CA51024 – ACCOUNTING FOR BUSINESS COMBINATION

CONSOLIDATED FS – SUBSEQUENT TO DATE OF ACQUISITION

ACCOUNTING FOR INVESTMENT IN SUBSIDIARY IN SEPARATE FINANCIAL

STATEMENTS

The Investment in Subsidiary Account will be accounted for separately in the books of the parent
company. According to IFRS 10, Investment in Subsidiary may be accounted for under the cost method,
equity method, or under IFRS 9, as a financial asset. The same amounts will appear in the consolidated
financial statements, no matter what method was used.

COST METHOD

Entries under the cost method are as follows:

To record the acquisition:

Investment in Subsidiary XX
Cash XX

Note: Cash can be replaced as consideration transferred by debt or equity instruments, non-cash asset.

To record the dividends received:

Cash XX
Dividend Income XX

Note: The Investment in Subsidiary account does not change in amount under the cost method. In the
Consolidated Financial Statements, that account must be eliminated.

Procedures for Consolidation

1. Compute for goodwill or gain on bargain purchase.

2. Prepare an amortization of excess schedule. The excess is attributable to the difference between
the fair and book values of the net assets of the acquiree company. If fair value is greater than
book value, there is an undervaluation and the opposite happen if the fair value is less than the
book value. The said computations are vital in the preparation of consolidated net income and its
components: Consolidated net income attributable to the parent and the non-controlling interest in
the net income of the subsidiary.

Working paper eliminating entries will be based on the excess and their respective amortizations.

3. Prepare a Determination and Allocation of Excess Schedule to serve as the basis for working
paper eliminating entries to set-up the goodwill or gain on bargain purchase in the consolidated
financial statements, as well as to serve as the basis for the working paper eliminating entries on
the impairment of goodwill.

4. Prepare the following schedule: The 3-column approach (If controlling interest is less than 100%)

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 Conso. NI Controlling NCINIS
NI of Parent XX XX XX
NI of Subsidiary XX XX XX
Amortization of excess (FV>BV)* (XX) (XX) (XX)
Amortization of excess (BV>FV)* XX XX XX
Impairment of Goodwill (XX) (XX) (XX)
Gain on Bargain Purchase*** XX XX XX
Inter Co. Dividends (XX) (XX) (XX)
XX XX XX

NCINIS – Non-Controlling Interest in Net Income of Subsidiary

* Reverse effect for liabilities

Uses of the net amounts found in the three-column approach:

 Consolidated Net Income - the bottom figure of the consolidated income statement.

 CNI-Controlling – needed to solve for the consolidated retained earnings.

 Non-Controlling Interest in the Net Income of the Subsidiary (NCINIS) – used to update
the Non-Controlling Interest in the Net Assets of the Subsidiary (NCINAS or simply
NCI).

5. Compute for Consolidated Retained Earnings:

RE of Parent beginning per books XX

+ CNI-Controlling XX
-Dividends Paid by Parent (XX)
Consolidated Retained Earnings XX

Note: The Consolidated Retained Earnings account will form part of the Consolidated
Shareholders’ Equity.

6. Compute for NCINAS or NCI at the end of the period.

NCINAS from previous year XX

+ NCINIS during the year XX
- NCI in Dividend Declared by Subsidiary (XX)
NCINAS end of the period XX

Note: NCINAS is part of Consolidated Shareholders’ Equity

7. Compute Consolidated Shareholders’ Equity:

Ordinary Shares (Parent) XX

Share Premium (Parent) XX
Consolidated RE XX
NCINAS XX
Consolidated SHE XX

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 8. Add the Consolidated Shareholders’ Equity with the Consolidated Liabilities to arrive at the
Consolidated Assets.

The Consolidated Total Assets amount will serve as the guiding amount when there is a line-by-
line consolidation of the individual asset accounts.

9. Prepare also the breakdown of the Consolidated Statement of Comprehensive Income where
inter-company dividends from the Subsidiary and intercompany gain or loss from intercompany
transactions should be eliminated.

Illustrative Problem 1:

Arkin Corporation acquired 60% of the outstanding shares of Sharp Company on January 2, 2019 for a
consideration transferred of P4,320,000. The Non-controlling interest is measured at fair value. On the
date of acquisition, the related cost of business combination amounted to P80,000. On January 2, 2019,
Sharp Company’s stockholders’ equity accounts were: Ordinary Shares, P4,700,000 and Retained
Earnings, P1,860,000. An examination of the acquired company’s assets and liabilities on the date of
acquisition, revealed that there were assets with book values different from their fair values. The
merchandise inventory of Sharp is undervalued by P180,000; land, which was undervalued by P200,000;
equipment, which was overvalued by P120,000 and copyright was undervalued by P90,000. Inventories
were all sold in 2019. The equipment had a remaining life of 8 years while copyright had a remaining life
of 5 years. Goodwill is impaired in the amount of P30,000 in year 1.

ARKIN SHARP
Cash P 3,240,000 P 1,800,000
Trade Receivable 1,020,000 960,000
Merchandise Inventory 2,640,000 740,000
Furniture, net 720,000 540,000
Equipment, net 1,140,000 660,000
Building, net 9,060,000 4,540,000
Machinery, net 480,000 360,000
Land 5,880,000 3,000,000
Copyright, net 660,000 240,000
Investment in Sharp Co. 4,320,000
Cost of Goods Sold 6,900,000 3,840,000
Loss on Sale of Machinery 60,000 180,000
Expenses 3,840,000 1,620,000
Dividends declared 2,280,000 1,920,000
P 42,240,000 P 20,400,000

Liabilities P3,570,000 P 2,700,000

Ordinary Shares 12,600,000 4,700,000
Retained Earnings, 1/2/19 7,200,000 1,860,000
Sales 16,800,000 9,940,000
Gain on sale of Furniture 90,000 120,000
Dividend Revenue 1,980,000 1,080,000
P 42,240,000 P 20,400,000

The acquirer corporation accounts for its investment account in subsidiary in the separate financial
statements using the cost method.

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 Required: Prepare the consolidated financial statements for the year 2019.

Illustrative Problem 2:

GBC Corporation acquired 80% of the outstanding shares of ARC Company on June 1, 2020 for
P3,517,500. ARC Company’s stockholder’s equity components at the date of acquisition were as
follows: Ordinary shares, P100 par, P1,500,000, Share premium P675,000 and Retained Earnings
P1,335,000. Non-controlling interest is measured at fair value and the fair value is P720,000. The assets
of ARC Co. were fairly valued, except for inventories, which are overstated by P66,000, and equipment,
which was understated by P90,000. Remaining useful life of equipment is 4 years. Stockholders’ equity
of GBC on January 1, 2020 is composed of Ordinary shares P4,500,000, Share premium P1,050,000,
Retained Earnings P3,150,000. Goodwill, if any, should be written down by P30,000 at year-end. Net
Income for the first year of parent is P450,000 and the net income of the subsidiary from the date of
acquisition is P255,000. Dividends declared at the end of the year amounted to P120,000 and P90,000
respectively for GBC and ARC. During the year, there was no issuance of new ordinary shares.

Required:
1. Compute the non-controlling interest in net income in 2020
2. Compute the consolidated net income attributable to controlling interest in 2020
3. Compute the consolidated retained earnings on December 31, 2020
4. Compute the non-controlling interest in net assets on December 31, 2020
5. Compute the amount of consolidated shareholders’ equity on December 31, 2020

Illustrative Problem 3:

Assume the trial balances as of December 31, 2019 for Powell Corporation and Siakam Co.:

DEBITS POWELL SIAKAM

Assets P 100,000 P 30,000
Equipment 400,000 240,000
Investment in Siakam 300,000
Expenses 320,000 110,000
Dividends . 10,000
P 1,120,000 P 390,000
CREDITS
Liabilities 140,000 50,000
Ordinary Share Capital, P1 par 200,000
Ordinary Share Capital, P2 par 40,000
Retained Earnings, Jan. 1 262,000 158,000
Revenues 510,000 142,000
Dividend received from Subsidiary 8,000 . 4
P 1,120,000 P 390,000
Powell Corp. acquired 80% interest in Siakam Co. in January 2017 for P300,000. On this date, the
recorded values of the assets and liabilities of Siakam Co. approximate their fair value, except for
Equipment, which was undervalued by P100,000. The equipment has an estimated remaining life of 10
years depreciated on the straight-line basis. Goodwill is tested for impairment. Powell elects to measure
the non-controlling interest at fair value of Siakam’s identifiable net assets.

Net income and dividends of Siakam Co. are reported as shown below:
  Year Net Income Dividends Paid
2017 P 30,000 P 16,000
2018 26,000 20,000
2019 32,000 10,000
 
The combined impairment loss of Goodwill for the years 2017-2018 is P5,000. Impairment loss for 2019
is P2,000.

Compute for the following:

1. The non-controlling interest on the net assets of the subsidiary (NCINAS) found in the
consolidated Statement of Financial Position on December 31, 2019.
2. The beginning Consolidated RE on January 1, 2019.
3. Consolidated Retained Earnings on Dec. 31, 2019.
4. The Total Consolidated Assets on December 31, 2019.

Illustrative Problem 4:

On January 1, 2019, MEGA INC acquires 75% of the outstanding stocks of WORLD CO for P675,000
which is inclusive of control premium amounting to P25,000. On the same day, MEGA INC paid
P100,000 for the acquisition-related costs. Furthermore, examination of subsidiary’s assets and liabilities
revealed that all assets and liabilities are recorded at fair value except for the following: book value of
inventory is P60,000 while its fair value is P68,000 (90% of the merchandise were sold in 2019); land’s
fair value is P30,000 more than its book value; and the book value of the equipment exceeds its fair value
in the amount of P50,000. The equipment’s economic life is 5 years and the companies use the straight-

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line-method. The non-controlling interest is measured at fair value in the amount of P220,000. The
following are the Statement of Financial Position of both entities as at January 1, 2019 right before the
business combination happened:
Mega Inc. World Co.
Cash 1,250,000 120,000
Accounts receivable 27,000 56,000
Inventories 80,000 60,000
Equipment 330,000 312,500
Land 898,000 530,000
TOTAL ASSETS 2,585,000 1,078,500

Accounts payable 190,000 120,000

Notes payable 400,000 130,000
Ordinary shares 800,000 200,000
Share premium 500,000 80,000
Retained earnings 695,000 548,500
TOTAL LIABILITIES & SHE 2,585,000 1,078,500

During the years 2019 and 2020, the results of operations for both companies revealed the following:

MEGA INC WORLD CO

2019 2020 2019 2020
Sales 800,000 810,000 500,000 490,000
Cost of sales (500,000) (530,000) (220,000) (250,000)
Gross profit 300,000 280,000 280,000 240,000
Other Income 50,000 80,000 20,000 50,000
Operating expenses (215,000) (204,000) (213,500) (197,000)
NET INCOME 135,000 156,000 86,500 93,000

Additional Information:

 Operating expenses presented by MEGA INC in 2019 include the acquisition-related costs
incurred at January 1, 2019.
 In 2019, goodwill was impaired in the amount of P12,000, while in 2020, it was impaired in the
amount of P9,000. They were recognized in their respective year of Impairment.

 Other Income includes dividend income.

The following are the unconsolidated statement of financial positions of P and WORLD CO. on
December 31, 2019 and December 31, 2020, respectively:

MEGA INC. WORLD CO.

2019 2020 2019 2020
Cash 580,000 630,000 180,000 200,000
Accounts receivable 90,000 320,000 50,000 30,000
Inventories 85,500 90,000 95,000 110,000
Equipment, net 326,000 118,000 250,000 320,000

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 Land 898,000 898,000 530,000 530,000
Investment in WORLD CO 675,000 675,000
TOTAL ASSETS 2,654,500 2,731,000 1,105,000 1,190,000

Accounts payable 180,000 150,000 95,000 105,000

Notes payable 367,000 368,000 110,000 120,000
Common stock 800,000 800,000 200,000 200,000
Additional paid-in capital 500,000 500,000 80,000 80,000
Retained earnings 807,500 913,000 620,000 685,000
TOTAL LIABILITIES & SHE 2,654,500 2,731,000 1,105,000 1,190,000

Required: Compute the following for the years ended 2019 and 2020 under the cost method:

1. Consolidated Cash
2. Consolidated Accounts Receivable
3. Consolidated Inventories
4. Consolidated Equipment, net
5. Consolidated Land
6. Investment in Subsidiary in Parent’s books
7. Consolidated Investment in Subsidiary
8. Goodwill in Consolidated Statement of Financial Position
9. Consolidated Total Assets
10. Consolidated Accounts Payable
11. Consolidated Notes Payable
12. Consolidated Total Liabilities
13. Consolidated Common Stock
14. Consolidated Additional Paid-In Capital
12. Consolidated Retained Earnings
13. Non-Controlling Interest in Net Assets of Subsidiary (NCINAS)
14. Consolidated Net income Attributable to Parent
15. Non-Controlling Interest in Net Income of Subsidiary (NCINIS)
16. Consolidated Stockholder’s Equity
EXERCISES

PROBLEM 1

JELAI Corporation purchased 70% of the outstanding capital stock of TONI Corporation on April 1,
2020 at book value. TONI reported net income of P477,000 for the year ended December 31, 2020 and
declared and paid P23,000 cash dividends on December 31. 2020. JELAI reported income of P350,000
from its own operations in 2020.

Compute for the following:

1. Consolidated net income for 2020

2. Consolidated net income attributable to the controlling interest for 2020
3. Consolidated net income attributable to the non-controlling interest for 2020

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 PROBLEM 2

On January 2, 2021 POPO purchases 80% of SOCO’s outstanding stock for P648,000. Of the total
excess, P30,000 is attributable to total goodwill and the balance is for equipment with estimated
remaining useful life of 10 years. NCI is measured using the fair value. On that date, the following
information is available.

ORDINARY SHARES RETAINED EARNINGS

POPO P 1,050,000 P1,560,000
SOCO 240,000 420,000

On December 31, 2021, SOCO net income was P105,000 and declared dividend of P36,000 for POPO but
paid only P30,000. POPO reported income of P285,000 from its own operation, DIVIDEND paid of
P138,000. Goodwill has been impaired and should be reported at P6,000 on December 31, 2021.

Compute for the following:

1. Consolidated Net Income attributable to NCI for the year 2021

2. Consolidated Net Income attributable to Parent for the year 2021
3. Consolidated Retained Earnings, December 31, 2021
4. NCI, December 31, 2021

PROBLEM 3

On January 2, 2021, Domus Corporation purchased 80% of the outstanding shares of Caritate Company
for a consideration of P19 MILLION including the control premium in the amount of P500,000.
Acquisition-related costs paid amount to P45,000. On the same date, Caritate had P16,000,000 of
ordinary shares outstanding and retained earnings of P6,400,000. Caritate also had equipment with a
remaining life of 5 years with a book value of P9,000,000 and a fair value of P10,520,000. The remaining
assets had book values equal to their fair values. All intangibles, except goodwill, are expected to have
remaining lives of 8 years.

The income and dividend figures for both Domus and Caritate are as follows: Net income of Domus for
2021 was P3,600,000 and for 2022 was P4,400,000. Net income of Caritate for 2021 was P1,360,000 and
for 2022 was P2,040,000. Dividends declared by Domus during 2021 was P880,000 and for 2022 was
P1,560,000. Dividends declared by Caritate during 2021 was P280,000 and for 2022 was P520,000.
Domus' retained earnings balance at the date of acquisition was P13,800,000.

1. What is the consolidated retained earnings attributable to controlling interest in as of December

31, 2022?
2. What is the consolidated profit for the year ended December 31, 2022?
3. What is the non-controlling interest in net assets as of December 31, 2022?
4. What is the non-controlling interest in net income in 2021?
5. What is the resulting amount of the business combination? Indicate if goodwill or gain.

SOLUTIONS - EXERCISES

PROBLEM 1 – JELAI AND TONI

70% 30%

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 JELAI CI% NCI%
NET INCOME-OWN OPERATIONS 350,000.00 350,000.00
NET INCOME-TONI, APRIL-DEC 2020
(477,000 x 9/12) 357,750.00 250,425.00 107,325.00
CONSOLIDATED NET INCOME 707,750.00 600,425.00 107,325.00
(1) (2) (3)

PROBLEM 2 – POPO AND SOCO

100% 80% 20%
COST OF INVESTMENT 810,000.00 648,000.00 162,000.00
BV NA SUB 660,000.00 528,000.00 132,000.00
EXCESS:EQUIPMENT 120,000.00 96,000.00 24,000.00
GOODWILL 30,000.00 24,000.00 6,000.00

100% C.I. (80%) NCI (20%)

NET INCOME-POPO-OWN
OPERATION 285,000.00 285,000.00  

NET INCOME-SOCO 105,000.00 84,000.00 21,000.00

AMORT-EXCESS (12,000.00) (9,600.00) (2,400.00)
NET INCOME-SOCO-ADJUSTED 93,000.00 74,400.00 18,600.00
GOODWILL IMPAIRMENT (6,000.00) (4,800.00) (1,200.00)
CONSOLIDATED NET INCOME 372,000.00 354,600.00 17,400.00
(2) (1)

R/E-POPO, 1/2/21 1,560,000.00

CONT. INT.-CONSO NI-2021 354,600.00
DIVIDENDS (138,000.00)
CONSO R/E, 12/31/21 1,776,600.00 (3)

NCI, DATE OF ACQUISITION 162,000.00

NCI-NET INCOME 17,400.00
NCI-DIVIDEND (36,000*20/80) (9,000.00)
NCI, END OF 2021 170,400.00 (4)

PROBLEM 3 – DOMUS AND CARITATE

100% 80% 20%
COST OF INVESTMENT 23,784,000.00 19,000,000.00 4,784,000.00
BV NA SUB 22,400,000.00 17,920,000.00 4,480,000.00
EXCESS:EQUIPMENT 1,520,000.00 1,216,000.00 304,000.00
GOODWILL/(GAIN) (136,000.00) (136,000.00) -0-
(5)
2021 2022
80% 20%   80% 20%
  CI% NCI%   CI% NCI%

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 NET INCOME-DOMUS 3,600,000.00     4,400,000.00    
DIVIDEND INCOME (224,000.00)     (416,000.00)    
3,984,000.0
NET INCOME-OWN OPERATION 3,376,000.00 3,376,000.00   3,984,000.00 0  
1,632,000.0
NET INCOME-CARITATE 1,360,000.00 1,088,000.00 272,000.00 2,040,000.00 0 408,000.00
AMORT-EXCESS (304,000.00) (243,200.00) (60,800.00) (304,000.00) (243,200.00) (60,800.00)
1,388,800.0
ADJUSTED NET INCOME-CARITATES 1,056,000.00 844,800.00 211,200.00 1,736,000.00 0 347,200.00
GAIN ON ACQUISITION 136,000.00 136,000.00 -  .   - . - .  - .
5,372,800.0
CONSOLIDATED NET INCOME 4,568,000.00 4,356,800.00 211,200.00 5,720,000.00 0 347,200.00
(4) (2)
RETAINED EARNINGS-DOMUS BEG 2021 13,800,000.00
CONSO-NI-ATTRIB-PARENT 2021 4,356,800.00
DIVIDENDS (880,000.00)
CONSO RETAINED EARNINGS END 2021 17,276,800.00 (1)

NCI-DATE OF ACQUISITION 4,784,000.00

NCI-NET INCOME 211,200.00
NCI-DIVIDEND (56,000.00)
NCI-END 2021 4,939,200.00

RETAINED EARNINGS-DOMUS BEG 2022 16,520,000.00 ALTERNATIVE COMPUTATION OF CONSO RE, 12/31/22:
GAIN ON ACQUISITION 136,000.00 RETAINED EARNINGS-DOMUS END 2022 19,090,000.00
CI% IN UNDISTRIBUTED EARNINGS 2021 620,800.00 GAIN ON ACQUISITION 136,000.00
CONSO RETAINED EARNINGS BEG 2022 17,276,800.00 CI% IN UNDISTRIBUTED EARNINGS 2022 1,593,600.00
CONSO-NI-ATTRIB-PARENT 2022 5,372,800.00 CONSO RETAINED EARNINGS END 2022 20,819,600.00
DIVIDENDS 2022 (1,560,000.00)
CONSO RETAINED EARNINGS END 2022 21,089,600.00 (1)

NCI, DATE OF ACQUISITION 4,784,000.00

NCI% IN UNDISTRIBUTED EARNINGS 2021 155,200.00
NCI, BEG 2022 4,939,200.00
NCI-NET INCOME 2022 347,200.00
NCI-DIVIDEND 2022 (104,000.00)
NCI, END 2022 10,121,600.00 (3)

COMPUTATION OF UNDISTRIBUTED EARNINGS

2021 2022
RETAINED EARNINGS-SUB END OF CY 7,480,000.00 9,000,000.00
RETAINED EARNINGS-SUB DATE OF ACQUISITION (6,400,000.00) (6,400,000.00)

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INCREASE IN RETAINED EARNINGS 1,080,000.00 2,600,000.00
CUMULATIVE AMORTIZATION (304,000.00) (608,000.00)
UNDISTRIBUTED EARNINGS CY 776,000.00 1,992,000.00

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