Chapter 16 Advanced Accounting Solution Manual

Problem I 1. P50,075

Chapter 16

Consolidated Net Income for 20x4 Net income from own/separate operations Pill Company [P25,000 – (P9,000 x 85%)] Sill Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment 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

P17,350 40,000 P57,350 P 5,775 0 1,500

7,275 P50,075 5,775 P55,850

*Net income of subsidiary – 20x4 Amortization of allocated excess – 20x4 Multiplied by: Non-controlling interest %.......... Less: Non-controlling interest on impairment loss on full-goodwill (P1,500 x 15%)* Non-controlling Interest in Net Income (NCINI)

P 40,000 ( 0)) P 40,000 15% P 6,000 ____225 P 5,775

*this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired.

2. P5,775 – refer to computation in No. 1

Problem II - Cost Model/Method versus Equity Method Partial-Goodwill Approach: Fair value of Subsidiary Consideration transferred: P600,000.............................................. Less: Carrying amount of Small’s net assets = Carrying amount of Small’s shareholders’ equity Common/Ordinary shares – Small (400,000 x 75%)............ Retained earnings – Small (100,000 x 75%)......................... 375,000 Allocated Excess: Acquisition differential – Jan. 1, 20x4 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory (40,000 x 75%)........................................ Decrease in Patents (70,000 x 75%).......................................... Positive Excess: Goodwill - partial Full-Goodwill Approach: Fair value of Subsidiary (Implied cost of 100% investment); P600,000/75% Less: Carrying amount of Small’s net assets = Carrying amount of Small’s shareholders’ equity Common/Ordinary shares Retained earnings Allocated Excess: Acquisition differential – Jan. 1, 20x4 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory Decrease in Patents Positive Excess: Goodwill - full

600,000 300,000 75,000 225,000 30,000 (52,500)

( 22,500) 247,500 800,000

400,000 100,000 500,000 300,000 40,000 (70,000)

(30,000) 330,000

A summary or depreciation and amortization adjustments is as follows: Account Adjustments amortized

to

be

Inventory Subject to Annual Amortization Patents

Over/ Under

Life

Annual Amount

P40,000

1

P 40,000

P 40,000

(70,000)

5

(14,000)

( 14,000)

P 26,000

P 26,000

_____

_____

P 26,000

P 26,000

Amortization Impairment of goodwill (full)

330,000

-

Current Year(20x4)

20x5 P

Investment in Son

1/1/x4 600,000

18,750 18,750

7,500

P -

-

(14,000) P(14,000 ) ______ P(14,000 )

For purposes of comparison between Cost Model/Method and Equity Method Cost Method Journal Entries Year 1 Year 2 Investment Investment in Small 600,000 Cash 600,000 Dividend of Subsidiary Cash Dividend income

20x6

(14,000) P(14,000 ) __ 19,300 P 5,300

Year 3

30,000

7,500

30,000

Dividend Income

CI……

18,750 - Div–S (75 x80%)

12/31/x4 600,000

18,750

7,500 - Div–S (10 x80%)

12/31/x5 600,000

18,750

30,000 - Div–S (40 x80%)

12/31/x6 600,000

30,000

Equity Method 1. Investment Investment in Small Cash Net Income (Loss) of Subsidiary: Investment in Small (75% x Small’s profit) Investment income Investment income Investment in Small (75% x Small’s profit)

Year 1

Year 3

600,000 600,000 60,000 60,000

67,500 67,500 26,,250 26,250

Dividend of Subsidiary Cash (75% x Small’s dividends) Investment in Small

18,750 18,750

Amortization of Allocated Excess Investment income (75% x amortization of PD*) Investment in Small

19,500 19,500

Investment in Small Investment income

Year 2

7,500

7,500

30,000

3,975 10,500 10,500

30,000

3,975

Investment in Son

1/1/x4: 600,000

CI

NI of S

(80,000 x 60,000

621,750

Investment Income (loss)

18,750

75%)…….

19,500

75% Div - Son

75% Amort & impairment

NI of Son

Amortization impairment 19,500

12/31/x4

26,250 75%)

(35,000 x

7,500

75% Div - Son

75% NL – Sub

(35,000 26,250

x

75%)

75% Amort & Impairment 10,500

10,500 impairment

50

12/31/x6 632,025

30,000

75%)…….

75% Amort

&

12/31/x5 598,500

(90,000 x 67,500

(80,000 x

40,500

75% NL – Sub

NI of S

60,000 75%)

3,975

15,7

75% Div - Son

75% Amort & impairment

NI of Son

Amortization impairment 3,975

67,500 75%)

(90,000 x

63,525

Reconciliation of Investment /Conversion of Investment Account from Cost to Equity Method: Investment in Small under cost method......................................... 600,000

Small’s retained earnings, end of year.......................................160,000 Small’s retained earnings, date of acquisition..........................100,000 Change since acquisition............................................................60,000 Less: Cumulative amortization of acquisition differential.............17,300 42,700 x: Controlling Interest (75%).............................................................. 32,025 Investment in Small under equity method..................................... 632,025 2. a. Goodwill, 12/31/20x6 (P330,000 – P19,300) P 310,700 b. FV of NCI, 12/31/20x6:

75%

Non-controlling interest (full-goodwill), December 31, 20x6 P 400,000 Common stock 20x6 . . . . . . . . . . . . . . . . . .

–

Subsidiary

Company,

December

31,

Retained earnings – Subsidiary Company, December 31, 20x6 Retained earnings – Subsidiary Company, January 1, 20x6 (P100,000 + P80,000 – P25,000 – P35,000 – P110,000 P10,000).............................. Add: Net income of Small for 20x6……………………………………………….. 90,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P200,000 ......... Less: Dividends paid – 20x6…………………………………………………………. 40,000 Stockholders’ equity – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . . Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4)- decreased in Net Assets .... Less: Amortization of allocated excess (refer to amortization above): 20x4 (P40,000 – P14,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P ........ 26,000 20x5 and ( 28,000 20x6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) Fair value of stockholders’ equity of subsidiary, December 31, 20x6 . . . . . . . . . . . Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . FV of Non-controlling interest (partial goodwill), 12/31/20x6 . . . . . . . . . . . . . .... Add: Non-controlling interest on full goodwill , net of impairment loss [(P330,000 full – P247,000, partial = P 82,500 P82,500…………………………………. Less: Impairment on the NCI (P19,300 x 25%) ___4,825 ………………………………… FV of Non-controlling interest (full-goodwill), 12/31/20x6. . . . . . . . . . . . . . . . ..... *or P330,000 full – P247,000, partial = P82,500 – (impairment loss on full goodwill less (P19,300 x = P77,625

160,000 P 560,000 (

30,000)

(

2,000) P 532,000 20 P 133,000

___*77,675 P 210,675 25%)]

Alternatively, NCI on December 31, 20x6 may also be computed as follows (Note: This is the American version of computing NCI, since they only allowed using Full-goodwill Method): Common stock, 12/31/20x6………………………………………….. P 400,000 Retained earnings, 12/31/20x6 (P100,000+P80,000 – P25,000 – P35,000 – P10,000)………….. P 110,000 Add: NI – Subsidiary (20x6) ……………………………………….. 90,000

Dividends – Subsidiary 20x6……………………………………….. ( 40,000) 160,000 Book value of SHE – S, 12/31/20x6…………………………………… P560,000 Adjustments to reflect fair value (Increase in Net Assets)………..P 300,000 Amortization of allocated excess: Inventory – 20x4...…………………………………………………….( 40,000) Patent (P14,000 x 3 years)………………………………………….. 42,000 Impairment of goodwill – 20x6…………………………………….. ( 19,300) 282,700 FV of SHE of Small………………………………………………………… P 842,700 Multiplied by: NCI%............................................................................... 25%

FV of NCI, 12/31/20x6…………………………………………………….. 210,675 Or, alternatively:

P P 400,000

Common stock 20x6 . . . . . . . . . . . . . . . . . .

–

Subsidiary

Company,

December

31,

Retained earnings – Subsidiary Company, December 31, 20x6 Retained earnings – Subsidiary Company, January 1, 20x6 (P100,000 + P80,000 – P25,000 – P35,000 – P10,000).............................. Add: Net income of Small for 20x6……………………………………………….. Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......... Less: Dividends paid – 20x6…………………………………………………………. Stockholders’ equity – Subsidiary Company, December 31, 20x6 . . . . . . . . . . . . . Unamortized acquisition differential / allocated excess / increase in net assets: {P300,000, allocated excess – {P40,000 - (P14,000 x 3) + P19,300, full impairment

P110,000 90,000 P200,000 40,000

160,000 P 560,000

__282,500 P 842,500 ______25%

Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . FV of Non-controlling interest (full-goodwill), 12/31/20x6. . . . . . . . . . . . . . . . .....

P 210,675

c. Consolidated Retained Earnings, 1/1/20x6 – P498,500 Consolidated Retained Earnings, January 1, 20x6 Retained earnings - Large Company, January 1, 20x6 (cost model) 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 – Small, January 1, 20x6 (P100,000 + P80,00 – P25,000 – P35,000 – P10,000) Less: Retained earnings – Small, January 1, 20x4 (date of acquisition) Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Amortization of allocated excess – 20x5 Multiplied by: Controlling interests %................... Less: Goodwill impairment loss (full-goodwill) – 20x6 Consolidated Retained earnings, January 1, 20x6

P500,000

P 110,000 100,000 P 10,000 26,000 (14,000) P ( 2,000) _____75% P ( 1,500) ________0

(___1,500) P 498,500

The CRE, December 31, 20x6 would be as follows: Consolidated Retained earnings, January 1, 20x6 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of Large for 20x6 Total Less: Dividends paid – Large Company for 20x6

P498,500 233,525 P717,550 70,000

Consolidated Retained Earnings, December 31, 20x6

P662,025

Or, alternatively: to compute CRE, 12/31/20x6 Consolidated Retained Earnings, December 31, 20x6 Retained earnings - Large Company, December 31, 20x6 (cost model) 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 – Small, December 31, 20x6 (P100,000 + P80,00 – P25,000 – P35,000 – P10,000 + P90,000 – P40,000) Less: Retained earnings – Small, January 1, 20x4 (date of acquisition) Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Amortization of allocated excess – 20x5 and 20x6: P14,000 x 2 Multiplied by: Controlling interests %................... Less: Goodwill impairment loss on full-goodwill) – 20x6 (P19,300 x 75%) Consolidated Retained earnings, December 31, 20x6

P630,000

P 160,000 100,000 P 60,000 26,000 (28,000) P 62,000 _____75% P 46,500 __14,475

__32,025 P 662,025

d. P233.525 Consolidated Net Income for 20x6 Net income from own/separate operations Parent Company: Large Company [P200,000 – (P40,000 x 75%)] Small Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment 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 20x6

P170,000 90,000 P260,000 P 21,175 (14,000) _19,300

__26,475 P233,525 __21,175 P254,700

*Net income of subsidiary – 20x6 Amortization of allocated excess – 20x6 Multiplied by: Non-controlling interest %.......... Less: Non-controlling interest on impairment loss on full-goodwill ( (P19,300 x 25%)* Non-controlling Interest in Net Income (NCINI)

P 90,000 ( 14,000) P 104,000 25% P 26,000 ___4,825 P 21,175

*this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired.

e. P21,175 – refer to (d) for computations Note: Regardless of the method used (cost or equity) answers for No. 2 (a) to (e) above are exactly the same. Problem III Cost of 85% investment

646,000

Fair value of Subsidiary (Implied cost of 100% investment); P646,000/85% 760,000 Less: Carrying amount of Silk’s net assets = Carrying amount of Silk’s shareholders’ equity Common/Ordinary shares 500,000 Retained earnings 100,000

600,000 Allocated Excess: Acquisition differential – December 31, 20x4 160,000 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory 70,000 Patents 90,000 Non-controlling interest (15% x 760,000, fair value of subsidiary),12/31/20x4 114,000 A summary or depreciation and amortization adjustments is as follows: Account Adjustments amortized

to

be

Inventory Subject to Annual Amortization Patents

Over/ under

Lif e

P70,000

1

90,000

10

P160,000

Annual Amount P 70,000

Current Year(20x5)

__9,000 P 79,000

___9,000

Unamortized balance of allocated excess: Balance Dec. 31 20x4 Inventory 70,000 Patents 90,000 160,000

20x6

P 70,000

P 79,000

P

20x7 -

___9,000 P 9,000

Amortization 20x5 20x6 70,000 9,000 9,000 79,000 9,000

P

-

___9,000 P 9,000,

Balance Dec. 31 20x6 72,000 72,000

1. NCI-CNI 20x5: P(7,350) 20x6: P6,450 20x5 Consolidated Net Income Net income from own/separate operations Large Company 20x5 [P28,000 – P0)]

20x6

P 28,000

20x6 [(P45,000, loss + (P15,000 x 85%)] Small Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment CI-CNI (loss) or Profit (loss) attributable to equity holders of parent Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income/Loss(CNI)

P(57,75 0) 52,000 P( 5,75 0)

30,000 P 58,000 P(7,350) 79,000 _____0

71,650 P(13,6 50) ( 7,350) P(21,00 0)

P 6,450 9,000 _____0

15,450 P(21,2 00) 6,450 P(14,75 0)

*Net income (loss) of subsidiary Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Less: Non-controlling interest on impairment loss on full-goodwill Non-controlling Interest in Net Income (NCINI)

20x5 P 30,000 ( 79,000) P(49,000) 15% P(7,350) _______P( 7,350)

20x6 P 52,000 ( 9,000) P43,000 15% P 6,450 ___ _P6,450

*this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired.

2. CI-CNI – refer to computation in No. 1 20x5: P(21,000) 20x6: P14,750 Or, alternatively: (1) Non-controlling interest in profit 20x5: 15%  (30,000 – 79,000)............................................................. 7,350 20x6: 15%  (52,000 – 9,000)............................................................... 6,450 (2) 20x5 20x6 NI (loss) Pen 28,000 (45,000) Less: Dividends from Silk 20x5 0 20x6 (85%  15,000) (12,750) 28,000 (57,750) Share of Silk’s profit 85%  (30,000 – 79,000) (41,650) 85%  (52,000 – 9,000) ________ 36,550_ Consolidated profit (loss) attributable to Pen’s shareholders (13,650) (21,200)

3. CRE, 12/31/20x6 – P73,150 Consolidated Retained Earnings, December 31, 20x6 Retained earnings - Pen Company, December 31, 20x6 (cost model 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 – Silk, December 31, 20x6: (P100,000 + P30,00 – P0 + P52,000 – P15,000) Less: Retained earnings – Silk, December 31, 20x4 (date of acquisition) Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x5 Amortization of allocated excess – 20x6 Multiplied by: Controlling interests %................... Less: Goodwill impairment loss (full-goodwill) – 20x5 Consolidated Retained earnings, December 31, 20x6

P 91,000

P 167,000 100,000 P 67,000 79,000 __9,000 P (21,000) 85% P (17,850) _____0

4. NCI, 12/31/20x6: P110,850 FV of SHE of Silk: Common stock, 12/31/20x6

P 500,000

( 17,850) P 73,150

Retained earnings, 12/31/20x6: Retained earnings, 1/1/20x4 P 100,000 NI – Subsidiary (20x5 and 20x6): P30,000 + P52,000 82,000 Dividends – Subsidiary (20x5 and 20x6): P0 + P15,000 ( 15,000) 167,000 Book value of SHE – S, 12/31/20x6 P 667,000 Adjustments to reflect fair value, 12/31/20x4 160,000 Amortization of allocated excess (P79,000 + P9,000) ( 88,000) FV of SHE of S P 739,000 Multiplied by: NCI% _________15% FV of NCI (partial), 12/31/20x6 P 110,850 Add: NCI on full-goodwill _______ _0 FV of NCI (full),12/31/20x6 P 110,850

Or, alternatively:

Non-controlling interest – date of acquisition,12/31/20x4 (1) Retained earnings Silk – Dec. 31, 20x6 (100,000 + 30,000 + 52,000 – 15,000) Less: Retained earnings, 12/31/20x4 (date of acquisition) Increase since acquisition Less: Amortization of allocated excess (79,000 + 9,000) Multiplied by: NCI’s share Non-controlling interest (full) 12/31/20x6

P 114,000 P167,000 100,000 P 67,000 88,000 P( 21,000) ____ 15% ( 3,150) P 110,850

5. Consolidated Patents, 12/31/20x6: P72,000 Unamortized balance of allocated excess:

Inventory Patents

Balance Dec. 31 20x4 70,000 90,000 160,000

Amortization 20x5 20x6 70,000 9,000 9,000 79,000 9,000

Or, alternatively:

Invest. account – equity Dec. 31, 20x6 Cost of investment, cost model Retained earnings Silk – Dec. 31, 20x6 (100,000 + 30,000 + 52,000 – 15,000) Retained earnings,12/31/20x4 (date of acquisition) Increase since acquisition Less: Accumulated amortization (79,000 + 9,000) Multiplied by: CI share Invest. account – equity method as at Dec. 31, 20x6

Implied value of 100% (628,150 / 85%) Silk –Common shares Retained earnings – Silk, 12/31/20x6 Balance unamortized allocated excess – Patents

Balance Dec. 31 20x6 72,000 72,000 628,150 646,000

167,000 100,000 67,000 88,000 ( 21,000) 85%

( 17,850) 628,150 739,000

500,000 167,000 667,000 72,000

Problem IV 1. (Full or partial-goodwill) – the same answer. Consideration transferred by MM .................... P664,000 Noncontrolling interest fair value..................... 166,000* Fair value of Subsidiary………………………… P830,000 Less: Book value of SHE – S…..……………………. (600,000) Positive excess ............................................... 230,000 Annual Excess Life Amortizations Excess fair value assigned to buildings 80,000 20 years P4,000 Goodwill - full P150,000 indefinite -0Total........................................................... P4,000

2.

P150,000 – full goodwill (see No. 1 above) P120,000 – partial-goodwill: Consideration transferred by MM .................... P 664,000 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) ............. 4.

5. 6.

300,000 90,000 210,000

80,000 150,000

480,000 120,000

184,000 46,000

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

Cost Model/Initial Value Method Dividends received (80%) ................................................ 8,000 Investment in Taylor—12/31/x4 (original value paid)…………

P P664,000

Cost Model/Initial Value Method – same answer with No. 4. 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 .......................................... P 800,000 TT book value—buildings ............................................ 300,000 Allocation ................................................................... 80,000 Excess Amortizations for 20x4–20x5 (P4,000 × 2) …………. ( 8,000) Consolidated buildings account ………………… P 1,172,000

7.

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

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 V 1. Partial Goodwill or Proportionate Basis a. Investment in S 225,000 Beginning Retained Earnings-Palm Inc. 225,000 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)

3,000,000 1,250.000 3,825,000 425,000

400,000 150,000 40,000

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% 10% FV of NCI P 465,000

210,000

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. 225,000 To establish reciprocity/convert to equity (0.90 x(P1,250,000 – P1,000,000)) b.

Common stock – S Retained earnings – S

3,000,000 1,250.000

Investment in S NCI (P4,250,000 x 10%)

c.

3,825,000 425,000

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)

400,000

150,000 40,000

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% 10% FV of NCI P 465,000

Full-goodwill or Fair Value Basis Fair value of Subsidiary: Consideration transferred P3,750,000 / 90%

P4,166,66 7 4,000,000

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)

210,000

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 fullgoodwill approach are the same. 2. Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model 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, 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 (inventory) Multiplied by: Controlling interests %................... Add: Bargain purchase gain (Controlling interest – P300,000) Less: Goodwill impairment loss Consolidated Retained earnings, December 31, 20x5

P2,000,000

P1,550,000 1,000,00 0 P 550,000 100,000 P 450,000 90% P405,000 300,000 _______0

__705,,000 P 4,705,000

Problem VI Computation of Goodwill: Partial Goodwill Fair value of Subsidiary: Consideration transferred

P2,800,00 0 _1,200,00 0 P1,600,00 0

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

__720,000 P 880,000

Full-goodwill: Fair value of Subsidiary: Consideration transferred P2,800,000 / 80%

P3,500,0 00 1,500,00 0 P2,000,0 00

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

__900,00 0 P1,100,00 0

Amortization of allocated excess: 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

Common stock, 1/1/20x4 Retained earnings, 1/1/20x4 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) Add: NCI on full-goodwill (P1,100,000 – P880,000) FV of NCI (full)

b. Depreciation Expense Property and Equipment (net)

1,000,000 500,000 900,000 1,100,000

2,800,000 700,000

P 500,000 1,000,000 P1,500,000 900,000 P2,400,000 20% P 480,000 220,000 P 700,000

90,000

90,000

20x5 a. Investment in S Company (P300,000 x 0.80) 240,000 Beginning Retained Earnings-P Co. To establish reciprocity/convert to equity as of 1/1/20x5 b. Beginning Retained Earnings-S Company 1,300,000 Capital Stock-S Company 500,000 Property and Equipment (net) 900,000 Goodwill 1,100,000 Investment in S Company (P2,800,000 + P240,000) Non-controlling Interest P700,000 + [(P1,300,000 – P1,000,000) x 0.20]

240,000

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) P 760,000

c. Beginning Retained Earnings-P Co. (P90,000 x 80%) Non-controlling Interest (P90,000, depreciation x 20%) Depreciation Expense Property and Equipment (net)

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.

1,000,000 500,000 900,000 880,000

2,800,000

Non-controlling Interest

480,000

b. Depreciation Expense Property and Equipment (net)

90,000 90,000

20x5 a. Investment in S Company (P300,000 x 0.80) 240,000 Beginning Retained Earnings-P Co. To establish reciprocity/convert to equity as of 1/1/20x5

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) 3,040,000 Non-controlling Interest P700,000 + [(P1,300,000 – P1,000,000) x 0.20] – (P1,100,000 – P880,000) 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)

P 500,000 P1,000,000 300,000 ( 0) 1,300,000 P1,800,000 900,000 P2,700,000 20% P 540,000

c. Beginning Retained Earnings-P Co. (P90,000 x 80%) Non-controlling Interest (P90,000 depreciation x 20%) Depreciation Expense Property and Equipment (net)

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

P400,000 300,000 P700,000 P 42,000 90,000

Goodwill impairment

____0

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

132,00 0 P568,000 42,000 P610,000

Net income of subsidiary…………………….. Amortization of allocated excess …...

P 300,000 ( 90,000) P210,000 20 % P 42,000

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

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

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

P673,000 62,000 P735,000

Net income of subsidiary…………………….. Amortization of allocated excess …...

P 400,000 ( 90,000) P310,000 20 % P 62,000

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

Problem VII 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

152,00 0

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 VIII 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 (P200,000 x 100%) ………………. Retained earnings (P100,000 x 100%)………... Allocated excess (excess of cost over book value) ….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P5,000 x 100%) ……………… Increase in land (P6,000 x 100%) ……………………. Increase in equipment (P80,000 x 100%) Decrease in buildings (P20,000 x 100%) ………..... Decrease in bonds payable (P4,000 x 100%) …… Positive excess: Goodwill (excess of cost over fair value) ………………………………………………...

P 360,000 105,000

P 465,000

P 240,000 120,000

360,000 P 105,000

P

6,000 7,200 96,000

( 24,000) 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………………………………………..

P 24,000 48,000 84,000 168,000 (120,000) P 204,000

S Co. Fair value P

30,000 55,200 180,000 144,000 ( 115,200) P 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 ..................

S Co. Book value 180,000

S Co. Fair value 180,000

Increase (Decrease) 0

Less: Accumulated depreciation….. Net book value………………………...

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

96,000

-

( 96,000)

84,000

180,000

S Co. Book value 360,000

S Co. Fair value 144,000

(Decrease) ( 216,000)

192,000

-

( 192,000)

168,000

144,000

96,000

(

24,000)

A summary or depreciation and amortization adjustments is as follows: Account amortized

Adjustments

to

be

Inventory Subject to Annual Amortization Equipment (net)......... Buildings (net) Bonds payable…

Over/ under P 6,000

Lif e

Current Year(20x4)

1

Annual Amount P 6,000

P 6,000

P -

96,000 (24,00 0) 4,80 0

8

12,000

12,000

12,000

4

( 6,000) 1,20 0 P 13,200

( 6,000) 1,200

(6,000) 1,20 0

P 13,200

P 7,200

4

20x5

20x4 : First Year after Acquisition Parent Company Cost Model Entry

January 1, 20x4: (1) Investment in S Company…………………………………………… Cash……………………………………………………………………. . Notes payable……………………………………

465,000 360,000 105,000

Acquisition 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……. Dividends paid by S Co..

Consolidation Workpaper – First Year after Acquisition

36,000

36,000

(E1) Common stock – S Co………………………………………… Retained earnings – S Co…………………………………… Investment in S Co……………………………………………

240,000 120,000 360,000

To eliminate intercompany investment and equity accounts of subsidiary on date of acquisition. ; and to establish noncontrolling interest (in net assets of subsidiary) on date of acquisition.

(E2) Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. Accumulated depreciation – buildings………………….. Land……………………………………………………………………… . Discount on bonds payable…………………………………………. Goodwill…………………………………………………………………. Buildings……………………………………….. Investment in S Co……………………………………………….

6,000 96,000 192,000 7,200 4,800 15,000 216,000 105,000

To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill…………….. and

6,000 6,000 6,000 1,200 3,600 6,000 12,000 1,200 3,600

To provide for 20x4 impairment loss and depreciation and amortization on differences between acquisition date fair value book value of Son’s identifiable assets and liabilities as follows:

Cost of Goods Sold Inventory sold Equipment Buildings Bonds payable Totals

Depreciation/ Amortization Expense

Amortizatio n -Interest

P 6,000

_______

P12,000 ( 6,000) _______

P 1,200

P 6,000

P 6,000

P1,200

(E4) Dividend income - P………. Dividends paid – S…………………… To eliminate intercompany dividends and non-controlling interest share of dividends.

36,000 36,000

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model 100%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition)

Sales

Income Statement

P Co P480,000

S Co. P240,000

Dividend income Total Revenue

36,000 P516,000

P240,000

Cost of goods sold Depreciation expense Interest expense

P204,000

P138,000

60,000

24,000

-

-

Goodwill impairment loss Other expenses Total Cost and Expenses Net Income to Retained Earnings

48,000 P312,000 P204,000

Statement of Retained Earnings Retained earnings, 1/1 P Company

P360,000

S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet

204,000 P564,000

Dr.

Cr.

(4) 36,000

Consolidated P 720,000 _________ P 720,000 P 348,000

(3) 6,000 (3) 6,000 (3) 1,200 (3) 3,600

90,000 1,200 3,600

18,000 P180,000 P 60,000

66,000 P508,800 P211,200

P 360,000 P120,000 60,000 P180,000

(1) 120,000 211,200 P571,200

72,000

72,000

-

36,000

P492,000

P144,000

Cash………………………. Accounts receivable……..

P 147,000 90,000

P 90,000 60,000

Inventory………………….

120,000

90,000

Land……………………………. Equipment Buildings

210,000 240,000 720,000

48,000 180,000 540,000

(4) 36,000

________ P 499,200

Balance Sheet

(2) 6,000 (2) 7,200

465,000

(3) 6,000

(3)

237,000 150,000 210,000

(2) 216,000 (2) 4,800 (2) 15,000

Discount on bonds payable Goodwill…………………… Investment in S Co………

P

265,200 420,000 1,044,000

1,200

3,600

(3) 3,600 (1) 360,000 (2) 105,00 0

11,400 -

Total Accumulated depreciation equipment

P1,992,000

P1,008,0 00

P 135,000

P 96,000

Accumulated depreciation buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Total

405,000 120,000 240,000 600,000 ___590,400 P1,992,00 0

P2,341,200

(2) (3) 96,000 12,000 (2) 192,000 288,000 (3) 6,000 120,000 120,000

240,000 144,000 P1,008,0 00

P 147,000

495,000 240,000 360,000 600,000

(1) 240,000 499,200 P 736,200

P 736,200

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 x 100%)…………….

48,000 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

48,000 48,000

Dividends paid by S Co..

Consolidation Workpaper – Second Year after Acquisition (E1) Investment in S Company………………………… Retained earnings – P Company……………………… To provide entry to convert from the cost method to the equity method or the entry to establish reciprocity at the beginning of the

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

24,000 24,000

(E2) Common stock – S Co………………………………………… Retained earnings – S Co., 1/1/20x5 Investment in S Co …………………………

240,000 144,000 384,000

To eliminate intercompany investment and equity accounts of subsidiary and to establish non-controlling interest (in net assets of subsidiary) on January 1, 20x5.

(E3) Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. Accumulated depreciation – buildings………………….. Land……………………………………………………………………… . Discount on bonds payable…………………………………………. Goodwill…………………………………………………………………. Buildings……………………………………….. Investment in S Co……………………………………………….

6,000 96,000 192,000 7,200 4,800 15,000 216,000 105,000

To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish noncontrolling interest (in net assets 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………………………………… Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill…………………………………… To provide for years 20x4 and 20x5 depreciation and amortization on differences between acquisition date fair value and book value of S’s identifiable assets and liabilities as follows: Year 20x4 amounts are debited to P’s retained earnings Year 20x5 amounts are debited to respective nominal accounts..

(20x4) Retaine d earnings ,

Depreciation/ Amortization expense

Amortizatio n -Interest

16,800 6,000 12,000 1,200 6,000 24,000 2,400 3,600

Inventory sold

P 6,000 12,000 (6,000) 1,200 3,60 0 P 16,800

Equipment Buildings Bonds payable Impairment loss Totals

P

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-controlling interest share of dividends.

(E6) Non-controlling interest in Subsidiary………… Non-controlling interest …………..

Net

Income

of

16,560 16,560

To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows:

Net income of subsidiary…………………….. Amortization of allocated excess [(E4)]…... Multiplied by: %.......... Non-controlling (NCINI)

Non-controlling

interest

Interest in Net Income

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 Sales

Income Statement

P Co. P540,000

S Co. P360,000

Dividend income Total Revenue Cost of goods sold

48,000 P588,000 P216,000

P360,000 P192,000

Dr. (5) 48,000

Cr.

Consolidated P 900,000 ___________ P P

900,000 408,000

Depreciation expense

60,000

24,000

Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses

72,000 P348,000

Net Income to Retained Earnings

P240,000

54,000 P270,000 P 90,000

(4) 6,000 (4) 1,200

90,000 1,200

P P

126,000 625,200 274,800

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet

P492,000 240,000 P732,000

P144,000 90,000 P234,000

(4) 16,800 (2) 144,000

(1) 24,000

P

499,200 274,800 P 774,000

72,000

72,000 (5) 48,000

-

48,000

_

________

P660,000

P186,000

P 702,000

Cash………………………. Accounts receivable……..

P 189,000 180,000

P 102,000 960,000

P 291,000 276,000

Inventory………………….

216,000

108,000

Land……………………………. Equipment

252,000 240,000

48,000 180,000

Buildings

720,000

540,000

Balance Sheet

(3) 4,800 (3) 15,000

Discount on bonds payable Goodwill…………………… Investment 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

5. 1/1/20x4

(3) 6,000 (3) 7,200

465,000

(1) 24,000

P2,220,000

P1,074,0 00

P 150,000

P 102,000

450,000

306,000

120,000 240,000 600,000

120,000 120,000

660,000 P2,220,000

240,000 186,000 P1,074,0 00

(4)

6,000

324,000 265,200 420,000

(3) 216,000 (4) 2,400 (4) 3,600 (2) 384,000 (3) 105,00 0

1,044,000 2,400 11,400

P2,634,000

(3) 96,000 (3) 192,000 (4) 12,000

(4) 24,000

P 180,000

552,000 240,000 360,000 600,000

(2) 240,000 702,000 P 783,120

P 783,120

P2,634,000

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 Retained earnings Total Stockholders’ Equity (Total Equity)

P 600,000 360,000 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 Total Less: Amortization of allocated excess Goodwill impairment loss Consolidated Net Income for 20x4

P168,000 60,000 P228,000 P 13,200 3,600

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) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P for 20x4 or Consolidated Net Income (CNI)* Total Less: Dividends paid – P Company for 20x4 Consolidated Retained Earnings, December 31, 20x4

P360,000 211,200 P571,200 72,000 P499,200

*since it is a 100%-owned subsidiary, Controlling Interest in Net Income is the same with Consolidated 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 convert 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

P492,000

P 144,000 120,000 P 24,000

Less: Amortization of allocated excess – 20x4

16,800 7,200 100%

P 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: Dividends paid – P Company for 20x5 Consolidated Retained Earnings, December 31, 20x5

274,800 P774,000 72,000 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 IX – 80% Partial Goodwill - Cost Model 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…………………. …………….. Land……………………………………… Equipment (net)......... Buildings (net) Bonds payable…………………………

P 24,000 48,000 84,000 168,000 (120,000)

S Co. Fair value P

30,000 55,200 180,000 144,000 ( 115,200)

7,200 P 499,200

(Over) Under Valuation P

6,000 7,200 96,000 (24,000) 4,800

Net………………………………………..

P 204,000

P 294,000

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 S Co. Book value 360,000

180,000 S Co. Fair value 144,000

96,000 (Decrease) ( 216,000)

192,000

-

( 192,000)

168,000

144,000

(

24,000)

A summary or depreciation and amortization adjustments is as follows: Account amortized

Adjustments

to

Inventory Subject to Annual Amortization Equipment (net)......... Buildings (net) Bonds payable…

be

Over/ Under P 6,000

Lif e

Current Year(20x4)

1

Annual Amount P 6,000

P 6,000

P -

96,000 (24,00 0) 4,80 0

8

12,000

12,000

12,000

4

( 6,000) 1,20 0 P 13,200

( 6,000) 1,200

(6,000) 1,20 0

P 13,200

P 7,200

4

20x5

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

20x4: First Year after Acquisition Parent Company Cost Model Entry

January 1, 20x4: (1) Investment in S Company…………………………………………… 372,000 Cash……………………………………………………………………. 372,000 . Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Dividend income (P36,000 x 80%)……………. 28,800 Record dividends from S Company. On the books of S Company, the P30,000 dividend paid was recorded as follows: Dividends paid………… 36,000 Cash……. 36,000 Dividends paid by S Co..

Consolidation Workpaper – Year of Acquisition (E1) Common stock – S Co………………………………………… Retained earnings – S Co…………………………………… Investment in S Co…………………………………………… Non-controlling interest (P360,000 x 20%) ………………………..

240,000 120.000 288,000 72,000

To eliminate intercompany investment and equity accounts of subsidiary on date of acquisition; and to establish noncontrolling interest (in net assets of subsidiary) on date of acquisition.

(E2) Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. Accumulated depreciation – buildings………………….. Land……………………………………………………………………… . Discount on bonds payable…………………………………………. Goodwill……………………………………………………………… …. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%) ……………………….. Investment in S Co………………………………………………. To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish noncontrolling interest (in net assets of subsidiary) on date of acquisition.

6,000 96,000 192,000 7,200 4,800 12,000 216,000 18,000 84,000

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss………………………………………. Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

6,000 6,000 6,000 1,200 3,000 6,000 12,000 1,200 3,000

To provide for 20x4 impairment loss and depreciation and amortization on differences between acquisition date fair value and

book value of Son’s identifiable assets and liabilities as follows: Cost of Goods Sold Inventory sold Equipment Buildings Bonds payable Totals

Depreciation/ Amortization expense

Amortizatio n -Interest

Total

P 6,000

_______ P 6,000

P 12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

13,20 0

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 P12,000 3,000 P15,000

Goodwill applicable to parent………………… 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: Goodwill impairment loss attributable to P or controlling Interest Goodwill impairment loss applicable to NCI…………………….. Goodwill impairment loss based on 100% fair value or fullGoodwill

(E4) Dividend income - P………. Non-controlling interest (P36,000 x 20%)……………….. Dividends paid – S……………………

Value P 3,000

% of Total 80.00%

750

20.00%

P 3,750

100.00%

28,800 7,200 36,000

To eliminate intercompany dividends and non-controlling interest share of dividends.

(E5) Non-controlling interest in Subsidiary………… Non-controlling interest …………..

Net

Income

of

To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows:

9,360 9,360

Net income of subsidiary…………………….. Amortization of allocated excess [(E3)]…... Multiplied by: %.......... Non-controlling (NCINI)

interest

P 60,000 ( 13,200) P 46,800 20%

Interest in Net Income

P 9,360

Non-controlling

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Sales

Income Statement

P Co P480,000

S Co. P240,000

Dividend income Total Revenue

28,800 P508,800

P240,000

Cost of goods sold

P204,000

P138,000

Depreciation expense

60,000

28,000

Interest expense Other expenses

48,000

18,000

Goodwill impairment loss Total Cost and Expenses Net Income

P310,000 P196,800

P180,000 P 60,000

NCI in Net Income - Subsidiary Net Income to Retained Earnings

P196,800

P 60,000

Dr.

Cr.

(4) 28,800

Consolidated P 720,000 _________ P 720,000 P 348,000

(3) 6,000 (3) 6,000 (3) 1,200

90,000 1,200 66,000 3,000

(3) 3,000

P508,200 P211,800 ( 9,360)

(5) 9,360

P202,440

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet

P 360,000

P360,000 196,800 P552,000

P120,000 60,000 P180,000

(1) 120,000 202,440 P562,440

72,000

72,000

-

36,000

P484,800

P144,000

Cash………………………. Accounts receivable……..

P 232,800 90,000

P 90,000 60,000

Inventory………………….

120,000

90,000

(4) 36,000

_

________ P 490,440

Balance Sheet P (2) 6,000

(3) 6,000

322,800 150,000 210,000

Land……………………………. Equipment

210,000 240,000

48,000 180,000

Buildings

720,000

540,000 (2) 4,800 (2) 12,000

Discount on bonds payable Goodwill…………………… Investment 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

372,000 P1,984,800

P1,008,0 00

P 135,000

P 96,000

405,000 120,000 240,000 600,000 484,800

240,000 144,000

_________ P1,984,800

(2) 216,000 (3) 1,200 (3) 3,000 (4) 288,000 (5) 84,000

1,044,000 3,600 9,000 -

(3) 12,000

P147,000

495,000 240,000 360,000 600,000

(1) 240,000 490,440 (4)

______ ___ P1,008,0 00

265,200 420,000

P2,424,600

(2) 96,000 (2) 192,000 288,000 (3) 6,000 120,000 120,000

Non-controlling interest…………

Total

(2) 7,200

7,200

__________ P 745,560

(1 ) 72,000 (2) 18,000 (5) 9,360 P 745,560

____92,160 P2,424,600

20x5: Second Year after Acquisition Sales Less: Cost of goods sold Gross profit Less: Depreciation expense Other expense Net income from its own separate operations Add: Dividend income Net income Dividends paid

P Co. P 540,000 216,000 P 324,000 60,000 72,000 P 192,000 38,400 P 230,400 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.

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 x 80%)……………. Record dividends from S Company.

38,400 38,400

Consolidation Workpaper – Second Year after Acquisition The working paper eliminations (in journal entry format) on December 31, 20x5, are as follows:

(E1) Investment in S Company………………………… Retained earnings – P Company……………………… the

19,200 19,200

To provide entry to convert from the cost method to the equity method or the entry to establish reciprocity at the beginning of year, 1/1/20x5, computed 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 – S Co………………………………………… Retained earnings – S Co., 1/1/20x5 Investment in S Co (P384,000 x 80%) ………………………… Non-controlling interest (P384,000 x 20%) ………………………..

240,000 144,000 307,200 76,800

To eliminate intercompany investment and equity accounts of subsidiary and to establish non-controlling interest (in net assets of subsidiary) on January 1, 20x5.

(E3) Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. Accumulated depreciation – buildings………………….. Land……………………………………………………………………… . Discount on bonds payable…………………………………………. Goodwill……………………………………………………………… …. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%) Investment in S Co………………………………………………. To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish noncontrolling interest (in net assets of subsidiary) on January 1, 20x5.

(E4) Retained earnings – P Company, 1/1/20x5

6,000 96,000 192,000 7,200 4,800 12,000 216,000 18,000 84,000

[(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] Non-controlling interests (P13,200 x 20%) ……………………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

13,560 2,640 6,000 12,000 1,200 6,000 24,000 2,400 3,000

To provide for years 20x4 and 20x5 depreciation and amortization on differences between acquisition date fair value and book value of S’s identifiable assets and liabilities as follows: Year 20x4 amounts are debited to P’s retained earnings & NCI; Year 20x5 amounts are debited to respective nominal accounts.

Inventory sold Equipment Buildings Bonds payable Sub-total Multiplied by: To Retained earnings Impairment loss Total

(20x4) Retaine d earnings , P 6,000 12,000 (6,000) 1,20 0 P13,200 80% P 10,560 3,00 0 P 13,560

Depreciation/ Amortization expense

Amortizatio n -Interest

P 12,000 ( 6,000) ________

P 1,200

P 6,000

P 1,200

(E5) Dividend income - P………. Non-controlling interest (P48,000 x 20%)……………….. Dividends paid – S……………………

38,400 9,600 48,000

To eliminate intercompany dividends and non-controlling interest share of dividends.

(E6) Non-controlling interest in Subsidiary………… Non-controlling interest …………..

Net

Income

of

16,560

To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows:

Net income of subsidiary…………………….. Amortization of allocated excess [(E4)]…... Multiplied

by:

Non-controlling

16,560

interest

P 90,000 ( 7,200) P 82,800 20

%.......... Non-controlling (NCINI

Interest in Net Income

% 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) Sales

Income Statement

P Co P540,000

S Co. P360,000

Dividend income Total Revenue Cost of goods sold

38,400 P578,400 P216,000

P360,000 P192,000

60,000

24,000

Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses

72,000 P348,000

Net Income

P230,400

54,000 P270,000 P 90,000

Depreciation expense

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 above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet

P230,400

P484,800

230,400 P715,200

P 90,000

Dr.

Cr.

(5) 38,400

Consolidated P 900,000 ___________ P P

900,000 408,000 90,000

(4) 6,000 (4) 1,200

1,200 126,000 P 625,200 P 274,800

(6) 16,560

( 16,560) P 258,240

(4) 13,56 0 (2) P 144,00 144,000 0 90,000 P234,000

(1) 19,200

P 490,440

258,240 P 748,680

72,000

72,000 (5) 48,000

-

48,000

P643,200

P186,000

P 676,680

Cash………………………. Accounts receivable……..

P 265,200 180,000

P 114,000 96,000

P 367,200 276,000

Inventory………………….

216,000

108,000

Land……………………………. Equipment

210,000 240,000

48,000 180,000

Buildings

720,000

540,000

Discount on bonds payable Goodwill……………………

(3) 6,000 (3) 7,200

(3) 4,800 (3) 12,000

(4)

6,000

_

________

324,000 265,200 420,000

(3) 216,000 (4) 2,400 (4) 3,000

1,044,000 2,400 9,000

Investment 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

372,000

(1) 19,200

P2,203,200

P1,074,0 00

P 150,000

P 102,000

450,000

306,000

120,000 240,000 600,000

120,000 120,000

643,200

240,000 186,000

(2) 307,200 (3) 84,000

P2,707,800

(3) 96,000 (3) 192,000 (4) 12,000

(4) 24,000

P180,000

552,000 240,000 360,000 600,000

(2) 240,000 676,680 (5)

Non-controlling interest………… ___ _____ Total

P2,203,200

______ ___ P1,074,0 00

9,600 (4) 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 P 240,000 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 value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Fair value of stockholders’ equity of subsidiary, January 1, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

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

P 600,000 360,000 P 960,000

NCI, 1/1/20x4 Consolidated SHE, 1/1/20x4

___90,000 P1,050,000

6. Note: The goodwill recognized on consolidation purely relates 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 above) 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

P168,000 60,000 P228,000 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 Less: Amortization of allocated excess / goodwill impairment (refer to amortization table above) 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: Dividends 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 P 240,000 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: Dividends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) – 20x4 Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

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 above) 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 above) 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 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:

P484,800

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 %...................

or

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)*

3,000

(P3, 750 x 80%) Consolidated Retained earnings, January 1, 20x5 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P for 20x5 Total Less: Dividends paid – P Company for 20x5 Consolidated Retained Earnings, December 31, 20x5

5,640 P 490,440 258,240 P748,680 72,000 P676,680

*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired.

e. Non-controlling interest (partial-goodwill), December 31, 20x5 P 240,000 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: Dividends paid – 20x5 Stockholders’ equity – S Company, December 31, 20x5 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) : 20x4 20x5 Fair value of stockholders’ equity of S, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)…………………………………..

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 NCI, 12/31/20x5 Consolidated SHE, 12/31/20x5

Problem X – 80% Full Goodwill – Cost Model

P 600,000 676,680 P1,276,680 ___99,120 P1,375,800

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%) ……………… 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 372,000 93,000 P 465,000 P 240,000 120,000

360,000 P 105,000

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: Account amortized

Adjustments

to

Inventory Subject to Annual Amortization Equipment (net)......... Buildings (net) Bonds payable…

20x4: First Year after Acquisition Parent Company Cost Model Entry

be

Over/ under P 6,000

Lif e

Current Year(20x4)

1

Annual Amount P 6,000

P 6,000

P -

96,000 (24,00 0) 4,80 0

8

12,000

12,000

12,000

4

( 6,000) 1,20 0 P 13,200

( 6,000) 1,200

(6,000) 1,20 0

P 13,200

P 7,200

4

20x5

January 1, 20x4: (1) Investment in S Company…………………………………………… Cash……………………………………………………………………. . Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Dividend income (P36,000x 80%)……………. Record dividends from S Company.

372,000 372,000

28,800 28,800

No entries are made on the P’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 – S Co………………………………………… Retained earnings – S Co…………………………………… Investment in S Co…………………………………………… Non-controlling interest (P360,000 x 20%) ………………………..

240,000 120.000

(E2) Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. Accumulated depreciation – buildings………………….. 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……………………………………………….

6,000

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss………………………………………. Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

288,000 72,000

96,000 192,000 7,200 4,800 15,000 216,000 21,000 84,000

6,000 6,000 6,000 1,200 3,750 6,000 12,000 1,200 3,750

Cost of Goods Sold Inventory sold Equipment Buildings Bonds payable Totals

Depreciation/ Amortization Expense

P 6,000 P12,000 ( 6,000) _______ P 6,000

_______ P 6,000

P 1,200 P1,200

(E4) Dividend income - P………. Non-controlling interest (P36,000 x 20%)……………….. Dividends paid – S……………………

(E5) Non-controlling interest in Subsidiary………… Non-controlling interest …………..

Net

by:

Non-controlling

28,800 7,200 36,000

Income

of

8,610 8,610

Net income of subsidiary…………………….. Amortization of allocated excess [(E3)]…... Multiplied %..........

Amortizatio n -Interest

interest

P 60,000 ( 13,200) P 46,800 20% P

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 partialgoodwill)* Non-controlling Interest in Net Income (NCINI)

9,360

750 P

8,610

*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,125 by 20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6).

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Sales

Income Statement

P Co P480,000

S Co. P240,000

Dividend income Total Revenue

28,800 P508,800

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

P312,000

P180,000

Dr. (4) 28,800 (3) 6,000 (3) 6,000 (3) 1,200 (3) 3,750

Cr.

Consolidated P 720,000 _________ P 720,000 P 348,000 90,000 1,200 66,000 3,750 P508,950

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 above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet

P196,800 P196,800

P 60,000 P 60,000

(

(5) 8,610

P211,050 8,610)

P202,680

P 360,000

P360,000 196,800 P556,800

P120,000 60,000 P180,000

(1) 120,000 202,680 P562,440

72,000

86,400

-

36,000

P484,800

P144,000

Cash………………………. Accounts receivable……..

P 232,800 90,000

P 90,000 60,000

Inventory………………….

120,000

90,000

Land……………………………. Equipment

210,000 240,000

48,000 180,000

Buildings

720,000

540,000

(4) 36,000

_

________ P 490,440

Balance Sheet

Total Accumulated depreciation equipment Accumulated depreciation buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par………

372,000 P1,984,800 P 135,000 405,000 120,000 240,000 600,000

Common stock, P10 par……… Retained earnings, from above

(2) 6,000 (2) 7,200

(2) 4,800 (2) 15,000

Discount on bonds payable Goodwill…………………… Investment in S Co………

P

484,800

_________ Total

P1,984,800

______ ___ P1,984,8 00

210,000 265,200 420,000

(2) 216,000 (3) 1,200 (3) 3,750 (3) 288,000 (4) 84,000

1,044,000 3,600 11,250 P2,426,850

(2) P 96,000 96,000 (5) 192,000 288,000 (6) 6,000 120,000 120,000

(3) 12,000

P147,000

495,000 240,000 360,000 600,000

(1) 240,000 490,440 (7)

Non-controlling interest…………

(3) 6,000

P1,008,0 00

240,000 144,00 0

322,800 150,000

7,200 __________ P 748,560

(1 ) 72,000 (2) 21,000 (5) 8,610 P 748,560

____94,410 P2,426,850

20x5: Second Year after Acquisition Sales

P Co. P 540,000

S Co. P 360,000

Less: Cost of goods sold Gross profit Less: Depreciation expense Other expense Net income from its own separate operations Add: Dividend income Net income Dividends paid

216,000 P 324,000 60,000 72,000 P 192,000 38,400 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 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

Consolidation Workpaper – Second Year after Acquisition (E1) Investment in S Company………………………… Retained earnings – P Company……………………… the

19,200 19,200

To provide entry to convert from the cost method to the equity method or the entry to establish reciprocity at the beginning of 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………………………………………… Retained earnings – S Co., 1/1/20x5 Investment in S Co (P384,000 x 80%) ………………………… Non-controlling interest (P384,000 x 20%) ………………………..

240,000 144,000

(E3) Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. Accumulated depreciation – buildings………………….. Land……………………………………………………………………… . Discount on bonds payable………………………………………….

6,000

307,200 76,800

96,000 192,000 7,200 4,800

Goodwill………………………………………………………………

15,000

…. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%) + [(P15,000, full – P12,000, partial goodwill)]………… Investment in S Co……………………………………………….

(E4) Retained earnings – P Company, 1/1/20x5 (P16,950 x 80%) Non-controlling interests (P16,950 x 20%) ……………………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

Inventory sold Equipment Buildings Bonds payable Impairment loss Totals Multiplied by: CI%.... To Retained earnings

(20x4) Retaine d earnings , P 6,000 12,000 (6,000) 1,200 3,75 0 P 16,950 80 % P13,560

Depreciation/ Amortization expense

P

216,000 21,000 84,000

13,560 3,390 6,000 12,000 1,200 6,000 24,000 2,400 3,750

Amortizatio n -Interest

12,000 ( 6,000) P 1,200 P 6,000

P1,200

(E5) Dividend income - P………. Non-controlling interest (P48,000 x 20%)……………….. Dividends paid – S……………………

38,400 9,600 48,000

To eliminate intercompany dividends and non-controlling interest share of dividends.

(E6) Non-controlling interest in Subsidiary………… Non-controlling interest …………..

Net

Net income of subsidiary…………………….. Amortization of allocated excess [(E4)]…...

Income

of

16,560 16,560

P 90,000 ( 7,200) P 82,800

Multiplied %.......... Less: full-

by:

Non-controlling

interest

20 % P 16,560

NCI on goodwill impairment loss on

Goodwill Non-controlling (NCINI)

0 Interest in Net Income

P 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

P Co P540,000

S Co. P360,000

38,400 P578,400 P216,000

P360,000 P192,000

60,000

24,000

Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses

72,000 P348,000

Net Income

P230,400

54,000 P270,000 P 90,000

Sales Dividend income Total Revenue Cost of goods sold Depreciation expense

NCI in Net Income - Subsidiary

-

Net Income to Retained Earnings

P230,400

P 90,000

Dr.

Cr.

(5) 38,400

Consolidated P 900,000 ___________ P P

900,000 408,000 90,000

(4) 6,000 (4) 1,200

1,200 126,000 P 625,200 P 274,800 (

(6) 16,560

16,560)

P 258,240

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet

P484,800

230,400 P715,200

(5) 13,56 0 (6) P 144,00 144,000 0 90,000 P234,000

(5) 19,200

P 490,440

258,240 P 748,680

72,000

72,000 (5) 57,600

-

48,000

_

________

P643,200

P186,000

P 676,680

P 265,200 180,000 216,000

P 102,000 96,000 108,000

P 367,200 276,000 324,000

Balance Sheet Cash………………………. Accounts receivable…….. Inventory………………….

(3)

(4)

6,000

Land……………………………. Equipment

210,000 240,000

48,000 180,000

Buildings

720,000

540,000 (3) 4,800 (3) 15,000 (1) 19,200

Discount on bonds payable Goodwill…………………… Investment 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

372,000

P2,203,200

P1,074,0 00

P 150,000

P 102,000

450,000

306,000

120,000 240,000 600,000

120,000 120,000

643,200

6,000 (3) 7,200

240,000 186,000

Total

P2,203,200

______ ___ P1,074,0 00

1,044,000 2,400 11,250 -

(4) 24,000

P180,000

552,000 240,000 360,000 600,000

(2) 240,000 676,680 (8)

___ _____

(3) 216,000 (4) 2,400 (4) 3,750 (2) 307,200 (7) 84,000

P2,710,050 (3) 96,000 (3) 192,000 (4) 12,000

(6) Non-controlling interest…………

265,200 420,000

9,600 3,390

__________ P 824,910

(2 ) 76,800 (3) 21,000 (6) 16,560 P 824,910

____101,37 0 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 P 240,000 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 value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Fair value 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)…………………………………..

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 above) 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 above) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) Less: Non-controlling int. 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

*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to 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: Dividends 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 P 240,000 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: Dividends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) – 20x4 Fair value 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……………..

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 P1,184,85 0

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 above) 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

23,760 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 above) 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 convert 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 %...................

or

Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)*

(P3, 750 x 80%) Consolidated Retained earnings, January 1, 20x5 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 Total Less: Dividends paid – P Company for 20x5 Consolidated Retained Earnings, December 31, 20x5

P484,800

P 144,000 120,000 P 24,000 13,200 P 10,800 80% P 8,640 3,000

5,640 P 490,440 258,240 P748,680 72,000 P676,680

*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired.

e. Non-controlling interest (partial-goodwill), December 31, 20x5 P 240,000 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: Dividends paid – 20x5 Stockholders’ equity – S Company, December 31, 20x5 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) : 20x4 20x5 Fair value 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)…………………………………..

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 P1,378,05 0

Problem XI 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.........................................

P900,000 770,000 P130,000

Excess fair value (undervalued equipment)................................ Excess fair value (overvalued patented technology)................... Goodwill................................................................................

100,000 (20,000) P 50,000

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 XII 1. Investment in WP, Inc. Contingent performance obligation Cash 2.

12/31/x5 Loss from increase in contingent performance obligation Contingent performance obligation

10,000

Common stock Retained earnings-WP Investment in WP

1,180,000 50,000 1,210,000

35,000 465,000

5,000

3. Cost Model/Initial Value Method Investment in WP Retained earnings-BS

800,000

500,000

12/31/x4 Loss from increase in contingent performance obligation Contingent performance obligation

12/31/x5 Contingent performance obligation Cash

P210,000

5,000

10,000

50,000 50,000 30,000 200,000 180,000

Royalty agreements Goodwill Investment in WP

90,000 60,000

Dividend income Dividends paid

35,000

Amortization expense Royalty agreements

10,000

30,000

380,000

150,000 35,000 10,000

510,000 680,000

Problem XIII (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 Total ...........................................................

_____-0P20,000

1. Consolidated copyrights PP (book value) ..................................................... P900,000 SS (book value) ..................................................... 400,000 Allocation (above) ................................................. 120,000 Excess amortizations, 20x4 .................................. (20,000) Total ................................................................ P1,400,000 2. Consolidated net income, 20X4 Revenues (add book values) ................................. Expenses: Add book values .............................................. Excess amortizations ....................................... Consolidated net income.......................................

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 XIV 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 XV 1. Net income for 20x4: QQ Operating income P 90,000 Income from subsidiary 24,500 Net income P114,500 2. Consolidated net income is P125,000 (P90,000 + P35,000). 3. Retained earnings reported at December 31, 20x4: QQ Retained earnings, January 1, 20x4 P290,000 Net income for 20x4 114,500 Dividends paid in 20x4 (30,000) Retained earnings, December 31, 20x4 P374,500

NN P35,000 P35,000 NN P40,000 35,000 (10,000) P65,000

4. Consolidated retained earnings at December 31, 20x4, is equal to the P374,500 retained earnings balance reported by QQ. 5. 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 total retained earnings reported by the parent in arriving at consolidated retained earnings. Problem XVI (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)............................. P2,500,000 Non-controlling interest fair value (P30.00 × 20,000 shares)........................ P600,000 SR’s total fair value 1/1/09............................................................................ 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............................................................................ P3,100,000 SR’s net assets book value............................................................................ 1,290,000 Excess acquisition-date fair value over book value....................................... P1,810,000 Adjustments from book to fair values............................................................ Buildings and equipment............................................. (250,000) Trademarks................................................................. 200,000 Patented technology................................................... 1,060,000 Unpatented technology............................................... 600,000 1,610,000 Goodwill ............................................................................................... P 200,000 4. Combined revenues...................................................................................... P4,400,000 Combined expenses...................................................................................... (2,350,000) Building and equipment excess depreciation................................................ 50,000 Trademark excess amortization..................................................................... (20,000) Patented technology amortization................................................................. (265,000) Unpatented technology amortization............................................................ (200,000) Consolidated net income............................................................................... P1,615,000 To non-controlling interest: SR’s revenues.......................................................................................... P1,400,000 SR’s expenses......................................................................................... (600,000) Total excess amortization expenses (above)............................................ (435,000) SR’s adjusted net income........................................................................ P365,000 Non-controlling interest percentage ownership....................................... 20% Non-controlling interest share of consolidated net income...................... P73,000 To controlling interest: Consolidated net income......................................................................... P1,615,000 Non-controlling interest share of consolidated net income...................... (73,000) Controlling interest share of consolidated net income............................. P1,542,000 -ORrevenues.......................................................................................... P3,000,000 expenses.......................................................................................... 1,750,000 separate net income........................................................................ P1,250,000 share of SR’s adjusted net income (80% × P365,000)........................................................................ 292,000 Controlling interest share of consolidated net income............................. P1,542,000 5. Fair value of non-controlling interest January 1, 20x4................................... P600,000 20x4 income ............................................................................................... ……..73,000 Dividends (20% × P30,000).......................................................................... (6,000) Non-controlling interest December 31, 20x4................................................. P 667,000 PS’s PS’s PS’s PS’s

6. 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 XVII (Full-Goodwill) A variety of consolidated balances-midyear acquisition) Book value of RR, 1/1 (stockholders' equity accounts) (P100,000 + P600,000 + P700,000)........... P1,400,000 Increase in book value: Net Income (revenues less cost of goods sold and expenses) ......................... P120,000 Dividends ................................................ (20,000) Change during year ......................................... P100,000 Change during first six months of year ..... 50,000 Book value of RR, 7/1 (acquisition date) P1,450,000 (Full-Goodwill) Consideration transferred by KL (P1,330,000 + P30,000)................................................... P1,360,000 Non-controlling interest fair value ......................... 300,000 RRs’ fair value (given)............................................ 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 follows: BV of SHE of Subsidiary (RR)....................... P1,450,000 Adjustments to reflect fair value (undervaluation) 150,000 FV of SHE of Subsidiary (RR)....................... P 1,600,000 Multiplied by: NCI%........................ 20% FV of NCI………………………………………………. P 320,000 Consideration transferred by KL (P1,330,000 + P30,000)................................................... P1,360,000 Non-controlling interest fair value ......................... ___320,000 RRs’ fair value (given)............................................ P1,680,000 Book value of RR, 7/1............................................ (1,450,000) Fair value in excess of book value.......................... P 230,000 Annual Excess Excess fair value assigned Life Amortizations Trademarks ........................................................ 150,000 5 years P30,000 Goodwill (full-goodwill) ....................................... P 80,000 indefinite -0Total ............................................................. P30,000 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) is 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 (postacquisition 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 XVIII (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

P526,000 300,000 P826,000 (765,000) P 61,000

Annual Excess

based on fair value: Life Amortizations Equipment............................................ (30,000) 5 years P(6,000) Goodwill (full)........................................ P 91,000 indefinite -0Total ........................................................... P(6,000) Amortization for 9 months ......................... P(4,500) 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) .....................

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)…………………… P765,000 Adjustments to reflect fair value (undervaluation) ( 30,000) FV of SHE of Subsidiary (DD).................. P735,000 Multiplied by: NCI%.......................... 40% FV of NCI……………………………………………. P294,000 (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...................................

(2)

(4)

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) 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 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 XIX (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 equity 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

3. 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

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

P40,000 1,750 (1,000) P40,750

Problem XX 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

Read discussion on step-acquisition regarding the initial treatment of investment as FVTOCI or FVTPL and its disposition. It is assumed that the investment above is FVTPL. Problem XXI 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 P

84,000 72,000 12,000

*the P720,000 is already the gross-up amount since it is the amount presented in the consolidated 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, Palmer Company’s additional paid-in capital increases by P60,000. Problem XXII 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:

P 210,000

Non-controlling interest prior to issuance of additional shares: Book value of SHE before issuance…P720,000 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 XXIII 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. 3.

Equity Method – same with No. 1 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 .......................................... P 800,000 TT book value—buildings ............................................ 300,000 Allocation ................................................................... 80,000 Excess Amortizations for 20x4–20x5 (P4,000 × 2) (8,000) Consolidated buildings account ...................... P1,172,000

4.

5.

Acquisition-date fair value allocated to goodwill

Goodwill-full ( see Problem I above) .......................................... Goodwill-partial (see Problem I above)………………………… 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 XXIV (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 (Schedule 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...................................................... 6. Consolidated goodwill Allocation of excess fair value to goodwill..............................

P288,000 (10,000) 1,500 P279,500 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 XXV Computation of Goodwill: Partial Goodwill or Proportionate Basis

Fair value of Subsidiary: Consideration transferred

P1,970,00 0 _1,440,00 0 P 530,000

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

P 100,000 140,000

Full-goodwill or Fair Value Basis Fair value of Subsidiary: Consideration transferred P1,970,000 / 80%

P2,467,50 0 1,800,000

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

__240,000 P 290,000

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

Equity in Subsidiary Income Investment in S Company 20x5 Cash (0.8 x P225,000) Investment in S Company Investment in S Company

120,000 600,000

80,000 80,000 180,000 180,000 720,000

Equity in Subsidiary Income (.80)(P900,000) 720,000 Equity in Subsidiary Income Investment in S Company

60,000

60,000

2. 20x4 (1) Equity in Subsidiary Income ((.80)(P750,000) -P80,000) 520,000 Dividends Declared (0.80 x P150,000) Investment in S Company 400,000 (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)

120,000

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) 660,000 Dividends Declared (0.80 x P225,000) Investment in Superstition Company

180,000 480,000

(2) Beginning Retained Earnings-Superstition Company 1,200,000 Common Stock - Superstition Company. 1,200,000 Investment in Superstition Company Non-controlling Interest (P492,500 + (P1,200,000 – P600,000) x .20)

612,500

(3) Investment in S Company Non-controlling Interest Cost of Goods Sold Equipment (net) Goodwill Investment in S Company

662,500

(4) Investment in S Company Non-controlling Interest Depreciation Expense Equipment (net)

60,000 15,000 50,000 175,000 362,500 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 P1,630,00 0

Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment

P130,000 100,000 ____0

Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent…………..

230,00 0 P1,400,00 0 130,000 P1,530,00 0

Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

Net income of subsidiary…………………….. Amortization of allocated excess (P25,000 + P75,000)

P 750,000 ( 100,000) P650,000 20 % P 130,000

Multiplied by: Non-controlling interest %.......... 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 XXVI – 80% Partial Goodwill – Equity Method 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.

S Co.

(Over) Under

Book value Inventory…………………. …………….. Land……………………………………… Equipment (net)......... Buildings (net) Bonds payable………………………… Net………………………………………..

Fair value

P 24,000 48,000 84,000 168,000 (120,000) P 204,000

Valuation

P

30,000 55,200 180,000 144,000 ( 115,200) P 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 S Co. Book value 360,000

180,000 S Co. Fair value 144,000

96,000 (Decrease) ( 216,000)

192,000

-

( 192,000)

168,000

144,000

(

24,000)

A summary or depreciation and amortization adjustments is as follows: Account amortized

Adjustments

to

Inventory Subject to Annual Amortization Equipment (net)......... Buildings (net)

be

Over/ Under P 6,000 96,000 (24,00 0) 4,80 0

Lif e

Current Year(20x4)

1

Annual Amount P 6,000

P 6,000

P -

8

12,000

12,000

12,000

4

20x5

( 6,000) ( 6,000) (6,000) 1,20 1,20 Bonds payable… 4 0 1,200 0 P 13,200 P 13,200 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%) P 372,000 Fair value of NCI (given) (20%) 93,000 Fair value of Subsidiary (100%) P 465,000 Less: Book value of stockholders’ equity of S (P360,000 x 100%) __360,000 Allocated excess (excess of cost over book value)….. P 105,000 Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) 90,000 Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………... P 15,000

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 S Company…………………………………………… Cash……………………………………………………………………. .

372,000 372,000

Acquisition 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 allocated excess of inventory, 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: Investment in S

Cost, 372,000

1/1/x4

28,800 80%)

NI of S

48,000

Dividends – S (36,000x

Amortization &

(60,000

x

80%)

13,560

impairment

Investment Income Balance, 377,640 Amortization &

12/31/x4 NI of S

impairment

48,000

(P60,000 x 80%)

13,560

34,440

Balance, 12/31/x4

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 – S Co………………………………………… Retained earnings – S Co…………………………………… Investment in Son Co…………………………………………… Non-controlling interest (P360,000 x 20%) ………………………..

240,000 120.000

(E2) Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. Accumulated depreciation – buildings………………….. Land……………………………………………………………………… . Discount on bonds payable…………………………………………. Goodwill…………………………………………………………………. Buildings……………………………………….. Non-controlling interest (P96,000 x 20%) ……………………….. Investment in S Co……………………………………………….

6,000

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss………………………………………. Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

Cost of Goods Sold Inventory sold Equipment Buildings Bonds payable Totals

Depreciation/ Amortization Expense

Amortizatio n -Interest

288,000 72,000

96,000 192,000 7,200 4,800 12,000 216,000 18,000 84,000

6,000 6,000 6,000 1,200 3,000 6,000 12,000 1,200 3,000

Total

P 6,000

_______ P 6,000

P 12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

13,20 0

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: Goodwill applicable to parent…………………

Value P12,000

% of Total 80.00%

Goodwill applicable to NCI…………………….. Total (full) goodwill………………………………..

3,000 P15,000

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: Goodwill impairment loss attributable to parent or controlling Interest Goodwill impairment loss applicable to NCI…………………….. Goodwill impairment loss based on 100% fair value or fullGoodwill

Value P 3,000

% of Total 80.00%

625

20.00%

P 3,750

100.00%

(E4) Investment income Non-controlling interest (P36,000 x 20%) ……………….. Dividends paid – S…………………… Investment in S Company

34,440 7,200 36,000 5,640

To eliminate intercompany dividends and investment income

under

equity method and establish share of dividends, computed as follows: Investment in S

Investment Income

NI of S

28,800

(60,000

Dividends - S

Amortization

NI of S

Amortization

(60,000

& 48,000

40

x

80%)…….

5,6

13,560

impairment

impairment

13,560

48,000 80%)

x

34,440

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,

Investment in S

Cost, 372,000

1/1/x4

28,800 80%)

Dividends – S (36,000x

NI of Son

Amortization &

(60,000

x

80%)

13,560

(E5) Non-controlling interest in 12/31/x4 Net Balance, 377,640 Subsidiary………… Non-controlling interest …………..

Income 288,000

impairment

48,000

of (E1) Investment, 9,360 1/1/20x4 9,360

To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: 84,000

Net income of subsidiary…………………….. Amortization of allocated excess [(E3)]…... Multiplied by: %.......... Non-controlling (NCINI)

Non-controlling

interest

Interest in Net Income 377,640

(E2) Investment, 1/1/20x4

P 5,640 60,000 ( 13,200) P 46,800 20%

(E4) Investment Income and dividends

P 9,360 377,640

Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Sales

Income Statement

P Co P480,000

S Co. P240,000

Investment income Total Revenue

34,440 P513,600

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

P312,000 P202,440

P180,000 P 60,000

NCI in Net Income - Subsidiary Net Income to Retained Earnings

P202,440

P 60,000

Dr. (4) 34,440 (3) 6,000 (3) 6,000 (3) 1,200 (3) 3,000

(5) 9,360

Cr.

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

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet

P360,000 202,440 P562,440

P360,000 P120,000 60,000 P180,000

72,000 36,000

P490,440

P144,000

Cash………………………. Accounts receivable……..

P 232,800 90,000

P 90,000 60,000

Inventory………………….

120,000

90,000

Land……………………………. Equipment

210,000 240,000

48,000 180,000

Buildings

720,000

540,000

Accumulated depreciation equipment Accumulated depreciation buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above

P1,990,440

P1,008,0 00

P 135,000

P 96,000

405,000 120,000 240,000 600,000

P (2) 6,000 (2) 7,200

490,440

_________ P1,990,440

______ ___ P1,008,0 00

322,800 150,000

(3) 6,000

210,000 265,200 420,000

(2) 216,000 (3) 1,200 (3) 3,000 (2) 288,000 (2) 84,000 (4) 5,640

1,044,000 3,600 9,000

P2,424,600

(2) 96,000 (8) 192,000 288,000 (9) 6,000 120,000 120,000 240,000 144,000

P490,440

377,640

Non-controlling interest…………

Total

(4) 36,000

(2) 4,800 (2) 12,000

Discount on bonds payable

Total

202,440 P562,440

72,000 -

Goodwill…………………… Investment in S Co………

(1) 120,000

(3) 12,000

P147,000

495,000 240,000 360,000 600,000

(1) 240,000 490,440 (1 ) 72,000 (2) (10) 7,200 18,000 (5) __________ 9,360 P P 751,200 751,200

____92,160 P2,424,600

20x5: Second Year after Acquisition Sales Less: Cost of goods sold

P Co. P 540,000 216,000

S Co. P 360,000 192,000

Gross profit Less: Depreciation expense Other expense Net income from its own separate operations Add: Investment income Net income Dividends paid

P 324,000 60,000 72,000 P 192,000 66,240 P 258,240 P 72,000

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 amortization of allocated excess of inventory, equipment, buildings and bonds payable

Thus, the investment balance and investment income in the books of P Company is as follows: Investment in S

Cost, 377,640

1/1/x5

38,400 80%)

NI of S

72,000

Dividends – S (48,000x

Amortization

(90,000

x

80%)

5,760

(P7,200 x 80%)

Investment Income Balance, 405,480 Amortization

12/31/x5 NI of S

(7,200

x

80%)

72,000

(90,000 x 80%)

5,760

66,240

Balance, 12/31/x4

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

(E2) Accumulated depreciation – equipment (P96,000 – P12,000) Accumulated depreciation – buildings (P192,000 + 6,000) Land……………………………………………………………………… . Discount on bonds payable (P4,800 – P1,200)…. Goodwill (P12,000 – P3,000)…………………………….. Buildings……………………………………….. Non-controlling interest [(P90,000 – P13,200) x 20%] Investment in S Co……………………………………………….

84,000

(E3) Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Accumulated depreciation – equipment……………….. Discount on bonds payable…………………………

Depreciation/ Amortization Expense Inventory sold Equipment Buildings Bonds payable Totals

Amortizatio n -Interest

P 12,000 ( 6,000) _______

P 1,200

P 6,000

P1,200

198,000 7,200 3,600 9,000 216,000 15,360 70,440

6,000 6,000 1,200 12,000 1,200

Total

P7,,20 0

(E4) Investment income Non-controlling interest (P48,000 x 20%) ……………….. Dividends paid – S…………………… Investment in S Company To eliminate intercompany dividends and investment income under

307,200 76,800

equity method and establish share of dividends, computed as follows:

66,240 9,600 48,000 27,840

Investment in S

NI of S

Investment Income

38,400

(90,000

Dividends – S

Amortization

x

80%)…….

72,000

5,760 80%)

(P7,200 x

NI of S

Amortization (P7,200 5,760

27,8

(90,000 x

80%)

72,000 80%)

x

66,240

40

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,

Investment in S

Cost, 377,640

NI of S (E5) Non-controlling interest in Subsidiary………… Non-controlling interest …………..

1/1/x5

38,400 80%)

Net

Income

Dividends – S (48,000x

of Amortization 16,560 16,560

To establish non-controlling interest in subsidiary’s (90,000 x 80%) adjusted 5,760 net income 72,000 for 20x4 as follows:

Balance, 12/31/x5 Net 405,480 income of subsidiary…………………….. Amortization of allocated excess [(E3)]…... Multiplied by: %.......... Non-controlling (NCINI)

Non-controlling

interest

Interest in Net Income

307,200 P 90,000 ( 7,200) P 82,800 20% 70,440 P 16,560 27,840

(7,200 x 80%)

(E1) Investment, 1/1/20x5

(E2) Investment, 1/1/20x5

(E4) Investment Income and dividends

405,480

405,480

Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition)

Sales

Income Statement

P Co P540,000

S Co. P360,000

Investment income Total Revenue Cost of goods sold

66,240 P606,000 P216,000

P360,000 P192,000

60,000

24,000

Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses

72,000 P348,000

Net Income

P258,240

54,000 P270,000 P 90,000

Depreciation expense

NCI in Net Income - Subsidiary

-

Net Income to Retained Earnings

P258,240

Statement of Retained Earnings Retained earnings, 1/1 P Company

P490,440

S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet

258,240 P748,680

P 90,000

Dr.

Cr.

(4) 66,240

Consolidated P 900,000 ___________ P P

(3) 6,000 (3) 1,200

900,000 408,000 90,000 1,200

126,000 P 625,200 P 274,800 (5) 16,560

( 16,560) P258,240

P490,440 P144,000 90,000 P234,000

(1) 144,000 258,240 P748,680

72,000

72,000 (4) 48,000

-

48,000

-

P676,680

P186,000

P676,680

Cash………………………. Accounts receivable…….. Inventory………………….

P 265,200 180,000 216,000

P 102,000 96,000 108,000

P 367,200 276,000 324,000

Land……………………………. Equipment

210,000 240,000

48,000 180,000

Buildings

720,000

540,000

Balance Sheet

(2) 3,600 (2) 9,000

Discount on bonds payable Goodwill…………………… Investment in S Co………

(2) 7,200

405,480

265,200 420,000 (3) 216,000 (3) 1,200

1,044,000 2,400 9,000

(1) 307,200 (2) 70,440 (4) 27,840

-

Total

Accumulated depreciation equipment Accumulated depreciation buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above

P2,236,680

P1,074,0 00

P 150,000

P 102,000

450,000

306,000

120,000 240,000 600,000

120,000 120,000

676,680

240,000 186,000

(2) 84,000

___ _____ P2,236,680

______ ___ P1,074,0 00

(3) 12,000

(2) 198,000 (3) 6,000

P180,000 552,000 240,000 360,000 600,000

(1) 240,000 676,680 (7)

Non-controlling interest…………

Total

P2,707,800

9,600

__________ P 794,400

(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 P 240,000 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 value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Fair value of stockholders’ equity of subsidiary, January 1, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

120,000 P 360,000 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 above) 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

P168,000 60,000 P228,000 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 Less: Amortization of allocated excess / goodwill impairment (refer to amortization table above) 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: Dividends 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 P 240,000 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: Dividends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) – 20x4 Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

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 above) 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

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 above) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x5

c. CNI, P274,800 – refer to (a)

23,760

P 90,000 80,400 P 82,800 20% P 16,560

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 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 – 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 %...................

or

Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)*

P484,800

P 144,000 120,000 P 24,000 13,200 P 10,800 80% P 8,640 3,000

(P3, 750 x 80%) Consolidated Retained earnings, January 1, 20x5 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 Total Less: Dividends paid – P Company for 20x5 Consolidated Retained Earnings, December 31, 20x5

5,640 P 490,440 258,240 P748,680 72,000 P676,680

*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired.

e. Non-controlling interest (partial-goodwill), December 31, 20x5 P 240,000 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: Dividends paid – 20x5 Stockholders’ equity – S Company, December 31, 20x5 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) : 20x4 20x5 Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)…………………………………..

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 P1,1375,80 0

Problem XXVII - 80% Full Goodwill – Equity Method 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%) ……………… 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 372,000 93,000 P 465,000 P 240,000 120,000

360,000 P 105,000

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: Account amortized

Adjustments

to

Inventory Subject to Annual Amortization Equipment (net)......... Buildings (net) Bonds payable…

be

Over/ under P 6,000 96,000 (24,00 0) 4,80 0

Lif e

Current Year(20x4)

1

Annual Amount P 6,000

P 6,000

P -

8

12,000

12,000

12,000

4

( 6,000) 1,20 0 P 13,200

( 6,000) 1,200

(6,000) 1,20 0

P 13,200

P 7,200

4

20x5

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 Company…………………………………………… Cash……………………………………………………………………. .

372,000 372,000

Acquisition 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%) + (P3,750 – P750)*, goodwill impairment loss)] Investment in S Company

13,560 13,560

Record amortization of allocated excess of inventory, 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: Investment in S

Cost, 372,000

1/1/x4

28,800 80%)

NI of S

Dividends – S (36,000x

Amortization &

(60,000

x

80%)

13,560

Impairment

48,000 Investment Income Balance, 377,640 Amortization &

13,560

12/31/x4 NI of S

Impairment

48,000

34,440

(P60,000 x 80%)

Balance, 12/31/x4

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 – S Co………………………………………… Retained earnings – S Co…………………………………… Investment in S Co…………………………………………… Non-controlling interest (P360,000 x 20%) ……………………….. (E2) Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. Accumulated depreciation – buildings………………….. 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……………………………………………….

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss………………………………………. Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

Cost of Goods Sold Inventory sold Equipment Buildings Bonds payable Totals

Depreciation/ Amortization Expense

Amortizatio n -Interest

240,000 120.000 288,000 72,000 6,000 96,000 192,000 7,200 4,800 15,000 216,000 21,000 84,000

6,000 6,000 6,000 1,200 3,750 6,000 12,000 1,200 3,750

Total

P 6,000

_______ P 6,000

P 12,000 ( 6,000) _______ P 6,000

P 1,200 P1,200

13,20 0

(E4) Investment income Non-controlling interest (P36,000 x 20%) ……………….. Dividends paid – S…………………… Investment in S Company

37,440 7,200 36,000 8,640

Investment in S

Investment Income

NI of S

28,800

(60,000

Dividends – S

NI of Son

Amortization

Amortization &

Impairment

13,560

(60,000

& 48,000

x

80%)…….

13,560

Impairment

5,6

40

48,000 80%)

x

34,440

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,

Investment in S

Cost, 372,000

1/1/x4

28,800 80%)

Dividends – S (36,000x

NI of S

Amortization &

(60,000

x

80%)

13,560

12/31/x4

288,000

Impairment

40,000

Balance, 377,640

(E5) Non-controlling interest in Subsidiary………… Non-controlling interest …………..

Net

Net income of subsidiary…………………….. Amortization of allocated excess [(E3)]…... 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 377,640 less P3,000, impairment on partialgoodwill)* Non-controlling Interest in Net Income (NCINI)

Income 84,000 P 60,000 ( 13,200) P 46,800 5,640 20% P

9,360

377,640 750 P

8,610

(E1) Investment, 1/1/20x4

of

8,610 8,610

(E2) Investment, 1/1/20x4

(E4) Investment Income and dividends

*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6).

Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Sales

Income Statement

P Co P480,000

S Co. P240,000

Investment income Total Revenue

34,440 P514,440

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

P312,000 P202,440

P180,000 P 60,000

NCI in Net Income - Subsidiary Net Income to Retained Earnings

P202,440

P 60,000

Statement of Retained Earnings Retained earnings, 1/1 P Company

P360,000

S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet

202,440 P562,440

Dr.

Cr.

(4) 34,440

Consolidated P 720,000 _________ P 720,000 P 348,000

(3) 6,000 (3) 6,000 (3) 1,200

90,000 1,200 66,000 3,750

(3) 3,750

P508,950 P211,050 ( 8,610)

(5) 8,610

P202,440

P360,000 P120,000 60,000 P180,000

(1) 120,000 202,440 P562,440

72,000

72,000

-

36,000

P490,440

P144,000

Cash………………………. Accounts receivable……..

P 232,800 90,000

P 90,000 60,000

Inventory………………….

120,000

90,000

Land……………………………. Equipment

210,000 240,000

48,000 180,000

Buildings

720,000

540,000

(4) 36,000

P490,440

Balance Sheet

Discount on bonds payable Goodwill……………………

P (2) 6,000 (2) 7,200

(2) 4,800 (2) 15,000

(3) 6,000

322,800 150,000 210,000 265,200 420,000

(2) 216,000 (3) 1,200 (3) 3,750

1,044,000 3,600 11,250

Investment in S Co………

Total Accumulated depreciation equipment

377,640

(2) 288,000 (2) 84,000 (4) 5,640

P1,990,440

P1,008,0 00

P 135,000

P 96,000

Accumulated depreciation buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par………

405,000 120,000 240,000 600,000

Common stock, P10 par……… Retained earnings, from above

490,440

Non-controlling interest………… _________ Total

P1,990,440

P2,426,850

(2) 96,000 (2) 192,000 288,000 (3) 6,000 120,000 120,000 240,000 144,000

______ ___ P1,008,0 00

-

(3) 12,000

P147,000

495,000 240,000 360,000 600,000

(1) 240,000 490,440 (1 ) 72,000 (2) (4) 7,200 21,000 (5) __________ 8,610 P P 754,200 754,200

____94,410 P2,426,850

20x5: Second Year after Acquisition Sales Less: Cost of goods sold Gross profit Less: Depreciation expense Other expense Net income from its own separate operations Add: Investment income Net income Dividends paid

P Co. P 540,000 216,000 P 324,000 60,000 72,000 P 192,000 66,240 P 258,240 P 72,000

S Co. P 380,000 192,000 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%) Record share in net income of subsidiary.

December 31, 20x5:

72,000 72,000

(4) Investment income (P7,200 x 80%) Investment in S Company

5,760 5,760

Record amortization of allocated excess of inventory, 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: Investment in S

Cost, 377,640

1/1/x5

38,400 80%)

NI of S

72,000

Dividends – S (48,000x

Amortization

(90,000

x

80%)

5,760

(P7,200 x 80%)

Investment Income Balance, 405,480 Amortization

12/31/x5 NI of S

(7,200

x

80%)

72,000

(90,000 x 80%)

5,760

66,240

Balance, 12/31/x4

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 eliminate investment on January 1, 20x5 and equity accounts of subsidiary on date of acquisition; and to establish noncontrolling interest (in net assets of subsidiary) on 1/1/20x5.

(E2) Accumulated depreciation – equipment (P96,000 – P12,000) Accumulated depreciation – buildings (P192,000 + P6,000) Land……………………………………………………………………… . Discount on bonds payable (P4,800 – P1,200)….

84,000 198,000 7,200 3,600

Goodwill (P15,000 – P3,750)…………………………….. Buildings……………………………………….. 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 S Co……………………………………………….

11,250 216,000

17,610 70,440

(E3) Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Accumulated depreciation – equipment……………….. Discount on bonds payable…………………………

Depreciation/ Amortization Expense Inventory sold Equipment Buildings Bonds payable Totals

Amortizatio n -Interest

P 12,000 ( 6,000) _______

P 1,200

P 6,000

P1,200

6,000 6,000 1,200 12,000 1,200

Total

P7,20 0

(E4) Investment income Non-controlling interest (P48,000 x 20%)……………….. Dividends paid – S…………………… Investment in S Company

Investment in S

NI of S

38,400

(90,000

72,000

40

x

27,8

5,760 80%)

48,000 27,840

Investment Income

Dividends - S

Amortization 80%)…….

66,240 9,600

(P7,200 x

NI of S

Amortization (P7,200 5,760

(90,000 x

80%)

72,000 80%)

66,240

x

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,

Investment in S

Cost, 377,640

1/1/x5

38,400 80%)

Dividends – S (48,000x

NI of S

Amortization

(90,000 72,000

x

(E5) Non-controlling interest in Subsidiary………… Non-controlling interest …………..

80%)

Net

5,760

(7,200 x 80%)

Income

of

16,560 16,560

Balance, 12/31/x5 adjusted 307,200 net To establish non-controlling interest in subsidiary’s income 405,480 for 20x5 as follows:

(E1) Investment, 1/1/20x5

70,440 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 full405,480 Goodwill Non-controlling Interest in Net Income (NCINI)

(E2) Investment, 1/1/20x5

P 90,000 ( 7,200) P 82,800 27,840 20%

(E4) Investment Income and dividends

P 16,560

0 405,480 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) Sales

Income Statement

P Co P540,000

S Co. P360,000

Investment income Total Revenue Cost of goods sold

66,240 P606,000 P216,000

P360,000 P192,000

60,000

24,000

-

-

Depreciation expense Interest expense

Dr. (4) 66,240

Cr.

Consolidated P 900,000 ___________ P P

(3) 6,000 (3) 1,200

900,000 408,000 90,000 1,200

Other expenses Goodwill impairment loss Total Cost and Expenses

72,000 P348,000

Net Income

P258,240

NCI in Net Income - Subsidiary

-

Net Income to Retained Earnings

P258,240

Statement of Retained Earnings Retained earnings, 1/1 P Company

P490,440

S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet

258,240 P748,680

54,000 P270,000 P 90,000 P 90,000

P P (5) 16,560

126,000 625,200 274,800 ( 16,560)

P 258,240

P490,440 P144,000 90,000 P234,000

(1) 144,000 258,240 P748,680

72,000

72,000 (4) 48,000

-

48,000

-

P676,680

P186,000

P676,680

Cash………………………. Accounts receivable…….. Inventory………………….

P 265,200 180,000 216,000

P 102,000 960,000 108,000

P 367,200 276,000 324,000

Land……………………………. Equipment

210,000 240,000

48,000 180,000

Buildings

720,000

540,000

Balance Sheet

(2) 3,600 (2) 11,250

Discount on bonds payable Goodwill…………………… Investment 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

405,9480

P2,236,680

P1,074,0 00

P 150,000

P 102,000

450,000

306,000

120,000 240,000 600,000

120,000 120,000

676,680

P2,236,680

(3) 216,000 (3) 1,200

240,000 186,000

_________ _ P1,074,0 00

1,044,000 2,400 11,250

P2,634,000

(2) 84,000

(3) 12,000

(2) 198,000 (3) 6,000

P 180,000

552,000 240,000 360,000 600,000

(1) 240,000 676,680 (3) 9,600

___ _____

265,200 420,000

(1) 307,200 (5) 70,440 (4) 27,840

Non-controlling interest…………

Total

(2) 7,200

__________ P 796,650

(2 ) 76,800 (2) 17,610 (5) 16,560 P 796,650

__________ P2,634,000

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 VII 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 (full-goodwill), January 1, 20x4 P 240,000 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 value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Fair value 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)…………………………………..

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 above) 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

b. NCI-CNI – P8,610

P168,000 60,000 P228,000 P 8,610 13,200 3,750

25,560 P202,440 8,610 P211.050

*Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess (refer to amortization table above) 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)* Non-controlling Interest in Net Income (NCINI)

P 60,000 13,200 P 46,800 20% P 9,360 750 P 8,610

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: Dividends 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 P 240,000 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: Dividends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) – 20x4 Fair value 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……………..

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 600,000 490,440

P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

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 above) 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

23,760 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 above) 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 convert 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%) Consolidated Retained earnings, January 1, 20x5 Add: Controlling Interest in Consolidated Net Income or Profit

3,000

5,640 P 490,440

attributable to equity holders of parent for 20x5 Total Less: Dividends paid – P Company for 20x5 Consolidated Retained Earnings, December 31, 20x5

258,240 P748,680 72,000 P676,680

e. Non-controlling interest (full-goodwill), December 31, 20x5 P 240,000 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: Dividends paid – 20x5 Stockholders’ equity – S Company, December 31, 20x5 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) : 20x4 20x5 Fair value 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)…………………………………..

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 XXVIII 1. AA 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 non-controlling 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.

Multiple Choice Problems 1. 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 2. b – P500,000 + P3,461 3. b 4. d – equivalent to consideration transferred, P320,000 5. d – equivalent to consideration transferred, P380,000 6. a 20x4 Investment income: Dividend of P10,000 x 100% 20x4 Investment balance: P500,000 7. d – P45,000/15% = P300,000 8. No answer available Pigeon’s separate income P150,00 0 Less: 60% of Home’s P10,000 loss = 6,000 Less: Equipment depreciation P10,000/ 10 years = __1,000 Controlling Interest in Consolidated Net Income P143,00 0 Add: NCI in CNI NL of S Company P( 10,000) Less: Amortization of allocated excess (P1,000/60%) 1,667 P (11,667) Multiplied by: NCI% 40% ( 4,667) Consolidated Net Income P138,333 9. 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

10. 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 above) 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 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) for 20x4 P 5,250 **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.

11. 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

12. 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 above) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent…………..

P 625,000 50,000 P675,000 P 8,750 6,250 0

15,000 P660,000

*Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess**

P50,000 6,250 P43,750 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) for 20x4 P 8,750 **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.

13. 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 14. 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

15. 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

16. b

P180,000 15,000 P165,000 4/12 P 55,000 ____20% P 22,000

Combined revenues................................................................................ P1,100,000 Combined expenses................................................................................ (700,000) Excess acquisition-date fair value amortization....................................... (15,000) Consolidated net income......................................................................... P385,000 Less: noncontrolling interest (P85,000 × 40%)........................................ (34,000) Consolidated net income to controlling interest...................................... P351,000

17. c HH expense............................................................................................. P621,000 NN expenses............................................................................................ 714,000 Excess fair value amortization (70,000 ÷ 10 yrs).................................... 7,000 Consolidated expenses............................................................................ P1,342,000 18. b Step-acquisition, either full-goodwill or partial goodwill approach, the answer remains the same. Full-Goodwill Presentation: Net income from own operations; Parent - Keefe…………………………………… P 300,000 Subsidiary - George (P500,000 – P400,000)…….. 100,000 P 400,000 Less: Amortization of allocated excess…………………… 6,000 Impairment of goodwill (if any)……………………. 0 Consolidated/Group Net Income…………………………. P 394,000 Less: Non-controlling interest in Net Income Subsidiary net income from own operations: 1/1/20y0 - 4/1/20y0 (3 months): P100,000 x 3/12 = P25,000 x 30%................ P 7,500 4/1/20y0 – 12/31/20y0 (9 months): P100,000 x 9/12 = P75,000 x 20%................ 15,000 Total…………………………………………….. P 22,500 Less: Amortization of allocated excess: 1/1/20y0 – 4/1/20y0 (3 months) P6,000 x 3/12 = P1,500 x 30%.......... 450 4/1/20y0 – 12/31/20y0 (9 months) P6,000 x 9/12 = P4,500 x 20%........... 900 Impairment of goodwill (if any): First 3 months: P 0 x 30%.......………… 0 Remaining 9 months: P 0 x 20%............... 0 21,150 CNI attributable to the controlling interest (CI-CNI)/ Profit attributable to equity holders of parent…………………. P372,850 * It should be noted that the phrase without regard for this investment means that excluding any income arising from investment in subsidiary (i.e., dividend income). 19. c - 20x4 = P86,400 Consolidated Net Income 20x4 20x5 Peters Company's reported net income 64,000 37,500 Less: dividend income from Smith (1,600) 0 Peters' income from independent operations 62,400 37,500 Add: Peter's share of Smith's net income in 20x4 since acquisition (.80)(8/12)(P45,000) 24,000 Less: Peter's share of Smith's net loss in 20x4 (.80  P5,000 (4,000) Controlling Interest in Consolidated net income 86,400 33,500 20. c - 20x5 = P33,500 – refer to No. 19 21. b - 20x4 = P151,400 Consolidated Retained Earnings 20x4 20x5 Peter's 12/31 retained earnings (P80,000 + P64,000 - P15,000) P129,000 P161,500 Add: Peter's share of the increase in Smith's retained earnings

18,400

from the date of acquisition to the current date: (.80  (P53,000 – P25,000)) (.80  (P48,000 – P25,000)

P179,900 22. c - 20x5 = P179,900 – refer to No. 21

22,400 P151,400

23. d 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. 24. 25. 26. 27. 28.

d – refer to No. 23 for further discussion. b – refer to No. 23 for further discussion. a – P40,000 x 80% b – P50,000 x 80% a – P60,000 x 80%

29. 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 fullgoodwill 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 30. 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*…………… Impairment of full-goodwill (if any)**……… x: Non-controlling interests………………………. Non-controlling interest in Net Income……………………

7,000 0 P113,000 20% 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 fullgoodwill 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………………………. 20% Non-controlling interest in Net Income…………………… P 22,600

31. a Full/Gross-up Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own 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 fullgoodwill 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 32. 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 non-controlling 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

33. e Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x5……………………………… P Retained earnings, 12/31/20x5: Retained earnings, 1/1/20x5 (refer to No. 32)…… P260,000 Add: Net income, 20x5………………………………. 120,000 Less: Dividends paid, 20x5…………………………… 50,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x5 P Add: Adjustments to reflect fair value (P30,000 + P40,000).. Less: Accumulated amortization of allocated excess – 2 yrs

300,000

330,000 630,000 70,000 14,000

Fair value of Stockholders’ Equity of Subsidiary. 12/31/x5… Multiplied by: Non-controlling Interest %.............................. Non-controlling Interest (partial goodwill)………………….. Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… Non-controlling Interest (full)……………………………… 34. e

P 686,000 20% P 137,200 11,000 P 148,200

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 non-controlling interest of acquiree (subsidiary) is not given.

35. d – Economic Unit or Entity Concept (as required by PFRS 10) Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: NCINI CNI - entity concept *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x4

P 500,000 100,000 P600,000 P 20,000 0 _ 0

20,000 P580,000 __20,000 P600,000

P100,000 _______0 P100,000 20% P 20,000

36. c – Parent Company Concept – Parent’s Net Income only (not required by PFRS 10) Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess

P 500,000 100,000 P600,000 P 20,000 0

Goodwill impairment (impairment under full-goodwill approach) CNI - entity concept *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x4

_

0

20,000 P580,000

P100,000 _______0 P100,000 20% P 20,000

37. Podex’s separate earnings for 20x6.............................................. P2,000,000 Dividend income from Sodex................................................... __120,000 Podex’s 20x6 net income..................................................... P2,120,000 38.

P2,260,000 Podex’s separate earnings for 20X6 P2,000,000 Podex’s equity in net income of Sodex..................................... 300,000 Less: Amortization of cost in excess of book value................... (40,000) Podex’s 20x6 net income..................................................... P2,260,000 39. b 40. 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 20x5 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 P45,000 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 Income...P 4,750 P 7,750 *Amortization of allocated excess: Increase in other intangibles: P50,000 / 8 years = P 6,250 41. 42. 43. 44.

c – refer to No. 40 c – refer to No. 40 b- refer to No. 40 d Inventory – not yet sold in 20x4

P

0

Building: (P390,000 – P200,000)/ 10 years Equipment (P280,000 – P350,000)/ 5 years

19,000 ( 14,000) P 5,000

45. c

Plochman’s acquisition entry is: Investment in Shure……………………………………………………………40,000,000 Retained earnings (acquisition-related expense – close to retained since only balance sheet accounts are being examined)…………………………………………………………………… 1,000,000 Common stock, 1,000,000 x P1 par……………………………… PIC in excess of par [(1,000,000 x P39) – P800,000)…………… Cash (P800,000 + P1,000,000)……………………………………..

1,000,000 32,000,000 1,800,000

Eliminating entries are: Book value of stockholders’ equity: Stockholders’ equity-Shure………………………………………………… 6,000,000 Investment in Shure………………………………………………… 6,000,000 Allocated excess (acquisition/purchase differential): Identifiable assets……………………………………………………………. 7,000,000 Long-term debt………………………………………………………………. 500,000 Goodwill………………………………………………………………………..28,500,000 Lawsuit liability………………………………………………………. 2,000,000 Investment in Shure………………………………………………… 34,000,000

46. d –refer to No. 45 47. a 48. a Cost of Goods Sold P80,000 debit Depreciation Expense (P192,000/120) 7 = P11,200 debit 49. c Cost of Goods Sold (P60,000 x 4/6) = P40,000 debit Interest Expense: (P15,000/5) = P3,000 debit 50. a [(P250,000 - P180,000)/10]7 51. c [(P380,000 - P260,000)/120]88 52. a 53. c P170,000 - {[P320,000 - (P300,000 - P170,000)]/10}2 54. b [P320,000 - (P300,000 - P170,000)]/10 55. d 56. d P105,000 - {[P405,000 - (P450,000 - P105,000)]/20}2 57. a [P405,000 - (P450,000 - P105,000)]/20 58. d - The acquisition method consolidates assets at fair value at acquisition date regardless of the parent’s percentage ownership. 59. d P: BV,12/31/20x6 P250,000 S: BV of building, 12/31/20x4 P170,000 Add: Adjustments to reflect fair value, 1/1/20x4 (P350,000 – P240,000) 110,000 Less: Amortization of excess (P110,000/10) x 3 years 33,000 247,000 P497,000

60. b P: BV,12/31/20x5 P 975,000 S: BV of building, 12/31/20x5 P105,000 Add: Adjustments to reflect fair value, 1/4/20x4 (P120,000 – P90,000) 30,000 Less: Amortization of excess (P30,000/10) x 2 years 6,000 129,000 P1,104,000 61. c - An asset acquired in a business combination is initially valued at 100% acquisitiondate 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

62. b

63. 64.

65.

66.

67.

BV of building, 1/1/20x4 P200,000 Adjustments to reflect fair value, 1/1/20x4 (P300,000 – P200,000) 100,000 Depreciation 1/1/20x4 – 12/31/20x6 (P100,000/20 x 3 years) ( 15,000) P285,000 d – same with No. 62 d BV of equipment, 1/1/20x4 P 80,000 Adjustments to reflect fair value, 1/1/20x4 (P80,000 – P75,000) ( 5,000) Depreciation 1/1/20x4 – 12/31/20x6 (P5,000/10 x 3 years) 1,500 P 76,500 a Adjustments to reflect fair value, 1/1/20x4 (P80,000 – P75,000) (P 5,000) Depreciation 1/1/20x4 – 12/31/20x6 (P5,000/10 x 3 years) 1,500 (P 3,500) d – 1/2/20x4: BV of equipment, 1/1/20x4 P200,000 Adjustments to reflect fair value, 1/1/20x4 (P300,000 – P200,000) 100,000 P300,000 c Consolidated Net Income for 20x4 Net income from own/separate operations P Company P30,200 – (P150,0000 – P20,000 – P60,000) S Company (P100,000 – P15,000 – P45,000) Total Less: Non-controlling Interest in Net Income Amortization of allocated excess Goodwill impairment 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 70,000 40,000 P110,000 P

0 0 ____0

____0 P110,000 _____0 P110,000

68. b Plimsol: P100,000 + P200,000,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,P 300,000 Shipping: P75,000 + P150,000………………………………………………………………. 225,000 P 525,000

69. Retained Earnings - Plimsol, 1/1/20x4 (cost method, same with equity method and consoiidated retained earnings since it is the date of acdquisition) P 150,000 Add: CI – CNI (refer to No. 71) 110,000 Less: CI – Dividends (Dividend of parent only) 25,000 Retained earnings, 12/31/20x4 (equity method same with CRE) P 235,000 70. d Liabilities: Plimsol (P40,000 + P75,000) Shipping (P25,000 + P50,000)

P115,000 75,000 P 190,000

71. d Total assets (No. 72) Les: Liabilities (No. 74) Stockholders’ equity

P525,000 190,000 P335,000

72. b

73. d

74. d

Decrease in Buildings account: Fair value…………………………………………… Book value………………………………………….. Decrease…………………………………………….

P 8,000 __10,000 P 2,000

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………………………………………….. Increase…………………………………………….

P 14,000 __18,000 P 4,000

75. a

76. a

Increase in equipment account (refer to No. 76)………… Less: Decrease due to depreciation (P4,000/4)…………… Increase in equipment accounts…………………………….. 77. a

Increase in equipment account (refer to No. 77)………… Less: Decrease due to depreciation (P4,000/4…………… Increase in equipment accounts……………………………..

P P

P 3,000 1,000 P 2,000

78. a Increase in Land account: Fair value……………………………………………P 12,000 Book value………………………………………….. 5,000 Increase…………………………………………….. P 7,000 79. b – refer to No. 78, no depreciation/amortization

4,000 1,000 3,000

80. b – refer to No. 78, no depreciation/amortization 81. 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. 82. e

83. d

Increase in patent account (refer to No. 85)……………… 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. 86)……………… Less: Decrease due to depreciation (P11,000/5).………… Increase in patent accounts………………………………….

P

84. c Fair Value of Subsidiary: Consideration Transferred (5,400 shares) Less: Book value of SHE-S, 1/1: Common stock – S: P50,000 x 90% APIC – S: P15,000 x 90% RE – S: P41,000 x 90% Allocated Excess Less: Over/undervaluation of A & L: Increase in Inv. (P17,100–P16,100) x 90% Increase in Eqpt. (P48,000–P40,000) x 90% Increase in Patents (P13,000–P10,000) x 90% Positive Excess: Goodwill Amortization of allocated excess - Starting January 1: Inventory: P1,000 / 1 year Equipment: P8,000 / 4 years Patents: P3,000 / 10 years 85. c

Common stock – S APIC – S RE – S Stockholders’ equity – Subsidiary, 1/1 Add: Adjustments to reflect fair value Fair value of Stockholders’ Equity – S, 1/1 x: Non-controlling) interests Non-controlling Interests (in net assets)

P

8,800 2,200 6,600 P120,600

P 45,000

13,500 36,900 95,400 P 25,200 P

900 7,200 2,700 10,800 P 14,400 P 1,000 2,000 300 P 3,300 P 50,000 15,000 41,000 P106,000 12,000 P118,000 10% P 11,800

86. a – P48,000, parent only. 87. a – P48,000. On the date of acquisition, the parent’s retained earnings is also the consolidated retained earnings. 88. No requirement. 89. b – P120,600, the initial value

90. b – P4,000 x 90% = P3,600 91. c Consolidated Net Income for 20x4 Net income from own/separate operations P Company P30,200 – (P4,000 x 90%) S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment 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

P26,600 9,400 P36,000 P

610 3,300 ____0

3,910 P32,090 610 P32,700

*Net income of subsidiary – 20x4 Amortization of allocated excess – 20x4

P 9,400 3,300) P 6,100 10% P 610 ____0 P 610

(

Multiplied by: Non-controlling interest %.......... Less: Non-controlling interest on impairment loss on full-goodwill Non-controlling Interest in Net Income (NCINI)

92. c Noncontrolling Interests (in net assets): Common stock - S, 12/31 Additional paid-in capital - S, 12/31 15,000 Retained earnings - S, 12/31: RE-S, 1/1/2011 Add: NI-S, 2011 Less: Dividends – S Book value of SHE - S, 12/31 Add: Adjustments to reflect fair value, 1/1 Less: Amortization of allocated excess (1 yr.) Fair Value of Net Assets/SHE - S, 12/31 x: Noncontrolling Interest %

P 50,000

P 41,000 9,400 4,000 46,400 P 111,400 12,000 3,300 P 120,100 10%

Noncontrolling Interest (in net assets), 12/31 P 12,010 93. b – refer to 91 for computation 94. c – refer to 91 for computation 95. b Controlling RE / RE Attributable to EH of Parent, 1/1 (refer to No. 102 P 48,000 Add: CI – CNI (refer to 106 and 109) 32,090 Less: CI – Dividends (Dividend of parent only) 15,000 Controlling RE / RE Attributable to EH of Parent, 12/31 P 65,090 96. b – same with No. 95 97. c Consolidated Equity: Controlling Interest / Equity Holders

Attributable to Parent: Common stock – P: [P100,000 + P120,600 – (5,400 shares x P10 par)] P154,000 APIC – P: [15,000 + [P120,600 – (5,400 x P10)] 81,600 RE – P (refer to No. 105) 65,090 Parent’s Stockholders Equity or Controlling Interest – Equity P300,690 Noncontrolling Interest 12,010 Consolidated Equity P312,700 98. c

P95,000 = (P956,000 / .80) - P1,000,000 - P100,000

99. c

P251,000 = .20[(P956,000 + P239,000) + (P190,000 - P5,000 - P125,000)]

100. b Combined revenues................................................................................. P1,300,000 Combined expenses................................................................................ (800,000) Trademark amortization........................................................................... (6,000) Patented technology amortization........................................................... (8,000) Consolidated net income......................................................................... P486,000 101. No answer available NCI-CNI - P34,400; NCI – P280,800 Subsidiary income (P100,000 – P14,000 excess amortizations)............. Non-controlling interest percentage........................................................ Non-controlling interest in subsidiary income..........................................

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....................................................

P200,000 52,000 (5,600) __34,400 P280,800

102. 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

103. 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.....................................................

P165,000 54,000 P219,000

104. c Non-controlling interest (full-goodwill), December 31, 20x4 Book value of SHE – S, 12/31/20x4 Add: Net income of S – 20x4 Total Less: Dividends paid – 20x4 Stockholders’ equity – S Company, December 31, Year 2 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition January 1, 20x4 Amortization of allocated excess (refer to amortization above: P200,000/10 Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial) Add: NCI on full-goodwill P85,714 – P60,000)

P1,000,000 ___150,000 P1,150,000 ____90,000 P1,060,000 200,000 _( 20,000) P1,240,000 30 % P 372,000 ___25,714

Non-controlling interest (full)

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.

105. b – (P50,000 + P70,000) x 25% = P30,000 106. b – P only. 107. b {(P250,000/.8) + [P75,000 + P90,000 - P25,000 - P50,000 - P30,000 (P80,000/8)2]}.2 108. d {(P420,000/.7) + [P160,000 + P210,000 - P60,000 - P80,000 - P50,000 (P90,000/5)2]}.3 109. a - P650,000 =P500,000 + P200,000 - P50,000 110. a – assume the use of equity method Punn’s equity in net income of Sunn (3 months ended,12/31/x6)…… P 200,000 Amortization of cost in excess of book value................................ ( 60,000) Increase in Parent’s retained earnings……………………………………. P 140,000 e - If cost model/cost method, the answer would be P100,000. Dividend income……………………………………………………………. P 100,000 111. c – P60,000 x 80% = P48,000 112. c Investment.1/1/20x4 P105,000 Add: Share in net income – 20x4 (P45,000 x 80%) 36,000 Less: Dividends received 12,000 Investment, 12/31/20x4 P129,000 Add: Share in net income – 20x5 (P60,000 x 80%) 48,000 Less: Dividends received 18,000 Investment, 12/31/20x5 P159,000 113. d Investment balance, 1/1/20x4……………………………………………….. P 150,000 Add: Puma’s equity in net income of Slume (30% x P25,000)..………… 7,500 Less: Dividends (P30% x P10,000)……………………………………………. 3,000 Amortization of cost in excess of book value (P50,000/10 years) x 30%.............................................................. 1,500 Puma’s 20x6 net income (equity method).................................... P 153,000 114. b Puma’s equity in net income of Slume (30% x P25,000)..……………….. P 7,500 Less: Amortization of cost in excess of book value (P50,000/10 years) x 30%.............................................................. 1,500 Investment income – 20x4 (equity method)………………………………. P 6,000 115. b Full—goodwill Aproach 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%)………...

P 180,000 20,000 P 200,000 P 100,000 60,000

160,000

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 40,000 P 5,000 ___10,000

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 fair value) ………………………………………………...

P 180,000 P 90,000 54,000

144,000 P

P

4,500 ___9,000

36,000

13,500 P 22,500

A summary or depreciation and amortization adjustments is as follows: Account Adjustments to amortized Subject to Annual Amortization Equipment (net)......... Patent

116. d

be

Over/ under 10,000 25,000

Lif e 5 5

Annual Amount

Current Year(20x4)

P 2,000 5,00 0 P 7,000

P 2,000 5,000 P 7,000

Investment in Wisden

1/1/x4. 180,000

S

18,000

Dividends –

(20,000 x

90%)

NI of S

(60,000

54,000

x

Amortization 90%)…….

12,600 90%)

(P14,000 x

1/1/x6 203,400

117. c Investment in Wisden

1/1/x6. 230,400

9,000

118. d – 20x3: P30,000 20x4: P40,000 x 119. a – no changes in there are investment and 120. None – no answer cost model share in of subsidiary does 121. d Investment 20x7: Original

Dividends – S

(10,000 x 90%)

investment unless dispositions of permanent impairment.

NI of S

(30,000 x 27,000

Amortization 90%)…….

6,300

x 75% = P22,500 75% = P30,000

available. Under the net income or earnings not affect investment.

(7,000 x 90%)

account, December 31, investment

1/1/x6 215,100

…………………………………………P 550,000 Tiny’s earnings, 20x4-20x77: 100% x P166,000…………… 166,000 Less: Dividends received: 100% x P114,000……………… 114,000 Balance, December 31, 20x7…………………………….. P602,000

122. a The adjusting entry required in 20x7 to convert from the cost to the equity method is: Investment in Tiny………………………………….52,000 Retained earnings beg………………………….. 4,000 Dividend revenue………………………………… 54,000 Equity in subsidiary income of Tiny……. 110,000 123. b 124. b – Dividend paid – S, P70,000 x 60% = P42,000

125. d – CNI amounted to P265,000 [CI-CNI, P235,000 and NCI-CNI, P30,000 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 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

P190,000 90,000 P280,000 P 30,000 15,000 ____0

45,000 P235,000 30,000 P265,000

*Net income of subsidiary – 20x4 Amortization of allocated excess – 20x4 Multiplied by: Non-controlling interest %.......... Less: Non-controlling interest on impairment loss on full-goodwill (P1,500 x 15%)*

P 90,000 ( 15,000_ P 75,000 40% P 30,000 ______0 P 30,000

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 Computation of Goodwill: Fair value of Subsidiary (100%) Consideration transferred: Cash (60%) Fair value of NCI (given) (40%) Fair value of Subsidiary (100%)

Peer P 600,000 410,000 P 190,000 45,000 P 235,000

Sea-Breeze P 300,000 210,000 P 90,000 P 90,000

P 414,000 276,000 P 690,000

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

P

__550,000 140,000

P

140,000 0

Over/under P 60,000 (20,000) 100,000 P 140,000

Amort. P 10,000 (5,000) 10,000 P 15,000

126. c – refer to No. 125 for computations 127. b – refer to No. 125 for computations 128. c - P811,000. Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model) 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 interests %................... Less: Goodwill impairment loss (full-goodwill), Consolidated Retained earnings, January 1, 20x5 Note: a. Date of acquisition: RE of Parent = Consolidated RE Regardless of the method used in the books of the subsidiary, always be applied – b. Subsequent to date of acquisition: Retained earnings of Parent under equity method = CRE

P700,000

P 300,000 70,000 P 230,000 45,000 P 185,000 60% P 111,000 0

111,00 0 P 811,000

the following rule should

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.

129. c - P811,000 – refer to note (b) of No. 128 130. b – P111,000 – refer to No. 128 131. 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 Total

P 811,000 235,00 0 P1,046,00

0 92,00 0 P 954,000

Less: Dividends paid – Parent Company for 20x5 Consolidated Retained Earnings, December 31, 20x5

132. d – refer to No.131 133. c Non-controlling interest (partial-goodwill), December 31, 2015 P 480,000

Common stock – Subsidiary Company, December 31, 2015…… Retained earnings – Subsidiary Company, December 31, 2015 Retained earnings – Subsidiary Company, January 1, 2015 Add: Net income of subsidiary for 2015 Less: Dividends paid – Subsidiary - 2015 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)

P300,00 0 90,00 0 70,00 0

320,000 P 800,000 140,000 ( 60,000 ) P 880,000 4 0 P 352,000 ____0 P 352,000

134. c Stockholders’ Equity Common stock - Peer 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

135. c

P 724,000 954,000 P 1,678,000 352,000 P 985,500 P2,030,000

Investment in Sea-Breeze

1/1/x2. 414,000

42,000

Retro 111,000

60%

Investment Income

Dividends – S

NI of S

(70,000 x

NI of S

(90,000

54,000

x

Amortization 60%)…….

9,000 60%)

(P15,000 x

Amortization (P15,000 x 60%) 9,000

12/31/x5 528,000

136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147.

(90,000

c d – refer to No. 125 c – refer to No. 125 b – refer to No. 125 c – refer to No. 128 c – refer to No. 128 a – not applicable under equity method. d – refer to No. 131 d – refer to No. 131 d – refer to No. 133 c – refer to No. 134 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

54,000 60%)

x

45,000

P997,500 857,500 P140,000 P40,000 ( 30,000) 80,000 50,000 140,000 P 0

148. a – P900,000 + P500,000 = P1,400,000 149. 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 P909,625 150. b – (P750,000 + P280,000) – P30,000 + (P1,500 x 5 years) = P1,007,500 151. c – (P300,000 + P500,000) + P80,000 – (P8,000 x 5 years) = P840,000 152. c – P450,000 + P180,000 + P40,000 = P670,000 153. d – P50,000 – P3,125 x 5 years) = P34,375 154. a – P only (the stock issued In 20x0 includes already in the December 31, 20x4 balance. 155. a – P only 156. a Consolidated Retained Earnings, December 31, 20x4 Consolidated Retained earnings, January 1, 20x4 (equity method)

P 1,350,000

Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Dividends paid – P Company for 20x4 Consolidated Retained Earnings, December 31, 20x4 (under equity method) Net Income from own operations: Sales Less: cost of goods sold Gross profit Less: Depreciation expense Other expenses Net income 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 above) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent…………..

490,375 P1,840,375 195,000 P1,645,375

P Co P900,000 360,000 P540,000 140,000 100,000 P300,000

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

157. c 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 P190,375 158. c – P3,1250 / .20 = P15,750 159. a Punn’s separate earnings for 20x6.............................................. P 6,000,000 Add: Punn’s equity in net income of Sunn (3 months ended,12/31/x6) 200,000 Less: Amortization of cost in excess of book value....................... ( 60,000) Punn’s 20x6 net income (equity method)..................................... P 6,140,000 160. a – assume the use of equity method Punn’s equity in net income of Sunn (3 months ended,12/31/x6)…… P 200,000 Amortization of cost in excess of book value................................ ( 60,000) Increase in Parent’s retained earnings……………………………………. P 140,000

E - If cost model/cost method, the answer would be P100,000. Dividend income……………………………………………………………. P 100,000 161. 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

162. 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

P560,000 300,000 P260,000 P208,000

80%

P 60,000 190,000 P130,000 P117,000

90%

163. (b) Net income of Subsidiary – 2015 and 2016 (P15,000 + P22,000)…………………………………….P 37,000 Less: Dividends of Subsidiary – 2015 and 2016 (P6,000 + P9,000)…………………………………….. . 15,000 Cumulative net income less dividends since date of acquisition, 1/1/2017 (date to establish reciprocity – should always be beginning of the year, not 12/31/17) / Increase in Retained earnings………………………………………………………………………………………...P 22,000 x: Controlling interests………………………………………………………………………………………… 70% P 15,400 It should be noted that the amortization/depreciation and any unrealized/realized profits (in case of intercompany sales of inventory/fixed assets) should not be included (refer to next number) as part of the entry to established reciprocity since there will be separate eliminating entry to be made at the end of the year (2017) for amortization and depreciation. Further, the eliminating entry to establish reciprocity for the year 20x7 should be made on January 1, 2017 not December 31, 2017 Incidentally, the entry to convert from cost method to equity method or the entry to establish reciprocity at the beginning of the year, 1/1/2017 would be as follows: Investment in Subsidiary………………………………………………………………… 15,400 Retained earning – Parent Company, 1/1/2017………………………………. 15,400

164. (a) Net income of Subsidiary – 2015 and 2016 (P15,000 + P22,000)……………………………………. P 37,000 Less: Dividends of Subsidiary – 2015 and 2016 (P6,000 + P9,000)…………………………………… 15,000 Increase in Retained earnings for 2 years……………………………………………………………… P 22,000 Less: Amortization of allocated excess [(P80,000 – P60,000)/10 years x 2 years]……………… 4,000 P 18,000 x: Controlling interests………………………………………………………………………………………. 70% Retroactive amount, December 31, 20x6 or January 1, 2017……………………………………… P 12,600

165. b

{(P260,000 - P230,000) + [(P650,000 - P590,000)/120] 8}.8

166. d {(P190,000 - P160,000) 4/6 - [(P241,000 - P220,000)/60] 5}.7 167. b

168. 169. 170. 171. 172. 173. 174.

[{(P84,000 + P105,000) - [(P310,000 - P220,000)/20]2} - (P30,000 + P50,000)].8 b – building account in the books of subsidiary at fair value e – building account in the books of subsidiary at book value d – push-down accounting: equipment account in the books of subsidiary is at fair value b a – P540,000 = (P500,000 + P150,000 – P90,000 – P20,000) c – equivalent to the original cost 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.

175. b - Intercompany receivables and payables from unconsolidated subsidiaries would not be eliminated.

Quiz - XVI 1. 2. 3. 4. 5. 6. 7. 8.

9.

b {P150,000 - [(P550,000 - P450,000)/10] - [(P300,000 - P280,000)/5]}.8 P36,925 {P110,000 - (P250,000 - P160,000 - P50,000) - [(P130,000 - P100,000) 3/5] + [(P215,000 - P200,000)/5] (3/12)}.7 P545,500 P500,000 + [P110,000 + P130,000 - P30,000 - P40,000 - P55,000 - (P200,000/8)2].7 P388,000 P320,000 + [P100,000 + P140,000 - P40,000 - P50,000 - P35,000 - (P75,000/5)2].8 P15,400 {P80,000 - [(P290,000 - P250,000)/8] + [(P160,000 - P150,000)/5]}.2 P13,200 {P150,000 - (P470,000 - P300,000 - P90,000) - [(P190,000 - P160,000) 4/5] [(P520,000 -P400,000)/10] (4/12) + [(P380,000 - P350,000)/5] (4/12)}.3 P70,500 {(P250,000/.8) + [P75,000 + P90,000 - P25,000 - P50,000 - P30,000 (P80,000/8)2]}.2 20x5: P56,000 20x6: P14,000 Purchase differential amortization to investment income 20x5 20x6 Inventory (P300,000 - P240,000).7 P42,000 P 0 Plant Assets [(P700,000 - P560,000)/7].7 14,000 14,000 P56,000 P14,000 Consolidation worksheet: Cost of Goods Sold Depreciation Expense

P60,000 20,000

10. P2,900 Sandpiper’s share of Shore net income (P18,000 x 30%) Add: Overvalued accounts receivable collected in 20x5 Undervalued accounts payable paid in 20x5 Less: Undervalued inventories sold in 20x5 Depreciation on building undervaluation P3,600/6 Amortization on patent P3,200/8 years Income from Shore/Income from subsidiary 11. P1,050,000 Parrco’s income from its own separate operations for 20x6 Subbco’s net income for the nine months ended 12/31/x6

P ( ( (

P 900,000 200,000

5,400 600 300 2,400) 600) 400) 2,900

Less: Amortization of cost in excess of book value (P30,000 ÷ 60%) ___50,000) Consolidated net income for 20x6 (economic unit concept) P1,050,000 Division of consolidated net income: To controlling interest (Parrco’s stockholders) P 990,000 To non-controlling interest (stockholders of Subbco) ___60,000 P1,050,000 12. P990,000 Parrco’s income from its own separate operations for 20x6 P 900,000 Parrco’s equity in net income of Subbco Company for nine months ended 12/31/x6 (P200,000  60%) 120,000 Less: Parrco’s amortization of cost in excess of book value ( 30,000) Consolidated net income for 20x6 (parent company concept) P 990,000 13. P400,000 (P100,000 + P300,000) 14.

P3,600,000 Plyco’s separate earnings for 20x6 P 3,500,000 Add:Dividend income from Slyco................................................. 100,000 Plyco’s 20x6 net income P 3,600,000

15.

P3,867,000 Plyco’s separate earnings for 20x6............................................. Add:Plyco’s equity in net income of Slyco..................................... Less: Amortization of cost in excess of book value....................... Plyco’s 20x6 net income...............................................................

16.

P3,500,000 400,000 ( 33,000) P3,867,000

P3,867,000 (same amount as calculated in Requirement 16).

17. P52,000 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 P 65,000

80%

P 52,000 18. P12,600 [{(P15,000 + P22,000) - [(P80,000 - P60,000)/10]2} - (P6,000 + P9,000)].7 = P12,600

19. 20x4 = P86,400 Consolidated Net Income 20x4 20x5 Peters Company's reported net income 64,000 37,500 Less: dividend income from Smith (1,600) 0 Peters' income from independent operations 62,400 37,500 Add: Peter's share of Smith's net income in 20x4 since acquisition (.80)(8/12)(P45,000) 24,000 Less: Peter's share of Smith's net loss in 20x4 (.80  P5,000 (4,000)

Controlling Interest in Consolidated net income 20. 20x5 = P33,500 – refer to No. 19 21. 20x4 = P151,400 Consolidated Retained Earnings 20x5 Peter's 12/31 retained earnings (P80,000 + P64,000 - P15,000) P161,500 Add: Peter's share of the increase in Smith's retained earnings from the date of acquisition to the current date: (.80  (P53,000 – P25,000)) (.80  (P48,000 – P25,000) 18,400 P179,900 22. 20x5 = P179,900 – refer to No. 21 19. P9,200 Pinta Company 20y4 equity-method income: Proportionate share of reported income (P30,000 x .40) Amortization of differential assigned to: Buildings and equipment [(P35,000 x .40) / 5 years] Goodwill (P8,000: not impaired) Investment Income Assignment of differential Purchase price Proportionate share of book value of net assets (P320,000 x .40) Proportionate share of fair value increase in buildings and equipment (P35,000 x .40) Goodwill

86,400

33,500

20x4 P129,000

22,400 P151,400

P 12,000 ( 2,800) -0P 9,200 P150,000 (128,000) P

(14,000) 8,000

20.

P3,600 - Dividend income, 20y4 (P9,000 x .40)

P

3,600

21.

Cost-method account balance (unchanged): Equity-method account balance: Balance, January 1, 20y4 Investment income Dividends received Balance, December 31, 20y4

P150,000 P150,000 9,200 (3,600) P155,600

Theories 1 . 2 . 3 . 4 . 5 .

c

6.

b

d

7.

c

d

8.

d

d*

9.

d

d

10 ,

a

11 . 12 . 13 . 14 . 15 ,

C* * b d c c

16 . 17 . 18 . 19 . 20 .

c c d d b

21 . 22 . 23 . 24 . 25 .

d a b c c

26 . 27 . 28 . 29 . 30 .

c

31

c

d

32 . 33 . 34 . 35 .

b

c c b

c c d

36 . 37 . 38 . 39 . 40 .

d b b c d

41 . 42 . 43 . 44 . 45 .

a c a

*under PAS 27, cost model recognizes any dividend declared/paid by the subsidiary is classified as income regardless of retained earnings balance, which means there is no such thing as liquidating dividend under the cost model. On the other hand, under FASB ruling, a liquidating dividend still exists under the cost method. **partial equity is the same with equity method except that amortization of allocated excess is not recognized in the investment and income account.