Chapter 16

Consolidated Financial Statements (Part 1)

Consolidation – Date of acquisition

Fact pattern
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares
with fair value of ₱60 per share and par value of ₱40 per share. The financial statements of
ABC Co. and XYZ, Inc. immediately before the acquisition are shown below:
  ABC Co. XYZ, Inc.
Cash 40,000 20,000
Accounts receivable 120,000 48,000
Inventory 160,000 92,000
Equipment 800,000 200,000
Accumulated depreciation (80,000) (40,000)
Total assets 1,040,000 320,000

Accounts payable 80,000 24,000

Bonds payable 120,000 -
Share capital 480,000 200,000
Share premium 160,000 -
Retained earnings 200,000 96,000
Total liabilities and equity 1,040,000 320,000

On January 1, 20x1, the fair value of the assets and liabilities of XYZ, Inc. were determined
by appraisal, as follows:

Carryin Fair
g value
XYZ, Inc.
amount Fair incremen
s values t
Cash 20,000 20,000 -
Accounts receivable 48,000 48,000 -
Inventory 92,000 124,000 32,000
Equipment 200,000 240,000 40,000
Accumulated (48,000
(40,000) (8,000)
depreciation )
(24,000
(24,000) -
Accounts payable )
296,00 360,00
64,000
Net assets 0 0

The equipment has a remaining useful life as of 4 years from January 1, 20x1.

Case #1: NCI measured at proportionate share of parent

ABC Co. elects to measure non-controlling interest as its proportionate share in XYZ’s net
identifiable assets.
1. How much is the consolidated total assets as of January 1, 20x1?
a. 1,436,000 b. 1,439,000 c. 1,736,000 d. 1,376,000

2. How much is the consolidated total equity as of January 1, 20x1?

a. 1,200,000 b. 1,215,000 c. 1,212,000 d. 1,364,000

Case #2: NCI measured at fair value

ABC Co. elects the option to measure non-controlling interest at fair value and a value of
₱75,000 is assigned to the 20% non-controlling interest [(₱300,000 ÷ 80%) x 20% =
75,000].
3. How much is the consolidated total assets as of January 1, 20x1?
a. 1,436,000 b. 1,439,000 c. 1,736,000 d. 1,376,000

4. How much is the consolidated total equity as of January 1, 20x1?

a. 1,200,000 b. 1,215,000 c. 1,212,000 d. 1,364,000

Consolidation subsequent to date of acquisition (Proportionate share)

Fact pattern
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares
with fair value of ₱60 per share and par value of ₱40 per share. On acquisition date, ABC
Co. elected to measure non-controlling interest as its proportionate share in XYZ, Inc.’s
net identifiable assets.

XYZ’s shareholders’ equity as of January 1, 20x1 comprises the following:

(at carrying
  amounts)
Share capital 200,000
Retained
earnings 96,000
Total equity 296,000

On January 1, 20x1, the fair values of the assets and liabilities of XYZ, Inc. were determined
by appraisal, as follows:

Carryin Fair
g value
XYZ, Inc.
amount Fair incremen
s values t
Cash 20,000 20,000 -
Accounts receivable 48,000 48,000 -
Inventory 92,000 124,000 32,000
Equipment 200,000 240,000 40,000
Accumulated
(40,000) (48,000) (8,000)
depreciation
Accounts payable (24,000) (24,000) -
360,00
296,000 64,000
Net assets 0
The remaining useful life of the equipment is 4 years.

During 20x1, no dividends were declared by either ABC or XYZ. There were also no inter-
company transactions. The group determined that there is no goodwill impairment.

ABC’s and XYZ’s individual financial statements at year-end are shown below:

Statements of financial position

As at December 31, 20x1

ABC Co. XYZ, Inc.

ASSETS
Cash 92,000 228,000
Accounts receivable 300,000 88,000
Inventory 420,000 60,000
Investment in subsidiary 300,000 -
Equipment 800,000 200,000
Accumulated depreciation (240,000) (80,000)
TOTAL ASSETS 1,672,000 496,000

LIABILITIES AND EQUITY

Accounts payable 172,000 120,000
Bonds payable 120,000 -
Total liabilities 292,000 120,000
Share capital 680,000 200,000
Share premium 260,000 -
Retained earnings 440,000 176,000
Total equity 1,380,000 376,000
TOTAL LIABILITIES AND EQUITY 1,672,000 496,000

Statements of profit or loss

For the year ended December 31, 20x1

ABC Co. XYZ, Inc.

Sales 1,200,000 480,000
Cost of goods sold (660,000) (288,000)
Gross profit 540,000 192,000
Depreciation expense (160,000) (40,000)
Distribution costs (128,000) (72,000)
(12,000
-
Interest expense )
Profit for the year 240,000 80,000

5. How much is the consolidated profit for 20x1?

a. 208,000 b. 280,000 c. 240,000 d. 296,000

6. How much is the consolidated total assets as of December 31, 20x1?

a. 1,867,000 b. 1,907,000 c. 1,894,000 d. 1,904,000
7. How much is the consolidated total equity as of December 31, 20x1?
a. 1,492,000 b. 1,415,000 c. 1,412,000 d. 1,421,000

Consolidation subsequent to date of acquisition – NCI at Fair value

Fact pattern
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares
with fair value of ₱60 per share and par value of ₱40 per share. On acquisition date, ABC
Co. elected to measure non-controlling interest at the non-controlling interest’s fair value.
A value of ₱75,000 is assigned to the 20% non-controlling interest [(₱300,000 ÷ 80%) x
20% = ₱75,000].

XYZ’s shareholders’ equity as of January 1, 20x1 comprises the following:

(at carrying
  amounts)
Share capital 200,000
Retained
earnings 96,000
Total equity 296,000

On January 1, 20x1, the fair values of the assets and liabilities of XYZ, Inc. were determined
by appraisal, as follows:
Fair value
XYZ, Inc.
Carrying amounts Fair values increment
Cash 20,000 20,000 -
Accounts receivable 48,000 48,000 -
Inventory 92,000 124,000 32,000
Equipment 200,000 240,000 40,000
Accumulated depreciation (40,000) (48,000) (8,000)
Accounts payable (24,000) (24,000) -
Net assets 296,000 360,000 64,000
The remaining useful life of the equipment is 4 years.

During 20x1, no dividends were declared by either ABC or XYZ. There were also no inter-
company transactions. The group determined that there is no goodwill impairment.

ABC’s and XYZ’s individual financial statements at year-end are shown below:

Statements of financial position

As at December 31, 20x1

ABC Co. XYZ, Inc.

ASSETS
Cash 92,000 228,000
Accounts receivable 300,000 88,000
Inventory 420,000 60,000
Investment in subsidiary 300,000
Equipment 800,000 200,000
Accumulated depreciation (240,000) (80,000)
TOTAL ASSETS 1,672,000 496,000
 LIABILITIES AND EQUITY
Accounts payable 172,000 120,000
Bonds payable 120,000 -
Total liabilities 292,000 120,000
Share capital 680,000 200,000
Share premium 260,000 -
Retained earnings 440,000 176,000
Total equity 1,380,000 376,000
TOTAL LIABILITIES AND EQUITY 1,672,000 496,000

Statements of profit or loss

For the year ended December 31, 20x1

ABC Co. XYZ, Inc.

Sales 1,200,000 480,000
Cost of goods sold (660,000) (288,000)
Gross profit 540,000 192,000
Depreciation expense (160,000) (40,000)
Distribution costs (128,000) (72,000)
Interest expense (12,000) -
Profit for the year 240,000 80,000

8. How much is the consolidated profit for 20x1?

a. 208,000 b. 280,000 c. 240,000 d. 296,000

9. How much is the consolidated total assets as of December 31, 20x1?

a. 1,867,000 b. 1,907,000 c. 1,894,000 d. 1,904,000

10. How much is the consolidated total equity as of December 31, 20x1?
a. 1,492,000 b. 1,415,000 c. 1,412,000 d. 1,495,000

KEY TO CORRECTION

Answers at a glance:
1. A 6. D
2. C 7. A
3. B 8. B
4. B 9. B
5. B 10. D

Solution:
1. A
Solution:
 Total assets of parent 1,040,000
Total assets of subsidiary 320,000
Investment in subsidiary -
Fair value adjustments - net 64,000
Goodwill – net* 12,000
Effect of intercompany transactions -
Consolidated total assets 1,436,000

*Consideration transferred (5,000 sh. x 60) 300,000

Non-controlling interest in the acquiree (360,000 x 20%) 72,000
Previously held equity interest in the acquire -
Total 372,000
Fair value of net identifiable assets acquired (360,000)
Goodwill 12,000

2. C
Solution:
Share capital of parent [480,000 + (5,000sh. x 40par)] 680,000
Share premium of parent {160,000 + [5,000sh. x (60 – 40)]} 260,000
Consolidated retained earnings – (parent only) 200,000
Equity attributable to owners of the parent 1,140,000
Non-controlling interests (360,000 x 20%) 72,000
Consolidated total equity 1,212,000

3. B
Solution:
Total assets of parent 1,040,000
Total assets of subsidiary 320,000
Investment in subsidiary -
Fair value adjustments - net 64,000
Goodwill – net* 15,000
Effect of intercompany transactions -
Consolidated total assets 1,439,000

*Consideration transferred (5,000 sh. x 60) 300,000

Non-controlling interest in the acquiree 75,000
Previously held equity interest in the acquire -
Total 375,000
Fair value of net identifiable assets acquired (360,000)
Goodwill 15,000

4. B
Solution:
Share capital of parent [480,000 + (5,000sh. x 40par)] 680,000
Share premium of parent {160,000 + [5,000sh. x (60 – 40)]} 260,000
Consolidated retained earnings – (parent only) 200,000
Equity attributable to owners of the parent 1,140,000
Non-controlling interests 75,000
Consolidated total equity 1,215,000

5. B
Solution:
Parent Subsidiary Consolidated
Profits before adjustments 240,000 80,000 320,000
 Consolidation adjustments:
Unrealized profits ( - ) ( - ) ( - )
Dividend income from subsidiary ( - ) N/A ( - )
Gain or loss on extinguishment
of bonds ( - ) ( - ) ( - )
Net consolidation adjustments ( - ) ( - ) ( - )
Profits before FVA 240,000 80,000 320,000
Depreciation of FVA* (32,000) (8,000) (40,000)
Impairment loss on goodwill ( - ) ( - ) ( - )
Consolidated profit 208,000 72,000 280,000

*The subsequent depreciation of fair value adjustments (FVA) is determined as follows:

Fair value Divide by Subsequent
  adjustments useful life depreciation
Inventory 32,000 N/A 32,000
Equipment 40,000
Accumulated depreciation (8,000)
Equipment – net 32,000 4 8,000
Totals 64,000   40,000

Parent’s share = 40,000 x 80% = 32,000

Subsidiary’s share = 40,000 x 20% = 8,000

6. D
Solution:
Total assets of parent 1,672,000
Total assets of subsidiary 496,000
Investment in subsidiary (300,000)
Fair value adjustments – net (64,000 – 40,000 dep’n.) 24,000
Goodwill – net* 12,000
Effect of intercompany transactions -
Consolidated total assets 1,904,000

*Consideration transferred (5,000 sh. x 60) 300,000

Non-controlling interest in the acquiree (360K x 20%) 72,000
Previously held equity interest in the acquire -
Total 372,000
Fair value of net identifiable assets acquired (360,000)
Goodwill 12,000

7. A
Solution:
Analysis of net assets
Consoli-dation
 Subsidiary Acquisition date
date
Net change
Share capital (& Share premium) 200,000 200,000
Retained earnings 96,000 176,000
Totals at carrying amounts 296,000 376,000
FVA at acquisition 64,000 64,000
Subsequent depn. Of FVA NIL (40,000)
Unrealized profits (Upstream only) NIL -
Net assets at fair value 360,000 400,000 40,000

NCI in net assets

XYZ's net assets at fair value – Dec. 31, 20x1 400,000
 Multiply by: NCI percentage 20%
Total 80,000
Add: Goodwill to NCI net of accumulated impairment losses -
Non-controlling interest in net assets – Dec. 31, 20x1 80,000

Consolidated retained earnings

ABC's retained earnings – Dec. 31, 20x1 440,000
Consolidation adjustments:
ABC's share in the net change in XYZ's net assets (a) 32,000
Unrealized profits (Downstream only) -
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable
-
to parent
Net consolidation adjustments 32,000
Consolidated ret. earnings – Dec. 31, 20x1   472,000
(a)
(40,000 net change in net assets x 80%) = 32,000

Share capital of parent 680,000

Share premium 260,000
Consolidated retained earnings – (see above) 472,000
Equity attributable to owners of the parent 1,412,000
Non-controlling interests - (see above) 80,000
Consolidated total equity 1,492,000

8. B
Solution:
Parent Subsidiary Consolidated
Profits before adjustments 240,000 80,000 320,000
Consolidation adjustments:
Unrealized profits ( - ) ( - ) ( - )
Dividend income from subsidiary ( - ) N/A ( - )
Gain or loss on extinguishment
of bonds ( - ) ( - ) ( - )
Net consolidation adjustments ( - ) ( - ) ( - )
Profits before FVA 240,000 80,000 320,000
Depreciation of FVA* (32,000) (8,000) (40,000)
Impairment loss on goodwill ( - ) ( - ) ( - )
Consolidated profit 208,000 72,000 280,000

*The subsequent depreciation of fair value adjustments (FVA) is determined as follows:

Fair value Divide by Subsequent
  adjustments useful life depreciation
Inventory 32,000 N/A 32,000
Equipment 40,000
Accumulated depreciation (8,000)
Equipment – net 32,000 4 8,000
Totals 64,000   40,000

9. B
Solution:
Total assets of parent 1,672,000
Total assets of subsidiary 496,000
Investment in subsidiary (300,000)
 Fair value adjustments – net (64,000 – 40,000 dep’n.) 24,000
Goodwill – net* 15,000
Effect of intercompany transactions -
Consolidated total assets 1,907,000

* Consideration transferred (5,000 x 60) 300,000

Previously held equity interest in the acquiree -
Total 300,000
Less: Parent's proportionate share in the net assets of
subsidiary (360,000 x 80%) (288,000)
Goodwill attrib. to owners of parent - acquisition date 12,000
Less: Parent's share in goodwill impairment -
Goodwill attrib. to owners of parent 12,000

Fair value of NCI 75,000

Less: NCI's proportionate share in net assets
(72,000)
of subsidiary (360,000 x 20%)
Goodwill attributable to NCI - acquisition date 3,000
Less: NCI's share in goodwill impairment -
Goodwill attributable to NCI – current year 3,000

Goodwill, net – current year 15,000

10. B
Solution:
Analysis of net assets
Consoli-dation
 Subsidiary Acquisition date
date
Net change
Share capital (& Share premium) 200,000 200,000
Retained earnings 96,000 176,000
Totals at carrying amounts 296,000 376,000
FVA at acquisition 64,000 64,000
Subsequent depn. Of FVA NIL (40,000)
Unrealized profits (Upstream only) NIL -
Net assets at fair value 360,000 400,000 40,000

NCI in net assets

XYZ's net assets at fair value – Dec. 31, 20x1 400,000
Multiply by: NCI percentage 20%
Total 80,000
Add: Goodwill to NCI net (see goodwill computation above) 3,000
NCI in net assets – Dec. 31, 20x1 83,000

Consolidated retained earnings

ABC's retained earnings – Dec. 31, 20x1 440,000
Consolidation adjustments:
ABC's share in the net change in XYZ's net
32,000
assets (40,000 x 80%)
Unrealized profits (Downstream only) -
 Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable
-
to parent
Net consolidation adjustments 32,000
Consolidated ret. earnings – Dec. 31, 20x1 472,000

Share capital of parent 680,000

Share premium 260,000
Consolidated retained earnings – (see above) 472,000
Equity attributable to owners of the parent 1,412,000
Non-controlling interests - (see above) 83,000
Consolidated total equity 1,495,000

Chapter 17
Consolidated Financial Statements (Part 2)

Chapter 17: Multiple Choice – Computational (For classroom instruction purposes)

Fair value decrement

Use the following information for the next two questions:
Popo Co. acquired 80% of Momo Co. on January 1, 20x1 for ₱800,000. The following
information was determined at acquisition date:
Momo Momo
  Popo Co. Co. Co.
Carrying Carrying Fair
  amount amount value
1,600,00
Equipment 4,000,000 2,000,000 0
Accumulated ( 320,000
depreciation (800,000) (400,000) )
1,280,00
Net 3,200,000 1,600,000 0

Remaining useful life – Jan. 1, 20x1 10 years 5 years 5 years

1. How much is the consolidated “equipment – net” in the December 31, 20x2 financial
statements?
a. 3,968,000 b. 3,628,000 c. 3,428,000 d. 3,328,000

2. The consolidation journal entry for the depreciation of the fair value adjustment on
December 31, 20x2 includes
a. debit to accumulated depreciation for ₱128,000
b. credit to accumulated depreciation for ₱128,000
c. debit to depreciation expense for ₱64,000
d. debit to retained earnings of Popo Co. for ₱51,200

Fair value increment

3. On January 1, 20x1, Donkey Co. acquired 75% of Monkey Co. At that time, Monkey’s
equipment has a carrying amount of ₱400,000 and a fair value of ₱480,000. The
equipment has a remaining useful life of 10 years. On December 31, 20x2, Donkey and
Monkey reported equipment with carrying amounts of ₱2,000,000 and ₱1,200,000,
respectively. How much is the consolidated “equipment – net” in the December 31, 20x2
financial statements?
a. 3,200,0000 b. 3,384,000 c. 3,264,000 d. 3,124,000

NCI in net assets

Use the following information for the next six questions:
Owl Co. paid ₱600,000 for its 75% interest in Owlet Co. Owl elected to value NCI at fair
value. Owlet’s net identifiable assets approximated their fair values at acquisition date. The
acquisition resulted in a goodwill attributable to NCI of ₱40,000.

Since the acquisition date, Owlet has made accumulated profits of ₱800,000. There have
been no changes in Owlet’s share capital since acquisition date. The group determined that
goodwill has been impaired by ₱32,000.

A summary of the individual statements of financial positions of the entities as at the end of
reporting period is shown below:
Owlet
  Owl Co. Co.
2,000,00
4,000,000
Total assets 0

Total liabilities 800,000 480,000

Share capital 1,200,000 400,000
1,120,00
2,000,000
Retained earnings 0
Total liabilities and 2,000,00
4,000,000
equity 0

4. How much is the fair value assigned to NCI at date of acquisition?

a. 220,000 b. 250,000 c. 268,000 d. 224,000

5. How much is the goodwill to be presented in the current-year consolidated financial

statements?
a. 72,000 b. 64,000 c. 56,000 d. 68,000

6. How much is the NCI in net assets?

a. 304,000 b. 380,000 c. 412,000 d. 426,000

7. How much is the consolidated retained earnings?

a. 2,600,000 b. 2,480,000 c. 2,576,000 d. 2,276,000

8. How much is the consolidated total assets?

a. 5,468,000 b. 6,068,000 c. 5,400,000 d. 5,620,000

9. How much is the consolidated total equity?

a. 6,188,000 b. 4,188,000 c. 4,156,000 d. 5,622,000
NCI in profit and comprehensive income
Use the following information for the next six questions:
On January 1, 20x1, Rooster Co. acquired 75% interest in Cockerel Co. for ₱600,000. At
this time, Cockerel's net identifiable assets have a carrying amount of ₱720,000 which
approximates fair value. NCI was assigned a fair value of ₱220,000.

During 20x1, Rooster sold goods to Cockerel for ₱600,000, having bought them for
₱480,000. A quarter of these goods remain unsold at year-end. Goodwill on acquisition of
Cockerel has been tested for impairment and found to be impaired (in total) by ₱32,000 for
the current year.

The individual statements of profit or loss and other comprehensive income of the entities
for the year ended December 31, 20x1 are shown below:

Rooster Co. Cockerel Co.

Revenue 4,000,000 2,800,000
Cost of sales (1,600,000) (1,200,000)
Gross profit 2,400,000 1,600,000
Dividend income from Cockerel Co. 40,000
Distribution costs (800,000) (400,000)
Administrative costs (320,000) (200,000)
Profit before tax 1,320,000 1,000,000
Income tax expense (384,000) (300,000)
Profit after tax 936,000 700,000
Other comprehensive income 296,000 100,000
Comprehensive income 1,232,000 800,000

10. How much is the consolidated sales?

a. 6,200,000 b. 6,350,000 c. 6,650,000 d. 6,180,000

11. How much is the consolidated cost of sales?

a. 2,170,000 b. 2,230,000 c. 2,770,000 d. 2,320,000

12. How much is the consolidated profit?

a. 1,574,000 b. 1,566,000 c. 1,564,000 d. 1,534,000

13. How much is the consolidated comprehensive income?

a. 1,970,000 b. 1,930,000 c. 1,962,000 d. 1,960,000

14. How much is the profit attributable to owners of the parent and NCI, respectively?
Owners of Parent NCI
a. 1,391,000 175,000
b. 1,367,000 167,000
c. 1,391,000 173,000
d. 1,384,000 190,000

15. How much is the comprehensive income attributable to owners of the parent and NCI,
respectively?
Owners of Parent NCI
a. 1,663,000 267,000
 b. 1,778,000 192,000
c. 1,756,000 206,000
d. 1,738,000 192,000

Acquisition during the year

Use the following information for the next four questions:
On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. At this time, Piglet's net
identifiable assets have a carrying amount of ₱720,000 which approximates fair value.

During the last month of the year, Piglet sold goods to Pig for ₱324,000. Piglet had marked
up these goods by 50% on cost. One-third of these goods remain unsold at year-end. The
group assessed that there is no impairment loss on goodwill for the current year.

The individual statements of profit or loss of the entities for the year ended December 31,
20x1 are shown below:

Pig Co. Piglet Co.

Revenue 4,000,000 2,880,000
Cost of sales (1,600,000) (1,200,000)
Gross profit 2,400,000 1,680,000
(800,000
Distribution costs )
(320,000
(180,000)
Administrative costs )
Profit before tax 1,280,000 1,100,000
(384,000
(380,000)
Income tax expense )
Profit after tax 896,000 720,000

All of Piglet’s income and expenses (including profit from inter-company sale) were earned
and incurred evenly during the year.

16. How much is the consolidated sales?

a. 6,556,000 b. 4,852,000 c. 4,786,000 d. 4,636,000

17. How much is the consolidated cost of sales?

a. 1,712,000 b. 2,530,000 c. 1,730,000 d. 1,876,000

18. How much is the consolidated profit?

a. 1,100,000 b. 1,580,000 c. 1,360,000 d. 1,420,000

19. How much is the profit attributable to owners of the parent and NCI, respectively?
Owners of Parent NCI
a. 1,040,000 60,000
b. 1,049,000 51,000
c. 1,036,000 544,000
d. 1,049,000 311,000

Subsidiary’s outstanding cumulative preference shares

20. Bear Co. owns 75% of Cub Co.’s ordinary shares. Cub Co. has 12%, ₱400,000
outstanding cumulative preference shares, none of which are held by Bear Co. The
carrying amount of Cub’s net identifiable assets at acquisition date approximates fair
value.

Bear and Cub reported individual profits of ₱936,000 and ₱700,000, respectively, for the
year ended December 31, 20x1. Neither company declared dividends. There are 3-year
dividends in arrears on the outstanding cumulative preference shares of Cub Co. It was
assessed that goodwill is not impaired.

How much is the profit attributable to owners of the parent and NCI, respectively?
Owners of Parent NCI
a. 1,425,000 163,000
b. 1,377,000 163,000
c. 1,377,000 211,000
d. 1,425,000 211,000
 KEY TO CORRECTION

Answers at a glance:
1. D 6. C 11. B 16. D
2. A 7. C 12. D 17. A
3. C 8. A 13. B 18. A
4. A 9. B 14. B 19. B
5. D 10. A 15. D 20. D

Solution:
1. D
Solution:
Equipment, net – Lion Co. (800,000 x 8/10) 2,560,000
Equipment, net – Cub Co. (fair value) (1,280,000 x 3/5) 768,000
Consolidated equipment, net – Dec. 31, 20x2 3,328,000

2. A
Solution:
Dec. Accumulated depreciation (320K x 2/5) 128,00
31,
Depreciation expense (320K ÷ 5) 0 64,000
20x2
Retained earnings – Lion Co.* 51,200
Retained earnings – Cub Co.* 12,800

*These are the shares of Lion and Cub in the depreciation of the FVA in the prior year, i.e., 20x1 (64,000 x 80% & 20%).

3. C
Solution:
Equipment, net – Kangaroo 2,000,000
Equipment, net – Joey 1,200,000
FVA on equipment, net - increment [(480,000 – 400,000) x 8/10] 64,000
Consolidated equipment, net – Dec. 31, 20x2 3,264,000

4. A
Solution:
Analysis of net assets
Acquisition Consolidation
Owlet Co. date date
Net change
Share capital 400,000 400,000
Retained earnings (1.12M – 800K) 320,000 1,120,000
 Totals at carrying amounts 720,000 1,520,000  
Fair value adjustments at acquisition date - -
Subsequent depreciation of FVA NIL -
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 720,000 1,520,000 800,000

The fair value of NCI at acquisition date is computed as follows:

(The solution below is based on a portion of Goodwill computation Formula #2.)

Fair value of NCI 220,000 (squeeze)

NCI's proportionate share in net assets of subsidiary (180,000)a
Goodwill attributable to NCI - acquisition date (given) 40,000 (start)
a
(₱720,000 see above x 25%) = ₱180,000

5. D
Solution:
Consideration transferred (given) 600,000
Less: Previously held equity interest in the acquiree -
Total 600,000
Less: Parent's proportionate share in the net assets of subsidiary (₱720,000
acquisition-date fair value x 75%) (540,000)
Goodwill attributable to owners of parent – acquisition date 60,000
Less: Parent’s share in goodwill impairment (₱32K x 75%) (24,000)
Goodwill attributable to owners of parent – current year 36,000
Fair value of NCI (see Requirement ‘a’) 220,000
Less: NCI's proportionate share in the net assets of subsidiary (₱720,000 acquisition-
date fair value x 25%) (180,000)
Goodwill attributable to NCI – acquisition date 40,000
Less: NCI’s share in goodwill impairment (₱32,000 x 25%) (8,000)
Goodwill attributable to NCI – current year 32,000

Goodwill, net – current year 68,000

6. C
Solution:
Subsidiary’s net assets at fair value (see above) 1,520,000
Multiply by: NCI percentage 25%
Total 380,000
Add: Goodwill attributable to NCI (see above) 32,000
NCI in net assets – current year 412,000

7. C
Solution:
Parent's retained earnings – current year   2,000,000
Consolidation adjustments:
Parent's share in the net change in
subsidiary's net assets (a) 600,000
Parent’s share in goodwill impairment (24,000)
Net consolidation adjustments 576,000
 Consolidated retained earnings   2,576,000 

(a)
Net change in subsidiary’s net assets (see above) ₱800,000 x 75% = ₱600,000.

8. A
Solution:
Total assets of Parent 4,000,000
Total assets of Subsidiary 2,000,000
Investment in subsidiary (consideration transferred) (600,000)
Fair value adjustments - net -
Goodwill – net 68,000
Effect of intercompany transactions -
Consolidated total assets 5,468,000

9. B
Solution:
Share capital of Parent 1,200,000
Share premium of Parent -
Consolidated retained earnings 2,576,000
Equity attributable to owners of the parent 3,776,000
Non-controlling interests 412,000
Consolidated total equity 4,188,000

10. A
Solution:
Sales by Rooster Co. 4,000,000
Sales by Cockerel Co. 2,800,000
Less: Intercompany sales during the current period (600,000)
Consolidated sales 6,200,000

11. B
Solution:
The unrealized profit in ending inventory is computed as follows:
Sale price of intercompany sale 600,000
Cost of intercompany sale (480,000)
Profit from intercompany sale 120,000
Multiply by: Unsold portion as of yr.-end 1/4
Unrealized gross profit in ending inventory 30,000

Cost of sales of Rooster Co. 1,600,000

Cost of sales of Cockerel Co. 1,200,000
Less: Intercompany sales during the current period (600,000)
Add: Unrealized gross profit in ending inventory 30,000
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory -
Consolidated cost of sales 2,230,000

12. D
Solution:
Rooster Cockerel Consolidated
Profits before adjustments 936,000 700,000 1,636,000
Consolidation adjustments:
Unrealized profit (Reqmt.’a’) (30,000) - (30,000)
Dividend income (given) (40,000) N/A (40,000)
 Net consol. adjustments (70,000) - (70,000)
Profits before FVA 866,000 700,000 1,566,000
Depreciation of FVA - - -
Sh. in goodwill impairment(b) (24,000) (8,000) (32,000)
Consolidated profit 842,000 692,000 1,534,000
OCI 296,000 100,000 396,000
Comprehensive income 1,138,000 792,000 1,930,000
(b)
Share in goodwill impairment: (₱32,000 x 75%); (₱32,000 x 25%)

13. B (See solution above)

14. B
Solution:
Owners Consoli-
  of parent NCI dated
Rooster's profit before FVA 866,000 N/A 866,000
(see above)
(c)
Sh. in Cockerel’s profit before FVA
Depreciation of FVA - - -
Sh. in goodwill impairment (see above) (24,000) (8,000) (32,000)
1,367,00 167,00
1,534,000
Profit attributable to 0 0
Rooster's OCI 296,000 N/A 296,000
Sh. in Cockerel’s OCI (d) 75,000 25,000 100,000
1,738,00 192,00
1,930,000
Comprehensive inc. attributable to 0 0
(c)
Share in Cockerel’s profit before FVA: (₱700,000 x 75%); (₱700,000 x 25%)
(d)
Share in Cockerel’s OCI: (₱100,000 x 75%); (₱100,000 x 25%)

15. D (See solution above)

16. D
Solution:
The consolidated sales and cost of sales are computed as follows:
Consolidated sales
Sales of Pig Co. 4,000,000
Sales of Piglet Co. from Sept. 1 to Dec. 31 only (₱2.88M x4/12) 960,000
Less: Intercompany sales during the year (324,000)
Consolidated sales 4,636,000

17. A
Solution:
The unrealized profit in ending inventory is computed as follows:
Sale price of intercompany sale 324,000
Cost of intercompany sale (₱324,000 ÷ 150%) (216,000)
Profit from intercompany sale 108,000
Multiply by: Unsold portion as of year-end 1/3
Unrealized gross profit 36,000

Cost of sales of Pig Co. 1,600,000

COS of Piglet Co. from Sept. 1 to Dec. 31 only (₱1.2M x 4/12) 400,000
Less: Intercompany sales during the year (324,000)
Add: Unrealized gross profit in ending inventory 36,000
Less: Realized profit in beginning inventory -
 Add: Depreciation of FVA on inventory -
Consolidated cost of sales 1,712,000

18. A
Solution:
Parent Subsidiary Consolidated
Profits before adjustments 896,000 240,000a 1,136,000
Consolidation adjustments:
Unrealized profit - (see above) ( - ) (36,000) (36,000)
Net consolidation adjustments ( - ) (36,000) (36,000)
Profits before FVA 896,000 204,000 1,100,000
Depreciation of FVA ( - ) ( - ) ( - )
Consolidated profit 896,000 204,000 1,100,000
a
(₱720,000 x 4/12 = ₱240,000)

19. B
Solution:
Owners Consoli-
  of parent NCI dated
Pig's profit before FVA (see
above) 896,000 N/A 896,000
Share in Piglet’s profit before FVA (c) 153,000 51,000 204,000
Depreciation of FVA ( - ) ( - ) ( - )
Share in goodwill impairment ( - ) ( - ) ( - )
1,049,00 51,00 1,100,00
Totals 0 0 0
(c)
Shares in Piglet’s profit before FVA (see above): (₱204K x 75%); (₱204K x 25%)

20. D
Solution:
Profit or loss attributable to owners of parent and NCI
Owners Consoli-
  of parent NCI dated
Bear's profit before FVA (given) 936,000 N/A 936,000
163,00
489,000 652,000
Share in Cub’s profit before FVA (a) 0
Profit attributable to preference
N/A 48,000 48,000
shareholders of Cub (b)
Depreciation of FVA - - -
Share in impairment loss on goodwill - - -
1,424,96 211,00
1,636,000
Totals 0 0

(a)
The shares in Cub’s profit are computed as follows:
Profit of Cub. Co. 700,000
One-year dividends on cumulative preference sh. (400K x 12%) (48,000)(b)
Profit of Cub Co. attributable to ordinary shareholders 652,000
Allocation:
Bear's share (₱652,000 x 75%) 489,000
NCI's share (₱652,000 x 25%) 163,000
As allocated: 652,000

NOTE: Answer choice is rounded-off.

 Chapter 18
Consolidated Financial Statements (Part 3)

Chapter 18: Multiple Choice – Computational (For classroom instruction purposes)

Impairment of goodwill
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares
with fair value of ₱60 per share and par value of ₱40 per share.

XYZ’s shareholders’ equity as of January 1, 20x1 comprises the following:

(at carrying
  amounts)
Share capital 200,000
Retained
earnings 96,000
Total equity 296,000
On January 1, 20x1, the fair values of the assets and liabilities of XYZ, Inc. were determined
by appraisal, as follows:
Fair value
XYZ, Inc.
Carrying amounts Fair values increment
Cash 20,000 20,000 -
Accounts receivable 48,000 48,000 -
Inventory 92,000 124,000 32,000
Equipment 200,000 240,000 40,000
Accumulated depreciation (40,000) (48,000) (8,000)
Accounts payable (24,000) (24,000) -
Net assets 296,000 360,000 64,000

The remaining useful life of the equipment is 4 years.

During 20x1, no dividends were declared by either ABC or XYZ. There were also no inter-
company transactions.

The group determined that goodwill is impaired by ₱4,000.

ABC’s and XYZ’s individual financial statements at year-end are shown below:

Statements of financial position

As at December 31, 20x1

ABC Co. XYZ, Inc.

ASSETS
Cash 92,000 228,000
Accounts receivable 300,000 88,000
Inventory 420,000 60,000
Investment in subsidiary 300,000 -
Equipment 800,000 200,000
Accumulated depreciation (240,000) (80,000)
TOTAL ASSETS 1,672,000 496,000

LIABILITIES AND EQUITY

Accounts payable 172,000 120,000
Bonds payable 120,000 -
Total liabilities 292,000 120,000
Share capital 680,000 200,000
Share premium 260,000 -
Retained earnings 440,000 176,000
Total equity 1,380,000 376,000
TOTAL LIABILITIES AND EQUITY 1,672,000 496,000
Statements of profit or loss
For the year ended December 31, 20x1

ABC Co. XYZ, Inc.

Sales 1,200,000 480,000
Cost of goods sold (660,000) (288,000)
Gross profit 540,000 192,000
Depreciation expense (160,000) (40,000)
Distribution costs (128,000) (72,000)
(12,000
-
Interest expense )
Profit for the year 240,000 80,000

Case #1: On acquisition date, ABC Co. elected to measure non-controlling interest as its
proportionate share in XYZ, Inc.’s net identifiable assets.
1. How much is the consolidated profit for 20x1?
a. 296,000 b. 280,000 c. 208,000 d. 276,000

2. How much is the consolidated total assets as of December 31, 20x1?

a. 1,900,000 b. 1,907,000 c. 1,903,000 d. 1,904,000

3. How much is the consolidated total equity as of December 31, 20x1?

a. 1,492,000 b. 1,415,000 c. 1,488,000 d. 1,491,000
Case #2:
On acquisition date, ABC Co. elected to measure non-controlling interest at fair value. A
value of ₱75,000 is assigned to the non-controlling interest.
4. How much is the consolidated profit for 20x1?
a. 296,000 b. 280,000 c. 278,000 d. 276,000

5. How much is the consolidated total assets as of December 31, 20x1?

a. 1,900,000 b. 1,907,000 c. 1,903,000 d. 1,904,000

6. How much is the consolidated total equity as of December 31, 20x1?

a. 1,492,000 b. 1,415,000 c. 1,488,000 d. 1,491,000

Changes in ownership interest not resulting to loss of control

Fact pattern
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares
with fair value of ₱60 per share and par value of ₱40 per share. XYZ’s net identifiable assets
have a fair value of ₱360,000. Goodwill has been computed under each of the available
options under PFRS 3 as follows:

Case #1 Case #2
    (proportionate) (fair value)
(1) Consideration transferred 300,000 300,000
(2) Non-controlling interest in the
72,000 75,000
acquiree
(3) Previously held equity interest
- -
in the acquire
  Total 372,000 375,000
Fair value of net identifiable
(360,000) (360,000)
assets acquired
  Goodwill 12,000 15,000

As of December 31, 20x1, XYZ, Inc. increased its net assets (after fair value adjustments)
by ₱40,000 to ₱400,000. The NCI in net assets is updated as follows:
Case #1 Case #2
  (proportionate) (fair value)
NCI at acquisition date – Jan. 1, 20x1 72,000 75,000
Subsequent increase (20% x ₱40,000) 8,000 8,000
Carrying amount of NCI – Jan. 1, 20x2 80,000 83,000

Scenario #1: Acquisition of all remaining NCI

On January 1, 20x2, ABC Co. acquired all of the remaining 20% NCI in XYZ for ₱120,000.

7. If NCI is measured at “proportionate share,” how much is the gain or loss on the
transaction to be recognized in the consolidated financial statements?
a. 80,000 b. (80,000) c. (83,000) d. 0

8. If NCI is measured at “fair value,” how much is the gain or loss on the transaction to be
recognized in the consolidated financial statements?
 a. (83,000) b. 83,000 c. (80,000) d. 0

9. If NCI is measured at “proportionate share,” what is the effect of the transaction on the
consolidated financial statements?
a. ₱80,000 decrease in NCI and ₱40,000 decrease in retained earnings of ABC Co.
b. ₱83,000 decrease in NCI and ₱37,000 decrease in retained earnings of ABC Co.
c. either a or b
d. No effect on the consolidated financial statements

10. If NCI is measured at “fair value,” what is the effect of the transaction on the
consolidated financial statements?
a. ₱80,000 decrease in NCI and ₱40,000 decrease in retained earnings of ABC Co.
b. ₱83,000 decrease in NCI and ₱37,000 decrease in retained earnings of ABC Co.
c. either a or b
d. No effect on the consolidated financial statements

Scenario #2: Acquisition of part of remaining NCI

On January 1, 20x2, ABC Co. acquired additional 12% equity interest held by non-
controlling interests in XYZ for cash consideration of ₱80,000.

11. If NCI is measured at “proportionate share,” what is the direct adjustment in equity?
a. 40,000 b. 32,000 c. 30,200 d. 38,500

12. If NCI is measured at “fair value,” what is the direct adjustment in equity?
a. 40,000 b. 32,000 c. 30,200 d. 38,500

Scenario #3: Disposal of part of controlling interest – Control not lost

On January 1, 20x2, ABC Co. sold its 10% interest in XYZ, Inc. for ₱80,000. The 70% (80%
- 10%) ownership interest retained still gives ABC control over XYZ.

13. If NCI is measured at “proportionate share,” what is the direct adjustment in equity?
a. 40,000 b. 32,000 c. 30,200 d. 38,500

14. If NCI is measured at “fair value,” what is the direct adjustment in equity?
a. 40,000 b. 32,000 c. 30,200 d. 38,500

Scenario #4: Subsidiary issues additional shares – Control not lost

The 80% interest acquired by ABC in XYZ on January 1, 20x1 represents 40,000 shares of
XYZ’s 50,000 outstanding shares as of that date.

On January 1, 20x2, XYZ, Inc. issues additional 10,000 shares with par value per share of
₱4 to other investors for ₱10 per share. Although none of the shares were purchased by
ABC, it was determined that the additional share issuance has no effect on ABC’s control
over XYZ.

15. If NCI is measured at “proportionate share,” what is the direct adjustment in equity?
a. 13,333 b. 11,332 c. 13,200 d. 0

16. If NCI is measured at “fair value,” what is the direct adjustment in equity?
a. 13,332 b. 11,332 c. 13,200 d. 0

Loss of control – Deconsolidation

17. On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares
with fair value of ₱60 per share and par value of ₱40 per share. ABC elected to measure
NCI as its proportionate share in XYZ’s net identifiable assets. The acquisition resulted to
goodwill of ₱12,000. There has been no impairment of goodwill.

On January 1, 20x2, ABC Co. sells 60% of its interest in XYZ, Inc. for ₱400,000. ABC’s
remaining 20% interest in XYZ has a fair value of ₱100,000. The remaining investment in
XYZ, Inc. gives ABC significant influence over XYZ. The statements of financial position
immediately before the sale are shown below:

Statements of financial position

As at December 31, 20x1
Consolidate
ABC Co. XYZ, Inc. d
ASSETS
Cash 92,000 228,000 320,000
Accounts receivable 300,000 88,000 388,000
Inventory 420,000 60,000 480,000
Investment in subsidiary 300,000 - -
Equipment 800,000 200,000 1,040,000
Accumulated depreciation (240,000) (80,000) (336,000)
Goodwill - - 12,000
TOTAL ASSETS 1,672,000 496,000 1,904,000

LIABILITIES AND EQUITY

Accounts payable 172,000 120,000 292,000
Bonds payable 120,000 - 120,000
Total liabilities 292,000 120,000 412,000
Share capital 680,000 200,000 680,000
Share premium 260,000 - 260,000
Retained earnings 440,000 176,000 472,000
Non-controlling interest - - 80,000
Total equity 1,380,000 376,000 1,492,000
TOTAL LIAB. & EQTY. 1,672,000 496,000 1,904,000

How much is the gain (loss) on the disposal of controlling interest?

a. (168,000) b. 168,000 c. 156,000 d. (156,000)

Loss of control – Derecognition of OCI

18. On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares
with fair value of ₱60 per share and par value of ₱40 per share. XYZ’s net identifiable
assets have a fair value of ₱360,000. ABC elected to measure NCI as its proportionate
share in XYZ’s net identifiable assets (i.e., ₱360,000 x 20% = ₱72,000). Accordingly,
 goodwill of ₱12,000 was recognized on the business combination. There has been no
impairment of goodwill.

Subsequent to acquisition date, XYZ, Inc. increased its net assets (after fair value
adjustments) by ₱52,000 to ₱412,000. The movement in XYZ’s net assets is shown below:

Net assets (at fair value) - Jan. 20x1 360,000

Subsequent changes:
Profit or loss after fair value adjustments 40,000
Other comprehensive income:
Gain on property revaluation 8,000
Exchange differences on translation of foreign operation 4,000
Total subsequent change in net assets 52,000
Net assets (at fair value) - Dec. 31, 20x1 412,000

The NCI in net assets is updated as follows:

NCI at acquisition date 72,000
Increase (20% x ₱52,000) 10,400
Carrying amount of NCI – Dec. 31, 20x1 82,400

Accordingly, the accumulated OCI attributable to owners of the parent presented in the
consolidated financial statements comprises the following:
Gain on property revaluation (8,000 x 80%) 6,400
Exchange differences on translation of foreign operation (4K x 80%) 3,200
Consolidated other components of equity – Dec. 31, 20x1 9,600

On January 1, 20x2, ABC Co. sells 60% of its interest in XYZ, Inc. for ₱400,000. ABC’s
remaining 20% interest in XYZ has a fair value of ₱100,000. The remaining investment in
XYZ, Inc. does not give ABC significant influence over XYZ.

How much is the gain or loss on disposal of controlling interest to be recognized in profit or
loss?
a. 152,400 b. 156,800 c. 160,200 d. 158,400

Inter-company receivables and payables

Use the following information for the next two questions:
On January 1, 20x1, Dad Co. acquired 80% interest in Son Co. by issuing bonds with fair
value of ₱1,000,000. The following information was determined immediately before the
acquisition:
  Dad Co. Son Co. Son Co.
  Carrying amount Carrying amount Fair value
Total assets 4,000,000 1,600,000 1,720,000
Total liabilities (2,400,000) (800,000) (800,000)
Net assets 1,600,000 800,000 920,000

Included in Son’s liabilities is an account payable to Dad amounting to ₱80,000. Dad elected
to measure NCI as its proportionate share in Son’s net identifiable assets.
19. How much is the total assets in Dad’s separate financial statements immediately after
the combination?
a. 6,304,000 b. 4,000,000 c. 5,000,000 d. 4,920,000

20. How much is the total assets in the consolidated financial statements?
a. 6,304,000 b. 5,904,000 c. 6,054,000 d. 5,984,000

Group accounting policy

Use the following information for the next five questions:
On June 30, 20x1, Cockroach Co. acquired 75,000 of Nymph Co.'s 100,000 outstanding
equity shares with par value per share of ₱4 for ₱16 per share. At the time of acquisition,
the retained earnings of Nymph were ₱320,000. The quoted price of Nymph's shares was
₱14 per share at acquisition date.

Additional information:
 Included in the total assets of Nymph is land classified as investment property with a
cost of ₱720,000. Its fair value at acquisition date was ₱800,000 and by June 30, 20x3
this had risen to ₱1,280,000. Nymph uses the cost model for its investment properties.
However, the group's policy for investment properties is the fair value model.
 Also at acquisition date, Nymph's building classified as property, plant, and equipment
had a fair value of ₱120,000 in excess of its carrying amount. The building's remaining
useful life is 5 years at that date. The group's depreciation method is straight-line basis.
 The inter-company current accounts included receivables and payables of ₱40,000 on
June 30, 20x3.
 An impairment test at June 30, 20x3 concluded that consolidated goodwill was impaired
by ₱80,000.
 Cockroach elected to measure NCI at the NCI's fair value. There have been no changes
in Nymph’s number of outstanding shares subsequent to date of acquisition.

A summary of the individual statements of financial positions of the entities as at June 30,
20x3 is shown below:
Cockroach Nymph
  Co. Co.
Total assets 4,000,000 2,000,000

Total liabilities 800,000 480,000

Share capital 1,200,000 400,000
Retained earnings 2,000,000 1,120,000
Total liabilities and equity 4,000,000 2,000,000

21. How much is the goodwill to be presented in the June 30, 20x3 consolidated financial
statements?
a. 550,000 b. 620,000 c. 485,000 d. 530,000

22. How much is the NCI in net assets?

a. 538,000 b. 584,000 c. 624,000 d. 638,000

23. How much is the consolidated retained earnings?

a. 2,864,000 b. 2,924,000 c. 2,874,000 d. 2,984,000
24. How much is the consolidated total assets?
a. 5,310,000 b. 5,942,000 c. 5,982,000 d. 5,350,000

25. How much is the consolidated total equity?

a. 4,064,000 b. 4,684,000 c. 4,702,000 d. 4,724,000

Business combination achieved in stages (‘Step acquisition’)

Use the following information for the next five questions:
On January 1, 20x1, Rabbit Co. acquired 40% of Bunny Co. for ₱160,000. At this time,
Bunny's net identifiable assets has a carrying amount of ₱400,000 which approximates fair
value. The investment was classified as “investment in associate.”

On January 1, 20x3, Rabbit Co. acquired additional 35% interest in Bunny Co. for ₱800,000.
On this date, the fair value of the existing holdings of Rabbit in Bunny was ₱400,000.
Bunny's net identifiable assets on January 1, 20x3, has a carrying amount of ₱720,000
which approximates fair value. Bunny’s net assets comprised of share capital amounting to
₱400,000 and retained earnings amounting to ₱320,000. Rabbit assigned a fair value of
₱220,000 to the NCI.

The group determined on Dec. 31, 20x3 that there is no impairment in goodwill. A summary
of the individual statements of financial positions of the entities as at December 31, 20x3 is
shown below:
  Rabbit Co. Bunny Co.
Total assets 4,000,000 2,000,000
Total liabilities 800,000 480,000
Share capital 1,200,000 400,000
Retained earnings 2,000,000 1,120,000
Total liabilities and equity 4,000,000 2,000,000

26. How much is the goodwill to be presented in the December 31, 20x3 consolidated
financial statements?
a. 480,000 b. 700,000 c. 300,000 d. 80,000

27. How much is the NCI in net assets?

a. 380,000 b. 340,000 c. 480,000 d. 420,000

28. How much is the consolidated retained earnings?

a. 2,600,000 b. 2,680,000 c. 2,740,000 d. 2,860,000

29. How much is the consolidated total assets?

a. 5,460,000 b. 5,500,000 c. 4,880,000 d. 5,280,000

30. How much is the consolidated total equity?

a. 4,180,000 b. 4,280,000 c. 4,420,000 d. 4,220,000

Reconstruction of financial information

Use the following information for the next three questions:
On January 1, 20x1, Sheep Co. acquired 75% interest in Lamb Co. for ₱600,000. At this
time, Lamb's net identifiable assets have a carrying amount of ₱720,000 which
approximates fair value. NCI was assigned a fair value of ₱220,000.
There were no inter-company transactions during the year. Goodwill on acquisition of
Lamb has been tested and found to be impaired (in total) by ₱32,000 for the current year.

Sheep's separate financial statements reported profit of ₱866,000 for the year ended
December 31, 20x1. Profit attributable to NCI was appropriately determined at ₱167,000.

31. How much is the profit of Lamb for the year ended December 31, 20x1?
a. 175,000 b. 625,000 c. 700,000 d. 225,000

32. How much is the consolidated profit?

a. 1,558,000 b. 1,534,000 c. 1,834,000 d. 1,526,000

33. How much is the profit attributable to owners of the parent and to NCI, respectively?
Parent NCI
a. 1,367,000 167,000
b. 1,391,000 167,000
c. 1,359,000 167,000
d. 1,436,000 398,000

Comprehensive problem
Use the following information for the next ten questions:
On January 1, 20x1, Peter Co. acquired 90% ownership interest in Simon Co. for ₱488,000.
Peter Co. elected to measure NCI at fair value. NCI was assigned a fair value of ₱60,000.

On January 1, 20x1, the fair values of the assets and liabilities of XYZ, Inc. were determined
by appraisal, as follows:
Carrying Fair Fair value
Simon Co.
amounts values increment
Cash 40,000 40,000 -
Accounts receivable 60,000 60,000 -
Inventory 100,000 124,000 24,000
Equipment 240,000 360,000 120,000
Accumulated
(80,000) (120,000) (40,000)
depreciation
Patent 80,000 80,000
Accounts payable (24,000) (24,000) -
Net assets 336,000 520,000 184,000

The remaining useful life of the equipment is 5 years while the patent has a remaining legal
and useful life of 8 years. Simon’s share capital has a balance of ₱200,000.

Among the transactions of Peter and Simon during 20x1 were the following:
 Peter's accounts receivable include a receivable from Simon amounting to ₱12,000 while
Simon's accounts payable include a payable to Peter amounting to ₱8,000. The
difference was due to a check amounting to ₱4,000 deposited by Simon directly to
Peter's bank account which was not yet recorded by Peter in its books. The check has
already cleared in Simon’s bank account.
 Peter sold goods costing ₱80,000 to Simon for ₱128,000. One-third of the inventory
remains as of Dec. 31, 20x1.
 Simon sold goods costing ₱40,000 to Peter for ₱60,000. One-half of the goods remain in
inventory as of December 31, 20x1.
 On January 1, 20x1, Simon sold to Peter equipment for ₱20,000. The equipment has a
historical cost of ₱40,000 and accumulated depreciation of ₱16,000 and a remaining
useful life of 5 years on the date of sale.
 On July 1, 20x1, Simon Co. purchased 50% of the outstanding bonds of Peter Co. from
the open market for ₱240,000. The interest income accruing on the bonds for the year
was received by Simon from Peter.
 The bonds payable carry an interest rate of 10% and were originally issued by Peter at
face amount.
 Peter declared dividends of ₱160,000.
 Simon declared dividends of ₱80,000.
 Goodwill is impaired by ₱8,000.
 There have been no changes in Simon’s share capital.

The individual financial statements of the entities at December 31, 20x1 are shown below:

Statements of financial position

As at December 31, 20x1

Peter Co. Simon Co.

ASSETS
Cash 1,448,000 85,200
Accounts receivable 712,000 20,000
Inventory 440,000 268,000
Investment in bonds 238,000
Investment in subsidiary 488,000
Equipment 4,020,000 200,000
Accumulated depreciation (1,444,000) (91,200)
TOTAL ASSETS 5,664,000 720,000

LIABILITIES AND EQUITY

Accounts payable 284,000 83,200
Bonds payable 400,000 -
Total liabilities 684,000 83,200
Share capital 3,200,000 200,000
Retained earnings 1,780,000 436,800
Total equity 4,980,000 636,800
TOTAL LIABILITIES AND EQUITY 5,664,000 720,000

Statements of profit or loss

For the year ended December 31, 20x1

Peter Co. Simon Co.

Sales 3,728,000 1,020,000
Cost of goods sold (1,700,000) (472,000)
Gross profit 2,028,000 548,000
 Interest income 8,000
Depreciation expense (644,000)
Distribution costs (256,000) (144,000)
Interest expense (40,000) -
Loss on sale of equipment - (4,000)
Dividend income 72,000 -
Profit for the year 1,160,000 380,800

34. How much is the consolidated sales?

a. 4,364,000 b. 4,560,000 c. 4,540,000 d. 4,650,000

35. How much is the consolidated cost of sales?

a. 1,862,000 b. 2,034,000 c. 2,128,000 d. 1,934,000

36. How much is the consolidated ending inventory?

a. 708,000 b. 634,000 c. 674,000 d. 682,000

37. How much is the goodwill in the December 31, 20x1 consolidated financial statements?
a. 20,000 b. 18,800 c. 22,000 d. 19,800

38. How much is the NCI in net assets as of December 31, 20x1?
a. 82,080 b. 82,720 c. 82,800 d. 82,880

39. How much is the consolidated retained earnings as of December 31, 20x1?
a. 1,939,200 b. 1,979,000 c. 1,946,400 d. 1,929,200

40. How much is the consolidated profit or loss in 20x1?

a. 1,398,000 b. 1,263,100 c. 1,470,000 d. 1,350,000
 KEY TO CORRECTION

1. D 11. B 21. A 31. C

2. A 12. C 22. D 32. B
3. C 13. A 23. A 33. A
4. D 14. D 24. B 34. B
5. C 15. A 25. C 35. B
6. D 16. B 26. B 36. D
7. D 17. B 27. D 37. A
8. D 18. D 28. A 38. C
9. A 19. C 29. B 39. A
10. B 20. B 30. D 40. D

Solutions:
1. D
Solutions:
Step 1: Analysis of effects of intercompany transaction
There are no intercompany transactions in the problem.

Step 2: Analysis of net assets

Acquisition Consolidation
XYZ, Inc. date date
Net change
Total equity at carrying amounts 296,000 376,000  
Fair value adjustments at acquisition date 64,000 64,000
Subsequent depreciation of FVA NIL (40,000)*
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 360,000 400,000 40,000
* ₱32,000 dep’n. of FVA on inventory + ₱8,000 [(₱40,000 - ₱8,000) ÷ 4 yrs.] dep’n. of FVA on equipment = ₱40,000
Step 3: Goodwill computation
Case #1: Formula #1 - NCI measured at proportionate share
Consideration transferred (5,000 sh. x ₱60) 300,000
Non-controlling interest in the acquiree (360K x20%) -(Step 2) 72,000
Previously held equity interest in the acquiree -
Total 372,000
Fair value of net identifiable assets acquired (Step 2) (360,000)
Goodwill at acquisition date 12,000
Accumulated impairment losses since acquisition date (4,000)
Goodwill, net – Dec. 31, 20x1 8,000

Step 4: Non-controlling interest in net assets

Case #1
XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2) 400,000
Multiply by: NCI percentage 20%
Total 80,000
Add: Goodwill attributable to NCI – Dec. 31, 20x1 (Step 3) -
Non-controlling interest in net assets – Dec. 31, 20x1 80,000

Step 5: Consolidated retained earnings

Case #1
ABC's retained earnings – Dec. 31, 20x1 440,000
Consolidation adjustments:
ABC's share in the net change in XYZ's net assets (a) 32,000
Unrealized profits (Downstream only) -
Gain on extinguishment of bonds -
Impairment loss on goodwill attributable to
parent (Step 3)) (4,000)
Net consolidation adjustments 28,000
Consolidated retained earnings – Dec. 31, 20x1 468,000
(a)
Net change in XYZ’s net assets (Step 2) of ₱40,000 x 80% = ₱32,000.

Step 6: Consolidated profit or loss

Case #1 Parent Subsidiary Consolidated
Profits before adjustments 240,000 80,000 320,000
Consolidation adjustments:
Unrealized profits - - -
Dividend income from subsidiary - N/A -
Gain or loss on extinguishment
- - -
of bonds
Net consolidation adjustments - - -
Profits before FVA 240,000 80,000 320,000
Depreciation of FVA (c) (32,000) (8,000) (40,000)
Goodwill impairment (Step 3) (4,000) - (4,000)
Consolidated profit 204,000 72,000 276,000
(c)
Shares in the depreciation of FVA: (40,000 x 80%); (40,000 x 20%)

Step 7: Profit or loss attributable to owners of parent and NCI

Owners Consoli-
Case #1
of parent NCI dated
ABC's profit before FVA (Step 6) 240,000 N/A 240,000
Share in XYZ’s profit before FVA (d) 64,000 16,000 80,000
 Depreciation of FVA (Step 6) (32,000) (8,000) (40,000)
Share in goodwill impairment (Step 3) (4,000) - (4,000)
Totals 268,000 8,000 276,000
(d)
Shares in XYZ’s profit before FVA (Step 6) – (80,000 x 80%); (80,000 x 20%)

2. A
Solution:
Case #1
  (proportionate)
Total assets of ABC Co. 1,672,000
Total assets of XYZ, Inc. 496,000
Investment in subsidiary (300,000)
FVA, net (16K - 10K) (Step 2) 24,000
Goodwill, net (Step 3) 8,000
Effect of intercompany transaction -
Consolidated total assets 1,900,000

3. C
Solution:
Case #1
  (proportionate)
Share capital of ABC Co. 680,000
Share premium of ABC Co. 260,000
Consolidated retained earnings (Step 5) 468,000
Equity attributable to owners of the parent 1,408,000
Non-controlling interests (Step 4) 80,000
Consolidated total equity 1,488,000

4. D
Solution:
Step 1: Analysis of effects of intercompany transaction
There are no intercompany transactions in the problem.

Step 2: Analysis of net assets

Acquisition Consolidation
XYZ, Inc. date date
Net change
Total equity at carrying amounts 296,000 376,000  
Fair value adjustments at acquisition date 64,000 64,000
Subsequent depreciation of FVA NIL (40,000)*
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 360,000 400,000 40,000
* ₱32,000 dep’n. of FVA on inventory + ₱8,000 [(₱40,000 - ₱8,000) ÷ 4 yrs.] dep’n. of FVA on equipment = ₱40,000

Step 3: Goodwill computation

Case #2: Formula #2 - NCI measured at fair value
Consideration transferred (5,000 sh. x ₱60) 300,000
Less: Previously held equity interest in the acquiree -
Total 300,000
Less: Parent's proportionate share in the net assets of subsidiary (₱90,000 acquisition-
date fair value x 80%) (288,000)
Goodwill attributable to owners of parent – Jan. 1, 20x1 12,000
Less: Parent’s share in goodwill impairment (₱4,000 x 80%) (3,200)
Goodwill attributable to owners of parent – Dec. 31, 20x1 8,800
Fair value of NCI (see given) 75,000
 Less: NCI's proportionate share in the net assets of subsidiary (₱360,000 acquisition-
(72,000)
date fair value x 20%)
Goodwill attributable to NCI – Jan. 1, 20x1 3,000
Less: NCI’s share in goodwill impairment (₱4,000 x 20%) (800)
Goodwill attributable to NCI – Dec. 31, 20x1 2,200
-
Goodwill, net – Dec. 31, 20x1 11,000

Step 4: Non-controlling interest in net assets

Case #2
XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2) 400,000
Multiply by: NCI percentage 20%
Total 80,000
Add: Goodwill attributable to NCI – Dec. 31, 20x1 (Step 3) 2,200
Non-controlling interest in net assets – Dec. 31, 20x1 82,200

Step 5: Consolidated retained earnings

Case #2
ABC's retained earnings – Dec. 31, 20x1 440,000
Consolidation adjustments:
ABC's share in the net change in XYZ's net assets (a) 32,000
Unrealized profits (Downstream only) -
Gain on extinguishment of bonds -
Impairment loss on goodwill attributable to
parent (Step 3) (b) (3,200)
Net consolidation adjustments 28,800
Consolidated retained earnings – Dec. 31, 20x1 468,800
(a)
Net change in XYZ’s net assets (Step 2) of ₱40,000 x 80% = ₱32,000.
(b)
Again, goodwill impairment is attributed only to the parent if NCI is measured at proportionate share (Case #1) while it is
shared between the parent and NCI if NCI is measured at fair value (Case #2).

Step 6: Consolidated profit or loss

Case #2 Parent Subsidiary Consolidated
Profits before adjustments 240,000 80,000 320,000
Consolidation adjustments:
Unrealized profits - - -
Dividend income from subsidiary - N/A -
Gain or loss on extinguishment
- - -
of bonds
Net consolidation adjustments - - -
Profits before FVA 240,000 80,000 320,000
Depreciation of FVA (32,000) (8,000) (40,000)
Goodwill impairment (Step 3) (3,200) (800) (4,000)
Consolidated profit 204,800 71,200 276,000

5. C
Solution:
Case #2 (fair
  value)
Total assets of ABC Co. 1,672,000
 Total assets of XYZ, Inc. 496,000
Investment in subsidiary (300,000)
FVA, net (16K - 10K) (Step 2) 24,000
Goodwill, net (Step 3) 11,000
Effect of intercompany transaction -
Consolidated total assets 1,903,000

6. D
Solution:
Case #2 (fair
  value)
Share capital of ABC Co. 680,000
Share premium of ABC Co. 260,000
Consolidated retained earnings (Step 5) 468,800
Equity attributable to owners of the parent 1,408,800
Non-controlling interests (Step 4) 82,200
Consolidated total equity 1,491,000

7. D None. The transaction is accounted for as equity transaction because it does not result to loss of
control.

8. D None. The transaction is accounted for as equity transaction because it does not result to loss of
control.

9. A
Solution:
Owners of Net assets of
  % parent % NCI XYZ
Before the transaction 80% 320,000 20% 80,000 400,000 a
After the transaction 100% 400,000 - - 400,000
Change – Inc./ (Decrease) 80,000   (80,000) -
a
This represents the fair value of XYZ’s net assets on December 31, 20x1 (₱360,000 fair value on acquisition date +
₱40,000 increase during the year).

Jan. 1, NCI (the decrease computed above) 80,000

20x2
Retained earnings – ABC Co. (squeeze) 40,000
Investment in subsidiary 120,000

10. B
Solution:
Owners of Net assets of
  % parent % NCI XYZ
Before the transaction 80% 332,000 20% 83,000 415,000 b
After the transaction 100% 415,000 - - 415,000
Change – Inc./ (Decrease) 83,000 (83,000) -

b
When NCI is measured at fair value, the subsidiary’s net assets is grossed up to reflect the goodwill attributable to
the NCI (₱83,000 NCI ÷ 20% = ₱415,000).

Jan. 1, NCI (the decrease computed above) 83,000

20x2
Retained earnings – ABC Co. (squeeze) 37,000
Investment in subsidiary 120,000
11. B
Solution:
Owners of Net assets of
  % parent % NCI XYZ
Before the transaction 80% 320,000 20% 80,000 400,000
After the transaction 92% 368,000 8% 32,000 400,000
Change – Inc./ (Decrease) 48,000 (48,000) -

The direct adjustment in equity is determined as follows:

  Case #1 (proportionate)
Fair value of consideration 80,000
Change in NCI (see table above) (48,000)
Direct adjustment to equity 32,000

12. C
Solution:
Owners of Net assets of
  % parent % NCI XYZ
Before the transaction 80% 332,000 20% 83,000 415,000*
After the transaction 92% 381,800 8% 33,200 415,000
Change – Inc./ (Decrease) 49,800 (49,800) -
*The net assets is grossed up as follows (₱20,750 NCI ÷ 20% = ₱103,750).

Case #2 (fair
  value)
Fair value of consideration 80,000
Change in NCI (see table above) (49,800)
Direct adjustment to equity 30,200

13. A
Solution:
Owners of
  % parent % NCI Net assets of XYZ
Before the transaction 80% 320,000 20% 80,000 400,000
After the transaction 70% 280,000 30% 120,000 400,000
Change – Inc./ (Decrease) (40,000) 40,000 -

  Case #1 (proportionate)
Fair value of consideration 80,000
Change in NCI (see table above) (40,000)
Direct adjustment to equity 40,000

14. D
Solution:
Owners of
  % parent % NCI Net assets of XYZ
Before the transaction 80% 332,000 20% 83,000 415,000
After the transaction 70% 290,500 30% 124,500 415,000
Change – Inc./ (Decrease) (41,500) 41,500 -
*The net assets is grossed up as follows: (₱83,000 NCI ÷ 20% = ₱415,000).

Case #2 (fair
  value)
Fair value of consideration 80,000
 Change in NCI (see table above) (41,500)
Direct adjustment to equity 38,500

15. A
Solution:
The change in ABC’s ownership interest in XYZ is determined as follows:
Before
  issuance % After issuance %
Shares held by ABC 40,000 40,000
80% 66.67%
Outstanding shares of XYZ 50,000 60,000 a
a
(50,000 + 10,000 additional shares issued to NCI = 60,000)

Owners of Net assets of

  % parent % NCI XYZ
Before the transaction 80% 320,000 20% 80,000 400,000
After the transaction 66.67% 333,332 33.33% 166,668 500,000 b
Change – Inc./ (Decrease) 13,332 86,668 100,000
b
100,000 + 25,000 proceeds from issuance of additional shares.

The direct adjustment in equity is determined as follows:

  Case #1 (proportionate)
Fair value of consideration 100,000
Change in NCI (see table above) (86,668)
Direct adjustment to equity 13,332

16. B
Solution:
Owners of
  % parent % NCI Net assets of XYZ
Before the transaction 80% 332,000 20% 83,000 415,000 c
After the transaction 66.67% 343,332 33.33% 171,668 515,000 d
Change – Inc./ (Decrease) 11,332 88,668 100,000
c
The net assets is grossed up as follows: (₱83,000 NCI ÷ 20% = ₱415,000).
d
(₱415,000 + ₱100,000 proceeds from issuance of additional shares = ₱515,000).

The direct adjustment in equity is determined as follows:

Case #2 (fair
  value)
Fair value of consideration 100,000
Change in NCI (see tables above) (88,668)
Direct adjustment to equity 11,332

17. B
Solution:
Step 1: We will identify the carrying amounts of XYZ’s assets and liabilities in the consolidated financial
statements as at the date control was lost.

Statements of financial position

As at January 1, 20x2
Consoli- Carrying amount of XYZ’s
ABC Co. XYZ, Inc.
dated net assets
ASSETS (a) (b) (c) = (b) – (a)
Cash 92,000 228,000 320,000 228,000
Accounts receivable 300,000 88,000 388,000 88,000
Inventory 420,000 60,000 480,000 60,000
Investment in subsidiary 300,000 - -
Equipment 800,000 200,000 1,040,000 240,000
Accumulated depreciation (240,000) (80,000) (336,000) (96,000)
Goodwill - - 12,000
TOTAL ASSETS 1,672,000 496,000 1,904,000 520,000

LIABILITIES AND EQUITY

Accounts payable 172,000 120,000 292,000 120,000
Bonds payable 120,000 - 120,000 -
Total liabilities 292,000 120,000 412,000 120,000
Share capital 680,000 200,000 680,000
Share premium 260,000 - 260,000 -
Retained earnings 440,000 176,000 472,000 -
Non-controlling interest - - 80,000 -
Total equity 1,380,000 376,000 1,492,000 400,000
TOTAL LIAB. & EQTY. 1,672,000 496,000 1,904,000 -

The consolidated retained earnings pertains to the parent only. Thus, no retained earnings is allocated to XYZ.

Step 2: We will prepare the deconsolidation journal entries (DJE):

DJE #1: To recognize the gain or loss on the disposal of controlling interest.
Jan. 1, Cash – ABC Co. (Consideration received) 400,000
20x2
Investment in associate (Investment retained) 100,000
Accounts payable – XYZ, Inc. 120,000
Accumulated depreciation – XYZ, Inc. 96,000
Non-controlling interest 80,000
Cash – XYZ, Inc. 228,000
Accounts receivable – XYZ, Inc. 88,000
Inventory – XYZ, Inc. 60,000
Equipment – XYZ, Inc. 240,000
Goodwill 12,000
Gain on disposal (squeeze) 168,000

18. D
Solution:
Jan. 1, Cash – ABC Co. (Consideration received) 400,000
20x2 Held for trading securities (Investment retained) 100,000
Non-controlling interest 82,400
Net identifiable assets a (see given) 412,000
Goodwill 12,000
Gain on disposal (squeeze) 158,400
a
Net identifiable assets is also excess of total assets over total liabilities.

19. C
Solution:
Total assets of Dad before the combination 4,000,000
Investment in subsidiary 1,000,000
Total assets of Dad after the combination 5,000,000
20. B
Solution:
Total assets of Dad after the combination (see above) 5,000,000
Total assets of Son (carrying amount) 1,600,000
Investment in subsidiary (1,000,000)
FVA on assets (430K fair value – 400K carrying amount) 120,000
Goodwill – net [1M + (920K x 20% NCI)] – 920 264,000
Effect of intercompany transactions (intercompany receivable) (80,000)
Consolidated total assets 5,904,000

21. A
Solution:
Analysis of net assets
Nymph Co. Acquisition date Consolidation date Net change
Share capital (100,000 sh. x ₱4) 400,000 400,000
Retained earnings 320,000 1,120,000
Totals at carrying amounts 720,000 1,520,000
FVA on investment property a 80,000 560,000
FVA on building 120,000 120,000
Subsequent depreciation of FVA b NIL (48,000)
Subsidiary's net assets at fair value 920,000 2,152,000 1,232,000
a
FVA on acquisition date (₱800,000 - ₱720,000 = ₱80,000); FVA on June 30, 20x3 (₱1,280,000 - ₱720,000 = ₱560,000).
These FVA’s are not subsequently depreciated because depreciation is prohibited under the fair value model.
b
The depreciation of FVA pertains only to the building (see discussion above) (₱120,000 x 2/5 = ₱48,000).

Goodwill at current year

Formula #2:
Consideration transferred (75,000 sh. x ₱16) 1,200,000
Less: Previously held equity interest in the acquiree -
Total 1,200,000
Less: Parent's proportionate share in the net assets of subsidiary (₱920,000
acquisition-date fair value x 75%) (690,000)
Goodwill attributable to owners of parent – acquisition date 510,000
Less: Parent’s share in goodwill impairment (₱80,000 x 75%) (60,000)
Goodwill attributable to owners of parent – current year 450,000

Fair value of NCI (25,000 sh. x ₱14) 350,000

Less: NCI's proportionate share in the net assets of subsidiary (₱920,000 acquisition-
date fair value x 25%) (230,000)
Goodwill attributable to NCI – acquisition date 120,000
Less: NCI’s share in goodwill impairment (₱80,000 x 25%) (20,000)
Goodwill attributable to NCI – current year 100,000

Goodwill, net – current year 550,000

22. D
Solution:
Nymph's net assets at fair value – 6/30/x3 (see ‘Analysis’ above) 2,152,000
Multiply by: NCI percentage 25%
Total 538,000
Add: Goodwill attributable to NCI – 6/30/x3 (see above) 100,000
Non-controlling interest in net assets – June 30, 20x3 638,000

23. A
Solution:
 Cockroach's retained earnings – 6/30/x3   2,000,000
Consolidation adjustments:
Share in the net change in Nymph's net assets (a) 924,000
Cockroach's share in goodwill impairment (60,000)
Net consolidation adjustments 864,000
Consolidated retained earnings – June 30, 20x3   2,864,000 
(a)
Net change in Nymph’s net assets (see ‘Analysis’) ₱1,232,000 x 75% = ₱924,000.

24. B
Solution:
Total assets of Cockroach 4,000,000
Total assets of Nymph 2,000,000
Investment in subsidiary (1,200,000)
Fair value adjustments – net (560K + 120K – 48K) see ‘Analysis’ 632,000
Goodwill – net 550,000
Effect of intercompany transactions (Intercompany receivable) (40,000)
Consolidated total assets 5,942,000

25. C
Solution:
Share capital of Cockroach 1,200,000
Share premium of Cockroach -
Consolidated retained earnings 2,864,000
Equity attributable to owners of the parent 4,064,000
Non-controlling interests 638,000
Consolidated total equity 4,702,000

26. B
Solution:
Analysis of net assets
Consolidation Net change
Acquisition date
Bunny Co. (Jan. 1, 20x3)
date
(Dec. 31, 20x3)
Share capital 400,000 400,000
Retained earnings 320,000 1,120,000
Totals at carrying amounts 720,000 1,520,000
Fair value adjustments - -
Subsequent depreciation of FVA NIL ( - )
Subsidiary's net assets at fair value 720,000 1,520,000 800,000

Goodwill at current year

Formula #2:
Consideration transferred 800,000
Less: Previously held equity interest in the acquiree 400,000
Total 1,200,000
Less: Parent's proportionate share in the net assets of subsidiary (₱720,000
acquisition-date fair value x 75%*) (540,00)
Goodwill attributable to owners of parent – Jan. 1, 20x3 660,000
Less: Parent’s share in goodwill impairment ( - )
Goodwill attributable to owners of parent – Dec. 31, 20x3 660,000
Fair value of NCI 220,000
Less: NCI's proportionate share in the net assets of subsidiary (₱720,000 acquisition-
date fair value x 25%) (180,000)
Goodwill attributable to NCI – Jan. 1, 20x3 40,000
Less: NCI’s share in goodwill impairment ( - )
 Goodwill attributable to NCI – Dec. 31, 20x3 40,000

Goodwill, net – Dec. 31, 20x3 700,000

* (40% previous interest + 35% additional interest acquired on Jan. 1, 20x3)

27. D
Solution:
Bunny's net assets at fair value – 12/31/x3 (see ‘Analysis’ above) 1,520,000
Multiply by: NCI percentage 25%
Total 380,000
Add: Goodwill attributable to NCI – 6/30/x3 (see above) 40,000
Non-controlling interest in net assets – Dec. 31, 20x3 420,000

28. A
Solution:
Rabbit's retained earnings – 12/31/x3   2,000,000
Consolidation adjustments:
Rabbit’s share in the net change in Bunny's net assets (a) 600,000
Rabbit's share in goodwill impairment ( - )
Net consolidation adjustments 600,000
Consolidated retained earnings – Dec. 31, 20x3   2,600,000 
(a)
Net change in Bunny’s net assets (see ‘Analysis’) ₱800,000 x 75% = ₱600,000.

29. B
Solution:
Total assets of Rabbit 4,000,000
Total assets of Bunny 2,000,000
Investment in subsidiary (₱800,000 + ₱400,000) (1,200,000)
Fair value adjustments – net -
Goodwill – net 700,000
Effect of intercompany transactions -
Consolidated total assets 5,500,000

30. D
Solution:
Share capital of Rabbit 1,200,000
Share premium of Rabbit -
Consolidated retained earnings 2,600,000
Equity attributable to owners of the parent 3,800,000
Non-controlling interest 420,000
Consolidated total equity 4,220,000

31. C
Solution:
Owners
  of parent NCI
Sheep's profit before FVA 866,000 N/A
Share in Lamb’s profit before FVA 525,000 b 175,00 squeeze
0
Depreciation of FVA ( - ) ( - )
Share in impairment of goodwill (24,000) (8,000) a
1,367,00
Totals 0 167,000 start
a
Shares in impairment of goodwill: (₱8,000 x 75%); (₱8,000 x 25%)
b
(₱175,000 ÷ 25%) = ₱700,000 Lamb’s separate profit x 75% = ₱525,000.

32. B (1,367,000 + 167,000 ‘see computations above’) = 1,534,000

33. A (See solution above)

34. B (See Step 1.ii below)

Solutions:
Step 1: Analysis of effects of intercompany transaction
The following are the intercompany transactions during the period:
i. In-transit item (Transaction ‘a’)
ii. Intercompany sale of inventory (Transactions ‘b’ and ‘c’)
iii. Intercompany sale of equipment (Transaction ‘d’)
iv. Intercompany bond transaction (Transactions ‘e’)
v. Intercompany dividend transaction (Transactions ‘f’)

i. In-transit item
The ₱4,000 check deposited to Peter’s account is a valid payment for Simon’s account. Therefore,
Simon’s ₱8,000 account payable to Peter need not be adjusted.

However, since Peter failed to record the payment, Peter’s ₱12,000 accounts receivable from Simon must
be adjusted. As to Peter, the deposit is a bank credit memo.

The adjusting journal entry (AJE) in Peter’s books is as follows:

Dec. 31, Cash in bank 4,000
20x1
Accounts receivable 4,000

Unlike CJE’s, AJE’s are recorded in the separate books. The remaining balance of ₱8,000 in the
intercompany account receivable/account payable shall be eliminated through CJE.

Summary of effects on the consolidated financial statements:

 Cash: increased by ₱4,000.
 Accounts receivable: decreased by ₱12,000 (₱3,000 AJE + ₱8,000 CJE).
 Accounts payable: decreased by ₱8,000

ii. Intercompany sale of inventory

Transaction (b) is downstream while transaction (c) is upstream. The unrealized profits in ending
inventory are determined as follows:
  Downstream Upstream Total
Sale price of intercompany sale 128,000 60,000
Cost of intercompany sale (80,000) (40,000)
Profit from intercompany sale 48,000 20,000
Multiply by: Unsold portion as of yr.-end 1/3 1/2
Unrealized gross profit 16,000 10,000 26,000

The related consolidated accounts are computed as follows:

Ending inventory of Peter Co. 440,000
Ending inventory of Simon Co. 268,000
Less: Unrealized profit in ending inventory (26,000)
Consolidated ending inventory 682,000

Sales by Peter Co. 3,728,000

Sales by Simon Co. 1,020,000
Less: Intercompany sales during 20x1 (128,000 + 60,000) (188,000)
 Consolidated sales 4,560,000

Before we can compute for the consolidated cost of sales, we need to determine first the depreciation of
FVA in 20x1.
FVA on inventory 24,000
FVA on equipment, net (20,000 ÷ 5 years) 16,000
FVA on patent (20,000 ÷ 8 years) 10,000
Depreciation of FVA in 20x1 50,000

The consolidated cost of sales is computed as follows:

Cost of sales of Peter Co. 1,700,000
Cost of sales of Simon Co. 472,000
Less: Intercompany sales during 20x1 (188,000)
Add: Unrealized profit in ending inventory 26,000
Add: Depreciation of FVA on inventory (see computation above) 24,000
Consolidated cost of sales 2,034,000

iii. Intercompany sale of property, plant and equipment

Transaction (d) is upstream. The effects of this transaction are analyzed as follows:
a) Unamortized balance of deferred gain (loss) on December 31, 20x1:
Sale price 20,000
Carrying amount of equipment on Jan. 1, 20x1 (24,000)
Loss on sale of equipment – Jan. 1, 20x1 (4,000)
Multiply by: Ratio of useful life at beg. and end of yr. 4/5
Unamortized balance of deferred loss – Dec. 31, 20x1 (3,200)

b) Effect on the 20x1 depreciation:

Because of the sale Had there been no sale Effect on combined FS
Peter recognized depreciation of Simon should have recognized Depreciation is understated by
₱4,000 in 20x1 (₱20,000 depreciation of ₱4,800 in 20x1 ₱800.
purchase price ÷ 5 yrs.). (₱24,000 carrying amount ÷ 5 yrs.).

The related consolidated accounts are computed as follows:

Equipment, net – Parent 2,576,000
Equipment, net – Subsidiary 108,800
Unamortized balance of deferred loss* 3,200
FVA on equipment, net (80,000 beg. - 16,000 dep'n of FVA) 64,000
Consolidated equipment – net 2,752,000
*The deferred loss is added because both “loss” and “equipment” have a normal debit balance. Debit and debit results to addition.

Depreciation – Peter 644,000

Depreciation – Simon 27,200
Understatement in depreciation 800
Depreciation of FVA on equipment (see computation above 16,000
Consolidated depreciation 688,000

The ₱4,000 loss on sale recognized by Simon shall be eliminated in the consolidated statement of profit
or loss.

We need to recognize also the unrecorded patent net of accumulated amortization.

Patent (unrecognized) (see given) 80,000
Less: Amortization of FVA on patent (see computation above) (10,000)
Consolidated patent – net 70,000
A patent amortization expense of ₱10,000 shall be recognized in the consolidated financial statements

iv. Intercompany bond transaction

The effects Transaction (e) are analyzed as follows:
a) Gain or loss on extinguishment of bonds:
Carrying amount of bonds payable acquired (400,000 x 50%) 200,000
Acquisition cost of bonds (assumed retirement price) (240,000)
Loss on extinguishment of bonds (40,000)

b) Intercompany interest expense and interest income:

Peter paid Simon interest of ₱10,000 (400K x 50% x 10% x 6/12). However, Simon’s interest income is only
₱8,000 (see Statement of profit or loss above) . The ₱2,000 difference must be an amortization of the premium on
the investment in bonds. Nonetheless, both Peter’s interest expense of ₱10,000 and Simon’s interest
income of ₱8,000 shall be eliminated in the consolidated financial statements together with the related
bonds payable and investment in bonds.

Summary of effects on the consolidated financial statements:

 Loss on extinguishment of bonds: recognize ₱40,000.
 Interest expense: decreased by ₱10,000.
 Interest income: eliminated
 Investment in bonds: eliminated
 Bonds payable: decreased by ₱200,000

v. Intercompany dividend transaction – Transaction (f)

The dividends declared by Simon are allocated as follows:
Total dividends declared ₱80,000
Allocation:
Owners of the parent (80,000 x 90%) 72,000
Non-controlling interest (80,000 x 10%) 8,000
As allocated ₱80,000

Peter’s ₱72,000 dividend income shall be eliminated in the consolidated financial statements.

No consolidation adjustment is needed for the dividends declared by Peter because the dividends pertain
solely to the owners of the parent.

Step 2: Analysis of net assets

Acquisition Consolidation
Simon Co. date date
Net change
Net assets at carrying amounts 336,000 636,800
Fair value adjustments at acquisition date 184,000 184,000
Subsequent depreciation of FVA a NIL (50,000)
Unrealized profit (Upstream) - (Step 1.ii) NIL (10,000)
Unamortized def. loss (Upstream) - (Step 1.ii) 3,200
Interest income (Step 1.iv) (8,000)
Subsidiary's net assets at fair value 520,000 756,000 236,000
a
See computation in Step 1.ii.

The unrealized profit on upstream sale on inventory, unamortized deferred loss on upstream sale of
equipment and interest income on investment in bonds were closed to Simon’s retained earnings by year-
end. These are eliminated through addition or subtraction, as appropriate.

Step 3: Goodwill computation

We will use ‘Formula #2’ because NCI is measured at fair value.
Consideration transferred (see given) 488,000
 Previously held equity interest in the acquiree -
Total 488,000
Less: Parent's proportionate share in the net assets of subsidiary (₱520,000
acquisition-date fair value x 90%) (468,000)
Goodwill attributable to owners of parent – Jan. 1, 20x1 20,000
Less: Parent’s share in goodwill impairment (₱8,000 x 90%) c (7,200)
Goodwill attributable to owners of parent – Dec. 31, 20x1 12,800
Fair value of NCI (see given) 60,000
Less: NCI's proportionate share in the net assets of subsidiary (₱520,000 acquisition-
date fair value x 20%) (52,000)
Goodwill attributable to NCI – Jan. 1, 20x1 8,000
Less: NCI’s share in goodwill impairment (₱8,000 x 10%) c (800)
Goodwill attributable to NCI – Dec. 31, 20x1 7,200

Goodwill, net – Dec. 31, 20x1 20,000

c
The problem states that goodwill was impaired by ₱8,000. The impairment is shared between the parent and NCI
because NCI is measured at fair value.

Step 4: Non-controlling interest in net assets

Simon's net assets at fair value – Dec. 31, 20x1 (Step 2) 756,000
Multiply by: NCI percentage 10%
Total 75,600
Add: Goodwill to NCI net of accumulated impairment (Step 3) 7,200
Non-controlling interest in net assets – Dec. 31, 20x1 82,800

Step 5: Consolidated retained earnings

Peter's retained earnings – Dec. 31, 20x1   1,780,000
Consolidation adjustments:
Peter's share in the net change in Simon's net assets (a) 212,400
Unrealized profits (Downstream only) - (Step 1.ii) (16,000)
Loss on extinguishment of bonds - (Step 1.iv) (40,000)
Intercompany interest expense - (Step 1.iv) 10,000
Peter’s share in goodwill impairment - (Step 3) (7,200)
Net consolidation adjustments 159,200
Consolidated retained earnings – Dec. 31, 20x1   1,939,200 
(a)
Net change in Simon’s net assets (Step 2) of ₱236,000 x 90% = ₱212,400.

The deferred loss on the sale of equipment is not included in the computations above because the sale is
upstream.

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits before adjustments 1,160,000 380,800 1,540,800
Consolidation adjustments:
Unrealized profits - (Step 1.ii) (16,000) (10,000) (26,000)
Unamortized def. loss - (Step 1.iii) 3,200 3,200
Loss on bonds - (Step 1.iv) (40,000) - (40,000)
Interest exp./income - (Step 1.iv) 10,000 (8,000) 2,000
Dividend income - (Step 1.v) (72,000) N/A (72,000)
Net consolidation adjustments (118,000) (14,800) (132,800)
Profits before FVA 1,042,000 366,000 1,408,000
Depreciation of FVA (b) (45,000) (5,000) (50,000)
Impairment of goodwill - (Step 3) (7,200) (800) (8,000)
Consolidated profit 989,800 360,200 1,350,000
(b)
Shares in the depreciation of FVA: (50,000 x 90%); (50,000 x 10%)

Step 7: Profit or loss attributable to owners of parent and NCI

Owners Consoli-
  of parent NCI dated
Peter's profit before FVA - (Step 1,042,00
N/A 1,042,000
6) 0
Share in Simon’s profit before FVA
(c) 329,400 36,600 366,000
(5,000
(45,000) (50,000)
Depreciation of FVA - (Step 6) )
Impairment of goodwill - (Step 6) (7,200) (800) (8,000)
1,319,20 30,80 1,350,00
Totals 0 0 0
(c)
Shares in Simon’s profit before FVA (Step 6): (366,000 x 90%); (366,000 x 10%)

The consolidated financial statements are prepared as follows:

Peter Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS  
Cash (1,448,000 + 85,200 + 4,000 Step 1.i) 1,537,200
Accounts receivable (712,000 + 20,000 - 12,000 Step 1.i) 720,000
Inventory (Step 1.ii) 682,000
Investment in bonds (eliminated - Step 1.iv) -
Investment in subsidiary (eliminated) -
Equipment, net (Step 1.iii) 2,752,000
Patent (Step 1.iii) 70,000
Goodwill, net (Step 3) 20,000
TOTAL ASSETS 5,781,200
   
LIABILITIES AND EQUITY  
Accounts payable (367,200 + 284,000 - 8,000 Step 1.i) 359,200
10% Bonds payable (400,000 - 200,000 Step 1.iv) 200,000
Total liabilities 559,200
Share capital (Parent only) 3,200,000
Retained earnings (Step 5) 1,939,200
Equity attributable to owners of parent 5,139,200
Non-controlling interest (Step 4) 82,800
Total equity 5,222,000
TOTAL LIABILITIES AND EQUITY 5,781,200
   

Peter Group
Statement of profit or loss
For the year ended December 31, 20x1
 
Sales (Step 1.ii) 4,560,000
Cost of goods sold (Step 1.ii) (2,034,000)
Gross profit 2,526,000
Interest income (eliminated - Step 1.iv) -
Distribution costs (400,000)
 Depreciation expense (Step 1.iii) (688,000)
Loss on sale of equipment (eliminated - Step 1.iv) -
Interest expense (10,000 - 2,500 Step 1.iv) (30,000)
Dividend income (eliminated - Step 1.v) -
Amortization expense on patent (Step 1.iii) (10,000)
Loss on extinguishment of bonds (Step 1.iv) (40,000)
Impairment loss on goodwill (Step 3) (8,000)
Profit for the year 1,350,000
   

Reconciliation using formulas:

Total assets of Peter Co. 5,664,000
Total assets of Simon Co. 720,000
Investment in subsidiary (488,000)
Fair value adjustments, net (184,000 beg. – 50,000 depreciation) 134,000
Goodwill – net 20,000
Effects of intercompany transactions:
Current accounts (elimination of account receivable) (8,000)
Inventory transactions (unrealized profit in ending inventory) (26,000)
Equipment transaction (unamortized balance of deferred loss) 3,200
Bond transaction (carrying amount of investment in bonds) (238,000)
Consolidated total assets 5,781,200

Total liabilities of Peter Co. 684,000

Total liabilities of Simon Co. 83,200
Fair value adjustments, net -
Effect of intercompany transactions:
Current accounts (elimination of account payable) (8,000)
Bond transaction (carrying amount of bonds payable) (200,000)
Consolidated total liabilities 559,200

Share capital of Peter Co. 3,200,000

Consolidated retained earnings (Step 5) 1,939,200
Equity attributable to owners of the parent 5,139,200
Non-controlling interest (Step 4) 82,800
Consolidated total equity 5,222,000

35. B (See Step 1.ii above)

36. D (See Step 1.ii above)

37. A (See Step 3 above)

38. C (See Step 4 above)

39. A (See Step 5 above)

40. D (See Step 6 above)