Solution Chapter 16

Chapter 16

Problem I 1. P50,075

Consolidated Net Income for 20x4 Net income from own/separate operations Pill Company [P25,000 – (P9,000 x 85%)] Sill Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P17,350 40,000 P57,350

P 5,775 0 1,500

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

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

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

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

2. P5,775 – refer to computation in No. 1 Problem II (Assume the use of full-goodwill approach) Cost of 75% investment 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 400,000 Retained earnings 100,000 Allocated Excess: Acquisition differential – Jan. 1, 20x4 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory Decrease in Patents Goodwill - full

600,000 800,000

500,000 300,000

40,000 (70,000)

(30,000) 330,000

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

Over/ Under P40,000

Life 1

(70,000)

5

330,000

-

Annual Amount P 40,000

Current Year(20x4) P 40,000

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

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

20x5 P

-

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

P

20x6

-

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

Unamortized balance of allocated excess: Balance Jan. 1 20x4 Inventory 40,000 Patents (70,000) Goodwill 330,000 300,000 Journal Entries Investment in Small Cash Cash Dividend income 2.

Balance Dec. 31

Amortization 20x4 & 20x5 20x6 40,000 (28,000) (14,000) 0 19,300 12,000 5,300 Year 1 600,000 600,000 18,750 18,750

(28,000) 310,700 282,700

Year 2 7,500

a. Goodwill, 12/31/20x6 (P330,000 – P19,300) b. FV of NCI, 12/31/20x6: Common stock, 12/31/20x6 Retained earnings, 1/1/20x6 (P100,000 + P80,000 – P25,000 – P35,000 – P10,000) Add; NI – Subsidiary (20x6) Dividends – Subsidiary 20x6 Book value of SHE – S, 12/31/20x6 Adjustments to reflect fair value Amortization of allocated excess – 20x5 - 20x6 Impairment of goodwill – 20x5 FV of SHE of S Multiplied by: NCI% FV of NCI

Year 3

7,500

NCI’s share (25%)

30,000

P 310,700 P 400,000 P 110,000 90,000 ( 40,000)

160,000 P 560,000

P 300,000 ( 12,000) 14,000 ( 19,300)___282,700 P842,700 25% P210,675

Or, alternatively; Small’s common/ordinary shares Small’s retained earnings (100,000+80,000-25,000-35,000-10,000+90,000 -40,000) Unamortized acquisition differential

30,000

400,000 160,000 560,000 282,700 842,700 210,675

c. Consolidated Retained Earnings, 1/1/20x6 – P498,500

Consolidated Retained Earnings, December 31, 20x6 Retained earnings - Large 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 – Small, January 1, 20x5 (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

P500,000

P 110,000 100,000 P 10,000 26,000

Amortization of allocated excess – 20x5

(14,000) P ( 2,000) 75% P ( 1,500) _____0

Multiplied by: Controlling interests %................... Less: Goodwill impairment loss (full-goodwill) – 20x5 Consolidated Retained earnings, January 1, 20x6

1,500 P498,500

Incidentally, 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

P498,500 219,050 P717,550 70,000 P647,550

d. P219,050

Consolidated Net Income for 20x6 Net income from own/separate operations 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 20x4

P170,000 90,000 P260,000

P 16,350 5,300 19,300

40,950 P219,050 16,350 P235,400

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


P 90,000 ( 5,300) P 84,700 25% P 21,175 ___4,825 P 16,350

e. P16,350 – refer to (d) for computations Teacher’s Guide: For purposes of comparison between Cost Model/Method and Equity Method 1. Year 1 Investment in Small 600,000 Cash 600,000 Investment in Small (75% x Small’s profit) 60,000 Investment income 60,000 Cash (75% x Small’s dividends) 18,750 Investment in Small 18,750 Investment income (75% x amortization of PD*) 19,500 Investment in Small 19,500 *purchase differential ( ) – indicates reduction

Year 2

Year 3

(26,250) 67,500 (26,250) 67,500 7,500 30,000 7,500 30,000 (10,500) 3,975 (10,500) 3,975

Investment in Small under cost method Small’s retained earnings, end of year Small’s retained earnings, date of acquisition Change since acquisition Less: cumulative amortization of acquisition differential

600,000

160,000 100,000 60,000 17,300

42,700 32,025 632,025

Large’s share (75%) Investment in Small under equity method

Note: Regardless of the method used (cost or equity) answers for No. 2 (a) to (e) above are exactly the same. Problem III Cost of 8% 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

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

Life 1 10

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



__9,000 P 79,000

___9,000 P 79,000

P

20x6

-

___9,000 P 9,000

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

P

20x7

-

___9,000 P 9,000,

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

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

20x5

20x6

P 28,000

P(7,350) 79,000 _____0

30,000 P 58,000 71,650

P 6,450 9,000 _____0

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

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


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) 20x6: 15%  (52,000 – 9,000) (2) Profit (loss) Pen Dividends from Silk 20x5 20x6 (85%  15,000) Share of Silk’s profit 85%  (30,000 – 79,000) 85%  (52,000 – 9,000) Consolidated profit (loss) attributable to Pen’s shareholders

- 7,350 6,450 20x5 28,000 0

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)

*Net income (loss) of subsidiary Amortization of allocated excess

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

20x6 (45,000)

28,000

(12,750) (57,750)

(41,650) _

36,550_

(13,650)

(21,200)

20x6 P 52,000 ( 9,000) P 43,000 15% P 6,450 ___ _P 6,450

3. CRE, 12/31/20x6 – P73,150

Consolidated Retained Earnings, December 31, 20x6 Retained earnings - Pen Company, December 31, 20x6 (cost model Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Silk, December 31, 20x6: (P100,000 + P30,00 – P0 + P52,000 – P15,000) Less: Retained earnings – Silk, December 31, 20x4 (date of acquisition) Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x5 Amortization of allocated excess – 20x6 Multiplied by: Controlling interests %................... Less: Goodwill impairment loss (full-goodwill) – 20x5 Consolidated Retained earnings, December 31, 20x6

P 91,000

P 167,000 100,000 P 67,000 79,000 __ 9,000 P (21,000) 85% P (17,850) _____0

( 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, 12/31/20x: Retained earnings, 1/1/20x4 P 100,000 NI – Subsidiary (20x5 and 20x6): P30,000 + P52,000 82,000 Dividends – Subsidiary (20x5 and 20x6): P) + 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) 167,000 Retained earnings, 12/31/20x4 (date of acquisition) 100,000 Increase since acquisition 67,000 Less: Amortization of allocated excess (79,000 + 9,000) 88,000 ( 21,000) NCI’s share 15% Non-controlling interest – Dec. 31, 20x6 5. Consolidated Patents, 12/31/20x6: P72,000 Unamortized balance of allocated excess: Balance Dec. 31 20x4 Inventory 70,000 Patents 90,000 160,000

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

P 114,000

( 3,150) P 110,850

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

Or, alternatively: Invest. account – equity Dec. 31, 20x6 Cost of investment 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) Invest. account – equity method as at Dec. 31, 20x6 Implied value of 100% (628,150 / 85%) Silk –Common shares Retained earnings

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

500,000 167,000

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

- 17,850 628,150 739,000 667,000 72,000

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

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

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

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

300,000 90,000 210,000

80,000 150,000

480,000 120,000

184,000 46,000

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

300,000 90,000 210,000

80,000 120,000

480,000 120,000

184,000 16,000

4.

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

5.

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

6.

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

7.

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

P 8,000 P664,000

P

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

150,000 120,000

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

c.

Common stock – S Retained earnings – S Investment in S Co NCI (P4,250,000 x 10%) Land Investment in S NCI [(P500,000 x 10%)– (P100,000 x 10%)] Retained earnings – P (bargain purchase gain – closed to retained earnings since only balance

3,000,000 1,250.000

400,000

225,000

3,825,000 425,000 150,000 40,000

sheets are being examined, P300,000 – P90,000 depreciation, 20x4)

210,000

FV of SHE of S: Common stock, 1/1/20x5 P3,000,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 250,000 Dividends – Subsidiary 20x4 ( 0) 1,250,000 Book value of SHE – S, 1/1/20x5 P4,250,000 Adjustments to reflect fair value 500,000 Amortization of allocated excess (P100,000 x 1) ( 100,000) FV of SHE of S P4,650,000 Multiplied by: NCI% 10% FV of NCI P 465,000

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

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

__450,000 (P300,000)

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

c.

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

3,000,000 1,250.000

400,000

FV of SHE of S: Common stock, 1/1/20x5 P3,000,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 250,000 Dividends – Subsidiary 20x4 ( 0) 1,250,000 Book value of SHE – S, 1/1/20x5 P4,250,000 Adjustments to reflect fair value 500,000 Amortization of allocated excess (P100,000 x 1) ( 100,000) FV of SHE of S P4,650,000 Multiplied by: NCI% 10% FV of NCI P 465,000

225,000

3,825,000 425,000 150,000 40,000

210,000

Full-goodwill or Fair Value Basis Fair value of Subsidiary: Consideration transferred P3,750,000 / 90% Less: BV of SHE of S (P3,000,000 + P1,000,000) x 100% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P800,000 – P700,000) x 100% Land (P2,000,000 – P1,600,000) x 100% Gain – full (attributable to parent)

2.

P 100,000 400,000

__500,000 (P333,333

Note: In case of gain, the working paper eliminating entries under partial and full-goodwill approach are the same. Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, December 31, 20x5 (P1,000,000 + P250,000 – P0 + P300,000 – P0) Less: Retained earnings – Subsidiary, January 1, 20x4 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x4 (inventory) Multiplied by: Controlling interests %................... Add: Bargain purchase gain (Controlling interest – P300,000) Less: Goodwill impairment loss Consolidated Retained earnings, December 31, 20x5

Problem VI Computation of Goodwill: Partial Goodwill Fair value of Subsidiary: Consideration transferred Less: BV of SHE of S (P1,000,000 + P500,000) x 80% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Prop., plant and eqpt. (P1,500,000 – P600,000) x 80% Goodwill – partial Full-goodwill: Fair value of Subsidiary: Consideration transferred P2,800,000 / 80% Less: BV of SHE of S (P1,500,000 x 100%) Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Prop., plant and eqpt. (P1,500,000 – P600,000) x 80% Goodwill – full Amortization of allocated excess: P900,000 / 10 years = P90,000 per year 1.

P4,166,667 4,000,000 P 166,667

P2,000,000

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

__705,,000 P 4,705,000

P2,800,000 _1,200,000 P1,600,000 __720,000 P 880,000

P3,500,000 1,500,000 P2,000,000 __900,000 P1,100,000

Cost Model-Full Goodwill (Eliminating Entries) 20x4 a. Beginning Retained Earnings-S Co. Capital Stock- S Co. Property and Equipment (net) Goodwill Investment in S Co. Non-controlling Interest

Common stock, 1/1/20x4 Retained earnings, 1/1/20x4 Book value of SHE – S, 1/1/20x5 Adjustments to reflect fair value FV of SHE of S1/1/x5 Multiplied by: NCI% FV of NCI (partial) Add: NCI on full-goodwill (P1,100,000 – P880,000) FV of NCI (full)

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

FV of SHE of S: Common stock, 1/1/20x5 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 300,000 Dividends – Subsidiary 20x4 ( 0) Book value of SHE – S, 1/1/20x5 Adjustments to reflect fair value FV of SHE of S1/1/x5 Multiplied by: NCI% FV of NCI (partial) Add: NCI on full-goodwill (P1,100,000 – P880,000) FV of NCI (full)

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

1,000,000 500,000 900,000 1,100,000 P 500,000 1,000,000 P1,500,000 900,000 P2,400,000 20% P 480,000 220,000 P 700,000

90,000

240,000

1,300,000 500,000 900,000 1,100,000

2,800,000 700,000

90,000

240,000

3,040,000 760,000

P 500,000

1,300,000 P1,800,000 900,000 P2,700,000 20% P 540,000 220,000 P 760,000

72,000 18,000 90,000

180,000

NCI (partial), 12/31/20x5: [(a) P760,000 – (b) P18,000 = P522,000] FV of SHE of S: Common stock, 1/1/20x5 P 500,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 300,000 Dividends – Subsidiary 20x4 ( 0) 1,300,000 Book value of SHE – S, 1/1/20x5 P1,800,000 Adjustments to reflect fair value 900,000 Amortization of allocated excess (P90,000 x 1) ( 90,000) FV of SHE of S P2,610,000 Multiplied by: NCI% 20% FV of NCI (partial) P 522,000 Add: NCI on full-goodwill (P1,100,000 – P880,000) 220,000 FV of NCI (full) P 742,000

Cost Model-Partial Goodwill (Eliminating Entries) 20x4 a. Beginning Retained Earnings-S Co. Capital Stock- S Co. Property and Equipment (net) Goodwill Investment in S Co. Non-controlling Interest

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

b. Depreciation Expense Property and Equipment (net)

90,000

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

240,000

b. Beginning Retained Earnings-S Company 1,300,000 Capital Stock-S Company 500,000 Property and Equipment (net) 900,000 Goodwill 880,000 Investment in S Company (P2,800,000 + P240,000) Non-controlling Interest P700,000 + [(P1,300,000 – P1,000,000) x 0.20] – (P1,100,000 – P880,000) NCI: FV of SHE of S: Common stock, 1/1/20x5 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 NI – Subsidiary (20x4) Dividends – Subsidiary 20x4 Book value of SHE – S, 1/1/20x5 Adjustments to reflect fair value FV of SHE of S1/1/x5 Multiplied by: NCI% FV of NCI (partial)

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

2,800,000 480,000 90,000

240,000

3,040,000 540,000

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

72,000 18,000 90,000

NCI (partial), 12/31/20x5: [(a) P540,000 – (b) P18,000 = P522,000] FV of SHE of S: Common stock, 1/1/20x5 P 500,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 300,000 Dividends – Subsidiary 20x4 ( 0) 1,300,000 Book value of SHE – S, 1/1/20x5 P1,800,000 Adjustments to reflect fair value 900,000 Amortization of allocated excess (P90,000 x 1) ( 90,000) FV of SHE of S P2,610,000 Multiplied by: NCI% 20% FV of NCI (partial) P 522,000

180,000

2. Consolidated Net Income (CNI) = Controlling Interest in CNI + NCI in CNI 20x4 Consolidated Net Income for 20x4 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P 42,000 90,000 ____0

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

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

20x5

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

132,000 P568,000 42,000 P610,000

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

Consolidated Net Income for 20x5 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P400,000 300,000 P700,000

P 62,000 90,000 ____0

P425,000 400,000 P825,000 152,000 P673,000 62,000 P735,000 P 400,000 ( 90,000) P310,000 20% P 62,000

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

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

3. Consolidated net income is P143,000. None of the 20x4 net income of TT Company was earned after the date of purchase and, therefore, none can be included in consolidated net income. 4. Consolidate net income would be P178,000 [P143,000 + (P195,000 - P160,000)]. Problem VIII Requirements 1 to 4: Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (100%) Consideration transferred: Cash Notes payable Less: Book value of stockholders’ equity of S: Common stock (P200,000 x 100%)………………. Retained earnings (P100,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P5,000 x 100%)……………… Increase in land (P6,000 x 100%)……………………. Increase in equipment (P80,000 x 100%) Decrease in buildings (P20,000 x 100%)………..... Decrease in bonds payable (P4,000 x 100%)…… Positive excess: Goodwill (excess of cost over fair value)………………………………………………...

P 360,000 105,000

P 465,000

P 240,000 120,000

360,000 P 105,000

P

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

90,000 P 15,000

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

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

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

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

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

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

S Co. Fair value 180,000 180,000

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

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

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

S Co. Fair value 144,000 144,000

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

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

Over/ under P 6,000

Life 1

96,000 (24,000) 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…………………………………………………………………….. Notes payable……………………………………

465,000

Acquisition of S Company.

January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Dividend income (P36,000 x 100%)…………….

36,000

Record dividends from S Company.

360,000 105,000

36,000

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

36,000

Dividends paid by S Co..

36,000

Consolidation Workpaper – First Year after Acquisition (E1) Common stock – S Co………………………………………… Retained earnings – S Co…………………………………… Investment in S Co……………………………………………

240,000 120,000

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

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

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.

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

360,000

216,000 105,000

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

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

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

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

Depreciation/ Amortization Expense

Amortization -Interest

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

P 1,200 P1,200

_______ P 6,000

(E4) Dividend income - P………. Dividends paid – S……………………

36,000

36,000

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

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model 100%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement Sales Dividend income Total Revenue Cost of goods sold Depreciation expense Interest expense Goodwill impairment loss Other expenses Total Cost and Expenses Net Income to Retained Earnings Statement of Retained Earnings Retained earnings, 1/1 P Company S Company Net income, from above Total Dividends paid P Company S Company Retained earnings, 12/31 to Balance Sheet Balance Sheet Cash………………………. Accounts receivable……..

P Co P480,000 36,000 P516,000 P204,000 60,000 -

S Co. P240,000 P240,000 P138,000 24,000 -

48,000 P312,000 P204,000

18,000 P180,000 P 60,000

P360,000

P

204,000 P564,000

P120,000 60,000 P180,000

72,000 -

36,000

P492,000

P144,000

147,000 90,000

P 90,000 60,000

Dr. (4)

36,000

(3) (3) (3) (3)

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

Cr.

Consolidated P 720,000 _________ P 720,000 P 348,000 90,000 1,200 3,600 66,000 P508,800 P211,200

P 360,000

(1) 120,000

211,200 P571,200 (4)

72,000 ________

36,000

P 499,200 P

237,000 150,000

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 Total

120,000 210,000 240,000 720,000

90,000 48,000 180,000 540,000

465,000 P1,992,000

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

___590,400 P1,992,000

240,000 144,000 P1,008,000

(2) (2)

6,000 7,200

(2) (2)

4,800 15,000

(3)

6,000

(2) 216,000 (3) 1,200 (3) 3,600 (1) 360,000 (2) 105,000

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

12,000

(1) 240,000 P 736,200

P 736,200

210,000 265,200 420,000 1,044,000 3,600 11,400 P2,341,200 P 147,000 495,000 240,000 360,000 600,000 499,200 P2,341,200

20x5: Second Year after Acquisition Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5: Cash……………………… Dividend income (P48,000 x 100%)…………….

48,000


48,000

On the books of S Company, the P40,000 dividend paid was recorded as follows: Dividends paid………… Cash

48,000

Dividends paid by S Co..

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

24,000

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

48,000

24,000

P144,000 120,000 P 24,000 100% P 24,000

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

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

240,000 144,000

384,000

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

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

To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish noncontrolling interest (in net assets of subsidiary) on January 1, 20x5.

(E4) Retained earnings – P Company, 1/1/20x5 (P16,800 x 100%) Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

16,800 6,000 12,000 1,200

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

Inventory sold Equipment Buildings Bonds payable Impairment loss Totals

(20x4) Retained earnings, P 6,000 12,000 (6,000) 1,200 3,600 P 16,800

Depreciation/ Amortization expense P

P 1,200

P 6,000

P1,200

(E5) Dividend income - P………. Dividends paid – S……………………

48,000

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

16,560


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


6,000 24,000 2,400 3,600


12,000 ( 6,000)

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

216,000 105,000

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

48,000

16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model 100%-Owned Subsidiary 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 to Retained Earnings

P Co. P540,000 48,000 P588,000 P216,000 60,000 72,000 P348,000 P240,000

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

P492,000

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 Total

P

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

Dr.

(5)

48,000

(4) (4)

6,000 1,200

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

(1)

Cr.

24,000

Consolidated P 900,000 ___________ P 900,000 P 408,000 90,000 1,200 126,000 P 625,200 P 274,800

P

499,200

240,000 P732,000

P144,000 90,000 P234,000

72,000 -

48,000

P660,000

P186,000

P 702,000

189,000 180,000 216,000 252,000 240,000 720,000

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

P 291,000 276,000 324,000 265,200 420,000 1,044,000 2,400 11,400

465,000 P2,220,000

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

660,000 P2,220,000

240,000 186,000 P1,074,000

274,800 P 774,000 (5)

(3) (3)

6,000 7,200

(3) (3) (1)

4,800 15,000 24,000

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

(4)

48,000

6,000

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

(4)

24,000

72,000 ________

P2,634,000 P 180,000 552,000 240,000 360,000 600,000

(2) 240,000 P 783,120

_

P 783,120

702,000 P2,634,000

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

b. NCI – not applicable, since it is 100% owned subsidiary c.

P360,000

Stockholders’ Equity Common stock, P10 par Retained earnings Total Stockholders’ Equity (Total Equity)

P 600,000 360,000 P 960,000

6. 12/31/20x4: a. P211,200 – same with CNI since there is no NCI. Consolidated Net Income for 20x4 Net income from own/separate operations: Pa Company S Company Total Less: Amortization of allocated excess Goodwill impairment loss Consolidated Net Income for 20x4

d.

P 13,200 3,600

P168,000 60,000 P228,000 16,800 P211,200

b. NCINI – not applicable, since it is 100% owned subsidiary c. P211,200 – same with NCI-CNI since there is no NCI. Consolidated Retained Earnings, December 31, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P for 20x4 or Consolidated Net Income (CNI)* 211,200 Total P571,200 Less: Dividends paid – P Company for 20x4 72,000 Consolidated Retained Earnings, December 31, 20x4 P499,200 *since it is a 100%-owned subsidiary, Controlling Interest in Net Income is the same with Consolidated Net Income.

e. NCI – not applicable, since it is 100% owned subsidiary f. Stockholders’ Equity Common stock, P10 par Retained earnings Total Stockholders’ Equity (Total Equity)

P 600,000 499,200 P 1,099,200

12/31/20x5 a. P274,800 – same with CNI since there is no NCI.

Consolidated Net Income for 20x5 Net income from own/separate operations P Company S Company Total Less: Amortization of allocated excess Goodwill impairment loss Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent or CNI

P 7,200 0

P192,000 90,000 P282,000 7,200 P274,800

b. NCINI – not applicable, since it is 100% owned subsidiary c. P274,800 – same with NCI-CNI since there is no NCI. d.

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

P492,000

P 144,000 120,000 P 24,000

Less: Amortization of allocated excess – 20x4

P

Multiplied by: Controlling interests %................... Consolidated Retained earnings, January 1, 20x5 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P for 20x5 or CNI Total Less: Dividends paid – P Company for 20x5 Consolidated Retained Earnings, December 31, 20x5

16,800 7,200 100%

7,200 P 499,200 274,800 P774,000 72,000 P702,000

e. NCI – not applicable, since it is 100% owned subsidiary f. Stockholders’ Equity Common stock, P10 par Retained earnings Total Stockholders’ Equity (Total Equity)

P 600,000 702,000 P1,302,000

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

P 372,000 P 192,000 96,000

288,000 84,000

P

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

72,000 P 12,000

The over/under valuation of assets and liabilities are summarized as follows: S Co. Book value

S Co. Fair value

Inventory………………….……………..

P 24,000

Land………………………………………

48,000

55,200

Equipment (net).........

P

(Over) Under Valuation

30,000

P

6,000 7,200

84,000

180,000

96,000

168,000

144,000

(24,000)

Bonds payable…………………………

(120,000)

( 115,200)

4,800

Net………………………………………..

P 204,000

P 294,000

P 90,000

Buildings (net)

he buildings and equipment will be further analyzed for consolidation purposes as follows: S Co. Book value

S Co. Fair value

Increase (Decrease)

Equipment ..................

180,000

180,000

0

Less: Accumulated depreciation…..

96,000

-

( 96,000)

Net book value………………………...

84,000 S Co. Book value

180,000 S Co. Fair value

96,000 (Decrease)

Buildings................

360,000

144,000

( 216,000)


192,000

-

( 192,000)


168,000

144,000

(

24,000)

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

Over/ Under

Life

Annual Amount

Current Year(20x4)

P 6,000

1

P 6,000

P 6,000

96,000

8

12,000

12,000

12,000

(25,000)

4

( 6,000)

( 6,000)

(6,000)

4,800

4

1,200

1,200

1,200

P 13,200

P 13,200

P 7,200

20x5 P

-

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

The goodwill impairment loss of P3,125 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows: Fair value of Subsidiary (100%) Consideration transferred: Cash (80%)

P 372,000

Fair value of NCI (given) (20%)

93,000

Fair value of Subsidiary (100%)

P 465,000

Less: Book value of stockholders’ equity of Son (P360,000 x 100%)

__360,000

Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P

105,000 90,000

P

15,000

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

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

Value P12,000 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

Value P 3,000

% of Total 80.00%

750

20.00%

P 3,750

100.00%

When cost model is used, only two journal entries are recorded by P Company during 20x4 related to its investment in S Company. 20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4: (1) Investment in S Company…………………………………………… Cash…………………………………………………………………….. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Dividend income (P36,000 x 80%)……………. Record dividends from S Company.

372,000

28,800

372,000

28,800

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

36,000

36,000

Consolidation Workpaper – Year of Acquisition

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

240,000 120.000

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

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

To eliminate 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.

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



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

Depreciation/ Amortization expense


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

P 1,200 P1,200

288,000 72,000

216,000 18,000 84,000

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

Value P12,000 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

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



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. 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

P360,000

P

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

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

Dr.

(4)

28,800

(3) (3) (3)

6,000 6,000 1,200

(3)

3,000

(5)

9,360

Cr.

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

P

(1) 120,000

360,000 202,440 P562,440

_

72,000 ________

P144,000

P

490,440

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

P

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

(4)

(2) (2)

6,000 7,200

(3)

36,000

6,000

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

720,000 372,000

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

540,000

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

(2) (2)

4,800 12,000

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

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

484,800

240,000 144,000

(1) 240,000

_________ P1,984,800

_________ P1,008,000

__________ P 745,560

(4)

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

7,200

P2,424,600

12,000

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

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

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

1,044,000 3,600 9,000

490,440 ____92,160 P2,424,600

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

No goodwill impairment loss for 20x5. 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

On the books of S Company, the P40,000 dividend paid was recorded as follows: Dividends paid………… Cash Dividends paid by S Co..

48,000

48,000

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

To provide entry to convert from the cost method to the equity method or the entry to establish reciprocity at the beginning of the year, 1/1/20x5, computed as follows:

19,200

19,200

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

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



(E4) Retained earnings – P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] Non-controlling interests (P13,200 x 20%)……………………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

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

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

307,200 76,800

216,000 18,000 84,000

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

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

38,400 9,600


16,560

48,000


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

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

P484,800

P

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

Dr.

(5)

38,400

(4) (4)

6,000 1,200

(6)

16,560

(4) 13,560 (2) 144,000

Cr.

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

(1) 19,200

P 490,440

230,400 P715,200

P 144,000 90,000 P234,000

72,000 -

48,000

P643,200

P186,000

P 676,680

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

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

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

372,000 P2,203,200

P1,074,000

258,240 P 748,680 (5)

(3) (3)

6,000 7,200

(3) (3) (1)

4,800 12,000 19,200

(4)

48,000

6,000

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

_

72,000 ________

P2,707,800

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 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

643,200

___ _____ P2,203,200

240,000 186,000

_________ P1,074,000

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

(4)

24,000

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

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

9,600 2,640

__________ P 821,160

P180,000

676,680 (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: b.

c.

6.

Consolidated Retained Earnings, January 1, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition)

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)…………………………………..

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

P360,000

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

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

P 9,360 13,200 3,000

P168,000 60,000 P228,000 25,560 P202,440 9,360 P211.800

b. NCI-CNI

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

e.

f.

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)…………………………………..

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

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

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

P16,560 __7,200

P192,000 90,000 P282,000 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 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.

f.

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)…………………………………..

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

Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. Fair value of NCI (given) (20%)……………….. Fair value of Subsidiary (100%)………. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. Retained earnings (P120,000 x 100%)………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… Increase in land (P7,200 x 100%)……………………. Increase in equipment (P96,000 x 100%) Decrease in buildings (P24,000 x 100%)………..... Decrease in bonds payable (P4,800 x 100%)…… Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

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

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

90,000 P 15,000


360,000 P 105,000

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

28,800

372,000

28,800

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

36,000

36,000

No entries are made on the P’s books to depreciate, amortize or 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%)……………………….. To eliminate intercompany investment and equity accounts of subsidiary on date of acquisition; and to establish non-controlling

240,000 120.000

288,000 72,000

interest (in net assets of subsidiary) on date of acquisition.

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

6,000 96,000 192,000 7,200 4,800 13,000

21,000 84,000

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


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

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





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

P 1,200 P1,200


28,800 7,200


(E5) Non-controlling interest in Net Income of Subsidiary………… Non-controlling interest ………….. To establish non-controlling interest in subsidiary’s adjusted net Income less NCI on goodwill impairment loss on full-goodwill for 20x4 as follows: Net income of subsidiary…………………….. Amortization of allocated excess [(E3)]…... Multiplied by: Non-controlling interest %..........

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

Less: Non-controlling interest on impairment loss on full-goodwill (P3,125 x 20%) or (P3,125 impairment on full-goodwill less P2,500, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) P 8,610 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,125 by 20%. There might be situations

216,000

8,610

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

36,000

8,610

where the NCI on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6).

Subsidiary accounts are adjusted to full fair value regardless on the controlling interest percentage or what option used to value non-controlling interest or goodwill. Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) 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 P312,000 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

P360,000

P

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

196,800 P556,800

P120,000 60,000 P180,000

72,000 -

36,000

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

Dr.

(4)

28,800

(3) (3) (3)

6,000 6,000 1,200

(3)

3,750

(5)

8,610

Cr.


P

(1) 120,000

360,000 202,680 P562,440

_

86,400 ________

P144,000

P

490,440

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

P

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

372,000 P1,984,800

P1,008,000

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

(4)

(2) (2)

6,000 7,200

(2) (2)

4,800 15,000

(3)

240,000 144,000

(1) 240,000

_________ P1,984,800

_________ P1,984,800

__________ P 748,560

(7)

7,200

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

484,800

36,000

12,000

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

P2,426,850 P147,000 495,000 240,000 360,000 600,000 490,440 ____94,410 P2,426,850

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

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

38,400

38,400

On the books of S Company, the P40,000 dividend paid was recorded as follows: Dividends paid………… Cash Dividends paid by S Co..

48,000

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

19,200

To provide entry to convert from the cost method to the equity method or the entry to establish reciprocity at the beginning of the year, 1/1/20x5. Retained earnings – S Company, 1/1/20x5 Retained earnings – S Company, 1/1/20x4 Increase in retained earnings…….. Multiplied by: Controlling interest % Retroactive adjustment

48,000

19,200

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

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

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)]…………

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


307,200 76,800

216,000 21,000

Investment in S Co……………………………………………….

84,000


(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……………………………………

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

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

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

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

Depreciation/ Amortization expense P


12,000 ( 6,000)

P 1,200

P 6,000

P1,200


38,400 9,600


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

6,000 24,000 2,400 3,750

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

48,000

16,560

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 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

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

(5) 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 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

643,200

___ _____ P2,203,200

240,000 186,000

_________ P1,074,000

258,240 P 748,680 (5)

(3) (3)

6,000 7,200

(3) (3) (1)

4,800 15,000 19,200

(4)

57,600

6,000

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

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

(4)

24,000

9,600 3,390

__________ P 824,910

72,000 ________

P2,710,050 P180,000 552,000 240,000 360,000 600,000

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

_

676,680 (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.

c.

6.

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)…………………………………..

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

P 240,000 120,000 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

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

P 8,610 13,200 3,750

P168,000 60,000 P228,000 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 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.

c. CNI, P211,050 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:

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

e.

f.

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……………..


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

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

P16,560 7,200 0

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

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


*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

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.

f.

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

P 600,000 676,680 P1,276,680 __101,370 P1,378,050

Problem XI Under the acquisition method, the shares issued by WW are recorded at fair value: Investment in BB (value of debt and shares issued) ............................ Common Stock (par value) ............................................................... Additional Paid-in Capital (excess over par value) ...................... Liabilities .................................................................................................

900,000

150,000 450,000 300,000

The payment to the broker is accounted for as an expense. The stock issue cost is a reduction in additional paid-in capital. Acquisition expense ................................................................................... Additional Paid-in Capital......................................................................... Cash ...................................................................................................

30,000 40,000

70,000

Allocation of Acquisition-Date Excess Fair Value: Consideration transferred (fair value) for BB Stock ............................ Book Value of BB, 6/30............................................................................... Fair Value in Excess of Book Value ................................................... Excess fair value (undervalued equipment) ......................................... Excess fair value (overvalued patented technology) ........................ Goodwill................................................................................................. Consolidated Balances: 1. Net income (adjusted for combination expenses. The figures earned by the subsidiary prior to the takeover are not included) ............................................................................................... 2. Retained Earnings, 1/1 (the figures earned by the subsidiary prior to the takeover are not included) ........................................................ 3. Patented Technology (the parent's book value plus the fair value of the subsidiary)..................................................................................... 4. Goodwill (computed above) ........................................................................... 5. Liabilities (the parent's book value plus the fair value of the subsidiary's debt plus the debt issued by the parent in acquiring the subsidiary) .............................................................................. 6. Common Stock (the parent's book value after recording the newly-issued shares) ................................................................................... 7. Additional Paid-in Capital (the parent's book value after recording the two entries above)......................................................... Problem XII 1. P15,000 2. P65,000 3. SS: P24,000 4.

= = =

BB P70,000 Fair value of SS as a whole: P200,000 10,000 40,000 9,000 P259,000

=

(P115,000 + P46,000) - P146,000 (P148,000 - P98,000) + P15,000 P380,000 - (P46,000 + P110,000 + P75,000 + P125,000) P94,000 - P24,000 Book value of SS shares Differential assigned to inventory (P195,000 - P105,000 - P80,000) Differential assigned to buildings and equipment (P780,000 - P400,000 - P340,000) Differential assigned to goodwill Fair value of SS

P900,000 770,000 P130,000 100,000 (20,000) P 50,000

P210,000 800,000 1,180,000 50,000 1,210,000 510,000 680,000

5. 6.

65 percent Capital Stock Retained Earnings

= 1.00 – (P90,650 / P259,000) = P120,000 = P115,000

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

500,000

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

5,000

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

10,000

12/31/x5 Contingent performance obligation Cash 3. Cost Model/Initial Value Method Investment in WP Retained earnings-BS Common stock Retained earnings-WP Investment in WP

50,000

30,000 200,000 180,000

Royalty agreements Goodwill Investment in WP

90,000 60,000

Dividend income Dividends paid

35,000

Amortization expense Royalty agreements

10,000

35,000 465,000

5,000

10,000 50,000

30,000

380,000

150,000 35,000 10,000

Problem XIV (Consolidated accounts one year after acquisition) SS acquisition fair value ($10,000 in stock issue costs reduce additional paid-in capital) ................................ P680,000 Book value of subsidiary (1/1/x4stockholders' equity balances) ............... (480,000) Fair value in excess of book value ......................... P200,000 Excess fair value allocated to copyrights Life Amortizations based on fair value ............................................ 120,000 6 yrs. P20,000 Goodwill ...................................................................... P 80,000 indefinite _____-0Total ....................................................................... P20,000

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

P900,000 400,000 120,000 (20,000) P1,400,000 P1,100,000 P700,000 20,000

720,000 P380,000

3. Consolidated retained earnings, 12/31/x4 Retained earnings 1/1/x4 (PP) ........................................ P600,000 Net income 20x4 (above) ............................................... 380,000 Dividends paid 20x4 (PP) ................................................. (80,000) Total .............................................................................. P900,000 SS’s retained earnings balance as of January 1, 20x4, is not included because these operations occurred prior to the purchase. SS's dividends were paid to PP and therefore are excluded because they are intercompany in nature. 4. Consolidated goodwill, 12/31/x4 Allocation (above) ...........................................................

P80,000

Problem XV Consolidated balances three years after the date of acquisition. Includes questions about parent's method of recording investment for internal reporting purposes.) 1. Acquisition-Date Fair Value Allocation and Amortization: Consideration transferred 1/1/09 ........................... P600,000 Book value (given) .................................................... (470,000) Annual Fair value in excess of book value ................... 130,000 Excess Allocation to equipment based on Life Amortizations difference in fair value and book value ........................................................... 90,000 10 yrs. P9,000 Goodwill ...................................................................... P40,000 indefinite -0Total ....................................................................... P9,000 Consolidated Balances  Depreciation expense = P659,000 (book values plus P9,000 excess depreciation)  Dividends Paid = P120,000 (parent balance only. Subsidiary's dividends are eliminated as intercompany transfer)  Revenues = P1,400,000 (add book values)  Equipment = P1,563,000 (add book values plus P90,000 allocation less three years of excess depreciation [P27,000])  Buildings = P1,200,000 (add book values)  Goodwill = P40,000 (original residual allocation)  Common Stock = P900,000 (parent balance only)

2. The parent's choice of an investment method has no impact on the consolidated totals. The choice of an investment method only affects the internal reporting of the parent. Under PAS 27, it requires a choice between cost model or under PFRS 9 (known as fair value model) 3. The cost model or initial value method is used. The parent's Investment in Subsidiary account still retains the original consideration transferred of P600,000. In addition, the Investment Income account equals the amount of dividends paid by the subsidiary. 4. If the equity method had been applied which is not allowed under PAS 27 for a parent to consolidate, the Investment Income account would have included both the equity accrual of P100,000 and excess amortizations of P9,000 for a balance of P91,000. Problem XVI 1. Net income for 20x4: Operating income Income from subsidiary 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

QQ P 90,000 24,500 P114,500

NN P35,000

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

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

P35,000

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 XVII (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 ............................................................................................... 1.

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

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

P4,400,000 (2,350,000) 50,000 (20,000) (265,000) (200,000) P1,615,000

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

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

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

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

1,610,000 P 200,000

-ORPS’s revenues ............................................................................................................... PS’s expenses............................................................................................................... PS’s separate net income ......................................................................................... PS’s share of SR’s adjusted net income (80% × P365,000)............................................................................................ Controlling interest share of consolidated net income ......................................

P3,000,000 1,750,000 P1,250,000

5. Fair value of non-controlling interest January 1, 20x4 ................................................ 20x4 income ....................................................................................................... 73,000 Dividends (20% × P30,000) ............................................................................................... Non-controlling interest December 31, 20x4................................................................

P600,000

292,000 P1,542,000

(6,000) 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 ............................................................................................... Collective fair values of SR’s net assets......................................................................... Bargain purchase ..............................................................................................................

P2,250,000 P2,300,000 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 XVIII (Full-Goodwill) A variety of consolidated balances-midyear acquisition) Book value of RR, 1/1 (stockholders' equity accounts) (P100,000 + P600,000 + P700,000) ...................... P1,400,000 Increase in book value: Net Income (revenues less cost of goods sold and expenses) ................................ P120,000 Dividends .............................................................. (20,000) Change during year ................................................. P100,000 Change during first six months of year .......... 50,000 Book value of RR, 7/1 (acquisition date) . P1,450,000 (Full-Goodwill) Consideration transferred by KL (P1,330,000 + P30,000)................................................................... P1,360,000 Non-controlling interest fair value ................................. 300,000 RRs’ fair value (given) ....................................................... P1,630,000 Note: The fair value of subsidiary amounting P1,630,000, indicates a fair value of NCI amounting to P300,000 (refer to above computation), which is lower compared to the FV of the NCI based on FV of SHE of Subsidiary (RR), computed as follows: BV of SHE of Subsidiary (RR) ...................................... P1,450,000 Adjustments to reflect fair value (undervaluation) 150,000 FV of SHE of Subsidiary (RR)....................................... P 1,600,000 Multiplied by: NCI%..................................................... 20% FV of NCI………………………………………………. P 320,000 Consideration transferred by KL (P1,330,000 + P30,000)................................................................... Non-controlling interest fair value ................................. RRs’ fair value (given) ....................................................... Book value of RR, 7/1 ........................................................ Fair value in excess of book value ................................. Excess fair value assigned Trademarks ..................................................................... Goodwill (full-goodwill) ................................................ Total ..........................................................................

P1,360,000 ___320,000 P1,680,000 (1,450,000) P 230,000

Annual Excess Life Amortizations 150,000 5 years P30,000 P 80,000 indefinite -0P30,000

It should be carefully noted, that NCI can never be less than its share of fair value of net identifiable assets (which is P320,000). Thus, the NCI share of company value is raised to P320,000 (replacing the P300,000 NCI computed as residual amount – refer to computation above). The rationale behind such rule is to avoid having a lower amount

of goodwill under the full-goodwill approach as compared to goodwill computed under the partial-goodwill approach. (Partial-Goodwill) Consideration transferred by KL ..................................... P 1,360,000 Less: Book value of SHE – RR (P1,450,000 x 80%)…….. 1,160,000 Allocated excess…………………………………………. P 200,000 Less: Over/under valuation of A and L: P150,000 x 80%.............................................. 120,000 Goodwill - partial ............................................................... P 80,000 Note that the goodwill under the full-goodwill and partial-goodwill approach are the same because the FV of the NCI based on the FV of SHE of subsidiary (P320,000) 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 XIX (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)................................

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

Fair value in excess of book value (positive) ........ Excess assigned based on fair value: Equipment ...................................................... Goodwill (full) ................................................. Total ....................................................................... Amortization for 9 months .................................

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

P765,000 ( 30,000) P735,000 40% P294,000 P 526,000 459,000 P 67,000 ( 18,000) P 85,000

1. Consolidated Income Statement: Revenues (1) P825,000 Cost of goods sold (2) P405,000 Operating expenses (3) 214,500 619,500 Consolidated net income P 205,500 Noncontrolling interest in CNI (4) 28,200 Controlling interest in CNI P 177,300 (1) P900,000 combined revenues less P75,000 (preacquisition subsidiary revenue) (2) P440,000 combined COGS less P35,000 (preacquisition subsidiary COGS) (3) P234,000 combined operating expenses less P15,000 (preacquisition subsidiary operating expenses) less nine month excess overvalued equipment depreciation reduction of P4,500 (4) 40% of post-acquisition subsidiary income less excess amortization 2. Goodwill, full = P91,000 (original allocation); Goodwill , partial = P85,000 Equipment = P774,500 (add the two book values less P30,000 reduction to fair value plus P4,500 nine months excess amortization) Common Stock = P630,000 (P company balance only) Buildings = P1,124,000 (add the two book values) Dividends Paid = P80,000 (P company balance only)

Problem XX (Determine consolidated balances for a step acquisition). 1. AD fair value implied by price paid by MM P560,000 ÷ 70% =

P800,000

2. Revaluation gain 1/1 equity investment in AD (book value) 25% income for 1st 6 months Investment book value at 6/30 Fair value of investment Gain on revaluation to fair value

P178,000 8,750 186,750 200,000 P13,250

3. Goodwill at 12/31 Fair value of AD at 6/30 Book value at 6/30 (700,000 + [70,000 ÷ 2]) Excess fair value Allocation to goodwill (no impairment)

P800,000 735,000 P65,000 P65,000

4. Non-controlling interest 5% fair value balance at 6/30 5% Income from 6/30 to 12/31 5% dividends Non-controlling interest 12/31

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

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

P

720,000 420,000

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

Read discussion on step-acquisition regarding the initial treatment of investment as FVTOCI or FVTPL and its disposition. It is assumed that the investment above is FVTPL. Problem XXII 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 84,000 1,200,000 P 60,000

*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 XXIII P Company’s additional paid-in capital arising sale of subsidiary shares is computed as follows: Cash proceeds from issuance of additional shares ….. P 210,000 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 P Company recognizes an increases in its Investment in S from P576,000 (P720,000x 80%) to P595,200 [P930,000 x (96,000/150,000) and in additional paid-in capital of P19,200. Problem XXIV 1. Equity Method Income accrual (80%) ................................................................... Excess amortization expense ....................................................... Investment income ..................................................................

P56,000 (3,200) P52,800

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

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

2.

Equity Method – same with No. 1

3.

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

4.

Acquisition-date fair value allocated to goodwill Goodwill-full ( see Problem I above) ......................................... Goodwill-partial (see Problem I above)…………………………

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

150,000 120,000

5.

If the parent has been applying the equity method, the stockholders' equity accounts on its books will already represent consolidated totals. The common stock and additional paid-in capital figures to be reported are the parent balances only. Common stock, P500,000 Additional paid-in capital, P280,000

Problem XXV (Consolidated balances three years after purchase. Parent has applied the equity method.) 1. Schedule 1—Acquisition-Date Fair Value Allocation and Amortization JJ’s acquisition-date fair value . P206,000 Book value of JJ ........................................... (140,000) Fair value in excess of book value ........... 66,000 Excess fair value assigned to specific accounts based on individual fair values Equipment .............................................. Buildings (overvalued) ......................... Goodwill .................................................. Total .........................................................

54,400 (10,000) P21,600

Life 8 yrs. 20 yrs. indefinite

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

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

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

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

P30,000 (6,300) P23,700

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

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

4. Consolidated Equipment Book values added together ............................................................. Allocation of purchase price .............................................................. Excess depreciation (P6,800 × 3) ....................................................... Consolidated equipment .............................................................

P370,000 54,400 (20,400) P404,000

5. Consolidated Buildings ........................................................................................ Book values added together ............................................................. Allocation of purchase price .............................................................. Excess depreciation (P500 × 3) .......................................................... Consolidated buildings ..................................................................

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

6. Consolidated goodwill Allocation of excess fair value to goodwill .......................................

P21,600

7. Consolidated Common Stock............................................................................ P290,000 As a purchase, the parent's balance of P290,000 is used (the acquired company's common stock will be eliminated each year on the consolidation worksheet). 8. Consolidated Retained Earnings ....................................................................... P410,000 Tyler's balance of P410,000 is equal to the consolidated total because the equity method has been applied. Problem XXVI Computation of Goodwill: Partial Goodwill or Proportionate Basis Fair value of Subsidiary: Consideration transferred Less: BV of SHE of S (P1,200,000 + P600,000) x 80% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P725,000 – P600,000) x 80% Equipment (P1,075,000 – P900,000) x 80% Goodwill – partial

Full-goodwill or Fair Value Basis Fair value of Subsidiary: Consideration transferred P1,970,000 / 80% Less: BV of SHE of S (P1,200,000 + P600,000) x 100% Allocated excess Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P725,000 – P600,000) x 100% Equipment (P1,075,000 – P900,000) x 100% Goodwill – full Amortization Inventory: P125,000 x 60% P125,000 x 40% Equipment: P175,000 / 7 years 1.

20x4

Investment in S Company Cash

P1,970,000 _1,440,000 P 530,000 P 100,000 140,000

__240,000 P 290,000

P2,467,500 1,800,000 P 662,500 P125,000 175,000

20x4 P 75,000 25,000 P 100,000

1,970,000

Cash (0.8 x P150,000) Investment in S Company

120,000

Investment in S Company Equity in Subsidiary Income (.80)(P750,000)

600,000

__300,000 P362,500 20x5 P 50,000 25,000 P 75,000

1,970,000 120,000 600,000

20x5

Equity in Subsidiary Income Investment in S Company

80,000

Cash (0.8 x P225,000) Investment in S Company

180,000

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

720,000

Equity in Subsidiary Income Investment in S Company 2.

20x4

(1) Equity in Subsidiary Income ((.80)(P750,000) -P80,000) Dividends Declared (0.80 x P150,000) Investment in S Company (2) Beginning Retained Earnings - S Company Common Stock- S Company Investment in S Company Noncontrolling Interest (3) Inventory (P125,000 – P75,000) Cost of Goods Sold Equipment (net) Goodwill Investment in S Company (4) Depreciation Expense Equipment (net)

20x5

(1) Equity in Subsidiary Income ((.80)(P900,000) - P60,000) Dividends Declared (0.80 x P225,000) Investment in Superstition Company (2) Beginning Retained Earnings-Superstition Company Common Stock - Superstition Company. Investment in Superstition Company Non-controlling Interest (P492,500 + (P1,200,000 – P600,000) x .20) (3) Investment in S Company Non-controlling Interest Cost of Goods Sold Equipment (net) Goodwill Investment in S Company

60,000

520,000

600,000 1,200,000

50,000 75,000 175,000 362,500 25,000

660,000

80,000

180,000 720,000 60,000

120,000 400,000

1,307,500 492,500

662,500 25,000

180,000 480,000

1,200,000 1,200,000 612,500 60,000 15,000 50,000 175,000 362,500

662,500

(4) Investment in S Company Non-controlling Interest Depreciation Expense Equipment (net) 3.

20,000 5,000 25,000

Consolidated Net Income for 20x5 Net income from own/separate operations P Company (P1,000,000 – P120,000) 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

50,000

P130,000 100,000 ____0

P 880,000 __ 750,000 P1,630,000 230,000 P1,400,000 130,000 P1,530,000

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

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


Note: Regardless on the method used in recording investments (cost model or equity method) the manner of computing CI-CNI, NCI-CNI and CNI are exactly the same. Problem XXVII Requirements 1 to 4: Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 80%)……………………. Retained earnings (P120,000 x 80%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… Increase in land (P7,200 x 80%)……………………. Increase in equipment (P96,000 x 80%) Decrease in buildings (P24,000 x 80%)………..... Decrease in bonds payable (P4,800 x 80%)…… Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

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

72,000

The over/under valuation of assets and liabilities are summarized as follows: S Co. Book value

288,000 84,000

P

S Co. Fair value

30,000

(Over) Under Valuation

Inventory………………….……………..

P 24,000

Land………………………………………

48,000

55,200

7,200

Equipment (net).........

84,000

180,000

96,000 (24,000)

Buildings (net)

P

P 12,000

P

6,000

168,000

144,000

Bonds payable…………………………

(120,000)

( 115,200)

4,800

Net………………………………………..

P 204,000

P 294,000

P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows: S Co. Book value

S Co. Fair value

Increase (Decrease)

Equipment ..................

180,000

180,000

0


96,000

-

( 96,000)


84,000 S Co. Book value

180,000 S Co. Fair value

96,000 (Decrease)

Buildings................

360,000

144,000

( 216,000)


192,000

-

( 192,000)


168,000

144,000

(

24,000)

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

Over/ Under

Life

Annual Amount

P 6,000

1

P 6,000

Current Year(20x4)

20x5

P 6,000

P

-

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

96,000

8

12,000

12,000

12,000

(25,000)

4

( 6,000)

( 6,000)

(6,000)

4,800

4

Bonds payable…

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%)

P 372,000

Fair value of NCI (given) (20%)

93,000

Fair value of Subsidiary (100%)

P 465,000

Less: Book value of stockholders’ equity of S (P360,000 x 100%)

__360,000

Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P

105,000 90,000

P

15,000

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

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

Value P12,000 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

Value P 3,000

% of Total 80.00%

750

20.00%

P 3,750

100.00%

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


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

28,800

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

48,000

372,000

28,800


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

Amortization & impairment

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

13,560

Investment Income 13,560

48,000 34,440

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

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

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

240,000 120.000

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

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

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

288,000 72,000

216,000

Non-controlling interest (P96,000 x 20%)……………………….. Investment in S Co……………………………………………….

18,000 84,000

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


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

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






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 P3,750 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 (E4) Investment income Non-controlling interest (P36,000 x 20%)……………….. Dividends paid – S…………………… Investment in S Company

Value P 3,000

% of Total 80.00%

625

20.00%

P 3,750 34,440 7,200

100.00%

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 34,440

36,000 5,640

NI of S (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, 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

377,640 Percentage of goodwill for amortization purposes: Goodwill applicable to parent Goodwill applicable to NCI Total (full) goodwill…………

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

Value P12,000 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

The goodwill impairment loss of P3,750 based on 100% fair value or full-goodwill would be allocated as follows: Value % of Total Goodwill impairment loss attributable P 3,000 80.00% to parent or controlling Interest Goodwill impairment loss applicable to NCI…………………….. 750 _20.00% Goodwill impairment loss based on 100% fair value or full-goodwill P 3,750 100.00%


9,360


9,360

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

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


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………

P360,000

P


20x5: Second Year after Acquisition

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

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

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)

240,000 144,000

(1) 240,000

_________ P1,990,440

_________ P1,008,000

__________ P 751,200

(10) 7,200

6,000

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

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

490,440

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

P360,000

(1) 120,000

P2,424,600

12,000

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

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

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

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

490,440 ____92,160 P2,424,600

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

No goodwill impairment loss for 20x5. 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


72,000



38,400

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

Investment Income

Amortization (7,200 x 80%)

5,760

72,000 66,240

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

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

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

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

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

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

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

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

Inventory sold Equipment

Depreciation/ Amortization Expense P 12,000


Total

6,000 6,000 1,200

307,200 76,800

216,000 15,360 70,440

12,000 1,200

Buildings Bonds payable Totals

( 6,000) _______ P 6,000

P 1,200 P1,200

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


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

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


16,560


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

16,560

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.

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

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

P490,440

P

P490,440

258,240 P748,680

P144,000 90,000 P234,000

72,000 -

48,000

P676,680

P186,000

P676,680

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

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

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

405,480 P2,236,680

P1,074,000

P 150,000 450,000

P 102,000 306,000

120,000 240,000 600,000

120,000 120,000

676,680

___ _____ P2,236,680

240,000 186,000

_________ P1,074,000

(1) 144,000

258,240 P748,680 (4)

(2)

7,200

(2) (2)

3,600 9,000

(2)

48,000

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

84,000

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

(3)

12,000

9,600

__________ P 794,400

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

(1) 240,000 (7)

72,000 -

676,680 (2 ) 76,800 (2) 15,360 (5) 16,560 P 794,400

____99,120 P2,707,800

Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem VI solution). 5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: 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)…………………………………..

P360,000

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

c.

6.


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

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

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)

P168,000 60,000 P228,000

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


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)…………………………………..

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

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.


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

P16,560 __7,200

P192,000 90,000 P282,000 23,760 P258,240 16,560 P274,800

b. NCI-CNI


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


e.

f.

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 XXVIII 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 P

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

90,000 P 15,000


360,000 P 105,000

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


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

28,800


48,000

372,000

28,800


48,000


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

13,560 13,560

Record amortization of allocated excess of inventory, equipment, buildings and bonds payable and goodwill impairment loss. *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6).


Amortization & Impairment

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

13,560


48,000 34,440

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

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

Consolidation Workpaper – First Year after Acquisition The schedule of determination and allocation of excess presented 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%)………………………..

240,000 120.000

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

6,000 96,000 192,000 7,200

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

288,000 72,000

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

4,800 15,000

21,000 84,000

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


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

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





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

P 1,200 P1,200

216,000

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

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

Value P12,000 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

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 parent or controlling Interest Goodwill impairment loss applicable to NCI…………………….. Goodwill impairment loss based on 100% fair value or fullGoodwill (E4) Investment income Non-controlling interest (P36,000 x 20%)……………….. Dividends paid – S…………………… Investment in S Company


Value P 3,000

% of Total 80.00%

750

20.00%

P 3,750

100.00%

37,440 7,200

36,000 8,640

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 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%) Balance, 12/31/x4

Investment in S 372,000 28,800 40,000 377,640

377,640 Percentage of goodwill for amortization purposes: Goodwill applicable to parent Goodwill applicable to NCI Total (full) goodwill…………

13,560 288,000 84,000 5,640 377,640

Value P12,000 3,000 P15,000

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

% of Total 80.00% 20.00% 100.00%

The goodwill impairment loss of P3,750 based on 100% fair value or full-goodwill would be allocated as follows: Value % of Total Goodwill impairment loss attributable P 3,000 80.00% to parent or controlling Interest Goodwill impairment loss applicable to NCI…………………….. 750 _20.00% Goodwill impairment loss based on 100% fair value or full-goodwill P 3,750 100.00%

(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)]…...

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).

Subsidiary accounts are adjusted to full fair value regardless on the controlling interest percentage or what option used to value non-controlling interest or goodwill.

Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement Sales 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…………………… Investment in S Co………

P360,000

P


20x5: Second Year after Acquisition Sales

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

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

P 135,000 405,000

P 96,000 288,000

120,000 240,000 600,000

120,000 120,000

Dr.

(4)

34,440

(3) (3) (3)

6,000 6,000 1,200

(3)

3,750

(5)

8,610

Cr.


P360,000

(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

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

490,440

240,000 144,000

(1) 240,000

_________ P1,990,440

_________ P1,008,000

__________ P 754,200

(4)

7,200

(3)

6,000

(2) 216,000 (3) 1,200 (3) 3,750 (2) 288,000 (2) 84,000 (4) 5,640

(3)

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

P Co. P 540,000

490,440 ____94,410 P2,426,850

S Co. P 380,000

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

216,000 P 324,000 60,000 72,000 P 192,000 66,240 P 258,240 P 72,000

192,000 P 168,000 24,000 54,000 P 90,000 P 90,000 P 48,000

No goodwill impairment loss for 20x5. Parent Company 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


72,000

38,400


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%) Balance, 12/31/x5


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

5,760


72,000 66,240

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

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%)……………………….. 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.

240,000 144.000

307,200 76,800

(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

To eliminate investment on January 1, 20x5 and allocate excess of cost over book value of identifiable assets acquired, with remainder to the original amount of goodwill; and to establish non- controlling interest (in net assets of subsidiary) on 1/1/20x5. *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6).

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

6,000 6,000 1,200

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




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

P 1,200 P1,200

Total

P7,200

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

66,240 9,600


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

12,000 1,200

Investment Income Amortization (P7,200 x 80%)

5,760

72,000 66,240

48,000 27,840

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 27,840 405,480

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


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 Discount on bonds payable Goodwill…………………… Investment in S Co……… Total Accumulated depreciation - equipment Accumulated depreciation

P490,440

P

16,560

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

258,240 P748,680

P144,000 90,000 P234,000

72,000 -

48,000

P676,680

P186,000

P676,680

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

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

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

405,9480 P2,236,680

P1,074,000

P 150,000 450,000

P 102,000 306,000

(1) 144,000

258,240 P748,680 (4)

(2)

7,200

(2) (2)

3,600 11,250

(2)

84,000

(2) 198,000

48,000

(3) 216,000 (3) 1,200 (1) 307,200 (5) 70,440 (4) 27,840

(3)

12,000

72,000 -

P2,634,000 P 180,000 552,000

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

120,000 240,000 600,000 676,680

240,000 186,000

(3)

__________ P1,074,000

6,000

240,000 360,000 600,000

(1) 240,000 (3)

___ _____ P2,236,680

Total

120,000 120,000

9,600

__________ P 796,650

676,680 (2 ) 76,800 (2) 17,610 (5) 16,560 P 796,650

__________ P2,634,000

Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem VII solution). 5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: b.

c.

6.


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)…………………………………..


P360,000

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

a. CI-CNI – P202,440

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

P 8,610 13,200 3,750

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


*Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company

P168,000 60,000 P228,000

P 60,000

Less: Amortization of allocated excess (refer to amortization table above)

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.


e.

f.

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……………..


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

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)

P16,560 7,200

P192,000 90,000 P282,000

Goodwill impairment (impairment under full-goodwill approach) Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5

0

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



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

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

P484,800

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


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)…………………………………..

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

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)…………………………………..

f.


2,250 P 101,370

P 600,000 676,680 P1,276,680 __101,370 P1,378,050

Problem XXVIII 1. Ambrose should report income from its subsidiary of P15,000 (P20,000 x .75) rather than dividend income of P9,000. 2. A total of P5,000 (P20,000 x .25) should be assigned to the noncontrolling interest in the 20x4 consolidated income statement. 3. Consolidated net income of P70,0000 should be reported for 20X4, computed as follows: Reported net income of AA P59,000 Less: Dividend income from KR (9,000) Operating income of AA P50,000 Net income of KR 20,000 Consolidated net income P70,000 4. Income of P79,000 would be attained by adding the income reported by AA (P59,000) to the income reported by KR (P20,000). However, the dividend income from KR recorded by AA must be excluded from consolidated net income. Multiple Choice Problems 1. b Full-Goodwill: (P600,000/70%) – P640,000 = P217,143 – P40,000 = P177,143 If partial goodwill: P600,000 – (P640,000 x 70%) = P152,000 – (P40,000 x 70%) = P124,000 2. b – P500,000 + P3,461 3. b 4. d – equivalent to consideration transferred, P320,000 5. d – equivalent to consideration transferred, P380,000 6. a 20x4 Investment income: Dividend of P10,000 x 100% 20x4 Investment balance: P500,000 7. d – P45,000/15% = P300,000 8. c 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 Consolidated net income P143,000 9. a Non-controlling Interest in Net Income (NCINI) for Year 3 Net income of S Company Less: Amortization of allocated excess

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for Year 3

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

10. c

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

11. a

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. *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

12. c

P5,250 3,750 0

P 375,000 30,000 P405,000

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**

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

P 8,750 6,250 0

P 625,000 50,000 P675,000 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.

13. b As a general rule, if problem is silent It is assumed that expenses are generated evenly throughout the year, thus: Expenses (9/1/20x4-12/31/20x4): P620,000 x 4/12 P206,667 Amortization of allocated excess: P15,000 x 4/12 5,000 P211,667 14. c

Net income of S Company (P800,000 – P620,000) Less: Amortization of allocated excess

P180,000 15,000 P165,000

15. a

Multiplied by: No of mos. (9/1-12/31)

4/12 P 55,000

Net income of S Company (P800,000 – P620,000) Less: Amortization of allocated excess

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

Multiplied by: No of mos. (9/1-12/31) Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) for 20x4

16. b

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

17. c

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

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

18. 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.

19. 20. 21. 22. 23. 23.

d – refer to No. 18 for further discussion. b – refer to No. 18 for further discussion. a – P40,000 x 80% b – P50,000 x 80% a – P60,000 x 80% c Full/Gross-up Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P100,000 Less: Amortization of allocated excess*…………… 7,000 Impairment of full-goodwill (if any)**………… 0 P 93,000 x: Non-controlling interests………………………. 20% Non-controlling interest in Net Income…………………… P 18,600 *Amortization of allocated excess: Increase in equipment: P30,000 / 10 years = P 3,000 Increase in buildings: P40,000 / 10 years = 4,000 Total amortization……………………………… P 7,000

** In case, there is an impairment of goodwill then the amount impaired under the 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 24. 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 25. 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 26. a

Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x4……………………………… P 300,000 Retained earnings, 12/31/20x4: Retained earnings, 1/1/20x4………………………….P200,000 Add: Net income – 20x4…………………………….. 100,000 Less: Dividends paid, 20x4…………..……………… 40,000 260,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x4 P 560,000 Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000 Less: Accumulated amortization of allocated excess P7,000 x 1 year…………………………………….…. 7,000 Fair value of Stockholders’ Equity of Subsidiary. 12/31/x4… P 623,000 Multiplied by: Non-controlling Interest %........................... 20% Non-controlling Interest (partial goodwill)………………….. P 124,600 Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… 11,000 Non-controlling Interest (full)……………………………… P 135,600 * this computation (i.e., P55,000 x 20%) should only be use when the fair value of the noncontrolling interest of acquiree (subsidiary) is not given.

Partial Goodwill: Fair value of Subsidiary: Fair value of consideration transferred: Cash………… P 500,000 Less: Book value of Net Assets (Stockholders’ Equity - Subsidiary): (P300,000 + P200,000) x 80%.. 400,000 Allocated Excess.…………………………………………. P 100,000 Less: Over/Undervaluation of Assets and Liabilities: Increase in equipment: P30,000 x 80%................... P 24,000 Increase in building: P40,000 x 80%......................... 32,000 56,000 Goodwill (Partial)………………………………………….. P 44,000 Full-goodwill: (100%) Fair value of Subsidiary: (100%) Fair value of consideration transferred: P500,000 / 80%........………………………….. Less: Book value of Net Assets (Stockholders’ Equity - Subsidiary)…………................................... Allocated Excess.………………………………………….

P 625,000 500,000 P 125,000

Less: Over/Undervaluation of Assets and Liabilities (P40,000 + P30,000)……………………. Goodwill (Full/Gross-up)..……………………………….. 27. e

28. e

P

70,000 55,000

Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x5……………………………… P 300,000 Retained earnings, 12/31/20x5: Retained earnings, 1/1/20x5 (refer to No. 94)……….P260,000 Add: Net income, 20x5………………………………. 120,000 Less: Dividends paid, 20x5…………………………… 50,000 330,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x5 P 630,000 Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000 Less: Accumulated amortization of allocated excess – 2 yrs 14,000 Fair value of Stockholders’ Equity of Subsidiary. 12/31/x5… P 686,000 Multiplied by: Non-controlling Interest %.............................. 20% Non-controlling Interest (partial goodwill)………………….. P 137,200 Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… 11,000 Non-controlling Interest (full)……………………………… P 148,200 Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x6……………………………… Retained earnings, 12/31/20x6: Retained earnings, 1/1/20x6………………………….P 330,000 Add: Net income, 20x6……………………………… 130,000 Less: Dividends paid, 20x6………………………….. 60,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x6 Add: Adjustments to reflect fair value (P30,000 + P40,000).. Less: Accumulated amortization of allocated excess (1/1/20x4 – 12/31/20x6): P7,000 x 3 years…………… Fair value of Stockholders’ Equity of Subsidiary. 12/31/x6… Multiplied by: Non-controlling Interest %............................ Non-controlling Interest (partial goodwill)………………….. Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… Non-controlling Interest (full)………………………………

P 300,000

400,000 P 700,000 70,000 21,000 P 749,000 20% P 149,800 11,000 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. 29. 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…………..

P 20,000 0 _ 0

P 500,000 100,000 P600,000 20,000 P580,000

Add: NCINI CNI - entity concept

__20,000 P600,000

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

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


30. 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

P 20,000 0 _ 0

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

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


31. No requirement 32. Podex’s separate earnings for 20x6 ............................................................ P2,000,000 Dividend income from Sodex................................................................ __120,000 Podex’s 20x6 net income ................................................................... P2,120,000 33.

P2,260,000

Podex’s separate earnings for 20X6 P2,000,000 Podex’s equity in net income of Sodex ............................................... 300,000 Less: Amortization of cost in excess of book value ........................... (40,000) Podex’s 20x6 net income ................................................................... P2,260,000

34. b 35. b Net Income from own operations: 20x4 20x5 Parent …………………………………………………P 100,000 P100,000 Subsidiary……………………………………………... 25,000 35,000 P125,000 P135,000 Subsidiary’s other comprehensive income………….. 5,000 10,000 Total Comprehensive Income……………………….....P130,000 P145,000 Less: Amortization of allocated excess…………….… 6,250 6,250 Impairment of full- goodwill (if any)……………. 0 0 Consolidated /Group Comprehensive Income…… P123,750 P138,750 Less: Non-controlling interest in Comprehensive Income *…………………………………………… 4,750 7,750 Controlling Interest in Consolidated __________________ Comprehensive Income …. …………………………P119,000 P131,000 *Non-controlling interest in Comprehensive Income:

20x4

2012

P 500,000 100,000 P600,000 20,000 P580,000

Subsidiary’s: Net income from own operations………….......P 25,000 P 35,000 Other Comprehensive Income (P30,000 – P25,000)…………………………….…………... 5,000 10,000 Subsidiary’s Comprehensive Income…………........P 30,000 P 45,000 Less: Amortization of allocated excess*………….. 6,250 6,250 Impairment of full-goodwill (if any)....………. 0 0 P 23,750 P 38,750 x: Non-controlling interests…………………………. 20% 20% Non-controlling interest in Comprehensive Income...P 4,750 P 7,750 *Amortization of allocated excess: Increase in other intangibles: P50,000 / 8 years = P 6,250 36. 37. 38. 39.

c – refer to No. 35 c – refer to No. 35 b- refer to No. 35 d Inventory – not yet sold in 20x4 Building: (P390,000 – P200,000)/ 10 years Equipment (P280,000 – P350,000)/ 5 years

40. a 41. a 42. c 43. a 44. c 45. a 46. c 47. b 48. d 49. d 50. a

p

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

Cost of Goods Sold P80,000 debit Depreciation Expense (P192,000/120) 7 = P11,200 debit Cost of Goods Sold (P60,000 x 4/6) = P40,000 debit Interest Expense: (P15,000/5) = P3,000 debit [(P250,000 - P180,000)/10]7 [(P380,000 - P260,000)/120]88 P170,000 - {[P320,000 - (P300,000 - P170,000)]/10}2 [P320,000 - (P300,000 - P170,000)]/10 P105,000 - {[P405,000 - (P450,000 - P105,000)]/20}2 [P405,000 - (P450,000 - P105,000)]/20

51. d - The acquisition method consolidates assets at fair value at acquisition date regardless of the parent’s percentage ownership. 52. b

53. a

Consideration transferred P3,800 Less: BV of SHE of S: P1,000 + P600 + P1,500 3,100 Allocated excess /differential / excess of cost or fair value over book value P 700

Allocated excess /differential / excess of cost or fair value over book value P 700 Less: O/U valuation of A and L Book value (P800 + P1,000 + P1,500 + P900 – P1,800) P2,400 Fair value (P900 + P1,200 + P1,250 + P1,300 – P1,700) 2,950 Net increase 550 Goodwill P 150 54. c – inventory at fair value 55. No answer available Book value of Building, 1/1/x4 Less: excess BV over FV Fair value Less: Dept’n based on BV (1,500/5) Add: Excess depreciation (300/5) Carrying amount on Conso BS, 12/31/x4 Or, FV of Building Depreciation (1,200/5) Carrying amount on Conso BS, 12/31/x4 56. No answer available FV of equipment 1/1/x4 Depreciation (1,250/2) Carrying amount on Conso BS 12/31/x4

1,500 ( 300) 1,200 ( 300) 60 960 1,200 ( 240) 960 1,250 ( 625) 625

57. c – (P900, book value + (P1,300 – P900) = P1,300 58. c – (P1,800 – (P1,800 – P1,700) + (P100/4) = P1,725 59. FV as of 1/1/x4 1,200 Acc. Dep. (1,200/5 * 2) (480) Carrying Amount in Conso BS, 12/31/x5 720 Or Book Value 1/1/x4 Excess BV over FV Acc. Depc’n based on BV (1,500/5 * 2) Excess depreciation ( 300 / 5 * 2) Carrying Amount in Conso BS, 12/31/x5 60.

1,500 ( 300) ( 600) 120 720

Book Value of Equipment 1/1/x4 Excess FV over BV Dep based on BV (20x4 to 20x5) (1,000/2 *2) Amortization of Excess FV over BV Carrying amount 12/31/x5

1,000 250 (1,000) ( 250) 0

Or FV of Equipment, 1/1/x4 Depreciation based on FV (1,250/2 *2) Carrying amount 12/31/x5

1,250 (1,250) 0

61. b - (P900, book value + (P1,300 – P900) = P1,3000 62. d - (P1,800 – (P1,800 – P1,700) + (P100/4) x 2 years = P1,750

63. d

64. b

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

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

65. 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 ...................................................... 66. b

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)

67. d – same with No. 5 68. 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) 69. 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)

70. d – 1/2/20x4: BV of equipment, 1/1/20x4 Adjustments to reflect fair value, 1/1/20x4 (P300,000 – P200,000) 71. 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

P45,000 (9,000) P36,000

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

P

0 0 ____0

P 70,000 40,000 P110,000 ____0

Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P110,000 _____0 P110,000

72. b Plimsol: P100,000 + P200,000,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,P 300, 000 Shipping: P75,000 + P150,000………………………………………………………………. 225,000 P 525,000 73.

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

74. d

75. d

76. b

77. d

78. d

79. a

80. a

81. a

Liabilities: Plimsol (P40,000 + P75,000) Shipping (P25,000 + P50,000)

P115,000 75,000 P 190,000

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

P525,000 190,000 P335,000

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

P 8,000 __10,000 P 2,000

Decrease in buildings account (refer to No. 73)………… Less: Increase due to depreciation (P2,000/10)………… Decrease in buildings accounts……………………………..

P 2,000 200 P 1,800

Decrease in buildings account (refer to No. 74)………… Less: Increase due to depreciation (P2,000/10)………… Decrease in buildings accounts……………………………..

P 1,800 200 P 1,600

Increase in Equipment account: Fair value…………………………………………… Book value………………………………………….. Increase…………………………………………….

P 14,000 __18,000 P 4,000

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

P

Increase in equipment account (refer to No. 77)…………

P 3,000

P

4,000 1,000 3,000

Less: Decrease due to depreciation (P4,000/4…………… Increase in equipment accounts…………………………….. 82. a

1,000 P 2,000

Increase in Land account: Fair value……………………………………………P 12,000 Book value………………………………………….. 5,000 Increase…………………………………………….. P 7,000

83. b – refer to No. 82, no depreciation/amortization 84. b – refer to No. 82, no depreciation/amortization 85. e Increase in Patent account: Fair value…………………………………………… Book value………………………………………….. Increase…………………………………………….

P 11,000 _ 0 P 11,000

(P234,000/90%) – (P160,000 + P80,000) = P20,000 – (P4,000 – P2,000 + P7,000) = P11,000. Partial or full-goodwill approach, the amortization remains the same. 86. e

87. d

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

P 11,000 2,200 P 8,800

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

P P

8,800 2,200 6,600

88. d - Parent’s inventory of P132,000 plus subsidiary’s book value of inventory of P38,000 plus excess of the fair value over the book value of P22,000 = P132,000 + P38,000 + P22,000 = P192,000 89. d - if partial Purchase price minus 75% of Grass’s underlying book value - P16,500 of excess cost over book value allocated to inventory (see 88) = P392,000 – (75%) x (P400,000) - P16,500 = P75,500, partial; if full goodwill , P75,500/75% (since no NCI available) = P100,667 90. d - Just add the liability amounts together 91. No answer available Net Assets at Book Value P 400,000 Increase in Inventories 22,000 Net Assets @ FV 422,000 Multiplied by 25% NCI, partial goodwill 105,500 Add: NCI on full goodwill Full goodwill (P75,500/75%) P100,667 Partial goodwill 75,500 25,167 NCI, partial goodwill 130,667 92. a- The parent’s Retained Earnings is the amount of consolidated Retained Earnings

93. No answer available Cash Accounts Receivable Inventory (132,000 + 60,000) Land Plant Assets (net) Goodwill - partial Total Assets

230,000 170,000 192,000 100,000 700,000 75,500 1,467,500

94. 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 95. 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)

if full

100,667 1,492,667

P120,600 P 45,000 13,500 36,900 95,400 P 25,200 P

900 7,200 2,700

10,800 P 14,400

P 1,000 2,000 300 P 3,300 P 50,000 15,000 41,000 P106,000 12,000 P118,000 10% P 11,800

96. a – P48,000, parent only. 97. a – P48,000. On the date of acquisition, the parent’s retained earnings is also the consolidated retained earnings. 98. No requirement. 99. b – P120,600, the initial value 100. b – P4,000 x 90% = P3,600 101. c Consolidated Net Income for 20x4 Net income from own/separate operations P Company P30,200 – (P4,000 x 90%) S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess

P

610 3,300

P26,600 9,400 P36,000

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

____0

3,910 P32,090 610 P32,700

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

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

(

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

102. 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 12,010 103. b – refer to 101 for computation 104. c – refer to 101 for computation 105. b Controlling RE / RE Attributable to EH of Parent, 1/1 (refer to No. 102 P 48,000 Add: CI – CNI (refer to 106 and 109) 32,090 Less: CI – Dividends (Dividend of parent only) 15,000 Controlling RE / RE Attributable to EH of Parent, 12/31 P 65,090 106. b – same with No. 105 107. c Consolidated Equity: Controlling Interest / Equity Holders Attributable to Parent: Common stock – P: [P100,000 + P120,600 – (5,400 shares x P10 par)] P154,000 APIC – P: [15,000 + [P120,600 – (5,400 x P10)] 81,600 RE – P (refer to No. 105) 65,090 Parent’s Stockholders Equity or Controlling Interest – Equity P300,690 Noncontrolling Interest 12,010 Consolidated Equity P312,700 108. c

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

109. c

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

110. b Combined revenues .................................................................................................. Combined expenses..................................................................................................

P1,300,000 (800,000)

Trademark amortization ............................................................................................ Patented technology amortization ........................................................................ Consolidated net income.........................................................................................

(6,000) (8,000) P486,000

NCI-CNI - P34,400; NCI – P260,800 Subsidiary income (P100,000 – P14,000 excess amortizations) .......................... Non-controlling interest percentage ...................................................................... Non-controlling interest in subsidiary income .......................................................

P86,000 40% P34,400

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

P180,000 52,000 (5,600) 34,400 P260,800

112. 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

113. 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

111. c

114. 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% P 372,000 ___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.

115. b – (P50,000 + P70,000) x 25% = P30,000 116. b – P only. 117. b {(P250,000/.8) + [P75,000 + P90,000 - P25,000 - P50,000 - P30,000 - (P80,000/8)2]}.2 118. d {(P420,000/.7) + [P160,000 + P210,000 - P60,000 - P80,000 - P50,000 - (P90,000/5)2]}.3 119. a - P650,000 =P500,000 + P200,000 - P50,000 120. a – assume the use of equity method Punn’s equity in net income of Sunn (3 months ended,12/31/x6)…… P 200,000 Amortization of cost in excess of book value........................................... ( 60,000)

Increase in Parent’s retained earnings……………………………………. P 140,000 e - If cost model/cost method, the answer would be P100,000. Dividend income……………………………………………………………. P 100,000 121. c – P120,000 x 70% 122. c Investment.1/1/20x4 P210,000 Add: Share in net income – 20x4 (P90,000 x 70%) 63,000 Less: Dividends received 24,000 Investment, 12/31/20x4 P249,000 Add: Share in net income – 20x5 (P120,000 x 70%) 84,000 Less: Dividends received 36,000 Investment, 12/31/20x5 P297,000 Note: The term “received” means that is the amount attributable to parent. If the term “declared or paid” were used then it should be multiplied further by controlling interest. 123. c – P60,000 x 80% = P48,000 124. c Investment.1/1/20x4 P105,000 Add: Share in net income – 20x4 (P45,000 x 80%) 36,000 Less: Dividends received 12,000 Investment, 12/31/20x4 P129,000 Add: Share in net income – 20x5 (P60,000 x 80%) 48,000 Less: Dividends received 18,000 Investment, 12/31/20x5 P159,000 125. d Investment balance, 1/1/20x4……………………………………………….. P 150,000 Add: Puma’s equity in net income of Slume (30% x P25,000)..………… 7,500 Less: Dividends (P30% x P10,000)……………………………………………. 3,000 Amortization of cost in excess of book value (P50,000/10 years) x 30%.............................................................. 1,500 Puma’s 20x6 net income (equity method) ............................................... P 153,000 126. b Puma’s equity in net income of Slume (30% x P25,000)..……………….. P 7,500 Less: Amortization of cost in excess of book value (P50,000/10 years) x 30%.............................................................. 1,500 Investment income – 20x4 (equity method)………………………………. P 6,000 127. 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: Full-goodwill (excess of cost over fair value)………………………………………………...

P 180,000 20,000 P 200,000 P 100,000 60,000 P 5,000 ___10,000

160,000 P 40,000 15,000 P 25,000

Partial-Goodwill Approach

Fair value of Subsidiary (90%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of S: Common stock (P100,000 x 90%)……………………. Retained earnings (P60,000 x 90%)………………... Allocated excess (excess of cost over book value)….. Less: Over/under valuation of assets and liabilities: Increase in land (P5,000 x 90%)……………………. Increase in equipment (P10,000 x 90%) Positive excess: partial-goodwill (excess of cost over fair value)………………………………………………...

P 180,000 P 90,000 54,000 P

Over/ under

10,000 25,000

144,000 36,000

4,500 ___9,000

13,500 P 22,500

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

P

Life 5 5

Annual Amount

P 2,000 5,000 P 7,000

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

128. 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/x6 203,400

12,600

Amortization (P14,000 x 90%)

129. c 1/1/x6.

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

NI of S (30,000 x 90%)……. 27,000 1/1/x6 215,100

6,300


130. d – 20x3: P30,000 x 75% = P22,500 20x4: P40,000 x 75% = P30,000 131. a – no changes in investment unless there are dispositions of investment and permanent impairment. 132. None – no answer available. Under the cost model share in net income or earnings of subsidiary does not affect investment. 133. 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…………………………….. P602,000 134. a The adjusting entry required in 20x7 to convert from the cost to the equity method is: Investment in Tiny………………………………….52,000

Retained earnings beg………………………….. 4,000 Dividend revenue………………………………… 54,000 Equity in subsidiary income of Tiny……. 110,000

135. b 136. b – Dividend paid – S, P70,000 x 60% = P42,000 137. d – CNI amounted to P265,000 [CI-CNI, P235,000 and NCI-CNI, P30,000 Consolidated Net Income for 20x5 Net income from own/separate operations P Company S Company Total Less: Non-controlling Interest in Net Income* Amortization of allocated excess Goodwill impairment Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x4

P 30,000 15,000 ____0

P 90,000 ( 15,000_ P 75,000 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%)*

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

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

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

20x5 results of operations are as follows:

P190,000 90,000 P280,000

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

138. c – refer to No. 137 for computations 139. b – refer to No. 137 for computations 140. c - P811,000.

Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model) Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5 Less: Retained earnings – Subsidiary, January 1, 20x2 Increase in retained earnings since date of acquisition Less: Amortization of allocated excess – 20x2 – 20x4 (P15,000 x 3 years) Multiplied by: Controlling interests %...................

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

P700,000

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

111,000 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.

141. c - P811,000 – refer to note (b) of No. 140 142. b – P111,000 – refer to No. 140 143. d

Consolidated Retained earnings, January 1, 20x5 (refer to Nos. 118 and 119) Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 Total Less: Dividends paid – Parent Company for 20x5 Consolidated Retained Earnings, December 31, 20x5

144. d – refer to No.143 145. 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 811,000 235,000 P1,046,000 92,000 P 954,000

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

146. c

Non-controlling interest (full)

P 352,000

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

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

147. 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/x5 528,000

724,000 954,000

Investment Income

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

148. c 149. d – refer to No. 137 150. c – refer to No. 137 151. b – refer to No. 137 152. c – refer to No. 140 153. c – refer to No. 140 154. a – not applicable under equity method. 155. d – refer to No. 143 156. d – refer to No. 143 157. d – refer to No. 145 158. c – refer to No. 146 159. b Consideration transferred: 10,500 shares x P95 Less: BV of SHE – S (?) Allocated excess; Less: O/U valuation of A and L: Undervaluation of land Overvaluation of buildings Undervaluation of equipment Undervaluation/unrecorded trademark

54,000 45,000

NI of S (90,000 x 60%)

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

160. a – P900,000 + P500,000 = P1,400,000 161. 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 P909,625 162. b – (P750,000 + P280,000) – P30,000 + (P1,500 x 5 years) = P1,007,500 163. c – (P300,000 + P500,000) + P80,000 – (P8,000 x 5 years) = P840,000 164. c – P450,000 + P180,000 + P40,000 = P670,000

165. 166. 167. 168.

d – P50,000 – P3,125 x 5 years) = P34,375 a – P only (the stock issued In 20x0 includes already in the December 31, 20x4 balance. a – P only 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

P

0 9,625 _ 0

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

P300,000 200,000 P500,000 9,625 P490,375

169. 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 P190,375 170. c – P3,1250 / .20 = P15,750 171. a Punn’s separate earnings for 20x6.............................................................. P6,000,000 Add: Punn’s equity in net income of Sunn (3 months ended,12/31/x6) 200,000 Less: Amortization of cost in excess of book value ................................. ( 60,000) Punn’s 20x6 net income (equity method)................................................. P6,140,000 172. a – assume the use of equity method Punn’s equity in net income of Sunn (3 months ended,12/31/x6)…… P 200,000 Amortization of cost in excess of book value........................................... ( 60,000) Increase in Parent’s retained earnings……………………………………. P 140,000 E - If cost model/cost method, the answer would be P100,000. Dividend income……………………………………………………………. 173. 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

P 100,000 P560,000 300,000

date of acquisition, 1/1/20x6 (date to establish reciprocity – not 12/31/x6) x: Controlling interests 174. a Net income of S (5/1/x5 – 12/31/x5): P210,000 x 8/12 Less: Dividend – S (11/1/20x5 – no need to pro-rate) Cumulative net income less dividends since date of acquisition, 12/31/20x5 (date to establish reciprocity – not or 1/1/20x6) x: Controlling interests 175. 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 176. b 177. d 178. c 179. b

P260,000 80% P208,000 P140,000 75,000 P 65,000 80% P 52,000 P 60,000 190,000 P130,000 90% P117,000

{(P260,000 - P230,000) + [(P650,000 - P590,000)/120] 8}.8 {(P190,000 - P160,000) 4/6 - [(P241,000 - P220,000)/60] 5}.7 [{(P15,000 + P22,000) - [(P80,000 - P60,000)/10]2} - (P6,000 + P9,000)].7

[{(P84,000 + P105,000) - [(P310,000 - P220,000)/20]2} - (P30,000 + P50,000)].8 180. b – building account in the books of subsidiary at fair value 181. e – building account in the books of subsidiary at book value 182. d – push-down accounting: equipment account in the books of subsidiary is at fair value 183. b 184. a – P540,000 = (P500,000 + P150,000 – P90,000 – P20,000) 185. c – equivalent to the original cost 186. 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. 187. b - Intercompany receivables and payables from unconsolidated subsidiaries would not be eliminated.

Quiz - XVI 1. 2. 3. 4. 5.

b {P150,000 - [(P550,000 - P450,000)/10] - [(P300,000 - P280,000)/5]}.8 P36,925 {P110,000 - (P250,000 - P160,000 - P50,000) - [(P130,000 - P100,000) 3/5] + [(P215,000 P200,000)/5] (3/12)}.7 P545,500 P500,000 + [P110,000 + P130,000 - P30,000 - P40,000 - P55,000 - (P200,000/8)2].7 P388,000 P320,000 + [P100,000 + P140,000 - P40,000 - P50,000 - P35,000 - (P75,000/5)2].8 P15,400 {P80,000 - [(P290,000 - P250,000)/8] + [(P160,000 - P150,000)/5]}.2

6. 7.

P13,200 {P150,000 - (P470,000 - P300,000 - P90,000) - [(P190,000 - P160,000) 4/5] - [(P520,000 P400,000)/10] (4/12) + [(P380,000 - P350,000)/5] (4/12)}.3 P70,500 {(P250,000/.8) + [P75,000 + P90,000 - P25,000 - P50,000 - P30,000 - (P80,000/8)2]}.2

8. 20x5: P56,000 20x6: P14,000 Purchase differential amortization to investment income Inventory (P300,000 - P240,000).7 Plant Assets [(P700,000 - P560,000)/7].7 9.

Consolidation worksheet: Cost of Goods Sold Depreciation Expense

20x5 P42,000 14,000 P56,000

20x6 P 0 14,000 P14,000

P60,000 20,000

10. P2,900 Sandpiper’s share of Shore net income (P18,000 x 30%) Add: Overvalued accounts receivable collected in 20x5 Undervalued accounts payable paid in 20x5 Less: Undervalued inventories sold in 20x5 Depreciation on building undervaluation P3,600/6 Amortization on patent P3,200/8 years Income from Shore/Income from subsidiary

P ( ( (

11. No requirement 12. P1,050,000 Parrco’s income from its own separate operations for 20x6 Subbco’s net income for the nine months ended 12/31/x6 Less: Amortization of cost in excess of book value (P30,000 ÷ 60%) Consolidated net income for 20x6 (economic unit concept) Division of consolidated net income: To controlling interest (Parrco’s stockholders) To non-controlling interest (stockholders of Subbco) 13. P990,000 Parrco’s income from its own separate operations for 20x6 Parrco’s equity in net income of Subbco Company for nine months ended 12/31/x6 (P200,000  60%) Less: Parrco’s amortization of cost in excess of book value Consolidated net income for 20x6 (parent company concept)

P 900,000 200,000 ___50,000) P1,050,000 P 990,000 ___60,000 P1,050,000 P 900,000 120,000 ( 30,000) P 990,000

14. P400,000 (P100,000 + P300,000) 15.

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

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

16.

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

17.

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

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

18. Correction 20x0 should be 20y0: P372,850 Step-acquisition, either full-goodwill or partial goodwill approach, the answer remains the same. Full-Goodwill Presentation: Net income from own operations; Parent - Keefe…………………………………… P 300,000 Subsidiary - George (P500,000 – P400,000)…….. 100,000 P 400,000 Less: Amortization of allocated excess…………………… 6,000 Impairment of goodwill (if any)……………………. 0 Consolidated/Group Net Income…………………………. P 394,000 Less: Non-controlling interest in Net Income Subsidiary net income from own operations: 1/1/20y0 - 4/1/20y0 (3 months): P100,000 x 3/12 = P25,000 x 30%................ P 7,500 4/1/20y0 – 12/31/20y0 (9 months): P100,000 x 9/12 = P75,000 x 20%................ 15,000 Total…………………………………………….. P 22,500 Less: Amortization of allocated excess: 1/1/20y0 – 4/1/20y0 (3 months) P6,000 x 3/12 = P1,500 x 30%.......... 450 4/1/20y0 – 12/31/20y0 (9 months) P6,000 x 9/12 = P4,500 x 20%........... 900 Impairment of goodwill (if any): First 3 months: P 0 x 30%.......………… 0 Remaining 9 months: P 0 x 20%............... 0 21,150 CNI attributable to the controlling interest (CI-CNI)/ Profit attributable to equity holders of parent…………………. P372,850 * It should be noted that the phrase without regard for this investment means that excluding any income arising from investment in subsidiary (i.e., dividend income).

19. Correction 20y0 should be 20x4 20x4 = P86,400 Consolidated Net Income Peters Company's reported net income Less: dividend income from Smith Peters' income from independent operations Add: Smith's net income in 20x4 since acquisition (8/12)(P45,000)

20x4 64,000 (1,600) 62,400 30,000

20x5 37,500 0 37,500

Less: Smith's net loss in 20x5 P5,000) Controlling Interest in Consolidated net income 20. 20x5 = P32,500 – refer to No. 19 21. 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) 22. 20x5 = P179,900 – refer to No. 21 23. P9,200 Pinta Company 20y4 equity-method income: Proportionate share of reported income (P30,000 x .40) Amortization of differential assigned to: Buildings and equipment [(P35,000 x .40) / 5 years] Goodwill (P8,000: not impaired) Investment Income Assignment of differential Purchase price Proportionate share of book value of net assets (P320,000 x .40) Proportionate share of fair value increase in buildings and equipment (P35,000 x .40) Goodwill

( 5,000) 32,500

92,400

20x4 P129,000 22,400 P151,400

20x5 P161,500

18,400 P179,900

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

(14,000) 8,000

24.

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

P

3,600

25.

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

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

Theories 1. 2. 3. 4. 5.

c 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.

Solution Chapter 16

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