UNIVERSITY OF NUEVA CACERES

City of Naga
COLLEGE OF BUSINESS AND ACCOUNTANCY
2020-2021
VARIAS, AIZEL ANN BELEN
BSA 3rd YEAR BLOCK –A FLEXI-KIT
2076 Accounting for Business Combinations

MODULE 3
INTERCOMPANY TRANSACTIONS

Chapter 5: Consolidated Financial Statements (Part 2)

LEARNING ACTIVITY 3.5
Concept-review

PROBLEM 1: MULTIPLE CHOICES – THEORY pages 226-230

1. A
2. C
3. A
4. A
5. B
6. B
7. B
8. B
9. C
10. A

PROBLEM 2: FOR CLASSROOM DISCUSSION pages230-234

1. Intercompany sale of inventory:

Requirement a: Consolidated Sales
Sales of Parent 1,000,000
Sales of Subsidiary 700,000
Less: Intercompany sales during the year (38K + 40K) - 78,000
Consolidated sales 1,622,000
Requirement c: Consolidated cost of sales
Unrealized profits in ending inventory:
Downstream Upstream Total
Sale price of intercompany sale 38,000
Cost of intercompany sale - 20,000
Profit from intercompany sale 18,000 8,000
Multipy by: Unsold portion a of year-end (9.5/38) 3/4
Unrealized gross profit 4,500 6,000 10,500

Profit from intercompany sale

(40,000 x 20%) = 8,000

Cost of sales of Parent 400,000

Cost of sales of Subsidiary 350,000
Less: Intercompany sales duirng the year (38K + 40K) - 78,000
Add: Unrealized profit in the ending inventory 10,500
Less: Realized profit in the beginning inventory -
Add: Depreciation of FVA on inventory -
Consolidated cost of sales 682,500

Requirement c: Consolidated ending inventory

Ending inventory of Parent 300,000
Ending inventory of Subsidiary 80,000
Less: Unrealized profit in ending inventory - 10,500
Consolidated ending inventory 369,500

2. Intercompany sale of PPE

Requirement a:
Historical cost 120,000
Accumulated depreciation 1/1/x1 - 72,000
Depreciation based on historical cost - 12,000
Carrying amount 36,000

Requirement b:
Equipment, net - Bright Co. 400,000
Equipment, net - Dull Co. 190,000
Unamortized deferred gain (a) - 9,000
Consolidated equipment - net 581,000
Requirement c:
Depreciation expense (Bright Co.) 40,000
Depreciation expense (Dull Co.) 12,000
Amortization of the deferred gain (12K gain on sale/4 yrs) - 3,000
Consolidated depreciation expense 49,000

Step 1: Analysis of
effects of
intercompany
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Step 1: Analysis of effects of intercompany transaction
The intercompany sale is downstream because the seller is the parent (Bright Co.)
The unamortized balance of the deferred gain is computed as follows:
Deferred gain on sale - Jan. 1, 20x1 12,000
Multiply by: 3yrs remaining as od Dec. 31 over 4 yrs 3/4
Deferred gain on sale - Dec. 31, 20x1 9,000

Step 2: Analysis of net assets

 Acquisition Consolidation Net
Dull Co.
Date Date Change
Total net assets at carrying amount 160,000 210,000
Fairvalue adjustments at acquisition-date - -
Subsidiary net assets at fair value 160,000 210,000 50,000

Step 3: Goodwill Computation

Consideration transferred 180,000
Non-controlling interest in the acquiree (160K x 25%) 40,000
Previously held equity interest in the acquiree -
Total 220,000
Fair value of net identifiable assets acquired - 160,000
Goodwill 60,000

Step 4: Non-controlling interest in net assets

Dull's net assets at fair value - Dec. 31, 20x1 210,000
Multiply by: NCI percentage 25%
Total 52,500
Add: Goodwill to NCI net of accumulated impairment losses -
Non-controlling interest in net assets - Dec. 31, 20x1 52,500

Step 5: Consolidated retained earnings

Bright's retained earnings - Dec. 31, 20x1 110,000
Consolidation adjustments:
Bright's share in the net change in Dull's net assets*** 37,500
Unamortized deferred gain - downstream (Step 1) - 9,000
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable to Parent -
Net consolidation adjustments 28,500
Consolidated retained earnings - Dec. 31, 20x1 138,500

Net change in Dull's net assets of 50,000 x 75% = 37,500

Step6: Consolidated profit or loss

 Parent Subsidiary Consolidated

Profits before adjustments 240,000 50,000 290,000

Consolidation adjustments:
Unamortized deferred gain (see step 1) - 9,000
Dividend from subsidiary - - - 9,000
Gain or loss on extinguishment of bonds - - -
Net consolidation adjustments - 9,000 - - 9,000
Profits before FVA 231,000 50,000 281,000
Depreciation of FVA - - -
Impairment loss on goodwill - - -
Consolidated profit 231,000 50,000 281,000

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

Owners of
NCI Consolidated
Parent
Bright's profit before FVA (see step 6) 231,000 N/A 231,000
Share in Dull's profit before FVA *** 37,500 12,500 50,000
Depreciation of FVA - - -
Share in impairment loss on goodwill - - -
Profit or los attributable 268,500 12,500 281,000
*** Shares in Dull's profit before FVA (50K x 75%=37,500) ; (50K x 25%=12,500)

Requirement d:
 Ice Group
Consolidated Statement of Financial Position
As of December 31, 20x1

ASSETS Consolidated
Investment in subsidiary (at cost) - eliminated -
Equipment, net 581,000
Other assets (200K + 45K) 245,000
Goodwill (see step 3) 60,000
Total Assets 886,000

LIABILITIES AND EQUITY

Liabilities (70K + 25K) 95,000
Share Capital - Bright 600,000
Retained earnings (see step 5) 138,500
Equity attributable to owners of the parent 738,500
Non-controlling interest (see step 4) 52,500
Total equity 791,000
Total Liabilities and Equity 886,000

Ice Group
Statement of Profit of loss
For the year ended December 31, 20x1

Revenues (300K + 80K) 380,000

Consolidated depreciation expense - 49,000
Other expenes (32K + 18K) - 50,000
Gain on sale of equipment (eliminated) -
Profit for the year 281,000

3. Intercompany Dividends
Requirement a: Non-controlling interest in the net assets of the subsidiary as of year-end.
Fire Co's net assets at fair value 320,000
Multiply by: NCI percentage 25%
Total 80,000
Add: Goodwill to NCI net of accumulated impairment losses -
Non-controlling interest in net assets - Dec. 31,20x1 80,000

Requirement b: Consolidated retained earnings at year-end

Ice Co's retained earnings - Dec. 31, 20x1 280,000
Consilidation adjustments:
Ice Co's share in the net change in the Fire Co's net assets 60,000
Unrealized profit -
Impairment loss on goodwill attributable to Parent -
Net consolidation adjustments 60,000
Consolidated retained earnings - Dec. 31, 20x1 340,000

Requirement c: Consolidated profit for the year broken down into amounts attributable to the owners of
the parent and attributable to non-controlling interest.

Parent Subsidiary Consolidated

Profits before adjustments 475,000 132,000 607,000

Consolidation adjustments:
Unrealized profits - - -
Dividend income from subsidiary - 75,000 N/A - 75,000
Gain or loss on extinguishment of bonds - - -
Net consolidation adjustments - 75,000 - - 75,000
Profits before FVA 400,000 132,000 532,000
Depreciation of FVA - - -
Impairment loss on goodwill - - -
Consolidated profit 400,000 132,000 532,000

Profit or los attributable to owners of Parent and NCI:

Owners of
NCI Consolidated
Parent
Ice Co's profit before FVA (see above) 400,000 N/A 400,000
Share in Fire Co's profit before FVA *** 99,000 33,000 132,000
Depreciation of FVA - - -
Share in impairment loss on goodwill - - -
Profit or los attributable 499,000 33,000 532,000
***Share in Fire Co's profit before FVA (132K x 75%=99,000) ; (132K x 25% = 33,000)

4. Intercompany bond transaction

Requirement a: Gain or loss in extinguishment of bonds
Acquisition cost of bonds 250,000
Carrying amount of bonds payable - 300,000
Gain (loss) extinguishment of bonds - 50,000

Requirement b: Consolidated total bonds payable

Bonds payable, at face amount - issued by Sing Co 300,000
Portion acquired by Dance Co. - 30,000
Consolidated total bonds payable

Requirement c:
Consolidated profit or loss:

Parent Subsidiary Consolidated

Profits before adjustments 80,000 20,000 100,000

Consolidation adjustments:
Unrealized profits - - -
Dividend income from subsidiary - N/A -
Gain or loss on extinguishment of bonds 50,000 - 50,000
Net consolidation adjustments 50,000 - 50,000
Profits before FVA 130,000 20,000 150,000
Depreciation of FVA - - -
Impairment loss on goodwill - - -
Consolidated profit 130,000 20,000 150,000

Owners of
NCI Consolidated
Parent
Sing's profit before FVA (see above) 130,000 N/A 130,000
Share in Dance's profit before FVA *** 15,000 5,000 20,000
Depreciation of FVA - - -
Share in impairment loss on goodwill - - -
Profit or los attributable 145,000 5,000 150,000
***Share in Dance's profit before FVA (20K x 75%= 15,000) ; (20K x 25% = 5,000)

Consolidated financial statements:

Sing Group
Consolidated Statement of Financial Position
As of December 31, 20x1

ASSETS Consolidated
Investment in subsidiary (at cost) - eliminated -
Investment in bonds - eliminated -
Other assets (500K + 50K) 550,000
Goodwill 30,000
Total Assets 580,000
LIABILITIES AND EQUITY
Accounts payable (40K + 30K) 70,000
Share Capital - Sing Co. 200,000
Retained earnings 242,500
Equity attributable to owners of the parent 442,500
Non-controlling interest (see step 4) 67,500
Total equity 510,000
Total Liabilities and Equity 580,000

Revenues (300K + 120K) 420,000

Operating expenses (217K + 100K) - 317,000
Interest expense - 3,000
Gain on extinguishment of bonds 50,000
Profit for the year 150,000

PROBLEM 3: EXERCISE pages 234-238

1. SOLUTIONS:
Requirement a: Consolidated sales
Sales of Parent 1,000,000
Sales of Subsidiary 700,000
Less: Intercompany sales during the year (16K + 60K) - 76,000
Consolidated Sales 1,624,000
(12,000 / 75%) = 16,000

Requirement b: Consolidated cost of sales

Downstream Upstream Total
Sale price of intercompany sale 16,000
Cost of intercompany sale - 12,000
Profit of intercompany sale 4,000 10,000
Multiply by: Unsold portion as of year-end 1/2 1/4
Unrealized gross profit 2,000 2,500 4,500
(60,000 / 120%) x 20% = 10,000

Cost of sales of Parent 400,000

Cost of sales of Subsidiary 350,000
Less: Intercompany sales during the year (16K + 60K) - 76,000
Add: Unrealized profit in the ending inventory 4,500
Requirement
Less: Realizedc: Consolidated
profit in beginningending inventory
inventory -
Add: Depreciation of FVA on inventory -
Consolidated cost of sales 678,500
Ending inventory of Parent 300,000
Ending inventory of Subsidiary 80,000
Less: Unrealized profit in ending inventory - 4,500
Consolidated ending inventory 375,500

2. SOLUTIONS:
Requirement a:
Historical cost 144,000
Accumulated depreciation 1/1/x1 - 86,400
Depreciation based on historical cost - 14,400
Carrying amount 43,200

Requirement b:
Day Co. Equipment, net 480,000
Night Co. Equipment, net 228,000
Unamortized deferred gain (see computations below - step 1) - 10,800
Consolidated equipment, net 697,200

Requirement c:
Day Co. Depreciation expense 48,000
Night Co. Depreciation expense 14,400
Amortization of the deferred gain
(12,000 gain on sale / 4 yrs) - 3,600
Consolidated depreciation expense 58,800

Step 1: Analysis of effects of intercompany transaction

Deferred gain on sale - Jan. 1, 20x1 [72K - (144K - 86.4K) 14,400
Multiply by: 3yrs remaining as od Dec. 31 over 4 yrs 3/4
Deferred gain on sale - Dec. 31, 20x1 10,800

Step 2: Analysis of net assets

Acquisition Consolidation
Night Co.
Date Date Net Change
Total net assets at carrying amount 192,000 252,000
Fairvalue adjustments at acquisition-date - -
Subsidiary's net assets at fair value 192,000 252,000 60,000
Step 3: Goodwill computation
Consideration transferred 216,000
Non-controlling interest in the acquiree (192K x 25%) 48,000
Previously held equity interest in the acquiree -
Total 264,000
Fair value of net identifiable assets acquired - 192,000
Goodwill 72,000

Step 4: Non-controlling interest in net assets

Night's net assets at fair value - Dec. 31, 20x1 252,000
Multiply by: NCI percentage 25%
Total 63,000
Add: Goodwill to NCI net of accumulated impairment losses -
Non-controlling interest in net assets - Dec. 31, 20x1 63,000

Step 5: Consolidated retained earnings

Day's retained earnings - Dec. 31, 20x1 132,000
Consolidation adjustments:
Day's share in the net change in Night's net assets*** 45,000
Unamortized deferred gain - downstream (Step 1) - 10,800
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable to Parent -
Net consolidation adjustments 34,200
Consolidated retained earnings - Dec. 31, 20x1 166,200

Net change in Night's net assets of 60,000 x 75% = 45,000

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated

Profits before adjustments 288,000 60,000 348,000

Consolidation adjustments:
Unamortized deferred gain (see step 1) - 10,800 - - 10,800
Dividend income from subsidiary - N/A -
Gain or loss on extinguishment of bonds - - -
Net consolidation adjustments - 10,800 - - 10,800
Profits before FVA 277,200 60,000 337,200
Depreciation of FVA - - -
Impairment loss on goodwill - - -
Consolidated profit 277,200 60,000 337,200

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

 Owners of
NCI Consolidated
Parent
Day's profit before FVA (see step 6) 277,200 N/A 277,200
Share in Night's profit before FVA *** 45,000 15,000 60,000
Depreciation of FVA - - -
Share in impairment loss on goodwill - - -
Profit or los attributable 322,200 15,000 337,200
*** Shares in Night's profit before FVA (60K x 75%=45,000) ; (60K x 25%=15,00)

Requirement d:
Day Group
Consolidated Statement of Financial Position
As of December 31, 20x1

ASSETS Consolidated
Investment in subsidiary (at cost) - eliminated -
Equipment, net 697,200
Other assets (240K + 54K) 294,000
Goodwill (see step 3) 72,000
Total Assets 1,063,200

LIABILITIES AND EQUITY

Liabilities (84K + 30K) 114,000
Day's Share Capital 720,000
Retained earnings (see step 5) 166,200
Equity attributable to owners of the parent 886,200
Non-controlling interest (see step 4) 63,000
Total equity 949,200
Total Liabilities and Equity 1,063,200

Day Group
Statement of Profit of loss
For the year ended December 31, 20x1

Revenues (360K + 96K) 456,000

Consolidated depreciation expense - 58,800
Other expenes (38.4K + 21.6K) - 60,000
Gain on sale of equipment (eliminated) -
Profit for the year 337,200

3. SOLUTIONS:
Requirement a:
Soft's net assets at fair value - Dec. 31, 20x1 480,000
Multiply by: NCI percentage 25%
Total 120,000
Add: Goodwill to NCI net of accumulated impairment losses -
Non-controlling interest in net assets - Dec. 31,20x1 120,000

Requirement b:
Loud's retained earnings - Dec. 31, 20x1 420,000
Consilidation adjustments:
Loud's share in the net change in the Soft's net assets 90,000
Unrealized profit -
Gain of loss on extinguishment of bonds -
Impairment loss on goodwill attributable to Parent -
Net consolidation adjustments 90,000
Consolidated retained earnings - Dec. 31, 20x1 510,000

Requirement c: Parent Subsidiary Consolidated

Profits before adjustments 712,500 198,000 910,500

Consolidation adjustments:
Unrealized profits - - -
Dividend income from subsidiary - 112,500 N/A - 112,500
Gain or loss on extinguishment of bonds - - -
Net consolidation adjustments - 112,500 - - 112,500
Profits before FVA 600,000 198,000 798,000
Depreciation of FVA - - -
Impairment loss on goodwill - - -
Consolidated profit 600,000 198,000 798,000

Profit or loss attributable to owners of Parent and NCI:

Owners of
NCI Consolidated
Parent
Loud's profit before FVA (see above) 600,000 N/A 600,000
Share in Soft's profit before FVA *** 148,500 49,500 198,000
Depreciation of FVA - - -
Share in impairment loss on goodwill - - -
Profit or los attributable 748,500 49,500 798,000
***Share in Soft's profit before FVA (198K x 75%= 148,500) ; (198K x 25% = 49,500)

4. SOLUTIONS:
Requirement a: Gain or loss on extinguishment of bonds
Acquisition cost of bonds 320,000
Carrying amount of bonds payable - 300,000
Gain (loss) extinguishment of bonds 20,000

Requirement b: Consolidated total bonds payable

Bonds payable, at face amount - issued by Walk Co. 300,000
Portion acquired by Run Co. - 300,000
Consolidated total bonds payable

Requirement c: Consolidated financial statements and profit or loss

Walk Group
Consolidated Statement of Financial Position
As of December 31, 20x1

ASSETS Consolidated
Investment in subsidiary (at cost) - eliminated -
Investment in bonds - eliminated -
Other assets (650K + 64K) 714,000
Goodwill 78,000
Total Assets 792,000

LIABILITIES AND EQUITY

Accounts payable (52K + 150K) 202,000
Walk's share capital 350,000
Retained earnings 181,500
Equity attributable to owners of the parent 531,500
Non-controlling interest (see step 4) 58,500
Total equity 590,000
Total Liabilities and Equity 792,000

Walk Group
Statement of Profit of loss
For the year ended December 31, 20x1

Revenues (390K + 156K) 546,000

Operating expenses (282,100 + 130K) - 412,100
Interest expense - 3,000
Gain on extinguishment of bonds - 20,000
Profit for the year 110,900
PROBLEM 4: MULTIPLE CHOICES – COMPUTATIONAL pages 238-242
1. D
2. A
3. C
4. C
5. B
6. B
7. B
8. D
9. C
10. A