gain (excess of fair value over cost)……………………………………

( 42,000)

42,000

(P 66,000)

2. Gain on acquisition, P66,000 Problem VIII Case 1: Proportionate Basis (Partial-goodwill Approach)  Partial-goodwill Fair value of subsidiary (80%): Consideration transferred: Cash… … … … … … … … … .......P12,000,000 (80%) Less: Book value of stockholders’ equity (net assets) – S Company: P7,200,000 x 80%................................. 5,760,000 (80%) Allocated excess.… … … … … … … … … … … … … … … … … … ........P 6,240,000 (80%) Less: Over/undervaluation of assets and liabilities: (P9,600,000 – P7,200,000) x 80%....................................... 1,920,000 (80%) Positive excess: Goodwill (partial)… … … … … … … … … … … ..... P 4,320,000 (80%) 

Non-controlling interest Book Value of stockholders’ equity of subsidiary… … … … . P 7,200,000 Adjustments to reflect fair value (over/ undervaluation of assets and liabilities): (P9,600,000 – P7,200,000)… .. 2,400,000 Fair value of stockholders’ equity of subsidiary… … … … … P 9,600,000 Multiplied by: Non-controlling interest percentage............ 20% Non-controlling Interest (partial)… … … … … … … … … … … … .. P1,920,000

Fair Value Basis (Full-goodwill Approach)  Full-goodwill Fair value of subsidiary (100%): Consideration transferred: Cash (P12,000,000 / 80%).. P15,000,000 (100%) Less: Book value of stockholders’ equity (net assets) – S Company: P7,200,000 x 100%.............................. 7,200,000 (100%) Allocated excess.… … … … … … … … … … … … … … … … … … .. P 7,800,000 (100%) Less: Over/Undervaluation of assets and liabilit ies: (P9,600,000 – P7,200,000) x 100%.................................... 2,400,000 (100%) Positive excess: Goodwill (full)… … … … … … … … … … … … ........P 5,400,000 (100%) The full – goodwill of P5,400,000 consists of two parts: Full-goodwill… … … … … … … … … … … … … … … … … ....... P 5,400,000 Less: Controlling interest on full-goodwill or partial-goodwill… … … … … … … … … … … .… .. 4,320,000 NCI on full-goodwill……… … … … … … … … … … … … .......P 1,080,000 

Non-controlling interest Non-controlling interest (partial)… … … … … … … … … … … … .......P1,920,000 Add: Non-controlling interest on full -goodwill (P5,400,000 – P4,320,000 partial-goodwill) or (P5,400,000 x 20%)*… … … … … … … … … … … … … ...... 1,080,000

Non-controlling interest (full)… … … … … … … … … … … … … ........P3,000,000 * applicable only when t he fair value of t he non-cont rolling int erest of subsidiary is not given.

Case 2: Proportionate Basis (Partial-goodwill Approach)  Partial-goodwill Fair value of subsidiary (60%): Consideration transferred: Cash… … … … … … … … … .....P 7,560,000 (60%) Less: Book value of stockholders’ equity (net assets) – S Company: P6,000,000 x 60%................................ 3,600,000 (60%) Allocated Excess.… … … … … … … … … … … … … … … … … … ..... P 3,960,000 (60%) Less: Over/undervaluation of assets and liabilities: (P8,400,000 – P6,000,000) x 60%...................................... 1,440,000 (60%) Positive excess: Goodwill (partial)… … … … … … … … … … … .... P 2,520,000 (60%) 

Non-controlling interest Book value of stockholders’ equity of subsidiary… … … … . P 6,000,000 Adjustments to reflect fair value (over/ undervaluation of assets and liabilities): (P8,400,000 – P6,000,000)… . 2,400,000 Fair value of stockholders’ equity of subsidiary… … … … … .P 8,400,000 Multiplied by: Non-controlling Interest percentage............ 40% Non-controlling interest (partial)… … … … … … … … … … … … .P 3,360,000

Fair Value Basis (Full-goodwill Approach)  Full-goodwill Fair value of subsidiary (100%): Consideration transferred: Cash … … … … … … … … … ...P 7,560,000 ( 60%) Fair value of NCI (given)… … … … … … … … … … … … … .. 4,800,000 ( 40%) Fair value of subsidiary… … … … … … … … … … … … … … … … ...P12,360,000 (100%) Less: Book value of stockholders’ equity (net assets) – S Company: P6,000,000 x 100%........................... 6,000,000 (100%) Allocated Excess.… … … … … … … … … … … … … … … … … … … ..P 6,360,000 (100%) Less: Over/undervaluation of assets and liabilities: (P8,400,000 – P6,000,000) x 100%.................................. 2,400,000 (100%) Positive excess: Goodwill (full)… … … … … … … … … … … … ......P 3,960,000 (100%) The full – goodwill of P3,960,000 consists of two parts: Full-goodwill… … … … … … … … … … … … … … … … … ...P 3,960,000 Less: Controlling interest on full-goodwill or partial-goodwill… … … … … … … … … … … . 2,520,000 NCI on full-goodwill… … … … … … … … … … … … … … ..P 1,440,000 

Non-controlling interest Non-controlling interest (partial)… … … … … … … … … … … … P 3,360,000 Add: Non-controlling interest on full -goodwill (P3,960,000 – P2,520,000 partial-goodwill)… … … … .. 1,440,000 Non-controlling Interest (full)… … … … … … … … … … … … … ..P 4,800,000

Case 3; Proportionate Basis (Partial-goodwill Approach)  Partial-goodwill Fair value of subsidiary (75%):

Consideration transferred: Cash… … … … … … … … … ..P 9,000,000 (75%) Less: Book value of stockholders’ equity (net assets) – S Company: P7,200,000 x 75%.......................... 5,400,000 (75%) Allocated Excess.… … … … … … … … … … … … … … … … … … ...P 3,600,000 (75%) Less: Over/undervaluation of assets and liabilities: (P9,600,000 – P7,200,000) x 75%................................. 1,800,000 (75%) Positive excess: Goodwill (partial)… … … … … … … … … … … .P 1,800,000 (75%) 

Non-controlling interest Book value of stockholders’ equity of subsidiary… … … … ..P 7,200,000 Adjustments to reflect fair value (over/ undervaluation of assets and liabilities): (P9,600,000 – P7,200,000)… . 2,400,000 Fair value of stockholders’ equity of subsidiary… … … … … P 9,600,000 Multiplied by: Non-controlling Interest percentage............ 25% Non-controlling interest (partial)… … … … … … … … … … … … .P 2,400,000

Fair Value Basis (Full-goodwill Approach)  Full-goodwill Fair value of subsidiary… … … … … … … … … … … … … … … … . P 11,640,000 (100%) Less: Book value of stockholders’ equity (net assets) – S Company: P7,200,000 x 100%........................... 7,200,000 (100%) Allocated Excess.… … … … … … … … … … … … … … … … … … … .P 4,440,000 (100%) Less: Over/undervaluation of assets and liabilities: (P9,600,000 – P7,200,000) x 100%.................................. 2,400,000 (100%) Positive excess: Goodwill (full)… … … … … … … … … … … … .....P 2,040,000 (100%) The full – goodwill of P2,040,000 consists of two parts: Full-goodwill… … … … … … … … … … … … … … … … … ...P 2,040,000 Less: Controlling interest on full-goodwill or partial-goodwill… … … … … … … … … … … .... 1,800,000 NCI on full-goodwill… … … … … … … … … … … … … … . .P 240,000 

Non-controlling interest Non-controlling interest (partial)… … … … … … … … … … … … P 2,400,000 Add: Non-controlling interest on full -goodwill (P2,040,000 – P1,800,000 partial-goodwill)… ..… … ..... 240,000 Non-controlling Interest (full)… … … … … … … … … … … … … ..P 2,640,000

Case 4: Proportionate Basis (Partial-goodwill Approach)  Partial-goodwill Fair value of subsidiary (75%): Consideration transferred: Cash… … … … … … … … … ..P 2,592,000 (60%) Fair value of previously held equity interest in acquiree P2,592,000/60% = P4,320,000 x 15%......... 648,000 (15%) Fair value of Subsidiary ..… … … … … … … … … … … … … … … . P 3,240,000 (75%) Less: Book value of stockholders’ equity (net assets) – S Company: (P4,680,000 – P2,280,000) x 75%......... 1,800,000 (75%) Allocated Excess.… … … … … … … … … … … … … … … … … … ....P 1,440,000 (75%) Less: Over/undervaluation of assets and liabilities: [(P6,120,000 – P2,280,000) –

(P4,680,000 – P2,280,000)] x 75%................................ 1,080,000 (75%) Positive excess: Goodwill (partial)… … … … … … … … … … … ... P 360,000 (75%) 

Non-controlling interest Book value of stockholders’ equity of subsidiary… … … … ..P 2,400,000 Adjustments to reflect fair value (over/ undervaluation of assets and liabilities): (P3,840,000 – P2,400,000)… . 1,440,000 Fair value of stockholders’ equity of subsidiary… … … … … P 3,840,000 Multiplied by: Non-controlling Interest percentage............ 25% Non-controlling interest (partial)… … … … … … … … … … … … P 960,000

Fair Value Basis (Full-goodwill Approach)  Full-goodwill Fair value of subsidiary (100%): Consideration transferred: Cash… … … … … … … … … ..P 2,592,000 (60%) Fair value of previously held equity interest in acquiree P2,592,000/60% = P4,320,000 x 15%...... 648,000 (15%) Fair value of NCI (given)… … … … … … … … … … … … … . 1,080,000 (25%) Fair value of subsidiary… … … … … … … … … … … … … … … … .P 4,320,000 (100%) Less: Book value of stockholders’ equity (net assets) – S Company: P2,400,000 x 100%........................ 2,400,000 (100%) Allocated Excess.… … … … … … … … … … … … … … … … … … ..P 1,920,000 (100%) Less: Over/undervaluation of assets and liabilities: (P3,840,000 – P2,400,000) x 100%................................ 1,440,000 (100%) Positive excess: Goodwill (full)… … … … … … … … … … … … ...P 480,000 (100%) The full – goodwill of P480,000 consists of two parts: Full-goodwill… … … … … … … … … … … … … … … … … ...P 480,000 Less: Controlling interest on full-goodwill or partial-goodwill… … … … … … … … … … … .… 360,000 NCI on full-goodwill… … … … … … … … … … … … … … ..P 120,000 

Non-controlling interest Non-controlling interest (partial)… … … … … … … … … … … … P 960,000 Add: Non-controlling interest on full -goodwill (P480,000 – P360,000 partial-goodwill)… ..… … … … ..... 120,000 Non-controlling Interest (full)… … … … … … … … … … … … … … P 1,080,000

Problem IX  Partial-goodwill (Proportionate Basis) Fair value of subsidiary (75%): Consideration transferred: Cash… …………………….. Less: Book value of stockholders’ equity (net assets) – S Company: (P480,000 – P228,000) x 75%....................................... Allocated excess… … … ………………………………………... Less: Over/undervaluation of assets and liabilities: [(P612,000 – P228,000) – (P480,000 – P228,000) x 75% Negative excess: Bargain purchase gain (to controlling interest or attributable to parent only)… …………….

P270,000 (75%)

189,000 (75%) P 81,000 (75%) 99,000 (75%) (P18,000) (75%)



Full-goodwill (Fair Value Basis) Fair value of subsidiary (100%): Consideration transferred: Cash… …………………….. Fair value of non-controlling interest (given)… ……… Fair value of subsidiary ………………………………………… Less: Book value of stockholders’ equity (net assets) – S Company: (P480,000 – P228,000) x 100%..................................... Allocated excess… … … ………………………………………... Less: Over/undervaluation of assets and liabilities: [(P612,000 – P228,000) – (P480,000 – P228,000) x 100% Negative excess: Bargain purchase gain (to controlling interest or attributable to parent only)… …………….

P270,000 ( 75%) 98,400 ( 25%) P368,400 (100%)

252,000 (100%) P116,400 (100%) 132,000 (100%) (P15,600) (100%)

Problem X Partial-goodwill Approach Schedule of Determination and Allocation of Excess (Partial -goodwill) Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of Sky: Common stock (P240,000 x 80%)……………………. Paid-in capital in excess of par (P96,000 x 80%).... Retained earnings (P24,000 x 80%)……………….... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P18,000 x 80%)……………… Increase in land (P72,000 x 80%)……………………. Decrease in buildings and equipment (P12,000 x 80%)……………………………………..... Increase in bonds payable (P42,000 x 80%)………. Positive excess: Partial-goodwill (excess of cost over fair

P 360,000

P 192,000 76,800 19,200

288,000 P 72,000

P 14,400 57,600 (

9,600)

( 33,600)

28,800 P 43,200

value)………………………………………………... The over/under valuation of assets and liabilities are summarized as follows:

Sky Co. Book value Inventory………………….…………….. 72,000 Land……………………………………… 48,000 Buildings and equipment (net)......... 360,000 Bonds payable………………………… (120,000) Net……………………………………….. 360,000

Sky Over/ Co. Under Fair value Valuation 90,000 18,000 120,000 72,000 348,000 ( 12,000) (162,000) 42,000 396,000 36,000

The buildings and equipment will be further analyzed for consolidation purposes as follows:

Buildings and equipment .................. Less: Accumulated depreciation….. Net book value………………………...

Sky Co. Book value

Sky Co. Fair value

720,000

348,000

( 372,000)

360,000

-

( 360,000)

360,000

348,000

(Decrease)

(

12,000)

The following entry on the date of acquisition in the books of Parent Company: January 1, 20x4

(1) Investment in Sky Company……………………………………………

360,000 360,000

Cash…………………………………………………………………….. Acquisition of Sky Company. (2) Retained earnings (acquisition-related expense - close to retained earnings since only balance sheets are being

14,400

examined)…………………………………………………………… Cash…………………………………………………………………….

14,400

Acquisition- related costs.

The schedule of determination and allocation of excess provides complete guidance for the worksheet eliminating entries on January 1, 20x4:

(E1) Common stock – Sky

240,000

Co………………………………………………. Additional paid-in capital – Sky Co…………………………………. Retained earnings – Sky Co…………………………………………... Investment in Sky Co………………………………………………… Non-controlling interest (P300,000 x 20%)………………………..

24,000 96,000 288,000 72,000

Eliminate investment against stockholders’ equity of Sky Co.

(E2) 18,000 Inventory…………………………………………………………………. Accumulated 360,000 depreciation…………………………………………. 72,000 Land………………………………………………………………………. 43,200 Goodwill…………………………………………………………………. Buildings and 372,000 equipment………………………………………….. Premium on bonds 42,000 payable……………………………………… Non-controlling interest (P30,000 x 7,200 20%)……………………….. Investment in Sky 72,000 Co……………………………………………….. Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned Subsidiary (Partial-goodwill) Eliminations Assets Cash* …………………………. Accounts receiv able……..

P

Peer Co.

Sky Co.

45,600

P 60,000

Dr.

Cr.

Consolidated P

105,600

90,000

60,000

Inv entory………………….

120,000

72,000

(2) 18,000

210,000

Land…………………………….

210,000

48,000

(2) 72,000

330,000

Buildings and equipment

960,000

720,000

Goodwill…………………… Inv estment in Sky Co………….

360,000

Total Assets

150,000

(2) 372,000

1,308,000

(2) 43,200

43,200 (1) 288,000 (2) 72,000

-

P1,785,600

P960,000

P 2,146,800

Accumulated depreciation

P 480,000

P360,000

Accounts payable……………

120,000

120,000

240,000

Bonds payable…………………

240,000

120,000

360,000

Liabilities and Stockholders’ Equity (2) 360,000

P

480,000

Premium on bonds payable

(3)

Common stock, P10 par………

42,000

600,000

Common stock, P10 par………

600,000 240,000

Paid in capital in excess of par. Retained earnings**……………

(1) 240,000

60,000

Paid in capital in excess of par.

60,000 24,000

(1) 24,000

285,600

Retained earnings…………… Non-controlling interest…………

285,600 96,000

_________

_______

Total Liabilities and Stockholders’ Equity P1,785,600 P960,000 (1) Eliminat e invest ment against st ockholders’ equit y of Sky Co. (2) Eliminat e invest ment against allocat ed excess. * P420,000 – P360,000 – P14,400 = P45,600. * * P300,000 – P14,400 = P285,600.



42,000

(1) 96,000 _________ P 853,200

(1 ) 72,000 (2) 7,200

_79,200

P 853,200

P2,146,800

Incidentally, the non-controlling interest on the date of acquisition is computed as follows: Common stock – Sky company……………………………………

P 240,000 24,000 80,000

Paid-in capital in excess of par – Sky co…………………………

Retained earnings – Sky Co..………………………………………. Book value of stockholders’ equity – Sky Co………..………….. Adjustments to reflect fair value (over/ undervaluation of assets and liabilities)…………………………………………. Fair value of stockholders’ equity of subsidiary………………… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial)…………………………………..

P 360,000 36,000 P 396,000 20 P 79,200

The balance sheet: Peer Company and Subsidiary Consolidated Balance Sheet January 1, 20x4 Assets Cash Accounts receiv ables Inv entories Land Buildings and equipment Accumulated depreciation Goodwill Total Assets Liabilities and Stockholders’ Equity Liabilities Accounts payable

P

105,600 150,000 210,000 330,000 1,308,000 ( 480,000) 43,200 P1,666,800

P 240,000

Bonds payable Premium on bonds payable Total Liabilities Stockholders’ Equity Common stock, P10 par Paid-in capital in excess of par Retained earnings Parent’s Stockholders’ Equity/Equity Attributable to the Owners of the Parent Non-controlling interest Total Stockholders’ Equity (Total Equity) Total Liabilities and Stockholders’ Equity

P 360,000 42,000

402,000 P 642,000 P 600,000 60,000 285,600 P 945,600 79,200 P 1,024,800 P1,666,800

Full-goodwill Approach Schedule of Determination and Allocation of Excess (Full -goodwill) Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (100%) Consideration transferred (P360,000 / 80%)………….. Less: Book value of stockholders’ equity of Sky: Common stock (P240,000 x 100%)…………………. Paid-in capital in excess of par (P96,000 x 100%).. Retained earnings (P24,000 x 100%)…………….... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P18,000 x 100%)…………… Increase in land (P72,000 x 100%)…………………. Decrease in buildings and equipment (P12,000 x 100%)…………………………………..... Increase in bonds payable (P42,000 x 100%)……. Positive excess: Full -goodwill (excess of cost over fair value)………………………………………………...

P 450,000

P 240,000 96,000 24,000

360,000 P 90,000

P 18,000 72,000 ( 12,000) ( 42,000)

36,000 P 54,000

The following entry on the date of acquisition in the books of Parent Company:

January 1, 20x4

(1) Investment in Sky Company……………………………………………

360,000 360,000

Cash…………………………………………………………………….. Acquisition of Sky Company.

(2) Retained earnings (acquisition-related expense - close to retained earnings since only balance sheets are being examined)……………………………………………………………

14,400

14,400

Cash……………………………………………………………………. Acquisition- related costs.

The schedule of determination and allocation of excess provides complete guidance for the worksheet eliminating entries on January 1, 20x4:

(E1) Common stock – Sky Co………………………………………………. Additional paid-in capital – Sky Co…………………………………. Retained earnings – Sky Co…………………………………………... Investment in Sky Co………………………………………………… Non-controlling interest (P300,000 x 20%)………………………..

240,000 24,000 96,000 288,000 72,000

Eliminate investment against stockholders’ equity of Sky Co.

(E2) 18,000 Inventory…………………………………………………………………. Accumulated 360,000 depreciation…………………………………………. 72,000 Land………………………………………………………………………. 54,000 Goodwill…………………………………………………………………. Buildings and 372,000 equipment………………………………………….. Premium on bonds 42,000 payable……………………………………… Non-controlling interest [(P30,000 x 20%) +

(P45,000 – P36,000)]……………………………………………. Investment in Sky Co………………………………………………..

18,000 72,000

Eliminate investment against allocated excess.

Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80% -Owned Subsidiary (Full-goodwill) Eliminations Assets

Cash*……………………… …. Accounts receivable…….. Inventory…………………. Land……………………… ……. Buildings and equipment Goodwill………………… … Investment in Sky Co…………. Total Assets

P

Peer Co.

Sky Co.

Dr.

Cr.

Consolidated

45,600

P 60,000

90,000

60,000

120,000

72,000

(2) 18,000

210,000

210,000

48,000

(2) 72,000

330,000

960,000

720,000

P

105,600 150,000

(2) 372,000

1,308,000

(2) 54,000

360,000

54,000 (1) 288,000 (2) 72,000

P1,785,600

P960,000

P 480,000

P360,000

P 2,157,600

Liabilities and Stockholders’ Equity Accumulated depreciation

Accounts payable…………… Bonds payable…………………

120,00 0 240,00 0

(2) 360,000

240,000

120,000

360,000 (2) 42,000

600,00 0

Common stock, P10 par……… Paid in capital in excess of par.

Retained earnings**……………

Non-controlling interest…………

(1) 240,000

60,000

60,000 24,000

(1) 24,000

285,60 0

Retained earnings……………

285,600 96,000

_______ __

42,000 600,000

240,000

Paid in capital in excess of par.

480,000

120,000

Premium on bonds payable Common stock, P10 par………

P

_____ __

(1) 96,000

(1 ) 72,000 _______ (2) __ 18,000

_90,000

Total Liabilities and Stockholders’ Equity P1,785,600 P960,000 (1) Eliminat e invest ment against st ockholders’ equit y of Sky Co. (2) Eliminat e invest ment against allocat ed excess. * P420,000 – P360,000 – P14,400 = P45,600. * * P300,000 – P14,400 = P285,600.



P 864,000

P 864,000

P2,157,600

Incidentally, the non-controlling interest on the date of acquisition is computed as follows:

Non-controlling interest (partial)………………………………….. Add: Non-controlling interest (P54,000, full – P43,200, partial). Non-controlling interest (full)……………………………………….

P 79,200 10,800 P 90,000

The balance sheet; Peer Company and Subsidiary Consolidated Balance Sheet January 1, 20x4 Cash Accounts receiv ables Inv entories Land Buildings and equipment Accumulated depreciation Goodwill Total Assets

Assets

Liabilities and Stockholders’ Equity Liabilities Accounts payable Bonds payable Premium on bonds payable Total Liabilities Stockholders’ Equity Common stock, P10 par Paid-in capital in excess of par Retained earnings Parent’s Stockholders’ Equity/Equity Attributable to the Owners of the Parent Non-controlling interest Total Stockholders’ Equity (Total Equity) Total Liabilities and Stockholders’ Equity

P

105,600 150,000 210,000 330,000 1,308,000 ( 480,000) 54,000 P1,677,600

P 360,000 42,000

P 240,000 402,000 P 642,000 P 600,000 60,000 285,600 P 945,600 90,000 P 1,035,600 P1,677,600

Problem XI Partial-goodwill Approach (Proportionate Basis) Schedule of Determination and Allocation of Excess (Proportionate Basis)) Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred: Common stock: 12,000 shares x P25 per share…... Less: Book value of stockholders’ equity of S:

P 300,000

Common stock (P12,000 x 80%)……………………. Paid-in capital in excess of par (P108,000 x 80%)... Retained earnings (P72,000 x 80%)……………….... Allocated excess (excess of cost over book value)…… Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… Increase in land (P36,000 x 80%)……………………. Increase in buildings and equipment (P150,000 x 80%)…………………………………...... Increase in copyrights (P60,000 x 80%)…………….. Increase in contingent liabilities – estimated liability for contingencies (P6,000 x 80%)……..... Negative excess: Bargain purchase gain to controlling interest or attributable to parent only)……………..

P

9,600 86,400 57,600

153,600 P 146,400

P

4,800 28,800

120,000 48,000

(

4,800)

196,800

(P 50,400)

The over/under valuation of assets and liabilities are summarized as follows:

Inventory………………….……………... Land………………………………………. Buildings and equipment (net)......... Copyright……………………………….. Estimated liability for contingencies.. Net undervaluation…………………….

S Co. Book value P 60,000 48,000

S Co. Fair Over/Under value Valuation P 66,000 P 6,000 84,000 36,000

222,000 372,000 -00 P

60,000 ( 6,000) P

150,000 60,000 (

6,000) P246,000

330,000 576,000 The following entry on the date of acquisition in the books of Parent Company January 1, 20x4

(1) Investment in S Company…...…………………………………… Common stock, P1 par……………………………………………… Paid-in capital in excess of par (P300,000 – P12,000 par)……..

300,000 12,000 288,000

Acquisition of S Company.

The schedule of determination and allocation of excess provides complete guidan ce for the worksheet eliminating entries on January 1, 20x4:

(E1) Common stock – S Co……………………………………………. Additional paid-in capital – S Co………………………………. Retained earnings – S Co………………………………………… Investment in S Co……………………………………………… Non-controlling interest (P192,000 x 20%)………………………..

12,000 108,000 72,000 153,600 38,400

Eliminate investment against stockholders’ equity of S Co

(E2) Inventory…………………………………………………………………..

6,000 36,000

Land……………………………………………………………………….. Buildings and 150,000 equipment……………………………………………… 60,000 Copyright……………………………………………………………….... Estimated liability for 6,000 contingencies…………………………….. Investment in S 146,400 Co……………………………………………... Non-controlling interest (P246,000 x 49,200 20%)………………………. Retained earnings (bargain purchase gain - closed to retained earnings since only balance sheets are being 50,400 examined)............................................................................. Eliminate investment against allocated excess.

Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80% -Owned Subsidiary (Proportionate Basis) Eliminations P Co.

Assets Cash…………………

S Co.

Dr.

Cr.

Consolidated

P 334,800

Accounts receiv able…….. Inv entory………………….

P

86,400

P 24,000

334,800 110,400

96,000

60,000

(2)

6,000

162,000

Land…………………………

120,000

48,000

(2) 36,000

204,000

Buildings and equipment (net).

744,000

222,000

(2) 150,000

1,116,000

Copyright……………………... Inv estment in S Co…….. Total Assets

(2) 60,000 300,000 __________ _________ P1,681,200

60,000 (1) 153,600 (2) 146,400

-

354,000

P1,987,200

96,000

42,000

P 138,000

240,000

120,000

Liabilities and Stockholders’ Equity Accounts payable……… Estimated liability for contingencies… Bonds payable……… Common stock, P1 par* …..… Common stock, P1 par……… Paid-in capital in excess of par* *

P

(2)

Retained earnings…………… Non-controlling interest…………

44,160 12,000

723,840

(1) 12,000

(1) 108,000

_________

723,840

(1) 108,000

577,200 72,000

(1) 72,000

_______

_________

Total Liabilities and Stockholders’ Equity P1,681,200 P354,000 (1) Eliminate inv estment against stockholders’ equity of Scud Co. (2) Eliminate inv estment against allocated excess. * P32,160 + (12,000 shares xP1 par) = P44,160. * * P435,840 + [12,000 shares x (P25 – P1)] = P723,840.



6,000 360,000

44,160

Paid-in capital in excess of par Retained earnings

6,000

P 444,000

(2) 50,400

627,600

(1 ) 38,400 (2) 49,200

_87,600

P 444,000

P1,987,200

Incidentally, the non-controlling interest on the date of acquisition is computed as follows: Common stock – S Co……….………………………………… Paid-in capital in excess of par – S Co……………………..

Retained earnings – S Co……………………………………… Book value of stockholders’ equity – S Co…………………. Adjustments to reflect fair value (over/ undervaluation of assets and liabilities)…………………………………………. Fair value of stockholders’ equity of subsidiary………………… Multiplied by: Non-controlling Interest

P 12,000 108,000 72,000 P 192,000 246,000 P 438,000 20

percentage…………... Non-controlling interest (partial)…………………………………..

P 87,600

The balance sheet: Assets Cash Accounts receiv ables Inv entories Land Buildings and equipment (net) Copyright Total Assets

P

334,800 110,400 162,000 204,000 1,116,000 60,000 P1,987,200

Liabilities and Stockholders’ Equity Liabilities Accounts payable Estimated liability for contingencies Bonds payable Total Liabilities Stockholders’ Equity Common stock, P1 par Paid-in capital in excess of par Retained earnings Parent’s Stockholders’ Equity/Equity Attributable to the Owners of the Parent Non-controlling interest Total Stockholders’ Equity (Total Equity) Total Liabilities and Stockholders’ Equity

P 138,000 6,000 360,000 P 504,000 P

44,160 723,840 627,600

P1,395,600 87,600 P1,483,200 P1,987,200

Full-goodwill Approach (Fair Value Basis) Schedule of Determination and Allocation of Excess (Full-goodwill or Fair Value Basis) Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (100%) Consideration transferred: Common stock: 12,000 x P25 (80%)……………… Fair value of NCI (given) (20%)………………………. Fair value of subsidiary (100%)………………………. Less: Book value of stockholders’ equity of S: Common stock (P12,000 x 100%)……………………. Paid-in capital in excess of par (P108,000 x 100%). Retained earnings (P72,000 x 100%)………………... Allocated excess (excess of cost over book value)……

P

300,000 90,000

P

390,000

P 12,000 108,000 72,000

192,000 P 198,000

Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… Increase in land (P36,000 x 100%)…………………… Increase in buildings and equipment (P150,000 x 100%)………………………………….... Increase in copyrights (P60,000 x 100%)…………… Increase in contingent liabilities – estimated liability for contingencies (P6,000 x 100%)…….. Negative excess: Bargain purchase gain to controlling interest or attributable to parent only)……………..

P

6,000 36,000

150,000 6,000

(

6,000)

246,000

(P 48,000)

The following entry on the date of acquisition in the books of Parent Company: January 1, 20x4

(1) Investment in S Company…...…………………………………… Common stock, P1 par……………………………………………… Paid-in capital in excess of par (P300,000 – P12,000 par)…….. Acquisition of S Company.

300,000 12,000 288,000

The schedule of determination and allocation of excess provides complete guidance for the worksheet eliminating entries on January 1, 20x4:

(E1) Common stock – S Co……………………………………………. Additional paid-in capital – S Co………………………………. Retained earnings – S Co………………………………………… Investment in S Co……………………………………………… Non-controlling int erest (P192,000 x 20%)……………………….. Eliminate investment against stockholders’

12,000 108,000 72,000 153,600 38,400

equity of S Co (E2) Inventory…………………………………………………………………..

6,000 36,000

Land……………………………………………………………………….. Buildings and 150,000 equipment……………………………………………… 60,000 Copyright……………………………………………………………….... Estimated liability for 6,000 contingencies…………………………….. Investment in S 146,400 Co……………………………………………... Non-controlling interest (P90,000 given – 51,600 P38,400)…………… Retained earnings (bargain purchase gain - closed to retained earnings since only balance sheets are being 48,000 examined)............................................................................. Eliminate investment against allocated excess. Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80% -Owned Subsidiary (Fair Value Basis) Eliminations P Co.

Assets Cash…………………

S Co.

Dr.

Cr.

P 334,800

Consolidated P

334,800

Accounts receiv able……..

86,400

P 24,000

Inv entory………………….

96,000

60,000

(2)

6,000

162,000

Land…………………………

120,000

48,000

(2) 36,000

204,000

Buildings and equipment (net).

744,000

222,000

(2) 150,000

1,116,000

Copyright……………………... Inv estment in S Co…….. Total Assets

300,000 __________ _________ P1,681,200

110,400

(2) 60,000

(1) 153,600 (2) 146,400

60,000 -

P354,000

P1,987,200

42,000

P 138,000

Liabilities and Stockholders’ Equity Accounts payable……… Estimated liability for contingencies… Bonds payable……… Common stock, P1 par* …..…

P

96,000

(2) 240,000

Paid-in capital in excess of par

6,000 360,000

44,160

Common stock, P1 par……… Paid-in capital in excess of par* *

120,000

6,000

44,160 12,000

(2) 12,000

723,840

723,840 (2) 108,000

(1) 108,000

Retained earnings Retained earnings…………… Non-controlling interest…………

577,200

_________

72,000

(1) 72,000

_______

_________

Total Liabilities and Stockholders’ Equity P1,681,200 P354,000 (1) Eliminat e invest ment against st ockholders’ equit y of Scud Co. (2) Eliminat e invest ment against allocat ed excess. * P32,160 + (12,000 shares xP1 par) = P44,160. * * P435,840 + [12,000 shares x (P25 – P1)] = P723,840.

P 444,000

(2) 48,000

625,200

(1 ) 38,400 (2) 51,600

_90,000

P 444,000

P1,987,200

The balance sheet: Assets Cash Accounts receiv ables Inv entories Land Buildings and equipment (net) Copyright Total Assets Liabilities and Stockholders’ Equity Liabilities Accounts payable Estimated liability for contingencies Bonds payable Total Liabilities Stockholders’ Equity Common stock, P1 par Paid-in capital in excess of par Retained earnings Parent’s Stockholders’ Equity/Equity Attributable to the Owners of the Parent Non-controlling interest Total Stockholders’ Equity (Total Equity) Total Liabilities and Stockholders’ Equity

Problem XII 1. Inventory 2. Land 3. Buildings and Equipment 4. Goodwill

5.

P

334,800 110,400 162,000 204,000 1,116,000 60,000 P1,987,200

P 138,000 6,000 360,000 P 504,000 P

44,160 723,840 652,200

P1,393,200 90,000 P1,483,200 P1,987,200

P 140,000 P 60,000 P 550,000

Fair value of consideration given P 576,000 Less; Book value of SHE 450,000 Allocated excess: P126,000 Increase / decrease in fair value (Fair value increment) for: Inventory P 20,000 Land (10,000) Buildings and equipment 70,000 80,000 Goodwill P 46,000 Investment in AA Corporation: Nothing would be reported; the balance in the investment account is eliminated.

Problem XIII

1. Inventories (P110,000 + P180,000 – P10,000) = P280,000 2. Buildings and equipment, net (P350,000 + P350,000 + P25,000 = P725,000 3. Investment in DD stock will be fully eliminated and will not appear in the consolidated balance sheet

Fair value of Subsidiary: Consideration transferred Less: BV of SHE of DD (P100,000 + P200,000 – P40,000) Allocated excess Less: Over/under valuation of A and L: Inc (Decrease) Inventory Buildings and equipment (net)

P280,000 260,000 P 20,000 (P 10,000) 25,000

Add: Existing goodwill (to be eliminated Goodwill to be reported

15,000 P 5,000 30,000 P 35,000

or, (Approach used in business combination – statutory merger/consolidation) Fair value of consideration given P280,000 Fair value of Decibel's net assets: Cash and receivables P 40,000 Inventory 170,000 Buildings and equipment (net) 375,000 Accounts payable (90,000) Notes payable (250,000) Fair value of net identifiable assets (245,000) Goodwill to be reported P 35,000 Not e: Goodwill on books of DD is not an identifiable asset and t herefore is not included in t he comput at ion of Decibel's net ident ifiable asset s at t he dat e of acquisit ion.

5. Common stock, P400,000 (parent only, SHE of subsidiary is eliminated) 6. Retained earnings, P`05,000 (parent only, SHE of subsidiary is eliminated) Problem XIV 1. Inventory (P120,000 + P20,000) 2. Land (P70,000 – P10,000) 3. Buildings and Equipment (P480,000 + P70,000) 4. Full-Goodwill, P57,500 Fair value of Subsidiary: Consideration transferred Add: FV of NCI Less: BV of SHE of Slim (P250,000 + P200,000) Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory Land Buildings and equipment (net) Goodwill – full

P140,000 P 60,000 550,000

P470,000 117,500

P 20,000 (10,000) 70,000

P587,500 450,000 P137,500

80,000 P 57,500

or, Fair value of consideration given by Ford Fair value of noncontrolling interest Total fair value Book value of Slim’s net assets Fair value increment for: Inventory Land Buildings and equipment (net) Fair value of identifiable net assets Goodwill - full Partial Goodwill, P46,000 Fair value of Subsidiary: Consideration transferred Less: BV of SHE of Slim (P250,000 + P200,000) x 80% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P20,000 x 80%) Land (P10,000 x 80%) Buildings and equipment (net) (P70,000 x 80%) Goodwill – partial 5.

6.

Investment in Slim Corporation: None would be reported; the balance in the investment account is eliminated. Noncontrolling Interest (P587,500 x .20)

P470,000 117,500 P587,500 P450,000 20,000 (10,000) 70,000 (530,000) P 57,500

P470,000 360,000 P110,000 P 16,000 ( 8,000) 56,000

64,000 P 46,000

P117,500

or, BV – SHE of SS P450,000 Adjustments to reflect fair value (P20,000 – P10,000 +P 70,000) 80,000 FV of SHE of SS P530,000 Multiplied by: NCI % 20% NCI – partial goodwill P106,000 Add: NCI on full-goodwill (P57,500 – P46,000) 11,500 NCI – full goodwill P117,500

Problem XV (Overview of the steps in applying the acquisition method when shares have been issued to create a combination No. 8 includes a bargain purchase.) 1. The fair value of the consideration includes Fair value of stock issued P1,500,000 Contingent performance obligation 30,000 Fair value of consideration transferred P1,530,000 2. Under the acquisition method, stock issue costs reduce additional paid -in capital. 3. The acquisition method records direct costs such as fees paid to investment banks for arranging the combination as expenses. 4. The par value of the 20,000 shares issued is recorded as an increase of P20,000 in the Common Stock account. The P74 fair value in excess of par value (P75 – P1) is an increase to additional paid-in capital of P1,480,000 (P74 × 20,000 shares). 5. Fair value of consideration transferred (above) P1,530,000 Receivables P 80,000

6.

7. 8.

Patented technology 700,000 Customer relationships 500,000 IPR&D 300,000 Liabilities (400,000) 1,180,000 Goodwill P 350,000 Revenues and expenses of the subsidiary from the period prior to the combination are omitted from the consolidated totals. Only the operational figures for the subsidiary after the purchase are applicable to the business combination. The previous owners earned any previous profits. The subsidiary’s Common Stock and Additional Paid-in Capital accounts have no impact on the consolidated totals. The fair value of the consideration transferred is now P1,030,000. This amount indicates a bargain purchase: Fair value of consideration transferred (above) P1,030,000 Receivables P 80,000 Patented technology 700,000 Customer relationships 500,000 IPR&D 300,000 Liabilities (400,000) 1,180,000 Gain on bargain purchase P 150,000

Problem XVI In acquisitions, the fair values of the subsidiary's assets and liabilities are consolidated (there are a limited number of exceptions). Goodwill is reported as P80,000, the amount that the P760,000 consideration transferred exceeds the P680,000 fair value of SS’s net assets acquired. 1. 2. 3. 4. 5. 6.

Inventory = P670,000 (P's book value plus Sun's fair value) Land = P710,000 (P's book value plus Sun's fair value) Buildings and equipment = P930,000 (P's book value plus S's fair value) Franchise agreements = P440,000 P's book value plus S's fair value) Goodwill = P80,000 (calculated above) Revenues = P960,000 (only parent company operational figures are reported at date of acquisition) 7. Additional Paid-in Capital = P65,000 (P's book value less stock issue costs) 8. Expenses = P940,000 (only parent company operational figures plus acquisition-related costs are reported at date of acquisition) 9. Retained Earnings, 1/1 = P390,000 (P's book value)

Problem XVII 1. A total of P210,000 (P120,000 + P90,000) should be reported. 2. As shown in the investment account balance, Beryl paid P110,000 for the ownership of SS. The amount paid was P30,000 greater than the book value of the net assets of SS and is reported as goodwill in the consolidated balance sheet at January 1, 20X5. 3. In determining the amount to be reported for land in the consolidated balance sheet, P15,000 (P70,000 + P50,000 - P105,000) was eliminated. BB apparently sold the land to SS for P25,000 (P10,000 + P15,000). 4. Accounts payable of P120,000 (P75,000 + P55,000 - P10,000) will be reported in the consolidated balance sheet. A total of P10,000 was deducted in determining the balance reported for accounts receivable (P90,000 + P50,000 - P130,000). The elimination of an intercompany receivable must be offset by the elimination of an intercompany payable. 5. The par value of B's stock outstanding is P100,000.

Problem XVIII 1. P470,000 = P470,000 - P55,000 + P55,000 2. P605,000 = (P470,000 - P55,000) + P190,000 3. P405,000 = P270,000 + P135,000 4. P200,000 (as reported by GG Corporation) Problem XIX 1. The investment balance reported by Roof will be P192,000. 2. Total assets will increase by P310,000. 3. Total liabilities will increase by P95,000. 4. The amount of goodwill for the entity as a whole will be P25,000 [(P192,000 + P48,000) - (P310,000 - P95,000)]. 5. Non-controlling interest will be reported at P48,000 (P240,000 x .20). Problem XX 1. P57,000 = (P120,000 - P25,000) x .60 2. P81,000 = (P120,000 - P25,000) + P40,000 - P54,000 3. P48,800 = (P120,000 - P25,000) + P27,000 - P73,200 Problem XXI 1. Investment in Craig Company.................................................... Cash .......................................................................................

950,000 950,000

2. Fair value of Subsidiary: Consideration transferred Less: BV of SHE of Craig (P300,000 + P420,000) Allocated excess Less: Over/under valuation of A and L: Inc (Decrease) Land (P250,000 fair – P200,000 book value Building (P700,000 fair – P600,000 book value) Discount on bonds payable P280,000 fair – P300,000 book value) Deferred tax liability (P40,000 fair – P50,000 book value) Buildings and equipment (net) Goodwill 3. Adjustments on Craig books: Land ............................................................................................ Building........................................................................................ Discount on Bonds Payable ........................................................ Goodwill ...................................................................................... Deferred Tax Liability ................................................................... Retained Earnings ....................................................................... Paid-In Capital in Excess of Par .............................................. Elimination entries: Common Stock ........................................................................... Paid-In Capital in Excess of Par ................................................... Investment in Craig Company ............................................... Problem XXII

P950,000 720,000 P 230,000 P 50,000 100,000 20,000 10,000 180,000 P 50,000

50,000 100,000 20,000 50,000 10,000 420,000 650,000

4.

300,000 650,000 950,000

Full-Goodwill Fair value of Subsidiary: Consideration transferred (200 shares x P25) Less: BV of SHE of Public (P200 + P800 + P1,000) Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Fixed assets (P3,000 fair – P2,000 book value) Goodwill – full

P 5,000 _2,000 P 3,000 _1,000 P2,000

or, Fair value of Subsidiary: Consideration transferred (200 shares x P25) Less: FV of SHE of Public (P1,0000 + P3,000 – P1,000) Goodwill – full

P 5,000 _3,000 P2,000

Note: The currently issued shares of Public Company and its fair value were used for the following reasons (refer to Illustration 15-15 for comparison):  Total number of shares for Public Company after acquisition – not given  The fair value of share of Private Company – not given.

Fair v alue of net assets…………….

Fair value of common stock per share Currently issued Additional shares issued

Public Company P3,000 P25 Public 200 60%** 300 40% 500

Private Company ?

Private ? /60% 100 /40% ?

15,000 shares / 25,000 shares = 60%

   

Values are prior to acquisition (200 shares × P25 market value). Subsequent to acquisition, Private Company is the “parent” with 60% ownership; prior to acquisition, Private Company has 0% ownership of Public Co mpany. Prior to acquisition, this represents 100% ownership of Public Company; subsequent to acquisition, these holders of 100 shares of Public Company become the 40% NCI. Incidentally, the partial goodwill amounted to P1,200 (P2,000 x 60%); FV of NCI on full -goodwill amounted to P800 (P2,000 – P1,200 or P2,000 x 40%). This approach to determine partial goodwill is acceptable as long as there is FV of NCI in the acquirer.

Problem XXIII (Assume the use of Full-Goodwill Method) Note: This solution assumes a difference between the basis of acquired assets for accounting and ta x purposes for this stock acquisition. 1. Investment in Seel y Company Common Stock*** Additional Paid-in-Capital

570,000 95,000 475,000

***Note: Depending on the wording of this exercise, the credit may be cash instead of common stock and additional paid-in-capital. If cash is paid, the credit to cash is P570,000. 2. Common Stock - Seely Other Contributed Capital – Seel y Retained Earnings - Seely Inventory Land Plant Assets Discount on Bonds Payable Goodwill** Deferred Income Tax Liability*

80,000 132,000 160,000 52,000 25,000 71,000 20,000 127,200

Investment in Seely Company Non-controlling Interest [(P570,000/.95) x .05] *(.40 x (P52,000 + P25,000 + P71,000 + P20,000))

67,200 570,000 30,000

Problem XXIV  HB Country and HCO Media Consolidation of a variable interest entity is required if a parent has a variable interest that will  Absorb a majority of the entity's expected losses if they occur  Receive a majority of the entity's expected residual returns if they occur Because (1) HCO Media’s losses are limited by contract, and (2) Hillsborough has the right to receive the residual benefits of the sales generated on the HCO Media internet site above P500,000, Hillsborough should consolidat e HCO Media. 

TPC (Nos. 1, 2 and 3 of the requirement are part of the information) a. The purpose of consolidated financial statements is to present the financial position and results of operations of a group of businesses as if they were a single entit y. They are designed to provide information useful for making business and economic decisions — especially assessing amounts, timing, and uncertainty of prospective cash flows. Consolidated statements also provide more complete information about the resources, obligations, risks, and opportunities of an enterprise than separate statements. b. An entity qualifies as a VIE and is subject to consolidation if either of the following conditions exist.  The total equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties. In most cases, if equity at risk is less than 10% of total assets, the risk is deemed insufficient.  The equity investors in the VIE lack any one of the following three characteristics of a controlling financial interest. 1. The direct or indirect ability to make decisions about an entity's activities through voting rights or similar rights. 2. The obligation to absorb the expected losses of the entity if they occur (e.g., another firm may guarantee a return to the equity investors) 3. The right to receive the expected residual returns of the entity (e.g., the investors' return may be capped by the entity's governing documents or other arrangement s with variable interest holders).



Consolidation is required if a parent has a variable interest that will Absorb a majority of the entity's expected losses if they occur

 Receive a majority of the entity's expected residual returns i f they occur Also, a direct or indirect ability to make decisions that significantly affect the results of the activities of a variable interest entity is a strong indication that an enterprise has one or both of the characteristics that would require consolidation of the variable interest entity. c. Risks of the construction project that has TPC has effectively shifted to the owners of the VIE  At the end of the 1st five-year lease term, if the parent opts to sell the facility, and the proceeds are insufficient to repay the VIE investors, TPC may be required to pay up to 85% of the project's cost. Thus, a potential 15% risk.  During construction 11.1% of project cost potential termination loss. Risks that remain with TPC  Guarantees of return to VIE investors at market rate, if facility does not perform as expected TPC is still obligated to pay market rates.  If lease is not renewed, TPC must either purchase the facility or sell it on behalf of the VIE with a guarantee of Investors' (debt and equity) balances representing a risk of decline in market value of asset  Debt guarantees d. TPC possesses the following characteristics of a primary beneficiary Direct decision -making ability (end of five-year lease term)  Absorb a majority of the entity's expected losses if they occur (via debt guarantees and guaranteed lease payments and residual value)  Receive a majority of the entity's expected residual returns if they occur (via use of the facility and potential increase in its market value). Problem XXV 1. Implied valuation and excess allocation for S. Noncontrolling interest fair value Consideration transferred by P. Total business fair value Fair value of VIE net assets Excess net asset value fair value

P 60,000 20,000 80,000 100,000 P20,000

The P20,000 excess net asset fair value is recognized by PanTech as a bargain purchase. All SoftPlus’ assets and liabilities are recognized at their individual fair values. Cash Marketing software Computer equipment Long-term debt Noncontrolling interest Pantech equity interest Gain on bargain purchase

2.

Implied valuation and excess valuation for Softplus. Noncontrolling interest fair value Consideration transferred by Pantech Total business fair value Fair value of VIE net identifiable assets Goodwill

P20,000 160,000 40,000 (120,000) (60,000) (20,000) (20,000) -0-

60,000 20,000 80,000 60,000 P20,000

When the business fair value of a VIE (that is a business) is greater than assessed asset values, all identifiable assets and liabilities are reported at fair values (unless a previously held interest) and the difference is treated as a goodwill. Cash P20,000 Marketing software 120,000 Computer equipment 40,000 Goodwill (excess business fair value) 20,000 Long-term debt (120,000) Noncontrolling interest (60,000) Pantech equity interest (20,000) -0Multiple Choice Problem 1. c 2. c [P300,000 – (P35,000 + P60,000 + 125,000 + P250,000 – P65,000 – P150,000)] 3. d Consideration transferred P300,000 Less: Book value of SHE of S (P100,000 + P115,000) 215,000 Allocated excess (excess of fair value or cost over book value) - sometimes termed as “Differential” P 85,000 4. a – Investment in subsidiary in the consolidated statements is eliminated in its entirety. 5. d Consideration transferred P150,000 Less: Book value of SHE of S (P40,000 + P52,000) 92,000 Allocated excess (excess of fair value or cost over book value) - sometimes termed as “Differential” P 58,000 6. b – [P150,000 – (P173,000 – P40,000 – P5,000)] 7. d – [P132,000 + (P38,000 + {P60,000 – P38,000}] or P132,000 + P60,000 8. b Total Assets of P. P1,278,000 Less: Investment in Silk Corp. (440,000) P 838,000 Book value of assets of S Corp. 542,000 Book value reported by P and S P1,380,000 Increase in inventory (P60,000 – P38,000) 22,000 Increase in land (P60,000 – P32,000) 28,000 Increase in plant assets [P350,000 – (P300,000 – P60,000)] 110,000 Goodwill (full)* 26,667 Total assets reported P1,566,667 *(P440,000/75%) – (P702,000 – P142,000) = P26,667 If partial-goodwill: Total Assets of P. Less: Investment in S Corp. Book value of assets of S Corp. Book value reported by P and S Increase in inventory (P60,000 – P38,000) Increase in land (P60,000 – P32,000) Increase in plant assets [P350,000 – (P300,000 – P60,000)] Goodwill (partial)* Total assets reported *[P440,000 – (P702,000 – P142,000) x 75%]

P1,278,000 (440,000) P 838,000 542,000 P1,380,000 22,000 28,000 110,000 20,000 P1,540,000

9. 10.

d P215,000 = P130,000 + P70,000 + (P85,000 - P70,000) a Partial Goodwill Fair value of Subsidiary: Consideration transferred Less: BV of SHE of SSD (P50,000 + P90,000) x 70% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P15,000 x 70%) P 10,500 Land (P20,000 x 70%) 14,000 Goodwill – partial

11.

P150,500 __98,000 P 52,500

24,500 P 28,000

c Full-goodwill: Fair value of Subsidiary: Consideration transferred Add: FV of NCI Less: BV of SHE of SS (P50,000 + P90,000) x 100% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P70,000 – P85,000) x 100% Land (P25,000 – P45,000) x 100% Goodwill – full

P150,500 **64,500

P 15,000 20,000

P215,000 140,000 P 75,000

35,000 P 40,000

**given amount, but it should not be lower than the fair value of SHE – subsidiary amounting to P52,500 computed as follows : FV of SHE of SS: Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000 Adjustments to reflect fair value (P15,000 + P20,000)… 35,000 FV of SHE of SS P 175,000 Multiplied by: NCI%.......................................................... 30% FV of NCI (partial)……………………………………………..P 52,500 12. b Total Assets of Power Corp. Less: Investment in Silk Corp. Book value of assets of Silk Corp. Book value reported by Power and Silk Increase in inventory (P85,000 - P70,000) Increase in land (P45,000 - P25,000) Goodwill (full) Total assets reported If partial-goodwill: Total Assets of Power Corp. Less: Investment in Silk Corp. Book value of assets of Silk Corp.

P 791,500 (150,500) P 641,000 405,000 P1,046,000 15,000 20,000 40,000 P1,121,000

P 791,500 (150,500) P 641,000 405,000

Book value reported by Power and Silk Increase in inventory (P85,000 - P70,000) Increase in land (P45,000 - P25,000) Goodwill (partial) Total assets reported 13.

d

14.

a

P701,500

=

P1,046,000 15,000 20,000 28,000 P1,109,000

(P61,500 + P95,000 + P280,000) + (P28,000 + P37,000 + P200,000)

Non-controlling interest (partial-goodwill): P52,500 NCI

FV of SHE of SSD: Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000 Adjustments to reflect fair value (P15,000 + P20,000)… 35,000 FV of SHE of SSD P 175,000 Multiplied by: NCI%.......................................................... 30% FV of NCI (partial)……………………………………………..P 52,500 15.

d Non-controlling interest (partial-goodwill): P64,500 NCI

FV of SHE of SSD: Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000 Adjustments to reflect fair value (P15,000 + P20,000)… 35,000 FV of SHE of SSD P 175,000 Multiplied by: NCI%.......................................................... 30% FV of NCI (partial)……………………………………………..P 52,500 Add: NCI on full-goodwill (P40,000 – P12,000)…………... 12,000 FV of NCI (full)…………………………………………………..P 64,500 16.

d

P205,000

=

The amount reported by Power Corporation

17.

c P419,500 = (P150,000 + P205,000) + P64,500 If partial-goodwill: Stockholders’ equity: P419,500 Consolidated SHE: Common stock Retained Earnings Parent’s SHE or Equity Attributable to Parent NCI (partial-goodwill) Consolidated SHE

P150,000 205,000 P355,000 52,500 P404,500

18. b Consideration transferred .............................................................................. Less: Strand's book value (P50,000 x 80%)....................................................... Fair value in excess of book value .................................................................

P60,000 (40,000) P20,000

Excess assigned to inventory (60% ) .................................................... P12,000 Excess assigned to goodwill (40%) ................................... P 8,000 19. c Consideration transferred (P60,000 ÷ 80%) ..................................................... Less: Strand's book value ............................................................................... Fair value in excess of book value ................................................................. Excess assigned to inventory (60%) .................................................... P15,000 Excess assigned to goodwill (40%) ................................... P10,000

P75,000 (50,000) P25,000

20. a Park current assets ........................................................................................... Strand current assets ....................................................................................... Excess inventory fair value............................................................................... Consolidated current assets ............................................................................

P 70,000 20,000 15,000 P105,000

Park noncurrent assets.................................................................................... Strand noncurrent assets ................................................................................ Excess fair value to goodwill (partial) ............................................................. Consolidated noncurrent assets .....................................................................

P 90,000 40,000 ___8,000 P140,000

Park noncurrent assets..................................................................................... Strand noncurrent assets ................................................................................. Excess fair value to goodwill (full).................................................................... Consolidated noncurrent assets ......................................................................

P 90,000 40,000 __10,000 P140,000

21. c

22. d

23. b Add the two book values and include 10% (the P6,000 current portion) of the loan taken out by Park to acquire Strand. 24. b

Add the two book values and include 90% (the P54,000 noncurrent portion) of the loan taken out by Polk to acquire Strand.

25. b Park stockholders' equity ................................................................................ NCI (partial): BV of SHE – S … …………………………………………………………..P50,000 Adjustments to reflect fair value (inventory)… … …………………. 15,000 FV of SHE – S… ……………………………………………………………P65,000 x: Multiplied by: NCI%........................................................................ 20% Total stockholders' equity ..............................................................................

P80,000

13,000 P93,000

26. c Park stockholders' equity ................................................................ …………. P80,000 NCI (full): BV of SHE – S … …………………………………………………………..P50,000 Adjustments to reflect fair value (inventory)… … …………………. 15,000 FV of SHE – S… ……………………………………………………………P65,000 x: Multiplied by: NCI%......................................................................... 20%

NCI (partial)… ……………………………………………………………P13,000 Add: NCI on full-goodwill (P10,,000 – P8,000)… … ………………… 2,000 Non-controlling interest at fair value (20% × P75,000)………… 15,000 Total stockholders' equity P95,000 27. 28. 29. 30.

b a – P150,000 + P500,000 a – at fair value d (1) NCI measured at its share of net assets (Partial Goodwill) Fair value of Subsidiary: Consideration transferred… … …………………………………………………P 100 million Less: Fair value of identifiable assets and liabilities of Loco (80% x P85 million)…………………………………………………….. 68 million Goodwill (partial)..…………………………………………………………………..P 32 million (2) NCI is measured at its fair value (Full Goodwill) Fair value of Subsidiary: Consideration transferred… … …………………………………………………P 100 million Fair value of NCI [(P100 million – P24 million = P76 million / 80% = P95 million] x 20%.................................................................................... 19 million Fair value of Subsidiary… … ………………………………………………………...P 119 million Less: Fair value of identifiable assets and liabilities of Oak… …………………. 85 million Goodwill (full)… ………………………………………………………………………...P 34 million Under PFRS3 par. 32, goodwill is measured at the consideration transferred plus the non-controlling interest (however measured) less net assets acquired. The noncontrolling interest may be measured at its share of net assets or its fair value, per PFRS3 par. 19. Note: Fair value is assumed to be the same with the carrying/book value.

31.

d Fair value of Subsidiary - Swan Consideration transferred… … ……………………………………………P 1,420,000 Less: Fair value of identifiable assets and liabilities of Swan (70% x P1.2 million)… ………………………………………………………. 840,000 Goodwill (partial)..………………………………………………………………..P 580,000 Goodwill is carried as an asset in the consolidated statement of financial position. Fair value of Subsidiary - Homer Consideration transferred… … … …………………………………………P 300,000 Less: Fair value of identifiable assets and liabilities of Homer (65% x P640,000)… … … ……………………………………………………... 416,000 Gain on bargain purchase… … ……………………………………………… …P ( 116,000) Gain on a bargain purchase is recognized in profit or loss not on the statement of financial position. Notes: 1. Moon measures non-controlling interests at the relevant share of the identifiable net assets at the acquisition date; therefore partial goodwill is in effect. 2. Fair value is assumed to be the same with the carrying/book value.

32.

a – See PFRS 3 par. 32. Fair value of Subsidiary: Consideration transferred… … …………………………………………………………P1,960,000 Less: Fair value of identifiable assets and liabilities of Oak (P700,000 x 70%)… … … ……………………………………………………………. 490,000 Goodwill (partial)………………………………………………………………………….. P1,470,000 Or, alternatively: Fair value of Subsidiary: Consideration transferred… … …………………………………………………………P1,960,000 Less: Book value of SHE of Oak (P100,000 + P300,000 + P1,400,000) x 70%.......... 1,260.000 Allocated excess… … … …………………………………………………………………..P 700,000 Less: Over/under valuation of assets and liabilities (P1,800,000 – P700,000) x 70%...................................................................... 770,000 Goodwill (partial)…………………………………………………………………………..P1,470,000 Note: Since the company elected to measure NCI at its share of the identifiable net assets instead of fair value, therefore the partial goodwill approach should be used.

33.

d - P592,000 = P300,000 + P270,000 + P22,000

34.

a – P26,667 Partial Goodwill Fair value of Subsidiary: Consideration transferred Less: BV of SHE of S (P400,000 x 75%) Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Current assets (P22,000 x 75%) Land, buildings and equipment (P138,000 x 75%) Goodwill – partial Full-goodwill: Fair value of Subsidiary: Consideration transferred (P440,000 / 75%) Less: BV of SHE of S (P400,000 x 100%) Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Current assets (P22,000 x 100%) Land, buildings and equipment (P138,000 x 100%) Goodwill – full

P440,000 __300,000 P140,000 P 16,500 103,500

120,000 P 20,000

P586,667 __400,000 P186,667 P 22,000 138,000

160,000 P 26,667

35. b Consolidated Total Assets: Current assets (No. 32) Land, buildings and equipment [P538,000 + P272,000 + P138,000 + P26,667, full-goodwill]

P

592,000

974,667 P 1,566,667

36 c FV of SHE of SS: Book value of SHE of S… …………………………………….P 400,000 Adjustments to reflect fair value … ………………………. 160,000 FV of SHE of S… … ……………………………………………..P 560,000

Multiplied by: NCI%.............................................................. 25% FV of NCI (partial)… …………………………………………..P 140,000 Add: NCI on full-goo dwill (P26,667 – P20,000)… … … ….... 6,667 FV of NCI (full-goodwill)… …………………………………...P 146,667 37. d Consolidated Total Liabilities: Liabilities: P Co. (P300,000 + P538,000 + P440,000 – P348,333)..P 929,667 S Co… …………………………………………………….. 142,000 P1,071,667 38. d Consolidated Stockholders’ Equity Parent’s stockholders’ equity… … …………………………………P 348,333 Add: NCI (full-goodwill) (No. 36)… … …………………………….. 146,667 P 495,000 39. b FV, stocks issued… … …………………………………………… Less: Par value of stocks issued (500,000 shares x P5)… … .. APIC Add: APIC of P Less: Stock issuance cost 40. 41. 42. 43. 44. 45. 46.

47.

48. 49. 50. 51. 52. 53.

P 4,200,000 __2,500,000 P 1,700,000 7,500,000 ___100,000 P 9,100,000

c a No answer available a ( P10 x 100,000 = P1,000,000 – P1,400,000) = P400,000 a c a [P15 x 100,000 = P1,500,000 – (P1,900,000 – P100,000 – 600,000 )+ P100,000 increase + P100,000 in increase in PPE] = P100,000 b P1,500,000 – (1,700,000 – 50,000 decrease in inventories) + (P100,000 increase in PPE – P300,000 – P500,000) = P550,000 a d (P1,000,000 + P250,000) = P1,250,000 P only. d [P99,000 + (P45,000 – P26,000)] or (P99,000 + P45,000) = P144,000 b [(P330,000/75%) – (P565,000 – P105,000)] = (P20,000) – full-goodwill approach a P only d Total Assets of P P 960,000 Less: Investment in S (330,000) P 630,000 Book value of assets of S 405,000 Book value reported by P and S P1,035,000 Increase in inventory (P45,000 – P26,000) 19,000 Increase in land (P45,000 - P24,000) 21,000 Increase in plant assets [P300,000 – (P225,000 – P45,000)] 120,000 Goodwill (full) _____0 Total assets reported P1,195,000 If partial-goodwill – same answer with full-goodwill approach, since there is no gain.

54. b – step-acquisition 60% FV, stocks issued: 60,000 shares x P6, fair value 30% FV of previously held equity interest: 30,000 shares x P5, fair value 10% FV of NCI (100,000 – 60,000 – 30,000) x P, fair value 100% Fair value of subsidiary Less: Fair value of net assets (SHE) of subsidiary 55. 56. 57. 58.

P360,000 150,000 40,000 P560,000 500,000 P 60,000

b a a [(P700,000 + P980,000) + (34,000 shares x P35)] = P2,780,000 d Book value of Assets (P80,000 + P50,000 + P200,000) Fair value of Assets (P85,000 + P60,000 + P250,000)

P330,000 395,000 P 65,000 59. a – zero, since the revaluation of P65,000 is already recorded in the books of subsidiary (not in the worksheet or eliminating entries. 60. b – (P250,000 – P200,000)/10 years = P5,000 depreciation to reduce net income of Sirius. 61. d – Since, CC Corp. is not a subsidiary, no elimination of intercompany accounts will be made. Therefore, the P200,000 remains to be a receivable. On the other hand, WW Corp. is a consolidated subsidiary, so the P300,000 intercompany account will be eliminated. 62. d 63. a 64. c – In the combined financial statements (which normally used to described financial statements in a “common control” situation), intercompany accounts are eliminated in full. 65. d – In consolidating the subsidiary's figures, all intercompany balances must be eliminated in their entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it. 66. d The acquisition method consolidates assets at fair value at acquisition date regardless of the parent’s percentage ownership. 67. d – refer to62 In consolidating the subsidiary's figures, all intercompany bal ances must be eliminated in their entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it. 68. d – refer to No. 61 69. c An asset acquired in a business combination is initially valued at 100% acquisition-date fair value and subsequently amortized its useful life. Patent fair value at January 1, 2009 ............................................................... Amortization for 2 years (10 year life) ............................................................. Patent reported amount December 31, 2010 ................................................

P45,000 (9,000) P36,000

70. a PP - building ..................................................................................................... TT building acquisition-date fair value P300,000 Amortization for 3 years (10-year life) (90,000) Consolidated buildings .................................................................................... -ORPP - building ...................................................................................................... TT building 12/31/x4 P182,000 Excess acquisition-date fair value allocation 40,000 Excess amortization for (P40,000/ 10 x 3 years) (12,000)

P510,000 210,000 P720,000 510,000

210,000

Consolidated buildings ....................................................................................

P720,000

71. No answer available – P60,000 AA, Inc. Fair value at January 1, 20x7: 30% previously owned fair value (30,000 shares × P5) ................................... 60% new shares acquired (60,000 shares × P6) .............................................. 10% NCI fair value (10,000 shares × P5) .......................................................... Acquisition-date fair value ............................................................................. Net assets' fair value ....................................................................................... Goodwill ......................................................................................................

P150,000 360,000 50,000 P560,000 500,000 P60,000

72. d Cost of Investment (40 shares* x P40)………………………………………………………P 1,600 Less: Book value of SHE – Pedro Ltd (P300 + P800) x 100%......................... 1,100 Allocated excess………………………………………………………………………………………P 500 Less: Over/Under valuation of Assets and Liabilities: Increase in Non-current assets: [(P1,500 – P1,300) x 100% x 70%........ 140 Goodwill…………………………………………………………………………………………………. P 360 (d)

*

100% Pedro Ltd Santi Ltd Currently issued…………………… 150 60% ** 60 60% Additional shares issued……….. 100 40% 40 / 40% Total shares………………………… 250 100 **150/250

Pedro ltd issues 2 ½ shares in exchange for each ordinary share of Santi Ltd. All of Santi Ltd’s shareholders exchange their shares for Pedro Ltd. Pedro Ltd therefore issues 150 shares (60 x 2 ½) for the 60 shares in Santi Ltd. Pedro Ltd is now the legal parent of the subsidiary Santi Ltd. However, analyzing the shareholding in Pedro Ltd shows that it consists of the 100 shares existing prior to the merger and 150 new shares held bye former shareholders in Santi Ltd. In essence, the former shareholders of Santi Ltd now control both entities Pedro Ltd and Santi Ltd. The former Santi Ltd shareholders have a 60% interest in Pedro Ltd [150/(100+150]. The IASB argues that there has been a reverse acquisition, and that Santi Ltd is effectively the a cquirer of Pedro Ltd. Reverse acquisition occurs when the legal subsidiary has this form of control over the legal parent. The usual circumstance creating a reverse acquisition is where an entity (the legal parent) obtains ownership of the equity of another entity (the legal subsidiary) but, as part of the exchange transaction, it issues enough voting equity as consideration for control of the combined entity to pass to the owners of the legal subsidiary. The key accounting effect of deciding that Santi Ltd is the acquirer is that the assets and liabilities of Pedro ltd are to be valued at fair value. This is contrary to normal acquisition accounting, based on Pedro Ltd being the legal parent of Santi Ltd, which would require the assets and liabilities of Santi Ltd to be valued at fair value. 73. c P60,000 allocation to equipment is "pushed-down" to subsidiary and increases balance from P330,000 to P390,000. Consolidated balance is P420,000 plus P390,000.

Theories 1. 2. 3. 4.

c a e e

6. 7. 8. 9.

b b A D

11. 12. 13. 14.

c c d d

16. 17. 18. 19.

d c b c

21. 22. 23. 24.

b a a b

26. 27. 28. 29.

d c c d

31 32. 33. 34.

c d b d

36. 37. 38. 39.

d d c b

5. 41. 42. 43. 44. 45.

b c c c c c

10, 46. 47. 48. 49. 50,

a b a c d b

15, 51. 52. 53. 54. 55,

b c b a a c

20. 56. 57. 58. 59. 60.

c

25.

c

30.

b

35.

d

40.

c

d

Chapter 16 Problem I 1. (Full or partial-goodwill) – the same answer. Consideration transferred by MM ........................ Noncontrolling interest fair value.......................... Fair value of Subsidiary…… …………………… Less: Book value of SHE – S… ..… …………………. Positive excess ..................................................... Excess fair value assigned to buildings Goodwill - full Total ................................................................

P664,000 166,000* P830,000 (600,000) 230,000

Annual Excess Life Amortizations 80,000 20 years P4,000 P150,000 indefinite -0P4,000

2.

P150,000 – full goodwill (see No. 1 above) P120,000 – partial-goodwill: Consideration transferred by MM ........................ P664,000 Less: Book value of SHE – S (P600,000 x 80%)… … .. 480,000 Allocated excess… … … …………………………….. P184,000 Less: Over/under valuation of A and L: P80,000 x 80%................................................. 64,000 Goodwill - partial .................................................. P120,000

3.

Full-goodwill Common Stock - TT .......................................................... Additional Paid-in Capital - TT ......................................... Retained Earnings - TT ....................................................... Investment in TT Company (80%) ............................... Non-controlling interest (20%) .................................... Buildings ........................................................................... Goodwill .......................................................................... Investment in TT Company (80%) ............................... Non-controlling interest (P166,000 – P120,000)........... Partial-goodwill Common Stock - TT .......................................................... Additional Paid-in Capital - TT ......................................... Retained Earnings - TT ....................................................... Investment in TT Company (80%) ............................... Non-controlling interest (20%) .................................... Buildings ........................................................................... Goodwill .......................................................................... Investment in TT Company (80%) ............................... Non-controlling interest (20% x P80,000) ....................

300,000 90,000 210,000 480,000 120,000 80,000 150,000 184,000 46,000

300,000 90,000 210,000 480,000 120,000 80,000 120,000 184,000 16,000

4.

Cost Model/Initial Value Method Dividends received (80%) ...................................................... Investment in Taylor—12/31/x4 (original value paid)…………

P 8,000 P664,000

5.

Cost Model/Initial Value Method – same answer with No. 4.

6.

Using the acquisition method, the allocation will be the total difference ( P80,000) between the buildings' book value and fair value. Based on a 20 year life, annual excess amortization is P4,000. MM book value—buildings .............................................. TT book value—buildings ................................................. Allocation ........................................................................ Excess Amortizations for 20x4–20x5 (P4,000 × 2) … ………. Consolidated buildings account … ………………

7.

Acquisition-date fair value allocated to goodwill: Goodwill-full ( see No. 1 above) ............................................ Goodwill-partial (see No. 1 above)… … …………………… ……

P

800,000 300,000 80,000 ( 8,000) P 1,172,000

P P

150,000 120,000

8. The common stock and additional paid-in capital figures to be reported are the parent balances only. Common stock, P500,000 Additional paid-in capital, P280,000 Problem II 1. Partial Goodwill or Proportionate Basis a. Investment in S 225,000 Beginning Retained Earnings-Palm Inc. To establish reciprocity/convert to equity (0.90 x(P1,250,000 – P1,000,000)) b.

c.

Common stock – S Retained earnings – S Investment in S Co NCI (P4,250,000 x 10%) Land Investment in S NCI [(P500,000 x 10%)– (P100,000 x 10%)] Retained earnings – P (bargain purchase gain – closed to retained earnings since only balance sheets are being examined, P300,000 – P90,000 depreciation, 20x4)

FV of SHE of S: Common stock, 1/1/20x5 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 NI – Subsidiary (20x4) Dividends – Subsidiary 20x4

225,000

3,000,000 1,250.000 3,825,000 425,000 400,000 150,000 40,000

210,000

P3,000,000 P1,000,000 250,000 ( 0) 1,250,000

Book value of SHE – S, 1/1/20x5 P4,250,000 Adjustments to reflect fair value 500,000 Amortization of allocated excess (P100,000 x 1) ( 100,000) FV of SHE of S P4,650,000 Multiplied by: NCI% 10% FV of NCI P 465,000

Computation of Gain: Partial Goodwill or Proportionate Basis Fair value of Subsidiary: Consideration transferred Less: BV of SHE of S (P3,000,000 + P1,000,000) x 90% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P800,000 – P700,000) x 90% Land (P2,000,000 – P1,600,000) x 90% Gain – partial (attributable to parent)

P3,750,000 _3,600,000 P 150,000 P 90,000 360,000

__450,000 (P300,000)

Full Goodwill or Fair Value Basis a. Investment in S 225,000 Beginning Retained Earnings-P Inc. To establish reciprocity/convert to equity (0.90 x(P1,250,000 – P1,000,000)) b.

c.

Common stock – S Retained earnings – S Investment in S NCI (P4,250,000 x 10%) Land Investment in S NCI [(P500,000 x 10%)– (P100,000 x 10%)] Retained earnings – P (bargain purchase gain – closed to retained earnings since only balance sheets are being examined, P300,000 – P90,000 depreciation, 20x4)

225,000

3,000,000 1,250.000 3,825,000 425,000 400,000 150,000 40,000

210,000

FV of SHE of S: Common stock, 1/1/20x5 P3,000,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 250,000 Dividends – Subsidiary 20x4 ( 0) 1,250,000 Book value of SHE – S, 1/1/20x5 P4,250,000 Adjustments to reflect fair value 500,000 Amortization of allocated excess (P100,000 x 1) ( 100,000) FV of SHE of S P4,650,000

Multiplied by: NCI% FV of NCI Full-goodwill or Fair Value Basis Fair value of Subsidiary: Consideration transferred P3,750,000 / 90% Less: BV of SHE of S (P3,000,000 + P1,000,000) x 100% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P800,000 – P700,000) x 100% Land (P2,000,000 – P1,600,000) x 100% Gain – full (attributable to parent)

10% P 465,000

P4,166,667 4,000,000 P 166,667 P 100,000 400,000

__500,000 (P333,333

Note: In case of gain, the working paper eliminating entries under partial and full -goodwill approach are the same. 2. Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, December 31, 20x5 (P1,000,000 + P250,000 – P0 + P300,000 – P0) Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 (inv entory) Multiplied by: Controlling interests %................... Add: Bargain purchase gain (Controlling interest – P300,000) Less: Goodwill impairment loss Consolidated Retained earnings, December 31, 20x5

Problem III Computation of Goodwill: Partial Goodwill Fair value of Subsidiary: Consideration transferred Less: BV of SHE of S (P1,000,000 + P500,000) x 80% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Prop., plant and eqpt. (P1,500,000 – P600,000) x 80% Goodwill – partial Full-goodwill: Fair value of Subsidiary: Consideration transferred P2,800,000 / 80% Less: BV of SHE of S (P1,500,000 x 100%) Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Prop., plant and eqpt. (P1,500,000 – P600,000) x 80% Goodwill – full Amortization of allocated excess:

P2,000,000

P1,550,000 1,000,000 P 550,000 100,000 P 450,000 90% P405,000 300,000 _______0

__705,,000 P2,705,000

P2,800,000 _1,200,000 P1,600,000 __720,000 P 880,000

P3,500,000 1,500,000 P2,000,000 __900,000 P1,100,000

P900,000 / 10 years = P90,000 per year 1. Cost Model-Full Goodwill (Eliminating Entries) 20x4 a. Beginning Retained Earnings-S Co. Capital Stock- S Co. Property and Equipment (net) Goodwill Investment in S Co. Non-controlling Interest

1,000,000 500,000 900,000 1,100,000 2,800,000 700,000

Common stock, 1/1/20x4 P 500,000 Retained earnings, 1/1/20x4 1,000,000 Book value of SHE – S, 1/1/20x5 P1,500,000 Adjustments to reflect fair value 900,000 FV of SHE of S1/1/x5 P2,400,000 Multiplied by: NCI% 20% FV of NCI (partial) P 480,000 Add: NCI on full-goodwill (P1,100,000 – P880,000) 220,000 FV of NCI (full) P 700,000 b. Depreciation Expense Property and Equipment (net ) 20x5 a. Investment in S Company (P300,000 x 0.80) Beginning Retained Earnings-P Co. To establish reciprocity/convert to equity as of 1/1/20x5 b. Beginning Retained Earnings-S Company Capital Stock-S Company Property and Equipment (net) Goodwill Investment in S Company (P2,800,000 + P240,000) Non-controlling Interest P700,000 + [(P1,300,000 – P1,000,000) x 0.20]

90,000 90,000

240,000 240,000

1,300,000 500,000 900,000 1,100,000 3,040,000 760,000

FV of SHE of S: Common stock, 1/1/20x5 P 500,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 300,000 Dividends – Subsidiary 20x4 ( 0) 1,300,000 Book value of SHE – S, 1/1/20x5 P1,800,000 Adjustments to reflect fair value 900,000 FV of SHE of S1/1/x5 P2,700,000 Multiplied by: NCI% 20% FV of NCI (partial) P 540,000 Add: NCI on full-goodwill (P1,100,000 – P880,000) 220,000

FV of NCI (full) c. Beginning Retained Earnings-P Co. (P90,000 x 80%) Non-controlling Interest (P90,000, depreciation x 20%) Depreciation Expense Property and Equipment (net)

P 760,000 72,000 18,000 90,000 180,000

NCI (partial), 12/31/20x5: [(a) P760,000 – (b) P18,000 = P522,000] FV of SHE of S: Common stock, 1/1/20x5 P 500,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 300,000 Dividends – Subsidiary 20x4 ( 0) 1,300,000 Book value of SHE – S, 1/1/20x5 P1,800,000 Adjustments to reflect fair value 900,000 Amortization of allocated excess (P90,000 x 1) ( 90,000) FV of SHE of S P2,610,000 Multiplied by: NCI% 20% FV of NCI (partial) P 522,000 Add: NCI on full-goodwill (P1,100,000 – P880,000) 220,000 FV of NCI (full) P 742,000

Cost Model-Partial Goodwill (Eliminating Entries) 20x4 a. Beginning Retained Earnings-S Co. Capital Stock- S Co. Property and Equipment (net) Goodwill Investment in S Co. Non-controlling Interest b. Depreciation Expense Property and Equipment (net ) 20x5 a. Investment in S Company (P300,000 x 0.80) Beginning Retained Earnings-P Co. To establish reciprocity/convert to equity as of 1/1/20x5

1,000,000 500,000 900,000 880,000 2,800,000 480,000 90,000 90,000

240,000

b. Beginning Retained Earnings-S Company 1,300,000 Capital Stock-S Company 500,000 Property and Equipment (net) 900,000 Goodwill 880,000 Investment in S Company (P2,800,000 + P240,000) Non-controlling Interest P700,000 + [(P1,300,000 – P1,000,000) x 0.20] – (P1,100,000 – P880,000)

240,000

3,040,000 540,000

NCI:

FV of SHE of S: Common stock, 1/1/20x5 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 NI – Subsidiary (20x4) Dividends – Subsidiary 20x4 Book value of SHE – S, 1/1/20x5 Adjustments to reflect fair value FV of SHE of S1/1/x5 Multiplied by: NCI% FV of NCI (partial) c. Beginning Retained Earnings-P Co. (P90,000 x 80%) Non-controlling Interest (P90,000 depreciation x 20%) Depreciation Expense Property and Equipment (net)

P 500,000 P1,000,000 300,000 ( 0) 1,300,000 P1,800,000 900,000 P2,700,000 20% P 540,000 72,000 18,000 90,000 180,000

NCI (partial), 12/31/20x5: [(a) P540,000 – (b) P18,000 = P522,000] FV of SHE of S: Common stock, 1/1/20x5 P 500,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 300,000 Dividends – Subsidiary 20x4 ( 0) 1,300,000 Book value of SHE – S, 1/1/20x5 P1,800,000 Adjustments to reflect fair value 900,000 Amortization of allocated excess (P90,000 x 1) ( 90,000) FV of SHE of S P2,610,000 Multiplied by: NCI% 20% FV of NCI (partial) P 522,000

2. Consolidated Net Income (CNI) = Controlling Interest in CNI + NCI in CNI 20x4

Consolidated Net Income for 20x4 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment

P400,000 300,000 P700,000 P 42,000 90,000 ____0

132,000

Controlling Interest in Consolidated Net Income or Profit attribut able to equity holders of P………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P568,000 42,000 P610,000

Net income of subsidiary……………………..

P 300,000 ( 90,000) P210,000

Amortization of allocated excess …...

Multiplied by: Non-controlling interest %..........

20% P 42,000

Non-controlling Interest in Net Income (NCINI) Note: If there is impairment in goodwill the CNI and NCI-CNI are not the same.

20x5

Consolidated Net Income for 20x5 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment

P425,000 400,000 P825,000 P 62,000 90,000 ____0 152,000

Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 Net income of subsidiary…………………….. Amortization of allocated excess …...

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

P673,000 62,000 P735,000 P 400,000 ( 90,000) P310,000 20% P

62,000 Problem IV 1. Common stock of TT Company on December 31, 20x4 Retained earnings of TT Company January 1, 20x4 Sales for 20x4 Less: Expenses Dividends paid Retained earnings of TT Company on December 31, 20x4 Net book value on December 31, 20x4 Proportion of stock acquired by QQ Purchase price 2. Net book value on December 31, 20x4 Proportion of stock held by noncontrolling interest Balance assigned to noncontrolling interest

P 90,000 P 130,000 195,000 (160,000) (15,000) 150,000 P240,000 x .80 P192,000 P240,000 x .20 P 48,000

3.

Consolidated net income is P143,000. None of the 20x4 net income of TT Company was earned after the date of purchase and, therefore, none can be included in consolidated net income.

4.

Consolidate net income would be P178,000 [P143,000 + (P195,000 - P160,000)].

Problem V Requirements 1 to 4: Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (100%) Consideration transferred: Cash Notes payable Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 100%)………………. Retained earnings (P120,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… Increase in land (P7,200 x 100%)……………………. Increase in equipment (P96,000 x 100%) Decrease in buildings (P24,000 x

P 360,000 105,000

P 465,000

P 240,000 120,000

P

6,000

7,200 96,000 ( 24,000)

360,000 P 105,000

100%)………..... Decrease in bonds payable (P4,800 x 100%)…… Positive excess: Goodwill (excess of cost over fair value)………………………………………………...

4,800

90,000 P 15,000

The over/under valuation of assets and liabilities are summarized as follows:

S Co. Book value Inventory………………….…………….. Land……………………………………… Equipment (net)......... Buildings (net) Bonds payable………………………… Net………………………………………..

S Co. Fair value

(Over) Under Valuation

P 24,000 48,000 84,000 168,000

P 30,000 55,200 180,000 144,000 ( (120,000) 115,200) P P 204,000 294,000

P

6,000 7,200 96,000 (24,000) 4,800

P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows:

Equipment .................. Less: Accumulated depreciation….. Net book value………………………...

Buildings................ Less: Accumulated depreciation….. Net book value………………………...

S Co. Book value 180,000

S Co. Fair value 180,000

Increase (Decrease) 0

96,000

-

( 96,000)

84,000

180,000

96,000

S Co. Book value 360,000

S Co. Fair value 144,000

(Decrease) ( 216,000)

192,000

-

( 192,000)

168,000

144,000

(

24,000)

A summary or depreciation and amortization adjustments is as follows:

Over/ Account Adjustments to be unde amortized r P Inventory 6,000 Subject to Annual

Lif e 1

Annu al Current Amou Year(20x nt 4) P 6,000 P 6,000

20x5 P -

Amortization

Buildings (net)

96,00 0 (24,0 00)

Bonds payable…

4,800

Equipment (net).........

8 4 4

12,000 ( 6,000) 1,200 P 13,200

12,00 0 (6,00 0)

12,000 ( 6,000) 1,200

1,200 P 7,200

P 13,200

20x4 : First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4:

(1) Investment in Company……………………………………………

S 465,000 360,000

Cash…………………………………………………………………….. Notes payable……………………………………

105,000

Acquisit ion of S Company.

January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Dividend income (P36,000 x 100%)…………….

36,000

36,000

Record dividends from S Company.

On the books of S Company, the P36,000 dividend paid was recorded as follows:

Dividends paid………… Cash…….

36,000

Div idends paid by S Co..

36,000

Consolidation Workpaper – First Year after Acquisition

(E1) Common stock – Co………………………………………… Retained earnings – Co…………………………………… Investment in Co……………………………………………

S

240,000

S

120,000

S

360,000

To eliminat e int ercompany invest ment and equit y account s of subsidiary on date of acquisition. ; and t o establish non-controlling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200

Land………………………………………………………………………. Discount on bonds payable…………………………………………. Goodwill…………………………………………………………………. Buildings……………………………………….. Investment in S Co……………………………………………….

4,800 15,000 216,000 105,000

To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation buildings………………….. Interest expense………………………………… Goodwill impairment loss

–

6,000 6,000 6,000 1,200 3,600 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………..

12,000 1,200 3,600

To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000

_______ P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

P12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

(E4) Dividend income - P………. Dividends paid – S……………………

36,000 36,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model 100%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement Sales Div idend income Total Rev enue

P Co P480,000 36,000 P516,000

S Co. P240,000 P240,000

Dr. (4)

36,000

Cr.

Consolidated P 720,000 _________ P 720,000

Cost of goods sold Depreciation expense Interest expense Goodwill impairment loss Other expenses Total Cost and Expenses Net Income to Retained Earnings Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Total

P204,000 60,000 -

P138,000 24,000 -

48,000 P312,000 P204,000

18,000 P180,000 P 60,000

(3) (3) (3) (3)

6,000 6,000 1,200 3,600

P 348,000 90,000 1,200 3,600 66,000 P508,800 P211,200

P360,000

P

P 360,000

204,000 P564,000

P120,000 60,000 P180,000

72,000 -

36,000

P492,000

P144,000

147,000 90,000 120,000 210,000 240,000 720,000

P 90,000 60,000 90,000 48,000 180,000 540,000

(1) 120,000 211,200 P571,200

(4)

P 499,200

P (2) (2)

6,000 7,200

(2) (2)

4,800 15,000

465,000 P1,992,000

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

___590,400 P1,992,000

240,000 144,000 P1,008,000

72,000 ________

36,000

(3)

6,000

(2) 216,000 (3) 1,200 (3) 3,600 (4) 360,000 (5) 105,000

(2) 96,000 (3) (2) 192,000 (3) 6,000

12,000

237,000 150,000 210,000 265,200 420,000 1,044,000 3,600 11,400

P2,341,200

P 147,000 495,000 240,000 360,000 600,000

(1) 240,000 P 736,200

P 736,200

499,200 P2,341,200

20x5: Second Year after Acquisition Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment:

January 1, 20x5 – December 31, 20x5: Cash……………………… Dividend income (P48,000 100%)…………….

48,000 x

48,000

Record dividends from S Company.

On the books of S Company, the P40,000 dividend paid was recorded as follows:

Dividends paid………… Cash Dividends paid by S Co..

48,000 48,000

Consolidation Workpaper – Second Year after Acquisition

(E1) Investment Company………………………… Retained earnings Company………………………

in

S –

24,000

P

24,000

To provide ent ry t o convert from t he cost met hod t o t he equit y met hod or t he entry t o establish reciprocit y at t he beginning of t he year, 1/1/20x5. Retained earnings – S Company, 1/1/20x5 Retained earnings – S Company, 1/1/20x4 Increase in retained earnings…….. Multiplied by: Controlling interest % Retroactive adjustment

P144,000 120,000 P 24,000 100% P 24,000

(E2) Common stock – Co………………………………………… Retained earnings – S Co., 1/1/20x5 Investment in S Co …………………………

S

240,000 144,000 384,000

To eliminat e int ercompany invest ment and equit y account s of subsidiary and to establish non-controlling interest (in net asset s of subsidiary) on January 1, 20x5.

(E3) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Investment in S 105,000 Co………………………………………………. To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on January 1, 20x5.

(E4) Retained earnings – P Company, 1/1/20x5 (P16,800 x 100%) Depreciation expense……………………….. Accumulated depreciation buildings………………….. Interest expense…………………………………

16,800 6,000 – 12,000 1,200

6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

24,000 2,400 3,600

To provide for years 20x4 and 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of S’s ident ifiable asset s and liabilit ies as follows: Year 20x4 amount s are debit ed t o P’s ret ained earnings Year 20x5 amount s are debit ed t o respect ive nominal account s..

Inv entory sold Equipment Buildings Bonds payable Impairment loss Totals

(20x4) Retained earnings, P 6,000 12,000 (6,000) 1,200 3,600 P 16,800

Depreciation/ Amortization expense P

Amortization -Interest

12,000 ( 6,000) P 1,200 P 6,000

P1,200

(E5) Dividend income - P………. Dividends paid – S……………………

48,000 48,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

(E6) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

16,560 16,560

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x5 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E4)] …... Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

P 90,000 ( 7,200) P 82,000 20% P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model 100%-Owned Subsidiary Income Statement Sales Div idend income Total Rev enue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income to Retained Earnings Statement of Retained Earnings Retained earnings, 1/1

P Co. P540,000 48,000 P588,000 P216,000 60,000 72,000 P348,000 P240,000

S Co. P360,000 P360,000 P192,000 24,000 54,000 P270,000 P 90,000

Dr.

(5)

48,000

(4) (4)

6,000 1,200

Cr.

Consolidated P 900,000 ___________ P 900,000 P 408,000 90,000 1,200 126,000 P 625,200 P 274,800

P Company

P492,000

S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Total

P

(4) 16,800 (2) 144,000

(1)

24,000

P

499,200

240,000 P732,000

P144,000 90,000 P234,000

72,000 -

48,000

P660,000

P186,000

P 702,000

189,000 180,000 216,000 252,000 240,000 720,000

P 102,000 960,000 108,000 48,000 180,000 540,000

P 291,000 276,000 324,000 265,200 420,000 1,044,000 2,400 11,400

(5)

(3) (3)

(3) (3) (1)

465,000 P2,220,000

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

660,000 P2,220,000

274,800 P 774,000

240,000 186,000 P1,074,000

6,000 (4) 7,200

4,800 15,000 24,000

(3) 96,000 (3) 192,000 (4) 12,000

48,000

6,000

(3) 216,000 (4) 2,400 (4) 3,600 (2) 384,000 (6) 105,000

(4)

24,000

72,000 ________

P2,634,000

P 180,000 552,000 240,000 360,000 600,000

(2) 240,000 P 783,120

_

P 783,120

702,000 P2,634,000

5. 1/1/20x4 a. On date of acquisition the retained earnings of P should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition)

P360,000

b. NCI – not applicable, since it is 100% owned subsidiary c.

Stockholders’ Equity Common stock, P10 par

P 600,000

Retained earnings Total Stockholders’ Equity (Total Equity)

360,000 P 960,000

6. 12/31/20x4: a. P211,200 – same with CNI since there is no NCI. Consolidated Net Income for 20x4 Net income from own/separate operations: Pa Company S Company

P168,000 60,000

Total Less: Amortization of allocated excess Goodwill impairment loss Consolidated Net Income for 20x4

P 13,200 3,600

P228,000 16,800 P211,200

b. NCINI – not applicable, since it is 100% owned subsidiary c. P211,200 – same with NCI-CNI since there is no NCI. d. Consolidated Retained Earnings, December 31, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P for 20x4 or Consolidated Net Income (CNI)* 211,200 Total P571,200 Less: Div idends paid – P Company for 20x4 72,000 Consolidated Retained Earnings, December 31, 20x4 P499,200 * since it is a 100%-owned subsidiary, Cont rolling Int erest in Net Income is t he same wit h Consolidat ed Net Income.

e. NCI – not applicable, since it is 100% owned subsidiary f.

Stockholders’ Equity Common stock, P10 par Retained earnings Total Stockholders’ Equity (Total Equity)

P 600,000 499,200 P 1,099,200

12/31/20x5 a. P274,800 – same with CNI since there is no NCI. Consolidated Net Income for 20x5 Net income from own/separate operations P Company S Company Total Less: Amortization of allocated excess Goodwill impairment loss Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent or CNI

P192,000 90,000 P282,000 P 7,200 0

7,200 P274,800

b. NCINI – not applicable, since it is 100% owned subsidiary c. P274,800 – same with NCI-CNI since there is no NCI. d. Consolidated Retained Earnings, December 31, 20x5 Retained earnings - P Company, January 1, 20x5 (cost model Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/P’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – S, January 1, 20x5 Less: Retained earnings – S, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Multiplied by: Controlling interests %................... Consolidated Retained earnings, January 1, 20x5 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P for 20x5 or CNI Total Less: Div idends paid – P Company for 20x5

P492,000

P 144,000 120,000 P 24,000 16,800 P 7,200 100%

7,200 P 499,200 274,800 P774,000 72,000

Consolidated Retained Earnings, December 31, 20x5

P702,000

e. NCI – not applicable, since it is 100% owned subsidiary f.

Stockholders’ Equity Common stock, P10 par Retained earnings Total Stockholders’ Equity (Total Equity)

P 600,000 702,000 P1,302,000

Problem VI Requirements 1 to 4: Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 80%)……………………. Retained earnings (P120,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… Increase in land (P7,200 x 80%)……………………. Increase in equipment (P96,000 x 80%) Decrease in buildings (P24,000 x 80%)………..... Decrease in bonds payable (P4,800 x 80%)…… Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

P 372,000 P 192,000 96,000

288,000 P 84,000

P 4,800 5,760 76,800 ( 19,200) 3,840

72,000 P 12,000

The over/under valuation of assets and liabilities are summarized as follows:

S Co. Book value Inventory………………….……………..

S Co. Fair value P

(Over) Under Valuation P P 6,000

24,000 48,000 84,000 168,000

30,000 Land……………………………………… 55,200 Equipment (net)......... 180,000 Buildings (net) 144,000 ( Bonds payable………………………… (120,000) 115,200) P P Net……………………………………….. 204,000 294,000

7,200 96,000 (24,000) 4,800 P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows:

Equipment .................. Less: Accumulated depreciation….. Net book value………………………...

Buildings................ Less: Accumulated depreciation….. Net book value………………………...

S Co. Book value 180,000

S Co. Fair value 180,000

Increase (Decrease) 0

96,000

-

( 96,000)

84,000

180,000

96,000

S Co. Book value 360,000

S Co. Fair value 144,000

(Decrease) ( 216,000)

192,000

-

( 192,000)

168,000

144,000

(

24,000)

A summary or depreciation and amortization adjustments is as follows:

Over/ Account Adjustments to be Unde amortized r P Inventory 6,000 Subject to Annual Amortization 96,00 Equipment (net)......... 0 (25,0 Buildings (net) 00) Bonds payable…

4,800

Lif e 1

8 4 4

Annu al Current Amou Year(20x nt 4) P 6,000 P 6,000

20x5 P -

12,000 ( 6,000)

12,00 0 (6,00 0)

1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

1,200 P 7,200

The goodwill impairment loss of P3,125 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full -goodwill is computed as follows:

Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) Fair value of NCI (given) (20%) Fair value of Subsidiary (100%) Less: Book value of stockholders’ equity of Son (P360,000 x 100%) Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P 372,000 93,000 P 465,000 __360,000 P 105,000 90,000 P

15,000

In this case, the goodwill was proportional to the controlling interest of 80% and non -controlling interest of 20% computed as follows:

Value Goodwill applicable to parent………………… Goodwill applicable to NCI…………………….. Total (full) goodwill………………………………..

P12,00 0 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

The goodwill impairment loss would be allocated as follows

Value Goodwill impairment loss attributable to parent P or controlling 3,000 Interest Goodwill applicable to NCI…………………….. 750 Goodwill impairment loss based on 100% fair value or fullP 3,750 Goodwill

% of Total 80.00% 20.00% 100.00%

When cost model is used, only two journal entries are recorded by P Company during 20x4 related to its investment in S Company. 20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4:

(1) Investment in Company……………………………………………

S 372,000

372,000 Cash…………………………………………………………………….. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Dividend income (P36,000 x 80%)……………. Record dividends from S Company.

28,800 28,800

On the books of S Company, the P30,000 dividend paid was recorded as follows:

Dividends paid………… Cash……. Dividends paid by S Co..

36,000

36,000

Consolidation Workpaper – Year of Acquisition

(E1) Common stock – Co………………………………………… Retained earnings – Co…………………………………… Investment in Co…………………………………………… Non-controlling interest (P360,000 20%)………………………..

S

240,000

S

120.000

S

288,000

x

72,000

To eliminat e int ercompany invest ment and equit y account s of subsidiary on date of acquisition; and t o establish non-cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 18,000 20%)……………………….. Investment in S 84,000 Co………………………………………………. To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish non-

cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss……………………………………….

6,000 6,000 6,000 1,200 3,000 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

12,000 1,200 3,000

To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000

_______ P 6,000

Depreciation/ Amortization expense

Amortization -Interest

P 12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

Total

13,200

It should be observed that the goodwill computed above was proportional t o the controlling interest of 80% and non-controlling interest of 20% computed as follows:

Value Goodwill applicable to parent………………… Goodwill applicable to NCI…………………….. Total (full) goodwill………………………………..

P12,00 0 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

Therefore, the goodwill impairment loss of P3,125 based on 100% fair value or full -goodwill would be allocated as follows:

Value Goodwill impairment loss attributable to P or P controlling 3,000 Interest Goodwill impairment loss applicable to 750

% of Total 80.00% 20.00%

NCI…………………….. Goodwill impairment loss based on 100% fair value or fullGoodwill (E4) Dividend income - P………. Non-controlling interest (P36,000 20%)……………….. Dividends paid – S……………………

P 3,750

100.00%

28,800 7,200

x

36,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

(E5) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

9,360 9,360

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x4 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E3)] …... Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

P 60,000 ( 13,200) P 46,800 20% P 9,360

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) P Co P480,000 28,800 P508,800 P204,000 60,000 48,000 P310,000 P196,800 P196,800

Income Statement Sales Div idend income Total Rev enue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash……………………….

S Co. P240,000 P240,000 P138,000 28,000 18,000 P180,000 P 60,000 P 60,000

Dr.

(4)

28,800

(3) (3) (3)

6,000 6,000 1,200

(3)

3,000

(5)

9,360

Cr.

P360,000

P

Consolidated P 720,000 _________ P 720,000 P 348,000 90,000 1,200 66,000 3,000 P508,200 P211,800 ( 9,360) P202,440

P

196,800 P552,000

P120,000 60,000 P180,000

72,000 -

36,000

P484,800

232,800

(1) 120,000

360,000 202,440 P562,440

_

72,000 ________

P144,000

P

490,440

P 90,000

P

322,800

(4)

36,000

Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest………… Total

90,000 120,000 210,000 240,000 720,000

60,000 90,000 48,000 180,000 540,000

(2) (2)

6,000 7,200

(2) (2)

4,800 12,000

372,000 P1,984,800

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

484,800

240,000 144,000 _________ P1,008,000

20x5: Second Year after Acquisition

Sales Less: Cost of goods sold Gross profit

P2,424,600

12,000

P147,000 495,000 240,000 360,000 600,000 490,440

7,200

__________ P 745,560

(1 ) 72,000 (2) 18,000 (5) 9,360 P 745,560

____92,160 P2,424,600

P Co.

S Co.

P 540,000 216,000

P 360,000

Less: Depreciation expense Other expense Net income from its own separate operations Add: Dividend income

P 192,000 38,400

Dividends paid

150,000 210,000 265,200 420,000 1,044,000 3,600 9,000

(1) 240,000

P 324,000 60,000 72,000

Net income

6,000

(2) 216,000 (3) 1,200 (3) 3,000 (7) 288,000 (8) 84,000

(2) 96,000 (3) (2) 192,000 (3) 6,000

(4) _________ P1,984,800

(3)

P 230,400 P 72,000

192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. Parent Company Cost Model Entry Only a single entry is recorded by the P in 20x5 in relation to its subsidiary investment:

January 1, 20x5 – December 31, 20x5: Cash……………………… Dividend income (P48,000

38,400 x

38,400

80%)……………. Record dividends from S Company. On the books of S Company, the P40,000 dividend paid was recorded as follows:

Dividends paid………… Cash Dividends paid by S Co..

48,000 48,000

Consolidation Workpaper – Second Year after Acquisition The working paper eliminations (in journal entry format) on December 31, 20x5, are as follows:

(E1) Investment Company………………………… Retained earnings Company………………………

in

S –

19,200

P

19,200

To provide ent ry t o convert from t he cost met hod t o t he equit y met hod or t he entry t o establish reciprocit y at t he beginning of t he year, 1/1/20x5, comput ed as follows: Retained earnings – S Company, 1/1/20x5 Retained earnings – S Company, 1/1/20x4 Increase in retained earnings…….. Multiplied by: Controlling interest % Retroactive adjustment

P144,000 120,000 P 24,000 80% P 19,200

(E2) Common stock – Co………………………………………… Retained earnings – S Co., 1/1/20x5 Investment in S Co (P384,000 80%)………………………… Non-controlling interest (P384,000 20%)………………………..

S

240,000 144,000

x

307,200

x

76,800

To eliminat e int ercompany invest ment and equit y account s of subsidiary and to establish non-controlling interest (in net asset s of subsidiary) on January 1, 20x5.

(E3) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill………………………………………………………………….

Buildings……………………………………….. Non-controlling interest (P90,000 x 20%) Investment in Co……………………………………………….

216,000 18,000 84,000

S

To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on January 1, 20x5.

(E4) Retained earnings – P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] Non-controlling interests (P13,200 20%)……………………. Depreciation expense……………………….. Accumulated depreciation buildings………………….. Interest expense…………………………………

x

13,560 2,640

6,000 – 12,000 1,200 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

24,000 2,400 3,000

To provide for years 20x4 and 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of S’s ident ifiable asset s and liabilit ies as follows: Year 20x4 amount s are debit ed t o P’s ret ained earnings & NCI; Year 20x5 amount s are debit ed t o respect ive nominal account s.

Inv entory sold Equipment Buildings Bonds payable Sub-total Multiplied by: To Retained earnings Impairment loss Total

(20x4) Retained earnings, P 6,000 12,000 (6,000) 1,200 P13,200 80% P 10,560 3,000 P 13,560

Depreciation/ Amortization expense

Amortization -Interest

P 12,000 ( 6,000) ________ P 6,000

P 1,200 P 1,200

(E5) Dividend income - P………. Non-controlling interest (P48,000 20%)……………….. Dividends paid – S……………………

x

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

38,400 9,600 48,000

(E6) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

16,560 16,560

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x5 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E4)] …... Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI

P 90,000 ( 7,200) P 82,800 20% P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) P Co P540,000 38,400 P578,400 P216,000 60,000 72,000 P348,000 P230,400 P230,400

Income Statement Sales Div idend income Total Rev enue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable……………

P484,800

P

S Co. P360,000 P360,000 P192,000 24,000 54,000 P270,000 P 90,000 P 90,000

Dr.

(5)

38,400

(4) (4)

6,000 1,200

(6)

16,560

(4) 13,560 (2) 144,000

Cr.

Consolidated P 900,000 ___________ P 900,000 P 408,000 90,000 1,200 126,000 P 625,200 P 274,800 ( 16,560) P 258,240

(1) 19,200

P 490,440

230,400 P715,200

P 144,000 90,000 P234,000

72,000 -

48,000

P643,200

P186,000

P 676,680

265,200 180,000 216,000 210,000 240,000 720,000

P 114,000 96,000 108,000 48,000 180,000 540,000

P 367,200 276,000 324,000 265,200 420,000 1,044,000 2,400 9,000

372,000 P2,203,200

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000

120,000

258,240 P 748,680

(5)

(3) (3)

6,000 7,200

(3) (3) (1)

4,800 12,000 19,200

(3) 96,000 (3) 192,000 (4) 12,000

(4)

48,000

6,000

(3) 216,000 (4) 2,400 (4) 3,000 (2) 307,200 (3) 84,000

(4)

24,000

_

72,000 ________

P2,707,800

P180,000 552,000 240,000

Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest…………

240,000 600,000 643,200

240,000 186,000

360,000 600,000 (2) 240,000 676,680 (5) (4)

___ _____ P2,203,200

Total

120,000

_________ P1,074,000

9,600 2,640

__________ P 821,160

(2 ) 76,800 (3) 18,000 (6) 16,560 P 821,160

____99,120 P2,707,800

5. 1/1/20x4 a. On date of acquisition the retained earnings of P should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition)

P360,000

b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – S Company, January 1, 20x4…… Retained earnings – S Company, January 1, 20x4 Stockholders’ equity – S Company, January 1, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Fair v alue of stockholders’ equity of subsidiary, January 1, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

P 240,000 120,000 P 360,000 90,000 P450,000 20 P 90,000

c.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings P’s Stockholders’ Equity / CI - SHE NCI, 1/1/20x4 Consolidated SHE, 1/1/20x4

P 600,000 360,000 P 960,000 ___90,000 P1,050,000

6. Note: The goodwill recognized on consolidation purely rel ates to the P’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI Consolidated Net Income for 20x4 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under partial-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P 9,360 13,200 3,000

25,560 P202,440 9,360 P211.800

b. NCI-CNI * Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company

P168,000 60,000 P228,000

P 60,000

Less: Amortization of allocated excess / goodwill impairment (refer to amortization table abov e) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

13,200 P 46,800 20% P 9,360

c. CNI, P211,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed a s follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Div idends paid – P Company for 20x4 Consolidated Retained Earnings, December 31, 20x4

P360,000 202,440 P562,440 72,000 P490,440

e. Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 Add: Net income of S for 20x4 Total Less: Div idends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) – 20x4 Fair v alue of stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

P 240,000 P120,000 60,000 P180,000 36,000

144,000 P 384,000 90,000 ( 13,200) P460,000 20 P 92,160

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

P 600,000 490,440 P1,090,440 ___92,160 P1,182,600

12/31/20x5: a. CI-CNI Consolidated Net Income for 20x5 Net income from own/separate operations: P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization abov e) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5

P192,000 90,000 P282,000 P16,560 __7,200

23,760 P258,240 16,560 P274,800

b. NCI-CNI * Non-controlling Interest in Net Income (NCINI) for 20x5 Net income of S Company Less: Amortization of allocated excess / goodwill impairment for 20x5 (refer to amortization table abov e) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x5

P 90,000 80,400 P 82,800 20% P 16,560

c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - P Company, January 1, 20x5 (cost model Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – S, January 1, 20x5 Less: Retained earnings – S, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Multiplied by: Controlling interests %...................

P484,800

P 144,000 120,000 P 24,000 13,200 P 10,800 80% P 8,640

Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or (P3, 750 x 80%) 3,000 5,640 Consolidated Retained earnings, January 1, 20x5 P 490,440 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P for 20x5 258,240 Total P748,680 Less: Div idends paid – P Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P676,680 * t his procedure would be more appropriate, instead of mult iplying t he full-goodwill impairment loss of P3,750 by 80%. There might be situations where t he controlling interests on goodwill impairment loss would not be proportionate t o NCI acquired.

e. Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – S Company, December 31, 20x5…… Retained earnings – S Company, December 31, 20x5 Retained earnings – S Company, January 1, 20x5 Add: Net income of S for 20x5 Total Less: Div idends paid – 20x5 Stockholders’ equity – S Company, December 31, 20x5 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) : 20x4 20x5 Fair v alue of stockholders’ equity of S, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)…………………………………..

P 240,000 P14,000 90,000 P234,000 48,000

186,000 P 426,000 90,000

P 13,200 7,200

( 20,400) P 495,600 20 P 99,120

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x5

P 600,000 676,680 P1,276,680

NCI, 12/31/20x5 Consolidated SHE, 12/31/20x5

___99,120 P1,1375,800

Problem VII Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)………………..

P 372,000

Fair value of Subsidiary (100%)………. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. Retained earnings (P120,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… Increase in land (P7,200 x 100%)……………………. Increase in equipment (P96,000 x 100%) Decrease in buildings (P24,000 x 100%)………..... Decrease in bonds payable (P4,800 x 100%)…… Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

93,000 P 465,000

P 240,000 120,000

P

360,000 P 105,000

6,000 7,200 96,000

( 24,000) 4,800

90,000

P 15,000

A summary or depreciation and amortization adjustments is as follows:

Over/ Account Adjustments to be unde amortized r P Inventory 6,000

Lif e 1

Annu al Current Amou Year(20x nt 4) P 6,000 P 6,000

20x5 P -

Subject to Amortization

Annual

Buildings (net)

96,00 0 (24,0 00)

Bonds payable…

4,800

Equipment (net).........

8 4 4

12,000 ( 6,000) 1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

12,00 0 (6,00 0) 1,200 P 7,200

20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4:

(1) Investment in Company……………………………………………

S 372,000 372,000

Cash…………………………………………………………………….. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Dividend income (P36,000x 80%)……………. Record dividends from S Company.

28,800 28,800

On the books of S Company, the P30,000 dividend paid was recorded as follows:

Dividends paid………… Cash……. Dividends paid by S Co..

36,000

36,000

No entries are made on the P’s books to depreciate, amortize or w rite-off the portion of the allocated excess that expires during 20x4. Consolidation Workpaper – First Year after Acquisition

(E1) Common stock – S Co………………………………………… 240,000 Retained earnings – S Co…………………………………… 120.000 Investment in S Co…………………………………………… 288,000 Non-controlling interest (P360,000 x 72,000 20%)……………………….. To eliminat e int ercompany invest ment and equit y account s of subsidiary on dat e of acquisit ion; and t o est ablish non-cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200

Land………………………………………………………………………. Discount on bonds payable…………………………………………. Goodwill…………………………………………………………………. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%) + [(P15,000, full – P12,000, partial goodwill)]………… Investment in S Co……………………………………………….

4,800 13,000 216,000 21,000 84,000

To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciat ion – buildings………………….. Interest expense………………………………… Goodwill impairment loss……………………………………….

6,000 6,000 6,000 1,200 3,750 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

12,000 1,200 3,750

To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of S’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000

_______ P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

P12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

(E4) Dividend income - P………. Non-controlling interest (P36,000 20%)……………….. Dividends paid – S……………………

x

28,800 7,200 36,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

(E5) Non-controlling interest in Net Income of Subsidiary…………

8,610

Non-controlling interest …………..

8,610

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net Income less NCI on goodwill impairment loss on full-goodwill for 20x4 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E3)] …... Multiplied by: Non-controlling interest %..........

P 60,000 ( 13,200) P 46,800 20% P 9,360

Less: Non-controlling interest on impairment loss on full-goodwill (P3,125 x 20%) or (P3,125 impairment on full-goodwill less P2,500, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) P 8,610 * t his procedure would be more appropriat e, inst ead of mult iplying t he fullgoodwill impairment loss of P3,125 by 20%. There might be situat ions where t he NCI on goodwill impairment loss would not be proport ionat e t o NCI acquired (refer t o Illust rat ion 15-6).

Subsidiary accounts are adjusted to full fair value regardless on the controlling interest percentage or what option used to value non-controlling interest or goodwill. Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) P Co P480,000 28,800 P508,800 P204,000 60,000 48,000 P312,000 P196,800 P196,800

Income Statement Sales Div idend income Total Rev enue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill……………………

S Co. P240,000 P240,000 P138,000 24,000 18,000 P180,000 P 60,000 P 60,000

Dr.

(4)

28,800

(3) (3) (3)

6,000 6,000 1,200

(3)

3,750

(5)

8,610

Cr.

P360,000

P

Consolidated P 720,000 _________ P 720,000 P 348,000 90,000 1,200 66,000 3,750 P508,950 P211,050 ( 8,610) P202,680

P

196,800 P556,800

P120,000 60,000 P180,000

72,000 -

36,000

P484,800

232,800 90,000 120,000 210,000 240,000 720,000

360,000

(1) 120,000 202,680 P562,440

_

86,400 ________

P144,000

P

490,440

P 90,000 60,000 90,000 48,000 180,000 540,000

P

322,800 150,000 210,000 265,200 420,000 1,044,000 3,600 11,250

(4)

(2) (2)

6,000 7,200

(2) (2)

4,800 15,000

(3)

36,000

6,000

(2) 216,000 (3) 1,200 (3) 3,750

Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest………… Total

372,000 P1,984,800

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

(3) 288,000 (4) 84,000

(2) 96,000 (3) (5) 192,000 (6) 6,000

240,000 144,000

(1) 240,000

484,800 _________ P1,984,800

_________ P1,984,800

__________ P 748,560

20x5: Second Year after Acquisition

Sales Less: Cost of goods sold Gross profit Less: Depreciation expense Other expense

(7)

7,200

P147,000 495,000 240,000 360,000 600,000 490,440 ____94,410 P2,426,850

P Co.

S Co.

P 540,000 216,000

P 360,000

P 324,000 60,000 72,000 P 192,000 38,400

Net income

P 230,400 P 72,000

No goodwill impairment loss for 20x5.

12,000

(1 ) 72,000 (2) 21,000 (5) 8,610 P 748,560

Net income from its own separate operations Add: Dividend income

Dividends paid

P2,426,850

192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment:

January 1, 20x5 – December 31, 20x5: Cash……………………… Dividend income (P48,000x 80%)……………. Record dividends from S Company.

38,400 38,400

On the books of S Company, the P40,000 dividend paid was recorded as follows:

Dividends paid………… Cash Dividends paid by S Co..

48,000 48,000

Consolidation Workpaper – Second Year after Acquisition

(E1) Investment Company………………………… Retained earnings Company………………………

in

S –

19,200

P

19,200

To provide ent ry t o convert from t he cost met hod t o t he equit y met hod or t he entry t o establish reciprocit y at t he beginning of t he year, 1/1/20x5. Retained earnings – S Company, 1/1/20x5 Retained earnings – S Company, 1/1/20x4 Increase in retained earnings…….. Multiplied by: Controlling interest % Retroactive adjustment

P144,000 120,000 P 24,000 80% P 19,200

(E2) Common stock – Co………………………………………… Retained earnings – S Co., 1/1/20x5 Investment in S Co (P384,000 80%)………………………… Non-controlling interest (P384,000 20%)………………………..

S

240,000 144,000

x

307,200

x

76,800

To eliminat e int ercompany invest ment and equit y account s of subsidiary and to establish non-controlling interest (in net asset s of subsidiary) on January 1, 20x5.

(E3) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in S 84,000 Co………………………………………………. To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish noncont rolling int erest (in net asset s of subs idiary) on January 1, 20x5.

(E4) Retained earnings – P Company, 1/1/20x5

(P16,950 x 80%) Non-controlling interests (P16,950 20%)……………………. Depreciation expense……………………….. Accumulated depreciation buildings………………….. Interest expense…………………………………

x

13,560 3,390

6,000 – 12,000 1,200 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

24,000 2,400 3,750

To provide for years 20x4 and 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows: Year 20x4 amount s are debit ed t o Perfect ’s ret ained earnings and NCI. Year 20x5 amount s are debit ed t o respect ive nominal account s..

Inv entory sold Equipment Buildings Bonds payable Impairment loss Totals Multiplied by: CI%.... To Retained earnings

(20x4) Retained earnings, P 6,000 12,000 (6,000) 1,200 3,750 P 16,950 80% P13,560

Depreciation/ Amortization expense P

Amortization -Interest

12,000 ( 6,000) P 1,200 P 6,000

P1,200

(E5) Dividend income - P………. Non-controlling interest (P48,000 20%)……………….. Dividends paid – S……………………

x

38,400 9,600 48,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

(E6) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest ………….. To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x5 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E4)] …... Multiplied by: Non-controlling interest %.......... Less: NCI on goodwill impairment loss on fullGoodwill Non-controlling Interest in Net Income (NCINI)

P 90,000 ( 7,200) P 82,800 20% P 16,560 0 P 16,560

16,560 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement Sales Div idend income Total Rev enue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

P Co P540,000 38,400 P578,400 P216,000 60,000 72,000 P348,000 P230,400 P230,400

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest…………

Total

S Co. P360,000 P360,000 P192,000 24,000 54,000 P270,000 P 90,000 P 90,000

P484,800

P

Dr. (5)

38,400

(4) (4)

6,000 1,200

(6)

16,560

(5) 13,560 (6) 144,000

Cr.

Consolidated P 900,000 ___________ P 900,000 P 408,000 90,000 1,200 126,000 P 625,200 P 274,800 ( 16,560) P 258,240

(5) 19,200

P 490,440

230,400 P715,200

P 144,000 90,000 P234,000

72,000 -

48,000

P643,200

P186,000

P 676,680

265,200 180,000 216,000 210,000 240,000 720,000

P 102,000 96,000 108,000 48,000 180,000 540,000

P 367,200 276,000 324,000 265,200 420,000 1,044,000 2,400 11,250

372,000 P2,203,200

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

643,200

240,000 186,000

258,240 P 748,680

(5)

(3) (3)

(3) (3) (1)

6,000 (4) 7,200

4,800 15,000 19,200

(3) 96,000 (3) 192,000 (4) 12,000

57,600

6,000

(3) 216,000 (4) 2,400 (4) 3,750 (2) 307,200 (7) 84,000

(4)

24,000

_

72,000 ________

P2,710,050 P180,000 552,000 240,000 360,000 600,000

(2) 240,000 676,680 (6) (8)

___ _____ P2,203,200

_________ P1,074,000

9,600 3,390 (2 ) 76,800 (3) 21,000 __________ (6) 16,560 P 824,910 P 824,910

____101,370 P2,710,050

5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition)

P360,000

b. Non-controlling interest (full-goodwill), January 1, 20x4 Common stock – S Company, January 1, 20x4…… Retained earnings – S Company, January 1, 20x4 Stockholders’ equity – S Company, January 1, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Fair v alue of stockholders’ equity of S, January 1, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)………………………………….. Add: NCI on full-goodwill (P15,000 – P12,000) Non-controlling interest (partial-goodwill)…………………………………..

P 240,000 120,000 P 360,000 90,000 P450,000 20 P 90,000 ___3,000 P 93,000

c.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI - SHE NCI, 1/1/20x4 Consolidated SHE, 1/1/20x4

P 600,000 360,000 P 960,000 ___93,000 P1,053,000

6. Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P202,440 Consolidated Net Income for 20x4 Net income from own/separate operations: P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P168,000 60,000 P228,000 P 8,610 13,200 3,750

P202,440 8,610 P211.050

b. NCI-CNI – P8,610 * Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess (refer to amortization table abov e) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)*

25,560

P 60,000 13,200 P 46,800 20% P 9,360 750

Non-controlling Interest in Net Income (NCINI) P 8,610 * t his procedure would be more appropriate, inst ead of mult iplying t he full-goodwill impairment loss of P3,750 by 20%. There might be sit uat ions where t he NCI on goodwill impa irment loss would not be proport ionat e t o NCI acquired.

c. CNI, P211,050 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Div idends paid – P Company for 20x4 Consolidated Retained Earnings, December 31, 20x4

P360,000 202,440 P562,440 72,000 P490,440

e. Non-controlling interest (full-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 Add: Net income of S for 20x4 Total Less: Div idends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) – 20x4 Fair v alue of stockholders’ equity of S, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill, 12/31/20x4………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4: [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill), 12/31/20x4……………..

P 240,000 P120,000 60,000 P180,000 36,000

144,000 P 384,000 90,000 ( 13,200) P460,800 20 P 92,160 2,250 P 94,410

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

P 600,000 490,440 P1,090,440 ___94,410 P1,184,850

12/31/20x5: a. CI-CNI – P258,240 Consolidated Net Income for 20x5 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to

P16,560 7,200 0

P192,000 90,000 P282,000

23,760

equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5

P258,240 16,560 P274,800

b. NCI-CNI – P16,560 * Non-controlling Interest in Net Income (NCINI) for 20x5 Net income of S Company Less: Amortization of allocated excess / goodwill impairment for 20x5 (refer to amortization table abov e) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x5

P 90,000 80,400 P 82,800 20% P 16,560

c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - P Company, January 1, 20x5 (cost model Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/P’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Multiplied by: Controlling interests %...................

P484,800

P 144,000 120,000 P 24,000 13,200 P 10,800 80% P 8,640

Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or (P3, 750 x 80%) 3,000 5,640 Consolidated Retained earnings, January 1, 20x5 P 490,440 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 258,240 Total P748,680 Less: Div idends paid – P Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P676,680 * t his procedure would be more appropriate, instead of mult iplying t he full-goodwill impairment loss of P3,750 by 80%. There might be situations where t he controlling interests on goodwill impairment loss would not be proportionate t o NCI acquired.

e. Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – S Company, December 31, 20x5…… Retained earnings – S Company, December 31, 20x5 Retained earnings – S Company, January 1, 20x5 Add: Net income of S for 20x5 Total Less: Div idends paid – 20x5 Stockholders’ equity – S Company, December 31, 20x5 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) : 20x4 20x5 Fair v alue of stockholders’ equity of S, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill)…………………………………..

P 240,000 P144,000 90,000 P234,000 48,000

186,000 P 426,000 90,000

P 13,200 7,200

( 20,400) P 495,600 20 P 99,120 2,250 P 101,370

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

P 600,000 676,680 P1,276,680 __101,370 P1,378,050

Problem VIII Under the acquisition method, the shares issued by WW are recorded at fair value: Investment in BB (value of debt and shares issued).......................... Common Stock (par value) ........................................................ Additional Paid-in Capital (excess over par value) .................... Liabilities ......................................................................................

900,000 150,000 450,000 300,000

The payment to the broker is accounted for as an expense. The stock issue cost is a reduction in additional paid-in capital. Acquisition expense .......................................................................... Additional Paid-in Capital................................................................. Cash ........................................................................................

30,000 40,000 70,000

Allocation of Acquisition-Date Excess Fair Value: Consideration transferred (fair value) for BB Stock ......................... Book Value of BB, 6/30 ...................................................................... Fair Value in Excess of Book Value .............................................. Excess fair value (undervalued equipment) ..................................... Excess fair value (overvalued patented technology) ...................... Goodwill ...................................................................................... Consolidated Balances: 1. Net income (adjusted for combination expenses. The figures earned by the subsidiary prior to the takeover are not included) .................................................................................... 2. Retained Earnings, 1/1 (the figures earned by the subsidiary prior to the takeover are not included) .................................................. 3. Patented Technology (the parent's book value plus the fair value of the subsidiary) ........................................................................... 4. Goodwill (computed above) ................................................................... 5. Liabilities (the parent's book value plus the fair value of the subsidiary's debt plus the debt issued by the parent in acquiring the subsidiary) ..................................................................... 6. Common Stock (the parent's book value after recording the newly-issued shares) ......................................................................... 7. Additional Paid-in Capital (the parent's book value after recording the two entries above) .................................................. Problem IX 1. P15,000

=

(P115,000 + P46,000) - P146,000

P900,000 770,000 P130,000 100,000 (20,000) P 50,000

P210,000 800,000 1,180,000 50,000

1,210,000 510,000 680,000

2. 3. 4.

P65,000 SS: P24,000

= =

BB P70,000 Fair value of SS as a whole: P200,000 10,000

=

(P148,000 - P98,000) + P15,000 P380,000 - (P46,000 + P110,000 + P75,000 + P125,000) P94,000 - P24,000 Book value of SS shares Differential assigned to inventory (P195,000 - P105,000 - P80,000) Differential assigned to buildings and equipment (P780,000 - P400,000 - P340,000) Differential assigned to goodwill Fair value of SS

40,000 9,000 P259,000 5. 6.

65 percent Capital Stock Retained Earnings

= = =

1.00 – (P90,650 / P259,000) P120,000 P115,000

Problem X 1. Investment in WP, Inc. Contingent performance obligation Cash

500,000 35,000 465,000

2. 12/31/x4 Loss from increase in contingent performance obligation Contingent performance obligation

5,000

12/31/x5 Loss from increase in contingent performance obligation Contingent performance obligation

10,000

12/31/x5 Contingent performance obligation Cash 3. Cost Model/Initial Value Method Investment in WP Retained earnings-BS Common stock Retained earnings-WP Investment in WP

5,000

10,000 50,000 50,000

30,000 30,000 200,000 180,000 380,000

Royalty agreements Goodwill Investment in WP

90,000 60,000

Dividend income Dividends paid

35,000

Amortization expense Royalty agreements

10,000

150,000

35,000

10,000

Problem XI (Consolidated accounts one year after acquisition) SS acquisition fair value ($10,000 in stock issue costs reduce additional paid-in capital) ............................ P680,000 Book value of subsidiary (1/1/x4stockholders' equity balances).............. (480,000) Fair value in excess of book value ....................... P200,000 Excess fair value allocated to copyrights Life Amortizations based on fair value ....................................... 120,000 6 yrs. P20,000 Goodwill .............................................................. P 80,000 indefinite _____-0Total ............................................................... P20,000 1.

2.

Consolidated copyrights PP (book value) ......................................................... SS (book value) .......................................................... Allocation (above) .................................................... Excess amortizations, 20x4 ......................................... Total ..................................................................... Consolidated net income, 20X4 Revenues (add book values) .................................... Expenses: Add book values ................................................. Excess amortizations ............................................ Consolidated net income ..........................................

P900,000 400,000 120,000 (20,000) P1,400,000

P1,100,000 P700,000 20,000

720,000 P380,000

3.

Consolidated retained earnings, 12/31/x4 Retained earnings 1/1/x4 (PP) ................................... P600,000 Net income 20x4 (above) ......................................... 380,000 Dividends paid 20x4 (PP) ........................................... (80,000) Total ..................................................................... P900,000 SS’s retained earnings balance as of January 1, 20x4, is not included because these operations occurred prior to the purchase. SS's dividends were paid to PP and therefore are excluded because they are intercompany in nature.

4.

Consolidated goodwill, 12/31/x4 Allocation (above) ....................................................

P80,000

Problem XII Consolidated balances three years after the date of acquisition. Includes questions about parent's method of recording investment for internal reporting purposes. ) 1.

Acquisition-Date Fair Value Allocation and Amortization: Consideration transferred 1/1/09 ........................ P600,000 Book value (given) .............................................. (470,000) Annual Fair value in excess of book value ................. 130,000 Excess Allocation to equipment based on Life Amortizations difference in fair value and book value .................................................... 90,000 10 yrs. P9,000 Goodwill .............................................................. P40,000 indefinite -0Total ............................................................... P9,000

Consolidated Balances  Depreciation expense = P659,000 (book values plus P9,000 excess depreciation)  Dividends Paid = P120,000 (parent balance only. Subsidiary's dividends are eliminated as intercompany transfer)  Revenues = P1,400,000 (add book values)  Equipment = P1,563,000 (add book values plus P90,000 allocation less three years of excess depreciation [P27,000])  Buildings = P1,200,000 (add book values)  Goodwill = P40,000 (original residual allocation)  Common Stock = P900,000 (parent balance only) 2.

The parent's choice of an investment method has no impact on the consolidated totals. The choice of an investment method only affects the internal reporting of the parent. Under PAS 27, it requires a choice between cost model or under PFRS 9 (known as fair value model)

3.

The cost model or initial value method is used. The parent's Investment in Subsidiary account still retains the original consideration transferred of P600,000. In addition, the Investment Income account equals the amount of dividends paid by the subsidiary.

4.

If the equity method had been applied which is not allowed under PAS 27 for a parent to consolidate, the Investment Income account would have included both the equity accrual of P100,000 and excess amortizations of P9,000 for a balance of P91,000.

Problem XIII 1. Net income for 20x4:

2. 3.

Operating income Income from subsidiary Net income Consolidated net income is P125,000 (P90,000 + P35,000). Retained earnings reported at December 31, 20x4: Retained earnings, January 1, 20x4 Net income for 20x4 Dividends paid in 20x4 Retained earnings, December 31, 20x4

4. 5.

QQ P 90,000 24,500 P114,500

NN P35,000

QQ P290,000 114,500 (30,000) P374,500

NN P40,000 35,000 (10,000) P65,000

P35,000

Consolidated retained earnings at December 31, 20x4, is equal to the P374,500 retained earnings balance reported by QQ. When the cost method is used, the parent's proportionate share of the increase in retained earnings of the subsidiary subsequent to acquisition is not included in the parent's retained earnings. Thus, this amount must be added to the tot al retained earnings reported by the parent in arriving at consolidated retained earnings.

Problem XIV (Several valuation and income determination questions for a business combination involving a non controlling interest.)

Business combinations are recorded generally at the fair value of the consideration transferred by the acquiring firm plus the acquisition-date fair value of the non-controlling interest. PS’s consideration transferred (P31.25 × 80,000 shares) ....................................... Non-controlling interest fair value (P30.00 × 20,000 shares) .................................. SR’s total fair value 1/1/09 ....................................................................................

P2,500,000 P600,000 P3,100,000

1.

Each identifiable asset acquired and liability assumed in a business combination should initially be reported at its acquisition-date fair value.

2.

In periods subsequent to acquisition, the subsidiary’s assets and liabilities are reported at their acquisition-date fair values adjusted for amortization and depreciation. Except for certain financial items, they are not continually adjusted for changing fair values.

3.

SR’s total fair value 1/1/09 .................................................................................... SR’s net assets book value.................................................................................... Excess acquisition-date fair value over book value ............................................. Adjustments from book to fair values ................................................................... Buildings and equipment ................................................. (250,000) Trademarks ...................................................................... 200,000 Patented technology ...................................................... 1,060,000 Unpatent ed technology.................................................. 600,000 Goodwill ......................................................................................................

P3,100,000 1,290,000 P1,810,000

Combined revenues............................................................................................. Combined expenses ............................................................................................ Building and equipment excess depreciation ..................................................... Trademark excess amortization ............................................................................ Patented technology amortization ...................................................................... Unpatent ed technology amortization ................................................................. Consolidated net income ....................................................................................

P4,400,000 (2,350,000) 50,000 (20,000) (265,000) (200,000) P1,615,000

To non-controlling interest: SR’s revenues .................................................................................................. SR’s expenses.................................................................................................. Total excess amortization expenses (above) ................................................. SR’s adjusted net income ............................................................................... Non-controlling interest percentage ownership ............................................ Non-controlling interest share of consolidated net income ...........................

P1,400,000 (600,000) (435,000) P365,000 20% P73,000

To controlling interest: Consolidated net income .............................................................................. Non-controlling interest share of consolidated net income........................... Controlling interest share of consolidated net income ..................................

P1,615,000 (73,000) P1,542,000

4.

1,610,000 P 200,000

-ORPS’s PS’s PS’s PS’s

revenues .................................................................................................. expenses.................................................................................................. separate net income .............................................................................. share of SR’s adjusted net income (80% × P365,000) .................................................................................

P3,000,000 1,750,000 P1,250,000 292,000

5.

6.

Controlling interest share of consolidated net income ..................................

P1,542,000

Fair value of non-controlling interest January 1, 20x4........................................... 20x4 income ............................................................................................ 73,000 Dividends (20% × P30,000) .................................................................................... Non-controlling interest December 31, 20x4 ........................................................

P600,000

P

(6,000) 667,000

If SR’s acquisition-date total fair value was P2,250,000, then a bargain purchase has occurred. SR’s total fair value 1/1/09 .................................................................................... P2,250,000 Collective fair values of SR’s net assets ................................................................ P2,300,000 Bargain purchase ................................................................................................. P50,000 The acquisition method requires that the subsidiary assets acquired and liabilities assumed be recognized at their acquisition date fair values regardless of the assessed fair value. Therefore, none of SR’s identifiable assets and liabilities would change as a result of the assessed fair value. When a bargain purchase occurs, however, no goodwill is recognized.

Problem XV (Full-Goodwill) A variety of consolidated balances-midyear acquisition) Book value of RR, 1/1 (stockholders' equity accounts) (P100,000 + P600,000 + P700,000) .................... Increase in book value: Net Income (revenues less cost of goods sold and expenses) ............................ Dividends ....................................................... Change during year ............................................ Change during first six months of year .......... Book value of RR, 7/1 (acquisition date) . (Full-Goodwill) Consideration transferred by KL (P1,330,000 + P30,000) ........................................................... Non-controlling interest fair value .............................. RRs’ fair value (given) .................................................

P1,400,000

P120,000 (20,000) P100,000 50,000 P1,450,000

P1,360,000 300,000 P1,630,000

Note: The fair value of subsidiary amounting P1,630,000, indicates a fair value of NCI amounting to P300,000 (refer to above computation), which is lower compared to the FV of the NCI based on FV of SHE of Subsidiary (RR), computed as follow s: BV of SHE of Subsidiary (RR) .................................. Adjustments to reflect fair value (undervaluation) FV of SHE of Subsidiary (RR) .................................. Multiplied by: NCI%............................................... FV of NCI… ……………………………………………. Consideration transferred by KL (P1,330,000 + P30,000) ........................................................... Non-controlling interest fair value .............................. RRs’ fair value (given) ................................................. Book value of RR, 7/1.................................................. Fair value in excess of book value.............................. Excess fair value assigned Trademarks .............................................................

P1,450,000 150,000 P 1,600,000 20% P 320,000

P1,360,000 ___320,000 P1,680,000 (1,450,000) P 230,000 Life 150,000 5 years

Annual Excess Amortizations P30,000

Goodwill (full-goodwill) ........................................... Total ..................................................................

P

80,000 indefinite

-0P30,000

It should be carefully noted, that NCI can never be less than its share of fair value of net identifiable assets (which is P320,000). Thus, the NCI share of company value is raised to P320,000 (replacing the P300,000 NCI computed as residual amount – refer to computation above). The rationale behind such rule is to avoid having a lower amount of goodwill under the full-goodwill approach as compared to goodwill computed under the partial -goodwill approach. (Partial-Goodwill) Consideration transferred by KL ................................. P 1,360,000 Less: Book value of SHE – RR (P1,450,000 x 80%)… … .. 1,160,000 Allocated excess… … … …………………………………. P 200,000 Less: Over/under valuation of A and L: P150,000 x 80%.............................................. 120,000 Goodwill - partial ........................................................ P 80,000 Note that the goodwill under the full-goodwill and partial-goodwill approach are the same because the FV of the NCI based on the FV of SHE of subsidiary (P320,000) i s higher compared to the imputed or the computed residual amount of NCI (P300,000). Consolidation Totals:  Expenses, P265,000 = P200,000 KK operating expenses plus P50,000 (post-acquisition subsidiary operating expenses) plus ½ year excess amortization of P15,000.  Dividends paid = P80,000  Sales, P1,050,000 = P800,000 KK revenues plus P250,000 (post-acquisition subsidiary revenue, P500,000 x 1/2)  Equipment, none  Depreciation expense, none  Subsidiary’s net income, P60,000 = [(P500,000 – P280,000 – P100,000) x 1/2]  Buildings, none  Goodwill (full), P80,000; Goodwill (partial), P80,000  Consolidated Net Income, P245,000  Sales (1) P1,050,000  Cost of goods sold (2) 540,000  Operating expenses (3) __265,000  Net Income P 245,000  Non-controlling Interest in Sub. Income (4) P 9,000  Controlling Interest in CNI P 236,000 (1) P800,000 KK revenues plus P250,000 (post-acquisition subsidiary revenue) (2) P400,000 KK COGS plus P140,000 (post-acquisition subsidiary COGS) (3) P200,000 KK operating expenses plus P50,000 (post-acquisition subsidiary operating expenses) plus ½ year excess amortization of P15,000 (4) 20% of post-acquisition subsidiary income less excess fair value amortization [20% × (120,000 – 30,000) × ½ year] = P9,000  Retained Earnings, 1/1 = P1,400,000 (the parent’s balance because the subsidiary was acquired during the current year)  Trademark = P935,000 (add the two book values and the excess fair value allocation after taking one-half year excess amortization)  Goodwill (full)= P80,000 (the original allocation)  Goodwill (partial) = P80,000 (the original allocation)

Problem XVI (Consolidated balances after a mid-year acquisition) Note: Investment account balance indicates the initial value method. Consideration transferred .................................... Non-controlling interest fair value ........................ FV of SHE - subsiary .............................................. Less: Book value of DD (below) ............................ Fair value in excess of book value (positive)........ Excess assigned based on fair value: Equipment ................................................ Goodwill (full) ........................................... Total ............................................................... Amortization for 9 months ..............................

P526,000 300,000 P826,000 (765,000) P 61,000 Life (30,000) 5 years P 91,000 indefinite

Acquisition-Date Subsidiary Book Value Book value of Duncan, 1/1/x4 (CS + 1/1 RE) ......................... Increase in book value-net income (dividends were paid after acquisition) ............................................ Time prior to purchase (3 months) ......................................... Book value of DD, 4/1/x4 (acquisition date) .........................

Annual Excess Amortizations P(6,000) -0P(6,000) P(4,500)

P740,000 P100,000 ×¼

25,000 P765,000

* The fair value of NCI amounting to P300,000 is higher compared to the FV of the NCI based on FV of SHE of Subsidiary (RR), computed as follows: BV of SHE of Subsidiary (DD)..…………………… Adjustments to reflect fair value (undervaluation) FV of SHE of Subsidiary (DD) ............................. Multiplied by: NCI% .......................................... FV of NCI… …………………………………………. (Partial-Goodwill) Consideration transferred .............................. Less: Book value of SHE – DD (P765,000 x 60%) Allocated excess…………………………………. Less: Over/under valuation of A and L: (P30,000 x 60%)........................................... Goodwill - partial ............................................

P765,000 ( 30,000) P735,000 40% P294,000

P 526,000 459,000 P 67,000 ( 18,000) P 85,000

1. Consolidated Income Statement: Revenues (1) P825,000 Cost of goods sold (2) P405,000 Operating expenses (3) 214,500 619,500 Consolidated net income P 205,500 Noncontrolling interest in CNI (4) 28,200 Controlling interest in CNI P 177,300 (1) P900,000 combined revenues less P75,000 (preacquisition subsidiary revenue) (2) P440,000 combined COGS less P35,000 (preacquisition subsidiary COGS) (3) P234,000 combined operating expenses less P15,000 (preacquisition subsidiary operating expenses) less nine month excess overvalued equipment depreciation reduction of P4,500 (4) 40% of post-acquisition subsidiary income less excess amortization

2. Goodwill, full = P91,000 (original allocation); Goodwill , partial = P85,000 Equipment = P774,500 (add the two book values less P30,000 reduction to fair value plus P4,500 nine months excess amortization) Common Stock = P630,000 (P company balance only) Buildings = P1,124,000 (add the two book values) Dividends Paid = P80,000 (P company balance only) Problem XVII P’s gain on sale of subsidiary stock is computed as follows:

Cash proceeds……………………………………… Fair value of retained non-controlling interest equity investment (35%) Carrying value of the non-controlling interest before deconsolidation (15% or prior outside non-controlling interest in Subsidiary) Less: Carrying value of Subsidiary’s net assets Gain on disposal or deconsolidation

P 720,000 420,000

120,000 P1,260,000 1,200,000 P 60,000

Parent Company reports the P60,000 gain in 20x5 income. Problem XVIII P Company’s additional paid-in capital arising sale of subsidiary shares is computed as follows:

Cash proceeds……………………………………… Less: Carrying value of non-controlling interest (P720,000* x 10%) “Gain” – transfer within equity in “Additional paid-in capital” account

P 96,000 72,000 P 60,000

* t he P720,000 is already t he gross-up amount since it is t he amount present ed in t he consolidat ed balance sheet .

Because P Company continues to have the ability to control S Company, the sale of S’s shares is treated as an equity transaction. Therefore, no gain or loss is recognized. Instead, Pa lmer Company’s additional paid-in capital increases by P60,000. Problem XIX P Company’s additional paid-in capital arising sale of subsidiary shares is computed as follows: Cash proceeds from issuance of additional shares … .. Less: Carrying Value of non-controlling from issuance of additional shares: Non-controlling interest prior to issuance of additional shares: Book value of SHE before issuance… P720,000

P 210,000

x: Non-controlling interest… … … … … . 20%* P 144,000 Non-controlling interest after issuance of additional shares: Book value of SHE before issuance… … … … … … … … … … … … .P720,000 Additional issuance… … … … … … … ..… 210,000 BV of SHE after issuance… … … … … … .P930,000 x: Non-controlling interest… … … … … ... 36%** 334,800 190,800 “Gain” – transfer within equity in “Additional paid-in capital” account.… … .............. P 19,200 * (120,000 – 96,000) / 120,000 = 20% ownership before additional issuance of shares. ** [(24,000 + 30,000) / (120.000 + 30,000)] = 36% ownership after additional issuance of shares P Company recognizes an increases in its Investment in S from P576,000 (P720,000x 80%) to P595,200 [P930,000 x (96,000/150,000) and in additional paid-in capital of P19,200.

Problem XX 1. Equity Method Income accrual (80%) ........................................................... Excess amortization expense ................................................. Investment income ..........................................................

P56,000 (3,200) P52,800

Initial fair value paid ............................................................... Income accrual 20x4–20x6 (P260,000 × 80%) ........................ Dividends 20x4–20x6 (P45,000 × 80%) .................................... Excess Amortizations 20x4–20x6 (P3,200 × 3) .......................... Investment in TT—12/31/x6 ...............................................

P664,000 208,000 (36,000) (9,600) P826,400

2.

Equity Method – same with No. 1

3.

Using the acquisition method, the allocation will be the total difference (P80,000) between the buildings' book value and fair value. Based on a 20 year life, annual excess amortization is P4,000. MM book value—buildings .............................................. TT book value—buildings ................................................. Allocation ........................................................................ Excess Amortizations for 20x4–20x5 (P4,000 × 2) Consolidated buildings account .........................

4.

5.

Acquisition-date fair value allocated to goodwill Goodwill-full ( see Problem I above) .................................... Goodwill-partial (see Problem I above)… … ……………………

P 800,000 300,000 80,000 (8,000) P1,172,000 P P

150,000 120,000

If the parent has been applying the equity method, the stockholders' equity accounts on its books will already represent consolidated totals. The common stock and additional paid -in capital figures to be reported are the parent balances only. Common stock, P500,000 Additional paid-in capital, P280,000

Problem XXI

(Consolidated balances three years after purchase. Parent has applied the equity method.) 1. Schedule 1—Acquisition-Date Fair Value Allocation and Amortization JJ’s acquisition-date fair value .. P206,000 Book value of JJ ....................................... (140,000) Fair value in excess of book value ........... 66,000 Excess fair value assigned to specific accounts based on individual fair values Equipment ......................................... Buildings (overvalued) ....................... Goodwill ............................................ Total ...................................................

54,400 (10,000) P21,600

Life 8 yrs. 20 yrs. indefinite

Annual Excess Amortization P6,800 (500) -0P6,300

Investment in JJ Company—12/31/x6 JJ’s acquisition-date fair value ..................................................... 20x4 Increase in book value of subsidiary 20x4 Excess amortizations (Schedule 1) ....................................... 20x5 Increase in book value of subsidiary ................................... 20x5 Excess amortizations (Schedule 1) ....................................... 20x6 Increase in book value of subsidiary ................................... 20x6 Excess amortizations (Schedule 1) ....................................... Investment in J Company ......................................................

P206,000 40,000 (6,300) 20,000 (6,300) 10,000 (6,300) P257,100

2. Equity in Subsidiary Earnings Income accrual ............................................................................ Excess amortizations (Schedul e 1) ............................................... Equity in subsidiary earnings ..................................................

P30,000 (6,300) P23,700

3. Consolidated Net Income Consolidated revenues (add book values) ................................. Consolidated expenses (add book values) ................................ Excess amortization expenses (Schedule 1) ................................ Consolidated net income ...........................................................

P414,000 (272,000) (6,300) P135,700

4. Consolidated Equipment Book values added together ...................................................... Allocation of purchase price ....................................................... Excess depreciation (P6,800 × 3) ................................................. Consolidated equipment ......................................................

P370,000 54,400 (20,400) P404,000

5. Consolidated Buildings .............................................................................. Book values added together ...................................................... Allocation of purchase price ....................................................... Excess depreciation (P500 × 3) .................................................... Consolidated buildings...........................................................

P288,000 (10,000) 1,500 P279,500

6. Consolidated goodwill Allocation of excess fair value to goodwill ...................................

P21,600

7. Consolidated Common Stock ................................................................... P290,000 As a purchase, the parent's balance of P290,000 is used (the acquired company's common stock will be eliminated each year on the consolidation worksheet). 8. Consolidated Retained Earnings ...............................................................

P410,000

Tyler's balance of P410,000 is equal to the consolidated total because the equity method has been applied. Problem XXII Computation of Goodwill: Partial Goodwill or Proportionate Basis Fair value of Subsidiary: Consideration transferred Less: BV of SHE of S (P1,200,000 + P600,000) x 80% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P725,000 – P600,000) x 80% Equipment (P1,075,000 – P900,000) x 80% Goodwill – partial

Full-goodwill or Fair Value Basis Fair value of Subsidiary: Consideration transferred P1,970,000 / 80% Less: BV of SHE of S (P1,200,000 + P600,000) x 100% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P725,000 – P600,000) x 100% Equipment (P1,075,000 – P900,000) x 100% Goodwill – full

P1,970,000 _1,440,000 P 530,000 P 100,000 140,000

__240,000 P 290,000

P2,467,500 1,800,000 P 662,500 P125,000 175,000

__300,000 P362,500

Amortization Inventory: P125,000 x 60% P125,000 x 40% Equipment: P175,000 / 7 years

20x4 P 75,000 25,000 P 100,000

20x5 P 50,000 25,000 P 75,000

1. 20x4 Investment in S Company Cash

1,970,000 1,970,000

Cash (0.8 x P150,000) Investment in S Company

120,000

Investment in S Company Equity in Subsidiary Income (.80)(P750,000)

600,000

120,000

600,000

Equity in Subsidiary Income Investment in S Company

80,000

Cash (0.8 x P225,000)

180,000

80,000

20x5

Investment in S Company Investment in S Company Equity in Subsidiary Income (.80)(P900,000) Equity in Subsidiary Income Investment in S Company

180,000 720,000 720,000 60,000 60,000

2. 20x4 (1) Equity in Subsidiary Income ((.80)(P750,000) -P80,000) Dividends Declared (0. 80 x P150,000) Investment in S Company (2) Beginning Retained Earnings - S Company Common Stock- S Company Investment in S Company Noncontrolling Interest (3) Inventory (P125, 000 – P75,000) Cost of Goods Sold Equipment (net) Goodwill Investment in S Company (4) Depreciation Expense Equipment (net)

520,000 120,000 400,000 600,000 1,200,000 1,307,500 492,500 50,000 75,000 175,000 362,500 662,500 25,000 25,000

20x5 (1) Equity in Subsidiary Income ((.80)(P900,000) - P60,000) Dividends Declared (0. 80 x P225,000) Investment in Superstition Company (2) Beginning Retained Earnings-Superstition Company Common Stock - Superstition Company. Investment in Superstition Company

660,000 180,000 480,000 1,200,000 1,200,000 1,787,500

Non-controlling Interest (P492,500 + (P1,200,000 – P600,000) x .20)

(3) Investment in S Company Non-controlling Interest Cost of Goods Sold Equipment (net) Goodwill Investment in S Company (4) Investment in S Company Non-controlling Interest Depreciation Expense Equipment (net)

612,500

60,000 15,000 50,000 175,000 362,500 662,500 20,000 5,000 25,000 50,000

3.

Consolidated Net Income for 20x5 Net income from own/separate operations P Company (P1,000,000 – P120,000) S Company

P 880,000 __ 750,000 P1,630,000

Total Less: Non-controlling Interest in Net Income* P130,000 Amortization of allocated excess 100,000 Goodwill impairment ____0 230,000 Controlling Interest in Consolidated Net Income or Profit P1,400,000 attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income 130,000 (NCINI) Consolidated Net Income for 20x4 P1,530,000 Net income of subsidiary…………………….. Amortization of allocated excess (P25,000 + P75,000)

P 750,000 ( 100,000) P650,000

Multiplied by: Non-controlling interest %.......... 20% P 130,000

Non-controlling Interest in Net Income (NCINI)

Note: Regardless on the method used in recording investments (cost model or equity method) the manner of computing CI-CNI, NCI-CNI and CNI are exactly the same. Problem XXIII Requirements 1 to 4: Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 80%)……………………. Retained earnings (P120,000 x 80%)………………... Allocated excess (excess of cost over book

P 372,000 P 192,000 96,000

288,000 P

value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… Increase in land (P7,200 x 80%)……………………. Increase in equipment (P96,000 x 80%) Decrease in buildings (P24,000 x 80%)………..... Decrease in bonds payable (P4,800 x 80%)…… Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

84,000

P 4,800 5,760 76,800 ( 19,200) 3,840

72,000 P 12,000

The over/under valuation of assets and liabilities are summarized as follows:

S Co. Book value

S Co. Fair value

P 24,000 48,000 84,000 168,000

P Inventory………………….…………….. 30,000 Land……………………………………… 55,200 Equipment (net)......... 180,000 Buildings (net) 144,000 ( Bonds payable………………………… (120,000) 115,200) P P Net……………………………………….. 204,000 294,000

(Over) Under Valuation P

6,000 7,200 96,000 (24,000) 4,800

P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows:

Equipment .................. Less: Accumulated depreciation….. Net book value………………………...

Buildings................ Less: Accumulated

S Co. Book value 180,000

S Co. Fair value 180,000

Increase (Decrease) 0

96,000

-

( 96,000)

84,000

180,000

96,000

S Co. Book value 360,000 192,000

S Co. Fair value 144,000 -

(Decrease) ( 216,000) ( 192,000)

depreciat ion….. Net book value………………………...

168,000

144,000

(

24,000)

A summary or depreciation and amortization adjustments is as follows:

Over/ Account Adjustments to be Unde amortized r P Inventory 6,000 Subject to Annual Amortization 96,00 Equipment (net)......... 0 (25,0 Buildings (net) 00) Bonds payable…

4,800

Lif e 1

8 4 4

Annu al Current Amou Year(20x nt 4) P 6,000 P 6,000

20x5 P -

12,000 ( 6,000)

12,00 0 (6,00 0)

1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

1,200 P 7,200

The goodwill impairment loss of P3,125 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full -goodwill is computed as follows:

Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) Fair value of NCI (given) (20%) Fair value of Subsidiary (100%) Less: Book value of stockholders’ equity of S (P360,000 x 100%) Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P 372,000 93,000 P 465,000 __360,000 P 105,000 90,000 P

15,000

In this case, the goodwill was proportional to the controlling interest of 80% and non -controlling interest of 20% computed as follows:

Value

% of Total

Goodwill applicable to P………………… Goodwill applicable to NCI…………………….. Total (full) goodwill………………………………..

P12,00 0 3,000 P15,000

80.00% 20.00% 100.00%

The goodwill impairment loss would be allocated as follows

Value Goodwill impairment loss attributable to P or P controlling 3,000 Interest Goodwill applicable to NCI…………………….. 750 Goodwill impairment loss based on 100% fair value or fullP 3,750 Goodwill

% of Total 80.00% 20.00% 100.00%

20x4: First Year after Acquisition Parent Company Equity Method Entry The following are entries recorded by the P in 20x4 in relation to its subsidiary investment: January 1, 20x4:

(1) Investment in Company……………………………………………

S 372,000 372,000

Cash…………………………………………………………………….. Acquisit ion of S Company.

January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Investment in S Company (P36,000 x 80%)…………….

28,800

28,800

Record dividends from S Company.

December 31, 20x4: (3) Investment in S Company Investment income (P60,000 x 80%)

48,000 48,000

Record share in net income of subsidiary.

December 31, 20x4: (4) Investment income [(P13,200 x 80%) + P3,000*, goodwill impairment loss)] Investment in S Company

13,560 13,560

Record amortization of allocat ed excess of invent ory, equipment , buildings and bonds payable and goodwill impairment loss.

Thus, the investment balance and investment income in the books of P Company is as follows: Cost, 1/1/x4

Inv estment in S 372,000 28,800

Div idends – S (36,000x 80%)

NI of S (60,000 x 80%) Balance, 12/31/x4

Amortization & impairment

48,000 377,640

13,560

Inv estment Income 13,560

48,000 34,440

Amortization & impairment

NI of S (P60,000 x 80%) Balance, 12/31/x4

Consolidation Workpaper – First Year after Acquisition The schedule of determination and allocation of excess presented a bove provides complete guidance for the worksheet eliminating entries on January 1, 20x4:

(E1) Common stock – S Co………………………………………… Retained earnings – S Co…………………………………… Investment in Son Co…………………………………………… Non-controlling interest (P360,000 x 20%)………………………..

240,000 120.000 288,000 72,000

To eliminat e invest ment on January 1, 20x4 and equit y account s of subsidiary on dat e of acquisit ion; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Non-controlling interest (P96,000 x 18,000 20%)……………………….. Investment in S 84,000 Co………………………………………………. To eliminat e invest ment on January 1, 20x4 and allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish non- cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E3) Cost of Goods Sold……………. Depreciation expense………………………..

6,000 6,000

Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss……………………………………….

6,000 1,200 3,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

6,000 12,000 1,200 3,000

To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

_______ P 6,000

Total

13,200

It should be observed that the goodwill computed above was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows:

Value Goodwill applicable to parent………………… Goodwill applicable to NCI…………………….. Total (full) goodwill………………………………..

P12,00 0 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

Therefore, the goodwill impairment loss of P3,750 based on 100% fair value or full -goodwill would be allocated as follows:

Value Goodwill impairment loss attributable to parent P or controlling 3,000 Interest Goodwill impairment loss applicable to 625 NCI…………………….. Goodwill impairment loss based on 100% fair value or fullP 3,750 Goodwill (E4) Investment income

34,440

% of Total 80.00% 20.00% 100.00%

Non-controlling interest (P36,000 20%)……………….. Dividends paid – S…………………… Investment in S Company

x

7,200 36,000 5,640

To eliminate intercompany dividends and investment income under equit y met hod and est ablish share of dividends, comput ed as follows: Inv estment in S NI of S 28,800 Div idends - S (60,000 Amortization & x 80%)……. 48,000 13,560 impairment 5,640

After

Inv estment Income Amortization impairment

13,560

NI of S (60,000 x 80%)

48,000 34,440

the

eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus,

goodwill purposes:

for

Cost, 1/1/x4 NI of Son (60,000 x 80%) Balance, 12/31/x4

Goodwill applicable to parent Goodwill applicable to NCI Total (full) goodwill…………

Inv estment in S 372,000 28,800 48,000 377,640

377,640 Value P12,000 3,000 P15,000

13,560 288,000 84,000 5,640

Div idends – S (36,000x 80%) Amortization & impairment (E1) Inv estment, 1/1/20x4 (E2) Inv estment, 1/1/20x4 (E4) Inv estment Income and div idends

Percentage of amortization

377,640 % of Total 80.00% 20.00% 100.00%

The goodwill impairment loss of P3,750 based on 100% fair v alue or full-goodwill would be allocated as follows: Value % of Total Goodwill impairment loss attributable P 3,000 80.00% to parent or controlling Interest Goodwill impairment loss applicable to NCI…………………….. 750 _20.00% Goodwill impairment loss based on 100% fair v alue or full-goodwill P 3,750 100.00%

(E5) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

9,360 9,360

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x4 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E3)] …... Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

P 60,000 ( 13,200) P 46,800 20% P 9,360

Subsidiary accounts are adjusted to full fair value regardless on the controlling interest percentage or what option used to value non-controlling interest or goodwill. Worksheet for Consolidated Financial Statements, December 31, 20x4.

Equity Method (Partial -goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) P Co P480,000 34,440 P513,600 P204,000 60,000 48,000 P312,000 P202,440 P202,440

Income Statement Sales Inv estment income Total Rev enue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest………… Total

P360,000

P

202,440 P562,440

P120,000 60,000 P180,000

72,000 -

36,000

P490,440

P144,000

232,800 90,000 120,000 210,000 240,000 720,000

P 90,000 60,000 90,000 48,000 180,000 540,000

Dr. (4)

34,440

(3) (3) (3)

6,000 6,000 1,200

(3)

3,000

(5)

9,360

377,640 P1,990,440

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

490,440

240,000 144,000 _________ P1,008,000

Consolidated P 720,000 _________ P 720,000 P 348,000 90,000 1,200 66,000 3,000 P508,200 P211,800 ( 9,360) P202,440

P360,000 202,440 P562,440

(4)

72,000 -

36,000

P490,440

P (2) (2)

6,000 (3) 7,200

6,000

(2) 216,000 4,800 (3) 1,200 12,000 (3) 3,000 (2) 288,000 (2) 84,000 (4) 5,640

(2) 96,000 (3) (8) 192,000 (9) 6,000

322,800 150,000 210,000 265,200 420,000 1,044,000 3,600 9,000

P2,424,600

12,000

P147,000 495,000 240,000 360,000 600,000

(1) 240,000

490,440 (10) 7,200

_________ P1,990,440

Cr.

(1) 120,000

(2) (2)

20x5: Second Year after Acquisition

Sales

S Co. P240,000 P240,000 P138,000 24,000 18,000 P180,000 P 60,000 P 60,000

__________ P 751,200

(1 ) 72,000 (2) 18,000 (5) 9,360 P 751,200

P Co.

____92,160 P2,424,600

S Co. P

P

540,000 216,000

Less: Cost of goods sold Gross profit Less: Depreciation expense Other expense

P 324,000 60,000 72,000

Net income from its own separate operations Add: Investment income

P 192,000 66,240

Net income

P 258,240 P 72,000

Dividends paid

360,000 192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. Parent Company Equity Method Entry The following are entries recorded by the parent in 20x5 in relation to its subsidiary investment:

January 1, 20x5 – December 31, 20x5: (2) Cash……………………… Investment in S Company (P48,000 x 80%)…………….

38,400 38,400

Record dividends from S Company.

December 31, 20x5: (3) Investment in S Company Investment income (P90,000 x 80%)

72,000 72,000

Record share in net income of subsidiary.

December 31, 20x5: (4) Investment income (P7,200 x 80%) Investment in S Company

5,760

5,760

Record amortizat ion of allocat ed excess of invent ory, equipment , buildings and bonds payable

Thus, the investment balance and investment income in the books of P Company is as follows: Cost, 1/1/x5 NI of S (90,000 x 80%) Balance, 12/31/x5

Inv estment in S 377,640 38,400 72,000 405,480

5,760

Div idends – S (48,000x 80%) Amortization (P7,200 x 80%)

Inv estment Income Amortization (7,200 x 80%)

5,760

72,000 66,240

Consolidation Workpaper – Second Year after Acquisition

NI of S (90,000 x 80%) Balance, 12/31/x4

The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries:

(E1) Common stock – S Co………………………………………… Retained earnings – S Co, 1/1/x5…………………………. Investment in S Co (P384,000 x 80%) Non-controlling interest (P384,000 x 20%)………………………..

240,000 144.000 307,200 76,800

To eliminat e invest ment on January 1, 20x5 and equit y account s of subsidiary on dat e of acquisit ion; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on 1/1/20x5.

(E2) Accumulated depreciation – equipment (P96,000 – 84,000 P12,000) Accumulat ed depreciation – buildings (P192,000 + 6,000) 198,000 7,200 Land………………………………………………………………………. Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P12,000 – P3,000)…………………………….. 9,000 Buildings……………………………………….. 216,000 Non-controlling interest [(P90,000 – P13,200) x 20%] 15,360 Investment in S 70,440 Co………………………………………………. To eliminat e invest ment on January 1, 20x5 and allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o t he original amount of goodwill; and t o est ablish non- cont rolling int erest (in net asset s of subsidiary) on 1/1/20x5.

(E3) Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… To provide for 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______

P 1,200

Total

6,000 6,000 1,200 12,000 1,200

Totals

P 6,000

P1,200

P7,,200

(E4) Investment income Non-controlling interest (P48,000 20%)……………….. Dividends paid – S…………………… Investment in S Company

66,240 9,600

x

48,000 27,840

To eliminate intercompany dividends and investment income under equit y met hod and est ablish share of dividends, comput ed as follows:

After

Inv estment in S NI of S 38,400 Div idends – S (90,000 Amortization x 80%)……. 72,000 5,760 (P7,200 x 80%) 27,840

Inv estment Income Amortization (P7,200 x 80%)

5,760

72,000 66,240

the NI of S (90,000 x 80%)

eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Cost, 1/1/x5 NI of S (90,000 x 80%) Balance, 12/31/x5

Inv estment in S 377,640 38,400 72,000 405,480

5,760 307,200 70,440 27,840

405,480

405,480

Div idends – S (48,000x 80%) Amortization (7,200 x 80%) (E1) Inv estment, 1/1/20x5 (E2) Inv estment, 1/1/20x5 (E4) Inv estment Income and div idends

(E5) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

16,560 16,560

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x4 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E3)] …... Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

P 90,000 ( 7,200) P 82,800 20% P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Partial -goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement Sales Inv estment income Total Rev enue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss

P Co P540,000 66,240 P606,000 P216,000 60,000 72,000 -

S Co. P360,000 P360,000 P192,000 24,000 54,000 -

Dr.

(4)

66,240

(3) (3)

6,000 1,200

Cr.

Consolidated P 900,000 ___________ P 900,000 P 408,000 90,000 1,200 126,000 -

Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

P348,000 P258,240 P258,240

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest…………

Total

P270,000 P 90,000 P 90,000

(5)

P 625,200 P 274,800 ( 16,560) P258,240

16,560

P490,440

P

P490,440

258,240 P748,680

P144,000 90,000 P234,000

72,000 -

48,000

P676,680

P186,000

P676,680

265,200 180,000 216,000 210,000 240,000 720,000

P 102,000 96,000 108,000 48,000 180,000 540,000

P 367,200 276,000 324,000 265,200 420,000 1,044,000 2,400 9,000

405,480 P2,236,680

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

676,680

240,000 186,000

(1) 144,000

(4)

(2)

7,200

(2) (2)

3,600 9,000

(2)

_________ P1,074,000

84,000

48,000

(3) 216,000 (3) 1,200 (1) 307,200 (2) 70,440 (4) 27,840

(3)

12,000

(2) 198,000 (3) 6,000

9,600

__________ P 794,400

72,000 -

P2,707,800

P180,000 552,000 240,000 360,000 600,000

(1) 240,000 (7)

___ _____ P2,236,680

258,240 P748,680

676,680 (2 ) 76,800 (2) 15,360 (5) 16,560 P 794,400

____99,120 P2,707,800

Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem VI solution). 5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition)

P360,000

b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – S Company, January 1, 20x4…… Retained earnings – S Company, January 1, 20x4 Stockholders’ equity – S Company, January 1, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and

P 240,000 120,000 P 360,000

liabilities, date of acquisition (January 1, 20x4) Fair v alue of stockholders’ equity of subsidiary, January 1, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

90,000 P450,000 20 P 90,000

c.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI - SHE NCI, 1/1/20x4 Consolidated SHE, 1/1/20x4

P 600,000 360,000 P 960,000 ___90,000 P1,050,000

6. 12/31/20x4: a. CI-CNI Consolidated Net Income for 20x4 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under partial-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P 9,360 13,200 3,000

P168,000 60,000 P228,000

25,560 P202,440 9,360 P211.800

b. NCI-CNI * Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess / goodw ill impairment (refer to amortization table abov e) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

P 60,000 13,200 P 46,800 20% P 9,360

c. CNI, P211,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Div idends paid – P Company for 20x4 Consolidated Retained Earnings, December 31, 20x4

P360,000 202,440 P562,440 72,000 P490,440

e. Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 Add: Net income of S for 20x4 Total

P 240,000 P120,000 60,000 P180,000

Less: Div idends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) – 20x4 Fair v alue of stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

36,000

144,000 P 384,000 90,000 ( 13,200) P460,000 20 P 92,160

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

P 600,000 490,440 P1,090,440 ___92,160 P1,182,600

12/31/20x5: a. CI-CNI Consolidated Net Income for 20x5 Net income from own/separate operations: P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization abov e) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5

P192,000 90,000 P282,000 P16,560 __7,200

23,760 P258,240 16,560 P274,800

b. NCI-CNI * Non-controlling Interest in Net Income (NCINI) for 20x5 Net income of S Company Less: Amortization of allocated excess / goodwill impairment for 20x5 (refer to amortization table abov e) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x5

P 90,000 80,400 P 82,800 20% P 16,560

c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - P Company, January 1, 20x5 (cost model Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – S, January 1, 20x5 Less: Retained earnings – S, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Multiplied by: Controlling interests %................... Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or

P484,800

P 144,000 120,000 P 24,000 13,200 P 10,800 80% P 8,640

(P3, 750 x 80%) 3,000 5,640 Consolidated Retained earnings, January 1, 20x5 P 490,440 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 258,240 Total P748,680 Less: Div idends paid – P Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P676,680 * t his procedure would be more appropriate, instead of mult iplying t he full-goodwill impairment loss of P3,750 by 80%. There might be situations where t he controlling interests on goodwill impairment loss would not be proportionate t o NCI acquired.

e. Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – S Company, December 31, 20x5…… Retained earnings – S Company, December 31, 20x5 Retained earnings – S Company, January 1, 20x5 Add: Net income of S for 20x5 Total Less: Div idends paid – 20x5 Stockholders’ equity – S Company, December 31, 20x5 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) : 20x4 20x5 Fair v alue of stockholders’ equity of subsidiary, December 31, 20x 5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)…………………………………..

P 240,000 P14,000 90,000 P234,000 48,000

186,000 P 426,000 90,000

P 13,200 7,200

( 20,400) P 495,600 20 P 99,120

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

P 600,000 676,680 P1,276,680 ___99,120 P1,1375,800

Problem XXIV Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)……………….. Fair value of Subsidiary (100%)………. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x

P 372,000 93,000 P 465,000

P 240,000

100%)………………. Retained earnings (P120,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… Increase in land (P7,200 x 100%)……………………. Increase in equipment (P96,000 x 100%) Decrease in buildings (P24,000 x 100%)………..... Decrease in bonds payable (P4,800 x 100%)…… Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

120,000

P

360,000 P 105,000

6,000 7,200 96,000

( 24,000) 4,800

90,000

P 15,000

A summary or depreciation and amortization adjustments is as follows:

Over/ Account Adjustments to be unde amortized r P Inventory 6,000 Subject to Annual Amortization 96,00 Equipment (net)......... 0 (24,0 Buildings (net) 00) Bonds payable…

Lif e 1

8 4

4,800

4

Annu al Current Amou Year(20x nt 4) P 6,000 P 6,000

20x5 P -

12,000 ( 6,000)

12,00 0 (6,00 0)

1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

1,200 P 7,200

2x4: First Year after Acquisition Parent Company Equity Method Entry The following are entries recorded by the parent in 20x4 in relation to its subsidiary investment: January 1, 20x4:

(1)

Investment

in

S 372,000

Company…………………………………………… 372,000

Cash…………………………………………………………………….. Acquisit ion of S Company.

January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Investment in S Company (P36,000 x 80%)…………….

28,800

December 31, 20x4: (3) Investment in S Company Investment income (P60,000 x 80%)

48,000

28,800

Record dividends from S Company.

48,000

Record share in net income of subsidiary.

December 31, 20x4: (4) Investment income [(P13,200 x 80%) + (P3,750 – P750)*, goodwill impairment loss)] Investment in S Company

13,560 13,560

Record amortization of allocat ed excess of invent ory, equipment , buildings and bonds payable and goodwill impairment loss. * t his procedure would be more appropriate, instead of mult iplying t he full-goodwill impairment loss of P3,750 by 80%. There might be sit uations where the controlling interests on goodwill impairment loss would not be proport ionat e t o NCI acquired (refer t o Illust rat ion 15-6).

Thus, the investment balance and investment income in the books of P Company is as follows: Cost, 1/1/x4 NI of S (60,000 x 80%) Balance, 12/31/x4

Inv estment in S 372,000 28,800 48,000 377,640

Div idends – S (36,000x 80%) Amortization & Impairment

13,560

Inv estment Income Amortization & Impairment

13,560

NI of S (P60,000 x 80%) Balance, 12/31/x4

48,000 34,440

Consolidation Workpaper – First Year after Acquisition The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries on January 1, 20x4:

(E1) Common stock – Co………………………………………… Retained earnings – Co…………………………………… Investment in Co…………………………………………… Non-controlling interest (P360,000 20%)………………………..

S

240,000

S

120.000

S

288,000

x

72,000

To eliminat e invest ment on January 1, 20x4 and equit y account s

of subsidiary on dat e of acquisit ion; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in S 84,000 Co………………………………………………. To eliminat e invest ment on January 1, 20x4 and allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish non- cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss……………………………………….

6,000 6,000 6,000 1,200 3,750 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill…………………………………… To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of S’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable

Cost of Goods Sold P 6,000

_______

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______

P 1,200

Total

12,000 1,200 3,750

Totals

P 6,000

P 6,000

P1,200

13,200

It should be observed that the goodwill computed above was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows:

Value Goodwill applicable to parent…………………

P12,00 0 3,000 P15,000

Goodwill applicable to NCI…………………….. Total (full) goodwill………………………………..

% of Total 80.00% 20.00% 100.00%

Therefore, the goodwill impairment loss of P3,125 based on 100% fair value or full-goodwill would be allocated as follows:

Value Goodwill impairment loss attributable to parent P or controlling 3,000 Interest Goodwill impairment loss applicable to 750 NCI…………………….. Goodwill impairment loss based on 100% fair value or fullP 3,750 Goodwill (E4) Investment income Non-controlling interest (P36,000 20%)……………….. Dividends paid – S…………………… Investment in S Company

% of Total 80.00% 20.00% 100.00%

37,440 7,200

x

36,000 8,640

To eliminate intercompany dividends and investment income under equit y met hod and est ablish share of dividends, comput ed as follows:

After

Inv estment in S NI of S 28,800 Div idends – S (60,000 Amortization & x 80%)……. 48,000 13,560 Impairment 5,640

Inv estment Income Amortization & Impairment

13,560

48,000 34,440

NI of Son (60,000 x 80%)

the

eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus,

Cost, 1/1/x4 NI of S (60,000 x 80%) Balance, 12/31/x4

Inv estment in S 372,000 28,800 40,000 377,640

13,560 288,000 84,000 5,640

Div idends – S (36,000x 80%) Amortization & Impairment (E1) Inv estment, 1/1/20x4 (E2) Inv estment, 1/1/20x4 (E4) Inv estment Income

and div idends 377,640

Percentage of goodwill for amortization purposes: Value Goodwill applicable to parent P12,000 Goodwill applicable to NCI 3,000 Total (full) goodwill………… P15,000

377,640

% of Total 80.00% 20.00% 100.00%

The goodwill impairment loss of P3,750 based on 100% fair v alue or full-goodwill would be allocated as follows: Value % of Total Goodwill impairment loss attributable P 3,000 80.00% to parent or controlling Interest Goodwill impairment loss applicable to NCI…………………….. 750 _20.00% Goodwill impairment loss based on 100% fair v alue or full-goodwill P 3,750 100.00%

(E5) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

8,610 8,610

To est ablish non-cont rolling int erest in subsidiary’s adj ust ed net income for 20x4 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E3)] …...

P 60,000 ( 13,200) P 46,800 20% P 9,360

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) P 8,610 * t his procedure would be more appropriat e, inst ead of mult iplying t he fullgoodwill impairment loss of P3,750 by 20%. There might be situat ions where t he NCI on goodwill impairment loss would not be proport ionat e t o NCI acquired (refer t o Illust rat ion 15-6).

Subsidiary accounts are adjusted to full fair value regardless on the controlling interest percentage or what option used to value non-controlling interest or goodwill. Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement Sales Inv estment income Total Rev enue Cost of goods sold Depreciation expense Interest expense

P Co P480,000 34,440 P514,440 P204,000 60,000 -

S Co. P240,000 P240,000 P138,000 24,000 -

Dr.

(4)

34,440

(3) (3) (3)

6,000 6,000 1,200

Cr.

Consolidated P 720,000 _________ P 720,000 P 348,000 90,000 1,200

Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

48,000 P312,000 P202,440 P202,440

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest………… Total

18,000 P180,000 P 60,000 P 60,000

(3)

3,750

(5)

8,610

66,000 3,750 P508,950 P211,050 ( 8,610) P202,440

P360,000

P

P360,000

202,440 P562,440

P120,000 60,000 P180,000

72,000 -

36,000

P490,440

P144,000

232,800 90,000 120,000 210,000 240,000 720,000

P 90,000 60,000 90,000 48,000 180,000 540,000

(1) 120,000 202,440 P562,440

(4)

P490,440

P (2) (2)

(2) (2)

377,640 P1,990,440

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

490,440

240,000 144,000

20x5: Second Year after Acquisition

Sales Less: Cost of goods sold Gross profit Less: Depreciation expense Other expense

_________ P1,008,000

6,000 (3) 7,200

6,000

(2) 216,000 4,800 (3) 1,200 15,000 (3) 3,750 (2) 288,000 (2) 84,000 (4) 5,640

(2) 96,000 (3) (2) 192,000 (3) 6,000

322,800 150,000 210,000 265,200 420,000 1,044,000 3,600 11,250

P2,426,850

12,000

P147,000 495,000 240,000 360,000 600,000

(1) 240,000 490,440 (4)

_________ P1,990,440

72,000 -

36,000

7,200

__________ P 754,200

(1 ) 72,000 (2) 21,000 (5) 8,610 P 754,200

____94,410 P2,426,850

P Co.

S Co.

P 540,000 216,000

P 380,000

P 324,000 60,000 72,000

192,000 P 168,000 24,000 54,000

Net income from its own separate operations Add: Investment income Net income

P 192,000 66,240 P 258,240 P 72,000

Dividends paid

P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5.

Parent Company Equity Method Entry The following are entries recorded by the parent in 20x5 in relation to its subsidiary investment:

January 1, 20x5 – December 31, 20x5: (2) Cash……………………… Investment in S Company (P48,000 x 80%)…………….

38,400

38,400

Record dividends from S Company.

December 31, 20x5: (3) Investment in S Company Investment income (P90,000 x 80%)

72,000

72,000

Record share in net income of subsidiary.

December 31, 20x5: (4) Investment income (P7,200 x 80%) Investment in S Company

5,760 5,760

Record amortizat ion of allocat ed excess of invent ory, equipment , buildings and bonds payable

P Company’s P12,000 portion of the differential related to goodwill related to goodwill is not adjusted on the parent’s books following Option 2 as referred to above for goodwill impairment loss. Even though the goodwill of the consolidated entity is impaired, Thus, the investment balance and investment income in the books of P Company is as follows: Cost, 1/1/x5 NI of S (90,000 x 80%) Balance, 12/31/x5

Inv estment in S 377,640 38,400 72,000 405,480

5,760

Div idends – S (48,000x 80%) Amortization (P7,200 x 80%)

Inv estment Income Amortization (7,200 x 80%)

5,760

72,000 66,240

NI of S (90,000 x 80%) Balance, 12/31/x4

Consolidation Workpaper – Second Year after Acquisition The schedule of determination and allocation of excess presented ab ove provides complete guidance for the worksheet eliminating entries.

(E1) Common stock – S Co………………………………………… Retained earnings – S Co, 1/1/x5…………………………. Investment in S Co (P384,000 x 80%) Non-controlling interest (P384,000 x 20%)………………………..

240,000 144.000 307,200 76,800

To eliminat e invest ment on January 1, 20x5 and equit y account s of subsidiary on dat e of acquisit ion; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on 1/1/20x5.

(E2) Accumulated depreciation – equipment (P96,000 – 84,000 P12,000) Accumulated depreciation – buildings (P192,000 + 198,000 P6,000) 7,200 Land………………………………………………………………………. Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P15,000 – P3,750)…………………………….. 11,250 Buildings……………………………………….. 216,000 Non-controlling interest [(P90,000 – P13,200) x 20%] + [P3,000, full goodwill - [(P3,750, full-goodwill impairment – P3,000, partial- goodwill impairment)* 17,610 or (P3,750 x 20%)] Investment in S 70,440 Co………………………………………………. To eliminat e invest ment on January 1, 20x5 and allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o t he original amount of goodwill; and t o est ablish non- cont rolling int erest (in net asset s of subsidiary) on 1/1/20x5. * t his procedure would be more appropriate, inst ead of mult iplying t he full-goodwill impairment loss of P3,750 by 20%. There might be situations where t he NCI on goodwill impairment loss would not be proportionate to NCI acquired (refer t o Illust rat ion 15-6).

(E3) Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… To provide for 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows:

6,000 6,000 1,200 12,000 1,200

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

Inv entory sold Equipment Buildings Bonds payable Totals

Total

P7,200

(E4) Investment income Non-controlling interest (P48,000 20%)……………….. Dividends paid – S…………………… Investment in S Company

66,240 9,600

x

48,000 27,840

To eliminate intercompany dividends and investment income under equit y met hod and est ablish share of dividends, comput ed as follows:

After

Inv estment in S NI of S 38,400 Div idends - S (90,000 Amortization x 80%)……. 72,000 5,760 (P7,200 x 80%) 27,840

Inv estment Income Amortization (P7,200 x 80%)

5,760

72,000 66,240

NI of S (90,000 x 80%)

the

eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Inv estment in S 377,640 38,400

Cost, 1/1/x5 NI of S (90,000 x 80%) Balance, 12/31/x5

72,000 405,480

5,760 307,200 70,440 27,840

405,480

405,480

Div idends – S (48,000x 80%) Amortization (7,200 x 80%) (E1) Inv estment, 1/1/20x5 (E2) Inv estment, 1/1/20x5 (E4) Inv estment Income and div idends

(E5) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

16,560 16,560

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x5 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E3)] …... Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) Less: NCI on goodwill impairment loss on fullGoodwill Non-controlling Interest in Net Income (NCINI)

P 90,000 ( 7,200) P 82,800 20% P 16,560 0 P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement

P Co

S Co.

Dr.

Cr.

Consolidated

Sales Inv estment income Total Rev enue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

P540,000 66,240 P606,000 P216,000 60,000 72,000 P348,000 P258,240 P258,240

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest…………

Total

P360,000 P360,000 P192,000 24,000 54,000 P270,000 P 90,000 P 90,000

(4)

66,240

(3) (3)

6,000 1,200

(5)

16,560

P 900,000 ___________ P 900,000 P 408,000 90,000 1,200 126,000 P 625,200 P 274,800 ( 16,560) P 258,240

P490,440

P

P490,440

258,240 P748,680

P144,000 90,000 P234,000

72,000 -

48,000

P676,680

P186,000

P676,680

265,200 180,000 216,000 210,000 240,000 720,000

P 102,000 960,000 108,000 48,000 180,000 540,000

P 367,200 276,000 324,000 265,200 420,000 1,044,000 2,400 11,250

405,9480 P2,236,680

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

676,680

240,000 186,000

(1) 144,000

(4)

(2)

7,200

(2) (2)

3,600 11,250

(2)

__________ P1,074,000

84,000

48,000

(3) 216,000 (3) 1,200 (1) 307,200 (5) 70,440 (4) 27,840

(3)

12,000

(2) 198,000 (3) 6,000

9,600

__________ P 796,650

72,000 -

P2,634,000

P 180,000 552,000 240,000 360,000 600,000

(1) 240,000 (3)

___ _____ P2,236,680

258,240 P748,680

676,680 (2 ) 76,800 (2) 17,610 (5) 16,560 P 796,650

__________ P2,634,000

Note: Using cost model or equity method, t he consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem VII solution). 5. 1/1/20x4 a. On date of acquisition the retained earnings o f parent should always be considered as the consolidated retained earnings, thus:

Consolidated Retained Earnings, January 1, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition)

P360,000

b. Non-controlling interest (full-goodwill), January 1, 20x4 Common stock – S Company, January 1, 20x4…… Retained earnings – S Company, January 1, 20x4 Stockholders’ equity – S Company, January 1, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Fair v alue of stockholders’ equity of subsidiary, January 1, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)………………………………….. Add: NCI on full-goodwill (P15,000 – P12,000) Non-controlling interest (partial-goodwill)…………………………………..

P 240,000 120,000 P 360,000 90,000 P450,000 20 P 90,000 ___3,000 P 93,000

c.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI - SHE NCI, 1/1/20x4 Consolidated SHE, 1/1/20x4

P 600,000 360,000 P 960,000 ___93,000 P1,053,000

6. a. CI-CNI – P202,440 Consolidated Net Income for 20x4 Net income from own/separate operations: P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P168,000 60,000 P228,000 P 8,610 13,200 3,750

25,560 P202,440 8,610 P211.050

b. NCI-CNI – P8,610 * Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess (refer to amortization table abov e)

P 60,000 13,200 P 46,800 20% P 9,360

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) P 8,610 * t his procedure would be more appropriate, inst ead of mult iplying t he full-goodwill impairment loss of P3,750 by 20%. There might be sit uat ions where t he NCI on goodwill impairment loss would not be proport ionat e t o NCI acquired.

c. CNI, P211,050 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition)

P360,000

Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Div idends paid – P Company for 20x4 Consolidated Retained Earnings, December 31, 20x4

202,440 P562,440 72,000 P490,440

e. Non-controlling interest (full-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – SCompany, January 1, 20x4 Add: Net income of S for 20x4 Total Less: Div idends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) – 20x4 Fair v alue of stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill, 12/31/20x4………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4: [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill), 12/31/20x4……………..

P 240,000 P120,000 60,000 P180,000 36,000

144,000 P 384,000 90,000 ( 13,200) P460,800 20 P 92,160 2,250 P 94,410

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

P 600,000 490,440 P1,090,440 ___94,410 P1,184,850

12/31/20x5: a. CI-CNI – P258,240 Consolidated Net Income for 20x5 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5

P192,000 90,000 P282,000 P16,560 7,200 0

P258,240 16,560 P274,800

b. NCI-CNI – P16,560 * Non-controlling Interest in Net Income (NCINI) for 20x5 Net income of S Company Less: Amortization of allocated excess / goodwill impairment for 20x5 (refer to amortization table abov e) Multiplied by: Non-controlling interest %..........

23,760

P 90,000 80,400 P 82,800 20%

Non-controlling Interest in Net Income (NCINI) for 20x5

P 16,560

c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - P Company, January 1, 20x5 (cost model Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/P’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – S, January 1, 20x5 Less: Retained earnings – S, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Multiplied by: Controlling interests %...................

P484,800

P 144,000 120,000 P 24,000 13,200 P 10,800 80% P 8,640

Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or (P3, 750 x 80%) 3,000 5,640 Consolidated Retained earnings, January 1, 20x5 P 490,440 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 258,240 Total P748,680 Less: Div idends paid – P Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P676,680 * t his procedure would be more appropriate, instead of mult iplying t he full-goodwill impairment loss of P3,750 by 80%. There might be situations where t he controlling interests on goodwill impairment loss would not be proportionate t o NCI acquired.

e. Non-controlling interest (full-goodwill), December 31, 20x5 Common stock – S Company, December 31, 20x5…… Retained earnings – S Company, December 31, 20x5 Retained earnings – S Company, January 1, 20x5 Add: Net income of S for 20x5 Total Less: Div idends paid – 20x5 Stockholders’ equity – S Company, December 31, 20x5 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) : 20x4 20x5 Fair v alue of stockholders’ equity of subsidiary, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill)…………………………………..

P 240,000 P144,000 90,000 P234,000 48,000

186,000 P 426,000 90,000

P 13,200 7,200

( 20,400) P 495,600 20 P 99,120 2,250 P 101,370

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings

P 600,000 676,680

P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

P1,276,680 __101,370 P1,378,050

Problem XXV 1. Ambrose should report income from its subsidiary of P15,000 (P20,000 x .75) rather than dividend income of P9,000. 2. A total of P5,000 (P20,000 x .25) should be assigned to the noncontrolling interest in the 20x4 consolidated income statement. 3. Consolidated net income of P70,0000 should be reported for 20X4, computed as follows: Reported net income of AA P59,000 Less: Dividend income from KR (9,000) Operating income of AA P50,000 Net income of KR 20,000 Consolidated net income P70,000 4. Income of P79,000 would be attained by adding the income reported by AA (P59,000) to the income reported by KR (P20,000). However, the dividend income from KR recorded by AA must be excluded from consolidated net income. Problem XXVI (Determine consolidated balances for a step acquisition). 1.

AD fair value implied by price paid by MM P560,000 ÷ 70% =

P800,000

2.

Revaluation gain 1/1 equit y investment in AD (book value) 25% income for 1st 6 months Investment book value at 6/30 Fair value of investment Gain on revaluation to fair value

P178,000 8,750 186,750 200,000 P13,250

Goodwill at 12/31 Fair value of AD at 6/30 Book value at 6/30 (700,000 + [70,000 ÷ 2]) Excess fair value Allocation to goodwill (no impairment)

P800,000 735,000 P65,000 P65,000

3.

4.

Non-controlling interest 5% fair value balance at 6/30 5% Income from 6/30 to 12/31 5% dividends Non-controlling interest 12/31

Multiple Choice Problem 1. d – equivalent to consideration transferred, P320,000

P40,000 1,750 (1,000) P40,750

2. d – equivalent to consideration transferred, P380,000 3. d P: BV,12/31/20x6 S: BV of building, 12/31/20x4 Add: Adjustments to reflect fair value, 1/1/20x4 (P350,000 – P240,000) Less: Amortization of excess (P110,000/10) x 3 years

P250,000 P170,000 110,000 33,000

247,000 P497,000

4. d Inventory – not yet sold in 20x4 Building: (P390,000 – P200,000)/ 10 years Equipment (P280,000 – P350,000)/ 5 years

p

0 19,000 ( 14,000) P 5,000

BV of building, 1/1/20x4 Adjustments to reflect fair value, 1/1/20x4 (P300,000 – P200,000) Depreciation 1/1/20x4 – 12/31/20x6 (P100,000/20 x 3 years)

P200,000 100,000 ( 15,000) P285,000

5. b

6. d – same with No. 5 7. d BV of equipment, 1/1/20x4 Adjustments to reflect fair value, 1/1/20x4 (P80,000 – P75,000) Depreciation 1/1/20x4 – 12/31/20x6 (P5,000/10 x 3 years)

P 80,000 ( 5,000) 1,500 P 76,500

8. a Adjustments to reflect fair value, 1/1/20x4 (P80,000 – P75,000) Depreciation 1/1/20x4 – 12/31/20x6 (P5,000/10 x 3 years) 9. d – 1/2/20x4: BV of equipment, 1/1/20x4 Adjustments to reflect fair value, 1/1/20x4 (P300,000 – P200,000)

(P 5,000) 1,500 (P 3,500) P200,000 100,000 P300,000

10. a Net income of S (5/1/x5 – 12/31/x5): P840,000 x 8/12 Less: Dividend – S (11/1/20x5 – no need to pro-rate) Cumulative net income less dividends since date of acquisition, 1/1/20x6 (date to establish reciprocity – not 12/31/x6) x: Controlling interests

P560,000 300,000

Net income of S (5/1/x5 – 12/31/x5): P210,000 x 8/12 Less: Dividend – S (11/1/20x5 – no need to pro-rate) Cumulative net income less dividends since date of acquisition, 12/31/20x5 (date to establish reciprocity – not or 1/1/20x6) x: Controlling interests

P140,000 75,000

Retained earnings – S Company, 1/1/20x4

P120,000

P260,000 80% P208,000

11. a

P 65,000 80% P 52,000

12. b

Less: Retained earnings – S Company, 12/31/20x4 Cumulative net income less dividends since date of acquisition, 1/1/20x6 (date to establish reciprocity – should always be beginning of the year, not 12/31/x6) x: Controlling interests

380,000

P260,000 90% P234,000

13. b Retained earnings – S Company, 1/1/20x4 Less: Retained earnings – S Company, 12/31/20x6 Cumulative net income less dividends since date of acquisition, 1/1/20x6 (date to establish reciprocity – should always be beginning of the year, not 12/31/x6) x: Controlling interests

P 60,000 190,000

P130,000 90% P117,000

14. a Non-controlling Interest in Net Income (NCINI) for Year 3 Net income of S Company Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for Year 3

P240,000 45,000 P195,000 30% P 58,500

15. c Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. * Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess* *

P 375,000 30,000 P405,000 P5,250 3,750 0

9,000 P396,000

P30,000 3,750 P26,250 20% P 5,250

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x4 * * P270,000/80% = P337,500 – (P150,000 + P150,000) = P37,500 / 10 years = P3,750 Note: Whether the partial or full-goodwill approach are used the amortization of excess are always the same.

16. a * Non-controlling Interest in Net Income (NCINI) for Year 3 Net income of S Company Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for Year 3

P600,000 112,500 P487,500 30% P146,250

17. c Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization abov e)

P 625,000 50,000 P675,000 P 8,750 6,250

Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. * Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess* *

0

15,000 P660,000

P50,000 6,250 P43,750 20% P 8,750

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x4 * * P450,000/80% = P562,500 – (P250,000 + P250,000) = P62,500 / 10 years = P6,250 Note: Whether the partial or full-goodwill approach are used the amortization of excess are always the same.

18. b As a general rule, if problem is silent It is assumed that expenses are generated evenly throughout the year, thus: Expenses (9/1/20x4-12/31/20x4): P620,000 x 4/12 P206,667 Amortization of allocated excess: P15,000 x 4/12 5,000 P211,667 19. c Net income of S Company (P800,000 – P620,000) Less: Amortization of allocated excess Multiplied by: No of mos. (9/1-12/31)

P180,000 15,000 P165,000 4/12 P 55,000

20. a Net income of S Company (P800,000 – P620,000) Less: Amortization of allocated excess Multiplied by: No of mos. (9/1-12/31) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x4

P180,000 15,000 P165,000 4/12 P 55,000 ____20% P 22,000

21. d Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. * Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess* *

P 560,000 140,000 P700,000 P 50,400 14,000 _ 0

64,400 P635,600

P140,000 14,000 P126,000 40% P 50,400

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x4 * * P420,000/60% = P700,000 – P560,000 = P140,000 – P140,000 = P0 Amortization: P140,000/10 years = P14,000 Note: Whether the partial or full-goodwill approach are used the amortization of excess are always the same.

22. a

NCI-CNI: P50,400 (refer to No. 21)

Non-controlling interest (full-goodwill), December 31, Year 2 Common stock – S Company, December 31, Year 2… Retained earnings – S Company, December 31, 20x5 Retained earnings – S Company, January 1, Year 2 Add: Net income of S for Year 2 Total Less: Div idends paid – Year 2 Stockholders’ equity – S Company, December 31, Year 2 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, Year 1) Amortization of allocated excess (refer to amortization abov e) : Year 1 Year 2 Fair v alue of stockholders’ equity of subsidiary, December 31, Year 2… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial/full goodwill) – since there is no goodwill

P 300,000 P260,000 140,000 P400,000 0

400,000 P 700,000 140,000

P 14,000 14,000

( 28,000) P 812,000 40% P 324,800

23. c Book v alue – equipment – Parent, 12/31/Year 2 Fair v alue – equipment – Subsidiary, 12/31/Year 2 Book v alue, 1/1/Year 1 Adjustments to reflect fair v alue Amortization – depreciation (P14,000 x 2 years) Consolidated equipment balance, 12/31/2Year 2

P444,000 P200,000 140,000 ( 28,000)

312,000 P756,000

24. b Full-Goodwill: (P600,000/70%) – P640,000 = P217,143 – P40,000 = P177,143 If partial goodwill: P600,000 – (P640,000 x 70%) = P152,000 – (P40,000 x 70%) = P124,000 25. c 26. d - The acquisition method consolidates assets at fair value at acquisition date regardless of the parent’s percentage ownership. 27. d - In consolidating the subsidiary's figures, all intercompany balances must be eliminated in their entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it. 28. c - An asset acquired in a business combination is initially valued at 100% acquisition -date fair value and subsequently amortized its useful life. Patent fair value at January 1, 20x4 ............................................................... Amortization for 2 years (10 year life) ............................................................. Patent reported amount December 31, 20x5 ................................................

P45,000 (9,000) P36,000

29. c Non-controlling interest (full-goodwill), December 31, 20x4 Book v alue of SHE – S, 12/31/20x4 Add: Net income of S – 20x4 Total Less: Div idends paid – 20x4 Stockholders’ equity – S Company, December 31, Year 2 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition January 1, 20x4 Amortization of allocated excess (refer to amortization abov e: P200,000/10 Fair v alue of stockholders’ equity of subsidiary, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial)

P1,000,000 ___150,000 P1,150,000 ____90,000 P1,060,000 200,000 _( 20,000) P1,240,000 30% P 372,000

Add: NCI on full-goodwill P85,714 – P60,000) Non-controlling interest (full)

___25,714 P397,714

*P900,000/70% = P1,285,714 – P1,000,000 = P285,714 – P200,000 = P85,714, full goodwill

*P900,000 – (P1,000,000 x 70%) = P200,000 – (P200,000 x 70%) = P60,000, partial goodwill It is assumed that full-goodwill is used. But, it should be noted that PFRS 3 either partial or full-goodwill approach are considered acceptable. 30. b

Combined revenues ....................................................................................... Combined expenses ...................................................................................... Trademark amortization ................................................................................. Patented technology amortization ................................................................ Consolidated net income ..............................................................................

31. No answer available: P34,400 and P260,800 NCI-CNI - P34,400; NCI – P260,800 Subsidiary income (P100,000 – P14,000 excess amortizations) ....................... Non-controlling interest percentage .............................................................. Non-controlling interest in subsidiary income .................................................

P1,300,000 (800,000) (6,000) (8,000) P486,000

P86,000 40% P34,400

Fair value of non-controlling interest at acquisition date............................... 40% change in Scott book value since acquisition ........................................ Excess fair value amortization (P14,000 × 40%) ............................................... 40% current year income ............................................................................... Non-controlling interest at end of year ..........................................................

P180,000 52,000 (5,600) 34,400 P260,800

32. a

MM trademark balance ................................................................................. SS trademark balance................................................................................... Excess fair value ............................................................................................. Two years amortization (10-year life) .............................................................. Consolidated trademarks...............................................................................

P260,000 200,000 60,000 (12,000) P508,000

33. b

Combined revenues ....................................................................................... Combined expenses ...................................................................................... Excess acquisition-date fair value amortization ............................................. Consolidated net income .............................................................................. Less: noncontrolling interest (P85,000 × 40%) .................................................. Consolidated net income to controlling interest ............................................

P1,100,000 (700,000) (15,000) P385,000 (34,000) P351,000

34. No answer available: 20x4 Investment income: Dividend of P10,000 x 100% 20x4 Investment balance: P500,000 35. c

HH expense .................................................................................................... NN expenses ................................................................................................... Excess fair value amortization (70,000 ÷ 10 yrs)............................................... Consolidated expenses ..................................................................................

36. b – refer to No. 33

P621,000 714,000 7,000 P1,342,000

37. a

Fair value of non-controlling interest on April 1 .............................................. 30% of net income for 9 months (¾ year × P240,000 × 30%)........................... Non-controlling interest December 31 ...........................................................

38. b – (P50,000 + P70,000) x 25% = P30,000 39. b – P only. 40. b

- refer to No. 30

41. No answer available – refer to No. 31 42. a

- refer to No. 32

43. a

P650,000 =P500,000 + P200,000 - P50,000

44. c

P95,000 = (P956,000 / .80) - P1,000,000 - P100,000

45. c P251,000 = .20[(P956,000 + P239,000) + (P190,000 - P5,000 - P125,000)] 46. a 47. b Net Income from own operations: 20x4 20x5 Parent … … … … … … … … … … … … … … … … … … … P 100,000 P100,000 Subsidiary… … … … … … … … … … … … … … … … … ... 25,000 35,000 P125,000 P135,000 Subsidiary’s other comprehensive income… … … … .. 5,000 10,000 Total Comprehensive Income… … … … … … … … … .....P130,000 P145,000 Less: Amortization of allocated excess… … … … … .… 6,250 6,250 Impairment of full- goodwill (if any)… … … … … . 0 0 Consolidated /Group Comprehensive Income… … P123,750 P138,750 Less: Non-controlling interest in Comprehensive Income *… … … … … … … … … … … … … … … … … 4,750 7,750 Controlling Interest in Consolidated __________________ Comprehensive Income … . … … … … … … … … … … P119,000 P131,000 *Non-controlling interest in Comprehensive Income: 20x4 2012 Subsidiary’s: Net income from own operations… … … … .......P 25,000 P 35,000 Other Comprehensive Income (P30,000 – P25,000)… … … … … … … … … … … .… … … … ... 5,000 10,000 Subsidiary’s Comprehensive Income… … … … ........P 30,000 P 45,000 Less: Amortization of allocated excess*… … … … .. 6,250 6,250 Impairment of full-goodwill (if any)....… … … . 0 0 P 23,750 P 38,750 x: Non-controlling interests… … … … … … … … … … . 20% 20% Non-controlling interest in Comprehensive Incom e...P 4,750 P 7,750

48. 49. 50. 51.

*Amortization of allocated excess: Increase in other intangibles: P50,000 / 8 years = P 6,250 c – refer to No. 47 c – refer to No. 47 b- refer to No. 47 b

P165,000 54,000 P219,000

Consideration transferred P3,800 Less: BV of SHE of S: P1,000 + P600 + P1,500 3,100 Allocated excess /differential / excess of cost or fair value over book value P 700 52. a Allocated excess /differential / excess of cost or fair value over book value P 700 Less: O/U valuation of A and L Book value (P800 + P1,000 + P1,500 + P900 – P1,800) P2,400 Fair value (P900 + P1,200 + P1,250 + P1,300 – P1,700) 2,950 Net increase 550 Goodwill P 150 53. 54. 55. 56. 57. 58. 59. 60. 61. 62.

c – inventory at fair value b - (P1,500, book value – (P1,500 – P1,200) + (P300/5) = P1,260 d – (P1,000, book value + (P1,250 – P1,000) – (P250/2) = P1,125 c – (P900, book value + (P1,300 – P900) = P1,300 c – (P1,800 – (P1,800 – P1,700) + (P100/4) = P1,725 c - (P1,500, book value – (P1,500 – P1,200) + (P300/5) x 2 years b - (P1,000, book value + (P1,250 – P1,000) – (P250/2) x 2 years b - (P900, book value + (P1,300 – P900) = P1,3000 d - (P1,800 – (P1,800 – P1,700) + (P100/4) x 2 years = P1,750 b Consideration transferred: 10,500 shares x P95 Less: BV of SHE – S (?) Allocated excess; Less: O/U valuation of A and L: Undervaluation of land Overvaluation of buildings Undervaluation of equipment Undervaluation/unrecorded trademark

= P1,320 = P1,000

P997,500 857,500 P140,000 P40,000 ( 30,000) 80,000 50,000 140,000 P 0

63. a – P900,000 + P500,000 = P1,400,000 64. d – assumed that total expenses includes cost of goods sold which is different when the question is “total operating expenses” Cost of goods sold (P360,000 + P200,000) P 560,000 Depreciation expense (P140,000 + P40,000) 180,000 Other expenses (P100,000 + P60,000) 160,000 Amortization of allocated excess: Buildings: (P30,000) / 20 (P1,500) Equipment; P80,000 / 10 8,000 Trademark: P50,000 / 16 3,125 9,625 Total expenses P909,625 65. 66. 67. 68. 69. 70. 71.

b – (P750,000 + P280,000) – P30,000 + (P1,500 x 5 years) = P1,007,500 c – (P300,000 + P500,000) + P80,000 – (P8,000 x 5 years) = P840,000 c – P450,000 + P180,000 + P40,000 = P670,000 d – P50,000 – P3,125 x 5 years) = P34,375 a – P only (the stock issued In 20x0 includes already in the December 31, 20x4 balance. a – P only Cannot be determined. Since PAS 27 allows two methods in the books of Par ent (i.e. cost model and fair value model (which is under PAS 39 or PFRS 9). It is therefore assumed that the retained earnings of parent on 1/1/20x4 amounting to P1,350,000 is under the cost model, therefore, there is a need to establish reciprocity (or retroactive adjustments from 1/1/20x0 to 1/1/20x4) but there is data as given amount for retained earnings of subsidiary on 1/1/20x0.

If equity method is used (therefore assume the P1,350,000 is computed under the equity method), the answer would be, Consolidated Retained Earnings, December 31, 20x 4 Consolidated Retained earnings, January 1, 20x 4 (equity method) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Div idends paid – P Company for 20x4 Consolidated Retained Earnings, December 31, 20x 4 (under equity method) Net Income from own operations: Sales Less: cost of goods sold Gross profit Less: Depreciation expense Other expenses Net income

P 1,350,000 490,375 P1,840,375 195,000 P1,645,375 P Co P900,000 360,000 P540,000 140,000 100,000 P300,000

Non-controlling interest (full-goodwill), December 31, 20x4 P Company S Company Total Less: Non-controlling Interest in Net Income Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent…………..

S Co P500,000 200,000 P300,000 40,000 60,000 P200,000

P300,000 200,000 P500,000 P

0 9,625 _ 0

9,625 P490,375

72. No answer available – (P80,000 x 100%) = P80,000. Refer to No. 71 for further discussion Note: Normally, the term used in the requirement “equity in subsidiary income”, is a term used under equity method, but it should be noted that under PAS 27, it prohibits the use of equity method for a parent to consolidate a subsidiary. But, assuming the use of equity method, the answer would be, P190,375. Share in net income: P200,000 x 100% P200,000 Less: Amortization of allocated excess 9,625 P190,375 73. b Decrease in Buildings account: Fair value… ………………………………………… P 8,000 Book value… ……………………………………….. __10,000 Decrease… … … ……………………………………. P 2,000 74. d Decrease in buildings account (refer to No. 73)… … … … Less: Increase due to depreciation (P2,000/10)… … … … Decrease in buildings accounts… … ………………………..

P 2,000 200 P 1,800

Decrease in buildings account (refer to No. 74)… … …… Less: Increase due to depreciation (P2,000/10)… … … … Decrease in buildings accounts… … ………………………..

P 1,800 200 P 1,600

Increase in Equipment account: Fair value… ………………………………………… Book value… ………………………………………..

P 14,000 __18,000

75. d

76. a

Increase… … … …………………………………….

P

4,000

77. a Increase in equipment account (refer to No. 76)… … …… Less: Decrease due to depreciation (P4,000/4)… … … …… Increase in equipment accounts… … ………………………..

P P

4,000 1,000 3,000

78. a Increase in equipment account (refer to No. 77)… … …… Less: Decrease due to depreciation (P4,000/4… … ……… Increase in equipment accounts… … ………………………..

P 3,000 1,000 P 2,000

79. a Increase in Land account: Fair value… …………………………………………P 12,000 Book value… ……………………………………….. 5,000 Increase… … … …………………………………….. P 7,000 80. b – refer to No. 79, no depreciation/amortization 81. b – refer to No. 79, no depreciation/amortization 82. e Increase in Patent account: Fair value… ………………………………………… Book value… ……………………………………….. Increase… … … …………………………………….

P 11,000 _ 0 P 11,000

(P234,000/90%) – (P160,000 + P80,000) = P20,000 – (P4,000 – P2,000 + P7,000) = P11,000. Partial or full-goodwill approach, the amortization remains the same. 83. e Increase in patent account (refer to No. 82)… … ………… Less: Decrease due to depreciation (P11,000/5).… … … … Increase in patent accounts… … …………………………….

P 11,000 2,200 P 8,800

Increase in patent account (refer to No. 83)… … ………… Less: Decrease due to depreciation (P11,000/5).… … … … Increase in patent accounts… … …………………………….

P

84. d 8,800 2,200 P 6,600

85. a Under the cost method, an investor recognizes its investment in the investee at cost. Income is recognized only to the extent that the investor receives distributions from the accumulated net profits (or dividend declared/paid by the investee) of the investee arising after the date of acquisition by the investor. Distributions (dividends) received in excess of such profits are regarded as a recovery of investment and are accounted for as a reduction of the cost of the investment (i.e., as a return of capital or liquidating dividend). Therefore, the investment balance of P500,000 on the acquisition date remains to be the same. 86. d – refer to No. 85 for further discussion. 87. b – refer to No. 85 for further discussion.

88. 89. 90. 91.

a – P40,000 x 80% b – P50,000 x 80% a – P60,000 x 80% c Full/Gross-up Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations… … … .P100,000 Less: Amortization of allocated excess*… … … … … 7,000 Impairment of full-goodwill (if any)**… … … … 0 P 93,000 x: Non-controlling interests… … … … … … … … … . 20% Non-controlling interest in Net Income… … … … … … … … P 18,600 *Amortization of allocated excess: Increase in equipment: P30,000 / 10 years = P 3,000 Increase in buildings: P40,000 / 10 years = 4,000 Total amortization……………………………… P 7,000 ** In case, there is an impairment of goodwill then the amount impaired under the full-goodwill method should also be allocated between controlling and non-controlling interests Partial Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations… … … .P100,000 Less: Amortization of allocated excess*… … … … … . 7,000 P 93,000 x: Non-controlling interests… … … … … … … … … . 20% Non-controlling interest in Net Income… … … … … … … . P 18,600

92. c Full/Gross-up Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations… … … .P120,000 Less: Amortization of allocated excess*… … … … … 7,000 Impairment of full-goodwill (if any)**… … … 0 P113,000 x: Non-controlling interests… … … … … … … … … . 20% Non-controlling interest in Net Income… … … … … … … … P 22,600 *Amortization of allocated excess: Increase in equipment: P30,000 / 10 years = P 3,000 Increase in buildings: P40,000 / 10 years = 4,000 Total amortization………………………. P 7,000 ** In case, there is an impairment of goodwill then the amount impaired under the full -goodwill method should also be allocated between controlling and non-controlling interests Partial Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations… … … .P120,000 Less: Amortization of allocated excess*… … … … … 7,000 P113,000

x: Non-controlling interests… … … … … … … … … . Non-controlling interest in Net Income… … … … … … … …

20% P 22,600

93. a Full/Gross-up Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from ow n operations… … … .P130,000 Less: Amortization of allocated excess*… … … … … 7,000 Impairment of full-goodwill (if any)**… … … 0 P123,000 x: Non-controlling interests… … … … … … … … … . 20% Non-controlling interest in Net Income… … … … … … … … P 24,600 *Amortization of allocated excess: Increase in equipment: P30,000 / 10 years = P 3,000 Increase in buildings: P40,000 / 10 years = 4,000 Total amortization………………………. P 7,000 ** In case, there is an impairment of goodwill then the amount impaired under the full -goodwill method should also be allocated between controlling and non-controlling interests Partial Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations… … … .P130,000 Less: Amortization of allocated excess*… … … … … 7,000 P123,000 x: Non-controlling interests… … … … … … … … … . 20% Non-controlling interest in Net Income… … … … … … … … P 24,600 94. a

Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x4……………………………… P 300,000 Retained earnings, 12/31/20x4: Retained earnings, 1/1/20x4………………………….P200,000 Add: Net income – 20x4…………………………….. 100,000 Less: Dividends paid, 20x4…………..……………… 40,000 260,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x4 P 560,000 Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000 Less: Accumulated amortization of allocated excess P7,000 x 1 year…………………………………….…. 7,000 Fair value of Stockholders’ Equity of Subsidiary. 12/31/x4… P 623,000 Multiplied by: Non-controlling Interest %........................... 20% Non-controlling Interest (partial goodwill)………………….. P 124,600 Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… 11,000 Non-controlling Interest (full)……………………………… P 135,600 * this computation (i.e., P55,000 x 20%) should only be use when the fair value of the noncontrolling interest of acquiree (subsidiary) is not given.

Partial Goodwill: Fair value of Subsidiary: Fair value of consideration transferred: Cash………… P 500,000 Less: Book value of Net Assets (Stockholders’ Equity - Subsidiary): (P300,000 + P200,000) x 80%.. 400,000 Allocated Excess.…………………………………………. P 100,000 Less: Over/Undervaluation of Assets and Liabilities: Increase in equipment: P30,000 x 80%...................... P 24,000 Increase in building: P40,000 x 80%.......................... 32,000 56,000 Goodwill (Partial)………………………………………….. P 44,000 Full-goodwill: (100%) Fair value of Subsidiary: (100%) Fair value of consideration transferred: P500,000 / 80%........………………………….. Less: Book value of Net Assets (Stockholders’ Equity - Subsidiary)…………................................... Allocated Excess.…………………………………………. Less: Over/Undervaluation of Assets and Liabilities (P40,000 + P30,000)……………………. Goodwill (Full/Gross- up)..………………………………..

P 625,000 500,000 P 125,000

P

70,000 55,000

95. e

Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x5……………………………… P 300,000 Retained earnings, 12/31/20x5: Retained earnings, 1/1/20x5 (refer to No. 94)……….P260,000 Add: Net income, 20x5………………………………. 120,000 Less: Dividends paid, 20x5…………………………… 50,000 330,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x5 P 630,000 Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000 Less: Accumulated amortization of allocated excess – 2 yrs 14,000 Fair value of Stockholders’ Equity of Subsidiary. 12/31/x5… P 686,000 Multiplied by: Non-controlling Interest %.............................. 20% Non-controlling Interest (partial goodwill)………………….. P 137,200 Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… 11,000 Non-controlling Interest (full)……………………………… P 148,200 96. e

Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x6……………………………… P 300,000 Retained earnings, 12/31/20x6: Retained earnings, 1/1/20x6………………………….P330,000 Add: Net income, 20x6……………………………… 130,000

Less: Dividends paid, 20x6………………………….. 60,000 400,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x6 P 700,000 Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000 Less: Accumulated amortization of allocated excess (1/1/20x4 – 12/31/20x6): P7,000 x 3 years…………… 21,000 Fair value of Stockholders’ Equity of Subsidiary. 12/31/x6… P 749,000 Multiplied by: Non-controlling Interest %............................ 20% Non-controlling Interest (partial goodwill)………………….. P 149,800 Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… 11,000 Non-controlling Interest (full)……………………………… P 160,800 * this computation (i.e., P55,000 x 20%) should only be use when the fair value of the noncontrolling interest of acquiree (subsidiary) is not given. 97. b

P: BV,12/31/20x5 S: BV of building, 12/31/20x5 Add: Adjustments to reflect fair value, 1/4/20x4 (P120,000 – P90,000) Less: Amortization of excess (P30,000/10) x 2 years

P 975,000 P105,000 30,000 6,000

129,000 P1,104,000

98. b – P500,000 + P3,461 99. b 100. c Fair Value of Subsidiary: Consideration Transferred (5,400 shares) P120,600 Less: Book value of SHE-S, 1/1: Common stock – S: P50,000 x 90% P 45,000 APIC – S: P15,000 x 90% 13,500 RE – S: P41,000 x 90% 36,900 95,400 Allocated Excess P 25,200 Less: Over/undervaluation of A & L: Increase in Inv. (P17,100–P16,100) x 90% P 900 Increase in Eqpt. (P48,000–P40,000) x 90% 7,200 Increase in Patents (P13,000–P10,000) x 90% 2,700 10,800 Positive Excess: Goodwill P 14,400 Amortization of allocated excess - Starting January 1: Inventory: P1,000 / 1 year P 1,000 Equipment: P8,000 / 4 years 2,000 Patents: P3,000 / 10 years 300 P 3,300 101. c Common stock – S P 50,000 APIC – S 15,000 RE – S P 41,000 Stockholders’ equity – Subsidiary, 1/1 P106,000 Add: Adjustments to reflect fair value 12,000 Fair value of Stockholders’ Equity – S, 1/1 P118,000 x: Non-controlling) interests 10% Non-controlling Interests (in net assets) P 11,800

102. a – P48,000, parent only. 103. a – P48,000. On the date of acquisition, the parent’s retained earnings is also the consolidated retained earnings. 104. No requirement. 105. b – P120,600, the initial value 106. b – P4,000 x 90% = P3,600 107. c - use also the traditional formula presented in the book Parent Subsidiary Consolidated Net Income from own operations: P: [P30,200 – (P4,000 x 90%) P 266,000 S (90% : 10%) 8,460 P 940 Amort.of Allocated Excess (90%:10%) ( 2,970) ( 330) Impairment – partial goodwill ( 0) _____ P 32,090 P 610 P32,700 CI – CNI/ NCI-CNI CNI/Group NI Profit Attributable to Equity Holders of Parent 108. c Noncontrolling Interests (in net assets): Common stock - S, 12/31/2011 P 50,000 Additional paid-in capital - S, 12/31/2011 15,000 Retained earnings - S, 12/31/2011: RE-S, 1/1/2011 P 41,000 Add: NI-S, 2011 9,400 Less: Dividends – S 4,000 46,400 Book value of SHE - S, 12/31/2011 P 111,400 Add: Adjustments to reflect fair value, 1/1/2011 12,000 Less: Amortization of allocated excess (1 yr.) 3,300 Fair Value of Net Assets/SHE - S, 12/31/2011 P 120,100 x: Noncontrolling Interest % 10% Noncontrolling Interest (in net assets), 12/31/2011 P 12,010 109. b – refer to 106 for computation 110. c – refer to 106 for computation 111. b Controlling RE / RE Attributable to EH of Parent, 1/1/2010 (refer to No. 102 Add: CI – CNI (refer to 106 and 109) Less: CI – Dividends (Dividend of parent only) Controlling RE / RE Attributable to EH of Parent, 12/31/2011 112. b – same with No. 111. 113. c Consolidated Equity: Controlling Interest / Equity Holders Attributable to Parent: Common stock – P: [P100,000 + P120,600 – (5,400 shares x P10 par)] APIC – P: [15,000 + [P120,600 – (5,400 x P10)] RE – P (refer to No. 12) Parent’s Stockholders Equity or

P 48,000 32,090 15,000 P 65,090

P154,000 81,600 65,090

Controlling Interest – Equity Noncontrolling Interest (refer to No. 8) Consolidated Equity

P300,690 12,010 P312,700

114. b 115. b – Dividend paid – S, P70,000 x 60% = P42,000 116. d – CNI amounted to P265,000 [CI-CNI, P235,000 (refer to No. 117) and NCI-CNI, P30,000 (refer to No. 118)] Peer Sea-Breeze Consolidated Net income from own operations: Parent 190,000 Subsidiary 54,000 36,000 Amortization of allocated excess ( 9,000) ( 6,000) Impairment of goodwill ( 0) ( 0) 235,000 30,000 265,000 CI-CNI NCI-CNI CNI 20x5 results of operations are as follows: Sales Less: Cost of goods sold Operating expenses Net income from its own separate operations Add: Investment income Net income

Peer P 600,000 410,000 P 190,000 45,000 P 235,000

Computation of Goodwill: Fair value of Subsidiary (100%) Consideration transferred: Cash (60%) Fair value of NCI (given) (40%) Fair value of Subsidiary (100%) Less: Book value of stockholders’ equity of Sea (P550,000 x 100%) Allocated excess (excess of cost over book value)… .. Add (deduct): (Over) under valuation of assets and liabilities (P140,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value) Amortization of Allocated Excess Book Value Buildings (net)- 6 300,000 Equipment (net)– 4 300,000 Patent -10 -0Net

Fair Value 360,000 280,000 100,000

Over/under P 60,000 (20,000) 100,000 P 140,000

Sea-Breeze P 300,000 210,000 P 90,000 P 90,000

P 414,000 276,000 P 690,000 __550,000 P 140,000

P

140,000 0

Amort. P 10,000 (5,000) 10,000 P 15,000

117. c – refer to No. 116 for computations 118. b – refer to No. 116 for computations 119. c - P811,000.

Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model)

P700,000

Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x2 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x2 – 20x4 (P15,000 x 3 years)

Multiplied %...................

by:

Controlling

P 300,000 70,000 P 230,000

45,000 P 185,000

interests

Less: Goodwill impairment loss (fullgoodwill), Consolidated Retained earnings, January 1, 20x5

60% P 111,000 0

Note: a. Date of acquisition: RE of Parent = Consolidated RE Regardless of the method used in the books of the subsidiary, rule should always be applied – b. Subsequent to date of acquisition: Retained earnings of Parent under equity method = CRE

111,000 P 811,000

the following

Since, the P811,000 is the retained earnings of parent under the equity method, it should also be considered as the parent’s portion or interest in consolidated retained earnings or simply the consolidated retained earnings. 120. c - P811,000 – refer to note (b) of No. 119 121. b – P111,000 – refer to No. 119 122. d

Consolidated Retained earnings, January 1, 20x5 (refer to Nos. 118 and 119) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5

P 811,000 235,000

Total

P1,046,0 00

Less: Dividends paid – Parent Company for 20x5 Consolidated Retained Earnings, December 31, 20x5

92,000 P 954,000

123. d – refer to No.122 124. c Non-controlling interest (partial-goodwill), December 31, 2015 Common stock – Subsidiary Company, December 31, 2015……

P 480,000

Retained earnings – Subsidiary Company, December 31, 2015 Retained earnings – Subsidiary Company, P300,000 January 1, 2015 Add: Net income of subsidiary for 2015 90,000 Less: Dividends paid – Subsidiary - 2015 70,000 Stockholders’ equity – Subsidiary Company, December 31, 2015 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 2012) Amortization of allocated excess (refer to amortization above) – (P15,000 x 4) Fair value of stockholders’ equity of subsidiary, 12/31/ 2015 Multiplied by: Non-controlling Interest percentage. Non-controlling interest (partial) Add: NCI on full-goodwill……………………. Non-controlling interest (full)

320,000 P 800,000 140,000

( 60,000) P 880,000 40 P 352,000 ____0 P 352,000

125. c

Stockholders’ Equity Common stock - Peer Retained earnings Parent’s Stockholders’ Attributable to the

P 724,000 954,000 Equity/Equity

P

Owners of the Parent Non-controlling interest** Total Stockholders’ Equity (Total Equity) Total Liabilities and Stockholders’ Equity

1,678,000 352,000 P 985,500 P2,030,000

126. c Investment in Sea-Breeze

Investment Income

127. 1/1/x2. 414,000 42,000 Dividends – S NI of S Retro 111,000 (70,000 x 60% 128. NI of S refer (90,000 Amortization Amortization (90,000 No. x 60%)……. 54,000 9,000 (P15,000 x 60%) (P15,000 x 60%) 54,000 x 129. 9,000 60%) 12/31/x5 528,000 45,000 refer No. 117 130. No requirement 131. b – refer to No. 118 132. c – refer to No. 119 133. c – refer to No. 120 134. a – not applicable under equity method. 135. d – refer to No. 122 136. d – refer to No. 123 137. d – refer to No. 124 138. c – refer to No. 125 139. b – building account in the books of subsidiary at fair value 140. e – building account in the books of subsidiary at book value 141. d – push-down accounting: equipment account in the books of subsidiary is at fair value 142. c – P120,000 x 70% 143. c Investment.1/1/20x4 P210,000 Add: Share in net income – 20x4 (P90,000 x 70%) 63,000 Less: Dividends received 24,000 Investment, 12/31/20x4 P249,000 Add: Share in net income – 20x5 (P120,000 x 70%) 84,000 Less: Dividends received 36,000 Investment, 12/31/20x5 P297,000 Note: The term “received” means that is the amount attributable to parent. If the term “declared or paid” were used then it should be multiplied further by controlling interest. 144. c – P60,000 x 80% = P48,000 145. c Investment.1/1/20x4 Add: Share in net income – 20x4 (P45,000 x 80%) Less: Dividends received Investment, 12/31/20x4 Add: Share in net income – 20x5 (P60,000 x 80%) Less: Dividends received Investment, 12/31/20x5 148. b Full—goodwill Aproach

P105,000 36,000 12,000 P129,000 48,000 18,000 P159,000

c d– to 116 c– to

Fair value of Subsidiary ( 100%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)……………….. Fair value of Subsidiary (100%)………. Less: Book value of stockholders’ equity of Son: Common stock (P100,000 x 100%)………………. Retained earnings (P60,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in land (P5,000 x 100%)……………………. Increase in equipment (P10,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P 180,000 20,000 P 200,000

P 100,000 60,000

P 5,000 ___10,000

160,000 P 40,000

15,000

P 25,000

Partial-Goodwill Approach

Fair value of Subsidiary (90%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P100,000 x 90%)……………………. Retained earnings (P60,000 x 90%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in land (P5,000 x 90%)……………………. Increase in equipment (P10,000 x 90%) Positive excess: partial-goodwill (excess of cost over

P 180,000

P 90,000 54,000

P

4,500 ___9,000

144,000 P 36,000

13,500 P 22,500

fair value)………………………………………………... A summary or depreciation and amortization adjustments is as follows:

Lif e

Annu al Amou nt

Current Year(20x 4)

P 2,000

P 2,000

Account Adjustments to be amortized Subject to Annual Amortization

Over/ under

Equipment (net).........

10,000

5

Patent

25,000

5

5,000 P 7,000

5,000 P 7,000

149. d Investment in Wisden 180,000 18,000 Dividends – S (20,000Inv x 90%) estment in Wisden NI of S 1/1/x6. 230,400 9,000 Div idends – S (60,000 Amortization (10,000 x 90%) x 90%)……. 54,000 12,600 (P14,000 x NI of S 90%) (30,000 Amortization 1/1/x6 203,400 x 90%)……. 27,000 6,300 (7,000 x 90%) 1/1/x6 215,100

150.

c

1/1/x4.

Theories 1. 2. 3. 4. 5.

B C D D a

6. 7. 8. 9. 10,

D B c* D d

11. 12. 13. 14. 15,

A C B D c

16. 17. 18. 19. 20.

C C C D d

21. 22. 23. 24. 25.

B D A B c

26. 27. 28. 29. 30.

C C D C a

31 32. 33. 34. 35.

C B C B B

36. 37. 38. 39. 40.

C C D D B

* partial equity is the same with equity met hod except t hat amortization of allocated excess is not recognized in t he investment and income account.

41. 42. 43. 44. 45.

B C D A c

46. 47. 48. 49. 50,

A

Chapter 17 Problem I 1. 20x4 Sales

1,080,000 Purchases (Cost of Goods Sold)

1,080,000

12/31 Inventory (Income Statement) [216,000 – (216,000/1.20)] 12/31 Inventory (Balance Sheet )

36,000 36,000

20x5 Sales

1,200,000 Purchases (Cost of Goods Sold)

12/31 Inventory (Income Statement) [300,000 – (300,000/1.20)] 12/31 Inventory (Balance Sheet ) Beginning R/E – Puma 1/1 Inventory (Income Statement)

1,200,000

50,000 50,000 36,000 36,000

2. Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P 760,000 36,000 (_50,000) P 746,000 P 460,000 0 ( 0) P 460,000

460,000 P1,206,000 0 P1,206,000 92,000 P 1,114,000

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 * t hat has been realized in t ransact ions wit h t hird part ies. * * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)

P 760,000 36,000 (_50,000) P 746,000 P 460,000 0 ( 0) P460,000 P 92,000 0

460,000 P1,206,000 92,000 P1,114,000 _ 92,000 P 1,206,000

P460,000 0 ( 0)

S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

Problem II 1. Sales

P460,000 _____0 P460,000 20% P 92,000

1,020,000

Purchases (Cost of Sales) To eliminate intercompany sales.

1,020,000

12/31 Inventory (Income Statement) 51,000 Inventory (Balance Sheet ) 51,000 To eliminate unrealized intercompany profit in ending inventory. Beginning Retained Earnings – Pinta (.90 × P40,000) 36,000 Noncontrolling interest 4,000 1/1 Inventory (Balance Sheet ) 40,000 To recognize unrealized profit in beginning inventory realized during the year. Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… Son Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P 600,000 40,000 ( 51,00 0) P 589,000

P 1,720,000 0 (_ 0) P 1, 720,000

589,000 P2,309,000 0 P2,309,000 58,900 P 2,250,100

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 * t hat has been realized in t ransact ions wit h t hird part ies. * * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company)

P 1,720,000 0 (________0) P1,720,,000 P 600,000 40,000 ( 51,000) P589,000 P 58,900 0

589,000 P2,309,000 __58,900 P2,250,100 _ 58,900 P 2,309,000

P600,000

Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) Son Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

40,000 ( 51,000) P589,000 _____0 P589,000 10% P 58,900

Problem III

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations (P1,500,000 + P2,400,000) Realized profit in beginning inv entory of P Company (upstream sales) – Salad Realized profit in beginning inv entory of P Company (upstream sales)- Tuna Unrealized profit in ending inventory of P Company (upstream sales) – Salad Unrealized profit in ending inv entory of P Company (upstream sales) – Tuna S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * - Salad Non-controlling Interest in Net Income* * - Tuna Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P 3,600,000 54,000 (_ 45,00 0) P 3,609,000 P3,900,000 66,000 63,000 ( 57,000) ( 69,000) P3,903,000

P 301,800 ___239,400

3,903,000 P7,512,000 0 P7,512,000 ___541,200 P6,970,800

Or, alternatively

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations (P1,500,000 + P2,400,000) Realized profit in beginning inv entory of P Company (upstream sales) – Salad Realized profit in beginning inv entory of P Company (upstream sales)- Tuna Unrealized profit in ending inventory of P Company (upstream sales) – Salad Unrealized profit in ending inv entory of P Company (upstream sales) – Tuna S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * - Salad Non-controlling Interest in Net Income* * - Tuna Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attrib utable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 * t hat has been realized in t ransact ions wit h t hird part ies.

P 3,600,000 54,000 (___45,000) P3,609,,000 P3,900,000 66,000 63,000 ( 57,000) ( 69,000) P3,903,000

3,903,000 P7,512,000

P 301,800 239,400 0

__541,200 P6,970,800 _541,200 P 7,512,000

**Salad

Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) Son Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

P1,500,000 66,000 ( 57,000) P1,509,000 _____0 P1,509,000 __ 20% P 301,800

**Tuna Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) Son Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

Realized Profit in Beginning inventory: Downstream Sales (Sales from Parent to Subsidiary) P414,000 x 15/115 Upstream Sales (Sales from Subsidiary-Salad to Parent): Salad: P396,000 x 20/120 Upstream Sales (Sales from Subsidiary-Tuna to Parent): Tuna: P315,000 x 25/125 Unrealized Profit in Ending inventory: Downstream Sales (Sales from Parent to Subsidiary) P345,000 x 15/115 Upstream Sales (Sales from Subsidiary-Salad to Parent): Salad: P342,000 x 20/120 Upstream Sales (Sales from Subsidiary-Tuna to Parent): Tuna: P345,000 x 25/125

Problem IV 1. Sales Cost of Goods Sold Cost of Goods Sold Ending Inventory (Balance Sheet ) [P1,250,000 - (P1,250,000/1.25)] 1/1 Retained Earnings – P Company (1) Noncontrolling interest (2) Cost of Goods Sold (Beginning Inventory) [P525,000 – (P525,000/1.25)] = P105,000

P2,400,000 63,000 ( 69,000) P2,394,000 _____0 P2,394,000 10% P 239,400

P54,000 66,000 63,000

P45,000 57,000 69,000

4,000,000 4,000,000 250,000 250,000

84,000 21,000 105,000

(1) .8(P105,000) (2) .2(P105,000) 2/3. 4.

P3,000,000 × .20 = P600,000 non-controlling interest in consolidated income. [(.20 × P5,400,000) -.20(P1,250,000 – P1,250,000/1.25)] = P1,030,000 non-controlling interest in consolidated net assets on December 31, 20x4.

Problem V

P COMPANY AND SUBSIDIARY Consolidated Income Statement For the Year Ended December 31, 20x4 Sales (P13,800,000 – P1,350,000) Cost of Goods Sold (a) Operating Expenses Consolidated Income Less Non-controlling Interest in Consolidated Income (b) Controlling Interest in Consolidated Net Income

P12,450,000 P7,755,000 1,800,000

9,555,000 2,895,000 197,500 P2,697,500

(a) Reported Cost of Goods Sold Less intercompany sales in 20x4 Plus unrealized profit in ending inv entory (2/5 x (P1,350,000 - P900,000)) Less realized profit in beginning inv entory (1/4 x (P1,800,000 - P1,500,000)) Corrected cost of goods sold

P9,000,000 (1,350,000) 180,000 (75,000) P7,755,000

(b)

P1,900,000

Reported net income of subsidiary

P190,00 0 Plus unrealized profit on subsidiary sales in 2013 that is considered realized in 20x4 0.1 (1/4 x (P1,800,000 - P1,500,000)) Less unrealized profit on subsidiary sales in 20x4 (there were no upstream sales in 20x4) Income realized in transactions with third parties Non-controlling interest in consolidated income

75,000 0 1,975,000 × 0.10 P197,500

Problem VIII (Determine selected consolidated balances; includes inventory tr ansfers and an outside ownership.) Customer list amortization = P65,000/5 years = P13,000 per year Intercompany Gross profit (P160,000 – P120,000) .......................................... Inventory Remaining at Year's End ................................................................. Unrealized Intercompany Gross profit, 12/31 ......................................................

P40,000 20% P8,000

Consolidated Totals:  Inventory = P592,000 (add the two book values and subtract the ending unrealized gross profit of P8,000)  Sales = P1,240,000 (add the two book values and subtract the P160,000 intercompany transfer)  Cost of Goods Sold = P548,000 (add the two book values and subtract the intercompany transfer and add [to defer] ending unrealized gross profit)  Operating Expenses = P443,000 (add the two book values and the amortization expense for the period)  Gross profit: P1,240,000 – P548,000 = P692,000  Controlling Interest in CNI: Gross profit.......................................................................................... P692,000 Less: Operating expenses ................................................................... 443,000 Consolidated Net Income ................................................................. P249,000 Less: NCI-CNI ....................................................................................... 8,700 CI-CNI ................................................................................................. P240,300 or

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P800-P400-P180) Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations (P600 – P300 – P250) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P 50,000 0 ( 8, 000) P 42,000

P 220,000 0 (_ 0) P 220,000

42,000 P 262,000 13,000 P 249,000 8,700 P 240,300

Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 * t hat has been realized in t ransact ions wit h t hird part ies. * * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill



P 220,000 0 (_ 0) P 220,000 P 50,000 0 ( 8,000) P 42,000 P 8,700 13,000

42,000 P 262,000 21,700 P240,300 _ 8,700 P249,000

P 50,000 0 ( 8,00 0) P 42,000 13,000 P 29,000 30% P 8,700

Noncontrolling Interest in Subsidiary's Net Income = P8,700 (30 percent of the reported income after subtracting 13,000 excess fair value amortization and deferring P8,000 ending unrealized gross profit) Gross profit is included in this computation because the transfer was upstream from SS to PT.

Problem IX Requirements 1 to 4: Schedule of Determination and Allocation of Excess (Partial -goodwill) Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 80%)……………………. Retained earnings (P120,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… Increase in land (P7,200 x 80%)……………………. Increase in equipment (P96,000 x 80%) Decrease in buildings (P24,000 x 80%)………..... Decrease in bonds payable (P4,800 x 80%)…… Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

P 372,000

P 192,000 96,000

288,000 P 84,000

P 4,800 5,760 76,800 ( 19,200) 3,840

72,000 P 12,000

The over/under valuation of assets and liabilities are summarized as follows:

S

S

Co. Book value P 24,000 48,000 84,000 168,000

(Over) Under

Co. Fair value Valuation P Inventory………………….…………….. 30,000 P 6,000 Land……………………………………… 55,200 7,200 Equipment (net)......... 180,000 96,000 Buildings (net) 144,000 (24,000) ( Bonds payable………………………… (120,000) 115,200) 4,800 P P Net……………………………………….. 204,000 294,000 P 90,000

The buildings and equipment will be further analyzed for consolidat ion purposes as follows:

S Co.

S

Book value Equipment .................. Less: Accumulated depreciation….. Net book value………………………...

Buildings................ Less: Accumulated depreciation….. Net book value………………………...

180,000

Co. Fair value 180,000

Increase (Decrease) 0

96,000

-

( 96,000)

84,000

180,000

96,000

S Co. Book value 360,000

S Co. Fair value 144,000

(Decrease) ( 216,000)

192,000

-

( 192,000)

168,000

144,000

(

24,000)

A summary of depreciation and amortization adjustments is as follows:

Over/ Account Adjustments to be Unde amortized r P Inventory 6,000 Subject to Annual Amortization 96,00 Equipment (net)......... 0 (24,0 Buildings (net) 00) Bonds payable…

4800

Lif e 1

8 4 4

Annu al Current Amou Year(20x nt 4) P 6,000 P 6,000

20x5 P -

12,000 ( 6,000)

12,00 0 (6,00 0)

1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

1,200 P 7,200

The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full -goodwill is computed as follows:

Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) Fair value of NCI (given) (20%) Fair value of Subsidiary (100%) Less: Book value of stockholders’ equity of Son (P360,000 x 100%) Allocated excess (excess of cost over book value)…..

P 372,000 93,000 P 465,000 P

__360,000 105,000

Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

90,000 P

15,000

In this case, the goodwill was proportional to the controlling interest of 80% and non -controlling interest of 20% computed as follows:

Value Goodwill applicable to parent………………… Goodwill applicable to NCI…………………….. Total (full) goodwill………………………………..

P12,00 0 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

The goodwill impairment loss would be allocated as follows

Value Goodwill impairment loss attributable t o parent P or controlling 3,000 Interest Goodwill applicable to NCI…………………….. 750 Goodwill impairment loss based on 100% fair value or fullP 3,750 Goodwill

% of Total 80.00% 20.00% 100.00%

The unrealized profits on January 1, and on December 31, 20x5, resulting intercompany sales, are as summarized below: Downstream Sales:

20x4

Sales of Parent to Subsidiary P150,000

Intercompany Merchandise in 12/31 Inventory of S Company P150,000 x 60% = P90,000

20x5

120,000

P120,000 x 80% = P96,000

Year

Unrealized Intercompany Profit in Ending Inventory P90,000 x 20% = P18,000 P96,000 x 25% = P24,000

Upstream Sales:

Year

Sales of Subsidiary to

Intercompany Merchandise in 12/31 Inventory

Unrealized Intercompany Profit in

20x4

Parent P 60,000

of S Company P60,000 x 50% = P30,000

20x5

75,000

P 75,000 x 40% = P30,000

Ending Inventory P30,000 x 40% = P12,000 P30,000 x 20% = P 6,000

20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4:

(1) Investment in Company……………………………………………

S 372,000 372,000

Cash…………………………………………………………………….. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Dividend income (P36,000 x 80%)……………. Record dividends from S Company.

28,800 28,800

No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4, and unrealized profits in ending inventory. Consolidation Workpaper – Year of Acquisition

(E1) Common stock – Co………………………………………… Retained earnings – Co…………………………………… Investment in Co…………………………………………… Non-controlling interest (P360,000 20%)………………………..

S

240,000

S

120.000

S

288,000

x

72,000

To eliminat e int ercompany invest ment and equit y account s of subsidiary on date of acquisition; and t o establish non-cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 12,000

Goodwill…………………………………………………………………. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%)……………………….. Investment in Son Co……………………………………………….

216,000 18,000 84,000

To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss……………………………………….

6,000 6,000 6,000 1,200 3,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

6,000 12,000 1,200 3,000

To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of S’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000

_______ P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______ P 2,000

P 1,200 P1,200

(E4) Dividend income - P………. Non-controlling interest (P36,000 20%)……………….. Dividends paid – S……………………

Total

13,200

x

28,800 7,200 36,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

(E5) Sales………………………. Cost of Goods Sold (or Purchases)

150,000 150,000

To eliminat ed int ercompany downst ream sales.

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

60,000 60,000

To eliminat ed int ercompany upst ream sales.

(E7) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

18,000 18,000

To defer t he downstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E8) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

12,000 12,000

To defer t he upstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

6,960 6,960

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x4 as follows: Net income of subsidiary…………………….. Unrealized profit in ending inv entory of P Company (upstream sales)……………………….. S Company’s realized net income from separate operations* …….….. Less: Amortization of allocated excess [(E3)] …. Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

P 60,000 ( 12,000) P 48,000 13,200 P 34,800 20% P

6,960

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) P Co P480,000

S Co. P240,000

Div idend income Total Rev enue Cost of goods sold

28,800 P508,800 P204,000

P240,000 P138,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 48,000 P312,000 P196,800 P196,800

24,000 18,000 P180,000 P 60,000 P 60,000

Sales

Income Statement

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company

P432,000

P144,000

Dr. (5) 150,000 (6) 60,000 (4) 36,000 (3) (7) (8) (3) (3)

Cr.

Consolidated P 510,000 _________ P 510,000 P 168,000

6,000 (5) 150,000 18,000 (6) 60,000 12,000 6,000 1,200

(3)

3,000

(9)

6,960

(1) 120,000

90,000 1,200 66,000 3,000 P328,200 P181,800 ( 6,960) P174,840

P

360,000

Net income, from abov e Total Div idends paid Perfect Company Son Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest………… Total

P

236,160 P668,160

72,000 P216,000

86,400 -

43,200

P581,760

174,840 P538,840

_

72,000 ________

P172,800

P

466,840

232,800 90,000 120,000

P 90,000 60,000 90,000

P

355,200 150,000

1210,000 240,000 720,000

48,000 180,000 540,000

372,000 P1,984,800

P1,008,000

P 135,000

P 96,000

405,000

288,000

120,000 240,000 600,000

120,000 120,000

581,760

240,000 144,000

(4)

(2)

6,000

(2)

7,200

(2) (2)

_________ P1,008,000

6,000 18,000 12,000

(2) 216,000 4,800 (3) 12000 12,000 (3) 3,000 (9) 288,000 (10) 84,000

(2) 96,000 (3) (11) 192,000 (12) 6,000

180,000 265,200 420,000 1,044,000 3,600 9,000 P2,394,600

12,000

P147,000 495,000 240,000 360,000 600,000

(1) 240,000 462,840 (13) 7,200

_________ P1,984,800

(3) (7) (8)

36,000

__________ P 983,160

(1 ) 72,000 (2) 18,000 (9) 6,960 P 983,160

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Unrealized profit in ending inv entory of S Company (upstream sales)… Son Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under partial-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 * t hat has been realized in t ransact ions wit h t hird part ies. * * Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

____89,760 P2,394,600

P168,000 ( 18,000) P150,000 P 60,000 ( 12,000) P 48,000 P 6,960 13,200 3,000

48,000 P198,000

23,160 P174,840 _ 6,960 P181.800

P 60,000 ( 12,000) P 48,000 13,200 P 34,800

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill * t hat has been realized in t ransact ions wit h t hird part ies.

P

20% 6,960

Since NCI share of goodwill is not recognized, no adjustment is required for the impairment loss on goodwill and impairment losses are not shared with NCI. 20x5: Second Year after Acquisi tion

P Co.

Sales

P 540,000 216,000

Less: Cost of goods sold Gross profit Less: Depreciation expense Other expense

P 324,000 60,000 72,000

Net income from its own separate operations Add: Dividend income

P 192,000 38,400

Net income

P 230,400 P 72,000

Dividends paid

S Co.

P 360,000 192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. 20x5: Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment:

January 1, 20x5 – December 31, 20x5: Cash……………………… Dividend income (P48,000 80%)……………. Record dividends from S Company.

38,400 x

38,400

On the books of S Company, the P48,000 dividend paid was recorded as follows:

Dividends paid………… Cash Dividends paid by S Co..

48,000 48,000

Consolidation Workpaper – Second Year after Acquisition

(E1) Investment Company…………………………

in

S

19,200

Retained earnings Company………………………

–

P

19,200

To provide ent ry t o convert from t he cost met hod t o t he equit y met hod or t he entry t o establish reciprocit y at t he beginning of t he year, 1/1/20x5, comput ed as follows: Retained earnings – S Company, 1/1/20x5 Retained earnings – S Company, 1/1/20x4 Increase in retained earnings…….. Multiplied by: Controlling interest % Retroactive adjustment

P144,000 120,000 P 24,000 80% P 19,200

(E2) Common stock – Co………………………………………… Retained earnings – S Co., 1/1/20x5 Investment in S Co (P384,000 80%)………………………… Non-controlling interest (P384,000 20%)………………………..

S

240,000 144.000

x

307,200

x

76,800

To eliminat e int ercompany invest ment and equit y account s of subsidiary and to establish non-controlling interest (in net asset s of subsidiary) on January 1, 20x5.

(E3) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 .... Accumulated depreciation – buildings………………….. ... 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill…………………………………………………………………. 216,000 Buildings………………………………………........................... Non-controlling interest (P90,000 20%)............................ Investment in Co……………………………………………….

x

18,000

S

84,000

To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on January 1, 20x5.

(E4) Retained earnings – P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] Non-controlling interests (P13,200

13,560 x 2,640

20%)……………………. Depreciation expense……………………….. Accumulated depreciation buildings………………….. Interest expense…………………………………

6,000 – 12,000 1,200 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

24,000 2,400 3,000

To provide for years 20x4 and 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of S’s ident ifiable asset s and liabilit ies as follows: Year 20x4 amount s are debit ed t o P’s ret ained earnings & NCI; Year 20x5 amount s are debit ed t o respect ive nominal account s.

Inv entory sold Equipment Buildings Bonds payable Sub-total Multiplied by: To Retained earnings Impairment loss Total

(20x4) Retained earnings, P 6,000 12,000 (6,000) 1,200 P13,200 80% P 10,560 3,000 P 13,560

Depreciation/ Amortization expense

Amortization -Interest

P 12,000 ( 6,000) ________ P 6,000

P 1,200 P 1,200

(E5) Dividend income - P………. Non-controlling interest (P48,000 20%)……………….. Dividends paid – S……………………

x

38,400 9,600 48,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

120,000 120,000

To eliminat ed int ercompany downst ream sales.

(E7) Sales………………………. Cost of Goods Sold (or Purchases)

75,000 75,000

To eliminat ed int ercompany upst ream sales.

(E8) Beginning Retained Earnings – P Company…… Cost of Goods Sold (Ending Inventory – Income Statement) To realized profit in downstream beginning inventory deferred in t he

18,000 18,000

prior period.

(E9) Beginning Retained Earnings – P Company (P12,000 x 80%) Noncontrolling interest (P12,000 x 20%)…… Cost of Goods Sold (Ending Inventory – Income Statement)

9,600 2,400 12,000

To realized profit in beginning inventory deferred in t he prior period.

(E10) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

24,000 24,000

To defer t he downstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E11) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

6,000 6,000

To defer t he upstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E12) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

17,760 17,760

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x5 as follows: Realized profit in beginning inv entory of P Company - 20x5 (upstream sales) Unrealized profit in ending inv entory of P Company - 20x5 (upstream sales) S Company’s Realized net income* Less: Amortization of allocated excess

12,000 ( 6,000) P 96,000 7,200 P 88,800 20%

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI ) – partial goodwill P 17,760 * from separat e t ransact ions t hat has been realized in t ransact ions wit h t hird persons.

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Sales

Income Statement

Div idend income Total Rev enue Cost of goods sold

P Co P540,000

S Co. P360,000

38,400 P501,600 P216,000

P360,000 P192,000

Dr. (6) 120,000 (7) 75,000 (5) 38,400

Cr.

(10) 24,000 (11) 6,000

(6) 120,000 (7) 75,000 (8) 18,000 (9) 12,000

Consolidated P 705,000 ___________ P 705,000 213,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 72,000 P348,000 P230,400 P230,400

Statement of Retained Earnings Retained earnings, 1/1 P Company

P484,800

S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest…………

Total

P

24,000 54,000 P270,000 P 90,000 P 90,000

(4) (4)

6,000 1,200

P P ( P

(12) 17,760

(6) 13,560 (8) 18,000 (9) 9,600 (10) 144,000

(9) 19,200

90,000 1,200 126,000 430,200 274,800 17,760) 257,040

P 462,840

230,400 P715,200

P 144,000 90,000 P234,000

72,000 -

48,000

P643,200

P186,000

P 647,880

265,200 180,000 216,000

P 102,000 96,000 108,000

P 367,200 276,000

210,000 240,000 720,000

48,000 180,000 540,000

372,000 P2,203,200

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

643,200

___ _____ 2,203,200

240,000 186,000

_________ P1,074,000

257,040 P 719,880

(5)

(11) 7,200 (3)

7,200

(3) (3) (1)

4,800 12,000 19,200

(3) 96,000 (3) 192,000 (4) 12,000

48,000

(4) 7,200 (10) 24,000 (11) 6,000

(3) 216,000 (4) 2,400 (4) 3,000 (2) 307,200 (3) 84,000

(4)

24,000

_

72,000 ________

294,000 265,200 420,000 1,044,000 2,400 9,000 P2,677,800 P180,000 552,000 240,000 360,000 600,000

(2) 240,000 (4) 2,640 (14) 9,600 (9) 2,400 __________ P1,077,360

647,880 (2 ) 76,800 (3) 18,000 (12) 17,760 P1,077,360

____97,920 P2,677,800

5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings – P Company, January 1, 20x4 (date of acquisition)

b.

P360,000

Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… Retained earnings – Subsidiary Company…………………………………. Stockholders’ equity – Subsidiary Company.………….. Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities Fair v alue of stockholders’ equity of subsidiary, January 1, 20x4………………… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial)

P 240,000 120,000 P 360,000 90,000 P 450,000 20 P 90,000

c. Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI - SHE NCI, 1/1/20x4 Consolidated SHE, 1/1/20x4

P 600,000 360,000 P 960,000 ___90,000 P1,050,000

6. Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributabl e to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P174,840 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Unrealized profit in ending inv entory of S Company (downstream sa les)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Unrealized profit in ending inv entory of S Company (upstream sales)… S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under partial-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 * t hat has been realized in t ransact ions wit h t hird part ies.

P168,000 ( 18,000) P150,000 P 60,000 ( 12,000) P 48,000 P 6,960 13,200 3,000

48,000 P198,000

23,160 P174,840 _ 6,960 P181.800

b. NCI-CNI – P6,960 * * Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill * t hat has been realized in t ransact ions wit h t hird part ies.

P 60,000 ( 12,000) P 48,000 13,200 P 34,800 20% P 6,960

c. CNI, P181,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:

Consolidated Retained Earnings, December 31, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Div idends paid – P Company for 20x4 Consolidated Retained Earnings, December 31, 20x4

P360,000 174,840 P534,840 72,000 P462,840

e. The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. The NCI on December 31, 20x4 are computed as follows: Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4 Add: Net income of subsidiary for 20x4 Total Less: Div idends paid – 20x4 Stockholders’ equity – Subsidiary Company, December 31, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) – 20x4 Fair v alue of stockholders’ equity of subsidiary, December 31, 20x4…… Less: Unrealized profit in ending inv entory of P Company (upstream sales) Realized stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

P 240,000 P120,000 6,000 P180,000 36,000

144,000 P 384,000 90,000 ( 13,200) P460,000 12,000 P448,800 20 P 89,760

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

P 600,000 462,840 P1,062,840 ___89,760 P1,152,600

12/31/20x5: a. CI-CNI Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… Son Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * t hat has been realized in t ransact ions wit h t hird part ies.

Or, alternatively

Consolidated Net Income for 20x5

P192,000 18,000 (_24,000) P186,000 P 90,000 12,000 ( 6,000) P 96,000

96,000 P282,000 7,200 P274,800 17,760 P257,040

P Company’s net income from own/separate operations…………. Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 * t hat has been realized in t ransact ions wit h t hird part ies.

P192,000 18,000 (_24,000) P186,000 P 90,000 12,000 ( 6,000) P 96,000 P 17,760 7,200

96,000 P282,000 24,960 P257,040 _ 17,760 P274,800

b. NCI-CNI

* * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

P 90,000 12,000 ( 6,000) P 96,000 7,200 P 88,800 20% P 17,760

c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model Less: Unrealized profit in ending inventory of S Company (downstream sales) – 20x4 (UPEI of S – 20x4) or Realized profit in beginning inv entory of S Company (downstream sales) –20x4 (RPBI of S - 20x5)……………. Adjusted Retained Earnings – Parent 1/1/20x5 (cost model (S Company’s Retained earnings that hav e been realized in transactions with third parties.. Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Unrealized profit in ending inv entory of P Company (upstream sales) 20x4 (UPEI of P – 20x4) or Realized profit in beginning inv entory of P Company (upstream sales) –20x5 (RPBI of P - 20x5) Multiplied by: Controlling interests %...................

P484,800 18,000 P466,800

P 144,000 120,000 P 24,000 13,200 12,000 (P 1,200) 80% (P 960) 3,000

Less: Goodwill impairment loss, partial goodwill ( 3,960) Consolidated Retained earnings, January 1, 20x5 P462,840 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 257,040 Total P748,680 Less: Div idends paid – Parent Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P647,880 * t his procedure would be more appropriate, instead of mult iplying t he full-goodwill impairment loss of P3,125 by 80%. There might be situations where t he controlling interests on goodwill impairment loss would not be proportionate t o NCI acquired (refer t o Illust rat ion 15-6).

Or, alternatively:

Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model Less: Unrealized profit in ending inventory of S Company (downstream sales) – 20x5 (UPEI of S – 20x5) or Realized profit in beginning inv entory of S Company (downstream sales) –20x6 (RPBI of S - 20x6)……………. Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ( S Company’s Retained earnings that hav e been realized in transactions with third parties.. Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, December 31, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Accumulated amortization of allocated excess – 20x4 and 20x5 (P11,000 + P6,000) Unrealized profit in ending inv entory of P Company (upstream sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inv entory of P Company (upstream sales) –20x6 (RPBI of P - 20x6) Multiplied by: Controlling interests %...................

P643,200 24,000 P619,200

P 186,000 120,000 P 66,000 20,400

P P

Less: Goodwill impairment loss, partial goodwill Consolidated Retained earnings, December 31, 20x5

6,000 39,600 80% 31,680 3,000

28,680 P647,880

e. Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5* P144,000 Add: Net income of subsidiary for 20x5 90,000 Total P234,000 Less: Div idends paid – 20x5 48,000 186,000 Stockholders’ equity – Subsidiary Company, December 31, 20x5 P 426,000 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization abov e) : 20x4 P 13,200 20x5 7,200 ( 20,400) Fair v alue of stockholders’ equity of subsidiary, December 31, 20x5…… P 495,600 Less: Unrealized profit in ending inv entory of P Company (upstream sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inv entory of P Company (upstream sales) –20x6 (RPBI of P - 20x6 6,000 Realized stockholders’ equity of subsidiary, December 31, 20x5………. P489,600 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 97,920 * t he realized profit in beginning inventory of P Company (upstream sales) –20x5 (RPBI of P - 20x5 amounting t o P10,000 is already included in t he beginning ret ained earnings of S Company.

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x4

P 600,000 647,880 P1,247,880

NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

___97,920 P1,345,800

Problem X Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)………………..

P 372,000

Fair value of Subsidiary (100%)………. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. Retained earnings (P120,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… Increase in land (P7,200 x 100%)……………………. Increase in equipment (P96,000 x 100%) Decrease in buildings (P24,000 x 100%)………..... Decrease in bonds payable (P4,800 x 100%)…… Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

93,000 P 465,000

P 240,000 120,000

P

360,000 P 105,000

6,000 7,200 96,000

( 24,000) 4,800

90,000 P 15,000

A summary or depreciation and amortization adjustments is as follows:

Over/ Account Adjustments to be unde amortized r Inventory P

Lif e 1

Annu al Current Amou Year(20x nt 4) P P 6,000

20x5 P

6,000 Subject to Amortization

6,000

-

Annual

Buildings (net)

96,00 0 (24,0 00)

Bonds payable…

4,800

Equipment (net).........

8 4 4

12,000 ( 6,000) 1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

12,00 0 (6,00 0) 1,200 P 7,200

20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4:

(1) Investment in Company……………………………………………

S 372,000 372,000

Cash…………………………………………………………………….. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Dividend income (P36,000 x 80%)……………. Record dividends from Son Company.

28,800

28,800

On the books of Son Company, the P36,000 dividend paid was recorded as follows:

Dividends paid………… Cash……. Dividends paid by S Co..

36,000

36,000

No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4. Consolidation Workpaper – First Year after Acquisition

(E1) Common stock – Co………………………………………… Retained earnings – Co…………………………………… Investment in Co…………………………………………… Non-controlling interest (P360,000 20%)……………………….. To eliminat e int ercompany invest ment and equit y account s

S

240,000

S

120.000

S

288,000

x

72,000

of subsidiary on date of acquisition; and t o establish non-cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in Son 84,000 Co………………………………………………. To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss……………………………………….

6,000 6,000 6,000 1,200 3,750 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill…………………………………… To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of S’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000

_______ P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

P12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

12,000 1,200 3,750

(E4) Dividend income - P………. Non-controlling interest (P36,000 20%)……………….. Dividends paid – S……………………

x

28,800 7,200 36,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

(E5) Sales………………………. Cost of Goods Sold (or Purchases)

150,000 150,000

To eliminat ed int ercompany downst ream sales.

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

60,000 60,000

To eliminat ed int ercompany upst ream sales.

(E7) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

18,000 18,000

To defer t he downstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E8) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

12,000 12,000

To defer t he upstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

6,210

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x4 as follows: Net income of subsidiary…………………….. Unrealized profit in ending inv entory of P Company (upstream sales)……………………….. S Company’s realized net income from separate operations* …….….. Less: Amortization of allocated excess [(E3)] …. Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill) Non-controlling Interest in Net Income (NCINI) – full goodwill

P 60,000 ( 12,000) P 48,000 13,200 P 34,800 20% P 6,960

750 P

6,210

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Full-goodwill) 80%-Owned Subsidiary

6,210

December 31, 20x4 (First Year after Acquisition) P Co

Income Statement

S Co.

Sales

P480,000

P240,000

Div idend income Total Rev enue

28,800 P451,200

P240,000

Cost of goods sold

P204,000

P138,000

Depreciation expense

60,000

24,000

Interest expense Other expenses

48,000

18,000

Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

P312,000 P196,800 P196,800

Statement of Retained Earnings Retained earnings, 1/1 P Company

P360,000

S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 Balance Sheet

P180,000 P 60,000 P 60,000

P120,000 60,000 P180,000

72,000 -

36,000

P484,800

Cash………………………. Accounts receiv able…….. Inv entory………………….

Land……………………………. Equipment Buildings

Total Accumulated depreciation

Consolidated P 510,000

_________ P 510,000 P 168,000 (5) 150,000 (6) 60,000 90,000 1,200 66,000 3,750

(3) 3,750

(9)

P328,950 P181,050 ( 6,210) P174,840

6,210

360,000

(1) 120,000

174,840 P534,840

_

72,000 ________

P144,000

P

462,840

P 232,800 90,000

P 90,000 60,000

P

322,800 150,000

120,000

90,000

(4)

36,000

to

210,000 240,000 720,000

48,000 180,000 540,000

Discount on bonds payable Goodwill…………………… Inv estment in S Co………

(3) 6,000 (7) 18,000 (8) 12,000 (3) 6,000 (3) 1,200

Cr.

P

196,800 P556,800

Balance Sheet

Dr. (5) 150,000 (6) 60,000 (4) 28,800

(2) 6,000

P1,008,000

P 135,000

P 96,000

6,000 18,000 12,000

180,000

(2) 216,000

265,200 420,000 1,044,000

(2) 7,200

(2) 4,800 (2) 15,000

372,000 P1,984,800

(3) (7) (8)

(2)

(3)

1,200

3,600

(3) 3,750 (11) 288,00 0 (12) 84,000

11,250

(3)

12,000

P2,396,850 P147,000

- equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above

405,000

288,000

120,000 240,000 600,000

120,000 120,000

484,800

(4) 7,200 _________ P1,984,800

462,840 (1 ) 72,000 (2) 21,000 (9) 6,210

_________ P1,008,000

495,000 240,000 360,000 600,000

(1) 240,000

240,000 144,000

Non-controlling interest…………

Total

96,000 (15) 192,000 (16) 6,000

P 986,160

P 986,160

____92,010 P2,396,850

20x5: Second Year after Acquisition

Sales Less: Cost of goods sold Gross profit Less: Depreciation expense Other expense

Perfect Co. P 540,000 216,000 P 324,000 60,000 72,000

Net income from its own separate operations Add: Dividend income

P 192,000 38,400

Net income

P 230,400 P 72,000

Dividends paid

Son Co. P 360,000 192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. 20x5: Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relati on to its subsidiary investment:

January 1, 20x5 – December 31, 20x5: Cash……………………… Dividend income (P48,000 80%)……………. Record dividends from S Company.

38,400 x

38,400

On the books of S Company, the P48,000 dividend paid was recorded as follows:

Dividends paid………… Cash Dividends paid by S Co..

48,000 48,000

Consolidation Workpaper – Second Year after Acquisition

(E1) Investment Company………………………… Retained earnings Company………………………

in

S –

P

19,200 19,200

To provide ent ry t o convert from t he cost met hod t o t he equit y met hod or t he entry t o establish reciprocit y at t he beginning of t he year, 1/1/20x5. Retained earnings – S Company, 1/1/20x5 Retained earnings – S Company, 1/1/20x4 Increase in retained earnings…….. Multiplied by: Controlling interest % Retroactive adjustment

P144,000 120,000 P 24,000 80% P 19,200

(E2) Common stock – S Co………………………………………… 240,000 Retained earnings – S Co., 1/1/20x5 144.000 Investment in S Co (P384,000 x 307,200 80%)………………………… Non-controlling interest (P384,000 x 76,800 20%)……………………….. To eliminat e int ercompany invest ment and equit y account s of subsidiary and t o est ablish non-cont rolling int erest (in net asset s of subsidiary) on January 1, 20x5.

(E3) 6000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in S 84,000 Co………………………………………………. To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish non-

cont rolling int erest (in net asset s of subsidiary) on January 1, 20x5.

(E4) Retained earnings – P Company, 1/1/20x5 (P16,950 x 80%) Non-controlling interests (P16,950 20%)……………………. Depreciation expense……………………….. Accumulated depreciation buildings………………….. Interest expense…………………………………

13,560 x 3,390 6,000 – 12,000 1,200

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

6,000 24,000 2,800 3,750

To provide for years 20x4 and 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows: Year 20x4 amount s are debit ed t o Perfect ’s ret ained earnings and NCI. Year 20x5 amount s are debit ed t o respect ive nominal account s..

Inv entory sold Equipment Buildings Bonds payable Impairment loss Totals Multiplied by: CI%.... To Retained earnings

(20x4) Retained earnings, P 6,000 12,000 (6,000) 1,200 3,750 P 16,950 80% P13,560

Depreciation/ Amortization expense P

Amortization -Interest

12,000 ( 6,000) P 1,200 P 6,000

(E5) Dividend income - P………. Non-controlling interest (P48,000 20%)……………….. Dividends paid – S……………………

P1,200

x

38,400 9,600 48,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

120,000 120,000

To eliminat ed int ercompany downst ream sales.

(E7) Sales………………………. Cost of Goods Sold (or Purchases)

75,000 75,000

To eliminat ed int ercompany upst r eam sales.

(E8) Beginning Retained Earnings – P Company……

18,000

Cost of Goods Sold (Ending Inventory – Income Statement)

18,000

To realized profit in downstream beginning inventory deferred in t he prior period.

(E9) Beginning Retained Earnings – P Company (P12,000 x 80%) Noncontrolling interest (P12,000 x 20%)…… Cost of Goods Sold (Ending Inventory – Income Statement)

9,600 2,400 12,000

To realized profit in upstream beginning inventory deferred in t he prior period.

(E10) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

24,000 24,000

To defer t he downstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E11) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

6,000 6,000

To defer t he upstream sales - unrealized profit in ending inventor y unt il it is sold to outsiders.

(E12) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

17,760 17,760

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x5 as follows: Net income of subsidiary…………………….. Realized profit in beginning inv entory of P Company - 20x5 (upstream sales) Unrealized profit in ending inventory of P Company - 20x5 (upstream sales) Son Company’s Realized net income* Less: Amortization of allocated excess

P 90,000 12,000 ( 6,000) P 96,000 7,200 P 88,800 20% P 17,760

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) partial goodwill Less: NCI on goodwill impairment loss on fullGoodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 17,760 * from separat e t ransact ions t hat has been realized in t ransact ions wit h t hird persons.

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Sales

Income Statement

P Co P540,000

S Co. P360,000

Dr. (6) 120,000

Cr.

Consolidated P 705,000

Div idend income Total Rev enue Cost of goods sold

38,400 P574,800 P216,000

P360,000 P192,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 72,000 P348,000 P230,400 P230,400

24,000 54,000 P270,000 P 90,000 P 90,000

Statement of Retained Earnings Retained earnings, 1/1 P Company

P484,800

S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest…………

Total

5. 1/1/20x4

P

(7) 75,000 (5) 38,400 (10) 24,000 (11) 6,000 (4) (4)

(6) 120,000 (7) 90,000 (8) 21,600 (9) 14,400

___________ P 705,000 P 213,000

6,000 1,200

P P ( P

(12) 17,760

(7) 13,560 (8) 18,000 (9) 96000 (13) 144,000

(12) 19,200

90,000 1,200 126,000 430,200 274,800 17,760) 257,040

P 462,840

230,400 P715,200

P 144,000 90,000 P234,000

72,000 -

48,000

P643,200

P186,000

P 647,880

265,200 180,000 216,000

P 102,000 96,000 108,000

P 367,200 276,000

210,000 240,000 720,000

48,000 180,000 540,000

372,000 P2,203,200

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

643,200

___ _____ P2,203,200

240,000 186,000

_________ P1,074,000

257,040 P 719,880

(5)

(14) 6,000 (3)

7,200

(3) (3) (1)

4,800 15,000 19,200

(3) 96,000 (3) 192,000 (4) 12,000

48,000

(4) 6,000 (10) 24,000 (11) 6,000

(3) 216,000 (4) 2,400 (4) 3,750 (2) 307,200 (3) 84,000

(4)

24,000

_

72,000 ________

294,000 265,200 420,000 1,044,000 2,400 11,250 P2,680,050 P180,000 552,000 240,000 360,000 600,000

(2) 240,000 647,880 (4) 3,390 (17) 9,600 (9) 2,400 __________ P1,081,110

(2 ) 76,800 (3) 21,000 (12) 17,760 P1,081,110

____100,170 P2,680,050

a.

On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition)

P360,000

b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… Retained earnings – Subsidiary Company…………………………………. Stockholders’ equity – Subsidiary Company.………….. Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities Fair v alue of stockholders’ equity of subsidiary, January 1, 20x4………………… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial)………………………………….. Add: Non-controlling interests on full goodwill, 1/1/20x4 (P12,500, full-goodwill – P10,000, partial goodwill) Non-controlling interest (full-goodwill)

P 240,000 120,000 P 360,000 90,000 P 450,000 20 P 90,000 3,000 P 93,000

c.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI - SHE NCI, 1/1/20x4 Consolidated SHE, 1/1/20x4

P 600,000 360,000 P 960,000 ___93,000 P1,053,000

6. Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P174,840 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Unrealized profit in ending inv entory of S Company (downstream sales)… Perfect Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Unrealized profit in ending inv entory of S Company (upstream sales)… Son Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 * t hat has been realized in t ransact ions wit h t hird part ies.

P168,000 ( 18,000) P150,000 P 60,000 ( 12,000) P 48,000 P 6,1210 13,200 3,750

23,160 P174,840 _ 6,210 P181.050

b. NCI-CNI – P6,210 * * Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized profit in ending inv entory of P Company (upstream sales)

48,000 P198,000

P 60,000 ( 12,000)

S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial- goodwill) Non-controlling Interest in Net Income (NCINI) * t hat has been realized in t ransact ions wit h t hird part ies.

P 48,000 13,200 P 34,800 20% P 6,960

P

750 6,210

c. CNI – P181,050 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Div idends paid – Parent Company for 20x4 Consolidated Retained Earnings, December 31, 20x4

P360,000 174,840 P534,840 72,000 P462,840

e. Non-controlling interest ), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4 Add: Net income of subsidiary for 20x4 Total Less: Div idends paid – 20x4 Stockholders’ equity – Subsidiary Company, December 31, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) – 20x4 Fair v alue of stockholders’ equity of subsidiary, December 31, 20x4…… Less: Unrealized profit in ending inv entory of P Company (upstream sales) Realized stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)………………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4: [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill)……………..

P 240,000 P120,000 60,000 P180,000 36,000

144,000 P 384,000 90,000 ( 13,200) P460,800 12,000 P448,800 20 P 89,760 2,250 P 92,010

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI - SHE NCI, 1/1/20x4 Consolidated SHE, 1/1/20x4

P 600,000 462,840 P1,062,840 ___92,010 P1,154,840

12/31/20x5: a. CI-CNI – P257,040 Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….…..

P192,000 18,000 (_24,000) P186,000

S Company’s net income from own operations…………………………………. Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P 90,000 12,000 ( 6,000) P 96,000

96,000 P282,000 7,200 P274,800 17,760 P257,040

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… Son Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 * t hat has been realized in t ransact ions wit h t hird part ies.

P192,000 18,000 (_24,000) P186,000 P 90,000 12,000 ( 6,000) P 96,000 P 17,760 7,200

96,000 P282,000 24,960 P257,040 _ 17,760 P274,800

b. NCI-CNI – P16,560 * * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

P 90,000 12,000 ( 6,000) P 96,000 7,200 P 88,800 20% P 17,760 0 P 17,760

c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model Less: Unrealized profit in ending inventory of S Company (downstream sales) – 20x4 (UPEI of S – 20x4) or Realized profit in beginning inv entory of S Company (downstream sales) –20x4 (RPBI of S - 20x5)……………. Adjusted Retained Earnings – Parent 1/1/20x5 (cost model (S Company’s Retained earnings that hav e been realized in transactions with third parties.. Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5

P484,800 18,000 P466,800

P 144,000

Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Unrealized profit in ending inv entory of P Company (upstream sales) 20x4 (UPEI of P – 20x4) or Realized profit in beginning inv entory of P Company (upstream sales) –20x5 (RPBI of P - 20x5) Multiplied by: Controlling interests %...................

120,000 P 24,000 13,200 12,000 (P 1,200) 80% (P 960)

Less: Goodwill impairment loss (full-goodwill), net (P3,750 – P750)* or (P3,750 x 80%) 3,000 ( 3,960) Consolidated Retained earnings, January 1, 20x5 P462,840 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 257,040 Total P719,880 Less: Div idends paid – Parent Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P647,880 * t his procedure would be more appropriate, instead of mult iplying t he full-goodwill impairment loss of P3,750 by 80%. There might be situations where t he controlling interests on goodwill impairment loss would not be proportionate t o NCI acquired (refer t o Illust rat i on 15-6).

Or, alternatively:

Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model Less: Unrealized profit in ending inventory of S Company (downstream sales) – 20x5 (UPEI of S – 20x5) or Realized profit in beginning inv entory of S Company (downstream sales) –20x6 (RPBI of S - 20x6)……………. Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ( S Company’s Retained earnings that hav e been realized in transactions with third parties.. Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, December 31, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Accumulated amortization of allocated excess – 20x4 and 20x5 (P13,200 + P7,200) Unrealized profit in ending inv entory of P Company (upstream sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inv entory of P Company (upstream sales) –20x6 (RPBI of P - 20x6)

P643,200 24,000 P619,200

P 186,000 120,000 P 66,000 20,400

P

Multiplied by: Controlling interests %................... P Less: Goodwill impairment loss (full-goodwill), net (P3,750 – P750)* or (P3,750 x 80%) Consolidated Retained earnings, December 31, 20x5

6,000 39,600 80% 31,680 3,000

28,680 P647,880

e. Non-controlling interest, December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5* Add: Net income of subsidiary for 20x5 Total Less: Div idends paid – 20x5 Stockholders’ equity – Subsidiary Company, December 31, 20x5 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) : 20x4 20x5

P 240,000 P144,000 90,000 P234,000 48,000

186,000 P 426,000 90,000

P 13,200 7,200

( 20,400)

f.

Fair v alue of stockholders’ equity of subsidiary, December 31, 20x5…… P 495,600 Less: Unrealized profit in ending inv entory of P Company (upstream sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inv entory of P Company (upstream sales) –20x6 (RPBI of P - 20x6 6,000 Realized stockholders’ equity of subsidiary, December 31, 20x5………. P489,600 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 97,920 Add: Non-controlling interest on full goodwill , net of impairment loss [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss 2,250 Non-controlling interest (full-goodwill)………………………………….. P 100,170 * t he realized profit in beginning inventory of P Company (upstream sales) –20x5 (RPBI of P - 20x5 amounting t o P10,000 is already included in t he beginning ret ained earnings of S Company.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI - SHE NCI, 1/1/20x4 Consolidated SHE, 12/31/20x5

P 600,000 647,880 P1,247,880 ___100,170 P1,348,050

Problem XI (Compute selected balances based on three different intercompany asset transfer scenarios) 1. Consolidated Cost of Goods Sold PP’s cost of goods sold ............................................................................ P290,000 SW’s cost of goods sold ........................................................................... 197,000 Elimination of 20x5 intercompany transfers ............................................. (110,000) Reduction of beginning Inventory because of 20x4unrealized gross profit (P28,000/1.4 = P20,000 cost; P28,000 transfer price less P20,000 cost = P8,000 unrealized gross profit) ................................................. (8,000) Reduction of ending inventory because of 20x5 unrealized gross profit (P42,000/1.4 = P30,000 cost; P42,000 transfer price less P30,000 cost = P12,000 unrealized gross profit) ............................................... 12,000 Consolidated cost of goods sold ................................................. P381,000 Consolidated Inventory PP book value .................................................................................... P346,000 SW book value ................................................................................... 110,000 Eliminate ending unrealized gross profit (see above) ....................... (12,000) Consolidated Inventory ..................................................................... P444,000 Non-controlling Interest in Subsidiary’s Net Income Because all intercompany sales were downstream, the deferrals do not affect SW. Thus, the non-controlling interest is 20% of the P58,000 (revenues minus cost of goods sold and expenses) reported income or P11,600. or Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P640-P290-P150) Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)…

P 200,000 8,000 (_ 12,000)

P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations (P360 – P197 – P105) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5…………..

P 196,000

P 58,000 0 ( 0) P 58,000

* * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

58,000 P 254,000 ____0 P 254,000 11,600 P 242,200

P 58,000 0 ( 0) P 58,000 ____0 P 58,000 20% P 11,600

2. Consolidated Cost of Goods Sold PP book value .......................................................................................... SW book value ......................................................................................... Elimination of 20x5 intercompany transfers ............................................. Reduction of beginning inventory because of 20x4 unrealized gross profit (P21,000/1.4 = P15,000 cost; P21,000 transfer price less P15,000 cost = P6,000 unrealized gross profit) ................................................. Reduction of ending inventory because of 20x5 unrealized gross profit (P35,000/1.4 = P25,000 cost; P35,000 transfer price less P25,000 cost = P10,000 unrealized gross profit) ............................................... Consolidated cost of goods sold ............................................................. Consolidated Inventory PP book value .......................................................................................... SW book value ......................................................................................... Eliminate ending unrealized gross profit (see above) ............................. Consolidated inventory .....................................................................

P290,000 197,000 (80,000)

(6,000)

10,000 P411,000 P346,000 110,000 (10,000) P446,000

Non-controlling Interest in Subsidiary's Net income Since all intercompany sales are upstream, the effect on Snow's income must be reflected in the non-controlling interest computation: SW reported income ............................................................................... 20x4 unrealized gross profit realized in 20x5 (above) .............................. 20x5 unrealized gross profit to be realized in 20x6 (above) ..................... SW realized income ................................................................................. Outside ownership percentage .............................................................. Non-controlling interest in SW’s income ............................................ or Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P640-P290-P150) Realized profit in beginning inv entory of S Company (downstream sales)

P58,000 6,000 (10,000) P54,000 20% P10,800 P 200,000

Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations (P360 – P197 – P105) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

(_ 0) P 200,000 P 58,000 6,000 ( 10,000) P 54,000

54,000 P 254,000 ____0 P 254,000 10,800 P 243,200

P 58,000 6,000 ( 10,000) P 54,000 ____0 P 54,000 20% P 10,800

Problem XIII 1. (Computation of selected consolidation balances as affected by downstream i nventory transfers)

UNREALIZED GROSS PROFIT, 12/31/x4: (downstream transfer) Intercompany gross profit (P120,000 – P72,000).........................

P48,000

Unrealized Intercompany Gross profit, 12/31/x4 ............................

P14,400

UNREALIZED GROSS PROFIT, 12/31/x5: (downstream transfer) Intercompany gross profit (P250,000 – P200,000) .....................

P50,000

Inv entory remaining at year's end ..............................................................................................

Inv entory remaining at year's end ..............................................................................................

30%

20%

Unrealized intercompany gross profit, 12/31/x5 ............................. P10,000 CONSOLIDATED TOTALS  Sales = P1,150,000 (add the two book values and eliminate intercompany sales of P250,000)  Cost of goods sold: Benson's book value ......................................................................... P535,000 Broadway's book value ................................................................... 400,000 Eliminate intercompany transfers .................................................. (250,000) Realized gross profit deferred in 20x4 .......................................... (14,400) Deferral of 20x5 unrealized gross profit ....................................... 10,000 Cost of goods sold ....................................................................... P680,600  Operating expenses = P210,000 (add the two book values and include intangible amortization for current year)  Dividend income = -0- (intercompany t ransfer eliminated in consolidation)  Noncontrolling interest in consolidated income: (impact of transfers is not included because they were downstream) Broadway reported income for 20x5 ................................................................................. Intangible amortization........................................................................................................... Broadway adjusted income.................................................................................................. Outside ownership ...................................................................................................................

P100,000 (10,000) 90,000 30%

Noncontrolling interest in Broadway’s earnings ..............................................................

P 27,000

or,

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P800-P535-P100) Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations (P600 – P400 – P100) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

 

P 165,000 14,400 (_10,000) P 169,400 P 100,000 0 ( 0) P 100,000

100,000 P 269,400 __10,000 P 259,400 27,000 P 232,400

P 100,000 0 ( 0) P 100,000 __10,000 P 90,000 30% P 27,000

Inventory = P988,000 (add the two book values less the P10,000 ending unrealized gross profit) Noncontrolling interest in subsidiary, 12/31/x5 = P385,500 30% beginning P950,000 book value ......................................... P285,000 Excess January 1 intangible allocation (30% × P295,000) .... 88,500 Noncontrolling Interest in Broadway’s earnings .................................................................. Dividends (30% × P50,000)..........................................................................................................

Total noncontrolling interest at 12/31/x5...................................

27,000 (15,000)

P385,500

2. (Computation of selected consolidation balances as affected by upstream inventory transfers). UNREALIZED GROSS PROFIT, 12/31/x4: (upstream transfer)

Intercompany gross profit (P120,000 – P72,000) ........................ Inventory remaining at year's end ................................................ Unrealized intercompany gross profit, 12/31/x4 .............................

P48,000 30% P14,400

UNREALIZED GROSS PROFIT, 12/31/x5: (upstream transfer) Intercompany gross profit (P250,000 – P200,000) ..................... Inventory remaining at year's end ................................................ Unrealized intercompany gross profit, 12/31/x5 .............................

P50,000 20% P10,000

CONSOLIDATED TOTALS  Sales = P1,150,000 (add the two book values and eliminate the Intercompany transfer)  Cost of goods sold:

  

Benson's COGS book value ............................................................ P535,000 Broadway's COGS book value ...................................................... 400,000 Eliminate intercompany transfers .................................................. (250,000) Realized gross profit deferred in 20x4 .......................................... (14,400) Deferral of 20x5 unrealized gross profit ....................................... 10,000 Consolidated cost of goods sold ............................................ P680,600 Operating expenses = P210,000 (add the two book values and include intangible amortization for current year) Dividend income = -0- (interco. transfer eliminated in consolidation) Noncontrolling interest in consolidated income: (impact of transfers is included because they were upstream) Broadway reported income for 20x5 ................................................................................. Intangible amortization...........................................................................................................

P100,000 (10,000)

20x4 gross profit recognized in 20x5 ....................................... 20x5 gross profit deferred .......................................................... Broadway realized income for 20x5........................................

14,400 (10,000) P94,400

Outside ownership ...................................................................................................................

Noncontrolling interest ..................................................................... Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P800-P535-P100) Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations (P600 – P400 – P100) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

 

30%

P28,320 P 165,000 0 (_ 0) P 165,000

P 100,000 14,400 ( 10,000) P 104,400

104,400 P 269,400 __10,000 P 259,400 28,320 P 231,080

P 100,000 14,400 ( 10,000) P 104,400 __10,000 P 94,400 30% P 28,320

Inventory = P988,000 (add the two book values and defer the P10,000 ending unrealized gross profit) Noncontrolling interest in subsidiary, 12/31/x5 = P382,500 30% beginning book value less P14,400 unrealized gross profit (30% × P935,600) ............................. P280,680 Excess int angible allocation (30% × P295,000) ..................... (88,500) Noncontrolling Interest in Broadway’s earnings .................. 28,320

Dividends (30% × P50,000)......................................................................................................

Total noncontrolling interest at 12/31/x5................................

(15,000)

P382,500

Problem XIV Amortization of equipment: P20,000 / 10 years = P2,000 RPBI of S (downstream sales):… … ……………..................................................... ... P15,000 RPBI of P (upstream sales)… … …………………....................................................... 10,000 UPEI of S (downstream sales)… … ………………………………………………..……. 20,000 UPEI of P (upstream sales)… … … ………………………………………….…………… 5,000 Pepper (CI-CNI) Net Income from own operations: Pepper [P724,000 – (PP30,000 x 80%)] Salt RPBI of S (down) RPBI of P (up) UPEI of S (down) UPEI of P (up) Amortization Impairment of goodwill

P700,000 72,000 15,000 8,000 ( 20,000) ( 4,000) ( 1,600) ( 0) P769,400

Salt (NCI-CNI)

CNI

P 18,000 2,000 (1,000) ( 400) ____( 0)__ P18,600

Profit Attributable to Equity NC Interest Holders of Parent in Net Income

P788,000

CNI

Note: Preferred Solution - since what is given is the RE – P, 12/31/2014 (ending balance of the current year) Retained earnings – Parent, 12/31/2014 (cost)… … … … … … … … … .. P 3,500,000 -: UPEI of S (down) – 2014 or RPBI of S (dow n) – 2015..… … … … . 20,000 Adjusted Retained earnings – Parent, 12/31/2014 (cost)… … … … .. P 3,480,000 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/2011… … … … … … … … … .P 150,000 Less: Retained earnings – Subsidiary, 12/31/2014… … … … ... 320,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)… … … … P 170,000 Accumulated amortization (1/1/2011 – 12/31/2014): P 2,000 x 4 years… … … … … … … … … … … … … … … … … … ..( 8,000) UPEI of P (up) – 2014 or RPBI of P (up) – 2015… … … … … … .....( 5,000) P 157,000 X: Controlling Interests… … … … … … … … … … … … … … … … 80% 125,600 RE – P, 12/31/2014 (equity method) = CRE, 12/31/2014… … … … . P 3,605,600 Or, compute first the RE – P on January 1, 2014 (use work back approach), Retained earnings – Parent, 1/1/2014 (cost) (P3,500,000 plus P25,000 Div of P less P724,000 NI of P)… . P2,801,000 -: UPEI of S (down) – 2013 or RPBI of S (down) – 2014..… … … … . 15,000 Adjusted Retained earnings – Parent, 1/1/2014 (cost)… … … … … … P2,786.000 Retroactive Adjustments to convert Cost to “Equity” for

purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/2011… … … … … … … … … P 150,000 Less: Retained earnings – Subsidiary, 1/1/2014… … … … … … 260,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)… … … … P110,000 Accumulated amortization (1/1/2011 – 1/1/2014): P 2,000 x 3 years… … … … … … … … … … … … … … … … … … . ( 6,000) UPEI of P (up) – 2013 or RPBI of P (up) – 2014… … … … … … ... ( 10,000) P 94,000 X: Controlling Interests… … … … … … … … … … … … … … … … 80% 75,200 RE – P, 1/1/2014 (equity method) = CRE, 1/1/2014… … … … … … ..P2,861,200 +: CI – CNI or Profit Attributable to Equity Holders of Parent… … .. 769,400 -: Dividends – P… … … … … … … … … ..… … … … … … … … … 25,000 RE – P, 12/31/2014 (equity method) = CRE, 12/31/2014… … … … ..P3,605,600 Sales Cost of Sales P P2,500,000 P1,250,000 S 1,200,000 875,000 Intercompany sales - downstream ( 320,000) ( 320,000) Intercompany sales - upstream ( 290,000) ( 290,000) RPBI of S (downstream sales)* ( 15,000) RPBI of P (upstream sales)*** ( 10,000) UPEI of S (downstream sales)** 20,000 UPEI of P (upstream sales)**** _________ 5,000 Consolidated P3,090,000 P1,515,000 Working Paper Eliminating Entries: 1. Intercompany Sales and Purchases: Downstream Sales: Sales… … …………………………………………………………………….. 320,000 Cost of Sales (or Purchases)… … … …………………………….... 320,000 Upstream Sales: Sales… … …………………………………………………………………….. 290,000 Cost of Sales (or Purchases)… … … …………………… ………… 290,000 2. Intercompany Profit: (COST Model) Downstream Sales: *100% RPBI of S: Retained Earnings – P, beginning… … …………………………………..... 15,000 Cost of Sales (Beginning Inventory in Income Statement)… ............ 15,000 **100% UPEI of S: Cost of Sales (Ending Inventory in Income Statement)… … ………… 20,000 Inventory (Ending Inventory in Balance Sheet)… … … ……….. 20,000 Upstream Sales: ***100% RPBI of P: (if equity method Investment in S instead of RE – P, beg.) Retained Earnings – P, beginning… … ……………………………...…….. 16,000 NCI … …………………………………………….……………………………... 4,000 Cost of Sales (Beginning Inventory in Income Statement)… ........ 20,000 ****100% UPEI of P: Cost of Sales (Ending Inventory in Income Statement)… … …………… 5,000 Inventory (Ending Inventory in Balance Sheet)… … … ……….. 5,000

Problem XV (Change 2009 – 20x4; 2010 – 20x5; 2011 – 20x6)

(Compute consolidated totals with transfers of both inventory and a building.)

Excess Amortization Expenses Equipment P60,000 ÷ 10 years = P6,000 per year Franchises P80,000 ÷ 20 years = P4,000 per year Annual excess amortizations P10,000 Unrealized Gross profit —Inventory, 1/1/x6 Markup (P70,000 – P49,000) ............................................................ Markup percentage (P21,000 ÷ P70,000) ...................................

P21,000 30%

Remaining inv entory ............................................................................................................................... Markup percentage ...............................................................................................................................

P30,000 30%

Unrealized gross profit, 1/1/x6 .........................................................

P9,000

Unrealized Gross profit —Inventory, 12/31/x6 Markup (P100,000 – P50,000) ..........................................................

P50,000

Remaining inventory .........................................................................

P40,000

Unrealized gross profit, 12/31/x6 ....................................................

P20,000

Markup percentage (P50,000 ÷ P100,000) .......................................................................................

Markup percentage ...............................................................................................................................

50%

50%

Impact of intercompany Building Transfer 12/31/x5—Transfer price figures Transfer price ................................................................................. Gain on transfer (P50,000 – P30,000) ...................................... Depreciation expense (P50,000 ÷ 5) ...................................... Accumulated depreciation ..................................................... 12/31/x6—Transfer price figures Depreciation expense ................................................................ Accumulated depreciation ..................................................... 12/31/x5—Historical cost figures Historical cost ................................................................................ Depreciation expense (P30,000 book value ÷ 5 years) .... Accumulated depreciation (P40,000 + P6,000) .................. 12/31/x6—Historical cost figures Depreciation expense ................................................................ Accumulated depreciation .....................................................

P50,000 20,000 10,000 10,000 10,000 20,000 P70,000 6,000 46,000 6,000 52,000

CONSOLIDATED BALANCES  Sales = P1,000,000 (add the two book values and subtract P100,000 in intercompany transfers)  Cost of Goods Sold = P571,000 (add the two book values and subtract P100,000 in intercompany purchases. Subtract P9,000 because of the previous year



  



unrealized gross profit and add P20,000 to defer the current year unrealized gross profit.) Operating Expenses = P206,000 (add the two book values and include the P10,000 excess amortization expenses but remove the P4,000 in excess depreciation expense [P10,000 – P6,000] created by building transfer) Investment Income = P0 (the intercompany balance is removed so that the individual revenue and expense accounts of the subsidiary can be shown) Inventory = P280,000 (add the two book values and subtract the P20,000 ending unrealized gross profit) Equipment (net) = P292,000 (add the two book values and include the P60,000 allocation from the acquisition-date fair value less three years of excess amortizations) Buildings (net) = P528,000 (add the two book values and subtract the P20,000 unrealized gain on the transfer after two years of excess depreciation [P4,000 per year])

Problem XVI Requirements 1 to 4: Schedule of Determination and Allocation of Excess (Partial -goodwill) Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 80%)……………………. Retained earnings (P120,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… Increase in land (P7,200 x 80%)……………………. Increase in equipment (P96,000 x 80%) Decrease in buildings (P24,000 x 80%)………..... Decrease in bonds payable (P4,800 x 80%)…… Positive excess: Partial-goodwill (excess of cost over

P 372,000

P 192,000 96,000

288,000 P 84,000

P 4,800 5,760 76,800 ( 19,200) 3,840

72,000 P 12,000

fair value)………………………………………………... The over/under valuation of assets and liabilities are summarized as follows:

S Co. Book value Inventory………………….…………….. Land……………………………………… Equipment (net)......... Buildings (net) Bonds payable………………………… Net………………………………………..

S Co. Fair value

(Over) Under Valuation

P 24,000 48,000 84,000 168,000

P 30,000 55,200 180,000 144,000 ( (120,000) 115,200) P P 204,000 294,000

P

6,000 7,200 96,000 (24,000) 4,800

P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows:

Equipment .................. Less: Accumulated depreciation….. Net book value………………………...

Buildings................ Less: Accumulated depreciation….. Net book value………………………...

S Co. Book value 180,000

S Co. Fair value 180,000

Increase (Decrease) 0

96,000

-

( 96,000)

84,000

180,000

96,000

S Co. Book value 360,000

S Co. Fair value 144,000

(Decrease) ( 216,000)

192,000

-

( 192,000)

168,000

144,000

(

24,000)

A summary or depreciation and amortization adjustments is as follows:

Account Adjustments to be amortized Inventory Subject to Amortization

Annual

Over/ Unde r P 6,000

Lif e 1

Annu al Current Amou Year(20x nt 4) P 6,000 P 6,000

20x5 P -

Equipment (net)......... Buildings (net) Bonds payable…

96,00 0 (24,0 00) 48000

8 4 4

12,000 ( 6,000) 1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

12,00 0 (6,00 0) 1,200 P 7,200

The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows:

Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) Fair value of NCI (given) (20%) Fair value of Subsidiary (100%) Less: Book value of stockholders’ equity of Son (P360,000 x 100%) Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P 372,000 93,000 P 465,000 __360,000 P 105,000 90,000 P

15,000

In this case, the goodwill was proportional to the controlling interest of 80% and non -controlling interest of 20% computed as follows:

Value Goodwill applicable to parent………………… Goodwill applicable to NCI…………………….. Total (full) goodwill………………………………..

P12,00 0 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

The goodwill impairment loss would be allocated as follows

Value Goodwill impairment loss attributable to parent P or controlling 3,000 Interest Goodwill applicable to NCI…………………….. 750 Goodwill impairment loss based on 100% fair value or fullP 3,750

% of Total 80.00% 20.00% 100.00%

Goodwill The unrealized profits on January 1, and on December 31, 20x5, resulting intercompany sales, are as summarized below: Downstream Sales:

20x4

Sales of Parent to Subsidiary P150,000

Intercompany Merchandise in 12/31 Inventory of S Company P150,000 x 60% = P90,000

20x5

120,000

P120,000 x 80% = P96,000

Year

Unrealized Intercompany Profit in Ending Inventory P90,000 x 20% = P18,000 P96,000 x 25% = P40,000

Upstream Sales:

Year 20x4 20x5

Sales of Subsidiary to Parent P 50,000 62,500

Intercompany Merchandise in 12/31 Inventory of S Company P100,000 x 50% = P25,000 P 62,500 x 40% = P25,000

Unrealized Intercompany Profit in Ending Inventory P25,000 x 40% = P10,000 P25,000 x 20% = P 5,000

20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4:

(1) Investment in Company……………………………………………

S 372,000 372,000

Cash…………………………………………………………………….. Acquisit ion of S Company.

January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Investment in S Company (P36,000 x 80%)…………….

28,800

28,800

Record dividends from S Company.

December 31, 20x4: (3) Investment in S Company Investment income (P60,000 x 80%) Record share in net income of subsidiary.

December 31, 20x4:

48,000 48,000

(4) Investment income [(P13,200 x 80%) + P3,000, goodwill impairment loss)] Investment in S Company

13,560 13,560

Record amortization of allocat ed excess of invent ory, equipment , buildings and bonds payable and goodwill impairment loss. December 31, 20x4: (5) Inv estment income (P18,000 x 100%) Inv estment in S Company To adjust inv estment income for downst ream sales - unrealized profit in ending invent ory of S. December 31, 20x4: (6) Inv estment income (P12,000 x 80%) Inv estment in S Company To adjust inv estment income for upstream sales - unrealized profit in ending inv entory P .

18,000

9,600

18,000

9,600

Thus, the investment balance and investment income in the books of P Company is as follows: Cost, 1/1/x4 NI of S (60,000 x 80%) Balance, 12/31/x4 Amortization & impairment UPEI of S (P18,000 x 100%) UPEI of P (P12,000 x80%)

Inv estment in S 372,000 28,800 48,000

Div idends – S (30,000x 80%) Amortization & impairment UPEI of Son (P15,000 x 100%) UPEI of Perfect (P10,000 x80%)

13,560 18,000 9,600

350,040 Inv estment Income 13,560 18,000 9,600

NI of S (P60,000 x 80%)

48,000 6,840

Balance, 12/31/x4

Consolidation Workpaper – First Year after Acquisition

(E1) Common stock – Co………………………………………… Retained earnings – Co…………………………………… Investment in Co…………………………………………… Non-controlling interest (P360,000 20%)………………………..

S

240,000

S

120.000

S

288,000

x

72,000

To eliminat e invest ment on January 1, 20x4 and equit y account s of subsidiary on date of acquisition; and t o establish non-controlling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800

payable…………………………………………. 12,000 Goodwill…………………………………………………………………. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%)……………………….. Investment in S Co……………………………………………….

216,000 18,000 84,000

To eliminat e invest ment on January 1, 20x4 and allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish non- cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss……………………………………….

6,000 6,000 6,000 1,200 3,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

6,000 12,000 1,200 3,000

To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of S’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000

_______ P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______ P 7,200

P 1,200 P1,200

(E4) Investment income Investment in S Company Non-controlling interest (P36,000 20%)……………….. Dividends paid – S……………………

Total

14,400

x

6,840 21,960 7,200 36,000

To eliminate intercompany dividends and investment income under equit y met hod and est ablish share of dividends, comput ed as follows:

NI of S

Inv estment in S 28,800 Div idends - S

Inv estment Income NI of S

After

(60,000 x 80%)……. 48,000

13,560 18,000 9,600 21,960

Amortization & impairment UPEI of S UPEI of P

Amortization impairment UPEI of S UPEI of P

13,560 18,000 9,600

(50,000 x 80%)

48,000

the

6,840

eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus,

Cost, 1/1/x4 NI of S (60,000 x 80%) Balance, 12/31/x4 (E4) Inv estment Income and div idends ……………

Inv estment in S 372,000 28,800 48,000 350,040 21,960 372,000

13,560 18,000 9,600 288,000 84,000

Div idends – S (30,000x 80%) Amortization & impairment UPEI of Son UPEI of Perfect (E1) Inv estment, 1/1/20x4 (E2) Inv estment, 1/1/20x4

372,000

(E5) Sales………………………. Cost of Goods Sold (or Purchases)

150,000 150,000

To eliminat ed int ercompany downst ream sales.

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

60,000 60,000

To eliminat ed int ercompany upst ream sales.

(E7) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

18,000 18,000

To defer t he downstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E8) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

12,000 12,000

To defer t he upstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest ………….. To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x4 as follows: Net income of subsidiary…………………….. Unrealized profit in ending inv entory of P Company (upstream sales)……………………….. Son Company’s realized net income from separate operations* …….….. Less: Amortization of allocated excess [(E3)] ….

P 60,000 ( 12,000) P 48,000 ( 13,200) P 34,800

6,960 6,960

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

20% P

6,960

Subsidiary accounts are adjusted to full fair value regardless on the controlling interest percentage or what option used to value non-controlling interest or goodwill. Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Partial -goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) P Co P480,000

S Co. P240,000

Inv estment income Total Rev enue

6,840 P486,840

P240,000

Cost of goods sold

P204,000

P138,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 48,000 P312,000 P174,840 P174,840

24,000 18,000 P180,000 P 60,000 P 60,000

Sales

Income Statement

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings

Dr. (5) 150,000 (6) 60,000 (4) 6,840

(3) (7) (8) (3) (3)

6,000 18,000 12,000 6,000 1,200

(3)

3,000

(9)

6,960

Cr.

_________ P 510,000 P 168,000

(5) 150,000 (6) 60,000

90,000 1,200 66,000 3,000 P328,200 P181,800 ( 6,960) P174,840

P360,000

P

Consolidated P 510,000

P

174,840 P414,840

P120,000 60,000 P180,000

72,000 -

36,000

P462,840

360,000

(1) 120,000

174,840 P414,840

_

72,000 ________

P144,000

P

642,840

232,800 90,000 120,000

P 90,000 60,000 90,000

P

387,360 150,000

210,000 220,000 720,000

48,000 180,000 540,000

(4)

(1)

5,000

(2)

7,200

(2) 4,800 (2) 12,000 (8) 21,960

350,040 P1,635,700

P1,006,000

P 135,000 405,000

P 96,000 288,000

(2) 96,000 (2) 192,000 (3) 6,000

(3) (7) (8)

36,000

6,000 18,000 12,000

(2) 216,000 (3) 1,200 (3) 3,000 (2) 288,000 (2) 84,000

(3)

12,000

180,000 265,200 380,000 1,044,000 3,600 9,000 P2,394,600

P 147,000 495,000

Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest………… Total

120,000 240,000 600,000

120,000 120,000

240,000 360,000 600,000

240,000 144,000

(1) 240,000

462,840 _________ P1,962,840

_________ P1,008,000

__________ P 983,160

(4)

7,200

(1 ) 72,000 (2) 18,000 (5) 6,960 P 983,160

462,840 ____89,760 P2,394,600

Second Year after Acquisition

Sales Less: Cost of goods sold Gross profit

P Co.

P 540,000 216,000

Less: Depreciation expense Other expense

P 324,000 60,000 72,000

Net income from its own separate operations Add: Investment income

P 192,000 65,040

Net income Dividends paid

P 257,040 P 72,000

S Co.

P 360,000 192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. 20x5: Parent Company Equity Method Entry

January 1, 20x5 – December 31, 20x5: (2) Cash……………………… Investment in S Company (P48,000 x 80%)…………….

38,400

38,400

Record dividends from S Company.

December 31, 20x5: (3) Investment in S Company Investment income (P90,000 x 80%)

72,000 72,000

Record share in net income of subsidiary.

December 31, 20x5: (4) Investment income (P7,200 x 80%) Investment in S Company Record amortizat ion of allocat ed excess of invent ory, equipment , buildings and bonds payable

5,760

5,760

December 31, 20x5: (5) Inv estment income (P24,000 x 100%) Inv estment in S Company To adjust inv estment income for downst ream sales - unrealized profit in ending invent ory of Son (UPEI of S). December 31, 20x5: (6) Inv estment in S Company…………….. Inv estment income (P18,000 x 100%)……….. To adjust inv estment income for downst ream sales - realized profit in beginning invent ory of S (RPBI of S). December 31, 20x5: (7) Inv estment income (P6,000 x 80%) Inv estment in S Company To adjust inv estment income for upstream sales - unrealized profit in ending inv entory Perfect (UPEI of P).

December 31, 20x5: (8) Inv estment in S Company…………….. Inv estment income (P12,000 x 80%)……….. To adjust inv estment income for upstream sales - realized profit in beginning inv entory of Perfect (RPBI of P)

24,000 24,000

18,000

18,000

4,800

4,800

9,600

9,600

Thus, the investment balance and investment income in the books of P Company is as follows:

Cost, 1/1/x5 NI of Son (90,000 x 80%) RPBI of S (P18,000 x 100%) RPBI of P (P12,000 x 80%) Balance, 12/31/x5

Amortization (7,200 x 805) UPEI of S (P24,000 x 100%) UPEI of P (P6,000 x 80%)

Inv estment in S 350,040 38,400 5,760 72,000 24,000 18,000 4,800 9,600 376,680 Inv estment Income 5,760 24,000 72,000 4,800 18,000 9,600 65,040

Div idends – S (48,000x 80%) Amortization (7,200 x 80%) UPEI of Son (P24,000 x 100%) UPEI of Perfect (P6,000 x 80%)

NI of S (P90,000 x 80%) RPBI of S (P18,000 x 100%) RPBI of P(P12,000 x 80%) Balance, 12/31/x5

Consolidation Workpaper – Second Year after Acquisi tion The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries:

(E1) Common stock – S Co………………………………………… Retained earnings – S Co, 1/1/x5…………………………. Investment in S Co (P384,000 x 80%) Non-controlling interest (P384,000 x 20%)……………………….. To eliminat e invest ment on January 1, 20x5 and equit y account s of subsidiary on dat e of acquisit ion; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on 1/1/20x5.

240,000 144.000 307,200 76,800

(E2) Accumulated depreciation – equipment (P96,000 – 84,000 P12,000) Accumulated depreciation – buildings (P160,000 + 198,000 P6,000) 7,200 Land………………………………………………………………………. Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P12,000 – P3,000)…………………………….. 9,000 Buildings……………………………………….. 216,000 Non-controlling interest [(P90,000 – P13,200) x 20%] 15,360 Investment in S 70,440 Co………………………………………………. To eliminat e invest ment on January 1, 20x5 and allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o t he original amount of goodwill; and t o est ablish non- cont rolling int erest (in net asset s of subsidiary) on 1/1/20x5.

(E3) Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Accumulated depreciation – equipment……………….. Discount on bonds payable…………………………

6,000 6,000 1,200 12,000 1,200

To provide for 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

Total

P7,200

(E4) Investment income Non-controlling interest (P48,000 20%)……………….. Dividends paid – S…………………… Investment in S Company

65,040 9,600

x

48,000 26,640

To eliminate intercompany dividends and investment income under equit y met hod and est ablish share of dividends, comput ed as follows: NI of S (90,000 x 80%)…….

Inv estment in S 38,400 Div idends – S Amortization 72,000 5,760 (P7,200 x 80%)

Inv estment Income Amortization (P7,200 x 80%)

5,760

72,000

NI of S (90,000 x 80%)

RPBI of S RPBI of P

18,000 9,600 26,640

24,000 4,800

UPEI of S UPEI of P

UPEI of S UPEI of P

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

24,000 4,800

18,000 RPBI of S 9,600 RPBI of P 65,040

120,000 120,000

To eliminat ed int ercompany downst ream sales.

(E7) Sales………………………. Cost of Goods Sold (or Purchases)

75,000 75,000

To eliminat ed int ercompany upst ream sales.

(E8) Investment in Son Company……………………. Cost of Goods Sold (Ending Inventory – Income Statement)

18,000 18,000

To realized profit in downstream beginning inventory deferred in t he prior period.

(E9) Investment in Son Company (P12,000 x 80%) Noncontrolling interest (P12,000 x 20%)…… Cost of Goods Sold (Ending Inventory – Income Statement)

9,600 2,400 12,000

To realized profit in upstream beginning inventory deferred in t he prior period.

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Cost, 1/1/x5 NI of S (90,000 x 80%) RPBI of S (P18,000 x 100%) RPBI of P (P12,000 x 80%) Balance, 12/31/x5 (E8) RPBI of S (E9) RPBI of P

Inv estment in S 350,040 38,400 72,000 18,000 9,600 376,680 18,000 9,600

5,760 24,000 4,800 307,200 70,440 26,640

336,900

404,280

(E10) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

Div idends – S (40,000x 80%) Amortization (6,000 x 80%) UPEI of S (P20,000 x 100%) UPEI of P (P5,000 x 80%) (E1) Inv estment, 1/1/20x5 (E2) Inv estment, 1/1/20x5 (E4) Inv estment Income and div idends

24,000 24,000

To defer t he downstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E11) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

6,000 6,000

To defer t he upstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E12) Non-controlling interest in Net Income of Subsidiary…………

17,760

Non-controlling interest …………..

17,760

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x5 as follows: Net income of subsidiary…………………….. Realized profit in beginning inv entory of P Company - 20x5 (upstream sales) Unrealized profit in ending inventory of P Company - 20x5 (upstream sales) S Company’s Realized net income* Less: Amortization of allocated excess

P 90,000 12,000 ( P ( P

6,000) 96,000 7,200) 88,800 20%

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill P 17,760 * from separat e t ransact ions t hat has been realized in t ransact ions wit h t hird persons.

Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Partial -goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) P Co P540,000

S Co. P360,000

Inv estment income Total Rev enue Cost of goods sold

65,040 P605,040 P216,000

P360,000 P192,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 72,000 P348,000 P257,040 P257,040

24,000 54,000 P270,000 P 90,000 P 90,000

(3) (3)

(1) 144,000

257,040 P719,880

P144,000 90,000 P234,000

72,000 -

48,000

P777,456

P223,200

P 777,456

265,200 180,000 216,000

P 102,000 96,000 108,000

P 367,200 276,000

210,000 240,000

48,000 180,000

Sales

Income Statement

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment

Dr. (6) 120,000 (7) 75,000 (4) 65,040

Cr.

(10) 24,000 (11) 6,000

(6) 120,000 (7) 75,000 (8) 18,000 (9) 12,000

(5)

6,000 1,200

Consolidated P 705,000 ___________ P 705,000 P 213,000

P P ( P

17,760

P462,840

P

90,000 1,200 126,000 430,200 274,800 17,760) 257,040

P 462,840 257,040 P 719,880

(4)

(2)

7,200

48,000

(10) 24,000 (11) 6,000

_

72,000 ________

294,000 265,200 420,000

Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest…………

Total

720,000

540,000

376,680 P2,207,880

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

647,880

240,000 186,000

(2) (2) (8) (9)

(3) 216,000 3,600 (3) 1,200 9,000 18,000 (1) 307,200 9,600 (6) 70,440 (4) 26,640

(2)

84,000

_________ P1,074,000

P2,677,800

12,000

(2) 198,000 (3) 6,000

P180,000 552,000 240,000 360,000 600,000

(1) 240,000 647,880 (4) (9)

___ _____ P2,207,880

(3)

1,044,000 2,400 9,000

9,600 2,400

__________ P1,046,400

(2 ) 76,800 (2) 15,360 (5) 17,760 P1,046,400

____97,920 P2,677,800

5 and 6. Refer to Problem IX for computations Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem IX solution). Problem XVII Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)……………….. Fair value of Subsidiary (100%)………. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. Retained earnings (P120,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)………………

P 372,000 93,000 P 465,000

P 240,000 120,000

P

6,000

360,000 P 105,000

Increase in land (P7,200 x 100%)……………………. Increase in equipment (P96,000 x 100%) Decrease in buildings (P24,000 x 100%)………..... Decrease in bonds payable (P4,800 x 100%)…… Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

7,200 96,000 ( 24,000) 4,800

90,000

P 15,000

A summary or depreciation and amortization adjustments is as follows:

Account Adjustments to be amortized Inventory Subject to Amortization

Over/ unde r P 6,000

Lif e 1

Annu al Current Amou Year(20x nt 4) P 6,000 P 6,000

20x5 P -

12,000 ( 6,000)

12,00 0 (6,00 0)

Annual

Buildings (net)

96,00 0 (24,0 00)

Bonds payable…

4,800

Equipment (net).........

8 4 4

1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

1,200 P 7,200

20x4: First Year after Acquisition Parent Company Equity Method Entry January 1, 20x4:

(1) Investment in Company……………………………………………

S 372,000 372,000

Cash…………………………………………………………………….. Acquisit ion of S Company.

January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Investment in S Company (P36,000 x 80%)……………. Record dividends from S Company.

December 31, 20x4:

28,800 28,800

(3) Investment in S Company Investment income (P60,000 x 80%)

48,000 48,000

Record share in net income of subsidiary.

December 31, 20x4: (4) Investment income [(P13,200 x 80%) + (P3,750 – P750)*, goodwill impairment loss)] Investment in S Company

13,560 13,560

Record amortization of allocat ed excess of invent ory, equipment , buildings and bonds payable and goodwill impairment loss.

* t his procedure would be more appropriate, instead of mult iplying t he full-goodwill impairment loss of P3,125 by 80%. There might be sit uations where the controlling interests on goodwill impairment loss would not be proport ionat e t o NCI acquired (refer t o Illust rat ion 15-6).

December 31, 20x4: (5) Inv estment income (P18,000 x 100%) Inv estment in S Company To adjust inv estment income for downst ream sales - unrealized profit in ending invent ory of S. December 31, 20x4: (6) Inv estment income (P12,000 x 80%) Inv estment in S Company To adjust inv estment income for upstream sales - unrealized profit in ending inv entory P .

18,000

9,600

18,000

9,600

Thus, the investment balance and investment income in the books of P Company is as follows

Cost, 1/1/x4 NI of S (60,000 x 80%)

Balance, 12/31/x4

Inv estment in S 372,000 28,800 48,000

Div idends – S (36,000x 80%) Amortization & impairment UPEI of S (P18,000 x 100%) UPEI of P (P12,000 x80%)

13,560 18,000 9,600

324,000 Inv estment Income

Amortization & impairment UPEI of S (P18,000 x 100%) UPEI of P (P12,000 x80%)

13,560 18,000 9,600

NI of S (P60,000 x 80%)

48,000 6,840

Balance, 12/31/x4

Consolidation Workpaper – First Year after Acquisition

(E1) Common stock – Co………………………………………… Retained earnings – Co…………………………………… Investment in Co…………………………………………… Non-controlling interest (P360,000

S

240,000

S

120.000

S

288,000

x

72,000

20%)……………………….. To eliminat e invest ment on January 1, 20x4 and equit y account s of subsidiary on dat e of acquisit ion; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in Son 84,000 Co………………………………………………. To eliminat e invest ment on January 1, 20x4 and allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish non- cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss……………………………………….

6,000 6,000 6,000 1,200 3,750 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill…………………………………… To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of S’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment

Cost of Goods Sold P 6,000

Depreciation/ Amortization Expense P 12,000

Amortization -Interest

Total

12,000 1,200 3,750

Buildings Bonds payable Totals

_______ P 6,000

( 6,000) _______ P 7,200

P 1,200 P1,200

14,400

(E4) Investment income Investment in S Company Non-controlling interest (P36,000 20%)……………….. Dividends paid – S……………………

6,840 21,960 7,200

x

36,000

To eliminate intercompany dividends and investment income under equit y met hod and est ablish share of dividends, comput ed as follows:

After

Inv estment Income

Inv estment in S NI of S 28,800 Div idends - S (60,000 Amortization & x 80%)……. 48,000 13,560 impairment 18,000 UPEI of S 9,600 UPEI of P 21,960

Amortization impairment UPEI of S UPEI of P

13,560 18,000 9,600

48,000

the NI of S (50,000 x 80%)

6,840

eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Cost, 1/1/x4 NI of S (60,000 x 80%) Balance, 12/31/x4 (E4) Inv estment Income and div idends ……………

Inv estment in S 372,000 28,800 48,000 350,040 21,960 372,000

13,560 18,000 9,600 288,000 84,000

Div idends – S (30,000x 80%) Amortization & impairment UPEI of S UPEI of P (E1) Inv estment, 1/1/20x4 (E2) Inv estment, 1/1/20x4

372,000

(E5) Sales………………………. Cost of Goods Sold (or Purchases)

150,000 150,000

To eliminat ed int ercompany downst ream sales.

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

60,000 60,000

To eliminat ed int ercompany upst ream sales.

(E7) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

18,000 18,000

To defer t he downstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E8) Cost of Goods Sold (Ending Inventory – Income St atement)… Inventory – Balance Sheet…… To defer t he upstream sales - unrealized profit in ending inventory

12,000 12,000

unt il it is sold to outsiders.

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

6,210 6,210

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x4 as follows: Net income of subsidiary…………………….. Unrealized profit in ending inv entory of P Company (upstream sales)……………………….. S Company’s realized net income from separate operations* …….….. Less: Amortization of allocated excess [(E3)] ….

P 60,000 ( 12,000) P 48,000 ( 13,200) P 34,800 20% P 6,960

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) – full goodwill P 6210 * t his procedure would be more appropriat e, inst ead of mult iplying t he fullgoodwill impairment loss of P3,750 by 20%. There might be situat ions where t he NCI on goodwill impairment loss would not be proport ionat e t o NCI acquired (refer t o Illust rat ion 15-6).

Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) P Co P480,000

S Co. P240,000

Inv estment income Total Rev enue

6,840 P486,840

P240,000

Cost of goods sold

P204,000

P138,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 48,000 P312,000 P174,840 P174,840

24,000 18,000 P150,000 P 50,000 P 50,000

Sales

Income Statement

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company

Dr. (5) 150,000 (6) 60,000 (4) 6,840

(3) (7) (8) (3) (3)

174,840 P414,840 72,000

Consolidated P 510,000 _________ P 510,000 P 168,000

(5) 6,000 150,000 18,000 (6) 12,000 60,000 6,000 1,200

(3)

3,750

(9)

5,175

P360,000 P120,000 60,000 P180,000

Cr.

90,000 1,200 66,000 3,750 P274,125 P150,875 ( 5,175) P145,700

P

360,000

P

174,840 414,840

(1) 120,000

72,000

S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory………………….

P

Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest………… Total

-

36,000

P462,840

_

________

P144,000

P

462,840

232,800 90,000 120,000

P 90,000 60,000 90,000

P

322,800 150,000

210,000 240,000 720,000

48,000 180,000 540,000

350,040 P1,635,700

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

462,840

240,000 144,000

_________ P1,962,840

_________ P1,008,000

Sales Less: Cost of goods sold Gross profit Less: Depreciation expense Other expense Net income from its own separate operations Add: Investment income

Dividends paid

(2)

6,000

(2)

7,200

(3) (7) (8)

36,000

6,000 18,000 12,000

(2) 216,000 (2) 4,800 (3) 1,200 (2) 15,000 (3) 3,750 (4) 21,960 (2) 288,000 (2) 84,000

(2) 96,000 (3) (2) 192,000 (3) 6,000

12,000

180,000 265,200 420,000 1,044,000 3,600 11,250 P2,396,850 P 147,000 495,000 240,000 360,000 600,000

(1) 240,000 462,840 (4)

20x5: Second Year after Acquisition

Net income

(4)

7,200

__________ P 986,160

(1 ) 72,000 (2) 21,000 (9) 6,210 P 986,160

Perfect Co. P 540,000 216,000 P 324,000 60,000 72,000 P 192,000 65,040 P 257,040 P 72,000

____92,010 P2,396,850

Son Co. P 360,000 192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5.

Parent Company Equity Method Entry

January 1, 20x5 – December 31, 20x5: (2) Cash……………………… Investment in S Company (P48,000 x 80%)…………….

38,400 38,400

Record dividends from S Company.

December 31, 20x5: (3) Investment in S Company Investment income (P90,000 x 80%)

72,000

72,000

Record share in net income of subsidiary.

December 31, 20x5: (4) Investment income (P7,200 x 80%) Investment in S Company

5,760

5,760

Record amortizat ion of allocat ed excess of invent ory, equipment , buildings and bonds payable December 31, 20x5: (5) Inv estment income (P24,000 x 100%) Inv estment in S Company To adjust inv estment income for downst ream sales - unrealized profit in ending invent ory of S (UPEI of S). December 31, 20x5: (6) Inv estment in S Company…………….. Inv estment income (P18,000 x 100%)……….. To adjust inv estment income for downst ream sales - realized profit in beginning invent ory of S (RPBI of S). December 31, 20x5: (7) Inv estment income (P6,000 x 80%) Inv estment in S Company To adjust inv estment income for upstream sales - unrealized profit in ending inv entory P (UPEI of P). December 31, 20x5: (8) Inv estment in S Company…………….. Inv estment income (P12,000 x 80%)……….. To adjust inv estment income for upstream sales - realized profit in beginning inv entory of P (RPBI of P)

24,000

18,000

24,000

18,000

4,800 4,800

9,600

9,600

Thus, the investment balance and investment income in the books of Perfect C ompany is as follows: Cost, 1/1/x5 NI of Son (90,000 x 80%) RPBI of (P18,000 x 100%) RPBI of P (P12,000 x 80%) Balance, 12/31/x5

Inv estment in S 350,040 38,400 5,760 72,000 24,000 18,000 4,800 9,600 376,680 Inv estment Income

Div idends – S (48,000x 80%) Amortization (7,200 x 80%) UPEI of S (P24,000 x 100%) UPEI of P (P6,000 x 80%)

Amortization (7,200 x 805) UPEI of S (P24,000 x 100%) UPEI of P (P6,000 x 80%)

5,760 24,000 4,800

72,000 18,000 9,600 65,040

NI of S (P90,000 x 80%) RPBI of S (P18,000 x 100%) RPBI of P (P12,000 x 80%) Balance, 12/31/x5

Consolidation Workpaper – Second Year after Acquisition The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries.

(E1) Common stock – S Co………………………………………… Retained earnings – S Co, 1/1/x5…………………………. Investment in S Co (P384,000 x 80%) Non-controlling interest (P384,000 x 20%)………………………..

240,000 144.000 307,200 76,800

To eliminat e invest ment on January 1, 20x5 and equit y account s of subsidiary on dat e of acquisit ion; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on 1/1/20x5.

(E2) Accumulated depreciation – equipment (P96,000 – 84,000 P12,000) Accumulated depreciation – buildings (P192,000 + 198,000 P6,000) 7,200 Land………………………………………………………………………. Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P15,000 – P3,750)…………………………….. 11,250 Buildings……………………………………….. 216,000 Non-controlling interest [(P90,000 – P13,200) x 20%] + [P3,000, full goodwill - [(P3,750, full-goodwill impairment – P3,000, partial- goodwill impairment)* 17,610 or (P3,750 x 20%)] Investment in S 70,440 Co………………………………………………. To eliminat e invest ment on January 1, 20x5 and allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o t he original amount of goodwill; and t o est ablish non- cont rolling int erest (in net asset s of subsidiary) on 1/1/20x5. * t his procedure would be more appropriate, inst ead of mult iplying t he full-goodwill impairment loss of P3,750 by 20%. There might be situations where t he NCI on goodwill impairment loss would not b e proportionate to NCI acquired (refer t o Illust rat ion 15-6).

(E3) Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense…………………………………

6,000 6,000 1,200

Accumulated depreciation equipment……………….. Discount on payable…………………………

–

12,000

bonds

1,200

To provide for 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

Total

P7,200

(E4) Investment income Non-controlling interest (P48,000 20%)……………….. Dividends paid – S…………………… Investment in S Company

65,040 9,600

x

48,000 26,640

To eliminate intercompany dividends and investment income under equit y met hod and est ablish share of dividends, comput ed as follows: NI of Son (90,000 x 80%)……. RPBI of S RPBI of P

Inv estment in S 38,400 Div idends – S Amortization 72,000 5,760 (P7,200 x 80%) 18,000 24,000 UPEI of S 9,600 4,800 UPEI of P 26,640

Inv estment Income Amortization (P7,200 x 80%) UPEI of S UPEI of P

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

5,760 24,000 4,800

72,000 18,000 9,600 65,040

NI of S (90,000 x 80%) RPBI of S RPBI of P

120,000 120,000

To eliminat ed int ercompany downst ream s ales.

(E7) Sales………………………. Cost of Goods Sold (or Purchases)

75,000 75,000

To eliminat ed int ercompany upst ream sales.

(E8) Investment in Son Company……………………. Cost of Goods Sold (Ending Inventory – Income Statement)

18,000 18,000

To realized profit in downstream beginning inventory deferred in t he prior period.

(E9) Investment in Son Company (P12,000 x 80%) Noncontrolling interest (P12,000 x 20%)…… Cost of Goods Sold (Ending Inventory – Income Statement) To realized profit in upstream beginning inventory deferred in t he prior period.

9,600 2,400 12,000

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus,

Cost, 1/1/x5 NI of Son (90,000 x 80%) RPBI of S (P18,000 x 100%) RPBI of P (P18,000 x 80%) Balance, 12/31/x5 (E8) RPBI of S (E9) RPBI of P

Inv estment in S 350,040 38,400 72,000 18,000 9,600 376,680 18,000 9,600

5,600 24,000 4,800 307,200 70,440 26,640

404,280

404,280

Div idends – S (48,000x 80%) Amortization (7,000 x 80%) UPEI of S (P24,000 x 100%) UPEI of P (P6,000 x 80%) (E1) Inv estment, 1/1/20x5 (E2) Inv estment, 1/1/20x5 (E4) Inv estment Income and div idends

(E10) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

24,000 24,000

To defer t he downstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E11) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

6,000 6,000

To defer t he upstream sales - unrealized profit in ending inventory unt il it is sold to outsiders.

(E12) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest ………….. To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x5 as follows:

Net income of subsidiary…………………….. Realized profit in beginning inv entory of P Company - 20x5 (upstream sales) Unrealized profit in ending inventory of P Company - 20x5 (upstream sales) Son Company’s Realized net income* Less: Amortization of allocated excess

P 90,000 12,000 ( P ( P

6,000) 96,000 7,200) 88,000 20% P 17,760

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on fullGoodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 17,760 * from separat e t ransact ions t hat has been realized in t ransact ions

17,760 17,760

wit h t hird persons.

Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) P Co P540,000

S Co. P360,000

Inv estment income Total Rev enue Cost of goods sold

65,040 P605,040 P216,000

P360,000 P192,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 72,000 P348,000 P257,040 P257,040

24,000 54,000 P270,000 P 90,000 P 90,000

(3) (3)

(1) 144,000

257,040 P719,880

P144,000 90,000 P234,000

72,000 -

48,000

P647,880

P186,000

P 647,880

265,200 180,000 216,000

P 114,000 96,000 108,000

P 367,200 276,000

210,000 240,000 720,000

48,000 180,000 540,000

Sales

Income Statement

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above

Dr. (6) 120,000 (7) 75,000 (4) 65,040

Cr.

(10) 24,000 (11) 6,000

(6) 120,000 (7) 75,000 (8) 18,000 (9) 12,000

(5)

Consolidated P 705,000 ___________ P 705,000 P 213,000

6,000 1,200

P P ( P

17,760

P462,840

P

P 462,840

376,680 P2,207,880

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

647,880

90,000 1,200 126,000 430,200 274,800 17,760) 308,448

240,000 186,000

257,040 P 719,880

(4)

(2)

7,200

48,000

(10) 24,000 (11) 6,000

(2) (2) (8) (9)

(3) 216,000 3,600 (3) 1,200 11,250 18,000 (1) 307,200 9,600 (7) 70,440 (4) 26,640

(2)

84,000

(2) 198,000 (3) 6,000

(3)

12,000

_

72,000 ________

294,000 265,200 420,000 1,044,000 2,400 11,250 P2,680,050 P180,000 552,000 240,000 360,000 600,000

(1) 240,000 647,880

Non-controlling interest…………

Total

(4) (9) ___ _____ P2,207,880

_________ P1,074,000

9,600 2,400

__________ P1,048,650

(1 ) 76,800 (2) 17,610 (14)17,760 P1,048,650

____100,170 P2,680,050

5 and 6. Refer to Problem X for computations Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem X solution). Multiple Choice Problems 1. a P Company S Company Total Less: Intercompany sales Realized profit in BI of S Co. [P300,000 x 1/2 = P150,000 x (300-240)/300] Add: Unrealized profit in EI of S Co. [P468,000 x 40% = P187,200 x (468-375)/468] Consolidated

Sales 2,250,000 1,125,000 3,375,000 468,000

Cost of Sales 1,800,000 _937,500 2,737,500 468,000 30,000

________ 2.907,000

__37,200 2,276,700

2. c – refer to No. 1 for computations

3. b Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) [P150,000 x 50% = P75,000 x (30/150)] S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P225,000 0 (_ 0) P225,000 P 90,000 0 ( 15,000) P 75,000

75,000 P300,000 0 P300,000 15,000 P285,000

Or, alternatively Consolidated Net Income for 20x4 P Company’s net income from own/separate operations………….

P225,000

Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales)… Son Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 * t hat has been realized i n t ransact ions wit h t hird part ies. * * Non-controlling Interest in Net Income (NCINI) for 20x 4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

0 (_ 0) P225,000 P 90,000 0 ( 15,000) P 75,000

75,000 P300,000

P 15,000 0

15,000 P285,000 _ 15,000 P290,000

P 90,000 0 ( 15,000) P 75,000 0 P 75,000 20% P 15,000 0 P 15,000

4. c – refer to No. 3 for computation 5. a – P25,000 x 125% = P31,250 intercompany sales and purchases (cost of sales) 6. c – P25,000 x 125% = P31,250 intercompany sales and purchases (cost of sales) 7. d Cost of Sales P Company 5,400,000 S Company _1,200,000 Total 6,600,000 Less: Intercompany sales 1,000,000 Realized profit in BI of S Co. [P625,000 x 12% = P75,000 x (625 - 425)/625] 24,000 Add: Unrealized profit in EI of S Co. [P1,000,000 x 10% = P100,000 x (1,000 - 800)/1,000] __20,000 Consolidated 5,596,000

8. b Net Income from own operations: X-Beams (parent) Kent (subsidiary), 70%:30% Unrealized Profit in EI of Parent (X-Beams): P180,000x 20% = P36,000 x (180-100/180) = P16,000, 70%:30%

Parent

Subsidiary

210,000

90,000

( 11,200)

( 4,800)

Non-controlling Interest in Kent’s Net Income

85,200

9. d Non-controlling Interest in Net Income (NCINI) for 20x4: S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P 137,000 40,000 ( 25,000) P 152,000 _ 0 P 152,000 30% P 45,600 0 P 45,600

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

10. c – Parent Net Income from own operations: Gibson (Parent): Sparis(subsidiary), 90%:10% RPBI of Parent (upstream: 420,000 x 30% = 126,000; 126,000 x 25/125 = 25,200; 90%:10% UPEI of Parent (upstream): 500,000 x 30% = 150,000; 150,000 x 25/125 = 30,000; 90%:10% Non-controlling Interest in Kent’s Net Income 11. b 12. a 13. b (downstream sales)

Sales – Pot (parent) - Skillet (subsidiary) Total Add(Deduct): I ntercompany sales - dow n Consolidated Sales

1,120,000 420,000 1,540,000 ( 140,000) 1,400,000

CGS – Pot (parent) - Skillet (subsidiary) Total Add(Deduct): I ntercompany sales - dow n Unrealized Profit in Ending I nv entory of Skillet (subsidiary)-dow n EI of Skillet : Sales of Pot 140,000 x: EI of Skillet 40% EI of Skillet 56,000 X: GP of Pot (1,120 – 840) 1,120 25% Consolidated CGS

840,000 252,000 1,092,000 ( 140,000)

14,000 966,000

Subsidiary

820,800

91,200

22,680

2,520

(27,000)

( 3,000) 90,720

14. c – upstream sales Note: The only change here from Problem 13 is the markup percentage which 40 percent*

would now be

CGS – Pot (parent) 840,000 - Skillet (subsidiary) 252,000 Total 1,092,000 Add(Deduct): I ntercompany sales - upstream ( 140,000) Unrealized Profit in Ending I nv entory of Pot (subsidiary)-upstream EI of Pot: Sales of Skillet 140,000 x: EI of Pot 40% EI of Pot 56,000 X: GP of Skillet (420 – 252) 420 40%* 22,400 Consolidated CGS 974,400 The problem is quite intriguing because of the statement “Pot had established the transfer price base on its normal markup”. It should be noted that Parent Company established the transfer price based on its normal price (in this case it is assumed that the mark -up of the parent which is 25% is also the normal transfer price). So, the solution should be as follows: Sales – Pot (parent) - Skillet (subsidiary) Total Add(Deduct): Intercompany sales - down Consolidated Sales

1,120,000 420,000 1,540,000 ( 140,000) 1,400,000

CGS – Pot (parent) - Skillet (subsidiary) Total Add(Deduct): Intercompany sales - down Unrealized Profit in Ending Inventory of Skillet (subsidiary)-down EI of Skillet : Sales of Pot 140,000 x: EI of Skillet 40% EI of Skillet 56,000 X: GP of Pot (1,120 – 840) 1,120 25% Consolidated CGS

840,000 252,000 1,092,000 ( 140,000)

14,000 966,000

15. No answer available – P140,000, intercompany sales 16. a – P20 x 28,000 picture tubes, intercompany sales 17. b – P120,000, the amount of sales to outsiders is the amount of sales presented in the consolidated income statement. 18. a – the cost of inventory produced by the parent (downstream sales)

19. c Consolidated Net Income for 20x4 P Company’s net income from own/separate operations (P90,000 – P62,000) Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations (P120,000 – P90,000) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P 28,000 0 (_ 0) P 28,000 P3 0,000 0 ( ) P30,000

30,000 P 58,000 0 P 58,000 3,000 P 55,000

Or, alternatively

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations (P90,000 – P62,000) Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations (P120,000 – P90,000) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 * t hat has been realized in t ransact ions wit h t hird part ies. * * Non-controlling Interest in Net Income (NCINI) for 20x 4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales)

P 28,000 0 (_ 0) P 28,000 P3 0,000 0 ( ) P30,000 P 3,000 0

30,000 P 58,000 3,000 P 55,000 _ 3,000 P 58,000

P 30,000 0

Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

( 0) P 30,000 0 P 30,000 10% P 3,000 0 P 3,000

20. c – P100,00 sales to unrelated/unaffiliated company.

21. c P Company S Company Total Less: Intercompany sales Add: Unrealized profit in EI of S Co. [P90,000 x 30% = P27,000 x (90 - 67)/90] Consolidated

Sales Less: Cost of goods sold – Parent Subsidiary (90,000 x 70%) Gross profit Ending inventory (90,000 x 30%)

Cost of Sales 67,000 _63,000 130,000 90,000 __6,900 46,900

Parent Subsidiary 90,000 100,000 67,000 ______ 63,000 23,000 37,000 27,000

22. a Consolidated Net Income for 20x4 P Company’s net income from own/separate operations [P100,000 – (P90,000 x 70%)] Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)…

P 37,000 0 (_ 0)

P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations (P90,000 – P67,000) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) [P90,000 x 30% = P27,000 x (90-67/90)] S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P23,000 0 (

6,900 ) P16,100

P 37,000

16,100 P 53,100 0 P 53,100 1,610 P 51,490

Or, alternatively

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations [P100,000 – (P90,000 x 70%)] Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations (P90,000 – P67,000) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) [P90,000 x 30% = P27,000 x (90-67/90)] S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 * t hat has been realized in t ransact ions wit h t hird part ies.

P 37,000 0 (_ 0) P 37,000 P23,000 0 (

6,900 ) P16,100 P 1,610 0

16,100 P 53,100 1,610 P 51,490 _ 1,610 P 53,100

* * Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstrea m sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P 23,000 0 ( 6,900) P 16,100 0 P 16,100 10% P 1,610 0 P 1,610

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

23. d – P27,000 x 67/90 = P20,100 24. a – the cost from parent of P48,000 x 45/60 = P36,000

Parent Sales Less: Cost of goods sold – P and S1 Subsidiary (60,000 x 45/60) Gross profit Ending inventory (60,000 x 15/60)

Subsidiary Subsidiary 1 2 60,000 60,000 67,000 48,000 60,000 ______ ______ 45,000 12,000

0

22,000 15,000

25. b – the cost from parent of P48,000 x 15/60 = P12,000 26. a Sales Intercompany Parent Subsidiary 1 Add: Cost of EI in S2 Co. [P15,000 x (48/60] Amount to be eliminated *or, P60,000 + P60,000 – [P15,000 x (60-48/60]

Cost of Sales

60,000 60,000

60,000 45,000

________ 120,000

__12,000 *117,000

27. b – refer to No. 26 for computation 28. d – P15,000 x [(60-48)/60] = P3,000 29. a Consolidated Net Income for 20x3 P Company’s net income from own/separate operations Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) [P105,000 x 20/120) S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x3

P150,000 0 (

17,500 ) P132,500

P 225,000 0 (_ 0) P225,000

132,500 P 357,500 _ 0 P357,500

30. c Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations Realized profit in beginning inv entory of P Company (upstream sales) [P105,000 x 20/120) Unrealized profit in ending inv entory of P Company (upstream sales) [P157,500 x 20/120) S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P360,000 0 (_ 0) P360,000 P135,000 17,500 ( 26,250 ) P126,250

126,250 P 486,250 _ 0 P486,250 1,610 P 51,490

Or, alternatively

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations ( Realized profit in beginning inv entory of P Company (upstream sales) [P105,000 x 20/120) Unrealized profit in ending inv entory of P Company (upstream sales) [P157,500 x 20/120) S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 * t hat has been realized in t ransact ions wit h t hird part ies.

P360,000 0 (_ 0) P360,000 P135,000 17,500 ( 26,250 ) P126,250 P 37,875 0

126,250 P 486,250 37,875 P 448,375 _37,875 P 486,250

* * Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P 135,000 17,500 ( 26,250) P 126,250 0 P126,250 30% P 37,875 0 P 37,875

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

31. a – refer to No. 30 for computation. 32. d Consolidated Net Income for 20x5 P Company’s net income from own/separate operations Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations Realized profit in beginning inv entory of P Company (upstream sales) [P157,500 x 20/120) Unrealized profit in ending inv entory of P Company (upstream sales) [P180,000 x 20/120) S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * t hat has been realized in t ransact ions wit h t hird part ies.

Or, alternatively

Consolidated Net Income for 20x5

P 450,000 0 (_ 0) P450,000 P240,000 26,250 (

30,000 ) P236,250

236,250 P 686,250 _ 0 P686,750 70,875 P 615,375

P Company’s net income from own/separate operations Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations Realized profit in beginning inv entory of P Company (upstream sales) [P157,500 x 20/120) Unrealized profit in ending inv entory of P Company (upstream sales) [P180,000 x 20/120) S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 * t hat has been realized in t ransact ions wit h t hird part ies. * * Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

P 450,000 0 (_ 0) P450,000 P240,000 26,250 (

30,000 ) P236,250 P 70,875 0

236,250 P 686,250 70,875 P 615,375 __70,875 P 686,250

P 240,000 26,250 ( 30,000) P 236,250 0 P 236,250 30% P 70.875 0 P 70,875

33. a - refer to No. 32 for computation. 34. c P Company S Company Total Less: Intercompany sales to Dundee Intercompany sales to Perth Consolidated

Sales 500,000 _350,000 850,000 100,000 150,000 600,000

35. a Ending inventory of Perth from Dundee (P36,000 / 110%) Ending inventory of Dundee from Perth (P31,000 / 130%) Total

32,727 _23,846 56,573

36. d P Company S Company Total Less: Intercompany sales Consolidated 37. No answer available – P47,000

Sales 420,000 280,000 700,000 140,000 560,000

Operating Expenses 28,000 14,000 42,000 _5,000 47,000

P Company S Company Total Add: Undervalued equipment (P35,000/7 years) Consolidated 38. c

Cost of Sales 196,000 _112,000 308,000 140,000

P Company S Company Total Less: Intercompany sales Add: Unrealized profit in EI of S Co. [P140,000 x 60% = P84,000 x (140 - 112)/140] Consolidated

_16,800 184,900

39. No answer available – P120,800 Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 Add: Net income of S for 20x4 Total Less: Div idends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) : 20x5 (P35,000/7 years) Fair v alue of stockholders’ equity of S, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: NCI on full-goodwill (P70,000 – P56,000) Non-controlling interest (full- goodwill)…………………………………..

P 140,000 P210,000 154,000 P364,000 0

364,000 P 504,000 35,000 ( 5,000) P 534,000 20 P 106,800 14,000 P 120,800

Partial-goodwill

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P140,000 x 80%)……………………. Retained earnings (P210,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in equipment (P35,000 x 80%)

P 364,000

P 112,000 168,000

280,000 P 84,000

___28,000

Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

P 56,000

Full-goodwill

Fair value of Subsidiary (100%) Consideration transferred: Cash ( P364,000/80%) Less: Book value of stockholders’ equity of S (P350,000 x 100%) Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities Increase in equipment P35,000 x 100% Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P 455,000 __350,000 P 105,000 35,000

P

70,000

40. d Equipment 616,000 420,000 1,036,000 35,000 7,000 1,064,000

P Company S Company Total Add: Undervalued equipment Less: Depreciation on undervalued equipment (P35,000/7 years) Consolidated 41. d

Inventory 210,000 154,000 364,000 16,800 347,200

P Company S Company Total Less: Unrealized profit in EI: [P140,000 x 60% = P84,000 x (140 - 112)/140] Consolidated 42.

43.

a

Selling price Less: Cost of sales Original unrealized profit Unsold percentage Unrealized profit

P

P

50,000 _40,000 10,000 __30% _3,000

No answer available – P253,000 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5

P180,000 ( 3,000) P 177,000 76,000 P253,000 0 P253,000

44.

a Combined 20x5 sales (P580,000 + P445,000) Less: 20x5 intercompany sales Consolidated sales

45.

P P

d Combined cost of sales Less: 20x5 intercompany sales Less: Unrealized profit in the 20x5 beginning inventory from 20x4 Add: Unrealized profit in 20x5 ending inventory Consolidated cost of sales

46.

47.

1,025,000 0 1,025,000

b

P 480,000 0 ( 3,000) ________0 P 477,000

Combined cost of sales Less: Intercompany sales revenue Add: Unrealized profit taken out of inventory (75%)x(35,000) = Consolidated cost of sales

P 160,000 110,000 26,250 P 76,250

Incomplete data – PAS 27 allows the use of cost model in accounting for investment in subsidiary in the books of parent company. Income recognized under this model is the dividends declared or paid by the subsidiary multiplied by controlling interest. Since, there is no data as to dividends of subsidiary, the amount of dividend income from the point of parent cannot be determined. If Equity Method is used, then the answer would be: (P115,000 x 70%) - P26,250 = P 54,250 But equity method is not allowed in the books of parent for purposes of CFS.

48.

a

Selling price Less: Cost of sales Unrealized profit Unsold fraction Credit to Inventory

P (

P

60,000 48,000 ) 12,000 1/3 4,000

49. a - P720,000 = P500,000 + P400,000 - P200,000 +P 20,000 50. b – using equity method. (P120,000 x 80%) – (P200,000 x 50% = P100,000 x 20% = P20,000) = P76,000 PAS 27 allows the use of cost model in accounting for investment in subsidiary in the books of parent company The use of equity method is not allowed in the books of parent (unless it is a stand-alone entity). 51. d Downstream situation S Company’s net income from own/separate operations

P120,000

x: NCI %

20% P 24,000

52. a - It will be overstated by the amount of the NC interests’ share of the P1,600 of profit margin in the P9,600 of materials carried over to 20x5 (20% x P1,600 = P320 53. c Grebe plus Swamp’s separate cost of goods sold = P400,000 + P320,000 = Less: Intercompany sales = Add: Profit +12,500 - 10,000 = Consolidated COGS =

P 720,000 200,000 ____2,500 P 522,500

54. a Ending inventory of Grebe (1/2 x P100,000) x: GP% of Parent (P100,000 – P80,00)/P100,000 Unrealized profit in ending inventory

P

50,000 20% 10,000

P

Squid’s reported income Less: Unrealized profits in the ending inventory Squid’s adjusted income NCI percentage NCI-CNI

P 100,000 _____16,000 P 84,000 _______10% P 8,400

55. a

56. b

Inventory remaining P100,000 × 50% = P50,000 Unrealized gross profit (based on LL's markup as the seller) P50,000 × 40% = P20,000. The ownership percentage has no impact on this computation.

57. c Unrealized Profit, 12/31/x4 Intercompany Gross profit (P100,000 – P75,000) ........................................... Inventory Remaining at Year's End ................................................................ Unrealized Intercompany Gross profit, 12/31/x4 ............................................

P25,000 16% P4,000

UNREALIZED GROSS PROFIT, 12/31/x5 Intercompany Gross profit (P120,000 – P96,000) ............................................ Inventory Remaining at Year's End ................................................................ Unrealized Intercompany Gross profit, 12/31/x5 ............................................

P24,000 35% P8,400

CONSOLIDATED COST OF GOODS SOLD Parent balance ....................................................................................... P380,000 Subsidiary Balance .................................................................................. 210,000 Remove Intercompany Transfer .............................................................. (120,000) .................................................................................................................. Recognize 20x4 Deferred Gross profit ................................................................................ (4,000) Defer 20x5 Unrealized Gross profit ........................................................... Cost of Goods Sold ........................................................................................

8,400 P474,400

58. a - Intercompany sales and purchases of P100,000 must be eliminated. Additionally, an unrealized gross profit of P10,000 must be removed from ending inventory based on a markup of 25

percent (P200,000 gross profit/P800,000 sales) which is multiplied by the P40,000 ending balance. This deferral increases cost of goods sold because ending inventory is a negative component of that computation. Thus, cost of goods sold for consolidation purposes is P690,000 (P600,000 + P180,000 – P100,000 + P10,000). 59. c - The only change here from No. 58 is the markup percentage which would now be 40 percent (P120,000 gross profit  P300,000 sales). Thus, the unrealized gross profit to be deferred is P16,000 (P40,000 × 40%). Consequently, consolidated cost of goods sold is P696,000 (P600,000 + P180,000 – P100,000 + P16,000). 60. b UNREALIZED GROSS PROFIT, 12/31/x4 Ending inventory ...................................................................................... Markup (P33,000/P 110,000) ..................................................................... Unrealized intercompany gross profit, 12/31/x4 ......................................

P 40,000 __ 30% P 12,000

UNREALIZED GROSS PROFIT, 12/31/x5 Ending inventory ...................................................................................... Markup (P48,000/P 120,000) ..................................................................... Unrealized intercompany gross profit, 12/31/x5 ......................................

P 50,000 40% P 20,000

Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

61. a – this topic is for Chapter 18 Individual Records after Transfer 12/31/x4 Machinery—P40,000 Gain—P10,000 Depreciation expense P8,000 (P40,000/5 years) Income effect net—P2,000 (P10,000 – P8,000) 12/31/x5 Depreciation expense—P8,000 Consolidated Figures—Historical Cost 12/31/x4 Machinery—P30,000 Depreciation expense—P6,000 (P30,000/5 years) 12/31/x5

P 90,000 12,000 ( 20,000) P 82,000 0 P 82,000 10% P 8,200 0 P 8,200

Depreciation expense--P6,000 Adjustments for Consolidation Purposes: 20x4: P2,000 income is reduced to a P6,000 expense (income is reduced by P8,000) 20x5: P8,000 expense is reduced to a P6,000 expense (income is increased by P2,000) 62. b

- this topic is for Chapter 18 UNREALIZED GAIN Transfer Price ............................................................................................ Book Value (cost after two years of depreciation) ................................. Unrealized Gain ....................................................................................... EXCESS DEPRECIATION Annual Depreciation Based on Cost (P300,000/10 years) ........................ Annual Depreciation Based on Transfer Price (P280,000/8 years) ............................................................................. Excess D epreciation ................................................................................ ADJUSTMENTS TO CONSOLIDATED NET INCOME Defer Unrealized Gain ............................................................................. Remove Excess Depreciation .................................................................. Decrease to Consolidated Net Income ..................................................

P280,000 240,000 P40,000

P30,000 35,000 P5,000

P(40,000) 5,000 P(35,000)

63. c P Company S Company Total Less: Intercompany sales – upstream sales Add: Unrealized profit in EI of S Co. [P60,000 x 30% = P18,000 x (10 – 7.5)/10] Consolidated

Sales 10,000,000 __200,000 10,200,000 60,000

Cost of Sales 7,520,000 _160,000 7,680,000 60,000

________ 10,140,000

__ 4,500 7,604,500

64. d – refer to No. 63 for computation 65. c P Company S Company Total Less: Intercompany sales – downstream sales Add: Unrealized profit in EI of S Co. [P60,000 x 30% = P18,000 x (10 – 7.5)/10] Consolidated

Sales 10,000,000 __200,000 10,200,000 60,000 ________ 10,140,000

66. d

Add the two book values and remove P100,000 intercompany transfers.

67. c

Intercompany gross profit (P100,000 - P80, 000) ............................................. Inventory remaining at year's end ................................................................. Unrealized intercompany gross profit ............................................................

P20,000 60% P12,000

CONSOLIDATED COST OF GOODS SOLD Parent balance ....................................................................................... Subsidiary balance ..................................................................................

P140,000 80,000

Remove intercompany transfer ............................................................... Defer unrealized gross profit (above) ...................................................... Cost of goods sold ......................................................................................... 68. c

Consideration transferred ......................................... Non-controlling interest fair value............................... SZ total fair value ........................................................ Book value of net assets ............................................. Excess fair over book value

(100,000) 12,000 P132,000

P260,000 65,000 P325,000 (250,000) P75,000 Annual Excess Amortizations

Life Excess fair value assigned to undervalued assets: Equipment ............................................................ Secret Formulas ................................................... Total ........................................................................

25,000 5 years P50,000 20 years -0-

P5,000 2,500 P7,500

Consolidated Expenses = P37,500 (add the two book values and include current year amortization expense) 69. a Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 Add: Net income of S for 20x4 Total Less: Div idends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) : Fair v alue of stockholders’ equity of S, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: NCI on full-goodwill ( Non-controlling interest (full- goodwill)…………………………………..

P 100,000 P150,000 110,000 P260,000 0

260,000 P 360,000 75,000 ( 7,500) P 427,500 20 P 85,500 ________0 P 85,500

Partial-goodwill

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P100,000 x 80%)……………………. Retained earnings (P150,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in equipment (P25,000 x

P 260,000

P 80,000 120,000

200,000 P

60,000

20,000

80%) Increase in secret formulas: P50,000 x 80%

40,000

Full-goodwill

Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) FV of NCI (20%) Fair value of Subsidiary (100%) Less: BV of stockholders’ equity of S (P100,000 + P150,000) x 100% Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities Increase in equipment P25,000 x 100% Increase in secret formulas: P50,000 x 100%

P 260,000 ___65,000 P 325,000 __250,000 P 75,000

P

25,000 50,000

Amortization: Equipment: P25,000 / 5 years = P 5,000 Secret formulas: P50,000 / 20 years = 2,500 Total amortization of allocated P 7,500 70. c Add the two book values plus the original allocation (P25,000) less one year of excess amortization expense (P5,000). 71. b Add the two book values less the ending unrealized gross profit of P12,000. Intercompany Gross profit (P100,000 – P80,000) ............................................ Inventory Remaining at Year's End ............................................................... Unrealized Intercompany Gross profit, 12/31 ................................................

P20,000 60% P12,000

72. c – P400,000 x 1/4 = P100,000 x 30% = P30,000 73. d Non-controlling Interest in Net Income (NCINI) for S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

20x5 P 400,000 (

20,000) P 380,000 0 P380,000 20% P 76,000 0 P 76,000

20x6 P 480,000 20,000 0 P 500,000 0 P500,000 20% P100,000 0 P100,000

74. c Ending inv entory at selling price: P300,000 x 1/3 = P100,000 x (300,000 – 240,000)/300,000 Less: Inv entory write-down (P100,000 – P92,000) Intercompany profit to be eliminated

P20,000 __8,000 P12,000

75. The requirement “P’s income from S” is a term normally used under the equity method , but, in some cases it may also refer to the term “dividend income” under the cost model depending on how the problem was described and presented. Since there are no data available to arrive at the dividend income under the cost model for reason that dividend declared or paid by subsidiary is not given, so the term “P’s income from S” may mean “Income from subsidiary” which is computed under the equi ty method, thus: Share in net income (P120,000 x 60%) Less: Unrealized profit in ending inv entory of S {P189,000 x 1/3 = P63,000 x (P189-135)/P189] Intercompany profit to be eliminated

P72,000 __18,000 P54,000

Answer: Equity method (c) It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. 76. a – refer to No. 1 77. c – refer to No. 1

78. b Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) [P200,000 x 50% = P100,000 x (P40,000/P200,000)] S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. * t hat has been realized in t ransact ions wit h t hird part ies. * * Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill

P 300,000 0 (_ 0) P300,000 P120,000

(

20,000 ) P100,000

100,000 P 400,000 _ 0 P 400,000 20,000 P 380,000

P 120,000 0 ( 20,000) P 100,000 0 P 100,000 20% P 20,000 0

Non-controlling Interest in Net Income (NCINI) – full goodwill

P 20,000

79. c – refer to No, 78 for computations. 80. – refer to No. 75 The requirement “P’s income from S” is a term normally used under the equity method, but, in some cases it may also refer to the term “dividend income” under the cost model depending on how the problem was described and presented. Since there are no data available to arrive at the dividend income under the cost model for reason that dividend declared or paid by subsidiary is not given, so the term “P’s income from S” may mean “Income from subsidiary” which is computed under the equity method, thus: Share in net income (P200,000 x 60%) Less: Unrealized profit in ending inv entory of S {P315,000 x 1/3 = P105,000 x (P315-P225)/P315] Intercompany profit to be eliminated

P120,000 __30,000 P 90,000

Answer: Equity method (b) It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. 81. a 20x5 P Company S Company Total Less: Intercompany sales Realized profit in BI of S Co. [P240,000 x 1/2 = P120,000 x (240-192)/240] Add: Unrealized profit in EI of S Co. [P375,000 x 40% = P150,000 x (375-300)/375] Consolidated

Sales 1,800,000 __900,000 2,700,000 375,000

Cost of Sales 1,440,000 _750,000 2,190,000 375,000 24,000

________ 2.325,000

__30,000 1,821,000

82. c - refer to No. 81 for computations

83. b Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) [P150,000 x 50% = P75,000 x (P30,000/P150,000)] S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4…………..

P 225,000 0 (_ 0) P225,000 P 90,000 (

15,000 ) P 75,000

75,000 P 300,000 _ 0 P 300,000 15,000 P 285,000

* t hat has been realized in t rans act ions wit h t hird part ies. * * Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P 90,000 0 ( 15,000) P 75,000 0 P 75,000 20% P 15,000 0 P 15,000

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

84. 85. 86. 87.

c – refer to No. 83 for computations a – [P100,000 x (25/100) = P25,000 x 40/100 = P10,000 b – [P300,000 x 1/2 = P150,000 x 40% = P60,000] No answer available – P300 * * Non-controlling Interest in Net Income (NCINI) for 20x6 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) (P100,000 x 10% = P10,000 x 30%) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P

0 0

( 3,000) P( 3,000) 0 P( 3,000) 10% P( 300) 0 P( 300)

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in GP Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in GP

88. b 20x3 Share in net income 20x3: P70,000 x 90% 20x4: P85,000 x 90% 20x5: P94,000 x 90% Less: Unrealized profit in ending inv entory of P 20x3: P1,200 x 25% = P300 x 90% 20x4: P4,000 x 25% = P1,000 x 90% 20x5: P3,000 x 25% = P750 x 90% Income from S

20x4

20x5

P 63,000 P 76,500

(

270)

________ P 62,730

270 ( 900) ________ P 75,870

P 84,600

900 __( 675) P 84,825

It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. 89. c – refer to No. 88 for computation. 90. d – refer to No. 88 for computation.

91. a * * Non-controlling Interest in Net Income (NCINI) for S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company)

20x3 P 70,000

20x4 P 85,000

20x5 P 94,000

RPBI of P Company (upstream sales) UPEI of P Company (upstream sales) S Company’s realized net income from separate operations Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

0 ( 300) P 69,700 0 P 69,700 10% P 6,970 0 P 6,970

300 ( 1,000) P 84,300 0 P 84,300 10% P 8,430 0 P 8,430

1,000 ( 750) P 94,250 0 P 94,250 10% P 9,425 0 P 9,425

92. c – refer to No. 91 for computation. 93. c – refer to No. 91 for computation. 94. a – refer to No. 88 for computation. 95. a – refer to No. 88 for computation. 96. b – refer to No. 88 for computation. 97. a – none, since intercompany profit starts only at the end of 20x3. 98. b – the amount of unrealized profit at the end of 20x3. 99. c – the amount of unrealized profit at the end of 20x4. 100. a 101. c Cost of Sales 400,000 _350,000 750,000 250,000 500,000

P Company S Company Total Less: Intercompany sales Consolidated 102. a – (P40,000 x 140% = P56,000) 103. a – (P56,000 – P40,000 = P16,000) 104. Not given 105.

105.

106.

c

c

Clark Net assets reported Profit on intercompany sale Proportion of inventory unsold at year end ($60,000 / $240,000) Unrealized profit at year end Amount reported in consolidated statements Dunn Inventory reported by Banks (P175,000 + P60,000) Inventory reported by Lamm Total inventory reported Unrealized profit at year end [P50,000 x (P60,000 / P200,000)] Amount reported in consolidated statements

P320,000 P48,000 x

.25 (12,000) P308,000

P235,000 250,000 P485,000 (15,000) P470,000

b Cost of goods sold reported by Park Cost of goods sold reported by Small Total cost of goods sold reported Cost of goods sold reported by Park on sale to Small (P500,000 x .40)

P 800,000 700,000 P1,500,000 (200,000)

Reduction of cost of goods sold reported by Small for profit on intercompany sale [(P500,000 x 4 / 5) x .60] Cost of goods sold for consolidated entity

Note:

107. 108. 109.

d b c

110.

b

111.

b

P32,000 P6,000 P9,000

(240,000) P1,060,000

Answer b in the actual AICPA examination question was P1,100,000, requiring candidates to select the closest answer. = = =

(P200,000 + P140,000) – P308,000 (P26,000 + P19,000) – P39,000 Inventory held by Spin (P32,000 x .375) Unrealized profit on sale [(P30,000 + P25,000) – P52,000] Carrying cost of inventory for Power

P12,000

(3,000) P 9,000

.20 = P14,000 / [(Stockholders’ Equity P50,000) +(Patent P20,000)] 14 years = (P28,000 / [(28,000 - P20,000) / 4 years]

112. c – the amount of sales to outsiders or unaffiliated company 113. b – the original cost (I,e., the cost to produced on the part of the seller – Blue Company)

114.

c

Total income (P86,000 - P47,000) Income assigned to noncontrolling interest [.40(P86,000 - P60,000)] Consolidated net income assigned to controlling interest

P39,000 (10,400) P28,600

115.

c

116.

a

Amount paid by Lorn Corporation Unrealized profit Actual cost Portion sold Cost of goods sold

P120,000 (45,000) P 75,000 x .80 P 60,000

117.

e

Consolidated sales Cost of goods sold Consolidated net income Income to Dresser’s noncontrolling interest: Sales Reported cost of sales Report income Portion realized Realized net income Portion to Noncontrolling

P140,000 (60,000) P 80,000

P120,000 (75,000) P 45,000 x .80 P 36,000

Interest Income to noncontrolling Interest Income to controlling interest 118.

a

x

.30 (10,800) P 69,200

Inventory reported by Lorn Unrealized profit (P45,000 x .20) Ending inventory reported

P 24,000 (9,000) P 15,000

119.

a

P20,000 = P30,000 x [(P48,000 - P16,000) / P48,000]

120.

d

Sales reported by Movie Productions Inc. Cost of goods sold (P30,000 x 2/3) Consolidated net income

121.

a

P7,000 = [(P67,000 - $32,000) x .20]

P67,000 (20,000) P47,000

122. c (P10,000 x 80%) 123. c – the original cost 124. d Date of Acquisition (1/1/2010) Partial Full Fair value of consideration given… … … … … … … P 340,000 Less: Book value of SHE - Subsidiary): (P150,000 + P230,000) x 80%..................... 304,000 Allocated Excess.… … … … … … … … … … … … … … .P 36,000 Less: Over/Undervaluation of Assets & Liabilities (P20,000 x 80%)… … … … … … … … … … … .. 16,000 Goodwill … … … … .… … … … … … … … … … … … … ...P 20,000 / 80% P 25,000 Amortization of equipment: P20,000 / 10 years = P2,000 RPBI of S (downstream sales): P3,000 x 35%........................................... ........... P1,050 RPBI of P (upstream sales): P2,500 (given)… .................................................... 1,000 UPEI of S (downstream sales): Sales of Parent EI % EI of S GP% of Parent P60,000 x 30% = P18,000 x 25/125… … …………………………. 3,600 UPEI of P (upstream sales): Sales of Subsidiary EI % EI of P P60,000 x 30% = P18,000 x

GP% of Subsidiary 20%… … ……………………..….

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to

2,400 P 100,000 1,050 (_ 3,600) P 97,450

P 30,000 1,000 ( ,2,400 ) P28,600

28,600 P 126,050 2,000 P124,050 5,320

equity holders of parent – 20x5………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P 118,730

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations Realized profit in beginning inv entory of S Company (downstream sales) Unrealized profit in ending inv entory of S Company (downstream sales)… P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 2012 * t hat has been realized in t ransact ions wit h t hird part ies.

P 100,000 1,050 (_ 3,600) P 97,450 P 30,000 1,000 ( 2,400 ) P 28,600 P

* * Non-controlling Interest in Net Income (NCINI) for 2012 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inv entory of P Company (upstream sales) Unrealized profit in ending inv entory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

125. 126. 127. 128. 129.

b – refer to No. 124 a – P124,050 – refer to No. 124 b – refer to No. 129 c – refer to No. 129 a Non-controlling Interests (in net assets): Common stock - S, 12/31/2012.… … ……..….……………………………..

5,320 2,000

28,600 P 126,050 7,320 P118,730 __ 5,320 P124,050

P 30,000 1,000 ( 2,400) P 28,600 2,000 P 26,600 20% P 5,320 0 P 5,320

P 150,000

Retained earnings - S, 12/31/2012: RE- S, 1/1/2012… … … …….……………………………………………….P300,000 +: NI-S… ………………………………………………………………………. 30,000 -: Div – S… … ………………………………………………………………… 10,000 320,000 Book value of Stockholders’ equity, 12/31/2012… … ..………………..... P 470,000 Adjustments to reflect fair value of net assets Increase in equipment, 1/1/2010..… … ..………………………….. 20,000 Accumulated amortization (P2,000 x 3 years)… … … ………………….... ( 6,000) Fair Value of Net Assets/SHE, 12/31/2012… … … …………………………. P 484,000 UPEI of P (up)… … ……………………………………………………………… ( 2,400) Realized SHE – S,12/31/2012… … … …………………………………………. P 481,600

x: NCI %.................................................................................... ...................... _ 20% Non-controlling Interest (in net assets) - partial… ……………………….. P 96,320 NCI on full goodwill (25,000 – 20,000)… … … ………………….. 5,000 Non-controlling Interest (in net assets) – full… ………………………….... P 101,320

+:

130. d – refer to No. 131 131. d Note: Preferred solution - since what is given is the RE – P, 1/1/2012 (beginning balance of the current year) Retained earnings – Parent, 1/1/2012 (cost)… … … … … … … … … … … P 700,000 -: UPEI of S (down) – 2011 or RPBI of S (down) – 2012..… … … … . 1,050 Adjusted Retained earnings – Parent, 1/1/2012 (cost)… … … … … … P 698,950 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/2010… … … … … … … … … .P 230,000 Less: Retained earnings – Subsidiary, 1/1/2012… … … … … … 300,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)… … … … P 70,000 Accumulated amortization (1/1/2010 – 1/1/2012): P 2,000 x 2 years… … … … … … … … … … … … … … … … … … … ( 4,000) UPEI of P (up) – 2011 or RPBI of P (up) – 2012… … … … … … ......( 1,000) P 65,000 X: Controlling Interests… … … … … … … … … … … … … … … … .........____80% 52,000 RE – P, 1/1/2012 (equity method) = CRE, 1/1/2012… … ……………..... P750,950 +: CI – CNI or Profit Attributable to Equity Holders of Parent… … .. 118,730 -: Dividends – P… … … … … … … … … … … … … … … … … … … … … … … … 60,000 RE – P, 12/31/2012 (equity method) = CRE, 12/31/2012… … … …...... P809,680 Or, if RE – P is not given on January 1, 2012, then RE – P on December 31, 2012 should be use: Retained earnings – Parent, 12/31/2012 (cost): (P700,000 + P108,000 – P60,000)… … … ..… … … … … … … … … … … P 748,000 -: UPEI of S (down) – 2012 or RPBI of S (down) – 2013..… … … … . 3,600 Adjusted Retained earnings – Parent, 1/1/2012 (cost)… … … … … … P 744,400 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/2010… … … … … … … … … .P 230,000 Less: Retained earnings – Subsidiary, 12/31/2012 (P300,000 + P20,000 – P10,000)… … … … … … … … … ..... 320,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)… … … … P 90,000 Accumulated amortization (1/1/2010 – 12/31/2012): P 2,000 x 3 years… … … … … … … … … … … … … … … … … … ( 6,000) UPEI of P (up) – 2012 or RPBI of P (up) – 2013… … … … … … .. ( 2,400) P 81,600 X: Controlling Interests… … … … … … … … … … … … … … … … … … . 80% 65,280 RE – P, 12/31/2012 (equity method) = CRE, 12/31/2012… … … …. P809,680 132. b Consolidated Stockholders’ Equity, 12/31/2012: Controlling Interest / Parent’s Interest / Parent’s Portion / Equity Holders of Parent – SHE, 12/31/2012: Common stock – P (P only)… … … … … … … … … … … … … … … … … ..

P1,000,000

Retained Earnings – P (equity method), 12/31/2012… … … … .. Controlling Interest / Parent’s Stockholders’ Equity… … … … … . Non-controlling interest, 12/31/2012 (partial)… … … … … … … … … … . Consolidated Stockholders’ Equity, 12/31/2012… … … … … … … … … …

809,680 P1,809,680 96,320 P1,906,000

Consolidated Stockholders’ Equity, 12/31/2012: Controlling Interest / Parent’s Interest / Parent’s Portion / Equity Holders of Parent – SHE, 12/31/2012: Common stock – P (P only)… … … … … … … … … … … … … … … … … .. Retained Earnings – P (equity method), 12/31/2012… … … … .. Controlling Interest / Parent’s Stockholders’ Equity… … … … … . Non-controlling interest, 12/31/2012 (full)… … ..… … … … … … … … … . Consolidated Stockholders’ Equity, 12/31/2012… … … … … … … … … …

P1,000,000 809,680 P1,809,680 101,320 P1,911,000

133. a

Theories 1. 2. 3. 4. 5.

d b c a c

6. 7. 8. 9. 10,

d c b c a

11. 12. 13. 14. 15,

d a c c d

16. 17. 18. 19. 20.

c c b c b

21. 22. 23. 24. 25.

c a a b c

Chapter 18 Problem I 1. Journal entry to record sale: Cash Accumulated Depreciation Equipment Gain on Sale of Equipment Record the sale of equipment: P84,000 = P150,000 - P80,000 + P14,000 P80,000 = (P150,000 / 15 years) x 8 years 2.

3.

26. 27. 28. 29. 30.

a b b c d

31 32. 33. 34. 35.

b

84,000 80,000 150,000 14,000

Journal entry to record purchase: Equipment Cash

84,000

Journal entry to record depreciation expense: Depreciation Expense Accumulated Depreciation

12,000

84,000

12,000

Eliminating entry at December 31, 20x4, to eliminate intercompany sale of equipment: E(1)

Equipment Gain on Sale of Equipment Depreciation Expense Accumulated Depreciation Eliminate unrealized profit on equipment.

Adjustment to equipment Amount paid by WW to acquire building Amount paid by LL on intercompany sale

66,000 14,000 2,000 78,000

P150,000 (84,000)

Adjustment to buildings and equipment Adjustment to depreciation expense Depreciation expense recorded by Lance Corporation (P84,000 / 7 years) Depreciation expense recorded by WW Corporation (P150,000 / 15 years) Adjustment to depreciation expense Adjustment to accumulated depreciation Amount required (P10,000 x 9 years) Amount reported by LL (P12,000 x 1 year) Required adjustment 4.

P 12,000 (10,000) P 2,000 P 90,000 (12,000) P 78,000

Eliminating entry at January 1, 20x4, to eliminate intercompany sale of equipment and prepare a consolidated balance sheet only: E(1) Equipment 66,000 Retained Earnings 12,000 Accumulated Depreciation 78,000 Eliminate unrealized profit on equipment.

Problem II 1. Eliminating entry, December 31, 20x8: E(1) Truck Gain on Sale of Truck Depreciation Expense Accumulated Depreciation Computation of gain on sale of truck: Price paid by Minnow Cost of truck to Frazer P300,000 Accumulated depreciation (P300,000 / 10 years) x 3 years ( 90,000) Gain on sale of truck Accumulated depreciation adjustment: Required [(P300,000 / 10 years) x 4 years] Reported [(P245,000 / 7 years) x 1 year] Required increase 2.

P 66,000

55,000 35,000 5,000 85,000 P245,000 (210,000) P 35,000 P120,000 (35,000) P 85,000

Eliminating entry, December 31, 20x9: E(1)

Truck Retained Earnings Depreciation Expense Accumulated Depreciation Accumulated depreciation adjustment: Required [(P300,000 / 10 years) x 5 years] Reported [(P245,000 / 7 years) x 2 years] Required increase

Problem III

55,000 30,000 5,000 80,000 P150,000 (70,000) P 80,000

a.

Eliminating entry, December 31, 20x8: E(1)

Truck Gain on Sale of Truck Accumulated Depreciation

Computation of gain on sale of truck: Price paid by MM Cost of truck to FF Accumulated depreciation (P300,000 / 10 years) x 4 years Gain on sale of truck b.

90,000 30,000 120,000 P210,000 P300,000 (120,000)

(180,000) P 30,000

Eliminating entry, December 31, 20x9: E(1)

Truck Retained Earnings, January 1 Depreciation Expense Accumulated Depreciation

Accumulated depreciation adjustment: Required [(P300,000 / 10 years) x 5 years] Recorded [(P210,000 / 6 years) x 1 year] Required increase

90,000 30,000 5,000 115,000 P150,000 (35,000) P115,000

Problem IV 1

Equipment Beginning R/E – Prince (P100,000 × .80) Noncontrolling Interest (P100,000 × .20) Accumulated Depreciation Accumulated Depreciation (P100,000/4) × 2 Depreciation Expense Beginning R/E – Prince (P25,000 × .80) Noncontrolling Interest (P25,000 × .20)

2

3.

540,000 80,000 20,000 640,000 50,000 25,000 20,000 5,000

Controlling Interest in Consolidated Net Income: Prince Company’s income from its independent operations Reported net income of Serf Company P820,000 Plus profit on intercompany sale of equipment considered to be realized through depreciation in 2014 25,000 Reported subsidiary income that has been realized in transactions with third parties 845,000 × .8 Prince Company’s share thereof Controlling Interest in Consolidated net income Noncontrolling Interest Calculation: Reported income of Serf Company

P3,270,000

676,000 P3,946,000

P820,000

Plus: Intercompany profit considered realized in the current period

25,000 P845,000

Noncontrolling interest in Serf Company (.20 × 845,000) 4.

P169,000

NCI-CNI (No. 3) CI-CNI (No. 2) CNI

P 169,000 3,946,000 P4,115,000

or, Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations…….….. S Company’s net income from own operations…………………………………. Realized gain on sale of equipment (upstream sales) through depreciation* Son Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5…………..

P3,270,000 0 P3,270,000 P 820,000 25,000 P 845,000

845,000 P4,115,000 0 P4,115,000 169,000 P3,946,000

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations…….….. S Company’s net income from own operations…………………………………. Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 * * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

1/1/20x4: Selling price of equipment Less: BV of equipment Cost Less: Accumulated depreciation: P1,280,000 / 8 years x 4 years* Unrealized gain on sales – 1/1/20x4

P3,270,000 0 P3,270,000 P820,000 25,000 P 845,000 P 169,000 0

169,000 P3,946,000 _169,000 P4,115,000

P 820,000 25,000 P 845,000 0 P845,000 20% P 169,000

P 740,000 P1,280,000 640,000

845,000 P4,115,000

640,000 P 100,000

Realized gain – depreciation: P100,000 / 4 years P 25,000 *the original life is 8 years as of 1/1/20x3, since the remaining life as of 1/1/20x4 in only 4 years, for purposes of computing the accumulated depreciation to determine the gain on sale, the difference of 4 years is presumed to be expired. Equipment 540,000 Beginning R/E – Prince 100,000 Accumulated Depreciation 640,000

5

Accumulated Depreciation (P100,000/4) × 2 Depreciation Expense Beginning R/E – Prince 6

50,000 25,000 25,000

Controlling Interest in Consolidated Net Income: Prince Company’s income from its independent operations Plus profit on intercompany sale of equipment considered to be realized through depreciation in 2014 Reported net income of S Company

P3,270,000

25,000 P3,295,000 P820,000 × .8

Prince Company’s share thereof Controlling Interest in Consolidated net income Noncontrolling Interest Calculation: Reported income of S Company Noncontrolling interest in S Company (.20 × 820,000) NCI-CNI CI-CNI CNI

656,000 P3,951,000

P820,000 P164,000 P 164,000 3,951,000 P4,115,000

or, Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations…….….. S Company’s net income from own operations…………………………………. Realized gain on sale of equipment (upstream sales) through depreciation* S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5…………..

P3,270,000 ____25,000 P3,295,000 P 820,000 0 P 820,000

820,000 P4,115,000 0 P4,115,000 164,000 P3,951,000

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations…….….. S Company’s net income from own operations…………………………………. Realized gain on sale of equipment (upstream sales) through depreciation

P3,270,000 25,000 P3,295,000 P820,000 0

S Company’s realized net income from separate operations…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 * * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

P 820,000 P 164,000 0

P 820,000 0 P 820,000 0 P820,000 20% P 164,000

P 372,000 P 192,000 96,000

288,000 P 84,000

P 4,800 5,760 76,800 ( 19,200) 3,840

72,000 P 12,000

The over/under valuation of assets and liabilities are summarized as follows:

S Co.

S Co.

164,000 P3,951,000 _169,000 P4,115,000

Problem V Requirements 1 to 4 Schedule of Determination and Allocation of Excess (Partial -goodwill) Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 80%)……………………. Retained earnings (P120,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… Increase in land (P7,200 x 80%)……………………. Increase in equipment (P96,000 x 80%) Decrease in buildings (P24,000 x 80%)………..... Decrease in bonds payable (P4,800 x 80%)…… Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

820,000 P4,115,000

(Over)

Book value

Inventory………………….…………….. Land……………………………………… Equipment (net)......... Buildings (net) Bonds payable………………………… Net………………………………………..

Fair value

P 24,000 48,000 84,000 168,000

Under Valuation

P 30,000 55,200 180,000 144,000 ( (120,000) 115,200) P P 204,000 294,000

P

6,000 7,200 96,000 (24,000) 4,800

P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows:

Equipment.................. Less: Accumulated depreciation….. Net book value………………………...

Buildings................ Less: Accumulated depreciation….. Net book value………………………...

S Co. Book value 180,000

S Co. Fair value 180,000

Increase (Decrease) 0

96,000

-

( 96,000)

84,000

180,000

96,000

S Co. Book value 360,000

S Co. Fair value 144,000

(Decrease) ( 216,000)

1992,000

-

( 192,000)

168,000

144,000

(

24,000)

A summary or depreciation and amortization adjustments is as follows:

Over/ Account Adjustments to be Unde amortized r P Inventory 6,000 Subject to Annual Amortization 96,00 Equipment (net)......... 0 (24,0 Buildings (net) 00) Bonds payable…

4,800

Annu al Current Amou Year(20x nt 4) P 6,000 P 6,000

20x5 P -

4

12,000 ( 6,000)

( 6,000)

12,00 0 (6,00 0)

4

1,200

1,200

1,200

Lif e 1

8

12,000

P 13,200

P 7,200

P 13,200

The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full -goodwill is computed as follows:

Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) Fair value of NCI (given) (20%) Fair value of Subsidiary (100%) Less: Book value of stockholders’ equity of S (P360,000 x 100%) Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P 372,000 93,000 P 465,000 P

__360,000 105,000 90,000

P

15,000

In this case, the goodwill was proportional to the controlling interest of 80% and non -controlling interest of 20% computed as follows:

Value Goodwill applicable to parent………………… Goodwill applicable to NCI…………………….. Total (full) goodwill………………………………..

P12,00 0 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

The goodwill impairment loss would be allocated as follows

Value Goodwill impairment loss attributable to parent P or controlling 3,000 Interest Goodwill applicable to NCI…………………….. 750 Goodwill impairment loss based on 100% fair value or fullP 3,750 Goodwill

% of Total 80.00% 20.00% 100.00%

The unrealized and gain on intercompany sales for 20x4 are as follows:

Date of Sale

Seller

Selling Book Price Value

Unrealize d* Gain on

Remaini Realized ng gain – Life depreciatio

20x4

4/1/20 P Co. x4 1/2/20 S Co. x4

P90,0 00 60,00 0

P75,0 00 28,80 0

sale P15,000

5 years

31,200

8 years

n** P3,000/year P3,900/year

P2,2 50 P3,9 00

* selling price less book value * * unrealized gain divided by remaining life; 20x4 – P3,000 x 9/12 = P2,250

20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4:

(1) Investment in Company……………………………………………

S 372,000 372,000

Cash…………………………………………………………………….. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Dividend income (P36,000 x 80%)……………. Record dividends from S Company.

28,800

28,800

No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4, and unrealized profits in ending inventory. Consolidation Workpaper – Year of Acquisition

(E1) Common stock – Co………………………………………… Retained earnings – Co…………………………………… Investment in Co…………………………………………… Non-controlling interest (P360,000 20%)………………………..

S

240,000

S

120.000

S

288,000

x

72,000

To eliminat e int ercompany invest ment and equit y account s of subsidiary on date of acquisition; and t o establish non-cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable………………………………………….

Goodwill…………………………………………………………………. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%)……………………….. Investment in S Co……………………………………………….

12,000 216,000 18,000 84,000

To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss……………………………………….

6,000 6,000 6,000 1,200 3,000 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

12,000 1,200 3,000

To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows: Cost of Depreciation/ Goods Amortization Amortization Sold Expense -Interest Total Inv entory sold P 6,000 Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 6,000 P1,200 13,200

(E4) Dividend income - P………. Non-controlling interest (P36,000 20%)……………….. Dividends paid – S……………………

x

28,800 7,200 36,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

(E5) Gain on sale of equipment Equipment Accumulated depreciation To eliminate the downstream intercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

15,000 30,000 45,000

(E6) Gain on sale of equipment Equipment Accumulated depreciation

31,200 12,000 43,200

To eliminat e t he upst ream int ercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E7) Accumulated depreciation……….. Depreciation expense……………

2,250 2,250

To adjust downstream depreciation expense on equipment sold t o subsidiary, thus realizing a portion of t he gain through depreciation (P15,000 / 5 years x 9/12 = P2,250).

(E8) Accumulated depreciation……….. Depreciation expense……………

3,900 3,900

To adjust upstream depreciation expense on equipment sold t o parent, thus realizing a portion of t he gain through depreciation (P31,200/85 years x 1 year = P3,900).

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

10,140 10,140

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x4 as follows: Net income of subsidiary…………………….. Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations Less: Amortization of allocated excess [(E3)] …. Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

P 91,200 ( 31,200) 3,900 P 63,900 13,200 P 50,700 20% P

10,140

Subsidiary accounts are adjusted to full fair value regardless on the controlling interest percentage or what option used to value non-controlling interest or goodwill. Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement Sales Gain on sale of equipment

P Co P480,000 15,000

S Co. P240,000 31,200

Div idend income Total Rev enue Cost of goods sold Depreciation expense

28,800 P523,800 P204,000 60,000

P271,200 P138,000 24,000

48,000

18,000

Interest expense Other expenses

Dr.

Cr.

(5) 15,000 (6) 31,200 (4) 28,800 (3) (3)

6,000 6,000 (7)

(3)

1,200

2,250 (8) 3,900

Consolidated P 720,000 _________ P 720,000 P 348,000 83,850 1,200 66,000

Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

P312,000 P211,800 P211,800

Statement of Retained Earnings Retained earnings, 1/1 P Company

P360,000

S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 Balance Sheet

P180,000 P 91,200 P 91,200

(3)

3,000

P P ( P

(9 10,140

3,000 502,050 217,950 10,140) 207,810

P 360,000

(1) 120,000

211,800 P571,800

P120,000 91,200 P211,200

72,000 -

36,000

P499,800

P175,200

P 495,810

Cash………………………. Accounts receiv able…….. Inv entory…………………. Land…………………………….

P 232,800 90,000 120,000 210,000

P 90,000 60,000 90,000 48,000

P 322,800 150,000 210,000 265,200

Equipment

240,000

180,000

Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co………

720,000

540,000

Accumulated depreciation - equipment

372,000 P1,984,800

P1,008,000

P 135,000

P 96,000

405,000

288,000

105,000 240,000 600,000

88,800 120,000

Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest…………

499,800 _________

Total

(4)

36,000

72,000 ________

_

to

Balance Sheet

Total

207,810 P 567,810

P1,984,800

20x5: Second Year after Acquisition

Sales Less: Cost of goods sold

240,000 175,200 _________ P1,008,000

(2) 6,000 3) 6,000 (2) 7,200 (5) 30,000 (6) 12,000 (2) 216,000 (2) 4,800 (3) 1,200 (2) 12,000 (3) 3,000 (13) 288,00 0 (14) 84,000

462,000 1,044,000 3,600 9,000 P2,466,600

(15) 96,000 (3) 12,000 (7) 2,250 (5) 45,000 (8) 3,900 (6) 43,200 (18) 192,000 (19) 6,000

P229,050 495,000 193,800 360,000 600,000

(1) 240,000 495,810 (20) 7,200 (1 ) 72,000 (2) 18,000 __________ (9) 10,140 P 834,450 P 834,450

P Co. P 540,000 216,000

____92,940 P2,466,600

S Co. P 360,000

Gross profit Less: Depreciation expense Other expense

P 324,000 60,000 72,000

Net income from its own separate operations Add: Dividend income

P 192,000 38,400

Net income

P 230,400 P 72,000

Dividends paid

192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment:

January 1, 20x5 – December 31, 20x5: Cash……………………… Dividend income (P48,000 80%)……………. Record dividends from S Company.

38,400 x

38,400

On the books of S Company, the P48,000 dividend paid was recorded as follows:

Dividends paid………… Cash Dividends paid by S Co..

48,000 48,000

Consolidation Workpaper – Second Year after Acquisition The working paper eliminations (in journal entry format) on December 31, 20x5, are as follows:

(E1) Investment Company………………………… Retained earnings Company………………………

in

S 44,160 –

P

To provide ent ry t o convert from t he cost met hod t o t he equit y met hod or t he entry t o establish reciprocit y at t he beginning of t he year, 1/1/20x5, comput ed as follows: Retained earnings – S Company, 1/1/20x5 Retained earnings – S Company, 1/1/20x4 Increase in retained earnings…….. Multiplied by: Controlling interest % Retroactive adjustment

P175,200 120,000 P 55,200 80% P 44,160

44,160

Entry (1) above is needed only for firms using the cost method to account for their investments in the subsidiary. If the parent is already using the equity method, there is no need to convert to equity.

(E2) Common stock – Co………………………………………… Retained earnings – S Co., 1/1/20x5 Investment in S Co (P415,200 80%)………………………… Non-controlling interest (P415,200 20%)………………………..

S

240,000 175,200

x

332,160

x

83,040

To eliminat e int ercompany invest ment and equit y account s of subsidiary and to establish non-controlling interest (in net asset s of subsidiary) on January 1, 20x5.

(E3) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) 18,000 Investment in S 84,000 Co………………………………………………. To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on January 1, 20x5.

(E4) Retained earnings – P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] Non-controlling interests (P13,200 20%)……………………. Depreciation expense……………………….. Accumulated depreciation buildings………………….. Interest expense…………………………………

13,560 x 2,640 6,000 – 12,000 1,200 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment………………..

24,000

Discount on bonds payable………………………… Goodwill……………………………………

2,400 3,000

To provide for years 20x4 and 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows: Year 20x4 amount s are debit ed t o Perfect ’s ret ained earnings & NCI; Year 20x5 amount s are debit ed t o respect ive nominal account s.

Inv entory sold Equipment Buildings Bonds payable Sub-total Multiplied by: To Retained earnings Impairment loss Total

(20x4) Retained earnings, P 6,000 12,000 (6,000) 1,200 P13,200 80% P 10,560 3,000 P 13,560

Depreciation/ Amortization expense

Amortization -Interest

P 12,000 ( 6,000) ________ P 6,000

P 1,200 P 1,200

(E5) Dividend income - P………. Non-controlling interest (P48,000 20%)……………….. Dividends paid – S……………………

x

38,400 9,600 48,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

(E5) Retained Earnings – P Company, 1/1/20x5 Equipment Accumulated depreciation

15,000 30,000 45,000

To eliminate the downstream intercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E6) Retained Earnings–P Company, 1/1/20x5 (P31,200 x 80%) Non-controlling interest (P31,200 x 20%) Equipment Accumulated depreciation

24,960 6,240 12,000 43,200

To eliminat e t he upst ream int ercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E7) Accumulated depreciation……….. Depreciation expense (current year)…………… Retained Earnings–P Company, 1/1/20x5 (prior year) To adjust downstream depreciation expense on equipment sold t o subsidiary, thus realizing a portion of t he gain through depreciation

5,250 3,000 2,250

(E8) Accumulated depreciation……….. Depreciation expense (current year) Retained Earnings–P Co. 1/1/20x5 (P3,900 x 80%) Non-controlling interest (P31,200 x 20%)

7,800 3,900 3,120 780

To adjust upstream depreciation expense on equipment sold t o parent, thus realizing a portion of t he gain through depreciation (P31,200/85 years x 1 year = P3,900).

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

17,340 17,340

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x5 as follows: Net income of subsidiary…………………….. Realized gain on sale of equipment (upstream sales) through depreciation S Company’s Realized net income* Less: Amortization of allocated excess

P 90,000 3,900 P 93,900 ( 7,200) P 86,700 20% P 17,340

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill * from separat e t ransact ions t hat has been realized in t ransact ions wit h t hird persons.

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement Sales Div idend income Total Rev enue Cost of goods sold Depreciation expense

P Co P540,000 38,400 P578,400 P216,000

S Co. P360,000 P360,000 P192,000

Dr.

(5)

38,400

60,000

24,000

(4)

6,000

Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

72,000 P348,000 P230,400 P230,400

54,000 P270,000 P 90,000 P 90,000

(4)

1,200

Statement of Retained Earnings Retained earnings, 1/1 P Company

P499,800

(1) 13,560 (21) 15,000 (22) 24,960 P 175,200 (2) 175,200 __90,000 P265,200

S Company Net income, from abov e Total Div idends paid P Company

230,400 P730,200 72,000

Cr.

(7) 3,000 (8) 3,900

Consolidated P 900,000 ___________ P 900,000 P 408,000 83,100

P P ( P

(9) 17,340

(1) 44,160 (23) 2,250 (24) 3,120

1,200 126,000 618,300 281,700 17,340) 264,360

P 495,810 264,360 P 760,170 72,000

S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest…………

Total

P

-

48,000

P658,200

P217,200

P 688,170

265,200 180,000 216,000 210,000 240,000

P 102,000 96,000 108,000 48,000 180,000

P 367,200 276,000 324,000 265,200

720,000

540,000

372,000 P2,203,200

P1,074,000

P 150,000

P 102,000

450,000

306,000

105,000 240,000 600,000

88,800 120,000

658,200

___ _____ P2,203,200

240,000 217,200

_________ P1,074,000

(5)

(15) (3) (5) (6) (3) (3) (1)

6,000 7,200 30,000 12,000 4,800 12,000 44,160

(3) 96,000 (7) 5,250 (8) 7,800 (3) 192,000 (4) 12,000

48,000

(16) 6,000

(3) 216,000 (4) 2,400 (4) 3,000 (2) 332,160 (3) 84,000

(4) (5) (6)

24,000 45,000 43,200

_

________

462,000 1,044,000 2,400 9,000 P2,749,800

P 255,150 552,000 193,800 360,000 600,000

(2) 240,000 688,170 (4) 2,640 (5) 9,600 (6) 6,240 __________ P 979,350

(2 83,040 (3) 18,000 (8) 780 (9) 17,340 P 979,350

____100,680 P2,749,800

5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition)

P360,000

b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… Retained earnings – Subsidiary Company…………………………………. Stockholders’ equity – Subsidiary Company.………….. Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities Fair v alue of stockholders’ equity of subsidiary, January 1, 20x4………………… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill),………………………………..

P 240,000 120,000 P 360,000 90,000 P 450,000 20 P 90,000

c.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI – SHE NCI, 1/1/20x4 Consolidated SHE, 1/1/20x4

P 600,000 360,000 P 960,000 ___90,000 P1,050,000

6. Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI - P Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under partial-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 * t hat has been realized in t ransact ions wit h t hird part ies.

P 91,200 ( 31,200) 3,900 P 63,900 P 10,140 13,200 3,000

P183,000 (15,000) 2,250 P170,250

63,900 P234,150

26,340 P207,810 _ 10,140 P217,950

b. NCI-CNI – P10,140 * * Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations……… Less: Amortization of allocated excess / goodwill impairment (refer to amortization table abov e) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill * t hat has been realized in t ransact ions wit h t hird part ies.

P 91,200 ( 31,200) 3,900 P 63,900 13,200 P 50,700 20% P 10,140

c. CNI, P217,950 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Div idends paid – Parent Company for 20x4 Consolidated Retained Earnings, December 31, 20x4

P360,000 207,810 P567,810 72,000 P495,810

e. The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. The NCI on January 1, 20x4 and December 31, 20x4 are computed as follows: Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4

P 240,000 P120,000

Add: Net income of subsidiary for 20x4 Total Less: Div idends paid – 20x4 Stockholders’ equity – Subsidiary Company, December 31, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) – 20x4 Fair v alue of stockholders’ equity of subsidiary, December 31, 20x4…… Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation Realized stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

91,200 P211,200 36,000

175,200 P 415,200 90,000 ( 13,200) P492,000 ( 31,200) 3,900 P464,700 20 P 92,940

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

P 600,000 495,810 P1,095,810 ___92,940 P1,188,750

12/31/20x5: a. CI-CNI – P264,360 Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P 90,000 3,90 P 93,900

P192,000 3,000 P195,000

93,900 P288,900 7,200 P281,700 17,340 P264,360

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 * t hat has been realized in t ransact ions wit h t hird part ies.

b. NCI-CNI – P17,340 * * Non-controlling Interest in Net Income (NCINI) for 20x5

P192,000 3,000 P195,000 P 90,000 3,900 P 93,900 P 17,340 7,200

93,900 P288,900 24,540 P264,360 _ 17,340 P281,700

S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P 90,000 3,900 P 93,900 7,200 P 86,700 20% P 17,340

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

c. CNI, P281,700 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model) Less: Downstream - net unrealized gain on sale of equipment – prior to 20x5 (P15,000 – P2,250) Adjusted Retained Earnings – Parent 1/1/20x5 (cost model ) Son Company’s Retained earnings that hav e been realized in transactions with third parties.. Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Upstream - net unrealized gain on sale of equipment –prior to 20x5 (P31,200 – P3,900) Multiplied by: Controlling interests %...................

P499,800 12,750 P487,050

P 175,200 120,000 P 55,200 13,200 27,300 P 14,700 80% P 11,760 3,000

Less: Goodwill impairment loss __ 8,760 Consolidated Retained earnings, January 1, 20x5 P495,810 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 264,360 Total P760,170 Less: Div idends paid – Parent Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P688,170 * t his procedure would be more appropriate, instead of mult iplying t he full-goodwill impairment loss of P3,750 by 80%. There might be situations where t he controlling interests on goodwill impairment loss would not be proportionate t o NCI acquired (refer t o Illust rat ion 15-6).

Or, alternatively:

Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model) Less: Downstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P15,000 – P2,250 – P3,000) Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ) S Company’s Retained earnings that hav e been realized in transactions with third parties.. Adjustment to conv ert from cost model to equity method for p urposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, December 31, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Accumulated amortization of allocated excess – 20x4 and 20x5 (P11,000 + P6,000) Upstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P31,200 – P3,900 – P3,900) Multiplied by: Controlling interests %...................

P658,200 9,750 P648,450

P 217,200 120,000 P 97,200 20,400 P

23,400 53,400 80%

P

Less: Goodwill impairment loss Consolidated Retained earnings, December 31, 20x5

42,720 3,000

39,720 P688,170

e. Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5 Add: Net income of subsidiary for 20x5 Total Less: Div idends paid – 20x5 Stockholders’ equity – Subsidiary Company, December 31, 20x5 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) : 20x4 20x5 Fair v alue of stockholders’ equity of subsidiary, December 31, 20x5…… Less: Upstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P31,200 – P3,900 – P3,900) Realized stockholders’ equity of subsidiary, December 31, 20x5………. Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)…………………………………..

P 240,000 P175,200 90,000 P 265,200 48,000

217,200 P 457,200 90,000

P 13,200 7,200

( 20,400) P 526,800 23,400 P503,400 20 P 100,680

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x5 NCI, 12/31/20x5 Consolidated SHE, 12/31/20x5

P 600,000 688,170 P1,288,170 __100,680 P1,188,850

Problem VI Requirements 1 to 4 Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)……………….. Fair value of Subsidiary (100%)………. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)……………….

P 372,000 93,000 P 465,000

P 240,000

Retained earnings (P120,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… Increase in land (P7,200 x 100%)……………………. Increase in equipment (P96,000 x 100%) Decrease in buildings (P24,000 x 100%)………..... Decrease in bonds payable (P4,800 x 100%)…… Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

120,000

P

360,000 P 105,000

6,000 7,200 96,000

( 24,000) 4,800

90,000 P 15,000

A summary or depreciation and amortization adjustments is as follows:

Over/ Account Adjustments to be unde amortized r P Inventory 6,000 Subject to Annual Amortization 96,00 Equipment (net)......... 0 (24,0 Buildings (net) 00) Bonds payable…

4,800

Lif e 1

8 4 4

Annu al Current Amou Year(20x nt 4) P 6,000 P 6,000

20x5 P -

12,000 ( 6,000)

12,00 0 (6,00 0)

1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

1,200 P 7,200

20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4:

(1) Investment in Company……………………………………………

S 372,000 372,000

Cash…………………………………………………………………….. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Dividend income (P36,000 x 80%)……………. Record dividends from S Company.

28,800 28,800

On the books of S Company, the P36,000 dividend paid was recorded as follows:

Dividends paid………… Cash……. Dividends paid by S Co..

36,000 36,000

No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4. Consolidation Workpaper – First Year after Acquisition

(E1) Common stock – Co………………………………………… Retained earnings – Co…………………………………… Investment in Co…………………………………………… Non-controlling interest (P360,000 20%)………………………..

S

240,000

S

120.000

S

288,000

x

72,000

To eliminat e int ercompany invest ment and equit y account s of subsidiary on date of acquisition; and t o establish non-cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in S 84,000 Co……………………………………………….

To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

Since the set-up entry in (E2) NCI at fair value, non-controlling interests have a share of entity goodwill and hence is exposed to impairment loss on goodwill. PAS 36 requires the impairment loss to be pro rated between the parent and NCI on the same basis as that on which profit or loss is allocated. In other words, the impairment loss is not pro -rated in accordance with the proportion of goodwill recognized by parent and NCI.

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss……………………………………….

6,000 6,000 6,000 1,200 3,750 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

12,000 1,200 3,750

To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

P12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

_______ P 6,000

(E4) Dividend income - P………. Non-controlling interest (P36,000 20%)……………….. Dividends paid – S……………………

x

28,800 7,200 36,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

(E5) Gain on sale of equipment Equipment Accumulated depreciation

15,000 30,000 45,000

To eliminate the downstream intercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E6) Gain on sale of equipment Equipment

31,200 12,000

Accumulated depreciation

43,200

To eliminat e t he upst ream int ercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E7) Accumulated depreciation……….. Depreciation expense……………

2,250 2,250

To adjust downstream depreciation expense on equipment sold t o subsidiary, thus realizing a portion of t he gain through depreciation (P15,000 / 5 years x 9/12 = P2,250).

(E8) Accumulated depreciation……….. Depreciation expense……………

3,900 3,900

To adjust upstream depreciation expense on equipment sold t o parent, thus realizing a portion of t he gain through depreciation (P31,200/85 years x 1 year = P3,900).

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

9,390 9,390

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x4 as follows: Net income of subsidiary…………………….. Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations Less: Amortization of allocated excess [(E3)] …. Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill) Non-controlling Interest in Net Income (NCINI)

P 91,200 ( 31,200) 3,900 P 63,900 13,200 P 50,700 20% P

10,140

P

750 9,390

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement Sales Gain on sale of equipment

P Co P480,000 15,000

S Co. P240,000 31,200

Div idend income Total Rev enue Cost of goods sold Depreciation expense

28,800 P523,800 P204,000 60,000

P271,200 P138,000 24,000

48,000 -

18,000 -

Interest expense Other expenses Goodwill impairment loss

Dr.

Cr.

(5) 15,000 (6) 31,200 (4) 28,800 (3) (3) (3)

6,000 6,000 (7) (8) 1,200

(3)

3,750

2,250 3,900

Consolidated P 720,000

_________ P 720,000 P 348,000 83,850 1,200 66,000 3,750

Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

P312,000 P211,800 P211,800

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment

Accumulated depreciation - equipment

P

9,390

P 360,000

211,800 P571,800

P120,000 91,200 P211,200

72,000 -

36,000

P499,800

P175,200

P 495,810

232,800 90,000 120,000 210,000 240,000

P 90,000 60,000 90,000 48,000 180,000

P 322,800 150,000 210,000 265,200

720,000

540,000

372,000 P1,984,800

P1,008,000

P 135,000

P 96,000

405,000

288,000

105,000 240,000 600,000

88,800 120,000

Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest………… Total

(9)

P 502,800 P 217,200 ( 9,390) P 207,810

P360,000

Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total

P180,000 P 91,200 P 91,200

499,800

240,000 175,200

(1) 120,000

(4)

20x5: Second Year after Acquisition

Sales Less: Cost of goods sold Gross profit Less: Depreciation expense Other expense

_________ P1,008,000

36,000

(2) 6,000 3) 6,000 (2) 7,200 (5) 30,000 (6) 12,000 (2) 216,000 (2) 4,800 (3) 1,200 (2) 15,000 (3) 3,750 (1) 288,000 (2) 84,000

(2) 80,000 (7) 2,250 (8) 3,900 (2) 192,000 (3) 6,000

72,000 ________

_

462,000 1,044,000 3,600 11,250 P2,468,850

(3) 10,000 (5) 45,000 (6) 43,200

P229,050 495,000 193,800 360,000 600,000

(1) 240,000 (17) 7,200

_________ P1,984,800

207,810 P 567,810

__________ P 843,690

495,810 (1 ) 72,000 (2) 21,000 (9) 9,390 P 843,690

P Co. P 540,000 216000 P 324,000 60,000 72,000

____95,190 P2,468,850

S Co. P 360,000 192,000 P 168,000 24,000 54,000

Net income from its own separate operations Add: Dividend income Net income

P 192,000 38,400 P 230,400 P 72,000

Dividends paid

P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. Parent Company Cost Model Entry

January 1, 20x5 – December 31, 20x5: Cash……………………… Dividend income (P48,000 80%)……………. Record dividends from S Company.

38,400 x

38,400

On the books of S Company, the P48,000 dividend paid was recorded as follows:

Dividends paid………… Cash Dividends paid by S Co..

48,000 48,000

Consolidation Workpaper – Second Year after Acquisition

(E1) Investment Company………………………… Retained earnings Company………………………

in

S –

44,160

P

44,160

To provide ent ry t o convert from t he cost met hod t o t he equit y met hod or t he entry t o establish reciprocit y at t he beginning of t he year, 1/1/20x5, comput ed as follows: Retained earnings – S Company, 1/1/20x5 Retained earnings – S Company, 1/1/20x4 Increase in retained earnings…….. Multiplied by: Controlling interest % Retroactive adjustment

P175,200 120,000 P 55,200 80% P 44,160

(E2) Common stock – Co………………………………………… Retained earnings – S Co., 1/1/20x5 Investment in S Co (P415,200 80%)………………………… Non-controlling interest (P415,200 20%)………………………..

S

240,000 175,200

x

332,160

x

83,040

To eliminat e int ercompany invest ment and equit y account s of subsidiary and to establish non-controlling interest (in net asset s of subsidiary) on January 1, 20x5.

(E3) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in S 84,000 Co………………………………………………. To allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on January 1, 20x5.

(E4) Retained earnings – P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] 13,560 Non-controlling interests (P16,950 x 20%) or (P13,200 x 20% + 3,390 (P3,750 – P3,000 = P750) Depreciation expense……………………….. 6,000 Accumulated depreciation – 12,000 buildings………………….. Interest expense………………………………… 1,200 6,000 Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill…………………………………… To provide for years 20x4 and 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows: Year 20x4 amount s are debit ed t o Perfect ’s ret ained earnings & NCI; Year 20x5 amount s are debit ed t o respect ive nominal account s.

Inv entory sold

(20x4) Retained earnings, P 6,000

Depreciation/ Amortization expense

Amortization -Interest

24,000 2,400 3,750

Equipment Buildings Bonds payable Sub-total Multiplied by: To Retained earnings Impairment loss Total

12,000 (6,000) 1,200 P13,200 80% P 10,560 3,000 P 13,560

P 12,000 ( 6,000) ________ P 6,000

P 1,200 P 1,200

(E5) Dividend income - P………. Non-controlling interest (P48,000 20%)……………….. Dividends paid – S……………………

x

38,400 9,600 48,000

To eliminate intercompany dividends and non-cont rolling int erest share of dividends.

(E6) Retained Earnings – P Company, 1/1/20x5 Equipment Accumulated depreciation

15,000 30,000 45,000

To eliminate the downstream intercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E7) Retained Earnings–P Company, 1/1/20x5 (P31,200 x 80%) Non-controlling interest (P31,200 x 20%) Equipment Accumulated depreciation

24,960 6,240 12,000 43,200

To eliminat e t he upst ream int ercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E8) Accumulated depreciation……….. Depreciation expense (current year)…………… Retained Earnings–P Company, 1/1/20x5 (prior year)

5,250 3,000 2,250

To adjust downstream depreciation expense on equipment sold t o subsidiary, thus realizing a portion of t he gain through depreciation

(E9) Accumulated depreciation……….. Depreciation expense (current year) Retained Earnings–P Co. 1/1/20x5 (P3,900 x 80%) Non-controlling interest (P3,900 x 20%)

7,800 3,900 3,120 780

To adjust upstream depreciation expense on equipment sold t o parent, thus realizing a portion of t he gain through depreciation (P31,200/85 years x 1 year = P3,900).

(E10) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

17,340 17,340

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x5 as follows: Net income of subsidiary…………………….. Realized gain on sale of equipment (upstream sales) through depreciation S Company’s Realized net income* Less: Amortization of allocated excess

P 90,000 3,900 P 93,900 ( 7,200) P 86,700 20% P 17,340

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI Less: NCI on goodwill impairment loss on fullGoodwill 0 Non-controlling Interest in Net Income (NCINI) P 17,340 * from separat e t ransact ions t hat has been realized in t ransact ions wit h t hird persons.

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) P Co P540,000 38,400 P578,400 P216,000

S Co. P360,000 P360,000 P192,000

(5)

60,000

24,000

(4)

6,000

Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

72,000 P348,000 P230,400 P230,400

54,000 P270,000 P 90,000 P 90,000

(4)

1,200

Statement of Retained Earnings Retained earnings, 1/1 P Company

P499,800

(2) 13,560 (6) 15,00 (7) 24,960 P 175,200 (1) 175,200 90,000 P265,200

Income Statement Sales Div idend income Total Rev enue Cost of goods sold Depreciation expense

S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill……………………

230,400 P730,200

P

Dr.

Cr.

38,400

(8) 3,000 (9) 3,900

Consolidated P 900,000 ___________ P 900,000 P 408,000 83,100

P P ( P

(10) 17,340

(1) 44,160 (8) 2,250 (9) 3,120

1,200 126,000 618,300 281,700 17,340) 264,360

P 495,810 264,360 P 760,170

72,000 -

48,000

P658,200

P217,200

P 688,170

265,200 180,000 216,000 210,000 240,000

P 102,000 96,000 108,000 48,000 180,000

P 367,200 276,000 324,000 265,200

720,000

540,000

(5)

(3) (3) (6) (7) (3) (3)

48,000

6,000 (4) 6,000 7,200 30,000 12,000 (3) 216,000 4,800 (4) 2,400 15,000 (4) 3,750

_

72,000 ________

462,000 1,044,000 2,400 11,250

Inv estment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest…………

Total

372,000

(1)

P2,203,200

P1,074,000

P 150,000

P 102,000

450,000

306,000

105,000 240,000 600,000

88,800 120,000

658,200

240,000 217,200

___ _____ P2,203,200

_________ P1,074,000

44,160 (2) 332,160 (3) 90,000

(3) 96,000 (8) 5,250 (9) 7,800 (3) 192,000 (4) 12,000

(4) (6) (7)

24,000 45,000 43,200

P2,752,050

P 255,150 552,000 193,800 360,000 600,000

(2) 240,000 (4) 3,390 (5) 9,600 (7) 6,240 __________ P 983,100

(2 ) 83,040 (3) 21,000 (9) 780 (10) 17,340 P 983,100

688,170

____102,930 P2,752,050

5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition)

P360,000

b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… Retained earnings – Subsidiary Company…………………………………. Stockholders’ equity – Subsidiary Company.………….. Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities Fair v alue of stockholders’ equity of subsidiary, January 1, 20x4………………… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill),……………………………….. Add: Non-controlling interests on full goodwill, 1/1/20x4 (P12,500, full-goodwill – P10,000, partial goodwill) Non-controlling interest (full-goodwill)

P 240,000 120,000 P 360,000 90,000 P 450,000 20 P 90,000 3,000 P 93,000

c.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI – SHE NCI, 1/1/20x4 Consolidated SHE, 1/1/20x4

P 600,000 360,000 P 960,000 ___93,000 P1,053,000

6. Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P207,810 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation

P183,000 (15,000) 2,250

P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess (refer to amortization abov e) Goodwill impairment (impairment under partial-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 * t hat has been realized in t ransact ions wit h t hird part ies.

P 91,200 ( 31,200) 3,900 P 63,900 P 10,140 13,200 3,000

P170,250

63,900 P234,150

26,340 P207,810 10,140 P217,950

b. NCI-CNI – P10,140 * * Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations……… Less: Amortization of allocated excess / goodwill impairment (refer to amortization table abov e) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750mpairment on full-goodwill less P3,000, impairment on partial- goodwill) Non-controlling Interest in Net Income (NCINI) – full goodwill * t hat has been realized in t ransact ions wit h t hird part ies.

P 91,200 ( 31,200) 3,900 P 63,900 13,200 P 50,700 20% P 10,140 750 P 9,390

c. CNI, P217,950 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Div idends paid – Parent Company for 20x4 Consolidated Retained Earnings, December 31, 20x4

P360,000 207,810 P567,810 72,000 P495,810

e. Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4 Add: Net income of subsidiary for 20x4 Total Less: Div idends paid – 20x4 Stockholders’ equity – Subsidiary Company, December 31, 20x4 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) – 20x4 Fair v alue of stockholders’ equity of subsidiary, December 31, 20x4…… Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation Realized stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………...

P 240,000 P120,000 91,200 P211,200 36,000

175,200 P 415,200 90,000 ( 13,200) P492,000 ( 31,200) 3,900 P464,700 20

Non-controlling interest (partial-goodwill)………………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4: [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill)……………..

P

92,940

2,250 P 95,190

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

P 600,000 495,810 P1,095,810 ___95,190 P1,191,000

12/31/20x5: a. CI-CNI – P281,700 Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P192,000 3,000 P195,000 P 90,000 3,900 P 93,900

93,900 P288,900 7,200 P281,700 17,340 P264,360

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 * t hat has been realized in t ransact ions wit h t hird part ies.

P192,000 3,000 P195,000 P 90,000 3,900 P 93,900 P 17,340 7,200

24,540 P264,360 _ 17,340 P281,700

b. NCI-CNI – P17,340 * * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

93,900 P288,900

P 90,000 3,900 P 93,900 7,200

P 86,700 20% P 17,340 0 P 17,340

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) - partial goodwill Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . .

c. CNI, P281,700 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model) Less: Downstream - net unrealized gain on sale of equipment – prior to 20x5 (P15,000 – P2,250) Adjusted Retained Earnings – Parent 1/1/20x5 (cost model ) Son Company’s Retained earnings that hav e been realized in transactions with third parties.. Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Upstream - net unrealized gain on sale of equipment –prior to 20x5 (P31,200 – P3,900) Multiplied by: Controlling interests %...................

P499,800 12,750 P487,050

P 175,200 120,000 P 55,200 13,200 27,300 P 14,700 80% P 11,760 3,000

Less: Goodwill impairment loss __ 8,760 Consolidated Retained earnings, January 1, 20x5 P495,810 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 264,360 Total P760,170 Less: Div idends paid – Parent Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P688,170 * t his procedure would be more appropriate, instead of mult iplying t he full-goodwill impairment loss of P3,750 by 80%. There might be situations where t he controlling interests on goodwill impairment loss would not be proportionate t o NCI acquired (refer t o Illust rat ion 15-6).

Or, alternatively:

Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model) Less: Downstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P15,000 – P2,250– P3,000) Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ) S Company’s Retained earnings that hav e been realized in transactions with third parties.. Adjustment to conv ert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, December 31, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Accumulated amortization of allocated excess – 20x4 and 20x5 (P13,200 + P7,200) Upstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P31,200 – P3,900– P3,900) Multiplied by: Controlling interests %...................

P658,200 9,750 P648,450

P 217,200 120,000 P 97,200 20,400

P P

Less: Goodwill impairment loss (full-goodwill) Consolidated Retained earnings, December 31, 20x5

23,400 53,400 80% 42,720 3,000

39,720 P688,170

e. Non-controlling interest, December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5 Add: Net income of subsidiary for 20x5 Total Less: Div idends paid – 20x5 Stockholders’ equity – Subsidiary Company, December 31, 20x5 Adjustments to reflect fair v alue - (ov er) underv aluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization abov e) : 20x4 20x5 Fair v alue of stockholders’ equity of subsidiary, December 31, 20x5…… Less: Upstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P31,200 – P3,900 – P3,900) Realized stockholders’ equity of subsidiary, December 31, 20x5………. Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill)…………………………………..

P 240,000 P175,200 90,000 P 265,200 48,000

217,200 P 457,200 90,000

P 13,200 7,200

( 20,400) P 526,800 23,400 P503,400 20 P 100,680 2,250 P 102,930

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x5 NCI, 12/31/20x5 Consolidated SHE, 12/31/20x5 Problem VII

1.

20x5

Noncontrolling interest in P 7,000 (1) Consolidated net income

P 46,200 (2)

Controlling interest in 290,500 (3) Consolidated net income

279,300 (4)

(1) (2) (3) (4) 2.

20x4

.4(P70,000 – P63,000 + P10,500) = P7,000 .4(P105,000 + P10,500) = P46,200 P280,000 + .6(P70,000 – P63,000 + P10,500) = P290,500 P210,000 + .6(P105,000 + P10,500) = P279,300 2014

Noncontrolling interest in P 28,000 (5) Consolidated income

2015 P 42,000 (6)

P 600,000 688,170 P1,288,170 __102,930 P1,391,100

Controlling interest in 269,500 (7) 283,500 (8) Consolidated net income (5) .4(P70,000) = P28,000 (6) .4(P105,000) = P42,000 (7) (P280,000 – P63,000 + P10,500) + .6(P70,000) = P269,500 (8) (P210,000 + P10,500) + .6(P105,000) = P283,500 Problem VIII (Determine consolidated net income when an intercompany transfer of equipment occurs. Includes an outside ownership) a. Income—ST .............................................................................................. Income—BB .............................................................................................. Excess amortization for unpatented technology ..................................... Remove unrealized gain on equipment ................................................. (P120,000 – P70,000) Remove excess depreciation created by inflated transfer price (P50,000 ÷ 5) ................................................... Consolidated net income .......................................................................

P220,000 90,000 (8,000) (50,000)

b. Income calculated in (part a.) ................................................................ Non-controlling interest in BB's income Income—BB ..................................................................... P90,000 Excess amortization ......................................................... (8,000) Adjusted net income ....................................................... P82,000 Non-controlling interest in BB’s income (10%)..................................... Consolidated net income to parent company .......................................

P262,000

c. Income calculated in (part a.) ................................................................ Non-controlling interest in BB's income (see Schedule 1) ........ (4,200) Consolidated net income to parent company .......................................

P262,000

10,000 P262,000

(8,200) P253,800

P257,800

Schedule 1: Non-controlling Interest in Bennett's Income (includes upstream transfer) Reported net income of subsidiary ......................................................... P90,000 Excess amortization .................................................................................. (8,000) Eliminate unrealized gain on equipment transfer .................................... (50,000) Eliminate excess depreciation (P50,000 ÷ 5) ............................................ 10,000 Bennett's realized net income ................................................................. P42,000 Outside ownership ................................................................................... 10% Non-controlling interest in subsidiary's income ........................................ P 4,200 d. Net income 20x5—ST ............................................................................... Net income 20x5—BB .............................................................................. Excess amortization .................................................................................. Eliminate excess depreciation stemming from transfer (P50,000 ÷ 5) (year after transfer) ....................................................... Consolidated net income ..............................................................

P240,000 100,000 (8,000) 10,000 P342,000

Problem IX

1.

20x4

20x5

20x6

Consolidated net income as reported Less: P10,000 deferred gain Plus: NCI portion of the gain Plus: Deferred gain Corrected consolidated net income

P 750,000

P 600,000

P 910,000

P 743,000

P 600,000

7,000 P 917,000

20x4 P 200,000 -10,000 P 190,000

20x5 P 240,000 -10,000 P 230,000

-10,000 3,000

2.

Land account as reported Less: Intercompany profit Restated land account

20x6 P 300,000 P 300,000

3. Final sales price outside the entity minus the original cost to the combined entity equals P102,000 minus P72,000 = P30,000 Problem X 1. On the consolidated balance sheet, the machine must be reported at its original cost when Tool purchased it on January 1, 20x1, which is P120,000. Since the elimination entry debited the machine account for P22,000 which must be the amount needed to bring the machine account up to P120,000, Buzzard must have recorded the machine at P98,000. Since the remaining useful life is seven years, Buzzard will record P14,000 of depreciation expense each year. 2.

The correct balances on the consolidated balance sheet for the Machine and Accumulated Depreciation accounts are the balances that would be in the accounts if there had been no sale. The balance in the machine account would be the original purchase price to Tool or P120,000. The balance in the Accumulated Depreciation account will be the original amount of annual depreciation, (P12,000) times the number of years the machine has been depreciated (4), or P48,000.

3.

The non-controlling interest income will be 30% of Tool’ adjusted net income. Tool’ reported net income of P60,000 is reduced by the P14,000 unrealized gain on the sale of the machine and is increased by the piecemeal recognition of the gain, which is P2,000. The net result of P48,000 is then multiplied by 30% to calculate a P14,400 income for the noncontrolling interest.

Problem XI 1. Consolidated net income for 20x9: Operating income reported by BW Net income reported by TW Amount of gain realized in 20x9 (P30,000 / 12 years) Realized net income of TW Consolidated net income

P100,000 P40,000 2,500 42,500 P142,500

2.

Consolidated net income for 20x9 would be unchanged.

3.

Eliminating entry, December 31, 20x9: E(1)

Buildings and Equipment Retained Earnings, January 1 Non-controlling Interest Depreciation Expense Accumulated Depreciation Eliminate unrealized profit on building.

30,000 20,000 5,000 2,500 52,500

Adjustment to buildings and equipment Amount paid by TW to acquire building Amount paid by BW on intercompany sale Adjustment to buildings and equipment

P300,000 (270,000) P 30,000

Adjustment to retained earnings, January 1, 20x9 Unrealized gain recorded January 1, 20x4 Amount realized following intercompany sale (P2,500 x 2) Unrealized gain, January 1, 20x9 Proportion of ownership held by Baywatch Required adjustment

P 30,000 (5,000) P 25,000 x .80 P 20,000

Adjustment to Noncontrolling interest, January 1, 20x9 Unrealized gain at January 1, 20x9 Proportion of ownership held by non-controlling interest Required adjustment

P 25,000 x P

.20 5,000

Adjustment to depreciation expense Depreciation expense recorded by BW Industries (P270,000 / 12 years) Depreciation expense recorded by TW Corporation (P300,000 / 15 years) Adjustment to depreciation expense

P 22,500 (20,000) P 2,500

Adjustment to accumulated depreciation Amount required (P20,000 x 6 years) Amount reported by BW (P22,500 x 3 years) Required adjustment

P120,000 (67,500) P 52,500

Problem XII 1. The gain on the sale of the land in 20x5 was equal to the sales price minus the original cost of the land when it was first acquired by the combined entity. In this case the gain was P150,000 - P90,000, or P60,000.

2.

The consolidated amount of depreciation expense was the combined amounts of depreciation expense showing on the separate income statements minus the piecemeal recognition of the gain on the sale of the equipment. Thus, the consolidated amount of depreciation expense was P95,000 + P32,000 – (P35,000/4 years) = P118,250.

3. Consolidated net income: Osprey separate income (not including Income from Branch)= P153,000 - P55,000 = Income from Branch Plus: Deferred gain on land Plus: Piecemeal recognition of gain on equipment sale: P35,000 gain/4 years = Consolidated net income

P 98,000 20,000 50,000 8,750 P176,750

Problem XIII Quail Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 20x5 Sales Gain on land (P20,000 + P25,000) Cost of sales Other expenses (see below) Consolidated Net Income NCI-CNI (see below) Consolidated net income

P

1,100,000 45,000 560,000 ) 320,000 ) 265,000 20,000 ) 245,000

( ( P ( P

Other expenses: P265,000 + P60,000 - P5,000 piecemeal recognition of gain on equipment

P

320,000

Non-controlling Interest in CNI: Net income from Savannah x 20%: (P100,000 x 20%) =

P

20,000

Problem XIV – refer to Problem IX Problem XV – refer to Problem X Problem XVI 1. Eliminating entry, December 31, 20x7: E(1) Gain on Sale of Land Land Eliminating entry, December 31, 20x8: E(1) Retained Earnings, January 1 Land 2.

Eliminating entry, December 31, 20x7:

10,000 10,000

10,000 10,000

E(1)

Gain on Sale of Land Land

10,000 10,000

Eliminating entry, December 31, 20x8: E(1) Retained Earnings, January 1 Non-controlling Interest Land

6,000 4,000 10,000

Problem XVII

1.

2.

Eliminating entry, December 31, 20x4: E(1) Gain on Sale of Land Land

45,000

Eliminating entry, December 31, 20x5: E(1) Retained Earnings, January 1 Non-controlling Interest Land

31,500 13,500

Eliminating entries, December 31, 20x4 and 20x5: E (1) Retained Earnings, January 1 Land

30,000

45,000

45,000

30,000

Problem XVIII 1. Downstream sale of land: 20x4 P 90,000 (25,000) P 65,000 60,000 P125,000

VV’s separate operating income Less: Unrealized gain on sale of land VV’s realized operating income Spawn’s realized net income Consolidated net income Income to non-controlling interest: (P60,000 x .25) (P40,000 X .25) Income to controlling interest 2.

20x5 P110,000 P110,000 40,000 P150,000

(15,000) P110,000

(10,000) P140,000

20x4 P 90,000

20x5 P110,000

35,000 P125,000

40,000 P150,000

Upstream sale of land: VV’s separate operating income SS’s net income Less: Unrealized gain on sale of land Spawn’s realized net income Consolidated net income Income to non-controlling interest: (P35,000 x .25) (P40,000 x .25) Income to controlling interest

P60,000 (25,000)

(8,750) P116,250

(10,000) P140,000

Problem XIX 1. Consolidated net income for 20x4 will be greater than PP Company's income from operations plus SS's reported net income. The eliminating entries at December 31, 20x4, will result in an increase of P16,000 to consolidated net income. 2.

As a result of purchasing the equipment at less than Parent's book value, depreciation expense reported by SS will be P2,000 (P16,000 / 8 years) below the amount that would have been recorded by PP. Thus, depreciation expense must be increased by P2,000 when eliminating entries are prepared at December 31, 20x5. Consolidated net income will be decreased by the full amount of the P2,000 increase in depreciation expense.

Problem XX 1. Eliminating entry, December 31, 20x9: E(1) Buildings and Equipment Loss on Sale of Building Accumulated Depreciation Eliminate unrealized loss on building. 2.

36,000 120,000

Consolidated net income and income to controlling interest for 20x9: Operating income reported by BB Net income reported by TT Add: Loss on sale of building Realized net income of TT Consolidated net income Income to non-controlling interest (P51,000 x .30) Income to controlling interest

3.

156,000

P125,000 P 15,000 36,000 51,000 P176,000 (15,300) P160,700

Eliminating entry, December 31, 20y0: E(1) Buildings and Equipment Depreciation Expense Accumulated Depreciation Retained Earnings, January 1 Non-controlling Interest Eliminate unrealized loss on building. Adjustment to buildings and equipment Amount paid by TT to acquire building Amount paid by BB on intercompany sale Adjustment to buildings and equipment Adjustment to depreciation expense Depreciation expense recorded by TT Company (P300,000 / 15 years) Depreciation expense recorded by BB Corporation (P144,000 / 9 years) Adjustment to depreciation expense Adjustment to accumulated depreciation Amount required (P20,000 x 7 years)

156,000 4,000 124,000 25,200 10,800

P300,000 (144,000) P156,000

P 20,000 P

(16,000) 4,000

P140,000

Amount reported by BB (P16,000 x 1 year) Required adjustment Adjustment to retained earnings, January 1, 20y0 Unrealized loss recorded, December 31, 20x9 Proportion of ownership held by BB Required adjustment Adjustment to Noncontrolling interest, January 1, 20y0 Unrealized loss recorded, December 31, 20x9 Proportion of ownership held by non-controlling Interest Required adjustment 4.

Consolidated net income and income assigned to controlling interest in 20y0: Operating income reported by BB Net income reported by TT Adjustment for loss on sale of building Realized net income of TT Consolidated net income Income assigned to non-controlling interest (P36,000 x .30) Income assigned to controlling interest

(16,000) P124,000 P36,000 x .70 P25,200 P36,000 x .30 P10,800

P150,000 P40,000 (4,000) 36,000 P186,000 (10,800) P175,200

Problem XXI Requirements 1 to 4 Schedule of Determination and Allocation of Excess (Partial -goodwill) Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 80%)……………………. Retained earnings (P120,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… Increase in land (P7,200 x 80%)……………………. Increase in equipment (P96,000 x 80%) Decrease in buildings (P24,000 x 80%)………..... Decrease in bonds payable (P4,800 x

P 372,000 P 192,000 96,000

P 4,800 5,760 76,800 ( 19,200) 3,840

288,000 P 84,000

80%)…… Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

72,000 P 12,000

The over/under valuation of assets and liabilities are summarized as follows:

S Co. Book value

S Co. Fair value

(Over) Under Valuation

P 24,000 48,000 84,000 168,000

P Inventory………………….…………….. 30,000 Land……………………………………… 55,200 Equipment (net)......... 180,000 Buildings (net) 144,000 ( Bonds payable………………………… (120,000) 115,200) P P Net……………………………………….. 204,000 294,000

P

6,000 7,200 96,000 (24,000) 4,800

P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows:

Equipment.................. Less: Accumulated depreciation….. Net book value………………………...

Buildings................ Less: Accumulated depreciation….. Net book value………………………...

S Co. Book value 180,000

S Co. Fair value 180,000

Increase (Decrease) 0

96,000

-

( 96,000)

84,000

180,000

96,000

S Co. Book value 360,000

S Co. Fair value 144,000

(Decrease) ( 216,000)

1992,000

-

( 192,000)

168,000

144,000

(

24,000)

A summary or depreciation and amortization adjustments is as follows:

Account Adjustments to be amortized Inventory Subject to

Annual

Over/ Unde r P 6,000

Lif e 1

Annu al Current Amou Year(20x nt 4) P 6,000 P 6,000

20x5 P -

Amortization

Buildings (net)

96,00 0 (24,0 00)

Bonds payable…

4,800

Equipment (net).........

8 4 4

12,000 ( 6,000) 1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

12,00 0 (6,00 0) 1,200 P 7,200

The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full -goodwill is computed as follows:

Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) Fair value of NCI (given) (20%) Fair value of Subsidiary (100%) Less: Book value of stockholders’ equity of S (P360,000 x 100%) Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P 372,000 93,000 P 465,000 __360,000 P 105,000 90,000 P

15,000

In this case, the goodwill was proportional to the controlling interest of 80% and non -controlling interest of 20% computed as follows:

Value Goodwill applicable to parent………………… Goodwill applicable to NCI…………………….. Total (full) goodwill………………………………..

P12,00 0 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

The goodwill impairment loss would be allocated as follows

Value Goodwill impairment loss attributable to parent P or controlling 3,000 Interest Goodwill applicable to NCI…………………….. 750 Goodwill impairment loss based on 100% fair value or fullP 3,750 Goodwill

% of Total 80.00% 20.00% 100.00%

The unrealized and gain on intercompany sales for 20x4 are as follows:

Date of Sale

Seller

4/1/20 P x4 1/2/20 S x4

Selling Book Price Value P90,0 00

P75,0 00

60,00 0

28,80 0

Unrealize d* Gain on sale P15,000 31,200

Remaini Realized ng gain – Life depreciatio n** 5 years P3,000/year 8 years P3,900/year

20x4 P2,2 50 P3,9 00

* selling price less book value * * unrealized gain divided by remaining life; 20x4 – P2,500 x 9/12 = P1,875

The following summary for 20x4 results of operations is as follows:

Sales Less: Cost of goods sold Gross profit

P Co.

S Co.

P 480,000 204,000

P 240,000

Less: Depreciation expense Other expenses

P 276,000 60,000 48,000

Add: Gain on sale of equipment

P 168,000 15,000

Net income from its own separate operations Add: Investment income

P 183,000 24,810

Net income

P 207,810

138,000 P 102,000 24,000 18,000 P 60,000 31,200 P 91,200 P 91,200

20x4: First Year after Acquisition Parent Company Equity Method Entry January 1, 20x4:

(1) Investment in Company……………………………………………

S 372,000

Cash…………………………………………………………………….. Acquisit ion of S Company.

January 1, 20x4 – December 31, 20x4:

372,000

(2) Cash……………………… Investment in S Company (P36,000 x 80%)…………….

28,800 28,800

Record dividends from Son Company.

December 31, 20x4: (3) Investment in S Company Investment income (P91,200 x 80%)

72,960

72,960

Record share in net income of subsidiary.

December 31, 20x4: (4) Investment income [(P13,200 x 80%) + P3,000, goodwill impairment loss)] Investment in S Company

13,560 13,560

Record amortization of allocat ed excess of invent ory, equipment , buildings and bonds payable and goodwill impairment loss. December 31, 20x4: (5) Inv estment income (P15,000 x 100%) Inv estment in S Company To adjust inv estment income for downst ream sales - unrealized gain on sale of equipment .. December 31, 20x4: (6) Inv estment income (P31,200 x 80%) Inv estment in S Company To adjust inv estment income for upstream sales - unrealized gain on sale of equipment .. December 31, 20x4: (7) Inv estment in S Company Inv estment income (P2,250 x 100%) To adjust inv estment income for downstream sales - realized gain on sale of equipment.. December 31, 20x4: (8) Inv estment in S Company Inv estment income (P3,900 x 80%) To adjust inv estment income for upstream sales - realized gain on sale of equipment..

15,000

24,960

2,250

3,120

15,000

24,960

2,250

3,120

Thus, the investment balance and investment income in the books of P Company is as follows:

Cost, 1/1/x4 NI of Son (91,200 x 80%) Realized gain downstream sale Realized gain upstream sale Balance, 12/31/x4 Amortization & impairment Unrealized gain downstream sale Unrealized gain upstream sale

Inv estment in S 372,000 28,800 72,960 2,250 3,120 368,010

13,560 15,000 24,960

Inv estment Income 13,560 15,000 24,960

72,960 2,250 3,120 24,810

Div idends – S (36,000x 80%) Amortization & impairment Unrealized gain downstream sale Unrealized gain upstream sale

NI of S (91,200 x 80%) Realized gain downstream sale Realized gain upstream sale Balance, 12/31/x4

Consolidation Workpaper – First Year after Acquisition

(E1) Common stock – Co………………………………………… Retained earnings – Co…………………………………… Investment in Co…………………………………………… Non-controlling interest (P360,000 20%)………………………..

S

240,000

S

120,000

S

288,000

x

72,000

To eliminat e invest ment on January 1, 20x4 and equit y account s of subsidiary on dat e of acquisit ion; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 18,000 20%)……………………….. Investment in S 84,000 Co………………………………………………. To eliminat e invest ment on January 1, 20x4 and allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish non- cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss………………………………………. Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable…………………………

6,000 6,000 6,000 1,200 3,000 6,000 12,000 1,200

Goodwill……………………………………

3,000

To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000

_______ P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

Total

14,400

(E4) Investment income Investment in S Company Non-controlling interest (P36,000 20%)……………….. Dividends paid – S……………………

x

24,810 3,990 7,200 36,000

To eliminate intercompany dividends and investment income under equit y met hod and est ablish share of dividends, comput ed as follows:

Inv estment in S NI of S 28,800 Div idends - S (91,200 Amortization & x 80%)……. 72,960 13,560 impairment Realized gain* 2,250 15,000 Unrealized gain * Realized gain** 3,120 24,960 Unrealized gain ** 3,990

Inv estment Income Amortization impairment 13,560 Unrealized gain * 15,000 Unrealized gain * * 24,960

NI of S (91,200 72,960 x 80%) 2,250 Realized gain* 3,120 Realized gain** 24,810

* downst ream sale (should be mult iplied by 100%) * * upst ream sale (should be mult iplied by 80%)

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Cost, 1/1/x4 NI of S (91,200 x 80%) Realized gain downstream sale Realized gain upstream sale Balance, 12/31/x4 (E4) Inv estment Income and div idends ……………

Inv estment in S 372,000 28,800 72,960 2,250 3,120 368,010 3,990 372,000

13,560 15,000 24,960 288,000 84,000

Div idends – S (36,000x 80%) Amortization & impairment Unrealized gain downstream sale Unrealized gain upstream sale (E1) Inv estment, 1/1/20x4 (E2) Inv estment, 1/1/20x4

372,000

(E5) Gain on sale of equipment Equipment Accumulated depreciation To eliminate the downstream intercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

15,000 30,000 45,000

(E6) Gain on sale of equipment Equipment Accumulated depreciation

31,200 12,000 43,200

To eliminat e t he upst ream int ercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E7) Accumulated depreciation……….. Depreciation expense……………

2,250 2,250

To adjust downstream depreciation expense on equipment sold t o subsidiary, thus realizing a portion of t he gain through depreciation (P15,000 / 5 years x 9/12 = P2,250).

(E8) Accumulated depreciation……….. Depreciation expense……………

3,900 3,900

To adjust upstream depreciation expense on equipment sold t o parent, thus realizing a portion of t he gain through depreciation (P26,000/85 years x 1 year = P3,250).

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

10,140 10,140

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x4 as follows: Net income of subsidiary…………………….. Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations Less: Amortization of allocated excess [(E3)] …. Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

P 91,200 ( 31,200) 3,900 P 63,900 13,200 P 50,700 20% P

10,140

Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Partial -goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement Sales Gain on sale of equipment

P Co P480,000 15,000

S Co. P240,000 31,200

Inv estment income Total Rev enue Cost of goods sold

24,810 P519,810 P204,000

P271,200 P138,000

Depreciation expense

60,000

Interest expense Other expenses Goodwill impairment loss

48,000 -

Dr.

Cr.

(5) 15,000 (6) 31,200 (4) 28,800 (3)

6,000

24,000

(3)

6,000

18,000 -

(3)

1,200

(3)

3,000

(7)

2,250 (8) 3,900

Consolidated P 720,000

_________ P 720,000 P 348,000 83,850 1,0200 66,000 3,000

Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

P312,000 P207,810 P207,810

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment

Accumulated depreciation - equipment

P

10,140

P 360,000

207,810 P567,810 72,000 -

36,000

P495,810

P175,200

P 495,810

232,800 90,000 120,000 210,000 240,000

P 90,000 60,000 90,000 48,000 180,000

P 322,800 150,000 210,000 265,200

720,000

540,000

P1,980,810

P1,008,000

P 135,000

P 96,000

405,000

288,000

105,000 240,000 600,000

88,800 120,000

495,810 _________ P1,980,810

(1) 120,000

(4)

36,000

(2) 6,000 (3) 5,000 (2) 7,200 (5) 30,000 (6) 12,000 (2) 216,000 (2) 4,800 (3) 1,200 (2) 12,000 (3) 3,000 (1) 288,000 (2) 84,000

72,000 ________

_

462,000 1,044,000 3,600 9,000 P2,466,600

(2) 96,000 (3) 12,000 (7) 2,250 (5) 45,000 (8) 3,900 (6) 43,200 (2) 192,000 (3) 6,000

240,000 (1) 240,000 175,200 (4) 7,200 _________ P1,008,000

207,810 P567,810

__________ P 840,690

P229,050 495,000 193,800 360,000 600,000 495,810

(1 ) 72,000 (2) 18,000 (9) 10,140 P 840,690

92,940 P2,466,600

20x5: Second Year after Acquisition

P Co.

Sales Less: Cost of goods sold Gross profit Less: Depreciation expense Other expense Net

502,050 217,950 10,140) 207,810

P120,000 91,200 P211,200

368,010

Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest………… Total

(9)

P P ( P

P360,000

Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total

P180,000 P 91,200 P 91,200

income from its own separate

P 540,000 216,000 P 324,000 60,000 72,000 P

S Co.

P 360,000 192,000 P 168,000 24,000 54,000 P

operations Add: Investment income

192,000 72,360

Net income

P 264,360 P 72,000

Dividends paid

90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5.

Parent Company Equity Method Entry

January 1, 20x5 – December 31, 20x5: (2) Cash……………………… Investment in S Company (P48,000 x 80%)…………….

38,400 38,400

Record dividends from S Company.

December 31, 20x5: (3) Investment in S Company Investment income (P90,000 x 80%)

72,000 72,000

Record share in net income of subsidiary.

December 31, 20x5: (4) Investment income (P7,200 x 80%) Investment in S Company

5,760

5,760

Record amortizat ion of allocat ed excess of invent ory, equipment , buildings and bonds payable December 31, 20x4: (5) Inv estment in S Company Inv estment income (P3,000 x 100%) To adjust inv estment income for downstream sales - realized gain on sale of equipment. December 31, 20x4: (6) Inv estment in S Company Inv estment income (P3,900 x 80%) To adjust inv estment income for upstream sales - realized gain on sale of equipment..

3,000

3,120

3,000

3,120

Thus, the investment balance and investment income in the books of P Company is as follows: Cost, 1/1/x5 NI of Son (90,000 x 80%) Realized gain downstream sale Realized gain upstream sale Balance, 12/31/x5

Amortization (6,000 x 805)

Inv estment in S 368,010 38,400 5,760 72,000 3,000 3,120 401,970

Div idends – S (48,000x 80%) Amortization (7,200 x 80%)

Inv estment Income 5,760 NI of S

72,000 3,000 3,120 72,360

(90,000 x 80%) Realized gain downstream sale Realized gain upstream sale Balance, 12/31/x5

Consolidation Workpaper – Second Year after Acquisition

(E1) Common stock – S Co………………………………………… Retained earnings – S Co, 1/1/x5…………………………. Investment in S Co (P415,200 x 80%) Non-controlling interest (P415,200 x 20%)………………………..

240,000 175,200 332,160 83,040

To eliminat e invest ment on January 1, 20x5 and equit y account s of subsidiary on dat e of acquisit ion; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on 1/1/20x5.

(E2) Accumulated depreciation – equipment (P96,000 – 84,000 P12,000) Accumulated depreciation – buildings (P192,000 + 198,000 P6,000) 6,000 Land………………………………………………………………………. Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P12,000 – P3,000)…………………………….. 9,000 Buildings……………………………………….. 180,000 Non-controlling interest [(P90,000 – P13,200) x 20%] 15,360 Investment in Son 70,440 Co………………………………………………. To eliminat e invest ment on January 1, 20x5 and allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o t he original amount of goodwill; and t o est ablish non- cont rolling int erest (in net asset s of subsidiary) on 1/1/20x5.

(E3) Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… To provide for 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows: Depreciation/ Amortization Expense

Amortization -Interest

Total

6,000 6,000 1,200 12,000 1,200

Inv entory sold Equipment Buildings Bonds payable Totals

P 12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

P7,200

(E4) Investment income Non-controlling interest (P48,000 20%)……………….. Dividends paid – S…………………… Investment in S Company

x

72.360 9,600 48,000 33,960

To eliminate intercompany dividends and investment income under equit y met hod and est ablish share of dividends, comput ed as follows: Inv estment in S NI of S 38,400 Div idends – S (90,000 Amortization x 80%)……. 72,000 5,760 (P7,200 x 80%) Realized gain* 3,000 Realized gain** 3,120 33,960

Inv estment Income NI of S Amortization (90,000 (P7,200 x 80%) 5,760 72,000 x 80%) 3,000 Realized gain* 3,120 Realized gain** 72,360

* downst ream sale (should be mult iplied by 100%) * * upst ream sale (should be mult iplied by 80%)

(E5) Investment in S Company Equipment Accumulated depreciation – equipment

15,000 30,000 45,000

To eliminate the downstream intercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E6) Investment in S Company Non-controlling interest (P31,200 x 20%) Equipment Accumulated depreciation- equipment

24,960 6,240 12,000 43,200

To eliminat e t he upst ream int ercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E7) Accumulated depreciation – equipment ……….. Depreciation expense (current year)…………… Investment in S Company (prior year)

5,250 3,000 2,250

To adjust downstream depreciation expense on equipment sold t o subsidiary, thus realizing a portion of t he gain through depreciation

(E8) Accumulated depreciation- equipment…….. Depreciation expense (current year) Investment in S Company (prior year) Non-controlling interest (P31,200 x 20%)

7,800 3,900 3,120 780

To adjust upstream depreciation expense on equipment sold t o parent, thus realizing a portion of t he gain through depreciation (P31,200/85 years x 1 year = P3,900).

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

17,340 17,340

To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x5 as follows: Net income of subsidiary…………………….. Realized gain on sale of equipment (upstream sales) through depreciation S Company’s Realized net income* Less: Amortization of allocated excess

P 90,000

3,900 P 93,900 ( 7,200) P 86,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI P 17,340 * from separat e t ransact ions t hat has been realized in t ransact ions wit h t hird persons.

Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Partial -goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) P Co P540,000 72,360 P612,360 P216,000

Income Statement Sales Inv estment income Total Rev enue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment

Dr.

(4)

Cr.

72,360

(7) 3,000 (8) 3,900

Consolidated P 900,000 ___________ P 900,000 P 408,000 83,100

60,000

24,000

(3)

6,000

72,000 P348,000 P264,360 P264,360

54,000 P270,000 P 90,000 P 90,000

(3)

1,200

(1) 175,200

_264,360 P760,170

P 175,200 90,000 P265,200

72,000 -

48,000

P688,170

P217,200

P 688,170

265,200 180,000 216,000 210,000 240,000

P 102,000 96,000 108,000 48,000 180,000

P 367,200 276,000 324,000 265,200 462,000

P495,810

P

S Co. P360,000 P360,000 P192,000

P P ( P

(9) 17,340

1,200 126,000 618,300 281,700 17,340) 264,360

P495,810 264,360 P 760,170

(5)

(2) (5)

7,200 30,000

48,000

_

72,000 ________

Buildings Discount on bonds payable Goodwill…………………… Inv estment in Son Co………

Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest…………

Total

720,000

540,000

(2) (2) (5) (6)

401,970

P2,233,170

P1,074,000

P 150,000

P 102,000

450,000

306,000

105,000 240,000 600,000

88,800 120,000

688,170

(6)

240,000 217,200

_________ P1,074,000

(2) 216,000 3,600 (3) 1,200 9,000 15,000 (1) 332,160 24,960 (2) 70,440 (4) 33,960 (7) 2,250 (8) 3,120

(2) 84,000 (7) 5,250 (8) 7,800 (2) 198,000 (3) 6,000

(3) (5) (6)

12,000 45,000 43,200

1,044,000 2,400 9,000

P2,749,800

P 255,150 552,000 193,800 360,000 600,000

(1) 240,000 688,170 (4) (6)

___ _____ P2,233,170

12,000

9,600 6,240

__________ P 930,750

(1) 69,200 (2) 15,360 (8) 780 (9) 17,340 P 930,750

____100,680 P2,749,800

5 and 6. Refer to Problem V for computations Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem X solution). Problem XXII Requirements 1 to 4 Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)……………….. Fair value of Subsidiary (100%)………. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. Retained earnings (P120,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities:

P 372,000 93,000 P 465,000

P 240,000 120,000

360,000 P 105,000

Increase in inventory (P6,000 x 100%)……………… Increase in land (P7,200 x 100%)……………………. Increase in equipment (P96,000 x 100%) Decrease in buildings (P24,000 x 100%)………..... Decrease in bonds payable (P4,800 x 100%)…… Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P

6,000 7,200 96,000

( 24,000) 4,800

90,000

P 15,000

A summary or depreciation and amortization adjustments is as follows:

Over/ Account Adjustments to be unde amortized r P Inventory 6,000 Subject to Annual Amortization 96,00 Equipment (net)......... 0 (24,0 Buildings (net) 00) Bonds payable…

4,800

Lif e 1

8 4 4

Annu al Current Amou Year(20x nt 4) P 6,000 P 6,000

20x5 P -

12,000 ( 6,000)

12,00 0 (6,00 0)

1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

The following summary for 20x4 results of operations is as follows:

Sales Less: Cost of goods sold Gross profit Less: Depreciation expense Other expenses

P Co.

S Co.

P 480,000 204,000

P 240,000

P 276,000 60,000 48,000 P

138,000 P 102,000 24,000 18,000 P

1,200 P 7,200

Add: Gain on sale of equipment

168,000 15,000

Net income from its own separate operations Add: Investment income

P 183,000 24,810

Net income

P 207,810

60,000 31,200 P 91,200 P 91,200

20x4: First Year after Acquisition Parent Company Equity Method Entry January 1, 20x4:

(1) Investment in Company……………………………………………

S 372,000 372,000

Cash…………………………………………………………………….. Acquisit ion of S Company.

January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Investment in S Company (P36,000 x 80%)……………. Record dividends from Son Company.

December 31, 20x4: (3) Investment in S Company Investment income (P91,200 x 80%)

28,800 28,800

72,960 72,960

Record share in net income of subsidiary.

December 31, 20x4: (4) Investment income [(P13,200 x 80%) + P3,000, goodwill impairment loss)] Investment in S Company

13,560 13,560

Record amortizat ion of allocat ed excess of invent ory, equipment , buildings and bonds payable and goodwill impairment loss.

December 31, 20x4: (5) Inv estment income (P15,000 x 100%) Inv estment in S Company To adjust inv estment income for downst ream sales - unrealized gain on sale of equipment .. December 31, 20x4: (6) Inv estment income (P31,200 x 80%) Inv estment in S Company To adjust inv estment income for upstream sales - unrealized gain on sale of equipment .. December 31, 20x4: (7) Inv estment in S Company

15,000

24,960

2,250

15,000

24,960

Inv estment income (P2,250 x 100%) To adjust inv estment income for downstream sales - realized gain on sale of equipment.. December 31, 20x4: (8) Inv estment in S Company Inv estment income (P3,900 x 80%) To adjust inv estment income for upstream sales - realized gain on sale of equipment..

2,250

3,120

3,120

Thus, the investment balance and investment income in the books of Perfect Company is as follows: Cost, 1/1/x4 NI of Son (91,200 x 80%) Realized gain downstream sale Realized gain upstream sale Balance, 12/31/x4

Amortization & impairment Unrealized gain downstream sale Unrealized gain upstream sale

Inv estment in S 372,000 28,800 72,960 2,250 3,120 368,010

13,560 15,000 24,960

Inv estment Income 13,560 15,000 24,960

72,960 2,250 3,120 24,810

Div idends – S (36,000x 80%) Amortization & impairment Unrealized gain downstream sale Unrealized gain upstream sale

NI of S (76,000 x 80%) Realized gain downstream sale Realized gain upstream sale Balance, 12/31/x4

Consolidation Workpaper – First Year after Acquisition

(E1) Common stock – Co………………………………………… Retained earnings – Co…………………………………… Investment in Co…………………………………………… Non-controlling interest (P360,000 20%)………………………..

S

240,000

S

120.000

S

288,000

x

72,000

To eliminat e invest ment on January 1, 20x4 and equit y account s of subsidiary on dat e of acquisit ion; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E2) 6,000 Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 7,200 Land………………………………………………………………………. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill…………………………………………………………………. Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) + [(P15,000 full

–

21,000

P12,000, partial goodwill)]………… Investment in Co……………………………………………….

S

84,000

To eliminat e invest ment on January 1, 20x4 and allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o goodwill; and t o est ablish non- cont rolling int erest (in net asset s of subsidiary) on dat e of acquisit ion.

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss……………………………………….

6,000 6,000 6,000 1,200 3,750 6,000

Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

12,000 1,200 3,750

To provide for 20x4 impairment loss and depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000

_______ P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

(E4) Investment income Investment in S Company Non-controlling interest (P36,000 20%)……………….. Dividends paid – S……………………

Total

14,400

x

24,810 3,990 7,200 36,000

To eliminate intercompany dividends and investment income under equit y met hod and est ablish share of dividends, comput ed as follows: Inv estment in S NI of S 28,800 Div idends - S (91,200 Amortization & x 80%)……. 72,960 13,560 impairment Realized gain* 2,250 15,000 Unrealized gain * Realized gain** 3,120 24,960 Unrealized gain ** 3,990 * downst ream sale (should be mult iplied by 100%) * * upst ream sale (should be mult iplied by 80%)

Inv estment Income Amortization impairment 13,560 Unrealized gain * 15,000 Unrealized gain * * 24,960

72,960 2,250 3,120 24,810

NI of S (91,200 x 80%) Realized gain* Realized gain**

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Cost, 1/1/x4 NI of S (91,200 x 80%) Realized gain downstream sale Realized gain upstream sale Balance, 12/31/x4 (E4) Inv estment Income and div idends ……………

Inv estment in S 372,000 28,800 72,960 2,250 3,120 368,010 3,990 372,000

13,560 15,000 24,960 288,000 84,000

Div idends – S (36,000x 80%) Amortization & impairment Unrealized gain downstream sale Unrealized gain upstream sale (E1) Inv estment, 1/1/20x4 (E2) Inv estment, 1/1/20x4

372,000

(E5) Gain on sale of equipment Equipment Accumulated depreciation

15,000 30,000 45,000

To eliminate the downstream intercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E6) Gain on sale of equipment Equipment Accumulated depreciation

31,200 12,000 43,200

To eliminat e t he upst ream int ercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E7) Accumulated depreciation……….. Depreciation expense……………

2,250 2,250

To adjust downstream depreciation expense on equipment sold t o subsidiary, thus realizing a portion of t he gain through depreciation (P15,000 / 5 years x 9/12 = P2,250).

(E8) Accumulated depreciation……….. Depreciation expense……………

3,900 3,900

To adjust upstream depreciation expense on equipment sold t o parent, thus realizing a portion of t he gain through depreciation (P31,120/85 years x 1 year = P3,900).

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest ………….. To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x4 as follows:

Net income of subsidiary…………………….. Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation

P 91,200 ( 31,200) 3,900

9,390 9,390

S Company’s realized net income from separate operations Less: Amortization of allocated excess [(E3)] …. Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* Non-controlling Interest in Net Income (NCINI) – full goodwill

P 63,900 13,200 P 50,700 20% P

10,140

750 P

9,390

Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement Sales Gain on sale of equipment

P Co P480,000 15,000

S Co. P240,000 31,200

Inv estment income Total Rev enue Cost of goods sold

24,810 P519,810 P204,000

P271,200 P138,000

60,000 48,000 P312,000 P207,810 P207,810

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co……… Total

Cr.

Consolidated P 720,000

(5) 15,000 (6) 31,200 (4) 28,800

_________ P 720,000 P 348,000 83,850

(3)

6,000

24,000

(3)

6,000

18,000 P180,000 P 91,200 P 91,200

(3)

1,200

(3)

3,750

(9)

9,390

(1) 120,000

207,810 P567,810

P120,000 91,200 P211,200

72,000 -

36,000

P495,810

P175,200

P 495,810

232,800 90,000 120,000 210,000 240,000

P 90,000 60,000 90,000 48,000 180,000

P 322,800 150,000 210,000 265,200

720,000

540,000

P360,000

P

Dr.

368,010 P1,980,810

P1,008,000

(7)

2,250 (8) 3,900

1,200 66,000 3,750 P 502,800 P 217,200 ( 9,390) P 207,810

P 360,000 207,810 P 567,810

(4)

36,000

(2) 6,000 (3) 6,000 (2) 6,000 (5) 30,000 (6) 12,000 (2) 216,000 (2) 4,800 (3) 1,200 (2) 15,000 (3) 3,750 (1) 288,000 (2) 84,000

_

72,000 ________

462,000 1,044,000 3,600 11,250 P2,468,850

Accumulated depreciation - equipment

P 135,000

P 96,000

405,000

288,000

105,000 240,000 600,000

88,800 120,000

Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest………… Total

495,810

240,000 175,200

(2) 96,000 (7) 2,250 (8) 3900 (2) 192,000 (3) 6,000

_________ P1,008,000

Second Year after Acquisition

Sales

P229,050 495,000 193,800 360,000 600,000

(1) 240,000 (4)

_________ P1,980,810

(3) 12,000 (5) 45,000 (6) 43,200

7,200

__________ P 843,690

495,810 (1 ) 72,000 (2) 21,000 (9) 9,390 P 843,690

____95,190 P2,468,850

Perfect Co. P 540,000

Son Co.

1216,000 P 324,000 60,000 72,000

192,000 P 168,000 24,000

P 360,000

Less: Cost of goods sold Gross profit Less: Depreciation expense Other expense Net income from its own separate operations Add: Investment income

P 192,000 72,360

Net income

P 264,360 P 72,000

Dividends paid

54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. Parent Company Equity Method Entry

January 1, 20x5 – December 31, 20x5: (2) Cash……………………… Investment in S Company (P48,000 x 80%)…………….

38,400 38,400

Record dividends from S Company.

December 31, 20x5: (3) Investment in S Company Investment income (P90,000 x 80%) Record share in net income of subsidiary.

72,000 72,000

December 31, 20x5: (4) Investment income (P7,200 x 80%) Investment in S Company

5,760

5,760

Record amortizat ion of allocat ed excess of invent ory, equipment , buildings and bonds payable December 31, 20x4: (5) Inv estment in S Company Inv estment income (P3,000 x 100%) To adjust inv estment income for downstream sales - realized gain on sale of equipment.. December 31, 20x4: (6) Inv estment in S Company Inv estment income (P3,900 x 80%) To adjust inv estment income for upstream sales - realized gain on sale of equipment..

3,000

3,120

3,000

3,120

Thus, the investment balance and investm ent income in the books of P Company is as follows: Cost, 1/1/x5 NI of S (90,000 x 80%) Realized gain downstream sale Realized gain upstream sale Balance, 12/31/x5

Amortization (7,200 x 805)

Inv estment in S 368,010 38,400 5,760 72,000 3,000 3,120 401,970

Div idends – S (40,000x 80%) Amortization (6,000 x 80%)

Inv estment Income 5,760 NI of S 72,000 (90,000 x 80%) 3,000 Realized gain downstream sale 3,120 Realized gain upstream sale 72,360 Balance, 12/31/x5

Consolidation Workpaper – Second Year after Acquisition

(E1) Common stock – S Co………………………………………… 240,000 Retained earnings – S Co, 1/1/x5…………………………. 175.200 Investment in S Co (P415,200 x 80%) 332,160 Non-controlling interest (P415,200 x 83,040 20%)……………………….. To eliminat e invest ment on January 1, 20x5 and equit y account s of subsidiary on dat e of acquisit ion; and t o est ablish noncont rolling int erest (in net asset s of subsidiary) on 1/1/20x5.

(E2) Accumulated depreciation – equipment (P96,000 – 84,000 P12,000) Accumulated depreciation – buildings (P192,000 + 198,000 P6,000) 7,200 Land………………………………………………………………………. Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P15,000 – P3,900)…………………………….. 11,250 Buildings……………………………………….. 216,000 Non-controlling interest [(P90,000 – P13,200) x 20%] + [P3,000, full goodwill - [(P3,750, full-goodwill

impairment

– P3,000, partial- goodwill impairment)* or (P3,750 x 20%)] Investment in Co……………………………………………….

17,610 S

70,440

To eliminat e invest ment on January 1, 20x5 and allocat e excess of cost over book value of ident ifiable asset s acquired, wit h remainder t o t he original amount of goodwill; and t o est ablish non- cont rolling int erest (in net asset s of subsidiary) on 1/1/20x5. * t his procedure would be more appropriate, inst ead of mult iplying t he full-goodwill impairment loss of P3,750 by 20%. There might be situations where t he NCI on goodwill impairment loss would not be proportionate to NCI acquired (refer t o Illust rat i on 15-6).

(E3) Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Accumulated depreciation – equipment……………….. Discount on bonds payable…………………………

6,000 6,000 1,200 12,000 1,200

To provide for 20x5 depreciat ion and amort izat ion on differences bet ween acquisit ion dat e fair value and book value of Son’s ident ifiable asset s and liabilit ies as follows:

Inv entory sold Equipment Buildings Bonds payable Totals

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6000) _______ P 6,000

P 1,200 P1,200

Total

P7,,200

(E4) Investment income Non-controlling interest (P48,000 20%)……………….. Dividends paid – S…………………… Investment in S Company

x

72,360 9,600 48,000 33,960

To eliminate intercompany dividends and investment income under equit y met hod and est ablish share of dividends, comput ed as follows: Inv estment in S NI of S 38,400 Div idends – S (90,000 Amortization x 80%)……. 72,000 5,760 (P72,000 x 80%) Realized gain* 3,000 Realized gain** 3,120 33,960 * downst ream sale (should be mult iplied by 100%) * * upst ream sale (should be mult iplied by 80%)

Inv estment Income NI of S Amortization (75,000 (P7,200 x 80%) 5,760 72,000 x 80%) 3,000 Realized gain* 3,120 Realized gain** 72,360

(E5) Investment in S Company Equipment Accumulated depreciation – equipment

15,000 30,000 45,000

To eliminate the downstream intercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E6) Investment in S Company Non-controlling interest (P31,200 x 20%) Equipment Accumulated depreciation- equipment

24,960 6,240 12,000 43,200

To eliminat e t he upst ream int ercompany gain and rest ore t o it s original cost to t he consolidate ent it y (along wit h it s accumulat ed depreciat ion at t he point of t he int ercompany sale).

(E7) Accumulated depreciation – equipment ……….. Depreciation expense (current year)…………… Investment in S Company (prior year)

5,250 3,000 2,250

To adjust downstream depreciation expense on equipment sold t o subsidiary, thus realizing a portion of t he gain through depreciation

(E8) Accumulated depreciation- equipment…….. Depreciation expense (current year) Investment in S Company (prior year) Non-controlling interest (P31,200 x 20%)

7,800 3,900 3,120 780

To adjust upstream depreciation expense on equipment sold t o parent, thus realizing a portion of t he gain through depreciation (P31,200/85 years x 1 year = P3,900).

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest ………….. To est ablish non-cont rolling int erest in subsidiary’s adjust ed net income for 20x5 as follows: Net income of subsidiary…………………….. Realized gain on sale of equipment (upstream sales) through depreciation S Company’s Realized net income* Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on fullGoodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

P 90,000 3,900 P 93,900 ( 7,200) P 86,700 20% P 17,340 0 P 17,340

17,340 17,340

* from separat e t ransact ions t hat has been realized in t ransact ions wit h t hird persons.

Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement Sales Inv estment income Total Rev enue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from abov e Total Div idends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receiv able…….. Inv entory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Inv estment in S Co………

Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par………

P Co P540,000 72,360 P612,360 P216,000

S Co. P360,000 P360,000 P192,000

(4)

60,000

24,000

(3)

6,000

72,000 P348,000 P264,360 P264,360

54,000 P270,000 P 90,000 P 90,000

(3)

1,200

(1) 175,200

_264,360 P760,170

P 175,200 90,000 P265,200

72,000 -

48,000

P688,170

P217,200

P 688,170

265,200 180,000 216,000 210,000 240,000

P 102,000 96,000 108,000 48,000 180,000

P 367,200 276,000 324,000 265,200

720,000

540,000

P495,810

P

Dr.

P2,233,170

P1,074,000

P 150,000

P 102,000

450,000

306,000

105,000 240,000 600,000

88,800 120,000 240,000

72,360

(7) 3,000 (8) 3,900

Consolidated P 900,000 ___________ P 900,000 P 408,000 83,100

P P ( P

(9) 17,340

1,200 126,000 618,300 281,700 17,340) 264,360

P495,810 264,360 P 760,170

(5)

(2) (5) (6) (2) (2) (5) (6)

401,970

Cr.

48,000

7,200 30,000 12,000 (2) 216,000 3,600 (3) 1,200 11,250 15,000 (1) 332,160 24,960 (2) 70,440 (4) 33,960 (7) 2,250 (8) 3,120

(2) 84,000 (7) 5,250 (8) 7,800 (2) 198,000 (3) 6,000

(1) 240,000

(3) (5) (6)

12,000 45,000 43,200

_

72,000 ________

462,000 1,044,000 2,400 11,250

P2,752,050

P 255,150 552,000 193,800 360,000 600,000

Retained earnings, from above Non-controlling interest…………

Total

688,170

217,200

___ _____ P2,233,170

_________ P1,074,000

(4) (6)

9,600 6,240

__________ P 933,000

(1) 83,040 (2) 17,610 (8) 780 (9) 17,340 P 933,000

688,170

____102,930 P2,752,050

5 and 6. Refer to Problem VI for computations Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem X solution). Multiple Choice Problems 1. c 2. b 3. c – (P20,000/20 years = P1,000), the eliminating entry to recognize the gain – depreciation would be as follows: Accumulated depreciation… … ………………………………………… 1,000 Depreciation expenses… … … ………………………………….. 1,000 4. a – no effect, since intercompany sales of equipment will be reverted back to its original cost/book value. 5. a 6. No answer available - It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. Since, the cost model is presumed to be the method used, the unrealized gain of P15,000 (P60,000 – P45,000) will not be recorded in the books of parent company, which give rise to no equity-adjustments at yearend. The available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (d) – the unrealized gain of P15,000 (P60,000 – P45,000). 7. No answer available – the truck account will be debited for P3,000 in the eliminating entry: Truck 3,000 Gain 15,000 Accumulated depreciation 18,000 Seller Cash Accumulated Truck Gain

Buyer 50,000 18,000

Truck Cash

50,000 50,000

53,000 15,000

8. b Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations* …….…..

P 98,000 ___0 P 98,000

S Company’s net income from own operations…………………………………. Unrealized gain on sales of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation (P15,000 / 5 years) S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P 55,000 (15,000) 3,000 P 45,000

45,000 P143,000 0 P143,000 18,000 P125,000

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Unrealized gain on sales of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation (P15,000 / 3 years) S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 * t hat has been realized in t ransact ions wit h t hird part ies. * * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized gain on sales of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) - partial goodwill Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . .

P 98,000 ___0 P 98,000 P 55,000 (15,000) 5,000 P 45,000

45,000 P143,000

P 18,000 ____0

18,000 P125,000 _ 18,000 P143,000

P 55,000 ( 15,000) 5,000 P 45,000 0 P 45,000 40% P 18,000 0 P 18,000

10. a 11. a

12.

Combined equipment amounts Less: gain on sale Consolidated equipment balance

P1,050,000 25,000 P1,025,000

Combined Accumulated Depreciation Less: Depreciation on gain Consolidated Accumulated Depreciation

P 250,000 5,000 P 245,000

Incomplete data - It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. Since, the cost model is presumed to be the method used and there is no avai lable data for “dividends paid/declared” by Cliff therefore, the requirement cannot be properly addressed.

The requirement and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (c) computed as follows: Cliff reported income Less: Intercompany gain on truck Plus: Piecemeal recognition of gain = P45,000/10 years Cliff’s adjusted income Majority percentage Income from Cliff

P225,000 45,000

Combined building amounts Less: Intercompany gain Consolidated buildings

P650,000 __30,000 P620,000

Combined Accumulated Depreciation Less: Piecemeal recognition of gain Consolidated accumulated depreciation

P195,000 ___3,000 P192,000

___4,500 P184,500 90% P166,050

13. a

14. d – P30,000 + P40,000 = P70,000 S Selling price Less: Book v alue Gain

15.

P 30,000

P

P

40,000

Consolidated

P 70,000

Incomplete data - It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. Since, the cost model is presumed to be the method used and there is no avail able data for “dividends paid/declared” by Cliff therefore, the requirement cannot be properly addressed. The requirement and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (c) computed as follows: Pied Imperial-Pigeon’s share of Roger’s income = (P320,000 x 90%) = Less: Profit on intercompany sale (P130,000 - P80,000) x 90% = Add: Piecemeal recognition of deferred profit ($50,000/4 years)90% = Income from Offshore

P288,000 45,000 11,250 P254,250

16. d – P110,000 – P30,000 = P80,000 Selling price Less: Book v alue Gain

17.

S (Nectar) P 50,000 _30,000 P 20,000

P (Lorikeet) P 110,000 __50,000 P 60,000

Consolidated P 110,000 _30,000 P 80,000

No answer available – No effect. It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. The requirement and available choices in the problem are on t he assumption of the use of “equity method”. So, the answer then would be (c) computed as follows: P30,000 - (1/4 x P30,000) = P 22,500

18. b * * Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized gain on sales of equipment (upstream sales) (P700,000 – P600,000) Realized gain on sale of equipment (upstream sales) through depreciation (P100,000/10) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) - partial goodwill Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . .

P2,000,000 ( 100,000) 10,000 P1,910,000 _ 0 P1,910,000 __40% P 764,000 __ 0 P 764,000

19. d 20x4 ( 90,000)

Unrealized gain on sales of equipment (downstream sales) Realized gain on sale of equipment (downstream sales) through depreciation P90,000 / 10 years Net

___9,000 ( 81,000)

20x5 -09,000 9,000

20. No answer available – P780,000 Selling price Less: Book v alue: Cost P2,000,000 Accumulated ___200,000 Unrealized gain on sale of equipment Realized Gain – depreciation (P180,000/9 x 6 yrs) Net unrealized gain, 1/1/20x9 Gain on sale * P1,980,000/ 9 x 6 years = P1,320,000 * * P1,800,000/9 x 6 years = P1,200,000

S P1,980,000 1,800,00

P P1,440,000 P1,980,000 * 1,320,000

Consolidated P1,440,000 P 1,800,000 * * 1,200,000

660,000

P 180,000 120,000 P 60,000 P 60,000

P 780,000

P 840,000

21. a 22. b Eliminating entries: Restoration of BV and eliminate unrealized gain Gain Land

50,000 50,000

Subsidiary Cash Land Gain

23.

__600,000

Parent xxx xxx 50,000

Land Cash

xxx xxx

It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. The requirement and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (d) – (P60,000 – P48,000)/4 years = P3,000

24. d –(P100,000 + P50,000 = P150,000) Selling price Less: Book v alue

S

P

Consolidated

Gain

P 100,000

P

50,000

P 150,000

25. d – the entry under the cost model would be as follows ; Accumulated depreciation… … ………………………………………. 4,000 Depreciation expenses (current year) – P6,000/3 years… . 2,000 Retained earnings (prior year – 20x4)… … … ……………….. 2,000 26. d 20x4 ( 150,000)

Unrealized gain on sale of equipment (downstream sales) Realized gain on sale of equipment (downstream sales) through depreciation P150,000 / 10 years Net

20x5 -0-

___15,000 ( 135,000)

15,000 15,000

27. No answer available – P780,000 Selling price Less: Book v alue : Cost Accumulated Unrealized gain on sale of equipment Realized Gain – depreciation (P90,000/9 x 4 yrs) Net unrealized gain, 1/1/20x8 Gain on sale * P990,000/ 9 x 4 years = P440,000 * * P900,000/9 x 4 years = P400,000

28.

S P 990,000 P1,000,000 100,000

__900,00

P P720,000 P990,000 * 440,000

550,000

Consolidated P 720,000 P 900,000 * * 400,000

__500,000

P 90,000 40,000 P 50,000 P 50,000

__________ P 170,000

___________ P 220,000

It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. The requirement “equity from subsidiary income” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (c) computed as follows: 20x4 720,000 ( 144,000)

Share in subsidiary net income (900,000 x 80%) Unrealized gain on sale of equipment (upstream sales): 180,000 x 80% Realized gain on sale of equipment (upstream sales) through depreciation P180,000 / 5 years = P36,000 x 80% Net

___28,800 604,800

29 d – (P30,000 + P15,000) 30. d – the entry under the cost model would be as follows ; Accumulated depreciation… … ………………………………………. 10,000 Depreciation expenses (current year) – P15,000/3 years.. 5,000 Retained earnings (prior year – 20x5)… … … ……………….. 5,000 31. a 32. b 33. a Unrealized gain on sale of equipment (upstream sales) : 50,000 – 30,000 Realized gain on sale of equipment (upstream sales) through depreciation P20,000 / 5 years Net

20x4 ( 20,000) ___4,000 ( 16,000)

20x5 -0__4,000 __4,000

34. a Original cost of

P1,100,000

Accumulated depreciation, 1/1/20x4 Add: Additional depreciation (P1,100,000 – P100,000) / 20 years Accumulated depreciation, 12/31/20x4

P 250,000 ____50,000 P 300,000

35. c Selling price – unrelated party Less: Original Book v alue, 12/31/20x5 Book v alue, 1/1/20x4 Less: Depreciation for 20x4 and 20x5: P20,000/4 years x 2 years Accumulated depreciation, 12/31/20x4

P 14,000 P20,000 10,000

10,000 P 4,000

36. b – at its original cost or book value. 37. b 20x4: Any intercompany gain should be eliminated in the CFS. 20x5 Selling price – unrelated party Less: Original Book v alue, 9/26/20x5 Accumulated depreciation, 9/26/20x5

P 100,000 __60,000 P 40,000

38. c – P50,000/5 years = P10,000 per year starting January 1, 20x6. 39.

It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. The requirement “equity from subsidiary income” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (c) computed as follows: Share in subsidiary net income (600,000 x 80%) Unrealized gain on sale of equipment (upstream sales): 120,000 x 80% Realized gain on sale of equipment (upstream sales) through depreciation P120,000 / 5 years = P24,000 x 80% Net

40.

b

20x4 480,000 ( 96,000) ___19,200 403,200

P40,000 Depreciation expense recorded by Pirn Depreciation expense recorded by Scroll Total depreciation reported Adjustment for excess depreciation charged by Scroll as a result of increase in carrying value of equipment due to gain on intercompany sale (P12,000 / 4 years) Depreciation for consolidated statements

10,000 P50,000

(3,000) P47,000

41.

d

When only retained earnings is debited, and not the non-controlling interest, a gain has been recorded in a prior period on the parent's books.

42.

a

The costs incurred by BB to develop the equipment are research and development

costs and must be expensed as they are incurred. Transfer to another legal entity does not cause a change in accounting treatment within the economic entity. 43.

b

The P39,000 paid to GG Company will be charged to depreciation expense by TLK Corporation over the remaining 3 years of ownership. As a result, TLK Corporation will debit depreciation expense for P13,000 each year. GG Company had charged P16,000 to accumulated depreciation in 2 years, for an annual rate of P8,000. Depreciation expense therefore must be reduced by P5,000 (P13,000 - P8,000) in preparing the consolidated statements.

44.

a

TLK Corporation will record the purchase at P39,000, the amount it paid. GG Company had the equipment recorded at P40,000; thus, a debit of P1,000 will raise the equipment balance back to its original cost from the viewpoint of the consolidated entity.

45.

b

Reported net income of GG Company Reported gain on sale of equipment Intercompany profit realized in 20x6 Realized net income of GG Company Proportion of stock held by non-controlling interest Income assigned to non-controlling interests

46.

47. 48. 49. 50.

c

P 45,000 P15,000 (5,000)

(10,000) P 35,000 x .40 P 14,000

Operating income reported by TLK Corporation Net income reported by GG Company

P 85,000 45,000 P130,000

Less: Unrealized gain on sale of equipment (P15,000 - P5,000) Consolidated net income

(10,000) P120,000

d a b a – the amount of land that will be presented in the presented in the CFS is the original cost of P416,000 + P256,000 = P672,000. 51. e Depreciation expense: Parent P 84,000 Subsidiary 60,000 Total P144,000 Less: Over-depreciaton due to realized gain: [P115,000 – (P125,000 – P45,000)] = P35,000/8 years __ 4,375 Consolidated net income P139,625 52. c Unrealized gain on sale of equipment Realized gain on sale of equipment (upstream sales) through depreciation Net Selling price Less: Book v alue, 1/1/20x6 Cost, 1/1/20x2

20x6 ( 56,000) ___7,000 ( 49,000) P 392,000

P420,000

Less: Accumulated depreciation: P420,000/10 years x 2 years Unrealized gain on sale of equipment Realized gain – depreciation: P56,000/8 years

84,000

53. b Eliminating entries: 12/31/20x5: date of acquisition Restoration of BV and eliminate unrealized gain Equipment Gain Accumulated depreciation

10,000 150,000 160,000

Parent Books – Mortar Cash Accumulat ed depreciat ion Equipment Gain

336,000 P 56,000 P 7,000

Subsidiary Books – Granite

390,000 160,000

Equipment Cash

390,000

390,000

400,000 150,000

Mortar Selling price Less: Book v alue, 12/31/20x5 Cost, 1/1/20x2 Less: Accumulated depreciation : P400,000/10 years x 4 years Unrealized gain on sale of equipment Realized gain – depreciation: P150,000/6 years

P390,000 P400,000 160,000

54. a – refer to No. 53 for computation 55. b - refer to No. 53 for computation 56. d Eliminating entries: 12/31/20x6: subsequent to date of acquisition Realized Gain – depreciation Accumulated depreciation Depreciation expense P150,000 / 6 years or P65,000 – P40,000 “Should be in CFS” Parent Books – Mortar

Depreciation expense (P400,000 / 10 years) Acc. Depreciation

40,000 40,000

240,000 P 150,000 P 25,000

25,000 25,000

“Recorded as” Subsidiary Books - Granite

Depreciation expense (P390,000 / 6 years) Acc. depreciation

57. c Eliminating entries: 12/31/20x6: subsequent to date of acquisition Equipment Retained earnings (150,000 – 25,000) Accumulated depreciation (P160,000 – P25,000)

65,000 65,000

10,000 100,000 135,000

58. a Eliminating entries: 1/1/20x5: date of acquisition Restoration of BV and eliminate unrealized gain Equipment Gain Accumulated depreciation

50,000 70,000 120,000

Parent Books – Mortar Cash Accumulat ed depreciat ion Equipment Gain

350,000 120,000

Subsidiary Books - Granite 400,000 70,000

Equipment Cash

350,000 350,000

Mortar Selling price Less: Book v alue, 12/31/20x5 Cost, 1/1/20x2 Less: Accumulated depreciation : P400,000/10 years x 3 years Unrealized gain on sale of equipment Realized gain – depreciation: P70,000/7 years

P350,000 P400,000 120,000

59. a - refer to No. 58 for computation 60. b Eliminating entries: 12/31/20x5: subsequent to date of acquisition Realized Gain – depreciation Accumulated depreciation Depreciation expense P700,000 / 7 years or P50,000 – P40,000 “Should be in CFS” Parent Books – Mortar

Depreciation expense (P400,000 / 10 years) Acc. Depreciation

40,000 40,000

10,000 10,000

“Recorded as” Subsidiary Books - Granite

Depreciation expense (P350,000 / 7 years) Acc. depreciation

Eliminating entries: 12/31/20x6: subsequent to date of acquisition Equipment Retained earnings (70,000 – 10,000) Accumulated depreciation (P120,000 – P10,000) 61. b - refer to No. 60 for computation 62. c - refer to No. 60 for computation

280,000 P 70,000 P 10,000

50,000 50,000

50,000 60,000 110,000

63. a Consolidated Net Income for 20x9 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Unrealized loss on sale of equipment (upstream sales) Realized loss on sale of equipment (upstream sales) through depreciation – none, since the date of sale is end of the year S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x9 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x9………….. * t hat has been realized in t ransact ions wit h t hird part ies. Selling price Less: Book v alue, 12/31/20x9 Cost, 1/1/20x4 Less: Accumulated depreciation : P500,000/10 years x 6 years Unrealized loss on sale of equipment Realized loss – depreciation: P20,000/4 years

P 140,000 ___0 P 140,000 P 30,000 20,000 ( 0) P 50,000

50,000 P190,000 0 P190,000 15,000 P175,000

P180,000 P500,000 300,000

200,000 P( 20,000) P( 5,000)

Or, alternatively

Consolidated Net Income for 20x9 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Unrealized loss on sale of equipment (upstream sales) Realized loss on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x9 * t hat has been realized in t ransact ions wit h t hird part ies.

P 30,000 20,000 ( 0) P 50,000 P 15,000 ____0

P 140,000 ___0 P 140,000

50,000 P190,000 15,000 P175,000 _ 15,000 P190,000

* * Non-controlling Interest in Net Income (NCINI) for 20x9 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized loss on sale of equipment (upstream sales) Realized loss on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P 30,000 20,000 ( 0) P 50,000 0 P 50,000 30% P 15,000 0 P 15,000

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) - partial goodwill Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . .

64. b Consolidated Net Income for 20y0 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Unrealized loss on sale of equipment (upstream sales) Realized loss on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20y0 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20y0………….. * t hat has been realized in t ransact ions wit h t hird part ies.

P 162,000 ___0 P 162,000 P 45,000 ( 5,000) P 40,000

40,000 P202,000 0 P202,000 7,500 P194,500

Or, alternatively

Consolidated Net Income for 20y0 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Unrealized loss on sale of equipment (upstream sales) Realized loss on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20y0 * t hat has been realized in t ransact ions wit h t hird part ies. * * Non-controlling Interest in Net Income (NCINI) for 20y0 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized loss on sale of equipment (upstream sales) Realized loss on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) - partial goodwill

P 162,000 ___0 P 162,000 P 45,000 ( 5,000) P 40,000 P 7,500 ____0

40,000 P202,000 7,500 P194,500 _ _ 7,500 P202,000

P 30,000 ( 5,000) P 25,000 0 P 25,000 30% P 7,500

Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . .

P

0 7,500

65. d – the original cost of land 66. b – no intercompany gain or loss be presented in the CFS. 67. a Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations* …….….. S3 Company’s net income from own operations…………………………………. S2 Company’s net income from own operations…………………………………. S1 Company’s net income from own operations…………………………………. Unrealized loss on sale of equipment (upstream sales) – S3 Unrealized gain on sale of equipment (upstream sales) – S2 Unrealized gain on sale of equipment (upstream sales) - S1 S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * (P23,000 + P5,400 + P7,200) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. * t hat has been realized in t ransact ions wit h t hird part ies.

Sales price Less: Cost Unrealized (loss) gain

S3 145,000 160,000 ( 15,000)

P 200,000 ___0 P 200,000 P100,000 70,000 95,000 15,000 ( 52,000) ( 23,000) P205,000

205,000 P405,000 0 P405,000 35,600 P369,400

S2 197,000 145,000 52,000

S1 220,000 197,000 23,000

Or, alternatively

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation P Company’s realized net income from separate operations* …….….. S3 Company’s net income from own operations…………………………………. S2 Company’s net income from own operations…………………………………. S1 Company’s net income from own operations…………………………………. Unrealized loss on sale of equipment (upstream sales) – S3 Unrealized gain on sale of equipment (upstream sales) – S2 Unrealized gain on sale of equipment (upstream sales) - S1 S Company’s realized net income from separate operations* Total Less: Non-controlling Interest in Net Income* * (P23,000 + P5,400 + P7,200) Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20y0 * t hat has been realized in t ransact ions wit h t hird part ies. * * Non-controlling Interest in Net Income (NCINI) S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized (gain) loss on sale of land (upstream sales) S Company’s realized net income from separate operations Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) - partial goodwill Less: NCI on goodwill impairment loss on full-goodwill

P 200,000 ___0 P 200,000 P100,000 70,000 95,000 15,000 ( 52,000) ( 23,000) P205,000 P 35,600 ____0

_ 35,600 P369,400 _ _35,600 P405,000

S3 P 100,000 15,000 P 115,000 0 P 115000 20% P 23,000 0

205,000 P405,000

S2 P

70,000 ( 52,000) P 18,000 0 P 18,000 30% P 5,400 0

S1 P 95,000 ( 23,000) P 72,000 0 P 72,000 10% P 7,200 0

Non-controlling Interest in Net Income (NCINI) – full goodwill

P 23,000

68. d Eliminating entries: 1/1/20x5: date of acquisition Restoration of BV and eliminate unrealized gain Building Gain Accumulated depreciation Parent Books – Sky Cash Accumulat ed depreciat ion Building Gain

P

5,400

P

7,200

3,000 8,250 11,250 Subsidiary Books - Earth

33,000 11,250

Building Cash

33,000 33,000

36,000 8,250

Sky, 7/1/20x4 Selling price Less: Book v alue, 7/11/20x4 Cost, 1/1/20x2 Less: Accumulated depreciation : P36,000/8years x 2.5 years Unrealized gain on sale of equipment Realized gain – depreciation: P8,250/5.5 years

P33,000 P36,000 11,250

69. a - refer to No. 60 for computation 70. b Eliminating entries: 12/31/20x4: subsequent to date of acquisition Realized Gain – depreciation (July 1, 20x4 – December 31, 20x4) Accumulated depreciation Depreciation expense P8,250 / 5.5 x ½ years or P3,000 – P2,250 “Should be in CFS” Parent Books – Sky

Depreciation expense (P24,750 / 5.5 x ½ years) Acc. Depreciation

71. c Eliminating entries:

24,750 P 8,250 P 1,500

750 750

“Recorded as” Subsidiary Books - Earth

2,250 2,250

Depreciation expense (P33,000 / 5.5 years x ½ yrs) Acc. depreciation

3,000 3,000

12/31/20x5: subsequent to date of acquisition Realized Gain – depreciation Accumulated depreciation Depreciation expense P8,250 / 5.5 x years or P6,000 – P4,500 “Should be in CFS” Parent Books – Sky

Depreciation expense (P24,750 / 5.5 years) Acc. Depreciation

1,500 1,500

“Recorded as” Subsidiary Books - Earth

4,500 4,500

Depreciation expense (P33,000 / 5.5 years) Acc. depreciation

72. d Eliminating entries: 1/1/20x5: subsequent to date of acquisition Building Retained earnings (8,250 – 750) Accumulated depreciation (P11,250 – P750)

6,000 6,000

3,000 7,500 10,500

73. c – (P22,500 x 4/15 = P6,000) 74. a – [P50,000 – (P50,000 x 4/10) = P30,000] 75. a Simon, 4/1/20x4 Selling price Less: Book v alue, 4/1/20x4 Cost, 1/1/20x4 Less: Accumulated depreciation : P50,000/10 years x 3/12 Unrealized gain on sale of equipment Realized gain – depreciation: P19,500/9.75 years

P68,250 P50,000 __1,250

48,750 P19,500 P 2,000

76. c – P2,000 x 9/12 (April 1, 20x4 – December 31, 20x4) = P1,500 77. c – P19,500 / 9.75 years = P2,000 78. c – P19,500 / 9.75 years = P2,000

79. It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method.

The requirement “share of income from Wilson” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (a) computed as follows: Share in subsidiary net income (100,000 x 90%) Unrealized gain on sale of equipment (downstream sales) Realized gain on sale of equipment (downstream sales) through depreciation P2,000 x 9/12 (April 1, 20x4 – December 31, 20x4) = P1,500 Net

20x4 90,000 ( 19,500) _ 1,500 72,000

80. It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. The requirement “share of income from Wilson” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (b) computed as follows: 20x5

Share in subsidiary net income (120,000 x 90%) Realized gain on sale of equipment (downstream sales) through depreciation Net

108,000 _ 2,000 110,000

81. It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. The requirement “share of income from Wilson” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (d) computed as follows: 20x6 117,000 _ 2,000 119,000

Share in subsidiary net income (130,000 x 90%) Realized gain on sale of equipment (downstream sales) through depreciation Net

82. c Smeder, 1/1/20x4 Selling price Less: Book v alue, 1/1/20x4 Cost, 1/1/20x4 Less: Accumulated depreciation Unrealized gain on sale of equipment Realized gain – depreciation: P12,000/6 years

83.

P84,000 P120,000 __48,000

72,000 P12,000 P 2,000

It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. The requirement “share of income from Wilson” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (b) computed as follows: Share in subsidiary net income (28,000 x 80%) Unrealized gain on sale of equipment (upstream sales); 12,000 x 80% Realized gain on sale of equipment (upstream sales) through depreciation P2,000 x 80% Net

84.

20x4 22,400 ( 9,600) _ 1,600 14,400

It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. The requirement “share of income from Wilson” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (c) computed as follows: Share in subsidiary net income (32,000 x 80%) Realized gain on sale of equipment (upstream sales) through depreciation P2,000 x 80% Net

20x5 25,600 _ 1,600 27,200

85. d Eliminating entries: 1/1/20x4: date of acquisition Restoration of BV and eliminate unrealized gain Equipment Gain Accumulated depreciation

36,000 12,000 48,000

Parent – Smeder Cash Accumulat ed depreciat ion Equipment Gain

Subsidiary - Collins 84,000 48,000

120,000 12,000

Equipment Cash

84,000 84,000

Smeder, 1/1/20x4 Selling price Less: Book v alue, 1/1/20x4 Cost, 1/1/20x4 Less: Accumulated depreciation Unrealized gain on sale of equipment Realized gain – depreciation: P12,000/6 years

P84,000 P120,000 __48,000

Eliminating entries: 12/31/20x4: subsequent to date of acquisition Realized Gain – depreciation Accumulated depreciation Depreciation expense P12,000 / 6 years or P14,000 – P12,000 “Should be in CFS” Parent – Smeder

Depreciation expense (P72,000 /6 years) Acc. Depreciation

72,000 P12,000 P 2,000

2,000 2,000

“Recorded as” Subsidiary - Collins

12,000 12,000

Depreciation expense (P84,000 / 6 years) Acc. depreciation

14,000 14,000

Combining the eliminating entries for 1/1/20x4 and 12/31/200x4, the net effect of accumulated depreciation would be a net credit of P46,000 (P48,000 – P2,000). 86. c Unrealized gain on sale of equipment Realized gain on sale of equipment through depreciation Net

20x4 ( 12,000) ___2,000 ( 10,000)

87. d Eliminating entries: 5/1/20x4: date of acquisition Restoration of BV and eliminate unrealized gain Cash Loss

5,000 5,000

Parent – Stark Cash Loss Land

Subsidiary - Parker 80,000 5,000

Land Cash

85,000 85,000

85,000

Selling price Less: Book v alue, 5/1/20x4 Unrealized gain on sale of equipment

Stark P 80,000 _85,000 P ( 5,000)

Parker P 92,000 __80,000 P 12,000

88. b – refer to No. 87 for eliminating entry 89. b Cash Retained earnings

Consolidated P 92,000 _85,000 P 7,000

5,000 5,000

90. It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method.

The requirement “income from Stark” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (e) computed as follows: 20x4 180,000 _ 4,500 184,500

Share in subsidiary net income (200,000 x 90%) Unrealized loss on sale of land (upstream sales): P5,000 x 90% Net

91. It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method.

The requirement “income from Stark” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (d) computed as follows: 20x4 180,000 _ 4,500 184,500

Share in subsidiary net income (200,000 x 90%) Unrealized loss on sale of land (upstream sales): P5,000 x 90% Net

92. b Selling price Less: Book v alue, 5/1/20x4 Unrealized gain on sale of equipment

Stark P 80,000 _85,000 P ( 5,000)

Parker P 92,000 __80,000 P 12,000

Consolidated P 92,000 _85,000 P 7,000

93. a – refer to No. 92 for computation 94. e – None, the loss was already recognized in the books of Stark in the year of sale - 20x4 but not in the subsequent years. 95. It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. The requirement “income from Stark” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (c) computed as follows: 20x6 198,000 _ ( 4,500) 193,500

Share in subsidiary net income (220,000 x 90%) Intercompany realized loss on sale of land (upstream sales): P5,000 x 90% Net

96. d - Investment in subsidiary, 12/31/20x5 (cost model) P700,000). Date of Acquisition (1/1/20x4) Partial Full Fair value of consideration given…………………………P 700,000 Less: Book value of SHE - Subsidiary): (P300,000 + P500,000) x 80%................. 640,000 Allocated Excess.……………………………………………….P 60,000 Less: Over/Undervaluation of Assets & Liabilities Increase in Bldg. (P75,000 x 80%)…………… 60,000 Goodwill ………….……………………………………………….P 0 P 0 Amortization of allocated excess: building - P75,000 / 25 years = P3,000 Upstream Sale of Equipment (date of sale – 4/1/20x5): Sales.......................................................................................................P 60,000 Less: Book value of equipment…………………………………………………………….. 30,000 Unrealized Gain (on sale of equipment)…………………………………………………..P 30,000 Realized gain on sale of equipment: 20x5: P30,000/5 years = P6,000 x 9/12 (4/1/20x5-12/31/20x5)………….P 4,500 20x6 ………………..……………………………………………………………………………..P 6,000 Downstream Sale of Machinery (date of sale – 9/30/20x5): Sales........................................................................................................P75,000 Less: Book value of machinery………………………………………………………………. 40,000 Unrealized Gain (on sale of machinery)……………………………………………………P35,000 Realized gain on sale of machinery: 20x5: P35,000/10 years = P3,500 x 3/12 (9/30/20x5-12/31/20x5)………..P 875 20x6………….. …………………………………………………………………………………..P 3,500 97. d – refer to No. 1 for cost model: Dividend paid or declared – S… … … … … … … … … … … … … … … … … … … P 50,000 x: Controlling Interest %… … … … … … … … … … … … … … … … … … … … … … . 80% Dividend income of Parent… … … … … … … … … … … … … … … … … … … … ..P 40,000 98. d Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation (P35,000 – P875) P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations………………………………….

P 300,000 34,125 P 265,875 P 150,000

Unrealized gain on sales of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations* …….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. * t hat has been realized in t ransact ions wit h t hird part ies.

(30,000) 4,500 P 124,500

124,500 P390,375 3,000 P387,375 24,300 P363,075

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized gain on sale of equipment (downstream sales) through depreciation (P35,000 – P875) P Company’s realized net income from separate operations* …….….. S Company’s net income from own operations…………………………………. Unrealized gain on sales of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations* …….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 * t hat has been realized in t ransact ions wit h t hird part ies.

* * Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized gain on sales of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) - partial goodwill Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . .

P 300,000 34,125 P 265,875 P 150,000 (30,000) 4,500 P 124,500 P 24,300 3,000

124,500 P390,375 27,300 P363,075 _ 24,300 P387,375

P 150,000 ( 30,000) 4,500 P 124,500 3,000 P 121,500 20% P 24,300 0 P 24,300

99. c – refer to No. 98 for computations 100. d – refer to No. 98 for computations 101. a Non-controlling Interests (in net assets): 20x5 20x6 Common stock - S, 12/31..….………………………… P 300,000 P 300,000 Retained earnings - S, 12/31: RE- S, 1/1.…………………………………………….P600,000 P 700,000 +: NI-S………………………………………………… 150,000 200,000 -: Div – S…………………………………………….. 50,000 700,000 70,000 830,000 Book value of Stockholders’ equity, 12/31…….... P1,000,000 P1,130,000 Adjustments to reflect fair value of net assets Increase in equipment, 1/1/2010..……..… 75,000 75,000 Accumulated amortization (P3,000 per year)*.…… ( 6,000) ( 9,000) Fair Value of Net Assets/SHE, 12/31..……………… P1,069,000 P1,196,000

Unrealized gain on sale of equipment (upstream) ( 30,000) **( 25,500) Realized gain thru depreciation (upstream)……… 4,500 6,000 Realized SHE – S,12/31………………………………….. P1,043,500 P1,176,500 x: NCI %........................................................... ___ 20% 20% Non-controlling Interest (in net assets) – partial... P 208,700 P 235,300 +: NCI on full goodwill……..…………………………….. 0 0 Non-controlling Interest (in net assets) – full…….. P 208,700 P 235,300 * 20x5: P3,000 x 2 years; 2012: P3,000 x 3 years; ** P30,000 – P4,500 realized gain in 20x5 = P25,500. Note: Preferred solution - since what is given is the RE – P, 1/1/20x5(beginning balance of the current year) Retained earnings – Parent, 1/1/20x5 (cost)…………………………… P 800,000 -: Downstream sale – 20x4 or prior to 20x5, Net unrealized gain 0 Adjusted Retained earnings – Parent, 1/1/20x5 (cost)……………… P 800,000 Retroactive Adjustments to convert Cost to “Equity”: Retained earnings – Subsidiary, 1/1/20x4……………………….P 500,000 Less: Retained earnings – Subsidiary, 1/1/20x5……………… 600,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)…………P 100,000 Accum. amortization (1/1/x4– 1/1/x5): P2,000 x 1 year……( 3,000) Upstream Sale – 2010 or prior to 20x5, Net unrealized gain……………………………..………………..( 0) P 97,000 X: Controlling Interests %..…………………………………………… 80% 77,600 RE – P, 1/1/20x5 (equity method) = CRE, 1/1/20x5………………… P 877,600 +: CI – CNI or Profit Attributable to Equity Holders of Parent……. 363,075 -: Dividends – P………………………………………………………………….. 100,000 RE – P, 12/31/20x5 (equity method) = CRE, 12/31/20x5………….. P 1,140,675 Or, if RE – P is not given on January 1, 20x5, then RE – P on December 31, 20x5 should be use. Retained earnings – Parent, 12/31/20x5 (cost model): (P800,000 + P340,000, P’s reported NI – P100,000)……………… P1,040,000 -: Downstream sale – 20x5 or prior to 12/31/20x5, Net unrealized gain - (P35,000 – P875)……………………………. 34,125 Adjusted Retained earnings – Parent, 1/1/20x5 (cost model)..…… P1,005,875 Retroactive Adjustments to convert Cost to “Equity”: Retained earnings – Subsidiary, 1/1/20x4……………………….P 500,000 Less: Retained earnings – Subsidiary, 12/31/20x5 (P600,000 + P150,000 – P50,000)..…………..…….. 700,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)……….P 200,000 Accumulated amortization (1/1/20x4 – 12/31/20x5): P 3,000 x 2 years……………………………………………..( 6,000) Upstream Sale – 20x5 or prior to 12/31/20x5, Net unrealized gain – (P30,000 – P4,500)…………….( 25,500) P 168,500 x: Controlling Interests %..………………………………………… 80% 134,800 RE – P, 12/31/20x5 (equity method) = CRE, 12/31/20x5…………. P1,140,675 102. 103. 104. 105.

c – refer to No, 101 computations. b – refer to No. 101 for computations d – refer to No. 101 for computations b Consolidated Stockholders’ Equity, 12/31/20x5:

Controlling Interest / Parent’s Interest / Parent’s Portion / Equity Holders of Parent – SHE, 12/31/20x5: Common stock – P (P only)……………………………………………..P1,000,000 Retained Earnings – P (equity method), 12/31/20x5…………. 1,140,675 Controlling Interest / Parent’s Stockholders’ Equity…………… P2,140,675 Non-controlling interest, 12/31/20x5 (partial/full)…………………… 208,700 Consolidated Stockholders’ Equity, 12/31/20x5……………………….P2,349,375

Theories 1. 2. 3. 4. 5.

d c d d b

6. 7. 8. 9. 10,

N/A c a a c

11. 12. 13. 14. 15,

b c d b c

16. 17. 18. 19. 20.

c b a a c

21. 22. 23. 24. 25.

a b d c c

26. 27. 28. 29. 30.

b b c b c

31 32. 33. 34. 35.

c b c d

Chapter 19 Problem I 1.

Indirect Exchange Rates Philippine Viewpoint: 1 $ = P40; 1 Peso = $0.025 ($1/P40) 1 Singapore dollar = P32.00; 1 Peso = 0.03125 Singapore (1 Singapore Dollar/P32)

2.

FCU

=

Peso Direct Exchange Rate

=

P8,000 P40.00

=

$200; or

= P8,000 x $1/P40 = $200 3.

4,000 Singapore dollars x P32 = P128,000

Problem II a. Exchange rates: Arrival Date 1 Singapore dollar = P33.00 Direct Exchange Rate

(P33,000 / 1,000 Singapore dollars) P1.00 = .03 Singapore dollars

Indirect Exchange Rate

2.

(1,000 Singapore dollars / P33,000)

Departure Date 1 Singapore Dollar = P32.50 (P3,250 / 100 Singapore dollars) P1.00 = .03 Singapore dollars (100 Singapore dollars / P3,250))

The direct exchange rate has decreased. This means that the peso has strengthened during Mr. Alt's visit. For example, upon arrival, Mr. Alt had to pay P33 per each dollar.

Upon departure, however, each dollar is worth just P32.50. This means that the relative value of the peso has increased or, alternatively, the value of the dollar has decreased. 3.

The Philippine peso equivalent values for the 100 Singapore dollars are: Arrival date 100 dollars x P33.00 = Departure date 100 dollars x P32.50 = Foreign Currency Transaction Loss

P3,300 P

3,250 50

Mr. Alt held dollars for a time in which the dollars was weakening against the peso. Thus, Mr. Alt experienced a loss by holding the weaker currency.

Problem III 1. If the direct exchange rate increases, the peso weakens relative to the foreign currency unit. If the indirect exchange rate increases, the peso strengthens relative to the foreign currency unit. 2.

Direct Exchange Rate

Transaction Importing Importing

Settlement Currency

Increases

Peso

Decreases

Indirect Exchange Rate Increases

Decreases

NA L

NA G

NA G

NA L

NA G

NA L

NA L

NA G

Purchases…………………….. Accounts payable ($24,000 x P40.55)………………………………

973,200

LCU Exporting Exporting

Peso LCU

Problem IV 1. December 1, 20x4 (Transaction date): 973,200

December 31, 20x4 (Balance sheet date): Foreign currency transaction loss….………………….. Accounts payable [$24,000 x (P40.80 – P40.55)]……… Accounts payable v alued at 12/31 Balance Sheet ($24,000 x P40.80)……… Accounts payable v alued at 12/1 Date of Transaction ($24,000 x P40.55)……… Adjustment to accounts payable needed………..

6,000 6,000

P979,200 973,200 P 6,000

March 1, 20x5 (Settlement date): Accounts payable………………… Foreign currency transaction gain [$24,000 x (P40.80 – P40.65)] Cash ($24,000 x P40.65)…………….

979,200 3,600 975,600

2. a. a.1. None – transaction date (December 1, 20x4) a.2. P6,000 loss a.3. P3,600 gain (March 1, 20x5) b. b.1. P979,200 – spot rate on the balance sheet date or current rate on the balance sheet b.2. P973,200 – spot rate on the transaction date or historical rate on the balance sheet date. Problem V 1. December 1, 20x4 (Transaction date): Accounts receiv able ($60,000 x P40.00)……………………………… Sales

December 31, 20x4 (Balance sheet date):

2,400,000 2,400,000

Accounts receiv able……….. Foreign currency transaction gain [$60,000 x (P40.70 – P40.00)] Accounts receiv able v alued at 12/31 Balance Sheet ($60,000 x P40.70)……… Accounts receiv able v alued at 12/1 Date of Transaction ($60,000 x P40.00)……… Adjustment to accounts receiv able needed………..

42,000 42,000

P2,442,000 2,400,000 P 42,000

March 1, 20x5 (Settlement date): Cash ($60,000 x P40,60)……………….. Foreign currency transaction loss……… Accounts receiv able ($60,000 x P40.70)……….

2,436,000 6,000 2,442,000

2. a. a.1. None – transaction date a.2. P42,000 gain a.3. P6,000 loss (March 1, 20x5) b. b.1. P2,442,000 – spot rate on the balance sheet date or current rate on the balance sheet b.2. P973,200 – spot rate on the transaction date or historical rate on t he balance sheet date. Problem VI The entries to record these transactions and the effects of changes in exchange rates are as follows: November 1, 20x4 (Transaction date): Equity inv estment (FVTPL)/Financial Asset …………… Cash

3,840,000 3,840,000

To record t he purchase of shares in Pineapple Computers at a cost of $96,000 at t he exchange rate of P40.

December 10, 20x4 (Transaction date): Equipment ………………………… Cash

636,000 636,000

To record t he purchase of equipment costing 12,000 euros at the exchange rate of P53.

December 31, 20x4 (Balance sheet date): Equity inv estment (FVTPL)/Financial Asset …………… Unrealized gain in fair v alue of equity inv estment (financial asset) To record gain in fair v alue of Pineapple Computer’s share. 12/31/x4: Rev alued Inv estment and translated at the rate on the date of rev aluation (closing/current rate): (1,200 units x $100 x P40.50)……………. 11/1/x4: Inv estment, cost (1,200 units x $80 x P40.00) Unrealized gain on equity inv estment Less: Foreign currency transaction gain – equity inv estment 11/1/20x4: Date of transaction (1,200 units x $80 x P40).. Less: 12/31/20x4: B/S Date (1,200 units x $80 x P40.50)….

1,020,000 1,020,000

P4,860,000 3,840,000 P1,020,000 P3,840,000 3,888,000

48,000

Other unrealized gain in the fair v alue of equity inv estment... Foreign currency transaction loss….………………….. Accounts payable [$96,000 x (P53.20 – P53)]………

P 972,000 19,200 19,200

To record exchange loss on accounts payable in euros.

Accounts payable v alued at 12/31 Balance Sheet (1,200 x $80 x P53.20)……… Accounts payable v alued at 12/1 Date of Transaction (1,200 x $80 x P53.00)……… Adjustment to accounts payable needed………..

5,107,200 5,088,000 P 19,200

February 3, 20x5 (Settlement date): Accounts payable………………… Foreign currency transaction loss [$96,000 x (P53.80 – P53.20)] Cash ($96,000 x P53.80)…………….

5,107,200 57,600 5,164,800

To record exchange loss on accounts payable in euros and settlement of account s payable in euros at the spot rate of P53.80.

Note the following:  The investment in Pineapple Computers, Inc shares is a non-monetary item that is carried at fair value as it is classified as equi t y i nv est m ent t hro ugh pro fi t o r l o ss (o r a fi nanci al asset – FVTPL refer PFRS 9). The investment is revalued and translated at the rate on the date of revaluation, that is, December 31, 20x4.  The equipment is translated at the spot rate at the date of purchase and, being a nonmonetary item, is carried at cost. It is not adjusted for the change in the exchange rate at balance sheet date. The accounts payable in euros is a monetary item and is remeasured using the current / closing rate at balance sheet date. The exchange loss is expensed off to the income statement Problem VII 1. May 1

June 20

July 1

August 10

2.

May 1

Inventory (or Purchases) Accounts Payable Foreign purchase denominated in pesos

8,400

Accounts Payable Cash Settle payable.

8,400

8,400

8,400

Accounts Receivable Sales Foreign sale denominated in pesos

10,000

Cash Accounts Receivable Collect receivable.

10,000

Inventory (or Purchases)

8,400

10,000

10,000

Accounts Payable (FC1) Foreign purchase denominated in yen: P8,400 / P.0070 = FC1 1,200,000 June 20

Foreign Currency Transaction Loss Accounts Payable (FC1) Revalue foreign currency payable to peso equivalent value: P9,000 = FC1 1,200,000 x P.0075 June 20 spot rate - 8,400 = FC1 1,200,000 x P.0070 May 1 spot rate P 600 = FC1 1,200,000 x (P.0075 - P.0070) Accounts Payable (FC1) Foreign Currency Units (FC1) Settle payable denominated in FC1.

July 1

August 10

8,400

Accounts Receivable (FC2) Sales Foreign sale denominated in foreign currency 2 (FC 2) FC3: P10,000 / P.20 = FC2 50,000 Accounts Receivable (FC2) Foreign Currency Transaction Gain Revalue foreign currency receivable to U.S. dollar equivalent value: P 11,000 = FC2 50,000 x P.22 Aug. 10 spot rate - 10,000 = FC2 50,000 x P.20 July 1 spot rate P 1,000 = FC2 50,000 x (P.22 - P.20) Foreign Currency Units (FC2) Accounts Receivable (FC2 Receive FC 2 in settlement of receivable

600 600

9,000 9,000 10,000 10,000

1,000 1,000

11,000 11,000

Problem VIII 1. Denominated in FC RR Imports reports in Philippine pesos: 12/1/x4

12/31/x4

1/15/x5

Transaction Date

Balance Sheet Date

Settlement Date

P.70

P.66

P.68

Direct Exchange Rate 2.

December 1, 20x4 Inventory (or Purchases) Accounts Payable (FC) P10,500 = FC 15,000 x P.70 December 31, 20x4

10,500 10,500

Accounts Payable (FC) Foreign Currency Transaction Gain Revalue foreign currency payable to equivalent peso value: P 9,900 = FC 15,000 x P.66 Dec. 31 spot rate -10,500 = FC 15,000 x P.70 Dec. 1 spot rate P 600 = FC 15,000 x (P.66 - P.70)

600 600

January 15, 20x5 Foreign Currency Transaction Loss Accounts Payable (FC) Revalue payable to current peso equivalent P10,200 = FC 15,000 x P.68 Jan. 15, 20x5, value - 9,900 = FC 15,000 x P.66 Dec. 31, 20x4, value P 300 = FC 15,000 x (P.68 - P.66)

300 300

Accounts Payable (FC) Foreign Currency Units (FC) P10,200 = FC 15,000 x P.68 Accounts Payable (FC) (FC 15,000 x P.70) 600 (FC 15,000 x P.66)

AJE 12/31/x4

(FC 15,000 x P.68) 1/15/x5 Settlement

10,200

10,200 10,200

12/1/x4

10,500

Bal 12/31/x4 AJE 1/15/x5 Bal 1/15/ x5

9,900 300 10,200

Bal 1/16/x5

Problem IX 1. December 31, 20x6 Accounts Receivable (FC1) Foreign Currency Transaction Gain Adjust receivable denominated in FC1 to current peso equivalent and recognize exchange gain: P83,600 = FC475,000 x P.176 Dec. 31 spot rate - 73,600 = Preadjusted Dec. 31, 20x6, value P10,000

2.

-0-

10,000 10,000

Accounts Payable (FC2) Foreign Currency Transaction Gain Adjust payable denominated in foreign currency to current peso equivalent and recognize exchange gain: P175,300 = Preadjusted Dec. 31, 20x6, value - 170,100 = FC2 21,000,000 x P.0081, Dec. 31 spot rate P 5,200

5,200

Accounts Receivable (FC1) Foreign Currency Transaction Gain Adjust receivable denominated in FC1 to equivalent peso value on settlement date:

1,900

5,200

1,900

P85,500 = FC1 475,000 x P.180 20x7 collection date value - 83,600 = FC1 475,000 x P.176 Dec. 31, 20x6, spot rate P 1,900 = FC1 475,000 x (P.180 - P.176) Cash Foreign Currency Units (FC1) Accounts Receivable (FC1) Accounts Receivable (P) Collect all accounts receivable. 3.

164,000 85,500 85,500 164,000

Accounts Payable (FC2) Foreign Currency Transaction Gain Adjust payable to equivalent peso value on settlement date: P163,800 = FC2 21,000,000 x P.0078 20x7 payment date value - 170,100 = FC2 21,000,000 x P.0081 Dec. 31, 20x6, spot rate P 6,300 = FC2 21,000,000 x (P.0078 - P.0081) Accounts Payable (P) Accounts Payable (FC2) Foreign Currency Units (FC2) Cash Payment of all accounts payable.

4.

5.

5.

6,300 6,300

86,000 163,800 163,800 86,000

Transaction gain on FC: December 31, 20x6 December 31, 20x7 Overall

P10,000 1,900 P11,900

gain gain gain

Transaction gain on FC2: December 31, 20x6 December 31, 20x7 Overall

P 5,200 6,300 P11,500

gain gain gain

Overall foreign currency transactions gain: Gain on FC1 transaction Gain on FC2 transaction

P11,900 11,500 P23,400

CDL could have hedged its exposed position. The exposed positions are only those denominated in foreign currency units. The accounts receivable denominated in FC1 could be hedged by selling FC1 in the forward market, thereby locking in the value of the FC1. The accounts payable denominated in FC2 could be hedged by buying FC2 in the forward market, thereby locking in the value of the FC2.

Problem X

Accounts Receivable

Accounts

Payable

Foreign Currency Transaction Exchange Loss

Foreign Currency Transaction Exchange Gain

Case 1

NA

P16,000(a)

NA

P2,000(b)

Case 2

P38,000(c)

NA

NA

P2,000(d)

Case 3

NA

P27,000(e)

P3,000(f)

NA

Case 4

P6,250(g)

NA

P1,250(h)

NA

(a) (b) (c) (d) (e) (f) (g) (h)

LCU 40,000 x P.40 LCU 40,000 x (P.40 - P.45) LCU 20,000 x P1.90 LCU 20,000 x (P1.90 - P1.80) LCU 30,000 x P.90 LCU 30,000 x (P.90 - P.80) LCU 2,500,000 x P.0025 LCU 2,500,000 x (P.0025 - P.003)

Multiple Choice Problems 1. 2.

c

C$1 / P.90 (C$1.11 = P1.00)

d P.4895 P.4845

3.

4.

b

d

x x

FC30,000 FC30,000 Gain

d

P.4845 P.4945

x x

FC30,000 FC30,000 Loss

January 15 Foreign Currency Units (LCU) Exchange Loss Accounts Receivable (LCU) Collect foreign currency receivable and recognize foreign currency transaction loss for changes in exchange rates: P300,000 = (LCU 900,000 / LCU 3) Jan. 15 value - 315,000 = Dec. 31 Peso equivalent P 15,000 Foreign currency transaction loss P120,000 P140,000

= =

-105,000

=

P(35,000) 5.

20x4 P14,685 14,535 P 150

P280,000 -240,000 P 40,000

= =

20x5 P14,535 14,835 P (300)

300,000 15,000 315,000

July 1, 20x4, Peso equivalent value December 31, 20x4, Peso equivalent value (LCU 840,000 / P140,000) = LCU 6 / P1 July 1, 20x5, Peso equivalent value (LCU 840,000 / 8) = P105,000 Foreign currency transaction loss July 1, 20x5, Peso equivalent value December 31, 20x4, Peso equivalent value Foreign currency transaction loss

6. c P4,000

AJE

Accounts Payable (FCU) (200,000 x P.4875) 12/10/x4 4,000 (200,000 x P.4675) 12/31/x4

Accounts Payable (FCU) Foreign Exchange Gain

97,500 93,500

4,000 4,000

7. d P27,000 = P6,000 + P20,000 + P1,000 Accounts Payable (FCU) 1/20/x4 AJE

90,000 6,000

3/20/x4 Foreign Exchange Loss Accounts Payable (FCU)

96,000

6,000 6,000 Notes Payable (FCU) 7/01/x4 AJE 12/31/x4 20,000

Foreign Exchange Loss Notes Payable (FCU)

Interest expense Interest Payable (FCU)

500,000 20,000 520,000 20,000

Interest Payable (FCU) (FCU500,000 x .10 x 1/2 year) AJE 12/3/x4 25,000

25,000 1,000 26,000 25,000

Foreign Exchange Loss Interest Payable (FCU)

1,000 1,000

8. c P5,000 Accounts Receivable (FCU) 10/15/x4 AJE

100,000 5,000

11/16/x4

105,000

Settlement

Accounts Receivable (FCU) Foreign Exchange Gain

11/16/x4

105,000

5,000 5,000

Note: The receivable is recorded on October 15, 20x4, when the goods were shipped, not on September 1, 20x4, when the order was received. 9. b P1,000 Accounts Payable (FCU) x4 AJE

500

X5 AJE

1,000

Settlement

4,500

(10,000 x P.60)

4/08/x4

6,000

(10,000 x P.55)

12/31/x4

5,500

(10,000 x P.45)

3/01/x5

4,500

Bal. 1,000

-0-

X5 AJE Accounts Payable (FCU) Foreign Exchange Gain 10.

b

1,000

P9,000 = 300,000 FCUs x (P1.65 - P1.62). The foreign currency transaction gain is computed using spot rates on the transaction date (November 30, 20x4) and the balance sheet date (December 31, 20x4). The forward exchange rates are not

used because the transaction was not hedged. 11. b Cash collected (spot rate date of settlement): 900,000 LCU x P.3333 = P300,000 12. d 20x4: (P.5395 – P.5445) loss x 70,000 FCU = P350 loss 20x5: (P.5445 - .P5495) loss x 70,000 FCU = P350 loss 13. c – Date of transaction (7/7) Balance sheet date (8/31) Foreign exchange currency gain per FCU Multiplied by: No. of FCU

Foreign exchange currency gain

P

2.08 2.05 P .03 350,000 P 10,500

14. b Date of transaction (7/3) Balance sheet date (8/31) Foreign exchange currency gain per FCU Multiplied by: No. of FCU

Foreign exchange currency gain

P

1.58 1.55 P .03 375,000 P 11,250

15. b – The value of the asset acquired should be the spot rate on the date of transaction, i.e. P -80. Therefore, the final recorded value of the electric generator should be P40,000 (P.80 x 50,000 FCs) 16. a Date of transaction Date of settlement Foreign exchange currency gain per FCU Multiplied by: No. of FCU Foreign exchange currency gain

P

.75 .80 P .05 200,000 P 10,000

17. d Date of transaction (12/15) Balance sheet date (12/31) Foreign exchange currency gain per FCU Multiplied by: No. of FCU Foreign exchange currency gain

P

.60 .65 P .05 80,000 P 4,000

Date of transaction (11/30) Balance sheet date (12/31) Foreign exchange currency gain per FCU Multiplied by: No. of FCU Foreign exchange currency gain

P

Date of transaction (11/30) Balance sheet date (12/31) Foreign exchange currency gain per FCU Multiplied by: No. of FCU Foreign exchange currency gain

P

18. b 1 .65 1.62 P .03 300,000 P 9,000

19. b 1.49 1.45 P .04 500,000 P 20,000

20. a Date of arriv al (P1,000 / 480,000 FC) Date of departure (P100/50,000 FC) Foreign exchange currency loss per FCU Multiplied by: No. of FCU Foreign exchange currency loss

P .00208 .00200 P .00008 50,000 P 4

21. b Date of transaction (10/1) Balance sheet date (12/31) Foreign exchange currency gain per LCU Multiplied by: No. of LCU Foreign exchange currency gain

P

1.20 1.10 P .10 5,000 P 500

Date of transaction (11/2) Balance sheet date (12/31) Foreign exchange currency gain per LCU Multiplied by: No. of LCU Foreign exchange currency gain

P

Date of transaction (9/3) : P17,000 / P.85 = 20,000 FC Date of settlement (10/10) Foreign exchange currency loss per FC Multiplied by: No. of FC Foreign exchange currency loss

P

Date of transaction (3/1) : P31,000 / P.31 = 100,000 FC Date of settlement (5/10) Foreign exchange currency gain per FC Multiplied by: No. of FC Foreign exchange currency gain

P

Date of transaction (12/5) Balance sheet date (12/31) Foreign exchange currency gain per FC Multiplied by: No. of FC Foreign exchange currency gain

P

Balance sheet date (12/31) Date of settlement (1/10) Foreign exchange currency loss per FC Multiplied by: No. of FC Foreign exchange currency loss

P

22. d 1. 08 1.10 P .02 23,000 P 460

23. a . 85 .90 P .05 20,000 P 1,000

24. b . 31 .34 P .03 100,000 P 3,000

25. a .265 .262 P .003 100,000 P 300

26. d .262 .264 P .002 100,000 P 200

27. c Foreign exchange currency gain (No. 25) Foreign exchange currency loss (No. 26) Ov erall gain , net

P _ P

300 200 100

or, Date of transaction (12/5) Date of settlement (1/10) Foreign exchange currency gain per FC Multiplied by: No. of FC Foreign exchange currency gain

P

.265 .264 P .001 100,000 P 100

28. c 9/5: Original forward rate or 90-day forward rate 12/2: Date of expiration of the contract (assumed) since the term “spot rate” was used Foreign exchange currency gain per FC Multiplied by: No. of FC Foreign exchange currency gain

P

.1850

.1865 .0015 100,000 P 150 P

It should be noted t hat since, the forward cont ract was not designat ed as a hedge, offset t ing of gain or loss on t he hedged it em and hedging inst rument is not allowed. Therefore, t he foreign exchange gain due t o revaluat ion of receivable from foreign currency receivable arising from forward contract will be reported separately, inst ead of being net t ed against t he exchanges loss of P300 [(P.1865 – P.1835) x 100,000 FCs.]

29. c – the question is related to purchase transaction or exposed liability, therefore the payment of the liability is equivalent to the spot rate on the date of settlement. 30. b 20x4 Date of transaction (12/1/20x4) Balance sheet date (12/31/20x4) Foreign exchange currency loss per FC Multiplied by: No. of FC Foreign exchange currency loss

P

.0095 .0096 P .0001 1,000,000 P 100

20x5 Balance sheet date (12/31/20x4) Date of settlement (1/10/20x5) Foreign exchange currency gain per FC Multiplied by: No. of FC Foreign exchange currency gain

P

.0096 .0094 P .0002 1,000,000 P 200

31. c Balance sheet date (12/31/20x4) Date of settlement (7/1/20x5) Foreign exchange currency loss

P125,000 140,000 P 15,000

32. b – any gain or loss on foreign currency should be considered ordinary. 33. d 1/1: Original forward rate or 60-day forward rate 3/1: Date of expiration of the contract Foreign exchange currency gain per FC

P P

.940 .930 .010

Multiplied by: No. of FC Foreign exchange currency gain

100,000 P 1,000

It should be noted t hat since, the forward cont ract was not designat ed as a hedge, offset t ing of gain or loss on t he hedged it em and hedging inst rument is not allowed. Therefore, t he foreign exchange gain due t o revaluat ion of payable t o foreign exchange dealer arising from forward contract will be reported separately, inst ead of being net t ed against t he exchanges loss of P1,500 [(P.945 – P.93) x 100,000 FCs.]

34. c It was assumed that the forward contract was designated as a hedging instrument . Hedged Item: Exposed Asset (Receivable) 1/1: Date of transaction – spot rate 12/31: Balance sheet date Foreign exchange currency loss per FC Multiplied by: No. of FC Foreign exchange currency loss

P

.945 .930 P .015 100,000 P 1,500

P 1,500

Forward Contract/Hedging Instrument: 1/1: Original forward rate or 60-day forward rate 3/1: Date of expiration of the contract Foreign exchange currency gain per FC Multiplied by: No. of FC Foreign exchange currency gain Net loss

P

.940 .930 P .010 100,000 P 1,000 P

1,000 500

35. d It was stated in the requirement that the forward contract will not be used, therefore, only the loss on hedged item will be recognized. Hedged Item: Exposed Asset (Receivable) 1/1: Date of transaction – spot rate 12/31: Balance sheet date Foreign exchange currency loss per FC Multiplied by: No. of FC Foreign exchange currency loss

P

.945 .930 P .015 100,000 P 1,500

36. d Date of transaction (4/8) : P1 / .65 FC (direct quote) Date of settlement (5/8): P1/ .70 FC (direct quote) Foreign exchange currency loss per FC Multiplied by: No. of FC Foreign exchange currency loss

P

1.54 1.43 P .11 35,000 P 3,850

37. d – the amount of sales should be the spot rate on the date of transaction (or the balance sheet date - historical rate). I.e., P1.7241 x 10,000 FCs = P17,241. 38. e 1/1: Date of transaction – spot rate 12/31: Balance sheet date Foreign exchange currency gain per FC Multiplied by: No. of FC Foreign exchange currency gain

P 1.7241 1.8182 P .0941 10,000 P 941

39. b Balance sheet date (12/31/20x4) Date of settlement (1/30/20x5) Foreign exchange currency loss per FC Multiplied by: No. of FC Foreign exchange currency loss

P P P

1.8182 1.6666 .1516 10,000 1,516

40. a – since accounts payable is an exposed account meaning their value will fluctuate based on the spot exchange rates, the value of the accounts payable should be the value on May 8, i.e., the spot rate of P1.25 (P.15 x 2,000,000 FCs = P2,500,000). 41. c 5/8: Date of transaction – spot rate 5/31: Balance sheet date Foreign exchange currency loss per FC Multiplied by: No. of FC Foreign exchange currency loss

P

1.25 1.26 P 0.01 2,000,000 P 20,000

42. e – in a two-transaction approach, the recognition of foreign exchange gain or loss is separate from the settlement, therefore, the amount of accounts payable to be settled should be the spot rate on the settlement date, i.e., P1.20 (P1.20 x 2,000,000 FCs = P2,400,000) 43. a Balance sheet date (12/31/20x4) Date of settlement (3/2/20x5) Foreign exchange currency loss

P8,000 6,900 P 1,100

44. d 4/8/20x3: Date of transaction 12/31/20x3: Balance sheet date Foreign exchange currency loss

P 97,000 103,000 P 6,000

Balance sheet date (12/31/20x3) Date of settlement (4/2/20x4) Foreign exchange currency loss

P103,000 105,000 P 2,000

45. d

Theories 1. False 2. False 3. True 4. False 5. True

6. 7. 8. 9. 10,

True False True False True

11. 12. 13. 14. 15.

True D C C B

16. 17. 18. 19. 20.

d d c b a

21. 22. 23. 24. 25.

c b a d b

26. 27. 28. 29. 30.

d b d a

31. 32. 33. 34. 35.

c d d b b

36 37. 38. 39.

b d c a

Problem V

Income

SPENCER CO. W ork Sheet for Combined Statements for Home Office and Branch December 31, 20x5 Adjustments

Balance Home Sheet Cr.

Dr.

Office Cr.

and Eliminations Branch

Debits Cash …………………………………….. 10,350 2,650 ……….. ……….. 13,100 ……….. Cash in Transit …………………………. 1,500 …….. ……….. ……….. 1,500 ……….. Accounts Receiv able ………………. 26,200 12,850 ……….. ……….. 39,050 ……….. Merchandise Inv . Dec 1 ……………. 31,500 14,400 ……….. ……….. ……….. ……….. Store Supplies …………………………. 380 300 ……….. ……….. 580 ……….. Prepaid Expenses ……………………. 350 120 ……….. ……….. 470 ……….. Furniture & Fixtures …………………… 8,500 3,600 ……….. ……….. 12,700 ……….. Branch…………………………………… 32,260 ……… ……….. ……….. ……….. ……….. Retained Earnings ……………………. 6,850 ……… ……….. ……….. 6,850 ……….. Purchases ………………………………. 27,600 4,100 ……….. ……….. ……….. ……….. Shipments from Home Office ………………… 10,200 ……….. ……….. ……….. ……….. Adv ertising Expense …………………. 2,850 2,800 ……….. ……….. ……….. ……….. Salaries and Commissions Expense . 4,250 2,350 ……….. ……….. ……….. ……….. Store Supplies Expense ………………. 560 280 ……….. ……….. ……….. ……….. Miscellaneous Selling Expense …….. 1,850 1,050 ……….. ……….. ……….. ……….. Rent Expense ………………………….. 2,700 1,500 ……….. ……….. ……….. ……….. Depreciation Expense – F&F ……….. 85 36 ……….. ……….. ……….. ……….. Miscellaneous General Expense ….. 2,510 95 ……….. ……….. ……….. ……….. 160,295 57,141 ……….. ……….. ……….. ……….. Merchandise Inv , Dec 31 …………… 24,900 14,600 ……….. ……….. 36,850 ………..

(c)

(a)

(b)

Statement

Dr.

Cr.

………..

………..

………..

………..

………..

………..

2,000

43,900

………..

………..

………..

………..

………..

………..

………..

32,260

………..

………..

………..

………..

10,200

………..

………..

5,650

………..

6,600

………..

840

………..

2,900

………..

4,200

………..

121

………..

3,415

………..

………..

………..

(d)

Dr.

1,950

Problem V continued Credits Accumulated Depreciation – Furniture And Fixtures ……………………… 2,585 ……….. ……….. Unrealized Intercompany Inv entory ……….. ……….. Profit ………………………………. 3,700 ……….. ……….. Accounts Payable ……………… 36,400 ……….. ……….. Accrued Expenses ……………... 260 ……….. ……….. Home Office …………………….. ……….. ……….. ……….. Capital Stock …………………… 65,000 ……….. ……….. Sales ……………………………… 44,850 64,850 ……….. ……….. Shipments to Branch …………... 8,500 ……….. ……….. 57,141 ……….. ……….. Merchandise Inv , Dec 31 …….. 24,200 36,850 ……….. ………..

576 3,161 ……….. ……….. ………..

………..

……….. ……….. ……….. (c)

(b)

……….. 1,700

………..

2,000

………..

………..

4,200

………..

………..

………..

105

………..

………..

………..

32,260

………..

………..

………..

………..

………..

………..

20,000

………..

………..

………..

39,000 365

32,250

(a)

……….. 65,000

……….. ………..

………..

(b)

8,500

……….. 14,600

(d)

……….. ……….. P160,295 ……….. ………..

1,950

……….. 46,410

99,326 101,700 110,500 108,126 Net Income to Balance ………. ……….. ……….. 2,374 101,700 ………..

………..

……….. 46,410 2,374 101,700

……….. ………..

………..

110,500 110,500 Explanation of adjustments and eliminations: (a) To eliminate reciprocal accounts, Home Office and Branch. (b) To eliminate shipments to Branch and Shipments to Home Office. Difference between the two balances is debited to Unrealized Intercompany Inv entory profit (20% of P8,500, or P1,700). (c) To eliminate unrealized profit in beginning inv entory balances : P3,700 balance per trial balance, less P1,700 adjustment per entry (b) or P2,000 (d) To reduce ending inv entory cost:Branch inv entory form home office at billed price ………………. P11,700 Branch inv entory from home office at cost, P11,700/1.20 ……… 9,750 Inv entory reduction …………………………………………………….. P 1,950

Problem VI Accounts

Trial Balance

Alignments and

Branch Income

Home

December 31, 20x4 Home Office Branch

Eliminations

Statement

Incom

Dr.

Cr.

Dr.

Cr.

Dr.

Debits Cash

15,000

2,000

Accounts Receiv able

20,000

17,000

Inv entory, December 31,20x4

30,000

8,000

Plant Assets (net)

150,000

Branch

44,000

Cost of goods sold - Home office

220,000

Expenses - Home Office

70,000

Cost of goods sold - Branch Expenses - Branch

_______

10,000

(g)

3,000

(a)

10,000

(d)

3,600

(f)

10,000

(h)

34,000

(b)

84,000

136,00

70,000 93,000

549,000

(f)

__41000

(d)

3,600

(e)

12,000

(c)

1,200

(b)

105,000

(b)

21,000

(c)

1,200

74,400 53,000

161,000

Credits Accounts Payable

23,000

Mortgage Payable

50,000

Capital Stock Retained Earnings - January 1, 20x4

100,000

Sales - Home Office

350,000

26,000

Sales - Branch

150,000

Accrued Expenses

2,000

Home Office

9,000

150,000 (h)

34,000

________

_______

_______

549,000

161,000

178,800

(a)

10,000

(e)

12,000

(g)

___3000

_______

_______

_______

178,800

127,400

150,000

206,00

Problem VI continued Branch Net Income

22,600

Home Office Net Income

_______

_______

__39,00

150,000

150,000

245,00

Explanation of adjustments and eliminations: (a) To record merchandise in transit from home office, determined as follows: Billings from home office plus beginning inventory – amount available for sale P105,000 + P6,000 … …………….P111,000 Less cost of goods sold and ending inventory per branch records: P93,000 + P8,000 … ……………………………. 101,000 Balance representing shipments from home office not yet recorded by the branch… … …………………….P 10,000

(b) To eliminate shipments of merchandise to branch recorded as sales. Reduction in home office cost of goods sold: P105,000 ÷ 1.25 or P84,000. (c) To adjust branch cost of goods sold for unrealized profit on beginning inventory: P6,000 – (P6,000 ÷ 1.25), or P1,200. (d) ) To adjust branch cost of goods sold for unrealized profit on ending inventory: P18,000 – (P18,000 ÷ 1.25) or P3,600. (e) To record branch expenses paid by home office. (f) To record cash deposited by branch on December 29 and 30 for accou nt of the home office and not recorded by home office in 20x4. (g) To record cash in transit from home office. (h) To eliminate inter office accounts.

Corrections: Volume II Chapters 12 to 19 page 23 page 24 page page page page page page page page

137 142 155 161 259 272 394 395

page page page page page page

401 403 406 408 410 411

page page page page

417 423 427 429

questions 4 and 5: Sales – P195,000 instead of P43,000; Shipments from home office – P135,000 instead of P135,000; Accounts receivable – P43,000 instead of P135,000 questions 6 to 8: Accounts receivable – P12,800 instead of shipments from home office No. 9: Changi Corp – 20x4 instead of 2004 Problem VIII Smith’s current assets should be P350,000 instead of P950,000. Problem XVI: change the name “Peter” to “Pure” Nos. 35 to 36: 2nd par. Atwood issued 50,000 shares instead of 50 No. 66: Using the same information in No. 64 and 65,… Questions 9 to 17: PP Corporation acquired 70 percent instead 90 percent No. 10. Under PFRS 3 instead of SFAS 141R Problem VI: Pascal Co. – Totals should be P2,368,800 instead of P2,368,000 Pascal Co.’s net income should be P196,800 instead of P198,800 Problem VII: Refer to the same data in Problem VI instead of II Problem XV: 3rd par. Should be 20x4 instead of 2009 Problem XVIII – unrelated parties for P84,000 instead of P96,000 Problem XXIV – Refer to the same data in Problem XXIII instead of X No. 3: change 2011 to 20x6 No. 17: change 2013 to 20x4 No. 21: Two years later the following data were reported by the two companies: Royce’s equipment (at BV), 12/31/Year 2, PP444,000; Park’s equipment (at BV), 1/1/Year 1, P200,000; Separate net income in Year 2: Royce, P560,000; Park, P140,000; Common stock and retained earnings of Park, 1/1/Year 2 – P300,000 and P260,000, respectively. Questions 51 to 61: Long-term liabilities (due 20x7 instead of 2012) Questions 98 and 99: change the name Harrison to Beatty For items 126 to 138, use the equity method instead of cost model Questions 142 and 143:  del ete the phra s e “no bol d – i ncons i s tent”  …P24,000 di vi dends from Suburbi a i n 20x4 a nd P36,000 i n 20x5 instead of 20x4

page page page page page page page

495 501 504 505 507 511 514

page 515 page 516 page 517 Page 520 page 521 page 523 page 598

page 603 page 604/605

page 607 page 611

page 613 page 615

page 617

page 620 page 621 page 622 page 626 page 645 page 646

page 652 page 655 page 657

Questions 14 and 145: delete the phrase “no bold” Change “2014” to “20x4” and “2015” to “20x5” Problem XI: 3rd par. Change “2009” to “20x4” Problem XVI: Son Co. – Land – P55,200 instead of P46,000 reduced by P3,750 instead of P3,125 Questions 3 & 4: Net income (20x4 instead of 2014) Questions 29 to 33: 2006 should be 20x3; 2007 should be 20x4; 2008 should be 20x5 Questions 42 to 45: Eagle Corporation owns 80% of Flyway Inc.’s common stock that was purchased at its underlying book value. The two companies report the following information for 20x4 and 20x5. During 20x4, one company sold inventory to the other company for P50,000 which cost the transferor P40,000. As of the end of 20x4, 30% of the inventory was unsold. In 20x5, the remaining inventory was resold outside the consolidated entity. questions 49 to 51: During 20x4 instead of 20x5, Wren sold questions 53 and 54: change 2004 to 20x4 No. 57: During 20x5 instead of 20x4, HH sold No. 59: Use the same information in problem 58 instead of 18 No. 76 and 77 should be 20x5 instead of 20x4 No. 80: 2x14 should be 20x4 Questions 81 and 82: 2013 should be 20x4 Nos. 94 to 99: delete the phrase “worksheet entry G” IV: …Serf Corporation on January 1, 20x4 instead of 20x3 for P1,280,000 …remaining useful life of four years on January 1, 20x4 instead of 20x5 …In 20x5 instead of 20x4 Prince Company reported net income X: …common stock of Tool, Inc. in 20x0 instead of 20x4. On January 1, 20x1 instead of 20x5, Tool Inc. XIV: …Fruit Corporation in 20x1 instead of 20x5 …In 20x4 instead of 20x6, Fruit sold …possession until 20x6 instead of 20x7 …after the books were closed in 20x6 instead of 20x7 …Cash in 20x4 instead of 20x6 for P82,000, and in 20x6 instead of 20x5 XXI: Trial Balance – Accounts receivable of Per should be P90,000 instead of P75,000 Questions 7 to 9: Avocet holds 60% of Shrimp. Shrimp reported net income of P55,000 in 20x5 and Avocet's separate net income (excludes interest in Shrimp) for 20x5 was P98,000. 18. What was the NCI in net income for 20x4 20. In January 1, 20x3 instead of 20x4, S Company 27. 20x6 should be 20x8 28. 20x6 should be 20x4 30. On January 1, 20x5 instead of 20x4 No. 38: …end of 20x4 instead of 20x7 …on December 31, 20x5 instead of 20x4 …on January 1, 20x6 instead of 20x5 questions 53 to 57: 2005 should be 20x2 questions 58 to 62: 2007 should be 20x4; 2005 should be 20x2 questions 63 and 64: 20x10 should be 20y0 questions 65 to 67: On February 15, 20x4 instead of 20x9 2008 should be 20x4 questions 96 to 105: 2nd par. 201x5 should be 20x5 II: Required 2. the U.S. dollar should be Philippine peso IV: a.1 December 1, 20x4 instead of December 16 a.3 March 1, 20x5 instead of January 15, 20x5 V: a.3 March 1, 20x5 instead of January 15, 20x5 No. 10: December 31, 20x4 instead of 20x5 No. 12: marks should be FCUs No. 24: b. credit should be Transaction Gain instead of Loss questions 25 to 27: December 31, 20x4 1FC = P.262 instead of P.265 No. 31: 12/31/20x4 (year-end instead of date borrowed)

Corrections: Volume II Chapters 12 to 15 page 23 page 24 page page page page page page page page

137 142 155 161 245 246 259 272

questions 4 and 5: Sales – P195,000 instead of P43,000; Shipments from home office – P135,000 instead of P135,000; Accounts receivable – P43,000 instead of P135,000 questions 6 to 8: Accounts receivable – P12,800 instead of shipments from home office No. 9: Changi Corp – 20x4 instead of 2004 Problem VIII Smith’s current assets should be P350,000 instead of P950,000. Problem XVI: change the name “Peter” to “Pure” Nos. 35 to 36: 2nd par. Atwood issued 50,000 shares instead of 50 No. 66: Using the same information in No. 64 and 65,… Problem V: Assuming the same data in Problem IV Problem VII: Assuming the same data in Problem IV Questions 9 to 17: PP Corporation acquired 70 percent instead 90 percent No. 10. Under PFRS 3 instead of SFAS 141R