Solution Chapter 17

Chapter 17 Problem I

1.

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. *that has been realized in transactions with third parties.

P 460,000 0 ( 0) P 460,000

P 760,000 36,000 (_50,000) P 746,000

460,000 P1,206,000 0 P1,206,000 92,000 P 1,114,000

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

2. 20x4

Sales

Purchases (Cost of Goods Sold)

12/31 Inventory (Income Statement) [216,000 – (216,000/1.20)] 12/31 Inventory (Balance Sheet) 20x5

Sales

1,080,000

36,000

1,200,000

P 460,000 0 ( 0) P460,000 P 92,000 0

P 760,000 36,000 (_50,000) P 746,000

460,000 P1,206,000 92,000 P1,114,000 _ 92,000 P 1,206,000

P460,000 0 ( 0) P460,000 _____0 P460,000 20% P 92,000

1,080,000

36,000

Purchases (Cost of Goods Sold) 12/31 Inventory (Income Statement) [300,000 – (300,000/1.20)] 12/31 Inventory (Balance Sheet) Beginning R/E – Puma 1/1 Inventory (Income Statement)

1,200,000 50,000 36,000

50,000 36,000

Problem II 1.

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… Son Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. *that has been realized in transactions with third parties.

P 600,000 40,000 ( 51,00 0) P 589,000

P 1,720,000 0 (_ 0) P 1, 720,000

589,000 P2,309,000 0 P2,309,000 58,900 P 2,250,100

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) Son Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

2.

Sales

Purchases (Cost of Sales) To eliminate intercompany sales.

1,020,000

P 600,000 40,000 ( 51,000) P589,000 P 58,900 0

P 1,720,000 0 (________0) P1,720,,000

589,000 P2,309,000 __58,900 P2,250,100 _ 58,900 P 2,309,000

P600,000 40,000 ( 51,000) P589,000 _____0 P589,000 10% P 58,900

1,020,000

12/31 Inventory (Income Statement) 51,000 Inventory (Balance Sheet) 51,000 To eliminate unrealized intercompany profit in ending inventory. Beginning Retained Earnings – Pinta (.90 × P40,000) 36,000 Noncontrolling interest 4,000 1/1 Inventory (Balance Sheet) 40,000 To recognize unrealized profit in beginning inventory realized during the year. Problem III

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations (P1,500,000 + P2,400,000) Realized profit in beginning inventory of P Company (upstream sales) – Salad Realized profit in beginning inventory of P Company (upstream sales)- Tuna Unrealized profit in ending inventory of P Company (upstream sales) – Salad Unrealized profit in ending inventory of P Company (upstream sales) – Tuna S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* *- Salad Non-controlling Interest in Net Income* *- Tuna Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. *that has been realized in transactions with third parties.

P3,900,000 66,000 63,000 ( 57,000) ( 69,000) P3,903,000

P 301,800 ___239,400

P 3,600,000 54,000 (_ 45,00 0) P 3,609,000

3,903,000 P7,512,000 0 P7,512,000 ___541,200 P6,970,800

Or, alternatively

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations (P1,500,000 + P2,400,000) Realized profit in beginning inventory of P Company (upstream sales) – Salad Realized profit in beginning inventory of P Company (upstream sales)- Tuna Unrealized profit in ending inventory of P Company (upstream sales) – Salad Unrealized profit in ending inventory of P Company (upstream sales) – Tuna S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * - Salad Non-controlling Interest in Net Income* * - Tuna Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 *that has been realized in transactions with third parties.

P3,900,000 66,000 63,000 ( 57,000) ( 69,000) P3,903,000

P 3,600,000 54,000 (___45,000) P3,609,,000

3,903,000 P7,512,000

P 301,800 239,400 0

__541,200 P6,970,800 _541,200 P 7,512,000

**Salad

Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) Son Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

P1,500,000 66,000 ( 57,000) P1,509,000 _____0 P1,509,000 __ 20% P 301,800

**Tuna

Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) Son Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

Realized Profit in Beginning inventory: Downstream Sales (Sales from Parent to Subsidiary) P414,000 x 15/115 Upstream Sales (Sales from Subsidiary-Salad to Parent): Salad: P396,000 x 20/120 Upstream Sales (Sales from Subsidiary-Tuna to Parent): Tuna: P315,000 x 25/125 Unrealized Profit in Ending inventory: Downstream Sales (Sales from Parent to Subsidiary) P345,000 x 15/115 Upstream Sales (Sales from Subsidiary-Salad to Parent): Salad: P342,000 x 20/120 Upstream Sales (Sales from Subsidiary-Tuna to Parent): Tuna: P345,000 x 25/125 Problem IV 1. Sales Cost of Goods Sold Cost of Goods Sold Ending Inventory (Balance Sheet) [P1,250,000 - (P1,250,000/1.25)] 1/1 Retained Earnings – P Company (1) Noncontrolling interest (2) Cost of Goods Sold (Beginning Inventory) [P525,000 – (P525,000/1.25)] = P105,000

4,000,000 250,000

84,000 21,000

P2,400,000 63,000 ( 69,000) P2,394,000 _____0 P2,394,000 10% P 239,400

P54,000 66,000 63,000

P45,000 57,000 69,000

4,000,000 250,000

105,000

(1) .8(P105,000) (2) .2(P105,000) 2/3.

P3,000,000 × .20 = P600,000 non-controlling interest in consolidated income.

4.

[(.20 × P5,400,000) -.20(P1,250,000 – P1,250,000/1.25)] = P1,030,000 non-controlling interest in consolidated net assets on December 31, 20x4.

Problem V

P COMPANY AND SUBSIDIARY Consolidated Income Statement For the Year Ended December 31, 20x4

Sales (P13,800,000 – P1,350,000)

P12,450,000

Cost of Goods Sold (a) Operating Expenses Consolidated Income Less Non-controlling Interest in Consolidated Income (b) Controlling Interest in Consolidated Net Income

P7,755,000 1,800,000

9,555,000 2,895,000 197,500 P2,697,500

(a) Reported Cost of Goods Sold Less intercompany sales in 20x4 Plus unrealized profit in ending inventory (2/5 x (P1,350,000 - P900,000)) Less realized profit in beginning inventory (1/4 x (P1,800,000 - P1,500,000)) Corrected cost of goods sold

P9,000,000 (1,350,000) 180,000 (75,000) P7,755,000

P190,000 0.1 Plus unrealized profit on subsidiary sales in 2013 that is considered realized in 20x4 (1/4 x (P1,800,000 - P1,500,000)) Less unrealized profit on subsidiary sales in 20x4 (there were no upstream sales in 20x4) Income realized in transactions with third parties

P1,900,000

(b)

Reported net income of subsidiary

75,000 0 1,975,000 × 0.10 P197,500

Non-controlling interest in consolidated income

Problem VIII (Determine selected consolidated balances; includes inventory transfers and an outside ownership.) Customer list amortization = P65,000/5 years = P13,000 per year Intercompany Gross profit (P160,000 – P120,000) ............................................... Inventory Remaining at Year's End ......................................................................... Unrealized Intercompany Gross profit, 12/31 .............................................................

P40,000 20% P8,000

Consolidated Totals:  Inventory = P592,000 (add the two book values and subtract the ending unrealized gross profit of P8,000)  Sales = P1,240,000 (add the two book values and subtract the P160,000 intercompany transfer)  Cost of Goods Sold = P548,000 (add the two book values and subtract the intercompany transfer and add [to defer] ending unrealized gross profit)  Operating Expenses = P443,000 (add the two book values and the amortization expense for the period)  Gross profit: P1,240,000 – P548,000 = P692,000  Controlling Interest in CNI: Gross profit ..................................................................................................... P692,000 Less: Operating expenses ........................................................................... 443,000 Consolidated Net Income ...........................................................................P249,000 Less: NCI-CNI ................................................................................................... 8,700 CI-CNI...............................................................................................................P240,300 or

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P800-P400-P180) Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations (P600 – P300 – P250) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)…

P 50,000 0 ( 8, 000)

P 220,000 0 (_ 0) P 220,000

S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. *that has been realized in transactions with third parties.

P 42,000

42,000 P 262,000 13,000 P 249,000 8,700 P 240,300

Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 *that has been realized in transactions with third parties.

P 50,000 0 ( 8,000) P 42,000 P 8,700 13,000

42,000 P 262,000 21,700 P240,300 _ 8,700 P249,000

**Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P 50,000 0 ( 8,00 0) P 42,000 13,000 P 29,000 30% P 8,700

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



P 220,000 0 (_ 0) P 220,000

Noncontrolling Interest in Subsidiary's Net Income = P8,700 (30 percent of the reported income after subtracting 13,000 excess fair value amortization and deferring P8,000 ending unrealized gross profit) Gross profit is included in this computation because the transfer was upstream from SS to PT.

Problem IX Requirements 1 to 4: Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 80%)……………………. Retained earnings (P120,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… Increase in land (P7,200 x 80%)……………………. Increase in equipment (P96,000 x 80%) Decrease in buildings (P24,000 x 80%)……….....

P 372,000 P 192,000 96,000 P 4,800 5,760 76,800 ( 19,200)

P

288,000 84,000

Decrease in bonds payable (P4,800 x 80%)…… Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

3,840

72,000 P 12,000

The over/under valuation of assets and liabilities are summarized as follows: Inventory………………….…………….. Land……………………………………… Equipment (net)......... Buildings (net) Bonds payable………………………… Net………………………………………..

S Co. Book value 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 .................. Less: Accumulated depreciation….. Net book value………………………...

S Co. Book value 180,000 96,000 84,000

S Co. Fair value 180,000 180,000

Increase (Decrease) 0 ( 96,000) 96,000

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

S Co. Book value 360,000 192,000 168,000

S Co. Fair value 144,000 144,000

(Decrease) ( 216,000) ( 192,000) ( 24,000)

A summary or depreciation and amortization adjustments is as follows: Account Adjustments to be amortized Inventory Subject to Annual Amortization Equipment (net)......... Buildings (net) Bonds payable…

Over/ Under P 6,000

Life 1

96,000 (24,000) 48000

8 4 4

Annual Amount P 6,000

Current Year(20x4) P 6,000

20x5 P -

12,000 ( 6,000) 1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

12,000 (6,000) 1,200 P 7,200

The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows: Fair value of Subsidiary (100%) Consideration transferred: Cash (80%)

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 Son (P360,000 x 100%)

__360,000

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

105,000 90,000

P

15,000

In this case, the goodwill was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows:

Goodwill applicable to parent…………………

Value P12,000

% of Total 80.00%

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

The goodwill impairment loss would be allocated as follows Goodwill impairment loss attributable to parent or controlling Interest Goodwill applicable to NCI…………………….. Goodwill impairment loss based on 100% fair value or fullGoodwill

3,000 P15,000

20.00% 100.00%

Value P 3,000

% of Total 80.00%

750

20.00%

P 3,750

100.00%

The unrealized profits on January 1, and on December 31, 20x5, resulting intercompany sales, are as summarized below: Downstream Sales: Year 20x4 20x5

Sales of Parent to Subsidiary P150,000 120,000

Upstream Sales: Year 20x4 20x5

Sales of Subsidiary to Parent P 50,000 62,500

Intercompany Merchandise in 12/31 Inventory of S Company P150,000 x 60% = P90,000 P120,000 x 80% = P96,000

Unrealized Intercompany Profit in Ending Inventory P90,000 x 20% = P18,000 P96,000 x 25% = P40,000

Intercompany Merchandise in 12/31 Inventory of S Company P100,000 x 50% = P25,000 P 62,500 x 40% = P25,000

Unrealized Intercompany Profit in Ending Inventory P25,000 x 40% = P10,000 P25,000 x 20% = P 5,000

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

372,000

28,800

372,000

28,800

No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4, and unrealized profits in ending inventory. Consolidation Workpaper – Year of Acquisition

(E1) Common stock – 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………………………………………….

6,000 96,000 192,000 7,200 4,800

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

288,000 72,000

Goodwill…………………………………………………………………. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%)……………………….. Investment in Son Co……………………………………………….

12,000

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 date of acquisition.

(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

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

Inventory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000 _______ P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______ P 2,000

P 1,200 P1,200

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

Total

13,200

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

28,800 7,200

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

(E5) Sales………………………. Cost of Goods Sold (or Purchases)

150,000

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

60,000

(E7) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

18,000

(E8) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

12,000

To eliminated intercompany downstream sales.

To eliminated intercompany upstream sales.

To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders.

To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders.

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest ………….. To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. Unrealized profit in ending inventory of P

216,000 18,000 84,000

P 60,000

6,960

36,000

150,000

60,000

18,000

12,000

6,960

Company (upstream sales)……………………….. S Company’s realized net income from separate operations*…….….. Less: Amortization of allocated excess [(E3)]…. Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

( 12,000) P 48,000 13,200 P 34,800 20% P

6,960

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

P Co P480,000

S Co. P240,000

Dividend income Total Revenue Cost of goods sold

28,800 P508,800 P204,000

P240,000 P138,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 48,000 P312,000 P196,800 P196,800

24,000 18,000 P180,000 P 60,000 P 60,000

Sales

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from above Total Dividends paid Perfect Company Son Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receivable…….. Inventory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Investment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par………

P432,000

P

236,160 P668,160

P144,000 72,000 P216,000

86,400 -

43,200

P581,760

Dr. (5) 150,000 (6) 60,000 (4) 36,000 (3) (7) (8) (3) (3)

6,000 18,000 12,000 6,000 1,200

(3)

3,000

(9)

6,960

Cr.

Consolidated P 510,000 _________ P 510,000 P 168,000

(5) 150,000 (6) 60,000

90,000 1,200 66,000 3,000 P328,200 P181,800 ( 6,960) P174,840

P

(1) 120,000

360,000 174,840 P538,840

_

72,000 ________

P172,800

P

466,840

232,800 90,000 120,000

P 90,000 60,000 90,000

P

355,200 150,000

1210,000 240,000 720,000

48,000 180,000 540,000

372,000 P1,984,800

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

(4)

(2)

6,000

(2)

7,200

(2) (2)

4,800 12,000

(3) (7) (8)

36,000

6,000 18,000 12,000

(2) 216,000 (3) 12000 (3) 3,000 (1) 288,000 (2) 84,000

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

12,000

180,000 265,200 420,000 1,044,000 3,600 9,000 P2,394,600 P147,000 495,000 240,000 360,000 600,000

Common stock, P10 par……… Retained earnings, from above Non-controlling interest………… Total

581,760

240,000 144,000

_________ P1,984,800

_________ P1,008,000

(1) 240,000 (4)

7,200

__________ P 983,160

(1 ) 72,000 (2) 18,000 (9) 6,960 P 983,160

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Unrealized profit in ending inventory of S Company (upstream sales)… Son Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess (refer to amortization 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 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill *that has been realized in transactions with third parties.

P 60,000 ( 12,000) P 48,000

462,840 ____89,760 P2,394,600

P168,000 ( 18,000) P150,000

P 6,960 13,200 3,000

48,000 P198,000 23,160 P174,840 _ 6,960 P181.800

P 60,000 ( 12,000) P 48,000 13,200 P 34,800 20% P 6,960

Since NCI share of goodwill is not recognized, no adjustment is required for the impairment loss on goodwill and impairment losses are not shared with NCI. 20x5: Second Year after 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. 20x5: Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5: Cash……………………… Dividend income (P48,000 x 80%)……………. Record dividends from S Company.

38,400

On the books of S Company, the P48,000 dividend paid was recorded as follows:

38,400

Dividends paid………… Cash Dividends paid by S Co..

48,000

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

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 the 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

240,000 144.000

(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……………………………………………….

6,000 96,000 192,000 7,200 4,800 12,000

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

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 [(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……………………………………

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

Depreciation/ Amortization expense

19,200

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%)………………………..

(20x4) Retained earnings, P 6,000

48,000

Amortization -Interest

13,560 2,640 6,000 12,000 1,200

307,200 76,800

216,000 18,000 84,000

6,000 24,000 2,400 3,000

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

12,000 (6,000) 1,200 P13,200 80% P 10,560 3,000 P 13,560

P 12,000 ( 6,000) ________ P 6,000

P 1,200 P 1,200

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

38,400 9,600

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

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

120,000

(E7) Sales………………………. Cost of Goods Sold (or Purchases)

75,000

(E8) Beginning Retained Earnings – P Company…… Cost of Goods Sold (Ending Inventory – Income Statement)

18,000

(E9) Beginning Retained Earnings – P Company (P12,000 x 80%) Noncontrolling interest (P12,000 x 20%)…… Cost of Goods Sold (Ending Inventory – Income Statement)

9,600 2,400

(E10) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

24,000

(E11) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

6,000

To eliminated intercompany downstream sales.

To eliminated intercompany upstream sales.

To realized profit in downstream beginning inventory deferred in the prior period.

To realized profit in beginning inventory deferred in the prior period.

To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders.

To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders.

(E12) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest ………….. To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Realized profit in beginning inventory of P Company - 20x5 (upstream sales) Unrealized profit in ending inventory of P Company - 20x5 (upstream sales) S Company’s Realized net income* Less: Amortization of allocated excess

12,000 ( 6,000) P 96,000 7,200 P 88,800 20%

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI ) – partial goodwill P 17,760 *from separate transactions that has been realized in transactions with third persons.

17,760

48,000

120,000

75,000

18,000

12,000

24,000

6,000

17,760

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

P Co P540,000

S Co. P360,000

Dividend income Total Revenue Cost of goods sold

38,400 P501,600 P216,000

P360,000 P192,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 72,000 P348,000 P230,400 P230,400

24,000 54,000 P270,000 P 90,000 P 90,000

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

P484,800

Sales

S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receivable…….. Inventory…………………. Land……………………………. Equipment Buildings 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 Non-controlling interest…………

Total

P

Dr. (6) 120,000 (7) 75,000 (5) 38,400

Cr.

(10) 24,000 (11) 6,000

(6) 120,000 (7) 75,000 (8) 18,000 (9) 12,000

(4) (4)

6,000 1,200

Consolidated P 705,000 ___________ P 705,000 213,000

P P ( P

(12) 17,760

(2) 13,560 (8) 18,000 (9) 9,600 (2) 144,000

(1) 19,200

90,000 1,200 126,000 430,200 274,800 17,760) 257,040

P 462,840

230,400 P715,200

P 144,000 90,000 P234,000

72,000 -

48,000

P643,200

P186,000

P 647,880

265,200 180,000 216,000

P 102,000 96,000 108,000

P 367,200 276,000

210,000 240,000 720,000

48,000 180,000 540,000

372,000 P2,203,200

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

643,200

___ _____ 2,203,200

240,000 186,000

_________ P1,074,000

257,040 P 719,880 (5)

(3)

7,200

(3)

7,200

(3) (3) (1)

4,800 12,000 19,200

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

48,000

(4) 7,200 (10) 24,000 (11) 6,000 (3) 216,000 (4) 2,400 (4) 3,000 (2) 307,200 (3) 84,000

(4)

24,000

72,000 ________

294,000 265,200 420,000 1,044,000 2,400 9,000 P2,677,800 P180,000 552,000 240,000 360,000 600,000

(2) 240,000 (4) 2,640 (5) 9,600 (9) 2,400 __________ P1,077,360

_

647,880 (2 ) 76,800 (3) 18,000 (12) 17,760 P1,077,360

____97,920 P2,677,800

5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings – P Company, January 1, 20x4 (date of acquisition)

b.

c.

6.

P360,000

Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… Retained earnings – Subsidiary Company…………………………………. Stockholders’ equity – Subsidiary Company.………….. Adjustments to reflect fair value - (over) undervaluation of assets and liabilities Fair value of stockholders’ equity of subsidiary, January 1, 20x4………………… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial)

P 240,000 120,000 P 360,000 90,000 P 450,000 20 P 90,000

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

Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P174,840

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Unrealized profit in ending inventory of S Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess (refer to amortization 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 *that has been realized in transactions with third parties.

P 60,000 ( 12,000) P 48,000 P 6,960 13,200 3,000

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill *that has been realized in transactions with third parties.

48,000 P198,000 23,160 P174,840 _ 6,960 P181.800

b. NCI-CNI – P6,960

**Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P168,000 ( 18,000) P150,000

P 60,000 ( 12,000) P 48,000 13,200 P 34,800 20% P 6,960

c. CNI, P181,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Dividends paid – P Company for 20x4 Consolidated Retained Earnings, December 31, 20x4

P360,000 174,840 P534,840 72,000 P462,840

e. The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. The NCI on December 31, 20x4 are computed as follows: Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4 Add: Net income of subsidiary for 20x4 Total Less: Dividends paid – 20x4 Stockholders’ equity – Subsidiary 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…… Less: Unrealized profit in ending inventory of P Company (upstream sales) Realized stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

12/31/20x5: a. CI-CNI

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… Son Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. *that has been realized in transactions with third parties.

P 240,000 P120,000 6,000 P180,000 36,000

144,000 P 384,000 90,000 ( 13,200) P460,000 12,000 P448,800 20 P 89,760

P 600,000 462,840 P1,062,840 ___89,760 P1,152,600

P 90,000 12,000 ( 6,000) P 96,000

P192,000 18,000 (_24,000) P186,000

96,000 P282,000 7,200 P274,800 17,760 P257,040

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 *that has been realized in transactions with third parties.

P 90,000 12,000 ( 6,000) P 96,000 P 17,760 7,200

P192,000 18,000 (_24,000) P186,000

96,000 P282,000 24,960 P257,040 _ 17,760 P274,800

b. NCI-CNI

**Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

P 90,000 12,000 ( 6,000) P 96,000 7,200 P 88,800 20% P 17,760

c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model Less: Unrealized profit in ending inventory of S Company (downstream sales) – 20x4 (UPEI of S – 20x4) or Realized profit in beginning inventory of S Company (downstream sales) –20x5 (RPBI of S - 20x5)……………. Adjusted Retained Earnings – Parent 1/1/20x5 (cost model (S Company’s Retained earnings that have been realized in transactions with third parties.. 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, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Unrealized profit in ending inventory of P Company (upstream sales) 20x4 (UPEI of P – 20x4) or Realized profit in beginning inventory of P Company (upstream sales) –20x5 (RPBI of P - 20x5) Multiplied by: Controlling interests %...................

P484,800 18,000 P466,800

P 144,000 120,000 P 24,000 13,200 12,000 (P 1,200) 80% (P 960) 3,000

Less: Goodwill impairment loss, partial goodwill ( 3,960) Consolidated Retained earnings, January 1, 20x5 P462,840 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 257,040 Total P748,680 Less: Dividends paid – Parent Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P647,880 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,125 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6).

Or, alternatively:

Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model Less: Unrealized profit in ending inventory of S Company (downstream sales) – 20x5 (UPEI of S – 20x5) or Realized profit in beginning inventory of S Company (downstream sales) –20x6 (RPBI of S - 20x6)……………. Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ( S Company’s Retained earnings that have been realized in transactions with third parties.. 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 Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Accumulated amortization of allocated excess – 20x4 and 20x5 (P11,000 + P6,000) Unrealized profit in ending inventory of P Company (upstream sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inventory of P Company (upstream sales) –20x6 (RPBI of P - 20x6) Multiplied by: Controlling interests %................... Less: Goodwill impairment loss, partial goodwill Consolidated Retained earnings, December 31, 20x5

e.

f.

Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5* Add: Net income of subsidiary for 20x5 Total Less: Dividends paid – 20x5 Stockholders’ equity – Subsidiary 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…… Less: Unrealized profit in ending inventory of P Company (upstream sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inventory of P Company (upstream sales) –20x6 (RPBI of P - 20x6 Realized stockholders’ equity of subsidiary, December 31, 20x5………. Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. * the realized profit in beginning inventory of P Company (upstream sales) –20x5 (RPBI already included in the beginning retained earnings of S Company.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

Problem X Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

P643,200 24,000 P619,200

P 186,000 120,000 P 66,000 20,400

P P

6,000 39,600 80% 31,680 3,000

28,680 P647,880

P 240,000 P144,000 90,000 P234,000 48,000

186,000 P 426,000 90,000

P 13,200 7,200

( 20,400) P 495,600

6,000 P489,600 20 P 97,920 of P - 20x5 amounting to P10,000 is

P 600,000 647,880 P1,247,880 ___97,920 P1,345,800

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

Over/ under P 6,000

Life 1

96,000 (24,000) 4,800

8 4 4

Annual Amount P 6,000

Current Year(20x4) P 6,000

20x5 P -

12,000 ( 6,000) 1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

12,000 (6,000) 1,200 P 7,200

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

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

372,000

28,800

372,000

28,800

On the books of Son Company, the P36,000 dividend paid was recorded as follows: Dividends paid………… Cash……. Dividends paid by S Co..

36,000

36,000

No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4. Consolidation Workpaper – First Year after Acquisition

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

240,000 120.000

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

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

6,000

288,000 72,000

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 Son Co……………………………………………….

96,000 192,000 7,200 4,800 15,000

21,000 84,000

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 date of acquisition.

(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 3,750

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

Inventory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

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

P 1,200 P1,200

_______ P 6,000

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

28,800 7,200

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

(E5) Sales………………………. Cost of Goods Sold (or Purchases)

150,000

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

60,000

(E7) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

18,000

(E8) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

12,000

To eliminated intercompany downstream sales.

To eliminated intercompany upstream sales.

To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders.

To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders.

(E9) Non-controlling interest in Net Income of Subsidiary…………

216,000

6,210

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

36,000

150,000

60,000

18,000

12,000

Non-controlling interest …………..

6,210

To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. Unrealized profit in ending inventory of P Company (upstream sales)……………………….. S Company’s realized net income from separate operations*…….….. Less: Amortization of allocated excess [(E3)]…. Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill) Non-controlling Interest in Net Income (NCINI) – full goodwill

P 60,000 ( 12,000) P 48,000 13,200 P 34,800 20% P 6,960

750 P

6,210

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

P Co P480,000

S Co. P240,000

Dividend income Total Revenue Cost of goods sold

28,800 P451,200 P204,000

P240,000 P138,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 48,000 P312,000 P196,800 P196,800

24,000 18,000 P180,000 P 60,000 P 60,000

Sales

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 Cash………………………. Accounts receivable…….. Inventory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill……………………

P360,000

P

196,800 P556,800

P120,000 60,000 P180,000

72,000 -

36,000

P484,800

Dr. (5) 150,000 (6) 60,000 (4) 28,800 (3) (7) (8) (3) (3)

6,000 18,000 12,000 6,000 1,200

(3)

3,750

(9)

6,210

Cr.

Consolidated P 510,000 _________ P 510,000 P 168,000

(5) 150,000 (6) 60,000

90,000 1,200 66,000 3,750 P328,950 P181,050 ( 6,210) P174,840

P

(1) 120,000

360,000 174,840 P534,840

_

72,000 ________

P144,000

P

462,840

232,800 90,000 120,000

P 90,000 60,000 90,000

P

322,800 150,000

210,000 240,000 720,000

48,000 180,000 540,000

(4)

(2)

6,000

(2)

7,200

(2) (2)

4,800 15,000

(3) (7) (8)

36,000

6,000 18,000 12,000

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

180,000 265,200 420,000 1,044,000 3,600 11,250

Investment in S Co………

372,000

Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest………… Total

P1,984,800

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

484,800

240,000 144,000

_________ P1,984,800

_________ P1,008,000

(3) 288,000 (4) 84,000

(2) 96,000 (3) (6) 192,000 (7) 6,000

P2,396,850

12,000

P147,000 495,000 240,000 360,000 600,000

(1) 240,000 (4)

7,200

P 986,160

20x5: Second Year after Acquisition

(1 ) 72,000 (2) 21,000 (9) 6,210 P 986,160

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

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

462,840 ____92,010 P2,396,850

Son Co. P 360,000 192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. 20x5: Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5: Cash……………………… Dividend income (P48,000 x 80%)……………. Record dividends from S Company.

38,400

38,400

On the books of S Company, the P48,000 dividend paid was recorded as follows: Dividends paid………… Cash Dividends paid by S Co..

48,000

48,000

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

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 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 80% P 19,200

(E2) Common stock – S Co…………………………………………

240,000

19,200

Retained earnings – S Co., 1/1/20x5 Investment in S Co (P384,000 x 80%)………………………… Non-controlling interest (P384,000 x 20%)………………………..

144.000

(E3) 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……………………………………………….

6000 96,000 192,000 7,200 4,800 15,000

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

13,560 3,390 6,000 12,000 1,200

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

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

(20x4) Retained earnings, P 6,000 12,000 (6,000) 1,200 3,750 P 16,950 80% P13,560

Depreciation/ Amortization expense P

6,000 24,000 2,800 3,750

Amortization -Interest

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

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

P 1,200 P1,200

38,400 9,600

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

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

120,000

(E7) Sales………………………. Cost of Goods Sold (or Purchases)

75,000

To eliminated intercompany downstream sales.

To eliminated intercompany upstream sales.

216,000 21,000 84,000

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 (P16,950 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……………………………………

307,200 76,800

48,000

120,000

75,000

(E8) Beginning Retained Earnings – P Company…… Cost of Goods Sold (Ending Inventory – Income Statement)

18,000

(E9) Beginning Retained Earnings – P Company (P12,000 x 80%) Noncontrolling interest (P12,000 x 20%)…… Cost of Goods Sold (Ending Inventory – Income Statement)

9,600 2,400

(E10) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

24,000

To realized profit in downstream beginning inventory deferred in the prior period.

To realized profit in upstream beginning inventory deferred in the prior period.

To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders.

(E11) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

6,000

To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders.

(E12) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

17,760

To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. Realized profit in beginning inventory of P Company - 20x5 (upstream sales) Unrealized profit in ending inventory of P Company - 20x5 (upstream sales) Son Company’s Realized net income* Less: Amortization of allocated excess

18,000

12,000

24,000

6,000

17,760

P 90,000 12,000 ( 6,000) P 96,000 7,200 P 88,800 20% P 17,760

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) partial goodwill Less: NCI on goodwill impairment loss on fullGoodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 17,760 *from separate transactions that has been realized in transactions with third persons.

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

Dividend income Total Revenue Cost of goods sold

38,400 P574,800 P216,000

P360,000 P192,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income

60,000 72,000 P348,000 P230,400

24,000 54,000 P270,000 P 90,000

Sales

Dr. (6) 120,000 (7) 75,000 (5) 38,400

Cr.

(10) 24,000 (11) 6,000

(6) 120,000 (7) 90,000 (8) 21,600 (9) 14,400

(4) (4)

6,000 1,200

Consolidated P 705,000 ___________ P 705,000 P 213,000

90,000 1,200 126,000 P 430,200 P 274,800

NCI in Net Income - Subsidiary Net Income to Retained Earnings

P230,400

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

P484,800

S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receivable…….. Inventory…………………. Land……………………………. Equipment Buildings 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 Non-controlling interest…………

Total

P

P 90,000

(12) 17,760

(3) 13,560 (8) 18,000 (9) 96000 (5) 144,000

( 17,760) P 257,040

(4) 19,200

P 462,840

230,400 P715,200

P 144,000 90,000 P234,000

72,000 -

48,000

P643,200

P186,000

P 647,880

265,200 180,000 216,000

P 102,000 96,000 108,000

P 367,200 276,000

210,000 240,000 720,000

48,000 180,000 540,000

372,000 P2,203,200

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

643,200

___ _____ P2,203,200

240,000 186,000

_________ P1,074,000

257,040 P 719,880 (5)

(6)

6,000

(3)

7,200

(3) (3) (1)

4,800 15,000 19,200

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

48,000

(4) 6,000 (10) 24,000 (11) 6,000 (3) 216,000 (4) 2,400 (4) 3,750 (2) 307,200 (3) 84,000

(4)

24,000

_

72,000 ________

294,000 265,200 420,000 1,044,000 2,400 11,250 P2,680,050 P180,000 552,000 240,000 360,000 600,000

(2) 240,000 (4) 3,390 (8) 9,600 (9) 2,400 __________ P1,081,110

647,880 (2 ) 76,800 (3) 21,000 (12) 17,760 P1,081,110

____100,170 P2,680,050

5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition)

b.

Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… Retained earnings – Subsidiary Company…………………………………. Stockholders’ equity – Subsidiary Company.………….. Adjustments to reflect fair value - (over) undervaluation of assets and liabilities Fair value of stockholders’ equity of subsidiary, January 1, 20x4………………… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial)………………………………….. Add: Non-controlling interests on full goodwill, 1/1/20x4 (P12,500, full-goodwill – P10,000, partial goodwill) Non-controlling interest (full-goodwill)

P360,000

P 240,000 120,000 P 360,000 90,000 P 450,000 20 P 90,000 3,000 P 93,000

c.

6.

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

Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P174,840 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Unrealized profit in ending inventory of S Company (downstream sales)… Perfect Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Unrealized profit in ending inventory of S Company (upstream sales)… Son Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income Amortization of allocated excess (refer to amortization 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 *that has been realized in transactions with third parties.

P 60,000 ( 12,000) P 48,000 P 6,1210 13,200 3,750

P168,000 ( 18,000) P150,000 48,000 P198,000 23,160 P174,840 _ 6,210 P181.050

b. NCI-CNI – P6,210 **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial 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) *that has been realized in transactions with third parties.

P 60,000 ( 12,000) P 48,000 13,200 P 34,800 20% P 6,960

P

750 6,210

c. CNI – P181,050 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:

e.

Consolidated Retained Earnings, December 31, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Dividends paid – Parent Company for 20x4 Consolidated Retained Earnings, December 31, 20x4

P360,000 174,840 P534,840 72,000 P462,840

f.

Non-controlling interest ), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4 Add: Net income of subsidiary for 20x4 Total Less: Dividends paid – 20x4 Stockholders’ equity – Subsidiary 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…… Less: Unrealized profit in ending inventory of P Company (upstream sales) Realized stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)………………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4: [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill)……………..

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 240,000 P120,000 60,000 P180,000 36,000

144,000 P 384,000 90,000 ( 13,200) P460,800 12,000 P448,800 20 P 89,760 2,250 P 92,010

P 600,000 462,840 P1,062,840 ___92,010 P1,154,840

12/31/20x5: a. CI-CNI – P257,040

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. *that has been realized in transactions with third parties.

P 90,000 12,000 ( 6,000) P 96,000

P192,000 18,000 (_24,000) P186,000

96,000 P282,000 7,200 P274,800 17,760 P257,040

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… Son Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent…………..

P 90,000 12,000 ( 6,000) P 96,000 P 17,760 7,200

P192,000 18,000 (_24,000) P186,000

96,000 P282,000 24,960 P257,040

Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 *that has been realized in transactions with third parties.

_ 17,760 P274,800

b. NCI-CNI – P16,560

**Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

P 90,000 12,000 ( 6,000) P 96,000 7,200 P 88,800 20% P 17,760 0 P 17,760

c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model Less: Unrealized profit in ending inventory of S Company (downstream sales) – 20x4 (UPEI of S – 20x4) or Realized profit in beginning inventory of S Company (downstream sales) –20x4 (RPBI of S - 20x5)……………. Adjusted Retained Earnings – Parent 1/1/20x5 (cost model (S Company’s Retained earnings that have been realized in transactions with third parties.. 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, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Unrealized profit in ending inventory of P Company (upstream sales) 20x4 (UPEI of P – 20x4) or Realized profit in beginning inventory of P Company (upstream sales) –20x5 (RPBI of P - 20x5) Multiplied by: Controlling interests %...................

P484,800 18,000 P466,800

P 144,000 120,000 P 24,000 13,200 12,000 (P 1,200) 80% (P 960)

Less: Goodwill impairment loss (full-goodwill), net (P3,750 – P750)* or (P3,750 x 80%) 3,000 ( 3,960) Consolidated Retained earnings, January 1, 20x5 P462,840 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 257,040 Total P719,880 Less: Dividends paid – Parent Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P647,880 *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 (refer to Illustration 15-6).

Or, alternatively:

Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model Less: Unrealized profit in ending inventory of S Company (downstream sales) – 20x5 (UPEI of S – 20x5) or Realized profit in beginning inventory of S Company (downstream sales) –20x6 (RPBI of S - 20x6)……………. Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ( S Company’s Retained earnings that have been realized in transactions with third parties.. Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net

P643,200 24,000 P619,200

increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, December 31, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Accumulated amortization of allocated excess – 20x4 and 20x5 (P13,200 + P7,200) Unrealized profit in ending inventory of P Company (upstream sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inventory of P Company (upstream sales) –20x6 (RPBI of P - 20x6) Multiplied by: Controlling interests %................... Less: Goodwill impairment loss (full-goodwill), net (P3,750 – P750)* or (P3,750 x 80%) Consolidated Retained earnings, December 31, 20x5

e.

f.

Non-controlling interest, December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5* Add: Net income of subsidiary for 20x5 Total Less: Dividends paid – 20x5 Stockholders’ equity – Subsidiary 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…… Less: Unrealized profit in ending inventory of P Company (upstream sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inventory of P Company (upstream sales) –20x6 (RPBI of P - 20x6 Realized stockholders’ equity of subsidiary, December 31, 20x5………. Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill)………………………………….. * the realized profit in beginning inventory of P Company (upstream sales) –20x5 (RPBI already included in the beginning retained earnings of S Company.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings Parent’s Stockholders’ Equity / CI - SHE NCI, 1/1/20x4 Consolidated SHE, 12/31/20x5

P 186,000 120,000 P 66,000 20,400

P P

6,000 39,600 80% 31,680 3,000

28,680 P647,880

P 240,000 P144,000 90,000 P234,000 48,000

186,000 P 426,000 90,000

P 13,200 7,200

( 20,400) P 495,600 6,000 P489,600 20 P 97,920

2,250 P 100,170 of P - 20x5 amounting to P10,000 is

P 600,000 647,880 P1,247,880 ___100,170 P1,348,050

Problem XI (Compute selected balances based on three different intercompany asset transfer scenarios) 1. Consolidated Cost of Goods Sold PP’s cost of goods sold ...................................................................................... P290,000 SW’s cost of goods sold ..................................................................................... 197,000 Elimination of 20x5 intercompany transfers ................................................... (110,000) Reduction of beginning Inventory because of 20x4unrealized gross profit (P28,000/1.4 = P20,000 cost; P28,000 transfer price less P20,000 cost = P8,000 unrealized gross profit) ....................................................... (8,000)

Reduction of ending inventory because of 20x5 unrealized gross profit (P42,000/1.4 = P30,000 cost; P42,000 transfer price less P30,000 cost = P12,000 unrealized gross profit) ..................................................... Consolidated cost of goods sold ....................................................... Consolidated Inventory PP book value .............................................................................................. SW book value ............................................................................................. Eliminate ending unrealized gross profit (see above) .......................... Consolidated Inventory ..............................................................................

12,000 P381,000 P346,000 110,000 (12,000) P444,000

Non-controlling Interest in Subsidiary’s Net Income Because all intercompany sales were downstream, the deferrals do not affect SW. Thus, the non-controlling interest is 20% of the P58,000 (revenues minus cost of goods sold and expenses) reported income or P11,600. or

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P640-P290-P150) Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations (P360 – P197 – P105) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5…………..

P 58,000 0 ( 0) P 58,000

**Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

2.

Consolidated Cost of Goods Sold PP book value ..................................................................................................... SW book value .................................................................................................... Elimination of 20x5 intercompany transfers ................................................... Reduction of beginning inventory because of 20x4 unrealized gross profit (P21,000/1.4 = P15,000 cost; P21,000 transfer price less P15,000 cost = P6,000 unrealized gross profit) ....................................................... Reduction of ending inventory because of 20x5 unrealized gross profit (P35,000/1.4 = P25,000 cost; P35,000 transfer price less P25,000 cost = P10,000 unrealized gross profit) ..................................................... Consolidated cost of goods sold .................................................................... Consolidated Inventory

P 200,000 8,000 (_ 12,000) P 196,000

58,000 P 254,000 ____0 P 254,000 11,600 P 242,200

P 58,000 0 ( 0) P 58,000 ____0 P 58,000 20% P 11,600

P290,000 197,000 (80,000)

(6,000)

10,000 P411,000

PP book value ..................................................................................................... SW book value .................................................................................................... Eliminate ending unrealized gross profit (see above) ................................. Consolidated inventory ..............................................................................

P346,000 110,000 (10,000) P446,000

Non-controlling Interest in Subsidiary's Net income Since all intercompany sales are upstream, the effect on Snow's income must be reflected in the non-controlling interest computation: SW reported income .......................................................................................... 20x4 unrealized gross profit realized in 20x5 (above) .................................. 20x5 unrealized gross profit to be realized in 20x6 (above) ....................... SW realized income ........................................................................................... Outside ownership percentage ...................................................................... Non-controlling interest in SW’s income .................................................. or Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P640-P290-P150) Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations (P360 – P197 – P105) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5…………..

P58,000 6,000 (10,000) P54,000 20% P10,800 P 200,000 (_ 0) P 200,000

P 58,000 6,000 ( 10,000) P 54,000

**Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

54,000 P 254,000 ____0 P 254,000 10,800 P 243,200

P 58,000 6,000 ( 10,000) P 54,000 ____0 P 54,000 20% P 10,800

Problem XIII 1. (Computation of selected consolidation balances as affected by downstream inventory transfers) UNREALIZED GROSS PROFIT, 12/31/x4: (downstream transfer) Intercompany gross profit (P120,000 – P72,000) .......................................................... Inventory remaining at year's end ....................................................................................... Unrealized Intercompany Gross profit, 12/31/x4 ...............................................................

P48,000 30% P14,400

UNREALIZED GROSS PROFIT, 12/31/x5: (downstream transfer) Intercompany gross profit (P250,000 – P200,000) ....................................................... P50,000 Inventory remaining at year's end ....................................................................................... 20% Unrealized intercompany gross profit, 12/31/x5 ................................................................ P10,000 CONSOLIDATED TOTALS  Sales = P1,150,000 (add the two book values and eliminate intercompany sales of P250,000)  Cost of goods sold: Benson's book value ....................................................................................................... P535,000 Broadway's book value .................................................................................................. 400,000 Eliminate intercompany transfers ................................................................................. (250,000) Realized gross profit deferred in 20x4 .......................................................................... (14,400) Deferral of 20x5 unrealized gross profit ........................................................................ 10,000

Cost of goods sold ................................................................................................... P680,600 Operating expenses = P210,000 (add the two book values and include intangible amortization for current year)  Dividend income = -0- (intercompany transfer eliminated in consolidation)  Noncontrolling interest in consolidated income: (impact of transfers is not included because they were downstream) Broadway reported income for 20x5 ........................................................................... P100,000 Intangible amortization ................................................................................................... (10,000) Broadway adjusted income ........................................................................................... 90,000 Outside ownership ........................................................................................................... 30% Noncontrolling interest in Broadway’s earnings.......................................................... P 27,000 or, 

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P800-P535-P100) Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations (P600 – P400 – P100) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5…………..

P 100,000 0 ( 0) P 100,000

**Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

 

P 165,000 14,400 (_10,000) P 169,400

100,000 P 269,400 __10,000 P 259,400 27,000 P 232,400

P 100,000 0 ( 0) P 100,000 __10,000 P 90,000 30% P 27,000

Inventory = P988,000 (add the two book values less the P10,000 ending unrealized gross profit) Noncontrolling interest in subsidiary, 12/31/x5 = P385,500 30% beginning P950,000 book value ......................................................................... P285,000 Excess January 1 intangible allocation (30% × P295,000) ...................................... 88,500 Noncontrolling Interest in Broadway’s earnings.............................................................. 27,000 Dividends (30% × P50,000)................................................................................................... (15,000) Total noncontrolling interest at 12/31/x5................................................................... P385,500

2. (Computation of selected consolidation balances as affected by upstream inventory transfers). UNREALIZED GROSS PROFIT, 12/31/x4: (upstream transfer) Intercompany gross profit (P120,000 – P72,000) ......................................................... Inventory remaining at year's end ................................................................................ Unrealized intercompany gross profit, 12/31/x4 ................................................................

P48,000 30% P14,400

UNREALIZED GROSS PROFIT, 12/31/x5: (upstream transfer) Intercompany gross profit (P250,000 – P200,000) ....................................................... Inventory remaining at year's end ................................................................................ Unrealized intercompany gross profit, 12/31/x5 ................................................................

P50,000 20% P10,000

CONSOLIDATED TOTALS  Sales = P1,150,000 (add the two book values and eliminate the Intercompany transfer)  Cost of goods sold: Benson's COGS book value ........................................................................................... P535,000 Broadway's COGS book value ...................................................................................... 400,000

  

Eliminate intercompany transfers ................................................................................. (250,000) Realized gross profit deferred in 20x4 .......................................................................... (14,400) Deferral of 20x5 unrealized gross profit ........................................................................ 10,000 Consolidated cost of goods sold .......................................................................... P680,600 Operating expenses = P210,000 (add the two book values and include intangible amortization for current year) Dividend income = -0- (interco. transfer eliminated in consolidation) Noncontrolling interest in consolidated income: (impact of transfers is included because they were upstream) Broadway reported income for 20x5 ........................................................................... P100,000 Intangible amortization ................................................................................................... (10,000) 20x4 gross profit recognized in 20x5 ...................................................................... 14,400 20x5 gross profit deferred ....................................................................................... (10,000) Broadway realized income for 20x5 ...................................................................... P94,400 Outside ownership ........................................................................................................... 30% Noncontrolling interest .................................................................................................... P28,320 Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P800-P535-P100) Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations (P600 – P400 – P100) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

 

P 100,000 14,400 ( 10,000) P 104,400

P 165,000 0 (_ 0) P 165,000

104,400 P 269,400 __10,000 P 259,400 28,320 P 231,080

P 100,000 14,400 ( 10,000) P 104,400 __10,000 P 94,400 30% P 28,320

Inventory = P988,000 (add the two book values and defer the P10,000 ending unrealized gross profit) Noncontrolling interest in subsidiary, 12/31/x5 = P382,500 30% beginning book value less P14,400 unrealized gross profit (30% × P935,600)............................................................. P280,680 Excess intangible allocation (30% × P295,000)..................................................... (88,500) Noncontrolling Interest in Broadway’s earnings .................................................. 28,320 Dividends (30% × P50,000)............................................................................................... (15,000) Total noncontrolling interest at 12/31/x5............................................................... P382,500

Problem XIV Amortization of equipment: P20,000 / 10 years = P2,000 RPBI of S (downstream sales):…………………..................................................... ... P15,000 RPBI of P (upstream sales)………………………....................................................... 10,000 UPEI of S (downstream sales)……………………………………………………..……. 20,000 UPEI of P (upstream sales)………………………………………………….…………… 5,000 Consolidated Net Income for 2014 P Company’s net income from own/separate operations (P724,000 – P24,000 Realized profit in beginning inventory of S Company (downstream sales)

P700,000 15,0000

Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 2014 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 2014………….. *that has been realized in transactions with third parties.

P 90,000 10,000 ( 5,000) P 95,000

(20,00 0) P695,000

95,000 P790,000 2,000 P788,000 18,600 P769,400

Or, alternatively

Consolidated Net Income for 2014 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… Son Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 2014 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 2014 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

P 90,000 10,000 ( 5,000) P 95,000 P 18,600 2,000

P700,000 15,0000 (20,00 0) P695,000

95,000 P790,000 20,600 P769,400 _ 18,600 P788,000

P 90,000 10,000 ( 5,000) P 95,000 2,000 P 93,000 20% P 18,600 0 P 18,600

Note: Preferred Solution - since what is given is the RE – P, 12/31/2014 (ending balance of the current year) Retained earnings – Parent, 12/31/2014 (cost)……………………….. P 3,500,000 -: UPEI of S (down) – 2014 or RPBI of S (down) – 2015..…………. 20,000 Adjusted Retained earnings – Parent, 12/31/2014 (cost)………….. P 3,480,000 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/2011……………………….P 150,000 Less: Retained earnings – Subsidiary, 12/31/2014…………... 320,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)………… P 170,000 Accumulated amortization (1/1/2011 – 12/31/2014): P 2,000 x 4 years………………………………………………..( 8,000) UPEI of P (up) – 2014 or RPBI of P (up) – 2015………………........( 5,000) P157,000

x: Controlling Interests………………………………………… RE – P, 12/31/2014 (equity method) = CRE, 12/31/2014………….

80%

125,600 P 3,605,600

Or, compute first the RE – P on January 1, 2014 (use work back approach), Retained earnings – Parent, 1/1/2014 (cost) (P3,500,000 plus P25,000 Div of P less P724,000 NI of P)…. P2,801,000 -: UPEI of S (down) – 2013 or RPBI of S (down) – 2014..…………. 15,000 Adjusted Retained earnings – Parent, 1/1/2014 (cost)……………… P2,786.000 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/2011………………………P 150,000 Less: Retained earnings – Subsidiary, 1/1/2014……………… 260,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)…………P110,000 Accumulated amortization (1/1/2011 – 1/1/2014): P 2,000 x 3 years………………………………………………. ( 6,000) UPEI of P (up) – 2013 or RPBI of P (up) – 2014………………... ( 10,000) P 94,000 X: Controlling Interests………………………………………… 80% 75,200 RE – P, 1/1/2014 (equity method) = CRE, 1/1/2014………………..P2,861,200 +: CI – CNI or Profit Attributable to Equity Holders of Parent…….. 769,400 -: Dividends – P………………………..……………………… 25,000 RE – P, 12/31/2014 (equity method) = CRE, 12/31/2014…………..P3,605,600 P S Intercompany sales - downstream Intercompany sales - upstream RPBI of S (downstream sales)* RPBI of P (upstream sales)*** UPEI of S (downstream sales)** UPEI of P (upstream sales)**** Consolidated

Sales Cost of Sales P2,500,000 P1,250,000 1,200,000 875,000 ( 320,000) ( 320,000) ( 290,000) ( 290,000) ( 15,000) ( 10,000) 20,000 _________ 5,000 P3,090,000 P1,515,000

Working Paper Eliminating Entries: 1. Intercompany Sales and Purchases: Downstream Sales: Sales………………………………………………………………………….. 320,000 Cost of Sales (or Purchases)…………………………………….... 320,000 Upstream Sales: Sales………………………………………………………………………….. 290,000 Cost of Sales (or Purchases)……………………………………… 290,000 2. Intercompany Profit: (COST Model) Downstream Sales: *100% RPBI of S: Retained Earnings – P, beginning………………………………………..... 15,000 Cost of Sales (Beginning Inventory in Income Statement)…............ 15,000 **100% UPEI of S: Cost of Sales (Ending Inventory in Income Statement)……………… 20,000 Inventory (Ending Inventory in Balance Sheet)……………….. 20,000 Upstream Sales:

***100% RPBI of P: (if equity method Investment in S instead of RE – P, beg.) Retained Earnings – P, beginning…………………………………...…….. 16,000 NCI ……………………………………………….……………………………... 4,000 Cost of Sales (Beginning Inventory in Income Statement)…........ 20,000 ****100% UPEI of P: Cost of Sales (Ending Inventory in Income Statement)………………… 5,000 Inventory (Ending Inventory in Balance Sheet)……………….. 5,000 Problem XV (Change 2009 – 20x4; 2010 – 20x5; 2011 – 20x6)

(Compute consolidated totals with transfers of both inventory and a building.) Excess Amortization Expenses Equipment P60,000 ÷ 10 years = P6,000 per year Franchises P80,000 ÷ 20 years = P4,000 per year Annual excess amortizations P10,000 Unrealized Gross profit—Inventory, 1/1/x6 Markup (P70,000 – P49,000) ........................................................................................... Markup percentage (P21,000 ÷ P70,000) ....................................................................

P21,000 30%

Remaining inventory ...................................................................................................................... Markup percentage ...................................................................................................................... Unrealized gross profit, 1/1/x6.........................................................................................

P30,000 30% P9,000

Unrealized Gross profit—Inventory, 12/31/x6 Markup (P100,000 – P50,000) ......................................................................................... Markup percentage (P50,000 ÷ P100,000) .................................................................................

P50,000 50%

Remaining inventory ....................................................................................................... Markup percentage ...................................................................................................................... Unrealized gross profit, 12/31/x6 ...................................................................................

P40,000 50% P20,000

Impact of intercompany Building Transfer 12/31/x5—Transfer price figures Transfer price ............................................................................................................. Gain on transfer (P50,000 – P30,000) ..................................................................... Depreciation expense (P50,000 ÷ 5) ..................................................................... Accumulated depreciation ................................................................................... 12/31/x6—Transfer price figures Depreciation expense ............................................................................................ Accumulated depreciation ................................................................................... 12/31/x5—Historical cost figures Historical cost ............................................................................................................ Depreciation expense (P30,000 book value ÷ 5 years) ..................................... Accumulated depreciation (P40,000 + P6,000) ................................................. 12/31/x6—Historical cost figures Depreciation expense ............................................................................................ Accumulated depreciation ...................................................................................

P50,000 20,000 10,000 10,000 10,000 20,000 P70,000 6,000 46,000 6,000 52,000

CONSOLIDATED BALANCES  Sales = P1,000,000 (add the two book values and subtract P100,000 in intercompany transfers)  Cost of Goods Sold = P571,000 (add the two book values and subtract P100,000 in intercompany purchases. Subtract P9,000 because of the previous year unrealized gross profit and add P20,000 to defer the current year unrealized gross profit.)  Operating Expenses = P206,000 (add the two book values and include the P10,000 excess amortization expenses but remove the P4,000 in excess depreciation expense [P10,000 – P6,000] created by building transfer)  Investment Income = P0 (the intercompany balance is removed so that the individual revenue and expense accounts of the subsidiary can be shown)  Inventory = P280,000 (add the two book values and subtract the P20,000 ending unrealized gross profit)

 

Equipment (net) = P292,000 (add the two book values and include the P60,000 allocation from the acquisitiondate fair value less three years of excess amortizations) Buildings (net) = P528,000 (add the two book values and subtract the P20,000 unrealized gain on the transfer after two years of excess depreciation [P4,000 per year])

Problem XVI Requirements 1 to 4: Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 80%)……………………. Retained earnings (P120,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… Increase in land (P7,200 x 80%)……………………. Increase in equipment (P96,000 x 80%) Decrease in buildings (P24,000 x 80%)………..... Decrease in bonds payable (P4,800 x 80%)…… Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

P 372,000 P 192,000 96,000

P

P 4,800 5,760 76,800 ( 19,200) 3,840

288,000 84,000

72,000 P 12,000

The over/under valuation of assets and liabilities are summarized as follows: Inventory………………….…………….. Land……………………………………… Equipment (net)......... Buildings (net) Bonds payable………………………… Net………………………………………..

S Co. Book value 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 .................. Less: Accumulated depreciation….. Net book value………………………...

S Co. Book value 180,000 96,000 84,000

S Co. Fair value 180,000 180,000

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

S Co. Book value 360,000 192,000 168,000

S Co. Fair value 144,000 144,000

Increase (Decrease)

0 ( 96,000) 96,000

(Decrease) ( 216,000) ( 192,000) ( 24,000)

A summary or depreciation and amortization adjustments is as follows: Account Adjustments to be amortized Inventory Subject to Annual Amortization Equipment (net)......... Buildings (net) Bonds payable…

Over/ Under P 6,000

Life 1

96,000 (24,000) 48000

8 4 4

Annual Amount P 6,000

Current Year(20x4) P 6,000

20x5 P -

12,000 ( 6,000) 1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

12,000 (6,000) 1,200 P 7,200

The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows: Fair value of Subsidiary (100%) Consideration transferred: Cash (80%)

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 Son (P360,000 x 100%)

__360,000

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

105,000 90,000

P

15,000

In this case, the goodwill was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows: Goodwill applicable to parent………………… Goodwill applicable to NCI…………………….. Total (full) goodwill………………………………..

Value P12,000 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

Value P 3,000

% of Total 80.00%

750

20.00%

P 3,750

100.00%

The goodwill impairment loss would be allocated as follows Goodwill impairment loss attributable to parent or controlling Interest Goodwill applicable to NCI…………………….. Goodwill impairment loss based on 100% fair value or fullGoodwill

The unrealized profits on January 1, and on December 31, 20x5, resulting intercompany sales, are as summarized below: Downstream Sales: Year 20x4 20x5

Sales of Parent to Subsidiary P150,000 120,000

Upstream Sales: Year 20x4 20x5

Sales of Subsidiary to Parent P 50,000 62,500

Intercompany Merchandise in 12/31 Inventory of S Company P150,000 x 60% = P90,000 P120,000 x 80% = P96,000

Unrealized Intercompany Profit in Ending Inventory P90,000 x 20% = P18,000 P96,000 x 25% = P40,000

Intercompany Merchandise in 12/31 Inventory of S Company P100,000 x 50% = P25,000 P 62,500 x 40% = P25,000

Unrealized Intercompany Profit in Ending Inventory P25,000 x 40% = P10,000 P25,000 x 20% = P 5,000

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

January 1, 20x4: (1) Investment in S Company…………………………………………… Cash…………………………………………………………………….. Acquisition of S Company.

January 1, 20x4 – December 31, 20x4:

372,000

372,000

(2) Cash……………………… Investment in S Company (P36,000 x 80%)…………….

28,800

Record dividends from S Company.

December 31, 20x4: (3) Investment in S Company Investment income (P60,000 x 80%)

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

28,800

48,000

13,560 13,560

Record amortization of allocated excess of inventory, equipment, buildings and bonds payable and goodwill impairment loss.

December 31, 20x4: (5) Investment income (P18,000 x 100%) Investment in S Company To adjust investment income for downstream sales - unrealized profit in ending inventory of S. December 31, 20x4: (6) Investment income (P12,000 x 80%) Investment in S Company To adjust investment income for upstream sales - unrealized profit in ending inventory P .

18,000

9,600

18,000

9,600

Thus, the investment balance and investment income in the books of P Company is as follows: Cost, 1/1/x4 NI of S (60,000 x 80%) Balance, 12/31/x4 Amortization & impairment UPEI of S (P18,000 x 100%) UPEI of P (P12,000 x80%)

Investment in S 372,000 28,800 48,000

13,560 18,000 9,600

Dividends – S (30,000x 80%) Amortization & impairment UPEI of Son (P15,000 x 100%) UPEI of Perfect (P10,000 x80%)

48,000

NI of S (P60,000 x 80%)

6,840

Balance, 12/31/x4

350,040 Investment Income 13,560 18,000 9,600

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%)……………………….. Investment in S Co……………………………………………….

6,000 96,000 192,000 7,200 4,800 12,000

To eliminate investment on January 1, 20x4 and equity accounts of subsidiary on date of acquisition; and to establish non-controlling interest (in net assets of subsidiary) on date of acquisition.

288,000 72,000

216,000 18,000 84,000

To eliminate investment on January 1, 20x4 and allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition.

(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 S’s identifiable assets and liabilities as follows:

Inventory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000 _______ P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______ P 7,200

P 1,200 P1,200

Total

14,400

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

6,840 21,960 7,200

36,000

To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows:

After

Investment in S NI of S 28,800 (60,000 x 80%)……. 48,000 13,560 18,000 9,600 21,960

Dividends - S Amortization & impairment UPEI of S UPEI of P

Investment Income Amortization impairment UPEI of S UPEI of P

13,560 18,000 9,600

48,000

NI of S (50,000 x 80%)

the

6,840

eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Investment in S 372,000 28,800

Cost, 1/1/x4 NI of S (60,000 x 80%) Balance, 12/31/x4 (E4) Investment Income and dividends ……………

(E5) Sales………………………. Cost of Goods Sold (or Purchases)

48,000 350,040 21,960 372,000

13,560 18,000 9,600 288,000 84,000 372,000

Dividends – S (30,000x 80%) Amortization & impairment UPEI of Son UPEI of Perfect (E1) Investment, 1/1/20x4 (E2) Investment, 1/1/20x4

150,000

To eliminated intercompany downstream sales.

(E6) Sales……………………….

60,000

150,000

Cost of Goods Sold (or Purchases)

60,000

To eliminated intercompany upstream sales.

(E7) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

18,000

(E8) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

12,000

18,000

To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders.

12,000

To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders.

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

6,960

6,960

To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. Unrealized profit in ending inventory of P Company (upstream sales)……………………….. Son Company’s realized net income from separate operations*…….….. Less: Amortization of allocated excess [(E3)]…. Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

P 60,000 ( 12,000) P 48,000 ( 13,200) P 34,800 20% P

6,960

Subsidiary accounts are adjusted to full fair value regardless on the controlling interest percentage or what option used to value non-controlling interest or goodwill. Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement

P Co P480,000

S Co. P240,000

Investment income Total Revenue

6,840 P486,840

P240,000

Cost of goods sold

P204,000

P138,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 48,000 P312,000 P174,840 P174,840

24,000 18,000 P180,000 P 60,000 P 60,000

Sales

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from above Total Dividends paid P Company

P360,000 174,840 P414,840 72,000

P120,000 60,000 P180,000

Dr. (5) 150,000 (6) 60,000 (4) 6,840 (3) (7) (8) (3) (3)

6,000 18,000 12,000 6,000 1,200

(3)

3,000

(9)

6,960

(1) 120,000

Cr.

Consolidated P 510,000 _________ P 510,000 P 168,000

(5) 150,000 (6) 60,000

90,000 1,200 66,000 3,000 P328,200 P181,800 ( 6,960) P174,840

P

360,000 174,840 P414,840 72,000

S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receivable…….. Inventory………………….

P

Land……………………………. Equipment Buildings 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 Non-controlling interest………… Total

-

36,000

P462,840

_

________

P144,000

P

642,840

232,800 90,000 120,000

P 90,000 60,000 90,000

P

387,360 150,000

210,000 220,000 720,000

48,000 180,000 540,000

350,040 P1,635,700

P1,006,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

462,840

240,000 144,000

_________ P1,962,840

_________ P1,008,000

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

(4)

(1)

5,000

(2)

7,200

(2) 4,800 (2) 12,000 (4) 21,960

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

(3) (7) (8)

36,000

6,000 18,000 12,000

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

(3)

12,000

180,000 265,200 380,000 1,044,000 3,600 9,000 P2,394,600 P 147,000 495,000 240,000 360,000 600,000

(1) 240,000 (4)

7,200

__________ P 983,160

(1 ) 72,000 (2) 18,000 (5) 6,960 P 983,160

P Co. P 540,000 216,000 P 324,000 60,000 72,000 P 192,000 65,040 P 257,040 P 72,000

462,840 ____89,760 P2,394,600

S Co. P 360,000 192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. 20x5: Parent Company Equity Method Entry

January 1, 20x5 – December 31, 20x5: (2) Cash……………………… Investment in S Company (P48,000 x 80%)…………….

38,400

December 31, 20x5: (3) Investment in S Company Investment income (P90,000 x 80%)

72,000

Record dividends from S Company.

Record share in net income of subsidiary.

December 31, 20x5: (4) Investment income (P7,200 x 80%) Investment in S Company

Record amortization of allocated excess of inventory, equipment,

5,760

38,400

72,000

5,760

buildings and bonds payable December 31, 20x5: (5) Investment income (P24,000 x 100%) Investment in S Company To adjust investment income for downstream sales - unrealized profit in ending inventory of Son (UPEI of S). December 31, 20x5: (6) Investment in S Company…………….. Investment income (P18,000 x 100%)……….. To adjust investment income for downstream sales - realized profit in beginning inventory of S (RPBI of S). December 31, 20x5: (7) Investment income (P6,000 x 80%) Investment in S Company To adjust investment income for upstream sales - unrealized profit in ending inventory Perfect (UPEI of P). December 31, 20x5: (8) Investment in S Company…………….. Investment income (P12,000 x 80%)……….. To adjust investment income for upstream sales - realized profit in beginning inventory of Perfect (RPBI of P)

24,000

24,000

18,000

18,000

4,800

4,800

9,600

9,600

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

Cost, 1/1/x5 NI of Son (90,000 x 80%) RPBI of S (P18,000 x 100%) RPBI of P (P12,000 x 80%) Balance, 12/31/x5

Amortization (7,200 x 805) UPEI of S (P24,000 x 100%) UPEI of P (P6,000 x 80%)

Investment in S 350,040 38,400 5,760 72,000 24,000 18,000 4,800 9,600 376,680 Investment Income 5,760 24,000 72,000 4,800 18,000 9,600 65,040

Dividends – S (48,000x 80%) Amortization (7,200 x 80%) UPEI of Son (P24,000 x 100%) UPEI of Perfect (P6,000 x 80%)

NI of S (P90,000 x 80%) RPBI of S (P18,000 x 100%) RPBI of P(P12,000 x 80%) Balance, 12/31/x5

Consolidation Workpaper – Second Year after 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 (P160,000 + P6,000) 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……………………………………………….

84,000 198,000 7,200 3,600 9,000

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.

307,200 76,800

216,000 15,360 70,440

To eliminate investment on January 1, 20x5 and allocate excess of cost over book value of identifiable assets acquired, with remainder to the original amount of goodwill; and to establish non- controlling interest (in net assets of subsidiary) on 1/1/20x5.

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

6,000 6,000 1,200

12,000 1,200

To provide for 20x5 depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows:

Inventory sold Equipment Buildings Bonds payable Totals

Depreciation/ Amortization Expense

Amortization -Interest

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

P 1,200 P1,200

Total

P7,200

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

65,040 9,600

48,000 26,640

To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: NI of S (90,000 x 80%)……. RPBI of S RPBI of P

Investment in S 38,400 Dividends – S Amortization 72,000 5,760 (P7,200 x 80%) 18,000 24,000 UPEI of S 9,600 4,800 UPEI of P 26,640

Investment Income Amortization (P7,200 x 80%) UPEI of S UPEI of P

5,760 24,000 4,800

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

120,000

(E7) Sales………………………. Cost of Goods Sold (or Purchases)

75,000

(E8) Investment in Son Company……………………. Cost of Goods Sold (Ending Inventory – Income Statement)

18,000

(E9) Investment in Son Company (P12,000 x 80%) Noncontrolling interest (P12,000 x 20%)…… Cost of Goods Sold (Ending Inventory – Income Statement)

9,600 2,400

To eliminated intercompany downstream sales.

To eliminated intercompany upstream sales.

To realized profit in downstream beginning inventory deferred in the prior period.

To realized profit in upstream beginning inventory deferred in the prior period.

72,000 18,000 9,600 65,040

NI of S (90,000 x 80%) RPBI of S RPBI of P

120,000

75,000

18,000

12,000

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Cost, 1/1/x5 NI of S (90,000 x 80%)

Investment in S 350,040 38,400 72,000

5,760

Dividends – S (40,000x 80%) Amortization (6,000 x 80%)

RPBI of S (P18,000 x 100%) RPBI of P (P12,000 x 80%) Balance, 12/31/x5 (E8) RPBI of S (E9) RPBI of P

18,000 9,600 376,680 18,000 9,600

24,000 4,800 307,200 70,440 26,640

336,900

404,280

UPEI of S (P20,000 x 100%) UPEI of P (P5,000 x 80%) (E1) Investment, 1/1/20x5 (E2) Investment, 1/1/20x5 (E4) Investment Income and dividends

(E10) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

24,000

(E11) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

6,000

24,000

To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders.

6,000

To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders.

(E12) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

17,760

17,760

To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. Realized profit in beginning inventory of P Company - 20x5 (upstream sales) Unrealized profit in ending inventory of P Company - 20x5 (upstream sales) S Company’s Realized net income* Less: Amortization of allocated excess

P 90,000 12,000 ( P ( P

6,000) 96,000 7,200) 88,800 20%

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill P 17,760 *from separate transactions that has been realized in transactions with third persons.

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

P Co P540,000

S Co. P360,000

Investment income Total Revenue Cost of goods sold

65,040 P605,040 P216,000

P360,000 P192,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 72,000 P348,000 P257,040 P257,040

24,000 54,000 P270,000 P 90,000 P 90,000

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

P462,840

Sales

Dr. (6) 120,000 (7) 75,000 (4) 65,040

Cr.

(10) 24,000 (11) 6,000

(6) 120,000 (7) 75,000 (8) 18,000 (9) 12,000

(3) (3)

(5)

6,000 1,200

17,760

Consolidated P 705,000 ___________ P 705,000 P 213,000

P P ( P

90,000 1,200 126,000 430,200 274,800 17,760) 257,040

P 462,840

S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receivable…….. Inventory…………………. Land……………………………. Equipment Buildings 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 Non-controlling interest…………

Total

P

257,040 P719,880

P144,000 90,000 P234,000

72,000 -

48,000

P777,456

P223,200

P 777,456

265,200 180,000 216,000

P 102,000 96,000 108,000

P 367,200 276,000

210,000 240,000 720,000

48,000 180,000 540,000

376,680 P2,207,880

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

647,880

___ _____ P2,207,880

240,000 186,000

_________ P1,074,000

(1) 144,000

257,040 P 719,880 (4)

(2)

7,200

(2) (2) (8) (9)

3,600 9,000 18,000 9,600

(2)

84,000

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

48,000

(10) 24,000 (11) 6,000 (3) 216,000 (3) 1,200 (1) 307,200 (2) 70,440 (4) 26,640

(3)

9,600 2,400

__________ P1,046,400

72,000 ________

294,000 265,200 420,000 1,044,000 2,400 9,000 P2,677,800

12,000

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

(1) 240,000 (4) (9)

_

647,880 (2 ) 76,800 (2) 15,360 (5) 17,760 P1,046,400

____97,920 P2,677,800

5 and 6. Refer to Problem IX for computations Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem IX solution). Problem XVII Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)……………….. Fair value of Subsidiary (100%)………. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. Retained earnings (P120,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… Increase in land (P7,200 x 100%)……………………. Increase in equipment (P96,000 x 100%) Decrease in buildings (P24,000 x 100%)……….....

P 372,000 93,000 P 465,000 P 240,000 120,000 P

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

360,000 P 105,000

Decrease in bonds payable (P4,800 x 100%)…… Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

4,800

90,000 P 15,000

A summary or depreciation and amortization adjustments is as follows: Account Adjustments to be amortized Inventory Subject to Annual Amortization Equipment (net)......... Buildings (net) Bonds payable…

Over/ under P 6,000

Life 1

96,000 (24,000) 4,800

8 4 4

Annual Amount P 6,000

Current Year(20x4) P 6,000

20x5 P -

12,000 ( 6,000) 1,200 P 13,200

12,000 ( 6,000) 1,200 P 13,200

12,000 (6,000) 1,200 P 7,200

20x4: First Year after Acquisition Parent Company Equity Method Entry

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

372,000

Acquisition of S Company.

January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Investment in S Company (P36,000 x 80%)…………….

28,800

December 31, 20x4: (3) Investment in S Company Investment income (P60,000 x 80%)

48,000

Record dividends from S Company.

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

372,000

28,800

48,000

13,560 13,560

Record amortization of allocated excess of inventory, equipment, buildings and bonds payable and goodwill impairment loss.

*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,125 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6).

December 31, 20x4: (5) Investment income (P18,000 x 100%) Investment in S Company To adjust investment income for downstream sales - unrealized profit in ending inventory of S. December 31, 20x4: (6) Investment income (P12,000 x 80%) Investment in S Company To adjust investment income for upstream sales - unrealized profit in ending inventory P .

18,000

9,600

18,000

9,600

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

Cost, 1/1/x4 NI of S (60,000 x 80%)

Investment in S 372,000 28,800 48,000

13,560 18,000

Dividends – S (36,000x 80%) Amortization & impairment UPEI of S (P18,000 x 100%)

9,600 Balance, 12/31/x4

UPEI of P (P12,000 x80%)

324,000

Amortization & impairment UPEI of S (P18,000 x 100%) UPEI of P (P12,000 x80%)

Investment Income 13,560 18,000 9,600

48,000

NI of S (P60,000 x 80%)

6,840

Balance, 12/31/x4

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 Son Co……………………………………………….

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

To eliminate investment on January 1, 20x4 and equity accounts of subsidiary on date of acquisition; and to establish noncontrolling interest (in net assets of subsidiary) on date of acquisition.

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

Inventory sold Equipment Buildings Bonds payable Totals

Cost of Goods Sold P 6,000 _______ P 6,000

Depreciation/ Amortization Expense

Amortization -Interest

P 12,000 ( 6,000) _______ P 7,200

P 1,200 P1,200

Total

14,400

216,000 21,000 84,000

To eliminate investment on January 1, 20x4 and allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition.

(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

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

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

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

6,840 21,960 7,200

36,000

To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows:

After

Investment in S NI of S 28,800 Dividends - S (60,000 Amortization & x 80%)……. 48,000 13,560 impairment 18,000 UPEI of S 9,600 UPEI of P 21,960

Investment Income Amortization impairment UPEI of S UPEI of P

13,560 18,000 9,600

NI of S (50,000 x 80%)

48,000 6,840

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 372,000 28,800

Cost, 1/1/x4 NI of S (60,000 x 80%) Balance, 12/31/x4 (E4) Investment Income and dividends ……………

48,000 350,040 21,960 372,000

13,560 18,000 9,600 288,000 84,000

Dividends – S (30,000x 80%) Amortization & impairment UPEI of S UPEI of P (E1) Investment, 1/1/20x4 (E2) Investment, 1/1/20x4

372,000

(E5) Sales………………………. Cost of Goods Sold (or Purchases)

150,000

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

60,000

(E7) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

18,000

(E8) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

12,000

(E9) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

6,210

To eliminated intercompany downstream sales.

To eliminated intercompany upstream sales.

To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders.

To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders.

To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. Unrealized profit in ending inventory of P Company (upstream sales)……………………….. S Company’s realized net income from separate operations*…….….. Less: Amortization of allocated excess [(E3)]…. Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

P 60,000 ( 12,000) P 48,000 ( 13,200) P 34,800 20% P 6,960

150,000

60,000

18,000

12,000

6,210

– partial goodwill Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) – full goodwill P 6210 *this procedure would be more appropriate, instead of multiplying the fullgoodwill 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) Income Statement

P Co P480,000

S Co. P240,000

Investment income Total Revenue

6,840 P486,840

P240,000

Cost of goods sold

P204,000

P138,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 48,000 P312,000 P174,840 P174,840

24,000 18,000 P150,000 P 50,000 P 50,000

Sales

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 Cash………………………. Accounts receivable…….. Inventory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Investment in S Co……… Total Accumulated depreciation - equipment

P360,000

P

Dr. (5) 150,000 (6) 60,000 (4) 6,840 (3) (7) (8) (3) (3)

6,000 18,000 12,000 6,000 1,200

(3)

3,750

(9)

5,175

Cr.

Consolidated P 510,000 _________ P 510,000 P 168,000

(5) 150,000 (6) 60,000

P

360,000

P

174,840 414,840

_

72,000 ________

174,840 P414,840

P120,000 60,000 P180,000

72,000 -

36,000

P462,840

P144,000

P

462,840

232,800 90,000 120,000

P 90,000 60,000 90,000

P

322,800 150,000

210,000 240,000 720,000

48,000 180,000 540,000

350,040 P1,635,700

P1,008,000

P 135,000

P 96,000

(1) 120,000

90,000 1,200 66,000 3,750 P274,125 P150,875 ( 5,175) P145,700

(4)

(2)

6,000

(2)

7,200

(2) 4,800 (2) 15,000 (4) 21,960

(2)

96,000

(3) (7) (8)

36,000

6,000 18,000 12,000

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

(3)

12,000

180,000 265,200 420,000 1,044,000 3,600 11,250 P2,396,850 P 147,000

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

405,000

288,000

120,000 240,000 600,000

120,000 120,000

(2) 192,000 (3) 6,000

462,840

240,000 144,000

(1) 240,000

_________ P1,962,840

_________ P1,008,000

__________ P 986,160

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

(4)

7,200

495,000 240,000 360,000 600,000 (1 ) 72,000 (2) 21,000 (9) 6,210 P 986,160

Perfect Co. P 540,000 216,000 P 324,000 60,000 72,000 P 192,000 65,040 P 257,040 P 72,000

462,840 ____92,010 P2,396,850

Son Co. P 360,000 192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. Parent Company Equity Method Entry

January 1, 20x5 – December 31, 20x5: (2) Cash……………………… Investment in S Company (P48,000 x 80%)…………….

38,400

December 31, 20x5: (3) Investment in S Company Investment income (P90,000 x 80%)

72,000

Record dividends from S Company.

Record share in net income of subsidiary.

December 31, 20x5: (4) Investment income (P7,200 x 80%) Investment in S Company

5,760

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

December 31, 20x5: (5) Investment income (P24,000 x 100%) Investment in S Company To adjust investment income for downstream sales - unrealized profit in ending inventory of S (UPEI of S). December 31, 20x5: (6) Investment in S Company…………….. Investment income (P18,000 x 100%)……….. To adjust investment income for downstream sales - realized profit in beginning inventory of S (RPBI of S). December 31, 20x5: (7) Investment income (P6,000 x 80%) Investment in S Company To adjust investment income for upstream sales - unrealized profit in ending inventory P (UPEI of P). December 31, 20x5:

24,000

18,000

4,800

38,400

72,000

5,760

24,000

18,000

4,800

(8) Investment in S Company…………….. Investment income (P12,000 x 80%)……….. To adjust investment income for upstream sales - realized profit in beginning inventory of P (RPBI of P)

9,600

9,600

Thus, the investment balance and investment income in the books of Perfect Company is as follows: Cost, 1/1/x5 NI of Son (90,000 x 80%) RPBI of (P18,000 x 100%) RPBI of P (P12,000 x 80%) Balance, 12/31/x5

Amortization (7,200 x 805) UPEI of S (P24,000 x 100%) UPEI of P (P6,000 x 80%)

Investment in S 350,040 38,400 5,760 72,000 24,000 18,000 4,800 9,600 376,680 Investment Income 5,760 24,000 72,000 4,800 18,000 9,600 65,040

Dividends – S (48,000x 80%) Amortization (7,200 x 80%) UPEI of S (P24,000 x 100%) UPEI of P (P6,000 x 80%)

NI of S (P90,000 x 80%) RPBI of S (P18,000 x 100%) RPBI of P (P12,000 x 80%) Balance, 12/31/x5

Consolidation Workpaper – Second Year after 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 + P6,000) Land………………………………………………………………………. Discount on bonds payable (P4,800 – P1,200)…. 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……………………………………………….

84,000 198,000 7,200 3,600 11,250

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.

307,200 76,800

216,000

17,610 70,440

To eliminate investment on January 1, 20x5 and allocate excess of cost over book value of identifiable assets acquired, with remainder to the original amount of goodwill; and to establish non- controlling interest (in net assets of subsidiary) on 1/1/20x5. *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).

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

To provide for 20x5 depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Depreciation/ Amortization

Amortization

6,000 6,000 1,200

12,000 1,200

Inventory sold Equipment Buildings Bonds payable Totals

Expense

-Interest

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

Total

P 1,200 P1,200

P7,200

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

65,040 9,600

48,000 26,640

To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: NI of Son (90,000 x 80%)……. RPBI of S RPBI of P

Investment in S 38,400 Dividends – S Amortization 72,000 5,760 (P7,200 x 80%) 18,000 24,000 UPEI of S 9,600 4,800 UPEI of P 26,640

Investment Income Amortization (P7,200 x 80%) UPEI of S UPEI of P

5,760 24,000 4,800

(E6) Sales………………………. Cost of Goods Sold (or Purchases)

120,000

(E7) Sales………………………. Cost of Goods Sold (or Purchases)

75,000

(E8) Investment in Son Company……………………. Cost of Goods Sold (Ending Inventory – Income Statement)

18,000

(E9) Investment in Son Company (P12,000 x 80%) Noncontrolling interest (P12,000 x 20%)…… Cost of Goods Sold (Ending Inventory – Income Statement)

9,600 2,400

To eliminated intercompany downstream sales.

To eliminated intercompany upstream sales.

To realized profit in downstream beginning inventory deferred in the prior period.

To realized profit in upstream beginning inventory deferred in the prior period.

72,000 18,000 9,600 65,040

NI of S (90,000 x 80%) RPBI of S RPBI of P

120,000

75,000

18,000

12,000

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus,

Cost, 1/1/x5 NI of Son (90,000 x 80%) RPBI of S (P18,000 x 100%) RPBI of P (P18,000 x 80%) Balance, 12/31/x5 (E8) RPBI of S (E9) RPBI of P

Investment in S 350,040 38,400 72,000 18,000 9,600 376,680 18,000 9,600

5,600 24,000 4,800 307,200 70,440 26,640

404,280

404,280

(E10) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet…… To defer the downstream sales - unrealized profit in ending inventory

Dividends – S (48,000x 80%) Amortization (7,000 x 80%) UPEI of S (P24,000 x 100%) UPEI of P (P6,000 x 80%) (E1) Investment, 1/1/20x5 (E2) Investment, 1/1/20x5 (E4) Investment Income and dividends

24,000

24,000

until it is sold to outsiders.

(E11) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet……

6,000

6,000

To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders.

(E12) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

17,760

17,760

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

Net income of subsidiary…………………….. Realized profit in beginning inventory of P Company - 20x5 (upstream sales) Unrealized profit in ending inventory of P Company - 20x5 (upstream sales) Son Company’s Realized net income* Less: Amortization of allocated excess

P 90,000 12,000 ( P ( P

6,000) 96,000 7,200) 88,000 20% P 17,760

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on fullGoodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 17,760 *from separate transactions that has been realized in transactions with third persons.

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

P Co P540,000

S Co. P360,000

Investment income Total Revenue Cost of goods sold

65,040 P605,040 P216,000

P360,000 P192,000

Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

60,000 72,000 P348,000 P257,040 P257,040

24,000 54,000 P270,000 P 90,000 P 90,000

(3) (3)

P144,000 90,000 P234,000

(1) 144,000

Sales

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from above Total

P462,840 257,040 P719,880

Dr. (6) 120,000 (7) 75,000 (4) 65,040

Cr.

(10) 24,000 (11) 6,000

(6) 120,000 (7) 75,000 (8) 18,000 (9) 12,000

(5)

6,000 1,200

17,760

Consolidated P 705,000 ___________ P 705,000 P 213,000

P P ( P

90,000 1,200 126,000 430,200 274,800 17,760) 308,448

P 462,840 257,040 P 719,880

Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receivable…….. Inventory…………………. Land……………………………. Equipment Buildings 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 Non-controlling interest…………

Total

P

72,000 -

48,000

P647,880

P186,000

P 647,880

265,200 180,000 216,000

P 114,000 96,000 108,000

P 367,200 276,000

210,000 240,000 720,000

48,000 180,000 540,000

376,680 P2,207,880

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000 240,000 186,000

647,880

___ _____ P2,207,880

_________ P1,074,000

(4)

(2)

7,200

48,000

(10) 24,000 (11) 6,000

(2) (2) (8) (9)

(3) 216,000 3,600 (3) 1,200 11,250 18,000 (1) 307,200 9,600 (3) 70,440 (4) 26,640

(2)

84,000

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

(3)

12,000

9,600 2,400

__________ P1,048,650

72,000 ________

294,000 265,200 420,000 1,044,000 2,400 11,250 P2,680,050 P180,000 552,000 240,000 360,000 600,000

(1) 240,000 (4) (9)

_

647,880 (1 ) 76,800 (2) 17,610 (14)17,760 P1,048,650

____100,170 P2,680,050

5 and 6. Refer to Problem X for computations Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem X solution). Multiple Choice Problems 1. b 2. a 3. c – P400,000 x 1/4 = P100,000 x 30% = P30,000 4. c

Ending inventory at selling price: P300,000 x 1/3 = P100,000 x (300,000 – 240,000)/300,000 Less: Inventory write-down (P100,000 – P92,000) Intercompany profit to be eliminated

5. b – [P300,000 x 1/2 = P150,000 x 40% = P60,000] 6. c – P100,00 sales to unrelated/unaffiliated company. 7. c P Company S Company Total Less: Intercompany sales Add: Unrealized profit in EI of S Co. [P90,000 x 30% = P27,000 x (90 - 67)/90] Consolidated

P20,000 __8,000 P12,000

Cost of Sales 67,000 _63,000 130,000 90,000 __6,900 46,900

Sales Less: Cost of goods sold – Parent Subsidiary (90,000 x 70%) Gross profit Ending inventory (90,000 x 30%)

8. a

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations [P100,000 – (P90,000 x 70%)] Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations (P90,000 – P67,000) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) [P90,000 x 30% = P27,000 x (90-67/90)] S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. *that has been realized in transactions with third parties.

Parent 90,000 67,000 ______ 23,000

P23,000 0 (

6,900 ) P16,100

Subsidiary 100,000 63,000 37,000 27,000

P 37,000 0 (_ 0) P 37,000

16,100 P 53,100 0 P 53,100 1,610 P 51,490

Or, alternatively

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations [P100,000 – (P90,000 x 70%)] Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations (P90,000 – P67,000) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) [P90,000 x 30% = P27,000 x (90-67/90)] S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

9. d – P27,000 x 67/90 = P20,100

P23,000 0 (

6,900 ) P16,100 P 1,610 0

P 37,000 0 (_ 0) P 37,000

16,100 P 53,100 1,610 P 51,490 _ 1,610 P 53,100

P 23,000 0 ( 6,900) P 16,100 0 P 16,100 10% P 1,610 0 P 1,610

10. b – P120,000, the amount of sales to outsiders is the amount of sales presented in the consolidated income statement. 11. a – the cost of inventory produced by the parent (downstream sales) 12. c

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations (P90,000 – P62,000) Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations (P120,000 – P90,000) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. *that has been realized in transactions with third parties.

P3 0,000 0 ( ) P30,000

P 28,000 0 (_ 0) P 28,000

30,000 P 58,000 0 P 58,000 3,000 P 55,000

Or, alternatively

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations (P90,000 – P62,000) Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations (P120,000 – P90,000) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

13. c

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

P Company S Company Total Less: Intercompany sales – upstream sales Add: Unrealized profit in EI of S Co. [P60,000 x 30% = P18,000 x (10 – 7.5)/10] Consolidated

P3 0,000 0 ( ) P30,000

P 28,000 0 (_ 0) P 28,000

30,000 P 58,000

P 3,000 0

3,000 P 55,000 _ 3,000 P 58,000

P 30,000 (

0 0) P 30,000 0 P 30,000 10% P 3,000 0 P 3,000

Sales 10,000,000 __200,000 10,200,000 60,000

Cost of Sales 7,520,000 _160,000 7,680,000 60,000

________ 10,140,000

__ 4,500 7,604,500

14. No requirement 15. d – refer to No. 13 for computation 16. c

Sales 10,000,000 __200,000 10,200,000 60,000

P Company S Company Total Less: Intercompany sales – downstream sales Add: Unrealized profit in EI of S Co. [P60,000 x 30% = P18,000 x (10 – 7.5)/10] Consolidated 17. a – (P40,000 x 140% = P56,000) 18. a – (P56,000 – P40,000 = P16,000) 19. a 20x5 P Company S Company Total Less: Intercompany sales Realized profit in BI of S Co. [P240,000 x 1/2 = P120,000 x (240-192)/240] Add: Unrealized profit in EI of S Co. [P375,000 x 40% = P150,000 x (375-300)/375] Consolidated

________ 10,140,000

Sales 1,800,000 __900,000 2,700,000 375,000

Cost of Sales 1,440,000 _750,000 2,190,000 375,000 24,000

________ 2.325,000

__30,000 1,821,000

20. c - refer to No. 19 for computations 21. b

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) [P150,000 x 50% = P75,000 x (P30,000/P150,000)] S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

P 90,000 (

15,000 ) P 75,000

P 225,000 0 (_ 0) P225,000

75,000 P 300,000 _ 0 P 300,000 15,000 P 285,000

P 90,000 0 ( 15,000) P 75,000 0 P 75,000 20% P 15,000 0 P 15,000

22. c – refer to No. 21 for computations 23. c 24 a Amount paid by Lorn Corporation Unrealized profit Actual cost Portion sold Cost of goods sold 25.

26.

e

A

Consolidated sales Cost of goods sold Consolidated net income Income to Dresser’s noncontrolling interest: Sales Reported cost of sales Report income Portion realized Realized net income Portion to Noncontrolling Interest Income to noncontrolling Interest Income to controlling interest

P120,000 (45,000) P 75,000 x .80 P 60,000 P140,000 (60,000) P 80,000 P120,000 (75,000) P 45,000 x .80 P 36,000 x

.30

Inventory reported by Lorn Unrealized profit (P45,000 x .20) Ending inventory reported

(10,800) P 69,200 P 24,000 (9,000) P 15,000

27. c

Sales 500,000 _350,000 850,000 100,000 150,000 600,000

P Company S Company Total Less: Intercompany sales to Dundee Intercompany sales to Perth Consolidated 28. a

29.

Ending inventory of Perth from Dundee (P36,000 / 110%) Ending inventory of Dundee from Perth (P31,000 / 130%) Total a

30. a

Selling price Less: Cost of sales Original unrealized profit Unsold percentage Unrealized profit Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Total

32,727 _23,846 56,573 P

50,000 _40,000 10,000 __30% P _3,000

P180,000 ( 3,000) P 177,000 76,000 P253,000

Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5

31.

32.

a

d

0 P253,000

Combined 20x5 sales (P580,000 + P445,000) Less: 20x5 intercompany sales Consolidated sales

P

1,025,000 0 1,025,000

P

Combined cost of sales Less: 20x5 intercompany sales Less: Unrealized profit in the 20x5 beginning inventory from 20x4 Add: Unrealized profit in 20x5 ending inventory Consolidated cost of sales

P 480,000 0 ( 3,000) ________0 P 477,000

33. d

Cost of Sales 5,400,000 _1,200,000 6,600,000 1,000,000

P Company S Company Total Less: Intercompany sales Realized profit in BI of S Co. [P625,000 x 12% = P75,000 x (625 - 425)/625] Add: Unrealized profit in EI of S Co. [P1,000,000 x 10% = P100,000 x (1,000 - 800)/1,000] Consolidated

24,000 __20,000 5,596,000

34. b

Cost of Sales 690,000 195,000 885,000 200,000

Bates Company Sam Company Total Less: Intercompany sales Realized profit in BI of Bates Co. [P40,000 x 20%] Add: Unrealized profit in EI of Bates Co. [P15,000 x 20%] Consolidated 35. b Net Income from own operations: X-Beams (parent) Kent (subsidiary), 70%:30% Unrealized Profit in EI of Parent (X-Beams): P180,000x 20% = P36,000 x (180-100/180) = P16,000, 70%:30% Non-controlling Interest in Kent’s Net Income 36. d

8,000 __3,000 680,000 Parent

Subsidiary

210,000

90,000

( 11,200)

( 4,800) 85,200

Non-controlling Interest in Net Income (NCINI) for S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations………

20x5 P 400,000 (

20,000) P 380,000

20x6 P 480,000 20,000 0 P 500,000

Less: Amortization of allocated excess

0 P380,000 20% P 76,000 0 P 76,000

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

37. a

**Non-controlling Interest in Net Income (NCINI) for 20x6 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) (P100,000 x 10% = P10,000 x 30%) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P

a a Selling price Less: Cost of sales Unrealized profit Unsold fraction Credit to Inventory

40. a – the cost from parent of P48,000 x 45/60 = P36,000 Sales Less: Cost of goods sold – P and S1 Subsidiary (60,000 x 45/60) Gross profit Ending inventory (60,000 x 15/60)

3,000) 3,000) 0 P( 3,000) 10% P( 300) 0 P( 300)

P (

Subsidiary 1 60,000 60,000 ______ 0

41. b – the cost from parent of P48,000 x 15/60 = P12,000 42. a

Sales

Intercompany Parent Subsidiary 1 Add: Cost of EI in S2 Co. [P15,000 x (48/60] Amount to be eliminated *or, P60,000 + P60,000 – [P15,000 x (60-48/60]

60,000 48,000 ) 12,000 1/3 4,000

P

Parent 60,000 48,000 ______ 12,000

0 0

( P(

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in GP Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in GP

38. 39.

0 P500,000 20% P100,000 0 P100,000

Subsidiary 2 67,000 45,000 22,000 15,000

Cost of Sales

60,000 60,000

60,000 45,000

________ 120,000

__12,000 *117,000

43. b – refer to No. 42 for computation 44. d – P15,000 x [(60-48)/60] = P3,000 45. a

Consolidated Net Income for 20x3 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations

P150,000

P 225,000 0 (_ 0) P225,000

Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) [P105,000 x 20/120) S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x3

46. c

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations Realized profit in beginning inventory of P Company (upstream sales) [P105,000 x 20/120) Unrealized profit in ending inventory of P Company (upstream sales) [P157,500 x 20/120) S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. *that has been realized in transactions with third parties.

0 (

17,500 ) P132,500

P135,000

132,500 P 357,500 _ 0 P357,500

P360,000 0 (_ 0) P360,000

17,500 ( 26,250 ) P126,250

126,250 P 486,250 _ 0 P486,250 1,610 P 51,490

Or, alternatively

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations ( Realized profit in beginning inventory of P Company (upstream sales) [P105,000 x 20/120) Unrealized profit in ending inventory of P Company (upstream sales) [P157,500 x 20/120) S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

47. a – refer to No. 46 for computation. 48. d

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations

P135,000

P360,000 0 (_ 0) P360,000

17,500 ( 26,250 ) P126,250 P 37,875 0

126,250 P 486,250 37,875 P 448,375 _37,875 P 486,250

P 135,000 17,500 ( 26,250) P 126,250 0 P126,250 30% P 37,875 0 P 37,875

P 450,000

Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations Realized profit in beginning inventory of P Company (upstream sales) [P157,500 x 20/120) Unrealized profit in ending inventory of P Company (upstream sales) [P180,000 x 20/120) S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. *that has been realized in transactions with third parties.

P240,000

0 (_ 0) P450,000

26,250 (

30,000 ) P236,250

236,250 P 686,250 _ 0 P686,750 70,875 P 615,375

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations Realized profit in beginning inventory of P Company (upstream sales) [P157,500 x 20/120) Unrealized profit in ending inventory of P Company (upstream sales) [P180,000 x 20/120) S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

49. a – refer to No. 48 for computation. 50. d P Company S Company Total Less: Intercompany sales Consolidated 51. b

P240,000

P 450,000 0 (_ 0) P450,000

26,250 (

30,000 ) P236,250 P 70,875 0

236,250 P 686,250 70,875 P 615,375 __70,875 P 686,250

P 240,000 26,250 ( 30,000) P 236,250 0 P 236,250 30% P 70.875 0 P 70,875

Sales 420,000 280,000 700,000 140,000 560,000 Operating Expenses

P Company S Company Total Add: Undervalued equipment (P35,000/7 years) Consolidated

28,000 14,000 42,000 _5,000 49,000

52. c

Cost of Sales 196,000 _112,000 308,000 140,000

P Company S Company Total Less: Intercompany sales Add: Unrealized profit in EI of S Co. [P140,000 x 60% = P84,000 x (140 - 112)/140] Consolidated 53. a

_16,800 184,900

Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 Add: Net income of S for 20x4 Total Less: 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) : 20x5 (P35,000/7 years) Fair value of stockholders’ equity of S, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: NCI on full-goodwill (P70,000 – P56,000) Non-controlling interest (full- goodwill)…………………………………..

P 140,000 P210,000 154,000 P364,000 0

364,000 P 504,000 35,000 ( 5,000) P 534,000 20 P 106,800 14,000 P 120,800

Partial-goodwill

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P140,000 x 80%)……………………. Retained earnings (P210,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in equipment (P35,000 x 80%) Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

P 364,000 P 112,000 168,000

P

280,000 84,000

___28,000 P 56,000

Full-goodwill

Fair value of Subsidiary (100%) Consideration transferred: Cash (P364,000/80%) Less: Book value of stockholders’ equity of S (P350,000 x 100%) Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities Increase in equipment P35,000 x 100% Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P 455,000 __350,000 P 105,000 35,000 P

70,000

54. d

Equipment 616,000 420,000 1,036,000 35,000 7,000 1,064,000

P Company S Company Total Add: Undervalued equipment Less: Depreciation on undervalued equipment (P35,000/7 years) Consolidated 55. d P Company S Company Total Less: Unrealized profit in EI: [P140,000 x 60% = P84,000 x (140 - 112)/140] Consolidated

Inventory 210,000 154,000 364,000 16,800 347,200

56. d

Add the two book values and remove P100,000 intercompany transfers.

57. c

Intercompany gross profit (P100,000 - P80,000) ................................................... Inventory remaining at year's end ......................................................................... Unrealized intercompany gross profit ...................................................................

P20,000 60% P12,000

CONSOLIDATED COST OF GOODS SOLD Parent balance ................................................................................................... Subsidiary balance ............................................................................................. Remove intercompany transfer ...................................................................... Defer unrealized gross profit (above) ............................................................. Cost of goods sold ....................................................................................................

P140,000 80,000 (100,000) 12,000 P132,000

58. c

Consideration transferred .............................................. Non-controlling interest fair value .................................. SZ total fair value ............................................................... Book value of net assets .................................................. Excess fair over book value

P260,000 65,000 P325,000 (250,000) P75,000

Excess fair value assigned to undervalued assets: Equipment.................................................................... Secret Formulas .......................................................... Total .................................................................................

Life 25,000 5 years 50,000 20 years P -0-

Annual Excess Amortizations P5,000 2,500 P7,500

Consolidated Expenses = P37,500 (add the two book values and include current year amortization expense) 59. a

Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 Add: Net income of S for 20x4 Total Less: 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)

P 100,000 P150,000 110,000 P260,000 0

260,000 P 360,000 75,000

Amortization of allocated excess (refer to amortization above) : Fair value of stockholders’ equity of S, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: NCI on full-goodwill ( Non-controlling interest (full- goodwill)…………………………………..

( 7,500) P 427,500 20 P 85,500 ________0 P 85,500

Partial-goodwill

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P100,000 x 80%)……………………. Retained earnings (P150,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in equipment (P25,000 x 80%) Increase in secret formulas: P50,000 x 80%

P 260,000 P 80,000 120,000

P

200,000 60,000 20,000 40,000

Full-goodwill

Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) FV of NCI (20%) Fair value of Subsidiary (100%) Less: BV of stockholders’ equity of S (P100,000 + P150,000) x 100% Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities Increase in equipment P25,000 x 100% Increase in secret formulas: P50,000 x 100%

P 260,000 ___65,000 P 325,000 __250,000 P 75,000 P

25,000 50,000

Amortization: Equipment: P25,000 / 5 years = P 5,000 Secret formulas: P50,000 / 20 years = 2,500 Total amortization of allocated P 7,500 60. c Add the two book values plus the original allocation (P25,000) less one year of excess amortization expense (P5,000). 61. b Add the two book values less the ending unrealized gross profit of P12,000. Intercompany Gross profit (P100,000 – P80,000) ................................................. Inventory Remaining at Year's End ........................................................................ Unrealized Intercompany Gross profit, 12/31 ...................................................... 62. b Share in net income 20x3: P70,000 x 90% 20x4: P85,000 x 90% 20x5: P94,000 x 90% Less: Unrealized profit in ending inventory of P 20x3: P1,200 x 25% = P300 x 90% 20x4: P4,000 x 25% = P1,000 x 90% 20x5: P3,000 x 25% = P750 x 90% Income from S

20x3 P 63,000

(

270)

________ P 62,730

20x4 P 76,500 270 ( 900) ________ P 75,870

P20,000 60% P12,000 20x5

P 84,600 900 __( 675) P 84,825

It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. 63. c – refer to No. 62 for computation.

64. d – refer to No. 62 for computation. 65. a

**Non-controlling Interest in Net Income (NCINI) for S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) RPBI of P Company (upstream sales) UPEI of P Company (upstream sales) S Company’s realized net income from separate operations Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

20x3

20x4

P 70,000 0 ( 300) P 69,700 0 P 69,700 10% P 6,970 0 P 6,970

P 85,000 300 ( 1,000) P 84,300 0 P 84,300 10% P 8,430 0 P 8,430

66. c – refer to No. 65 for computation. 67. c – refer to No. 65 for computation. 68. a – refer to No. 65 for computation. 69. a – refer to No. 65 for computation. 70. b – refer to No. 65 for computation. 71. a – none, since intercompany profit starts only at the end of 20x3. 72. b – the amount of unrealized profit at the end of 20x3. 73. c – the amount of unrealized profit at the end of 20x4. 74. d P32,000 = (P200,000 + P140,000) – P308,000 75. b P6,000 = (P26,000 + P19,000) – P39,000 76. c P9,000 = Inventory held by Spin P12,000 (P32,000 x .375) Unrealized profit on sale [(P30,000 + P25,000) – P52,000] (3,000) Carrying cost of inventory for Power P 9,000 77.

b

.20 = P14,000 / [(Stockholders’ Equity P50,000) +(Patent P20,000)] 78 b 14 years = (P28,000 / [(28,000 - P20,000) / 4 years] 79. c (P10,000 x 80%) 80. c – the original cost 81. d Date of Acquisition (1/1/2010) Partial Fair value of consideration given…………………P 340,000 Less: Book value of SHE - Subsidiary): (P150,000 + P230,000) x 80%..................... 304,000 Allocated Excess.…………………………………….P 36,000 Less: Over/Undervaluation of Assets & Liabilities (P20,000 x 80%)…………………………….. 16,000 Goodwill ………….…………………………………...P 20,000 / 80%

Full

P 25,000

Amortization of equipment: P20,000 / 10 years = P2,000 RPBI of S (downstream sales): P3,000 x 35%............................................... ....... P1,050 RPBI of P (upstream sales): P2,500 (given)….................................................... 1,000 UPEI of S (downstream sales): Sales of Parent EI % EI of S GP% of Parent P60,000 x 30% = P18,000 x 25/125………………………………. 3,600 UPEI of P (upstream sales): Sales of Subsidiary EI % EI of P GP% of Subsidiary P60,000 x 30% = P18,000 x 20%…………………………..…. 2,400

20x5 P 94,000 1,000 ( 750) P 94,250 0 P 94,250 10% P 9,425 0 P 9,425

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. *that has been realized in transactions with third parties.

P 30,000 1,000 ( ,2,400 ) P28,600

P 100,000 1,050 (_ 3,600) P 97,450

28,600 P 126,050 2,000 P124,050 5,320 P 118,730

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 2012 *that has been realized in transactions with third parties.

P 30,000 1,000 ( 2,400 ) P 28,600 P

5,320 2,000

**Non-controlling Interest in Net Income (NCINI) for 2012 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

82. b – refer to No. 81 83. a – P124,050 – refer to No. 81 84. b – refer to No. 86 85. c – refer to No. 86 86. a Non-controlling Interests (in net assets): Common stock - S, 12/31/20x2.…………..….…………………………….. Retained earnings - S, 12/31/20x2: RE- S, 1/1/20x2…………….……………………………………………….P300,000 +: NI-S…………………………………………………………………………. 30,000 -: Div – S……………………………………………………………………… 10,000

P 100,000 1,050 (_ 3,600) P 97,450

28,600 P 126,050 7,320 P118,730 __ 5,320 P124,050

P 30,000 1,000 ( 2,400) P 28,600 2,000 P 26,600 20% P 5,320 0 P 5,320

P 150,000

320,000

Book value of Stockholders’ equity, 12/31/20x2……..………………..... Adjustments to reflect fair value of net assets Increase in equipment, 1/1/20x0 .………………………….. Accumulated amortization (P2,000 x 3 years)………………………….... Fair Value of Net Assets/SHE, 12/31/20x2…………………………………. UPEI of P (up)…………………………………………………………………… Realized SHE – S,12/31/20x2…………………………………………………. x: NCI %.................................................................................... ...................... Non-controlling Interest (in net assets) - partial………………………….. +: NCI on full goodwill (25,000 – 20,000)………………………….. Non-controlling Interest (in net assets) – full……………………………....

P 470,000 20,000 ( 6,000) P 484,000 ( 2,400) P 481,600 _ 20% P 96,320 5,000 P 101,320

87. d – refer to No. 88 88. d Note: Preferred solution - since what is given is the RE – P, 1/1/20x2 (beginning balance of the current year) Retained earnings – Parent, 1/1/20x2 (cost)…………………………… P 700,000 -: UPEI of S (down) – 20x1 or RPBI of S (down) – 20x2..…………. 1,050 Adjusted Retained earnings – Parent, 1/1/20x2 (cost)……………… P 698,950 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/20x0……………………….P 230,000 Less: Retained earnings – Subsidiary, 1/1/20x2……………… 300,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)…………P 70,000 Accumulated amortization (1/1/20x0 – 1/1/20x2): P 2,000 x 2 years…………………………………………………( 4,000) UPEI of P (up) – 20x1 or RPBI of P (up) – 20x2………………......( 1,000) P 65,000 X: Controlling Interests………………………………………….........____80% 52,000 RE – P, 1/1/2012 (equity method) = CRE, 1/1/20x2…………………..... P750,950 +: CI – CNI or Profit Attributable to Equity Holders of Parent…….. 118,730 -: Dividends – P……………………………………………………………… 60,000 RE – P, 12/31/20x2 (equity method) = CRE, 12/31/20x2…………...... P809,680 Or, if RE – P is not given on January 1, 20x2, then RE – P on December 31, 2012 should be use: Retained earnings – Parent, 12/31/20x2 (cost): (P700,000 + P108,000 – P60,000)………..…………………………… P 748,000 -: UPEI of S (down) – 20x2 or RPBI of S (down) – 20x3..…………. 3,600 Adjusted Retained earnings – Parent, 1/1/20x2 (cost)……………… P 744,400 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/20x0……………………….P 230,000 Less: Retained earnings – Subsidiary, 12/31/20x2 (P300,000 + P20,000 – P10,000)………………………..... 320,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)…………P 90,000 Accumulated amortization (1/1/20x0 – 12/31/20x2): P 2,000 x 3 years……………………………………………… ( 6,000) UPEI of P (up) – 20x2 or RPBI of P (up) – 20x3……………….. ( 2,400) P 81,600 X: Controlling Interests……………………………………………… . 80% 65,280 RE – P, 12/31/20x2 (equity method) = CRE, 12/31/20x2…………. P809,680

89. b

90. a

91. c

92. a

93. c

Consolidated Stockholders’ Equity, 12/31/20x2: Controlling Interest / Parent’s Interest / Parent’s Portion / Equity Holders of Parent – SHE, 12/31/20x2: Common stock – P (P only)…………………………………………….. Retained Earnings – P (equity method), 12/31/20x2………….. Controlling Interest / Parent’s Stockholders’ Equity……………. Non-controlling interest, 12/31/20x2 (partial)…………………………. Consolidated Stockholders’ Equity, 12/31/20x2…………………………

P1,000,000 809,680 P1,809,680 96,320 P1,906,000

Consolidated Stockholders’ Equity, 12/31/20x2: Controlling Interest / Parent’s Interest / Parent’s Portion / Equity Holders of Parent – SHE, 12/31/20x2: Common stock – P (P only)…………………………………………….. Retained Earnings – P (equity method), 12/31/20x2………….. Controlling Interest / Parent’s Stockholders’ Equity……………. Non-controlling interest, 12/31/20x2 (full)……..………………………. Consolidated Stockholders’ Equity, 12/31/20x2…………………………

P1,000,000 809,680 P1,809,680 101,320 P1,911,000

Non-controlling interest , December 31, 20x1 Common stock – Subsidiary Company, December 31, 20x1…… Retained earnings – Subsidiary Company, December 31, 20x1 Stockholders’ equity – Subsidiary 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…… Less: Unrealized profit in ending inventory of P Company (upstream sales) P3,000 x 40% Realized stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest. December 31, 20x1 …………………………………..

P 10,000 8,600 P 18,600 (

1,200 P 17,400 20 P 3,480

Realized profit in BI of Bates Co. [P40,000 x 20%] Unrealized profit in EI of Bates Co. [P15,000 x 20%] Net realized profit in intercompany sales of inventory Multiplied by: NCI% NCI share in net realized profit

P 8,000 __3,000 P 5,000 ___40% P 2,000

RPBI of P (upstream sales)……..………………………..………………………… UPEI of P (upstream sales): EI of Paque GP% of Subsidiary P75,000 x 20%...................................………………………..…. Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P103,500 – P54,000) Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess……………………

0 0) P 18,600

45,000 15,000

P 71,250 45,000 ( 15,000 ) P 101,250

P 49,500 0 (_ 0) P 49,500

101,250 P 150,750 ____0

Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. *that has been realized in transactions with third parties.

P150,750 10,125 P 140,625

Or, alternatively

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P103,500 – P54,000) Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 2012 *that has been realized in transactions with third parties.

P 71,250 45,000 ( 15,000 ) P 101,250

**Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

P 10,125 ___0

P 49,500 0 (_ 0) P 49,500

101,250 P 150,750 10,125 P140,625 __ 10,125 P150,750

P 71,250 45,000 ( 15,000) P 101,250 _0 P101,250 10% P 10,125 0 P 10,125

(Not required)

Analysis of workpaper entries (1) Investment in Segal (0.90  (P180,000 – P150,000)) Beginning Retained Earnings-Paque Co. To establish reciprocity as of 1/1/20x8 (2) Sales

Purchases (Cost of Goods Sold) To eliminate intercompany sales

27,000

300,000

(3) Ending Inventory - Income Statement (CGS) Ending Inventory (Balance Sheet) To eliminate unrealized intercompany profit in ending inventory (P75,000  0.20)

15,000

(4) Beginning Retained Earnings - Paque Co. (P45,000  0.90) Non-controlling Interest P45,000  0.10) Beginning Inventory (Income statement) To recognize intercompany profit realized during the year and to reduce controlling and non-controlling interests for their share of unrealized profit at beginning of year

40,500 4,500

(5) Dividend Income (P60,000  0.90) Dividends Declared To eliminate intercompany dividends

54,000

27,000

300,000

15,000

45,000

54,000

(6) Beginning Retained Earnings- Segal Co. Common Stock - Segal Company Investment in Segal Company (P810,000 + P27,000) Non-controlling Interest (P750,000 + P180,000) x .10 To eliminate investment account and create non-controlling interest account

180,000 750,000

94. c Preferred Solution - since what is given is the RE – P, 1/1/20x8 Retained earnings – Parent, 1/1/20x8 (cost)…………………….. P 598,400 -: UPEI of S (down) – 20x7 or RPBI of S (down) – 20x8..…………. 25,000 Adjusted Retained earnings – Parent, 1/1/20x8 (cost)……………… P 573.400 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/20x4……………………P 95,000 Less: Retained earnings – Subsidiary, 1/1/20x8…………….. 144,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)………P 49,000 Accumulated amortization (1/1/20x4 – 1/1/20x8)…………. 0 UPEI of P (up) – 20x7 or RPBI of P (up) – 20x8………………... ( 0) P 49,000 X: Controlling Interests…………………………………………… 90% 44,100 RE – P, 1/1/20x8 (equity method) = CRE, 1/1/20x8……………….. P 617,500 +: CI – CNI or Profit Attributable to Equity Holders of Parent…… 203,700 -: Dividends – P………………………..………………………………… 110,000 RE – P, 12/31/2014 (equity method) = CRE, 12/31/2014………….. P 711,200 Consolidated Net Income for 20x8 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x8 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x8………….. *that has been realized in transactions with third parties.

P 63,000 0 ( 0) P 63,000

P132,000 25,000 (10,000) P147,000

63,000 P210,000 0 P210,000 6,300 P203,700

Or, alternatively

Consolidated Net Income for 20x8 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x8 *that has been realized in transactions with third parties.

P 63,000 0 ( 0) P 63,000 P 6,300 _____0

P132,000 25,000 (10,000) P147,000

63,000 P210,000 6,300 P203,700 _ 6,300 P210,000

837,000 93,000

**Non-controlling Interest in Net Income (NCINI) for 20x8 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P 63,000 0 0) P 63,000 0 P 63,000 10% P 6,300 0 P 6,300

(

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

Amortization of equipment: P20,000 / 10 years = P2,000 RPBI of Sedbrock (downstream sales) – 20x8......................................................... P25,000 UPEI of Sedbrock (downstream sales) – 20x8: P60,000 x 20%/120%……..……… 10,000 Net income: Sales Less: Cost of goods sold Inventory, 1/1 Purchases Inventory, 12/31 Gross profit Less: Other expense Net income from its own separate operations Add: Dividend income Net income Dividends declared

Pruitt Co. P1,210,000 165,000 935,000 (220,000)

__880,000 P 330,000 198,000

Sedbrook P 636,000 132,000 420,000 (144,000)

P 132,000 31,500 P 163,500 P 110,000

Or, alternatively(compute the RE-P end of the year under the cost model) Retained earnings – Parent, 1/1/20x8 (cost)………………………….. P Add: NI of Parent as reported – 20x8 under cost model…………… Less: Dividend of Parent – 20x8………………………………………….. Retained earnings – Parent, 12/31/20x8 (cost)……………………….. P -: UPEI of S (down) – 20x8 or RPBI of S (down) – 20x9..……………….. Adjusted Retained earnings – Parent, 12/31/20x8 (cost model)….. P Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/20x4………… P 95,000 Less: Retained earnings – Subsidiary, 12/31/20x8 Retained earnings – Subsidiary , 1/1/20x8..… P144,000 Add: NI of Subsidiary – 20x8…………………… 63,000 Less: Dividend of Subsidiary – 20x8…………... 35,000 172,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)………… P 97,000 Accumulated amortization (1/1/20x4 – 12/31/20x8)…………..( 0) UPEI of P (up) – 20x8 or RPBI of P (up) – 20x9………………........ ( 0) P 97,000 x: Controlling Interests………………………………………… 90% RE – P, 12/31/20x8 (equity method) = CRE, 12/31/20x8……… P (Not required)

__408,000 P 228,000 165,000 P 63,000 P 63,000 P 35,000 598,400 163,500 110,000 651,900 10,000 641,900

69,300 711,200

Analysis of workpaper entries (1) Investment in Sedbrook Company (0.90( P144,000 – P95,000)) Beginning Retained Earnings - Pruitt Co. To establish reciprocity/convert to equity as of 1/1/x8

44,100

(2) Sales

44,100

250,000

Purchases (Cost of Goods Sold) To eliminate intercompany sales

(3) Ending Inventory - Income Statement (CGS) Ending Inventory (Balance Sheet) To eliminate unrealized intercompany profit in ending inventory (P60,000 – (P60,000/1.2)

10,000

(4) Beginning Retained Earnings - Pruitt Co. Beginning Inventory (Income Statement) To recognize intercompany profit in beginning inventory realized during the year

25,000

(5) Dividend Income (P35,000.90) Dividends Declared To eliminate intercompany dividends

31,500

250,000

10,000

25,000

31,500

(6) Beginning Retained Earnings - Sedbrook Co. 144,000 Common Stock - Sedbrook Co. 600,000 Investment in Sedbrook Co.(P625,500 + P44,100) Non-controlling Interest (P744,000 x .10) To eliminate investment account and create non-controlling interest account

669,600 74,400

95. P941,000. Additional information and correction: In 20x4, Simon Company reported net income of P270,000 and declared dividends of P90,000. Paul Company reported net income from independent operations in 20x4 in the amount of P700,000 and retained earnings on December 31, 20x4, of P1,500,000. Fair value of consideration given…………………P1,360,000 Less: Book value of SHE - Subsidiary): (P1,000,000 + P450,000) x 80%................... 1,160,000 Allocated Excess.…………………………………….P 200,000 Less: Over/Undervaluation of Assets & Liabilities Increase in franchise (P250,000 x 80%)…….. 200,000 / 80% = P250,000 P 0 Amortization of equipment: P250,000 / 25 years = P10,000 RPBI of S (downstream sales):…………………........................................................ P 30,000 RPBI of P (upstream sales)………………………....................................................... 20,000 UPEI of S (downstream sales)……………………………………………………..……. 5,000 UPEI of P (upstream sales)………………………………………………….…………… 10,000 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations*…….….. Total

P270,000 20,000 ( 10,000) P280,000

P700,000 30,000 ( 5,000) P725,000

280,000 P1,005,000

Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. *that has been realized in transactions with third parties.

10,000 P 995,000 54,000 P 941,000

Or, alternatively

Consolidated Net Income for 2014 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 2014 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 2014 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: NCI on goodwill impairment loss on full goodwill Non-controlling Interest in Net Income (NCINI) – full goodwill

P270,000 20,000 ( 10,000) P280,000 P 54,000 10,000

P700,000 30,000 ( 5,000) P725,000

280,000 P1,005,000 64,000 P 941,000 __ _ 54,000 P 995,000

P270,000 20,000 ( 10,000) P280,000 10,000 P270,000 20% P 54,000 0 P 54,000

(Not required)

Analysis of workpaper entries (1) Sales Purchases (Cost of Goods Sold) To eliminate intercompany sales (P50,000 + P70,000)

120,000

(2) Ending Inventory – Income Statement (CGS) Inventory (Balance Sheet) To eliminate unrealized profit in ending inventories (P10,000 + P5,000)

15,000

(3) Beginning Retained Earnings – Paul Company (P20,000  0.8) Non-controlling Interest Beginning Inventory – Income Statement (CGS) To recognize profit in beginning inventory (upstream sales) realized during year and to reduce the controlling and noncontrolling interests for their shares of the amount of unrealized upstream intercompany profit at beginning of year

16,000 4,000

(4) Beginning Retained Earnings – Paul Company. Beginning Inventory – Income Statement (CoGS) To recognize profit in beginning inventory (downstream sales) realized during the year and to reduce consolidated retained earnings at beginning of the year for the amount of unrealized downstream intercompany profit at the beginning of the year

30,000

96. P1,863,000

120,000

15,000

20,000

30,000

Retained earnings – Parent, 12/31/20x4 (cost)……………………….. P 1,500,000 -: UPEI of S (down) – 20x4 or RPBI of S (down) – 20x5..……………….. 5,000 Adjusted Retained earnings – Parent, 12/31/20x4 (cost model)….. P 1,495,000 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/20x1……………………….P 450,000 Less: Retained earnings – Subsidiary, 12/31/20x4……………… 960,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)………… P 510,000 Accumulated amortization (1/1/20x1 – 12/31/20x4)…………..( 40,000) UPEI of P (up) – 20x4 or RPBI of P (up) – 20x5………………........ ( 10,000) P 460,000 x: Controlling Interests………………………………………… 80% 368,000 RE – P, 12/31/20x4 (equity method) = CRE, 12/31/20x4……… P1,863,000 97. P54,000 – refer to No. 95 for computation 98. a Full-goodwill

Fair value of Subsidiary (100%) Consideration transferred: Cash (P7,500,000/80%) Less: Book value of stockholders’ equity of S (P6,000,000 x 100%) Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities Decrease in inventory: P(150,000 x 100%) Increase in building: P450,000 x 100% Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P9,375,000 _6,000,000 P3,375,000 P( 150,000) ___450,000

___300,000 P3,075,000

Partial-goodwill

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P1,000,000 x 80%)……………………. Retained earnings (P5,000,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Add (deduct): (Over) under valuation of assets and liabilities Decrease in inventory: P(150,000 x 80%) Increase in building: P450,000 x 80% Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

P7,500,000 P 800,000 4,000,000

P( 120,000) ___360,000

4,800,000 P2,700,000

240,000 P2,460,000

Amortization schedule

Inventory Building (15 years) Goodwill Total

Balance at acquisition Dec. 31/X2 P(150,000) 450,000 3,075,000 P3,375,000

Amortization 20X3 P(150,000) 30,000 _________0 P(120,000)

Amortization 20X4 0 P30,000 ______0 P30,000

Remaining at Dec.31/X4 P 0 390,000 3,075,000 P3,465,000

99. a Non-controlling interest is 20% × 9,375,000 (fair value of subsidiary, 12/31/20x2) = P1,875,000 Or, alternatively:

Non-controlling interest, December 31, 20x2 Common stock – S Company, December 31, 20x2…… Retained earnings – S Company, December 31, 20x2 Stockholders’ equity – S Company, December 31, 20x2 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (December 31, 20x2) Fair value of stockholders’ equity of S, December 31, 20x2…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: NCI on full-goodwill (P3,075,000 – P2,460,000) Non-controlling interest (full- goodwill)…………………………………..

P1,000,000 5,000,000 P6,000,000 ___300,000 P6,300,000 20 P 1,260,000 ___615,000 P1,875,000

100. d – P2,393,800

Non-controlling interest , December 31, 20x4 Common stock – S Company, December 31, 20x4 Retained earnings – S Company, December 31, 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (December 31, 20x2) Amortization of allocated excess (refer to amortization above- 20x3 and 20x4: Fair value of stockholders’ equity of S, December 31, 20x4…… Less: UPEI of P (up) – 20x3 or RPBI of P (up) – 20x4 Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: NCI on full-goodwill Non-controlling interest (full- goodwill)…………………………………..

P1,000,000 7,524,000 P8,524,000 300,000 __90,000 P8,914,000 ____20,000 P8,894,000 _ 20 P1,778,800 ___615,000 P2,393,800

RPBI of P (upstream sales): Sales of Subsidiary EI % EI of P GP% of Subsidiary P100,000 x 60% = P60,000 x 50,000/100,000………………………..….

30,000

UPEI of P (upstream sales): (given)……………………………………………………….

20,000

Or, alternatively: Balance of NCI on acquisition — December 31, 20x2 P1,875,000 Add: NCI's share of the adjusted change in retained earnings to 12/ 31/20x4 Jane's retained earnings, December 31, 20x4 P7,524,000 Jane's retained earnings at December 31, 20x2 ( 5,000,000) Change in carrying value P2,524,000 Adjustments: Amortization of fair value increments to date 90,000 Unrealized upstream profit — 20x4 ( 20,000) djusted change in retained earnings of Jane since acquisition P2,594,000 Multiplied by: NCI's share at 20% 518,800 Ending balance of NCI on December 31, 20x4 P2,393,800 101. b Retained earnings – Parent, 12/31/20x4 (cost)……………………….. P11,900,000 -: UPEI of S (down) – 20x4 or RPBI of S (down) – 20x5..……………….. 0 Adjusted Retained earnings – Parent, 12/31/20x4 (cost model)….. P11,900,000 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 12/31/20x2…………………..P5,000,000 Less: Retained earnings – Subsidiary, 12/31/20x4…………… 7,524,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)……….P2,524,000 Accumulated amortization (1/1/20x1 – 12/31/20x4)……….. 90,000 UPEI of P (up) – 20x4 or RPBI of P (up) – 20x5……………….....( 20,000)

102. 103. 104. 105. 106. 107. 108. d

x: Controlling Interests………………………………………… RE – P, 12/31/20x4 (equity method) = CRE, 12/31/20x4……… b - (P125,000 - P93,000) .8 = P25,600 c - (P125,000 - P93,000) .2 = P6,400 d a - (P125,000 - P93,000) .7 c - (P125,000 - P93,000) .3 a - [P293,000 + (P125,000 - P93,000) .7] .2 = P63,080

P2,594,000 80% 2,075,200 P13,975,200

Non-controlling Interest in Net Income (NCINI) for 20x4: S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

109.

b

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

Combined cost of sales Less: Intercompany sales revenue Add: Unrealized profit taken out of inventory (75%)x(35,000) = Consolidated cost of sales

P 160,000 110,000

P 137,000 40,000 ( 25,000) P 152,000 _ 0 P 152,000 30% P 45,600 0 P 45,600

26,250 P 76,250

110. a (P115,000 x 70%) - P26,250 = P 54,250 The requirement “P’s income from S” is a term normally used under the equity method, but, in some cases it may also refer to the term “dividend income” under the cost model depending on how the problem was described and presented. Since there are no data available to arrive at the dividend income under the cost model for reason that dividend declared or paid by subsidiary is not given, so the term “P’s income from S” may mean “Income from subsidiary” which is computed under the equity method, It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. 111. a - P720,000 = P500,000 + P400,000 - P200,000 +P 20,000 112. b (P120,000 x 80%) – (P200,000 x 50% = P100,000 x 20% = P20,000) = P76,000 113. d Downstream situation S Company’s net income from own/separate operations P120,000 x: NCI % 20% P 24,000 114. c

115. b

Share in net income (P120,000 x 60%) Less: Unrealized profit in ending inventory of S {P189,000 x 1/3 = P63,000 x (P189-135)/P189] Intercompany profit to be eliminated

P72,000 __18,000 P54,000

Share in net income (P200,000 x 60%) Less: Unrealized profit in ending inventory of S {P315,000 x 1/3 = P105,000 x (P315-P225)/P315] Intercompany profit to be eliminated

P120,000 __30,000 P 90,000

Quiz - XVII

1. Overstated by P320 It will be overstated by the amount of the NC interests’ share of the P1,600 of profit margin in the P9,600 of materials carried over to 20x5 (20% x P1,600 = P320 2. P20,000 - Inventory remaining P100,000 × 50% = P50,000 Unrealized gross profit (based on LL's markup as the seller) P50,000 × 40% = P20,000. The ownership percentage has no impact on this computation 3. (downstream sales) Sales, P1,400,000; Cost of Sales, P966,00

Sales – Pot (parent) - Skillet (subsidiary) Total Add(Deduct): Intercompany sales - down Consolidated Sales

1,120,000 420,000 1,540,000 ( 140,000) 1,400,000

CGS – Pot (parent) - Skillet (subsidiary) Total Add(Deduct): Intercompany sales - down Unrealized Profit in Ending Inventory of Skillet (subsidiary)-down EI of Skillet : Sales of Pot 140,000 x: EI of Skillet 40% EI of Skillet 56,000 X: GP of Pot (1,120 – 840) 1,120 25% Consolidated CGS

840,000 252,000 1,092,000 ( 140,000)

14,000 966,000

4. (upstream sales) - P1,400,000; Cost of Sales, P974,400 (or – refer to Note)

Note: The only change here from No. 3 is the markup percentage which would now be 40 percent*

CGS – Pot (parent) 840,000 - Skillet (subsidiary) 252,000 Total 1,092,000 Add(Deduct): Intercompany sales - upstream ( 140,000) Unrealized Profit in Ending Inventory of Pot (subsidiary)-upstream EI of Pot: Sales of Skillet 140,000 x: EI of Pot 40% EI of Pot 56,000 X: GP of Skillet (420 – 252) 420 40%* 22,400 Consolidated CGS (preferred answer) 974,400

Note: The problem is quite intriguing because of the statement “Pot had established the transfer price base on its normal markup”. It should be noted that Parent Company established the transfer price based on its normal price (in this case it is assumed that th e mark-up of the parent which is 25% is also the normal transfer price). So, if is assumed to be of the same markup with parent company, then the answer would be as follows: Sales – Pot (parent) - Skillet (subsidiary) Total

1,120,000 420,000 1,540,000

Add(Deduct): Intercompany sales - down Consolidated Sales CGS – Pot (parent) - Skillet (subsidiary) Total Add(Deduct): Intercompany sales - down Unrealized Profit in Ending Inventory of Skillet (subsidiary)-down EI of Skillet : Sales of Pot 140,000 x: EI of Skillet 40% EI of Skillet 56,000 X: GP of Pot (1,120 – 840) 1,120 25% Consolidated CGS

( 140,000) 1,400,000 840,000 252,000 1,092,000 ( 140,000)

14,000 966,000

5. P522,500 Grebe plus Swamp’s separate cost of goods sold = P400,000 + P320,000 = Less: Intercompany sales = Add: Profit +12,500 - 10,000 = Consolidated COGS =

P 720,000 200,000 ____2,500 P 522,500

6. P10,000 Ending inventory of Grebe (1/2 x P100,000) x: GP% of Parent (P100,000 – P80,00)/P100,000 Unrealized profit in ending inventory

P P

50,000 20% 10,000

7. Sales, P1,000,000; Cost of Sales, P690,000 Intercompany sales and purchases of P100,000 must be eliminated. Additionally, an unrealized gross profit of P10,000 must be removed from ending inventory based on a markup of 25 percent (P200,000 gross profit/P800,000 sales) which is multiplied by the P40,000 ending balance. This deferral increases cost of goods sold because ending inventory is a negative component of that computation. Thus, cost of goods sold for consolidation purposes is P690,000 (P600,000 + P180,000 – P100,000 + P10,000). 8. Sales, P1,000,000; Cost of Sales, P696,000 (refer to No. 4 above for further discussions) The only change here from No. 7 is the markup percentage which would now be 40 percent (P120,000 gross profit  P300,000 sales). Thus, the unrealized gross profit to be deferred is P16,000 (P40,000 × 40%). Consequently, consolidated cost of goods sold is P696,000 (P600,000 + P180,000 – P100,000 + P16,000). 9. Sales, P2,907,000 P Company S Company Total Less: Intercompany sales Realized profit in BI of S Co. [P300,000 x 1/2 = P150,000 x (300-240)/300] Add: Unrealized profit in EI of S Co. [P468,000 x 40% = P187,200 x (468-375)/468] Consolidated

Sales 2,250,000 1,125,000 3,375,000 468,000

Cost of Sales 1,800,000 _937,500 2,737,500 468,000 30,000

________ 2.907,000

__37,200 2,276,700

10. Cost of sales, P2,276,700 - refer to No. 9 11. P380,000

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations

P120,000

P 300,000 0 (_ 0) P300,000

Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) [P200,000 x 50% = P100,000 x (P40,000/P200,000)] S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. *that has been realized in transactions with third parties.

(

20,000 ) P100,000

P 380,000

**Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P 120,000 0 ( 20,000) P 100,000 0 P 100,000 20% P 20,000 0 P 20,000

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

12. P20,000 – refer to No, 11 for computations. 13. Sales, P2,907,000 P Company S Company Total Less: Intercompany sales Realized profit in BI of S Co. [P300,000 x 1/2 = P150,000 x (300-240)/300] Add: Unrealized profit in EI of S Co. [P468,000 x 40% = P187,200 x (468-375)/468] Consolidated

Sales 2,250,000 1,200,000 3,450,000 468,000

100,000 P 400,000 _ 0 P 400,000 20,000

Cost of Sales 1,800,000 _1,000,000 2,800,000 468,000 30,000

________ 2.982,000

__37,200 2,339,200

14. Cost of sales, P2,339,200 - refer to No. 13 15. P285,000

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) [P150,000 x 50% = P75,000 x (30/150)] S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x4 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. *that has been realized in transactions with third parties.

P 90,000 0 ( 15,000) P 75,000

P225,000 0 (_ 0) P225,000

75,000 P300,000 0 P300,000 15,000 P285,000

Or, alternatively

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… Son Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to

P 90,000 0 ( 15,000) P 75,000 P 15,000 0

P225,000 0 (_ 0) P225,000

75,000 P300,000 15,000

equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4 *that has been realized in transactions with third parties.

P285,000 _ 15,000 P290,000

**Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

P 90,000 0 ( 15,000) P 75,000 0 P 75,000 20% P 15,000 0 P 15,000

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

16. P15,000 - refer to No. 15 for computation 17. P25,000 x 125% = P31,250 intercompany sales and purchases (cost of sales) 18. P25,000 x 125% = P31,250 intercompany sales and purchases (cost of sales) 19. P86,000 - the amount of sales to outsiders or unaffiliated company 20. P47,000 – the original cost (I,e., the cost to produced on the part of the seller – Blue Company) 21. P28,600 Total income (P86,000 - P47,000) P39,000 Income assigned to noncontrolling interest [.40(P86,000 - P60,000)] (10,400) Consolidated net income assigned to controlling interest P28,600 22. P20,000 = P30,000 x [(P48,000 - P16,000) / P48,000] 23. P47,000 Sales reported by Movie Productions Inc. Cost of goods sold (P30,000 x 2/3) Consolidated net income 24. P7,000 = [(P67,000 - $32,000) x .20] 25. P90,720 Net Income from own operations: Gibson (Parent): Sparis(subsidiary), 90%:10% RPBI of Parent (upstream: 420,000 x 30% = 126,000; 126,000 x 25/125 = 25,200; 90%:10% UPEI of Parent (upstream): 500,000 x 30% = 150,000; 150,000 x 25/125 = 30,000; 90%:10% Non-controlling Interest in Kent’s Net Income

P67,000 (20,000) P47,000 Parent

Subsidiary

820,800

91,200

22,680

2,520

(27,000)

( 3,000) 90,720

26. P28,000 – P140,000 x 50% = P70,000 x 40% = P28,000 27. P474,400 Unrealized Profit, 12/31/x4 Intercompany Gross profit (P100,000 – P75,000) ................................................. Inventory Remaining at Year's End ........................................................................ Unrealized Intercompany Gross profit, 12/31/x4 .................................................

P25,000 16% P4,000

UNREALIZED GROSS PROFIT, 12/31/x5 Intercompany Gross profit (P120,000 – P96,000) .................................................. Inventory Remaining at Year's End ........................................................................ Unrealized Intercompany Gross profit, 12/31/x5 .................................................

P24,000 35% P8,400

CONSOLIDATED COST OF GOODS SOLD Parent balance ................................................................................................... P380,000 Subsidiary Balance ............................................................................................. 210,000 Remove Intercompany Transfer ...................................................................... (120,000) Recognize 20x4 Deferred Gross profit ............................................................ (4,000) Defer 20x5 Unrealized Gross profit ................................................................... 8,400 Cost of Goods Sold ................................................................................................... P474,400 28. P8,400 Squid’s reported income P 100,000

Less: Unrealized profits in the ending inventory Squid’s adjusted income NCI percentage NCI-CNI

_____16,000 P 84,000 _______10% P 8,400

29. P8,200 UNREALIZED GROSS PROFIT, 12/31/x4 Ending inventory ................................................................................................. Markup (P33,000/P110,000) ............................................................................... Unrealized intercompany gross profit, 12/31/x4 ...........................................

P 40,000 __ 30% P 12,000

UNREALIZED GROSS PROFIT, 12/31/x5 Ending inventory ................................................................................................. Markup (P48,000/P120,000) ............................................................................... Unrealized intercompany gross profit, 12/31/x5 ...........................................

P 50,000 40% P 20,000

30. P10,000 = [P100,000 x (25/100) = P25,000 x 40/100 31. Sales and cost of goods sold should be reduced by the intercompany sales. 32. P500,000 P Company S Company Total Less: Intercompany sales Consolidated 33. P1,060,000 Cost of goods sold reported by Park Cost of goods sold reported by Small Total cost of goods sold reported Cost of goods sold reported by Park on sale to Small (P500,000 x .40) Reduction of cost of goods sold reported by Small for profit on intercompany sale [(P500,000 x 4 / 5) x .60] Cost of goods sold for consolidated entity

Cost of Sales 400,000 _350,000 750,000 250,000 500,000

P 800,000 700,000 P1,500,000 (200,000) (240,000) P1,060,000

34. P115,000 35. P102,400 = P94,000 + (P115,000 - P94,000).4 36. P12,600 = (P115,000 - P94,000) .6 37. P6,300 = (P37,000 - P28,000) .7 38. P2,700 = (P37,000 - P28,000) .3 39. Zero 40. P5,400 = (P37,000 - P28,000) .6 41. P3,600 = (P37,000 - P28,000) .4 42. P56,820 = [P184,000 + (P37,000 - P28,000) .6] .3 43. P9,360 = [(P65,000 - P52,000) - (P65,000 - P52,000) .2] .9 44. P1,040 = [(P65,000 - P52,000) - (P65,000 - P52,000) .2] .1 45. Zero 46. P9,100 =(P65,000 - P52,000) .7 47. P32,110 = [P312,000 + (P65,000 - P52,000) .7] .1 48. P280,000 Full-goodwill

Fair value of Subsidiary (100%) Consideration transferred: Cash (P960,000/60%) Less: Book value of stockholders’ equity of S (P600,000 + P540,000) x 100%) Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities Decrease in inventory: P(40,000) x 100% Increase in capital assets P220,000 x 100% Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P1,600,000 _1,140,000 P 460,000 P( 40,000) __220,000

__180,000 P 280,000

Partial-goodwill

Fair value of Subsidiary (60%) Consideration transferred………………………………..................... Less: Book value of stockholders’ equity of S: Common stock (P600,000 x 60%)……………………................... Retained earnings (P540,000 x 60%)………………................... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Add (deduct): (Over) under valuation of assets and liabilities Decrease in inventory: P(40,000 x 60%) Increase in building: P220,000 x 60% Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

P 960,000 P 360,000 _ 324,000

P( 24,000) ___132,000

_ 684,000 P 276,000

_108,000 P 168,000

Amortization Table: (in thousands of P's)

Amortization/ Amortization/ Balance of Amortization/ Impairment Impairment Allocated Excess Allocated Amortizati Impairment 20x6 loss during remaining at end of Asset Excess on period per year 1 year 20x7 20x7 Inventory (40) 1 (40) 0 Building 220 20 11 11 11 198 Goodwill 280 280 Total 460 (29) 11 478

49. P640,000 Non-controlling interest , 12/31/20x5 — 40% × P1,600,000, fair value of subsidiary = P640,000 Or, alternatively: Non-controlling interest, December 31, 20x5 Common stock – S Company, December 31, 20x5…… Retained earnings – S Company, December 31, 20x5 Stockholders’ equity – S Company, December 31, 20x5 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (December 31, 20x5) Fair value of stockholders’ equity of S, December 31, 20x2…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: NCI on full-goodwill (P280,000 – P168,000) Non-controlling interest (full- goodwill)…………………………………..

P 600,000 540,000 P1,140,000 ___180,000 P1,320,000 40 P 528,000 ___112,000 P 640,000

50. Since there was no impairment in goodwill reported in 20x6 and 20x7, the balance showing for goodwill is P280,000. 51. P779,200 Non-controlling interest , December 31, 20x7 Common stock – S Company, December 31, 20x7 Retained earnings – S Company, December 31, 20x7 Stockholders’ equity – S Company, December 31, 20x7 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (December 31, 20x5) Amortization of allocated excess (refer to amortization above- 20x6 and 20x7 (P40,000 - P11,000) = P(29,000) + P11,000 Fair value of stockholders’ equity of S, December 31, 20x7…… Less: UPEI of P (up) – 20x7 or RPBI of P (up) – 20x8

P

600,000 __935,000 P1,535,000 180,000

__18,000 P1,733,000 ____65,000 P1,668,000 _ 40 P 667,200 ___112,000 P 779,200

Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: NCI on full-goodwill Non-controlling interest (full- goodwill)………………………………….. Or, alternatively: Calculation of Non-controlling interest at December 31, 20X7: Balance of NCI at time of acquisition P640,000 Add: NCI's share of adjusted change in retained earnings in prior years: Retained earnings balance of Book at end of 20X7 P935,000 Retained earnings balance of Book at date of acquisition (540,000) Change in carrying value of Book since acquisition P395,000 Adjustments:

Amortization of fair value increments Unrealized profit on upstream sale of inventory in 20X7 Adjusted change in retained earnings since acquisition NCI's share Ending balance of NCI on December 31, 20X7

18,000 ( 65,000) P348,000 40% 139,200 P779,200

RPBI of S (downstream sales)- 20x7: Sales of Parent EI % EI of S GP% of Parent P800,000 x 25% = P200,000 x 30%………………………………. RPBI of P (upstream sales - 20x7 Sales of Subsidiary EI % EI of P GP% of Subsidiary P500,000 x 60% = P300,000 x 25%......………………………….. UPEI of S (downstream sales) - 20x7 Sales of Parent EI % EI of S GP% of Parent P1,000,000 x 15% = P150,000 x 30%………………………………. UPEI of P (upstream sales) - 20x7 Sales of Subsidiary EI % EI of P GP% of Subsidiary P650,000 x 40% = P260,000 x 25%………………………….....

60,000 75,000 45,000 65,000

52. P1,780,400 Retained earnings – Parent, 12/31/20x6 (cost)……………………….. P 1,775,000 -: UPEI of S (down) – 20x6 or RPBI of S (down) – 20x7..……………….. 60,000 Adjusted Retained earnings – Parent, 12/31/20x6 (cost model)….. P 1,715,000 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 12/31/20x5…………………..P540,000 Less: Retained earnings – Subsidiary, 12/31/20x6…………… 695,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)……….P155,000 Accumulated amortization - 20x6…………………………….. 29,000 UPEI of P (up) – 20x6 or RPBI of P (up) – 20x7………………....( 75,000) P 109,000 x: Controlling Interests………………………………………… 60% 65,400 RE – P, 12/31/20x4 (equity method) = CRE, 12/31/20x4……… P1,780,400 Or, alternatively: Ending balance - Retained earnings separate entity - Paper Less unrealized profit on downstream sale of inventory 20x6 Subtotal Paper’s share of adjusted retained earnings - see Note 1 below: 60% × P109,000 Ending consolidated retained earnings balance of Paper, 12/ 31/ 20x6 Note 1: Retained earnings balance of Book at end of 20x6 Retained earnings balance of Book at date of acquisition Change in carrying value of Book since acquisition Adjustments: Amortization of fair value increments Unrealized profit on upstream sale of inventory in 20x6 Adjusted change in retained earnings since acquisition Paper's s share 60% × 109,000

P1,775,000 (60,000) P1,715,000 65,400 P1,780,400

P695,000 (540,000) P155,000 29,000 (75,000) P109,000 P 65,400

53. P2,428,800 Retained earnings – Parent, 12/31/20x7 (cost)……………………….. -: UPEI of S (down) – 20x7 or RPBI of S (down) – 20x8..……………….. Adjusted Retained earnings – Parent, 12/31/20x6 (cost model)….. Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 12/31/20x5…………………..P540,000 Less: Retained earnings – Subsidiary, 12/31/20x7…………… 935,000

P 2,265,000 45,000 P 2,220,000

Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)……….P395,000 Accumulated amortization - 20x6 and 20x7 (P29,000 – P11,000)…………………………………………….. 18,000 UPEI of P (up) – 20x7 or RPBI of P (up) – 20x8………………....( 65,000) P 348,000 x: Controlling Interests………………………………………… 60% 208,800 RE – P, 12/31/20x4 (equity method) = CRE, 12/31/20x4……… P2,428,800 Or, alternatively: Ending balance - Retained earnings separate entity - Paper Less unrealized profit on downstream sale of inventory 20x7 Subtotal Paper's share of adjusted retained earnings - see Note 1 below: 60% × 348,000 Ending consolidated retained earnings balance of Paper, 12/31/20x7 Note 1: Retained earnings balance of Book at end of 20x7 Retained earnings balance of Book at date of acquisition Change in carrying value of Book since acquisition Adjustments: Amortization of fair value increments Unrealized profit on upstream sale of inventory in 20x7 Adjusted change in retained earnings since acquisition Paper's s share 60% × 348,000

P2,265,000 (__45,000) P2,220,000 208,800 P2,428,800

P935,000 (540,000) P395,000 18,000 (65,000) P348,000 P208,800

or alternatively: Consolidated retained earnings, December 31, 20x6 (No. 52) Controlling Interests in Consolidated Net income (refer to statement of comprehensive income below) Dividends declared – paper Retained earnings, December 31, 20x7 Incidentally, the Eliminate intercompany transactions for 20X7 Intercompany transactions and balances Accounts receivable/accounts payable still outstanding Downstream sales by Paper Upstream sales by Book Dividends declared by Book Paper's portion of dividends P250,000 X 60% = P150,000

P1,780,400 1,148,400 ( 500,000) P2,428,800

P 150,000 P1,000,000 P 650,000 P 250,000

Paper Co. Consolidated Statement of Comprehensive Income For the year ended December 31,20s7 Sales (2,520 + 2,400 - 1,000 - 650) Management fees (250 - 250) Dividend income (150 - 150)

Consolidated Net income

3,270,000 0 0 3,270,000 325,000 1,006,000 0 595,000 1,926,000 1,344,000

Allocated as follows: Non-controlling interests in CNI — see below Controlling Interest in CNI Owners of the parent Consolidated Net Income

195,600 1,148,400 1,344,000

Cost of sales (800 + 1,200 - 1,000 - 650 - 60 - 75 + 45 + 65) Depreciation and amortization expenses (670 + 325 + 11) Management fees expense (250 - 250) Other expenses (460 + 135)

Non-controlling interest's portion of adjusted net earnings: Net income of Book for 20X7 as per separate-entity statement Adjustments for 20X7 Realized profits on upstream sale of inventory 20x6 Unrealized profits on upstream sale of inventory — 20x7 Amortization of fair value increments for 20x7 Adjusted net income of Book for 20x7 NCI's share 40% × P489,000

P490,000 75,000 ( 65,000) ( 11,000) P489,000 P195,600

Theories 1. 2. 3. 4. 5.

True False False True False

41. 42. 43. 44. 45.

b c a c d

6. 7. 8. 9. 10, 46. 47. 48. 49. 50,

True False False True False c b c a d

51. 52. 53. 54. 55,

11. 12. 13. 14. 15, a c c d c

True False False True True

16. 17. 18. 19. 20.

56. 57. 58. 59. 60.

c b c b c

False False True True False 61. 62. 63. 64. 65.

21. 22. 23. 24. 25. a a b c a

True False b e a 66. 67. 68. 69. 70.

b b c d b

26. 27. 28. 29. 30. 71 72. 73. 74. 75.

e e c d a b a a a c

31 32. 33. 34. 35. 76. 77. 78. 79. 80.

b e b d a c c a c e

36. 37. 38. 39. 40.

a b e d d