Cost Method VS Equity Method

Cost Method Equity Method

Date of Acquisition

Separate financial position

Investment in subsidiary @ Cost @ Cost
Subsequent to Date of Acquisition

Separate financial performance

Income
Separate financial position
Investment in subsidiary
Dividend income Investment income
@ Cost – impairment loss of Cost – share in dividend +/- share in
investment net income(loss) +/- share in amor. –
impairment of goodwill

Problem 01:
On January 1, 2020, P Company acquired 40,000 of S Company in the open market for P2,280,000. On that date, the assets
and liabilities of S Company had book values that approximate their respective fair market values except inventory that has
a value of P120,000 and a book value of P100,000 and equipment that has a value of P100,000 more than its carrying
amount. This equipment has a remaining useful life of 5 years. Goodwill, if any, is to be tested for impairment at the end of
each year. P Company elects to measure non-controlling interest at its proportionate share of the identifiable net assets.
On December 31, 2020, S Company owed P Company P10,000 on open account from purchases made last year. Goodwill
impairment losses in 2020 is P10,000.
Financial statements for the two corporations for the year ended December 31, 2020 are as follows:
Books of P Company Jan. 1, 2020
Investment in subsidiary 2,280,000
Cash 2,280,000
Dec. 31, 2020
Cash 96,000
Investment in subsidiary 96,000
Share in dividend declared by S Company

Investment in subsidiary 288,000

Investment income 288,000
Share in net income reported by S Company

Investment income 16,000

Investment in subsidiary 16,000
Share in amortization of inventory

Investment income 16,000

Investment in subsidiary 16,000
Share in amortization of equipment

Investment income 10,000

Investment in subsidiary 10,000
Impairment of goodwill
Under Equity Method
Income Statement P Company S Company Adjustment Consolidated
Sales P4,000,000 P2,000,000 6,000,000
Cost of sales (1,600,000) (1,200,000) 20,000 2,820,000
Gross profit P2,400,000 P800,000 3,180,000
Operating expenses (440,000) 20,000+10,000 2,030,000
Operating income P360,000 1,150,000

Investment income -246,000 -

Net Profit P1,086,000 P360,000 1,150,000

Share of NCI in Net income 64,000 (64,000)
Share of Controlling interest 1,086,000
Statement of Changes in
RE
Balance, January 1, 2020 P6,000,000 P1,600,000 -1,600,000 6,000,0000
Profit 1,086,000 360,000 1,086,000
Dividend declared (800,000) (120,000) -120,000

Balance, December 31, 2020 P6,286,000 P1,840,000

Financial Position
Cash P600,000 P200,000 800,000
Accounts receivable 400,000 400,000 -10,000 790,000
Inventories 800,000 600,000 20,000-20,000 1,400,000
Land 1,200,000 1,200,000
Building (net) 800,000 800,000
Equipment (net) 2,456,000 2,000,000 100,000-20,000 4,536,000
Investment in subsidiary 2,430,000 - -
2,080,000200,000+96,000246,000

Goodwill 104,000-10,000 94,000

Total Assets P8,686,000 P3,200,000 9,620,000

Accounts payable P604,000 P360,000 -10,000 954,000
Bonds payable (face amount 196,000 196,000
P200,000)
Ordinary share capital, P100 1,000,000 1,000,000
par
Ordinary share capital, P20 1,000,000 -1,000,000 -
par
Additional paid in capital 600,000 600,000
Retained earnings 6,286,000 1,840,000 6,286,000
NCI 520,000+24,000- 584,000
24,000+64,000

Totals P8,686,000 P3,200,000 9,620,000

Eliminating entries:
Ordinary Share capital, P20 par 1,000,000
Retained earnings – S company 1,600,000
Investment in subsidiary 2,080,000
Noncontrolling interest 520,000
Equipment 100,000
Inventory 20,000
Goodwill 104,000
Investment in subsidiary 200,000
Noncontrolling interest 24,000
Depreciation 20,000
Accumulated Depreciation 20,000
Cost of sales 20,000
Inventory 20,000
Impairment loss 10,000
Goodwill 10,000
AP-S Company 10,000
AR-P Company 10,000
Intercompany accounts
Investment in Subsidiary 94,000
NCI 24,000
RE/Dividend paid 120,000
Share of NCI in Net income 64,000
NCI 64,000
Investment income 246,000
Investment in Subsidiary 246,000