Solution Chapter 16

Chapter 16

Problem I

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 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 Taylor12/31/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 valuebuildings .................................................... P 800,000 TT book valuebuildings ....................................................... 300,000 Allocation .................................................................................. 80,000 Excess Amortizations for 20x420x5 (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 II

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 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) FV of SHE of S P4,650,000 Multiplied by: NCI% 10%

FV of NCI P 465,000

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

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. Consolidated Retained Earnings, December 31, 20x5

Retained earnings - Parent Company, December 31, 20x5 (cost model P2,000,000

Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parents share in adjusted net increased in subsidiarys 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 1,000,000

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 P2,705,000

Problem III

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 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:

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

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 P1,100,000

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 Multiplied by: NCI% 20%

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 Property and Equipment (net) 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 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 Multiplied by: NCI% 20%



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) 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) FV of SHE of S P2,610,000 Multiplied by: NCI% 20%



Cost Model-Partial 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 880,000 Investment in S Co. 2,800,000 Non-controlling Interest 480,000 b. Depreciation Expense 90,000 Property and Equipment (net) 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 Multiplied by: NCI% 20%

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 Adjustments to reflect fair value 900,000 Amortization of allocated excess (P90,000 x 1) ( 90,000) FV of SHE of S P2,610,000 Multiplied by: NCI% 20%

FV of NCI (partial) P 522,000

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

20x4 Consolidated Net Income for 20x4 Net income from own/separate operations 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 Goodwill impairment ____0 132,000 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 Consolidated Net Income for 20x4 P610,000

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

Note: If there is impairment in goodwill the CNI and NCI-CNI are not the same.

20x5 Consolidated Net Income for 20x5 Net income from own/separate operations 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 ____0 152,000 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 Consolidated Net Income for 20x4 P735,000

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 IV 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 V

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 (P240,000 x 100%). P 240,000 Retained earnings (P120,000 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 (P6,000 x 100%) P 6,000 Increase in land (P7,200 x 100%). 7,200 Increase in equipment (P96,000 x 100%) 96,000 Decrease in buildings (P24,000 x 100%)..... ( 24,000) Decrease in bonds payable (P4,800 x 100%) 4,800 90,000 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 S Co.

Fair value (Over) Under

Valuation 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 S Co.

Fair value Increase

(Decrease) 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 S Co.

Fair value

(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

Annual Amount

Current Year(20x4) 20x5

Inventory P 6,000 1 P 6,000 P 6,000 P - Subject to Annual Amortization 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

(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 Sons 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

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) 105,000 -

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.


Dividends paid 48,000 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.

(E3) 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; 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

Depreciation expense.. 6,000 Accumulated depreciation buildings.. 12,000 Interest expense 1,200 Inventory.. 6,000

Accumulated depreciation equipment.. 24,000 Discount on bonds payable 2,400 Goodwill 3,600 To provide for years 20x4 and 20x5 depreciation and amortization on

differences between acquisition date fair value and book value of

Ss identifiable assets and liabilities as follows:

Year 20x4 amounts are debited to Ps retained earnings

Year 20x5 amounts are debited to respective nominal accounts..

(20x4) Retained earnings,


expense

Amortization

-Interest


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

(E5) Dividend income - P. 48,000 Dividends paid S 48,000 To eliminate intercompany dividends and non-controlling interest

share of dividends.

(E6) Non-controlling interest in Net Income of Subsidiary 16,560 Non-controlling interest .. 16,560 To establish non-controlling interest in subsidiarys 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

100%-Owned Subsidiary Income Statement P Co. S Co. Dr. Cr. Consolidated

Sales P540,000 P360,000 P 900,000 Dividend income 48,000 - (5) 48,000 ___________

Total Revenue P588,000 P360,000 P 900,000

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


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. P 189,000 P 102,000 P 291,000


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


450,000

306,000

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


Bonds payable 240,000 120,000 360,000


Common stock, P10 par 240,000 (2) 240,000 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 c.

Stockholders Equity Common stock, P10 par P 600,000 Retained earnings 360,000 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

Consolidated Net Income for 20x4 P211,200

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

d. Consolidated Retained Earnings, December 31, 20x4


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. Stockholders Equity Common stock, P10 par P 600,000

Retained earnings 499,200 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 Net income from own/separate operations

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.

Consolidated Retained Earnings, December 31, 20x5

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:/Ps share in adjusted net increased in subsidiarys retained earnings:

Retained earnings S, January 1, 20x5 P 144,000 Less: Retained earnings S, January 1, 20x4 120,000


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.

Stockholders Equity Common stock, P10 par P 600,000 Retained earnings 702,000 Total Stockholders Equity (Total Equity) P1,302,000

Problem VI

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 S Co.

Fair value (Over) Under

Valuation

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 S Co.

Fair value Increase

(Decrease)

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 S Co.

Fair value

(Decrease)

Buildings................ 360,000 144,000 ( 216,000)

Less: Accumulated depreciation.. 192,000 - ( 192,000)

Net book value... 168,000 144,000 ( 24,000)


Account Adjustments to be amortized Over/ Under Life

Annual Amount


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

Subject to Annual Amortization

Equipment (net)......... 96,000 8 12,000 12,000 12,000

Buildings (net) (25,000) 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 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.


Dividends paid 36,000 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


(E2) Inventory. 6,000

Accumulated depreciation equipment.. 96,000 Accumulated depreciation buildings.. 192,000 Land. 7,200 Discount on bonds payable. 4,800 Goodwill. 12,000 Buildings.. 216,000 Non-controlling interest (P90,000 x 20%).. 18,000 Investment in S Co. 84,000 To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non-

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

(E3) Cost of Goods Sold. 6,000 Depreciation expense.. 6,000 Accumulated depreciation buildings.. 6,000

Interest expense 1,200 Goodwill impairment loss. 3,000 Inventory.. 6,000 Accumulated depreciation equipment.. 12,000 Discount on bonds payable 1,200 Goodwill 3,000 To provide for 20x4 impairment loss and depreciation and


book value of Sons identifiable assets and liabilities as follows:

Cost of Goods

Sold


expense

Amortization

-Interest

Total


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:

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%

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

share of dividends.





P 46,800




Cost Model (Partial-goodwill)


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 28,800 - (4) 28,800 _________


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

Depreciation expense 60,000 28,000 (3) 6,000 90,000 Interest expense - - (3) 1,200 1,200

Other expenses 48,000 18,000 66,000

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


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

NCI in Net Income - Subsidiary - - (5) 9,360 ( 9,360)




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 _ ________


Balance Sheet

Cash. P 232,800 P 90,000 P 322,800


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


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


405,000

288,000

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


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 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

Record dividends from S Company.


Dividends paid 48,000 Cash 48,000

Dividends paid by S Co..


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


year, 1/1/20x5, computed as follows:






(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



(E3) Inventory. 6,000 Accumulated depreciation equipment.. 96,000 Accumulated depreciation buildings.. 192,000 Land. 7,200

Discount on bonds payable. 4,800 Goodwill. 12,000 Buildings.. 216,000 Non-controlling interest (P90,000 x 20%) 18,000 Investment in S Co. 84,000 To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non-


(E4) Retained earnings P Company, 1/1/20x5 [(P13,200 x 80%) + P3,000, impairment loss on partial-goodwill]

13,560

Non-controlling interests (P13,200 x 20%). 2,640 Depreciation expense.. 6,000 Accumulated depreciation buildings.. 12,000 Interest expense 1,200 Inventory.. 6,000



Ss identifiable assets and liabilities as follows:

Year 20x4 amounts are debited to Ps 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


Total P 13,560

(E5) Dividend income - P. 38,400 Non-controlling interest (P48,000 x 20%).. 9,600 Dividends paid S 48,000 To eliminate intercompany dividends and non-controlling interest

share of dividends.




Amortization of allocated excess [(E4)]... ( 7,200) P 82,800


Non-controlling Interest in Net Income (NCINI P 16,560


Cost Model (Partial-goodwill)


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

Sales P540,000 P360,000 P 900,000

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




Interest expense - - (4) 1,200 1,200 Other expenses 72,000 54,000 126,000



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





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

S Company P 144,000 (2) 144,000 Net income, from above 230,400 90,000 258,240

Total P715,200 P234,000 P 748,680

Dividends paid

P Company 72,000 72,000

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


Balance Sheet

Cash. P 265,200 P 114,000 P 367,200


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


(2) 307,200 (3) 84,000 -

Total P2,203,200 P1,074,000 P2,707,800



450,000

306,000

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


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


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 Common stock, P10 par P 600,000

Retained earnings 360,000 Ps 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 Ps 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


Net income from own/separate operations

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

Add: Non-controlling Interest in Net Income (NCINI) 9,360

Consolidated Net Income for 20x4 P211.800

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: Consolidated Retained Earnings, December 31, 20x4


Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4

202,440

Total P562,440


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



f. Consolidated SHE:

Stockholders Equity Common stock, P10 par P 600,000 Retained earnings 490,440 Ps 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


P258,240



b. NCI-CNI *Non-controlling Interest in Net Income (NCINI) for 20x5


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




Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Parents share in adjusted net increased in subsidiarys retained earnings:

Retained earnings S, January 1, 20x5 P 144,000

Less: Retained earnings S, January 1, 20x4 120,000



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

Less: Dividends paid P Company for 20x5 72,000

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



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

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

Total P234,000


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


Non-controlling interest (partial goodwill).. P 99,120

f. Consolidated SHE: Stockholders Equity Common stock, P10 par P 600,000 Retained earnings 676,680 Parents Stockholders Equity / CI SHE, 12/31/20x5 P1,276,680

NCI, 12/31/20x5 ___99,120 Consolidated SHE, 12/31/20x5 P1,1375,800

Problem VII

Requirements 1 to 4: Schedule of Determination and Allocation of Excess Date of Acquisition January 1, 20x4

Fair value of Subsidiary (80%) Consideration transferred (80%).. P 372,000 Fair value of NCI (given) (20%).. 93,000 Fair value of Subsidiary (100%). P 465,000 Less: Book value of stockholders equity of Son: Common stock (P240,000 x 100%). P 240,000 Retained earnings (P120,000 x 100%)... 120,000 360,000

Allocated excess (excess of cost over book value).. P 105,000 Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 100%) P 6,000 Increase in land (P7,200 x 100%). 7,200 Increase in equipment (P96,000 x 100%) 96,000 Decrease in buildings (P24,000 x 100%)..... ( 24,000) Decrease in bonds payable (P4,800 x 100%) 4,800 90,000 Positive excess: Full-goodwill (excess of cost over fair value)... P 15,000


Account Adjustments to be amortized Over/ under Life

Annual Amount


Inventory P 6,000 1 P 6,000 P 6,000 P - Subject to Annual Amortization 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 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 Record dividends from S Company.

On the books of S Company, the P30,000 dividend paid was recorded as follows: Dividends paid 36,000 Cash. 36,000 Dividends paid by S Co..

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

Consolidation Workpaper First Year after Acquisition (E1) Common stock S Co 240,000 Retained earnings S Co 120.000 Investment in S Co 288,000 Non-controlling interest (P360,000 x 20%).. 72,000 To eliminate intercompany investment and equity accounts

of subsidiary on date of acquisition; and to establish non-controlling


(E2) Inventory. 6,000 Accumulated depreciation equipment.. 96,000 Accumulated depreciation buildings.. 192,000 Land. 7,200 Discount on bonds payable. 4,800

Goodwill. 13,000 Buildings.. 216,000 Non-controlling interest (P90,000 x 20%) + [(P15,000, full P12,000, partial goodwill)]

21,000

Investment in S Co. 84,000 To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non-

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

(E3) Cost of Goods Sold. 6,000 Depreciation expense.. 6,000 Accumulated depreciation buildings.. 6,000 Interest expense 1,200 Goodwill impairment loss. 3,750 Inventory.. 6,000 Accumulated depreciation equipment.. 12,000 Discount on bonds payable 1,200

Goodwill 3,750 To provide for 20x4 impairment loss and depreciation and


book value of Ss identifiable assets and liabilities as follows:

Cost of Goods

Sold


Expense

Amortization

-Interest


Equipment P12,000

Buildings ( 6,000) Bonds payable _______ _______ P 1,200

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

(E4) Dividend income - P. 28,800

Non-controlling interest (P36,000 x 20%).. 7,200 Dividends paid S 36,000 To eliminate intercompany dividends and non-controlling interest

share of dividends.


Income less NCI on goodwill impairment loss on full-goodwill

for 20x4 as follows:


Amortization of allocated excess [(E3)]... ( 13,200) P 46,800


P 9,360

Less: Non-controlling interest on impairment loss on full-goodwill (P3,125 x 20%) or (P3,125 impairment on full-goodwill less P2,500, impairment on partial-goodwill)*

750


*this procedure would be more appropriate, instead of multiplying the

full-goodwill impairment loss of P3,125 by 20%. There might be situations

where the NCI on goodwill impairment loss would not be proportionate

to NCI acquired (refer to Illustration 15-6). Subsidiary accounts are adjusted to full fair value regardless on the controlling interest percentage or what option used to value non-controlling interest or goodwill. Worksheet for Consolidated Financial Statements, December 31, 20x4.

Cost Model (Full-goodwill)


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 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) 3,750 3,750


Net Income P196,800 P 60,000 P211,050





P Company P360,000 P 360,000

S Company P120,000 (1) 120,000


Total P556,800 P180,000 P562,440

Dividends paid

P Company 72,000 86,400

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


Balance Sheet

Cash. P 232,800 P 90,000 P 322,800


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


Goodwill (2) 15,000 (3) 3,750 11,250

Investment in S Co 372,000

(3) 288,000 (4) 84,000 -

Total P1,984,800 P1,008,000 P2,426,850



405,000

288,000

(5) 192,000 (6) 6,000 495,000


Bonds payable 240,000 120,000 360,000



Retained earnings, from above 484,800 144,000 490,440 Non-controlling interest _________

_________

(7) 7,200

__________

(1 ) 72,000 (2) 21,000 (5) 8,610 ____94,410

Total P1,984,800 P1,984,800 P 748,560 P 748,560 P2,426,850

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 parent in 20x5 in relation to its subsidiary investment:

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


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


(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


year, 1/1/20x5.






(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



(E3) 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 Non-controlling interest (P90,000 x 20%) + [(P15,000, full P12,000, partial goodwill)]

21,000

Investment in S Co. 84,000 To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish non-


(E4) Retained earnings P Company, 1/1/20x5 (P16,950 x 80%)

13,560

Non-controlling interests (P16,950 x 20%). 3,390 Depreciation expense.. 6,000 Accumulated depreciation buildings.. 12,000 Interest expense 1,200 Inventory.. 6,000



Sons identifiable assets and liabilities as follows:

Year 20x4 amounts are debited to Perfects retained earnings

and NCI.

Year 20x5 amounts are debited to respective nominal accounts..

(20x4)

Retained earnings,


expense

Amortization

-Interest


Equipment 12,000 P 12,000

Buildings (6,000) ( 6,000) Bonds payable 1,200 P 1,200


Totals P 16,950 P 6,000 P1,200

Multiplied by: CI%.... 80%

To Retained earnings P13,560

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

Dividends paid S 48,000 To eliminate intercompany dividends and non-controlling interest

share of dividends.





P 82,800


P 16,560 Less: NCI on goodwill impairment loss on full- Goodwill

0



Cost Model (Full-goodwill)


December 31, 20x5 (Second Year after Acquisition)

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

Sales P540,000 P360,000 P 900,000

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



Depreciation expense 60,000 24,000 (4) 6,000 90,000 Interest expense - - (4) 1,200 1,200

Other expenses 72,000 54,000 126,000



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




Retained earnings, 1/1 P Company P484,800 (5) 13,560 (5) 19,200 P 490,440

S Company P 144,000 (6) 144,000


Total P715,200 P234,000 P 748,680

Dividends paid

P Company 72,000 72,000

S Company - 48,000 (5) 57,600 _ ________


Balance Sheet

Cash. P 265,200 P 102,000 P 367,200


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) 15,000 (4) 3,750 11,250


(2) 307,200 (7) 84,000 -

Total P2,203,200 P1,074,000 P2,710,050



450,000

306,000

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


Bonds payable 240,000 120,000 360,000




Non-controlling interest ___ _____

_________

(6) 9,600 (8) 3,390

__________

(2 ) 76,800 (3) 21,000 (6) 16,560 ____101,370

Total P2,203,200 P1,074,000 P 824,910 P 824,910 P2,710,050

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

the consolidated retained earnings, thus:

Consolidated Retained Earnings, January 1, 20x4


b. Non-controlling interest (full-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


90,000

Fair value of stockholders equity of S, January 1, 20x4 P450,000



Add: NCI on full-goodwill (P15,000 P12,000) ___3,000


c. Consolidated SHE: Stockholders Equity

Common stock, P10 par P 600,000 Retained earnings 360,000 Parents Stockholders Equity / CI - SHE P 960,000 NCI, 1/1/20x4 ___93,000 Consolidated SHE, 1/1/20x4 P1,053,000

6.

Note: The goodwill recognized on consolidation purely relates to the parents 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 P202,440

Consolidated Net Income for 20x4 Net income from own/separate operations:

P Company P168,000

S Company 60,000

Total P228,000

Less: Non-controlling Interest in Net Income* P 8,610


Goodwill impairment (impairment under full-goodwill approach) 3,750 25,560

Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of P..

P202,440


Consolidated Net Income for 20x4 P211.050

b. NCI-CNI P8,610

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


Less: Amortization of allocated excess (refer to amortization table above) 13,200 P 46,800



Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%) or (P3,750 impairment on full-goodwill less P3,000, impairment on partial-goodwill)*

750


*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss

of P3,750 by 20%. There might be situations where the NCI on goodwill impairment loss would not

be proportionate to NCI acquired. c. CNI, P211,050 refer to (a) d. On subsequent to date of acquisition, consolidated retained earnings would be computed

as follows:

Consolidated Retained Earnings, December 31, 20x4


Add: Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent for 20x4

202,440

Total P562,440


e.

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



Retained earnings S Company, January 1, 20x4 P120,000 Add: Net income of S for 20x4 60,000

Total P180,000


Stockholders equity S Company, December 31, 20x4 P 384,000


90,000

Amortization of allocated excess (refer to amortization above) 20x4 ( 13,200)

Fair value of stockholders equity of S, December 31, 20x4 P460,800

Multiplied by: Non-controlling Interest percentage... 20 Non-controlling interest (partial-goodwill, 12/31/20x4.. P 92,160

Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4: [(P15,000 full P12,000, partial = P3,000) P750 impairment loss

2,250

Non-controlling interest (full-goodwill), 12/31/20x4.. P 94,410

f.

Consolidated SHE:

Stockholders Equity Common stock, P10 par P 600,000 Retained earnings 490,440 Ps Stockholders Equity / CI SHE, 12/31/20x4 P1,090,440 NCI, 12/31/20x4 ___94,410 Consolidated SHE, 12/31/20x4 P1,184,850

12/31/20x5: a. CI-CNI P258,240


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


Goodwill impairment (impairment under full-goodwill approach) 0 23,760


P258,240



b. NCI-CNI P16,560

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


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




Adjustment to convert from cost model to equity method for purposes of consolidation or to establish reciprocity:/Ps share in adjusted net increased in subsidiarys retained earnings:

Retained earnings Subsidiary, January 1, 20x5 P 144,000

Less: Retained earnings Subsidiary, January 1, 20x4 120,000



P 10,800 Multiplied by: Controlling interests %................... 80%

P 8,640

Documents

Solution Chapter 16