Eliminating Entries

Chapter 18Problem I1. Journal entry to record sale:

Cash 84,000 Accumulated Depreciation 80,000 Equipment 150,000 Gain on Sale of Equipment 14,000 Record the sale of equipment: P84,000 = P150,000 - P80,000 + P14,000 P80,000 = (P150,000 / 15 years) x 8 years

2. Journal entry to record purchase:Equipment 84,000 Cash 84,000

Journal entry to record depreciation expense:Depreciation Expense 12,000 Accumulated Depreciation 12,000

3. Eliminating entry at December 31, 20x4, to eliminate intercompany sale of equipment:

E(1) Equipment 66,000 Gain on Sale of Equipment 14,000 Depreciation Expense 2,000 Accumulated Depreciation 78,000 Eliminate unrealized profit on equipment.

Adjustment to equipmentAmount paid by WW to acquire building P150,000 Amount paid by LL on intercompany sale (84,000 )Adjustment to buildings and equipment P 66,000

Adjustment to depreciation expenseDepreciation expense recorded by Lance Corporation (P84,000 / 7 years) P 12,000 Depreciation expense recorded by WW Corporation (P150,000 / 15 years) (10,000 )Adjustment to depreciation expense P 2,000

Adjustment to accumulated depreciationAmount required (P10,000 x 9 years) P 90,000 Amount reported by LL (P12,000 x 1 year) (12,000 )Required adjustment P 78,000

4. Eliminating entry at January 1, 20x4, to eliminate intercompany sale of equipment and prepare a consolidated balance sheet only:

E(1) Equipment 66,000 Retained Earnings 12,000 Accumulated Depreciation 78,000 Eliminate unrealized profit on equipment.

Problem II1. Eliminating entry, December 31, 20x8:

E(1) Truck 55,000 Gain on Sale of Truck 35,000 Depreciation Expense 5,000 Accumulated Depreciation 85,000

Computation of gain on sale of truck:Price paid by Minnow P245,000 Cost of truck to Frazer P300,000Accumulated depreciation (P300,000 / 10 years) x 3 years ( 90,000)

(210,000)

Gain on sale of truck P 35,000

Accumulated depreciation adjustment:Required [(P300,000 / 10 years) x 4 years] P120,000 Reported [(P245,000 / 7 years) x 1 year] (35,000 )Required increase P 85,000

2. Eliminating entry, December 31, 20x9:

E(1) Truck 55,000 Retained Earnings 30,000 Depreciation Expense 5,000 Accumulated Depreciation 80,000

Accumulated depreciation adjustment:Required [(P300,000 / 10 years) x 5 years] P150,000 Reported [(P245,000 / 7 years) x 2 years] (70,00

0)Required increase P 80,000

Problem IIIa. Eliminating entry, December 31, 20x8:

E(1) Truck 90,000 Gain on Sale of Truck 30,000 Accumulated Depreciation 120,000

Computation of gain on sale of truck:Price paid by MM P210,000 Cost of truck to FF P300,000Accumulated depreciation (P300,000 / 10 years) x 4 years (120,000)

(180,000)

Gain on sale of truck P 30,000

b. Eliminating entry, December 31, 20x9:

E(1) Truck 90,000 Retained Earnings, January 1 30,000 Depreciation Expense 5,000 Accumulated Depreciation 115,000

Accumulated depreciation adjustment:Required [(P300,000 / 10 years) x 5 years] P150,000 Recorded [(P210,000 / 6 years) x 1 year]

(35,000)Required increase P115,000

Problem IV

1 Equipment 540,000Beginning R/E – Prince (P100,000 × .80) 80,000Noncontrolling Interest (P100,000 × .20) 20,000

Accumulated Depreciation 640,000

Accumulated Depreciation (P100,000/4) × 2 50,000Depreciation Expense 25,000Beginning R/E – Prince (P25,000 × .80) 20,000Noncontrolling Interest (P25,000 × .20) 5,000

2 Controlling Interest in Consolidated Net Income:Prince Company’s income from its

independent operations P3,270,000Reported net income of Serf Company P820,000Plus profit on intercompany sale of

equipment considered to be realized

through depreciation in 2014 25,000Reported subsidiary income that has been

realized in transactions with thirdparties 845,000

× .8Prince Company’s share thereof 676,000Controlling Interest in Consolidated net income P3,946,000

3. Noncontrolling Interest Calculation:Reported income of Serf Company P820,000Plus: Intercompany profit considered realized

in the current period 25,000P845,000

Noncontrolling interest in Serf Company(.20 × 845,000) P169,000

4. NCI-CNI (No. 3) P 169,000CI-CNI (No. 2) 3,946,000

CNI P4,115,000

or,Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P3,270,000 Realized gain on sale of equipment (downstream sales) through depreciation

0

P Company’s realized net income from separate operations…….….. P3,270,000 S Company’s net income from own operations…………………………………. P 820,000 Realized gain on sale of equipment (upstream sales) through depreciation*

25,000

Son Company’s realized net income from separate operations*…….….. P 845,000 845,000 Total P4,115,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x5 P4,115,000 Less: Non-controlling Interest in Net Income* * 169,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P3,946,000

Or, alternativelyConsolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P3,270,000 Realized gain on sale of equipment (downstream sales) through depreciation

0

P Company’s realized net income from separate operations…….….. P3,270,000 S Company’s net income from own operations…………………………………. P820,000 Realized gain on sale of equipment (upstream sales) through depreciation 25,000 S Company’s realized net income from separate operations…….….. P 845,000 845,000 Total P4,115,000 Less: Non-controlling Interest in Net Income* * P 169,000 Amortization of allocated excess…………………… 0 169,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P3,946,000 Add: Non-controlling Interest in Net Income (NCINI) _169,000 Consolidated Net Income for 20x5 P4,115,000

**Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 820,000 Realized gain on sale of equipment (upstream sales) through depreciation

25,000

S Company’s realized net income from separate operations……… P 845,000 Less: Amortization of allocated excess 0

P845,000 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 169,000

1/1/20x4:Selling price of equipment P 740,000Less: BV of equipment Cost P1,280,000 Less: Accumulated depreciation:

P1,280,000 / 8 years x 4 years* 640,000 640,000

Unrealized gain on sales – 1/1/20x4 P 100,000

Realized gain – depreciation: P100,000 / 4 years P 25,000*the original life is 8 years as of 1/1/20x3, since the remaining life as of

1/1/20x4 in only 4 years, for purposes of computing the accumulated depreciation to determine the gain on sale, the difference of 4 years is presumed to be expired.5 Equipment 540,000

Beginning R/E – Prince 100,000Accumulated Depreciation 640,000

Accumulated Depreciation (P100,000/4) × 2 50,000Depreciation Expense 25,000Beginning R/E – Prince 25,000

6 Controlling Interest in Consolidated Net Income:Prince Company’s income from its

independent operations P3,270,000Plus profit on intercompany sale of

equipment considered to be realizedthrough depreciation in 2014 25,000

P3,295,000Reported net income of S Company P820,000

× .8Prince Company’s share thereof 656,000Controlling Interest in Consolidated net income P3,951,000

Noncontrolling Interest Calculation:Reported income of S Company P820,000

Noncontrolling interest in S Company(.20 × 820,000) P164,000

NCI-CNI P 164,000 CI-CNI 3,951,000

CNI P4,115,000

or,Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P3,270,000 Realized gain on sale of equipment (downstream sales) through depreciation

____25,000

P Company’s realized net income from separate operations…….….. P3,295,000 S Company’s net income from own operations…………………………………. P 820,000 Realized gain on sale of equipment (upstream sales) through depreciation*

0

S Company’s realized net income from separate operations*…….….. P 820,000 820,000 Total P4,115,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x5 P4,115,000 Less: Non-controlling Interest in Net Income* * 164,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P3,951,000

Or, alternativelyConsolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P3,270,000 Realized gain on sale of equipment (downstream sales) through depreciation

25,000

P Company’s realized net income from separate operations…….….. P3,295,000 S Company’s net income from own operations…………………………………. P820,000 Realized gain on sale of equipment (upstream sales) through depreciation 0 S Company’s realized net income from separate operations…….….. P 820,000 820,000 Total P4,115,000 Less: Non-controlling Interest in Net Income* * P 164,000 Amortization of allocated excess…………………… 0 164,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P3,951,000 Add: Non-controlling Interest in Net Income (NCINI) _169,000 Consolidated Net Income for 20x5 P4,115,000

**Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 820,000 Realized gain on sale of equipment (upstream sales) through depreciation

0

S Company’s realized net income from separate operations……… P 820,000

Less: Amortization of allocated excess 0 P820,000

Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 164,000

Problem VRequirements 1 to 4Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred……………………………….. P 372,000Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 80%)……………………. P 192,000 Retained earnings (P120,000 x 80%)………………... 96,000 288,000Allocated excess (excess of cost over book value)….. P 84,000Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… P 4,800 Increase in land (P7,200 x 80%)……………………. 5,760 Increase in equipment (P96,000 x 80%) 76,800 Decrease in buildings (P24,000 x 80%)………..... ( 19,200) Decrease in bonds payable (P4,800 x 80%)…… 3,840 72,000Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………... P 12,000

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

Book valueS Co.

Fair value (Over) Under

Valuation Inventory………………….…………….. P 24,000 P 30,000 P 6,000Land……………………………………… 48,000 55,200 7,200Equipment (net)......... 84,000 180,000 96,000Buildings (net) 168,000 144,000 (24,000)Bonds payable………………………… (120,000) ( 115,200) 4,800Net……………………………………….. P 204,000 P 294,000 P 90,000

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

Book valueS Co.

Fair value Increase

(Decrease)Equipment.................. 180,000 180,000 0Less: Accumulated depreciation….. 96,000 - ( 96,000)Net book value………………………... 84,000 180,000 96,000

S Co. Book value

S Co.Fair value (Decrease)

Buildings................ 360,000 144,000 ( 216,000)Less: Accumulated depreciation….. 1992,000 - ( 192,000)Net book value………………………... 168,000 144,000 ( 24,000)

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

Over/Under

Life

Annual Amount

Current Year(20x4) 20x5

InventoryP

6,000 1P

6,000 P 6,000P -

Subject to Annual Amortization Equipment (net)......... 96,000 8 12,000 12,000 12,000

Buildings (net)(24,00

0) 4 ( 6,000) ( 6,000) (6,000)

Bonds payable… 4,80

0 4 1,20

0 1,200 1,20

0P

13,200 P 13,200 P 7,200

The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows:

Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) P 372,000 Fair value of NCI (given) (20%) 93,000 Fair value of Subsidiary (100%) P 465,000Less: Book value of stockholders’ equity of S (P360,000 x 100%) __360,000Allocated excess (excess of cost over book value)….. P 105,000Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) 90,000Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………... P 15,000

In this case, the goodwill was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows:

Value % of TotalGoodwill applicable to parent………………… P12,000 80.00%Goodwill applicable to NCI…………………….. 3,000 20.00%Total (full) goodwill……………………………….. P15,000 100.00%

The goodwill impairment loss would be allocated as followsValue % of Total

Goodwill impairment loss attributable to parent or controlling Interest

P 3,000 80.00%

Goodwill applicable to NCI…………………….. 750 20.00%Goodwill impairment loss based on 100% fair value or full- Goodwill P 3,750 100.00%

The unrealized and gain on intercompany sales for 20x4 are as follows:

Date of Sale Seller

Selling Price

Book Value

Unrealized*Gain on sale

Remaining

Life

Realized gain – depreciation** 20x4

4/1/20x4

P Co. P90,000

P75,000

P15,000 5 years P3,000/year P2,250

1/2/20x4

S Co. 60,000

28,800

31,200 8 years P3,900/year P3,900

* selling price less book value ** unrealized gain divided by remaining life; 20x4 – P3,000 x 9/12 = P2,250 20x4: First Year after Acquisition Parent Company Cost Model Entry

January 1, 20x4:(1) Investment in S Company…………………………………………… 372,000 Cash……………………………………………………………………..

372,000

Acquisition of S Company.

January 1, 20x4 – December 31, 20x4:(2) Cash……………………… 28,800 Dividend income (P36,000 x 80%)……………. 28,800 Record dividends from S Company.

No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4, and unrealized profits in ending inventory.

Consolidation Workpaper – Year of Acquisition(E1) Common stock – S Co………………………………………… 240,000 Retained earnings – S Co…………………………………… 120.000 Investment in S Co…………………………………………… 288,000 Non-controlling interest (P360,000 x 20%)………………………..

72,000

To eliminate intercompany investment and equity accounts of subsidiary on date of acquisition; and to establish non-controlling interest (in net assets of subsidiary) on date of acquisition.

(E2) Inventory………………………………………………………………….

6,000

Accumulated depreciation – equipment……………….. 96,000 Accumulated depreciation – buildings………………….. 192,000 Land……………………………………………………………………….

7,200

Discount on bonds payable………………………………………….

4,800

Goodwill…………………………………………………………………. 12,000 Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%)………………………..

18,000

Investment in S Co………………………………………………. 84,000 To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition.

(E3) Cost of Goods Sold……………. 6,000 Depreciation expense……………………….. 6,000 Accumulated depreciation – buildings………………….. 6,000 Interest expense………………………………… 1,200 Goodwill impairment loss………………………………………. 3,000 Inventory………………………………………………………….. 6,000 Accumulated depreciation – equipment……………….. 12,000 Discount on bonds payable………………………… 1,200 Goodwill…………………………………… 3,000 To provide for 20x4 impairment loss and depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows:

Cost of Goods Sold

Depreciation/Amortization

ExpenseAmortizatio

n-Interest

Total

Inventory sold P 6,000

Equipment P 12,000

Buildings ( 6,000)

Bonds payable _______ _______ P 1,200

Totals P 6,000 P 6,000 P1,200 13,200

(E4) Dividend income - P………. 28,800 Non-controlling interest (P36,000 x 20%)……………….. 7,200 Dividends paid – S…………………… 36,000 To eliminate intercompany dividends and non-controlling interest share of dividends.

(E5) Gain on sale of equipment 15,000 Equipment 30,000 Accumulated depreciation 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale).

(E6) Gain on sale of equipment 31,200 Equipment 12,000 Accumulated depreciation 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale).

(E7) Accumulated depreciation……….. 2,250 Depreciation expense…………… 2,250 To adjust downstream depreciation expense on equipment sold

to subsidiary, thus realizing a portion of the gain through depreciation

(P15,000 / 5 years x 9/12 = P2,250).

(E8) Accumulated depreciation……….. 3,900 Depreciation expense…………… 3,900 To adjust upstream depreciation expense on equipment sold to

parent, thus realizing a portion of the gain through depreciation (P31,200/85 years x 1 year = P3,900).

(E9) Non-controlling interest in Net Income of Subsidiary…………

10,140

Non-controlling interest ………….. 10,140 To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows:

Net income of subsidiary…………………….. P 91,200Unrealized gain on sale of equipment (upstream sales) ( 31,200)Realized gain on sale of equipment (upstream sales) through depreciation 3,900S Company’s realized net income from separate operations P 63,900Less: Amortization of allocated excess [(E3)]…. 13,200

P 50,700 Multiplied by: Non-controlling interest %.......... 20%Non-controlling Interest in Net Income (NCINI) – partial goodwill P

10,140

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

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Partial-goodwill)80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition)

Income Statement P Co S Co. Dr. Cr. ConsolidatedSales P480,000 P240,000 P 720,000

Gain on sale of equipment 15,000 31,200

(5) 15,000(6) 31,200

Dividend income 28,800 -(4) 28,800

_________

Total Revenue P523,800 P271,200 P 720,000

Cost of goods sold P204,000 P138,000(3) 6,000

P 348,000

Depreciation expense 60,000 24,000(3) 6,000

(7) 2,250(8)

3,900

83,850

Interest expense - -(3) 1,200

1,200

Other expenses 48,000 18,000 66,000

Goodwill impairment loss - -(3) 3,000

3,000

Total Cost and Expenses P312,000 P180,000 P 502,050Net Income P211,800 P 91,200 P 217,950NCI in Net Income - Subsidiary - - (9 10,140 ( 10,140)Net Income to Retained Earnings P211,800 P 91,200 P 207,810

Statement of Retained EarningsRetained earnings, 1/1 P Company P360,000 P 360,000

S Company P120,000(1) 120,000

Net income, from above 211,800 91,200 207,810 Total P571,800 P211,200 P 567,810Dividends paid P Company 72,000 72,000

S Company - 36,000(4) 36,000 _ ________

Retained earnings, 12/31 to Balance Sheet P499,800 P175,200 P 495,810

Balance Sheet

Cash……………………….P

232,800 P 90,000 P 322,800Accounts receivable…….. 90,000 60,000 150,000

Inventory…………………. 120,000 90,000(2) 6,000 3) 6,000 210,000

Land……………………………. 210,000 48,000(2) 7,200 265,200

Equipment 240,000 180,000

(5) 30,000

(6) 12,000 462,000

Buildings 720,000 540,000 (2) 216,000 1,044,000Discount on bonds payable (2) (3) 1,200 3,600

4,800

Goodwill……………………(2) 12,000 (3) 3,000 9,000

Investment in S Co……… 372,000 (1) 288,000(2) 84,000 -

Total P1,984,800P1,008,0

00 P2,466,600

Accumulated depreciation - equipment P 135,000 P 96,000

(3) 96,000(7) 2,250(8) 3,900

(3) 12,000(5) 45,000(6) 43,200 P229,050

Accumulated depreciation - buildings

405,000 288,000 (2) 192,000(3) 6,000 495,000

Accounts payable…………… 105,000 88,800 193,800Bonds payable………………… 240,000 120,000 360,000Common stock, P10 par……… 600,000 600,000

Common stock, P10 par……… 240,000(1) 240,000

Retained earnings, from above 499,800 175,200 495,810Non-controlling interest…………

_________ ______

___

(4) 7,200

__________

(1 ) 72,000 (2) 18,000(9) 10,140 ____92,940

Total P1,984,800

P1,008,000

P 834,450

P 834,450 P2,466,600

20x5: Second Year after AcquisitionP Co. S Co.

Sales P 540,000 P 360,000Less: Cost of goods sold 216,000 192,000Gross profit P 324,000 P 168,000Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000Net income from its own separate operations P 192,000 P 90,000Add: Dividend income 38,400 -Net income P 230,400 P 90,000Dividends paid P 72,000 P 48,000

No goodwill impairment loss for 20x5.

Parent Company Cost Model EntryOnly a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment:

January 1, 20x5 – December 31, 20x5: Cash……………………… 38,400 Dividend income (P48,000 x 80%)……………. 38,400 Record dividends from S Company.

On the books of S Company, the P48,000 dividend paid was recorded as follows:

Dividends paid………… 48,000 Cash 48,000 Dividends paid by S Co..

Consolidation Workpaper – Second Year after AcquisitionThe working paper eliminations (in journal entry format) on December 31, 20x5, are as follows:

(E1) Investment in S Company………………………… 44,160

Retained earnings – P Company……………………… 44,160 To provide entry to convert from the cost method to the equity method or the entry to establish reciprocity at the beginning of the year, 1/1/20x5, computed as follows:

Retained earnings – S Company, 1/1/20x5 P175,200Retained earnings – S Company, 1/1/20x4 120,000Increase in retained earnings…….. P 55,200Multiplied by: Controlling interest % 80%Retroactive adjustment P 44,160

Entry (1) above is needed only for firms using the cost method to account for their investments in the subsidiary. If the parent is already using the equity method, there is no need to convert to equity.

(E2) Common stock – S Co………………………………………… 240,000 Retained earnings – S Co., 1/1/20x5 175,200 Investment in S Co (P415,200 x 80%)…………………………

332,160

Non-controlling interest (P415,200 x 20%)………………………..

83,040

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

(E3) Inventory………………………………………………………………….

6,000


7,200


4,800

Goodwill…………………………………………………………………. 12,000 Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) 18,000 Investment in S Co………………………………………………. 84,000 To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on January 1, 20x5.

(E4) Retained earnings – P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] 13,560 Non-controlling interests (P13,200 x 20%)……………………. 2,640 Depreciation expense……………………….. 6,000 Accumulated depreciation – buildings………………….. 12,000 Interest expense………………………………… 1,200 Inventory………………………………………………………….. 6,000 Accumulated depreciation – equipment……………….. 24,000 Discount on bonds payable………………………… 2,400 Goodwill…………………………………… 3,000 To provide for years 20x4 and 20x5 depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Year 20x4 amounts are debited to Perfect’s retained earnings & NCI; Year 20x5 amounts are debited to respective nominal accounts.

(20x4)Retaine

d earnings

,


expenseAmortizatio

n-Interest

Inventory sold P 6,000Equipment 12,000 P 12,000Buildings (6,000) ( 6,000)Bonds payable 1,20

0 ________ P 1,200

Sub-total P13,200 P 6,000 P 1,200Multiplied by: 80%To Retained earnings P

10,560Impairment loss 3,00

0Total P 13,560


(E5) Retained Earnings – P Company, 1/1/20x5 15,000

Equipment 30,000 Accumulated depreciation 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale).

(E6) Retained Earnings–P Company, 1/1/20x5 (P31,200 x 80%) 24,960 Non-controlling interest (P31,200 x 20%) 6,240 Equipment 12,000 Accumulated depreciation 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale).

(E7) Accumulated depreciation……….. 5,250 Depreciation expense (current year)…………… 3,000 Retained Earnings–P Company, 1/1/20x5 (prior year) 2,250 To adjust downstream depreciation expense on equipment sold


(E8) Accumulated depreciation……….. 7,800 Depreciation expense (current year) 3,900 Retained Earnings–P Co. 1/1/20x5 (P3,900 x 80%) 3,120 Non-controlling interest (P31,200 x 20%) 780 To adjust upstream depreciation expense on equipment sold to



17,340


Net income of subsidiary…………………….. P 90,000Realized gain on sale of equipment (upstream sales) through depreciation

3,900

S Company’s Realized net income* P 93,900Less: Amortization of allocated excess ( 7,200)

P 86,700Multiplied by: Non-controlling interest %..........

20%

Non-controlling Interest in Net Income (NCINI) – partial goodwill

P 17,340

*from separate transactions that has been realized in transactions with third persons. Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Partial-goodwill)80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition)



___________

Total Revenue P578,400 P360,000 P 900,000Cost of goods sold P216,000 P192,000 P 408,000


(7) 3,000

(8) 3,900

83,100


1,200

Other expenses 72,000 54,000 126,000Goodwill impairment loss - - - Total Cost and Expenses P348,000 P270,000 P 618,300

Net Income P230,400P

90,000P 281,700

NCI in Net Income - Subsidiary - - (9) 17,340 ( 17,340)

Net Income to Retained Earnings P230,400P

90,000P 264,360

Statement of Retained Earnings

Retained earnings, 1/1

P Company P499,800

(1) 13,560

(5) 15,000

(6) 24,960

(1) 44,160(7) 2,250(8) 3,120 P 495,810

S CompanyP

175,200(2)

175,200Net income, from above 230,400 __90,000 264,360 Total P730,200 P265,200 P 760,170Dividends paid P Company 72,000 72,000

S Company - 48,000(5) 48,000 _ ________


Balance Sheet

Cash……………………….P

265,200P

102,000 P 367,200Accounts receivable…….. 180,000 96,000 276,000

Inventory…………………. 216,000 108,000 (1) 6,000(2) 6,00

0 324,000

Land……………………………. 210,000 48,000(3) 7,200 265,200

Equipment 240,000 180,000

(5) 30,000(6) 12,000 462,000

Buildings 720,000 540,000(3) 216,000 1,044,000

Discount on bonds payable(3) 4,800

(4) 2,400 2,400

Goodwill……………………(3) 12,000

(4) 3,000 9,000

Investment in S Co……… 372,000(1) 44,160

(2) 332,160(3) 84,000 -

Total P2,203,200P1,074,0

00 P2,749,800

Accumulated depreciation - equipment

P 150,000P

102,000 (3) 96,000(7) 5,250(8) 7,800

(4) 24,000(5) 45,000(6) 43,200 P 255,150


450,000 306,000

(3) 192,000 (4) 12,000 552,000



Retained earnings, from above 658,200 217,200 688,170

Non-controlling interest…………

___ _____

_________

(4) 2,640(5) 9,600(6) 6,240__________

(2 83,040 (3) 18,000(8) 780(9) 17,340 ____100,680

Total P2,203,200

P1,074,000

P 979,350

P 979,350 P2,749,800

5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as

the consolidated retained earnings, thus:Consolidated Retained Earnings, January 1, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) P360,000

b.Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… P 240,000 Retained earnings – Subsidiary Company…………………………………. 120,000 Stockholders’ equity – Subsidiary Company.………….. P 360,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities 90,000Fair value of stockholders’ equity of subsidiary, January 1, 20x4………………… P 450,000

Multiplied by: Non-controlling Interest percentage…………... 20Non-controlling interest (partial goodwill),……………………………….. P 90,000

c.Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 360,000 Parent’s Stockholders’ Equity / CI – SHE P 960,000 NCI, 1/1/20x4 ___90,000 Consolidated SHE, 1/1/20x4 P1,050,000

6.Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized.

12/31/20x4: a. CI-CNI - P

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. P183,000 Unrealized gain on sale of equipment (upstream sales) (15,000) Realized gain on sale of equipment (upstream sales) through depreciation 2,250 P Company’s realized net income from separate operations*…….….. P170,250 S Company’s net income from own operations…………………………………. P 91,200 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations*…….….. P 63,900 63,900 Total P234,150 Less: Non-controlling Interest in Net Income* * P 10,140 Amortization of allocated excess (refer to amortization above) 13,200 Goodwill impairment (impairment under partial-goodwill approach) 3,000 26,340 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P207,810 Add: Non-controlling Interest in Net Income (NCINI) _ 10,140 Consolidated Net Income for 20x4 P217,950

*that has been realized in transactions with third parties.

b. NCI-CNI – P10,140**Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company)

P 91,200

Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations……… P 63,900 Less: Amortization of allocated excess / goodwill impairment (refer to amortization table above) 13,200

P 50,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 10,140


c. CNI, P217,950 – refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be

computed as follows:

Consolidated Retained Earnings, December 31, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 207,810 Total P567,810 Less: Dividends paid – Parent Company for 20x4 72,000 Consolidated Retained Earnings, December 31, 20x4 P495,810

e. The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized. The NCI on January 1, 20x4 and December 31, 20x4 are computed as follows:

Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4 P120,000 Add: Net income of subsidiary for 20x4 91,200 Total P211,200 Less: Dividends paid – 20x4 36,000 175,200

Stockholders’ equity – Subsidiary Company, December 31, 20x4 P 415,200 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200) Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P492,000 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 Realized stockholders’ equity of subsidiary, December 31, 20x4…… P464,700 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)………………………………….. P 92,940

f.Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 495,810 Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,095,810 NCI, 12/31/20x4 ___92,940 Consolidated SHE, 12/31/20x4 P1,188,750

12/31/20x5: a. CI-CNI – P264,360

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P192,000 Realized gain on sale of equipment (downstream sales) through depreciation

3,000

P Company’s realized net income from separate operations*…….….. P195,000 S Company’s net income from own operations…………………………………. P 90,000 Realized gain on sale of equipment (upstream sales) through depreciation 3,90 S Company’s realized net income from separate operations*…….….. P 93,900 93,900 Total P288,900 Less: Amortization of allocated excess…………………… 7,200 Consolidated Net Income for 20x5 P281,700 Less: Non-controlling Interest in Net Income* * 17,340 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P264,360


Or, alternativelyConsolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P192,000 Realized gain on sale of equipment (downstream sales) through depreciation

3,000

P Company’s realized net income from separate operations*…….….. P195,000 S Company’s net income from own operations…………………………………. P 90,000 Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations*…….….. P 93,900 93,900 Total P288,900 Less: Non-controlling Interest in Net Income* * P 17,340 Amortization of allocated excess…………………… 7,200 24,540 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P264,360 Add: Non-controlling Interest in Net Income (NCINI) _ 17,340 Consolidated Net Income for 20x5 P281,700


b. NCI-CNI – P17,340**Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company)

P 90,000

Realized gain on sale of equipment (upstream sales) through depreciation

3,900

S Company’s realized net income from separate operations……… P 93,900 Less: Amortization of allocated excess 7,200

P 86,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 17,340


computed as follows:Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model) P499,800 Less: Downstream - net unrealized gain on sale of equipment – prior to 20x5 (P15,000 – P2,250)

12,750

Adjusted Retained Earnings – Parent 1/1/20x5 (cost model ) Son Company’s Retained earnings that have been realized in transactions with third P487,050

parties.. Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5 P 175,200 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 55,200 Less: Amortization of allocated excess – 20x4 13,200 Upstream - net unrealized gain on sale of equipment –prior to 20x5 (P31,200 – P3,900)

27,300

P 14,700 Multiplied by: Controlling interests %................... 80% P

11,760 Less: Goodwill impairment loss 3,000 __ 8,760 Consolidated Retained earnings, January 1, 20x5 P495,810 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5

264,360

Total P760,170 Less: Dividends paid – Parent Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P688,170

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

Or, alternatively:Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model) P658,200 Less: Downstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P15,000 – P2,250 – P3,000) 9,750 Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ) S Company’s Retained earnings that have been realized in transactions with third parties.. P648,450 Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, December 31, 20x5 P 217,200 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 97,200 Less: Accumulated amortization of allocated excess – 20x4 and 20x5 (P11,000 + P6,000) 20,400 Upstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P31,200 – P3,900 – P3,900)

23,400

P 53,400 Multiplied by: Controlling interests %................... 80% P 42,720 Less: Goodwill impairment loss 3,000 39,720 Consolidated Retained earnings, December 31, 20x5 P688,170

e.Non-controlling interest (partial-goodwill), December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5 P175,200 Add: Net income of subsidiary for 20x5 90,000 Total P

265,200 Less: Dividends paid – 20x5 48,000 217,20

0 Stockholders’ equity – Subsidiary Company, December 31, 20x5 P 457,200 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) : 20x4 P

13,200 20x5 7,200 ( 20,400) Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P 526,800 Less: Upstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P31,200 – P3,900 – P3,900)

23,400

Realized stockholders’ equity of subsidiary, December 31, 20x5………. P503,400 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 100,680

f.

Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 688,170 Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x5 P1,288,170 NCI, 12/31/20x5 __100,680 Consolidated SHE, 12/31/20x5 P1,188,850

Problem VIRequirements 1 to 4Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. P 372,000 Fair value of NCI (given) (20%)……………….. 93,000 Fair value of Subsidiary (100%)………. P 465,000Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. P 240,000 Retained earnings (P120,000 x 100%)………... 120,000 360,000Allocated excess (excess of cost over book value)….. P 105,000Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… P 6,000 Increase in land (P7,200 x 100%)……………………. 7,200 Increase in equipment (P96,000 x 100%) 96,000 Decrease in buildings (P24,000 x 100%)………..... ( 24,000) Decrease in bonds payable (P4,800 x 100%)…… 4,800 90,000Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………... P 15,000


Over/under

Life

Annual Amount


InventoryP

6,000 1P

6,000 P 6,000P -



0) 4 ( 6,000) ( 6,000) (6,000)


0 4 1,20

0 1,200 1,20

0P

13,200 P 13,200 P 7,200

20x4: First Year after Acquisition Parent Company Cost Model Entry


372,000


January 1, 20x4 – December 31, 20x4:(2) Cash……………………… 28,800 Dividend income (P36,000 x 80%)……………. 28,800 Record dividends from S Company.


Dividends paid………… 36,000 Cash……. 36,000 Dividends paid by S Co..

No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4.

Consolidation Workpaper – First Year after Acquisition (E1) Common stock – S Co………………………………………… 240,000 Retained earnings – S Co…………………………………… 120.000 Investment in S Co…………………………………………… 288,000 Non-controlling interest (P360,000 x 20%)………………………..

72,000

To eliminate intercompany investment and equity accounts of subsidiary on date of acquisition; and to establish non-controlling interest (in net assets of subsidiary) on date of acquisition.

(E2) Inventory………………………………………………………………….

6,000


7,200


4,800

Goodwill…………………………………………………………………. 15,000 Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – P12,000, partial goodwill)]…………

21,000

Investment in S Co………………………………………………. 84,000 To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition.

Since the set-up entry in (E2) NCI at fair value, non-controlling interests have a share of entity goodwill and hence is exposed to impairment loss on goodwill. PAS 36 requires the impairment loss to be pro-rated between the parent and NCI on the same basis as that on which profit or loss is allocated. In other words, the impairment loss is not pro-rated in accordance with the proportion of goodwill recognized by parent and NCI.


Cost of Goods Sold


ExpenseAmortizatio

n-Interest


Equipment P12,000Buildings ( 6,000)Bonds payable _______ _______ P 1,200Totals P 6,000 P 6,000 P1,200


(E5) Gain on sale of equipment 15,000 Equipment 30,000 Accumulated depreciation 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated

depreciation at the point of the intercompany sale).




(P15,000 / 5 years x 9/12 = P2,250).




9,390




10,140Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill) 750 Non-controlling Interest in Net Income (NCINI) P 9,390

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Full-goodwill)80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition)



(5) 15,000(6) 31,200


_________



P 348,000


(7) 2,250

(8) 3,900

83,850


1,200

Other expenses 48,000 18,000 66,000


3,750

Total Cost and Expenses P312,000 P180,000 P 502,800Net Income P211,800 P 91,200 P 217,200

NCI in Net Income - Subsidiary - -(9) 9,390

( 9,390)

Net Income to Retained Earnings P211,800 P 91,200 P 207,810

Statement of Retained Earnings

Retained earnings, 1/1 P Company P360,000 P 360,000

S Company P120,000(1) 120,000


S Company - 36,000(4) 36,000 _ ________


Balance Sheet

Cash……………………….P


Inventory…………………. 120,000 90,000(2) 6,000 3) 6,000 210,000

Land……………………………. 210,000 48,000(2) 7,200 265,200

Equipment 240,000 180,000

(5) 30,000

(6) 12,000 462,000

Buildings 720,000 540,000(2) 216,000 1,044,000


(3) 1,200 3,600

Goodwill……………………(2) 15,000

(3) 3,750 11,250


Total P1,984,800P1,008,0

00 P2,468,850


(2) 80,000(7) 2,250(8) 3,900

(3) 10,000(5) 45,000(6) 43,200 P229,050


405,000 288,000

(2) 192,000(3) 6,000 495,000





_________ ______

___

(3) 7,200

__________

(1 ) 72,000 (2) 21,000(9) 9,390 ____95,190

Total P1,984,800

P1,008,000

P 843,690

P 843,690 P2,468,850

20x5: Second Year after Acquisition P Co. S Co.

Sales P 540,000 P 360,000Less: Cost of goods sold 216000 192,000Gross profit P 324,000 P 168,000Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000Net income from its own separate operations P 192,000 P 90,000Add: Dividend income 38,400 -Net income P 230,400 P 90,000Dividends paid P 72,000 P 48,000

No goodwill impairment loss for 20x5.Parent Company Cost Model Entry

January 1, 20x5 – December 31, 20x5: Cash……………………… 38,400 Dividend income (P48,000 x 80%)……………. 38,400

Record dividends from S Company.


Dividends paid………… 48,000 Cash 48,000 Dividends paid by S Co..

Consolidation Workpaper – Second Year after Acquisition (E1) Investment in S Company………………………… 44,160 Retained earnings – P Company……………………… 44,160 To provide entry to convert from the cost method to the equity method or the entry to establish reciprocity at the beginning of the year, 1/1/20x5, computed as follows:

Retained earnings – S Company, 1/1/20x5 P175,200Retained earnings – S Company, 1/1/20x4 120,000Increase in retained earnings…….. P 55,200Multiplied by: Controlling interest % 80%Retroactive adjustment P 44,160

(E2) Common stock – S Co………………………………………… 240,000 Retained earnings – S Co., 1/1/20x5 175,200 Investment in S Co (P415,200 x 80%)…………………………

332,160

Non-controlling interest (P415,200 x 20%)………………………..

83,040

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

(E3) Inventory………………………………………………………………….

6,000


7,200


4,800

Goodwill…………………………………………………………………. 15,000 Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) + [(P15,000, full – P12,000, partial goodwill)]…………

21,000

Investment in S Co………………………………………………. 84,000 To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on January 1, 20x5.

(E4) Retained earnings – P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill] 13,560 Non-controlling interests (P16,950 x 20%) or (P13,200 x 20% + (P3,750 – P3,000 = P750)

3,390

Depreciation expense……………………….. 6,000 Accumulated depreciation – buildings………………….. 12,000 Interest expense………………………………… 1,200 Inventory………………………………………………………….. 6,000 Accumulated depreciation – equipment……………….. 24,000 Discount on bonds payable………………………… 2,400 Goodwill…………………………………… 3,750 To provide for years 20x4 and 20x5 depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows: Year 20x4 amounts are debited to Perfect’s retained earnings & NCI; Year 20x5 amounts are debited to respective nominal accounts.

(20x4)Retaine

d earnings

,


expenseAmortizatio

n-Interest

Inventory sold P 6,000Equipment 12,000 P 12,000Buildings (6,000) ( 6,000)Bonds payable 1,20

0 ________ P 1,200

Sub-total P13,200 P 6,000 P 1,200Multiplied by: 80%To Retained earnings P

10,560Impairment loss 3,00

0Total P 13,560


(E6) Retained Earnings – P Company, 1/1/20x5 15,000 Equipment 30,000 Accumulated depreciation 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale).

(E7) Retained Earnings–P Company, 1/1/20x5 (P31,200 x 80%) 24,960 Non-controlling interest (P31,200 x 20%) 6,240 Equipment 12,000 Accumulated depreciation 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale).

(E8) Accumulated depreciation……….. 5,250 Depreciation expense (current year)…………… 3,000 Retained Earnings–P Company, 1/1/20x5 (prior year) 2,250 To adjust downstream depreciation expense on equipment sold


(E9) Accumulated depreciation……….. 7,800 Depreciation expense (current year) 3,900 Retained Earnings–P Co. 1/1/20x5 (P3,900 x 80%) 3,120 Non-controlling interest (P3,900 x 20%) 780 To adjust upstream depreciation expense on equipment sold to



17,340



3,900



20%

Non-controlling Interest in Net Income (NCINI

P 17,340

Less: NCI on goodwill impairment loss on full- Goodwill

0

Non-controlling Interest in Net Income (NCINI)

P 17,340

*from separate transactions that has been realized in transactions with third persons.

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Full-goodwill)80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition)



___________



(8) 3,000

(9) 3,900

83,100


1,200



90,000P 281,700


( 17,340)


90,000P 264,360

Statement of Retained EarningsRetained earnings, 1/1

P Company P499,800

(2) 13,560

(6) 15,00(7) 24,960

(1) 44,160(8) 2,250(9) 3,120 P 495,810

S CompanyP

175,200 (1) 175,200


S Company - 48,000(5) 48,000 _ ________


Balance Sheet

Cash……………………….P

265,200P

102,000 P 367,200Accounts receivable…….. 180,000 96,000 276,000

Inventory…………………. 216,000 108,000(3) 6,000

(4) 6,000 324,000

Land……………………………. 210,000 48,000(3) 7,200 265,200

Equipment 240,000 180,000

(6) 30,000(7) 12,000 462,000

Buildings 720,000 540,000(3) 216,000 1,044,000


(4) 2,400 2,400

Goodwill……………………(3) 15,000

(4) 3,750 11,250

Investment in S Co……… 372,000(1) 44,160

(2) 332,160(3) 90,000 -

Total P2,203,200P1,074,0

00 P2,752,050


P 150,000P

102,000

(3) 96,000(8) 5,250(9) 7,800

(4) 24,000(6) 45,000(7) 43,200 P 255,150


450,000 306,000

(3) 192,000 (4) 12,000 552,000

Accounts payable…………… 105,000 88,800 193,800

Bonds payable………………… 240,000 120,000 360,000Common stock, P10 par……… 600,000 600,000




___ _____

_________

(4) 3,390(5) 9,600(7) 6,240__________

(2 ) 83,040 (3) 21,000(9) 780(10) 17,340 ____102,930

Total P2,203,200

P1,074,000

P 983,100

P 983,100 P2,752,050

5. 1/1/20x4 a. On date of acquisition the retained earnings of parent should always be considered as

the consolidated retained earnings, thus:Consolidated Retained Earnings, January 1, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) P360,000

b.Non-controlling interest (partial-goodwill), January 1, 20x4 Common stock – Subsidiary Company…………………………………… P 240,000 Retained earnings – Subsidiary Company…………………………………. 120,000 Stockholders’ equity – Subsidiary Company.………….. P 360,000 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities 90,000Fair value of stockholders’ equity of subsidiary, January 1, 20x4………………… P 450,000Multiplied by: Non-controlling Interest percentage…………... 20Non-controlling interest (partial goodwill),……………………………….. P 90,000Add: Non-controlling interests on full goodwill, 1/1/20x4 (P12,500, full-goodwill – P10,000, partial goodwill)

3,000

Non-controlling interest (full-goodwill) P 93,000

c.Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 360,000 Parent’s Stockholders’ Equity / CI – SHE P 960,000 NCI, 1/1/20x4 ___93,000 Consolidated SHE, 1/1/20x4 P1,053,000

6.Note: The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized.

12/31/20x4: a. CI-CNI – P207,810

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. P183,000 Unrealized gain on sale of equipment (upstream sales) (15,000) Realized gain on sale of equipment (upstream sales) through depreciation 2,250 P Company’s realized net income from separate operations*…….….. P170,250 S Company’s net income from own operations…………………………………. P 91,200 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations*…….….. P 63,900 63,900 Total P234,150 Less: Non-controlling Interest in Net Income* * P 10,140 Amortization of allocated excess (refer to amortization above) 13,200 Goodwill impairment (impairment under partial-goodwill approach) 3,000 26,340 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P207,810 Add: Non-controlling Interest in Net Income (NCINI) 10,140 Consolidated Net Income for 20x4 P217,950



P 91,200

Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations……… P 63,900 Less: Amortization of allocated excess / goodwill impairment (refer to amortization table above) 13,200

P 50,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) – partial goodwill P 10,140 Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750mpairment on full-goodwill less P3,000, impairment on partial- goodwill)

750

Non-controlling Interest in Net Income (NCINI) – full goodwill P 9,390 *that has been realized in transactions with third parties.


computed as follows:Consolidated Retained Earnings, December 31, 20x4 Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4 207,810 Total P567,810 Less: Dividends paid – Parent Company for 20x4 72,000 Consolidated Retained Earnings, December 31, 20x4 P495,810

e. Non-controlling interest (partial-goodwill), December 31, 20x4 Common stock – Subsidiary Company, December 31, 20x4…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x4 Retained earnings – Subsidiary Company, January 1, 20x4 P120,000 Add: Net income of subsidiary for 20x4 91,200 Total P211,200 Less: Dividends paid – 20x4 36,000 175,200 Stockholders’ equity – Subsidiary Company, December 31, 20x4 P 415,200 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200) Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P492,000 Unrealized gain on sale of equipment (upstream sales) ( 31,200) Realized gain on sale of equipment (upstream sales) through depreciation 3,900 Realized stockholders’ equity of subsidiary, December 31, 20x4…… P464,700 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)………………………………….. P 92,940 Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4: [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss

2,250

Non-controlling interest (full-goodwill)…………….. P 95,190

f.Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 495,810 Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,095,810 NCI, 12/31/20x4 ___95,190 Consolidated SHE, 12/31/20x4 P1,191,000

12/31/20x5: a. CI-CNI – P281,700

Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P192,000 Realized gain on sale of equipment (downstream sales) through depreciation

3,000

P Company’s realized net income from separate operations*…….….. P195,000 S Company’s net income from own operations…………………………………. P 90,000 Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations*…….….. P 93,900 93,900 Total P288,900 Less: Amortization of allocated excess…………………… 7,200 Consolidated Net Income for 20x5 P281,700 Less: Non-controlling Interest in Net Income* * 17,340 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P264,360


Or, alternativelyConsolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P192,000

Realized gain on sale of equipment (downstream sales) through depreciation

3,000

P Company’s realized net income from separate operations*…….….. P195,000 S Company’s net income from own operations…………………………………. P 90,000 Realized gain on sale of equipment (upstream sales) through depreciation 3,900 S Company’s realized net income from separate operations*…….….. P 93,900 93,900 Total P288,900 Less: Non-controlling Interest in Net Income* * P 17,340 Amortization of allocated excess…………………… 7,200 24,540 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P264,360 Add: Non-controlling Interest in Net Income (NCINI) _ 17,340 Consolidated Net Income for 20x5 P281,700



P 90,000

Realized gain on sale of equipment (upstream sales) through depreciation

3,900

S Company’s realized net income from separate operations……… P 93,900 Less: Amortization of allocated excess 7,200

P 86,700 Multiplied by: Non-controlling interest %.......... 20% Non-controlling Interest in Net Income (NCINI) - partial goodwill P 17,340 Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . .

0

Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . .

P 17,340


computed as follows:Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, January 1, 20x5 (cost model) P499,800 Less: Downstream - net unrealized gain on sale of equipment – prior to 20x5 (P15,000 – P2,250)

12,750

Adjusted Retained Earnings – Parent 1/1/20x5 (cost model ) Son Company’s Retained earnings that have been realized in transactions with third parties..

P487,050

Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, January 1, 20x5 P 175,200 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 55,200 Less: Amortization of allocated excess – 20x4 13,200 Upstream - net unrealized gain on sale of equipment –prior to 20x5 (P31,200 – P3,900)

27,300

P 14,700 Multiplied by: Controlling interests %................... 80% P

11,760 Less: Goodwill impairment loss 3,000 __ 8,760 Consolidated Retained earnings, January 1, 20x5 P495,810 Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x5

264,360

Total P760,170 Less: Dividends paid – Parent Company for 20x5 72,000 Consolidated Retained Earnings, December 31, 20x5 P688,170

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

Or, alternatively:Consolidated Retained Earnings, December 31, 20x5 Retained earnings - Parent Company, December 31, 20x5 (cost model) P658,200 Less: Downstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P15,000 – P2,250– P3,000) 9,750 Adjusted Retained Earnings – Parent 12/31/20x5 (cost model ) S Company’s Retained earnings that have been realized in transactions with third parties.. P648,450 Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parent’s share in adjusted

net increased in subsidiary’s retained earnings: Retained earnings – Subsidiary, December 31, 20x5 P 217,200 Less: Retained earnings – Subsidiary, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 97,200 Less: Accumulated amortization of allocated excess – 20x4 and 20x5 (P13,200 + P7,200) 20,400 Upstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P31,200 – P3,900– P3,900)

23,400

P 53,400 Multiplied by: Controlling interests %................... 80% P 42,720 Less: Goodwill impairment loss (full-goodwill) 3,000 39,720 Consolidated Retained earnings, December 31, 20x5 P688,170

e.Non-controlling interest, December 31, 20x5 Common stock – Subsidiary Company, December 31, 20x5…… P 240,000 Retained earnings – Subsidiary Company, December 31, 20x5 Retained earnings – Subsidiary Company, January 1, 20x5 P175,200 Add: Net income of subsidiary for 20x5 90,000 Total P

265,200 Less: Dividends paid – 20x5 48,000 217,20

0 Stockholders’ equity – Subsidiary Company, December 31, 20x5 P 457,200 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) : 20x4 P

13,200 20x5 7,200 ( 20,400) Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P 526,800 Less: Upstream - net unrealized gain on sale of equipment – prior to 12/31/20x5 (P31,200 – P3,900 – P3,900)

23,400

Realized stockholders’ equity of subsidiary, December 31, 20x5………. P503,400 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)………………………………….. P 100,680 Add: Non-controlling interest on full goodwill , net of impairment loss [(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss 2,250 Non-controlling interest (full-goodwill)………………………………….. P 102,930

f.Consolidated SHE: Stockholders’ Equity Common stock, P10 par P 600,000 Retained earnings 688,170 Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x5 P1,288,170 NCI, 12/31/20x5 __102,930 Consolidated SHE, 12/31/20x5 P1,391,100

Problem VII20x4 20x5

1.Noncontrolling interest inP 7,000 (1) P 46,200 (2)

Consolidated net income

Controlling interest in 290,500 (3) 279,300 (4) Consolidated net income

(1) .4(P70,000 – P63,000 + P10,500) = P7,000(2) .4(P105,000 + P10,500) = P46,200(3) P280,000 + .6(P70,000 – P63,000 + P10,500) = P290,500(4) P210,000 + .6(P105,000 + P10,500) = P279,300

2014 20152.

Noncontrolling interest in P 28,000 (5)P 42,000 (6)Consolidated income

Controlling interest in 269,500 (7) 283,500 (8)Consolidated net income

(5) .4(P70,000) = P28,000(6) .4(P105,000) = P42,000(7) (P280,000 – P63,000 + P10,500) + .6(P70,000) = P269,500(8) (P210,000 + P10,500) + .6(P105,000) = P283,500

Problem VIII(Determine consolidated net income when an intercompany transfer of equipment occurs. Includes an outside ownership)

a. Income—ST ....................................................................................... P220,000Income—BB....................................................................................... 90,000Excess amortization for unpatented technology................................ (8,000)Remove unrealized gain on equipment ............................................. (50,000)(P120,000 – P70,000)Remove excess depreciation created by

inflated transfer price (P50,000 ÷ 5) ........................................... 10,000Consolidated net income .................................................................. P262,000

b. Income calculated in (part a.) ........................................................... P262,000Non-controlling interest in BB's income

Income—BB ................................................................ P90,000Excess amortization ................................................... (8,000)Adjusted net income ................................................... P82,000Non-controlling interest in BB’s income (10%)............................. (8,200 )

Consolidated net income to parent company..................................... P253,800

c. Income calculated in (part a.) ........................................................... P262,000Non-controlling interest in BB's income (see Schedule 1) (4,200)Consolidated net income to parent company..................................... P257,800

Schedule 1: Non-controlling Interest in Bennett's Income (includes upstream transfer)Reported net income of subsidiary ................................................... P90,000Excess amortization........................................................................... (8,000)Eliminate unrealized gain on equipment transfer .............................. (50,000)Eliminate excess depreciation (P50,000 ÷ 5) .................................... 10,000Bennett's realized net income ........................................................... P42,000Outside ownership ............................................................................ 10%Non-controlling interest in subsidiary's income ................................. P 4,200

d. Net income 20x5—ST ........................................................................ P240,000Net income 20x5—BB ....................................................................... 100,000Excess amortization........................................................................... (8,000)Eliminate excess depreciation stemming from transfer

(P50,000 ÷ 5) (year after transfer) .............................................. 10,000 Consolidated net income ......................................................... P342,000

Problem IX1.

20x4 20x5 20x6Consolidated net income as reported P 750,000 P 600,000 P 910,000Less: P10,000 deferred gain -10,000Plus: NCI portion of the gain 3,000Plus: Deferred gain 7,000Corrected consolidated net income P 743,000 P 600,000 P 917,000

2. 20x4 20x5 20x6

Land account as reported P 200,000 P 240,000 P 300,000Less: Intercompany profit -10,000 -10,000Restated land account P 190,000 P 230,000 P 300,000

3. Final sales price outside the entity minus the original cost to the combined entity equals P102,000 minus P72,000 = P30,000

Problem X

1. On the consolidated balance sheet, the machine must be reported at its original cost when Tool purchased it on January 1, 20x1, which is P120,000. Since the elimination entry debited the machine account for P22,000 which must be the amount needed to bring the machine account up to P120,000, Buzzard must have recorded the machine at P98,000. Since the remaining useful life is seven years, Buzzard will record P14,000 of depreciation expense each year.

2. The correct balances on the consolidated balance sheet for the Machine and Accumulated Depreciation accounts are the balances that would be in the accounts if there had been no sale. The balance in the machine account would be the original purchase price to Tool or P120,000. The balance in the Accumulated Depreciation account will be the original amount of annual depreciation, (P12,000) times the number of years the machine has been depreciated (4), or P48,000.

3. The non-controlling interest income will be 30% of Tool’ adjusted net income. Tool’ reported net income of P60,000 is reduced by the P14,000 unrealized gain on the sale of the machine and is increased by the piecemeal recognition of the gain, which is P2,000. The net result of P48,000 is then multiplied by 30% to calculate a P14,400 income for the non-controlling interest.

Problem XI1. Consolidated net income for 20x9:

Operating income reported by BW P100,000Net income reported by TW P40,000Amount of gain realized in 20x9 (P30,000 / 12 years) 2,500 Realized net income of TW 42,500 Consolidated net income P142,500

2. Consolidated net income for 20x9 would be unchanged.


E(1) Buildings and Equipment 30,000Retained Earnings, January 1 20,000Non-controlling Interest 5,000 Depreciation Expense 2,500 Accumulated Depreciation 52,500 Eliminate unrealized profit on building.

Adjustment to buildings and equipment

Amount paid by TW to acquire building P300,000 Amount paid by BW on intercompany sale (270,000 )Adjustment to buildings and equipment P 30,000

Adjustment to retained earnings, January 1, 20x9

Unrealized gain recorded January 1, 20x4 P 30,000 Amount realized following intercompany sale

(P2,500 x 2) (5,000 )Unrealized gain, January 1, 20x9 P 25,000 Proportion of ownership held by Baywatch x .80 Required adjustment P 20,000

Adjustment to Noncontrolling interest, January 1, 20x9

Unrealized gain at January 1, 20x9 P 25,000 Proportion of ownership held by non-controlling interest x .20 Required adjustment P 5,000

Adjustment to depreciation expense

Depreciation expense recorded by BW

Industries (P270,000 / 12 years) P 22,500 Depreciation expense recorded by TW Corporation (P300,000 / 15 years) (20,000 )Adjustment to depreciation expense P 2,500

Adjustment to accumulated depreciation

Amount required (P20,000 x 6 years) P120,000 Amount reported by BW (P22,500 x 3 years) (67,500 )Required adjustment P 52,500

Problem XII1. The gain on the sale of the land in 20x5 was equal to the sales price minus the original

cost of the land when it was first acquired by the combined entity. In this case the gain was P150,000 - P90,000, or P60,000.

2. The consolidated amount of depreciation expense was the combined amounts of depreciation expense showing on the separate income statements minus the piecemeal recognition of the gain on the sale of the equipment. Thus, the consolidated amount of depreciation expense was P95,000 + P32,000 – (P35,000/4 years) = P118,250.

3. Consolidated net income:Osprey separate income (not including Income from Branch)= P153,000 - P55,000 = P 98,000Income from Branch 20,000Plus: Deferred gain on land 50,000Plus: Piecemeal recognition of gain on equipment sale: P35,000 gain/4 years = 8,750Consolidated net income P176,750

Problem XIIIQuail Corporation and SubsidiaryConsolidated Income Statement

for the year ended December 31, 20x5

Sales P 1,100,000Gain on land (P20,000 + P25,000) 45,000Cost of sales ( 560,000 )Other expenses (see below) ( 320,000 )Consolidated Net Income P 265,000NCI-CNI (see below) ( 20,000 )Consolidated net income P 245,000

Other expenses:P265,000 + P60,000 - P5,000 piecemeal recognition of gain on equipment P

320,000

Non-controlling Interest in CNI:Net income from Savannah x 20%: (P100,000 x 20%) = P

20,000

Problem XIV – refer to Problem IX

Problem XV – refer to Problem X

Problem XVI1. Eliminating entry, December 31, 20x7:

E(1)

Gain on Sale of Land 10,000

Land 10,000

Eliminating entry, December 31, 20x8: Retained Earnings, January 1 10,000

E(1) Land 10,000


E(1)Gain on Sale of Land 10,000

Land 10,000

Eliminating entry, December 31, 20x8: E(1) Retained Earnings, January 1 6,000

Non-controlling Interest 4,000 Land 10,000

Problem XVII1. Eliminating entry, December 31, 20x4:

E(1)Gain on Sale of Land 45,000

Land 45,000

Eliminating entry, December 31, 20x5: E(1)

Retained Earnings, January 1 31,500

Non-controlling Interest 13,500 Land 45,000

2. Eliminating entries, December 31, 20x4 and 20x5:

E (1)

Retained Earnings, January 1 30,000

Land 30,000

Problem XVIII1. Downstream sale of land:

20x4 20x5 VV’s separate operating income P 90,000 P110,000 Less: Unrealized gain on sale of land (25,000) VV’s realized operating income P 65,000 P110,000 Spawn’s realized net income 60,000 40,000 Consolidated net income P125,000 P150,000 Income to non-controlling interest: (P60,000 x .25) (15,000) (P40,000 X .25) (10,00

0)Income to controlling interest P110,000 P140,000

2. Upstream sale of land: 20x4 20x5

VV’s separate operating income P 90,000 P110,000 SS’s net income P60,000 Less: Unrealized gain on sale of land (25,000)Spawn’s realized net income 35,000 40,000 Consolidated net income P125,000 P150,000 Income to non-controlling interest: (P35,000 x .25) (8,750) (P40,000 x .25) (10,00

0)Income to controlling interest P116,250 P140,000

Problem XIX

1. Consolidated net income for 20x4 will be greater than PP Company's income from operations plus SS's reported net income. The eliminating entries at December 31, 20x4, will result in an increase of P16,000 to consolidated net income.

2. As a result of purchasing the equipment at less than Parent's book value, depreciation expense reported by SS will be P2,000 (P16,000 / 8 years) below the amount that would have been recorded by PP. Thus, depreciation expense must be increased by P2,000 when eliminating entries are prepared at December 31, 20x5. Consolidated net income will be decreased by the full amount of the P2,000 increase in depreciation expense.

Problem XX1. Eliminating entry, December 31, 20x9:

E(1)

Buildings and Equipment 156,000

Loss on Sale of Building 36,000 Accumulated Depreciation 120,000 Eliminate unrealized loss on building.

2. Consolidated net income and income to controlling interest for 20x9:

Operating income reported by BB P125,000 Net income reported by TT P 15,000 Add: Loss on sale of building 36,000 Realized net income of TT 51,000 Consolidated net income P176,000 Income to non-controlling interest (P51,000 x .30) (15,30

0)Income to controlling interest P160,700

3. Eliminating entry, December 31, 20y0: E(1) Buildings and Equipment 156,000

Depreciation Expense 4,000 Accumulated Depreciation 124,000 Retained Earnings, January 1 25,200 Non-controlling Interest 10,800 Eliminate unrealized loss on building.

Adjustment to buildings and equipmentAmount paid by TT to acquire building P300,000 Amount paid by BB on intercompany sale (144,000 )Adjustment to buildings and equipment P156,000

Adjustment to depreciation expenseDepreciation expense recorded by TT Company (P300,000 / 15 years) P 20,000 Depreciation expense recorded by BB Corporation (P144,000 / 9 years) (16,000 )Adjustment to depreciation expense P 4,000

Adjustment to accumulated depreciationAmount required (P20,000 x 7 years) P140,000 Amount reported by BB (P16,000 x 1 year) (16,000 )Required adjustment P124,000

Adjustment to retained earnings, January 1, 20y0Unrealized loss recorded, December 31, 20x9 P36,000 Proportion of ownership held by BB x .70 Required adjustment P25,200

Adjustment to Noncontrolling interest, January 1, 20y0Unrealized loss recorded, December 31, 20x9 P36,000 Proportion of ownership held by non-controlling

Interest x .30 Required adjustment P10,800

4. Consolidated net income and income assigned to controlling interest in 20y0:Operating income reported by BB P150,000 Net income reported by TT P40,000 Adjustment for loss on sale of building (4,000 )Realized net income of TT 36,000 Consolidated net income P186,000 Income assigned to non-controlling interest (P36,000 x .30) (10,800)Income assigned to controlling interest P175,200

Problem XXIRequirements 1 to 4Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred……………………………….. P 372,000Less: Book value of stockholders’ equity of S: Common stock (P240,000 x 80%)……………………. P 192,000 Retained earnings (P120,000 x 80%)………………... 96,000 288,000Allocated excess (excess of cost over book value)….. P 84,000Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%)……………… P 4,800 Increase in land (P7,200 x 80%)……………………. 5,760 Increase in equipment (P96,000 x 80%) 76,800 Decrease in buildings (P24,000 x 80%)………..... ( 19,200) Decrease in bonds payable (P4,800 x 80%)…… 3,840 72,000Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………... P 12,000

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

Book valueS Co.

Fair value (Over) Under

Valuation Inventory………………….…………….. P 24,000 P 30,000 P 6,000Land……………………………………… 48,000 55,200 7,200Equipment (net)......... 84,000 180,000 96,000Buildings (net) 168,000 144,000 (24,000)Bonds payable………………………… (120,000) ( 115,200) 4,800Net……………………………………….. P 204,000 P 294,000 P 90,000

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

Book valueS Co.

Fair value Increase

(Decrease)Equipment.................. 180,000 180,000 0Less: Accumulated depreciation….. 96,000 - ( 96,000)Net book value………………………...

84,000 180,000 96,000

S Co. Book value

S Co.Fair value (Decrease)

Buildings................ 360,000 144,000 ( 216,000)Less: Accumulated depreciation….. 1992,000 - ( 192,000)Net book value………………………... 168,000 144,000 ( 24,000)

A summary or depreciation and amortization adjustments is as follows:

Account Adjustments to be amortized

Over/Under

Life

Annual Amount


InventoryP

6,000 1P

6,000 P 6,000P -



0) 4 ( 6,000) ( 6,000) (6,000)


0 4 1,20

0 1,200 1,20

0P

13,200 P 13,200 P 7,200

The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows:

Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) P 372,000 Fair value of NCI (given) (20%) 93,000 Fair value of Subsidiary (100%) P 465,000Less: Book value of stockholders’ equity of S (P360,000 x 100%) __360,000Allocated excess (excess of cost over book value)….. P 105,000Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) 90,000Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………... P 15,000

In this case, the goodwill was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows:

Value % of TotalGoodwill applicable to parent………………… P12,000 80.00%Goodwill applicable to NCI…………………….. 3,000 20.00%Total (full) goodwill……………………………….. P15,000 100.00%

The goodwill impairment loss would be allocated as followsValue % of Total

Goodwill impairment loss attributable to parent or controlling Interest

P 3,000 80.00%

Goodwill applicable to NCI…………………….. 750 20.00%Goodwill impairment loss based on 100% fair value or full- Goodwill P 3,750 100.00%

The unrealized and gain on intercompany sales for 20x4 are as follows:

Date of Sale Seller

Selling Price

Book Value

Unrealized*Gain on sale

Remaining

Life

Realized gain – depreciation** 20x4

4/1/20x4

P P90,000

P75,000

P15,000 5 years P3,000/year P2,250

1/2/20x4

S 60,000

28,800

31,200 8 years P3,900/year P3,900

* selling price less book value ** unrealized gain divided by remaining life; 20x4 – P2,500 x 9/12 = P1,875

The following summary for 20x4 results of operations is as follows: P Co. S Co.

Sales P 480,000 P 240,000Less: Cost of goods sold 204,000 138,000Gross profit P 276,000 P 102,000Less: Depreciation expense 60,000 24,000 Other expenses 48,000 18,000

P 168,000 P 60,000Add: Gain on sale of equipment 15,000 31,200Net income from its own separate operations P 183,000 P 91,200Add: Investment income 24,810 -Net income P 207,810 P 91,200

20x4: First Year after Acquisition Parent Company Equity Method Entry


372,000


January 1, 20x4 – December 31, 20x4:(2) Cash……………………… 28,800 Investment in S Company (P36,000 x 80%)……………. 28,800 Record dividends from Son Company.

December 31, 20x4:(3) Investment in S Company 72,960 Investment income (P91,200 x 80%) 72,960 Record share in net income of subsidiary.

December 31, 20x4:(4) Investment income [(P13,200 x 80%) + P3,000, goodwill impairment loss)]

13,560

Investment in S Company 13,560 Record amortization of allocated excess of inventory, equipment,

buildings and bonds payable and goodwill impairment loss.

December 31, 20x4:(5) Investment income (P15,000 x 100%) 15,000 Investment in S Company 15,000 To adjust investment income for downstream sales - unrealized

gain on sale of equipment..

December 31, 20x4:(6) Investment income (P31,200 x 80%) 24,960 Investment in S Company 24,960 To adjust investment income for upstream sales - unrealized gain

on sale of equipment..

December 31, 20x4:(7) Investment in S Company 2,250 Investment income (P2,250 x 100%) 2,250 To adjust investment income for downstream sales - realized gain


December 31, 20x4:(8) Investment in S Company 3,120 Investment income (P3,900 x 80%) 3,120 To adjust investment income for upstream sales - realized gain


Thus, the investment balance and investment income in the books of P Company is as follows:

Consolidation Workpaper – First Year after Acquisition (E1) Common stock – S Co………………………………………… 240,000 Retained earnings – S Co…………………………………… 120,000 Investment in S Co…………………………………………… 288,000 Non-controlling interest (P360,000 x 20%)………………………..

72,000

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

(E2) Inventory………………………………………………………………….

6,000

Accumulated depreciation – equipment……………….. 96,000

Investment in SCost, 1/1/x4 372,000

28,800 Dividends – S (36,000x 80%)

NI of Son Amortization & (91,200 x 80%) 72,960

13,560 impairment

Realized gain downstream sale 2,250

15,000 Unrealized gain downstream sale

Realized gain upstream sale 3,120

24,960 Unrealized gain upstream sale

Balance, 12/31/x4 368,010

Investment Income Amortization & NI of S impairment 13,560

72,960 (91,200 x 80%)

Unrealized gain downstream sale 15,000

2,250 Realized gain downstream sale

Unrealized gain upstream sale 24,960

3,120 Realized gain upstream sale

24,810 Balance, 12/31/x4

Accumulated depreciation – buildings………………….. 192,000 Land……………………………………………………………………….

7,200


4,800

Goodwill…………………………………………………………………. 12,000 Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%)………………………..

18,000

Investment in S Co………………………………………………. 84,000 To eliminate investment on January 1, 20x4 and allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition.


Cost of Goods Sold


ExpenseAmortizatio

n-Interest

Total


Equipment P 12,000Buildings ( 6,000)Bonds payable _______ _______ P 1,200Totals P 6,000 P 6,000 P1,200 14,40

0

(E4) Investment income 24,810 Investment in S Company 3,990 Non-controlling interest (P36,000 x 20%)……………….. 7,200 Dividends paid – S…………………… 36,000 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows:

Investment in S Investment IncomeNI of S 28,800 Dividends - S NI of S(91,200 x 80%)……. 72,960

Amortization &13,560 impairment

Amortization impairment 13,560

(91,20072,960 x 80%)

Realized gain* 2,250

15,000 Unrealized gain *

Unrealized gain * 15,000

2,250 Realized gain*

Realized gain** 3,120

24,960 Unrealized gain **

Unrealized gain **24,960

3,120 Realized gain**

3,990 24,810 *downstream sale (should be multiplied by 100%)**upstream sale (should be multiplied by 80%)

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus,





(P15,000 / 5 years x 9/12 = P2,250).




10,140




10,140

Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Partial-goodwill)80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition)



(5) 15,000(6) 31,200

Investment income 24,810 -(4) 28,800

_________



P 348,000

Depreciation expense 60,000 24,000 (3) (7) 83,850


28,800 Dividends – S (36,000x 80%)

NI of S Amortization & (91,200 x 80%) 72,960

13,560 impairment





Balance, 12/31/x4 368,010

288,000 (E1) Investment, 1/1/20x4

(E4) Investment Income and dividends …………… 3,990

84,000 (E2) Investment, 1/1/20x4

372,000 372,000

6,0002,250

(8) 3,900


1,0200

Other expenses 48,000 18,000 66,000


3,000



( 10,140)



S Company P120,000(1) 120,000

Net income, from above 207,810 91,200 207,810 Total P567,810 P211,200 P567,810Dividends paid P Company 72,000 72,000

S Company - 36,000(4) 36,000 _ ________


Balance Sheet

Cash……………………….P


Inventory…………………. 120,000 90,000(2) 6,000

(3) 5,000 210,000

Land……………………………. 210,000 48,000(2) 7,200 265,200

Equipment 240,000 180,000

(5) 30,000

(6) 12,000 462,000

Buildings 720,000 540,000(2) 216,000 1,044,000


(3) 1,200 3,600

Goodwill……………………(2) 12,000

(3) 3,000 9,000


Total P1,980,810P1,008,0

00 P2,466,600


(2) 96,000(7) 2,250(8) 3,900

(3) 12,000(5) 45,000(6) 43,200 P229,050


405,000 288,000

(2) 192,000 (3) 6,000 495,000


Common stock, P10 par……… 240,000(1)

240,000Retained earnings, from above 495,810 175,200 495,810


_________ ______

___

(4) 7,200

__________

(1 ) 72,000 (2) 18,000(9) 10,140 92,940

Total P1,980,810

P1,008,000

P 840,690

P 840,690 P2,466,600

20x5: Second Year after AcquisitionP Co. S Co.

Sales P 540,000 P 360,000Less: Cost of goods sold 216,000 192,000

Gross profit P 324,000 P 168,000Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000Net income from its own separate operations P 192,000 P 90,000Add: Investment income 72,360 -Net income P 264,360 P 90,000Dividends paid P 72,000 P 48,000


Parent Company Equity Method EntryJanuary 1, 20x5 – December 31, 20x5:(2) Cash……………………… 38,400 Investment in S Company (P48,000 x 80%)……………. 38,400 Record dividends from S Company.


December 31, 20x5:(4) Investment income (P7,200 x 80%) 5,760 Investment in S Company 5,760 Record amortization of allocated excess of inventory, equipment,

buildings and bonds payable


on sale of equipment.




Consolidation Workpaper – Second Year after Acquisition (E1) Common stock – S Co………………………………………… 240,000 Retained earnings – S Co, 1/1/x5…………………………. 175,200 Investment in S Co (P415,200 x 80%) 332,160 Non-controlling interest (P415,200 x 20%)………………………..

83,040

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

(E2) Accumulated depreciation – equipment (P96,000 – P12,000)

84,000

Accumulated depreciation – buildings (P192,000 + P6,000) 198,000 Land……………………………………………………………………….

6,000

Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P12,000 – P3,000)…………………………….. 9,000 Buildings……………………………………….. 180,000


38,400 Dividends – S (48,000x 80%)

NI of Son 5,760 Amortization (7,200 x 80%) (90,000 x 80%) 72,000Realized gain downstream sale 3,000Realized gain upstream sale 3,120Balance, 12/31/x5 401,970

Investment Income Amortization (6,000 x 805) 5,760

NI of S

72,000 (90,000 x 80%) 3,000 Realized gain downstream sale 3,120 Realized gain upstream sale 72,360 Balance, 12/31/x5

Non-controlling interest [(P90,000 – P13,200) x 20%] 15,360 Investment in Son Co……………………………………………….

70,440

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

(E3) Depreciation expense……………………….. 6,000 Accumulated depreciation – buildings………………….. 6,000 Interest expense………………………………… 1,200 Accumulated depreciation – equipment……………….. 12,000 Discount on bonds payable………………………… 1,200 To provide for 20x5 depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows:


ExpenseAmortizatio

n-Interest

Total

Inventory soldEquipment P 12,000Buildings ( 6,000)Bonds payable

_______ P 1,200

Totals P 6,000 P1,200 P7,200

(E4) Investment income 72.360 Non-controlling interest (P48,000 x 20%)……………….. 9,600 Dividends paid – S…………………… 48,000 Investment in S Company 33,960 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows:

*downstream sale (should be multiplied by 100%)**upstream sale (should be multiplied by 80%)

(E5) Investment in S Company 15,000 Equipment 30,000 Accumulated depreciation – equipment 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale).

(E6) Investment in S Company 24,960 Non-controlling interest (P31,200 x 20%) 6,240 Equipment 12,000 Accumulated depreciation- equipment 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale).

(E7) Accumulated depreciation – equipment ……….. 5,250 Depreciation expense (current year)…………… 3,000 Investment in S Company (prior year) 2,250 To adjust downstream depreciation expense on equipment sold


Investment in S Investment IncomeNI of S 38,400 Dividends – S NI of S(90,000 x 80%)……. 72,000

Amortization 5,760 (P7,200 x 80%)

Amortization (P7,200 x 80%) 5,760

(90,000 72,000 x 80%)





33,960

72,360

(E8) Accumulated depreciation- equipment…….. 7,800 Depreciation expense (current year) 3,900 Investment in S Company (prior year) 3,120 Non-controlling interest (P31,200 x 20%) 780 To adjust upstream depreciation expense on equipment sold to



17,340



3,900



20%

Non-controlling Interest in Net Income (NCINI

P 17,340


Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Partial-goodwill)80%-Owned Subsidiary December 31, 20x5 (Second Year after Acquisition)



___________



(7) 3,000

(8) 3,900

83,100


1,200



90,000P 281,700


( 17,340)


90,000P 264,360

Statement of Retained EarningsRetained earnings, 1/1 P Company P495,810 P495,810

S CompanyP

175,200(1) 175,200

Net income, from above _264,360 90,000 264,360 Total P760,170 P265,200 P 760,170Dividends paid P Company 72,000 72,000

S Company - 48,000(5) 48,000 _ ________


Balance Sheet

Cash……………………….P

265,200P 102,000 P 367,200

Accounts receivable…….. 180,000 96,000 276,000Inventory…………………. 216,000 108,000 324,000

Land……………………………. 210,000 48,000(2) 7,200 265,200

Equipment 240,000 180,000

(5) 30,000(6) 12,000 462,000

Buildings 720,000 540,000(2) 216,000 1,044,000


(3) 1,200 2,400

Goodwill……………………(2) 9,000 9,000

Investment in Son Co……… 401,970

(5) 15,000(6) 24,960

(1) 332,160(2) 70,440(4) 33,960(7) 2,250(8) 3,120 -

Total P2,233,170P1,074,0

00 P2,749,800


P 150,000P

102,000

(2) 84,000(7) 5,250(8) 7,800

(3) 12,000(5) 45,000(6) 43,200 P 255,150


450,000 306,000

(2) 198,000 (3) 6,000 552,000





___ _____

_________

(4) 9,600(6) 6,240

__________

(1) 69,200 (2) 15,360(8) 780(9) 17,340 ____100,680

Total P2,233,170

P1,074,000

P 930,750

P 930,750 P2,749,800

5 and 6. Refer to Problem V for computationsNote: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem X solution).

Problem XXIIRequirements 1 to 4Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred (80%)…………….. P 372,000 Fair value of NCI (given) (20%)……………….. 93,000 Fair value of Subsidiary (100%)………. P 465,000Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 100%)………………. P 240,000 Retained earnings (P120,000 x 100%)………... 120,000 360,000Allocated excess (excess of cost over book value)….. P 105,000Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%)……………… P 6,000 Increase in land (P7,200 x 100%)……………………. 7,200 Increase in equipment (P96,000 x 100%) 96,000 Decrease in buildings (P24,000 x 100%)………..... ( 24,000) Decrease in bonds payable (P4,800 x 100%)…… 4,800 90,000Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………... P 15,000


Over/under

Life

Annual Amount


InventoryP

6,000 1P

6,000 P 6,000P -



0) 4 ( 6,000) ( 6,000) (6,000)


0 4 1,20

0 1,200 1,20

0P

13,200 P 13,200 P 7,200

The following summary for 20x4 results of operations is as follows: P Co. S Co.

Sales P 480,000 P 240,000Less: Cost of goods sold 204,000 138,000Gross profit P 276,000 P 102,000Less: Depreciation expense 60,000 24,000 Other expenses 48,000 18,000

P 168,000 P 60,000Add: Gain on sale of equipment 15,000 31,200Net income from its own separate operations P 183,000 P 91,200Add: Investment income 24,810 -Net income P 207,810 P 91,200

20x4: First Year after Acquisition Parent Company Equity Method Entry


372,000


January 1, 20x4 – December 31, 20x4:(2) Cash……………………… 28,800 Investment in S Company (P36,000 x 80%)……………. 28,800 Record dividends from Son Company.


December 31, 20x4:(4) Investment income [(P13,200 x 80%) + P3,000, goodwill impairment loss)]

13,560

Investment in S Company 13,560 Record amortization of allocated excess of inventory, equipment,

buildings and bonds payable and goodwill impairment loss.

December 31, 20x4:(5) Investment income (P15,000 x 100%) 15,000 Investment in S Company 15,000 To adjust investment income for downstream sales - unrealized

gain on sale of equipment..

December 31, 20x4:(6) Investment income (P31,200 x 80%) 24,960 Investment in S Company 24,960 To adjust investment income for upstream sales - unrealized gain






Thus, the investment balance and investment income in the books of Perfect Company is as follows:

Consolidation Workpaper – First Year after Acquisition (E1) Common stock – S Co………………………………………… 240,000 Retained earnings – S Co…………………………………… 120.000 Investment in S Co…………………………………………… 288,000 Non-controlling interest (P360,000 x 20%)………………………..

72,000

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

(E2) Inventory………………………………………………………………….

6,000


7,200


4,800

Goodwill…………………………………………………………………. 15,000 Buildings……………………………………….. 216,000 Non-controlling interest (P90,000 x 20%) + [(P15,000 full – P12,000, partial goodwill)]…………

21,000

Investment in S Co………………………………………………. 84,000 To eliminate investment on January 1, 20x4 and allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of subsidiary) on date of acquisition.


Cost of Goods Sold


ExpenseAmortizatio

n-Interest

Total


Equipment P 12,000Buildings ( 6,000)Bonds payable _______ _______ P 1,200Totals P 6,000 P 6,000 P1,200 14,40


28,800 Dividends – S (36,000x 80%)

NI of Son Amortization & (91,200 x 80%) 72,960

13,560 impairment





Balance, 12/31/x4 368,010

Investment Income Amortization & NI of S impairment 13,560

72,960 (76,000 x 80%)

Unrealized gain downstream sale 15,000

2,250 Realized gain downstream sale

Unrealized gain upstream sale 24,960

3,120 Realized gain upstream sale

24,810 Balance, 12/31/x4

0

(E4) Investment income 24,810 Investment in S Company 3,990 Non-controlling interest (P36,000 x 20%)……………….. 7,200 Dividends paid – S…………………… 36,000 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows:

Investment in S Investment IncomeNI of S 28,800 Dividends - S NI of S(91,200 x 80%)……. 72,960

Amortization &13,560 impairment

Amortization impairment 13,560

(91,200 72,960 x 80%)


15,000 Unrealized gain *

Unrealized gain * 15,000



24,960 Unrealized gain **

Unrealized gain **24,960


3,990 24,810 *downstream sale (should be multiplied by 100%)**upstream sale (should be multiplied by 80%)

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus,





(P15,000 / 5 years x 9/12 = P2,250).




9,390


Net income of subsidiary…………………….. P 91,200Unrealized gain on sale of equipment (upstream sales) ( 31,200)Realized gain on sale of equipment (upstream


28,800 Dividends – S (36,000x 80%)

NI of S Amortization & (91,200 x 80%) 72,960

13,560 impairment





Balance, 12/31/x4 368,010

288,000 (E1) Investment, 1/1/20x4

(E4) Investment Income and dividends …………… 3,990

84,000 (E2) Investment, 1/1/20x4

372,000 372,000

sales) through depreciation 3,900S Company’s realized net income from separate operations P 63,900Less: Amortization of allocated excess [(E3)]…. 13,200


10,140Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)* 750 Non-controlling Interest in Net Income (NCINI) – full goodwill P 9,390

Worksheet for Consolidated Financial Statements, December 31, 20x4. Equity Method (Full-goodwill)80%-Owned Subsidiary December 31, 20x4 (First Year after Acquisition)



(5) 15,000(6) 31,200


_________



P 348,000


(7) 2,250

(8) 3,900

83,850


1,200

Other expenses 48,000 18,000 66,000


3,750



( 9,390)



S Company P120,000(1) 120,000


S Company - 36,000(4) 36,000 _ ________


Balance Sheet

Cash……………………….P


Inventory…………………. 120,000 90,000(2) 6,000

(3) 6,000 210,000

Land……………………………. 210,000 48,000(2) 6,000 265,200

Equipment 240,000 180,000

(5) 30,000(6) 12,000 462,000

Buildings 720,000 540,000(2) 216,000 1,044,000


(3) 1,200 3,600

Goodwill……………………(2) 15,000

(3) 3,750 11,250

Investment in S Co……… 368,010 (1) 288,000(2)

-

84,000

Total P1,980,810P1,008,0

00 P2,468,850


(2) 96,000(7) 2,250(8) 3900

(3) 12,000(5) 45,000(6) 43,200 P229,050


405,000 288,000

(2) 192,000(3) 6,000 495,000





_________ ______

___

(4) 7,200

__________

(1 ) 72,000 (2) 21,000(9) 9,390 ____95,190

Total P1,980,810

P1,008,000

P 843,690

P 843,690 P2,468,850

Second Year after AcquisitionPerfect Co. Son Co.

Sales P 540,000 P 360,000Less: Cost of goods sold 1216,000 192,000Gross profit P 324,000 P 168,000Less: Depreciation expense 60,000 24,000 Other expense 72,000 54,000Net income from its own separate operations P 192,000 P 90,000Add: Investment income 72,360 -Net income P 264,360 P 90,000Dividends paid P 72,000 P 48,000


Parent Company Equity Method EntryJanuary 1, 20x5 – December 31, 20x5:(2) Cash……………………… 38,400 Investment in S Company (P48,000 x 80%)……………. 38,400 Record dividends from S Company.


December 31, 20x5:(4) Investment income (P7,200 x 80%) 5,760 Investment in S Company 5,760 Record amortization of allocated excess of inventory, equipment,

buildings and bonds payable







38,400 Dividends – S (40,000x 80%)

NI of S 5,760 Amortization (6,000 x 80%) (90,000 x 80%) 72,000Realized gain downstream sale 3,000Realized gain upstream sale 3,120Balance, 12/31/x5 401,970

Consolidation Workpaper – Second Year after Acquisition (E1) Common stock – S Co………………………………………… 240,000 Retained earnings – S Co, 1/1/x5…………………………. 175.200 Investment in S Co (P415,200 x 80%) 332,160 Non-controlling interest (P415,200 x 20%)………………………..

83,040

To eliminate investment on January 1, 20x5 and equity accounts of subsidiary on date of acquisition; and to establish non- controlling interest (in net assets of subsidiary) on 1/1/20x5. (E2) Accumulated depreciation – equipment (P96,000 – P12,000)

84,000

Accumulated depreciation – buildings (P192,000 + P6,000) 198,000 Land……………………………………………………………………….

7,200

Discount on bonds payable (P4,800 – P1,200)…. 3,600 Goodwill (P15,000 – P3,900)…………………………….. 11,250 Buildings……………………………………….. 216,000 Non-controlling interest [(P90,000 – P13,200) x 20%] + [P3,000, full goodwill - [(P3,750, full-goodwill impairment – P3,000, partial- goodwill impairment)* or (P3,750 x 20%)]

17,610

Investment in S Co………………………………………………. 70,440 To eliminate investment on January 1, 20x5 and allocate excess of cost over book value of identifiable assets acquired, with remainder to the original amount of goodwill; and to establish non- controlling interest (in net assets of subsidiary) on 1/1/20x5.

*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 15-6).

(E3) Depreciation expense……………………….. 6,000 Accumulated depreciation – buildings………………….. 6,000 Interest expense………………………………… 1,200 Accumulated depreciation – equipment……………….. 12,000 Discount on bonds payable………………………… 1,200 To provide for 20x5 depreciation and amortization on differences between acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows:


ExpenseAmortizatio

n-Interest

Total

Inventory soldEquipment P 12,000Buildings ( 6000)Bonds payable

_______ P 1,200

Totals P 6,000 P1,200 P7,,200

(E4) Investment income 72,360 Non-controlling interest (P48,000 x 20%)……………….. 9,600 Dividends paid – S…………………… 48,000 Investment in S Company 33,960 To eliminate intercompany dividends and investment income under equity method and establish share of dividends, computed as follows:

Investment Income Amortization (7,200 x 805) 5,760

NI of S

72,000 (90,000 x 80%) 3,000 Realized gain downstream sale 3,120 Realized gain upstream sale 72,360 Balance, 12/31/x5

*downstream sale (should be multiplied by 100%)**upstream sale (should be multiplied by 80%)

(E5) Investment in S Company 15,000 Equipment 30,000 Accumulated depreciation – equipment 45,000 To eliminate the downstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale).

(E6) Investment in S Company 24,960 Non-controlling interest (P31,200 x 20%) 6,240 Equipment 12,000 Accumulated depreciation- equipment 43,200 To eliminate the upstream intercompany gain and restore to its original cost to the consolidate entity (along with its accumulated depreciation at the point of the intercompany sale).

(E7) Accumulated depreciation – equipment ……….. 5,250 Depreciation expense (current year)…………… 3,000 Investment in S Company (prior year) 2,250 To adjust downstream depreciation expense on equipment sold


(E8) Accumulated depreciation- equipment…….. 7,800 Depreciation expense (current year) 3,900 Investment in S Company (prior year) 3,120 Non-controlling interest (P31,200 x 20%) 780 To adjust upstream depreciation expense on equipment sold to



17,340



3,900



20%

Non-controlling Interest in Net Income (NCINI) – partial goodwill

P 17,340

Less: NCI on goodwill impairment loss on full- Goodwill

0

Non-controlling Interest in Net Income (NCINI) – full goodwill

P 17,340


Worksheet for Consolidated Financial Statements, December 31, 20x5. Equity Method (Full-goodwill)80%-Owned Subsidiary

Investment in S Investment IncomeNI of S 38,400 Dividends – S NI of S(90,000 x 80%)……. 72,000

Amortization 5,760 (P72,000 x 80%)

Amortization (P7,200 x 80%) 5,760

(75,000 72,000 x 80%)





33,960

72,360

December 31, 20x5 (Second Year after Acquisition)Income Statement P Co S Co. Dr. Cr. Consolidated

Sales P540,000 P360,000 P 900,000


___________



(7) 3,000

(8) 3,900

83,100


1,200



90,000P 281,700


( 17,340)


90,000P 264,360

Statement of Retained EarningsRetained earnings, 1/1 P Company P495,810 P495,810

S CompanyP

175,200(1) 175,200

Net income, from above _264,360 90,000 264,360 Total P760,170 P265,200 P 760,170Dividends paid P Company 72,000 72,000

S Company - 48,000(5) 48,000 _ ________


Balance Sheet

Cash……………………….P

265,200P

102,000 P 367,200Accounts receivable…….. 180,000 96,000 276,000Inventory…………………. 216,000 108,000 324,000

Land……………………………. 210,000 48,000(2) 7,200 265,200

Equipment 240,000 180,000

(5) 30,000(6) 12,000 462,000

Buildings 720,000 540,000(2) 216,000 1,044,000


(3) 1,200 2,400

Goodwill……………………(2) 11,250 11,250

Investment in S Co……… 401,970

(5) 15,000(6) 24,960

(1) 332,160(2) 70,440(4) 33,960(7) 2,250(8) 3,120 -

Total P2,233,170P1,074,0

00 P2,752,050


P 150,000P

102,000

(2) 84,000(7) 5,250(8) 7,800

(3) 12,000(5) 45,000(6) 43,200 P 255,150


450,000 306,000

(2) 198,000 (3) 6,000 552,000





___ _____

_________

(4) 9,600(6) 6,240

__________

(1) 83,040 (2) 17,610(8) 780(9) 17,340 ____102,930

Total P2,233,170

P1,074,000

P 933,000

P 933,000 P2,752,050

5 and 6. Refer to Problem VI for computationsNote: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem X solution).

Multiple Choice Problems

1. c2. b3. c – (P20,000/20 years = P1,000), the eliminating entry to recognize the gain –

depreciation would be as follows:Accumulated depreciation……………………………………………… 1,000

Depreciation expenses………………………………………….. 1,000

4. a – no effect, since intercompany sales of equipment will be reverted back to its original cost/book value.

5. a

6. No answer available - It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. Since, the cost model is presumed to be the method used, the unrealized gain of P15,000 (P60,000 – P45,000) will not be recorded in the books of parent company, which give rise to no equity-adjustments at year-end.

The available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (d) – the unrealized gain of P15,000 (P60,000 – P45,000).

7. No answer available – the truck account will be debited for P3,000 in the eliminating entry:

Truck 3,000Gain 15,000

Accumulated depreciation 18,000

Seller Buyer Cash 50,000 Truck 50,000 Accumulated 18,000 Cash 50,000

Truck 53,000 Gain 15,000

8. bConsolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 98,000 Realized gain on sale of equipment (downstream sales) through depreciation

___0

P Company’s realized net income from separate operations*…….….. P 98,000 S Company’s net income from own operations…………………………………. P 55,000 Unrealized gain on sales of equipment (upstream sales) (15,000) Realized gain on sale of equipment (upstream sales) through depreciation (P15,000 / 5 years) 3,000 S Company’s realized net income from separate operations*…….….. P 45,000 45,000 Total P143,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x5 P143,000 Less: Non-controlling Interest in Net Income* * 18,000 Controlling Interest in Consolidated Net Income or Profit attributable to

equity holders of parent – 20x5………….. P125,000 *that has been realized in transactions with third parties.

Or, alternativelyConsolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 98,000 Realized gain on sale of equipment (downstream sales) through depreciation

___0

P Company’s realized net income from separate operations*…….….. P 98,000 S Company’s net income from own operations…………………………………. P 55,000 Unrealized gain on sales of equipment (upstream sales) (15,000) Realized gain on sale of equipment (upstream sales) through depreciation (P15,000 / 3 years) 5,000 S Company’s realized net income from separate operations*…….….. P 45,000 45,000 Total P143,000 Less: Non-controlling Interest in Net Income* * P 18,000 Amortization of allocated excess…………………… ____0 18,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P125,000 Add: Non-controlling Interest in Net Income (NCINI) _ 18,000 Consolidated Net Income for 20x5 P143,000


**Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company)

P 55,000

Unrealized gain on sales of equipment (upstream sales) ( 15,000) Realized gain on sale of equipment (upstream sales) through depreciation 5,000 S Company’s realized net income from separate operations……… P 45,000 Less: Amortization of allocated excess 0

P 45,000 Multiplied by: Non-controlling interest %.......... 40% Non-controlling Interest in Net Income (NCINI) - partial goodwill P 18,000 Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . 0 Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . P 18,000

10. a11. a

Combined equipment amounts P1,050,000Less: gain on sale 25,000Consolidated equipment balance P1,025,000

Combined Accumulated Depreciation P 250,000Less: Depreciation on gain 5,000Consolidated Accumulated Depreciation P 245,000

12. Incomplete data - It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. Since, the cost model is presumed to be the method used and there is no available data for “dividends paid/declared” by Cliff therefore, the requirement cannot be properly addressed.

The requirement and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (c) computed as follows:

Cliff reported income P225,000Less: Intercompany gain on truck 45,000Plus: Piecemeal recognition of gain = P45,000/10 years ___4,500Cliff’s adjusted income P184,500Majority percentage 90%Income from Cliff P166,050

13. aCombined building amounts P650,000Less: Intercompany gain __30,000Consolidated buildings P620,000

Combined Accumulated Depreciation P195,000Less: Piecemeal recognition of gain ___3,000Consolidated accumulated depreciation P192,000

14. d – P30,000 + P40,000 = P70,000

S P ConsolidatedSelling price Less: Book valueGain P 30,000 P 40,000 P 70,000

15. Incomplete data - It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method. Since, the cost model is presumed to be the method used and there is no available data for “dividends paid/declared” by Cliff therefore, the requirement cannot be properly addressed.


Pied Imperial-Pigeon’s share of Roger’s income = (P320,000 x 90%) =

P288,000

Less: Profit on intercompany sale (P130,000 - P80,000) x 90% = 45,000Add: Piecemeal recognition of deferred profit ($50,000/4 years)90% =

11,250

Income from Offshore P254,250

16. d – P110,000 – P30,000 = P80,000S (Nectar) P (Lorikeet) Consolidated

Selling price P 50,000 P 110,000 P 110,000Less: Book value _30,000 __50,000 _30,000Gain P 20,000 P 60,000 P 80,000

17. No answer available – No effect. It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method.


P30,000 - (1/4 x P30,000) = P 22,500

18. b **Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P2,000,000 Unrealized gain on sales of equipment (upstream sales) (P700,000 – P600,000) ( 100,000) Realized gain on sale of equipment (upstream sales) through depreciation (P100,000/10)

10,000

S Company’s realized net income from separate operations……… P1,910,000 Less: Amortization of allocated excess _ 0

P1,910,000

Multiplied by: Non-controlling interest %.......... __40%

Non-controlling Interest in Net Income (NCINI) - partial goodwill P 764,000

Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . __ 0

Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . P 764,000

19. d20x4 20x5

Unrealized gain on sales of equipment (downstream sales) ( 90,000) -0-Realized gain on sale of equipment (downstream sales) through depreciation P90,000 / 10 years ___9,000 9,000Net ( 81,000) 9,000

20. No answer available – P780,000S P Consolidated

Selling price P1,980,000

P1,440,000

P1,440,000

Less: Book value: Cost P2,000,000

P1,980,000

P 1,800,000

Accumulated

___200,000

1,800,00 *1,320,000

660,000

**1,200,000

__600,000

Unrealized gain on sale of equipment P

180,000

Realized Gain – depreciation (P180,000/9 x 6 yrs) 120,000Net unrealized gain, 1/1/20x9 P

60,000Gain on sale P

60,000P

780,000P 840,000

*P1,980,000/ 9 x 6 years = P1,320,000 **P1,800,000/9 x 6 years = P1,200,000

21. a22. b Eliminating entries: Restoration of BV and eliminate unrealized gain

Gain 50,000 Land 50,000

Subsidiary Parent Cash xxx Land xxx Land xxx Cash xxx Gain 50,000

23. It should be noted that PAS 27 allow the use of cost model in accounting for investment in subsidiary in the books of parent company but not the equity method.

The requirement and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (d) – (P60,000 – P48,000)/4 years = P3,000

24. d –(P100,000 + P50,000 = P150,000)S P Consolidated

Selling price Less: Book valueGain P

100,000P 50,000 P 150,000

25. d – the entry under the cost model would be as follows ;Accumulated depreciation……………………………………………. 4,000

Depreciation expenses (current year) – P6,000/3 years…. 2,000Retained earnings (prior year – 20x4)……………………….. 2,000

26. d20x4 20x5

Unrealized gain on sale of equipment (downstream sales) ( 150,000) -0-Realized gain on sale of equipment (downstream sales) through depreciation P150,000 / 10 years ___15,000 15,000Net ( 135,000) 15,000

27. No answer available – P780,000S P Consolidated

Selling price P 990,000

P720,000 P 720,000

Less: Book value : Cost P1,000,000

P990,000 P 900,000

Accumulated

100,000 __900,00 *440,000 550,000

**400,000 __500,000

Unrealized gain on sale of equipment P

90,000Realized Gain – depreciation (P90,000/9 x 4 yrs) 40,000Net unrealized gain, 1/1/20x8 P

50,000__________ ___________

Gain on sale P 50,000

P 170,000

P 220,000

*P990,000/ 9 x 4 years = P440,000 **P900,000/9 x 4 years = P400,000


The requirement “equity from subsidiary income” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (c) computed as follows:

20x4

Share in subsidiary net income (900,000 x 80%) 720,000Unrealized gain on sale of equipment (upstream sales): 180,000 x 80% ( 144,000)Realized gain on sale of equipment (upstream sales) through depreciation P180,000 / 5 years = P36,000 x 80% ___28,800Net 604,800

29 d – (P30,000 + P15,000)30. d – the entry under the cost model would be as follows ;

Accumulated depreciation……………………………………………. 10,000Depreciation expenses (current year) – P15,000/3 years.. 5,000Retained earnings (prior year – 20x5)……………………….. 5,000

31. a32. b33. a

20x4 20x5Unrealized gain on sale of equipment (upstream sales) : 50,000 – 30,000

( 20,000) -0-

Realized gain on sale of equipment (upstream sales) through depreciation P20,000 / 5 years

___4,000 __4,000

Net ( 16,000) __4,000

34. aOriginal cost of P1,100,000

Accumulated depreciation, 1/1/20x4 P 250,000

Add: Additional depreciation (P1,100,000 – P100,000) / 20 years ____50,000Accumulated depreciation, 12/31/20x4 P

300,000

35. cSelling price – unrelated party P 14,000Less: Original Book value, 12/31/20x5 Book value, 1/1/20x4 P20,000 Less: Depreciation for 20x4 and 20x5: P20,000/4 years x 2 years 10,000 10,000Accumulated depreciation, 12/31/20x4 P 4,000

36. b – at its original cost or book value.37. b 20x4: Any intercompany gain should be eliminated in the CFS.

20x5 Selling price – unrelated party P 100,000Less: Original Book value, 9/26/20x5 __60,000Accumulated depreciation, 9/26/20x5 P 40,000

38. c – P50,000/5 years = P10,000 per year starting January 1, 20x6.


The requirement “equity from subsidiary income” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (c) computed as follows:

20x4

Share in subsidiary net income (600,000 x 80%) 480,000Unrealized gain on sale of equipment (upstream sales): 120,000 x 80% ( 96,000)Realized gain on sale of equipment (upstream sales) through depreciation P120,000 / 5 years = P24,000 x 80% ___19,200Net 403,200

40. bDepreciation expense recorded by Pirn

P40,000

Depreciation expense recorded by Scroll 10,000 Total depreciation reported P50,000 Adjustment for excess depreciation charged by Scroll as a result of increase in

carrying value of equipment due to gain on intercompany sale (P12,000 / 4 years) (3,000 )Depreciation for consolidated statements P47,000

41.

d When only retained earnings is debited, and not the non-controlling interest, a gain has been recorded in a prior period on the parent's books.

42.

a The costs incurred by BB to develop the equipment are research and development costs and must be expensed as they are incurred. Transfer to another legal entity does not cause a change in accounting treatment within the economic entity.

43.

b The P39,000 paid to GG Company will be charged to depreciation expense by TLK Corporation over the remaining 3 years of ownership. As a result, TLK Corporation will debit depreciation expense for P13,000 each year. GG Company had charged P16,000 to accumulated depreciation in 2 years, for an annual rate of P8,000. Depreciation expense therefore must be reduced by P5,000 (P13,000 - P8,000) in preparing the consolidated statements.

44.

a TLK Corporation will record the purchase at P39,000, the amount it paid. GG Company had the equipment recorded at P40,000; thus, a debit of P1,000 will raise the equipment balance back to its original cost from the viewpoint of the consolidated entity.

45.

b Reported net income of GG Company P 45,000

Reported gain on sale of equipment P15,000 Intercompany profit realized in 20x6 (5,000) (10,000 )Realized net income of GG Company P 35,000 Proportion of stock held by non-controlling interest x .40 Income assigned to non-controlling interests P 14,000

46.

c Operating income reported by TLK Corporation P 85,000

Net income reported by GG Company 45,000 P130,000

Less: Unrealized gain on sale of equipment (P15,000 - P5,000) (10,00

0)Consolidated net income P120,000

47. d48. a49. b50. a – the amount of land that will be presented in the presented in the CFS is the original

cost of P416,000 + P256,000 = P672,000.51. e

Depreciation expense: Parent P 84,000 Subsidiary 60,000Total P144,000Less: Over-depreciaton due to realized gain: [P115,000 – (P125,000 – P45,000)] = P35,000/8 years __ 4,375Consolidated net income P139,625

52. c20x6

Unrealized gain on sale of equipment ( 56,000)Realized gain on sale of equipment (upstream sales) through depreciation ___7,000Net ( 49,000)

Selling price P 392,000

Less: Book value, 1/1/20x6

Cost, 1/1/20x2 P420,000 Less: Accumulated depreciation: P420,000/10 years x 2 years

84,000 336,000

Unrealized gain on sale of equipment P 56,000Realized gain – depreciation: P56,000/8 years P 7,000

53. b Eliminating entries: 12/31/20x5: date of acquisition Restoration of BV and eliminate unrealized gain

Equipment 10,000Gain 150,00

0 Accumulated depreciation 160,00

0

Parent Books – Mortar Subsidiary Books – GraniteCash 390,000 Equipment 390,000Accumulated depreciation 160,000 Cash 390,000 Equipment 400,000 Gain 150,000

MortarSelling price P390,000Less: Book value, 12/31/20x5 Cost, 1/1/20x2 P400,000 Less: Accumulated depreciation : P400,000/10 years x 4 years

160,000 240,000

Unrealized gain on sale of equipment P 150,000

Realized gain – depreciation: P150,000/6 years P 25,000

54. a – refer to No. 53 for computation55. b - refer to No. 53 for computation56. d Eliminating entries: 12/31/20x6: subsequent to date of acquisition Realized Gain – depreciation

Accumulated depreciation 25,000 Depreciation expense 25,000 P150,000 / 6 years or P65,000 – P40,000

“Should be in CFS” Parent Books – Mortar “Recorded as” Subsidiary Books - Granite

Depreciation expense (P400,000 / 10 years) 40,000


Acc. Depreciation 40,000 Acc. depreciation 65,000 57. c Eliminating entries: 12/31/20x6: subsequent to date of acquisition

Equipment 10,000Retained earnings (150,000 – 25,000) 100,00

0 Accumulated depreciation (P160,000 – P25,000) 135,00

0

58. a Eliminating entries: 1/1/20x5: date of acquisition

Restoration of BV and eliminate unrealized gain Equipment 50,000Gain 70,000 Accumulated depreciation 120,00

0

Parent Books – Mortar Subsidiary Books - GraniteCash 350,000 Equipment 350,000Accumulated depreciation 120,000 Cash 350,000 Equipment 400,000 Gain 70,000

MortarSelling price P350,000Less: Book value, 12/31/20x5 Cost, 1/1/20x2 P400,000 Less: Accumulated depreciation : P400,000/10 years x 3 years

120,000 280,000

Unrealized gain on sale of equipment P 70,000

Realized gain – depreciation: P70,000/7 years P 10,000

59. a - refer to No. 58 for computation60. b Eliminating entries: 12/31/20x5: subsequent to date of acquisition Realized Gain – depreciation


“Should be in CFS” Parent Books – Mortar “Recorded as” Subsidiary Books - Granite



Acc. Depreciation 40,000 Acc. depreciation 50,000 Eliminating entries: 12/31/20x6: subsequent to date of acquisition

Equipment 50,000Retained earnings (70,000 – 10,000) 60,000 Accumulated depreciation (P120,000 – P10,000) 110,00

0

61. b - refer to No. 60 for computation62. c - refer to No. 60 for computation

63. a

Consolidated Net Income for 20x9 P Company’s net income from own/separate operations…………. P 140,000 Realized gain on sale of equipment (downstream sales) through depreciation

___0

P Company’s realized net income from separate operations*…….….. P 140,000 S Company’s net income from own operations…………………………………. P 30,000 Unrealized loss on sale of equipment (upstream sales) 20,000 Realized loss on sale of equipment (upstream sales) through depreciation – none, since the date of sale is end of the year

( 0)

S Company’s realized net income from separate operations*…….….. P 50,000 50,000 Total P190,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x9 P190,000 Less: Non-controlling Interest in Net Income* * 15,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x9………….. P175,000


Selling price P180,000Less: Book value, 12/31/20x9 Cost, 1/1/20x4 P500,000 Less: Accumulated depreciation : P500,000/10 years x 6 years

300,000 200,000

Unrealized loss on sale of equipment P( 20,000)

Realized loss – depreciation: P20,000/4 years P( 5,000)


___0

P Company’s realized net income from separate operations*…….….. P 140,000 S Company’s net income from own operations…………………………………. P 30,000 Unrealized loss on sale of equipment (upstream sales) 20,000 Realized loss on sale of equipment (upstream sales) through depreciation ( 0) S Company’s realized net income from separate operations*…….….. P 50,000 50,000 Total P190,000 Less: Non-controlling Interest in Net Income* * P 15,000 Amortization of allocated excess…………………… ____0 15,000 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P175,000 Add: Non-controlling Interest in Net Income (NCINI) _ 15,000 Consolidated Net Income for 20x9 P190,000



P 30,000

Unrealized loss on sale of equipment (upstream sales) 20,000 Realized loss on sale of equipment (upstream sales) through depreciation ( 0) S Company’s realized net income from separate operations……… P 50,000 Less: Amortization of allocated excess 0


64. bConsolidated Net Income for 20y0 P Company’s net income from own/separate operations…………. P 162,000 Realized gain on sale of equipment (downstream sales) through depreciation

___0

P Company’s realized net income from separate operations*…….….. P 162,000 S Company’s net income from own operations…………………………………. P 45,000 Unrealized loss on sale of equipment (upstream sales) Realized loss on sale of equipment (upstream sales) through depreciation ( 5,000) S Company’s realized net income from separate operations*…….….. P 40,000 40,000 Total P202,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20y0 P202,000 Less: Non-controlling Interest in Net Income* * 7,500 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20y0………….. P194,500


Or, alternativelyConsolidated Net Income for 20y0 P Company’s net income from own/separate operations…………. P 162,000 Realized gain on sale of equipment (downstream sales) through depreciation

___0

P Company’s realized net income from separate operations*…….….. P 162,000 S Company’s net income from own operations…………………………………. P 45,000 Unrealized loss on sale of equipment (upstream sales) Realized loss on sale of equipment (upstream sales) through depreciation ( 5,000) S Company’s realized net income from separate operations*…….….. P 40,000 40,000 Total P202,000 Less: Non-controlling Interest in Net Income* * P 7,500 Amortization of allocated excess…………………… ____0 7,500 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P194,500 Add: Non-controlling Interest in Net Income (NCINI) _ _ 7,500 Consolidated Net Income for 20y0 P202,000


**Non-controlling Interest in Net Income (NCINI) for 20y0 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company)

P 30,000

Unrealized loss on sale of equipment (upstream sales) Realized loss on sale of equipment (upstream sales) through depreciation ( 5,000) S Company’s realized net income from separate operations……… P 25,000 Less: Amortization of allocated excess 0


65. d – the original cost of land66. b – no intercompany gain or loss be presented in the CFS.67. a

Consolidated Net Income for 20x4 P Company’s net income from own/separate operations…………. P 200,000 Realized gain on sale of equipment (downstream sales) through depreciation

___0

P Company’s realized net income from separate operations*…….….. P 200,000 S3 Company’s net income from own operations…………………………………. P100,000 S2 Company’s net income from own operations…………………………………. 70,000 S1 Company’s net income from own operations…………………………………. 95,000 Unrealized loss on sale of equipment (upstream sales) – S3 15,000 Unrealized gain on sale of equipment (upstream sales) – S2 ( 52,000) Unrealized gain on sale of equipment (upstream sales) - S1 ( 23,000) S Company’s realized net income from separate operations*…….….. P205,000 205,000 Total P405,000 Less: Amortization of allocated excess…………………… 0 Consolidated Net Income for 20x4 P405,000 Less: Non-controlling Interest in Net Income* * (P23,000 + P5,400 + P7,200)

35,600

Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x4………….. P369,400


S3 S2 S1Sales price 145,000 197,000 220,000Less: Cost 160,000 145,000 197,000Unrealized (loss) gain ( 15,000) 52,000 23,000


___0

P Company’s realized net income from separate operations*…….….. P 200,000 S3 Company’s net income from own operations…………………………………. P100,000 S2 Company’s net income from own operations…………………………………. 70,000 S1 Company’s net income from own operations…………………………………. 95,000 Unrealized loss on sale of equipment (upstream sales) – S3 15,000 Unrealized gain on sale of equipment (upstream sales) – S2 ( 52,000) Unrealized gain on sale of equipment (upstream sales) - S1 ( 23,000) S Company’s realized net income from separate operations* P205,000 205,000 Total P405,000 Less: Non-controlling Interest in Net Income* * (P23,000 + P5,400 + P 35,600

P7,200) Amortization of allocated excess…………………… ____0 _ 35,600 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P369,400 Add: Non-controlling Interest in Net Income (NCINI) _ _35,600 Consolidated Net Income for 20y0 P405,000


**Non-controlling Interest in Net Income (NCINI) S3 S2 S1 S Company’s net income of Subsidiary Company from its own operations (Reported net income of S Company) P 100,000 P 70,000 P 95,000 Unrealized (gain) loss on sale of land (upstream sales) 15,000 ( 52,000) ( 23,000) S Company’s realized net income from separate operations P 115,000 P 18,000 P 72,000 Less: Amortization of allocated excess 0 0 0

P 115000 P 18,000

P 72,000

Multiplied by: Non-controlling interest %.......... 20% 30% 10% Non-controlling Interest in Net Income (NCINI) - partial goodwill

P 23,000 P 5,400 P 7,200

Less: NCI on goodwill impairment loss on full-goodwill 0 0 0 Non-controlling Interest in Net Income (NCINI) – full goodwill P 23,000 P 5,400 P 7,200

68. d Eliminating entries: 1/1/20x5: date of acquisition Restoration of BV and eliminate unrealized gain

Building 3,000Gain 8,250 Accumulated depreciation 11,250

Parent Books – Sky Subsidiary Books - EarthCash 33,000 Building 33,000Accumulated depreciation 11,250 Cash 33,000 Building 36,000 Gain 8,250

Sky, 7/1/20x4Selling price P33,000Less: Book value, 7/11/20x4 Cost, 1/1/20x2 P36,000 Less: Accumulated depreciation : P36,000/8years x 2.5 years

11,250 24,750

Unrealized gain on sale of equipment P 8,250Realized gain – depreciation: P8,250/5.5 years P 1,500

69. a - refer to No. 60 for computation70. b Eliminating entries: 12/31/20x4: subsequent to date of acquisition Realized Gain – depreciation (July 1, 20x4 – December 31, 20x4)

Accumulated depreciation 750 Depreciation expense 750 P8,250 / 5.5 x ½ years or P3,000 – P2,250

“Should be in CFS” Parent Books – Sky “Recorded as” Subsidiary Books - EarthDepreciation expense (P24,750 / 5.5 x ½ years) 2,250

Depreciation expense (P33,000 / 5.5 years x ½ yrs)

3,000

Acc. Depreciation 2,250 Acc. depreciation 3,000

71. c Eliminating entries: 12/31/20x5: subsequent to date of acquisition Realized Gain – depreciation

Accumulated depreciation 1,500 Depreciation expense 1,500 P8,250 / 5.5 x years or P6,000 – P4,500

“Should be in CFS” Parent Books – Sky “Recorded as” Subsidiary Books - EarthDepreciation expense (P24,750 / 5.5 years) 4,500

Depreciation expense (P33,000 / 5.5 years) 6,000


72. d Eliminating entries: 1/1/20x5: subsequent to date of acquisition

Building 3,000Retained earnings (8,250 – 750) 7,500 Accumulated depreciation (P11,250 – P750) 10,500

73. c – (P22,500 x 4/15 = P6,000)74. a – [P50,000 – (P50,000 x 4/10) = P30,000]75. a Simon, 4/1/20x4

Selling price P68,250Less: Book value, 4/1/20x4 Cost, 1/1/20x4 P50,000 Less: Accumulated depreciation : P50,000/10 years x 3/12 __1,250 48,750Unrealized gain on sale of equipment P19,500Realized gain – depreciation: P19,500/9.75 years P 2,000

76. c – P2,000 x 9/12 (April 1, 20x4 – December 31, 20x4) = P1,50077. c – P19,500 / 9.75 years = P2,00078. c – P19,500 / 9.75 years = P2,00079. It should be noted that PAS 27 allow the use of cost model in accounting for investment

in subsidiary in the books of parent company but not the equity method.

The requirement “share of income from Wilson” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (a) computed as follows:

20x4

Share in subsidiary net income (100,000 x 90%) 90,000Unrealized gain on sale of equipment (downstream sales) ( 19,500)Realized gain on sale of equipment (downstream sales) through depreciation P2,000 x 9/12 (April 1, 20x4 – December 31, 20x4) = P1,500 _ 1,500Net 72,000


The requirement “share of income from Wilson” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (b) computed as follows:

20x5

Share in subsidiary net income (120,000 x 90%) 108,000Realized gain on sale of equipment (downstream sales) through depreciation _ 2,000Net 110,000


The requirement “share of income from Wilson” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (d) computed as follows:

20x6

Share in subsidiary net income (130,000 x 90%) 117,000Realized gain on sale of equipment (downstream sales) through depreciation _ 2,000

Net 119,000

82. c Smeder, 1/1/20x4

Selling price P84,000Less: Book value, 1/1/20x4 Cost, 1/1/20x4 P120,000 Less: Accumulated depreciation __48,000 72,000Unrealized gain on sale of equipment P12,000Realized gain – depreciation: P12,000/6 years P 2,000


The requirement “share of income from Wilson” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (b) computed as follows:

20x4

Share in subsidiary net income (28,000 x 80%) 22,400Unrealized gain on sale of equipment (upstream sales); 12,000 x 80% ( 9,600)Realized gain on sale of equipment (upstream sales) through depreciation P2,000 x 80% _ 1,600Net 14,400


The requirement “share of income from Wilson” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (c) computed as follows:

20x5

Share in subsidiary net income (32,000 x 80%) 25,600Realized gain on sale of equipment (upstream sales) through depreciation P2,000 x 80% _ 1,600Net 27,200


Equipment 36,000Gain 12,000 Accumulated depreciation 48,000

Parent – Smeder Subsidiary - CollinsCash 84,000 Equipment 84,000Accumulated depreciation 48,000 Cash 84,000 Equipment 120,000 Gain 12,000

Smeder, 1/1/20x4Selling price P84,000Less: Book value, 1/1/20x4 Cost, 1/1/20x4 P120,000 Less: Accumulated depreciation __48,000 72,000Unrealized gain on sale of equipment P12,000Realized gain – depreciation: P12,000/6 years P 2,000

Eliminating entries: 12/31/20x4: subsequent to date of acquisition Realized Gain – depreciation


“Should be in CFS” Parent – Smeder “Recorded as” Subsidiary - Collins

Depreciation expense (P72,000 /6 years) 12,000



Combining the eliminating entries for 1/1/20x4 and 12/31/200x4, the net effect of accumulated depreciation would be a net credit of P46,000 (P48,000 – P2,000).

86. c20x4

Unrealized gain on sale of equipment ( 12,000)Realized gain on sale of equipment through depreciation ___2,000Net ( 10,000)


Cash 5,000 Loss 5,000

Parent – Stark Subsidiary - ParkerCash 80,000 Land 85,000Loss 5,000 Cash 85,000 Land 85,000

Stark Parker ConsolidatedSelling price P 80,000 P 92,000 P 92,000Less: Book value, 5/1/20x4 _85,000 __80,000 _85,000Unrealized gain on sale of equipment P

( 5,000)P

12,000P 7,000

88. b – refer to No. 87 for eliminating entry89. b

Cash 5,000 Retained earnings 5,000


The requirement “income from Stark” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (e) computed as follows:

20x4Share in subsidiary net income (200,000 x 90%) 180,000Unrealized loss on sale of land (upstream sales): P5,000 x 90% _ 4,500Net 184,500


The requirement “income from Stark” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (d) computed as follows:

20x4

Share in subsidiary net income (200,000 x 90%) 180,000Unrealized loss on sale of land (upstream sales): P5,000 x 90% _ 4,500Net 184,500

92. bStark Parker Consolidated

Selling price P 80,000 P 92,000 P 92,000Less: Book value, 5/1/20x4 _85,000 __80,000 _85,000Unrealized gain on sale of equipment P

( 5,000)P

12,000P 7,000

93. a – refer to No. 92 for computation94. e – None, the loss was already recognized in the books of Stark in the year of sale -

20x4 but not in the subsequent years.95. It should be noted that PAS 27 allow the use of cost model in accounting for investment

in subsidiary in the books of parent company but not the equity method.

The requirement “income from Stark” and available choices in the problem are on the assumption of the use of “equity method”. So, the answer then would be (c) computed as follows:

20x6Share in subsidiary net income (220,000 x 90%) 198,000Intercompany realized loss on sale of land (upstream sales): P5,000 x 90% _ ( 4,500)Net 193,500

96. d - Investment in subsidiary, 12/31/20x5 (cost model) P700,000).

Date of Acquisition (1/1/20x4) Partial Full Fair value of consideration given…………………………P 700,000 Less: Book value of SHE - Subsidiary): (P300,000 + P500,000) x 80%................. 640,000 Allocated Excess.……………………………………………….P 60,000 Less: Over/Undervaluation of Assets & Liabilities Increase in Bldg. (P75,000 x 80%)…………… 60,000 Goodwill ………….……………………………………………….P 0 P 0 Amortization of allocated excess: building - P75,000 / 25 years = P3,000 Upstream Sale of Equipment (date of sale – 4/1/20x5):

Sales.......................................................................................................P 60,000

Less: Book value of equipment…………………………………………………………….. 30,000

Unrealized Gain (on sale of equipment)…………………………………………………..P 30,000

Realized gain on sale of equipment: 20x5: P30,000/5 years = P6,000 x 9/12 (4/1/20x5-12/31/20x5)………….P 4,500

20x6 ………………..……………………………………………………………………………..P 6,000 Downstream Sale of Machinery (date of sale – 9/30/20x5):

Sales........................................................................................................P75,000Less: Book value of

machinery………………………………………………………………. 40,000Unrealized Gain (on sale of machinery)……………………………………………………

P35,000

Realized gain on sale of machinery: 20x5: P35,000/10 years = P3,500 x 3/12 (9/30/20x5-12/31/20x5)………..P 875

20x6………….. …………………………………………………………………………………..P 3,500

97. d – refer to No. 1 for cost model: Dividend paid or declared – S…………………………………………………P 50,000x: Controlling Interest %…………………………………………………………. 80%Dividend income of Parent……………………………………………………..P 40,000

98. dConsolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 300,000

Realized gain on sale of equipment (downstream sales) through depreciation (P35,000 – P875)

34,125

P Company’s realized net income from separate operations*…….….. P 265,875 S Company’s net income from own operations…………………………………. P 150,000 Unrealized gain on sales of equipment (upstream sales) (30,000) Realized gain on sale of equipment (upstream sales) through depreciation 4,500 S Company’s realized net income from separate operations*…….….. P 124,500 124,500 Total P390,375 Less: Amortization of allocated excess…………………… 3,000 Consolidated Net Income for 20x5 P387,375 Less: Non-controlling Interest in Net Income* * 24,300 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. P363,075


Or, alternativelyConsolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. P 300,000 Realized gain on sale of equipment (downstream sales) through depreciation (P35,000 – P875)

34,125

P Company’s realized net income from separate operations*…….….. P 265,875 S Company’s net income from own operations…………………………………. P 150,000 Unrealized gain on sales of equipment (upstream sales) (30,000) Realized gain on sale of equipment (upstream sales) through depreciation 4,500 S Company’s realized net income from separate operations*…….….. P 124,500 124,500 Total P390,375 Less: Non-controlling Interest in Net Income* * P 24,300 Amortization of allocated excess…………………… 3,000 27,300 Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. P363,075 Add: Non-controlling Interest in Net Income (NCINI) _ 24,300 Consolidated Net Income for 20x5 P387,375



P 150,000

Unrealized gain on sales of equipment (upstream sales) ( 30,000) Realized gain on sale of equipment (upstream sales) through depreciation 4,500 S Company’s realized net income from separate operations……… P 124,500 Less: Amortization of allocated excess 3,000


99. c – refer to No. 98 for computations100. d – refer to No. 98 for computations101. a

Non-controlling Interests (in net assets): 20x5 20x6 Common stock - S, 12/31..….………………………… P 300,000 P 300,000 Retained earnings - S, 12/31: RE- S, 1/1.…………………………………………….P600,000 P 700,000 +: NI-S………………………………………………… 150,000 200,000 -: Div – S…………………………………………….. 50,000 700,000 70,000 830,000 Book value of Stockholders’ equity, 12/31…….... P1,000,000 P1,130,000 Adjustments to reflect fair value of net assets

Increase in equipment, 1/1/2010..……..… 75,000 75,000

Accumulated amortization (P3,000 per year)*.…… ( 6,000) ( 9,000)

Fair Value of Net Assets/SHE, 12/31..……………… P1,069,000 P1,196,000 Unrealized gain on sale of equipment (upstream) ( 30,000) **( 25,500)

Realized gain thru depreciation (upstream)……… 4,500 6,000 Realized SHE – S,12/31………………………………….. P1,043,500 P1,176,500 x: NCI %........................................................... ___ 20% 20%

Non-controlling Interest (in net assets) – partial... P 208,700 P 235,300

+: NCI on full goodwill……..…………………………….. 0 0

Non-controlling Interest (in net assets) – full…….. P 208,700 P 235,300 * 20x5: P3,000 x 2 years; 2012: P3,000 x 3 years;

** P30,000 – P4,500 realized gain in 20x5 = P25,500.

Note: Preferred solution - since what is given is the RE – P, 1/1/20x5(beginning balance of the current year) -

Retained earnings – Parent, 1/1/20x5 (cost)…………………………… P 800,000 -: Downstream sale – 20x4 or prior to 20x5, Net unrealized gain 0 Adjusted Retained earnings – Parent, 1/1/20x5 (cost)……………… P 800,000 Retroactive Adjustments to convert Cost to “Equity”:

Retained earnings – Subsidiary, 1/1/20x4……………………….P 500,000 Less: Retained earnings – Subsidiary, 1/1/20x5……………… 600,000 Increase in Retained earnings since acquisition

(cumulative net income – cumulative dividends)…………P 100,000 Accum. amortization (1/1/x4– 1/1/x5): P2,000 x 1 year……( 3,000) Upstream Sale – 2010 or prior to 20x5, Net unrealized gain……………………………..………………..( 0)

P 97,000 X: Controlling Interests %..…………………………………………… 80% 77,600 RE – P, 1/1/20x5 (equity method) = CRE, 1/1/20x5………………… P 877,600 +: CI – CNI or Profit Attributable to Equity Holders of Parent……. 363,075 -: Dividends – P………………………………………………………………….. 100,000 RE – P, 12/31/20x5 (equity method) = CRE, 12/31/20x5………….. P 1,140,675

Or, if RE – P is not given on January 1, 20x5, then RE – P on December 31, 20x5 should be use.

Retained earnings – Parent, 12/31/20x5 (cost model): (P800,000 + P340,000, P’s reported NI – P100,000)……………… P1,040,000 -: Downstream sale – 20x5 or prior to 12/31/20x5, Net unrealized gain - (P35,000 – P875)……………………………. 34,125 Adjusted Retained earnings – Parent, 1/1/20x5 (cost model)..…… P1,005,875 Retroactive Adjustments to convert Cost to “Equity”:

Retained earnings – Subsidiary, 1/1/20x4……………………….P 500,000 Less: Retained earnings – Subsidiary, 12/31/20x5

(P600,000 + P150,000 – P50,000)..…………..…….. 700,000 Increase in Retained earnings since acquisition

(cumulative net income – cumulative dividends)……….P 200,000 Accumulated amortization (1/1/20x4 – 12/31/20x5): P 3,000 x 2 years……………………………………………..( 6,000) Upstream Sale – 20x5 or prior to 12/31/20x5, Net unrealized gain – (P30,000 – P4,500)…………….( 25,500)

P 168,500 x: Controlling Interests %..………………………………………… 80% 134,800

RE – P, 12/31/20x5 (equity method) = CRE, 12/31/20x5…………. P1,140,675

102. c – refer to No, 101 computations.103. b – refer to No. 101 for computations104. d – refer to No. 101 for computations105. b Consolidated Stockholders’ Equity, 12/31/20x5:

Controlling Interest / Parent’s Interest / Parent’s Portion / Equity Holders of Parent – SHE, 12/31/20x5:

Common stock – P (P only)……………………………………………..P1,000,000Retained Earnings – P (equity method), 12/31/20x5…………. 1,140,675Controlling Interest / Parent’s Stockholders’ Equity…………… P2,140,675

Non-controlling interest, 12/31/20x5 (partial/full)…………………… 208,700 Consolidated Stockholders’ Equity, 12/31/20x5……………………….P2,349,375

Theories 1.

d 6. N/A 11. b 16. c 21. a 26. b 31 c

2.

c 7. c 12. c 17. b 22. b 27. b 32. b

3.

d 8. a 13. d 18. a 23. d 28. c 33. c

4.

d 9. a 14. b 19. a 24. c 29. b 34. d

5.

b 10, c 15, c 20. c 25. c 30. c 35.

Eliminating Entries

Documents

Transcript of Eliminating Entries