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Activity 4

Why would you ever kiss me? I'm not even half as pretty You gave her your sweater, it's just polyester But you like her better Wish I were Heather

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207 views

Activity 4

Why would you ever kiss me? I'm not even half as pretty You gave her your sweater, it's just polyester But you like her better Wish I were Heather

Uploaded by

Lala Ford
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Summary of Workpaper Entries Relating to Intercompany Sales of Equipment

Consolidated statements workpaper eliminating entries for intercompany sales of


section).
Table 5-1: Summary of Workpaper Elimination Entries Intercompany Profit - Cost
Model Intercompany gain on Sale of Equipment

Entries in Year of Intercompany Sale:

To eliminate unrealized gain on intercompany sole in year of sole and to restore


equipment to its original cost and accumulated depreciation (or book value) to its

balance of the date of the intercompany sole.


To reverse the amount if any) of excess depreciation recorded during the current
year, thus recognizing an equivalent amount of intercompany profit as realized.
Entries in Years Subsequent to Year of Intercompany Sale:

To reduce consolidated retained earnings for


the intercompany gain, to restore
accumulated depreciation and equipment to
their . original balances at the date of
intercompany sale. To reduce the controlling and NCI for
their respective shares of the
intercompany gain, to restore
accumulated depreciation and
equipment to their original balances at
the date of intercompany sale.
To reverse the amount (if any) of excess depreciation recorded during the current
year, thus recognizing an equivalent amount of intercompany profit as realized.
*CIPY - Controlling Interest - prior year.

Illustration 5-4: 80% Owned subsidiary: Cost Model – Partial Goodwill Approach;
Downstream and Upstream of Property, Unrealized Gain and realized Gain on
Sale
To illustrate all aspects of intercompany transactions (downstream and upstream sales)
when the parent company records its investment using the cost model, assuming the
following:
On January 1, 20x4, Perfect Company acquires 80% of the common stock of Son
Company for P310,000. At that time, the fair value of the 20% non-controlling interest is
estimated to be P77.500. The following assets and liabilities of Son Company had book
values that were different from their respective market values:

All other assets and liabilities had book values approximately equal to their respective
fair values.
On January 1, 20x4, the equipment and buildings had a remaining life of 8 and 4 years,
respectively. Inventory is sold in 20x4 and FIFO inventory costing is used. Goodwill, if
any, is reduced by a P3,125 impairment loss during 20x4 based on the fair value basis
(or full- goodwill), meaning the management has determined that the goodwill arising in
the acquisition of Son Company relates proportionately to the controlling and non-
controlling interests, as does the impairment. There was no inter-company sales prior to
20x4, information resulting from intercompany sales of equipment are summarized
below:

Trial balances for the companies for the year ended December 31, 20x4 are as follows:

From the trial balances presented above the following summary for 20x4 results of
operations are as follows:
The resulting ownership situation can be viewed in the schedule of determination and
allocation of excess.
Schedule of Determination and Allocation of Excess (Partial-goodwill)
Date of Acquisition - January 1, 20x4

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


The buildings and equipment will be further analyzed for consolidation purposes as
follows:
A summary or depreciation and amortization adjustments is as follows:

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:
In this case, the goodwill was proportional to the controlling interest of 80% and non-
controlling interest of 20% computed as follows:
The goodwill impairment loss would be allocated as follows:
The unrealized and gain on intercompany sales for 20x4 are as follows:

*selling price less book value


**unrealized gain divided by remaining life; 20x4 - P2,500 x 9/12 = P1,875

First Year after Acquisition


Parent Company Cost Model Entry
When the cost model is used, only two journal entries are recorded by Perfect Company
during 20x4 related to its investment in Son Company. Entry (1) records Perfect
Company's purchase of Son Company's stock, entry (2) recognizes dividend income
based on the P24.000 (P30,000 x 80%) of dividends received during the period.

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
The schedule of determination and allocation of excess presented above provides
complete guidance for the worksheet eliminating entries on January 1, 20x4:
Subsidiary accounts are adjusted to full fair value regardless on the controlling interest
percentage or option used to value non-controlling interest or goodwill. The trial balance
data for Perfect and Son Company are entered in the consolidation workpaper, the
separate financial statements of the two companies, the eliminating entries, and the
consolidated totals for the financial statements on December 31, 20X4 as shown in
Figure 5-5.
Figure 5–5: Worksheet for Consolidated Financial Statements, December 31,
20x4.
Cost Model (Partial-goodwill)
80%-Owned Subsidiary
December 31, 20x4 (First Year after Acquisition)
The consolidated net income, retained earnings and non-controlling interests which can
be verified in Figure 5-5 can also be computed as follows:

*that has been realized in transactions with third parties.


*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.
On date of acquisition the retained earnings of parent should always be considered as
the consolidated retained earnings, thus:

On subsequent to date of acquisition, consolidated retained earnings would be


computed as follows:
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:
Alternatively, NCI on December 31, 20x4 may also be computed as follows:
Second Year after Acquisition
Assume the following information available for Perfect and Son Company for the year

20x5:
No goodwill impairment loss for 20x5.
On December 31, 20x5, intercompany accounts payable and receivable arising from
intercompany sales were fully settled.
Parent Company Cost Model Entry
Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary
investment:

On the books of Son Company, the P40,000 dividend paid was recorded as follows:

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