Solution Chapter 17

Chapter 17 Problem I 1. 20x4 Sales

1,080,000 Purchases (Cost of Goods Sold)

1,080,000

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

36,000 36,000

20x5 Sales

1,200,000 Purchases (Cost of Goods Sold)

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

1,200,000 50,000 50,000 36,000 36,000

2. Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning 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 760,000 36,000 (_50,000) P 746,000 P 460,000 0 ( 0) P 460,000

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

Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning 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

P 760,000 36,000 (_50,000) P 746,000 P 460,000 0 ( 0) P460,000 P 92,000 0

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

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

Problem II 1. Sales

1,020,000

Purchases (Cost of Sales) To eliminate intercompany sales.

1,020,000

12/31 Inventory (Income Statement) 51,000 Inventory (Balance Sheet) 51,000 To eliminate unrealized intercompany profit in ending inventory. Beginning Retained Earnings – Pinta (.90 × P40,000) 36,000 Noncontrolling interest 4,000 1/1 Inventory (Balance Sheet) 40,000 To recognize unrealized profit in beginning inventory realized during the year. Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning 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 1,720,000 0 (_ 0) P 1, 720,000 P 600,000 40,000 ( 51,00 0) P 589,000

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)

P 1,720,000 0 (________0) P1,720,,000 P 600,000 40,000 ( 51,000) P589,000 P 58,900 0

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

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

Problem III Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Realized profit in beginning 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*…….…..

P 3,600,000 54,000 (_ 45,00 0) P 3,609,000 P3,900,000 66,000 63,000 ( 57,000) ( 69,000) P3,903,000

3,903,000

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.

P7,512,000 0 P7,512,000 P 301,800 ___239,400

___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.

P 3,600,000 54,000 (___45,000) P3,609,,000 P3,900,000 66,000 63,000 ( 57,000) ( 69,000) P3,903,000

3,903,000 P7,512,000

P 301,800 239,400 0

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

**Salad Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning 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

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

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 4,000,000 250,000 250,000 84,000 21,000 105,000

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

P12,450,000 P7,755,000 1,800,000

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

(a) Reported Cost of Goods Sold Less intercompany sales in 20x4 Plus unrealized profit in ending 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

Non-controlling interest in consolidated income

75,000 0 1,975,000 × 0.10 P197,500

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)… 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 220,000 0 (_ 0) P 220,000 P 50,000 0 ( 8, 000) 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. **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



P 220,000 0 (_ 0) P 220,000 P 50,000 0 ( 8,000) P 42,000 P 8,700 13,000

21,700 P240,300 _ 8,700 P249,000

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

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

Problem IX Requirements 1 to 4: Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4

42,000 P 262,000

Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 80%)……………………. Retained earnings (P120,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… Increase in land (P7,200 x 80%)……………………. Increase in equipment (P96,000 x 80%) Decrease in buildings (P24,000 x 80%)………..... Decrease in bonds payable (P4,800 x 80%)…… Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

P 372,000 P 192,000 96,000

288,000 84,000

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

72,000 P 12,000

The over/under valuation of assets and liabilities are summarized as follows: 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 of 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) 4800

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%) 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)………………………………………………...

__360,000 P

105,000 90,000

P

15,000

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

Goodwill applicable to parent………………… 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

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 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 60,000 75,000

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% = P24,000

Intercompany Merchandise in 12/31 Inventory of S Company P60,000 x 50% = P30,000 P 75,000 x 40% = P30,000

Unrealized Intercompany Profit in Ending Inventory P30,000 x 40% = P12,000 P30,000 x 20% = P 6,000

20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4: (1) Investment in 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.

372,000 372,000

28,800 28,800

No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4, and unrealized profits in ending inventory. Consolidation Workpaper – Year of Acquisition (E1) Common stock – S Co………………………………………… Retained earnings – S Co…………………………………… Investment in S Co…………………………………………… Non-controlling interest (P360,000 x 20%)………………………..

240,000 120.000 288,000 72,000

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

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

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

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

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

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

Total

13,200

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

28,800 7,200 36,000

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

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

150,000 150,000

To eliminated intercompany downstream sales.


60,000 60,000

To eliminated intercompany upstream sales.

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

18,000 18,000

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


12,000 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)……………………….. S Company’s realized net income from separate operations*…….….. Less: Amortization of allocated excess [(E3)]…. Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

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

6,960

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

Income Statement

P Co P480,000

S Co. P240,000

Dividend income Total Revenue

28,800 P508,800

P240,000

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

Cr.

Consolidated P 510,000 _________ P 510,000

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 P196,800 P196,800

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

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

Total

(3) (7) (8) (3) (3)

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

(3)

3,000

(9)

6,960

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

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

P432,000

P

P 168,000

P

236,160 P668,160

P144,000 72,000 P216,000

86,400 -

43,200

P581,760

360,000

(1) 120,000 174,840 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

(4)

(2)

6,000

(2)

7,200

(2) (2)

4,800 12,000

372,000 P1,984,800

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

581,760

240,000 144,000

_________ P1,008,000

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

180,000 265,200 420,000 1,044,000 3,600 9,000 P2,394,600

12,000

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

(1) 240,000 462,840 (4)

_________ P1,984,800

(3) (7) (8)

36,000

7,200

__________ 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

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

____89,760 P2,394,600

P168,000 ( 18,000) P150,000 P 60,000 ( 12,000) P 48,000 P 6,960 13,200 3,000

48,000 P198,000

23,160 P174,840 _ 6,960 P181.800

P 60,000 ( 12,000) P 48,000 13,200

P 34,800 20% P 6,960

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

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

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

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

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 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 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

P144,000 120,000 P 24,000 80% P 19,200

(E2) Common stock – S Co………………………………………… Retained earnings – S Co., 1/1/20x5 Investment in S Co (P384,000 x 80%)………………………… Non-controlling interest (P384,000 x 20%)………………………..

240,000 144.000 307,200 76,800

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

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

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

(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……………………………………

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

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

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

(20x4) Retained earnings, P 6,000 12,000 (6,000) 1,200 P13,200 80% P 10,560 3,000 P 13,560

Depreciation/ Amortization expense


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

P 1,200 P 1,200


38,400 9,600 48,000



120,000 120,000



75,000 75,000


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

18,000 18,000

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

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

9,600 2,400 12,000

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


24,000 24,000



6,000 6,000


(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:

17,760 17,760

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.

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

Income Statement

P Co P540,000

S Co. P360,000

Dividend income Total Revenue Cost of goods sold

38,400 P501,600 P216,000

P360,000 P192,000


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

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

P484,800

S Company Net income, from 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…………

P

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

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

Cr.

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

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

(4) (4)

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

6,000 1,200

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 ___ _____

240,000 186,000

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

(2 ) 76,800

647,880 ____97,920

_________

Total

2,203,200

P1,074,000

(5) 9,600 (9) 2,400 __________ P1,077,360

(3) 18,000 (12) 17,760 P1,077,360

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)

P360,000

b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… Retained earnings – Subsidiary Company…………………………………. Stockholders’ equity – Subsidiary Company.………….. Adjustments to reflect fair 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

c.

6. Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P174,840 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Unrealized profit in ending 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.

P168,000 ( 18,000) P150,000 P 60,000 ( 12,000) P 48,000 P 6,960 13,200 3,000

48,000 P198,000

23,160 P174,840 _ 6,960 P181.800

b. NCI-CNI – P6,960 **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Unrealized profit in ending 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 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)…………………………………..

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

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

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

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

12/31/20x5: a. CI-CNI Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning 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.

P192,000 18,000 (_24,000) P186,000 P 90,000 12,000 ( 6,000) P 96,000

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

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.

P192,000 18,000 (_24,000) P186,000 P 90,000 12,000 ( 6,000) P 96,000 P 17,760 7,200

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

b. NCI-CNI **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning 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 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

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) 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)

P643,200

24,000

P619,200

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

P Multiplied by: Controlling interests %................... P Less: Goodwill impairment loss, partial goodwill Consolidated Retained earnings, December 31, 20x5

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

28,680 P647,880

e. Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5* P144,000 Add: Net income of subsidiary for 20x5 90,000 Total P234,000 Less: Dividends paid – 20x5 48,000 186,000 Stockholders’ equity – Subsidiary Company, December 31, 20x5 P 426,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) : 20x4 P 13,200 20x5 7,200 ( 20,400) Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P 495,600 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 6,000 Realized stockholders’ equity of subsidiary, December 31, 20x5………. P489,600 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 97,920 * the realized profit in beginning inventory of P Company (upstream sales) –20x5 (RPBI of P - 20x5 amounting to P10,000 is already included in the beginning retained earnings of S Company.

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

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

Problem X Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)……………….. 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



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……………………………………………………………………..

372,000 372,000

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

28,800 28,800

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

36,000 36,000

No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4. Consolidation Workpaper – First Year after Acquisition (E1) Common stock – S Co………………………………………… Retained earnings – S Co…………………………………… Investment in S Co…………………………………………… Non-controlling interest (P360,000 x 20%)………………………..

240,000 120.000 288,000 72,000

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

(E2) Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. Accumulated depreciation – buildings………………….. Land………………………………………………………………………. Discount on bonds payable…………………………………………. Goodwill…………………………………………………………………. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%) + [(P15,000, full – P12,000, partial goodwill)]………… Investment in Son Co……………………………………………….

6,000 96,000 192,000 7,200 4,800 15,000 216,000 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 date of acquisition.


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






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

P 1,200 P1,200

_______ P 6,000


28,800 7,200 36,000


(E5) Sales………………………. Cost of Goods Sold (or Purchases) To eliminated intercompany downstream sales.

150,000 150,000


60,000 60,000



18,000 18,000



12,000 12,000



6,210 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


28,800 P451,200 P204,000

P240,000 P138,000


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………………….

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.

_________ 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

P360,000

P

Consolidated P 510,000

P

196,800 P556,800

P120,000 60,000 P180,000

72,000 -

36,000

P484,800

232,800 90,000 120,000

360,000

(1) 120,000 174,840 P534,840

_

72,000 ________

P144,000

P

462,840

P 90,000 60,000 90,000

P

322,800 150,000

(4)

(2)

6,000

(3) (7)

36,000

6,000 18,000

180,000

(8) Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Investment in S Co………

210,000 240,000 720,000

(2)

7,200

(2) (2)

4,800 15,000

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…………

P1,984,800

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000 240,000 144,000

484,800

_________ P1,008,000

12,000

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

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

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

12,000

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

(1) 240,000 462,840 (4)

_________ P1,984,800

Total

48,000 180,000 540,000

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

____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 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………………………………………… Retained earnings – S Co., 1/1/20x5 Investment in S Co (P384,000 x 80%)………………………… Non-controlling interest (P384,000 x 20%)……………………….. To eliminate intercompany investment and equity accounts of subsidiary and to establish non-controlling interest (in net assets of

240,000 144.000 307,200 76,800

subsidiary) on January 1, 20x5.

(E3) Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. Accumulated depreciation – buildings………………….. Land………………………………………………………………………. Discount on bonds payable…………………………………………. Goodwill…………………………………………………………………. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%) + [(P15,000, full – P12,000, partial goodwill)]………… Investment in S Co……………………………………………….

6000 96,000 192,000 7,200 4,800 15,000 216,000 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……………………………………

13,560 3,390 6,000 12,000 1,200 6,000 24,000 2,800 3,750

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


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

P1,200


38,400 9,600 48,000



120,000 120,000



75,000 75,000


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

18,000 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 12,000

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

(E10) Cost of Goods Sold (Ending Inventory – Income Statement)… Inventory – Balance Sheet…… To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders.

24,000 24,000


6,000 6,000



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 ( 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) Sales

Income Statement

P Co P540,000

S Co. P360,000


38,400 P574,800 P216,000

P360,000 P192,000


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

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

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

P484,800

S Company Net income, from 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

P

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)

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

6,000 1,200

P P ( P

(12) 17,760

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

(4) 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

257,040 P 719,880

(5)

(6)

6,000

(3)

7,200

(3)

4,800

48,000

(4) 6,000 (10) 24,000 (11) 6,000

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

_

72,000 ________

294,000 265,200 420,000 1,044,000 2,400

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…………

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

Total

(3) (1)

372,000

240,000 186,000

_________ P1,074,000

15,000 19,200

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

(4) 3,750 (2) 307,200 (3) 84,000

(4)

24,000

11,250 P2,680,050

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

(2) 240,000 647,880 (4) 3,390 (8) 9,600 (9) 2,400 __________ P1,081,110

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

____100,170 P2,680,050

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

P360,000

b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… Retained earnings – Subsidiary Company…………………………………. Stockholders’ equity – Subsidiary Company.………….. Adjustments to reflect fair 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)

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

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

P 600,000 360,000 P 960,000 ___93,000 P1,053,000

6. Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P174,840 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. Unrealized profit in ending 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.

b. NCI-CNI – P6,210

P168,000 ( 18,000) P150,000 P 60,000 ( 12,000) P 48,000 P 6,1210 13,200 3,750

48,000 P198,000

23,160 P174,840 _ 6,210 P181.050

**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: 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

e. Non-controlling interest ), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4 Add: Net income of subsidiary for 20x4 Total Less: 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)……………..

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

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

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

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

12/31/20x5: a. CI-CNI – P257,040 Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning 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.

P192,000 18,000 (_24,000) P186,000 P 90,000 12,000 ( 6,000) P 96,000

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

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

P192,000 18,000 (_24,000) P186,000 P 90,000 12,000 ( 6,000) P 96,000 P 17,760 7,200

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

b. NCI-CNI – P16,560 **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning 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)…………….

P643,200

24,000

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 (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)

P619,200

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

P Multiplied by: Controlling interests %................... P Less: Goodwill impairment loss (full-goodwill), net (P3,750 – P750)* or (P3,750 x 80%) Consolidated Retained earnings, December 31, 20x5

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

28,680 P647,880

e. Non-controlling interest, December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5* P144,000 Add: Net income of subsidiary for 20x5 90,000 Total P234,000 Less: Dividends paid – 20x5 48,000 186,000 Stockholders’ equity – Subsidiary Company, December 31, 20x5 P 426,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) : 20x4 P 13,200 20x5 7,200 ( 20,400) Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P 495,600 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 6,000 Realized stockholders’ equity of subsidiary, December 31, 20x5………. P489,600 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 97,920 Add: Non-controlling interest on full goodwill , net of impairment loss [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss 2,250 Non-controlling interest (full-goodwill)………………………………….. P 100,170 * the realized profit in beginning inventory of P Company (upstream sales) –20x5 (RPBI of P - 20x5 amounting to P10,000 is already included in the beginning retained earnings of S Company.

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

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

Problem XI (Compute selected balances based on three different intercompany asset transfer scenarios) 1. Consolidated Cost of Goods Sold PP’s cost of goods sold ...................................................................................... P290,000 SW’s cost of goods sold ..................................................................................... 197,000 Elimination of 20x5 intercompany transfers ................................................... (110,000) Reduction of beginning Inventory because of 20x4unrealized gross profit (P28,000/1.4 = P20,000 cost; P28,000 transfer price less P20,000 cost = P8,000 unrealized gross profit) ....................................................... (8,000) Reduction of ending inventory because of 20x5 unrealized gross profit (P42,000/1.4 = P30,000 cost; P42,000 transfer price less P30,000 cost = P12,000 unrealized gross profit) ..................................................... 12,000 Consolidated cost of goods sold ....................................................... P381,000

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

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 200,000 8,000 (_ 12,000) P 196,000 P 58,000 0 ( 0) P 58,000

**Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning 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

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

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

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

P290,000 197,000 (80,000)

(6,000)

10,000 P411,000 P346,000 110,000 (10,000) P446,000

Non-controlling Interest in Subsidiary's Net income Since all intercompany sales are upstream, the effect on Snow's income must be reflected in the non-controlling interest computation: SW reported income .......................................................................................... 20x4 unrealized gross profit realized in 20x5 (above) .................................. 20x5 unrealized gross profit to be realized in 20x6 (above) ....................... SW realized income ............................................................................................ Outside ownership percentage ....................................................................... Non-controlling interest in SW’s income ..................................................

P58,000 6,000 (10,000) P54,000 20% P10,800

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 200,000 (_ 0) P 200,000 P 58,000 6,000 ( 10,000) P 54,000

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

**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 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 165,000 14,400 (_10,000) P 169,400 P 100,000 0 ( 0) P 100,000

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

**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 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)

P 165,000 0 (_ 0) P 165,000 P 100,000 14,400 ( 10,000) P 104,400

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

P 100,000 14,400

Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess

( 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 Pepper (CI-CNI) Net Income from own operations: Pepper [P724,000 – (PP30,000 x 80%)] Salt RPBI of S (down) RPBI of P (up) UPEI of S (down) UPEI of P (up) Amortization Impairment of goodwill

P700,000 72,000 15,000 8,000 ( 20,000) ( 4,000) ( 1,600) ( 0) P769,400

Salt (NCI-CNI)

CNI

P 18,000 2,000 (1,000) ( 400) ____( 0)__ P18,600

P788,000

Profit Attributable to Equity NC Interest CNI Holders of Parent in Net Income 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) P 157,000 X: Controlling Interests………………………………………… 80% 125,600 RE – P, 12/31/2014 (equity method) = CRE, 12/31/2014…………. P 3,605,600 Or, compute first the RE – P on January 1, 2014 (use work back approach), Retained earnings – Parent, 1/1/2014 (cost) (P3,500,000 plus P25,000 Div of P less P724,000 NI of P)…. P2,801,000 -: UPEI of S (down) – 2013 or RPBI of S (down) – 2014..…………. 15,000 Adjusted Retained earnings – Parent, 1/1/2014 (cost)……………… P2,786.000 Retroactive Adjustments to convert Cost to ―Equity‖ for

purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/2011………………………P 150,000 Less: Retained earnings – Subsidiary, 1/1/2014……………… 260,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)…………P110,000 Accumulated amortization (1/1/2011 – 1/1/2014): P 2,000 x 3 years………………………………………………. ( 6,000) UPEI of P (up) – 2013 or RPBI of P (up) – 2014………………... ( 10,000) P 94,000 X: Controlling Interests………………………………………… 80% 75,200 RE – P, 1/1/2014 (equity method) = CRE, 1/1/2014………………..P2,861,200 +: CI – CNI or Profit Attributable to Equity Holders of Parent…….. 769,400 -: Dividends – P………………………..……………………… 25,000 RE – P, 12/31/2014 (equity method) = CRE, 12/31/2014…………..P3,605,600 Sales Cost of Sales P P2,500,000 P1,250,000 S 1,200,000 875,000 Intercompany sales - downstream ( 320,000) ( 320,000) Intercompany sales - upstream ( 290,000) ( 290,000) RPBI of S (downstream sales)* ( 15,000) RPBI of P (upstream sales)*** ( 10,000) UPEI of S (downstream sales)** 20,000 UPEI of P (upstream sales)**** _________ 5,000 Consolidated P3,090,000 P1,515,000 Working Paper Eliminating Entries: 1. Intercompany Sales and Purchases: Downstream Sales: Sales………………………………………………………………………….. 320,000 Cost of Sales (or Purchases)…………………………………….... 320,000 Upstream Sales: Sales………………………………………………………………………….. 290,000 Cost of Sales (or Purchases)……………………………………… 290,000 2. Intercompany Profit: (COST Model) Downstream Sales: *100% RPBI of S: Retained Earnings – P, beginning………………………………………..... 15,000 Cost of Sales (Beginning Inventory in Income Statement)…............ 15,000 **100% UPEI of S: Cost of Sales (Ending Inventory in Income Statement)……………… 20,000 Inventory (Ending Inventory in Balance Sheet)……………….. 20,000 Upstream Sales: ***100% RPBI of P: (if equity method Investment in S instead of RE – P, beg.) Retained Earnings – P, beginning…………………………………...…….. 16,000 NCI ……………………………………………….……………………………... 4,000 Cost of Sales (Beginning Inventory in Income Statement)…........ 20,000 ****100% UPEI of P: Cost of Sales (Ending Inventory in Income Statement)………………… 5,000 Inventory (Ending Inventory in Balance Sheet)……………….. 5,000 Problem XV (Change 2009 – 20x4; 2010 – 20x5; 2011 – 20x6)

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

P21,000 30%

Remaining 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 acquisition-date fair value less three years of excess amortizations)  Buildings (net) = P528,000 (add the two book values and subtract the P20,000 unrealized gain on the transfer after two years of excess depreciation [P4,000 per year])

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

P 372,000 P 192,000 96,000 P P 4,800 5,760 76,800 ( 19,200) 3,840

72,000 P 12,000

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

S Co. Book value P 24,000 48,000 84,000 168,000

288,000 84,000

S Co. Fair value P 30,000 55,200 180,000 144,000

(Over) Under Valuation P 6,000 7,200 96,000 (24,000)

Bonds payable………………………… Net………………………………………..

(120,000) P 204,000

( 115,200) P 294,000

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)


Over/ Under P 6,000

Life 1

96,000 (24,000) 48000

8 4 4



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

Sales of Parent to Subsidiary

Intercompany Merchandise in 12/31 Inventory of S Company

Unrealized Intercompany Profit in Ending Inventory

20x4 20x5

P150,000 120,000

P150,000 x 60% = P90,000 P120,000 x 80% = P96,000

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

Upstream Sales: Year 20x4 20x5

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

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

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

372,000 372,000

Acquisition of S Company.

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

28,800 28,800

Record dividends from S Company.

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

48,000 48,000

Record share in net income of subsidiary.

December 31, 20x4: (4) Investment income [(P13,200 x 80%) + P3,000, goodwill impairment loss)] Investment in S Company

13,560 13,560

Record amortization of allocated excess of inventory, equipment, buildings and bonds payable and goodwill impairment loss. 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 18,000

9,600

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%)

350,040 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%)……………………….. 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.

240,000 120.000 288,000 72,000

(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 12,000 216,000 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 noncontrolling interest (in net assets of subsidiary) on date of acquisition.


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






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

P 1,200 P1,200

_______ P 6,000

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

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

Amortization impairment UPEI of S UPEI of P

13,560 18,000 9,600

48,000

NI of S (50,000 x 80%)

6,840

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

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

Balance, 12/31/x4 (E4) Investment Income and dividends ……………

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

350,040

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

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

21,960 372,000

(E5) Sales………………………. Cost of Goods Sold (or Purchases) To eliminated intercompany downstream sales.

372,000

150,000 150,000


60,000 60,000



18,000 18,000



12,000 12,000



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) Sales

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


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

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


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

Cr.

_________ P 510,000 P 168,000

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

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

P360,000

P


P

174,840 P414,840

P120,000 60,000 P180,000

72,000 -

36,000

P462,840

232,800 90,000 120,000

360,000

(1) 120,000 174,840 P414,840

_

72,000 ________

P144,000

P

642,840

P 90,000 60,000 90,000

P

387,360 150,000

(4)

(1)

5,000

(3) (7) (8)

36,000

6,000 18,000 12,000

180,000

Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Investment in S Co………


Total

210,000 220,000 720,000

48,000 180,000 540,000

(2)

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

350,040

P1,635,700

P1,006,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000 240,000 144,000

462,840

_________ 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

265,200 380,000 1,044,000 3,600 9,000

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

P2,394,600

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

(3)

12,000

P 147,000 495,000 240,000 360,000 600,000

(1) 240,000 462,840 (4)

_________ P1,962,840

7,200

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

____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

38,400



72,000 72,000


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

5,760 5,760

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

24,000 24,000

18,000 18,000

4,800 4,800

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)

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%)………………………..

240,000 144.000 307,200 76,800

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

(E2) Accumulated depreciation – equipment (P96,000 – P12,000) Accumulated depreciation – buildings (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 9,000 216,000 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 noncontrolling 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:




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

65,040 9,600 48,000 26,640

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

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

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

120,000 120,000



75,000 75,000


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

18,000 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 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%) 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

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

5,760 24,000 4,800 307,200 70,440 26,640

336,900

404,280

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


24,000 24,000



6,000 6,000


(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: 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.

17,760 17,760

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

Income Statement

P Co P540,000

S Co. P360,000

Investment income Total Revenue Cost of goods sold

65,040 P605,040 P216,000

P360,000 P192,000


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

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

(3) (3)

(1) 144,000

257,040 P719,880

P144,000 90,000 P234,000

72,000 -

48,000

P777,456

P223,200

P 777,456

265,200 180,000 216,000

P 102,000 96,000 108,000

P 367,200 276,000

210,000 240,000 720,000

48,000 180,000 540,000

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

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

P P ( P

17,760

P462,840

P

P 462,840

376,680

P2,207,880

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

257,040 P 719,880

(4)

240,000 186,000

(2)

7,200

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

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

_________ P1,074,000

(3) 216,000 (3) 1,200 (1) 307,200 (2) 70,440 (4) 26,640

_

72,000 ________

294,000 265,200 420,000 1,044,000 2,400 9,000

P2,677,800

84,000 (3)

12,000

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

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

(1) 240,000 647,880 (4) (9)

___ _____ P2,207,880

48,000

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

(2)

647,880

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

9,600 2,400

__________ P1,046,400

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

____97,920 P2,677,800

5 and 6. Refer to Problem IX for computations Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem IX solution). Problem XVII Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)……………….. Fair value of Subsidiary (100%)………. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. Retained earnings (P120,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… 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


Over/ under P 6,000

Life 1

96,000 (24,000) 4,800

8 4 4



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……………………………………………………………………..

372,000 372,000

Acquisition of S Company.


28,800 28,800



48,000 48,000


December 31, 20x4: (4) Investment income [(P13,200 x 80%) + (P3,750 – P750)*, goodwill impairment loss)] Investment in S Company

13,560 13,560

Record amortization of allocated excess of inventory, equipment, buildings and bonds payable and goodwill impairment loss. *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 18,000

9,600 9,600

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

Investment in S 372,000 28,800

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

48,000

Balance, 12/31/x4

Dividends – S (36,000x 80%) Amortization & impairment UPEI of S (P18,000 x 100%) UPEI of P (P12,000 x80%)

13,560 18,000 9,600

324,000 Investment Income

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

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%)………………………..

240,000 120.000 288,000 72,000

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.

(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 15,000 216,000 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 noncontrolling interest (in net assets of subsidiary) on date of acquisition.


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




_______ P 6,000



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

6,840 21,960 7,200 36,000

Investment Income 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

Amortization impairment UPEI of S UPEI of P

13,560 18,000 9,600

48,000

NI of S (50,000 x 80%)

6,840

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Cost, 1/1/x4 NI of S (60,000 x 80%)

Balance, 12/31/x4 (E4) Investment Income and dividends ……………

Investment in S 372,000 28,800 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


150,000 150,000



60,000 60,000



18,000 18,000



12,000 12,000


(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 Company (upstream sales)……………………….. S Company’s realized net income from separate operations*…….….. Less: Amortization of allocated excess [(E3)]….

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

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) – full goodwill P 6210 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6).

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

6,210 6,210

Sales

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


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

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


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)

3,750

(9)

5,175

Cr.



Total

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

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

(1) 120,000

(4)

(2)

6,000

(2)

7,200

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

350,040

P1,635,700

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000 240,000 144,000

462,840

_________ P1,962,840

_________ P1,008,000

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

(3) (7) (8)

36,000

6,000 18,000 12,000

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

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

P2,396,850

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

(3)

12,000

P 147,000 495,000 240,000 360,000 600,000

(1) 240,000 462,840 (4)

No goodwill impairment loss for 20x5.

_________ P 510,000 P 168,000

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

P360,000

P


7,200

__________ P 986,160

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

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

____92,010 P2,396,850

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

Parent Company Equity Method Entry


38,400 38,400



72,000 72,000


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

5,760 5,760

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

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 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%)………………………..

240,000 144.000 307,200 76,800

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

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

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

Goodwill (P15,000 – P3,750)…………………………….. Buildings……………………………………….. Non-controlling interest [(P90,000 – P13,200) x 20%] + [P3,000, full goodwill - [(P3,750, full-goodwill impairment – P3,000, partial- goodwill impairment)* or (P3,750 x 20%)] Investment in S Co……………………………………………….

11,250 216,000

17,610 70,440

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 noncontrolling 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…………………………

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:




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 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

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

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

120,000 120,000



75,000 75,000


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

18,000 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 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

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



6,000 6,000



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) Sales

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


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

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

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

P P ( P

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


P462,840 257,040 P719,880 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

P



Total

P 462,840 P144,000 90,000 P234,000

(1) 144,000 257,040 P 719,880

(4)

(10) 24,000 (11) 6,000 (2)

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

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

(2)

647,880

240,000 186,000

_________ P1,074,000

7,200 (3) 216,000 3,600 (3) 1,200 11,250 18,000 (1) 307,200 9,600 (3) 70,440 (4) 26,640

_

72,000 ________

294,000 265,200 420,000 1,044,000 2,400 11,250

P2,680,050

84,000 (3)

12,000

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

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

(1) 240,000 647,880 (4) (9)

___ _____ P2,207,880

48,000

9,600 2,400

__________ P1,048,650

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

____100,170 P2,680,050

5 and 6. Refer to Problem X for computations Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem X solution). Multiple Choice Problems 1. a P Company S Company Total Less: Intercompany sales Realized profit in BI of S Co. [P300,000 x 1/2 = P150,000 x (300-240)/300] Add: Unrealized profit in EI of S Co. [P468,000 x 40% = P187,200 x (468-375)/468] Consolidated 2. c – refer to No. 1 for computations

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

3. 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 (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.

P225,000 0 (_ 0) P225,000 P 90,000 0 ( 15,000) P 75,000

75,000 P300,000 0 P300,000 15,000 P285,000

Or, alternatively Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. 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 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

P225,000 0 (_ 0) P225,000 P 90,000 0 ( 15,000) P 75,000

75,000 P300,000

P 15,000 0

15,000 P285,000 _ 15,000 P290,000

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

4. c – refer to No. 3 for computation 5. a – P25,000 x 125% = P31,250 intercompany sales and purchases (cost of sales) 6. c – P25,000 x 125% = P31,250 intercompany sales and purchases (cost of sales) 7. d Cost of Sales P Company 5,400,000 S Company _1,200,000 Total 6,600,000 Less: Intercompany sales 1,000,000 Realized profit in BI of S Co. [P625,000 x 12% = P75,000 x (625 - 425)/625] 24,000 Add: Unrealized profit in EI of S Co. [P1,000,000 x 10% = P100,000 x (1,000 - 800)/1,000] __20,000 Consolidated 5,596,000

8. b Net Income from own operations: X-Beams (parent) Kent (subsidiary), 70%:30% Unrealized Profit in EI of Parent (X-Beams): P180,000x 20% = P36,000 x (180-100/180) = P16,000, 70%:30% Non-controlling Interest in Kent’s Net Income

Parent

Subsidiary

210,000

90,000

( 11,200)

( 4,800) 85,200

9. d Non-controlling Interest in Net Income (NCINI) for 20x4: S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning 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 137,000 40,000 ( 25,000) P 152,000 _ 0 P 152,000 30% P 45,600 0 P 45,600

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

10. c – Parent Net Income from own operations: Gibson (Parent): Sparis(subsidiary), 90%:10% RPBI of Parent (upstream: 420,000 x 30% = 126,000; 126,000 x 25/125 = 25,200; 90%:10% UPEI of Parent (upstream): 500,000 x 30% = 150,000; 150,000 x 25/125 = 30,000; 90%:10% Non-controlling Interest in Kent’s Net Income

Subsidiary

820,800

91,200

22,680

2,520

(27,000)

( 3,000) 90,720

11. b 12. a 13. b (downstream sales)

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

14. c – upstream sales Note: The only change here from Problem 13 is the markup percentage which now be 40 percent*

CGS – Pot (parent) - Skillet (subsidiary)

840,000 252,000

would

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 974,400 The problem is quite intriguing because of the statement ―Pot had established the transfer price base on its normal markup‖. It should be noted that Parent Company established the transfer price based on its normal price (in this case it is assumed that the mark-up of the parent which is 25% is also the normal transfer price). So, the solution should be as follows: Sales – Pot (parent) - Skillet (subsidiary) Total Add(Deduct): Intercompany sales - down Consolidated Sales

1,120,000 420,000 1,540,000 ( 140,000) 1,400,000

CGS – Pot (parent) - Skillet (subsidiary) Total Add(Deduct): Intercompany sales - down Unrealized Profit in Ending Inventory of Skillet (subsidiary)-down EI of Skillet : Sales of Pot 140,000 x: EI of Skillet 40% EI of Skillet 56,000 X: GP of Pot (1,120 – 840) 1,120 25% Consolidated CGS

840,000 252,000 1,092,000 ( 140,000)

14,000 966,000

15. No answer available – P140,000, intercompany sales 16. a – P20 x 28,000 picture tubes, intercompany sales 17. b – P120,000, the amount of sales to outsiders is the amount of sales presented in the consolidated income statement. 18. a – the cost of inventory produced by the parent (downstream sales)

19. c Consolidated Net Income for 20x4 P Company’s net income from own/separate operations (P90,000 – P62,000) Realized profit in beginning 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.

P 28,000 0 (_ 0) P 28,000 P3 0,000 0 ( ) P30,000

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

Or, alternatively Consolidated Net Income for 20x4 P Company’s net income from own/separate operations (P90,000 – P62,000) Realized profit in beginning 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 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

20. c – P100,00 sales to unrelated/unaffiliated company.

P 28,000 0 (_ 0) P 28,000 P3 0,000 0 ( ) P30,000

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

21. c Cost of Sales 67,000 _63,000 130,000 90,000

P Company S Company Total Less: Intercompany sales Add: Unrealized profit in EI of S Co. [P90,000 x 30% = P27,000 x (90 - 67)/90] Consolidated Sales Less: Cost of goods sold – Parent Subsidiary (90,000 x 70%) Gross profit Ending inventory (90,000 x 30%)

__6,900 46,900 Parent 90,000 67,000 ______ 23,000

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

22. a Consolidated Net Income for 20x4 P Company’s net income from own/separate operations [P100,000 – (P90,000 x 70%)] Realized profit in beginning 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.

P 37,000 0 (_ 0) P 37,000 P23,000 0 (

6,900 ) P16,100

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

P 37,000 0 (_ 0) P 37,000 P23,000 0 (

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

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

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

23. d – P27,000 x 67/90 = P20,100 24. 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)

Parent 60,000 48,000 ______ 12,000

Subsidiary 1 60,000 60,000 ______ 0

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

25. b – the cost from parent of P48,000 x 15/60 = P12,000 26. a Sales Intercompany Parent Subsidiary 1 Add: Cost of EI in S2 Co. [P15,000 x (48/60] Amount to be eliminated *or, P60,000 + P60,000 – [P15,000 x (60-48/60]

Cost of Sales

60,000 60,000

60,000 45,000

________ 120,000

__12,000 *117,000

27. b – refer to No. 26 for computation 28. d – P15,000 x [(60-48)/60] = P3,000 29. a Consolidated Net Income for 20x3 P Company’s net income from own/separate operations Realized profit in beginning 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) [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

P 225,000 0 (_ 0) P225,000 P150,000 0 (

17,500 ) P132,500

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

30. c Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Realized profit in beginning 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.

P360,000 0 (_ 0) P360,000 P135,000 17,500 ( 26,250 ) P126,250

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

Or, alternatively Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Realized profit in beginning 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.

P360,000 0 (_ 0) P360,000 P135,000 17,500 ( 26,250 ) P126,250 P 37,875 0

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

**Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning 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 135,000 17,500 ( 26,250) P 126,250 0 P126,250 30% P 37,875 0 P 37,875


31. a – refer to No. 30 for computation. 32. d Consolidated Net Income for 20x5 P Company’s net income from own/separate operations Realized profit in beginning 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.

P 450,000 0 (_ 0) P450,000 P240,000 26,250 (

30,000 ) P236,250

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

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.

P 450,000 0 (_ 0) P450,000 P240,000 26,250 (

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

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


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


33. a - refer to No. 32 for computation. 34. c 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 35. a Ending inventory of Perth from Dundee (P36,000 / 110%) Ending inventory of Dundee from Perth (P31,000 / 130%) Total

32,727 _23,846 56,573

36. d Sales 420,000 280,000 700,000 140,000 560,000

P Company S Company Total Less: Intercompany sales Consolidated 37. No answer available – P47,000

Operating Expenses 28,000 14,000 42,000 _5,000 47,000

P Company S Company Total Add: Undervalued equipment (P35,000/7 years) Consolidated 38. c 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

Cost of Sales 196,000 _112,000 308,000 140,000 _16,800 184,900

39. No answer available – P120,800 Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 Add: Net income of S for 20x4 Total Less: Dividends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and

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

364,000 P 504,000

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)…………………………………..

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

40. d Equipment 616,000 420,000 1,036,000 35,000 7,000 1,064,000

P Company S Company Total Add: Undervalued equipment Less: Depreciation on undervalued equipment (P35,000/7 years) Consolidated 41. d

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

P Company S Company Total Less: Unrealized profit in EI: [P140,000 x 60% = P84,000 x (140 - 112)/140] Consolidated 42.

43.

a

Selling price Less: Cost of sales Original unrealized profit Unsold percentage Unrealized profit

P

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

No answer available – P253,000 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5

P180,000 ( 3,000) P 177,000 76,000 P253,000 0 P253,000

44.

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

45.

P P

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

46.

47.

1,025,000 0 1,025,000

b

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

Combined cost of sales Less: Intercompany sales revenue Add: Unrealized profit taken out of inventory (75%)x(35,000) = Consolidated cost of sales

P 160,000 110,000 26,250 P 76,250

Incomplete data – PAS 27 allows the use of cost model in accounting for investment in subsidiary in the books of parent company. Income recognized under this model is the dividends declared or paid by the subsidiary multiplied by controlling interest. Since, there is no data as to dividends of subsidiary, the amount of dividend income from the point of parent cannot be determined. If Equity Method is used, then the answer would be: (P115,000 x 70%) - P26,250 = P 54,250 But equity method is not allowed in the books of parent for purposes of CFS.

48.

a

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

P (

P

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

49. a - P720,000 = P500,000 + P400,000 - P200,000 +P 20,000 50. b – using equity method. (P120,000 x 80%) – (P200,000 x 50% = P100,000 x 20% = P20,000) = P76,000 PAS 27 allows the use of cost model in accounting for investment in subsidiary in the books of parent company The use of equity method is not allowed in the books of parent (unless it is a stand-alone entity). 51. d Downstream situation S Company’s net income from own/separate operations x: NCI %

P120,000 20% P 24,000

52. a - It will be overstated by the amount of the NC interests’ share of the P1,600 of profit margin in the P9,600 of materials carried over to 20x5 (20% x P1,600 = P320 53. c Grebe plus Swamp’s separate cost of goods sold = P400,000 + P320,000 = Less: Intercompany sales = Add: Profit +12,500 - 10,000 = Consolidated COGS =

P 720,000 200,000 ____2,500 P 522,500

54. a Ending inventory of Grebe (1/2 x P100,000) x: GP% of Parent (P100,000 – P80,00)/P100,000 Unrealized profit in ending inventory

P

50,000 20% 10,000

P

Squid’s reported income Less: Unrealized profits in the ending inventory Squid’s adjusted income NCI percentage NCI-CNI

P 100,000 _____16,000 P 84,000 _______10% P 8,400

55. a

56. b

Inventory remaining P100,000 × 50% = P50,000 Unrealized gross profit (based on LL's markup as the seller) P50,000 × 40% = P20,000. The ownership percentage has no impact on this computation.

57. c Unrealized Profit, 12/31/x4 Intercompany Gross profit (P100,000 – P75,000) ................................................. Inventory Remaining at Year's End ........................................................................ Unrealized Intercompany Gross profit, 12/31/x4 .................................................

P25,000 16% P4,000

UNREALIZED GROSS PROFIT, 12/31/x5 Intercompany Gross profit (P120,000 – P96,000) .................................................. Inventory Remaining at Year's End ........................................................................ Unrealized Intercompany Gross profit, 12/31/x5 .................................................

P24,000 35% P8,400

CONSOLIDATED COST OF GOODS SOLD Parent balance ................................................................................................... Subsidiary Balance ............................................................................................. Remove Intercompany Transfer ...................................................................... Recognize 20x4 Deferred Gross profit ............................................................ Defer 20x5 Unrealized Gross profit ................................................................... Cost of Goods Sold ...................................................................................................

P380,000 210,000 (120,000) (4,000) 8,400 P474,400

58. a - Intercompany sales and purchases of P100,000 must be eliminated. Additionally, an unrealized gross profit of P10,000 must be removed from ending inventory based on a markup of 25 percent (P200,000 gross profit/P800,000 sales) which is multiplied by the P40,000 ending balance. This deferral increases cost of goods sold because ending inventory is a negative component of that computation. Thus, cost of goods sold for consolidation purposes is P690,000 (P600,000 + P180,000 – P100,000 + P10,000). 59. c - The only change here from No. 58 is the markup percentage which would now be 40 percent (P120,000 gross profit  P300,000 sales). Thus, the unrealized gross profit to be deferred is P16,000 (P40,000 × 40%). Consequently, consolidated cost of goods sold is P696,000 (P600,000 + P180,000 – P100,000 + P16,000). 60. b UNREALIZED GROSS PROFIT, 12/31/x4 Ending inventory ................................................................................................. Markup (P33,000/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

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

P 90,000 12,000 ( 20,000) P 82,000 0 P 82,000 10% P 8,200 0 P 8,200


61. a – this topic is for Chapter 18 Individual Records after Transfer 12/31/x4 Machinery—P40,000 Gain—P10,000 Depreciation expense P8,000 (P40,000/5 years) Income effect net—P2,000 (P10,000 – P8,000) 12/31/x5 Depreciation expense—P8,000 Consolidated Figures—Historical Cost 12/31/x4 Machinery—P30,000 Depreciation expense—P6,000 (P30,000/5 years) 12/31/x5 Depreciation expense--P6,000 Adjustments for Consolidation Purposes: 20x4: P2,000 income is reduced to a P6,000 expense (income is reduced by P8,000) 20x5: P8,000 expense is reduced to a P6,000 expense (income is increased by P2,000) 62. b

- this topic is for Chapter 18 UNREALIZED GAIN Transfer Price ........................................................................................................ Book Value (cost after two years of depreciation) ..................................... Unrealized Gain ................................................................................................... EXCESS DEPRECIATION Annual Depreciation Based on Cost (P300,000/10 years) ........................... Annual Depreciation Based on Transfer Price (P280,000/8 years) ........................................................................................ Excess Depreciation ........................................................................................... ADJUSTMENTS TO CONSOLIDATED NET INCOME Defer Unrealized Gain ....................................................................................... Remove Excess Depreciation ........................................................................... Decrease to Consolidated Net Income ........................................................

P280,000 240,000 P40,000 P30,000 35,000 P5,000 P(40,000) 5,000 P(35,000)

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

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

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

________ 10,140,000

__ 4,500 7,604,500

64. d – refer to No. 63 for computation 65. c P Company S Company

Sales 10,000,000 __200,000

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

10,200,000 60,000 ________ 10,140,000

66. d

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

67. c

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

P20,000 60% P12,000

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

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

68. 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 Annual Excess Amortizations

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

25,000 5 years P50,000 20 years -0-

P5,000 2,500 P7,500

Consolidated Expenses = P37,500 (add the two book values and include current year amortization expense) 69. a Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 Add: Net income of S for 20x4 Total Less: 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) : 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)…………………………………..

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

260,000 P 360,000 75,000 ( 7,500) P 427,500 20 P 85,500 ________0 P 85,500

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

P 260,000 ___65,000

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 325,000 __250,000 P 75,000

P

25,000 50,000

Amortization: Equipment: P25,000 / 5 years = P 5,000 Secret formulas: P50,000 / 20 years = 2,500 Total amortization of allocated P 7,500 70. c Add the two book values plus the original allocation (P25,000) less one year of excess amortization expense (P5,000). 71. b Add the two book values less the ending unrealized gross profit of P12,000. Intercompany Gross profit (P100,000 – P80,000) .................................................. Inventory Remaining at Year's End ........................................................................ Unrealized Intercompany Gross profit, 12/31 .......................................................

P20,000 60% P12,000

72. c – P400,000 x 1/4 = P100,000 x 30% = P30,000 73. d Non-controlling Interest in Net Income (NCINI) for S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning 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

20x5 P 400,000 (

20,000) P 380,000 0 P380,000 20% P 76,000 0 P 76,000

20x6 P 480,000 20,000 0 P 500,000 0 P500,000 20% P100,000 0 P100,000

74. c Ending 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

P20,000 __8,000 P12,000

75. The requirement ―P’s income from S‖ is a term normally used under the equity method, but, in some cases it may also refer to the term ―dividend income‖ under the cost model depending on how the problem was described and presented. Since there are no data available to arrive at the dividend income under the cost model for reason that dividend declared or paid by subsidiary is not given, so the term ―P’s income from S‖ may mean ―Income from subsidiary‖ which is computed under the equity method, thus: 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

Answer: Equity method (c) It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. 76. a – refer to No. 1 77. c – refer to No. 1

78. b Consolidated Net Income for 20x4 P Company’s net income from own/separate operations Realized profit in beginning 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) [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.

P 300,000 0 (_ 0) P300,000 P120,000

(

20,000 ) P100,000

100,000 P 400,000 _ 0 P 400,000 20,000 P 380,000


P 120,000 0 ( 20,000) P 100,000 0 P 100,000 20% P 20,000 0 P 20,000


79. c – refer to No, 78 for computations. 80. – refer to No. 75 The requirement ―P’s income from S‖ is a term normally used under the equity method, but, in some cases it may also refer to the term ―dividend income‖ under the cost model depending on how the problem was described and presented. Since there are no data available to arrive at the dividend income under the cost model for reason that dividend declared or paid by subsidiary is not given, so the term ―P’s income from S‖ may mean ―Income from subsidiary‖ which is computed under the equity method, thus: Share in net income (P200,000 x 60%) Less: Unrealized profit in ending 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

Answer: Equity method (b) It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. 81. a 20x5 P Company S Company Total Less: Intercompany sales Realized profit in BI of S Co. [P240,000 x 1/2 = P120,000 x (240-192)/240] Add: Unrealized profit in EI of S Co. [P375,000 x 40% = P150,000 x (375-300)/375] Consolidated 82. c - refer to No. 81 for computations

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

83. 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.

P 225,000 0 (_ 0) P225,000 P 90,000

(

15,000 ) P 75,000

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


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


84. c – refer to No. 83 for computations 85. a – [P100,000 x (25/100) = P25,000 x 40/100 = P10,000 86. b – [P300,000 x 1/2 = P150,000 x 40% = P60,000] 87. No answer available – P300 **Non-controlling Interest in Net Income (NCINI) for 20x6 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) Realized profit in beginning 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

0 0

( P(

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

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

88. b 20x3 Share in net income 20x3: P70,000 x 90% 20x4: P85,000 x 90% 20x5: P94,000 x 90% Less: Unrealized profit in ending 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

20x4

20x5

P 63,000 P 76,500 P 84,600 (

270)

________ P 62,730

270 ( 900) ________ P 75,870

900 __( 675) P 84,825

It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. 89. c – refer to No. 88 for computation. 90. d – refer to No. 88 for computation.

91. a **Non-controlling Interest in Net Income (NCINI) for S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) 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

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

92. c – refer to No. 91 for computation. 93. c – refer to No. 91 for computation. 94. a – refer to No. 88 for computation. 95. a – refer to No. 88 for computation. 96. b – refer to No. 88 for computation. 97. a – none, since intercompany profit starts only at the end of 20x3. 98. b – the amount of unrealized profit at the end of 20x3. 99. c – the amount of unrealized profit at the end of 20x4. 100. a 101. c Cost of Sales 400,000 _350,000 750,000 250,000 500,000

P Company S Company Total Less: Intercompany sales Consolidated 102. a – (P40,000 x 140% = P56,000) 103. a – (P56,000 – P40,000 = P16,000) 104. Not given 105.

105.

106.

c

c

Clark Net assets reported Profit on intercompany sale Proportion of inventory unsold at year end ($60,000 / $240,000) Unrealized profit at year end Amount reported in consolidated statements Dunn Inventory reported by Banks (P175,000 + P60,000) Inventory reported by Lamm Total inventory reported Unrealized profit at year end [P50,000 x (P60,000 / P200,000)] Amount reported in consolidated statements

P320,000 P48,000 x

.25 (12,000) P308,000 P235,000 250,000 P485,000 (15,000) P470,000

b Cost of goods sold reported by Park Cost of goods sold reported by Small Total cost of goods sold reported Cost of goods sold reported by Park on sale to Small (P500,000 x .40) Reduction of cost of goods sold reported by Small for profit on intercompany sale [(P500,000 x 4 / 5) x .60] Cost of goods sold for consolidated entity Note:

P 800,000 700,000 P1,500,000 (200,000) (240,000) P1,060,000

Answer b in the actual AICPA examination question was P1,100,000, requiring candidates to select the closest answer.

107. 108. 109.

d b c

110.

b

111.

b

P32,000 P6,000 P9,000

= = =

(P200,000 + P140,000) – P308,000 (P26,000 + P19,000) – P39,000 Inventory held by Spin (P32,000 x .375) Unrealized profit on sale [(P30,000 + P25,000) – P52,000] Carrying cost of inventory for Power

P12,000 (3,000) P 9,000

.20 = P14,000 / [(Stockholders’ Equity P50,000) +(Patent P20,000)] 14 years = (P28,000 / [(28,000 - P20,000) / 4 years]

112. c – the amount of sales to outsiders or unaffiliated company 113. b – the original cost (I,e., the cost to produced on the part of the seller – Blue Company) 114.

c

Total income (P86,000 - P47,000) Income assigned to noncontrolling interest [.40(P86,000 - P60,000)] Consolidated net income assigned to controlling interest

P39,000 (10,400) P28,600

115.

c

116.

a

Amount paid by Lorn Corporation Unrealized profit Actual cost Portion sold Cost of goods sold

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

117.

e

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

P140,000 (60,000) P 80,000

118.

a

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

119.

a

P20,000 = P30,000 x [(P48,000 - P16,000) / P48,000]

120.

d

Sales reported by Movie Productions Inc. Cost of goods sold (P30,000 x 2/3) Consolidated net income

121.

a

P7,000 = [(P67,000 - $32,000) x .20]

122. c (P10,000 x 80%) 123. c – the original cost 124. d

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

.30 (10,800) P 69,200 P 24,000 (9,000) P 15,000

P67,000 (20,000) P47,000

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 P60,000 x 30% = P18,000 x

GP% of Subsidiary 20%…………………………..….

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations Realized profit in beginning 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.

2,400 P 100,000 1,050 (_ 3,600) P 97,450

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

28,600 P 126,050 2,000 P124,050 5,320 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. **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

P 100,000 1,050 (_ 3,600) P 97,450 P 30,000 1,000 ( 2,400 ) P 28,600 P

5,320 2,000

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

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

125. b – refer to No. 124 126. a – P124,050 – refer to No. 124 127. b – refer to No. 129 128. c – refer to No. 129 129. a Non-controlling Interests (in net assets): Common stock - S, 12/31/2012.…………..….……………………………..

P 150,000

Retained earnings - S, 12/31/2012: RE- S, 1/1/2012…………….……………………………………………….P300,000 +: NI-S…………………………………………………………………………. 30,000 -: Div – S……………………………………………………………………… 10,000 320,000 Book value of Stockholders’ equity, 12/31/2012……..………………..... P 470,000 Adjustments to reflect fair value of net assets Increase in equipment, 1/1/2010..……..………………………….. 20,000 Accumulated amortization (P2,000 x 3 years)………………………….... ( 6,000) Fair Value of Net Assets/SHE, 12/31/2012…………………………………. P 484,000 UPEI of P (up)…………………………………………………………………… ( 2,400) Realized SHE – S,12/31/2012…………………………………………………. P 481,600 x: NCI %.......................................................................................................... _ 20% Non-controlling Interest (in net assets) - partial………………………….. P 96,320 +: NCI on full goodwill (25,000 – 20,000)………………………….. 5,000 Non-controlling Interest (in net assets) – full…………………………….... P 101,320 130. d – refer to No. 131 131. d Note: Preferred solution - since what is given is the RE – P, 1/1/2012 (beginning balance of the current year) Retained earnings – Parent, 1/1/2012 (cost)…………………………… P 700,000 -: UPEI of S (down) – 2011 or RPBI of S (down) – 2012..…………. 1,050 Adjusted Retained earnings – Parent, 1/1/2012 (cost)……………… P 698,950 Retroactive Adjustments to convert Cost to ―Equity‖ for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/2010……………………….P 230,000 Less: Retained earnings – Subsidiary, 1/1/2012……………… 300,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)…………P 70,000 Accumulated amortization (1/1/2010 – 1/1/2012): P 2,000 x 2 years…………………………………………………( 4,000) UPEI of P (up) – 2011 or RPBI of P (up) – 2012………………......( 1,000) P 65,000 X: Controlling Interests………………………………………….........____80% 52,000 RE – P, 1/1/2012 (equity method) = CRE, 1/1/2012…………………..... P750,950 +: CI – CNI or Profit Attributable to Equity Holders of Parent…….. -: Dividends – P……………………………………………………………… RE – P, 12/31/2012 (equity method) = CRE, 12/31/2012…………......

118,730 60,000 P809,680

Or, if RE – P is not given on January 1, 2012, then RE – P on December 31, 2012 should be use: Retained earnings – Parent, 12/31/2012 (cost): (P700,000 + P108,000 – P60,000)………..…………………………… P 748,000 -: UPEI of S (down) – 2012 or RPBI of S (down) – 2013..…………. 3,600 Adjusted Retained earnings – Parent, 1/1/2012 (cost)……………… P 744,400 Retroactive Adjustments to convert Cost to ―Equity‖ for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/2010……………………….P 230,000 Less: Retained earnings – Subsidiary, 12/31/2012 (P300,000 + P20,000 – P10,000)………………………..... 320,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)…………P 90,000 Accumulated amortization (1/1/2010 – 12/31/2012): P 2,000 x 3 years……………………………………………… ( 6,000) UPEI of P (up) – 2012 or RPBI of P (up) – 2013……………….. ( 2,400)

P 81,600 X: Controlling Interests……………………………………………… . 80% 65,280 RE – P, 12/31/2012 (equity method) = CRE, 12/31/2012…………. P809,680 132. b Consolidated Stockholders’ Equity, 12/31/2012: Controlling Interest / Parent’s Interest / Parent’s Portion / Equity Holders of Parent – SHE, 12/31/2012: Common stock – P (P only)…………………………………………….. Retained Earnings – P (equity method), 12/31/2012………….. Controlling Interest / Parent’s Stockholders’ Equity……………. Non-controlling interest, 12/31/2012 (partial)…………………………. Consolidated Stockholders’ Equity, 12/31/2012…………………………

P1,000,000 809,680 P1,809,680 96,320 P1,906,000

133. a Consolidated Stockholders’ Equity, 12/31/2012: Controlling Interest / Parent’s Interest / Parent’s Portion / Equity Holders of Parent – SHE, 12/31/2012: Common stock – P (P only)…………………………………………….. Retained Earnings – P (equity method), 12/31/2012………….. Controlling Interest / Parent’s Stockholders’ Equity……………. Non-controlling interest, 12/31/2012 (full)……..………………………. Consolidated Stockholders’ Equity, 12/31/2012…………………………

P1,000,000 809,680 P1,809,680 101,320 P1,911,000

Theories 1. 2. 3. 4. 5.

d b c a c

6. 7. 8. 9. 10,

d c b c a

11. 12. 13. 14. 15,

d a c c d

16. 17. 18. 19. 20.

c c b c b

21. 22. 23. 24. 25.

c a a b c

26. 27. 28. 29. 30.

a b b c d

31 32. 33. 34. 35.

b

Solution Chapter 17

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