PHINMA Education StudentActivitySheet

Lesson Title: Financial Statements Materials:

Presentation and Accounting for SME Columnar notebook; calculator; textbook

Learning Targets: References:

At the end of the learning session, Millan, Zeus Vernon B.; Accounting for Business
Combinations; 2019 Edition; pp. 1-23
1. I can prepare accounting working papers to accumulate , classify, and arrange
data, including the preparation of Dayag, Antonio J.; Advanced Financial
financial reports and statements.. Accounting and Reporting, 2016 Edition
2. Account business combination and goodwill computation under PFRS for SMEs

Reading of Concept Notes:

The following items should be noted in the worksheet which will lead us to distinguish figures from”
1. Parent’s Separate (Internal) Financial Statements - the financial statements of parent before adjustments and
working paper elimination entries. It is here wherein the cost (initial value) method or equity method are applied.
2. Group/Consolidated Financial Statements - summation of the financial statements of the group members and the
consolidated adjustments. It is wherein adjustments and eliminating entries are reflected.
3. Parent’s (Interest/Equity Interest/Controlling Interest) Financial Statements - the parent figures are then
determined by subtracting the Non-controlling interest from the total consolidated equity (group/consolidated
financial statements)

Relevant provision of the PFRS for SMEs

Section 9 Consolidated and Separate Financial Statements
A parent is required to prepare consolidated financial statements except if:
I. The parent is itself a subsidiary and its ultimate or intermediate parent produces consolidated financial
statements that comply with full PFRSs or the PFRS for SMEs.
II. The subsidiary is acquired with the intention of selling it within one year from the acquisition date.
If the subsidiary is not sold within one year, it must be consolidated by restating all prior period financial
statement, except when the failure to sell is beyond the parent’s control and the parent remains committed to
sell the subsidiary.

Separate Financial Statements

The PFRS for SMEs required a parent to present consolidated financial statements but does not require a parent to
present separate financial statements.
Separate financial statements are a second set of financial statements presented by an entity in addition to any of the
following:
1. Consolidated financial statements prepared by a parent,
2. Financial statements prepared by a parent exempted from preparing consolidated financial statements, or
3. Financial statements prepared by an entity that is not a parent but is an investor in an associate or has a venturer’s
interest in a joint venture.

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The PFRS for SMEs does not require combined financial statements to be prepared.
Areas covered in full PFRS but not in PFRS for SMEs include:
1. Subsequent adjustments to assets and liabilities (re-measurement period).
2. Deferred tax recognized after initial purchase accounting.
3. Non-controlling interests.
4. Step acquisitions.
5. A business combination achieved without the transfer of consideration.
6. Indemnification assets.
7. Shared-based payments.
8. Employee benefits.

Guided Practice 1:
Activity 23-1. (30 min.)
Problem: The financial statements for Goody and Carry Company for the year ended December 31, 2019, prior
to Goody’s business combination transaction regarding Carry, follow:
Goody Carry

Revenues P 2,700,000 P 600,000

Expenses

Net Income P P

Retained earnings, Jan. 1 P 2,400,000 P 400,000

Net income 720,000 200,000

Dividends ( 270,000) ( 0)
Retained earnings, Dec. 31 P 2,850,000 P 600,000

Cash P 240,000 P 220,000

Receivables and inventory 1,200,000 340,000

Building (net) 2,700,000 600,000

Equipment (net)

Total assets P P

Liabilities P 1,500,000 P 820,000

Common stock 1,080,000 400,000

Additional paid-in capital 810,000 540,000

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Retained earnings

Total liabilities and stockholders’ equity P P

On December 31, 2019, Goody issued P600,000 in debt 30,000 shares of its P10par value common stock to the owners
of Carry to purchase all of the outstanding shares of that company. Goody shares had a fair value of P40 per share.
Goody paid P25,000 to a broker for arranging the transaction. Goody paid P35,000 in stock issuance costs. Carry’s
equipment was actually worth 1,400,000 but its building were only at P560,000.
Requirements: Compute the following
1. Amount of the investment recorded on Goody’s book?
2. Consolidated revenues for 2019.
3. Compute the consolidated expenses for 2019.
4. Consolidated cash account at December 31, 2019.
5. Consolidated buildings (net) account at December 31, 2019.
6. Consolidated goodwill account for December 31, 2019
7. Consolidated common stock account at December 31, 2019 8. Consolidated additional paid-in capital at December
31, 2019
9. Consolidated retained earnings at December 31, 2019.

Answers to Activity 23-1:

1.
Fair value of consideration transferred:

Debt P 600,000
Shares: 30,000 x P40, fair value 1,200,000
P1,800,000
2. Consolidated revenue: P2,700,000.
On the date of acquisition only the parent’s reported revenue and expenses should be reported in the
consolidated statement. The revenue and expenses of the subsidiary are already closed to retained earnings account
on the acquisition date. 3.
Parent’s expenses P1,980,000
Add: Acquisition-related costs (direct costs -costs of arranging) 25,000
Consolidated expenses on the date of acquisition P2,005,000
4 Consolidated Balance Sheet, Date of Acquisition (12/31/19)
Goody’s (parent) cash P 240,000
Carry’s (subsidiary) cash 220,000
Total cash before acquisition P 460,000
Less: Payment to a broker 25,000
Stock issuance cost 35,000
Consolidated cash P 400,000
5, Consolidated Balance Sheet, Date of Acquisition (12/31/19):
Goody’s (parent) building P2,700,000

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Carry;s (subsidiary) building 600,000

Total building before consolidation P3,300,000

Add (Deduct): Adjustments to reflect fair value - Building of subsidiary ( 40,000)

Consolidated building (net P3,260,000

6. Fair value of consideration transferred:

Debt P 600,000

Shares: 30,000 x P40, fair value 1,200,000

Fair value of subsidiary P1,800,000

Less: Book value of net assets (stockholders’ equity-

Subsidiary): [(P400,000 + P540,000 + P600,000) x 100%] 1,540,000
Allocated excess P 260,000

Less: Over/undervaluation of Assets and Liabilities: Increase

in equipment (P1,400,000 - P1,200,000) P200,000
Decrease in building (P600,000 - P560,000) 160,000
40,000
Goodwil P 100,000

7. Consolidated Common Stock:

Acquirer (Parent - Goody) P1,080,000
Add: Newly issued shares (30,000 shares x P10) 300,000
Acquiree (Subsidiary-Carry), eliminated in preparing the CBS 0
P1,380,000
8. Consolidated Additional Paid-in Capital:
Acquirer (Parent - Goody) P 810,000
Add: newly issued shares (30,000 shares x (P40 - P10) 900,000
Less: Stock issuance costs ( 35,000)
Acquiree (subsidiary- Carry), eliminated in preparing CBS 0
P1,675,000
9. Consolidated Retained Earnings:
Acquirer (Parent - Goody): (P700,000 + P980,000) P2,850,000

Less: Acquisition-related costs ( 35,000)

Acquiree (Subsidiary - Carry), eliminated in preparing the CBS 0

P2,825,000

Independent Practice 1

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Activity 23-2 (40 min.)

Problem. On January 1, 2020, P Corporation and S Corporation and their condensed balance sheet are as follows:
P Corporation S Corporation

Current Assets P 70,000 P 20,000

Non-Current Assets 90,000 40,000

Total Assets P 160,000 P 60,000

Current Liabilities P 30,000 P 10,000
Long-term Debt 50,000 0

Stockholders’ Equity 80,000 50,000

Total Liabilities and Equities P 160,000 P 60,000

On January 2, 2020, P Corporation borrowed P60,000 and used the proceeds to obtain 80% of the outstanding
common shares of S Corporation. The acquisition price was considered proportionate to S’s fair value. The P60,000
debt is payable in 10 equal annual principal payments plus interest, beginning December 21, 2020. The excess fair
value of the investment over the underlying book value of the acquired net assets is allocated to inventory (60%) and
to goodwill (40%).

Requirements: Compute the following consolidated balance accounts as of January 2, 2020:

1. Goodwill using proportionate basis (partial) 2.
Goodwill using full fair value (full/gross-up) basis.
3. Current assets
4. Non-current assets using proportionate basis (partial) in computing goodwill.
5. Non-current assets using full fair value (full/gross-up) in computing goodwill.
6. Current liabilities
7. Non-current liabilities
8. Stockholders’ equity using proportionate (partial goodwill) basis to determine non-controlling interest.
9. Stockholders’ equity using full value (full/gross-up) basis to determine non-controlling interest.

Note: Use your columnar notebook to answer activity 23-2

Independent Practice 2
Activity 23-3 (40 min.)
On January , 2020, P Company acquired 90% of S Company in exchange for 5,400 shares of P10 par common stock
having a market value of P120,600. P and S condensed balance sheet where as follows:
P Company S Company

ASSETS:

Cash P 30,900 P 37,400

Accounts receivable (net0 34,200 9,100
Inventories 22,900 16,100
Equipment 9net) 179,000 40,000
Patents ---- 10,000
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Total Assets P267,000 P112,600

LIABILITIES AND STOCKHOLDERS’ EQUITY

Accounts payable P 4,000 P 6,600

Bonds payable, 10% 100,000 ---
Common stock, P10 par 100,000 50,000
Additional paid-in capital 15,000 15,000
Retained earnings 48,000 41,000
Total liabilities and stockholders’ equity P267,000 P112,600
At the date of acquisition, all assets and liabilities of S Company have book value approximately equal to their
respective market values except the following as determined by appraisal as follows:
Inventories (FIFO method) P 17,100
Equipment (net - remaining life - 4 years) 48,000
Patents (remaining life 10 years) 13,000
Goodwill (no impairment)

Requirements: Compute the following:

1. Partial goodwill on Jan. 1, 2020
2. Non-controlling interest (in net assets) on Jan. 1, 2020
3. Consolidated Retained Earnings, Jan. 1, 2020
4. Equity Holders of Parent - Retained Earnings, Jan. 1, 2020
5. In addition to the information, assuming that on Dec. 31, 2020, the following results were given:
Dividends Paid Net Income

P Company P 15,000 P 30,200

S Company 4,000 9,400
Using cost method to record results of operations, compute the Investment balance on Dec. 31, 2020
6. Dividend income for 2020 using cost method.
7. Non-controlling interest in Net Income on Dec. 31, 2020.
8. Non-controlling interest on Dec. 31, 2020.
9. Profit for the period attributable to Equity Holders of Parent on Dec. 31, 2020.
10. Consolidated/Group Net Income on Dec. 31, 2020.
11. Consolidated Retained Earnings, Dec. 31, 2020.
12. Consolidated Total Equity (Stockholders’ Equity) on Dec. 31, 2020.
Note: Use your columnar notebook to answer activity 23-3.

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