CHAPTER 6: CONSOLIDATED

FINANCIAL STATEMENTS (PART

3)
Group 3 IV- 16

Compilation of Reports

 Reporters: Theresa Fe Macasieb, Matthew Idanan, Christine Jane

Ramos, Emman Francisco, Jadelle Dacut and Janhart Montefalcon
 CHAPTER 6: CONSOLIDATED FINANCIAL STATEMENTS (PART 3)

 Macasieb, Theresa Fe

Impairment of Goodwill
 When NCI is measured at proportionate share, goodwill is attributed only to the owners of the parent. Therefore, goodwill
impairment is also attributed only to the owners of the parent.
 When NCI is measured at fair value, goodwill is attributed to both the owners of the parent and NCI. Therefore, goodwill
impairment is allocated to both the owners of the parent and NCI.

Illustration: Impairment of Goodwill

On January 01, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares with fair value of ₱15 per share. On
this date, XYZ's total equity was ₱74,000. The investment in subsidiary is measured at cost.

XYZ's asset and liabilities approximate their fair value on January 01, 20x1 except for the following:

XYZ, Inc. Carrying Amounts Fair Value Fair Value adjustments

Inventory 23,000 31,000 8,000
Equipment (4 yrs. Remaining life) 40,000 48,000 8,000
Total 63,000 79,000 16,000

There were no intercompany transactions during 20x1. However, it was determined that goodwill is
impaired by ₱1,000.

The December 31, 20x1 individual financial statements of the entities show the following information:

ABC Co. XYZ, Inc

Total Asset 418,000 124,000
Total Liabilities 73,000 30,000
Share Capital 170,000 50,000
Share Premium 65,000
Retained Earnings 110,000 44,000
Total Equity 345,000 94,000
Total Liabilities and Equity 418,000 124,000
Profit for the year 60,000 20,000

Requirements: Compute for the (a) consolidated total assets, (b) consolidated total liabilities,(C)
Consolidated total equity,
(d) consolidated profit or loss, and € profit or loss attributable to owners of parent and NCI under each of the
following cases:
Case #1: NCI is measured at proportionate share.
Case#2: NCI is measured at fair value. The NCI's fair value on the acquisition date is 18,750.

Solution:
Step 1: Analysis of effects of intercompany No intercompany transactions in the
transaction problem.

Step 2: Analysis of net assets

XYZ, Inc. Acquisition Consolidation Net
 date date Change
Total equity at carrying amounts 74,000 94,000
Fair value adjustments at acquisition date 16,000 16,000
Subsequent depreciation of FVA NIL -10,000
Unrealized profits(Upstream only) NIL
Subsidiary's net assets at fair value 90,000 100,000 10,000

Step 3: Goodwill Computation

Case#2: Formula #2- NCI measured at fair
Case #1: Formula #1- NCI measured at proportionate share value
Consideration transferred (5,000 x ₱15) 75,000 Consideration transferred (5,000 x ₱15) 75,000
NCI in the acquiree (90,000 x 20%) 18,000 Previously held equity interest in the acquiree -
Previously held equity interest in the acquiree - Total 75,000
Total 93,000 Less: Parent's proportionate share in the net
assets of
Fair Value of net identifiable asset acquired -90,000
subsidiary (90,000 x 80%) -72,000
Goodwill at acquisition date 3,000
Accumulated impairment losses since acquisition Goodwill attributable to owners of parent- Jan
date -1,000 01, 20x1 3,000
Less: Parent's share in goodwill impairment
Goodwill, net - Dec. 31, 20x1 2,000 (1,000 x 80%) -800
Goodwill attributable to owners of parent- Dec
31, 20x1 2,200

Fair value of NCI 18,750

Less: NCI's proportionate share in the net assets
of
subsidiary (90,000 x 20%) -18,000
Goodwill attributable to NCI-Jan. 01,20x1 750
Less: NCI's share in goodwill impairment (1000 x
20%) -200
Goodwill attributable to NCI-Dec. 31,20x1 550

Goodwill, net - December 31, 20x1 2,750

Step 4: Non-Controlling interest in net assets

Case#1 Case#2
XYZ's net assets at fair value- Dec 31,20x1 100,000 100,000
Multiply by: NCI percentage 20% 20%
Total 20,000 20,000
Add: Goodwill attributable to NCI- Dec. 31, 20x1 550
Non-controlling interest in net asset - Dec. 31, 20x1 20,000 20,550

Step 5: Consolidated Retained Earnings

Case#1 Case#2
ABC's retained earnings- Dec. 31, 20x1 110,000 110,000
Consolidation adjustments
ABC's share in net change in XYZ's net asset 8,000 8,000
Unrealized Profits
Gain on extinguishment of bonds
Impairment loss on goodwill attributable to parent -1,000 -800
Net consolidation adjustments 7,000 7,200
Consolidated Retained Earnings- Dec. 31, 20x1 117,000 117,200
Step 6: Consolidated profit or loss
Case #1 Parent Subsidiary Consolidated
Profits before adjustments   60,000 20,000 80,000
Consolidation adjustments
Unrealized profits (-) (-) (-)
Divided income from subsidiary (-) N/A (-)
Gain or lose on extinguishment of
bonds (-) (-) (-)
Net consolidation adjustments (-) (-) (-)
Profits before FVA 60,000 20,000 80,000
Depreciation of FVA -8,000 -2,000 -10,000
Goodwill impairment   -1,000 (-) -1,000
Consolidated Profit   51,000 18,000 69,000

Case #2 Parent Subsidiary Consolidated

Profits before adjustments   60,000 20,000 80,000
Consolidation adjustments:
Unrealized profits (-) (-) (-)
Dividend income from subsidiary (-) N/A (-)
Gain or lose extinguishment of bonds (-) (-) (-)
Net consolidation adjustments (-) (-) (-)
Profits before FVA 60,000 20,000 80,000
Depreciation of FVA -8,000 -2,000 -10,000
Goodwill impairment -800 -200 -1,000
Consolidated profit   51,200 17,800 69,000

Step 7: Profit or loss attributes to owners of parent and NCI

Case #1       Owners of parent
ABC's profit before FVA 60,000 60,000
Share in XYZ's profit before FVA 16,000 20,000
Depreciation of FVA -8,000 -10,000
Share in goodwill impairment -1,000 -1,000
Total       67,000 69,000

Case #2       Owners of parent Consolidated

ABC's profit before FVA 60,000 60,000
Share in XYZ's profit before FVA 16,000 20,000
Depreciation of FVA -8,000 -10,000
Share in goodwill impairment -800 -1,000
Total       67,200 69,000
Requirement (a): Consolidated total assets
Case #1 Case #2 (fair
        (proportionate) value)
Total assets of ABC Co. 418,000 418,000
Total assets of XYZ, Inc. 124,000 124,000
Investment in subsidiary -75,000 -75,000
FVA, net (16k-10k) 6,000 6,000
Goodwill, net 2,000 2,750
Effect of intercompany transaction - -
Consolidated total assets   475,000 475,750

Requirement (b): Consolidated total liabilities

Case #1 Case #2 (fair
        (proportionate) value)
Total liabilities of ABC Co. 73,000 73,000
Total liabilities of XYZ, Inc. 30,000 30,000
Fair value adjustments - net - -
Effect of intercompany transactions - -
Consolidated total liabilities 103,000 103,000

Requirement ( c ): Consolidated total equity

        Case #1 (proportionate) Case #2 (fair value)
Share capital of ABC Co. 170,000 170,000
Share premium of ABC Co. 65,000 65,000
Consolidated retained earnings 117,000 117,200
Equity attributes to owners of the
parent 352,000 352,200
Non-controlling interests   20,000 20,550
Consolidated total equity   372,000 372,750
 Idanan, Matthew
Example given:

Carrying Fair Fair value

Simon Co. amount adjustmen
values
s t
Cash 10,000 10,000 -
Accounts receivable 15,000 15,000 -
Inventory 25,000 31,000 6,000
Equipment, net (5 yrs. Remaining life) 40,000 60,000 20,000
Patent (8 yrs. Remaining life - 20,000 20,000
Accounts Payable -6,000 -6000 -
Net assets 84,000 130,000 46,000

Statements of financial position

As at December 31, 20x1
Peter Simon
Co. Co.
ASSETS
Cash 362,000 21,300
Accounts Receivable 178,000 5,000
Inventory 110,000 67,000
Investment in bonds (at amortized cost) 59,500
Investment in subsidiary (at cost) 122,000
Equipment, net     644,000   27,200
1,416,00 180,00
TOTAL ASSETS     0   0

LIABILITIES AND EQUITY

Accounts Payable 71,000 20,800
100,00
 
10% Bonds payable (issued at face amount)   0  
Total Liabilities     171,000   20,800
Share Capital 800,000 50,000
109,20
Retained Earnings     445,000   0
1,245,00 159,20
Total Equity     0   0
1,416,00 180,00
TOTAL LIABILITIES AND EQUITY 0 0

Statement of profit and loss

For the year ended December 31, 20x1

Peter Simon
Co. Co.
932,00 255,00
Sales 0 0
- -
425,00 118,00
Cost of goods sold     0   0
507,00 137,00
Gross profit 0 0
Interest income 2,000
Distribution costs -64,000 -36,000
-
161,00
Depreciation expense 0 -6,800
Loss on sale of equipment -1,000
Interest expense -10,000
Dividend income     18,000    
290,00
Profit for the year     0   95,200

iii. Intercompany sale of equipment (transaction 'd')

Step 1: Analysis of effects of intercompany transaction iv. Intercompany bond transaction (transaction 'e')
The following are the intercompany transactions during the v. Intercompany dividend transaction (transaction 'f')
period:
i. In-transit item (transaction 'a')
i. In-transit item
ii. Inter company sale of inventory (transaction 'b' and 'c')
a. Peter's accounts receivable include a Php 3,000
account receivable from Simon
while Simon's accounts payable include a Php 2,000
account payable to Peter
The difference is due to a Php 1,000 check deposited by
Simon directly to Peter's bank account
which the latter failed to record. The check has
already cleared in Simon's bank account.

The adjusting journal entry in Peter's books is as

follows
Cash in
Dec.
bank   1,000    
Accounts
31,
  receivable 1,000
20x1            

The remaining balance of Php 2,000 in the intercompany

accounts receivable/payable shall be eliminated through
CJE
 Summary of effects on the consolidated financial statements:
* Cash: increased by Php 1,000
* Accounts receivable: decreased by Php 3,000
(1,000AJE+2000CJE)
* Accounts payable: decreased by Php 2,000

ii. Intercompany sale of inventory

b. Peter sold goods costing 20,000 to Simon for 32,000. One-third of the goods remain unsold on Dec.
31, 20x1
c. Simon sold goods costing 10,000 to Peter for 15,000. Half of the goods remain unsold on Dec. 31,
20x1

Transaction 'b' is downstream while transaction 'c' is upstream.

        Downstream Upstream   Total

Sales price of intercompany sale 32,000 15,000
Cost of intercompany
-20,000 10000
sale        
Profit from
12,000 5,000
intercompany sale
Multiply by: Unsold portion as of
1/3 1/2
yr. end      
Unrealized gross profit   4,000   2,500   6,500

The related consolidated accounts are computed as follows:

Ending inventory of Peter Co. 110,000

Ending inventory of Simon Co. 67,000
Less: Unrealized profit in ending inventory -6,500
Consolidated sales 170,500

Sales by Peter Co. 932,000

Sales by Simon Co. 255,000
Less: Intercompany sales during 20x1 (32,000+15,000) -47,000
Consolidated sales 1,140,000
FVA on inventory 6,000
FVA on equipment, net (20,000/5 yrs) 4,000
FVA on patent (20,000/8 yrs) 2,500
Depreciation of FVA in 20x1 12,500

The consolidated cost of sales is computed as follows:

Cost of sales of Peter Co. 425,000

Cost of sales of Simon Co. 118,000
Less: Intercompany sales during 20x1 -47,000
Add: Unrealized profit in ending inventory 6,500
Add: Depreciation of FVA on inventory 6,000
Consolidated cost of sales 508,500

iii. Intercompany sale of property, plant and equipment

d. On January 1, 20x1, Simon sold equipment with carrying amount of

6,000
and remaining useful life of 5 years to Peter for 5,000

Transaction 'd' is upstream.

a. Unamortized balance of deffered gain(loss) on December 31, 20x1:

Sales price 5,000

Carrying amount of equipment on Jan 1, 20x1 -6,000
Loss on sale of equipment - Jan 1, 20x1 -1,000
Multiply by: Ratio of useful life at beg. and of yr. 4/5

Unamortized balance of deferred loss - Dec 31, 20x1 -800

b. Effect on the 20x1 depreciation:

Had there been no

Because of the sale sale   Effect on combined FS
Peter recognized   Simon should have   Depreciation is
recognized
depreciation of 1,000 depreciation   understated by 200
of 1,200 in 20x1
in 20x1 (6,000    
carrying amount/5
(5,000 purchase price/5 yrs) yrs)        
Equipment, net - Parent 644,000
Equipment, net - Subsidiary 27,200
Unamortized balance of deferred loss 800
FVA on equipment, net (20,000 - 4,000) 16,000
Consolidated equipment 688,000

Depreciation - Peter 161,000

Depreciation - Simon 6,800
Understatement in depreciation 200
Depreciation of FVA on equipment 4,000
Consolidated depreciation 172,000

Patent (unrecognized) 20,000

Less: Amortization of FVA on patent 2,500
Consolidated patent, net 17,500

iv. Intercompany bond transaction

e. On July 1, 20x1, Simon purchased 50% of the outstanding bonds of Peter from
a. Gain or loss on extinguishment of bonds:
Carrying amount of bonds payable acquired (100,000*50%) 50,000
Acquisition cost of bonds (assumed retirement price) -60,000
Loss on extinguishment of bonds -10,000
b. intercompany interest expense and interest income:
Peter paid Simon interest of 2,500 (50,000*5%).
However, Simon's interest income is only 2,000.
The 500 difference must be an amortization of the
premium on the investment in bonds. Nonetheless,
both Peter's interest expense of 2,500 and Simon's
interest income of 2,000 shall be eliminated in the
consolidated financial statements together with the
related bonds payable and investment in bonds.

Summary of effects on the consolidated financial

statements:
* Loss in extinguishment of bonds: recognize 10,000
* Interest expense: decreased by 2,500
* Interest income: eliminated
* Investment in bonds: eliminated
* Bonds payable: decreased by 50,000

v. Intercompany dividend transaction

f. Peter declared dividends of 40,000 while Simon declared dividends of

20,000.

Dividends declared by Simon

Allocation: 20,000

Owners of the parent (20,000*90%) 18,000

Non-controlling interest (20,000*10%) 2,000
As allocated 20,000
Step 4: Non-controlling Step 4: Non-controlling
interest in net assets interest in net assets

Simon's net assets at fair value 189,00

- Dec 31, 20x1 0 Simon's net assets at fair value 189,00
Multiply by: NCI - Dec 31, 20x1 0
percentage       10% Multiply by: NCI
Total 18,900 percentage       10%
Add: Goodwill to NCI net of
Total 18,900
accumulated impairment   1,800
Add: Goodwill to NCI net of
Non-controlling interest in net assets
accumulated impairment   1,800
- Dec 31, 20x1 20,700
Non-controlling interest in net assets
- Dec 31, 20x1 20,700
Step 5: Consolidated retained earnings

Peter's retained earnings - Dec 31, 20x1 445,000

Consolidation adjustments:
Peter's share in the net change in Simon's net assets 53,100
Unrealized profits (downstream only) -4,000
Loss on extinuishment of bonds -10,000
Untercompany interest expense 2,500
Peter's share in goodwill impairment -1,800
Net consolidation adjustments 39,800
Consolidated retained earnings - Dec 31, 20x1 484,800

Step 6: Consolidated profit or loss

Parent Subsudiary Consolidated

Profits before adjustments 290,000 95,200 385,200
Consolidation adjustments:
Unrealized profits -4,000 -2,500 -6,500
Unamortized deferred loss 800 800
Loss on bonds -10,000 -10,000
Interest expense/income 2,500 -2,000 500
Dividend income -18,000 -18,000
Net consolidation adjustments -29,500 -3,700 -33,200
Profits before FVA 260,500 91,500 352,000
Depreciation of FVA -11,250 -1,250 -12,500
Impairment of goodwill -1,800 -200 -2,000
Consolidated profit 247,450 90,050 337,500

Step 7: Profit or loss attributable to owners of parernt and NCI

Owners NCI Consolidated

of parent
Peter's profit before FVA 260,500 N/A 260,500
Share in Simon's profit before FVA 82,350 9,150 91,500
Depreciation of FVA -11,250 -1,250 -12,500
Impairment of goodwill -1,800 -200 -2,000
Totals 329,800 7,700 337,500
 Ramos, Christine Jane
ILLUSTRATION 1: Changes in ownership interest - No loss of control
Fact pattern
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ Inc. for P75,000. XYZ's net identifiable assets have a fair value
of P90,000. The investment in subsidiary is measured at cost. Goodwill has been computed under each of the available options
under PFRS 3 as follows.

  Case #1 Case #2
  (proportionate share) (fair value)
Consideration transferred 75,000 75,000
NCI in the acquiree (90000x 20%); [(75000 ÷ 80%) x 20%] 18,000 18,750
Previously held equity interest in the acquiree    
Total 93,000 93,750
Fair value of net identiable assets acquired (90,000) (90,000)
Goodwill - Jan. 1, 20x1 3,000 3,750

During the year, XYZ's net assets increased by P10,000 (after fair value adjustments). The NCI is updated as follows:
  Case #1 Case #2
  (proportionate share) (fair value)
NCI at acquisition date -Jan. 1, 20x1 18,000 18,750
Subsequent increase (P10,000 x 20%) 2,000 2,000
NCI in net assets - Dec. 31, 20x2 20,000 20,750

Scenario #1: Acquisition of all remaining NCI

On January 1, 20x2, ABC Co. acquires all the remaining 20% NCI in XYZ for P30,000.

Requirements:
a. How much is the gain or loss on the transaction to be recognized in the consolidated financial statements?
b. Compute for the effect of thw transcation on the consolidated financial statements.

Solutions:
Requirement (a):
None. The transaction is accounted for as equity transaction because it does not result to loss of control.
Requirement (b):
Case #1: Proportionate shares
Net assets of
%
  Owners of parent % NCI XYZ
Before the transaction 80% 80000 20% 20000 100000
After the transaction 100% 100000     100000
Change - Inc./ (Decrease)   20000   -20000  
a) This represents the fair value of XYZ's net assets on December 31, 20x1 (P90,000 fair value on acquisition
date + P10,000 increase during the year).

After acquiring the remaining 20% NCI, the parent's ownership interest is increased to 100%. Consequently, NCI
is reduced to zero.
Therefore, after the acquisition, the NCI in net assets is eliminated and attributed to the owners of the parent.
Case #2: Fair value
Net assets of
%
  Owners of parent % NCI XYZ
Before the transaction 80% 83750 20% 20750 100000
After the transaction 100% 103750     100000
Change - Inc./ (Decrease)   20750   -20750  

The effects of the transaction are determined as follows:

  Case #1 Case #2
  (proportionate share) (fair value)
Fair value of comsideration 30,000 30,000
Change in NCI (see tables above) (20,000) (20,750)
Direct adjustment to equity 10,000 9,250

The effects of the transaction may also be determined by preparing journal entries.

The entry in ABC's separate books as follows:

Jan 1, 20x2 Investment in Subsidiary 30000  
  Cash 30000
  to record the acquisition of remaining NCI in XYZ, Inc.

The consolidation journal entries are as follows:

Case #1:NCI measured at proportionate share      
NCI (the decrease computed
Jan. 1, 20x2
above) 20000  
Retained earnings - ABC Co.
  (squeeze) 10000  
    Investment in subsidiary 30000

Case #2: NCI measured at fair value        

NCI (the decrease computed
Jan. 1, 20x2
above) 20750  
Retained earnings - ABC Co.
  (squeeze) 9250  
    Investment in subsidiary 30000

Scenario #2: Acquisition of part of remaining NCI

On January 1, 20x2, ABC Co. acquires additional 12% equity interest held by non-controlling interests in XYZ for cash consideration
of P20,000.

Case #1: Proportionate shares

Net assets of
%
  Owners of parent % NCI XYZ
Before the transaction 80% 80000 20% 20000 100000
After the transaction 92% 92000 8% -8000 100000
Change - Inc./ (Decrease)   20000   -12000  

Case #2: Fair value

Net assets of
%
  Owners of parent % NCI XYZ
Before the transaction 80% 83000 20% 20750 100000
After the transaction 100% 95450 8% 8300 100000
Change - Inc./ (Decrease)   12450   -12450  

The direct adjustment in equity is determined as follows:

  Case #1 Case #2
(proportionate
  share) (fair value)
Fair value of comsideration 20,000 20,000

Change in NCI (see tables above) (12,000) (12,450)

Direct adjustment to equity 8,000 7,550

The entry in ABC's separate books as follows:

2000
Jan 1, 20x2
Investment in Subsidiary 0  
  Cash 20000
  to record the acquisition of additional interest

The consolidation journal entries are as follows:

Case #1:NCI measured at proportionate share      
1200
Jan. 1, 20x2
NCI (the decrease computed above) 0  
Retained earnings - ABC Co.
  (squeeze) 8000  
    Investment in subsidiary 20000

Case #2: NCI measured at fair value        

1245
Jan. 1, 20x2
NCI (the decrease computed above) 0  
Retained earnings - ABC Co.
  (squeeze) 7550  
    Investment in subsidiary 20000

Scenario #3: Disposal of part of controlling interest - Control not lost

On January 1, 20x2, ABC Co. sold its 10% interest in XYZ, Inc. for P20,000. The 70% (80%-10%) remaining interest still gives
ABC control over XYZ.

Case #1: Proportionate shares

Net assets of
%
  Owners of parent % NCI XYZ
Before the transaction 80% 80000 20% 20000 100000
After the transaction 70% 70000 8% 30000 100000
Change - Inc./ (Decrease)   -10000   10000  

Case #2: Fair value

Net assets of
%
Owners of parent % NCI XYZ
Before the transaction 80% 83000 20% 20750 100000
After the transaction 70% 72625 8% 31125 100000
Change - Inc./ (Decrease)   -10375   10375  

The direct adjustment in equity is determined as follows:

  Case #1 Case #2
 (proportionate
  share) (fair value)
Fair value of comsideration 20,000 20,000

Change in NCI (see tables above) (10,000) (10,375)

Direct adjustment to equity 10,000 9,625

The entry in ABC's separate books as follows:

Jan 1, 20x2 Cash in bank 20000  
  Investment in subsidiary 9375
  Gain on sale 10625
  to record the partial disposal of investment

The consolidation journal entries are as follows:

Case #1:NCI measured at proportionate share      
Jan. 1, 20x2 Investment in subsidiary 9375  
  Gain on sale 10625  
  NCI (the increase computed above) 10000
Retained earnings - ABC Co.
    (squeeze) 10000

Case #2: NCI measured at far value        

Jan. 1, 20x2 Investment in subsidiary 9375  
  Gain on sale 10625  
  NCI (the increase computed above) 10375
Retained earnings - ABC Co.
    (squeeze) 9625

Scenario #4: Subsidiary issues additional shares - Control not lost

The 80% interest acquired by ABC in XYZ on January 1, 20x1 represents 40,000 of XYZ's 50,000 outstanding shares as of that date.

On January 1, 20x2, XYZ, Inc. issues additional 10,000 shares with par value of P1 per share to other investors for P2.50 per share.
Although ABC acquires none of those shares, ABC still retains its control over XYZ

The change in ABC's ownership interest in XYZ is determined as follows:

After
  Before issuance % issuance %
Shares held by ABC 40000 40000
80% 66.67%
Outstanding shares of XYZ 50000 60000
(50000 + 10000 addt'l shares issued to NCI)

Case #1: Proportionate shares

Net assets of
%
  Owners of parent % NCI XYZ
Before the transaction 80% 80000 20% 20000 100000
After the transaction 66.67% 83333 33.33% 41667 125000
Change - Inc./ (Decrease)   3333   21667 25000
Case #2: Fair value
Net assets of
%
Owners of parent % NCI XYZ
Before the transaction 80% 83000 20% 20750 103750
After the transaction 66.67% 85833 33.33% 42917 128750
Change - Inc./ (Decrease)   2833   22167 25000

The direct adjustment in equity is determined as follows:

  Case #1 Case #2
(proportionate
  share) (fair value)
Fair value of comsideration 25,000 25,000
Change in NCI (see tables above) (21,667) (22,167)
Direct adjustment to equity 3,333 2,833

The entry in ABC's separate books as follows:

Jan 1, 20x2 Cash on hand 25000  
  Share capital (P10,000 x P1 par) 10000
  Share premium 15000
  to record issuance of shares    

The consolidation journal entries are as follows:

Case #1:NCI measured at proportionate share      
Jan. 1, 20x2 Share capital - XYZ Inc. 10000  
  Share premium - XYZ Inc. 15000  
  NCI (the increase computed above) 21667
Retained earnings - ABC Co.
    (squeeze) 3333

Case #2: NCI measured at fair

value        
Jan. 1, 20x2 Share capital - XYZ Inc. 10000  
  Share premium - XYZ Inc. 15000  
  NCI (the increase computed above) 22167
Retained earnings - ABC Co.
    (squeeze) 2833

The gain or loss on disposal of controlling interest is computed as follows:

       
Consideration received (at fair value)   xx
Investment retained in the former subsidiary (at fair value) xx
NCI (carrying amount)   xx
Total     xx
Less: Former subsidiary's net identifiable assets (carrying amount) (xx)
 Goodwill (carrying amount)   (xx)
Gain or loss on disposal of controlling interest xx
       

OR

Date Cash or other assets (Consideration received) xx  

  Investment account (Investment retained) xx  
  NCI   xx  
  Liabilities of former subsidiary xx  
    Assets of former subsidiary xx
    Goodwill   xx
    Gain on disposal of controlling interest (squeeze) xx

Illustration: Loss of control - Deconsolidation

On January 1, 20x2, ABC Co, sells out 60% out of its 80% interest in XYZ, Inc. for P100,000.
ABC's remaining 20% interest in XYZ has a fair value of P25,000.
This gives ABC significant influence over XYZ. The statement of financial position immediately before the sale
are shown below.

Statement of financial position

As at January 1, 20x2
  ABC Co. XYZ Inc. Consolidated
ASSETS
Cash 23000 57000 80000
Accounts receivable 75000 22000 97000
Inventory 105000 15000 120000
Investment in subsidiary 75000
Equipment 200000 50000 260000
Accumulated depreciation -60000 -20000 -84000
Goodwill 3000
TOTAL ASSETS 418000 124000 476000

LIABILITIES AND EQUITY

Accounts payable 43000 30000 73000
Bonds payable 30000 30000
Total liabilities 73000 30000 103000
Share capital 170000 50000 170000
Share premium 65000 65000
Retained earnings 110000 44000 118000
Noncontrolling interest 20000
Total equity 345000 94000 373000
TOTAL LIAB. & EQUITY 418000 124000 476000

Requirement:
Prepare the statement of financial position immediately after the sale.
Step 1: We will identify the carrying amounts of XYZ's assets and liabilities in the consolidated financial
statements as at the date contol was lost.

Statement of financial position

As at January 1, 20x2
Carrying amount of XYZ's net
  ABC Co. XYZ Inc. Consolidated
assets
ASSETS (a) (b) (c) = (a) - (a)
Cash 23000 57000 80000 57000
Accounts receivable 75000 22000 97000 22000
Inventory 105000 15000 120000 15000
Investment in
75000
subsidiary
Equipment 200000 50000 260000 60000
Accumulated
-60000 -20000 -84000 -24000
depreciation
Goodwill 3000
TOTAL ASSETS 418000 124000 476000 130000

LIABILITIES AND EQUITY

Accounts payable 43000 30000 73000 30000
Bonds payable 30000 30000
Total liabilities 73000 30000 103000 30000
Share capital 170000 50000 170000
Share premium 65000 65000
Retained earnings 110000 44000 118000
Noncontrolling interest 20000
Total equity 345000 94000 373000 100000
TOTAL LIAB. & EQUITY 418000 124000 476000  

Step 2: We will prepare the deconsolidation journal entries (DJE):  

DJE #1: To reognize the gain or loss on the disposal of controlling interest
Jan. 1, 20x2 Cash - ABC Co. (Consideration received) 100000  
  Investment in associate (Investment retained) 25000  
  Accounts payable 30000  
  Accumulated depreciation - XYZ, Inc. 24000  
  Non-controlling interest 20000  
  Cash - XYZ Inc. 57000
  Accounts receivable - XYZ Inc. 22000
  Inventory - XYZ Inc. 15000
  Equipment - XYZ Inc. 60000
  Goodwill 3000
Gain on disposal of controlling interest
    42000
(squeeze)
DJE #2: To close the gain on disposal to retained earnings.
Jan. 1, 20x2 Income summary - working 100000  
 paper
Retained earnings - ABC
    22000
Co.

DJ
DJE
E
  Consolidated Deconsolidated adjustments ref. Deconsolidated
ref
#
.#
ASSETS Dr Cr
Cash 80000 100000 57000 123000
Accounts receivable 97000 22000 75000
Inventory 120000 15000 105000
Investment in subsidiary 25000 25000
Equipment 260000 60000 200000
Accumulated depreciation -84000 24000 -60000
Goodwill 3000 3000
TOTAL ASSETS 476000 468000

LIABILITIES AND EQUITY

Accounts payable 73000 30000 43000
Bonds payable 30000 30000
Total liabilities 103000 73000
Share capital 170000 170000
Share premium 65000 65000
Retained earnings 118000 42000 160000
Noncontrolling interest 20000 20000
Total equity 373000 395000
TOTAL LIAB. & EQUITY 476000 199000 199000 468000

     

ABC Company
Statement of financial position
As at January 1, 20x2

     
ASSETS  
Cash 123000
Accounts receivable 75000
Inventory 105000
Investment in subsidiary 25000
Equipment 200000
Accumulated depreciation -60000
Goodwill  
TOTAL ASSETS   468000
LIABILITIES AND EQUITY  
Accounts payable 43000
Bonds payable 30000
Total liabilities   73000
Share capital 170000
Share premium 65000
Retained earnings 160000
Noncontrolling interest  
Total equity   395000
TOTAL LIAB. & EQUITY 468000
 Francisco, Emmanuel
Illustration 1: Intercompany receivables and
payables
Requirement (a): Total assets in separate financial statements

Total assets of Horse before the combination 1,000,000

Investment in subsidiary 250,000
Total assets of Horse after the combination 1,250,000

Requirement (b): Total assets in consolidated financial

statements

Total assets of Horse after the combination 1,250,000

Total assets of Colt 400,000
Investment in subsidiary (250,000)
FVA on assets (430k-400k) 30,000
Goodwill - net (250k+(230k x 20% )-230k) 66,000
Effect of intercompany transactions (20,000)
Consolidated total assets   1,476,000

Illustration 2.1: Fair value adjustment - Decrement

Q1 Q2

Equipment, net - Lion Co. Accumulated Depreciation 32000

(800k x 8/10) 640,000 Depreciation
Equipment, net - Cub Co. Expense 16000
(400k x 3/5) 240,000 Retained
FVA on equipment, net - earnings- Lion Co. 12800
decrement ((320k-400k)x3/5) (48,000) Retained
Consolidated equipment, net - earnings- Cub Co. 3200
Dec. 31, 20x2 832,000

Illustration 2.2: Fair value adjustment - Increment

Equipment, net - kangaroo 500,000

Equipment, net - Joey 300,000
FVA on equipment, net - Increment ((120k-
100k)x8/10) 16,000
Consolidated equipment, net - Dec. 31, 20x2 816,000
Requirement (a): Fair value of NCI at acquisition
date

Analysis of net assets

Acquisition Consolidatio Net
Owlet co. date n date Change

Share capital 100,000 100,000

Retained Earnings (280k-200k) 80,000 280,000  

Totals at carrying amounts 180,000 380,000

Fair value adjustments at acquisition date - -
Subsequent depreciation of FVA NIL -
Unrealized profits (Upstream only) NIL -  

Subsidiary's net assets at fair value 180,000 380,000 200,000

Fair value of NCI 55,000

NCI's proportionate share in net assets of
subsidiary (45,000)
Goodwill attributable to NCI - acquisition date
(given) 10,000

Requirement (b): Goodwill at current year net assets of subsidiary (180000x25%) 45,000)
Formula #2; Goodwill attributable to NCI -
1 acquisition date 10,000
Consideration transferred 50,000 Less: NCI's share in goodwill
Less: Previously held equity interest in impairment (8000x25%) (2,000)
-
the acquiree Goodwill attributable to NCI - current
1 year 8,000
Total 50,000
Less: Parent's proportionate share in Goodwill, net - current year 17,000
(1
the net assets of subsidiary
35,000)
(180000x75%)
Requirement (c): NCI in net assets
Goodwill attributable to owners of parent - Owl's net assets at fair value - current
acquisition date 15,000
year 380000
Less: Parent's share in goodwill
Multiply by: NCI percentage 25%
impairment (8000x75%) (6,000)
Total 95000
Goodwill attributable to owners of
Add: Goodwill attributable to NCI -
parent - current year 9,000
current yr. 8000
Fair value of NCI 55,000 Non-controlling interest in net assets
- current year 103000
Less: NCI's proportionate share in the (
Requirement (d): Consolidated 1,3
retained earnings Consolidated total assets 67,000

Owl's retained earnings - current 500,00

year 0
Consolidated adjustments:
Owl's share in the net change in
Owlet's net assets 150,000
Owl's share in goodwill
impairment (6,000)  

144,00
Requirement (f): Consolidated total
Net consolidation adjustments 0
equity
3
Consolidated retained earnings 644,00
Share capital of Owl 00,000
- current year   0
Share premium of Owl -
6
Requirement (e): Consolidated Total Consolidated retained earnings 44,000
assets Equity attributable to owners of the 9
1,0 parent 44,000
Total assets of Owl 00,000 1
5 Non-controlling interests 03,000
Total assets of Owlet 00,000 1,0
(1 Consolidated total equity 47,000
Investment in subsidiary 50,000)
Fair value adjustments - net -

Goodwill - net 17,000

Effect of intercompany transactions -

Analysis of net assets

Consolidation
Owlet co. Acquisition date
date
Net Change

Share capital (100000x1) 100,000 100,000

Retained Earnings 80,000 280,000  

Totals at carrying amounts 180,000 380,000

FVA on investment property 20,000 140,000

FVA on building 30,000 30,000

(12,000.0
Subsequent depreciation of FVA NIL 0)

Subsidiary's net assets at fair value 230,000 538,000 308,000

Requirement (a): Goodwill at 87,500
current year Less: NCI's proportionate share in the
(
net assets of subsidiary
57,500)
Formula #2; (230000x25%)
Goodwill attributable to NCI -
Consideration transferred (75000x4) 300,000 acquisition date 30,000
Less: Previously held equity interest Less: NCI's share in goodwill
-
in the acquiree impairment (20000x25%) (5,000)
Goodwill attributable to NCI -
Total 300,000 current year 25,000
Less: Parent's proportionate share in
(1
the net assets of subsidiary Goodwill, net - current year 137,500
72,500)
(230000x75%)
Goodwill attributable to owners of parent -
acquisition date 127,500
Less: Parent's share in goodwill ( Requirement (b): NCI in net assets
impairment (20000x75%) 15,000) Nymph's net assets at fair value 538000
Goodwill attributable to owners of Multiply by: NCI percentage 25%
parent - current year 112,500 Total 134000
Add: Goodwill attributable to NCI 25000
Non-controlling interest in net
assets - current year 159500
Fair value of NCI (25000x3.50)

Requirement (c):
Consolidated retained
earnings

Cockroach's retained 500,00 Requirement (d): Consolidated

earnings 0 Total assets
Consolidated adjustments: 1,
Owl's share in the net Total assets of Cockroach 000,000
change in Nymph's net 231,00
assets 0 Total assets of Nymph 500,000
(
Owl's share in goodwill (15,000 Investment in subsidiary 300,000)
impairment )   Fair value adjustments - net
(140k+30k-12k) 158,000
Net consolidation 216,00
adjustments 0 Goodwill - net 137,500

Consolidated retained 716,00 Effect of intercompany transactions (10,000)

earnings - current year   0 1,
Consolidated total assets 485,500

Requirement (e): Consolidated

Total liabilities

Total liabilities of Cockroach 200,000

Total assets of Nymph
 120,000
Fair value adjustments - net - Consolidated total assets 310,000

Effect of intercompany transactions (10,000)

Requirement (f): Consolidated
total equity

Share capital of Cockroach 300,000

Share premium of Cockroach -

Consolidated retained earnings 716,000

Equity attributable to owners of the 1,
parent 016,000

Non-controlling interests 159,500

1,
Consolidated total equity 175,500
 Montefalcon, Janhart
Illustration 5
Solutions:
Analysis of net assets
Acquisition Consolidated Net
date date change
(Jan. 1, 20x3) Dec. 31, 20x3
Share capital P100,000 P100,000
Retained earnings 80,000 280,000
Total at carrying amounts 180,000 380,000
FV adjustments 0 0
Less: Subsequent dep'n of FVA NIL 0
Subsidiary's net asstes at FV P180,000 P380,000 P200,000

Requirement (a): Goodwill at current year

Formula 2:
Consideration trasferred P200,000
Less: Previously held equity interest
in the acquiree 100,000
Total 300,000
Less: Parent's proportionate share in the net assets
of subsidiary (180,000 Acquisition-
date FV X 75%) 135,000
GW attributable to owners pf parent-
Jan. 1, 20x3 165,000
Less: Parent's share in GW
impairment 0
GW impairment attributable to
P165,000
owners of parent

FV of NCI P55,000
Less: NCI's proportionate share in the net assets of
subsidiary (180,000 acquisition-date
FV X 25%) 45,000
GW attributable to NCI- Jan. 1, 20x3 10,000
Less: NCI's share in GW impairment 0
GW attributable to NCI- Dec. 31,
20x3 10,000
Goodwill, net - Dec. 31, 20x3 P175,000
(previously interest plus 35% additional acquired on Jan.
1, 20x3)
Requirement (b): NCI in net assets
Bunny's net assets at FV - 12/31/X3 P380,000
X NCI percentage 25%
Total 95,000
Add: GW attributable to NCI (req. 'a') 10,000
NCI in net assets- Dec. 31, 20x3 P105,000

Requirement (c): Consolidated retained earnings

Rabbit's RE- 12/31/x3 P500,000
Consolidated adjustments:
Rabbit's share in NET CHANGE in Bunny's net assets (a) P150,000
Rabbit's share in GW impairment 0
Net consolidated adjustments 150,000
Consolidated Retained Earnings- Dec. 31, 20x3 P650,000
(a) Net change in Bunny's net assets (see 'Analysis') P200,000 X 75%= P150,000.

Requirement (d): Consolidated total assets

Total assets of Rabbit P1,000,000
Total assets of Bunny 500,000
Investment im Subsidiary (P200,000+P100,000) -300,000
FV adjustments- net 0
GW- net 175,000
Effect of intercompany transactions 0
Consolidated total assets P1,375,000

Requirement (e): Consolidated total liabilities

Total liabilities of Rabbit P200,000
Total liabilities of Bunny 120,000
FV adjustments- net 0
Effect of intercompany transactions 0
Consolidated total assets P320,000

Requirement (f): Consolidated total equity

Share capital of Rabbit P300,000
Share premium of Rabbit 0
Consolidated retained earnings 650,000
Equity attributable to owners of the parent 950,000
Non-controlling interest 105,000
Consolidated total equity P1,055,000

Illustration 6
Solutions:
Requirement (a): Consolidated sales and Cost of Sales
The intercompany sale of inventory is DOWNSTREAM.
The unrealized profit in ending inventory is computed as follows:
Sales of price of intercompany sale P150,000
Cost of intercompany sale -120,000
Profit from intercompany sale 30,000
X unsold proportion as of yr.-end 1÷4
Unrealized gross profit in ending inventory P7,500

The consolidated sales and cost of sales are computed as follows:

Sales by Rooster Co. P1,000,000
Sales by Cockerel Co. 700,000
Less: Intercompany sales during the current period 150,000
Consolidated sales P1,550,000

Cost of sales of Rooster Co. P400,000

Cost of sale Cockerel Co. 300,000
Less: Intercompany sales during the current period 150,000
Add: Unrealized gross profit in beggining inventory 7,500
Less: Realized profit in beggining inventory 0
Add: Depreciation of FVA on inventory 0
Consolidated cost of sales P557,500

Requirement (b): Consolidated profit and Comprehensive income

Rooster Cockerel Consolidated
Profits before adjustments P234,000 175,000 409,000
Consolidation adjustments:
Unrealized profit (Reqmt. 'a') -7,500 0 -7500
Dividend Income (given) -10,000 N/A -10,000
Net consolidation adjustments -17,500 0 -17,500
Profit before FVA 216,000 175,000 391,500
Depreciation of FVA 0 0 0
Share in GW impairment (b) -6,000 -2,000 -8,000
Consolidated profit 210,500 173,000 383,500
Other Comprehensive income 74,000 25,000 99,000
Comprehensive income P284,500 P198,000 P482,500
(b) Share in GW impairment: (P8,000X75%); (8,000X25%)

Illustration 7 Sales of Piglet Co. from Sep. 1 to Dec. 31 only

Solutions: (P720,000X4/12) 240000
Less: Intercompany sales during the
Requirement (a)
year 81,000
The intercompany sale transaction is UPSTREAM. The
unrealized profit inventory in ending inventory is Consolidated sales P1,159,000
computed as follows:
Cost of sales of Pig Co. P400,000
Sale Price of intercompany sale P81,000
Cost of Piglet Co. from Sep. 1 to Dec. 31 only
Cost of intercompany sale
54,000 (P300,000X4/12) 100,000
(P81,000÷150%)
27,000 Less: Intercompany sales during the
Profit from intercompany sale
year 81,000
X unsold portion as of year-end 1÷3 Add: Unrealized gross profit in ending
P9,000 inventory 9,000
Unrealized gross profit
Add: Realized profit in beggining
inventory 0
The consolidated sales and cost of sales are computed
Add: Depreciation FVA 0
as follows:
Consolidated cost of sales P428,000
Sales of Pig Co. P1,000,000
Requirement (b)
Parent Subsidiary Consolidated
Profits before adjustments P224,000 P60,000 P284,000
Consolidated adjustments:
Unrealized profit- (reqmt. 'a') 0 -9,000 -9000
Net consolidated adjustments 0 -9,000 -9000
Profits before FVA 224,000 51,000 275,000
Depreciation of FVA 0 0 0
Consolidated Profit P224,000 P51,000 P275,000

Requirement (c)
Owners of parent NCI Consolidated
Pig's profit before FVA (reqmt. 'b') P224,000 N/A P224,000
Share in Piglet's profit bef. FVA (req.
38,250 12,750 51,000
c)
Depreciation of FVA 0 0 0
Share in GW impairment 0 0 0
Totals P26,250 P12,750 P275,000

Illustration 8
Solutions:
Profit attributable to owners of parent and NCI

Owner of Parent NCI

N/A
Sheep's before FVA P216,500
Share in Lamb's profit before
131250 (b) 43,750 Squeeze
FVA
0 0
Depreciation of FVA
Share in impairment of goodwill -6000 (2,000) (a)
Totals P341, 750 P41,750 Start

(a) Shares in impairment of goodwill: (P8,000X75%); (P8,000X25%)

(b) P43,750÷25%)= P175,000 Lamb's separate profit X 75%= P131,250

Answers to the requirements

a. Profit of Lam for the year ended Dec. 31, 20x1= P175,000
b. Consolidated Profit= (P341,750+P41,750)= P383,500
c. Profit attributable to owners of the parent and NCI= P341,750 and P41,750
 Macasieb, Theresa Fe