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Chapter 12

Problem I
(a)Working Fund – Agency ……………………………… ……………………….. 5,000
Cash …………………………………………………………………………. 5,000
(b)Accounts Receivable …………………………………..................................... 50,000
Sales-Agency ………………………………………………………………. 50,000

(c)Cash ………………………………………………………..................................... 35,000


Accounts Receivable …………………………………………………….. 35,000

(d)Expenses-Agency ……………………………………………………………….. 4,500


Cash …………………………………………………………………………. 4,500

(e)Expenses-Agency ……………………………………………………………….. 2,250


Cash …………………………………………………………………………. 2,250

(f) Cost of Goods Sold-Agency …………………………………………………… 36,000


Merchandise Inventory - Agency ………………………………………. 36,000

2.
Sales……………………………………………………………………………….P 50,000
Less: CGS………………………………………………………………………… 36,000
GP………………………………………………………………………………….P 14,000
Less: Expenses (P4,500 + P2,250)…………………………………………….. 6,750
Net income – agency………………………………………………………….P 7,250

Problem II
(a) Branch Books:

(a) Cash ………………………………………………………….. 42,500


Home Office …………………………………………… 42,500

(b) Shipments from Home Office …………………………… 50,200


Home Office …………………………………………... 50,200

(c) Accounts Receivable ……………………………………. 60,000


Sales …………………………………………………….. 60,000

(d) Purchases …………………………………………………… 22,500


Accounts Payable …………………………………… 22,500

(e) Home Office ……………………………………………….. 53,400


Accounts Receivable ………………………….. 53,400

(f) Accounts Payable ………………………………………... 12,250


Cash …………………………………………………….. 12,250

(g) Furniture & Fixtures ………………………………………… 8,000


Cash …………………………………………………….. 8,000

(h) Expenses …………………………………………………….. 18,000


Cash …………………………………………………….. 18,000
(b) Home Office Books:

(a) Branch ………………………………………………………. 42,500


Cash ……………………………………………………. 42,500

(b) Branch ……………………………………………………… 50,200


Shipments to Branch ……………………………….. 50,200

(c) Accounts Receivable …………………………………... 105,000


Sales …………………………………………………… 105,000

(d) Purchases …………………………………………………. 122,500


Accounts Payable …………………………………. 122,500

(e) Cash ……………………………………………………….. 113,600


Accounts Receivable ……………………………… 113,600

(f) Accounts Payable ………………………………………. 124,000


Cash …………………………………………………… 124,000

(g) Expenses …………………………………………………… 26,600


Cash …………………………………………………… 26,600

(h) Cash ……………………………………………………….. 53,400


Branch ………………………………………………... 53,400

(i) Retained Earnings ………………………………………. 10,000


Cash …………………………………………………... 10,000
BARTON CO.
Balance Sheet for Branch
December 31, 20x4

Assets Liabilities

Cash …………………………… P 4,250 Accounts Payable ………… P 10,250


Accounts Receivable ……… 12,600 Accrued Expenses ……………
300
Merchandise Inv……………... 23,500 Home Office …………………..
37,900
Prepaid Expenses …………… 750
Furnitures & Fixtures …. P 8,000
Less accum. Depr …… 650 7,350
Total Assets …………………… P48,450 Total Liabilities ………………….P48,450

BARTON CO.
Income Statement for Branch
For Year Ended December 31, 19X6

Sales …………………………………………………………………………… P66,000


Cost of Goods Sold:
Purchases …………………………………………………………… P22,500
Shipments for home office ………………………………………. 50,200
Merchandise available for sale ………………………………… P72,700
Less merchandise inv, December 31 ………………………….. 23,500
Cost of Goods Sold ……………………………………………….. 49,200
Gross Profit ……………………………………………………………………. P16,800
Expenses ………………………………………………………………………
18,200
Net loss ………………………………………………………………………... P 1,400
BARTON CO.
Income Statement for Branch
For Year Ended December 31, 20x4

Assets Liabilities & Stockholders’ Equity

Cash …………………………….. P 23,200 Liabilities


Accounts Receivable ……….. 19,050 Accounts payable ………… P 21,300
Merchandise Inventory……… 48,500 Accrued Expenses …………. 1,350 P22,650
Prepaid Expenses ……………. 2,050 Stockholders Equity
Furniture & Fixtures …. P 20,000 Capital stock, P20 par……… P50,000
Less accum. Depr….. 5,580 14,420 Retained Earnings …………. 72,740 122,470
Branch ………………………… 37,900 Total liabilities and stockholders’
Total Assets …………………... P145,120 equity ………………… P145,120

BARTON CO.
Income Statement for Home Office
For Year Ended December 31, 20x4

Sales …………………………………………………………………………….......
P105,000
Cost of goods sold:
Merchandise inventory, January 1 …………………………………. P 40,120
Purchases ………………………………………………………………... 122,500
Merchandise available for sale ……………………………………… P162,620
Less shipments to branch ……………………………………………... 50,200
Merchandise available for own sale ……………………………….. P112,420
Less merchandise inventory, December 31 ………………………. 48,500
Cost of Goods Sold …………………………………………………….
63,920
Gross Profit ………………………………………………………………………… P
41,080
Expenses ……………………………………………………………………………
27,630
Net income from own operations …………………………………………….. P
13,450
Deduct branch net loss ………………………………………………………….
1,400
Total Income ………………………………………………………………………. P
12,050

BARTON CO.
Income Statement for Home Office
For Year Ended December 31, 20x4

Sales ………………………………………………………………………………….
P171,000
Cost of goods sold:
Merchandise inventory, January 1 ………………………………….. P 40,120
Purchases ………………………………………………………………… 145,000
Merchandise available for sale ……………………………………… P185,120
Less merchandise inventory, December 31 ……………………….. 72,000
Cost of goods sold ……………………………………………………….
113,120
Gross profit ………………………………………………………………………….. P
57,880
Expenses ……………………………………………………………………………..
45,830
Net Income …………………………………………………………………………. P
12,050

(a) Branch Books:


Expenses ………………………………………………………………. 650
Accumulated Depreciation – F&F………………………. 650
Sales …………………………………………………………………… 66,000
Merchandise Inventory ……………………………………………. 23,500
Income summary ………………………………………….. 89,500

Income Summary …………………………………………………… 90,900


Shipments from Home Office …………………………… 50,200
Purchases …………………………………………………… 22,500
Expenses …………………………………………………….. 18,200

Home Office ………………………………………………………… 1,400


Income Summary ………………………………………… 1,400

(b) Home Office Books


Expenses ………………………………………………………………. 1,180
Accumulated Depreciation – F&F………………………. 1,180

Sales …………………………………………………………………… 105,000


Merchandise Inventory ……………………………………………. 48,500
Shipments to Branch ……………………………………………….. 50,200
Income summary …………………………………………..
203,700

Income Summary …………………………………………………… 190,250


Merchandise Inventory ……………………………………
40,120
Purchases …………………………………………………….
122,500
Expenses ……………………………………………………..
27,630

Branch Income ……………………………………………………… 1,400


Branch ………………………………………………………. 1,400

Income Summary ………………………………………………….. 1,400


Branch Income …………………………………………… 1,400

Income Summary ………………………………………………….. 12,050


Retained Earnings ……………………………………….. 12,050

Problem III
Journal and Adjusting Entries – Home Office and Branch
Home Office Books Branch Books
INTERCOMPANY / INTER-OFFICE Transactions
1/1 a Branch Current . . . . . . . 1,500 Cash . . . . . . . . . . . . . . . . . . . . . . 1,500
Cash . . . . . . . . . . . . . . . 1,500 Home Office Current. . . . . . 1,500
b Shipment to branch, cost 10,200 Home Office Current . . . . . . . . 10,200
Branch Current . . . . . . 10,200 Shipments from Home Office 10,200
c SFF - Branch 3,000 No entry – eqpt accounts
Store Furniture & Fixt 3,000 maintained in the HO books
Acc. Depreciation – SFF 750 No entry – eqpt accounts
Acc. Deprec. SFF – Br. 750 maintained in the HO books
P3,000 x 10% x 2.5 yrs
SFF – Branch . . . . . . . . . . 900 Home Office Current . . . . . . . . 900
Branch Current . . . . . . 900 Cash . . . . . . . . . . . . . . . . . . . 900
d. Branch Current . . . . . . . 2,600 Accounts Receivable - HO 2,600
Accounts Receivable 2,600 Home Office Current. . . . . . 2,600

1/1 – 1/31 Transaction with Outsiders


Accounts Receivable . . . 34,600 Accounts Receivable . . . 6,200
Sales.. . . . . . . . . . . . . . . 34,600 Sales.. . . . . . . . . . . . . . . 6,200
Cash. . . . . . . . . . . . . . . . . . 40,000 Cash . . . . . . . . . . . . . . . . . . . . . . 2,600
Accounts Receivable 40,000 Accounts Receivable . . . . . 2,600
Purchases . . . . . . . . . . . . 31,600 Purchases. . . . . . . . . . . . . . . . . . 3,000
Accounts Payable . . 31,600 Accounts Payable. . . . . . . . 3,000
Accounts Payable . . . . . 36,200 Accounts Payable . .. . . . . . . . 1,450
Cash. . . . . . . . . . . . . . . 36.200 Cash. . . . . . . . . . . . . . . 1,450
Accrued expenses . . . . . 250 Expenses . .. . . . . . . . . . . . . . . . 1,250
Expenses. . . . . . . . . . . . . . 8,950 Cash. . . . . . . . . . . . . . .. . . . . 1,250
Cash. . . . . . . . . . . . . . . 9,200

1/1 – 1/31 Intercompany / INTER-OFFICE Transactions


Cash . . . . . . . . . . . . . . . . . . . . . . 1,600
Accts. Rec. – HO……………. 1,600
Allowance for D/A. . . . . 150 Home Office Current . . . . . . . . 150
Branch Current . . . . . . 150 Accts. Rec. – HO……………. 150
Shipment to branch ,cost 1,250 Home Office Current . . . . . . . . 1,250
Branch Current . . . . . . 1,250 Shipments from Home Office 1,250
Cash. . . . . . . . . . . . . . . . . 1,000 Home Office Current . . . . . . . . 1,000
Branch Current . . . . . . 1,000 Cash. . . . . . . . . . . . . . . . . . . 1,000
Adjusting Entries
a. Shipment to branch, cost 600 Home Office Current . . . . . . . . 600
Branch Current . . . . . . 600 Shipments from Home Office 600

b. Branch Current . . . . . . .. 475 Expenses. . . . . . . . . . . . . . . . . . . 475


Expenses. . . . . . . . . . . 475 Home Office Current . . . . . . 475

c. Branch Current.. . . . . . .. 35 Expenses. . . . . . . . . . . . . . . . . . . 35


Acc. Deprec. SFF – Br. 35 Home Office Current . . . . . . 35
P3,000/10 years x 1/12 = P25 (depreciation for one month; Asset life, 10 years); P900 / 7.5 years, remaining
life = P120 x 1/12= P10)

Expenses. . . . . . . . . . . . . . 100
Acc. Deprec. – SFF 100
[(P15,000 – P3,000)/10 x 1/12]
d. Included in closing entries
e. Expenses. . . . . . . . . . . . . . 750 Expenses. . . . . . . . . . . . . . 350
Accrued expenses. . . 750 Accrued expenses. . . 350

Closing Entries
Sales. . . . . . .. . . . . . . . . . . 34,600 Sales. . . . . . .. . . . . . . . . . . 6,200
Merch. inventory, ending 44,500 Merch. inventory, ending
Shipments to branch 12,050 (P9,800 + P600) 10,400
Merch. Inv. , beg……. 46,000 Income Summary. . . . . . . 560
Purchases. . . . . . . . . . 31,600 Merch. Inv. , beg……. 0
Expenses (9,200 – 250 Purchases. . . . . . . . . . 3,000
- 475 + 100 + 750)….. 9,325 Shipments from HO
Income Summary…… 4,225 (P10,200 + P1,250 +P600) 12,050
Expenses (1,250 + 475
+ 35 + 350)……………. 2,110

Branch Income Summary 560 Home Office Current . . . . . . . . 560


Branch Current………. 560 Income Summary . . . . . . . . 560

Income Summary……….. 560


Branch Income Sum 560

Income Summary……….. 3.665


Retained Earnings….. 3,665

EAGLE CO.
Balance Sheet for Branch
January 31, 20x4

Assets Liabilities

Cash …………............................ P 1,100 Accounts Payable ………………. P


1,550
Accounts Receivable ………….. 3,600 Accrued expenses ……………….
350
Accts. Rec.-home office ………. 850 Home Office ………………………
14,050
Merchandise Inventory ………… 9,800
Merchandise in Transit …………. 600
Total assets ………………… P15,950 Total Liabilities …………………….
P15,950

EAGLE CO.
Income Statement for Branch
For Month Ended January 31, 20x4

Sales …………………………………………………………………………………………. P 6,200


Cost of Goods Sold:
Merchandise inventory, beginning………………………………..P 0
Add: Purchases ………………………………………………………. 3,000
Shipments from home office (P11,450 +P600, in-transit) 12,050
Merchandise Available for Sale ……………………….. P 15,050
Less: Merchandise inv. Dec 31, 19x4 (P9,800 + P600)…. 10,400
Cost of Goods Sold ……………………………………………………………. 4,650
Gross Profit ………………………………………………………………………………… P 1,550
Expenses …………………………………………………………………………………… 2,110
Net Loss, from own operations………………………………………………………… P 560
EAGLE CO.
Balance Sheet for Home Office
January 31, 20x4

Assets
Cash …………………………………………………………………… P 9,100
Accounts Receivable ……………………………………………… P34,000
Less allowance for doubtful accounts ……………….. 1,050 32,950
Merchandise Inventory ……………………………………………. 44,500
Store furniture and fixtures ………………………………………… P12,000
Less accumulated depreciation ………………………. 3,950 8,050
Store furniture and fixtures-branch ……………………………… P 3,900
Less accumulated depreciation ……………………… 785 3,315
Branch office ………………………………………………………... 14,050
Total Assets …………………………………………………………… P111,765

Liabilities

Accounts Payable …………………………………………….. P29,150


Accrued Expenses …………………………………………….. 750
Total Liabilities ………………………………………………….. P29,900
Stockholders’ Equity

Capital Stock …………………………………………………… P50,000


Retained earnings …………………………………………….. 31,865
Total stockholder’s equity …………………………………… 81,865
Total liabilities and stockholders’ equity …………………… P111,765

EAGLE CO.
Income Statement for Home Office
For Month Ended January 31, 20x4

Sales ……………………………………………………………………………… P 34,600


Cost of goods sold:
Merchandise inventory, January 1 …………………….. P46,000
Purchases …………………………………………………… 31,600
Merchandise available for sale ………………………… 77,600
Less shipments to branch ………………………………… 12,050
Merchandise available for own sales …………………. P65,550
Less merchandise inventory, January 31 ……………… 44,500
Cost of goods sold …………………………………………………………… 21,050
Gross Profit ………………………………………………………………………… P 13,650
Expenses …………………………………………………………………………… 9,325
Net income from own operations ……………………………………………. P 4,225
Deduct branch net loss ………………………………………………………… 560
Total Income …………………………………………………………………… P 3,665
EAGLE CO.
Income Statement for Home Office
For Month Ended January 31, 20x4
Assets Liabilities’ and Stockholders’ Equity
Liabilities
Cash …………………………….. ………. P 10,200 Accounts Payable …… P30,700
Accounts receivable ……….. P38,450 Accrued Expenses …… 1,100 P
31,800
Less allow for doubt-
Ful accounts ……….. 1,050 37,400
Merchandise Inventory ……………….. 54,900 Stockholders Equity
Store furn. & fixtures ………… P15,900 Capital Stocks …………P50,000
Less accum depr 4,735 11,165 Retained earnings …… 31,865
81,865
Total assets ……………………………… P113,665 Total liab. And stockholders’ equity .
P113,665
EAGLE CO.
Combined Income Statement for Home Office and Branch
For Month Ended January 31, 20x4

Sales ………………………………………………………………………………….. P 40,800


Cost of goods sold:
Merchandise Inventory, January 1 ………………. P46,000
Purchases ……………………………………………... 34,600
Merchandise available for sale …………………... P80,600
Less merchandise inventory, Jan 31 ……………... 54,900
Cost of goods sold …………………………………............................... 25,700
Gross profit …………………………………………………………………………... P 15,100
Expenses ……………………………………………………………………………… 11,435
Net Income ………………………………………………………………………….. P 3,665

EAGLE CO.
Combined Balance Sheet
January 31, 20x4
Assets
Cash …………………………………………………………………… P 10,200
Accounts Receivable ……………………………………………… P38,450
Less: Allowance for doubtful accounts ………………………… 1,050 37,400
Merchandise Inventory ……………………………………………. 54,900
Store furniture and fixtures ………………………………………… P15,900
Less: Accumulated depreciation ……………………………….. 4,735 _ 11,165
Total Assets …………………………………………………………… P113,665
Liabilities
Accounts Payable …………………………………………….. P30,700
Accrued Expenses …………………………………………….. 1,100
Total Liabilities ………………………………………………….. P 31,800
Stockholders’ Equity

Capital Stock …………………………………………………… P50,000


Retained earnings …………………………………………….. 31,865
Total stockholder’s equity …………………………………… 81,865
Total liabilities and stockholders’ equity …………………… P113,665
Problem IV
1.
Socrates Company
Home Office and Plato Branch
Reconciliation of Reciprocal Ledger Accounts
June 30, 20x4
Investment in
Plato Branch Home Office
Ledger Ledger

Account Account
(Debit) (Credit)
Balances prior to adjustment P85,000 P33,500
Add: Merchandise shipped to branch 24,000
Less: Acquisition of office equipment by branch
(carried in accounting records of home office) (14,500)
Collection of branch trade accounts receivable (9,000)
Payment of cash by branch (22,000) _______
Adjusted balances P48,500 P48,500
2. (a) Accounting records of home office:
Office Equipment: Plato Branch 14,500
Investment in Plato Branch 14,500
To record acquisition of office equipment by branch.

Cash in Transit 22,000


Investment in Plato Branch 22,000
To record cash in transit from branch.

(b) Accounting records of branch:


Home Office 9,000
Trade Accounts Receivable 9,000
To record collection by home office of branch accounts
receivable.

Inventories in Transit 24,000


Home Office 24,000
To record shipment of merchandise in transit from
home office.

Problem V
((a) BRANCH HOME OFFICE
ACCOUNT ACCOUNT…
Balances before Adjustments ……………………………………….. P 8,400 P 9,735
Adjustments:
Additions:
Merchandise in transit to branch …………………. 615
Collection of Home office receivable by Branch 2,500
Understatement of branch net income for Nov.. 90
P10,990 P10,350
Deductions:
Merchandise return to home office in transit ……………. 640
Corrected Balances ……………………………………………… P10,350 P10,350

(b) Branch Books:


Shipments from Home Office-in Transit ……………………. 615
Home Office …………………………………………... 615

Home Office Books:


Branch …………………………………………………………… 2,500
Accounts Receivable ……………………………….. 2,500

Branch …………………………………………………………… 90
Retained Earnings ……………………………………. 90

Merchandise Returns from Branch – in Transit ……………. 640


Branch ………………………………………………….. 640

Problem VI
1.
Branch Home office
Account Account
Balances before adjustments P 77,150 P 56,450
Adjustments:
Additions:
Advertising charged to branch but not yet recorded
on branch books 600
Merchandise in transit to branch but not yet shown on
branch books 4,400
Collection of home office account by branch not yet
recorded by home office ____750 _______
P77,900 P61,450
Deductions:
Overstatement of branch profit for 20x0 on home
office books 540
Cash in transit to home office but not yet shown on
home office books 16,000
Overstatement of charge for merchandise from home
office on branch books (home office shipped 200 units
@ P37.85, or P7,570, and 200 units @ P44,95, or P8,990,
a total of P16,560; branch erroneously recorded
shipment at P16,650, an overstatement of P90
_______ ___90
Corrected balances P 61360 P 61,360

2. Home office books:


Jan. 31 Retained Earnings 540
Wilshire Branch 540

31 Cash in Transit 16,000


Wilshire Branch 16,000

31 Wilshire Branch 750


Accounts Receivable 750

Branch Books:
Jan. 31 Advertising Expense 600
Home Office 600

31 Shipments from Home Office – In Transit 4,400


Home Office 4,400

31 Home Office 90
Shipments from Home Office 90

Problem VII
1.
Branch Home Office
Account Account
Balances before adjustments P 59,365 P 57,525
Adjustments:
Additions:
Corrected branch income for January (P1,440 – P215)
1,225
Understatement of branch paid by home office for
December 310
Expenses of branch paid by home office _______ ____215
P 60,900 P 57,740
Deductions:
Collection by home office of branch receivable 65
Correction of branch income for January 215
Merchandise transferred to Brentwood branch but
incorrectly charged by Beverly Hills branch 1,400
Merchandise returns to home office in transit 840
Uncollectible accounts of branch __1,200 _______
Corrected Balances P 57,460 P 57,460

2. (a) Entries to bring branch books up to date:

Correction in Income of Prior Periods 215


Home Office 215

Home Office 215


Income Summary 215

Home Office 65
Accounts Receivable 65

(b) Entries to bring home office books up to date:


Beverly Hills Branch 1,225
Beverly Hills Branch Income 1,225

Beverly Hills Branch 310


Retained Earnings 310

Shipments to Beverly Hills Branch 1,400


Beverly Hills Branch 1,400

Brentwood Branch 1,400


Shipments to Brentwood Branch 1,400

Merchandise Returns from Branch – In Transit – Beverly Hills


Branch 840
Beverly Hills Branch 840

Allowance for Doubtful Accounts – Beverly Hills Branch 1,200


Beverly Hills Branch 1,200
Problem VIII
1.
Home Office
(b) Mdse. allowance by home (a) Charge for office furniture
office 350.00 by home office 780.00
(f) Truck repairs charged by home (d) Charge for labor by home
office 293.00 office 866.00
(e) Charge for freight by home
office 78.50
(h) Proceeds from sale of truck 475.00
643.00 2,199.50
Net credit Total 1,556.50 _______
1,229.50 2,199.50
Branch
(a) Purchase of office furniture for (b) Mdse. allowance for
branch 870.00 branch 300.00
(c) Branch charge for interest 325.00 (g) Proceeds from sale of 475.00
truck
(d) Branch charge for labor 433.00
(e) Branch charge for freight _785.00 ______
2,413.00 775.00
_______ Net Debit Total 1,638,000
2,413.00 _2,413.00

Balance in branch account per home office book, September 30, 20x2 P 131,690.00
Deduct net debit total per home office books for transactions that involve
discrepancies 1,638.00
P 130,052.00
Add net credit total per branch books for transaction that involve
discrepancies __1,556.50
Balance in home office account per branch books, September 30, 20x2 P 131,608.50

2.
Balance in home office account per branch books,
September 30, 20x2 P 131,608.50
Add: (a) Failure by branch to take up full furniture charges P 90.00
(b) Recognition by branch of excess merchandise
allowance 50.00
(c) Failure by branch to recognize charge by home
office for interest 325
(e) Failure by branch to recognize full freight
charges 706.50
(f) Truck repairs charge to home office account in
error 293.00 ___1,464.50
P 133,073.00
Deduct: (d) Recognition by branch of excess labor charges 433.00
(h) Credit entry to home office made in error on
sale of truck __475.00 ___908.00
Corrected interoffice balance, September 30, 20x2 P 132,265.00
3.
Balance in branch account per home office books,
September 30, 20x2 P 131,690.00
Add credit to branch account made in error for proceeds from sale of
truck _____475.00
Corrected interoffice balance, September 30, 20x2 P 132,265.00
4.
Office Furniture 90.00
Merchandise allowances 50.00
Home office interest charges payable 250.00
Interest expense 75.00
Freight In 706.50
Repairs on truck 293.00
Labor 433.00
Trucks 475.00
Home Office 556.50

Multiple Choice Problem


1. d
Branch A Branch B
Assets:
Inventory, January 1 P 21,000 P 19,000
Imprest branch fund 2,000 1,500
Accounts receivable, January 1 55,000 43,500
Total Assets P 78,000 P 64,000
Less: Liabilities -0- -0-
Home Office Current Account P 78,000 P 64,000
2. b
Branch A Branch B
Assets:
Inventory, December 31 P 19,000 P 12,000
Imprest branch fund 2,000 1,500
Accounts receivable, December 31 70,000 53,500
Total Assets P 91,000 P 67,000
Less: Liabilities -0- -0-
Home Office Current Account P 91,000 P 67,000

3. d – incidentally, the entry in the books of the branch would be as follows:


Profit and loss summary ………………………………………………………… xxx
Home Office Current……………………………………………………. Xxx

4. c
January 1,20x4 January 1, 20x5
Assets:
Inventory P 37,000 P 41,000
Petty cash fund 3,000 3,000
Accounts receivable 43,000 49,000
Total Assets P 83,000 P 93,000
Less: Liabilities _____-0- _____-0-
Home Office Current Account P 83,000 P 93,000

5. a – refer to No. 4 for computations


6. a
Sales P 74,000
Less: Cost of goods sold:
SFHO…………………………………………………………… P67,680
Less: Inventory, ending……………………………………… 9,180 58,500
Gross profit…………………………………………………………… P 15,500
Less: Expenses – 6,820
Net Loss……………………………………………………………….. P 8,680

7. a
January 1, 20x6
Assets:
Cash P 4,200
Inventory 9,180
Accounts receivable 12,800
Total Assets P 26,180
Less: Liabilities _____-0-
Home Office Current Account P 26,180

8. a – nominal accounts have zero beginning balance.


9. d
Branch H. Office
Current Current
Unadjusted balance, 6/30/20x4 P 225,770
P 226,485*
Add (Deduct): Adjustments
1 Erroneous recording of branch equipment 3150
2. Insurance premium recorded twice ( 675)
3. Erroneous recording of freight ( 90)
4. Discount on merchandise ( 800)
5. Failure by the branch to record share in advertising 700
6. error by the home office to record remittance of Cebu 3,000 ________
Adjusted balance, 6/30/20x4 P 228,770 P 228,770
* The P226,485 is compute simply by working back with P228,770 adjusted balance as the starting point.

10. c
Home Office Books Branch Books
(Branch Current- (Home Office Current –
Dr. balance) Cr. balance)
Unadjusted balance P518,575 P452,276
Add (deduct) adjustments:
In transit 10,500
Remittance ( 17,000)
Returns ( 775)
Cash in transit 25,000
Expenses - HO ( 800)
Expenses – branch 12,000
Error ________ _____224
Adjusted balance P 500,000 P 500,000

11. d
Home Office Books Branch Books
(Branch Current- (Home Office Current –
Dr. balance) Cr. balance)
Unadjusted balance P515,000 P495,750
Add (deduct) adjustments:
Excess freight ( 750)
Cash in transit ( 11,000)
Returns ( 4,000)
Expenses – branch ________ 5,000

Adjusted balance P 500,000 P 500,000

12. c – refer to No. 11 for computations


13. a – refer to No. 11 for computations
14. d – refer to No. 11 for computations
15. d - No entry should be made in the books of the home office, since the freight should be
chargeable to the branch and the payment of the freight was made by the branch.
16. a
Home Office Books Branch Books
(Branch Current- (Home Office Current –
Dr. balance) Cr. balance)
Unadjusted balance P85,000 P33,500
Add (deduct) adjustments:
Collection of branch receiv ( 9,000)
Shipments in transit 24,000
Purchase by branch of office
equipment ( 14,500)
Remittance ( 22,000) _________
Adjusted balance P 48,500 P 48,500

17. b
Home Office Books Branch Books
(Branch Current- (Home Office Current –
Dr. balance) Cr. balance)
Unadjusted balance P590,000 P506,700
Add (deduct) adjustments:
Remittance (40,000)
Returns (15,000)
Error by the branch 300
Expenses – branch ________ 28,000

Adjusted balance P 535,000 P 535,000

18. c
Home Office Books Branch Books
(Branch Current- (Home Office Current –
Dr. balance) Cr. balance)
Unadjusted balance P150,000 P117,420
Add (deduct) adjustments:
In transit 37,500
HO A/R collected by br. 10,500
Supplies returned ( 4,500)
Error in recording Br. NI ( 1,080)
Cash sent to branch
to General Expense by HO 25,000 25,000
Adjusted balance P 179,920 P 179,920

19. d – refer to No. 18 for computation.

20. a
Home Office Books Branch Books
(Branch Current- Dr. (Home Office Current –
balance) Cr. balance)
Unadjusted balance P40,000 P31,100
Add (deduct) adjustments:
In transit 5,800
HO A/R collected by br. 500
Cash in transit 2,000 2,000
Error in recording Br. NI ( 3,600) _______
Adjusted balance P38,900 P38,900

21. a – refer to No. 20 for computations

22. a
Home Office Books Branch Books
(Branch Current- Dr. (Home Office Current –
balance) Cr. balance)
Unadjusted balance P49,600 P44,00
Add (deduct) adjustments:
Collection of branch A/R ( 800)
In transit 3,200
Purchase of furniture ( 1,200)
Return of excess merchandise ( 1,500)
Remittance ( 500) _______
Adjusted balance P46,400 P46,400

23. b – refer to No. 22 for computations


24. (C)
Sales (P350,000 + P100,000)………………………………………………………….P 450,000
Less: Cost of goods sold:
Purchases (P400,000 + P50,000)……………………………. P 450,000
Less: Inventory, ending……………………………………… 90,000 360,000
Gross profit…………………………………………………………… P 90,000
Less: Expenses –
Salaries and commission…………………………………….. P 70,000
Rent……………………………………………………………… 20,000
Advertising supplies (P10,000 – P6,000)…………………… 4,000
Other expenses………………………………………………. 5,000 99,000
Net Loss……………………………………………………………….. P ( 9,000)

25. a
In adopting the imprest system for the agency working fund, the home office writes a check
to the agency for the amount of the fund. Establishment of the fund is recorded on the home
office books by a debit to the Agency working fund and credit cash. The agency will request
fund replenishment whenever the fund runs low and at the end of each fiscal period. Such a
request is normally accomplished by an itemized and authenticated statement of
disbursements and the paid vouchers. Upon sending the agency a check in replenishment of
the fund, the home office debits expense or other accounts for which disbursements from the
fund were reported and credits cash.

26. d
Normally, transactions of the agency are recorded in the books of the home office separately
identified with the appropriate agency.

Theories
1. decentralized 11. False 21. False 31. E 41. A
2. Home Office Current 12. False 22. True 32. B 42. C
3. Branch Income 13. False 23. True 33. c 43. B
4. Home Office 14. True 24. True 34. d 44. D
5. intracompany 15. True 25. False 35. A 45. D
6. True 16. False 26. C 36. C 46. C
7. True 17. True 27. A 37. A 47. B
8. False 18. False 28. A 38. B 48. B
9. False 19. True 29. D 39. B 49. C
10, True 20. True 30. A 40. B 50. C
51. C
52. D
Chapter 13
Problem I
1.
Home Office Books Branch Books
Branch Current 55,000 Shipm from Home Office 55,000
Shipments to Branch 50,000 Home Office Current 55,000
Unrealized Int Inv. Profit 5,000

Billed price P55,000 / 110%


Cost 50,000
Allowance for overvaluation of branch inventory/ _______
Unrealized Intercompany Inventory Profit/Deferred Profit P 5,000
2.
Sales......................................................................................................................................
P140,000
Cost of goods sold:
Merchandise inventory, September 1................................................ P 35,200
Purchases.............................................................................................. 24,000
Shipments from home office............................................................... 55,000
Merchandise available for sale.......................................................... P 114,200
Less: Merchandise Inventory, September 30..................................... 30,000
Cost of goods sold.......................................................................................................
84,200
Gross profit............................................................................................................................P
55,800
Operating expenses:
Selling expenses……………………………………..................................P 8,000
General expenses…………………......................................................... 12,000
Total operating expenses..........................................................................................
20,000
Unadjusted branch net income...................................................................................... P
15,800
3. Results of Branch Operations:
a. Branch Net Income/Loss from its own operations:
Branch Current………………........................................................................... 15,800
Branch Income Summary...................................................................
15,800
b. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch
Inventory/ Unrealized Intercompany Inventory Profit:
Unrealized Intercompany Inventory Profit.................................................... 4,600
Branch Income Summary..................................................................
4,600
Unrealized Profit
Cost (Billing Price Minus
Billing Price (Billing/1.10) Cost)
Inventory, 9/1 *P 17,600 P 16,000 P 1,600
Shipments during December __55,000 __50,000 __ 5,000
Available for Sale (before adjustment) P 72,600 P 66,000 P 6,600
Less: Inventory, 9/30 (after adjustment) **22,000 __20,000 __2,000
Reduction in unrealized profit account- adjustment
to branch profit for overstated of cost of goods sold
(adjustment) P 50,600 P 46,000 ***P 4,600
* P35,200 x 50% = P17,600
** P30,000 – P8,000
***or, P50,600 x 10/110 = P4,125; Decrease in Unrealized Intercompany Inventory
Profit:
Therefore, the True/Real/Adjusted Branch Net Income or Branch Net Income in so far
as HO is concerned amounted to:
Unadjusted branch net income...............................................................................P15,800
Add: Allowance for Overvaluation of CGS…………………………………………….
4,600
Adjusted Branch Net
Income……………………………………………………………..P20,400
Problem II
Books of Home Office
Correcting entries:
A. Sales............................................................................................................... 42,000
Shipments to Branch................................................................ …………
35,000
Unrealized Intercompany Inventory Profit........................................... 7,000
Cost of merchandise shipped t branch: P42,000/1.20= P35,000.
Entry Made Correct/Should be Entry
Branch Current…………… 42,000 Branch Current……….. 42,000
Sales…………………… 42,000 Shipments to Branch 35,000
Unrealized Int. Inv Pr. 7,000
B. Shipments to Branch...................................................................................... 625
Unrealized Intercompany Inventory Profit................................................... 125
Sales Returns...........................................................................................
750
Cost of merchandise returned by branch: P750/1.20= P625.
Entry Made Correct/Should be Entry
Sales Returns……………… 750 Shipments to Branch………. 625
Branch Current……… 750 Unrealized Int. Inv Profit…… 125
Branch Current…………. 750
Results of Branch Operations:
A. Branch Net Income/Loss from its own operations:
Branch Income Summary............................................................................... 2,600
Branch Current…................................................................................
2,600
B. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch
Inventory/ Unrealized Intercompany Inventory Profit:
Unrealized Intercompany Inventory Profit.................................................... 4,125
Branch Income Summary..................................................................
4,125
Unrealized Profit
Cost (Billing Price Minus
Billing Price (Billing/1.20) Cost)
Inventory, December 1 P 0 P 0 P 0
Shipments during December 42,000 35,000 7,000
Less: Returns _____750 ____625 ____125
Available for Sale (before adjustment) P 41,250 P 34,375 P 6,875
Less: Inventory, Dec. 31 (after adjustment) 16,500 13,750 __2,750
Reduction in unrealized profit account- adjustment
to branch profit for overstated of cost of goods sold
(adjustment) P 24,750 P 20,625 *P 4,125
*or, P24,750 x 20/120 = P4,125;
Decrease in Unrealized Intercompany Inventory Profit:
Balance prior to adjustment, 12/31, P7,000 – P125................... P6,875
Balance required in account, 12/31,P16,500 – (P16,500/1.20).. 2,750
Decrease in Allowance................................................................. P4,125
Branch Income Summary (P4,125 – P2,600)....................................................1,525
Income Summary....................................................................................
1,525
Therefore, the Real/True/Adjusted Branch Net Income/Branch Net Income in so far as HO is
concerned, amounted to P1,525, computed as follows:
Branch net loss as reported/unadjusted……………………………………………………(P2,600)
Add: Overvaluation of branch inventory/Realized profit from branch sales……….. 4,125
Real/True/Adjusted Branch Net Income or Branch NI in so far as HO is concerned P1,525

Problem III
a. Unrealized Intercompany Inventory Profit has a credit balance of P9,450 before adjustment on
December 31, calculated as follows:
Unrealized Profit
Cost (Billing Price Minus
Billing Price (Billing/1.35) Cost)
Inventory, December 1 P 16,200 P 12,000 P 4,200
Shipments during December __20,250 _ 15,000 __ 5,250
Available for Sale (before adjustment) P 36,450 P 35,625 P 9,450
Less: Inventory, Dec. 31 (after adjustment) __18,900 _14,000 __4,900
Reduction in unrealized profit account- adjustment
to branch profit for overstated of cost of goods sold
(adjustment) P 17,550 P 21,625 *P 4,550
* or, P17,550 x 35/135 = P4,550

b. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/


Unrealized Intercompany Inventory Profit (refer to “a” for computation):
Unrealized Intercompany Inventory Profit.................................................... 4,550
Branch Income Summary..................................................................
4,550
c.
Home Office Books Branch Books
Shipments to Branch 400 Home Office Current 540
Unrealized Int Inv. Pr 140 Shipments to Branch 540
Branch Current 540
Cost of merchandise returned: P540/1.35, or P400.

Problem IV
1. The branch office inventory as of December 1 considered of:
Shipments from Home Office (see below)............................................................. P 12,000**
Purchases from outsiders (balance of inventory).................................................. 3,000
Total inventory........................................................................................................... P 15,000

Goods acquired from home office and included in branch inventory at billed price are
calculated as follows:
Unrealized Profit
Cost (Billing Price Minus
Billing Price (Billing/1.20) Cost)
Inventory, December 1 **P 12,000 *P 10,000 P 2,000
Shipments during December __9,600 _ 8,000 __ 1,600
Available for Sale (before adjustment) P 21,600 P 18,000 P 3,600
Less: Inventory, Dec. 31 (after adjustment) __8,400 __7,000 __1,400
Reduction in unrealized profit account- adjustment
to branch profit for overstated of cost of goods sold
(adjustment) P 13,200 P 11,000 ***P 2,200
*P2,000/20% = P10,000; ***P13,200 x 20/120 = P2,200

2. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/


Unrealized Intercompany Inventory Profit (refer to “a” for computation):
Unrealized Intercompany Inventory Profit......................................... 2,200
Branch Income Summary.......................................................... 2,200

Problems V
(1) Individual Statements
SPENCER CO.
Balance Sheet for Branch
December 31,20x4
Assets
Liabilities____________________
Cash..................................................... P 2,650 Accounts
payable................................... P 4,200
Accounts receivable........................ 12,850 Accrued expenses...................................
105
Merchandise inventory..................... 14,600 Home office...............................................
29,239
Store supplies...................................... 300
Prepaid expenses............................... 120
Furniture and fixtures.............. P 3,600
Less: Accumulated
depreciation.............. 576 3,024
________
Total assets....................................... P 33,544 Total
liabilities............................................ P 33,544

SPENCER CO.
Income Statement for Branch
For Month Ended December 31, 20x4
Sales........................................................................................................................................... P
20,000
Cost of goods sold:
Merchandise inventory, December 1................................................ P 14,400
Purchases.............................................................................................. 4,100
Shipments from home office............................................................... 10,200
Merchandise available for sale.......................................................... P 28,700
Less: Merchandise Inventory, December 31..................................... 14,600
Cost of goods sold.......................................................................................................
14,100
Gross profit................................................................................................................................. P
5,900
Operating expenses:
Advertising expense............................................................................. P 2,800
Salaries and commissions expense..................................................... 2,350
Store supplies expense......................................................................... 280
Miscellaneous selling expense............................................................ 1,050
Rent expense........................................................................................ 1,500
Depreciation expense – furniture and fixtures.................................. 36
Miscellaneous general expense......................................................... 905
Total operating expenses..........................................................................................
8,921
Net loss...................................................................................................................................... P
3,021

SPENCER CO.
Balance Sheet for Home Office
December 31, 20x4
Assets Liabilities and Stockholder’s
Equity_______
Cash..................................................... P10,350 Liabilities
Cash in transit..................................... 1,500 Accounts payable................ P 35,400
Accounts receivable........................ 26,200 Accrued expenses............... 260
P 35,660
Merchandise inventory..................... 24,200 Stockholders’ Equity
Store supplies...................................... 380 Capital Stock......................... P 65,000
Prepaid expenses............................... 350 Less deficit..............................
4,476 60,524
Furniture and fixtures.............. P 8,500
Less: Accumulated
depreciation.............. 2, 585 5,915
Branch..................................... P29,239
Less: Unrealized intercompany
inventory profit............ 1,950 27,289 Total liabilities and
________
Total assets........................................ P 96,184 stockholder’s equity...............................
P 96,184

SPENCER CO.
Income Statement for Home Office
For Month Ended December 31, 20x4
Sales........................................................................................................................................... P
44,850
Cost of goods sold:
Merchandise inventory, December 1................................................ P 31,500
Purchases.............................................................................................. 27,600
Merchandise available for sale.......................................................... P 59,100
Less: Shipments to branch................................................................... 8,500
Merchandise available for own sales................................................ P 50,600
Less: Merchandise Inventory, December 31..................................... 24,200
Cost of goods sold..........................................................................................
26,400
Gross profit................................................................................................................................. P
18,450
Operating expenses:
Advertising expense............................................................................. P 2,850
Salaries and commissions expense..................................................... 4,250
Store supplies expense......................................................................... 560
Miscellaneous selling expense............................................................ 1,850
Rent expense........................................................................................ 2,700
Depreciation expense – furniture and fixtures.................................. 85
Miscellaneous general expense......................................................... 2,510
Total operating expenses............................................................................. 14,805
Net income from own operations......................................................................................... P
3,645
Less: Branch net loss................................................................................................................
1,271
Total income............................................................................................................................ P
2,374

2. Refer to Word Document Worksheet


3, Combined Statements
SPENCER CO.
Combined Balance Sheet for Home Office and Branch
December 31, 20x4

Assets Liabilities and Stockholders’ Equity

Cash ………………………………. P 14,500 Liabilities


Accounts Receivable ………… 39,050 Accounts Payable ……….. P39,600
Merchandise Inv ………………. 36,850 Accrued Expenses ………. 365 P
39,965
Store Supplies ………………….. 680 Stockholders’ Equity
Prepaid Expenses …………….. 470 Capital Stock ……………… P65,000
Furniture & Fixtures ……… P12,100 Less deficit …………………. 4,476
60,524
Less accumulated
Depreciation …... 3,161 8,939

Total assets ……………………… P100,489 Total liabilities and SHEquity P100,489

SPENCER CO.
Combined Income Statement for Home Office and Branch
For Month Ended December 31, 20x4

Sales ………………………………………………………………………………………………………… P64,850


Cost of goods sold:
Merchandise Inventory, December 1 …………………………………… P43,900
Purchases ……………………………………………………………………… 31,700
Merchandise available for sale …………………………………………… P75,600
Less merchandise inventory, December 31 ……………………………. 36,850
Cost of goods sold ………………………………………………………….. 38,750
Gross profit ……………………………………………………………………………… P26,100
Operating Expenses:
Advertising Expense ………………………………………………………… P 5,650
Salaries and Commissions expense ……………………………………… 6,600
Store supplies expense …………………………………………………….. 840
Miscellaneous selling expense …………………………………………… 2,900
Rent expense ………………………………………………………………… 4,200
Depreciation Expense – F&F ………………………………………………. 121
Miscellaneous general expense …………………………………………. 3,415
Total operating expense ………………………………………………………………………. 23,726
Net Income ………………………………………………………………………………………………… P 2,374

4. Adjusting and Closing Entries


(a) Branch Books
Dec 31 Income Summary …………………………………………….. 14,400
Merchandise Inventory …………………………….. 14,400

31 Merchandise Inventory ……………………………………… 14,600


Income Summary ……………………………………. 14,600

31 Store Supplies Expense ………………………………………. 280


Store Supplies ………………………………………… 280
Store supplies used: P580 – P300, or P280

Dec. 31 Prepaid Expenses ………………………………………………… 120


Miscellaneous General Expense ……………………. 120

31 Miscellaneous General Expense ……………………………… 105


Accrued Expenses …………………………………….. 105

31 Depreciation Expense – F&F ………………………………….. 36


Accumulated Depreciation ………………………… 36
Depreciation: 1% of P3,600

31 Miscellaneous General Expense …………………………….. 220


Home Office Current………………………………… 220

31 Sales ……………………………………………………………… 20,000


Income Summary ……………………………………. 20,000

31 Income Summary ……………………………………………… 22,221


Purchases ……………………………………………… 4,100
Shipments from Home Office ……………………… 10,200
Advertising Expense …………………………………. 2,800
Salaries and Commissions Expense ………………. 2,350
Store Supplies Expense ……………………………… 280
Miscellaneous Selling Expense …………………….. 1,050
Rent Expense …………………………………………. 1,500
Depreciation Expense – F&F ………………………. 36
Miscellaneous General Expense …………………. 905

31 Home Office Current………….………………………………. 3,021


Income Summary …………………………………….. 3,021

(b) Home Office Books

Dec 31 Income Summary ………………………………………………. 31,500


Merchandise Inventory ………………………………. 31,500

31 Merchandise Inventory ………………………………………... 24,200


Income Summary ……………………………………… 24,200

31 Store Supplies Expense …………………………………………. 560


Store Supplies …………………………………………… 560
Store supplies used: P940 – P380, or : 560

31 Prepaid Expense ………………………………………………… 350


Miscellaneous General Expense …………………… 350

31 Miscellaneous General Expense …………………………….. 260


Accrued Expenses ……………………………………. 260

31 Depreciation Expense ………………………………………….. 85


Accumulated Depreciation – F&F …………………. 85
Depreciation: 1% of P8,500, or P85
31 Cash in Transit …………………………………………………. 1,500
Branch Current………………………………………… 1,500
31 Sales …………………………………………………………… 44,850
Shipments to branch ………………………....................... 8,500
Income Summary …………………………………. 53,350
Dec 31 Income Summary ……………………………………………… 42,405
Purchases ……………………………………………… 27,600
Advertising Expense …………………………………. 2,850
Salaries and Commissions Expense ………………. 4,250
Store Supplies Expense ……………………………… 560
Miscellaneous Selling Expense …………………….. 1,850
Rent Expense …………………………………………. 2,700
Depreciation Expense – F&F ………………………. 85
Miscellaneous General Expense …………………. 2,510

31 Branch Income Summary…………………………………….. 3,021


Branch Current…………………………………………
3,021

31 Unrealized Intercompany Inventory Profit ………………. 1,750


Branch Income Summary………………………… 1,750
Calculation of unrealized profit adjustment:
Balance of unrealized profit account,
December 31 ……………………….. P3,700
Inventory merchandise received from
Home office at billed price on
December 31, P11,700
Inventory at cost: P11,700/ 1.20, or P9,750
Balance of unrealized profit account on
December 31, P11,700 – P9,750 .... 1,950
Required decreased in unrealized profit
Adjustment to branch income for
Overstatement of cost of goods
Sold …………………………………….. P1,750

31 Income Summary …………………………………………… 1,271


Branch Income Summary……………………. 1,271

31 Income Summary …………………………………………… 2,374


Retained Earnings …………………………………. 2,374

Problem VI
1.
Branch H. Office
Current Current
Unadjusted balance, 12/31/20x4 P 44,000
P 9,000
Add (Deduct): Adjustments
1 Cash in transit ( 10,000)
2. Merchandise in transit 10,000
3. Branch expenses paid by home office 12,000
4. Cash in transit from home office _______ 3,000
Adjusted balance, 12/31/20x4 P 34,000 P34,000

2. Refer to PDF Copy of the Worsheet

3. Combined Income Statement


Sales [(P350,000 – P105,000) + P150,000)……….......................................................
P395,000
Less: Cost of goods sold [(P220,000 – P84,000) +
(P93,000 + P3,600 – P21,000 – P1,200)]…………………………………….
210,400
Gross profit................................................................................................................... P184,600
Operating expenses (P70,000 + P41,000 + P12,000)................................................ 123,000
Net income................................................................................................................... P 61,600

Problem VII
(1)
PAXTON CO.
Income Statement for Dayton Branch
For Year Ended December 31, 20x5
Sales.............................................................................................................................. P315,000
Cost of goods sold:
Merchandise inventory, January 1, 20x5................................... P 44,500
Shipments from home office...................................................... 252,000
Merchandise available for sale................................................. P296,500
Less: Merchandise Inventory, December 31, 20x5.................. 58,500 238,000
Gross profit................................................................................................................. P 77,000
Operating expenses................................................................................................. 101,500
Net loss....................................................................................................................... P 24,500
PAXTON CO.
Income Statement for Cincinnati Home Office
For Year Ended December 31, 20x5
Sales.............................................................................................................................. P1,060,000
Cost of goods sold:
Merchandise inventory, January 1, 20x5................................... P115,000
Shipments from home office...................................................... 820,000
Merchandise available for sale................................................. P935,000
Less: Shipments to branch.......................................................... 210,000
Merchandise available for own sales....................................... P725,000
Less: Merchandise Inventory, December 31, 20x5.................. 142,500
582,500
Gross profit.................................................................................................................. P477,500
Expenses...................................................................................................................... 382,000
Net income from own operations............................................................................ P 95,500
Add branch net income........................................................................................... 16,650
Total income............................................................................................................... P112,150

(2)
PAXTON CO.
Combined Income Statement for Home Office and Branch
For Year Ended December 31, 20x5
Sales.............................................................................................................................. P1,375,000
Cost of goods sold:
Merchandise inventory, January 1, 20x5...................................P 150,600
Purchases...................................................................................... 820,000
Merchandise available for sale................................................. P970,600
Less: Merchandise Inventory, December 31, 20x5.................. 191,250
779,350
Gross profit.................................................................................................................... P595,650
Operating expenses.................................................................................................... 483,500
Net income................................................................................................................... P112,150

(3) Merchandise Inventory, December 31................................................................ 58,500


Sales.......................................................................................................................... 315,000
Income Summary............................................................................................
373,500

Income Summary......................................................................................................... 398,000


Merchandise Inventory, January 1................................................................
44,500
Shipments from Home Office.........................................................................
252,000
Operating expenses........................................................................................
101,500
Home Office............................................................................................................... 24,500
Income Summary..........................................................................................
24,500

(4) Branch Income Summary........................................................................................ 24,500


Branch Current.....................................................................................................
24,500

Unrealized Intercompany Inventory Profit............................................................... 41,150


Branch Income Summary....................................................................................
41,150
Calculation of unrealized profit adjustment:
Branch inventory, January 1, acquired from home office
at billed price...................................................................................... P 44,500
Less: Cost of inventory (P44,500/1.25)......................................................... 35,600
Unrealized Intercompany Inventory Profit Jan. 1....................................... P 8,900
Add: Increase in unrealized profit for shipments
made during year, billed price of goods,
P252,000, cost of goods, P210,000.................................................... 42,000
P 50,900

Deduct balance to remain in unrealized profit account:


Branch inventory, December 31,
acquired from home office....................................... P 58,500
Less: Cost of inventory to home office,
P58,500/1.20................................................................ 48,750 9,750
Reduction in unrealized profit account- adjustment to
branch income for overstatement of cost of
goods sold.................................................................. 41,150

Branch Income Summary........................................................................................... 16,650


Income Summary............................................................................................
16,650

Merchandise Inventory, December 31...................................................................... 142,500


Sales............................................................................................................................... 1,060,000
Shipments to Branch.................................................................................................... 210,000
Income Summary.............................................................................................
1,412,500

Income Summary......................................................................................................... 1,317,000


Merchandise Inventory, January 1................................................................
115,000
Purchases.........................................................................................................
820,000
Expenses...........................................................................................................
382,000

Income Summary.......................................................................................................... 112,150


Retained Earnings............................................................................................
112,150

Problem VIII
(1)
RUGGLES CO.
Income Statement for Branch
For Year Ended December 31, 20x4
Sales................................................................................................................................ P 78,500
Cost of goods sold:
Merchandise inventory, January 1, 20x4......................................... P 32,000
Shipments from home office........................................... P 40,000
Purchases from outsiders................................................. 20,000 60,000
Merchandise available for sale....................................................... P 92,000
Less: Merchandise Inventory, December 31, 20x4........................ 31,500
Cost of goods sold............................................................................. 60,500
Gross profit.................................................................................................................... P 18,000
Operating expenses.................................................................................................... 12,500
Net income................................................................................................................... P 5,500

RUGGLES CO.
Income Statement for Home Office
For Year Ended December 31, 20x4
Sales.............................................................................................................................. P 256,000
Cost of goods sold:
Merchandise inventory, January 1, 20x4................................... P 80,000
Purchases...................................................................................... 210,000
Merchandise available for sale................................................. P 290,000
Less: Shipments to branch.......................................................... 30,000
Merchandise available for own sales....................................... P 260,000
Less: Merchandise Inventory, December 31, 20x4.................. 55,000
Cost of goods sold............................................................................. 205,000
Gross profit................................................................................................................... P 51,000
Operating Expenses.................................................................................................... 60,000
Net loss from own operations..................................................................................... P ( 9,000)
Add: Adjusted branch net income............................................................................. 13,500
Combine net income.................................................................................................... P 4,500

(2)
RUGGLES CO.
Combined Income Statement for Home Office and Branch
For Year Ended December 31, 20x4
Sales.............................................................................................................................. P 334,500
Cost of goods sold:
Merchandise inventory, January 1, 20x4................................... P 107,500
Purchases...................................................................................... 230,000
Merchandise available for sale.................................................. P 337,500
Less: Merchandise Inventory, December 31, 20x4................... 80,000
Cost of goods sold............................................................................. 257,500
Gross profit.................................................................................................................... P 77,000
Operating expenses.................................................................................................... 72,500
Net income................................................................................................................... P 4,500

(3) Merchandise Inventory......................................................................................... 31,500


Sales.......................................................................................................................... 78,500
Income Summary............................................................................................
110,000

Income Summary......................................................................................................... 104,500


Merchandise Inventory...................................................................................
32,000
Shipments from Home Office.........................................................................
40,000
Purchases.........................................................................................................
20,000
Expenses...........................................................................................................
12,500

Income Summary......................................................................................................... 5,500


Home Office.....................................................................................................
5,500

(4) Branch...................................................................................................................... 5,500


Branch Income................................................................................................
5,500

Unrealized Intercompany Inventory Profit............................................................... 8,000


Branch Income.............................................................................................. 8,000

Calculation of unrealized profit adjustment:


Branch inventory, January 1, acquired from home office
at billed price.................................................................................... P 24,500
Less: Cost of inventory (P24,500/1.225).................................................... 20,000
Unrealized Intercompany Inventory Profit Jan. 1................................... P 4,500
Add: Increase in unrealized profit for shipments
made during year, billed price of goods,
P40,000, cost of goods, P30,000.................................................... 10,000
P 14,500
Deduct balance to remain in unrealized profit account:
Branch inventory, December 31,
acquired from home office....................................... P 26,000
Less: Cost of inventory to home office,
P26,000/1.1/3................................................................ 19,500 6,500
Reduction in unrealized profit account- adjustment to branch
income for overstatement of cost of goods sold........................... 8,000
Branch Income............................................................................................................. 13,500
Income Summary............................................................................................
13,500

Merchandise Inventory................................................................................................ 55,000


Sales............................................................................................................................... 256,000
Shipments to Branch.................................................................................................... 30,000
Income Summary.............................................................................................
341,000

Income Summary......................................................................................................... 350,000


Merchandise Inventory...................................................................................
80,000
Purchases.........................................................................................................
210,000
Expenses...........................................................................................................
60,000

Income Summary.......................................................................................................... 4,500


Retained Earnings............................................................................................
4,500

Problem IX
1.
Branch H. Office
Current Current
Unadjusted balance, 12/31/20x4 P 60,000
P 51,500
Add (Deduct): Adjustments
1 Remittance I 1,700)
2. Cash in transit 1,800
3. Shipments in transit 5,800
Adjusted balance, 12/31/20x4 P 57,300 P 57,300

2. Income Statement - Branch


Sales................................................................................................................................ P
140,000
Cost of goods sold:
Merchandise inventory, January 1, 20x4 (P11,550 – P1,000)....... P 10,550
Shipments from home office (P105,000 + P5,000 – P10,000)........ 100,000
Freight-in (P5,500 + P250)…………………………………………….. 5,750
Merchandise available for sale.....................................................P116,300
Less: Merchandise Inventory, December 31, 20x4...................... 14,770
Cost of goods sold.............................................................................
101,530
Gross profit.................................................................................................................... P
38,470
Operating expenses....................................................................................................
24,300
Net income................................................................................................................... P
14,170
Income Statement – Home Office
Sales.............................................................................................................................. P
155,000
Cost of goods sold:
Merchandise inventory, January 1, 20x4................................... P 23,000
Purchases...................................................................................... 190,000
Merchandise available for sale................................................. P 213,000
Less: Shipments to branch.......................................................... 100,000
Merchandise available for own sales....................................... P 113,000
Less: Merchandise Inventory, December 31, 20x4.................. 30,000
Cost of goods sold........................................................................
83,000
Gross profit................................................................................................................... P
72,000
Operating Expenses....................................................................................................
42,000
Net loss from own operations..................................................................................... P
30,000
Add branch net income............................................................................................ 14,170
Combined net income.............................................................................................. P
44,170

3.
Combined Income Statement for Home Office and Branch
For Year Ended December 31, 20x4
Sales.............................................................................................................................. P
295,000
Cost of goods sold:
Merchandise inventory, January 1, 20x4................................... P 33,550
Purchases...................................................................................... 190,000
Freight-in……………………………………………………………… 5,750
Merchandise available for sale.................................................. P 229,300
Less: Merchandise Inventory, December 31, 20x4................... 44,770
Cost of goods sold........................................................................ 184,530
Gross profit.................................................................................................................... P
110,470
Operating expenses.................................................................................................... 66,300
Net income................................................................................................................... P
44,170

Problem X
a. The cost of the merchandise destroyed was P30,000.
Total merchandise acquired from home ofiice, at billed price:
Inventory, January 1...................................................................................... P26,400
Shipments from home office, Jan. 1-17....................................................... 20,000
P46,400

Cost of goods sold, January 1-17, at billed price:


Net sales, P13,000/1.25...................................................................................... 10,400
Merchandise on hand, January 17, at billed price....................................... P36,000
Merchandise on hand, January 17, at cost, P36,000/1.20............................ P30,000

b. Branch Books:
Loss from Fire (or Home Office)............................................................ 36,000
Merchandise Inventory............................................................ 36,000
Home Office Books:
No entry needs to be made on the books of the home office until the end of the fiscal period,
when the branch earnings (including the loss from fire) are recognized and when the balance of
the account Unrealized Intercompany Inventory Profit is adjusted to conform to the branch
ending inventory. If it is desired to recognize the loss from fire on the home office books
immediately, the following entry may be made:
Branch Loss from Fire (or Retained Earnings)...................................... 30,000
Unrealized Intercompany Inventory Profit........................................... 6,000
Branch......................................................................................... 36,000

Problem XI
a. Books of Branch A:
Home Office........................................................................................ 1,500
Cash......................................................................................... 1,500

b. Books of branch B:
Cash...................................................................................................... 1,500
Home Office............................................................................ 1,500

c. Books of Home Office:


Branch B............................................................................................... 1,500
Branch A.................................................................................. 1,500

Problem XII
a. Books of Branch No. 1 :
Home Office ……………………………………………………………. 1,950
Shipments from Home Office…………………………………….. 1,600
Freight In……………………………………………………………… 350

b. Books of branch No. 5:


Shipments from Home Office………………………………………… 1,600
Freight In…………………………………………………………………… 400
Home Office…………………………………………………………. 1,750
Cash…………………………………………………………………… 250

c. Books of the Home Office


Branch No. 5…………………………………………………………….. 1,750
Excess Freight on Inter branch Transfer of Merchandise……….. 200
Branch No. 1………………………………………………………… 1,950

Shipments to Branch No. 1…………………………………………….. 1,600


Shipments to Branch No. 5………………………………………… 1,600
Multiple Choice Problems
1. c - P50,400, billed price x 40/140 = P 14,400

2. b
Ending inventory in the combined income statement:
From Home Office: (P50,000-P6,600) x 100/140 P 31,000
From Outsiders 6,600
P 37,600
3. a
True Branch Net Income
Branch Net Income P 5,000
Add (deduct):
Overvaluation of cost of goods sold/realized profit
from sales made by branch:
Shipments from home office. P 280,000
Less: Ending inventory, at billed
price (P50,000 – P6,600) 43,400
Cost of goods sold from home
office at billed price P 236,600
Multiplied by: Mark-up 40/140 67,600
Unrecorded branch expenses ( 2,500)
True Branch Net Income P 70,100

4. a – P30,000 x (90,000 – 60,000)/90,000

5. a

6. d – (P50,000 – P40,000)/P40,000 = 25% markup on cost

7. c – (P480,000 – P360,000) x (P80,000/P480,000) = P20,000

8. c – P700,000, since the problem stated that the “home office adjusted the intracompany Profit
Deferred account” and the amount of P700,000 is the amount of net income in the adjusted
financial statements of the home office, and therefore it is understood to be combined net
income.

9. b
Reported (unadjusted) branch net income (per branch books) ………………..P 30,000
Branch Income in so far as home office is concerned per home office books. 50,000
Overvaluation of branch cost of goods sold…………………………………………P 20,000

Cost of sales of Home Office…………………………………………………………….P500,000


Cost of sales of Branch…………………………………………………………………… 100,000
Overvaluation of branch cost of sales…………………………………………………( 20,000)
Combined cost of sales…………………………………………………………………...P580,000

10. c – the amount of net income as reported by Home office is considered the combined net
income.

11. a
True Branch Net Income P156,000
Less: branch Net Income as reported by the branch 60,000
Overvaluation of CGS P 96,000
Less: Cost of goods sold from home office at BP
Inventory, December 1 P 70,000
Shipment from HO 350,000
COGAS P 420,000
Less: Inventory, December 31 84,000 336,000
CGS from home office, at cost P 240,000
Billing Price: P336,000 / P240,000 = 140%.

12. b – Allowance for overvaluation after adjustment / for December 31 inventory: P84,000 x
40/140 = P24,000.

13. b
Net Income as reported by the Branch P 20,000
Less: Rental expense charged by the home office
(P1,000 x 6 months) 6,000
Adjusted NI as reported by the Branch P 14,000
Add: Overvaluation of CGS
Billed Price
MI, beginning 0
SFHO 550,000
COGAS 550,000
Less: MI, ending 75,000
CGS, at BP 475,000
X: Mark-up ratio 25/125 95,000
True/Adjusted/Real Branch Net Income P109,000

14. d
Sales (P537,500 + P300,000)……………………………………………….………. P 837,500
Less: Cost of goods sold
Merchandise inventory, beg. [P50,000 + (P45,000 / 1.20)]P 87,500
Add: Purchases…………………………………………………. 500,000
Cost of Goods Available for Sale…………………………... P 587,500
Less: MI, ending [P70,000 + (P60,000 / 1.20)]………………. 120,000 467,500
Gross profit………………………………………………………………. P 370,000
Less: Expenses (P120,000 + P50,000..………………………………. 170,000
Net Income……………………………………………………………… P 200,000
15. d
Overvaluation of Cost of Goods Sold:
Unrealized Profit in branch inventory/ before adjustment……………….P 7,200
Less: Allowance of ending branch inventory (P20,000 x 84% =
P16,800 x 20/120…………………………………………………………. 2,800
Overvaluation of Cost of Goods Sold……………………………………. ….P 4,400

Adjusted branch net income:


Sales………………………………………………………………………………………P60,000
Less: Cost of goods sold:
Inventory, January 1, 2003……………………………….P 30,000
Add: Purchases…………………………………………..... 11,000
Shipments from home office…………………….. 19,200
Cost of Goods available for sale……………………… P 60,200
Less: Inventory, December 31, 2003…………………. 20,000 40,200
Gross profit…………………………………………………………………………….. P19,200
Less: Expenses………………………………………………………………………….. 12,000
Unadjusted branch net income…………………………………………………...P 7,800
Add: Overvaluation of Cost of Goods Sold……………………………………. 4,400
Adjusted branch net income……………………………………………………...P 12,000
16. d
Billed Price Cost Allowance
Merchandise Inventory, 12/31/2005 *P 36,000 P 30,000 P 6,000
Shipments 28,800 24,000 4,800
Cost of goods sold P10,800
From Home at billed price: *P6,000 / 20% = P30,000 + P6,000 = P36,000.
From outsiders: P45,000 – P36,000 = P9,000
17. d
Billed Price Cost Allowance
Merch. Inventory, 12/31/20x4 *P12,000 P10,000 P 2,000
Shipments 9,600 8,000 1,600
Cost of Goods Sold P 3,600
*P2,000 / 20% = P10,000 + P2,000 = P12,000.

Merchandise inventory, December 1, 20x4…………………………………P 15,000


Less: Shipments from home office at billed price*………………………… 12,000
Merchandise from outsiders……………………………………………………P 3,000

18. d
Combined Cost of Goods Sold:
Merchandise Inventory, 1/1/2003:
Home Office, cost……………………………………………… P 3,500
Branch: Outsiders, ……………………………...........................P 300
From Home Office (P2,500 – P300)/110%................. 2,000 2,300 P 5,800
Add Purchases (P240,000 + P11,000)…………………………….. 251,000
COGAS………………………………………………………………… P256,800
Less: Merchandise Inventory, 12/31/2003
Home Office, cost………………………………………………. P 3,000
Branch: Outsiders………………………………………………. P 150
From Home Office (P1,800 – P150)/110%................ 1,500 1,650 4,650
Cost of Goods Sold………………………………………………… P252,150
19. d
100% 60% 40%
Billed Price Cost Allowance
Merchandise inventory, 1/1/x4 32,000
Shipments *60,000 36,000 *24,000
Cost of goods available for sale 56,000
Less: MI, 3/31/x4 (25,000 x 40%) 10,000
Overvaluation of CGS** 46,000
*36,000 cost / 60% = 60,000 x 40% = 24,000. (Note: Markup is based on billed price)
**Realized Profit from Branch Sales

20. d
Billed Cost Allowance
Price
Merchandise inventory, 8/1/x4 60,000
Shipments (400,000 x 25%) 400,000 *100,,000
Cost of goods available for sale 160,000
Less: MI, 8/31/x4 (160,000 x 25%) 160,000 40,000
Overvaluation of CGS/RPBSales 120,000
21. b
(1) Sales P 40,000
Less: Cost of goods sold:
Inventory, 1/1/2003 (P4,950 / 110%) P 4,500
Add: Shipments (P22,000 / 110%) 20,000
COGAS P 24,500
Less: Inventory, 12/31/2003 (P6,050 / 110%) 5,500 19,000
Gross profit P 21,000
Less: Expenses _ 13,100
Net income from own operations P 7,900

(2) Combined Cost of Goods Sold:


Merchandise Inventory, 1/1/2003:
of Home Office, cost……………………………………………..P 17,000
of Branch, cost: P4,950 / 110%…………………………………. 4,500 P 21,500
Add Purchases…………………………………………………………. 50,000
COGAS………………………………………………………………….. P 71,500
Less: Merchandise Inventory, 12/31/2003
of Home Office, cost……………………………………………… P 14,000
of Branch, cost: P6,050 /100%………………………………….. 5,500 19,500
Cost of Goods Sold……………………………………………………. P 52,000

22. a - P48,000 / 120% = P40,000

23. a – P48,000 x 20/120 = P8,000 (note: adjusted allowance refers to the allowance related to the
ending inventory, so, the allowance related to the CGS, which is P10,00 in this case is
considered to be the adjustments in the books of Home Office to determine the adjusted
branch net income)
120% 100% 20%
Billed Price Cost Allowance
Merchandise inventory, 1/1/x4 0
Shipments 108,000
Cost of goods available for sale 108,000
Less: MI, 12/31/x4 (P60,000 x 80%) 48,000
Overvaluation of CGS (60,000 x 20/120) 60,000 10,000*

24. b
Sales (P148,000 + P44,000) P192,000
Less: Cost of Sales
Inventory, 1/1/20x4 P 0
Purchases 52,000
Shipments from home office 108,000
Cost of goods available for sale P 160,000
Less: Inventory, 12/31/20x4 60,000 100,000
Gross profit P 92,000
Less: Expenses (P76,000 + P24,000) 100,000
Net income, unadjusted P( 8,000)
Add: Overvaluation of CGS 10,000
Adjusted branch net income P 2,000

25. c
125% 100% 25%
Billed Price Cost Allowance
Merchandise inventory, 1/1/x4 40,000
Shipments 250,000
Cost of goods available for sale 290,000
Less: MI, 12/31/x4 (P60,000 x 80%) 60,000
Overvaluation of CGS(230,000x 25/125) 230,000 46,000*

26. b – P326,000
Sales (P600,000 + P300,000) ………………………………………………….. P 900,000
Less: Cost of goods sold
Merchandise inventory, beg.
[P100,000 + (P40,000/1.25)] ………………………. … P 132,000
Add: Purchases…………………………………… 350,000
Cost of goods available for sale………………… P 482,000
Less: MI, ending
[P30,000 + (P60,000/1.25)] ………………………… 78,000 404,000
Gross profit……………………………………………………… P 496,000
Less: Expenses (P120,000 + P50,000)………………………. _ 170,000
Net Income …………………………………………………. P 326,000

27. b
Sales (P537,500 + P300,000) ………………………………………………… P 837,500
Less: Cost of goods sold
Merchandise inventory, beg.
[P50,000 + (P60,000/1.20)]…………………………….. P 87,500
Add: Purchases ……………………………………. 500,000
Cost of goods available for sale………………… P587,500
Less: MI, ending
[P70,000 + (P60,000/1.20)] …………………………. 120,000 467,500
Gross profit…………………………………………………….. P 370,000
Less: Expenses (P120,000 + P50,000)………………………. _ 170,000
Net Income …………………………………………………… P 200,000

28. c
Sales (P120,000 + P60,000)……………………………………… P 180,000
Less: Cost of goods sold:
Merchandise inventory, beg. [P40,000 + P6,000 +
(P24,000 / 1.2)]……………………………… P 66,000
Add: Purchases (P70,000 + P11,000)………………… 81,000
Cost of Goods Available for Sale……………………P 147,000
Less: MI, ending [P40,000 + P3,200 + (P16,800 / 1.20)] 57,200 89,800
Gross profit……………………………………………………… P 90,200
Less: Expenses (P28,000 + P12,000)………………………… 40,000
Net Income……………………………………………………. P 50,200

29. d
Sales (P100,000 – P33,000 + P50,000)…………………………………… P 117,000
Less: Cost of goods sold:
Inventory, beg. [P15,000 + (P5,500/110%) or (P5,500 – P500)] P20,000
Add: Purchases (P50,000 + P7,000)……………………………… 57,000
COGAS……………………………………………………………….. P77,000
Less: Inventory, end [P11,000 + P1,050 +
(P6,000- P1,050)/110%]……………………………………… 16,550 60,450
Gross profit…………………………………………………………………… P 56,550
Less: Expenses (P20,000 + P6,000 + P5,000)……………………………… 31,000
Combined Net income……………………………………………………. P 25,550

30. c
Sales ……………………………………………………………………... P155,000
Less: Cost of Sales
Inventory, 1/1/10…………………………………………….. P 23,000
Purchases …………………………………………………….. 190,000
Cost of goods available for sale ……………………….. P213,000
Less: Shipment/Sales to Branch,
at cost (P110,000/110%)………………………………………… 100,000
Cost of goods available for HO
Sale………………………………………………….. P113,000
Less: Inventory, 12/31/10 ………………………………..... 30,000 83,000

Gross profit ………………………………………………………………... P 72,000


Less: Expenses ……………………………………………………………. 52,000
Net income – home office ……………………………………………. P 20,000

31. a
Sales …………………………………………………………………….... P140,000
Less: Cost of Sales
Inventory, 1/1/x4……………………………………………… P 11,550
Purchases ……………………………………………………. 105,000
Freight-in ……………………………………………………… 5,500
Shipment in transit (P5,000+P250) ………………………. 5,250
Cost of goods available for sale …………………………. P127,300
Less: Inventory, 12/31/x4
(P10,400 + P520 + P5,250) ………………………………………. 16,170 111,130
Gross profit. ……………………………………………………………. P 28,870
Less: Expenses ………………………………………………………… 28,000
Net income per branch books/unadjusted ……………………… P 870
Add: Overvaluation of CGS* ……………………………………….. 9,600
Net Income of Davao Branch, adjusted …………………………. P 10,470

BP Cost Allowance
MI. 1/1/20x4 1,000
Shipments 110,000 100,000 **10,000
Available for sale 11,000
-: MI, 12/31/x4 ***15,400 ****1,400
CGS 9,600
**110,000 x 10/110
***10,400 + 5,000, in transit
****15,400 x 10/110

32. a
Inventory, 1/1 at billed price…………………………………….. P165,000
Add: Shipments at billed price………………………………….. 110,000
Cost of goods available for sale at billed price ……………… P275,000
Less: CGS at BP:
Sales……………………………………………………………… P169,000
Less: Sales returns and allowances ………………….. 3,750
Sales price of merchandise
acquired from outsiders
(P7,500 / 120%)…………………………… 9,000
Net Sales of merchandise acquired from
home office ……………………………………….. P156,250
x: Intercompany cost ratio ………………………………... 100/125 125,000
Inventory, 8/1/2008 at billed price……………………………… P150,000
x: Cost ratio …………………………………………………………….. 100/125
Merchandise inventory at cost destroyed by fire ………………… P120,000

33. d
Freight actually paid by:
Home Office……………………………………………………………………P 500
Branch P………………………………………………………………………… 700
Total………………………………………………………………………………P 1,200
Less: Freight that should be recorded…………………………………………….. 800
Excess freight……………………………………………………………………………P 400

34. d – in arriving at the cost of merchandise inventory at the end of the period, freight charges
are properly recognized as a part of the cost. But a branch should not be charged with
excessive freight charges when, because of indirect routing, excessive costs are incurred.
Under such circumstances, the branch acquiring the goods should be charged for no more
than the normal freight from the usual shipping point. The office directing the inter-branch
transfers are responsible for the excessive cost should absorb the excess as an expense
because it represents management mistakes (or inefficiencies.)

35. c
Inventory of the Branch:
Shipments from home office at billed price.........................................P 37,700
X: Ending inventory %................................................................................ 60%
Ending inventory at billed price……………………………………...……P 22,620
Add: Freight (P1,300 x 60%)………………………………………………...... 780
P 23,400
Or, P39,000 x 60% = P23,400
36. b
Inventory in the published balance sheet, at cost
Shipments at cost…………………………………..........................................P 32,500
X: Ending inventory %.................................................................................... 60%
Ending inventory at billed price……………………………………………….P19,500
Add: Freight (P1,300 x 60%)………………………………………….......…….. 780
P 20,280

37. c
Home Office Books Davao Branch Baguio Branch
Davao Branch…39,000 SFHO…………….37,700
STB, cost……. 32,500 Freight-in………. 1,300
Unrealized profit 5,200 HOC………….. 39,000
Cash (freight)…. 1,300
BC – Baguio……19,630 HOC……………….20,150 SFHO………18,850
Excess freight… 520 SFHO(50%)… 18,850 Freight-in.. 780
BC-Davao……. 20,150 Freight-in (50%) 650 HOC……... 19,630
Cash…………...... 650

38. c – (P300,000 x ¼ = P75,000, ending inventory x (P300,000 – P250,000)/P300,000 = P12,500


39. d
40. d
41. b – refer to No. 21
42. b – refer to No. 21
43. c – refer to No. 21
44. c
45. d

Theories
1. True 6. False 11. False 16. True 21. D
2. False 7. False 12. True 17. True 22. A
3. True 8. False 13. False 18. True 23. d
4. True 9. True 14. True 19. False 24. d
5. False 10. True 15. False 20. d 25. a
26. c

Chapter 14
Problem I
1.(in millions)
Acquisition of assets and liabilities:
Cash 90
Receivables 190
Inventories 7,000
Plant & equipment 40,000
Trademarks 4,000
Brand names 5,000
Secret formulas 7,000
Goodwill 6,120
Current liabilities 400
Long-term liabilities 47,000
Cash 18,000
Common stock, P2 par 100
APIC (P4,000 – P100) 3,900

Consideration transferred:
Cash 18,000,000
Common stock 4,000,000
Consideration transferred 22,000,000
Less: MV of Assets and Liabilities Acquired:
Cash 90,000
Receivables 190,000
Inventories 7,000,000
Plant & equipment, net 40,000,000
Trademarks 4,000,000
Brand names 5,000,000
Secret formulas 7,000,000
Current liabilities ( 400,000)
Long-term liabilities (47,000,000) 15,880,000
Positive excess: Goodwill 6,120,000

Acquisition expenses
Acquisition/merger expenses 1,100
Cash 1,100

Costs to Issue and Register Stocks


APIC 500
Cash 500

2.(in millions)
Cash 90
Receivables 190
Inventories 7,000
Plant & equipment 40,000
Trademarks 4,000
Brand names 5,000
Secret formulas 7,000
Noncompetition agreements 10,000
Current liabilities 400
Long-term liabilities 47,000
Cash 18,000
Common stock, P2 par 100
APIC (P4,000 – P100) 3,900
Gain on acquisition 3,880

Consideration transferred:
Cash 18,000,000
Common stock 4,000,000
Consideration transferred 22,000,000
Less: MV of Assets and Liabilities
Acquired:
Cash 90,000
Receivables 190,000
Inventories 7,000,000
Plant & equipment, net 40,000,000
Trademarks 4,000,000
Brand names 5,000,000
Secret formulas 7,000,000
Noncompetition agreement 10,000,000
Current liabilities ( 400,000)
Long-term liabilities (47,000,000) 25,880,000
Negative excess: Gain on Acquisition ( 3,880,000)

Acquisition expenses
Acquisition/merger expenses 1,100
Cash 1,100

Costs to Issue and Register Stocks


APIC/Share Issue Costs 500
Cash 500

3.
Post-Combination Balance Sheet: (requirement 1)
Assets Liabilities and Stockholders’ Equity
Cash P 5,490,000 Current liabilities P 900,000
Receivables 2,190,000 Long-term liabilities 117,000,000
Inventories 27,000,000
Plant and equipment 139,500,000
Trademarks 9,000,000 Common stock 2,100,000
Brand names 5,000,000 Paid-in capital – par 58,400,000
Secret formulas 7,000,000 Retained earnings* 23,900,000
Goodwill __6,120,,000 Treasury stock ( 1,000,000)
Total P201,300,000 Total P 201,300,000

*25,000,000 – 1,100,000, merger expenses = 23,900,000.

Post-Combination Balance Sheet: (requirement 2)


Assets Liabilities and Stockholders’ Equity
Cash P 5,490,000 Current liabilities P 900,000
Receivables 2,190,000 Long-term liabilities 117,000,000
Inventories 27,000,000
Plant and equipment 139,500,000
Trademarks 9,000,000 Common stock 2,100,000
Brand names 5,000,000 Paid-in capital – par 58,400,000
Secret formulas 7,000,000 Retained earnings* 27,780,000
Noncompetition agreement _10,000,,000 Treasury stock __( 1,000,000)
Total P205,180,000 Total P 205,180,000

*25,000,000 – 1,100,000 + 3,880,000 = 27,780,000

Problem II
1. (in millions)
Cash and receivables 200
Inventories 400
Property, plant & equipment 5,500
Customer contracts 25
In-process R&D 300
Goodwill 2,035
Current liabilities 400
Long-term debt 7,300
Warranty liability 10
Estimated liability for Contigent Cons. 50
Capital stock 700

Note: Read the topic “Items included in Goodwill” in Chapter 14 about “Skilled
(assembled) workforce” (they are not identifiable at the date of acquisition) and “Potential
Contracts” (they are not qualified as assets at the acquisition date).

Consideration transferred:
Shares 700,000,000
Estimated liability for Contigent Cons. _50,000,000
Consideration transferred 750,000,000
Less: MV of Assets and Liabilities
Acquired:
Cash and receivables 200,000,000
Inventories 400,000,000
Property, plant & equipment 5,500,000,000
Customer contracts 25,000,000
In-process R&D 300,000,000
Current liabilities ( 400,000,000)
Long-term debt (7,300,000,000)
Warranty liability ( 10,000,000) (1,285,000,000)
Positive excess: Goodwill 2,035,000,000

Acquisition expenses
Acquisition/merger expenses 150
Cash 150

Costs to Issue and Register Stocks


Share Issue Costs 100
Cash 100

2. (in millions)
Goodwill 1,500
Property, plant & equipment 1,500

Problem III
1.
Current assets 1,500,000
Investments 500,000
Land 6,000,000
Buildings 16,000,000
Equipment 2,000,000
Identifiable intangibles 5,000,000
Goodwill 22,500,000
Current liabilities 1,500,000
Long-term liabilities 12,000,000
Common stock 4,000,000
Additional paid-in capital 36,000,000
Cash 1,100,000

Consideration transferred:
Shares (400,000 x P100) 40,000,000
Less: MV of Assets and Liabilities
Acquired:
Current assets 1,500,000
Investments 500,000
Land 6,000,000
Buildings 16,000,000
Equipment 2,000,000
Identifiable intangibles 5,000,000
Current liabilities ( 1,500,000)
Long-term liabilities (12, 000,000) (17,500,000)
Positive excess: Goodwill 22,500,000

Costs to Issue and Register Stocks


Share Issue 1,100
Costs/APIC
Cash 1,100
2.
Current assets 1,500,000
Investments 500,000
Land 6,000,000
Buildings 16,000,000
Equipment 2,000,000
Identifiable intangibles 5,000,000
Current liabilities 1,500,000
Long-term liabilities 12,000,000
Common stock 1,000,000
Additional paid-in capital 9,000,000
Gain on acquisition 7,500,000

Consideration transferred:
Shares (100,000 x P100) 10,000,000
Less: MV of Assets and Liabilities
Acquired:
Current assets 1,500,000
Investments 500,000
Land 6,000,000
Buildings 16,000,000
Equipment 2,000,000
Identifiable intangibles 5,000,000
Current liabilities ( 1,500,000)
Long-term liabilities (12, 000,000) (17,500,000)
Negative excess: Gain on acquisition ( 7,500,000)

Costs to Issue and Register Stocks


Share Issue 800
Costs/APIC
Cash 800

3.
Current assets 1,500,000
Investments 500,000
Land 6,000,000
Buildings 16,000,00
0
Equipment 2,000,000
Identifiable intangibles 5,000,000
Goodwill 500,000
Current liabilities 1,500,000
Long-term liabilities 12,000,00
0
Estimated liability for Contigent 8,000,000
Cons.
Common stock 1,000,000
Additional paid-in capital 9,000,000

Consideration transferred:
Shares (100,000 x P100) 10,000,000
Estimated liability for Contigent Cons. _8,000,000
Consideration transferred 18,000,000
Less: MV of Assets and Liabilities
Acquired:
Current assets 1,500,000
Investments 500,000
Land 6,000,000
Buildings 16,000,000
Equipment 2,000,000
Identifiable intangibles 5,000,000
Current liabilities ( 1,500,000)
Long-term liabilities (12, 000,000) (17,500,000)
Positive excess: Goodwill 500,000

Costs to Issue and Register Stocks


Share Issue Costs/APIC 800
Cash 800

4.
(a)
Estimated liability for
Contigent 3,000,000
Cons.
Goodwill 500,000
Gain on acquisition 2,500,000

(b)
Estimated liability for
Contigent 3,000,000
Cons.
Gain on reduction in
liability 3,000,000

Problem IV
1. January 1, 20x4
Accounts Receivable (net) 65,000
Inventory 99,000
Land 162,000
Buildings 450,000
Equipment 288,000
Goodwill 54,000
Accounts Payable 83,000
Note Payable 180,000
Cash 720,000
Estimated Liability for Contingent Consideration 135,000

Consideration transferred (P720,000 + P135,000) P855,000


Total fair value of net assets acquired (P1,064,000 - P263,000) 801,000
Goodwill P 54,000

2. January 2, 20x6
Estimated Liability for Contingent Consideration 135,000
Cash 135,000

3. January 2, 20x6
Estimated Liability for Contingent Consideration 135,000
Gain on Contingent Consideration 135,000

Problem V

Current Assets 362,000


Long-term Assets (P1,890,000 + P20,000) + (P98,000 + P5,000) 2,013,000
Goodwill * 395,000
Liabilities 119,000
Long-term Debt 491,000
Common Stock (144,000 P5) 720,000
PIC - par (144,000 x P15 - P5)) 1,440,000

* (144,000 P15) – [P362,000 + P2,013,000 – (P119,000 + P491,000)] = P395,000

Total shares issued (P700,000 / P5) + P20,000 / P5) 144,000


Fair value of stock issued (144,000P15) = P2,160,000

Problem VI

Case A
Consideration transferred P130,000
Less: Fair Value of Net Assets 120,000
Goodwill P 10,000

Case B
Consideration transferred P110,000
Less: Fair Value of Net Assets 90,000
Goodwill P 20,000

Case C
Consideration transferred P15,000
Less: Fair Value of Net Assets 20,000
Gain (P 5,000)

Assets Liabilities Retained


Goodwill Current Assets Long-Lived Assets Earnings
(Gain)
Case A P10,000 P20,000 P130,000 P30,000 0
Case B 20,000 30,000 80,000 20,000 0
Case C 0 20,000 40,000 40,000 5,000

Problem VII
Present value of maturity value, 20 periods @ 6%: 0.3118 x P600,000 = P187,080
Present value of interest annuity, 20 periods @ 6%: 11.46992 x 30,000 = 344,098
Total Present value P531,178
Par value 600,000
Discount on bonds payable P 68,822

Cash 114,000
Accounts Receivable 135,000
Inventory 310,000
Land 315,000
Buildings 54,900
Equipment 39,450
Bond Discount (P40,000 + P68,822) 108,822
Current Liabilities 95,300
Bonds Payable (P300,000 + P600,000) 900,000
Gain on Acquisition of Stalton (ordinary) 81,872

Computation of Excess of Net Assets Received Over Cost


Consideration transferred (P531,178 plus liabilities assumed of P95,300
andP260,000) P886,478
Less: Total fair value of assets received _968,350
Excess of fair value of net assets over cost (P 81,872)

Problem VIII
Acquisition Method—Entry to record acquisition of Sampras
Consideration transferred P300,000
Estimated Liability for contingent Consideration 15,000
Consideration transferred (fair value) 315,000
Fair value of net identifiable assets 282,000
Goodwill P33,000

Receivables 80,000
Inventory 70,000
Buildings 115,000
Equipment 25,000
Customer list 22,000
IPRD 30,000
Goodwill 33,000
Current liabilities 10,000
Long-term liabilities 50,000
Estimated liability for contingent consideration 15,000
Cash 300,000

Acquisition related-expenses 10,000


Cash 10,000

Problem IX
1.
a. The computation of goodwill is as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 30% probability 36,000
Total P 966,000
Less: Fair value of identifiable assets acquired and
liabilities assumed:
Cash P 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Accounts payable ( 72,000)
Other liabilities ( 168,000) 864,000
Positive Excess – Goodwill P
102,000

b. The journal entries by Peter Corporation to record the acquisition is as follows:

Cash 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Goodwill 102,000
Accounts payable 62,000
Other liabilities 168,000
Notes payable 180,000
Estimated Liability for Contingent 36,000
Consideration
Common stock (P10 par x 30,000 shares) 300,000
Paid-in capital in excess of par
[(P25 – P10) x 30,000 shares] 450,000
Acquisition of Saul Company.

Acquisition-related expenses 78,000


Cash 78,000
Acquisition related costs – direct costs.

Paid-in capital in excess of par 32,400


Cash 32,400
Acquisition related costs – costs to issue and
register stocks.

Acquisition-related expenses 27,600


Cash 27,600
Acquisition related costs – indirect costs.
c. The balance sheet of Pure Corporation immediately after the acquisition is as follows:

Pure Corporation
Balance Sheet
December 31, 20x4

Assets
Cash P 162,000
Receivables – net 144,000
Inventories 360,000
Land 348,000
Buildings – net 840,000
Equipment – net 732,000
In-process research and development 60,000
Goodwill 102,000
Total Assets P2,748,000

Liabilities and Stockholders’ Equity


Liabilities
Accounts payable P 288,000
Other liabilities 408,000
Notes payable 180,000
Estimated liability for contingent consideration 36,000
Total Liabilities P 912,000
Stockholders’ Equity
Common stock, P10 par P 1,020,000
Paid-in capital in excess of par1 657,600
Retained earnings2 158,400
Total Stockholders’ Equity P1,836,000
Total Liabilities and Stockholders’ Equity P2,748,000
1
P240,000 + P446,400 – P32,400
2
P264,000 - P78,000 – P27,600
It should be noted that under PFRS 3, in-process R&D is measured and recorded at fair value as an asset on the acquisition date. This
requirement does not extend to R&D in contexts other than business combinations.

2.
a. Assets that have been provisionally recorded as of the acquisition date are retrospectively
adjusted in value during the measurement period for new information that clarifies the
acquisition-date value. The adjustments affect goodwill since the measurement period is
still within one year (i.e., eight months) from the acquisition date. Therefore, the goodwill
to be reported then on the acquisition should be P78,000 (P102,000 – P24,000).
b.
Buildings 24,000
Goodwill 24,000
Adjustment to goodwill due to measurement date.

3.
a. The goodwill to be reported then on the acquisition should be P126,000 (P102,000 +
P24,000).

b. The adjustment is still within the measurement period, the entry to adjust the liability would
be:
Goodwill 24,000
Estimated liability for contingent consideration 24,000
Adjustment to goodwill due to measurement date.

c.
c.1. The goodwill remains at P126,000, since the change of estimate should be done only once
(last August 31, 20x5).

c.2. On November 1, 20x5, the probability value of the contingent consideration amounted to
P48,000, the entry to adjust the liability would be:

Estimated liability for contingent consideration 12,000


Gain on estimated contingent consideration 12,000
Adjustment after measurement date.

In this case, the measurement period ends at the earlier of:


 one year from the acquisition date, or
 the date when the acquirer receives needed information about facts and
circumstances (or learns that the information is unobtainable) to consummate the
acquisition.
c.3.
c.3.1. The goodwill remains at P126,000, since the change of estimate should be done
only once (last August 31, 20x5).
c.3.2. On December 15, 20x5, the entry would be:
Loss on estimated liability contingent 30,000
consideration
Estimated liability for contingent consideration 30,000
Adjustment after measurement date.

c.3.3.
c.3.3.1. P126,000.
c.3.3.2. On January 1, 20x7, Saul’s average income in 20x5 is P270,000 and 20x6 is P260,000,
which means that the target is met, Peter Corporation will make the
following entry:
Estimated liability for contingent consideration 78,000
Loss on estimated contingent consideration 42,000
Cash 120,000
Settlement of contingent consideration.
4.
a.The amount of goodwill on acquisition will be recomputed as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 35% probability x (1/[1 + .04]*) 40,385
Total P 970,385
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Goodwill P 106,385
b. The journal entries by Pure Corporation to record the acquisition is as follows:
Cash 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Goodwill 106,386
Accounts payable 62,000
Other liabilities 168,000
Notes payable 180,000
Estimated Liability for Contingent 40,385
Consideration
Common stock (P10 par x 30,000 shares) 300,000
Paid-in capital in excess of par
[(P25 – P10) x 30,000 shares] 450,000
c.
c.1. Goodwill remains at P106,385.
c.2. Theentry for Pure Corporation on December 31, 20x5 to record such occurrence would
be:
Estimated liability for contingent consideration 40,385
Gain on estimated contingent consideration 40,385
Adjustment after measurement date.

Since the contingent event does not happen, the position taken by PFRS 3 is that the
conditions that prevent the target from being met occurred in a subsequent period and
that Peter had the information to measure the liability at the acquisition date based on
circumstances that existed at that time. Thus the adjustment will flow through income
statement in the subsequent period.

d. The entry by Peter Corporation on January 1, 20x7 for the payment of the contingent
consideration would be:
Estimated liability for contingent consideration 36,000
Loss on estimated contingent consideration 66,000
Cash [(P78,000 + P84,000)/2 – P30,000] x 2 102,000
Settlement of contingent consideration.

5.
a. The amount of goodwill on acquisition will be recomputed as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 30% probability 36,000
Contingent consideration (stock contingency) 18,000
Total P 984,000
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Positive Excess – Goodwill P 120,000

b. The journal entries by Pure Corporation to record the acquisition is as follows:


Cash 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Goodwill 120,000
Accounts payable 72,000
Other liabilities 168,000
Notes payable 180,000
Estimated Liability for Contingent 36,000
Consideration
Paid-in capital for Contingent Consideration
18,000
Common stock (P10 par x 30,000 shares) 300,000
Additional paid-in capital [(P25 – P10) x 30,000 shares] 450,000
Acquisition of Saul Company.

c. PureCorporation will make the following entry for the issuance of 1,200 additional shares:
Paid-in capital for Contingent Consideration 18,000
Common stock (P10 par x 1,200 shares) 12,000
Paid-in capital in excess of par 6,000
Settlement of contingent consideration.

6. On January 1, 20x7, the average income amounted to P132,000 (the contingent event
occurs). Thus, the entry record the occurrence of such event to reassign the P750,000 original
consideration to 36,000 shares (30,000 original shares issued + 6,000 additional shares due to
contingency) would be:
Paid-in capital in excess of par 60,000
Common stock (P10 par x 6,000 shares) 60,000
Settlement of contingent consideration.

7. On January 1, 20x7, the contingent event happens since the fair value per share fall below
P25. Thus, the entry record the occurrence of such event to reassign the P750,000 original
consideration to 37,500 shares (30,000 original shares issued + 7,500* additional shares due to
contingency) would be:
Paid-in capital in excess of par 75,000
Common stock (P10 par x 7,500 shares) 75,000
Settlement of contingent consideration.
* Deficiency: (P25 – P20) x 25,000 shares issued to acquire...P150,000
Divide by fair value per share on January 1, 20x7………….P 20
Added number of shares to issue………………………………. 7,500
8. The amount of goodwill on acquisition will be recomputed as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (stock contingency):
[(P750,000 – P510,000) x 40% probability
x (1/[1 + .04]*) 92,308
Total P1,022,308
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Positive Excess – Goodwill P 158,308
* present value of P1 @ 4% for one period.
The journal entries by Pure Corporation to record the acquisition is as follows:
Cash 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Goodwill 158,308
Accounts payable 62,000
Other liabilities 168,000
Notes payable 180,000
Paid-in capital for Contingent Consideration 92,308
Common stock (P10 par x 25,000 shares) 300,000
Paid-in capital in excess of par[(P25 – P10) x 30,000 shares] 450,000
On December 31, 20x5, the contingent event occurs, wherein Peter’s stock price had fallen to
P20, thus requiring Peter to issue additional shares of stock to the former owners of Saul
Corporation. The entry for Peter Corporation on December 31, 20x5 to record such
occurrence such event to reassign the P750,000 original consideration to 37,500 shares
(30,000 original shares issued + 7,500* additional shares due to contingency) would be:

Paid-in capital for Contingent Consideration 92,308


Common stock, P10 par 75,000
Paid-in capital in excess of par 17,308
Settlement of contingent consideration.
* Deficiency: (P25 – P20) x 30,000 shares issued to acquire....P150,000
Divide by fair value per share on December 31, 20x5……P 20
Added number of shares to issue……………………………… 7,500

Problem X
1.
Consideration transferred:
Shares: 2/3 x 60,000 x P3.20 128,000
Cash
Accounts payable 45,100
Mortgage and interest 44,000
Debentures and premium 52,500
Liquidation expenses 2,400
144,000
Cash held (12,000) 132,000
260,000
Less: Fair value of assets and liabilities acquired:
Accounts receivable P34,700
Inventory 39,000
Freehold land 130,000
Buildings 40,000
Plant and equipment 46,000 289,700
Bargain Purchase Gain 29,700

Homer Ltd
Accounts Receivable 34,700
Inventory 39,000
Freehold Land 130,000
Buildings 40,000
Plant and Equipment 46,000
Payable to Tan Ltd 132,000
Common stock, P1 par x 40,000 shares 40,000
Additional paid-in capital 88,000
Gain on acquisition 29,700
(Acquisition of net assets of
Tan Ltd and shares issued)

Payable to Tan Ltd 132,000


Cash 132,000
(Being payment of cash consideration)

Paid-in capital in excess of par 1,200


Cash 1,200
(Being costs of issuing shares)
2.
Tan LTD
General Ledger
Liquidation
P P
Accounts Receivable 34,700 Additional paid in capital 26,800
Inventory 27,600 Retained earnings 32,000
Freehold Land 100,000 Receivable from Homer Ltd 260,000
Buildings 30,000
Plant and Equipment 46,000
Goodwill 2,000
Interest Payable 4,000
Liquidation Expenses 2,400
Premium on Debentures 2,500
Accounts Payable 1,600
Shareholders’ Distribution 68,000
318,800 318,800

Liquidator’s Cash
P P
Opening Balance 12,000 Liquidation Expenses 2,400
Receivable from Homer Ltd 132,000 Mortgage and Interest 44,000
Debentures and Premium 52,500
Accounts Payable 45,100
144,000 144,000

Shareholders’ Distribution
P P
Shares in Homer Ltd 128,000 Common stock 60,000
Liquidation 68,0000
128,000 128,000

Problem XI
Cash 20,000
Accounts Receivable 112,000
Inventory 134,000
Land 55,000
Plant Assets 463,000
Discount on Bonds Payable 20,000
Goodwill* 127,200
Allowance for Uncollectible Accounts 10,000
Accounts Payable 54,000
Bonds Payable 200,000
Deferred Income Tax Liability 67,200
Cash 600,000

Consideration transferred P600,000


Less: Fair value of net assets acquired
(P784,000 – P10,000 – P54,000 – P180,000 - P67,200*) 472,800
Goodwill P127,200

* Increase in net assets


Increase inventory, land, and plantassets to fair value
P52,000 + P25,000 + P71,000) P148,000
Decrease bonds payable to fair value(20,000)
Increase in net assets P168,000
Establish deferred income tax liability(P168,000 x 40%)P67,200

Multiple Choice Problems

1. c
Acquisition-related costs. Acquisition-related costs are costs the acquirer incurs to effect
a business combination. Those costs include finder’s fee; advisory, legal, accounting,
valuation and other professional or consulting fees; general administrative costs,
including the costs of maintaining an internal acquisitions department; and costs of
registering and issuing debt and equity securities. Under PFRS 3 (2008), the acquirer is
required to recognize acquisition-related costs as expenses in the periods in which the
costs are incurred and the services are received, with one exception, i.e. the costs to
issue debt or equity securities are recognized in accordance with PAS 32 (for equity) and
PAS 39 (for debt).

2. P2,240,000, No answer available


Consideration transferred : FMV of shares issued by Robin (80,000 sh ×P28) = P2,240,000

3. P520,000, no answer available


Considerationtrasnferred P2,240,000
Less: Fair value of Hope’s net assets (P2,720,000+P200,000–P1,200,000) 1,720,000
Goodwill P 520,000

4. c
Acquisition related-expenses 20,000
Accounts Receivable 180,000
Inventory 400,000
Land 50,000
Building 60,000
Equipment 70,000
Patent 20,000
CurrentLiabilities 70,000
Long-termDebt 160,000
Cash 520,000
Gain on Acquisition 50,000

Considerationtrasnsferred : Cash P500,000


Less : Fair value of West’s net assets
(P180,000 + P400,000 + P50,000
+ P60,000 + P P70,000 + P20,000
– P70,000 - P160,000) 550,000
BargainPurchase Gain (P50,000)

5.d
Accounts Receivable (net of P33,000 allowance) 198,000
Inventory 330,000
Land 550,000
Buildings and Equipment 1,144,000
Goodwill 848,000
Current Liabilities 275,000
Bonds Payable 450,000
Premium on Bonds Payable (P495,000 - P450,000) 45,000
Preferred Stock (15,000 x P100) 1,500,000
Common Stock (30,000 x P10) 300,000
PIC - par (P25 - P10) x 30,000 450,000
Cash 50,000

Consideration transferred: (P1,500,000 + P750,000 + P50,000) P2,300,000


Less: Fair value of net assets (198,000 + 330,000 + 550,000 +
1,144,000 – 275,000 – 495,000) = 1,452,000
Goodwill P 848,000

6.d
Current Assets 960,000
Plant and Equipment 1,440,000
Goodwill 336,000
Liabilities 216,000
Cash 2,160,00
0
Estimated Liability for Contingent Consideration 360,000

7.c
Cash 1,400
Receivables 650
Investments 1,000
Maintenance supplies 400
Flight equipment 12,000
International routes 500
Leases 800
Goodwill 450
Current liabilities 3,200
Long-term debt 6,000
Cash 8,000

8. c
The amount of the contingency is P500,000 (10,000 shares at P50 per share)
Goodwill 500,000
Paid-in-Capital for Contingent Consideration - 500,000
Issuable

9. c
Paid-in-Capital for Contingent Consideration – Issuable 500,000
Common Stock (P10 par) 100,000
Paid-In-Capital in Excess of Par 400,000

Platz Company does not adjust the original amount recorded as equity .

10.c
Accounts Receivable (net) 220,000
Inventory 320,000
Land 1,508,000
Buildings 1,392,000
Goodwill 230,000
Accounts Payable 270,000
Note Payable 600,000
Cash 2,600,000
Estimated Liability for Contingent Consideration 200,000

Consideration transferred (2,600,000 + 200,000)………………..P2,800,000


Fair value of net assets acquired(P3,440,000 – P870,000)……. 2,570,000
Goodwill………………………………………………………………...P230,000

Or, alternatively:
Accounts Receivable 240,000
Inventory 320,000
Land 1,508,000
Buildings 1,392,000
Goodwill 30,000
Allowance for Uncollectible Accounts 20,000
Accounts Payable 270,000
Note Payable 600,000
Cash 2,600,000

Consideration transferred P2,600,000


Fair value of net assets acquired
(P3,440,000 – P870,000) 2,570,000
Goodwill P 30,000

Goodwill 200,000
Estimated Liability for Contingent Consideration 200,000

1/1/20x6:
Estimated Liability for Contingent Consideration 200,000
Gain on Contingent Consideration 200,000

11. c
In accounting for the combination of NT and OTG, the fair value of the acquisition is allocated
to each identifiable asset and liability acquired with any remaining excess attributed to
goodwill.

Consideration transferred (shares issued) P750,000


Fair value of net assets acquired:
Cash P29,000
Receivables 63,000
Trademarks 225,000
Record music catalog 180,000
In-process R&D 200,000
Equipment 105,000
Accounts payable (34,000)
Notes payable (45,000) 723,000
Goodwill P27,000

Entry by NT to record combination with OTG:


Cash 29,000
Receivables 63,000
Trademarks 225,000
Record Music Catalog 180,000
Capitalized R&D 200,000
Equipment 105,000
Goodwill 27,000
Accounts Payable 34,000
Notes Payable 45,000
Common Stock (NewTune par value) 60,000
PIC - par 690,000
(To record merger with OTG at fair value)

PIC - par 25,000


Cash 25,000
(Stock issue costs incurred)

Post-Combination Balance Sheet:

Assets Liabilities and Owners’ Equity


Cash P 64,000 Accounts payable P 144,000
Receivables 213,000 Notes payable ___415,000
Trademarks 625,000 Total liabilities P 559,000
Record music catalog 1,020,000
Capitalized R&D 200,000 Common stock 460,000
Equipment 425,000 Paid-in capital - par 695,000
Goodwill 27,000 Retained earnings 860,000
Total P2,574,000 Total P2,574,000

12. P559,000, no answer available – refer to No. 11


13. d – refer to No. 11
14.c – refer to No. 11
15.c – refer to No. 11

16. d
Correction: …completion goals by December 31, 20x5 not 20x4.

Entry to record the acquisition on Pacifica’s records:


Cash 85,000
Receivables and inventory 180,000
PPE 600,000
Trademarks 200,000
IPRD 100,000

Goodwill 77,500
Liabilities 180,000
Common Stock (50,000 xP5) 250,000
Paid-In Capital in excess of par (50,000 xP15) 750,000
Contingent performance obligation 62,500

The goodwill is computed as:


Consideration transferred: 50,000 shares x P20 P1,000,000
Contingent consideration:

P130,000 payment x 50% probability x 0.961538 62,500


Total P1,062,500
Less: Fair value of net assets acquired
(P85,000 + P180,000 + P600,000 + P200,000
+ P100,000 - P180,000) 985,000
Goodwill P 77,500

Acquisition related-expenses 15,000


Cash 15,000

PIC - par 9,000


Cash 9,000

Note: The following amounts will appear in the income statement and statement of retained
earnings after business combination:
PP Inc.
Revenues (1,200,000)
Expenses (P875,000 + P15,000) 890,000
Net income (310,000)
Retained earnings, 1/1 (950,000)
Net income (310,000)
Dividends paid 90,000
Retained earnings, 12/31 *(1,170,000)
* or, P1,185,000 – P15,000 = P1,170,000

17. c – refer to No. 16 (P400,000 + P750,000 – P9,000 = P1,141,000)


18. d – refer to No. 16
19. b – refer to No. 16
20. b – refer to No. 16
21. d – refer to No. 16 [P77,500 + (P75,000 – P62,500)] = P90,000
22.b – refer to No. 16. It should be noted that goodwill can only be revised once, so, the goodwill
remains at P90,000, but the liability will be adjusted to P80,000, the entry would be
Loss on contingent consideration…………………………………. 5,000
Contingent performance obligation………………………. 5,000

23. a
10,000,000 x P5 x 0.20 P 10,000,000
15,000,000 x P5 x 0.10 ___7,500,000
P 17,500,000
17,500,000/(1.12)4 P 11,121,566

24. a – at fair value


25. a
26.a – (P100,000 x ½ = P50,000 x 1/1.05) or P50,000 x 0.909091 = P45,454
27. c
Fair value of Subsidiary
Consideration transferred………………………………………………………P 200
million
Add: Fair value of contingent consideration……………………………… 10 million
Fair value of subsidiary………………………………………………………… P 210
million
Less: Fair value of identifiable assets and liabilities of Homer...............… 116 million
Goodwill…………………………………………………………………………… P 94 million
Note: The consideration transferred should be compared with the fair value of the net
assets acquired, per PFRS3 par. 32. The contingent consideration should be measured
at its fair value at the acquisition date; any subsequent change in this cash liability
comes under PAS 39 Financial instruments: recognition and measurement and should
be recognized in profit or loss, even if it arises within the measurement period. See
PFRS3 pars. 39, 40 and 58.

28. b
29. b
30. d
P77,500,000 = P100,000,000 – (P1,500,000 + P35,000,000 + P2,000,000 + P10,000,000
+ P4,000,000 - P30,000,000).
31. b
P(12,500,000) = P10,000,000 – (P1,500,000 + P35,000,000 + P2,000,000 + P10,000,000
+ P4,000,000 - P30,000,000).
32. c
The correcting entry, within the measurement period, is:
Goodwill 2,000,000
Patents 2,000,000

33. a
The correcting entry, within the measurement period, is:
Gain on acquisition 2,000,000
Liabilities 2,000,000

34. c
Goodwill 400,000
Estimated lawsuit liability 400,000

35.b
Loss on lawsuit 400,000
Estimated lawsuit liability 400,000

36.b
Assets 570,000,000
Liabilities 100,000,00
0
Capital stock 400,000,00
0
Cash 50,000,000
PIC-stock contingency 20,000,000

37. b - P350,000,000 – (P12 x 25,000,000) = P50,000,000/P12 = 4,166,667 additional shares

38. c
The contingency was originally recorded in equity at the amount of P20,000,000. However,
changes in the value of stock price contingencies do not affect the acquisition price or
income. Any changes in value are adjustments in equity.

PIC- stock contingency 20,000,000


PIC-other 30,000,000
Common stock 50,000,000

39. b
40. c
41. c
42. b – [(P47 x 12,000 shares) – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 –
P420,000)
= P104,000
43. d
APIC: P20,000 + [(P42 – P5) x12,000 = P464,000
Retained earnings: P160,000, parent only
44. b
Inventory: PP230,000 + P210,000 = P440,000
Land: P280,000 + P240,000 = P520,000
45. b – [P480,000 – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000)] =
P20,000
46. c AA records new shares at fair value
Value of shares issued (51,000 × P3) ............................................................... P153,000
Par value of shares issued (51,000 × P1)......................................................... 51,000
Additional paid-in capital (new shares) ....................................................... P102,000
Additional paid-in capital (existing shares) .................................................. 90,000
Consolidated additional paid-in capital ....................................................... P192,000

At the date of acquisition, the parent makes no change to retained earnings.

47. a – at fair value


48. c
Depreciation expense:
Building, at book value (P200,000 – P100,000) / 10 years P 10,000
Building, undervaluation (P130,000, fair value
– P100,000, book value) / 10 years3,000
Equipment, at book value (P100,000 – P50,000) / 5 years 10,000
Equipment, undervaluation (P75,000, fair value
- P50,000, book value) / 5 years 5,000
Total depreciation expense= P 28,000

49. c - [(24,000 shares x P30) – P686,400] = P33,600


50. d - [(24,000 shares x P30) – (P270,000 + P726,000 – P168,000)] = P108,000, gain
51. c
A bargain purchase is a business combination in which the net fair value of the identifiable
assets acquired and liabilities assumed exceeds the aggregate of the consideration
transferred.

It should be noted that bargain purchase gain would arise only in exceptional
circumstances. Therefore, before determining that gain has arisen, the acquirer has to:
1. Reassess whether it has correctly identified all of the assets acquired and all of the
liabilities assumed. The acquirer should recognize any additional assets or liabilities
that are identified in that review.
2. Any balance should be recognized immediately in profit or loss.

52. b – no valuation to be recorded in the books of the acquirer


Cost P180,000
Less: Accumulated depreciation (P180,000/30 years = P6,000/year x 3 yrs 18,000
Net book value P162,000
53. c
Net Assets [P100,000 + P50,000 + P162,000 (No. 54)]
P312,000
Less: Shares issued at par (15,000 shares x P10 par) 150,000
APIC P162,000
Or: since, there is no excess, the P312,000 represents the amount of consideration
transferred, therefore the APIC should be P162,000 [P312,000 / 15,000 shares = P20,80 – P15
= P10.80 x 15,000 shares)
54. c
The consideration transferred should be compared with the fair value of the net assets
acquired, per PFRS3 par. 32. The gain of P8 million results from a bargain purchase and
should be recognized in profit or loss, per PFRS3 par. 34.

55. c
Consideration transferred:
Shares: 2/3 x 60,000 x P3.20 128,000
Cash
Accounts payable 45,100
Mortgage and interest 44,000
Debentures and premium 52,500
Liquidation expenses 2,400
144,000
Cash held (12,000) 132,000
260,000
Less: Fair value of assets and liabilities acquired:
Accounts receivable P34,700
Inventory 39,000
Freehold land 130,000
Buildings 40,000
Plant and equipment 46,000289,700
Bargain Purchase Gain 29,700
56. d
PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are
measured at their acquisition-date fair values.
57.c
Selling price P 110,000
Less: Book value of Comb (P50,000 + P80,000 + P40,000
- P30,000) 140,000
Loss on sale of business by the acquiree (Comb) P( 30,000)

58. d P215,000 = P130,000 + P85,000


59. b P23,000 = P198,000 – (P405,000 - P265,000 + P15,000 +
P20,000)
60 c P1,109,00 = Total Assets of TT Corp. P 844,000
. 0
Less: Investment in SS Corp. (198,000)
Book value of assets of TT Corp. P 646,000
Book value of assets of SS Corp. 405,000
Total book value P1,051,000
Payment in excess of book value
(P198,000 - P140,000) 58,000
Total assets reported P1,109,000
61 c P701,500 = (P61,500 + P95,000 + P280,000) + (P28,000 +
. P37,000
+P200,000)
62 d P257,500 = The amount reported by TT Corporation
.
63 a P407,500 = The amount reported by TT Corporation
.

64. c
Par value of shares outstanding before issuance P200,000
Par value of shares outstanding after issuance 250,000
Par value of additional shares issued P 50,000
Divided by: No. of shares issued* __12,500
Par value of common stock P 4

*Paid-in capital before issuance (P200,000 + P350,000) P 550,000


Paid-in capital after issuance (P250,000 + P550,00)800,000
Paid-in capital of share issued at the time of exchangeP250,000
Divided by: Fair value per share of stockP 20
Shares issued 12,500

65. a
Consideration transferred: Shares – 12,500 shares P250,000
Less: Goodwill 56,000
Fair value of identifiable net assets acquiredP194,000

66. a –
Blue Town:
Stockholders’ equity before issuance of shares (P700,000 + P980,000) P1,680,000
Issued shares: 34,000 shares x P35
1,190,000
Consolidated SHE/Net Assets P2,870,000
67. d

68. c
Common stock – combined…………………………………………………………P
160,000
Common – Acquirer Zyxel………………………………….. …………………….…
100,000
Common stock issued………………………………………………………………...P
60,000
Divided by: Par value of common stock………………………………………….P
2
Number of Zyxel shares to acquire Globe Tattoo………………………….....… 30,000
69. d
Paid-in capital books of Zyxel (P100,000 + P65,000)………………………........P
165,000
Paid-in capital in the combined balance sheet
(P160,000 + P245,000)…………………………………………………….…
405,000
Paid-in capital from the shares issued to acquire Globe Tattoo…………... P 240,000
Divided by: No. of shares issued (No. 31)……………………………………..... 30,000
Fair value per share when stock was issued………………………………….... P 8

Or,
Par value of common stock of Zyxel……………………………………… P 2
Add: Share premium/APIC per share from the additional
issuance of shares (P245,000 – P65,000)/30,000…………............ 6
Fair value per share when stock was issued……………………………....... P 8

70.b
Net identifiable assets of Zyxel before acquisition:
(P65,000 + P72,000 + P33,000 + P400,000 – P50,000
- P250,000)…………………………………………………………………….
P270,000
Net identifiable assets in the combined balance sheet:
(P90,000 + P94,000 + P88,000 + P650,000 – P75,000 - P350,000)…..........
497,000
Fair value of the net identifiable assets held by Globe Tattoo
at the date of acquisition..…………………………………………………….. P227,000

71. a
Consideration transferred (30,000 shares x P8)………………………………… P240,000
Less: Fair value of net identifiable assets acquired (No. 49)……………….... 227,000
Goodwill……………………………………………………………………………….. P
13,000
72. c
Retained earnings:
Acquirer – Zyxel (at book value)………………………………………....
P105,000
Acquiree– Globe Tattoo (not acquired)……………………………… __ 0
P105,000
It should be noted that, there was no bargain purchase gain and acquisition-related costs
which may affect retained earnings on the acquisition date.

73. a
II ____ _____JJ _ ____Total____
Average annual earnings P 46,080 P 69,120 P 115,200
Divided by: Capitalized at _10%
Total stock to be issued P1,152,000
Less: Net Assets (for P/S) 864,000
Goodwill (for Common Stock) P 288,000
Preferred stock (same with Net Assets):
864,000/P100 par 8,640 shares

Theories
1. True 21. False 41. True 61. c 81. b 101. c 121 a
2. False 22. True 42. False 62. b 82. a 102. d 122. b
3. True 23. False 43. a 63. c 83. d 103. d 123. b
4. True 24. True 44. c 64. d 84. a 104. d 124. c
5. False 25, True 45, b 65, d 85. c 105. c 125. b
6. True 26. False 46. b 66. a 86. d 106. d 126. c
7. False 27. True 47. d 67. a 87. c 107. d 127. c
8. True 28. False 48. c 68. d 88. a 108. d
9. True 29. True 49. c 69. a 89. c 109. b
10. True 30, True 50, b 70, b 90, d 110, c
11. True 31. False 51. a 71. c 91. b 111. c
12. True 32. True 52. b 72. A 92. a 112. c
13. False 33. True 53. c 73. c 93. C 113. a
14. False 34. False 54. a 74. c 94. B 114. d
15. False 35. True 55. c 75. a 95. D 115. d
16. True 36. True 56. b 76. d 96. A 116. c
17. False 37. False 57. a 77. a 97. A 117. b
18. True 38. True 58. c 78. d 98. c 118. b
19. True 39. False 59. a 79. b 99. d 119. b
20. False 40, False 60, c 80, c 100, d 120. a
Note for the following numbers:
2. A horizontal combination occurs when management attempts to dominate an industry.
5. A vertical combination exists when an entity purchases another entity that could have a
buyer-seller relationship with the acquirer. The combination described here is a
horizontal combination.
7. A conglomerate combination is one where an unrelated or tangentially related business
is acquired. A vertical combination occurs when a supplier is acquired.
13. Greenmail is the payment of a price above market value to acquire stock back from a potential acquirer.
15. The sale of the crown jewels results when a target sells assets that would be particularly valuable to the potential acquirer.
The scorched earth defense results when a target generally sells large amounts of assets without regard to the
specific desirability to the potential acquirer.
17. Golden parachutes are generally given only to top executives of the acquiree.
20. Control over the net assets of an entity can be accomplished by purchasing the net assets or by purchasing the acquiree
voting common stock that represents ownership of the assets.
21. The amount of cash will always equal the net assets recorded by the acquirer. As a result, the acquirer book value will not
change due to an acquisition.
23. There is no exchange of stock in an asset for asset acquisition so there cannot be a change in ownership structure of
either entity.
26. The acquiree corporation becomes an acquirer stockholder, not the acquiree
stockholders.
28. A combination that results in one of the original entities in existence after the
combination is a statutory merger.
31. The combination results in the stockholders of one entity controlling the other entity.
The Retained Earnings of the entity acquiring control is carried forward to the newly
formed corporation.
34. The stock of the acquiree company must be purchased by the acquirer, but the value
transferred to the acquiree stockholders does not have to be in stock. Payment may be
in another asset or the issuance of debt.
37. The consideration to be given by the acquirer is sometimes not completely known
because the consideration is based partially on acquiree future earnings or the market
value of acquirer debt or stock.
39. Any change in the number of shares of acquirer stock given returns the purchase price
to the agreed level. The adjustment is to stock and additional paid-in capital. The
investment account is unchanged.
40. The acquiree stockholders must continue to have an indirect ownership interest in the
acquiree net assets. Preferred stock or a nonvoting class of stock qualifies as an
indirect ownership as well as voting common stock.
42. A net operating loss carryforward cannot be acquired. They are only available to the
acquirer if the combination qualifies as a nontaxable exchange.

Chapter 15
Problem I
Investment in Shy Inc. [P2,500,000 + (15,000  P40)] 3,100,000
Cash 2,500,000
Common Stock 30,000
Paid in capital in excess of par (P40 - P2)  15,000 570,000

Paid in capital in excess of par 30,000

Acquisition Expense 67,000


Deferred Acquisition Charges 90,000
Acquisition Costs Payable 7,000

Problem II
Cash consideration transferred P 300,000
Contingent performance obligation __15,000
Fair value of Subsidiary P 315,000
Less: Book value of SS Company (P90,000 + P100,000) 190,000
Allocated excess P125,000
Less: Over/under valuation of assets and liabilities:
Increase in building: P40,000 x 100% P 40,000
Increase in customer list: P22,000 x 100% 22,000
Increase in R&D: P30,000 x 100% 30,000 __92,000
Goodwill P 33,000

Investment in SS Company 315,000


Cash 300,000
Estimated Liability on Contingent Consideration 15,000

Acquisition Expense (or Retained earnings) 10,000


Cash 10,000
Not Required: The working paper eliminating entry on the date of acquisition, 6/30/20x4 would
be:
Receivables 80,000
Inventory 70,000
Buildings 115,000
Equipment 25,000
Customer list 22,000
Capitalized R&D 30,000
Goodwill 33,000
Current liabilities 10,000
Long-term liabilities 50,000
Investment in SS Company 315,000

Problem III
Case 1:
Proportionate Basis (Partial-goodwill Approach)
 Partial-goodwill
Fair value of subsidiary (80%):
Consideration transferred: Cash……………………….......P12,000,000 (80%)
Less: Book value of stockholders’ equity (net assets)
– S Company: P7,200,000 x 80%...................................... 5,760,000 (80%)
Allocated excess.……………………………………………….......P 6,240,000 (80%)
Less: Over/undervaluation of assets and liabilities:
(P9,600,000 – P7,200,000) x 80%........................................... 1,920,000 (80%)
Positive excess: Goodwill (partial)…………………………….... P 4,320,000 (80%)

 Non-controlling interest
Book Value of stockholders’ equity of subsidiary…………. P 7,200,000
Adjustments to reflect fair value (over/ undervaluation
of assets and liabilities): (P9,600,000 – P7,200,000)….. 2,400,000
Fair value of stockholders’ equity of subsidiary…………… P 9,600,000
Multiplied by: Non-controlling interest percentage............ 20%
Non-controlling Interest (partial)……………………………….. P1,920,000
Fair Value Basis (Full-goodwill Approach)
 Full-goodwill
Fair value of subsidiary (100%):
Consideration transferred: Cash (P12,000,000 / 80%).. P 15,000,000 (100%)
Less: Book value of stockholders’ equity (net assets)
– S Company: P7,200,000 x 100%.............................. 7,200,000 (100%)
Allocated excess.……………………………………………….. P 7,800,000 (100%)
Less: Over/Undervaluation of assets and liabilities:
(P9,600,000 – P7,200,000) x 100%.................................... 2,400,000 (100%)
Positive excess: Goodwill (full)………………………………........P 5,400,000 (100%)
The full – goodwill of P5,400,000 consists of two parts:
Full-goodwill……………………………………………....... P 5,400,000
Less: Controlling interest on full-goodwill
or partial-goodwill…………………………….…. 4,320,000
NCI on full-goodwill…………………………………….......P 1,080,000

 Non-controlling interest
Non-controlling interest (partial)……………………………….......P1,920,000
Add: Non-controlling interest on full -goodwill
(P5,400,000 – P4,320,000 partial-goodwill) or
(P5,400,000 x 20%)*…………………………………...... 1,080,000
Non-controlling interest (full)…………………………………........ P3,000,000
* applicable only when the fair value of the non-controlling interest of subsidiary is not given.

Case 2:
Proportionate Basis (Partial-goodwill Approach)
 Partial-goodwill
Fair value of subsidiary (60%):
Consideration transferred: Cash……………………….....P 7,560,000 (60%)
Less: Book value of stockholders’ equity (net assets)
– S Company: P6,000,000 x 60%................................ 3,600,000 (60%)
Allocated Excess.……………………………………………….... P 3,960,000 (60%)
Less: Over/undervaluation of assets and liabilities:
(P8,400,000 – P6,000,000) x 60%...................................... 1,440,000 (60%)
Positive excess: Goodwill (partial)……………………………....P 2,520,000 (60%)

 Non-controlling interest
Book value of stockholders’ equity of subsidiary…………. P 6,000,000
Adjustments to reflect fair value (over/ undervaluation
of assets and liabilities): (P8,400,000 – P6,000,000)…. 2,400,000
Fair value of stockholders’ equity of subsidiary…………….P 8,400,000
Multiplied by: Non-controlling Interest percentage............. 40%
Non-controlling interest (partial)……………………………….P 3,360,000

Fair Value Basis (Full-goodwill Approach)


 Full-goodwill
Fair value of subsidiary (100%):
Consideration transferred: Cash ………………………...P 7,560,000 ( 60%)
Fair value of NCI (given)………………………………….. 4,800,000 ( 40%)
Fair value of subsidiary…………………………………………...P12,360,000 (100%)
Less: Book value of stockholders’ equity (net assets)
– S Company: P6,000,000 x 100%........................... 6,000,000 (100%)
Allocated Excess.…………………………………………………..P 6,360,000 (100%)
Less: Over/undervaluation of assets and liabilities:
(P8,400,000 – P6,000,000) x 100%.................................. 2,400,000 (100%)
Positive excess: Goodwill (full)………………………………......P 3,960,000 (100%)

The full – goodwill of P3,960,000 consists of two parts:


Full-goodwill……………………………………………...P 3,960,000
Less: Controlling interest on full-goodwill
or partial-goodwill……………………………. 2,520,000
NCI on full-goodwill……………………………………..P 1,440,000

 Non-controlling interest
Non-controlling interest (partial)………………………………P 3,360,000
Add: Non-controlling interest on full -goodwill
(P3,960,000 – P2,520,000 partial-goodwill)………….. 1,440,000
Non-controlling Interest (full)…………………………………..P 4,800,000

Case 3;
Proportionate Basis (Partial-goodwill Approach)
 Partial-goodwill
Fair value of subsidiary (75%):

Consideration transferred: Cash………………………..P 9,000,000 (75%)


Less: Book value of stockholders’ equity (net assets)
– S Company: P7,200,000 x 75%............................. 5,400,000 (75%)
Allocated Excess.………………………………………………...P 3,600,000 (75%)
Less: Over/undervaluation of assets and liabilities:
(P9,600,000 – P7,200,000) x 75%..................................... 1,800,000 (75%)
Positive excess: Goodwill (partial)…………………………….P 1,800,000 (75%)

 Non-controlling interest
Book value of stockholders’ equity of subsidiary…………..P 7,200,000
Adjustments to reflect fair value (over/ undervaluation
of assets and liabilities): (P9,600,000 – P7,200,000)…. 2,400,000
Fair value of stockholders’ equity of subsidiary……………P 9,600,000
Multiplied by: Non-controlling Interest percentage.............. 25%
Non-controlling interest (partial)……………………………….P 2,400,000

Fair Value Basis (Full-goodwill Approach)


 Full-goodwill
Fair value of subsidiary…………………………………………. P 11,640,000 (100%)
Less: Book value of stockholders’ equity (net assets)
– S Company: P7,200,000 x 100%............................... 7,200,000 (100%)
Allocated Excess.………………………………………………….P 4,440,000 (100%)
Less: Over/undervaluation of assets and liabilities:
(P9,600,000 – P7,200,000) x 100%.................................. 2,400,000 (100%)
Positive excess: Goodwill (full)……………………………….....P 2,040,000 (100%)

The full – goodwill of P2,040,000 consists of two parts:


Full-goodwill……………………………………………...P 2,040,000
Less: Controlling interest on full-goodwill
or partial-goodwill…………………………….... 1,800,000
NCI on full-goodwill……………………………………. .P 240,000

 Non-controlling interest
Non-controlling interest (partial)………………………………P 2,400,000
Add: Non-controlling interest on full -goodwill
(P2,040,000 – P1,800,000 partial-goodwill)…..…….... . 240,000
Non-controlling Interest (full)…………………………………..P 2,640,000

Case 4:
Proportionate Basis (Partial-goodwill Approach)
 Partial-goodwill
Fair value of subsidiary (75%):
Consideration transferred: Cash………………………..P 2,592,000 (60%)
Fair value of previously held equity interest
in acquiree P2,592,000/60% = P4,320,000 x 15%......... 648,000 . (15%)
Fair value of Subsidiary ..………………………………………. P 3,240,000 (75%)
Less: Book value of stockholders’ equity (net assets)
– S Company: (P4,680,000 – P2,280,000) x 75%.......... 1,800,000 .(75%)
Allocated Excess.………………………………………………....P 1,440,000 (75%)
Less: Over/undervaluation of assets and liabilities:
[(P6,120,000 – P2,280,000) –
(P4,680,000 – P2,280,000)] x 75%..................................... 1,080,000 (75%)
Positive excess: Goodwill (partial)……………………………...P 360,000 (75%)

 Non-controlling interest
Book value of stockholders’ equity of subsidiary…………..P 2,400,000
Adjustments to reflect fair value (over/ undervaluation
of assets and liabilities): (P3,840,000 – P2,400,000)…. 1,440,000
Fair value of stockholders’ equity of subsidiary……………P 3,840,000
Multiplied by: Non-controlling Interest percentage............ 25%
Non-controlling interest (partial)………………………………P 960,000

Fair Value Basis (Full-goodwill Approach)


 Full-goodwill
Fair value of subsidiary (100%):
Consideration transferred: Cash………………………..P 2,592,000 (60%)
Fair value of previously held equity interest
in acquiree P2,592,000/60% = P4,320,000 x 15%...... 648,000 (15%)
Fair value of NCI (given)…………………………………. 1,080,000 (25%)
Fair value of subsidiary………………………………………….P 4,320,000 (100%)
Less: Book value of stockholders’ equity (net assets)
– S Company: P2,400,000 x 100%.................................... 2,400,000 (100%)
Allocated Excess.…………………………………………………P 1,920,000 (100%)
Less: Over/undervaluation of assets and liabilities:
(P3,840,000 – P2,400,000) x 100%................................ …..1,440,000 (100%)
Positive excess: Goodwill (full)…………………………………..P 480,000 (100%)

The full – goodwill of P480,000 consists of two parts:


Full-goodwill……………………………………………...P 480,000
Less: Controlling interest on full-goodwill
or partial-goodwill…………………………….…... 360,000
NCI on full-goodwill……………………………………..P. 120,000

 Non-controlling interest
Non-controlling interest (partial)………………………………P 960,000
Add: Non-controlling interest on full -goodwill
(P480,000 – P360,000 partial-goodwill)…..…………....... 120,000
Non-controlling Interest (full)……………………………………P 1,080,000

Problem IV
 Partial-goodwill (Proportionate Basis)
Fair value of subsidiary (75%):
Consideration transferred: Cash……………………….. P270,000 (75%)
Less: Book value of stockholders’ equity
(net assets) – S Company:
(P480,000 – P228,000) x 75%....................................... 189,000 (75%)
Allocated excess………………………………………………... P 81,000 (75%)
Less: Over/undervaluation of assets and liabilities:
[(P612,000 – P228,000) – (P480,000 – P228,000) x 75% 99,000 (75%)
Negative excess: Bargain purchase gain (to controlling
interest or attributable to parent only)………………. (P18,000) (75%)
 Full-goodwill (Fair Value Basis)
Fair value of subsidiary (100%):
Consideration transferred: Cash……………………….. P270,000 ( 75%)
Fair value of non-controlling interest (given)………… 98,400 ( 25%)
Fair value of subsidiary ………………………………………… P368,400 (100%)
Less: Book value of stockholders’ equity
(net assets) – S Company:
(P480,000 – P228,000) x 100%..................................... 252,000 (100%)
Allocated excess………………………………………………... P116,400 (100%)
Less: Over/undervaluation of assets and liabilities:
[(P612,000 – P228,000) – (P480,000 – P228,000) x 100% 132,000 (100%)
Negative excess: Bargain purchase gain (to controlling
interest or attributable to parent only)………………. (P15,600) (100%)

Problem V
1.
A. Investment in Sewell 675,000
Cash 675,000
B. Investment in Sewell 675,000
Cash 675,000
C. Investment in Sewell 318,000
Cash 318,000
2.
A.
Fair value of Subsidiary:
Consideration transferred P675,000
Less: BV of SHE of S (P450,000 + P180,000 + P75,000)x100% 705,000
Allocated excess P( 30,000)
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P30,000 – P20,000) x 100% (P10,000)
Land (P50,000 – P70,000) x 100% __20,000 __10,000
Bargain Purchase Gain – full (P 40,000)
B.
Partial Goodwill
Fair value of Subsidiary:
Consideration transferred P675,000
Less: BV of SHE of S (P450,000 + P180,000 + P75,000) x 90% 634,500
Allocated excess P 40,500
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P30,000 – P20,000) x 90% (P9,000)
Land (P50,000 – P70,000) x 90% __18,000 __9,000
Goodwill – partial P 31,500
Full-Goodwill
Fair value of Subsidiary:
Consideration transferred (P675,000/90%) P750,000
Less: BV of SHE of S (P450,000 + P180,000 + P75,000)x100% 705,000
Allocated excess P 45,000
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P30,000 – P20,000) x 100% (P10,000)
Land (P50,000 – P70,000) x 100% __20,000 __10,000
Goodwill – full P 35,000
C.
Partial Goodwill
Fair value of Subsidiary:
Consideration transferred P318,000
Less: BV of SHE of S (P620,000 + P140,000 + P20,000) x 80% 624,000
Allocated excess (P306,000)
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P30,000 – P20,000) x 80% (P 8,000)
Land (P50,000 – P70,000) x 80% __16,000 __8,000
Bargain Purchase Gain – partial (parent only) (P314,000)

Full-Goodwill
Fair value of Subsidiary:
Consideration transferred P 318,000
FV of NCI* _158,000
P 476,000
Less: BV of SHE of S (P620,000 + P140,000 + P20,000) x 100% 780,000
Allocated excess (P304,000)
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P30,000 – P20,000) x 100% (P10,000)
Land (P50,000 – P70,000) x 100% __20,000 _10,000
Bargain Purchase Gain – full (parent only) (P314,000)
*BV of SHE of S P780,000
Adjustments to reflect fair value 10,000
FV of SHE of S P790,000
x: NCI% 20%
FV of NCI P158,000
3.
A.
Common Stock – Sewell 450,000
Paid in capital in excess of par – Sewell 180,000
Retained Earnings – Sewell 75,000
Land 20,000
Inventory 10,000
Investment in Sewell 675,000
Retained earnings (gain) – Parent (since
balance sheet accounts are being
examined) 40,000

B.
Partial-Goodwill (Proportionate Basis)
Common Stock – Sewell 450,000
Paid in capital in excess of par – Sewell 180,000
Retained Earnings – Sewell 75,000
Land 20,000
Goodwill 31,500
Inventory 10,000
Investment in Sewell 675,000
Non-controlling Interest 71,500
BV – SHE of Sewell
(P450,000 + P180,000 + P75,000) P705,000
Adjustments to reflect fair value 10,000
FV of SHE of Sewell P715,000
x: NCI% 10%
FV of NCI (partial) P 71,500

Full-Goodwill (Fair Value Basis)


Common Stock – Sewell 450,000
Paid in capital in excess of par – Sewell 180,000
Retained Earnings – Sewell 75,000
Land 20,000
Goodwill 35,000
Inventory 10,000
Investment in Sewell 675,000
Non-controlling Interest 75,000
BV – SHE of Sewell
(P450,000 + P180,000 + P75,000) P705,000
Adjustments to reflect fair value 10,000
FV of SHE of Sewell P715,000
x: NCI% 10%
FV of NCI (partial) P 71,500
NCI on Full-Goodwill
(P35,000 – P31,500) 3,500
FV of NCI (full) P 75,000
C.
Partial-Goodwill (Proportionate Basis)
Common Stock – Sewell 620,000
Paid in capital in excess of par – Sewell 140,000
Retained Earnings – Sewell 20,000
Land 20,000
Inventory 10,000
Investment in Sewell 318,000
Retained earnings (gain)–Parent (refer to 3A) 314,000
Non-controlling Interest 158,000
BV – SHE of Sewell
(P620,000 + P140,000 + P20,000) P780,000
Adjustments to reflect fair value 10,000
FV of SHE of Sewell P790,000
x: NCI% 20%
FV of NCI (partial) P158,000

Full-Goodwill (Fair Value Basis)


Common Stock – Sewell 620,000
Paid in capital in excess of par – Sewell 140,000
Retained Earnings – Sewell 20,000
Land 20,000
Inventory 10,000
Investment in Sewell 318,000
Retained earnings (gain)–Parent (refer to 3A) 314,000
Non-controlling Interest 158,000

BV – SHE of Sewell
(P620,000 + P140,000 + P20,000) P780,000
Adjustments to reflect fair value 10,000
FV of SHE of Sewell P790,000
x: NCI% 20%
FV of NCI (full) P158,000

Problem VI
1.
January 1, 20x4
Investment in S 408,00
Company…………………………………………… 0
408,00
Cash………………………………………………………………… 0
…..
2.
Schedule of Determination and Allocation of Excess
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (100%)
Consideration P
transferred……………………………….. 408,000
Less: Book value of stockholders’ equity of S:
Common stock (P240,000 x
100%)………………….. P 240,000
Paid-in capital in excess of par (P24,000 x
100%)... 24,000
Retained earnings (P96,000 x
100%)………………... 96,000 360,000
Allocated excess (excess of cost over book P
value)…… 48,000
Less: Over/under valuation of assets and
liabilities:
Increase in inventory (P18,000 x
100%)…………….. P 18,000
Increase in land (P72,000 x
100%)…………………… 72,000
Decrease in buildings and equipment
(P12,000 x
100%)……………………………………... ( 12,000)
Increase in bonds payable (P42,000 x
100%)…….. ( 42,000) 36,000
Positive excess: Goodwill (excess of cost over fair
P
value)…………………………………………………….. 12,000

(E1) Common stock – S Co………………………………………… 240,000


Additional paid-in capital – S Co…………………………… 24,000
Retained earnings – S Co…………………………………… 96.000
Investment in S Co……………………………………… 360,000
Eliminate investment against stockholders’ equity of S
Co.

(E2) Inventory…………………………………………………………. 18,000


Land……………………………………………………………… 72,000
Goodwill…………………………………………………………. 12,000
Buildings and equipment……………………………… 12,000
Premium on bonds payable……………………………… 42,000
Investment in S Co………………………………………… 48,000
Eliminate investment against allocated excess.

4.
Eliminations
Assets P Co. S Co. Dr. Cr. Consolidated
Cash*…………………………. P 12,000 P 60,000 P 72,000
Accounts receivable…….. 90,000 60,000 150,000
Inventory…………………. 120,000 72,000 (2) 18,000 210,000
Land……………………………. 210,000 48,000 (2) 72,000 330,000
Buildings and equipment (net) 480,000 360,000 (2) 12,000 828,000
Goodwill…………………… (2) 12,000 12,000
Investment in S Co…………. 408,000 (1) 360,000
(2) 48,000 -
Total Assets P1,320,000 P600,000 P1,602,000
Liabilities and Stockholders’ Equity
Accounts payable…………… P 120,000 P120,000 P 240,000
Bonds payable………………… 240,000 120,000 360,000
Premium on bonds payable (3) 42,000 42,000
Common stock, P10 par……… 600,000 600,000
Common stock, P10 par……… 240,000 (1) 240,000
Paid in capital in excess of par. 60,000 60,000
Paid in capital in excess of par. 24,000 (1) 24,000
Retained earnings…………… 300,000 300,000
Retained earnings…………… _________ 96,000 (1) 96,000 __________ _________
Total Liabilities and Stockholders’
Equity P1,320,000 P600,000 P 462,000 P 462,000 P1,602,000
(1) Eliminate investment against stockholders’ equity of S Co.
(2) Eliminate investment against allocated excess.
* P420,000 – P408,000 = P12,000.

5.
Assets
Cash P 72,000
Accounts receivables 150,000
Inventories 210,000
Land 330,000
Buildings and equipment (net) 828,000
Goodwill 12,000
Total Assets P1,602,000

Liabilities and Stockholders’ Equity


Liabilities
Accounts payable P 240,000
Bonds payable P 360,000
Premium on bonds payable 42,000 402,000
Total Liabilities P 642,000
Stockholders’ Equity
Common stock, P10 par P 600,000
Paid-in capital in excess of par 60,000
Retained earnings 300,000
Total Stockholders’ Equity P 960,000
Total Liabilities and Stockholders’ Equity P1,602,000

Problem VII
Partial-goodwill Approach
Schedule of Determination and Allocation of Excess (Partial-goodwill)
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (80%)
Consideration P
transferred……………………………….. 360,000
Less: Book value of stockholders’ equity of
Sky:
Common stock (P240,000 x
80%)……………………. P 192,000
Paid-in capital in excess of par (P96,000
x 80%).... 76,800
Retained earnings (P24,000 x
80%)……………….... 19,200 288,000
Allocated excess (excess of cost over book P
value)….. 72,000
Less: Over/under valuation of assets and
liabilities:
Increase in inventory (P18,000 x
80%)……………… P 14,400
Increase in land (P72,000 x
80%)……………………. 57,600
Decrease in buildings and equipment
(P12,000 x
80%)……………………………………..... ( 9,600)
Increase in bonds payable (P42,000 x
80%)………. ( 33,600) 28,800
Positive excess: Partial-goodwill (excess of
cost over
fair P
value)………………………………………………... 43,200
The over/under valuation of assets and liabilities are summarized as follows:

Sky Co. Sky Over/


Co. Under
Book Fair
value value Valuation
Inventory………………….…………….. 72,000 90,000 18,000
Land……………………………………… 48,000 120,000 72,000
Buildings and equipment (net)......... 360,000 348,000 ( 12,000)
Bonds payable………………………… (120,000) (162,000) 42,000
Net……………………………………….. 360,000 396,000 36,000
The buildings and equipment will be further analyzed for consolidation purposes as follows:
Sky Co. Sky Co.
Book value Fair value (Decrease)
Buildings and
equipment .................. 720,000 348,000 ( 372,000)
Less: Accumulated
depreciation….. 360,000 - ( 360,000)
Net book
value………………………... 360,000 348,000 ( 12,000)
The following entry on the date of acquisition in the books of Parent Company:
January 1, 20x4
(1) Investment in Sky 360,00
Company…………………………………………… 0
360,00
Cash…………………………………………………………………… 0
..
Acquisition of Sky Company.
(2) Retained earnings (acquisition-related expense - close
to
14,400
retained earnings since only balance sheets are
being

examined)……………………………………………………………
14,400
Cash……………………………………………………………………
.
Acquisition- related costs.
The schedule of determination and allocation of excess provides complete guidance for the
worksheet eliminating entries on January 1, 20x4:
(E1) Common stock – Sky 240,000
Co……………………………………………….
Additional paid-in capital – Sky 24,000
Co………………………………….
Retained earnings – Sky 96,000
Co…………………………………………...
Investment in Sky 288,000
Co…………………………………………………
Non-controlling interest (P300,000 x 72,000
20%)………………………..
Eliminate investment against stockholders’ equity of Sky Co.

(E2) 18,000
Inventory………………………………………………………………
….
Accumulated 360,00
depreciation…………………………………………. 0
72,000
Land……………………………………………………………………
….
43,200
Goodwill………………………………………………………………
….
Buildings and 372,00
equipment………………………………………….. 0
Premium on bonds 42,000
payable………………………………………
Non-controlling interest (P30,000 x 7,200
20%)………………………..
Investment in Sky 72,000
Co………………………………………………..
Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned
Subsidiary (Partial-goodwill)

Eliminations
Assets Peer Co. Sky Co. Dr. Cr. Consolidated
Cash*…………………………. P 45,600 P 60,000 P 105,600
Accounts receivable…….. 90,000 60,000 150,000
Inventory…………………. 120,000 72,000 (2) 18,000 210,000
Land……………………………. 210,000 48,000 (2) 72,000 330,000

Buildings and equipment 960,000 720,000 (2) 372,000 1,308,000


Goodwill…………………… (2) 43,200 43,200
Investment in Sky Co…………. 360,000 (1) 288,000
(2) 72,000 -
Total Assets P1,785,600 P960,000 P 2,146,800
Liabilities and Stockholders’ Equity
Accumulated depreciation P 480,000 P360,000 (2) 360,000 P 480,000
Accounts payable…………… 120,000 120,000 240,000
Bonds payable………………… 240,000 120,000 360,000
Premium on bonds payable (3) 42,000 42,000
Common stock, P10 par……… 600,000 600,000
Common stock, P10 par……… 240,000 (1) 240,000
Paid in capital in excess of par. 60,000 60,000
Paid in capital in excess of par. 24,000 (1) 24,000
Retained earnings**…………… 285,600 285,600
Retained earnings…………… 96,000 (1) 96,000
Non-controlling interest………… (1 ) 72,000
_________ _______ _________ (2) 7,200 _79,200
Total Liabilities and Stockholders’
Equity P1,785,600 P960,000 P 853,200 P 853,200 P2,146,800
(1) Eliminate investment against stockholders’ equity of Sky Co.
(2) Eliminate investment against allocated excess.
* P420,000 – P360,000 – P14,400 = P45,600.
**P300,000 – P14,400 = P285,600.

 Incidentally, the non-controlling interest on the date of acquisition is computed as follows:


Common stock – Sky company…………………………………… P
240,000
Paid-in capital in excess of par – Sky co………………………… 24,000
Retained earnings – Sky 80,000
Co..……………………………………….
Book value of stockholders’ equity – Sky P
Co………..………….. 360,000
Adjustments to reflect fair value (over/
undervaluation 36,000
of assets and
liabilities)………………………………………….
Fair value of stockholders’ equity of P
subsidiary………………… 396,000
Multiplied by: Non-controlling Interest 20
percentage…………...
Non-controlling interest P
(partial)………………………………….. 79,200

The balance sheet:


Peer Company and Subsidiary
Consolidated Balance Sheet
January 1, 20x4
Assets
Cash P 105,600
Accounts receivables 150,000
Inventories 210,000
Land 330,000
Buildings and equipment 1,308,000
Accumulated depreciation ( 480,000)
Goodwill 43,200
Total Assets P1,666,800

Liabilities and Stockholders’ Equity


Liabilities
Accounts payable P 240,000
Bonds payable P 360,000
Premium on bonds payable 42,000 402,000
Total Liabilities P 642,000
Stockholders’ Equity
Common stock, P10 par P 600,000
Paid-in capital in excess of par 60,000
Retained earnings 285,600
Parent’s Stockholders’ Equity/Equity Attributable to the
Owners of the Parent P 945,600
Non-controlling interest 79,200
Total Stockholders’ Equity (Total Equity) P 1,024,800
Total Liabilities and Stockholders’ Equity P1,666,800

Full-goodwill Approach
Schedule of Determination and Allocation of Excess (Full-goodwill)
Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (100%)


Consideration transferred (P360,000 / P
80%)………….. 450,000
Less: Book value of stockholders’ equity of
Sky:
Common stock (P240,000 x
100%)…………………. P 240,000
Paid-in capital in excess of par (P96,000
x 100%).. 96,000
Retained earnings (P24,000 x
100%)…………….... 24,000 360,000
Allocated excess (excess of cost over book P
value)….. 90,000
Less: Over/under valuation of assets and
liabilities:
Increase in inventory (P18,000 x
100%)…………… P 18,000
Increase in land (P72,000 x
100%)…………………. 72,000
Decrease in buildings and equipment
(P12,000 x
100%)…………………………………..... ( 12,000)
Increase in bonds payable (P42,000 x
100%)……. ( 42,000) 36,000
Positive excess: Full -goodwill (excess of cost
over
fair P
value)………………………………………………... 54,000

The following entry on the date of acquisition in the books of Parent Company:
January 1, 20x4
(1) Investment in Sky 360,00
Company…………………………………………… 0
360,00
Cash…………………………………………………………………… 0
..
Acquisition of Sky Company.

(2) Retained earnings (acquisition-related expense - close


to
retained earnings since only balance sheets are 14,400
being

examined)……………………………………………………………
14,400
Cash……………………………………………………………………
.
Acquisition- related costs.

The schedule of determination and allocation of excess provides complete guidance for the
worksheet eliminating entries on January 1, 20x4:
240,000
(E1) Common stock – Sky
Co……………………………………………….
Additional paid-in capital – Sky 24,000
Co………………………………….
Retained earnings – Sky 96,000
Co…………………………………………...
Investment in Sky 288,000
Co…………………………………………………
Non-controlling interest (P300,000 x 72,000
20%)………………………..
Eliminate investment against stockholders’ equity of Sky Co.

(E2) 18,000
Inventory………………………………………………………………
….
Accumulated 360,00
depreciation…………………………………………. 0
72,000
Land……………………………………………………………………
….
54,000
Goodwill………………………………………………………………
….
Buildings and 372,00
equipment………………………………………….. 0
Premium on bonds 42,000
payable………………………………………
Non-controlling interest [(P30,000 x 20%) +
(P45,000 – 18,000
P36,000)]…………………………………………….
Investment in Sky 72,000
Co………………………………………………..
Eliminate investment against allocated excess.

Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned
Subsidiary (Full-goodwill)

Eliminations
Assets Peer Co. Sky Co. Dr. Cr. Consolidated
Cash*………………………
…. P 45,600 P 60,000 P 105,600
Accounts
receivable…….. 90,000 60,000 150,000
Inventory…………………. 120,000 72,000 (2) 18,000 210,000
Land………………………
……. 210,000 48,000 (2) 72,000 330,000

Buildings and equipment 960,000 720,000 (2) 372,000 1,308,000


Goodwill…………………
… (2) 54,000 54,000
Investment in Sky 360,000
(1) 288,000
Co…………. (2) 72,000 -
Total Assets P1,785,600 P960,000 P 2,157,600
Liabilities and Stockholders’ Equity
Accumulated depreciation P 480,000 P360,000 (2) 360,000 P 480,000

120,00
Accounts payable…………… 0 120,000 240,000
240,00
Bonds payable………………… 0 120,000 360,000
Premium on bonds payable (2) 42,000 42,000
600,00
Common stock, P10 par……… 0 600,000
Common stock, P10 par……… 240,000 (1) 240,000
Paid in capital in excess of par. 60,000 60,000
Paid in capital in excess of par. 24,000 (1) 24,000
285,60
Retained earnings**…………… 0 285,600
Retained earnings…………… 96,000 (1) 96,000
(1 )
72,000
Non-controlling interest…………
_______ _____ _______ (2)
__ __ __ 18,000 _90,000
Total Liabilities and Stockholders’
Equity P1,785,600 P960,000 P 864,000 P 864,000 P2,157,600
(1) Eliminate investment against stockholders’ equity of Sky Co.
(2) Eliminate investment against allocated excess.
* P420,000 – P360,000 – P14,400 = P45,600.
**P300,000 – P14,400 = P285,600.

 Incidentally, the non-controlling interest on the date of acquisition is computed as follows:


Non-controlling interest P
(partial)………………………………….. 79,200
Add: Non-controlling interest (P54,000, full –
P43,200, partial). 10,800
Non-controlling interest P 90,000
(full)……………………………………….

The balance sheet;

Peer Company and Subsidiary


Consolidated Balance Sheet
January 1, 20x4
Assets
Cash P 105,600
Accounts receivables 150,000
Inventories 210,000
Land 330,000
Buildings and equipment 1,308,000
Accumulated depreciation ( 480,000)
Goodwill 54,000
Total Assets P1,677,600

Liabilities and Stockholders’ Equity


Liabilities
Accounts payable P 240,000
Bonds payable P 360,000
Premium on bonds payable 42,000 402,000
Total Liabilities P 642,000
Stockholders’ Equity
Common stock, P10 par P 600,000
Paid-in capital in excess of par 60,000
Retained earnings 285,600
Parent’s Stockholders’ Equity/Equity Attributable to the P 945,600
Owners of the Parent
Non-controlling interest 90,000
Total Stockholders’ Equity (Total Equity) P 1,035,600
Total Liabilities and Stockholders’ Equity P1,677,600

Problem VIII
Partial-goodwill Approach (Proportionate Basis)
Schedule of Determination and Allocation of Excess (Proportionate Basis))
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (80%)
Consideration transferred:
Common stock: 12,000 shares x P25
per share…... P 300,000
Less: Book value of stockholders’ equity
of S:
Common stock (P12,000 x
80%)……………………. P 9,600
Paid-in capital in excess of par
(P108,000 x 80%)... 86,400
Retained earnings (P72,000 x
80%)……………….... 57,600 153,600
Allocated excess (excess of cost over
book value)…… P 146,400
Less: Over/under valuation of assets and
liabilities:
Increase in inventory (P6,000 x
80%)……………… P 4,800
Increase in land (P36,000 x
80%)……………………. 28,800
Increase in buildings and
equipment
(P150,000 x
80%)…………………………………...... 120,000
Increase in copyrights (P60,000 x
80%)…………….. 48,000
Increase in contingent liabilities –
estimated
liability for contingencies (P6,000
x 80%)……..... ( 4,800) 196,800
Negative excess: Bargain purchase gain
to controlling
interest or attributable to parent
only)…………….. (P 50,400)

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

S Co.
Book S Co. Over/Under
value Fair value Valuation
P
Inventory………………….……………... 60,000 P 66,000 P 6,000
Land………………………………………. 48,000 84,000 36,000
Buildings and equipment (net)......... 222,000 372,000 150,000

Copyright……………………………….. -0- 60,000 60,000


Estimated liability for contingencies..
0 ( 6,000) ( 6,000)
P
Net undervaluation……………………. 330,000 P 576,000 P246,000

The following entry on the date of acquisition in the books of Parent Company
January 1, 20x4
(1) Investment in S 300,000
Company…...……………………………………
Common stock, P1 12,000
par………………………………………………
Paid-in capital in excess of par (P300,000 – 288,000
P12,000 par)……..
Acquisition of S Company.

The schedule of determination and allocation of excess provides complete guidance for the
worksheet eliminating entries on January 1, 20x4:
(E1) Common stock – S 12,000
Co…………………………………………….
Additional paid-in capital – S 108,000
Co……………………………….
Retained earnings – S 72,000
Co…………………………………………
Investment in S 153,600
Co………………………………………………
Non-controlling interest (P192,000 x 38,400
20%)………………………..
Eliminate investment against stockholders’ equity of S Co

(E2) 6,000
Inventory………………………………………………………………
…..
36,000
Land……………………………………………………………………
…..
Buildings and 150,00
equipment……………………………………………… 0
60,000
Copyright………………………………………………………………
....
Estimated liability for 6,000
contingencies……………………………..
Investment in S 146,40
Co……………………………………………... 0
Non-controlling interest (P246,000 x 49,200
20%)……………………….
Retained earnings (bargain purchase gain - closed
to
retained earnings since only balance sheets are 50,400
being

examined).............................................................................
Eliminate investment against allocated excess.

Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned
Subsidiary (Proportionate Basis)

Eliminations
Assets P Co. S Co. Dr. Cr. Consolidated
Cash………………… P 334,800 P 334,800
Accounts receivable…….. 86,400 P 24,000 110,400
Inventory…………………. 96,000 60,000 (2) 6,000 162,000
Land………………………… 120,000 48,000 (2) 36,000 204,000

Buildings and equipment (net). 744,000 222,000 (2) 150,000 1,116,000


Copyright……………………... (2) 60,000 60,000
Investment in S Co…….. 300,000 (1) 153,600
__________ _________ (2) 146,400 -
Total Assets P1,681,200 354,000 P1,987,200
Liabilities and Stockholders’ Equity
Accounts payable……… P 96,000 42,000 P 138,000
Estimated liability for
contingencies… (2) 6,000 6,000
Bonds payable……… 240,000 120,000 360,000
Common stock, P1 par*…..… 44,160 44,160
Common stock, P1 par……… 12,000 (1) 12,000
Paid-in capital in excess of
par** 723,840 723,840
(1) (1)
Paid-in capital in excess of par 108,000 108,000
Retained earnings 577,200 (2) 50,400 627,600
Retained earnings…………… 72,000 (1) 72,000
Non-controlling interest………… (1 ) 38,400
_________ _______ _________ (2) 49,200 _87,600
Total Liabilities and Stockholders’
Equity P1,681,200 P354,000 P 444,000 P 444,000 P1,987,200
(1) Eliminate investment against stockholders’ equity of Scud Co.
(2) Eliminate investment against allocated excess.
* P32,160 + (12,000 shares xP1 par) = P44,160.
**P435,840 + [12,000 shares x (P25 – P1)] = P723,840.
 Incidentally, the non-controlling interest on the date of acquisition is computed as follows:
Common stock – S Co……….………………………………… P 12,000
Paid-in capital in excess of par – S Co…………………….. 108,000
Retained earnings – S 72,000
Co………………………………………
Book value of stockholders’ equity – S P
Co…………………. 192,000
Adjustments to reflect fair value (over/
undervaluation 246,000
of assets and
liabilities)………………………………………….
Fair value of stockholders’ equity of P
subsidiary………………… 438,000
Multiplied by: Non-controlling Interest 20
percentage…………...
Non-controlling interest P
(partial)………………………………….. 87,600

The balance sheet:


Assets
Cash P 334,800
Accounts receivables 110,400
Inventories 162,000
Land 204,000
Buildings and equipment (net) 1,116,000
Copyright 60,000
Total Assets P1,987,200
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable P 138,000
Estimated liability for contingencies 6,000
Bonds payable 360,000
Total Liabilities P 504,000
Stockholders’ Equity
Common stock, P1 par P 44,160
Paid-in capital in excess of par 723,840
Retained earnings 627,600
Parent’s Stockholders’ Equity/Equity Attributable to the
Owners of the Parent P1,395,600
Non-controlling interest 87,600
Total Stockholders’ Equity (Total Equity) P1,483,200
Total Liabilities and Stockholders’ Equity P1,987,200

Full-goodwill Approach (Fair Value Basis)


Schedule of Determination and Allocation of Excess (Full-goodwill or Fair Value Basis)
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (100%)
Consideration transferred:
Common stock: 12,000 x P25
(80%)……………… P 300,000
Fair value of NCI (given)
(20%)………………………. 90,000
Fair value of subsidiary
(100%)………………………. P 390,000
Less: Book value of stockholders’ equity
of S:
Common stock (P12,000 x
100%)……………………. P 12,000
Paid-in capital in excess of par
(P108,000 x 100%). 108,000
Retained earnings (P72,000 x
100%)………………... 72,000 192,000
Allocated excess (excess of cost over
book value)…… P 198,000
Less: Over/under valuation of assets and
liabilities:
Increase in inventory (P6,000 x
100%)……………… P 6,000
Increase in land (P36,000 x
100%)…………………… 36,000
Increase in buildings and
equipment
(P150,000 x
100%)………………………………….... 150,000
Increase in copyrights (P60,000 x
100%)…………… 6,000
Increase in contingent liabilities –
estimated
liability for contingencies (P6,000
x 100%)…….. ( 6,000) 246,000
Negative excess: Bargain purchase gain
to controlling
interest or attributable to parent
only)…………….. (P 48,000)

The following entry on the date of acquisition in the books of Parent Company:
January 1, 20x4
(1) Investment in S 300,000
Company…...……………………………………
Common stock, P1 12,000
par………………………………………………
Paid-in capital in excess of par (P300,000 – 288,000
P12,000 par)……..
Acquisition of S Company.

The schedule of determination and allocation of excess provides complete guidance for the
worksheet eliminating entries on January 1, 20x4:
(E1) Common stock – S 12,000
Co…………………………………………….
Additional paid-in capital – S 108,000
Co……………………………….
Retained earnings – S 72,000
Co…………………………………………
Investment in S 153,600
Co………………………………………………
Non-controlling interest (P192,000 x 38,400
20%)………………………..
Eliminate investment against stockholders’
equity of S Co

(E2) 6,000
Inventory………………………………………………………………
…..
36,000
Land……………………………………………………………………
…..
Buildings and 150,00
equipment……………………………………………… 0
60,000
Copyright………………………………………………………………
....
Estimated liability for 6,000
contingencies……………………………..
Investment in S 146,40
Co……………………………………………... 0
Non-controlling interest (P90,000 given – 51,600
P38,400)……………
Retained earnings (bargain purchase gain - closed
to
retained earnings since only balance sheets are 48,000
being

examined).............................................................................
Eliminate investment against allocated excess.

Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned
Subsidiary (Fair Value Basis)

Eliminations
Assets P Co. S Co. Dr. Cr. Consolidated
Cash………………… P 334,800 P 334,800
Accounts receivable…….. 86,400 P 24,000 110,400
Inventory…………………. 96,000 60,000 (2) 6,000 162,000
Land………………………… 120,000 48,000 (2) 36,000 204,000

Buildings and equipment (net). 744,000 222,000 (2) 150,000 1,116,000


Copyright……………………... (2) 60,000 60,000
Investment in S Co…….. 300,000 (1) 153,600
__________ _________ (2) 146,400 -
Total Assets P1,681,200 P354,000 P1,987,200
Liabilities and Stockholders’ Equity
Accounts payable……… P 96,000 42,000 P 138,000
Estimated liability for
contingencies… (2) 6,000 6,000
Bonds payable……… 240,000 120,000 360,000
Common stock, P1 par*…..… 44,160 44,160
Common stock, P1 par……… 12,000 (2) 12,000
Paid-in capital in excess of par** 723,840 723,840
(2) (1)
Paid-in capital in excess of par 108,000 108,000
Retained earnings 577,200 (2) 48,000 625,200
Retained earnings…………… 72,000 (1) 72,000
Non-controlling interest………… (1 ) 38,400
_________ _______ _________ (2) 51,600 _90,000
Total Liabilities and Stockholders’
Equity P1,681,200 P354,000 P 444,000 P 444,000 P1,987,200
(1) Eliminate investment against stockholders’ equity of Scud Co.
(2) Eliminate investment against allocated excess.
* P32,160 + (12,000 shares xP1 par) = P44,160.
**P435,840 + [12,000 shares x (P25 – P1)] = P723,840.

The balance sheet:

Assets
Cash P 334,800
Accounts receivables 110,400
Inventories 162,000
Land 204,000
Buildings and equipment (net) 1,116,000
Copyright 60,000
Total Assets P1,987,200

Liabilities and Stockholders’ Equity


Liabilities
Accounts payable P 138,000
Estimated liability for contingencies 6,000
Bonds payable 360,000
Total Liabilities P 504,000
Stockholders’ Equity
Common stock, P1 par P 44,160
Paid-in capital in excess of par 723,840
Retained earnings 652,200
Parent’s Stockholders’ Equity/Equity Attributable to the
Owners of the Parent P1,393,200
Non-controlling interest 90,000
Total Stockholders’ Equity (Total Equity) P1,483,200
Total Liabilities and Stockholders’ Equity P1,987,200

Problem IX
1.
Schedule of Determination and Allocation of Excess

Date of Acquisition – January 1, 20x4


Fair value of Subsidiary (100%)
Consideration transferred:
Common stock: 24,000 shares x P14
per share P 336,000
Less: Book value of stockholders’ equity
of Sky:
Common stock (P240,000 x
100%)………………….. P 240,000
Paid-in capital in excess of par
(P96,000 x 100%)... 96,000
Retained earnings (P24,000 x
100%)………………... 24,000 360,000
Allocated excess (excess of book value
over cost)…… (P 24,000)
Less: Over/under valuation of assets and
liabilities:
Increase in inventory (P18,000 x
100%)…………….. P 18,000
Increase in land (P72,000 x
100%)…………………… 72,000
Decrease in buildings and
equipment
(P12,000 x
100%)……………………………………... ( 12,000)
Increase in patent (P24,000 x
100%)………………... 24,000
Increase in contingent liability
(P18,000 x 100%)…. ( 18,000)
Increase in bonds payable (P42,000
x 100%)…….. ( 42,000) 42,000
Negative excess: Bargain Purchase Gain
(excess of
fair value over
cost)…………………………………… (P 66,000)

2. Gain on acquisition, P66,000

Problem X
1.
January 1, 20x4
(1) Investment in S 432,00
Company…………………………………………… 0
288,00
Cash………………………………………………………………… 0
…..
Common stock, P10 120,00
par…………………………………………….. 0
Paid-in capital in excess of 24,000
par…………………………………….

(2) Retained earnings (acquisition-related expense -


close to
retained earnings since only balance sheets are 12,000
being

examined)…………………………………………………………

12,000
Cash…………………………………………………………………
….
Acquisition- related costs.

(3) Paid-in capital in excess of 8,400


par………………………………………..
8,400
Cash…………………………………………………………………
….
Costs to issue and register stocks.

2.
Schedule of Determination and Allocation of Excess
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (100%)
Consideration transferred

Cash………………………………………………………. P 288,000
Common stock: 12,000 shares x P12 per P
share….. 144,000 432,000
Less: Book value of stockholders’ equity of S:
Common stock (P240,000 x
100%)………………….. P 240,000
Paid-in capital in excess of par (P96,000 x
100%).. 96,000
Retained earnings (P24,000 x
100%)………………... 24,000 360,000
Allocated excess (excess of cost over book P
value)…… 72,000
Add: Existing Goodwill of Sky Co. (P6,000 x
100%)……… 6,000
Adjusted allocated P
excess…………………………………. 78,000
Less: Over/under valuation of assets and
liabilities:
Increase in inventory (P18,000 x
100%)…………….. P 18,000
Increase in land (P72,000 x
100%)…………………… 72,000
Decrease in buildings and equipment ( 12,000)
(P12,000 x
100%)……………………………………...
Increase in bonds payable (P42,000 x
100%)…….. ( 42,000) 36,000
Positive excess: Goodwill (excess of cost over fair
P
value)…………………………………………………….. 42,000

Alternatively, the unrecorded goodwill may also be computed by ignoring the existing
goodwill in the books of the subsidiary, thus:

Date of Acquisition – January 1, 20x4 (refer to previous table for details of computation)
Fair value of Subsidiary (100%)
P
Consideration 432,00
transferred……………………………………………………… 0

Less: Book value of stockholders’ equity of 360,00


S……………………………….. 0
Allocated excess (excess of cost over book P
value)…………………………. 72,000
Less: Over/under valuation of assets and
liabilities…………………………… 36,000
Positive excess: Goodwill (excess of cost over fair P
value)…………………... 36,000
Add: Existing
Goodwill……………………………………………………………… 6,000
Positive excess: Goodwill (excess of cost over fair

value)……………………………………………………………………… P
…… 42,000

3.
Eliminations
Assets P Co. S Co. Dr. Cr. Consolidated
Cash*………………………….. P 111,600 P 54,000 P 165,600
Accounts receivable…….. 90,000 60,000 150,000
Inventory…………………. 120,000 72,000 (2) 18,000 210,000
Land……………………………. 210,000 48,000 (2) 72,000 330,000
Buildings and equipment (net) 480,000 360,000 (2) 12,000 828,000
Goodwill…………………… 6,000 (2) 36,000 42,000
Investment in S Co…………. 432,000 (4) 360,000
(5) 72,000 -
Total Assets P1,443,600 P600,000 P1,725,600
Liabilities and Stockholders’ Equity
Accounts payable…………… P 120,000 P120,000 P 240,000
Bonds payable………………… 240,000 120,000 360,000
Premium on bonds payable (6) 42,000 42,000
Common stock, P10 par**…..… 720,000 720,000
Common stock, P10 par……… 240,000 (1) 240,000
Additional paid in capital*** 75,600 75,600
Additional paid in capital…… 24,000 (1) 24,000
Retained earnings**** 288,000 288,000
Retained earnings…………… _________ 96,000 (1) 96,000 __________ _________
Total Liabilities and Stockholders’
Equity P1,443,600 P600,000 P 486,000 P 486,000 P1,725,600
(1) Eliminate investment against stockholders’ equity of Sky Co.
(2) Eliminate investment against allocated excess.
* P420,000 – P288,000 – P12,000 – P8,400 = P111,600.
* *P600,000 + P120,000 (12,000 shares x p10 par) = P720,000.
*** P50,000 + P20,000 – P7,000 = P63,000.
****P300,000 – P12,000 = P288,000.

4.
Assets
Cash P 165,600
Accounts receivables 150,000
Inventories 210,000
Land 330,000
Buildings and equipment (net) 828,000
Goodwill 42,000
Total Assets P1,725,600

Liabilities and Stockholders’ Equity


Liabilities
Accounts payable P 240,000
Bonds payable P 360,000
Premium on bonds payable 42,000 402,000
Total Liabilities P 642,000
Stockholders’ Equity
Common stock, P10 par P 720,000
Additional paid-in capital in excess of par 75,600
Retained earnings 288,000
Total Stockholders’ Equity P 1083,600
Total Liabilities and Stockholders’ Equity P1,725,600

Problem XI
1.
Schedule of Determination and Allocation of Excess

Date of Acquisition – January 1, 20x4


Fair value of Subsidiary (100%)
Consideration transferred (P408,000 – P
P6,000)…….. 402,000
Less: Book value of stockholders’ equity of S:
Common stock (P240,000 x
100%)………………….. P 240,000
Paid-in capital in excess of par (P96,000 x
100%)... 96,000
Retained earnings (P24,000 x
100%)………………... 24,000 360,000
Allocated excess (excess of cost over book P
value)…… 42,000
Less: Over/under valuation of assets and
liabilities:
Increase in inventory (P18,000 x
100%)…………….. P 18,000
Increase in land (P72,000 x
100%)…………………… 72,000
Decrease in buildings and equipment
(P12,000 x
100%)……………………………………... ( 12,000)
Increase in bonds payable (P42,000 x
100%)…….. ( 42,000) 36,000
Positive excess: Goodwill (excess of cost over fair
P
value)…………………………………………………….. 6,000

2. Goodwill, P6,000

Problem XII
1. Inventory P 140,000
2. Land P 60,000
3. Buildings and Equipment P 550,000

4. Goodwill

Fair value of consideration given P 576,000


Less; Book value of SHE 450,000
Allocated excess: P126,000
Increase / decrease in fair value (Fair value
increment) for:
Inventory P 20,000
Land (10,000)
Buildings and equipment 70,000 80,000
Goodwill P 46,000

5. Investment in AA Corporation: Nothing would be reported; the balance in the


investment account is eliminated.

Problem XIII
1. Inventory (P120,000 + P20,000) P140,000
2. Land (P70,000 – P10,000) P 60,000
3. Buildings and Equipment (P480,000 + P70,000) 550,000
4. Full-Goodwill, P57,500
Fair value of Subsidiary:
Consideration transferred P470,000
Add: FV of NCI 117,500 P587,500
Less: BV of SHE of Slim (P250,000 + P200,000) 450,000
Allocated excess P137,500
Less: Over/under valuation of A and L: Inc.
(Dec.)
Inventory P
20,000
Land (10,000)
Buildings and equipment (net) 70,000 80,000
Goodwill – full P 57,500
or,
Fair value of consideration given by Ford P470,000
Fair value of noncontrolling interest 117,500
Total fair value P587,500
Book value of Slim’s net assets P450,000
Fair value increment for:
Inventory 20,000
Land (10,000)
Buildings and equipment (net) 70,000
Fair value of identifiable net assets (530,000)
Goodwill – full P 57,500
Partial Goodwill, P46,000
Fair value of Subsidiary:
Consideration transferred P470,000
Less: BV of SHE of Slim (P250,000 + P200,000) x 80% 360,000
Allocated excess P110,000
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P20,000 x 80%) P 16,000
Land (P10,000 x 80%) ( 8,000)
Buildings and equipment (net) (P70,000 x 80%) 56,000 64,000
Goodwill – partial P 46,000

5. Investment in Slim Corporation: None would be reported;


the balance in the investment account is eliminated.
Noncontrolling Interest (P587,500 x .20) P117,500
6.
or,
BV – SHE of SS P450,000
Adjustments to reflect fair value (P20,000 – P10,000 +P 70,000) 80,000
FV of SHE of SS P530,000
Multiplied by: NCI % 20%
NCI – partial goodwill P106,000
Add: NCI on full-goodwill (P57,500 – P46,000) 11,500
NCI – full goodwill P117,500

Problem XIV
1. P470,000 = P470,000 - P55,000 + P55,000
2. P605,000 = (P470,000 - P55,000) + P190,000
3. P405,000 = P270,000 + P135,000
4. P200,000 (as reported by GG Corporation)

Problem XV
1. P57,000 = (P120,000 - P25,000) x .60
2. P81,000 = (P120,000 - P25,000) + P40,000 - P54,000
3. P48,800 = (P120,000 - P25,000) + P27,000 - P73,200

Problem XVI (assuming that acquisition-related costs is treated as expenses)


In acquisitions, the fair values of the subsidiary's assets and liabilities are consolidated (there are a
limited number of exceptions). Goodwill is reported as P80,000, the amount that the P760,000
consideration transferred exceeds the P680,000 fair value of SS’s net assets acquired.

1. Inventory = P670,000 (P's book value plus Sun's fair value)


2. Land = P710,000 (P's book value plus Sun's fair value)
3. Buildings and equipment = P930,000 (P's book value plus S's fair value)
4. Franchise agreements = P440,000 P's book value plus S's fair value)
5. Goodwill = P80,000 (calculated above)
6. Revenues = P960,000 (only parent company operational figures are reported at date of
acquisition)
7. Additional Paid-in Capital = P65,000 (P's book value less stock issue costs)
8. Expenses = P940,000 (only parent company operational figures plus acquisition-related costs
are reported at date of acquisition)
9. Retained Earnings, 1/1 = P390,000 (P's book value)

Problem XVII
1. Investment in Craig Company .......................................................... 950,000
Cash .................................................................................................. 950,000

2.
Fair value of Subsidiary:
Consideration transferred P950,000
Less: BV of SHE of Craig (P300,000 + P420,000) 720,000
Allocated excess P 230,000
Less: Over/under valuation of A and L: Inc (Decrease)
Land (P250,000 fair – P200,000 book value P 50,000
Building (P700,000 fair – P600,000 book value) 100,000
Discount on bonds payable P280,000 fair – P300,000
book value) 20,000
Deferred tax liability (P40,000 fair – P50,000 book value) 10,000
Buildings and equipment (net) 180,000
Goodwill P 50,000

3. Adjustments on Craig books:


Land ........................................................................................................ 50,000
Building ................................................................................................... 100,000
Discount on Bonds Payable ............................................................... 20,000
Goodwill ................................................................................................. 50,000
Deferred Tax Liability ........................................................................... 10,000
Retained Earnings ................................................................................ 420,000
Paid-In Capital in Excess of Par .................................................... 650,000

4. Elimination entries:
Common Stock..................................................................................... 300,000
Paid-In Capital in Excess of Par ......................................................... 650,000
Investment in Craig Company ..................................................... 950,000

Problem XXI
1.
* Man Mask
(Public Co.) (Private Co.)
Currently issued…………………… 10 M 40% 4 M 40%
Additional shares issued……….. 15 M 60% ** 6 M / 60%
Total shares………………………… 25 M 10 M
**15M/25M
FV of net assets………………………P 18 M P30 M
BV of net assets (same with FV)…. 18 M ?
Fv per share of stock……………….P 8 P 6

2.
Consideration transferred (4,000,000 shares* x P6)…………………………..P24,000,000
Less: Book value of SHE – Man: P18,000,000 x 100%.................................... 18,000,000
Allocated excess …………………………………………………………………..P 6,000,000
Less: Over/Under valuation of assets and liabilities
(book value same fair value)……………………………………………… 0
Goodwill………………………………………………………………………………P 6,000,000

Problem XXII (Assume the use of Full-Goodwill Method)


Note: This solution assumes a difference between the basis of acquired assets for accounting and
tax purposes for this stock acquisition.

1. Investment in Seely Company 570,000


Common Stock*** 95,000
Additional Paid-in-Capital 475,000

***Note: Depending on the wording of this exercise, the credit may be cash instead of common
stock and additional paid-in-capital. If cash is paid, the credit to cash is P570,000.

2. Common Stock - Seely 80,000


Other Contributed Capital – Seely 132,000
Retained Earnings - Seely 160,000
Inventory 52,000
Land 25,000
Plant Assets 71,000
Discount on Bonds Payable 20,000
Goodwill** 127,200
Deferred Income Tax Liability* 67,200

Investment in Seely Company 570,000


Non-controlling Interest [(P570,000/.95) x .05] 30,000
*(.40 x (P52,000 + P25,000 + P71,000 + P20,000))

Problem XXIII
 HB Country and HCO Media
Consolidation of a variable interest entity is required if a parent has a variable interest that
will
 Absorb a majority of the entity's expected losses if they occur
 Receive a majority of the entity's expected residual returns if they occur

Because (1) HCO Media’s losses are limited by contract, and (2) Hillsborough has the right
to receive the residual benefits of the sales generated on the HCO Media internet site
above P500,000, Hillsborough should consolidate HCO Media.
 TPC (Nos. 1, 2 and 3 of the requirement are part of the information)
a. The purpose of consolidated financial statements is to present the financial position and
results of operations of a group of businesses as if they were a single entity. They are
designed to provide information useful for making business and economic decisions—
especially assessing amounts, timing, and uncertainty of prospective cash flows.
Consolidated statements also provide more complete information about the resources,
obligations, risks, and opportunities of an enterprise than separate statements.
b. An entity qualifies as a VIE and is subject to consolidation if either of the following
conditions exist.
 The total equity at risk is not sufficient to permit the entity to finance its activities
without additional subordinated financial support from other parties. In most cases, if
equity at risk is less than 10% of total assets, the risk is deemed insufficient.
 The equity investors in the VIE lack any one of the following three characteristics of a
controlling financial interest.
1. The direct or indirect ability to make decisions about an entity's activities through
voting rights or similar rights.
2. The obligation to absorb the expected losses of the entity if they occur (e.g., another
firm may guarantee a return to the equity investors)
3. The right to receive the expected residual returns of the entity (e.g., the investors'
return may be capped by the entity's governing documents or other arrangements
with variable interest holders).
Consolidation is required if a parent has a variable interest that will
 Absorb a majority of the entity's expected losses if they occur
 Receive a majority of the entity's expected residual returns if they occur
Also, a direct or indirect ability to make decisions that significantly affect the results of
the activities of a variable interest entity is a strong indication that an enterprise has one
or both of the characteristics that would require consolidation of the variable interest
entity.
c. Risks of the construction project that has TPC has effectively shifted to the owners of the
VIE
 At the end of the 1st five-year lease term, if the parent opts to sell the facility, and
the proceeds are insufficient to repay the VIE investors, TPC may be required to pay up
to 85% of the project's cost. Thus, a potential 15% risk.
 During construction 11.1% of project cost potential termination loss.
Risks that remain with TPC
 Guarantees of return to VIE investors at market rate, if facility does not perform as
expected TPC is still obligated to pay market rates.
 If lease is not renewed, TPC must either purchase the facility or sell it on behalf of the
VIE with a guarantee of Investors' (debt and equity) balances representing a risk of
decline in market value of asset
 Debt guarantees
d. TPC possesses the following characteristics of a primary beneficiary Direct decision-
making ability (end of five-year lease term)
 Absorb a majority of the entity's expected losses if they occur (via debt guarantees
and guaranteed lease payments and residual value)
 Receive a majority of the entity's expected residual returns if they occur (via use of
the facility and potential increase in its market value).
Problem XXIV
1. Implied valuation and excess allocation for SP.
FV of VIE:
Consideration transferred by P. P 20,000
Non-controlling interest fair value __ 60,000
FV/Total business fair value of VIE P 80,000
Less: Fair value of VIE net assets [P20,000 + (P140,000 + P20,000)
+ P40,000 – P120,000) __100,000
Excess net asset value fair value/Bargain purchase gain P( 20,000)

The P20,000 excess net asset fair value is recognized by PT as a bargain purchase. All SP’
assets and liabilities are recognized at their individual fair values.

Cash P20,000
Marketing software 160,000
Computer equipment 40,000
Long-term debt (120,000)
Noncontrolling interest (60,000)
Pantech equity interest (20,000)
Gain on bargain purchase (20,000)
- 0-

2. Implied valuation and excess valuation for SP.


FV of VIE:
Consideration transferred by P. P 20,000
Non-controlling interest fair value __ 60,000
FV/Total business fair value of VIE P 80,000
Less: Fair value of VIE net assets [P20,000 + (P140,000 - P20,000)
+ P40,000 – P120,000) __60,000
Excess fair value over net assets/ Goodwill P 20,000

Noncontrolling interest fair value 60,000


Consideration transferred by Pantech 20,000
Total business fair value 80,000
Fair value of VIE net identifiable assets 60,000
Goodwill P20,000

When the business fair value of a VIE (that is a business) is greater than assessed asset
values, all identifiable assets and liabilities are reported at fair values (unless a previously
held interest) and the difference is treated as a goodwill.
Cash P20,000
Marketing software 120,000
Computer equipment 40,000
Goodwill (excess business fair value) 20,000
Long-term debt (120,000)
Noncontrolling interest (60,000)
PT equity interest (20,000)
-0-
Multiple Choice Problems
1. c – at fair value
2. c [P300,000 – (P35,000 + P60,000 + 125,000 + P250,000 – P65,000 – P150,000)]
3. d
Consideration transferred P300,000
Less: Book value of SHE of S (P100,000 + P115,000) 215,000
Allocated excess (excess of fair value or cost over book value)
- sometimes termed as “Differential” P 85,000
4. a – Investment in subsidiary in the consolidated statements is eliminated in its entirety.
5. d
Consideration transferred P150,000
Less: Book value of SHE of S (P40,000 + P52,000) 92,000
Allocated excess (excess of fair value or cost over book value)
- sometimes termed as “Differential” P 58,000
6. b – [P150,000 – (P173,000 – P40,000 – P5,000)]
7. d - P600,000 - P15,000 - P255,000 = P330,000
8. c - P475,000 - P300,000 = P175,000 debit
9. b – fair value
10. d – fair value
11. d – fair value
12. c -
Full-goodwill:
Fair value of Subsidiary:
Consideration transferred P300,000
Add: FV of NCI 100,000 P400,000
Less: BV of SHE of Silver (P100,000 + P180,000) x 100% 280,000
Allocated excess P120,000
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P65,000 – P70,000) x 100% P( 5,000)
Land (P100,000 – P90,000) x 100% 10,000
Buildings and equipment (P300,000 – P250,00) x 100% 50,000 __55,000
Goodwill – full P 65,000

If partial-goodwill, no answer available, computed as follows:


Fair value of Subsidiary:
Consideration transferred P300,000
Less: BV of SHE of Silver (P100,000 + P180,000) x 75% _210,000
Allocated excess P 90,000
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P65,000 – P70,000) x 75% P( 3,750)
Land (P100,000 – P90,000) x 75% 7,500
Buildings and equipment (P300,000 – P250,00) x 75% 37,500 __41,250
Goodwill – full P 48,750
13. a – Investment in Silver will be eliminated in the consolidated balance sheet
14. d
FV of SHE of S:
Book value of SHE of S (P100,000 + P180,000)………………..P 280,000
Adjustments to reflect fair value ……………………………… 55,000
FV of SHE of S……………………………………………………… P 335,000
Multiplied by: NCI%.................................................................... 25%
FV of NCI (partial)………………………………………………….P 83,750
Add: NCI on full goodwill (P65,000 – P48,750)……………….. 16,250
FV of NCI (full-goodwill)*…………………………………………P100,000
* same with the NCI given per problem

15. b – P135,000 = P90,000 + P45,000


16. d
Full-goodwill:
Fair value of Subsidiary:
Consideration transferred P160,000
Add: FV of NCI _40,000 P200,000
Less: BV of SHE of Silver (P40,000 + P120,000) x 100% _160,000
Allocated excess P 40,000
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P45,000 – P40,000) x 100% P 5,000
Land (P60,000 – P40,000) x 100% 20,000 25,000
Goodwill – full P 15,000

17. a
Total Assets of Gulliver (Jonathan) P610,000
Less: Investment in Sea-Gull Corp. (160,000)
P 450,000
Book value of assets of Sea Corp. 230,000
Book value reported by Gulliver/Jonathan and Sea P 680,000
Increase in inventory (P45,000 – P40,000) 5,000
Increase in land (P60,000 – P40,000) 20,000
Goodwill (full)* 15,000
Total assets reported P 720,000

18. c – P100,000 + P95,000 + P30,000 + P40,000 = P265,000

19. c
FV of SHE of S:
Book value of SHE of S (P40,000 + P120,000)………………….P 160,000
Adjustments to reflect fair value [(P45,000 + P60,000) -
(P40,000 + P40,000)………….……………………………… 25,000
FV of SHE of S……………………………………………………… P 185,000
Multiplied by: NCI%.................................................................... 20%
FV of NCI (partial)………………………………………………….P 37,000
Add: NCI on full goodwill (P15,000 – P12,000)……………….. 3,000
FV of NCI (full-goodwill)*………………………………………… P 40,000
* same with the NCI given per problem

Partial Goodwill
Fair value of Subsidiary:
Consideration transferred P160,000
Less: BV of SHE of S (P40,000 + _128,000
P120,000) x 80%
Allocated excess P 32,000
Less: Over/under valuation of A and L:
Inc. (Dec.)
Inventory (P5,000 x 80%) P
4,000
Land (P20,000 x 80%) 16,000 __20,000
Goodwill – partial P 12,000

20. a - The amount reported by Jonathan Corporation


21. a
Jonathan stockholders' equity(P200,000 + P205,000)……………….. P405,000
NCI (full-goodwill) – refer to No. 19…………………………………….. 40,000
Consolidated stockholders’ equity……………………………………. P445,000
22. d – [P132,000 + (P38,000 + {P60,000 – P38,000}] or P132,000 + P60,000
23. b
Total Assets of P. P1,278,000
Less: Investment in Swimmer Corp. (440,000)
P 838,000
Book value of assets of S Corp. 542,000
Book value reported by P and S P1,380,000
Increase in inventory (P60,000 – P38,000) 22,000
Increase in land (P60,000 – P32,000) 28,000
Increase in plant assets [P350,000 – (P300,000 – P60,000)] 110,000
Goodwill (full)* 26,667
Total assets reported P1,566,667
*(P440,000/75%) – (P702,000 – P142,000) = P26,667

If partial-goodwill:
Total Assets of P. P1,278,000
Less: Investment in S Corp. (440,000)
P 838,000
Book value of assets of S Corp. 542,000
Book value reported by P and S P1,380,000
Increase in inventory (P60,000 – P38,000) 22,000
Increase in land (P60,000 – P32,000) 28,000
Increase in plant assets [P350,000 – (P300,000 – P60,000)] 110,000
Goodwill (partial)* 20,000
Total assets reported P1,540,000
*[P440,000 – (P702,000 – P142,000) x 75%]

24. d P215,000 = P130,000 + P70,000 + (P85,000 - P70,000)


25. a
Partial Goodwill
Fair value of Subsidiary:
Consideration transferred P150,500
Less: BV of SHE of SSD (P50,000 + P90,000) x 70% __98,000
Allocated excess P 52,500
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P15,000 x 70%) P 10,500
Land (P20,000 x 70%) 14,000 24,500
Goodwill – partial P 28,000

26. c
Full-goodwill:
Fair value of Subsidiary:
Consideration transferred P150,500
Add: FV of NCI **64,500 P215,000
Less: BV of SHE of SS (P50,000 + P90,000) x 100% 140,000
Allocated excess P 75,000
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P70,000 – P85,000) x 100% P 15,000
Land (P25,000 – P45,000) x 100% 20,000 35,000
Goodwill – full P 40,000
**given amount, but it should not be lower than the fair value of SHE –
subsidiary amounting to
P52,500 computed as follows :
FV of SHE of SS:
Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000
Adjustments to reflect fair value (P15,000 + P20,000)… 35,000
FV of SHE of SS……………………………………………… P 175,000
Multiplied by: NCI%.......................................................... 30%
FV of NCI (partial)……………………………………………..P 52,500
27. b
Total Assets of Power Corp. P 791,500
Less: Investment in Silk Corp. (150,500)
P 641,000
Book value of assets of Silk Corp. 405,000
Book value reported by Power and
Silk P1,046,000
Increase in inventory (P85,000 - P70,000) 15,000
Increase in land (P45,000 - P25,000) 20,000
Goodwill (full) 40,000
Total assets reported P1,121,000

If partial-goodwill:
Total Assets of Power Corp. P 791,500
Less: Investment in Silk Corp. (150,500)
P 641,000
Book value of assets of Silk Corp. 405,000
Book value reported by Power and
Silk P1,046,000
Increase in inventory (P85,000 - P70,000) 15,000
Increase in land (P45,000 - P25,000) 20,000
Goodwill (partial) 28,000
Total assets reported P1,109,000
28. d P701,500 = (P61,500 + P95,000 + P280,000) + (P28,000 + P37,000
+ P200,000)
29. a
Non-controlling interest (partial-goodwill): P52,500
NCI
FV of SHE of SSD:
Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000
Adjustments to reflect fair value (P15,000 + P20,000)… 35,000
FV of SHE of SSD P 175,000
Multiplied by: NCI%.......................................................... 30%
FV of NCI (partial)……………………………………………..P 52,500
30. d
Non-controlling interest (fulll-goodwill): P64,500
NCI
FV of SHE of SSD:
Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000
Adjustments to reflect fair value (P15,000 + P20,000)… 35,000
FV of SHE of SSD P 175,000
Multiplied by: NCI%.......................................................... 30%
FV of NCI (partial)……………………………………………..P 52,500
Add: NCI on full-goodwill (P40,000 – P12,000)…………...
12,000
FV of NCI (full)…………………………………………………..P 64,500

31. d P205,000 = The amount reported by Power Corporation

32. c P419,500 = (P150,000 + P205,000) + P64,500


If partial-goodwill:
Stockholders’ equity: P419,500
Consolidated SHE:
Common stock P150,000
Retained Earnings 205,000
Parent’s SHE or Equity Attributable to Parent P355,000
NCI (partial-goodwill) 52,500
Consolidated SHE P404,500
33. b
Consideration transferred ........................................................................................ P60,000
Less: Strand's book value (P50,000 x 80%) .............................................................. (40,000)
Fair value in excess of book value .......................................................................... P20,000
Excess assigned to inventory (60%) .......................................................... P12,000
Excess assigned to goodwill (40%) ............................................................ P 8,000

34. c
Consideration transferred (P60,000 ÷ 80%) ............................................................ P75,000
Less: Strand's book value .......................................................................................... (50,000)
Fair value in excess of book value .......................................................................... P25,000
Excess assigned to inventory (60%) .......................................................... P15,000
Excess assigned to goodwill (40%) ............................................................ P10,000

35. a
Park current assets ....................................................................................................... P 70,000
Strand current assets ................................................................................................... 20,000
Excess inventory fair value ......................................................................................... 15,000
Consolidated current assets ...................................................................................... P105,000

36. c
Park noncurrent assets ............................................................................................... P 90,000
Strand noncurrent assets ........................................................................................... 40,000
Excess fair value to goodwill (partial) ..................................................................... ___8,000
Consolidated noncurrent assets .............................................................................. P140,000

37. d
Park noncurrent assets ................................................................................................ P 90,000
Strand noncurrent assets ............................................................................................ 40,000
Excess fair value to goodwill (full) ............................................................................. __10,000
Consolidated noncurrent assets ............................................................................... P140,000

38. b Add the two book values and include 10% (the P6,000 current portion) of the loan taken
out by Park to acquire Strand.

39. b Add the two book values and include 90% (the P54,000 noncurrent portion) of the loan
taken out by Polk to acquire Strand.
40. b
Park stockholders' equity ........................................................................................... P80,000
NCI (partial):
BV of SHE – S ……………………………………………………………..P50,000
Adjustments to reflect fair value (inventory)………………………. 15,000
FV of SHE – S………………………………………………………………P65,000
x: Multiplied by: NCI%........................................................................ 20% 13,000
Total stockholders' equity ......................................................................................... P93,000
41. c
Park stockholders' equity ......................................................................... …………. P80,000
NCI (full):
BV of SHE – S ……………………………………………………………..P50,000
Adjustments to reflect fair value (inventory)………………………. 15,000
FV of SHE – S………………………………………………………………P65,000
x: Multiplied by: NCI%......................................................................... 20%
NCI (partial)………………………………………………………………P13,000
Add: NCI on full-goodwill (P10,,000 – P8,000)……………………… 2,000
Non-controlling interest at fair value (20% × P75,000)………… 15,000
Total stockholders' equity P95,000

42. b
P’s acquisition entry is:
Investment in Silicon 2,500,000
Merger expenses 250,000
C/S (100,000@P1) 100,000
APIC [(100,000@P24) – P400,000] 2,000,000
Cash (P400,000 + P250,000) 650,000

Eliminating entries are:


Capital stock 560,000
Retained earnings 280,000
AOCI 195,000
Treasury stock 35,000
Investment in Silicon 1,000,000

Customer lists 700,000


Goodwill 800,000
Investment in Silicon 1,500,000

43. b – refer to No. 42


44. a – refer to No. 42
45. a – refer to No. 42
46. b – refer to No. 42
47. b
48. a – P150,000 + P500,000
49. a – at fair value
50. b
FV, stocks issued………………………………………………… P 4,200,000
Less: Par value of stocks issued (500,000 shares x P5)…….. __2,500,000
APIC P 1,700,000
Add: APIC of P 7,500,000
Less: Stock issuance cost ___100,000
P 9,100,000
51. a ( P10 x 100,000 = P1,000,000 – P1,400,000) = P400,000
52. a – at fair value
53. c
54. a
[P15 x 100,000 = P1,500,000 – (P1,900,000 – P100,000 – 600,000 )+ P100,000 increase +
P100,000 in increase in PPE] = P100,000
55. b
P1,500,000 – (1,700,000 – 50,000 decrease in inventories) + (P100,000 increase in PPE –
P300,000 – P500,000) = P550,000
56. a
57. d (P1,000,000 + P250,000) = P1,250,000 P only.
58. d [P99,000 + (P45,000 – P26,000)] or (P99,000 + P45,000) = P144,000
59. b [(P330,000/75%) – (P565,000 – P105,000)] = (P20,000) – full-goodwill approach
61. a - P only
62. d
Book value of Assets (P80,000 + P50,000 + P200,000) P330,000
Fair value of Assets (P85,000 + P60,000 + P250,000) 395,000
P 65,000
63. a – zero, since the revaluation of P65,000 is already recorded in the books of subsidiary (not in
the worksheet or eliminating entries.
64. b – (P250,000 – P200,000)/10 years = P5,000 depreciation to reduce net income of Sirius.
65. a - P15,000 = (P115,000 + P46,000) - P146,000
66. b - P65,000 = (P148,000 - P98,000) + P15,000
67. BB, P70,000; SS, P24,000, no answer available
SS: P24,000 = P380,000 - (P46,000 + P110,000
+ P75,000 + P125,000)
BB P70,000 = P94,000 - P24,000
68. P259,000, no answer available
Fair value of SS as a
whole:
P200,000 Book value of SS shares
10,000 Differential assigned to inventory
(P195,000 - P105,000 - P80,000)
40,000 Differential assigned to buildings and equipment
(P780,000 - P400,000 - P340,000)
9,000 Differential assigned to goodwill
P259,000 Fair value of SS

69. c - 65 percent = 1.00 – (P90,650 / P259,000)


70. a
Capital Stock = P120,000
Retained Earnings = P115,000
71. d - A total of P210,000 (P120,000 + P90,000) should be reported.
72. a - As shown in the investment account balance, Beryl paid P110,000 for the ownership of SS.
The amount paid was P30,000 greater than the book value of the net assets of SS and is
reported as goodwill in the consolidated balance sheet at January 1, 20X5.
73. c - In determining the amount to be reported for land in the consolidated balance sheet,
P15,000 (P70,000 + P50,000 - P105,000) was eliminated. BB apparently sold the land to SS for
P25,000 (P10,000 + P15,000).
74. d - Accounts payable of P120,000 (P75,000 + P55,000 - P10,000) will be reported in the
consolidated balance sheet. A total of P10,000 was deducted in determining the balance
reported for accounts receivable (P90,000 + P50,000 - P130,000). The elimination of an
intercompany receivable must be offset by the elimination of an intercompany payable.
75. P100,000, the par value of B's stock outstanding is P100,000, no answer available
76. c**/d*
Note: The following discussion regarding the treatment of direct acquisition-related costs in the books of parent entity,
does not affect the computation of goodwill wherein under PFRS 3, acquisition-related costs direct or indirect are
considered as expensed.
The following discussions focus on the books of parent entity regarding direct acquisition-related costs.

Currently, the Interpretation Committee (IFRIC) of IASB is discussing the topic of Contingent Pricing of Property, Plant
and Equipment and Intangible Assets. The scope of those deliberations does not include the cost of investment in
associate, joint venture or subsidiary but it is possible that the scope of the project might be expanded in future.
(IGAAP 2013 under IFRS by Ernst and Young, page 530,)

This raises the question of the treatment of the transaction costs as, under PFRS 3 these costs are usually recognized as
expenses in the consolidated accounts.

Revised PAS 27 does not define what is meant by “cost”, but in the glossary to PFRS provides an over-riding definition
of “cost” as “the amount of cash or cash equivalents paid or the fair value of the other consideration given to
acquire an asset at the time of its acquisition or construction”

As a general rule under PFRS, “cost” includes the purchase price and other costs directly attributable to the
acquisition or issuance of the asset such as professional fees for legal services, transfer taxes and other transaction
costs”

* Answer d – P1,600,000 (P1,500,000 + P100,000) – Position of Ernst and Young (EY). Given that Revised PAS 27 does not
separately define “cost”, it is appropriate to apply the general meaning of “cost” to separate financial statements.
Therefore, in the opinion of EY, the cost of investment in subsidiary in the separate financial statements includes any
costs incurred even if such costs are expensed in the consolidated financial statements.

The view of EY, maybe based on the assumption that under the revised PAS 27 since it applies only to “Separate
Financial Statements” not consolidated statements; therefore PFRS 3 which is a standard for business
combination/consolidation will not be the basis for the definition of “cost”). Unlike before the revision of PAS 27 and
implementation of PFRS 10, the basis of the old PAS 27, which is “Consolidated and Separate Statements”, is PFRS 3,
wherein the definition of “cost” was clearly defined. That is why the general rule in the definition of “cost” was
applied. This view is also as suggest by the IASB since they introduced the requirement to expense acquisition costs
within PFRS 3, it only applies to financial statements in which a business combination is accounted for under PFRS 3. It
follows that this requirement does not extend to the individual (or separate) financial statements of the investing or
parent entity.
So, it seems that the basis of the general rule applies to PAS 16 (Property, Plant and Equipment) and PAS 38
(Intangible Assets) wherein the direct costs is capitalized in the books of parent entity and eventually become
expense through eliminating entry to prepare consolidated statements.
** Answer c – P1,500,000; In Revised PAS 27 “Separate Financial Statements” in relation to PFRS 3 par. 33, which refers to
any acquisition-related costs incurred by the acquirer in relation to the business combination (for example legal
costs, due diligence costs – such as finder’s fee are expensed off and not included in the consideration transferred.
The key reasons given for this approach are provided in paragraph BC366:
 Acquisition-related costs are not part of the fair value exchange between the buyer and seller.
 They are separate transactions for which the buyer pays the fair value for the services received.
 These amounts do not generally represent assets of the acquirer at acquisition date because the benefits
obtained are consumed as the services are received.

The PFRS 3 accounting for these outlays is a result of the decision to record the identifiable assets acquired and
liabilities assumed at fair value. In contrast, under PAS 16 and PAS 38, the assets acquired are initially recorded at
cost. The following items are worth noting to justify the use of this approach:
1. This view is supported by Hilton and Herauf in their book Modern Advanced Accounting in Canada, 7th Edition
(2013) which is an IFRS based discussion, in the solution they presented in one of their end-of-chapter
problems, they expensed the direct costs in recording the investment in subsidiary in the book of parent
company
2. Similar with No. 1 above, in the book Applying IFRS, 3rd edition (2013), by Picker, et al (which is also Ernst and
Young book, which seems to contradict their position in the discussion above) in chapter 24 end-of-the
chapter problems, the direct costs (or “costs incurred in undertaking taking the acquisition” as the term used
in the book) were not part of the investment in subsidiary as evidenced by the amount in the eliminating
entry.
3. One respected author in accounting even commented that, despite the above analysis capitalizing the
direct costs seems to be correct and have basis since the segregation of old PAS 27 to Revised PAS 27 and
PFRS 10, the problem is, if the parent records the direct costs as part of Investment in subsidiary, it may be a
problem when there will be an impairment test which will reveal the costs are in fact unrecoverable and thus
that there must be an impairment charge at the parent level (in which the direct costs is included as part the
investment), which would have the effect of bringing the parent’s accounting (with the impairment investment
including the direct costs) in line with what would later appear on the consolidated financial statements.
The author believes that the there is logic on the basis of applying the general rule in interpreting the definition of
“costs” in PAS 27 wherein the basis are PAS 16 and PAS 38, giving rise to an effect wherein the direct costs will be
part of the investment in the books of parent entity. But because of the three reasons mentioned above, the author
believes that the direct costs still be considered as expenses applying PFRS 3, aside from the fact that in substance
the ultimate objective is to consolidate, eventhough there was a separation of standard between Revised PAS 27
and PFRS 10.

77. a
78. d – Since, CC Corp. is not a subsidiary, no elimination of intercompany accounts will be made.
Therefore, the P200,000 remains to be a receivable. On the other hand, WW Corp. is a
consolidated subsidiary, so the P300,000 intercompany account will be eliminated.
79. d
80. a
81. c – In the combined financial statements (which normally used to described financial
statements in a “common control” situation), intercompany accounts are eliminated in full.

82. d – In consolidating the subsidiary's figures, all intercompany balances must be eliminated in
their entirety for external reporting purposes. Even though the subsidiary is less than fully
owned, the parent nonetheless controls it.
83. d
The acquisition method consolidates assets at fair value at acquisition date regardless of the
parent’s percentage ownership.
84. c
85. c
An asset acquired in a business combination is initially valued at 100% acquisition-date
fair value and subsequently amortized its useful life.
Patent fair value at January 1, 2009 ....................................................................... P45,000
Amortization for 2 years (10 year life)...................................................................... (9,000)
Patent reported amount December 31, 2010 ...................................................... P36,000

86 a
PP - building................................................................................................................... P510,000
TT building acquisition-date fair value P300,000
Amortization for 3 years (10-year life) (90,000) 210,000
Consolidated buildings ............................................................................................... P720,000
-OR-
PP - building ................................................................................................................... 510,000
TT building 12/31/x4 P182,000
Excess acquisition-date fair value allocation 40,000
Excess amortization for (P40,000/ 10 x 3 years) (12,000) 210,000
Consolidated buildings ............................................................................................... P720,000
87. b
Target not met: 100,000 shares x .75 share x P10 = P750,000
Target met: 100,000 shares x .8 x P10 = P800,000
88. c
Target not met: 250,000 shares x 1.50 share x P30 = P11,250,000
Target met: 250,000 shares x 1.8 x P30 = P13,500,000
89. c
500,000 shares x 1.7 exchange ratio x P25 = P21,250,000
The investment value does not change as a result of a change in the share prices.
90. d
Cost of Investment (40 shares* x P40)………………………………………………………P 1,600
Less: Book value of SHE – Pedro Ltd (P300 + P800) x 100%............................................ 1,100
Allocated excess……………………………………………………………………………… P 500
Less: Over/Under valuation of Assets and Liabilities:
Increase in Non-current assets: [(P1,500 – P1,300) x 100% x 70%......................... 140
Goodwill………………………………………………………………………………………….P 360

100%
* Pedro Ltd Santi Ltd
Currently issued…………………… 100 40% 40 40%
Additional shares issued……….. 150 60%** 60 / 60%
Total shares………………………… 250 100

**150/250
FV of net assets [P.5M + P1.5M – P.7M)] P1.3M P ?
BV of net assets (same with FV)……….. 1.1 M ?
Fv per share of stock……………………… P 16 P 40

Pedro ltd issues 2 ½ shares in exchange for each ordinary share of Santi Ltd. All of Santi Ltd’s
shareholders exchange their shares for Pedro Ltd. Pedro Ltd therefore issues 150 shares (60 x 2
½) for the 60 shares in Santi Ltd.

Pedro Ltd is now the legal parent of the subsidiary Santi Ltd. However, analyzing the
shareholding in Pedro Ltd shows that it consists of the 100 shares existing prior to the merger
and 150 new shares held by former shareholders in Santi Ltd. In essence, the former
shareholders of Santi Ltd now control both entities Pedro Ltd and Santi Ltd. The former Santi Ltd
shareholders have a 60% interest in Pedro Ltd [150/(100+150]. The IASB argues that there has
been a reverse acquisition, and that Santi Ltd is effectively the acquirer of Pedro Ltd.

Reverse acquisition occurs when the legal subsidiary has this form of control over the legal
parent. The usual circumstance creating a reverse acquisition is where an entity (the legal
parent) obtains ownership of the equity of another entity (the legal subsidiary) but, as part of
the exchange transaction, it issues enough voting equity as consideration for control of the
combined entity to pass to the owners of the legal subsidiary.

The key accounting effect of deciding that Santi Ltd is the acquirer is that the assets and
liabilities of Pedro ltd are to be valued at fair value. This is contrary to normal acquisition
accounting, based on Pedro Ltd being the legal parent of Santi Ltd, which would require the
assets and liabilities of Santi Ltd to be valued at fair value.

91. b – building account in the books of subsidiary at fair value


92. e – building account in the books of subsidiary at book value
93. d – push-down accounting: equipment account in the books of subsidiary is at fair value
94. c
P60,000 allocation to equipment is "pushed-down" to subsidiary and increases balance from
P330,000 to P390,000. Consolidated balance is P420,000 plus P390,000.

Theories
1. c 6. B 11. c 16. d 21. b 26. d 31 c 36. d
2. a 7. b 12. c 17. c 22. a 27. c 32. d 37. d
3. e 8. A 13. d 18. b 23. a 28. c 33. b 38. c
4. e 9. D 14. d 19. c 24. b 29. d 34. d 39. b
5. b 10, a 15, b 20. c 25. c 30. b 35. d 40. c

41. c 46. b 51. c 56. c


42. c 47. a 52. b 57. d
43. c 48. c 53. a
44. c 49. d 54. a
45. c 50, b 55, b

Chapter 16

Problem I - Cost Model/Method versus Equity Method


Partial-Goodwill Approach:
Fair value of Subsidiary
Consideration transferred: P600,000.............................................. 600,000
Less: Carrying amount of Small’s net assets =
Carrying amount of Small’s shareholders’ equity
Common/Ordinary shares – Small (400,000 x 75%)............ 300,000
Retained earnings – Small (100,000 x 75%)......................... 75,000 375,000
Allocated Excess: Acquisition differential – Jan. 1, 20x4 225,000
Less: Over/under valuation of A/L (Allocated to):
Increase in Inventory (40,000 x 75%)........................................ 30,000
Decrease in Patents (70,000 x 75%).......................................... (52,500) ( 22,500)
Positive Excess: Goodwill - partial 247,500
Full-Goodwill Approach:
Fair value of Subsidiary (Implied cost of 100% investment); P600,000/75% 800,000
Less: Carrying amount of Small’s net assets =
Carrying amount of Small’s shareholders’ equity
Common/Ordinary shares 400,000
Retained earnings 100,000
500,000
Allocated Excess: Acquisition differential – Jan. 1, 20x4 300,000
Less: Over/under valuation of A/L (Allocated to):
Increase in Inventory 40,000
Decrease in Patents (70,000) (30,000)
Positive Excess: Goodwill - full 330,000
A summary or depreciation and amortization adjustments is as follows:
Account Adjustments to be Over/ Annual Current
amortized Under Life Amount Year(20x4) 20x5 20x6
Inventory P40,000 1 P 40,000 P 40,000 P - P -
Subject to Annual Amortization
Patents (70,000) 5 (14,000) ( 14,000) (14,000) (14,000)
Amortization P 26,000 P 26,000 P(14,000) P(14,000)
Impairment of goodwill (full) 330,000 - _____ _____ ______ __ 19,300
P 26,000 P 26,000 P(14,000) P 5,300

For purposes of comparison between Cost Model/Method and Equity Method


Cost Method
Journal Entries Year 1 Year 2 Year 3
Investment
Investment in Small 600,000
Cash 600,000
Dividend of Subsidiary
Cash 18,750 7,500 30,000
Dividend income 18,750 7,500 30,000
Investment in Son Dividend Income
1/1/x4 CI…… 600,000
18,750 - Div–S (75 x80%)
12/31/x4 600,000 18,750
7,500 - Div–S (10 x80%)
12/31/x5 600,000 18,750
30,000 - Div–S (40 x80%)
12/31/x6 600,000 30,000

Equity Method
1. Year 1 Year 2 Year 3
Investment
Investment in Small 600,000
Cash 600,000
Net Income (Loss) of Subsidiary:
Investment in Small (75% x Small’s profit) 60,000 67,500
Investment income 60,000 67,500
Investment income 26,,250
Investment in Small (75% x Small’s profit) 26,250
Dividend of Subsidiary
Cash (75% x Small’s dividends) 18,750 7,500 30,000
Investment in Small 18,750 7,500 30,000
Amortization of Allocated Excess
Investment income (75% x amortization of PD*) 19,500 3,975
Investment in Small 19,500 3,975

Investment in Small 10,500


Investment income 10,500
Investment in Son Investment Income (loss)
1/1/x4: CI 600,000
NI of S 18,750 75% Div - Son NI of Son
(80,000 75% Amort& Amortization (80,000
x 75%)……. 60,000 19,500 impairment impairment 19,500 60,000 x 75%)
12/31/x4 621,750 40,500
75% NL – Sub 75% NL – Sub
26,250 (35,000 x 75%) (35,000 x 75%) 26,250
7,500 75% Div - Son
75% Amort& 75% Amort&
Impairment 10,500 10,500 impairment
12/31/x5 598,500 15,750
NI of S 30,00075% Div - Son NI of Son
(90,000 75%Amort& Amortization (90,000
x 75%)……. 67,500 3,975 impairment impairment 3,975 67,500 x 75%)
12/31/x6632,025 63,525
Reconciliation of Investment /Conversion of Investment Account from Cost to Equity Method:
Investment balance under cost model P
600,000
Retroactive adjustments: (Small’s net income less
dividends)
Small’s retained earnings, end of year P160,000
Less: Small’s retained earnings, date of acquisition _100,000
Increase in retained earnings (NI less dividend) P 60,000
Less: Cumulative amortization of allocated excess _17,300
P 42,700
X: Controlling interests ____75%
P 32,025
Less: Impairment of goodwill _______0 _32,025
Investment balance under equity method P
632,025

2.
a. Goodwill, 12/31/20x6 (P330,000 – P19,300) P 310,700
b. FV of NCI, 12/31/20x6:
Non-controlling interest (full-goodwill), December 31, 20x6
Common stock – Subsidiary Company, December 31, 20x6 . . . . . . . . . . . . . . . . . . P 400,000
Retained earnings – Subsidiary Company, December 31, 20x6
Retained earnings – Subsidiary Company, January 1, 20x6
(P100,000 + P80,000 – P25,000 – P35,000 – P10,000).............................. P110,000
Add: Net income of Small for 20x6……………………………………………….. 90,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P200,000
Less: Dividends paid – 20x6…………………………………………………………. 40,000 160,000
Stockholders’ equity – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . . P 560,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4)- decreased in Net Assets . . . . ( 30,000)
Less: Amortization of allocated excess (refer to amortization above):
20x4 (P40,000 – P14,000). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 26,000
20x5 and 20x6. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28,000) (2,000)
Fair value of stockholders’ equity of subsidiary, December 31, 20x6 . . . . . . . . . . . P 532,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . 20
FV of Non-controlling interest (partial goodwill), 12/31/20x6 . . . . . . . . . . . . . . . . . P 133,000
Add: Non-controlling interest on full goodwill , net of impairment loss
[(P330,000 full – P247,000, partial = P82,500…………………………………. P 82,500
Less: Impairment on the NCI (P19,300 x 25%)………………………………… ___4,825 ___*77,675
FV of Non-controlling interest (full-goodwill), 12/31/20x6. . . . . . . . . . . . . . . . . . . . . P 210,675
*or P330,000 full – P247,000, partial = P82,500 – (impairment loss on full goodwill less (P19,300 x 25%)]
= P77,625

Alternatively, NCI on December 31, 20x6may also be computed as follows (Note: This is the
American version of computing NCI, since they only allowed using Full-goodwill Method):
Common stock, 12/31/20x6………………………………………………… P 400,000
Retained earnings, 12/31/20x6
(P100,000+P80,000 – P25,000 – P35,000 – P10,000)………….. P 110,000
Add: NI – Subsidiary (20x6) …………………………………………………. 90,000
Dividends – Subsidiary 20x6………………………………………………….( 40,000) 160,000
Book value of SHE – S, 12/31/20x6…………………………………………. P560,000
Adjustments to reflect fair value (Increase in Net Assets)………………P 300,000
Amortization of allocated excess:
Inventory – 20x4...…………………………………………………….( 40,000)
Patent (P14,000 x 3 years)………………………………………….. 42,000
Impairment of goodwill – 20x6……………………………………..( 19,300) 282,700
FV of SHE of Small……………………………………………………………… P 842,700
Multiplied by: NCI%..................................................................................... 25%
FV of NCI, 12/31/20x6………………………………………………………….. P 210,675

Or, alternatively:
Common stock – Subsidiary Company, December 31, 20x6 . . . . . . . . . . . . . . . . . . P 400,000
Retained earnings – Subsidiary Company, December 31, 20x6
Retained earnings – Subsidiary Company, January 1, 20x6
(P100,000 + P80,000 – P25,000 – P35,000 – P10,000).............................. P110,000
Add: Net income of Small for 20x6……………………………………………….. 90,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P200,000
Less: Dividends paid – 20x6…………………………………………………………. 40,000 160,000
Stockholders’ equity – Subsidiary Company, December 31, 20x6 . . . . . . . . . . . . . P 560,000
Unamortized acquisition differential / allocated excess / increase in net assets:
{P300,000, allocated excess – {P40,000 - (P14,000 x 3) + P19,300, full impairment __282,500
P 842,500
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . ______25%
FV of Non-controlling interest (full-goodwill), 12/31/20x6. . . . . . . . . . . . . . . . . . . . . P 210,675

c. Consolidated Retained Earnings, 1/1/20x6 – P498,500


Consolidated Retained Earnings, January 1, 20x6
Retained earnings - Large Company, January 1, 20x6 (cost model) P500,000
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 – Small, January 1, 20x6
(P100,000 + P80,00 – P25,000 – P35,000 – P10,000) P 110,000
Less: Retained earnings – Small, January 1, 20x4 (date of acquisition) 100,000
Increase in retained earnings since date of acquisition P 10,000
Less: Amortization of allocated excess – 20x4 26,000
Amortization of allocated excess – 20x5 (14,000)
P ( 2,000)
Multiplied by: Controlling interests %................... _____75%
P ( 1,500)
Less: Goodwill impairment loss (full-goodwill) – 20x6 ________0 (___1,500)
Consolidated Retained earnings, January 1, 20x6 P498,500

The CRE, December 31, 20x6 would be as follows:


Consolidated Retained earnings, January 1, 20x6 P498,500
Add: Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of Large for 20x6 233,525
Total P717,550
Less: Dividends paid – Large Company for 20x6 70,000
Consolidated Retained Earnings, December 31, 20x6 P662,025

Or, alternatively: to compute CRE, 12/31/20x6


Consolidated Retained Earnings, December 31, 20x6
Retained earnings - Large Company, December 31, 20x6 (cost model) P630,000
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 – Small, December 31, 20x6
(P100,000 + P80,00 – P25,000 – P35,000 – P10,000 + P90,000 – P40,000) P 160,000
Less: Retained earnings – Small, January 1, 20x4 (date of acquisition) 100,000
Increase in retained earnings since date of acquisition P 60,000
Less: Amortization of allocated excess – 20x4 26,000
Amortization of allocated excess – 20x5 and 20x6: P14,000 x 2 (28,000)
P 62,000
Multiplied by: Controlling interests %................... _____75%
P 46,500
Less: Goodwill impairment loss on full-goodwill) – 20x6 (P19,300 x 75%) __14,475 __32,025
Consolidated Retained earnings, December 31, 20x6 P 662,025

d. P233.525
Consolidated Net Income for 20x6
Net income from own/separate operations
Parent Company: Large Company [P200,000 – P170,000
(P40,000 x 75%)]
Small Company 90,000
Total P260,000
Less: Non-controlling Interest in Net Income* P 21,175
Amortization of allocated excess (14,000)
Goodwill impairment _19,300 __26,475
Controlling Interest in Consolidated Net Income or
Profit P233,525
attributable to equity holders of parent…………..
Add: Non-controlling Interest in Net Income (NCINI) __21,175
Consolidated Net Income for 20x6 P254,700
*Net income of subsidiary – 20x6 P 90,000
Amortization of allocated excess – 20x6 ( 14,000)
P
104,000
Multiplied by: Non-controlling interest %..........
25%
P 26,000
Less: Non-controlling interest on impairment loss on full-goodwill ___4,825
( (P19,300 x 25%)*
Non-controlling Interest in Net Income (NCINI) P
21,175
*this procedure would be not be applicable where the NCI on goodwill impairment loss would not
be proportionate to NCI acquired.

e. P21,175 – refer to (d) for computations

Note: Regardless of the method used (cost or equity) answers for No. 2 (a) to (e) above are exactly
the same.

Problem II
A.
1.
a. P87,725
Consolidated Net Income for 20x4
Net income from own/separate operations
Pill Company P55,000
Sill Company 40,000
Total P95,000
Less: Non-controlling Interest in Net Income* P 5,775
Amortization of allocated excess 0
Goodwill impairment 1,500 __7,275
Controlling Interest in Consolidated Net Income or
Profit P87,725
attributable to equity holders of parent…………..
Add: Non-controlling Interest in Net Income (NCINI) __5,775
Consolidated Net Income for 20x4 P93,500

b. P5,775
*Net income of subsidiary – 20x4 P 40,000
Amortization of allocated excess – 20x4 ( 0))
P 40,000
Multiplied by: Non-controlling interest %.......... _____15%
P 6,000
Less: Non-controlling interest on impairment loss on full-goodwill _____225
(P1,500 x 15%)*
Non-controlling Interest in Net Income (NCINI) P 5,775
*this procedure would be not be applicable where the NCI on goodwill impairment loss would not
be proportionate to NCI acquired.

c. P93,500 – refer to computation in (a)


d.
d.1. P75,000. Retained earnings of Parent on the date of acquisition should always be the
same with the Consolidated Retained Earnings also on the date of acquisition.
d.2
Retained earnings of P Co, 1/1/20x4 P75,000
Add; Net income under cost method [P55,000 + (P9,000 x _62,650
85%)]
P
137,650
Less: Dividends of P Company ___5,000
Retained Earnings of P Co, 12/31/20x4 under cost model P
132,650

d.3
Retained earnings of P company (same with P75,000
Consolidated RE), 1/1/20x4
Add; Controlling Interest in CNI (refer to a above) _87,725
P 162,725
Less: Dividends of P Company ____5,000
Consolidated Retained Earnings, 12/31/20x4 P 157,725

e. P238,000

2.
a. P87,725
Consolidated Net Income for 20x4
Net income from own/separate operations
Pill Company P55,000
Sill Company 40,000
Total P95,000
Less: Non-controlling Interest in Net Income* P 5,775
Amortization of allocated excess 0
Goodwill impairment 1,500 __7,275
Controlling Interest in Consolidated Net Income or
Profit P87,725
attributable to equity holders of parent…………..
Add: Non-controlling Interest in Net Income (NCINI) __5,775
Consolidated Net Income for 20x4 P93,500

b. P5,775
*Net income of subsidiary – 20x4 P 40,000
Amortization of allocated excess – 20x4 ( 0))
P 40,000
Multiplied by: Non-controlling interest %.......... _____15%
P 6,000
Less: Non-controlling interest on impairment loss on full-goodwill _____225
(P1,500 x 15%)*
Non-controlling Interest in Net Income (NCINI) P 5,775
*this procedure would be not be applicable where the NCI on goodwill impairment loss would not
be proportionate to NCI acquired.
c. P93,500 – refer to computation in (a)
d.
d.1. P75,000. Retained earnings of Parent on the date of acquisition should always be the
same with the Consolidated Retained Earnings also on the date of acquisition.
d.2
Retained earnings of P Co, 1/1/20x4 P75,000
Add; Net income under equity method {P55,000 +
[(P40,000 x 85%) -
(P1,500, impairment loss x 85%) – (P0, amortization)}
_87,725
P162,725
Less: Dividends of P Company ___5,000
Retained Earnings of P Co., 12/31/20x4 under equity P157,725
method

d.3
Retained earnings of P Co., (same with Consolidated RE), P75,000
1/1/20x4
Add; Controlling Interest in CNI same with Net Income in
d.2 above under
equity method but not cost model
_87,725
P162,725
Less: Dividends of P Company ___5,000
Consolidated Retained Earnings, 12/31/20x4 P157,725

e. P263,075 = P238,000 + (P40,000 x 85%) – (P9,000, div x 85%) – (P1,500, impair, x 85%)

3. Reconciliation of Investment balance – Cost Model to Equity Method


Investment balance under cost model P
238,000
Retroactive adjustments: (Sill’s net income less
dividends)
Sill’s net income – 20x4 40,000
Less: Sill’s dividend – 20x4 _9,000
Increase in retained earnings (NI less dividend) 31,000
Less: Cumulative amortization of allocated excess _____0
31,000
X: Controlling interests __85%
26,350
Less: Impairment of goodwill (P1,500 x 85%) _1,275 __25,075
Investment balance under equity method P263,075

Reconciliation of Retained Earnings – Cost Model to Equity Method


Retained earnings, 12/31/20x4 under cost P
model(requirement 1 d.2) 132,650
Retroactive adjustments: (Sill’s net income less
dividends)
Sill’s net income – 20x4 40,000
Less: Sill’s dividend – 20x4 _9,000
Increase in retained earnings (NI less dividend) 31,000
Less: Cumulative amortization of allocated excess _____0
31,000
X: Controlling interests __85%
26,350
Less: Impairment of goodwill (P1,500 x 85%) _1,275 __25,075
Retained earnings, 12/31/20x4 under equity P157,725
method(requirement 2 d.2)

B.
4.
a. P87,725
Consolidated Net Income for 20x4
Net income from own/separate operations
Pill Company [P62,650 – (P9,000 x 85%)] P55,000
Sill Company 40,000
Total P95,000
Less: Non-controlling Interest in Net Income* P 5,775
Amortization of allocated excess 0
Goodwill impairment 1,500 __7,275
Controlling Interest in Consolidated Net Income or
Profit P87,725
attributable to equity holders of parent…………..
Add: Non-controlling Interest in Net Income (NCINI) __5,775
Consolidated Net Income for 20x4 P93,500

b. P5,775
*Net income of subsidiary – 20x4 P 40,000
Amortization of allocated excess – 20x4 ( 0))
P 40,000
Multiplied by: Non-controlling interest %.......... _____15%
P 6,000
Less: Non-controlling interest on impairment loss on full-goodwill _____225
(P1,500 x 15%)*
Non-controlling Interest in Net Income (NCINI) P 5,775
*this procedure would be not be applicable where the NCI on goodwill impairment loss would not
be proportionate to NCI acquired.

c. P93,500 – refer to computation in (a)


d.
d.1. P75,000. Retained earnings of Parent on the date of acquisition should always be the same
with the Consolidated Retained Earnings also on the date of acquisition.
d.2
Retained earnings of P Co, 1/1/20x4 P75,000
Add; Net income under cost method (given) _62,650
P
137,650
Less: Dividends of P Company ___5,000
P
Retained Earnings of P Co, 12/31/20x4 under cost model 132,650

d.3
Retained earnings of P company (same with P75,000
Consolidated RE), 1/1/20x4
Add; Controlling Interest in CNI (refer to a above) _87,725
P 162,725
Less: Dividends of P Company ____5,000
Consolidated Retained Earnings, 12/31/20x4 P 157,725

e. P238,000

5. Correction: Pill’s net income should be P87,725 instead of P86,725


a. P87,725
Consolidated Net Income for 20x4
Net income from own/separate operations
Pill Company [P87,725 – (P40,000 x 85%) + P55,000
(P1,500 x 85%)]
Sill Company 40,000
Total P95,000
Less: Non-controlling Interest in Net Income* P 5,775
Amortization of allocated excess 0
Goodwill impairment 1,500 __7,275
Controlling Interest in Consolidated Net Income or
Profit P87,725
attributable to equity holders of parent…………..
Add: Non-controlling Interest in Net Income (NCINI) __5,775
Consolidated Net Income for 20x4 P93,500

b. P5,775
*Net income of subsidiary – 20x4 P 40,000
Amortization of allocated excess – 20x4 ( 0))
P 40,000
Multiplied by: Non-controlling interest %.......... _____15%
P 6,000
Less: Non-controlling interest on impairment loss on full-goodwill _____225
(P1,500 x 15%)*
Non-controlling Interest in Net Income (NCINI) P 5,775
*this procedure would be not be applicable where the NCI on goodwill impairment loss would not
be proportionate to NCI acquired.

c. P93,500 – refer to computation in (a)


d.
d.1. P75,000. Retained earnings of Parent on the date of acquisition should always be the
same with the Consolidated Retained Earnings also on the date of acquisition.
d.2
Retained earnings of P Co, 1/1/20x4 P75,000
Add; Net income under equity method (given)
_87,725
P162,725
Less: Dividends of P Company ___5,000
Retained Earnings of P Co., 12/31/20x4 under equity P157,725
method

d.3
Retained earnings of P Co., (same with Consolidated RE), P75,000
1/1/20x4
Add; Controlling Interest in CNI same with Net Income in
d.2 above under
equity method but not cost model
_87,725
P162,725
Less: Dividends of P Company ___5,000
Consolidated Retained Earnings, 12/31/20x4 P157,725

e. P263,075 = P238,000 + (P40,000 x 85%) – (P9,000, div x 85%) – (P1,500, impair, x 85%)

5. Reconciliation of Investment balance – Cost Model to Equity Method


Investment balance under cost model P
238,000
Retroactive adjustments: (Sill’s net income less
dividends)
Sill’s net income – 20x4 P
40,000
Less: Sill’s dividend – 20x4 ___9,000
Increase in retained earnings (NI less dividend) P
31,000
Less: Cumulative amortization of allocated excess _______0
P
31,000
X: Controlling interests ____85%
P
26,350
Less: Impairment of goodwill (P1,500 x 85%) ___1,275 __25,075
Investment balance under equity method P263,075

Reconciliation of Retained Earnings – Cost Model to Equity Method


Retained earnings, 12/31/20x4 under cost P
model(requirement 1 d.2) 132,650
Retroactive adjustments: (Sill’s net income less
dividends)
Sill’s net income – 20x4 P 40,000
Less: Sill’s dividend – 20x4 ___9,000
Increase in retained earnings (NI less dividend) P 31,000
Less: Cumulative amortization of allocated excess _______0
P 31,000
X: Controlling interests ____85%
P 26,350
Less: Impairment of goodwill (P1,500 x 85%) ___1,275 __25,075
Retained earnings, 12/31/20x4 under equity P157,725
method(requirement 2 d.2)

Problem III
Cost of 85% investment 646,000
Fair value of Subsidiary (Implied cost of 100% investment); P646,000/85% 760,000
Less: Carrying amount of Silk’s net assets =
Carrying amount of Silk’s shareholders’ equity
Common/Ordinary shares 500,000
Retained earnings 100,000
600,000
Allocated Excess: Acquisition differential – December 31, 20x4 160,000
Less: Over/under valuation of A/L (Allocated to):
Increase in Inventory 70,000
Patents 90,000
Non-controlling interest (15% x 760,000, fair value of subsidiary),12/31/20x4 114,000
A summary or depreciation and amortization adjustments is as follows:
Annu
al Current
Account Adjustments to Over/ Lif Amou Year(20x
be amortized under e nt 5) 20x6 20x7
P70,00 P
Inventory 0 1 70,000 P 70,000 P - P -
Subject to Annual
Amortization
__9,00 ___9,00 ___9,00
Patents 90,000 10 0 ___9,000 0 0
P160,0 P P P
00 79,000 P 79,000 9,000 9,000,
Unamortized balance of allocated excess:
Balance Balance
Dec. 31 Amortization Dec.
31
20x4 20x5 20x6 20x6
Inventory 70,000 70,000
Patents 90,000 9,000 9,000 72,000
160,000 79,000 9,000 72,000
1. NCI-CNI
20x5: P(7,350)
20x6: P6,450
20x5 20x6
Consolidated Net Income
Net income from own/separate
operations
Large Company
20x5 [P28,000 – P0)] P 28,000
20x6 [(P45,000, loss + P(57,750)
(P15,000 x 85%)]
Small Company 30,000 52,000
Total P 58,000 P( 5,750)
Less: Non-controlling Interest in P(7,350) P
Net Income* 6,450
Amortization of allocated 79,000 9,000
excess
Goodwill impairment _____0 71,650 _____0 15,450
CI-CNI (loss) or Profit (loss)
attributable to equity P(13,650) P(21,200)
holders of parent
Add: Non-controlling Interest in Net ( 7,350) 6,450
Income (NCINI)
Consolidated Net P(21,000) P(14,750)
Income/Loss(CNI)
20x5 20x6
*Net income (loss) of subsidiary P 30,000 P 52,000
Amortization of allocated excess ( 79,000) ( 9,000)
P(49,000) P43,000
Multiplied by: Non-controlling interest %.......... 15% 15%
P(7,350) P
6,450
Less: Non-controlling interest on impairment loss on full- _______- ___
goodwill _-
Non-controlling Interest in Net Income (NCINI) P( 7,350) P6,450
*this procedure would be not be applicable where the NCI on goodwill impairment loss would not
be proportionate to NCI acquired.

2. CI-CNI – refer to computation in No. 1


20x5: P(21,000)
20x6: P14,750
Or, alternatively:
(1) Non-controlling interest in profit
20x5: 15%  (30,000 – 79,000).............................................................7,350
20x6: 15%  (52,000 – 9,000)............................................................... 6,450
(2)
20x5 20x6
NI (loss) Pen 28,000 (45,000)
Less: Dividends from Silk
20x5 0
20x6 (85%  15,000) (12,750)
28,000 (57,750)
Share of Silk’s profit
85%  (30,000 – 79,000) (41,650)
85%  (52,000 – 9,000) ________ 36,550_
Consolidated profit (loss) attributable to
Pen’s shareholders (13,650) (21,200)

3. CRE, 12/31/20x6 – P73,150


Consolidated Retained Earnings, December 31, 20x6
Retained earnings - Pen Company, December 31, 20x6 (cost model P 91,000
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 – Silk, December 31, 20x6:
(P100,000 + P30,00 – P0 + P52,000 – P15,000) P 167,000
Less: Retained earnings – Silk, December 31, 20x4 (date of acquisition) 100,000
Increase in retained earnings since date of acquisition P 67,000
Less: Amortization of allocated excess – 20x5 79,000
Amortization of allocated excess – 20x6 __9,000
P (21,000)
Multiplied by: Controlling interests %................... 85%
P (17,850)
Less: Goodwill impairment loss (full-goodwill) – 20x5 _____0 ( 17,850)
Consolidated Retained earnings, December 31, 20x6 P 73,150

4. NCI, 12/31/20x6: P110,850


FV of SHE of Silk:
Common stock, 12/31/20x6 P 500,000
Retained earnings, 12/31/20x6:
Retained earnings, 1/1/20x4 P 100,000
NI – Subsidiary (20x5 and 20x6): P30,000 + P52,000 82,000
Dividends – Subsidiary (20x5 and 20x6): P0 + P15,000( 15,000)
167,000
Book value of SHE – S, 12/31/20x6 P 667,000
Adjustments to reflect fair value, 12/31/20x4 160,000
Amortization of allocated excess (P79,000 + P9,000) ( 88,000)
FV of SHE of S P 739,000
Multiplied by: NCI% _____15%
FV of NCI (partial), 12/31/20x6 P 110,850
Add: NCI on full-goodwill ______ _0
FV of NCI (full),12/31/20x6 P 110,850
Or, alternatively:
Non-controlling interest – date of acquisition,12/31/20x4 (1)
P114,000
Retained earnings Silk – Dec. 31, 20x6
(100,000 + 30,000 + 52,000 – 15,000) P167,000
Less: Retained earnings, 12/31/20x4 (date of acquisition)100,000
Increase since acquisition P 67,000
Less: Amortization of allocated excess (79,000 + 9,000)88,000
P( 21,000)
Multiplied by: NCI’s share ____ 15%
( 3,150)
Non-controlling interest (full) 12/31/20x6 P 110,850
5. Consolidated Patents, 12/31/20x6: P72,000
Unamortized balance of allocated excess:
Balance Balance
Dec. 31 Amortization Dec.
31
20x4 20x5 20x6 20x6
Inventory 70,000 70,000
Patents 90,000 9,000 9,000 72,000
160,000 79,000 9,000 72,000
Or, alternatively:
Invest. account – equity Dec. 31, 20x6 628,150
Cost of investment, cost model 646,000
Retained earnings Silk – Dec. 31, 20x6
(100,000 + 30,000 + 52,000 – 15,000) 167,000
Retained earnings,12/31/20x4 (date of acquisition) 100,000
Increase since acquisition 67,000
Less: Accumulated amortization (79,000 + 9,000)88,000
( 21,000)
Multiplied by: CI share 85% (17,850)
Invest. account – equity method as at Dec. 31, 20x6
628,150

Implied value of 100% (628,150 / 85%) 739,000


Silk –Common shares 500,000
Retained earnings – Silk, 12/31/20x6 167,000
667,000
Balance unamortized allocated excess – Patents 72,000

Problem IV
Additional information:
Parent’s net income from own operations - 20x4, P100,000; 20x5, P120,000
Parent’s dividend declared – 20x4, P30,000; 20x5, P40,000

1. NCNCI for 20x4, P8,400; NCNCI for 20x5, P12,020


20x4
Consolidated Net Income for 20x4
Net income from own/separate operations
Parent – Davis Company P100,000
Subsidiary - Martin Company 60,000
Total P160,000
Less: Non-controlling Interest in Net Income* P 8,400
Amortization of allocated excess** 18,000
Goodwill impairment _______0 __26,400
Controlling Interest in Consolidated Net Income or
Profit P133,600
attributable to equity holders of parent…………..
Add: Non-controlling Interest in Net Income (NCINI) ___8,400
Consolidated Net Income for 20x4 P142,000
*Net income of subsidiary – 20x4 P 60,000
Amortization of allocated excess – 20x4 (P2,000 + P16,000) ( 18,000)
P 42,000
Multiplied by: Non-controlling interest %..........
20%
P 8,400
Less: Non-controlling interest on impairment loss on full-goodwill _______0
Non-controlling Interest in Net Income (NCINI) P 8,400
*this procedure would be not be applicable where the NCI on goodwill impairment loss would not
be proportionate to NCI acquired.

** Amortization of allocated excess


Partial-Goodwill Approach:
Fair value of Subsidiary
Consideration transferred:.................................................................. 300,000
Less: Carrying amount of Martins net assets =
Carrying amount of Martin’s shareholders’ equity
Common/Ordinary shares – Martin (180,000 x 80%)............ 144,000
Retained earnings – Martin (60,000 x 80%)......................... 48,000192,000
Allocated Excess: Acquisition differential – Jan. 1, 20x4 108,000
Less: Over/under valuation of A/L (Allocated to):
Increase in Inventory (16,000 x 80%)........................................ 12,800
Increase in Patents (20,000 x 80%).......................................... 16,000 28,800
Positive Excess: Goodwill - partial 79,200
Full-Goodwill Approach:
Fair value of Subsidiary P300,000/80%..................................................
Consideration transferred:.................................................................. 375,000
Less: Carrying amount of Martins net assets =
Carrying amount of Martin’s shareholders’ equity
Common/Ordinary shares – Martin (180,000 x 100%)............ 180,000
Retained earnings – Martin (60,000 x 100%)......................... 60,000 240,000
Allocated Excess: Acquisition differential – Jan. 1, 20x4 135,000
Less: Over/under valuation of A/L (Allocated to):
Increase in Inventory (16,000 x 100%)........................................ 16,000
Increase in Patents (20,000 x 100%).......................................... 20,000 36,000
Positive Excess: Goodwill - partial 99,000

A summary or depreciation and amortization adjustments is as follows:


Account Adjustments to be Over/ Annual Current
amortized Under Life Amount Year(20x4) 20x5
Inventory P16,000 1 P 16,000 P 16,000 P -
Subject to Annual Amortization
Patents 20,000 10 2,000 2,000 ___2,000
Amortization P 18,000 P 18,000 P 2,000
Impairment of goodwill (full) 99,000 - ________ _____ ___9,900
P 18,000 P 18,000 P 11,900

20x5
Consolidated Net Income for 20x5
Net income from own/separate operations
Parent – Davis Company P120,000
Subsidiary - Martin Company 72,000
Total P192,000
Less: Non-controlling Interest in Net Income* P 12,020
Amortization of allocated excess** 2,000
Goodwill impairment ___9,900 __23,920
Controlling Interest in Consolidated Net Income or
Profit P168,080
attributable to equity holders of parent…………..
Add: Non-controlling Interest in Net Income (NCINI) __12,020
Consolidated Net Income for 20x5 P180,100
*Net income of subsidiary – 20x5 P 72,000
Amortization of allocated excess – 20x5 ( 2,000)
P70,000
Multiplied by: Non-controlling interest %..........
20%
P 14,000
Less: Non-controlling interest on impairment loss on full-goodwill
(P99,000 x 10% = ___1,980
P9,900 x 20%)
Non-controlling Interest in Net Income (NCINI) P 12,020
*this procedure would be not be applicable where the NCI on goodwill impairment loss would not
be proportionate to NCI acquired.

2. CI – CNI for 20x4, P133,600; CI – CNI for 20x5, P168,080


3. CRE, 12/31/20x5, P208,080
Correction: RE on January 1, 20x5 instead of December 31, 20x5.
Retained earnings of P Co, 1/1/20x5, equity method (same P 80,000
with CRE)
Add; CI – CNI 168,080
P248,080
Less: Dividends of P Company __40,000
Retained Earnings of P Co., 12/31/20x4 under equity method P208,080

4. NCI, 12/31/20x5
Non-controlling interest, December 31, 20x5
Common stock – Martin Company, December 31, 20x5…… P 180,000
Retained earnings – Martin Company, December 31, 20x4
Retained earnings – Martin Company, January 1, 20x4 P 60,000
Add: NI of Martin for 20x4 and 20x5 (60,000 + 72,000) 132,000
Total P192,000
Less: Dividends paid – 20x4 and 20x5 (12,000 + 15,000) 27,000 165,000
Stockholders’ equity – S Company, December 31, 20x4 P 345,000
Adjustments to reflect fair value - (over) undervaluation of
assets and liabilities, date of acquisition (January 1, 20x4)
(20,000 + 16,000) 36,000
Amortization of allocated excess (refer to amortization
above – 20x4 and 20x5 (P2,000 + 16,000 + 2,000) ( 20,000)
Fair value of stockholders’ equity of S, December 31, 20x5…… P 361,000
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial-goodwill), 12/31/20x5……….. P 72,200
Add: Non-controlling interest on full goodwill , net of
impairment loss, 12/31/x5:[(P99,000 full – P79,200, partial
= P19,800) – (P99,000 x 10%, impairment loss x 20%) 17,820
Non-controlling interest (full-goodwill), 12/31/20x5…………….. P 90,020

5.
Partial (80%) Full (100%)
Goodwill balance, 1/1/20x4 79,200 99,000
Less Impairment – 20x4 ____-0- ____-0-
Goodwill balance, 1/1/20x5 79,200 99,000
Less Impairment – 20x5 (99,000 x 10% = 9,900) _7,920 __9,900
Goodwill balance, 12/31/20x5 71,280 89,100

6.

Patents, 1/1/20x4 20,000


Less: Amortization (20,000/10 years = 2,000 x 2) _4,000
Consolidated Patents, 12/31/20x5 16,000

Problem V
1. (Full or partial-goodwill) – the same answer.
Consideration transferred by MM ............................ P664,000

Noncontrolling interest fair value .................................... 166,000*


air value of Subsidiary…………………………………. P830,000
Less: Book value of SHE – S…..……………………. (600,000)
Positive excess ............................................................ 230,000 Annual Excess
Life Amortizations
Excess fair value assigned to buildings 80,000 20 years P4,000
Goodwill - full P150,000 indefinite -0-
Total......................................................................... P4,000
2. P150,000 – full goodwill (see No. 1 above)
P120,000 – partial-goodwill:
Consideration transferred by MM ........................... P664,000
Less: Book value of SHE – S (P600,000 x 80%)…….. 480,000
Allocated excess…………………………………….. P184,000
Less: Over/under valuation of A and L:
P80,000 x 80%................................................. 64,000
Goodwill - partial......................................................... P120,000

3. Full-goodwill
Common Stock - TT .................................................................. 300,000
Additional Paid-in Capital - TT ............................................... 90,000
Retained Earnings - TT.............................................................. 210,000
Investment in TT Company (80%) .................................. 480,000
Non-controlling interest (20%) ........................................ 120,000

Buildings .................................................................................... 80,000


Goodwill .................................................................................... 150,000
Investment in TT Company (80%) .................................. 184,000
Non-controlling interest (P166,000 – P120,000) ........... 46,000
Partial-goodwill
Common Stock - TT .................................................................. 300,000
Additional Paid-in Capital - TT ............................................... 90,000
Retained Earnings - TT.............................................................. 210,000
Investment in TT Company (80%) .................................. 480,000
Non-controlling interest (20%) ........................................ 120,000

Buildings .................................................................................... 80,000


Goodwill .................................................................................... 120,000
Investment in TT Company (80%) .................................. 184,000
Non-controlling interest (20% x P80,000) ....................... 16,000

4. Cost Model/Initial Value Method


Dividends received (80%) ............................................................. P 8,000
Investment in Taylor—12/31/x4 (original value paid)………… P664,000

Equity Method
Income accrual (80%) .................................................................. P56,000
Excess amortization expense ....................................................... (3,200)
Investment income ................................................................. P52,800

Initial fair value paid ..................................................................................... P664,000


Income accrual 20x4–20x6 (P260,000 × 80%) ........................... 208,000
Dividends 20x4–20x6 (P45,000 × 80%) ......................................... (36,000)
Excess Amortizations 20x4–20x6 (P3,200 × 3) ............................ (9,600)
Investment in TT—12/31/x6 ..................................................... P826,400
5. Same answer with No. 4.

6. Using the acquisition method, the allocation will be the total difference (P80,000) between
the buildings' book value and fair value. Based on a 20 year life, annual excess amortization
is P4,000.
MM book value—buildings ................................................... P 800,000
TT book value—buildings ....................................................... 300,000
Allocation ................................................................................. 80,000
Excess Amortizations for 20x4–20x5 (P4,000 × 2) …………. (8,000)
Consolidated buildings account ………………… P1,172,000

7. Acquisition-date fair value allocated to goodwill:


Goodwill-full ( see No. 1 above) ................................................. P 150,000
Goodwill-partial (see No. 1 above)……………………………… P 120,000

8. The common stock and additional paid-in capital figures to be reported are the parent
balances only.
Common stock, P500,000
Additional paid-in capital, P280,000

Problem VI
1. Common stock of TT Company on December 31, 20x4 P 90,000
Retained earnings of TT Company
January 1, 20x4 P 130,000
Sales for 20x4 195,000
Less: Expenses (160,000)
Dividends paid (15,000)
Retained earnings of TT Company
on December 31, 20x4 150,000
Net book value on December 31, 20x4 P240,000
Proportion of stock acquired by QQ x .80
Purchase price P192,000
2. Net book value on December 31, 20x4 P240,000
Proportion of stock held by
noncontrolling interest x .20
Balance assigned to noncontrolling interest P 48,000

3. Consolidated net income is P143,000. None of the 20x4 net income of TT Company was earned
after the date of purchase and, therefore, none can be included in consolidated net income.

4. Consolidated net income would be P178,000 [P143,000 + (P195,000 - P160,000)].

Problem VII
(Several valuation and income determination questions for a business combination involving a
non-controlling interest.)

Business combinations are recorded generally at the fair value of the consideration transferred by
the acquiring firm plus the acquisition-date fair value of the non-controlling interest.

PS’s consideration transferred (P31.25 × 80,000 shares) ............................................. P2,500,000


Non-controlling interest fair value (P30.00 × 20,000 shares) ...................................... P600,000
SR’s total fair value 1/1/09................................................................................................ P3,100,000

1. Each identifiable asset acquired and liability assumed in a business combination should
initially be reported at its acquisition-date fair value.

2. In periods subsequent to acquisition, the subsidiary’s assets and liabilities are reported at their
acquisition-date fair values adjusted for amortization and depreciation. Except for certain
financial items, they are not continually adjusted for changing fair values.

3. SR’s total fair value 1/1/09................................................................................................ P3,100,000


SR’s net assets book value ............................................................................................... 1,290,000
Excess acquisition-date fair value over book value ................................................... P1,810,000
Adjustments from book to fair values ............................................................................
Buildings and equipment ........................................................ (250,000)
Trademarks ................................................................................ 200,000
Patented technology .............................................................. 1,060,000
Unpatented technology ......................................................... 600,000 1,610,000
Goodwill ................................................................................................................... P200,000

4. Combined revenues ......................................................................................................... P4,400,000


Combined expenses ......................................................................................................... (2,350,000)
Building and equipment excess depreciation............................................................. 50,000
Trademark excess amortization ...................................................................................... (20,000)
Patented technology amortization ............................................................................... (265,000)
Unpatented technology amortization .......................................................................... (200,000)
Consolidated net income ................................................................................................ P1,615,000

To non-controlling interest:
SR’s revenues ............................................................................................................... P1,400,000
SR’s expenses ............................................................................................................... (600,000)
Total excess amortization expenses (above) ........................................................ (435,000)
SR’s adjusted net income.......................................................................................... P365,000
Non-controlling interest percentage ownership................................................... 20%
Non-controlling interest share of consolidated net income .............................. P73,000

To controlling interest:
Consolidated net income ......................................................................................... P1,615,000
Non-controlling interest share of consolidated net income .............................. (73,000)
Controlling interest share of consolidated net income....................................... P1,542,000

-OR-
PS’s revenues ............................................................................................................... P3,000,000
PS’s expenses ............................................................................................................... 1,750,000
PS’s separate net income ......................................................................................... P1,250,000
PS’s share of SR’s adjusted net income
(80% × P365,000) ............................................................................................ 292,000
Controlling interest share of consolidated net income....................................... P1,542,000
5. Fair value of non-controlling interest January 1, 20x4 ................................................ P600,000
20x4 income ..................................................................................................................... ……..73,000
Dividends (20% × P30,000)................................................................................................ (6,000)
Non-controlling interest December 31, 20x4 ................................................................ P 667,000

6. If SR’s acquisition-date total fair value was P2,250,000, then a bargain purchase has occurred.
SR’s total fair value 1/1/09................................................................................................ P2,250,000
Collective fair values of SR’s net assets ......................................................................... P2,300,000
Bargain purchase .............................................................................................................. P50,000

The acquisition method requires that the subsidiary assets acquired and liabilities assumed be
recognized at their acquisition date fair values regardless of the assessed fair value. Therefore,
none of SR’s identifiable assets and liabilities would change as a result of the assessed fair value.
When a bargain purchase occurs, however, no goodwill is recognized.

Problem VIII (Full-Goodwill)


A variety of consolidated balances-midyear acquisition)
Book value of RR, 1/1(stockholders' equity accounts)
(P100,000 + P600,000 + P700,000)....................... P1,400,000
Increase in book value:
Net Income (revenues less cost of
goods sold and expenses) ................................ P120,000
Dividends .............................................................. (20,000)
Change during year .................................................. P100,000
Change during first six months of year ........... 50,000
Book value of RR, 7/1 (acquisition date) . P1,450,000
(Full-Goodwill)
Consideration transferred by KL(P1,330,000 +
P30,000) ................................................................... P1,360,000
Non-controlling interest fair value .................................. 300,000
RRs’ fair value (given)........................................................ P1,630,000
Note: The fair value of subsidiary amounting P1,630,000, indicates a fair value of NCI
amounting to P300,000 (refer to above computation), which is lower compared to the FV
of the NCI based on FV of SHE of Subsidiary (RR), computed as follows:

BV of SHE of Subsidiary (RR) ....................................... P1,450,000


Adjustments to reflect fair value (undervaluation) 150,000
FV of SHE of Subsidiary (RR) ....................................... P 1,600,000
Multiplied by: NCI% ..................................................... 20%
FV of NCI………………………………………………. P 320,000

Consideration transferred by KL(P1,330,000 +


P30,000) ................................................................... P1,360,000
Non-controlling interest fair value .................................. ___320,000
RRs’ fair value (given)........................................................ P1,680,000
Book value of RR, 7/1 ........................................................ (1,450,000)
Fair value in excess of book value.................................. P 230,000 Annual Excess
Excess fair value assigned Life Amortizations
Trademarks ...................................................................... 150,000 5 years P30,000
Goodwill (full-goodwill) .................................................. P 80,000 indefinite -0-
Total .......................................................................... P30,000
It should be carefully noted, that NCI can never be less than its share of fair value of net
identifiable assets (which is P320,000). Thus, the NCI share of company value is raised to
P320,000 (replacing the P300,000 NCI computed as residual amount – refer to computation
above). The rationale behind such rule is to avoid having a lower amount of goodwill
under the full-goodwill approach as compared to goodwill computed under the partial-
goodwill approach.

(Partial-Goodwill)
Consideration transferred by KL...................................... P1,360,000
Less: Book value of SHE – RR (P1,450,000 x 80%)…….. 1,160,000
Allocated excess………………………………………….P 200,000
Less: Over/under valuation of A and L:
P150,000 x 80%.............................................. 120,000
Goodwill - partial P80,000
Note that the goodwill under the full-goodwill and partial-goodwill approach are the same
because the FV of the NCI based on the FV of SHE of subsidiary (P320,000) is higher
compared to the imputed or the computed residual amount of NCI (P300,000).

Consolidation Totals:
 Expenses, P265,000 = P200,000 KK operating expenses plus P50,000 (post-acquisition
subsidiary operating expenses) plus ½ year excess amortization of P15,000.
 Dividends paid = P80,000
 Sales, P1,050,000 = P800,000 KK revenues plus P250,000 (post-acquisition subsidiary
revenue, P500,000 x 1/2)
 Equipment, none
 Depreciation expense, none
 Subsidiary’s net income, P60,000 = [(P500,000 – P280,000 – P100,000) x 1/2]
 Buildings, none
 Goodwill (full), P80,000; Goodwill (partial), P80,000
 Consolidated Net Income, P245,000
 Sales (1) P1,050,000
 Cost of goods sold (2) 540,000
 Operating expenses (3) __265,000
 Net Income P 245,000
 Non-controlling Interest in Sub. Income (4) P 9,000
 Controlling Interest in CNI P 236,000
(1) P800,000 KK revenues plus P250,000 (post-acquisition subsidiary revenue)
(2) P400,000 KK COGS plus P140,000 (post-acquisition subsidiary COGS)
(3) P200,000 KK operating expenses plus P50,000 (post-acquisition subsidiary
operating expenses) plus ½ year excess amortization of P15,000
(4) 20% of post-acquisition subsidiary income less excess fair value amortization
[20% × (120,000 – 30,000) × ½ year] = P9,000
 Retained Earnings, 1/1 = P1,400,000 (the parent’s balance because the subsidiary
was acquired during the current year)
 Trademark = P935,000 (add the two book values and the excess fair value allocation
after taking one-half year excess amortization)
 Goodwill (full)= P80,000 (the original allocation)
 Goodwill (partial) = P80,000 (the original allocation)

Problem IX: Consolidated balances after a mid-year acquisition)


Note: Investment account balance indicates the initial value method.

Consideration transferred ......................................... P526,000


Non-controlling interest fair value ........................... 300,000
FV of SHE - subsiary...................................................... P826,000
Less: Book value of DD (below) ................................ (765,000)
Fair value in excess of book value (positive) ........ P 61,000
Excess assigned Annual Excess
based on fair value: Life Amortizations
Equipment....................................................... (30,000) 5 years P(6,000)
Goodwill (full) ................................................. P 91,000 indefinite -0-
Total ........................................................................ P(6,000)
Amortization for 9 months .................................. P(4,500)

Acquisition-Date Subsidiary Book Value


Book value of Duncan, 1/1/x4 (CS + 1/1 RE) ............................ P740,000
Increase in book value-net income (dividends
were paid after acquisition) .................................................. P100,000
Time prior to purchase (3 months) .............................................. ×¼ 25,000
Book value of DD, 4/1/x4 (acquisition date) ............................ P765,000

* The fair value of NCI amounting to P300,000 is higher compared to the FV of the NCI
based on FV of SHE of Subsidiary (RR), computed as follows:

BV of SHE of Subsidiary (DD) . …………………… P765,000


Adjustments to reflect fair value (undervaluation) ( 30,000)
FV of SHE of Subsidiary (DD)................................. P735,000
Multiplied by: NCI%................................................ _______40%
FV of NCI……………………………………………. P294,000

(Partial-Goodwill)
Consideration transferred .................................. P 526,000
Less: Book value of SHE – DD (P765,000 x 60%) 459,000
Allocated excess………………………………… . P 67,000
Less: Over/under valuation of A and L:
(P30,000 x 60%)........................................... ................................. ( 18,000)
Goodwill - partial .................................................. P 85,000

1. Consolidated Income Statement:


Revenues (1) P825,000
Cost of goods sold (2) P405,000
Operating expenses (3) 214,500 619,500
Consolidated net income P 205,500
Noncontrolling interest in CNI (4) 28,200
Controlling interest in CNI P 177,300
(1) P900,000 combined revenues less P75,000 (preacquisition subsidiary revenue)
(2) P440,000 combined COGS less P35,000 (preacquisition subsidiary COGS)
(3) P234,000 combined operating expenses less P15,000 (preacquisition subsidiary
operating expenses) less nine month excess overvalued equipment depreciation
reduction of P4,500
(4) 40% of post-acquisition subsidiary income less excess amortization
2.
Goodwill, full = P91,000 (original allocation); Goodwill , partial = P85,000
Equipment = P774,500 (add the two book values less P30,000 reduction to fair value plus
P4,500 nine months excess amortization)
Common Stock = P630,000 (P company balance only)
Buildings = P1,124,000 (add the two book values)
Dividends Paid = P80,000 (P company balance only)

Problem X
1. AA should report income from its subsidiary of P15,000 (P20,000 x .75) rather than dividend
income of P9,000.
2. A total of P5,000 (P20,000 x .25) should be assigned to the non-controlling interest in the 20x4
consolidated income statement.
3. Consolidated net income of P70,0000 should be reported for 20X4, computed as follows:
Reported net income of AA P59,000
Less: Dividend income from KR (9,000)
Operating income of AA P50,000
Net income of KR 20,000
Consolidated net income P70,000
4. Income of P79,000 would be attained by adding the income reported by AA (P59,000) to the
income reported by KR (P20,000). However, the dividend income from KR recorded by AA
must be excluded from consolidated net income.

Problem XI
1. Net income for 20x4:
QQ NN
Operating income P 90,000 P35,000
Income from subsidiary 24,500
Net income P114,500 P35,000
2. Consolidated net income is P125,000 (P90,000 + P35,000).
3. Retained earnings reported at December 31, 20x4:
QQ NN
Retained earnings, January 1, 20x4 P290,000 P40,000
Net income for 20x4 114,500 35,000
Dividends paid in 20x4 (30,000) (10,000)
Retained earnings, December 31, 20x4 P374,500 P65,000

4. Consolidated retained earnings at December 31, 20x4, is equal to the P374,500 retained
earnings balance reported by QQ.
5. When the cost method is used, the parent's proportionate share of the increase in retained
earnings of the subsidiary subsequent to acquisition is not included in the parent's retained
earnings. Thus, this amount must be added to the total retained earnings reported by the
parent in arriving at consolidated retained earnings.

Problem XII
(Consolidated balances three years after purchase. Parent has applied the equity method.)
1. Schedule 1—Acquisition-Date Fair Value Allocation and Amortization
JJ’s acquisition-date fair value .. P206,000
Book value of JJ ............................................ (140,000)
Fair value in excess of book value ............ 66,000
Excess fair value assigned to specific
accounts based on individual fair values Annual Excess
Life Amortization
Equipment .............................................. 54,400 8 yrs. P6,800
Buildings (overvalued) .......................... (10,000) 20 yrs. (500)
Goodwill .................................................. P21,600 indefinite -0-
Total .......................................................... P6,300
Investment in JJ Company—12/31/x6
JJ’s acquisition-date fair value ............................................................ P206,000
20x4 Increase in book value of subsidiary 40,000
20x4 Excess amortizations (Schedule 1) ............................................ (6,300)
20x5 Increase in book value of subsidiary ........................................ 20,000
20x5 Excess amortizations (Schedule 1) ............................................ (6,300)
20x6 Increase in book value of subsidiary ........................................ 10,000
20x6 Excess amortizations (Schedule 1) ............................................ (6,300)
Investment in J Company ............................................................ P257,100

2. Equity in Subsidiary Earnings


Income accrual ................................................................... P30,000
Excess amortizations (Schedule 1) ................................. (6,300)
Equity in subsidiary earnings ....................................... P23,700
3.Consolidated Net Income
Consolidated revenues (add book values) ..................................... P414,000
Consolidated expenses (add book values) .................................... (272,000)
Excess amortization expenses (Schedule 1) .................................... (6,300)
Consolidated net income ................................................................... P135,700
4. Consolidated Equipment
Book values added together ............................................................. P370,000
Allocation of purchase price .............................................................. 54,400
Excess depreciation (P6,800 × 3) ....................................................... (20,400)
Consolidated equipment ............................................................. P404,000
5.Consolidated Buildings ...........................................................................................
Book values added together ............................................................. P288,000
Allocation of purchase price .............................................................. (10,000)
Excess depreciation (P500 × 3) ........................................................... 1,500
Consolidated buildings .................................................................. P279,500
6. Consolidated goodwill
Allocation of excess fair value to goodwill ....................................... P21,600
7. Consolidated Common Stock ............................................................................ P290,000
As a purchase, the parent's balance of P290,000 is used (the acquired company's
common stock will be eliminated each year on the consolidation worksheet).
8. Consolidated Retained Earnings ....................................................................... P410,000
Tyler's balance of P410,000 is equal to the consolidated total because the equity
method has been applied.

Problem XIII – 80% Partial Goodwill - Cost Model


Correction: The dividend income in the trial balance should be P38,400 instead P48,000
Requirements 1 to 4:
Schedule of Determination and Allocation of Excess (Partial-goodwill)
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (80%)
Consideration P
transferred……………………………….. 372,000
Less: Book value of stockholders’ equity of S:
Common stock (P240,000 x
80%)……………………. P192,000
Retained earnings (P120,000 x
80%)………………... 96,000 288,000
Allocated excess (excess of cost over book P
value)….. 84,000
Less: Over/under valuation of assets and
liabilities:
Increase in inventory (P6,000 x
80%)……………… P 4,800
Increase in land (P7,200 x
80%)……………………. 5,760
Increase in equipment (P96,000 x 80%) 76,800
Decrease in buildings (P24,000 x
80%)………..... ( 19,200)
Decrease in bonds payable (P4,800 x
80%)…… 3,840 72,000
Positive excess: Partial-goodwill (excess of
cost over
fair P
value)………………………………………………... 12,000

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


S Co. (Over)
Book S Co. Under
value Fair value Valuation
P
Inventory………………….…………….. 24,000 P 30,000 P 6,000
Land……………………………………… 48,000 55,200 7,200
Equipment (net)......... 84,000 180,000 96,000
Buildings (net) 168,000 144,000 (24,000)
Bonds payable………………………… (120,000) ( 115,200) 4,800
P
Net……………………………………….. 204,000 P 294,000 P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows:
S Co. S Co. Increase
Book value Fair value (Decrease)
Equipment .................. 180,000 180,000 0
Less: Accumulated
depreciation….. 96,000 - ( 96,000)
Net book
value………………………... 84,000 180,000 96,000
S Co. S Co.
Book value Fair value (Decrease)
Buildings................ 360,000 144,000 ( 216,000)
Less: Accumulated
depreciation….. 192,000 - ( 192,000)
Net book
value………………………... 168,000 144,000 ( 24,000)

A summary or depreciation and amortization adjustments is as follows:


Annu
Over/ al Current
Account Adjustments to be Unde Lif Amou Year(20x
amortized r e nt 4) 20x5
P P P
Inventory 6,000 1 6,000 P 6,000 -
Subject to Annual
Amortization
96,00 12,00
Equipment (net)......... 0 8 12,000 12,000 0
(24,0 ( 6,000 (6,00
Buildings (net) 00) 4 ) ( 6,000) 0)

Bonds payable… 4,800 4 1,200 1,200 1,200


P P
13,200 P 13,200 7,200

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 372,000
Fair value of NCI (given) (20%) 93,000
Fair value of Subsidiary (100%) P 465,000
Less: Book value of stockholders’ equity of Son
(P360,000 x 100%) __360,000
Allocated excess (excess of cost over book value)….. P 105,000
Add (deduct): (Over) under valuation of assets and
liabilities
(P90,000 x 100%) 90,000
Positive excess: Full-goodwill (excess of cost over P 15,000
fair value)………………………………………………...

20x4: First Year after Acquisition


Parent Company Cost Model Entry
January 1, 20x4:
(1) Investment in S 372,00
Company…………………………………………… 0
372,00
Cash…………………………………………………………………… 0
..
Acquisition of S Company.
January 1, 20x4 – December 31, 20x4:
(2) Cash……………………… 28,800
Dividend income (P36,000 x 80%)……………. 28,800
Record dividends from S Company.
On the books of S Company, the P30,000 dividend paid was recorded as follows:
Dividends paid………… 36,000
Cash……. 36,000
Dividends paid by S Co..
Consolidation Workpaper – Year of Acquisition
(E1) Common stock – S 240,000
Co…………………………………………
Retained earnings – S 120.000
Co……………………………………
Investment in S 288,000
Co……………………………………………
Non-controlling interest (P360,000 x 72,000
20%)………………………..
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) 6,000
Inventory………………………………………………………………
….
Accumulated depreciation – equipment……………….. 96,000
Accumulated depreciation – buildings………………….. 192,00
0
7,200
Land……………………………………………………………………
….
Discount on bonds 4,800
payable………………………………………….
12,000
Goodwill………………………………………………………………
….
Buildings……………………………………….. 216,00
0
Non-controlling interest (P90,000 x 18,000
20%)………………………..
Investment in S 84,000
Co……………………………………………….
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.

(E3) Cost of Goods Sold……………. 6,000


Depreciation expense……………………….. 6,000
Accumulated depreciation – 6,000
buildings…………………..
Interest expense………………………………… 1,200
Goodwill impairment 3,000
loss……………………………………….
6,000
Inventory…………………………………………………………..
Accumulated depreciation – 12,000
equipment………………..
Discount on bonds payable………………………… 1,200
Goodwill…………………………………… 3,000
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 6,000
Equipment P 12,000
Buildings ( 6,000)
Bonds payable _______ _______ P 1,200
Totals P 6,000 P 6,000 P1,200 13,200

It should be observed that the goodwill computed above was proportional to the controlling
interest of 80% and non-controlling interest of 20% computed as follows:
Value % of
Total
Goodwill applicable to parent………………… P12,000 80.00%
Goodwill applicable to NCI…………………….. 3,000 20.00%
Total (full) goodwill……………………………….. P15,000 100.00%
Therefore, the goodwill impairment loss of P3,125 based on 100% fair value or full-goodwill would
be allocated as follows:
Value % of
Total
Goodwill impairment loss attributable to P or P 80.00%
controlling 3,000
Interest
Goodwill impairment loss applicable to 750 20.00%
NCI……………………..
Goodwill impairment loss based on 100% fair
value or full- P 3,750 100.00%
Goodwill
(E4) Dividend income - P………. 28,800
Non-controlling interest (P36,000 x 7,200
20%)………………..
Dividends paid – S…………………… 36,000
To eliminate intercompany dividends and non-controlling interest
share of dividends.

(E5) Non-controlling interest in Net Income of 9,360


Subsidiary…………
Non-controlling interest ………….. 9,360
To establish non-controlling interest in subsidiary’s adjusted net
income for 20x4 as follows:

Net income of subsidiary…………………….. P 60,000


Amortization of allocated excess [(E3)]…... ( 13,200)
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 9,360

Worksheet for Consolidated Financial Statements, December 31, 20x4.


Cost Model (Partial-goodwill)
80%-Owned Subsidiary
December 31, 20x4 (First Year after Acquisition)
Income Statement P Co S Co. Dr. Cr. Consolidated
Sales P480,000 P240,000 P 720,000
Dividend income 28,800 - (4) 28,800 _________
Total Revenue P508,800 P240,000 P 720,000
Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000
Depreciation expense 60,000 28,000 (3) 6,000 90,000
Interest expense - - (3) 1,200 1,200
Other expenses 48,000 18,000 66,000
Goodwill impairment loss - - (3) 3,000 3,000
Total Cost and Expenses P310,000 P180,000 P508,200
Net Income P196,800 P 60,000 P211,800
NCI in Net Income - Subsidiary - - (5) 9,360 ( 9,360)
Net Income to Retained Earnings P196,800 P 60,000 P202,440

Statement of Retained Earnings


Retained earnings, 1/1
P Company P360,000 P 360,000
S Company P120,000 (1) 120,000
Net income, from above 196,800 60,000 202,440
Total P552,000 P180,000 P562,440
Dividends paid
P Company 72,000 72,000
S Company - 36,000 (4) 36,000 _ ________
Retained earnings, 12/31 to Balance
Sheet P484,800 P144,000 P 490,440

Balance Sheet
Cash………………………. P 232,800 P 90,000 P 322,800
Accounts receivable…….. 90,000 60,000 150,000
Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000
Land……………………………. 210,000 48,000 (2) 7,200 265,200
Equipment 240,000 180,000 420,000
Buildings 720,000 540,000 (2) 216,000 1,044,000
Discount on bonds payable (2) 4,800 (3) 1,200 3,600
Goodwill…………………… (2) 12,000 (3) 3,000 9,000
Investment in S Co……… 372,000 (4) 288,000
(5) 84,000 -
Total P1,984,800 P1,008,000 P2,424,600

Accumulated depreciation
- equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000
Accumulated depreciation 405,000 288,000 (2) 192,000
- buildings (3) 6,000 495,000
Accounts payable…………… 120,000 120,000 240,000
Bonds payable………………… 240,000 120,000 360,000
Common stock, P10 par……… 600,000 600,000
Common stock, P10 par……… 240,000 (1) 240,000
Retained earnings, from above 484,800 144,000 490,440
Non-controlling interest………… (4) 7,200 (1 ) 72,000
(2) 18,000
_________ _________ __________ (5) 9,360 ____92,160
Total P1,984,800 P1,008,000 P 745,560 P 745,560 P2,424,600

20x5: Second Year after Acquisition


P Co. S Co.
Sales P P
540,000 360,000
Less: Cost of goods sold 216,000
192,000
Gross profit P P
324,000 168,000
Less: Depreciation expense 60,000 24,000
Other expense 72,000
54,000
Net income from its own separate P P
operations 192,000 90,000
Add: Dividend income 38,400
-
Net income P P
230,400 90,000
Dividends paid P P
72,000 48,000
No goodwill impairment loss for 20x5.
Parent Company Cost Model Entry
Only a single entry is recorded by the P in 20x5 in relation to its subsidiary investment:

January 1, 20x5 – December 31, 20x5:


Cash……………………… 38,400
Dividend income (P48,000 x 80%)……………. 38,400
Record dividends from S Company.
Consolidation Workpaper – Second Year after Acquisition
The working paper eliminations (in journal entry format) on December 31, 20x5, are as follows:

(E1) Investment in S Company………………………… 19,200


Retained earnings – P 19,200
Company………………………
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 – S Company, 1/1/20x5 P144,000
Retained earnings – S Company, 1/1/20x4 120,000
Increase in retained earnings…….. P 24,000
Multiplied by: Controlling interest % 80%
Retroactive adjustment P 19,200

(E2) Common stock – S 240,000


Co…………………………………………
Retained earnings – S Co., 1/1/20x5 144,000
Investment in S Co (P384,000 x 307,200
80%)…………………………
Non-controlling interest (P384,000 x 76,800
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) 6,000
Inventory………………………………………………………………
….
Accumulated depreciation – equipment……………….. 96,000
Accumulated depreciation – buildings………………….. 192,00
0
7,200
Land……………………………………………………………………
….
Discount on bonds 4,800
payable………………………………………….
12,000
Goodwill………………………………………………………………
….
Buildings……………………………………….. 216,00
0
Non-controlling interest (P90,000 x 20%) 18,000
Investment in S 84,000
Co……………………………………………….
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 – P Company, 1/1/20x5
[(P13,200 x 80%) + P3,000, impairment loss on
partial-goodwill] 13,560
Non-controlling interests (P13,200 x 2,640
20%)…………………….
Depreciation expense……………………….. 6,000
Accumulated depreciation – buildings………………….. 12,000
Interest expense………………………………… 1,200
6,000
Inventory…………………………………………………………..
Accumulated depreciation – 24,000
equipment………………..
Discount on bonds payable………………………… 2,400
Goodwill…………………………………… 3,000
To provide for years 20x4 and 20x5 depreciation and amortization on
differences between acquisition date fair value and book value of
S’s identifiable assets and liabilities as follows:
Year 20x4 amounts are debited to P’s retained earnings &
NCI;
Year 20x5 amounts are debited to respective nominal accounts.

(20x4) Depreciation/
Retained Amortization Amortization
earnings, expense -Interest
Inventory sold P 6,000
Equipment 12,000 P 12,000
Buildings (6,000) ( 6,000)
Bonds payable 1,200 ________ P 1,200
Sub-total P13,200 P 6,000 P 1,200
Multiplied by: 80%
To Retained earnings P 10,560
Impairment loss 3,000
Total P 13,560

(E5) Dividend income - P………. 38,400


Non-controlling interest (P48,000 x 9,600
20%)………………..
Dividends paid – S…………………… 48,000
To eliminate intercompany dividends and non-controlling interest
share of dividends.

(E6) Non-controlling interest in Net Income of 16,560


Subsidiary…………
Non-controlling interest ………….. 16,560
To establish non-controlling interest in subsidiary’s adjusted net
income for 20x5 as follows:
Net income of subsidiary…………………….. P 90,000
Amortization of allocated excess [(E4)]…... ( 7,200)
P 82,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5.


Cost Model (Partial-goodwill)
80%-Owned Subsidiary
December 31, 20x5 (Second Year after Acquisition)
Income Statement P Co S Co. Dr. Cr. Consolidated
Sales P540,000 P360,000 P 900,000
Dividend income 38,400 - (5) 38,400 ___________
Total Revenue P578,400 P360,000 P 900,000
Cost of goods sold P216,000 P192,000 P 408,000
Depreciation expense 60,000 24,000 (4) 6,000 90,000
Interest expense - - (4) 1,200 1,200
Other expenses 72,000 54,000 126,000
Goodwill impairment loss - - -
Total Cost and Expenses P348,000 P270,000 P 625,200
Net Income P230,400 P 90,000 P 274,800
NCI in Net Income - Subsidiary - - (6) 16,560 ( 16,560)
Net Income to Retained Earnings P230,400 P 90,000 P 258,240
Statement of Retained Earnings
Retained earnings, 1/1
P Company P484,800 (2) 13,560 (1) 19,200 P 490,440
S Company P 144,000 (2) 144,000
Net income, from above 230,400 90,000 258,240
Total P715,200 P234,000 P 748,680
Dividends paid
P Company 72,000 72,000
S Company - 48,000 (5) 48,000 _ ________
Retained earnings, 12/31 to Balance
Sheet P643,200 P186,000 P 676,680
Balance Sheet
Cash………………………. P 265,200 P 114,000 P 367,200
Accounts receivable…….. 180,000 96,000 276,000
Inventory…………………. 216,000 108,000 (3) 6,000 (4) 6,000 324,000
Land……………………………. 210,000 48,000 (3) 7,200 265,200
Equipment 240,000 180,000 420,000
Buildings 720,000 540,000 (3) 216,000 1,044,000
Discount on bonds payable (3) 4,800 (4) 2,400 2,400
Goodwill…………………… (3) 12,000 (4) 3,000 9,000
Investment in S Co……… 372,000 (1) 19,200 (2) 307,200
(3) 84,000 -
Total P2,203,200 P1,074,000 P2,707,800
Accumulated depreciation
- equipment P 150,000 P 102,000 (3) 96,000 (4) 24,000 P180,000
Accumulated depreciation 450,000 306,000 (3) 192,000
- buildings (4) 12,000 552,000
Accounts payable…………… 120,000 120,000 240,000
Bonds payable………………… 240,000 120,000 360,000
Common stock, P10 par……… 600,000 600,000
Common stock, P10 par……… 240,000 (2) 240,000
Retained earnings, from above 643,200 186,000 676,680
Non-controlling interest………… (5) 9,600
(4) 2,640 (2 ) 76,800
(3) 18,000
___ _____ _________ __________ (6) 16,560 ____99,120
Total P2,203,200 P1,074,000 P 821,160 P 821,160 P2,707,800

5. 1/1/20x4
a. On date of acquisition the retained earnings of P should always be considered as the consolidated
retained earnings, thus:
Consolidated Retained Earnings, January 1, 20x4
Retained earnings - P Company, January 1, 20x4 (date P360,000
of acquisition)
b.
Non-controlling interest (partial-goodwill), January 1, 20x4
Common stock – S Company, January 1, 20x4…… P 240,000
Retained earnings – S Company, January 1, 20x4 120,000
Stockholders’ equity – S Company, January 1, 20x4 P 360,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 90,000
Fair value of stockholders’ equity of subsidiary, January 1, 20x4…… P450,000
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial-goodwill)………………………………….. P 90,000
c.
Consolidated SHE:
Stockholders’ Equity
Common stock, P10 par P 600,000
Retained earnings 360,000
P’s Stockholders’ Equity / CI - SHE P 960,000
NCI, 1/1/20x4 ___90,000
Consolidated SHE, 1/1/20x4 P1,050,000
6.
Note: The goodwill recognized on consolidation purely relates to the P’s share. NCI is measured
as a proportion of identifiable assets and goodwill attributable to NCI share is not recognized.
12/31/20x4:
a. CI-CNI
Consolidated Net Income for 20x4
Net income from own/separate operations
P Company P168,000
S Company 60,000
Total P228,000
Less: Non-controlling Interest in Net Income* P 9,360
Amortization of allocated excess (refer to amortization above) 13,200
Goodwill impairment (impairment under partial-goodwill approach) 3,000 25,560
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent………….. P202,440
Add: Non-controlling Interest in Net Income (NCINI) 9,360
Consolidated Net Income for 20x4 P211.800
b. NCI-CNI
*Non-controlling Interest in Net Income (NCINI) for 20x4
Net income of S Company P 60,000
Less: Amortization of allocated excess / goodwill impairment
(refer to amortization table above) 13,200
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 9,360
c. CNI, P211,800 – refer to (a)
d. On subsequent to date of acquisition, consolidated retained earnings would be computed
as follows:
Consolidated Retained Earnings, December 31, 20x4
Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000
Add: Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent for 20x4 202,440
Total P562,440
Less: Dividends paid – P Company for 20x4 72,000
Consolidated Retained Earnings, December 31, 20x4 P490,440
e.
Non-controlling interest (partial-goodwill), December 31, 20x4
Common stock – S Company, December 31, 20x4…… P 240,000
Retained earnings – S Company, December 31, 20x4
Retained earnings – S Company, January 1, 20x4 P120,000
Add: Net income of S for 20x4 60,000
Total P180,000
Less: Dividends paid – 20x4 36,000 144,000
Stockholders’ equity – S Company, December 31, 20x4 P 384,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 90,000
Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200)
Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P460,000
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial-goodwill)………………………………….. P 92,160
f.
Consolidated SHE:
Stockholders’ Equity
Common stock, P10 par P 600,000
Retained earnings 490,440
P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,090,440
NCI, 12/31/20x4 ___92,160
Consolidated SHE, 12/31/20x4 P1,182,600
12/31/20x5:
a. CI-CNI
Consolidated Net Income for 20x5
Net income from own/separate operations:
P Company P192,000
S Company 90,000
Total P282,000
Less: Non-controlling Interest in Net Income* P16,560
Amortization of allocated excess (refer to amortization above) __7,200 23,760
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent………….. P258,240
Add: Non-controlling Interest in Net Income (NCINI) 16,560
Consolidated Net Income for 20x5 P274,800
b. NCI-CNI
*Non-controlling Interest in Net Income (NCINI) for 20x5
Net income of S Company P 90,000
Less: Amortization of allocated excess / goodwill impairment for 20x5
(refer to amortization table above) 80,400
P 82,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) for 20x5 P 16,560
c. CNI, P274,800 – refer to (a)
d. On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:
Consolidated Retained Earnings, December 31, 20x5
Retained earnings - P Company, January 1, 20x5 (cost model P484,800
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 – S, January 1, 20x5 P 144,000
Less: Retained earnings – S, January 1, 20x4 120,000
Increase in retained earnings since date of acquisition P 24,000
Less: Amortization of allocated excess – 20x4 13,200
P 10,800
Multiplied by: Controlling interests %................... 80%
P 8,640
Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or
(P3, 750 x 80%) 3,000 5,640
Consolidated Retained earnings, January 1, 20x5 P 490,440
Add: Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of P for 20x5 258,240
Total P748,680
Less: Dividends paid – P Company for 20x5 72,000
Consolidated Retained Earnings, December 31, 20x5 P676,680
*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by
80%. There might be situations where the controlling interests on goodwill impairment loss would not be
proportionate to NCI acquired.
e.
Non-controlling interest (partial-goodwill), December 31, 20x5
Common stock – S Company, December 31, 20x5…… P 240,000
Retained earnings – S Company, December 31, 20x5
Retained earnings – S Company, January 1, 20x5 P14,000
Add: Net income of S for 20x5 90,000
Total P234,000
Less: Dividends paid – 20x5 48,000 186,000
Stockholders’ equity – S Company, December 31, 20x5 P 426,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 90,000
Amortization of allocated excess (refer to amortization above) :
20x4 P 13,200
20x5 7,200 ( 20,400)
Fair value of stockholders’ equity of S, December 31, 20x5…… P 495,600
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial goodwill)………………………………….. P 99,120
f.
Consolidated SHE:
Stockholders’ Equity
Common stock, P10 par P 600,000
Retained earnings 676,680
Parent’s Stockholders’ Equity / CI – SHE, 12/31/20x5 P1,276,680
NCI, 12/31/20x5 ___99,120
Consolidated SHE, 12/31/20x5 P1,375,800

Problem XIV – 80% Full Goodwill – Cost Model

Requirements 1 to 4:
Schedule of Determination and Allocation of Excess
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (80%)
Consideration transferred P
(80%)…………….. 372,000
Fair value of NCI (given)
(20%)……………….. 93,000
P
Fair value of Subsidiary (100%)………. 465,000
Less: Book value of stockholders’ equity of
Son:
Common stock (P240,000 x
100%)………………. P 240,000
Retained earnings (P120,000 x
100%)………... 120,000 360,000
Allocated excess (excess of cost over book P
value)….. 105,000
Less: Over/under valuation of assets and
liabilities:
Increase in inventory (P6,000 x
100%)……………… P 6,000
Increase in land (P7,200 x
100%)……………………. 7,200
Increase in equipment (P96,000 x 100%) 96,000
Decrease in buildings (P24,000 x
100%)………..... ( 24,000)
Decrease in bonds payable (P4,800 x
100%)…… 4,800 90,000
Positive excess: Full-goodwill (excess of cost
over
fair P
value)………………………………………………... 15,000
A summary or depreciation and amortization adjustments is as follows:
Annu
Over/ al Current
Account Adjustments to be unde Lif Amou Year(20x
amortized r e nt 4) 20x5
P P P
Inventory 6,000 1 6,000 P 6,000 -
Subject to Annual
Amortization
96,00 12,00
Equipment (net)......... 0 8 12,000 12,000 0
(24,0 ( 6,000 (6,00
Buildings (net) 00) 4 ) ( 6,000) 0)

Bonds payable… 4,800 4 1,200 1,200 1,200


P P
13,200 P 13,200 7,200
20x4: First Year after Acquisition
Parent Company Cost Model Entry
January 1, 20x4:
(1) Investment in S 372,00
Company…………………………………………… 0
372,00
Cash…………………………………………………………………… 0
..
Acquisition of S Company.

January 1, 20x4 – December 31, 20x4:


(2) Cash……………………… 28,800
Dividend income (P36,000x 80%)……………. 28,800
Record dividends from S Company.
No entries are made on the P’s books to depreciate, amortize or write-off the portion of the
allocated excess that expires during 20x4.
Consolidation Workpaper – First Year after Acquisition
(E1) Common stock – S 240,000
Co…………………………………………
Retained earnings – S 120.000
Co……………………………………
Investment in S 288,000
Co……………………………………………
Non-controlling interest (P360,000 x 72,000
20%)………………………..
(E2) 6,000
Inventory………………………………………………………………
….
Accumulated depreciation – equipment……………….. 96,000
Accumulated depreciation – buildings………………….. 192,00
0
7,200
Land……………………………………………………………………
….
Discount on bonds 4,800
payable………………………………………….
15,000
Goodwill………………………………………………………………
….
Buildings……………………………………….. 216,00
0
Non-controlling interest (P90,000 x 20%) + [(P15,000,
full – 21,000
P12,000, partial goodwill)]…………
Investment in S 84,000
Co……………………………………………….
(E3) Cost of Goods Sold……………. 6,000
Depreciation expense……………………….. 6,000
Accumulated depreciation – 6,000
buildings…………………..
Interest expense………………………………… 1,200
Goodwill impairment 3,750
loss……………………………………….
6,000
Inventory…………………………………………………………..
Accumulated depreciation – 12,000
equipment………………..
Discount on bonds payable………………………… 1,200
Goodwill…………………………………… 3,750
Cost of Goods Depreciation/ Amortization Amortization
Sold Expense -Interest
Inventory sold P 6,000
Equipment P12,000
Buildings ( 6,000)
Bonds payable _______ _______ P 1,200
Totals P 6,000 P 6,000 P1,200

(E4) Dividend income - P………. 28,800


Non-controlling interest (P36,000 x 7,200
20%)………………..
Dividends paid – S…………………… 36,000
(E5) Non-controlling interest in Net Income of 8,610
Subsidiary…………
Non-controlling interest ………….. 8,610
Net income of subsidiary…………………….. P 60,000
Amortization of allocated excess [(E3)]…... ( 13,200)
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
P 9,360
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)* 750
Non-controlling Interest in Net Income (NCINI) P 8,610
*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 (refer to Illustration 15-6).
Worksheet for Consolidated Financial Statements, December 31, 20x4.
Cost Model (Full-goodwill)
80%-Owned Subsidiary
December 31, 20x4 (First Year after Acquisition)
Income Statement P Co S Co. Dr. Cr. Consolidated
Sales P480,000 P240,000 P 720,000
Dividend income 28,800 - (4) 28,800 _________
Total Revenue P508,800 P240,000 P 720,000
Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000
Depreciation expense 60,000 24,000 (3) 6,000 90,000
Interest expense - - (3) 1,200 1,200
Other expenses 48,000 18,000 66,000
Goodwill impairment loss - - (3) 3,750 3,750
Total Cost and Expenses P312,000 P180,000 P508,950
Net Income P196,800 P 60,000 P211,050
NCI in Net Income - Subsidiary - - (5) 8,610 ( 8,610)
Net Income to Retained Earnings P196,800 P 60,000 P202,680
Statement of Retained Earnings
Retained earnings, 1/1
P Company P360,000 P 360,000
S Company P120,000 (1) 120,000
Net income, from above 196,800 60,000 202,680
Total P556,800 P180,000 P562,440
Dividends paid
P Company 72,000 86,400
S Company - 36,000 (4) 36,000 _ ________
Retained earnings, 12/31 to Balance
Sheet P484,800 P144,000 P 490,440
Balance Sheet
Cash………………………. P 232,800 P 90,000 P 322,800
Accounts receivable…….. 90,000 60,000 150,000
Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000
Land……………………………. 210,000 48,000 (2) 7,200 265,200
Equipment 240,000 180,000 420,000
Buildings 720,000 540,000 (2) 216,000 1,044,000
Discount on bonds payable (2) 4,800 (3) 1,200 3,600
Goodwill…………………… (2) 15,000 (3) 3,750 11,250
Investment in S Co……… 372,000 (3) 288,000
(4) 84,000 -
Total P1,984,800 P1,008,000 P2,426,850
Accumulated depreciation
- equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000
Accumulated depreciation 405,000 288,000 (5) 192,000
- buildings (6) 6,000 495,000
Accounts payable…………… 120,000 120,000 240,000
Bonds payable………………… 240,000 120,000 360,000
Common stock, P10 par……… 600,000 600,000
Common stock, P10 par……… 240,000 (1) 240,000
Retained earnings, from above 484,800 144,000 490,440
Non-controlling interest………… (7) 7,200 (1 ) 72,000
(2) 21,000
_________ _________ __________ (5) 8,610 ____94,410
Total P1,984,800 P1,984,800 P 748,560 P 748,560 P2,426,850
20x5: Second Year after Acquisition
P Co. S Co.
Sales P P
540,000 360,000
Less: Cost of goods sold 216,000
192,000
Gross profit P P
324,000 168,000
Less: Depreciation expense 60,000 24,000
Other expense 72,000
54,000
Net income from its own separate P P
operations 192,000 90,000
Add: Dividend income 38,400
-
Net income P P
230,400 90,000
Dividends paid P P
72,000 48,000
No goodwill impairment loss for 20x5.

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:


Cash……………………… 38,400
Dividend income (P48,000x 80%)……………. 38,400
Record dividends from S Company.
Consolidation Workpaper – Second Year after Acquisition
(E1) Investment in S Company………………………… 19,200
Retained earnings – P 19,200
Company………………………
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 – S Company, 1/1/20x5 P144,000
Retained earnings – S Company, 1/1/20x4 120,000
Increase in retained earnings…….. P 24,000
Multiplied by: Controlling interest % 80%
Retroactive adjustment P 19,200

(E2) Common stock – S 240,000


Co…………………………………………
Retained earnings – S Co., 1/1/20x5 144,000
Investment in S Co (P384,000 x 307,200
80%)…………………………
Non-controlling interest (P384,000 x 76,800
20%)………………………..
(E3) 6,000
Inventory………………………………………………………………
….
Accumulated depreciation – equipment……………….. 96,000
Accumulated depreciation – buildings………………….. 192,00
0
7,200
Land……………………………………………………………………
….
Discount on bonds 4,800
payable………………………………………….
15,000
Goodwill………………………………………………………………
….
Buildings……………………………………….. 216,00
0
Non-controlling interest (P90,000 x 20%) + [(P15,000,
full – 21,000
P12,000, partial goodwill)]…………
Investment in S 84,000
Co……………………………………………….
(E4) Retained earnings – P Company, 1/1/20x5
(P16,950 x 80%) 13,560
Non-controlling interests (P16,950 x 3,390
20%)…………………….
Depreciation expense……………………….. 6,000
Accumulated depreciation – 12,000
buildings…………………..
Interest expense………………………………… 1,200
6,000
Inventory…………………………………………………………..
Accumulated depreciation – 24,000
equipment………………..
Discount on bonds payable………………………… 2,400
Goodwill…………………………………… 3,750
(20x4) Depreciation/
Retained Amortization Amortization
earnings, expense -Interest
Inventory sold P 6,000
Equipment 12,000 P 12,000
Buildings (6,000) ( 6,000)
Bonds payable 1,200 P 1,200
Impairment loss 3,750
Totals P 16,950 P 6,000 P1,200
Multiplied by: CI%.... 80%
To Retained earnings P13,560

(E5) Dividend income - P………. 38,400


Non-controlling interest (P48,000 x 9,600
20%)………………..
Dividends paid – S…………………… 48,000
To eliminate intercompany dividends and non-controlling interest
share of dividends.

(E6) Non-controlling interest in Net Income of 16,560


Subsidiary…………
Non-controlling interest ………….. 16,560
Net income of subsidiary…………………….. P 90,000
Amortization of allocated excess [(E4)]…... ( 7,200)
P 82,800
Multiplied by: Non-controlling interest %.......... 20%
P 16,560
Less: NCI on goodwill impairment loss on full-
Goodwill 0
Non-controlling Interest in Net Income (NCINI) P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5.


Cost Model (Full-goodwill)
80%-Owned Subsidiary
December 31, 20x5 (Second Year after Acquisition)

Income Statement P Co S Co. Dr. Cr. Consolidated


Sales P540,000 P360,000 P 900,000
Dividend income 38,400 - (5) 38,400 ___________
Total Revenue P578,400 P360,000 P 900,000
Cost of goods sold P216,000 P192,000 P 408,000
Depreciation expense 60,000 24,000 (4) 6,000 90,000
Interest expense - - (4) 1,200 1,200
Other expenses 72,000 54,000 126,000
Goodwill impairment loss - - -
Total Cost and Expenses P348,000 P270,000 P 625,200
Net Income P230,400 P 90,000 P 274,800
NCI in Net Income - Subsidiary - - (6) 16,560 ( 16,560)
Net Income to Retained Earnings P230,400 P 90,000 P 258,240

Statement of Retained Earnings


Retained earnings, 1/1
P Company P484,800 (3) 13,560 (5) 19,200 P 490,440
S Company P 144,000 (6) 144,000
Net income, from above 230,400 90,000 258,240
Total P715,200 P234,000 P 748,680
Dividends paid
P Company 72,000 72,000
S Company - 48,000 (5) 57,600 _ ________
Retained earnings, 12/31 to Balance
Sheet P643,200 P186,000 P 676,680

Balance Sheet
Cash………………………. P 265,200 P 102,000 P 367,200
Accounts receivable…….. 180,000 96,000 276,000
Inventory…………………. 216,000 108,000 (3) 6,000 (4) 6,000 324,000
Land……………………………. 210,000 48,000 (3) 7,200 265,200
Equipment 240,000 180,000 420,000
Buildings 720,000 540,000 (3) 216,000 1,044,000
Discount on bonds payable (3) 4,800 (4) 2,400 2,400
Goodwill…………………… (3) 15,000 (4) 3,750 11,250
Investment in S Co……… 372,000 (1) 19,200 (2) 307,200
(7) 84,000 -
Total P2,203,200 P1,074,000 P2,710,050
Accumulated depreciation
- equipment P 150,000 P 102,000 (3) 96,000 (4) 24,000 P180,000
Accumulated depreciation 450,000 306,000 (3) 192,000
- buildings (4) 12,000 552,000
Accounts payable…………… 120,000 120,000 240,000
Bonds payable………………… 240,000 120,000 360,000
Common stock, P10 par……… 600,000 600,000
Common stock, P10 par……… 240,000 (2) 240,000
Retained earnings, from above 643,200 186,000 676,680
Non-controlling interest………… (6) 9,600
(8) 3,390 (2 ) 76,800
(3) 21,000
___ _____ _________ __________ (6) 16,560 ____101,370
Total P2,203,200 P1,074,000 P 824,910 P 824,910 P2,710,050
5. 1/1/20x4
a. 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 - P Company, January 1, 20x4 (date of acquisition) P360,000
b.
Non-controlling interest (full-goodwill), January 1, 20x4
Common stock – S Company, January 1, 20x4…… P 240,000
Retained earnings – S Company, January 1, 20x4 120,000
Stockholders’ equity – S Company, January 1, 20x4 P 360,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 90,000
Fair value of stockholders’ equity of S, January 1, 20x4…… P450,000
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial-goodwill)………………………………….. P 90,000
Add: NCI on full-goodwill (P15,000 – P12,000) ___3,000
Non-controlling interest (partial-goodwill)………………………………….. P 93,000
c.
Consolidated SHE:
Stockholders’ Equity
Common stock, P10 par P 600,000
Retained earnings 360,000
Parent’s Stockholders’ Equity / CI - SHE P 960,000
NCI, 1/1/20x4 ___93,000
Consolidated SHE, 1/1/20x4 P1,053,000
6.
Note: 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.
12/31/20x4:
a. CI-CNI – P202,440
Consolidated Net Income for 20x4
Net income from own/separate operations:
P Company P168,000
S Company 60,000
Total P228,000
Less: Non-controlling Interest in Net Income* P 8,610
Amortization of allocated excess (refer to amortization above) 13,200
Goodwill impairment (impairment under full-goodwill approach) 3,750 25,560
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of P………….. P202,440
Add: Non-controlling Interest in Net Income (NCINI) 8,610
Consolidated Net Income for 20x4 P211.050
b. NCI-CNI – P8,610
*Non-controlling Interest in Net Income (NCINI) for 20x4
Net income of S Company P 60,000
Less: Amortization of allocated excess (refer to amortization table above) 13,200
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 9,360
Less: Non-controlling int. on impairment loss on full-goodwill (P3,750 x 20%)
or (P3,750 impairment on full-goodwill less P3,000, impairment on
partial-goodwill)* 750
Non-controlling Interest in Net Income (NCINI) P 8,610
*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss
of P3,750 by 20%. There might be situations where the NCI on goodwill impairment loss would not be
proportionate to NCI acquired.

c. CNI, P211,050 – refer to (a)

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


Consolidated Retained Earnings, December 31, 20x4
Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000
Add: Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent for 20x4 202,440
Total P562,440
Less: Dividends paid – P Company for 20x4 72,000
Consolidated Retained Earnings, December 31, 20x4 P490,440
e.
Non-controlling interest (full-goodwill), December 31, 20x4
Common stock – S Company, December 31, 20x4…… P 240,000
Retained earnings – S Company, December 31, 20x4
Retained earnings – S Company, January 1, 20x4 P120,000
Add: Net income of S for 20x4 60,000
Total P180,000
Less: Dividends paid – 20x4 36,000 144,000
Stockholders’ equity – S Company, December 31, 20x4 P 384,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 90,000
Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200)
Fair value of stockholders’ equity of S, December 31, 20x4…… P460,800
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial-goodwill, 12/31/20x4………………………….. P 92,160
Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4:
[(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss 2,250
Non-controlling interest (full-goodwill), 12/31/20x4…………….. P 94,410
f.
Consolidated SHE:
Stockholders’ Equity
Common stock, P10 par P 600,000
Retained earnings 490,440
P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,090,440
NCI, 12/31/20x4 ___94,410
Consolidated SHE, 12/31/20x4 P1,184,850
12/31/20x5:
a. CI-CNI – P258,240
Consolidated Net Income for 20x5
Net income from own/separate operations
P Company P192,000
S Company 90,000
Total P282,000
Less: Non-controlling Interest in Net Income* P16,560
Amortization of allocated excess (refer to amortization above) 7,200
Goodwill impairment (impairment under full-goodwill approach) 0 23,760
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent………….. P258,240
Add: Non-controlling Interest in Net Income (NCINI) 16,560
Consolidated Net Income for 20x5 P274,800
b. NCI-CNI – P16,560
*Non-controlling Interest in Net Income (NCINI) for 20x5
Net income of S Company P 90,000
Less: Amortization of allocated excess / goodwill impairment for 20x5
(refer to amortization table above) 80,400
P 82,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) for 20x5 P 16,560
c. CNI, P274,800 – refer to (a)

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


Consolidated Retained Earnings, December 31, 20x5
Retained earnings - P Company, January 1, 20x5 (cost model P484,800
Adjustment to convert from cost model to equity method for purposes of
consolidation or to establish reciprocity:/P’s share in adjusted net
increased in subsidiary’s retained earnings:
Retained earnings – Subsidiary, January 1, 20x5 P 144,000
Less: Retained earnings – Subsidiary, January 1, 20x4 120,000
Increase in retained earnings since date of acquisition P 24,000
Less: Amortization of allocated excess – 20x4 13,200
P 10,800
Multiplied by: Controlling interests %................... 80%
P 8,640
Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or
(P3, 750 x 80%) 3,000 5,640
Consolidated Retained earnings, January 1, 20x5 P 490,440
Add: Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent for 20x5 258,240
Total P748,680
Less: Dividends paid – P Company for 20x5 72,000
Consolidated Retained Earnings, December 31, 20x5 P676,680
*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by
80%. There might be situations where the controlling interests on goodwill impairment loss would not be
proportionate to NCI acquired.
e.
Non-controlling interest (partial-goodwill), December 31, 20x5
Common stock – S Company, December 31, 20x5…… P 240,000
Retained earnings – S Company, December 31, 20x5
Retained earnings – S Company, January 1, 20x5 P144,000
Add: Net income of S for 20x5 90,000
Total P234,000
Less: Dividends paid – 20x5 48,000 186,000
Stockholders’ equity – S Company, December 31, 20x5 P 426,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 90,000
Amortization of allocated excess (refer to amortization above) :
20x4 P 13,200
20x5 7,200 ( 20,400)
Fair value of stockholders’ equity of S, December 31, 20x5…… P 495,600
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial goodwill)………………………………….. P 99,120
Add: Non-controlling interest on full goodwill , net of impairment loss
[(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss 2,250
Non-controlling interest (full-goodwill)………………………………….. P 101,370
f.
Consolidated SHE:
Stockholders’ Equity
Common stock, P10 par P 600,000
Retained earnings 676,680
P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,276,680
NCI, 12/31/20x4 __101,370
Consolidated SHE, 12/31/20x4 P1,378,050

Problem XV – 80% Partial Goodwill – Equity Method


Requirements 1 to 4:
Schedule of Determination and Allocation of Excess (Partial-goodwill)
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (80%)
Consideration P
transferred……………………………….. 372,000
Less: Book value of stockholders’ equity of S:
Common stock (P240,000 x
80%)……………………. P192,000
Retained earnings (P120,000 x
80%)………………... 96,000 288,000
Allocated excess (excess of cost over book P
value)….. 84,000
Less: Over/under valuation of assets and
liabilities:
Increase in inventory (P6,000 x
80%)……………… P 4,800
Increase in land (P7,200 x
80%)……………………. 5,760
Increase in equipment (P96,000 x 80%) 76,800
Decrease in buildings (P24,000 x
80%)………..... ( 19,200)
Decrease in bonds payable (P4,800 x
80%)…… 3,840 72,000
Positive excess: Partial-goodwill (excess of
cost over
fair P
value)………………………………………………... 12,000

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


S Co. (Over)
Book S Co. Under
value Fair value Valuation
P
Inventory………………….…………….. 24,000 P 30,000 P 6,000
Land……………………………………… 48,000 55,200 7,200
Equipment (net)......... 84,000 180,000 96,000
Buildings (net) 168,000 144,000 (24,000)
Bonds payable………………………… (120,000) ( 115,200) 4,800
P
Net……………………………………….. 204,000 P 294,000 P 90,000
The buildings and equipment will be further analyzed for consolidation purposes as follows:
S Co. S Co. Increase
Book value Fair value (Decrease)
Equipment .................. 180,000 180,000 0
Less: Accumulated
depreciation….. 96,000 - ( 96,000)
Net book
value………………………... 84,000 180,000 96,000
S Co. S Co.
Book value Fair value (Decrease)
Buildings................ 360,000 144,000 ( 216,000)
Less: Accumulated
depreciation….. 192,000 - ( 192,000)
Net book
value………………………... 168,000 144,000 ( 24,000)
A summary or depreciation and amortization adjustments is as follows:
Annu
Over/ al Current
Account Adjustments to be Unde Lif Amou Year(20x
amortized r e nt 4) 20x5
P P P
Inventory 6,000 1 6,000 P 6,000 -
Subject to Annual
Amortization
96,00 12,00
Equipment (net)......... 0 8 12,000 12,000 0
(24,0 ( 6,000 (6,00
Buildings (net) 00) 4 ) ( 6,000) 0)

Bonds payable… 4,800 4


1,200 1,200 1,200
P P
13,200 P 13,200 7,200
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 372,000
Fair value of NCI (given) (20%) 93,000
Fair value of Subsidiary (100%) P 465,000
Less: Book value of stockholders’ equity of S (P360,000
x 100%) __360,000
Allocated excess (excess of cost over book value)….. P 105,000
Add (deduct): (Over) under valuation of assets and
liabilities
(P90,000 x 100%) 90,000
Positive excess: Full-goodwill (excess of cost over
fair value)………………………………………………... P 15,000

20x4: First Year after Acquisition


Parent Company Equity Method Entry

The following are entries recorded by the P in 20x4 in relation to its subsidiary investment:
January 1, 20x4:
(1) Investment in S 372,00
Company…………………………………………… 0
372,00
Cash…………………………………………………………………… 0
..
Acquisition of S Company.

January 1, 20x4 – December 31, 20x4:


(2) Cash……………………… 28,800
Investment in S Company (P36,000 x 80%)……………. 28,800
Record dividends from S Company.

December 31, 20x4:


(3) Investment in S Company 48,000
Investment income (P60,000 x 80%) 48,000
Record share in net income of subsidiary.

December 31, 20x4:


(4) Investment income [(P13,200 x 80%) + P3,000*, goodwill 13,560
impairment loss)]
Investment in S Company 13,560
Record amortization of allocated excess of inventory, equipment, buildings and
bonds payable and goodwill impairment loss.

Thus, the investment balance and investment income in the books of P Company is as follows:
Investment in S
Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%)
NI of S Amortization &
(60,000 x 80%) 48,000 13,560 impairment
Balance, 12/31/x4 377,640

Investment Income
Amortization & NI of S
impairment 13,560 48,000 (P60,000 x 80%)
34,440 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 – S 240,000
Co…………………………………………
Retained earnings – S 120.000
Co……………………………………
Investment in Son 288,000
Co……………………………………………
Non-controlling interest (P360,000 x 72,000
20%)………………………..
(E2) 6,000
Inventory………………………………………………………………
….
Accumulated depreciation – equipment……………….. 96,000
Accumulated depreciation – buildings………………….. 192,00
0
7,200
Land……………………………………………………………………
….
Discount on bonds 4,800
payable………………………………………….
12,000
Goodwill………………………………………………………………
….
Buildings……………………………………….. 216,00
0
Non-controlling interest (P96,000 x 18,000
20%)………………………..
Investment in S 84,000
Co……………………………………………….
(E3) Cost of Goods Sold……………. 6,000
Depreciation expense……………………….. 6,000
Accumulated depreciation – 6,000
buildings…………………..
Interest expense………………………………… 1,200
Goodwill impairment 3,000
loss……………………………………….
6,000
Inventory…………………………………………………………..
Accumulated depreciation – 12,000
equipment………………..
Discount on bonds payable………………………… 1,200
Goodwill…………………………………… 3,000
Cost of Depreciation/
Goods Amortization Amortization
Sold Expense -Interest Total
Inventory sold P 6,000
Equipment P 12,000
Buildings ( 6,000)
Bonds payable _______ _______ P 1,200
Totals P 6,000 P 6,000 P1,200 13,200

It should be observed that the goodwill computed above was proportional to the controlling
interest of 80% and non-controlling interest of 20% computed as follows:
Value % of
Total
Goodwill applicable to parent………………… P12,000 80.00%
Goodwill applicable to NCI…………………….. 3,000 20.00%
Total (full) goodwill……………………………….. P15,000 100.00%

Therefore, the goodwill impairment loss of P3,750 based on 100% fair value or full-goodwill would
be allocated as follows:
Value % of
Total
Goodwill impairment loss attributable to parent P 80.00%
or controlling 3,000
Interest
Goodwill impairment loss applicable to 625 20.00%
NCI……………………..
Goodwill impairment loss based on 100% fair
value or full- P 3,750 100.00%
Goodwill

(E4) Investment income 34,440


Non-controlling interest (P36,000 x 7,200
20%)………………..
Dividends paid – S…………………… 36,000
Investment in S Company 5,640
To eliminate intercompany dividends and investment income under
equity method and establish share of dividends, computed as
follows:

Investment in S Investment Income


NI of S 28,800 Dividends - S NI of S
(60,000 Amortization & Amortization (60,000
x 80%)……. 48,000 13,560 impairment impairment 13,560 48,000 x 80%)
5,640 34,440

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,

Investment in S
Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%)
NI of Son Amortization &
(60,000 x 80%) 48,000 13,560 impairment
Balance, 12/31/x4 377,640 288,000 (E1) Investment, 1/1/20x4
84,000 (E2) Investment, 1/1/20x4
5,640 (E4) Investment Income
and dividends
377,640 377,640

(E5) Non-controlling interest in Net Income of 9,360


Subsidiary…………
Non-controlling interest ………….. 9,360
To establish non-controlling interest in subsidiary’s adjusted net
income for 20x4 as follows:

Net income of subsidiary…………………….. P 60,000


Amortization of allocated excess [(E3)]…... ( 13,200)
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 9,360
Worksheet for Consolidated Financial Statements, December 31, 20x4.
Equity Method (Partial-goodwill)
80%-Owned Subsidiary
December 31, 20x4 (First Year after Acquisition)
Income Statement P Co S Co. Dr. Cr. Consolidated
Sales P480,000 P240,000 P 720,000
Investment income 34,440 - (4) 34,440 _________
Total Revenue P513,600 P240,000 P 720,000
Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000
Depreciation expense 60,000 24,000 (3) 6,000 90,000
Interest expense - - (3) 1,200 1,200
Other expenses 48,000 18,000 66,000
Goodwill impairment loss - - (3) 3,000 3,000
Total Cost and Expenses P312,000 P180,000 P508,200
Net Income P202,440 P 60,000 P211,800
NCI in Net Income - Subsidiary - - (5) 9,360 ( 9,360)
Net Income to Retained Earnings P202,440 P 60,000 P202,440

Statement of Retained Earnings


Retained earnings, 1/1
P Company P360,000 P360,000
S Company P120,000 (1) 120,000
Net income, from above 202,440 60,000 202,440
Total P562,440 P180,000 P562,440
Dividends paid
P Company 72,000 72,000
S Company - 36,000 (4) 36,000 -
Retained earnings, 12/31 to Balance
Sheet P490,440 P144,000 P490,440
Balance Sheet
Cash………………………. P 232,800 P 90,000 P 322,800
Accounts receivable…….. 90,000 60,000 150,000
Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000
Land……………………………. 210,000 48,000 (2) 7,200 265,200
Equipment 240,000 180,000 420,000
Buildings 720,000 540,000 (2) 216,000 1,044,000
Discount on bonds payable (2) 4,800 (3) 1,200 3,600
Goodwill…………………… (2) 12,000 (3) 3,000 9,000
Investment in S Co……… 377,640 (2) 288,000
(2) 84,000
(4) 5,640 -
Total P1,990,440 P1,008,000 P2,424,600

Accumulated depreciation
- equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000
Accumulated depreciation 405,000 288,000 (8) 192,000
- buildings (9) 6,000 495,000
Accounts payable…………… 120,000 120,000 240,000
Bonds payable………………… 240,000 120,000 360,000
Common stock, P10 par……… 600,000 600,000
Common stock, P10 par……… 240,000 (1) 240,000
Retained earnings, from above 490,440 144,000 490,440
Non-controlling interest………… (10) 7,200 (1 ) 72,000
(2) 18,000
_________ _________ __________ (5) 9,360 ____92,160
Total P1,990,440 P1,008,000 P 751,200 P 751,200 P2,424,600

20x5: Second Year after Acquisition


P Co. S Co.
Sales P P
540,000 360,000
Less: Cost of goods sold 216,000
192,000
Gross profit P P
324,000 168,000
Less: Depreciation expense 60,000 24,000
Other expense 72,000
54,000
Net income from its own separate P P
operations 192,000 90,000
Add: Investment income 66,240
-
Net income P P
258,240 90,000
Dividends paid P P
72,000 48,000
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……………………… 38,400
Investment in S Company (P48,000 x 38,400
80%)…………….
Record dividends from S Company.
December 31, 20x5:
(3) Investment in S Company 72,000
Investment income (P90,000 x 80%) 72,000
Record share in net income of subsidiary.
December 31, 20x5:
(4) Investment income (P7,200 x 80%) 5,760
Investment in S Company 5,760
Record amortization of allocated excess of inventory, equipment,
buildings and bonds payable

Thus, the investment balance and investment income in the books of P Company is as follows:
Investment in S
Cost, 1/1/x5 377,640 38,400 Dividends – S (48,000x 80%)
NI of S Amortization
(90,000 x 80%) 72,000 5,760 (P7,200 x 80%)
Balance, 12/31/x5 405,480

Investment Income
Amortization NI of S
(7,200 x 80%) 5,760 72,000 (90,000 x 80%)
66,240 Balance, 12/31/x4
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 – S 240,000
Co…………………………………………
Retained earnings – S Co, 144.000
1/1/x5………………………….
Investment in S Co (P384,000 x 80%) 307,200
Non-controlling interest (P384,000 x 76,800
20%)………………………..
(E2) Accumulated depreciation – equipment (P96,000 – 84,000
P12,000)
Accumulated depreciation – buildings (P192,000 + 198,00
6,000) 0
7,200
Land……………………………………………………………………
….
Discount on bonds payable (P4,800 – P1,200)…. 3,600
Goodwill (P12,000 – P3,000)…………………………….. 9,000
Buildings……………………………………….. 216,00
0
Non-controlling interest [(P90,000 – P13,200) x 20%] 15,360
Investment in S 70,440
Co……………………………………………….
(E3) Depreciation expense……………………….. 6,000
Accumulated depreciation – 6,000
buildings…………………..
Interest expense………………………………… 1,200
Accumulated depreciation – 12,000
equipment………………..
Discount on bonds 1,200
payable…………………………
Depreciation/
Amortization Amortization
Expense -Interest Total
Inventory sold
Equipment P 12,000
Buildings ( 6,000)
Bonds payable _______ P 1,200
Totals P 6,000 P1,200 P7,,200

(E4) Investment income 66,240


Non-controlling interest (P48,000 x 9,600
20%)………………..
Dividends paid – S…………………… 48,000
Investment in S Company 27,840
To eliminate intercompany dividends and investment income under
equity method and establish share of dividends, computed as
follows:
Investment in S Investment Income
NI of S 38,400 Dividends – S NI of S
(90,000 Amortization Amortization (90,000
x 80%)……. 72,000 5,760 (P7,200 x 80%) (P7,200 x 80%) 5,760 72,000 x 80%)
27,840 66,240

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,
Investment in S
Cost, 1/1/x5 377,640 38,400 Dividends – S (48,000x 80%)
NI of S Amortization
(90,000 x 80%) 72,000 5,760 (7,200 x 80%)
Balance, 12/31/x5 405,480 307,200 (E1) Investment, 1/1/20x5
70,440 (E2) Investment, 1/1/20x5
27,840 (E4) Investment Income
and dividends
405,480 405,480

(E5) Non-controlling interest in Net Income of 16,560


Subsidiary…………
Non-controlling interest ………….. 16,560
To establish non-controlling interest in subsidiary’s adjusted net
income for 20x4 as follows:

Net income of subsidiary…………………….. P 90,000


Amortization of allocated excess [(E3)]…... ( 7,200)
P 82,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5.


Equity Method (Partial-goodwill)
80%-Owned Subsidiary
December 31, 20x5 (Second Year after Acquisition)
Income Statement P Co S Co. Dr. Cr. Consolidated
Sales P540,000 P360,000 P 900,000
Investment income 66,240 - (4) 66,240 ___________
Total Revenue P606,000 P360,000 P 900,000
Cost of goods sold P216,000 P192,000 P 408,000
Depreciation expense 60,000 24,000 (3) 6,000 90,000
Interest expense - - (3) 1,200 1,200
Other expenses 72,000 54,000 126,000
Goodwill impairment loss - - -
Total Cost and Expenses P348,000 P270,000 P 625,200
Net Income P258,240 P 90,000 P 274,800
NCI in Net Income - Subsidiary - - (5) 16,560 ( 16,560)
Net Income to Retained Earnings P258,240 P 90,000 P258,240

Statement of Retained Earnings


Retained earnings, 1/1
P Company P490,440 P490,440
S Company P144,000 (1) 144,000
Net income, from above 258,240 90,000 258,240
Total P748,680 P234,000 P748,680
Dividends paid
P Company 72,000 72,000
S Company - 48,000 (4) 48,000 -
Retained earnings, 12/31 to Balance
Sheet P676,680 P186,000 P676,680

Balance Sheet
Cash………………………. P 265,200 P 102,000 P 367,200
Accounts receivable…….. 180,000 96,000 276,000
Inventory…………………. 216,000 108,000 324,000
Land……………………………. 210,000 48,000 (2) 7,200 265,200
Equipment 240,000 180,000 420,000
Buildings 720,000 540,000 (3) 216,000 1,044,000
Discount on bonds payable (2) 3,600 (3) 1,200 2,400
Goodwill…………………… (2) 9,000 9,000
Investment in S Co……… 405,480 (1) 307,200
(2) 70,440
(4) 27,840 -
Total P2,236,680 P1,074,000 P2,707,800

Accumulated depreciation (2) 84,000


- equipment P 150,000 P 102,000 (3) 12,000 P180,000
Accumulated depreciation 450,000 306,000 (2) 198,000
- buildings (3) 6,000 552,000
Accounts payable…………… 120,000 120,000 240,000
Bonds payable………………… 240,000 120,000 360,000
Common stock, P10 par……… 600,000 600,000
Common stock, P10 par……… 240,000 (1) 240,000
Retained earnings, from above 676,680 186,000 676,680
Non-controlling interest………… (7) 9,600
(2 ) 76,800
(2) 15,360
___ _____ _________ __________ (5) 16,560 ____99,120
Total P2,236,680 P1,074,000 P 794,400 P 794,400 P2,707,800
Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings,
non-controlling interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer
to Problem VI solution).

5. 1/1/20x4
a. 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 - P Company, January 1, 20x4 (date of acquisition) P360,000
b.
Non-controlling interest (partial-goodwill), January 1, 20x4
Common stock – S Company, January 1, 20x4…… P 240,000
Retained earnings – S Company, January 1, 20x4 120,000
Stockholders’ equity – S Company, January 1, 20x4 P 360,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 90,000
Fair value of stockholders’ equity of subsidiary, January 1, 20x4…… P450,000
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial-goodwill)………………………………….. P 90,000
c.
Consolidated SHE:
Stockholders’ Equity
Common stock, P10 par P 600,000
Retained earnings 360,000
Parent’s Stockholders’ Equity / CI - SHE P 960,000
NCI, 1/1/20x4 ___90,000
Consolidated SHE, 1/1/20x4 P1,050,000
6.
12/31/20x4:
a. CI-CNI
Consolidated Net Income for 20x4
Net income from own/separate operations
P Company P168,000
S Company 60,000
Total P228,000
Less: Non-controlling Interest in Net Income* P 9,360
Amortization of allocated excess (refer to amortization above) 13,200
Goodwill impairment (impairment under partial-goodwill approach) 3,000 25,560
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of P………….. P202,440
Add: Non-controlling Interest in Net Income (NCINI) 9,360
Consolidated Net Income for 20x4 P211.800
b. NCI-CNI
*Non-controlling Interest in Net Income (NCINI) for 20x4
Net income of S Company P 60,000
Less: Amortization of allocated excess / goodwill impairment
(refer to amortization table above) 13,200
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 9,360

c. CNI, P211,800 – refer to (a)

d. On subsequent to date of acquisition, consolidated retained earnings would be computed


as follows:
Consolidated Retained Earnings, December 31, 20x4
Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000
Add: Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent for 20x4 202,440
Total P562,440
Less: Dividends paid – P Company for 20x4 72,000
Consolidated Retained Earnings, December 31, 20x4 P490,440

e.
Non-controlling interest (partial-goodwill), December 31, 20x4
Common stock – S Company, December 31, 20x4…… P 240,000
Retained earnings – S Company, December 31, 20x4
Retained earnings – S Company, January 1, 20x4 P120,000
Add: Net income of S for 20x4 60,000
Total P180,000
Less: Dividends paid – 20x4 36,000 144,000
Stockholders’ equity – S Company, December 31, 20x4 P 384,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 90,000
Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200)
Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P460,000
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial-goodwill)………………………………….. P 92,160
f.
Consolidated SHE:
Stockholders’ Equity
Common stock, P10 par P 600,000
Retained earnings 490,440
P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,090,440
NCI, 12/31/20x4 ___92,160
Consolidated SHE, 12/31/20x4 P1,182,600
12/31/20x5:
a. CI-CNI
Consolidated Net Income for 20x5
Net income from own/separate operations:
P Company P192,000
S Company 90,000
Total P282,000
Less: Non-controlling Interest in Net Income* P16,560
Amortization of allocated excess (refer to amortization above) __7,200 23,760
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent………….. P258,240
Add: Non-controlling Interest in Net Income (NCINI) 16,560
Consolidated Net Income for 20x5 P274,800

b. NCI-CNI
*Non-controlling Interest in Net Income (NCINI) for 20x5
Net income of S Company P 90,000
Less: Amortization of allocated excess / goodwill impairment for 20x5
(refer to amortization table above) 80,400
P 82,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) for 20x5 P 16,560

c. CNI, P274,800 – refer to (a)

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


Consolidated Retained Earnings, December 31, 20x5
Retained earnings - P Company, January 1, 20x5 (cost model P484,800
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 – S, January 1, 20x5 P 144,000
Less: Retained earnings – S, January 1, 20x4 120,000
Increase in retained earnings since date of acquisition P 24,000
Less: Amortization of allocated excess – 20x4 13,200
P 10,800
Multiplied by: Controlling interests %................... 80%
P 8,640
Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or
(P3, 750 x 80%) 3,000 5,640
Consolidated Retained earnings, January 1, 20x5 P 490,440
Add: Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent for 20x5 258,240
Total P748,680
Less: Dividends paid – P Company for 20x5 72,000
Consolidated Retained Earnings, December 31, 20x5 P676,680
*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by
80%. There might be situations where the controlling interests on goodwill impairment loss would not be
proportionate to NCI acquired.
e.
Non-controlling interest (partial-goodwill), December 31, 20x5
Common stock – S Company, December 31, 20x5…… P 240,000
Retained earnings – S Company, December 31, 20x5
Retained earnings – S Company, January 1, 20x5 P14,000
Add: Net income of S for 20x5 90,000
Total P234,000
Less: Dividends paid – 20x5 48,000 186,000
Stockholders’ equity – S Company, December 31, 20x5 P 426,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 90,000
Amortization of allocated excess (refer to amortization above) :
20x4 P 13,200
20x5 7,200 ( 20,400)
Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P 495,600
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial goodwill)………………………………….. P 99,120
f.
Consolidated SHE:
Stockholders’ Equity
Common stock, P10 par P 600,000
Retained earnings 676,680
P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,276,680
NCI, 12/31/20x4 ___99,120
Consolidated SHE, 12/31/20x4 P1,1375,800

Problem XVI - 80% Full Goodwill – Equity Method

Requirements 1 to 4:
Schedule of Determination and Allocation of Excess
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (80%)
Consideration transferred P
(80%)…………….. 372,000
Fair value of NCI (given)
(20%)……………….. 93,000
P
Fair value of Subsidiary (100%)………. 465,000
Less: Book value of stockholders’ equity of
Son:
Common stock (P240,000 x
100%)………………. P 240,000
Retained earnings (P120,000 x
100%)………... 120,000 360,000
Allocated excess (excess of cost over book P
value)….. 105,000
Less: Over/under valuation of assets and
liabilities:
Increase in inventory (P6,000 x
100%)……………… P 6,000
Increase in land (P7,200 x
100%)……………………. 7,200
Increase in equipment (P96,000 x 100%) 96,000
Decrease in buildings (P24,000 x
100%)………..... ( 24,000)
Decrease in bonds payable (P4,800 x
100%)…… 4,800 90,000
Positive excess: Full-goodwill (excess of cost
over
fair P
value)………………………………………………... 15,000

A summary or depreciation and amortization adjustments is as follows:


Annu
Over/ al Current
Account Adjustments to be unde Lif Amou Year(20x
amortized r e nt 4) 20x5
P P P
Inventory 6,000 1 6,000 P 6,000 -
Subject to Annual
Amortization
96,00 12,00
Equipment (net)......... 0 8 12,000 12,000 0
(24,0 ( 6,000 (6,00
Buildings (net) 00) 4 ) ( 6,000) 0)

Bonds payable… 4,800 4 1,200 1,200 1,200


P P
13,200 P 13,200 7,200
2x4: 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 S 372,00
Company…………………………………………… 0
372,00
Cash…………………………………………………………………… 0
..
Acquisition of S Company.

January 1, 20x4 – December 31, 20x4:


(2) Cash……………………… 28,800
Investment in S Company (P36,000 x 80%)……………. 28,800
Record dividends from S Company.

December 31, 20x4:


(3) Investment in S Company 48,000
Investment income (P60,000 x 80%) 48,000
Record share in net income of subsidiary.

December 31, 20x4:


(4) Investment income [(P13,200 x 80%) + (P3,750 – P750)*, 13,560
goodwill impairment loss)]
Investment in S Company 13,560
Record amortization of allocated excess of inventory, equipment, buildings and
bonds payable and goodwill impairment loss.

Thus, the investment balance and investment income in the books of P Company is as follows:
Investment in S
Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%)
NI of S Amortization &
(60,000 x 80%) 48,000 13,560 Impairment
Balance, 12/31/x4 377,640

Investment Income
Amortization & NI of S
Impairment 13,560 48,000 (P60,000 x 80%)
34,440 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 – S Co………………………………………… 240,00
0
Retained earnings – S Co…………………………………… 120.00
0
Investment in S 288,00
Co…………………………………………… 0
Non-controlling interest (P360,000 x 72,000
20%)………………………..
(E2) 6,000
Inventory………………………………………………………………
….
Accumulated depreciation – equipment……………….. 96,000
Accumulated depreciation – buildings………………….. 192,00
0
7,200
Land……………………………………………………………………
….
Discount on bonds 4,800
payable………………………………………….
15,000
Goodwill………………………………………………………………
….
Buildings……………………………………….. 216,00
0
Non-controlling interest (P90,000 x 20%) + [(P15,000,
full – 21,000
P12,000, partial goodwill)]…………
Investment in S 84,000
Co……………………………………………….
(E3) Cost of Goods Sold……………. 6,000
Depreciation expense……………………….. 6,000
Accumulated depreciation – 6,000
buildings…………………..
Interest expense………………………………… 1,200
Goodwill impairment 3,750
loss……………………………………….
6,000
Inventory…………………………………………………………..
Accumulated depreciation – 12,000
equipment………………..
Discount on bonds payable………………………… 1,200
Goodwill…………………………………… 3,750
Cost of Depreciation/
Goods Amortization Amortization
Sold Expense -Interest Total
Inventory sold P 6,000
Equipment P 12,000
Buildings ( 6,000)
Bonds payable _______ _______ P 1,200
Totals P 6,000 P 6,000 P1,200 13,200

(E4) Investment income 37,440


Non-controlling interest (P36,000 x 7,200
20%)………………..
Dividends paid – S…………………… 36,000
Investment in S Company 8,640
Investment in S Investment Income
NI of S 28,800 Dividends – S NI of Son
(60,000 Amortization & Amortization & (60,000
x 80%)……. 48,000 13,560 Impairment Impairment 13,560 48,000 x 80%)
5,640 34,440

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,
Investment in S
Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%)
NI of S Amortization &
(60,000 x 80%) 40,000 13,560 Impairment
Balance, 12/31/x4 377,640 288,000 (E1) Investment, 1/1/20x4
84,000 (E2) Investment, 1/1/20x4
5,640 (E4) Investment Income
and dividends
377,640 377,640

(E5) Non-controlling interest in Net Income of 8,610


Subsidiary…………
Non-controlling interest ………….. 8,610
Net income of subsidiary…………………….. P 60,000
Amortization of allocated excess [(E3)]…... ( 13,200)
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 9,360
Less: Non-controlling interest on impairment
loss on full-goodwill (P3,750 x 20%) or
(P3,750 impairment on full-goodwill less
P3,000, impairment on partial-goodwill)* 750
Non-controlling Interest in Net Income (NCINI) P 8,610
*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,750 by
20%. There might be situations where the NCI on goodwill impairment loss would not be proportionate to NCI
acquired (refer to Illustration 15-6).

Worksheet for Consolidated Financial Statements, December 31, 20x4.


Equity Method (Full-goodwill)
80%-Owned Subsidiary
December 31, 20x4 (First Year after Acquisition)
Income Statement P Co S Co. Dr. Cr. Consolidated
Sales P480,000 P240,000 P 720,000
Investment income 34,440 - (4) 34,440 _________
Total Revenue P514,440 P240,000 P 720,000
Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000
Depreciation expense 60,000 24,000 (3) 6,000 90,000
Interest expense - - (3) 1,200 1,200
Other expenses 48,000 18,000 66,000
Goodwill impairment loss - - (3) 3,750 3,750
Total Cost and Expenses P312,000 P180,000 P508,950
Net Income P202,440 P 60,000 P211,050
NCI in Net Income - Subsidiary - - (5) 8,610 ( 8,610)
Net Income to Retained Earnings P202,440 P 60,000 P202,440

Statement of Retained Earnings


Retained earnings, 1/1
P Company P360,000 P360,000
S Company P120,000 (1) 120,000
Net income, from above 202,440 60,000 202,440
Total P562,440 P180,000 P562,440
Dividends paid
P Company 72,000 72,000
S Company - 36,000 (4) 36,000 -
Retained earnings, 12/31 to Balance
Sheet P490,440 P144,000 P490,440

Balance Sheet
Cash………………………. P 232,800 P 90,000 P 322,800
Accounts receivable…….. 90,000 60,000 150,000
Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000
Land……………………………. 210,000 48,000 (2) 7,200 265,200
Equipment 240,000 180,000 420,000
Buildings 720,000 540,000 (2) 216,000 1,044,000
Discount on bonds payable (2) 4,800 (3) 1,200 3,600
Goodwill…………………… (2) 15,000 (3) 3,750 11,250
Investment in S Co……… 377,640 (2) 288,000
(2) 84,000
(4) 5,640 -
Total P1,990,440 P1,008,000 P2,426,850

Accumulated depreciation
- equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000
Accumulated depreciation 405,000 288,000 (2) 192,000
- buildings (3) 6,000 495,000
Accounts payable…………… 120,000 120,000 240,000
Bonds payable………………… 240,000 120,000 360,000
Common stock, P10 par……… 600,000 600,000
Common stock, P10 par……… 240,000 (1) 240,000
Retained earnings, from above 490,440 144,000 490,440
Non-controlling interest………… (4) 7,200 (1 ) 72,000
(2) 21,000
_________ _________ __________ (5) 8,610 ____94,410
Total P1,990,440 P1,008,000 P 754,200 P 754,200 P2,426,850
20x5: Second Year after Acquisition
P Co. S Co.
Sales P P
540,000 380,000
Less: Cost of goods sold 216,000
192,000
Gross profit P P
324,000 168,000
Less: Depreciation expense 60,000 24,000
Other expense 72,000
54,000
Net income from its own separate P P
operations 192,000 90,000
Add: Investment income 66,240
-
Net income P P
258,240 90,000
Dividends paid P P
72,000 48,000
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……………………… 38,400
Investment in S Company (P48,000 x 38,400
80%)…………….
Record dividends from S Company.

December 31, 20x5:


(3) Investment in S Company 72,000
Investment income (P90,000 x 80%) 72,000
Record share in net income of subsidiary.

December 31, 20x5:


(4) Investment income (P7,200 x 80%) 5,760
Investment in S Company 5,760
Record amortization of allocated excess of inventory, equipment,
buildings and bonds payable

P Company’s P12,000 portion of the differential related to goodwill related to goodwill is not
adjusted on the parent’s books following Option 2 as referred to above for goodwill impairment
loss. Even though the goodwill of the consolidated entity is impaired,

Thus, the investment balance and investment income in the books of P Company is as follows:
Investment in S
Cost, 1/1/x5 377,640 38,400 Dividends – S (48,000x 80%)
NI of S Amortization
(90,000 x 80%) 72,000 5,760 (P7,200 x 80%)
Balance, 12/31/x5 405,480
Investment Income
Amortization NI of S
(7,200 x 80%) 5,760 72,000 (90,000 x 80%)
66,240 Balance, 12/31/x4

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 – S 240,000
Co…………………………………………
Retained earnings – S Co, 144.000
1/1/x5………………………….
Investment in S Co (P384,000 x 80%) 307,200
Non-controlling interest (P384,000 x 76,800
20%)………………………..
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 (P96,000 – 84,000


P12,000)
Accumulated depreciation – buildings (P192,000 + 198,00
P6,000) 0
7,200
Land……………………………………………………………………
….
Discount on bonds payable (P4,800 – P1,200)…. 3,600
Goodwill (P15,000 – P3,750)…………………………….. 11,250
Buildings……………………………………….. 216,00
0
Non-controlling interest [(P90,000 – P13,200) x 20%] +
[P3,000, full goodwill - [(P3,750, full-goodwill
impairment
– P3,000, partial- goodwill impairment)* 17,610
or (P3,750 x 20%)]
Investment in S 70,440
Co……………………………………………….
(E3) Depreciation expense……………………….. 6,000
Accumulated depreciation – 6,000
buildings…………………..
Interest expense………………………………… 1,200
Accumulated depreciation – 12,000
equipment………………..
Discount on bonds 1,200
payable…………………………
Depreciation/
Amortization Amortization
Expense -Interest Total
Inventory sold
Equipment P 12,000
Buildings ( 6,000)
Bonds payable _______ P 1,200
Totals P 6,000 P1,200 P7,200

(E4) Investment income 66,240


Non-controlling interest (P48,000 x 9,600
20%)………………..
Dividends paid – S…………………… 48,000
Investment in S Company 27,840

Investment in S Investment Income


NI of S 38,400 Dividends - S NI of S
(90,000 Amortization Amortization (90,000
x 80%)……. 72,000 5,760 (P7,200 x 80%) (P7,200 x 80%) 5,760 72,000 x 80%)
27,840 66,240
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,
Investment in S
Cost, 1/1/x5 377,640 38,400 Dividends – S (48,000x 80%)
NI of S Amortization
(90,000 x 80%) 72,000 5,760 (7,200 x 80%)
Balance, 12/31/x5 405,480 307,200 (E1) Investment, 1/1/20x5
70,440 (E2) Investment, 1/1/20x5
27,840 (E4) Investment Income
and dividends
405,480 405,480
(E5) Non-controlling interest in Net Income of 16,560
Subsidiary…………
Non-controlling interest ………….. 16,560
To establish non-controlling interest in subsidiary’s adjusted net
income for 20x5 as follows:

Net income of subsidiary…………………….. P 90,000


Amortization of allocated excess [(E3)]…... ( 7,200)
P 82,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 16,560
Less: NCI on goodwill impairment loss on full-
Goodwill 0
Non-controlling Interest in Net Income (NCINI) P 16,560

Worksheet for Consolidated Financial Statements, December 31, 20x5.


Equity Method (Full-goodwill)
80%-Owned Subsidiary
December 31, 20x5 (Second Year after Acquisition)
Income Statement P Co S Co. Dr. Cr. Consolidated
Sales P540,000 P360,000 P 900,000
Investment income 66,240 - (4) 66,240 ___________
Total Revenue P606,000 P360,000 P 900,000
Cost of goods sold P216,000 P192,000 P 408,000
Depreciation expense 60,000 24,000 (3) 6,000 90,000
Interest expense - - (3) 1,200 1,200
Other expenses 72,000 54,000 126,000
Goodwill impairment loss - - -
Total Cost and Expenses P348,000 P270,000 P 625,200
Net Income P258,240 P 90,000 P 274,800
NCI in Net Income - Subsidiary - - (5) 16,560 ( 16,560)
Net Income to Retained Earnings P258,240 P 90,000 P 258,240
Statement of Retained Earnings
Retained earnings, 1/1
P Company P490,440 P490,440
S Company P144,000 (1) 144,000
Net income, from above 258,240 90,000 258,240
Total P748,680 P234,000 P748,680
Dividends paid
P Company 72,000 72,000
S Company - 48,000 (4) 48,000 -
Retained earnings, 12/31 to Balance
Sheet P676,680 P186,000 P676,680
Balance Sheet
Cash………………………. P 265,200 P 102,000 P 367,200
Accounts receivable…….. 180,000 960,000 276,000
Inventory…………………. 216,000 108,000 324,000
Land……………………………. 210,000 48,000 (2) 7,200 265,200
Equipment 240,000 180,000 420,000
Buildings 720,000 540,000 (3) 216,000 1,044,000
Discount on bonds payable (2) 3,600 (3) 1,200 2,400
Goodwill…………………… (2) 11,250 11,250
Investment in S Co……… 405,9480 (1) 307,200
(5) 70,440
(4) 27,840 -
Total P2,236,680 P1,074,000 P2,634,000
Accumulated depreciation (2) 84,000
- equipment P 150,000 P 102,000 (3) 12,000 P 180,000
Accumulated depreciation 450,000 306,000 (2) 198,000
- buildings (3) 6,000 552,000
Accounts payable…………… 120,000 120,000 240,000
Bonds payable………………… 240,000 120,000 360,000
Common stock, P10 par……… 600,000 600,000
Common stock, P10 par……… 240,000 (1) 240,000
Retained earnings, from above 676,680 186,000 676,680
Non-controlling interest…………
(3) 9,600
(2 ) 76,800
(2) 17,610
___ _____ __________ __________ (5) 16,560 __________
Total P2,236,680 P1,074,000 P 796,650 P 796,650 P2,634,000
Note: Using cost model or equity method, the consolidated net income, consolidated retained earnings, non-controlling
interests, consolidated equity on December 31, 20x4 and 20x5 are exactly the same (refer to Problem VII solution).
5. 1/1/20x4
a. 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 - P Company, January 1, 20x4 (date of acquisition) P360,000
b.
Non-controlling interest (full-goodwill), January 1, 20x4
Common stock – S Company, January 1, 20x4…… P 240,000
Retained earnings – S Company, January 1, 20x4 120,000
Stockholders’ equity – S Company, January 1, 20x4 P 360,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 90,000
Fair value of stockholders’ equity of subsidiary, January 1, 20x4…… P450,000
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial-goodwill)………………………………….. P 90,000
Add: NCI on full-goodwill (P15,000 – P12,000) ___3,000
Non-controlling interest (partial-goodwill)………………………………….. P 93,000
c.
Consolidated SHE:
Stockholders’ Equity
Common stock, P10 par P 600,000
Retained earnings 360,000
Parent’s Stockholders’ Equity / CI - SHE P 960,000
NCI, 1/1/20x4 ___93,000
Consolidated SHE, 1/1/20x4 P1,053,000
6.
a. CI-CNI – P202,440
Consolidated Net Income for 20x4
Net income from own/separate operations:
P Company P168,000
S Company 60,000
Total P228,000
Less: Non-controlling Interest in Net Income* P 8,610
Amortization of allocated excess (refer to amortization above) 13,200
Goodwill impairment (impairment under full-goodwill approach) 3,750 25,560
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent………….. P202,440
Add: Non-controlling Interest in Net Income (NCINI) 8,610
Consolidated Net Income for 20x4 P211.050
b. NCI-CNI – P8,610
*Non-controlling Interest in Net Income (NCINI) for 20x4
Net income of S Company P 60,000
Less: Amortization of allocated excess (refer to amortization table above) 13,200
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 9,360
Less: Non-controlling interest on impairment loss on full-goodwill (P3,750 x 20%)
or (P3,750 impairment on full-goodwill less P3,000, impairment on
partial-goodwill)* 750
Non-controlling Interest in Net Income (NCINI) P 8,610
c. CNI, P211,050 – refer to (a)

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


Consolidated Retained Earnings, December 31, 20x4
Retained earnings - P Company, January 1, 20x4 (date of acquisition) P360,000
Add: Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent for 20x4 202,440
Total P562,440
Less: Dividends paid – P Company for 20x4 72,000
Consolidated Retained Earnings, December 31, 20x4 P490,440

e.
Non-controlling interest (full-goodwill), December 31, 20x4
Common stock – S Company, December 31, 20x4…… P 240,000
Retained earnings – S Company, December 31, 20x4
Retained earnings – SCompany, January 1, 20x4 P120,000
Add: Net income of S for 20x4 60,000
Total P180,000
Less: Dividends paid – 20x4 36,000 144,000
Stockholders’ equity – S Company, December 31, 20x4 P 384,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 90,000
Amortization of allocated excess (refer to amortization above) – 20x4 ( 13,200)
Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P460,800
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial-goodwill, 12/31/20x4………………………….. P 92,160
Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4:
[(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss 2,250
Non-controlling interest (full-goodwill), 12/31/20x4…………….. P 94,410
f.
Consolidated SHE:
Stockholders’ Equity
Common stock, P10 par P 600,000
Retained earnings 490,440
P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,090,440
NCI, 12/31/20x4 ___94,410
Consolidated SHE, 12/31/20x4 P1,184,850
12/31/20x5:
a. CI-CNI – P258,240
Consolidated Net Income for 20x5
Net income from own/separate operations
P Company P192,000
S Company 90,000
Total P282,000
Less: Non-controlling Interest in Net Income* P16,560
Amortization of allocated excess (refer to amortization above) 7,200
Goodwill impairment (impairment under full-goodwill approach) 0 23,760
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent………….. P258,240
Add: Non-controlling Interest in Net Income (NCINI) 16,560
Consolidated Net Income for 20x5 P274,800
b. NCI-CNI – P16,560
*Non-controlling Interest in Net Income (NCINI) for 20x5
Net income of S Company P 90,000
Less: Amortization of allocated excess / goodwill impairment for 20x5
(refer to amortization table above) 80,400
P 82,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) for 20x5 P 16,560
c. CNI, P274,800 – refer to (a)
d. On subsequent to date of acquisition, consolidated retained earnings would be computed
as follows:
Consolidated Retained Earnings, December 31, 20x5
Retained earnings - P Company, January 1, 20x5 (cost model P484,800
Adjustment to convert from cost model to equity method for purposes of
consolidation or to establish reciprocity:/P’s share in adjusted net
increased in subsidiary’s retained earnings:
Retained earnings – S, January 1, 20x5 P 144,000
Less: Retained earnings – S, January 1, 20x4 120,000
Increase in retained earnings since date of acquisition P 24,000
Less: Amortization of allocated excess – 20x4 13,200
P 10,800
Multiplied by: Controlling interests %................... 80%
P 8,640
Less: Goodwill impairment loss (full-goodwill), net (P3,750– P750)* or
(P3, 750 x 80%) 3,000 5,640
Consolidated Retained earnings, January 1, 20x5 P 490,440
Add: Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent for 20x5 258,240
Total P748,680
Less: Dividends paid – P Company for 20x5 72,000
Consolidated Retained Earnings, December 31, 20x5 P676,680
e.
Non-controlling interest (full-goodwill), December 31, 20x5
Common stock – S Company, December 31, 20x5…… P 240,000
Retained earnings – S Company, December 31, 20x5
Retained earnings – S Company, January 1, 20x5 P144,000
Add: Net income of S for 20x5 90,000
Total P234,000
Less: Dividends paid – 20x5 48,000 186,000
Stockholders’ equity – S Company, December 31, 20x5 P 426,000
Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 90,000
Amortization of allocated excess (refer to amortization above) :
20x4 P 13,200
20x5 7,200 ( 20,400)
Fair value of stockholders’ equity of subsidiary, December 31, 20x5…… P 495,600
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial goodwill)………………………………….. P 99,120
Add: Non-controlling interest on full goodwill , net of impairment loss
[(P15,000 full – P12,000, partial = P3,000) – P750 impairment loss 2,250
Non-controlling interest (full-goodwill)………………………………….. P 101,370

f.
Consolidated SHE:
Stockholders’ Equity
Common stock, P10 par P 600,000
Retained earnings 676,680
P’s Stockholders’ Equity / CI – SHE, 12/31/20x4 P1,276,680
NCI, 12/31/20x4 __101,370
Consolidated SHE, 12/31/20x4 P1,378,050

Problem XVII
P’s gain on sale of subsidiary stock is computed as follows:

Cash proceeds……………………………………… P
720,000
Fair value of retained non-controlling interest equity 420,000
investment (35%)
Carrying value of the non-controlling interest before
deconsolidation 120,000
(15% or prior outside non-controlling interest in
Subsidiary)
P1,260,000
Less: Carrying value of Subsidiary’s net assets 1,200,000
Gain on disposal or deconsolidation P 60,000

Read discussion on step-acquisition regarding the initial treatment of investment as FVTOCI


or FVTPL and its disposition. It is assumed that the investment above is FVTPL.

Problem XVIII
P Company’s additional paid-in capital arising sale of subsidiary shares is computed as follows:

Cash proceeds……………………………………… P
84,000
Less: Carrying value of non-controlling interest 72,000
(P720,000* x 10%)
“Gain” – transfer within equity in “Additional paid-in P
capital” account 12,000
*the P720,000 is already the gross-up amount since it is the amount presented in the consolidated balance sheet.
Because P Company continues to have the ability to control S Company, the sale of S’s shares is
treated as an equity transaction. Therefore, no gain or loss is recognized. Instead, Palmer
Company’s additional paid-in capital increases by P60,000.

Problem XIX
P Company’s additional paid-in capital arising sale of subsidiary shares is computed as follows:

Cash proceeds from issuance of additional shares …..P210,000


Less: Carrying Value of non-controlling from issuance
of additional shares:
Non-controlling interest prior to issuance
of additional shares:
Book value of SHE before issuance…P720,000
x: Non-controlling interest……………. 20%* P 144,000
Non-controlling interest after issuance of
additional shares:
Book value of SHE before
issuance…………………….P720,000
Additional issuance…………………..…210,000
BV of SHE after issuance……………….P930,000
x: Non-controlling interest……………... 36%** 334,800 190,800
“Gain” – transfer within equity in
“Additional paid-in capital” account...P 19,200

* (120,000 – 96,000) / 120,000 = 20% ownership before additional issuance of shares.


** [(24,000 + 30,000) / (120.000 + 30,000)] = 36% ownership after additional issuance of shares

PCompany recognizes an increases in its Investment in S from P576,000 (P720,000x 80%) to P595,200
[P930,000 x (96,000/150,000) and in additional paid-in capital of P19,200.

Multiple Choice Problems


1. b
Full-Goodwill: (P600,000/70%) – P640,000 = P217,143 – P40,000 = P177,143
If partial goodwill: P600,000 – (P640,000 x 70%) = P152,000 – (P40,000 x 70%) = P124,000
2. b – P500,000 + P3,461
3. b
4. d – equivalent to consideration transferred, P320,000
5. d – equivalent to consideration transferred, P380,000
6. a
7. P2,120,000
Podex’s separate earnings for 20x6...................................................... P2,000,000
Dividend income from Sodex ................................................................ __120,000
Podex’s 20x6 net income ....................................................................... P2,120,000

8. P2,260,000
Podex’s separate earnings for 20X6 P2,000,000
Podex’s equity in net income of Sodex ............................................... 300,000
Less: Amortization of cost in excess of book value ............................ (40,000)
Podex’s 20x6 net income ....................................................................... P2,260,000
9. b
10. c
Retained earnings of Parent, 12/31/20x6, Cost Method 310,000
Add: Increased in Retained earnings of Subsidiary _80,000
RE of Parent, 12/31/20x6, Equity Method (same with 390,000
Consolidated RE)
11. c
Investment balance 12/31/x6, Cost Method 200,000
Add: Increased in Retained earnings of Subsidiary 80,000
Investment balance 12/31/x6, Equity Method 280,000

12. d
Retained earnings of Parent, 12/31/20x6, Cost Method 210,000
Add: Increased in Retained earnings of Subsidiary _240,000
RE of Parent, 12/31/20x6, Equity Method (same with 450,000
Consolidated RE)

13. b – dividends of subsidiary considered as dividend income in the parent’s separate income
statement.

14. b
Retained earnings of Parent, 12/31/20x6, Cost Method 360,000
Less: Decreased in Retained earnings of Subsidiary _40,000
RE of Parent, 12/31/20x6, Equity Method (same with 320,000
Consolidated RE)

15. d – 20x3: P30,000 x 75% = P22,500


20x4: P40,000 x 75% = P30,000
16. a – no changes in investment unless there are dispositions of investment and permanent
impairment.
17. c - 20x4 = P86,400
Consolidated Net Income 20x4 20x5
Peters Company's reported net income64,000 37,500
Less: dividend income from Smith (1,600) _____0
Peters' income from independent operations62,400 37,500
Add: Peter's share of Smith's net income in 20x4 since acquisition
(.80)(8/12)(P45,000)24,000
Less: Peter's share of Smith's net loss in 20x4 (.80  P5,000 ______ (4,000)
Controlling Interest in Consolidated net income86,400 33,500

18. c - 20x5 = P33,500 – refer to No. 17


19. b - 20x4 = P151,400
Consolidated Retained Earnings 20x4 20x5
Peter's 12/31 retained earnings (P80,000 + P64,000 - P15,000) P129,000 P161,500
Add: Peter's share of the increase in Smith's retained earnings
from the date of acquisition to the current date:
(.80  (P53,000 – P25,000)) 22,400
(.80  (P48,000 – P25,000) ________18,400
P151,400 P179,900
20. c - 20x5 = P179,900 – refer to No. 19
21. c
Consolidated Net Income for 20x4
Net income from own/separate operations
P Company P30,200 – (P150,0000 – P20,000 – P70,000
P60,000)
S Company (P100,000 – P15,000 – P45,000) 40,000
Total P110,000
Less: Non-controlling Interest in Net Income P 0
Amortization of allocated excess 0
Goodwill impairment ____0 ____0
Controlling Interest in Consolidated Net Income or
Profit P110,000
attributable to equity holders of parent…………..
Add: Non-controlling Interest in Net Income (NCINI) _____0
Consolidated Net Income for 20x4 P110,000
22. b
Plimsol: P100,000 + P200,000,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,P300,000
Shipping: P75,000 + P150,000………………………………………………………………. 225,000
P525,000
23.
Retained Earnings - Plimsol, 1/1/20x4 (cost method, same with equity method and
consoilidated retained earnings since it is the date of acquisition)P 150,000
Add: CI – CNI (refer to No. 21) 110,000
Less: CI – Dividends (Dividend of parent only)25,000
Retained earnings, 12/31/20x4 (equity method same with CRE) P 235,000

24. d
Liabilities:
Plimsol (P40,000 + P75,000) P115,000
Shipping (P25,000 + P50,000) 75,000
P
190,000
25. d
Total assets (No. 22) P525,000
Les: Liabilities (No. 24) 190,000
Stockholders’ equity P335,000

26. c – P60,000 x 80% = P48,000


27. c
Investment.1/1/20x4 P105,000
Add: Share in net income – 20x4 (P45,000 x 80%) 36,000
Less: Dividends received 12,000
Investment, 12/31/20x4 P129,000
Add: Share in net income – 20x5 (P60,000 x 80%) 48,000
Less: Dividends received 18,000
Investment, 12/31/20x5 P159,000

28. a
Investment. 4/1/20x6 P500,000
Add: Share in net income – 20x6
(3 quarters x P30,000 x 90%) 81,000
Less: Dividends declared of Satz (3 quarters x P10,000 x 90%) 27,000
Amortization (the recorded amount which means it represents
only 9 months, no need to pro-rate) 10,000
Investment, 12/31/20x6 P544,000

29. c
Patz’s equity in net income of Sats (90% x P30,000 x 3 qtrs) P81,000
Less: Amortization (the recorded amount which means it represents
only 9 months, no need to pro-rate) 10,000
Investment income – 20x4 (equity method)P 71,000

30. d
Investment balance, 1/1/20x4……………………………………………….. P150,000
Add: Puma’s equity in net income of Slume (30% x P25,000)..………… 7,500
Less: Dividends (P30% x P10,000)……………………………………………. 3,000
Amortization of cost in excess of book value
(P50,000/10 years) x 30%.............................................................. 1,500
Puma’s 20x6 net income (equity method) ............................................... P153,000

31. b
Puma’s equity in net income of Slume (30% x P25,000)..……………….. P 7,500
Less: Amortization of cost in excess of book value
(P50,000/10 years) x 30%.............................................................. 1,500
Investment income – 20x4 (equity method)………………………………. P 6,000

32. a – under equity method, the Parent’s retained earnings is the same with Consolidated RE.

33. b
{(P260,000 - P230,000) + [(P650,000 - P590,000)/120] 8}.8
34. d
{(P190,000 - P160,000) 4/6 - [(P241,000 - P220,000)/60] 5}.7
35. b
Consideration transferred: 10,500 shares x P95 P997,500
Less: BV of SHE – S (?) 857,500
Allocated excess; P140,000
Less: O/U valuation of A and L:
Undervaluation of land P40,000
Overvaluation of buildings ( 30,000)
Undervaluation of equipment 80,000
Undervaluation/unrecorded trademark 50,000 140,000
P 0
36. a – P900,000 + P500,000 = P1,400,000
37. d – assumed that total expenses includes cost of goods sold which is different when the
question is “total operating expenses”
Cost of goods sold (P360,000 + P200,000) P 560,000
Depreciation expense (P140,000 + P40,000) 180,000
Other expenses (P100,000 + P60,000) 160,000
Amortization of allocated excess:
Buildings: (P30,000) / 20 (P1,500)
Equipment; P80,000 / 10 8,000
Trademark: P50,000 / 16 3,125 9,625
Total expenses P909,625
38. b – (P750,000 + P280,000) – P30,000 + (P1,500 x 5 years) = P1,007,500
39. c – (P300,000 + P500,000) + P80,000 – (P8,000 x 5 years) = P840,000
40. c – P450,000 + P180,000 + P40,000 = P670,000
41. d – P50,000 – P3,125 x 5 years) = P34,375
42. a – P only (the stock issued In 20x0 includes already in the December 31, 20x4 balance.
43. a – P only
44. a
Consolidated Retained Earnings, December 31, 20x4
Consolidated Retained earnings, January 1, 20x4 (equity method) P 1,350,000
Add: Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent for 20x4 490,375
Total P1,840,375
Less: Dividends paid – P Company for 20x4 195,000
Consolidated Retained Earnings, December 31, 20x4 (under equity method) P1,645,375
Net Income from own operations: P Co S Co
Sales P900,000 P500,000
Less: cost of goods sold 360,000 200,000
Gross profit P540,000 P300,000
Less: Depreciation expense 140,000 40,000
Other expenses 100,000 60,000
Net income P300,000 P200,000

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


P Company P300,000
S Company 200,000
Total P500,000
Less: Non-controlling Interest in Net Income P 0
Amortization of allocated excess (refer to amortization above) 9,625
Goodwill impairment (impairment under full-goodwill approach) _ 0 9,625
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent………….. P490,375

45. c
Note: Normally, the term used in the requirement “equity in subsidiary income”, is a term used
under equity method, but it should be noted that under PAS 27, it prohibits the use of equity
method for a parent to consolidate a subsidiary. But, assuming the use of equity method, the
answer would be, P190,375.
Share in net income: P200,000 x 100% P200,000
Less: Amortization of allocated excess 9,625
P190,375
46. a
Punn’s equity in net income of Sunn (3 months ended,12/31/x6)…… P
200,000
Amortization of cost in excess of book value ........................................... ( 60,000)
Increase in Parent’s retained earnings……………………………………. P 140,000

47. a
Punn’s net income from own operations, 12 months ended, 12/31/x6
P6,000,000
Add: Increase in RE of Sunn:
Punn’s equity in net income of Sunn (3 months ended,12/31/x6)P200,000
Amortization of cost in excess of book value ............................................... ( 60,000)
Increase in Parent’s retained earnings……………………………………. P 140,000
Punn’s net income for 20x6 under the equity method……………………… P6,140,000

48. b
Full—goodwill Aproach
Fair value of Subsidiary (100%)
Consideration transferred P
(80%)…………….. 180,000
Fair value of NCI (given)
(20%)……………….. 20,000
P
Fair value of Subsidiary (100%)………. 200,000
Less: Book value of stockholders’ equity of
Son:
Common stock (P100,000 x
100%)………………. P 100,000
Retained earnings (P60,000 x
100%)………... 60,000 160,000
Allocated excess (excess of cost over book P
value)….. 40,000
Less: Over/under valuation of assets and
liabilities:
Increase in land (P5,000 x
100%)……………………. P 5,000
Increase in equipment (P10,000 x 100%) ___10,000 15,000
Positive excess: Increase in Patent (excess of
cost over
fair P
value)………………………………………………... 25,000

A summary or depreciation and amortization adjustments is as follows:


Annu
al Current
Account Adjustments to be Over/ Lif Amou Year(20x
amortized under e nt 4)
Subject to Annual
Amortization
P
Equipment (net)......... 10,000 5 2,000 P 2,000
Patent 25,000 5 5,000 5,000
P
7,000 P 7,000

49. d
Investment in Wisden
1/1/x4. 180,000 18,000 Dividends – S
(20,000 x 90%)
NI of S
(60,000 Amortization
x 90%)……. 54,000 12,600 (P14,000 x 90%)
1/1/x6203,400

50. c
Investment in Wisden
1/1/x6. 230,400 9,000 Dividends – S
(10,000 x 90%)
NI of S
(30,000 Amortization
x 90%)……. 27,000 6,300 (7,000 x 90%)
1/1/x6215,100
51. a
20x4 Investment income: Dividend of P10,000 x 100% = P10,000
20x4 Investment balance: P500,000
52. b
Pedro’s equity in net income of Sanburn – x4 (100% x P80,000)..………. P 80,000
Less: Amortization of cost in excess of book value
Inventory: P20,000 x 100%……………………………………………….. 20,000
Patent [P500,000 – P380,000 = P120,000 – P20,000 = P100,000)
(P100,000/20 years) x 100%.......................................................... 5,000
Investment income – 20x4 (equity method)………………………………. P 55,000

Investment balance, 1/1/20x4……………………………………………….. P500,000


Add: Pedro’s equity in net income of Sanburn – x4 (100% x P80,000)..…80,000
Less: Dividends (100% x P10,000)……………………………………………. 10,000
Amortization of cost in excess of book value:
Inventory: P20,000 x 100%……………………………………………… 20,000
Patent [P500,000 – P380,000 = P120,000 – P20,000 = P100,000)
(P100,000/20 years) x 100%.......................................................... ___5,000
Investment balance, equity method, 12/31/20x4…………………………. P545,000

53. d
Under the cost method, an investor recognizes its investment in the investee at cost. Income is
recognized only to the extent that the investor receives distributions from the accumulated
net profits (or dividend declared/paid by the investee) of the investee arising after the date
of acquisition by the investor. Distributions (dividends) received in excess of such profits are
regarded as a recovery of investment and are accounted for as a reduction of the cost of the
investment (i.e., as a return of capital or liquidating dividend).

Therefore, the investment balance of P500,000 on the acquisition date remains to be the same.

54. d – refer to No. 53 for further discussion.


55. b – refer to No. 53 for further discussion.
56. a – P40,000 x 80%
57. b – P50,000 x 80%
58. a – P60,000 x 80%
59. c
Full/Gross-up Goodwill Presentation:
Non-controlling interest in Net Income:
Subsidiary net income from own operations……….P100,000
Less: Amortization of allocated excess*…………… 7,000
Impairment of full-goodwill (if any)**………… 0
P 93,000
x: Non-controlling interests……………………………. 20%
Non-controlling interest in Net Income………………………..P 18,600
*Amortization of allocated excess:
Increase in equipment: P30,000 / 10 years = P 3,000
Increase in buildings: P40,000 / 10 years = 4,000
Total amortization……………………………… P 7,000
** In case, there is an impairment of goodwill then the amount impaired under the full-
goodwill method should also be allocated between controlling and non-controlling
interests
Partial Goodwill Presentation:
Non-controlling interest in Net Income:
Subsidiary net income from own operations……….P100,000
Less: Amortization of allocated excess*………………7,000
P 93,000
x: Non-controlling interests……………………………. 20%
Non-controlling interest in Net Income…………………. P 18,600
60. c
Full/Gross-up Goodwill Presentation:
Non-controlling interest in Net Income:
Subsidiary net income from own operations……….P120,000
Less: Amortization of allocated excess*…………….. 7,000
Impairment of full-goodwill (if any)**………… 0
P113,000
x: Non-controlling interests……………………………. 20%
Non-controlling interest in Net Income………………………..P 22,600

*Amortization of allocated excess:


Increase in equipment: P30,000 / 10 years = P 3,000
Increase in buildings: P40,000 / 10 years = 4,000
Total amortization………………………. P 7,000

** In case, there is an impairment of goodwill then the amount impaired under the full-
goodwill method should also be allocated between controlling and non-controlling
interests

Partial Goodwill Presentation:


Non-controlling interest in Net Income:
Subsidiary net income from own operations……….P120,000
Less: Amortization of allocated excess*…………….. 7,000
P113,000
x: Non-controlling interests……………………………. 20%
Non-controlling interest in Net Income…………………………P 22,600
61. a
Full/Gross-up Goodwill Presentation:
Non-controlling interest in Net Income:
Subsidiary net income from own operations……….P130,000
Less: Amortization of allocated excess*…………… 7,000
Impairment of full-goodwill (if any)**……… 0
P123,000
x: Non-controlling interests………………………….. 20%
Non-controlling interest in Net Income……………………… P 24,600
*Amortization of allocated excess:
Increase in equipment: P30,000 / 10 years = P 3,000
Increase in buildings: P40,000 / 10 years = 4,000
Total amortization………………………. P 7,000

** In case, there is an impairment of goodwill then the amount impaired under the full-
goodwill method should also be allocated between controlling and non-controlling
interests

Partial Goodwill Presentation:


Non-controlling interest in Net Income:
Subsidiary net income from own operations……….P130,000
Less: Amortization of allocated excess*……………… 7,000
P123,000
x: Non-controlling interests……………………………… 20%
Non-controlling interest in Net Income………………..P 24,600

62. a
Book value of Stockholders’ Equity of Subsidiary
Common stock, 12/31/20x4……………………………… P 300,000
Retained earnings, 12/31/20x4:
Retained earnings, 1/1/20x4………………………….P200,000
Add: Net income – 20x4…………………………….. 100,000
Less: Dividends paid, 20x4…………..………………40,000 260,000
Book value of Stockholders’ Equity of Subsidiary, 12/31/x4 P 560,000
Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000
Less: Accumulated amortization of allocated excess
P7,000 x 1 year…………………………………….…. 7,000
Fair value of Stockholders’ Equity of Subsidiary. 12/31/x4… P623,000
Multiplied by: Non-controlling Interest %........................... ____ 20%
Non-controlling Interest (partial goodwill)………………….. P124,600
Add: Non-controlling interest in Full Goodwill
(P55,000, full – P44,000 partial l) or
(P55,00,000 x 20%)*……………………………… 11,000
Non-controlling Interest (full)……………………………… P135,600

* this computation (i.e., P55,000 x 20%) should only be use when the fair value of the non-
controlling interest of acquiree (subsidiary) is not given.

Partial Goodwill:
Fair value of Subsidiary:
Fair value of consideration transferred: Cash………… P 500,000
Less: Book value of Net Assets (Stockholders’
Equity - Subsidiary): (P300,000 + P200,000) x 80%.. 400,000
Allocated Excess.…………………………………………. P 100,000
Less: Over/Undervaluation of Assets and Liabilities:
Increase in equipment: P30,000 x 80%................... P 24,000
Increase in building: P40,000 x 80%......................... 32,000 56,000
Goodwill (Partial)………………………………………….. P 44,000

Full-goodwill:
(100%) Fair value of Subsidiary:
(100%) Fair value of consideration transferred:
P500,000 / 80%........………………………….. P 625,000
Less: Book value of Net Assets (Stockholders’
Equity - Subsidiary)…………................................... 500,000
Allocated Excess.…………………………………………. P 125,000
Less: Over/Undervaluation of Assets and
Liabilities (P40,000 + P30,000)……………………. 70,000
Goodwill (Full/Gross-up)..……………………………….. P 55,000

63. e
Book value of Stockholders’ Equity of Subsidiary
Common stock, 12/31/20x5……………………………… P 300,000
Retained earnings, 12/31/20x5:
Retained earnings, 1/1/20x5 …………………..……P260,000
Add: Net income, 20x5………………………………. 120,000
Less: Dividends paid, 20x5…………………………… 50,000 330,000
Book value of Stockholders’ Equity of Subsidiary, 12/31/x5 P 630,000
Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000
Less: Accumulated amortization of allocated excess – 2 yrs 14,000
Fair value of Stockholders’ Equity of Subsidiary. 12/31/x5… P 686,000
Multiplied by: Non-controlling Interest %.............................. 20%
Non-controlling Interest (partial goodwill)………………….. P 137,200
Add: Non-controlling interest in Full Goodwill
(P55,000, full – P44,000 partial l) or
(P55,00,000 x 20%)*……………………………… 11,000
Non-controlling Interest (full)……………………………… P 148,200

64. e
Book value of Stockholders’ Equity of Subsidiary
Common stock, 12/31/20x6……………………………… P 300,000
Retained earnings, 12/31/20x6:
Retained earnings, 1/1/20x6………………………….P330,000
Add: Net income, 20x6……………………………… 130,000
Less: Dividends paid, 20x6…………………………..60,000 400,000
Book value of Stockholders’ Equity of Subsidiary, 12/31/x6 P 700,000
Add: Adjustments to reflect fair value (P30,000 + P40,000).. 70,000
Less: Accumulated amortization of allocated excess
(1/1/20x4 – 12/31/20x6): P7,000 x 3 years…………… 21,000
Fair value of Stockholders’ Equity of Subsidiary. 12/31/x6… P 749,000
Multiplied by: Non-controlling Interest %............................ 20%
Non-controlling Interest (partial goodwill)………………….. P 149,800
Add: Non-controlling interest in Full Goodwill
(P55,000, full – P44,000 partial l) or
(P55,00,000 x 20%)*……………………………… 11,000
Non-controlling Interest (full)……………………………… P 160,800

* this computation (i.e., P55,000 x 20%) should only be use when the fair value of the non-
controlling interest of acquiree (subsidiary) is not given.

65. P542,400
Investment balance, 1/1/20x4……………………………………………….. P500,000
Add: Bell’s equity in net income of Demers – x4 (80% x P100,000)..……80,000
Less: Dividends (80% x P40,000)……………………………………………….32,000
Amortization of cost in excess of book value:
Equipment: P30,000/10 years x 80%………………………………… 2,400
Building: P40,000/10 years x 80%................................................. 3,200
Investment balance, equity method, 12/31/20x4…………………………. P542,400

66. c
Investment balance, 12/3/20x4……………………………………………….. P542,400
Add: Bell’s equity in net income of Demers – x4 (80% x P120,000)..…… 96,000
Less: Dividends (80% x P50,000)………………………………………………. 40,000
Amortization of cost in excess of book value:
Equipment: P30,000/10 years x 80%………………………………… 2,400
Building: P40,000/10 years x 80%................................................. 3,200
Investment balance, equity method, 12/31/20x5…………………………. P592,800

67. b
Investment balance, 12/3/20x5……………………………………………….. P592,800
Add: Bell’s equity in net income of Demers – x4 (80% x P130,000)..…… 104,000
Less: Dividends (80% x P60,000)………………………………………………. 48,000
Amortization of cost in excess of book value:
Equipment: P30,000/10 years x 80%………………………………… 2,400
Building: P40,000/10 years x 80%................................................. 3,200
Investment balance, equity method, 12/31/20x6…………………………. P643,200

68. a
Bell’s equity in net income of Demers (80% x P100,000)………………. P 80,000
Less: Amortization of cost in excess of book value (refer to No. 65):
(P2,400 + P3,200) 5,600
Investment income – 20x4 (equity method)………………………………. P 74,400

69. a
Bell’s equity in net income of Demers (80% x P120,000)………………. P 96,000
Less: Amortization of cost in excess of book value (refer to No. 65):
(P2,400 + P3,200) 5,600
Investment income – 20x5 (equity method)………………………………. P 90,400

70. c
Bell’s equity in net income of Demers (80% x P130,000)………………. P 104,000
Less: Amortization of cost in excess of book value (refer to No. 65):
(P2,400 + P3,200) 5,600
Investment income – 20x6 (equity method)………………………………. P 98,400

71. c
Non-controlling interest in Net Income:
Subsidiary net income from own operations…………………………… P100,000
Less: Amortization of allocated excess (refer to No. 65)
(P3,000 + P4,000)………………………………………..……………. 7,000
P 93,000
x: Non-controlling interests……………………………………………….. 20%
Non-controlling interest in Net Income…………………………………P 18,600

72. c
Non-controlling interest in Net Income:
Subsidiary net income from own operations…………………………… P120,000
Less: Amortization of allocated excess (refer to No. 65)
(P3,000 + P4,000)………………………………………..……………. 7,000
P 113,000
x: Non-controlling interests……………………………………………….. 20%
Non-controlling interest in Net Income………………………………… P 22,600

72. c
Non-controlling interest in Net Income:
Subsidiary net income from own operations…………………………… P130,000
Less: Amortization of allocated excess (refer to No. 65)
(P3,000 + P4,000)………………………………………..……………. 7,000
P 123,000
x: Non-controlling interests……………………………………………….. 20%
Non-controlling interest in Net Income………………………………… P 24,600

73. a – same with No. 62 (cost method)


74. e – same with No. 63 (cost method)
75. d – same with No. 64 (cost method)
76. b
77. b – Dividend paid – S, P70,000 x 60% = P42,000
78. d – CNI amounted to P265,000 [CI-CNI, P235,000 and NCI-CNI, P30,000
Consolidated Net Income for 20x5
Net income from own/separate operations
P Company P190,000
SCompany 90,000
Total P280,000
Less: Non-controlling Interest in Net Income* P 30,000
Amortization of allocated excess 15,000
Goodwill impairment ____0 45,000
Controlling Interest in Consolidated Net Income or
Profit P235,000
attributable to equity holders of parent…………..
Add: Non-controlling Interest in Net Income (NCINI) 30,000
Consolidated Net Income for 20x4 P265,000

*Net income of subsidiary – 20x4 P 90,000


Amortization of allocated excess – 20x4 ( 15,000_
P75,000
Multiplied by: Non-controlling interest %.......... 40%
P 30,000
Less: Non-controlling interest on impairment loss on full-goodwill ______0
(P1,500 x 15%)*
P 30,000

20x5 results of operations are as follows:


Peer Sea-Breeze
Sales P 600,000 P 300,000
Less: Cost of goods sold Operating expenses 410,000 210,000
Net income from its own separate operations P 190,000 P 90,000
Add: Investment income 45,000 -
Net income P 235,000 P 90,000

Computation of Goodwill:
Fair value of Subsidiary (100%)
Consideration transferred: Cash (60%) P 414,000
Fair value of NCI (given) (40%) 276,000
Fair value of Subsidiary (100%) P 690,000
Less: Book value of stockholders’ equity of Sea (P550,000 x 100%) __550,000
Allocated excess (excess of cost over book value)….. P 140,000
Add (deduct): (Over) under valuation of assets and liabilities
(P140,000 x 100%) 140,000
Positive excess: Full-goodwill (excess of cost over fair value) P 0

Amortization of Allocated Excess


Book Value Fair Value Over/under Amort.
Buildings (net)- 6 300,000 360,000 P 60,000 P 10,000
Equipment (net)– 4 300,000 280,000 (20,000) (5,000)
Patent -10 -0- 100,000 100,000 10,000
Net P 140,000 P 15,000

79. c – refer to No. 78 for computations


80. b – refer to No. 78 for computations
81. c - P811,000.
Consolidated Retained Earnings, December 31, 20x5
Retained earnings - Parent Company, January 1, P700,000
20x5 (cost model)
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, P
20x5 300,000
Less: Retained earnings – Subsidiary, January 70,000
1, 20x2
Increase in retained earnings since date of P
acquisition 230,000
Less: Amortization of allocated excess – 20x2
– 20x4
(P15,000 x 3 years) 45,000
P
185,000
Multiplied by: Controlling
interests %................... 60%
P
111,000
Less: Goodwill impairment loss (full-goodwill), 0
111,000
Consolidated Retained earnings, January 1, 20x5 P
811,000
Note:
a. Date of acquisition: RE of Parent = Consolidated RE
Regardless of the method used in the books of the subsidiary, the
following rule should always be applied –
b. Subsequent to date of acquisition:
Retained earnings of Parent under equity method = CRE

Since, the P811,000 is the retained earnings of parent under the equity
method, it should also be considered as the parent’s portion or interest in
consolidated retained earnings or simply the consolidated retained
earnings.

82. c - P811,000 – refer to note (b) of No. 81


83. b – P111,000 – refer to No. 81
84. d
Consolidated Retained earnings, January 1, 20x5 (refer to P
Nos. 81 and 82) 811,000
Add: Controlling Interest in Consolidated Net Income or
Profit attributable to equity holders of parent for 20x5
235,000
Total P1,046,0
00
Less: Dividends paid – Parent Company for 20x5
92,000
Consolidated Retained Earnings, December 31, 20x5 P
954,000
85. d – refer to No. 84
86. c
Non-controlling interest (partial-goodwill), December 31, 2015
Common stock – Subsidiary Company, December 31, P
2015……
480,000
Retained earnings – Subsidiary Company,
December 31, 2015
Retained earnings – Subsidiary Company, P300,000
January 1, 2015
Add: Net income of subsidiary for 2015 90,000
Less: Dividends paid – Subsidiary - 2015 70,000 320,000
Stockholders’ equity – Subsidiary Company, P
December 31, 2015 800,000
Adjustments to reflect fair value - (over)
undervaluation 140,000
of assets and liabilities, date of acquisition
(January 1, 2012)
Amortization of allocated excess (refer to
amortization above) –
(P15,000 x 4) ( 60,000)
Fair value of stockholders’ equity of subsidiary, P
12/31/ 2015 880,000
Multiplied by: Non-controlling Interest
percentage. 40
Non-controlling interest (partial) P
352,000
Add: NCI on full-goodwill……………………. ____0
Non-controlling interest (full) P
352,000

87. c
Stockholders’ Equity
Common stock - Peer P
724,000
Retained earnings 954,000
Parent’s Stockholders’ Equity/Equity
Attributable to the
Owners of the Parent P
1,678,000
Non-controlling interest** 352,000
Total Stockholders’ Equity (Total Equity) P 985,500
Total Liabilities and Stockholders’ Equity P2,030,000

88. c
Investment in Sea-Breeze Investment Income
1/1/x2. 414,000 42,000 Dividends – S NI of S
Retro 111,000 (70,000 x 60%
NI of S
(90,000 Amortization Amortization (90,000
x 60%)……. 54,000 9,000 (P15,000 x 60%) (P15,000 x 60%) 9,000 54,000 x 60%)
12/31/x5528,000 45,000

89. c
90. d – refer to No. 78
91. c – refer to No. 78
92. b – refer to No. 78
93. c – refer to No. 81
94. c – refer to No. 81
95. a – not applicable under equity method.
96. d – refer to No. 84
97. d – refer to No. 84
98. d – refer to No. 86
99. c – refer to No. 87
100. a
Net income of S (5/1/x5 – 12/31/x5): P840,000 x 8/12 P560,000
Less: Dividend – S (11/1/20x5 – no need to pro-rate) 300,000
Cumulative net income less dividends since
date of acquisition, 1/1/20x6 (date to establish reciprocity –
not 12/31/x6) P260,000
x: Controlling interests 80%
P208,000
101. b
Retained earnings – S Company, 1/1/20x4 P 60,000
Less: Retained earnings – S Company, 12/31/20x6 190,000
Cumulative net income less dividends since
date of acquisition, 1/1/20x6 (date to establish reciprocity –
should always be beginning of the year, not 12/31/x6) P130,000
x: Controlling interests 90%
P117,000
102. (b)
Net income of Subsidiary – 2015 and 2016 (P15,000 + P22,000)…………………………………….P 37,000
Less: Dividends of Subsidiary – 2015 and 2016 (P6,000 + P9,000)……………………………………... 15,000
Cumulative net income less dividends since date of acquisition, 1/1/2017 (date to establish
reciprocity –should always be beginning of the year, not 12/31/17) / Increase in
Retained earnings………………………………………………………………………………………... P 22,000
x: Controlling interests……………………………………………………………………………………..70%
P 15,400
It should be noted that the amortization/depreciation and any unrealized/realized profits (in case of
intercompany sales of inventory/fixed assets) should not be included (refer to next number) as part of the entry to
established reciprocity since there will be separate eliminating entry to be made at the end of the year (2017) for
amortization and depreciation.

Further, the eliminating entry to establish reciprocity for the year 20x7 should be made on January 1, 20 17 not
December 31, 2017
Incidentally, the entry to convert from cost method to equity method or the entry to establish reciprocity at the
beginning of the year, 1/1/2017 would be as follows:
Investment in Subsidiary………………………………………………………………… 15,400
Retained earning – Parent Company, 1/1/2017………………………………. 15,400

103. (a)
Net income of Subsidiary – 2015 and 2016 (P15,000 + P22,000)……………………………………. P 37,000
Less: Dividends of Subsidiary – 2015 and 2016 (P6,000 + P9,000)…………………………………… 15,000
Increase in Retained earnings for 2 years……………………………………………………………… P 22,000
Less: Amortization of allocated excess [(P80,000 – P60,000)/10 years x 2 years]………………… 4,000
P 18,000
x: Controlling interests………………………………………………………………………………………. 70%
Retroactive amount, December 31, 20x6 or January 1, 2017……………………………………… P 12,600

104. b
[{(P84,000 + P105,000) - [(P310,000 - P220,000)/20]2} - (P30,000 + P50,000)].8
105. a - under the cost model share in net income or earnings of subsidiary does not affect
investment.

106. d
Investment account, December 31, 20x7:
Original investment …………………………………………..P 550,000
Tiny’s earnings, 20x4-20x77: 100% x P166,000……………166,000
Less: Dividends received: 100% x P114,000………………114,000
Balance, December 31, 20x7……………………………..P602,000

107. a
The adjusting entry required in 20x7 to convert from the cost to the equity methodis:
Investment in Tiny………………………………….52,000
Retained earnings beg………………………….. 4,000
Dividend revenue………………………………… 54,000
Equity in subsidiary income of Tiny……. 110,000

108. d – P45,000/15% = P300,000


109. d
Pigeon’s separate income P150,000
Less: 60% of Home’s P10,000 loss = 6,000
Less: Equipment depreciation
P10,000/ 10 years = __1,000
Controlling Interest in Consolidated Net Income P143,000
Add: NCI in CNI
NL of S Company P( 10,000)
Less: Amortization of allocated excess (P1,000/60%) 1,667
P (11,667)
Multiplied by: NCI% 40% ( 4,667)
Consolidated Net Income P138,333

110. a
Non-controlling Interest in Net Income (NCINI) for Year 3
Net income of S Company P240,000
Less: Amortization of allocated excess 45,000
P195,000
Multiplied by: Non-controlling interest %.......... 30%
Non-controlling Interest in Net Income (NCINI) for Year 3 P 58,500

111. c
Net income from own/separate operations
P Company P 375,000
S Company 30,000
Total P405,000
Less: Non-controlling Interest in Net Income* P5,250
Amortization of allocated excess (refer to amortization above) 3,750
Goodwill impairment (impairment under full-goodwill approach) 0 9,000
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent………….. P396,000

*Non-controlling Interest in Net Income (NCINI) for 20x4


Net income of S Company P30,000
Less: Amortization of allocated excess** 3,750
P26,250
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) for 20x4 P 5,250
**P270,000/80% = P337,500 – (P150,000 + P150,000) = P37,500 / 10 years = P3,750
Note: Whether the partial or full-goodwill approach are used the amortization of excess are always
the same.
112. a
*Non-controlling Interest in Net Income (NCINI) for Year 3
Net income of S Company P600,000
Less: Amortization of allocated excess 112,500
P487,500
Multiplied by: Non-controlling interest %.......... 30%
Non-controlling Interest in Net Income (NCINI) for Year 3 P146,250

113. c
Net income from own/separate operations
P Company P 625,000
S Company 50,000
Total P675,000
Less: Non-controlling Interest in Net Income* P 8,750
Amortization of allocated excess (refer to amortization above) 6,250
Goodwill impairment (impairment under full-goodwill approach) 0 15,000
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent………….. P660,000

*Non-controlling Interest in Net Income (NCINI) for 20x4


Net income of S Company P50,000
Less: Amortization of allocated excess** 6,250
P43,750
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) for 20x4 P 8,750
**P450,000/80% = P562,500 – (P250,000 + P250,000) = P62,500 / 10 years = P6,250
Note: Whether the partial or full-goodwill approach are used the amortization of excess are always
the same.

114. b
As a general rule, if problem is silent It is assumed that expenses are generated evenly
throughout the year, thus:
Expenses (9/1/20x4-12/31/20x4): P620,000 x 4/12 P206,667
Amortization of allocated excess: P15,000 x 4/12 5,000
P211,667

115. c
Net income of S Company (P800,000 – P620,000) P180,000
Less: Amortization of allocated excess 15,000
P165,000
Multiplied by: No of mos. (9/1-12/31) 4/12
P 55,000

116. a
Net income of S Company (P800,000 – P620,000) P180,000
Less: Amortization of allocated excess 15,000
P165,000
Multiplied by: No of mos. (9/1-12/31) 4/12
P 55,000
Multiplied by: Non-controlling interest %.......... ____20%
Non-controlling Interest in Net Income (NCINI) for 20x4 P 22,000

117.b Combined revenues .................................................................................................. P1,100,000


Combined expenses .................................................................................................. (700,000)
Excess acquisition-date fair value amortization ................................................... (15,000)
Consolidated net income ......................................................................................... P385,000
Less: Noncontrolling interest (P85,000 × 40%) ........................................................ (34,000)
Consolidated net income to controlling interest.................................................. P351,000

118. c HH expense .................................................................................................................. P621,000


NN expenses ................................................................................................................ 714,000
Excess fair value amortization (70,000 ÷ 10 yrs) ..................................................... 7,000
Consolidated expenses ............................................................................................. P1,342,000

119. b
Step-acquisition, either full-goodwill or partial goodwill approach, the answer remains the
same.
Full-Goodwill Presentation:
Net income from own operations;
Parent - Keefe…………………………………… P 300,000
Subsidiary - George (P500,000 – P400,000)…….. 100,000
P 400,000
Less: Amortization of allocated excess…………………… 6,000
Impairment of goodwill (if any)……………………. 0
Consolidated/Group Net Income…………………………. P 394,000
Less: Non-controlling interest in Net Income
Subsidiary net income from own operations:
1/1/20y0 - 4/1/20y0 (3 months):
P100,000 x 3/12 = P25,000 x 30%................ P 7,500
4/1/20y0 – 12/31/20y0 (9 months):
P100,000 x 9/12 = P75,000 x 20%................ 15,000
Total…………………………………………….. P 22,500
Less: Amortization of allocated excess:
1/1/20y0 – 4/1/20y0 (3 months)
P6,000 x 3/12 = P1,500 x 30%.......... 450
4/1/20y0 – 12/31/20y0 (9 months)
P6,000 x 9/12 = P4,500 x 20%........... 900
Impairment of goodwill (if any):
First 3 months: P 0 x 30%.......………… 0
Remaining 9 months: P 0 x 20%............... 0 21,150
CNI attributable to the controlling interest (CI-CNI)/ Profit
attributable to equity holders of parent…………………. P372,850

* It should be noted that the phrase without regard for this investment means that
excluding any income arising from investment in subsidiary (i.e., dividend income).

120. d – Economic Unit or Entity Concept (as required by PFRS 10)


Net income from own/separate operations
P Company P 500,000
S Company 100,000
Total P600,000
Less: Non-controlling Interest in Net Income* P20,000
Amortization of allocated excess 0
Goodwill impairment (impairment under full-goodwill approach) _ 0 20,000
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent………….. P580,000
Add: NCINI __20,000
CNI - entity concept P600,000

*Non-controlling Interest in Net Income (NCINI) for 20x4


Net income of S Company P100,000
Less: Amortization of allocated excess _______0
P100,000
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) for 20x4 P 20,000

121. c – Parent Company Concept – Parent’s Net Income only (not required by PFRS 10)
Net income from own/separate operations
P Company P 500,000
S Company 100,000
Total P600,000
Less: Non-controlling Interest in Net Income* P 20,000
Amortization of allocated excess 0
Goodwill impairment (impairment under full-goodwill approach) _ 0 20,000
CNI - entity concept P580,000

*Non-controlling Interest in Net Income (NCINI) for 20x4


Net income of S Company P100,000
Less: Amortization of allocated excess _______0
P100,000
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) for 20x4 P 20,000

122. b
Net Income from own operations: 20x420x5
Parent …………………………………………………P 100,000 P100,000
Subsidiary……………………………………………... 25,000 35,000
P125,000 P135,000
Subsidiary’s other comprehensive income…………..5,000 10,000
Total Comprehensive Income……………………….....P130,000 P145,000
Less: Amortization of allocated excess…………….… 6,250 6,250
Impairment of full- goodwill (if any)…………. 0 0
Consolidated /Group Comprehensive Income…… P123,750 P138,750
Less: Non-controlling interest in Comprehensive
Income *…………………………………………… 4,750 7,750
Controlling Interest in Consolidated __________________
Comprehensive Income …. …………………………P119,000 P131,000

*Non-controlling interest in Comprehensive Income: 20x420x5


Subsidiary’s:
Net income from own operations………….......P 25,000 P 35,000
Other Comprehensive Income (P30,000 –
P25,000)…………………………….…………... 5,000 10,000
Subsidiary’s Comprehensive Income…………........P 30,000 P45,000
Less: Amortization of allocated excess*………….. 6,250 6,250
Impairment of full-goodwill (if any)....………. 0 0
P 23,750 P 38,750
x: Non-controlling interests……………………………. 20% 20%
Non-controlling interest in Comprehensive IncomeP 4,750P 7,750

*Amortization of allocated excess:


Increase in other intangibles: P50,000 / 8 years = P 6,250

123. c – refer to No. 122


124. c – refer to No. 122
125. b- refer to No. 122
126. d
Inventory – not yet sold in 20x4 P 0
Building: (P390,000 – P200,000)/ 10 years 19,000
Equipment (P280,000 – P350,000)/ 5 years ( 14,000)
P 5,000
127. c
Plochman’s acquisition entry is:
Investment in Shure……………………………………………………………40,000,000
Retained earnings (acquisition-related expense – close to
retained since only balance sheet accounts are being
examined)…………………………………………………………………… 1,000,000
Common stock, 1,000,000 x P1 par……………………………… 1,000,000
PIC in excess of par [(1,000,000 x P39) – P800,000)…………… 32,000,000
Cash (P800,000 + P1,000,000)…………………………………….. 1,800,000

Eliminating entries are:


Book value of stockholders’ equity:
Stockholders’ equity-Shure………………………………………………… 6,000,000
Investment in Shure………………………………………………… 6,000,000
Allocated excess (acquisition/purchase differential):
Identifiable assets……………………………………………………………. 7,000,000
Long-term debt………………………………………………………………. 500,000
Goodwill………………………………………………………………………..28,500,000
Lawsuit liability………………………………………………………. 2,000,000
Investment in Shure………………………………………………… 34,000,000

128. d –refer to No. 127


129. a
130. a
Cost of Goods Sold P80,000 debit
Depreciation Expense (P192,000/120) 7 = P11,200 debit
131. c
Cost of Goods Sold (P60,000 x 4/6) = P40,000 debit
Interest Expense: (P15,000/5) = P3,000 debit
132. a [(P250,000 - P180,000)/10]7
133. c
[(P380,000 - P260,000)/120]88
134. No question available
135. a
136.c
P170,000 - {[P320,000 - (P300,000 - P170,000)]/10}2
137.b
[P320,000 - (P300,000 - P170,000)]/10
138.d
139.d
P105,000 - {[P405,000 - (P450,000 - P105,000)]/20}2
140. a
[P405,000 - (P450,000 - P105,000)]/20

141. d - The acquisition method consolidates assets at fair value at acquisition date regardless
of the parent’s percentage ownership.
142. d
P: BV,12/31/20x6 P250,000
S:
BV of building, 12/31/20x4 P170,000
Add: Adjustments to reflect fair value, 1/1/20x4
(P350,000 – P240,000) 110,000
Less: Amortization of excess (P110,000/10) x 3 years 33,000 247,000
P497,000
143. b
P: BV,12/31/20x5 P 975,000
S:
BV of building, 12/31/20x5 P105,000
Add: Adjustments to reflect fair value, 1/4/20x4
(P120,000 – P90,000) 30,000
Less: Amortization of excess (P30,000/10) x 2 years 129,000 6,000
P1,104,000
144. c - An asset acquired in a business combination is initially valued at 100% acquisition-date
fair value and subsequently amortized its useful life.
Patent fair value at January 1, 20x4 ........................................................................ P45,000
Amortization for 2 years (10 year life)...................................................................... (9,000)
Patent reported amount December 31, 20x5....................................................... P36,000
145. b
BV of building, 1/1/20x4 P200,000
Adjustments to reflect fair value, 1/1/20x4 (P300,000 – P200,000) 100,000
Depreciation 1/1/20x4 – 12/31/20x6 (P100,000/20 x 3 years) ( 15,000)
P285,000
146. d – same with No. 145
147. d
BV of equipment, 1/1/20x4 P 80,000
Adjustments to reflect fair value, 1/1/20x4 (P80,000 – P75,000) ( 5,000)
Depreciation 1/1/20x4 – 12/31/20x6 (P5,000/10 x 3 years) 1,500
P 76,500
148. a
Adjustments to reflect fair value, 1/1/20x4 (P80,000 – P75,000) (P 5,000)
Depreciation 1/1/20x4 – 12/31/20x6 (P5,000/10 x 3 years) 1,500
(P 3,500)
149. d – 1/2/20x4:
BV of equipment, 1/1/20x4 P200,000
Adjustments to reflect fair value, 1/1/20x4 (P300,000 – P200,000) 100,000
P300,000
150. b
Decrease in Buildings account:
Fair value……………………………………………P 8,000
Book value………………………………………….. __10,000
Decrease…………………………………………….P 2,000
151. d
Decrease in buildings account (refer to No. 73)………… P 2,000
Less: Increase due to depreciation (P2,000/10)………… 200
Decrease in buildings accounts……………………………..P 1,800
152. d
Decrease in buildings account (refer to No. 74)………… P 1,800
Less: Increase due to depreciation (P2,000/10)………… 200
Decrease in buildings accounts……………………………..P 1,600
153. a
Increase in Equipment account:
Fair value……………………………………………P 14,000
Book value………………………………………….. __18,000
Increase…………………………………………….P 4,000
154. a
Increase in equipment account (refer to No. 76)………… P 4,000
Less: Decrease due to depreciation (P4,000/4)…………… 1,000
Increase in equipment accounts……………………………..P 3,000

155. a
Increase in equipment account (refer to No. 77)………… P 3,000
Less: Decrease due to depreciation (P4,000/4…………… 1,000
Increase in equipment accounts……………………………..P 2,000

156. a
Increase in Land account:
Fair value……………………………………………P 12,000
Book value………………………………………….. 5,000
Increase…………………………………………….. P 7,000

157. b – refer to No. 156, no depreciation/amortization


158. b – refer to No. 156, no depreciation/amortization
159. e
Increase in Patent account:
Fair value……………………………………………P 11,000
Book value………………………………………….. _ 0
Increase…………………………………………….P 11,000

(P234,000/90%) – (P160,000 + P80,000) = P20,000 – (P4,000 – P2,000 + P7,000) = P11,000.


Partial or full-goodwill approach, the amortization remains the same.
160. e
Increase in patent account (refer to No. 159)……………… P 11,000
Less: Decrease due to depreciation (P11,000/5).………… 2,200
Increase in patent accounts…………………………………. P 8,800
161. d
Increase in patent account (refer to No. 160)……………… P 8,800
Less: Decrease due to depreciation (P11,000/5).………… 2,200
Increase in patent accounts…………………………………. P 6,600
162. c
Fair Value of Subsidiary:
Consideration Transferred (5,400 shares) P120,600
Less: Book value of SHE-S, 1/1:
Common stock – S: P50,000 x 90% P 45,000
APIC – S: P15,000 x 90% 13,500
RE – S: P41,000 x 90% 36,900 95,400
Allocated Excess P 25,200
Less: Over/undervaluation of A & L:
Increase in Inv. (P17,100–P16,100) x 90% P 900
Increase in Eqpt. (P48,000–P40,000) x 90% 7,200
Increase in Patents (P13,000–P10,000) x 90% 2,700 10,800
Positive Excess: Goodwill P 14,400
Amortization of allocated excess - Starting January 1:
Inventory: P1,000 / 1 year P 1,000
Equipment: P8,000 / 4 years 2,000
Patents: P3,000 / 10 years 300
P 3,300
163. c
Common stock – S P 50,000
APIC – S 15,000
RE – S 41,000
Stockholders’ equity – Subsidiary, 1/1 P106,000
Add: Adjustments to reflect fair value 12,000
Fair value of Stockholders’ Equity – S, 1/1 P118,000
x: Non-controlling) interests 10%
Non-controlling Interests (in net assets) P 11,800

164. a – P48,000, parent only.

165. a – P48,000. On the date of acquisition, the parent’s retained earnings is also the consolidated
retained earnings.

166. b – P120,600, the initial value

167. b – P4,000 x 90% = P3,600

168. c
Consolidated Net Income for 20x4
Net income from own/separate operations
P CompanyP30,200 – (P4,000 x 90%) P26,600
S Company 9,400
Total P36,000
Less: Non-controlling Interest in Net Income* P 610
Amortization of allocated excess 3,300
Goodwill impairment ____0 3,910
Controlling Interest in Consolidated Net Income or
Profit P32,090
attributable to equity holders of parent…………..
Add: Non-controlling Interest in Net Income (NCINI) 610
Consolidated Net Income for 20x4 P32,700

*Net income of subsidiary – 20x4 P 9,400


Amortization of allocated excess – 20x4 ( 3,300)
P 6,100
Multiplied by: Non-controlling interest %.......... 10%
P 610
Less: Non-controlling interest on impairment loss on full-goodwill ____0
Non-controlling Interest in Net Income (NCINI) P 610

169. c
Noncontrolling Interests (in net assets):
Common stock - S, 12/31 P 50,000
Additional paid-in capital - S, 12/31 15,000
Retained earnings - S, 12/31:
RE-S, 1/1/2011 P 41,000
Add: NI-S, 2011 9,400
Less: Dividends – S 4,000 46,400
Book value of SHE - S, 12/31