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ABC Chapter 4 - Accounting for Business Combinations by

Millan 2020
Accountancy (Universal College of Parañaque)

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Chapter 4
 Home
Consolidated
Consolidated Financial Statements (Part 1)
 Saved

PROBLEM 1: MULTIPLE CHOICE - THEORY

 Bestsellers

 Books 1. A 6. B
2. D 7. D
 Audiobooks
3. C 8. A
 Magazines
4. A 9. C
 Podcasts 5. B 10. C
11. A
 Sheet Music

 Snapshots

PROBLEM 2: FOR CLASSROOM DISCUSSION

 Documents
1. Solutions:
R eq
equir
uirem
emen
entt (a):
(a):
Goodwill is computed as follows:
Consideration transferred 300,000
NCI in the acquiree (380K –  80K) x 40% 
(380K – 80K) 120,000
Previously held equity interest in the acquire -
Total 420,000
Fair value of net identifiable assets acquired (300,000)
Goodwill 120,000

CJE #1: To eliminate investment in subsidiary and recognize goodwill 

Jan. 1, Land (250K –
(250K – 200K)
 200K) 50,000
20x1
Share capital –
capital – Rainy
 Rainy 250,000
Ret. earnings –
earnings – Rainy
 Rainy (Carrying amt.) 40,000
Goodwill 120,000
Inventory (120K –
(120K – 80K)
 80K) 40,000
Investment in subsidiary 300,000
Non-controlling interest 120,000
to adjust the subsidiary’s assets to
Much more than acquisition-date fair values, to eliminate the
documents. investment in subsidiary and subsidiary’s
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 pre-combination equity, and to recognize
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Sunny Group
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 Consolidation Worksheet

CJE Consolidation CJ E ref.

 Home Sunny Co. Rainy Co. ref. # adjustments #
Consolidated
ASSETS Dr. Cr.
 Cash
Saved
Inventory
80,000
400,000
50,000
120,000 1 40,000
130,000
480,000
Investment in subsidiary 300,000 - 300,000 1 -
Land 600,000 200,000 1 50,000 850,000
Goodwill - - 1 120,000 120,000
 Bestsellers
TOTAL ASSE TS 1,380,000 370,000 1,580,000

LIABILITIES AND EQUITY

 Books
 Accounts payable 200,000 80,000  280,000

Share capital 1,000,000 250,000 1 250,000 1,000,000

 Audiobooks
Retained earnings 180,000 40,000 1 40,000 180,000
Non-controlling interest - - 120,000 1 120,000
Total equity 1,180,000 290,000 1,300,000
 Magazines
TOTAL LIAB ILITES & E QUITY 1,380,000 370,000 460,000 460,000 1,580,000

 Podcasts

 Sheet Music

 Snapshots 2

 Documents

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2. Solutions:

 Home
 S tep 1:  Analysis of effects of intercompany transaction
There were no intercompany transactions during the period.
 Saved

 S tep 2: Analysis of net assets

 Bestsellers  A cqui s ition Consolidation Net
 A xion, Inc. date date change
 Books Share capital 250,000 250,000
Retained earnings 40,000 60,000
 Audiobooks
Totals at carrying amounts 290,000 310,000
Fair value adjustments at acq’n. date 10,000 10,000
 Magazines
Subsequent depreciation of FVA NIL 30,000*
Unrealized profits (Upstream only) NIL -
 Podcasts
 S ubs idiary's net as s ets at fair value 300,000 350,000 50,000
 Sheet Music

*The subsequent depreciation of fair value adjustments (FVA) is

 Snapshots
determined as follows:
Fair value Divide by  S ubs equent
 Documents
adjustments us eful life depreciation
Inventory (40,000) N/A 40,000
Building – net 50,000 5 (10,000)
Totals 10,000  30,000

 S tep 3: Goodwill computation

Formula #1: NCI is measured at NCI’s proportionate share
Consideration transferred 300,000
Non-controlling interest in the acquiree (300K x 40%) – (Step 2) 120,000
Previously held equity interest in the acquiree -
Total 420,000
Fair value of net identifiable assets acquired (Step 2) (300,000)
Goodwill at acquisition date 120,000
 Accumulated impairment losses since acquisition date -
G oodwill, net – current year 120,000

 S tep 4: Non-controlling interest in net assets

 Axion's net assets at fair value – Dec. 31, 20x1 (Step 2)  350,000
Much more than
Multiply by: NCI percentage 40%
documents. Total 140,000
 Add: Goodwill to NCI net of accumulated impairment losses
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-*
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 S tep 5: Consolidated retained earnings
Joy's retained earnings – Dec. 31, 20x1 243,000
 Home
Consolidation adjustments:
Joy's share in the net chang e in Axion's net assets (a) 30,000
 Saved
Unrealized profits (Downstream only) -
Gain or loss on extinguishment of bonds -
 Bestsellers
Impairment loss on goodwill attributable to Parent -
Net consolidation adjustments 30,000
 Books C ons olidated retained earni ng s  – Dec. 31, 20x1 273,000
 Audiobooks
(a)

 Net change in Axion’s net assets (Step 2) 

Magazines 50,000
Multiply by: Joy’s interest in Axion 60%
 Podcasts J oy ’s share in the net change in  A xion ’s net assets 30,000

 Sheet Music
 S tep 6: Consolidated profit or loss
 Snapshots Parent Subsidiary Consolidated
Profits before adjustments 63,000 20,000 83,000
 DocumentsConsolidation adjustments:
Unrealized profits ( - ) ( - ) ( - )
Dividend income from subsidiary ( - ) N/A ( - )
Gain or loss on extinguishment
of bonds ( - ) ( - ) ( - )
Net consolidation adjustments ( - ) ( - ) ( - )
Profits before FVA 63,000 20,000 83,000
Depreciation of FVA (b) 18,000 12,000 30,000
Impairment loss on goodwill ( - ) ( - ) ( - )
C ons olidated profit 81,000 32,000 113,000

(b)
The shares in the depreciation of fair value adjustments (FVA) are
computed as follows:
Total subsequent depreciation of fair value (Step 2) 30,000
 Allocation:
Parent’s share in depreciation of fair value (30,000 x 60%) 18,000
NCI’s share in depreciation of fair value (30,000 x 40%) 12,000
 As allocated 30,000 

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 S tep 7: Profit or loss attributable to owners of parent and NCI
documents. Owners Consoli-
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of parent NC I dated
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(c)
The shares in Axion’s profit before FVA are computed as follows:
 Home
Profit of Axion before fair value adjustments (Step 6 ) 20,000
 Saved  Allocation:
Joy’s share (20,000 x 60%) 12,000
NCI’s share (20,000 x 40%) 8,000
 Bestsellers
 As allocated: 20,000
 Books
Joy Group
 Audiobooks Consolidated statement of financial position
As of December 31, 20x1
 Magazines

ASSETS
 PodcastsCash (143,000 + 60,000) 203,000
Inventory (440,000 + 160,000 – 40K FVA + 40K depn) 600,000
 Sheet Music
Building – net (560K + 160K + 50K FVA  – 10K depn) 760,000
Goodwill (Step 3) 120,000
 Snapshots
TOTA L A S S E TS 1,683,000
 Documents

LIABILITIES AND EQUITY

 Accounts payable (200,000 + 70,000) 270,000

Share capital (Parent only) 1,000,000

Retained earnings (Step 5) 273,000
Owners of parent 1,273,000
Non-controlling interes t (Step 4) 140,000
Total equity 1,413,000
TOTA L LIA B ILITIE S A ND E QUITY 1,683,000

Joy Group
Statement of profit or loss
For the year ended December 31, 20x1
Sales (300,000 + 120,000) 420,000
Cost of goods sold (165,000 + 72,000 – 40K depn of FVAa ) (197,000)
Gross profit 223,000
Depreciation expense (40,000 + 10,000 + 10K depn of FVA) (60,000)
Much more than
Distribution costs (32,000 + 18,000)
documents. (50,000)
Profi t for the year
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Circle's net assets at fair value – Dec. 31, 20x1 400,000
Multiply by: NCI percentage 20%
 Home
Total 80,000
 Add: Goodwill to NCI net of accumulated impairment losses -
 Saved
Non-controlling interes t in net as s ets  – Dec. 31, 20x1 80,000

 Bestsellers

12. C
 Books
Solution:
 Audiobooks
C ons olidated retained earni ng s
Square's retained earnings – Dec. 31, 20x1 440,000
 Consolidation adjustments:
Magazines
Square's share in the net chang e in Circle's
 Podcastsnet assets (a) 32,000
Unrealized profits (Downstream only) -
 Sheet Music
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable
 Snapshots
to parent
-

 Net consolidation adjustments

Documents 32,000
C onsolidated ret. earning s  – Dec. 31, 20x1 472,000
(a) (40,000 net change in net assets x 80%) = 32,000

13. D
Solution:

Share capital of parent 940,000

Consolidated retained earnings – (see above) 472,000
Equity attributable to owners of the parent  1,412,000
Non-controlling interests - (see above) 80,000
C ons olidated total equity 1,492,000

14. B
Solution:
Parent Subsidiary Consolidated
Profits before adjustments 400,000 80,000 480,000
Consolidation adjustments:
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documents.
Unrealized profits ( - ) ( - ) ( - )
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Dividend income from subsidiary ( - ) N/A ( - )
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Impairment loss on goodwill ( - ) ( - ) ( - )
C ons olidated profit 381,800 72,200 454,000
 Home

 Saved *The subsequent depreciation of fair value adjustments (FVA) is

determined as follows:
 Inventory = ₱10,000 excess fair value;
 Bestsellers
  Building (₱80,000 FV ÷ 5 years) = 16,000
 Total FVA depreciation = 10,000 + 16,000 = 26,000 
 Books
 Share of parent = 26,0000 x 70% = 18,200
 Share of NCI = 26,000 x 30% = 7,800
 Audiobooks

 Magazines
15. C
Solution:
 Podcasts
Owners Consoli-
of parent NC I dated
 Sheet Music
Parent's profit before FVA 400,000 N/A 400,000
(c)
 Snapshots Sh. in Sub.’s profit before FVA 56,000 24,000 80,000
Depreciation of FVA (18,200) (7,800) (26,000)
 DocumentsShare in impairment loss on goodwill ( - ) ( - ) ( - )
Totals 437,800 16,200 454,000

(c)
The shares in Subsidiary’s profit before FVA are computed as
follows:
Profit of Subsidiary before fair value adjustments 80,000
 Allocation:
Original’s share (80,000 x 70%)  56,000
NCI’s share (80,000 x 30%) 24,000
 As allocated: 80,000

16. B (See solution in previous question)

17. A – same as the parent

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