INVESTMENT IN SUBSIDIARY

Problem A - Equity Model and Cost Model

Lovelle Inc. acquired 80% of the ordinary shares of Rachelle Co. for P300,000 on January 1, 2022. At the
end of the year, Rachel Co. reported net income of P200,000 and paid dividends of P150,000 to its
shareholders.

Requirements:
1. Prepare the journal entries in 2022, assuming Lovelle Inc. uses equity model.
2. Prepare the journal entries in 2022, assuming Lovelle Inc. uses cost model.
3. On December 31, 2022, what amount of Investment in Subsidiary will be reported assuming
Lovelle uses the equity or cost model.

Problem B – Amortization of Overvaluation / Undervaluation of Net Assets

Dannah acquired 75% of the ordinary shares of Lush on January 1, 2022. On the same date, the
following data taken from the records of Lush Company:

Book Value Fair Value (OVA) / UVA

Inventories P500,000 P575,000 P75,000
Buildings – net 1,200,000 1,350,000 150,000
Equipment – net 600,000 500,000 (100,000)

The equipment and equipment had remaining life of 5 years and 10 years respectively. The undervalued
inventory was sold by December 31, 2022.

Lush reported the following condensed income statement, on December 31, 2022.

Sales P1,500,000
Less: Cost of Sales 800,000
Gross Profit 700,000
Less: Operating Expense
Depreciation - Bldg 240,000
Depreciation – Equipment 60,000
Other Expenses 100,000
Net Income P300,000

Requirements:
1. What amount of income from subsidiary will be reported by the parent?
 CONSOLIDATED NET INCOMEAND INCOME STATEMENT

Problem C – Consolidated Net Income and Income Statement

Dannah acquired 75% of the ordinary shares of Lush on January 1, 2022. At the date of acquisition, the
only assets of Lush whose fair values were different from the carrying amount were the following:

Book Value Fair Value

Inventories P500,000 P575,000
Buildings – net 1,200,000 1,350,000
Equipment – net 600,000 500,000

The equipment and equipment had remaining life of 5 years and 10 years respectively. The undervalued
inventory was sold by December 31, 2022.

The following are separate condensed income statements on December 31, 2022 of Dannah and Lush.

Dannah Lush
Sales P5,000,000 P1,500,000
Income from Subsidiary 153,750
Gross Revenue P5,153,750 P1,500,000
Less: Cost of Sales 3,200,000 800,000
Gross Profit P1,953,750 P700,000
Less: Operating Expense
Depreciation – Building 500,000 240,000
Depreciation – Equipment 250,000 60,000
Other Expense 300,000 100,000
Net Income P903,750 P300,000

Dannah uses the equity model in accounting for investment in subsidiary. Shanks declared dividends of
P160,000 in 2022.

Requirements:
1. Compute the amount of consolidated net income (CNI), profit attributable to parent (PAP) and
non-controlling interest (NCII) to be presented in December 31, 2022 consolidated income
statement if Dannah uses the equity model in accounting for investment in subsidiary and Lush
declared dividends of P160,000 in 2022. Prepare the consolidated income statement.
2. Compute the amount of consolidated net income (CNI), profit attributable to parent (PAP) and
non-controlling interest (NCII) to be presented in December 31, 2022 consolidated income
statement if parent uses cost model and the dividend income is P120,000.