Chapter 4

Consolidated Financial Statements (Part 1)

PROBLEM 1: TRUE OR FALSE

1. FALSE - control
2. FALSE – The 20x1 consolidated profit includes only the profit
of Entity B from November 1 to December 31, 20x1.
3. FALSE – At each reporting date, goodwill is measured at
acquisition-date fair value less accumulated impairment
losses.
4. TRUE – 200 x 10% = 20
5. TRUE (1,000 + 90* share of Entity A in the net change in Entity
B’s net assets) = 1,090
* (200 – 100) = 100 net change x 90% = 90

6. FALSE
7. TRUE
8. TRUE
9. TRUE (200 + 100) = 300
10. TRUE [200 + (80% of 100)] = 280
PROBLEM 2: FOR CLASSROOM DISCUSSION

1. Solution:
Health Group
Consolidated statement of financial position
As of January 1, 20x1

Cash (100K + 20K) 120,000

Accounts receivable (120K + 20K fair value) 140,000
Inventory (400K + 100K) 500,000
Investment in subsidiary (eliminated) -
Prepaid assets (30K + 10K) 40,000
Building, net (1.2M + 540K fair value) 1,740,000
Goodwill (see computations below) 140,000
Total assets 2,680,000

Accounts payable (70K + 90K) 160,000

Share capital (Parent only) 1,000,000
Share premium (Parent only) 350,000
Retained earnings (Parent only) 990,000
NCI (see computations below) 180,000
Total liabilities and equity 2,680,000

Consideration transferred (equal to Investment in subsidiary) 560,000

NCI (600K (a) x 30%) 180,000
Previously held equity interest -
Total 740,000
Fair value of net identifiable assets acquired (a) (600,000)
Goodwill 140,000

Share capital
(a) 200,000
Share premium 50,000
Retained earnings 230,000
Net assets at carrying amount 480,000
Fair value adjustment (20K + 540K - 40K - 400K) 120,000
Fair value of net identifiable assets acquired 600,000

2. Solution:

Step 1: Analysis of subsidiary’s net assets

Net
Floyd Co. Jan. 1, 20x1 Dec. 31, 20x1
change
Net assets at carrying amount 480,000 568,000*
Fair value adjustments (FVA) 120,000(a) 88,000(b)
Net assets at fair value 600,000 656,000 56,000
* (200K share capital + 50K share premium + 318K retained earnings) = 568K total
equity on 12/31/x1

FVA at acquisition date

(a)

Carrying Fair Fair value

amount value adjustment (FVA)
Inventory 100,000 110,000 10,000
Building, net 400,000 510,000 110,000
Totals 500,000 620,000 120,000

FVA at acquisition date less subsequent depreciation.

(b)

FVA, 1/1/x1 Useful life Depreciation FVA, 12/31/x1

Inventory 10,000 N/A * 10,000 -
Equipment 110,000 5 yrs. 22,000 88,000
Totals 120,000 32,000 88,000
* The entire inventory is assumed to have been sold during the year.

Step 2: Goodwill computation

Consideration transferred (equal to Investment in subsidiary) 560,000
NCI (600K x 10%) 60,000
Previously held equity interest -
Total 620,000
Fair value of net identifiable assets acquired (600,000)
Goodwill 20,000
Step 3: Non-controlling interest in net assets
Subsidiary's net assets at fair value – Dec. 31, 20x1 (see Step 1) 656,000
Multiply by: NCI percentage 10%
Non-controlling interest in net assets – Dec. 31, 20x1 65,600

Step 4: Consolidated retained earnings

Parent's retained earnings – Dec. 31, 20x1 1,260,000
Parent's share in the net change in subsidiary's net assets (d) 50,400
Consolidated retained earnings – Dec. 31, 20x1 1,310,400

Net change in Floyd’s net assets (See Step 1)

(d) 56,000
Multiply by: Pink’s interest in Floyd 90%
Pink’s share in the net change in Floyd’s net assets 50,400

Step 5: Consolidated profit or loss

Profits of Pink & Floyd (270K + 88K) 358,000
Depreciation of FVA (see Step 1) (32,000)
Consolidated profit 326,000

Owners of parent NCI Consolidated

Parent's profit before FVA 270,000 N/A 270,000
Share in Floyd's profit before FVA (e) 79,200 8,800 88,000
Depreciation of FVA (f) (28,800) (3,200) (32,000)
Totals 320,400 5,600 326,000

(e) (88K x 90% = 79,200); (88K x 10% = 8,800).

(f) (32K x 90% = 28,000); (32K x 10% = 3,200).

 Pink Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS
Cash (620,000 + 120,000) 740,000
Accounts receivable (170,000 + 100,000) 270,000
Inventory (200,000 + 80,000 + 0 FVA net, Step 1) 280,000
Prepaid assets (10,000 + 8,000) 18,000
Investment in subsidiary (Eliminated)
Building, net (1,100,000 + 350,000 + 88,000 FVA net, Step 1) 1,538,000
Goodwill (Step 2) 20,000
TOTAL ASSETS 2,866,000

LIABILITIES AND EQUITY

Accounts payable (50,000 + 90,000) 140,000
Total liabilities 140,000
Share capital (Parent only) 1,000,000
Share premium (Parent only) 350,000
Retained earnings (Parent only – Step 4) 1,310,400
Owners of parent 2,660,400
Non-controlling interest (Step 3) 65,600
Total equity 2,726,000
TOTAL LIABILITIES AND EQUITY 2,866,000

Pink Group
Statement of profit or loss
For the year ended December 31, 20x1
Sales (600,000 + 200,000) 800,000
Cost of goods sold (200K + 60K + 10K dep’n. of FVA on inventory) (270,000)
Gross profit 530,000
Depreciation expense (100K + 50K + 22K dep’n. of FVA on bldg.) (172,000)
Distribution costs (30,000 + 2,000) (32,000)
Profit for the year 326,000
Profit attributable to:
Owners of the parent (Step 5) 320,400
Non-controlling interests (Step 5) 5,600
326,000
3. Solution:
Step 1: Analysis of subsidiary’s net assets (Same as #2)
Net
Floyd Co. Jan. 1, 20x1 Dec. 31, 20x1
change
Net assets at carrying amount 480,000 568,000*
Fair value adjustments (FVA) 120,000(a) 88,000(b)
Net assets at fair value 600,000 656,000 56,000
* (200K share capital + 50K share premium + 318K retained earnings) = 568K total
equity on 12/31/x1

FVA at acquisition date

(a)

Carrying Fair Fair value

amount value adjustment (FVA)
Inventory 100,000 110,000 10,000
Building, net 400,000 510,000 110,000
Totals 500,000 620,000 120,000

FVA at acquisition date less subsequent depreciation.

(b)

FVA, 1/1/x1 Useful life Depreciation FVA, 12/31/x1

Inventory 10,000 N/A * 10,000 -
Equipment 110,000 5 yrs. 22,000 88,000
Totals 120,000 32,000 88,000
* The entire inventory is assumed to have been sold during the year.

Step 2: Goodwill computation

Consideration transferred (equal to Investment in subsidiary) 560,000
Previously held equity interest in the acquiree -
Total 560,000
Less: Parent’s proportionate share in the net assets
of subsidiary (600,000 x 90%) – Step 1 (540,000)
Goodwill attributable to owners of the parent 20,000
Fair value of NCI 65,000
Less: NCI’s proportionate share in the net assets
of subsidiary (600,000 x 10%) – Step 1 (60,000)
Goodwill attributable to NCI 5,000
Goodwill – Dec. 31, 20x1 25,000

Reconciliation using regular formula:

Consideration transferred (equal to Investment in subsidiary) 560,000
NCI 65,000
Previously held equity interest -
Total 625,000
Fair value of net identifiable assets acquired (600,000)
Goodwill 25,000

Step 3: Non-controlling interest in net assets

Subsidiary's net assets at fair value – Dec. 31, 20x1 (Step 1) 656,000
Multiply by: NCI percentage 10%
Total 65,600
Add: Goodwill attributable to NCI (Step 2) 5,000
Non-controlling interest in net assets – Dec. 31, 20x1 70,600

Step 4: Consolidated retained earnings (Same as #2)

Parent's retained earnings – Dec. 31, 20x1 1,260,000
Parent's share in the net change in subsidiary's net assets (d) 50,400
Consolidated retained earnings – Dec. 31, 20x1 1,310,400

Net change in Floyd’s net assets (See Step 1)

(d) 56,000
Multiply by: Pink’s interest in Floyd 90%
Pink’s share in the net change in Floyd’s net assets 50,400

Step 5: Consolidated profit or loss (Same as #2)

Profits of Pink & Floyd (270K + 88K) 358,000
Depreciation of FVA (see Step 1) (32,000)
Consolidated profit 326,000

Owners of parent NCI Consolidated

Parent's profit before FVA 270,000 N/A 270,000
Share in Floyd's profit before FVA (e) 79,200 8,800 88,000
Depreciation of FVA (f) (28,800) (3,200) (32,000)
Totals 320,400 5,600 326,000

(e) (88K x 90% = 79,200); (88K x 10% = 8,800).

(f) (32K x 90% = 28,000); (32K x 10% = 3,200).

Pink Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS
Cash (620,000 + 120,000) 740,000
Accounts receivable (170,000 + 100,000) 270,000
Inventory (200,000 + 80,000 + 0 FVA net, Step 1) 280,000
Prepaid assets (10,000 + 8,000) 18,000
Investment in subsidiary (Eliminated)
Building, net (1,100,000 + 350,000 + 88,000 FVA net, Step 1) 1,538,000
Goodwill (Step 2) 25,000
TOTAL ASSETS 2,871,000

LIABILITIES AND EQUITY

Accounts payable (50,000 + 90,000) 140,000
Total liabilities 140,000
Share capital (Parent only) 1,000,000
Share premium (Parent only) 350,000
Retained earnings (Parent only – Step 4) 1,310,400
Owners of parent 2,660,400
Non-controlling interest (Step 3) 70,600
Total equity 2,731,000
TOTAL LIABILITIES AND EQUITY 2,871,000

Pink Group
Statement of profit or loss
For the year ended December 31, 20x1
Sales (600,000 + 200,000) 800,000
Cost of goods sold (200K + 60K + 10K dep’n. of FVA on inventory) (270,000)
Gross profit 530,000
Depreciation expense (100K + 50K + 22K dep’n. of FVA on bldg.) (172,000)
Distribution costs (30,000 + 2,000) (32,000)
Profit for the year 326,000
Profit attributable to:
Owners of the parent (Step 5) 320,400
Non-controlling interests (Step 5) 5,600
326,000
PROBLEM 3: EXERCISES

1. Solution:
Sunny Group
Consolidated statement of financial position
As of January 1, 20x1
ASSETS
Cash (80,000 + 50,000) 130,000
Inventory (400,000 + 80,000 fair value) 480,000
Investment in subsidiary (Eliminated)
Land (600,000 + 250,000 fair value) 850,000
Goodwill (see computations below) 120,000
TOTAL ASSETS 1,580,000

LIABILITIES AND EQUITY

Accounts payable (200,000 + 80,000) 280,000
Total liabilities 280,000
Share capital (Parent only) 1,000,000
Retained earnings (Parent only) 180,000
Owners of parent 1,180,000
Non-controlling interest (see computations below) 120,000
Total equity 1,300,000
TOTAL LIABILITIES AND EQUITY 1,580,000

Consideration transferred (equal to Investment in subsidiary) 300,000

NCI (300K x 40%) 120,000
Previously held equity interest -
Total 420,000
Fair value of net identifiable assets (250K + 50K) (300,000)
Goodwill 120,000

2. Solution:
 Hammer Group
Consolidated statement of financial position
As of January 1, 20x1
ASSETS
Cash (160,000 + 10,000) 170,000
Accounts receivable (200,000 + 110,000) 310,000
Inventory (400,000 + 100,000 fair value) 500,000
Investment in subsidiary (Eliminated)
Building (1,000,000 + 400,000 fair value) 1,400,000
Goodwill (see computations below) 40,000
TOTAL ASSETS 2,420,000

LIABILITIES AND EQUITY

Accounts payable (100,000 + 20,000) 120,000
Total liabilities 120,000
Share capital (Parent only) 1,000,000
Share premium (Parent only) 300,000
Retained earnings (Parent only) 880,000
Owners of parent 2,180,000
Non-controlling interest (see computations below) 120,000
Total equity 2,300,000
TOTAL LIABILITIES AND EQUITY 2,420,000

Consideration transferred (equal to Investment in subsidiary) 520,000

NCI (600K x 20%) 120,000
Previously held equity interest -
Total 640,000
Fair value of net identifiable assets (a) (600,000)
Goodwill 40,000

(a) (200K share cap. + 100K share prem. + 180K ret. earnings + 20K FVA on inventory +

100K FVA on building) = 600K

3. Solution:
Step 1: Analysis of subsidiary’s net assets
Net
Walk Co. Jan. 1, 20x1 Dec. 31, 20x1
change
Net assets at carrying amount 480,000 568,000*
Fair value adjustments (FVA) 120,000(a) 90,000(b)
Net assets at fair value 600,000 658,000 58,000
* (200K share capital + 100K share premium + 268K retained earnings) = 568K total
equity on 12/31/x1

FVA at acquisition date

(a)

Carrying Fair Fair value

amount value adjustment (FVA)
Inventory 80,000 100,000 20,000
Building, net 300,000 400,000 100,000
Totals 380,000 500,000 120,000

FVA at acquisition date less subsequent depreciation.

(b)

FVA, 1/1/x1 Useful life Depreciation FVA, 12/31/x1

Inventory 20,000 N/A * 20,000 -
Equipment 100,000 10 yrs. 10,000 90,000
Totals 120,000 30,000 90,000
* The entire inventory is assumed to have been sold during the year.

Step 2: Goodwill computation

Consideration transferred (equal to Investment in subsidiary) 520,000
NCI (600K x 20%) 120,000
Previously held equity interest -
Total 640,000
Fair value of net identifiable assets acquired (600,000)
Goodwill 40,000

Step 3: Non-controlling interest in net assets

Subsidiary's net assets at fair value – Dec. 31, 20x1 (see Step 1) 658,000
Multiply by: NCI percentage 20%
Non-controlling interest in net assets – Dec. 31, 20x1 131,600
Step 4: Consolidated retained earnings
Parent's retained earnings – Dec. 31, 20x1 1,300,000
Parent's share in the net change in subsidiary's net assets (d) 46,400
Consolidated retained earnings – Dec. 31, 20x1 1,346,400

Net change in Walk’s net assets (See Step 1)

(d) 58,000
Multiply by: Run’s interest in Walk 80%
Run’s share in the net change in Walk’s net assets 46,400

Step 5: Consolidated profit or loss

Profits of Run & Walk (420K + 88K) 508,000
Depreciation of FVA (see Step 1) (30,000)
Consolidated profit 478,000

Owners of parent NCI Consolidated

Parent's profit before FVA 420,000 N/A 420,000
Share in Walk's profit before FVA (e) 70,400 17,600 88,000
Depreciation of FVA (f) (24,000) (6,000) (30,000)
Totals 466,400 11,600 478,000

(e) (88K x 80% = 70,400); (88K x 20% = 17,600).

(f) (30K x 80% = 24,000); (30K x 20% = 6,000).

Run Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS
Cash (750,000 + 258,000) 1,008,000
Accounts receivable (260,000 + 50,000) 310,000
Inventory (200,000 + 20,000 + 0 FVA net, Step 1) 220,000
Investment in subsidiary (Eliminated)
Building, net (950,000 + 250,000 + 90,000 FVA net, Step 1) 1,290,000
Goodwill (Step 2) 40,000
TOTAL ASSETS 2,868,000
LIABILITIES AND EQUITY
Accounts payable (80,000 + 10,000) 90,000
Total liabilities 90,000
Share capital (Parent only) 1,000,000
Share premium (Parent only) 300,000
Retained earnings (Parent only – Step 4) 1,346,400
Owners of parent 2,646,400
Non-controlling interest (Step 3) 131,600
Total equity 2,778,000
TOTAL LIABILITIES AND EQUITY 2,868,000

Run Group
Statement of profit or loss
For the year ended December 31, 20x1
Sales (800,000 + 200,000) 1,000,000
Cost of goods sold (200K + 60K + 20K dep’n. of FVA on inventory) (280,000)
Gross profit 720,000
Depreciation expense (50K + 50K + 10K dep’n. of FVA on bldg.) (110,000)
Distribution costs (130,000 + 2,000) (132,000)
Profit for the year 478,000
Profit attributable to:
Owners of the parent (Step 5) 466,400
Non-controlling interests (Step 5) 11,600
478,000

4. Solution:
Step 1: Analysis of subsidiary’s net assets (Same as #3)
Net
Walk Co. Jan. 1, 20x1 Dec. 31, 20x1
change
Net assets at carrying amount 480,000 568,000*
Fair value adjustments (FVA) 120,000(a) 90,000(b)
Net assets at fair value 600,000 658,000 58,000
* (200K share capital + 100K share premium + 268K retained earnings) = 568K total
equity on 12/31/x1
 FVA at acquisition date
(a)

Carrying Fair Fair value

amount value adjustment (FVA)
Inventory 80,000 100,000 20,000
Building, net 300,000 400,000 100,000
Totals 380,000 500,000 120,000

FVA at acquisition date less subsequent depreciation.

(b)

FVA, 1/1/x1 Useful life Depreciation FVA, 12/31/x1

Inventory 20,000 N/A * 20,000 -
Equipment 100,000 10 yrs. 10,000 90,000
Totals 120,000 30,000 90,000
* The entire inventory is assumed to have been sold during the year.

Step 2: Goodwill computation

Consideration transferred (equal to Investment in subsidiary) 520,000

Previously held equity interest in the acquiree -
Total 520,000
Less: Parent’s proportionate share in the net assets
of subsidiary (600,000 x 80%) – Step 1 (480,000)
Goodwill attributable to owners of the parent 40,000
Fair value of NCI 130,000
Less: NCI’s proportionate share in the net assets
of subsidiary (600,000 x 20%) – Step 1 (120,000)
Goodwill attributable to NCI 10,000
Goodwill – Dec. 31, 20x1 50,000

Reconciliation using regular formula:

Consideration transferred (equal to Investment in subsidiary) 520,000
NCI 130,000
Previously held equity interest -
Total 650,000
Fair value of net identifiable assets acquired (600,000)
Goodwill 50,000
Step 3: Non-controlling interest in net assets
Subsidiary's net assets at fair value – Dec. 31, 20x1 (Step 1) 658,000
Multiply by: NCI percentage 20%
Total 131,600
Add: Goodwill attributable to NCI (Step 2) 10,000
Non-controlling interest in net assets – Dec. 31, 20x1 141,600

Step 4: Consolidated retained earnings (Same as #3)

Parent's retained earnings – Dec. 31, 20x1 1,300,000
Parent's share in the net change in subsidiary's net assets (d) 46,400
Consolidated retained earnings – Dec. 31, 20x1 1,346,400

Net change in Walk’s net assets (See Step 1)

(d) 58,000
Multiply by: Run’s interest in Walk 80%
Run’s share in the net change in Walk’s net assets 46,400

Step 5: Consolidated profit or loss (Same as #3)

Profits of Run & Walk (420K + 88K) 508,000
Depreciation of FVA (see Step 1) (30,000)
Consolidated profit 478,000

Owners of parent NCI Consolidated

Parent's profit before FVA 420,000 N/A 420,000
Share in Walk's profit before FVA (e) 70,400 17,600 88,000
Depreciation of FVA (f) (24,000) (6,000) (30,000)
Totals 466,400 11,600 478,000

(e) (88K x 80% = 70,400); (88K x 20% = 17,600).

(f) (30K x 80% = 24,000); (30K x 20% = 6,000).

 Run Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS
Cash (750,000 + 258,000) 1,008,000
Accounts receivable (260,000 + 50,000) 310,000
Inventory (200,000 + 20,000 + 0 FVA net, Step 1) 220,000
Investment in subsidiary (Eliminated)
Building, net (950,000 + 250,000 + 90,000 FVA net, Step 1) 1,290,000
Goodwill (Step 2) 50,000
TOTAL ASSETS 2,878,000

LIABILITIES AND EQUITY

Accounts payable (80,000 + 10,000) 90,000
Total liabilities 90,000
Share capital (Parent only) 1,000,000
Share premium (Parent only) 300,000
Retained earnings (Parent only – Step 4) 1,346,400
Owners of parent 2,646,400
Non-controlling interest (Step 3) 141,600
Total equity 2,788,000
TOTAL LIABILITIES AND EQUITY 2,878,000

Run Group
Statement of profit or loss
For the year ended December 31, 20x1
Sales (800,000 + 200,000) 1,000,000
Cost of goods sold (200K + 60K + 20K dep’n. of FVA on inventory) (280,000)
Gross profit 720,000
Depreciation expense (50K + 50K + 10K dep’n. of FVA on bldg.) (110,000)
Distribution costs (130,000 + 2,000) (132,000)
Profit for the year 478,000
Profit attributable to:
Owners of the parent (Step 5) 466,400
Non-controlling interests (Step 5) 11,600
478,000
5. Solution:

Step 1: Analysis of subsidiary’s net assets

Net
Axion Co. Jan. 1, 20x1 Dec. 31, 20x1
change
Net assets at carrying amount 290,000* 310,000
Fair value adjustments (FVA) 10,000(a) 40,000(b)
Net assets at fair value 300,000 350,000 50,000
* (250K share capital + 40K retained earnings)

FVA at acquisition date

(a)

Carrying Fair Fair value

amount value adjustment (FVA)
Inventory 120,000 80,000 (40,000)
Building, net 200,000 250,000 50,000
Totals 320,000 330,000 10,000

FVA at acquisition date less subsequent depreciation.

(b)

FVA, 1/1/x1 Useful life Depreciation FVA, 12/31/x1

Inventory (40,000) N/A (40,000) -
Equipment 50,000 5 yrs. 10,000 40,000
Totals 10,000 (30,000) 40,000

Step 2: Goodwill computation

Consideration transferred 300,000
NCI (300K x 40%) 120,000
Previously held equity interest -
Total 420,000
Fair value of net identifiable assets acquired (Step 1) (300,000)
Goodwill 120,000

Step 3: Non-controlling interest in net assets

Subsidiary's net assets at fair value – Dec. 31, 20x1 (see Step 1) 350,000
Multiply by: NCI percentage 40%
Non-controlling interest in net assets – Dec. 31, 20x1 140,000
Step 4: Consolidated retained earnings
Parent's retained earnings – Dec. 31, 20x1 243,000
Parent's share in the net change in subsidiary's net assets (d) 30,000
Consolidated retained earnings – Dec. 31, 20x1 273,000

Net change in Axion’s net assets (See Step 1)

(d) 50,000
Multiply by: 60%
Joy’s share in the net change in Axion’s net assets 30,000

Step 5: Consolidated profit or loss

Profits of Joy & Axion (63K + 20K) 83,000
Depreciation of FVA (see Step 1) 30,000
Consolidated profit 113,000

Owners of parent NCI Consolidated

Parent's profit before FVA 63,000 N/A 63,000
Share in Axion's profit before FVA (e) 12,000 8,000 20,000
Depreciation of FVA (f) 18,000 12,000 30,000
Totals 93,000 20,000 113,000

(e) (20K x 60% = 12,000); (20K x 40% = 8,000).

(f) (-30K x 60% = 18,000); (-30K x 40% = 12,000).

Joy Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS
Cash (143,000 + 60,000) 203,000
Inventory (440,000 + 160,000 + 0 FVA net, Step 1) 600,000
Investment in subsidiary (Eliminated)
Building, net (560,000 + 160,000 + 40,000 FVA net, Step 1) 760,000
Goodwill (Step 2) 120,000
TOTAL ASSETS 1,683,000
LIABILITIES AND EQUITY
Accounts payable (200,000 + 70,000) 270,000
Total liabilities 270,000
Share capital (Parent only) 1,000,000
Retained earnings (Parent only – Step 4) 273,000
Owners of parent 1,273,000
Non-controlling interest (Step 3) 140,000
Total equity 1,413,000
TOTAL LIABILITIES AND EQUITY 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 (165K + 72K - 40K dep’n. of FVA on inventory) (197,000)
Gross profit 223,000
Depreciation expense (40K + 10K + 10K dep’n. of FVA on bldg.) (60,000)
Distribution costs (32,000 + 18,000) (50,000)
Profit for the year 113,000
Profit attributable to:
Owners of the parent (Step 5) 93,000
Non-controlling interests (Step 5) 20,000
113,000

6. Solution:
Step 1: Analysis of subsidiary’s net assets (Same as #5)
Net
Axion Co. Jan. 1, 20x1 Dec. 31, 20x1
change
Net assets at carrying amount 290,000* 310,000
Fair value adjustments (FVA) 10,000(a) 40,000(b)
Net assets at fair value 300,000 350,000 50,000
* (250K share capital + 40K retained earnings)

(a) FVA at acquisition date

Carrying Fair Fair value
 amount value adjustment (FVA)
Inventory 120,000 80,000 (40,000)
Building, net 200,000 250,000 50,000
Totals 320,000 330,000 10,000

FVA at acquisition date less subsequent depreciation.

(b)

FVA, 1/1/x1 Useful life Depreciation FVA, 12/31/x1

Inventory (40,000) N/A (40,000) -
Equipment 50,000 5 yrs. 10,000 40,000
Totals 10,000 (30,000) 40,000

Step 2: Goodwill computation

Consideration transferred 300,000
Previously held equity interest in the acquiree -
Total 300,000
Less: Parent’s proportionate share in the net assets
of subsidiary (300,000 x 60%) – Step 1 (180,000)
Goodwill attributable to owners of the parent 120,000
Fair value of NCI 132,000
Less: NCI’s proportionate share in the net assets
of subsidiary (300,000 x 40%) – Step 1 (120,000)
Goodwill attributable to NCI 12,000
Goodwill – Dec. 31, 20x1 132,000

Reconciliation using regular formula:

Consideration transferred 300,000

NCI 132,000
Previously held equity interest -
Total 432,000
Fair value of net identifiable assets acquired (Step 1) (300,000)
Goodwill 132,000
Step 3: Non-controlling interest in net assets
Subsidiary's net assets at fair value – Dec. 31, 20x1 (Step 1) 350,000
Multiply by: NCI percentage 40%
Total 140,000
Add: Goodwill attributable to NCI (Step 2) 12,000
Non-controlling interest in net assets – Dec. 31, 20x1 152,000

Step 4: Consolidated retained earnings (Same as #5)

Parent's retained earnings – Dec. 31, 20x1 243,000
Parent's share in the net change in subsidiary's net assets (d) 30,000
Consolidated retained earnings – Dec. 31, 20x1 273,000

Net change in Axion’s net assets (See Step 1)

(d) 50,000
Multiply by: 60%
Joy’s share in the net change in Axion’s net assets 30,000

Step 5: Consolidated profit or loss (Same as #5)

Profits of Joy & Axion (63K + 20K) 83,000
Depreciation of FVA (see Step 1) 30,000
Consolidated profit 113,000

Owners of parent NCI Consolidated

Parent's profit before FVA 63,000 N/A 63,000
Share in Axion's profit before FVA (e) 12,000 8,000 20,000
Depreciation of FVA (f) 18,000 12,000 30,000
Totals 93,000 20,000 113,000

(e) (20K x 60% = 12,000); (20K x 40% = 8,000).

(f) (-30K x 60% = 18,000); (-30K x 40% = 12,000).

 Joy Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS
Cash (143,000 + 60,000) 203,000
Inventory (440,000 + 160,000 + 0 FVA net, Step 1) 600,000
Investment in subsidiary (Eliminated)
Building, net (560,000 + 160,000 + 40,000 FVA net, Step 1) 760,000
Goodwill (Step 2) 132,000
TOTAL ASSETS 1,695,000

LIABILITIES AND EQUITY

Accounts payable (200,000 + 70,000) 270,000
Total liabilities 270,000
Share capital (Parent only) 1,000,000
Retained earnings (Parent only – Step 4) 273,000
Owners of parent 1,273,000
Non-controlling interest (Step 3) 152,000
Total equity 1,425,000
TOTAL LIABILITIES AND EQUITY 1,695,000

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 (165K + 72K - 40K dep’n. of FVA on inventory) (197,000)
Gross profit 223,000
Depreciation expense (40K + 10K + 10K dep’n. of FVA on bldg.) (60,000)
Distribution costs (32,000 + 18,000) (50,000)
Profit for the year 113,000
Profit attributable to:
Owners of the parent (Step 5) 93,000
Non-controlling interests (Step 5) 20,000
113,000
PROBLEM 5: MULTIPLE CHOICE - THEORY
1. A
2. C
3. B
4. D
Explanation: Only in choice (d) that Entity A has all the elements
of control:
1. Power – “Entity A is the ultimate boss of Entity B.”
2. Variable return – Entity A “earns profit the most if Entity B
earns profit, but suffers the most if Entity B incurs.”
3. Ability to affect return – “Entity A makes all the major
decisions.”

5. D
6. A
Explanation: Consolidation is applied prospectively. Therefore,
Entity B’s profit will be consolidated starting January 1, 20x2.
However, Entity B’s statement of financial position will be
included in the December 31, 20x1 consolidated financial
statements.

7. B
8. D
9. B
10. A
PROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL

1. B
Solution:
Total assets of parent (1,296,000 + 360,000) 1,656,000
Total assets of subsidiary 444,000
Investment in subsidiary (360,000)
Fair value adjustments – net (310,000 – 348,000) (38,000)
Goodwill – net (see computation below) 290,000
Consolidated total assets 1,992,000

Consideration transferred (equal to Investment in subsidiary) 360,000

NCI 240,000
Previously held equity interest -
Total 600,000
Fair value of net identifiable assets acquired (310,000)
Goodwill 290,000

2. B
Solution:
Total assets of parent 2,000,000
Total assets of subsidiary 750,000
Investment in subsidiary (430,000)
Fair value adjustments – net 50,000
Goodwill – net (see computation below) 110,000
Consolidated total assets 2,480,000

Consideration transferred (equal to Investment in subsidiary) 430,000

NCI (400K x 20%) 80,000
Previously held equity interest -
Total 510,000
Fair value of net identifiable assets acquired
(310K + 40K + 50K FVA) (400,000)
Goodwill 110,000
3. B
Solution:
Owners of parent: (1M share cap. + 250K ret. earnings) = 1.25M
NCI: (see solution in preceding question)

4. D
Solution:
Step 1: Analysis of subsidiary’s net assets
Net
Jan. 1, 20x1 Dec. 31, 20x1
change
Net assets at carrying amount 296,000 376,000
Fair value adjustments (FVA) 64,000(a) 24,000(b)
Net assets at fair value 360,000 400,000 40,000

FVA at acquisition date

(a)

Carrying Fair Fair value

amount value adjustment (FVA)
Inventory 92,000 124,000 32,000
Equipment, net 160,000 192,000 32,000
Totals 252,000 316,000 64,000

FVA at acquisition date less subsequent depreciation.

(b)

FVA, 1/1/x1 Useful life Depreciation FVA, 12/31/x1

Inventory 32,000 N/A 32,000 -
Equipment 32,000 4 yrs. 8,000 24,000
Totals 64,000 40,000 24,000

5. A
Solution:
Step 2: Goodwill computation
Consideration transferred (equal to invest. in subs.) 300,000
NCI (360K x 20%) 72,000
Previously held equity interest -
Total 372,000
Fair value of net identifiable assets acquired (Step 1) (360,000)
Goodwill 12,000

6. D - None because NCI is measured at ‘proportionate share’.

7. C
Solution:
Total assets of parent 1,672,000
Total assets of subsidiary+ 496,000
Investment in subsidiary (300,000)
Fair value adjustments – net (See Step 1 above) 24,000
Goodwill – net (See Step 2 above) 12,000
Consolidated total assets 1,904,000

8. B
Solution:
Step 3: Non-controlling interest in net assets
Subsidiary's net assets at fair value – Dec. 31, 20x1 (see Step 1) 400,000
Multiply by: NCI percentage 20%
Non-controlling interest in net assets – Dec. 31, 20x1 80,000

9. C
Solution:
Step 4: Consolidated retained earnings
Parent's retained earnings – Dec. 31, 20x1 440,000
Parent's share in the net change in subsidiary's net assets (d) 32,000
Consolidated retained earnings – Dec. 31, 20x1 472,000

Net change in subsidiary’s net assets (See Step 1)

(d) 40,000
Multiply by: 80%
Parent’s share in the net change in Subsidiary’s net assets 32,000
10. C
Solution:
Share capital (Parent only) 940,000
Retained earnings (Parent only – Step 4) 472,000
Owners of parent 1,412,000
Non-controlling interest (Step 3) 80,000
Total equity 1,492,000

11. C
Solution:
Step 5: Consolidated profit or loss
Profits of parent & subsidiary (600K + 80K) 680,000
Depreciation of FVA (see Step 1) (40,000)
Consolidated profit 640,000

Owners of parent NCI Consolidated

Parent's profit before FVA 600,000 N/A 600,000
Share in sub.'s profit before FVA (e) 64,000 16,000 80,000
Depreciation of FVA (f) (32,000) (8,000) (40,000)
Totals 632,000 8,000 640,000

(e) (80,000 x 80% = 64,000); (80K x 20% = 16,000)

(f) (40,000 x 80% = 32,000); (40K x 20% = 8,000)

12. B See Step 5

13. B
Solution:
Step 1: Analysis of subsidiary’s net assets
Net
Jan. 1, 20x1 Dec. 31, 20x1
change
Net assets at carrying amount 348,000* 418,000
Fair value adjustments (FVA) (38,000)(a) 8,750 (a)
Net assets at fair value 310,000 426,750 116,750
*300,000 share capital + 48,000 retained earnings on 1/1/x1 = 348,000 carrying amount

(a) FVA – Useful FVA –

Dep’n
1/1/x1 life 12/31/x1
Inventory (96K – 144K) (48,000) N/A (48,000) -
Building – net (250K – 240K) 10,000 8 1,250 8,750
Totals (38,000) (46,750) 8,750

Step 2: Goodwill computation

Consideration transferred (equal to Investment in subsidiary) 360,000
Previously held equity interest in the acquiree -
Total 360,000
Less: Parent’s proportionate share in the net assets
of subsidiary (310,000 x 60%) – Step 1 (186,000)
Goodwill attributable to owners of the parent 174,000
Fair value of NCI 240,000
Less: NCI’s proportionate share in the net assets
of subsidiary (310,000 x 40%) – Step 1 (124,000)
Goodwill attributable to NCI 116,000
Goodwill – Dec. 31, 20x1 290,000

Reconciliation using regular formula:

Consideration transferred 360,000
NCI 240,000
Previously held equity interest -
Total 600,000
Fair value of net identifiable assets acquired (Step 1) (310,000)
Goodwill 290,000
14. C
Solution:
Total assets of parent 1,550,000
Total assets of subsidiary 550,000
Investment in subsidiary (equal to the consideration transferred) (360,000)
Fair value adjustments – net (Step 1) 8,750
Goodwill – net (Step 2) 290,000
Consolidated total assets 2,038,750

15. A
Solution:
Step 3: Non-controlling interest in net assets
Subsidiary's net assets at fair value – Dec. 31, 20x1 (Step 1) 426,750
Multiply by: NCI percentage 40%
Total 170,700
Add: Goodwill attributable to NCI (Step 2) 116,000
Non-controlling interest in net assets – Dec. 31, 20x1 286,700

16. A
Solution:
Step 4: Consolidated retained earnings
Parent's retained earnings – Dec. 31, 20x1 316,000
Parent's share in the net change in subsidiary's net assets (d) 70,050
Consolidated retained earnings – Dec. 31, 20x1 386,050

Net change in subsidiary’s net assets (See Step 1)

(d) 116,750
Multiply by: 60%
Parent’s share in the net change in Sub.’s net assets 70,050

Share capital (Parent only) 1,200,000

Retained earnings (Parent only – Step 4) 386,050
Owners of parent 1,586,050
17. B
Solution:
COS of parent & subsidiary (200K + 80K) 280,000
Depreciation of FVA on inventory (see Step 1) (48,000)
Consolidated cost of sales 232,000

The depreciation of FVA is deducted because the carrying amount

exceeded the fair value. This is the opposite of the illustration in
the text where the fair value exceeded the carrying amount.

18. A
Solution:
Other operating expenses of parent & subsidiary (400K + 200K) 600,000
Depreciation of FVA on building (see Step 1) 1,250
Consolidated other operating expenses 601,250

19. A
Solution:
Step 5: Consolidated profit or loss
Profits of parent & subsidiary (100K + 70K) 170,000
Depreciation of FVA (see Step 1) 46,750
Consolidated profit 216,750

Owners of parent NCI Consolidated

Parent's profit before FVA 100,000 N/A 100,000
Share in sub.'s profit before FVA (e) 42,000 28,000 70,000
Depreciation of FVA (f) 28,050 18,700 46,750
Totals 170,050 46,700 216,750

(e) (70K x 60% = 42,000); (70K x 40% = 28,000)

(f) (46,750 x 60% = 28,050); (46,750 x 40% = 18,700)

20. D See Step 5