After December 31, 20x4, no more book or workpaper entries relating to this equipment

will be required, because by that date the amount of gain recorded by the affiliates is
equal to the amount of gain considered realized in the consolidated financial
statements. The equality of the recorded and consolidated amounts is confirmed in
Table 5-3.

Table 5-3: Reconciliation of Net Income Recorded on Books with Consolidated

Net Income Reported on consolidated Financial Statements

Equity Method
In applying the equity method, the accounting objective is to report the subsidiary's
(investor's) investment and investment income reflecting the close relationship between
parent and subsidiaries.

Consolidated financial statement amounts are the same regardless of whether a

parent company uses the cost model (or fair value model) or equity method to
account for a subsidiary's results of operations. However, the working paper
eliminations used in both methods are different as illustrated in this chapter and on the
succeeding chapters.

The amounts in the consolidated financial statements are amounts appearing in the
books of parent company under the equity method which ensure particularly the
following aspects:

1. The parent company's net income as reported is exactly equal to the

controlling interest in consolidated net income on the consolidated financial
statements.
2. The parent company's retained earnings is exactly equal to the consolidated
retained earnings on the consolidated financial statements.
 3. The parent company's common stock is exactly equal to the consolidated
common stock on the consolidated financial statements.
4. The parent company's additional paid-in capital is exactly equal to the
consolidated additional paid-in capital on the consolidated financial
statements.
5. The parent company's -dividends declared or paid is exactly equal to the
consolidated dividends declared or paid on the consolidated financial
statements.

Table 5-4: Summary of Workpaper Elimination Entires Intercompany Profit -

Equity Method; Intercompany gain on Sale of Equipment

Selling Affiliate is the Parent - Selling Affiliate is the Subsidiary -

Downstream Sales Upstream Sales

Entries in Year of Intercompany Sale:

To eliminate unrealized gain on intercompany sale in year of sale and to restore equipment to its original
cost and accumulated depreciation (or book value) to its balance at the date of the intercompany sale.

To reverse the amount (if any) of excess depreciation recorded during the current year, thus recognizing
an equivalent amount of intercompany profit as realized.

Entries in Years Subsequent to Year of Intercompany Sale:

To reduce consolidated retained earnings for To reduce the controlling and NCI for their
the intercompany gain, to restore accumulated respective shares of the intercompany gain, to
depreciation and equipment to their original restore accumulated depreciation and
balances at the date of intercompany sale. equipment to their original balances at the date
of intercompany sale.
To reverse the amount {if any) of excess depreciation recorded during the current year, thus recognizing
an equivalent amount of intercompany profit as realized.

Illustration 5-6: 80%-Owned Subsidiary: Equity Method, Partial-goodwill, with

Goodwill Impairment Loss Recognized in the books of Subsidiary

Assume that on January 1, 20x4, Perfect Company acquires 80% of the common stock
of Son Company for P310,000. At that time, the fair value of the 20% non-controlling
interest is estimated to be P77,500. On that the following assets and liabilities of Son
Company had book values that were different from their respective market values:

All other assets and liabilities had book values approximately equal to their respective
fair values.

On January 1, 20x4, the equipment and buildings had a remaining life of 8 and 4 years,
respectively. Inventory is sold in 20x4 and FIFO inventory costing is used. Goodwill, if
any, is reduced by a P3,125 impairment loss during 20x4 based on the fair value basis
(or full-goodwill), meaning the management has determined that the goodwill arising in
the acquisition of Son Company relates proportionately to the controlling and non-
controlling interests, as does the impairment.

On December 31, 20x4, intercompany accounts payable and receivable arising from
intercompany sales was fully settled.

Trial balances for the companies for the year ended December 31, 20x4 are as follows:
From the trial balances presented above the following summary for 20X4 results of
operations are as follows:
The resulting ownership situation can be viewed in the schedule of determination and
allocation of excess.

Schedule of Determination and Allocation of Excess (Partial-goodwill)

Date of Acquisition - January 1, 20X4

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

The buildings and equipment will be further analyzed for consolidation purposes as
follows:

A summary or depreciation and amortization adjustments is as follows:

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:
In this case, the goodwill was proportional to the controlling interest of 80% and non-
controlling interest of 20% computed as follows:

The goodwill impairment loss would be allocated as follows:

The unrealized and gain on intercompany sales for 20X4 are as follows:

* selling price less book value

** unrealized gain divided by remaining life; 20X4 - P2,500 x 9/12 = P1,875

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:
Thus, the investment balance and investment income in the books of Perfect Company
are as follows:
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:
* downstream sale (should be multiplied by 100%)
** upstream sale (should be multiplied by 80%)

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,
Subsidiary accounts are adjusted to full fair value regardless of the controlling interest
percentage or option used to value non-controlling interest or goodwill.

The trial balance data for Perfect and Son Company are entered in the consolidation
workpaper, the separate financial statements of the two companies, the eliminating
entries, and the consolidated totals for the financial statements on December 31, 20x4
as shown in Figure 5-9.

Figure 5-9: Worksheet for Consolidated Financial Statements, December 31, 20x4.
Equity Method (Partial-goodwill)
80%-Owned Subsidiary
December 31, 20x4 (First Year after Acquisition)
The consolidated net income, non-controlling interests in net income, consolidated
retained earnings on January 1, 20x4 and December 31, 20x4, and non-controlling
interests on January 1, 20x4 and December 31, 20x4 can be verified in Figure 5-9.