Chapter 18

Consolidated Financial Statements (Part 3)

PROBLEM 18-1: THEORY

1. B
2. A
3. C
4. A
5. D
6. D

PROBLEM 18-2: COMPUTATIONAL

1. Solutions:
Step 1: Analysis of effects of intercompany transaction
There were no inter-company transactions during the year.

Step 2: Analysis of net assets

Acquisition Consolidation Net
Subsidiary Co.
date date change
Total net assets at carrying amounts 160,000 210,000  
Fair value adjustments at acquisition
date - -
Subsequent depreciation of FVA NIL -
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 160,000 210,000 50,000

Step 3: Goodwill computation

Formula #2 - NCI measured at fair value
Consideration transferred 180,000
Less: Previously held equity interest in the acquiree -
Total 180,000
Less: Parent's proportionate share in the net assets of (120,000
subsidiary (₱160,000 acquisition-date fair value x 75%) )
Goodwill attributable to owners of parent – Jan. 1, 20x1 60,000
Less: Parent’s share in goodwill impairment (₱10,000 x 75%) (7,500)
Goodwill attributable to owners of parent – Dec. 31, 20x1 52,500

Fair value of NCI (see given) 60,000

Less: NCI's proportionate share in the net assets of subsidiary (40,000
(₱160,000 acquisition-date fair value x 25%) )
Goodwill attributable to NCI – Jan. 1, 20x1 20,000

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 (2,500
Less: NCI’s share in goodwill impairment (₱10,000 x 25%) )
Goodwill attributable to NCI – Dec. 31, 20x1 17,500

Goodwill, net – Dec. 31, 20x1 70,000

Step 4: Non-controlling interest in net assets

Sub.'s net assets at fair value – Dec. 31, 20x1 (Step 2) 210,000
Multiply by: NCI percentage 25%
Total 52,500
Add: Goodwill to NCI net of accumulated impairment 17,50
losses 0
Non-controlling interest in net assets – Dec. 31,
20x1 70,000

Step 5: Consolidated retained earnings

Parent's retained earnings – Dec. 31, 20x1   110,000
Consolidation adjustments:
Parent's share in the net change in Sub.'s net assets 37,50
(a)
0
Unamortized deferred gain (Downstream only) -
Gain or loss on extinguishment of bonds -
(7,500
Impairment loss on goodwill attributable to Parent )
30,00
Net consolidation adjustments 0
Consolidated retained earnings – Dec. 31,
20x1   140,000 
(a)
Net change in Sub.’s net assets (Step 2) of ₱50,000 x 75% = ₱37,500.

Step 6: Consolidated profit or loss

Subsidiar
Parent y Consolidated
Profits before adjustments 240,000 50,000 290,000
Consolidation adjustments:
Unamortized def. gain - (Step ( -
1) ) ( - ) ( - )
Dividend income from ( -
subsidiary ) N/A ( - )
Gain or loss on extinguishment ( -
of bonds ) ( - ) ( - )
Net consolidation ( - ( - ) ( - )

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adjustments )
240,00
Profits before FVA 0 50,000 290,000
( -
Depreciation of FVA ) ( - ) ( - )
(7,500
Impairment loss on goodwill ) (2,500) (10,000)
Consolidated profit 232,500 47,500 280,000

Step 7: Profit or loss attributable to owners of parent and NCI

Owners Consoli-
  of parent NCI dated
Parent's profit before FVA (Step 6) 240,000 N/A 240,000
Share in Sub.’s profit before FVA (c) 37,500 12,500 50,000
Depreciation of FVA ( - ) ( - ) ( - )
Share in impairment loss on goodwill (7,500) (2,500) (10,000)
Totals 270,000 10,000 280,000
(c)
Shares in Sub.’s profit before FVA (Step 6): (50,000 x 75%); (50,000 x 25%)

Requirement (d):
Consolidated
ASSETS
Investment in subsidiary (at cost) – eliminated -
Other assets (600,000 + 235,000) 835,000
Goodwill – net (Step 3) 70,000
TOTAL ASSETS 905,000

LIABILITIES AND EQUITY

Liabilities (70,000 + 25,000) 95,000
Share capital (Parent's only) 600,000
Retained earnings (Step 5) 140,000
Equity attributable to owners of the parent 740,000
Non-controlling interest (Step 4) 70,000
Total equity 810,000
TOTAL LIABILITIES AND EQUITY 905,000

Consolidated
Revenues (300,000 + 80,000) 380,000
Operating expenses (60,000 + 30,000) (90,000)
Impairment loss on goodwill (10,000)

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Profit for the year 280,000

270,00
Profit attributable to owners of the parent (Step 7)
0
10,00
Profit attributable to NCI (Step 7)
0
280,00
Profit for the year
0

2. D

3. D

4. C
Solution:
Owners
of Net assets
  % parent % NCI of XYZ
Before the 112,50 37,50 150,000
a
transaction 75% 0 25% 0
142,50 5 7,50
After the transaction 95% 0 % 0 150,000
(30,000
Change – Inc./ (Decrease) 30,000   ) -

a
The fair value of Plastic Co.’s net assets on January 1, 20x1 is computed as
follows:
Rubber Plastic, FV of net
  Co. Inc. Consolidated assets
(a) (b) (c) (d) = (c) - (a)
Investment in
sub. 112,500 - - -
Other assets 514,500 186,000 709,500 195,000
Goodwill - - 12,000
TOTAL ASSETS 627,000 186,000 721,500 195,000

Accounts payable 109,500 45,000 154,500 45,000

 
NET ASSETS 517,500 141,000 567,000 150,000

ANSWER: NCI in net assets after the additional acquisition = 7,500

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5. B
Solution:
The entry in Rubber’s separate books is as follows:
Jan. Investment in subsidiary 100,00
1,
Cash in bank 0 100,00
20x2
to record the acquisition of additional interest in 0
Plastic, Inc.

The consolidation journal entry is as follows:

Jan. NCI (the decrease computed above) 30,000
1, Retained earnings – Rubber Co. 70,00
20x2
(squeeze) 0 100,00
Investment in subsidiary 0

Consolidated retained earnings before additional acquisition 177,000

Decrease in retained earnings (70,000)
Consolidated retained earnings after additional
acquisition 107,000

6. A
Solution:
The fair value of Plastic’s net identifiable assets is computed as follows:
Rubber Plastic, FV of net
  Co. Inc. Consolidated assets
(a) (b) (c) (d) = (c) - (a)
Investment in
sub. 112,500 - - -
Other assets 514,500 186,000 709,500 195,000
Goodwill - - 12,000
TOTAL ASSETS 627,000 186,000 721,500 195,000

Accounts payable 109,500 45,000 154,500 45,000

 
NET ASSETS 517,500 141,000 567,000 150,000

The gain or loss on the sale is computed as follows:

Jan. Cash (Consideration received) 120,00
1,
Held for trading securities* 0
20x2
Accounts payable – Plastic, Inc. 30,000
Non-controlling interest 45,000
Other assets – Plastic, Inc. 37,500 195,00

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 Goodwill 0
Gain on disposal (squeeze) 12,000
25,500

*(120,000 ÷ 60%) x 15% = 30,000

OR
Consideration received 120,000
Investment retained in the former subsidiary (at fair
30,000
value)
NCI (carrying amount - see consolidated financial statements) 37,500
Total 187,500
Less: Plastic’s net identifiable assets (see computation
(150,000)
above)
Goodwill (see consolidated financial statements) (12,000)
Gain or loss on disposal of controlling interest 25,500

PROBLEM 18-3: MULTIPLE CHOICE: COMPUTATIONAL

1. B
Solution:
Accounts receivable of Parent 52,000
Accounts receivable of Subsidiary 38,000
Less: Intercompany receivable/payable (squeeze) (12,000)
Consolidated accounts receivable 78,000

2. D

3. D The receivable from Winn will be eliminated in the consolidation. The

receivable from Carr will not be eliminated (Carr is not a subsidiary),
thus, it remains. Grey reports accounts receivable from affiliates (Carr) of
₱200,000 in its consolidated balance sheet.

4. C

5. A The purchase by the member of a consolidated group of stock of

another member of the consolidated group is treated as a treasury stock
transaction. This follows the theory of consolidated financial statements

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 presenting one economic entity. (You cannot make money selling stock
to yourself.)

6. D

7. D

8. A
Solution:
Owners
of Net assets
  % parent % NCI of XYZ
Before the 192,00 48,00 240,000
a
transaction 80% 0 20% 0
216,00 24,00
After the transaction 90% 0 10% 0 240,000
(24,000
Change – Inc./ (Decrease) 24,000   ) -

a
The fair value of Round Co.’s net assets on January 1, 20x1 is computed as
follows:

Consolidate FV of net
  Oblong Co. Round, Inc.
d assets
(a) (b) (c) (d) = (c) - (a)
Investment in
sub. 180,000 - - -
Other assets 823,200 297,600 1,135,200 312,000
Goodwill - - 7,200 -
TOTAL ASSETS 1,003,200 297,600 1,142,400 312,000
Accounts payable 175,200 72,000 247,200 72,000
 
NET ASSETS 828,000 225,600 895,200 240,000

ANSWER: NCI in net assets after the additional acquisition = 24,000

9. C
Solution:

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The entry in Oblong’s separate books is as follows:
Jan. Investment in subsidiary 100,00
1,
Cash in bank 0 100,00
20x2
to record the acquisition of additional interest in 0
Round, Inc.

The consolidation journal entry is as follows:

Jan. NCI (the decrease computed above) 24,000
1, Retained earnings – Oblong Co. 76,00
20x2
(squeeze) 0 100,00
Investment in subsidiary 0

Consolidated retained earnings before additional acquisition 283,200

Decrease in retained earnings (76,000)
Consolidated retained earnings after additional
acquisition 207,200

10. B
Solution:
The fair value of Round’s net identifiable assets is computed as follows:

Consolidate FV of net
  Oblong Co. Round, Inc.
d assets
(a) (b) (c) (d) = (c) - (a)
Investment in
sub. 180,000 - - -
Other assets 823,200 297,600 1,135,200 312,000
Goodwill - - 7,200 -
TOTAL ASSETS 1,003,200 297,600 1,142,400 312,000

Accounts payable 175,200 72,000 247,200 72,000

 
NET ASSETS 828,000 225,600 895,200 240,000

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The gain or loss on the sale is computed as follows:
Jan. Cash (Consideration received) 120,00
1,
Held for trading securities* 0
20x2
Accounts payable – Round, Inc. 40,000
Non-controlling interest 72,000
Loss on disposal 48,000
Other assets – Round, Inc. 39,200 312,00
Goodwill 0
7,200

*(120,000 ÷ 60%) x 20% = 40,000

OR
Consideration received 120,000
Investment retained in the former subsidiary (at fair
40,000
value)
NCI (carrying amount - see consolidated financial statements) 48,000
Total 208,000
Less: Round’s net identifiable assets (see computation
(240,000)
above)
Goodwill (see consolidated financial statements) (7,200)
Gain or loss on disposal of controlling interest (39,200)

PROBLEM 18-4: EXERCISES: COMPUTATIONAL

1. Solutions:

Step 1: Analysis of effects of intercompany transaction

There were no intercompany transactions during the period.

Step 2: Analysis of net assets

Acquisition Consolidation Net
Night Co.
date date change
Total net assets at carrying amounts 192,000 252,000  
Fair value adjustments at acquisition
date - -

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Subsequent depreciation of FVA NIL -
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 192,000 252,000 60,000

Step 3: Goodwill computation

Formula #2 - NCI measured at fair value

Consideration transferred 216,000
Less: Previously held equity interest in the acquiree -
Total 216,000
Less: Parent's proportionate share in the net assets of (144,000
subsidiary (₱192,000 acquisition-date fair value x 75%) )
Goodwill attributable to owners of parent – Jan. 1, 20x1 72,000
Less: Parent’s share in goodwill impairment (₱8,000 x 75%) (6,000)
Goodwill attributable to owners of parent – Dec. 31, 20x1 66,000

Fair value of NCI (see given) 72,000

Less: NCI's proportionate share in the net assets of subsidiary (48,000
(₱192,000 acquisition-date fair value x 25%) )
Goodwill attributable to NCI – Jan. 1, 20x1 24,000
(2,000
Less: NCI’s share in goodwill impairment (₱8,000 x 25%) )
Goodwill attributable to NCI – Dec. 31, 20x1 22,000

Goodwill, net – Dec. 31, 20x1 88,000

Step 4: Non-controlling interest in net assets

Night's net assets at fair value – Dec. 31, 20x1 (Step 2) 252,000
Multiply by: NCI percentage 25%
Total 63,000
Add: Goodwill to NCI net of accumulated impairment 22,00
losses 0
Non-controlling interest in net assets – Dec. 31,
20x1 85,000

Step 5: Consolidated retained earnings

Day's retained earnings – Dec. 31, 20x1   132,000
Consolidation adjustments:
Day's share in the net change in Night's net assets
(a)
45,000
Unamortized deferred gain (Downstream only) -
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable to
Parent (6,000)
Net consolidation adjustments 39,00

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 0
Consolidated retained earnings – Dec. 31,
20x1   171,000 
(a)
Net change in Night’s net assets (Step 2) of ₱60,000 x 75% = ₱45,000.

Step 6: Consolidated profit or loss

Subsidiar
Parent y Consolidated
Profits before adjustments 288,000 60,000 348,000
Consolidation adjustments:
( -
Unamortized def. gain ) ( - ) ( - )
Dividend income from ( -
subsidiary ) N/A ( - )
Gain or loss on extinguishment ( -
of bonds ) ( - ) ( - )
Net consolidation ( -
adjustments ) ( - ) ( - )
288,00
Profits before FVA 0 60,000 348,000
( -
Depreciation of FVA ) ( - ) ( - )
(6,000
Impairment loss on goodwill ) (2,000) (8,000)
Consolidated profit 282,000 58,000 340,000

Step 7: Profit or loss attributable to owners of parent and NCI

Owners Consoli-
  of parent NCI dated
Day's profit before FVA (Step 6) 288,000 N/A 288,000
Share in Night’s profit before FVA (c) 45,000 15,000 60,000
Depreciation of FVA ( - ) ( - ) ( - )
Share in impairment loss on goodwill (6,000) (2,000) (8,000)
Totals 327,000 13,000 340,000
(c)
Shares in Night’s profit before FVA (Step 6): (60,000 x 75%); (60,000 x 25%)

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Requirement (d):
Consolidated
ASSETS
Investment in subsidiary (at cost) – eliminated -
Other assets (720,000 + 282,000) 1,002,000
Goodwill – net (Step 3) 88,000
TOTAL ASSETS 1,090,000

LIABILITIES AND EQUITY

Liabilities (84,000 + 30,000) 114,000
Share capital (Day's only) 720,000
Retained earnings (Step 5) 171,000
Equity attributable to owners of the parent 891,000
Non-controlling interest (Step 4) 85,000
Total equity 976,000
TOTAL LIABILITIES AND EQUITY 1,090,000

Consolidated
Revenues (360,000 + 96,000) 456,000
Operating expenses (72,000 + 36,000) (108,000)
(8,000
Impairment loss on goodwill (Step 3)
)
Profit for the year 340,000

327,00
Profit attributable to owners of the parent (Step 7)
0
13,00
Profit attributable to NCI (Step 7)
0
340,00
Profit for the year
0

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