Solution Chapter 16

(1)

Chapter 16

Problem I

1. P50,075

Consolidated Net Income for 20x4

Net income from own/separate operations

Pill Company [P25,000 – (P9,000 x 85%)] P17,350

Sill Company 40,000

Total P57,350

Less: Non-controlling Interest in Net Income* P 5,775

Amortization of allocated excess 0

Goodwill impairment 1,500 7,275

Controlling Interest in Consolidated Net Income or Profit

attributable to equity holders of parent………….. P50,075 Add: Non-controlling Interest in Net Income (NCINI) 5,775

Consolidated Net Income for 20x4 P55,850

*Net income of subsidiary – 20x4 P 40,000

Amortization of allocated excess – 20x4 ( 0))

P 40,000

Multiplied by: Non-controlling interest %... 15%

P 6,000 Less: Non-controlling interest on impairment loss on full-goodwill (P1,500 x 15%)* ____225

Non-controlling Interest in Net Income (NCINI) P 5,775

*this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired.

2. P5,775 – refer to computation in No. 1

Problem II (Assume the use of full-goodwill approach)

Cost of 75% investment 600,000

Fair value of Subsidiary (Implied cost of 100% investment); P600,000/75% 800,000 Less: Carrying amount of Small’s net assets =

Carrying amount of Small’s shareholders’ equity

Common/Ordinary shares 400,000

Retained earnings 100,000

500,000 Allocated Excess: Acquisition differential – Jan. 1, 20x4 300,000 Less: Over/under valuation of A/L (Allocated to):

Increase in Inventory 40,000

Decrease in Patents (70,000) (30,000)

Goodwill - full 330,000

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

amortized UnderOver/ Life AmountAnnual Year(20x4)Current 20x5 20x6

Inventory P40,000 1 P 40,000 P 40,000 P - P

-Subject to Annual Amortization

Patents (70,000) 5 (14,000) ( 14,000) (14,000) (14,000)

Amortization P 26,000 P 26,000 P(14,000) P(14,000)

Impairment of goodwill 330,000 - _____ _____ ______ __ 19,300 P 26,000 P 26,000 P(14,000) P 5,300

(2)

Unamortized balance of allocated excess:

Balance Balance

Jan. 1 Amortization Dec. 31

20x4 20x4 & 20x5 20x6

Inventory 40,000 40,000

Patents (70,000) (28,000) (14,000) (28,000)

Goodwill 330,000 0 19,300 310,700

300,000 12,000 5,300 282,700

Journal Entries Year 1 Year 2 Year 3

Investment in Small 600,000 Cash 600,000 Cash 18,750 7,500 30,000 Dividend income 18,750 7,500 30,000 2. a. Goodwill, 12/31/20x6 (P330,000 – P19,300) P 310,700 b. FV of NCI, 12/31/20x6: Common stock, 12/31/20x6 P 400,000 Retained earnings, 1/1/20x6 (P100,000 + P80,000 – P25,000 – P35,000 – P10,000) P 110,000 Add; NI – Subsidiary (20x6) 90,000 Dividends – Subsidiary 20x6 ( 40,000) 160,000

Book value of SHE – S, 12/31/20x6 P 560,000

Adjustments to reflect fair value P 300,000 Amortization of allocated excess – 20x5 ( 12,000)

- 20x6 14,000

Impairment of goodwill – 20x5 ( 19,300)___282,700

FV of SHE of S P842,700

Multiplied by: NCI% 25%

FV of NCI P210,675

Or, alternatively;

Small’s common/ordinary shares 400,000

Small’s retained earnings (100,000+80,000-25,000-35,000-10,000+90,000

-40,000) 160,000

560,000

Unamortized acquisition differential 282,700

842,700

NCI’s share (25%) 210,675

c. Consolidated Retained Earnings, 1/1/20x6 – P498,500 Consolidated Retained Earnings, December 31, 20x6

Retained earnings - Large Company, January 1, 20x5 (cost model P500,000 Adjustment to convert from cost model to equity method for purposes of

consolidation or to establish reciprocity:/Parent’s share in adjusted net increased in subsidiary’s retained earnings:

Retained earnings – Small, January 1, 20x5

(P100,000 + P80,00 – P25,000 – P35,000 – P10,000) P 110,000 Less: Retained earnings – Small, January 1, 20x4 (date of acquisition) 100,000 Increase in retained earnings since date of acquisition P 10,000 Less: Amortization of allocated excess – 20x4 26,000

(3)

Amortization of allocated excess – 20x5 (14,000) P ( 2,000) Multiplied by: Controlling interests %... 75% P ( 1,500)

Less: Goodwill impairment loss (full-goodwill) – 20x5 _____0 1,500

Consolidated Retained earnings, January 1, 20x6 P498,500

Incidentally, the CRE, December 31, 20x6 would be as follows:

Consolidated Retained earnings, January 1, 20x6 P498,500

Add: Controlling Interest in Consolidated Net Income or Profit attributable to

equity holders of Large for 20x6 219,050

Total P717,550

Less: Dividends paid – Large Company for 20x6 70,000

Consolidated Retained Earnings, December 31, 20x6 P647,550 d. P219,050

Large Company [P200,000 – (P40,000 x 75%)] P170,000

Small Company 90,000

Total P260,000

Amortization of allocated excess 5,300

Goodwill impairment 19,300 40,950

*Net income of subsidiary – 20x6 P 90,000

Amortization of allocated excess – 20x6 ( 5,300)

P 84,700

P 21,175 Less: Non-controlling interest on impairment loss on full-goodwill ( (P19,300 x 25%)* ___4,825

e. P16,350 – refer to (d) for computations

Teacher’s Guide: For purposes of comparison between Cost Model/Method and Equity Method

1. Year 1 Year 2 Year 3

Investment in Small 600,000

Cash 600,000

Investment in Small (75% x Small’s profit) 60,000 (26,250) 67,500

Investment income 60,000 (26,250) 67,500

Cash (75% x Small’s dividends) 18,750 7,500 30,000

Investment in Small 18,750 7,500 30,000

Investment income (75% x amortization of PD*) 19,500 (10,500) 3,975

Investment in Small 19,500 (10,500) 3,975

*purchase differential ( ) – indicates reduction

(4)

Investment in Small under cost method 600,000 Small’s retained earnings, end of year 160,000

Small’s retained earnings, date of acquisition 100,000

Change since acquisition 60,000

Less: cumulative amortization of acquisition differential 17,300

42,700

Large’s share (75%) 32,025

Investment in Small under equity method 632,025

Note: Regardless of the method used (cost or equity) answers for No. 2 (a) to (e) above are exactly the same.

Problem III

Cost of 8% investment 646,000

Fair value of Subsidiary (Implied cost of 100% investment); P646,000/85% 760,000 Less: Carrying amount of Silk’s net assets =

Carrying amount of Silk’s shareholders’ equity

Common/Ordinary shares 500,000

600,000 Allocated Excess: Acquisition differential – December 31, 20x4 160,000 Less: Over/under valuation of A/L (Allocated to):

Increase in Inventory 70,000

Patents 90,000

Non-controlling interest (15% x 760,000, fair value of subsidiary),12/31/20x4 114,000 A summary or depreciation and amortization adjustments is as follows:

Account Adjustments to be

amortized Over/under Life AmountAnnual Year(20x5)Current 20x6 20x7

Inventory P70,000 1 P 70,000 P 70,000 P - P

Patents 90,000 10 __9,000 ___9,000 ___9,000 ___9,000

P160,000 P 79,000 P 79,000 P 9,000 P 9,000, Unamortized balance of allocated excess:

Dec. 31 Amortization Dec. 31

20x4 20x5 20x6 20x6

Inventory 70,000 70,000

Patents 90,000 9,000 9,000 72,000

(5)

1. NCI-CNI

20x5: P(7,350) 20x6: P6,450

20x5 20x6

Consolidated Net Income

Net income from own/separate operations Large Company

20x5 [P28,000 – P0)] P 28,000

20x6 [(P45,000, loss + (P15,000 x 85%)] P(57,750)

Small Company 30,000 52,000

Total P 58,000 P( 5,750)

Less: Non-controlling Interest in Net Income* P(7,350) P 6,450

Amortization of allocated excess 79,000 9,000

Goodwill impairment _____0 71,650 _____0 15,450

CI-CNI (loss) or Profit (loss) attributable to equity

holders of parent P(13,650) P(21,200)

Add: Non-controlling Interest in Net Income (NCINI) ( 7,350) 6,450

Consolidated Net Income/Loss (CNI) P(21,000) P(14,750)

20x5 20x6

*Net income (loss) of subsidiary P 30,000 P 52,000

Amortization of allocated excess ( 79,000) ( 9,000)

P(49,000) P 43,000 Multiplied by: Non-controlling interest %... 15% 15% P( 7,350) P 6,450 Less: Non-controlling interest on impairment loss on full-goodwill _______- ___

_-Non-controlling Interest in Net Income (NCINI) P( 7,350) P 6,450

2. CI-CNI – refer to computation in No. 1 20x5: P(21,000)

20x6: P14,750 Or, alternatively:

(1) Non-controlling interest in profit

20x5: 15%  (30,000 – 79,000) - 7,350 20x6: 15%  (52,000 – 9,000) 6,450 (2)

20x5 20x6

Profit (loss) Pen 28,000 (45,000)

Dividends from Silk

20x5 0

20x6 (85%  15,000) (12,750)

28,000 (57,750) Share of Silk’s profit

85%  (30,000 – 79,000) (41,650)

85%  (52,000 – 9,000) _ 36,550_

Consolidated profit (loss) attributable to

(6)

3. CRE, 12/31/20x6 – P73,150

Consolidated Retained Earnings, December 31, 20x6

Retained earnings - Pen Company, December 31, 20x6 (cost model P 91,000 Adjustment to convert from cost model to equity method for purposes of

Retained earnings – Silk, December 31, 20x6:

(P100,000 + P30,00 – P0 + P52,000 – P15,000) P 167,000 Less: Retained earnings – Silk, December 31, 20x4 (date of acquisition) 100,000 Increase in retained earnings since date of acquisition P 67,000 Less: Amortization of allocated excess – 20x5 79,000 Amortization of allocated excess – 20x6 __ 9,000 P (21,000) Multiplied by: Controlling interests %... 85% P (17,850)

Less: Goodwill impairment loss (full-goodwill) – 20x5 _____0 ( 17,850)

Consolidated Retained earnings, December 31, 20x6 P 73,150

4. NCI, 12/31/20x6: P110,850 FV of SHE of Silk: Common stock, 12/31/20x6 P 500,000 Retained earnings, 12/31/20x: Retained earnings, 1/1/20x4 P 100,000 NI – Subsidiary (20x5 and 20x6): P30,000 + P52,000 82,000

Dividends – Subsidiary (20x5 and 20x6): P) + P15,000 ( 15,000) 167,000

Book value of SHE – S, 12/31/20x6 P 667,000

Adjustments to reflect fair value, 12/31/20x4 160,000 Amortization of allocated excess (P79,000 + P9,000) ( 88,000)

FV of SHE of S P 739,000

FV of NCI (partial), 12/31/20x6 P 110,850

Add: NCI on full-goodwill 0

FV of NCI (full),12/31/20x6 P 110,850

Or, alternatively:

Non-controlling interest – date of acquisition,12/31/20x4 (1) P 114,000 Retained earnings Silk – Dec. 31, 20x6

(100,000 + 30,000 + 52,000 – 15,000) 167,000 Retained earnings, 12/31/20x4 (date of acquisition) 100,000

Increase since acquisition 67,000

Less: Amortization of allocated excess (79,000 + 9,000) 88,000 ( 21,000)

NCI’s share 15% ( 3,150)

Non-controlling interest – Dec. 31, 20x6 P 110,850

5. Consolidated Patents, 12/31/20x6: P72,000 Unamortized balance of allocated excess:

Dec. 31 Amortization Dec. 31

20x4 20x5 20x6 20x6

Inventory 70,000 70,000

Patents 90,000 9,000 9,000 72,000

(7)

Or, alternatively:

Invest. account – equity Dec. 31, 20x6 628,150

Cost of investment 646,000

Retained earnings Silk – Dec. 31, 20x6

(100,000 + 30,000 + 52,000 – 15,000) 167,000 Retained earnings,12/31/20x4 (date of acquisition) 100,000

Increase since acquisition 67,000

Less: Accumulated amortization (79,000 + 9,000) 88,000 - 21,000

85% - 17,850 Invest. account – equity method as at Dec. 31, 20x6 628,150

Implied value of 100% (628,150 / 85%) 739,000

Silk –Common shares 500,000

667,000 Balance unamortized allocated excess – Patents 72,000 Problem IV

1. (Full or partial-goodwill) – the same answer.

Consideration transferred by MM ... P664,000 Noncontrolling interest fair value... 166,000*

Fair value of Subsidiary……… P830,000 Less: Book value of SHE – S…..………. (600,000)

Positive excess ... 230,000 Annual Excess Life Amortizations Excess fair value assigned to buildings 80,000 20 years P4,000

Goodwill - full P150,000 indefinite

-0-Total ... P4,000 2. P150,000 – full goodwill (see No. 1 above)

P120,000 – partial-goodwill:

Consideration transferred by MM ... P664,000 Less: Book value of SHE – S (P600,000 x 80%)…….. 480,000 Allocated excess……….. P184,000 Less: Over/under valuation of A and L:

P80,000 x 80%... 64,000 Goodwill - partial ... P120,000 3. Full-goodwill

Common Stock - TT ... 300,000 Additional Paid-in Capital - TT ... 90,000 Retained Earnings - TT ... 210,000 Investment in TT Company (80%) ... 480,000 Non-controlling interest (20%) ... 120,000 Buildings ... 80,000 Goodwill ... 150,000 Investment in TT Company (80%) ... 184,000 Non-controlling interest (P166,000 – P120,000)... 46,000

(8)

Partial-goodwill

Common Stock - TT ... 300,000 Additional Paid-in Capital - TT ... 90,000 Retained Earnings - TT ... 210,000 Investment in TT Company (80%) ... 480,000 Non-controlling interest (20%) ... 120,000 Buildings ... 80,000 Goodwill ... 120,000 Investment in TT Company (80%) ... 184,000 Non-controlling interest (20% x P80,000) ... 16,000 4. Cost Model/Initial Value Method

Dividends received (80%) ... P 8,000 Investment in Taylor—12/31/x4 (original value paid)………… P664,000 5. Cost Model/Initial Value Method – same answer with No. 4.

6. Using the acquisition method, the allocation will be the total difference (P80,000) between the buildings' book value and fair value. Based on a 20 year life, annual excess amortization is P4,000.

MM book value—buildings ... P 800,000 TT book value—buildings ... 300,000 Allocation ... 80,000 Excess Amortizations for 20x4–20x5 (P4,000 × 2) …………. ( 8,000)

Consolidated buildings account ……… P 1,172,000 7. Acquisition-date fair value allocated to goodwill:

Goodwill-full ( see No. 1 above) ... P 150,000 Goodwill-partial (see No. 1 above)……… P 120,000

8. The common stock and additional paid-in capital figures to be reported are the parent balances only.

Common stock, P500,000

Additional paid-in capital, P280,000 Problem V

1.

Partial Goodwill or Proportionate Basis

a. Investment in S 225,000

Beginning Retained Earnings-Palm Inc. 225,000

To establish reciprocity/convert to equity (0.90 x(P1,250,000 – P1,000,000))

b. Common stock – S 3,000,000 Retained earnings – S 1,250.000 Investment in S Co 3,825,000 NCI (P4,250,000 x 10%) 425,000 c. Land 400,000 Investment in S 150,000 NCI [(P500,000 x 10%)– (P100,000 x 10%)] 40,000

Retained earnings – P (bargain purchase gain – closed to retained earnings since only balance

(9)

sheets are being examined, P300,000 – P90,000 depreciation, 20x4) 210,000 FV of SHE of S: Common stock, 1/1/20x5 P3,000,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 250,000 Dividends – Subsidiary 20x4 ( 0) 1,250,000 Book value of SHE – S, 1/1/20x5 P4,250,000 Adjustments to reflect fair value 500,000 Amortization of allocated excess (P100,000 x 1) ( 100,000)

FV of SHE of S P4,650,000

FV of NCI P 465,000

Computation of Gain:

Partial Goodwill or Proportionate Basis Fair value of Subsidiary:

Consideration transferred P3,750,000

Less: BV of SHE of S (P3,000,000 + P1,000,000) x 90% _3,600,000

Allocated excess P 150,000

Less: Over/under valuation of A and L: Inc. (Dec.)

Inventory (P800,000 – P700,000) x 90% P 90,000

Land (P2,000,000 – P1,600,000) x 90% 360,000 __450,000

Gain – partial (attributable to parent) (P300,000)

Full Goodwill or Fair Value Basis

a. Investment in S 225,000

Beginning Retained Earnings-P Inc. 225,000

To establish reciprocity/convert to equity (0.90 x(P1,250,000 – P1,000,000))

b. Common stock – S 3,000,000 Retained earnings – S 1,250.000 Investment in S 3,825,000 NCI (P4,250,000 x 10%) 425,000 c. Land 400,000 Investment in S 150,000 NCI [(P500,000 x 10%)– (P100,000 x 10%)] 40,000

Retained earnings – P (bargain purchase gain – closed to retained earnings since only balance sheets are being examined, P300,000 – P90,000

depreciation, 20x4) 210,000 FV of SHE of S: Common stock, 1/1/20x5 P3,000,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 250,000 Dividends – Subsidiary 20x4 ( 0) 1,250,000 Book value of SHE – S, 1/1/20x5 P4,250,000 Adjustments to reflect fair value 500,000 Amortization of allocated excess (P100,000 x 1) ( 100,000)

(10)

Full-goodwill or Fair Value Basis Fair value of Subsidiary:

Consideration transferred P3,750,000 / 90% P4,166,667 Less: BV of SHE of S (P3,000,000 + P1,000,000) x 100% 4,000,000

Allocated excess P 166,667

Inventory (P800,000 – P700,000) x 100% P 100,000

Land (P2,000,000 – P1,600,000) x 100% 400,000 __500,000

Gain – full (attributable to parent) (P333,333

Note: In case of gain, the working paper eliminating entries under partial and full-goodwill approach are the same.

2.

Retained earnings - Parent Company, December 31, 20x5 (cost model P2,000,000 Adjustment to convert from cost model to equity method for purposes of

Retained earnings – Subsidiary, December 31, 20x5

(P1,000,000 + P250,000 – P0 + P300,000 – P0) P1,550,000 Less: Retained earnings – Subsidiary, January 1, 20x4 1,000,000 Increase in retained earnings since date of acquisition P 550,000 Less: Amortization of allocated excess – 20x4 (inventory) 100,000 P 450,000 Multiplied by: Controlling interests %... 90% P405,000 Add: Bargain purchase gain (Controlling interest – P300,000) 300,000

Less: Goodwill impairment loss _______0 __705,,000

Consolidated Retained earnings, December 31, 20x5 P 4,705,000 Problem VI

Computation of Goodwill: Partial Goodwill

Fair value of Subsidiary:

Consideration transferred P2,800,000

Less: BV of SHE of S (P1,000,000 + P500,000) x 80% _1,200,000

Allocated excess P1,600,000

Prop., plant and eqpt. (P1,500,000 – P600,000) x 80% __720,000

Goodwill – partial P 880,000

Full-goodwill:

Fair value of Subsidiary:

Consideration transferred P2,800,000 / 80% P3,500,000

Less: BV of SHE of S (P1,500,000 x 100%) 1,500,000

Allocated excess P2,000,000

Prop., plant and eqpt. (P1,500,000 – P600,000) x 80% __900,000

Goodwill – full P1,100,000

Amortization of allocated excess:

P900,000 / 10 years = P90,000 per year 1.

(11)

Cost Model-Full Goodwill (Eliminating Entries) 20x4

a. Beginning Retained Earnings-S Co. 1,000,000

Capital Stock- S Co. 500,000

Property and Equipment (net) 900,000

Goodwill 1,100,000

Investment in S Co. 2,800,000

Non-controlling Interest 700,000

Common stock, 1/1/20x4 P 500,000

Retained earnings, 1/1/20x4 1,000,000

Book value of SHE – S, 1/1/20x5 P1,500,000 Adjustments to reflect fair value 900,000

FV of SHE of S1/1/x5 P2,400,000

FV of NCI (partial) P 480,000

Add: NCI on full-goodwill (P1,100,000 – P880,000) 220,000

FV of NCI (full) P 700,000

b. Depreciation Expense 90,000

20x5

a. Investment in S Company (P300,000 x 0.80) 240,000

Beginning Retained Earnings-P Co. 240,000

To establish reciprocity/convert to equity as of 1/1/20x5

b. Beginning Retained Earnings-S Company 1,300,000

Capital Stock-S Company 500,000

Goodwill 1,100,000 Investment in S Company (P2,800,000 + P240,000) 3,040,000 Non-controlling Interest P700,000 + [(P1,300,000 – P1,000,000) x 0.20] 760,000 FV of SHE of S: Common stock, 1/1/20x5 P 500,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 300,000 Dividends – Subsidiary 20x4 ( 0) 1,300,000 Book value of SHE – S, 1/1/20x5 P1,800,000 Adjustments to reflect fair value 900,000

FV of SHE of S1/1/x5 P2,700,000

c. Beginning Retained Earnings-P Co. (P90,000 x 80%) 72,000 Non-controlling Interest (P90,000, depreciation x 20%) 18,000

Depreciation Expense 90,000

(12)

NCI (partial), 12/31/20x5: [(a) P760,000 – (b) P18,000 = P522,000] FV of SHE of S: Common stock, 1/1/20x5 P 500,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 300,000 Dividends – Subsidiary 20x4 ( 0) 1,300,000 Book value of SHE – S, 1/1/20x5 P1,800,000 Adjustments to reflect fair value 900,000 Amortization of allocated excess (P90,000 x 1) ( 90,000)

Cost Model-Partial Goodwill (Eliminating Entries) 20x4

a. Beginning Retained Earnings-S Co. 1,000,000

Capital Stock- S Co. 500,000

Goodwill 880,000

Investment in S Co. 2,800,000

Non-controlling Interest 480,000

b. Depreciation Expense 90,000

20x5

a. Investment in S Company (P300,000 x 0.80) 240,000

Beginning Retained Earnings-P Co. 240,000

To establish reciprocity/convert to equity as of 1/1/20x5

b. Beginning Retained Earnings-S Company 1,300,000

Capital Stock-S Company 500,000

Goodwill 880,000 Investment in S Company (P2,800,000 + P240,000) 3,040,000 Non-controlling Interest P700,000 + [(P1,300,000 – P1,000,000) x 0.20] – (P1,100,000 – P880,000) 540,000 NCI: FV of SHE of S: Common stock, 1/1/20x5 P 500,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 300,000 Dividends – Subsidiary 20x4 ( 0) 1,300,000 Book value of SHE – S, 1/1/20x5 P1,800,000 Adjustments to reflect fair value 900,000

FV of SHE of S1/1/x5 P2,700,000

(13)

c. Beginning Retained Earnings-P Co. (P90,000 x 80%) 72,000 Non-controlling Interest (P90,000 depreciation x 20%) 18,000

Depreciation Expense 90,000

NCI (partial), 12/31/20x5: [(a) P540,000 – (b) P18,000 = P522,000] FV of SHE of S: Common stock, 1/1/20x5 P 500,000 Retained earnings, 1/1/20x5 Retained earnings, 1/1/20x4 P1,000,000 NI – Subsidiary (20x4) 300,000 Dividends – Subsidiary 20x4 ( 0) 1,300,000 Book value of SHE – S, 1/1/20x5 P1,800,000 Adjustments to reflect fair value 900,000 Amortization of allocated excess (P90,000 x 1) ( 90,000)

2. Consolidated Net Income (CNI) = Controlling Interest in CNI + NCI in CNI 20x4

P Company P400,000

S Company 300,000

Total P700,000

Goodwill impairment ____0 132,000

attributable to equity holders of P………….. P568,000

Add: Non-controlling Interest in Net Income (NCINI) 42,000

Net income of subsidiary……….. P 300,000

Amortization of allocated excess …... ( 90,000)

P210,000

20x5

P Company P425,000

S Company 400,000

Total P825,000

Goodwill impairment ____0 152,000

Net income of subsidiary……….. P 400,000

Amortization of allocated excess …... ( 90,000)

P310,000

(14)

Problem VII

1. Common stock of TT Company

on December 31, 20x4 P 90,000

Retained earnings of TT Company

January 1, 20x4 P 130,000

Sales for 20x4 195,000

Less: Expenses (160,000)

Dividends paid (15,000)

Retained earnings of TT Company

on December 31, 20x4 150,000

Net book value on December 31, 20x4 P240,000

Proportion of stock acquired by QQ x .80

Purchase price P192,000

2. Net book value on December 31, 20x4 P240,000

Proportion of stock held by

noncontrolling interest x .20

Balance assigned to noncontrolling interest P 48,000

3. Consolidated net income is P143,000. None of the 20x4 net income of TT Company was earned after the date of purchase and, therefore, none can be included in consolidated net income.

4. Consolidate net income would be P178,000 [P143,000 + (P195,000 - P160,000)]. Problem VIII

Requirements 1 to 4:

Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (100%)

Consideration transferred:

Cash P 360,000

Notes payable 105,000 P 465,000

Less: Book value of stockholders’ equity of S:

Common stock (P200,000 x 100%)………. P 240,000

Retained earnings (P100,000 x 100%)………... 120,000 360,000 Allocated excess (excess of cost over book value)….. P 105,000 Less: Over/under valuation of assets and liabilities:

Increase in inventory (P5,000 x 100%)……… P 6,000 Increase in land (P6,000 x 100%)………. 7,200 Increase in equipment (P80,000 x 100%) 96,000 Decrease in buildings (P20,000 x 100%)………... ( 24,000)

Decrease in bonds payable (P4,000 x 100%)…… 4,800 90,000 Positive excess: Goodwill (excess of cost over

fair value)………... P 15,000

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

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

(15)

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

Book value Fair valueS Co. (Decrease)Increase

Equipment ... 180,000 180,000 0

Less: Accumulated depreciation….. 96,000 - ( 96,000)

Net book value………... 84,000 180,000 96,000

S Co.

Book value Fair valueS Co. (Decrease) Buildings... 360,000 144,000 ( 216,000) Less: Accumulated depreciation….. 192,000 - ( 192,000) Net book value………... 168,000 144,000 ( 24,000) A summary or depreciation and amortization adjustments is as follows:

Account Adjustments to be amortized Over/under Life AmountAnnual Year(20x4)Current 20x5

Inventory P 6,000 1 P 6,000 P 6,000 P

Equipment (net)... 96,000 8 12,000 12,000 12,000 Buildings (net) (24,000) 4 ( 6,000) ( 6,000) (6,000)

Bonds payable… 4,800 4 1,200 1,200 1,200

P 13,200 P 13,200 P 7,200 20x4 : First Year after Acquisition

Parent Company Cost Model Entry January 1, 20x4: (1) Investment in S Company……… 465,000 Cash……….. 360,000 Notes payable……… 105,000 Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……… 36,000 Dividend income (P36,000 x 100%)………. 36,000

Record dividends from S Company.

On the books of S Company, the P36,000 dividend paid was recorded as follows:

Dividends paid………… 36,000

Cash……. 36,000

Dividends paid by S Co..

Consolidation Workpaper – First Year after Acquisition

(E1) Common stock – S Co……… 240,000 Retained earnings – S Co……… 120,000

Investment in S Co……… 360,000

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………. 15,000

Buildings……….. 216,000

Investment in S Co………. 105,000

To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill

(16)

(E3) Cost of Goods Sold………. 6,000

Depreciation expense……….. 6,000

Accumulated depreciation – buildings……….. 6,000

Interest expense……… 1,200

Goodwill impairment loss 3,600

Inventory……….. 6,000

Accumulated depreciation – equipment……….. 12,000

Discount on bonds payable……… 1,200

Goodwill……….. 3,600

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

Expense Amortization-Interest Inventory sold P 6,000

Equipment P12,000

Buildings ( 6,000)

Bonds payable _______ _______ P 1,200

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

(E4) Dividend income - P………. 36,000

Dividends paid – S……… 36,000

To eliminate intercompany dividends and non-controlling interest share of dividends.

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model

100%-Owned Subsidiary

December 31, 20x4 (First Year after Acquisition)

Income Statement P Co S Co. Dr. Cr. Consolidated

Sales P480,000 P240,000 P 720,000

Dividend income 36,000 - (4) 36,000 _________

Total Revenue P516,000 P240,000 P 720,000

Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000

Depreciation expense 60,000 24,000 (3) 6,000 90,000

Interest expense - - (3) 1,200 1,200

Goodwill impairment loss (3) 3,600 3,600

Other expenses 48,000 18,000 66,000

Total Cost and Expenses P312,000 P180,000 P508,800

Net Income to Retained Earnings P204,000 P 60,000 P211,200 Statement of Retained Earnings

Retained earnings, 1/1

P Company P360,000 P 360,000

S Company P120,000 (1) 120,000

Net income, from above 204,000 60,000 211,200

Total P564,000 P180,000 P571,200

Dividends paid

P Company 72,000 72,000

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

Retained earnings, 12/31 to Balance

Sheet P492,000 P144,000 P 499,200

Balance Sheet

Cash………. P 147,000 P 90,000 P 237,000

(17)

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

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

Equipment 240,000 180,000 420,000

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

Discount on bonds payable (2) 4,800 (3) 1,200 3,600

Goodwill……… (2) 15,000 (3) 3,600 11,400 Investment in S Co……… 465,000 (1) 360,000 (2) 105,000 -Total P1,992,000 P1,008,000 P2,341,200 Accumulated depreciation - equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P 147,000 Accumulated depreciation - buildings 405,000 288,000 (2) 192,000(3) 6,000 495,000 Accounts payable……… 120,000 120,000 240,000 Bonds payable……… 240,000 120,000 360,000

Common stock, P10 par……… 600,000 600,000

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

Retained earnings, from above ___590,400 144,000 499,200

Total P1,992,000 P1,008,000 P 736,200 P 736,200 P2,341,200 20x5: Second Year after Acquisition

Parent Company Cost Model Entry

Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5:

Cash……… 48,000

Dividend income (P48,000 x 100%)………. 48,000

Record dividends from S Company.

Cash 48,000

Dividends paid by S Co..

Consolidation Workpaper – Second Year after Acquisition

(E1) Investment in S Company……… 24,000

Retained earnings – P Company……… 24,000

To provide entry to convert from the cost method to the equity method or the entry to establish reciprocity at the beginning of the year, 1/1/20x5.

Retained earnings – S Company, 1/1/20x5 P144,000 Retained earnings – S Company, 1/1/20x4 120,000 Increase in retained earnings…….. P 24,000 Multiplied by: Controlling interest % 100% Retroactive adjustment P 24,000

(E2) Common stock – S Co……… 240,000

Retained earnings – S Co., 1/1/20x5 144,000

Investment in S Co ……… 384,000

To eliminate intercompany investment and equity accounts

of subsidiary and to establish non-controlling interest (in net assets of subsidiary) on January 1, 20x5.

(18)

(E3) Inventory………. 6,000 Accumulated depreciation – equipment……….. 96,000 Accumulated depreciation – buildings……….. 192,000

Land………. 7,200

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

(E4) Retained earnings – P Company, 1/1/20x5

(P16,800 x 100%) 16,800

Goodwill……… 3,600

To provide for years 20x4 and 20x5 depreciation and amortization on differences between acquisition date fair value and book value of S’s identifiable assets and liabilities as follows:

Year 20x4 amounts are debited to P’s retained earnings

Year 20x5 amounts are debited to respective nominal accounts.. (20x4)

Retained earnings,

expense Amortization-Interest Inventory sold P 6,000 Equipment 12,000 P 12,000 Buildings (6,000) ( 6,000) Bonds payable 1,200 P 1,200 Impairment loss 3,600 Totals P 16,800 P 6,000 P1,200

(E6) Non-controlling interest in Net Income of Subsidiary………… 16,560

Non-controlling interest ………….. 16,560

To establish non-controlling interest in subsidiary’s adjusted net income for 20x5 as follows:

Net income of subsidiary……….. P 90,000 Amortization of allocated excess [(E4)]…... ( 7,200) P 82,000 Multiplied by: Non-controlling interest %... 20% Non-controlling Interest in Net Income (NCINI) P 16,560

(19)

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model

Income Statement P Co. S Co. Dr. Cr. Consolidated

Sales P540,000 P360,000 P 900,000

Dividend income 48,000 - (5) 48,000 ___________

Cost of goods sold P216,000 P192,000 P 408,000

Other expenses 72,000 54,000 126,000

Goodwill impairment loss - -

-Total Cost and Expenses P348,000 P270,000 P 625,200

Net Income to Retained Earnings P240,000 P 90,000 P 274,800 Statement of Retained Earnings

Retained earnings, 1/1

P Company P492,000 (4) 16,800 (1) 24,000 P 499,200

S Company P144,000 (2)144,000

Total P732,000 P234,000 P 774,000

Dividends paid

P Company 72,000 72,000

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

Sheet P660,000 P186,000 P 702,000 Balance Sheet Cash………. P 189,000 P 102,000 P 291,000 Accounts receivable…….. 180,000 960,000 276,000 Inventory………. 216,000 108,000 (3) 6,000 (4) 6,000 324,000 Land………. 252,000 48,000 (3) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (3) 216,000 1,044,000

Goodwill……… (3) 15,000 (4) 3,600 11,400 Investment in S Co……… 465,000 (1) 24,000 (2) 384,000 (3) 105,000 -Total P2,220,000 P1,074,000 P2,634,000 Accumulated depreciation - equipment P 150,000 P 102,000 (3) 96,000 (4) 24,000 P 180,000 Accumulated depreciation - buildings 450,000 306,000 (3) 192,000(4) 12,000 552,000 Accounts payable……… 120,000 120,000 240,000 Bonds payable……… 240,000 120,000 360,000

Retained earnings, from above 660,000 186,000 702,000

Total P2,220,000 P1,074,000 P 783,120 P 783,120 P2,634,000 5. 1/1/20x4

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

Consolidated Retained Earnings, January 1, 20x4

Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000 b. NCI – not applicable, since it is 100% owned subsidiary

(20)

Stockholders’ Equity

Common stock, P10 par P 600,000

Total Stockholders’ Equity (Total Equity) P 960,000 6. 12/31/20x4:

a. P211,200 – same with CNI since there is no NCI. Consolidated Net Income for 20x4

Net income from own/separate operations:

Pa Company P168,000

S Company 60,000

Total P228,000

Less: Amortization of allocated excess P 13,200

Goodwill impairment loss 3,600 16,800

b. NCINI – not applicable, since it is 100% owned subsidiary c. P211,200 – same with NCI-CNI since there is no NCI. d.

Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to

equity holders of P for 20x4 or Consolidated Net Income (CNI)* 211,200

Total P571,200

Less: Dividends paid – P Company for 20x4 72,000

Consolidated Retained Earnings, December 31, 20x4 P499,200 *since it is a 100%-owned subsidiary, Controlling Interest in Net Income is the same with Consolidated Net Income.

e. NCI – not applicable, since it is 100% owned subsidiary f.

Total Stockholders’ Equity (Total Equity) P 1,099,200 12/31/20x5

a. P274,800 – same with CNI since there is no NCI. Consolidated Net Income for 20x5

P Company P192,000

S Company 90,000

Total P282,000

Less: Amortization of allocated excess P 7,200

Goodwill impairment loss 0 7,200

Controlling Interest in Consolidated Net Income or Profit attributable to

equity holders of parent or CNI P274,800

b. NCINI – not applicable, since it is 100% owned subsidiary c. P274,800 – same with NCI-CNI since there is no NCI. d.

Retained earnings - P Company, January 1, 20x5 (cost model P492,000 Adjustment to convert from cost model to equity method for purposes of

consolidation or to establish reciprocity:/P’s share in adjusted net increased in subsidiary’s retained earnings:

Retained earnings – S, January 1, 20x5 P 144,000 Less: Retained earnings – S, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 24,000

(21)

Less: Amortization of allocated excess – 20x4 16,800 P 7,200

Multiplied by: Controlling interests %... 100% 7,200 Consolidated Retained earnings, January 1, 20x5 P 499,200 Add: Controlling Interest in Consolidated Net Income or Profit attributable to

equity holders of P for 20x5 or CNI 274,800

Total P774,000

Consolidated Retained Earnings, December 31, 20x5 P702,000 e. NCI – not applicable, since it is 100% owned subsidiary

f.

Total Stockholders’ Equity (Total Equity) P1,302,000 Problem IX

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

Fair value of Subsidiary (80%)

Consideration transferred……….. P 372,000

Less: Book value of stockholders’ equity of S:

Common stock (P240,000 x 80%)………. P 192,000

Decrease in bonds payable (P4,800 x 80%)…… 3,840 72,000 Positive 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 value Fair valueS Co. (Over) UnderValuation Inventory……….……….. P 24,000 P 30,000 P 6,000 Land……… 48,000 55,200 7,200 Equipment (net)... 84,000 180,000 96,000 Buildings (net) 168,000 144,000 (24,000) Bonds payable……… (120,000) ( 115,200) 4,800 Net……….. P 204,000 P 294,000 P 90,000

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

Book value Fair valueS Co. (Decrease)Increase

Equipment ... 180,000 180,000 0

Less: Accumulated depreciation….. 96,000 - ( 96,000)

Net book value………... 84,000 180,000 96,000

S Co.

Book value Fair valueS Co. (Decrease) Buildings... 360,000 144,000 ( 216,000) Less: Accumulated depreciation….. 192,000 - ( 192,000) Net book value………... 168,000 144,000 ( 24,000)

(22)

A summary or depreciation and amortization adjustments is as follows:

Account Adjustments to be amortized Over/Under Life AmountAnnual Year(20x4)Current 20x5

Inventory P 6,000 1 P 6,000 P 6,000 P

Bonds payable… 4,800 4 1,200 1,200 1,200

P 13,200 P 13,200 P 7,200

The goodwill impairment loss of P3,125 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows:

Consideration transferred: Cash (80%) P 372,000

Fair value of NCI (given) (20%) 93,000

Fair value of Subsidiary (100%) P 465,000

Less: Book value of stockholders’ equity of Son (P360,000 x 100%) __360,000 Allocated excess (excess of cost over book value)….. P 105,000 Add (deduct): (Over) under valuation of assets and liabilities

(P90,000 x 100%) 90,000

Positive excess: Full-goodwill (excess of cost over

fair value)………... P 15,000

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

Value % of Total

Goodwill applicable to parent……… P12,000 80.00%

Goodwill applicable to NCI……….. 3,000 20.00%

Total (full) goodwill……….. P15,000 100.00%

The goodwill impairment loss would be allocated as follows

Value % of Total Goodwill impairment loss attributable to parent 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%

When cost model is used, only two journal entries are recorded by P Company during 20x4 related to its investment in S Company.

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.

Cash……. 36,000

(23)

Consolidation Workpaper – Year of Acquisition

(E1) Common stock – S Co……… 240,000 Retained earnings – S Co……… 120.000

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.

Land………. 7,200

Non-controlling interest (P90,000 x 20%)……….. 18,000

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

Goodwill impairment loss………. 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

expense Amortization-Interest Total Inventory sold P 6,000

Equipment P 12,000

Buildings ( 6,000)

Bonds payable _______ _______ P 1,200

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

It should be observed that the goodwill computed above was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows:

Value % of Total

Goodwill applicable to parent……… P12,000 80.00%

Goodwill applicable to NCI……….. 3,000 20.00%

Total (full) goodwill……….. P15,000 100.00%

Therefore, the goodwill impairment loss of P3,125 based on 100% fair value or full-goodwill would be allocated as follows:

(24)

Value % of Total Goodwill impairment loss attributable to P or controlling

Interest P 3,000 80.00%

Goodwill impairment loss applicable to NCI……….. 750 20.00% Goodwill impairment loss based on 100% fair value or

full-Goodwill P 3,750 100.00%

Non-controlling interest (P36,000 x 20%)……….. 7,200

Net income of subsidiary……….. P 60,000 Amortization of allocated excess [(E3)]…... ( 13,200) P 46,800 Multiplied by: Non-controlling interest %... 20% Non-controlling Interest in Net Income (NCINI) P 9,360

Worksheet for Consolidated Financial Statements, December 31, 20x4. Cost Model (Partial-goodwill)

December 31, 20x4 (First Year after Acquisition)

Sales P480,000 P240,000 P 720,000

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

Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000

Other expenses 48,000 18,000 66,000

Goodwill impairment loss - - (3) 3,000 3,000

Total Cost and Expenses P310,000 P180,000 P508,200

Net Income P196,800 P 60,000 P211,800

NCI in Net Income - Subsidiary - - (5) 9,360 ( 9,360) Net Income to Retained Earnings P196,800 P 60,000 P202,440

Statement of Retained Earnings Retained earnings, 1/1

P Company P360,000 P 360,000

S Company P120,000 (1) 120,000

Total P552,000 P180,000 P562,440

Dividends paid

P Company 72,000 72,000

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

Sheet P484,800 P144,000 P 490,440 Balance Sheet Cash………. P 232,800 P 90,000 P 322,800 Accounts receivable…….. 90,000 60,000 150,000 Inventory………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000 Land………. 210,000 48,000 (2) 7,200 265,200 Equipment 240,000 180,000 420,000

(25)

Buildings 720,000 540,000 (2) 216,000 1,044,000 Discount on bonds payable (2) 4,800 (3) 1,200 3,600

Goodwill……… (2) 12,000 (3) 3,000 9,000 Investment in S Co……… 372,000 (4) 288,000 (5) 84,000 -Total P1,984,800 P1,008,000 P2,424,600 Accumulated depreciation - equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000 Accumulated depreciation - buildings 405,000 288,000 (2) 192,000(3) 6,000 495,000 Accounts payable……… 120,000 120,000 240,000 Bonds payable……… 240,000 120,000 360,000

Non-controlling interest………… _________ _________ (4) 7,200 __________ (1 ) 72,000 (2) 18,000 (5) 9,360 ____92,160 Total P1,984,800 P1,008,000 P 745,560 P 745,560 P2,424,600 20x5: Second Year after Acquisition

P Co. S Co.

Sales P 540,000 P 360,000

Less: Cost of goods sold 216,000 192,000

Gross profit P 324,000 P 168,000

Less: Depreciation expense 60,000 24,000

Other expense 72,000 54,000

Net income from its own separate operations P 192,000 P 90,000

Add: Dividend income 38,400

-Net income P 230,400 P 90,000

Dividends paid P 72,000 P 48,000

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

Only a single entry is recorded by the P in 20x5 in relation to its subsidiary investment: January 1, 20x5 – December 31, 20x5:

Cash……… 38,400

Dividend income (P48,000 x 80%)………. 38,400

Cash 48,000

Consolidation Workpaper – Second Year after Acquisition

The working paper eliminations (in journal entry format) on December 31, 20x5, are as follows:

(E1) Investment in S Company……… 19,200

Retained earnings – P Company……… 19,200

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:

(26)

Retained earnings – S Company, 1/1/20x5 P144,000 Retained earnings – S Company, 1/1/20x4 120,000 Increase in retained earnings…….. P 24,000 Multiplied by: Controlling interest % 80% Retroactive adjustment P 19,200

Retained earnings – S Co., 1/1/20x5 144,000

Investment in S Co (P384,000 x 80%)……… 307,200 Non-controlling interest (P384,000 x 20%)……….. 76,800 To eliminate intercompany investment and equity accounts

of subsidiary and to establish non-controlling interest (in net assets of subsidiary) on January 1, 20x5.

Land………. 7,200

Non-controlling interest (P90,000 x 20%) 18,000

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

To provide for years 20x4 and 20x5 depreciation and amortization on differences between acquisition date fair value and book value of S’s identifiable assets and liabilities as follows:

Year 20x4 amounts are debited to P’s retained earnings & NCI;

Year 20x5 amounts are debited to respective nominal accounts. (20x4)

Retained earnings,

expense Amortization-Interest Inventory sold P 6,000 Equipment 12,000 P 12,000 Buildings (6,000) ( 6,000) Bonds payable 1,200 ________ P 1,200 Sub-total P13,200 P 6,000 P 1,200 Multiplied by: 80% To Retained earnings P 10,560 Impairment loss 3,000 Total P 13,560

(27)

(E5) Dividend income - P………. 38,400 Non-controlling interest (P48,000 x 20%)……….. 9,600

Net income of subsidiary……….. P 90,000 Amortization of allocated excess [(E4)]…... ( 7,200) P 82,800 Multiplied by: Non-controlling interest %... 20% Non-controlling Interest in Net Income (NCINI P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5. Cost Model (Partial-goodwill)

December 31, 20x5 (Second Year after Acquisition)

Sales P540,000 P360,000 P 900,000

Dividend income 38,400 - (5) 38,400 ___________

Cost of goods sold P216,000 P192,000 P 408,000

Other expenses 72,000 54,000 126,000

Goodwill impairment loss - -

-Total Cost and Expenses P348,000 P270,000 P 625,200

Net Income P230,400 P 90,000 P 274,800

NCI in Net Income - Subsidiary - - (6) 16,560 ( 16,560) Net Income to Retained Earnings P230,400 P 90,000 P 258,240

Statement of Retained Earnings Retained earnings, 1/1

P Company P484,800 (4) 13,560 (1) 19,200 P 490,440

S Company P 144,000 (2) 144,000

Total P715,200 P234,000 P 748,680

Dividends paid

P Company 72,000 72,000

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

Sheet P643,200 P186,000 P 676,680 Balance Sheet Cash………. P 265,200 P 114,000 P 367,200 Accounts receivable…….. 180,000 96,000 276,000 Inventory………. 216,000 108,000 (3) 6,000 (4) 6,000 324,000 Land………. 210,000 48,000 (3) 7,200 265,200 Equipment 240,000 180,000 420,000 Buildings 720,000 540,000 (3) 216,000 1,044,000

Goodwill……… (3) 12,000 (4) 3,000 9,000

Investment in S Co……… 372,000 (1) 19,200 (2) 307,200

(3) 84,000

(28)

Accumulated depreciation - equipment P 150,000 P 102,000 (3) 96,000 (4) 24,000 P180,000 Accumulated depreciation - buildings 450,000 306,000 (3) 192,000(4) 12,000 552,000 Accounts payable……… 120,000 120,000 240,000 Bonds payable……… 240,000 120,000 360,000

Non-controlling interest………… ___ _____ _________ (5) 9,600 (4) 2,640 __________ (2 ) 76,800 (3) 18,000 (6) 16,560 ____99,120 Total P2,203,200 P1,074,000 P 821,160 P 821,160 P2,707,800 5. 1/1/20x4

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

Consolidated Retained Earnings, January 1, 20x4

Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000 b.

Non-controlling interest (partial-goodwill), January 1, 20x4

Common stock – S Company, January 1, 20x4…… P 240,000 Retained earnings – S Company, January 1, 20x4 120,000 Stockholders’ equity – S Company, January 1, 20x4 P 360,000 Adjustments to reflect fair value - (over) undervaluation of assets and

liabilities, date of acquisition (January 1, 20x4) 90,000 Fair value of stockholders’ equity of subsidiary, January 1, 20x4…… P450,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)……….. P 90,000 c.

Consolidated SHE: Stockholders’ Equity

P’s Stockholders’ Equity / CI - SHE P 960,000

NCI, 1/1/20x4 ___90,000

Consolidated SHE, 1/1/20x4 P1,050,000

6.

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

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

P Company P168,000

S Company 60,000

Total P228,000

Less: Non-controlling Interest in Net Income* P 9,360 Amortization of allocated excess (refer to amortization above) 13,200

Goodwill impairment (impairment under partial-goodwill approach) 3,000 25,560 Controlling Interest in Consolidated Net Income or Profit attributable to

equity holders of parent………….. P202,440

(29)

b. NCI-CNI

*Non-controlling Interest in Net Income (NCINI) for 20x4

Net income of S Company P 60,000

Less: Amortization of allocated excess / goodwill impairment

(refer to amortization table above) 13,200

P 46,800 Multiplied by: Non-controlling interest %... 20% Non-controlling Interest in Net Income (NCINI) P 9,360 c. CNI, P211,800 – refer to (a)

d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:

Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000 Add: Controlling Interest in Consolidated Net Income or Profit attributable to

equity holders of parent for 20x4 202,440

Total P562,440

Consolidated Retained Earnings, December 31, 20x4 P490,440 e.

Non-controlling interest (partial-goodwill), December 31, 20x4

Common stock – S Company, December 31, 20x4…… P 240,000

Retained earnings – S Company, December 31, 20x4

Retained earnings – S Company, January 1, 20x4 P120,000

Add: Net income of S for 20x4 60,000

Total P180,000

Less: Dividends paid – 20x4 36,000 144,000

Stockholders’ equity – S Company, December 31, 20x4 P 384,000 Adjustments to reflect fair value - (over) undervaluation of assets and

liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200) Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P460,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial-goodwill)……….. P 92,160 f.

P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,090,440

NCI, 12/31/20x4 ___92,160

Consolidated SHE, 12/31/20x4 P1,182,600

12/31/20x5: a. CI-CNI

Net income from own/separate operations:

P Company P192,000

S Company 90,000

Total P282,000

Less: Non-controlling Interest in Net Income* P16,560

Amortization of allocated excess (refer to amortization above) __7,200 23,760 Controlling Interest in Consolidated Net Income or Profit attributable to

equity holders of parent………….. P258,240

(30)

b. NCI-CNI

*Non-controlling Interest in Net Income (NCINI) for 20x5

Net income of S Company P 90,000

Less: Amortization of allocated excess / goodwill impairment for 20x5

(refer to amortization table above) 80,400

P 82,800 Multiplied by: Non-controlling interest %... 20% Non-controlling Interest in Net Income (NCINI) for 20x5 P 16,560 c. CNI, P274,800 – refer to (a)

d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:

Retained earnings - P Company, January 1, 20x5 (cost model P484,800 Adjustment to convert from cost model to equity method for purposes of

Retained earnings – S, January 1, 20x5 P 144,000 Less: Retained earnings – S, January 1, 20x4 120,000 Increase in retained earnings since date of acquisition P 24,000 Less: Amortization of allocated excess – 20x4 13,200 P 10,800 Multiplied by: Controlling interests %... 80% P 8,640 Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or

(P3, 750 x 80%) 3,000 5,640

Consolidated Retained earnings, January 1, 20x5 P 490,440 Add: Controlling Interest in Consolidated Net Income or Profit attributable to

equity holders of P for 20x5 258,240

Total P748,680

Consolidated Retained Earnings, December 31, 20x5 P676,680 *this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by 80%. There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired.

e.

Non-controlling interest (partial-goodwill), December 31, 20x5

Common stock – S Company, December 31, 20x5…… P 240,000

Retained earnings – S Company, December 31, 20x5

Retained earnings – S Company, January 1, 20x5 P14,000

Add: Net income of S for 20x5 90,000

Total P234,000

Less: Dividends paid – 20x5 48,000 186,000

Stockholders’ equity – S Company, December 31, 20x5 P 426,000 Adjustments to reflect fair value - (over) undervaluation of assets and

liabilities, date of acquisition (January 1, 20x4) 90,000 Amortization of allocated excess (refer to amortization above) :

20x4 P 13,200

20x5 7,200 ( 20,400)

Fair value of stockholders’ equity of S, December 31, 20x5…… P 495,600 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial goodwill)……….. P 99,120 f.

Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x5 P1,276,680

NCI, 12/31/20x5 ___99,120

(31)

Problem X

Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Consideration transferred (80%)……….. P 372,000

Fair value of NCI (given) (20%)……….. 93,000

Fair value of Subsidiary (100%)………. P 465,000

Less: Book value of stockholders’ equity of Son:

Common stock (P240,000 x 100%)………. P 240,000

Decrease in bonds payable (P4,800 x 100%)…… 4,800 90,000 Positive excess: Full-goodwill (excess of cost over

fair value)………... P 15,000

A summary or depreciation and amortization adjustments is as follows:

Account Adjustments to be amortized Over/under Life AmountAnnual Year(20x4)Current 20x5

Inventory P 6,000 1 P 6,000 P 6,000 P

Bonds payable… 4,800 4 1,200 1,200 1,200

P 13,200 P 13,200 P 7,200 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 (P36,000x 80%)………. 28,800

Cash……. 36,000

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

Consolidation Workpaper – First Year after Acquisition

Retained earnings – S Co……… 120.000

Non-controlling interest (P360,000 x 20%)……….. 72,000 To eliminate intercompany investment and equity accounts