Consolidation – Intercompany Sale of Plant Assets (New Standard)

MAIN ASSUMPTIONS:
 Acquisition of subsidiary at other than BV
 Partially-owned subsidiary
 2 years consolidation

CONSOLIDATION CONCEPTS (INTERCOMPANY SALE OF PLANT ASSETS)

1. Investment account and SE of subsidiary are eliminated
2. Dividend income – eliminated
3. All intercompany transactions are eliminated as if they have never occurred
4. All items are stated at cost
5. Excess allocation of FV and BV of the subsidiary are amortized over the remaining life of the assets or
liabilities
6. Downstream sale – sale from parent to subsidiary
Upstream sale – sale from subsidiary to parent
7. Intercompany sale of plant assets do not happen frequently
8. Profits are realized only when the plant asset is sold to outsiders (adjustment to unrealized gain or loss)
9. The unrealized gain or loss on the sale is included in the Total NI of the selling affiliate in the year of sale
10. “Whoever sold the inventory, charge the deductions to the seller”
11. Take note of: date of sale – Dec. 31, Jan. 01, others fractional months
- this will affect piecemeal realization
12. Piecemeal realization of the unrealized gain or loss – realized over the remaining life of the asset
13. The entire unrealized gain / loss on sale is included in the computation or elimination (in whole amount or in full)
in the year of sale
14. For piecemeal realization, take note of effect of: date of sale fractional months
15. The effect of the piecemeal realization is charged against depreciation expense
piecemeal realization – charged to depreciation expense
amortization – charged to other OE
16. Consolidated NI – nominal
Consolidated RE and NIC – real
17. Treatment of undervaluation / overvaluation in the amortization
Undervaluation – deducted from NI to arrive at BV
Overvaluation – added to NI to arrive at BV
18. The Consolidated PPE is reported at its original cost

CONCEPT ON ELIMINATING ENTRY TO ELIMINATE UNREALIZED GAIN ON SALE

PPE3 xx
Gain on sale1 xx
Accumulated xx
depreciation2

1
cancel unrealized gain
2
to record depreciation not recognized by the selling affiliate
3
to restate PPE to original cost (from SP to buying affiliate)

CONSOLIDATION PROCEDURES:
YEAR 1:
1. COMPUTATIONS: (Upstream sale and Downstream sale)
CONSOLIDATED NI
Parent NI from operations xx
(Total NI – dividend income)
Unrealized gain on sale (xx) CONSOLIDATED RE
Parent NI, adjusted xx Method 1:
Parent RE, NI,
Subsidiary endunadjusted
of Year 1 xx xx
(Parent RE, beg. + Total NI – dividends
Amortization (xx) paid – unrealized gain on sale)
Parent’s share
Unrealized gaininon
increase
sale in subsidiary
(xx) RE,xxyear 1
(Subsidiary NI NI
Consolidated – Dividends paid – Amortization
xx – Unrealized gain on sale) x Parent xx
%
Attributable to NCI (xx)
Consolidated
Attributable to REparent xx xx

Method 2:
Parent RE, beg. xx
Attributable to parent – year 1 xx
Dividends paid – parent only (xx)
Consolidated RE xx
NCI
NCI Valuation (higher) xx
NCI-NIS xx
NCI Dividends (xx)
NCI xx

CONSOLIDATED SE
CS – parent xx
APIC – parent xx
Consolidated RE xx CONSOLIDATED SALES
Parent Total Sales
NCI xx xx
Subsidiary TotalSE
Consolidated Sales xx xx
Consolidated Sales xx

CONSOLIDATED COGS
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 Parent Total COGS xx
Subsidiary Total COGS xx
Amortization of Inventory xx
Consolidated COGS xx

CONSOLIDATED DEPRECIATION EXPENSE

Parent Depreciation Expense xx
Subsidiary Depreciation Expense xx
Consolidated Depreciation Expense xx

CONSOLIDATED OTHER OE
Parent Other OE xx
Subsidiary Other OE xx
Consolidated Other OE xx

CONSOLIDATED NI (TO CHECK)

Consolidated Sales xx
Consolidated COGS (xx)
2. Consolidated Depreciation Expense (xx) CONSOLIDATION WORKING PAPER
YEAR Consolidated Other OE (xx) 2:
1. NCI-NIS (xx) COMPUTATIONS: (Upstream sale and Downstream sale)
Attributable to parent xx CONSOLIDATED NI
Parent NI from operations xx
(Total NI – dividend income)
Realized gain on sale xx CONSOLIDATED RE
Parent NI, adjusted xx Method 1:
Parent RE, NI,
Subsidiary endunadjusted
of Year 2 xx xx
(Parent RE, end of year 1 + Total
Amortization NI – dividends paid + realized gain on sale)
(xx)
Parent’s share
Realized gain onin sale
increase in subsidiary
xx RE,xxyear 1 xx
Parent’s share in
Consolidated NIincrease in subsidiary RE,xxyear 2
(Subsidiary
Attributable NIto
– Dividends
NCI paid – Amortization
(xx) + realized gain on sale) x Parent % xx
Consolidatedto
Attributable REparent xx xx
Method 2:
Parent RE, beg. xx
Attributable to parent – year 1 xx
Attributable to parent – year 2 xx
Dividends paid – parent only (Year 1 + Year 2) (xx)
Consolidated RE xx
NCI
NCI Valuation (higher) xx
NCI-NIS – Year 1 xx
NCI-NIS – Year 2 xx
NCI Dividends – Year 1 (xx)
NCI Dividends – Year 2 (xx)
NCI xx
CONSOLIDATED SE
CS – parent xx
APIC – parent xx
Consolidated RE xx CONSOLIDATED SALES
Parent Total Sales
NCI xx xx
Subsidiary TotalSE
Consolidated Sales xx xx
Consolidated Sales xx

CONSOLIDATED COGS
Parent Total COGS xx
Subsidiary Total COGS xx
Amortization of Inventory xx
Consolidated COGS xx

CONSOLIDATED DEPRECIATION EXPENSE

Parent Depreciation Expense xx
Realized gain (xx) xx
Subsidiary Depreciation Expense xx
Realized gain (xx) xx
Consolidated Depreciation Expense xx

CONSOLIDATED OTHER OE
Parent Other OE xx
Subsidiary Other OE xx
Consolidated Other OE xx

CONSOLIDATED NI (TO CHECK)

Consolidated Sales xx
Consolidated COGS (xx)
Consolidated Depreciation Expense (xx) 4. CONSOLIDATION WORKING PAPER
Consolidated Other OE (xx) Illustrative Problem: (DOWNSTREAM SALE)
On NCI-NIS (xx) January 2, 2008, P Company purchased 80% of the common stock
of S Attributable to parent xx Company for P240,000. At that time, S Company has P200,000 of
common stock and retained earnings of P100,000. P Company has

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common stock of P500,000. Assume further that on the date of the combination, all assets and liabilities of S Company
have fair market values equal to their book values. Assume that P Company sold equipment to S Company on December
31, 2008 for P70,000. The equipment originally cost P90,000 when purchased three years before December 31, 2008,
and is being depreciated over a total life of 10 years using the straight line method with no residual value. On December
31, 2008 and 2009, the following data are given for both P Company and S Company:
December 31, 2008 December 31, 2009
P Company S Company P Company S Company
Income Statement
Sales P400,000 P200,000 P450,000 P300,000
Gain on sale of equipment 7,000 -- -- --
Dividend income 24,000 -- 32,000 --
Total revenue P431,000 P200,000 P482,000 P300,000
Cost of goods sold P170,000 P115,000 P180,000 P160,000
Depreciation and amortization 50,000 20,000 51,000 21,000
Other expenses 40,000 15,000 60,000 45,000
Total costs and expenses P260,000 P150,000 P291,000 P226,000
Net income to RE P171,000 P50,000 P191,000 P74,000

Statement of Retained Earnings

Retained earnings, January 1 P300,000 P100,000 P411,000 P120,000
Net income from above 171,000 50,000 191,000 74,000
Total P471,000 P150,000 P602,000 P194,000
Dividends declared 60,000 30,000 60,000 40,000
Retained earnings, Dec. 31 P411,000 P120,000 P542,000 P154,000

Required:
Compute the following:
Year 1: Year 2:

Goodwill / Income from acquisition Goodwill / Income from acquisition

Consolidated NI Consolidated NI
Consolidated RE Consolidated RE
NCI NCI
Consolidated SE Consolidated SE
Consolidated Sales Consolidated Sales
Consolidated COGS Consolidated COGS
Consolidated Depreciation Expense Consolidated Depreciation Expense
Consolidated Other OE Consolidated Other OE
SOLUTIONS: (DOWNSTREAM SALE)
Year 1:
CONSOLIDATED NI
Parent Total COGS P170,000
Parent NI from operations P147,000 Subsidiary Total COGS 115,000
Unrealized gain on sale Amortization of Inventory --
(Dec. 31, 2008 sale) (7,000) Consolidated COGS P285,000
Parent NI, adjusted P140,000
Subsidiary NI 50,000 CONSOLIDATED DEPRECIATION EXPENSE
Consolidated NI P190,000 Parent Depreciation Expense P50,000
Attributable to NCI (10,000) Subsidiary Depreciation Expense 20,000
Attributable to parent P180,000 Consolidated Depreciation P70,000
CONSOLIDATED RE Expense
Method 1:
Parent RE, end of Year 1 P404,000 CONSOLIDATED OTHER OE
Parent’s share in increase in 16,000 Parent Other OE P40,000
subsidiary RE, year 1 Subsidiary Other OE 15,000
Consolidated RE P420,000 Consolidated Other OE P55,000

Method 2: CONSOLIDATED NI (TO CHECK)

Parent RE, beg. P300,000 Consolidated Sales P600,000
Attributable to parent – year 1 180,000 Consolidated COGS (285,000)
Dividends paid – parent only (60,000) Consolidated Depreciation Expense (70,000)
Consolidated RE P420,000 Consolidated Other OE (55,000)
NCI-NIS (10,000)
NCI Attributable to parent P180,000
NCI Valuation (higher) P60,000
NCI-NIS 10,000
NCI Dividends (6,000)
NCI P64,000
Year 2:
CONSOLIDATED NI
CONSOLIDATED SE
Parent NI from operations P159,000
CS – parent P500,000
Consolidated RE 420,000
Realized gain on sale 1,000 P160,000
NCI 64,000
Subsidiary NI 74,000
Consolidated SE P984,000
Consolidated NI P234,000
CONSOLIDATED SALES
Attributable to NCI
Parent Total Sales P400,000
(14,800)
Subsidiary Total Sales 200,000
Attributable to parent P219,200
Consolidated Sales P600,000
CONSOLIDATED RE
Method 1:
CONSOLIDATED COGS
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 Parent RE, end of Year 2 36,000 CONSOLIDATED SALES
Parent’s share in increase in 16,000 Parent Total Sales P450,000
subsidiary RE, year 1 Subsidiary Total Sales 300,000
Parent’s share in increase in 7,200 Consolidated Sales P750,000
subsidiary RE, year 2
Consolidated RE P579,200 CONSOLIDATED COGS
Parent Total COGS P180,000
Method 2: Subsidiary Total COGS 160,000
Parent RE, beg. P300,000 Amortization of Inventory --
Attributable to parent – year 1 180,000 Consolidated COGS P340,000
Attributable to parent – year 2 219,200
Dividends paid – parent only 120,000) CONSOLIDATED DEPRECIATION EXPENSE
Consolidated RE P579,200 Parent Depreciation P51,000
Expense
NCI Realized gain (1,000) P50,000
NCI Valuation (higher) P60,000 Subsidiary Depreciation 21,000
NCI-NIS – Year 1 10,000 Expense
NCI-NIS – Year 2 14,800 Consolidated P71,000
NCI Dividends – Year 1 (6,000) Depreciation Expense
NCI Dividends – Year 2 (8,000)
NCI P70,800 CONSOLIDATED OTHER OE
Parent Other OE P60,000
CONSOLIDATED SE Subsidiary Other OE 45,000
CS – parent P500,000 Consolidated Other OE P105,000
Consolidated RE 579,200
NCI 70,800 CONSOLIDATED NI (TO CHECK)
Consolidated SE P950,000

Illustrative Problem: (UPSTREAM SALE)

On January 2, 2008, P Company purchased 80% of the common stock of S Company for P240,000. At that time, S Company has
P200,000 of common stock and retained earnings of P100,000. P Company has common stock of P500,000. Assume further that
on the date of the combination, all assets and liabilities of S Company have fair market values equal to their book values. Assume
that S Company sold equipment to P Company on December 31, 2008 for P70,000. The equipment originally cost P90,000 when
purchased three years before December 31, 2008, and is being depreciated over a total life of 10 years using the straight line
method with no residual value. On December 31, 2008 and 2009, the following data are given for both P Company and S
Company:
December 31, 2008 December 31, 2009
P Company S Company P Company S Company
Income Statement
Sales P400,000 P200,000 P450,000 P300,000
Gain on sale of equipment -- 7,000 -- --
Dividend income 24,000 -- 32,000 --
Total revenue P424,000 P207,000 P482,000 P300,000
Cost of goods sold P170,000 P115,000 P180,000 P160,000
Depreciation and amortization 50,000 20,000 51,000 19,100
Other expenses 40,000 15,000 60,000 45,000
Total costs and expenses P260,000 P150,000 P291,000 P224,100
Net income to RE P164,000 P57,000 P191,000 P75,900

Statement of Retained Earnings

Retained earnings, January 1 P300,000 P100,000 P404,000 P127,000
Net income from above 164,000 57,000 191,000 75,900
Total P464,000 P157,000 P595,000 P202,900
Dividends declared 60,000 30,000 60,000 40,000
Retained earnings,
Consolidated Dec. 31
Sales P404,000
P750,000 P127,000 P535,000 P162,900
Consolidated COGS (340,000)
Consolidated Depreciation Expense (71,000) Required:
Compute the following:
Consolidated Other OE (105,000)
Year 1: NCI-NIS (14,800) Year 2:
Goodwill Attributable to parent P219,200 / Income from acquisition Goodwill / Income
from acquisition
Consolidated NI Consolidated NI
Consolidated RE Consolidated RE
NCI NCI
Consolidated SE Consolidated SE
Consolidated Sales Consolidated Sales
Consolidated COGS Consolidated COGS
Consolidated Depreciation Expense Consolidated Depreciation Expense
Consolidated Other OE Consolidated Other OE

SOLUTIONS: (UPSTREAM SALE)

Year 1:
CONSOLIDATED NI
Parent NI from operations P140,000
Subsidiary NI P57,0
Unrealized gain on sale (Dec. 31, 2008 sale) (7,0) 50,000 CONSOLIDATED RE
Consolidated NI P190,000 Method 1:
Parent RE, endtoofNCI
Attributable Year 1 P404,000
(10,000)
Parent’s shareto
Attributable in parent
increase in subsidiary RE, year 1 16,000 P180,000
Consolidated RE P420,000

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Method 2:
Parent RE, beg. P300,000
Attributable to parent – year 1 180,000
Dividends paid – parent only (60,000)
Consolidated RE P420,000

NCI
NCI Valuation (higher) P60,000
NCI-NIS 10,000
NCI Dividends (6,000)
NCI P64,000

CONSOLIDATED SE
CS – parent P500,000
Consolidated RE 420,000
NCI 64,000 CONSOLIDATED SALES
Parent Total Sales
Consolidated SE P984,000 P400,000
Subsidiary Total Sales 200,000
Consolidated Sales P600,000
CONSOLIDATED COGS
Parent Total COGS P170,000
Subsidiary Total COGS 115,000
Amortization of Inventory --
Consolidated COGS P285,000

CONSOLIDATED DEPRECIATION EXPENSE

Parent Depreciation Expense P50,000
Subsidiary Depreciation Expense 20,000
Consolidated Depreciation Expense P70,000

CONSOLIDATED OTHER OE
Parent Other OE P40,000
Subsidiary Other OE 15,000
Consolidated Other OE P55,000

CONSOLIDATED NI (TO CHECK)

Consolidated Sales P600,000
Consolidated COGS (285,000)
Consolidated Depreciation Expense (70,000) Year 2:
Consolidated Other OE (55,000) CONSOLIDATED NI
Parent
NCI-NISNI from operations (10,000) P159,000
Subsidiary NI to parent
Attributable P75,900
P180,000
Realized gain (Dec. 31, 2008 sale) 1,000 76,900 CONSOLIDATED RE
Consolidated NI P235,900 Method 1:
Parent RE, endtoofNCI
Attributable Year 2 P535,000
15,380)
Parent’s shareto
Attributable in parent
increase in subsidiary RE, year 1 16,000
P220,520
Parent’s share in increase in subsidiary RE, year 2 29,520
Consolidated RE P580,520

Method 2:
Parent RE, beg. P300,000
Attributable to parent – year 1 180,000
Attributable to parent – year 2 220,520
Dividends paid – parent only (120,000)
Consolidated RE P580,520

NCI
NCI Valuation (higher) P60,000
NCI-NIS – Year 1 10,000
NCI-NIS – Year 2 15,380
NCI Dividends – Year 1 (6,000)
NCI Dividends – Year 2 (8,000)
NCI P71,380

CONSOLIDATED SE
CS – parent P500,000
Consolidated RE 580,520
NCI 71,380 CONSOLIDATED SALES
Parent Total Sales
Consolidated SE P1,151,900 P450,000
Subsidiary Total Sales 300,000
Consolidated Sales P750,000

CONSOLIDATED COGS
Parent Total COGS P180,000
Subsidiary Total COGS 160,000
Amortization of Inventory --
Consolidated COGS P340,000
CONSOLIDATED DEPRECIATION EXPENSE
Parent Depreciation Expense P51,000
Subsidiary Depreciation Expense P19,100
Realized gain (1,000) (18,100)
Consolidated Depreciation Expense P69,100
CONSOLIDATED OTHER OE
Parent Other OE P60,000
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Subsidiary Other OE 45,000
Consolidated Other OE P105,000
CONSOLIDATED NI (TO CHECK)
Consolidated Sales P750,000
Consolidated COGS (340,000)
Consolidated Depreciation Expense (69,100)
Consolidated Other OE (105,000)
NCI-NIS (15,380)
Attributable to parent P220,520

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