Answers -

Activity 2.4, 2.5

& 3.1
Activity 2.4
Number 1
On January 1, 1991, Dallas, Inc. acquired 80% of Style, Inc.’s outstanding common
stock. On that date, the carrying amounts of Style’s assets and liabilities
approximated their fair values. Non-controlling interest was measured using the
proportionate share method.
During 1991, Style paid P 5,000 cash dividends to its stockholders. Summarized
balance sheet information for the two companies follows:
Dallas Style
12/31/1991 12/31/1991 1/1/1991
Investment in Style (equity method)132,000
Other assets 138,000 115,000 100,000
Totals 270,000 115,000 100,000

Common stock 50,000 20,000 20,000

Additional paid-in capital 80,250 44,000 44,000
Retained earnings 139,750 51,000 36,000
Totals 270,000 115,000 100,000
 
1. What amount should Dallas report as earnings from subsidiary, in its 1991
income statement?_________________
2. How much is the acquisition cost of the investment on January 1, 1991?
_________________
3. How much is the goodwill on the business combination? _________________
4. How much is the non-controlling interest in the net assets of Style on December
31, 1991? ________________
5. How much is the consolidated retained earnings on December 31, 1991?
________________
6. How much is the total assets in the consolidated statement of financial position as
of December 31, 1991? _____________
7. What amount of equity attributable to the owners of the parent should be reported
in Dallas’ December 31, 1991, consolidated balance sheet? _________________
 Solutions
1. Share in profit of subsidiary = 20,000 x 80% = 16,000
Retained earnings – Subsidiary
  36,000 1/1/1991
Dividends 5,000 20,000 Profit (squeeze)
51,000  

2. Dividends received (5,000 X 80%) = 4,000

Investment in subsidiary
Initial cost (squeeze) 120,000
Sh. in profit of Sub. 16,000 4,000 Dividends received
Share in the amortization
of undervaluation of
- assets
132,000 Dec. 31, 20x1
3. Solution
Consideration transferred 120,000
Non-controlling interest in the acquiree (100K x 20%) 20,000
Previously held equity interest in the acquiree -
Total 140,000
Fair value of net identifiable assets acquired (100,000)
Goodwill at acquisition date 40,000
Accumulated impairment losses since acquisition date -
Goodwill, net – current year 40,000

4. 115, 000 X 20% = 23,000

5. Consolidated retained earnings is equal to parent’s retained earnings which is P

139,750.
6. Total Assets is P 293,000

Other assets (138,000 + 115,000) 253,000

Goodwill 40,000
Total assets 293,000

Common stock (Parent only) 50,000

Additional paid-in capital (Parent only) 80,250
Retained earnings (Parent only) 139,750
Equity attributable to owners of the parent 270,000
Non-controlling interest 23,000
Total equity 293,000
7. Equity Attributable to the owners of the parent is P 270,000
 Number 2
The following transactions occurred during 20x1:
• On January 1, 20x1, P acquired 80% interest in S1 for P 400,000.
• On December 31, 20x1, S1 acquired 60% interest in S2 for P 200,000.
 
The following information has been determined:
Retained earnings S1 S2
January 1, 20x1 120,000 40,000
December 31, 20x1 208,000 112,000
  
Fair value of NCI S1 S2
January 1, 20x1 100,000 192,000
December 31, 20x1 112,000 168,000
A summary of the individual statement of financial position of the entities as at December
31, 20x1 is shown below:
 
P S1 S2
Investment in Subsidiary 400,000 200,000 -
Other assets 800,000 480,000 320,000
Total assets 1,200,000 680,000 320,000
 
Liabilities 120,000 152,000 8,000
Share capital 480,000 320,000 200,000
Retained earnings 600,000 208,000 112,000
Total liabilities and equity 1,200,000 680,000 320,000
 
Statements of profit or loss
For the year ended December 31, 20x1
 
Revenues 720,000 408,000 192,000
Expenses (400,000) (320,000) (120,000)
Profit 320,000 88,000 72,000
The carrying amounts of the net identifiable assets of S1 and S2 approximate their fair
values at their acquisition dates. The group determined that the goodwill to S1 has been
impaired by P 40,000 as at December 31, 20x1. There have been no changes in the
share capitals of S1 and S2 during the year.
 
8. How much is the total goodwill as of December 31, 20x1? ___________________
9. How much is the total NCI in net assets as of December 31, 20x1? _____________
10. How much is the consolidated retained earnings as of December 31, 20x1?
____________
11. How much is the consolidated profit or loss in 20x1? _______________
12. How much are the profit attributable to owners of parent and to the NCIs?
Parent: ___________ NCI in S1 _____________ NCI in S2 _____________
 13. How much is the consolidated total assets as of December 31, 20x1?
________________
14. How much is the consolidated total equity as of December 31, 20x1?
________________
Step 1: Analysis of group structure

The group structure is analyzed as follows:

P’s ownership interest in S1 80%
S1’s ownership interest in S2 60%

• P, S1 and S2 all belong to a vertical group.

The controlling interest and NCI percentages are calculated as follows:

Ownership over S1
Direct holdings of P in S1 80%
NCI in S1 20%
Total 100%

Ownership over S2
Direct holdings of P in S2 0%
Indirect holding of P in S2 (80% X 60%) 48%
Total holdings of P in S2 48%
NCI is S2 52%
Total 100%
The acquisitions dates of the subsidiaries are January 1, 20x1 for S1 and December
31, 20x1 for S2. Goodwill and NCI on each of S1 and S2 shall be computed
separately on their respective acquisition dates. Their pre-acquisition reserves are
also calculated from these dates.

Step 2: Analysis of net assets.

  S1 S2
Acqn. Cons. Net Acqn. Cons. Net
 
Date Date change Date Date change
Share capital 320,000 320,000 200,000 200,000
Ret. earnings 120,000 208,000 112,000 112,000
Totals at carrying
440,000 528,000 312,000 312,000
amts.
FVA at acquisition
- - - -
date
Depreciation of FVA NIL - NIL -
Net assets at fair value 440,000 528,000 88,000 312,000 312,000 -
Step 3: Goodwill Computation
 Formula #2: S1 S2
Consideration transferred (given) 400,000 200,000
Indirect holding adjustment (₱200,000 x 20%) (40,000)
Less: Prev. held equity interest in the acquiree - -
Total 400,000 160,000
Less: P's proportionate sh. in net assets of S1 & S2
(₱440,000 x 80%) & (₱312,000 x 48%) (352,000) (149,760)
Goodwill attributable to owners of P (acq’n. dates) 48,000 10,240
Less: P’s sh. in goodwill impairment (₱40,000 x 80%) (32,000) -
Goodwill attributable to owners of P – Dec. 31, 20x1 16,000 10,240

 
Fair value of NCI (given) 100,000 168,000
Less: NCI's proportionate sh. in the net assets of
S1 & S2 (₱440,000 x 20%) & (₱312,000 x 52%) (88,000) (162,240)
Goodwill attributable to NCI (acquisition dates) 12,000 5,760
Less: NCI’s sh. in goodwill impairment (₱40,000 x 20%) (8,000) -
Goodwill attributable to NCI – Dec. 31, 20x1 4,000 5,760

 
Goodwill, net – Dec. 31, 20x1 20,000 16,000
8. Answer is P 36,000

Step 4: Non-controlling interest in net assets

  S1 S2 Total
Net assets at fair value - 12/31x1 (Step 2) 528,000 312,000
Multiply by: NCI percentage 20% 52%
Total 105,600 162,240
Add: Goodwill to NCI - 12/31x1 (Step 3) 4,000 5,760
Indirect holding adjustment (Step 3) (40,000)
NCI - Dec. 31, 20x1 109,600 128,000 237,600

9. Total NCI in net assets is P 237,600

 Step 5: Consolidated Retained Earnings

P's retained earnings – Dec. 31, 20x1 600,000

Consolidation adjustments:
P's share in the net change in S1's net assets (a) 70,400
P's share in the net change in S2's net assets (b) -
Unrealized profits (Downstream only) -
Gain or loss on extinguishment of bonds -
P's sh. in goodwill impairment (Step 3) (32,000)
Net consolidation adjustments 38,400
Consolidated retained earnings – Dec. 31, 20x1   638,400
(a) Net change in S1’s net assets (Step 2) of ₱88,000 x 80% = ₱70,400.
(b) Net change in S2’s net assets (Step 2) of ₱0 x 48% = ₱0.

10. Consolidated retained earnings is P 638,400.

Step 6: Consolidated Profit or loss

P S1 S2 Consolidated
Profits before adj. 320,000 88,000 - 408,000
Cons. adjustments:  
Unrealized profits - - - -
Dividend income - N/A N/A -
Extinguishment of bonds - - - -
Net cons. adjustments - - - -
Profits before FVA 320,000 88,000 - 408,000
Depreciation of FVA ( - ) ( - ) ( - ) ( - )
Goodwill impairment (32,000) (8,000) - (40,000)
Consolidated profit 288,000 80,000 - 368,000

None of S2’s profit is included in the 20x1 consolidated financial statements

because S2 was acquired only on December 31, 20x1.

11. Consolidated profit or loss is P 368,000

Step 7: Profit or loss attributable to owners of parent and NCIs
Owners NCI in NCI Consoli-
of P S1 in S2 dated
P's profit before FVA (Step 6) 320,000 N/A N/A 320,000
Share in S1’s profit before FVA (c) 70,400 17,600   88,000
Share in S2’s profit before FVA (d) -   - -
Depreciation of FVA ( - ) ( - ) ( - ) ( - )
Goodwill impairment (32,000) (8,000) - (40,000)
Totals 358,400 9,600 - 368,000

(c) Shares in S1’s profit before FVA (Step 6): (₱88,000 x 80%); (₱88,000 x 20%)
(d) Shares in S2’s profit before FVA (Step 6): (₱0 x 48%); (₱0 x 52%)

12. Profit attributable to owners of parent is P 358,400; NCI in S1 is P 9,600;

NCI in S2 is P 0
The consolidated financial statements are prepared as follows:
 
Consolidated statement of financial position
As at December 31, 20x1

Other assets (800,000 + 480,000 + 320,000) 1,600,000

Goodwill (20,000 + 16,000) (Step 3) 36,000
Total assets 1,636,000
 
Liabilities (120,000 + 152,000 + 8,000) 280,000
Share capital (P only) 480,000
Retained earnings (Step 5) 638,400
Owners of parent 1,118,400
Non-controlling interests (Step 4) 237,600
Total equity 1,356,000
Total liabilities and equity 1,636,000
 Consolidated statement of profit or loss
For the year ended December 31, 20x1

Revenues (720,000 + 408,000) 1,128,000

Expenses (400,000 + 320,000) (720,000)
Impairment loss on goodwill (Step 3) (40,000)
Consolidated profit 368,000

 
Profit attributable to:
Owners of the parent (Step 7) 358,400
Non-controlling interests (Step 7) 9,600
 Consolidated profit 368,000
13. Consolidate total assets is P 1,636,000.

14. Consolidated total equity is P 1,356,000

Activity 2.5
1. On January 2, 1993, Well Co. purchased 10% of Rea, Inc.’s outstanding
common shares for P 400,000. Well is the largest single shareholder in Rea, and
all of Well’s officers are on Rea’s board of directors. Rea reported net income
of P 500,000 for 1993, and paid dividends of P 150,000. The fair value of the
investment on December 31, 1993 is P 450,000. In its December 31, 1993,
separate balance sheet, what amount should Well report as investment in Rea?
_______________

Answers:
At cost = P 400,000
A fair value = P 450,000
Using equity method = 400,000 + (500,000 X 10%) – (150,000 X 10%) = 435,000
Bandolin Co. had the following investment transactions during 20x1:
 Acquired 80% interest in Zaskar, Inc. for P 4,000,000 on January 1, 20x1. Zaskar reported profit of P
40 million and declared dividends of P 1,200,000 during 20x1. The fair value of the investment on
December 31, 20x1 is P 4,800,000.
 Acquired 20% interest in Goat Co. for P 400,000 on July 1, 20x1. Transaction costs incurred
amounted to P 80,000. Goat reported profit of P 8,000,000 for the six months ended December 31,
20x1 and declared year-end dividends of P 800,000. The fair value of the investment on December
31, 20x1 is P 420,000.
 
Bandolin’s policy is to measure investments in subsidiaries at cost and investments in associates at fair
value through profit or loss in the separate financial statements.
 
2. How much is the carrying amount of the investment in subsidiary in the December 31, 20x1
consolidated financial statements? _____________

3. How much is the carrying amount of the investment in subsidiary in the December 31, 20x1 separate
financial statements? ___________

4. How much is the carrying amount of the investment in associate in the December 31, 20x1 separate
financial statements? ___________

5. How much is the net investment income recognized in the 20x1 separate financial statements for the
investments referred to above? ____________
 
2. Answer is P 0

3. Investment in subsidiary (XYZ, Inc.) – at cost = P 4,000,000

4. Investment in associate(Alphabets Co.) – at fair value = P 420,000

5. Solutions
Investment in subsidiary (XYZ, Inc.)
Dividend revenue (₱1,200,000 x 80%) ₱ 960,000
 
Investment in associate (Alphabets Co.)
Dividend revenue (₱800,000 x 20%) ₱ 40,000
Unrealized gain on change in fair value (₱420K – ₱400) 20,000
Transaction costs expensed immediately ( 80,000)
Net investment income ₱ 100,000
 
(960,000 + 100,000) = 1,060,000
Activity 3.1
SOBRIQUET NICKNAME Co. operates in a hyperinflationary economy. Its unrestated
financial statements are provided below:
  SOBRIQUET NICKNAME Co.
Statement of financial position
As of December 31, 20x2

  20x2 20x1
ASSETS
Cash 80,000 60,000
Accounts receivable 160,000 120,000
Allowance for doubtful accounts (40,000) (20,000)
Inventory (at cost) 200,000 160,000
Land (at cost) 400,000 400,000
Building (at cost) 2,000,000 2,000,000
Accumulated depreciation (800,000) (600,000)
Total assets 2,000,000 2,120,000

LIABILITIES AND EQUITY

Accounts payable 80,000 188,000
Loan payable 400,000 320,000
Total liabilities 480,000 508,000
Share capital 1,200,000 1,200,000
Retained earnings 320,000 412,000
Total equity 1,520,000 1,612,000
Total liabilities and equity 2,000,000 2,120,000
  
 
SOBRIQUET NICKNAME Co.
Statement of profit or loss and other comprehensive income
For the year ended December 31, 20x2

Sales 1,600,000
Cost of sales:
Inventory, January 1 160,000
Purchases 1,200,000
Total goods available for sale 1,360,000
Inventory, December 31 (200,000) (1,160,000)
Gross income 440,000
Depreciation expense (200,000)
Distribution costs (140,000)
Bad debts expense (20,000)
Finance cost (40,000)
Profit before tax 40,000
Income tax expense (12,000)
Profit for the year 28,000
Other comprehensive income -
Total comprehensive income for the year 28,000
Additional information:
• The land and building were acquired on April 1, 20x0.
• The share capital was issued on March 1, 20x0.
• Sales, purchases, and expenses (except interest expense) were incurred evenly during the
year.
• Interest expense was recognized and paid on December 31, 20x2.
• Dividends of ₱120,000 were declared and paid on December 31, 20x2.
• Selected values of general price indices (CPI) are shown below:
March 1, 20x0……………………………………………...100
April 1, 20x0………………………………………………..100
Average for 20x1…………………………………………..110
December 31, 20x1…………………..………….…………120
Average for 20x2…………………………………………..125
December 31, 20x2………………………………………….140
1. How much is the restated total assets in the 20x1 comparative statement of financial position?
a. 2,910,303 b. 3,004,604 c. 3, 028,640 d. 2,910,340
 
2. How much is the restated total liabilities in the 20x1 comparative statement of financial position?
a. 592,677 b. 508,000 c. 584,767 d. 592,667
 
3. How much is the restated total assets in the 20x2 statement of financial position?
a. 2,664,000 b. 2,894,00 c. 2784,000 d. 2,646,000
 
4. How much is the restated total liabilities in the 20x2 statement of financial position?
a. 520,000 b. 480,000 c. 460,000 d. 540,000
 
5. How much is the restated profit?
a. 13,636 b. (13,636)c. (13,726) d. 13,726
 
6. How much is the gain (loss) on net monetary position (purchasing power gain or loss)?
a. 28,420 b. (28,420)c. 28,240 d. (28,240)
 
7. How much is the restated retained earnings on December 31, 20x2?
a.637,636 b. 540,000 c. 637,663 d. 504,000
Solution: SOBRIQUET NICKNAME Company
Statement of financial position
As of December 31, 20x2
(Restated in terms of December 31, 20x2 current pesos)
  20x2 20x1
  Historical Fraction Restated Historical Fraction Restated
ASSETS
Cash 80,000 N/A 80,000 60,000 140 / 120 70,000
Accounts receivable 160,000 N/A 160,000 120,000 140 / 120 140,000
Allowance for doubtful (40,000)
(40,000) (20,000) (23,333)
accounts N/A 140 / 120
Inventory (at cost) 200,000 140 / 125 224,000 160,000 140 / 110 203,636
Land (at cost) 400,000 140 / 100 560,000 400,000 140 / 100 560,000
2,000,000 2,800,000 2,000,000 2,800,000
Building (at cost) 140 / 100 140 / 100
(800,000)
(1,120,000) (600,000) (840,000)
Accumulated depreciation 140 / 100 140 / 100
Total assets 2,000,000   2,664,000 2,120,000   2,910,303
LIABILITIES AND
EQUITY
Accounts payable 80,000 N/A 80,000 188,000 140 / 120 219,333
Loan payable 400,000 N/A 400,000 320,000 140 / 120 373,333
Total liabilities 480,000   480,000 508,000   592,667
Share capital 1,200,000 140 / 100 1,680,000 1,200,000 140 / 100 420,000
Retained earnings 320,000 (squeeze) 504,000 412,000 (squeeze) 1,897,636
Total equity 1,520,000   2,184,000 1,612,000   2,317,636
2,000,000
2,664,000 2,120,000 2,910,303
Total liabilities and equity    
1. Answer is letter a. P 2,910,303
2. Answer is letter d. P 592, 667
3. Answer is letter a P 2,664,000
4. Answer is letter b. P 480,000
 SOBRIQUET NICKNAME Company
Statement of profit or loss and other comprehensive income
For the year ended December 31, 20x2
(Restated to December 31, 20x2 current pesos)

  Historical Frac-tion Restated

Sales 1,600,000 140/125 1,792,000
Cost of sales:
Inventory, Jan. 1 160,000 140/110 203,636
Purchases 1,200,000 140/125 1,344,000
Total goods available for
1,547,636
sale 1,360,000
Inventory, Dec. 31 (200,000) (1,160,000) 140/125 (224,000) (1,323,636)
Gross income 440,000 468,364
Depreciation expense (200,000) 140/100 (280,000)
Distribution costs (140,000) 140/125 (156,800)
Bad debts expense (20,000) N/A (20,000)
Finance cost (40,000) 140/140 (40,000)
Gain on net monetary position 28,240
Profit before tax   40,000 (196)
Income tax expense (12,000) 140/125 (13,440)
Profit for the year   28,000 (13,636)
Other comprehensive income - -
Total comprehensive income for the yr. 28,000   (13,636)
Total monetary assets, Dec. 31, 20x2, Historical cost:
Cash P80,000
Accounts receivable 160,000
Allowance for doubtful accounts (40,000) P200,000
Total monetary liabilities, Dec. 31, 20x2, Historical cost:
Accounts payable 80,000
Loan payable 400,000 (480,000)
Net monetary items, Dec. 31, 20x2, Historical cost (a)   (280,000)

Total monetary assets, Dec. 31, 20x1, Restated:

Cash 70,000
Accounts receivable 140,000
Allowance for doubtful accounts (23,332) 186,668
Total monetary liabilities, Dec. 31, 20x1, Restated:
Accounts payable 219,332
Loan payable 373,332 (592,668)
Net monetary items, Dec. 31, 20x1, Restated   (406,500)
Net monetary items, Dec. 31, 20x1, Restated   (406,500)
Increases in net monetary items during 20x2:
Sales, restated 1,792,000
Decreases in net monetary items during 20x2:
Purchases, restated (1,344,000)
Distribution costs, restated (156,800)
Bad debts expense (20,000)
Finance cost, restated (40,000)
Income tax expense, restated (13,440)
Dividends paid, restated (120,000 x 140 /140) (120,000) (1,694,240)
Net monetary items, Dec. 31, 20x2, Restated (b)   (308,240)

Gain on net monetary position (a - b)   P28,240 C

5. The restated profit is (P 13,636)
6. There is a gain on net monetary position (purchasing power
gain) of P 28,240.
7. Restated retained earnings is P 504,000 (see restated
statement of financial position in slide number 29)
Rice Wholesaling Corp. accounts for inventory on a FIFO basis. There were 8,000 units in
inventory on January 1, 20x3. Costs were incurred and goods purchased as follows during
20x3:
20x3 Historical costs Units purchased Units sold
1st qtr. 410,000 7,000 7,500
2nd qtr. 550,000 8,500 7,300
3rd qtr. 425,000 6,500 8,200
4th qtr. 630,000 9,000 7,000
Totals 2,015,000 31,000 30,000

Rice estimates that the current cost per unit of inventory was ₱57 at January 1, 20x3, and ₱71
at December 31, 20x3.
 
8. How much is the December 31, 20x3 inventory restated to current cost?
a. 576,000 b. 585,000 c. 630,000 d. 639,000
 
9. How much is the 20x3 cost of goods sold restated to current cost?
a. 1,920,000 b. 1,944,000 c. 2,100,000 d. 2,130,000
 
8. Answer is letter D. P 639,000
Solution

Beginning inventory - units 8,000

Units purchased 31,000
Total goods available for sale - units 39,000
Units sold 30,000
Ending inventory in units 9,000
Current cost per unit 71
Ending inventory - current cost 639,000
9. Answer is letter A. P 1,920,000
Solution

Units sold 30,000

Average current cost [(71 + 57) ÷ 2] 64
Cost of sales - current cost 1,920,000
10. Fair Value, Inc., paid ₱1,200,000 in December 20x7 for certain of
its inventory. In December 20x8, one half of the inventory was sold
for ₱1,000,000 when the replacement cost of the original inventory
was ₱1,400,000. Ignoring income taxes, what amount should be
shown as the total gain resulting from the above facts in a current
value accounting income statement for 20x8?
a. 200,000 b. 300,000 c. 400,000 d. 500,000
10. Answer is letter D. P 500,000
Solution:
Sales 1,000,000
Historical cost of portion sold (1,200,000 x 1/2) (600,000)
Realized gain 400,000
Current cost of unsold portion (1,400,000 x 1/2) 700,000
Historical cost of portion unsold (1,200,000 x 1/2) (600,000)
Unrealized gain 100,000
Total gain 500,000