Advanced Financial Accounting and Reporting WJGuzman

Consolidated Financial Statement

Controlling Interest or Parent is a entity

- who owns more than 50% voting rights over the subsidiary.
- who has the power to govern the financial or operating policies of the subsidiary.
- who appoints or removes majority of the board of directors.
- who has the power to cast majority votes at meetings of the board of directors.

Noncontrolling interest can be measured either at

- Fair value
- Proportionate share of the NCI in the acquiree’s (subsidiary’s) identifiable net assets.

Note:
 The consolidation process is performed independently each year
 All elimination entries are working paper only
- They are not posted to the general ledger of parent nor the subsidiary

Equity Method Cost Method

Every change in Subsidiary’s The investment account
Equity is recorded on a pro-rata remains at its original cost-of-
basis in the investment account acquisition balance
Recognize Parent’s share of Investment in Sub. Xx N/A
Subsidiary’s net income Income from Sub. xx
Receipt of dividends Cash xx Cash xx
Investment in Sub. xx Dividend Income xx

 Excess allocated to net asset of subsidiary will be adjusted to the net income of the subsidiary
- Excess allocated to inventories will have an effect only on the first year of operation. This is under
the assumption that these inventories will ALL be sold on the first year. This will be adjusted to the
Cost of Sales.
- Excess allocated to depreciable asset will have an effect through the useful life of the asset. The
excess allocated will be amortized over the remaining useful life of the asset. This will be adjusted
to the Depreciation Expense.
- Excess allocated to non-depreciable asset (LAND) will have no effect on the income statement
thus no adjustment to income must be made.
- Goodwill recognized is subject for impairment.

Total Parent NCI

Unadjusted Net Income of Subsidiary xx xx xx
Excess allocation
 in Inventory (total amount = to increase COS) (xx) (xx) (xx)
 in Inventory (total amount = to decrease COS) xx xx xx
 in Depreciable assets (amount / remaining useful life = to increase (xx) (xx) (xx)
depreciation)
 in Depreciable assets (total amount / remaining useful life = to decrease xx xx xx
depreciation)
 in Non-depreciable assets (no income adjustment) - - -
 in Non-depreciable assets (no income adjustment) - - -
Impairment of Goodwill (if NCI is valued at fair value) (xx) (xx) (xx)
Impairment of Goodwill (if NCI is valued at proportionate share) (xx) (xx)
Adjusted Net Income of Subsidiary xx Xx Xx
Net Income of Parent (own operation) xx Xx
Consolidated Net Income xx Xx xx

Intercompany transactions
 These are the sales transactions between the parent and its subsidiary.
 There are three common intercompany sales transactions
- Sale of inventory
- Sale of depreciable asset
- Sale of non-depreciable asset

Sale of Inventory
 Intercompany sales revenue should be eliminated
 Cost of Sales should be adjusted based on the original cost of the inventory sold to outside party
 Profit is realized when the goods are sold to an outside party
 Inventory balance should be adjusted based on the original cost of the inventory

Sale of Depreciable Asset

 Gain or Loss on sale of asset should be eliminated
 Gain or Loss on sale should be amortized over the remaining useful life of the asset. Under the
assumption that the buyer affiliate continues to use the depreciation policy of the seller affiliate. The
amortization should be adjusted to depreciation expense.
 Asset value should be adjusted back to its original cost.
 Accumulated depreciation should be adjusted back to its original valuation plus adjustment to the date
of reporting.
 Gain or Loss on intercompany sale should be recorded back, less the amortized portion, once the asset
has been sold to an outside party.

Sale of Non-depreciable Asset

 Gain or Loss on sale of asset should be eliminated
 No amortization of gain or loss should be adjusted.
 Asset value should be adjusted back to its original cost.
 Gain or Loss on intercompany sale should be recorded back once the asset has been sold to an outside
party.

Upstream or Downstream
 Upstream sale is an intercompany sale made by the Subsidiary to its Parent.
- Both the Parent and NCI share in Subsidiary’s Net Income will be affected.
 Downstream sale is an intercompany sale made by the Parent to its Subsidiary.
- Only the Parent share in Subsidiary’s Net Income will be affected.

Total Parent NCI

Unadjusted Net Income of Subsidiary xx xx xx
Intercompany transaction
 of Inventory (gross profit of unsold goods current) (xx) (xx) (xx)
 of Inventory (gross profit of unsold goods prior year) xx xx xx
 of Inventory (gross profit of unsold goods current) (xx) (xx)
 of Inventory (gross profit of unsold goods prior year) xx xx
 of Depreciable assets (gain) (xx) (xx) (xx)
Piecemeal amortization (gain / remaining useful life) xx xx xx
Year of sale to outside party (gain – total piecemeal amortized) xx xx xx
 of Depreciable assets (loss) xx xx xx
Piecemeal amortization (loss / remaining useful life) (xx) (xx) (xx)
Year of sale to outside party (loss – total piecemeal amortized) (xx) (xx) (xx)
 of Depreciable assets (gain) (xx) (xx)
Piecemeal amortization (gain / remaining useful life) xx xx
Year of sale to outside party (gain – total piecemeal amortized) xx xx
 of Depreciable assets (loss) xx xx
Piecemeal amortization (loss / remaining useful life) (xx) (xx)
Year of sale to outside party (loss – total piecemeal amortized) (xx) (xx)
 of Non-depreciable assets (gain) (xx) (xx) (xx)
Year of sale to outside party (gain) xx xx xx
 of Non-depreciable assets (loss) xx xx xx
Year of sale to outside party (loss) (xx) (xx) (xx)
 of Non-depreciable assets (gain) (xx) (xx)
Year of sale to outside party (gain) xx xx
 of Non-depreciable assets (loss) xx xx
Year of sale to outside party (loss) (xx) (xx)
Adjusted Net Income of Subsidiary xx xx xx
Net Income of Parent (own operation) xx xx
Consolidated Net Income xx xx xx

Problem 1
Statement of financial position for Han Corporation and Solo Corporation before acquisition on December
31, 2016 are given below:
Han Corporation Solo Corporation
Cash and cash equivalent P 220,000 P 100,000
Inventory 100,000 60,000
Property and equipment 400,000 220,000
Goodwill 80,000 20,000
Total assets 800,000 P 400,000

Current liabilities P 150,000 P 100,000

Long-term liabilities 180,000 90,000
Share Capital 220,000 100,000
Share Premium 120,000 60,000
Retained Earnings 130,000 50,000
Total Equities P 800,000 P 400,000

Han Corporation purchased for cash 80% ownership of Solo Corporation on December 31, 2016, for
P200,000. On that date, Solo’s inventory had a fair value of P40,000, while its property and equipment had
a fair value of P50,000 more than the book value shown.

1. How much is the goodwill to be reported in the consolidated financial position?

2. How much is the value of NCI to be reported in the consolidated financial position?
 3. If in December 31, 2016, the NCI has a fair value of P48,000, how much should be reported as
goodwill to be reported in the consolidated financial position?
4. If in December 31, 2016, the NCI has a fair value of P40,000, how much should be reported as
goodwill to be reported in the consolidated financial position?

Problem 2
On January 1, 2016, PASKO Corporation purchased 6,000 shares of the 10,000 outstanding shares SANTA
Corporation from existing shareholders for P444,000. SANTA Corporation also issued 5,000 shares for P70
per share (the estimated fair value at date) of which the PASKO Corporation purchased 3,000 of the said
shares. SANTA had the following statement of financial position on December 31, 2015:

ASSETS LIABILITIES AND EQUITY

Current Assets 330,000 Liabilities 130,000
Building(net) 280,000 Ordinary Share 200,000
Equipment(net) 200,000 Retained Earnings 480,000
Total Assets 810,000 Total Liabilities and Equity 810,000

On the date of purchase, PASKO determines that SANTA’s equipment was undervalued by P100,000 and
had a 5-year remaining life. All other book values approximate fair values.

1. What is the value of the non-controlling interest on January 1, 2016?

2. What is the amount of goodwill (gain) to be reported in consolidated statement of financial position on
January 1, 2016?

Problem 3
On January 1, 2016, MALIYA Corp. purchased 75% of TRISTAN Corp.’s common stock for P1,275,000.
On that date, TRISTAN’s inventory has a fair value P40,000 higher than its book value and equipment, with
remaining useful life of 5 years, has a fair value P100,000 higher than its book value.

MALIYA TRISTAN
Share Capital P 2,000,000 P 600,000
Share Premium 760,000 340,000
Retained earnings (01/01/2016) 1,240,000 560,000
Income from own operation 2016 400,000 140,000
Dividend paid in 2016 50,000 20,000
Net Income in 2017 500,000 200,000
Dividend paid in 2017 60,000 40,000

Using equity method

1. How much is the investment balance immediately BEFORE consolidation on January 1, 2016?
2. In the consolidated financial statement, how much is the value of NCI on January 1, 2016?
3. How much is the share of parent in subsidiary’s net income in 2016?
4. How much is the share of parent in the consolidated net income in 2016?
5. How much is the share of NCI in the consolidated net income in 2016?
6. How much is the investment balance immediately BEFORE consolidation on December 31, 2016?
7. In the consolidated financial statement, how much is the value of NCI on December 31, 2016?
8. How much is the share of parent in subsidiary’s net income in 2017?
9. How much is the share of parent in the consolidated net income in 2017?
10. How much is the share of NCI in the consolidated net income in 2017?
11. How much is the investment balance immediately BEFORE consolidation on December 31, 2017?
12. In the consolidated financial statement, how much is the value of NCI on December 31, 2017?

Using cost method

1. How much is the investment balance immediately BEFORE consolidation on January 1, 2016?
2. In the consolidated financial statement, how much is the value of NCI on January 1, 2016?
3. How much is the share of parent in subsidiary’s net income in 2016?
4. How much is the share of parent in the consolidated net income in 2016?
5. How much is the share of NCI in the consolidated net income in 2016?
6. How much is the investment balance immediately BEFORE consolidation on December 31, 2016?
7. In the consolidated financial statement, how much is the value of NCI on December 31, 2016?
8. How much is the share of parent in subsidiary’s net income in 2017?
9. How much is the share of parent in the consolidated net income in 2017?
10. How much is the share of NCI in the consolidated net income in 2017?
11. How much is the investment balance immediately BEFORE consolidation on December 31, 2017?
12. In the consolidated financial statement, how much is the value of NCI on December 31, 2017?

Problem 4
On January 2, 2017, Polo Corporation purchase 80 percent of Seed Company’s common stock for
P216,000. P10,000 of the total excess is attributable to goodwill and the balance to a depreciable asset
with an economic life of ten years. On the date of acquisition Seed reported common stock outstanding of
P80,000 and retained earnings of P140,000, and Polo reported common stock outstanding of P350,000
and retained eanings of P520,000.
On December 31, 2017, Seed reported comprehensive income of P35,000 and paid dividends of P15,000,
Polo reported comprehensive income from its separate operations of P95,000 and paid dividends of
P46,000.

1. How much is the consolidated net income to be reported by Polo?

2. How much is the NCI to be reported in the consolidated financial statement?
3. If, at the time of acquisition, NCI is valued equivalent to its proportionate share in the subsidiary’s
net assets, how much will be the balance of NCI to be reported in the consolidated financial
statement?

Problem 5
Parent Company owns 90% of Subsidiary Company stocks. During 2016, Parent purchased inventory for
P120,000 and sold 60% to Subsidiary for a 20% mark-up on cost. Subsidiary then sold 75% of this inventory
to their customers for a 30% mark-up on cost. Parent also has third-party customers which they sell goods
for a 20% gross profit rate. Parent’s Consolidated Balance Sheet reports inventory value of P20,000.
1. How much is the total Sales reported by Parent?
2. How much is the total Sales reported in the Consolidated Income Statement?
3. How much is eliminated in the Cost of Sales in Consolidation?

Problem 6
Pepsi Corporation purchased 70% of Sarsi Company’s voting stock on December 31, 2014, at underlying
book value. The companies reported the following data with respect to intercompany sales in 2015 and
2016:

Purchased Purchased Sold Sale Unsold at Year Sold to

Year by Price to Price End of year Outsiders
2015 Sarsi P 12,000 Pepsi P 18,000 P 4,500 2016
2016 Sarsi 9,000 Pepsi 13,500 3,000 2017
2016 Pepsi 14,000 Sarsi 28,000 11,000 2017

Pepsi reported operating income (excluding dividend income) of P16,000 and P22,000 in 2015 and 2016,
respectively. Sarsi reported operating income of P9,000 and P8,500 in 2015 and 2016, respectively.

1. What is the amount of consolidated comprehensive income attributable to parent for 2015?
2. What is the amount of inventory balance to be reported in the consolidate statement of financial position
at December 31, 2016?
3. What is the amount of consolidated cost of goods sold for 2016?
4. What is the amount of consolidated comprehensive income for 2016?

Problem 7
Sea Company sells all its output at 25 percent above cost. Pal Corporation purchases its entire inventory
from Sea. Selected information on the operations of the companies over the past three years is as follows:
Sea Company Pal Company
Sales to Operating Inventory, Operating
Year Pal Corp Income Dec. 31 Income

2015 P 20,000 P 10,000 P 7,000 P 15,000

2016 17,500 9,000 10,500 24,000
2017 22,500 16,000 12,000 30,000

Pal purchased 60 percent of the ownership of Sea on December 31, 2014, at underlying book value.

1. How much of the consolidated net income is attributable to parent for 2015?
2. How much of the consolidated net income is attributable to parent for 2016?
3. How much is eliminated in cost of sales in working paper consolidation for 2016?
4. How much of the consolidated net income is attributable to parent for 2017?
5. How much is eliminated in cost of sales in working paper consolidation for 2017?

Problem 8
On January 1, 2014 (acquisition date), discrepancy between subsidiary interest and the implied value of
the subsidiary yielded an adjustment to subsidiary’s equipment for P100,000 with a remaining useful life of
5 years. Income information for 2016 taken from the separate company financial statement of Peras and
its 75% owned subsidiary, Star, is presented as follows:
Peras Star
Sales P 1,000,000 P 560,000
Loss on sale of building (20,000)
Dividend income 75,000
Cost of goods sold (500,000) (260,000)
Depreciation expense (100,000) (60,000)
Other operating expenses (200,000) (40,000)
Net income 275,000 180,000
Star’s loss on sale of building relates to a building with a historical cost of P112,000 that was sold to Peras
for 60,000 on July 1, 2016. Remaining useful life of the building is 10 years.

1. How much is NCI as at December 31, 2016?

2. How much is the consolidated net income attributable to parent?
3. How much is the depreciation expense in the consolidated income statement?
4. How much should be the balance of Accumulated Depreciation of the Building in the consolidated
financial position?

Assume further that in December 31, 2017, the building was sold by Peras to an outside party for P53,000.
Net Income of Peras (including dividend income) amounted to P300,000 and Net Income of Star amounted
to P200,000. Peras and Star paid dividend amounting to P150,000 and P120,000, respectively.

5. How much is NCI as at December 31, 2017?

6. How much is the consolidated net income attributable to parent?
7. How much is the depreciation expense in the consolidated income statement?

Problem 9
Parent Corporation purchased 75% of the outstanding voting stock of Subsidiary Corporation for
P1,500,000 on January 1, 2013. Subsidiary’s stockholders’ equity on this date consisted of the following:

Share capital P 800,000

Share premium 500,000
Retained earnings, December 31, 2012 200,000
Total stockholders’ equity P 1,500,000

The excess of investment cost over book value of the net assets acquired was allocated 30 percent to
undervalued inventory (sold in 2013), 30 percent to plant assets with a remaining useful life of ten years,
and the remaining to unidentifiable intangible asset. Comparative trial balances of Parent and Subsidiary
Corporation at December 31, 2016 are as follows:

Parent Subsidiary
Other Assets (net) 3,500,000 2,400,000
Investment in Subsidiary 1,500,000
Expenses (including cost of sales) 2,400,000 1,200,000
Dividends 550,000 200,000

Liabilities 800,000 200,000

Share Capital 2,000,000 800,000
Share Premium 400,000 500,000
Retained Earnings 1,600,000 800,000
Sales 3,000,000 1,500,000
Dividend Income 150,000

1. How much is the NCI in the consolidated statement at December 31, 2016?
2. How much is the retained earnings in the consolidated statement at December 31, 2016?
3. How much is the total shareholders’ equity in the consolidated statement at December 31, 2016?
4. How much is the investment balance at January 1, 2016 if the equity method is used?
5. How much is the adjusted investment balance at December 31, 2016 if the equity method is used?