SUERTE, ROSEMILYN L.

BSA 3B

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. Solutions:
Requirement (a):
Sales of Parent 1,000,000
Sales of Subsidiary 700,000
Less: Intercompany sales during the year (38,000 + 40,000) (78,000)
Consolidated sales 1,622,000

Requirement (b): The unrealized profits in ending inventory are computed as follows:

Downstream Upstream Total

Sale price of intercompany sale 38,000
Cost of intercompany sale (20,000)
Profit from intercompany sale 18,000 8,000*
Multiply by: Unsold portion as of yr.- end (9.5/38) 3/4
Unrealized gross profit 4,500 6,000 10,500

*(40,000 x 20%) = 8,000

Cost of sales of Parent 400,000

Cost of sales of Subsidiary 350,000
Less: Intercompany sales during the yr. (38,000 + 40,000) (78,000)
Add: Unrealized profit in ending inventory 10,500
Less: Realized profit in beginning inventory –
Add: Depreciation of FVA on inventory –
Consolidated cost of sales 682,500

Requirement (c):
Ending inventory of Parent 300,000
Ending inventory of Subsidiary 80,000
Less: Unrealized profit in ending inventory (10,500)
Consolidated ending inventory 369,500

2. Solutions:
Requirement (a):
Historical cost 120,000
Accumulated dep'n. 1/1/x1 (72,000)
Depreciation based on historical cost (12,000)
Carrying amount 36,000

The solution above is based on the notion that it is as if he intercompany sale never happened.

Requirement (b):
Equipment - net (Bright Co.) 400,000
Equipment - net (Dull Co.) 190,000
Unamortized deferred gain (see Step 1 below) (9,000)
Consolidated equipment - net 581,000

Step 1: Analysis of effects of intercompany transaction

The intercompany sale is downstream because the seller is the parent (Bright Co.).

The unamortized balance of the deferred gain is computed as follows:

Deferred gain on sale - Jan. 1, 20x1 [60K – (120K - 72K)] 12,000
Multiply by: (3 yrs. remaining as of Dec. 31, 20x1 over 4 yrs.) 3/4
Deferred gain on sale - Dec. 31, 20x1 9,000
Requirement (c):
Depreciation expense (Bright Co.) 40,000
Depreciation expense (Dull Co.) 12,000
Depreciation in Dull's books (60,000 ÷ 4 yrs.) (15,000)
Depreciation in Bright's books if the sale never happened (120,000 ÷ 10 yrs.) 12,000
Consolidated depreciation expense 49,000

Requirement (d):
Consolidated
ASSETS
Investment in subsidiary (at cost) - eliminated –
Equipment - net (Requirement 'b') 581,000
Other assets (200,000 + 45,000) 245,000
Goodwill (Step 3) 60,000
TOTAL ASSETS 886,000

LIABILITIES AND EQUITY

Liabilities (70,000 + 25,000) 95,000
Share capital (Bright's only) 600,000
Retained earnings (Step 5) 138,500
Equity attributable to owners of the parent 738,500
Non-controlling interest (Step 4) 52,500
Total equity 791,000
TOTAL LIABILITIES AND EQUITY 886,000

Consolidated
Revenues (300,000 + 80,000) 380,000
Depreciation expense (Requirement 'c') (49,000)
Other expenses (32,000 + 18,000) (50,000)
Gain on sale of equipment (eliminated) –
Profit for the year 281,000
Profit attributable to owners of the parent (Step 7) 268,50
Profit attributable to NCI (Step 7) 12,50 0
Profit for the year 281,00 0

Step 2: Analysis of net assets

Dull Co. Acquisition date Consolidation date Net change
Total net assets at carrying amounts 160,000 210,000
Fair value adjustments at acquisition date - -
Subsequent depreciation of FVA NIL –
Unrealized profits (Upstream only) NIL –
Subsidiary's net assets at fair value 160,000 210,000 50,000

Step 3: Goodwill computation

Consideration transferred 180,000
Non-controlling interest in the acquiree (160K x 25%) 40,000
Previously held equity interest in the acquire –
Total 220,000
Fair value of net identifiable assets acquired (160,000)
Goodwill 60,000

Step 4: Non-controlling interest in net assets

Dull's net assets at fair value – Dec. 31, 20x1 (Step 2) 210,000
Multiply by: NCI percentage 25%
Total 52,500
Add: Goodwill to NCI of accumulated impairment losses net –*
Non-controlling interest in net assets – Dec. 31, 20x1 52,500

*No goodwill is attributed to NCI because NCI is measured at.

 Step 5: Consolidated retained earnings
Bright's retained earnings – Dec. 31, 20x1 110,000
Consolidation adjustments:
Bright's share in the net change in Dull's net assets *37,500
Unamortized deferred gain (Downstream only) - (Step 1) (9,000)
Gain or loss on extinguishment of bonds –
Impairment loss on goodwill attributable to Parent –
Net consolidation adjustments 28,500
Consolidated retained earnings – Dec. 31, 20x1 138,500

*Net change in Dull’s net assets (Step 2) of ₱50,000 x 75% = ₱37,500.

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits before adjustments 240,000 50,000 290,000
Consolidation adjustments:
Unamortized def. gain - (Step 1) (9,000) (-) (9,000)
Dividend income from subsidiary (-) N/A (-)
Gain or loss on extinguishment of bonds (-) (-) (-)
Net consolidation adjustments (9,000) (-) (9,000)
Profits before FVA 231,000 50,000 281,000
Depreciation of FVA (-) (-) (-)
Impairment loss on goodwill (-) (-) (-)
Consolidated profit 231,000 50,000 281,000

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

Owners of parent NCI Consolidated
Bright's profit before FVA (Step 6) 231,000 N/A 231,000
Share in Dull’s profit before FVA* 37,500 12,500 50,000
Depreciation of FVA (-) (-) (-)
Share in impairment loss on goodwill (-) (-) (-)
Totals 268,50 12,500 281,000

*Shares in Dull’s profit before FVA (Step 6): (50,000 x 75%); (50,000 x 25%)

3. Solutions:
Step 1: Analysis of effects of intercompany transaction
The dividends declared by the subsidiary are allocated as follows:
Total dividends declared ₱100,000
Allocation:
Owners of the parent (100,000 x 75%) 75,000
Non-controlling interest (100,000 x 25%) 25,000
As allocated ₱100,000

Step 2: Analysis of net assets

Subsidiary Acquisition date Consolidation date Net change
Net assets at carrying amts. 240,000 320,000
Fair value adjustments at acquisition date - -
Subsequent depreciation of FVA NIL –
Unrealized profits (Upstream only) NIL –
Subsidiary's net assets at fair value 240,000 320,000 80,000

Step 3: Goodwill computation We can leave out this step because the information is insufficient.

Step 4: Non-controlling interest in net assets

Sub.'s net assets at fair value – Dec. 31, 20x1 (Step 2) 320,000
Multiply by: NCI percentage 25%
Total 80,000
Add: Goodwill to NCI net of accumulated impairment losses –
Non-controlling interest in net assets – Dec. 31, 20x1 80,000
 Step 5: Consolidated retained earnings
Parent's retained earnings – Dec. 31, 20x1 280,000
Consolidation adjustments:
Parent's sh. in the net change in Sub.'s net assets *60,000
Unrealized profits (Downstream only) –
Gain or loss on extinguishment of bonds –
Impairment loss on goodwill attributable to Parent –
Net consolidation adjustments 60,000
Consolidated retained earnings – Dec. 31, 20x1 340,000

*₱80,000 Net change in subsidiary’s assets x 75% (Step 2)

The dividends received from the subsidiary are not separately adjusted in the formula above because their effect
is automatically eliminated by including only the parent’s share in the net change in the subsidiary’s net assets.

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits before adjustments 475,000 132,000 607,000
Consolidation adjustments: Unrealized profits - - -
Dividend income from subsidiary (75,000) N/A (75,000)
Gain or loss on extinguishment of bonds - - -
Net consolidation adjustments (75,000) - (75,000)
Profits before FVA 400,000 132,000 532,000
Depreciation of FVA (-) (-) (-)
Impairment loss on goodwill (-) (-) (-)
Consolidated profit 400,000 132,000 532,000

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

Owners of parent NCI Consolidated
Parent's profit before FVA (Step 6) 400,000 N/A 400,000
Share in Sub.’s profit before FVA* 99,000 33,000 132,000
Depreciation of FVA (Step 6) (-) (-) (-)
Share in impairment loss on goodwill (-) (-) (-)
Totals 499,000 33,000 532,000

*Shares in Sub.’s profit before FVA – (Step 6) (132,000 x 75%); (132,000 x 25%)

SUMMARY OF ANSWERS TO REQUIREMENTS:

a. NCI in the net assets = 80,000 (Step 4)
b. Consolidated retained earnings = 340,000 (Step 5)
c. Consolidated profit = 532,000 (Step 6)
Attributable to owners of parent = 499,000 (Step 7)
Attributable to NCI = 33,000 (Step 7)

4. Solutions:
Step 1: Analysis of effects of intercompany transaction
Requirement (a): Gain (loss) on extinguishment of bonds
The on the extinguishment of bonds is computed as:
gain or loss Acquisition cost of bonds (assumed retirement price) 250,000
Carrying amount of bonds payable (300,000)
Gain on extinguishment of bonds 50,000

Requirement (b): Consolidated total bonds payable

Bonds payable (at face amount) – issued by Parent 300,000
Portion acquired by Subsidiary (300,000)
Consolidated total bonds payable –
Step 2: Analysis of net assets
Subsidiary Acquisition date Consolidation date Net change
Net assets at carrying amounts 200,000 270,000
Fair value adjustments at acquisition date - -
Subsequent depreciation of FVA NIL –
Unrealized profits (Upstream only) NIL –
Subsidiary's net assets at fair value 200,000 270,000 70,000

Step 3: Goodwill computation

Consideration transferred (cost of investment in sub.) 180,000
Non-controlling interest in the acquiree (200K x 25%) 50,000
Previously held equity interest in the acquire –
Total 230,000
Fair value of net identifiable assets acquired (200,000)
Goodwill 30,000

Step 4: Non-controlling interest in net assets

Sub.'s net assets at fair value – Dec. 31, 20x1 (Step 2) 270,000
Multiply by: NCI percentage 25%
Total 67,500
Add: Goodwill to NCI net of accumulated impairment losses –
Non-controlling interest in net assets – Dec. 31, 20x1 67,500

Step 5: Consolidated retained earnings

Parent's retained earnings – Dec. 31, 20x1 140,000
Consolidation adjustments:
Parent's share in the in Sub.'s net assets net change *52,500
Unrealized profits (Downstream only) –
Gain on extinguishment of bonds (Step 1) 50,000
Impairment loss on goodwill attributable to Parent –
Net consolidation adjustments 102,500
Consolidated retained earnings – Dec. 31, 20x1 242,500

*Net change in Subsidiary’s net assets (Step 2) of ₱70,000 x 75% = ₱52,500.

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits before adjustments 80,000 20,000 100,000
Consolidation adjustments: Unrealized profits (-) (-) (-)
Dividend income from subsidiary (-) N/A (-)
Gain on extinguishment of bonds 50,000 (-) 50,000
Net consolidation adjustments 50,000 (-) 50,000
Profits before FVA 130,000 20,000 150,000
Depreciation of FVA (-) (-) (-)
Impairment loss on goodwill (-) (-) (-)
Consolidated profit 130,000 20,000 150,000

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

Owners of parent NCI Consolidated
Parent's profit before FVA (Step 6) 130,000 N/A 130,000
Share in Sub.’s profit before FVA* 15,000 5,000 20,000
Depreciation of FVA (-) (-) (-)
Share in impairment loss on goodwill (-) (-) (-)
Totals 145,000 5,000 150,000

*Shares in Sub.’s profit before FVA: (Step 6) (20,000 x 75%); (20,000 x 25%)
Requirement (c): Consolidated financial statements
Consolidated
ASSETS
Investment in subsidiary (at cost) - eliminated –
Investment in bonds - eliminated –
Other assets (500,000 + 50,000) 550,000
Goodwill (Step 3) 30,000
TOTAL ASSETS 580,000

LIABILITIES AND EQUITY

Accounts payable (40,000 + 30,000) 70,000
Bonds payable (at face amount) - eliminated -
Total liabilities 70,000
Share capital (Parent only) 200,000
Retained earnings (Step 5) 242,500
Equity attributable to owners of parent 442,500
NCI in net assets (Step 4) 67,500
Total equity 510,000
TOTAL LIABILITIES AND EQUITY 580,000

Consolidated
Revenues (300,000 + 120,000) 420,000
Operating expenses (217,000 + 100,000) (317,000)
Interest expense (3,000* + 0) (3,000)
Gain on extinguishment of bonds (Step 1) 50,000
Profit for the year 150,000

Profit attributable to owners of the parent (Step 7) 145,000

Profit attributable to NCI (Step 7) 5,000
Profit for the year 150,000

*The interest expense is not eliminated because the interest expense was paid to unrelated parties, the previous
holder of the bonds (i.e., the bonds were acquired by the subsidiary only at year-end.

SUMMARY OF ANSWERS TO REQUIREMENTS

a. Gain (loss) on extinguishment of bonds = 50,000 gain (Step 1)
b. Consolidated bonds payable = 0 (Step 1)
c. Consolidated financial statements (See above)