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ADAMSON UNIVERSITY

PRACTICAL ACCOUNTING II
Consolidated Statements

Consolidated financial statements- are the financial statements of a group presented as those of a single economic entity.

Group is a parent and all of its subsidiaries.


Separate financial statements – are those presented by a parent, an investor in an associate, or a venturer in a jointly
controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the
basis of the reported credits, and the net assets of the investee.

PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS


A parent shall present consolidated financial statements, except when
 The parent is itself a wholly-owned subsidiary, or is a partially-owned subsidiary of another entity
 The parent’s debt or equity instruments are not traded in a public market
 The parent did not file, nor is in the process of filing, its financial statements with a securities commission for the
purpose of issuing any class of instruments in a public market
 The ultimate parent produces consolidated financial statements available for public use

CONSOLIDATION PROCEDURES
 The carrying amount of the parent’s investment in each subsidiary and the parent’s portion of equity of each
subsidiary are eliminated
 Non-controlling interests in the profit or loss of consolidated subsidiaries for the reporting period are identified
 Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from the parent
shareholders’ equity in them. Non-controlling interests in the net assets consist of:
1. The amount of those non-controlling interests at the date of the original combination
2. The non-controlling share of changes in equity since the date of the combination

ACCOUNTING FOR INVESTMENTS IN SUBSIDIARIES, JOINTLY CONTROLLED ENTITIES AND ASSOCIATES IN SEPARATE
FINANCIAL STATEMENTS
For separate financial statements investment in subsidiaries, jointly controlled entities and associates, that are not
classified as held for sales, shall be accounted for either:
 at cost, or
 in accordance with IAS 39
Summary of Critical Points:
1. Consolidated statements are prepared from the separate statements of the acquiring company and acquired
company(ies) from the standpoint of a single economic entity.
2. Consolidation procedures are necessary whenever a parent and a subsidiary relationship existed, except if the parent
is exempted under PAS 27 to present consolidated financial statements.
3. The acquiring company, generally, is a parent if it owns, directly and indirectly, more than 50% of the outstanding
voting shares of the acquired company. If the controlling interest is not 100%, the difference would represent the
non-controlling interest.0
4. The following steps summarize the consolidation worksheet procedures.
a. Prepare a schedule of excess to determine if there is either goodwill, or, income from acquisition. This will also be
the basis in formulating the working paper elimination entries.
b. If the working paper is to prepare post acquisition consolidated statements, computations must show the
amortization of increase/decrease in value of net assets of the acquired company.

DETERMINATION OF GOODWILL
An important aspect of accounting for business combination, especially when control is less than 100%, is the
computation of goodwill or excess in combination. Goodwill is computed as follows:

Goodwill = Fair value of consideration transferred + Amount of non-controlling interest (NCI)* +


Fair value of previously-held equity interest LESS
net identifiable assets of the acquiree

* Under revised provisions of IFRS3, the non-controlling interest may be measured at either: (1) fair value or (2) as a
proportionate share of identifiable net assets at the date of acquisition. These allowed alternatives result in goodwill being
computed in two different amounts. If non-controlling interests are measured at full fair value, goodwill recognized in
the consolidated financial statements will include a share for non-controlling interests. In that case, goodwill is said to be
grossed-up. Under the second alternative, goodwill will be for the parent only, i.e. not grossed-up. Unless otherwise
indicated, the fair value approach is preferable to determine goodwill.
5. Increase/decrease to fair value of net asset items and GOODWILL, if the NCI is measured at FAIR VALUE, are
recognized in full regardless of the extent of the non-controlling interest. Such re-measurement and resulting
amortization/impairment loss affect both the controlling interest and the non-controlling interests.

Please note that goodwill is no longer amortized but subjected to annual tests for impairment losses. Recognized
goodwill belongs to the parent only, as well as any impairment loss thereon, if the NCI is measured at its
proportionate share of the identifiable net assets at FAIR VALUE

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6. Working paper elimination entries orchestrate the items and balances that must comprise the consolidated
statements. Their two basic objectives are (1) to eliminate intercompany balances and (2) to make adjustments to or
set-up some items in order to conform with purchase principles.
7. In purchase combination, for example, working paper elimination entries aim to accomplish the following:
a. Eliminate inter-company balances
b. Make adjustments for acquired assets and assumed liabilities to comply with fair value considerations.
c. Set up goodwill or income from acquisition into the consolidated statements.
d. Amortize increase/decrease in value of net assets and measure their effects in the consolidated financial
statements,
e. Make adjustments to consolidated amounts as a result of inter-company transactions.
f. And for a variety of other consolidation requirements.
8. Basically, in the working papers, similar items from the parent’s records and from the subsidiary’s records are simply
combined, plus/minus any working paper adjustments affecting such items.

PROBLEMS

Problem 1 – (Wholly-owned subsidiary)


On January 1, 2010, P Company purchased interest in S Company. On this date the book values and the fair values of S
Company were as follows:
Fair Market
Book Values Values
Cash P 240,000
Accounts receivable 144,000
Merchandise inventory 576,000 720,000
Building (net) 1,488,000 1,536,000
Equipment 480,000 384,000
Long term inv. in MS 960,000 1,392,000
P3,888,000
Current liabilities P 480,000
Bonds payable 1,008,000 1,248,000
Common stock 960,000
Retained earnings 1,440,000
P 3,888,000
Requirements: Prepare the following assuming that P Company paid P 2,736,000 for a 100% interest
1. Determination and distribution of excess schedule
2. Working paper elimination entries

Problem 2 (Determination of Goodwill)


On July 1, 2010 P Co purchased 1,500,000 shares from S Co’s existing owners. The total number of shares outstanding
was 2,000,000. In addition to the P15,000,000 cash paid for the S Co shares, P Co is obligated to pay an additional
P1,000,000 to the vendors of S Co if S Co maintained existing profitability over the subsequent 2 years from July 1,
2010. The fair value of the contingent consideration was assessed at P500,000. The fair value of non-controlling interests
at July 1, 2010 is P5,000,000. The tax effects on fair value differences are to be recognized at 20%.
A comparison of book values and fair values of assets, liabilities, and contingent liabilities to be taken in under the
acquisition are:
Fair value -
Book Value Fair Values Book Values
Plant and equipment P3,000,000 P2,800,000 P (200,000)
Research & development 0 10,000,000 10,000,000
Other intangible assets 1,200,000 2,500,000 1,300,000
Inventory 500,000 650,000 150,000
Accounts receivable 400,000 350,000 ( 50,000)
Cash 50,000 50,000 0
Total assets P 5,150,000 P16,350,000 P11,200,000
Liabilities P 1,500,000 P 1,500,000 P 0
Contingent liabilities 0 500,000 500,000
Total liabilities
P 1,500,000 P 2,000,000 P 500,000
Net assets P 3,650,000 P14,350,000 P10,700,000
Share capital P 2,000,000
Retained earnings 1,650,000
Stockholders’ equity P 3,650,000
Required:
1. Determine goodwill if non-controlling interests are measured at FV at the date of acquisition, and
2. Determine goodwill if non-controlling interests are measured at the proportionate share in the FV of the net assets.
3. Prepare WPEE at date of acquisition for each alternative method.

Problem 3 (Determination of Gain on Acquisition)


P Co paid P6,000,000 to acquire an 80% interest in S Co. S Co had been plagued many troubles, financially and
otherwise. The existing owner of S Co was willing to sell the company at a discount to its net fair value. The fair value of
the identifiable net assets, non-controlling interests and the consideration transferred were reassessed and deemed to be
reliably determined. Hence, the gain arising was taken to the income statement in the year of the acquisition. Fair value
of non-controlling interests as at acquisition date was P1,500,000. The tax effects on fair value differentials are to be
recognized at 20%.

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A comparison of book values and fair values at date of acquisition follows:
Fair Value –
Book Values Fair Values Book values
Assets P50,000,000 P50,000,000 P 0
Liabilities (30,000,000) (30,000,000) 0
Contingent liabilities 0 ( 6,000,000) 6,000,000
Identifiable net assets
P20,000,000 P14,000,000 P(6,000,000)
Share capital P 5,000,000
Retained earnings 15,000,000
Stockholders’ equity P20,000,000

Required:
1. Determine the gain on bargain purchase if the NCI is measured at FV.
2. Determine the gain on bargain purchase if the NCI is measured as a proportion of the FV of the acquiree’s net assets.
3. Prepare WPEE at date of acquisition for each alternative method.

Problem 4
Pluto Company acquired a 60% interest in Saturn Co on 2 January, 2010. Book and fair values at the date of acquisition
were close to each other. The fair value of non-controlling interests as at the date of acquisition is P60,000. A control
premium was paid by Pluto to acquire Saturn.
The following balance sheets relate to Pluto and Saturn right after the combination:
Pluto Co Saturn Co
Investment in Saturn Co, cost P93,600 P 0
Other assets 462,400 235,760
Total assets P556,000 P235,760
Share capital P240,000 P 64,000
Retained earnings 112,000 24,000
Long-term liabilities 160,000 120,320
Current liabilities 44,000 27,440
Total equities P556,000 P235,760

Required:
1. Determination and distribution of excess schedule at the date of acquisition.
2. Consolidation working paper entries at the date of acquisition.
3. Consolidated balance sheet at the date of acquisition.

Problem 5
Pet Company acquired a 60% interest in Show Enterprises on 2 January 20x2 when Show’s share capital and retained
earnings were P80,000 and P30,000 respectively. The net assets of Show were fairly valued on that date. The fair value
of non-controlling interest as at the date of acquisition is P78,000.

The following financial statements pertain to the two companies for the year ended December 31, 20x9

Income Statement for the year ended December 31, 20x9


Pet Co Show Ent
Operating profit P160,000 P 60,000
Dividend income from Show 18,900 -
Net profit before tax 178,900 60,000
Tax expense (48,900) (18,000)
Net profit after tax 130,000 42,000
Retained earnings, January 1 110,000 38,200
Dividends declared (100,000) (31,500)
Retained earnings, December 31 P140,000 P 48,700

Balance as at December 31, 20x9


Pet Co Show Ent
Investment in Saturn Co, cost
P117,000 P -
Other assets 520,200 265,230
Total assets P637,200 P265,230
Share capital P270,000 P 80,000
Retained earnings 140,000 48,700
Long-term liabilities 166,000 120,000
Current liabilities 61,200 16,530
Total equities P637,200 P265,230

Required:
1. Show the consolidation working paper entries for the year ended December 31, 20x9.
2. Perform an analytical check on the non-controlling interests as at December 31, 20x9.
3. Prepare the consolidated income statement and consolidated balance sheet for 20x9.

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Problem 6 (Consolidation WPEE one year after date of acquisition)
On December 31, 20x1, P Co purchased 90% of S Co’s outstanding ordinary shares from S Co’s present shareholders for
P8,260,000 cash and issuance of 1 million shares of P Co’s ordinary shares, which had a market value of P5,000,000. The
balance sheets of S Co and P Co at the date of acquisition (also the financial year-end) are shown below. Assume that all
fair value adjustments have tax effects and give rise to either a deferred tax liability or deferred tax asset. However,
goodwill impairment loss does not have tax effects. Fair value of non-controlling interests at acquisition date was
P1,400,000. Tax rate was 20% throughout. Assume an accounting policy where the non-controlling interests are
recognized at fair value on acquisition date.
S Company P Company
Book Value Fair Value Book Value
Assets
Land P 780,000 P 1,170,000 P 1,560,000
Leased bldg. 5,200,000 6,500,000 10,400,000
Equipt. – net 2,600,000 2,210,000 9,100,000
Inv. in S Co 13,260,000
Inventories 650,000 780,000 1,170,000
AR – net 390,000 390,000 910,000
Other CA 520,000 520,000 780,000
Cash 260,000 260,000 1,690,000
P10,400,000 P11,830,000 P38,870,000

Equity and liabilities


Ordinary sh. P 6,500,000 P25,870,000
RE 1,170,000 P 8,970,000* 5,590,000
Other liab. 910,000 910,000 2,600,000
Loan payable 1,820,000 1,820,000 4,810,000
Contingent liab. 130,000
P10,400,000 P11,830,000 P38,870,000

Information on S Co’s net profit after tax and dividends declared during 20x2 are as follows:

P Co’s dividend income from S Co P409,500


S Co’s net profit after tax 728,000
S Co’s dividend declared 455,000

There were no other changes to equity.


In 20x2, the following information applies to undervalued and overvalued assets and goodwill:
 Undervalued inventories of P130,000 – sold in 20x2
 Undervalued land of P390,000 – still held by S Co – no depreciation
 Undervalued buildings of P1,300,000 – useful life 50 years from 1 January 20x2
 Overvalued equipment of P390,000 – useful life 5 years from 1 January 20x2
 Contingent liabilities of P130,000 – materialized (paid-off in 20x2)
 Goodwill – impairment loss of P520,000 recognized in 20x2.

Requirements:
1. Prepare consolidation adjustments for 20x2.
2. Reconcile the non-controlling interests’ balance from the consolidation adjustments with the NCI’s share of the net
assets of the subsidiary.

Problem 7
On January 1, 20x9, P Company purchased an 80% interest in S Company for P340,000. On this date, S Company had
Capital Stock of P150,000 and Retained Earnings of P100,000. An examination of S Company’s
assets and liabilities revealed that book values were equal to market values for all except the following:

Book value Market value


Plant and equipment (net) 300,000 400,000
Merchandise inventory 80,000 100,000

The plant and equipment had an expected remaining life of 5 years, and the inventory should be sold in 20x9. P
Company’s income was P250,000 in 20x9 and P290,000 in 20x0. S Company’s income was P120,000 in 20x9 and P
180,000 in 20x0. S Company paid cash dividends of P50,000 in 20x9 and P60,000 in 20x0.

P Company uses the cost method in accounting for its investment in stocks of S Company.
Requirements:
1. Calculate the investment income of P Company from S Company in 20x9 and in 20x0.
2. Elimination entries for consolidated statement working papers on January 1, 20x9, December 31, 20x9 and
December 31, 20x0.
3. Calculation of minority interest in net income of subsidiary for 20x9 and 20x0
4. Calculation of consolidated net income for 20x9 and 20x0.
5. Calculation of minority interest in net assets as of January 1, 20x9, December 31, 20x9 and December 31, 20x0.

Problem 8 (Upstream Merchandise Transfer)


S Company, a 75% owned subsidiary of P Company, sold merchandise during 2009 to its parent company for P 150,000.
The merchandise cost S Company P 110,000, 25% of the transferred merchandise remained in P Company’s ending
inventory. For the year 2009, S Company reported a net income of P 150,000 and P Company reported net income
(including dividend income of P 60,000) of P 275,000.

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Requirements:
1. Calculate P Company’s investment income from S Company in 2009.
2. Elimination entries for 2009
3. Determine non-controlling interests in the net income of the subsidiary for 2009.
4. Show consolidated net income for 2009, and allocate to Controlling interests and Non-controlling interests.

Problem 9 (Downstream Land Transfer)


During 2008 P Company sold land with a cost of P150,000 to its 80% owned subsidiary, S Company, for P 200,000. The
subsidiary sold the land in 2010 to an outsider for P280,000. The subsidiary and the parent reported net income as
follows:
Parent Subsidiary
2008 351,000 154,000
2009 335,000 149,000
2010 315,000 165,000

The reported income of the parent company includes P 51,000 of dividend income each year.

Requirements:
1. Calculate P Company’s investment income from S Company in 2008, 2009, and 2010.
2. Elimination entries for 2008, 2009, and 2010
3. Determine non-controlling interest in the net income of the subsidiary in 2008, 2009 and 2010
4. Show the consolidated net income for 2008, 2009 & 2010. Allocate each to Controlling and non-controlling interests.

Problem 10 (Upstream depreciable asset transfer)


On January 1, 2009, S Company a 90% owned subsidiary of P Company transferred equipment to its parent in exchange
for P75,000 cash. At the date of transfer, the subsidiary’s record carried the equipment at a cost of P106,000 less
accumulated depreciation of P45,000. The equipment has an estimated remaining life of 7 years. The subsidiary
reported net income for 2009 and 2010 of P 132,000 and P197,000, respectively. The parent company reported income
of P 220,000 (including dividend income of P 45,000) and P295,000 (including dividend income of P45,000) for 2009 and
2010, respectively.
Requirements
1. Calculate P Company’s investment income from S Company in 2009 and in 2010.
2. Elimination entries for 2009 and for 2010.
3. Determine non-controlling interest in the net income of the subsidiary for 2009 and for 2010.
4. Show the consolidated net income for 2009 and 2010. Allocate each to Controlling and Non-controlling interests.

Problem 11 (Intercompany Transactions)


On January 1, 2009, P Company acquired 75% of the outstanding shares of S Company at a fair value differential of
P50,000, represented by understated plant assets with a 10-year remaining life. During 2010, P Company purchased
merchandise from S Company in the amount of P 400,000 at billed prices. S Company shipped the merchandise at 40%
above its cost, and this pricing policy was also used for shipments made in 2009 to P Company. The inventories of P
Company included merchandise at billed prices from S Company as follows:

January 1, 2010 112,000


December 31, 2010 84,000

Also, in 2009 P Co sold land to S Co for P200, 000. The cost of the land to P Co was P150, 000. S Co sold the land to an
outsider for P230, 000 in 2010.

Furthermore, on January 1, 2010 S Co sold equipment to P Co for P75, 000 cash at the date of the transfer, the
equipment is carried at a cost of P106, 000 less accumulated depreciation of P45, 000. The equipment has an estimated
remaining life of 7 years.

Income statements for the two companies for the year 2010 are as follows:
P Company S Company
Sales P2,000,000 P1,000,000
Cost of sales 800,000 500,000
Gross profit 1,200,000 500,000
Operating expenses 720,000 320,000
Operating income 480,000 180,000
Gain on sale of land 30,000
Gain on sale of equipment _________ 14,000
Net income P 480,000 P 224,000

Requirements:
1. Calculate the non-controlling interests in the consolidated net income in 2010.
2. Calculate the controlling interest in the consolidated net income in 2010.
3. Prepare working paper elimination entries for the above information at December 31, 2010.
4. Prepare a consolidated income statement for the year ended December 31, 2010.

- end –

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MULTIPLE CHOICE

Daito Corporation owns 100% of Prince Enterprises. On January 1, 2010, Daito sold Prince delivery equipment at a gain.
Daito had owned the equipment for two years and used a five-year straight-line depreciation rate with no residual value.
Prince is using a three-year straight-line depreciation rate with no residual value for the equipment.
1. In the consolidated income statement, Prince recorded depreciation expense on the equipment for 2010 will be
decreased by:
a. 20% of the gain on sale
b. 33.33% of the gain on sale
c. 50% of the gain on sale
d. 100% of the gain on sale
Parker Corporation sells equipment with a book value of P80,000 to Sheaffer Enterprises, its 75%-owned subsidiary, for
P100,000 on January 1, 2010. Sheaffer determines that the remaining useful life of the equipment is four years and that
straight-line depreciation is appropriate. The December 31, 2010 separate company financial statements of Parker and
Sheaffer show equipment-net of P500,000 and P300,000, respectively.

2. The consolidated equipment-net will be:


a. P800,000 c. P780,000
b. P785,000 d P650,000

Balance sheet data for P Corporation and S Company on December 31, 2010, are given below:
P Corporation S Company
Cash P 70,000 P 90,000
Merchandise
Inventory 100,000 60,000
Property and
equipment (net) 500,000 250,000
Investment in S
Company 260,000 ________
Total assets P930,000 P400,000

Current liabilities P180,000 P 60,000


Long term liabilities 200,000 90,000
Common stock 300,000 100,000
Retained earnings 250,000 150,000
Total liabilities & SE P930,000 P400,000

P Corporation purchased 80% interest in S Company on December 31, 2010 for P260,000. S Company’s property and
equipment had a fair value of P50,000 more than the book value shown above. All other book values approximated fair
value. In the consolidated balance sheet on December 31, 2010.

3. The amount of total stockholders’ equity to be reported will be


a. P 550,000 c. P 750,000
b. P 610,000 d. P 615,000

4. The amount of non-controlling interest will be


a. P 50,000 c. P 110,000
b. P 60,000 d. P 65,000

On January 1, 2010. SABINA Corporation purchased 75% of the common stock of ARGO Company. Separate balance
sheet data for the companies at the combination date are given below:
Sabina Argo
Cash 12,000 103,000
Accounts Receivables 72,000 13,000
Inventory 66,000 19,000
Land 39,000 16,000
Plant Assets 350,000 150,000
Accum. Depreciation (120,000) (30,000)
Invesment in Argo 196,000 _______-
Total Assets 615,000 271,000
Accounts Payable 103,000 71,000
Capital Stock 400,000 150,000
Retained Earnings 112,000 50,000
Total Equities. 615,000 271,000

At the date of combination the book values of ARGO’s net assets was equal to the fair value of the net assets except for
ARGO’s inventory which has a fair value of P30,000.
5. What amount of goodwill will be reported?
a. P15,667 c. P21,000
b. P37,750 d. P50,333

6. What amount of total liability will be reported?


a. P174,000 c. P213,000
b. P284,333 d. P 90,667

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7. What is the amount of total assets?
a. P590,667 c. P751,333
b. P686,000 d. P738,750

On January 1, 2009, Paul Company purchased 90% of the common stock of Bryan Company for P81,000 over the book
value of the shares acquired. All of the differential was related to land held by Bryan. On May 1, 2010, Bryan sold the
land at a gain of P145,000. For the year 2010, Bryan reported net income of P331,000 and paid dividends of P80,000.
Paul reported income from its own separate operations of P659,000 and paid no dividends.
9. Consolidated net income for 2010 was

a. P 824,000 c. P 1,005,400
b. P 875,900 d. P 900,000

On January 1, 2009 the Blumentritt Corporation sold equipment to its wholly-owned subsidiary, Morayta Enterprises, for
P1,800,000. The equipment cost Blumentritt P2,000,000; accumulated depreciation at the time of the sale of P500,000.
Blumentritt was depreciating the equipment on the straight-line-method over twenty years with no salvage value, a
procedure that Morayta continued.

10. On the consolidated balance sheet at December 31, 2009 the cost and accumulated depreciation, respectively, should
be:
a. P1,500,000 and P600,000
b. P1,800,000 and P100,000
c. P1,800,000 and P500,000
d. P2,000,000 and P600,000

P Company acquired a 65% interest in S company in 2008. For years ended December 31, 2009 and 2010, S reported
net income of P325,000 and P390,000, respectively. During 2009, S sold merchandise to P for P70,000 at a cost of
P54,000. Two-fifths of the merchandise was later resold by P to outsiders for P38,000 during 2010. In 2010, P sold
merchandise to S for P98,000 at a profit of P24,000. One-fourth of the merchandise was resold by S to outsiders for
P30,000 during 2010.

11. Minority interest net income in 2009 is


a. P115,100 c. P111,510
b. P151,110 d. P110,510

12. Minority interest net income in 2010 is


a. P138,740 c. P134,780
b. b. P143,870 d. P137,480

CORN Corporation sells equipment with a book value of P200,000 to BEANS Company, its 75% owned subsidiary for
P160,000 on April 1, 2009. BEANS determines that the remaining useful life of the equipment is four years and that the
straight-line depreciation is appropriate. The December 31, 2009 separate financial statements of CORN and BEANS show
equipment-net of P1,000,000 and P600,000, respectively.

13. Consolidated equipment-net will be


a. P1,236,500 c. P1,623,500
b. P1,326,500 d. P1,523,600

RICH Corporation paid P1,125,000 for an 80% interest in HARD Corporation on January 1, 2009 at a price P37,500 in
excess of underlying book value. The excess was allocated P15,000 to undervalued equipment with a ten-year remaining
useful life and P22,500 to goodwill which was not impaired during the year. During 2009, HARD Corporation paid
dividend of P60,000 to RICH Corporation. The income statements of RICH and HARD for 2009 are given below:
RICH HARD
Sales P2,500,000 P1,000,000
Cost of sales (1,250,000) (500,000)
Depreciation
expense (250,000) (150,000)
Other expense (500,000) (225,000)
Net income P500,000 P125,000

14. Consolidated net income for 2009 is


a. P632,125 c. P623,125
b. P263,125 d. P632,215

15. Non-controlling interest in net assets at December 31, 2009.


a. P290,785 c. P270,985
b. P209,785 d. P290,875

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