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Chapter 5
Consolidated Financial Statements (Part 2)
NAME: Date:
Professor: Section: Score:

QUIZ 1:
Use the following information for the next three questions:
Rainy Afternoon Co. owns 80% interest in Sunny Morning Co. During 20x1, Rainy sold inventories
costing ₱200,000 to Sunny for ₱300,000. One-fourth of the inventories were unsold as of December
31, 20x1 and were included in Sunny’s year-end statement of financial position at the purchase price
from Rainy. The individual financial statements of Rainy and Sunny on December 31, 20x1 show the
following information:

  Rainy Sunny
Inventory 1,260,000 380,000

Sales 6,700,000 2,700,000

Cost of
(3,015,000) (1,755,000)
sales
Gross profit 3,685,000 945,000

There are no fair value adjustments arising from the business combination date.

1. How much is the consolidated inventory on December 31, 20x1?

a. 1,615,000
b. 1,590,000
c. 1,665,000
d. 1,585,000

2. How much is the consolidated sales?

a. 9,400,000
b. 9,100,000
c. 9,375,000
d. 9,700,000

3. How much is the consolidated cost of sales?

a. 4,695,000
b. 4,495,000
c. 4,565,000
d. 4,545,000

Use the following information for the next two questions:

On January 1, 20x1, Horse Co. acquired 80% interest in Colt Co. by issuing bonds with fair value of
₱250,000. NCI is measured at proportionate share. The following information was determined
immediately before the acquisition:
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  Horse Co. Colt Co. Colt Co.

  Carrying amount Carrying amount Fair value
Total assets 1,000,000 400,000 430,000
Total liabilities (600,000) (200,000) (200,000)
Net assets 400,000 200,000 230,000

Included in Colt’s liabilities is an account payable to Horse amounting to ₱20,000.

4. How much is the total assets in Horse’s separate financial statements immediately after the
combination?
a. 1,000,000
b. 1,400,000
c. 1,250,000
d. 1,430,000

5. How much is the total assets in the consolidated financial statements?

a. 1,476,000
b. 1,580,000
c. 1,465,000
d. 1,528,000

Use the following information for the next two questions:

Lion Co. acquired 80% of Cub Co. on January 1, 20x1 for ₱100,000. The following information was
determined at acquisition date:

  Lion Co. Cub Co. Cub Co.

  Carrying amt. Carrying amt. Fair value
Equipment 1,000,000 500,000 400,000
Accumulated depreciation (200,000) (100,000) (80,000)
Net 800,000 400,000 320,000

Remaining useful life, 1/1/ x1 10 yrs. 5 yrs. 5 yrs.

6. How much is the consolidated “Equipment – net” in the December 31, 20x2 financial statements?
a. 880,000
b. 846,000
c. 852,000
d. 832,000

7. The consolidation journal entry for the depreciation of the fair value adjustment on December
31, 20x2 includes which of the following?
a. 16,000 debit to depreciation expense
b. 12,800 credit to retained earnings of Lion
c. 32,000 credit to accumulated depreciation
d. 16,000 credit to depreciation expense
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8. On January 1, 20x1, Kangaroo Co. acquired 75% of Joey Co. At that time, Joey’s equipment has a
carrying amount of ₱100,000 and a fair value of ₱120,000. The equipment has a remaining useful
life of 10 years. On December 31, 20x2, Kangaroo and Joey reported equipment with carrying
amounts of ₱500,000 and ₱300,000, respectively. How much is the consolidated “equipment –
net” in the December 31, 20x2 financial statements?
a. 800,000
b. 816,000
c. 784,000
d. 826,000

9. On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares with fair
value of ₱15 per share. On this date, XYZ’s equity comprised of ₱50,000 share capital and ₱24,000
retained earnings. NCI was measured at its proportionate share in XYZ’s net identifiable assets.

XYZ’s assets and liabilities on January 1, 20x1 approximate their fair values except for the following:
Fair value
XYZ, Inc. Carrying Fair adjustments
amounts values (FVA)
Inventory 23,000 31,000 8,000
Equipment (4 yrs. remaining life) 50,000 60,000 10,000
Accumulated depreciation (10,000) (12,000) (2,000)
Totals 63,000 79,000 16,000

XYZ, Inc. declared and paid dividends of ₱6,000 during 20x1. There was no impairment in goodwill.
The year-end individual statements of profit or loss are shown below:

Statements of profit or loss

For the year ended December 31, 20x1
ABC Co. XYZ, Inc.
Sales 300,000 120,000
Cost of goods sold (165,000) (72,000)
Gross profit 135,000 48,000
Depreciation expense (40,000) (10,000)
Distribution costs (32,000) (18,000)
Interest expense (3,000) -
Dividend income 4,800 -
Profit for the year 64,800 20,000

How much is the profit attributable to

Owners of the parent NCI
a. 68,000 2,000
b. 64,800 5,200
c. 52,000 18,000
d. 57,200 12,800

10. ABC Co. owns 80% interest in XYZ, Inc. The individual statements of financial position of the
entities as of December 31, 20x1 are shown below:
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Statements of financial position

As at December 31, 20x1
ABC Co. XYZ, Inc.
ASSETS
Cash 23,000 44,000
Accounts receivable 75,000 22,000
Inventory 105,000 15,000
Investment in subsidiary (at cost) 75,000 -
Investment in bonds - 13,000
Equipment 200,000 50,000
Accumulated depreciation (60,000) (20,000)
TOTAL ASSETS 418,000 124,000

LIABILITIES AND EQUITY

Accounts payable 43,000 30,000
Bonds payable (at face amount) 30,000 -
Total liabilities 73,000 30,000
Share capital 170,000 50,000
Share premium 65,000 -
Retained earnings 110,000 44,000
Total equity 345,000 94,000
TOTAL LIABILITIES AND
EQUITY 418,000 124,000

On December 31, 20x1, XYZ, Inc. purchased 50% of the outstanding bonds of ABC Co. from the open
market for ₱13,000. There were no other intercompany transactions during the year.

The consolidation journal entry to eliminate the intercompany bond transaction includes which of
the following?
a. debit to bonds payable for ₱30,000
b. credit to gain on extinguishment of debt for ₱4,000
c. credit to investment in bonds for ₱15,000
d. credit to gain on extinguishment of debt for ₱2,000

“What we think, we become.” (Buddha)

- end -
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SOLUTIONS TO QUIZ 1:
1. A Solution:

Ending inventory of Rainy 1,260,000

Ending inventory of Sunny 380,000
Less: Unrealized profit in ending inventory (300,000 – 200,000) x 1/4 (25,000)
Consolidated ending inventory 1,615,000

2. B Solution:

Sales by Rainy 6,700,000

Sales by Sunny 2,700,000
Less: Intercompany sales during 20x1 (300,000) (300,000)
Consolidated sales 9,100,000

3. B Solution:

Cost of sales of Rainy 3,015,000

Cost of sales of Sunny 1,755,000
Less: Intercompany sales during 20x1 (300,000)
Add: Unrealized profit in ending inventory 25,000
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory -
Consolidated cost of sales 4,495,000

4. C Solution:

Total assets of Horse before the combination 1,000,000

Investment in subsidiary (fair value of bonds issued) 250,000
Total assets of Horse after the combination 1,250,000

5. A Solution:

Total assets of Horse after the combination (see above) 1,250,000

Total assets of Colt (carrying amount) 400,000
Investment in subsidiary (250,000)
FVA on assets (430K fair value – 400K carrying amount) 30,000
Goodwill – net [250K + (230K x 20% NCI)] – 230 66,000
Effect of intercompany transactions (intercompany receivable) (20,000)
Consolidated total assets 1,476,000
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6. D Solution:

Equipment, net – Lion Co. (800,000 x 8/10) 640,000

Equipment, net – Cub Co. (carrying amount) (400,000 x 3/5) 240,000
FVA on equipment, net - decrement [(320,000 – 400,000) x 3/5] (48,000)
Consolidated equipment, net – Dec. 31, 20x2 832,000

Alternative solution:
Equipment, net – Lion Co. (800,000 x 8/10) 640,000
Equipment, net – Cub Co. (fair value) (320,000 x 3/5) 192,000
Consolidated equipment, net – Dec. 31, 20x2 832,000

7. D Solution:

Dec. Accumulated depreciation (80,000 x 2/5) 32,000

31,
Depreciation expense (80,000 ÷ 5) 16,000
20x2
Retained earnings – Lion Co.* 12,800
Retained earnings – Cub Co.* 3,200
*These are the shares of Lion and Cub in the depreciation of the FVA in the prior year, i.e., 20x1 (16,000 x 80% & 20%).

8. B Solution:

Equipment, net – Kangaroo 500,000

Equipment, net – Joey 300,000
FVA on equipment, net - increment [(120,000 – 100,000) x 8/10] 16,000
Consolidated equipment, net – Dec. 31, 20x2 816,000

9. A Solution:

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits before adjustments 64,800 20,000 84,800
Consolidation adjustments:
Unrealized profits - - -
Dividend income from
subsidiary (4,800) N/A (4,800)
Gain or loss on
extinguishment of bonds - - -
Net consolidation adjustments (4,800) - (4,800)
Profits before FVA 60,000 20,000 80,000
Depreciation of FVA (b) (8,000) (2,000) (10,000)
Impairment loss on goodwill ( - ) ( - ) ( - )
Consolidated profit 52,000 18,000 70,000
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₱8,000 dep’n. of FVA on inventory + ₱2,000 [(₱10,000 - ₱2,000) ÷ 4 yrs.] dep’n. of FVA on
(b)

equipment = ₱10,000

Shares in the depreciation of FVA: (10,000 x 80%); (10,000 x 20%)

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

Owners Consoli-
  of parent NCI dated
ABC's profit before FVA (Step 6) 60,000 N/A 60,000
(c)
Share in XYZ’s profit before FVA 16,000 4,000 20,000
Depreciation of FVA (Step 6) (8,000) (2,000) (10,000)
Share in impairment loss on goodwill ( - ) ( - ) ( - )
Totals 68,000 2,000 70,000

(c)
Shares in XYZ’s profit before FVA (Step 6) – (20,000 x 80%); (20,000 x 20%)

10. D Solution:

Acquisition cost of bonds (assumed retirement price) 13,000

Carrying amount of bonds payable (₱30,000 x 50%) (15,000)
Gain on extinguishment of bonds 2,000

CJE #1: To recognize the gain on extinguishment of bonds.

Dec. 31, Bonds payable (30,000 x 50%) 15,000
20x1
Investment in bonds 13,000
Gain on extinguishment of debt 2,000
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NAME: Date:
Professor: Section: Score:

QUIZ 2:

On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. The business combination resulted
to goodwill of ₱3,000. On this date, XYZ’s equity comprised of ₱50,000 share capital and ₱24,000
retained earnings. NCI was measured at its proportionate share in XYZ’s net identifiable assets.

XYZ’s assets and liabilities on January 1, 20x1 approximate their fair values except for the following:
Carryin
g Fair value
XYZ, Inc.
amount Fair adjustments
s values (FVA)
Inventory 23,000 31,000 8,000
Equipment (4 yrs. remaining life) 50,000 60,000 10,000
Accumulated depreciation (10,000) (12,000) (2,000)
Totals 63,000 79,000 16,000

During 20x1, the following intercompany transactions occurred:

a. ABC Co. sold goods costing ₱12,000 to XYZ, Inc., for cash, at a markup of 40% on selling price. A
quarter of these goods are held in inventory by XYZ, Inc. by year-end.
b. ABC Co. acquired inventory from XYZ, Inc. for ₱12,000 cash. XYZ, Inc. uses a normal markup of
25% above its cost. ABC's ending inventory included ₱4,000 from this purchase.

The year-end individual financial statements are shown below:

Statements of financial position

As at December 31, 20x1
ABC Co. XYZ, Inc.
ASSETS
Cash 41,000 67,750
Accounts receivable 75,000 22,000
Inventory 97,000 10,400
Investment in subsidiary (at cost) 75,000
Equipment 200,000 50,000
Accumulated depreciation (60,000) (20,000)
TOTAL ASSETS 428,000 130,150

LIABILITIES AND EQUITY

Accounts payable 43,000 30,000
Bonds payable 30,000 -
Total liabilities 73,000 30,000
Share capital 170,000 50,000
Share premium 65,000 -
Retained earnings 120,000 50,150
Total equity 355,000 100,150
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TOTAL LIABILITIES AND EQUITY 428,000 130,150

Statements of profit or loss

For the year ended December 31, 20x1
ABC Co. XYZ, Inc.
Sales 330,000 150,750
Cost of goods sold (185,000) (96,600)
Gross profit 145,000 54,150
Depreciation expense (40,000) (10,000)
Distribution costs (32,000) (18,000)
Interest expense (3,000) -
Profit for the year 70,000 26,150

1. How much is the total unrealized gross profit from the intercompany sales of inventory?
a. 2,000
b. 800
c. 2,800
d. 3,600

2. How much is the NCI in net assets as of December 31, 20x1?

a. 15,350
b. 18,350
c. 19,350
d. 21,070

3. How much is the consolidated retained earnings?

a. 130,280
b. 136,720
c. 142,280
d. 146,280

4. How much is the consolidated profit or loss?

a. 83,350
b. 78,750
c. 86,270
d. 79,450

5. How much is the consolidated profit or loss attributable to

Owners of parent NCI
a. 80,280 3,070
b. 74,460 4,290
c. 82,990 3,280
d. 76,470 2,980

6. How much is the consolidated ending inventory?

a. 104,600
b. 103,800
c. 120,200
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d. 98,800

7. How much is the consolidated sales?

a. 426,750
b. 428,750
c. 448,750
d. 456,750

8. How much is the consolidated cost of sales?

a. 260,400
b. 248,600
c. 256,400
d. 272,400

9. How much is the consolidated total assets?

a. 448,950
b. 489,350
c. 498,750
d. 502,250

10. How much is the consolidated total liabilities?

a. 98,000
b. 102,000
c. 102,800
d. 103,000

11. How much is the consolidated total equity?

a. 234,550
b. 332,850
c. 368,500
d. 386,350

“This poor man cried out and the Lord heard him and saved him out of all his troubles.” (Psalm 34:6)

-END -
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SOLUTIONS TO QUIZ 2:

1. B Solution:

Step 1: Analysis of effects of intercompany transaction

Transaction (a) is downstream because the seller is the parent (ABC Co.) while transaction (b) is
upstream because the seller is the subsidiary (XYZ, Inc.).

The unrealized profits in ending inventory are determined as follows:

  Downstream Upstream Total
Sale price of intercompany sale 20,000a 12,000
Cost of intercompany sale (12,000) (9,600)b
Profit from intercompany sale 8,000 2,400
Multiply by: Unsold portion as of yr.-end 1/4c 4/12d
Unrealized gross profit 2,000 800 2,800

a
12,000 cost ÷ (100% - 40% profit on selling price) = 20,000
b
12,000 selling price ÷ (100% + 25% profit on cost) = 9,600
c
Given in the problem, “A quarter of these goods are held in inventory..”
d
₱4,000 unsold over ₱12,000 total goods purchased.

2. D Solution:

Step 2: Analysis of net assets

Acquisition Consolidation
XYZ, Inc. date date
Net change
Share capital 50,000 50,000
Retained earnings 24,000 50,150
Other components of equity - -
Totals at carrying amounts 74,000 100,150  
Fair value adjustments at acquisition date 16,000 16,000
Subsequent depreciation of FVA NIL (10,000)*
Unrealized profits (Upstream only) NIL (800)**
Subsidiary's net assets at fair value 90,000 105,350 15,350

* ₱8,000 dep’n. of FVA on inventory + ₱2,000 [(₱10,000 - ₱2,000) ÷ 4 yrs.] dep’n. of FVA on equipment = ₱10,000

** See ‘Step 1’. Notice that the upstream sale affects XYZ’s equity and consequently the NCI.

Step 3: Goodwill computation

The problem states that goodwill on acquisition date was ₱3,000. This is also the amount at year-end
because there is no impairment of goodwill during the year.

Step 4: Non-controlling interest in net assets

XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2) 105,350
Multiply by: NCI percentage 20%
Total 21,070
Add: Goodwill to NCI net of accumulated impairment losses - *
Non-controlling interest in net assets – Dec. 31, 20x1 21,070

*No goodwill is attributed to NCI because NCI is measured at proportionate share. Goodwill is attributed to NCI only if
NCI is measured at fair value.
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3. A Solution:

Step 5: Consolidated retained earnings

ABC's retained earnings – Dec. 31, 20x1   120,000
Consolidation adjustments:
ABC's share in the net change in XYZ's net assets (a) 12,280
Unrealized profits (Downstream only) - (Step 1) (2,000)
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable to Parent -
Net consolidation adjustments 10,280
Consolidated retained earnings – Dec. 31, 20x1   130,280 

(a)
ABC’s share in the net change in XYZ’s net assets is computed as:
Net change in XYZ’s net assets (Step 2) 15,350
Multiply by: ABC’s interest in XYZ 80%
ABC’s share in the net change in XYZ’s net assets 12,280

4. A Solution

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits before adjustments 70,000 26,150 96,150
Consolidation adjustments:
Unrealized profits - (Step 1) (2,000) (800) (2,800)
Dividend income from subsidiary ( - ) N/A ( - )
Gain or loss on extinguishment
of bonds ( - ) ( - ) ( - )
Net consolidation adjustments (2,000) (800) (2,800)
Profits before FVA 68,000 25,350 93,350
Depreciation of FVA (b) (8,000) (2,000) (10,000)
Impairment loss on goodwill ( - ) ( - ) ( - )
Consolidated profit 60,000 23,350 83,350
(b)
Shares in the depreciation of FVA: (10,000 x 80%); (10,000 x 20%)

5. A Solution:

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

Owners Consoli-
  of parent NCI dated
ABC's profit before FVA (Step 6) 68,000 N/A 68,000
Share in XYZ’s profit before FVA (c) 20,280 5,070 25,350
(2,000
Depreciation of FVA (Step 6) (8,000) ) (10,000)
Share in impairment loss on goodwill ( - ) ( - ) ( - )
Totals 80,280 3,070 83,350
(c)
Shares in XYZ’s profit before FVA (Step 6) – (25,350 x 80%); (25,350 x 20%)

6. A Solution:

Ending inventory of ABC Co. 97,000

Ending inventory of XYZ, Inc. 10,400
Less: Unrealized profit in ending inventory (2,800)
Consolidated ending inventory 104,600
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7. C Solution:

Sales by ABC Co. 330,000

Sales by XYZ, Inc. 150,750
Less: Intercompany sales during 20x1 (20,000 + 12,000) (32,000)
Consolidated sales 448,750

8. A Solution:

Cost of sales of ABC Co. 185,000

Cost of sales of XYZ, Inc. 96,600
Less: Intercompany sales during 20x1 (20,000 + 12,000) (32,000)
Add: Unrealized profit in ending inventory (2,000 + 800) 2,800
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory (Step 2) 8,000
Consolidated cost of sales 260,400

Consolidated Gross profit 188,350

9. B Solution:

Total assets of ABC Co. 428,000

Total assets of XYZ, Inc. 130,150
Investment in subsidiary (75,000)
Fair value adjustments - net (16K FVA - 10K depreciation) 6,000
Goodwill – net 3,000
Effect of intercompany transactions (2,800)
Consolidated total assets 489,350

10. D Solution:

Total liabilities of ABC Co. 73,000

Total liabilities of XYZ, Inc. 30,000
Fair value adjustments - net -
Effect of intercompany transactions -
Consolidated total liabilities 103,000

11. D Solution:

Share capital of ABC Co. 170,000

Share premium of ABC Co. 65,000
Consolidated retained earnings 130,280
Equity attributable to owners of the parent 365,280
Non-controlling interests 21,070
Consolidated total equity 386,350

ABC Group
Consolidated statement of financial position
As of December 31, 20x1
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ASSETS
Cash 108,750
Accounts receivable 97,000
Inventory 104,600
Equipment 260,000
Accumulated depreciation (84,000)
Goodwill 3,000
TOTAL ASSETS 489,350
   
LIABILITIES AND EQUITY  
Accounts payable 73,000
Bonds payable 30,000
Total liabilities 103,000
Share capital 170,000
Share premium 65,000
Retained earnings 130,280
Owners of parent 365,280
Non-controlling interest 21,070
Total equity 386,350
TOTAL LIABILITIES AND EQUITY 489,350
   

The consolidated statement of profit or loss is shown below:

ABC Group
Statement of profit or loss
For the year ended December 31, 20x1
   
Sales 448,750
Cost of goods sold (260,400)
Gross profit 188,350
Depreciation expense (52,000)
Distribution costs (50,000)
Interest expense (3,000)
Profit for the year 83,350
   
Profit attributable to:  
Owners of the parent 80,280
Non-controlling interests 3,070
  83,350