Elimination of

Unrealized Profit on
Intercompany Sales of
Inventory
CHAPTER 4
Introduction
Affiliated companies may make intercompany sales of inventory or other assets. The term “affiliated group” is
used to refer to a parent and all subsidiaries for which consolidated financial statements are prepared;
alternatively, this group may be referred to as the economic entity or as the consolidated entity. Sales from a
parent company to one or more of its subsidiaries are referred to as downstream sales. Sales from subsidiaries
to the parent company are referred to as upstream sales. Sales from one subsidiary to another subsidiary are
referred to as horizontal sales.

Ordinarily, the selling affiliate will record a profit or loss on such sales. From the point of view of the
consolidated entity, however, such profit or loss should not be reported until the inventory or other assets
acquired by the purchasing affiliate have been used during the course of operations or sold to parties outside
the affiliated group (third parties). Profit (loss) that has not been realized from the point of view of the
consolidated entity through subsequent sales to third parties is defined as unrealized intercompany profit (loss)
and must be eliminated in the preparation of consolidated financial statements.
 Effects of Intercompany Sales of Merchandise on the Determination of Consolidated
Balances
The workpaper procedures illustrated in this chapter are designed to accomplish the following financial
reporting objectives in the consolidated financial statements:

• Consolidated sales include only sales to parties outside the affiliated group.
• Consolidated cost of sales includes only the cost to the affiliated group, of goods that have been sold to
parties outside the affiliated group.
• Consolidated inventory on the balance sheet is recorded at a value equal its cost to the affiliated group.

Stated in another way, the objective of eliminating the effects of intercompany sales of merchandise is to
present consolidated balances for sales, cost of sales, and inventory as if the intercompany sale had never
occurred.

As a result, the recognition of income or loss on the intercompany transaction, including its allocation
between the controlling and non-controlling interests, is deferred until the profit or loss is confirmed by sale
of the merchandise to non-affiliates or to outsiders.
Determination of Consolidated Sales, Cost of Sales, and Inventory Balances
Recall that the cost of sales is computed as:
Beginning inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P xxx
Add: Purchases (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxx
Cost of goods available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P xxx
Less: Ending inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxx
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P xxx

Depending upon the accounting system used, a given company may have a single account in its general ledger entitled “cost of sales” or
“cost of goods sold” and a single line on its workpaper or, alternatively, separate accounts for the various components.

In this chapter, we assume that the trial balance lists each component separately, and we present the workpaper entries accordingly.

Using this approach, the cost of sales line on the income statement is replaced with lines for:
• Beginning Inventory—Income Statement;
• Purchases;
• Ending Inventory—Income Statement; and
• Cost of Sales (or Cost of Goods Sold).

Note that under this assumption:

• Ending Inventory - Income Statement requires an entry distinct from the balance sheet account Inventory.
• The account “Ending Inventory - Income Statement” has a normal credit balance because it is subtracted in computing Cost of Sales
(Cost of Goods Sold).
• Those items in parentheses are entries that might be replaced by the use of the single account “cost of sales (cost of goods sold).”
Illustration 4-1: Downstream Sales - Elimination of Intercompany Sale of Inventory, No Unrealized Profit (All
Inventory Sold to Third Parties) – Cost Model/Equity Method

The basic workpaper eliminating entries required because of intercompany sales of merchandise are illustrated using the
following simplifying assumptions:
1. P Company sells all goods it buys or manufactures to its wholly owned subsidiary, S Company, at 125% of cost.
2. During the first year of this arrangement, goods that cost P Company P100,000 are sold to S Company for P125,000
(downstream sale).
3. During the same year, S Company sold all the goods purchased by it from P Company to third parties for P135,000.

The workpaper entry in the year of the sale to eliminate intercompany sales and purchases of merchandise takes the
following form:
(1) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
... 125,000  
Purchases (Cost of Sales) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.   125,000
Analysis:
To eliminate intercompany sales and purchases.    

Books of P Company   Books of S Company

Accounts receivable 125,000     Purchases . . . . . . . . . . . 125,000  
Sales . . . . . . . . . . . .   125,000   Accounts payable. .   125,000
..
Incidentally, If S Company still owes P Company P40,000, the workpaper entry would be as follows:
Accounts payable – S Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000  
Accounts receivable – P Company . . . . . . . . . . . . . . . . . . . . . . . .   40,000
To eliminate intercompany accounts payable and receivable.    

Sales, cost of sales, and inventory balances reported by the affiliated company are presented in Figure 4-1.
Figure 4-1: Cost Model/Equity Method - Partial Consolidated Statements Workpaper – Elimination of Intercompany Sale of
Inventory, No Unrealized Profit (All Inventories are Sold to Third Parties)
  S S Company     Consolidated  
Income Company Dr. Cr. Balances %
Statement
           
Sales . . . . . . . . . . . . . . P125,000 P 135,000 (1) 125,000 P 135,000 100.00
           
Cost of sales . . . . . . . _100,000 _125,000 (1) 125,000 _100,000 74.07
Gross profit . . . . . . . . P 25,000 P 10,000     P 35,000 25.93
Balance Sheet            
Inventory . . . . . . . . . . ______-0- ______-0-     ______-0-  
(1) To eliminate intercompany sales.

No unrealized intercompany profit exists, since all goods sold by P Company to S Company have been resold to third parties.

After the elimination of:

• intercompany sales, consolidated sales of P135,000 equals the amount of sales by the affiliated group (S Company) to third parties (as
indicated by an arrow above), and
• consolidated cost of sales of P100,000 equals the cost to the affiliated group (P Company) of purchasing/manufacturing the goods sold.

The gross profit percentage should be 25.93% (P35,000/P135,000), failure to eliminate the intercompany sales would show the gross
percentage as only 13.46% (P35,000/P260,000).

Since both sales and cost of sales would be overstated by the same amounts, consolidated net income is not affected by the failure to
eliminate intercompany sales.

Failure to eliminate intercompany sales would result in an overstatement of sales and of cost of sales in the consolidated financial statements.
If the intercompany sales were not eliminated.
Illustration 4-2: Cost Model - Elimination of Downstream Intercompany Sale of Inventory, Unrealized Profit in
Ending Inventory (60% Inventory Sold to Third Parties) – First Year
Assume now that S Company sells 60% of the goods purchased from P Company to third parties at P81,000 prior to the end of the current
year. Sales, cost of sales, and inventory balances reported by each of the affiliated companies are presented in Figure 4-2.

Year One Eliminating Entries—Downstream Sales

Entry (1) to eliminate sales and purchases is the same as explained before. However, intercompany profit in the amount of
P10,000 [P25,000 x 40%] resides in the ending inventory balance of S Company. This profit has not yet been realized by
the consolidated entity through sales to outsiders (third parties).

When, at the end of the accounting period, some of the merchandise remains in the inventory of the purchasing affiliate,
the intercompany profit recognized thereon must be excluded from consolidated net income and from the inventory
balance in the consolidated balance sheet.

The workpaper entry to accomplish this elimination and to reduce Inventory on both the Income Statement and the Balance
Sheet is as follows:
(1) Ending Inventory – Income Statement (Cost of Sales) . . . . . . . . 10,000  
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000
To defer the unrealized profit in ending inventory until it is
sold to
outsiders.    
The entry eliminating intercompany sales, entry (1), implicitly assumes that there is no unrealized intercompany profit.

Accordingly, either entry (1) must be adjusted, or entry (2) must be made to remove the unrealized intercompany profit
from the ending inventory and to reduce the excessive credit to cost of sales. To reflect the above eliminating entries in the
workpaper refer to Figure 4-2.
Figure 4-2: Cost Model - Partial Consolidated Statements Workpaper – Elimination of Downstream Intercompany
Sale of Inventory, Unrealized Profit in Ending Inventory -60% Inventory Sold to Third Parties (First Year of
Intercompany Sales).   P S     Consolidated
Income Statement Company Company Dr. Cr. Balances
Sales . . . . . . . . . . . . . . . . 125,000   (1) 125,000    
  81,000 81,000
Cost of sales . . . . . . . . . . 100,000 60%     60,000
  ______ 40% 75,000 (2) 10,000 (1) 125,000 _____
Gross profit . . . . . . . . . . . 25,000 6,000     21,000
           
Balance Sheet          
Inventory (40% remains) -0- 50,000   (2) 10,000 40,000

(1) To eliminate intercompany sales

(2) to eliminate intercompany profit in ending inventory (P50,000 x 25/125)
As a practical matter, two entries are conventionally prepared as shown in Figure 4-2:
1. In either case, after adjustment, consolidated sales of P81,000 equals the amount of sales of the affiliated group to
third parties.
2. Consolidated cost of sales of P60,000 equals the cost to the affiliated group of the goods sold (P100,000 x 60%).
3. The consolidated inventory balance of P40,000 equals the cost to the affiliated group of the goods held by S
Company at the end of the year (P100,000 x 40%).

The above entries for intercompany sales and unrealized profit in ending inventory are the same regardless of whether the
parent uses the cost model or equity method. However, as shown next (second year), the entries for intercompany profit in
beginning inventory differ slightly.
Year Two Eliminating Entries—Downstream Sales
Illustration 4-3: Cost Model - Elimination of Downstream Intercompany Sale of Inventory, Unrealized Profit in Ending Inventory (Second Year of
Intercompany Sales)
Assume now that in the next period P Company sells merchandise to S Company in the amount of P250,000 (cost P200,000) and S Company sells all its
beginning inventory (P50,000 cost to S; P40,000 cost to consolidated entity) and one-half of its current purchases from P Company (P125,000 cost to S;
P100,000 cost to consolidated entity) to third parties for P202,500. Sales, cost of sales, and inventory balances reported by the affiliated companies are presented
in Figure 4-3. This illustration assumes that cost model is used.

Figure 4-3: Cost Model - Partial Consolidated Statements Workpaper – Elimination of Downstream Intercompany Sale of Inventory, Unrealized Profit
in Ending Inventory (Second Year  of Intercompany Sales) P S     Consolidated
Income Statement Company Company Dr. Cr. Balances
Sales . . . . . . . . . . . . . . . . 250,000   (1) 250,000    
  202,500   202,500
Cost of sales . . . . . . . . . . 200,000       140,000
    50%   (1) 250,000  
_______ *175,000 (2) 25,000 (3) 10,000 _______
Gross profit . . . . . . . . . . . 50,000 27,500     62,500
Retained Earnings          
Beginning Retained          
Earnings – P Company **xxx (3) 10,000 xxx
Balance Sheet          
Inventory . . . . . . . . . . . . -0- 125,000   (2) 25,000 100,000

(1) To eliminate intercompany sales

(2) To eliminate intercompany profit in ending inventory (P125,000 x 25/125)
(3) To recognize intercompany profit in beginning inventory realized during the period and reduce
consolidated retained earnings for unrealized intercompany profit at the beginning of the year (P50,000 x 25/125)
- refer to eliminating entry (2) last year.
*(P125,000 x 40% = P50,000) + (P250,000 x ½ = P125,000) = P175,000.
**Includes P10,000 of unrealized profit in ending inventory from the previous year (not yet sold to third parties).

Unrealized intercompany profit in the amount of P25,000 (P125,000 x 25/125) resides in the ending inventory of S Company. Workpaper eliminating entries (1) and (2) are
similar to those discussed in the preceding example.

Assuming a first-in, first-out (FIFO) inventory cost flow, intercompany profit in inventories excluded from consolidated net income in one period will be realized by sales to
Cost Model
If the parent uses the cost model of recording its investment in the subsidiary, the entry takes the following
form (as shown in Figure 4-3):
(1) Beginning Retained Earnings – P Company* . . . . . . . . . . .
..... 10,000  
Ending Inventory – Income Statement (Cost of Sales) . .
....   10,000
To realized profit in beginning inventory deferred in the
*If the parent company uses the equity method, this debit is replaced by a debit to the Investment in  Subsidiary  account
prior period. (refer to Figure 4-4).

The credit to beginning inventory (Cost of Sales) in entry (3) is necessary in order to recognize in
consolidated income the amount of profit in the beginning inventory that has been confirmed by sales to third
parties during the current period.

S Company charged cost of sales for its cost of P50,000, whereas the cost to the affiliated group of the
beginning inventory of S Company is only P40,000 (ending inventory of first year).

Accordingly, cost of sales must be decreased by P10,000, which increases consolidated net income by
P10,000. The adjustment to beginning Inventory this period is in the same amount with ending inventory last
period.
For firms using the cost model to account for its investment in the subsidiary, the rationale for the debit of P10,000 to
beginning retained earnings of P Company is as follows:
1. In the previous year, P Company recorded P25,000 in profit on intercompany sales and transferred it to its Retained
Earnings account as part of the normal accounting process.
In as much as, at the beginning of the year, 40% of that amount has not been realized by sales to third parties, it must
be eliminated from the beginning retained earnings of P Company to correctly reflect the beginning consolidated
retained earnings.
2. In determining consolidated net income in the prior year, P10,000 was deducted from the reported income and from
the retained earnings of the affiliated group by a workpaper entry (which, like all workpaper entries, was not posted to
the ledger accounts).
In order for beginning retained earnings to match the prior year’s ending retained earnings (to the consolidated
entity), this P10,000 adjustment must be made to beginning retained earnings.

Consolidated sales of P202,500 are equal to the amount of sales of the affiliated group to third parties.

Consolidated cost of sales of P140,000 equals the cost to the affiliated group of the goods sold and are calculated as
follows:
Cost of goods transferred to S Company in prior year and sold this
year (40% x P100,000;cost of sales of P Company - first
year) . . . . . . . . P 40,000
Cost of goods transferred to S Company in current year and sold
this year (1/2 x P200,000; cost of sales of P Company - second year) . . 100,000
Cost of sales to third parties during the current
year . . . . . . . . . . . . . . . . . . P140,000

It should be noted that the cost model is allowed under PAS 27, so any discussion on equity method for this chapter and in
chapter 5 is for purposes of comparison and at the same time appreciation of the significance of equity method in relation to
Equity Method
For firms using the equity method, the debit to beginning retained earnings is not needed, assuming the parent correctly adjusted for all
intercompany profits/losses in its “Subsidiary/Investment income or Income from subsidiary” account in the preceding year.
Under the equity method, consolidated retained earnings are identical to the parent’s reported retained earnings and thus no
adjustment is needed. The eliminating entry for the realized profit in beginning inventory should be as follows:
(3) Investment in
Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000  
Ending Inventory – Income Statement (Cost of Sales) . . . .
..   10,000
To realized profit in beginning inventory deferred in the
The debit to retained earnings is replaced by a debit to Investment in Subsidiary, which serves 
prior period. simply to  facilitate the elimination of this
account on the workpaper (as shown in Figure 4-4):
Figure 4-4: Equity Method - Partial Consolidated Statements Workpaper – Elimination of Downstream Intercompany Sale of
Inventory, Unrealized Profit in Ending Inventory (Second Year of Intercompany Sales)
  P S     Consolidated
Income Statement Company Company Dr. Cr. Balances
Sales . . . . . . . . . . . . . . . . 250,000   (1) 250,000    
  202,500   202,500
Cost of sales . . . . . . . . . . 200,000       140,000
    50%   (1) 250,000  
_______ *175,000 (2) 25,000 (3) 10,000 _______
Gross profit . . . . . . . . . . . 50,000 27,500     62,500
Balance Sheet          
Inventory . . . . . . . . . . . . . -0- 125,000   (2) 25,000 100,000
Investment in Subsidiary. xxx   (3) 10,000 xxx -0-
(1) To eliminate intercompany sales
(2) To eliminate intercompany profit in ending inventory (P125,000 x 25/125)
(3) To recognize intercompany profit in beginning inventory realized during the period and reduce consolidated retained earnings for unrealized intercompany
profit at the beginning of the year (P50,000 x 25/125) – refer to eliminating entry (2) last year.
* (P125,000 x 40% = P50,000) + (P250,000 x ½ = P125,000) = P175,000.
Determination of Amount of Intercompany Profit
In the preceding examples, the amount of intercompany profit subject to elimination was calculated on the basis of the
selling affiliate’s gross profit rate stated as a percentage of cost. Recall that gross profit may be stated either as a percentage
of sales or as a percentage of cost. When it is stated as a percentage of cost, it is often referred to as “markup.”
To calculate the amount of intercompany gross profit to be eliminated from ending inventory, be careful to distinguish
between percentages stated in terms of sales versus cost of sales.

Determination of Proportion of Intercompany Profit to be Eliminated

It is clear that unrealized intercompany profit should not be included in consolidated net income or assets.
However, two alternative views of the amount of intercompany profit that should be considered as “unrealized” exist. The
elimination methods associated with these two points of view are generally referred to as:
1. 100% (total) elimination, and
2. Partial elimination

Both current and past GAAP require 100% elimination of intercompany profit in the preparation of consolidated financial
statements. Because past and current GAAP and PFRS are silent in this regard we do not elaborate on the alternative of
partial elimination. The following items should be properly noted:
• Under the 100% elimination, the entire amount of unconfirmed intercompany profit is eliminated from consolidated
net income and the related asset balance.
• This approach is particularly logical under the proposed view of consolidated financial statements, based on the
“entity” rather than “parent” concept, as required by PFRS 10.
• The amount of intercompany profit or loss to be eliminated is not affected by the existence of a non-controlling
interest.
• The complete elimination of the intercompany profit or loss is consistent with the underlying assumption that
Upstream Sale of Inventory (Downstream Sale)
When an upstream sale of inventory occurs and the inventory is resold by the parent to a non-affiliate during the same
period:
• the entire parent’s cost model entries (or even equity method) and the eliminating entries in the consolidation
workpaper are identical to those in the downstream case.
The only difference between (upstream and downstream profit) is
• when the inventory is not resold to a non-affiliate before the end of the period, workpaper eliminating entries are
different from the downstream case only by the apportionment of the unrealized intercompany profit to both the
controlling and non-controlling interests
• The intercompany profit in an upstream sale is recognized by the subsidiary and shared between the controlling and
non-controlling stockholders of the subsidiary.
Therefore, the elimination of the unrealized intercompany profit must be reduced by the interests of both ownership groups
each period until the profit is confirmed by resale of the inventory to a nonaffiliated party (outside party).

Determination of the Non-controlling Interest in Consolidated Income

• Intercompany sales of inventory necessitate adjustments to the calculation of the distribution of income to the controlling
and non-controlling interests. Whether the adjustments directly affect the non-controlling interest (or only the controlling
interest) depends on who the intercompany seller (selling affiliate) is.
• If the intercompany seller is the subsidiary, it is the subsidiary’s income that needs adjustment, thereby directly affecting
the non-controlling interest. On the other hand, if the intercompany seller is the parent, it is the parent’s income that needs
adjustment.
Summary of Workpaper Elimination Entries Relating to Intercompany Sales of Merchandise

Consolidated statement workpaper eliminating entries for intercompany sales of inventory are summarized in Table 4-1. The
entries are under the equity method/cost model to record its investment. However, the form of the workpaper entry for
unrealized profit in beginning inventories differs between upstream and downstream sales.

Table 4-1: Summary of Workpaper Elimination Entries Intercompany Profit

Selling Affiliate is the Parent – Selling Affiliate is the Subsidiary –
Downstream Sales Upstream Sales

To eliminate Intercompany Sales:

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . xxx Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . xxx

Purchases (Cost of sales) . . . . . . . . xxx Purchases (Cost of sales) . . . . . . . . xxx

To recognize realized profit in beginning inventory (RPBI):

Investment in Subsidiary (equity method)   Investment in Subsidiary (equity method)  
or Beginning Retained Earnings – P   or Beginning Retained Earnings – P  
Company* (cost model). . . xxx Company* (cost model). . xxx
Beginning Inventory – Income   Non-controlling interest. . . . . . . . . . . . . xxx
Statement (Cost of Sales) . . . . . . . . . . xxx Beginning Inventory – Income . . .. . .
    Statement (Cost of Sales) . . . . . . . . . xxx

To eliminate unrealized profit in ending inventory (UPEI):

Ending Inventory (Cost of Sales) . . . .. . . xxx Ending Inventory (Cost of Sales) . . . . . . xxx
Inventory (Balance Sheet) . . . . . . . . . xxx Inventory (Balance Sheet) . . . . . . . . xxx
CFS with Partially-Owned Subsidiary – Downstream and Upstream Sales
Illustration 4-3: 80% Owned-Subsidiary: Cost Model – Partial Goodwill Approach; Elimination of Downstream and Upstream Intercompany Sale of Inventory,
Unrealized Profit in Ending Inventory

To illustrate all aspects of intercompany transactions (downstream and upstream sales) when the parent company records its investment using the cost model, assuming the
following:

On January 1, 20x4, Perfect Company acquires 80% of the common stock of Son Company for P310,000. At that time, the fair value of the 20% non-controlling interest is
estimated to be P77,500. On that the following assets and liabilities of Son Company had book values that were different from their respective market values:
Son Co. Son Co.
  Book value Fair value
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P20,000 25,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 150,000
Accumulated depreciation-equipment . . . . . . . . . . . . ( 80,000)  
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 120,000
Accumulated depreciation-buildings . . . . . . . . . . . . . . ( 160,000)  
Bonds payable (4 years) . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 96,000

All other assets and liabilities had book values approximately equal to their respective fair values. On January 1, 20x4, the equipment and buildings had a remaining life of 8
and 4 years, respectively. Inventory is sold in 20x4 and FIFO inventory costing is used. Goodwill, if any, is reduced by a P3,125 impairment loss during 20x4 based on the fair
value basis (or full-goodwill), meaning the management has determined that the goodwill arising in the acquisition of Son Company relates proportionately to the controlling
and non-controlling interests, as does the impairment.

There were no intercompany sales prior to 20x4, information resulting from intercompany sales, ending inventory and gross profit rates are summarized below:
Downstream Sales:
  Sales of Parent to Intercompany Merchandise in Intercompany Profit
Year Subsidiary 12/31 Inventory of S Company (based on Selling Price)
20x4 P125,000 60% of sales 20%
20x5 100,000 80% of sales 25%

Upstream Sales:
  Sales of Subsidiary Intercompany Merchandise in Intercompany Profit
Year to Parent 12/31 Inventory of P Company (based on Selling Price)
20x4 P 50,000 50% of sales 40%
20x5 62,500 40% of sales 20%

On December 31, 20x4, intercompany accounts payable and receivable arising from intercompany sales were fully settled.
Trial balances for the companies for the year ended December 31, 20x4 are as follows:
Debits Perfect Co. Son Co.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P194,000 P75,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 50,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 75,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . 310,000 -
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 115,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . - -
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 15,000
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 30,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,974,000 P1,020,000
Credits    
Accumulated depreciation – equipment . . . . . . . . . . . . P 112,500 P 80,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . 337,500 240,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 100,000
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 200,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 100,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 200,000
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 -
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,974,000 P1,020,000
     
From the trial balances presented above the following summary for 20x4 results of operations is as follows:
  Perfect Co. Son Co.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 400,000 P 200,000
...
Less: Cost of goods 170,000 115,000
sold . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross P 230,000 P 85,000
profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
.
Other 40,000 15,000
expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The resulting ownership situation can be viewed in the schedule of determination
Net income from its own separate operations . . . . . . . P 140,000
and allocation
P 50,000
of excess.
The over/under valuation of assets
. and liabilities is summarized as follows:
Add: Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 -
. Son Co. Son Co. (Over) Under
  Net Book value FairPvalue
164,000 Valuation
P 50,000
income .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . .
Inventory
.. P 20,000 P 25,000 P 5,000
Land . . . . . . . . . . . . . . . . . . . . . . . . .
.. 40,000 46,000 6,000
Equipment
(net) . . . . . . . . . . . . . . . . . 70,000 150,000 80,000
Buildings (net) . . . . . . . . . . . . . . . . .
.. 140,000 120,000 (20,000)
Bonds payable . . . . . . . . . . . . . . . . .
. (100,000) ( 96,000) 4,000
Net . . . . . . . . . . . . . . . . . . . . . . . . . .
.. P 170,000 P 245,000 P 75,000
 Schedule of Determination and Allocation of Excess (Partial-goodwill)
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (80%)    
Consideration transferred . . . . . . . . . . . . . . . . . . . . . .   P 310,000
Less: Book value of stockholders’ equity of Son:    
Common stock (P200,000 x 80%) . . . . . . . . . . . . . . P 160,000  
Retained earnings (P100,000 x 80%) . . . . . . . . . . . . 80,000 240,000
Allocated excess (excess of cost over book value) . . .   P 70,000
Less: Over/under valuation of assets and liabilities:    
Increase in inventory (P5,000 x 80%) . . . . . . . . . . .
. P 4,000  
Increase in land (P6,000 x
80%) . . . . . . . . . . . . . . . . 4,800  
Increase in equipment (P80,000 x 80%) . . . . . . . . . 64,000  
Decrease in buildings (P20,000 x 80%) . . . . . . . . . . ( 16,000)  
Decrease in bonds payable (P4,000 x 80%) . . . . . 3,200 60,000
Positive excess: Partial-goodwill (excess of cost over
The
fairover/under
value) . . . . . valuation
. . . . . . . . . .of
. . .assets
. . . . . .and
. . . . liabilities
...... is summarized  as follows:
P 10,000
Son Co. Son Co. (Over) Under
  Book value Fair value Valuation
Inventory . . . . . . . . . . . . . . . . . . . . . . . P 20,000 P 25,000 P 5,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000 6,000
Equipment (net) . . . . . . . . . . . . . . . . . 70,000 150,000 80,000
Buildings (net) . . . . . . . . . . . . . . . . . . . 140,000 120,000 (20,000)
Bonds payable . . . . . . . . . . . . . . . . . . (100,000) ( 96,000) 4,000
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 170,000 P 245,000 P 75,000
The buildings and equipment will be further analyzed for consolidation purposes as follows:
Son Co. Son Co. Increase
  Book value Fair value (Decrease)
Equipment . . . . . . . . . . . . . . . . . . .
.. 150,000 150,000 0
Less: Accumulated depreciation . .
. 80,000 - 80,000
Buildings
Net book . . . . . . . . . . . . . . . . . . . . .
.value
.. .................. 300,000
70,000 120,000
150,000 ( 180,000)
80,000
Less: Accumulated depreciation . .
. 160,000 - ( 160,000)
Net book
A value . . or
summary . . . .depreciation
............ 140,000
and amortization 120,000
adjustments ( is20,000)
as follows:
Account Adjustments to be Over/ Lif Annual Current
amortized Under e Amount Year(20x4) 20x5
Inventory . . . . . . . . . . . . . . . . . . . . P
.. 5,000 1 P 5,000 P 5,000 P -
Subject to Annual Amortization          
Equipment (net) . . . . . . . . . . . . . .
.. 80,000 8 10,000 10,000 10,000
Buildings (20,000
(net) . . . . . . . . . . . . . . . . . . ) 4 ( 5,000) ( 5,000) (5,000)
Bonds
payable . . . . . . . . . . . . . . . . . 4,000 4 1,000 1,000 1,000
      P 11,000 P 11,000 P 6,000
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 310,000
Fair value of NCI (given) (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,500
Fair value of Subsidiary (100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 387,500
Less: Book value of stockholders’ equity of Son (P300,000 x 100%) . . . . . . . __300,000
Allocated excess (excess of cost over book value) . . . . . . . . . . . . . . . . . . . P 87,500
Add (deduct): (Over) under valuation of assets and liabilities
(P75,000 x 100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Positive excess: Full-goodwill (excess of cost over
fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 12,500
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P10,000 80.00%
Goodwill applicable to NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 20.00%
Total (full) goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P12,500 100.00%

The goodwill impairment loss would be allocated as follows:

  Value % of Total
Goodwill impairment loss attributable to parent or controlling    
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 2,500 80.00%
Goodwill applicable to NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625 20.00%
Goodwill impairment loss based on 100% fair value or full-    
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 3,125 100.00%
The unrealized profits on January 1, and on December 31, 20x5, resulting intercompany sales, are summarized as follows:
Downstream Sales:
    Intercompany Merchandise  
Year Sales of Parent to in 12/31 Inventory Unrealized Intercompany Profit in
Subsidiary of S Company Ending Inventory
20x4 P125,000 P125,000 x 60% = P75,000 P75,000 x 20% = P15,000
20x5 100,000 P100,000 x 80% = P80,000 P80,000 x 25% = P20,000

Upstream Sales:
    Intercompany Merchandise  
Year Sales of Subsidiary to in 12/31 Inventory Unrealized Intercompany Profit in
Parent of S Company Ending Inventory
20x4 P 50,000 P100,000 x 50% = P25,000 P25,000 x 40% = P10,000
20x5 62,500 P 62,500 x 40% = P25,000 P25,000 x 20% = P 5,000
First Year after Acquisition
Parent Company Cost Model Entry
When the cost model is used, only two journal entries are recorded by Perfect Company during 20x4 related to its investment in Son Company. Entry (1) records
Perfect Company’s purchase of Son Company’s stock, entry (2) recognizes dividend income based on the P24,000 (P30,000 x 80%) of dividends received
during the period.
January 1, 20x4:    
(1) Investment in Son 310,000  
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   310,000
...
Acquisition of Son Company    
January 1, 20x4 – December 31, 20x4:    
(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000  
...
No entries are made on the parent’sbooks to depreciate, amortize or Dividend
write-offincome  24,000
the portion
allocated excess that (P30,000 of the x
expires during 20x4, and unrealized profits
80%) . . . . . . . . . . . . . . . . . . . . . . .
in ending inventory. Record dividends from Son Company    
Consolidation Workpaper – Year of Acquisition
The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries on January 1, 20x4:
(E1) Common stock – Son 200,000  
Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.000  
...
Investment in Son   240,000
Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(E2) Non-controlling interest (P300,000 x 20%) . . . . . . . . . . . . . 5,000  60,000 
.Inventory
... ..............................................
To eliminate intercompany investmentdepreciation
Accumulated and equity accounts – of subsidiary
80,000 on date of 
acquisition;
equipment . . . . . . . . . . . . . . . . . .
and to establish non-controlling interest (in net assets of subsidiary) on date of
acquisition. Accumulated depreciation – 160,000  
buildings . . . . . . . . . . . . . . . . . . . .
6,000  
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000  
.
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000  
...
  180,000
(E3) Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 5,000  
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000  
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500  
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
Accumulated depreciation – equipment . . . . . . . . . . . . . . . .   10,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2,500
To provide for 20x4 impairment loss and depreciation and amortization on differences
between
acquisition date fair value and book value of Son’s identifiable assets and liabilities as follows:

  Cost of Depreciation/    
Goods Amortization Amortization  
Sold Expense -Interest Total
Inventory sold P 5,000      
Equipment   P 10,000    
Buildings   ( 5,000)    
Bonds payable _______ _______ P 1,000  
Totals P 5,000 P 5,000 P1,000 11,000
 (E4) Dividend income – Perfect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000  
Non-controlling interest (P30,000 x 20%) . . . . . . . . . . . . . . . . . . . . 6,000  
Dividends paid – Son . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   30,000
To eliminate intercompany dividends and non-controlling interest share of dividends.
(E5) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000  
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . . . .   125,000
To eliminate intercompany downstream sales.    
(E6) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . . . .   50,000
To eliminate intercompany upstream sales.    
(E7) Cost of Goods Sold (Ending Inventory – Income Statement) . . . 15,000  
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   15,000
To defer the downstream sales - unrealized profit in ending inventory until it is sold to outsiders.
(E8) Cost of Goods Sold (Ending Inventory – Income Statement) . . . 10,000  
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000
To defer the upstream sales - unrealized profit in ending inventory until it is sold to outsiders.
(E9) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . . 5,800  
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,800
To establish non-controlling interest in subsidiary’s adjusted net income for 20x4 as follows:

Net income of subsidiary . . . . . . . . . . . . . . . . . . . P 50,000

Unrealized profit in ending inventory of P Company  
(upstream sales) . . . . . . . . . . . . . . . . . ( 10,000)
Son Company’s realized net income from  
separate operations* . . . . . . . . . . . . . . . . . . . . P 40,000
Less: Amortization of allocated excess [(E3)] . . . 11,000
  P 29,000
Multiplied by: Non-controlling interest % . . . . . . 20%
Non-controlling Interest in Net Income (NCINI)  
– partial goodwill P 5,800

Subsidiary accounts are adjusted to full fair value regardless of the controlling interest percentage or options used to value non-
controlling interest or goodwill. The trial balance data for Perfect and Son Company are entered in the consolidation workpaper, the separate
financial statements of the two companies, the eliminating entries, and the consolidated totals for the financial statements on December 31,
20x4 are shown in Figure 4-5
 Income Statement Perfect Co Son Co. Dr. Cr. Consolidated
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P400,000 P200,000 (5) 125,000   P 425,000
      (6) 50,000
Dividend income . . . . . . . . . . . . . . . . . . . 24,000 - (4) 24,000   _________
Total Revenue . . . . . . . . . . . . . . . . . . . P424,000 P200,000     P 425,000
Cost of goods sold . . . . . . . . . . . . . . . . . . P170,000 P115,000 (3) 5,000 (5) 125,000 P 140,000
      (7) 15,000 (6) 50,000
      (8) 10,000  
Depreciation expense . . . . . . . . . . . . . . . 50,000 20,000 (3) 5,000   75,000
Interest expense . . . . . . . . . . . . . . . . . . . . - - (3) 1,000   1,000
Other expenses . . . . . . . . . . . . . . . . . . . . 40,000 15,000     55,000
Goodwill impairment loss . . . . . . . . . . . . - - (3) 2,500   2,500
Total Cost and Expenses . . . . . . . . . . P260,000 P150,000     P273,500
Net Income . . . . . . . . . . . . . . . . . . . . . . . . P164,000 P 50,000     P151,500
NCI in Net Income - Subsidiary . . . . . . . - - (9) 5,800   ( 5,800)
Net Income to Retained Earnings . . . . P164,000 P 50,000     P145,700
Statement of Retained Earnings          
Retained earnings, 1/1 . . . . . . . . . . . . . .          
Perfect Company . . . . . . . . . . . . . . . . P300,000       P 300,000
Son Company . . . . . . . . . . . . . . . . . . .   P100,000 (1) 100,000    
Net income, from above . . . . . . . . . . . . 164,000 50,000     145,700
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P464,000 P150,000     P445,700
Figure 4–5: Worksheet for Dividends paid . . . . . . . . . . . . . . . . . . . . .
Perfect Company . . . . . . . . . . . . . . . . 60,000
   
 
 
 
 
 
 
60,000
Consolidated Financial Son Company . . . . . . . . . . . . . . . . . . .
Retained earnings, 12/31 to Balance Sheet . . . . . . . . . . . . .. P404,000
- 30,000
P120,000
 
 
(4) 30,000
 
_ ________
P 385,700
Statements, December 31, 20x4. Balance Sheet
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 194,000
   
P 75,000
 
 
   
  P 269,000
Cost Model (Partial-goodwill)/ Accounts receivable . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . .
75,000
100,000
50,000
75,000 (2) 5,000
 
(3) 5,000
  125,000

80%-Owned Subsidiary / (First  

 
 
 
 
 
 
 
(7) 15,000
(8) 10,000 150,000
Year after Acquisition) Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . .
175,000
200,000
40,000
150,000
(2) 6,000
 
 
 
221,000
350,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000   (2) 180,000 870,000
Discount on bonds payable . . . . . . . . . .     (2) 4,000 (3) 1,000 3,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .     (2) 10,000 (3) 2,500 7,500
Investment in Son Co . . . . . . . . . . . . . . . . 310,000  
(1) 240,000
__________ ________
  (2) 70,000 __________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,654,000 P840,000     P1,995,500
Accumulated depreciation
- equipment . . . . . . . . . . . . . . . . . . P 112,500 P 80,000 (2) 80,000 (3) 10,000 P122,500

Accumulated depreciation 337,500 240,000 (2) 160,000

- buildings . . . . . . . . . . . . . . . . . . . . .     (3) 5,000   412,500
Accounts payable . . . . . . . . . . . . . . . . . . 100,000 100,000     200,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . 200,000 100,000     300,000
Common stock, P10 par . . . . . . . . . . . . . 500,000       500,000
Common stock, P10 par . . . . . . . . . . . . .   200,000 (1) 200,000    
Retained earnings, from above . . . . . . 404,000 120,000     385,700
Non-controlling interest . . . . . . . . . . . . . . (2) 6,000 (1 ) 60,000
    (2) 15,000
  _________ _________ __________ (9) 5,800 ____74,800
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,654,000 P840,000 P 819,300 P 819,300 P1,995,500
The consolidated net income and non-controlling interests in consolidated net income which can be verified in Figure 4-5 can also be
computed as follows:
Consolidated Net Income for 20x4    
Perfect Company’s net income from own/separate operations . . . . . . . . . . .   P140,000
..
Unrealized profit in ending inventory of S Company (downstream sales) . .   ( 15,000)
....
Perfect Company’s realized net income from separate   P125,000
operations* . . . . . . .
Son Company’s net income from own operations . . . . . . . . . . . . . . . . . . . . . . P 50,000  
...
Unrealized profit in ending inventory of S Company (upstream ( 10,000)  
sales) . . . . . . . . .
Son Company’s realized net income from separate P 40,000 40,000
operations* . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P165,000
.....
*thatLess:has Non-controlling
been realized inInterest transactionsin Net Income* * . . . . . . . . . . . . . . . . . . . . . .
with third parties. P 5,800  
......
**Non-controlling Interest inofNetallocated
Amortization Income (NCINI)excess (refer for 20x4 to amortization  
11,000  
above) Son.Company’s
. . . . . . . . net income of Subsidiary Company from its own operations  
(Reported net income
Goodwill of Son Company)
impairment (impairment . . . .under
. . . . . .partial-goodwill
. . . . . . . . . . . . . . . . . . . 2,500 P 50,000
19,300
Unrealized
approach) . . . . profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 10,000)
Son Company’s
Controlling Interest in realized
Consolidated net income
Net Incomefrom separate
or Profitoperations
attributable . . to
........   P 40,000  
Less: holders
Equity Amortizationof parent of allocated
. . . . . . . .excess
. . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000
P145,700
. . . .  P 29,000
Multiplied Add: by: Non-controlling
Non-controlling interestInterest
% . . . . . . .in. . . . Net
. . . . . . Income
..............   20%
_ 5,800
.
(NCINI) . . . . . . . . . . . . . . . . . . . . . . .
**thatNon-controlling
has been
Consolidated Interest
realized
Net Income forinin Net. Income
. . . . . . .(NCINI)
transactions
20x4 .with . . .–. partial
. . . . third . . . . . goodwill
. parties . . . . . . . ........ . . . . . . .   P 5,800
P151.500
....

Since NCI share of goodwill is not recognized, no adjustment is required for the impairment loss on goodwill and impairment losses are not
shared with NCI.
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  

Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) . . . . . . . . . . . P300,000
....
On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:
Consolidated Retained Earnings, December 31, 20x4  
Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) . . . . . . . . . . . P300,000
....
Add: Controlling Interest in Consolidated Net Income or Profit attributable to  
equity holders of parent for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,700
.....
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P445,700
.....
Less: Dividends paid – Parent Company for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
.....
Consolidated Retained Earnings, December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P385,700
....
The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of
identifiable assets and goodwill attributable to NCI share is not recognized. The NCI on January 1, 20x4 and December 31,
20x4 are computed as follows:
Non-controlling interest (partial-goodwill), January 1, 20x4  
Common stock – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000
...
Retained earnings – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
...
Stockholders’ equity – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 300,000
...
Adjustments to reflect fair value - (over) undervaluation of assets and liabilities . . . . . . . . 75,000
...
Non-controlling
Fair value interest of (partial-goodwill),
stockholders’ December
equity 31, of 20x4 subsidiary, January 1,  P 375,000 
Common stock – Subsidiary Company,
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 20x4 . . . . . . . . . . . . . . . .   P 200,000
..
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
. . .Retained earnings – Subsidiary Company, December 31, 20x4    
Non-controlling Retained interest earnings – Subsidiary Company, January 1,
(partial-goodwill)January P100,000 1, P 75,000 
20x4 . . . . . . . . . . . . . . . .
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Net income of subsidiary for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
...
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P150,000  
...
Less: Dividends paid – 30,000 120,000
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity – Subsidiary Company, December 31,   P 320,000
20x4 . . . . . . . . . . . . .
Adjustments to reflect fair value - (over) undervaluation of assets and    
liabilities, date of acquisition (January 1, 75,000
20x4) . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of allocated excess (refer to amortization above) –   ( 11,000)
Alternatively, NCI on December 31, 20x4may also be computed as follows:
20x4 . . . . . . . .
Fair value of stockholders’
Non-controlling equity of subsidiary,
interest (partial-goodwill), JanuaryDecember
1, 20x4. . .31, . . .20x4
. . . . .. .. .. .. .. .. .. .. .. . . . . . . . . . .  PP384,000
75,000
.Add:
. NCINI– 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,800
Less: Unrealized
Less: Dividends - Son, profit in(P30,000
20x4 ending inventory
x 20%). . of . .P. .Company
. . . . . . . . .(upstream
. . . . . . . . . sales)
. . . . . .. .. . . . . . . . . .   10,000
_6,000
.Non-controlling
.. interest (partial-goodwill), December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . P 74,800
Realized stockholders’ equity of subsidiary, December 31,   P374,000
20x4 . . . . . . . . . . . . . .
Multiplied by: Non-controlling Interest   20
Second Year after Acquisition
Assume the following information available for Perfect and Son Company for the year 20x5:
  Perfect Co. Son Co.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 450,000 P 300,000
....
Less: Cost of goods 180,000 160,000
sold . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross P 270,000 P 140,000
profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
..
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 45,000
...
No goodwill impairment loss for 20x5.On December 31, 20x5, intercompany
..
P 160,000
accounts payable and receivable
Net income from its own separate operations . . . . . .
P 75,000

arising from intercompany sales was fully settled.

Add: 32,000 - Dividend
income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net P 192,000 P 75,000
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Parent Company Cost Model Entry Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 60,000 P 40,000
Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment:
...

January 1, 20x5 – December 31, 20x5:    

32,000  
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
..
Dividend income (P40,000 x 80%) . . . . . . . . . . . . . . . . . .   32,000
On the books of Son Company, the P40,000 dividend paid was recorded as follows:
.....
Record dividends from Son Company.    
Dividends 40,000  
paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   40,000
....
Dividends paid by Son Co.    
The trial balance data for Perfect and Son Company are entered in the consolidation workpaper on December 31, 20x5, as
shown in Figure 4-5.

Consolidation Workpaper – Second Year after Acquisition

The working paper eliminations (in journal entry format) on December 31, 20x5, are as follows:
(E1) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000  
Retained earnings – Perfect Company . . . . . . . . . . . . . . . . . .   16,000
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, computed as follows:
Retained earnings – Son Company, 1/1/20x5 . . P 120,000
Retained earnings – Son Company, 1/1/20x4 . . _100,000
Increase in retained earnings . . . . . . . . . . . . . . . P 20,000
Multiplied by: Controlling interest % . . . . . . . . . . 80%
Retroactive adjustment . . . . . . . . . . . . . . . . . . . . P 16,000
 

(E2) Common stock – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  

Retained earnings – Son Co., 1/1/20x5 . . . . . . . . . . . . . . . . . . . . 120.000  
Investment in Son Co (P320,000 x 80%) . . . . . . . . . . . . . . . . . .   256,000
Non-controlling interest (P320,000 x   64,000
20%) . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . 80,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 160,000  
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000  
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000  
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000  
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   180,000
Non-controlling interest (P75,000 x 20%) . . . . . . . . . . . . . . . . .   15,000
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   70,000
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 – Perfect Company, 1/1/20x5    

[(P11,000 x 80%) + P2,500, impairment loss on  
partial-goodwill] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,300
Non-controlling interests (P11,000 x 20%) . . . . . . . . . . . . . . . . . . . 2,200  
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 10,000  
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000  
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
Accumulated depreciation – equipment . . . . . . . . . . . . . . . .   20,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . .   2,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2,500
To provide for years 20x4 and 20x5 depreciation and amortization on differences between acquisition
date fair value and book value of Son’s identifiable assets and liabilities as follows:
Year 20x4 amounts are debited to Perfect’s retained earnings & NCI;
Year 20x5 amounts are debited to respective nominal accounts.

  (20x4) Depreciation/  
Retained Amortization Amortization
earnings, expense -Interest
Inventory sold . . . . . . . . P 5,000    
Equipment . . . . . . . . . . . 10,000 P 10,000  
Buildings . . . . . . . . . . . . . (5,000) ( 5,000)  
Bonds payable . . . . . . . 1,000 ________ P 1,000
Sub-total . . . . . . . . . . . . . P11,000 P 5,000 P 1,000
Multiplied by: . . . . . . . . . 80%    
To Retained earnings . . P 8,800    
Impairment loss . . . . . . . 2,500    
Total . . . . . . . . . . . . . . . . P 11,300    
 
(E5) Dividend income – Perfect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000  
Non-controlling interest (P40,000 x 20%) . . . . . . . . . . . . . . . . . . . . 8,000  
Dividends paid – Son . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   40,000
To eliminate intercompany dividends and non-controlling    
interest
share of dividends
(E6) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . . . .   100,000
To eliminated intercompany downstream sales    

(E7) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,500  

Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . . . .   62,500
To eliminated intercompany upstream sales    

(E8) Beginning Retained Earnings – P Company . . . . . . . . . . . . . . . . . 15,000  

Cost of Goods Sold (Beginning Inventory – I/S)).. . . . . . . . . . .   15,000
To realized profit in downstream beginning inventory deferred
in the
prior period    
(E9) Beginning Retained Earnings – P Company (P10,000 x 80%) . . . 8,000  
Non-controlling interest (P10,000 x 20%) . . . . . . . . . . . . . . . . . . . .. 2,000  
Cost of Goods Sold (Beginning Inventory – I/S). . . . . . . . . . .   10,000
To realized profit in beginning inventory deferred in the prior
period    
 (E10) Cost of Goods Sold (Ending Inventory – Income Statement) . . 20,000  
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20,000
To defer the downstream sales - unrealized profit in ending inventory
until it is sold to outsiders    

(E11) Cost of Goods Sold (Ending Inventory – Income Statement) . . 5,000  

Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
To defer the upstream sales - unrealized profit in ending inventory
until it is sold to outsiders    

(E12) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . 14,800  

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14,800
To establish non-controlling interest in subsidiary’s adjusted net    
income for 20x5 as follows:

Net income of subsidiary . . . . . . . . . . . . . . . . . . . P 75,000

Realized profit in beginning inventory of P Company -  
20x5 (upstream sales) . . . . . . . . . . . 10,000
Unrealized profit in ending inventory of P Company -  
20x5 (upstream sales) . . . . . . . . . . . ( 5,000)
Son Company’s Realized net income* . . . . . . . . P 80,000
Less: Amortization of allocated excess . . . . . . . 6,000
  P 74,000
Multiplied by: Non-controlling interest % . . . . . . 20%
Non-controlling Interest in Net Income (NCINI )  
– partial goodwill . . . . . . . . . . . . . . . . . . . . . . P 14,800
 

*from separate transactions that has been realized in transactions with third persons.

The separate financial statements of the two companies, the eliminating entries, and the consolidated totals for the financial
statements on December 31, 20x5, are shown in Figure 4-6.
 Income Statement Perfect Co Son Co. Dr. Cr. Consolidated
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P450,000 P300,000 (6) 100,000   P 587,500
      (7) 62,500
Dividend income . . . . . . . . . . . . . . . . . . . 32,000 - (5) 32,000   ___________
Total Revenue . . . . . . . . . . . . . . . . . . . P482,000 P300,000     P 587,500
Cost of goods sold . . . . . . . . . . . . . . . . . . P180,000 P160,000 (10) 20,000 (6) 100,000 P 177,500
      (11) 5,000 (7) 62,500
        (8) 15,000
        (9) 10,000
Depreciation expense . . . . . . . . . . . . . . 50,000 20,000 (4) 5,000   75,000
Interest expense . . . . . . . . . . . . . . . . . . . . - - (4) 1,000   1,000
Other expenses . . . . . . . . . . . . . . . . . . . . 60,000 45,000     105,000
Goodwill impairment loss . . . . . . . . . . . . - -     -
Total Cost and Expenses . . . . . . . . . . P290,000 P225,000     P 358,500
Net Income . . . . . . . . . . . . . . . . . . . . . . . . P192,000 P 75,000     P 229,000
NCI in Net Income - Subsidiary . . . . . . . - - (12) 14,800   ( 14,800)
Net Income to Retained Earnings . . . . . P192,000 P 75,000     P 214,200
Statement of Retained Earnings          
Retained earnings, 1/1          
Perfect Company . . . . . . . . . . . . . . . . P404,000 (4) 11,300
    (8) 15,000
      (9) 8,000 (1) 16,000 P 385,700
Son Company . . . . . . . . . . . . . . . . . . .   P 120,000 (1) 120,000    
Net income, from above . . . . . . . . . . . . 192,000 75,000     214,200
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P596,000 P195,000     P 599,900
Figure 4–6: Worksheet for Dividends paid . . . . . . . . . . . . . . . . . . . .
Perfect Company . . . . . . . . . . . . . . . 60,000
   
 
 
 
 
 
 
60,000

Consolidated Financial Statements, Son Company . . . . . . . . . . . . . . . . . . .

Retained earnings, 12/31 to Balance
- 40,000   (5) 40,000 _ ________

Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . P536,000 P155,000     P 539,900

December 31, 20x5.  
Balance Sheet
 
 
 
 
 
 
 
 
 
 
Cost Model Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . .
P 221,000
150,000
P 85,000
80,000
 
 
 
 
P 306,000
230,000
(Partial-goodwill)/80%-Owned Inventory . . . . . . . . . . . . . . . . . . . . . . . . . .
 
180,000
 
90,000
 
(1) 5,000
 
(4) 5,000
(10) 20,000
        (11) 5,000 245,000
Subsidiary/ (Second Year after Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (3) 6,000   221,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000     350,000
Acquisition) Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on bonds payable . . . . . . . . . .
600,000
 
450,000
  (3) 4,000
  (3) 180,000
(4) 2,000
870,000
2,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .     (3) 10,000 (4) 2,500 7,500
Investment in Son Co . . . . . . . . . . . . . . . . 310,000   (1) 16,000 (2) 256,000
__________ _________   (3) 70,000 __________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,836,000 P895,000     P2,231,500
Accumulated depreciation
- equipment . . . . . . . . . . . . . . . . . . P 125,000 P 85,000 (3) 80,000 (4) 20,000 P150,000
Accumulated depreciation 375,000 255,000 (3) 160,000
- buildings . . . . . . . . . . . . . . . . . . . .     (4) 10,000   460,000
Accounts payable . . . . . . . . . . . . . . . . . 100,000 100,000     200,000
Bonds payable . . . . . . . . . . . . . . . . . . . . 200,000 100,000     300,000
Common stock, P10 par . . . . . . . . . . . . 500,000       500,000
Common stock, P10 par . . . . . . . . . . . .   200,000 (2) 200,000    
Retained earnings, from above . . . . . . 536,000 155,000     539,900
Non-controlling interest . . . . . . . . . . . . . (4) 2,200
  (2) 8,000 (2 ) 64,000
  (9) 2,000 (3) 15,000
  ___ _____ _________ __________ (12) 14,800 ____81,600
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,836,000 P895,000 P 897,800 P 897,800 P2,231,500
The consolidated net income and non-controlling interests in consolidated net income which can be verified in Figure
4-6 can also be computed as follows:
Consolidated Net Income for 20x5    
Perfect Company’s net income from own/separate operations . . . . . . . . . . . . .   P160,000
Realized profit in beginning inventory of S Company (downstream sales) . . . .   15,000
.
Unrealized profit in ending inventory of S Company (downstream sales) . . . . .   (_20,000)
.
Perfect Company’s realized net income from separate operations* . . . . . . .   P155,000
Son Company’s net income from own operations . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000  
Realized profit in beginning inventory of P Company (upstream 10,000  
sales) . . . . . . .
Unrealized profit in ending inventory of P Company (upstream ( 5,000)  
sales) . . . . . . . .
Son Company’s realized net income from separate operations* . . . . . . . . . . P 80,000 80,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P235,000
..
Less:
*that hasAmortization
been realized of allocated excess . . . . . . .with
in transactions . . . . .third
. . . . . .parties.
................   6,000
.
Consolidated Net Income for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P229,000
.
Less: Non-controlling Interest in Net Income* * . . . . . . . . . . . . . . . . . . . . . . . . .   14,800
...
Controlling Interest in Consolidated Net Income or Profit attributable to    
equity holders of parent – P214,200
20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Or, alternatively
Consolidated Net Income for 20x5    
Perfect Company’s net income from own/separate operations . . . . . . . . . . . . .   P160,000
Realized profit in beginning inventory of S Company (downstream sales) . . . . .   15,000
Unrealized profit in ending inventory of S Company (downstream sales) . . . . . .   (_20,000)
Perfect Company’s realized net income from separate operations* . . . . . . .   P155,000
Son Company’s net income from own operations . . . . . . . . . . . . . . . . . . . . . . . . P 75,000  
Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 10,000  
Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 5,000)  
Son Company’s realized net income from separate operations* . . . . . . . . . . P 80,000 80,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P235,000
Less: Non-controlling Interest in Net Income* * . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 14,800  
Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 20,800
Controlling Interest in Consolidated Net Income or Profit attributable to    
equity holders of parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P214,200
Add: Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . .   _ 14,800
Consolidated Net Income for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P229,000
*that has been realized in transactions with third parties.
**Non-controlling Interest in Net Income (NCINI) for 20x5  
Son Company’s net income of Subsidiary Company from its own operations  
(Reported net income of Son Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
Realized profit in beginning inventory of P Company (upstream 10,000
sales) . . . . . . .
Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . ( 5,000)
.
Son Company’s realized net income from separate operations . . . . . . . . . . P 80,000
Less: Amortization of allocated 6,000
excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
  P 74,000
Multiplied by: Non-controlling interest 20%
%................................
Cost Model – Analysis of Consolidated Net Income and Consolidated Retained Earnings
In Chapter 3, the calculations of consolidated net income and consolidated retained earnings were refined to
accommodate the effect of the amortization, depreciation, and impairment of differences between fair values
(implied) and book values. These analyses must now be further refined to accommodate the effect of
unrealized intercompany profit.

The non-controlling interest in consolidated net income is calculated:

1. After subtracting end-of-year unrealized intercompany profit and adding intercompany profit realized
during the current year to the net income reported by the subsidiary.
2. If the sale of merchandise had been downstream rather than upstream, the amount of subsidiary income
included in consolidated net income would not be affected by the workpaper entries related to unrealized
intercompany profit, and no adjustment would be necessary in the calculation of the non-controlling
interest in consolidated income.

Consolidated Net Income

Consolidated net income is the:
• parent company’s income from its own (independent) operations that has been realized in transactions
with third parties
• plus (minus) subsidiary income (loss) that has been realized in transactions with third parties
• plus or minus adjustments for the period relating to the depreciation, amortization, and impairment of
differences between fair value/implied and book values.
Consolidated Retained Earnings – Cost Model
Consolidated retained earnings are the:
• parent company’s cost basis retained earnings that has been realized in transactions with third parties
• plus (minus) the parent company’s share of the increase (decrease) in subsidiary retained earnings that has been realized in transactions with
third parties from the date of acquisition to the current date
• plus or minus the cumulative effect of adjustments to date relating to the amortization, depreciation, and impairment of differences between
implied and book values.
Consolidated Retained Earnings, December 31, 20x5    
Retained earnings - Parent Company, January 1, 20x5 (cost model . . . . . . . . .   P404,000
Less: Unrealized profit in ending inventory of S Company (downstream sales)    
– 20x4 (UPEI of S – 20x4) or Realized profit in beginning inventory of S Company (downstream  
sales) –20x4 (RPBI of S - 20x5) . . . . . . . . . . . . . . . . . __15,000
Adjusted Retained Earnings – Parent 1/1/20x5 (cost model (Son Company’s    
Retained earnings that have been realized in transactions with third  
parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P389,000
Adjustment to convert from cost model to equity method for purposes of    
consolidation or to establish reciprocity:/Parent’s share in adjusted net    
increased in subsidiary’s retained earnings:  
Retained earnings – Subsidiary, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . . . P 120,000  
Less: Retained earnings – Subsidiary, January 1, 20x4 . . . . . . . . . . . . . . . . . 100,000  
Increase in retained earnings since date of acquisition . . . . . . . . . . . . . . . P 20,000  
Less: Amortization of allocated excess – 20x4 . . . . . . . . . . . . . . . . . . . . . . . . 11,000  
Unrealized profit in ending inventory of P Company (upstream    
sales) 20x4 (UPEI of P – 20x4) or Realized profit in beginning  
inventory of P Company (upstream sales) –20x5 (RPBI of P - 20x5) . . __10,000
  (P 1,000)  
Multiplied by: Controlling interests % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80%  
  (P 800)  
Less: Goodwill impairment loss, partial goodwill . . . . . . . . . . . . . . . . . . . . . . 2,500 ( 3,300)
Consolidated Retained earnings, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . . . . .   P385,700
Add: Controlling Interest in Consolidated Net Income or Profit attributable to    
equity holders of parent for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,200
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P623,900
Less: Dividends paid – Parent Company for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . .   60,000
Consolidated Retained Earnings, December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . .   P539,900

*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,125 by 80%.
There might be situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired.
Or, alternatively:
Consolidated Retained Earnings, December 31, 20x5    
Retained earnings - Parent Company, December 31, 20x5 (cost model) . . . . . .   P536,000
Less: Unrealized profit in ending inventory of S Company (downstream sales)    
– 20x5 (UPEI of S – 20x5) or Realized profit in beginning inventory of S Company (downstream  
sales) –20x6 (RPBI of S - 20x6) . . . . . . . . . . . . . . . . . 20,000
Adjusted Retained Earnings – Parent 12/31/20x5 (cost model )    
Son Company’s Retained earnings that have been realized in  
transactions with third parties) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P516,000
Adjustment to convert from cost model to equity method for purposes of    
consolidation or to establish reciprocity:/Parent’s share in adjusted net    
increased in subsidiary’s retained earnings:  
Retained earnings – Subsidiary, December 31, 20x5 . . . . . . . . . . . . . . . . . . P 155,000  
Less: Retained earnings – Subsidiary, January 1, 20x4 . . . . . . . . . . . . . . . . . 100,000  
Increase in retained earnings since date of acquisition . . . . . . . . . . . . . . . P 55,000  
Less: Accumulated amortization of allocated excess –    
20x4 and 20x5 (P11,000 + P6,000) . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000
Unrealized profit in ending inventory of P Company (upstream    
sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning  
inventory of P Company (upstream sales) –20x6 (RPBI of P - 20x6) . . 5,000
  P33,000  
Multiplied by: Controlling interests % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80%  
  P 26,400  
Less: Goodwill impairment loss, partial goodwill . . . . . . . . . . . . . . . . . . . . . . 2,500 23,900
Consolidated Retained earnings, December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . .   P539,900
 Non-controlling interest (partial-goodwill), December 31, 20x5    
Common stock – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . . . . . . .   P 200,000
Retained earnings – Subsidiary Company, December 31, 20x5:    
Retained earnings – Subsidiary Company, January 1, 20x5* . . . . . . . . . . . . . . . P120,000  
Add: Net income of subsidiary for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000  
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P195,000  
Less: Dividends paid – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 155,000
Stockholders’ equity – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . .   P 355,000
Adjustments to reflect fair value - (over) undervaluation of assets and    
liabilities, date of acquisition (January 1, 20x4) . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Amortization of allocated excess (refer to amortization above) :    
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 11,000  
20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 ( 17,000)
Fair value of stockholders’ equity of subsidiary, December 31, 20x5 . . . . . . . . . . .   P 413,000
Less: Unrealized profit in ending inventory of P Company (upstream    
sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inventory  
of P Company (upstream sales) –20x6 (RPBI of P - 20x6 . . . . . . . . . . . . . . . . . 5,000
Realized stockholders’ equity of subsidiary, December 31, 20x5 . . . . . . . . . . . . . .   P408,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . .   20
Non-controlling interest (partial -goodwill), December 31, 20x5 . . . . . . . . . . . . . . .   P 81,600
*the realized profit in beginning inventory of P Company (upstream sales) –20x5
(RPBI of P - 20x5 amounting to P10,000 is already included in the beginning retained earnings of S Company

Alternatively, NCI on December 31, 20x5 may also be computed as follows:

Non-controlling interest (partial-goodwill), January 1, 20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 74,800
Add: NCINI – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,800
Less: Dividends - Son, 20x5 (P40,000 x 20%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____8,000
Non-controlling interest (partial-goodwill), December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 81,600

Or,
Common stock – Subsidiary Company, January 1, 20x5 . . . . . . . . . . . . . . . . . .. . . . .   P 200,000
Retained earnings – Subsidiary Company, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . .   _120,000
Stockholders’ equity – Subsidiary Company, January 1, 20x5 . . . . . . . . . . . . . . . . . . .   P 320,000
Adjustments to reflect fair value - (over) undervaluation of assets and    
liabilities, date of acquisition (January 1, 20x4) . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000  
Amortization of allocated excess – 20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 11,000) ___64,000
Fair value of stockholders’ equity of subsidiary, January 1, 20x5 . . . . . . . . . . . . . . . . .   P 384,000
Less: Realized profit in beginning inventory of P Company (upstream sales) – 20x5.   __10,000
Realized stockholders’ equity of subsidiary, January 1, 20x5   P 374,000
Realized stockholders’ equity of subsidiary, January 1, 20x5   P 374,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . .. . .   20
Non-controlling interest (partial-goodwill), January 1, 20x5. . . . . . . . . . . . . . . . . . .   P 74,800
Add: NCINI – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14,800
Less: Dividends - Son, 20x5 (P40,000 x 20%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____8,000
Non-controlling interest (partial-goodwill), December 31, 20x5 . . . . . . . . . . . . . . P 81,600
Illustration 4-4: 80%-Owned Subsidiary: Cost Model – Full-Goodwill Approach
Refer to Illustration 4-3 for determination of separate net income, computation of full-goodwill, amortization of allocated excess, impairment of goodwill, and
intercompany sales and accounts receivable and payable.
The resulting ownership situation can be viewed in the schedule of determination and allocation of excess.

Schedule of Determination and Allocation of Excess

Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (80%)    
Consideration transferred (80%) . . . . . . . . . . . . . . .   P 310,000
Fair value of NCI (given) (20%) . . . . . . . . . . . . . . . .   77,500
Fair value of Subsidiary (100%) . . . . . . . . . . . . . . . .   P 387,500
Less: Book value of stockholders’ equity of Son:    
Common stock (P200,000 x 100%) . . . . . . . . . . . . . P 200,000  
Retained earnings (P100,000 x 100%) . . . . . . . . . . . 100,000 300,000
Allocated excess (excess of cost over book value) . . .   P 87,500
Less: Over/under valuation of assets and liabilities:    
Increase in inventory (P5,000 x 100%) . . . . . . . . . . . P 5,000  
Increase in land (P6,000 x 100%) . . . . . . . . . . . . . . . 6,000  
Increase in equipment (P80,000 x 100%) . . . . . . . . 80,000  
Decrease in buildings (P20,000 x 100%) . . . . . . . . . ( 20,000)  
Decrease in bonds payable (P4,000 x 100%) . . . . 4,000 75,000
Positive excess: Full-goodwill (excess of cost over
fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 12,500

A summary or depreciation and amortization adjustments is as follows:

Over/ Annual Current
Account Adjustments to be amortized under Life Amount Year(20x4) 20x5
Inventory . . . . . . . . . . . . . . . . . . . . . . P 5,000 1 P 5,000 P 5,000 P -
Subject to Annual Amortization          
Equipment (net) . . . . . . . . . . . . . . . . 80,000 8 10,000 10,000 10,000
Buildings (net) . . . . . . . . . . . . . . . . . . (20,000) 4 ( 5,000) ( 5,000) (5,000)
Bonds payable . . . . . . . . . . . . . . . . . 4,000 4 1,000 1,000 1,000
      P 11,000 P 11,000 P 6,000
First Year after Acquisition
Parent Company Cost Model Entry
When the cost model is used, only two journal entries are recorded by Perfect Company during 20x4 related to its investment
in Son Company. Entry (1) records Perfect Company’s purchase of Son Company’s stock, entry (2) recognizes dividend
income based on the P32,000 (P30,000 x 80%) of dividends received during the period
January 1, 20x4:    
(1) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000  
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   310,000
Acquisition of Son Company.    
January 1, 20x4 – December 31, 20x4:    
(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000  
Dividend income (P30,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . .   24,000
Record dividends from Son Company.    

On the books of Son Company, the P30,000 dividend paid was recorded as follows:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000  
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   30,000
Dividends paid by Son Co.    

The dividends paid (or declared) account is a temporary account that is closed to retained earnings at year-end. An alternative
is to debit retained earnings directly when dividends are paid or declared.
No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires
during 20x4.
Consolidation Workpaper – First Year after Acquisition
The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet
eliminating entries on January 1, 20x4.
(E1) Common stock – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  
Retained earnings – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.000  
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   240,000
Non-controlling interest (P300,000 x 20%) . . . . . . . . . . . . . . . .   60,000
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  

Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . 80,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 160,000  
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000  
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000  
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500  
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   180,000
Non-controlling interest (P75,000 x 20%) + [(P12,500, full –    
P10,000, partial goodwill)] . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   70,000
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.

Since the set-up entry in (E2) NCI at fair value, non-controlling interests have a share of entity goodwill and hence is exposed to impairment loss on
goodwill.
For practicality, impairment loss requires to be pro-rated between the parent and NCI on the same basis as that on which
profit or loss is allocated.

In other words, the impairment loss is pro-rated in accordance with the proportion of goodwill recognized by parent and
NCI. (E3) Cost of Goods 5,000  
Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 5,000  
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000  
.
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,125  
. Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
3,125
.
Goodwill ............................................
ToAccumulated
provide for 20x4 depreciation
impairment – equipment
loss and depreciation
. . . . . . . . . . . and
....   10,000 
amortization on differences between acquisition date fair
value and book value of Son’s identifiable assets and
liabilities as follows:
  Cost of Depreciation/  
Goods Amortization Amortizatio
Sold Expense n
-Interest
Inventory sold . . . . P 5,000    
Equipment . . . . . . .   P10,000  
Buildings . . . . . . . . .   ( 5,000)  
Bonds payable . . . . _______ _______ P 1,000
Totals . . . . . . . . . . . . P 5,000 P 5,000 P1,000
(E4) Dividend income - 24,000  
Perfect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest (P30,000 x 20%) . . . . . . . . . . . . . . . . . . 6,000  
..
Dividends paid –   30,000
Son . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
To eliminate intercompany dividends and non-controlling    
interest
share of dividends
 (E5) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000  
...
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . .   125,000
..
(E6) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
. . . To eliminated intercompany downstream sales    
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . .   50,000
..
(E7) Cost of Goods Sold
To eliminated (Ending Inventory
intercompany upstream–sales Income    
Statement) . . . 15,000  
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . .
..   15,000
To defer the downstream sales - unrealized profit in ending
(E8) Cost of Goods Sold (Ending Inventory – Income
inventory until it is sold to outsiders    
Statement) . . . 10,000  
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . .
..   10,000
(E9) ToNon-controlling
defer the upstreaminterest sales - unrealized
in Netprofit Income
in ending of 5,175  
inventory until
Subsidiary . . . . . . . . . . it is sold to outsiders    
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,175
...
To establish non-controlling interest in subsidiary’s
Net income of subsidiary . . . . . . . . . . . . . . . . . . .
 P 50,000  
adjusted net
Unrealized profit in ending inventory of P Company (upstream  
income
sales) . . for
. . . . 20x4
. . . . . as
. . . follows:
... ( 10,000)
Son Company’s realized net income from  
separate operations* . . . . . . . . . . . . . . . . . . . . P 40,000
Less: Amortization of allocated excess [(E3)] . . . 11,000
  P 29,000
Multiplied by: Non-controlling interest % . . . . . . 20%
Non-controlling Interest in Net Income (NCINI)  
– partial goodwill . . . . . . . . . . . . . . . . . . . . . . P 5,800
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) . 625
Non-controlling Interest in Net Income (NCINI)  
– full goodwill . . . . . . . . . . . . . . . . . . . . . . . . P 5,175

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
 Income Statement Perfect Co Son Co. Dr. Cr. Consolidated
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P400,000 P200,000 (5) 125,000   P 425,000
      (6) 50,000
Dividend income . . . . . . . . . . . . . . . . . . . 24,000 - (4) 24,000   _________
Total Revenue . . . . . . . . . . . . . . . . . . . P424,000 P200,000     P 425,000
Cost of goods sold . . . . . . . . . . . . . . . . . . P170,000 P115,000 (3) 5,000 (5) 125,000 P 140,000
      (7) 15,000 (6) 50,000
      (8) 10,000  
Depreciation expense . . . . . . . . . . . . . . 50,000 20,000 (3) 5,000   75,000
Interest expense . . . . . . . . . . . . . . . . . . . . - - (3) 1,000   1,000
Other expenses . . . . . . . . . . . . . . . . . . . . 40,000 15,000     55,000
Goodwill impairment loss . . . . . . . . . . . . - - (3) 3,125   3,125
Total Cost and Expenses . . . . . . . . . . P260,000 P150,000     P274,125
Net Income . . . . . . . . . . . . . . . . . . . . . . . . P164,000 P 50,000     P150,875
NCI in Net Income - Subsidiary . . . . . . . - - (9) 5,175   ( 5,175)
Net Income to Retained Earnings . . . . P164,000 P 50,000     P145,700
Statement of Retained Earnings          
The trial balance data for Perfect and Son Company Retained earnings, 1/1 . . . . . . . . . . . . . .
Perfect Company . . . . . . . . . . . . . . . . P300,000
   
 
 
 
 
  P
 
300,000
are entered in the consolidation workpaper, the Son Company . . . . . . . . . . . . . . . . . . .
Net income, from above . . . . . . . . . . . . 164,000
  P100,000
50,000
(1) 100,000
 
 
 
 
145,700
separate financial statements of the two companies, Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P464,000 P150,000     P445,700
Dividends paid . . . . . . . . . . . . . . . . . . . . .          
the eliminating entries, and the consolidated totals for Perfect Company . . . . . . . . . . . . . . . . 60,000       60,000
the financial statements on December 31, 20x4 as Son Company . . . . . . . . . . . . . . . . . . .
Retained earnings, 12/31 to Balance
- 30,000   (4) 30,000 _ ________

shown in Figure 4-7. Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . P404,000 P120,000     P 385,700

Balance Sheet          
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 194,000 P 75,000     P 269,000
Accounts receivable . . . . . . . . . . . . . . . . 75,000 50,000     125,000
Figure 4–7: Worksheet for Consolidated Financial Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 75,000 (2) 5,000 (3) 5,000
Statements, December 31, 20x4.  
 
 
 
 
 
 
 
(7)
(8)
15,000
10,000 150,000
Cost Model (Full-goodwill)/80%-Owned Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (2) 6,000   221,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000     350,000
Subsidiary/December 31, 20x4 (First Year after Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000   (2) 180,000 870,000
Discount on bonds payable . . . . . . . . . .     (2) 4,000 (3) 1,000 3,000
Acquisition) Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .     (2) 12,500 (3) 3,125 9,375
Investment in Son Co . . . . . . . . . . . . . . . . 310,000   (1) 240,000
__________ _________   (1) 70,000 __________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,654,000 P840,000     P1,997,375
Accumulated depreciation
- equipment . . . . . . . . . . . . . . . . . . P 112,500 P 80,000 (2) 80,000 (3) 10,000 P122,500

Accumulated depreciation 337,500 240,000 (2) 160,000

- buildings . . . . . . . . . . . . . . . . . . . . .     (3) 5,000   412,500
Accounts payable . . . . . . . . . . . . . . . . . 100,000 100,000     200,000
Bonds payable . . . . . . . . . . . . . . . . . . . . 200,000 100,000     300,000
Common stock, P10 par . . . . . . . . . . . . 500,000       500,000
Common stock, P10 par . . . . . . . . . . . .   200,000 (1) 200,000    
Retained earnings, from above . . . . . . 404,000 120,000     385,700
Non-controlling interest . . . . . . . . . . . . . . (4) 6,000 (1 ) 60,000
    (2) 17,500
  _________ _________ __________ (9) 5,175 ____76,675
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,654,000 P840,000 P 821,800 P 821,800 P1,997,375
The consolidated net income and non-controlling interests in consolidated net income which can be verified in Figure 4-7 can also be
computed as follows:
Consolidated Net Income for 20x4    
Perfect Company’s net income from own/separate operations . . . . . . . . . . . . .   P140,000
Unrealized profit in ending inventory of S Company (downstream sales) . . . .   ( 15,000)
..
Perfect Company’s realized net income from separate   P125,000
operations* . . . . . . .
Son Company’s net income from own operations . . . . . . . . . . . . . . . . . . . . . . . . P 50,000  
.
Unrealized profit in ending inventory of S Company (upstream ( 10,000)  
sales) . . . . . . . . .
Son Company’s realized net income from separate P 40,000 40,000
operations* . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P165,000
...
Less: Non-controlling Interest in Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,175  
. . .
*that has been realized in transactions with third parties
Amortization of allocated excess (refer to amortization 11,000  
above) . . . . . . . . .
**Non-controlling Interest in Net Income (NCINI) for 20x4  
Son Company’sGoodwill net income impairment
of Subsidiary (impairment
Company from underitspartial-goodwill
own operations 3,125 19,300 
approach) . . . .
(Reported net income of Son Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 50,000
Controlling
Unrealized profit Interest in Consolidated
in ending inventoryNet of PIncomeCompany or Profit(upstream attributable
sales) . to .......   ( 10,000) 
Son Company’s realized net income from separate operations . . . . . . . . .of. equity holders PP145,700
40,000
parentLess:. . .Amortization
. . . . . . . . . . . .of. .allocated
. . . . . . . . excess
. . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . 11,000
  Add: Non-controlling Interest in Net Income   _ 5,175
P 29,000
(NCINI) . . . . . . . . . . . . . . . . . . . . . .
Multiplied by: Non-controlling interest % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
Non-controlling Interest in Net Consolidated
Income (NCINI) –Net partial . Income . . . . . . . . . . . . for
......   PP150.875
5,800
20x4Less:
. . . .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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625
Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,175
*that has been realized in transactions with third parties

Since NCI share of goodwill is not recognized, no adjustment is required for the impairment loss on goodwill and impairment losses are not
shared with NCI.
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  

Retained earnings - Parent Company, January 1, 20x4 (date of P300,000
acquisition) . . . . . . . . . . . . . . .

On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:

Consolidated Retained Earnings, December 31, 20x4  
Retained earnings - Parent Company, January 1, 20x4 (date of P300,000
acquisition) . . . . . . . . . . . . . . .
Add: Controlling Interest in Consolidated Net Income or Profit attributable to  
equity holders of parent for 145,700
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P445,700
....
Less: Dividends paid – Parent Company for 60,000
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Retained Earnings, December 31, P385,700
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and goodwill attributable to
NCI share is not recognized. The NCI on January 1, 20x4 and December 31, 20x4 are computed as follows:
Non-controlling interest (full-goodwill), January 1, 20x4  
Common stock – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000
Retained earnings – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Stockholders’ equity – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 300,000
Adjustments to reflect fair value - (over) undervaluation of assets and liabilities . . . . . . . . . . . 75,000
Fair value of stockholders’ equity of subsidiary, January 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 375,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Non-controlling interest (partial) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
Add: Non-controlling interests on full goodwill, 1/1/20x4 (P12,500, full-goodwill – P10,000, partial  
goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Non-controlling interest (full-goodwill), January 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . P 77,500

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

Common stock – Subsidiary Company, December 31, 20x4 . . . . . . . . . . . . . . . . . .   P 200,000
Retained earnings – Subsidiary Company, December 31, 20x4    
Retained earnings – Subsidiary Company, January 1, 20x4 . . . . . . . . . . . . . . . . P100,000  
Add: Net income of subsidiary for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P150,000  
Less: Dividends paid – 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 120,000
Stockholders’ equity – Subsidiary Company, December 31, 20x4 . . . . . . . . . . . . .   P 320,000
Adjustments to reflect fair value - (over) undervaluation of assets and    
liabilities, date of acquisition (January 1, 20x4) . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Amortization of allocated excess (refer to amortization above) – 20x4 . . . . . . . .   ( 11,000)
Fair value of stockholders’ equity of subsidiary, December 31, 20x4 . . . . . . . . . . .   P384,000
Less: Unrealized profit in ending inventory of P Company (upstream sales) . . . . .   10,000
Realized stockholders’ equity of subsidiary, December 31, 20x4 . . . . . . . . . . . . . .   P374,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . .   20
Non-controlling interest (partial-goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 74,800
Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4:    
[(P12,500 full – P10,000, partial = P2,500) – P625 impairment loss 1,875
Non-controlling interest (full-goodwill), December 31, 20x4 . . . . . . . . . . . . . . . . . .   P 76,675

Alternatively, NCI on December 31, 20x4 may also be computed as follows:

Non-controlling interest (full-goodwill), January 1, 20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 77,500
Add: NCINI– 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,175
Less: Dividends - Son, 20x4 (P30,000 x 20%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _6,000
Non-controlling interest (full-goodwill), December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 76,675
Second Year after Acquisition
Assume the following information available for Perfect and Son Company for the year 20x5:
  Perfect Co. Son Co.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 450,000 P 300,000
.
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 160,000
Gross P 270,000 P 140,000
profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 45,000
Net income from its own separate operations . . . . . . . . P 160,000 P 75,000
Add: Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000 -
Netgoodwill
No income . .impairment
. . . . . . . . . . .loss
. . . . for
. . . .20x5.
............... P 192,000 P 75,000
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000 P 40,000
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:    
32,000  
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend income (P40,000 x   32,000
80%) . . . . . . . . . . . . . . . . . . . . . . .
Record dividends from Son Company.    
On the books of Son Company, the P40,000 dividend paid was recorded as follows:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000  
.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   40,000
..
Dividends paid by Son Co.    
The trial balance data for Perfect and Son Company are entered in the consolidation workpaper on December 31, 20x5, as
shown in Figure 4-11.

Consolidation Workpaper – Second Year after Acquisition

The working paper eliminations (in journal entry format) on December 31, 20x5, are as follows:
(E1) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000  
Retained earnings – Perfect Company . . . . . . . . . . . . . . . . . .   16,000
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 – Son Company, 1/1/20x5. . P120,000
Retained earnings – Son Company, 100,000
1/1/20x4 . .
Increase in retained earnings . . . . . . . . . . . . . . P 20,000
.
Multiplied by: Controlling interest % . . . . . . . 80%
(E2) Common stock .–.Son . Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  
Retained earnings – Son Co., 1/1/20x5 . . . . . . . . . . . . . . . . . . . . . P 16,000 120.000
Retroactive  
Investment inadjustment
Son Co (P320,000
. . . . . . x. .80%)
. . . . .. .. .. .. .. .. .. .. . . . . . . . . . . .   256,000
Non-controlling interest (P320,000 x 20%) . . . . . . . . . . . . . . . . .   64,000
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . 80,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 160,000  
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000  
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000  
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500  
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   180,000
Non-controlling interest (P75,000 x 20%) + [(P12,500, full –    
P10,000, partial goodwill)] . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   70,000
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 – Perfect Company, 1/1/20x5    

(P14,125 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,300
Non-controlling interests (P14,125 x 20%) . . . . . . . . . . . . . . . . . . . 2,825  
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 10,000  
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000  
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
Accumulated depreciation – equipment . . . . . . . . . . . . . . .   20,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . .   2,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3,125
To provide for years 20x4 and 20x5 depreciation and amortization on    
differences between acquisition date fair value and book value of
Son’s identifiable assets and liabilities as follows:
Year 20x4 amounts are debited to Perfect’s retained earnings
and NCI.
Year 20x5 amounts are debited to respective nominal accounts..

  (20x4) Depreciation/  
Retained Amortization Amortization
earnings, expense -Interest
Inventory sold . . . . . . . . P 5,000    
Equipment . . . . . . . . . . . 10,000 P 10,000  
Buildings . . . . . . . . . . . . . (5,000) ( 5,000)  
Bonds payable . . . . . . . 1,000   P 1,000
Impairment loss . . . . . . . 3,125 ________ ______
Totals . . . . . . . . . . . . . . . . P 14,125 P 5,000 P1,000
Multiplied by: CI% . . . . . 80%    
To Retained earnings. . . P11,300    

(E5) Dividend income – Perfect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000  

Non-controlling interest (P40,000 x 20%) . . . . . . . . . . . . . . . . . . . . 8,000  
Dividends paid – Son . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   40,000
To eliminate intercompany dividends and non-controlling interest    
share of dividends.
 (E6) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . . . .   100,000
To eliminated intercompany downstream sales    
(E7) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,500  
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . . . .   62,500
To eliminated intercompany upstream sales    
(E8) Beginning Retained Earnings – P Company . . . . . . . . . . . . . . . . . 15,000  
Cost of Goods Sold (Ending Inventory – Income Statement)   15,000
To realized profit in downstream beginning inventory deferred in the
prior period    

(E9) Beginning Retained Earnings – P Company (P10,000 x 80%) . . . 8,000  

Non-controlling interest (P10,000 x 20%) . . . . . . . . . . . . . . . . . . . . . 2,000  
Cost of Goods Sold (Ending Inventory – Income Statement)   10,000
To realized profit in upstream beginning inventory deferred in the
prior period    

(E10) Cost of Goods Sold (Ending Inventory – Income Statement) . . 20,000  

Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20,000
To defer the downstream sales - unrealized profit in ending inventory
until it is sold to outsiders.    

(E11) Cost of Goods Sold (Ending Inventory – Income Statement).. 5,000  

Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
To defer the upstream sales - unrealized profit in ending inventory
until it is sold to outsiders.    

(E12) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . 14,800  

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14,800
To establish non-controlling interest in subsidiary’s adjusted net    
income for 20x5 as follows:

Net income of subsidiary . . . . . . . . . . . . . . . . . . . P 75,000

Realized profit in beginning inventory of P Company - 20x5  
(upstream sales) . . . . . . . . . . . 10,000
Unrealized profit in ending inventory of P Company - 20x5  
(upstream sales) . . . . . . . . . . . ( 5,000)
Son Company’s Realized net income* . . . . . . . . P 80,000
Less: Amortization of allocated excess . . . . . . . . 6,000
  P 74,000
Multiplied by: Non-controlling interest % . . . . . . 20%
Non-controlling Interest in Net Income (NCINI)  
- partial goodwill . . . . . . . . . . . . . . . . . . . . . . P 14,800
Less: NCI on goodwill impairment loss on full-  
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Non-controlling Interest in Net Income (NCINI)  
– full goodwill . . . . . . . . . . . . . . . . . . . . . . . . . P 14,800

*from separate transactions that have been realized in transactions with third persons.
The separate financial statements of the two companies, the eliminating entries, and the consolidated totals for the financial statements on December 31, 20x5, are shown in Figure 4-8.
 Income Statement Perfect Co Son Co. Dr. Cr. Consolidated
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P450,000 P300,000 (6) 100,000   P 587,500
      (7) 62,500
Dividend income . . . . . . . . . . . . . . . . . . . 32,000 - (5) 32,000   ___________
Total Revenue . . . . . . . . . . . . . . . . . . . P482,000 P300,000     P 587,500
Cost of goods sold . . . . . . . . . . . . . . . . . . P180,000 P160,000 (10) 20,000 (6) 100,000 P 177,500
      (11) 5,000 (7) 62,500
        (8) 15,000
        (9) 10,000
Depreciation expense . . . . . . . . . . . . . . 50,000 20,000 (4) 5,000   75,000
Interest expense . . . . . . . . . . . . . . . . . . . . - - (4) 1,000   1,000
Other expenses . . . . . . . . . . . . . . . . . . . . 60,000 45,000     105,000
Goodwill impairment loss . . . . . . . . . . . . - -     -
Total Cost and Expenses . . . . . . . . . . P290,000 P225,000     P 358,500
Net Income . . . . . . . . . . . . . . . . . . . . . . . P192,000 P 75,000     P 229,000
NCI in Net Income - Subsidiary . . . . . . . - - (12) 14,800   ( 14,800)
Net Income to Retained Earnings . . . . P192,000 P 75,000     P 214,200
Statement of Retained Earnings          
Retained earnings, 1/1          
Perfect Company . . . . . . . . . . . . . . . . P404,000 (4) 11,300
    (8) 15,000
      (9) 8,000 (1) 16,000 P 385,700

Figure 4–8: Worksheet for Son Company . . . . . . . . . . . . . . . . . . .

Net income, from above . . . . . . . . . . . . 192,000
  P 120,000
75,000
(5) 120,000
 
 
  214,200
 

Consolidated Financial Total . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dividends paid
P596,000
 
P195,000
 
 
 
 
 
P 599,900
 
Perfect Company . . . . . . . . . . . . . . . . 60,000       60,000
Statements, December 31, 20x5. Son Company . . . . . . . . . . . . . . . . . .
Retained earnings, 12/31 to Balance
- 40,000   (5) 40,000 _ ________

Cost Model (Full-goodwill)/80%- Sheet . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance Sheet
P536,000
 
P155,000
 
 
 
 
 
P 539,900
 

Owned Subsidiary (Second Year Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Accounts receivable . . . . . . . . . . . . . . . .
P 221,000
150,000
P 85,000
80,000
 
 
 
 
P 306,000
230,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 90,000 (3) 5,000 (4) 5,000
after Acquisition)  
 
 
 
 
 
 
 
(10) 20,000
(11) 5,000 245,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (3) 6,000   221,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000     350,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000   (3) 180,000 870,000
Discount on bonds payable . . . . . . . . . .     (3) 4,000 (4) 2,000 2,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .     (3) 12,500 (4) 3,125 9,375
Investment in Son Co . . . . . . . . . . . . . . . . 310,000   (1) 16,000 (2) 256,000
__________ _________   (3) 70,000 _________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,836,000 P895,000     P2,233,375
Accumulated depreciation
- equipment . . . . . . . . . . . . . . . . . . P 125,000 P 85,000(3) 80,000 (4) 20,000 P150,000
Accumulated depreciation 375,000 255,000(3) 160,000
- buildings . . . . . . . . . . . . . . . . . . . . .    
(4) 10,000   460,000
Accounts payable . . . . . . . . . . . . . . . . . . 100,000 100,000    200,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . 200,000 100,000    300,000
Common stock, P10 par . . . . . . . . . . . . . . 500,000  
    500,000
Common stock, P10 par . . . . . . . . . . . . .   200,000(2) 200,000    
Retained earnings, from above . . . . . . 536,000 155,000    539,900
Non-controlling interest . . . . . . . . . . . . . . (4) 2,825
  (5) 8,000 (2 ) 64,000
  (9) 2,000 (3) 17,500
  ___ _____ _________ __________ (12) 14,800 ____83,475
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,836,000 P895,000 P 900,925 P 900,925 P2,233,375
The consolidated net income and non-controlling interests in consolidated net income which can be verified in Figure 4-8 can also be computed as follows:
Consolidated Net Income for 20x5    
Perfect Company’s net income from own/separate operations . . . . . . . . . . . . .   P160,000
Realized profit in beginning inventory of S Company (downstream sales) . . . . .   15,000
Unrealized profit in ending inventory of S Company (downstream sales) . . . . . .   (_20,000)
Perfect Company’s realized net income from separate operations* . . . . . . .   P155,000
Son Company’s net income from own operations . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000  
Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 10,000  
Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 5,000)  
Son Company’s realized net income from separate operations* . . . . . . . . . . P 80,000 80,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P235,000
Less: Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6,000
Consolidated Net Income for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P229,000
Less: Non-controlling Interest in Net Income* * . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14,800
Controlling Interest in Consolidated Net Income or Profit attributable to    
equity holders of parent – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P214,200

*that has been realized in transactions with third parties.

Or, alternatively
Consolidated Net Income for 20x5    
Perfect Company’s net income from own/separate operations . . . . . . . . . . . . .   P160,000
Realized profit in beginning inventory of S Company (downstream sales) . . . . .   15,000
Unrealized profit in ending inventory of S Company (downstream sales) . . . . . .   (_20,000)
Perfect Company’s realized net income from separate operations* . . . . . . .   P155,000
Son Company’s net income from own operations . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000  
Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 10,000  
Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 5,000)  
Son Company’s realized net income from separate operations* . . . . . . . . . . P 80,000 80,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P235,000
Less: Non-controlling Interest in Net Income* * . . . . . . . . . . . . . . . . . . . . . . . . . . . P 14,800  
Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 20,800
Controlling Interest in Consolidated Net Income or Profit attributable to    
equity holders of parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P214,200
Add: Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . .   _ 14,800
Consolidated Net Income for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P229,000

*that has been realized in transactions with third parties

**Non-controlling Interest in Net Income (NCINI) for 20x5  
Son Company’s net income of Subsidiary Company from its own operations P 75,000
(Reported net income of Son Company)
Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 10,000
Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 5,000)
Son Company’s realized net income from separate operations . . . . . . . . . . P 80,000
Less: Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
  P 74,000
Multiplied by: Non-controlling interest % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
Non-controlling Interest in Net Income (NCINI) –partial goodwill . . . . . . . . . . . P 14,800
Less: NCI on goodwill impairment loss on full goodwill . . . . . . . . . . . . . . . . . . . . . 0
Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . . P 14,800
 Consolidated Retained Earnings, December 31, 20x5    
Retained earnings - Parent Company, January 1, 20x5 (cost model . . . . . . . .   P404,000
Less: Unrealized profit in ending inventory of S Company (downstream sales)    
– 20x4 (UPEI of S – 20x4) or Realized profit in beginning inventory of S  
Company (downstream sales) –20x4 (RPBI of S - 20x5) . . . . . . . . . . . . . . . . 15,000
Adjusted Retained Earnings – Parent 1/1/20x5 (cost model (Son Company’s    
Retained earnings that have been realized in transactions with third  
parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P389,000
Adjustment to convert from cost model to equity method for purposes of    
consolidation or to establish reciprocity:/Parent’s share in adjusted net    
increased in subsidiary’s retained earnings:  
Retained earnings – Subsidiary, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . P 120,000  
Less: Retained earnings – Subsidiary, January 1, 20x4 . . . . . . . . . . . . . . . . 100,000  
Increase in retained earnings since date of acquisition . . . . . . . . . . . . . . P 20,000  
Less: Amortization of allocated excess – 20x4 . . . . . . . . . . . . . . . . . . . . . . 11,000  
Unrealized profit in ending inventory of P Company (upstream    
sales) 20x4 (UPEI of P – 20x4) or Realized profit in beginning  
inventory of P Company (upstream sales) –20x5 (RPBI of P - 20x5). . 10,000
  (P 1,000)  
Multiplied by: Controlling interests % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80%  
  (P 800)  
Less: Goodwill impairment loss (full-goodwill), net (P3,125 – P625)* or    
(P3,125 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 ( 3,300)
Consolidated Retained earnings, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . . . . .   P385,700
Add: Controlling Interest in Consolidated Net Income or Profit attributable to    
equity holders of parent for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214,200
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P623,900
Less: Dividends paid – Parent Company for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . .   60,000
Consolidated Retained Earnings, December 31, 20x5 . . . . . . . . . . . . . . . . . . . . .   P539,900
 

*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,125 by 80%. There might be
situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired (refer to Illustration 4-6).
Or, alternatively:
Consolidated Retained Earnings, December 31, 20x5    
Retained earnings - Parent Company, December 31, 20x5 (cost model . . . . .   P536,000
Less: Unrealized profit in ending inventory of S Company (downstream sales)    
– 20x5 (UPEI of S – 20x5) or Realized profit in beginning inventory of S Company  
(downstream sales) –20x6 (RPBI of S - 20x6) . . . . . . . . . . . . . . . . 20,000
Adjusted Retained Earnings – Parent 12/31/20x5 (cost model (    
Son Company’s Retained earnings that have been realized in  
transactions with third parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P516,000
Adjustment to convert from cost model to equity method for purposes of    
consolidation or to establish reciprocity:/Parent’s share in adjusted net    
increased in subsidiary’s retained earnings:  
Retained earnings – Subsidiary, December 31, 20x5 . . . . . . . . . . . . . . . . . P 155,000  
Less: Retained earnings – Subsidiary, January 1, 20x4 . . . . . . . . . . . . . . . . 100,000  
Increase in retained earnings since date of acquisition . . . . . . . . . . . . . . P 55,000  
Less: Accumulated amortization of allocated excess –    
20x4 and 20x5 (P11,000 + P6,000) . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000
Unrealized profit in ending inventory of P Company (upstream    
sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning  
inventory of P Company (upstream sales) –20x6 (RPBI of P - 20x6). . 5,000
  P 33,000  
Multiplied by: Controlling interests % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80%  
  P 26,400  
Less: Goodwill impairment loss (full-goodwill), net (P3,125 – P625)* or    
(P3,125 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 23,900
Consolidated Retained earnings, December 31, 20x5 . . . . . . . . . . . . . . . . . . . .   P539,900
 Non-controlling interest (full-goodwill), December 31, 20x5    
Common stock – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . . . .   P 200,000
...
Retained earnings – Subsidiary Company, December 31, 20x5    
Retained earnings – Subsidiary Company, January 1, P120,000  
20x5* . . . . . . . . . . . . . . .
Add: Net income of subsidiary for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000  
....
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P195,000  
....
Less: Dividends paid – 40,000 155,000
20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity – Subsidiary Company, December 31,   P 355,000
20x5 . . . . . . . . . . . . .
Adjustments to reflect fair value - (over) undervaluation of assets and    
liabilities, date of acquisition (January 1, 20x4) . . . . . . . . . . . . . . . . . . . . . . 75,000
....
Amortization of allocated excess (refer to amortization above) :    
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 11,000  
....
20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 ( 17,000)
....
Fair value of stockholders’ equity of subsidiary, December 31, 20x5 . . . . . . . .   P 413,000
...
* the realized profit in beginning inventory
Less: Unrealized profitofinPending
Company inventory (upstream
of P Company sales) –20x5 (RPBI of P - 20x5
(upstream   amounting
  to P10,000 is already
included
sales) 20x5 (UPEI in theof beginning
P – 20x5) orretained earnings
Realized profit of S Company
in beginning  
inventory 5,000
of P Company (upstream sales) –20x6 (RPBI of P -
20x6 . . . . . . . . . . . . . . . . .
Realized stockholders’ equity of subsidiary, December 31,   P408,000
20x5 . . . . . . . . . . . . . .
Alternatively, NCI on December 31, 20x5may also be computed as follows:
Non-controlling interest (full-goodwill), January 1, P 76,675
20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: NCINI – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,800
Less: Dividends - Son, 20x5 (P40,000 x 20%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
... ____8,000
Non-controlling interest (full-goodwill), December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . P 83,475
......
Or,
Common stock – Subsidiary Company, January 1,   P 200,000
20x5 . . . . . . . . . . . . . . . . . .. . . . .
Retained earnings – Subsidiary Company, January 1,   _120,000
20x5 . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity – Subsidiary Company, January 1,   P 320,000
20x5 . . . . . . . . . . . . . . . . . . .
Adjustments to reflect fair value - (over) undervaluation of assets and    
liabilities, date of acquisition (January 1, 20x4) . . . . . . . . . . . . . . . . . . . . P 75,000  
......
Amortization of allocated excess – ( 11,000)  
20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill (full), 12,500  
1/1/20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of goodwill – 20x4…. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 3,125 ) __73,375
. . . .. .
Fair value of stockholders’ equity of subsidiary, January 1, 20x5 . . . . . . . . . . .   P 393,375
......
Less: Realized profit in beginning inventory of P Company (upstream sales)   __10,000
– 20x5.
Realized stockholders’ equity of subsidiary, January 1, 20x5   P 383,375
Multiplied by: Non-controlling Interest   20
percentage . . . . . . . . . . . . . . . . . . . . . . . . .. . .
Equity Method

In applying the equity method, the accounting objective is to report the subsidiary’s (investor’s) investment and investment
income reflecting the close relationship between parent and subsidiaries.

Consolidated financial statement amounts are the same regardless of whether a parent company uses the cost model (or
fair value model) or equity method to account for a subsidiary’s results of operations. However, the working paper
eliminations used in both methods are different as illustrated in this chapter and on the succeeding chapters.

The amounts in the consolidated financial statements are amounts appearing in the books of parent company under the
equity method which ensure particularly the following aspects:
1. The parent company’s net income as reported is exactly equal to the controlling interest in consolidated net income on
the consolidated financial statements.
2. The parent company’s retained earnings is exactly equal to the consolidated retained earnings on the consolidated
financial statements.
3. The parent company’s common stock is exactly equal to the consolidated common stock on the consolidated financial
statements.
4. The parent company’s additional paid-in capital is exactly equal to the consolidated additional paid-in capital on the
consolidated financial statements.
5. The parent company’s dividends declared or paid is exactly equal to the consolidated dividends declared or paid on the
consolidated financial statements.
Illustration 5-5: 80%-Owned Subsidiary: Equity Method, Partial-goodwill, With Goodwill Impairment Loss Recognized in the
books of Subsidiary
Assume that on January 1, 20x4, Perfect Company acquires 80% of the common stock of Son Company for P310,000. At that time, the fair
value of the 20% non-controlling interest is estimated to be P77,500. The following assets and liabilities of Son Company had book values
that were different from their respective market values: Son Co. Son Co.
  Book value Fair value
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P20,000 25,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 150,000
Accumulated depreciation-equipment . . . . . . . . . . . . ( 80,000)  
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 120,000
Accumulated depreciation-buildings . . . . . . . . . . . . . . ( 160,000)  
Bonds payable (4 years) . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 96,000

All other assets and liabilities had book values approximately equal to their respective fair values.
On January 1, 20x4, the equipment and buildings had a remaining life of 8 and 4 years, respectively. Inventory is sold in 20x4 and FIFO
inventory costing is used. Goodwill, if any, is reduced by a P3,125 impairment loss during 20x4 based on the fair value basis (or full-
goodwill), meaning the management has determined that the goodwill arising in the acquisition of Son Company relates proportionately to
the controlling and non-controlling interests, as does the impairment.
There were no intercompany sales prior to 20x4, information resulting from intercompany sales, ending inventory and gross profit rates are
summarized below:
  Sales of Parent to Intercompany Merchandise in Intercompany Profit
Downstream
Year Sales:
Subsidiary 12/31 Inventory of S Company (based on Selling Price)
20x4 P125,000 60% of sales 20%
20x5 100,000 80% of sales 25%

  Sales of Subsidiary Intercompany Merchandise in Intercompany Profit

Upstream
Year Sales:
to Parent 12/31 Inventory of P Company (based on Selling Price)
20x4 P 50,000 50% of sales 40%
20x5 62,500 40% of sales 20%
Trial balances for the companies for the year ended December 31, 20x4 are as follows:
Debits Perfect Co. Son Co.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 194,000 P 75,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 50,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 75,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . 291,700 -
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 115,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . - -
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 15,000
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 30,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,955,700 P1,020,000
Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    
Accumulated depreciation – equipment . . . . . . . . . . . P 112,500 P 80,000
Accumulated depreciation – buildings . . . . . . . . . . . . . 337,500 240,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 100,000
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 200,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 100,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 200,000
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,700 -
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,955,700 P1,020,000
From the trial balances presented above the following summary for 20x4 results of operations are as follows:
  Perfect Co. Son Co.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 400,000 P 200,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 115,000
Gross P 230,000 P 85,000
profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 15,000
Net income from its own separate operations . . . . . . . P 140,000 P 50,000
Add: Investment income . . . . . . . . . . . . . . . . . . . . . . . . . 5,700 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 145,700 P 50,000
The resulting ownership situation can be viewed in the schedule of determination and allocation of excess.
The over/under valuation of assets and liabilities is summarized as follows:
Son Co. Son Co. (Over) Under
  Book value Fair value Valuation
Inventory . . . . . . . . . . . . . . . . . . . .
... P 20,000 P 25,000 P 5,000
Land . . . . . . . . . . . . . . . . . . . . . . . .
... 40,000 46,000 6,000
Equipment (net) . . . . . . . . . . . . . . .
.. 70,000 150,000 80,000
Buildings
(net) . . . . . . . . . . . . . . . . . . . 140,000 120,000 (20,000)
Bonds
payable . . . . . . . . . . . . . . . . . . (100,000) ( 96,000) 4,000
Net . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule of Determination and Allocation of Excess (Partial-goodwill)
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (80%)    
Consideration transferred . . . . . . . . . . . . . . . . . . . . . .   P 310,000
Less: Book value of stockholders’ equity of Son:    
Common stock (P200,000 x 80%) . . . . . . . . . . . . . . P 160,000  
Retained earnings (P100,000 x 80%) . . . . . . . . . . . . 80,000 240,000
Allocated excess (excess of cost over book value) . . .   P 70,000
Less: Over/under valuation of assets and liabilities:    
Increase in inventory (P5,000 x 80%) . . . . . . . . . . . . P 4,000  
Increase in land (P6,000 x 80%) . . . . . . . . . . . . . . . . 4,800  
Increase in equipment (P80,000 x 80%) . . . . . . . . . 64,000  
Decrease in buildings (P20,000 x 80%) . . . . . . . . . . ( 16,000)  
Decrease in bonds payable (P4,000 x 80%) . . . . . 3,200 60,000
Positive excess: Partial-goodwill (excess of cost over
fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 10,000

The over/under valuation of assets and liabilities is summarized as follows:

Son Co. Son Co. (Over) Under
  Book value Fair value Valuation
Inventory . . . . . . . . . . . . . . . . . . . . . . . P 20,000 P 25,000 P 5,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000 6,000
Equipment (net) . . . . . . . . . . . . . . . . . 70,000 150,000 80,000
Buildings (net) . . . . . . . . . . . . . . . . . . . 140,000 120,000 (20,000)
Bonds payable . . . . . . . . . . . . . . . . . . (100,000) ( 96,000) 4,000
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 170,000 P 245,000 P 75,000

The buildings and equipment will be further analyzed for consolidation purposes as follows:

Son Co. Son Co. Increase

  Book value Fair value (Decrease)
Equipment . . . . . . . . . . . . . . . . . . . . . 150,000 150,000 0
Less: Accumulated depreciation . . . 80,000 - 80,000
Net book value . . . . . . . . . . . . . . . . . . 70,000 150,000 80,000

Buildings . . . . . . . . . . . . . . . . . . . . . . . . 300,000 120,000 ( 180,000)

Less: Accumulated depreciation . . . 160,000 - ( 160,000)
Net book value . . . . . . . . . . . . . . . . . . 140,000 120,000 ( 20,000)

A summary or depreciation and amortization adjustments is as follows:

Over/ Annual Current

Account Adjustments to be amortized Under Life Amount Year(20x4) 20x5
Inventory . . . . . . . . . . . . . . . . . . . . . . P 5,000 1 P 5,000 P 5,000 P -
Subject to Annual Amortization          
Equipment (net) . . . . . . . . . . . . . . . . 80,000 8 10,000 10,000 10,000
Buildings (net) . . . . . . . . . . . . . . . . . . (20,000) 4 ( 5,000) ( 5,000) (5,000)
Bonds payable . . . . . . . . . . . . . . . . . 4,000 4 1,000 1,000 1,000
      P 11,000 P 11,000 P 6,000
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 310,000
Fair value of NCI (given) (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,500
Fair value of Subsidiary (100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 387,500
Less: Book value of stockholders’ equity of Son (P300,000 x 100%) . . . . . . . __300,000
Allocated excess (excess of cost over book value) . . . . . . . . . . . . . . . . . . . P 87,500
Add (deduct): (Over) under valuation of assets and liabilities
(P75,000 x 100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Positive excess: Full-goodwill (excess of cost over
fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 12,500

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P10,000 80.00%
Goodwill applicable to NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 20.00%
Total (full) goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P12,500 100.00%

The goodwill impairment loss would be allocated as follows:

Goodwill impairment loss attributable to parent or controlling    
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 2,500 80.00%
Goodwill applicable to NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625 20.00%
Goodwill impairment loss based on 100% fair value or full-    
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 3,125 100.00%

The unrealized profits on January 1, and on December 31, 20x5, resulting intercompany sales, are summarized as follows:
Downstream Sales:
    Intercompany Merchandise  
Year Sales of Parent to in 12/31 Inventory Unrealized Intercompany Profit in
Subsidiary of S Company Ending Inventory
20x4 P125,000 P125,000 x 60% = P75,000 P75,000 x 20% = P15,000
20x5 100,000 P100,000 x 80% = P80,000 P80,000 x 25% = P20,000

Upstream Sales:
    Intercompany Merchandise  
Year Sales of Subsidiary in 12/31 Inventory Unrealized Intercompany Profit in
8 to Parent of S Company Ending Inventory
20x4 P 50,000 P100,000 x 50% = P25,000 P25,000 x 40% = P10,000
20x5 62,500 P 62,500 x 40% = P25,000 P25,000 x 20% = P 5,000
First Year after Acquisition
Parent Company Equity Method Entry
The following are entries recorded by the parent in 20x4 in relation to its subsidiary investment:
January 1, 20x4:    
(1) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000  
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   310,000
Acquisition of Son Company.    
     
January 1, 20x4 – December 31, 20x4:    
(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000  
Investment in Son Company (P30,000 x 80%) . . . . . . . . . . . . . .   24,000
Record dividends from Son Company.    
December 31, 20x4:    
(3) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000  
Investment income (P50,000 x 80%) . . . . . . . . . . . . . . . . . . . . .   40,000
Record share in net income of subsidiary.    
     
December 31, 20x4:    
(4) Investment income [(P11,000 x 80%) + P2,500, goodwill    
impairment loss)] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,300
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . .   11,300
Record amortization of allocated excess of inventory, equipment, buildings and bonds payable and goodwill    
impairment loss.
     
December 31, 20x4:    
(5) Investment income (P15,000 x 100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000  
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   15,000
To adjust investment income for downstream sales - unrealized profit in ending inventory of Son.    
     
December 31, 20x4:    
(6) Investment income (P10,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000  
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   8,000
To adjust investment income for upstream sales - unrealized profit in ending inventory Perfect .    

Thus, the investment balance and investment income in the books of Perfect Company are as follows:
Investment in Son
Cost, 1/1/x4 310,000 24,000 Dividends – Son (30,000x 80%)
NI of Son Amortization&
(50,000 x 80%) 40,000 11,300 impairment
  15,000 UPEI of Son (P15,000 x 100%)
  8,000 UPEI of Perfect (P10,000 x80%)
Balance, 12/31/x4 291,700  
Investment Income
Amortization& NI of Son
impairment 11,300 40,000 (P50,000 x 80%)
UPEI of Son (P15,000 x 100%) 15,000  
UPEI of Perfect (P10,000 x80%) 8,000  
  5,700 Balance, 12/31/x4
 Consolidation Workpaper – First Year after Acquisition
The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries on January 1, 20x4:
(E1) Common stock – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  
Retained earnings – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.000  
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   240,000
Non-controlling interest (P300,000 x 20%) . . . . . . . . . . . . . . . . .   60,000
To eliminate investment on January 1, 20x4 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  

Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . 80,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 160,000  
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000  
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000  
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000  
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   180,000
Non-controlling interest (P75,000 x 20%) . . . . . . . . . . . . . . . . .   15,000
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   70,000
To eliminate investment on January 1, 20x4 and 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  

Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 5,000  
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000  
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500  
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
Accumulated depreciation – equipment . . . . . . . . . . . . . . . .   10,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   2,500
To provide for 20x4 impairment loss and depreciation and    
amortization on differences between acquisition date fair value and
book value of Son’s identifiable assets and liabilities as follows:

  Cost of Depreciation/    
Goods Amortization Amortization  
Sold Expense -Interest Total
Inventory sold.. P 5,000      
Equipment. . . .   P 10,000    
Buildings . . . . .   ( 5,000)    
Bonds payable. _______ _______ P 1,000  
Totals. . . . . . . . . P 5,000 P 6,000 P1,000 12,000
 (E4) Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,700  
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,300  
Non-controlling interest (P30,000 x 20%) . . . . . . . . . . . . . . . . . . . . 6,000  
Dividends paid – Son . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   30,000
To eliminate intercompany dividends and investment income under    
equity method and establish share of dividends, computed as
follows:

Investment in Son   Investment Income

NI of Son 24,000 Dividends - Son     NI of Son
(50,000 Amortization&   Amortization (50,000
x 80%)……. 40,000 11,300 impairment impairment 11,300 40,000 x 80%)
  15,000 UPEI of Son   UPEI of Son 15,000  
  8,000 UPEI of Perfect   UPEI of Perfect 8,000  
  18,300     5,700

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view
the investment account is totally eliminated. Thus, the investment balance to be eliminated is as follows
Investment in Son
Cost, 1/1/x4 310,000 24,000 Dividends – Son (30,000x 80%)
NI of Son Amortization&
(50,000 x 80%) 40,000 11,300 impairment
  15,000 UPEI of Son
  8,000 UPEI of Perfect
Balance, 12/31/x4 291,700 240,000 (E1) Investment, 1/1/20x4
(E4) Investment Income 70,000 (E2) Investment, 1/1/20x4
and dividends …………… 18,300
   
310,000 310,000
 (E5) 125,000  
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of Goods Sold (or   125,000
Purchases) . . . . . . . . . . . . . . . . . . . . . .
(E6) To eliminate intercompany downstream sales. 50,000    
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of Goods Sold (or   50,000
Purchases) . . . . . . . . . . . . . . . . . . . . . .
(E7) CostTo
of eliminate
Goods Sold (Ending Inventory
intercompany upstream – Income
sales. Statement) . . . 15,000
     
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   15,000
To defer the downstream sales - unrealized profit in ending
inventory
until it is sold to outsiders.    
(E8) Cost of Goods Sold (Ending Inventory – Income Statement) . . . 10,000  
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000
To defer the upstream sales - unrealized profit in ending
inventory
Until it is sold to outsiders.    
(E9) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . . 5,800  
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,800
To establish non-controlling interest in subsidiary’s adjusted net    
income for 20x4 as follows:

Net income of subsidiary . . . . . . . . . . . . . . . . . . . P 50,000

Unrealized profit in ending inventory of P Company  
(upstream sales) . . . . . . . . . . . . . . . . . ( 10,000)
Son Company’s realized net income from  
separate operations* . . . . . . . . . . . . . . . . . . . . P 40,000
Less: Amortization of allocated excess [(E3)] . . . ( 11,000)
  P 29,000
Multiplied by: Non-controlling interest % . . . . . . 20%
Non-controlling Interest in Net Income (NCINI)  
– partial goodwill . . . . . . . . . . . . . . . . . . . . . . P 5,800

Subsidiary accounts are adjusted to full fair value regardless of the controlling interest percentage or option used to value non-
controlling interest or goodwill.

The trial balance data for Perfect and Son Company are entered in the consolidation workpaper, the separate financial statements of the two
companies, the eliminating entries, and the consolidated totals for the financial statements on December 31, 20x4 as shown in Figure 4-9
 Income Statement Perfect Co Son Co. Dr. Cr. Consolidated
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P400,000 P200,000 (5) 125,000   P 425,000
      (6) 50,000
Investment income . . . . . . . . . . . . . . . . . 5,700 - (4) 5,700   _________
Total Revenue . . . . . . . . . . . . . . . . . . . P405,700 P200,000     P 425,000
Cost of goods sold . . . . . . . . . . . . . . . . . . P170,000 P115,000 (3) 5,000 (5) 125,000 P 140,000
      (7) 15,000 (6) 50,000
      (8) 10,000
Depreciation expense . . . . . . . . . . . . . . . 50,000 20,000 (3) 5,000   75,000
Interest expense . . . . . . . . . . . . . . . . . . . . - - (3) 1,000   1,000
Other expenses . . . . . . . . . . . . . . . . . . . . 40,000 15,000     55,000
Goodwill impairment loss . . . . . . . . . . . . - - (3) 2,500   2,500
Total Cost and Expenses . . . . . . . . . . P260,000 P150,000     P273,500
Net Income . . . . . . . . . . . . . . . . . . . . . . . . P145,700 P 50,000     P151,500
NCI in Net Income - Subsidiary . . . . . . . - - (9) 5,800   ( 5,800)
Net Income to Retained Earnings . . . . P145,700 P 50,000     P145,700
Statement of Retained Earnings          
Retained earnings, 1/1 . . . . . . . . . . . . . .          
Perfect Company . . . . . . . . . . . . . . . . P300,000       P 300,000
Son Company . . . . . . . . . . . . . . . . . . .   P100,000 (1) 100,000    
Net income, from above . . . . . . . . . . . . 145,700 50,000     145,700

Figure 4–9: Worksheet for Total . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dividends paid . . . . . . . . . . . . . . . . . . . . .
P345,700
 
P150,000
 
 
 
 
 
P345,700
 

Consolidated Financial
Perfect Company . . . . . . . . . . . . . . . . 60,000       60,000
Son Company . . . . . . . . . . . . . . . . . . . - 30,000   (4) 30,000 _ ________
Retained earnings, 12/31 to Balance
Statements, December 31, 20x4. Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet
P385,700
Perfect Co
P120,000
Son Co.
 
Dr.
 
Cr.
P 385,700
Consolidated
Equity Method (Partial- Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . .
P 194,000
75,000
P 75,000
50,000
 
 
 
 
P 269,000
125,000

goodwill)/80%-Owned Inventory . . . . . . . . . . . . . . . . . . . . . . . . . .
 
100,000
 
75,000
 
(1)
 
5,000 (3) 5,000
(7) 15,000

Subsidiary / (First Year after

        (8) 10,000 150,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (2) 6,000   221,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000     350,000
Acquisition) Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on bonds payable . . . . . . . . . .
600,000
 
450,000
 
 
(2) 4,000
(2) 180,000
(3) 1,000
870,000
3,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .     (2) 10,000 (3) 2,500 7,500
Investment in Son Co . . . . . . . . . . . . . . . 291,700   (4) 18,300 (1) 240,000
      (2) 70,000
__________ _________   __________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,635,700 P840,000     P1,995,500
Accumulated depreciation
- equipment . . . . . . . . . . . . . . . . . . P 112,500 P 80,000 (2) 80,000 (3) 10,000 P122,500
Accumulated depreciation 337,500 240,000 (2) 160,000
- buildings . . . . . . . . . . . . . . . . . . . . .    (3) 5,000   412,500
Accounts payable . . . . . . . . . . . . . . . . . . 100,000 100,000     200,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . 200,000 100,000     300,000
Common stock, P10 par . . . . . . . . . . . . . 500,000      500,000
Common stock, P10 par . . . . . . . . . . . . .   200,000 (1) 200,000    
Retained earnings, from above . . . . . . 385,700 120,000     385,700
Non-controlling interest . . . . . . . . . . . . . . (4) 6,000 (1) 60,000
    (2) 15,000
  _________ _________ __________ (5) 5,800 ____74,800
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,635,700 P840,000 P 819,300 P 819,300 P1,995,500
The consolidated net income, consolidated retained earnings on January 1, 20x4 and December 31, 20x4, non-controlling interests on
January 1, 20x4 and December 31, 20x4 are the same with Illustration 4-3.
The consolidated net income and non-controlling interests in consolidated net income which can be verified in Figure 4-9 can also be
computed as follows:
Consolidated Net Income for 20x4    
Perfect Company’s net income from own/separate operations . . . . . . . . . . . . .   P140,000
Unrealized profit in ending inventory of S Company (downstream   ( 15,000)
sales) . . . . . .
Perfect Company’s realized net income from separate operations* . . . . . . .   P125,000
Son Company’s net income from own P 50,000  
operations . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized profit in ending inventory of S Company (upstream sales) . . . . . . . ( 10,000)  
..
Son Company’s realized net income from separate operations* . . . . . . . . . . P 40,000 40,000
  P165,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Non-controlling Interest in Net Income* P 5,800  
*............................
Amortization of allocated excess (refer to amortization above) . . . . . . . . . 11,000  
Goodwill impairment (impairment under partial-goodwill approach) . . . 2,500 19,300
*that
. has been realized in transactions with third parties
Controlling Interest
**Non-controlling Interestin Consolidated
in Net Income Net Incomefor
(NCINI) or 20x4
Profit attributable to     
equity holders of parent . .
Son Company’s net income of Subsidiary Company from . . . . . . . . . . . . . . . . . . . . . . . . . its
. . .own
. . . .operations
......... P145,700 
. (Reported net income of Son Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 50,000
Add: Non-controlling
Unrealized profit in ending Interest in Net Income
inventory of P Company (NCINI)(upstream . . . . . . . . .sales)
. . . . .............. .   _ 5,800
( 10,000)
... Son Company’s realized net income from separate operations . . . . . . . . . . P 40,000
Less: Amortization of allocated Consolidated
excess . . . . . . . . . Net . . . . . . . . . Income
. . . . . . . . . . . . for
....   P151.500
11,000
20x4
  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 29,000
Multiplied by: Non-controlling interest % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
Non-controlling Interest in Net Income (NCINI) – partial goodwill . . . . . . . . . . . P 5,800
**that has been realized in transactions with third parties
Since NCI share of goodwill is not recognized, no adjustment is required for the impairment loss on goodwill and
impairment losses are not shared with NCI.
 
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  
Retained earnings - Parent Company, January 1, 20x4 (date of P300,000
acquisition) . . . . . . . . . . . . . . .
On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:
Consolidated Retained Earnings, December 31, 20x4  
Retained earnings - Parent Company, January 1, 20x4 (date of P300,000
acquisition) . . . . . . . . . . . . . . .
Add: Controlling Interest in Consolidated Net Income or Profit attributable to  
equity holders of parent for 145,700
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P445,700
....
Less: Dividends paid – Parent Company for 60,000
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Retained Earnings, December 31, P385,700
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and
goodwill attributable to NCI share is not recognized. The NCI on January 1, 20x4 and December 31, 20x4 are computed as follows:
Non-controlling interest (partial-goodwill), January 1, 20x4  
Common stock – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000
..
Retained earnings – Subsidiary 100,000
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity – Subsidiary P 300,000
Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reflect fair value - (over) undervaluation of assets and liabilities . . . . . . . . . 75,000
..
Non-controlling interest (partial-goodwill),
Fair value of stockholders’ equity of subsidiary, December January 31,1, 20x4
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . .  P 375,000 
.. Common stock – Subsidiary Company, December 31, 20x4 .................   P 200,000
.
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
. . Retained earnings – Subsidiary Company, December 31, 20x4    
Retained earnings – Subsidiary Company,
Non-controlling interest (partial-goodwill)January 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 1, P100,000 P 75,000 
20x4
.. ................
Add: Net income of subsidiary for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
..
P150,000  
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Dividends paid – 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 120,000
..
Stockholders’ equity – Subsidiary Company, December 31,   P 320,000
20x4 . . . . . . . . . . . . .
Adjustments to reflect fair value - (over) undervaluation of assets and    
liabilities, date of acquisition (January 1, 75,000
20x4) . . . . . . . . . . . . . . . . . . . . . . . . . .
Alternatively, NCI on DecemberAmortization
31, 20x4ofmay allocatedalsoexcess be computed(refer to amortization as follows: above) – 20x4 . . . . . . . .   ( 11,000)
Fair value of stockholders’ equity of subsidiary, December 31, 20x4 . . . . . . . . . .   P384,000
.Non-controlling interest (partial-goodwill), January 1, 20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
Add: NCINI–
Less: 20x4 . . . . . . . .profit
Unrealized . . . . . . in
. . . ending
. . . . . . . .inventory
. . . . . . . . . .of
. . .P. . Company
. . . . . . . . . . .(upstream
.......   5,800
10,000
Less: Dividends
sales) . . . . . - Son, 20x4 (P30,000 x 20%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......... _6,000
Non-controlling interest (partial-goodwill), December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . P 74,800
Realized stockholders’ equity of subsidiary, December 31,   P374,000
20x4 . . . . . . . . . . . . . .
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . .   20
.
Second Year after Acquisition
Assume the following information available for Perfect and Son Company for the year 20x5:
  Perfect Co. Son Co.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 450,000 P 300,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 160,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 270,000 P 140,000
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 45,000
Net income from its own separate operations . . . . . . . P 160,000 P 75,000
Add: Investment income . . . . . . . . . . . . . . . . . . . . . . . . . 54,200 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 214,200 P 75,000
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000 P 40,000
No goodwill impairment loss for 20x5.
Parent Company Equity Method Entry
The following are entries recorded by the parent in 20x5 in relation to its subsidiary investment:
January 1, 20x5 – December 31, 20x5:    
(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000  
Investment in Son Company (P40,000 x 80%) . . . . . . . . . . . . .   32,000
Record dividends from Son Company.    
December 31, 20x5:    
(3) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000  
Investment income (P75,000 x 80%) . . . . . . . . . . . . . . . . . . . . .   60,000
Record share in net income of subsidiary.    
     
December 31, 20x5:    
(4) Investment income (P6,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . 4,800  
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . .   4,800
Record amortization of allocated excess of inventory, equipment, buildings and bonds payable    
     
December 31, 20x5:
(5) Investment income (P20,000 x 100%) . . . . . . . . . . . . . . . . . . . . . . . 20,000  
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . .   20,000
To adjust investment income for downstream sales - unrealized profit in ending inventory of Son (UPEI of S).    
     
December 31, 20x5:    
(6) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000  
Investment income (P15,000 x 100%) . . . . . . . . . . . . . . . . . . . .   15,000
To adjust investment income for downstream sales - realized profit in beginning inventory of Son (RPBI of S).    
     
December 31, 20x5:    
(7) Investment income (P5,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . 4,000  
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . .   4,000
To adjust investment income for upstream sales - unrealized profit in ending inventory Perfect (UPEI of P).    
     
December 31, 20x5:
(8) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000  
Investment income (P10,000 x 80%) . . . . . . . . . . . . . . . . . . . . .   8,000
To adjust investment income for upstream sales - realized profit in beginning inventory of Perfect (RPBI of    
P)

Thus, the investment balance and investment income in the books of Perfect Company are as follows:
Investment in Son
Cost, 1/1/x5 291,700 32,000 Dividends – Son (40,000x 80%)
NI of Son 4,800 Amortization (6,000 x 80%)
(75,000 x 80%) 60,000 20,000 UPEI of Son (P20,000 x 100%)
RPBI of Son (P15,000 x 100%) 15,000 4,000 UPEI of Perfect (P5,000 x 80%)
RPBI of Perfect (P10,000 x 80%) 8,000  
Balance, 12/31/x5313,900  
Investment Income
Amortization (6,000 x 805) 4,800 NI of Son
UPEI of Son (P20,000 x 100%) 20,000 60,000 (P75,000 x 80%)
UPEI of Perfect (P5,000 x 80%) 4,000 15,000 RPBI of Son (P15,000 x 100%)
  8,000 RPBI of Perfect (P10,000 x 80%)
  54,200 Balance, 12/31/x5
 Consolidation Workpaper – Second Year after Acquisition
The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries:
(E1) Common stock – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  
Retained earnings – Son Co, 1/1/x5 . . . . . . . . . . . . . . . . . . . . . . . 120.000  
Investment in Son Co (P320,000 x 80%) . . . . . . . . . . . . . . . . . .   256,000
Non-controlling interest (P320,000 x 20%) . . . . . . . . . . . . . . . .   64,000
To eliminate investment on January 1, 20x5 and equity accounts    
of subsidiary on date of acquisition; and to establish non-
controlling interest (in net assets of subsidiary) on 1/1/20x5.
(E2) Accumulated depreciation – equipment(P80,000 – P10,000). . 70,000  
Accumulated depreciation – buildings (P160,000 + P5,000). . . . 165,000  
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000  
Discount on bonds payable (P4,000 – P1,000) . . . . . . . . . . . . . . 3,000  
Goodwill (P10,000 – P2,500) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500  
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   180,000
Non-controlling interest [(P75,000 – P11,000) x 20%] . . . . . . . .   12,800
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   58,700
To eliminate investment on January 1, 20x5 and allocate excess of    
cost over book value of identifiable assets acquired, with remainder
to the original amount of goodwill; and to establish non- controlling
interest (in net assets of subsidiary) on 1/1/20x5.
(E3) Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 5,000  
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000  
Accumulated depreciation – equipment . . . . . . . . . . . . . . . .   10,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,000
To provide for 20x5 depreciation and amortization on differences    
between acquisition date fair value and book value of Son’s
identifiable assets and liabilities as follows:
  Depreciation/    
Amortization Amortization  
Expense -Interest Total
Inventory sold.      
Equipment . . . . P 10,000    
Buildings . . . . . ( 5,000)    
Bonds payable _______ P 1,000  
Totals . . . . . . . . . P 5,000 P1,000 P6,,000
(E4) Investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,200  
Non-controlling interest (P40,000 x 20%)……………….. . . . . . . . . 8,000  
Dividends paid – Son……………………. . . . . . . . . . . . . . . . . . .   40,000
Investment in Son Company. . . . . . . . . . . . . . . . . . . . . . . . . . .   22,200
To eliminate intercompany dividends and investment income under    
equity method and establish share of dividends, computed as
follows:
Investment in Son   Investment Income
NI of Son 32,000 Dividends – Son     NI of Son
(75,000 Amortization   Amortization (75,000
x 80%)……. 60,000 4,800 (P6,000 x 80%) (P6,000 x 80%) 4,800 60,000 x 80%)
RPBI of Son 15,000 20,000 UPEI of Son   UPEI of Son 20,000 15,000 RPBI of Son
RPBI of Perfect 8,000 4,000 UPEI of Perfect (   UPEI of Perfect 4,000 8,000 RPBI of Perfect
22,200       54,200
 
 (E5) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 100,000  
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . . . .   100,000
To eliminate intercompany downstream sales.    
(E6) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,500  
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . . . .   62,500
To eliminate intercompany upstream sales.    

(E7) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000  

Cost of Goods Sold (Beginning Inventory – I/S). . . . . . . . . . .   15,000
To realize profit in downstream beginning inventory deferred in the
prior period.    

(E8) Investment in Son Company (P10,000 x 80%) . . . . . . . . . . . . . . . . 8,000  

Non-controlling interest (P10,000 x 20%) . . . . . . . . . . . . . . . . . . . . 2,000  
Cost of Goods Sold (Beginning Inventory – I/S). . . . . . . . . . .   10,000
To realize profit in upstream beginning inventory deferred in the
prior period.    

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment
account is totally eliminated. Thus, the investment balance to be eliminated is as follows:
Investment in Son
Cost, 1/1/x5 291,700 32,000 Dividends – Son (40,000x 80%)
NI of Son Amortization
(75,000 x 80%) 60,000 4,800 (6,000 x 80%)
RPBI of Son (P15,000 x 100%) 15,000 20,000 UPEI of Son (P20,000 x 100%)
RPBI of Perfect (P10,000 x 80%) 8,000 4,000 UPEI of Perfect (P5,000 x 80%)
Balance, 12/31/x5 313,900 256,000 (E1) Investment, 1/1/20x5
(E8) RPBI of Son 15,000 58,700 (E2) Investment, 1/1/20x5
(E9) RPBI of Perfect 8,000 22,200 (E4) Investment Income & div
336,900 336,900
 (E9) Cost of Goods Sold (Ending Inventory – Income Statement) . . 20,000  
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20,000
To defer the downstream sales - unrealized profit in ending inventory
until it is sold to outsiders.    
(E10) Cost of Goods Sold (Ending Inventory – Income Statement). . 5,000  
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
To defer the upstream sales - unrealized profit in ending inventory
until it is sold to outsiders.    
(E11) Non-controlling interest in Net Income of Subsidiary . . . . . . . . 14,800  
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14,800
To establish non-controlling interest in subsidiary’s adjusted net    
income for 20x5 as follows:

Net income of subsidiary . . . . . . . . . . . . . . . . . . . P 75,000

Realized profit in beginning inventory of P Company - 20x5  
(upstream sales) . . . . . . . . . . . 10,000
Unrealized profit in ending inventory of P Company - 20x5  
(upstream sales) . . . . . . . . . . . ( 5,000)
Son Company’s Realized net income* . . . . . . . . P 80,000
Less: Amortization of allocated excess . . . . . . . . ( 6,000)
  P 74,000
Multiplied by: Non-controlling interest % . . . . . . 20%
Non-controlling Interest in Net Income (NCINI)  
– partial goodwill . . . . . . . . . . . . . . . . . . . . . P 14,800

*from separate transactions that have been realized in transactions with third persons.

The separate financial statements of the two companies, the eliminating entries, and the consolidated totals for the financial statements on
December 31, 20x5, are shown in Figure 4-10.
 Income Statement Perfect Co Son Co. Dr. Cr. Consolidated
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P450,000 P300,000 (5) 100,000   P 587,500
      (6) 62,500
Investment income . . . . . . . . . . . . . . . . . 54,200 - (4) 54,200   ___________
Total Revenue . . . . . . . . . . . . . . . . . . . P504,200 P300,000     P 587,500
Cost of goods sold . . . . . . . . . . . . . . . . . . P180,000 P160,000 (9) 20,000 (5) 100,000 P 177,500
      (10) 5,000 (6) 62,500
        (7) 15,000
        (8) 10,000
Depreciation expense . . . . . . . . . . . . . . . 50,000 20,000 (3) 5,000   75,000
Interest expense . . . . . . . . . . . . . . . . . . . . - - (3) 1,000   1,000
Other expenses . . . . . . . . . . . . . . . . . . . . 60,000 45,000     105,000
Goodwill impairment loss . . . . . . . . . . . . - -     -
Total Cost and Expenses . . . . . . . . . . P290,000 P225,000     P 358,500
Net Income . . . . . . . . . . . . . . . . . . . . . . . . P214,200 P 75,000     P 229,000
NCI in Net Income - Subsidiary . . . . . . . - - (11) 14,800   ( 14,800)
Net Income to Retained Earnings . . . . P214,200 P 75,000     P 214,200
Statement of Retained Earnings          
Retained earnings, 1/1 . . . . . . . . . . . . . .          
Perfect Company . . . . . . . . . . . . . . . . P385,700       P 385,700
Son Company . . . . . . . . . . . . . . . . . . .   P120,000 (1) 120,000    
Net income, from above . . . . . . . . . . . . 214,200 75,000     214,200
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P599,900 P195,000     P 599,900
Dividends paid . . . . . . . . . . . . . . . . . . . .          
Figure 4–10: Worksheet for Perfect Company . . . . . . . . . . . . . . . . 60,000       60,000
Son Company . . . . . . . . . . . . . . . . . . - 40,000   (4) 40,000 _ ________
Consolidated Financial Statements, Retained earnings, 12/31 to Balance Sheet . . . P539,900 P155,000     P 539,900

December 31, 20x5. Balance Sheet

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 221,000
   
P 85,000
 
 
 
 
 
P 306,000
Equity Method (Partial-goodwill)/80%- Accounts receivable . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . .
150,000
180,000
80,000
90,000
   
( 9) 20,000
230,000

Owned Subsidiary (Second Year after  

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000
 
40,000
   
(2) 6,000
(10) 5,000
 
245,000
221,000
Acquisition) Equipment . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . .
200,000
600,000
150,000
450,000
 
 
 
(3) 180,000
350,000
870,000
Discount on bonds payable . . . . . . . . . .     (2) 3,000 (3) 1,000 2,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .     (2) 7,500   7,500
Investment in Son Co . . . . . . . . . . . . . . . . 313,900   (7) 15,000 (1) 256,000
    (8) 8,000 (2) 58,700
__________ _________   (4) 22,200 __________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,839,900 P895,000     P2,231,500
Accumulated depreciation (2) 70,000
- equipment . . . . . . . . . . . . . . . . . . P 125,000 P 85,000   (3) 10,000 P150,000
Accumulated depreciation 375,000 255,000 (2) 165,000
- buildings . . . . . . . . . . . . . . . . . . . . .     (3) 5,000   460,000
Accounts payable . . . . . . . . . . . . . . . . . . 100,000 100,000     200,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . 200,000 100,000     300,000
Common stock, P10 par . . . . . . . . . . . . . . 500,000       500,000
Common stock, P10 par . . . . . . . . . . . . .   200,000 (1) 200,000    
Retained earnings, from above . . . . . . 539,900 155,000     539,900
Non-controlling interest . . . . . . . . . . . . . . (4) 8,000
  (8) 2,000 (1) 64,000 (2)
    12,800
  ___ _____ _________ __________ (11) 14,800 ____81,600
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,839,900 P895,000 P 872,000 P 872,000 P2,231,500
The consolidated net income and non-controlling interests in consolidated net income which can be verified in Figure 4-10 can also be computed as follows:
Consolidated Net Income for 20x5    
Perfect Company’s net income from own/separate operations . . . . . . . . . . . . .   P160,000
Realized profit in beginning inventory of S Company (downstream sales) . . . . .   15,000
Unrealized profit in ending inventory of S Company (downstream sales) . . . . . .   (_20,000)
Perfect Company’s realized net income from separate operations* . . . . . . .   P155,000
Son Company’s net income from own operations . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000  
Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 10,000  
Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 5,000)  
Son Company’s realized net income from separate operations* . . . . . . . . . . P 80,000 80,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P235,000
Less: Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6,000
Consolidated Net Income for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P229,000
Less: Non-controlling Interest in Net Income* * . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14,800
Controlling Interest in Consolidated Net Income or Profit attributable to    
equity holders of parent – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P214,200

*that has been realized in transactions with third parties.

Or, alternatively
Consolidated Net Income for 20x5    
Perfect Company’s net income from own/separate operations . . . . . . . . . . . . .   P160,000
Realized profit in beginning inventory of S Company (downstream sales) . . . . .   15,000
Unrealized profit in ending inventory of S Company (downstream sales) . . . . . .   (_20,000)
Perfect Company’s realized net income from separate operations* . . . . . . .   P155,000
Son Company’s net income from own operations . . . . . . . . . . . . . . . . . . . . . . . . P 75,000  
Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 10,000  
Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 5,000)  
Son Company’s realized net income from separate operations* . . . . . . . . . . P 80,000 80,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P235,000
Less: Non-controlling Interest in Net Income* * . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 14,800  
Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 20,800
Controlling Interest in Consolidated Net Income or Profit attributable to    
equity holders of parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P214,200
Add: Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . .   _ 14,800
Consolidated Net Income for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P229,000

*that has been realized in transactions with third parties.

**Non-controlling Interest in Net Income (NCINI) for 20x5  
Son Company’s net income of Subsidiary Company from its own operations  
(Reported net income of Son Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 10,000
Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 5,000)
Son Company’s realized net income from separate operations . . . . . . . . . . P 80,000
Less: Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
  P 74,000
Multiplied by: Non-controlling interest % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
Non-controlling Interest in Net Income (NCINI) – partial goodwill . . . . . . . . . . . P 14,800
Observe that the consolidated balances in Illustration 4-5 are also the same as those in Illustration 4-3 (cost
method workpaper).

However, when the parent company records its investment using the equity method, entry (1) in Illustration 4-
3 replaces the cost method entries to establish reciprocity and to eliminate dividend income [entries (1) and
(5) in Illustration 4-3].

Most importantly, a comparison of workpaper entries (8) and (9) in Illustration 4-3 with entries (8) and (9) in
Illustration 4-4 demonstrates that the workpaper entries to eliminate intercompany sales and unrealized
intercompany profit differ in only one respect, that is, the parent company’s retained earnings account needs no
adjustment under the equity method. Any adjusting/ eliminating entries made to that account under the equity
method is replaced by an entry to the Investment account.
Equity Method - Analysis of Consolidated Net Income and Consolidated Retained Earnings

Consolidated net income is the sum of the following components:

- the parent company’s net income from its own/separate (independent) operations that has been realized in transactions with third parties
- plus (minus) reported subsidiary income (loss) that has been realized in transactions with third parties
- plus or minus adjustments for the period relating to the depreciation, amortization, and impairment of differences between fair values/implied
and book values.

Under the equity method, no formal calculation of the controlling interest in consolidated net income is needed.
- The parent company has already made adjustments for realized/unrealized gross profit depending upon whether or not such profit has been
confirmed through transactions with outsiders.
- The controlling interest in consolidated net income equals the parent company’s recorded income.

When the parent company uses the equity method to record its investment,
- the parent company’s share of subsidiary income (including any needed adjustments for intercompany profits) since acquisition is already included
in the parent company’s reported retained earnings.
- Consequently, consolidated retained earnings are equal to the parent company’s recorded complete equity basis retained earnings.

The consolidated net income, and non-controlling interests on December 31, 20x5 is the same with Illustration 4-3 except only in the computation of
consolidated retained earnings presented as follows:
Retained earnings of Parent Company (under equity method) /  
Consolidated Retained earnings , January 1, 20x5 . . . . . . . . . . . . . . . . . . . . P385,700
.
Add: Controlling Interest in Consolidated Net Income or Profit attributable to  
equity holders of parent for 214,200
20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P623,900
.
Less: Dividends paid – Parent Company for 60,000
Therefore, regardless of the method used
20x5 in
. . .the
. . . . separate
. . . . . . . . . . financial
. . . . . . . . . . statement of parent, the consolidated balance (which is under equity method) is
Retained earnings of Parent Company always (under theequity
same. method) /  
Consolidated Retained Earnings, December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . . P539,900
Illustration 4-6: 80%-Owned Subsidiary: Equity Method, Full-goodwill, With Goodwill Impairment Loss Recognized in the books of Subsidiary
From the trial balances presented in Illustration 4-5, the following summary for 20x4 results of operations are as follows:
  Perfect Co. Son Co.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 400,000 P 200,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 115,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 230,000 P 85,000
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 15,000
Net income from its own separate operations . . . . . . . . P 140,000 P 50,000
Add: Investment income . . . . . . . . . . . . . . . . . . . . . . . . . 5,700 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 145,700 P 50,000
The resulting ownership situation can be viewed in the schedule of determination and allocation of excess.
The over/under valuation of assets and liabilities is summarized as follows (refer to the schedule on page for the computation of allocated excess):
Son Co. Son Co. (Over) Under
  Book value Fair value Valuation
Inventory . . . . . . . . . . . . . . . . . . . . . . . P 20,000 P 25,000 P 5,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000 6,000
Equipment (net) . . . . . . . . . . . . . . . . . 70,000 150,000 80,000
Buildings (net) . . . . . . . . . . . . . . . . . . . 140,000 120,000 (20,000)
Bonds payable . . . . . . . . . . . . . . . . . . (100,000) ( 96,000) 4,000
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 170,000 P 245,000 P 75,000

Schedule of Determination and Allocation of Excess (Partial-goodwill)

Date of Acquisition – January 1, 20x4 (Basis to compare with Full-GW to determine the NCI-GW)
Fair value of Subsidiary (80%)    
Consideration transferred . . . . . . . . . . . . . . . . . . . . . .   P 310,000
Less: Book value of stockholders’ equity of Son:    
Common stock (P200,000 x 80%) . . . . . . . . . . . . . . P 160,000  
Retained earnings (P100,000 x 80%) . . . . . . . . . . . . 80,000 240,000
Allocated excess (excess of cost over book value) . . .   P 70,000
Less: Over/under valuation of assets and liabilities:    
Increase in inventory (P5,000 x 80%) . . . . . . . . . . . . P 4,000  
Increase in land (P6,000 x 80%) . . . . . . . . . . . . . . . . 4,800  
Increase in equipment (P80,000 x 80%) . . . . . . . . . 64,000  
Decrease in buildings (P20,000 x 80%) . . . . . . . . . . ( 16,000)  
Decrease in bonds payable (P4,000 x 80%) . . . . . 3,200 60,000
Positive excess: Partial-goodwill (excess of cost over fair value) . . . .   P 10,000

The over/under valuation of assets and liabilities is summarized as follows

Son Co. Son Co. (Over) Under
  Book value Fair value Valuation
Inventory . . . . . . . . . . . . . . . . . . . . . . . P 20,000 P 25,000 P 5,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000 6,000
Equipment (net) . . . . . . . . . . . . . . . . . 70,000 150,000 80,000
Buildings (net) . . . . . . . . . . . . . . . . . . . 140,000 120,000 (20,000)
Bonds payable . . . . . . . . . . . . . . . . . . (100,000) ( 96,000) 4,000
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 170,000 P 245,000 P 75,000
The buildings and equipment will be further analyzed for consolidation purposes as follows:
Son Co. Son Co. Increase
  Book value Fair value (Decrease)
Equipment . . . . . . . . . . . . . . . . . . . . . 150,000 150,000 0
Less: Accumulated depreciation . . . 80,000 - 80,000
Net book value
Buildings . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 70,000
300,000 150,000
120,000 80,000
( 180,000)
Less: Accumulated depreciation . . . 160,000 - ( 160,000)
Net book value . . . . . . . . . . . . . . . . . . 140,000 120,000 ( 20,000)

A summary or depreciation and amortization adjustments is as follows:

Over/ Annual Current
Account Adjustments to be amortized Under Life Amount Year(20x4) 20x5
Inventory . . . . . . . . . . . . . . . . . . . . . . P 5,000 1 P 5,000 P 5,000 P -
Subject to Annual Amortization          
Equipment (net) . . . . . . . . . . . . . . . . 80,000 8 10,000 10,000 10,000
Buildings (net) . . . . . . . . . . . . . . . . . . (20,000) 4 ( 5,000) ( 5,000) (5,000)
Bonds payable . . . . . . . . . . . . . . . . . 4,000 4 1,000 1,000 1,000
      P 11,000 P 11,000 P 6,000

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 310,000
Fair value of NCI (given) (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,500
Fair value of Subsidiary (100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 387,500
Less: Book value of stockholders’ equity of Son (P300,000 x 100%) . . . . . . . __300,000
Allocated excess (excess of cost over book value) . . . . . . . . . . . . . . . . . . . P 87,500
Add (deduct): (Over) under valuation of assets and liabilities
(P75,000 x 100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Positive excess: Full-goodwill (excess of cost over fair value) . . . . . . . . . . . . P 12,500

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 (partial goodwill) . . . . . . . . . . . . . . P10,000 80.00%
Goodwill applicable to NCI (NCI-GW) . . . . . . . . . . . . . . . . . . . . . . . 2,500 20.00%
Total (full) goodwill ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P12,500 100.00%

The goodwill impairment loss would be allocated as follows:

  Value % of Total
Goodwill impairment loss attributable to parent or controlling    
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 2,500 80.00%
Goodwill applicable to NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625 20.00%
Goodwill impairment loss based on 100% fair value or full-    
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 3,125 100.00%
The unrealized profits on January 1, and on December 31, 20x5, resulting intercompany sales, are summarized as follows:
Downstream Sales:
    Intercompany Merchandise  
Year Sales of Parent to in 12/31 Inventory Unrealized Intercompany
Subsidiary of S Company Profit in Ending Inventory
20x4 P125,000 P125,000 x 60% = P75,000 P75,000 x 20% = P15,000
20x5 100,000 P100,000 x 80% = P80,000 P80,000 x 25% = P20,000

Upstream Sales:
    Intercompany Merchandise  
Year Sales of in 12/31 Inventory Unrealized Intercompany
Subsidiary to of S Company Profit in Ending Inventory
Parent
20x4 P 50,000 P100,000 x 50% = P25,000 P25,000 x 40% = P10,000
20x5 62,500 P 62,500 x 40% = P25,000 P25,000 x 20% = P 5,000
 First Year after Acquisition: Parent Company Equity Method Entry
The following are entries recorded by the parent in 20x4 in relation to its subsidiary investment:
January 1, 20x4:    
(1) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000  
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   310,000
Acquisition of Son Company.    
January 1, 20x4 – December 31, 20x4:    
(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000  
Investment in Son Company (P30,000 x 80%) . . . . . . . . . . . . . .   24,000
Record dividends from Son Company.    
December 31, 20x4:    
(3) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000  
Investment income (P50,000 x 80%) . . . . . . . . . . . . . . . . . . . . .   40,000
Record share in net income of subsidiary.    
December 31, 20x4:    
(4) Investment income [(P11,000 x 80%) + (P3,125 – P625)*, 11,300  
goodwill impairment loss)] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . .   11,300
Record amortization of allocated excess of inventory, equipment, buildings    
and bonds payable and goodwill impairment loss.

*this procedure would be more appropriate, instead of multiplying

the full goodwill impairment loss of P3,125 by 80%.
There might be situations where the CI on GW impairment loss
would not be proportionate to NCI acquired.
December 31, 20x4:    
(5) Investment income (P15,000 x 100%) . . . . . . . . . . . . . . . ………… 15,000  
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . …   15,000
To adjust investment income for downstream sales - unrealized profit in    
ending inventory of Son.
December 31, 20x4:    
(6) Investment income (P10,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . 8,000  
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . .   8,000
To adjust investment income for upstream sales - unrealized profit in ending    
inventory Perfect.

Thus, the investment balance and investment income in the books of Perfect Company is as follows:
Investment in Son
Cost, 1/1/x4 310,000 24,000 Dividends – Son (30,000x 80%)
NI of Son Amortization &
(50,000 x 80%) 40,000 11,300 impairment
  15,000 UPEI of Son (P15,000 x 100%)
  8,000 UPEI of Perfect (P10,000 x80%)
Balance, 12/31/x4 291,700  
Investment Income
Amortization & NI of Son
impairment 11,300 40,000 (P50,000 x 80%)
UPEI of Son (P15,000 x 100%) 15,000  
UPEI of Perfect (P10,000 x80%) 8,000  
  5,700 Balance, 12/31/x4
Consolidation Workpaper – First Year after Acquisition
The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries on
January 1, 20x4:
(E1) Common stock – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  
Retained earnings – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.000  
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   240,000
Non-controlling interest (P300,000 x 20%) . . . . . . . . . . . . . . . . .   60,000
To eliminate investment on January 1, 20x4 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . 80,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 160,000  
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000  
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000  
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500  
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   180,000
Non-controlling interest (P75,000 x 20%) + [(P12,500, full –    
P10,000, partial goodwill)] . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   70,000
To eliminate investment on January 1, 20x4 and 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 5,000  
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000  
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,125  
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
Accumulated depreciation – equipment . . . . . . . . . . . . . . . .   10,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   3,125
To provide for 20x4 impairment loss and depreciation and    
amortization on differences between acquisition date fair value and
book value of Son’s identifiable assets and liabilities as follows:

  Cost of Depreciation/    
Goods Amortization Amortization  
Sold Expense -Interest Total
Inventory sold. P 5,000      
Equipment. . . . .   P 10,000    
Buildings . . . . . .   ( 5,000)    
Bonds payable _______ _______ P 1,000  
Totals . . . . . . . . . P 5,000 P 6,000 P1,000 12,000
 (E4) Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,700  
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,300  
Non-controlling interest (P30,000 x 20%) . . . . . . . . . . . . . . . . . . . . 6,000  
Dividends paid – Son . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   30,000
To eliminate intercompany dividends and investment income under    
equity method and establish share of dividends, computed as
follows:

Investment in Son   Investment Income

NI of Son 24,000 Dividends - Son     NI of Son
(50,000 Amortization &   Amortization (50,000
x 80%)……. 40,000 11,300 impairment impairment 11,300 40,000 x 80%)
  15,000 UPEI of Son   UPEI of Son 15,000  
  8,000 UPEI of Perfect   UPEI of Perfect 8,000  
  18,300     5,700

After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of
view the investment account is totally eliminated. Thus, the investment balance to be eliminated is as follows:
Investment in Son
Cost, 1/1/x4 310,000 24,000 Dividends – Son (30,000x 80%)
NI of Son Amortization &
(50,000 x 80%) 40,000 11,300 impairment
  15,000 UPEI of Son
  8,000 UPEI of Perfect
Balance, 12/31/x4 291,700 240,000 (E1) Investment, 1/1/20x4
(E4) Investment Income 70,000 (E2) Investment, 1/1/20x4
and dividends …………… 18,300
   
310,000 310,000
 (E5) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000  
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . . . .   125,000
To eliminate intercompany downstream sales.    
(E6) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . . . .   50,000
To eliminate intercompany upstream sales.    
(E7) Cost of Goods Sold (Ending Inventory – Income Statement) . . . 15,000  
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   15,000
To defer the downstream sales - unrealized profit in ending inventory
until it is sold to outsiders.    
(E8) Cost of Goods Sold (Ending Inventory – Income Statement) . . . 10,000  
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   10,000
To defer the upstream sales - unrealized profit in ending inventory
until it is sold to outsiders.    

(E9) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . 5,175  

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,175
To establish non-controlling interest in subsidiary’s adjusted net    
income for 20x4 as follows:

Net income of subsidiary . . . . . . . . . . . . . . . . . . . P 50,000

Unrealized profit in ending inventory of P Company (upstream sales)  
................. ( 10,000)
Son Company’s realized net income from  
separate operations* . . . . . . . . . . . . . . . . . . . . P 40,000
Less: Amortization of allocated excess [(E3)] . . . ( 11,000)
  P 29,000
Multiplied by: Non-controlling interest % . . . . . . 20%
Non-controlling Interest in Net Income (NCINI)  
– partial goodwill . . . . . . . . . . . . . . . . . . . . . . P 5,800
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)* 625
Non-controlling Interest in Net Income (NCINI)  
– full goodwill . . . . . . . . . . . . . . . . . . . . . . . . . P 5,175

*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

Subsidiary accounts are adjusted to full fair value regardless of the controlling interest percentage or option used to value non-controlling interest or goodwill.
The separate financial statements of the two companies, the eliminating entries, and the consolidated totals for the financial statements on December 31, 20x4,
are shown in Figure 4-11.
 Income Statement Perfect Co Son Co. Dr. Cr. Consolidated
Figure 4–11: Worksheet for Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P400,000 P200,000 (5) 125,000   P 425,000
      (6) 50,000
Consolidated Financial Statements, Investment income . . . . . . . . . . . . . . . . . 5,700 - (4) 5,700   _________
December 31, 20x4. Total Revenue . . . . . . . . . . . . . . . . . . . P405,700 P200,000     P 425,000
(5) 125,000 P 140,000
Equity Method (Full-goodwill)/80%- Cost of goods sold . . . . . . . . . . . . . . . . . .
 
P170,000
 
P115,000
 
(3)
(7)
5,000
15,000 (6) 50,000
Owned Subsidiary (First Year after       (8) 10,000
Depreciation expense . . . . . . . . . . . . . . . 50,000 20,000 (3) 5,000   75,000
Acquisition) Interest expense . . . . . . . . . . . . . . . . . . . . - - (3) 1,000   1,000
Other expenses . . . . . . . . . . . . . . . . . . . . 40,000 15,000     55,000
Goodwill impairment loss . . . . . . . . . . . . - - (3) 3,125   3,125
Total Cost and Expenses . . . . . . . . . . P260,000 P150,000     P274,125
Net Income . . . . . . . . . . . . . . . . . . . . . . . . P145,700 P 50,000     P150,875
NCI in Net Income - Subsidiary . . . . . . . - - (9) 5,175   ( 5,175)
Net Income to Retained Earnings . . . . P145,700 P 50,000     P145,700
Statement of Retained Earnings          
Retained earnings, 1/1          
Perfect Company . . . . . . . . . . . . . . . . P300,000       P 300,000
Son Company . . . . . . . . . . . . . . . . . . .   P100,000 (1) 100,000    
Net income, from above . . . . . . . . . . . . 145,700 50,000     145,700
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P345,700 P150,000     P345,700
Dividends paid . . . . . . . . . . . . . . . . . . . . .          
Perfect Company . . . . . . . . . . . . . . . . 60,000       60,000
Son Company . . . . . . . . . . . . . . . . . . . - 30,000   (4) 30,000 _ ________
Retained earnings, 12/31 to Balance
Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . P385,700 P120,000     P 385,700
Balance Sheet          
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 194,000 P 75,000     P 269,000
Accounts receivable . . . . . . . . . . . . . . . . 75,000 50,000     125,000

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 75,000 (1) 5,000 (3) 5,000

        (7) 15,000
        (8) 10,000 150,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (2) 6,000   221,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000     350,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000   (2) 180,000 870,000
Discount on bonds payable . . . . . . . . . .     (2) 4,000 (3) 1,000 3,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . .     (2) 12,500 (3) 3,125 9,375
Investment in Son Co . . . . . . . . . . . . . . . . 291,700   (4) 18,300 (1) 240,000
      (2) 70,000
__________ _________     __________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,635,700 P840,000     P1,997,375
Accumulated depreciation
- equipment . . . . . . . . . . . . . . . . . . P 112,500 P 80,000 (2) 80,000 (3) 10,000 P 122,500
Accumulated depreciation 337,500 240,000 (2) 160,000
- buildings . . . . . . . . . . . . . . . . . . . . .     (3) 5,000   412,500
Accounts payable . . . . . . . . . . . . . . . . . 100,000 100,000     200,000
The consolidated net income, Bonds payable . . . . . . . . . . . . . . . . . . . . 200,000 100,000     300,000
consolidated retained earnings on January Common stock, P10 par . . . . . . . . . . . . 500,000       500,000
Common stock, P10 par . . . . . . . . . . . .   200,000 (1) 200,000    
1, 20x4 and December 31, 20x4, non- Retained earnings, from above . . . . . 385,700 120,000     385,700
controlling interests on January 1, 20x4 Non-controlling interest . . . . . . . . . . . . . (4) 6,000
    (1 ) 60,000 (2) 17,500
and December 31, 20x4 are the same   _________ _________ __________ (9) 5,175 ____76,675
with Illustration 4-4. Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,635,700 P840,000 P 821,800 P 821,800 P1,997,375
 The consolidated net income and non-controlling interests in consolidated net income which can be verified in Figure 4-11 can also be computed as follows:
Consolidated Net Income for 20x4    
Perfect Company’s net income from own/separate operations . . . . . . . . . . . . .   P140,000
Unrealized profit in ending inventory of S Company (downstream sales) . . . . . .   ( 15,000)
Perfect Company’s realized net income from separate operations* . . . . . . .   P125,000
Son Company’s net income from own operations . . . . . . . . . . . . . . . . . . . . . . . . . P 50,000  
Unrealized profit in ending inventory of S Company (upstream sales) . . . . . . . . . ( 10,000)  
Son Company’s realized net income from separate operations* . . . . . . . . . . P 40,000 40,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P165,000
Less: Non-controlling Interest in Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,175  
Amortization of allocated excess (refer to amortization above) . . . . . . . . . 11,000  
Goodwill impairment (impairment under partial-goodwill approach) . . . . 3,125 19,300
Controlling Interest in Consolidated Net Income or Profit attributable to    
equity holders of parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P145,700
Add: Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . .   _ 5,175
Consolidated Net Income for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P150.875
*that has been realized in transactions with third parties.
**Non-controlling Interest in Net Income (NCINI) for 20x4  
Son Company’s net income of Subsidiary Company from its own operations  
(Reported net income of Son Company) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 50,000
Unrealized profit in ending inventory of P Company (upstream ( 10,000)
sales) . . . . . . . .
Son Company’s realized net income from separate operations . . . . . . . . . . P 40,000
Less: Amortization of allocated 11,000
excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
  P 29,000
Multiplied by: Non-controlling interest % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
...
Non-controlling Interest in Net Income (NCINI) – partial . . . . . . . . . . . . . . . . P 5,800
...
Less: Non-controlling interest on impairment loss on full-goodwill (P3,125 x  
*that has20%) beenorrealized in transactions
(P3,125 impairment with third
on full-goodwill lessparties
P2,500, impairment  
on 625
partial-
Since NCI share of goodwill is not recognized, no adjustment is required for the impairment loss on goodwill and
goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
impairment losses are not shared with NCI. Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling P 5,175
..
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  

Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) . . P300,000
..
On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:
Consolidated Retained Earnings, December 31, 20x4  
Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) . . . . . . . . . . . P300,000
....
Add: Controlling Interest in Consolidated Net Income or Profit attributable to  
equity holders of parent for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,700
.....
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P445,700
.....
Less: Dividends paid – Parent Company for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
.....
Consolidated Retained Earnings, December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P385,700
....
The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and
goodwill attributable to NCI share is not recognized. The NCI on January 1, 20x4 and December 31, 20x4 are computed as follows:
Non-controlling interest (full-goodwill), January 1, 20x4  
Common stock – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000
Retained earnings – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Stockholders’ equity – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 300,000
Adjustments to reflect fair value - (over) undervaluation of assets and liabilities . . . . . . . . . . . 75,000
Fair value of stockholders’ equity of subsidiary, January 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 375,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Non-controlling interest (partial) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
Add: Non-controlling interests on full goodwill, 1/1/20x4 (P12,500, full-goodwill – P10,000, partial  
goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Non-controlling interest (full-goodwill) , January 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . P 77,500
Non-controlling interest (full-goodwill), December 31, 20x4    
Common stock – Subsidiary Company, December 31, 20x4 . . . . . . . . . . . . . . . . . .   P 200,000
Retained earnings – Subsidiary Company, December 31, 20x4    
Retained earnings – Subsidiary Company, January 1, 20x4 . . . . . . . . . . . . . . . . P100,000  
Add: Net income of subsidiary for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000  
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P150,000  
Less: Dividends paid – 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000 120,000
Stockholders’ equity – Subsidiary Company, December 31, 20x4 . . . . . . . . . . . . .   P 320,000
Adjustments to reflect fair value - (over) undervaluation of assets and    
liabilities, date of acquisition (January 1, 20x4) . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Amortization of allocated excess (refer to amortization above) – 20x4 . . . . . . . .   ( 11,000)
Fair value of stockholders’ equity of subsidiary, December 31, 20x4 . . . . . . . . . . .   P384,000
Less: Unrealized profit in ending inventory of P Company (upstream sales) . . . . .   10,000
Realized stockholders’ equity of subsidiary, December 31, 20x4 . . . . . . . . . . . . . .   P374,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . .   20
Non-controlling interest (partial-goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 74,800
Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4:    
[(P12,500 full – P10,000, partial = P2,500) – P625 impairment loss 1,875
Non-controlling interest (full-goodwill), December 31, 20x4 . . . . . . . . . . . . . . . . . .   P 76,675
Alternatively, NCI on December 31, 20x4 may also be computed as follows:
Non-controlling interest (full-goodwill), January 1, 20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 77,500
Add: NCINI– 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,175
Less: Dividends - Son, 20x4 (P30,000 x 20%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____6,000
Non-controlling interest (full-goodwill), December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 76,675
Second Year after Acquisition
Assume the following information available for Perfect and Son Company for the year 20x5:
  Perfect Co. Son Co.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 450,000 P 300,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 160,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 270,000 P 140,000
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 45,000
Net income from its own separate operations . . . . . . . . P 160,000 P 75,000
Add: Investment income . . . . . . . . . . . . . . . . . . . . . . . . . 54,200 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 214,200 P 75,000
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000 P 40,000
No goodwill impairment loss for 20x5.
 Parent Company Equity Method Entry
The following are entries recorded by the parent in 20x5 in relation to its subsidiary investment:
January 1, 20x5 – December 31, 20x5:1    
(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000  
Investment in Son Company (P40,000 x 80%) . . . . . . . . . . . . . .   32,000
Record dividends from Son Company.    
     
December 31, 20x5:    
(3) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000  
Investment income (P75,000 x 80%) . . . . . . . . . . . . . . . . . . . . .   60,000
Record share in net income of subsidiary.    
     
December 31, 20x5:    
(4) Investment income (P6,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . 4,800  
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . .   4,800
Record amortization of allocated excess of inventory, equipment, buildings and bonds payable    
     
December 31, 20x5:    
(5) Investment income (P20,000 x 100%) . . . . . . . . . . . . . . . . . . . . . . . 20,000  
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . .   20,000
To adjust investment income for downstream sales - unrealized profit in ending inventory of Son    
(UPEI of S).
December 31, 20x5:    
(6) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000  
Investment income (P15,000 x 100%) . . . . . . . . . . . . . . . . . . . ..   15,000
To adjust investment income for downstream sales - realized profit in beginning inventory of Son    
(RPBI of S).
December 31, 20x5:    
(7) Investment income (P5,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . 4,000  
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . .   4,000
To adjust investment income for upstream sales - unrealized profit in ending inventory Perfect    
(UPEI of P).
December 31, 20x5:    
(8) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000  
Investment income (P10,000 x 80%) . . . . . . . . . . . . . . . . . . . . ..   8,000
To adjust investment income for upstream sales - realized profit in beginning inventory of    
Perfect (RPBI of P)

Thus, the investment balance and investment income in the books of Perfect Company are as follows:
Investment in Son
Cost, 1/1/x5 291,700 32,000 Dividends – Son (40,000x 80%)
NI of Son 4,800 Amortization (6,000 x 80%)
(75,000 x 80%) 60,000 20,000 UPEI of Son (P20,000 x 100%)
RPBI of Son (P15,000 x 100%) 15,000 4,000 UPEI of Perfect (P5,000 x 80%)
RPBI of Perfect (P10,000 x 80%) 8,000  
Balance, 12/31/x5 313,900  
 
Investment Income
Amortization (6,000 x 805) 4,800 NI of Son
UPEI of Son (P20,000 x 100%) 20,000 60,000 (P75,000 x 80%)
UPEI of Perfect (P5,000 x 80%) 4,000 15,000 RPBI of Son (P15,000 x 100%)
  8,000 RPBI of Perfect (P10,000 x 80%)
  54,200 Balance, 12/31/x5
Consolidation Workpaper – Second Year after Acquisition
The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries.
(E1) Common stock – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000  
Retained earnings – Son Co, 1/1/x5 . . . . . . . . . . . . . . . . . . . . . . . 120.000  
Investment in Son Co (P320,000 x 80%) . . . . . . . . . . . . . . . . . .   256,000
Non-controlling interest (P320,000 x 20%) . . . . . . . . . . . . . . . . .   64,000
To eliminate investment on January 1, 20x5 and equity accounts    
of subsidiary on date of acquisition; and to establish non-
controlling interest (in net assets of subsidiary) on 1/1/20x5.

(E2) Accumulated depreciation – equipment (P80,000 – P10,000). . 70,000  

Accumulated depreciation – buildings (P160,000 + P5,000). . . . 165,000  
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000  
Discount on bonds payable (P4,000 – P1,000) . . . . . . . . . . . . . . 3,000  
Goodwill (P12,500 – P3,125) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,375  
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   180,000
Non-controlling interest [(P75,000 – P11,000) x 20%]+  
[P2,500, full goodwill - [(P3,125, full-goodwill impairment  
– P2,500, partial-goodwill impairment)*
or (P3,125 x 20%)] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,675
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   58,700
To eliminate investment on January 1, 20x5 and allocate excess of    
cost over book value of identifiable assets acquired, with remainder
to the original amount of goodwill; and to establish non- controlling
interest (in net assets of subsidiary) on 1/1/20x5.

*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
(E3) Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000  
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 5,000  
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000  
Accumulated depreciation – equipment . . . . . . . . . . . . . . . .   10,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,000
To provide for 20x5 depreciation and amortization on differences    
between acquisition date fair value and book value of Son’s
identifiable assets and liabilities as follows:

  Depreciation/    
Amortization Amortization  
Expense -Interest Total
Inventory sold.      
Equipment . . . P 10,000    
Buildings . . . . . ( 5,000)    
Bonds payable _______ P 1,000  
Totals. . . . . . . . P 5,000 P1,000 P6,,000
 (E4) Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,200  
Non-controlling interest (P40,000 x 20%) . . . . . . . . . . . . . . . . . . . . 8,000  
Dividends paid – Son . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   40,000
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . .   22,200
To eliminate intercompany dividends and investment income under    
equity method and establish share of dividends, computed as
follows:

Investment in Son   Investment Income

NI of Son 32,000 Dividends – Son     NI of Son
(75,000 Amortization   Amortization (75,000
x 80%)……. 4,800 (P6,000 x 80%) (P6,000 x 80%) 4,800 60,000 x 80%)
60,000
RPBI of Son 15,000 20,000 UPEI of Son   UPEI of Son 20,000 15,000 RPBI of Son
RPBI of Perfect 8,000 4,000 UPEI of Perfect (   UPEI of Perfect 4,000 8,000 RPBI of Perfect
22,200       54,200
(E5) Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000  
.
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . . . .   100,000
To eliminate intercompany downstream sales.    
(E6) Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,500  
Cost of Goods Sold (or Purchases) . . . . . . . . . . . . . . . . . . . . . .   62,500
To eliminate intercompany upstream sales.    
(E7) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000  
Cost of Goods Sold (Beginning Inventory –
I/S). . . . . . . . . . . .   15,000
To realize profit in downstream beginning inventory deferred
in the
prior period.    
(E8) Investment in Son Company (P10,000 x
80%) . . . . . . . . . . . . . . . 8,000  
Non-controlling interest (P10,000 x 20%) . . . . . . . . . . . . . . . . . .
. 2,000  
Cost of Goods Sold (Beginning Inventory –
After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally eliminated. Thus, the
I/S). . . . . . . . . . . .   10,000
investment balance to be eliminated is as follows To realize profit in upstream beginning inventory deferred in
the
Investment in Son
prior period.
Cost, 1/1/x5 291,700 32,000
 
Dividends – Son (40,000x 80%)
 
NI of Son Amortization
(75,000 x 80%) 60,000 4,800 (6,000 x 80%)
RPBI of Son (P15,000 x 100%) 15,000 20,000 UPEI of Son (P20,000 x 100%)
RPBI of Perfect (P10,000 x 80%) 8,000 4,000 UPEI of Perfect (P5,000 x 80%)
Balance, 12/31/x5 313,900 256,000 (E1) Investment, 1/1/20x5
(E8) RPBI of Son 15,000 58,700 (E2) Investment, 1/1/20x5
(E9) RPBI of Perfect 8,000 22,200 (E4) Investment Income & div
336,900 336,900
 (E9) Cost of Goods Sold (Ending Inventory – Income Statement) . . 20,000  
Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   20,000
To defer the downstream sales - unrealized profit in ending inventory
until it is sold to outsiders.    

(E10) Cost of Goods Sold (Ending Inventory – Income Statement) . . 5,000  

Inventory – Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   5,000
To defer the upstream sales - unrealized profit in ending inventory
until it is sold to outsiders.    

(E11) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . 14,800  

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14,800
To establish non-controlling interest in subsidiary’s adjusted net    
income for 20x5 as follows:

Net income of subsidiary . . . . . . . . . . . . . . . . . . . P 75,000

Realized profit in beginning inventory of P Company - 20x5 (upstream  
sales) . . . . . . . . . . 10,000
Unrealized profit in ending inventory of P Company - 20x5 (upstream  
sales) . . . . . . . . . . ( 5,000)
Son Company’s Realized net income* . . . . . . P 80,000
Less: Amortization of allocated excess . . . . . . ( 6,000)
  P 74,000
Multiplied by: Non-controlling interest % . . . .. 20%
Non-controlling Interest in Net Income (NCINI)  
– partial goodwill . . . . . . . . . . . . . . . . . . . . . P 14,800

Non-controlling Interest in Net Income (NCINI)  

– partial goodwill . . . . . . . . . . . . . . . . . . . . . P 14,800
Less: NCI on goodwill impairment loss on full-  
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Non-controlling Interest in Net Income (NCINI)  
– full goodwill . . . . . . . . . . . . . . . . . . . . . . . . P 14,800

*from separate transactions that have been realized in transactions with third persons.

The separate financial statements of the two companies, the eliminating entries, and the consolidated totals for the financial
statements on December 31, 20x5, are shown in Figure 4-12
 Income Statement Perfect Co Son Co. Dr. Cr. Consolidated
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P450,000 P300,000 (6) 100,000   P 587,500
      (7) 62,500
Investment income. . . . . . . . . . . . . . . . . . 54,200 - (4) 54,200   ___________
Total Revenue. . . . . . . . . . . . . . . . . . . . P504,200 P300,000     P 587,500
Cost of goods sold. . . . . . . . . . . . . . . . . . . P180,000 P160,000 (10) 20,000 (6) 100,000 P 177,500
      (11) 5,000 (7) 62,500
        (8) 15,000
        (9) 10,000
Depreciation expense. . . . . . . . . . . . . . . . 50,000 20,000 (3) 5,000   75,000
Interest expense. . . . . . . . . . . . . . . . . . . . - - (3) 1,000   1,000
Other expenses. . . . . . . . . . . . . . . . . . . . . 60,000 45,000     105,000
Goodwill impairment loss. . . . . . . . . . . . . . - -     -
Total Cost and Expenses. . . . . . . . . . . . P290,000 P225,000     P 358,500
Net Income. . . . . . . . . . . . . . . . . . . . . . . . P214,200 P 75,000     P 229,000
NCI in Net Income - Subsidiary. . . . . . . . - - (5) 14,800   ( 14,800)
Net Income to Retained Earnings. . . . . P214,200 P 75,000     P 214,200
Statement of Retained Earnings Perfect Co Son Co. Dr. Cr. Consolidated
Retained earnings, 1/1. . . . . . . . . . . . . . . .          
Perfect Company. . . . . . . . . . . . . . . . . P385,700       P 385,700
Son Company. . . . . . . . . . . . . . . . . . . .   P120,000 (1) 120,000    
Net income, from above. . . . . . . . . . . . . . 214,200 75,000     214,200
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . P599,900 P195,000     P 599,900
Dividends paid. . . . . . . . . . . . . . . . . . . . . .          
Perfect Company. . . . . . . . . . . . . . . . 60,000       60,000
Figure 4–12: Worksheet for Consolidated Son Company. . . . . . . . . . . . . . . . . . . . - 40,000   (4) 40,000 _ ________
Retained earnings, 12/31 to Balance
Financial Statements, December 31, 20x5. Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . P539,900 P155,000     P 539,900
Equity Method (Full-goodwill)/80%- Balance Sheet
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
 
P 221,000
 
P 85,000
 
 
 
 
 
P 306,000
Owned Subsidiary (Second Year after Accounts receivable. . . . . . . . . . . . . . . . 150,000 80,000     230,000
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 90,000 (10) 20,000
Acquisition)         (11) 5,000 245,000
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (2) 6,000   221,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000     350,000
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000   (3) 180,000 870,000
Discount on bonds payable. . . . . . . . . .     (2) 3,000 (3) 1,000 2,000
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . .     (2) 9,375   9,375
Investment in Son Co. . . . . . . . . . . . . . . . 313,900   (8) 15,000 (1) 256,000
    (9) 8,000 (2) 58,700
__________ _________   (4) 22,200 __________-
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,839,900 P895,000     P2,233,375
Accumulated depreciation (2) 70,000
- equipment . . . . . . . . . . . . . . . . . . . P 125,000 P 85,000   (3) 10,000 P150,000
Accumulated depreciation 375,000 255,000 (2) 165,000 (3)
- buildings. . . . . . . . . . . . . . . . . . . . .     5,000   460,000
Accounts payable. . . . . . . . . . . . . . . . . 100,000 100,000     200,000
Bonds payable. . . . . . . . . . . . . . . . . . . . 200,000 100,000     300,000
Common stock, P10 par. . . . . . . . . . . . 500,000       500,000
Common stock, P10 par. . . . . . . . . . . .   200,000 (1) 200,000    
Retained earnings, from above. . . . . . 539,900 155,000     539,900
Non-controlling interest. . . . . . . . . . . . . (4) 8,000
  (9) 2,000 (1 ) 64,000
    (2) 14,675
  ___ _____ _________ __________ (11)14,800 ____83,475
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,839,900 P895,000 P 873,875 P 873,875 P2,233,375
The consolidated net income and non-controlling interests in consolidated net income which can be verified in Figure 4-12 can also be
computed as follows: Consolidated Net Income for 20x5    
Perfect Company’s net income from own/separate operations . . . . . . . . . . . . .   P160,000
Realized profit in beginning inventory of S Company (downstream sales) . . . . .   15,000
Unrealized profit in ending inventory of S Company (downstream sales) . . . . . .   (_20,000)
Perfect Company’s realized net income from separate operations* . . . . . . .   P155,000
Son Company’s net income from own operations . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000  
Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 10,000  
Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 5,000)  
Son Company’s realized net income from separate operations* . . . . . . . . . . P 80,000 80,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P235,000
Less: Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   6,000
Consolidated Net Income for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P229,000
Less: Non-controlling Interest in Net Income* * . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14,800
Controlling Interest in Consolidated Net Income or Profit attributable to    
equity holders of parent – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P214,200

*that has been realized in transactions with third parties.

Or, alternatively
Consolidated Net Income for 20x5    
Perfect Company’s net income from own/separate operations . . . . . . . . . . . . .   P160,000
Realized profit in beginning inventory of S Company (downstream sales) . . . . .   15,000
Unrealized profit in ending inventory of S Company (downstream sales) . . . . . .   (_20,000)
Perfect Company’s realized net income from separate operations* . . . . . . .   P155,000
Son Company’s net income from own operations . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000  
Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 10,000  
Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 5,000)  
Son Company’s realized net income from separate operations* . . . . . . . . . . P 80,000 80,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P235,000
Less: Non-controlling Interest in Net Income* * . . . . . . . . . . . . . . . . . . . . . . . . . . . P 14,800  
Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 20,800
Controlling Interest in Consolidated Net Income or Profit attributable to    
equity holders of parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P214,200
Add: Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . .   _ 14,800
Consolidated Net Income for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P229,000

*that has been realized in transactions with third parties.

**Non-controlling Interest in Net Income (NCINI) for 20x5  
Son Company’s net income of Subsidiary Company from its own operations P 75,000
(Reported net income of Son Company)
Realized profit in beginning inventory of P Company (upstream sales) . . . . . . . 10,000
Unrealized profit in ending inventory of P Company (upstream sales) . . . . . . . . ( 5,000)
Son Company’s realized net income from separate operations . . . . . . . . . . P 80,000
Less: Amortization of allocated excess . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
  P 74,000
Multiplied by: Non-controlling interest % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
Non-controlling Interest in Net Income (NCINI) – partial goodwill . . . . . . . . . . . P 14,800
Less: NCI on goodwill impairment loss on full goodwill . . . . . . . . . . . . . . . . . . . . . 0
Non-controlling Interest in Net Income (NCINI) – full goodwill . . . . . . . . . . . . . . P 14,800
 Non-controlling interest (full-goodwill), December 31, 20x5    
Common stock – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . . . . . . .   P 200,000
Retained earnings – Subsidiary Company, December 31, 20x5    
Retained earnings – Subsidiary Company, January 1, 20x5* . . . . . . . . . . . . . . . P120,000  
Add: Net income of subsidiary for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000  
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P195,000  
Less: Dividends paid – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 155,000
Stockholders’ equity – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . .   P 355,000
Adjustments to reflect fair value - (over) undervaluation of assets and    
liabilities, date of acquisition (January 1, 20x4) . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Amortization of allocated excess (refer to amortization above) :    
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 11,000  
20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 ( 17,000)
Fair value of stockholders’ equity of subsidiary, December 31, 20x5 . . . . . . . . . . .   P 413,000
Less: Unrealized profit in ending inventory of P Company (upstream    
sales) 20x5 (UPEI of P – 20x5) or Realized profit in beginning inventory  
of P Company (upstream sales) –20x6 (RPBI of P - 20x6 . . . . . . . . . . . . . . . . . 5,000
Realized stockholders’ equity of subsidiary, December 31, 20x5 . . . . . . . . . . . . . .   P408,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . .   20
Non-controlling interest (partial goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   P 81,600
Add: Non-controlling interest on full goodwill , net of impairment loss    
[(P12,500 full – P10,000, partial = P2,500) – P625 impairment loss . . . . . . . . . 1,875
Non-controlling interest (full-goodwill), December 31, 20x5 . . . . . . . . . . . . . . . . . .   P 83,475

*the realized profit in beginning inventory of P Company

(upstream sales) –20x5 (RPBI of P - 20x5 amounting to P10,000
is already included in the beginning retained earnings of S Company
Alternatively, NCI on December 31, 20x5 may also be computed as follows:
Non-controlling interest (full-goodwill), January 1, 20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 76,675
Add: NCINI – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,800
Less: Dividends - Son, 20x5 (P40,000 x 20%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____8,000
Non-controlling interest (full-goodwill), December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 83,475

Or,
Common stock – Subsidiary Company, January 1, 20x5 . . . . . . . . . . . . . . . . . .. . . . .   P 200,000
Retained earnings – Subsidiary Company, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . .   _120,000
Stockholders’ equity – Subsidiary Company, January 1, 20x5 . . . . . . . . . . . . . . . . . . .   P 320,000
Adjustments to reflect fair value - (over) undervaluation of assets and    
liabilities, date of acquisition (January 1, 20x4) . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000  
Amortization of allocated excess – 20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 11,000)  
Goodwill (full), 1/1/20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500  
Impairment of goodwill – 20x4…. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . ( 3,125 ) __73,375
Fair value of stockholders’ equity of subsidiary, January 1, 20x5 . . . . . . . . . . . . . . . . .   P 393,375
Less: Realized profit in beginning inventory of P Company (upstream sales) – 20x5.   __10,000
Realized stockholders’ equity of subsidiary, January 1, 20x5   P 383,375
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . .. . .   20
Non-controlling interest (full-goodwill), January 1, 20x5. . . . . . . . . . . . . . . . . . . . . .   P 76,675
Add: NCINI – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   14,800
Less: Dividends - Son, 20x5 (P40,000 x 20%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____8,000
Non-controlling interest (full-goodwill), December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . P 83,475
The consolidated net incomes, and non-controlling interests on December 31, 20x5 are the same with Illustration 4-4 except
only in the computation of consolidated retained earnings presented as follows:
Retained earnings of Parent Company (under equity method) /  
Consolidated Retained earnings , January 1, P385,700
20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Controlling Interest in Consolidated Net Income or Profit attributable to  
equity holders of parent for 214,200
20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P623,900
...
Less: Dividends paid – Parent Company for 20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Therefore, regardless of .Retained
.
the method used in the separate financial statement of parent, the
earnings of Parent Company (under equity method) /
consolidated
 
balance (which is
under equity method) is always the same. Consolidated Retained Earnings, December 31, P539,900
20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .