Business Combi and Conso Handout

AFAR REVIEW NOTES
Business combinations and consolidated financial statements

CONTROL PREMIUM
 Additional investment
 Part of purchase price
 Affects goodwill/(gain)
 Ignored in computing NCI
CONTINGENT CONSIDERATION
ERRATUM:
Sorry, sets 4 and 2, mali nasabi ko sa klase. Measurement period is always one year. Adjustments to goodwill (gain) can be
done in the measurement period. Beyond the measurement period, any adjustment to the ELCC will now affect P/L instead of
goodwill (gain).
WORKING PAPER ELIMINATION ENTRIES:
 DIVIDEND RECEIVED
Dividend income xx
Partial NCI xx
Dividends declared - Subsidiary xx
 SUBSIDIARY-SHE
Ordinary Share - Subsidiary xx
Share Premium - Subsidiary xx
Retained Earnings - Subsidiary xx
Investment in Subsidiary xx
NCI xx
 OVERVALUATION OF ASSETS (OVA), UNDERVALUATION OF ASSETS (UVA), GOODWILL

Equipment xx
Inventory xx
Goodwill xx
Investment in Subsidiary xx
NCI xx
 AMORTIZATION OF IMPAIRMENT LOSS

Operating Expense xx
PPE, net xx
Impairment Loss xx
Goodwill xx
Cost of Sales xx
Inventory xx
 INTERCOMPANY SALES AND PURCHASES

Sales xx
Cost of Sales xx
 UNREALIZED PROFIT IN ENDING INVENTORY (UPEI)

Cost of Sales xx
Inventory xx
Patrick Louie E. Reyes, CPA http://bit.ly/afarconso Page 1 of 16

 REALIZED PROFIT IN BEGINNING INVENTORY (RPBI)
Retained Earnings – Parent xx
NCI (only for upstream sales) xx
Cost of Sales xx
COMPUTATION OF INCOME (I call it the “mega formula”)

Parent Subsidiary
SUBSEQUENT TO DATE OF ACQUISITION
1. Parent net income (full) xx
2. Dividend received (Dividend-Subsidiary x Controlling interest rate) (xx)
INCOME FROM OPERATIONS OF PARENT / SEPARATE INCOME - PARENT xx
3. Subsidiary Net Income (fractional year, if applicable) xx xx
4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) (xx) (xx)
5. Amortization of OVA (OVA/remaining life x fractional year, if applicable) xx xx
6. Gain xx xx
7. Impairment Loss (xx) (xx)
INTERCOMPANY SALE OF INVENTORY
8. UPEI – downstream (xx)
9. UPEI – upstream (xx) (xx)
10. RPBI – downstream xx
11. RPBI – upstream xx xx
INTERCOMPANY SALE OF PPE
12. Unrealized gain – down (year of sale) (xx)
13. Unrealized gain – up (year of sale) (xx) (xx)
14. Unrealized loss – down (year of sale) xx
15. Unrealized loss – up (year of sale) xx xx
rd
16. Realized gain – down (depreciation, sale to 3 party) xx
rd
17. Realized gain – up (depreciation, sale to 3 party) xx xx
18. Realized loss – down (depreciation, sale to 3rd party) (xx)
19. Realized loss – up (depreciation, sale to 3rd party) (xx) (xx)
INTERCOMPANY SALE OF LAND
24. Realized gain – down (sale to 3rd party) xx
25. Realized gain – up (sale to 3rd party) xx xx
26. Realized loss – down (sale to 3rd party) (xx)
27. Realized loss – up (sale to 3rd party) (xx) (xx)
NET INCOME (CNI-P and NCI-NI) xx xx
Other Comprehensive Income xx xx
COMPREHENSIVE INCOME (CCI-P and NCI-CI) xx xx
Consolidated Net Income = CNI-P + NCI-NI ; Consolidated Comprehensive Income = CCI-P + NCI-CI
Other Formulae:
Non-controlling Interest, beginning ₱xx Sales – Parent ₱xx
Non-controlling Interest – Net Income xx Sales – Subsidiary xx
Dividend Share (xx) Intercompany Sales & Purchases at Selling Price (xx)
Non-controlling Interest, end ₱xx Consolidated Sales ₱xx
Retained Earnings – Parent (date of acquisition) ₱xx Cost of Sales – Parent ₱xx
Consolidated Net Income – Parent xx Cost of Sales – Subsidiary xx
Dividends declared by Parent (xx) Intercompany Sales & Purchases at Selling Price (xx)
Consolidated Retained Earnings ₱xx Unrealized Profit in Ending Inventory (UPEI) xx
Ordinary Share – Parent ₱xx Realized Profit in Beginning Inventory (RPBI) (xx)
Share Premium – Parent xx Amortization of Undervalued Assets xx
Consolidated Retained Earnings xx Amortization of Overvalued Assets (xx)
Non-controlling Interest xx Consolidated Cost of Sales ₱xx
Consolidated Shareholder’s Equity ₱xx

Shareholder’s Equity - Subsidiary, end ₱xx Consolidated Sales ₱xx
Net Income of Subsidiary xx Consolidated Cost of Sales (xx)
Dividends declared by Subsidiary (xx) Consolidated Gross Profit ₱xx
Shareholder’s Equity – Subsidiary, at book value ₱xx
Overvalued Assets (OVA) (xx)
Undervalued Assets (UVA) xx
Amortization of OVA xx
Amortization of UVA (xx)
Net Assets at fair value ₱xx
Inventory – Parent, at book value ₱xx Expenses – Parent ₱xx
Inventory – Subsidiary, at book value xx Expenses – Subsidiary xx
Undervaluation of Inventory xx Amortization of UVA xx
Amortization of Undervaluation of Inventory (xx) Amortization of OVA (xx)
Overvaluation of Inventory (xx) Realized Loss – Depreciation xx
Amortization of Undervaluation of Inventory xx Realized Gain – Depreciation (xx)
UPEI xx Consolidated Expense ₱xx
Consolidated Inventory ₱xx
Sample problem: #119-122, Practical Accounting 2 (2013 ed.) by Antonio J. Dayag
On January 1, 2013, Bristol Company acquired 80% of Animation Company’s common stock for P280,000 cash. At that date,
Animation rfeported (sic) common stock outstanding of P200,000 and retained earnings of P100,000 and the fair value of the
non-controlling interest was P70,000. The book values and fair values of Animation’s assets and liabilities were equal, except for
other intangible assets which had a fair value of P50,000 greater than book value and an 8-year remaining life. Animation reported
the following data for 2013 and 2014:
Year Net Income Comprehensive Income Dividends Paid

2013 P 25,000 P 30,000 P 5,000
2014 35,000 45,000 10,000
Bristol reported separate net income from own operations of P100,000 and paid dividends of P30,000 for both the years.
119. What is the amount of consolidated comprehensive income reported for 2013?
a. 125,000 b. 123,750
c. 118,750 d. 130,000
120. Using the same information in No. 120 (sic), what is the amount of comprehensive income attributable to the controlling
interest for 2013?
a. 123,750 b. 118,750
c. 119,000 d. 104,000
121. Using the same information in No. 120 (sic), what is the amount of consolidated comprehensive income for 2014?
a. 145,000 b. 135,000
c. 138,750 d. 128,750
122. Using the same information in No. 120 (sic), what is the amount of comprehensive income attributable to the controlling
interest for 2014?
a. 138,750 b. 131,000
c. 128,750 d. 135,000
Solution:
Fair value of consideration given 280,000 Amortization of
Fair value of NCI 70,000 undervaluation of
Fair value of Subsidiary 350,000 assets: 50,000/8 years
Book value of Subsidiary’s SHE (200,000 + 100,000) (300,000) = 6,250 per
Allocated excess 50,000 year
Increase in intangible assets  undervaluation (50,000)
Goodwill 0

(using the “mega formula”) FOR YEAR 2013:
Parent Subsidiary
1. Parent net income (full) 100,000
3. Subsidiary Net Income (fractional year, if applicable) 20,000 5,000
4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) (5,000) (1,250)
6. Gain plus other comprehensive income xx xx
16. Realized gain – down (depreciation, sale to 3rd party) xx
17. Realized gain – up (depreciation, sale to 3rd party) xx xx
NET INCOME 115,000 3,750
Other Comprehensive Income 4,000 1,000
COMPREHENSIVE INCOME 119,000 4,750
Consolidated Net Income: 115,000 + 3,750 = 118,750

Consolidated Comprehensive Income: 119,000 + 4,750 = 123,750
(using the “mega formula”) FOR YEAR 2014:

Parent Subsidiary
4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) (5,000) (1,250)
6. Gain plus other comprehensive income xx xx

NET INCOME 123,000 5,750
Other Comprehensive Income 8,000 2,000
COMPREHENSIVE INCOME 131,000 7,750
Consolidated Net Income: 123,000 + 5,750 = 128,750

Consolidated Comprehensive Income: 131,000 + 7,750 = 138,750
INTER-COMPANY SALES OF INVENTORY
2 goals of Working Paper Elimination Entries:
 Elimination of the effects in the Statement of Comprehensive Income of the inter-company sale in the period of sale,
removing the sales revenue from the intercompany sale and the related cost of goods sold recorded by the selling
affiliate.
 Elimination from the inventory on the Statement of Financial Position of any profit or loss on the intercompany sale that
has not been realized by resale of said inventories to outside parties.
Unrealized Profit in Ending Inventory (UPEI) – merchandise purchased from affiliated company (either parent or subsidiary)
that remains unsold on the Balance Sheet date results in the overstatement of the purchaser’s ending inventory.
Working Paper Elimination Entry: see page 1
Realized Profit in Beginning Inventory (RPBI) – on a FIFO basis, the UPEI in the previous year gets realized through sales to
outside parties in the next year.
Working Paper Elimination Entry: see page 2
Nota bene: RPBI HAS NO IMPACT ON CONSOLIDATED INVENTORY
Sample problem: #133-135, ibid.
Income statement information for the year 2012 for Perfect Corporation and its 60% owned subsidiary, Seven Corporation is as
follows:
Perfect Seven
Sales 900,000 350,000
Cost of Sales (400,000) (250,000)
Gross Profit 500,000 100,000
Operating expenses (250,000) (50,000)
Seven’s Net Income 50,000
Perfect’s Net Income 250,000

Intercompany sales for 2012 are upstream (from Seven to Perfect) and total 100,000. Perfect’s December 31, 2011 and December
31, 2012 inventories contain unrealized profits of 5,000 and 10,000, respectively.
133. The consolidated sales for 2012:

a. 900,000 b. 1,150,000
c. 1,190,000 d. 1,250,000
134. The consolidated cost of sales for 2012:

a. 545,000 b. 550,000
c. 555,000 d. 560,000
135. The profit attributable to equity holders of parent or CNI contributable to Controlling Interests for 2012:
a. 277,000 b. 280,000
c. 282,000 d. 305,000
Solution (using other formulae):

Sales – Parent ₱900,000
Sales – Subsidiary 350,000
Intercompany Sales & Purchases at Selling Price (100,000)
Consolidated Sales ₱1,150,000
Cost of Sales – Parent ₱400,000

Cost of Sales – Subsidiary 250,000
Intercompany Sales & Purchases at Selling Price (100,000)
Unrealized Profit in Ending Inventory (UPEI) 10,000
Realized Profit in Beginning Inventory (RPBI) (5,000)
Amortization of Undervalued Assets xx
Amortization of Overvalued Assets (xx)
Consolidated Cost of Sales ₱555,000
Solution (using the “mega formula”)
Parent Subsidiary
INCOME FROM OPERATIONS OF PARENT / SEPARATE INCOME - PARENT 250,000
6. Gain xx xx
9. UPEI – upstream (6,000) (4,000)
11. RPBI – upstream 3,000 2,000

NET INCOME (CNI-P and NCI-NI) 277,000 18,000
INTER-COMPANY SALES OF LAND
The selling entity’s gain must be eliminated since the land owned by a combined must be reported at original/historical cost,
regardless of who (between the parent and subsidiary) holds the land.
SALE ELIMINATION
Downstream Against controlling interest
Upstream – wholly owned Against controlling interest
Upstream – partially owned Proportionately against controlling interest and NCI
Working Paper Elimination Entries:
Gain on sale of land xx

Land xx
If subsequently sold to outside parties,
Retained earnings xx
Gain on sale of land xx
INTER-COMPANY SALES OF PPE OR DEPRECIABLE ASSETS
The working paper elimination entries must be able to:
 Eliminate the gain

 Restore the accumulated depreciation
 Restore the cost of asset
In short, the working paper elimination entries restores the asset to its value AS IF THE INTER-COMPANY SALES DIDN’T
HAPPEN.
Example:
The seller sells an equipment costing P90,000 and 30% (Useful life of 10 years, 3 years has passed) depreciated to a buyer who
is an affiliate for P70,000.
Entries to recognize the inter-company sales:

Seller Buyer
Cash 70,000 Equipment 70,000

Accumulated depreciation 27,000 Cash 70,000
Equipment 90,000
Gain on sale of equipment 7,000
Working Paper Elimination Entry:

Gain on sale of equipment 7,000
Equipment 20,000
Accumulated Depreciation 27,000

MORE SAMPLE PROBLEMS TO TEST THE “OTHER FORMULAE” AND OTHER PARTS OF THE “MEGA FORMULA”
Problems 94-106, ibid. (names of companies changed)
On January 1, 2011, Patrick Company acquired 90% of Star Company in exchange for 5,400 shares of P10 par common stock
having a market value of 120,600. Patrick and Star condensed balance sheets were as follows:
Patrick Company and Star Company

Balance Sheets at January 1, 2011
(before combination)
Patrick Company Star Company
ASSETS
Cash 30,900 37,400
Accounts receivable, net 34,200 9,100
Inventories 22,900 16,100
Equipment, net 179,000 40,000
Patents 10,000
TOTAL ASSETS 267,000 112,600
LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable 4,000 6,600
Bonds payable, 10% 100,000
Common stock, P10 par 100,000 50,000
Additional paid-in capital 15,000 15,000
Retained earnings 48,000 41,000
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY 267,000 112,600
At the date of acquisition, all assets and liabilities of Star Company have book value approximately equal to their respective
market values except the following as determined by appraisal as follows:
Inventories (FIFO method) 17,100

Equipment, net (remaining life: 4 years) 48,000
Patents (remaining life: 10 years) 13,000
Goodwill (no impairment)
94. Compute for the amount of partial goodwill on January 1, 2011.

a. 2,600 b. 3,800
c. 14,400 d. 25,200
95. Using the same information in No. 94, compute the non-controlling interests (in net assets) on January 1, 2011.
a. 10,600 b. 11,200
c. 11,800 d. 13,090
96. Using the same information in No. 94, compute the consolidated retained earnings, January 1, 2011.
a. 48,000 b. 52,100
c. 84,900 d. 89,000
97. Using the same information in No. 94, compute the equity holders of parent – retained earnings, January 1, 2011.
a. 48,000 b. 52,100
c. 84,900 d. 89,000
In addition to the information in No. 94, assuming that on December 31, 2011, the following results were given:
Dividends Paid Net Income
Patrick Company 15,000 30,200
Star Company 4,000 9,400
98. Using cost method to record results of operations, compute the investment in Star Company balance on December 31, 2011.
a. 0 b. 120,600
c. 122,160 d. 125,460

99. Using the same information in Nos. 94 and 98, compute the dividend income for 2011 using the cost method.
a. 0 b. 3,600
c. 4,000 d. 8,400
100. Using the same information in Nos. 94 and 98, compute the non-controlling interest in net income on December 31, 2011.
a. 0 b. 540
c. 610 d. 940
101. Using the same information in Nos. 94 and 98, compute the non-controlling interest on December 31, 2011.
a. 10,600 b. 11,140
c. 12,010 d. 12,300
102. Using the same information in Nos. 94 and 98, compute the profit for the period attributable to equity holders of parent
on December 31, 2011.
a. 26,600 b. 32,090
c. 36,000 d. 44,100
103. Using the same information in Nos. 94 and 98, compute the consolidated group net income on December 31, 2011.
a. 26,600 b. 32,090
c. 32,700 d. 44,100
104. Using the same information in Nos. 94 and 98, compute the consolidated retained earnings, December 31, 2011.
a. 64,760 b. 65,090
c. 69,400 d. 69,800
105. Using the same information in Nos. 94 and 98, compute the Equity holders of Parent – Retained earnings, December 31,
2011.
a. 64,760 b. 65,090
c. 69,400 d. 69,800
106. Using the same information in Nos. 94 and 98, compute the consolidated total equity (stockholders’ equity on December
31, 2011.
a. 108,090 b. 300,690
c. 312,700 d. 317,410
Solutions:
94. Remember my PowerPoint presentation?
Let’s use the same formula:

FV of consideration transferred 120,600
Book value of net assets (106,000 x 90%) (95,400)
Allocated excess 25,200
OVA [(1,000+8,000+3,000) x 90%] (10,800)
Partial goodwill 14,400

95. FV of net assets acquired: 118,000
NCI % 10%
NCI 11,800
96, 97. Retained Earnings – Parent (date of acquisition) ₱48,000

Consolidated Net Income – Parent xx
Dividends declared by Parent (xx)
Consolidated Retained Earnings, 1/1/2011 ₱48,000
98. FV of consideration given by parent: 120,600 (cost method)
99. Dividend received by parent = dividend paid by subsidiary = 4,000

x NCI % 90%
Dividend Income = 3,600
100. Use the “mega formula”

Parent Subsidiary
2. Dividend received (Dividend-Subsidiary x Controlling interest rate) (3,600)
3. Subsidiary Net Income (fractional year, if applicable) 8,460 940
4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) (2,970) (330)*
6. Gain xx xx
NET INCOME (CNI-P and NCI-NI) 32,090 610
* Amortization of UVA:
Inventories: 1,000/year
Equipment: 8,000/4 years
Patent: 3,000/10 years

101. Shareholder’s Equity – Subsidiary, end (50,000+15,000+41,000) ₱106,000
Net Income of Subsidiary 9,400
Dividends declared by Subsidiary (4,000)
Shareholder’s Equity – Subsidiary, at book value ₱111,400
Overvalued Assets (OVA) (xx)
Undervalued Assets (UVA) (1,000+8,000+3,000) 12,000
Amortization of OVA xx
Amortization of UVA (3,300)
Net Assets at fair value ₱120,100
NCI in net assets: 120,000 x 10% = 12,010
102. Refer to “mega formula” (No. 100)
103. Consolidated Net Income = CNI-P + NCI-NI = 32,090 + 610 = 32,700
104, 105. Retained Earnings – Parent (date of acquisition) ₱48,000

Consolidated Net Income – Parent (see No. 103) 32,090
Dividends declared by Parent (15,000)
Consolidated Retained Earnings, 12/31/2011 ₱65,090
106. Ordinary Share – Parent (100,000 + consideration: 5,400 shares x 10 par) ₱154,000
Share Premium – Parent (15,000 + APIC on consideration: 120,600-54,000) 81,600
Consolidated Retained Earnings (see No. 104, 105) 65,090
Non-controlling Interest (see No. 101) 12,010
Consolidated Shareholder’s Equity ₱312,700
Problem 160-162, ibid.
Saul is a 90%-owned subsidiary of Paul Corporation, acquired at book value several years ago. Comparative separate company
income statements for these affiliated corporation for 2012 are as follows:
Paul Corp. Saul Corp.

Sales 1,500,000 700,000
Dividend income 108,000
Gain on sale of building 30,000
Income credits 1,638,000 700,000
Cost of sales 1,000,000 400,000
Operating expenses 300,000 150,000
Income debits 1,300,000 550,000
Net income credits over debits 338,000 150,000
On January 5, 2012, Paul sold a building with a 10-year remaining useful life to Saul at a gain of 30,000. Saul paid dividends of
120,000 during 2012.
160. The NCI-NI for 2012 is

a. 12,000 b. 12,300
c. 15,000 d. 15,300
161. The profit attributable to equity holders of Parent or CNI-P for 2012 is
a. 342,000 b. 340,700
c. 338,000 d. 335,000
162. The Consolidated/group net income for 2012 is

a. 342,000 b. 353,000
c. 380,000 d. 443,000

Solutions (using the “mega formula”)
Parent Subsidiary
2. Dividend received (Dividend-Subsidiary x Controlling interest rate) (108,000)
6. Gain xx xx
12. Unrealized gain – down (year of sale) (30,000)
16. Realized gain – down (depreciation, sale to 3rd party) 3,000
Consolidated Net Income = CNI-P + NCI-NI = 338,000 + 15,000 = 353,000
Problems 163-166, ibid.
Silver Corporation is a 90% owned subsidiary of Proto Corporation, acquired several years ago at book value. For the years 2011
and 2012, Proto and Silver report the following:
2011 2012
Proto’s separate income (IFOOP/SIP) 300,000 400,000
Silver’s net income 80,000 60,000
The only inter-company profit transaction between Proto and Silver during 2011 and 2012 was the January 1, 2011 sale of land.
The land had a book value of 20,000 and was sold inter-company for 30,000, its appraised value at the time of sale.
163. If the land was sold by Proto to Silver (downstream sales) and that Silver still owns the land at December 31, 2012, compute
the CNI-P for 2011 and 2012.
a. 363,000; 454,000 b. 362,000; 454,000
c. 372,000; 460,000 d. 362,000; 460,000

164. Using the same information in No. 163, the Consolidated/group net incomes for 2011 and 2012 are:
a. 362,000; 454,000 b. 380,000; 460,000
c. 370,000; 460,000 d. 372,000; 460,000
165. Using the same information in No. 163, except that the land was sold by Silver to Proto (upstream sales) and Proto still
owns the land at December 31, 2012, compute the CNI-P for 2011 and 2012.
a. 363,000; 454,000 b. 362,000; 454,000
c. 370,000; 460,000 d. 363,000; 460,000
166. Using the same information in No. 165, the Consolidated/group net incomes for 2011 and 2012 are:
a. 362,000; 454,000 b. 380,000; 460,000
c. 370,000; 460,000 d. 372,000; 460,000
Solutions (mega formula)
2011 - downstream
Parent Subsidiary
6. Gain xx xx
20. Unrealized gain – down (year of sale) (10,000)

2012 - downstream
Parent Subsidiary
6. Gain xx xx

2011 - upstream
Parent Subsidiary
6. Gain xx xx
21. Unrealized gain – up (year of sale) (9,000) (1,000)
Consolidated Net Income = CNI-P + NCI-NI = 363,000 +7,000 = 370,000
2012 – upstream, same with 2011 – upstream

Problem 140, ibid.
Power Co. is a manufacturer and Slack Co., its 100%-owned subsidiary, is a retailer. The companies are vertically integrated.
Thus, Slack purchases all of its inventory from Power. On January 1, 2012, Slack’s inventory was 30,000. For the year ended
December 31, 2012, its purchases were 150,000, and its cost of sales was 166,500. Power’s sales to Slack reflect a 50% mark-up
on cost. Slack then resells the goods to outside entities at a 100% mark-up on cost. At what amount should the intercompany
inventory purchased from power be reported in the consolidated balance sheet at December 31, 2012?
a. 3,000 b. 9,000
c. 13,500 d. 46,000
Solution (other formulae)
Inventory – Parent, at book value ₱xx

Inventory – Subsidiary, at book value (30,000+150,000-166,500) 13,500
Undervaluation of Inventory xx
Amortization of Undervaluation of Inventory (xx)
Overvaluation of Inventory (xx)
Amortization of Undervaluation of Inventory xx
UPEI (Ending inventory of 13,500/150% x 50% 4,500
Consolidated Inventory ₱9,000
Problem 193, ibid.
During 2012, Pard Corp. sold goods to its 80% owned subsidiary, Seed Corp. At December 31, 2012, ½ of these goods were
included in Seed’s ending inventory. Reported 2012 selling expenses were 1,100,000 and 400,000 for Pard and Seed,
respectively. Pard’s selling expenses included 50,000 in freight-out costs for goods sold to Seed. What amount of selling expenses
should be reported in the consolidated financial statements?
a. 1,500,000 b. 1,480,000
c. 1,475,000 d. 1,450,000
Solution (other formulae)
Expenses – Parent ₱1,100,000

Expenses – Subsidiary 400,000
Amortization of UVA xx
Amortization of OVA (xx)
Realized Loss – Depreciation xx
Realized Gain – Depreciation (xx)
Inventoriable cost (not to be included as expense) (50,000)
Consolidated Expense ₱1,450,000
Good luck and God bless sa exams niyo! Sorry this came super late. Alam niyo naman, busy 7 days a week.

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AFAR REVIEW NOTES

Business combinations and consolidated financial statements

WORKING PAPER ELIMINATION ENTRIES:

 OVERVALUATION OF ASSETS (OVA), UNDERVALUATION OF ASSETS (UVA), GOODWILL

 AMORTIZATION OF IMPAIRMENT LOSS

 INTERCOMPANY SALES AND PURCHASES

 UNREALIZED PROFIT IN ENDING INVENTORY (UPEI)

Patrick Louie E. Reyes, CPA http://bit.ly/afarconso Page 1 of 16

COMPUTATION OF INCOME (I call it the “mega formula”)

Patrick Louie E. Reyes, CPA http://bit.ly/afarconso Page 2 of 16

Sample problem: #119-122, Practical Accounting 2 (2013 ed.) by Antonio J. Dayag

Year Net Income Comprehensive Income Dividends Paid

Patrick Louie E. Reyes, CPA http://bit.ly/afarconso Page 3 of 16

Consolidated Net Income: 115,000 + 3,750 = 118,750

(using the “mega formula”) FOR YEAR 2014:

Patrick Louie E. Reyes, CPA http://bit.ly/afarconso Page 4 of 16

Consolidated Net Income: 123,000 + 5,750 = 128,750

INTER-COMPANY SALES OF INVENTORY

2 goals of Working Paper Elimination Entries:

Working Paper Elimination Entry: see page 1

Working Paper Elimination Entry: see page 2

Nota bene: RPBI HAS NO IMPACT ON CONSOLIDATED INVENTORY

Sample problem: #133-135, ibid.

Patrick Louie E. Reyes, CPA http://bit.ly/afarconso Page 5 of 16

133. The consolidated sales for 2012:

134. The consolidated cost of sales for 2012:

Solution (using other formulae):

Cost of Sales – Parent ₱400,000

Solution (using the “mega formula”)

Patrick Louie E. Reyes, CPA http://bit.ly/afarconso Page 6 of 16

INTER-COMPANY SALES OF LAND

Working Paper Elimination Entries:

Gain on sale of land xx

If subsequently sold to outside parties,

INTER-COMPANY SALES OF PPE OR DEPRECIABLE ASSETS

The working paper elimination entries must be able to:

 Eliminate the gain

Entries to recognize the inter-company sales:

Cash 70,000 Equipment 70,000

Working Paper Elimination Entry:

Patrick Louie E. Reyes, CPA http://bit.ly/afarconso Page 7 of 16

Problems 94-106, ibid. (names of companies changed)

Patrick Company and Star Company

LIABILITIES AND STOCKHOLDERS’ EQUITY

Inventories (FIFO method) 17,100

94. Compute for the amount of partial goodwill on January 1, 2011.

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94. Remember my PowerPoint presentation?

Let’s use the same formula:

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96, 97. Retained Earnings – Parent (date of acquisition) ₱48,000

98. FV of consideration given by parent: 120,600 (cost method)

99. Dividend received by parent = dividend paid by subsidiary = 4,000

100. Use the “mega formula”

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103. Consolidated Net Income = CNI-P + NCI-NI = 32,090 + 610 = 32,700

104, 105. Retained Earnings – Parent (date of acquisition) ₱48,000

Paul Corp. Saul Corp.

160. The NCI-NI for 2012 is

162. The Consolidated/group net income for 2012 is

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Consolidated Net Income = CNI-P + NCI-NI = 338,000 + 15,000 = 353,000

Problems 163-166, ibid.

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