Chapter 16 Advanced Accounting Solution Manual

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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 - Cost Model/Method versus Equity Method Partial-Goodwill Approach:

Fair value of Subsidiary

Consideration transferred: P600,000... 600,000 Less: Carrying amount of Small’s net assets =

Carrying amount of Small’s shareholders’ equity

Common/Ordinary shares – Small (400,000 x 75%)... 300,000

Retained earnings – Small (100,000 x 75%)... 75,000 375,000

Allocated Excess: Acquisition differential – Jan. 1, 20x4 225,000 Less: Over/under valuation of A/L (Allocated to):

Increase in Inventory (40,000 x 75%)... 30,000

Decrease in Patents (70,000 x 75%)... (52,500) ( 22,500)

Positive Excess: Goodwill - partial 247,500

Full-Goodwill Approach:

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)

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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 (full) 330,000 - _____ _____ ______ 19,300__ P 26,000 P 26,000 P(14,000) 5,300P For purposes of comparison between Cost Model/Method and Equity Method

Cost Method

Journal Entries Year 1 Year 2 Year 3

Investment Investment in Small 600,000 Cash 600,000 Dividend of Subsidiary Cash 18,750 7,500 30,000 Dividend income 18,750 7,500 30,000

Investment in Son Dividend Income

1/1/x4 CI…… 600,000 18,750 - Div–S (75 x80%) 12/31/x4 600,000 18,750 7,500 - Div–S (10 x80%) 12/31/x5 600,000 18,750 30,000 - Div–S (40 x80%) 12/31/x6 600,000 30,000

(3)

Equity Method

1. Year 1 Year 2 Year 3

Investment

Investment in Small 600,000

Cash 600,000

Net Income (Loss) of Subsidiary:

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

Investment income 60,000 67,500

Investment income 26,,250 Investment in Small (75% x Small’s profit) 26,250 Dividend of Subsidiary

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

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

Amortization of Allocated Excess

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

Investment in Small 19,500 3,975

Investment in Small 10,500

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Reconciliation of Investment /Conversion of Investment Account from Cost to Equity Method:

Investment in Small under cost method... 600,000 Investment in Son Investment Income (loss)

1/1/x4: CI

600,000

NI of S 18,750 75% Div - Son NI of Son

(80,000

x 75%)……. 60,000

75% Amort &

19,500 impairment Amortization impairment 19,500 (80,000 60,000 x 75%) 12/31/x4 621,750 40,500 75% NL – Sub 75% NL – Sub 26,250 (35,000 x 75%) (35,000 x 75%)26,250 7,500 75% Div - Son 75% Amort & Impairment 10,500 75% Amort & 10,500 impairment 12/31/x5 598,500 15,750

NI of S 30,000 75% Div - Son NI of Son

(90,000

x 75%)……. 67,500

75% Amort &

3,975 impairment Amortization impairment 3,975 (90,000 67,500 x 75%) 12/31/x6 632,025 63,525

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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

x: Controlling Interest (75%)... 75% 32,025

Investment in Small under equity method... 632,025 2.

a. Goodwill, 12/31/20x6 (P330,000 – P19,300) P 310,700 b. FV of NCI, 12/31/20x6:

Non-controlling interest (full-goodwill), December 31, 20x6

Common stock – Subsidiary Company, December 31, 20x6 . . . .

P 400,000

Retained earnings – Subsidiary Company, December 31, 20x6 Retained earnings – Subsidiary Company, January 1, 20x6

(P100,000 + P80,000 – P25,000 – P35,000 –

P10,000)... P110,000

Add: Net income of Small for 20x6……….. 90,000 Total . . .

. . . P200,000

Less: Dividends paid – 20x6………. 40,000 160,000 Stockholders’ equity – Subsidiary Company, December 31,

20x5 . . . P 560,000

Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4)- decreased in Net Assets . . . .

( 30,000) Less: Amortization of allocated excess (refer to amortization above):

20x4 (P40,000 – P14,000). . . .

. . . 26,000P

20x5 and

20x6. . . ( 28,000) ( 2,000) Fair value of stockholders’ equity of subsidiary, December 31,

20x6 . . . P 532,000

Multiplied by: Non-controlling Interest

percentage . . . 20 FV of Non-controlling interest (partial goodwill), 12/31/20x6 . . . .

. . . . P 133,000

Add: Non-controlling interest on full goodwill , net of impairment loss [(P330,000 full – P247,000, partial =

P82,500………. P 82,500

Less: Impairment on the NCI (P19,300 x 25%)

……… ___4,825 ___*77,675

FV of Non-controlling interest (full-goodwill), 12/31/20x6. . . .

. . . P 210,675

*or P330,000 full – P247,000, partial = P82,500 – (impairment loss on full goodwill less (P19,300 x 25%)] = P77,625

Alternatively, NCI on December 31, 20x6 may also be computed as follows (Note: This

is the American version of computing NCI, since they only allowed using Full-goodwill Method):

Common stock, 12/31/20x6……….. P 400,000 Retained earnings, 12/31/20x6

(P100,000+P80,000 – P25,000 – P35,000 – P10,000)………….. P 110,000 Add: NI – Subsidiary (20x6) ……….. 90,000

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Dividends – Subsidiary 20x6……….. ( 40,000) 160,000 Book value of SHE – S, 12/31/20x6……… P560,000 Adjustments to reflect fair value (Increase in Net Assets)………..P 300,000 Amortization of allocated excess:

Inventory – 20x4...……….( 40,000) Patent (P14,000 x 3 years)……….. 42,000

Impairment of goodwill – 20x6……….. ( 19,300) 282,700 FV of SHE of Small……… P 842,700 Multiplied by: NCI%... 25%

FV of NCI, 12/31/20x6……….. P 210,675

Or, alternatively:

Common stock – Subsidiary Company, December 31, 20x6 . . . .

P 400,000

Retained earnings – Subsidiary Company, December 31, 20x6 Retained earnings – Subsidiary Company, January 1, 20x6

(P100,000 + P80,000 – P25,000 – P35,000 –

P10,000)... P110,000

Add: Net income of Small for 20x6……….. 90,000 Total . . .

. . . P200,000

Less: Dividends paid – 20x6………. 40,000 160,000 Stockholders’ equity – Subsidiary Company, December 31,

20x6 . . . P 560,000

Unamortized acquisition differential / allocated excess / increase in net assets:

{P300,000, allocated excess – {P40,000 - (P14,000 x 3) + P19,300, full

impairment __282,500

P 842,500

Multiplied by: Non-controlling Interest

percentage . . . ______25% FV of Non-controlling interest (full-goodwill), 12/31/20x6. . . .

. . . P 210,675

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

Consolidated Retained Earnings, January 1, 20x6

Retained earnings - Large Company, January 1, 20x6 (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, 20x6

(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 Amortization of allocated excess – 20x5 (14,000) P ( 2,000) Multiplied by: Controlling interests %... _____75% P ( 1,500)

Less: Goodwill impairment loss (full-goodwill) – 20x6 ________0 (___1,500) Consolidated Retained earnings, January 1, 20x6 P 498,500 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 233,525

Total P717,550

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Consolidated Retained Earnings, December 31, 20x6 P662,025 Or, alternatively: to compute CRE, 12/31/20x6

Consolidated Retained Earnings, December 31, 20x6

Retained earnings - Large Company, December 31, 20x6 (cost model) P630,000 Adjustment to convert from cost model to equity method for purposes of

increased in subsidiary’s retained earnings:

Retained earnings – Small, December 31, 20x6

(P100,000 + P80,00 – P25,000 – P35,000 – P10,000 + P90,000 –

P40,000) P 160,000

Less: Retained earnings – Small, January 1, 20x4 (date of

Increase in retained earnings since date of acquisition P 60,000 Less: Amortization of allocated excess – 20x4 26,000 Amortization of allocated excess – 20x5 and 20x6: P14,000 x 2 (28,000) P 62,000 Multiplied by: Controlling interests %... _____75% P 46,500 Less: Goodwill impairment loss on full-goodwill) – 20x6 (P19,300 x

75%) __14,475 __32,025

Consolidated Retained earnings, December 31, 20x6 P 662,025 d. P233.525

Parent Company: Large Company [P200,000 – (P40,000 x

75%)] P170,000

Small Company 90,000

Total P260,000

Less: Non-controlling Interest in Net Income* P 21,175 Amortization of allocated excess (14,000)

Goodwill impairment _19,300 __26,475

Controlling Interest in Consolidated Net Income or Profit

attributable to equity holders of parent………….. P233,525 Add: Non-controlling Interest in Net Income (NCINI) __21,175

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

Amortization of allocated excess – 20x6 ( 14,000)

P 104,000 Multiplied by: Non-controlling interest %... 25% P 26,000 Less: Non-controlling interest on impairment loss on full-goodwill ( (P19,300 x

25%)* ___4,825

Non-controlling Interest in Net Income (NCINI) P 21,175 *this procedure would be not be applicable where the NCI on goodwill impairment loss would

not be proportionate to NCI acquired.

e. P21,175 – refer to (d) for computations

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

Problem III

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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 underOver/ Life AmountAnnual Year(20x5)Current 20x6 20x7 Inventory P70,000 1 70,000P P 70,000 P - P -Subject to Annual Amortization

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

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

Balance Balance

Dec. 31 Amortization Dec. 31

20x4 20x5 20x6 20x6 Inventory 70,000 70,000 Patents 90,000 9,000 9,000 72,000 160,000 79,000 9,000 72,000 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(57,75 0) 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(21,00

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20x5 20x6

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

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

P(49,000) P43,000

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) P6,450 *this procedure would be not be applicable where the NCI on goodwill impairment loss would

not be proportionate to NCI acquired.

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

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

Less: 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

Pen’s shareholders (13,650) (21,200)

3. CRE, 12/31/20x6 – P73,150

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

increased in subsidiary’s retained earnings: 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

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:

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Retained earnings, 12/31/20x6:

Retained earnings, 1/1/20x4 P 100,000 NI – Subsidiary (20x5 and 20x6): P30,000 + P52,000 82,000

Dividends – Subsidiary (20x5 and 20x6): P0 + 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 Multiplied by: NCI% _________15%

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) P167,000 Less: Retained earnings, 12/31/20x4 (date of acquisition) 100,000 Increase since acquisition P 67,000 Less: Amortization of allocated excess (79,000 + 9,000) 88,000

P( 21,000)

Multiplied by: NCI’s share ____ 15% ( 3,150) Non-controlling interest (full) 12/31/20x6 P 110,850

5. Consolidated Patents, 12/31/20x6: P72,000

Unamortized balance of allocated excess:

Balance Balance

Dec. 31 Amortization Dec. 31

20x4 20x5 20x6 20x6

Inventory 70,000 70,000

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

160,000 79,000 9,000 72,000

Or, alternatively:

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

Cost of investment, cost model 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)

Multiplied by: CI share 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

Retained earnings – Silk, 12/31/20x6 167,000

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

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2. P150,000 – full goodwill (see No. 1 above) P120,000 – partial-goodwill:

Consideration transferred by MM ... P 664,000 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 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

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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 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

Multiplied by: NCI% 10%

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

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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

FV of NCI P 465,000

Full-goodwill or Fair Value Basis

Fair value of Subsidiary:

Consideration transferred P3,750,000 / 90% P4,166,66 7 Less: BV of SHE of S (P3,000,000 + P1,000,000) x 100% 4,000,000 Allocated excess P 166,667 Less: Over/under valuation of A and L: Inc. (Dec.)

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

increased in subsidiary’s retained earnings:

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 1,000,00 0 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

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Problem VI

Computation of Goodwill: Partial Goodwill

Consideration transferred P2,800,00 0 Less: BV of SHE of S (P1,000,000 + P500,000) x 80% _1,200,00 0 Allocated excess P1,600,00 0 Less: Over/under valuation of A and L: Inc. (Dec.)

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

__720,000

Goodwill – partial P

880,000

Full-goodwill:

Consideration transferred P2,800,000 / 80% P3,500,0 00 Less: BV of SHE of S (P1,500,000 x 100%) 1,500,00 0 Allocated excess P2,000,0 00 Less: Over/under valuation of A and L: Inc. (Dec.)

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

80% __900,000

Goodwill – full P1,100,00

0 Amortization of allocated excess:

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

1.

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

(15)

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 Property and Equipment (net) 900,000

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

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

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

(16)

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 Property and Equipment (net) 900,000

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

FV of NCI (partial) P 540,000

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

Property and Equipment (net) 180,000 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

FV of NCI (partial) P 522,000 2. Consolidated Net Income (CNI) = Controlling Interest in CNI + NCI in CNI 20x4

P Company P400,000

S Company 300,000

Total P700,000

Less: Non-controlling Interest in Net Income* P 42,000 Amortization of allocated excess 90,000

(17)

Goodwill impairment ____0 132,00 0 Controlling Interest in Consolidated Net Income or Profit

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 Multiplied by: Non-controlling interest %... 20 % Non-controlling Interest in Net Income (NCINI) P 42,000 20x5

P Company P425,000

S Company 400,000

Total P825,000

Less: Non-controlling Interest in Net Income* P 62,000 Amortization of allocated excess 90,000

Goodwill impairment ____0 152,00

0 Controlling Interest in Consolidated Net Income or Profit

attributable to equity holders of parent………….. P673,000 Add: Non-controlling Interest in Net Income (NCINI) 62,000

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

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

P310,000 Multiplied by: Non-controlling interest %... 20 % Non-controlling Interest in Net Income (NCINI) P 62,000 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

(18)

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 value S 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

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

Book value Fair value S Co. (Decrease)Increase

(19)

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 underOver/ Life AmountAnnual Year(20x4)Current 20x5

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

(20)

(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

(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.

(21)

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………. 147,000P P 90,000 P 237,000 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 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) 105,00

(22)

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 736,200 736,200P P2,341,200

20x5: Second Year after Acquisition

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.

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

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

(23)

(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.

(E3)

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; and to establish 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) Retaine d earnings , Depreciation/ Amortization expense Amortization -Interest

(24)

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 3,60 0 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

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 ___________

(25)

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 90,000P 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 _ ________ Retained earnings, 12/31 to Balance

Sheet P660,000 P186,000 P 702,000 Balance Sheet Cash………. 189,000P 102,000P 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) 105,00 0 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 783,120 783,120P P2,634,000

(26)

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

c.

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.

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.

(27)

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.

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

(28)

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

Less: Dividends paid – P Company for 20x5 72,000 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 – 80% Partial Goodwill - Cost Model

Requirements 1 to 4:

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

Retained earnings (P120,000 x 80%)

………... 96,000 288,000

Allocated excess (excess of cost over book value)

….. P 84,000

Less: 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 72,000

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 value S 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

(29)

Net……….. 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 value Fair value S 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 value S 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 UnderOver/ Life AmountAnnual Year(20x4)Current 20x5

Inventory 6,000P 1 6,000P 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

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:

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 465,000

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

(30)

20x4: First Year after Acquisition

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.

On the books of S Company, the P30,000 dividend paid was recorded as follows:

Cash……. 36,000

Dividends paid by S Co..

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)

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 controlling interest (in net assets of subsidiary) on date of acquisition.

(31)

(E3) Cost of Goods Sold………. 6,000

Goodwill impairment

loss………. 3,000

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 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 13,20 0

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:

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

Goodwill P 3,750 100.00%

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

(32)

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

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 P360,000 360,000P

S Company P120,000 (1) 120,000

Total P552,000 P180,000 P562,440

Dividends paid

P Company 72,000 72,000

Sheet P484,800 P144,000 490,440P

Balance Sheet

Cash………. 232,800P P 90,000 P 322,800

Accounts receivable…….. 90,000 60,000 150,000

(33)

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

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

Retained earnings, from above 484,800 144,000 490,440

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 745,560 745,560P 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.

(34)

January 1, 20x5 – December 31, 20x5:

Cash……… 38,400

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

Record dividends from S Company.

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:

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

(E2) Common stock – S Co……… 240,000

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.

(E3)

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 controlling interest (in net assets of subsidiary) on January 1, 20x5.

(35)

[(P13,200 x 80%) + P3,000, impairment loss on

partial-goodwill] 13,560

Non-controlling interests (P13,200 x 20%)

………. 2,640

Goodwill……… 3,000

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) Retaine d earnings , Depreciation/ Amortization expense Amortization -Interest Inventory sold P 6,000 Equipment 12,000 P 12,000 Buildings (6,000) ( 6,000) Bonds payable 1,20 0 ________ P 1,200 Sub-total P13,200 P 6,000 P 1,200 Multiplied by: 80% To Retained earnings P 10,560 Impairment loss 3,00 0 Total P 13,560

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

(36)

%... % Non-controlling Interest in Net Income

(NCINI P 16,560

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 90,000P P 274,800

NCI in Net Income - Subsidiary - -(6) 16,560

( 16,560) Net Income to Retained Earnings P230,400 90,000P 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 144,000P (2) 144,00 0

Total P715,200 P234,000 P 748,680

Dividends paid

P Company 72,000 72,000

Sheet P643,200 P186,000 P 676,680 Balance Sheet Cash………. 265,200P 114,000P 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

Discount on bonds payable

(3) 4,800

(4)

2,400 2,400