Advanced-Accounting-Part 2-Dayag-2015-Chapter-16.docx

Chapter 16 Problem I - Cost Model/Method versus Equity Method Partial-Goodwill Approach: Fair value of Subsidiary Consideration transferred: P600,000.............................................. Less: Carrying amount of Small’s net assets = Carrying amount of Small’s shareholders’ equity Common/Ordinary shares – Small (400,000 x 75%)............ Retained earnings – Small (100,000 x 75%)......................... Allocated Excess: Acquisition differential – Jan. 1, 20x4 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory (40,000 x 75%)........................................ Decrease in Patents (70,000 x 75%).......................................... Positive Excess: Goodwill - partial Full-Goodwill Approach: Fair value of Subsidiary (Implied cost of 100% investment); P600,000/75% Less: Carrying amount of Small’s net assets = Carrying amount of Small’s shareholders’ equity Common/Ordinary shares Retained earnings Allocated Excess: Acquisition differential – Jan. 1, 20x4 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory Decrease in Patents Positive Excess: Goodwill - full A summary or depreciation and amortization adjustments is as follows: Account Adjustments to be Over/ Annual amortized Under Life Amount Inventory P40,000 1 P 40,000 Subject to Annual Amortization Patents (70,000) 5 (14,000) Amortization P 26,000 Impairment of goodwill (full) 330,000 _____ P 26,000 For purposes of comparison between Cost Model/Method and Equity Method Cost Method Journal Entries Year 1 Investment Investment in Small 600,000 Cash 600,000 Dividend of Subsidiary Cash Dividend income

18,750 18,750

Investment in Son 1/1/x4 CI…… 600,000 12/31/x4

600,000

12/31/x5

600,000

12/31/x6

600,000

Equity Method 1. Investment Investment in Small Cash Net Income (Loss) of Subsidiary:

600,000 300,000 75,000 375,000 225,000 30,000 (52,500)

( 22,500) 247,500 800,000

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

Current Year(20x4) P 40,000

(30,000) 330,000

20x5 P

( 14,000) P 26,000 _____ P 26,000

20x6 -

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

Year 2

7,500 7,500

P

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

Year 3

30,000 30,000

Dividend Income 18,750 - Div–S (75 x80%) 18,750 7,500 - Div–S (10 x80%) 18,750 30,000 - Div–S (40 x80%) 30,000

Year 1 600,000 600,000

Year 2

-

Year 3

Investment in Small (75% x Small’s profit) Investment income

60,000 60,000

Investment income Investment in Small (75% x Small’s profit)

26,,250 26,250

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

18,750 18,750

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

19,500 19,500

67,500 67,500

7,500 7,500

3,975 3,975

Investment in Small Investment income Investment in Son 1/1/x4: CI 600,000 NI of S 18,750 75% Div - Son (80,000 75% Amort& x 75%)……. 60,000 19,500 impairment 12/31/x4 621,750 75% NL – Sub 26,250 (35,000 x 75%) 7,500 75% Div - Son 75% Amort& Impairment 10,500 12/31/x5 598,500 NI of S 30,00075% Div - Son (90,000 75%Amort& x 75%)……. 67,500 3,975 impairment 12/31/x6632,025

30,000 30,000

10,500 10,500 Investment Income (loss)

Amortization impairment

19,500

75% NL – Sub (35,000 x 75%)

26,250

NI of Son (80,000 x 75%)

60,000 40,500

10,500

75% Amort& impairment

15,750 Amortization impairment

3,975

NI of Son (90,000 x 75%)

67,500 63,525

Reconciliation of Investment /Conversion of Investment Account from Cost to Equity Method: Investment balance under cost model Retroactive adjustments: (Small’s net income less dividends) Small’s retained earnings, end of year Less: Small’s retained earnings, date of acquisition Increase in retained earnings (NI less dividend) Less: Cumulative amortization of allocated excess X: Controlling interests Less: Impairment of goodwill Investment balance under equity method

P 600,000 P160,000 _100,000 P 60,000 _17,300 P 42,700 ____75% P 32,025 _______0

_32,025 P 632,025

2. a. Goodwill, 12/31/20x6 (P330,000 – P19,300) b. FV of NCI, 12/31/20x6: Non-controlling interest (full-goodwill), December 31, 20x6 Common stock – Subsidiary Company, December 31, 20x6 . . . . . . . . . . . . . . . . . . Retained earnings – Subsidiary Company, December 31, 20x6 Retained earnings – Subsidiary Company, January 1, 20x6 (P100,000 + P80,000 – P25,000 – P35,000 – P10,000).............................. Add: Net income of Small for 20x6……………………………………………….. Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Dividends paid – 20x6…………………………………………………………. Stockholders’ equity – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . . Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4)- decreased in Net Assets . . . . Less: Amortization of allocated excess (refer to amortization above): 20x4 (P40,000 – P14,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20x5 and 20x6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 310,700 P 400,000 P110,000 90,000 P200,000 40,000

160,000 P 560,000 (

P 26,000 (28,000)

30,000) (2,000)

Fair value of stockholders’ equity of subsidiary, December 31, 20x6 . . . . . . . . . . . Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . FV of Non-controlling interest (partial goodwill), 12/31/20x6 . . . . . . . . . . . . . . . . . Add: Non-controlling interest on full goodwill , net of impairment loss [(P330,000 full – P247,000, partial = P82,500…………………………………. P 82,500 Less: Impairment on the NCI (P19,300 x 25%)………………………………… ___4,825 FV of Non-controlling interest (full-goodwill), 12/31/20x6. . . . . . . . . . . . . . . . . . . . . *or P330,000 full – P247,000, partial = P82,500 – (impairment loss on full goodwill less (P19,300 x 25%)] = P77,625

P 532,000 20 P 133,000 ___*77,675 P 210,675

Alternatively, NCI on December 31, 20x6may also be computed as follows (Note: This is the American version of computing NCI, since they only allowed using Full-goodwill Method): Common stock, 12/31/20x6………………………………………………… P 400,000 Retained earnings, 12/31/20x6 (P100,000+P80,000 – P25,000 – P35,000 – P10,000)………….. P 110,000 Add: NI – Subsidiary (20x6) …………………………………………………. 90,000 Dividends – Subsidiary 20x6………………………………………………….( 40,000) 160,000 Book value of SHE – S, 12/31/20x6…………………………………………. P560,000 Adjustments to reflect fair value (Increase in Net Assets)………………P 300,000 Amortization of allocated excess: Inventory – 20x4...…………………………………………………….( 40,000) Patent (P14,000 x 3 years)………………………………………….. 42,000 Impairment of goodwill – 20x6……………………………………..( 19,300) 282,700 FV of SHE of Small……………………………………………………………… P 842,700 Multiplied by: NCI%..................................................................................... 25% FV of NCI, 12/31/20x6………………………………………………………….. P 210,675 Or, alternatively: Common stock – Subsidiary Company, December 31, 20x6 . . . . . . . . . . . . . . . . . . Retained earnings – Subsidiary Company, December 31, 20x6 Retained earnings – Subsidiary Company, January 1, 20x6 (P100,000 + P80,000 – P25,000 – P35,000 – P10,000).............................. Add: Net income of Small for 20x6……………………………………………….. Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Dividends paid – 20x6…………………………………………………………. Stockholders’ equity – Subsidiary Company, December 31, 20x6 . . . . . . . . . . . . . Unamortized acquisition differential / allocated excess / increase in net assets: {P300,000, allocated excess – {P40,000 - (P14,000 x 3) + P19,300, full impairment

P 400,000 P110,000 90,000 P200,000 40,000

160,000 P 560,000 __282,500 P 842,500 ______25% P 210,675

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

c. Consolidated Retained Earnings, 1/1/20x6 – P498,500 Consolidated Retained Earnings, January 1, 20x6 Retained earnings - Large Company, January 1, 20x6 (cost model) Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Small, January 1, 20x6 (P100,000 + P80,00 – P25,000 – P35,000 – P10,000) Less: Retained earnings – Small, January 1, 20x4 (date of acquisition) Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Amortization of allocated excess – 20x5 Multiplied by: Controlling interests %................... Less: Goodwill impairment loss (full-goodwill) – 20x6 Consolidated Retained earnings, January 1, 20x6

P500,000

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

(___1,500) P498,500

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

P498,500 233,525 P717,550 70,000 P662,025

Or, alternatively: to compute CRE, 12/31/20x6 Consolidated Retained Earnings, December 31, 20x6 Retained earnings - Large Company, December 31, 20x6 (cost model) Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Small, December 31, 20x6 (P100,000 + P80,00 – P25,000 – P35,000 – P10,000 + P90,000 – P40,000) Less: Retained earnings – Small, January 1, 20x4 (date of acquisition) Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Amortization of allocated excess – 20x5 and 20x6: P14,000 x 2 Multiplied by: Controlling interests %................... Less: Goodwill impairment loss on full-goodwill) – 20x6 (P19,300 x 75%) Consolidated Retained earnings, December 31, 20x6

P630,000

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

__32,025 P 662,025

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

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

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

__26,475 P233,525 __21,175 P254,700 P 90,000 ( 14,000) P 104,000 25% P 26,000 ___4,825 P 21,175

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

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

Problem II A. 1. a. P87,725 Consolidated Net Income for 20x4 Net income from own/separate operations Pill Company Sill Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P55,000 40,000 P95,000 P 5,775 0 1,500

b. P5,775 *Net income of subsidiary – 20x4 Amortization of allocated excess – 20x4 Multiplied by: Non-controlling interest %.......... Less: Non-controlling interest on impairment loss on full-goodwill (P1,500 x 15%)* Non-controlling Interest in Net Income (NCINI)

__7,275 P87,725 __5,775 P93,500

P 40,000 ( 0)) P 40,000 _____15% P 6,000 _____225 P 5,775


c. P93,500 – refer to computation in (a) d. d.1. P75,000. Retained earnings of Parent on the date of acquisition should always be the same with the Consolidated Retained Earnings also on the date of acquisition. d.2 Retained earnings of P Co, 1/1/20x4 Add; Net income under cost method [P55,000 + (P9,000 x 85%)] Less: Dividends of P Company Retained Earnings of P Co, 12/31/20x4 under cost model

P75,000 _62,650 P 137,650 ___5,000 P 132,650

d.3 Retained earnings of P company (same with Consolidated RE), 1/1/20x4 Add; Controlling Interest in CNI (refer to a above) Less: Dividends of P Company Consolidated Retained Earnings, 12/31/20x4

P75,000 _87,725 P 162,725 ____5,000 P 157,725

e. P238,000 2. a. P87,725 Consolidated Net Income for 20x4 Net income from own/separate operations Pill Company Sill Company Total

P55,000 40,000 P95,000

Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P 5,775 0 1,500

__7,275 P87,725 __5,775 P93,500

b. P5,775 *Net income of subsidiary – 20x4 Amortization of allocated excess – 20x4

P 40,000 ( 0)) P 40,000 _____15% P 6,000 _____225 P 5,775

Multiplied by: Non-controlling interest %.......... Less: Non-controlling interest on impairment loss on full-goodwill (P1,500 x 15%)* Non-controlling Interest in Net Income (NCINI) *this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired.

c. P93,500 – refer to computation in (a) d. d.1. P75,000. Retained earnings of Parent on the date of acquisition should always be the same with the Consolidated Retained Earnings also on the date of acquisition. d.2 Retained earnings of P Co, 1/1/20x4 Add; Net income under equity method {P55,000 + [(P40,000 x 85%) (P1,500, impairment loss x 85%) – (P0, amortization)}

P75,000 _87,725 P162,725 ___5,000 P157,725

Less: Dividends of P Company Retained Earnings of P Co., 12/31/20x4 under equity method

d.3 Retained earnings of P Co., (same with Consolidated RE), 1/1/20x4 Add; Controlling Interest in CNI same with Net Income in d.2 above under equity method but not cost model

P75,000 _87,725 P162,725 ___5,000 P157,725

Less: Dividends of P Company Consolidated Retained Earnings, 12/31/20x4

e. P263,075 = P238,000 + (P40,000 x 85%) – (P9,000, div x 85%) – (P1,500, impair, x 85%) 3. Reconciliation of Investment balance – Cost Model to Equity Method Investment balance under cost model Retroactive adjustments: (Sill’s net income less dividends) Sill’s net income – 20x4 Less: Sill’s dividend – 20x4 Increase in retained earnings (NI less dividend) Less: Cumulative amortization of allocated excess X: Controlling interests Less: Impairment of goodwill (P1,500 x 85%) Investment balance under equity method

P 238,000 40,000 _9,000 31,000 _____0 31,000 __85% 26,350 _1,275

__25,075 P263,075

Reconciliation of Retained Earnings – Cost Model to Equity Method Retained earnings, 12/31/20x4 under cost model(requirement 1 d.2)

P 132,650

Retroactive adjustments: (Sill’s net income less dividends) Sill’s net income – 20x4 Less: Sill’s dividend – 20x4 Increase in retained earnings (NI less dividend) Less: Cumulative amortization of allocated excess

40,000 _9,000 31,000 _____0 31,000 __85% 26,350 _1,275

X: Controlling interests Less: Impairment of goodwill (P1,500 x 85%) Retained earnings, 12/31/20x4 under equity method(requirement 2 d.2)

__25,075 P157,725

B. 4. a. P87,725 Consolidated Net Income for 20x4 Net income from own/separate operations Pill Company [P62,650 – (P9,000 x 85%)] Sill Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P55,000 40,000 P95,000 P 5,775 0 1,500


__7,275 P87,725 __5,775 P93,500

P 40,000 ( 0)) P 40,000 _____15% P 6,000 _____225 P 5,775


c. P93,500 – refer to computation in (a) d. d.1. P75,000. Retained earnings of Parent on the date of acquisition should always be the same with the Consolidated Retained Earnings also on the date of acquisition. d.2 Retained earnings of P Co, 1/1/20x4 Add; Net income under cost method (given) Less: Dividends of P Company

P75,000 _62,650 P 137,650 ___5,000 P 132,650

Retained Earnings of P Co, 12/31/20x4 under cost model

d.3 Retained earnings of P company (same with Consolidated RE), 1/1/20x4 Add; Controlling Interest in CNI (refer to a above) Less: Dividends of P Company

P75,000 _87,725 P 162,725 ____5,000

Consolidated Retained Earnings, 12/31/20x4

P 157,725

e. P238,000 5. Correction: Pill’s net income should be P87,725 instead of P86,725 a. P87,725 Consolidated Net Income for 20x4 Net income from own/separate operations Pill Company [P87,725 – (P40,000 x 85%) + (P1,500 x 85%)] Sill Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P55,000 40,000 P95,000 P 5,775 0 1,500

__7,275 P87,725 __5,775 P93,500


P 40,000 ( 0)) P 40,000 _____15% P 6,000 _____225 P 5,775


c. P93,500 – refer to computation in (a) d. d.1. P75,000. Retained earnings of Parent on the date of acquisition should always be the same with the Consolidated Retained Earnings also on the date of acquisition. d.2 Retained earnings of P Co, 1/1/20x4 Add; Net income under equity method (given)

P75,000 _87,725 P162,725 ___5,000 P157,725


d.3 Retained earnings of P Co., (same with Consolidated RE), 1/1/20x4 Add; Controlling Interest in CNI same with Net Income in d.2 above under equity method but not cost model Less: Dividends of P Company Consolidated Retained Earnings, 12/31/20x4

P75,000 _87,725 P162,725 ___5,000 P157,725

e. P263,075 = P238,000 + (P40,000 x 85%) – (P9,000, div x 85%) – (P1,500, impair, x 85%) 5. Reconciliation of Investment balance – Cost Model to Equity Method Investment balance under cost model Retroactive adjustments: (Sill’s net income less dividends) Sill’s net income – 20x4

P 238,000 P 40,000

Less: Sill’s dividend – 20x4 Increase in retained earnings (NI less dividend) Less: Cumulative amortization of allocated excess

___9,000 P 31,000 _______0 P 31,000 ____85% P 26,350 ___1,275

X: Controlling interests Less: Impairment of goodwill (P1,500 x 85%) Investment balance under equity method

__25,075 P263,075

Reconciliation of Retained Earnings – Cost Model to Equity Method Retained earnings, 12/31/20x4 under cost model(requirement 1 d.2) Retroactive adjustments: (Sill’s net income less dividends) Sill’s net income – 20x4 Less: Sill’s dividend – 20x4 Increase in retained earnings (NI less dividend) Less: Cumulative amortization of allocated excess

P 132,650

X: Controlling interests Less: Impairment of goodwill (P1,500 x 85%) Retained earnings, 12/31/20x4 under equity method(requirement 2 d.2)

P 40,000 ___9,000 P 31,000 _______0 P 31,000 ____85% P 26,350 ___1,275

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

__25,075 P157,725

646,000 760,000

600,000 160,000

Allocated Excess: Acquisition differential – December 31, 20x4 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory Patents Non-controlling interest (15% x 760,000, fair value of subsidiary),12/31/20x4

70,000 90,000 114,000

A summary or depreciation and amortization adjustments is as follows: Account Adjustments to be amortized Inventory Subject to Annual Amortization Patents

Over/ under P70,000 90,000 P160,000

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

Life 1 10

Annual Amount P 70,000


__9,000 P 79,000

___9,000 P 79,000

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

20x6 9,000 9,000

20x6 P

-

___9,000 P 9,000

20x7 P

___9,000 P 9,000,

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

1. NCI-CNI 20x5: P(7,350) 20x6: P6,450 20x5

-

20x6

Consolidated Net Income Net income from own/separate operations Large Company 20x5 [P28,000 – P0)] 20x6 [(P45,000, loss + (P15,000 x 85%)] Small Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment CI-CNI (loss) or Profit (loss) attributable to equity holders of parent Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income/Loss(CNI)

P 28,000 P(57,750) 52,000 P( 5,750)

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

71,650

P 6,450 9,000 _____0

P(13,650) ( 7,350) P(21,000)

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

15,450 P(21,200) 6,450 P(14,750)

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

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


2. CI-CNI – refer to computation in No. 1 20x5: P(21,000) 20x6: P14,750 Or, alternatively: (1) Non-controlling interest in profit 20x5: 15%  (30,000 – 79,000).............................................................7,350 20x6: 15%  (52,000 – 9,000)............................................................... 6,450 (2) 20x5 20x6 NI (loss) Pen 28,000 (45,000) Less: Dividends from Silk 20x5 0 20x6 (85%  15,000) (12,750) 28,000 (57,750) Share of Silk’s profit 85%  (30,000 – 79,000) (41,650) 85%  (52,000 – 9,000) ________ 36,550_ Consolidated profit (loss) attributable to Pen’s shareholders (13,650) (21,200) 3. CRE, 12/31/20x6 – P73,150 Consolidated Retained Earnings, December 31, 20x6 Retained earnings - Pen Company, December 31, 20x6 (cost model Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Silk, December 31, 20x6: (P100,000 + P30,00 – P0 + P52,000 – P15,000) Less: Retained earnings – Silk, December 31, 20x4 (date of acquisition) Increase in retained earnings since date of acquisition

P 91,000

P 167,000 100,000 P 67,000

Less: Amortization of allocated excess – 20x5 Amortization of allocated excess – 20x6

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

Multiplied by: Controlling interests %................... Less: Goodwill impairment loss (full-goodwill) – 20x5 Consolidated Retained earnings, December 31, 20x6

( 17,850) P 73,150

4. NCI, 12/31/20x6: P110,850 FV of SHE of Silk: Common stock, 12/31/20x6 P 500,000 Retained earnings, 12/31/20x6: Retained earnings, 1/1/20x4 P 100,000 NI – Subsidiary (20x5 and 20x6): P30,000 + P52,000 82,000 Dividends – Subsidiary (20x5 and 20x6): P0 + P15,000( 15,000) 167,000 Book value of SHE – S, 12/31/20x6 P 667,000 Adjustments to reflect fair value, 12/31/20x4 160,000 Amortization of allocated excess (P79,000 + P9,000) ( 88,000) FV of SHE of S P 739,000 Multiplied by: NCI% _____15% FV of NCI (partial), 12/31/20x6 P 110,850 Add: NCI on full-goodwill ______ _0 FV of NCI (full),12/31/20x6 P 110,850

Or, alternatively:

Non-controlling interest – date of acquisition,12/31/20x4 (1) Retained earnings Silk – Dec. 31, 20x6 (100,000 + 30,000 + 52,000 – 15,000) P167,000 Less: Retained earnings, 12/31/20x4 (date of acquisition)100,000 Increase since acquisition P 67,000 Less: Amortization of allocated excess (79,000 + 9,000)88,000 P( 21,000) Multiplied by: NCI’s share ____ 15% Non-controlling interest (full) 12/31/20x6

P114,000

( 3,150) P 110,850

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

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

Inventory Patents

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

20x6 9,000 9,000

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

Or, alternatively: Invest. account – equity Dec. 31, 20x6 Cost of investment, cost model Retained earnings Silk – Dec. 31, 20x6 (100,000 + 30,000 + 52,000 – 15,000) Retained earnings,12/31/20x4 (date of acquisition) Increase since acquisition Less: Accumulated amortization (79,000 + 9,000) Multiplied by: CI share Invest. account – equity method as at Dec. 31, 20x6 Implied value of 100% (628,150 / 85%) Silk –Common shares Retained earnings – Silk, 12/31/20x6 Balance unamortized allocated excess – Patents

628,150 646,000 167,000 100,000 67,000 88,000 ( 21,000) 85%

(17,850) 628,150 739,000

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

Problem IV Additional information: Parent’s net income from own operations - 20x4, P100,000; 20x5, P120,000 Parent’s dividend declared – 20x4, P30,000; 20x5, P40,000 1. NCNCI for 20x4, P8,400; NCNCI for 20x5, P12,020 20x4 Consolidated Net Income for 20x4 Net income from own/separate operations Parent – Davis Company Subsidiary - Martin Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess** Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P100,000 60,000 P160,000 P 8,400 18,000 _______0

__26,400 P133,600 ___8,400 P142,000

*Net income of subsidiary – 20x4 Amortization of allocated excess – 20x4 (P2,000 + P16,000)

P 60,000 ( 18,000) P 42,000 20% P 8,400 _______0 P 8,400

Multiplied by: Non-controlling interest %.......... Less: Non-controlling interest on impairment loss on full-goodwill Non-controlling Interest in Net Income (NCINI) *this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired.

** Amortization of allocated excess Partial-Goodwill Approach: Fair value of Subsidiary Consideration transferred:.................................................................. Less: Carrying amount of Martins net assets = Carrying amount of Martin’s shareholders’ equity Common/Ordinary shares – Martin (180,000 x 80%)............ Retained earnings – Martin (60,000 x 80%)......................... Allocated Excess: Acquisition differential – Jan. 1, 20x4 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory (16,000 x 80%)........................................ Increase in Patents (20,000 x 80%).......................................... Positive Excess: Goodwill - partial Full-Goodwill Approach: Fair value of Subsidiary P300,000/80%.................................................. Consideration transferred:.................................................................. Less: Carrying amount of Martins net assets = Carrying amount of Martin’s shareholders’ equity Common/Ordinary shares – Martin (180,000 x 100%)............ Retained earnings – Martin (60,000 x 100%)......................... Allocated Excess: Acquisition differential – Jan. 1, 20x4 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory (16,000 x 100%)........................................ Increase in Patents (20,000 x 100%).......................................... Positive Excess: Goodwill - partial

300,000 144,000 48,000192,000 108,000 12,800 16,000

28,800 79,200

375,000 180,000 60,000 240,000 135,000 16,000 20,000

36,000 99,000

A summary or depreciation and amortization adjustments is as follows: Account Adjustments to be Over/ amortized Under Life Inventory P16,000 1 Subject to Annual Amortization Patents 20,000 10 Amortization Impairment of goodwill (full) 99,000 -



2,000 P 18,000 ________ P 18,000

2,000 P 18,000 _____ P 18,000

20x5 P

-

___2,000 P 2,000 ___9,900 P 11,900

20x5 Consolidated Net Income for 20x5 Net income from own/separate operations Parent – Davis Company Subsidiary - Martin Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess** Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5

P120,000 72,000 P192,000 P 12,020 2,000 ___9,900

__23,920 P168,080 __12,020 P180,100

*Net income of subsidiary – 20x5 Amortization of allocated excess – 20x5

P 72,000 2,000) P70,000 20% P 14,000

(

Multiplied by: Non-controlling interest %.......... Less: Non-controlling interest on impairment loss on full-goodwill (P99,000 x 10% = P9,900 x 20%) Non-controlling Interest in Net Income (NCINI)

___1,980 P 12,020


2. CI – CNI for 20x4, P133,600; CI – CNI for 20x5, P168,080 3. CRE, 12/31/20x5, P208,080 Correction: RE on January 1, 20x5 instead of December 31, 20x5. Retained earnings of P Co, 1/1/20x5, equity method (same with CRE) Add; CI – CNI

P 80,000 168,080 P248,080 __40,000 P208,080


4.

NCI, 12/31/20x5 Non-controlling interest, December 31, 20x5 Common stock – Martin Company, December 31, 20x5…… Retained earnings – Martin Company, December 31, 20x4 Retained earnings – Martin Company, January 1, 20x4 Add: NI of Martin for 20x4 and 20x5 (60,000 + 72,000) Total Less: Dividends paid – 20x4 and 20x5 (12,000 + 15,000) Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4)

P 180,000 P 60,000 132,000 P192,000 27,000

165,000 P 345,000

(20,000 + 16,000) Amortization of allocated excess (refer to amortization above – 20x4 and 20x5 (P2,000 + 16,000 + 2,000) Fair value of stockholders’ equity of S, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill), 12/31/20x5……….. Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x5:[(P99,000 full – P79,200, partial = P19,800) – (P99,000 x 10%, impairment loss x 20%) Non-controlling interest (full-goodwill), 12/31/20x5……………..

36,000 ( 20,000) P 361,000 20 P 72,200

17,820 P 90,020

5. Partial (80%) 79,200 ____-079,200 _7,920 71,280

Goodwill balance, 1/1/20x4 Less Impairment – 20x4 Goodwill balance, 1/1/20x5 Less Impairment – 20x5 (99,000 x 10% = 9,900) Goodwill balance, 12/31/20x5

Full (100%) 99,000 ____-099,000 __9,900 89,100

6. Patents, 1/1/20x4 Less: Amortization (20,000/10 years = 2,000 x 2) Consolidated Patents, 12/31/20x5 Problem V 1. (Full or partial-goodwill) – the same answer. Consideration transferred by MM............................ Noncontrolling interest fair value .................................... air value of Subsidiary…………………………………. Less: Book value of SHE – S…..……………………. Positive excess ............................................................ Excess fair value assigned to buildings Goodwill - full P150,000 Total ........................................................................ 2.

3.

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

20,000 _4,000 16,000

P664,000 166,000* P830,000 (600,000) 230,000 Life 80,000 20 years indefinite -0-

Annual Excess Amortizations P4,000 P4,000

P664,000 480,000 P184,000 64,000 P120,000

Full-goodwill Common Stock - TT ................................................................... Additional Paid-in Capital - TT ................................................ Retained Earnings - TT ..............................................................

300,000 90,000 210,000

Investment in TT Company (80%) ................................... Non-controlling interest (20%) .........................................

480,000 120,000

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

80,000 150,000

Buildings ..................................................................................... Goodwill .................................................................................... Investment in TT Company (80%) ................................... Non-controlling interest (20% x P80,000) ........................

80,000 120,000

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

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

184,000 16,000 P

8,000 P664,000

Equity Method Income accrual (80%) ................................................................... Excess amortization expense ....................................................... Investment income ..................................................................

P56,000 (3,200) P52,800

Initial fair value paid ..................................................................................... Income accrual 20x4–20x6 (P260,000 × 80%) ............................ Dividends 20x4–20x6 (P45,000 × 80%) ......................................... Excess Amortizations 20x4–20x6 (P3,200 × 3) ............................. Investment in TT—12/31/x6 ......................................................

P664,000 208,000 (36,000) (9,600) P826,400

5. Same answer with No. 4. 6.

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

7.

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

P 800,000 300,000 80,000 (8,000) P1,172,000 P P

150,000 120,000

8. The common stock and additional paid-in capital figures to be reported are the parent balances only. Common stock, P500,000

Additional paid-in capital, P280,000 Problem VI 1. Common stock of TT Company on December 31, 20x4 Retained earnings of TT Company January 1, 20x4 Sales for 20x4 Less: Expenses Dividends paid Retained earnings of TT Company on December 31, 20x4 Net book value on December 31, 20x4 Proportion of stock acquired by QQ Purchase price 2. Net book value on December 31, 20x4 Proportion of stock held by noncontrolling interest Balance assigned to noncontrolling interest

P 90,000 P 130,000 195,000 (160,000) (15,000) 150,000 P240,000 x .80 P192,000 P240,000 x .20 P 48,000

3. Consolidated net income is P143,000. None of the 20x4 net income of TT Company was earned after the date of purchase and, therefore, none can be included in consolidated net income. 4. Consolidated net income would be P178,000 [P143,000 + (P195,000 - P160,000)]. Problem VII (Several valuation and income determination questions for a business combination involving a non-controlling interest.) Business combinations are recorded generally at the fair value of the consideration transferred by the acquiring firm plus the acquisition-date fair value of the non-controlling interest. PS’s consideration transferred (P31.25 × 80,000 shares) ............................................. Non-controlling interest fair value (P30.00 × 20,000 shares) ...................................... SR’s total fair value 1/1/09 ...............................................................................................

P2,500,000 P600,000 P3,100,000

1. Each identifiable asset acquired and liability assumed in a business combination should initially be reported at its acquisition-date fair value. 2. In periods subsequent to acquisition, the subsidiary’s assets and liabilities are reported at their acquisition-date fair values adjusted for amortization and depreciation. Except for certain financial items, they are not continually adjusted for changing fair values. 3. SR’s total fair value 1/1/09 ............................................................................................... SR’s net assets book value ............................................................................................... Excess acquisition-date fair value over book value ................................................... Adjustments from book to fair values ............................................................................ Buildings and equipment ........................................................ (250,000) Trademarks ................................................................................ 200,000 Patented technology .............................................................. 1,060,000 Unpatented technology ......................................................... 600,000 Goodwill ...................................................................................................................

P3,100,000 1,290,000 P1,810,000

4. Combined revenues .........................................................................................................

P4,400,000

1,610,000 P200,000

Combined expenses......................................................................................................... Building and equipment excess depreciation ............................................................ Trademark excess amortization ...................................................................................... Patented technology amortization ............................................................................... Unpatented technology amortization .......................................................................... Consolidated net income ...............................................................................................

(2,350,000) 50,000 (20,000) (265,000) (200,000) P1,615,000

To non-controlling interest: SR’s revenues ............................................................................................................... SR’s expenses............................................................................................................... Total excess amortization expenses (above) ........................................................ SR’s adjusted net income ......................................................................................... Non-controlling interest percentage ownership .................................................. Non-controlling interest share of consolidated net income ..............................

P1,400,000 (600,000) (435,000) P365,000 20% P73,000

To controlling interest: Consolidated net income......................................................................................... Non-controlling interest share of consolidated net income .............................. Controlling interest share of consolidated net income ......................................

P1,615,000 (73,000) P1,542,000

-ORPS’s revenues ............................................................................................................... P3,000,000 PS’s expenses ............................................................................................................... 1,750,000 PS’s separate net income ......................................................................................... P1,250,000 PS’s share of SR’s adjusted net income (80% × P365,000) ............................................................................................ 292,000 Controlling interest share of consolidated net income ...................................... P1,542,000 5. Fair value of non-controlling interest January 1, 20x4 ................................................ P600,000 20x4 income ..................................................................................................................... ……..73,000 Dividends (20% × P30,000) ............................................................................................... (6,000) Non-controlling interest December 31, 20x4 ................................................................ P 667,000 6. If SR’s acquisition-date total fair value was P2,250,000, then a bargain purchase has occurred. SR’s total fair value 1/1/09 ............................................................................................... P2,250,000 Collective fair values of SR’s net assets ......................................................................... P2,300,000 Bargain purchase .............................................................................................................. P50,000 The acquisition method requires that the subsidiary assets acquired and liabilities assumed be recognized at their acquisition date fair values regardless of the assessed fair value. Therefore, none of SR’s identifiable assets and liabilities would change as a result of the assessed fair value. When a bargain purchase occurs, however, no goodwill is recognized. Problem VIII (Full-Goodwill) A variety of consolidated balances-midyear acquisition) Book value of RR, 1/1(stockholders' equity accounts) (P100,000 + P600,000 + P700,000) ...................... Increase in book value: Net Income (revenues less cost of goods sold and expenses) ................................ Dividends .............................................................. Change during year ................................................. Change during first six months of year ..........

P1,400,000 P120,000 (20,000) P100,000 50,000

Book value of RR, 7/1 (acquisition date) . (Full-Goodwill) Consideration transferred by KL(P1,330,000 + P30,000) ................................................................... Non-controlling interest fair value ................................. RRs’ fair value (given) .......................................................

P1,450,000 P1,360,000 300,000 P1,630,000

Note: The fair value of subsidiary amounting P1,630,000, indicates a fair value of NCI amounting to P300,000 (refer to above computation), which is lower compared to the FV of the NCI based on FV of SHE of Subsidiary (RR), computed as follows: BV of SHE of Subsidiary (RR) ...................................... P1,450,000 Adjustments to reflect fair value (undervaluation) 150,000 FV of SHE of Subsidiary (RR) ....................................... P 1,600,000 Multiplied by: NCI% ..................................................... 20% FV of NCI………………………………………………. P 320,000 Consideration transferred by KL(P1,330,000 + P30,000) ................................................................... P1,360,000 Non-controlling interest fair value ................................. ___320,000 RRs’ fair value (given) ....................................................... P1,680,000 Book value of RR, 7/1 ........................................................ (1,450,000) Fair value in excess of book value ................................. P 230,000 Annual Excess Excess fair value assigned Life Amortizations Trademarks ..................................................................... 150,000 5 years P30,000 Goodwill (full-goodwill).................................................. P 80,000 indefinite -0Total .......................................................................... P30,000 It should be carefully noted, that NCI can never be less than its share of fair value of net identifiable assets (which is P320,000). Thus, the NCI share of company value is raised to P320,000 (replacing the P300,000 NCI computed as residual amount – refer to computation above). The rationale behind such rule is to avoid having a lower amount of goodwill under the full-goodwill approach as compared to goodwill computed under the partialgoodwill approach. (Partial-Goodwill) Consideration transferred by KL ..................................... P1,360,000 Less: Book value of SHE – RR (P1,450,000 x 80%)…….. 1,160,000 Allocated excess………………………………………….P 200,000 Less: Over/under valuation of A and L: P150,000 x 80%.............................................. 120,000 Goodwill - partial P80,000 Note that the goodwill under the full-goodwill and partial-goodwill approach are the same because the FV of the NCI based on the FV of SHE of subsidiary (P320,000) is higher compared to the imputed or the computed residual amount of NCI (P300,000). Consolidation Totals:  Expenses, P265,000 = P200,000 KK operating expenses plus P50,000 (post-acquisition subsidiary operating expenses) plus ½ year excess amortization of P15,000.  Dividends paid = P80,000  Sales, P1,050,000 = P800,000 KK revenues plus P250,000 (post-acquisition subsidiary revenue, P500,000 x 1/2)  Equipment, none

    

   

Depreciation expense, none Subsidiary’s net income, P60,000 = [(P500,000 – P280,000 – P100,000) x 1/2] Buildings, none Goodwill (full), P80,000; Goodwill (partial), P80,000 Consolidated Net Income, P245,000  Sales (1) P1,050,000  Cost of goods sold (2) 540,000  Operating expenses (3) __265,000  Net Income P 245,000  Non-controlling Interest in Sub. Income (4) P 9,000  Controlling Interest in CNI P 236,000 (1) P800,000 KK revenues plus P250,000 (post-acquisition subsidiary revenue) (2) P400,000 KK COGS plus P140,000 (post-acquisition subsidiary COGS) (3) P200,000 KK operating expenses plus P50,000 (post-acquisition subsidiary operating expenses) plus ½ year excess amortization of P15,000 (4) 20% of post-acquisition subsidiary income less excess fair value amortization [20% × (120,000 – 30,000) × ½ year] = P9,000 Retained Earnings, 1/1 = P1,400,000 (the parent’s balance because the subsidiary was acquired during the current year) Trademark = P935,000 (add the two book values and the excess fair value allocation after taking one-half year excess amortization) Goodwill (full)= P80,000 (the original allocation) Goodwill (partial) = P80,000 (the original allocation)

Problem IX: Consolidated balances after a mid-year acquisition) Note: Investment account balance indicates the initial value method. Consideration transferred ........................................ Non-controlling interest fair value .......................... FV of SHE - subsiary ..................................................... Less: Book value of DD (below)................................ Fair value in excess of book value (positive) ........ Excess assigned based on fair value: Equipment ...................................................... Goodwill (full) ................................................. Total ....................................................................... Amortization for 9 months .................................

P526,000 300,000 P826,000 (765,000) P 61,000 Annual Excess Life Amortizations (30,000) 5 years P(6,000) P 91,000 indefinite -0P(6,000) P(4,500)

Acquisition-Date Subsidiary Book Value Book value of Duncan, 1/1/x4 (CS + 1/1 RE) ............................ Increase in book value-net income (dividends were paid after acquisition) ................................................. Time prior to purchase (3 months) .............................................. Book value of DD, 4/1/x4 (acquisition date) ............................

P740,000 P100,000 ×¼

25,000 P765,000

* The fair value of NCI amounting to P300,000 is higher compared to the FV of the NCI based on FV of SHE of Subsidiary (RR), computed as follows: BV of SHE of Subsidiary (DD) ..…………………… P765,000 Adjustments to reflect fair value (undervaluation) ( 30,000) FV of SHE of Subsidiary (DD) ................................ P735,000

Multiplied by: NCI% ............................................... FV of NCI……………………………………………. (Partial-Goodwill) Consideration transferred ................................. Less: Book value of SHE – DD (P765,000 x 60%) Allocated excess………………………………… Less: Over/under valuation of A and L: (P30,000 x 60%)........................................... ................................ Goodwill - partial ..................................................

_______40% P294,000 P 526,000 459,000 P 67,000 ( 18,000) P 85,000

1. Consolidated Income Statement: Revenues (1) P825,000 Cost of goods sold (2) P405,000 Operating expenses (3) 214,500 619,500 Consolidated net income P 205,500 Noncontrolling interest in CNI (4) 28,200 Controlling interest in CNI P 177,300 (1) P900,000 combined revenues less P75,000 (preacquisition subsidiary revenue) (2) P440,000 combined COGS less P35,000 (preacquisition subsidiary COGS) (3) P234,000 combined operating expenses less P15,000 (preacquisition subsidiary operating expenses) less nine month excess overvalued equipment depreciation reduction of P4,500 (4) 40% of post-acquisition subsidiary income less excess amortization 2. Goodwill, full = P91,000 (original allocation); Goodwill , partial = P85,000 Equipment = P774,500 (add the two book values less P30,000 reduction to fair value plus P4,500 nine months excess amortization) Common Stock = P630,000 (P company balance only) Buildings = P1,124,000 (add the two book values) Dividends Paid = P80,000 (P company balance only) Problem X 1. AA should report income from its subsidiary of P15,000 (P20,000 x .75) rather than dividend income of P9,000. 2. A total of P5,000 (P20,000 x .25) should be assigned to the non-controlling interest in the 20x4 consolidated income statement. 3. Consolidated net income of P70,0000 should be reported for 20X4, computed as follows: Reported net income of AA P59,000 Less: Dividend income from KR (9,000) Operating income of AA P50,000 Net income of KR 20,000 Consolidated net income P70,000 4. Income of P79,000 would be attained by adding the income reported by AA (P59,000) to the income reported by KR (P20,000). However, the dividend income from KR recorded by AA must be excluded from consolidated net income. Problem XI 1. Net income for 20x4: Operating income Income from subsidiary

QQ P 90,000 24,500

NN P35,000

Net income 2. Consolidated net income is P125,000 (P90,000 + P35,000). 3. Retained earnings reported at December 31, 20x4: Retained earnings, January 1, 20x4 Net income for 20x4 Dividends paid in 20x4 Retained earnings, December 31, 20x4

P114,500

P35,000

QQ P290,000 114,500 (30,000) P374,500

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

4. Consolidated retained earnings at December 31, 20x4, is equal to the P374,500 retained earnings balance reported by QQ. 5. When the cost method is used, the parent's proportionate share of the increase in retained earnings of the subsidiary subsequent to acquisition is not included in the parent's retained earnings. Thus, this amount must be added to the total retained earnings reported by the parent in arriving at consolidated retained earnings. Problem XII (Consolidated balances three years after purchase. Parent has applied the equity method.) 1. Schedule 1—Acquisition-Date Fair Value Allocation and Amortization JJ’s acquisition-date fair value . P206,000 Book value of JJ ............................................ (140,000) Fair value in excess of book value ........... 66,000 Excess fair value assigned to specific accounts based on individual fair values Equipment .............................................. Buildings (overvalued) ......................... Goodwill .................................................. Total .........................................................

54,400 (10,000) P21,600

Life 8 yrs. 20 yrs. indefinite

Annual Excess Amortization P6,800 (500) -0P6,300

Investment in JJ Company—12/31/x6 JJ’s acquisition-date fair value ........................................................... 20x4 Increase in book value of subsidiary 20x4 Excess amortizations (Schedule 1) ........................................... 20x5 Increase in book value of subsidiary ........................................ 20x5 Excess amortizations (Schedule 1) ........................................... 20x6 Increase in book value of subsidiary ........................................ 20x6 Excess amortizations (Schedule 1) ........................................... Investment in J Company ............................................................

P206,000 40,000 (6,300) 20,000 (6,300) 10,000 (6,300) P257,100

2. Equity in Subsidiary Earnings Income accrual .................................................................................................. Excess amortizations (Schedule 1) ................................................................. Equity in subsidiary earnings .....................................................................

P30,000 (6,300) P23,700

3.Consolidated Net Income Consolidated revenues (add book values) .................................... Consolidated expenses (add book values) .................................... Excess amortization expenses (Schedule 1) .................................... Consolidated net income ...................................................................

P414,000 (272,000) (6,300) P135,700

4. Consolidated Equipment Book values added together ............................................................. Allocation of purchase price ..............................................................

P370,000 54,400

Excess depreciation (P6,800 × 3) ....................................................... Consolidated equipment .............................................................

(20,400) P404,000

5.Consolidated Buildings........................................................................................... Book values added together ............................................................. Allocation of purchase price .............................................................. Excess depreciation (P500 × 3) .......................................................... Consolidated buildings .................................................................. 6. Consolidated goodwill Allocation of excess fair value to goodwill .......................................

P288,000 (10,000) 1,500 P279,500 P21,600

7. Consolidated Common Stock ............................................................................ P290,000 As a purchase, the parent's balance of P290,000 is used (the acquired company's common stock will be eliminated each year on the consolidation worksheet). 8. Consolidated Retained Earnings ....................................................................... P410,000 Tyler's balance of P410,000 is equal to the consolidated total because the equity method has been applied. Problem XIII – 80% Partial Goodwill - Cost Model Correction: The dividend income in the trial balance should be P38,400 instead P48,000 Requirements 1 to 4: Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 80%)……………………. Retained earnings (P120,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… Increase in land (P7,200 x 80%)……………………. Increase in equipment (P96,000 x 80%) Decrease in buildings (P24,000 x 80%)………..... Decrease in bonds payable (P4,800 x 80%)…… Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

P 372,000 P192,000 96,000 P P 4,800 5,760 76,800 ( 19,200) 3,840

288,000 84,000

72,000 P 12,000

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

S Co. Book value P 24,000 48,000 84,000 168,000 (120,000) P 204,000

S Co. Fair value P 30,000 55,200 180,000 144,000 ( 115,200) P 294,000

(Over) Under Valuation P 6,000 7,200 96,000 (24,000) 4,800 P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows: Equipment .................. Less: Accumulated depreciation….. Net book value………………………...

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

S Co. Fair value 180,000 180,000 S Co.

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

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

Book value 360,000 192,000 168,000

Fair value 144,000 144,000

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

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

Over/ Under P 6,000

Life 1

96,000 (24,000) 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

The goodwill impairment loss of P3,125 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows: Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) Fair value of NCI (given) (20%) Fair value of Subsidiary (100%) Less: Book value of stockholders’ equity of Son (P360,000 x 100%) Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P 372,000 93,000 P 465,000 __360,000 P 105,000 90,000 P

15,000

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

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

On the books of S Company, the P30,000 dividend paid was recorded as follows: Dividends paid………… 36,000 Cash……. Dividends paid by S Co..

36,000

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………………..

6,000 96,000

Accumulated depreciation – buildings………………….. Land………………………………………………………………………. Discount on bonds payable…………………………………………. Goodwill…………………………………………………………………. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%)……………………….. Investment in S Co……………………………………………….

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

To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish noncontrolling interest (in net assets of subsidiary) on date of acquisition.

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

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

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

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 6,000

P 1,200 P1,200

Total

13,200

It should be observed that the goodwill computed above was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows: Value P12,000 3,000 P15,000

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

% of Total 80.00% 20.00% 100.00%

Therefore, the goodwill impairment loss of P3,125 based on 100% fair value or full-goodwill would be allocated as follows: Goodwill impairment loss attributable to P or controlling Interest Goodwill impairment loss applicable to NCI…………………….. Goodwill impairment loss based on 100% fair value or fullGoodwill (E4) Dividend income - P………. Non-controlling interest (P36,000 x 20%)……………….. Dividends paid – S……………………

Value P 3,000

% of Total 80.00%

750

20.00%

P 3,750

100.00%

28,800 7,200 36,000

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

(E5) Non-controlling interest in 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…………………….. Amortization of allocated excess [(E3)]…...

P 60,000 ( 13,200)

9,360 9,360

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

P 46,800 20% P 9,360

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement Sales Dividend income Total Revenue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

P Co P480,000 28,800 P508,800 P204,000 60,000 48,000 P310,000 P196,800 P196,800

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

S Co. P240,000 P240,000 P138,000 28,000 18,000 P180,000 P 60,000 P 60,000

Dr. (4)

28,800

(3) (3) (3)

6,000 6,000 1,200

(3)

3,000

(5)

9,360

Cr.

P360,000

P

P

196,800 P552,000

P120,000 60,000 P180,000

72,000 -

36,000

P484,800

232,800 90,000 120,000 210,000 240,000 720,000

202,440 P562,440

_

72,000 ________

P144,000

P

490,440

P 90,000 60,000 90,000 48,000 180,000 540,000

P

322,800 150,000 210,000 265,200 420,000 1,044,000 3,600 9,000

(4)

(2) (2)

372,000 P1,984,800

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

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

_________ P1,008,000

6,000 7,200

(3)

36,000

6,000

(2) 216,000 4,800 (3) 1,200 12,000 (3) 3,000 (1) 288,000 (2) 84,000

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

12,000

P2,424,600

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

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

_________ P1,984,800

360,000

(1) 120,000

(2) (2)

484,800

Consolidated P 720,000 _________ P 720,000 P 348,000 90,000 1,200 66,000 3,000 P508,200 P211,800 ( 9,360) P202,440

7,200

__________ P 745,560

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

____92,160 P2,424,600

20x5: Second Year after Acquisition

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. Parent Company Cost Model Entry Only a single entry is recorded by the P in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5: Cash……………………… Dividend income (P48,000 x 80%)……………. Record dividends from S Company.

38,400 38,400

Consolidation Workpaper – Second Year after Acquisition The working paper eliminations (in journal entry format) on December 31, 20x5, are as follows: (E1) Investment in S Company………………………… Retained earnings – P Company………………………

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……………………………………………….

6,000 96,000 192,000 7,200 4,800 12,000 216,000 18,000 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 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] Non-controlling interests (P13,200 x 20%)…………………….

13,560 2,640

Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

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

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

38,400 9,600 48,000


(E6) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest …………..

16,560 16,560

To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E4)]…... Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI

P 90,000 ( 7,200) P 82,800 20% P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement Sales Dividend income Total Revenue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings Statement of Retained Earnings

P Co P540,000 38,400 P578,400 P216,000 60,000 72,000 P348,000 P230,400 P230,400

S Co. P360,000 P360,000 P192,000 24,000 54,000 P270,000 P 90,000 P 90,000

Dr. (5)

38,400

(4) (4)

6,000 1,200

(6)

16,560

Cr.

Consolidated P 900,000 ___________ P 900,000 P 408,000 90,000 1,200 126,000 P 625,200 P 274,800 ( 16,560) P 258,240

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

Total

P484,800

P

(2) 13,560 (2) 144,000

(1) 19,200

P 490,440

230,400 P715,200

P 144,000 90,000 P234,000

72,000 -

48,000

P643,200

P186,000

P 676,680

265,200 180,000 216,000 210,000 240,000 720,000

P 114,000 96,000 108,000 48,000 180,000 540,000

P 367,200 276,000 324,000 265,200 420,000 1,044,000 2,400 9,000

372,000 P2,203,200

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

643,200

240,000 186,000

258,240 P 748,680

(5)

(3) (3)

6,000 7,200

(3) (3) (1)

4,800 12,000 19,200

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

_________ P1,074,000

6,000

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

(4)

24,000

_

72,000 ________

P2,707,800 P180,000 552,000 240,000 360,000 600,000

(2) 240,000 676,680 (5) (4)

___ _____ P2,203,200

(4)

48,000

9,600 2,640

__________ P 821,160

(2 ) 76,800 (3) 18,000 (6) 16,560 P 821,160

____99,120 P2,707,800

5. 1/1/20x4 a. On date of acquisition the retained earnings of P should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000

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

P 240,000 120,000 P 360,000 90,000 P450,000 20 P 90,000

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

P 600,000 360,000 P 960,000 ___90,000 P1,050,000

6. Note: The goodwill recognized on consolidation purely relates to the P’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI Consolidated Net Income for 20x4 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization above) Goodwill impairment (impairment under partial-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P168,000 60,000 P228,000 P 9,360 13,200 3,000

25,560 P202,440 9,360 P211.800

b. NCI-CNI *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess / goodwill impairment (refer to amortization table above) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

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

c. CNI, P211,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Dividends paid – P Company for 20x4 Consolidated Retained Earnings, December 31, 20x4

P360,000 202,440 P562,440 72,000 P490,440

e. Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 Add: Net income of S for 20x4 Total Less: Dividends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) – 20x4 Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

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

144,000 P 384,000 90,000 ( 13,200) P460,000 20 P 92,160

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

P 600,000 490,440 P1,090,440 ___92,160 P1,182,600

12/31/20x5: a. CI-CNI Consolidated Net Income for 20x5 Net income from own/separate operations: P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization above) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5 b. NCI-CNI *Non-controlling Interest in Net Income (NCINI) for 20x5 Net income of S Company Less: Amortization of allocated excess / goodwill impairment for 20x5 (refer to amortization table above)

P192,000 90,000 P282,000 P16,560 __7,200

23,760 P258,240 16,560 P274,800

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

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x5 c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - P Company, January 1, 20x5 (cost model P484,800 Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – S, January 1, 20x5 P 144,000 Less: Retained earnings – S, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 24,000 Less: Amortization of allocated excess – 20x4 13,200 P 10,800 Multiplied by: Controlling interests %................... 80% P 8,640 Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or (P3, 750 x 80%) 3,000 5,640 Consolidated Retained earnings, January 1, 20x5 P 490,440 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P for 20x5 258,240 Total P748,680 Less: Dividends paid – P Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P676,680 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired.

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

P 240,000 P14,000 90,000 P234,000 48,000

186,000 P 426,000 90,000

P 13,200 7,200

( 20,400) P 495,600 20 P 99,120

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

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

Problem XIV – 80% Full Goodwill – Cost Model 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 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 (P36,000x 80%)……………. Record dividends from S Company.

372,000 372,000

28,800 28,800

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

240,000 120.000

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

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

288,000 72,000




216,000 21,000 84,000 6,000 6,000 6,000 1,200 3,750 6,000 12,000 1,200 3,750

Depreciation/ Amortization Expense


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

P 1,200 P1,200

_______ P 6,000

(E4) Dividend income - P………. Non-controlling interest (P36,000 x 20%)……………….. Dividends paid – S…………………… (E5) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest ………….. Net income of subsidiary…………………….. Amortization of allocated excess [(E3)]…... Multiplied by: Non-controlling interest %..........

28,800 7,200 36,000 8,610 8,610

P 60,000 ( 13,200) P 46,800 20% P 9,360

Less: Non-controlling interest on impairment loss on full-goodwill (P3,125 x 20%) or (P3,125 impairment on full-goodwill less P2,500, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) P 8,610 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,125 by 20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6).

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

Income Statement Sales Dividend income Total Revenue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receivable…….. Inventory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill…………………… Investment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation - buildings Accounts payable…………… Bonds payable………………… Common stock, P10 par……… Common stock, P10 par……… Retained earnings, from above Non-controlling interest…………

Total

P Co P480,000 28,800 P508,800 P204,000 60,000 48,000 P312,000 P196,800 P196,800

S Co. P240,000 P240,000 P138,000 24,000 18,000 P180,000 P 60,000 P 60,000

(4)

28,800

(3) (3) (3)

6,000 6,000 1,200

(3)

3,750

(5)

8,610

Cr.

P360,000

P

196,800 P556,800 72,000 -

36,000

P484,800 232,800 90,000 120,000 210,000 240,000 720,000

202,680 P562,440

_

86,400 ________

P144,000

P

490,440

P 90,000 60,000 90,000 48,000 180,000 540,000

P

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

(4)

(2) (2)

6,000 7,200

(2) (2)

4,800 15,000

_________ P1,984,800

(3)

36,000

6,000

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

(2) 96,000 (3) (5) 192,000 (6) 6,000

322,800 150,000 210,000 265,200 420,000 1,044,000 3,600 11,250

P2,426,850

12,000

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

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

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

360,000

(1) 120,000

372,000

_________ P1,984,800


P P120,000 60,000 P180,000


No goodwill impairment loss for 20x5.

Dr.

7,200

__________ P 748,560

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

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

____94,410 P2,426,850

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

Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5: Cash……………………… Dividend income (P48,000x 80%)……………. Record dividends from S Company.

38,400 38,400

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%)………………………..

240,000 144,000

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

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

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

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

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

(E5) Dividend income - P……….

Depreciation/ Amortization expense P

307,200 76,800

216,000 21,000 84,000 13,560 3,390 6,000 12,000 1,200 6,000 24,000 2,400 3,750


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

P1,200

38,400

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

9,600 48,000


(E6) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest ………….. Net income of subsidiary…………………….. Amortization of allocated excess [(E4)]…...

16,560 16,560

P 90,000 ( 7,200) P 82,800 20% P 16,560

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

0 P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement Sales Dividend income Total Revenue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

P Co P540,000 38,400 P578,400 P216,000 60,000 72,000 P348,000 P230,400 P230,400

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

S Co. P360,000 P360,000 P192,000 24,000 54,000 P270,000 P 90,000 P 90,000

P484,800

P

Dr. (5)

38,400

(4) (4)

6,000 1,200

(6)

16,560

(3) 13,560 (6) 144,000

Cr.


(5) 19,200

P 490,440

230,400 P715,200

P 144,000 90,000 P234,000

72,000 -

48,000

P643,200

P186,000

P 676,680

265,200 180,000 216,000 210,000 240,000 720,000

P 102,000 96,000 108,000 48,000 180,000 540,000

P 367,200 276,000 324,000 265,200 420,000 1,044,000 2,400 11,250

372,000 P2,203,200

P1,074,000

P 150,000

P 102,000

258,240 P 748,680

(5)

(4)

57,600

(3) (3)

6,000 7,200

6,000

(3) (3) (1)

4,800 15,000 19,200

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

(3)

96,000

(4)

24,000

_

72,000 ________

P2,710,050 P180,000

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

Total

450,000

306,000

120,000 240,000 600,000

120,000 120,000

643,200

240,000 186,000

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

(2) 240,000 676,680 (6) (8)

___ _____ P2,203,200

_________ P1,074,000

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

9,600 3,390

__________ P 824,910

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

____101,370 P2,710,050

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

P360,000

b. Non-controlling interest (full-goodwill), January 1, 20x4 Common stock – S Company, January 1, 20x4…… Retained earnings – S Company, January 1, 20x4 Stockholders’ equity – S Company, January 1, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Fair value of stockholders’ equity of S, January 1, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)………………………………….. Add: NCI on full-goodwill (P15,000 – P12,000) Non-controlling interest (partial-goodwill)…………………………………..

P 240,000 120,000 P 360,000 90,000 P450,000 20 P 90,000 ___3,000 P 93,000

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

6.

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

Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P202,440 Consolidated Net Income for 20x4 Net income from own/separate operations: P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization above) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

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

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

b. NCI-CNI – P8,610 *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess (refer to amortization table above)

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

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) Less: Non-controlling int. on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) P 8,610 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to NCI acquired.


P360,000 202,440 P562,440 72,000 P490,440

e. Non-controlling interest (full-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 Add: Net income of S for 20x4 Total Less: Dividends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) – 20x4 Fair value of stockholders’ equity of S, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill, 12/31/20x4………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4: [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill), 12/31/20x4……………..

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

144,000 P 384,000 90,000 ( 13,200) P460,800 20 P 92,160 2,250 P 94,410

f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par Retained earnings P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4 12/31/20x5: a. CI-CNI – P258,240 Consolidated Net Income for 20x5 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization above) Goodwill impairment (impairment under full-goodwill approach)

P 600,000 490,440 P1,090,440 ___94,410 P1,184,850

P192,000 90,000 P282,000 P16,560 7,200 0

23,760

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

P258,240 16,560 P274,800

b. NCI-CNI – P16,560 *Non-controlling Interest in Net Income (NCINI) for 20x5 Net income of S Company Less: Amortization of allocated excess / goodwill impairment for 20x5 (refer to amortization table above) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x5

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

c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - P Company, January 1, 20x5 (cost model Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/P’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Multiplied by: Controlling interests %...................

P484,800

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

Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or (P3, 750 x 80%) 3,000 5,640 Consolidated Retained earnings, January 1, 20x5 P 490,440 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 258,240 Total P748,680 Less: Dividends paid – P Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P676,680 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired.

e. Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – S Company, December 31, 20x5…… Retained earnings – S Company, December 31, 20x5 Retained earnings – S Company, January 1, 20x5 Add: Net income of S for 20x5 Total Less: Dividends paid – 20x5 Stockholders’ equity – S Company, December 31, 20x5 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) : 20x4 20x5 Fair value of stockholders’ equity of S, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill)…………………………………..

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

186,000 P 426,000 90,000

P 13,200 7,200

( 20,400) P 495,600 20 P 99,120 2,250 P 101,370

f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par

P 600,000

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

676,680 P1,276,680 __101,370 P1,378,050

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

P 372,000 P192,000 96,000 P P 4,800 5,760 76,800 ( 19,200) 3,840

288,000 84,000

72,000 P 12,000

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

S Co. Book value P 24,000 48,000 84,000 168,000 (120,000) P 204,000

S Co. Fair value P 30,000 55,200 180,000 144,000 ( 115,200) P 294,000

(Over) Under Valuation P 6,000 7,200 96,000 (24,000) 4,800 P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows: Equipment .................. Less: Accumulated depreciation….. Net book value………………………... Buildings................ Less: Accumulated depreciation….. Net book value………………………...

S Co. Book value 180,000 96,000 84,000 S Co. Book value 360,000 192,000 168,000

S Co. Fair value 180,000 180,000 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) 4,800

8 4 4



20x5 P -

12,000 12,000 12,000 ( 6,000) ( 6,000) (6,000) 1,200 1,200 1,200 P 13,200 P 13,200 P 7,200 The goodwill impairment loss of P3,125 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows:

Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) Fair value of NCI (given) (20%) Fair value of Subsidiary (100%) Less: Book value of stockholders’ equity of S (P360,000 x 100%) Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P 372,000 93,000 P 465,000 __360,000 P 105,000 90,000 P

15,000

20x4: First Year after Acquisition Parent Company Equity Method Entry The following are entries recorded by the P in 20x4 in relation to its subsidiary investment: January 1, 20x4: (1) Investment in S Company…………………………………………… Cash……………………………………………………………………..

372,000 372,000

Acquisition of S Company.

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

28,800

28,800

Record dividends from S Company.

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

48,000 48,000

Record share in net income of subsidiary.

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

13,560 13,560

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

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

Investment in S 372,000 28,800 48,000 377,640

13,560

Dividends – S (36,000x 80%) Amortization & impairment

Investment Income Amortization & impairment

13,560

48,000 34,440

NI of S (P60,000 x 80%) Balance, 12/31/x4

Consolidation Workpaper – First Year after Acquisition The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries on January 1, 20x4: (E1) Common stock – S Co………………………………………… Retained earnings – S Co…………………………………… Investment in Son Co…………………………………………… Non-controlling interest (P360,000 x 20%)………………………..

240,000 120.000

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

6,000 96,000

288,000 72,000

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

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




_______ P 6,000



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

P 1,200 P1,200

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

Total

13,200

It should be observed that the goodwill computed above was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows: Value P12,000 3,000 P15,000

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

% of Total 80.00% 20.00% 100.00%

Therefore, the goodwill impairment loss of P3,750 based on 100% fair value or full-goodwill would be allocated as follows: Goodwill impairment loss attributable to parent or controlling Interest Goodwill impairment loss applicable to NCI…………………….. Goodwill impairment loss based on 100% fair value or fullGoodwill

Value P 3,000

% of Total 80.00%

625

20.00%

P 3,750

100.00%

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

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

To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: Investment in S NI of S 28,800 Dividends - S (60,000 Amortization & x 80%)……. 48,000 13,560 impairment 5,640

Investment Income Amortization impairment 13,560

48,000

NI of S (60,000

x 80%)

34,440

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

Investment in S 372,000 28,800

Cost, 1/1/x4 NI of Son (60,000 x 80%) Balance, 12/31/x4

48,000 377,640

Dividends – S (36,000x 80%) Amortization & impairment (E1) Investment, 1/1/20x4 (E2) Investment, 1/1/20x4 (E4) Investment Income and dividends

13,560 288,000 84,000 5,640

377,640

377,640


9,360 9,360

To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E3)]…... Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

P 60,000 ( 13,200) P 46,800 20% P 9,360

Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement Sales Investment income Total Revenue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from 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

P Co P480,000 34,440 P513,600 P204,000 60,000 48,000 P312,000 P202,440 P202,440

S Co. P240,000 P240,000 P138,000 24,000 18,000 P180,000 P 60,000 P 60,000

Dr. (4)

34,440

(3) (3) (3)

6,000 6,000 1,200

(3)

3,000

(5)

9,360

Cr.


P360,000

P

P360,000

202,440 P562,440

P120,000 60,000 P180,000

72,000 -

36,000

P490,440

P144,000

232,800 90,000 120,000 210,000 240,000 720,000

P 90,000 60,000 90,000 48,000 180,000 540,000

377,640

P1,990,440

P1,008,000

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

(4)

72,000 -

36,000

P490,440 P (2) (2)

6,000 7,200

(2) (2)

4,800 12,000

(3)

6,000

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

322,800 150,000 210,000 265,200 420,000 1,044,000 3,600 9,000

P2,424,600

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 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

_________ P1,008,000

12,000

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

(1) 240,000 490,440 (10) 7,200

_________ P1,990,440

Total

240,000 144,000

490,440

(2) 96,000 (3) (8) 192,000 (9) 6,000

__________ P 751,200

(1 ) 72,000 (2) 18,000 (5) 9,360 P 751,200

____92,160 P2,424,600

20x5: Second Year after Acquisition P Co. P 540,000 216,000 P 324,000 60,000 72,000 P 192,000 66,240 P 258,240 P 72,000

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 No goodwill impairment loss for 20x5.

S 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 The following are entries recorded by the parent in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5: (2) Cash……………………… Investment in S Company (P48,000 x 80%)…………….

38,400 38,400



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


Investment in S 377,640 38,400 72,000 405,480

5,760

Dividends – S (48,000x 80%) Amortization (P7,200 x 80%)

Investment Income Amortization (7,200 x 80%)

5,760

72,000 66,240

NI of S (90,000 x 80%) Balance, 12/31/x4

Consolidation Workpaper – Second Year after Acquisition The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries: (E1) Common stock – S Co………………………………………… 240,000 Retained earnings – S Co, 1/1/x5…………………………. 144.000

Investment in S Co (P384,000 x 80%) Non-controlling interest (P384,000 x 20%)……………………….. (E2) Accumulated depreciation – equipment (P96,000 – P12,000) Accumulated depreciation – buildings (P192,000 + 6,000) Land………………………………………………………………………. Discount on bonds payable (P4,800 – P1,200)…. Goodwill (P12,000 – P3,000)…………………………….. Buildings……………………………………….. Non-controlling interest [(P90,000 – P13,200) x 20%] Investment in S Co……………………………………………….

307,200 76,800 84,000 198,000 7,200 3,600 9,000 216,000 15,360 70,440

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




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

P 1,200 P1,200

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

Total

P7,,200

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

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

To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: Investment in S NI of S 38,400 Dividends – S (90,000 Amortization x 80%)……. 72,000 5,760 (P7,200 x 80%) 27,840

Investment Income Amortization (P7,200 x 80%)

5,760

72,000 66,240

NI of S (90,000 x 80%)

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Cost, 1/1/x5 NI of S (90,000 x 80%) Balance, 12/31/x5

Investment in S 377,640 38,400 72,000 405,480

405,480

5,760 307,200 70,440 27,840

Dividends – S (48,000x 80%) Amortization (7,200 x 80%) (E1) Investment, 1/1/20x5 (E2) Investment, 1/1/20x5 (E4) Investment Income and dividends

405,480

(E5) 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:

16,560 16,560

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

P 90,000 ( 7,200) P 82,800 20% P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement Sales Investment income Total Revenue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

P Co P540,000 66,240 P606,000 P216,000 60,000 72,000 P348,000 P258,240 P258,240

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

S Co. P360,000 P360,000 P192,000 24,000 54,000 P270,000 P 90,000 P 90,000

Dr. (4)

66,240

(3) (3)

6,000 1,200

(5)

16,560

Cr.

P490,440

P

Consolidated P 900,000 ___________ P 900,000 P 408,000 90,000 1,200 126,000 P 625,200 P 274,800 ( 16,560) P258,240

P490,440

258,240 P748,680

P144,000 90,000 P234,000

(1) 144,000

72,000 -

48,000

P676,680

P186,000

P676,680

265,200 180,000 216,000 210,000 240,000 720,000

P 102,000 96,000 108,000 48,000 180,000 540,000

P 367,200 276,000 324,000 265,200 420,000 1,044,000 2,400 9,000

258,240 P748,680

(4)

(2)

7,200

(2) (2)

3,600 9,000

405,480

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

(2)

240,000 186,000

_________

72,000 -

P2,707,800

84,000 (3)

12,000

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

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

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

___ _____

(3) 216,000 (3) 1,200 (1) 307,200 (2) 70,440 (4) 27,840

P2,236,680

676,680

48,000

9,600

(2 ) 76,800 (2) 15,360 (5) 16,560

____99,120

Total

P2,236,680

P1,074,000

__________ P 794,400

P 794,400

P2,707,800

Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem VI solution).


P360,000

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

P 240,000 120,000 P 360,000 90,000 P450,000 20 P 90,000


P 600,000 360,000 P 960,000 ___90,000 P1,050,000

6. 12/31/20x4: a. CI-CNI Consolidated Net Income for 20x4 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization above) Goodwill impairment (impairment under partial-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P168,000 60,000 P228,000 P 9,360 13,200 3,000

25,560 P202,440 9,360 P211.800

b. NCI-CNI *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess / goodwill impairment (refer to amortization table above) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

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

c. CNI, P211,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4

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

P360,000 202,440 P562,440 72,000 P490,440

e. Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 Add: Net income of S for 20x4 Total Less: Dividends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) – 20x4 Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)…………………………………..

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

144,000 P 384,000 90,000 ( 13,200) P460,000 20 P 92,160


P 600,000 490,440 P1,090,440 ___92,160 P1,182,600

12/31/20x5: a. CI-CNI Consolidated Net Income for 20x5 Net income from own/separate operations: P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization above) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5

P192,000 90,000 P282,000 P16,560 __7,200

23,760 P258,240 16,560 P274,800

b. NCI-CNI *Non-controlling Interest in Net Income (NCINI) for 20x5 Net income of S Company Less: Amortization of allocated excess / goodwill impairment for 20x5 (refer to amortization table above) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x5

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

c. CNI, P274,800 – refer to (a)

d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:

Consolidated Retained Earnings, December 31, 20x5 Retained earnings - P Company, January 1, 20x5 (cost model Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – S, January 1, 20x5 Less: Retained earnings – S, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Multiplied by: Controlling interests %...................

P484,800

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

Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or (P3, 750 x 80%) 3,000 5,640 Consolidated Retained earnings, January 1, 20x5 P 490,440 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 258,240 Total P748,680 Less: Dividends paid – P Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P676,680 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired.

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

P 240,000 P14,000 90,000 P234,000 48,000

186,000 P 426,000 90,000

P 13,200 7,200

( 20,400) P 495,600 20 P 99,120


P 600,000 676,680 P1,276,680 ___99,120 P1,1375,800

Problem XVI - 80% Full Goodwill – Equity Method Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)……………….. Fair value of Subsidiary (100%)……….

P 372,000 93,000 P 465,000

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 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

2x4: First Year after Acquisition Parent Company Equity Method Entry The following are entries recorded by the parent in 20x4 in relation to its subsidiary investment: January 1, 20x4: (1) Investment in S Company…………………………………………… Cash……………………………………………………………………..

372,000 372,000

Acquisition of S Company.

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

28,800 28,800



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.


Investment in S 372,000 28,800 48,000 377,640

13,560

Dividends – S (36,000x 80%) Amortization & Impairment

Investment Income Amortization & Impairment

13,560

48,000 34,440

Consolidation Workpaper – First Year after Acquisition

NI of S (P60,000 x 80%) Balance, 12/31/x4

The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries on January 1, 20x4: (E1) Common stock – S Co………………………………………… Retained earnings – S Co…………………………………… Investment in S Co…………………………………………… Non-controlling interest (P360,000 x 20%)……………………….. (E2) Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. Accumulated depreciation – buildings………………….. Land………………………………………………………………………. Discount on bonds payable…………………………………………. Goodwill…………………………………………………………………. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%) + [(P15,000, full – P12,000, partial goodwill)]………… Investment in S Co……………………………………………….

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




_______ P 6,000



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

P 1,200 P1,200

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

Total

13,200

(E4) Investment income Non-controlling interest (P36,000 x 20%)……………….. Dividends paid – S…………………… Investment in S Company Investment in S NI of S 28,800 Dividends – S (60,000 Amortization & x 80%)……. 48,000 13,560 Impairment 5,640

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

Amortization & Impairment

13,560

48,000 34,440

NI of Son (60,000 x 80%)

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

Investment in S 372,000 28,800 40,000

13,560

Dividends – S (36,000x 80%) Amortization & Impairment

Balance, 12/31/x4

377,640

377,640

288,000 84,000 5,640

(E1) Investment, 1/1/20x4 (E2) Investment, 1/1/20x4 (E4) Investment Income and dividends

377,640

(E5) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest ………….. Net income of subsidiary…………………….. Amortization of allocated excess [(E3)]…...

8,610 8,610

P 60,000 ( 13,200) P 46,800 20% P 9,360

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) P 8,610 *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) Income Statement Sales Investment income Total Revenue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

P Co P480,000 34,440 P514,440 P204,000 60,000 48,000 P312,000 P202,440 P202,440

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receivable…….. Inventory…………………. Land……………………………. Equipment Buildings Discount on bonds payable Goodwill……………………

S Co. P240,000 P240,000 P138,000 24,000 18,000 P180,000 P 60,000 P 60,000

Dr. (4)

34,440

(3) (3) (3)

6,000 6,000 1,200

(3)

3,750

(5)

8,610

Cr.


P360,000

P

P360,000

202,440 P562,440

P120,000 60,000 P180,000

72,000 -

36,000

P490,440

P144,000

232,800 90,000 120,000 210,000 240,000 720,000

P 90,000 60,000 90,000 48,000 180,000 540,000

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

(4)

72,000 -

36,000

P490,440

P (2) (2)

6,000 7,200

(2) (2)

4,800 15,000

(3)

6,000

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

322,800 150,000 210,000 265,200 420,000 1,044,000 3,600 11,250

Investment in S Co………


377,640

P1,990,440

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

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

490,440

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

_________ P1,008,000


(3)

12,000

P147,000 495,000 240,000 360,000 600,000 490,440

7,200

__________ P 754,200

(1 ) 72,000 (2) 21,000 (5) 8,610 P 754,200

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

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

P2,426,850

(1) 240,000 (4)

_________ P1,990,440

Total

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

____94,410 P2,426,850

S Co. P 380,000 192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. Parent Company Equity Method Entry The following are entries recorded by the parent in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5: (2) Cash……………………… Investment in S Company (P48,000 x 80%)…………….

38,400 38,400



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

P Company’s P12,000 portion of the differential related to goodwill related to goodwill is not adjusted on the parent’s books following Option 2 as referred to above for goodwill impairment loss. Even though the goodwill of the consolidated entity is impaired,

Thus, the investment balance and investment income in the books of P Company is as follows: Cost, 1/1/x5 NI of S (90,000 x 80%)

Investment in S 377,640 38,400 72,000

5,760

Dividends – S (48,000x 80%) Amortization (P7,200 x 80%)

Balance, 12/31/x5

405,480

Investment Income Amortization (7,200 x 80%)

5,760

72,000 66,240

NI of S (90,000 x 80%) Balance, 12/31/x4

Consolidation Workpaper – Second Year after Acquisition The schedule of determination and allocation of excess presented 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)…. Goodwill (P15,000 – P3,750)…………………………….. Buildings……………………………………….. Non-controlling interest [(P90,000 – P13,200) x 20%] + [P3,000, full goodwill - [(P3,750, full-goodwill impairment – P3,000, partial- goodwill impairment)* or (P3,750 x 20%)] Investment in S Co……………………………………………….

84,000 198,000 7,200 3,600 11,250 216,000

17,610 70,440

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




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

P 1,200 P1,200

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

Total

P7,200

(E4) Investment income Non-controlling interest (P48,000 x 20%)……………….. Dividends paid – S…………………… Investment in S Company Investment in S NI of S 38,400 Dividends - S (90,000 Amortization x 80%)……. 72,000 5,760 (P7,200 x 80%) 27,840

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

Amortization (P7,200 x 80%)

5,760

72,000 66,240

NI of S (90,000 x 80%)

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Investment in S 377,640 38,400

Cost, 1/1/x5 NI of S (90,000 x 80%) Balance, 12/31/x5

72,000 405,480

Dividends – S (48,000x 80%) Amortization (7,200 x 80%) (E1) Investment, 1/1/20x5 (E2) Investment, 1/1/20x5 (E4) Investment Income and dividends

5,760 307,200 70,440 27,840

405,480

405,480


16,560 16,560

To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E3)]…... Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) Less: NCI on goodwill impairment loss on fullGoodwill Non-controlling Interest in Net Income (NCINI)

P 90,000 ( 7,200) P 82,800 20% P 16,560 0 P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement Sales Investment income Total Revenue Cost of goods sold Depreciation expense Interest expense Other expenses Goodwill impairment loss Total Cost and Expenses Net Income NCI in Net Income - Subsidiary Net Income to Retained Earnings

P Co P540,000 66,240 P606,000 P216,000 60,000 72,000 P348,000 P258,240 P258,240

Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receivable…….. Inventory…………………. Land……………………………. Equipment Buildings

S Co. P360,000 P360,000 P192,000 24,000 54,000 P270,000 P 90,000 P 90,000

Dr. (4)

66,240

(3) (3)

6,000 1,200

(5)

16,560

Cr.

P490,440

P


P490,440

258,240 P748,680

P144,000 90,000 P234,000

(1) 144,000

72,000 -

48,000

P676,680

P186,000

P676,680

265,200 180,000 216,000 210,000 240,000 720,000

P 102,000 960,000 108,000 48,000 180,000 540,000

P 367,200 276,000 324,000 265,200 420,000 1,044,000

258,240 P748,680

(4)

(2)

48,000

7,200 (3) 216,000

72,000 -

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


(2) (2)

3,600 11,250

405,9480

1,200

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

P2,236,680

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

(2)

676,680

(3)

240,000 186,000

2,400 11,250

P2,634,000

84,000 (3)

12,000

P 180,000

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

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

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

9,600

(2 ) 76,800 (2) 17,610 ___ _____ __________ __________ (5) 16,560 __________ Total P2,236,680 P1,074,000 P 796,650 P 796,650 P2,634,000 Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem VII solution).


P360,000

b. Non-controlling interest (full-goodwill), January 1, 20x4 Common stock – S Company, January 1, 20x4…… Retained earnings – S Company, January 1, 20x4 Stockholders’ equity – S Company, January 1, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Fair value of stockholders’ equity of subsidiary, January 1, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill)………………………………….. Add: NCI on full-goodwill (P15,000 – P12,000) Non-controlling interest (partial-goodwill)…………………………………..

P 240,000 120,000 P 360,000 90,000 P450,000 20 P 90,000 ___3,000 P 93,000


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

6. a. CI-CNI – P202,440 Consolidated Net Income for 20x4 Net income from own/separate operations: P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization above) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI)

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

25,560 P202,440 8,610

Consolidated Net Income for 20x4

P211.050

b. NCI-CNI – P8,610 *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess (refer to amortization table above) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* Non-controlling Interest in Net Income (NCINI)

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

750 P 8,610


P360,000 202,440 P562,440 72,000 P490,440

e. Non-controlling interest (full-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… Retained earnings – S Company, December 31, 20x4 Retained earnings – SCompany, January 1, 20x4 Add: Net income of S for 20x4 Total Less: Dividends paid – 20x4 Stockholders’ equity – S Company, December 31, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) – 20x4 Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial-goodwill, 12/31/20x4………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4: [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill), 12/31/20x4……………..

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

144,000 P 384,000 90,000 ( 13,200) P460,800 20 P 92,160 2,250 P 94,410


P 600,000 490,440 P1,090,440 ___94,410 P1,184,850

12/31/20x5: a. CI-CNI – P258,240 Consolidated Net Income for 20x5 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization above) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to

P192,000 90,000 P282,000 P16,560 7,200 0

23,760

equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5

P258,240 16,560 P274,800

b. NCI-CNI – P16,560 *Non-controlling Interest in Net Income (NCINI) for 20x5 Net income of S Company Less: Amortization of allocated excess / goodwill impairment for 20x5 (refer to amortization table above) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x5

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

c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - P Company, January 1, 20x5 (cost model Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/P’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – S, January 1, 20x5 Less: Retained earnings – S, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 Multiplied by: Controlling interests %................... Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or (P3, 750 x 80%) Consolidated Retained earnings, January 1, 20x5 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 Total Less: Dividends paid – P Company for 20x5 Consolidated Retained Earnings, December 31, 20x5

P484,800

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

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

e. Non-controlling interest (full-goodwill), December 31, 20x5 Common stock – S Company, December 31, 20x5…… Retained earnings – S Company, December 31, 20x5 Retained earnings – S Company, January 1, 20x5 Add: Net income of S for 20x5 Total Less: Dividends paid – 20x5 Stockholders’ equity – S Company, December 31, 20x5 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) : 20x4 20x5 Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (partial goodwill)………………………………….. Add: Non-controlling interest on full goodwill , net of impairment loss [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss Non-controlling interest (full-goodwill)…………………………………..

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

186,000 P 426,000 90,000

P 13,200 7,200

( 20,400) P 495,600 20 P 99,120 2,250 P 101,370

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

P 600,000 676,680 P1,276,680

NCI, 12/31/20x4 Consolidated SHE, 12/31/20x4

__101,370 P1,378,050

Problem XVII P’s gain on sale of subsidiary stock is computed as follows: Cash proceeds……………………………………… Fair value of retained non-controlling interest equity investment (35%) Carrying value of the non-controlling interest before deconsolidation (15% or prior outside non-controlling interest in Subsidiary)

P

720,000 420,000

120,000 P1,260,000 1,200,000 P 60,000

Less: Carrying value of Subsidiary’s net assets Gain on disposal or deconsolidation

Read discussion on step-acquisition regarding the initial treatment of investment as FVTOCI or FVTPL and its disposition. It is assumed that the investment above is FVTPL. Problem XVIII P Company’s additional paid-in capital arising sale of subsidiary shares is computed as follows: Cash proceeds……………………………………… Less: Carrying value of non-controlling interest (P720,000* x 10%) “Gain” – transfer within equity in “Additional paid-in capital” account

P P

84,000 72,000 12,000

*the P720,000 is already the gross-up amount since it is the amount presented in the consolidated balance sheet.

Because P Company continues to have the ability to control S Company, the sale of S’s shares is treated as an equity transaction. Therefore, no gain or loss is recognized. Instead, Palmer Company’s additional paid-in capital increases by P60,000. Problem XIX P Company’s additional paid-in capital arising sale of subsidiary shares is computed as follows: Cash proceeds from issuance of additional shares …..P210,000 Less: Carrying Value of non-controlling from issuance of additional shares: Non-controlling interest prior to issuance of additional shares: Book value of SHE before issuance…P720,000 x: Non-controlling interest……………. 20%* P 144,000 Non-controlling interest after issuance of additional shares: Book value of SHE before issuance…………………….P720,000 Additional issuance…………………..…210,000 BV of SHE after issuance……………….P930,000 x: Non-controlling interest……………... 36%** 334,800 190,800 “Gain” – transfer within equity in “Additional paid-in capital” account...P 19,200 * (120,000 – 96,000) / 120,000 = 20% ownership before additional issuance of shares. ** [(24,000 + 30,000) / (120.000 + 30,000)] = 36% ownership after additional issuance of shares PCompany recognizes an increases in its Investment in S from P576,000 (P720,000x 80%) to P595,200 [P930,000 x (96,000/150,000) and in additional paid-in capital of P19,200.

Multiple Choice Problems 1. b Full-Goodwill: (P600,000/70%) – P640,000 = P217,143 – P40,000 = P177,143 If partial goodwill: P600,000 – (P640,000 x 70%) = P152,000 – (P40,000 x 70%) = P124,000 2. b – P500,000 + P3,461 3. b 4. d – equivalent to consideration transferred, P320,000 5. d – equivalent to consideration transferred, P380,000 6. a 7. P2,120,000 Podex’s separate earnings for 20x6 ..................................................... P2,000,000 Dividend income from Sodex ................................................................ __120,000 Podex’s 20x6 net income ....................................................................... P2,120,000 8.

P2,260,000 Podex’s separate earnings for 20X6 Podex’s equity in net income of Sodex ............................................... Less: Amortization of cost in excess of book value ........................... Podex’s 20x6 net income ....................................................................... 9. b 10. c

P2,000,000 300,000 (40,000) P2,260,000

Retained earnings of Parent, 12/31/20x6, Cost Method Add: Increased in Retained earnings of Subsidiary RE of Parent, 12/31/20x6, Equity Method (same with Consolidated RE)

310,000 _80,000 390,000

Investment balance 12/31/x6, Cost Method Add: Increased in Retained earnings of Subsidiary Investment balance 12/31/x6, Equity Method

200,000 80,000 280,000

11. c

12. d Retained earnings of Parent, 12/31/20x6, Cost Method Add: Increased in Retained earnings of Subsidiary RE of Parent, 12/31/20x6, Equity Method (same with Consolidated RE)

210,000 _240,000 450,000

13. b – dividends of subsidiary considered as dividend income in the parent’s separate income statement. 14. b Retained earnings of Parent, 12/31/20x6, Cost Method Less: Decreased in Retained earnings of Subsidiary RE of Parent, 12/31/20x6, Equity Method (same with Consolidated RE)

360,000 _40,000 320,000

15. d – 20x3: P30,000 x 75% = P22,500 20x4: P40,000 x 75% = P30,000 16. a – no changes in investment unless there are dispositions of investment and permanent impairment. 17. c - 20x4 = P86,400 Consolidated Net Income 20x4 20x5 Peters Company's reported net income64,000 37,500 Less: dividend income from Smith (1,600) _____0 Peters' income from independent operations62,400 37,500

Add: Peter's share of Smith's net income in 20x4 since acquisition (.80)(8/12)(P45,000)24,000 Less: Peter's share of Smith's net loss in 20x4 (.80  P5,000 ______ (4,000) Controlling Interest in Consolidated net income86,400 33,500 18. c - 20x5 = P33,500 – refer to No. 17 19. b - 20x4 = P151,400 Consolidated Retained Earnings Peter's 12/31 retained earnings (P80,000 + P64,000 - P15,000) Add: Peter's share of the increase in Smith's retained earnings from the date of acquisition to the current date: (.80  (P53,000 – P25,000)) (.80  (P48,000 – P25,000) P151,400 20. c - 20x5 = P179,900 – refer to No. 19 21. c Consolidated Net Income for 20x4 Net income from own/separate operations P Company P30,200 – (P150,0000 – P20,000 – P60,000) S Company (P100,000 – P15,000 – P45,000) Total Less: Non-controlling Interest in Net Income Amortization of allocated excess Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

20x4 P129,000

20x5 P161,500

22,400 ________18,400 P179,900

P70,000 40,000 P110,000 P

0 0 ____0

____0 P110,000 _____0 P110,000

22. b Plimsol: P100,000 + P200,000,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,P300,000 Shipping: P75,000 + P150,000………………………………………………………………. 225,000 P525,000 23. Retained Earnings - Plimsol, 1/1/20x4 (cost method, same with equity method and consoilidated retained earnings since it is the date of acquisition)P 150,000 Add: CI – CNI (refer to No. 21) 110,000 Less: CI – Dividends (Dividend of parent only)25,000 Retained earnings, 12/31/20x4 (equity method same with CRE) P 235,000 24. d Liabilities: Plimsol (P40,000 + P75,000) Shipping (P25,000 + P50,000)

P115,000 75,000 P 190,000

25. d Total assets (No. 22) Les: Liabilities (No. 24) Stockholders’ equity

26. c – P60,000 x 80% = P48,000 27. c Investment.1/1/20x4 Add: Share in net income – 20x4 (P45,000 x 80%)

P525,000 190,000 P335,000

P105,000 36,000

Less: Dividends received Investment, 12/31/20x4 Add: Share in net income – 20x5 (P60,000 x 80%) Less: Dividends received Investment, 12/31/20x5

12,000 P129,000 48,000 18,000 P159,000

28. a Investment. 4/1/20x6 P500,000 Add: Share in net income – 20x6 (3 quarters x P30,000 x 90%) 81,000 Less: Dividends declared of Satz (3 quarters x P10,000 x 90%) 27,000 Amortization (the recorded amount which means it represents only 9 months, no need to pro-rate) 10,000 Investment, 12/31/20x6 P544,000 29. c Patz’s equity in net income of Sats (90% x P30,000 x 3 qtrs) Less: Amortization (the recorded amount which means it represents only 9 months, no need to pro-rate) Investment income – 20x4 (equity method)P 71,000

P81,000 10,000

30. d Investment balance, 1/1/20x4……………………………………………….. P150,000 Add: Puma’s equity in net income of Slume (30% x P25,000)..………… 7,500 Less: Dividends (P30% x P10,000)……………………………………………. 3,000 Amortization of cost in excess of book value (P50,000/10 years) x 30%.............................................................. 1,500 Puma’s 20x6 net income (equity method) ............................................... P153,000 31. b Puma’s equity in net income of Slume (30% x P25,000)..……………….. P Less: Amortization of cost in excess of book value (P50,000/10 years) x 30%.............................................................. Investment income – 20x4 (equity method)………………………………. P

7,500 1,500 6,000

32. a – under equity method, the Parent’s retained earnings is the same with Consolidated RE. 33. b {(P260,000 - P230,000) + [(P650,000 - P590,000)/120] 8}.8 34. d 35. b

{(P190,000 - P160,000) 4/6 - [(P241,000 - P220,000)/60] 5}.7 Consideration transferred: 10,500 shares x P95 Less: BV of SHE – S (?) Allocated excess; Less: O/U valuation of A and L: Undervaluation of land Overvaluation of buildings Undervaluation of equipment Undervaluation/unrecorded trademark

36. a – P900,000 + P500,000 = P1,400,000

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

37. d – assumed that total expenses includes cost of goods sold which is different when the question is “total operating expenses” Cost of goods sold (P360,000 + P200,000) P 560,000 Depreciation expense (P140,000 + P40,000) 180,000 Other expenses (P100,000 + P60,000) 160,000 Amortization of allocated excess: Buildings: (P30,000) / 20 (P1,500) Equipment; P80,000 / 10 8,000 Trademark: P50,000 / 16 3,125 9,625 Total expenses P909,625 38. b – (P750,000 + P280,000) – P30,000 + (P1,500 x 5 years) = P1,007,500 39. c – (P300,000 + P500,000) + P80,000 – (P8,000 x 5 years) = P840,000 40. c – P450,000 + P180,000 + P40,000 = P670,000 41. d – P50,000 – P3,125 x 5 years) = P34,375 42. a – P only (the stock issued In 20x0 includes already in the December 31, 20x4 balance. 43. a – P only 44. a Consolidated Retained Earnings, December 31, 20x4 Consolidated Retained earnings, January 1, 20x4 (equity method) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 Total Less: Dividends paid – P Company for 20x4 Consolidated Retained Earnings, December 31, 20x4 (under equity method) Net Income from own operations: Sales Less: cost of goods sold Gross profit Less: Depreciation expense Other expenses Net income Non-controlling interest (full-goodwill), December 31, 20x4 P Company S Company Total Less: Non-controlling Interest in Net Income Amortization of allocated excess (refer to amortization above) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent…………..

P 1,350,000 490,375 P1,840,375 195,000 P1,645,375 P Co P900,000 360,000 P540,000 140,000 100,000 P300,000

S Co P500,000 200,000 P300,000 40,000 60,000 P200,000

P300,000 200,000 P500,000 P 0 9,625 _ 0

9,625 P490,375

45. c Note: Normally, the term used in the requirement “equity in subsidiary income”, is a term used under equity method, but it should be noted that under PAS 27, it prohibits the use of equity method for a parent to consolidate a subsidiary. But, assuming the use of equity method, the answer would be, P190,375. Share in net income: P200,000 x 100% P200,000 Less: Amortization of allocated excess 9,625 P190,375 46. a Punn’s equity in net income of Sunn (3 months ended,12/31/x6)…… P 200,000 Amortization of cost in excess of book value ........................................... ( 60,000) Increase in Parent’s retained earnings……………………………………. P 140,000 47. a

Punn’s net income from own operations, 12 months ended, 12/31/x6 P6,000,000 Add: Increase in RE of Sunn: Punn’s equity in net income of Sunn (3 months ended,12/31/x6)P200,000 Amortization of cost in excess of book value ............................................... ( 60,000) Increase in Parent’s retained earnings……………………………………. P 140,000 Punn’s net income for 20x6 under the equity method……………………… P6,140,000 48. b Full—goodwill Aproach Fair value of Subsidiary (100%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)……………….. Fair value of Subsidiary (100%)………. Less: Book value of stockholders’ equity of Son: Common stock (P100,000 x 100%)………………. Retained earnings (P60,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in land (P5,000 x 100%)……………………. Increase in equipment (P10,000 x 100%) Positive excess: Increase in Patent (excess of cost over fair value)………………………………………………...

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

160,000 P 40,000

P 5,000 ___10,000

15,000 P 25,000

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

Over/ under

Life

10,000 25,000

5 5

Annual Amount P 2,000 5,000 P 7,000

Current Year(20x4) P 2,000 5,000 P 7,000

49. d 1/1/x4.

Investment in Wisden 180,000 18,000 Dividends – S (20,000 x 90%)

NI of S (60,000 x 90%)……. 54,000 1/1/x6203,400

12,600

Amortization (P14,000 x 90%)

50. c 1/1/x6.

51. a

Investment in Wisden 230,400 9,000 Dividends – S (10,000 x 90%)

NI of S (30,000 x 90%)……. 27,000 1/1/x6215,100

6,300

Amortization (7,000 x 90%)

20x4 Investment income: Dividend of P10,000 x 100% = P10,000 20x4 Investment balance: P500,000 52. b Pedro’s equity in net income of Sanburn – x4 (100% x P80,000)..………. P 80,000 Less: Amortization of cost in excess of book value

Inventory: P20,000 x 100%……………………………………………….. 20,000 Patent [P500,000 – P380,000 = P120,000 – P20,000 = P100,000) (P100,000/20 years) x 100%.......................................................... 5,000 Investment income – 20x4 (equity method)………………………………. P 55,000 Investment balance, 1/1/20x4……………………………………………….. P500,000 Add: Pedro’s equity in net income of Sanburn – x4 (100% x P80,000)..…80,000 Less: Dividends (100% x P10,000)……………………………………………. 10,000 Amortization of cost in excess of book value: Inventory: P20,000 x 100%……………………………………………… 20,000 Patent [P500,000 – P380,000 = P120,000 – P20,000 = P100,000) (P100,000/20 years) x 100%.......................................................... ___5,000 Investment balance, equity method, 12/31/20x4…………………………. P545,000 53. d Under the cost method, an investor recognizes its investment in the investee at cost. Income is recognized only to the extent that the investor receives distributions from the accumulated net profits (or dividend declared/paid by the investee) of the investee arising after the date of acquisition by the investor. Distributions (dividends) received in excess of such profits are regarded as a recovery of investment and are accounted for as a reduction of the cost of the investment (i.e., as a return of capital or liquidating dividend). Therefore, the investment balance of P500,000 on the acquisition date remains to be the same. 54. d – refer to No. 53 for further discussion. 55. b – refer to No. 53 for further discussion. 56. a – P40,000 x 80% 57. b – P50,000 x 80% 58. a – P60,000 x 80% 59. c Full/Gross-up Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P100,000 Less: Amortization of allocated excess*…………… 7,000 Impairment of full-goodwill (if any)**………… 0 P 93,000 x: Non-controlling interests……………………………. 20% Non-controlling interest in Net Income………………………..P 18,600 *Amortization of allocated excess: Increase in equipment: P30,000 / 10 years = P 3,000 Increase in buildings: P40,000 / 10 years = 4,000 Total amortization……………………………… P 7,000 ** In case, there is an impairment of goodwill then the amount impaired under the fullgoodwill method should also be allocated between controlling and non-controlling interests Partial Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P100,000 Less: Amortization of allocated excess*………………7,000 P 93,000 x: Non-controlling interests……………………………. 20% Non-controlling interest in Net Income…………………. P 18,600

60. c Full/Gross-up Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P120,000 Less: Amortization of allocated excess*…………….. 7,000 Impairment of full-goodwill (if any)**………… 0 P113,000 x: Non-controlling interests……………………………. 20% Non-controlling interest in Net Income………………………..P 22,600 *Amortization of allocated excess: Increase in equipment: P30,000 / 10 years = P 3,000 Increase in buildings: P40,000 / 10 years = 4,000 Total amortization………………………. P 7,000 ** In case, there is an impairment of goodwill then the amount impaired under the fullgoodwill method should also be allocated between controlling and non-controlling interests Partial Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P120,000 Less: Amortization of allocated excess*…………….. 7,000 P113,000 x: Non-controlling interests……………………………. 20% Non-controlling interest in Net Income…………………………P 22,600 61. a Full/Gross-up Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P130,000 Less: Amortization of allocated excess*…………… 7,000 Impairment of full-goodwill (if any)**……… 0 P123,000 x: Non-controlling interests………………………….. 20% Non-controlling interest in Net Income……………………… P 24,600 *Amortization of allocated excess: Increase in equipment: P30,000 / 10 years = P 3,000 Increase in buildings: P40,000 / 10 years = 4,000 Total amortization………………………. P 7,000 ** In case, there is an impairment of goodwill then the amount impaired under the fullgoodwill method should also be allocated between controlling and non-controlling interests Partial Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P130,000 Less: Amortization of allocated excess*……………… 7,000 P123,000 x: Non-controlling interests……………………………… 20% Non-controlling interest in Net Income………………..P 24,600

62. a Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x4……………………………… P 300,000 Retained earnings, 12/31/20x4: Retained earnings, 1/1/20x4………………………….P200,000 Add: Net income – 20x4…………………………….. 100,000 Less: Dividends paid, 20x4…………..………………40,000 260,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x4 P 560,000 Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000 Less: Accumulated amortization of allocated excess P7,000 x 1 year…………………………………….…. 7,000 Fair value of Stockholders’ Equity of Subsidiary. 12/31/x4… P623,000 Multiplied by: Non-controlling Interest %........................... ____ 20% Non-controlling Interest (partial goodwill)………………….. P124,600 Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… 11,000 Non-controlling Interest (full)……………………………… P135,600 * this computation (i.e., P55,000 x 20%) should only be use when the fair value of the noncontrolling interest of acquiree (subsidiary) is not given. Partial Goodwill: Fair value of Subsidiary: Fair value of consideration transferred: Cash………… P 500,000 Less: Book value of Net Assets (Stockholders’ Equity - Subsidiary): (P300,000 + P200,000) x 80%.. 400,000 Allocated Excess.…………………………………………. P 100,000 Less: Over/Undervaluation of Assets and Liabilities: Increase in equipment: P30,000 x 80%................... P 24,000 Increase in building: P40,000 x 80%......................... 32,000 56,000 Goodwill (Partial)………………………………………….. P 44,000 Full-goodwill: (100%) Fair value of Subsidiary: (100%) Fair value of consideration transferred: P500,000 / 80%........………………………….. Less: Book value of Net Assets (Stockholders’ Equity - Subsidiary)…………................................... Allocated Excess.…………………………………………. Less: Over/Undervaluation of Assets and Liabilities (P40,000 + P30,000)……………………. Goodwill (Full/Gross-up)..………………………………..

P 625,000 500,000 P 125,000 P

70,000 55,000

63. e Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x5……………………………… P 300,000 Retained earnings, 12/31/20x5: Retained earnings, 1/1/20x5 …………………..……P260,000 Add: Net income, 20x5………………………………. 120,000 Less: Dividends paid, 20x5…………………………… 50,000 330,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x5 P 630,000

Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000 Less: Accumulated amortization of allocated excess – 2 yrs 14,000 Fair value of Stockholders’ Equity of Subsidiary. 12/31/x5… P 686,000 Multiplied by: Non-controlling Interest %.............................. 20% Non-controlling Interest (partial goodwill)………………….. P 137,200 Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… 11,000 Non-controlling Interest (full)……………………………… P 148,200 64. e Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x6……………………………… P 300,000 Retained earnings, 12/31/20x6: Retained earnings, 1/1/20x6………………………….P330,000 Add: Net income, 20x6……………………………… 130,000 Less: Dividends paid, 20x6…………………………..60,000 400,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x6 P 700,000 Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000 Less: Accumulated amortization of allocated excess (1/1/20x4 – 12/31/20x6): P7,000 x 3 years…………… 21,000 Fair value of Stockholders’ Equity of Subsidiary. 12/31/x6… P 749,000 Multiplied by: Non-controlling Interest %............................ 20% Non-controlling Interest (partial goodwill)………………….. P 149,800 Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… 11,000 Non-controlling Interest (full)……………………………… P 160,800 * this computation (i.e., P55,000 x 20%) should only be use when the fair value of the noncontrolling interest of acquiree (subsidiary) is not given. 65. P542,400 Investment balance, 1/1/20x4……………………………………………….. P500,000 Add: Bell’s equity in net income of Demers – x4 (80% x P100,000)..……80,000 Less: Dividends (80% x P40,000)……………………………………………….32,000 Amortization of cost in excess of book value: Equipment: P30,000/10 years x 80%………………………………… 2,400 Building: P40,000/10 years x 80%................................................. 3,200 Investment balance, equity method, 12/31/20x4…………………………. P542,400 66. c Investment balance, 12/3/20x4……………………………………………….. P542,400 Add: Bell’s equity in net income of Demers – x4 (80% x P120,000)..…… 96,000 Less: Dividends (80% x P50,000)………………………………………………. 40,000 Amortization of cost in excess of book value: Equipment: P30,000/10 years x 80%………………………………… 2,400 Building: P40,000/10 years x 80%................................................. 3,200 Investment balance, equity method, 12/31/20x5…………………………. P592,800 67. b Investment balance, 12/3/20x5……………………………………………….. P592,800

Add: Bell’s equity in net income of Demers – x4 (80% x P130,000)..…… 104,000 Less: Dividends (80% x P60,000)………………………………………………. 48,000 Amortization of cost in excess of book value: Equipment: P30,000/10 years x 80%………………………………… 2,400 Building: P40,000/10 years x 80%................................................. 3,200 Investment balance, equity method, 12/31/20x6…………………………. P643,200 68. a Bell’s equity in net income of Demers (80% x P100,000)………………. P 80,000 Less: Amortization of cost in excess of book value (refer to No. 65): (P2,400 + P3,200) 5,600 Investment income – 20x4 (equity method)………………………………. P 74,400 69. a Bell’s equity in net income of Demers (80% x P120,000)………………. P 96,000 Less: Amortization of cost in excess of book value (refer to No. 65): (P2,400 + P3,200) 5,600 Investment income – 20x5 (equity method)………………………………. P 90,400 70. c Bell’s equity in net income of Demers (80% x P130,000)………………. P 104,000 Less: Amortization of cost in excess of book value (refer to No. 65): (P2,400 + P3,200) 5,600 Investment income – 20x6 (equity method)………………………………. P 98,400 71. c Non-controlling interest in Net Income: Subsidiary net income from own operations…………………………… P100,000 Less: Amortization of allocated excess (refer to No. 65) (P3,000 + P4,000)………………………………………..……………. 7,000 P 93,000 x: Non-controlling interests……………………………………………….. 20% Non-controlling interest in Net Income…………………………………P 18,600 72. c Non-controlling interest in Net Income: Subsidiary net income from own operations…………………………… P120,000 Less: Amortization of allocated excess (refer to No. 65) (P3,000 + P4,000)………………………………………..……………. 7,000 P 113,000 x: Non-controlling interests……………………………………………….. 20% Non-controlling interest in Net Income………………………………… P 22,600 72. c Non-controlling interest in Net Income: Subsidiary net income from own operations…………………………… P130,000 Less: Amortization of allocated excess (refer to No. 65) (P3,000 + P4,000)………………………………………..……………. 7,000 P 123,000 x: Non-controlling interests……………………………………………….. 20% Non-controlling interest in Net Income………………………………… P 24,600

73. a – same with No. 62 (cost method) 74. e – same with No. 63 (cost method) 75. d – same with No. 64 (cost method) 76. b 77. b – Dividend paid – S, P70,000 x 60% = P42,000 78. d – CNI amounted to P265,000 [CI-CNI, P235,000 and NCI-CNI, P30,000 Consolidated Net Income for 20x5 Net income from own/separate operations P Company SCompany Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

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

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

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

P 90,000 ( 15,000_ P75,000 40% P 30,000 ______0 P 30,000

Multiplied by: Non-controlling interest %.......... Less: Non-controlling interest on impairment loss on full-goodwill (P1,500 x 15%)*

20x5 results of operations are as follows: Sales Less: Cost of goods sold Operating expenses Net income from its own separate operations Add: Investment income Net income

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

Computation of Goodwill: Fair value of Subsidiary (100%) Consideration transferred: Cash (60%) Fair value of NCI (given) (40%) Fair value of Subsidiary (100%) Less: Book value of stockholders’ equity of Sea (P550,000 x 100%) Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities (P140,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value) Amortization of Allocated Excess Book Value Buildings (net)- 6 300,000 Equipment (net)– 4 300,000 Patent -10 -0Net

Fair Value 360,000 280,000 100,000

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

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

P 414,000 276,000 P 690,000 __550,000 P 140,000

P

140,000 0

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

79. c – refer to No. 78 for computations 80. b – refer to No. 78 for computations 81. c - P811,000. Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model) Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x2 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x2 – 20x4 (P15,000 x 3 years)

P700,000

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

Multiplied by: Controlling interests %................... Less: Goodwill impairment loss (full-goodwill), Consolidated Retained earnings, January 1, 20x5 Note: a. Date of acquisition: RE of Parent = Consolidated RE Regardless of the method used in the books of the subsidiary, applied – b. Subsequent to date of acquisition: Retained earnings of Parent under equity method = CRE

111,000 P 811,000

the following rule should always be

Since, the P811,000 is the retained earnings of parent under the equity method, it should also be considered as the parent’s portion or interest in consolidated retained earnings or simply the consolidated retained earnings.

82. c - P811,000 – refer to note (b) of No. 81 83. b – P111,000 – refer to No. 81 84. d Consolidated Retained earnings, January 1, 20x5 (refer to Nos. 81 and 82) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 Total Less: Dividends paid – Parent Company for 20x5 Consolidated Retained Earnings, December 31, 20x5

P 811,000 235,000 P1,046,000 92,000 P 954,000

85. d – refer to No. 84 86. c Non-controlling interest (partial-goodwill), December 31, 2015 Common stock – Subsidiary Company, December 31, 2015…… Retained earnings – Subsidiary Company, December 31, 2015 Retained earnings – Subsidiary Company, January 1, 2015 Add: Net income of subsidiary for 2015 Less: Dividends paid – Subsidiary - 2015 Stockholders’ equity – Subsidiary Company, December 31, 2015 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 2012) Amortization of allocated excess (refer to amortization above) – (P15,000 x 4) Fair value of stockholders’ equity of subsidiary, 12/31/ 2015 Multiplied by: Non-controlling Interest percentage. Non-controlling interest (partial) Add: NCI on full-goodwill…………………….

P 480,000 P300,000 90,000 70,000

320,000 P 800,000 140,000 ( 60,000) P 880,000 40 P 352,000 ____0

Non-controlling interest (full)

P 352,000

87. c Stockholders’ Equity Common stock - Peer Retained earnings Parent’s Stockholders’ Equity/Equity Attributable to the Owners of the Parent Non-controlling interest** Total Stockholders’ Equity (Total Equity) Total Liabilities and Stockholders’ Equity

P

724,000 954,000

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

88. c Investment in Sea-Breeze 1/1/x2. 414,000 42,000 Dividends – S Retro 111,000 (70,000 x 60% NI of S (90,000 Amortization x 60%)……. 54,000 9,000 (P15,000 x 60%) 12/31/x5528,000

Investment Income NI of S Amortization (P15,000 x 60%) 9,000

89. c 90. d – refer to No. 78 91. c – refer to No. 78 92. b – refer to No. 78 93. c – refer to No. 81 94. c – refer to No. 81 95. a – not applicable under equity method. 96. d – refer to No. 84 97. d – refer to No. 84 98. d – refer to No. 86 99. c – refer to No. 87 100. a Net income of S (5/1/x5 – 12/31/x5): P840,000 x 8/12 Less: Dividend – S (11/1/20x5 – no need to pro-rate) Cumulative net income less dividends since date of acquisition, 1/1/20x6 (date to establish reciprocity – not 12/31/x6) x: Controlling interests 101. b Retained earnings – S Company, 1/1/20x4 Less: Retained earnings – S Company, 12/31/20x6 Cumulative net income less dividends since date of acquisition, 1/1/20x6 (date to establish reciprocity – should always be beginning of the year, not 12/31/x6) x: Controlling interests

54,000 45,000

P560,000 300,000 P260,000 80% P208,000 P 60,000 190,000 P130,000 90% P117,000

102. (b) Net income of Subsidiary – 2015 and 2016 (P15,000 + P22,000)…………………………………….P 37,000 Less: Dividends of Subsidiary – 2015 and 2016 (P6,000 + P9,000)……………………………………... 15,000 Cumulative net income less dividends since date of acquisition, 1/1/2017 (date to establish reciprocity –should always be beginning of the year, not 12/31/17) / Increase in Retained earnings………………………………………………………………………………………... P 22,000 x: Controlling interests……………………………………………………………………………………..70%

(90,000 x 60%)

P 15,400 It should be noted that the amortization/depreciation and any unrealized/realized profits (in case of intercompany sales of inventory/fixed assets) should not be included (refer to next number) as part of the entry to established reciprocity since there will be separate eliminating entry to be made at the end of the year (2017) for amortization and depreciation. Further, the eliminating entry to establish reciprocity for the year 20x7 should be made on January 1, 2017 not December 31, 2017 Incidentally, the entry to convert from cost method to equity method or the entry to establish reciprocity at the beginning of the year, 1/1/2017 would be as follows: Investment in Subsidiary………………………………………………………………… 15,400 Retained earning – Parent Company, 1/1/2017………………………………. 15,400

103. (a)

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

104. b [{(P84,000 + P105,000) - [(P310,000 - P220,000)/20]2} - (P30,000 + P50,000)].8 105. a - under the cost model share in net income or earnings of subsidiary does not affect investment. 106. d Investment account, December 31, 20x7: Original investment …………………………………………..P 550,000 Tiny’s earnings, 20x4-20x77: 100% x P166,000……………166,000 Less: Dividends received: 100% x P114,000………………114,000 Balance, December 31, 20x7……………………………..P602,000 107. a The adjusting entry required in 20x7 to convert from the cost to the equity methodis: Investment in Tiny………………………………….52,000 Retained earnings beg………………………….. 4,000 Dividend revenue………………………………… 54,000 Equity in subsidiary income of Tiny……. 110,000 108. d – P45,000/15% = P300,000 109. d Pigeon’s separate income P150,000 Less: 60% of Home’s P10,000 loss = 6,000 Less: Equipment depreciation P10,000/ 10 years = __1,000 Controlling Interest in Consolidated Net Income P143,000 Add: NCI in CNI NL of S Company P( 10,000) Less: Amortization of allocated excess (P1,000/60%) 1,667 P (11,667) Multiplied by: NCI% 40% ( 4,667) Consolidated Net Income P138,333

110. a Non-controlling Interest in Net Income (NCINI) for Year 3 Net income of S Company Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for Year 3

P240,000 45,000 P195,000 30% P 58,500

111. c Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization above) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess**

P 375,000 30,000 P405,000 P5,250 3,750 0

9,000 P396,000

P30,000 3,750 P26,250 20% P 5,250

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x4 **P270,000/80% = P337,500 – (P150,000 + P150,000) = P37,500 / 10 years = P3,750 Note: Whether the partial or full-goodwill approach are used the amortization of excess are always the same.

112. a *Non-controlling Interest in Net Income (NCINI) for Year 3 Net income of S Company Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for Year 3

P600,000 112,500 P487,500 30% P146,250

113. c Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess (refer to amortization above) Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess**

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

15,000 P660,000

P50,000 6,250 P43,750 20% P 8,750

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x4 **P450,000/80% = P562,500 – (P250,000 + P250,000) = P62,500 / 10 years = P6,250 Note: Whether the partial or full-goodwill approach are used the amortization of excess are always the same.

114. b As a general rule, if problem is silent It is assumed that expenses are generated evenly throughout the year, thus: Expenses (9/1/20x4-12/31/20x4): P620,000 x 4/12 P206,667 Amortization of allocated excess: P15,000 x 4/12 5,000 P211,667 115. c Net income of S Company (P800,000 – P620,000) Less: Amortization of allocated excess Multiplied by: No of mos. (9/1-12/31)

P180,000 15,000 P165,000 4/12 P 55,000

116. a Net income of S Company (P800,000 – P620,000) Less: Amortization of allocated excess Multiplied by: No of mos. (9/1-12/31) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x4

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

117.b Combined revenues .................................................................................................. Combined expenses .................................................................................................. Excess acquisition-date fair value amortization ................................................... Consolidated net income......................................................................................... Less: Noncontrolling interest (P85,000 × 40%) ........................................................ Consolidated net income to controlling interest .................................................

P1,100,000 (700,000) (15,000) P385,000 (34,000) P351,000

118. c HH expense .................................................................................................................. NN expenses ................................................................................................................ Excess fair value amortization (70,000 ÷ 10 yrs) ..................................................... Consolidated expenses .............................................................................................

P621,000 714,000 7,000 P1,342,000

119. b Step-acquisition, either full-goodwill or partial goodwill approach, the answer remains the same. Full-Goodwill Presentation: Net income from own operations; Parent - Keefe…………………………………… P 300,000 Subsidiary - George (P500,000 – P400,000)…….. 100,000 P 400,000 Less: Amortization of allocated excess…………………… 6,000 Impairment of goodwill (if any)……………………. 0 Consolidated/Group Net Income…………………………. P 394,000 Less: Non-controlling interest in Net Income Subsidiary net income from own operations: 1/1/20y0 - 4/1/20y0 (3 months): P100,000 x 3/12 = P25,000 x 30%................ P 7,500 4/1/20y0 – 12/31/20y0 (9 months): P100,000 x 9/12 = P75,000 x 20%................ 15,000 Total…………………………………………….. P 22,500

Less: Amortization of allocated excess: 1/1/20y0 – 4/1/20y0 (3 months) P6,000 x 3/12 = P1,500 x 30%.......... 4/1/20y0 – 12/31/20y0 (9 months) P6,000 x 9/12 = P4,500 x 20%........... Impairment of goodwill (if any): First 3 months: P 0 x 30%.......………… Remaining 9 months: P 0 x 20%............... CNI attributable to the controlling interest (CI-CNI)/ Profit attributable to equity holders of parent………………….

450 900 0 0

21,150 P372,850

* It should be noted that the phrase without regard for this investment means that excluding any income arising from investment in subsidiary (i.e., dividend income). 120. d – Economic Unit or Entity Concept (as required by PFRS 10) Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: NCINI CNI - entity concept *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x4

P 500,000 100,000 P600,000 P20,000 0 _ 0

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

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

121. c – Parent Company Concept – Parent’s Net Income only (not required by PFRS 10) Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment (impairment under full-goodwill approach) CNI - entity concept *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x4

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

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

20,000 P580,000

122. b Net Income from own operations: 20x420x5 Parent …………………………………………………P 100,000 P100,000 Subsidiary……………………………………………... 25,000 35,000 P125,000 P135,000 Subsidiary’s other comprehensive income…………..5,000 10,000 Total Comprehensive Income……………………….....P130,000 P145,000 Less: Amortization of allocated excess…………….… 6,250 6,250 Impairment of full- goodwill (if any)…………. 0 0 Consolidated /Group Comprehensive Income…… P123,750 P138,750 Less: Non-controlling interest in Comprehensive Income *…………………………………………… 4,750 7,750 Controlling Interest in Consolidated __________________ Comprehensive Income …. …………………………P119,000 P131,000 *Non-controlling interest in Comprehensive Income: 20x420x5 Subsidiary’s: Net income from own operations………….......P 25,000 P 35,000 Other Comprehensive Income (P30,000 – P25,000)…………………………….…………... 5,000 10,000 Subsidiary’s Comprehensive Income…………........P 30,000 P45,000 Less: Amortization of allocated excess*………….. 6,250 6,250 Impairment of full-goodwill (if any)....………. 0 0 P 23,750 P 38,750 x: Non-controlling interests……………………………. 20% 20% Non-controlling interest in Comprehensive IncomeP 4,750P 7,750 *Amortization of allocated excess: Increase in other intangibles: P50,000 / 8 years = P 6,250 123. c – refer to No. 122 124. c – refer to No. 122 125. b- refer to No. 122 126. d Inventory – not yet sold in 20x4 Building: (P390,000 – P200,000)/ 10 years Equipment (P280,000 – P350,000)/ 5 years

P

0 19,000 ( 14,000) P 5,000

127. c Plochman’s acquisition entry is: Investment in Shure……………………………………………………………40,000,000 Retained earnings (acquisition-related expense – close to retained since only balance sheet accounts are being examined)…………………………………………………………………… 1,000,000 Common stock, 1,000,000 x P1 par……………………………… 1,000,000 PIC in excess of par [(1,000,000 x P39) – P800,000)…………… 32,000,000 Cash (P800,000 + P1,000,000)…………………………………….. 1,800,000 Eliminating entries are: Book value of stockholders’ equity: Stockholders’ equity-Shure………………………………………………… 6,000,000 Investment in Shure………………………………………………… 6,000,000 Allocated excess (acquisition/purchase differential): Identifiable assets……………………………………………………………. 7,000,000

Long-term debt………………………………………………………………. 500,000 Goodwill………………………………………………………………………..28,500,000 Lawsuit liability………………………………………………………. 2,000,000 Investment in Shure………………………………………………… 34,000,000

128. d –refer to No. 127 129. a 130. a Cost of Goods Sold P80,000 debit Depreciation Expense (P192,000/120) 7 = P11,200 debit 131. c Cost of Goods Sold (P60,000 x 4/6) = P40,000 debit Interest Expense: (P15,000/5) = P3,000 debit 132. a [(P250,000 - P180,000)/10]7 133. c [(P380,000 - P260,000)/120]88 134. No question available 135. a 136.c P170,000 - {[P320,000 - (P300,000 - P170,000)]/10}2 137.b [P320,000 - (P300,000 - P170,000)]/10 138.d 139.d P105,000 - {[P405,000 - (P450,000 - P105,000)]/20}2 140. a [P405,000 - (P450,000 - P105,000)]/20 141. d - The acquisition method consolidates assets at fair value at acquisition date regardless of the parent’s percentage ownership. 142. d P: BV,12/31/20x6 S: BV of building, 12/31/20x4 Add: Adjustments to reflect fair value, 1/1/20x4 (P350,000 – P240,000) Less: Amortization of excess (P110,000/10) x 3 years 143. b P: BV,12/31/20x5 S: BV of building, 12/31/20x5 Add: Adjustments to reflect fair value, 1/4/20x4 (P120,000 – P90,000) Less: Amortization of excess (P30,000/10) x 2 years

P250,000 P170,000 110,000 33,000

247,000 P497,000 P 975,000

P105,000 30,000 6,000

129,000 P1,104,000 144. c - An asset acquired in a business combination is initially valued at 100% acquisition-date fair value and subsequently amortized its useful life. Patent fair value at January 1, 20x4 ....................................................................... Amortization for 2 years (10 year life) ..................................................................... Patent reported amount December 31, 20x5 ...................................................... 145. b

P45,000 (9,000) P36,000

BV of building, 1/1/20x4 Adjustments to reflect fair value, 1/1/20x4 (P300,000 – P200,000) Depreciation 1/1/20x4 – 12/31/20x6 (P100,000/20 x 3 years) 146. d – same with No. 145 147. d BV of equipment, 1/1/20x4 Adjustments to reflect fair value, 1/1/20x4 (P80,000 – P75,000) Depreciation 1/1/20x4 – 12/31/20x6 (P5,000/10 x 3 years) 148. a Adjustments to reflect fair value, 1/1/20x4 (P80,000 – P75,000) Depreciation 1/1/20x4 – 12/31/20x6 (P5,000/10 x 3 years) 149. d – 1/2/20x4: BV of equipment, 1/1/20x4 Adjustments to reflect fair value, 1/1/20x4 (P300,000 – P200,000) 150. b

P200,000 100,000 ( 15,000) P285,000 P 80,000 ( 5,000) 1,500 P 76,500 (P 5,000) 1,500 (P 3,500) P200,000 100,000 P300,000

Decrease in Buildings account: Fair value……………………………………………P 8,000 Book value………………………………………….. __10,000 Decrease…………………………………………….P 2,000 151. d Decrease in buildings account (refer to No. 73)………… P 2,000 Less: Increase due to depreciation (P2,000/10)………… 200 Decrease in buildings accounts……………………………..P 1,800 152. d

153. a

Decrease in buildings account (refer to No. 74)………… P 1,800 Less: Increase due to depreciation (P2,000/10)………… 200 Decrease in buildings accounts……………………………..P 1,600 Increase in Equipment account: Fair value……………………………………………P 14,000 Book value………………………………………….. __18,000 Increase…………………………………………….P 4,000

154. a Increase in equipment account (refer to No. 76)………… P 4,000 Less: Decrease due to depreciation (P4,000/4)…………… 1,000 Increase in equipment accounts……………………………..P 3,000 155. a Increase in equipment account (refer to No. 77)………… P 3,000 Less: Decrease due to depreciation (P4,000/4…………… 1,000 Increase in equipment accounts……………………………..P 2,000 156. a Increase in Land account: Fair value……………………………………………P 12,000 Book value………………………………………….. 5,000 Increase…………………………………………….. P 7,000

157. b – refer to No. 156, no depreciation/amortization 158. b – refer to No. 156, no depreciation/amortization 159. e Increase in Patent account: Fair value……………………………………………P 11,000 Book value………………………………………….. _ 0 Increase…………………………………………….P 11,000 (P234,000/90%) – (P160,000 + P80,000) = P20,000 – (P4,000 – P2,000 + P7,000) = P11,000. Partial or full-goodwill approach, the amortization remains the same. 160. e Increase in patent account (refer to No. 159)……………… Less: Decrease due to depreciation (P11,000/5).………… Increase in patent accounts………………………………….

P 11,000 2,200 P 8,800

Increase in patent account (refer to No. 160)……………… Less: Decrease due to depreciation (P11,000/5).………… Increase in patent accounts………………………………….

P 8,800 2,200 P 6,600

161. d

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

P120,600 P 45,000 13,500 36,900 95,400 P 25,200 P 900 7,200 2,700 10,800 P 14,400 P 1,000 2,000 300 P 3,300

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

P 50,000 15,000 41,000 P106,000 12,000 P118,000 10% P 11,800

164. a – P48,000, parent only. 165. a – P48,000. On the date of acquisition, the parent’s retained earnings is also the consolidated retained earnings. 166. b – P120,600, the initial value

167. b – P4,000 x 90% = P3,600 168. c Consolidated Net Income for 20x4 Net income from own/separate operations P CompanyP30,200 – (P4,000 x 90%) S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P26,600 9,400 P36,000 P

610 3,300 ____0

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

169. c Noncontrolling Interests (in net assets): Common stock - S, 12/31 P 50,000 Additional paid-in capital - S, 12/31 15,000 Retained earnings - S, 12/31: RE-S, 1/1/2011 P 41,000 Add: NI-S, 2011 9,400 Less: Dividends – S 4,000 46,400 Book value of SHE - S, 12/31 P 111,400 Add: Adjustments to reflect fair value, 1/1 12,000 Less: Amortization of allocated excess (1 yr.) 3,300 Fair Value of Net Assets/SHE - S, 12/31 P 120,100 x: Noncontrolling Interest % 10% Noncontrolling Interest (in net assets), 12/31 P 12,010 170. b – refer to 168 for computation 171. c – refer to 168 for computation 172. b Controlling RE / RE Attributable to EH of Parent, 1/1 (refer to No. 102 P 48,000 Add: CI – CNI (refer to 168) 32,090 Less: CI – Dividends (Dividend of parent only) 15,000 Controlling RE / RE Attributable to EH of Parent, 12/31 P 65,090 173. b – same with No. 172 174. c Consolidated Equity: Controlling Interest / Equity Holders Attributable to Parent: Common stock – P: [P100,000 + P120,600 – (5,400 shares x P10 par)] P154,000 APIC – P: [15,000 + [P120,600 – (5,400 x P10)] 81,600

3,910 P32,090 610 P32,700 P 9,400 3,300) P 6,100 10% P 610 ____0 P 610

(

RE – P (refer to No. 172) 65,090 Parent’s Stockholders Equity or Controlling Interest – Equity Noncontrolling Interest Consolidated Equity P312,700

P300,690 12,010

175. c

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

176. c

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

177. b Combined revenues .................................................................................................. Combined expenses .................................................................................................. Trademark amortization ............................................................................................ Patented technology amortization ........................................................................ Consolidated net income.........................................................................................

P1,300,000 (800,000) (6,000) (8,000) P486,000

178. c Subsidiary income (P100,000 – P14,000 excess amortizations) .......................... Non-controlling interest percentage ...................................................................... Non-controlling interest in subsidiary income .......................................................

P86,000 __40% P34,400

Fair value of non-controlling interest at acquisition date ................................... 40% change in Scott book value since acquisition ............................................. Excess fair value amortization (P14,000 × 40%) ..................................................... 40% current year income .......................................................................................... Non-controlling interest at end of year ..................................................................

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

179. a MM trademark balance............................................................................................ SS trademark balance .............................................................................................. Excess fair value .......................................................................................................... Two years amortization (10-year life) ...................................................................... Consolidated trademarks .........................................................................................

P260,000 200,000 60,000 (12,000) P508,000

180 a Fair value of non-controlling interest on April 1 .................................................... 30% of net income for 9 months (¾ year×P240,000 × 30%) ................................ Non-controlling interest December 31 ...................................................................

P165,000 54,000 P219,000

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

P1,000,000 ___150,000 P1,150,000 ____90,000 P1,060,000 200,000 _( 20,000) P1,240,000 30% P372,000 ___25,714 P397,714

*P900,000/70% = P1,285,714 – P1,000,000 = P285,714 – P200,000 = P85,714, full goodwill *P900,000 – (P1,000,000 x 70%) = P200,000 – (P200,000 x 70%) = P60,000, partial goodwill It is assumed that full-goodwill is used. But, it should be noted that PFRS 3 either partial or fullgoodwill approach are considered acceptable.

182. b – (P50,000 + P70,000) x 25% = P30,000 183. b – P only. 184. b {(P250,000/.8) + [P75,000 + P90,000 - P25,000 - P50,000 - P30,000 - (P80,000/8)2]}.2 185. d {(P420,000/.7) + [P160,000 + P210,000 - P60,000 - P80,000 - P50,000 - (P90,000/5)2]}.3 186. a - P650,000 =P500,000 + P200,000 - P50,000 187. b 188. a – P540,000 = (P500,000 + P150,000 – P90,000 – P20,000) 189. c – equivalent to the original cost 190. d - In consolidating the subsidiary's figures, all intercompany balances must be eliminated in their entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it. 191. b - Intercompany receivables and payables from unconsolidated subsidiaries would not be eliminated.

Theories 1. 2. 3. 4. 5.

c d d d* d

6. 7. 8. 9. 10,

b c d d a

11. 12. 13. 14. 15,

C** b d c c

16. 17. 18. 19. 20.

c c d d b

21. 22. 23. 24. 25.

d a b c c

26. 27. 28. 29. 30.

c d c c b

31 32. 33. 34. 35.

c b c c d

36. 37. 38. 39. 40.

d b b c d

41. 42. 43. 44. 45.

a c a

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

Advanced-Accounting-Part 2-Dayag-2015-Chapter-16.docx

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