Chapter 12Problem I (a)Working Fund – Agency ……………………………… ……………………….. 5,000 Cash …………………………………………………………………………. 5,000 (b)Accounts Receivable …………………………………..................................... 50,000 Sales-Agency ………………………………………………………………. 50,000 (c)Cash ………………………………………………………..................................... 35,000 Accounts Receivable …………………………………………………….. 35,000 (d)Expenses-Agency ……………………………………………………………….. 4,500 Cash …………………………………………………………………………. 4,500 (e)Expenses-Agency ……………………………………………………………….. 2,250 Cash …………………………………………………………………………. 2,250 (f) Cost of Goods Sold-Agency …………………………………………………… 36,000 Merchandise Inventory - Agency ………………………………………. 36,000 2. Sales……………………………………………………………………………….P 50,000 Less: CGS………………………………………………………………………… 36,000 GP………………………………………………………………………………….P 14,000 Less: Expenses (P4,500 + P2,250)…………………………………………….. 6,750 Net income – agency………………………………………………………….P 7,250 Problem II (a) Branch Books: (a) Cash ………………………………………………………….. 42,500 Home Office …………………………………………… 42,500 (b) Shipments from Home Office …………………………… 50,200 Home Office …………………………………………... 50,200 (c) Accounts Receivable ……………………………………. 60,000 Sales …………………………………………………….. 60,000 (d) Purchases …………………………………………………… 22,500 Accounts Payable …………………………………… 22,500 (e) Home Office ……………………………………………….. 53,400 Accounts Receivable ………………………….. 53,400 (f) Accounts Payable ………………………………………... 12,250 Cash …………………………………………………….. 12,250 (g) Furniture & Fixtures ………………………………………… 8,000 Cash …………………………………………………….. 8,000 (h) Expenses …………………………………………………….. 18,000 Cash …………………………………………………….. 18,000 (b) Home Office Books: (a) Branch ………………………………………………………. 42,500 Cash ……………………………………………………. 42,500 (b) Branch ……………………………………………………… 50,200 Shipments to Branch ……………………………….. 50,200 (c) Accounts Receivable …………………………………... 105,000 Sales …………………………………………………… 105,000 (d) Purchases …………………………………………………. 122,500 Accounts Payable …………………………………. 122,500 (e) Cash ……………………………………………………….. 113,600 Accounts Receivable ……………………………… 113,600 (f) Accounts Payable ………………………………………. 124,000 Cash …………………………………………………… 124,000 (g) Expenses …………………………………………………… 26,600 Cash …………………………………………………… 26,600 (h) Cash ……………………………………………………….. 53,400 Branch ………………………………………………... 53,400 (i) Retained Earnings ………………………………………. 10,000 Cash …………………………………………………... 10,000 BARTON CO. Balance Sheet for Branch December 31, 20x4 Assets Liabilities Cash …………………………… P 4,250 Accounts Payable ………… P 10,250 Accounts Receivable ……… 12,600 Accrued Expenses …………… 300 Merchandise Inv……………... 23,500 Home Office ………………….. 37,900 Prepaid Expenses …………… 750 Furnitures & Fixtures …. P 8,000 Less accum. Depr …… 650 7,350 Total Assets …………………… P48,450 Total Liabilities ………………….P48,450 BARTON CO. Income Statement for Branch For Year Ended December 31, 19X6 Sales …………………………………………………………………………… P66,000 Cost of Goods Sold: Purchases …………………………………………………………… P22,500 Shipments for home office ………………………………………. 50,200 Merchandise available for sale ………………………………… P72,700 Less merchandise inv, December 31 ………………………….. 23,500 Cost of Goods Sold ……………………………………………….. 49,200 Gross Profit ……………………………………………………………………. P16,800 Expenses ……………………………………………………………………… 18,200 Net loss ………………………………………………………………………... P 1,400 BARTON CO. Income Statement for Branch For Year Ended December 31, 20x4 Assets Liabilities & Stockholders’ Equity Cash …………………………….. P 23,200 Liabilities Accounts Receivable ……….. 19,050 Accounts payable ………… P 21,300 Merchandise Inventory……… 48,500 Accrued Expenses …………. 1,350 P22,650 Prepaid Expenses ……………. 2,050 Stockholders Equity Furniture & Fixtures …. P 20,000 Capital stock, P20 par……… P50,000 Less accum. Depr….. 5,580 14,420 Retained Earnings …………. 72,740 122,470 Branch ………………………… 37,900 Total liabilities and stockholders’ Total Assets …………………... P145,120 equity ………………… P145,120 BARTON CO. Income Statement for Home Office For Year Ended December 31, 20x4 Sales ……………………………………………………………………………....... P105,000 Cost of goods sold: Merchandise inventory, January 1 …………………………………. P 40,120 Purchases ………………………………………………………………... 122,500 Merchandise available for sale ……………………………………… P162,620 Less shipments to branch ……………………………………………... 50,200 Merchandise available for own sale ……………………………….. P112,420 Less merchandise inventory, December 31 ………………………. 48,500 Cost of Goods Sold ……………………………………………………. 63,920 Gross Profit ………………………………………………………………………… P 41,080 Expenses …………………………………………………………………………… 27,630 Net income from own operations …………………………………………….. P 13,450 Deduct branch net loss …………………………………………………………. 1,400 Total Income ………………………………………………………………………. P 12,050 BARTON CO. Income Statement for Home Office For Year Ended December 31, 20x4 Sales …………………………………………………………………………………. P171,000 Cost of goods sold: Merchandise inventory, January 1 ………………………………….. P 40,120 Purchases ………………………………………………………………… 145,000 Merchandise available for sale ……………………………………… P185,120 Less merchandise inventory, December 31 ……………………….. 72,000 Cost of goods sold ………………………………………………………. 113,120 Gross profit ………………………………………………………………………….. P 57,880 Expenses …………………………………………………………………………….. 45,830 Net Income …………………………………………………………………………. P 12,050 (a) Branch Books: Expenses ………………………………………………………………. 650 Accumulated Depreciation – F&F………………………. 650 Sales …………………………………………………………………… 66,000 Merchandise Inventory ……………………………………………. 23,500 Income summary ………………………………………….. 89,500 Income Summary …………………………………………………… 90,900 Shipments from Home Office …………………………… 50,200 Purchases …………………………………………………… 22,500 Expenses …………………………………………………….. 18,200 Home Office ………………………………………………………… 1,400 Income Summary ………………………………………… 1,400 (b) Home Office Books Expenses ………………………………………………………………. 1,180 Accumulated Depreciation – F&F………………………. 1,180 Sales …………………………………………………………………… 105,000 Merchandise Inventory ……………………………………………. 48,500 Shipments to Branch ……………………………………………….. 50,200 Income summary ………………………………………….. 203,700 Income Summary …………………………………………………… 190,250 Merchandise Inventory …………………………………… 40,120 Purchases ……………………………………………………. 122,500 Expenses …………………………………………………….. 27,630 Branch Income ……………………………………………………… 1,400 Branch ………………………………………………………. 1,400 Income Summary ………………………………………………….. 1,400 Branch Income …………………………………………… 1,400 Income Summary ………………………………………………….. 12,050 Retained Earnings ……………………………………….. 12,050 Problem III Journal and Adjusting Entries – Home Office and Branch Home Office Books Branch Books INTERCOMPANY / INTER-OFFICE Transactions 1/1 a Branch Current . . . . . . . 1,500 Cash . . . . . . . . . . . . . . . . . . . . . . 1,500 Cash . . . . . . . . . . . . . . . 1,500 Home Office Current. . . . . . 1,500 b Shipment to branch, cost 10,200 Home Office Current . . . . . . . . 10,200 Branch Current . . . . . . 10,200 Shipments from Home Office 10,200 c SFF - Branch 3,000 No entry – eqpt accounts Store Furniture & Fixt 3,000 maintained in the HO books Acc. Depreciation – SFF 750 No entry – eqpt accounts Acc. Deprec. SFF – Br. 750 maintained in the HO books P3,000 x 10% x 2.5 yrs SFF – Branch . . . . . . . . . . 900 Home Office Current . . . . . . . . 900 Branch Current . . . . . . 900 Cash . . . . . . . . . . . . . . . . . . . 900 d. Branch Current . . . . . . . 2,600 Accounts Receivable - HO 2,600 Accounts Receivable 2,600 Home Office Current. . . . . . 2,600 1/1 – 1/31 Transaction with Outsiders Accounts Receivable . . . 34,600 Accounts Receivable . . . 6,200 Sales.. . . . . . . . . . . . . . . 34,600 Sales.. . . . . . . . . . . . . . . 6,200 Cash. . . . . . . . . . . . . . . . . . 40,000 Cash . . . . . . . . . . . . . . . . . . . . . . 2,600 Accounts Receivable 40,000 Accounts Receivable . . . . . 2,600 Purchases . . . . . . . . . . . . 31,600 Purchases. . . . . . . . . . . . . . . . . . 3,000 Accounts Payable . . 31,600 Accounts Payable. . . . . . . . 3,000 Accounts Payable . . . . . 36,200 Accounts Payable . .. . . . . . . . 1,450 Cash. . . . . . . . . . . . . . . 36.200 Cash. . . . . . . . . . . . . . . 1,450 Accrued expenses . . . . . 250 Expenses . .. . . . . . . . . . . . . . . . 1,250 Expenses. . . . . . . . . . . . . . 8,950 Cash. . . . . . . . . . . . . . .. . . . . 1,250 Cash. . . . . . . . . . . . . . . 9,200 1/1 – 1/31 Intercompany / INTER-OFFICE Transactions Cash . . . . . . . . . . . . . . . . . . . . . . 1,600 Accts. Rec. – HO……………. 1,600 Allowance for D/A. . . . . 150 Home Office Current . . . . . . . . 150 Branch Current . . . . . . 150 Accts. Rec. – HO……………. 150 Shipment to branch ,cost 1,250 Home Office Current . . . . . . . . 1,250 Branch Current . . . . . . 1,250 Shipments from Home Office 1,250 Cash. . . . . . . . . . . . . . . . . 1,000 Home Office Current . . . . . . . . 1,000 Branch Current . . . . . . 1,000 Cash. . . . . . . . . . . . . . . . . . . 1,000 Adjusting Entries a. Shipment to branch, cost 600 Home Office Current . . . . . . . . 600 Branch Current . . . . . . 600 Shipments from Home Office 600 b. Branch Current . . . . . . .. 475 Expenses. . . . . . . . . . . . . . . . . . . 475 Expenses. . . . . . . . . . . 475 Home Office Current . . . . . . 475 c. Branch Current.. . . . . . .. 35 Expenses. . . . . . . . . . . . . . . . . . . 35 Acc. Deprec. SFF – Br. 35 Home Office Current . . . . . . 35 P3,000/10 years x 1/12 = P25 (depreciation for one month; Asset life, 10 years); P900 / 7.5 years, remaining life = P120 x 1/12= P10) Expenses. . . . . . . . . . . . . . 100 Acc. Deprec. – SFF 100 [(P15,000 – P3,000)/10 x 1/12] d. Included in closing entries e. Expenses. . . . . . . . . . . . . . 750 Expenses. . . . . . . . . . . . . . 350 Accrued expenses. . . 750 Accrued expenses. . . 350 Closing Entries Sales. . . . . . .. . . . . . . . . . . 34,600 Sales. . . . . . .. . . . . . . . . . . 6,200 Merch. inventory, ending 44,500 Merch. inventory, ending Shipments to branch 12,050 (P9,800 + P600) 10,400 Merch. Inv. , beg……. 46,000 Income Summary. . . . . . . 560 Purchases. . . . . . . . . . 31,600 Merch. Inv. , beg……. 0 Expenses (9,200 – 250 Purchases. . . . . . . . . . 3,000 - 475 + 100 + 750)….. 9,325 Shipments from HO Income Summary…… 4,225 (P10,200 + P1,250 +P600) 12,050 Expenses (1,250 + 475 + 35 + 350)……………. 2,110 Branch Income Summary 560 Home Office Current . . . . . . . . 560 Branch Current………. 560 Income Summary . . . . . . . . 560 Income Summary……….. 560 Branch Income Sum 560 Income Summary……….. 3.665 Retained Earnings….. 3,665 EAGLE CO. Balance Sheet for Branch January 31, 20x4 Assets Liabilities Cash …………............................ P 1,100 Accounts Payable ………………. P 1,550 Accounts Receivable ………….. 3,600 Accrued expenses ………………. 350 Accts. Rec.-home office ………. 850 Home Office ……………………… 14,050 Merchandise Inventory ………… 9,800 Merchandise in Transit …………. 600 Total assets ………………… P15,950 Total Liabilities ……………………. P15,950 EAGLE CO. Income Statement for Branch For Month Ended January 31, 20x4 Sales …………………………………………………………………………………………. P 6,200 Cost of Goods Sold: Merchandise inventory, beginning………………………………..P 0 Add: Purchases ………………………………………………………. 3,000 Shipments from home office (P11,450 +P600, in-transit) 12,050 Merchandise Available for Sale ……………………….. P 15,050 Less: Merchandise inv. Dec 31, 19x4 (P9,800 + P600)…. 10,400 Cost of Goods Sold ……………………………………………………………. 4,650 Gross Profit ………………………………………………………………………………… P 1,550 Expenses …………………………………………………………………………………… 2,110 Net Loss, from own operations………………………………………………………… P 560 EAGLE CO. Balance Sheet for Home Office January 31, 20x4 Assets Cash …………………………………………………………………… P 9,100 Accounts Receivable ……………………………………………… P34,000 Less allowance for doubtful accounts ……………….. 1,050 32,950 Merchandise Inventory ……………………………………………. 44,500 Store furniture and fixtures ………………………………………… P12,000 Less accumulated depreciation ………………………. 3,950 8,050 Store furniture and fixtures-branch ……………………………… P 3,900 Less accumulated depreciation ……………………… 785 3,315 Branch office ………………………………………………………... 14,050 Total Assets …………………………………………………………… P111,765 Liabilities Accounts Payable …………………………………………….. P29,150 Accrued Expenses …………………………………………….. 750 Total Liabilities ………………………………………………….. P29,900 Stockholders’ Equity Capital Stock …………………………………………………… P50,000 Retained earnings …………………………………………….. 31,865 Total stockholder’s equity …………………………………… 81,865 Total liabilities and stockholders’ equity …………………… P111,765 EAGLE CO. Income Statement for Home Office For Month Ended January 31, 20x4 Sales ……………………………………………………………………………… P 34,600 Cost of goods sold: Merchandise inventory, January 1 …………………….. P46,000 Purchases …………………………………………………… 31,600 Merchandise available for sale ………………………… 77,600 Less shipments to branch ………………………………… 12,050 Merchandise available for own sales …………………. P65,550 Less merchandise inventory, January 31 ……………… 44,500 Cost of goods sold …………………………………………………………… 21,050 Gross Profit ………………………………………………………………………… P 13,650 Expenses …………………………………………………………………………… 9,325 Net income from own operations ……………………………………………. P 4,225 Deduct branch net loss ………………………………………………………… 560 Total Income …………………………………………………………………… P 3,665 EAGLE CO. Income Statement for Home Office For Month Ended January 31, 20x4 Assets Liabilities’ and Stockholders’ Equity Liabilities Cash …………………………….. ………. P 10,200 Accounts Payable …… P30,700 Accounts receivable ……….. P38,450 Accrued Expenses …… 1,100 P 31,800 Less allow for doubt- Ful accounts ……….. 1,050 37,400 Merchandise Inventory ……………….. 54,900 Stockholders Equity Store furn. & fixtures ………… P15,900 Capital Stocks …………P50,000 Less accum depr 4,735 11,165 Retained earnings …… 31,865 81,865 Total assets ……………………………… P113,665 Total liab. And stockholders’ equity . P113,665 EAGLE CO. Combined Income Statement for Home Office and Branch For Month Ended January 31, 20x4 Sales ………………………………………………………………………………….. P 40,800 Cost of goods sold: Merchandise Inventory, January 1 ………………. P46,000 Purchases ……………………………………………... 34,600 Merchandise available for sale …………………... P80,600 Less merchandise inventory, Jan 31 ……………... 54,900 Cost of goods sold …………………………………............................... 25,700 Gross profit …………………………………………………………………………... P 15,100 Expenses ……………………………………………………………………………… 11,435 Net Income ………………………………………………………………………….. P 3,665 EAGLE CO. Combined Balance Sheet January 31, 20x4 Assets Cash …………………………………………………………………… P 10,200 Accounts Receivable ……………………………………………… P38,450 Less: Allowance for doubtful accounts ………………………… 1,050 37,400 Merchandise Inventory ……………………………………………. 54,900 Store furniture and fixtures ………………………………………… P15,900 Less: Accumulated depreciation ……………………………….. 4,735 _ 11,165 Total Assets …………………………………………………………… P113,665 Liabilities Accounts Payable …………………………………………….. P30,700 Accrued Expenses …………………………………………….. 1,100 Total Liabilities ………………………………………………….. P 31,800 Stockholders’ Equity Capital Stock …………………………………………………… P50,000 Retained earnings …………………………………………….. 31,865 Total stockholder’s equity …………………………………… 81,865 Total liabilities and stockholders’ equity …………………… P113,665 Problem IV 1. Socrates Company Home Office and Plato Branch Reconciliation of Reciprocal Ledger Accounts June 30, 20x4 Investment in Plato Branch Home Office Ledger Ledger Account Account (Debit) (Credit) Balances prior to adjustment P85,000 P33,500 Add: Merchandise shipped to branch 24,000 Less: Acquisition of office equipment by branch (carried in accounting records of home office) (14,500) Collection of branch trade accounts receivable (9,000) Payment of cash by branch (22,000) _______ Adjusted balances P48,500 P48,500 2. (a) Accounting records of home office: Office Equipment: Plato Branch 14,500 Investment in Plato Branch 14,500 To record acquisition of office equipment by branch. Cash in Transit 22,000 Investment in Plato Branch 22,000 To record cash in transit from branch. (b) Accounting records of branch: Home Office 9,000 Trade Accounts Receivable 9,000 To record collection by home office of branch accounts receivable. Inventories in Transit 24,000 Home Office 24,000 To record shipment of merchandise in transit from home office. Problem V ((a) BRANCH HOME OFFICE ACCOUNT ACCOUNT… Balances before Adjustments ……………………………………….. P 8,400 P 9,735 Adjustments: Additions: Merchandise in transit to branch …………………. 615 Collection of Home office receivable by Branch 2,500 Understatement of branch net income for Nov.. 90 P10,990 P10,350 Deductions: Merchandise return to home office in transit ……………. 640 Corrected Balances ……………………………………………… P10,350 P10,350 (b) Branch Books: Shipments from Home Office-in Transit ……………………. 615 Home Office …………………………………………... 615 Home Office Books: Branch …………………………………………………………… 2,500 Accounts Receivable ……………………………….. 2,500 Branch …………………………………………………………… 90 Retained Earnings ……………………………………. 90 Merchandise Returns from Branch – in Transit ……………. 640 Branch ………………………………………………….. 640 Problem VI 1. Branch Home office Account Account Balances before adjustments P 77,150 P 56,450 Adjustments: Additions: Advertising charged to branch but not yet recorded on branch books 600 Merchandise in transit to branch but not yet shown on branch books 4,400 Collection of home office account by branch not yet recorded by home office ____750 _______ P77,900 P61,450 Deductions: Overstatement of branch profit for 20x0 on home office books 540 Cash in transit to home office but not yet shown on home office books 16,000 Overstatement of charge for merchandise from home office on branch books (home office shipped 200 units @ P37.85, or P7,570, and 200 units @ P44,95, or P8,990, a total of P16,560; branch erroneously recorded shipment at P16,650, an overstatement of P90 _______ ___90 Corrected balances P 61360 P 61,360 2. Home office books: Jan. 31 Retained Earnings 540 Wilshire Branch 540 31 Cash in Transit 16,000 Wilshire Branch 16,000 31 Wilshire Branch 750 Accounts Receivable 750 Branch Books: Jan. 31 Advertising Expense 600 Home Office 600 31 Shipments from Home Office – In Transit 4,400 Home Office 4,400 31 Home Office 90 Shipments from Home Office 90 Problem VII 1. Branch Home Office Account Account Balances before adjustments P 59,365 P 57,525 Adjustments: Additions: Corrected branch income for January (P1,440 – P215) 1,225 Understatement of branch paid by home office for December 310 Expenses of branch paid by home office _______ ____215 P 60,900 P 57,740 Deductions: Collection by home office of branch receivable 65 Correction of branch income for January 215 Merchandise transferred to Brentwood branch but incorrectly charged by Beverly Hills branch 1,400 Merchandise returns to home office in transit 840 Uncollectible accounts of branch __1,200 _______ Corrected Balances P 57,460 P 57,460 2. (a) Entries to bring branch books up to date: Correction in Income of Prior Periods 215 Home Office 215 Home Office 215 Income Summary 215 Home Office 65 Accounts Receivable 65 (b) Entries to bring home office books up to date: Beverly Hills Branch 1,225 Beverly Hills Branch Income 1,225 Beverly Hills Branch 310 Retained Earnings 310 Shipments to Beverly Hills Branch 1,400 Beverly Hills Branch 1,400 Brentwood Branch 1,400 Shipments to Brentwood Branch 1,400 Merchandise Returns from Branch – In Transit – Beverly Hills Branch 840 Beverly Hills Branch 840 Allowance for Doubtful Accounts – Beverly Hills Branch 1,200 Beverly Hills Branch 1,200 Problem VIII 1. Home Office (b) Mdse. allowance by home (a) Charge for office furniture office 350.00 by home office 780.00 (f) Truck repairs charged by home (d) Charge for labor by home office 293.00 office 866.00 (e) Charge for freight by home office 78.50 (h) Proceeds from sale of truck 475.00 643.00 2,199.50 Net credit Total 1,556.50 _______ 1,229.50 2,199.50 Branch (a) Purchase of office furniture for (b) Mdse. allowance for branch 870.00 branch 300.00 (c) Branch charge for interest 325.00 (g) Proceeds from sale of 475.00 truck (d) Branch charge for labor 433.00 (e) Branch charge for freight _785.00 ______ 2,413.00 775.00 _______ Net Debit Total 1,638,000 2,413.00 _2,413.00 Balance in branch account per home office book, September 30, 20x2 P 131,690.00 Deduct net debit total per home office books for transactions that involve discrepancies 1,638.00 P 130,052.00 Add net credit total per branch books for transaction that involve discrepancies __1,556.50 Balance in home office account per branch books, September 30, 20x2 P 131,608.50 2. Balance in home office account per branch books, September 30, 20x2 P 131,608.50 Add: (a) Failure by branch to take up full furniture charges P 90.00 (b) Recognition by branch of excess merchandise allowance 50.00 (c) Failure by branch to recognize charge by home office for interest 325 (e) Failure by branch to recognize full freight charges 706.50 (f) Truck repairs charge to home office account in error 293.00 ___1,464.50 P 133,073.00 Deduct: (d) Recognition by branch of excess labor charges 433.00 (h) Credit entry to home office made in error on sale of truck __475.00 ___908.00 Corrected interoffice balance, September 30, 20x2 P 132,265.00 3. Balance in branch account per home office books, September 30, 20x2 P 131,690.00 Add credit to branch account made in error for proceeds from sale of truck _____475.00 Corrected interoffice balance, September 30, 20x2 P 132,265.00 4. Office Furniture 90.00 Merchandise allowances 50.00 Home office interest charges payable 250.00 Interest expense 75.00 Freight In 706.50 Repairs on truck 293.00 Labor 433.00 Trucks 475.00 Home Office 556.50 Multiple Choice Problem 1. d Branch A Branch B Assets: Inventory, January 1 P 21,000 P 19,000 Imprest branch fund 2,000 1,500 Accounts receivable, January 1 55,000 43,500 Total Assets P 78,000 P 64,000 Less: Liabilities -0- -0- Home Office Current Account P 78,000 P 64,000 2. b Branch A Branch B Assets: Inventory, December 31 P 19,000 P 12,000 Imprest branch fund 2,000 1,500 Accounts receivable, December 31 70,000 53,500 Total Assets P 91,000 P 67,000 Less: Liabilities -0- -0- Home Office Current Account P 91,000 P 67,000 3. d – incidentally, the entry in the books of the branch would be as follows: Profit and loss summary ………………………………………………………… xxx Home Office Current……………………………………………………. Xxx 4. c January 1,20x4 January 1, 20x5 Assets: Inventory P 37,000 P 41,000 Petty cash fund 3,000 3,000 Accounts receivable 43,000 49,000 Total Assets P 83,000 P 93,000 Less: Liabilities _____-0- _____-0- Home Office Current Account P 83,000 P 93,000 5. a – refer to No. 4 for computations 6. a Sales P 74,000 Less: Cost of goods sold: SFHO…………………………………………………………… P67,680 Less: Inventory, ending……………………………………… 9,180 58,500 Gross profit…………………………………………………………… P 15,500 Less: Expenses – 6,820 Net Loss……………………………………………………………….. P 8,680 7. a January 1, 20x6 Assets: Cash P 4,200 Inventory 9,180 Accounts receivable 12,800 Total Assets P 26,180 Less: Liabilities _____-0- Home Office Current Account P 26,180 8. a – nominal accounts have zero beginning balance. 9. d Branch H. Office Current Current Unadjusted balance, 6/30/20x4 P 225,770 P 226,485* Add (Deduct): Adjustments 1 Erroneous recording of branch equipment 3150 2. Insurance premium recorded twice ( 675) 3. Erroneous recording of freight ( 90) 4. Discount on merchandise ( 800) 5. Failure by the branch to record share in advertising 700 6. error by the home office to record remittance of Cebu 3,000 ________ Adjusted balance, 6/30/20x4 P 228,770 P 228,770 * The P226,485 is compute simply by working back with P228,770 adjusted balance as the starting point. 10. c Home Office Books Branch Books (Branch Current- (Home Office Current – Dr. balance) Cr. balance) Unadjusted balance P518,575 P452,276 Add (deduct) adjustments: In transit 10,500 Remittance ( 17,000) Returns ( 775) Cash in transit 25,000 Expenses - HO ( 800) Expenses – branch 12,000 Error ________ _____224 Adjusted balance P 500,000 P 500,000 11. d Home Office Books Branch Books (Branch Current- (Home Office Current – Dr. balance) Cr. balance) Unadjusted balance P515,000 P495,750 Add (deduct) adjustments: Excess freight ( 750) Cash in transit ( 11,000) Returns ( 4,000) Expenses – branch ________ 5,000 Adjusted balance P 500,000 P 500,000 12. c – refer to No. 11 for computations 13. a – refer to No. 11 for computations 14. d – refer to No. 11 for computations 15. d - No entry should be made in the books of the home office, since the freight should be chargeable to the branch and the payment of the freight was made by the branch. 16. a Home Office Books Branch Books (Branch Current- (Home Office Current – Dr. balance) Cr. balance) Unadjusted balance P85,000 P33,500 Add (deduct) adjustments: Collection of branch receiv ( 9,000) Shipments in transit 24,000 Purchase by branch of office equipment ( 14,500) Remittance ( 22,000) _________ Adjusted balance P 48,500 P 48,500 17. b Home Office Books Branch Books (Branch Current- (Home Office Current – Dr. balance) Cr. balance) Unadjusted balance P590,000 P506,700 Add (deduct) adjustments: Remittance (40,000) Returns (15,000) Error by the branch 300 Expenses – branch ________ 28,000 Adjusted balance P 535,000 P 535,000 18. c Home Office Books Branch Books (Branch Current- (Home Office Current – Dr. balance) Cr. balance) Unadjusted balance P150,000 P117,420 Add (deduct) adjustments: In transit 37,500 HO A/R collected by br. 10,500 Supplies returned ( 4,500) Error in recording Br. NI ( 1,080) Cash sent to branch to General Expense by HO 25,000 25,000 Adjusted balance P 179,920 P 179,920 19. d – refer to No. 18 for computation. 20. a Home Office Books Branch Books (Branch Current- Dr. (Home Office Current – balance) Cr. balance) Unadjusted balance P40,000 P31,100 Add (deduct) adjustments: In transit 5,800 HO A/R collected by br. 500 Cash in transit 2,000 2,000 Error in recording Br. NI ( 3,600) _______ Adjusted balance P38,900 P38,900 21. a – refer to No. 20 for computations 22. a Home Office Books Branch Books (Branch Current- Dr. (Home Office Current – balance) Cr. balance) Unadjusted balance P49,600 P44,00 Add (deduct) adjustments: Collection of branch A/R ( 800) In transit 3,200 Purchase of furniture ( 1,200) Return of excess merchandise ( 1,500) Remittance ( 500) _______ Adjusted balance P46,400 P46,400 23. b – refer to No. 22 for computations 24. (C) Sales (P350,000 + P100,000)………………………………………………………….P 450,000 Less: Cost of goods sold: Purchases (P400,000 + P50,000)……………………………. P 450,000 Less: Inventory, ending……………………………………… 90,000 360,000 Gross profit…………………………………………………………… P 90,000 Less: Expenses – Salaries and commission…………………………………….. P 70,000 Rent……………………………………………………………… 20,000 Advertising supplies (P10,000 – P6,000)…………………… 4,000 Other expenses………………………………………………. 5,000 99,000 Net Loss……………………………………………………………….. P ( 9,000) 25. a In adopting the imprest system for the agency working fund, the home office writes a check to the agency for the amount of the fund. Establishment of the fund is recorded on the home office books by a debit to the Agency working fund and credit cash. The agency will request fund replenishment whenever the fund runs low and at the end of each fiscal period. Such a request is normally accomplished by an itemized and authenticated statement of disbursements and the paid vouchers. Upon sending the agency a check in replenishment of the fund, the home office debits expense or other accounts for which disbursements from the fund were reported and credits cash. 26. d Normally, transactions of the agency are recorded in the books of the home office separately identified with the appropriate agency. Theories 1. decentralized 11. False 21. False 31. E 41. A 2. Home Office Current 12. False 22. True 32. B 42. C 3. Branch Income 13. False 23. True 33. c 43. B 4. Home Office 14. True 24. True 34. d 44. D 5. intracompany 15. True 25. False 35. A 45. D 6. True 16. False 26. C 36. C 46. C 7. True 17. True 27. A 37. A 47. B 8. False 18. False 28. A 38. B 48. B 9. False 19. True 29. D 39. B 49. C 10, True 20. True 30. A 40. B 50. C 51. C 52. D Chapter 13 Problem I 1. Home Office Books Branch Books Branch Current 55,000 Shipm from Home Office 55,000 Shipments to Branch 50,000 Home Office Current 55,000 Unrealized Int Inv. Profit 5,000 Billed price P55,000 / 110% Cost 50,000 Allowance for overvaluation of branch inventory/ _______ Unrealized Intercompany Inventory Profit/Deferred Profit P 5,000 2. Sales...................................................................................................................................... P140,000 Cost of goods sold: Merchandise inventory, September 1................................................ P 35,200 Purchases.............................................................................................. 24,000 Shipments from home office............................................................... 55,000 Merchandise available for sale.......................................................... P 114,200 Less: Merchandise Inventory, September 30..................................... 30,000 Cost of goods sold....................................................................................................... 84,200 Gross profit............................................................................................................................P 55,800 Operating expenses: Selling expenses……………………………………..................................P 8,000 General expenses…………………......................................................... 12,000 Total operating expenses.......................................................................................... 20,000 Unadjusted branch net income...................................................................................... P 15,800 3. Results of Branch Operations: a. Branch Net Income/Loss from its own operations: Branch Current………………........................................................................... 15,800 Branch Income Summary................................................................... 15,800 b. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/ Unrealized Intercompany Inventory Profit: Unrealized Intercompany Inventory Profit.................................................... 4,600 Branch Income Summary.................................................................. 4,600 Unrealized Profit Cost (Billing Price Minus Billing Price (Billing/1.10) Cost) Inventory, 9/1 *P 17,600 P 16,000 P 1,600 Shipments during December __55,000 __50,000 __ 5,000 Available for Sale (before adjustment) P 72,600 P 66,000 P 6,600 Less: Inventory, 9/30 (after adjustment) **22,000 __20,000 __2,000 Reduction in unrealized profit account- adjustment to branch profit for overstated of cost of goods sold (adjustment) P 50,600 P 46,000 ***P 4,600 * P35,200 x 50% = P17,600 ** P30,000 – P8,000 ***or, P50,600 x 10/110 = P4,125; Decrease in Unrealized Intercompany Inventory Profit: Therefore, the True/Real/Adjusted Branch Net Income or Branch Net Income in so far as HO is concerned amounted to: Unadjusted branch net income...............................................................................P15,800 Add: Allowance for Overvaluation of CGS……………………………………………. 4,600 Adjusted Branch Net Income……………………………………………………………..P20,400 Problem II Books of Home Office Correcting entries: A. Sales............................................................................................................... 42,000 Shipments to Branch................................................................ ………… 35,000 Unrealized Intercompany Inventory Profit........................................... 7,000 Cost of merchandise shipped t branch: P42,000/1.20= P35,000. Entry Made Correct/Should be Entry Branch Current…………… 42,000 Branch Current……….. 42,000 Sales…………………… 42,000 Shipments to Branch 35,000 Unrealized Int. Inv Pr. 7,000 B. Shipments to Branch...................................................................................... 625 Unrealized Intercompany Inventory Profit................................................... 125 Sales Returns........................................................................................... 750 Cost of merchandise returned by branch: P750/1.20= P625. Entry Made Correct/Should be Entry Sales Returns……………… 750 Shipments to Branch………. 625 Branch Current……… 750 Unrealized Int. Inv Profit…… 125 Branch Current…………. 750 Results of Branch Operations: A. Branch Net Income/Loss from its own operations: Branch Income Summary............................................................................... 2,600 Branch Current…................................................................................ 2,600 B. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/ Unrealized Intercompany Inventory Profit: Unrealized Intercompany Inventory Profit.................................................... 4,125 Branch Income Summary.................................................................. 4,125 Unrealized Profit Cost (Billing Price Minus Billing Price (Billing/1.20) Cost) Inventory, December 1 P 0 P 0 P 0 Shipments during December 42,000 35,000 7,000 Less: Returns _____750 ____625 ____125 Available for Sale (before adjustment) P 41,250 P 34,375 P 6,875 Less: Inventory, Dec. 31 (after adjustment) 16,500 13,750 __2,750 Reduction in unrealized profit account- adjustment to branch profit for overstated of cost of goods sold (adjustment) P 24,750 P 20,625 *P 4,125 *or, P24,750 x 20/120 = P4,125; Decrease in Unrealized Intercompany Inventory Profit: Balance prior to adjustment, 12/31, P7,000 – P125................... P6,875 Balance required in account, 12/31,P16,500 – (P16,500/1.20).. 2,750 Decrease in Allowance................................................................. P4,125 Branch Income Summary (P4,125 – P2,600)....................................................1,525 Income Summary.................................................................................... 1,525 Therefore, the Real/True/Adjusted Branch Net Income/Branch Net Income in so far as HO is concerned, amounted to P1,525, computed as follows: Branch net loss as reported/unadjusted……………………………………………………(P2,600) Add: Overvaluation of branch inventory/Realized profit from branch sales……….. 4,125 Real/True/Adjusted Branch Net Income or Branch NI in so far as HO is concerned P1,525 Problem III a. Unrealized Intercompany Inventory Profit has a credit balance of P9,450 before adjustment on December 31, calculated as follows: Unrealized Profit Cost (Billing Price Minus Billing Price (Billing/1.35) Cost) Inventory, December 1 P 16,200 P 12,000 P 4,200 Shipments during December __20,250 _ 15,000 __ 5,250 Available for Sale (before adjustment) P 36,450 P 35,625 P 9,450 Less: Inventory, Dec. 31 (after adjustment) __18,900 _14,000 __4,900 Reduction in unrealized profit account- adjustment to branch profit for overstated of cost of goods sold (adjustment) P 17,550 P 21,625 *P 4,550 * or, P17,550 x 35/135 = P4,550 b. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/ Unrealized Intercompany Inventory Profit (refer to “a” for computation): Unrealized Intercompany Inventory Profit.................................................... 4,550 Branch Income Summary.................................................................. 4,550 c. Home Office Books Branch Books Shipments to Branch 400 Home Office Current 540 Unrealized Int Inv. Pr 140 Shipments to Branch 540 Branch Current 540 Cost of merchandise returned: P540/1.35, or P400. Problem IV 1. The branch office inventory as of December 1 considered of: Shipments from Home Office (see below)............................................................. P 12,000** Purchases from outsiders (balance of inventory).................................................. 3,000 Total inventory........................................................................................................... P 15,000 Goods acquired from home office and included in branch inventory at billed price are calculated as follows: Unrealized Profit Cost (Billing Price Minus Billing Price (Billing/1.20) Cost) Inventory, December 1 **P 12,000 *P 10,000 P 2,000 Shipments during December __9,600 _ 8,000 __ 1,600 Available for Sale (before adjustment) P 21,600 P 18,000 P 3,600 Less: Inventory, Dec. 31 (after adjustment) __8,400 __7,000 __1,400 Reduction in unrealized profit account- adjustment to branch profit for overstated of cost of goods sold (adjustment) P 13,200 P 11,000 ***P 2,200 *P2,000/20% = P10,000; ***P13,200 x 20/120 = P2,200 2. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/ Unrealized Intercompany Inventory Profit (refer to “a” for computation): Unrealized Intercompany Inventory Profit......................................... 2,200 Branch Income Summary.......................................................... 2,200 Problems V (1) Individual Statements SPENCER CO. Balance Sheet for Branch December 31,20x4 Assets Liabilities____________________ Cash..................................................... P 2,650 Accounts payable................................... P 4,200 Accounts receivable........................ 12,850 Accrued expenses................................... 105 Merchandise inventory..................... 14,600 Home office............................................... 29,239 Store supplies...................................... 300 Prepaid expenses............................... 120 Furniture and fixtures.............. P 3,600 Less: Accumulated depreciation.............. 576 3,024 ________ Total assets....................................... P 33,544 Total liabilities............................................ P 33,544 SPENCER CO. Income Statement for Branch For Month Ended December 31, 20x4 Sales........................................................................................................................................... P 20,000 Cost of goods sold: Merchandise inventory, December 1................................................ P 14,400 Purchases.............................................................................................. 4,100 Shipments from home office............................................................... 10,200 Merchandise available for sale.......................................................... P 28,700 Less: Merchandise Inventory, December 31..................................... 14,600 Cost of goods sold....................................................................................................... 14,100 Gross profit................................................................................................................................. P 5,900 Operating expenses: Advertising expense............................................................................. P 2,800 Salaries and commissions expense..................................................... 2,350 Store supplies expense......................................................................... 280 Miscellaneous selling expense............................................................ 1,050 Rent expense........................................................................................ 1,500 Depreciation expense – furniture and fixtures.................................. 36 Miscellaneous general expense......................................................... 905 Total operating expenses.......................................................................................... 8,921 Net loss...................................................................................................................................... P 3,021 SPENCER CO. Balance Sheet for Home Office December 31, 20x4 Assets Liabilities and Stockholder’s Equity_______ Cash..................................................... P10,350 Liabilities Cash in transit..................................... 1,500 Accounts payable................ P 35,400 Accounts receivable........................ 26,200 Accrued expenses............... 260 P 35,660 Merchandise inventory..................... 24,200 Stockholders’ Equity Store supplies...................................... 380 Capital Stock......................... P 65,000 Prepaid expenses............................... 350 Less deficit.............................. 4,476 60,524 Furniture and fixtures.............. P 8,500 Less: Accumulated depreciation.............. 2, 585 5,915 Branch..................................... P29,239 Less: Unrealized intercompany inventory profit............ 1,950 27,289 Total liabilities and ________ Total assets........................................ P 96,184 stockholder’s equity............................... P 96,184 SPENCER CO. Income Statement for Home Office For Month Ended December 31, 20x4 Sales........................................................................................................................................... P 44,850 Cost of goods sold: Merchandise inventory, December 1................................................ P 31,500 Purchases.............................................................................................. 27,600 Merchandise available for sale.......................................................... P 59,100 Less: Shipments to branch................................................................... 8,500 Merchandise available for own sales................................................ P 50,600 Less: Merchandise Inventory, December 31..................................... 24,200 Cost of goods sold.......................................................................................... 26,400 Gross profit................................................................................................................................. P 18,450 Operating expenses: Advertising expense............................................................................. P 2,850 Salaries and commissions expense..................................................... 4,250 Store supplies expense......................................................................... 560 Miscellaneous selling expense............................................................ 1,850 Rent expense........................................................................................ 2,700 Depreciation expense – furniture and fixtures.................................. 85 Miscellaneous general expense......................................................... 2,510 Total operating expenses............................................................................. 14,805 Net income from own operations......................................................................................... P 3,645 Less: Branch net loss................................................................................................................ 1,271 Total income............................................................................................................................ P 2,374 2. Refer to Word Document Worksheet 3, Combined Statements SPENCER CO. Combined Balance Sheet for Home Office and Branch December 31, 20x4 Assets Liabilities and Stockholders’ Equity Cash ………………………………. P 14,500 Liabilities Accounts Receivable ………… 39,050 Accounts Payable ……….. P39,600 Merchandise Inv ………………. 36,850 Accrued Expenses ………. 365 P 39,965 Store Supplies ………………….. 680 Stockholders’ Equity Prepaid Expenses …………….. 470 Capital Stock ……………… P65,000 Furniture & Fixtures ……… P12,100 Less deficit …………………. 4,476 60,524 Less accumulated Depreciation …... 3,161 8,939 Total assets ……………………… P100,489 Total liabilities and SHEquity P100,489 SPENCER CO. Combined Income Statement for Home Office and Branch For Month Ended December 31, 20x4 Sales ………………………………………………………………………………………………………… P64,850 Cost of goods sold: Merchandise Inventory, December 1 …………………………………… P43,900 Purchases ……………………………………………………………………… 31,700 Merchandise available for sale …………………………………………… P75,600 Less merchandise inventory, December 31 ……………………………. 36,850 Cost of goods sold ………………………………………………………….. 38,750 Gross profit ……………………………………………………………………………… P26,100 Operating Expenses: Advertising Expense ………………………………………………………… P 5,650 Salaries and Commissions expense ……………………………………… 6,600 Store supplies expense …………………………………………………….. 840 Miscellaneous selling expense …………………………………………… 2,900 Rent expense ………………………………………………………………… 4,200 Depreciation Expense – F&F ………………………………………………. 121 Miscellaneous general expense …………………………………………. 3,415 Total operating expense ………………………………………………………………………. 23,726 Net Income ………………………………………………………………………………………………… P 2,374 4. Adjusting and Closing Entries (a) Branch Books Dec 31 Income Summary …………………………………………….. 14,400 Merchandise Inventory …………………………….. 14,400 31 Merchandise Inventory ……………………………………… 14,600 Income Summary ……………………………………. 14,600 31 Store Supplies Expense ………………………………………. 280 Store Supplies ………………………………………… 280 Store supplies used: P580 – P300, or P280 Dec. 31 Prepaid Expenses ………………………………………………… 120 Miscellaneous General Expense ……………………. 120 31 Miscellaneous General Expense ……………………………… 105 Accrued Expenses …………………………………….. 105 31 Depreciation Expense – F&F ………………………………….. 36 Accumulated Depreciation ………………………… 36 Depreciation: 1% of P3,600 31 Miscellaneous General Expense …………………………….. 220 Home Office Current………………………………… 220 31 Sales ……………………………………………………………… 20,000 Income Summary ……………………………………. 20,000 31 Income Summary ……………………………………………… 22,221 Purchases ……………………………………………… 4,100 Shipments from Home Office ……………………… 10,200 Advertising Expense …………………………………. 2,800 Salaries and Commissions Expense ………………. 2,350 Store Supplies Expense ……………………………… 280 Miscellaneous Selling Expense …………………….. 1,050 Rent Expense …………………………………………. 1,500 Depreciation Expense – F&F ………………………. 36 Miscellaneous General Expense …………………. 905 31 Home Office Current………….………………………………. 3,021 Income Summary …………………………………….. 3,021 (b) Home Office Books Dec 31 Income Summary ………………………………………………. 31,500 Merchandise Inventory ………………………………. 31,500 31 Merchandise Inventory ………………………………………... 24,200 Income Summary ……………………………………… 24,200 31 Store Supplies Expense …………………………………………. 560 Store Supplies …………………………………………… 560 Store supplies used: P940 – P380, or : 560 31 Prepaid Expense ………………………………………………… 350 Miscellaneous General Expense …………………… 350 31 Miscellaneous General Expense …………………………….. 260 Accrued Expenses ……………………………………. 260 31 Depreciation Expense ………………………………………….. 85 Accumulated Depreciation – F&F …………………. 85 Depreciation: 1% of P8,500, or P85 31 Cash in Transit …………………………………………………. 1,500 Branch Current………………………………………… 1,500 31 Sales …………………………………………………………… 44,850 Shipments to branch ………………………....................... 8,500 Income Summary …………………………………. 53,350 Dec 31 Income Summary ……………………………………………… 42,405 Purchases ……………………………………………… 27,600 Advertising Expense …………………………………. 2,850 Salaries and Commissions Expense ………………. 4,250 Store Supplies Expense ……………………………… 560 Miscellaneous Selling Expense …………………….. 1,850 Rent Expense …………………………………………. 2,700 Depreciation Expense – F&F ………………………. 85 Miscellaneous General Expense …………………. 2,510 31 Branch Income Summary…………………………………….. 3,021 Branch Current………………………………………… 3,021 31 Unrealized Intercompany Inventory Profit ………………. 1,750 Branch Income Summary………………………… 1,750 Calculation of unrealized profit adjustment: Balance of unrealized profit account, December 31 ……………………….. P3,700 Inventory merchandise received from Home office at billed price on December 31, P11,700 Inventory at cost: P11,700/ 1.20, or P9,750 Balance of unrealized profit account on December 31, P11,700 – P9,750 .... 1,950 Required decreased in unrealized profit Adjustment to branch income for Overstatement of cost of goods Sold …………………………………….. P1,750 31 Income Summary …………………………………………… 1,271 Branch Income Summary……………………. 1,271 31 Income Summary …………………………………………… 2,374 Retained Earnings …………………………………. 2,374 Problem VI 1. Branch H. Office Current Current Unadjusted balance, 12/31/20x4 P 44,000 P 9,000 Add (Deduct): Adjustments 1 Cash in transit ( 10,000) 2. Merchandise in transit 10,000 3. Branch expenses paid by home office 12,000 4. Cash in transit from home office _______ 3,000 Adjusted balance, 12/31/20x4 P 34,000 P34,000 2. Refer to PDF Copy of the Worsheet 3. Combined Income Statement Sales [(P350,000 – P105,000) + P150,000)………....................................................... P395,000 Less: Cost of goods sold [(P220,000 – P84,000) + (P93,000 + P3,600 – P21,000 – P1,200)]……………………………………. 210,400 Gross profit................................................................................................................... P184,600 Operating expenses (P70,000 + P41,000 + P12,000)................................................ 123,000 Net income................................................................................................................... P 61,600 Problem VII (1) PAXTON CO. Income Statement for Dayton Branch For Year Ended December 31, 20x5 Sales.............................................................................................................................. P315,000 Cost of goods sold: Merchandise inventory, January 1, 20x5................................... P 44,500 Shipments from home office...................................................... 252,000 Merchandise available for sale................................................. P296,500 Less: Merchandise Inventory, December 31, 20x5.................. 58,500 238,000 Gross profit................................................................................................................. P 77,000 Operating expenses................................................................................................. 101,500 Net loss....................................................................................................................... P 24,500 PAXTON CO. Income Statement for Cincinnati Home Office For Year Ended December 31, 20x5 Sales.............................................................................................................................. P1,060,000 Cost of goods sold: Merchandise inventory, January 1, 20x5................................... P115,000 Shipments from home office...................................................... 820,000 Merchandise available for sale................................................. P935,000 Less: Shipments to branch.......................................................... 210,000 Merchandise available for own sales....................................... P725,000 Less: Merchandise Inventory, December 31, 20x5.................. 142,500 582,500 Gross profit.................................................................................................................. P477,500 Expenses...................................................................................................................... 382,000 Net income from own operations............................................................................ P 95,500 Add branch net income........................................................................................... 16,650 Total income............................................................................................................... P112,150 (2) PAXTON CO. Combined Income Statement for Home Office and Branch For Year Ended December 31, 20x5 Sales.............................................................................................................................. P1,375,000 Cost of goods sold: Merchandise inventory, January 1, 20x5...................................P 150,600 Purchases...................................................................................... 820,000 Merchandise available for sale................................................. P970,600 Less: Merchandise Inventory, December 31, 20x5.................. 191,250 779,350 Gross profit.................................................................................................................... P595,650 Operating expenses.................................................................................................... 483,500 Net income................................................................................................................... P112,150 (3) Merchandise Inventory, December 31................................................................ 58,500 Sales.......................................................................................................................... 315,000 Income Summary............................................................................................ 373,500 Income Summary......................................................................................................... 398,000 Merchandise Inventory, January 1................................................................ 44,500 Shipments from Home Office......................................................................... 252,000 Operating expenses........................................................................................ 101,500 Home Office............................................................................................................... 24,500 Income Summary.......................................................................................... 24,500 (4) Branch Income Summary........................................................................................ 24,500 Branch Current..................................................................................................... 24,500 Unrealized Intercompany Inventory Profit............................................................... 41,150 Branch Income Summary.................................................................................... 41,150 Calculation of unrealized profit adjustment: Branch inventory, January 1, acquired from home office at billed price...................................................................................... P 44,500 Less: Cost of inventory (P44,500/1.25)......................................................... 35,600 Unrealized Intercompany Inventory Profit Jan. 1....................................... P 8,900 Add: Increase in unrealized profit for shipments made during year, billed price of goods, P252,000, cost of goods, P210,000.................................................... 42,000 P 50,900 Deduct balance to remain in unrealized profit account: Branch inventory, December 31, acquired from home office....................................... P 58,500 Less: Cost of inventory to home office, P58,500/1.20................................................................ 48,750 9,750 Reduction in unrealized profit account- adjustment to branch income for overstatement of cost of goods sold.................................................................. 41,150 Branch Income Summary........................................................................................... 16,650 Income Summary............................................................................................ 16,650 Merchandise Inventory, December 31...................................................................... 142,500 Sales............................................................................................................................... 1,060,000 Shipments to Branch.................................................................................................... 210,000 Income Summary............................................................................................. 1,412,500 Income Summary......................................................................................................... 1,317,000 Merchandise Inventory, January 1................................................................ 115,000 Purchases......................................................................................................... 820,000 Expenses........................................................................................................... 382,000 Income Summary.......................................................................................................... 112,150 Retained Earnings............................................................................................ 112,150 Problem VIII (1) RUGGLES CO. Income Statement for Branch For Year Ended December 31, 20x4 Sales................................................................................................................................ P 78,500 Cost of goods sold: Merchandise inventory, January 1, 20x4......................................... P 32,000 Shipments from home office........................................... P 40,000 Purchases from outsiders................................................. 20,000 60,000 Merchandise available for sale....................................................... P 92,000 Less: Merchandise Inventory, December 31, 20x4........................ 31,500 Cost of goods sold............................................................................. 60,500 Gross profit.................................................................................................................... P 18,000 Operating expenses.................................................................................................... 12,500 Net income................................................................................................................... P 5,500 RUGGLES CO. Income Statement for Home Office For Year Ended December 31, 20x4 Sales.............................................................................................................................. P 256,000 Cost of goods sold: Merchandise inventory, January 1, 20x4................................... P 80,000 Purchases...................................................................................... 210,000 Merchandise available for sale................................................. P 290,000 Less: Shipments to branch.......................................................... 30,000 Merchandise available for own sales....................................... P 260,000 Less: Merchandise Inventory, December 31, 20x4.................. 55,000 Cost of goods sold............................................................................. 205,000 Gross profit................................................................................................................... P 51,000 Operating Expenses.................................................................................................... 60,000 Net loss from own operations..................................................................................... P ( 9,000) Add: Adjusted branch net income............................................................................. 13,500 Combine net income.................................................................................................... P 4,500 (2) RUGGLES CO. Combined Income Statement for Home Office and Branch For Year Ended December 31, 20x4 Sales.............................................................................................................................. P 334,500 Cost of goods sold: Merchandise inventory, January 1, 20x4................................... P 107,500 Purchases...................................................................................... 230,000 Merchandise available for sale.................................................. P 337,500 Less: Merchandise Inventory, December 31, 20x4................... 80,000 Cost of goods sold............................................................................. 257,500 Gross profit.................................................................................................................... P 77,000 Operating expenses.................................................................................................... 72,500 Net income................................................................................................................... P 4,500 (3) Merchandise Inventory......................................................................................... 31,500 Sales.......................................................................................................................... 78,500 Income Summary............................................................................................ 110,000 Income Summary......................................................................................................... 104,500 Merchandise Inventory................................................................................... 32,000 Shipments from Home Office......................................................................... 40,000 Purchases......................................................................................................... 20,000 Expenses........................................................................................................... 12,500 Income Summary......................................................................................................... 5,500 Home Office..................................................................................................... 5,500 (4) Branch...................................................................................................................... 5,500 Branch Income................................................................................................ 5,500 Unrealized Intercompany Inventory Profit............................................................... 8,000 Branch Income.............................................................................................. 8,000 Calculation of unrealized profit adjustment: Branch inventory, January 1, acquired from home office at billed price.................................................................................... P 24,500 Less: Cost of inventory (P24,500/1.225).................................................... 20,000 Unrealized Intercompany Inventory Profit Jan. 1................................... P 4,500 Add: Increase in unrealized profit for shipments made during year, billed price of goods, P40,000, cost of goods, P30,000.................................................... 10,000 P 14,500 Deduct balance to remain in unrealized profit account: Branch inventory, December 31, acquired from home office....................................... P 26,000 Less: Cost of inventory to home office, P26,000/1.1/3................................................................ 19,500 6,500 Reduction in unrealized profit account- adjustment to branch income for overstatement of cost of goods sold........................... 8,000 Branch Income............................................................................................................. 13,500 Income Summary............................................................................................ 13,500 Merchandise Inventory................................................................................................ 55,000 Sales............................................................................................................................... 256,000 Shipments to Branch.................................................................................................... 30,000 Income Summary............................................................................................. 341,000 Income Summary......................................................................................................... 350,000 Merchandise Inventory................................................................................... 80,000 Purchases......................................................................................................... 210,000 Expenses........................................................................................................... 60,000 Income Summary.......................................................................................................... 4,500 Retained Earnings............................................................................................ 4,500 Problem IX 1. Branch H. Office Current Current Unadjusted balance, 12/31/20x4 P 60,000 P 51,500 Add (Deduct): Adjustments 1 Remittance I 1,700) 2. Cash in transit 1,800 3. Shipments in transit 5,800 Adjusted balance, 12/31/20x4 P 57,300 P 57,300 2. Income Statement - Branch Sales................................................................................................................................ P 140,000 Cost of goods sold: Merchandise inventory, January 1, 20x4 (P11,550 – P1,000)....... P 10,550 Shipments from home office (P105,000 + P5,000 – P10,000)........ 100,000 Freight-in (P5,500 + P250)…………………………………………….. 5,750 Merchandise available for sale.....................................................P116,300 Less: Merchandise Inventory, December 31, 20x4...................... 14,770 Cost of goods sold............................................................................. 101,530 Gross profit.................................................................................................................... P 38,470 Operating expenses.................................................................................................... 24,300 Net income................................................................................................................... P 14,170 Income Statement – Home Office Sales.............................................................................................................................. P 155,000 Cost of goods sold: Merchandise inventory, January 1, 20x4................................... P 23,000 Purchases...................................................................................... 190,000 Merchandise available for sale................................................. P 213,000 Less: Shipments to branch.......................................................... 100,000 Merchandise available for own sales....................................... P 113,000 Less: Merchandise Inventory, December 31, 20x4.................. 30,000 Cost of goods sold........................................................................ 83,000 Gross profit................................................................................................................... P 72,000 Operating Expenses.................................................................................................... 42,000 Net loss from own operations..................................................................................... P 30,000 Add branch net income............................................................................................ 14,170 Combined net income.............................................................................................. P 44,170 3. Combined Income Statement for Home Office and Branch For Year Ended December 31, 20x4 Sales.............................................................................................................................. P 295,000 Cost of goods sold: Merchandise inventory, January 1, 20x4................................... P 33,550 Purchases...................................................................................... 190,000 Freight-in……………………………………………………………… 5,750 Merchandise available for sale.................................................. P 229,300 Less: Merchandise Inventory, December 31, 20x4................... 44,770 Cost of goods sold........................................................................ 184,530 Gross profit.................................................................................................................... P 110,470 Operating expenses.................................................................................................... 66,300 Net income................................................................................................................... P 44,170 Problem X a. The cost of the merchandise destroyed was P30,000. Total merchandise acquired from home ofiice, at billed price: Inventory, January 1...................................................................................... P26,400 Shipments from home office, Jan. 1-17....................................................... 20,000 P46,400 Cost of goods sold, January 1-17, at billed price: Net sales, P13,000/1.25...................................................................................... 10,400 Merchandise on hand, January 17, at billed price....................................... P36,000 Merchandise on hand, January 17, at cost, P36,000/1.20............................ P30,000 b. Branch Books: Loss from Fire (or Home Office)............................................................ 36,000 Merchandise Inventory............................................................ 36,000 Home Office Books: No entry needs to be made on the books of the home office until the end of the fiscal period, when the branch earnings (including the loss from fire) are recognized and when the balance of the account Unrealized Intercompany Inventory Profit is adjusted to conform to the branch ending inventory. If it is desired to recognize the loss from fire on the home office books immediately, the following entry may be made: Branch Loss from Fire (or Retained Earnings)...................................... 30,000 Unrealized Intercompany Inventory Profit........................................... 6,000 Branch......................................................................................... 36,000 Problem XI a. Books of Branch A: Home Office........................................................................................ 1,500 Cash......................................................................................... 1,500 b. Books of branch B: Cash...................................................................................................... 1,500 Home Office............................................................................ 1,500 c. Books of Home Office: Branch B............................................................................................... 1,500 Branch A.................................................................................. 1,500 Problem XII a. Books of Branch No. 1 : Home Office ……………………………………………………………. 1,950 Shipments from Home Office…………………………………….. 1,600 Freight In……………………………………………………………… 350 b. Books of branch No. 5: Shipments from Home Office………………………………………… 1,600 Freight In…………………………………………………………………… 400 Home Office…………………………………………………………. 1,750 Cash…………………………………………………………………… 250 c. Books of the Home Office Branch No. 5…………………………………………………………….. 1,750 Excess Freight on Inter branch Transfer of Merchandise……….. 200 Branch No. 1………………………………………………………… 1,950 Shipments to Branch No. 1…………………………………………….. 1,600 Shipments to Branch No. 5………………………………………… 1,600 Multiple Choice Problems 1. c - P50,400, billed price x 40/140 = P 14,400 2. b Ending inventory in the combined income statement: From Home Office: (P50,000-P6,600) x 100/140 P 31,000 From Outsiders 6,600 P 37,600 3. a True Branch Net Income Branch Net Income P 5,000 Add (deduct): Overvaluation of cost of goods sold/realized profit from sales made by branch: Shipments from home office. P 280,000 Less: Ending inventory, at billed price (P50,000 – P6,600) 43,400 Cost of goods sold from home office at billed price P 236,600 Multiplied by: Mark-up 40/140 67,600 Unrecorded branch expenses ( 2,500) True Branch Net Income P 70,100 4. a – P30,000 x (90,000 – 60,000)/90,000 5. a 6. d – (P50,000 – P40,000)/P40,000 = 25% markup on cost 7. c – (P480,000 – P360,000) x (P80,000/P480,000) = P20,000 8. c – P700,000, since the problem stated that the “home office adjusted the intracompany Profit Deferred account” and the amount of P700,000 is the amount of net income in the adjusted financial statements of the home office, and therefore it is understood to be combined net income. 9. b Reported (unadjusted) branch net income (per branch books) ………………..P 30,000 Branch Income in so far as home office is concerned per home office books. 50,000 Overvaluation of branch cost of goods sold…………………………………………P 20,000 Cost of sales of Home Office…………………………………………………………….P500,000 Cost of sales of Branch…………………………………………………………………… 100,000 Overvaluation of branch cost of sales…………………………………………………( 20,000) Combined cost of sales…………………………………………………………………...P580,000 10. c – the amount of net income as reported by Home office is considered the combined net income. 11. a True Branch Net Income P156,000 Less: branch Net Income as reported by the branch 60,000 Overvaluation of CGS P 96,000 Less: Cost of goods sold from home office at BP Inventory, December 1 P 70,000 Shipment from HO 350,000 COGAS P 420,000 Less: Inventory, December 31 84,000 336,000 CGS from home office, at cost P 240,000 Billing Price: P336,000 / P240,000 = 140%. 12. b – Allowance for overvaluation after adjustment / for December 31 inventory: P84,000 x 40/140 = P24,000. 13. b Net Income as reported by the Branch P 20,000 Less: Rental expense charged by the home office (P1,000 x 6 months) 6,000 Adjusted NI as reported by the Branch P 14,000 Add: Overvaluation of CGS Billed Price MI, beginning 0 SFHO 550,000 COGAS 550,000 Less: MI, ending 75,000 CGS, at BP 475,000 X: Mark-up ratio 25/125 95,000 True/Adjusted/Real Branch Net Income P109,000 14. d Sales (P537,500 + P300,000)……………………………………………….………. P 837,500 Less: Cost of goods sold Merchandise inventory, beg. [P50,000 + (P45,000 / 1.20)]P 87,500 Add: Purchases…………………………………………………. 500,000 Cost of Goods Available for Sale…………………………... P 587,500 Less: MI, ending [P70,000 + (P60,000 / 1.20)]………………. 120,000 467,500 Gross profit………………………………………………………………. P 370,000 Less: Expenses (P120,000 + P50,000..………………………………. 170,000 Net Income……………………………………………………………… P 200,000 15. d Overvaluation of Cost of Goods Sold: Unrealized Profit in branch inventory/ before adjustment……………….P 7,200 Less: Allowance of ending branch inventory (P20,000 x 84% = P16,800 x 20/120…………………………………………………………. 2,800 Overvaluation of Cost of Goods Sold……………………………………. ….P 4,400 Adjusted branch net income: Sales………………………………………………………………………………………P60,000 Less: Cost of goods sold: Inventory, January 1, 2003……………………………….P 30,000 Add: Purchases…………………………………………..... 11,000 Shipments from home office…………………….. 19,200 Cost of Goods available for sale……………………… P 60,200 Less: Inventory, December 31, 2003…………………. 20,000 40,200 Gross profit…………………………………………………………………………….. P19,200 Less: Expenses………………………………………………………………………….. 12,000 Unadjusted branch net income…………………………………………………...P 7,800 Add: Overvaluation of Cost of Goods Sold……………………………………. 4,400 Adjusted branch net income……………………………………………………...P 12,000 16. d Billed Price Cost Allowance Merchandise Inventory, 12/31/2005 *P 36,000 P 30,000 P 6,000 Shipments 28,800 24,000 4,800 Cost of goods sold P10,800 From Home at billed price: *P6,000 / 20% = P30,000 + P6,000 = P36,000. From outsiders: P45,000 – P36,000 = P9,000 17. d Billed Price Cost Allowance Merch. Inventory, 12/31/20x4 *P12,000 P10,000 P 2,000 Shipments 9,600 8,000 1,600 Cost of Goods Sold P 3,600 *P2,000 / 20% = P10,000 + P2,000 = P12,000. Merchandise inventory, December 1, 20x4…………………………………P 15,000 Less: Shipments from home office at billed price*………………………… 12,000 Merchandise from outsiders……………………………………………………P 3,000 18. d Combined Cost of Goods Sold: Merchandise Inventory, 1/1/2003: Home Office, cost……………………………………………… P 3,500 Branch: Outsiders, ……………………………...........................P 300 From Home Office (P2,500 – P300)/110%................. 2,000 2,300 P 5,800 Add Purchases (P240,000 + P11,000)…………………………….. 251,000 COGAS………………………………………………………………… P256,800 Less: Merchandise Inventory, 12/31/2003 Home Office, cost………………………………………………. P 3,000 Branch: Outsiders………………………………………………. P 150 From Home Office (P1,800 – P150)/110%................ 1,500 1,650 4,650 Cost of Goods Sold………………………………………………… P252,150 19. d 100% 60% 40% Billed Price Cost Allowance Merchandise inventory, 1/1/x4 32,000 Shipments *60,000 36,000 *24,000 Cost of goods available for sale 56,000 Less: MI, 3/31/x4 (25,000 x 40%) 10,000 Overvaluation of CGS** 46,000 *36,000 cost / 60% = 60,000 x 40% = 24,000. (Note: Markup is based on billed price) **Realized Profit from Branch Sales 20. d Billed Cost Allowance Price Merchandise inventory, 8/1/x4 60,000 Shipments (400,000 x 25%) 400,000 *100,,000 Cost of goods available for sale 160,000 Less: MI, 8/31/x4 (160,000 x 25%) 160,000 40,000 Overvaluation of CGS/RPBSales 120,000 21. b (1) Sales P 40,000 Less: Cost of goods sold: Inventory, 1/1/2003 (P4,950 / 110%) P 4,500 Add: Shipments (P22,000 / 110%) 20,000 COGAS P 24,500 Less: Inventory, 12/31/2003 (P6,050 / 110%) 5,500 19,000 Gross profit P 21,000 Less: Expenses _ 13,100 Net income from own operations P 7,900 (2) Combined Cost of Goods Sold: Merchandise Inventory, 1/1/2003: of Home Office, cost……………………………………………..P 17,000 of Branch, cost: P4,950 / 110%…………………………………. 4,500 P 21,500 Add Purchases…………………………………………………………. 50,000 COGAS………………………………………………………………….. P 71,500 Less: Merchandise Inventory, 12/31/2003 of Home Office, cost……………………………………………… P 14,000 of Branch, cost: P6,050 /100%………………………………….. 5,500 19,500 Cost of Goods Sold……………………………………………………. P 52,000 22. a - P48,000 / 120% = P40,000 23. a – P48,000 x 20/120 = P8,000 (note: adjusted allowance refers to the allowance related to the ending inventory, so, the allowance related to the CGS, which is P10,00 in this case is considered to be the adjustments in the books of Home Office to determine the adjusted branch net income) 120% 100% 20% Billed Price Cost Allowance Merchandise inventory, 1/1/x4 0 Shipments 108,000 Cost of goods available for sale 108,000 Less: MI, 12/31/x4 (P60,000 x 80%) 48,000 Overvaluation of CGS (60,000 x 20/120) 60,000 10,000* 24. b Sales (P148,000 + P44,000) P192,000 Less: Cost of Sales Inventory, 1/1/20x4 P 0 Purchases 52,000 Shipments from home office 108,000 Cost of goods available for sale P 160,000 Less: Inventory, 12/31/20x4 60,000 100,000 Gross profit P 92,000 Less: Expenses (P76,000 + P24,000) 100,000 Net income, unadjusted P( 8,000) Add: Overvaluation of CGS 10,000 Adjusted branch net income P 2,000 25. c 125% 100% 25% Billed Price Cost Allowance Merchandise inventory, 1/1/x4 40,000 Shipments 250,000 Cost of goods available for sale 290,000 Less: MI, 12/31/x4 (P60,000 x 80%) 60,000 Overvaluation of CGS(230,000x 25/125) 230,000 46,000* 26. b – P326,000 Sales (P600,000 + P300,000) ………………………………………………….. P 900,000 Less: Cost of goods sold Merchandise inventory, beg. [P100,000 + (P40,000/1.25)] ………………………. … P 132,000 Add: Purchases…………………………………… 350,000 Cost of goods available for sale………………… P 482,000 Less: MI, ending [P30,000 + (P60,000/1.25)] ………………………… 78,000 404,000 Gross profit……………………………………………………… P 496,000 Less: Expenses (P120,000 + P50,000)………………………. _ 170,000 Net Income …………………………………………………. P 326,000 27. b Sales (P537,500 + P300,000) ………………………………………………… P 837,500 Less: Cost of goods sold Merchandise inventory, beg. [P50,000 + (P60,000/1.20)]…………………………….. P 87,500 Add: Purchases ……………………………………. 500,000 Cost of goods available for sale………………… P587,500 Less: MI, ending [P70,000 + (P60,000/1.20)] …………………………. 120,000 467,500 Gross profit…………………………………………………….. P 370,000 Less: Expenses (P120,000 + P50,000)………………………. _ 170,000 Net Income …………………………………………………… P 200,000 28. c Sales (P120,000 + P60,000)……………………………………… P 180,000 Less: Cost of goods sold: Merchandise inventory, beg. [P40,000 + P6,000 + (P24,000 / 1.2)]……………………………… P 66,000 Add: Purchases (P70,000 + P11,000)………………… 81,000 Cost of Goods Available for Sale……………………P 147,000 Less: MI, ending [P40,000 + P3,200 + (P16,800 / 1.20)] 57,200 89,800 Gross profit……………………………………………………… P 90,200 Less: Expenses (P28,000 + P12,000)………………………… 40,000 Net Income……………………………………………………. P 50,200 29. d Sales (P100,000 – P33,000 + P50,000)…………………………………… P 117,000 Less: Cost of goods sold: Inventory, beg. [P15,000 + (P5,500/110%) or (P5,500 – P500)] P20,000 Add: Purchases (P50,000 + P7,000)……………………………… 57,000 COGAS……………………………………………………………….. P77,000 Less: Inventory, end [P11,000 + P1,050 + (P6,000- P1,050)/110%]……………………………………… 16,550 60,450 Gross profit…………………………………………………………………… P 56,550 Less: Expenses (P20,000 + P6,000 + P5,000)……………………………… 31,000 Combined Net income……………………………………………………. P 25,550 30. c Sales ……………………………………………………………………... P155,000 Less: Cost of Sales Inventory, 1/1/10…………………………………………….. P 23,000 Purchases …………………………………………………….. 190,000 Cost of goods available for sale ……………………….. P213,000 Less: Shipment/Sales to Branch, at cost (P110,000/110%)………………………………………… 100,000 Cost of goods available for HO Sale………………………………………………….. P113,000 Less: Inventory, 12/31/10 ………………………………..... 30,000 83,000 Gross profit ………………………………………………………………... P 72,000 Less: Expenses ……………………………………………………………. 52,000 Net income – home office ……………………………………………. P 20,000 31. a Sales …………………………………………………………………….... P140,000 Less: Cost of Sales Inventory, 1/1/x4……………………………………………… P 11,550 Purchases ……………………………………………………. 105,000 Freight-in ……………………………………………………… 5,500 Shipment in transit (P5,000+P250) ………………………. 5,250 Cost of goods available for sale …………………………. P127,300 Less: Inventory, 12/31/x4 (P10,400 + P520 + P5,250) ………………………………………. 16,170 111,130 Gross profit. ……………………………………………………………. P 28,870 Less: Expenses ………………………………………………………… 28,000 Net income per branch books/unadjusted ……………………… P 870 Add: Overvaluation of CGS* ……………………………………….. 9,600 Net Income of Davao Branch, adjusted …………………………. P 10,470 BP Cost Allowance MI. 1/1/20x4 1,000 Shipments 110,000 100,000 **10,000 Available for sale 11,000 -: MI, 12/31/x4 ***15,400 ****1,400 CGS 9,600 **110,000 x 10/110 ***10,400 + 5,000, in transit ****15,400 x 10/110 32. a Inventory, 1/1 at billed price…………………………………….. P165,000 Add: Shipments at billed price………………………………….. 110,000 Cost of goods available for sale at billed price ……………… P275,000 Less: CGS at BP: Sales……………………………………………………………… P169,000 Less: Sales returns and allowances ………………….. 3,750 Sales price of merchandise acquired from outsiders (P7,500 / 120%)…………………………… 9,000 Net Sales of merchandise acquired from home office ……………………………………….. P156,250 x: Intercompany cost ratio ………………………………... 100/125 125,000 Inventory, 8/1/2008 at billed price……………………………… P150,000 x: Cost ratio …………………………………………………………….. 100/125 Merchandise inventory at cost destroyed by fire ………………… P120,000 33. d Freight actually paid by: Home Office……………………………………………………………………P 500 Branch P………………………………………………………………………… 700 Total………………………………………………………………………………P 1,200 Less: Freight that should be recorded…………………………………………….. 800 Excess freight……………………………………………………………………………P 400 34. d – in arriving at the cost of merchandise inventory at the end of the period, freight charges are properly recognized as a part of the cost. But a branch should not be charged with excessive freight charges when, because of indirect routing, excessive costs are incurred. Under such circumstances, the branch acquiring the goods should be charged for no more than the normal freight from the usual shipping point. The office directing the inter-branch transfers are responsible for the excessive cost should absorb the excess as an expense because it represents management mistakes (or inefficiencies.) 35. c Inventory of the Branch: Shipments from home office at billed price.........................................P 37,700 X: Ending inventory %................................................................................ 60% Ending inventory at billed price……………………………………...……P 22,620 Add: Freight (P1,300 x 60%)………………………………………………...... 780 P 23,400 Or, P39,000 x 60% = P23,400 36. b Inventory in the published balance sheet, at cost Shipments at cost…………………………………..........................................P 32,500 X: Ending inventory %.................................................................................... 60% Ending inventory at billed price……………………………………………….P19,500 Add: Freight (P1,300 x 60%)………………………………………….......…….. 780 P 20,280 37. c Home Office Books Davao Branch Baguio Branch Davao Branch…39,000 SFHO…………….37,700 STB, cost……. 32,500 Freight-in………. 1,300 Unrealized profit 5,200 HOC………….. 39,000 Cash (freight)…. 1,300 BC – Baguio……19,630 HOC……………….20,150 SFHO………18,850 Excess freight… 520 SFHO(50%)… 18,850 Freight-in.. 780 BC-Davao……. 20,150 Freight-in (50%) 650 HOC……... 19,630 Cash…………...... 650 38. c – (P300,000 x ¼ = P75,000, ending inventory x (P300,000 – P250,000)/P300,000 = P12,500 39. d 40. d 41. b – refer to No. 21 42. b – refer to No. 21 43. c – refer to No. 21 44. c 45. d Theories 1. True 6. False 11. False 16. True 21. D 2. False 7. False 12. True 17. True 22. A 3. True 8. False 13. False 18. True 23. d 4. True 9. True 14. True 19. False 24. d 5. False 10. True 15. False 20. d 25. a 26. c Chapter 14 Problem I 1.(in millions) Acquisition of assets and liabilities: Cash 90 Receivables 190 Inventories 7,000 Plant & equipment 40,000 Trademarks 4,000 Brand names 5,000 Secret formulas 7,000 Goodwill 6,120 Current liabilities 400 Long-term liabilities 47,000 Cash 18,000 Common stock, P2 par 100 APIC (P4,000 – P100) 3,900 Consideration transferred: Cash 18,000,000 Common stock 4,000,000 Consideration transferred 22,000,000 Less: MV of Assets and Liabilities Acquired: Cash 90,000 Receivables 190,000 Inventories 7,000,000 Plant & equipment, net 40,000,000 Trademarks 4,000,000 Brand names 5,000,000 Secret formulas 7,000,000 Current liabilities ( 400,000) Long-term liabilities (47,000,000) 15,880,000 Positive excess: Goodwill 6,120,000 Acquisition expenses Acquisition/merger expenses 1,100 Cash 1,100 Costs to Issue and Register Stocks APIC 500 Cash 500 2.(in millions) Cash 90 Receivables 190 Inventories 7,000 Plant & equipment 40,000 Trademarks 4,000 Brand names 5,000 Secret formulas 7,000 Noncompetition agreements 10,000 Current liabilities 400 Long-term liabilities 47,000 Cash 18,000 Common stock, P2 par 100 APIC (P4,000 – P100) 3,900 Gain on acquisition 3,880 Consideration transferred: Cash 18,000,000 Common stock 4,000,000 Consideration transferred 22,000,000 Less: MV of Assets and Liabilities Acquired: Cash 90,000 Receivables 190,000 Inventories 7,000,000 Plant & equipment, net 40,000,000 Trademarks 4,000,000 Brand names 5,000,000 Secret formulas 7,000,000 Noncompetition agreement 10,000,000 Current liabilities ( 400,000) Long-term liabilities (47,000,000) 25,880,000 Negative excess: Gain on Acquisition ( 3,880,000) Acquisition expenses Acquisition/merger expenses 1,100 Cash 1,100 Costs to Issue and Register Stocks APIC/Share Issue Costs 500 Cash 500 3. Post-Combination Balance Sheet: (requirement 1) Assets Liabilities and Stockholders’ Equity Cash P 5,490,000 Current liabilities P 900,000 Receivables 2,190,000 Long-term liabilities 117,000,000 Inventories 27,000,000 Plant and equipment 139,500,000 Trademarks 9,000,000 Common stock 2,100,000 Brand names 5,000,000 Paid-in capital – par 58,400,000 Secret formulas 7,000,000 Retained earnings* 23,900,000 Goodwill __6,120,,000 Treasury stock ( 1,000,000) Total P201,300,000 Total P 201,300,000 *25,000,000 – 1,100,000, merger expenses = 23,900,000. Post-Combination Balance Sheet: (requirement 2) Assets Liabilities and Stockholders’ Equity Cash P 5,490,000 Current liabilities P 900,000 Receivables 2,190,000 Long-term liabilities 117,000,000 Inventories 27,000,000 Plant and equipment 139,500,000 Trademarks 9,000,000 Common stock 2,100,000 Brand names 5,000,000 Paid-in capital – par 58,400,000 Secret formulas 7,000,000 Retained earnings* 27,780,000 Noncompetition agreement _10,000,,000 Treasury stock __( 1,000,000) Total P205,180,000 Total P 205,180,000 *25,000,000 – 1,100,000 + 3,880,000 = 27,780,000 Problem II 1. (in millions) Cash and receivables 200 Inventories 400 Property, plant & equipment 5,500 Customer contracts 25 In-process R&D 300 Goodwill 2,035 Current liabilities 400 Long-term debt 7,300 Warranty liability 10 Estimated liability for Contigent Cons. 50 Capital stock 700 Note: Read the topic “Items included in Goodwill” in Chapter 14 about “Skilled (assembled) workforce” (they are not identifiable at the date of acquisition) and “Potential Contracts” (they are not qualified as assets at the acquisition date). Consideration transferred: Shares 700,000,000 Estimated liability for Contigent Cons. _50,000,000 Consideration transferred 750,000,000 Less: MV of Assets and Liabilities Acquired: Cash and receivables 200,000,000 Inventories 400,000,000 Property, plant & equipment 5,500,000,000 Customer contracts 25,000,000 In-process R&D 300,000,000 Current liabilities ( 400,000,000) Long-term debt (7,300,000,000) Warranty liability ( 10,000,000) (1,285,000,000) Positive excess: Goodwill 2,035,000,000 Acquisition expenses Acquisition/merger expenses 150 Cash 150 Costs to Issue and Register Stocks Share Issue Costs 100 Cash 100 2. (in millions) Goodwill 1,500 Property, plant & equipment 1,500 Problem III 1. Current assets 1,500,000 Investments 500,000 Land 6,000,000 Buildings 16,000,000 Equipment 2,000,000 Identifiable intangibles 5,000,000 Goodwill 22,500,000 Current liabilities 1,500,000 Long-term liabilities 12,000,000 Common stock 4,000,000 Additional paid-in capital 36,000,000 Cash 1,100,000 Consideration transferred: Shares (400,000 x P100) 40,000,000 Less: MV of Assets and Liabilities Acquired: Current assets 1,500,000 Investments 500,000 Land 6,000,000 Buildings 16,000,000 Equipment 2,000,000 Identifiable intangibles 5,000,000 Current liabilities ( 1,500,000) Long-term liabilities (12, 000,000) (17,500,000) Positive excess: Goodwill 22,500,000 Costs to Issue and Register Stocks Share Issue 1,100 Costs/APIC Cash 1,100 2. Current assets 1,500,000 Investments 500,000 Land 6,000,000 Buildings 16,000,000 Equipment 2,000,000 Identifiable intangibles 5,000,000 Current liabilities 1,500,000 Long-term liabilities 12,000,000 Common stock 1,000,000 Additional paid-in capital 9,000,000 Gain on acquisition 7,500,000 Consideration transferred: Shares (100,000 x P100) 10,000,000 Less: MV of Assets and Liabilities Acquired: Current assets 1,500,000 Investments 500,000 Land 6,000,000 Buildings 16,000,000 Equipment 2,000,000 Identifiable intangibles 5,000,000 Current liabilities ( 1,500,000) Long-term liabilities (12, 000,000) (17,500,000) Negative excess: Gain on acquisition ( 7,500,000) Costs to Issue and Register Stocks Share Issue 800 Costs/APIC Cash 800 3. Current assets 1,500,000 Investments 500,000 Land 6,000,000 Buildings 16,000,00 0 Equipment 2,000,000 Identifiable intangibles 5,000,000 Goodwill 500,000 Current liabilities 1,500,000 Long-term liabilities 12,000,00 0 Estimated liability for Contigent 8,000,000 Cons. Common stock 1,000,000 Additional paid-in capital 9,000,000 Consideration transferred: Shares (100,000 x P100) 10,000,000 Estimated liability for Contigent Cons. _8,000,000 Consideration transferred 18,000,000 Less: MV of Assets and Liabilities Acquired: Current assets 1,500,000 Investments 500,000 Land 6,000,000 Buildings 16,000,000 Equipment 2,000,000 Identifiable intangibles 5,000,000 Current liabilities ( 1,500,000) Long-term liabilities (12, 000,000) (17,500,000) Positive excess: Goodwill 500,000 Costs to Issue and Register Stocks Share Issue Costs/APIC 800 Cash 800 4. (a) Estimated liability for Contigent 3,000,000 Cons. Goodwill 500,000 Gain on acquisition 2,500,000 (b) Estimated liability for Contigent 3,000,000 Cons. Gain on reduction in liability 3,000,000 Problem IV 1. January 1, 20x4 Accounts Receivable (net) 65,000 Inventory 99,000 Land 162,000 Buildings 450,000 Equipment 288,000 Goodwill 54,000 Accounts Payable 83,000 Note Payable 180,000 Cash 720,000 Estimated Liability for Contingent Consideration 135,000 Consideration transferred (P720,000 + P135,000) P855,000 Total fair value of net assets acquired (P1,064,000 - P263,000) 801,000 Goodwill P 54,000 2. January 2, 20x6 Estimated Liability for Contingent Consideration 135,000 Cash 135,000 3. January 2, 20x6 Estimated Liability for Contingent Consideration 135,000 Gain on Contingent Consideration 135,000 Problem V Current Assets 362,000 Long-term Assets (P1,890,000 + P20,000) + (P98,000 + P5,000) 2,013,000 Goodwill * 395,000 Liabilities 119,000 Long-term Debt 491,000 Common Stock (144,000 P5) 720,000 PIC - par (144,000 x P15 - P5)) 1,440,000 * (144,000 P15) – [P362,000 + P2,013,000 – (P119,000 + P491,000)] = P395,000 Total shares issued (P700,000 / P5) + P20,000 / P5) 144,000 Fair value of stock issued (144,000P15) = P2,160,000 Problem VI Case A Consideration transferred P130,000 Less: Fair Value of Net Assets 120,000 Goodwill P 10,000 Case B Consideration transferred P110,000 Less: Fair Value of Net Assets 90,000 Goodwill P 20,000 Case C Consideration transferred P15,000 Less: Fair Value of Net Assets 20,000 Gain (P 5,000) Assets Liabilities Retained Goodwill Current Assets Long-Lived Assets Earnings (Gain) Case A P10,000 P20,000 P130,000 P30,000 0 Case B 20,000 30,000 80,000 20,000 0 Case C 0 20,000 40,000 40,000 5,000 Problem VII Present value of maturity value, 20 periods @ 6%: 0.3118 x P600,000 = P187,080 Present value of interest annuity, 20 periods @ 6%: 11.46992 x 30,000 = 344,098 Total Present value P531,178 Par value 600,000 Discount on bonds payable P 68,822 Cash 114,000 Accounts Receivable 135,000 Inventory 310,000 Land 315,000 Buildings 54,900 Equipment 39,450 Bond Discount (P40,000 + P68,822) 108,822 Current Liabilities 95,300 Bonds Payable (P300,000 + P600,000) 900,000 Gain on Acquisition of Stalton (ordinary) 81,872 Computation of Excess of Net Assets Received Over Cost Consideration transferred (P531,178 plus liabilities assumed of P95,300 andP260,000) P886,478 Less: Total fair value of assets received _968,350 Excess of fair value of net assets over cost (P 81,872) Problem VIII Acquisition Method—Entry to record acquisition of Sampras Consideration transferred P300,000 Estimated Liability for contingent Consideration 15,000 Consideration transferred (fair value) 315,000 Fair value of net identifiable assets 282,000 Goodwill P33,000 Receivables 80,000 Inventory 70,000 Buildings 115,000 Equipment 25,000 Customer list 22,000 IPRD 30,000 Goodwill 33,000 Current liabilities 10,000 Long-term liabilities 50,000 Estimated liability for contingent consideration 15,000 Cash 300,000 Acquisition related-expenses 10,000 Cash 10,000 Problem IX 1. a. The computation of goodwill is as follows: Consideration transferred; Common shares: 30,000 shares x P25 P 750,000 Notes payable 180,000 Contingent consideration (cash contingency): P120,000 x 30% probability 36,000 Total P 966,000 Less: Fair value of identifiable assets acquired and liabilities assumed: Cash P 24,000 Receivables – net 48,000 Inventories 72,000 Land 240,000 Buildings – net 360,000 Equipment – net 300,000 In-process research and development 60,000 Accounts payable ( 72,000) Other liabilities ( 168,000) 864,000 Positive Excess – Goodwill P 102,000 b. The journal entries by Peter Corporation to record the acquisition is as follows: Cash 24,000 Receivables – net 48,000 Inventories 72,000 Land 240,000 Buildings – net 360,000 Equipment – net 300,000 In-process research and development 60,000 Goodwill 102,000 Accounts payable 62,000 Other liabilities 168,000 Notes payable 180,000 Estimated Liability for Contingent 36,000 Consideration Common stock (P10 par x 30,000 shares) 300,000 Paid-in capital in excess of par [(P25 – P10) x 30,000 shares] 450,000 Acquisition of Saul Company. Acquisition-related expenses 78,000 Cash 78,000 Acquisition related costs – direct costs. Paid-in capital in excess of par 32,400 Cash 32,400 Acquisition related costs – costs to issue and register stocks. Acquisition-related expenses 27,600 Cash 27,600 Acquisition related costs – indirect costs. c. The balance sheet of Pure Corporation immediately after the acquisition is as follows: Pure Corporation Balance Sheet December 31, 20x4 Assets Cash P 162,000 Receivables – net 144,000 Inventories 360,000 Land 348,000 Buildings – net 840,000 Equipment – net 732,000 In-process research and development 60,000 Goodwill 102,000 Total Assets P2,748,000 Liabilities and Stockholders’ Equity Liabilities Accounts payable P 288,000 Other liabilities 408,000 Notes payable 180,000 Estimated liability for contingent consideration 36,000 Total Liabilities P 912,000 Stockholders’ Equity Common stock, P10 par P 1,020,000 Paid-in capital in excess of par1 657,600 Retained earnings2 158,400 Total Stockholders’ Equity P1,836,000 Total Liabilities and Stockholders’ Equity P2,748,000 1 P240,000 + P446,400 – P32,400 2 P264,000 - P78,000 – P27,600 It should be noted that under PFRS 3, in-process R&D is measured and recorded at fair value as an asset on the acquisition date. This requirement does not extend to R&D in contexts other than business combinations. 2. a. Assets that have been provisionally recorded as of the acquisition date are retrospectively adjusted in value during the measurement period for new information that clarifies the acquisition-date value. The adjustments affect goodwill since the measurement period is still within one year (i.e., eight months) from the acquisition date. Therefore, the goodwill to be reported then on the acquisition should be P78,000 (P102,000 – P24,000). b. Buildings 24,000 Goodwill 24,000 Adjustment to goodwill due to measurement date. 3. a. The goodwill to be reported then on the acquisition should be P126,000 (P102,000 + P24,000). b. The adjustment is still within the measurement period, the entry to adjust the liability would be: Goodwill 24,000 Estimated liability for contingent consideration 24,000 Adjustment to goodwill due to measurement date. c. c.1. The goodwill remains at P126,000, since the change of estimate should be done only once (last August 31, 20x5). c.2. On November 1, 20x5, the probability value of the contingent consideration amounted to P48,000, the entry to adjust the liability would be: Estimated liability for contingent consideration 12,000 Gain on estimated contingent consideration 12,000 Adjustment after measurement date. In this case, the measurement period ends at the earlier of: one year from the acquisition date, or the date when the acquirer receives needed information about facts and circumstances (or learns that the information is unobtainable) to consummate the acquisition. c.3. c.3.1. The goodwill remains at P126,000, since the change of estimate should be done only once (last August 31, 20x5). c.3.2. On December 15, 20x5, the entry would be: Loss on estimated liability contingent 30,000 consideration Estimated liability for contingent consideration 30,000 Adjustment after measurement date. c.3.3. c.3.3.1. P126,000. c.3.3.2. On January 1, 20x7, Saul’s average income in 20x5 is P270,000 and 20x6 is P260,000, which means that the target is met, Peter Corporation will make the following entry: Estimated liability for contingent consideration 78,000 Loss on estimated contingent consideration 42,000 Cash 120,000 Settlement of contingent consideration. 4. a.The amount of goodwill on acquisition will be recomputed as follows: Consideration transferred; Common shares: 30,000 shares x P25 P 750,000 Notes payable 180,000 Contingent consideration (cash contingency): P120,000 x 35% probability x (1/[1 + .04]*) 40,385 Total P 970,385 Less: Fair value of identifiable assets acquired and liabilities assumed (refer to 1a above) 864,000 Goodwill P 106,385 b. The journal entries by Pure Corporation to record the acquisition is as follows: Cash 24,000 Receivables – net 48,000 Inventories 72,000 Land 240,000 Buildings – net 360,000 Equipment – net 300,000 In-process research and development 60,000 Goodwill 106,386 Accounts payable 62,000 Other liabilities 168,000 Notes payable 180,000 Estimated Liability for Contingent 40,385 Consideration Common stock (P10 par x 30,000 shares) 300,000 Paid-in capital in excess of par [(P25 – P10) x 30,000 shares] 450,000 c. c.1. Goodwill remains at P106,385. c.2. Theentry for Pure Corporation on December 31, 20x5 to record such occurrence would be: Estimated liability for contingent consideration 40,385 Gain on estimated contingent consideration 40,385 Adjustment after measurement date. Since the contingent event does not happen, the position taken by PFRS 3 is that the conditions that prevent the target from being met occurred in a subsequent period and that Peter had the information to measure the liability at the acquisition date based on circumstances that existed at that time. Thus the adjustment will flow through income statement in the subsequent period. d. The entry by Peter Corporation on January 1, 20x7 for the payment of the contingent consideration would be: Estimated liability for contingent consideration 36,000 Loss on estimated contingent consideration 66,000 Cash [(P78,000 + P84,000)/2 – P30,000] x 2 102,000 Settlement of contingent consideration. 5. a. The amount of goodwill on acquisition will be recomputed as follows: Consideration transferred; Common shares: 30,000 shares x P25 P 750,000 Notes payable 180,000 Contingent consideration (cash contingency): P120,000 x 30% probability 36,000 Contingent consideration (stock contingency) 18,000 Total P 984,000 Less: Fair value of identifiable assets acquired and liabilities assumed (refer to 1a above) 864,000 Positive Excess – Goodwill P 120,000 b. The journal entries by Pure Corporation to record the acquisition is as follows: Cash 24,000 Receivables – net 48,000 Inventories 72,000 Land 240,000 Buildings – net 360,000 Equipment – net 300,000 In-process research and development 60,000 Goodwill 120,000 Accounts payable 72,000 Other liabilities 168,000 Notes payable 180,000 Estimated Liability for Contingent 36,000 Consideration Paid-in capital for Contingent Consideration 18,000 Common stock (P10 par x 30,000 shares) 300,000 Additional paid-in capital [(P25 – P10) x 30,000 shares] 450,000 Acquisition of Saul Company. c. PureCorporation will make the following entry for the issuance of 1,200 additional shares: Paid-in capital for Contingent Consideration 18,000 Common stock (P10 par x 1,200 shares) 12,000 Paid-in capital in excess of par 6,000 Settlement of contingent consideration. 6. On January 1, 20x7, the average income amounted to P132,000 (the contingent event occurs). Thus, the entry record the occurrence of such event to reassign the P750,000 original consideration to 36,000 shares (30,000 original shares issued + 6,000 additional shares due to contingency) would be: Paid-in capital in excess of par 60,000 Common stock (P10 par x 6,000 shares) 60,000 Settlement of contingent consideration. 7. On January 1, 20x7, the contingent event happens since the fair value per share fall below P25. Thus, the entry record the occurrence of such event to reassign the P750,000 original consideration to 37,500 shares (30,000 original shares issued + 7,500* additional shares due to contingency) would be: Paid-in capital in excess of par 75,000 Common stock (P10 par x 7,500 shares) 75,000 Settlement of contingent consideration. * Deficiency: (P25 – P20) x 25,000 shares issued to acquire...P150,000 Divide by fair value per share on January 1, 20x7………….P 20 Added number of shares to issue………………………………. 7,500 8. The amount of goodwill on acquisition will be recomputed as follows: Consideration transferred; Common shares: 30,000 shares x P25 P 750,000 Notes payable 180,000 Contingent consideration (stock contingency): [(P750,000 – P510,000) x 40% probability x (1/[1 + .04]*) 92,308 Total P1,022,308 Less: Fair value of identifiable assets acquired and liabilities assumed (refer to 1a above) 864,000 Positive Excess – Goodwill P 158,308 * present value of P1 @ 4% for one period. The journal entries by Pure Corporation to record the acquisition is as follows: Cash 24,000 Receivables – net 48,000 Inventories 72,000 Land 240,000 Buildings – net 360,000 Equipment – net 300,000 In-process research and development 60,000 Goodwill 158,308 Accounts payable 62,000 Other liabilities 168,000 Notes payable 180,000 Paid-in capital for Contingent Consideration 92,308 Common stock (P10 par x 25,000 shares) 300,000 Paid-in capital in excess of par[(P25 – P10) x 30,000 shares] 450,000 On December 31, 20x5, the contingent event occurs, wherein Peter’s stock price had fallen to P20, thus requiring Peter to issue additional shares of stock to the former owners of Saul Corporation. The entry for Peter Corporation on December 31, 20x5 to record such occurrence such event to reassign the P750,000 original consideration to 37,500 shares (30,000 original shares issued + 7,500* additional shares due to contingency) would be: Paid-in capital for Contingent Consideration 92,308 Common stock, P10 par 75,000 Paid-in capital in excess of par 17,308 Settlement of contingent consideration. * Deficiency: (P25 – P20) x 30,000 shares issued to acquire....P150,000 Divide by fair value per share on December 31, 20x5……P 20 Added number of shares to issue……………………………… 7,500 Problem X 1. Consideration transferred: Shares: 2/3 x 60,000 x P3.20 128,000 Cash Accounts payable 45,100 Mortgage and interest 44,000 Debentures and premium 52,500 Liquidation expenses 2,400 144,000 Cash held (12,000) 132,000 260,000 Less: Fair value of assets and liabilities acquired: Accounts receivable P34,700 Inventory 39,000 Freehold land 130,000 Buildings 40,000 Plant and equipment 46,000 289,700 Bargain Purchase Gain 29,700 Homer Ltd Accounts Receivable 34,700 Inventory 39,000 Freehold Land 130,000 Buildings 40,000 Plant and Equipment 46,000 Payable to Tan Ltd 132,000 Common stock, P1 par x 40,000 shares 40,000 Additional paid-in capital 88,000 Gain on acquisition 29,700 (Acquisition of net assets of Tan Ltd and shares issued) Payable to Tan Ltd 132,000 Cash 132,000 (Being payment of cash consideration) Paid-in capital in excess of par 1,200 Cash 1,200 (Being costs of issuing shares) 2. Tan LTD General Ledger Liquidation P P Accounts Receivable 34,700 Additional paid in capital 26,800 Inventory 27,600 Retained earnings 32,000 Freehold Land 100,000 Receivable from Homer Ltd 260,000 Buildings 30,000 Plant and Equipment 46,000 Goodwill 2,000 Interest Payable 4,000 Liquidation Expenses 2,400 Premium on Debentures 2,500 Accounts Payable 1,600 Shareholders’ Distribution 68,000 318,800 318,800 Liquidator’s Cash P P Opening Balance 12,000 Liquidation Expenses 2,400 Receivable from Homer Ltd 132,000 Mortgage and Interest 44,000 Debentures and Premium 52,500 Accounts Payable 45,100 144,000 144,000 Shareholders’ Distribution P P Shares in Homer Ltd 128,000 Common stock 60,000 Liquidation 68,0000 128,000 128,000 Problem XI Cash 20,000 Accounts Receivable 112,000 Inventory 134,000 Land 55,000 Plant Assets 463,000 Discount on Bonds Payable 20,000 Goodwill* 127,200 Allowance for Uncollectible Accounts 10,000 Accounts Payable 54,000 Bonds Payable 200,000 Deferred Income Tax Liability 67,200 Cash 600,000 Consideration transferred P600,000 Less: Fair value of net assets acquired (P784,000 – P10,000 – P54,000 – P180,000 - P67,200*) 472,800 Goodwill P127,200 * Increase in net assets Increase inventory, land, and plantassets to fair value P52,000 + P25,000 + P71,000) P148,000 Decrease bonds payable to fair value(20,000) Increase in net assets P168,000 Establish deferred income tax liability(P168,000 x 40%)P67,200 Multiple Choice Problems 1. c Acquisition-related costs. Acquisition-related costs are costs the acquirer incurs to effect a business combination. Those costs include finder’s fee; advisory, legal, accounting, valuation and other professional or consulting fees; general administrative costs, including the costs of maintaining an internal acquisitions department; and costs of registering and issuing debt and equity securities. Under PFRS 3 (2008), the acquirer is required to recognize acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception, i.e. the costs to issue debt or equity securities are recognized in accordance with PAS 32 (for equity) and PAS 39 (for debt). 2. P2,240,000, No answer available Consideration transferred : FMV of shares issued by Robin (80,000 sh ×P28) = P2,240,000 3. P520,000, no answer available Considerationtrasnferred P2,240,000 Less: Fair value of Hope’s net assets (P2,720,000+P200,000–P1,200,000) 1,720,000 Goodwill P 520,000 4. c Acquisition related-expenses 20,000 Accounts Receivable 180,000 Inventory 400,000 Land 50,000 Building 60,000 Equipment 70,000 Patent 20,000 CurrentLiabilities 70,000 Long-termDebt 160,000 Cash 520,000 Gain on Acquisition 50,000 Considerationtrasnsferred : Cash P500,000 Less : Fair value of West’s net assets (P180,000 + P400,000 + P50,000 + P60,000 + P P70,000 + P20,000 – P70,000 - P160,000) 550,000 BargainPurchase Gain (P50,000) 5.d Accounts Receivable (net of P33,000 allowance) 198,000 Inventory 330,000 Land 550,000 Buildings and Equipment 1,144,000 Goodwill 848,000 Current Liabilities 275,000 Bonds Payable 450,000 Premium on Bonds Payable (P495,000 - P450,000) 45,000 Preferred Stock (15,000 x P100) 1,500,000 Common Stock (30,000 x P10) 300,000 PIC - par (P25 - P10) x 30,000 450,000 Cash 50,000 Consideration transferred: (P1,500,000 + P750,000 + P50,000) P2,300,000 Less: Fair value of net assets (198,000 + 330,000 + 550,000 + 1,144,000 – 275,000 – 495,000) = 1,452,000 Goodwill P 848,000 6.d Current Assets 960,000 Plant and Equipment 1,440,000 Goodwill 336,000 Liabilities 216,000 Cash 2,160,00 0 Estimated Liability for Contingent Consideration 360,000 7.c Cash 1,400 Receivables 650 Investments 1,000 Maintenance supplies 400 Flight equipment 12,000 International routes 500 Leases 800 Goodwill 450 Current liabilities 3,200 Long-term debt 6,000 Cash 8,000 8. c The amount of the contingency is P500,000 (10,000 shares at P50 per share) Goodwill 500,000 Paid-in-Capital for Contingent Consideration - 500,000 Issuable 9. c Paid-in-Capital for Contingent Consideration – Issuable 500,000 Common Stock (P10 par) 100,000 Paid-In-Capital in Excess of Par 400,000 Platz Company does not adjust the original amount recorded as equity . 10.c Accounts Receivable (net) 220,000 Inventory 320,000 Land 1,508,000 Buildings 1,392,000 Goodwill 230,000 Accounts Payable 270,000 Note Payable 600,000 Cash 2,600,000 Estimated Liability for Contingent Consideration 200,000 Consideration transferred (2,600,000 + 200,000)………………..P2,800,000 Fair value of net assets acquired(P3,440,000 – P870,000)……. 2,570,000 Goodwill………………………………………………………………...P230,000 Or, alternatively: Accounts Receivable 240,000 Inventory 320,000 Land 1,508,000 Buildings 1,392,000 Goodwill 30,000 Allowance for Uncollectible Accounts 20,000 Accounts Payable 270,000 Note Payable 600,000 Cash 2,600,000 Consideration transferred P2,600,000 Fair value of net assets acquired (P3,440,000 – P870,000) 2,570,000 Goodwill P 30,000 Goodwill 200,000 Estimated Liability for Contingent Consideration 200,000 1/1/20x6: Estimated Liability for Contingent Consideration 200,000 Gain on Contingent Consideration 200,000 11. c In accounting for the combination of NT and OTG, the fair value of the acquisition is allocated to each identifiable asset and liability acquired with any remaining excess attributed to goodwill. Consideration transferred (shares issued) P750,000 Fair value of net assets acquired: Cash P29,000 Receivables 63,000 Trademarks 225,000 Record music catalog 180,000 In-process R&D 200,000 Equipment 105,000 Accounts payable (34,000) Notes payable (45,000) 723,000 Goodwill P27,000 Entry by NT to record combination with OTG: Cash 29,000 Receivables 63,000 Trademarks 225,000 Record Music Catalog 180,000 Capitalized R&D 200,000 Equipment 105,000 Goodwill 27,000 Accounts Payable 34,000 Notes Payable 45,000 Common Stock (NewTune par value) 60,000 PIC - par 690,000 (To record merger with OTG at fair value) PIC - par 25,000 Cash 25,000 (Stock issue costs incurred) Post-Combination Balance Sheet: Assets Liabilities and Owners’ Equity Cash P 64,000 Accounts payable P 144,000 Receivables 213,000 Notes payable ___415,000 Trademarks 625,000 Total liabilities P 559,000 Record music catalog 1,020,000 Capitalized R&D 200,000 Common stock 460,000 Equipment 425,000 Paid-in capital - par 695,000 Goodwill 27,000 Retained earnings 860,000 Total P2,574,000 Total P2,574,000 12. P559,000, no answer available – refer to No. 11 13. d – refer to No. 11 14.c – refer to No. 11 15.c – refer to No. 11 16. d Correction: …completion goals by December 31, 20x5 not 20x4. Entry to record the acquisition on Pacifica’s records: Cash 85,000 Receivables and inventory 180,000 PPE 600,000 Trademarks 200,000 IPRD 100,000 Goodwill 77,500 Liabilities 180,000 Common Stock (50,000 xP5) 250,000 Paid-In Capital in excess of par (50,000 xP15) 750,000 Contingent performance obligation 62,500 The goodwill is computed as: Consideration transferred: 50,000 shares x P20 P1,000,000 Contingent consideration: P130,000 payment x 50% probability x 0.961538 62,500 Total P1,062,500 Less: Fair value of net assets acquired (P85,000 + P180,000 + P600,000 + P200,000 + P100,000 - P180,000) 985,000 Goodwill P 77,500 Acquisition related-expenses 15,000 Cash 15,000 PIC - par 9,000 Cash 9,000 Note: The following amounts will appear in the income statement and statement of retained earnings after business combination: PP Inc. Revenues (1,200,000) Expenses (P875,000 + P15,000) 890,000 Net income (310,000) Retained earnings, 1/1 (950,000) Net income (310,000) Dividends paid 90,000 Retained earnings, 12/31 *(1,170,000) * or, P1,185,000 – P15,000 = P1,170,000 17. c – refer to No. 16 (P400,000 + P750,000 – P9,000 = P1,141,000) 18. d – refer to No. 16 19. b – refer to No. 16 20. b – refer to No. 16 21. d – refer to No. 16 [P77,500 + (P75,000 – P62,500)] = P90,000 22.b – refer to No. 16. It should be noted that goodwill can only be revised once, so, the goodwill remains at P90,000, but the liability will be adjusted to P80,000, the entry would be Loss on contingent consideration…………………………………. 5,000 Contingent performance obligation………………………. 5,000 23. a 10,000,000 x P5 x 0.20 P 10,000,000 15,000,000 x P5 x 0.10 ___7,500,000 P 17,500,000 17,500,000/(1.12)4 P 11,121,566 24. a – at fair value 25. a 26.a – (P100,000 x ½ = P50,000 x 1/1.05) or P50,000 x 0.909091 = P45,454 27. c Fair value of Subsidiary Consideration transferred………………………………………………………P 200 million Add: Fair value of contingent consideration……………………………… 10 million Fair value of subsidiary………………………………………………………… P 210 million Less: Fair value of identifiable assets and liabilities of Homer...............… 116 million Goodwill…………………………………………………………………………… P 94 million Note: The consideration transferred should be compared with the fair value of the net assets acquired, per PFRS3 par. 32. The contingent consideration should be measured at its fair value at the acquisition date; any subsequent change in this cash liability comes under PAS 39 Financial instruments: recognition and measurement and should be recognized in profit or loss, even if it arises within the measurement period. See PFRS3 pars. 39, 40 and 58. 28. b 29. b 30. d P77,500,000 = P100,000,000 – (P1,500,000 + P35,000,000 + P2,000,000 + P10,000,000 + P4,000,000 - P30,000,000). 31. b P(12,500,000) = P10,000,000 – (P1,500,000 + P35,000,000 + P2,000,000 + P10,000,000 + P4,000,000 - P30,000,000). 32. c The correcting entry, within the measurement period, is: Goodwill 2,000,000 Patents 2,000,000 33. a The correcting entry, within the measurement period, is: Gain on acquisition 2,000,000 Liabilities 2,000,000 34. c Goodwill 400,000 Estimated lawsuit liability 400,000 35.b Loss on lawsuit 400,000 Estimated lawsuit liability 400,000 36.b Assets 570,000,000 Liabilities 100,000,00 0 Capital stock 400,000,00 0 Cash 50,000,000 PIC-stock contingency 20,000,000 37. b - P350,000,000 – (P12 x 25,000,000) = P50,000,000/P12 = 4,166,667 additional shares 38. c The contingency was originally recorded in equity at the amount of P20,000,000. However, changes in the value of stock price contingencies do not affect the acquisition price or income. Any changes in value are adjustments in equity. PIC- stock contingency 20,000,000 PIC-other 30,000,000 Common stock 50,000,000 39. b 40. c 41. c 42. b – [(P47 x 12,000 shares) – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000) = P104,000 43. d APIC: P20,000 + [(P42 – P5) x12,000 = P464,000 Retained earnings: P160,000, parent only 44. b Inventory: PP230,000 + P210,000 = P440,000 Land: P280,000 + P240,000 = P520,000 45. b – [P480,000 – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000)] = P20,000 46. c AA records new shares at fair value Value of shares issued (51,000 × P3) ............................................................... P153,000 Par value of shares issued (51,000 × P1)......................................................... 51,000 Additional paid-in capital (new shares) ....................................................... P102,000 Additional paid-in capital (existing shares) .................................................. 90,000 Consolidated additional paid-in capital ....................................................... P192,000 At the date of acquisition, the parent makes no change to retained earnings. 47. a – at fair value 48. c Depreciation expense: Building, at book value (P200,000 – P100,000) / 10 years P 10,000 Building, undervaluation (P130,000, fair value – P100,000, book value) / 10 years3,000 Equipment, at book value (P100,000 – P50,000) / 5 years 10,000 Equipment, undervaluation (P75,000, fair value - P50,000, book value) / 5 years 5,000 Total depreciation expense= P 28,000 49. c - [(24,000 shares x P30) – P686,400] = P33,600 50. d - [(24,000 shares x P30) – (P270,000 + P726,000 – P168,000)] = P108,000, gain 51. c A bargain purchase is a business combination in which the net fair value of the identifiable assets acquired and liabilities assumed exceeds the aggregate of the consideration transferred. It should be noted that bargain purchase gain would arise only in exceptional circumstances. Therefore, before determining that gain has arisen, the acquirer has to: 1. Reassess whether it has correctly identified all of the assets acquired and all of the liabilities assumed. The acquirer should recognize any additional assets or liabilities that are identified in that review. 2. Any balance should be recognized immediately in profit or loss. 52. b – no valuation to be recorded in the books of the acquirer Cost P180,000 Less: Accumulated depreciation (P180,000/30 years = P6,000/year x 3 yrs 18,000 Net book value P162,000 53. c Net Assets [P100,000 + P50,000 + P162,000 (No. 54)] P312,000 Less: Shares issued at par (15,000 shares x P10 par) 150,000 APIC P162,000 Or: since, there is no excess, the P312,000 represents the amount of consideration transferred, therefore the APIC should be P162,000 [P312,000 / 15,000 shares = P20,80 – P15 = P10.80 x 15,000 shares) 54. c The consideration transferred should be compared with the fair value of the net assets acquired, per PFRS3 par. 32. The gain of P8 million results from a bargain purchase and should be recognized in profit or loss, per PFRS3 par. 34. 55. c Consideration transferred: Shares: 2/3 x 60,000 x P3.20 128,000 Cash Accounts payable 45,100 Mortgage and interest 44,000 Debentures and premium 52,500 Liquidation expenses 2,400 144,000 Cash held (12,000) 132,000 260,000 Less: Fair value of assets and liabilities acquired: Accounts receivable P34,700 Inventory 39,000 Freehold land 130,000 Buildings 40,000 Plant and equipment 46,000289,700 Bargain Purchase Gain 29,700 56. d PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are measured at their acquisition-date fair values. 57.c Selling price P 110,000 Less: Book value of Comb (P50,000 + P80,000 + P40,000 - P30,000) 140,000 Loss on sale of business by the acquiree (Comb) P( 30,000) 58. d P215,000 = P130,000 + P85,000 59. b P23,000 = P198,000 – (P405,000 - P265,000 + P15,000 + P20,000) 60 c P1,109,00 = Total Assets of TT Corp. P 844,000 . 0 Less: Investment in SS Corp. (198,000) Book value of assets of TT Corp. P 646,000 Book value of assets of SS Corp. 405,000 Total book value P1,051,000 Payment in excess of book value (P198,000 - P140,000) 58,000 Total assets reported P1,109,000 61 c P701,500 = (P61,500 + P95,000 + P280,000) + (P28,000 + . P37,000 +P200,000) 62 d P257,500 = The amount reported by TT Corporation . 63 a P407,500 = The amount reported by TT Corporation . 64. c Par value of shares outstanding before issuance P200,000 Par value of shares outstanding after issuance 250,000 Par value of additional shares issued P 50,000 Divided by: No. of shares issued* __12,500 Par value of common stock P 4 *Paid-in capital before issuance (P200,000 + P350,000) P 550,000 Paid-in capital after issuance (P250,000 + P550,00)800,000 Paid-in capital of share issued at the time of exchangeP250,000 Divided by: Fair value per share of stockP 20 Shares issued 12,500 65. a Consideration transferred: Shares – 12,500 shares P250,000 Less: Goodwill 56,000 Fair value of identifiable net assets acquiredP194,000 66. a – Blue Town: Stockholders’ equity before issuance of shares (P700,000 + P980,000) P1,680,000 Issued shares: 34,000 shares x P35 1,190,000 Consolidated SHE/Net Assets P2,870,000 67. d 68. c Common stock – combined…………………………………………………………P 160,000 Common – Acquirer Zyxel………………………………….. …………………….… 100,000 Common stock issued………………………………………………………………...P 60,000 Divided by: Par value of common stock………………………………………….P 2 Number of Zyxel shares to acquire Globe Tattoo………………………….....… 30,000 69. d Paid-in capital books of Zyxel (P100,000 + P65,000)………………………........P 165,000 Paid-in capital in the combined balance sheet (P160,000 + P245,000)…………………………………………………….… 405,000 Paid-in capital from the shares issued to acquire Globe Tattoo…………... P 240,000 Divided by: No. of shares issued (No. 31)……………………………………..... 30,000 Fair value per share when stock was issued………………………………….... P 8 Or, Par value of common stock of Zyxel……………………………………… P 2 Add: Share premium/APIC per share from the additional issuance of shares (P245,000 – P65,000)/30,000…………............ 6 Fair value per share when stock was issued……………………………....... P 8 70.b Net identifiable assets of Zyxel before acquisition: (P65,000 + P72,000 + P33,000 + P400,000 – P50,000 - P250,000)……………………………………………………………………. P270,000 Net identifiable assets in the combined balance sheet: (P90,000 + P94,000 + P88,000 + P650,000 – P75,000 - P350,000)….......... 497,000 Fair value of the net identifiable assets held by Globe Tattoo at the date of acquisition..…………………………………………………….. P227,000 71. a Consideration transferred (30,000 shares x P8)………………………………… P240,000 Less: Fair value of net identifiable assets acquired (No. 49)……………….... 227,000 Goodwill……………………………………………………………………………….. P 13,000 72. c Retained earnings: Acquirer – Zyxel (at book value)……………………………………….... P105,000 Acquiree– Globe Tattoo (not acquired)……………………………… __ 0 P105,000 It should be noted that, there was no bargain purchase gain and acquisition-related costs which may affect retained earnings on the acquisition date. 73. a II ____ _____JJ _ ____Total____ Average annual earnings P 46,080 P 69,120 P 115,200 Divided by: Capitalized at _10% Total stock to be issued P1,152,000 Less: Net Assets (for P/S) 864,000 Goodwill (for Common Stock) P 288,000 Preferred stock (same with Net Assets): 864,000/P100 par 8,640 shares Theories 1. True 21. False 41. True 61. c 81. b 101. c 121 a 2. False 22. True 42. False 62. b 82. a 102. d 122. b 3. True 23. False 43. a 63. c 83. d 103. d 123. b 4. True 24. True 44. c 64. d 84. a 104. d 124. c 5. False 25, True 45, b 65, d 85. c 105. c 125. b 6. True 26. False 46. b 66. a 86. d 106. d 126. c 7. False 27. True 47. d 67. a 87. c 107. d 127. c 8. True 28. False 48. c 68. d 88. a 108. d 9. True 29. True 49. c 69. a 89. c 109. b 10. True 30, True 50, b 70, b 90, d 110, c 11. True 31. False 51. a 71. c 91. b 111. c 12. True 32. True 52. b 72. A 92. a 112. c 13. False 33. True 53. c 73. c 93. C 113. a 14. False 34. False 54. a 74. c 94. B 114. d 15. False 35. True 55. c 75. a 95. D 115. d 16. True 36. True 56. b 76. d 96. A 116. c 17. False 37. False 57. a 77. a 97. A 117. b 18. True 38. True 58. c 78. d 98. c 118. b 19. True 39. False 59. a 79. b 99. d 119. b 20. False 40, False 60, c 80, c 100, d 120. a Note for the following numbers: 2. A horizontal combination occurs when management attempts to dominate an industry. 5. A vertical combination exists when an entity purchases another entity that could have a buyer-seller relationship with the acquirer. The combination described here is a horizontal combination. 7. A conglomerate combination is one where an unrelated or tangentially related business is acquired. A vertical combination occurs when a supplier is acquired. 13. Greenmail is the payment of a price above market value to acquire stock back from a potential acquirer. 15. The sale of the crown jewels results when a target sells assets that would be particularly valuable to the potential acquirer. The scorched earth defense results when a target generally sells large amounts of assets without regard to the specific desirability to the potential acquirer. 17. Golden parachutes are generally given only to top executives of the acquiree. 20. Control over the net assets of an entity can be accomplished by purchasing the net assets or by purchasing the acquiree voting common stock that represents ownership of the assets. 21. The amount of cash will always equal the net assets recorded by the acquirer. As a result, the acquirer book value will not change due to an acquisition. 23. There is no exchange of stock in an asset for asset acquisition so there cannot be a change in ownership structure of either entity. 26. The acquiree corporation becomes an acquirer stockholder, not the acquiree stockholders. 28. A combination that results in one of the original entities in existence after the combination is a statutory merger. 31. The combination results in the stockholders of one entity controlling the other entity. The Retained Earnings of the entity acquiring control is carried forward to the newly formed corporation. 34. The stock of the acquiree company must be purchased by the acquirer, but the value transferred to the acquiree stockholders does not have to be in stock. Payment may be in another asset or the issuance of debt. 37. The consideration to be given by the acquirer is sometimes not completely known because the consideration is based partially on acquiree future earnings or the market value of acquirer debt or stock. 39. Any change in the number of shares of acquirer stock given returns the purchase price to the agreed level. The adjustment is to stock and additional paid-in capital. The investment account is unchanged. 40. The acquiree stockholders must continue to have an indirect ownership interest in the acquiree net assets. Preferred stock or a nonvoting class of stock qualifies as an indirect ownership as well as voting common stock. 42. A net operating loss carryforward cannot be acquired. They are only available to the acquirer if the combination qualifies as a nontaxable exchange. Chapter 15 Problem I Investment in Shy Inc. [P2,500,000 + (15,000 P40)] 3,100,000 Cash 2,500,000 Common Stock 30,000 Paid in capital in excess of par (P40 - P2) 15,000 570,000 Paid in capital in excess of par 30,000 Acquisition Expense 67,000 Deferred Acquisition Charges 90,000 Acquisition Costs Payable 7,000 Problem II Cash consideration transferred P 300,000 Contingent performance obligation __15,000 Fair value of Subsidiary P 315,000 Less: Book value of SS Company (P90,000 + P100,000) 190,000 Allocated excess P125,000 Less: Over/under valuation of assets and liabilities: Increase in building: P40,000 x 100% P 40,000 Increase in customer list: P22,000 x 100% 22,000 Increase in R&D: P30,000 x 100% 30,000 __92,000 Goodwill P 33,000 Investment in SS Company 315,000 Cash 300,000 Estimated Liability on Contingent Consideration 15,000 Acquisition Expense (or Retained earnings) 10,000 Cash 10,000 Not Required: The working paper eliminating entry on the date of acquisition, 6/30/20x4 would be: Receivables 80,000 Inventory 70,000 Buildings 115,000 Equipment 25,000 Customer list 22,000 Capitalized R&D 30,000 Goodwill 33,000 Current liabilities 10,000 Long-term liabilities 50,000 Investment in SS Company 315,000 Problem III Case 1: Proportionate Basis (Partial-goodwill Approach) Partial-goodwill Fair value of subsidiary (80%): Consideration transferred: Cash……………………….......P12,000,000 (80%) Less: Book value of stockholders’ equity (net assets) – S Company: P7,200,000 x 80%...................................... 5,760,000 (80%) Allocated excess.……………………………………………….......P 6,240,000 (80%) Less: Over/undervaluation of assets and liabilities: (P9,600,000 – P7,200,000) x 80%........................................... 1,920,000 (80%) Positive excess: Goodwill (partial)…………………………….... P 4,320,000 (80%) Non-controlling interest Book Value of stockholders’ equity of subsidiary…………. P 7,200,000 Adjustments to reflect fair value (over/ undervaluation of assets and liabilities): (P9,600,000 – P7,200,000)….. 2,400,000 Fair value of stockholders’ equity of subsidiary…………… P 9,600,000 Multiplied by: Non-controlling interest percentage............ 20% Non-controlling Interest (partial)……………………………….. P1,920,000 Fair Value Basis (Full-goodwill Approach) Full-goodwill Fair value of subsidiary (100%): Consideration transferred: Cash (P12,000,000 / 80%).. P 15,000,000 (100%) Less: Book value of stockholders’ equity (net assets) – S Company: P7,200,000 x 100%.............................. 7,200,000 (100%) Allocated excess.……………………………………………….. P 7,800,000 (100%) Less: Over/Undervaluation of assets and liabilities: (P9,600,000 – P7,200,000) x 100%.................................... 2,400,000 (100%) Positive excess: Goodwill (full)………………………………........P 5,400,000 (100%) The full – goodwill of P5,400,000 consists of two parts: Full-goodwill……………………………………………....... P 5,400,000 Less: Controlling interest on full-goodwill or partial-goodwill…………………………….…. 4,320,000 NCI on full-goodwill…………………………………….......P 1,080,000 Non-controlling interest Non-controlling interest (partial)……………………………….......P1,920,000 Add: Non-controlling interest on full -goodwill (P5,400,000 – P4,320,000 partial-goodwill) or (P5,400,000 x 20%)*…………………………………...... 1,080,000 Non-controlling interest (full)…………………………………........ P3,000,000 * applicable only when the fair value of the non-controlling interest of subsidiary is not given. Case 2: Proportionate Basis (Partial-goodwill Approach) Partial-goodwill Fair value of subsidiary (60%): Consideration transferred: Cash……………………….....P 7,560,000 (60%) Less: Book value of stockholders’ equity (net assets) – S Company: P6,000,000 x 60%................................ 3,600,000 (60%) Allocated Excess.……………………………………………….... P 3,960,000 (60%) Less: Over/undervaluation of assets and liabilities: (P8,400,000 – P6,000,000) x 60%...................................... 1,440,000 (60%) Positive excess: Goodwill (partial)……………………………....P 2,520,000 (60%) Non-controlling interest Book value of stockholders’ equity of subsidiary…………. P 6,000,000 Adjustments to reflect fair value (over/ undervaluation of assets and liabilities): (P8,400,000 – P6,000,000)…. 2,400,000 Fair value of stockholders’ equity of subsidiary…………….P 8,400,000 Multiplied by: Non-controlling Interest percentage............. 40% Non-controlling interest (partial)……………………………….P 3,360,000 Fair Value Basis (Full-goodwill Approach) Full-goodwill Fair value of subsidiary (100%): Consideration transferred: Cash ………………………...P 7,560,000 ( 60%) Fair value of NCI (given)………………………………….. 4,800,000 ( 40%) Fair value of subsidiary…………………………………………...P12,360,000 (100%) Less: Book value of stockholders’ equity (net assets) – S Company: P6,000,000 x 100%........................... 6,000,000 (100%) Allocated Excess.…………………………………………………..P 6,360,000 (100%) Less: Over/undervaluation of assets and liabilities: (P8,400,000 – P6,000,000) x 100%.................................. 2,400,000 (100%) Positive excess: Goodwill (full)………………………………......P 3,960,000 (100%) The full – goodwill of P3,960,000 consists of two parts: Full-goodwill……………………………………………...P 3,960,000 Less: Controlling interest on full-goodwill or partial-goodwill……………………………. 2,520,000 NCI on full-goodwill……………………………………..P 1,440,000 Non-controlling interest Non-controlling interest (partial)………………………………P 3,360,000 Add: Non-controlling interest on full -goodwill (P3,960,000 – P2,520,000 partial-goodwill)………….. 1,440,000 Non-controlling Interest (full)…………………………………..P 4,800,000 Case 3; Proportionate Basis (Partial-goodwill Approach) Partial-goodwill Fair value of subsidiary (75%): Consideration transferred: Cash………………………..P 9,000,000 (75%) Less: Book value of stockholders’ equity (net assets) – S Company: P7,200,000 x 75%............................. 5,400,000 (75%) Allocated Excess.………………………………………………...P 3,600,000 (75%) Less: Over/undervaluation of assets and liabilities: (P9,600,000 – P7,200,000) x 75%..................................... 1,800,000 (75%) Positive excess: Goodwill (partial)…………………………….P 1,800,000 (75%) Non-controlling interest Book value of stockholders’ equity of subsidiary…………..P 7,200,000 Adjustments to reflect fair value (over/ undervaluation of assets and liabilities): (P9,600,000 – P7,200,000)…. 2,400,000 Fair value of stockholders’ equity of subsidiary……………P 9,600,000 Multiplied by: Non-controlling Interest percentage.............. 25% Non-controlling interest (partial)……………………………….P 2,400,000 Fair Value Basis (Full-goodwill Approach) Full-goodwill Fair value of subsidiary…………………………………………. P 11,640,000 (100%) Less: Book value of stockholders’ equity (net assets) – S Company: P7,200,000 x 100%............................... 7,200,000 (100%) Allocated Excess.………………………………………………….P 4,440,000 (100%) Less: Over/undervaluation of assets and liabilities: (P9,600,000 – P7,200,000) x 100%.................................. 2,400,000 (100%) Positive excess: Goodwill (full)……………………………….....P 2,040,000 (100%) The full – goodwill of P2,040,000 consists of two parts: Full-goodwill……………………………………………...P 2,040,000 Less: Controlling interest on full-goodwill or partial-goodwill…………………………….... 1,800,000 NCI on full-goodwill……………………………………. .P 240,000 Non-controlling interest Non-controlling interest (partial)………………………………P 2,400,000 Add: Non-controlling interest on full -goodwill (P2,040,000 – P1,800,000 partial-goodwill)…..…….... . 240,000 Non-controlling Interest (full)…………………………………..P 2,640,000 Case 4: Proportionate Basis (Partial-goodwill Approach) Partial-goodwill Fair value of subsidiary (75%): Consideration transferred: Cash………………………..P 2,592,000 (60%) Fair value of previously held equity interest in acquiree P2,592,000/60% = P4,320,000 x 15%......... 648,000 . (15%) Fair value of Subsidiary ..………………………………………. P 3,240,000 (75%) Less: Book value of stockholders’ equity (net assets) – S Company: (P4,680,000 – P2,280,000) x 75%.......... 1,800,000 .(75%) Allocated Excess.………………………………………………....P 1,440,000 (75%) Less: Over/undervaluation of assets and liabilities: [(P6,120,000 – P2,280,000) – (P4,680,000 – P2,280,000)] x 75%..................................... 1,080,000 (75%) Positive excess: Goodwill (partial)……………………………...P 360,000 (75%) Non-controlling interest Book value of stockholders’ equity of subsidiary…………..P 2,400,000 Adjustments to reflect fair value (over/ undervaluation of assets and liabilities): (P3,840,000 – P2,400,000)…. 1,440,000 Fair value of stockholders’ equity of subsidiary……………P 3,840,000 Multiplied by: Non-controlling Interest percentage............ 25% Non-controlling interest (partial)………………………………P 960,000 Fair Value Basis (Full-goodwill Approach) Full-goodwill Fair value of subsidiary (100%): Consideration transferred: Cash………………………..P 2,592,000 (60%) Fair value of previously held equity interest in acquiree P2,592,000/60% = P4,320,000 x 15%...... 648,000 (15%) Fair value of NCI (given)…………………………………. 1,080,000 (25%) Fair value of subsidiary………………………………………….P 4,320,000 (100%) Less: Book value of stockholders’ equity (net assets) – S Company: P2,400,000 x 100%.................................... 2,400,000 (100%) Allocated Excess.…………………………………………………P 1,920,000 (100%) Less: Over/undervaluation of assets and liabilities: (P3,840,000 – P2,400,000) x 100%................................ …..1,440,000 (100%) Positive excess: Goodwill (full)…………………………………..P 480,000 (100%) The full – goodwill of P480,000 consists of two parts: Full-goodwill……………………………………………...P 480,000 Less: Controlling interest on full-goodwill or partial-goodwill…………………………….…... 360,000 NCI on full-goodwill……………………………………..P. 120,000 Non-controlling interest Non-controlling interest (partial)………………………………P 960,000 Add: Non-controlling interest on full -goodwill (P480,000 – P360,000 partial-goodwill)…..…………....... 120,000 Non-controlling Interest (full)……………………………………P 1,080,000 Problem IV Partial-goodwill (Proportionate Basis) Fair value of subsidiary (75%): Consideration transferred: Cash……………………….. P270,000 (75%) Less: Book value of stockholders’ equity (net assets) – S Company: (P480,000 – P228,000) x 75%....................................... 189,000 (75%) Allocated excess………………………………………………... P 81,000 (75%) Less: Over/undervaluation of assets and liabilities: [(P612,000 – P228,000) – (P480,000 – P228,000) x 75% 99,000 (75%) Negative excess: Bargain purchase gain (to controlling interest or attributable to parent only)………………. (P18,000) (75%) Full-goodwill (Fair Value Basis) Fair value of subsidiary (100%): Consideration transferred: Cash……………………….. P270,000 ( 75%) Fair value of non-controlling interest (given)………… 98,400 ( 25%) Fair value of subsidiary ………………………………………… P368,400 (100%) Less: Book value of stockholders’ equity (net assets) – S Company: (P480,000 – P228,000) x 100%..................................... 252,000 (100%) Allocated excess………………………………………………... P116,400 (100%) Less: Over/undervaluation of assets and liabilities: [(P612,000 – P228,000) – (P480,000 – P228,000) x 100% 132,000 (100%) Negative excess: Bargain purchase gain (to controlling interest or attributable to parent only)………………. (P15,600) (100%) Problem V 1. A. Investment in Sewell 675,000 Cash 675,000 B. Investment in Sewell 675,000 Cash 675,000 C. Investment in Sewell 318,000 Cash 318,000 2. A. Fair value of Subsidiary: Consideration transferred P675,000 Less: BV of SHE of S (P450,000 + P180,000 + P75,000)x100% 705,000 Allocated excess P( 30,000) Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P30,000 – P20,000) x 100% (P10,000) Land (P50,000 – P70,000) x 100% __20,000 __10,000 Bargain Purchase Gain – full (P 40,000) B. Partial Goodwill Fair value of Subsidiary: Consideration transferred P675,000 Less: BV of SHE of S (P450,000 + P180,000 + P75,000) x 90% 634,500 Allocated excess P 40,500 Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P30,000 – P20,000) x 90% (P9,000) Land (P50,000 – P70,000) x 90% __18,000 __9,000 Goodwill – partial P 31,500 Full-Goodwill Fair value of Subsidiary: Consideration transferred (P675,000/90%) P750,000 Less: BV of SHE of S (P450,000 + P180,000 + P75,000)x100% 705,000 Allocated excess P 45,000 Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P30,000 – P20,000) x 100% (P10,000) Land (P50,000 – P70,000) x 100% __20,000 __10,000 Goodwill – full P 35,000 C. Partial Goodwill Fair value of Subsidiary: Consideration transferred P318,000 Less: BV of SHE of S (P620,000 + P140,000 + P20,000) x 80% 624,000 Allocated excess (P306,000) Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P30,000 – P20,000) x 80% (P 8,000) Land (P50,000 – P70,000) x 80% __16,000 __8,000 Bargain Purchase Gain – partial (parent only) (P314,000) Full-Goodwill Fair value of Subsidiary: Consideration transferred P 318,000 FV of NCI* _158,000 P 476,000 Less: BV of SHE of S (P620,000 + P140,000 + P20,000) x 100% 780,000 Allocated excess (P304,000) Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P30,000 – P20,000) x 100% (P10,000) Land (P50,000 – P70,000) x 100% __20,000 _10,000 Bargain Purchase Gain – full (parent only) (P314,000) *BV of SHE of S P780,000 Adjustments to reflect fair value 10,000 FV of SHE of S P790,000 x: NCI% 20% FV of NCI P158,000 3. A. Common Stock – Sewell 450,000 Paid in capital in excess of par – Sewell 180,000 Retained Earnings – Sewell 75,000 Land 20,000 Inventory 10,000 Investment in Sewell 675,000 Retained earnings (gain) – Parent (since balance sheet accounts are being examined) 40,000 B. Partial-Goodwill (Proportionate Basis) Common Stock – Sewell 450,000 Paid in capital in excess of par – Sewell 180,000 Retained Earnings – Sewell 75,000 Land 20,000 Goodwill 31,500 Inventory 10,000 Investment in Sewell 675,000 Non-controlling Interest 71,500 BV – SHE of Sewell (P450,000 + P180,000 + P75,000) P705,000 Adjustments to reflect fair value 10,000 FV of SHE of Sewell P715,000 x: NCI% 10% FV of NCI (partial) P 71,500 Full-Goodwill (Fair Value Basis) Common Stock – Sewell 450,000 Paid in capital in excess of par – Sewell 180,000 Retained Earnings – Sewell 75,000 Land 20,000 Goodwill 35,000 Inventory 10,000 Investment in Sewell 675,000 Non-controlling Interest 75,000 BV – SHE of Sewell (P450,000 + P180,000 + P75,000) P705,000 Adjustments to reflect fair value 10,000 FV of SHE of Sewell P715,000 x: NCI% 10% FV of NCI (partial) P 71,500 NCI on Full-Goodwill (P35,000 – P31,500) 3,500 FV of NCI (full) P 75,000 C. Partial-Goodwill (Proportionate Basis) Common Stock – Sewell 620,000 Paid in capital in excess of par – Sewell 140,000 Retained Earnings – Sewell 20,000 Land 20,000 Inventory 10,000 Investment in Sewell 318,000 Retained earnings (gain)–Parent (refer to 3A) 314,000 Non-controlling Interest 158,000 BV – SHE of Sewell (P620,000 + P140,000 + P20,000) P780,000 Adjustments to reflect fair value 10,000 FV of SHE of Sewell P790,000 x: NCI% 20% FV of NCI (partial) P158,000 Full-Goodwill (Fair Value Basis) Common Stock – Sewell 620,000 Paid in capital in excess of par – Sewell 140,000 Retained Earnings – Sewell 20,000 Land 20,000 Inventory 10,000 Investment in Sewell 318,000 Retained earnings (gain)–Parent (refer to 3A) 314,000 Non-controlling Interest 158,000 BV – SHE of Sewell (P620,000 + P140,000 + P20,000) P780,000 Adjustments to reflect fair value 10,000 FV of SHE of Sewell P790,000 x: NCI% 20% FV of NCI (full) P158,000 Problem VI 1. January 1, 20x4 Investment in S 408,00 Company…………………………………………… 0 408,00 Cash………………………………………………………………… 0 ….. 2. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (100%) Consideration P transferred……………………………….. 408,000 Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 100%)………………….. P 240,000 Paid-in capital in excess of par (P24,000 x 100%)... 24,000 Retained earnings (P96,000 x 100%)………………... 96,000 360,000 Allocated excess (excess of cost over book P value)…… 48,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P18,000 x 100%)…………….. P 18,000 Increase in land (P72,000 x 100%)…………………… 72,000 Decrease in buildings and equipment (P12,000 x 100%)……………………………………... ( 12,000) Increase in bonds payable (P42,000 x 100%)…….. ( 42,000) 36,000 Positive excess: Goodwill (excess of cost over fair P value)…………………………………………………….. 12,000 (E1) Common stock – S Co………………………………………… 240,000 Additional paid-in capital – S Co…………………………… 24,000 Retained earnings – S Co…………………………………… 96.000 Investment in S Co……………………………………… 360,000 Eliminate investment against stockholders’ equity of S Co. (E2) Inventory…………………………………………………………. 18,000 Land……………………………………………………………… 72,000 Goodwill…………………………………………………………. 12,000 Buildings and equipment……………………………… 12,000 Premium on bonds payable……………………………… 42,000 Investment in S Co………………………………………… 48,000 Eliminate investment against allocated excess. 4. Eliminations Assets P Co. S Co. Dr. Cr. Consolidated Cash*…………………………. P 12,000 P 60,000 P 72,000 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 72,000 (2) 18,000 210,000 Land……………………………. 210,000 48,000 (2) 72,000 330,000 Buildings and equipment (net) 480,000 360,000 (2) 12,000 828,000 Goodwill…………………… (2) 12,000 12,000 Investment in S Co…………. 408,000 (1) 360,000 (2) 48,000 - Total Assets P1,320,000 P600,000 P1,602,000 Liabilities and Stockholders’ Equity Accounts payable…………… P 120,000 P120,000 P 240,000 Bonds payable………………… 240,000 120,000 360,000 Premium on bonds payable (3) 42,000 42,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Paid in capital in excess of par. 60,000 60,000 Paid in capital in excess of par. 24,000 (1) 24,000 Retained earnings…………… 300,000 300,000 Retained earnings…………… _________ 96,000 (1) 96,000 __________ _________ Total Liabilities and Stockholders’ Equity P1,320,000 P600,000 P 462,000 P 462,000 P1,602,000 (1) Eliminate investment against stockholders’ equity of S Co. (2) Eliminate investment against allocated excess. * P420,000 – P408,000 = P12,000. 5. Assets Cash P 72,000 Accounts receivables 150,000 Inventories 210,000 Land 330,000 Buildings and equipment (net) 828,000 Goodwill 12,000 Total Assets P1,602,000 Liabilities and Stockholders’ Equity Liabilities Accounts payable P 240,000 Bonds payable P 360,000 Premium on bonds payable 42,000 402,000 Total Liabilities P 642,000 Stockholders’ Equity Common stock, P10 par P 600,000 Paid-in capital in excess of par 60,000 Retained earnings 300,000 Total Stockholders’ Equity P 960,000 Total Liabilities and Stockholders’ Equity P1,602,000 Problem VII Partial-goodwill Approach Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration P transferred……………………………….. 360,000 Less: Book value of stockholders’ equity of Sky: Common stock (P240,000 x 80%)……………………. P 192,000 Paid-in capital in excess of par (P96,000 x 80%).... 76,800 Retained earnings (P24,000 x 80%)……………….... 19,200 288,000 Allocated excess (excess of cost over book P value)….. 72,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P18,000 x 80%)……………… P 14,400 Increase in land (P72,000 x 80%)……………………. 57,600 Decrease in buildings and equipment (P12,000 x 80%)……………………………………..... ( 9,600) Increase in bonds payable (P42,000 x 80%)………. ( 33,600) 28,800 Positive excess: Partial-goodwill (excess of cost over fair P value)………………………………………………... 43,200 The over/under valuation of assets and liabilities are summarized as follows: Sky Co. Sky Over/ Co. Under Book Fair value value Valuation Inventory………………….…………….. 72,000 90,000 18,000 Land……………………………………… 48,000 120,000 72,000 Buildings and equipment (net)......... 360,000 348,000 ( 12,000) Bonds payable………………………… (120,000) (162,000) 42,000 Net……………………………………….. 360,000 396,000 36,000 The buildings and equipment will be further analyzed for consolidation purposes as follows: Sky Co. Sky Co. Book value Fair value (Decrease) Buildings and equipment .................. 720,000 348,000 ( 372,000) Less: Accumulated depreciation….. 360,000 - ( 360,000) Net book value………………………... 360,000 348,000 ( 12,000) The following entry on the date of acquisition in the books of Parent Company: January 1, 20x4 (1) Investment in Sky 360,00 Company…………………………………………… 0 360,00 Cash…………………………………………………………………… 0 .. Acquisition of Sky Company. (2) Retained earnings (acquisition-related expense - close to 14,400 retained earnings since only balance sheets are being examined)…………………………………………………………… 14,400 Cash…………………………………………………………………… . Acquisition- related costs. The schedule of determination and allocation of excess provides complete guidance for the worksheet eliminating entries on January 1, 20x4: (E1) Common stock – Sky 240,000 Co………………………………………………. Additional paid-in capital – Sky 24,000 Co…………………………………. Retained earnings – Sky 96,000 Co…………………………………………... Investment in Sky 288,000 Co………………………………………………… Non-controlling interest (P300,000 x 72,000 20%)……………………….. Eliminate investment against stockholders’ equity of Sky Co. (E2) 18,000 Inventory……………………………………………………………… …. Accumulated 360,00 depreciation…………………………………………. 0 72,000 Land…………………………………………………………………… …. 43,200 Goodwill……………………………………………………………… …. Buildings and 372,00 equipment………………………………………….. 0 Premium on bonds 42,000 payable……………………………………… Non-controlling interest (P30,000 x 7,200 20%)……………………….. Investment in Sky 72,000 Co……………………………………………….. Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned Subsidiary (Partial-goodwill) Eliminations Assets Peer Co. Sky Co. Dr. Cr. Consolidated Cash*…………………………. P 45,600 P 60,000 P 105,600 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 72,000 (2) 18,000 210,000 Land……………………………. 210,000 48,000 (2) 72,000 330,000 Buildings and equipment 960,000 720,000 (2) 372,000 1,308,000 Goodwill…………………… (2) 43,200 43,200 Investment in Sky Co…………. 360,000 (1) 288,000 (2) 72,000 - Total Assets P1,785,600 P960,000 P 2,146,800 Liabilities and Stockholders’ Equity Accumulated depreciation P 480,000 P360,000 (2) 360,000 P 480,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Premium on bonds payable (3) 42,000 42,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Paid in capital in excess of par. 60,000 60,000 Paid in capital in excess of par. 24,000 (1) 24,000 Retained earnings**…………… 285,600 285,600 Retained earnings…………… 96,000 (1) 96,000 Non-controlling interest………… (1 ) 72,000 _________ _______ _________ (2) 7,200 _79,200 Total Liabilities and Stockholders’ Equity P1,785,600 P960,000 P 853,200 P 853,200 P2,146,800 (1) Eliminate investment against stockholders’ equity of Sky Co. (2) Eliminate investment against allocated excess. * P420,000 – P360,000 – P14,400 = P45,600. **P300,000 – P14,400 = P285,600. Incidentally, the non-controlling interest on the date of acquisition is computed as follows: Common stock – Sky company…………………………………… P 240,000 Paid-in capital in excess of par – Sky co………………………… 24,000 Retained earnings – Sky 80,000 Co..………………………………………. Book value of stockholders’ equity – Sky P Co………..………….. 360,000 Adjustments to reflect fair value (over/ undervaluation 36,000 of assets and liabilities)…………………………………………. Fair value of stockholders’ equity of P subsidiary………………… 396,000 Multiplied by: Non-controlling Interest 20 percentage…………... Non-controlling interest P (partial)………………………………….. 79,200 The balance sheet: Peer Company and Subsidiary Consolidated Balance Sheet January 1, 20x4 Assets Cash P 105,600 Accounts receivables 150,000 Inventories 210,000 Land 330,000 Buildings and equipment 1,308,000 Accumulated depreciation ( 480,000) Goodwill 43,200 Total Assets P1,666,800 Liabilities and Stockholders’ Equity Liabilities Accounts payable P 240,000 Bonds payable P 360,000 Premium on bonds payable 42,000 402,000 Total Liabilities P 642,000 Stockholders’ Equity Common stock, P10 par P 600,000 Paid-in capital in excess of par 60,000 Retained earnings 285,600 Parent’s Stockholders’ Equity/Equity Attributable to the Owners of the Parent P 945,600 Non-controlling interest 79,200 Total Stockholders’ Equity (Total Equity) P 1,024,800 Total Liabilities and Stockholders’ Equity P1,666,800 Full-goodwill Approach Schedule of Determination and Allocation of Excess (Full-goodwill) Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (100%) Consideration transferred (P360,000 / P 80%)………….. 450,000 Less: Book value of stockholders’ equity of Sky: Common stock (P240,000 x 100%)…………………. P 240,000 Paid-in capital in excess of par (P96,000 x 100%).. 96,000 Retained earnings (P24,000 x 100%)…………….... 24,000 360,000 Allocated excess (excess of cost over book P value)….. 90,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P18,000 x 100%)…………… P 18,000 Increase in land (P72,000 x 100%)…………………. 72,000 Decrease in buildings and equipment (P12,000 x 100%)…………………………………..... ( 12,000) Increase in bonds payable (P42,000 x 100%)……. ( 42,000) 36,000 Positive excess: Full -goodwill (excess of cost over fair P value)………………………………………………... 54,000 The following entry on the date of acquisition in the books of Parent Company: January 1, 20x4 (1) Investment in Sky 360,00 Company…………………………………………… 0 360,00 Cash…………………………………………………………………… 0 .. Acquisition of Sky Company. (2) Retained earnings (acquisition-related expense - close to retained earnings since only balance sheets are 14,400 being examined)…………………………………………………………… 14,400 Cash…………………………………………………………………… . Acquisition- related costs. The schedule of determination and allocation of excess provides complete guidance for the worksheet eliminating entries on January 1, 20x4: 240,000 (E1) Common stock – Sky Co………………………………………………. Additional paid-in capital – Sky 24,000 Co…………………………………. Retained earnings – Sky 96,000 Co…………………………………………... Investment in Sky 288,000 Co………………………………………………… Non-controlling interest (P300,000 x 72,000 20%)……………………….. Eliminate investment against stockholders’ equity of Sky Co. (E2) 18,000 Inventory……………………………………………………………… …. Accumulated 360,00 depreciation…………………………………………. 0 72,000 Land…………………………………………………………………… …. 54,000 Goodwill……………………………………………………………… …. Buildings and 372,00 equipment………………………………………….. 0 Premium on bonds 42,000 payable……………………………………… Non-controlling interest [(P30,000 x 20%) + (P45,000 – 18,000 P36,000)]……………………………………………. Investment in Sky 72,000 Co……………………………………………….. Eliminate investment against allocated excess. Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned Subsidiary (Full-goodwill) Eliminations Assets Peer Co. Sky Co. Dr. Cr. Consolidated Cash*……………………… …. P 45,600 P 60,000 P 105,600 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 72,000 (2) 18,000 210,000 Land……………………… ……. 210,000 48,000 (2) 72,000 330,000 Buildings and equipment 960,000 720,000 (2) 372,000 1,308,000 Goodwill………………… … (2) 54,000 54,000 Investment in Sky 360,000 (1) 288,000 Co…………. (2) 72,000 - Total Assets P1,785,600 P960,000 P 2,157,600 Liabilities and Stockholders’ Equity Accumulated depreciation P 480,000 P360,000 (2) 360,000 P 480,000 120,00 Accounts payable…………… 0 120,000 240,000 240,00 Bonds payable………………… 0 120,000 360,000 Premium on bonds payable (2) 42,000 42,000 600,00 Common stock, P10 par……… 0 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Paid in capital in excess of par. 60,000 60,000 Paid in capital in excess of par. 24,000 (1) 24,000 285,60 Retained earnings**…………… 0 285,600 Retained earnings…………… 96,000 (1) 96,000 (1 ) 72,000 Non-controlling interest………… _______ _____ _______ (2) __ __ __ 18,000 _90,000 Total Liabilities and Stockholders’ Equity P1,785,600 P960,000 P 864,000 P 864,000 P2,157,600 (1) Eliminate investment against stockholders’ equity of Sky Co. (2) Eliminate investment against allocated excess. * P420,000 – P360,000 – P14,400 = P45,600. **P300,000 – P14,400 = P285,600. Incidentally, the non-controlling interest on the date of acquisition is computed as follows: Non-controlling interest P (partial)………………………………….. 79,200 Add: Non-controlling interest (P54,000, full – P43,200, partial). 10,800 Non-controlling interest P 90,000 (full)………………………………………. The balance sheet; Peer Company and Subsidiary Consolidated Balance Sheet January 1, 20x4 Assets Cash P 105,600 Accounts receivables 150,000 Inventories 210,000 Land 330,000 Buildings and equipment 1,308,000 Accumulated depreciation ( 480,000) Goodwill 54,000 Total Assets P1,677,600 Liabilities and Stockholders’ Equity Liabilities Accounts payable P 240,000 Bonds payable P 360,000 Premium on bonds payable 42,000 402,000 Total Liabilities P 642,000 Stockholders’ Equity Common stock, P10 par P 600,000 Paid-in capital in excess of par 60,000 Retained earnings 285,600 Parent’s Stockholders’ Equity/Equity Attributable to the P 945,600 Owners of the Parent Non-controlling interest 90,000 Total Stockholders’ Equity (Total Equity) P 1,035,600 Total Liabilities and Stockholders’ Equity P1,677,600 Problem VIII Partial-goodwill Approach (Proportionate Basis) Schedule of Determination and Allocation of Excess (Proportionate Basis)) Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred: Common stock: 12,000 shares x P25 per share…... P 300,000 Less: Book value of stockholders’ equity of S: Common stock (P12,000 x 80%)……………………. P 9,600 Paid-in capital in excess of par (P108,000 x 80%)... 86,400 Retained earnings (P72,000 x 80%)……………….... 57,600 153,600 Allocated excess (excess of cost over book value)…… P 146,400 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… P 4,800 Increase in land (P36,000 x 80%)……………………. 28,800 Increase in buildings and equipment (P150,000 x 80%)…………………………………...... 120,000 Increase in copyrights (P60,000 x 80%)…………….. 48,000 Increase in contingent liabilities – estimated liability for contingencies (P6,000 x 80%)……..... ( 4,800) 196,800 Negative excess: Bargain purchase gain to controlling interest or attributable to parent only)…………….. (P 50,400) The over/under valuation of assets and liabilities are summarized as follows: S Co. Book S Co. Over/Under value Fair value Valuation P Inventory………………….……………... 60,000 P 66,000 P 6,000 Land………………………………………. 48,000 84,000 36,000 Buildings and equipment (net)......... 222,000 372,000 150,000 Copyright……………………………….. -0- 60,000 60,000 Estimated liability for contingencies.. 0 ( 6,000) ( 6,000) P Net undervaluation……………………. 330,000 P 576,000 P246,000 The following entry on the date of acquisition in the books of Parent Company January 1, 20x4 (1) Investment in S 300,000 Company…...…………………………………… Common stock, P1 12,000 par……………………………………………… Paid-in capital in excess of par (P300,000 – 288,000 P12,000 par)…….. Acquisition of S Company. The schedule of determination and allocation of excess provides complete guidance for the worksheet eliminating entries on January 1, 20x4: (E1) Common stock – S 12,000 Co……………………………………………. Additional paid-in capital – S 108,000 Co………………………………. Retained earnings – S 72,000 Co………………………………………… Investment in S 153,600 Co……………………………………………… Non-controlling interest (P192,000 x 38,400 20%)……………………….. Eliminate investment against stockholders’ equity of S Co (E2) 6,000 Inventory……………………………………………………………… ….. 36,000 Land…………………………………………………………………… ….. Buildings and 150,00 equipment……………………………………………… 0 60,000 Copyright……………………………………………………………… .... Estimated liability for 6,000 contingencies…………………………….. Investment in S 146,40 Co……………………………………………... 0 Non-controlling interest (P246,000 x 49,200 20%)………………………. Retained earnings (bargain purchase gain - closed to retained earnings since only balance sheets are 50,400 being examined)............................................................................. Eliminate investment against allocated excess. Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned Subsidiary (Proportionate Basis) Eliminations Assets P Co. S Co. Dr. Cr. Consolidated Cash………………… P 334,800 P 334,800 Accounts receivable…….. 86,400 P 24,000 110,400 Inventory…………………. 96,000 60,000 (2) 6,000 162,000 Land………………………… 120,000 48,000 (2) 36,000 204,000 Buildings and equipment (net). 744,000 222,000 (2) 150,000 1,116,000 Copyright……………………... (2) 60,000 60,000 Investment in S Co…….. 300,000 (1) 153,600 __________ _________ (2) 146,400 - Total Assets P1,681,200 354,000 P1,987,200 Liabilities and Stockholders’ Equity Accounts payable……… P 96,000 42,000 P 138,000 Estimated liability for contingencies… (2) 6,000 6,000 Bonds payable……… 240,000 120,000 360,000 Common stock, P1 par*…..… 44,160 44,160 Common stock, P1 par……… 12,000 (1) 12,000 Paid-in capital in excess of par** 723,840 723,840 (1) (1) Paid-in capital in excess of par 108,000 108,000 Retained earnings 577,200 (2) 50,400 627,600 Retained earnings…………… 72,000 (1) 72,000 Non-controlling interest………… (1 ) 38,400 _________ _______ _________ (2) 49,200 _87,600 Total Liabilities and Stockholders’ Equity P1,681,200 P354,000 P 444,000 P 444,000 P1,987,200 (1) Eliminate investment against stockholders’ equity of Scud Co. (2) Eliminate investment against allocated excess. * P32,160 + (12,000 shares xP1 par) = P44,160. **P435,840 + [12,000 shares x (P25 – P1)] = P723,840. Incidentally, the non-controlling interest on the date of acquisition is computed as follows: Common stock – S Co……….………………………………… P 12,000 Paid-in capital in excess of par – S Co…………………….. 108,000 Retained earnings – S 72,000 Co……………………………………… Book value of stockholders’ equity – S P Co…………………. 192,000 Adjustments to reflect fair value (over/ undervaluation 246,000 of assets and liabilities)…………………………………………. Fair value of stockholders’ equity of P subsidiary………………… 438,000 Multiplied by: Non-controlling Interest 20 percentage…………... Non-controlling interest P (partial)………………………………….. 87,600 The balance sheet: Assets Cash P 334,800 Accounts receivables 110,400 Inventories 162,000 Land 204,000 Buildings and equipment (net) 1,116,000 Copyright 60,000 Total Assets P1,987,200 Liabilities and Stockholders’ Equity Liabilities Accounts payable P 138,000 Estimated liability for contingencies 6,000 Bonds payable 360,000 Total Liabilities P 504,000 Stockholders’ Equity Common stock, P1 par P 44,160 Paid-in capital in excess of par 723,840 Retained earnings 627,600 Parent’s Stockholders’ Equity/Equity Attributable to the Owners of the Parent P1,395,600 Non-controlling interest 87,600 Total Stockholders’ Equity (Total Equity) P1,483,200 Total Liabilities and Stockholders’ Equity P1,987,200 Full-goodwill Approach (Fair Value Basis) Schedule of Determination and Allocation of Excess (Full-goodwill or Fair Value Basis) Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (100%) Consideration transferred: Common stock: 12,000 x P25 (80%)……………… P 300,000 Fair value of NCI (given) (20%)………………………. 90,000 Fair value of subsidiary (100%)………………………. P 390,000 Less: Book value of stockholders’ equity of S: Common stock (P12,000 x 100%)……………………. P 12,000 Paid-in capital in excess of par (P108,000 x 100%). 108,000 Retained earnings (P72,000 x 100%)………………... 72,000 192,000 Allocated excess (excess of cost over book value)…… P 198,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… P 6,000 Increase in land (P36,000 x 100%)…………………… 36,000 Increase in buildings and equipment (P150,000 x 100%)………………………………….... 150,000 Increase in copyrights (P60,000 x 100%)…………… 6,000 Increase in contingent liabilities – estimated liability for contingencies (P6,000 x 100%)…….. ( 6,000) 246,000 Negative excess: Bargain purchase gain to controlling interest or attributable to parent only)…………….. (P 48,000) The following entry on the date of acquisition in the books of Parent Company: January 1, 20x4 (1) Investment in S 300,000 Company…...…………………………………… Common stock, P1 12,000 par……………………………………………… Paid-in capital in excess of par (P300,000 – 288,000 P12,000 par)…….. Acquisition of S Company. The schedule of determination and allocation of excess provides complete guidance for the worksheet eliminating entries on January 1, 20x4: (E1) Common stock – S 12,000 Co……………………………………………. Additional paid-in capital – S 108,000 Co………………………………. Retained earnings – S 72,000 Co………………………………………… Investment in S 153,600 Co……………………………………………… Non-controlling interest (P192,000 x 38,400 20%)……………………….. Eliminate investment against stockholders’ equity of S Co (E2) 6,000 Inventory……………………………………………………………… ….. 36,000 Land…………………………………………………………………… ….. Buildings and 150,00 equipment……………………………………………… 0 60,000 Copyright……………………………………………………………… .... Estimated liability for 6,000 contingencies…………………………….. Investment in S 146,40 Co……………………………………………... 0 Non-controlling interest (P90,000 given – 51,600 P38,400)…………… Retained earnings (bargain purchase gain - closed to retained earnings since only balance sheets are 48,000 being examined)............................................................................. Eliminate investment against allocated excess. Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned Subsidiary (Fair Value Basis) Eliminations Assets P Co. S Co. Dr. Cr. Consolidated Cash………………… P 334,800 P 334,800 Accounts receivable…….. 86,400 P 24,000 110,400 Inventory…………………. 96,000 60,000 (2) 6,000 162,000 Land………………………… 120,000 48,000 (2) 36,000 204,000 Buildings and equipment (net). 744,000 222,000 (2) 150,000 1,116,000 Copyright……………………... (2) 60,000 60,000 Investment in S Co…….. 300,000 (1) 153,600 __________ _________ (2) 146,400 - Total Assets P1,681,200 P354,000 P1,987,200 Liabilities and Stockholders’ Equity Accounts payable……… P 96,000 42,000 P 138,000 Estimated liability for contingencies… (2) 6,000 6,000 Bonds payable……… 240,000 120,000 360,000 Common stock, P1 par*…..… 44,160 44,160 Common stock, P1 par……… 12,000 (2) 12,000 Paid-in capital in excess of par** 723,840 723,840 (2) (1) Paid-in capital in excess of par 108,000 108,000 Retained earnings 577,200 (2) 48,000 625,200 Retained earnings…………… 72,000 (1) 72,000 Non-controlling interest………… (1 ) 38,400 _________ _______ _________ (2) 51,600 _90,000 Total Liabilities and Stockholders’ Equity P1,681,200 P354,000 P 444,000 P 444,000 P1,987,200 (1) Eliminate investment against stockholders’ equity of Scud Co. (2) Eliminate investment against allocated excess. * P32,160 + (12,000 shares xP1 par) = P44,160. **P435,840 + [12,000 shares x (P25 – P1)] = P723,840. The balance sheet: Assets Cash P 334,800 Accounts receivables 110,400 Inventories 162,000 Land 204,000 Buildings and equipment (net) 1,116,000 Copyright 60,000 Total Assets P1,987,200 Liabilities and Stockholders’ Equity Liabilities Accounts payable P 138,000 Estimated liability for contingencies 6,000 Bonds payable 360,000 Total Liabilities P 504,000 Stockholders’ Equity Common stock, P1 par P 44,160 Paid-in capital in excess of par 723,840 Retained earnings 652,200 Parent’s Stockholders’ Equity/Equity Attributable to the Owners of the Parent P1,393,200 Non-controlling interest 90,000 Total Stockholders’ Equity (Total Equity) P1,483,200 Total Liabilities and Stockholders’ Equity P1,987,200 Problem IX 1. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (100%) Consideration transferred: Common stock: 24,000 shares x P14 per share P 336,000 Less: Book value of stockholders’ equity of Sky: Common stock (P240,000 x 100%)………………….. P 240,000 Paid-in capital in excess of par (P96,000 x 100%)... 96,000 Retained earnings (P24,000 x 100%)………………... 24,000 360,000 Allocated excess (excess of book value over cost)…… (P 24,000) Less: Over/under valuation of assets and liabilities: Increase in inventory (P18,000 x 100%)…………….. P 18,000 Increase in land (P72,000 x 100%)…………………… 72,000 Decrease in buildings and equipment (P12,000 x 100%)……………………………………... ( 12,000) Increase in patent (P24,000 x 100%)………………... 24,000 Increase in contingent liability (P18,000 x 100%)…. ( 18,000) Increase in bonds payable (P42,000 x 100%)…….. ( 42,000) 42,000 Negative excess: Bargain Purchase Gain (excess of fair value over cost)…………………………………… (P 66,000) 2. Gain on acquisition, P66,000 Problem X 1. January 1, 20x4 (1) Investment in S 432,00 Company…………………………………………… 0 288,00 Cash………………………………………………………………… 0 ….. Common stock, P10 120,00 par…………………………………………….. 0 Paid-in capital in excess of 24,000 par……………………………………. (2) Retained earnings (acquisition-related expense - close to retained earnings since only balance sheets are 12,000 being examined)………………………………………………………… … 12,000 Cash………………………………………………………………… …. Acquisition- related costs. (3) Paid-in capital in excess of 8,400 par……………………………………….. 8,400 Cash………………………………………………………………… …. Costs to issue and register stocks. 2. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (100%) Consideration transferred Cash………………………………………………………. P 288,000 Common stock: 12,000 shares x P12 per P share….. 144,000 432,000 Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 100%)………………….. P 240,000 Paid-in capital in excess of par (P96,000 x 100%).. 96,000 Retained earnings (P24,000 x 100%)………………... 24,000 360,000 Allocated excess (excess of cost over book P value)…… 72,000 Add: Existing Goodwill of Sky Co. (P6,000 x 100%)……… 6,000 Adjusted allocated P excess…………………………………. 78,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P18,000 x 100%)…………….. P 18,000 Increase in land (P72,000 x 100%)…………………… 72,000 Decrease in buildings and equipment ( 12,000) (P12,000 x 100%)……………………………………... Increase in bonds payable (P42,000 x 100%)…….. ( 42,000) 36,000 Positive excess: Goodwill (excess of cost over fair P value)…………………………………………………….. 42,000 Alternatively, the unrecorded goodwill may also be computed by ignoring the existing goodwill in the books of the subsidiary, thus: Date of Acquisition – January 1, 20x4 (refer to previous table for details of computation) Fair value of Subsidiary (100%) P Consideration 432,00 transferred……………………………………………………… 0 Less: Book value of stockholders’ equity of 360,00 S……………………………….. 0 Allocated excess (excess of cost over book P value)…………………………. 72,000 Less: Over/under valuation of assets and liabilities…………………………… 36,000 Positive excess: Goodwill (excess of cost over fair P value)…………………... 36,000 Add: Existing Goodwill……………………………………………………………… 6,000 Positive excess: Goodwill (excess of cost over fair value)……………………………………………………………………… P …… 42,000 3. Eliminations Assets P Co. S Co. Dr. Cr. Consolidated Cash*………………………….. P 111,600 P 54,000 P 165,600 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 72,000 (2) 18,000 210,000 Land……………………………. 210,000 48,000 (2) 72,000 330,000 Buildings and equipment (net) 480,000 360,000 (2) 12,000 828,000 Goodwill…………………… 6,000 (2) 36,000 42,000 Investment in S Co…………. 432,000 (4) 360,000 (5) 72,000 - Total Assets P1,443,600 P600,000 P1,725,600 Liabilities and Stockholders’ Equity Accounts payable…………… P 120,000 P120,000 P 240,000 Bonds payable………………… 240,000 120,000 360,000 Premium on bonds payable (6) 42,000 42,000 Common stock, P10 par**…..… 720,000 720,000 Common stock, P10 par……… 240,000 (1) 240,000 Additional paid in capital*** 75,600 75,600 Additional paid in capital…… 24,000 (1) 24,000 Retained earnings**** 288,000 288,000 Retained earnings…………… _________ 96,000 (1) 96,000 __________ _________ Total Liabilities and Stockholders’ Equity P1,443,600 P600,000 P 486,000 P 486,000 P1,725,600 (1) Eliminate investment against stockholders’ equity of Sky Co. (2) Eliminate investment against allocated excess. * P420,000 – P288,000 – P12,000 – P8,400 = P111,600. * *P600,000 + P120,000 (12,000 shares x p10 par) = P720,000. *** P50,000 + P20,000 – P7,000 = P63,000. ****P300,000 – P12,000 = P288,000. 4. Assets Cash P 165,600 Accounts receivables 150,000 Inventories 210,000 Land 330,000 Buildings and equipment (net) 828,000 Goodwill 42,000 Total Assets P1,725,600 Liabilities and Stockholders’ Equity Liabilities Accounts payable P 240,000 Bonds payable P 360,000 Premium on bonds payable 42,000 402,000 Total Liabilities P 642,000 Stockholders’ Equity Common stock, P10 par P 720,000 Additional paid-in capital in excess of par 75,600 Retained earnings 288,000 Total Stockholders’ Equity P 1083,600 Total Liabilities and Stockholders’ Equity P1,725,600 Problem XI 1. Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (100%) Consideration transferred (P408,000 – P P6,000)…….. 402,000 Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 100%)………………….. P 240,000 Paid-in capital in excess of par (P96,000 x 100%)... 96,000 Retained earnings (P24,000 x 100%)………………... 24,000 360,000 Allocated excess (excess of cost over book P value)…… 42,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P18,000 x 100%)…………….. P 18,000 Increase in land (P72,000 x 100%)…………………… 72,000 Decrease in buildings and equipment (P12,000 x 100%)……………………………………... ( 12,000) Increase in bonds payable (P42,000 x 100%)…….. ( 42,000) 36,000 Positive excess: Goodwill (excess of cost over fair P value)…………………………………………………….. 6,000 2. Goodwill, P6,000 Problem XII 1. Inventory P 140,000 2. Land P 60,000 3. Buildings and Equipment P 550,000 4. Goodwill Fair value of consideration given P 576,000 Less; Book value of SHE 450,000 Allocated excess: P126,000 Increase / decrease in fair value (Fair value increment) for: Inventory P 20,000 Land (10,000) Buildings and equipment 70,000 80,000 Goodwill P 46,000 5. Investment in AA Corporation: Nothing would be reported; the balance in the investment account is eliminated. Problem XIII 1. Inventory (P120,000 + P20,000) P140,000 2. Land (P70,000 – P10,000) P 60,000 3. Buildings and Equipment (P480,000 + P70,000) 550,000 4. Full-Goodwill, P57,500 Fair value of Subsidiary: Consideration transferred P470,000 Add: FV of NCI 117,500 P587,500 Less: BV of SHE of Slim (P250,000 + P200,000) 450,000 Allocated excess P137,500 Less: Over/under valuation of A and L: Inc. (Dec.) Inventory P 20,000 Land (10,000) Buildings and equipment (net) 70,000 80,000 Goodwill – full P 57,500 or, Fair value of consideration given by Ford P470,000 Fair value of noncontrolling interest 117,500 Total fair value P587,500 Book value of Slim’s net assets P450,000 Fair value increment for: Inventory 20,000 Land (10,000) Buildings and equipment (net) 70,000 Fair value of identifiable net assets (530,000) Goodwill – full P 57,500 Partial Goodwill, P46,000 Fair value of Subsidiary: Consideration transferred P470,000 Less: BV of SHE of Slim (P250,000 + P200,000) x 80% 360,000 Allocated excess P110,000 Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P20,000 x 80%) P 16,000 Land (P10,000 x 80%) ( 8,000) Buildings and equipment (net) (P70,000 x 80%) 56,000 64,000 Goodwill – partial P 46,000 5. Investment in Slim Corporation: None would be reported; the balance in the investment account is eliminated. Noncontrolling Interest (P587,500 x .20) P117,500 6. or, BV – SHE of SS P450,000 Adjustments to reflect fair value (P20,000 – P10,000 +P 70,000) 80,000 FV of SHE of SS P530,000 Multiplied by: NCI % 20% NCI – partial goodwill P106,000 Add: NCI on full-goodwill (P57,500 – P46,000) 11,500 NCI – full goodwill P117,500 Problem XIV 1. P470,000 = P470,000 - P55,000 + P55,000 2. P605,000 = (P470,000 - P55,000) + P190,000 3. P405,000 = P270,000 + P135,000 4. P200,000 (as reported by GG Corporation) Problem XV 1. P57,000 = (P120,000 - P25,000) x .60 2. P81,000 = (P120,000 - P25,000) + P40,000 - P54,000 3. P48,800 = (P120,000 - P25,000) + P27,000 - P73,200 Problem XVI (assuming that acquisition-related costs is treated as expenses) In acquisitions, the fair values of the subsidiary's assets and liabilities are consolidated (there are a limited number of exceptions). Goodwill is reported as P80,000, the amount that the P760,000 consideration transferred exceeds the P680,000 fair value of SS’s net assets acquired. 1. Inventory = P670,000 (P's book value plus Sun's fair value) 2. Land = P710,000 (P's book value plus Sun's fair value) 3. Buildings and equipment = P930,000 (P's book value plus S's fair value) 4. Franchise agreements = P440,000 P's book value plus S's fair value) 5. Goodwill = P80,000 (calculated above) 6. Revenues = P960,000 (only parent company operational figures are reported at date of acquisition) 7. Additional Paid-in Capital = P65,000 (P's book value less stock issue costs) 8. Expenses = P940,000 (only parent company operational figures plus acquisition-related costs are reported at date of acquisition) 9. Retained Earnings, 1/1 = P390,000 (P's book value) Problem XVII 1. Investment in Craig Company .......................................................... 950,000 Cash .................................................................................................. 950,000 2. Fair value of Subsidiary: Consideration transferred P950,000 Less: BV of SHE of Craig (P300,000 + P420,000) 720,000 Allocated excess P 230,000 Less: Over/under valuation of A and L: Inc (Decrease) Land (P250,000 fair – P200,000 book value P 50,000 Building (P700,000 fair – P600,000 book value) 100,000 Discount on bonds payable P280,000 fair – P300,000 book value) 20,000 Deferred tax liability (P40,000 fair – P50,000 book value) 10,000 Buildings and equipment (net) 180,000 Goodwill P 50,000 3. Adjustments on Craig books: Land ........................................................................................................ 50,000 Building ................................................................................................... 100,000 Discount on Bonds Payable ............................................................... 20,000 Goodwill ................................................................................................. 50,000 Deferred Tax Liability ........................................................................... 10,000 Retained Earnings ................................................................................ 420,000 Paid-In Capital in Excess of Par .................................................... 650,000 4. Elimination entries: Common Stock..................................................................................... 300,000 Paid-In Capital in Excess of Par ......................................................... 650,000 Investment in Craig Company ..................................................... 950,000 Problem XXI 1. * Man Mask (Public Co.) (Private Co.) Currently issued…………………… 10 M 40% 4 M 40% Additional shares issued……….. 15 M 60% ** 6 M / 60% Total shares………………………… 25 M 10 M **15M/25M FV of net assets………………………P 18 M P30 M BV of net assets (same with FV)…. 18 M ? Fv per share of stock……………….P 8 P 6 2. Consideration transferred (4,000,000 shares* x P6)…………………………..P24,000,000 Less: Book value of SHE – Man: P18,000,000 x 100%.................................... 18,000,000 Allocated excess …………………………………………………………………..P 6,000,000 Less: Over/Under valuation of assets and liabilities (book value same fair value)……………………………………………… 0 Goodwill………………………………………………………………………………P 6,000,000 Problem XXII (Assume the use of Full-Goodwill Method) Note: This solution assumes a difference between the basis of acquired assets for accounting and tax purposes for this stock acquisition. 1. Investment in Seely Company 570,000 Common Stock*** 95,000 Additional Paid-in-Capital 475,000 ***Note: Depending on the wording of this exercise, the credit may be cash instead of common stock and additional paid-in-capital. If cash is paid, the credit to cash is P570,000. 2. Common Stock - Seely 80,000 Other Contributed Capital – Seely 132,000 Retained Earnings - Seely 160,000 Inventory 52,000 Land 25,000 Plant Assets 71,000 Discount on Bonds Payable 20,000 Goodwill** 127,200 Deferred Income Tax Liability* 67,200 Investment in Seely Company 570,000 Non-controlling Interest [(P570,000/.95) x .05] 30,000 *(.40 x (P52,000 + P25,000 + P71,000 + P20,000)) Problem XXIII HB Country and HCO Media Consolidation of a variable interest entity is required if a parent has a variable interest that will Absorb a majority of the entity's expected losses if they occur Receive a majority of the entity's expected residual returns if they occur Because (1) HCO Media’s losses are limited by contract, and (2) Hillsborough has the right to receive the residual benefits of the sales generated on the HCO Media internet site above P500,000, Hillsborough should consolidate HCO Media. TPC (Nos. 1, 2 and 3 of the requirement are part of the information) a. The purpose of consolidated financial statements is to present the financial position and results of operations of a group of businesses as if they were a single entity. They are designed to provide information useful for making business and economic decisions— especially assessing amounts, timing, and uncertainty of prospective cash flows. Consolidated statements also provide more complete information about the resources, obligations, risks, and opportunities of an enterprise than separate statements. b. An entity qualifies as a VIE and is subject to consolidation if either of the following conditions exist. The total equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties. In most cases, if equity at risk is less than 10% of total assets, the risk is deemed insufficient. The equity investors in the VIE lack any one of the following three characteristics of a controlling financial interest. 1. The direct or indirect ability to make decisions about an entity's activities through voting rights or similar rights. 2. The obligation to absorb the expected losses of the entity if they occur (e.g., another firm may guarantee a return to the equity investors) 3. The right to receive the expected residual returns of the entity (e.g., the investors' return may be capped by the entity's governing documents or other arrangements with variable interest holders). Consolidation is required if a parent has a variable interest that will Absorb a majority of the entity's expected losses if they occur Receive a majority of the entity's expected residual returns if they occur Also, a direct or indirect ability to make decisions that significantly affect the results of the activities of a variable interest entity is a strong indication that an enterprise has one or both of the characteristics that would require consolidation of the variable interest entity. c. Risks of the construction project that has TPC has effectively shifted to the owners of the VIE At the end of the 1st five-year lease term, if the parent opts to sell the facility, and the proceeds are insufficient to repay the VIE investors, TPC may be required to pay up to 85% of the project's cost. Thus, a potential 15% risk. During construction 11.1% of project cost potential termination loss. Risks that remain with TPC Guarantees of return to VIE investors at market rate, if facility does not perform as expected TPC is still obligated to pay market rates. If lease is not renewed, TPC must either purchase the facility or sell it on behalf of the VIE with a guarantee of Investors' (debt and equity) balances representing a risk of decline in market value of asset Debt guarantees d. TPC possesses the following characteristics of a primary beneficiary Direct decision- making ability (end of five-year lease term) Absorb a majority of the entity's expected losses if they occur (via debt guarantees and guaranteed lease payments and residual value) Receive a majority of the entity's expected residual returns if they occur (via use of the facility and potential increase in its market value). Problem XXIV 1. Implied valuation and excess allocation for SP. FV of VIE: Consideration transferred by P. P 20,000 Non-controlling interest fair value __ 60,000 FV/Total business fair value of VIE P 80,000 Less: Fair value of VIE net assets [P20,000 + (P140,000 + P20,000) + P40,000 – P120,000) __100,000 Excess net asset value fair value/Bargain purchase gain P( 20,000) The P20,000 excess net asset fair value is recognized by PT as a bargain purchase. All SP’ assets and liabilities are recognized at their individual fair values. Cash P20,000 Marketing software 160,000 Computer equipment 40,000 Long-term debt (120,000) Noncontrolling interest (60,000) Pantech equity interest (20,000) Gain on bargain purchase (20,000) - 0- 2. Implied valuation and excess valuation for SP. FV of VIE: Consideration transferred by P. P 20,000 Non-controlling interest fair value __ 60,000 FV/Total business fair value of VIE P 80,000 Less: Fair value of VIE net assets [P20,000 + (P140,000 - P20,000) + P40,000 – P120,000) __60,000 Excess fair value over net assets/ Goodwill P 20,000 Noncontrolling interest fair value 60,000 Consideration transferred by Pantech 20,000 Total business fair value 80,000 Fair value of VIE net identifiable assets 60,000 Goodwill P20,000 When the business fair value of a VIE (that is a business) is greater than assessed asset values, all identifiable assets and liabilities are reported at fair values (unless a previously held interest) and the difference is treated as a goodwill. Cash P20,000 Marketing software 120,000 Computer equipment 40,000 Goodwill (excess business fair value) 20,000 Long-term debt (120,000) Noncontrolling interest (60,000) PT equity interest (20,000) -0- Multiple Choice Problems 1. c – at fair value 2. c [P300,000 – (P35,000 + P60,000 + 125,000 + P250,000 – P65,000 – P150,000)] 3. d Consideration transferred P300,000 Less: Book value of SHE of S (P100,000 + P115,000) 215,000 Allocated excess (excess of fair value or cost over book value) - sometimes termed as “Differential” P 85,000 4. a – Investment in subsidiary in the consolidated statements is eliminated in its entirety. 5. d Consideration transferred P150,000 Less: Book value of SHE of S (P40,000 + P52,000) 92,000 Allocated excess (excess of fair value or cost over book value) - sometimes termed as “Differential” P 58,000 6. b – [P150,000 – (P173,000 – P40,000 – P5,000)] 7. d - P600,000 - P15,000 - P255,000 = P330,000 8. c - P475,000 - P300,000 = P175,000 debit 9. b – fair value 10. d – fair value 11. d – fair value 12. c - Full-goodwill: Fair value of Subsidiary: Consideration transferred P300,000 Add: FV of NCI 100,000 P400,000 Less: BV of SHE of Silver (P100,000 + P180,000) x 100% 280,000 Allocated excess P120,000 Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P65,000 – P70,000) x 100% P( 5,000) Land (P100,000 – P90,000) x 100% 10,000 Buildings and equipment (P300,000 – P250,00) x 100% 50,000 __55,000 Goodwill – full P 65,000 If partial-goodwill, no answer available, computed as follows: Fair value of Subsidiary: Consideration transferred P300,000 Less: BV of SHE of Silver (P100,000 + P180,000) x 75% _210,000 Allocated excess P 90,000 Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P65,000 – P70,000) x 75% P( 3,750) Land (P100,000 – P90,000) x 75% 7,500 Buildings and equipment (P300,000 – P250,00) x 75% 37,500 __41,250 Goodwill – full P 48,750 13. a – Investment in Silver will be eliminated in the consolidated balance sheet 14. d FV of SHE of S: Book value of SHE of S (P100,000 + P180,000)………………..P 280,000 Adjustments to reflect fair value ……………………………… 55,000 FV of SHE of S……………………………………………………… P 335,000 Multiplied by: NCI%.................................................................... 25% FV of NCI (partial)………………………………………………….P 83,750 Add: NCI on full goodwill (P65,000 – P48,750)……………….. 16,250 FV of NCI (full-goodwill)*…………………………………………P100,000 * same with the NCI given per problem 15. b – P135,000 = P90,000 + P45,000 16. d Full-goodwill: Fair value of Subsidiary: Consideration transferred P160,000 Add: FV of NCI _40,000 P200,000 Less: BV of SHE of Silver (P40,000 + P120,000) x 100% _160,000 Allocated excess P 40,000 Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P45,000 – P40,000) x 100% P 5,000 Land (P60,000 – P40,000) x 100% 20,000 25,000 Goodwill – full P 15,000 17. a Total Assets of Gulliver (Jonathan) P610,000 Less: Investment in Sea-Gull Corp. (160,000) P 450,000 Book value of assets of Sea Corp. 230,000 Book value reported by Gulliver/Jonathan and Sea P 680,000 Increase in inventory (P45,000 – P40,000) 5,000 Increase in land (P60,000 – P40,000) 20,000 Goodwill (full)* 15,000 Total assets reported P 720,000 18. c – P100,000 + P95,000 + P30,000 + P40,000 = P265,000 19. c FV of SHE of S: Book value of SHE of S (P40,000 + P120,000)………………….P 160,000 Adjustments to reflect fair value [(P45,000 + P60,000) - (P40,000 + P40,000)………….……………………………… 25,000 FV of SHE of S……………………………………………………… P 185,000 Multiplied by: NCI%.................................................................... 20% FV of NCI (partial)………………………………………………….P 37,000 Add: NCI on full goodwill (P15,000 – P12,000)……………….. 3,000 FV of NCI (full-goodwill)*………………………………………… P 40,000 * same with the NCI given per problem Partial Goodwill Fair value of Subsidiary: Consideration transferred P160,000 Less: BV of SHE of S (P40,000 + _128,000 P120,000) x 80% Allocated excess P 32,000 Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P5,000 x 80%) P 4,000 Land (P20,000 x 80%) 16,000 __20,000 Goodwill – partial P 12,000 20. a - The amount reported by Jonathan Corporation 21. a Jonathan stockholders' equity(P200,000 + P205,000)……………….. P405,000 NCI (full-goodwill) – refer to No. 19…………………………………….. 40,000 Consolidated stockholders’ equity……………………………………. P445,000 22. d – [P132,000 + (P38,000 + {P60,000 – P38,000}] or P132,000 + P60,000 23. b Total Assets of P. P1,278,000 Less: Investment in Swimmer Corp. (440,000) P 838,000 Book value of assets of S Corp. 542,000 Book value reported by P and S P1,380,000 Increase in inventory (P60,000 – P38,000) 22,000 Increase in land (P60,000 – P32,000) 28,000 Increase in plant assets [P350,000 – (P300,000 – P60,000)] 110,000 Goodwill (full)* 26,667 Total assets reported P1,566,667 *(P440,000/75%) – (P702,000 – P142,000) = P26,667 If partial-goodwill: Total Assets of P. P1,278,000 Less: Investment in S Corp. (440,000) P 838,000 Book value of assets of S Corp. 542,000 Book value reported by P and S P1,380,000 Increase in inventory (P60,000 – P38,000) 22,000 Increase in land (P60,000 – P32,000) 28,000 Increase in plant assets [P350,000 – (P300,000 – P60,000)] 110,000 Goodwill (partial)* 20,000 Total assets reported P1,540,000 *[P440,000 – (P702,000 – P142,000) x 75%] 24. d P215,000 = P130,000 + P70,000 + (P85,000 - P70,000) 25. a Partial Goodwill Fair value of Subsidiary: Consideration transferred P150,500 Less: BV of SHE of SSD (P50,000 + P90,000) x 70% __98,000 Allocated excess P 52,500 Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P15,000 x 70%) P 10,500 Land (P20,000 x 70%) 14,000 24,500 Goodwill – partial P 28,000 26. c Full-goodwill: Fair value of Subsidiary: Consideration transferred P150,500 Add: FV of NCI **64,500 P215,000 Less: BV of SHE of SS (P50,000 + P90,000) x 100% 140,000 Allocated excess P 75,000 Less: Over/under valuation of A and L: Inc. (Dec.) Inventory (P70,000 – P85,000) x 100% P 15,000 Land (P25,000 – P45,000) x 100% 20,000 35,000 Goodwill – full P 40,000 **given amount, but it should not be lower than the fair value of SHE – subsidiary amounting to P52,500 computed as follows : FV of SHE of SS: Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000 Adjustments to reflect fair value (P15,000 + P20,000)… 35,000 FV of SHE of SS……………………………………………… P 175,000 Multiplied by: NCI%.......................................................... 30% FV of NCI (partial)……………………………………………..P 52,500 27. b Total Assets of Power Corp. P 791,500 Less: Investment in Silk Corp. (150,500) P 641,000 Book value of assets of Silk Corp. 405,000 Book value reported by Power and Silk P1,046,000 Increase in inventory (P85,000 - P70,000) 15,000 Increase in land (P45,000 - P25,000) 20,000 Goodwill (full) 40,000 Total assets reported P1,121,000 If partial-goodwill: Total Assets of Power Corp. P 791,500 Less: Investment in Silk Corp. (150,500) P 641,000 Book value of assets of Silk Corp. 405,000 Book value reported by Power and Silk P1,046,000 Increase in inventory (P85,000 - P70,000) 15,000 Increase in land (P45,000 - P25,000) 20,000 Goodwill (partial) 28,000 Total assets reported P1,109,000 28. d P701,500 = (P61,500 + P95,000 + P280,000) + (P28,000 + P37,000 + P200,000) 29. a Non-controlling interest (partial-goodwill): P52,500 NCI FV of SHE of SSD: Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000 Adjustments to reflect fair value (P15,000 + P20,000)… 35,000 FV of SHE of SSD P 175,000 Multiplied by: NCI%.......................................................... 30% FV of NCI (partial)……………………………………………..P 52,500 30. d Non-controlling interest (fulll-goodwill): P64,500 NCI FV of SHE of SSD: Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000 Adjustments to reflect fair value (P15,000 + P20,000)… 35,000 FV of SHE of SSD P 175,000 Multiplied by: NCI%.......................................................... 30% FV of NCI (partial)……………………………………………..P 52,500 Add: NCI on full-goodwill (P40,000 – P12,000)…………... 12,000 FV of NCI (full)…………………………………………………..P 64,500 31. d P205,000 = The amount reported by Power Corporation 32. c P419,500 = (P150,000 + P205,000) + P64,500 If partial-goodwill: Stockholders’ equity: P419,500 Consolidated SHE: Common stock P150,000 Retained Earnings 205,000 Parent’s SHE or Equity Attributable to Parent P355,000 NCI (partial-goodwill) 52,500 Consolidated SHE P404,500 33. b Consideration transferred ........................................................................................ P60,000 Less: Strand's book value (P50,000 x 80%) .............................................................. (40,000) Fair value in excess of book value .......................................................................... P20,000 Excess assigned to inventory (60%) .......................................................... P12,000 Excess assigned to goodwill (40%) ............................................................ P 8,000 34. c Consideration transferred (P60,000 ÷ 80%) ............................................................ P75,000 Less: Strand's book value .......................................................................................... (50,000) Fair value in excess of book value .......................................................................... P25,000 Excess assigned to inventory (60%) .......................................................... P15,000 Excess assigned to goodwill (40%) ............................................................ P10,000 35. a Park current assets ....................................................................................................... P 70,000 Strand current assets ................................................................................................... 20,000 Excess inventory fair value ......................................................................................... 15,000 Consolidated current assets ...................................................................................... P105,000 36. c Park noncurrent assets ............................................................................................... P 90,000 Strand noncurrent assets ........................................................................................... 40,000 Excess fair value to goodwill (partial) ..................................................................... ___8,000 Consolidated noncurrent assets .............................................................................. P140,000 37. d Park noncurrent assets ................................................................................................ P 90,000 Strand noncurrent assets ............................................................................................ 40,000 Excess fair value to goodwill (full) ............................................................................. __10,000 Consolidated noncurrent assets ............................................................................... P140,000 38. b Add the two book values and include 10% (the P6,000 current portion) of the loan taken out by Park to acquire Strand. 39. b Add the two book values and include 90% (the P54,000 noncurrent portion) of the loan taken out by Polk to acquire Strand. 40. b Park stockholders' equity ........................................................................................... P80,000 NCI (partial): BV of SHE – S ……………………………………………………………..P50,000 Adjustments to reflect fair value (inventory)………………………. 15,000 FV of SHE – S………………………………………………………………P65,000 x: Multiplied by: NCI%........................................................................ 20% 13,000 Total stockholders' equity ......................................................................................... P93,000 41. c Park stockholders' equity ......................................................................... …………. P80,000 NCI (full): BV of SHE – S ……………………………………………………………..P50,000 Adjustments to reflect fair value (inventory)………………………. 15,000 FV of SHE – S………………………………………………………………P65,000 x: Multiplied by: NCI%......................................................................... 20% NCI (partial)………………………………………………………………P13,000 Add: NCI on full-goodwill (P10,,000 – P8,000)……………………… 2,000 Non-controlling interest at fair value (20% × P75,000)………… 15,000 Total stockholders' equity P95,000 42. b P’s acquisition entry is: Investment in Silicon 2,500,000 Merger expenses 250,000 C/S (100,000@P1) 100,000 APIC [(100,000@P24) – P400,000] 2,000,000 Cash (P400,000 + P250,000) 650,000 Eliminating entries are: Capital stock 560,000 Retained earnings 280,000 AOCI 195,000 Treasury stock 35,000 Investment in Silicon 1,000,000 Customer lists 700,000 Goodwill 800,000 Investment in Silicon 1,500,000 43. b – refer to No. 42 44. a – refer to No. 42 45. a – refer to No. 42 46. b – refer to No. 42 47. b 48. a – P150,000 + P500,000 49. a – at fair value 50. b FV, stocks issued………………………………………………… P 4,200,000 Less: Par value of stocks issued (500,000 shares x P5)…….. __2,500,000 APIC P 1,700,000 Add: APIC of P 7,500,000 Less: Stock issuance cost ___100,000 P 9,100,000 51. a ( P10 x 100,000 = P1,000,000 – P1,400,000) = P400,000 52. a – at fair value 53. c 54. a [P15 x 100,000 = P1,500,000 – (P1,900,000 – P100,000 – 600,000 )+ P100,000 increase + P100,000 in increase in PPE] = P100,000 55. b P1,500,000 – (1,700,000 – 50,000 decrease in inventories) + (P100,000 increase in PPE – P300,000 – P500,000) = P550,000 56. a 57. d (P1,000,000 + P250,000) = P1,250,000 P only. 58. d [P99,000 + (P45,000 – P26,000)] or (P99,000 + P45,000) = P144,000 59. b [(P330,000/75%) – (P565,000 – P105,000)] = (P20,000) – full-goodwill approach 61. a - P only 62. d Book value of Assets (P80,000 + P50,000 + P200,000) P330,000 Fair value of Assets (P85,000 + P60,000 + P250,000) 395,000 P 65,000 63. a – zero, since the revaluation of P65,000 is already recorded in the books of subsidiary (not in the worksheet or eliminating entries. 64. b – (P250,000 – P200,000)/10 years = P5,000 depreciation to reduce net income of Sirius. 65. a - P15,000 = (P115,000 + P46,000) - P146,000 66. b - P65,000 = (P148,000 - P98,000) + P15,000 67. BB, P70,000; SS, P24,000, no answer available SS: P24,000 = P380,000 - (P46,000 + P110,000 + P75,000 + P125,000) BB P70,000 = P94,000 - P24,000 68. P259,000, no answer available Fair value of SS as a whole: P200,000 Book value of SS shares 10,000 Differential assigned to inventory (P195,000 - P105,000 - P80,000) 40,000 Differential assigned to buildings and equipment (P780,000 - P400,000 - P340,000) 9,000 Differential assigned to goodwill P259,000 Fair value of SS 69. c - 65 percent = 1.00 – (P90,650 / P259,000) 70. a Capital Stock = P120,000 Retained Earnings = P115,000 71. d - A total of P210,000 (P120,000 + P90,000) should be reported. 72. a - As shown in the investment account balance, Beryl paid P110,000 for the ownership of SS. The amount paid was P30,000 greater than the book value of the net assets of SS and is reported as goodwill in the consolidated balance sheet at January 1, 20X5. 73. c - In determining the amount to be reported for land in the consolidated balance sheet, P15,000 (P70,000 + P50,000 - P105,000) was eliminated. BB apparently sold the land to SS for P25,000 (P10,000 + P15,000). 74. d - Accounts payable of P120,000 (P75,000 + P55,000 - P10,000) will be reported in the consolidated balance sheet. A total of P10,000 was deducted in determining the balance reported for accounts receivable (P90,000 + P50,000 - P130,000). The elimination of an intercompany receivable must be offset by the elimination of an intercompany payable. 75. P100,000, the par value of B's stock outstanding is P100,000, no answer available 76. c**/d* Note: The following discussion regarding the treatment of direct acquisition-related costs in the books of parent entity, does not affect the computation of goodwill wherein under PFRS 3, acquisition-related costs direct or indirect are considered as expensed. The following discussions focus on the books of parent entity regarding direct acquisition-related costs. Currently, the Interpretation Committee (IFRIC) of IASB is discussing the topic of Contingent Pricing of Property, Plant and Equipment and Intangible Assets. The scope of those deliberations does not include the cost of investment in associate, joint venture or subsidiary but it is possible that the scope of the project might be expanded in future. (IGAAP 2013 under IFRS by Ernst and Young, page 530,) This raises the question of the treatment of the transaction costs as, under PFRS 3 these costs are usually recognized as expenses in the consolidated accounts. Revised PAS 27 does not define what is meant by “cost”, but in the glossary to PFRS provides an over-riding definition of “cost” as “the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction” As a general rule under PFRS, “cost” includes the purchase price and other costs directly attributable to the acquisition or issuance of the asset such as professional fees for legal services, transfer taxes and other transaction costs” * Answer d – P1,600,000 (P1,500,000 + P100,000) – Position of Ernst and Young (EY). Given that Revised PAS 27 does not separately define “cost”, it is appropriate to apply the general meaning of “cost” to separate financial statements. Therefore, in the opinion of EY, the cost of investment in subsidiary in the separate financial statements includes any costs incurred even if such costs are expensed in the consolidated financial statements. The view of EY, maybe based on the assumption that under the revised PAS 27 since it applies only to “Separate Financial Statements” not consolidated statements; therefore PFRS 3 which is a standard for business combination/consolidation will not be the basis for the definition of “cost”). Unlike before the revision of PAS 27 and implementation of PFRS 10, the basis of the old PAS 27, which is “Consolidated and Separate Statements”, is PFRS 3, wherein the definition of “cost” was clearly defined. That is why the general rule in the definition of “cost” was applied. This view is also as suggest by the IASB since they introduced the requirement to expense acquisition costs within PFRS 3, it only applies to financial statements in which a business combination is accounted for under PFRS 3. It follows that this requirement does not extend to the individual (or separate) financial statements of the investing or parent entity. So, it seems that the basis of the general rule applies to PAS 16 (Property, Plant and Equipment) and PAS 38 (Intangible Assets) wherein the direct costs is capitalized in the books of parent entity and eventually become expense through eliminating entry to prepare consolidated statements. ** Answer c – P1,500,000; In Revised PAS 27 “Separate Financial Statements” in relation to PFRS 3 par. 33, which refers to any acquisition-related costs incurred by the acquirer in relation to the business combination (for example legal costs, due diligence costs – such as finder’s fee are expensed off and not included in the consideration transferred. The key reasons given for this approach are provided in paragraph BC366: Acquisition-related costs are not part of the fair value exchange between the buyer and seller. They are separate transactions for which the buyer pays the fair value for the services received. These amounts do not generally represent assets of the acquirer at acquisition date because the benefits obtained are consumed as the services are received. The PFRS 3 accounting for these outlays is a result of the decision to record the identifiable assets acquired and liabilities assumed at fair value. In contrast, under PAS 16 and PAS 38, the assets acquired are initially recorded at cost. The following items are worth noting to justify the use of this approach: 1. This view is supported by Hilton and Herauf in their book Modern Advanced Accounting in Canada, 7th Edition (2013) which is an IFRS based discussion, in the solution they presented in one of their end-of-chapter problems, they expensed the direct costs in recording the investment in subsidiary in the book of parent company 2. Similar with No. 1 above, in the book Applying IFRS, 3rd edition (2013), by Picker, et al (which is also Ernst and Young book, which seems to contradict their position in the discussion above) in chapter 24 end-of-the chapter problems, the direct costs (or “costs incurred in undertaking taking the acquisition” as the term used in the book) were not part of the investment in subsidiary as evidenced by the amount in the eliminating entry. 3. One respected author in accounting even commented that, despite the above analysis capitalizing the direct costs seems to be correct and have basis since the segregation of old PAS 27 to Revised PAS 27 and PFRS 10, the problem is, if the parent records the direct costs as part of Investment in subsidiary, it may be a problem when there will be an impairment test which will reveal the costs are in fact unrecoverable and thus that there must be an impairment charge at the parent level (in which the direct costs is included as part the investment), which would have the effect of bringing the parent’s accounting (with the impairment investment including the direct costs) in line with what would later appear on the consolidated financial statements. The author believes that the there is logic on the basis of applying the general rule in interpreting the definition of “costs” in PAS 27 wherein the basis are PAS 16 and PAS 38, giving rise to an effect wherein the direct costs will be part of the investment in the books of parent entity. But because of the three reasons mentioned above, the author believes that the direct costs still be considered as expenses applying PFRS 3, aside from the fact that in substance the ultimate objective is to consolidate, eventhough there was a separation of standard between Revised PAS 27 and PFRS 10. 77. a 78. d – Since, CC Corp. is not a subsidiary, no elimination of intercompany accounts will be made. Therefore, the P200,000 remains to be a receivable. On the other hand, WW Corp. is a consolidated subsidiary, so the P300,000 intercompany account will be eliminated. 79. d 80. a 81. c – In the combined financial statements (which normally used to described financial statements in a “common control” situation), intercompany accounts are eliminated in full. 82. 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. 83. d The acquisition method consolidates assets at fair value at acquisition date regardless of the parent’s percentage ownership. 84. c 85. 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, 2009 ....................................................................... P45,000 Amortization for 2 years (10 year life)...................................................................... (9,000) Patent reported amount December 31, 2010 ...................................................... P36,000 86 a PP - building................................................................................................................... P510,000 TT building acquisition-date fair value P300,000 Amortization for 3 years (10-year life) (90,000) 210,000 Consolidated buildings ............................................................................................... P720,000 -OR- PP - building ................................................................................................................... 510,000 TT building 12/31/x4 P182,000 Excess acquisition-date fair value allocation 40,000 Excess amortization for (P40,000/ 10 x 3 years) (12,000) 210,000 Consolidated buildings ............................................................................................... P720,000 87. b Target not met: 100,000 shares x .75 share x P10 = P750,000 Target met: 100,000 shares x .8 x P10 = P800,000 88. c Target not met: 250,000 shares x 1.50 share x P30 = P11,250,000 Target met: 250,000 shares x 1.8 x P30 = P13,500,000 89. c 500,000 shares x 1.7 exchange ratio x P25 = P21,250,000 The investment value does not change as a result of a change in the share prices. 90. d Cost of Investment (40 shares* x P40)………………………………………………………P 1,600 Less: Book value of SHE – Pedro Ltd (P300 + P800) x 100%............................................ 1,100 Allocated excess……………………………………………………………………………… P 500 Less: Over/Under valuation of Assets and Liabilities: Increase in Non-current assets: [(P1,500 – P1,300) x 100% x 70%......................... 140 Goodwill………………………………………………………………………………………….P 360 100% * Pedro Ltd Santi Ltd Currently issued…………………… 100 40% 40 40% Additional shares issued……….. 150 60%** 60 / 60% Total shares………………………… 250 100 **150/250 FV of net assets [P.5M + P1.5M – P.7M)] P1.3M P ? BV of net assets (same with FV)……….. 1.1 M ? Fv per share of stock……………………… P 16 P 40 Pedro ltd issues 2 ½ shares in exchange for each ordinary share of Santi Ltd. All of Santi Ltd’s shareholders exchange their shares for Pedro Ltd. Pedro Ltd therefore issues 150 shares (60 x 2 ½) for the 60 shares in Santi Ltd. Pedro Ltd is now the legal parent of the subsidiary Santi Ltd. However, analyzing the shareholding in Pedro Ltd shows that it consists of the 100 shares existing prior to the merger and 150 new shares held by former shareholders in Santi Ltd. In essence, the former shareholders of Santi Ltd now control both entities Pedro Ltd and Santi Ltd. The former Santi Ltd shareholders have a 60% interest in Pedro Ltd [150/(100+150]. The IASB argues that there has been a reverse acquisition, and that Santi Ltd is effectively the acquirer of Pedro Ltd. Reverse acquisition occurs when the legal subsidiary has this form of control over the legal parent. The usual circumstance creating a reverse acquisition is where an entity (the legal parent) obtains ownership of the equity of another entity (the legal subsidiary) but, as part of the exchange transaction, it issues enough voting equity as consideration for control of the combined entity to pass to the owners of the legal subsidiary. The key accounting effect of deciding that Santi Ltd is the acquirer is that the assets and liabilities of Pedro ltd are to be valued at fair value. This is contrary to normal acquisition accounting, based on Pedro Ltd being the legal parent of Santi Ltd, which would require the assets and liabilities of Santi Ltd to be valued at fair value. 91. b – building account in the books of subsidiary at fair value 92. e – building account in the books of subsidiary at book value 93. d – push-down accounting: equipment account in the books of subsidiary is at fair value 94. c P60,000 allocation to equipment is "pushed-down" to subsidiary and increases balance from P330,000 to P390,000. Consolidated balance is P420,000 plus P390,000. Theories 1. c 6. B 11. c 16. d 21. b 26. d 31 c 36. d 2. a 7. b 12. c 17. c 22. a 27. c 32. d 37. d 3. e 8. A 13. d 18. b 23. a 28. c 33. b 38. c 4. e 9. D 14. d 19. c 24. b 29. d 34. d 39. b 5. b 10, a 15, b 20. c 25. c 30. b 35. d 40. c 41. c 46. b 51. c 56. c 42. c 47. a 52. b 57. d 43. c 48. c 53. a 44. c 49. d 54. a 45. c 50, b 55, b Chapter 16 Problem I - Cost Model/Method versus Equity Method Partial-Goodwill Approach: Fair value of Subsidiary Consideration transferred: P600,000.............................................. 600,000 Less: Carrying amount of Small’s net assets = Carrying amount of Small’s shareholders’ equity Common/Ordinary shares – Small (400,000 x 75%)............ 300,000 Retained earnings – Small (100,000 x 75%)......................... 75,000 375,000 Allocated Excess: Acquisition differential – Jan. 1, 20x4 225,000 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory (40,000 x 75%)........................................ 30,000 Decrease in Patents (70,000 x 75%).......................................... (52,500) ( 22,500) Positive Excess: Goodwill - partial 247,500 Full-Goodwill Approach: Fair value of Subsidiary (Implied cost of 100% investment); P600,000/75% 800,000 Less: Carrying amount of Small’s net assets = Carrying amount of Small’s shareholders’ equity Common/Ordinary shares 400,000 Retained earnings 100,000 500,000 Allocated Excess: Acquisition differential – Jan. 1, 20x4 300,000 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory 40,000 Decrease in Patents (70,000) (30,000) Positive Excess: Goodwill - full 330,000 A summary or depreciation and amortization adjustments is as follows: Account Adjustments to be Over/ Annual Current amortized Under Life Amount Year(20x4) 20x5 20x6 Inventory P40,000 1 P 40,000 P 40,000 P - P - Subject to Annual Amortization Patents (70,000) 5 (14,000) ( 14,000) (14,000) (14,000) Amortization P 26,000 P 26,000 P(14,000) P(14,000) Impairment of goodwill (full) 330,000 - _____ _____ ______ __ 19,300 P 26,000 P 26,000 P(14,000) P 5,300 For purposes of comparison between Cost Model/Method and Equity Method Cost Method Journal Entries Year 1 Year 2 Year 3 Investment Investment in Small 600,000 Cash 600,000 Dividend of Subsidiary Cash 18,750 7,500 30,000 Dividend income 18,750 7,500 30,000 Investment in Son Dividend Income 1/1/x4 CI…… 600,000 18,750 - Div–S (75 x80%) 12/31/x4 600,000 18,750 7,500 - Div–S (10 x80%) 12/31/x5 600,000 18,750 30,000 - Div–S (40 x80%) 12/31/x6 600,000 30,000 Equity Method 1. Year 1 Year 2 Year 3 Investment Investment in Small 600,000 Cash 600,000 Net Income (Loss) of Subsidiary: Investment in Small (75% x Small’s profit) 60,000 67,500 Investment income 60,000 67,500 Investment income 26,,250 Investment in Small (75% x Small’s profit) 26,250 Dividend of Subsidiary Cash (75% x Small’s dividends) 18,750 7,500 30,000 Investment in Small 18,750 7,500 30,000 Amortization of Allocated Excess Investment income (75% x amortization of PD*) 19,500 3,975 Investment in Small 19,500 3,975 Investment in Small 10,500 Investment income 10,500 Investment in Son Investment Income (loss) 1/1/x4: CI 600,000 NI of S 18,750 75% Div - Son NI of Son (80,000 75% Amort& Amortization (80,000 x 75%)……. 60,000 19,500 impairment impairment 19,500 60,000 x 75%) 12/31/x4 621,750 40,500 75% NL – Sub 75% NL – Sub 26,250 (35,000 x 75%) (35,000 x 75%) 26,250 7,500 75% Div - Son 75% Amort& 75% Amort& Impairment 10,500 10,500 impairment 12/31/x5 598,500 15,750 NI of S 30,00075% Div - Son NI of Son (90,000 75%Amort& Amortization (90,000 x 75%)……. 67,500 3,975 impairment impairment 3,975 67,500 x 75%) 12/31/x6632,025 63,525 Reconciliation of Investment /Conversion of Investment Account from Cost to Equity Method: Investment balance under cost model P 600,000 Retroactive adjustments: (Small’s net income less dividends) Small’s retained earnings, end of year P160,000 Less: Small’s retained earnings, date of acquisition _100,000 Increase in retained earnings (NI less dividend) P 60,000 Less: Cumulative amortization of allocated excess _17,300 P 42,700 X: Controlling interests ____75% P 32,025 Less: Impairment of goodwill _______0 _32,025 Investment balance under equity method P 632,025 2. a. Goodwill, 12/31/20x6 (P330,000 – P19,300) P 310,700 b. FV of NCI, 12/31/20x6: Non-controlling interest (full-goodwill), December 31, 20x6 Common stock – Subsidiary Company, December 31, 20x6 . . . . . . . . . . . . . . . . . . P 400,000 Retained earnings – Subsidiary Company, December 31, 20x6 Retained earnings – Subsidiary Company, January 1, 20x6 (P100,000 + P80,000 – P25,000 – P35,000 – P10,000).............................. P110,000 Add: Net income of Small for 20x6……………………………………………….. 90,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P200,000 Less: Dividends paid – 20x6…………………………………………………………. 40,000 160,000 Stockholders’ equity – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . . P 560,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4)- decreased in Net Assets . . . . ( 30,000) Less: Amortization of allocated excess (refer to amortization above): 20x4 (P40,000 – P14,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 26,000 20x5 and 20x6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28,000) (2,000) Fair value of stockholders’ equity of subsidiary, December 31, 20x6 . . . . . . . . . . . P 532,000 Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . 20 FV of Non-controlling interest (partial goodwill), 12/31/20x6 . . . . . . . . . . . . . . . . . P 133,000 Add: Non-controlling interest on full goodwill , net of impairment loss [(P330,000 full – P247,000, partial = P82,500…………………………………. P 82,500 Less: Impairment on the NCI (P19,300 x 25%)………………………………… ___4,825 ___*77,675 FV of Non-controlling interest (full-goodwill), 12/31/20x6. . . . . . . . . . . . . . . . . . . . . P 210,675 *or P330,000 full – P247,000, partial = P82,500 – (impairment loss on full goodwill less (P19,300 x 25%)] = P77,625 Alternatively, NCI on December 31, 20x6may also be computed as follows (Note: This is the American version of computing NCI, since they only allowed using Full-goodwill Method): Common stock, 12/31/20x6………………………………………………… P 400,000 Retained earnings, 12/31/20x6 (P100,000+P80,000 – P25,000 – P35,000 – P10,000)………….. P 110,000 Add: NI – Subsidiary (20x6) …………………………………………………. 90,000 Dividends – Subsidiary 20x6………………………………………………….( 40,000) 160,000 Book value of SHE – S, 12/31/20x6…………………………………………. P560,000 Adjustments to reflect fair value (Increase in Net Assets)………………P 300,000 Amortization of allocated excess: Inventory – 20x4...…………………………………………………….( 40,000) Patent (P14,000 x 3 years)………………………………………….. 42,000 Impairment of goodwill – 20x6……………………………………..( 19,300) 282,700 FV of SHE of Small……………………………………………………………… P 842,700 Multiplied by: NCI%..................................................................................... 25% FV of NCI, 12/31/20x6………………………………………………………….. P 210,675 Or, alternatively: Common stock – Subsidiary Company, December 31, 20x6 . . . . . . . . . . . . . . . . . . P 400,000 Retained earnings – Subsidiary Company, December 31, 20x6 Retained earnings – Subsidiary Company, January 1, 20x6 (P100,000 + P80,000 – P25,000 – P35,000 – P10,000).............................. P110,000 Add: Net income of Small for 20x6……………………………………………….. 90,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P200,000 Less: Dividends paid – 20x6…………………………………………………………. 40,000 160,000 Stockholders’ equity – Subsidiary Company, December 31, 20x6 . . . . . . . . . . . . . P 560,000 Unamortized acquisition differential / allocated excess / increase in net assets: {P300,000, allocated excess – {P40,000 - (P14,000 x 3) + P19,300, full impairment __282,500 P 842,500 Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . ______25% FV of Non-controlling interest (full-goodwill), 12/31/20x6. . . . . . . . . . . . . . . . . . . . . P 210,675 c. Consolidated Retained Earnings, 1/1/20x6 – P498,500 Consolidated Retained Earnings, January 1, 20x6 Retained earnings - Large Company, January 1, 20x6 (cost model) P500,000 Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Small, January 1, 20x6 (P100,000 + P80,00 – P25,000 – P35,000 – P10,000) P 110,000 Less: Retained earnings – Small, January 1, 20x4 (date of acquisition) 100,000 Increase in retained earnings since date of acquisition P 10,000 Less: Amortization of allocated excess – 20x4 26,000 Amortization of allocated excess – 20x5 (14,000) P ( 2,000) Multiplied by: Controlling interests %................... _____75% P ( 1,500) Less: Goodwill impairment loss (full-goodwill) – 20x6 ________0 (___1,500) Consolidated Retained earnings, January 1, 20x6 P498,500 The CRE, December 31, 20x6 would be as follows: Consolidated Retained earnings, January 1, 20x6 P498,500 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of Large for 20x6 233,525 Total P717,550 Less: Dividends paid – Large Company for 20x6 70,000 Consolidated Retained Earnings, December 31, 20x6 P662,025 Or, alternatively: to compute CRE, 12/31/20x6 Consolidated Retained Earnings, December 31, 20x6 Retained earnings - Large Company, December 31, 20x6 (cost model) P630,000 Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Small, December 31, 20x6 (P100,000 + P80,00 – P25,000 – P35,000 – P10,000 + P90,000 – P40,000) P 160,000 Less: Retained earnings – Small, January 1, 20x4 (date of acquisition) 100,000 Increase in retained earnings since date of acquisition P 60,000 Less: Amortization of allocated excess – 20x4 26,000 Amortization of allocated excess – 20x5 and 20x6: P14,000 x 2 (28,000) P 62,000 Multiplied by: Controlling interests %................... _____75% P 46,500 Less: Goodwill impairment loss on full-goodwill) – 20x6 (P19,300 x 75%) __14,475 __32,025 Consolidated Retained earnings, December 31, 20x6 P 662,025 d. P233.525 Consolidated Net Income for 20x6 Net income from own/separate operations Parent Company: Large Company [P200,000 – P170,000 (P40,000 x 75%)] Small Company 90,000 Total P260,000 Less: Non-controlling Interest in Net Income* P 21,175 Amortization of allocated excess (14,000) Goodwill impairment _19,300 __26,475 Controlling Interest in Consolidated Net Income or Profit P233,525 attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) __21,175 Consolidated Net Income for 20x6 P254,700 *Net income of subsidiary – 20x6 P 90,000 Amortization of allocated excess – 20x6 ( 14,000) P 104,000 Multiplied by: Non-controlling interest %.......... 25% P 26,000 Less: Non-controlling interest on impairment loss on full-goodwill ___4,825 ( (P19,300 x 25%)* Non-controlling Interest in Net Income (NCINI) P 21,175 *this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired. e. P21,175 – refer to (d) for computations Note: Regardless of the method used (cost or equity) answers for No. 2 (a) to (e) above are exactly the same. Problem II A. 1. a. P87,725 Consolidated Net Income for 20x4 Net income from own/separate operations Pill Company P55,000 Sill Company 40,000 Total P95,000 Less: Non-controlling Interest in Net Income* P 5,775 Amortization of allocated excess 0 Goodwill impairment 1,500 __7,275 Controlling Interest in Consolidated Net Income or Profit P87,725 attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) __5,775 Consolidated Net Income for 20x4 P93,500 b. P5,775 *Net income of subsidiary – 20x4 P 40,000 Amortization of allocated excess – 20x4 ( 0)) P 40,000 Multiplied by: Non-controlling interest %.......... _____15% P 6,000 Less: Non-controlling interest on impairment loss on full-goodwill _____225 (P1,500 x 15%)* Non-controlling Interest in Net Income (NCINI) P 5,775 *this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired. c. P93,500 – refer to computation in (a) d. d.1. P75,000. Retained earnings of Parent on the date of acquisition should always be the same with the Consolidated Retained Earnings also on the date of acquisition. d.2 Retained earnings of P Co, 1/1/20x4 P75,000 Add; Net income under cost method [P55,000 + (P9,000 x _62,650 85%)] P 137,650 Less: Dividends of P Company ___5,000 Retained Earnings of P Co, 12/31/20x4 under cost model P 132,650 d.3 Retained earnings of P company (same with P75,000 Consolidated RE), 1/1/20x4 Add; Controlling Interest in CNI (refer to a above) _87,725 P 162,725 Less: Dividends of P Company ____5,000 Consolidated Retained Earnings, 12/31/20x4 P 157,725 e. P238,000 2. a. P87,725 Consolidated Net Income for 20x4 Net income from own/separate operations Pill Company P55,000 Sill Company 40,000 Total P95,000 Less: Non-controlling Interest in Net Income* P 5,775 Amortization of allocated excess 0 Goodwill impairment 1,500 __7,275 Controlling Interest in Consolidated Net Income or Profit P87,725 attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) __5,775 Consolidated Net Income for 20x4 P93,500 b. P5,775 *Net income of subsidiary – 20x4 P 40,000 Amortization of allocated excess – 20x4 ( 0)) P 40,000 Multiplied by: Non-controlling interest %.......... _____15% P 6,000 Less: Non-controlling interest on impairment loss on full-goodwill _____225 (P1,500 x 15%)* Non-controlling Interest in Net Income (NCINI) P 5,775 *this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired. c. P93,500 – refer to computation in (a) d. d.1. P75,000. Retained earnings of Parent on the date of acquisition should always be the same with the Consolidated Retained Earnings also on the date of acquisition. d.2 Retained earnings of P Co, 1/1/20x4 P75,000 Add; Net income under equity method {P55,000 + [(P40,000 x 85%) - (P1,500, impairment loss x 85%) – (P0, amortization)} _87,725 P162,725 Less: Dividends of P Company ___5,000 Retained Earnings of P Co., 12/31/20x4 under equity P157,725 method d.3 Retained earnings of P Co., (same with Consolidated RE), P75,000 1/1/20x4 Add; Controlling Interest in CNI same with Net Income in d.2 above under equity method but not cost model _87,725 P162,725 Less: Dividends of P Company ___5,000 Consolidated Retained Earnings, 12/31/20x4 P157,725 e. P263,075 = P238,000 + (P40,000 x 85%) – (P9,000, div x 85%) – (P1,500, impair, x 85%) 3. Reconciliation of Investment balance – Cost Model to Equity Method Investment balance under cost model P 238,000 Retroactive adjustments: (Sill’s net income less dividends) Sill’s net income – 20x4 40,000 Less: Sill’s dividend – 20x4 _9,000 Increase in retained earnings (NI less dividend) 31,000 Less: Cumulative amortization of allocated excess _____0 31,000 X: Controlling interests __85% 26,350 Less: Impairment of goodwill (P1,500 x 85%) _1,275 __25,075 Investment balance under equity method P263,075 Reconciliation of Retained Earnings – Cost Model to Equity Method Retained earnings, 12/31/20x4 under cost P model(requirement 1 d.2) 132,650 Retroactive adjustments: (Sill’s net income less dividends) Sill’s net income – 20x4 40,000 Less: Sill’s dividend – 20x4 _9,000 Increase in retained earnings (NI less dividend) 31,000 Less: Cumulative amortization of allocated excess _____0 31,000 X: Controlling interests __85% 26,350 Less: Impairment of goodwill (P1,500 x 85%) _1,275 __25,075 Retained earnings, 12/31/20x4 under equity P157,725 method(requirement 2 d.2) B. 4. a. P87,725 Consolidated Net Income for 20x4 Net income from own/separate operations Pill Company [P62,650 – (P9,000 x 85%)] P55,000 Sill Company 40,000 Total P95,000 Less: Non-controlling Interest in Net Income* P 5,775 Amortization of allocated excess 0 Goodwill impairment 1,500 __7,275 Controlling Interest in Consolidated Net Income or Profit P87,725 attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) __5,775 Consolidated Net Income for 20x4 P93,500 b. P5,775 *Net income of subsidiary – 20x4 P 40,000 Amortization of allocated excess – 20x4 ( 0)) P 40,000 Multiplied by: Non-controlling interest %.......... _____15% P 6,000 Less: Non-controlling interest on impairment loss on full-goodwill _____225 (P1,500 x 15%)* Non-controlling Interest in Net Income (NCINI) P 5,775 *this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired. c. P93,500 – refer to computation in (a) d. d.1. P75,000. Retained earnings of Parent on the date of acquisition should always be the same with the Consolidated Retained Earnings also on the date of acquisition. d.2 Retained earnings of P Co, 1/1/20x4 P75,000 Add; Net income under cost method (given) _62,650 P 137,650 Less: Dividends of P Company ___5,000 P Retained Earnings of P Co, 12/31/20x4 under cost model 132,650 d.3 Retained earnings of P company (same with P75,000 Consolidated RE), 1/1/20x4 Add; Controlling Interest in CNI (refer to a above) _87,725 P 162,725 Less: Dividends of P Company ____5,000 Consolidated Retained Earnings, 12/31/20x4 P 157,725 e. P238,000 5. Correction: Pill’s net income should be P87,725 instead of P86,725 a. P87,725 Consolidated Net Income for 20x4 Net income from own/separate operations Pill Company [P87,725 – (P40,000 x 85%) + P55,000 (P1,500 x 85%)] Sill Company 40,000 Total P95,000 Less: Non-controlling Interest in Net Income* P 5,775 Amortization of allocated excess 0 Goodwill impairment 1,500 __7,275 Controlling Interest in Consolidated Net Income or Profit P87,725 attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) __5,775 Consolidated Net Income for 20x4 P93,500 b. P5,775 *Net income of subsidiary – 20x4 P 40,000 Amortization of allocated excess – 20x4 ( 0)) P 40,000 Multiplied by: Non-controlling interest %.......... _____15% P 6,000 Less: Non-controlling interest on impairment loss on full-goodwill _____225 (P1,500 x 15%)* Non-controlling Interest in Net Income (NCINI) P 5,775 *this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired. c. P93,500 – refer to computation in (a) d. d.1. P75,000. Retained earnings of Parent on the date of acquisition should always be the same with the Consolidated Retained Earnings also on the date of acquisition. d.2 Retained earnings of P Co, 1/1/20x4 P75,000 Add; Net income under equity method (given) _87,725 P162,725 Less: Dividends of P Company ___5,000 Retained Earnings of P Co., 12/31/20x4 under equity P157,725 method d.3 Retained earnings of P Co., (same with Consolidated RE), P75,000 1/1/20x4 Add; Controlling Interest in CNI same with Net Income in d.2 above under equity method but not cost model _87,725 P162,725 Less: Dividends of P Company ___5,000 Consolidated Retained Earnings, 12/31/20x4 P157,725 e. P263,075 = P238,000 + (P40,000 x 85%) – (P9,000, div x 85%) – (P1,500, impair, x 85%) 5. Reconciliation of Investment balance – Cost Model to Equity Method Investment balance under cost model P 238,000 Retroactive adjustments: (Sill’s net income less dividends) Sill’s net income – 20x4 P 40,000 Less: Sill’s dividend – 20x4 ___9,000 Increase in retained earnings (NI less dividend) P 31,000 Less: Cumulative amortization of allocated excess _______0 P 31,000 X: Controlling interests ____85% P 26,350 Less: Impairment of goodwill (P1,500 x 85%) ___1,275 __25,075 Investment balance under equity method P263,075 Reconciliation of Retained Earnings – Cost Model to Equity Method Retained earnings, 12/31/20x4 under cost P model(requirement 1 d.2) 132,650 Retroactive adjustments: (Sill’s net income less dividends) Sill’s net income – 20x4 P 40,000 Less: Sill’s dividend – 20x4 ___9,000 Increase in retained earnings (NI less dividend) P 31,000 Less: Cumulative amortization of allocated excess _______0 P 31,000 X: Controlling interests ____85% P 26,350 Less: Impairment of goodwill (P1,500 x 85%) ___1,275 __25,075 Retained earnings, 12/31/20x4 under equity P157,725 method(requirement 2 d.2) Problem III Cost of 85% investment 646,000 Fair value of Subsidiary (Implied cost of 100% investment); P646,000/85% 760,000 Less: Carrying amount of Silk’s net assets = Carrying amount of Silk’s shareholders’ equity Common/Ordinary shares 500,000 Retained earnings 100,000 600,000 Allocated Excess: Acquisition differential – December 31, 20x4 160,000 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory 70,000 Patents 90,000 Non-controlling interest (15% x 760,000, fair value of subsidiary),12/31/20x4 114,000 A summary or depreciation and amortization adjustments is as follows: Annu al Current Account Adjustments to Over/ Lif Amou Year(20x be amortized under e nt 5) 20x6 20x7 P70,00 P Inventory 0 1 70,000 P 70,000 P - P - Subject to Annual Amortization __9,00 ___9,00 ___9,00 Patents 90,000 10 0 ___9,000 0 0 P160,0 P P P 00 79,000 P 79,000 9,000 9,000, Unamortized balance of allocated excess: Balance Balance Dec. 31 Amortization Dec. 31 20x4 20x5 20x6 20x6 Inventory 70,000 70,000 Patents 90,000 9,000 9,000 72,000 160,000 79,000 9,000 72,000 1. NCI-CNI 20x5: P(7,350) 20x6: P6,450 20x5 20x6 Consolidated Net Income Net income from own/separate operations Large Company 20x5 [P28,000 – P0)] P 28,000 20x6 [(P45,000, loss + P(57,750) (P15,000 x 85%)] Small Company 30,000 52,000 Total P 58,000 P( 5,750) Less: Non-controlling Interest in P(7,350) P Net Income* 6,450 Amortization of allocated 79,000 9,000 excess Goodwill impairment _____0 71,650 _____0 15,450 CI-CNI (loss) or Profit (loss) attributable to equity P(13,650) P(21,200) holders of parent Add: Non-controlling Interest in Net ( 7,350) 6,450 Income (NCINI) Consolidated Net P(21,000) P(14,750) Income/Loss(CNI) 20x5 20x6 *Net income (loss) of subsidiary P 30,000 P 52,000 Amortization of allocated excess ( 79,000) ( 9,000) P(49,000) P43,000 Multiplied by: Non-controlling interest %.......... 15% 15% P(7,350) P 6,450 Less: Non-controlling interest on impairment loss on full- _______- ___ goodwill _- Non-controlling Interest in Net Income (NCINI) P( 7,350) P6,450 *this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired. 2. CI-CNI – refer to computation in No. 1 20x5: P(21,000) 20x6: P14,750 Or, alternatively: (1) Non-controlling interest in profit 20x5: 15% (30,000 – 79,000).............................................................7,350 20x6: 15% (52,000 – 9,000)............................................................... 6,450 (2) 20x5 20x6 NI (loss) Pen 28,000 (45,000) Less: Dividends from Silk 20x5 0 20x6 (85% 15,000) (12,750) 28,000 (57,750) Share of Silk’s profit 85% (30,000 – 79,000) (41,650) 85% (52,000 – 9,000) ________ 36,550_ Consolidated profit (loss) attributable to Pen’s shareholders (13,650) (21,200) 3. CRE, 12/31/20x6 – P73,150 Consolidated Retained Earnings, December 31, 20x6 Retained earnings - Pen Company, December 31, 20x6 (cost model P 91,000 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) P 167,000 Less: Retained earnings – Silk, December 31, 20x4 (date of acquisition) 100,000 Increase in retained earnings since date of acquisition P 67,000 Less: Amortization of allocated excess – 20x5 79,000 Amortization of allocated excess – 20x6 __9,000 P (21,000) Multiplied by: Controlling interests %................... 85% P (17,850) Less: Goodwill impairment loss (full-goodwill) – 20x5 _____0 ( 17,850) Consolidated Retained earnings, December 31, 20x6 P 73,150 4. NCI, 12/31/20x6: P110,850 FV of SHE of Silk: Common stock, 12/31/20x6 P 500,000 Retained earnings, 12/31/20x6: Retained earnings, 1/1/20x4 P 100,000 NI – Subsidiary (20x5 and 20x6): P30,000 + P52,000 82,000 Dividends – Subsidiary (20x5 and 20x6): P0 + P15,000( 15,000) 167,000 Book value of SHE – S, 12/31/20x6 P 667,000 Adjustments to reflect fair value, 12/31/20x4 160,000 Amortization of allocated excess (P79,000 + P9,000) ( 88,000) FV of SHE of S P 739,000 Multiplied by: NCI% _____15% FV of NCI (partial), 12/31/20x6 P 110,850 Add: NCI on full-goodwill ______ _0 FV of NCI (full),12/31/20x6 P 110,850 Or, alternatively: Non-controlling interest – date of acquisition,12/31/20x4 (1) P114,000 Retained earnings Silk – Dec. 31, 20x6 (100,000 + 30,000 + 52,000 – 15,000) P167,000 Less: Retained earnings, 12/31/20x4 (date of acquisition)100,000 Increase since acquisition P 67,000 Less: Amortization of allocated excess (79,000 + 9,000)88,000 P( 21,000) Multiplied by: NCI’s share ____ 15% ( 3,150) Non-controlling interest (full) 12/31/20x6 P 110,850 5. Consolidated Patents, 12/31/20x6: P72,000 Unamortized balance of allocated excess: Balance Balance Dec. 31 Amortization Dec. 31 20x4 20x5 20x6 20x6 Inventory 70,000 70,000 Patents 90,000 9,000 9,000 72,000 160,000 79,000 9,000 72,000 Or, alternatively: Invest. account – equity Dec. 31, 20x6 628,150 Cost of investment, cost model 646,000 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: Accumulated amortization (79,000 + 9,000)88,000 ( 21,000) Multiplied by: CI share 85% (17,850) Invest. account – equity method as at Dec. 31, 20x6 628,150 Implied value of 100% (628,150 / 85%) 739,000 Silk –Common shares 500,000 Retained earnings – Silk, 12/31/20x6 167,000 667,000 Balance unamortized allocated excess – Patents 72,000 Problem IV Additional information: Parent’s net income from own operations - 20x4, P100,000; 20x5, P120,000 Parent’s dividend declared – 20x4, P30,000; 20x5, P40,000 1. NCNCI for 20x4, P8,400; NCNCI for 20x5, P12,020 20x4 Consolidated Net Income for 20x4 Net income from own/separate operations Parent – Davis Company P100,000 Subsidiary - Martin Company 60,000 Total P160,000 Less: Non-controlling Interest in Net Income* P 8,400 Amortization of allocated excess** 18,000 Goodwill impairment _______0 __26,400 Controlling Interest in Consolidated Net Income or Profit P133,600 attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) ___8,400 Consolidated Net Income for 20x4 P142,000 *Net income of subsidiary – 20x4 P 60,000 Amortization of allocated excess – 20x4 (P2,000 + P16,000) ( 18,000) P 42,000 Multiplied by: Non-controlling interest %.......... 20% P 8,400 Less: Non-controlling interest on impairment loss on full-goodwill _______0 Non-controlling Interest in Net Income (NCINI) P 8,400 *this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired. ** Amortization of allocated excess Partial-Goodwill Approach: Fair value of Subsidiary Consideration transferred:.................................................................. 300,000 Less: Carrying amount of Martins net assets = Carrying amount of Martin’s shareholders’ equity Common/Ordinary shares – Martin (180,000 x 80%)............ 144,000 Retained earnings – Martin (60,000 x 80%)......................... 48,000192,000 Allocated Excess: Acquisition differential – Jan. 1, 20x4 108,000 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory (16,000 x 80%)........................................ 12,800 Increase in Patents (20,000 x 80%).......................................... 16,000 28,800 Positive Excess: Goodwill - partial 79,200 Full-Goodwill Approach: Fair value of Subsidiary P300,000/80%.................................................. Consideration transferred:.................................................................. 375,000 Less: Carrying amount of Martins net assets = Carrying amount of Martin’s shareholders’ equity Common/Ordinary shares – Martin (180,000 x 100%)............ 180,000 Retained earnings – Martin (60,000 x 100%)......................... 60,000 240,000 Allocated Excess: Acquisition differential – Jan. 1, 20x4 135,000 Less: Over/under valuation of A/L (Allocated to): Increase in Inventory (16,000 x 100%)........................................ 16,000 Increase in Patents (20,000 x 100%).......................................... 20,000 36,000 Positive Excess: Goodwill - partial 99,000 A summary or depreciation and amortization adjustments is as follows: Account Adjustments to be Over/ Annual Current amortized Under Life Amount Year(20x4) 20x5 Inventory P16,000 1 P 16,000 P 16,000 P - Subject to Annual Amortization Patents 20,000 10 2,000 2,000 ___2,000 Amortization P 18,000 P 18,000 P 2,000 Impairment of goodwill (full) 99,000 - ________ _____ ___9,900 P 18,000 P 18,000 P 11,900 20x5 Consolidated Net Income for 20x5 Net income from own/separate operations Parent – Davis Company P120,000 Subsidiary - Martin Company 72,000 Total P192,000 Less: Non-controlling Interest in Net Income* P 12,020 Amortization of allocated excess** 2,000 Goodwill impairment ___9,900 __23,920 Controlling Interest in Consolidated Net Income or Profit P168,080 attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) __12,020 Consolidated Net Income for 20x5 P180,100 *Net income of subsidiary – 20x5 P 72,000 Amortization of allocated excess – 20x5 ( 2,000) P70,000 Multiplied by: Non-controlling interest %.......... 20% P 14,000 Less: Non-controlling interest on impairment loss on full-goodwill (P99,000 x 10% = ___1,980 P9,900 x 20%) Non-controlling Interest in Net Income (NCINI) P 12,020 *this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired. 2. CI – CNI for 20x4, P133,600; CI – CNI for 20x5, P168,080 3. CRE, 12/31/20x5, P208,080 Correction: RE on January 1, 20x5 instead of December 31, 20x5. Retained earnings of P Co, 1/1/20x5, equity method (same P 80,000 with CRE) Add; CI – CNI 168,080 P248,080 Less: Dividends of P Company __40,000 Retained Earnings of P Co., 12/31/20x4 under equity method P208,080 4. NCI, 12/31/20x5 Non-controlling interest, December 31, 20x5 Common stock – Martin Company, December 31, 20x5…… P 180,000 Retained earnings – Martin Company, December 31, 20x4 Retained earnings – Martin Company, January 1, 20x4 P 60,000 Add: NI of Martin for 20x4 and 20x5 (60,000 + 72,000) 132,000 Total P192,000 Less: Dividends paid – 20x4 and 20x5 (12,000 + 15,000) 27,000 165,000 Stockholders’ equity – S Company, December 31, 20x4 P 345,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) (20,000 + 16,000) 36,000 Amortization of allocated excess (refer to amortization above – 20x4 and 20x5 (P2,000 + 16,000 + 2,000) ( 20,000) Fair value of stockholders’ equity of S, December 31, 20x5…… P 361,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill), 12/31/20x5……….. P 72,200 Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x5:[(P99,000 full – P79,200, partial = P19,800) – (P99,000 x 10%, impairment loss x 20%) 17,820 Non-controlling interest (full-goodwill), 12/31/20x5…………….. P 90,020 5. Partial (80%) Full (100%) Goodwill balance, 1/1/20x4 79,200 99,000 Less Impairment – 20x4 ____-0- ____-0- Goodwill balance, 1/1/20x5 79,200 99,000 Less Impairment – 20x5 (99,000 x 10% = 9,900) _7,920 __9,900 Goodwill balance, 12/31/20x5 71,280 89,100 6. Patents, 1/1/20x4 20,000 Less: Amortization (20,000/10 years = 2,000 x 2) _4,000 Consolidated Patents, 12/31/20x5 16,000 Problem V 1. (Full or partial-goodwill) – the same answer. Consideration transferred by MM ............................ P664,000 Noncontrolling interest fair value .................................... 166,000* air value of Subsidiary…………………………………. P830,000 Less: Book value of SHE – S…..……………………. (600,000) Positive excess ............................................................ 230,000 Annual Excess Life Amortizations Excess fair value assigned to buildings 80,000 20 years P4,000 Goodwill - full P150,000 indefinite -0- Total......................................................................... P4,000 2. P150,000 – full goodwill (see No. 1 above) P120,000 – partial-goodwill: Consideration transferred by MM ........................... P664,000 Less: Book value of SHE – S (P600,000 x 80%)…….. 480,000 Allocated excess…………………………………….. P184,000 Less: Over/under valuation of A and L: P80,000 x 80%................................................. 64,000 Goodwill - partial......................................................... P120,000 3. Full-goodwill Common Stock - TT .................................................................. 300,000 Additional Paid-in Capital - TT ............................................... 90,000 Retained Earnings - TT.............................................................. 210,000 Investment in TT Company (80%) .................................. 480,000 Non-controlling interest (20%) ........................................ 120,000 Buildings .................................................................................... 80,000 Goodwill .................................................................................... 150,000 Investment in TT Company (80%) .................................. 184,000 Non-controlling interest (P166,000 – P120,000) ........... 46,000 Partial-goodwill Common Stock - TT .................................................................. 300,000 Additional Paid-in Capital - TT ............................................... 90,000 Retained Earnings - TT.............................................................. 210,000 Investment in TT Company (80%) .................................. 480,000 Non-controlling interest (20%) ........................................ 120,000 Buildings .................................................................................... 80,000 Goodwill .................................................................................... 120,000 Investment in TT Company (80%) .................................. 184,000 Non-controlling interest (20% x P80,000) ....................... 16,000 4. Cost Model/Initial Value Method Dividends received (80%) ............................................................. P 8,000 Investment in Taylor—12/31/x4 (original value paid)………… P664,000 Equity Method Income accrual (80%) .................................................................. P56,000 Excess amortization expense ....................................................... (3,200) Investment income ................................................................. P52,800 Initial fair value paid ..................................................................................... P664,000 Income accrual 20x4–20x6 (P260,000 × 80%) ........................... 208,000 Dividends 20x4–20x6 (P45,000 × 80%) ......................................... (36,000) Excess Amortizations 20x4–20x6 (P3,200 × 3) ............................ (9,600) Investment in TT—12/31/x6 ..................................................... P826,400 5. Same answer with No. 4. 6. Using the acquisition method, the allocation will be the total difference (P80,000) between the buildings' book value and fair value. Based on a 20 year life, annual excess amortization is P4,000. MM book value—buildings ................................................... P 800,000 TT book value—buildings ....................................................... 300,000 Allocation ................................................................................. 80,000 Excess Amortizations for 20x4–20x5 (P4,000 × 2) …………. (8,000) Consolidated buildings account ………………… P1,172,000 7. Acquisition-date fair value allocated to goodwill: Goodwill-full ( see No. 1 above) ................................................. P 150,000 Goodwill-partial (see No. 1 above)……………………………… P 120,000 8. The common stock and additional paid-in capital figures to be reported are the parent balances only. Common stock, P500,000 Additional paid-in capital, P280,000 Problem VI 1. Common stock of TT Company on December 31, 20x4 P 90,000 Retained earnings of TT Company January 1, 20x4 P 130,000 Sales for 20x4 195,000 Less: Expenses (160,000) Dividends paid (15,000) Retained earnings of TT Company on December 31, 20x4 150,000 Net book value on December 31, 20x4 P240,000 Proportion of stock acquired by QQ x .80 Purchase price P192,000 2. Net book value on December 31, 20x4 P240,000 Proportion of stock held by noncontrolling interest x .20 Balance assigned to noncontrolling interest P 48,000 3. Consolidated net income is P143,000. None of the 20x4 net income of TT Company was earned after the date of purchase and, therefore, none can be included in consolidated net income. 4. Consolidated net income would be P178,000 [P143,000 + (P195,000 - P160,000)]. Problem VII (Several valuation and income determination questions for a business combination involving a non-controlling interest.) Business combinations are recorded generally at the fair value of the consideration transferred by the acquiring firm plus the acquisition-date fair value of the non-controlling interest. PS’s consideration transferred (P31.25 × 80,000 shares) ............................................. P2,500,000 Non-controlling interest fair value (P30.00 × 20,000 shares) ...................................... P600,000 SR’s total fair value 1/1/09................................................................................................ P3,100,000 1. Each identifiable asset acquired and liability assumed in a business combination should initially be reported at its acquisition-date fair value. 2. In periods subsequent to acquisition, the subsidiary’s assets and liabilities are reported at their acquisition-date fair values adjusted for amortization and depreciation. Except for certain financial items, they are not continually adjusted for changing fair values. 3. SR’s total fair value 1/1/09................................................................................................ P3,100,000 SR’s net assets book value ............................................................................................... 1,290,000 Excess acquisition-date fair value over book value ................................................... P1,810,000 Adjustments from book to fair values ............................................................................ Buildings and equipment ........................................................ (250,000) Trademarks ................................................................................ 200,000 Patented technology .............................................................. 1,060,000 Unpatented technology ......................................................... 600,000 1,610,000 Goodwill ................................................................................................................... P200,000 4. Combined revenues ......................................................................................................... P4,400,000 Combined expenses ......................................................................................................... (2,350,000) Building and equipment excess depreciation............................................................. 50,000 Trademark excess amortization ...................................................................................... (20,000) Patented technology amortization ............................................................................... (265,000) Unpatented technology amortization .......................................................................... (200,000) Consolidated net income ................................................................................................ P1,615,000 To non-controlling interest: SR’s revenues ............................................................................................................... P1,400,000 SR’s expenses ............................................................................................................... (600,000) Total excess amortization expenses (above) ........................................................ (435,000) SR’s adjusted net income.......................................................................................... P365,000 Non-controlling interest percentage ownership................................................... 20% Non-controlling interest share of consolidated net income .............................. P73,000 To controlling interest: Consolidated net income ......................................................................................... P1,615,000 Non-controlling interest share of consolidated net income .............................. (73,000) Controlling interest share of consolidated net income....................................... P1,542,000 -OR- PS’s revenues ............................................................................................................... P3,000,000 PS’s expenses ............................................................................................................... 1,750,000 PS’s separate net income ......................................................................................... P1,250,000 PS’s share of SR’s adjusted net income (80% × P365,000) ............................................................................................ 292,000 Controlling interest share of consolidated net income....................................... P1,542,000 5. Fair value of non-controlling interest January 1, 20x4 ................................................ P600,000 20x4 income ..................................................................................................................... ……..73,000 Dividends (20% × P30,000)................................................................................................ (6,000) Non-controlling interest December 31, 20x4 ................................................................ P 667,000 6. If SR’s acquisition-date total fair value was P2,250,000, then a bargain purchase has occurred. SR’s total fair value 1/1/09................................................................................................ P2,250,000 Collective fair values of SR’s net assets ......................................................................... P2,300,000 Bargain purchase .............................................................................................................. P50,000 The acquisition method requires that the subsidiary assets acquired and liabilities assumed be recognized at their acquisition date fair values regardless of the assessed fair value. Therefore, none of SR’s identifiable assets and liabilities would change as a result of the assessed fair value. When a bargain purchase occurs, however, no goodwill is recognized. Problem VIII (Full-Goodwill) A variety of consolidated balances-midyear acquisition) Book value of RR, 1/1(stockholders' equity accounts) (P100,000 + P600,000 + P700,000)....................... P1,400,000 Increase in book value: Net Income (revenues less cost of goods sold and expenses) ................................ P120,000 Dividends .............................................................. (20,000) Change during year .................................................. P100,000 Change during first six months of year ........... 50,000 Book value of RR, 7/1 (acquisition date) . P1,450,000 (Full-Goodwill) Consideration transferred by KL(P1,330,000 + P30,000) ................................................................... P1,360,000 Non-controlling interest fair value .................................. 300,000 RRs’ fair value (given)........................................................ P1,630,000 Note: The fair value of subsidiary amounting P1,630,000, indicates a fair value of NCI amounting to P300,000 (refer to above computation), which is lower compared to the FV of the NCI based on FV of SHE of Subsidiary (RR), computed as follows: BV of SHE of Subsidiary (RR) ....................................... P1,450,000 Adjustments to reflect fair value (undervaluation) 150,000 FV of SHE of Subsidiary (RR) ....................................... P 1,600,000 Multiplied by: NCI% ..................................................... 20% FV of NCI………………………………………………. P 320,000 Consideration transferred by KL(P1,330,000 + P30,000) ................................................................... P1,360,000 Non-controlling interest fair value .................................. ___320,000 RRs’ fair value (given)........................................................ P1,680,000 Book value of RR, 7/1 ........................................................ (1,450,000) Fair value in excess of book value.................................. P 230,000 Annual Excess Excess fair value assigned Life Amortizations Trademarks ...................................................................... 150,000 5 years P30,000 Goodwill (full-goodwill) .................................................. P 80,000 indefinite -0- Total .......................................................................... P30,000 It should be carefully noted, that NCI can never be less than its share of fair value of net identifiable assets (which is P320,000). Thus, the NCI share of company value is raised to P320,000 (replacing the P300,000 NCI computed as residual amount – refer to computation above). The rationale behind such rule is to avoid having a lower amount of goodwill under the full-goodwill approach as compared to goodwill computed under the partial- goodwill approach. (Partial-Goodwill) Consideration transferred by KL...................................... P1,360,000 Less: Book value of SHE – RR (P1,450,000 x 80%)…….. 1,160,000 Allocated excess………………………………………….P 200,000 Less: Over/under valuation of A and L: P150,000 x 80%.............................................. 120,000 Goodwill - partial P80,000 Note that the goodwill under the full-goodwill and partial-goodwill approach are the same because the FV of the NCI based on the FV of SHE of subsidiary (P320,000) is higher compared to the imputed or the computed residual amount of NCI (P300,000). Consolidation Totals: Expenses, P265,000 = P200,000 KK operating expenses plus P50,000 (post-acquisition subsidiary operating expenses) plus ½ year excess amortization of P15,000. Dividends paid = P80,000 Sales, P1,050,000 = P800,000 KK revenues plus P250,000 (post-acquisition subsidiary revenue, P500,000 x 1/2) Equipment, none Depreciation expense, none Subsidiary’s net income, P60,000 = [(P500,000 – P280,000 – P100,000) x 1/2] Buildings, none Goodwill (full), P80,000; Goodwill (partial), P80,000 Consolidated Net Income, P245,000 Sales (1) P1,050,000 Cost of goods sold (2) 540,000 Operating expenses (3) __265,000 Net Income P 245,000 Non-controlling Interest in Sub. Income (4) P 9,000 Controlling Interest in CNI P 236,000 (1) P800,000 KK revenues plus P250,000 (post-acquisition subsidiary revenue) (2) P400,000 KK COGS plus P140,000 (post-acquisition subsidiary COGS) (3) P200,000 KK operating expenses plus P50,000 (post-acquisition subsidiary operating expenses) plus ½ year excess amortization of P15,000 (4) 20% of post-acquisition subsidiary income less excess fair value amortization [20% × (120,000 – 30,000) × ½ year] = P9,000 Retained Earnings, 1/1 = P1,400,000 (the parent’s balance because the subsidiary was acquired during the current year) Trademark = P935,000 (add the two book values and the excess fair value allocation after taking one-half year excess amortization) Goodwill (full)= P80,000 (the original allocation) Goodwill (partial) = P80,000 (the original allocation) Problem IX: Consolidated balances after a mid-year acquisition) Note: Investment account balance indicates the initial value method. Consideration transferred ......................................... P526,000 Non-controlling interest fair value ........................... 300,000 FV of SHE - subsiary...................................................... P826,000 Less: Book value of DD (below) ................................ (765,000) Fair value in excess of book value (positive) ........ P 61,000 Excess assigned Annual Excess based on fair value: Life Amortizations Equipment....................................................... (30,000) 5 years P(6,000) Goodwill (full) ................................................. P 91,000 indefinite -0- Total ........................................................................ P(6,000) Amortization for 9 months .................................. P(4,500) Acquisition-Date Subsidiary Book Value Book value of Duncan, 1/1/x4 (CS + 1/1 RE) ............................ P740,000 Increase in book value-net income (dividends were paid after acquisition) .................................................. P100,000 Time prior to purchase (3 months) .............................................. ×¼ 25,000 Book value of DD, 4/1/x4 (acquisition date) ............................ P765,000 * The fair value of NCI amounting to P300,000 is higher compared to the FV of the NCI based on FV of SHE of Subsidiary (RR), computed as follows: BV of SHE of Subsidiary (DD) . …………………… P765,000 Adjustments to reflect fair value (undervaluation) ( 30,000) FV of SHE of Subsidiary (DD)................................. P735,000 Multiplied by: NCI%................................................ _______40% FV of NCI……………………………………………. P294,000 (Partial-Goodwill) Consideration transferred .................................. P 526,000 Less: Book value of SHE – DD (P765,000 x 60%) 459,000 Allocated excess………………………………… . P 67,000 Less: Over/under valuation of A and L: (P30,000 x 60%)........................................... ................................. ( 18,000) Goodwill - partial .................................................. P 85,000 1. Consolidated Income Statement: Revenues (1) P825,000 Cost of goods sold (2) P405,000 Operating expenses (3) 214,500 619,500 Consolidated net income P 205,500 Noncontrolling interest in CNI (4) 28,200 Controlling interest in CNI P 177,300 (1) P900,000 combined revenues less P75,000 (preacquisition subsidiary revenue) (2) P440,000 combined COGS less P35,000 (preacquisition subsidiary COGS) (3) P234,000 combined operating expenses less P15,000 (preacquisition subsidiary operating expenses) less nine month excess overvalued equipment depreciation reduction of P4,500 (4) 40% of post-acquisition subsidiary income less excess amortization 2. Goodwill, full = P91,000 (original allocation); Goodwill , partial = P85,000 Equipment = P774,500 (add the two book values less P30,000 reduction to fair value plus P4,500 nine months excess amortization) Common Stock = P630,000 (P company balance only) Buildings = P1,124,000 (add the two book values) Dividends Paid = P80,000 (P company balance only) Problem X 1. AA should report income from its subsidiary of P15,000 (P20,000 x .75) rather than dividend income of P9,000. 2. A total of P5,000 (P20,000 x .25) should be assigned to the non-controlling interest in the 20x4 consolidated income statement. 3. Consolidated net income of P70,0000 should be reported for 20X4, computed as follows: Reported net income of AA P59,000 Less: Dividend income from KR (9,000) Operating income of AA P50,000 Net income of KR 20,000 Consolidated net income P70,000 4. Income of P79,000 would be attained by adding the income reported by AA (P59,000) to the income reported by KR (P20,000). However, the dividend income from KR recorded by AA must be excluded from consolidated net income. Problem XI 1. Net income for 20x4: QQ NN Operating income P 90,000 P35,000 Income from subsidiary 24,500 Net income P114,500 P35,000 2. Consolidated net income is P125,000 (P90,000 + P35,000). 3. Retained earnings reported at December 31, 20x4: QQ NN Retained earnings, January 1, 20x4 P290,000 P40,000 Net income for 20x4 114,500 35,000 Dividends paid in 20x4 (30,000) (10,000) Retained earnings, December 31, 20x4 P374,500 P65,000 4. Consolidated retained earnings at December 31, 20x4, is equal to the P374,500 retained earnings balance reported by QQ. 5. When the cost method is used, the parent's proportionate share of the increase in retained earnings of the subsidiary subsequent to acquisition is not included in the parent's retained earnings. Thus, this amount must be added to the total retained earnings reported by the parent in arriving at consolidated retained earnings. Problem XII (Consolidated balances three years after purchase. Parent has applied the equity method.) 1. Schedule 1—Acquisition-Date Fair Value Allocation and Amortization JJ’s acquisition-date fair value .. P206,000 Book value of JJ ............................................ (140,000) Fair value in excess of book value ............ 66,000 Excess fair value assigned to specific accounts based on individual fair values Annual Excess Life Amortization Equipment .............................................. 54,400 8 yrs. P6,800 Buildings (overvalued) .......................... (10,000) 20 yrs. (500) Goodwill .................................................. P21,600 indefinite -0- Total .......................................................... P6,300 Investment in JJ Company—12/31/x6 JJ’s acquisition-date fair value ............................................................ P206,000 20x4 Increase in book value of subsidiary 40,000 20x4 Excess amortizations (Schedule 1) ............................................ (6,300) 20x5 Increase in book value of subsidiary ........................................ 20,000 20x5 Excess amortizations (Schedule 1) ............................................ (6,300) 20x6 Increase in book value of subsidiary ........................................ 10,000 20x6 Excess amortizations (Schedule 1) ............................................ (6,300) Investment in J Company ............................................................ P257,100 2. Equity in Subsidiary Earnings Income accrual ................................................................... P30,000 Excess amortizations (Schedule 1) ................................. (6,300) Equity in subsidiary earnings ....................................... P23,700 3.Consolidated Net Income Consolidated revenues (add book values) ..................................... P414,000 Consolidated expenses (add book values) .................................... (272,000) Excess amortization expenses (Schedule 1) .................................... (6,300) Consolidated net income ................................................................... P135,700 4. Consolidated Equipment Book values added together ............................................................. P370,000 Allocation of purchase price .............................................................. 54,400 Excess depreciation (P6,800 × 3) ....................................................... (20,400) Consolidated equipment ............................................................. P404,000 5.Consolidated Buildings ........................................................................................... Book values added together ............................................................. P288,000 Allocation of purchase price .............................................................. (10,000) Excess depreciation (P500 × 3) ........................................................... 1,500 Consolidated buildings .................................................................. 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 XIII – 80% Partial Goodwill - Cost Model Correction: The dividend income in the trial balance should be P38,400 instead P48,000 Requirements 1 to 4: Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration P transferred……………………………….. 372,000 Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 80%)……………………. P192,000 Retained earnings (P120,000 x 80%)………………... 96,000 288,000 Allocated excess (excess of cost over book P value)….. 84,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… P 4,800 Increase in land (P7,200 x 80%)……………………. 5,760 Increase in equipment (P96,000 x 80%) 76,800 Decrease in buildings (P24,000 x 80%)………..... ( 19,200) Decrease in bonds payable (P4,800 x 80%)…… 3,840 72,000 Positive excess: Partial-goodwill (excess of cost over fair P value)………………………………………………... 12,000 The over/under valuation of assets and liabilities are summarized as follows: S Co. (Over) Book S Co. Under value Fair value Valuation P Inventory………………….…………….. 24,000 P 30,000 P 6,000 Land……………………………………… 48,000 55,200 7,200 Equipment (net)......... 84,000 180,000 96,000 Buildings (net) 168,000 144,000 (24,000) Bonds payable………………………… (120,000) ( 115,200) 4,800 P Net……………………………………….. 204,000 P 294,000 P 90,000 The buildings and equipment will be further analyzed for consolidation purposes as follows: S Co. S Co. Increase Book value Fair value (Decrease) Equipment .................. 180,000 180,000 0 Less: Accumulated depreciation….. 96,000 - ( 96,000) Net book value………………………... 84,000 180,000 96,000 S Co. S Co. Book value Fair value (Decrease) Buildings................ 360,000 144,000 ( 216,000) Less: Accumulated depreciation….. 192,000 - ( 192,000) Net book value………………………... 168,000 144,000 ( 24,000) A summary or depreciation and amortization adjustments is as follows: Annu Over/ al Current Account Adjustments to be Unde Lif Amou Year(20x amortized r e nt 4) 20x5 P P P Inventory 6,000 1 6,000 P 6,000 - Subject to Annual Amortization 96,00 12,00 Equipment (net)......... 0 8 12,000 12,000 0 (24,0 ( 6,000 (6,00 Buildings (net) 00) 4 ) ( 6,000) 0) Bonds payable… 4,800 4 1,200 1,200 1,200 P P 13,200 P 13,200 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 Son (P360,000 x 100%) __360,000 Allocated excess (excess of cost over book value)….. P 105,000 Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) 90,000 Positive excess: Full-goodwill (excess of cost over P 15,000 fair value)………………………………………………... 20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4: (1) Investment in S 372,00 Company…………………………………………… 0 372,00 Cash…………………………………………………………………… 0 .. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Dividend income (P36,000 x 80%)……………. 28,800 Record dividends from S Company. On the books of S Company, the P30,000 dividend paid was recorded as follows: Dividends paid………… 36,000 Cash……. 36,000 Dividends paid by S Co.. Consolidation Workpaper – Year of Acquisition (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S 120.000 Co…………………………………… Investment in S 288,000 Co…………………………………………… Non-controlling interest (P360,000 x 72,000 20%)……………………….. To eliminate intercompany investment and equity accounts of subsidiary on date of acquisition; and to establish non-controlling interest (in net assets of subsidiary) on date of acquisition. (E2) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 18,000 20%)……………………….. Investment in S 84,000 Co………………………………………………. To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition. (E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Goodwill impairment 3,000 loss………………………………………. 6,000 Inventory………………………………………………………….. Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 3,000 To provide for 20x4 impairment loss and depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Cost of Depreciation/ Goods Amortization Amortization Sold expense -Interest Total Inventory sold P 6,000 Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 6,000 P1,200 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 % of Total Goodwill applicable to parent………………… P12,000 80.00% Goodwill applicable to NCI…………………….. 3,000 20.00% Total (full) goodwill……………………………….. P15,000 100.00% Therefore, the goodwill impairment loss of P3,125 based on 100% fair value or full-goodwill would be allocated as follows: Value % of Total Goodwill impairment loss attributable to P or P 80.00% controlling 3,000 Interest Goodwill impairment loss applicable to 750 20.00% NCI…………………….. Goodwill impairment loss based on 100% fair value or full- P 3,750 100.00% Goodwill (E4) Dividend income - P………. 28,800 Non-controlling interest (P36,000 x 7,200 20%)……………….. Dividends paid – S…………………… 36,000 To eliminate intercompany dividends and non-controlling interest share of dividends. (E5) Non-controlling interest in Net Income of 9,360 Subsidiary………… Non-controlling interest ………….. 9,360 To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. P 60,000 Amortization of allocated excess [(E3)]…... ( 13,200) P 46,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) 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 P Co S Co. Dr. Cr. Consolidated Sales P480,000 P240,000 P 720,000 Dividend income 28,800 - (4) 28,800 _________ Total Revenue P508,800 P240,000 P 720,000 Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000 Depreciation expense 60,000 28,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200 Other expenses 48,000 18,000 66,000 Goodwill impairment loss - - (3) 3,000 3,000 Total Cost and Expenses P310,000 P180,000 P508,200 Net Income P196,800 P 60,000 P211,800 NCI in Net Income - Subsidiary - - (5) 9,360 ( 9,360) Net Income to Retained Earnings P196,800 P 60,000 P202,440 Statement of Retained Earnings Retained earnings, 1/1 P Company P360,000 P 360,000 S Company P120,000 (1) 120,000 Net income, from above 196,800 60,000 202,440 Total P552,000 P180,000 P562,440 Dividends paid P Company 72,000 72,000 S Company - 36,000 (4) 36,000 _ ________ Retained earnings, 12/31 to Balance Sheet P484,800 P144,000 P 490,440 Balance Sheet Cash………………………. P 232,800 P 90,000 P 322,800 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 1,200 3,600 Goodwill…………………… (2) 12,000 (3) 3,000 9,000 Investment in S Co……… 372,000 (4) 288,000 (5) 84,000 - Total P1,984,800 P1,008,000 P2,424,600 Accumulated depreciation - equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000 Accumulated depreciation 405,000 288,000 (2) 192,000 - buildings (3) 6,000 495,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 484,800 144,000 490,440 Non-controlling interest………… (4) 7,200 (1 ) 72,000 (2) 18,000 _________ _________ __________ (5) 9,360 ____92,160 Total P1,984,800 P1,008,000 P 745,560 P 745,560 P2,424,600 20x5: Second Year after Acquisition P Co. S Co. Sales P P 540,000 360,000 Less: Cost of goods sold 216,000 192,000 Gross profit P P 324,000 168,000 Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000 Net income from its own separate P P operations 192,000 90,000 Add: Dividend income 38,400 - Net income P P 230,400 90,000 Dividends paid P P 72,000 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……………………… 38,400 Dividend income (P48,000 x 80%)……………. 38,400 Record dividends from S Company. 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………………………… 19,200 Retained earnings – P 19,200 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: Retained earnings – S Company, 1/1/20x5 P144,000 Retained earnings – S Company, 1/1/20x4 120,000 Increase in retained earnings…….. P 24,000 Multiplied by: Controlling interest % 80% Retroactive adjustment P 19,200 (E2) Common stock – S 240,000 Co………………………………………… Retained earnings – S Co., 1/1/20x5 144,000 Investment in S Co (P384,000 x 307,200 80%)………………………… Non-controlling interest (P384,000 x 76,800 20%)……………………….. To eliminate intercompany investment and equity accounts of subsidiary and to establish non-controlling interest (in net assets of subsidiary) on January 1, 20x5. (E3) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 20%) 18,000 Investment in S 84,000 Co………………………………………………. To 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 January 1, 20x5. (E4) Retained earnings – P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] 13,560 Non-controlling interests (P13,200 x 2,640 20%)……………………. Depreciation expense……………………….. 6,000 Accumulated depreciation – buildings………………….. 12,000 Interest expense………………………………… 1,200 6,000 Inventory………………………………………………………….. Accumulated depreciation – 24,000 equipment……………….. Discount on bonds payable………………………… 2,400 Goodwill…………………………………… 3,000 To provide for years 20x4 and 20x5 depreciation and amortization on differences between acquisition date fair value and book value of S’s identifiable assets and liabilities as follows: Year 20x4 amounts are debited to P’s retained earnings & NCI; Year 20x5 amounts are debited to respective nominal accounts. (20x4) Depreciation/ Retained Amortization Amortization earnings, expense -Interest Inventory sold P 6,000 Equipment 12,000 P 12,000 Buildings (6,000) ( 6,000) Bonds payable 1,200 ________ P 1,200 Sub-total P13,200 P 6,000 P 1,200 Multiplied by: 80% To Retained earnings P 10,560 Impairment loss 3,000 Total P 13,560 (E5) Dividend income - P………. 38,400 Non-controlling interest (P48,000 x 9,600 20%)……………….. Dividends paid – S…………………… 48,000 To eliminate intercompany dividends and non-controlling interest share of dividends. (E6) Non-controlling interest in Net Income of 16,560 Subsidiary………… Non-controlling interest ………….. 16,560 To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. P 90,000 Amortization of allocated excess [(E4)]…... ( 7,200) P 82,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI 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 P Co S Co. Dr. Cr. Consolidated Sales P540,000 P360,000 P 900,000 Dividend income 38,400 - (5) 38,400 ___________ Total Revenue P578,400 P360,000 P 900,000 Cost of goods sold P216,000 P192,000 P 408,000 Depreciation expense 60,000 24,000 (4) 6,000 90,000 Interest expense - - (4) 1,200 1,200 Other expenses 72,000 54,000 126,000 Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 625,200 Net Income P230,400 P 90,000 P 274,800 NCI in Net Income - Subsidiary - - (6) 16,560 ( 16,560) Net Income to Retained Earnings P230,400 P 90,000 P 258,240 Statement of Retained Earnings Retained earnings, 1/1 P Company P484,800 (2) 13,560 (1) 19,200 P 490,440 S Company P 144,000 (2) 144,000 Net income, from above 230,400 90,000 258,240 Total P715,200 P234,000 P 748,680 Dividends paid P Company 72,000 72,000 S Company - 48,000 (5) 48,000 _ ________ Retained earnings, 12/31 to Balance Sheet P643,200 P186,000 P 676,680 Balance Sheet Cash………………………. P 265,200 P 114,000 P 367,200 Accounts receivable…….. 180,000 96,000 276,000 Inventory…………………. 216,000 108,000 (3) 6,000 (4) 6,000 324,000 Land……………………………. 210,000 48,000 (3) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (3) 216,000 1,044,000 Discount on bonds payable (3) 4,800 (4) 2,400 2,400 Goodwill…………………… (3) 12,000 (4) 3,000 9,000 Investment in S Co……… 372,000 (1) 19,200 (2) 307,200 (3) 84,000 - Total P2,203,200 P1,074,000 P2,707,800 Accumulated depreciation - equipment P 150,000 P 102,000 (3) 96,000 (4) 24,000 P180,000 Accumulated depreciation 450,000 306,000 (3) 192,000 - buildings (4) 12,000 552,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (2) 240,000 Retained earnings, from above 643,200 186,000 676,680 Non-controlling interest………… (5) 9,600 (4) 2,640 (2 ) 76,800 (3) 18,000 ___ _____ _________ __________ (6) 16,560 ____99,120 Total P2,203,200 P1,074,000 P 821,160 P 821,160 P2,707,800 5. 1/1/20x4 a. On date of acquisition the retained earnings of P should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - P Company, January 1, 20x4 (date P360,000 of acquisition) b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – S Company, January 1, 20x4…… P 240,000 Retained earnings – S Company, January 1, 20x4 120,000 Stockholders’ equity – S Company, January 1, 20x4 P 360,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Fair value of stockholders’ equity of subsidiary, January 1, 20x4…… P450,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)………………………………….. P 90,000 c. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 360,000 P’s Stockholders’ Equity / CI - SHE P 960,000 NCI, 1/1/20x4 ___90,000 Consolidated SHE, 1/1/20x4 P1,050,000 6. Note: The goodwill recognized on consolidation purely relates to the P’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI Consolidated Net Income for 20x4 Net income from own/separate operations P Company P168,000 S Company 60,000 Total P228,000 Less: Non-controlling Interest in Net Income* P 9,360 Amortization of allocated excess (refer to amortization above) 13,200 Goodwill impairment (impairment under partial-goodwill approach) 3,000 25,560 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P202,440 Add: Non-controlling Interest in Net Income (NCINI) 9,360 Consolidated Net Income for 20x4 P211.800 b. NCI-CNI *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company P 60,000 Less: Amortization of allocated excess / goodwill impairment (refer to amortization table above) 13,200 P 46,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) 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) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 202,440 Total P562,440 Less: Dividends paid – P Company for 20x4 72,000 Consolidated Retained Earnings, December 31, 20x4 P490,440 e. Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… P 240,000 Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 P120,000 Add: Net income of S for 20x4 60,000 Total P180,000 Less: Dividends paid – 20x4 36,000 144,000 Stockholders’ equity – S Company, December 31, 20x4 P 384,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200) Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P460,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)………………………………….. P 92,160 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 490,440 P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,090,440 NCI, 12/31/20x4 ___92,160 Consolidated SHE, 12/31/20x4 P1,182,600 12/31/20x5: a. CI-CNI Consolidated Net Income for 20x5 Net income from own/separate operations: P Company P192,000 S Company 90,000 Total P282,000 Less: Non-controlling Interest in Net Income* P16,560 Amortization of allocated excess (refer to amortization above) __7,200 23,760 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P258,240 Add: Non-controlling Interest in Net Income (NCINI) 16,560 Consolidated Net Income for 20x5 P274,800 b. NCI-CNI *Non-controlling Interest in Net Income (NCINI) for 20x5 Net income of S Company P 90,000 Less: Amortization of allocated excess / goodwill impairment for 20x5 (refer to amortization table above) 80,400 P 82,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) for 20x5 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 P484,800 Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – S, January 1, 20x5 P 144,000 Less: Retained earnings – S, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 24,000 Less: Amortization of allocated excess – 20x4 13,200 P 10,800 Multiplied by: Controlling interests %................... 80% P 8,640 Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or (P3, 750 x 80%) 3,000 5,640 Consolidated Retained earnings, January 1, 20x5 P 490,440 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P for 20x5 258,240 Total P748,680 Less: Dividends paid – P Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P676,680 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired. e. Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – S Company, December 31, 20x5…… P 240,000 Retained earnings – S Company, December 31, 20x5 Retained earnings – S Company, January 1, 20x5 P14,000 Add: Net income of S for 20x5 90,000 Total P234,000 Less: Dividends paid – 20x5 48,000 186,000 Stockholders’ equity – S Company, December 31, 20x5 P 426,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) : 20x4 P 13,200 20x5 7,200 ( 20,400) Fair value of stockholders’ equity of S, December 31, 20x5…… P 495,600 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 99,120 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 676,680 Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x5 P1,276,680 NCI, 12/31/20x5 ___99,120 Consolidated SHE, 12/31/20x5 P1,375,800 Problem XIV – 80% Full Goodwill – Cost Model Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred P (80%)…………….. 372,000 Fair value of NCI (given) (20%)……………….. 93,000 P Fair value of Subsidiary (100%)………. 465,000 Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. P 240,000 Retained earnings (P120,000 x 100%)………... 120,000 360,000 Allocated excess (excess of cost over book P value)….. 105,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… P 6,000 Increase in land (P7,200 x 100%)……………………. 7,200 Increase in equipment (P96,000 x 100%) 96,000 Decrease in buildings (P24,000 x 100%)………..... ( 24,000) Decrease in bonds payable (P4,800 x 100%)…… 4,800 90,000 Positive excess: Full-goodwill (excess of cost over fair P value)………………………………………………... 15,000 A summary or depreciation and amortization adjustments is as follows: Annu Over/ al Current Account Adjustments to be unde Lif Amou Year(20x amortized r e nt 4) 20x5 P P P Inventory 6,000 1 6,000 P 6,000 - Subject to Annual Amortization 96,00 12,00 Equipment (net)......... 0 8 12,000 12,000 0 (24,0 ( 6,000 (6,00 Buildings (net) 00) 4 ) ( 6,000) 0) Bonds payable… 4,800 4 1,200 1,200 1,200 P P 13,200 P 13,200 7,200 20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4: (1) Investment in S 372,00 Company…………………………………………… 0 372,00 Cash…………………………………………………………………… 0 .. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Dividend income (P36,000x 80%)……………. 28,800 Record dividends from S Company. 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 240,000 Co………………………………………… Retained earnings – S 120.000 Co…………………………………… Investment in S 288,000 Co…………………………………………… Non-controlling interest (P360,000 x 72,000 20%)……………………….. (E2) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in S 84,000 Co………………………………………………. (E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Goodwill impairment 3,750 loss………………………………………. 6,000 Inventory………………………………………………………….. Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 3,750 Cost of Goods Depreciation/ Amortization Amortization Sold Expense -Interest Inventory sold P 6,000 Equipment P12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 6,000 P1,200 (E4) Dividend income - P………. 28,800 Non-controlling interest (P36,000 x 7,200 20%)……………….. Dividends paid – S…………………… 36,000 (E5) Non-controlling interest in Net Income of 8,610 Subsidiary………… Non-controlling interest ………….. 8,610 Net income of subsidiary…………………….. P 60,000 Amortization of allocated excess [(E3)]…... ( 13,200) P 46,800 Multiplied by: Non-controlling interest %.......... 20% P 9,360 Less: Non-controlling interest on impairment loss on full-goodwill (P3,125 x 20%) or (P3,125 impairment on full-goodwill less P2,500, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) P 8,610 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,125 by 20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6). Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P480,000 P240,000 P 720,000 Dividend income 28,800 - (4) 28,800 _________ Total Revenue P508,800 P240,000 P 720,000 Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000 Depreciation expense 60,000 24,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200 Other expenses 48,000 18,000 66,000 Goodwill impairment loss - - (3) 3,750 3,750 Total Cost and Expenses P312,000 P180,000 P508,950 Net Income P196,800 P 60,000 P211,050 NCI in Net Income - Subsidiary - - (5) 8,610 ( 8,610) Net Income to Retained Earnings P196,800 P 60,000 P202,680 Statement of Retained Earnings Retained earnings, 1/1 P Company P360,000 P 360,000 S Company P120,000 (1) 120,000 Net income, from above 196,800 60,000 202,680 Total P556,800 P180,000 P562,440 Dividends paid P Company 72,000 86,400 S Company - 36,000 (4) 36,000 _ ________ Retained earnings, 12/31 to Balance Sheet P484,800 P144,000 P 490,440 Balance Sheet Cash………………………. P 232,800 P 90,000 P 322,800 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 1,200 3,600 Goodwill…………………… (2) 15,000 (3) 3,750 11,250 Investment in S Co……… 372,000 (3) 288,000 (4) 84,000 - Total P1,984,800 P1,008,000 P2,426,850 Accumulated depreciation - equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000 Accumulated depreciation 405,000 288,000 (5) 192,000 - buildings (6) 6,000 495,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 484,800 144,000 490,440 Non-controlling interest………… (7) 7,200 (1 ) 72,000 (2) 21,000 _________ _________ __________ (5) 8,610 ____94,410 Total P1,984,800 P1,984,800 P 748,560 P 748,560 P2,426,850 20x5: Second Year after Acquisition P Co. S Co. Sales P P 540,000 360,000 Less: Cost of goods sold 216,000 192,000 Gross profit P P 324,000 168,000 Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000 Net income from its own separate P P operations 192,000 90,000 Add: Dividend income 38,400 - Net income P P 230,400 90,000 Dividends paid P P 72,000 48,000 No goodwill impairment loss for 20x5. Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5: Cash……………………… 38,400 Dividend income (P48,000x 80%)……………. 38,400 Record dividends from S Company. Consolidation Workpaper – Second Year after Acquisition (E1) Investment in S Company………………………… 19,200 Retained earnings – P 19,200 Company……………………… To provide entry to convert from the cost method to the equity method or the entry to establish reciprocity at the beginning of the year, 1/1/20x5. Retained earnings – S Company, 1/1/20x5 P144,000 Retained earnings – S Company, 1/1/20x4 120,000 Increase in retained earnings…….. P 24,000 Multiplied by: Controlling interest % 80% Retroactive adjustment P 19,200 (E2) Common stock – S 240,000 Co………………………………………… Retained earnings – S Co., 1/1/20x5 144,000 Investment in S Co (P384,000 x 307,200 80%)………………………… Non-controlling interest (P384,000 x 76,800 20%)……………………….. (E3) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in S 84,000 Co………………………………………………. (E4) Retained earnings – P Company, 1/1/20x5 (P16,950 x 80%) 13,560 Non-controlling interests (P16,950 x 3,390 20%)……………………. Depreciation expense……………………….. 6,000 Accumulated depreciation – 12,000 buildings………………….. Interest expense………………………………… 1,200 6,000 Inventory………………………………………………………….. Accumulated depreciation – 24,000 equipment……………….. Discount on bonds payable………………………… 2,400 Goodwill…………………………………… 3,750 (20x4) Depreciation/ Retained Amortization Amortization earnings, expense -Interest Inventory sold P 6,000 Equipment 12,000 P 12,000 Buildings (6,000) ( 6,000) Bonds payable 1,200 P 1,200 Impairment loss 3,750 Totals P 16,950 P 6,000 P1,200 Multiplied by: CI%.... 80% To Retained earnings P13,560 (E5) Dividend income - P………. 38,400 Non-controlling interest (P48,000 x 9,600 20%)……………….. Dividends paid – S…………………… 48,000 To eliminate intercompany dividends and non-controlling interest share of dividends. (E6) Non-controlling interest in Net Income of 16,560 Subsidiary………… Non-controlling interest ………….. 16,560 Net income of subsidiary…………………….. P 90,000 Amortization of allocated excess [(E4)]…... ( 7,200) P 82,800 Multiplied by: Non-controlling interest %.......... 20% P 16,560 Less: NCI on goodwill impairment loss on full- Goodwill 0 Non-controlling Interest in Net Income (NCINI) P 16,560 Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P540,000 P360,000 P 900,000 Dividend income 38,400 - (5) 38,400 ___________ Total Revenue P578,400 P360,000 P 900,000 Cost of goods sold P216,000 P192,000 P 408,000 Depreciation expense 60,000 24,000 (4) 6,000 90,000 Interest expense - - (4) 1,200 1,200 Other expenses 72,000 54,000 126,000 Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 625,200 Net Income P230,400 P 90,000 P 274,800 NCI in Net Income - Subsidiary - - (6) 16,560 ( 16,560) Net Income to Retained Earnings P230,400 P 90,000 P 258,240 Statement of Retained Earnings Retained earnings, 1/1 P Company P484,800 (3) 13,560 (5) 19,200 P 490,440 S Company P 144,000 (6) 144,000 Net income, from above 230,400 90,000 258,240 Total P715,200 P234,000 P 748,680 Dividends paid P Company 72,000 72,000 S Company - 48,000 (5) 57,600 _ ________ Retained earnings, 12/31 to Balance Sheet P643,200 P186,000 P 676,680 Balance Sheet Cash………………………. P 265,200 P 102,000 P 367,200 Accounts receivable…….. 180,000 96,000 276,000 Inventory…………………. 216,000 108,000 (3) 6,000 (4) 6,000 324,000 Land……………………………. 210,000 48,000 (3) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (3) 216,000 1,044,000 Discount on bonds payable (3) 4,800 (4) 2,400 2,400 Goodwill…………………… (3) 15,000 (4) 3,750 11,250 Investment in S Co……… 372,000 (1) 19,200 (2) 307,200 (7) 84,000 - Total P2,203,200 P1,074,000 P2,710,050 Accumulated depreciation - equipment P 150,000 P 102,000 (3) 96,000 (4) 24,000 P180,000 Accumulated depreciation 450,000 306,000 (3) 192,000 - buildings (4) 12,000 552,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (2) 240,000 Retained earnings, from above 643,200 186,000 676,680 Non-controlling interest………… (6) 9,600 (8) 3,390 (2 ) 76,800 (3) 21,000 ___ _____ _________ __________ (6) 16,560 ____101,370 Total P2,203,200 P1,074,000 P 824,910 P 824,910 P2,710,050 5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000 b. Non-controlling interest (full-goodwill), January 1, 20x4 Common stock – S Company, January 1, 20x4…… P 240,000 Retained earnings – S Company, January 1, 20x4 120,000 Stockholders’ equity – S Company, January 1, 20x4 P 360,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Fair value of stockholders’ equity of S, January 1, 20x4…… P450,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)………………………………….. P 90,000 Add: NCI on full-goodwill (P15,000 – P12,000) ___3,000 Non-controlling interest (partial-goodwill)………………………………….. P 93,000 c. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 360,000 Parent’s Stockholders’ Equity / CI - SHE P 960,000 NCI, 1/1/20x4 ___93,000 Consolidated SHE, 1/1/20x4 P1,053,000 6. Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P202,440 Consolidated Net Income for 20x4 Net income from own/separate operations: P Company P168,000 S Company 60,000 Total P228,000 Less: Non-controlling Interest in Net Income* P 8,610 Amortization of allocated excess (refer to amortization above) 13,200 Goodwill impairment (impairment under full-goodwill approach) 3,750 25,560 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P………….. P202,440 Add: Non-controlling Interest in Net Income (NCINI) 8,610 Consolidated Net Income for 20x4 P211.050 b. NCI-CNI – P8,610 *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company P 60,000 Less: Amortization of allocated excess (refer to amortization table above) 13,200 P 46,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) P 9,360 Less: Non-controlling int. on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) P 8,610 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to NCI acquired. 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) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 202,440 Total P562,440 Less: Dividends paid – P Company for 20x4 72,000 Consolidated Retained Earnings, December 31, 20x4 P490,440 e. Non-controlling interest (full-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… P 240,000 Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 P120,000 Add: Net income of S for 20x4 60,000 Total P180,000 Less: Dividends paid – 20x4 36,000 144,000 Stockholders’ equity – S Company, December 31, 20x4 P 384,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200) Fair value of stockholders’ equity of S, December 31, 20x4…… P460,800 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill, 12/31/20x4………………………….. P 92,160 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 2,250 Non-controlling interest (full-goodwill), 12/31/20x4…………….. P 94,410 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 490,440 P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,090,440 NCI, 12/31/20x4 ___94,410 Consolidated SHE, 12/31/20x4 P1,184,850 12/31/20x5: a. CI-CNI – P258,240 Consolidated Net Income for 20x5 Net income from own/separate operations P Company P192,000 S Company 90,000 Total P282,000 Less: Non-controlling Interest in Net Income* P16,560 Amortization of allocated excess (refer to amortization above) 7,200 Goodwill impairment (impairment under full-goodwill approach) 0 23,760 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P258,240 Add: Non-controlling Interest in Net Income (NCINI) 16,560 Consolidated Net Income for 20x5 P274,800 b. NCI-CNI – P16,560 *Non-controlling Interest in Net Income (NCINI) for 20x5 Net income of S Company P 90,000 Less: Amortization of allocated excess / goodwill impairment for 20x5 (refer to amortization table above) 80,400 P 82,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) for 20x5 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 P484,800 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 P 144,000 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 24,000 Less: Amortization of allocated excess – 20x4 13,200 P 10,800 Multiplied by: Controlling interests %................... 80% P 8,640 Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or (P3, 750 x 80%) 3,000 5,640 Consolidated Retained earnings, January 1, 20x5 P 490,440 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 258,240 Total P748,680 Less: Dividends paid – P Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P676,680 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired. e. Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – S Company, December 31, 20x5…… P 240,000 Retained earnings – S Company, December 31, 20x5 Retained earnings – S Company, January 1, 20x5 P144,000 Add: Net income of S for 20x5 90,000 Total P234,000 Less: Dividends paid – 20x5 48,000 186,000 Stockholders’ equity – S Company, December 31, 20x5 P 426,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) : 20x4 P 13,200 20x5 7,200 ( 20,400) Fair value of stockholders’ equity of S, December 31, 20x5…… P 495,600 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. 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 2,250 Non-controlling interest (full-goodwill)………………………………….. P 101,370 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 676,680 P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,276,680 NCI, 12/31/20x4 __101,370 Consolidated SHE, 12/31/20x4 P1,378,050 Problem XV – 80% Partial Goodwill – Equity Method Requirements 1 to 4: Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration P transferred……………………………….. 372,000 Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 80%)……………………. P192,000 Retained earnings (P120,000 x 80%)………………... 96,000 288,000 Allocated excess (excess of cost over book P value)….. 84,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… P 4,800 Increase in land (P7,200 x 80%)……………………. 5,760 Increase in equipment (P96,000 x 80%) 76,800 Decrease in buildings (P24,000 x 80%)………..... ( 19,200) Decrease in bonds payable (P4,800 x 80%)…… 3,840 72,000 Positive excess: Partial-goodwill (excess of cost over fair P value)………………………………………………... 12,000 The over/under valuation of assets and liabilities are summarized as follows: S Co. (Over) Book S Co. Under value Fair value Valuation P Inventory………………….…………….. 24,000 P 30,000 P 6,000 Land……………………………………… 48,000 55,200 7,200 Equipment (net)......... 84,000 180,000 96,000 Buildings (net) 168,000 144,000 (24,000) Bonds payable………………………… (120,000) ( 115,200) 4,800 P Net……………………………………….. 204,000 P 294,000 P 90,000 The buildings and equipment will be further analyzed for consolidation purposes as follows: S Co. S Co. Increase Book value Fair value (Decrease) Equipment .................. 180,000 180,000 0 Less: Accumulated depreciation….. 96,000 - ( 96,000) Net book value………………………... 84,000 180,000 96,000 S Co. S Co. Book value Fair value (Decrease) Buildings................ 360,000 144,000 ( 216,000) Less: Accumulated depreciation….. 192,000 - ( 192,000) Net book value………………………... 168,000 144,000 ( 24,000) A summary or depreciation and amortization adjustments is as follows: Annu Over/ al Current Account Adjustments to be Unde Lif Amou Year(20x amortized r e nt 4) 20x5 P P P Inventory 6,000 1 6,000 P 6,000 - Subject to Annual Amortization 96,00 12,00 Equipment (net)......... 0 8 12,000 12,000 0 (24,0 ( 6,000 (6,00 Buildings (net) 00) 4 ) ( 6,000) 0) Bonds payable… 4,800 4 1,200 1,200 1,200 P P 13,200 P 13,200 7,200 The goodwill impairment loss of P3,125 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows: Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) P 372,000 Fair value of NCI (given) (20%) 93,000 Fair value of Subsidiary (100%) P 465,000 Less: Book value of stockholders’ equity of S (P360,000 x 100%) __360,000 Allocated excess (excess of cost over book value)….. P 105,000 Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) 90,000 Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………... P 15,000 20x4: First Year after Acquisition Parent Company Equity Method Entry The following are entries recorded by the P in 20x4 in relation to its subsidiary investment: January 1, 20x4: (1) Investment in S 372,00 Company…………………………………………… 0 372,00 Cash…………………………………………………………………… 0 .. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Investment in S Company (P36,000 x 80%)……………. 28,800 Record dividends from S Company. December 31, 20x4: (3) Investment in S Company 48,000 Investment income (P60,000 x 80%) 48,000 Record share in net income of subsidiary. December 31, 20x4: (4) Investment income [(P13,200 x 80%) + P3,000*, goodwill 13,560 impairment loss)] Investment in S Company 13,560 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable and goodwill impairment loss. Thus, the investment balance and investment income in the books of P Company is as follows: Investment in S Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%) NI of S Amortization & (60,000 x 80%) 48,000 13,560 impairment Balance, 12/31/x4 377,640 Investment Income Amortization & NI of S impairment 13,560 48,000 (P60,000 x 80%) 34,440 Balance, 12/31/x4 Consolidation Workpaper – First Year after Acquisition The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries on January 1, 20x4: (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S 120.000 Co…………………………………… Investment in Son 288,000 Co…………………………………………… Non-controlling interest (P360,000 x 72,000 20%)……………………….. (E2) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P96,000 x 18,000 20%)……………………….. Investment in S 84,000 Co………………………………………………. (E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Goodwill impairment 3,000 loss………………………………………. 6,000 Inventory………………………………………………………….. Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 3,000 Cost of Depreciation/ Goods Amortization Amortization Sold Expense -Interest Total Inventory sold P 6,000 Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 6,000 P1,200 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 % of Total Goodwill applicable to parent………………… P12,000 80.00% Goodwill applicable to NCI…………………….. 3,000 20.00% Total (full) goodwill……………………………….. P15,000 100.00% Therefore, 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 to parent P 80.00% or controlling 3,000 Interest Goodwill impairment loss applicable to 625 20.00% NCI…………………….. Goodwill impairment loss based on 100% fair value or full- P 3,750 100.00% Goodwill (E4) Investment income 34,440 Non-controlling interest (P36,000 x 7,200 20%)……………….. Dividends paid – S…………………… 36,000 Investment in S Company 5,640 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: Investment in S Investment Income NI of S 28,800 Dividends - S NI of S (60,000 Amortization & Amortization (60,000 x 80%)……. 48,000 13,560 impairment impairment 13,560 48,000 x 80%) 5,640 34,440 After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Investment in S Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%) NI of Son Amortization & (60,000 x 80%) 48,000 13,560 impairment Balance, 12/31/x4 377,640 288,000 (E1) Investment, 1/1/20x4 84,000 (E2) Investment, 1/1/20x4 5,640 (E4) Investment Income and dividends 377,640 377,640 (E5) Non-controlling interest in Net Income of 9,360 Subsidiary………… Non-controlling interest ………….. 9,360 To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. P 60,000 Amortization of allocated excess [(E3)]…... ( 13,200) P 46,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) P 9,360 Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P480,000 P240,000 P 720,000 Investment income 34,440 - (4) 34,440 _________ Total Revenue P513,600 P240,000 P 720,000 Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000 Depreciation expense 60,000 24,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200 Other expenses 48,000 18,000 66,000 Goodwill impairment loss - - (3) 3,000 3,000 Total Cost and Expenses P312,000 P180,000 P508,200 Net Income P202,440 P 60,000 P211,800 NCI in Net Income - Subsidiary - - (5) 9,360 ( 9,360) Net Income to Retained Earnings P202,440 P 60,000 P202,440 Statement of Retained Earnings Retained earnings, 1/1 P Company P360,000 P360,000 S Company P120,000 (1) 120,000 Net income, from above 202,440 60,000 202,440 Total P562,440 P180,000 P562,440 Dividends paid P Company 72,000 72,000 S Company - 36,000 (4) 36,000 - Retained earnings, 12/31 to Balance Sheet P490,440 P144,000 P490,440 Balance Sheet Cash………………………. P 232,800 P 90,000 P 322,800 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 1,200 3,600 Goodwill…………………… (2) 12,000 (3) 3,000 9,000 Investment in S Co……… 377,640 (2) 288,000 (2) 84,000 (4) 5,640 - Total P1,990,440 P1,008,000 P2,424,600 Accumulated depreciation - equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000 Accumulated depreciation 405,000 288,000 (8) 192,000 - buildings (9) 6,000 495,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 490,440 144,000 490,440 Non-controlling interest………… (10) 7,200 (1 ) 72,000 (2) 18,000 _________ _________ __________ (5) 9,360 ____92,160 Total P1,990,440 P1,008,000 P 751,200 P 751,200 P2,424,600 20x5: Second Year after Acquisition P Co. S Co. Sales P P 540,000 360,000 Less: Cost of goods sold 216,000 192,000 Gross profit P P 324,000 168,000 Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000 Net income from its own separate P P operations 192,000 90,000 Add: Investment income 66,240 - Net income P P 258,240 90,000 Dividends paid P P 72,000 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……………………… 38,400 Investment in S Company (P48,000 x 38,400 80%)……………. Record dividends from S Company. December 31, 20x5: (3) Investment in S Company 72,000 Investment income (P90,000 x 80%) 72,000 Record share in net income of subsidiary. December 31, 20x5: (4) Investment income (P7,200 x 80%) 5,760 Investment in S Company 5,760 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable Thus, the investment balance and investment income in the books of P Company is as follows: Investment in S Cost, 1/1/x5 377,640 38,400 Dividends – S (48,000x 80%) NI of S Amortization (90,000 x 80%) 72,000 5,760 (P7,200 x 80%) Balance, 12/31/x5 405,480 Investment Income Amortization NI of S (7,200 x 80%) 5,760 72,000 (90,000 x 80%) 66,240 Balance, 12/31/x4 Consolidation Workpaper – Second Year after Acquisition The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries: (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S Co, 144.000 1/1/x5…………………………. Investment in S Co (P384,000 x 80%) 307,200 Non-controlling interest (P384,000 x 76,800 20%)……………………….. (E2) Accumulated depreciation – equipment (P96,000 – 84,000 P12,000) Accumulated depreciation – buildings (P192,000 + 198,00 6,000) 0 7,200 Land…………………………………………………………………… …. Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P12,000 – P3,000)…………………………….. 9,000 Buildings……………………………………….. 216,00 0 Non-controlling interest [(P90,000 – P13,200) x 20%] 15,360 Investment in S 70,440 Co………………………………………………. (E3) Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Accumulated depreciation – 12,000 equipment……………….. Discount on bonds 1,200 payable………………………… Depreciation/ Amortization Amortization Expense -Interest Total Inventory sold Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ P 1,200 Totals P 6,000 P1,200 P7,,200 (E4) Investment income 66,240 Non-controlling interest (P48,000 x 9,600 20%)……………….. Dividends paid – S…………………… 48,000 Investment in S Company 27,840 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: Investment in S Investment Income NI of S 38,400 Dividends – S NI of S (90,000 Amortization Amortization (90,000 x 80%)……. 72,000 5,760 (P7,200 x 80%) (P7,200 x 80%) 5,760 72,000 x 80%) 27,840 66,240 After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Investment in S Cost, 1/1/x5 377,640 38,400 Dividends – S (48,000x 80%) NI of S Amortization (90,000 x 80%) 72,000 5,760 (7,200 x 80%) Balance, 12/31/x5 405,480 307,200 (E1) Investment, 1/1/20x5 70,440 (E2) Investment, 1/1/20x5 27,840 (E4) Investment Income and dividends 405,480 405,480 (E5) Non-controlling interest in Net Income of 16,560 Subsidiary………… Non-controlling interest ………….. 16,560 To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. P 90,000 Amortization of allocated excess [(E3)]…... ( 7,200) P 82,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) 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 P Co S Co. Dr. Cr. Consolidated Sales P540,000 P360,000 P 900,000 Investment income 66,240 - (4) 66,240 ___________ Total Revenue P606,000 P360,000 P 900,000 Cost of goods sold P216,000 P192,000 P 408,000 Depreciation expense 60,000 24,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200 Other expenses 72,000 54,000 126,000 Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 625,200 Net Income P258,240 P 90,000 P 274,800 NCI in Net Income - Subsidiary - - (5) 16,560 ( 16,560) Net Income to Retained Earnings P258,240 P 90,000 P258,240 Statement of Retained Earnings Retained earnings, 1/1 P Company P490,440 P490,440 S Company P144,000 (1) 144,000 Net income, from above 258,240 90,000 258,240 Total P748,680 P234,000 P748,680 Dividends paid P Company 72,000 72,000 S Company - 48,000 (4) 48,000 - Retained earnings, 12/31 to Balance Sheet P676,680 P186,000 P676,680 Balance Sheet Cash………………………. P 265,200 P 102,000 P 367,200 Accounts receivable…….. 180,000 96,000 276,000 Inventory…………………. 216,000 108,000 324,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (3) 216,000 1,044,000 Discount on bonds payable (2) 3,600 (3) 1,200 2,400 Goodwill…………………… (2) 9,000 9,000 Investment in S Co……… 405,480 (1) 307,200 (2) 70,440 (4) 27,840 - Total P2,236,680 P1,074,000 P2,707,800 Accumulated depreciation (2) 84,000 - equipment P 150,000 P 102,000 (3) 12,000 P180,000 Accumulated depreciation 450,000 306,000 (2) 198,000 - buildings (3) 6,000 552,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 676,680 186,000 676,680 Non-controlling interest………… (7) 9,600 (2 ) 76,800 (2) 15,360 ___ _____ _________ __________ (5) 16,560 ____99,120 Total P2,236,680 P1,074,000 P 794,400 P 794,400 P2,707,800 Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem VI solution). 5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000 b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – S Company, January 1, 20x4…… P 240,000 Retained earnings – S Company, January 1, 20x4 120,000 Stockholders’ equity – S Company, January 1, 20x4 P 360,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Fair value of stockholders’ equity of subsidiary, January 1, 20x4…… P450,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)………………………………….. P 90,000 c. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 360,000 Parent’s Stockholders’ Equity / CI - SHE P 960,000 NCI, 1/1/20x4 ___90,000 Consolidated SHE, 1/1/20x4 P1,050,000 6. 12/31/20x4: a. CI-CNI Consolidated Net Income for 20x4 Net income from own/separate operations P Company P168,000 S Company 60,000 Total P228,000 Less: Non-controlling Interest in Net Income* P 9,360 Amortization of allocated excess (refer to amortization above) 13,200 Goodwill impairment (impairment under partial-goodwill approach) 3,000 25,560 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P………….. P202,440 Add: Non-controlling Interest in Net Income (NCINI) 9,360 Consolidated Net Income for 20x4 P211.800 b. NCI-CNI *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company P 60,000 Less: Amortization of allocated excess / goodwill impairment (refer to amortization table above) 13,200 P 46,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) 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) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 202,440 Total P562,440 Less: Dividends paid – P Company for 20x4 72,000 Consolidated Retained Earnings, December 31, 20x4 P490,440 e. Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… P 240,000 Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 P120,000 Add: Net income of S for 20x4 60,000 Total P180,000 Less: Dividends paid – 20x4 36,000 144,000 Stockholders’ equity – S Company, December 31, 20x4 P 384,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200) Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P460,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)………………………………….. P 92,160 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 490,440 P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,090,440 NCI, 12/31/20x4 ___92,160 Consolidated SHE, 12/31/20x4 P1,182,600 12/31/20x5: a. CI-CNI Consolidated Net Income for 20x5 Net income from own/separate operations: P Company P192,000 S Company 90,000 Total P282,000 Less: Non-controlling Interest in Net Income* P16,560 Amortization of allocated excess (refer to amortization above) __7,200 23,760 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P258,240 Add: Non-controlling Interest in Net Income (NCINI) 16,560 Consolidated Net Income for 20x5 P274,800 b. NCI-CNI *Non-controlling Interest in Net Income (NCINI) for 20x5 Net income of S Company P 90,000 Less: Amortization of allocated excess / goodwill impairment for 20x5 (refer to amortization table above) 80,400 P 82,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) for 20x5 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 P484,800 Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – S, January 1, 20x5 P 144,000 Less: Retained earnings – S, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 24,000 Less: Amortization of allocated excess – 20x4 13,200 P 10,800 Multiplied by: Controlling interests %................... 80% P 8,640 Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or (P3, 750 x 80%) 3,000 5,640 Consolidated Retained earnings, January 1, 20x5 P 490,440 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 258,240 Total P748,680 Less: Dividends paid – P Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P676,680 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired. e. Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – S Company, December 31, 20x5…… P 240,000 Retained earnings – S Company, December 31, 20x5 Retained earnings – S Company, January 1, 20x5 P14,000 Add: Net income of S for 20x5 90,000 Total P234,000 Less: Dividends paid – 20x5 48,000 186,000 Stockholders’ equity – S Company, December 31, 20x5 P 426,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) : 20x4 P 13,200 20x5 7,200 ( 20,400) Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P 495,600 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 99,120 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 676,680 P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,276,680 NCI, 12/31/20x4 ___99,120 Consolidated SHE, 12/31/20x4 P1,1375,800 Problem XVI - 80% Full Goodwill – Equity Method Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred P (80%)…………….. 372,000 Fair value of NCI (given) (20%)……………….. 93,000 P Fair value of Subsidiary (100%)………. 465,000 Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. P 240,000 Retained earnings (P120,000 x 100%)………... 120,000 360,000 Allocated excess (excess of cost over book P value)….. 105,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… P 6,000 Increase in land (P7,200 x 100%)……………………. 7,200 Increase in equipment (P96,000 x 100%) 96,000 Decrease in buildings (P24,000 x 100%)………..... ( 24,000) Decrease in bonds payable (P4,800 x 100%)…… 4,800 90,000 Positive excess: Full-goodwill (excess of cost over fair P value)………………………………………………... 15,000 A summary or depreciation and amortization adjustments is as follows: Annu Over/ al Current Account Adjustments to be unde Lif Amou Year(20x amortized r e nt 4) 20x5 P P P Inventory 6,000 1 6,000 P 6,000 - Subject to Annual Amortization 96,00 12,00 Equipment (net)......... 0 8 12,000 12,000 0 (24,0 ( 6,000 (6,00 Buildings (net) 00) 4 ) ( 6,000) 0) Bonds payable… 4,800 4 1,200 1,200 1,200 P P 13,200 P 13,200 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 372,00 Company…………………………………………… 0 372,00 Cash…………………………………………………………………… 0 .. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Investment in S Company (P36,000 x 80%)……………. 28,800 Record dividends from S Company. December 31, 20x4: (3) Investment in S Company 48,000 Investment income (P60,000 x 80%) 48,000 Record share in net income of subsidiary. December 31, 20x4: (4) Investment income [(P13,200 x 80%) + (P3,750 – P750)*, 13,560 goodwill impairment loss)] Investment in S Company 13,560 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable and goodwill impairment loss. Thus, the investment balance and investment income in the books of P Company is as follows: Investment in S Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%) NI of S Amortization & (60,000 x 80%) 48,000 13,560 Impairment Balance, 12/31/x4 377,640 Investment Income Amortization & NI of S Impairment 13,560 48,000 (P60,000 x 80%) 34,440 Balance, 12/31/x4 Consolidation Workpaper – First Year after Acquisition The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries on January 1, 20x4: (E1) Common stock – S Co………………………………………… 240,00 0 Retained earnings – S Co…………………………………… 120.00 0 Investment in S 288,00 Co…………………………………………… 0 Non-controlling interest (P360,000 x 72,000 20%)……………………….. (E2) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in S 84,000 Co………………………………………………. (E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Goodwill impairment 3,750 loss………………………………………. 6,000 Inventory………………………………………………………….. Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 3,750 Cost of Depreciation/ Goods Amortization Amortization Sold Expense -Interest Total Inventory sold P 6,000 Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 6,000 P1,200 13,200 (E4) Investment income 37,440 Non-controlling interest (P36,000 x 7,200 20%)……………….. Dividends paid – S…………………… 36,000 Investment in S Company 8,640 Investment in S Investment Income NI of S 28,800 Dividends – S NI of Son (60,000 Amortization & Amortization & (60,000 x 80%)……. 48,000 13,560 Impairment Impairment 13,560 48,000 x 80%) 5,640 34,440 After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Investment in S Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%) NI of S Amortization & (60,000 x 80%) 40,000 13,560 Impairment Balance, 12/31/x4 377,640 288,000 (E1) Investment, 1/1/20x4 84,000 (E2) Investment, 1/1/20x4 5,640 (E4) Investment Income and dividends 377,640 377,640 (E5) Non-controlling interest in Net Income of 8,610 Subsidiary………… Non-controlling interest ………….. 8,610 Net income of subsidiary…………………….. P 60,000 Amortization of allocated excess [(E3)]…... ( 13,200) P 46,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) P 9,360 Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) P 8,610 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6). Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P480,000 P240,000 P 720,000 Investment income 34,440 - (4) 34,440 _________ Total Revenue P514,440 P240,000 P 720,000 Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000 Depreciation expense 60,000 24,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200 Other expenses 48,000 18,000 66,000 Goodwill impairment loss - - (3) 3,750 3,750 Total Cost and Expenses P312,000 P180,000 P508,950 Net Income P202,440 P 60,000 P211,050 NCI in Net Income - Subsidiary - - (5) 8,610 ( 8,610) Net Income to Retained Earnings P202,440 P 60,000 P202,440 Statement of Retained Earnings Retained earnings, 1/1 P Company P360,000 P360,000 S Company P120,000 (1) 120,000 Net income, from above 202,440 60,000 202,440 Total P562,440 P180,000 P562,440 Dividends paid P Company 72,000 72,000 S Company - 36,000 (4) 36,000 - Retained earnings, 12/31 to Balance Sheet P490,440 P144,000 P490,440 Balance Sheet Cash………………………. P 232,800 P 90,000 P 322,800 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 1,200 3,600 Goodwill…………………… (2) 15,000 (3) 3,750 11,250 Investment in S Co……… 377,640 (2) 288,000 (2) 84,000 (4) 5,640 - Total P1,990,440 P1,008,000 P2,426,850 Accumulated depreciation - equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000 Accumulated depreciation 405,000 288,000 (2) 192,000 - buildings (3) 6,000 495,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 490,440 144,000 490,440 Non-controlling interest………… (4) 7,200 (1 ) 72,000 (2) 21,000 _________ _________ __________ (5) 8,610 ____94,410 Total P1,990,440 P1,008,000 P 754,200 P 754,200 P2,426,850 20x5: Second Year after Acquisition P Co. S Co. Sales P P 540,000 380,000 Less: Cost of goods sold 216,000 192,000 Gross profit P P 324,000 168,000 Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000 Net income from its own separate P P operations 192,000 90,000 Add: Investment income 66,240 - Net income P P 258,240 90,000 Dividends paid P P 72,000 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……………………… 38,400 Investment in S Company (P48,000 x 38,400 80%)……………. Record dividends from S Company. December 31, 20x5: (3) Investment in S Company 72,000 Investment income (P90,000 x 80%) 72,000 Record share in net income of subsidiary. December 31, 20x5: (4) Investment income (P7,200 x 80%) 5,760 Investment in S Company 5,760 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable P Company’s P12,000 portion of the differential related to goodwill related to goodwill is not adjusted on the parent’s books following Option 2 as referred to above for goodwill impairment loss. Even though the goodwill of the consolidated entity is impaired, Thus, the investment balance and investment income in the books of P Company is as follows: Investment in S Cost, 1/1/x5 377,640 38,400 Dividends – S (48,000x 80%) NI of S Amortization (90,000 x 80%) 72,000 5,760 (P7,200 x 80%) Balance, 12/31/x5 405,480 Investment Income Amortization NI of S (7,200 x 80%) 5,760 72,000 (90,000 x 80%) 66,240 Balance, 12/31/x4 Consolidation Workpaper – Second Year after Acquisition The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries. (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S Co, 144.000 1/1/x5…………………………. Investment in S Co (P384,000 x 80%) 307,200 Non-controlling interest (P384,000 x 76,800 20%)……………………….. To eliminate investment on January 1, 20x5 and equity accounts of subsidiary on date of acquisition; and to establish non- controlling interest (in net assets of subsidiary) on 1/1/20x5. (E2) Accumulated depreciation – equipment (P96,000 – 84,000 P12,000) Accumulated depreciation – buildings (P192,000 + 198,00 P6,000) 0 7,200 Land…………………………………………………………………… …. Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P15,000 – P3,750)…………………………….. 11,250 Buildings……………………………………….. 216,00 0 Non-controlling interest [(P90,000 – P13,200) x 20%] + [P3,000, full goodwill - [(P3,750, full-goodwill impairment – P3,000, partial- goodwill impairment)* 17,610 or (P3,750 x 20%)] Investment in S 70,440 Co………………………………………………. (E3) Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Accumulated depreciation – 12,000 equipment……………….. Discount on bonds 1,200 payable………………………… Depreciation/ Amortization Amortization Expense -Interest Total Inventory sold Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ P 1,200 Totals P 6,000 P1,200 P7,200 (E4) Investment income 66,240 Non-controlling interest (P48,000 x 9,600 20%)……………….. Dividends paid – S…………………… 48,000 Investment in S Company 27,840 Investment in S Investment Income NI of S 38,400 Dividends - S NI of S (90,000 Amortization Amortization (90,000 x 80%)……. 72,000 5,760 (P7,200 x 80%) (P7,200 x 80%) 5,760 72,000 x 80%) 27,840 66,240 After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Investment in S Cost, 1/1/x5 377,640 38,400 Dividends – S (48,000x 80%) NI of S Amortization (90,000 x 80%) 72,000 5,760 (7,200 x 80%) Balance, 12/31/x5 405,480 307,200 (E1) Investment, 1/1/20x5 70,440 (E2) Investment, 1/1/20x5 27,840 (E4) Investment Income and dividends 405,480 405,480 (E5) Non-controlling interest in Net Income of 16,560 Subsidiary………… Non-controlling interest ………….. 16,560 To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. P 90,000 Amortization of allocated excess [(E3)]…... ( 7,200) P 82,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) P 16,560 Less: NCI on goodwill impairment loss on full- Goodwill 0 Non-controlling Interest in Net Income (NCINI) 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 P Co S Co. Dr. Cr. Consolidated Sales P540,000 P360,000 P 900,000 Investment income 66,240 - (4) 66,240 ___________ Total Revenue P606,000 P360,000 P 900,000 Cost of goods sold P216,000 P192,000 P 408,000 Depreciation expense 60,000 24,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200 Other expenses 72,000 54,000 126,000 Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 625,200 Net Income P258,240 P 90,000 P 274,800 NCI in Net Income - Subsidiary - - (5) 16,560 ( 16,560) Net Income to Retained Earnings P258,240 P 90,000 P 258,240 Statement of Retained Earnings Retained earnings, 1/1 P Company P490,440 P490,440 S Company P144,000 (1) 144,000 Net income, from above 258,240 90,000 258,240 Total P748,680 P234,000 P748,680 Dividends paid P Company 72,000 72,000 S Company - 48,000 (4) 48,000 - Retained earnings, 12/31 to Balance Sheet P676,680 P186,000 P676,680 Balance Sheet Cash………………………. P 265,200 P 102,000 P 367,200 Accounts receivable…….. 180,000 960,000 276,000 Inventory…………………. 216,000 108,000 324,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (3) 216,000 1,044,000 Discount on bonds payable (2) 3,600 (3) 1,200 2,400 Goodwill…………………… (2) 11,250 11,250 Investment in S Co……… 405,9480 (1) 307,200 (5) 70,440 (4) 27,840 - Total P2,236,680 P1,074,000 P2,634,000 Accumulated depreciation (2) 84,000 - equipment P 150,000 P 102,000 (3) 12,000 P 180,000 Accumulated depreciation 450,000 306,000 (2) 198,000 - buildings (3) 6,000 552,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 676,680 186,000 676,680 Non-controlling interest………… (3) 9,600 (2 ) 76,800 (2) 17,610 ___ _____ __________ __________ (5) 16,560 __________ Total P2,236,680 P1,074,000 P 796,650 P 796,650 P2,634,000 Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem VII solution). 5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000 b. Non-controlling interest (full-goodwill), January 1, 20x4 Common stock – S Company, January 1, 20x4…… P 240,000 Retained earnings – S Company, January 1, 20x4 120,000 Stockholders’ equity – S Company, January 1, 20x4 P 360,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Fair value of stockholders’ equity of subsidiary, January 1, 20x4…… P450,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)………………………………….. P 90,000 Add: NCI on full-goodwill (P15,000 – P12,000) ___3,000 Non-controlling interest (partial-goodwill)………………………………….. P 93,000 c. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 360,000 Parent’s Stockholders’ Equity / CI - SHE P 960,000 NCI, 1/1/20x4 ___93,000 Consolidated SHE, 1/1/20x4 P1,053,000 6. a. CI-CNI – P202,440 Consolidated Net Income for 20x4 Net income from own/separate operations: P Company P168,000 S Company 60,000 Total P228,000 Less: Non-controlling Interest in Net Income* P 8,610 Amortization of allocated excess (refer to amortization above) 13,200 Goodwill impairment (impairment under full-goodwill approach) 3,750 25,560 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P202,440 Add: Non-controlling Interest in Net Income (NCINI) 8,610 Consolidated Net Income for 20x4 P211.050 b. NCI-CNI – P8,610 *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company P 60,000 Less: Amortization of allocated excess (refer to amortization table above) 13,200 P 46,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) P 9,360 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 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) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 202,440 Total P562,440 Less: Dividends paid – P Company for 20x4 72,000 Consolidated Retained Earnings, December 31, 20x4 P490,440 e. Non-controlling interest (full-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… P 240,000 Retained earnings – S Company, December 31, 20x4 Retained earnings – SCompany, January 1, 20x4 P120,000 Add: Net income of S for 20x4 60,000 Total P180,000 Less: Dividends paid – 20x4 36,000 144,000 Stockholders’ equity – S Company, December 31, 20x4 P 384,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200) Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P460,800 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill, 12/31/20x4………………………….. P 92,160 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 2,250 Non-controlling interest (full-goodwill), 12/31/20x4…………….. P 94,410 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 490,440 P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,090,440 NCI, 12/31/20x4 ___94,410 Consolidated SHE, 12/31/20x4 P1,184,850 12/31/20x5: a. CI-CNI – P258,240 Consolidated Net Income for 20x5 Net income from own/separate operations P Company P192,000 S Company 90,000 Total P282,000 Less: Non-controlling Interest in Net Income* P16,560 Amortization of allocated excess (refer to amortization above) 7,200 Goodwill impairment (impairment under full-goodwill approach) 0 23,760 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P258,240 Add: Non-controlling Interest in Net Income (NCINI) 16,560 Consolidated Net Income for 20x5 P274,800 b. NCI-CNI – P16,560 *Non-controlling Interest in Net Income (NCINI) for 20x5 Net income of S Company P 90,000 Less: Amortization of allocated excess / goodwill impairment for 20x5 (refer to amortization table above) 80,400 P 82,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) for 20x5 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 P484,800 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 P 144,000 Less: Retained earnings – S, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 24,000 Less: Amortization of allocated excess – 20x4 13,200 P 10,800 Multiplied by: Controlling interests %................... 80% P 8,640 Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or (P3, 750 x 80%) 3,000 5,640 Consolidated Retained earnings, January 1, 20x5 P 490,440 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of 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 e. Non-controlling interest (full-goodwill), December 31, 20x5 Common stock – S Company, December 31, 20x5…… P 240,000 Retained earnings – S Company, December 31, 20x5 Retained earnings – S Company, January 1, 20x5 P144,000 Add: Net income of S for 20x5 90,000 Total P234,000 Less: Dividends paid – 20x5 48,000 186,000 Stockholders’ equity – S Company, December 31, 20x5 P 426,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) : 20x4 P 13,200 20x5 7,200 ( 20,400) Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P 495,600 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. 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 2,250 Non-controlling interest (full-goodwill)………………………………….. P 101,370 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 676,680 P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,276,680 NCI, 12/31/20x4 __101,370 Consolidated SHE, 12/31/20x4 P1,378,050 Problem XVII P’s gain on sale of subsidiary stock is computed as follows: Cash proceeds……………………………………… P 720,000 Fair value of retained non-controlling interest equity 420,000 investment (35%) Carrying value of the non-controlling interest before deconsolidation 120,000 (15% or prior outside non-controlling interest in Subsidiary) P1,260,000 Less: Carrying value of Subsidiary’s net assets 1,200,000 Gain on disposal or deconsolidation 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 XVIII P Company’s additional paid-in capital arising sale of subsidiary shares is computed as follows: Cash proceeds……………………………………… P 84,000 Less: Carrying value of non-controlling interest 72,000 (P720,000* x 10%) “Gain” – transfer within equity in “Additional paid-in P capital” account 12,000 *the P720,000 is already the gross-up amount since it is the amount presented in the consolidated balance sheet. Because P Company continues to have the ability to control S Company, the sale of S’s shares is treated as an equity transaction. Therefore, no gain or loss is recognized. Instead, Palmer Company’s additional paid-in capital increases by P60,000. Problem XIX P Company’s additional paid-in capital arising sale of subsidiary shares is computed as follows: Cash proceeds from issuance of additional shares …..P210,000 Less: Carrying Value of non-controlling from issuance of additional shares: Non-controlling interest prior to issuance of additional shares: Book value of SHE before issuance…P720,000 x: Non-controlling interest……………. 20%* P 144,000 Non-controlling interest after issuance of additional shares: Book value of SHE before issuance…………………….P720,000 Additional issuance…………………..…210,000 BV of SHE after issuance……………….P930,000 x: Non-controlling interest……………... 36%** 334,800 190,800 “Gain” – transfer within equity in “Additional paid-in capital” account...P 19,200 * (120,000 – 96,000) / 120,000 = 20% ownership before additional issuance of shares. ** [(24,000 + 30,000) / (120.000 + 30,000)] = 36% ownership after additional issuance of shares PCompany recognizes an increases in its Investment in S from P576,000 (P720,000x 80%) to P595,200 [P930,000 x (96,000/150,000) and in additional paid-in capital of P19,200. Multiple Choice Problems 1. b Full-Goodwill: (P600,000/70%) – P640,000 = P217,143 – P40,000 = P177,143 If partial goodwill: P600,000 – (P640,000 x 70%) = P152,000 – (P40,000 x 70%) = P124,000 2. b – P500,000 + P3,461 3. b 4. d – equivalent to consideration transferred, P320,000 5. d – equivalent to consideration transferred, P380,000 6. a 7. P2,120,000 Podex’s separate earnings for 20x6...................................................... P2,000,000 Dividend income from Sodex ................................................................ __120,000 Podex’s 20x6 net income ....................................................................... P2,120,000 8. P2,260,000 Podex’s separate earnings for 20X6 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 9. b 10. c Retained earnings of Parent, 12/31/20x6, Cost Method 310,000 Add: Increased in Retained earnings of Subsidiary _80,000 RE of Parent, 12/31/20x6, Equity Method (same with 390,000 Consolidated RE) 11. c Investment balance 12/31/x6, Cost Method 200,000 Add: Increased in Retained earnings of Subsidiary 80,000 Investment balance 12/31/x6, Equity Method 280,000 12. d Retained earnings of Parent, 12/31/20x6, Cost Method 210,000 Add: Increased in Retained earnings of Subsidiary _240,000 RE of Parent, 12/31/20x6, Equity Method (same with 450,000 Consolidated RE) 13. b – dividends of subsidiary considered as dividend income in the parent’s separate income statement. 14. b Retained earnings of Parent, 12/31/20x6, Cost Method 360,000 Less: Decreased in Retained earnings of Subsidiary _40,000 RE of Parent, 12/31/20x6, Equity Method (same with 320,000 Consolidated RE) 15. d – 20x3: P30,000 x 75% = P22,500 20x4: P40,000 x 75% = P30,000 16. a – no changes in investment unless there are dispositions of investment and permanent impairment. 17. c - 20x4 = P86,400 Consolidated Net Income 20x4 20x5 Peters Company's reported net income64,000 37,500 Less: dividend income from Smith (1,600) _____0 Peters' income from independent operations62,400 37,500 Add: Peter's share of Smith's net income in 20x4 since acquisition (.80)(8/12)(P45,000)24,000 Less: Peter's share of Smith's net loss in 20x4 (.80 P5,000 ______ (4,000) Controlling Interest in Consolidated net income86,400 33,500 18. c - 20x5 = P33,500 – refer to No. 17 19. b - 20x4 = P151,400 Consolidated Retained Earnings 20x4 20x5 Peter's 12/31 retained earnings (P80,000 + P64,000 - P15,000) P129,000 P161,500 Add: Peter's share of the increase in Smith's retained earnings from the date of acquisition to the current date: (.80 (P53,000 – P25,000)) 22,400 (.80 (P48,000 – P25,000) ________18,400 P151,400 P179,900 20. c - 20x5 = P179,900 – refer to No. 19 21. c Consolidated Net Income for 20x4 Net income from own/separate operations P Company P30,200 – (P150,0000 – P20,000 – P70,000 P60,000) S Company (P100,000 – P15,000 – P45,000) 40,000 Total P110,000 Less: Non-controlling Interest in Net Income P 0 Amortization of allocated excess 0 Goodwill impairment ____0 ____0 Controlling Interest in Consolidated Net Income or Profit P110,000 attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) _____0 Consolidated Net Income for 20x4 P110,000 22. b Plimsol: P100,000 + P200,000,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,P300,000 Shipping: P75,000 + P150,000………………………………………………………………. 225,000 P525,000 23. Retained Earnings - Plimsol, 1/1/20x4 (cost method, same with equity method and consoilidated retained earnings since it is the date of acquisition)P 150,000 Add: CI – CNI (refer to No. 21) 110,000 Less: CI – Dividends (Dividend of parent only)25,000 Retained earnings, 12/31/20x4 (equity method same with CRE) P 235,000 24. d Liabilities: Plimsol (P40,000 + P75,000) P115,000 Shipping (P25,000 + P50,000) 75,000 P 190,000 25. d Total assets (No. 22) P525,000 Les: Liabilities (No. 24) 190,000 Stockholders’ equity P335,000 26. c – P60,000 x 80% = P48,000 27. 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 28. a Investment. 4/1/20x6 P500,000 Add: Share in net income – 20x6 (3 quarters x P30,000 x 90%) 81,000 Less: Dividends declared of Satz (3 quarters x P10,000 x 90%) 27,000 Amortization (the recorded amount which means it represents only 9 months, no need to pro-rate) 10,000 Investment, 12/31/20x6 P544,000 29. c Patz’s equity in net income of Sats (90% x P30,000 x 3 qtrs) P81,000 Less: Amortization (the recorded amount which means it represents only 9 months, no need to pro-rate) 10,000 Investment income – 20x4 (equity method)P 71,000 30. d Investment balance, 1/1/20x4……………………………………………….. P150,000 Add: Puma’s equity in net income of Slume (30% x P25,000)..………… 7,500 Less: Dividends (P30% x P10,000)……………………………………………. 3,000 Amortization of cost in excess of book value (P50,000/10 years) x 30%.............................................................. 1,500 Puma’s 20x6 net income (equity method) ............................................... P153,000 31. b Puma’s equity in net income of Slume (30% x P25,000)..……………….. P 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 32. a – under equity method, the Parent’s retained earnings is the same with Consolidated RE. 33. b {(P260,000 - P230,000) + [(P650,000 - P590,000)/120] 8}.8 34. d {(P190,000 - P160,000) 4/6 - [(P241,000 - P220,000)/60] 5}.7 35. b Consideration transferred: 10,500 shares x P95 P997,500 Less: BV of SHE – S (?) 857,500 Allocated excess; P140,000 Less: O/U valuation of A and L: Undervaluation of land P40,000 Overvaluation of buildings ( 30,000) Undervaluation of equipment 80,000 Undervaluation/unrecorded trademark 50,000 140,000 P 0 36. a – P900,000 + P500,000 = P1,400,000 37. d – assumed that total expenses includes cost of goods sold which is different when the question is “total operating expenses” Cost of goods sold (P360,000 + P200,000) P 560,000 Depreciation expense (P140,000 + P40,000) 180,000 Other expenses (P100,000 + P60,000) 160,000 Amortization of allocated excess: Buildings: (P30,000) / 20 (P1,500) Equipment; P80,000 / 10 8,000 Trademark: P50,000 / 16 3,125 9,625 Total expenses P909,625 38. b – (P750,000 + P280,000) – P30,000 + (P1,500 x 5 years) = P1,007,500 39. c – (P300,000 + P500,000) + P80,000 – (P8,000 x 5 years) = P840,000 40. c – P450,000 + P180,000 + P40,000 = P670,000 41. d – P50,000 – P3,125 x 5 years) = P34,375 42. a – P only (the stock issued In 20x0 includes already in the December 31, 20x4 balance. 43. a – P only 44. a Consolidated Retained Earnings, December 31, 20x4 Consolidated Retained earnings, January 1, 20x4 (equity method) P 1,350,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 490,375 Total P1,840,375 Less: Dividends paid – P Company for 20x4 195,000 Consolidated Retained Earnings, December 31, 20x4 (under equity method) P1,645,375 Net Income from own operations: P Co S Co Sales P900,000 P500,000 Less: cost of goods sold 360,000 200,000 Gross profit P540,000 P300,000 Less: Depreciation expense 140,000 40,000 Other expenses 100,000 60,000 Net income P300,000 P200,000 Non-controlling interest (full-goodwill), December 31, 20x4 P Company P300,000 S Company 200,000 Total P500,000 Less: Non-controlling Interest in Net Income P 0 Amortization of allocated excess (refer to amortization above) 9,625 Goodwill impairment (impairment under full-goodwill approach) _ 0 9,625 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P490,375 45. c Note: Normally, the term used in the requirement “equity in subsidiary income”, is a term used under equity method, but it should be noted that under PAS 27, it prohibits the use of equity method for a parent to consolidate a subsidiary. But, assuming the use of equity method, the answer would be, P190,375. Share in net income: P200,000 x 100% P200,000 Less: Amortization of allocated excess 9,625 P190,375 46. a Punn’s equity in net income of Sunn (3 months ended,12/31/x6)…… P 200,000 Amortization of cost in excess of book value ........................................... ( 60,000) Increase in Parent’s retained earnings……………………………………. P 140,000 47. a Punn’s net income from own operations, 12 months ended, 12/31/x6 P6,000,000 Add: Increase in RE of Sunn: Punn’s equity in net income of Sunn (3 months ended,12/31/x6)P200,000 Amortization of cost in excess of book value ............................................... ( 60,000) Increase in Parent’s retained earnings……………………………………. P 140,000 Punn’s net income for 20x6 under the equity method……………………… P6,140,000 48. b Full—goodwill Aproach Fair value of Subsidiary (100%) Consideration transferred P (80%)…………….. 180,000 Fair value of NCI (given) (20%)……………….. 20,000 P Fair value of Subsidiary (100%)………. 200,000 Less: Book value of stockholders’ equity of Son: Common stock (P100,000 x 100%)………………. P 100,000 Retained earnings (P60,000 x 100%)………... 60,000 160,000 Allocated excess (excess of cost over book P value)….. 40,000 Less: Over/under valuation of assets and liabilities: Increase in land (P5,000 x 100%)……………………. P 5,000 Increase in equipment (P10,000 x 100%) ___10,000 15,000 Positive excess: Increase in Patent (excess of cost over fair P value)………………………………………………... 25,000 A summary or depreciation and amortization adjustments is as follows: Annu al Current Account Adjustments to be Over/ Lif Amou Year(20x amortized under e nt 4) Subject to Annual Amortization P Equipment (net)......... 10,000 5 2,000 P 2,000 Patent 25,000 5 5,000 5,000 P 7,000 P 7,000 49. d Investment in Wisden 1/1/x4. 180,000 18,000 Dividends – S (20,000 x 90%) NI of S (60,000 Amortization x 90%)……. 54,000 12,600 (P14,000 x 90%) 1/1/x6203,400 50. c Investment in Wisden 1/1/x6. 230,400 9,000 Dividends – S (10,000 x 90%) NI of S (30,000 Amortization x 90%)……. 27,000 6,300 (7,000 x 90%) 1/1/x6215,100 51. a 20x4 Investment income: Dividend of P10,000 x 100% = P10,000 20x4 Investment balance: P500,000 52. b Pedro’s equity in net income of Sanburn – x4 (100% x P80,000)..………. P 80,000 Less: Amortization of cost in excess of book value Inventory: P20,000 x 100%……………………………………………….. 20,000 Patent [P500,000 – P380,000 = P120,000 – P20,000 = P100,000) (P100,000/20 years) x 100%.......................................................... 5,000 Investment income – 20x4 (equity method)………………………………. P 55,000 Investment balance, 1/1/20x4……………………………………………….. P500,000 Add: Pedro’s equity in net income of Sanburn – x4 (100% x P80,000)..…80,000 Less: Dividends (100% x P10,000)……………………………………………. 10,000 Amortization of cost in excess of book value: Inventory: P20,000 x 100%……………………………………………… 20,000 Patent [P500,000 – P380,000 = P120,000 – P20,000 = P100,000) (P100,000/20 years) x 100%.......................................................... ___5,000 Investment balance, equity method, 12/31/20x4…………………………. P545,000 53. d Under the cost method, an investor recognizes its investment in the investee at cost. Income is recognized only to the extent that the investor receives distributions from the accumulated net profits (or dividend declared/paid by the investee) of the investee arising after the date of acquisition by the investor. Distributions (dividends) received in excess of such profits are regarded as a recovery of investment and are accounted for as a reduction of the cost of the investment (i.e., as a return of capital or liquidating dividend). Therefore, the investment balance of P500,000 on the acquisition date remains to be the same. 54. d – refer to No. 53 for further discussion. 55. b – refer to No. 53 for further discussion. 56. a – P40,000 x 80% 57. b – P50,000 x 80% 58. a – P60,000 x 80% 59. c Full/Gross-up Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P100,000 Less: Amortization of allocated excess*…………… 7,000 Impairment of full-goodwill (if any)**………… 0 P 93,000 x: Non-controlling interests……………………………. 20% Non-controlling interest in Net Income………………………..P 18,600 *Amortization of allocated excess: Increase in equipment: P30,000 / 10 years = P 3,000 Increase in buildings: P40,000 / 10 years = 4,000 Total amortization……………………………… P 7,000 ** In case, there is an impairment of goodwill then the amount impaired under the full- goodwill method should also be allocated between controlling and non-controlling interests Partial Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P100,000 Less: Amortization of allocated excess*………………7,000 P 93,000 x: Non-controlling interests……………………………. 20% Non-controlling interest in Net Income…………………. P 18,600 60. c Full/Gross-up Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P120,000 Less: Amortization of allocated excess*…………….. 7,000 Impairment of full-goodwill (if any)**………… 0 P113,000 x: Non-controlling interests……………………………. 20% Non-controlling interest in Net Income………………………..P 22,600 *Amortization of allocated excess: Increase in equipment: P30,000 / 10 years = P 3,000 Increase in buildings: P40,000 / 10 years = 4,000 Total amortization………………………. P 7,000 ** In case, there is an impairment of goodwill then the amount impaired under the full- goodwill method should also be allocated between controlling and non-controlling interests Partial Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P120,000 Less: Amortization of allocated excess*…………….. 7,000 P113,000 x: Non-controlling interests……………………………. 20% Non-controlling interest in Net Income…………………………P 22,600 61. a Full/Gross-up Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P130,000 Less: Amortization of allocated excess*…………… 7,000 Impairment of full-goodwill (if any)**……… 0 P123,000 x: Non-controlling interests………………………….. 20% Non-controlling interest in Net Income……………………… P 24,600 *Amortization of allocated excess: Increase in equipment: P30,000 / 10 years = P 3,000 Increase in buildings: P40,000 / 10 years = 4,000 Total amortization………………………. P 7,000 ** In case, there is an impairment of goodwill then the amount impaired under the full- goodwill method should also be allocated between controlling and non-controlling interests Partial Goodwill Presentation: Non-controlling interest in Net Income: Subsidiary net income from own operations……….P130,000 Less: Amortization of allocated excess*……………… 7,000 P123,000 x: Non-controlling interests……………………………… 20% Non-controlling interest in Net Income………………..P 24,600 62. a Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x4……………………………… P 300,000 Retained earnings, 12/31/20x4: Retained earnings, 1/1/20x4………………………….P200,000 Add: Net income – 20x4…………………………….. 100,000 Less: Dividends paid, 20x4…………..………………40,000 260,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x4 P 560,000 Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000 Less: Accumulated amortization of allocated excess P7,000 x 1 year…………………………………….…. 7,000 Fair value of Stockholders’ Equity of Subsidiary. 12/31/x4… P623,000 Multiplied by: Non-controlling Interest %........................... ____ 20% Non-controlling Interest (partial goodwill)………………….. P124,600 Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… 11,000 Non-controlling Interest (full)……………………………… P135,600 * this computation (i.e., P55,000 x 20%) should only be use when the fair value of the non- controlling interest of acquiree (subsidiary) is not given. Partial Goodwill: Fair value of Subsidiary: Fair value of consideration transferred: Cash………… P 500,000 Less: Book value of Net Assets (Stockholders’ Equity - Subsidiary): (P300,000 + P200,000) x 80%.. 400,000 Allocated Excess.…………………………………………. P 100,000 Less: Over/Undervaluation of Assets and Liabilities: Increase in equipment: P30,000 x 80%................... P 24,000 Increase in building: P40,000 x 80%......................... 32,000 56,000 Goodwill (Partial)………………………………………….. P 44,000 Full-goodwill: (100%) Fair value of Subsidiary: (100%) Fair value of consideration transferred: P500,000 / 80%........………………………….. P 625,000 Less: Book value of Net Assets (Stockholders’ Equity - Subsidiary)…………................................... 500,000 Allocated Excess.…………………………………………. P 125,000 Less: Over/Undervaluation of Assets and Liabilities (P40,000 + P30,000)……………………. 70,000 Goodwill (Full/Gross-up)..……………………………….. P 55,000 63. e Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x5……………………………… P 300,000 Retained earnings, 12/31/20x5: Retained earnings, 1/1/20x5 …………………..……P260,000 Add: Net income, 20x5………………………………. 120,000 Less: Dividends paid, 20x5…………………………… 50,000 330,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x5 P 630,000 Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000 Less: Accumulated amortization of allocated excess – 2 yrs 14,000 Fair value of Stockholders’ Equity of Subsidiary. 12/31/x5… P 686,000 Multiplied by: Non-controlling Interest %.............................. 20% Non-controlling Interest (partial goodwill)………………….. P 137,200 Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… 11,000 Non-controlling Interest (full)……………………………… P 148,200 64. e Book value of Stockholders’ Equity of Subsidiary Common stock, 12/31/20x6……………………………… P 300,000 Retained earnings, 12/31/20x6: Retained earnings, 1/1/20x6………………………….P330,000 Add: Net income, 20x6……………………………… 130,000 Less: Dividends paid, 20x6…………………………..60,000 400,000 Book value of Stockholders’ Equity of Subsidiary, 12/31/x6 P 700,000 Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000 Less: Accumulated amortization of allocated excess (1/1/20x4 – 12/31/20x6): P7,000 x 3 years…………… 21,000 Fair value of Stockholders’ Equity of Subsidiary. 12/31/x6… P 749,000 Multiplied by: Non-controlling Interest %............................ 20% Non-controlling Interest (partial goodwill)………………….. P 149,800 Add: Non-controlling interest in Full Goodwill (P55,000, full – P44,000 partial l) or (P55,00,000 x 20%)*……………………………… 11,000 Non-controlling Interest (full)……………………………… P 160,800 * this computation (i.e., P55,000 x 20%) should only be use when the fair value of the non- controlling interest of acquiree (subsidiary) is not given. 65. P542,400 Investment balance, 1/1/20x4……………………………………………….. P500,000 Add: Bell’s equity in net income of Demers – x4 (80% x P100,000)..……80,000 Less: Dividends (80% x P40,000)……………………………………………….32,000 Amortization of cost in excess of book value: Equipment: P30,000/10 years x 80%………………………………… 2,400 Building: P40,000/10 years x 80%................................................. 3,200 Investment balance, equity method, 12/31/20x4…………………………. P542,400 66. c Investment balance, 12/3/20x4……………………………………………….. P542,400 Add: Bell’s equity in net income of Demers – x4 (80% x P120,000)..…… 96,000 Less: Dividends (80% x P50,000)………………………………………………. 40,000 Amortization of cost in excess of book value: Equipment: P30,000/10 years x 80%………………………………… 2,400 Building: P40,000/10 years x 80%................................................. 3,200 Investment balance, equity method, 12/31/20x5…………………………. P592,800 67. b Investment balance, 12/3/20x5……………………………………………….. P592,800 Add: Bell’s equity in net income of Demers – x4 (80% x P130,000)..…… 104,000 Less: Dividends (80% x P60,000)………………………………………………. 48,000 Amortization of cost in excess of book value: Equipment: P30,000/10 years x 80%………………………………… 2,400 Building: P40,000/10 years x 80%................................................. 3,200 Investment balance, equity method, 12/31/20x6…………………………. P643,200 68. a Bell’s equity in net income of Demers (80% x P100,000)………………. P 80,000 Less: Amortization of cost in excess of book value (refer to No. 65): (P2,400 + P3,200) 5,600 Investment income – 20x4 (equity method)………………………………. P 74,400 69. a Bell’s equity in net income of Demers (80% x P120,000)………………. P 96,000 Less: Amortization of cost in excess of book value (refer to No. 65): (P2,400 + P3,200) 5,600 Investment income – 20x5 (equity method)………………………………. P 90,400 70. c Bell’s equity in net income of Demers (80% x P130,000)………………. P 104,000 Less: Amortization of cost in excess of book value (refer to No. 65): (P2,400 + P3,200) 5,600 Investment income – 20x6 (equity method)………………………………. P 98,400 71. c Non-controlling interest in Net Income: Subsidiary net income from own operations…………………………… P100,000 Less: Amortization of allocated excess (refer to No. 65) (P3,000 + P4,000)………………………………………..……………. 7,000 P 93,000 x: Non-controlling interests……………………………………………….. 20% Non-controlling interest in Net Income…………………………………P 18,600 72. c Non-controlling interest in Net Income: Subsidiary net income from own operations…………………………… P120,000 Less: Amortization of allocated excess (refer to No. 65) (P3,000 + P4,000)………………………………………..……………. 7,000 P 113,000 x: Non-controlling interests……………………………………………….. 20% Non-controlling interest in Net Income………………………………… P 22,600 72. c Non-controlling interest in Net Income: Subsidiary net income from own operations…………………………… P130,000 Less: Amortization of allocated excess (refer to No. 65) (P3,000 + P4,000)………………………………………..……………. 7,000 P 123,000 x: Non-controlling interests……………………………………………….. 20% Non-controlling interest in Net Income………………………………… P 24,600 73. a – same with No. 62 (cost method) 74. e – same with No. 63 (cost method) 75. d – same with No. 64 (cost method) 76. b 77. b – Dividend paid – S, P70,000 x 60% = P42,000 78. d – CNI amounted to P265,000 [CI-CNI, P235,000 and NCI-CNI, P30,000 Consolidated Net Income for 20x5 Net income from own/separate operations P Company P190,000 SCompany 90,000 Total P280,000 Less: Non-controlling Interest in Net Income* P 30,000 Amortization of allocated excess 15,000 Goodwill impairment ____0 45,000 Controlling Interest in Consolidated Net Income or Profit P235,000 attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) 30,000 Consolidated Net Income for 20x4 P265,000 *Net income of subsidiary – 20x4 P 90,000 Amortization of allocated excess – 20x4 ( 15,000_ P75,000 Multiplied by: Non-controlling interest %.......... 40% P 30,000 Less: Non-controlling interest on impairment loss on full-goodwill ______0 (P1,500 x 15%)* P 30,000 20x5 results of operations are as follows: Peer Sea-Breeze Sales P 600,000 P 300,000 Less: Cost of goods sold Operating expenses 410,000 210,000 Net income from its own separate operations P 190,000 P 90,000 Add: Investment income 45,000 - Net income P 235,000 P 90,000 Computation of Goodwill: Fair value of Subsidiary (100%) Consideration transferred: Cash (60%) P 414,000 Fair value of NCI (given) (40%) 276,000 Fair value of Subsidiary (100%) P 690,000 Less: Book value of stockholders’ equity of Sea (P550,000 x 100%) __550,000 Allocated excess (excess of cost over book value)….. P 140,000 Add (deduct): (Over) under valuation of assets and liabilities (P140,000 x 100%) 140,000 Positive excess: Full-goodwill (excess of cost over fair value) P 0 Amortization of Allocated Excess Book Value Fair Value Over/under Amort. Buildings (net)- 6 300,000 360,000 P 60,000 P 10,000 Equipment (net)– 4 300,000 280,000 (20,000) (5,000) Patent -10 -0- 100,000 100,000 10,000 Net P 140,000 P 15,000 79. c – refer to No. 78 for computations 80. b – refer to No. 78 for computations 81. c - P811,000. Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, P700,000 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, P 20x5 300,000 Less: Retained earnings – Subsidiary, January 70,000 1, 20x2 Increase in retained earnings since date of P acquisition 230,000 Less: Amortization of allocated excess – 20x2 – 20x4 (P15,000 x 3 years) 45,000 P 185,000 Multiplied by: Controlling interests %................... 60% P 111,000 Less: Goodwill impairment loss (full-goodwill), 0 111,000 Consolidated Retained earnings, January 1, 20x5 P 811,000 Note: a. Date of acquisition: RE of Parent = Consolidated RE Regardless of the method used in the books of the subsidiary, the following rule should always be applied – b. Subsequent to date of acquisition: Retained earnings of Parent under equity method = CRE Since, the P811,000 is the retained earnings of parent under the equity method, it should also be considered as the parent’s portion or interest in consolidated retained earnings or simply the consolidated retained earnings. 82. c - P811,000 – refer to note (b) of No. 81 83. b – P111,000 – refer to No. 81 84. d Consolidated Retained earnings, January 1, 20x5 (refer to P Nos. 81 and 82) 811,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 235,000 Total P1,046,0 00 Less: Dividends paid – Parent Company for 20x5 92,000 Consolidated Retained Earnings, December 31, 20x5 P 954,000 85. d – refer to No. 84 86. c Non-controlling interest (partial-goodwill), December 31, 2015 Common stock – Subsidiary Company, December 31, P 2015…… 480,000 Retained earnings – Subsidiary Company, December 31, 2015 Retained earnings – Subsidiary Company, P300,000 January 1, 2015 Add: Net income of subsidiary for 2015 90,000 Less: Dividends paid – Subsidiary - 2015 70,000 320,000 Stockholders’ equity – Subsidiary Company, P December 31, 2015 800,000 Adjustments to reflect fair value - (over) undervaluation 140,000 of assets and liabilities, date of acquisition (January 1, 2012) Amortization of allocated excess (refer to amortization above) – (P15,000 x 4) ( 60,000) Fair value of stockholders’ equity of subsidiary, P 12/31/ 2015 880,000 Multiplied by: Non-controlling Interest percentage. 40 Non-controlling interest (partial) P 352,000 Add: NCI on full-goodwill……………………. ____0 Non-controlling interest (full) P 352,000 87. c Stockholders’ Equity Common stock - Peer P 724,000 Retained earnings 954,000 Parent’s Stockholders’ Equity/Equity Attributable to the Owners of the Parent P 1,678,000 Non-controlling interest** 352,000 Total Stockholders’ Equity (Total Equity) P 985,500 Total Liabilities and Stockholders’ Equity P2,030,000 88. c Investment in Sea-Breeze Investment Income 1/1/x2. 414,000 42,000 Dividends – S NI of S Retro 111,000 (70,000 x 60% NI of S (90,000 Amortization Amortization (90,000 x 60%)……. 54,000 9,000 (P15,000 x 60%) (P15,000 x 60%) 9,000 54,000 x 60%) 12/31/x5528,000 45,000 89. c 90. d – refer to No. 78 91. c – refer to No. 78 92. b – refer to No. 78 93. c – refer to No. 81 94. c – refer to No. 81 95. a – not applicable under equity method. 96. d – refer to No. 84 97. d – refer to No. 84 98. d – refer to No. 86 99. c – refer to No. 87 100. a Net income of S (5/1/x5 – 12/31/x5): P840,000 x 8/12 P560,000 Less: Dividend – S (11/1/20x5 – no need to pro-rate) 300,000 Cumulative net income less dividends since date of acquisition, 1/1/20x6 (date to establish reciprocity – not 12/31/x6) P260,000 x: Controlling interests 80% P208,000 101. b Retained earnings – S Company, 1/1/20x4 P 60,000 Less: Retained earnings – S Company, 12/31/20x6 190,000 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) P130,000 x: Controlling interests 90% P117,000 102. (b) Net income of Subsidiary – 2015 and 2016 (P15,000 + P22,000)…………………………………….P 37,000 Less: Dividends of Subsidiary – 2015 and 2016 (P6,000 + P9,000)……………………………………... 15,000 Cumulative net income less dividends since date of acquisition, 1/1/2017 (date to establish reciprocity –should always be beginning of the year, not 12/31/17) / Increase in Retained earnings………………………………………………………………………………………... P 22,000 x: Controlling interests……………………………………………………………………………………..70% P 15,400 It should be noted that the amortization/depreciation and any unrealized/realized profits (in case of intercompany sales of inventory/fixed assets) should not be included (refer to next number) as part of the entry to established reciprocity since there will be separate eliminating entry to be made at the end of the year (2017) for amortization and depreciation. Further, the eliminating entry to establish reciprocity for the year 20x7 should be made on January 1, 20 17 not December 31, 2017 Incidentally, the entry to convert from cost method to equity method or the entry to establish reciprocity at the beginning of the year, 1/1/2017 would be as follows: Investment in Subsidiary………………………………………………………………… 15,400 Retained earning – Parent Company, 1/1/2017………………………………. 15,400 103. (a) Net income of Subsidiary – 2015 and 2016 (P15,000 + P22,000)……………………………………. P 37,000 Less: Dividends of Subsidiary – 2015 and 2016 (P6,000 + P9,000)…………………………………… 15,000 Increase in Retained earnings for 2 years……………………………………………………………… P 22,000 Less: Amortization of allocated excess [(P80,000 – P60,000)/10 years x 2 years]………………… 4,000 P 18,000 x: Controlling interests………………………………………………………………………………………. 70% Retroactive amount, December 31, 20x6 or January 1, 2017……………………………………… P 12,600 104. b [{(P84,000 + P105,000) - [(P310,000 - P220,000)/20]2} - (P30,000 + P50,000)].8 105. a - under the cost model share in net income or earnings of subsidiary does not affect investment. 106. d Investment account, December 31, 20x7: Original investment …………………………………………..P 550,000 Tiny’s earnings, 20x4-20x77: 100% x P166,000……………166,000 Less: Dividends received: 100% x P114,000………………114,000 Balance, December 31, 20x7……………………………..P602,000 107. a The adjusting entry required in 20x7 to convert from the cost to the equity methodis: Investment in Tiny………………………………….52,000 Retained earnings beg………………………….. 4,000 Dividend revenue………………………………… 54,000 Equity in subsidiary income of Tiny……. 110,000 108. d – P45,000/15% = P300,000 109. d Pigeon’s separate income P150,000 Less: 60% of Home’s P10,000 loss = 6,000 Less: Equipment depreciation P10,000/ 10 years = __1,000 Controlling Interest in Consolidated Net Income P143,000 Add: NCI in CNI NL of S Company P( 10,000) Less: Amortization of allocated excess (P1,000/60%) 1,667 P (11,667) Multiplied by: NCI% 40% ( 4,667) Consolidated Net Income P138,333 110. a Non-controlling Interest in Net Income (NCINI) for Year 3 Net income of S Company P240,000 Less: Amortization of allocated excess 45,000 P195,000 Multiplied by: Non-controlling interest %.......... 30% Non-controlling Interest in Net Income (NCINI) for Year 3 P 58,500 111. c Net income from own/separate operations P Company P 375,000 S Company 30,000 Total P405,000 Less: Non-controlling Interest in Net Income* P5,250 Amortization of allocated excess (refer to amortization above) 3,750 Goodwill impairment (impairment under full-goodwill approach) 0 9,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P396,000 *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company P30,000 Less: Amortization of allocated excess** 3,750 P26,250 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) for 20x4 P 5,250 **P270,000/80% = P337,500 – (P150,000 + P150,000) = P37,500 / 10 years = P3,750 Note: Whether the partial or full-goodwill approach are used the amortization of excess are always the same. 112. a *Non-controlling Interest in Net Income (NCINI) for Year 3 Net income of S Company P600,000 Less: Amortization of allocated excess 112,500 P487,500 Multiplied by: Non-controlling interest %.......... 30% Non-controlling Interest in Net Income (NCINI) for Year 3 P146,250 113. c Net income from own/separate operations P Company P 625,000 S Company 50,000 Total P675,000 Less: Non-controlling Interest in Net Income* P 8,750 Amortization of allocated excess (refer to amortization above) 6,250 Goodwill impairment (impairment under full-goodwill approach) 0 15,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P660,000 *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company P50,000 Less: Amortization of allocated excess** 6,250 P43,750 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) for 20x4 P 8,750 **P450,000/80% = P562,500 – (P250,000 + P250,000) = P62,500 / 10 years = P6,250 Note: Whether the partial or full-goodwill approach are used the amortization of excess are always the same. 114. b As a general rule, if problem is silent It is assumed that expenses are generated evenly throughout the year, thus: Expenses (9/1/20x4-12/31/20x4): P620,000 x 4/12 P206,667 Amortization of allocated excess: P15,000 x 4/12 5,000 P211,667 115. c Net income of S Company (P800,000 – P620,000) P180,000 Less: Amortization of allocated excess 15,000 P165,000 Multiplied by: No of mos. (9/1-12/31) 4/12 P 55,000 116. a Net income of S Company (P800,000 – P620,000) P180,000 Less: Amortization of allocated excess 15,000 P165,000 Multiplied by: No of mos. (9/1-12/31) 4/12 P 55,000 Multiplied by: Non-controlling interest %.......... ____20% Non-controlling Interest in Net Income (NCINI) for 20x4 P 22,000 117.b Combined revenues .................................................................................................. P1,100,000 Combined expenses .................................................................................................. (700,000) Excess acquisition-date fair value amortization ................................................... (15,000) Consolidated net income ......................................................................................... P385,000 Less: Noncontrolling interest (P85,000 × 40%) ........................................................ (34,000) Consolidated net income to controlling interest.................................................. P351,000 118. c HH expense .................................................................................................................. P621,000 NN expenses ................................................................................................................ 714,000 Excess fair value amortization (70,000 ÷ 10 yrs) ..................................................... 7,000 Consolidated expenses ............................................................................................. P1,342,000 119. b Step-acquisition, either full-goodwill or partial goodwill approach, the answer remains the same. Full-Goodwill Presentation: Net income from own operations; Parent - Keefe…………………………………… P 300,000 Subsidiary - George (P500,000 – P400,000)…….. 100,000 P 400,000 Less: Amortization of allocated excess…………………… 6,000 Impairment of goodwill (if any)……………………. 0 Consolidated/Group Net Income…………………………. P 394,000 Less: Non-controlling interest in Net Income Subsidiary net income from own operations: 1/1/20y0 - 4/1/20y0 (3 months): P100,000 x 3/12 = P25,000 x 30%................ P 7,500 4/1/20y0 – 12/31/20y0 (9 months): P100,000 x 9/12 = P75,000 x 20%................ 15,000 Total…………………………………………….. P 22,500 Less: Amortization of allocated excess: 1/1/20y0 – 4/1/20y0 (3 months) P6,000 x 3/12 = P1,500 x 30%.......... 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). 120. d – Economic Unit or Entity Concept (as required by PFRS 10) Net income from own/separate operations P Company P 500,000 S Company 100,000 Total P600,000 Less: Non-controlling Interest in Net Income* P20,000 Amortization of allocated excess 0 Goodwill impairment (impairment under full-goodwill approach) _ 0 20,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P580,000 Add: NCINI __20,000 CNI - entity concept P600,000 *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company P100,000 Less: Amortization of allocated excess _______0 P100,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) for 20x4 P 20,000 121. c – Parent Company Concept – Parent’s Net Income only (not required by PFRS 10) Net income from own/separate operations P Company P 500,000 S Company 100,000 Total P600,000 Less: Non-controlling Interest in Net Income* P 20,000 Amortization of allocated excess 0 Goodwill impairment (impairment under full-goodwill approach) _ 0 20,000 CNI - entity concept P580,000 *Non-controlling Interest in Net Income (NCINI) for 20x4 Net income of S Company P100,000 Less: Amortization of allocated excess _______0 P100,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) for 20x4 P 20,000 122. b Net Income from own operations: 20x420x5 Parent …………………………………………………P 100,000 P100,000 Subsidiary……………………………………………... 25,000 35,000 P125,000 P135,000 Subsidiary’s other comprehensive income…………..5,000 10,000 Total Comprehensive Income……………………….....P130,000 P145,000 Less: Amortization of allocated excess…………….… 6,250 6,250 Impairment of full- goodwill (if any)…………. 0 0 Consolidated /Group Comprehensive Income…… P123,750 P138,750 Less: Non-controlling interest in Comprehensive Income *…………………………………………… 4,750 7,750 Controlling Interest in Consolidated __________________ Comprehensive Income …. …………………………P119,000 P131,000 *Non-controlling interest in Comprehensive Income: 20x420x5 Subsidiary’s: Net income from own operations………….......P 25,000 P 35,000 Other Comprehensive Income (P30,000 – P25,000)…………………………….…………... 5,000 10,000 Subsidiary’s Comprehensive Income…………........P 30,000 P45,000 Less: Amortization of allocated excess*………….. 6,250 6,250 Impairment of full-goodwill (if any)....………. 0 0 P 23,750 P 38,750 x: Non-controlling interests……………………………. 20% 20% Non-controlling interest in Comprehensive IncomeP 4,750P 7,750 *Amortization of allocated excess: Increase in other intangibles: P50,000 / 8 years = P 6,250 123. c – refer to No. 122 124. c – refer to No. 122 125. b- refer to No. 122 126. d Inventory – not yet sold in 20x4 P 0 Building: (P390,000 – P200,000)/ 10 years 19,000 Equipment (P280,000 – P350,000)/ 5 years ( 14,000) P 5,000 127. c Plochman’s acquisition entry is: Investment in Shure……………………………………………………………40,000,000 Retained earnings (acquisition-related expense – close to retained since only balance sheet accounts are being examined)…………………………………………………………………… 1,000,000 Common stock, 1,000,000 x P1 par……………………………… 1,000,000 PIC in excess of par [(1,000,000 x P39) – P800,000)…………… 32,000,000 Cash (P800,000 + P1,000,000)…………………………………….. 1,800,000 Eliminating entries are: Book value of stockholders’ equity: Stockholders’ equity-Shure………………………………………………… 6,000,000 Investment in Shure………………………………………………… 6,000,000 Allocated excess (acquisition/purchase differential): Identifiable assets……………………………………………………………. 7,000,000 Long-term debt………………………………………………………………. 500,000 Goodwill………………………………………………………………………..28,500,000 Lawsuit liability………………………………………………………. 2,000,000 Investment in Shure………………………………………………… 34,000,000 128. d –refer to No. 127 129. a 130. a Cost of Goods Sold P80,000 debit Depreciation Expense (P192,000/120) 7 = P11,200 debit 131. c Cost of Goods Sold (P60,000 x 4/6) = P40,000 debit Interest Expense: (P15,000/5) = P3,000 debit 132. a [(P250,000 - P180,000)/10]7 133. c [(P380,000 - P260,000)/120]88 134. No question available 135. a 136.c P170,000 - {[P320,000 - (P300,000 - P170,000)]/10}2 137.b [P320,000 - (P300,000 - P170,000)]/10 138.d 139.d P105,000 - {[P405,000 - (P450,000 - P105,000)]/20}2 140. a [P405,000 - (P450,000 - P105,000)]/20 141. d - The acquisition method consolidates assets at fair value at acquisition date regardless of the parent’s percentage ownership. 142. d P: BV,12/31/20x6 P250,000 S: BV of building, 12/31/20x4 P170,000 Add: Adjustments to reflect fair value, 1/1/20x4 (P350,000 – P240,000) 110,000 Less: Amortization of excess (P110,000/10) x 3 years 33,000 247,000 P497,000 143. b P: BV,12/31/20x5 P 975,000 S: BV of building, 12/31/20x5 P105,000 Add: Adjustments to reflect fair value, 1/4/20x4 (P120,000 – P90,000) 30,000 Less: Amortization of excess (P30,000/10) x 2 years 129,000 6,000 P1,104,000 144. c - An asset acquired in a business combination is initially valued at 100% acquisition-date fair value and subsequently amortized its useful life. Patent fair value at January 1, 20x4 ........................................................................ P45,000 Amortization for 2 years (10 year life)...................................................................... (9,000) Patent reported amount December 31, 20x5....................................................... P36,000 145. b BV of building, 1/1/20x4 P200,000 Adjustments to reflect fair value, 1/1/20x4 (P300,000 – P200,000) 100,000 Depreciation 1/1/20x4 – 12/31/20x6 (P100,000/20 x 3 years) ( 15,000) P285,000 146. d – same with No. 145 147. d BV of equipment, 1/1/20x4 P 80,000 Adjustments to reflect fair value, 1/1/20x4 (P80,000 – P75,000) ( 5,000) Depreciation 1/1/20x4 – 12/31/20x6 (P5,000/10 x 3 years) 1,500 P 76,500 148. a Adjustments to reflect fair value, 1/1/20x4 (P80,000 – P75,000) (P 5,000) Depreciation 1/1/20x4 – 12/31/20x6 (P5,000/10 x 3 years) 1,500 (P 3,500) 149. d – 1/2/20x4: BV of equipment, 1/1/20x4 P200,000 Adjustments to reflect fair value, 1/1/20x4 (P300,000 – P200,000) 100,000 P300,000 150. b Decrease in Buildings account: Fair value……………………………………………P 8,000 Book value………………………………………….. __10,000 Decrease…………………………………………….P 2,000 151. d Decrease in buildings account (refer to No. 73)………… P 2,000 Less: Increase due to depreciation (P2,000/10)………… 200 Decrease in buildings accounts……………………………..P 1,800 152. d Decrease in buildings account (refer to No. 74)………… P 1,800 Less: Increase due to depreciation (P2,000/10)………… 200 Decrease in buildings accounts……………………………..P 1,600 153. a Increase in Equipment account: Fair value……………………………………………P 14,000 Book value………………………………………….. __18,000 Increase…………………………………………….P 4,000 154. a Increase in equipment account (refer to No. 76)………… P 4,000 Less: Decrease due to depreciation (P4,000/4)…………… 1,000 Increase in equipment accounts……………………………..P 3,000 155. a Increase in equipment account (refer to No. 77)………… P 3,000 Less: Decrease due to depreciation (P4,000/4…………… 1,000 Increase in equipment accounts……………………………..P 2,000 156. a Increase in Land account: Fair value……………………………………………P 12,000 Book value………………………………………….. 5,000 Increase…………………………………………….. P 7,000 157. b – refer to No. 156, no depreciation/amortization 158. b – refer to No. 156, no depreciation/amortization 159. e Increase in Patent account: Fair value……………………………………………P 11,000 Book value………………………………………….. _ 0 Increase…………………………………………….P 11,000 (P234,000/90%) – (P160,000 + P80,000) = P20,000 – (P4,000 – P2,000 + P7,000) = P11,000. Partial or full-goodwill approach, the amortization remains the same. 160. e Increase in patent account (refer to No. 159)……………… P 11,000 Less: Decrease due to depreciation (P11,000/5).………… 2,200 Increase in patent accounts…………………………………. P 8,800 161. d Increase in patent account (refer to No. 160)……………… P 8,800 Less: Decrease due to depreciation (P11,000/5).………… 2,200 Increase in patent accounts…………………………………. P 6,600 162. c Fair Value of Subsidiary: Consideration Transferred (5,400 shares) P120,600 Less: Book value of SHE-S, 1/1: Common stock – S: P50,000 x 90% P 45,000 APIC – S: P15,000 x 90% 13,500 RE – S: P41,000 x 90% 36,900 95,400 Allocated Excess P 25,200 Less: Over/undervaluation of A & L: Increase in Inv. (P17,100–P16,100) x 90% P 900 Increase in Eqpt. (P48,000–P40,000) x 90% 7,200 Increase in Patents (P13,000–P10,000) x 90% 2,700 10,800 Positive Excess: Goodwill P 14,400 Amortization of allocated excess - Starting January 1: Inventory: P1,000 / 1 year P 1,000 Equipment: P8,000 / 4 years 2,000 Patents: P3,000 / 10 years 300 P 3,300 163. c Common stock – S P 50,000 APIC – S 15,000 RE – S 41,000 Stockholders’ equity – Subsidiary, 1/1 P106,000 Add: Adjustments to reflect fair value 12,000 Fair value of Stockholders’ Equity – S, 1/1 P118,000 x: Non-controlling) interests 10% Non-controlling Interests (in net assets) P 11,800 164. a – P48,000, parent only. 165. a – P48,000. On the date of acquisition, the parent’s retained earnings is also the consolidated retained earnings. 166. b – P120,600, the initial value 167. b – P4,000 x 90% = P3,600 168. c Consolidated Net Income for 20x4 Net income from own/separate operations P CompanyP30,200 – (P4,000 x 90%) P26,600 S Company 9,400 Total P36,000 Less: Non-controlling Interest in Net Income* P 610 Amortization of allocated excess 3,300 Goodwill impairment ____0 3,910 Controlling Interest in Consolidated Net Income or Profit P32,090 attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) 610 Consolidated Net Income for 20x4 P32,700 *Net income of subsidiary – 20x4 P 9,400 Amortization of allocated excess – 20x4 ( 3,300) P 6,100 Multiplied by: Non-controlling interest %.......... 10% P 610 Less: Non-controlling interest on impairment loss on full-goodwill ____0 Non-controlling Interest in Net Income (NCINI) P 610 169. c Noncontrolling Interests (in net assets): Common stock - S, 12/31 P 50,000 Additional paid-in capital - S, 12/31 15,000 Retained earnings - S, 12/31: RE-S, 1/1/2011 P 41,000 Add: NI-S, 2011 9,400 Less: Dividends – S 4,000 46,400 Book value of SHE - S, 12/31 P 111,400 Add: Adjustments to reflect fair value, 1/1 12,000 Less: Amortization of allocated excess (1 yr.) 3,300 Fair Value of Net Assets/SHE - S, 12/31 P 120,100 x: Noncontrolling Interest % 10% Noncontrolling Interest (in net assets), 12/31 P 12,010 170. b – refer to 168 for computation 171. c – refer to 168 for computation 172. b Controlling RE / RE Attributable to EH of Parent, 1/1 (refer to No. 102 P 48,000 Add: CI – CNI (refer to 168) 32,090 Less: CI – Dividends (Dividend of parent only) 15,000 Controlling RE / RE Attributable to EH of Parent, 12/31 P 65,090 173. b – same with No. 172 174. c Consolidated Equity: Controlling Interest / Equity Holders Attributable to Parent: Common stock – P: [P100,000 + P120,600 – (5,400 shares x P10 par)] P154,000 APIC – P: [15,000 + [P120,600 – (5,400 x P10)] 81,600 RE – P (refer to No. 172) 65,090 Parent’s Stockholders Equity or Controlling Interest – Equity P300,690 Noncontrolling Interest 12,010 Consolidated Equity P312,700 175. c P95,000 = (P956,000 / .80) - P1,000,000 - P100,000 176. c P251,000 = .20[(P956,000 + P239,000) + (P190,000 - P5,000 - P125,000)] 177. b Combined revenues .................................................................................................. P1,300,000 Combined expenses .................................................................................................. (800,000) Trademark amortization ............................................................................................ (6,000) Patented technology amortization......................................................................... (8,000) Consolidated net income ......................................................................................... P486,000 178. c Subsidiary income (P100,000 – P14,000 excess amortizations)........................... P86,000 Non-controlling interest percentage ...................................................................... __40% Non-controlling interest in subsidiary income ........................................................ P34,400 Fair value of non-controlling interest at acquisition date ................................... P200,000 40% change in Scott book value since acquisition ............................................. 52,000 Excess fair value amortization (P14,000 × 40%) ..................................................... (5,600) 40% current year income .......................................................................................... __34,400 Non-controlling interest at end of year .................................................................. P280,800 179. a MM trademark balance ............................................................................................ P260,000 SS trademark balance .............................................................................................. 200,000 Excess fair value .......................................................................................................... 60,000 Two years amortization (10-year life) ...................................................................... (12,000) Consolidated trademarks ......................................................................................... P508,000 180 a Fair value of non-controlling interest on April 1..................................................... P165,000 30% of net income for 9 months (¾ year×P240,000 × 30%) ................................ 54,000 Non-controlling interest December 31 ................................................................... P219,000 181. c Non-controlling interest (full-goodwill), December 31, 20x4 Book value of SHE – S, 12/31/20x4 P1,000,000 Add: Net income of S – 20x4 ___150,000 Total P1,150,000 Less: Dividends paid – 20x4 ____90,000 Stockholders’ equity – S Company, December 31, Year 2 P1,060,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition January 1, 20x4 200,000 Amortization of allocated excess (refer to amortization above: P200,000/10 _( 20,000) Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P1,240,000 Multiplied by: Non-controlling Interest percentage…………... 30% Non-controlling interest (partial) P372,000 Add: NCI on full-goodwill P85,714 – P60,000) ___25,714 Non-controlling interest (full) P397,714 *P900,000/70% = P1,285,714 – P1,000,000 = P285,714 – P200,000 = P85,714, full goodwill *P900,000 – (P1,000,000 x 70%) = P200,000 – (P200,000 x 70%) = P60,000, partial goodwill It is assumed that full-goodwill is used. But, it should be noted that PFRS 3 either partial or full-goodwill approach are considered acceptable. 182. b – (P50,000 + P70,000) x 25% = P30,000 183. b – P only. 184. b {(P250,000/.8) + [P75,000 + P90,000 - P25,000 - P50,000 - P30,000 - (P80,000/8)2]}.2 185. d {(P420,000/.7) + [P160,000 + P210,000 - P60,000 - P80,000 - P50,000 - (P90,000/5)2]}.3 186. a - P650,000 =P500,000 + P200,000 - P50,000 187. b 188. a – P540,000 = (P500,000 + P150,000 – P90,000 – P20,000) 189. c – equivalent to the original cost 190. d - In consolidating the subsidiary's figures, all intercompany balances must be eliminated in their entirety for external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless controls it. 191. b - Intercompany receivables and payables from unconsolidated subsidiaries would not be eliminated. Theories 1. c 6. b 11. C** 16. c 21. d 26. c 31 c 36. d 41. a 2. d 7. c 12. b 17. c 22. a 27. d 32. b 37. b 42. c 3. d 8. d 13. d 18. d 23. b 28. c 33. c 38. b 43. a 4. d* 9. d 14. c 19. d 24. c 29. c 34. c 39. c 44. 5. d 10, a 15, c 20. b 25. c 30. b 35. d 40. d 45. *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. Chapter 17 Problem I 1. Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 760,000 Realized profit in beginning inventory of S Company (downstream sales) 36,000 Unrealized profit in ending inventory of S Company (downstream sales)… (_50,000) P Company’s realized net income from separate operations*…….….. P 746,000 S Company’s net income from own operations…………………………………. P 460,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales)… ( 0) S Company’s realized net income from separate operations*…….….. P 460,000 460,000 Total P1,206,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x5 P1,206,000 Less: Non-controlling Interest in Net Income* * 92,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P 1,114,000 *that has been realized in transactions with third parties. Beginning inventory: P1,080,000 x 1/5 = P216,000 x 20/120 = P36,000 profit Ending inventory: P1,200,000 x ¼ = P300,000 x 20/120 = P50,000 profit Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 760,000 Realized profit in beginning inventory of S Company (downstream sales) 36,000 Unrealized profit in ending inventory of S Company (downstream sales)… (_50,000) P Company’s realized net income from separate operations*…….….. P 746,000 S Company’s net income from own operations…………………………………. P 460,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales)… ( 0) S Company’s realized net income from separate operations*…….….. P460,000 460,000 Total P1,206,000 Less: Non-controlling Interest in Net Income* * P 92,000 Amortization of allocated excess…………………… 0 92,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P1,114,000 Add: Non-controlling Interest in Net Income (NCINI) _ 92,000 Consolidated Net Income for 20x5 P 1,206,000 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) P460,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) ( 0) S Company’s realized net income from separate operations……… P460,000 Less: Amortization of allocated excess _____0 P460,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 92,000 2. Books of Puma (a) Cost Method 20x4 Dividend – Smarte Company: None, since, there is no amount given 20x5 Dividend – Smarte Company: None, since, there is no amount given (b) Equity Method 20x4 Net income – Smarte Investment in Smarte (400,000 x 80%) 320,000 Equity in Subsidiary Income 320,000 Dividend – Smarte Cash/Dividends receivable 0 Investment in Smarte 0 Amortization of Allocated excess: Equity in Subsidiary Income 0 Investment in Smarte 0 Realized Profit in BI: Investment in Smarte 0 Equity in Subsidiary Income 0 Unrealized Profit in EI: Equity in Subsidiary Income 36,000 Investment in Smarte 36,000 20x5 Net income – Smarte Investment in Smarte (460,000 x 80%) 368,000 Equity in Subsidiary Income 368,000 Dividend – Smarte Cash/Dividends receivable 0 Investment in Smarte 0 Amortization of Allocated excess: Equity in Subsidiary Income 0 Investment in Smarte 0 Realized Profit in BI: Investment in Smarte 36,000 Equity in Subsidiary Income 36,000 Unrealized Profit in EI: Equity in Subsidiary Income 50,000 50,000 Investment in Smarte 3. Downstream Sales 20x4 Sales………………………………………………………………………………… 1,080,000 Purchases (Cost of Goods Sold)……………………………………... 1,080,000 **100% UPEI of S: Cost of Sales (Ending Inventory in Income Statement) [216,000 – (216,000/1.20)]………..………………………………………….. 36,000 Inventory (Ending Inventory in Balance Sheet)…………………….. 36,000 20x5 100% Interscompany Sales Sales………………………………………………………………………………….1,200,000 Purchases (Cost of Goods Sold)………………………………….. 1,200,000 Downstream Sales: *100% RPBI of S: Retained Earnings – P, beginning………………………………………..... 36,000 Cost of Sales (Beginning Inventory in Income Statement)….. 36,000 **100% UPEI of S: Cost of Sales (Ending Inventory in Income Statement) [300,000 – (300,000/1.20)]………..………………………………………….. 15,000 Inventory (Ending Inventory in Balance Sheet)……………….. 15,000 Problem II 1. Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 1,720,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_ 0) P Company’s realized net income from separate operations*…….….. P 1, 720,000 S Company’s net income from own operations…………………………………. P 600,000 Realized profit in beginning inventory of P Company (upstream sales) 40,000 Unrealized profit in ending inventory of P Company (upstream sales)… ( 51,00 0) Son Company’s realized net income from separate operations*…….….. P 589,000 589,000 Total P2,309,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x5 P2,309,000 Less: Non-controlling Interest in Net Income* * 58,900 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P 2,250,100 *that has been realized in transactions with third parties. Beginning inventory: P800,000 x 1/4 = P200,000 x 25/125 = P40,000 profit Ending inventory: P1,020,000 x ¼ = P255,000 x 25/125 = P51,000 profit Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 1,720,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (________0) P Company’s realized net income from separate operations*…….….. P1,720,,000 S Company’s net income from own operations…………………………………. P 600,000 Realized profit in beginning inventory of P Company (upstream sales) 40,000 Unrealized profit in ending inventory of P Company (upstream sales)… ( 51,000) S Company’s realized net income from separate operations*…….….. P589,000 589,000 Total P2,309,000 Less: Non-controlling Interest in Net Income* * P 58,900 Amortization of allocated excess…………………… 0 __58,900 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P2,250,100 Add: Non-controlling Interest in Net Income (NCINI) _ 58,900 Consolidated Net Income for 20x5 P 2,309,000 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) P600,000 Realized profit in beginning inventory of P Company (upstream sales) 40,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 51,000) Son Company’s realized net income from separate operations……… P589,000 Less: Amortization of allocated excess _____0 P589,000 Multiplied by: Non-controlling interest %.......... 10% Non-controlling Interest in Net Income (NCINI) P 58,900 2. Books of Pinta (a) Cost Method 20x4 Dividend – Simplex Company: None, since, there is no amount given 20x5 Dividend – Simplex Company: None, since, there is no amount given (b) Equity Method 20x4 Net income – Simplex Investment in Simplex (600,000 x 90%) 540,000 Equity in Subsidiary Income 540,000 Dividend – Simplex Cash/Dividends receivable 0 Investment in Simplex 0 Amortization of Allocated excess: Equity in Subsidiary Income 0 Investment in Simplex 0 Realized Profit in BI: Investment in Simplex 0 Equity in Subsidiary Income 0 Unrealized Profit in EI: Investment in Simplex (40,000 x 90%) 36,000 Equity in Subsidiary Income 36,000 20x5 Net income – Simplex Investment in Simplex (600,000 x 90%) 540,000 Equity in Subsidiary Income 540,000 Dividend – Simplex Cash/Dividends receivable 0 Investment in Simplex 0 Amortization of Allocated excess: Equity in Subsidiary Income 0 Investment in Simplex 0 Realized Profit in BI: Investment in Simplex (40,000 x 90%) 36,000 Equity in Subsidiary Income 36,000 Unrealized Profit in EI: Investment in Simplex (51,000 x 90%) 45,900 Equity in Subsidiary Income 45,900 3. Upstream Sales: 100% Interscompany Sales Sales…………………………………………………………………………………1,020,000 Purchases (Cost of Sales)………………………………………. ……. 1,020,000 To eliminate intercompany sales. ***100% RPBI of P: (if equity method Investment in S instead of RE – P, beg.) Retained Earnings – P, beginning (90% x P40,000)……………...…. 36,000 NCI ……………………………………………….…………………………. 4,000 Cost of Sales (Beginning Inventory in Income Statement) 40,000 To recognize unrealized profit in beginning inventory realized during the year. ****100% UPEI of P: Cost of Sales (Ending Inventory in Income Statement)………………51,000 Inventory (Ending Inventory in Balance Sheet)……………… 51,000 To eliminate unrealized intercompany profit in ending inventory. Problem III 1. Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) P3,000,000 Realized profit in beginning inventory of P Company (upstream sales): P525,000 x 25/125 105,000 Unrealized profit in ending inventory of P Company (upstream sales): P1,250,000 x 25/125 ( 250,000) Son Company’s realized net income from separate operations……… P 2,855,000 Less: Amortization of allocated excess _____0 P3,055,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) P 571,000 2 .Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5 – cannot be solved, since there is no net income from separate operations for P Company. Incidentally, the eliminating entries are as follows: Sales 4,000,000 Cost of Goods Sold 4,000,000 Cost of Goods Sold 250,000 Ending Inventory (Balance Sheet) 250,000 [P1,250,000 - (P1,250,000/1.25)] Retained Earnings, beginning – P Company (80%) 84,000 Noncontrolling interest (20%) 21,000 Cost of Goods Sold (Beginning Inventory) 105,000 [P525,000 – (P525,000/1.25)] = P105,000 3. Stockholders’ equity – Subsidiary Company, December 31, 20x4 P5,400,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 0 Amortization of allocated excess (refer to amortization above) – 20x4 ( 0) Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P5,400,000 Less: Unrealized profit in ending inventory of P Company (upstream sales) 250,000 Realized stockholders’ equity of subsidiary, December 31, 20x4…… P5,150,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (in net assets)…………………………….. P1,030,000 Problem IV 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 P transferred……………………………….. 372,000 Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 80%)……………………. P 192,000 Retained earnings (P120,000 x 80%)………………... 96,000 288,000 Allocated excess (excess of cost over book P value)….. 84,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… P 4,800 Increase in land (P7,200 x 80%)……………………. 5,760 Increase in equipment (P96,000 x 80%) 76,800 Decrease in buildings (P24,000 x 80%)………..... ( 19,200) Decrease in bonds payable (P4,800 x 80%)…… 3,840 72,000 Positive excess: Partial-goodwill (excess of cost over fair P value)………………………………………………... 12,000 The over/under valuation of assets and liabilities are summarized as follows: SCo. (Over) Book S Co. Under value Fair value Valuation P Inventory………………….…………….. 24,000 P 30,000 P 6,000 Land……………………………………… 48,000 55,200 7,200 Equipment (net)......... 84,000 180,000 96,000 Buildings (net) 168,000 144,000 (24,000) Bonds payable………………………… (120,000) ( 115,200) 4,800 P Net……………………………………….. 204,000 P 294,000 P 90,000 The buildings and equipment will be further analyzed for consolidation purposes as follows: S Co. S Co. Increase Book value Fair value (Decrease) Equipment .................. 180,000 180,000 0 Less: Accumulated depreciation….. 96,000 - ( 96,000) Net book value………………………... 84,000 180,000 96,000 S Co. SCo. Book value Fair value (Decrease) Buildings................ 360,000 144,000 ( 216,000) Less: Accumulated depreciation….. 192,000 - ( 192,000) Net book value………………………... 168,000 144,000 ( 24,000) A summary or depreciation and amortization adjustments is as follows: Annu Over/ al Current Account Adjustments to be Unde Lif Amou Year(20x amortized r e nt 4) 20x5 P P P Inventory 6,000 1 6,000 P 6,000 - Subject to Annual Amortization 96,00 12,00 Equipment (net)......... 0 8 12,000 12,000 0 (24,0 ( 6,000 (6,00 Buildings (net) 00) 4 ) ( 6,000) 0) Bonds payable… 48000 4 1,200 1,200 1,200 P P 13,200 P 13,200 7,200 The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows: Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) P 372,000 Fair value of NCI (given) (20%) 93,000 Fair value of Subsidiary (100%) P 465,000 Less: Book value of stockholders’ equity of Son (P360,000 x 100%) __360,000 Allocated excess (excess of cost over book value)….. P 105,000 Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) 90,000 Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………... P 15,000 In this case, the goodwill was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows: Value % of Total Goodwill applicable to parent………………… P12,000 80.00% Goodwill applicable to NCI…………………….. 3,000 20.00% Total (full) goodwill……………………………….. P15,000 100.00% The goodwill impairment loss would be allocated as follows Value % of Total Goodwill impairment loss attributable to parent P 80.00% or controlling 3,000 Interest Goodwill applicable to NCI…………………….. 750 20.00% Goodwill impairment loss based on 100% fair value or full- P 3,750 100.00% Goodwill The unrealized profits on January 1, and on December 31, 20x5, resulting intercompany sales, are as summarized below: Downstream Sales: Intercompany Year Sales of Merchandise Unrealized Parent to in 12/31 Inventory Intercompany Profit in Subsidiary of S Company Ending Inventory 20x4 P150,000 P150,000 x 60% = P90,000 P90,000 x 20% = P18,000 20x5 120,000 P120,000 x 80% = P96,000 P96,000 x 25% = P40,000 Upstream Sales: Intercompany Year Sales of Merchandise Unrealized Subsidiary to in 12/31 Inventory Intercompany Profit in Parent of S Company Ending Inventory 20x4 P 50,000 P100,000 x 50% = P25,000 P25,000 x 40% = P10,000 20x5 62,500 P 62,500 x 40% = P25,000 P25,000 x 20% = P 5,000 20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4: (1) Investment in S 372,00 Company…………………………………………… 0 372,00 Cash…………………………………………………………………… 0 .. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Dividend income (P36,000 x 80%)……………. 28,800 Record dividends from S Company. No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4, and unrealized profits in ending inventory. Consolidation Workpaper – Year of Acquisition (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S 120.000 Co…………………………………… Investment in S 288,000 Co…………………………………………… Non-controlling interest (P360,000 x 72,000 20%)……………………….. To eliminate intercompany investment and equity accounts of subsidiary on date of acquisition; and to establish non-controlling interest (in net assets of subsidiary) on date of acquisition. (E2) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 18,000 20%)……………………….. Investment in Son 84,000 Co………………………………………………. To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition. (E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Goodwill impairment 3,000 loss………………………………………. 6,000 Inventory………………………………………………………….. Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 3,000 To provide for 20x4 impairment loss and depreciation and amortization on differences between acquisition date fair value and book value of S’s identifiable assets and liabilities as follows: Cost of Depreciation/ Goods Amortization Amortization Sold Expense -Interest Total Inventory sold P 6,000 Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 2,000 P1,200 13,200 (E4) Dividend income - P………. 28,800 Non-controlling interest (P36,000 x 7,200 20%)……………….. Dividends paid – S…………………… 36,000 To eliminate intercompany dividends and non-controlling interest share of dividends. (E5) Sales………………………. 150,000 Cost of Goods Sold (or Purchases) 150,000 To eliminated intercompany downstream sales. (E6) Sales………………………. 60,000 Cost of Goods Sold (or Purchases) 60,000 To eliminated intercompany upstream sales. (E7) Cost of Goods Sold (Ending Inventory – Income Statement)… 18,000 Inventory – Balance Sheet…… 18,000 To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E8) Cost of Goods Sold (Ending Inventory – Income Statement)… 12,000 Inventory – Balance Sheet…… 12,000 To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E9) Non-controlling interest in Net Income of 6,960 Subsidiary………… Non-controlling interest ………….. 6,960 To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. P 60,000 Unrealized profit in ending inventory of P Company (upstream sales)……………………….. ( 12,000) S Company’s realized net income from separate operations*…….….. P 48,000 Less: Amortization of allocated excess [(E3)]…. 13,200 P 34,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 6,960 Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P480,000 P240,000 (5) 150,000 P 510,000 (6) 60,000 Dividend income 28,800 - (4) 36,000 _________ Total Revenue P508,800 P240,000 P 510,000 Cost of goods sold P204,000 P138,000 (3) 6,000 (5) 150,000 P 168,000 (7) 18,000 (6) 60,000 (8) 12,000 Depreciation expense 60,000 24,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200 Other expenses 48,000 18,000 66,000 Goodwill impairment loss - - (3) 3,000 3,000 Total Cost and Expenses P312,000 P180,000 P328,200 Net Income P196,800 P 60,000 P181,800 NCI in Net Income - Subsidiary - - (9) 6,960 ( 6,960) Net Income to Retained Earnings P196,800 P 60,000 P174,840 Statement of Retained Earnings Retained earnings, 1/1 P Company P360,000 P 360,000 S Company P120,000 (1) 120,000 Net income, from above 196,800 __60,000 174,840 Total P556,800 P180,000 P534,840 Dividends paid P Company 72,000 72,000 S Company - __36,000 (4) 36,000 _ ________ Retained earnings, 12/31 to Balance Sheet P484,800 P144,000 P 462,840 Balance Sheet Cash………………………. P 232,800 P 90,000 P 355,200 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 (7) 18,000 (8) 12,000 180,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 12000 3,600 Goodwill…………………… (2) 12,000 (3) 3,000 9,000 Investment in S Co……… 372,000 (6) 288,000 (7) 84,000 - Total P1,984,800 P1,008,000 P2,394,600 Accumulated depreciation - equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000 (11) Accumulated depreciation 405,000 288,000 192,000 - buildings (12) 6,000 495,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 484,800 144,000 462,840 Non-controlling interest………… (13) 7,200 (1 ) 72,000 (2) 18,000 _________ _________ __________ (9) 6,960 ____89,760 Total P1,984,800 P1,008,000 P 983,160 P 983,160 P2,394,600 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. P168,000 Unrealized profit in ending inventory of S Company (downstream sales)… ( 18,000) P Company’s realized net income from separate operations*…….….. P150,000 S Company’s net income from own operations…………………………………. P 60,000 Unrealized profit in ending inventory of S Company (upstream sales)… ( 12,000) Son Company’s realized net income from separate operations*…….….. P 48,000 48,000 Total P198,000 Less: Non-controlling Interest in Net Income* * P 6,960 Amortization of allocated excess (refer to amortization above) 13,200 Goodwill impairment (impairment under partial-goodwill approach) 3,000 23,160 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P174,840 Add: Non-controlling Interest in Net Income (NCINI) _ 6,960 Consolidated Net Income for 20x4 P181.800 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations P 60,000 (Reported net income of S Company) Unrealized profit in ending inventory of P Company (upstream sales) ( 12,000) S Company’s realized net income from separate operations……… P 48,000 Less: Amortization of allocated excess 13,200 P 34,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 6,960 *that has been realized in transactions with third parties. Since NCI share of goodwill is not recognized, no adjustment is required for the impairment loss on goodwill and impairment losses are not shared with NCI. 20x5: Second Year after Acquisition P Co. S Co. Sales P P 540,000 360,000 Less: Cost of goods sold 216,000 192,000 Gross profit P P 324,000 168,000 Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000 Net income from its own separate P P operations 192,000 90,000 Add: Dividend income 38,400 - Net income P P 230,400 90,000 Dividends paid P P 72,000 48,000 No goodwill impairment loss for 20x5. 20x5: Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5: Cash……………………… 38,400 Dividend income (P48,000 x 38,400 80%)……………. Record dividends from S Company. On the books of S Company, the P48,000 dividend paid was recorded as follows: Dividends paid………… 48,000 Cash 48,000 Dividends paid by S Co.. Consolidation Workpaper – Second Year after Acquisition (E1) Investment in S 19,200 Company………………………… Retained earnings – P 19,200 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: Retained earnings – S Company, 1/1/20x5 P144,000 Retained earnings – S Company, 1/1/20x4 120,000 Increase in retained earnings…….. P 24,000 Multiplied by: Controlling interest % 80% Retroactive adjustment P 19,200 (E2) Common stock – S 240,000 Co………………………………………… Retained earnings – S Co., 1/1/20x5 144.000 Investment in S Co (P384,000 x 307,200 80%)………………………… Non-controlling interest (P384,000 x 76,800 20%)……………………….. To eliminate intercompany investment and equity accounts of subsidiary and to establish non-controlling interest (in net assets of subsidiary) on January 1, 20x5. (E3) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – 96,000 equipment……………….. .... Accumulated depreciation – 192,00 buildings………………….. ... 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill……………………………………………………………… …. 216,00 Buildings………………………………………........................... 0 Non-controlling interest (P90,000 x 18,000 20%)............................ Investment in S 84,000 Co………………………………………………. To 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 January 1, 20x5. (E4) Retained earnings – P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] 13,560 Non-controlling interests (P13,200 x 2,640 20%)……………………. Depreciation expense……………………….. 6,000 Accumulated depreciation – 12,000 buildings………………….. Interest expense………………………………… 1,200 6,000 Inventory………………………………………………………….. Accumulated depreciation – 24,000 equipment……………….. Discount on bonds payable………………………… 2,400 Goodwill…………………………………… 3,000 To provide for years 20x4 and 20x5 depreciation and amortization on differences between acquisition date fair value and book value of S’s identifiable assets and liabilities as follows: Year 20x4 amounts are debited to P’s retained earnings & NCI; Year 20x5 amounts are debited to respective nominal accounts. (20x4) Depreciation/ Retained Amortization Amortization earnings, expense -Interest Inventory sold P 6,000 Equipment 12,000 P 12,000 Buildings (6,000) ( 6,000) Bonds payable 1,200 ________ P 1,200 Sub-total P13,200 P 6,000 P 1,200 Multiplied by: 80% To Retained earnings P 10,560 Impairment loss 3,000 Total P 13,560 (E5) Dividend income - P………. 38,400 Non-controlling interest (P48,000 x 9,600 20%)……………….. Dividends paid – S…………………… 48,000 To eliminate intercompany dividends and non-controlling interest share of dividends. (E6) Sales………………………. 120,000 Cost of Goods Sold (or Purchases) 120,000 To eliminated intercompany downstream sales. (E7) Sales………………………. 75,000 Cost of Goods Sold (or Purchases) 75,000 To eliminated intercompany upstream sales. (E8) Beginning Retained Earnings – P Company…… 18,000 Cost of Goods Sold (Ending Inventory – Income Statement) 18,000 To realized profit in downstream beginning inventory deferred in the prior period. (E9) Beginning Retained Earnings – P Company (P12,000 x 80%) 9,600 Noncontrolling interest (P12,000 x 20%)…… 2,400 Cost of Goods Sold (Ending Inventory – Income Statement) 12,000 To realized profit in beginning inventory deferred in the prior period. (E10) Cost of Goods Sold (Ending Inventory – Income Statement)… 24,000 Inventory – Balance Sheet…… 24,000 To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E11) Cost of Goods Sold (Ending Inventory – Income Statement)… 6,000 Inventory – Balance Sheet…… 6,000 To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E12) Non-controlling interest in Net Income of 17,760 Subsidiary………… Non-controlling interest ………….. 17,760 To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Realized profit in beginning inventory of P Company - 20x5 (upstream sales) 12,000 Unrealized profit in ending inventory of P Company - 20x5 (upstream sales) ( 6,000) S Company’s Realized net income* P 96,000 Less: Amortization of allocated excess 7,200 P 88,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI ) – partial goodwill P 17,760 *from separate transactions that has been realized in transactions with third persons. Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P540,000 P360,000 (6) 120,000 P 705,000 (7) 75,000 Dividend income 38,400 - (5) 38,400 ___________ Total Revenue P578,400 P360,000 P 705,000 Cost of goods sold P216,000 P192,000 (10) 24,000 (6) 120,000 (11) 6,000 (7) 75,000 213,000 (8) 18,000 (9) 12,000 Depreciation expense 60,000 24,000 (4) 6,000 90,000 Interest expense - - (4) 1,200 1,200 Other expenses 72,000 54,000 126,000 Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 430,200 Net Income P230,400 P 90,000 P 274,800 NCI in Net Income - Subsidiary - - (12) 17,760 ( 17,760) Net Income to Retained Earnings P230,400 P 90,000 P 257,040 Statement of Retained Earnings Retained earnings, 1/1 P Company P484,800 (4) 13,560 (8) 18,000 (9) 19,200 P 462,840 (9) 9,600 (10) S Company P 144,000 144,000 Net income, from above 230,400 90,000 257,040 Total P715,200 P234,000 P 719,880 Dividends paid P Company 72,000 72,000 S Company - 48,000 (5) 48,000 _ ________ Retained earnings, 12/31 to Balance Sheet P643,200 P186,000 P 647,880 Balance Sheet Cash………………………. P 265,200 P 102,000 P 367,200 Accounts receivable…….. 180,000 96,000 276,000 Inventory…………………. 216,000 108,000 (11) 7,200 (4) 7,200 (10) 24,000 (11) 6,000 294,000 Land……………………………. 210,000 48,000 (3) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (3) 216,000 1,044,000 Discount on bonds payable (3) 4,800 (4) 2,400 2,400 Goodwill…………………… (3) 12,000 (4) 3,000 9,000 Investment in S Co……… 372,000 (1) 19,200 (2) 307,200 (3) 84,000 - Total P2,203,200 P1,074,000 P2,677,800 Accumulated depreciation - equipment P 150,000 P 102,000 (3) 96,000 (4) 24,000 P180,000 Accumulated depreciation 450,000 306,000 (3) 192,000 - buildings (4) 12,000 552,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (2) 240,000 Retained earnings, from above 643,200 186,000 647,880 Non-controlling interest………… (4) 2,640 (14) 9,600 (2 ) 76,800 (9) 2,400 (3) 18,000 ___ _____ _________ __________ (12) 17,760 ____97,920 Total 2,203,200 P1,074,000 P1,077,360 P1,077,360 P2,677,800 5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings – P Company, January 1, 20x4 (date of acquisition) P360,000 b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… P 240,000 Retained earnings – Subsidiary Company…………………………………. 120,000 Stockholders’ equity – Subsidiary Company.………….. P 360,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities 90,000 Fair value of stockholders’ equity of subsidiary, January 1, 20x4………………… P 450,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial) P 90,000 c. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 360,000 Parent’s Stockholders’ Equity / CI - SHE P 960,000 NCI, 1/1/20x4 ___90,000 Consolidated SHE, 1/1/20x4 P1,050,000 6. Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P174,840 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. P168,000 Unrealized profit in ending inventory of S Company (downstream sales)… ( 18,000) P Company’s realized net income from separate operations*…….….. P150,000 S Company’s net income from own operations…………………………………. P 60,000 Unrealized profit in ending inventory of S Company (upstream sales)… ( 12,000) S Company’s realized net income from separate operations*…….….. P 48,000 48,000 Total P198,000 Less: Non-controlling Interest in Net Income* * P 6,960 Amortization of allocated excess (refer to amortization above) 13,200 Goodwill impairment (impairment under partial-goodwill approach) 3,000 23,160 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P174,840 Add: Non-controlling Interest in Net Income (NCINI) _ 6,960 Consolidated Net Income for 20x4 P181.800 *that has been realized in transactions with third parties. b. NCI-CNI – P6,960 **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations P 60,000 (Reported net income of S Company) Unrealized profit in ending inventory of P Company (upstream sales) ( 12,000) S Company’s realized net income from separate operations……… P 48,000 Less: Amortization of allocated excess 13,200 P 34,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 6,960 *that has been realized in transactions with third parties. c. CNI, P181,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 174,840 Total P534,840 Less: Dividends paid – P Company for 20x4 72,000 Consolidated Retained Earnings, December 31, 20x4 P462,840 e. The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. The NCI on December 31, 20x4 are computed as follows: Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4 P120,000 Add: Net income of subsidiary for 20x4 6,000 Total P180,000 Less: Dividends paid – 20x4 36,000 144,000 Stockholders’ equity – Subsidiary Company, December 31, 20x4 P 384,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200) Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P460,000 Less: Unrealized profit in ending inventory of P Company (upstream sales) 12,000 Realized stockholders’ equity of subsidiary, December 31, 20x4…… P448,800 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)………………………………….. P 89,760 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 462,840 Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,062,840 NCI, 12/31/20x4 ___89,760 Consolidated SHE, 12/31/20x4 P1,152,600 12/31/20x5: a. CI-CNI Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P192,000 Realized profit in beginning inventory of S Company (downstream sales) 18,000 Unrealized profit in ending inventory of S Company (downstream sales)… (_24,000) P Company’s realized net income from separate operations*…….….. P186,000 S Company’s net income from own operations…………………………………. P 90,000 Realized profit in beginning inventory of P Company (upstream sales) 12,000 Unrealized profit in ending inventory of P Company (upstream sales)… ( 6,000) Son Company’s realized net income from separate operations*…….….. P 96,000 96,000 Total P282,000 Less: Amortization of allocated excess…………………… 7,200 Consolidated Net Income for 20x5 P274,800 Less: Non-controlling Interest in Net Income* * 17,760 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P257,040 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P192,000 Realized profit in beginning inventory of S Company (downstream sales) 18,000 Unrealized profit in ending inventory of S Company (downstream sales)… (_24,000) P Company’s realized net income from separate operations*…….….. P186,000 S Company’s net income from own operations…………………………………. P 90,000 Realized profit in beginning inventory of P Company (upstream sales) 12,000 Unrealized profit in ending inventory of P Company (upstream sales)… ( 6,000) S Company’s realized net income from separate operations*…….….. P 96,000 96,000 Total P282,000 Less: Non-controlling Interest in Net Income* * P 17,760 Amortization of allocated excess…………………… 7,200 24,960 Controlling Interest in Consolidated Net Income or Profit attributable toequity holders of parent………….. P257,040 Add: Non-controlling Interest in Net Income (NCINI) _ 17,760 Consolidated Net Income for 20x5 P274,800 *that has been realized in transactions with third parties. b. NCI-CNI **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations P 90,000 (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) 12,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 6,000) S Company’s realized net income from separate operations……… P 96,000 Less: Amortization of allocated excess 7,200 P 88,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 17,760 c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model P484,800 Less: Unrealized profit in ending inventory of S Company (downstream sales) – 20x4 (UPEI of S – 20x4) or Realized profit in beginning inventory of S Company (downstream sales) –20x5 (RPBI of S - 20x5)……………. 18,000 Adjusted Retained Earnings – Parent 1/1/20x5 (cost model (S Company’s Retained earnings that have been realized in transactions with third parties.. P466,800 Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5 P 144,000 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 24,000 Less: Amortization of allocated excess – 20x4 13,200 Unrealized profit in ending inventory of P Company (upstream sales) 20x4 (UPEI of P – 20x4) or Realized profit in beginning inventory of P Company (upstream sales) –20x5 (RPBI of P - 20x5) 12,000 (P 1,200) Multiplied by: Controlling interests %................... 80% (P 960) Less: Goodwill impairment loss, partial goodwill 3,000 ( 3,960) Consolidated Retained earnings, January 1, 20x5 P462,840 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 257,040 Total P748,680 Less: Dividends paid – Parent Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P647,880 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,125 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6). Or, alternatively: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model P643,200 Less: Unrealized profit in ending inventory of S Company (downstream sales) – 20x5 (UPEI of S – 20x5) or Realized profit in beginning inventory of S Company (downstream sales) –20x6 (RPBI of S - 20x6)……………. 24,000 Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ( S Company’s Retained earnings that have been realized in transactions with third parties.. P619,200 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 P 186,000 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 66,000 Less: Accumulated amortization of allocated excess – 20x4 and 20x5 (P11,000 + P6,000) 20,400 Unrealized profit in ending inventory of P Company (upstream sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inventory of P Company (upstream sales) –20x6 (RPBI of P - 20x6) 6,000 P 39,600 Multiplied by: Controlling interests %................... 80% P 31,680 Less: Goodwill impairment loss, partial goodwill 3,000 28,680 Consolidated Retained earnings, December 31, 20x5 P647,880 e. Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5* P144,000 Add: Net income of subsidiary for 20x5 90,000 Total P234,000 Less: Dividends paid – 20x5 48,000 186,000 Stockholders’ equity – Subsidiary Company, December 31, 20x5 P 426,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) : 20x4 P 13,200 20x5 7,200 ( 20,400) Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P 495,600 Less: Unrealized profit in ending inventory of P Company (upstream sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inventory of P Company (upstream sales) –20x6 (RPBI of P - 20x6 6,000 Realized stockholders’ equity of subsidiary, December 31, 20x5………. P489,600 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 97,920 * the realized profit in beginning inventory of P Company (upstream sales) –20x5 (RPBI of P - 20x5 amounting to P10,000 is already included in the beginning retained earnings of S Company. f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 647,880 Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,247,880 NCI, 12/31/20x4 ___97,920 Consolidated SHE, 12/31/20x4 P1,345,800 Problem V Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred P (80%)…………….. 372,000 Fair value of NCI (given) (20%)……………….. 93,000 P Fair value of Subsidiary (100%)………. 465,000 Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. P 240,000 Retained earnings (P120,000 x 100%)………... 120,000 360,000 Allocated excess (excess of cost over book P value)….. 105,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… P 6,000 Increase in land (P7,200 x 100%)……………………. 7,200 Increase in equipment (P96,000 x 100%) 96,000 Decrease in buildings (P24,000 x 100%)………..... ( 24,000) Decrease in bonds payable (P4,800 x 100%)…… 4,800 90,000 Positive excess: Full-goodwill (excess of cost over fair P value)………………………………………………... 15,000 A summary or depreciation and amortization adjustments is as follows: Annu Over/ al Current Account Adjustments to be unde Lif Amou Year(20x amortized r e nt 4) 20x5 P P P Inventory 6,000 1 6,000 P 6,000 - Subject to Annual Amortization 96,00 12,00 Equipment (net)......... 0 8 12,000 12,000 0 (24,0 ( 6,000 (6,00 Buildings (net) 00) 4 ) ( 6,000) 0) Bonds payable… 4,800 4 1,200 1,200 1,200 P P 13,200 P 13,200 7,200 20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4: (1) Investment in S 372,00 Company…………………………………………… 0 372,00 Cash…………………………………………………………………… 0 .. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Dividend income (P36,000 x 80%)……………. 28,800 Record dividends from Son Company. On the books of Son Company, the P36,000 dividend paid was recorded as follows: Dividends paid………… 36,000 Cash……. 36,000 Dividends paid by SCo.. No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4. Consolidation Workpaper – First Year after Acquisition (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S 120.000 Co…………………………………… Investment in S 288,000 Co…………………………………………… Non-controlling interest (P360,000 x 72,000 20%)……………………….. To eliminate intercompany investment and equity accounts of subsidiary on date of acquisition; and to establish non-controlling interest (in net assets of subsidiary) on date of acquisition. (E2) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in Son 84,000 Co………………………………………………. To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition. (E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Goodwill impairment 3,750 loss………………………………………. 6,000 Inventory………………………………………………………….. Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 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: Cost of Depreciation/ Goods Amortization Amortization Sold Expense -Interest Inventory sold P 6,000 Equipment P12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 6,000 P1,200 (E4) Dividend income - P………. 28,800 Non-controlling interest (P36,000 x 7,200 20%)……………….. Dividends paid – S…………………… 36,000 To eliminate intercompany dividends and non-controlling interest share of dividends. (E5) Sales………………………. 150,000 Cost of Goods Sold (or Purchases) 150,000 To eliminated intercompany downstream sales. (E6) Sales………………………. 60,000 Cost of Goods Sold (or Purchases) 60,000 To eliminated intercompany upstream sales. (E7) Cost of Goods Sold (Ending Inventory – Income Statement)… 18,000 Inventory – Balance Sheet…… 18,000 To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E8) Cost of Goods Sold (Ending Inventory – Income Statement)… 12,000 Inventory – Balance Sheet…… 12,000 To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E9) Non-controlling interest in Net Income of 6,210 Subsidiary………… Non-controlling interest ………….. 6,210 To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. P 60,000 Unrealized profit in ending inventory of P Company (upstream sales)……………………….. ( 12,000) S Company’s realized net income from separate operations*…….….. P 48,000 Less: Amortization of allocated excess [(E3)]…. 13,200 P 34,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) P 6,960 – partial goodwill Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill) 750 Non-controlling Interest in Net Income (NCINI) – full goodwill P 6,210 Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P480,000 P240,000 (5) 150,000 P 510,000 (6) 60,000 Dividend income 28,800 - (4) 28,800 _________ Total Revenue P451,200 P240,000 P 510,000 Cost of goods sold P204,000 P138,000 (3) 6,000 (5) 150,000 P 168,000 (7) 18,000 (6) 60,000 (8) 12,000 Depreciation expense 60,000 24,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200 Other expenses 48,000 18,000 66,000 Goodwill impairment loss - - (3) 3,750 3,750 Total Cost and Expenses P312,000 P180,000 P328,950 Net Income P196,800 P 60,000 P181,050 NCI in Net Income - Subsidiary - - (9) 6,210 ( 6,210) Net Income to Retained Earnings P196,800 P 60,000 P174,840 Statement of Retained Earnings Retained earnings, 1/1 P Company P360,000 P 360,000 S Company P120,000 (1) 120,000 Net income, from above 196,800 60,000 174,840 Total P556,800 P180,000 P534,840 Dividends paid P Company 72,000 72,000 S Company - 36,000 (4) 36,000 _ ________ Retained earnings, 12/31 to Balance Sheet P484,800 P144,000 P 462,840 Balance Sheet Cash………………………. P 232,800 P 90,000 P 322,800 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 (7) 18,000 (8) 12,000 180,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 1,200 3,600 Goodwill…………………… (2) 15,000 (3) 3,750 11,250 Investment in S Co……… 372,000 (8) 288,000 (9) 84,000 - Total P1,984,800 P1,008,000 P2,396,850 Accumulated depreciation - equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000 (15) Accumulated depreciation 405,000 288,000 192,000 - buildings (16) 6,000 495,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 484,800 144,000 462,840 Non-controlling interest………… (4) 7,200 (1 ) 72,000 (2) 21,000 _________ _________ (9) 6,210 ____92,010 Total P1,984,800 P1,008,000 P 986,160 P 986,160 P2,396,850 20x5: Second Year after Acquisition Perfect Son Co. Co. Sales P P 540,000 360,000 Less: Cost of goods sold 216,000 192,000 Gross profit P P 324,000 168,000 Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000 Net income from its own separate P P operations 192,000 90,000 Add: Dividend income 38,400 - Net income P P 230,400 90,000 Dividends paid P P 72,000 48,000 No goodwill impairment loss for 20x5. 20x5: Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5: Cash……………………… 38,400 Dividend income (P48,000 x 38,400 80%)……………. Record dividends from S Company. On the books of S Company, the P48,000 dividend paid was recorded as follows: Dividends paid………… 48,000 Cash 48,000 Dividends paid by SCo.. Consolidation Workpaper – Second Year after Acquisition (E1) Investment in S 19,200 Company………………………… Retained earnings – P 19,200 Company……………………… To provide entry to convert from the cost method to the equity method or the entry to establish reciprocity at the beginning of the year, 1/1/20x5. Retained earnings – S Company, 1/1/20x5 P144,000 Retained earnings – S Company, 1/1/20x4 120,000 Increase in retained earnings…….. P 24,000 Multiplied by: Controlling interest % 80% Retroactive adjustment P 19,200 (E2) Common stock – S Co………………………………………… 240,00 0 Retained earnings – S Co., 1/1/20x5 144.00 0 Investment in S Co (P384,000 x 307,20 80%)………………………… 0 Non-controlling interest (P384,000 x 76,800 20%)……………………….. To eliminate intercompany investment and equity accounts of subsidiary and to establish non-controlling interest (in net assets of subsidiary) on January 1, 20x5. (E3) 6000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in S 84,000 Co………………………………………………. To 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 January 1, 20x5. (E4) Retained earnings – P Company, 1/1/20x5 (P16,950 x 80%) 13,560 Non-controlling interests (P16,950 x 3,390 20%)……………………. Depreciation expense……………………….. 6,000 Accumulated depreciation – buildings………………….. 12,000 Interest expense………………………………… 1,200 6,000 Inventory………………………………………………………….. Accumulated depreciation – 24,000 equipment……………….. Discount on bonds payable………………………… 2,800 Goodwill…………………………………… 3,750 To provide for years 20x4 and 20x5 depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Year 20x4 amounts are debited to Perfect’s retained earnings and NCI. Year 20x5 amounts are debited to respective nominal accounts.. (20x4) Depreciation/ Retained Amortization Amortization earnings, expense -Interest Inventory sold P 6,000 Equipment 12,000 P 12,000 Buildings (6,000) ( 6,000) Bonds payable 1,200 P 1,200 Impairment loss 3,750 Totals P 16,950 P 6,000 P1,200 Multiplied by: CI%.... 80% To Retained earnings P13,560 (E5) Dividend income - P………. 38,400 Non-controlling interest (P48,000 x 9,600 20%)……………….. Dividends paid – S…………………… 48,000 To eliminate intercompany dividends and non-controlling interest share of dividends. (E6) Sales………………………. 120,000 Cost of Goods Sold (or Purchases) 120,000 To eliminated intercompany downstream sales. (E7) Sales………………………. 75,000 Cost of Goods Sold (or Purchases) 75,000 To eliminated intercompany upstream sales. (E8) Beginning Retained Earnings – P Company…… 18,000 Cost of Goods Sold (Ending Inventory – Income Statement) 18,000 To realized profit in downstream beginning inventory deferred in the prior period. (E9) Beginning Retained Earnings – P Company (P12,000 x 80%) 9,600 Noncontrolling interest (P12,000 x 20%)…… 2,400 Cost of Goods Sold (Ending Inventory – Income Statement) 12,000 To realized profit in upstream beginning inventory deferred in the prior period. (E10) Cost of Goods Sold (Ending Inventory – Income Statement)… 24,000 Inventory – Balance Sheet…… 24,000 To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E11) Cost of Goods Sold (Ending Inventory – Income Statement)… 6,000 Inventory – Balance Sheet…… 6,000 To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E12) Non-controlling interest in Net Income of 17,760 Subsidiary………… Non-controlling interest ………….. 17,760 To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. P 90,000 Realized profit in beginning inventory of P Company - 20x5 (upstream sales) 12,000 Unrealized profit in ending inventory of P Company - 20x5 (upstream sales) ( 6,000) Son Company’s Realized net income* P 96,000 Less: Amortization of allocated excess 7,200 P 88,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) P 17,760 - partial goodwill Less: NCI on goodwill impairment loss on full- Goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 17,760 *from separate transactions that has been realized in transactions with third persons. Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P540,000 P360,000 (6) 120,000 P 705,000 (7) 75,000 Dividend income 38,400 - (5) 38,400 ___________ Total Revenue P574,800 P360,000 P 705,000 Cost of goods sold P216,000 P192,000 (10) 24,000 (6) 120,000 P 213,000 (11) 6,000 (7) 90,000 (8) 21,600 (9) 14,400 Depreciation expense 60,000 24,000 (4) 6,000 90,000 Interest expense - - (4) 1,200 1,200 Other expenses 72,000 54,000 126,000 Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 430,200 Net Income P230,400 P 90,000 P 274,800 NCI in Net Income - Subsidiary - - (12) 17,760 ( 17,760) Net Income to Retained Earnings P230,400 P 90,000 P 257,040 Statement of Retained Earnings Retained earnings, 1/1 P Company P484,800 (5) 13,560 (8) 18,000 (9) 96000 (12) 19,200 P 462,840 (13) S Company P 144,000 144,000 Net income, from above 230,400 90,000 257,040 Total P715,200 P234,000 P 719,880 Dividends paid P Company 72,000 72,000 S Company - 48,000 (5) 48,000 _ ________ Retained earnings, 12/31 to Balance Sheet P643,200 P186,000 P 647,880 Balance Sheet Cash………………………. P 265,200 P 102,000 P 367,200 Accounts receivable…….. 180,000 96,000 276,000 Inventory…………………. 216,000 108,000 (14) 6,000 (4) 6,000 (10) 24,000 294,000 (11) 6,000 Land……………………………. 210,000 48,000 (3) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (3) 216,000 1,044,000 Discount on bonds payable (3) 4,800 (4) 2,400 2,400 Goodwill…………………… (3) 15,000 (4) 3,750 11,250 Investment in S Co……… 372,000 (1) 19,200 (2) 307,200 (3) 84,000 - Total P2,203,200 P1,074,000 P2,680,050 Accumulated depreciation - equipment P 150,000 P 102,000 (3) 96,000 (4) 24,000 P180,000 Accumulated depreciation 450,000 306,000 (3) 192,000 - buildings (4) 12,000 552,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (2) 240,000 Retained earnings, from above 643,200 186,000 647,880 Non-controlling interest………… (4) 3,390 (17) 9,600 (2 ) 76,800 (9) 2,400 (3) 21,000 ___ _____ _________ __________ (12) 17,760 ____100,170 Total P2,203,200 P1,074,000 P1,081,110 P1,081,110 P2,680,050 5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) P360,000 b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… P 240,000 Retained earnings – Subsidiary Company…………………………………. 120,000 Stockholders’ equity – Subsidiary Company.………….. P 360,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities 90,000 Fair value of stockholders’ equity of subsidiary, January 1, 20x4………………… P 450,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial)………………………………….. P 90,000 Add: Non-controlling interests on full goodwill, 1/1/20x4 (P12,500, full-goodwill – P10,000, partial goodwill) 3,000 Non-controlling interest (full-goodwill) P 93,000 c. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 360,000 Parent’s Stockholders’ Equity / CI - SHE P 960,000 NCI, 1/1/20x4 ___93,000 Consolidated SHE, 1/1/20x4 P1,053,000 6. Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P174,840 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. P168,000 Unrealized profit in ending inventory of S Company (downstream sales)… ( 18,000) Perfect Company’s realized net income from separate operations*…….….. P150,000 S Company’s net income from own operations…………………………………. P 60,000 Unrealized profit in ending inventory of S Company (upstream sales)… ( 12,000) Son Company’s realized net income from separate operations*…….….. P 48,000 48,000 Total P198,000 Less: Non-controlling Interest in Net Income P 6,1210 Amortization of allocated excess (refer to amortization above) 13,200 Goodwill impairment (impairment under full-goodwill approach) 3,750 23,160 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P174,840 Add: Non-controlling Interest in Net Income (NCINI) _ 6,210 Consolidated Net Income for 20x4 P181.050 *that has been realized in transactions with third parties. b. NCI-CNI – P6,210 **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations P 60,000 (Reported net income of S Company) Unrealized profit in ending inventory of P Company (upstream sales) ( 12,000) S Company’s realized net income from separate operations……… P 48,000 Less: Amortization of allocated excess 13,200 P 34,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial P 6,960 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 6,210 *that has been realized in transactions with third parties. c. CNI – P181,050 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 174,840 Total P534,840 Less: Dividends paid – Parent Company for 20x4 72,000 Consolidated Retained Earnings, December 31, 20x4 P462,840 e. Non-controlling interest ), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4 P120,000 Add: Net income of subsidiary for 20x4 60,000 Total P180,000 Less: Dividends paid – 20x4 36,000 144,000 Stockholders’ equity – Subsidiary Company, December 31, 20x4 P 384,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200) Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P460,800 Less: Unrealized profit in ending inventory of P Company (upstream sales) 12,000 Realized stockholders’ equity of subsidiary, December 31, 20x4…… P448,800 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)………………………………….. P 89,760 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 2,250 Non-controlling interest (full-goodwill)…………….. P 92,010 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 462,840 Parent’s Stockholders’ Equity / CI - SHE P1,062,8 40 NCI, 1/1/20x4 ___92,0 10 Consolidated SHE, 1/1/20x4 P1,154,8 40 12/31/20x5: a. CI-CNI – P257,040 Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P192,000 Realized profit in beginning inventory of S Company (downstream sales) 18,000 Unrealized profit in ending inventory of S Company (downstream sales)… (_24,000) P Company’s realized net income from separate operations*…….….. P186,000 S Company’s net income from own operations…………………………………. P 90,000 Realized profit in beginning inventory of P Company (upstream sales) 12,000 Unrealized profit in ending inventory of P Company (upstream sales)… ( 6,000) S Company’s realized net income from separate operations*…….….. P 96,000 96,000 Total P282,000 Less: Amortization of allocated excess…………………… 7,200 Consolidated Net Income for 20x5 P274,800 Less: Non-controlling Interest in Net Income* * 17,760 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P257,040 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P192,000 Realized profit in beginning inventory of S Company (downstream sales) 18,000 Unrealized profit in ending inventory of S Company (downstream sales)… (_24,000) P Company’s realized net income from separate operations*…….….. P186,000 S Company’s net income from own operations…………………………………. P 90,000 Realized profit in beginning inventory of P Company (upstream sales) 12,000 Unrealized profit in ending inventory of P Company (upstream sales)… ( 6,000) Son Company’s realized net income from separate operations*…….….. P 96,000 96,000 Total P282,000 Less: Non-controlling Interest in Net Income* * P 17,760 Amortization of allocated excess…………………… 7,200 24,960 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P257,040 Add: Non-controlling Interest in Net Income (NCINI) _ 17,760 Consolidated Net Income for 20x5 P274,800 *that has been realized in transactions with third parties. b. NCI-CNI – P16,560 **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations P 90,000 (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) 12,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 6,000) S Company’s realized net income from separate operations……… P 96,000 Less: Amortization of allocated excess 7,200 P 88,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 17,760 Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 17,760 c. CNI, P274,800 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model P484,800 Less: Unrealized profit in ending inventory of S Company (downstream sales) – 20x4 (UPEI of S – 20x4) or Realized profit in beginning inventory of S Company (downstream sales) –20x4 (RPBI of S - 20x5)……………. 18,000 Adjusted Retained Earnings – Parent 1/1/20x5 (cost model (S Company’s Retained earnings that have been realized in transactions with third parties.. P466,800 Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5 P 144,000 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 24,000 Less: Amortization of allocated excess – 20x4 13,200 Unrealized profit in ending inventory of P Company (upstream sales) 20x4 (UPEI of P – 20x4) or Realized profit in beginning inventory of P Company (upstream sales) –20x5 (RPBI of P - 20x5) 12,000 (P 1,200) Multiplied by: Controlling interests %................... 80% (P 960) Less: Goodwill impairment loss (full-goodwill), net (P3,750 – P750)* or (P3,750 x 80%) 3,000 ( 3,960) Consolidated Retained earnings, January 1, 20x5 P462,840 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 257,040 Total P719,880 Less: Dividends paid – Parent Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P647,880 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6). Or, alternatively: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model P643,200 Less: Unrealized profit in ending inventory of S Company (downstream sales) – 20x5 (UPEI of S – 20x5) or Realized profit in beginning inventory of S Company (downstream sales) –20x6 (RPBI of S - 20x6)……………. 24,000 Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ( S Company’s Retained earnings that have been realized in transactions with third parties.. P619,200 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 P 186,000 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 66,000 Less: Accumulated amortization of allocated excess – 20x4 and 20x5 (P13,200 + P7,200) 20,400 Unrealized profit in ending inventory of P Company (upstream sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inventory of P Company (upstream sales) –20x6 (RPBI of P - 20x6) 6,000 P 39,600 Multiplied by: Controlling interests %................... 80% P 31,680 Less: Goodwill impairment loss (full-goodwill), net (P3,750 – P750)* or (P3,750 x 80%) 3,000 28,680 Consolidated Retained earnings, December 31, 20x5 P647,880 e. Non-controlling interest, December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5* P144,000 Add: Net income of subsidiary for 20x5 90,000 Total P234,000 Less: Dividends paid – 20x5 48,000 186,000 Stockholders’ equity – Subsidiary Company, December 31, 20x5 P 426,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) : 20x4 P 13,200 20x5 7,200 ( 20,400) Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P 495,600 Less: Unrealized profit in ending inventory of P Company (upstream sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inventory of P Company (upstream sales) –20x6 (RPBI of P - 20x6 6,000 Realized stockholders’ equity of subsidiary, December 31, 20x5………. P489,600 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 97,920 Add: Non-controlling interest on full goodwill , net of impairment loss [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss 2,250 Non-controlling interest (full-goodwill)………………………………….. P 100,170 * the realized profit in beginning inventory of P Company (upstream sales) –20x5 (RPBI of P - 20x5 amounting to P10,000 is already included in the beginning retained earnings of S Company. f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 647,880 Parent’s Stockholders’ Equity / CI - SHE P1,247,880 NCI, 1/1/20x4 ___100,170 Consolidated SHE, 12/31/20x5 P1,348,050 Problem VI 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 P transferred……………………………….. 372,000 Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 80%)……………………. P 192,000 Retained earnings (P120,000 x 80%)………………... 96,000 288,000 Allocated excess (excess of cost over book P value)….. 84,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… P 4,800 Increase in land (P7,200 x 80%)……………………. 5,760 Increase in equipment (P96,000 x 80%) 76,800 Decrease in buildings (P24,000 x 80%)………..... ( 19,200) Decrease in bonds payable (P4,800 x 80%)…… 3,840 72,000 Positive excess: Partial-goodwill (excess of cost over fair P value)………………………………………………... 12,000 The over/under valuation of assets and liabilities are summarized as follows: S Co. (Over) Book S Co. Under value Fair value Valuation P Inventory………………….…………….. 24,000 P 30,000 P 6,000 Land……………………………………… 48,000 55,200 7,200 Equipment (net)......... 84,000 180,000 96,000 Buildings (net) 168,000 144,000 (24,000) Bonds payable………………………… (120,000) ( 115,200) 4,800 P Net……………………………………….. 204,000 P 294,000 P 90,000 The buildings and equipment will be further analyzed for consolidation purposes as follows: S Co. S Co. Book Fair Increase value value (Decrease) Equipment .................. 180,000 180,000 0 Less: Accumulated depreciation….. 96,000 - ( 96,000) Net book value………………………... 84,000 180,000 96,000 S Co. S Co. Book Fair value value (Decrease) Buildings................ 360,000 144,000 ( 216,000) Less: Accumulated depreciation….. 192,000 - ( 192,000) Net book value………………………... 168,000 144,000 ( 24,000) A summary or depreciation and amortization adjustments is as follows: Over/ Annu CurrentY Account Adjustments to be Unde LifalAmo ear(20x4 amortized r e unt ) 20x5 P P P Inventory 6,000 1 6,000 P 6,000 - Subject to Annual Amortization 96,00 12,00 Equipment (net)......... 0 8 12,000 12,000 0 (24,0 ( 6,000 (6,00 Buildings (net) 00) 4 ) ( 6,000) 0) Bonds payable… 48000 4 1,200 1,200 1,200 P P 13,200 P 13,200 7,200 The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows: Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) P 372,000 Fair value of NCI (given) (20%) 93,000 Fair value of Subsidiary (100%) P 465,000 Less: Book value of stockholders’ equity of Son (P360,000 x 100%) __360,000 Allocated excess (excess of cost over book value)….. P 105,000 Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) 90,000 Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………... P 15,000 In this case, the goodwill was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows: Value % of Total Goodwill applicable to parent………………… P12,000 80.00% Goodwill applicable to NCI…………………….. 3,000 20.00% Total (full) goodwill……………………………….. P15,000 100.00% The goodwill impairment loss would be allocated as follows Value % of Total Goodwill impairment loss attributable to parent P 80.00% or controlling 3,000 Interest Goodwill applicable to NCI…………………….. 750 20.00% Goodwill impairment loss based on 100% fair value or full- P 3,750 100.00% Goodwill The unrealized profits on January 1, and on December 31, 20x5, resulting intercompany sales, are as summarized below: Downstream Sales: Intercompany Year Sales of Merchandise Unrealized Parent to in 12/31 Inventory Intercompany Profit in Subsidiary of S Company Ending Inventory 20x4 P150,000 P150,000 x 60% = P90,000 P90,000 x 20% = P18,000 20x5 120,000 P120,000 x 80% = P96,000 P96,000 x 25% = P40,000 Upstream Sales: Intercompany Year Sales of Merchandise Unrealized Subsidiary to in 12/31 Inventory Intercompany Profit in Parent of S Company Ending Inventory 20x4 P 50,000 P100,000 x 50% = P25,000 P25,000 x 40% = P10,000 20x5 62,500 P 62,500 x 40% = P25,000 P25,000 x 20% = P 5,000 20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4: (1) Investment in S 372,00 Company…………………………………………… 0 372,00 Cash…………………………………………………………………… 0 .. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Investment in S Company (P36,000 x 80%)……………. 28,800 Record dividends from S Company. December 31, 20x4: (3) Investment in S Company 48,000 Investment income (P60,000 x 80%) 48,000 Record share in net income of subsidiary. December 31, 20x4: (4) Investment income [(P13,200 x 80%) + P3,000, goodwill 13,560 impairment loss)] Investment in S Company 13,560 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable and goodwill impairment loss. December 31, 20x4: (5) Investment income (P18,000 x 100%) 18,000 Investment in S Company 18,000 To adjust investment income for downstream sales - unrealized profit in ending inventory of S. December 31, 20x4: (6) Investment income (P12,000 x 80%) 9,600 Investment in S Company 9,600 To adjust investment income for upstream sales - unrealized profit in ending inventory P . Thus, the investment balance and investment income in the books of P Company is as follows: Investment in S Cost, 1/1/x4 372,000 28,800 Dividends – S (30,000x 80%) NI of S Amortization & (60,000 x 80%) 48,000 13,560 impairment 18,000 UPEI of Son (P15,000 x 100%) 9,600 UPEI of Perfect (P10,000 x80%) Balance, 12/31/x4 350,040 Investment Income Amortization & NI of S impairment 13,560 48,000 (P60,000 x 80%) UPEI of S (P18,000 x 100%) 18,000 UPEI of P (P12,000 x80%) 9,600 6,840 Balance, 12/31/x4 Consolidation Workpaper – First Year after Acquisition (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S 120.000 Co…………………………………… Investment in S 288,000 Co…………………………………………… Non-controlling interest (P360,000 x 72,000 20%)……………………….. To eliminate investment on January 1, 20x4 and equity accounts of subsidiary on date of acquisition; and to establish non-controlling interest (in net assets of subsidiary) on date of acquisition. (E2) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 18,000 20%)……………………….. Investment in S 84,000 Co………………………………………………. To eliminate investment on January 1, 20x4 and allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition. (E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Goodwill impairment 3,000 loss………………………………………. 6,000 Inventory………………………………………………………….. Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 3,000 To provide for 20x4 impairment loss and depreciation and amortization on differences between acquisition date fair value and book value of S’s identifiable assets and liabilities as follows: Cost of Depreciation/ Goods Amortization Amortization Sold Expense -Interest Total Inventory sold P 6,000 Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 7,200 P1,200 14,400 (E4) Investment income 6,840 Investment in S Company 21,960 Non-controlling interest (P36,000 x 7,200 20%)……………….. Dividends paid – S…………………… 36,000 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: Investment in S Investment Income NI of S 28,800 Dividends - S NI of S (60,000 Amortization & Amortization (50,000 x 80%)……. 48,000 13,560 impairment impairment 13,560 48,000 x 80%) 18,000 UPEI of S UPEI of S 18,000 9,600 UPEI of P UPEI of P 9,600 21,960 6,840 After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Investment in S Cost, 1/1/x4 372,000 28,800 Dividends – S (30,000x 80%) NI of S Amortization & (60,000 x 80%) 48,000 13,560 impairment 18,000 UPEI of Son 9,600 UPEI of Perfect Balance, 12/31/x4 350,040 288,000 (E1) Investment, 1/1/20x4 (E4) Investment Income 84,000 (E2) Investment, 1/1/20x4 and dividends …………… 21,960 372,000 372,000 (E5) Sales………………………. 150,000 Cost of Goods Sold (or Purchases) 150,000 To eliminated intercompany downstream sales. (E6) Sales………………………. 60,000 Cost of Goods Sold (or Purchases) 60,000 To eliminated intercompany upstream sales. (E7) Cost of Goods Sold (Ending Inventory – Income Statement)… 18,000 Inventory – Balance Sheet…… 18,000 To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E8) Cost of Goods Sold (Ending Inventory – Income Statement)… 12,000 Inventory – Balance Sheet…… 12,000 To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E9) Non-controlling interest in Net Income of 6,960 Subsidiary………… Non-controlling interest ………….. 6,960 To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. P 60,000 Unrealized profit in ending inventory of P Company (upstream sales)……………………….. ( 12,000) Son Company’s realized net income from separate operations*…….….. P 48,000 Less: Amortization of allocated excess [(E3)]…. ( 13,200) P 34,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 6,960 Subsidiary accounts are adjusted to full fair value regardless on the controlling interest percentage or what option used to value non-controlling interest or goodwill. Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P480,000 P240,000 (5) 150,000 P 510,000 (6) 60,000 Investment income 6,840 - (4) 6,840 _________ Total Revenue P486,840 P240,000 P 510,000 (5) P 168,000 Cost of goods sold P204,000 P138,000 (3) 6,000 150,000 (7) 18,000 (6) (8) 12,000 60,000 Depreciation expense 60,000 24,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200 Other expenses 48,000 18,000 66,000 Goodwill impairment loss - - (3) 3,000 3,000 Total Cost and Expenses P312,000 P180,000 P328,200 Net Income P174,840 P 60,000 P181,800 NCI in Net Income - Subsidiary - - (9) 6,960 ( 6,960) Net Income to Retained Earnings P174,840 P 60,000 P174,840 Statement of Retained Earnings Retained earnings, 1/1 PCompany P360,000 P 360,000 S Company P120,000 (1) 120,000 Net income, from above 174,840 60,000 174,840 Total P414,840 P180,000 P414,840 Dividends paid P Company 72,000 72,000 S Company - 36,000 (4) 36,000 _ ________ Retained earnings, 12/31 to Balance Sheet P462,840 P144,000 P 642,840 Balance Sheet Cash………………………. P 232,800 P 90,000 P 387,360 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 90,000 (1) 5,000 (3) 6,000 (7) 18,000 (8) 12,000 180,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 220,000 180,000 380,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 1,200 3,600 Goodwill…………………… (2) 12,000 (3) 3,000 9,000 Investment in S Co……… 350,040 (6) 21,960 (2) 288,000 (2) 84,000 - Total P1,635,700 P1,006,000 P2,394,600 Accumulated depreciation - equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P 147,000 Accumulated depreciation 405,000 288,000 (2) 192,000 - buildings (3) 6,000 495,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 462,840 144,000 462,840 Non-controlling interest………… (4) 7,200 (1 ) 72,000 (2) 18,000 _________ _________ __________ (5) 6,960 ____89,760 Total P1,962,840 P1,008,000 P 983,160 P 983,160 P2,394,600 Second Year after Acquisition P Co. S Co. Sales P P 540,000 360,000 Less: Cost of goods sold 216,000 192,000 Gross profit P P 324,000 168,000 Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000 Net income from its own separate P P operations 192,000 90,000 Add: Investment income 65,040 - Net income P P 257,040 90,000 Dividends paid P P 72,000 48,000 No goodwill impairment loss for 20x5. 20x5: Parent Company Equity Method Entry January 1, 20x5 – December 31, 20x5: (2) Cash……………………… 38,400 Investment in S Company (P48,000 x 38,400 80%)……………. Record dividends from S Company. December 31, 20x5: (3) Investment in S Company 72,000 Investment income (P90,000 x 80%) 72,000 Record share in net income of subsidiary. December 31, 20x5: (4) Investment income (P7,200 x 80%) 5,760 Investment in S Company 5,760 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable December 31, 20x5: (5) Investment income (P24,000 x 100%) 24,000 Investment in S Company 24,000 To adjust investment income for downstream sales - unrealized profit in ending inventory of Son (UPEI of S). December 31, 20x5: (6) Investment in S Company…………….. 18,000 Investment income (P18,000 x 100%)……….. 18,000 To adjust investment income for downstream sales - realized profit in beginning inventory of S (RPBI of S). December 31, 20x5: (7) Investment income (P6,000 x 80%) 4,800 Investment in S Company 4,800 To adjust investment income for upstream sales - unrealized profit in ending inventory Perfect (UPEI of P). December 31, 20x5: (8) Investment in S Company…………….. 9,600 Investment income (P12,000 x 80%)……….. 9,600 To adjust investment income for upstream sales - realized profit in beginning inventory of Perfect (RPBI of P) Thus, the investment balance and investment income in the books of P Company is as follows: Investment in S Cost, 1/1/x5 350,040 38,400 Dividends – S (48,000x 80%) NI of Son 5,760 Amortization (7,200 x 80%) (90,000 x 80%) 72,000 24,000 UPEI of Son (P24,000 x 100%) RPBI of S (P18,000 x 100%) 18,000 4,800 UPEI of Perfect (P6,000 x 80%) RPBI of P (P12,000 x 80%) 9,600 Balance, 12/31/x5 376,680 Investment Income Amortization (7,200 x 805) 5,760 NI of S UPEI of S (P24,000 x 100%) 24,000 72,000 (P90,000 x 80%) UPEI of P (P6,000 x 80%) 4,800 18,000 RPBI of S (P18,000 x 100%) 9,600 RPBI of P(P12,000 x 80%) 65,040 Balance, 12/31/x5 Consolidation Workpaper – Second Year after Acquisition The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries: (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S Co, 144.000 1/1/x5…………………………. Investment in SCo (P384,000 x 80%) 307,200 Non-controlling interest (P384,000 x 76,800 20%)……………………….. To eliminate investment on January 1, 20x5 and equity accounts of subsidiary on date of acquisition; and to establish non- controlling interest (in net assets of subsidiary) on 1/1/20x5. (E2) Accumulated depreciation – equipment (P96,000 – 84,000 P12,000) Accumulated depreciation – buildings (P160,000 + 198,00 P6,000) 0 7,200 Land…………………………………………………………………… …. Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P12,000 – P3,000)…………………………….. 9,000 Buildings……………………………………….. 216,00 0 Non-controlling interest [(P90,000 – P13,200) x 20%] 15,360 Investment in S Co………………………………………………. 70,440 To eliminate investment on January 1, 20x5 and allocate excess of cost over book value of identifiable assets acquired, with remainder to the original amount of goodwill; and to establish non- controlling interest (in net assets of subsidiary) on 1/1/20x5. (E3) Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Accumulated depreciation – 12,000 equipment……………….. Discount on bonds 1,200 payable………………………… To provide for 20x5 depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Depreciation/ Amortization Amortization Expense -Interest Total Inventory sold Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ P 1,200 Totals P 6,000 P1,200 P7,200 (E4) Investment income 65,040 Non-controlling interest (P48,000 x 9,600 20%)……………….. Dividends paid – S…………………… 48,000 Investment in S Company 26,640 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: Investment in S Investment Income NI of S 38,400 Dividends – S NI of S (90,000 Amortization Amortization (90,000 x 80%)……. 72,000 5,760 (P7,200 x 80%) (P7,200 x 80%) 5,760 72,000 x 80%) RPBI of S 18,000 24,000 UPEI of S UPEI of S 24,000 18,000 RPBI of S RPBI of P 9,600 4,800 UPEI of P UPEI of P 4,800 9,600 RPBI of P 26,640 65,040 (E6) Sales………………………. 120,000 Cost of Goods Sold (or Purchases) 120,000 To eliminated intercompany downstream sales. (E7) Sales………………………. 75,000 Cost of Goods Sold (or Purchases) 75,000 To eliminated intercompany upstream sales. (E8) Investment in Son Company……………………. 18,000 Cost of Goods Sold (Ending Inventory – Income Statement) 18,000 To realized profit in downstream beginning inventory deferred in the prior period. (E9) Investment in Son Company (P12,000 x 80%) 9,600 Noncontrolling interest (P12,000 x 20%)…… 2,400 Cost of Goods Sold (Ending Inventory – Income Statement) 12,000 To realized profit in upstream beginning inventory deferred in the prior period. After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Investment in S Cost, 1/1/x5 350,040 38,400 Dividends – S (40,000x 80%) NI of S Amortization (90,000 x 80%) 72,000 5,760 (6,000 x 80%) RPBI of S (P18,000 x 100%) 18,000 24,000 UPEI of S (P20,000 x 100%) RPBI of P(P12,000 x 80%) 9,600 4,800 UPEI of P (P5,000 x 80%) Balance, 12/31/x5 376,680 307,200 (E1) Investment, 1/1/20x5 (E8) RPBI of S 18,000 70,440 (E2) Investment, 1/1/20x5 (E9) RPBI of P 9,600 26,640 (E4) Investment Income and dividends 336,900 404,280 (E10) Cost of Goods Sold (Ending Inventory – Income Statement)… 24,000 Inventory – Balance Sheet…… 24,000 To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E11) Cost of Goods Sold (Ending Inventory – Income Statement)… 6,000 Inventory – Balance Sheet…… 6,000 To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E12) Non-controlling interest in Net Income of 17,760 Subsidiary………… Non-controlling interest ………….. 17,760 To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. P 90,000 Realized profit in beginning inventory of P Company - 20x5 (upstream sales) 12,000 Unrealized profit in ending inventory of P Company - 20x5 (upstream sales) ( 6,000) S Company’s Realized net income* P 96,000 Less: Amortization of allocated excess ( 7,200) P 88,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 17,760 *from separate transactions that has been realized in transactions with third persons. Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P540,000 P360,000 (6) 120,000 P 705,000 (7) 75,000 Investment income 65,040 - (4) 65,040 ___________ Total Revenue P605,040 P360,000 P 705,000 Cost of goods sold P216,000 P192,000 (10) 24,000 (6) 120,000 P 213,000 (11) 6,000 (7) 75,000 (8) 18,000 (9) 12,000 Depreciation expense 60,000 24,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200 Other expenses 72,000 54,000 126,000 Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 430,200 Net Income P257,040 P 90,000 P 274,800 NCI in Net Income - Subsidiary - - (5) 17,760 ( 17,760) Net Income to Retained Earnings P257,040 P 90,000 P 257,040 Statement of Retained Earnings Retained earnings, 1/1 P Company P462,840 P 462,840 S Company P144,000 (1) 144,000 Net income, from above 257,040 90,000 257,040 Total P719,880 P234,000 P 719,880 Dividends paid P Company 72,000 72,000 S Company - 48,000 (4) 48,000 _ ________ Retained earnings, 12/31 to Balance Sheet P777,456 P223,200 P 777,456 Balance Sheet Cash………………………. P 265,200 P 102,000 P 367,200 Accounts receivable…….. 180,000 96,000 276,000 Inventory…………………. 216,000 108,000 (10) 24,000 (11) 6,000 294,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (3) 216,000 1,044,000 Discount on bonds payable (2) 3,600 (3) 1,200 2,400 Goodwill…………………… (2) 9,000 9,000 Investment in S Co……… 376,680 (8) 18,000 (1) 307,200 (9) 9,600 (6) 70,440 (4) 26,640 - Total P2,207,880 P1,074,000 P2,677,800 Accumulated depreciation (2) 84,000 - equipment P 150,000 P 102,000 (3) 12,000 P180,000 Accumulated depreciation 450,000 306,000 (2) 198,000 - buildings (3) 6,000 552,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 647,880 186,000 647,880 Non-controlling interest………… (4) 9,600 (9) 2,400 (2 ) 76,800 (2) 15,360 ___ _____ _________ __________ (5) 17,760 ____97,920 Total P2,207,880 P1,074,000 P1,046,400 P1,046,400 P2,677,800 5 and 6. Refer to Problem IX for computations Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem IX solution). Problem VII Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred P (80%)…………….. 372,000 Fair value of NCI (given) (20%)……………….. 93,000 P Fair value of Subsidiary (100%)………. 465,000 Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. P 240,000 Retained earnings (P120,000 x 100%)………... 120,000 360,000 Allocated excess (excess of cost over book P value)….. 105,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… P 6,000 Increase in land (P7,200 x 100%)……………………. 7,200 Increase in equipment (P96,000 x 100%) 96,000 Decrease in buildings (P24,000 x 100%)………..... ( 24,000) Decrease in bonds payable (P4,800 x 100%)…… 4,800 90,000 Positive excess: Full-goodwill (excess of cost over fair P value)………………………………………………... 15,000 A summary or depreciation and amortization adjustments is as follows: Annu Over/ al Current Account Adjustments to be unde Lif Amou Year(20x amortized r e nt 4) 20x5 P P P Inventory 6,000 1 6,000 P 6,000 - Subject to Annual Amortization 96,00 12,00 Equipment (net)......... 0 8 12,000 12,000 0 (24,0 ( 6,000 (6,00 Buildings (net) 00) 4 ) ( 6,000) 0) Bonds payable… 4,800 4 1,200 1,200 1,200 P P 13,200 P 13,200 7,200 20x4: First Year after Acquisition Parent Company Equity Method Entry January 1, 20x4: (1) Investment in S 372,00 Company…………………………………………… 0 372,00 Cash…………………………………………………………………… 0 .. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Investment in S Company (P36,000 x 80%)……………. 28,800 Record dividends from S Company. December 31, 20x4: (3) Investment in S Company 48,000 Investment income (P60,000 x 80%) 48,000 Record share in net income of subsidiary. December 31, 20x4: (4) Investment income [(P13,200 x 80%) + (P3,750 – P750)*, 13,560 goodwill impairment loss)] Investment in S Company 13,560 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable and goodwill impairment loss. *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,125 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6). December 31, 20x4: (5) Investment income (P18,000 x 100%) 18,000 Investment in S Company 18,000 To adjust investment income for downstream sales - unrealized profit in ending inventory of S. December 31, 20x4: (6) Investment income (P12,000 x 80%) 9,600 Investment in S Company 9,600 To adjust investment income for upstream sales - unrealized profit in ending inventory P . Thus, the investment balance and investment income in the books of P Company is as follows Investment in S Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%) NI of S Amortization & (60,000 x 80%) 48,000 13,560 impairment 18,000 UPEI of S (P18,000 x 100%) 9,600 UPEI of P (P12,000 x80%) Balance, 12/31/x4 324,000 Investment Income Amortization & NI of S impairment 13,560 48,000 (P60,000 x 80%) UPEI of S (P18,000 x 100%) 18,000 UPEI of P (P12,000 x80%) 9,600 6,840 Balance, 12/31/x4 Consolidation Workpaper – First Year after Acquisition (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S 120.000 Co…………………………………… Investment in S 288,000 Co…………………………………………… Non-controlling interest (P360,000 x 72,000 20%)……………………….. To eliminate investment on January 1, 20x4 and equity accounts of subsidiary on date of acquisition; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition. (E2) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in Son 84,000 Co………………………………………………. To eliminate investment on January 1, 20x4 and allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition. (E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Goodwill impairment 3,750 loss………………………………………. 6,000 Inventory………………………………………………………….. Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 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: Cost of Depreciation/ Goods Amortization Amortization Sold Expense -Interest Total Inventory sold P 6,000 Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 7,200 P1,200 14,400 (E4) Investment income 6,840 Investment in S Company 21,960 Non-controlling interest (P36,000 x 7,200 20%)……………….. Dividends paid – S…………………… 36,000 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: Investment Income Investment in S NI of S 28,800 Dividends - S NI of S (60,000 Amortization & Amortization (50,000 x 80%)……. 48,000 13,560 impairment impairment 13,560 48,000 x 80%) 18,000 UPEI of S UPEI of S 18,000 9,600 UPEI of P UPEI of P 9,600 21,960 6,840 After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Investment in S Cost, 1/1/x4 372,000 28,800 Dividends – S (30,000x 80%) NI of S Amortization & (60,000 x 80%) 48,000 13,560 impairment 18,000 UPEI of S 9,600 UPEI of P Balance, 12/31/x4 350,040 288,000 (E1) Investment, 1/1/20x4 (E4) Investment Income 84,000 (E2) Investment, 1/1/20x4 and dividends …………… 21,960 372,000 372,000 (E5) Sales………………………. 150,000 Cost of Goods Sold (or Purchases) 150,000 To eliminated intercompany downstream sales. (E6) Sales………………………. 60,000 Cost of Goods Sold (or Purchases) 60,000 To eliminated intercompany upstream sales. (E7) Cost of Goods Sold (Ending Inventory – Income Statement)… 18,000 Inventory – Balance Sheet…… 18,000 To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E8) Cost of Goods Sold (Ending Inventory – Income Statement)… 12,000 Inventory – Balance Sheet…… 12,000 To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E9) Non-controlling interest in Net Income of 6,210 Subsidiary………… Non-controlling interest ………….. 6,210 To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. P 60,000 Unrealized profit in ending inventory of P Company (upstream sales)……………………….. ( 12,000) S Company’s realized net income from separate operations*…….….. P 48,000 Less: Amortization of allocated excess [(E3)]…. ( 13,200) P 34,800 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) P 6,960 – partial goodwill Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) – full goodwill P 6210 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6). Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P480,000 P240,000 (5) 150,000 P 510,000 (6) 60,000 Investment income 6,840 - (4) 6,840 _________ Total Revenue P486,840 P240,000 P 510,000 (5) P 168,000 Cost of goods sold P204,000 P138,000 (3) 6,000 150,000 (7) 18,000 (6) (8) 12,000 60,000 Depreciation expense 60,000 24,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200 Other expenses 48,000 18,000 66,000 Goodwill impairment loss - - (3) 3,750 3,750 Total Cost and Expenses P312,000 P150,000 P274,125 Net Income P174,840 P 50,000 P150,875 NCI in Net Income - Subsidiary - - (9) 5,175 ( 5,175) Net Income to Retained Earnings P174,840 P 50,000 P145,700 Statement of Retained Earnings Retained earnings, 1/1 P Company P360,000 P 360,000 S Company P120,000 (1) 120,000 Net income, from above 174,840 60,000 174,840 Total P414,840 P180,000 P 414,840 Dividends paid P Company 72,000 72,000 S Company - 36,000 (4) 36,000 _ ________ Retained earnings, 12/31 to Balance Sheet P462,840 P144,000 P 462,840 Balance Sheet Cash………………………. P 232,800 P 90,000 P 322,800 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 (7) 18,000 (8) 12,000 180,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 1,200 3,600 Goodwill…………………… (2) 15,000 (3) 3,750 11,250 Investment in S Co……… 350,040 (4) 21,960 (2) 288,000 (2) 84,000 - Total P1,635,700 P1,008,000 P2,396,850 Accumulated depreciation - equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P 147,000 Accumulated depreciation 405,000 288,000 (2) 192,000 - buildings (3) 6,000 495,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 462,840 144,000 462,840 Non-controlling interest………… (4) 7,200 (1 ) 72,000 (2) 21,000 _________ _________ __________ (9) 6,210 ____92,010 Total P1,962,840 P1,008,000 P 986,160 P 986,160 P2,396,850 20x5: Second Year after Acquisition Perfect Son Co. Co. Sales P P 540,000 360,000 Less: Cost of goods sold 216,000 192,000 Gross profit P P 324,000 168,000 Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000 Net income from its own separate P P operations 192,000 90,000 Add: Investment income 65,040 - Net income P P 257,040 90,000 Dividends paid P P 72,000 48,000 No goodwill impairment loss for 20x5. Parent Company Equity Method Entry January 1, 20x5 – December 31, 20x5: (2) Cash……………………… 38,400 Investment in S Company (P48,000 x 38,400 80%)……………. Record dividends from S Company. December 31, 20x5: (3) Investment in S Company 72,000 Investment income (P90,000 x 80%) 72,000 Record share in net income of subsidiary. December 31, 20x5: (4) Investment income (P7,200 x 80%) 5,760 Investment in S Company 5,760 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable December 31, 20x5: (5) Investment income (P24,000 x 100%) 24,000 Investment in S Company 24,000 To adjust investment income for downstream sales - unrealized profit in ending inventory of S (UPEI of S). December 31, 20x5: (6) Investment in S Company…………….. 18,000 Investment income (P18,000 x 100%)……….. 18,000 To adjust investment income for downstream sales - realized profit in beginning inventory of S (RPBI of S). December 31, 20x5: (7) Investment income (P6,000 x 80%) 4,800 Investment in S Company 4,800 To adjust investment income for upstream sales - unrealized profit in ending inventory P (UPEI of P). December 31, 20x5: (8) Investment in S Company…………….. 9,600 Investment income (P12,000 x 80%)……….. 9,600 To adjust investment income for upstream sales - realized profit inbeginning inventory of P (RPBI of P) Thus, the investment balance and investment income in the books of Perfect Company is as follows: Investment in S Cost, 1/1/x5 350,040 38,400 Dividends – S (48,000x 80%) NI of Son 5,760 Amortization (7,200 x 80%) (90,000 x 80%) 72,000 24,000 UPEI of S (P24,000 x 100%) RPBI of (P18,000 x 100%) 18,000 4,800 UPEI of P (P6,000 x 80%) RPBI of P (P12,000 x 80%) 9,600 Balance, 12/31/x5 376,680 Investment Income Amortization (7,200 x 805) 5,760 NI of S UPEI of S (P24,000 x 100%) 24,000 72,000 (P90,000 x 80%) UPEI of P (P6,000 x 80%) 4,800 18,000 RPBI of S (P18,000 x 100%) 9,600 RPBI of P (P12,000 x 80%) 65,040 Balance, 12/31/x5 Consolidation Workpaper – Second Year after Acquisition The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries. (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S Co, 144.000 1/1/x5…………………………. Investment in SCo (P384,000 x 80%) 307,200 Non-controlling interest (P384,000 x 76,800 20%)……………………….. To eliminate investment on January 1, 20x5 and equity accounts of subsidiary on date of acquisition; and to establish non- controlling interest (in net assets of subsidiary) on 1/1/20x5. (E2) Accumulated depreciation – equipment (P96,000 – 84,000 P12,000) Accumulated depreciation – buildings (P192,000 + 198,00 P6,000) 0 7,200 Land…………………………………………………………………… …. Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P15,000 – P3,750)…………………………….. 11,250 Buildings……………………………………….. 216,00 0 Non-controlling interest [(P90,000 – P13,200) x 20%] + [P3,000, full goodwill - [(P3,750, full-goodwill impairment – P3,000, partial- goodwill impairment)* 17,610 or (P3,750 x 20%)] Investment in S 70,440 Co………………………………………………. 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……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Accumulated depreciation – 12,000 equipment……………….. Discount on bonds 1,200 payable………………………… To provide for 20x5 depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Depreciation/ Amortization Amortization Expense -Interest Total Inventory sold Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ P 1,200 Totals P 6,000 P1,200 P7,200 (E4) Investment income 65,040 Non-controlling interest (P48,000 x 9,600 20%)……………….. Dividends paid – S…………………… 48,000 Investment in S Company 26,640 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: Investment in S Investment Income NI of Son 38,400 Dividends – S NI of S (90,000 Amortization Amortization (90,000 x 80%)……. 72,000 5,760 (P7,200 x 80%) (P7,200 x 80%) 5,760 72,000 x 80%) RPBI of S 18,000 24,000 UPEI of S UPEI of S 24,000 18,000 RPBI of S RPBI of P 9,600 4,800 UPEI of P UPEI of P 4,800 9,600 RPBI of P 26,640 65,040 (E6) Sales………………………. 120,000 Cost of Goods Sold (or Purchases) 120,000 To eliminated intercompany downstream sales. (E7) Sales………………………. 75,000 Cost of Goods Sold (or Purchases) 75,000 To eliminated intercompany upstream sales. (E8) Investment in Son Company……………………. 18,000 Cost of Goods Sold (Ending Inventory – Income Statement) 18,000 To realized profit in downstream beginning inventory deferred in the prior period. (E9) Investment in Son Company (P12,000 x 80%) 9,600 Noncontrolling interest (P12,000 x 20%)…… 2,400 Cost of Goods Sold (Ending Inventory – Income Statement) 12,000 To realized profit in upstream beginning inventory deferred in the prior period. After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, Investment in S Cost, 1/1/x5 350,040 38,400 Dividends – S (48,000x 80%) NI of Son Amortization (90,000 x 80%) 72,000 5,600 (7,000 x 80%) RPBI of S (P18,000 x 100%) 18,000 24,000 UPEI of S (P24,000 x 100%) RPBI of P (P18,000 x 80%) 9,600 4,800 UPEI of P (P6,000 x 80%) Balance, 12/31/x5 376,680 307,200 (E1) Investment, 1/1/20x5 (E8) RPBI of S 18,000 70,440 (E2) Investment, 1/1/20x5 (E9) RPBI of P 9,600 26,640 (E4) Investment Income and dividends 404,280 404,280 (E10) Cost of Goods Sold (Ending Inventory – Income Statement)… 24,000 Inventory – Balance Sheet…… 24,000 To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E11) Cost of Goods Sold (Ending Inventory – Income Statement)… 6,000 Inventory – Balance Sheet…… 6,000 To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders. (E12) Non-controlling interest in Net Income of 17,760 Subsidiary………… Non-controlling interest ………….. 17,760 To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. P 90,000 Realized profit in beginning inventory of P Company - 20x5 (upstream sales) 12,000 Unrealized profit in ending inventory of P Company - 20x5 (upstream sales) ( 6,000) Son Company’s Realized net income* P 96,000 Less: Amortization of allocated excess ( 7,200) P 88,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) P 17,760 – partial goodwill Less: NCI on goodwill impairment loss on full- Goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 17,760 *from separate transactions that has been realized in transactions with third persons. Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P540,000 P360,000 (6) 120,000 P 705,000 (7) 75,000 Investment income 65,040 - (4) 65,040 ___________ Total Revenue P605,040 P360,000 P 705,000 Cost of goods sold P216,000 P192,000 (10) 24,000 (6) 120,000 P 213,000 (11) 6,000 (7) 75,000 (8) 18,000 (9) 12,000 Depreciation expense 60,000 24,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200 Other expenses 72,000 54,000 126,000 Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 430,200 Net Income P257,040 P 90,000 P 274,800 NCI in Net Income - Subsidiary - - (5) 17,760 ( 17,760) Net Income to Retained Earnings P257,040 P 90,000 P 308,448 Statement of Retained Earnings Retained earnings, 1/1 P Company P462,840 P 462,840 S Company P144,000 (1) 144,000 Net income, from above 257,040 90,000 257,040 Total P719,880 P234,000 P 719,880 Dividends paid P Company 72,000 72,000 S Company - 48,000 (4) 48,000 _ ________ Retained earnings, 12/31 to Balance Sheet P647,880 P186,000 P 647,880 Balance Sheet Cash………………………. P 265,200 P 114,000 P 367,200 Accounts receivable…….. 180,000 96,000 276,000 Inventory…………………. 216,000 108,000 (10) 24,000 (11) 6,000 294,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (3) 216,000 1,044,000 Discount on bonds payable (2) 3,600 (3) 1,200 2,400 Goodwill…………………… (2) 11,250 11,250 Investment in S Co……… 376,680 (8) 18,000 (1) 307,200 (9) 9,600 (7) 70,440 (4) 26,640 - Total P2,207,880 P1,074,000 P2,680,050 Accumulated depreciation (2) 84,000 - equipment P 150,000 P 102,000 (3) 12,000 P180,000 Accumulated depreciation 450,000 306,000 (2) 198,000 - buildings (3) 6,000 552,000 Accounts payable…………… 120,000 120,000 240,000 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 647,880 186,000 647,880 Non-controlling interest………… (4) 9,600 (9) 2,400 (1 ) 76,800 (2) 17,610 ___ _____ _________ __________ (14)17,760 ____100,170 Total P2,207,880 P1,074,000 P1,048,650 P1,048,650 P2,680,050 5 and 6. Refer to Problem V for computations Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem V solution). Problem VIII 1. (Computation of selected consolidation balances as affected by downstream inventory transfers) UNREALIZED GROSS PROFIT, 12/31/x4: (downstream transfer) Intercompany gross profit (P120,000 – P72,000) ....................... P48,000 Inventory remaining at year's end ....................................................................................... 30% Unrealized Intercompany Gross profit, 12/31/x4 ........................... P14,400 UNREALIZED GROSS PROFIT, 12/31/x5: (downstream transfer) Intercompany gross profit (P250,000 – P200,000) .................... P50,000 Inventory remaining at year's end ....................................................................................... 20% Unrealized intercompany gross profit, 12/31/x5 ............................ P10,000 CONSOLIDATED TOTALS Sales = P1,150,000 (add the two book values and eliminate intercompany sales of P250,000) Cost of goods sold: Benson's book value ...................................................................... P535,000 Broadway's book value ................................................................ 400,000 Eliminate intercompany transfers ............................................... (250,000) Realized gross profit deferred in 20x4 ........................................ (14,400) Deferral of 20x5 unrealized gross profit ..................................... 10,000 Cost of goods sold ................................................................... P680,600 Operating expenses = P210,000 (add the two book values and include intangible amortization for current year) Dividend income = -0- (intercompany transfer eliminated in consolidation) Noncontrolling interest in consolidated income: (impact of transfers is not included because they were downstream) Broadway reported income for 20x5 ........................................................................... P100,000 Intangible amortization ................................................................................................... (10,000) Broadway adjusted income ........................................................................................... 90,000 Outside ownership ........................................................................................................... 30% Noncontrolling interest in Broadway’s earnings.......................................................... P 27,000 or, Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P800-P535-P100) P 165,000 Realized profit in beginning inventory of S Company (downstream sales) 14,400 Unrealized profit in ending inventory of S Company (downstream sales)… (_10,000) P Company’s realized net income from separate operations*…….….. P 169,400 S Company’s net income from own operations (P600 – P400 – P100) P 100,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales)… ( 0) S Company’s realized net income from separate operations*…….….. P 100,000 100,000 Total P 269,400 Less: Amortization of allocated excess…………………… __10,000 Consolidated Net Income for 20x5 P 259,400 Less: Non-controlling Interest in Net Income* * 27,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P 232,400 **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 100,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) ( 0) S Company’s realized net income from separate operations……… P 100,000 Less: Amortization of allocated excess __10,000 P 90,000 Multiplied by: Non-controlling interest %.......... 30% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 27,000 Inventory = P988,000 (add the two book values less the P10,000 ending unrealized gross profit) Noncontrolling interest in subsidiary, 12/31/x5 = P385,500 30% beginning P950,000 book value ....................................... P285,000 Excess January 1 intangible allocation (30% × P295,000).... 88,500 Noncontrolling Interest in Broadway’s earnings ............................................................. 27,000 Dividends (30% × P50,000)................................................................................................... (15,000) Total noncontrolling interest at 12/31/x5 ................................. P385,500 2. (Computation of selected consolidation balances as affected by upstream inventory transfers). UNREALIZED GROSS PROFIT, 12/31/x4: (upstream transfer) Intercompany gross profit (P120,000 – P72,000) ...................... P48,000 Inventory remaining at year's end ............................................. 30% Unrealized intercompany gross profit, 12/31/x4 ............................ P14,400 UNREALIZED GROSS PROFIT, 12/31/x5: (upstream transfer) Intercompany gross profit (P250,000 – P200,000) .................... P50,000 Inventory remaining at year's end ............................................. 20% Unrealized intercompany gross profit, 12/31/x5 ............................ P10,000 CONSOLIDATED TOTALS Sales = P1,150,000 (add the two book values and eliminate the Intercompany transfer) Cost of goods sold: Benson's COGS book value ......................................................... P535,000 Broadway's COGS book value ................................................... 400,000 Eliminate intercompany transfers ............................................... (250,000) Realized gross profit deferred in 20x4 ........................................ (14,400) Deferral of 20x5 unrealized gross profit ..................................... 10,000 Consolidated cost of goods sold .......................................... P680,600 Operating expenses = P210,000 (add the two book values and include intangible amortization for current year) Dividend income = -0- (interco. transfer eliminated in consolidation) Noncontrolling interest in consolidated income: (impact of transfers is included because they were upstream) Broadway reported income for 20x5 ............................................................................................ P100,000 Intangible amortization .................................................................................................................... (10,000) 20x4 gross profit recognized in 20x5 ..................................................................................... 14,400 20x5 gross profit deferred ....................................................................................................... (10,000) Broadway realized income for 20x5 ...................................................................................... P94,400 Outside ownership ........................................................................................................................... 30% Noncontrolling interest .................................................................................................................... P28,320 Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P800-P535-P100) P 165,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_ 0) P Company’s realized net income from separate operations*…….….. P 165,000 S Company’s net income from own operations (P600 – P400 – P100) P 100,000 Realized profit in beginning inventory of P Company (upstream sales) 14,400 Unrealized profit in ending inventory of P Company (upstream sales)… ( 10,000) S Company’s realized net income from separate operations*…….….. P 104,400 104,400 Total P 269,400 Less: Amortization of allocated excess…………………… __10,000 Consolidated Net Income for 20x5 P 259,400 Less: Non-controlling Interest in Net Income* * 28,320 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P 231,080 **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 100,000 Realized profit in beginning inventory of P Company (upstream sales) 14,400 Unrealized profit in ending inventory of P Company (upstream sales) ( 10,000) S Company’s realized net income from separate operations……… P 104,400 Less: Amortization of allocated excess __10,000 P 94,400 Multiplied by: Non-controlling interest %.......... 30% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 28,320 Inventory = P988,000 (add the two book values and defer the P10,000 ending unrealized gross profit) Noncontrolling interest in subsidiary, 12/31/x5 = P382,500 30% beginning book value less P14,400 unrealized gross profit (30% × P935,600) ............................... P280,680 Excess intangible allocation (30% × P295,000) .................... (88,500) Noncontrolling Interest in Broadway’s earnings ................. 28,320 Dividends (30% × P50,000)............................................................................................... (15,000) Total noncontrolling interest at 12/31/x5 .............................. P382,500 Problem IX (Compute selected balances based on three different intercompany asset transfer scenarios) 1. Consolidated Cost of Goods Sold PP’s cost of goods sold ...................................................................................... P290,000 SW’s cost of goods sold ..................................................................................... 197,000 Elimination of 20x5 intercompany transfers ................................................... (110,000) Reduction of beginning Inventory because of 20x4unrealized gross profit (P28,000/1.4 = P20,000 cost; P28,000 transfer price less P20,000 cost = P8,000 unrealized gross profit) ....................................................... (8,000) Reduction of ending inventory because of 20x5 unrealized gross profit (P42,000/1.4 = P30,000 cost; P42,000 transfer price less P30,000 cost = P12,000 unrealized gross profit) ..................................................... 12,000 Consolidated cost of goods sold ....................................................... P381,000 Consolidated Inventory PP book value ............................................................................................... P346,000 SW book value .............................................................................................. 110,000 Eliminate ending unrealized gross profit (see above) ........................... (12,000) Consolidated Inventory .............................................................................. P444,000 Non-controlling Interest in Subsidiary’s Net Income Because all intercompany sales were downstream, the deferrals do not affect SW. Thus, the non-controlling interest is 20% of the P58,000 (revenues minus cost of goods sold and expenses) reported income or P11,600. or Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P640-P290-P150) P 200,000 Realized profit in beginning inventory of S Company (downstream sales) 8,000 Unrealized profit in ending inventory of S Company (downstream sales)… (_ 12,000) P Company’s realized net income from separate operations*…….….. P 196,000 S Company’s net income from own operations (P360 – P197 – P105) P 58,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales)… ( 0) S Company’s realized net income from separate operations*…….….. P 58,000 58,000 Total P 254,000 Less: Amortization of allocated excess…………………… ____0 Consolidated Net Income for 20x5 P 254,000 Less: Non-controlling Interest in Net Income* * 11,600 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P 242,200 **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) P 58,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) ( 0) S Company’s realized net income from separate operations……… P 58,000 Less: Amortization of allocated excess ____0 P 58,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 11,600 2. Consolidated Cost of Goods Sold PP book value ...................................................................................................... P290,000 SW book value ..................................................................................................... 197,000 Elimination of 20x5 intercompany transfers ................................................... (80,000) Reduction of beginning inventory because of 20x4 unrealized gross profit (P21,000/1.4 = P15,000 cost; P21,000 transfer price less P15,000 cost = P6,000 unrealized gross profit) ....................................................... (6,000) Reduction of ending inventory because of 20x5 unrealized gross profit (P35,000/1.4 = P25,000 cost; P35,000 transfer price less P25,000 cost = P10,000 unrealized gross profit) ..................................................... 10,000 Consolidated cost of goods sold ..................................................................... P411,000 Consolidated Inventory PP book value ...................................................................................................... P346,000 SW book value ..................................................................................................... 110,000 Eliminate ending unrealized gross profit (see above) ................................. (10,000) Consolidated inventory .............................................................................. P446,000 Non-controlling Interest in Subsidiary's Net income Since all intercompany sales are upstream, the effect on Snow's income must be reflected in the non-controlling interest computation: SW reported income .......................................................................................... P58,000 20x4 unrealized gross profit realized in 20x5 (above) ................................... 6,000 20x5 unrealized gross profit to be realized in 20x6 (above) ........................ (10,000) SW realized income ............................................................................................ P54,000 Outside ownership percentage ....................................................................... 20% Non-controlling interest in SW’s income .................................................. P10,800 or Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P640-P290-P150) P 200,000 Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… (_ 0) P Company’s realized net income from separate operations*…….….. P 200,000 S Company’s net income from own operations (P360 – P197 – P105) P 58,000 Realized profit in beginning inventory of P Company (upstream sales) 6,000 Unrealized profit in ending inventory of P Company (upstream sales)… ( 10,000) S Company’s realized net income from separate operations*…….….. P 54,000 54,000 Total P 254,000 Less: Amortization of allocated excess…………………… ____0 Consolidated Net Income for 20x5 P 254,000 Less: Non-controlling Interest in Net Income* * 10,800 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P 243,200 **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) P 58,000 Realized profit in beginning inventory of P Company (upstream sales) 6,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 10,000) S Company’s realized net income from separate operations……… P 54,000 Less: Amortization of allocated excess ____0 P 54,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 10,800 Problem X Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. P 3,600,000 Realized profit in beginning inventory of S Company (downstream sales) 54,000 Unrealized profit in ending inventory of S Company (downstream sales)… (_ 45,00 0) P Company’s realized net income from separate operations*…….….. P 3,609,000 S Company’s net income from own operations (P1,500,000 + P2,400,000) P3,900,000 Realized profit in beginning inventory of P Company (upstream sales) – Salad 66,000 Realized profit in beginning inventory of P Company (upstream sales)- Tuna 63,000 Unrealized profit in ending inventory of P Company (upstream sales) – Salad ( 57,000) Unrealized profit in ending inventory of P Company (upstream sales) – Tuna ( 69,000) S Company’s realized net income from separate operations*…….….. P3,903,000 3,903,000 Total P7,512,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x4 P7,512,000 Less: Non-controlling Interest in Net Income* *- Salad P 301,800 Non-controlling Interest in Net Income* *- Tuna ___239,400 ___541,200 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. P6,970,800 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. P 3,600,000 Realized profit in beginning inventory of S Company (downstream sales) 54,000 Unrealized profit in ending inventory of S Company (downstream sales)… (___45,000) P Company’s realized net income from separate operations*…….….. P3,609,,000 S Company’s net income from own operations (P1,500,000 + P2,400,000) P3,900,000 Realized profit in beginning inventory of P Company (upstream sales) – Salad 66,000 Realized profit in beginning inventory of P Company (upstream sales)- Tuna 63,000 Unrealized profit in ending inventory of P Company (upstream sales) – Salad ( 57,000) Unrealized profit in ending inventory of P Company (upstream sales) – Tuna ( 69,000) S Company’s realized net income from separate operations*…….….. P3,903,000 3,903,000 Total P7,512,000 Less: Non-controlling Interest in Net Income* * - Salad P 301,800 Non-controlling Interest in Net Income* * - Tuna 239,400 Amortization of allocated excess…………………… 0 __541,200 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P6,970,800 Add: Non-controlling Interest in Net Income (NCINI) _541,200 Consolidated Net Income for 20x4 P 7,512,000 *that has been realized in transactions with third parties. **Salad Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P1,500,000 Realized profit in beginning inventory of P Company (upstream sales) 66,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 57,000) Son Company’s realized net income from separate operations……… P1,509,000 Less: Amortization of allocated excess _____0 P1,509,000 Multiplied by: Non-controlling interest %.......... __ 20% Non-controlling Interest in Net Income (NCINI) P 301,800 **Tuna Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P2,400,000 Realized profit in beginning inventory of P Company (upstream sales) 63,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 69,000) Son Company’s realized net income from separate operations……… P2,394,000 Less: Amortization of allocated excess _____0 P2,394,000 Multiplied by: Non-controlling interest %.......... 10% Non-controlling Interest in Net Income (NCINI) P 239,400 Realized Profit in Beginning inventory: Downstream Sales (Sales from Parent to Subsidiary) P414,000 x 15/115 P54,000 Upstream Sales (Sales from Subsidiary-Salad to Parent): Salad: P396,000 x 20/120 66,000 Upstream Sales (Sales from Subsidiary-Tuna to Parent): Tuna: P315,000 x 25/125 63,000 Unrealized Profit in Ending inventory: Downstream Sales (Sales from Parent to Subsidiary) P345,000 x 15/115 P45,000 Upstream Sales (Sales from Subsidiary-Salad to Parent): Salad: P342,000 x 20/120 57,000 Upstream Sales (Sales from Subsidiary-Tuna to Parent): Tuna: P345,000 x 25/125 69,000 Problem XI (Determine selected consolidated balances; includes inventory transfers and an outside ownership.) Customer list amortization = P65,000/5 years = P13,000 per year Intercompany Gross profit (P160,000 – P120,000) ................................................ P40,000 Inventory Remaining at Year's End .......................................................................... 20% Unrealized Intercompany Gross profit, 12/31 .............................................................. P8,000 Consolidated Totals: Inventory = P592,000 (add the two book values and subtract the ending unrealized gross profit of P8,000) Sales = P1,240,000 (add the two book values and subtract the P160,000 intercompany transfer) Cost of Goods Sold = P548,000 (add the two book values and subtract the intercompany transfer and add [to defer] ending unrealized gross profit) Operating Expenses = P443,000 (add the two book values and the amortization expense for the period) Gross profit: P1,240,000 – P548,000 = P692,000 Controlling Interest in CNI: Gross profit ...................................................................................................... P692,000 Less: Operating expenses ............................................................................ 443,000 Consolidated Net Income .......................................................................... P249,000 Less: NCI-CNI ................................................................................................... 8,700 CI-CNI .............................................................................................................. P240,300 or Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P800-P400-P180) P 220,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_ 0) P Company’s realized net income from separate operations*…….….. P 220,000 S Company’s net income from own operations (P600 – P300 – P250) P 50,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales)… ( 8, 000) S Company’s realized net income from separate operations*…….….. P 42,000 42,000 Total P 262,000 Less: Amortization of allocated excess…………………… 13,000 Consolidated Net Income for 20x5 P 249,000 Less: Non-controlling Interest in Net Income* * 8,700 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P 240,300 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 220,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_ 0) P Company’s realized net income from separate operations*…….….. P 220,000 S Company’s net income from own operations…………………………………. P 50,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales)… ( 8,000) S Company’s realized net income from separate operations*…….….. P 42,000 42,000 Total P 262,000 Less: Non-controlling Interest in Net Income* * P 8,700 Amortization of allocated excess…………………… 13,000 21,700 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P240,300 Add: Non-controlling Interest in Net Income (NCINI) _ 8,700 Consolidated Net Income for 20x5 P249,000 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) P 50,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) ( 8,00 0) S Company’s realized net income from separate operations……… P 42,000 Less: Amortization of allocated excess 13,000 P 29,000 Multiplied by: Non-controlling interest %.......... 30% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 8,700 Noncontrolling Interest in Subsidiary's Net Income = P8,700 (30 percent of the reported income after subtracting 13,000 excess fair value amortization and deferring P8,000 ending unrealized gross profit) Gross profit is included in this computation because the transfer was upstream from SS to PT. Problem XII Amortization of equipment: P20,000 / 10 years = P2,000 RPBI of S (downstream sales):…………………........................................................ P15,000 RPBI of P (upstream sales)………………………....................................................... 10,000 UPEI of S (downstream sales)……………………………………………………..……. 20,000 UPEI of P (upstream sales)………………………………………………….…………… 5,000 Consolidated Net Income for 2014 P Company’s net income from own/separate operations (P724,000 – P24,000 P700,000 Realized profit in beginning inventory of S Company (downstream sales) 15,000 Unrealized profit in ending inventory of S Company (downstream sales)… (20,00 0) P Company’s realized net income from separate operations*…….….. P695,000 S Company’s net income from own operations…………………………………. P 90,000 Realized profit in beginning inventory of P Company (upstream sales) 10,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 5,000) S Company’s realized net income from separate operations*…….….. P 95,000 95,000 Total P790,000 Less: Amortization of allocated excess…………………… 2,000 Consolidated Net Income for 2014 P788,000 Less: Non-controlling Interest in Net Income* * 18,600 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 2014………….. P769,400 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 2014 P Company’s net income from own/separate operations P700,000 Realized profit in beginning inventory of S Company (downstream sales) 15,0000 Unrealized profit in ending inventory of S Company (downstream sales)… (20,00 0) P Company’s realized net income from separate operations*…….….. P695,000 S Company’s net income from own operations…………………………………. P 90,000 Realized profit in beginning inventory of P Company (upstream sales) 10,000 Unrealized profit in ending inventory of P Company (upstream sales)… ( 5,000) Son Company’s realized net income from separate operations*…….….. P 95,000 95,000 Total P790,000 Less: Non-controlling Interest in Net Income* * P 18,600 Amortization of allocated excess…………………… 2,000 20,600 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P769,400 Add: Non-controlling Interest in Net Income (NCINI) _ 18,600 Consolidated Net Income for 2014 P788,000 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 2014 S Company’s net income of Subsidiary Company from its own operations P 90,000 (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) 10,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 5,000) S Company’s realized net income from separate operations……… P 95,000 Less: Amortization of allocated excess 2,000 P 93,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 18,600 Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 18,600 Note: Preferred Solution - since what is given is the RE – P, 12/31/2014 (ending balance of the current year) - Retained earnings – Parent, 12/31/2014 (cost)……………………….. P 3,500,000 -: UPEI of S (down) – 2014 or RPBI of S (down) – 2015..…………. 20,000 Adjusted Retained earnings – Parent, 12/31/2014 (cost)………….. P 3,480,000 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/2011……………………….P 150,000 Less: Retained earnings – Subsidiary, 12/31/2014…………... 320,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)………… P 170,000 Accumulated amortization (1/1/2011 – 12/31/2014): P 2,000 x 4 years………………………………………………..( 8,000) UPEI of P (up) – 2014 or RPBI of P (up) – 2015………………........( 5,000) P157,000 x: Controlling Interests………………………………………… 80% 125,600 RE – P, 12/31/2014 (equity method) = CRE, 12/31/2014…………. P 3,605,600 Or, compute first the RE – P on January 1, 2014 (use work back approach), Retained earnings – Parent, 1/1/2014 (cost) (P3,500,000 plus P25,000 Div of P less P724,000 NI of P)…. P2,801,000 -: UPEI of S (down) – 2013 or RPBI of S (down) – 2014..…………. 15,000 Adjusted Retained earnings – Parent, 1/1/2014 (cost)……………… P2,786.000 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/2011………………………P 150,000 Less: Retained earnings – Subsidiary, 1/1/2014……………… 260,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)…………P 110,000 Accumulated amortization (1/1/2011 – 1/1/2014): P 2,000 x 3 years………………………………………………. ( 6,000) UPEI of P (up) – 2013 or RPBI of P (up) – 2014………………... ( 10,000) P 94,000 X: Controlling Interests………………………………………… 80% 75,200 RE – P, 1/1/2014 (equity method) = CRE, 1/1/2014………………..P2,861,200 +: CI – CNI or Profit Attributable to Equity Holders of Parent…….. 769,400 -: Dividends – P………………………..……………………… 25,000 RE – P, 12/31/2014 (equity method) = CRE, 12/31/2014………….P3,605,600 Sales Cost of Sales P P2,500,000 P1,250,000 S 1,200,000 875,000 Intercompany sales - downstream ( 320,000) ( 320,000) Intercompany sales - upstream ( 290,000) ( 290,000) RPBI of S (downstream sales)* ( 15,000) RPBI of P (upstream sales)*** ( 10,000) UPEI of S (downstream sales)** 20,000 UPEI of P (upstream sales)**** _________ 5,000 Consolidated P3,090,000 P1,515,000 Working Paper Eliminating Entries: 1. Intercompany Sales and Purchases: Downstream Sales: Sales………………………………………………………………………….. 320,000 Cost of Sales (or Purchases)…………………………………….... 320,000 Upstream Sales: Sales………………………………………………………………………….. 290,000 Cost of Sales (or Purchases)……………………………………… 290,000 2. Intercompany Profit: (COST Model) Downstream Sales: *100% RPBI of S: Retained Earnings – P, beginning………………………………………..... 15,000 Cost of Sales (Beginning Inventory in Income Statement)…............ 15,000 **100% UPEI of S: Cost of Sales (Ending Inventory in Income Statement)……………… 20,000 Inventory (Ending Inventory in Balance Sheet)……………….. 20,000 Upstream Sales: ***100% RPBI of P: (if equity method Investment in S instead of RE – P, beg.) Retained Earnings – P, beginning…………………………………...…….. 16,000 NCI ……………………………………………….……………………………... 4,000 Cost of Sales (Beginning Inventory in Income Statement)…........ 20,000 ****100% UPEI of P: Cost of Sales (Ending Inventory in Income Statement)………………… 5,000 Inventory (Ending Inventory in Balance Sheet)……………….. 5,000 Multiple Choice Problems 1. a 20x4 and 20x5:: P12,000 x 80% = P9,600 20x6: P18,000 x 80% = P14,400 2. c 20x4: (P84,000 x 80%) = P67,200 – (P1,440 x 30% x 80%) = P66,854.40 20x5: (P102,000 x 80%) + (P1,440 x 30% x 80%) - (P4,800 x 30% x 80%) = P80,793.60 20x6: (P112,800 x 80%) + (P4,800 x 30% x 80%) – (P3,600 x 30% x 80%) = P90,258.00 3. No requirement. 4. b – (P14,400 + P432 – P1,440 = P13,392) Analysis: Eliminating entries Upstream Sales: Sales………………………………………………………………………….. 14,400 Cost of Sales (or Purchases)…………………………………… 14,400 100% RPBI of P: (if equity method Investment in S instead of RE – P, beg.): (P1,440 x 30% = P432) Retained Earnings – P, beginning…………………………………...….. 345.60 NCI ……………………………………………….…………………………… 86.40 Cost of Sales (Beginning Inventory in Income Statement).. 432.00 100% UPEI of P: (P4,800 x 30% = P1,440) Cost of Sales (Ending Inventory in Income Statement)…………….. 1,440 Inventory (Ending Inventory in Balance Sheet)……………... 1,440 5. a – there are no intercompany profit in 20x3 (prior year), so need to adjust retained earnings. 6. a - Investment income, P5,000 x 80% = P4,000; Investment in Leisure, P100,000. 7.c Investment in Leisure Cost, 1/1/x3 109,070 4,000 Dividends – Lei (5,000x 80%) NI of Leisure 4,800 Amortization (6,000 x 80%) (13,000 x 80%) 10,400 850 Impairment (1,000 x 85%)* RPBI of LP (350 x 80%) 280 336 UPEI of LP (420 x 80%) Balance, 12/31/x3 109,764 Investment Income Amortization 4,800 NI of Leisure Impairment* 850 10,400 (13,000 x 80%) UPEI of LP (420 x 80%)) 336 280 RPBI of LP (350 x 80%) 4,694 Balance, 12/31/x4 RPBI of LP: P1,350 x 35/135 = P350 UPEI of LP: P1,620 x 35/135 = P420 Partial Fair value of Subsidiary (80%) Consideration P transferred . . . . . . . . . . . . . . . . . . . . . . 100,000 Less: Book value of stockholders’ equity of LP (P10,000 x 80%)………………………………………... ____8,000 Allocated excess (excess of cost over book P value) . . . 92,000 Less: Over/under valuation of assets and liabilities: Increase in favorable leases (P30,000 x 80%) . . . . . ___24,000 Positive excess: Partial-goodwill (excess of cost over fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 68,000 Full Fair value of Subsidiary (100%) Consideration transferred P (80%). . . . . . . . . . . . . . . . . . 100,000 Fair value of NCI (given) (20%)…………………………….. ___20,000 P Fair value of Subsidiary (100%) ……………………………. 120,000 Less: Book value of stockholders’ equity of LP (P10,000 x 100%)………………………………………. ___10,000 Allocated excess (excess of cost over book P value) . . . 110,000 Less: Over/under valuation of assets and liabilities: Increase in favorable leases (P30,000 x 100%) . . . . ___30,000 Positive excess: Partial-goodwill (excess of cost over fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 80,000 Note: The controlling interests of parent to subsidiary of 80% is not an outright application to impairment of goodwill, it still depends on the resulting goodwill of partial and full goodwill, for instance in Questions 6 to 10, the CI is 85% and NCI is 15% for impairment computed as follows: Partial goodwill 68,000 85% NCI on Full Goodwill 12,000 _15% Full-goodwill 80,000 100% 8. a Consolidated Net Income for 20x3 Parent Company’s net income from own/separate operations (P400,000 – P250,000 – P130,000) P 20,000 Subsidiary Company’s net income from own operations (P200,000 – P120,000 – P67,000) P 13,000 Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 350 Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 420) Son Company’s realized net income from separate operations* . . . . . . . . . . P12,930 12,930 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 32,930 Less: Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 Impairment of goodwill. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . ___1,000 Consolidated Net Income for 20x3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 25,930 Less: Non-controlling Interest in Net Income* * . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,236 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P24,694 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x3 Parent Company’s net income from own/separate operations (P400,000 – P250,000 – P130,000) P 20,000 Subsidiary Company’s net income from own operations (P200,000 – P120,000 – P67,000) P 13,000 Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 350 Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 420) Son Company’s realized net income from separate operations* . . . . . . . . . . P12,930 12,930 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 32,930 Less: Non-controlling Interest in Net Income* * . . . . . . . . . . . . . . . . . . . . . . . . . . . P 1,236 Impairment of goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 8,236 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 24,694 Add: Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . . _ _ 1,236 Consolidated Net Income for 20x3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P25,930 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x3 S Company’s net income of Subsidiary Company from its own operations P 13,000 (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 350 Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 420) S Company’s realized net income from separate operations . . . . . . . . . . P 12,930 Less: Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 P 6,930 Multiplied by: Non-controlling interest % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill . . . . . . . . . . . P 1,386 Less: NCI on goodwill impairment loss on full goodwill (P1,000 x 15%). . . . . . . . . 150 Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . . P 1,236 Or, alternatively CI-CNI NCINI CNI Parent’s net income own operations 20,000 Subsidiary’s reported net income 10,400 2,600 Favorable leases amortization (4,800) (1,200) Goodwill impairment loss (850) (150) Upstream beg. inv. profit confirmed 80 70 Upstream end. inv. profit unconfirmed (336) (84) 24,694 1,236 25,930 9. b Retained earnings of Parent Company (under equity method) / Consolidated Retained earnings , January 1, 20x3. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 40,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,694 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 64,694 Less: Dividends paid – Parent Company for 20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 Retained earnings of Parent Company (under equity method) / Consolidated Retained Earnings, December 31, 20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 54,694 Therefore, regardless of the method used in the separate financial statement of parent, the consolidated balance (which is under equity method) is always the same. 10. Ignore, there are some missing figures particularly the details of subsidiary’s stockholders equity since the date of acquisition. 11. d Non-controlling Interest in Net Income (NCINI) for 20x4: S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 137,000 Realized profit in beginning inventory of P Company (upstream sales) 40,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 25,000) S Company’s realized net income from separate operations……… P 152,000 Less: Amortization of allocated excess _ 0 P 152,000 Multiplied by: Non-controlling interest %.......... 30% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 45,600 Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 45,600 12. b Combined cost of sales P 160,000 Less: Intercompany sales revenue 110,000 Add: Unrealized profit taken out of inventory (75%)x(35,000) = 26,250 Consolidated cost of sales P 76,250 13. d Cost method: P40,000 x 70% = P28,000, dividend income Equity Method: (P115,000 x 70%) - P26,250 = P54,250, equity in subsidiary income 14. a - P720,000 = P500,000 + P400,000 - P200,000 +P 20,000 15. b Cost method: P60,000 x 80% = P48,000 Equity Method: (P120,000 x 80%) –(P200,000 x 50% = P100,000 x 20% = P20,000)=P76,000 16. d Downstream situation S Company’s net income from own/separate operations P120,000 x: NCI % 20% P 24,000 17. c Share in net income (P120,000 x 60%) P72,000 Less: Unrealized profit in ending inventory of S {P189,000 x 1/3 = P63,000 x (P189-135)/P189] __18,000 Intercompany profit to be eliminated P54,000 18. b Share in net income (P200,000 x 60%) P120,000 Less: Unrealized profit in ending inventory of S {P315,000 x 1/3 = P105,000 x (P315-P225)/P315] __30,000 Intercompany profit to be eliminated P 90,000 19. b - P45,000 + P110,000 - P50,000 - P80,000 = P25,000 increase 20. a Beginning inventory profit = P825,000 - P825,000/1.25 = P165,000 Ending inventory profit = P750,000 - P750,000/1.25 = P150,000 Downstream sales only affect equity in net income. P165,000 - P150,000 = P15,000 increase. 21. c - There is no unconfirmed profit in beginning or ending inventory, so the only eliminating entry is to debit sales revenue and credit cost of goods sold for P1,000,000. 22. b 23. a 24. c – P400,000 x 1/4 = P100,000 x 30% = P30,000 25. c Ending inventory at selling price: P300,000 x 1/3 = P100,000 x (300,000 – 240,000)/300,000 P20,000 Less: Inventory write-down (P100,000 – P92,000) __8,000 Intercompany profit to be eliminated P12,000 26. b – [P300,000 x 1/2 = P150,000 x 40% = P60,000] 27. c – P100,00 sales to unrelated/unaffiliated company. 28. c Cost of Sales P Company 67,000 S Company _63,000 Total 130,000 Less: Intercompany sales 90,000 Add: Unrealized profit in EI of S Co. [P90,000 x 30% = P27,000 x (90 - 67)/90] __6,900 Consolidated 46,900 Parent Subsidiary Sales 90,000 100,000 Less: Cost of goods sold – Parent 67,000 Subsidiary (90,000 x 70%) ______ 63,000 Gross profit 23,000 37,000 Ending inventory (90,000 x 30%) 27,000 29. a Consolidated Net Income for 20x4 P Company’s net income from own/separate operations [P100,000 – (P90,000 x 70%)] P 37,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_0) P Company’s realized net income from separate operations*…….….. P 37,000 S Company’s net income from own operations (P90,000 – P67,000) P23,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) [P90,000 x 30% = P27,000 x (90-67/90)] ( 6,900 ) S Company’s realized net income from separate operations*…….….. P16,100 16,100 Total P 53,100 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x4 P 53,100 Less: Non-controlling Interest in Net Income* * 1,610 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. P 51,490 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x4 P Company’s net income from own/separate operations [P100,000 – (P90,000 x 70%)] P 37,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_0) P Company’s realized net income from separate operations*…….….. P 37,000 S Company’s net income from own operations (P90,000 – P67,000) P23,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) [P90,000 x 30% = P27,000 x (90-67/90)] ( 6,900 ) S Company’s realized net income from separate operations*…….….. P16,100 16,100 Total P 53,100 Less: Non-controlling Interest in Net Income* * P 1,610 Amortization of allocated excess…………………… 0 1,610 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P 51,490 Add: Non-controlling Interest in Net Income (NCINI) _ 1,610 Consolidated Net Income for 20x4 P 53,100 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 23,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) ( 6,900) S Company’s realized net income from separate operations……… P 16,100 Less: Amortization of allocated excess 0 P 16,100 Multiplied by: Non-controlling interest %.......... 10% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 1,610 Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 1,610 30. d – P27,000 x 67/90 = P20,100 31. b – P120,000, the amount of sales to outsiders is the amount of sales presented in the consolidated income statement. 32. a – the cost of inventory produced by the parent (downstream sales) 33. c Consolidated Net Income for 20x4 P Company’s net income from own/separate operations (P90,000 – P62,000) P 28,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_0) P Company’s realized net income from separate operations*…….….. P 28,000 S Company’s net income from own operations (P120,000 – P90,000) P3 0,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) () S Company’s realized net income from separate operations*…….….. P30,000 30,000 Total P 58,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x4 P 58,000 Less: Non-controlling Interest in Net Income* * 3,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. P 55,000 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x4 P Company’s net income from own/separate operations (P90,000 – P62,000) P 28,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_0) P Company’s realized net income from separate operations*…….….. P 28,000 S Company’s net income from own operations (P120,000 – P90,000) P3 0,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales () S Company’s realized net income from separate operations*…….….. P30,000 30,000 Total P 58,000 Less: Non-controlling Interest in Net Income* * P 3,000 Amortization of allocated excess…………………… 0 3,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P 55,000 Add: Non-controlling Interest in Net Income (NCINI) _ 3,000 Consolidated Net Income for 20x4 P 58,000 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations P 30,000 (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) ( 0) S Company’s realized net income from separate operations……… P 30,000 Less: Amortization of allocated excess 0 P 30,000 Multiplied by: Non-controlling interest %.......... 10% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 3,000 Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 3,000 34. c Sales Cost of Sales P Company 10,000,000 7,520,000 S Company __200,000 _160,000 Total 10,200,000 7,680,000 Less: Intercompany sales – upstream sales 60,000 60,000 Add: Unrealized profit in EI of S Co. [P60,000 x 30% = P18,000 x (10 – 7.5)/10] ________ __ 4,500 Consolidated 10,140,000 7,604,500 35. d – refer to No. 34 for computation 36. c – (P10,140,000 – P7,604,500) = P2,535,500 37. c Sales P Company 10,000,000 S Company __200,000 Total 10,200,000 Less: Intercompany sales – downstream sales 60,000 Add: Unrealized profit in EI of S Co. [P60,000 x 30% = P18,000 x (10 – 7.5)/10] ________ Consolidated 10,140,000 38. a – (P40,000 x 140% = P56,000) 39. a – (P56,000 – P40,000 = P16,000) 40. a 20x5 Sales Cost of Sales P Company 1,800,000 1,440,000 S Company __900,000 _750,000 Total 2,700,000 2,190,000 Less: Intercompany sales 375,000 375,000 Realized profit in BI of S Co. [P240,000 x 1/2 = P120,000 x (240-192)/240] 24,000 Add: Unrealized profit in EI of S Co. [P375,000 x 40% = P150,000 x (375-300)/375] ________ __30,000 Consolidated 2.325,000 1,821,000 41. c - refer to No. 40 for computations 42. b Consolidated Net Income for 20x4 P Company’s net income from own/separate operations P 225,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_0) P Company’s realized net income from separate operations*…….….. P225,000 S Company’s net income from own operations P 90,000 Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) [P150,000 x 50% = P75,000 x (P30,000/P150,000)] ( 15,000 ) S Company’s realized net income from separate operations*…….….. P 75,000 75,000 Total P 300,000 Less: Amortization of allocated excess…………………… _0 Consolidated Net Income for 20x4 P 300,000 Less: Non-controlling Interest in Net Income* * 15,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. P 285,000 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 90,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) ( 15,000) S Company’s realized net income from separate operations……… P 75,000 Less: Amortization of allocated excess 0 P 75,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 15,000 Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 15,000 43. c – refer to No. 42 for computations 44. c 45 a Amount paid by Lorn Corporation P120,000 Unrealized profit (45,000) Actual cost P 75,000 Portion sold x .80 Cost of goods sold P 60,000 46. e Consolidated sales P140,000 Cost of goods sold (60,000) Consolidated net income P 80,000 Income to Dresser’s noncontrolling interest: Sales P120,000 Reported cost of sales (75,000) Report income P 45,000 Portion realized x .80 Realized net income P 36,000 Portion to Noncontrolling Interest x .30 Income to noncontrolling Interest (10,800) Income to controlling interest P 69,200 47. A Inventory reported by Lorn P 24,000 Unrealized profit (P45,000 x .20) (9,000) Ending inventory reported P 15,000 48. c Sales P Company 500,000 S Company _350,000 Total 850,000 Less: Intercompany sales to Dundee 100,000 Intercompany sales to Perth 150,000 Consolidated 600,000 49. a Ending inventory of Perth from Dundee (P36,000 / 110%) 32,727 Ending inventory of Dundee from Perth (P31,000 / 130%) _23,846 Total 56,573 50. a Selling price P 50,000 Less: Cost of sales _40,000 Original unrealized profit 10,000 Unsold percentage __30% Unrealized profit P _3,000 51. a Consolidated Net Income for 20x4 P Company’s net income from own/separate operations P180,000 Unrealized profit in ending inventory of S Company (downstream sales)… ( 3,000) P Company’s realized net income from separate operations*…….….. P 177,000 S Company’s net income from own operations…………………………………. 76,000 Total P253,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x5 P253,000 52. a Combined 20x5 sales (P580,000 + P445,000) P 1,025,000 Less: 20x5 intercompany sales 0 Consolidated sales P 1,025,000 53. d Combined cost of sales P 480,000 Less: 20x5 intercompany sales 0 Less: Unrealized profit in the 20x5 beginning inventory from 20x4 ( 3,000) Add: Unrealized profit in 20x5 ending inventory ________0 Consolidated cost of sales P 477,000 54. d Cost of Sales P Company 5,400,000 S Company _1,200,000 Total 6,600,000 Less: Intercompany sales 1,000,000 Realized profit in BI of S Co. [P625,000 x 12% = P75,000 x (625 - 425)/625] 24,000 Add: Unrealized profit in EI of S Co. [P1,000,000 x 10% = P100,000 x (1,000 - 800)/1,000] __20,000 Consolidated 5,596,000 55. b Cost of Sales Bates Company 690,000 Sam Company 195,000 Total 885,000 Less: Intercompany sales 200,000 Realized profit in BI of Bates Co. [P40,000 x 20%] 8,000 Add: Unrealized profit in EI of Bates Co. [P15,000 x 20%] __3,000 Consolidated 680,000 56. b Parent Subsidiary Net Income from own operations: X-Beams (parent)Kent (subsidiary), 70%:30% 210,000 90,000 Unrealized Profit in EI of Parent (X-Beams): P180,000x 20% = P36,000 x (180-100/180)= P16,000, 70%:30% ( 11,200) ( 4,800) Non-controlling Interest in Kent’s Net Income 85,200 57. d Non-controlling Interest in Net Income (NCINI) for 20x5 20x6 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 400,000 P 480,000 Realized profit in beginning inventory of P Company (upstream sales) 20,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 20,000) 0 S Company’s realized net income from separate operations……… P 380,000 P 500,000 Less: Amortization of allocated excess 0 0 P380,000 P500,000 Multiplied by: Non-controlling interest %.......... 20% 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 76,000 P100,000 Less: NCI on goodwill impairment loss on full goodwill 0 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 76,000 P100,000 58. a **Non-controlling Interest in Net Income (NCINI) for 20x6 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 0 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) (P100,000 x 10% = P10,000 x 30%) ( 3,000) S Company’s realized net income from separate operations……… P( 3,000) Less: Amortization of allocated excess 0 P( 3,000) Multiplied by: Non-controlling interest %.......... 10% Non-controlling Interest in GP P(300) Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in GP P( 300) 59. a 60. a Selling price P 60,000 Less: Cost of sales ( 48,000 ) Unrealized profit 12,000 Unsold fraction 1/3 Credit to Inventory P 4,000 61. a – the cost from parent of P48,000 x 45/60 = P36,000 Parent Subsidiary 1 Subsidiary 2 Sales 60,000 60,000 67,000 Less: Cost of goods sold – P and S1 48,000 60,000 Subsidiary (60,000 x 45/60) ______ ______ 45,000 Gross profit 12,000 0 22,000 Ending inventory (60,000 x 15/60) 15,000 62. b – the cost from parent of P48,000 x 15/60 = P12,000 63. a Sales Cost of Sales Intercompany Parent 60,000 60,000 Subsidiary 1 60,000 45,000 Add: Cost of EI in S2 Co. [P15,000 x (48/60] ________ __12,000 Amount to be eliminated 120,000 *117,000 *or, P60,000 + P60,000 – [P15,000 x (60-48/60] 64. b – refer to No. 63 for computation 65. d – P15,000 x [(60-48)/60] = P3,000 66. a Consolidated Net Income for 20x3 P Company’s net income from own/separate operations P 225,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_0) P Company’s realized net income from separate operations*…….….. P225,000 S Company’s net income from own operations P150,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) [P105,000 x 20/120) ( 17,500 ) S Company’s realized net income from separate operations*…….….. P132,500 132,500 Total P 357,500 Less: Amortization of allocated excess…………………… _0 Consolidated Net Income for 20x3 P357,500 67. c Consolidated Net Income for 20x4 P Company’s net income from own/separate operations P360,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_0) P Company’s realized net income from separate operations*…….….. P360,000 S Company’s net income from own operations P135,000 Realized profit in beginning inventory of P Company (upstream sales) [P105,000 x 20/120) 17,500 Unrealized profit in ending inventory of P Company (upstream sales) [P157,500 x 20/120) ( 26,250 ) S Company’s realized net income from separate operations*…….….. P126,250 126,250 Total P 486,250 Less: Amortization of allocated excess…………………… _0 Consolidated Net Income for 20x4 P486,250 Less: Non-controlling Interest in Net Income* * 1,610 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. P 51,490 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x4 P Company’s net income from own/separate operations P360,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_0) P Company’s realized net income from separate operations*…….….. P360,000 S Company’s net income from own operations ( P135,000 Realized profit in beginning inventory of P Company (upstream sales) [P105,000 x 20/120) 17,500 Unrealized profit in ending inventory of P Company (upstream sales) [P157,500 x 20/120) ( 26,250 ) S Company’s realized net income from separate operations*…….….. P126,250 126,250 Total P 486,250 Less: Non-controlling Interest in Net Income* * P 37,875 Amortization of allocated excess…………………… 0 37,875 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P 448,375 Add: Non-controlling Interest in Net Income (NCINI) _37,875 Consolidated Net Income for 20x4 P 486,250 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 135,000 Realized profit in beginning inventory of P Company (upstream sales) 17,500 Unrealized profit in ending inventory of P Company (upstream sales) ( 26,250) S Company’s realized net income from separate operations……… P 126,250 Less: Amortization of allocated excess 0 P126,250 Multiplied by: Non-controlling interest %.......... 30% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 37,875 Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 37,875 68. a – refer to No. 67 for computation. 69. d Consolidated Net Income for 20x5 P Company’s net income from own/separate operations P 450,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_0) P Company’s realized net income from separate operations*…….….. P450,000 S Company’s net income from own operations P240,000 Realized profit in beginning inventory of P Company (upstream sales) [P157,500 x 20/120) 26,250 Unrealized profit in ending inventory of P Company (upstream sales) [P180,000 x 20/120) ( 30,000 ) S Company’s realized net income from separate operations*…….….. P236,250 236,250 Total P 686,250 Less: Amortization of allocated excess…………………… _0 Consolidated Net Income for 20x4 P686,750 Less: Non-controlling Interest in Net Income* * 70,875 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P 615,375 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations P 450,000 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_0) P Company’s realized net income from separate operations*…….….. P450,000 S Company’s net income from own operations P240,000 Realized profit in beginning inventory of P Company (upstream sales) [P157,500 x 20/120) 26,250 Unrealized profit in ending inventory of P Company (upstream sales) [P180,000 x 20/120) ( 30,000 ) S Company’s realized net income from separate operations*…….….. P236,250 236,250 Total P 686,250 Less: Non-controlling Interest in Net Income* * P 70,875 Amortization of allocated excess…………………… 0 70,875 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P 615,375 Add: Non-controlling Interest in Net Income (NCINI) __70,875 Consolidated Net Income for 20x5 P 686,250 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 240,000 Realized profit in beginning inventory of P Company (upstream sales) 26,250 Unrealized profit in ending inventory of P Company (upstream sales) ( 30,000) S Company’s realized net income from separate operations……… P 236,250 Less: Amortization of allocated excess 0 P 236,250 Multiplied by: Non-controlling interest %.......... 30% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 70.875 Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 70,875 70. a – refer to No. 69 for computation. 71. d Sales P Company 420,000 S Company 280,000 Total 700,000 Less: Intercompany sales 140,000 Consolidated 560,000 72. b Operating Expenses P Company 28,000 S Company 14,000 Total 42,000 Add: Undervalued equipment (P35,000/7 years) _5,000 Consolidated 47,000 73. c Cost of Sales P Company 196,000 S Company _112,000 Total 308,000 Less: Intercompany sales 140,000 Add: Unrealized profit in EI of S Co. [P140,000 x 60% = P84,000 x (140 - 112)/140] _16,800 Consolidated 184,800 74. a or e - if full goodwill method. Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… P 140,000 Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 P210,000 Add: Net income of S for 20x4 154,000 Total P364,000 Less: Dividends paid – 20x4 0 364,000 Stockholders’ equity – S Company, December 31, 20x4 P 504,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 35,000 Amortization of allocated excess (refer to amortization above) : 20x5 (P35,000/7 years) ( 5,000) Fair value of stockholders’ equity of S, December 31, 20x5…… P 534,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 106,800 Add: NCI on full-goodwill (P70,000 – P56,000) 14,000 Non-controlling interest (full- goodwill)………………………………….. P 120,800 Partial-goodwill Fair value of Subsidiary (80%) Consideration P transferred……………………………….. 364,000 Less: Book value of stockholders’ equity of S: Common stock (P140,000 x 80%)……………………. P112,000 Retained earnings (P210,000 x 80%)………………... 168,000 280,000 Allocated excess (excess of cost over book P value)….. 84,000 Less: Over/under valuation of assets and liabilities: Increase in equipment (P35,000 x 80%) ___28,000 Positive excess: Partial-goodwill (excess of cost over P 56,000 fair value)………………………………………………... Full-goodwill Fair value of Subsidiary (100%) P Consideration transferred: Cash (P364,000/80%) 455,000 Less: Book value of stockholders’ equity of S (P350,000 x 100%) __350,000 P Allocated excess (excess of cost over book value)….. 105,000 Add (deduct): (Over) under valuation of assets and liabilities Increase in equipment P35,000 x 100% 35,000 Positive excess: Full-goodwill (excess of cost over P fair value)………………………………………………... 70,000 75. d Equipment P Company 616,000 S Company 420,000 Total 1,036,000 Add: Undervalued equipment 35,000 Less: Depreciation on undervalued equipment (P35,000/7 years) 7,000 Consolidated 1,064,000 76. d Inventory P Company 210,000 S Company 154,000 Total 364,000 Less: Unrealized profit in EI: [P140,000 x 60% = P84,000 x (140 - 112)/140] 16,800 Consolidated 347,200 77. d Add the two book values and remove P100,000 intercompany transfers. 78. c Intercompany gross profit (P100,000 - P80,000) ................................................... P20,000 Inventory remaining at year's end .......................................................................... 60% Unrealized intercompany gross profit .................................................................... P12,000 CONSOLIDATED COST OF GOODS SOLD Parent balance ................................................................................................... P140,000 Subsidiary balance ............................................................................................. 80,000 Remove intercompany transfer ....................................................................... (100,000) Defer unrealized gross profit (above) ............................................................. 12,000 Cost of goods sold ..................................................................................................... P132,000 79. c Consideration transferred .............................................. P260,000 Non-controlling interest fair value................................... 65,000 SZ total fair value ................................................................ P325,000 Book value of net assets ................................................... (250,000) Excess fair over book value P75,000 Annual Excess Life Amortizations Excess fair value assigned to undervalued assets: Equipment .................................................................... 25,000 5 years P5,000 Secret Formulas .......................................................... 50,000 20 years 2,500 Total ................................................................................. P -0- P7,500 Consolidated Expenses = P37,500 (add the two book values and include current year amortization expense) 80. a Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – S Company, December 31, 20x4…… P 100,000 Retained earnings – S Company, December 31, 20x4 Retained earnings – S Company, January 1, 20x4 P150,000 Add: Net income of S for 20x4 110,000 Total P260,000 Less: Dividends paid – 20x4 0 260,000 Stockholders’ equity – S Company, December 31, 20x4 P 360,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 75,000 Amortization of allocated excess (refer to amortization above) : ( 7,500) Fair value of stockholders’ equity of S, December 31, 20x5…… P 427,500 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 85,500 Add: NCI on full-goodwill ( ________0 Non-controlling interest (full- goodwill)………………………………….. P 85,500 Partial-goodwill Fair value of Subsidiary (80%) Consideration P transferred……………………………….. 260,000 Less: Book value of stockholders’ equity of S: Common stock (P100,000 x P 80%)……………………. 80,000 Retained earnings (P150,000 x 80%)………………... 120,000 200,000 Allocated excess (excess of cost over book P value)….. 60,000 Less: Over/under valuation of assets and liabilities: Increase in equipment (P25,000 x 80%) 20,000 Increase in secret formulas: P50,000 x 80% 40,000 Full-goodwill Fair value of Subsidiary (100%) P Consideration transferred: Cash (80%) 260,000 FV of NCI (20%) ___65,000 P Fair value of Subsidiary (100%) 325,000 Less: BV of stockholders’ equity of S (P100,000 + P150,000) x 100% __250,000 Allocated excess (excess of cost over book P value)….. 75,000 Add (deduct): (Over) under valuation of assets and liabilities Increase in equipment P25,000 x 100% 25,000 P Increase in secret formulas: P50,000 x 100% 50,000 Amortization: Equipment: P25,000 / 5 years = P 5,000 Secret formulas: P50,000 / 20 years = 2,500 Total amortization of allocated P 7,500 81. c Add the two book values plus the original allocation (P25,000) less one year of excess amortization expense (P5,000). 82. b Add the two book values less the ending unrealized gross profit of P12,000. Intercompany Gross profit (P100,000 – P80,000) .................................................. P20,000 Inventory Remaining at Year's End ........................................................................ 60% Unrealized Intercompany Gross profit, 12/31 ....................................................... P12,000 83. b 20x3 20x4 20x5 Share in net income 20x3: P70,000 x 90% P 63,000 20x4: P85,000 x 90% P 76,500 20x5: P94,000 x 90% P 84,600 Less: Unrealized profit in ending inventory of P 20x3: P1,200 x 25% = P300 x 90% ( 270) 270 20x4: P4,000 x 25% = P1,000 x 90% ( 900) 900 20x5: P3,000 x 25% = P750 x 90% ________ ________ __( 675) Income from S P 62,730 P 75,870 P 84,825 It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. 84. c – refer to No. 83 for computation. 85. d – refer to No. 83 for computation. 86. a **Non-controlling Interest in Net Income (NCINI) for 20x3 20x4 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 70,000 P 85,000 P 94,000 RPBI of P Company (upstream sales) 0 300 1,000 UPEI of P Company (upstream sales) ( 300) ( 1,000) ( 750) S Company’s realized net income from separate operations P 69,700 P 84,300 P 94,250 Less: Amortization of allocated excess 0 0 0 P 69,700 P 84,300 P 94,250 Multiplied by: Non-controlling interest %.......... 10% 10% 10% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 6,970 P 8,430 P 9,425 Less: NCI on goodwill impairment loss on full goodwill 0 0 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 6,970 P 8,430 P 9,425 87. c – refer to No. 86 for computation. 88. c – refer to No. 86 for computation. 89. a – refer to No. 86 for computation. 90. a – refer to No. 86 for computation. 91. b – refer to No. 86 for computation. 92. a – none, since intercompany profit starts only at the end of 20x3. 93. b – the amount of unrealized profit at the end of 20x3. 94. c – the amount of unrealized profit at the end of 20x4. 95. d P32,000 = (P200,000 + P140,000) – P308,000 96. b P6,000 = (P26,000 + P19,000) – P39,000 97. c P9,000 = Inventory held by Spin P12,000 (P32,000 x .375) Unrealized profit on sale [(P30,000 + P25,000) – P52,000] (3,000) Carrying cost of inventory for Power P 9,000 98. B .20 = P14,000 / [(Stockholders’ Equity P50,000) +(Patent P20,000)] 99 B 14 years = (P28,000 / [(28,000 - P20,000) / 4 years] 100. c (P10,000 x 80%) 101. d – the original cost 102. d Date of Acquisition (1/1/2010) Partial Full Fair value of consideration given…………………P 340,000 Less: Book value of SHE - Subsidiary): (P150,000 + P230,000) x 80%..................... 304,000 Allocated Excess.…………………………………….P 36,000 Less: Over/Undervaluation of Assets & Liabilities (P20,000 x 80%)…………………………….. 16,000 Goodwill ………….…………………………………...P 20,000 / 80% P 25,000 Amortization of equipment: P20,000 / 10 years = P2,000 RPBI of S (downstream sales): P3,000 x 35%...................................................... P1,050 RPBI of P (upstream sales): P2,500 (given)….................................................... 1,000 UPEI of S (downstream sales): Sales of Parent EI % EI of S GP% of Parent P60,000 x 30% = P18,000 x 25/125………………………………. 3,600 UPEI of P (upstream sales): Sales of Subsidiary EI % EI of P GP% of Subsidiary P60,000 x 30% = P18,000 x 20%…………………………..…. 2,400 Consolidated Net Income for 20x5 P Company’s net income from own/separate operations P 100,000 Realized profit in beginning inventory of S Company (downstream sales) 1,050 Unrealized profit in ending inventory of S Company (downstream sales)… (_ 3,600) P Company’s realized net income from separate operations*…….….. P 97,450 S Company’s net income from own operations P 30,000 Realized profit in beginning inventory of P Company (upstream sales) 1,000 Unrealized profit in ending inventory of P Company (upstream sales) ( ,2,400 ) S Company’s realized net income from separate operations*…….….. P28,600 28,600 Total P 126,050 Less: Amortization of allocated excess…………………… 2,000 Consolidated Net Income for 20x4 P124,050 Less: Non-controlling Interest in Net Income* * 5,320 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P 118,730 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations P 100,000 Realized profit in beginning inventory of S Company (downstream sales) 1,050 Unrealized profit in ending inventory of S Company (downstream sales)… (_ 3,600) P Company’s realized net income from separate operations*…….….. P 97,450 S Company’s net income from own operations P 30,000 Realized profit in beginning inventory of P Company (upstream sales) 1,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 2,400 ) S Company’s realized net income from separate operations*…….….. P 28,600 28,600 Total P 126,050 Less: Non-controlling Interest in Net Income* * P 5,320 Amortization of allocated excess…………………… 2,000 7,320 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P118,730 Add: Non-controlling Interest in Net Income (NCINI) __ 5,320 Consolidated Net Income for 2012 P124,050 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 2012 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 30,000 Realized profit in beginning inventory of P Company (upstream sales) 1,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 2,400) S Company’s realized net income from separate operations……… P 28,600 Less: Amortization of allocated excess 2,000 P 26,600 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 5,320 Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 5,320 103. b – refer to No. 102 104. a – P124,050 – refer to No. 102 105. b – refer to No. 107 106. c – refer to No. 107 107. a Non-controlling Interests (in net assets): Common stock - S, 12/31/20x2.…………..….…………………………….. P 150,000 Retained earnings - S, 12/31/20x2: RE- S, 1/1/20x2…………….……………………………………………….P300,000 +: NI-S…………………………………………………………………………. 30,000 -: Div – S……………………………………………………………………… 10,000 320,000 Book value of Stockholders’ equity, 12/31/20x2……..………………..... P 470,000 Adjustments to reflect fair value of net assets Increase in equipment, 1/1/20x0 .………………………….. 20,000 Accumulated amortization (P2,000 x 3 years)………………………….... ( 6,000) Fair Value of Net Assets/SHE, 12/31/20x2…………………………………. P 484,000 UPEI of P (up)…………………………………………………………………… ( 2,400) Realized SHE – S,12/31/20x2…………………………………………………. P 481,600 x: NCI %.......................................................................................................... _ 20% Non-controlling Interest (in net assets) - partial………………………….. P 96,320 +: NCI on full goodwill (25,000 – 20,000)………………………….. 5,000 Non-controlling Interest (in net assets) – full…………………………….... P 101,320 108. d – refer to No. 109 109. d Note: Preferred solution - since what is given is the RE – P, 1/1/20x2 (beginning balance of the current year) - Retained earnings – Parent, 1/1/20x2 (cost)…………………………… P 700,000 -: UPEI of S (down) – 20x1 or RPBI of S (down) – 20x2..…………. 1,050 Adjusted Retained earnings – Parent, 1/1/20x2 (cost)……………… P698,950 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/20x0……………………….P 230,000 Less: Retained earnings – Subsidiary, 1/1/20x2……………… 300,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)…………P 70,000 Accumulated amortization (1/1/20x0 – 1/1/20x2): P 2,000 x 2 years…………………………………………………( 4,000) UPEI of P (up) – 20x1 or RPBI of P (up) – 20x2………………...... ( 1,000) P 65,000 X: Controlling Interests………………………………………….........____80% 52,000 RE – P, 1/1/2012 (equity method) = CRE, 1/1/20x2…………………..... P750,950 +: CI – CNI or Profit Attributable to Equity Holders of Parent…….. 118,730 -: Dividends – P……………………………………………………………… 60,000 RE – P, 12/31/20x2 (equity method) = CRE, 12/31/20x2…………...... P809,680 Or, if RE – P is not given on January 1, 20x2, then RE – P on December 31, 2012 should be use: Retained earnings – Parent, 12/31/20x2 (cost): (P700,000 + P108,000 – P60,000)………..…………………………… P 748,000 -: UPEI of S (down) – 20x2 or RPBI of S (down) – 20x3..…………. 3,600 Adjusted Retained earnings – Parent, 1/1/20x2 (cost)……………… P 744,400 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/20x0……………………….P 230,000 Less: Retained earnings – Subsidiary, 12/31/20x2 (P300,000 + P20,000 – P10,000)………………………........ 320,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)…………P 90,000 Accumulated amortization (1/1/20x0 – 12/31/20x2): P 2,000 x 3 years……………………………………………….. ( 6,000) UPEI of P (up) – 20x2 or RPBI of P (up) – 20x3……………….. .. ( 2,400) P 81,600 X: Controlling Interests………………………………………………. 80% 65,280 RE – P, 12/31/20x2 (equity method) = CRE, 12/31/20x2…………. P809,680 110. b Consolidated Stockholders’ Equity, 12/31/20x2: Controlling Interest / Parent’s Interest / Parent’s Portion / Equity Holders of Parent – SHE, 12/31/20x2: Common stock – P (P only)…………………………………………….. P1,000,000 Retained Earnings – P (equity method), 12/31/20x2………….. 809,680 Controlling Interest / Parent’s Stockholders’ Equity……………. P1,809,680 Non-controlling interest, 12/31/20x2 (partial)…………………………. 96,320 Consolidated Stockholders’ Equity, 12/31/20x2………………………… P1,906,000 111. a Consolidated Stockholders’ Equity, 12/31/20x2: Controlling Interest / Parent’s Interest / Parent’s Portion / Equity Holders of Parent – SHE, 12/31/20x2: Common stock – P (P only)…………………………………………….. P1,000,000 Retained Earnings – P (equity method), 12/31/20x2………….. 809,680 Controlling Interest / Parent’s Stockholders’ Equity……………. P1,809,680 Non-controlling interest, 12/31/20x2 (full)……..………………………. 101,320 Consolidated Stockholders’ Equity, 12/31/20x2………………………… P1,911,000 112. c Non-controlling interest , December 31, 20x1 Common stock – Subsidiary Company, December 31, 20x1…… P 10,000 Retained earnings – Subsidiary Company, December 31, 20x1 8,600 Stockholders’ equity – Subsidiary Company, December 31, 20x4 P 18,600 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 0 Amortization of allocated excess (refer to amortization above) – 20x4 ( 0) Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P 18,600 Less: Unrealized profit in ending inventory of P Company (upstream sales) P3,000 x 40% 1,200 Realized stockholders’ equity of subsidiary, December 31, 20x4…… P 17,400 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest. December 31, 20x1 ………………………………….. P 3,480 113. a Realized profit in BI of Bates Co. [P40,000 x 20%] P 8,000 Unrealized profit in EI of Bates Co. [P15,000 x 20%] __3,000 Net realized profit in intercompany sales of inventory P 5,000 Multiplied by: NCI% ___40% NCI share in net realized profit P 2,000 114. c RPBI of P (upstream sales)……..………………………..………………………… 45,000 UPEI of P (upstream sales): EI of Paque GP% of Subsidiary P75,000 x 20%...................................………………………..…. 15,000 Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P103,500 – P54,000) P 49,500 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_ 0) P Company’s realized net income from separate operations*…….….. P 49,500 S Company’s net income from own operations P 71,250 Realized profit in beginning inventory of P Company (upstream sales) 45,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 15,000 ) S Company’s realized net income from separate operations*…….….. P 101,250 101,250 Total P 150,750 Less: Amortization of allocated excess…………………… ____0 Consolidated Net Income for 20x4 P150,750 Less: Non-controlling Interest in Net Income* * 10,125 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P 140,625 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations (P103,500 – P54,000) P 49,500 Realized profit in beginning inventory of S Company (downstream sales) 0 Unrealized profit in ending inventory of S Company (downstream sales)… (_ 0) P Company’s realized net income from separate operations*…….….. P 49,500 S Company’s net income from own operations P 71,250 Realized profit in beginning inventory of P Company (upstream sales) 45,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 15,000 ) S Company’s realized net income from separate operations*…….….. P 101,250 101,250 Total P 150,750 Less: Non-controlling Interest in Net Income* * P 10,125 Amortization of allocated excess…………………… ___0 10,125 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P140,625 Add: Non-controlling Interest in Net Income (NCINI) __ 10,125 Consolidated Net Income for 2012 P150,750 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 71,250 Realized profit in beginning inventory of P Company (upstream sales) 45,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 15,000) S Company’s realized net income from separate operations……… P 101,250 Less: Amortization of allocated excess _0 P101,250 Multiplied by: Non-controlling interest %.......... 10% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 10,125 Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 10,125 (Not required) Analysis of workpaper entries (1) Investment in Segal (0.90 (P180,000 – P150,000)) 27,000 Beginning Retained Earnings-Paque Co. 27,000 To establish reciprocity as of 1/1/20x8 (2) Sales 300,000 Purchases (Cost of Goods Sold) 300,000 To eliminate intercompany sales (3) Ending Inventory - Income Statement (CGS) 15,000 Ending Inventory (Balance Sheet) 15,000 To eliminate unrealized intercompany profit in ending inventory (P75,000 0.20) (4) Beginning Retained Earnings - Paque Co. (P45,000 0.90) 40,500 Non-controlling Interest P45,000 0.10) 4,500 Beginning Inventory (Income statement) 45,000 To recognize intercompany profit realized during the year and to reduce controlling and non-controlling interests for their share of unrealized profit at beginning of year (5) Dividend Income (P60,000 0.90) 54,000 Dividends Declared 54,000 To eliminate intercompany dividends (6) Beginning Retained Earnings- Segal Co. 180,000 Common Stock - Segal Company 750,000 Investment in Segal Company (P810,000 + P27,000) 837,000 Non-controlling Interest (P750,000 + P180,000) x .10 93,000 To eliminate investment account and create non-controlling interest account 115. c Preferred Solution - since what is given is the RE – P, 1/1/20x8 - Retained earnings – Parent, 1/1/20x8 (cost)…………………….. P 598,400 -: UPEI of S (down) – 20x7 or RPBI of S (down) – 20x8..…………. 25,000 Adjusted Retained earnings – Parent, 1/1/20x8 (cost)……………… P 573.400 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/20x4……………………P 95,000 Less: Retained earnings – Subsidiary, 1/1/20x8…………….. 144,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)………P 49,000 Accumulated amortization (1/1/20x4 – 1/1/20x8)…………. 0 UPEI of P (up) – 20x7 or RPBI of P (up) – 20x8………………... ( 0) P 49,000 X: Controlling Interests…………………………………………… 90% 44,100 RE – P, 1/1/20x8 (equity method) = CRE, 1/1/20x8……………….. P 617,500 +: CI – CNI or Profit Attributable to Equity Holders of Parent…… 203,700 -: Dividends – P………………………..………………………………… 110,000 RE – P, 12/31/2014 (equity method) = CRE, 12/31/2014………….. P 711,200 Consolidated Net Income for 20x8 P Company’s net income from own/separate operations P132,000 Realized profit in beginning inventory of S Company (downstream sales) 25,000 Unrealized profit in ending inventory of S Company (downstream sales)… (10,000) P Company’s realized net income from separate operations*…….….. P147,000 S Company’s net income from own operations…………………………………. P 63,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) ( 0) S Company’s realized net income from separate operations*…….….. P 63,000 63,000 Total P210,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x8 P210,000 Less: Non-controlling Interest in Net Income* * 6,300 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x8………….. P203,700 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x8 P Company’s net income from own/separate operations P132,000 Realized profit in beginning inventory of S Company (downstream sales) 25,000 Unrealized profit in ending inventory of S Company (downstream sales)… (10,000) P Company’s realized net income from separate operations*…….….. P147,000 S Company’s net income from own operations…………………………………. P 63,000 Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) ( 0) S Company’s realized net income from separate operations*…….….. P 63,000 63,000 Total P210,000 Less: Non-controlling Interest in Net Income* * P 6,300 Amortization of allocated excess…………………… _____0 6,300 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P203,700 Add: Non-controlling Interest in Net Income (NCINI) _ 6,300 Consolidated Net Income for 20x8 P210,000 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x8 S Company’s net income of Subsidiary Company from its own operations P 63,000 (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) 0 Unrealized profit in ending inventory of P Company (upstream sales) ( 0) S Company’s realized net income from separate operations……… P 63,000 Less: Amortization of allocated excess 0 P 63,000 Multiplied by: Non-controlling interest %.......... 10% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 6,300 Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 6,300 Amortization of equipment: P20,000 / 10 years = P2,000 RPBI of Sedbrock (downstream sales) – 20x8......................................................... P25,000 UPEI of Sedbrock (downstream sales) – 20x8: P60,000 x 20%/120%……..……… 10,000 Net income: Pruitt Co. Sedbrook Sales P1,210,000 P 636,000 Less: Cost of goods sold Inventory, 1/1 165,000 132,000 Purchases 935,000 420,000 Inventory, 12/31 (220,000) __880,000 (144,000) __408,000 Gross profit P 330,000 P 228,000 Less: Other expense 198,000 165,000 Net income from its own separate operations P 132,000 P 63,000 Add: Dividend income 31,500 - Net income P 163,500 P 63,000 Dividends declared P 110,000 P 35,000 Or, alternatively(compute the RE-P end of the year under the cost model) Retained earnings – Parent, 1/1/20x8 (cost)………………………….. P 598,400 Add: NI of Parent as reported – 20x8 under cost model…………… 163,500 Less: Dividend of Parent – 20x8………………………………………….. 110,000 Retained earnings – Parent, 12/31/20x8 (cost)……………………….. P 651,900 -: UPEI of S (down) – 20x8 or RPBI of S (down) – 20x9..……………….. 10,000 Adjusted Retained earnings – Parent, 12/31/20x8 (cost model)….. P 641,900 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/20x4………… P 95,000 Less: Retained earnings – Subsidiary, 12/31/20x8 Retained earnings – Subsidiary , 1/1/20x8..… P144,000 Add: NI of Subsidiary – 20x8…………………… 63,000 Less: Dividend of Subsidiary – 20x8…………... 35,000 172,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)………… P 97,000 Accumulated amortization (1/1/20x4 – 12/31/20x8)…………..( 0) UPEI of P (up) – 20x8 or RPBI of P (up) – 20x9………………........( 0) P 97,000 x: Controlling Interests………………………………………… 90% 69,300 RE – P, 12/31/20x8 (equity method) = CRE, 12/31/20x8……… P 711,200 (Not required) Analysis of workpaper entries (1) Investment in Sedbrook Company (0.90 (P144,000 – P95,000)) 44,100 Beginning Retained Earnings - Pruitt Co. 44,100 To establish reciprocity/convert to equity as of 1/1/x8 (2) Sales 250,000 Purchases (Cost of Goods Sold) 250,000 To eliminate intercompany sales (3) Ending Inventory - Income Statement (CGS) 10,000 Ending Inventory (Balance Sheet) 10,000 To eliminate unrealized intercompany profit in ending inventory (P60,000 – (P60,000/1.2) (4) Beginning Retained Earnings - Pruitt Co. 25,000 Beginning Inventory (Income Statement) 25,000 To recognize intercompany profit in beginning inventory realized during the year (5) Dividend Income (P35,000 .90) 31,500 Dividends Declared 31,500 To eliminate intercompany dividends (6) Beginning Retained Earnings - Sedbrook Co. 144,000 Common Stock - Sedbrook Co. 600,000 Investment in Sedbrook Co.(P625,500 + P44,100) 669,600 Non-controlling Interest (P744,000 x .10) 74,400 To eliminate investment account and create non-controlling interest account 116. P941,000. Fair value of consideration given…………………P1,360,000 Less: Book value of SHE - Subsidiary): (P1,000,000 + P450,000) x 80%................... 1,160,000 Allocated Excess.…………………………………….P 200,000 Less: Over/Undervaluation of Assets & Liabilities Increase in franchise (P250,000 x 80%)…….. 200,000 / 80% = P250,000 P 0 Amortization of equipment: P250,000 / 25 years = P10,000 RPBI of S (downstream sales):…………………........................................................ P30,000 RPBI of P (upstream sales)………………………....................................................... 20,000 UPEI of S (downstream sales)……………………………………………………..……. 5,000 UPEI of P (upstream sales)………………………………………………….…………… 10,000 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations P700,000 Realized profit in beginning inventory of S Company (downstream sales) 30,000 Unrealized profit in ending inventory of S Company (downstream sales)… ( 5,000) P Company’s realized net income from separate operations*…….….. P725,000 S Company’s net income from own operations…………………………………. P270,000 Realized profit in beginning inventory of P Company (upstream sales) 20,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 10,000) S Company’s realized net income from separate operations*…….….. P280,000 280,000 Total P1,005,000 Less: Amortization of allocated excess…………………… 10,000 Consolidated Net Income for 20x4 P 995,000 Less: Non-controlling Interest in Net Income* * 54,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. P 941,000 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 2014 P Company’s net income from own/separate operations P700,000 Realized profit in beginning inventory of S Company (downstream sales) 30,000 Unrealized profit in ending inventory of S Company (downstream sales)… ( 5,000) P Company’s realized net income from separate operations*…….….. P725,000 S Company’s net income from own operations…………………………………. P270,000 Realized profit in beginning inventory of P Company (upstream sales) 20,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 10,000) S Company’s realized net income from separate operations*…….….. P280,000 280,000 Total P1,005,000 Less: Non-controlling Interest in Net Income* * P 54,000 Amortization of allocated excess…………………… 10,000 64,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P 941,000 Add: Non-controlling Interest in Net Income (NCINI) __ _ 54,000 Consolidated Net Income for 2014 P 995,000 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 2014 S Company’s net income of Subsidiary Company from its own operations P270,000 (Reported net income of S Company) Realized profit in beginning inventory of P Company (upstream sales) 20,000 Unrealized profit in ending inventory of P Company (upstream sales) ( 10,000) S Company’s realized net income from separate operations……… P280,000 Less: Amortization of allocated excess 10,000 P270,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 54,000 Less: NCI on goodwill impairment loss on full goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 54,000 (Not required) Analysis of workpaper entries (1) Sales 120,000 Purchases (Cost of Goods Sold) 120,000 To eliminate intercompany sales (P50,000 + P70,000) (2) Ending Inventory – Income Statement (CGS) 15,000 Inventory (Balance Sheet) 15,000 To eliminate unrealized profit in ending inventories (P10,000 + P5,000) (3) Beginning Retained Earnings – Paul Company (P20,000 0.8) 16,000 Non-controlling Interest 4,000 Beginning Inventory – Income Statement (CGS) 20,000 To recognize profit in beginning inventory (upstream sales) realized during year and to reduce the controlling and noncontrolling interests for their shares of the amount of unrealized upstream intercompany profit at beginning of year (4) Beginning Retained Earnings – Paul Company. 30,000 Beginning Inventory – Income Statement (CoGS) 30,000 To recognize profit in beginning inventory (downstream sales) realized during the year and to reduce consolidated retained earnings at beginning of the year for the amount of unrealized downstream intercompany profit at the beginning of the year 117. P1,863,000 Retained earnings – Parent, 12/31/20x4 (cost)……………………….. P 1,500,000 -: UPEI of S (down) – 20x4 or RPBI of S (down) – 20x5..……………….. 5,000 Adjusted Retained earnings – Parent, 12/31/20x4 (cost model)….. P 1,495,000 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 1/1/20x1……………………….P 450,000 Less: Retained earnings – Subsidiary, 12/31/20x4……………… 960,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)………… P 510,000 Accumulated amortization (1/1/20x1 – 12/31/20x4)…………..( 40,000) UPEI of P (up) – 20x4 or RPBI of P (up) – 20x5………………........ ( 10,000) P 460,000 x: Controlling Interests………………………………………… 80% 368,000 RE – P, 12/31/20x4 (equity method) = CRE, 12/31/20x4……… P1,863,000 118. P54,000 – refer to No. 116 for computation 119. a Full-goodwill Fair value of Subsidiary (100%) Consideration transferred: Cash P9,375,00 (P7,500,000/80%) 0 Less: Book value of stockholders’ equity of S _6,000,00 (P6,000,000 x 100%) 0 Allocated excess (excess of cost over book P3,375,00 value)….. 0 Add (deduct): (Over) under valuation of assets and liabilities P( 150,000 Decrease in inventory: P(150,000 x 100%) ) ___300,00 Increase in building: P450,000 x 100% ___450,000 0 Positive excess: Full-goodwill (excess of cost over fair P3,075,00 value)………………………………………………... 0 Partial-goodwill Fair value of Subsidiary (80%) Consideration P7,500,00 transferred……………………………….. 0 Less: Book value of stockholders’ equity of S: Common stock (P1,000,000 x 80%)……………………. P 800,000 Retained earnings (P5,000,000 x 80%)………………... 4,000,000 4,800,000 Allocated excess (excess of cost over book P2,700,00 value)….. 0 Less: Over/under valuation of assets and liabilities: Add (deduct): (Over) under valuation of P( 120,000 assets and liabilities ) Decrease in inventory: P(150,000 x 80%) ___360,00 Increase in building: P450,000 x 80% 0 240,000 Positive excess: Partial-goodwill (excess of cost over fair P2,460,00 value)………………………………………………... 0 Amortization schedule Balance at Remaining acquisition Amortization Amortization at Dec. 31/X2 20X3 20X4 Dec.31/X4 Inventory P(150,000) P(150,000) 0 P 0 Building (15 years) 450,000 30,000 P30,000 390,000 Goodwill 3,075,000 _________0 ______0 3,075,000 Total P3,375,000 P(120,000) P30,000 P3,465,000 120. a Non-controlling interest is 20% × 9,375,000 (fair value of subsidiary, 12/31/20x2) = P1,875,000 Or, alternatively: Non-controlling interest, December 31, 20x2 Common stock – S Company, December 31, 20x2…… P1,000,000 Retained earnings – S Company, December 31, 20x2 5,000,000 Stockholders’ equity – S Company, December 31, 20x2 P6,000,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (December 31, 20x2) ___300,000 Fair value of stockholders’ equity of S, December 31, 20x2…… P6,300,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 1,260,000 Add: NCI on full-goodwill (P3,075,000 – P2,460,000) ___615,000 Non-controlling interest (full- goodwill)………………………………….. P1,875,000 121. d – P2,393,800 Non-controlling interest , December 31, 20x4 Common stock – S Company, December 31, 20x4 P1,000,000 Retained earnings – S Company, December 31, 20x4 7,524,000 Stockholders’ equity – S Company, December 31, 20x4 P8,524,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (December 31, 20x2) 300,000 Amortization of allocated excess (refer to amortization above- 20x3 and 20x4: __90,000 Fair value of stockholders’ equity of S, December 31, 20x4…… P8,914,000 Less: UPEI of P (up) – 20x3 or RPBI of P (up) – 20x4 ____20,000 P8,894,000 Multiplied by: Non-controlling Interest percentage…………... _ 20 Non-controlling interest (partial goodwill)………………………………….. P1,778,800 Add: NCI on full-goodwill ___615,000 Non-controlling interest (full- goodwill)………………………………….. P2,393,800 RPBI of P (upstream sales): Sales of Subsidiary EI % EI of P GP% of Subsidiary P100,000 x 60% = P60,000 x 50,000/100,000………………………..…. 30,000 UPEI of P (upstream sales): (given)………………………………………………………. 20,000 Or, alternatively: Balance of NCI on acquisition — December 31, 20x2 P1,875,000 Add: NCI's share of the adjusted change in retained earnings to 12/ 31/20x4 Jane's retained earnings, December 31, 20x4 P7,524,000 Jane's retained earnings at December 31, 20x2 ( 5,000,000) Change in carrying value P2,524,000 Adjustments: Amortization of fair value increments to date 90,000 Unrealized upstream profit — 20x4 ( 20,000) Adjusted change in retained earnings of Jane since acquisition P2,594,000 Multiplied by: NCI's share at 20% 518,800 Ending balance of NCI on December 31, 20x4 P2,393,800 122. b Retained earnings – Parent, 12/31/20x4 (cost)……………………….. P11,900,000 -: UPEI of S (down) – 20x4 or RPBI of S (down) – 20x5..……………….. 0 Adjusted Retained earnings – Parent, 12/31/20x4 (cost model)….. P11,900,000 Retroactive Adjustments to convert Cost to “Equity” for purposes of consolidation / Parent’s share of adjusted net increase in subsidiary’s retained earnings: Retained earnings – Subsidiary, 12/31/20x2…………………..P5,000,000 Less: Retained earnings – Subsidiary, 12/31/20x4…………… 7,524,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)……….P2,524,000 Accumulated amortization (1/1/20x1 – 12/31/20x4)……….. 90,000 UPEI of P (up) – 20x4 or RPBI of P (up) – 20x5……………….....( 20,000) P2,594,000 x: Controlling Interests………………………………………… 80% 2,075,200 RE – P, 12/31/20x4 (equity method) = CRE, 12/31/20x4 P13,975,200 122. b - (P125,000 - P93,000) .8 = P25,600 123. c - (P125,000 - P93,000) .2 = P6,400 124. d 125. a - (P125,000 - P93,000) .7 126. c - (P125,000 - P93,000) .3 127. a - [P293,000 + (P125,000 - P93,000) .7] .2 = P63,080 Theories 1. True 6. True 11. True 16. False 21. True 26. e 31 b 36. a 2. False 7. False 12. False 17. False 22. False 27. e 32. e 37. b 3. False 8. False 13. False 18. True 23. b 28. c 33. b 38. e 4. True 9. True 14. True 19. True 24. e 29. d 34. d 39. d 5. False 10, False 15, True 20. False 25. a 30. a 35. a 40. d 41. b 46. c 51. a 56. c 61. a 66. b 71 b 76. c 42. c 47. b 52. c 57. b 62. a 67. b 72. a 77. c 43. a 48. c 53. c 58. c 63. b 68. c 73. a 78. a 44. c 49. a 54. d 59. b 64. c 69. d 74. a 79. c 45. d 50, d 55, c 60. c 65. a 70. b 75. c 80. e Chapter 18 Problem I A. Downstream Sale 1. Cost Model – 20x5 (104,000/130,000 = 80% ownership) Dividends – S Company Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,00 0 Dividend income (P60,000 x 48,00 80%) . . . . . . . . . . . . . . . . . . . . . . . 0 Net Income – S Company No entry Amortization of Allocated Excess No entry Unrealized Gain on Sale of Equipment No entry Realized Gain on Sale – depreciation No entry Equity Method – 20x5 Dividends – S Company Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,00 0 Investment in S Co (60,000 x 32,00 80%) . . . . . . . . . . . . . . . . . . . . . . . 0 Net Income – S Company Investment in S 656,000 Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income (P820,000 x 656,000 80%). . . . . . . . . . . . . . . . . . . . . Amortization of Allocated Excess None, since there is no amount available Unrealized Gain on Sale of Equipment No entry 1/1/20x4 Selling price……………………………………… P740,000 Less: Book value: Cost…………………………………………P 1,280,000 Less: Accumulated depreciation P1,280,000/8 years x 4 years……. 640,000 640,000 Unrealized gain on sales………………………. P 100,000 Realized gain on sale thru depreciation based on remaining life of equipment [P100,000 / (8 – 4, expired years)……… P 25,000 Realized Gain on Sale – depreciation 25,000 Investment in S Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income (P25,000 x 25,000 100%). . . . . . . . . . . . . . . . . . . . . 2. Working Paper Elimination Entries: Cost Model Equipment 540,000 Beginning R/E – Prince 100,000 Accumulated Depreciation 640,000 Accumulated Depreciation (P100,000/4) × 2 50,000 Depreciation Expense 25,000 Beginning R/E – Prince 25,000 Equity Method Equipment 540,000 Investment in S Co. 100,000 Accumulated Depreciation 640,000 Accumulated Depreciation (P100,000/4) × 2 50,000 Depreciation Expense 25,000 Investment in S Co. 25,000 3 Controlling Interest in Consolidated Net Income: Prince Company’s income from its independent operations P3,270,000 Reported net income of Serf Company P820,000 Plus profit on intercompany sale of equipment considered to be realized through depreciation in 20x4 25,000 Reported subsidiary income that has been realized in transactions with third parties 845,000 × .8 Prince Company’s share thereof 676,000 Controlling Interest in Consolidated net income P3,946,000 4. Noncontrolling Interest Calculation: Reported income of Serf Company P820,000 Plus: Intercompany profit considered realized in the current period 25,000 P845,000 Noncontrolling interest in Serf Company (.20 × 845,000) P169,000 5. NCI-CNI (No. 4) P 169,000 CI-CNI (No. 3) 3,946,000 CNI P4,115,000 or, Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P3,270,000 Realized gain on sale of equipment (downstream sales) through depreciation 0 P Company’s realized net income from separate operations…….….. P3,270,000 S Company’s net income from own operations…………………………………. P 820,000 Realized gain on sale of equipment (upstream sales) through depreciation* 25,000 Son Company’s realized net income from separate operations*…….….. P 845,000 845,000 Total P4,115,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x5 P4,115,000 Less: Non-controlling Interest in Net Income* * 169,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P3,946,000 Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P3,270,000 Realized gain on sale of equipment (downstream sales) through depreciation 0 P Company’s realized net income from separate operations…….….. P3,270,000 S Company’s net income from own operations…………………………………. P820,000 Realized gain on sale of equipment (upstream sales) through depreciation 25,000 S Company’s realized net income from separate operations…….….. P 845,000 845,000 Total P4,115,000 Less: Non-controlling Interest in Net Income* * P 169,000 Amortization of allocated excess…………………… 0 169,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P3,946,000 Add: Non-controlling Interest in Net Income (NCINI) _169,000 Consolidated Net Income for 20x5 P4,115,000 **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 820,000 Realized gain on sale of equipment (upstream sales) through depreciation 25,000 S Company’s realized net income from separate operations……… P 845,000 Less: Amortization of allocated excess 0 P845,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 169,000 1/1/20x4: Selling price of equipment P 740,000 Less: BV of equipment Cost P1,280,000 Less: Accumulated depreciation: P1,280,000 / 8 years x 4 years* 640,000 640,000 Unrealized gain on sales – 1/1/20x4 P 100,000 Realized gain – depreciation: P100,000 / 4 years P 25,000 *the original life is 8 years as of 1/1/20x3, since the remaining life as of 1/1/20x4 in only 4 years, for purposes of computing the accumulated depreciation to determine the gain on sale, the difference of 4 years is presumed to be expired. Controlling Interest in Consolidated Net Income: Prince Company’s income from its independent operations P3,270,000 Plus profit on intercompany sale of equipment considered to be realized through depreciation in 2014 25,000 P3,295,000 Reported net income of S Company P820,000 × .8 Prince Company’s share thereof 656,000 Controlling Interest in Consolidated net income P3,951,000 Noncontrolling Interest Calculation: Reported income of S Company P820,000 Noncontrolling interest in S Company (.20 × 820,000) P164,000 NCI-CNI P 164,000 CI-CNI 3,951,000 CNI P4,115,000 or, Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P3,270,000 Realized gain on sale of equipment (downstream sales) through depreciation ____25,000 P Company’s realized net income from separate operations…….….. P3,295,000 S Company’s net income from own operations…………………………………. P 820,000 Realized gain on sale of equipment (upstream sales) through depreciation* 0 S Company’s realized net income from separate operations*…….….. P 820,000 820,000 Total P4,115,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x5 P4,115,000 Less: Non-controlling Interest in Net Income* * 164,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P3,951,000 Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P3,270,000 Realized gain on sale of equipment (downstream sales) through depreciation 25,000 P Company’s realized net income from separate operations…….….. P3,295,000 S Company’s net income from own operations…………………………………. P820,000 Realized gain on sale of equipment (upstream sales) through depreciation 0 S Company’s realized net income from separate operations…….….. P 820,000 820,000 Total P4,115,000 Less: Non-controlling Interest in Net Income* * P 164,000 Amortization of allocated excess…………………… 0 164,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P3,951,000 Add: Non-controlling Interest in Net Income (NCINI) _169,000 Consolidated Net Income for 20x5 P4,115,000 **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 820,000 Realized gain on sale of equipment (upstream sales) through depreciation 0 S Company’s realized net income from separate operations……… P 820,000 Less: Amortization of allocated excess 0 P820,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 164,000 B. Upstream Sale 1. Cost Model – 20x5 (104,000/130,000 = 80% ownership) Dividends – S Company Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,00 0 Dividend income (P60,000 x 48,00 80%) . . . . . . . . . . . . . . . . . . . . . . . 0 Net Income – S Company No entry Amortization of Allocated Excess No entry Unrealized Gain on Sale of Equipment No entry Realized Gain on Sale – depreciation No entry Equity Method – 20x5 Dividends – S Company Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,00 0 Investment in S Co (60,000 x 32,00 80%) . . . . . . . . . . . . . . . . . . . . . . . 0 Net Income – S Company Investment in S 656,000 Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income (P820,000 x 656,000 80%). . . . . . . . . . . . . . . . . . . . . Amortization of Allocated Excess None, since there is no amount available Unrealized Gain on Sale of Equipment No entry 1/1/20x4 Selling price……………………………………… P740,000 Less: Book value: Cost…………………………………………P 1,280,000 Less: Accumulated depreciation P1,280,000/8 years x 4 years……. 640,000 640,000 Unrealized gain on sales………………………. P 100,000 Realized gain on sale thru depreciation based on remaining life of equipment [P100,000 / (8 – 4, expired years)……… P 25,000 Realized Gain on Sale – depreciation 25,000 Investment in S Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income (P25,000 x 25,000 100%). . . . . . . . . . . . . . . . . . . . . 2. Working Paper Elimination Entries: Cost Model Equipment 540,000 Beginning R/E – Prince (P100,000 × .80) 80,000 Noncontrolling Interest (P100,000 × .20) 20,000 Accumulated Depreciation 640,000 Accumulated Depreciation (P100,000/4) × 2 50,000 Depreciation Expense 25,000 Beginning R/E – Prince (P25,000 × .80) 20,000 Noncontrolling Interest (P25,000 × .20) 5,000 Equity Method Equipment 540,000 Investment in S Co. (P100,000 × .80) 80,000 Noncontrolling Interest (P100,000 × .20) 20,000 Accumulated Depreciation 640,000 Accumulated Depreciation (P100,000/4) × 2 50,000 Depreciation Expense 25,000 Investment in S Co. (P25,000 × .80) 20,000 Noncontrolling Interest (P25,000 × .20) 5,000 3 Controlling Interest in Consolidated Net Income: Prince Company’s income from its independent operations P3,270,000 Reported net income of Serf Company P820,000 Plus profit on intercompany sale of equipment considered to be realized through depreciation in 20x4 25,000 Reported subsidiary income that has been realized in transactions with third parties 845,000 × .8 Prince Company’s share thereof 676,000 Controlling Interest in Consolidated net income P3,946,000 4. Noncontrolling Interest Calculation: Reported income of Serf Company P820,000 Plus: Intercompany profit considered realized in the current period 25,000 P845,000 Noncontrolling interest in Serf Company (.20 × 845,000) P169,000 5. NCI-CNI (No. 4) P 169,000 CI-CNI (No. 3) 3,946,000 CNI P4,115,000 or, Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P3,270,000 Realized gain on sale of equipment (downstream sales) through depreciation 0 P Company’s realized net income from separate operations…….….. P3,270,000 S Company’s net income from own operations…………………………………. P 820,000 Realized gain on sale of equipment (upstream sales) through depreciation* 25,000 Son Company’s realized net income from separate operations*…….….. P 845,000 845,000 Total P4,115,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x5 P4,115,000 Less: Non-controlling Interest in Net Income* * 169,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P3,946,000 Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P3,270,000 Realized gain on sale of equipment (downstream sales) through depreciation 0 P Company’s realized net income from separate operations…….….. P3,270,000 S Company’s net income from own operations…………………………………. P820,000 Realized gain on sale of equipment (upstream sales) through depreciation 25,000 S Company’s realized net income from separate operations…….….. P 845,000 845,000 Total P4,115,000 Less: Non-controlling Interest in Net Income* * P 169,000 Amortization of allocated excess…………………… 0 169,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P3,946,000 Add: Non-controlling Interest in Net Income (NCINI) _169,000 Consolidated Net Income for 20x5 P4,115,000 **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 820,000 Realized gain on sale of equipment (upstream sales) through depreciation 25,000 S Company’s realized net income from separate operations……… P 845,000 Less: Amortization of allocated excess 0 P845,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 169,000 1/1/20x4: Selling price of equipment P 740,000 Less: BV of equipment Cost P1,280,000 Less: Accumulated depreciation: P1,280,000 / 8 years x 4 years* 640,000 640,000 Unrealized gain on sales – 1/1/20x4 P 100,000 Realized gain – depreciation: P100,000 / 4 years P 25,000 *the original life is 8 years as of 1/1/20x3, since the remaining life as of 1/1/20x4 in only 4 years, for purposes of computing the accumulated depreciation to determine the gain on sale, the difference of 4 years is presumed to be expired. Problem II 1. Eliminating entry, December 31, 20x8: E(1) Truck 55,000 Gain on Sale of Truck 35,000 Depreciation Expense 5,000 Accumulated Depreciation 85,000 Computation of gain on sale of truck: Price paid by Minnow P245,000 Cost of truck to Frazer P300,000 Accumulated depreciation (P300,000 / 10 years) x 3 years ( 90,000) (210,000) Gain on sale of truck P 35,000 Accumulated depreciation adjustment: Required [(P300,000 / 10 years) x 4 years] P120,000 Reported [(P245,000 / 7 years) x 1 year] (35,000) Required increase P 85,000 2. Eliminating entry, December 31, 20x9: E(1) Truck 55,000 Retained Earnings 30,000 Depreciation Expense 5,000 Accumulated Depreciation 80,000 Accumulated depreciation adjustment: Required [(P300,000 / 10 years) x 5 years] P150,000 Reported [(P245,000 / 7 years) x 2 years] (70,000) Required increase P 80,000 Problem III a. Eliminating entry, December 31, 20x8: E(1) Truck 90,000 Gain on Sale of Truck 30,000 Accumulated Depreciation 120,000 Computation of gain on sale of truck: Price paid by MM P210,000 Cost of truck to FF P300,000 Accumulated depreciation (P300,000 / 10 years) x 4 years (120,000) (180,000) Gain on sale of truck P 30,000 b. Eliminating entry, December 31, 20x9: E(1) Truck 90,000 Retained Earnings, January 1 30,000 Depreciation Expense 5,000 Accumulated Depreciation 115,000 Accumulated depreciation adjustment: Required [(P300,000 / 10 years) x 5 years] P150,000 Recorded [(P210,000 / 6 years) x 1 year] (35,000) Required increase P115,000 Problem IV 1. Consolidated net income for 20x9: Operating income reported by BW P100,000 Net income reported by TW P40,000 Amount of gain realized in 20x9 (P30,000 / 12 years) 2,500 Realized net income of TW 42,500 Consolidated net income P142,500 2. Consolidated net income for 20x9 would be unchanged. 3. Eliminating entry, December 31, 20x9: E(1) Buildings and Equipment 30,000 Retained Earnings, January 1 20,000 Non-controlling Interest 5,000 Depreciation Expense 2,500 Accumulated Depreciation 52,500 Eliminate unrealized profit on building. Adjustment to buildings and equipment Amount paid by TW to acquire building P300,000 Amount paid by BW on intercompany sale (270,000) Adjustment to buildings and equipment P 30,000 Adjustment to retained earnings, January 1, 20x9 Unrealized gain recorded January 1, 20x4 P 30,000 Amount realized following intercompany sale (P2,500 x 2) (5,000) Unrealized gain, January 1, 20x9 P 25,000 Proportion of ownership held by Baywatch x .80 Required adjustment P 20,000 Adjustment to Noncontrolling interest, January 1, 20x9 Unrealized gain at January 1, 20x9 P 25,000 Proportion of ownership held by non-controlling interest x .20 Required adjustment P 5,000 Adjustment to depreciation expense Depreciation expense recorded by BW Industries (P270,000 / 12 years) P 22,500 Depreciation expense recorded by TW Corporation (P300,000 / 15 years) (20,000) Adjustment to depreciation expense P 2,500 Adjustment to accumulated depreciation Amount required (P20,000 x 6 years) P120,000 Amount reported by BW (P22,500 x 3 years) (67,500) Required adjustment P 52,500 Problem V 20x5 20x6 1. Noncontrolling interest in P 7,000 (1) P 46,200 (2) Consolidated net income Controlling interest in 290,500 (3) 279,300 (4) Consolidated net income (1) .4(P70,000 – P63,000 + P10,500) = P7,000 (2) .4(P105,000 + P10,500) = P46,200 (3) P280,000 + .6(P70,000 – P63,000 + P10,500) = P290,500 (4) P210,000 + .6(P105,000 + P10,500) = P279,300 20x5 20x6 2. Noncontrolling interest in P 28,000 (5) P 42,000 (6) Consolidated income Controlling interest in 269,500 (7) 283,500 (8) Consolidated net income (5) .4(P70,000) = P28,000 (6) .4(P105,000) = P42,000 (7) (P280,000 – P63,000 + P10,500) + .6(P70,000) = P269,500 (8) (P210,000 + P10,500) + .6(P105,000) = P283,500 Problem VI Quail Corporation and Subsidiary Consolidated Income Statement for the year ended December 31, 20x5 Sales P 1,100,000 Gain on land (P20,000 + P25,000) 45,000 Cost of sales ( 560,000 ) Other expenses (see below) ( 320,000 ) Consolidated Net Income P 265,000 NCI-CNI (see below) ( 20,000 ) Consolidated net income P 245,000 Other expenses: P265,000 + P60,000 - P5,000 piecemeal recognition of gain on equipment P 320,000 Non-controlling Interest in CNI: Net income from Savannah x 20%: (P100,000 x 20%) = P 20,000 Problem VII 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 P transferred……………………………….. 372,000 Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 80%)……………………. P 192,000 Retained earnings (P120,000 x 80%)………………... 96,000 288,000 Allocated excess (excess of cost over book P value)….. 84,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… P 4,800 Increase in land (P7,200 x 80%)……………………. 5,760 Increase in equipment (P96,000 x 80%) 76,800 Decrease in buildings (P24,000 x 80%)………..... ( 19,200) Decrease in bonds payable (P4,800 x 80%)…… 3,840 72,000 Positive excess: Partial-goodwill (excess of cost over fair P value)………………………………………………... 12,000 The over/under valuation of assets and liabilities are summarized as follows: S Co. (Over) Book S Co. Under value Fair value Valuation P Inventory………………….…………….. 24,000 P 30,000 P 6,000 Land……………………………………… 48,000 55,200 7,200 Equipment (net)......... 84,000 180,000 96,000 Buildings (net) 168,000 144,000 (24,000) Bonds payable………………………… (120,000) ( 115,200) 4,800 P Net……………………………………….. 204,000 P 294,000 P 90,000 The buildings and equipment will be further analyzed for consolidation purposes as follows: S Co. S Co. Increase Book value Fair value (Decrease) Equipment.................. 180,000 180,000 0 Less: Accumulated depreciation….. 96,000 - ( 96,000) Net book value………………………... 84,000 180,000 96,000 S Co. S Co. Book value Fair value (Decrease) Buildings................ 360,000 144,000 ( 216,000) Less: Accumulated depreciation….. 1992,000 - ( 192,000) Net book value………………………... 168,000 144,000 ( 24,000) A summary or depreciation and amortization adjustments is as follows: Annu Over/ al Current Account Adjustments to be Unde Lif Amou Year(20x amortized r e nt 4) 20x5 P P P Inventory 6,000 1 6,000 P 6,000 - Subject to Annual Amortization 96,00 12,00 Equipment (net)......... 0 8 12,000 12,000 0 (24,0 ( 6,000 (6,00 Buildings (net) 00) 4 ) ( 6,000) 0) Bonds payable… 4,800 4 1,200 1,200 1,200 P P 13,200 P 13,200 7,200 The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows: Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) P 372,000 Fair value of NCI (given) (20%) 93,000 Fair value of Subsidiary (100%) P 465,000 Less: Book value of stockholders’ equity of S (P360,000 x 100%) __360,000 Allocated excess (excess of cost over book value)….. P 105,000 Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) 90,000 Positive excess: Full-goodwill (excess of cost over P 15,000 fair value)………………………………………………... In this case, the goodwill was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows: Value % of Total Goodwill applicable to parent………………… P12,000 80.00% Goodwill applicable to NCI…………………….. 3,000 20.00% Total (full) goodwill……………………………….. P15,000 100.00% The goodwill impairment loss would be allocated as follows Value % of Total Goodwill impairment loss attributable to parent P 80.00% or controlling 3,000 Interest Goodwill applicable to NCI…………………….. 750 20.00% Goodwill impairment loss based on 100% fair value or full- P 3,750 100.00% Goodwill The unrealized and gain on intercompany sales for 20x4 are as follows: Date Selling Book Unrealize Remaini Realized of Seller Price Value d* ng gain – 20x4 Sale Gain on Life depreciatio sale n** 4/1/20 P Co. P90,0 P75,0 P15,000 5 years P3,000/year P2,2 x4 00 00 50 1/2/20 S Co. 31,200 8 years P3,9 x4 60,00 28,80 P3,900/year 00 0 0 * selling price less book value ** unrealized gain divided by remaining life; 20x4 – P3,000 x 9/12 = P2,250 20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4: (1) Investment in S 372,00 Company…………………………………………… 0 372,00 Cash…………………………………………………………………… 0 .. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Dividend income (P36,000 x 80%)……………. 28,800 Record dividends from S Company. No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4, and unrealized profits in ending inventory. Consolidation Workpaper – Year of Acquisition (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S 120.000 Co…………………………………… Investment in S 288,000 Co…………………………………………… Non-controlling interest (P360,000 x 72,000 20%)……………………….. To eliminate intercompany investment and equity accounts of subsidiary on date of acquisition; and to establish non-controlling interest (in net assets of subsidiary) on date of acquisition. (E2) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 18,000 20%)……………………….. Investment in S 84,000 Co………………………………………………. To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition. (E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Goodwill impairment 3,000 loss………………………………………. 6,000 Inventory………………………………………………………….. Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 3,000 To provide for 20x4 impairment loss and depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Cost of Depreciation/ Goods Amortization Amortization Sold Expense -Interest Total Inventory sold P 6,000 Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 6,000 P1,200 13,200 (E4) Dividend income - P………. 28,800 Non-controlling interest (P36,000 x 7,200 20%)……………….. Dividends paid – S…………………… 36,000 To eliminate intercompany dividends and non-controlling interest share of dividends. (E5) Gain on sale of equipment 15,000 Equipment 30,000 Accumulated depreciation 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E6) Gain on sale of equipment 31,200 Equipment 12,000 Accumulated depreciation 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E7) Accumulated depreciation……….. 2,250 Depreciation expense…………… 2,250 To adjust downstream depreciation expense on equipment sold to subsidiary, thus realizing a portion of the gain through depreciation (P15,000 / 5 years x 9/12 = P2,250). (E8) Accumulated depreciation……….. 3,900 Depreciation expense…………… 3,900 To adjust upstream depreciation expense on equipment sold to parent, thus realizing a portion of the gain through depreciation (P31,200/85 years x 1 year = P3,900). (E9) Non-controlling interest in Net Income of 10,140 Subsidiary………… Non-controlling interest ………….. 10,140 To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. P 91,200 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations P 63,900 Less: Amortization of allocated excess [(E3)]…. 13,200 P 50,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 10,140 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 (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P480,000 P240,000 P 720,000 Gain on sale of equipment 15,000 31,200 (5) 15,000 (6) 31,200 Dividend income 28,800 - (4) 28,800 _________ Total Revenue P523,800 P271,200 P 720,000 Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000 Depreciation expense 60,000 24,000 (3) 6,000 (7) 2,250 83,850 (8) 3,900 Interest expense - - (3) 1,200 1,200 Other expenses 48,000 18,000 66,000 Goodwill impairment loss - - (3) 3,000 3,000 Total Cost and Expenses P312,000 P180,000 P 502,050 Net Income P211,800 P 91,200 P 217,950 NCI in Net Income - Subsidiary - - (9 10,140 ( 10,140) Net Income to Retained P 207,810 Earnings P211,800 P 91,200 Statement of Retained Earnings Retained earnings, 1/1 P Company P360,000 P 360,000 S Company P120,000 (1) 120,000 Net income, from above 211,800 91,200 207,810 Total P571,800 P211,200 P 567,810 Dividends paid P Company 72,000 72,000 S Company - 36,000 (4) 36,000 _ ________ Retained earnings, 12/31 to Balance Sheet P499,800 P175,200 P 495,810 Balance Sheet P Cash………………………. 232,800 P 90,000 P 322,800 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 90,000 (2) 6,000 3) 6,000 210,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 (5) 30,000 (6) 12,000 462,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 1,200 3,600 Goodwill…………………… (2) 12,000 (3) 3,000 9,000 Investment in S Co……… 372,000 (10) 288,000 (11) 84,000 - Total P1,984,800 P1,008,000 P2,466,600 Accumulated depreciation (12) 96,000 (3) 12,000 - equipment P 135,000 P 96,000 (7) 2,250 (5) 45,000 (8) 3,900 (6) 43,200 P229,050 (18) Accumulated depreciation 405,000 288,000 192,000 - buildings (19) 6,000 495,000 Accounts payable…………… 105,000 88,800 193,800 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 499,800 175,200 495,810 Non-controlling interest………… (20) 7,200 (1 ) 72,000 (2) 18,000 _________ _________ __________ (9) 10,140 ____92,940 Total P1,984,800 P1,008,000 P 834,450 P 834,450 P2,466,600 20x5: Second Year after Acquisition P Co. S Co. Sales P P 540,000 360,000 Less: Cost of goods sold 216,000 192,000 Gross profit P P 324,000 168,000 Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000 Net income from its own separate P P operations 192,000 90,000 Add: Dividend income 38,400 - Net income P P 230,400 90,000 Dividends paid P P 72,000 48,000 No goodwill impairment loss for 20x5. Parent Company Cost Model Entry Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5: Cash……………………… 38,400 Dividend income (P48,000 x 80%)……………. 38,400 Record dividends from S Company. On the books of S Company, the P48,000 dividend paid was recorded as follows: Dividends paid………… 48,000 Cash 48,000 Dividends paid by S Co.. 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………………………… 44,160 Retained earnings – P 44,160 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: Retained earnings – S Company, 1/1/20x5 P175,200 Retained earnings – S Company, 1/1/20x4 120,000 Increase in retained earnings…….. P 55,200 Multiplied by: Controlling interest % 80% Retroactive adjustment P 44,160 Entry (1) above is needed only for firms using the cost method to account for their investments in the subsidiary. If the parent is already using the equity method, there is no need to convert to equity. (E2) Common stock – S 240,000 Co………………………………………… Retained earnings – S Co., 1/1/20x5 175,200 Investment in S Co (P415,200 x 332,160 80%)………………………… Non-controlling interest (P415,200 x 83,040 20%)……………………….. To eliminate intercompany investment and equity accounts of subsidiary and to establish non-controlling interest (in net assets of subsidiary) on January 1, 20x5. (E3) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 20%) 18,000 Investment in S 84,000 Co………………………………………………. To 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 January 1, 20x5. (E4) Retained earnings – P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] 13,560 Non-controlling interests (P13,200 x 2,640 20%)……………………. Depreciation expense……………………….. 6,000 Accumulated depreciation – 12,000 buildings………………….. Interest expense………………………………… 1,200 6,000 Inventory………………………………………………………….. Accumulated depreciation – 24,000 equipment……………….. Discount on bonds payable………………………… 2,400 Goodwill…………………………………… 3,000 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 & NCI; Year 20x5 amounts are debited to respective nominal accounts. (20x4) Depreciation/ Retained Amortization Amortization earnings, expense -Interest Inventory sold P 6,000 Equipment 12,000 P 12,000 Buildings (6,000) ( 6,000) Bonds payable 1,200 ________ P 1,200 Sub-total P13,200 P 6,000 P 1,200 Multiplied by: 80% To Retained earnings P 10,560 Impairment loss 3,000 Total P 13,560 (E5) Dividend income - P………. 38,400 Non-controlling interest (P48,000 x 9,600 20%)……………….. Dividends paid – S…………………… 48,000 To eliminate intercompany dividends and non-controlling interest share of dividends. (E5) Retained Earnings – P Company, 1/1/20x5 15,000 Equipment 30,000 Accumulated depreciation 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E6) Retained Earnings–P Company, 1/1/20x5 24,960 (P31,200 x 80%) Non-controlling interest (P31,200 x 20%) 6,240 Equipment 12,000 Accumulated depreciation 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E7) Accumulated depreciation……….. 5,250 Depreciation expense (current year)…………… 3,000 Retained Earnings–P Company, 1/1/20x5 (prior year) 2,250 To adjust downstream depreciation expense on equipment sold to subsidiary, thus realizing a portion of the gain through depreciation (E8) Accumulated depreciation……….. 7,800 Depreciation expense (current year) 3,900 Retained Earnings–P Co. 1/1/20x5 (P3,900 x 80%) 3,120 Non-controlling interest (P31,200 x 20%) 780 To adjust upstream depreciation expense on equipment sold to parent, thus realizing a portion of the gain through depreciation (P31,200/85 years x 1 year = P3,900). (E9) Non-controlling interest in Net Income of 17,340 Subsidiary………… Non-controlling interest ………….. 17,340 To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. P 90,000 Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s Realized net income* P 93,900 Less: Amortization of allocated excess ( 7,200) P 86,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) P 17,340 – partial goodwill *from separate transactions that has been realized in transactions with third persons. Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P540,000 P360,000 P 900,000 Dividend income 38,400 - (5) 38,400 ___________ Total Revenue P578,400 P360,000 P 900,000 Cost of goods sold P216,000 P192,000 P 408,000 Depreciation expense 60,000 24,000 (4) 6,000 (7) 3,000 83,100 (8) 3,900 Interest expense - - (4) 1,200 1,200 Other expenses 72,000 54,000 126,000 Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 618,300 Net Income P230,400 P 90,000 P 281,700 NCI in Net Income - Subsidiary - - (9) 17,340 ( 17,340) Net Income to Retained Earnings P230,400 P 90,000 P 264,360 Statement of Retained Earnings Retained earnings, 1/1 P Company P499,800 (1) 13,560 (1) 44,160 (21) 15,000 (23) 2,250 (22) 24,960 (24) 3,120 P 495,810 S Company P 175,200 (2) 175,200 Net income, from above 230,400 __90,000 264,360 Total P730,200 P265,200 P 760,170 Dividends paid P Company 72,000 72,000 S Company - 48,000 (5) 48,000 _ ________ Retained earnings, 12/31 to Balance Sheet P658,200 P217,200 P 688,170 Balance Sheet Cash………………………. P 265,200 P 102,000 P 367,200 Accounts receivable…….. 180,000 96,000 276,000 Inventory…………………. 216,000 108,000 (15) 6,000 (16) 6,000 324,000 Land……………………………. 210,000 48,000 (3) 7,200 265,200 Equipment 240,000 180,000 (5) 30,000 (6) 12,000 462,000 Buildings 720,000 540,000 (3) 216,000 1,044,000 Discount on bonds payable (3) 4,800 (4) 2,400 2,400 Goodwill…………………… (3) 12,000 (4) 3,000 9,000 Investment in S Co……… 372,000 (1) 44,160 (2) 332,160 (3) 84,000 - Total P2,203,200 P1,074,000 P2,749,800 Accumulated depreciation P 150,000 P 102,000 (3) 96,000 (4) 24,000 - equipment (7) 5,250 (5) 45,000 (8) 7,800 (6) 43,200 P 255,150 Accumulated depreciation 450,000 306,000 (3) 192,000 - buildings (4) 12,000 552,000 Accounts payable…………… 105,000 88,800 193,800 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (2) 240,000 Retained earnings, from above 658,200 217,200 688,170 Non-controlling interest………… (4) 2,640 (2 83,040 (5) 9,600 (3) 18,000 (6) 6,240 (8) 780 ___ _____ _________ __________ (9) 17,340 ____100,680 Total P2,203,200 P1,074,000 P 979,350 P 979,350 P2,749,800 5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) P360,000 b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… P 240,000 Retained earnings – Subsidiary Company…………………………………. 120,000 Stockholders’ equity – Subsidiary Company.………….. P 360,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities 90,000 Fair value of stockholders’ equity of subsidiary, January 1, 20x4………………… P 450,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill),……………………………….. P 90,000 c. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 360,000 Parent’s Stockholders’ Equity / CI – SHE P 960,000 NCI, 1/1/20x4 ___90,000 Consolidated SHE, 1/1/20x4 P1,050,000 6. Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI - P Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. P183,000 Unrealized gain on sale of equipment (downstream sales) (15,000) Realized gain on sale of equipment (downstream sales) through depreciation 2,250 P Company’s realized net income from separate operations*…….….. P170,250 S Company’s net income from own operations…………………………………. P 91,200 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations*…….….. P 63,900 63,900 Total P234,150 Less: Non-controlling Interest in Net Income* * P 10,140 Amortization of allocated excess (refer to amortization above) 13,200 Goodwill impairment (impairment under partial-goodwill approach) 3,000 26,340 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P207,810 Add: Non-controlling Interest in Net Income (NCINI) _ 10,140 Consolidated Net Income for 20x4 P217,950 *that has been realized in transactions with third parties. b. NCI-CNI – P10,140 **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 91,200 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations……… P 63,900 Less: Amortization of allocated excess / goodwill impairment (refer to amortization table above) 13,200 P 50,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 10,140 *that has been realized in transactions with third parties. c. CNI, P217,950 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 207,810 Total P567,810 Less: Dividends paid – Parent Company for 20x4 72,000 Consolidated Retained Earnings, December 31, 20x4 P495,810 e. The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. The NCI on January 1, 20x4 and December 31, 20x4 are computed as follows: Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4 P120,000 Add: Net income of subsidiary for 20x4 91,200 Total P211,200 Less: Dividends paid – 20x4 36,000 175,200 Stockholders’ equity – Subsidiary Company, December 31, 20x4 P 415,200 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200) Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P492,000 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 Realized stockholders’ equity of subsidiary, December 31, 20x4…… P464,700 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)………………………………….. P 92,940 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 495,810 Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,095,810 NCI, 12/31/20x4 ___92,940 Consolidated SHE, 12/31/20x4 P1,188,750 12/31/20x5: a. CI-CNI – P264,360 Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P192,000 Realized gain on sale of equipment (downstream sales) through depreciation 3,000 P Company’s realized net income from separate operations*…….….. P195,000 S Company’s net income from own operations…………………………………. P 90,000 Realized gain on sale of equipment (upstream sales) through depreciation 3,90 S Company’s realized net income from separate operations*…….….. P 93,900 93,900 Total P288,900 Less: Amortization of allocated excess…………………… 7,200 Consolidated Net Income for 20x5 P281,700 Less: Non-controlling Interest in Net Income* * 17,340 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P264,360 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P192,000 Realized gain on sale of equipment (downstream sales) through depreciation 3,000 P Company’s realized net income from separate operations*…….….. P195,000 S Company’s net income from own operations…………………………………. P 90,000 Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations*…….….. P 93,900 93,900 Total P288,900 Less: Non-controlling Interest in Net Income* * P 17,340 Amortization of allocated excess…………………… 7,200 24,540 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P264,360 Add: Non-controlling Interest in Net Income (NCINI) _ 17,340 Consolidated Net Income for 20x5 P281,700 *that has been realized in transactions with third parties. b. NCI-CNI – P17,340 **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations P 90,000 (Reported net income of Son Company) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations……… P 93,900 Less: Amortization of allocated excess 7,200 P 86,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 17,340 c. CNI, P281,700 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model) P499,800 Less: Downstream - net unrealized gain on sale of equipment – prior to 20x5 (P15,000 – P2,250) 12,750 Adjusted Retained Earnings – Parent 1/1/20x5 (cost model ) Son Company’s Retained earnings that have been realized in transactions with third parties.. P487,050 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 P 175,200 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 55,200 Less: Amortization of allocated excess – 20x4 13,200 Upstream - net unrealized gain on sale of equipment –prior to 20x5 (P31,200 – P3,900) 27,300 P 14,700 Multiplied by: Controlling interests %................... 80% P 11,760 Less: Goodwill impairment loss 3,000 __ 8,760 Consolidated Retained earnings, January 1, 20x5 P495,810 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 264,360 Total P760,170 Less: Dividends paid – Parent Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P688,170 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6). Or, alternatively: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model) P658,200 Less: Downstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P15,000 – P2,250 – P3,000) 9,750 Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ) S Company’s Retained earnings that have been realized in transactions with third parties.. P648,450 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 P 217,200 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 97,200 Less: Accumulated amortization of allocated excess – 20x4 and 20x5 (P11,000 + P6,000) 20,400 Upstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P31,200 – P3,900 – P3,900) 23,400 P 53,400 Multiplied by: Controlling interests %................... 80% P 42,720 Less: Goodwill impairment loss 3,000 39,720 Consolidated Retained earnings, December 31, 20x5 P688,170 e. Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5 P175,200 Add: Net income of subsidiary for 20x5 90,000 Total P 265,200 Less: Dividends paid – 20x5 48,000 217,200 Stockholders’ equity – Subsidiary Company, December 31, 20x5 P 457,200 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) : 20x4 P 13,200 20x5 7,200 ( 20,400) Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P 526,800 Less: Upstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P31,200 – P3,900 – P3,900) 23,400 Realized stockholders’ equity of subsidiary, December 31, 20x5………. P503,400 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 100,680 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 688,170 Parent’s Stockholders’ Equity / CI – SHE, P1,288,170 12/31/20x5 NCI, 12/31/20x5 __100,680 Consolidated SHE, 12/31/20x5 P1,188,850 Problem VIII Requirements 1 to 4 Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred P (80%)…………….. 372,000 Fair value of NCI (given) (20%)……………….. 93,000 P Fair value of Subsidiary (100%)………. 465,000 Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x P 100%)………………. 240,000 Retained earnings (P120,000 x 100%)………... 120,000 360,000 Allocated excess (excess of cost over book P value)….. 105,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x P 100%)……………… 6,000 Increase in land (P7,200 x 100%)……………………. 7,200 Increase in equipment (P96,000 x 100%) 96,000 Decrease in buildings (P24,000 x 100%)………..... ( 24,000) Decrease in bonds payable (P4,800 x 100%)…… 4,800 90,000 Positive excess: Full-goodwill (excess of cost over fair P value)………………………………………………... 15,000 A summary or depreciation and amortization adjustments is as follows: Annu Over/ al Current Account Adjustments to be unde Lif Amou Year(20x amortized r e nt 4) 20x5 P P P Inventory 6,000 1 6,000 P 6,000 - Subject to Annual Amortization 96,00 12,00 Equipment (net)......... 0 8 12,000 12,000 0 (24,0 ( 6,000 (6,00 Buildings (net) 00) 4 ) ( 6,000) 0) Bonds payable… 4,800 4 1,200 1,200 1,200 P P 13,200 P 13,200 7,200 20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4: (1) Investment in S 372,00 Company…………………………………………… 0 372,00 Cash…………………………………………………………………… 0 .. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Dividend income (P36,000 x 80%)……………. 28,800 Record dividends from S Company. On the books of S Company, the P36,000 dividend paid was recorded as follows: Dividends paid………… 36,000 Cash……. 36,000 Dividends paid by S Co.. No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4. Consolidation Workpaper – First Year after Acquisition (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S 120.000 Co…………………………………… Investment in S 288,000 Co…………………………………………… Non-controlling interest (P360,000 x 72,000 20%)……………………….. To eliminate intercompany investment and equity accounts of subsidiary on date of acquisition; and to establish non-controlling interest (in net assets of subsidiary) on date of acquisition. (E2) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in S 84,000 Co………………………………………………. To 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. Since the set-up entry in (E2) NCI at fair value, non-controlling interests have a share of entity goodwill and hence is exposed to impairment loss on goodwill. PAS 36 requires the impairment loss to be pro-rated between the parent and NCI on the same basis as that on which profit or loss is allocated. In other words, the impairment loss is not pro-rated in accordance with the proportion of goodwill recognized by parent and NCI. (E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Goodwill impairment 3,750 loss………………………………………. 6,000 Inventory………………………………………………………….. Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 3,750 To provide for 20x4 impairment loss and depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Cost of Depreciation/ Goods Amortization Amortization Sold Expense -Interest Inventory sold P 6,000 Equipment P12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 6,000 P1,200 (E4) Dividend income - P………. 28,800 Non-controlling interest (P36,000 x 7,200 20%)……………….. Dividends paid – S…………………… 36,000 To eliminate intercompany dividends and non-controlling interest share of dividends. (E5) Gain on sale of equipment 15,000 Equipment 30,000 Accumulated depreciation 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E6) Gain on sale of equipment 31,200 Equipment 12,000 Accumulated depreciation 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E7) Accumulated depreciation……….. 2,250 Depreciation expense…………… 2,250 To adjust downstream depreciation expense on equipment sold to subsidiary, thus realizing a portion of the gain through depreciation (P15,000 / 5 years x 9/12 = P2,250). (E8) Accumulated depreciation……….. 3,900 Depreciation expense…………… 3,900 To adjust upstream depreciation expense on equipment sold to parent, thus realizing a portion of the gain through depreciation (P31,200/85 years x 1 year = P3,900). (E9) Non-controlling interest in Net Income of 9,390 Subsidiary………… Non-controlling interest ………….. 9,390 To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. P 91,200 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations P 63,900 Less: Amortization of allocated excess [(E3)]…. 13,200 P 50,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 10,140 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 9,390 Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P480,000 P240,000 P 720,000 Gain on sale of equipment 15,000 31,200 (5) 15,000 (6) 31,200 Dividend income 28,800 - (4) 28,800 _________ Total Revenue P523,800 P271,200 P 720,000 Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000 Depreciation expense 60,000 24,000 (3) 6,000 (7) 2,250 83,850 (8) 3,900 Interest expense - - (3) 1,200 1,200 Other expenses 48,000 18,000 66,000 Goodwill impairment loss - - (3) 3,750 3,750 Total Cost and Expenses P312,000 P180,000 P 502,800 Net Income P211,800 P 91,200 P 217,200 NCI in Net Income - Subsidiary - - (9) 9,390 ( 9,390) Net Income to Retained Earnings P211,800 P 91,200 P 207,810 Statement of Retained Earnings Retained earnings, 1/1 P Company P360,000 P 360,000 S Company P120,000 (1) 120,000 Net income, from above 211,800 91,200 207,810 Total P571,800 P211,200 P 567,810 Dividends paid P Company 72,000 72,000 S Company - 36,000 (4) 36,000 _ ________ Retained earnings, 12/31 to Balance Sheet P499,800 P175,200 P 495,810 Balance Sheet Cash………………………. P 232,800 P 90,000 P 322,800 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 90,000 (2) 6,000 3) 6,000 210,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 (5) 30,000 (6) 12,000 462,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 1,200 3,600 Goodwill…………………… (2) 15,000 (3) 3,750 11,250 Investment in S Co……… 372,000 (1) 288,000 (2) 84,000 - Total P1,984,800 P1,008,000 P2,468,850 Accumulated depreciation (2) 80,000 (3) 10,000 - equipment P 135,000 P 96,000 (7) 2,250 (5) 45,000 (8) 3,900 (6) 43,200 P229,050 Accumulated depreciation 405,000 288,000 (2) 192,000 - buildings (3) 6,000 495,000 Accounts payable…………… 105,000 88,800 193,800 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 499,800 175,200 495,810 Non-controlling interest………… (17) 7,200 (1 ) 72,000 (2) 21,000 _________ _________ __________ (9) 9,390 ____95,190 Total P1,984,800 P1,008,000 P 843,690 P 843,690 P2,468,850 20x5: Second Year after Acquisition P Co. S Co. Sales P P 540,000 360,000 Less: Cost of goods sold 216000 192,000 Gross profit P P 324,000 168,000 Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000 Net income from its own separate P P operations 192,000 90,000 Add: Dividend income 38,400 - Net income P P 230,400 90,000 Dividends paid P P 72,000 48,000 No goodwill impairment loss for 20x5. Parent Company Cost Model Entry January 1, 20x5 – December 31, 20x5: Cash……………………… 38,400 Dividend income (P48,000 x 80%)……………. 38,400 Record dividends from S Company. On the books of S Company, the P48,000 dividend paid was recorded as follows: Dividends paid………… 48,000 Cash 48,000 Dividends paid by S Co.. Consolidation Workpaper – Second Year after Acquisition (E1) Investment in S 44,160 Company………………………… Retained earnings – P 44,160 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: Retained earnings – S Company, 1/1/20x5 P175,200 Retained earnings – S Company, 1/1/20x4 120,000 Increase in retained earnings…….. P 55,200 Multiplied by: Controlling interest % 80% Retroactive adjustment P 44,160 (E2) Common stock – S 240,000 Co………………………………………… Retained earnings – S Co., 1/1/20x5 175,200 Investment in S Co (P415,200 x 332,160 80%)………………………… Non-controlling interest (P415,200 x 83,040 20%)……………………….. To eliminate intercompany investment and equity accounts of subsidiary and to establish non-controlling interest (in net assets of subsidiary) on January 1, 20x5. (E3) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – 21,000 P12,000, partial goodwill)]………… Investment in S 84,000 Co………………………………………………. To 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 January 1, 20x5. (E4) Retained earnings – P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] 13,560 Non-controlling interests (P16,950 x 20%) or (P13,200 x 20% + 3,390 (P3,750 – P3,000 = P750) Depreciation expense……………………….. 6,000 Accumulated depreciation – 12,000 buildings………………….. Interest expense………………………………… 1,200 6,000 Inventory………………………………………………………….. Accumulated depreciation – 24,000 equipment……………….. Discount on bonds payable………………………… 2,400 Goodwill…………………………………… 3,750 To provide for years 20x4 and 20x5 depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Year 20x4 amounts are debited to Perfect’s retained earnings & NCI; Year 20x5 amounts are debited to respective nominal accounts. (20x4) Depreciation/ Retained Amortization Amortization earnings, expense -Interest Inventory sold P 6,000 Equipment 12,000 P 12,000 Buildings (6,000) ( 6,000) Bonds payable 1,200 ________ P 1,200 Sub-total P13,200 P 6,000 P 1,200 Multiplied by: 80% To Retained earnings P 10,560 Impairment loss 3,000 Total P 13,560 (E5) Dividend income - P………. 38,400 Non-controlling interest (P48,000 x 9,600 20%)……………….. Dividends paid – S…………………… 48,000 To eliminate intercompany dividends and non-controlling interest share of dividends. (E6) Retained Earnings – P Company, 1/1/20x5 15,000 Equipment 30,000 Accumulated depreciation 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E7) Retained Earnings–P Company, 1/1/20x5 24,960 (P31,200 x 80%) Non-controlling interest (P31,200 x 20%) 6,240 Equipment 12,000 Accumulated depreciation 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E8) Accumulated depreciation……….. 5,250 Depreciation expense (current year)…………… 3,000 Retained Earnings–P Company, 1/1/20x5 (prior year) 2,250 To adjust downstream depreciation expense on equipment sold to subsidiary, thus realizing a portion of the gain through depreciation (E9) Accumulated depreciation……….. 7,800 Depreciation expense (current year) 3,900 Retained Earnings–P Co. 1/1/20x5 (P3,900 x 80%) 3,120 Non-controlling interest (P3,900 x 20%) 780 To adjust upstream depreciation expense on equipment sold to parent, thus realizing a portion of the gain through depreciation (P31,200/85 years x 1 year = P3,900). (E10) Non-controlling interest in Net Income of 17,340 Subsidiary………… Non-controlling interest ………….. 17,340 To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. P 90,000 Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s Realized net income* P 93,900 Less: Amortization of allocated excess ( 7,200) P 86,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI P 17,340 Less: NCI on goodwill impairment loss on full- Goodwill 0 Non-controlling Interest in Net Income (NCINI) P 17,340 *from separate transactions that has been realized in transactions with third persons. Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P540,000 P360,000 P 900,000 Dividend income 38,400 - (5) 38,400 ___________ Total Revenue P578,400 P360,000 P 900,000 Cost of goods sold P216,000 P192,000 P 408,000 Depreciation expense 60,000 24,000 (4) 6,000 (8) 3,000 83,100 (9) 3,900 Interest expense - - (4) 1,200 1,200 Other expenses 72,000 54,000 126,000 Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 618,300 Net Income P230,400 P 90,000 P 281,700 NCI in Net Income - Subsidiary - - (10) 17,340 ( 17,340) Net Income to Retained Earnings P230,400 P 90,000 P 264,360 Statement of Retained Earnings Retained earnings, 1/1 P Company P499,800 (2) 13,560 (1) 44,160 (6) 15,00 (8) 2,250 (7) 24,960 (9) 3,120 P 495,810 S Company P 175,200 (1) 175,200 Net income, from above 230,400 90,000 264,360 Total P730,200 P265,200 P 760,170 Dividends paid P Company 72,000 72,000 S Company - 48,000 (5) 48,000 _ ________ Retained earnings, 12/31 to Balance Sheet P658,200 P217,200 P 688,170 Balance Sheet Cash………………………. P 265,200 P 102,000 P 367,200 Accounts receivable…….. 180,000 96,000 276,000 Inventory…………………. 216,000 108,000 (3) 6,000 (4) 6,000 324,000 Land……………………………. 210,000 48,000 (3) 7,200 265,200 Equipment 240,000 180,000 (6) 30,000 (7) 12,000 462,000 Buildings 720,000 540,000 (3) 216,000 1,044,000 Discount on bonds payable (3) 4,800 (4) 2,400 2,400 Goodwill…………………… (3) 15,000 (4) 3,750 11,250 Investment in S Co……… 372,000 (1) 44,160 (2) 332,160 (3) 90,000 - Total P2,203,200 P1,074,000 P2,752,050 Accumulated depreciation P 150,000 P 102,000 (3) 96,000 (4) 24,000 - equipment (8) 5,250 (6) 45,000 (9) 7,800 (7) 43,200 P 255,150 Accumulated depreciation 450,000 306,000 (3) 192,000 - buildings (4) 12,000 552,000 Accounts payable…………… 105,000 88,800 193,800 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (2) 240,000 Retained earnings, from above 658,200 217,200 688,170 Non-controlling interest………… (4) 3,390 (2 ) 83,040 (5) 9,600 (3) 21,000 (7) 6,240 (9) 780 ___ _____ _________ __________ (10) 17,340 ____102,930 Total P2,203,200 P1,074,000 P 983,100 P 983,100 P2,752,050 5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus: Consolidated Retained Earnings, January 1, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) P360,000 b. Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… P 240,000 Retained earnings – Subsidiary Company…………………………………. 120,000 Stockholders’ equity – Subsidiary Company.………….. P 360,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities 90,000 Fair value of stockholders’ equity of subsidiary, January 1, 20x4………………… P 450,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill),……………………………….. P 90,000 Add: Non-controlling interests on full goodwill, 1/1/20x4 (P12,500, full-goodwill – P10,000, partial goodwill) 3,000 Non-controlling interest (full-goodwill) P 93,000 c. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 360,000 Parent’s Stockholders’ Equity / CI – SHE P 960,000 NCI, 1/1/20x4 ___93,000 Consolidated SHE, 1/1/20x4 P1,053,000 6. Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. 12/31/20x4: a. CI-CNI – P207,810 Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. P183,000 Unrealized gain on sale of equipment (downstream sales) (15,000) Realized gain on sale of equipment (downstream sales) through depreciation 2,250 P Company’s realized net income from separate operations*…….….. P170,250 S Company’s net income from own operations…………………………………. P 91,200 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations*…….….. P 63,900 63,900 Total P234,150 Less: Non-controlling Interest in Net Income* * P 10,140 Amortization of allocated excess (refer to amortization above) 13,200 Goodwill impairment (impairment under partial-goodwill approach) 3,000 26,340 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P207,810 Add: Non-controlling Interest in Net Income (NCINI) 10,140 Consolidated Net Income for 20x4 P217,950 *that has been realized in transactions with third parties. b. NCI-CNI – P10,140 **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations P 91,200 (Reported net income of S Company) Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations……… P 63,900 Less: Amortization of allocated excess / goodwill impairment (refer to amortization table above) 13,200 P 50,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 10,140 Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750mpairment on full-goodwill less P3,000, impairment on partial- goodwill) 750 Non-controlling Interest in Net Income (NCINI) – full goodwill P 9,390 *that has been realized in transactions with third parties. c. CNI, P217,950 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 207,810 Total P567,810 Less: Dividends paid – Parent Company for 20x4 72,000 Consolidated Retained Earnings, December 31, 20x4 P495,810 e. Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4 P120,000 Add: Net income of subsidiary for 20x4 91,200 Total P211,200 Less: Dividends paid – 20x4 36,000 175,200 Stockholders’ equity – Subsidiary Company, December 31, 20x4 P 415,200 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200) Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P492,000 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 Realized stockholders’ equity of subsidiary, December 31, 20x4…… P464,700 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)………………………………….. P 92,940 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 2,250 Non-controlling interest (full-goodwill)…………….. P 95,190 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 495,810 Parent’s Stockholders’ Equity / CI – SHE, P1,095,810 12/31/20x4 NCI, 12/31/20x4 ___95,190 Consolidated SHE, 12/31/20x4 P1,191,000 12/31/20x5: a. CI-CNI – P281,700 Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P192,000 Realized gain on sale of equipment (downstream sales) through depreciation 3,000 P Company’s realized net income from separate operations*…….….. P195,000 S Company’s net income from own operations…………………………………. P 90,000 Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations*…….….. P 93,900 93,900 Total P288,900 Less: Amortization of allocated excess…………………… 7,200 Consolidated Net Income for 20x5 P281,700 Less: Non-controlling Interest in Net Income* * 17,340 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P264,360 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P192,000 Realized gain on sale of equipment (downstream sales) through depreciation 3,000 P Company’s realized net income from separate operations*…….….. P195,000 S Company’s net income from own operations…………………………………. P 90,000 Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations*…….….. P 93,900 93,900 Total P288,900 Less: Non-controlling Interest in Net Income* * P 17,340 Amortization of allocated excess…………………… 7,200 24,540 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P264,360 Add: Non-controlling Interest in Net Income (NCINI) _ 17,340 Consolidated Net Income for 20x5 P281,700 *that has been realized in transactions with third parties. b. NCI-CNI – P17,340 **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations P 90,000 (Reported net income of S Company) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations……… P 93,900 Less: Amortization of allocated excess 7,200 P 86,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) - partial goodwill P 17,340 Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . 0 Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . P 17,340 c. CNI, P281,700 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model) P499,800 Less: Downstream - net unrealized gain on sale of equipment – prior to 20x5 (P15,000 – P2,250) 12,750 Adjusted Retained Earnings – Parent 1/1/20x5 (cost model ) Son Company’s Retained earnings that have been realized in transactions with third parties.. P487,050 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 P 175,200 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 55,200 Less: Amortization of allocated excess – 20x4 13,200 Upstream - net unrealized gain on sale of equipment –prior to 20x5 (P31,200 – P3,900) 27,300 P 14,700 Multiplied by: Controlling interests %................... 80% P 11,760 Less: Goodwill impairment loss 3,000 __ 8,760 Consolidated Retained earnings, January 1, 20x5 P495,810 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 264,360 Total P760,170 Less: Dividends paid – Parent Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P688,170 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6). Or, alternatively: Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model) P658,200 Less: Downstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P15,000 – P2,250– P3,000) 9,750 Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ) S Company’s Retained earnings that have been realized in transactions with third parties.. P648,450 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 P 217,200 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 97,200 Less: Accumulated amortization of allocated excess – 20x4 and 20x5 (P13,200 + P7,200) 20,400 Upstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P31,200 – P3,900– P3,900) 23,400 P 53,400 Multiplied by: Controlling interests %................... 80% P 42,720 Less: Goodwill impairment loss (full-goodwill) 3,000 39,720 Consolidated Retained earnings, December 31, 20x5 P688,170 e. Non-controlling interest, December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5 P175,200 Add: Net income of subsidiary for 20x5 90,000 Total P 265,200 Less: Dividends paid – 20x5 48,000 217,200 Stockholders’ equity – Subsidiary Company, December 31, 20x5 P 457,200 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) : 20x4 P 13,200 20x5 7,200 ( 20,400) Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P 526,800 Less: Upstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P31,200 – P3,900 – P3,900) 23,400 Realized stockholders’ equity of subsidiary, December 31, 20x5………. P503,400 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 100,680 Add: Non-controlling interest on full goodwill , net of impairment loss [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss 2,250 Non-controlling interest (full-goodwill)………………………………….. P 102,930 f. Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 688,170 Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x5 P1,288,170 NCI, 12/31/20x5 __102,930 Consolidated SHE, 12/31/20x5 P1,391,100 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 P transferred……………………………….. 372,000 Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 80%)……………………. P 192,000 Retained earnings (P120,000 x 80%)………………... 96,000 288,000 Allocated excess (excess of cost over book P value)….. 84,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… P 4,800 Increase in land (P7,200 x 80%)……………………. 5,760 Increase in equipment (P96,000 x 80%) 76,800 Decrease in buildings (P24,000 x 80%)………..... ( 19,200) Decrease in bonds payable (P4,800 x 80%)…… 3,840 72,000 Positive excess: Partial-goodwill (excess of cost over fair P value)………………………………………………... 12,000 The over/under valuation of assets and liabilities are summarized as follows: S Co. S Co. (Over) Book Fair Under value value Valuation P Inventory………………….…………….. 24,000 P 30,000 P 6,000 Land……………………………………… 48,000 55,200 7,200 Equipment (net)......... 84,000 180,000 96,000 Buildings (net) 168,000 144,000 (24,000) Bonds payable………………………… (120,000) ( 115,200) 4,800 P Net……………………………………….. 204,000 P 294,000 P 90,000 The buildings and equipment will be further analyzed for consolidation purposes as follows: S Co. S Co. Increase Book value Fair value (Decrease) Equipment.................. 180,000 180,000 0 Less: Accumulated depreciation….. 96,000 - ( 96,000) Net book value………………………... 84,000 180,000 96,000 S Co. S Co. Book value Fair value (Decrease) Buildings................ 360,000 144,000 ( 216,000) Less: Accumulated depreciation….. 1992,000 - ( 192,000) Net book value………………………... 168,000 144,000 ( 24,000) A summary or depreciation and amortization adjustments is as follows: Annu Over/ al Current Account Adjustments to be Unde Lif Amou Year(20x amortized r e nt 4) 20x5 P P P Inventory 6,000 1 6,000 P 6,000 - Subject to Annual Amortization 96,00 12,00 Equipment (net)......... 0 8 12,000 12,000 0 (24,0 ( 6,000 (6,00 Buildings (net) 00) 4 ) ( 6,000) 0) Bonds payable… 4,800 4 1,200 1,200 1,200 P P 13,200 P 13,200 7,200 The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows: Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) P 372,000 Fair value of NCI (given) (20%) 93,000 Fair value of Subsidiary (100%) P 465,000 Less: Book value of stockholders’ equity of S (P360,000 x 100%) __360,000 Allocated excess (excess of cost over book value)….. P 105,000 Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) 90,000 Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………... P 15,000 In this case, the goodwill was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows: Value % of Total Goodwill applicable to parent………………… P12,000 80.00% Goodwill applicable to NCI…………………….. 3,000 20.00% Total (full) goodwill……………………………….. P15,000 100.00% The goodwill impairment loss would be allocated as follows Value % of Total Goodwill impairment loss attributable to parent P 80.00% or controlling 3,000 Interest Goodwill applicable to NCI…………………….. 750 20.00% Goodwill impairment loss based on 100% fair value or full- P 3,750 100.00% Goodwill The unrealized and gain on intercompany sales for 20x4 are as follows: Date Selling Book Unrealize Remaini Realized of Seller Price Value d* ng gain – 20x4 Sale Gain on Life depreciatio sale n** 4/1/20 P P90,0 P75,0 P15,000 5 years P3,000/year P2,2 x4 00 00 50 1/2/20 S 31,200 8 years P3,9 x4 60,00 28,80 P3,900/year 00 0 0 * selling price less book value ** unrealized gain divided by remaining life; 20x4 – P2,500 x 9/12 = P1,875 The following summary for 20x4 results of operations is as follows: P Co. S Co. Sales P P 480,000 240,000 Less: Cost of goods sold 204,000 138,000 Gross profit P P 276,000 102,000 Less: Depreciation expense 60,000 24,000 Other expenses 48,000 18,000 P P 168,000 60,000 Add: Gain on sale of equipment 15,000 31,200 Net income from its own separate P P operations 183,000 91,200 Add: Investment income 24,810 - Net income P P 91,200 207,810 20x4: First Year after Acquisition Parent Company Equity Method Entry January 1, 20x4: (1) Investment in S Company……………………………………… 372,000 Cash…………………………………………………………… 372,000 Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Investment in S Company (P36,000 x 80%)……………. 28,800 Record dividends from Son Company. December 31, 20x4: (3) Investment in S Company 72,960 Investment income (P91,200 x 80%) 72,960 Record share in net income of subsidiary. December 31, 20x4: (4) Investment income [(P13,200 x 80%) + P3,000, goodwill 13,560 impairment loss)] Investment in S Company 13,560 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable and goodwill impairment loss. December 31, 20x4: (5) Investment income (P15,000 x 100%) 15,000 Investment in S Company 15,000 To adjust investment income for downstream sales - unrealized gain on sale of equipment.. December 31, 20x4: (6) Investment income (P31,200 x 80%) 24,960 Investment in S Company 24,960 To adjust investment income for upstream sales - unrealized gain on sale of equipment.. December 31, 20x4: (7) Investment in S Company 2,250 Investment income (P2,250 x 100%) 2,250 To adjust investment income for downstream sales - realized gain on sale of equipment.. December 31, 20x4: (8) Investment in S Company 3,120 Investment income (P3,900 x 80%) 3,120 To adjust investment income for upstream sales - realized gain on sale of equipment.. Thus, the investment balance and investment income in the books of P Company is as follows: Investment in S Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%) NI of Son Amortization & (91,200 x 80%) 72,960 13,560 impairment Realized gain downstream sale 2,250 15,000 Unrealized gain downstream sale Realized gain upstream sale 3,120 24,960 Unrealized gain upstream sale Balance, 12/31/x4 368,010 Investment Income Amortization & NI of S impairment 13,560 72,960 (91,200 x 80%) Unrealized gain downstream sale 15,000 2,250 Realized gain downstream sale Unrealized gain upstream sale 24,960 3,120 Realized gain upstream sale 24,810 Balance, 12/31/x4 Consolidation Workpaper – First Year after Acquisition (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S 120,000 Co…………………………………… Investment in S 288,000 Co…………………………………………… Non-controlling interest (P360,000 x 72,000 20%)……………………….. To eliminate investment on January 1, 20x4 and equity accounts of subsidiary on date of acquisition; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition. (E2) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 12,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 18,000 20%)……………………….. Investment in S 84,000 Co………………………………………………. To eliminate investment on January 1, 20x4 and allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition. (E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Goodwill impairment 3,000 loss………………………………………. 6,000 Inventory………………………………………………………….. Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 3,000 To provide for 20x4 impairment loss and depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Cost of Depreciation/ Goods Amortization Amortization Sold Expense -Interest Total Inventory sold P 6,000 Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 6,000 P1,200 14,400 (E4) Investment income 24,810 Investment in S Company 3,990 Non-controlling interest (P36,000 x 7,200 20%)……………….. Dividends paid – S…………………… 36,000 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: Investment in S Investment Income NI of S 28,800 Dividends - S NI of S (91,200 Amortization & Amortization (91,200 x 80%)……. 72,960 13,560 impairment impairment 13,560 72,960 x 80%) Realized gain* 2,250 15,000 Unrealized gain * Unrealized gain * 15,000 2,250 Realized gain* Realized gain** 3,120 24,960 Unrealized gain ** Unrealized gain **24,960 3,120 Realized gain** 3,990 24,810 *downstream sale (should be multiplied by 100%) **upstream sale (should be multiplied by 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 Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%) NI of S Amortization & (91,200 x 80%) 72,960 13,560 impairment Realized gain downstream sale 2,250 15,000 Unrealized gain downstream sale Realized gain upstream sale 3,120 24,960 Unrealized gain upstream sale Balance, 12/31/x4 368,010 288,000 (E1) Investment, 1/1/20x4 (E4) Investment Income 84,000 (E2) Investment, 1/1/20x4 and dividends …………… 3,990 372,000 372,000 (E5) Gain on sale of equipment 15,000 Equipment 30,000 Accumulated depreciation 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E6) Gain on sale of equipment 31,200 Equipment 12,000 Accumulated depreciation 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E7) Accumulated depreciation……….. 2,250 Depreciation expense…………… 2,250 To adjust downstream depreciation expense on equipment sold to subsidiary, thus realizing a portion of the gain through depreciation (P15,000 / 5 years x 9/12 = P2,250). (E8) Accumulated depreciation……….. 3,900 Depreciation expense…………… 3,900 To adjust upstream depreciation expense on equipment sold to parent, thus realizing a portion of the gain through depreciation (P26,000/85 years x 1 year = P3,250). (E9) Non-controlling interest in Net Income of 10,140 Subsidiary………… Non-controlling interest ………….. 10,140 To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. P 91,200 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations P 63,900 Less: Amortization of allocated excess [(E3)]…. 13,200 P 50,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 10,140 Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P480,000 P240,000 P 720,000 Gain on sale of equipment 15,000 31,200 (5) 15,000 (6) 31,200 Investment income 24,810 - (4) 28,800 _________ Total Revenue P519,810 P271,200 P 720,000 Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000 (7) 2,250 83,850 Depreciation expense 60,000 24,000 (3) 6,000 (8) 3,900 Interest expense - - (3) 1,200 1,0200 Other expenses 48,000 18,000 66,000 Goodwill impairment loss - - (3) 3,000 3,000 Total Cost and Expenses P312,000 P180,000 P 502,050 Net Income P207,810 P 91,200 P 217,950 NCI in Net Income - Subsidiary - - (9) 10,140 ( 10,140) Net Income to Retained Earnings P207,810 P 91,200 P 207,810 Statement of Retained Earnings Retained earnings, 1/1 P Company P360,000 P 360,000 S Company P120,000 (1) 120,000 Net income, from above 207,810 91,200 207,810 Total P567,810 P211,200 P567,810 Dividends paid P Company 72,000 72,000 S Company - 36,000 (4) 36,000 _ ________ Retained earnings, 12/31 to Balance Sheet P495,810 P175,200 P 495,810 Balance Sheet Cash………………………. P 232,800 P 90,000 P 322,800 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 90,000 (2) 6,000 (3) 5,000 210,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 (5) 30,000 (6) 12,000 462,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 1,200 3,600 Goodwill…………………… (2) 12,000 (3) 3,000 9,000 Investment in S Co……… 368,010 (1) 288,000 (2) 84,000 - Total P1,980,810 P1,008,000 P2,466,600 Accumulated depreciation (2) 96,000 (3) 12,000 - equipment P 135,000 P 96,000 (7) 2,250 (5) 45,000 (8) 3,900 (6) 43,200 P229,050 Accumulated depreciation 405,000 288,000 (2) 192,000 - buildings (3) 6,000 495,000 Accounts payable…………… 105,000 88,800 193,800 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 495,810 175,200 495,810 Non-controlling interest………… (4) 7,200 (1 ) 72,000 (2) 18,000 _________ _________ __________ (9) 10,140 92,940 Total P1,980,810 P1,008,000 P 840,690 P 840,690 P2,466,600 20x5: Second Year after Acquisition P Co. S Co. Sales P P 540,000 360,000 Less: Cost of goods sold 216,000 192,000 Gross profit P P 324,000 168,000 Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000 Net income from its own separate P P operations 192,000 90,000 Add: Investment income 72,360 - Net income P P 264,360 90,000 Dividends paid P P 72,000 48,000 No goodwill impairment loss for 20x5. Parent Company Equity Method Entry January 1, 20x5 – December 31, 20x5: (2) Cash……………………… 38,400 Investment in S Company (P48,000 x 80%)……………. 38,400 Record dividends from S Company. December 31, 20x5: (3) Investment in S Company 72,000 Investment income (P90,000 x 80%) 72,000 Record share in net income of subsidiary. December 31, 20x5: (4) Investment income (P7,200 x 80%) 5,760 Investment in S Company 5,760 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable December 31, 20x4: (5) Investment in S Company 3,000 Investment income (P3,000 x 100%) 3,000 To adjust investment income for downstream sales - realized gain on sale of equipment. December 31, 20x4: (6) Investment in S Company 3,120 Investment income (P3,900 x 80%) 3,120 To adjust investment income for upstream sales - realized gain on sale of equipment.. Thus, the investment balance and investment income in the books of P Company is as follows: Investment in S Cost, 1/1/x5 368,010 38,400 Dividends – S (48,000x 80%) NI of Son 5,760 Amortization (7,200 x 80%) (90,000 x 80%) 72,000 Realized gain downstream sale 3,000 Realized gain upstream sale 3,120 Balance, 12/31/x5 401,970 Investment Income Amortization (6,000 x 805) 5,760 NI of S 72,000 (90,000 x 80%) 3,000 Realized gain downstream sale 3,120 Realized gain upstream sale 72,360 Balance, 12/31/x5 Consolidation Workpaper – Second Year after Acquisition (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S Co, 175,200 1/1/x5…………………………. Investment in S Co (P415,200 x 80%) 332,160 Non-controlling interest (P415,200 x 83,040 20%)……………………….. To eliminate investment on January 1, 20x5 and equity accounts of subsidiary on date of acquisition; and to establish non- controlling interest (in net assets of subsidiary) on 1/1/20x5. (E2) Accumulated depreciation – equipment (P96,000 – 84,000 P12,000) Accumulated depreciation – buildings (P192,000 + 198,00 P6,000) 0 6,000 Land…………………………………………………………………… …. Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P12,000 – P3,000)…………………………….. 9,000 Buildings……………………………………….. 180,00 0 Non-controlling interest [(P90,000 – P13,200) x 20%] 15,360 Investment in Son 70,440 Co………………………………………………. 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……………………….. 6,000 Accumulated depreciation – buildings………………….. 6,000 Interest expense………………………………… 1,200 Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 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: Depreciation/ Amortization Amortization Expense -Interest Total Inventory sold Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ P 1,200 Totals P 6,000 P1,200 P7,200 (E4) Investment income 72.360 Non-controlling interest (P48,000 x 9,600 20%)……………….. Dividends paid – S…………………… 48,000 Investment in S Company 33,960 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: Investment in S Investment Income NI of S 38,400 Dividends – S NI of S (90,000 Amortization Amortization (90,000 x 80%)……. 72,000 5,760 (P7,200 x 80%) (P7,200 x 80%) 5,760 72,000 x 80%) Realized gain* 3,000 3,000 Realized gain* Realized gain** 3,120 3,120 Realized gain** 33,960 72,360 *downstream sale (should be multiplied by 100%) **upstream sale (should be multiplied by 80%) (E5) Investment in S Company 15,000 Equipment 30,000 Accumulated depreciation – equipment 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E6) Investment in S Company 24,960 Non-controlling interest (P31,200 x 20%) 6,240 Equipment 12,000 Accumulated depreciation- equipment 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E7) Accumulated depreciation – equipment ……….. 5,250 Depreciation expense (current year)…………… 3,000 Investment in S Company (prior year) 2,250 To adjust downstream depreciation expense on equipment sold to subsidiary, thus realizing a portion of the gain through depreciation (E8) Accumulated depreciation- equipment…….. 7,800 Depreciation expense (current year) 3,900 Investment in S Company (prior year) 3,120 Non-controlling interest (P31,200 x 20%) 780 To adjust upstream depreciation expense on equipment sold to parent, thus realizing a portion of the gain through depreciation (P31,200/85 years x 1 year = P3,900). (E9) Non-controlling interest in Net Income of 17,340 Subsidiary………… Non-controlling interest ………….. 17,340 To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. P 90,000 Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s Realized net income* P 93,900 Less: Amortization of allocated excess ( 7,200) P 86,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI P 17,340 *from separate transactions that has been realized in transactions with third persons. Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Partial-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P540,000 P360,000 P 900,000 Investment income 72,360 - (4) 72,360 ___________ Total Revenue P612,360 P360,000 P 900,000 Cost of goods sold P216,000 P192,000 P 408,000 Depreciation expense 60,000 24,000 (3) 6,000 (7) 83,100 3,000 (8) 3,900 Interest expense - - (3) 1,200 1,200 Other expenses 72,000 54,000 126,000 Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 618,300 Net Income P264,360 P 90,000 P 281,700 NCI in Net Income - Subsidiary - - (9) 17,340 ( 17,340) Net Income to Retained Earnings P264,360 P 90,000 P 264,360 Statement of Retained Earnings Retained earnings, 1/1 P Company P495,810 P495,810 S Company P 175,200 (1) 175,200 Net income, from above _264,360 90,000 264,360 Total P760,170 P265,200 P 760,170 Dividends paid P Company 72,000 72,000 S Company - 48,000 (5) 48,000 _ ________ Retained earnings, 12/31 to Balance Sheet P688,170 P217,200 P 688,170 Balance Sheet Cash………………………. P 265,200 P 102,000 P 367,200 Accounts receivable…….. 180,000 96,000 276,000 Inventory…………………. 216,000 108,000 324,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 (5) 30,000 (6) 12,000 462,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 3,600 (3) 1,200 2,400 Goodwill…………………… (2) 9,000 9,000 Investment in Son Co……… 401,970 (5) 15,000 (1) 332,160 (6) 24,960 (2) 70,440 (4) 33,960 (7) 2,250 (8) 3,120 - Total P2,233,170 P1,074,000 P2,749,800 Accumulated depreciation P 150,000 P 102,000 (2) 84,000 (3) 12,000 - equipment (7) 5,250 (5) 45,000 (8) 7,800 (6) 43,200 P 255,150 Accumulated depreciation 450,000 306,000 (2) 198,000 - buildings (3) 6,000 552,000 Accounts payable…………… 105,000 88,800 193,800 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 688,170 217,200 688,170 Non-controlling interest………… (4) 9,600 (1) 69,200 (6) 6,240 (2) 15,360 (8) 780 ___ _____ _________ __________ (9) 17,340 ____100,680 Total P2,233,170 P1,074,000 P 930,750 P 930,750 P2,749,800 5 and 6. Refer to Problem V for computations Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem X solution). 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 P (80%)…………….. 372,000 Fair value of NCI (given) (20%)……………….. 93,000 P Fair value of Subsidiary (100%)………. 465,000 Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. P 240,000 Retained earnings (P120,000 x 100%)………... 120,000 360,000 Allocated excess (excess of cost over book P value)….. 105,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… P 6,000 Increase in land (P7,200 x 100%)……………………. 7,200 Increase in equipment (P96,000 x 100%) 96,000 Decrease in buildings (P24,000 x 100%)………..... ( 24,000) Decrease in bonds payable (P4,800 x 100%)…… 4,800 90,000 Positive excess: Full-goodwill (excess of cost over fair P value)………………………………………………... 15,000 A summary or depreciation and amortization adjustments is as follows: Annu Over/ al Current Account Adjustments to be unde Lif Amou Year(20x amortized r e nt 4) 20x5 P P P Inventory 6,000 1 6,000 P 6,000 - Subject to Annual Amortization 96,00 12,00 Equipment (net)......... 0 8 12,000 12,000 0 (24,0 ( 6,000 (6,00 Buildings (net) 00) 4 ) ( 6,000) 0) Bonds payable… 4,800 4 1,200 1,200 1,200 P P 13,200 P 13,200 7,200 The following summary for 20x4 results of operations is as follows: P Co. S Co. Sales P P 480,000 240,000 Less: Cost of goods sold 204,000 138,000 Gross profit P P 276,000 102,000 Less: Depreciation expense 60,000 24,000 Other expenses 48,000 18,000 P P 168,000 60,000 Add: Gain on sale of equipment 15,000 31,200 Net income from its own separate P P operations 183,000 91,200 Add: Investment income 24,810 - Net income P P 91,200 207,810 20x4: First Year after Acquisition Parent Company Equity Method Entry January 1, 20x4: (1) Investment in S 372,00 Company…………………………………………… 0 372,00 Cash…………………………………………………………………… 0 .. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… 28,800 Investment in S Company (P36,000 x 80%)……………. 28,800 Record dividends from Son Company. December 31, 20x4: (3) Investment in S Company 72,960 Investment income (P91,200 x 80%) 72,960 Record share in net income of subsidiary. December 31, 20x4: (4) Investment income [(P13,200 x 80%) + P3,000, 13,560 goodwill impairment loss)] Investment in S Company 13,560 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable and goodwill impairment loss. December 31, 20x4: (5) Investment income (P15,000 x 100%) 15,000 Investment in S Company 15,000 To adjust investment income for downstream sales - unrealized gain on sale of equipment.. December 31, 20x4: (6) Investment income (P31,200 x 80%) 24,960 Investment in S Company 24,960 To adjust investment income for upstream sales - unrealized gain on sale of equipment.. December 31, 20x4: (7) Investment in S Company 2,250 Investment income (P2,250 x 100%) 2,250 To adjust investment income for downstream sales - realized gain on sale of equipment.. December 31, 20x4: (8) Investment in S Company 3,120 Investment income (P3,900 x 80%) 3,120 To adjust investment income for upstream sales - realized gain on sale of equipment.. Thus, the investment balance and investment income in the books of Perfect Company is as follows: Investment in S Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%) NI of Son Amortization & (91,200 x 80%) 72,960 13,560 impairment Realized gain downstream sale 2,250 15,000 Unrealized gain downstream sale Realized gain upstream sale 3,120 24,960 Unrealized gain upstream sale Balance, 12/31/x4 368,010 Investment Income Amortization & NI of S impairment 13,560 72,960 (76,000 x 80%) Unrealized gain downstream sale 15,000 2,250 Realized gain downstream sale Unrealized gain upstream sale 24,960 3,120 Realized gain upstream sale 24,810 Balance, 12/31/x4 Consolidation Workpaper – First Year after Acquisition (E1) Common stock – S 240,000 Co………………………………………… Retained earnings – S 120.000 Co…………………………………… Investment in S 288,000 Co…………………………………………… Non-controlling interest (P360,000 x 72,000 20%)……………………….. To eliminate investment on January 1, 20x4 and equity accounts of subsidiary on date of acquisition; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition. (E2) 6,000 Inventory……………………………………………………………… …. Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,00 0 7,200 Land…………………………………………………………………… …. Discount on bonds 4,800 payable…………………………………………. 15,000 Goodwill……………………………………………………………… …. Buildings……………………………………….. 216,00 0 Non-controlling interest (P90,000 x 20%) + [(P15,000 full – 21,000 P12,000, partial goodwill)]………… Investment in S 84,000 Co………………………………………………. To eliminate investment on January 1, 20x4 and allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition. (E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Goodwill impairment 3,750 loss………………………………………. 6,000 Inventory………………………………………………………….. Accumulated depreciation – 12,000 equipment……………….. Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 3,750 To provide for 20x4 impairment loss and depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Cost of Depreciation/ Goods Amortization Amortization Sold Expense -Interest Total Inventory sold P 6,000 Equipment P 12,000 Buildings ( 6,000) Bonds payable _______ _______ P 1,200 Totals P 6,000 P 6,000 P1,200 14,400 (E4) Investment income 24,810 Investment in S Company 3,990 Non-controlling interest (P36,000 x 7,200 20%)……………….. Dividends paid – S…………………… 36,000 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: Investment in S Investment Income NI of S 28,800 Dividends - S NI of S (91,200 Amortization & Amortization (91,200 x 80%)……. 72,960 13,560 impairment impairment 13,560 72,960 x 80%) Realized gain* 2,250 15,000 Unrealized gain * Unrealized gain * 15,000 2,250 Realized gain* Realized gain** 3,120 24,960 Unrealized gain ** Unrealized gain **24,960 3,120 Realized gain** 3,990 24,810 *downstream sale (should be multiplied by 100%) **upstream sale (should be multiplied by 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 Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%) NI of S Amortization & (91,200 x 80%) 72,960 13,560 impairment Realized gain downstream sale 2,250 15,000 Unrealized gain downstream sale Realized gain upstream sale 3,120 24,960 Unrealized gain upstream sale Balance, 12/31/x4 368,010 288,000 (E1) Investment, 1/1/20x4 (E4) Investment Income 84,000 (E2) Investment, 1/1/20x4 and dividends …………… 3,990 372,000 372,000 (E5) Gain on sale of equipment 15,000 Equipment 30,000 Accumulated depreciation 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E6) Gain on sale of equipment 31,200 Equipment 12,000 Accumulated depreciation 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E7) Accumulated depreciation……….. 2,250 Depreciation expense…………… 2,250 To adjust downstream depreciation expense on equipment sold to subsidiary, thus realizing a portion of the gain through depreciation (P15,000 / 5 years x 9/12 = P2,250). (E8) Accumulated depreciation……….. 3,900 Depreciation expense…………… 3,900 To adjust upstream depreciation expense on equipment sold to parent, thus realizing a portion of the gain through depreciation (P31,120/85 years x 1 year = P3,900). (E9) Non-controlling interest in Net Income of 9,390 Subsidiary………… Non-controlling interest ………….. 9,390 To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows: Net income of subsidiary…………………….. P 91,200 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations P 63,900 Less: Amortization of allocated excess [(E3)]…. 13,200 P 50,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 10,140 Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) – full goodwill P 9,390 Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P480,000 P240,000 P 720,000 Gain on sale of equipment 15,000 31,200 (5) 15,000 (6) 31,200 Investment income 24,810 - (4) 28,800 _________ Total Revenue P519,810 P271,200 P 720,000 Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000 Depreciation expense 60,000 24,000 (3) 6,000 (7) 2,250 83,850 (8) 3,900 Interest expense - - (3) 1,200 1,200 Other expenses 48,000 18,000 66,000 Goodwill impairment loss - - (3) 3,750 3,750 Total Cost and Expenses P312,000 P180,000 P 502,800 Net Income P207,810 P 91,200 P 217,200 NCI in Net Income - Subsidiary - - (9) 9,390 ( 9,390) Net Income to Retained Earnings P207,810 P 91,200 P 207,810 Statement of Retained Earnings Retained earnings, 1/1 P Company P360,000 P 360,000 S Company P120,000 (1) 120,000 Net income, from above 207,810 91,200 207,810 Total P567,810 P211,200 P 567,810 Dividends paid P Company 72,000 72,000 S Company - 36,000 (4) 36,000 _ ________ Retained earnings, 12/31 to Balance Sheet P495,810 P175,200 P 495,810 Balance Sheet Cash………………………. P 232,800 P 90,000 P 322,800 Accounts receivable…….. 90,000 60,000 150,000 Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000 Land……………………………. 210,000 48,000 (2) 6,000 265,200 Equipment 240,000 180,000 (5) 30,000 (6) 12,000 462,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 1,200 3,600 Goodwill…………………… (2) 15,000 (3) 3,750 11,250 Investment in S Co……… 368,010 (1) 288,000 (2) 84,000 - Total P1,980,810 P1,008,000 P2,468,850 Accumulated depreciation (2) 96,000 (3) 12,000 - equipment P 135,000 P 96,000 (7) 2,250 (5) 45,000 (8) 3900 (6) 43,200 P229,050 Accumulated depreciation 405,000 288,000 (2) 192,000 - buildings (3) 6,000 495,000 Accounts payable…………… 105,000 88,800 193,800 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 495,810 175,200 495,810 Non-controlling interest………… (4) 7,200 (1 ) 72,000 (2) 21,000 _________ _________ __________ (9) 9,390 ____95,190 Total P1,980,810 P1,008,000 P 843,690 P 843,690 P2,468,850 Second Year after Acquisition Perfect Son Co. Co. Sales P P 540,000 360,000 Less: Cost of goods sold 1216,000 192,000 Gross profit P P 324,000 168,000 Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000 Net income from its own separate P P operations 192,000 90,000 Add: Investment income 72,360 - Net income P P 264,360 90,000 Dividends paid P P 72,000 48,000 No goodwill impairment loss for 20x5. Parent Company Equity Method Entry January 1, 20x5 – December 31, 20x5: (2) Cash……………………… 38,400 Investment in S Company (P48,000 x 38,400 80%)……………. Record dividends from S Company. December 31, 20x5: (3) Investment in S Company 72,000 Investment income (P90,000 x 80%) 72,000 Record share in net income of subsidiary. December 31, 20x5: (4) Investment income (P7,200 x 80%) 5,760 Investment in S Company 5,760 Record amortization of allocated excess of inventory, equipment, buildings and bonds payable December 31, 20x4: (5) Investment in S Company 3,000 Investment income (P3,000 x 100%) 3,000 To adjust investment income for downstream sales - realized gain on sale of equipment.. December 31, 20x4: (6) Investment in S Company 3,120 Investment income (P3,900 x 80%) 3,120 To adjust investment income for upstream sales - realized gain on sale of equipment.. Thus, the investment balance and investment income in the books of P Company is as follows: Investment in S Cost, 1/1/x5 368,010 38,400 Dividends – S (40,000x 80%) NI of S 5,760 Amortization (6,000 x 80%) (90,000 x 80%) 72,000 Realized gain downstream sale 3,000 Realized gain upstream sale 3,120 Balance, 12/31/x5 401,970 Investment Income Amortization (7,200 x 805) 5,760 NI of S 72,000 (90,000 x 80%) 3,000 Realized gain downstream sale 3,120 Realized gain upstream sale 72,360 Balance, 12/31/x5 Consolidation Workpaper – Second Year after Acquisition (E1) Common stock – S Co………………………………………… 240,00 0 Retained earnings – S Co, 1/1/x5…………………………. 175.20 0 Investment in S Co (P415,200 x 80%) 332,16 0 Non-controlling interest (P415,200 x 83,040 20%)……………………….. To eliminate investment on January 1, 20x5 and equity accounts of subsidiary on date of acquisition; and to establish non- controlling interest (in net assets of subsidiary) on 1/1/20x5. (E2) Accumulated depreciation – equipment (P96,000 – 84,000 P12,000) Accumulated depreciation – buildings (P192,000 + 198,00 P6,000) 0 7,200 Land…………………………………………………………………… …. Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P15,000 – P3,900)…………………………….. 11,250 Buildings……………………………………….. 216,00 0 Non-controlling interest [(P90,000 – P13,200) x 20%] + [P3,000, full goodwill - [(P3,750, full-goodwill impairment – P3,000, partial- goodwill impairment)* 17,610 or (P3,750 x 20%)] Investment in S 70,440 Co………………………………………………. 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……………………….. 6,000 Accumulated depreciation – 6,000 buildings………………….. Interest expense………………………………… 1,200 Accumulated depreciation – 12,000 equipment……………….. Discount on bonds 1,200 payable………………………… To provide for 20x5 depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Depreciation/ Amortization Amortization Expense -Interest Total Inventory sold Equipment P 12,000 Buildings ( 6000) Bonds payable _______ P 1,200 Totals P 6,000 P1,200 P7,,200 (E4) Investment income 72,360 Non-controlling interest (P48,000 x 20%)……………….. 9,600 Dividends paid – S…………………… 48,000 Investment in S Company 33,960 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows: Investment in S Investment Income NI of S 38,400 Dividends – S NI of S (90,000 Amortization Amortization (75,000 x 80%)……. 72,000 5,760 (P72,000 x 80%) (P7,200 x 80%) 5,760 72,000 x 80%) Realized gain* 3,000 3,000 Realized gain* Realized gain** 3,120 3,120 Realized gain** 33,960 72,360 *downstream sale (should be multiplied by 100%) **upstream sale (should be multiplied by 80%) (E5) Investment in S Company 15,000 Equipment 30,000 Accumulated depreciation – equipment 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E6) Investment in S Company 24,960 Non-controlling interest (P31,200 x 20%) 6,240 Equipment 12,000 Accumulated depreciation- equipment 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale). (E7) Accumulated depreciation – equipment ……….. 5,250 Depreciation expense (current year)…………… 3,000 Investment in S Company (prior year) 2,250 To adjust downstream depreciation expense on equipment sold to subsidiary, thus realizing a portion of the gain through depreciation (E8) Accumulated depreciation- equipment…….. 7,800 Depreciation expense (current year) 3,900 Investment in S Company (prior year) 3,120 Non-controlling interest (P31,200 x 20%) 780 To adjust upstream depreciation expense on equipment sold to parent, thus realizing a portion of the gain through depreciation (P31,200/85 years x 1 year = P3,900). (E9) Non-controlling interest in Net Income of 17,340 Subsidiary………… Non-controlling interest ………….. 17,340 To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows: Net income of subsidiary…………………….. P 90,000 Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s Realized net income* P 93,900 Less: Amortization of allocated excess ( 7,200) P 86,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 17,340 Less: NCI on goodwill impairment loss on full- Goodwill 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 17,340 *from separate transactions that has been realized in transactions with third persons. Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Full-goodwill) 80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition) Income Statement P Co S Co. Dr. Cr. Consolidated Sales P540,000 P360,000 P 900,000 Investment income 72,360 - (4) 72,360 ___________ Total Revenue P612,360 P360,000 P 900,000 Cost of goods sold P216,000 P192,000 P 408,000 (7) 83,100 3,000 Depreciation expense 60,000 24,000 (3) 6,000 (8) 3,900 Interest expense - - (3) 1,200 1,200 Other expenses 72,000 54,000 126,000 Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 618,300 Net Income P264,360 P 90,000 P 281,700 NCI in Net Income - Subsidiary - - (9) 17,340 ( 17,340) Net Income to Retained Earnings P264,360 P 90,000 P 264,360 Statement of Retained Earnings Retained earnings, 1/1 P Company P495,810 P495,810 S Company P 175,200 (1) 175,200 Net income, from above _264,360 90,000 264,360 Total P760,170 P265,200 P 760,170 Dividends paid P Company 72,000 72,000 S Company - 48,000 (5) 48,000 _ ________ Retained earnings, 12/31 to Balance Sheet P688,170 P217,200 P 688,170 Balance Sheet Cash………………………. P 265,200 P 102,000 P 367,200 Accounts receivable…….. 180,000 96,000 276,000 Inventory…………………. 216,000 108,000 324,000 Land……………………………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 (5) 30,000 (6) 12,000 462,000 Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 3,600 (3) 1,200 2,400 Goodwill…………………… (2) 11,250 11,250 Investment in S Co……… 401,970 (5) 15,000 (1) 332,160 (6) 24,960 (2) 70,440 (4) 33,960 (7) 2,250 (8) 3,120 - Total P2,233,170 P1,074,000 P2,752,050 Accumulated depreciation P 150,000 P 102,000 (2) 84,000 (3) 12,000 - equipment (7) 5,250 (5) 45,000 (8) 7,800 (6) 43,200 P 255,150 Accumulated depreciation 450,000 306,000 (2) 198,000 - buildings (3) 6,000 552,000 Accounts payable…………… 105,000 88,800 193,800 Bonds payable………………… 240,000 120,000 360,000 Common stock, P10 par……… 600,000 600,000 Common stock, P10 par……… 240,000 (1) 240,000 Retained earnings, from above 688,170 217,200 688,170 Non-controlling interest………… (4) 9,600 (1) 83,040 (6) 6,240 (2) 17,610 (8) 780 ___ _____ _________ __________ (9) 17,340 ____102,930 Total P2,233,170 P1,074,000 P 933,000 P 933,000 P2,752,050 5 and 6. Refer to Problem VI for computations Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem X solution). Problem XI (Determine consolidated net income when an intercompany transfer of equipment occurs. Includes an outside ownership) 1. Income—ST ........................................................................................................... P220,000 Income—BB ........................................................................................................... 90,000 Excess amortization for unpatented technology .......................................... (8,000) Remove unrealized gain on equipment ........................................................ (50,000) (P120,000 – P70,000) Remove excess depreciation created by inflated transfer price (P50,000 ÷ 5) .......................................................... 10,000 Consolidated net income ................................................................................. P262,000 2. Income calculated in (part a.) ........................................................................ P262,000 Non-controlling interest in BB's income Income—BB .............................................................................. P90,000 Excess amortization ................................................................. (8,000) Adjusted net income .............................................................. P82,000 Non-controlling interest in BB’s income (10%).......................................... (8,200) Consolidated net income to parent company ............................................. P253,800 3. Income calculated in (part a.) ........................................................................ P262,000 Non-controlling interest in BB's income (see Schedule 1) ........ (4,200) Consolidated net income to parent company ............................................. P257,800 Schedule 1: Non-controlling Interest in Bennett's Income (includes upstream transfer) Reported net income of subsidiary ................................................................. P90,000 Excess amortization.............................................................................................. (8,000) Eliminate unrealized gain on equipment transfer ........................................ (50,000) Eliminate excess depreciation (P50,000 ÷ 5) .................................................. 10,000 Bennett's realized net income .......................................................................... P42,000 Outside ownership .............................................................................................. 10% Non-controlling interest in subsidiary's income .............................................. P 4,200 4. Net income 20x5—ST .......................................................................................... P240,000 Net income 20x5—BB ......................................................................................... 100,000 Excess amortization.............................................................................................. (8,000) Eliminate excess depreciation stemming from transfer (P50,000 ÷ 5) (year after transfer) .............................................................. 10,000 Consolidated net income ...................................................................... P342,000 Problem XII 1. On the consolidated balance sheet, the machine must be reported at its original cost when Tool purchased it on January 1, 20x1, which is P120,000. Since the elimination entry debited the machine account for P22,000 which must be the amount needed to bring the machine account up to P120,000, Buzzard must have recorded the machine at P98,000. Since the remaining useful life is seven years, Buzzard will record P14,000 of depreciation expense each year. 2. The correct balances on the consolidated balance sheet for the Machine and Accumulated Depreciation accounts are the balances that would be in the accounts if there had been no sale. The balance in the machine account would be the original purchase price to Tool or P120,000. The balance in the Accumulated Depreciation account will be the original amount of annual depreciation, (P12,000) times the number of years the machine has been depreciated (4), or P48,000. 3. The non-controlling interest income will be 30% of Tool’ adjusted net income. Tool’ reported net income of P60,000 is reduced by the P14,000 unrealized gain on the sale of the machine and is increased by the piecemeal recognition of the gain, which is P2,000. The net result of P48,000 is then multiplied by 30% to calculate a P14,400 income for the non-controlling interest. Problem XIII 1. Downstream sale of land: 20x4 20x5 VV’s separate operating income P 90,000 P110,000 Less: Unrealized gain on sale of land (25,000) VV’s realized operating income P 65,000 P110,000 Spawn’s realized net income 60,000 40,000 Consolidated net income P125,000 P150,000 Income to non-controlling interest: (P60,000 x .25) (15,000) (P40,000 X .25) (10,000) Income to controlling interest P110,000 P140,000 2. Upstream sale of land: 20x4 20x5 VV’s separate operating income P 90,000 P110,000 SS’s net income P60,000 Less: Unrealized gain on sale of land (25,000) Spawn’s realized net income 35,000 40,000 Consolidated net income P125,000 P150,000 Income to non-controlling interest: (P35,000 x .25) (8,750) (P40,000 x .25) (10,000) Income to controlling interest P116,250 P140,000 Problem XIV 1. Consolidated net income for 20x4 will be greater than PP Company's income from operations plus SS's reported net income. The eliminating entries at December 31, 20x4, will result in an increase of P16,000 to consolidated net income. 2. As a result of purchasing the equipment at less than Parent's book value, depreciation expense reported by SS will be P2,000 (P16,000 / 8 years) below the amount that would have been recorded by PP. Thus, depreciation expense must be increased by P2,000 when eliminating entries are prepared at December 31, 20x5. Consolidated net income will be decreased by the full amount of the P2,000 increase in depreciation expense. Problem XV 1. Eliminating entry, December 31, 20x9: E(1) Buildings and Equipment 156,000 Loss on Sale of Building 36,000 Accumulated Depreciation 120,000 Eliminate unrealized loss on building. 2. Consolidated net income and income to controlling interest for 20x9: Operating income reported by BB P125,000 Net income reported by TT P 15,000 Add: Loss on sale of building 36,000 Realized net income of TT 51,000 Consolidated net income P176,000 Income to non-controlling interest (P51,000 x .30) (15,300) Income to controlling interest P160,700 3. Eliminating entry, December 31, 20y0: E(1) Buildings and Equipment 156,000 Depreciation Expense 4,000 Accumulated Depreciation 124,000 Retained Earnings, January 1 25,200 Non-controlling Interest 10,800 Eliminate unrealized loss on building. Adjustment to buildings and equipment Amount paid by TT to acquire building P300,000 Amount paid by BB on intercompany sale (144,000) Adjustment to buildings and equipment P156,000 Adjustment to depreciation expense Depreciation expense recorded by TT Company (P300,000 / 15 years) P 20,000 Depreciation expense recorded by BB Corporation (P144,000 / 9 years) (16,000) Adjustment to depreciation expense P 4,000 Adjustment to accumulated depreciation Amount required (P20,000 x 7 years) P140,000 Amount reported by BB (P16,000 x 1 year) (16,000) Required adjustment P124,000 Adjustment to retained earnings, January 1, 20y0 Unrealized loss recorded, December 31, 20x9 P36,000 Proportion of ownership held by BB x .70 Required adjustment P25,200 Adjustment to Noncontrolling interest, January 1, 20y0 Unrealized loss recorded, December 31, 20x9 P36,000 Proportion of ownership held by non-controlling Interest x .30 Required adjustment P10,800 4. Consolidated net income and income assigned to controlling interest in 20y0: Operating income reported by BB P150,000 Net income reported by TT P40,000 Adjustment for loss on sale of building (4,000) Realized net income of TT 36,000 Consolidated net income P186,000 Income assigned to non-controlling interest (P36,000 x .30) (10,800) Income assigned to controlling interest P175,200 Problem XVI 1. 20x4 20x5 20x6 Consolidated net income as P 750,000 P 600,000 P 910,000 reported Less: P10,000 deferred gain -10,000 Plus: NCI portion of the gain 3,000 Plus: Deferred gain 7,000 Corrected consolidated net P 743,000 P 600,000 P 917,000 income 2. 20x4 20x5 20x6 Land account as reported P 200,000 P 240,000 P 300,000 Less: Intercompany profit -10,000 -10,000 Restated land account P 190,000 P 230,000 P 300,000 3. Final sales price outside the entity minus the original cost to the combined entity equals P102,000 minus P72,000 = P30,000 Problem XVII 1. The gain on the sale of the land in 20x5 was equal to the sales price minus the original cost of the land when it was first acquired by the combined entity. In this case the gain was P150,000 - P90,000, or P60,000. 2. The consolidated amount of depreciation expense was the combined amounts of depreciation expense showing on the separate income statements minus the piecemeal recognition of the gain on the sale of the equipment. Thus, the consolidated amount of depreciation expense was P95,000 + P32,000 – (P35,000/4 years) = P118,250. 3. Consolidated net income: Osprey separate income (not including Income from Branch)= P153,000 - P55,000 = P 98,000 Income from Branch 20,000 Plus: Deferred gain on land 50,000 Plus: Piecemeal recognition of gain on equipment sale: P35,000 gain/4 years = 8,750 Consolidated net income P176,750 Problem XVIII 1. Eliminating entry, December 31, 20x7: E(1) Gain on Sale of Land 10,000 Land 10,000 Eliminating entry, December 31, 20x8: E(1) Retained Earnings, January 1 10,000 Land 10,000 2. Eliminating entry, December 31, 20x7: E(1) Gain on Sale of Land 10,000 Land 10,000 Eliminating entry, December 31, 20x8: E(1) Retained Earnings, January 1 6,000 Non-controlling Interest 4,000 Land 10,000 Problem XIX 1. Eliminating entry, December 31, 20x4: E(1) Gain on Sale of Land 45,000 Land 45,000 Eliminating entry, December 31, 20x5: E(1) Retained Earnings, January 1 31,500 Non-controlling Interest 13,500 Land 45,000 2. Eliminating entries, December 31, 20x4 and 20x5: E (1) Retained Earnings, January 1 30,000 Land 30,000 Multiple Choice Problems 1. a Combined equipment amounts P1,050,000 Less: gain on sale 25,000 Consolidated equipment balance P1,025,000 Combined Accumulated Depreciation P 250,000 Less: Depreciation on gain 5,000 Consolidated Accumulated Depreciation P 245,000 2. a Original cost of P1,100,000 Accumulated depreciation, 1/1/20x4 P 250,000 Add: Additional depreciation (P1,100,000 – P100,000) / 20 ____50,000 years Accumulated depreciation, 12/31/20x4 P 300,000 3. a Combined building amounts P650,000 Less: Intercompany gain __30,000 Consolidated buildings P620,000 Combined Accumulated Depreciation P195,000 Less: Piecemeal recognition of gain ___3,000 Consolidated accumulated depreciation P192,000 4. a – the amount of land that will be presented in the presented in the CFS is the original cost of P416,000 + P256,000 = P672,000. 5. a The costs incurred by BB to develop the equipment are research and development costs and must be expensed as they are incurred. Transfer to another legal entity does not cause a change in accounting treatment within the economic entity. 6. e Original cost of P 100,000 Accumulated depreciation, 1/1/20x6 (P100,000 x 50%) P 50,000 Add: Additional depreciation (P100,000 – P50,000) / 5 years ___10,000 Accumulated depreciation, 12/31/20x6 P 60,000 7. d Sales price P 80,000 Less: Book value Cost P100,000 Less: Accumulated depreciation (50% x P100,000) __50,000 __50,000 Unrealized gain on sale P 30,000 Less: Realized gain - depreciation (P30,000 / 5 years) ___6,000 Net unrealized gain, 12/31/20x6 P 24,000 8. e Eliminating entries: 12/31/20x6: subsequent to date of acquisition Realized Gain – depreciation Accumulated depreciation 6,000 Depreciation expense 6,000 [P80,000 - (P100,000 - {P100,000 x 50%])] = P30,000 / 5 years or P15,000 – P8,000 = P7,000 “Should be in CFS” Parent – Pylux “Recorded as” Subsidiary - Sylux Depreciation expense Depreciation expense (P50,000 /5 years) 10,000 (P80,000 / 5 years) 16,000 Acc. Depreciation 8,000 Acc. depreciation 16,000 9. d 20x4 20x5 Unrealized gain on sales of equipment (downstream sales) ( 90,000) -0- Realized gain on sale of equipment (downstream sales) through depreciation P90,000 / 10 years ___9,000 9,000 Net ( 81,000) 9,000 10. d 20x4 20x5 Unrealized gain on sale of equipment (downstream sales) ( 150,000) -0- Realized gain on sale of equipment (downstream sales) through depreciation P150,000 / 10 years ___15,000 15,000 Net ( 135,000) 15,000 11. a 20x4 20x5 Unrealized gain on sale of equipment (upstream sales) : 50,000 – 30,000 ( 20,000) -0- Realized gain on sale of equipment (upstream sales) through depreciation P20,000 / 5 years ___4,000 __4,000 Net ( 16,000) __4,000 12. e Original cost of P 100,000 Accumulated depreciation, 1/1/20x6 P 40,000 Add: Additional depreciation (P100,000 – P40,000) / 6 years x 2 years ___20,000 Accumulated depreciation, 12/31/20x4 P 70,000 13. c Sales price P 48,000 Less: Book value Cost P100,000 Less: Accumulated depreciation __40,000 __60,000 Unrealized loss on sale P(12,000) Add: Realized loss - depreciation (P12,000 / 6 years) x 2 years ___4,000 Net unrealized loss, 12/31/20x7 P( 8,000) 14. a Eliminating entries: 12/31/20x7: subsequent to date of acquisition Realized Gain – depreciation Depreciation expense 2,000 Accumulated depreciation 2,000 [P48,000 - (P100,000 - P40,000) = P(12,000) / 6 years or P10,000 – P8,000 = P2,000 “Should be in CFS” Parent – Poxey “Recorded as” Subsidiary - Soxey Depreciation expense Depreciation expense (P60,000 /6 years) 10,000 (P48,000 / 6 years) 8,000 Acc. Depreciation 10,000 Acc. depreciation 8,000 15. c Original cost of P 100,000 Accumulated depreciation, 1/1/20x6 (P100,000 - P20,000) P 80,000 Add: Additional depreciation (P100,000 – P80,000) / 5 years x 2 years ____8,000 Accumulated depreciation, 12/31/20x7 P 88,000 16. c Sales price P 45,000 Less: Book value Cost P100,000 Less: Accumulated depreciation __80,000 __20,000 Unrealized gain on sale P 25,000 Less: Realized gain - depreciation (P25,000 / 5 years) x 2 years __10,000 Net unrealized gain, 12/31/20x7 P 15,000 17. b Eliminating entries: 12/31/20x7: subsequent to date of acquisition Realized Gain – depreciation Accumulated depreciation 5,000 Depreciation expense 5,000 [P45,000 - (P100,000 - P80,000) = P25,000 / 5 years or P4,000 – P9,000 = P5,000 “Should be in CFS” Parent – Sayex “Recorded as” Subsidiary - Payex Depreciation expense Depreciation expense (P20,000 /5 years) 4,000 (P45,000 / 5 years) 9,000 Acc. Depreciation 4,000 Acc. depreciation 9,000 18. c 19. b 20. c – (P20,000/20 years = P1,000), the eliminating entry to recognize the gain – depreciation would be as follows: Accumulated depreciation……………………………………………… 1,000 Depreciation expenses………………………………………….. 1,000 21. a The truck account will be debited for P3,000 in the eliminating entry: Truck 3,000 Gain 15,000 Accumulated depreciation 18,000 Seller Buyer Cash 50,000 Truck 50,000 Accumulated 18,000 Cash 50,000 Truck 53,000 Gain 15,000 22. b Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 98,000 Realized gain on sale of equipment (downstream sales) through depreciation ___0 P Company’s realized net income from separate operations*…….….. P 98,000 S Company’s net income from own operations…………………………………. P 55,000 Unrealized gain on sales of equipment (upstream sales) (15,000) Realized gain on sale of equipment (upstream sales) through depreciation (P15,000 / 3 years) 5,000 S Company’s realized net income from separate operations*…….….. P 45,000 45,000 Total P143,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x5 P143,000 Less: Non-controlling Interest in Net Income* * 18,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P125,000 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 98,000 Realized gain on sale of equipment (downstream sales) through depreciation ___0 P Company’s realized net income from separate operations*…….….. P 98,000 S Company’s net income from own operations…………………………………. P 55,000 Unrealized gain on sales of equipment (upstream sales) (15,000) Realized gain on sale of equipment (upstream sales) through depreciation (P15,000 / 3 years) 5,000 S Company’s realized net income from separate operations*…….….. P 45,000 45,000 Total P143,000 Less: Non-controlling Interest in Net Income* * P 18,000 Amortization of allocated excess…………………… ____0 18,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P125,000 Add: Non-controlling Interest in Net Income (NCINI) _ 18,000 Consolidated Net Income for 20x5 P143,000 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations P 55,000 (Reported net income of S Company) Unrealized gain on sales of equipment (upstream sales) ( 15,000) Realized gain on sale of equipment (upstream sales) through depreciation 5,000 S Company’s realized net income from separate operations……… P 45,000 Less: Amortization of allocated excess 0 P 45,000 Multiplied by: Non-controlling interest %.......... 40% Non-controlling Interest in Net Income (NCINI) - partial goodwill P 18,000 Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . 0 Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . P 18,000 23. a - refer to No. 22 computation 24. a 25. a 26. b 27. d – the entry under the cost model would be as follows ; Accumulated depreciation……………………………………………. 4,000 Depreciation expenses (current year) – P6,000/3 years…. 2,000 Retained earnings (prior year – 20x4)……………………….. 2,000 28. d – the entry under the cost model would be as follows ; Accumulated depreciation……………………………………………. 10,000 Depreciation expenses (current year) – P15,000/3 years.. 5,000 Retained earnings (prior year – 20x5)……………………….. 5,000 29. a 30. b 31. c – P50,000/5 years = P10,000 per year starting January 1, 20x6. 32. b P40,000 Depreciation expense recorded by Pirn Depreciation expense recorded by Scroll 10,000 Total depreciation reported P50,000 Adjustment for excess depreciation charged by Scroll as a result of increase in carrying value of equipment due to gain on intercompany sale (P12,000 / 4 years) (3,000) Depreciation for consolidated statements P47,000 33. e Depreciation expense: Parent P 84,000 Subsidiary 60,000 Total P144,000 Less: Over-depreciation due to realized gain: [P115,000 – (P125,000 – P45,000)] = P35,000/8 years __ 4,375 Consolidated income statement P139,625 34. c 20x6 Unrealized gain on sale of equipment ( 56,000) Realized gain on sale of equipment (upstream sales) through depreciation ___7,000 Net ( 49,000) Selling price P 392,000 Less: Book value, 1/1/20x6 Cost, 1/1/20x2 P420,000 Less: Accumulated depreciation: P420,000/10 years x 2 years 84,000 336,000 Unrealized gain on sale of equipment P 56,000 Realized gain – depreciation: P56,000/8 years P 7,000 35. c – (P22,500 x 4/15 = P6,000) 36. a – [P50,000 – (P50,000 x 4/10) = P30,000] 37. b The P39,000 paid to GG Company will be charged to depreciation expense by TLK Corporation over the remaining 3 years of ownership. As a result, TLK Corporation will debit depreciation expense for P13,000 each year. GG Company had charged P16,000 to accumulated depreciation in 2 years, for an annual rate of P8,000. Depreciation expense therefore must be reduced by P5,000 (P13,000 - P8,000) in preparing the consolidated statements. 38. a TLK Corporation will record the purchase at P39,000, the amount it paid. GG Company had the equipment recorded at P40,000; thus, a debit of P1,000 will raise the equipment balance back to its original cost from the viewpoint of the consolidated entity. 39. b Reported net income of GG Company P 45,000 Reported gain on sale of equipment P15,000 Intercompany profit realized in 20x6 (5,000) (10,000) Realized net income of GG Company P 35,000 Proportion of stock held by non-controlling interest x .40 Income assigned to non-controlling interests P 14,000 40. c Operating income reported by TLK Corporation P 85,000 Net income reported by GG Company 45,000 P130,000 Less: Unrealized gain on sale of equipment (P15,000 - P5,000) (10,000) Consolidated net income P120,000 41. b Eliminating entries: 12/31/20x5: date of acquisition Restoration of BV and eliminate unrealized gain Equipment 10,000 Gain 150,000 Accumulated depreciation 160,000 Parent Books – Mortar Subsidiary Books – Granite Cash 390,000 Equipment 390,000 Accumulated depreciation 160,000 Cash 390,000 Equipment 400,000 Gain 150,000 Mortar Selling price P390,000 Less: Book value, 12/31/20x5 Cost, 1/1/20x2 P400,000 Less: Accumulated depreciation : P400,000/10 years x 4 years 160,000 240,000 Unrealized gain on sale of equipment P 150,000 Realized gain – depreciation: P150,000/6 years P 25,000 42. a – refer to No. 41 for computation 43. b - refer to No. 41 for computation 44. d Eliminating entries: 12/31/20x6: subsequent to date of acquisition Realized Gain – depreciation Accumulated depreciation 25,000 Depreciation expense 25,000 P150,000 / 6 years or P65,000 – P40,000 “Should be in CFS” Parent Books – Mortar “Recorded as” Subsidiary Books - Granite Depreciation expense Depreciation expense (P400,000 / 10 years) 40,000 (P390,000 / 6 years) 65,000 Acc. Depreciation 40,000 Acc. depreciation 65,000 45. c Eliminating entries: 12/31/20x6: subsequent to date of acquisition Equipment 10,000 Retained earnings (150,000 – 25,000) 100,000 Accumulated depreciation (P160,000 – P25,000) 135,000 46. a Total gain on the sale = P1,000,000 – (P500,000 - P150,000) = P650,000 Unconfirmed gain after three years = 2/5 x P650,000 = P260,000 47. d Depreciation to 1/1/x3 is P25,000 Depreciation expense for 20x3 and 20x4 is (P85,000 - P25,000)/6 = P10,000 per year Therefore accumulated depreciation at 12/31/x4 is P45,000. Net equipment balance is P85,000 - P45,000 = P40,000. 48. b At the end of two years, the subsidiary reports the equipment at original cost of P2,500,000 and accumulated depreciation of (P2,500,000/10) x 2 = P500,000. Depreciation expense is P250,000. The consolidated balance sheet reports the equipment at original cost of P1,000,000 and accumulated depreciation of P200,000 + ([(P1,000,000 - P200,000)/10] x 2) = P360,000. Depreciation expense is P80,000. Eliminating entries at the end of the second year are: Accumulated depreciation 170,000 Investment in subsidiary 1,530,000 Equipment 1,700,000 Equipment 200,000 Accumulated 200,000 depreciation Accumulated depreciation 170,000 Depreciation expense 170,000 49. d 50. d The subsidiary reports depreciation expense for the year at P500,000 (P2,500,000/5) and a gain on the sale at P1,750,000 [P2,750,000 - ((P2,500,000 - (3)(P500,000))]. The consolidated statements show depreciation expense for the year at P600,000 (P3,000,000/5) and a gain on the sale at P1,550,000 [P2,750,000 - ((P3,000,000 - (3)(P600,000))]. Therefore the eliminating entries increase depreciation expense by P100,000 and reduce the gain by P200,000, for a net effect on consolidated income of: P300,000 decrease. 51. a Consolidated Net Income for 20x9 P Company’s net income from own/separate operations…………. P 140,000 Realized gain on sale of equipment (downstream sales) through depreciation ___0 P Company’s realized net income from separate operations*…….….. P 140,000 S Company’s net income from own operations…………………………………. P 30,000 Unrealized loss on sale of equipment (upstream sales) 20,000 Realized loss on sale of equipment (upstream sales) through depreciation – none, since the date of sale is end of the year ( 0) S Company’s realized net income from separate operations*…….….. P 50,000 50,000 Total P190,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x9 P190,000 Less: Non-controlling Interest in Net Income* * 15,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x9………….. P175,000 *that has been realized in transactions with third parties. Selling price P180,000 Less: Book value, 12/31/20x9 Cost, 1/1/20x4 P500,000 Less: Accumulated depreciation : P500,000/10 years x 6 years 300,000 200,000 Unrealized loss on sale of equipment P( 20,000) Realized loss – depreciation: P20,000/4 years P( 5,000) Or, alternatively Consolidated Net Income for 20x9 P Company’s net income from own/separate operations…………. P 140,000 Realized gain on sale of equipment (downstream sales) through depreciation ___0 P Company’s realized net income from separate operations*…….….. P 140,000 S Company’s net income from own operations…………………………………. P 30,000 Unrealized loss on sale of equipment (upstream sales) 20,000 Realized loss on sale of equipment (upstream sales) through depreciation ( 0) S Company’s realized net income from separate operations*…….….. P 50,000 50,000 Total P190,000 Less: Non-controlling Interest in Net Income* * P 15,000 Amortization of allocated excess…………………… ____0 15,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P175,000 Add: Non-controlling Interest in Net Income (NCINI) _ 15,000 Consolidated Net Income for 20x9 P190,000 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x9 S Company’s net income of Subsidiary Company from its own operations P 30,000 (Reported net income of S Company) Unrealized loss on sale of equipment (upstream sales) 20,000 Realized loss on sale of equipment (upstream sales) through depreciation ( 0) S Company’s realized net income from separate operations……… P 50,000 Less: Amortization of allocated excess 0 P 50,000 Multiplied by: Non-controlling interest %.......... 30% Non-controlling Interest in Net Income (NCINI) - partial goodwill P 15,000 Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . 0 Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . P 15,000 52. b Consolidated Net Income for 20y0 P Company’s net income from own/separate operations…………. P 162,000 Realized gain on sale of equipment (downstream sales) through depreciation ___0 P Company’s realized net income from separate operations*…….….. P 162,000 S Company’s net income from own operations…………………………………. P 45,000 Unrealized loss on sale of equipment (upstream sales) Realized loss on sale of equipment (upstream sales) through depreciation ( 5,000) S Company’s realized net income from separate operations*…….….. P 40,000 40,000 Total P202,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20y0 P202,000 Less: Non-controlling Interest in Net Income* * 7,500 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20y0………….. P194,500 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20y0 P Company’s net income from own/separate operations…………. P 162,000 Realized gain on sale of equipment (downstream sales) through depreciation ___0 P Company’s realized net income from separate operations*…….….. P 162,000 S Company’s net income from own operations…………………………………. P 45,000 Unrealized loss on sale of equipment (upstream sales) Realized loss on sale of equipment (upstream sales) through depreciation ( 5,000) S Company’s realized net income from separate operations*…….….. P 40,000 40,000 Total P202,000 Less: Non-controlling Interest in Net Income* * P 7,500 Amortization of allocated excess…………………… ____0 7,500 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P194,500 Add: Non-controlling Interest in Net Income (NCINI) _ _ 7,500 Consolidated Net Income for 20y0 P202,000 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20y0 S Company’s net income of Subsidiary Company from its own operations P 30,000 (Reported net income of S Company) Unrealized loss on sale of equipment (upstream sales) Realized loss on sale of equipment (upstream sales) through depreciation ( 5,000) S Company’s realized net income from separate operations……… P 25,000 Less: Amortization of allocated excess 0 P 25,000 Multiplied by: Non-controlling interest %.......... 30% Non-controlling Interest in Net Income (NCINI) - partial goodwill P 7,500 Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . 0 Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . P 7,500 53. d Eliminating entries: 1/1/20x5: date of acquisition Restoration of BV and eliminate unrealized gain Building 3,000 Gain 8,250 Accumulated depreciation 11,250 Parent Books – Sky Subsidiary Books - Earth Cash 33,000 Building 33,000 Accumulated depreciation 11,250 Cash 33,000 Building 36,000 Gain 8,250 Sky, 7/1/20x4 Selling price P33,000 Less: Book value, 7/11/20x4 Cost, 1/1/20x2 P36,000 Less: Accumulated depreciation : P36,000/8years x 2.5 years 11,250 24,750 Unrealized gain on sale of equipment P 8,250 Realized gain – depreciation: P8,250/5.5 years P 1,500 54. a - refer to No. 53 for computation 55. b Eliminating entries: 12/31/20x4: subsequent to date of acquisition Realized Gain – depreciation (July 1, 20x4 – December 31, 20x4) Accumulated depreciation 750 Depreciation expense 750 P8,250 / 5.5 x ½ years or P3,000 – P2,250 “Should be in CFS” Parent Books – Sky “Recorded as” Subsidiary Books - Earth Depreciation expense Depreciation expense (P24,750 / 5.5 x ½ years) 2,250 (P33,000 / 5.5 years x ½ yrs) 3,000 Acc. Depreciation 2,250 Acc. depreciation 3,000 56. c Eliminating entries: 12/31/20x5: subsequent to date of acquisition Realized Gain – depreciation Accumulated depreciation 1,500 Depreciation expense 1,500 P8,250 / 5.5 x years or P6,000 – P4,500 “Should be in CFS” Parent Books – Sky “Recorded as” Subsidiary Books - Earth Depreciation expense Depreciation expense (P24,750 / 5.5 years) 4,500 (P33,000 / 5.5 years) 6,000 Acc. Depreciation 4,500 Acc. depreciation 6,000 57. d Eliminating entries: 1/1/20x5: subsequent to date of acquisition Building 3,000 Retained earnings (8,250 – 750) 7,500 Accumulated depreciation (P11,250 – P750) 10,500 58. d - P60,000 - P36,000 = P24,000 debit 59. b - P36,000 - (P60,000 - P31,200) = P7,200 gain (debit) 60. c - (P36,000/6)(8/12) - [(P60,000 - P31,200)/6](8/12) = P800 credit 61. a - P31,200 - {(P36,000/6)(8/12) - [(P60,000 - P31,200)/6](8/12)} = P30,400 credit 62. c - P36,000 - (P60,000 - P31,200) = P7,200 gain (debit) (P36,000/6)(8/12) - [(P60,000 - P31,200)/6](8/12) = P800 credit 63. b P72,000 - (P96,000 - P36,600) = P12,600 gain (debit) (P72,000/5)(4/12) - [(P96,000 - P36,600)/5](4/12) = P840 (credit) (P12,600 - P840) .1 = P1,176 debit 64. d When only retained earnings is debited, and not the non-controlling interest, a gain has been recorded in a prior period on the parent's books. 65. d 66. a 67. b 68. b – at its original cost or book value. 69. b 20x4: Any intercompany gain should be eliminated in the CFS. 20x5 Selling price – unrelated party P 100,000 Less: Original Book value, 9/26/20x5 __60,000 Accumulated depreciation, 9/26/20x5 P 40,000 70. d – P30,000 + P40,000 = P70,000 S P Consolidated Selling price Less: Book value Gain P 30,000 P 40,000 P 70,000 71. d – P110,000 – P30,000 = P80,000 S (Nectar) P (Lorikeet) Consolidated Selling price P 50,000 P 110,000 P 110,000 Less: Book value _30,000 __50,000 _30,000 Gain P 20,000 P 60,000 P 80,000 72. d S P Consolidated Selling price P1,980,000 P1,440,000 P1,440,000 Less: Book value: Cost P2,000,000 P1,980,000 P 1,800,000 Accumulated ___200,000 1,800,00 *1,320,000 660,000 **1,200,000 __600,000 Unrealized gain on sale of equipment P 180,000 Realized Gain – depreciation (P180,000/9 x 6 yrs) 120,000 Net unrealized gain, 1/1/20x9 P 60,000 Gain on sale P 60,000 P 780,000 P 840,000 *P1,980,000/ 9 x 6 years = P1,320,000 **P1,800,000/9 x 6 years = P1,200,000 73. d –(P100,000 + P50,000 = P150,000) S P Consolidated Selling price Less: Book value Gain P 100,000 P 50,000 P 150,000 74. c S P Consolidated Selling price P 990,000 P720,000 P 720,000 Less: Book value : Cost P1,000,000 P990,000 P 900,000 Accumulated 100,000 __900,000 *440,000 550,000 **400,000 __500,000 Unrealized gain on sale of Equipment,1/1/20x4 P 90,000 Realized Gain – depreciation (P90,000/9 x 4 yrs) 40,000 Net unrealized gain, 1/1/20x8 P 50,000 __________ ___________ Gain on sale P 50,000 P 170,000 P 220,000 *P990,000/ 9 x 4 years = P440,000 **P900,000/9 x 4 years = P400,000 75. d – (P30,000 + P15,000) 76. c Selling price – unrelated party P 14,000 Less: Original Book value, 12/31/20x5 Book value, 1/1/20x4 P20,000 Less: Depreciation for 20x4 and 20x5: P20,000/4 years x 2 years 10,000 10,000 Accumulated depreciation, 12/31/20x4 P 4,000 77. b Sort Fort Consolidated Selling price P 100,000 P 65,000 P 65,000 Less: Book value : Cost P 120,000 P100,000 P 90,000 Accumulated __30,000 __90,000 **50,000 50,000 **45,000 __45,000 Unrealized gain on sale of Equipment, 12/30/20x3 P 10,000 Realized Gain – depreciation (P10,000/6 x 3 yrs) __ 5,000 Net unrealized gain, 12/31/20x6 P 5,000 __________ _________ Gain on sale P 5,000 P 15,000 P 20,000 *P100,000/6 x 3 years = P48,000 ***P90,000/6 x 3 years = P45,000 78. b Depreciation expense: (P50,000 - P40,000) / 10 years = P1,000 over depreciation 79. b **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P2,000,000 Unrealized gain on sales of equipment (upstream sales) (P700,000 – P600,000) ( 100,000) Realized gain on sale of equipment (upstream sales) through depreciation (P100,000/10) 10,000 S Company’s realized net income from separate operations……… P1,910,000 Less: Amortization of allocated excess _ 0 P1,910,000 Multiplied by: Non-controlling interest %.......... __40% Non-controlling Interest in Net Income (NCINI) - partial goodwill P 764,000 Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . __ 0 Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . P 764,000 80. a **Non-controlling Interest in Net Income (NCINI) for 20y2 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 135,000 Unrealized gain on sale of equipment (downstream sales) Realized gain on sale of equipment (downstream sales) through depreciation ( 0) S Company’s realized net income from separate operations……… P 135,000 Less: Amortization of allocated excess 0 P 135,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) - partial goodwill P 27,000 Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . 0 Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . P 27,000 81. a Consolidated Net Income for 20y2 P Company’s net income from own/separate operations…………. P 200,800 Realized gain on sale of equipment (downstream sales) through depreciation _ 8,000 P Company’s realized net income from separate operations*…….….. P 208,800 S Company’s net income from own operations…………………………………. P 135,000 Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation ( 0) S Company’s realized net income from separate operations*…….….. P 135,000 135,000 Total P343,800 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20y2 P343,800 Less: Non-controlling Interest in Net Income* *(refer to No. 80) 27,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20y2………….. P316,800 *that has been realized in transactions with third parties. Net income from own operations: Prout Sexton Sales P1,475,000 P1,110,000 Less: Cost of goods sold 942,000 795,000 Other expenses (including depreciation) 145,000 90,000 Income tax expense __187,200 ____90,000 Net income from own operations P 200,800 P 135,000 Add: Dividend income ____80,000 Net income P 280,800 P 135,000 Sexton, 1/1/20y1 Selling price P360,000 Less: Book value, 1/1/20y1 Cost, 1/1/20x1 P400,000 Less: Accumulated depreciation : P400,000/25 years x 10 years 160,000 240,000 Unrealized gain on sale of equipment P120,000 Realized gain – depreciation: P120,000/15 years P 8,000 Or, alternatively Consolidated Net Income for 20y2 P Company’s net income from own/separate operations…………. P 200,800 Realized gain on sale of equipment (downstream sales) through depreciation _ 8,000 P Company’s realized net income from separate operations*…….….. P 208,800 S Company’s net income from own operations…………………………………. P 135,000 Unrealized gain on sale of equipment (upstream sales) Realized gain on sale of equipment (upstream sales) through depreciation ( 0) S Company’s realized net income from separate operations*…….….. P 135,000 135,000 Total P343,800 Less: Non-controlling Interest in Net Income* * (refer to No. 80) P 27,000 Amortization of allocated excess…………………… ____0 27,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P316,800 Add: Non-controlling Interest in Net Income (NCINI) _ _27,000 Consolidated Net Income for 20y2 P343,800 *that has been realized in transactions with third parties. 82. a – refer to No. 81 83. c Consolidated Retained Earnings, December 31, 20y2 Retained earnings - Parent Company, January 1, 20y1 (cost model) P1,300,000 Less: Downstream - net unrealized gain on sale of equipment – prior to 20y1 [P120,000 – (P8,000 x 1 year)] 112,000 Adjusted Retained Earnings – Parent 1/1/20y1 (cost model ) Son Company’s Retained earnings that have been realized in transactions with third parties.. P1,188,000 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, 20x9 P 800,000 Less: Retained earnings – Subsidiary, January 1, 20y1 1,040,000 Increase in retained earnings since date of acquisition P 240,000 Less: Amortization of allocated excess – 20x9 to – 20y0 0 Upstream - net unrealized gain on sale of equipment –prior to 20y1 0 P 240,000 Multiplied by: Controlling interests %................... 80% P192,000 Less: Goodwill impairment loss 0 _192,000 Consolidated Retained earnings, January 1, 20x5 P1,380,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5 316,800 Total P1,696,800 Less: Dividends declared – Parent Company for 20y1 120,000 Consolidated Retained Earnings, December 31, 20y1 P1,576,8000 Or, alternatively: Consolidated Retained Earnings, December 31, 20y2 Retained earnings - Parent Company, December 31, 20y1 (cost model) (P1,300,000 + P280,800 – P120,000) P1,460,800 Less: Downstream - net unrealized gain on sale of equipment – prior to 12/31/20y1 [P120,000 – (P8,000 x 2 years)] 104,000 Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ) S Company’s Retained earnings that have been realized in transactions with third parties.. P1,356,800 Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, December 31, 20y2 (P1,040,000 + P135,000 – P100,000) P 1,075,000 Less: Retained earnings – Subsidiary, January 1, 20x9 800,000 Increase in retained earnings since date of acquisition P 275,000 Less: Accumulated amortization of allocated excess 0 Upstream - net unrealized gain on sale of equipment – prior to 12/31/20y2 _______0 P 275,000 Multiplied by: Controlling interests %................... 80% P 220,000 Less: Goodwill impairment loss _____0 220,000 Consolidated Retained earnings, December 31, 20y2 P1,576,800 84. c Non-controlling interest (fulll-goodwill), December 31, 20y2 Common stock – Subsidiary Company, December 31, 20y2…… P 1,200,000 Retained earnings – Subsidiary Company, December 31, 20y2 Retained earnings – Subsidiary Company, January 1, 20y2 P1,040,000 Add: Net income of subsidiary for 20y2 135,000 Total P1,175,000 Less: Dividends paid – 20y2 100,000 1,075,000 Stockholders’ equity – Subsidiary Company, December 31, 20x5 P 2,275,200 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 0 Amortization of allocated excess (refer to amortization above) : 0 Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P2,275,200 Less: Upstream - net unrealized gain on sale of equipment – prior to 12/31/20y2 _____)0 Realized stockholders’ equity of subsidiary, December 31, 20x5………. P 2,275,00 Multiplied by: Non-controlling Interest percentage…………... _ 20 Non-controlling interest (partial goodwill)………………………………….. P 455,000 85. c Prout Sexton Consolidated Selling price P 360,000 P300,000 P 300,000 Less: Book value : Cost P 400,000 P360,000 P 240,000 Accumulated *160,000 __240,000 **48,000 312,000 ***32,000 _208,000 Unrealized gain on sale of Equipment, 1/1/20y1 P 120,000 Realized Gain – depreciation (P120,000/15 x 2 yrs) __16,000 Net unrealized gain, 1/1/20y3 P 104,000 __________ _________ Gain on sale P 104,000 P( 12,000) P 92,000 *P400,000/25 x 10 years = P160,000 **P360,000/15 x 2 years = P48,000 ***P240,000/15 x 2years = P400,000 86. b – refer to No. 85 87. a – refer to No. 85 Analysis: Workpaper entries (not required) Intercompany Sale of Equipment Accumulated Remaining Cost Depreciation Carrying Value Life Depreciation Original Cost P400,000 P160,000 P240,000 15 yr P 16,000 Intercompany Selling Price 360,000_______ 360,000 15 yr 24,000 Difference P 40,000 P160,000 P120,000 P 8,000 (1) Investment in Sexton Company 192,000 Retained Earnings - Prout 192,000 To establish reciprocity/convert to equity (.80 x (P1,040,000 - P800,000)) (2) Equipment 40,000 Beginning Retained Earnings - Prout 120,000 Accumulated Depreciation 160,000 To reduce beginning consolidated retained earnings by amount of unrealized profit at the beginning of the year, to restate property and equipment to its book value to Prout Company on the date of the intercompany sale. (3) Accumulated Depreciation 16,000 Depreciation Expense 8,000 Beginning Retained Earnings - Prout 8,000 To reverse amount of excess depreciation recorded during current year and recognize an equivalent amount of intercompany profit as realized (4) Dividend Income 80,000 Dividends Declared 80,000 To eliminate intercompany dividends (5) Beginning Retained Earnings – Sexton 1,040,000 Common Stock – Sexton 1,200,000 Investment in Sexton Company (P1,600,000 + P192,000) 1,792,000 Noncontrolling Interest [P400,000 + (P1,040,000 - P800,000) x .20] 448,000 To eliminate investment account and create noncontrolling interest account Entry analysis: Journal Entry on the books of Sexton to record the sale Cash 300,000 Accumulated Depreciation - Fixed Assets (P360,000/15) x 2 years)48,000 Loss on Sale of Equipment 12,000 Plant and Equipment 360,000 Workpaper eliminating entry on December 31, 20y3 consolidated statement necessary to prepare consolidated statements: Beginning Retained Earnings – Prout(P120,000 - P16,000) 104,000 Loss on Sale of Equipment 12,000 Gain on Sale of Equipment 92,000 Cost to the Affiliated Companies P400,000 Accumulated Depreciation Based on Original Cost ((12/25)x P400,000) 192,000 Book Value, 1/1/y3 P 208,000 Proceeds from Sale to Non-affiliate (300,000) Gain from consolidated point of view P 92,000 Note: As of Dec. 31, 20y3, the amount of profit recorded by the affiliates on their books (P120,000 - P12,000 = P108,000) is equal to the amount of profit considered realized in the consolidated financial statements (P8,000 + P8,000 + P92,000) = P108,000. 88. d - Investment in subsidiary, 12/31/20x5 (cost model) P700,000). Date of Acquisition (1/1/20x4) Partial Full Fair value of consideration given…………………….P 700,000 Less: Book value of SHE - Subsidiary): (P300,000 + P500,000) x 80%........................... 640,000 Allocated Excess.………………………………………….P 60,000 Less: Over/Undervaluation of Assets & Liabilities Increase in Bldg. (P75,000 x 80%)……………… 60,000 Goodwill ………….………………………………………….P 0 P 0 Amortization of allocated excess: building - P75,000 / 25 years = P3,000 Upstream Sale of Equipment (date of sale – 4/1/20x5): Sales.......................................................................................................P 60,000 Less: Book value of equipment………………………………………………………………. 30,000 Unrealized Gain (on sale of equipment)……………………………………………………P 30,000 Realized gain on sale of equipment: 20x5: P30,000/5 years = P6,000 x 9/12 (4/1/20x5- 12/31/20x5)…………………………. .P 4,500 20x6 ………………..……………………………………………………………………………P 6,000 Downstream Sale of Machinery (date of sale – 9/30/20x5): Sales......................................................................................................................... ........... P75,000 Less: Book value of machinery………………………………………………………………. 40,000 Unrealized Gain (on sale of machinery)…………………………………………………… P35,000 Realized gain on sale of machinery: 20x5: P35,000/10 years = P3,500 x 3/12 (9/30/20x5- 12/31/20x5)………. ……………… .P 875 20x6………….. ………………………………………………………………………………...P 3,500 89. d Dividend paid or declared – S…………………………………………………P 50,000 x: Controlling Interest %…………………………………………………………. 80% Dividend income of Parent……………………………………………………..P 40,000 90. d Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 300,000 Net unrealized gain on sale of equipment (downstream sales) through depreciation P35,000 – P875) 34,125 P Company’s realized net income from separate operations*…….….. P 265,875 S Company’s net income from own operations…………………………………. P 150,000 Unrealized gain on sales of equipment (upstream sales) (30,000) Realized gain on sale of equipment (upstream sales) through depreciation 4,500 S Company’s realized net income from separate operations*…….….. P 124,500 124,500 Total P390,375 Less: Amortization of allocated excess…………………… 3,000 Consolidated Net Income for 20x5 P387,375 Less: Non-controlling Interest in Net Income* * 24,300 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P363,075 *that has been realized in transactions with third parties. Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 300,000 Net unrealized gain on sale of equipment (downstream sales) through depreciation P35,000 – P875) 34,125 P Company’s realized net income from separate operations*…….….. P 265,875 S Company’s net income from own operations…………………………………. P 150,000 Unrealized gain on sales of equipment (upstream sales) (30,000) Realized gain on sale of equipment (upstream sales) through depreciation 4,500 S Company’s realized net income from separate operations*…….….. P 124,500 124,500 Total P390,375 Less: Non-controlling Interest in Net Income* * P 24,300 Amortization of allocated excess…………………… 3,000 27,300 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P363,075 Add: Non-controlling Interest in Net Income (NCINI) _ 24,300 Consolidated Net Income for 20x5 P387,375 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations P 150,000 (Reported net income of S Company) Unrealized gain on sales of equipment (upstream sales) ( 30,000) Realized gain on sale of equipment (upstream sales) through depreciation 4,500 S Company’s realized net income from separate operations……… P 124,500 Less: Amortization of allocated excess 3,000 P 121,500 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) - partial goodwill P 24,300 Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . 0 Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . P 24,300 91. c – refer to No. 90 for computations 92. d – refer to No. 90 for computations 93. a Non-controlling Interests (in net assets): 20x5 20x6 Common stock - S, 12/31..….………………………… P 300,000 P 300,000 Retained earnings - S, 12/31: RE- S, 1/1.…………………………………………….P600,000 P 700,000 +: NI-S………………………………………………… 150,000 200,000 -: Div – S…………………………………………….. 50,000 700,000 70,000 830,000 Book value of Stockholders’ equity, 12/31…….... P1,000,000 P1,130,000 Adjustments to reflect fair value of net assets Increase in equipment, 1/1/2010..……..… 75,000 75,000 Accumulated amortization (P3,000 per year)*.…… ( 6,000) ( 9,000) Fair Value of Net Assets/SHE, 12/31..……………… P1,069,000 P1,196,000 Unrealized gain on sale of equipment (upstream) ( 30,000) **( 25,500) Realized gain thru depreciation (upstream)……… 4,500 6,000 Realized SHE – S,12/31………………………………….. P1,043,500 P1,176,500 x: NCI %........................................................... ………… ___ 20% 20% Non-controlling Interest (in net assets) – partial... P 208,700 P 235,300 +: NCI on full goodwill……..…………………………….. 0 0 Non-controlling Interest (in net assets) – full…….. P 208,700 P 235,300 * 20x5: P3,000 x 2 years; 2012: P3,000 x 3 years; ** P30,000 – P4,500 realized gain in 20x5 = P25,500. Note: Preferred solution - since what is given is the RE – P, 1/1/20x5(beginning balance of the current year) - Retained earnings – Parent, 1/1/20x5 (cost)…………………………… P 800,000 -: Downstream sale – 20x4 or prior to 20x5, Net unrealized gain 0 Adjusted Retained earnings – Parent, 1/1/20x5 (cost)……………… P 800,000 Retroactive Adjustments to convert Cost to “Equity”: Retained earnings – Subsidiary, 1/1/20x4……………………….P 500,000 Less: Retained earnings – Subsidiary, 1/1/20x5……………….. 600,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)…………P 100,000 Accum. amortization (1/1/x4– 1/1/x5): P2,000 x 1 year…….. ( 3,000) Upstream Sale – 2010 or prior to 20x5, Net unrealized gain……………………………..……………….( 0) P 97,000 X: Controlling Interests %..…………………………………………… 80% 77,600 RE – P, 1/1/20x5 (equity method) = CRE, 1/1/20x5………………… P 877,600 +: CI – CNI or Profit Attributable to Equity Holders of Parent……. 363,075 -: Dividends – P………………………………………………………………….. 100,000 RE – P, 12/31/20x5 (equity method) = CRE, 12/31/20x5………….. P 1,140,675 Or, if RE – P is not given on January 1, 20x5, then RE – P on December 31, 20x5 should be use. Retained earnings – Parent, 12/31/20x5 (cost model): (P800,000 + P340,000, P’s reported NI – P100,000)……………… P1,040,000 -: Downstream sale – 20x5 or prior to 12/31/20x5, Net unrealized gain - (P35,000 – P875)……………………………. 34,125 Adjusted Retained earnings – Parent, 1/1/20x5 (cost model)..…… P1,005,875 Retroactive Adjustments to convert Cost to “Equity”: Retained earnings – Subsidiary, 1/1/20x4……………………….P 500,000 Less: Retained earnings – Subsidiary, 12/31/20x5 (P600,000 + P150,000 – P50,000)..…………..……………. 700,000 Increase in Retained earnings since acquisition (cumulative net income – cumulative dividends)……. ….P 200,000 Accumulated amortization (1/1/20x4 – 12/31/20x5): P 3,000 x 2 years……………………………………………. .( 6,000) Upstream Sale – 20x5 or prior to 12/31/20x5, Net unrealized gain – (P30,000 – P4,500)……………. ( 25,500) P 168,500 x: Controlling Interests %..………………………………………… 80% 134,800 RE – P, 12/31/20x5 (equity method) = CRE, 12/31/20x5…………. P1,140,675 94. c – refer to No, 93 computations. 95. b – refer to No. 93 for computations 96. d – refer to No. 93 for computations 97. b Consolidated Stockholders’ Equity, 12/31/20x5: Controlling Interest / Parent’s Interest / Parent’s Portion / Equity Holders of Parent – SHE, 12/31/20x5: Common stock – P (P only)……………………………………….. .P 1,000,000 Retained Earnings – P (equity method), 12/31/20x5…………. 1,140,675 Controlling Interest / Parent’s Stockholders’ Equity……………P2,140,675 Non-controlling interest, 12/31/20x5 (partial/full)…………………… 208,700 Consolidated Stockholders’ Equity, 12/31/20x5……………………….P2,349,375 98. d – the original cost of land 99. b – no intercompany gain or loss be presented in the CFS. 100. a Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. P 200,000 Realized gain on sale of equipment (downstream sales) through depreciation ___0 P Company’s realized net income from separate operations*…….….. P 200,000 S3 Company’s net income from own operations…………………………………. P100,000 S2 Company’s net income from own operations…………………………………. 70,000 S1 Company’s net income from own operations…………………………………. 95,000 Unrealized loss on sale of equipment (upstream sales) – S3 15,000 Unrealized gain on sale of equipment (upstream sales) – S2 ( 52,000) Unrealized gain on sale of equipment (upstream sales) - S1 ( 23,000) S Company’s realized net income from separate operations*…….….. P205,000 205,000 Total P405,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x4 P405,000 Less: Non-controlling Interest in Net Income* * (P23,000 + P5,400 + P7,200) 35,600 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. P369,400 *that has been realized in transactions with third parties. S3 S2 S1 Sales price 145,000 197,000 220,000 Less: Cost 160,000 145,000 197,000 Unrealized (loss) gain ( 15,000) 52,000 23,000 Or, alternatively Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. P 200,000 Realized gain on sale of equipment (downstream sales) through depreciation ___0 P Company’s realized net income from separate operations*…….….. P 200,000 S3 Company’s net income from own operations…………………………………. P100,000 S2 Company’s net income from own operations…………………………………. 70,000 S1 Company’s net income from own operations…………………………………. 95,000 Unrealized loss on sale of equipment (upstream sales) – S3 15,000 Unrealized gain on sale of equipment (upstream sales) – S2 ( 52,000) Unrealized gain on sale of equipment (upstream sales) - S1 ( 23,000) S Company’s realized net income from separate operations* P205,000 205,000 Total P405,000 Less: Non-controlling Interest in Net Income* * (P23,000 + P5,400 + P7,200) P 35,600 Amortization of allocated excess…………………… ____0 _ 35,600 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P369,400 Add: Non-controlling Interest in Net Income (NCINI) _ _35,600 Consolidated Net Income for 20y0 P405,000 *that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) S3 S2 S1 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 100,000 P 70,000 P 95,000 Unrealized (gain) loss on sale of land (upstream sales) 15,000 ( 52,000) ( 23,000) S Company’s realized net income from separate operations P 115,000 P 18,000 P 72,000 Less: Amortization of allocated excess 0 0 0 P 115000 P 18,000 P 72,000 Multiplied by: Non-controlling interest %.......... 20% 30% 10% Non-controlling Interest in Net Income (NCINI) - partial goodwill P 23,000 P 5,400 P 7,200 Less: NCI on goodwill impairment loss on full-goodwill 0 0 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 23,000 P 5,400 P 7,200 101. b Non-controlling Interest in Net Income (NCINI) for 20y2 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 40,000 Unrealized gain on sales of equipment (upstream sales) – year of sale - Realized gain on sale of equipment (upstream sales) through depreciation (P14,500 – P9,000) / 5 years 1,100 S Company’s realized net income from separate operations……… P 41,100 Less: Amortization of allocated excess 0 P 41,100 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) - partial goodwill P 8,220 Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . 0 Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . P 8,220 102. d – the unrealized gain amounted to P15,000 (P60,000 – P45,000). It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. Since, the cost model is presumed to be the method used, the unrealized gain of P15,000 (P60,000 – P45,000) will not be recorded in the books of parent company, which give rise to no equity-adjustments at year-end. 103. c Cliff reported income P225,000 Less: Intercompany gain on truck 45,000 Plus: Piecemeal recognition of gain = P45,000/10 years ___4,500 Cliff’s adjusted income P184,500 Majority percentage 90% Income from Cliff P166,050 104. c Pied Imperial-Pigeon’s share of Roger’s income = (P320,000 x 90%) = P288,000 Less: Profit on intercompany sale (P130,000 - P80,000) x 90% = 45,000 Add: Piecemeal recognition of deferred profit ($50,000/4 years)90% = 11,250 Income from Offshore P254,250 105 c P30,000 - (1/4 x P30,000) = P 22,500 106. d - P60,000 – P48,000)/4 years = P3,000 107. a Simon, 4/1/20x4 Selling price P68,250 Less: Book value, 4/1/20x4 Cost, 1/1/20x4 P50,000 Less: Accumulated depreciation : P50,000/10 years x 3/12 __1,250 48,750 Unrealized gain on sale of equipment P19,500 Realized gain – depreciation: P19,500/9.75 years P 2,000 108. c – P2,000 x 9/12 (April 1, 20x4 – December 31, 20x4) = P1,500 109. c – P19,500 / 9.75 years = P2,000 110. c – P19,500 / 9.75 years = P2,000 111. d 20x4 Share in subsidiary net income (100,000 x 90%) 90,000 Unrealized gain on sale of equipment (downstream sales) ( 19,500) Realized gain on sale of equipment (downstream sales) through depreciation P2,000 x 9/12 (April 1, 20x4 – December 31, 20x4) = P1,500 _ 1,500 Net 72,000 112. b 20x5 Share in subsidiary net income (120,000 x 90%) 108,000 Realized gain on sale of equipment (downstream sales) through depreciation _ 2,000 Net 110,000 113. d 20x6 Share in subsidiary net income (130,000 x 90%) 117,000 Realized gain on sale of equipment (downstream sales) through depreciation _ 2,000 Net 119,000 114. c Smeder, 1/1/20x4 Selling price P84,000 Less: Book value, 1/1/20x4 Cost, 1/1/20x4 P120,000 Less: Accumulated depreciation __48,000 72,000 Unrealized gain on sale of equipment P12,000 Realized gain – depreciation: P12,000/6 years P 2,000 115. b 20x4 Share in subsidiary net income (28,000 x 80%) 22,400 Unrealized gain on sale of equipment (upstream sales); ( 9,600) 12,000 x 80% Realized gain on sale of equipment (upstream sales) through depreciation _ 1,600 P2,000 x 80% Net 14,400 116. c 20x5 Share in subsidiary net income (32,000 x 80%) 25,600 Realized gain on sale of equipment (upstream sales) through depreciation _ 1,600 P2,000 x 80% Net 27,200 117. d Eliminating entries: 1/1/20x4: date of acquisition Restoration of BV and eliminate unrealized gain Equipment 36,000 Gain 12,000 Accumulated depreciation 48,000 Parent – Smeder Subsidiary - Collins Cash 84,000 Equipment 84,000 Accumulated depreciation 48,000 Cash 84,000 Equipment 120,000 Gain 12,000 Smeder, 1/1/20x4 Selling price P84,000 Less: Book value, 1/1/20x4 Cost, 1/1/20x4 P120,000 Less: Accumulated depreciation __48,000 72,000 Unrealized gain on sale of equipment P12,000 Realized gain – depreciation: P12,000/6 years P 2,000 Eliminating entries: 12/31/20x4: subsequent to date of acquisition Realized Gain – depreciation Accumulated depreciation 2,000 Depreciation expense 2,000 P12,000 / 6 years or P14,000 – P12,000 “Should be in CFS” Parent – Smeder “Recorded as” Subsidiary - Collins Depreciation expense Depreciation expense (P72,000 /6 years) 12,000 (P84,000 / 6 years) 14,000 Acc. Depreciation 12,000 Acc. depreciation 14,000 Combining the eliminating entries for 1/1/20x4 and 12/31/200x4, the net effect of accumulated depreciation would be a net credit of P46,000 (P48,000 – P2,000). 118. c 20x4 Unrealized gain on sale of equipment ( 12,000) Realized gain on sale of equipment through depreciation ___2,000 Net ( 10,000) 119. d Eliminating entries: 5/1/20x4: date of acquisition Restoration of BV and eliminate unrealized gain Cash 5,000 Loss 5,000 Parent – Stark Subsidiary - Parker Cash 80,000 Land 85,000 Loss 5,000 Cash 85,000 Land 85,000 Stark Parker Consolidated Selling price P 80,000 P 92,000 P 92,000 Less: Book value, 5/1/20x4 _85,000 __80,000 _85,000 Unrealized gain on sale of equipment P ( 5,000) P 12,000 P 7,000 120. b – refer to No. 119 for eliminating entry 121. b Cash 5,000 Retained earnings 5,000 122. e 20x4 Share in subsidiary net income (200,000 x 90%) 180,000 Unrealized loss on sale of land (upstream sales): P5,000 x 90% _ 4,500 Net 184,500 123. d 20x4 Share in subsidiary net income (200,000 x 90%) 180,000 Unrealized loss on sale of land (upstream sales): P5,000 x 90% _ 4,500 Net 184,500 124. b Stark Parker Consolidated Selling price P 80,000 P P 92,000 92,000 Less: Book value, 5/1/20x4 _85,000 __80,000 _85,000 Unrealized gain on sale of P ( 5,000) P P 7,000 equipment 12,000 125. a – refer to No. 124 for computation 126. e – None, the loss was already recognized in the books of Stark in the year of sale - 20x4 but not in the subsequent years. 127. c 20x6 Share in subsidiary net income (220,000 x 90%) 198,000 Intercompany realized loss on sale of land (upstream sales): _ P5,000 x 90% ( 4,500) Net 193,500 Theories 1. d 6. c 11. c 16. b 21. b 26. b 31 d 2. c 7. c 12. c 17. a 22. d 27. c 3. d 8. a 13. d 18. a 23. c 28. b 4. d 9. a 14. b 19. c 24. c 29. c 5. b 10, c 15, d 20. a 25. b 30. c Chapter 19 Problem I 1. Indirect Exchange Rates Philippine Viewpoint: 1 $ = P40; 1 Peso = $0.025 ($1/P40) 1 Singapore dollar = P32.00; 1 Peso = 0.03125 Singapore (1 Singapore Dollar/P32) Peso P8,000 2. FCU = = = $200; or Direct Exchange Rate P40.00 = P8,000 x $1/P40 = $200 3. 4,000 Singapore dollars x P32 = P128,000 Problem II a. Exchange rates: Arrival Date Departure Date 1 Singapore dollar = P33.00 1 Singapore Dollar = P32.50 Direct Exchange Rate (P33,000 / 1,000 Singapore (P3,250 / 100 Singapore dollars) dollars) P1.00 = .03 Singapore dollars P1.00 = .03 Singapore dollars Indirect Exchange Rate (1,000 Singapore dollars / (100 Singapore dollars / P33,000) P3,250)) 2. The direct exchange rate has decreased. This means that the peso has strengthened during Mr. Alt's visit. For example, upon arrival, Mr. Alt had to pay P33 per each dollar. Upon departure, however, each dollar is worth just P32.50. This means that the relative value of the peso has increased or, alternatively, the value of the dollar has decreased. 3. The Philippine peso equivalent values for the 100 Singapore dollars are: Arrival date 100 dollars x P33.00 = P3,300 Departure date 100 dollars x P32.50 = 3,250 Foreign Currency Transaction Loss P 50 Mr. Alt held dollars for a time in which the dollars was weakening against the peso. Thus, Mr. Alt experienced a loss by holding the weaker currency. Problem III 1. If the direct exchange rate increases, the peso weakens relative to the foreign currency unit. If the indirect exchange rate increases, the peso strengthens relative to the foreign currency unit. 2. Settlement Direct Exchange Rate Indirect Exchange Rate Transaction Currency Increases Decreases Increases Decreases Importing Peso NA NA NA NA Importing L G G L LCU Exporting Peso NA NA NA NA Exporting LCU G L L G Problem IV 1. December 1, 20x4 (Transaction date): Purchases…………………….. 973,200 Accounts payable ($24,000 x P40.55)……………………………… 973,200 December 31, 20x4 (Balance sheet date): Foreign currency transaction loss….………………….. 6,000 Accounts payable [$24,000 x (P40.80 – P40.55)]……… 6,000 Accounts payable valued at 12/31 Balance Sheet ($24,000 x P40.80)……… P979,200 Accounts payable valued at 12/1 Date of Transaction ($24,000 x P40.55)……… 973,200 Adjustment to accounts payable needed……….. P 6,000 March 1, 20x5 (Settlement date): Accounts payable………………… 979,200 Foreign currency transaction gain [$24,000 x (P40.80 – P40.65)] 3,600 Cash ($24,000 x P40.65)……………. 975,600 2. a. a.1. None – transaction date (December 1, 20x4) a.2. P6,000 loss a.3. P3,600 gain (March 1, 20x5) b. b.1. P979,200 – spot rate on the balance sheet date or current rate on the balance sheet b.2. P973,200 – spot rate on the transaction date or historical rate on the balance sheet date. Problem V 1. December 1, 20x4 (Transaction date): Accounts receivable ($60,000 x P40.00)……………………………… 2,400,000 Sales 2,400,000 December 31, 20x4 (Balance sheet date): Accounts receivable……….. 42,000 Foreign currency transaction gain [$60,000 x (P40.70 – P40.00)] 42,000 Accounts receivable valued at 12/31 Balance Sheet ($60,000 x P40.70)……… P2,442,000 Accounts receivable valued at 12/1 Date of Transaction ($60,000 x P40.00)……… 2,400,000 Adjustment to accounts receivable needed……….. P 42,000 March 1, 20x5 (Settlement date): Cash ($60,000 x P40,60)……………….. 2,436,000 Foreign currency transaction loss……… 6,000 Accounts receivable ($60,000 x P40.70)………. 2,442,000 2. a. a.1. None – transaction date a.2. P42,000 gain a.3. P6,000 loss (March 1, 20x5) b. b.1. P2,442,000 – spot rate on the balance sheet date or current rate on the balance sheet b.2. P973,200 – spot rate on the transaction date or historical rate on the balance sheet date. Problem VI The entries to record these transactions and the effects of changes in exchange rates are as follows: November 1, 20x4 (Transaction date): Equity investment (FVTPL)/Financial Asset …………… 3,840,000 Cash 3,840,000 To record the purchase of shares in Pineapple Computers at a cost of $96,000 at the exchange rate of P40. December 10, 20x4 (Transaction date): Equipment ………………………… 636,000 Cash 636,000 To record the purchase of equipment costing 12,000 euros at the exchange rate of P53. December 31, 20x4 (Balance sheet date): Equity investment (FVTPL)/Financial Asset …………… 1,020,000 Unrealized gain in fair value of equity investment (financial asset) 1,020,000 To record gain in fair value of Pineapple Computer’s share. 12/31/x4: Revalued Investment and translated at the rate on the date of revaluation (closing/current rate): (1,200 units x $100 x P40.50)……………. P4,860,000 11/1/x4: Investment, cost (1,200 units x $80 x P40.00) 3,840,000 Unrealized gain on equity investment P1,020,000 Less: Foreign currency transaction gain – equity investment 11/1/20x4: Date of transaction (1,200 units x $80 x P40).. P3,840,000 Less: 12/31/20x4: B/S Date (1,200 units x $80 x P40.50)…. 3,888,000 48,000 Other unrealized gain in the fair value of equity investment... P 972,000 Foreign currency transaction loss….………………….. 19,200 Accounts payable [$96,000 x (P53.20 – P53)]……… 19,200 To record exchange loss on accounts payable in euros. Accounts payable valued at 12/31 Balance Sheet (1,200 x $80 x P53.20)……… 5,107,200 Accounts payable valued at 12/1 Date of Transaction (1,200 x $80 x P53.00)……… 5,088,000 Adjustment to accounts payable needed……….. P 19,200 February 3, 20x5 (Settlement date): Accounts payable………………… 5,107,200 Foreign currency transaction loss [$96,000 x (P53.80 – P53.20)] 57,600 Cash ($96,000 x P53.80)……………. 5,164,800 To record exchange loss on accounts payable in euros and settlement of accounts payable in euros at the spot rate of P53.80. Note the following: The investment in Pineapple Computers, Inc shares is a non-monetary item that is carried at fair value as it is classified as equity investment through profit or loss (or a financial asset – FVTPL refer PF RS 9). The investment is revalued and translated at the rate on the date of revaluation, that is, December 31, 20x4. The equipment is translated at the spot rate at the date of purchase and, being a non-monetary item, is carried at cost. It is not adjusted for the change in the exchange rate at balance sheet date. The accounts payable in euros is a monetary item and is remeasured using the c u rre nt/ closing rate at balance sheet date. The exchange loss is expensed off to the income statement Problem VII 1. May 1 Inventory (or Purchases) 8,400 Accounts Payable 8,400 Foreign purchase denominated in pesos June 20 Accounts Payable 8,400 Cash 8,400 Settle payable. July 1 Accounts Receivable 10,000 Sales 10,000 Foreign sale denominated in pesos August 10 Cash 10,000 Accounts Receivable 10,000 Collect receivable. 2. May 1 Inventory (or Purchases) 8,400 Accounts Payable (FC1) 8,400 Foreign purchase denominated in yen: P8,400 / P.0070 = FC1 1,200,000 June 20 Foreign Currency Transaction Loss 600 Accounts Payable (FC1) 600 Revalue foreign currency payable to peso equivalent value: P9,000 = FC1 1,200,000 x P.0075 June 20 spot rate - 8,400 = FC1 1,200,000 x P.0070 May 1 spot rate P 600 = FC1 1,200,000 x (P.0075 - P.0070) Accounts Payable (FC1) 9,000 Foreign Currency Units (FC1) 9,000 Settle payable denominated in FC1. July 1 Accounts Receivable (FC2) 10,000 Sales 10,000 Foreign sale denominated in foreign currency 2 (FC 2) FC3: P10,000 / P.20 = FC2 50,000 August 10 Accounts Receivable (FC2) 1,000 Foreign Currency Transaction Gain 1,000 Revalue foreign currency receivable to U.S. dollar equivalent value: P 11,000 = FC2 50,000 x P.22 Aug. 10 spot rate - 10,000 = FC2 50,000 x P.20 July 1 spot rate P 1,000 = FC2 50,000 x (P.22 - P.20) Foreign Currency Units (FC2) 11,000 Accounts Receivable (FC2 11,000 Receive FC 2 in settlement of receivable Problem VIII 1. Denominated in FC RR Imports reports in Philippine pesos: 12/1/x4 12/31/x4 1/15/x5 Transaction Balance Sheet Settlement Date Date Date Direct Exchange P.70 P.66 P.68 Rate 2. December 1, 20x4 Inventory (or Purchases) 10,500 Accounts Payable (FC) 10,500 P10,500 = FC 15,000 x P.70 December 31, 20x4 Accounts Payable (FC) 600 Foreign Currency Transaction Gain 600 Revalue foreign currency payable to equivalent peso value: P 9,900 = FC 15,000 x P.66 Dec. 31 spot rate -10,500 = FC 15,000 x P.70 Dec. 1 spot rate P 600 = FC 15,000 x (P.66 - P.70) January 15, 20x5 Foreign Currency Transaction Loss 300 Accounts Payable (FC) 300 Revalue payable to current peso equivalent P10,200 = FC 15,000 x P.68 Jan. 15, 20x5, value - 9,900 = FC 15,000 x P.66 Dec. 31, 20x4, value P 300 = FC 15,000 x (P.68 - P.66) Accounts Payable (FC) 10,200 Foreign Currency Units (FC) 10,200 P10,200 = FC 15,000 x P.68 Accounts Payable (FC) (FC 15,000 x P.70) 12/1/x4 10,500 AJE 12/31/x4 600 (FC 15,000 x P.66) Bal 12/31/x4 9,900 AJE 1/15/x5 300 (FC 15,000 x P.68) Bal 1/15/ x5 10,200 1/15/x5 Settlement 10,200 Bal 1/16/x5 -0- Problem IX 1. December 31, 20x6 Accounts Receivable (FC1) 10,000 Foreign Currency Transaction Gain 10,000 Adjust receivable denominated in FC1 to current peso equivalent and recognize exchange gain: P83,600 = FC475,000 x P.176 Dec. 31 spot rate - 73,600 = Preadjusted Dec. 31, 20x6, value P10,000 Accounts Payable (FC2) 5,200 Foreign Currency Transaction Gain 5,200 Adjust payable denominated in foreign currency to current peso equivalent and recognize exchange gain: P175,300 = Preadjusted Dec. 31, 20x6, value - 170,100 = FC2 21,000,000 x P.0081, Dec. 31 spot rate P 5,200 2. Accounts Receivable (FC1) 1,900 Foreign Currency Transaction Gain 1,900 Adjust receivable denominated in FC1 to equivalent peso value on settlement date: P85,500 = FC1 475,000 x P.180 20x7 collection date value - 83,600 = FC1 475,000 x P.176 Dec. 31, 20x6, spot rate P 1,900 = FC1 475,000 x (P.180 - P.176) Cash 164,000 Foreign Currency Units (FC1) 85,500 Accounts Receivable (FC1) 85,500 Accounts Receivable (P) 164,000 Collect all accounts receivable. 3. Accounts Payable (FC2) 6,300 Foreign Currency Transaction Gain 6,300 Adjust payable to equivalent peso value on settlement date: P163,800 = FC2 21,000,000 x P.0078 20x7 payment date value - 170,100 = FC2 21,000,000 x P.0081 Dec. 31, 20x6, spot rate P 6,300 = FC2 21,000,000 x (P.0078 - P.0081) Accounts Payable (P) 86,000 Accounts Payable (FC2) 163,800 Foreign Currency Units (FC2) 163,800 Cash 86,000 Payment of all accounts payable. 4. Transaction gain on FC: December 31, 20x6 P10,000 gain December 31, 20x7 1,900 gain Overall P11,900 gain 5. Transaction gain on FC2: December 31, 20x6 P 5,200 gain December 31, 20x7 6,300 gain Overall P11,500 gain 6. Overall foreign currency transactions gain: Gain on FC1 transaction P11,900 Gain on FC2 transaction 11,500 P23,400 CDL could have hedged its exposed position. The exposed positions are only those denominated in foreign currency units. The accounts receivable denominated in FC1 could be hedged by selling FC1 in the forward market, thereby locking in the value of the FC1. The accounts payable denominated in FC2 could be hedged by buying FC2 in the forward market, thereby locking in the value of the FC2. Problem X Foreign Foreign Currency Currency Accounts Transaction Exchange Transaction Receivable Accounts Payable Loss Exchange Gain Case 1 NA P16,000(a) NA P2,000(b) Case 2 P38,000(c) NA NA P2,000(d) Case 3 NA P27,000(e) P3,000(f) NA Case 4 P6,250(g) NA P1,250(h) NA (a) LCU 40,000 x P.40 (b) LCU 40,000 x (P.40 - P.45) (c) LCU 20,000 x P1.90 (d) LCU 20,000 x (P1.90 - P1.80) (e) LCU 30,000 x P.90 (f) LCU 30,000 x (P.90 - P.80) (g) LCU 2,500,000 x P.0025 (h) LCU 2,500,000 x (P.0025 - P.003) Multiple Choice Problems 1. c C$1 / P.90 (C$1.11 = P1.00) 2. d – (correction: the question should be April 20, 20x5 not 20x4) 20x4 20x5 P.4895 x FC30,000 P14,685 P.4845 x FC30,000 P14,535 P.4845 x FC30,000 14,535 P.4945 x FC30,000 14,835 Gain P 150 Loss P (300) 3. b 20x4 Date of transaction (12/1/20x4) P .0095 Balance sheet date (12/31/20x4) .0096 Foreign exchange currency loss per FC P .0001 Multiplied by: No. of FC 1,000,000 Foreign exchange currency loss P 100 20x5 Balance sheet date (12/31/20x4) P .0096 Date of settlement (1/10/20x5) .0094 Foreign exchange currency gain per FC P .0002 Multiplied by: No. of FC 1,000,000 Foreign exchange currency gain P 200 4. c Balance sheet date (12/31/20x4) P125,000 Date of settlement (7/1/20x5) 140,000 Foreign exchange currency loss P 15,000 5. b January 15 Foreign Currency Units (LCU) 300,000 Exchange Loss 15,000 Accounts Receivable (LCU) 315,000 Collect foreign currency receivable and recognize foreign currency transaction loss for changes in exchange rates: P300,000 = (LCU 900,000 / LCU 3) Jan. 15 value - 315,000 = Dec. 31 Peso equivalent P 15,000 Foreign currency transaction loss 6. c – spot rate on the date of transaction 7. a - spot rate on the date of transaction 8. d P120,000 = July 1, 20x4, Peso equivalent value P140,000 = December 31, 20x4, Peso equivalent value (LCU 840,000 / P140,000) = LCU 6 / P1 -105,000 = July 1, 20x5, Peso equivalent value (LCU 840,000 / 8) = P105,000 P(35,000) Foreign currency transaction loss 9. d P27,000 = P6,000 + P20,000 + P1,000 Accounts Payable (FCU) 1/20/x4 90,000 AJE 6,000 3/20/x4 96,000 Foreign Exchange Loss 6,000 Accounts Payable (FCU) 6,000 Notes Payable (FCU) 7/01/x4 500,000 AJE 20,000 12/31/x4 520,000 Foreign Exchange Loss 20,000 Notes Payable (FCU) 20,000 Interest Payable (FCU) (FCU500,000 x .10 x 1/2 year) 25,000 AJE 1,000 12/3/x4 26,000 Interest expense 25,000 Interest Payable (FCU) 25,000 Foreign Exchange Loss 1,000 Interest Payable (FCU) 1,000 10. c P5,000 Accounts Receivable (FCU) 10/15/x4 100,000 AJE 5,000 11/16/x4 105,000 Settlement 11/16/x4 105,000 Accounts Receivable (FCU) 5,000 Foreign Exchange Gain 5,000 Note: The receivable is recorded on October 15, 20x4, when the goods were shipped, not on September 1, 20x4, when the order was received. 11. b P1,000 Accounts Payable (FCU) (10,000 x P.60) 4/08/x4 6,000 x4 AJE 500 (10,000 x P.55) 12/31/x4 5,500 X5 AJE 1,000 (10,000 x P.45) 3/01/x5 4,500 Settlement 4,500 Bal. -0- X5 AJE Accounts Payable (FCU) 1,000 Foreign Exchange Gain 1,000 12. b P9,000 = 300,000 FCUs x (P1.65 - P1.62). The foreign currency transaction gain is computed using spot rates on the transaction date (November 30, 20x4) and the balance sheet date (December 31, 20x4). The forward exchange rates are not used because the transaction was not hedged. 13. c – Date of transaction (7/7) P 2.08 Balance sheet date (8/31) 2.05 Foreign exchange currency gain per FCU P .03 Multiplied by: No. of FCU 350,000 Foreign exchange currency gain P 10,500 14. b – The value of the asset acquired should be the spot rate on the date of transaction, i.e. P-80. Therefore, the final recorded value of the electric generator should be P40,000 (P.80 x 50,000 FCs) 15. a Date of transaction P .75 Date of settlement .80 Foreign exchange currency gain per FCU P .05 Multiplied by: No. of FCU 200,000 Foreign exchange currency gain P 10,000 16. d Date of transaction (12/15) P .60 Balance sheet date (12/31) .65 Foreign exchange currency gain per FCU P .05 Multiplied by: No. of FCU 80,000 Foreign exchange currency gain P 4,000 17. b Date of transaction (11/30) P 1 .65 Balance sheet date (12/31) 1.62 Foreign exchange currency gain per FCU P .03 Multiplied by: No. of FCU 300,000 Foreign exchange currency gain P 9,000 18. b Date of transaction (11/30) P1.49 Balance sheet date (12/31) 1.45 Foreign exchange currency gain per FCU P .04 Multiplied by: No. of FCU 500,000 Foreign exchange currency gain P 20,000 19. a Date of arrival (P1,000 / 480,000 FC) P .00208 Date of departure (P100/50,000 FC) .00200 Foreign exchange currency loss per FCU P .00008 Multiplied by: No. of FCU 50,000 Foreign exchange currency loss P 4 20. b Date of transaction (10/1) P 1.20 Balance sheet date (12/31) 1.10 Foreign exchange currency gain per LCU P .10 Multiplied by: No. of LCU 5,000 Foreign exchange currency gain P 500 21. d Date of transaction (11/2) P 1. 08 Balance sheet date (12/31) 1.10 Foreign exchange currency gain per LCU P .02 Multiplied by: No. of LCU 23,000 Foreign exchange currency gain P 460 22. a Date of transaction (9/3) : P17,000 / P.85 = 20,000 FC P . 85 Date of settlement (10/10) .90 Foreign exchange currency loss per FC P .05 Multiplied by: No. of FC 20,000 Foreign exchange currency loss P 1,000 23. a Date of transaction (12/5) P .265 Balance sheet date (12/31) .262 Foreign exchange currency gain per FC P .003 Multiplied by: No. of FC 100,000 Foreign exchange currency gain P 300 24. d Balance sheet date (12/31) P .262 Date of settlement (1/10) .264 Foreign exchange currency loss per FC P .002 Multiplied by: No. of FC 100,000 Foreign exchange currency loss P 200 25. c Foreign exchange currency gain (No. 25) P 300 Foreign exchange currency loss (No. 26) _ 200 Overall gain , net P 100 or, Date of transaction (12/5) P .265 Date of settlement (1/10) .264 Foreign exchange currency gain per FC P .001 Multiplied by: No. of FC 100,000 Foreign exchange currency gain P 100 26. b – any gain or loss on foreign currency should be considered ordinary. 27. d Date of transaction (4/8) : P1 / .65 FC (direct quote) P 1.54 Date of settlement (5/8): P1/ .70 FC (direct quote) 1.43 Foreign exchange currency loss per FC P .11 Multiplied by: No. of FC 35,000 Foreign exchange currency loss P 3,850 28. d – the amount of sales should be the spot rate on the date of transaction (or the balance sheet date - historical rate). I.e., P1.7241 x 10,000 FCs = P17,241. 29. e 1/1: Date of transaction – spot rate P 1.7241 12/31: Balance sheet date 1.8182 Foreign exchange currency gain per FC P .0941 Multiplied by: No. of FC 10,000 Foreign exchange currency gain P 941 30. b Balance sheet date (12/31/20x4) P 1.8182 Date of settlement (1/30/20x5) 1.6666 Foreign exchange currency loss per FC P .1516 Multiplied by: No. of FC 10,000 Foreign exchange currency loss P 1,516 31. a – since accounts payable is an exposed account meaning their value will fluctuate based on the spot exchange rates, the value of the accounts payable should be the value on May 8, i.e., the spot rate of P1.25 (P.15 x 2,000,000 FCs = P2,500,000). 32. c 5/8: Date of transaction – spot rate P 1.25 5/31: Balance sheet date 1.26 Foreign exchange currency loss per FC P 0.01 Multiplied by: No. of FC 2,000,000 Foreign exchange currency loss P 20,000 33. e – in a two-transaction approach, the recognition of foreign exchange gain or loss is separate from the settlement, therefore, the amount of accounts payable to be settled should be the spot rate on the settlement date, i.e., P1.20 (P1.20 x 2,000,000 FCs = P2,400,000) 34. a Balance sheet date (12/31/20x4) P8,000 Date of settlement (3/2/20x5) 6,900 Foreign exchange currency loss P 1,100 35. d 4/8/20x3: Date of transaction P 97,000 12/31/20x3: Balance sheet date 103,000 Foreign exchange currency loss P 6,000 36. d Balance sheet date (12/31/20x3) P103,000 Date of settlement (4/2/20x4) 105,000 Foreign exchange currency loss P 2,000 37. d 11/4/x6: Date of transaction – spot rate P .70 12//31/x6: Balance sheet date .67 Foreign exchange currency loss per FC P 0.03 Multiplied by: No. of FC 100,000 Foreign exchange currency loss P 3,000 38. d 10/5/x6: Date of transaction – spot rate P .80 12//31/x6: Balance sheet date .84 Foreign exchange currency loss per FC P 0.04 Multiplied by: No. of FC 100,000 Foreign exchange currency loss P 4,000 39. b Income statement: 12/20/x6: Date of transaction – spot rate P .798 12//31/x6: Balance sheet date .795 Foreign exchange currency gain per FC P 0.003 Multiplied by: No. of FC 1,000,000 Foreign exchange currency gain P 3,000 Balance sheet: Inventory should be spot rate on the transaction date: P.798 x 1,000,000 = P798,000. 40. a Income statement: 12/15/x6: Date of transaction – spot rate P .181 12//31/x6: Balance sheet date .180 Foreign exchange currency loss per FC P 0.001 Multiplied by: No. of FC 1,000,000 Foreign exchange currency loss P 1,000 Sales should be spot rate on the transaction date: P.181 x 1,000,000 = P181,000 41. b - 70,000 x P.65 42. b - 70,000 x P.65 43. a - 70,000 x P.72 44. c - 70,000 x (P.72 - P.65) 45. b - 70,000 x (P.69 - P.72) 46. d - 25,000 x P1.14 47. b - 25,000 x P1.06 48. a - 25,000 (P1.14 - P1.06) 49. d - 25,000 (P1.06 - P1.09) 50. d – spot rate on the date of settlement 51. b – spot rate on the date of purchase/transaction 52. b - spot rate on the date of transaction 53. a – refer to page 646 of the book for the discussion of “one-transaction theory” 54. c – (P.82 – P.82) x 1,000 FCUs 55. a - P5 exchange gain = (P.81 – P.8050) x 1,000 FCUs 56. b – spot rate on the date of transaction(loan date) – 5,000,000 x P1.150 57. d – spot rate on the balance sheet date – (5,000,000 x 5%) x P1.1490 58. a – (P1.15 – P1.149) x 5,000,000 = P5,000 gain 59. d – spot rate on the date of transaction(loan date) – (5,000,000 x 5%) x P1.1485 60. d P78,000/P.80 per FCU = P 97,500 P78,000/P.78 per FCU = _100,000 Difference in FCU = P (2,500) Difference in pesos (2,500) x .78 = P (1,950) 61. b - P97,500 francs (from 60 above) x P.78 = P76,050 62. d Indirect exchange rate: for the Singapore dollars: 1/07025 = 1.4235 for the HK dollars: 1/2.5132 = .3979 63. a - HK$10,000 x P2.5132/HK$ = P25,132 64. b - P10,000/P.7025 = 14,235 Singapore dollars 65. b – FC 1,000,000 x (P0.77 - P0.80) = P30,000 loss 66. d – FC 5,000 x P0.77 = P3,850 Theories Completion Statements 1. International Accounting Standards Board 2. International Accounting Standards 3. commodities 4. conversion 5. translation 6. indirect 7. direct 8. floating, free 9. spot 10. differential rates of inflation 11. purchasing power parity theory 12. denominated 13. measures 14. exposed asset position 15. exposed liability position 16. transaction date 17. bank wire transfers True or False/Multiple Choice 1. False 6. False 11. True 16. False 21. False 26. True 31. True 36. False 2. True 7. True 12. False 17. True 22. True 27. False 32. False 37. True 3. False 8. False 13. True 18. False 23. True 28. False 33. False 38. False 4. True 9. True 14. False 19. False 24. False 29. True 34. True 39. True 5. False 10. False 15. True 20. False 25. True 30. False 35. False 40. True 41. False 46. b 51. c 56. d 61. c 66. d 71. d 76. b 42. True 47. b 52. a 57. c 62. b 67. c 72. c 77. a 43. False 48. d 53. a 58. d 63. a 68. c 73. b 78. d 44. True 49. b 54. b 59. a 64. c 69. b 74. a 79. b 45. True 50. d 55. d 60. c 65. c 70. d 75. c 80. d 81. b 86. d 91. c 96. b 82. d 87. b 92. a 97. a 83. d 88. b 93. a 98. d 84. c 89. b 94. d 99. c 85. d 90. d 95. c/d 100. d