Notes to Consolidation

(Subsequent to Business Combination)

CNI-(P) NCI-(S)
Subsequent to Business Combination

PER NI-P xxx -

BOOKS NI-S xx - %P xx - %S
Amort. UVA (FMV>BV) (x) - %P (x) - %S
Excess OVA (FMV<BV) xx - %P xx - %S
Impairment loss (xx) (xx) Based on allocation of GOODWILL

Inter-company dividends (xx) - %P - Share in dividend from subsidiary

Gain on acquisition xxx - Only on the year of acquisition

Intercompany Sale of Inventory

UPEI – Downstream (xx)
UPEI – Upstream (xx) - %P (xx) -%S Effect it on the Year of Sale
RPBI – Downstream xx
RPBI – Upstream xx - %P xx - %S

Intercompany Sale of Depreciable Asset

Unrealized Gain – Downstream (xx)
Unrealized Gain – Upstream (xx) - %P (xx) -%S
Unrealized Loss – Downstream xx Effect it on the Year of Sale
Unrealized Loss – Upstream xx - %P xx -%S
Realized Gain – Downstream xx
Realized Gain – Upstream xx - %P xx -%S
Realized Loss – Downstream (xx) Thru depreciation & sale to 3rd party
Realized Loss – Upstream (xx) - %P (xx) -%S

Intercompany Sale of Land

Unrealized Gain – Downstream (xx)
Unrealized Gain – Upstream (xx) - %P (xx) -%S
Unrealized Loos – Downstream xx Effect it on the Year of Sale
Unrealized Loss – Upstream xx - %P xx -%S
Realized Gain – Downstream xx
Realized Gain – Upstream xx - %P xx -%S
Realized Loss – Downstream (xx) Thru Sale to 3rd party
Realized Loss – Upstream (xx) - %P (xx) -%S
CONSOLIDATED NET INCOME XXX + XXX

Consolidated Net Income attributable to Parent xxx

Non-controlling Interest in Net Income xxx
Consolidated Net Income xxx
Problem Discussion
(Subsequent to Business Combination)

On January 1, 2020, Entity A acquired 70% of outstanding ordinary shares of Entity B at a price of
P210,000. On the same date, the net assets of Entity B is reported at P260,000. On January 1, 2020 Entity
A reported retained earnings of P2,000,000 while Entity B reported retained earnings of P200,000.

All the assets and liabilities of Entity B are fairly valued except machinery which is undervalued by P80,000
and inventory which is overvalued by P10,000. The said machinery has remaining useful life of four years
while 40% of the said inventory remained unsold at the end of 2020.

For the year ended December 31, 2020, Entity A reported net income of P1,000,000 and declared dividends
of P200,000 in its separate financial statements while Entity B reported net income of P150,000 and
declared dividends of P20,000 in its separate financial statements.

Entity A accounted its investment in Entity B using cost method in its separate financial statements.

1. What is the noncontrolling interest in net income for the year ended December 31, 2020?
2. What is the noncontrolling interest in net assets on December 31, 2020?
3. What is the consolidated net income attributable to parent’s shareholders for the year ended
December 31, 2020?
4. What is the consolidated retained earnings on December 31, 2020?

Solution: AGGREGATE AMOUNT OF: 1. Consideration given:

a. Cash 210,000
b. Issued share(@FMV) -
c. Bonds(@FMV) -
d. Contingent consideration(@FMV) -

2. Non-controlling interest (FMV:90,000 vs. P.S:99,000) 99,000

3. FMV of previously held equity share if achieved in stage 0

LESS: *FMV of Identifiable Net Assets of Acquiree (Exc: Existing Goodwill) (330,000)

GAIN ON ACQUISITION (21,000)

CNI-(P) 70% NCI-(S)30%

Subsequent to Business Combination

PER NI-P 1,000,000 -

BOOKS NI-S 105,000 45,000
Amort. UVA (FMV>BV) (14,000) (6,000)
Excess OVA (FMV<BV) 4,200 1,800
Impairment loss - -
Inter-company dividends (14,000) -
Gain on acquisition 21,000 -
CONSOLIDATED NET INCOME 1,102,200 40,800

1. NCI – Beginning 99,000

NCI – NI 40,800
Dividends declared by Subsidiary – %S (6,000)
NCI, ENDING 133,800
2. a. RE – P, Beginning 2,000,000
CNI – P 1,102,200
Dividends declared – P (200,000)
CRE 2,902,200

b. RE – P, Ending xxxx
CNI – P (Exc: NI-P) xxxx
CRE XXX

Discussion Problem
(Intercompany Sale of Inventory)

On January 1, 2019, Entity A acquires 60% of outstanding ordinary shares of Entity B at a gain on bargain purchase of
P40,000. For the year ended December 31, 2020, Entity A and Entity B reported sales revenue of P2,000,000 and P1,000,000
in their respective separate income statements. At the same year, Entity A and Entity B reported cost of sales of P1,200,000
and P700,000 in their respective separate income statements.

During 2019, Entity A sold inventory to Entity B at a selling price of P280,000 with gross profit rate of 40% based on cost.
On the other hand, Entity B sold inventory to Entity A at a selling price of P400,000 with gross profit rate of 30% based on
sales during 2020.

On December 31, 2019, ¼ of the goods coming from Entity A remained in Entity B’s inventory but all were eventually sold
to third persons during 2020. As of December 31, 2020, 2/5 of the goods coming from Entity B were eventually sold to third
persons.

For the year ended December 31, 2020, Entity A reported net income of P500,000 while Entity B reported net income of
P200,000 and distributed dividends of P50,000. Entity A accounted for its investment in Entity B using cost method in its
separate financial statements.

1. What is the consolidated sales revenue for the year ended December 31, 2020?
2. What is the consolidated gross profit for the year ended December 31, 2020?
3. What is the non-controlling interest in net income for the year ended December 31, 2020?
4. What is the consolidated net income attributable to parent’s shareholders for the year ended December 31, 2020?

CNI-(P) 60% NCI-(S)40%

Subsequent to Business Combination

PER NI-P 500,000 -

BOOKS NI-S 120,000 80,000
Amort. UVA (FMV>BV) - -
Excess OVA (FMV<BV) - -
Impairment loss - -
Inter-company dividends (30,000) -
Gain on acquisition - -

Intercompany Sale of Inventory

UPEI – Downstream -
UPEI – Upstream (72,000) (48,000)
RPBI – Downstream 20,000
RPBI – Upstream 28,800 19,200
CONSOLIDATED NET INCOME 566,800 51,200
3. Sales – Parent 2,000,000
Sales – Subsidiary 1,000,000
Intercompany Sales & Purchases @ SP (During the Year) (400,000)
Consolidated Sales 2,600,000

4. Cost of Sales – Parent 1,200,000

Cost of Sales – Subsidiary 700,000
Intercompany Sales & Purchases @ SP (During the Year) (400,000)
Unrealized Profit in Ending Inventory (UPEI) 72,000
Realized Profit in Beginning Inventory (RPBI) (20,000)
Amortization of Undervalued Assets – Inventory -
Amortization of Overvalued Assets – Inventory -
Consolidated Cost of Sales 1,552,000

5. Consolidated Sales 2,600,000

Consolidated Cost of Sales (1,552,000)
Consolidated Gross Profit 1,048,000

Gross Profit – Parent 800,000

Gross Profit – Subsidiary 300,000
Unrealized Profit in Ending Inventory (UPEI) (72,000)
Realized Profit in Beginning Inventory (RPBI) 20,000
Amortization of Undervalued Assets – Inventory -
Amortization of Overvalued Assets – Inventory -
Consolidated Gross Profit 1,048,000

Discussion Problem
(Intercompany Sale of Land and Depreciable Asset )

On January 1, 2019, Entity A acquires 80% of outstanding ordinary shares of Entity B at a gain on bargain purchase of
P180,000. The following intercompany transactions occurred for between the two entities:

 On January 1, 2019, Entity B sold a land to Entity A with a cost of P1,000,000 at a selling price of P1,100,000.
The land was eventually sold by Entity A to third person during 2020.

 On January 1, 2019, Entity A sold a white machinery to Entity B with a cost of P200,000 and accumulated
depreciation of P40,000 at a selling price of P180,000. The machinery is already 4 years old at the date of sale.
The residual value of white machinery is immaterial.

 On July 1, 2020, Entity B sold a black machinery to Entity A at with a cost of P270,000 and accumulated
depreciation of P180,000 at a selling price of P60,000. The machinery is already 6 years old at the date of sale.
The residual value of black machinery is immaterial.

For the year ended December 31, 2020, Entity A reported net income of P800,000 while Entity B reported net income of
P500,000 and distributed dividends of P150,000. Entity A accounted for its inventory in Entity B using cost method in its
separate financial statements.

1. What is the consolidated depreciation expense of machinery for the year ended December 31, 2020?
2. What is the consolidated book value of machinery on December 31, 2020?
3. What is the noncontrolling interest in net income for the year ended December 31, 2020?
4. What is the consolidated net income attributable to parent’s shareholders for the year ended December 31, 2020?
 CNI-(P) 80% NCI-(S)20%
Subsequent to Business Combination

PER NI-P 800,000 -

BOOKS NI-S 400,000 100,000
Amort. UVA (FMV>BV) - -
Excess OVA (FMV<BV) - -
Impairment loss - -
Inter-company dividends (120,000) -
Gain on acquisition - -

Intercompany Sale of Inventory

UPEI – Downstream -
UPEI – Upstream - -
RPBI – Downstream -
RPBI – Upstream - -

Intercompany Sale of Depreciable Asset

Unrealized Gain – Downstream -
Unrealized Gain – Upstream - -
Unrealized Loss – Downstream -
Unrealized Loss – Upstream 24,000 6,000
Realized Gain – Downstream 1,250
Realized Gain – Upstream - -
Realized Loss – Downstream -
Realized Loss – Upstream (4,000) (1,000)

Intercompany Sale of Land

Unrealized Gain – Downstream -
Unrealized Gain – Upstream - -
Unrealized Loos – Downstream -
Unrealized Loss – Upstream - -
Realized Gain – Downstream -
Realized Gain – Upstream 80,000 20,000
Realized Loss – Downstream -
Realized Loss – Upstream - - .

CONSOLIDATED NET INCOME 1,181,250 125,000

Depreciation of White Machinery (P160,000/16 years) P 10,000

Depreciation of Black Machinery (P90,000/3 years) 30,000
Consolidated depreciation expense for year 2020 P 40,000

Book value of white machinery (P160,000 – P10,000 – P10,000) P 140,000

Book value of black machinery (P90,000 – P15,000) 75,000
Consolidated book value of machinery on December 31, 2020 P 215,000
Additional Consolidation Computation For Subsequent to Business Combination:

Share capital – P xxxx

Share premium – P xxxx
CRE xxxx
NCI, End xxxx
CONSO SHE XXX

Operating Expense – Parent xxx

Operating Expense – Subsidiary xxx
Realized Loss (thru depreciation/amortization) xxx
Realized Gain (thru depreciation/amortization) (xx)
Impairment Loss xxx
Amortization of Undervalued Assets – D.A & Land xxx
Amortization of Overvalued Assets – D.A & Land (xx)
Consolidated Operating Expense xxx

Inventory – Parent @ BV xxx

Inventory – Subsidiary @ FV xxx
Amortization of Undervalued Assets – Inventory (xx)
Amortization of Overvalued Assets – Inventory xxx
Unrealized Profit in Ending Inventory (UPEI) (xx)
Consolidated Inventory xxx