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ADVANCED ACCOUNTING
Module 5: Accounting for Business Combinations

Module 5.0: Introduction

Accounting for Business Combinations is perhaps the most advanced topic in Advanced Accounting.
Advanced… but not the most difficult. At the end of this module, you will realize that this topic is, at
its core, procedural and methodical in nature.

In law, business combinations are classified either as a merger (A + B = A or B) or a consolidation (A

+ B = C). In accounting, business combinations are classified in a similar way. The focal point,
however, is the accounting treatment of the transaction/s rather than its legal structure.
a. Acquisition of net assets (Accounting merger) – there is an actual purchase of ALL
(100%) the assets and liabilities of the acquiree. To put it in another way, all the assets and
liabilities of the acquiree are closed in its separate books and transferred to the books of the
acquirer. After the acquisition, the acquiree is dissolved and only the acquirer continues in
existence.
b. Acquisition of stock (Accounting consolidation) – control is obtained USUALLY by
purchasing all or majority of the voting shares of another company. The acquiree (or more
appropriately referred to as the subsidiary) and the acquirer (i.e. parent) continue their
separate existence. However, at the end of the accounting period, they are consolidated into
one company. Normally, I would have romanticized this, but I’ll leave that up to you.

The difference between the two primarily lies in the journal entries made in the books of the
acquirer (or parent), the acquiree (or subsidiary), and the consolidated books. Journalizing the
transactions involved in business combinations will be embedded in our classroom discussions, but
to give you an overview of the entries made, the following illustration is provided:

Acquisition of Net assets: Assume that A Corp. acquired all the assets and assumed all the liabilities
of B Corp. for P1,000,000 cash. The fair values, which is also equal to their book values, of B Corp.’s
assets and liabilities at the date of acquisition is P1,500,000 and P700,000, respectively. The
combination is properly accounted for as an acquisition of net assets. The ff. entries are made at the
acquisition date:

Books of A Corp. (Acquirer) Books of B Corp. (Acquiree) Consolidated books

Assets of B Corp P1.5 M Liabilities P0.7 M The consolidated books is simply the
Goodwill 0.2 M Equity 0.8 M books of A Corp.
Cash (consideration) P1 M Assets P1.5 M
Liabilities of B Corp. 0.7 (to close the books of B Corp.)

Acquisition of Stock: Assume that C Corp. obtained control of D Corp. by acquiring 100% of the
voting shares of the latter for P1,000,000 cash. The fair values, which is also equal to their books
values, of D Corp.’s assets and liabilities at the date of acquisition is P1,500,000 and P700,000,
respectively. The combination is properly accounted for as an acquisition of stock. The ff. entries are
made:

Books of C Corp. (Parent) Books of D Corp. (Subsidiary) Consolidated books

Investment in D Corp. P1 M No journal entry is made. The cash Equity – D Corp. P0.8 M
Cash (consideration) P1 M consideration is a personal Goodwill 0.2 M
transaction to the shareholders of D Investment in D Corp. P1
Corp. M

Notice that the goodwill recognized for both types of acquisitions is the same, but the journal
entries to recognize the business combination at the date of acquisition are different.

According to IFRS 3, the ACQUISITION METHOD is the only acceptable method in accounting for
business combinations. The acquisition method involves the following steps:
1. Identify the acquirer.

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2. Determine the acquisition date – the acquisition date is the date control is obtained.
3. Recognize and measure the identifiable assets acquired, liabilities assumed, and any non-
controlling interest in the acquiree.
4. Recognize and measure goodwill or bargain purchase gain.

Module 5.1: Business Combination – Date of Acquisition

Focus notes:

 The MAIN CONCERN of accounting problems for business combinations at the date of
acquisition is the computation of GOODWILL or BARGAIN PURCHASE GAIN (i.e. negative
goodwill).
 The basic formula to compute goodwill (bargain purchase gain) is:
Cost of investment (COI) xxx
Fair value of the identifiable net assets of the acquiree/subsidiary (FVNA) _xxx_
Goodwill/(Bargain Purchase Gain) xxx

Question: Where is goodwill/bargain purchase gain recorded?

It depends on the type of acquisition. If it is an acquisition of net assets, goodwill is
recorded in the BOOKS OF THE ACQUIRER. If it is an acquisition of stock, goodwill is
recorded in the CONSOLIDATED BOOKS. In no case shall goodwill or gain arising from the
combination be recorded in the books of the acquiree/subsidiary or the parent.
 Cost of investment (COI) – the COI is essentially the consideration given by the acquirer (or
parent) to the acquiree (or subsidiary) to effect the business combination. The COI is the sum of
the following items, all of which are valued at FAIR VALUE:
1. Cash consideration given to acquire the acquiree or subsidiary
2. Nonmonetary assets given as consideration
3. Equity instruments issued as consideration
4. Liabilities assumed
5. Contingent consideration payable (CCP) – the CCP is a consideration payable when the
subsidiary satisfies a certain condition (e.g. a profit target or a sales quota).
6. Share-based payments
7. Non-controlling interest (NCI) – arises in acquisition of stock and less than 100% of the
voting shares are acquired by the parent.
8. Previously-held interest (PHI) – arises in step acquisitions. Accounting for step
acquisitions is discussed in the succeeding pages.

 Acquisition-related costs – these costs are NOT PART of the COI. They are expensed
immediately. However, if they relate to the issuance of equity securities, they are treated as a
DEDUCTION to the extent of the APIC arising from the issuance of such securities. Any EXCESS
to the amount of the APIC arising from the issuance is EXPENSED. Examples of share issuance
costs are SEC registration fees and printing costs.
Illustration: Assume that A Corp. acquired B. Corp. by issuing 10,000 shares with a par of P2 and
fair value of P5 per share. The following acquisition-related costs were incurred and paid: legal
fees P10,000, SEC registration fees P20,000, printing of stock certificates P20,000. The legal fees
are expensed immediately. The SEC registration fees and printing of stock certificates should be
deducted or offset against the APIC. But since the APIC arising from the issuance is just P30,000
(10,000 shares x [P5 – P2]), P10,000 of the cost of issuing shares is expensed. All these are
summarized in the journal entry below:

Acquisition-related expenses (P10,000 finders fee + P10,000 excess) P20,000

Additional paid-in capital (APIC) 30,000
Cash P50,000

When debt securities (such as bonds) are issued as consideration, any issuance costs are treated
as a deduction to the carrying amount of the security. A new effective rate is computed to
amortize the liability. However, accounting problems on business combinations rarely involve
debt securities as a consideration. Rarely… but not never.

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 Fair value of the identifiable net assets of the acquiree/subsidiary (FVNA) – the FVNA is
simply the difference of the identifiable assets and the identifiable liabilities of the
subsidiary/acquiree at fair value.

FVNA = Identifiable assets @ FV – Identifiable Liabilities @ FV

The label “identifiable” is very important. IDENTIFIABLE does not necessarily mean that it is
RECORDED (and vice versa) in the books of the subsidiary/acquiree. Some assets and
liabilities may not be recorded in the books of the acquiree/subsidiary but are identifiable at the
point of acquisition. The fair value of these assets and liabilities should be included in the
computation of the FVNA. Examples are unrecorded intangibles in the books of the
acquiree/subsidiary but have existing fair values per appraisal. Similarly, some recorded assets
and liabilities are not identifiable and should be excluded in the computation of the FVNA. An
example would be receivables that are fully uncollectible. GOODWILL in the BOOKS OF THE
ACQUIREE/SUBSIDIARY is NOT IDENTIFIABLE and should be EXCLUDED from the
computation of the FVNA.

Another tricky rule in computing the FVNA is in the treatment of CONTINGENT ASSETS and
LIABILITIES. Normally, contingent assets are neither disclosed nor recognized, while contingent
liabilities are disclosed when their existence is possible and recognized as provisions when they
are probable. In business combinations, contingent assets are considered identifiable
when their level of existence is probable, while contingent liabilities are considered
identifiable when they are either possible or probable. In other words, the level of
recognition of the subsidiary’s contingent assets and liabilities at the date of acquisition is “one
step higher” than the usual accounting. The table below summarizes this rule:

Accounting for Business

Normal Accounting
Combinations
NEVER RECOGNIZED or Recognized when they are
Contingent assets
DISCLOSED PROBABLE
Recognized when they are Recognized when they are
Contingent liabilities
PROBABLE POSSIBLE or PROBABLE

For a more comprehensive discussion on the theory behind the recognition of assets and
liabilities at the point of acquisition, refer to your Module in ACCTG 610 on Business
combinations (IFRS 3). #CumulativeLearning #TinatamadLangTalagaAkoMagEncode

 Valuation of NCI – NCI is valued using the following HIERARCHY:

1. Explicit fair value (1st level) – the given fair value of the NCI in the problem.

2. Assumed fair value (2nd level) – if the fair value is not explicitly given, it is is obtained by
grossing up the consideration given by the parent to the subsidiary and multiplying the
ownership percentage of the NCI. To illustrate, assume that A Corp. acquired 80% of B Corp.
for P800,000 cash. The assumed FV of the NCI is P200,000 (P800,000 ÷ 80% x 20%).
Control premium – when control premium is part of the purchase price, it should be
deducted from the price before grossing up the consideration to obtain the assumed FV of
the NCI. Illustration: Assume that A Corp. acquired 70% of B Corp. for P710,000 cash. The
purchase price includes control premium of P10,000. The assumed FV of the NCI is
P300,000 ([P710,000 – 10,000] ÷ 70% x 30%).
3. Proportionate share in the subsidiary’s FVNA (3 rd level) – obtained by multiplying the
ownership percentage of the NCI by the FVNA. Illustration: Assume that the fair value of
the net assets of B Corp, the subsidiary, is P1,200,000. If the parent owns 70% of the voting
stock of the subsidiary, then the proportionate share of the NCI in the subsidiary’s FVNA is
P360,000 (P1,200,000 x 30%).

 NCI valuation rule - the value of the NCI at the date of acquisition CANNOT GO BELOW its
value when computed using the proportionate share in the subsidiary’s FVNA. The reason
behind this rule is to avoid the recognition of NEGATIVE GOODWILL (i.e. bargain purchase gain)

ADVACC (Acctg 630) – MODULE 5: ACCOUNTING FOR BUSINESS COMBINATIONS

Ateneo de Zamboanga University – School of Management and Accountancy
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that is attributed to the NCI. Illustration: if the assumed fair value is P300,000, but the NCI’s fair
value using the proportionate method is P360,000, the P360,000 will be used to compute COI
even if the proportionate method is the third level of the valuation hierarchy. This valuation rule
should always be remembered when solving since it is one of the many tricks that your examiner
(including me) can use to mislead your computation of the NCI and the resulting goodwill or
bargain purchase gain.
The following table can be used to facilitate your solution and to double-check whether the
valuation rule is violated or not:
TOTAL PARENT (%) NCI (%)
COI XXX3 XXX2 XXX1
FVNA _(XXX)_ _(XXX)_ _(XXX)_
Goodwill (BP gain) XXX XXX XXX4
1
the acquisition-date value of NCI using the valuation hierarchy.
2
the consideration given by the parent to obtain control over the subsidiary (e.g. cash,
shares, nonmonetary assets, liabilities assumed, CCP, etc.)
3
the total of (1) and (2).
4
this should never be negative, otherwise the valuation rule is violated.

 Measurement period – when the fair values of the acquiree or subsidiary’s net assets are
provisional (i.e. tentative), a measurement period of ONE (1) YEAR from the DATE OF
ACQUISITION is given to allow any changes in the fair values recognized to compute goodwill or
bargain purchase gain. Changes in the fair value after the measurement period are disregarded
and no longer accounted for as adjustments to the goodwill or bargain purchase gain initially
recognized.

 Step acquisition (Business combination achieved in stages) – this happens when the
acquirer initially has no control over the subsidiary but subsequently obtains control by
purchasing additional interest. In accounting, our primary concern in step acquisitions is the
valuation of the previously-held interest (PHI) to be included in the COI to compute goodwill or
bargain purchase gain. The fair value of the PHI is computed by grossing up the consideration
given by the parent to acquire the additional interest and multiplying the percentage of the PHI
in relation to the total voting shares of the subsidiary.

Illustration: Assume that A Corp. initially owns 20% of B Corp. This investment is accounted for
using the equity method and has a book value of P150,000 at the end of the year. At that time, A
Corp. acquired an additional 60% of B’s voting shares for P600,000, bringing its total ownership
to 80%. The fair value of the previously-held interest of 20% at the date of acquisition is
P200,000 (600,000 ÷ 60% x 20%). A remeasurement gain of P50,000 is recognized in the books
of A Corp.

Practice problems (Business Combination – Date of Acquisition):

Problem 1: The following Statements of Financial Position were prepared for POTATO Corp. and
SALAD Corp. on January 1, 2015, just before they entered into a business combination.
Potato Corp. Salad Corp.
Cash P84,000 P2,000
Accounts receivable 30,000 8,000
Inventory 80,000 20,000
PPE (net) 120,000 30,000
Goodwill ___-___ 20,000
Total assets P314,000 P80,000

Accounts payable P50,000 P28,000

Bonds payable 80,000 12,000
Common stock 84,000 20,000
Additional paid-in capital 20,000 4,000
Retained earnings 80,000 16,000
Total liabilities and equity P314,000 P80,000

ADVACC (Acctg 630) – MODULE 5: ACCOUNTING FOR BUSINESS COMBINATIONS

Ateneo de Zamboanga University – School of Management and Accountancy
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On that date, the fair market value of POTATO’s property, plant and equipment amounts to
P150,000, while its bonds payable has a fair value of P65,000. The fair market value of SALAD’s
inventories and PPE were P31,200 and P49,600, respectively, while its bonds payable has a fair
value of P16,800. The fair market value of all other assets and liabilities of POTATO and SALAD
(except for goodwill) were equal to their book values.

On January 2, 2015, POTATO Corp acquired the net assets of SALAD Corp by issuing 2,500 shares of
its P12 par value common stock (current fair value P14.40 per share). Cash amounting to P12,800
was also given by POTATO to SALAD. A contingent consideration amounting to P1,000 will be given
by POTATO in the event that the acquisition will result to a 10% increase in SALAD’s revenue. The
contingent consideration is probable and determinable, and it has been ascertained that the fair
value of this liability is P800. Additional cash payments made by POTATO Corp in completing the
acquisition were the following: legal fees for contract of business combination, P3,200; Accounting
and legal fees for SEC registration, P4,400; Printing costs of stock certificates, P2,400; Finder’s fee,
P2,800; Indirect cost, P2,000.

Compute for the following amounts at the date of acquisition:

a. Goodwill or bargain purchase gain c. Consolidated liabilities
b. Consolidated assets d. Consolidated equity

Problem 2: ABC Company acquired all of JKL Corporation's assets and liabilities on October 1,
2015. JKL reported assets with a book value of P998,400 and liabilities of P569,600.
 ABC noted that JKL included the amount of P64,000 pertaining to the cost of obsolete
merchandise in its recorded assets. The merchandise are no longer saleable.
 ABC also determined that an old delivery van previously used by JKL had a fair value of
P192,000 but is fully depreciated in its books.
 Except for machinery and equipment, ABC determined the fair value of all other assets and
liabilities reported by JKL approximated their recorded values.
 In recording the transfer of assets and liabilities in its books, ABC recorded gain on
acquisition of P148,800. ABC paid P327,200 to acquire JKL's assets and liabilities.
(1) If the book value of JKL's machinery and equipment was P345,600, what was their fair value?
(2) Using the same information above, but with the following changes in assumption: ABC
recorded goodwill of P402,000 and ABC paid P1,037,000 to acquire JKL's assets and liabilities.
If the book value of JKL's machinery and equipment was P516,500, what was their fair value?
A. P264,800; P438,300 C. P264,800; P594,700
B. P426,400; P438,300 D. P426,400; P594,700

Problem 3: On September 18, 2015, DG Co. acquired all the AX Inc.'s P2,150,000 identifiable assets
and P530,000 liabilities. Book values of the AX's assets and liabilities equal to their fair values
except for the overvalued furniture and fixtures. As a consideration, DG issued its own shares of
stock with a market value of PI,715,000 and cash amounting to P375,000. Contingent consideration
that was probable and reasonably estimated on the date of acquisition amount to P148,000. The
merger resulted into P647,000 goodwill. DG Co. had P4,890,000 total assets and P2,731,000 total
liabilities prior to the combination and no additional cash payments were made. Expenses were
incurred for acquisition-related cost amounting to P28,000.
(1) After the merger, how much is the combined total assets in the books of the acquirer?
(2) After the merger, how much is the increase in liabilities in the books of the acquirer?
A. P7,283,000; P706,000 C. P7,658,000; P706,000
B. P7,128,000; P678,000 D. P7,255,000; P678,000

Problem 4: On August 1, 2015, the Polo Company acquired the net assets of Sport Company for a
consideration transferred of P17,450,000 cash. In addition to the cash consideration, an extra
P1,015,000 cash shall be transferred nine months after the acquisition date if a specified profit
target was met. At the acquisition date there was only a low probability of the profit target being
met, so the fair value of the additional consideration liability was determined to be P468,000.
 At the acquisition date, the carrying amount of Sport's net assets was P11,925,000 and a
temporary appraisal of fair value amounting to P12,385,000 was given.

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 On December 31, 2015, an new provisional fair value of P16,815,000 was attributed to the
net assets. Also, at year end the estimated amount of the contingent consideration payable
is determined to decrease by P72,000 from the original estimate.
 On March 31, 2016 the estimated amount of the contingent consideration payable is
determined to be probable at P284,000
 On July 1, 2016 the temporary appraisal decreased by P940,000 from the latest valuation.
 The provisional fair value was finalized on August 31, 2016 with an amount that is higher
by P1,070,000 from the temporary appraisal as of July 1, 2016.
 As a subsequent event, the profit target was met and the P1,015,000 cash was transferred.

What amount of goodwill is presented in the separate statement of financial position of the acquirer
company as of December 31, 2016?

A. P1,859,000 B. P2,625,000 C. P789,000 D. P1,555,000

Problem 5: On January 1, 2015, the Statement of Financial Position of Body and Shop Company
prior to the combination are:
Body Co. Shop Co.
Cash P675,000 P22,500
Inventories 450,000 45,000
Property and equipment (net) 1,125,000 157,500
Total Assets P2,250,000 P225,000

Current liabilities P135,000 P22,500

Ordinary shares, P100 par 225,000 22,500
Share premium 675,000 45,000
Retained earnings 1,215,000 135,000
Total Liabilities and Stockholder’s Equity P2,250,000 P225,000

The fair value of Shop Company’s equipment is P229,500.

Assume the following independent cases:

1. Assume that Body Company acquired all of the outstanding stock of Shop Company
resulting to a goodwill of P99,000. Contingent consideration is P54,000. How much is the
price paid to Shop Company's stock?
A. P373,500 B. P472,500 C. P319,500 D. P427,500

2. Assuming Body Company acquired 70% of the outstanding common stock of Shop Company
for P157,500. Non-controlling interest is measured at fair value of P91,500. How much is
the goodwill or bargain purchase gain?
A. P(25,500) B. P25,500 C. P34,650 D. P(34,650)

3. Assuming Body Company acquired 80% of the outstanding common stock of Shop Company
for P205,200. Non-controlling interest is measured at its proportionate share in Shop
Company's identifiable net assets. How much is the consolidated stockholder's equity on the
date of acquisition?
A. P2,115,000 B. P2,129,400 C. P2,169,900 D. P2,184,300

4. Assuming Body Company acquired 90% of the outstanding common stock of Shop Company
for P364,500. Non-controlling interest is measured at fair value. How much is the total
consolidated assets on the date of acquisition?
A. P2,313,000 B. P2,677,500 C. P2,605,500 D. P2,241,000

Problem 6: Acquirer Company acquires 25% of Acquired Company’s common stock for P190,000
cash and carries the investment using the cost method. After three months, Parent purchases
another 60% of Subsidiary’s common stock for P540,000. On this date, Acquired Company reports
identifiable net assets with carrying value of P720,000 and fair value of P920,000. The liabilities of
the acquired company has a book value and fair value of P280,000. The fair value of the 15% non-
controlling interest is P125,000.

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How much is the goodwill or bargain purchase gain?

A. P(17,000) B. P250,000 C. P(30,000) D. P263,000

Problem 7: Blue Co. merged into Soda Corp. on June 30, 2015. In exchange for the net assets at fair
market value of Blue Co. amounting to P2,785,800 , Soda issued 68,000 common shares at P36 par
value, then going at a market price of P41 per share. Relevant data on stockholders' equity
immediately before the combination show;
Soda Blue
Common stock P8,790,000 P2,030,000
APIC 3,834,000 782,000
Retained earnings/(deficit) (1,516,000) 495,000

Out of pocket costs of the combination were as follows:

Legal fees for the contract of business combination P174,700

Audit fee for SEC registration of stock issue 198,400
Printing costs of stock certificates 144,900
Broker's fee 135,000
Accountant's fee for pre-acquisition audit 161,000
Other direct cost of acquisition 90,400
General and allocated expenses 115,300
Listing fees in issuing new-shares 172,000

What is the amount to be expensed at the date of acquisition?

A. P676,400 B. P851,700 C. P765,400 D. P940,700

Problem 8: On July 1, 2015, Giordano, Inc. acquired most of the outstanding common stock of
Esprit Company for cash. The incomplete working paper elimination entries on that date for the
consolidated statement of financial position of Giordano, Inc. and its subsidiary are shown below:

(1) Stockholders’ equity – Esprit 2,437,500

Investment in Esprit 1,584,375
Non-controlling interest 853,125

(2) Inventories 62,500

Equipment 312,500
Patent 61,250
Goodwill ?
Investment in Esprit 468,750
Non-controlling interest ?

Included in the purchase price is a control premium of P68,750.

The amount of goodwill to be reported in the consolidated statement of financial position on July 1,
2015 (1) assuming non-controlling interest is measured at fair value, (2) assuming non-controlling
interest is measured at the proportionate or relevant share, and (3) assuming non-controlling
interest is measured at fair value. The fair value of the non controlling interest is P1,150,000.

A. P179,135; P185,188; P260,625

B. P284,904; P253,938; P398,125
C. P247,885; P185,188; P329,375
D. P185,188; P284,904; P260,625

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Module 5.2: Business Combination (Stock Acquisition) – Subsequent to

Date of Acquisition

Focus notes:

 MAIN CONCERN: Computation of the consolidated net income and breaking it down into the
share of the parent and the share of the NCI.
 Notice that this topic is exclusively for business combinations through stock acquisition. This is
because in ACQUISITION OF NET ASSETS, consolidation does not recur after the date of
acquisition. The moment the assets and liabilities of the acquiree are acquired and transferred
to the books of the acquirer, the acquiree ceases to operate. The acquirer and acquiree will
and will always be ONE COMPANY with ONE SET OF BOOKS at ANY GIVEN POINT IN TIME.
 However, for STOCK ACQUISITIONS, it’s a different story. Although the parent already controls
the subsidiary, the two continue to operate separately. They are considered to be distinct
accounting entities with separate sets of financial statements. At the end of the accounting
period, the two books are then consolidated for external reporting purposes. In other words,
consolidation is done every accounting period.
 How is consolidation done? By instinct, one might think that the process of consolidation is
simply adding the balances in the books of the parent and the subsidiary. Well, it’s a little bit
more complicated than that. Similar to accounting for home office and branches, there are
certain amounts that we need to eliminate/recognize to conform to financial reporting
standards.
 The process (or the ‘how’ aspect) of consolidation becomes easier and more digestible when its
‘why’ aspect is understood. Why do we need to consolidate? The following KEY CONCEPTS are
CRUCIAL for you to understand the reason behind the computations for consolidation:
1. In the separate books, the income/loss of the parent and the subsidiary are closed to their
respective retained earnings account. In the consolidated books, the income/loss of the
parent and the subsidiary should be allocated to the parent (as the owner of the
subsidiary) and the NCI (as the minority shareholders of the subsidiary).
2. In the separate books, NCI, as an equity account, is not recognized. NCI only arises upon
consolidation.
3. Goodwill is not recorded in the separate books. Goodwill only arises when the consolidated
books are prepared. Consequently, any goodwill impairment loss will only be
recognized upon consolidation.
4. Since the “Investment in Subsidiary” account in the separate books of the parent is usually
carried using the cost method, dividends given by the subsidiary to the parent are recorded
by the parent as “Dividends Income” in its separate books. Upon consolidation, it would be
improper for such dividends to be classified as income in the consolidated income
statement since it constitutes a mere intercompany transfer of cash.
5. The assets and liabilities of the subsidiary at the date of acquisition are still recorded at
book value in its separate books. These assets and liabilities are only adjusted to their
fair values when consolidation is made to comply with IFRS 3 requirements.
6. Depreciable assets of the subsidiary at the DATE OF ACQUISITION are being depreciated
at their book value in the separate books. In the consolidated books, these assets are
revalued to fair value. This means that there is either unrecognized depreciation (if FV >
BV) or excess depreciation (if BV > FV) to be recognized or eliminated in the consolidated
books, as the case may be.
7. The inventory of the subsidiary at the DATE OF ACQUISITION will become cost of goods
sold at book value at the point of sale in the separate books (following a FIFO assumption).
In the consolidated books, the cost of goods sold should be the fair value of the inventory
sold. This means that there is either unrecognized COGS (if FV > BV) or excess COGS (if
BV > FV) to be recognized or to be eliminated in the consolidated books, as the case may be.

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 So, why do we need to consolidate? It is for us to recognize certain accounts (such as goodwill and
NCI) that are absent in the separate books and eliminate amounts (such as intercompany
income) that should not be present in the consolidated financial statements. Ultimately, the goal
is to present the parent and all its subsidiaries as a SINGLE COMPANY based on financial
reporting standards.

 In computing consolidated net income, the logic is to get the sum of the parent’s and the
subsidiary’s net incomes (losses) and eliminate or recognize any item of income or expense to
comply with generally accepted accounting principles “as if” the parent and the subsidiary are
one company ever since control is obtained by the parent. To facilitate this process, the following
table is useful:

Parent’s share in the NCI in the net

Consolidated Net income of the Explanation
Income (CNI-P) subsidiary (NCINIS)

Net income (loss) of The NCI has no share

the parent in its XXX - in the parent’s net
separate books (NI-P) income (loss).
The NI-S is allocated
Net income (loss) of
to the parent and the
the subsidiary in its XXX XXX
NCI using their
separate books (NI-S)
ownership ratios.
To eliminate dividend
Dividends received by income recognized by
the parent from the (XXX) - the parent in its books
subsidiary (DIV-S) that came from its
own subsidiary.
To allocate any excess
or insufficient
Amortization of fair depreciation or
value-book value amortization of
XXX/(XXX) XXX/(XXX)
differences depreciable assets to
(FV-BV AMORT) the parent and the
NCI using their
ownership ratios.
To allocate any
impairment loss to the
Goodwill impairment
(XXX) (XXX) parent and the NCI
loss (IMP LOSS)
using their
GOODWILL ratios.*

TOTAL XXXX XXXX CNI-P + NCINIS = CNI

*The GOODWILL RATIO pertains to the ratio of goodwill attributed to parent equity and goodwill
attributed to NCI using the three-column goodwill table at the date of acquisition.

1. PARTIAL GOODWILL – there is partial goodwill when only the parent has a share in the
goodwill that is presented in the consolidated balance sheet. This arises when the NCI is
valued at its proportionate share in the fair value of the subsidiary’s net assets (FVNA).
When there is partial goodwill, any goodwill impairment loss is fully allocated to CNI-
P.
2. TOTAL/FULL GOODWILL – there is total goodwill when both the parent and the NCI have
shares in the goodwill amount. This arises when then the NCI is valued at assumed fair
value (i.e. grossed-up amount) or explicit fair value, and the amount is greater than the

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NCI’s share in the FVNA of the subsidiary. When there is total goodwill, any goodwill
impairment loss is allocated to CNI-P and NCINIS using the goodwill ratios.

Take note that the sum of the parent’s share in the CNI and the NCI’s share is equal to the TOTAL
CONSOLIDATED NET INCOME. Notice also that intercompany sales transactions are not yet
incorporated in the CNI table above. A more comprehensive CNI table is presented in Module 5.4:
Business Combination – Intercompany Sales Transactions.

Practice problems (Business Combination – Subsequent Date):

Problem 1: On January 1, 2015, Perry Corporation purchased 80% of Sub Company's common
stock for P3,240,000. P150,000 of the excess is attributable to goodwill and the balance to an
undervalued depreciable asset with a remaining useful life of ten years. Non-controlling interest is
measured at its fair value on date of the acquisition. On the date of acquisition, stockholders' equity
of the two companies are as follows:
Perry Corporation Sub Company
Common stock P5,250,000 P 1,200,000
Retained earnings 7,800,000 2,100,000

On December 31, 2015, Sub Company reported net income of P525,000 and paid dividends of
P225,000. Perry reported net income of P1,605,000 and paid dividends of P690,000. Goodwill had
been impaired and should be reported at P30,000 on December 31, 2015.

Questions:

a. What is the non-controlling interest in net income of Sub Company (NCINIS)? P69,000
b. What is the consolidated net income attributable to parent shareholders (CNI-P)?
P1,701,000
c. What is the consolidated net income (CNI) to be presented in the consolidated income
statement at year-end? P1,770,000
d. What is the consolidated retained earnings (CRE) to be presented in the consolidated
statement of financial position at year-end? P8,811,000
e. What is the non-controlling interest in the net assets of the subsidiary (NCINAS) to be
presented in the consolidated statement of financial position at year-end? P834,000

Problem 2: Periwinkle Corporation acquired 80% of the outstanding common stock of Strawberry
Company on June 1, 2015 for P2,345,000. At the date of acquisition, the fair value of the non-
controlling interest was P470,000.
 Strawberry Company's stockholder's equity components at December 31, 2015 are as
follows: Common stock 100 par, P1,000,000, APIC P450,000, Retained Earnings P890,000.
 All the assets of Strawberry were fairly valued except for inventories, which are overstated
by P44,000, and equipment, which was understated by P60,000. The equipment has a
remaining useful life of 4 years. The straight-line method for depreciation is used.
 Stockholder's equity of Periwinkle on June 1, 2015 is composed of Common stock
P3,000,000, APIC P700,000, Retained Earnings P2,100,000.
 Goodwill, if any, should be written down by 56,900 at year-end.
 Net income for the first year of parent and subsidiary are P300,000 and P170,000,
respectively.
 The parent and the subsidiary declared and paid dividends amounting to P80,000 and
P60,000, respectively.
 During the year, there was no issuance of new ordinary shares for both companies.

What is the balance of the non-controlling interest in net assets of subsidiary on December 31,
2015?
A. P580,670 B. P508,970 C. P496,970 D. P487,670

What is the consolidated shareholder’s equity on December 31, 2015?

A. P6,081,380 B. P6,569,050 C. P6,569,050 D. P6,578,350

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Problem 3: P Company purchased 75% of the capital stock of S Company on December 31, 2010 at
P126,000 more than the book value of its net assets. The excess was allocated to equipment in the
amount of P56,250 and to goodwill for the balance. The equipment has an estimated useful life of
10 years and goodwill was not impaired. For four years, S Company reported cumulative earnings
of P567,000 and paid P163,800 in dividends. On January 1, 2015, non-controlling interest in net
asset of S Company amounts to P236,250. Assuming NCI is measured at estimated fair value, what
is the price paid by P Company on the date of acquisition?

A. P423,225 B. P420,525 C. P504,000 D. P532,350

Module 5.3: Business Combination – Intercompany Sales Transactions

Focus notes:

 MAIN CONCERN: Eliminating the effects of intercompany transactions on consolidated net

income.
 What are intercompany sales transactions? These are sales transactions between a parent and its
subsidiary. An intercompany sales transaction can either be:
1. Downstream – the parent sells an asset to the subsidiary
o (i.e. PARENT = SELLING AFFILIATE; SUBSIDIARY = BUYING AFFILIATE)
2. Upstream – the subsidiary sells an asset to the parent
o (i.e. SUBSIDIARY = SELLING AFFILIATE; PARENT = BUYING AFFILIATE)
 Why do I need to know if it is a downstream or upstream transaction? Identifying whether an
intercompany sales transaction is downstream or upstream is crucial in the allocation of the
intercompany income or loss to the CNI-P and the NCINIS.

Type of transaction Treatment

Any intercompany income/loss is allocated

DOWNSTREAM
entirely to the CNI-P.

Any intercompany income/loss is allocated

between the CNI-P and the NCINIS using
UPSTREAM
the ownership percentages of the parent and
the NCI.

 What is the effect of intercompany sales transactions on consolidation, specifically on consolidated

net income? The effect of an intercompany sales transaction will depend on the type of asset
sold.

A. INTERCOMPANY SALE OF INVENTORY

Intercompany sales of inventory give rise to intercompany gross profit. In the separate books of the
selling affiliate, this gross profit may be valid for internal purposes. However, in the consolidated
books (or for external reporting), such gross profit is considered unrealized unless it is sold to an
unrelated party. The following consolidating items are incorporated in our CNI table:

1. Unrealized profit in ending inventory (UPEI) – gross profit that is considered unrealized
in the ending inventory of the buying affiliate since the inventory from intercompany sales
is still unsold to unrelated parties. There are multiple ways of computing UPEI, but the most
common is:
Ending/Unsold inventory from intercompany sales x GP ratio of selling affiliate
Accounting treatment: UPEI is a DEDUCTION in the CNI table since it represents fictitious or
overstatement of gross profit that should be eliminated in consolidation.

2. Realized profit in beginning inventory (RPBI) – due to a FIFO cost flow assumption, the
RPBI of this year is simply equal to any UPEI last year.

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Accounting treatment: RPBI is an ADDITION in the CNI table since it represents incremental
gross profit had the inventory been sold by its original owner to unrelated parties.

Illustration: Parent Corp. acquired 80% of Subsidiary Inc. at book value. No goodwill or bargain
purchase gain was recognized. During 2015, Parent Corp. sold goods costing P80,000 to Subsidiary
Inc. for P100,000 (i.e. downstream sale), 40% of which remained unsold to unrelated parties at the
end of the year. Also, on the same year, an upstream sale of inventory for P120,000 occurred with a
gross profit rate on sales of 25%, all of which was unsold at the end of 2015. At the end of 2015, the
parent and the subsidiary reported separate net incomes of P300,000 and P100,000, respectively.
No dividends were declared by both companies.

Question 1: What is the UPEI for 2015?

Solution: For the downstream sale, the UPEI is P8,000, computed using any of the two
alternatives:
Alternative 1: Gross profit from intercompany sale x % unsold
P100,000 – P80,000 = P20,000 x 40% = P8,000
Alternative 2: Sales price x unsold inventory x GP ratio on sales
P100,000 x 40% x 20% = P8,000
Since it is a downstream sale, the P8,000 is allocated entirely to CNI-P in the CNI table as a
deduction.
For the upstream sale, the UPEI is P30,000. Computed as follows: P120,000 x 25% x 100% unsold.
Since it is an upstream sale, the P30,000 is allocated to CNI-P and NCINIS using the ownership
percentages. Total UPEI for the year is P38,000.

Question 2: What is the RPBI for 2016?

Solution: The RPBI for next year is simply equal to the UPEI of last year. The rule of allocation for
upstream and downstream transactions still applies. Consequently, RPBI for 2015 is zero since the
problem does not mention of any intercompany sale of inventory during 2014.

Question 3: What is the CNI-P, NCINIS and CNI for 2015?

Solution:
CNI-P (80%) NCINIS (20%)
NI-P P300,000 -
NI-S 80,000 20,000
UPEI (Downstream) (8,000) -
UPEI (Upstream) (24,000) (6,000)
RPBI - -
TOTAL P348,000 P14,000

Consolidated Net Income (CNI) = P348,000 + P14,000 = P362,000

B. INTERCOMPANY SALE OF DEPRECIABLE ASSETS

When a depreciable asset is sold by the parent to the subsidiary (and vice versa), the book value of
the asset is derecognized in the books of the seller, while the buyer records the asset purchased at
its selling price. This results to two things: (1) an unrealized gain (loss) on sale in the consolidated
books, since the sale is not to an unrelated party, and (2) a change in the periodic depreciation
recognized on such asset since the buying affiliate records the asset at its new purchase price. The
following consolidating items are incorporated in our CNI table:

1. Unrealized gain/loss on sale (UG/UL) – equal to the gain or loss on sale arising from the
intercompany sale (i.e. Selling price less book value). In our CNI table, the UG/UL is only
recognized at the year of the intercompany sale (i.e. the first year). Any UG/UL
recognized on the year of the intercompany sale is no longer recognized in subsequent
periods since it no longer affects net income in those periods.

Accounting treatment: Unrealized gains (UG) are a DEDUCTION in the CNI table since
they represent fictitious gains that should be eliminated in consolidation. On the contrary,

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unrealized losses (UL) are an ADDITION in the CNI table since they represent fictitious
losses.

2. Realized gain/loss (RG/RL) – equal to the change in the periodic depreciation due to the
intercompany sale. There are multiple ways of computing RG/RL, but the most common is:

Unrealized gain (loss) / Remaining life of the depreciable asset from the point of sale

The periodic realization of the unrealized gain or loss is (surprisingly or not) equal to the
change in the periodic depreciation of the depreciable asset (try figuring this out through
journalizing the transactions). HOWEVER, if the asset is sold to unrelated parties before
it is fully depreciated, any remaining unrealized gain or loss that arose from its
intercompany sale is immediately recognized.
Accounting treatment: Realized gains (RG) is an ADDITION in the CNI table since it
represents excess depreciation expense that should be eliminated. On the other hand,
realized losses (RL) is a DEDUCTION in the CNI table since it represents insufficient
depreciation that should be recognized in the consolidated books.

Illustration: P Co. owns 70% of S Inc. The acquisition was at book value. No goodwill or bargain
purchase gain was recorded. On January 1, 2015, P Co. sold machinery to S Inc. for a gain of
P100,000. The machinery has a remaining useful life of 5 years on that date. Also, on July 1, 2016, S
Inc. sold a delivery truck to P Co. for P200,000. The truck had a book value of P250,000 and has a
remaining life of 10 years from the date of sale. No other intercompany transactions occurred for
2015 and 2016. Net income of P Co. and S Inc. for 2015 is P500,000 and P200,000, respectively; for
2016, P400,000 and P150,000, respectively. No dividends were declared by both companies for
2015 and 2016.

Question 1: What is the CNI-P, NCINIS and CNI for 2015 and 2016?
FOR 2015:
CNI-P (70%) NCINIS (30%) Explanation/Computation
NI-P P500,000 - Net income of parent
NI-S 140,000 P60,000 P200,000 is allocated using 70:30 ratio.
UG (100,000) - The unrealized gain of P100,000 is only
deducted in the CNI-P column since it is
downstream.
RG 20,000 - 100,000 / 5 years, this pertains to
EXCESS DEPRECIATION arising from
the intercompany downstream sale
that should be eliminated in the
consolidated books every period until
the asset is fully-depreciated or until
the asset is sold to unrelated parties.
UL - - N/A
RL - - N/A
TOTAL P560,000 60,000 CNI (2015) = P620,000
FOR 2016:
CNI-P (70%) NCINIS (30%) Explanation/Computation
NI-P P400,000 - Net income of parent
NI-S 105,000 P45,000 P150,000 is allocated using 70:30 ratio.
UG - - The UG last year will no longer be
eliminated in the consolidated books
this year since it no longer affects the
net income of both companies this year.
RG 20,000 - 100,000 / 5 years, same explanation
as above
UL 35,000 15,000 The unrealized loss of P50,000 is
allocated to CNI-P and NCINIS since it is
upstream.
RL (1,750) (750) 50,000 / 10 years x 6/12 = P2,500,

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this pertains to INSUFFICIENT

DEPRECIATION arising from the
intercompany upstream sale that
should be recognized in the
consolidated books.
TOTAL P558,250 P59,250 CNI (2016) = P617,500

Question 2: If the machinery was sold on January 1, 2017 to unrelated parties, what is the amount of
realized gain for 2017 attributed to the sale of this asset to be included in the CNI table?

Unrealized gain during intercompany sale P100,000

Cumulative realized gains (P20,000 + P20,000) (40,000)
Realized gain – 2017 P60,000
INTERCOMPANY SALE OF NON-DEPRECIABLE ASSET
The effect is similar to an intercompany sale of depreciable asset, except that depreciation is not
affected. The effect is an unrealized gain or loss on sale, as the case may be. The amount will always
be unrealized since no periodic realization occurs, unless the non-depreciable asset is sold to
unrelated parties.

COMPREHENSIVE CNI TABLE:

Consolidating items CNI-P NCINIS Things to remember:

NI – P XXX - Fully to CNI-P
NI – S XXX XXX Allocated using ownership percentages
Dividends paid by S x % ownership of
Div Income from S (XXX) - parent; Note: If NI-P is from own or separate
operations, no need to deduct this amount.
XXX/
FV-BV Amortization XXX/(XXX) Allocated using ownership percentages
(XXX)
Allocated using GOODWILL ratios if total
GW Imp. Loss (XXX) (XXX) goodwill. If partial goodwill, allocated only
to CNI-P
UPEI
(XXX)
(End inv. x GP%)
RPBI If DOWNSTREAM, entire amount is
XXX
(Beg. inv. x GP%) to CNI-P only.
UG If UPSTREAM, amount is allocated to
(XXX)
(SP > BV) CNI-P and NCINIS using
RG ownership percentages.
(UG/Rem. Life) x XXX *UG and UL are only recognized once
fraction of time on the year of the intercompany sale
UL of the asset.
XXX
(SP < BV)
RL
(UL/Rem. Life) x (XXX)
fraction of time
TOTAL XXXX XXXX CNI-P + NCINIS = CNI

---------------------------------------------------------------------------------------------------------------------------
TOO… MUCH… INFORMATION... SIR, HOW DO YOU EXPECT ME TO REMEMBER ALL OF THESE?!
---------------------------------------------------------------------------------------------------------------------------------

Well, the only way that you can only absorb all these is if you understand the concept behind.
Luckily, the inclusion of the UPEI, RPBI, UG, UL, RG, and RL in the CNI table follows a single
underlying concept: Obtaining consolidated net income (CNI) assuming that NO
INTERCOMPANY TRANSACTIONS occurred.

As what I’ve mentioned at the beginning of this module, accounting for business combinations are
fundamentally procedural. However, due to the bulk of the procedures, it is almost impossible to

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retain everything in one sitting. That’s when conceptual learning comes in. Again, the “how” will
only make sense if you understand the “why”. Just remember:

The PARENT and the SUBSIDIARY are ONE and THE SAME COMPANY, and that
the HEART of CONSOLIDATION is the PREVENTION of FRAUDULENT FINANCIAL
REPORTING.

Practice problems:

Problem 1: GV Company purchased 70% ownership of DL Company on January 1, 2013 at

underlying book value. While each company has its own sales forces and independent product
lines, there are substantial intercompany sales of inventory each period. The following
intercompany sales occurred during 2014 and 2015:

Selling Cost of Buying Sales Unsold at Year Sold to

Year affiliate goods sold affiliate Price year-end Outsiders
2014 GV Co. P448,000 DL Co. P640,000 P140,000 2015
2015 DL Co. P312,000 GV Co. P480,000 P77,000 2016
2015 GV Co. P350,000 DL Co. P437,500 P63,000 2016

The following data summarized the results of their financial operations for the year ended,
December 31, 2015:
GV Company DL Company
Sales P3,850,000 P1,680,000
Gross Profit 1,904,000 504,000
Operating Expenses 770,000 280,000
Ending Inventories 336,000 280,000
Dividend Received from affiliate 126,000 -
Dividend Received from non-affiliate - 70,000

For the year ended 2015, compute:

1. Consolidated sales and Consolidated cost of goods sold

A. P4,612,500; P2,457,550 C. P4,612,500; P2,202,050
B. P4,612,500; P2,206,950 D. P5,530,000; P2,202,050

2. Consolidated net income attributable to parent’s shareholders equity and non-controlling

interest in net income
A. P1,301,335; P59,115 C. P1,476,335; P80,115
B. P1,476,335; P59,115 D. P1,350,335; P80,115

Problem 2: A Co. acquired 60% of the outstanding ordinary shares of B Co. on January 1, 2014. A
Co. acquired it at book value which is the same as its fair value at the date of acquisition. Income
statements of A Co. and B Co. for 2015 were as follows:
A B
Net Sales P875,000 P350,000
Cost of Sales 525,000 210,000
Gross Profit P350,000 P140,000
Operating expenses 105,000 52,500
Operating income P245,000 P87,500
Dividend income 56,000 ____-____

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Net income P301,000 P87,500

 There was an upstream sales of P112,000 in 2014 and P168,000 in 2015.
 The buying affiliate reported inventory on December 31, 2014 amounting to P70,000 of
which 20% comes from the selling affiliate and inventory on December 31, 2015 amounting
to P84,000 of which 30% comes from the selling affiliate.
 A Co. uses 30% mark up on cost and B Co. uses 25% mark up on cost for their selling prices.
 A Co. and B Co. declared and paid dividends in 2015 amounting to P84,000 and P70,000
respectively.
 On January 1, 2015, B Co. has ordinary shares of P320,000; share premium of P120,000 and
retained earnings of P160,000.

How much is the non-controlling interest in the net assets of the subsidiary (NCINAS) at the end of
2015?
A. P296,156 B. P244,984 C. P246,104 D. P245,024
Problem 3: On January 1, 2015, RDJ Company purchased 80% of the stocks of MCD Corporation at
book value. The stockholders’ equity of MCD Corporation on this date showed: Common stock -
PI,140,000 and Retained earnings - P980,000.
 On April 30, 2015, RDJ Company acquired a used machinery for P168,000 from MCD Corp.
that was being carried in the latter's books at P210,000. The asset still has a remaining
useful life of 5 years.
 On the other hand, on August 31, 2015, MCD Corp. purchased an equipment that was
already 20% depreciated from RDJ Co. for P690,000. The original cost of this equipment
was P750,000 and had a remaining life of 8 years.
 Net income of RDJ Co. and MCD Corp. for 2015 amounted to P720,000 and P310,000.
Dividends paid totaled to P230,000 and P105,000 for RDJ Co. and MCD Corp, respectively.
Net income attributable to parent's shareholders equity and non-controlling interest net income:
A. P826,870; P69,280 C. P834,150; P62,000
B. P826,870; P62,000 D. P834,150; P59,280

Non-controlling interest in net assets and carrying value of the Property and equipment:
A. P472,280; P810,000 C. P465,000; P757,000
B. P465,000; P810,000 D. P472,280; P757,000

Problem 4: On January 1, 2015, P Corporation purchased 80% of S Company's outstanding stock

for P3,100,000. At that date, all of S Company's assets and liabilities had market values
approximately equal to their book values and no goodwill was included in the purchase price.

 The following information was available for 2015: Income from own operations of P
Corporation, P750,000 ; Operating loss of S Company, P100,000
 Dividends paid in 2015 by P Corporation, P375,000; by S Company to P Corporation,
P60,000.
 On July 1, 2015, there was a downstream sale of equipment at a gain of P125,000. The
equipment is expected to have a remaining useful life of 10 years from the date of sale.
 Also, on January 2, 2015, there was an upstream sale of furniture at a loss of P37,500. The
furniture is expected to have a useful life of five years from the date of sale.
 Non-controlling interest is measured at fair market value.

How much is the consolidated net income attributable to parent shareholders' equity?

A. P486,250 B. P575,250 C. P561,250 D. P515,250

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Comprehensive problem:

On January 1, 2014, Parent Corporation acquired 70% of the common stock of Subsidiary
Corporation by issuing 150,000 shares (P2 par value, P10 market value) and paying cash of
P2,000,000. The shareholders’ equity balances of the two companies at the acquisition date are
given below:

Parent Corporation Subsidiary Corporation

Common stock P2,000,000 P1,500,000
Additional paid-in capital 4,000,000 2,750,000
Retained earnings 890,000 180,000
Upon appraisal, the following has been determined:
a. Non-controlling interest is valued at P1,400,000.
b. The subsidiary’s land is overvalued by P200,000
c. One of the subsidiary’s machinery has a book value and fair value of P300,000 and
P400,000, respectively. The machinery has a remaining useful life of 4 years.
d. The inventory of the subsidiary is undervalued by P30,000.
For the year 2014 and 2015, the parent and the subsidiary reported the following figures in their
separate books:
Parent Corporation Subsidiary Corporation
YEAR 2014
Sales P1,500,000 P650,000
Cost of goods sold (1,125,000) (520,000)
Operating expenses (169,000) (32,400)
Other income (other losses) _91,500_ ___-____
Net income (Net loss) 297,500 97,600

Dividends declared and paid 40,000 45,000

YEAR 2015
Sales P1,275,000 P480,000
Cost of goods sold (892,500) (360,000)
Operating expenses (60,500) (189,700)
Other income (other losses) _39,000_ _(20,000)_
Net income (Net loss) 361,000 (89,700)

Dividends declared and paid 45,000 20,000

During 2014, the subsidiary sold inventory to the parent for P150,000. The parent was able to sell
70% of the inventory to outsiders before the end of 2014. There was also a downstream sale of
inventory costing P45,000, half of which remained in the ending inventory of the buying affiliate.
The gross profit rates (on sales) of the parent and subsidiary averaged 25% and 20%, respectively.
On October 1, 2015, a delivery truck with a remaining life of 5 years on that date was sold by the

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parent to the subsidiary for P100,000, resulting to a gain of P60,000. Goodwill, if any, is impaired
by P50,000.

On February 23, 2015, there was an downstream sale of land costing P300,000. The sale resulted to
a gain of P25,000. On March 31, 2015, the subsidiary sold to its parent machinery with a book value
of P80,000 for P20,000 loss. The machinery has a remaining life of 4 years on that date. Towards
the end of the year, an upstream sale of inventory occurred for P100,000. The sale resulted to a
P30,000 increase in gross profit in the books of the selling affiliate. Only 10% of the inventory was
sold to outsiders. An assessment of intangibles indicated that goodwill is impaired to P450,000 at
the end of 2015.

Required: Prepare the consolidated income statement of Parent Corporation and Subsidiary
Corporation.

Appendix (Other Formulas):

Assets of the acquirer (parent) at BOOK VALUE XXX

Assets of the acquiree (subsidiary) at FAIR VALUE XXX
Cash consideration/Purchase price (XXX)
Non-monetary assets given as consideration at FAIR VALUE (XXX)
Payment for acquisition-related costs (XXX)
Goodwill arising from acquisition XXX_
Total consolidated assets – DATE OF ACQUISITION XXXX

Liabilities of the acquirer (parent) at BOOK VALUE XXX

Liabilities of the acquiree (subsidiary) at FAIR VALUE XXX
Acquisition-related costs INCURRED BUT NOT YET PAID XXX
Liabilities assumed as consideration at FAIR VALUE/PRESENT VALUE XXX
Contingent consideration payable (CCP) XXX_
Total consolidated liabilities - DATE OF ACQUISITION XXXX

Cost of goods sold – Parent XXX

Cost of goods sold – Subsidiary XXX
Intercompany sales (XXX)
FV-BV amortization of inventory XXX/(XXX)
UPEI (current year) XXX
RPBI (current year, which is the UPEI last year) (XXX)
Consolidated COGS for the year XXXX

Sales – Parent XXX

Sales – Subsidiary XXX
Intercompany sales (XXX)
Consolidated Sales for the year XXXX

Operating expenses – Parent XXX

Operating expenses – Subsidiary XXX
FV-BV amortization of depreciable assets XXX/(XXX)
Realized gain on intercompany sale of plant assets (XXX)
Realized losses on intercompany sale of plant assets XXX
Consolidated Operating Expenses for the year XXXX

Retained earnings, parent (at date of acquisition) XXX

Cumulative consolidated net income (loss) – parent (CNI-P) XXX
Cumulative dividends declared by the parent (XXX)
Consolidated retained earnings (CRE), end XXXX
Or
Consolidated retained earnings, beginning XXX
Consolidated net income (loss) – parent (CNI-P) XXX
Dividends declared by the parent (XXX)
Consolidated retained earnings (CRE), end XXXX

ADVACC (Acctg 630) – MODULE 5: ACCOUNTING FOR BUSINESS COMBINATIONS

Ateneo de Zamboanga University – School of Management and Accountancy
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NCI (at date of acquisition) XXX

Cumulative NCI in the net income (loss) of the subsidiary (NCINIS) XXX
Cumulative dividends paid to NCI (XXX)
NCI in the net assets of the subsidiary (NCINAS), end XXXX
Or
NCINAS, beginning XXX
NCINIS XXX
Dividends paid to NCI (XXX)
NCI in the net assets of the subsidiary (NCINAS), end XXXX

Shareholders’ equity – PARENT XXX

Bargain purchase gain (date of acquisition) XXX
Consolidated retained earnings (CRE) XXX
Non-controlling interest in the net assets of the subsidiary (NCINAS) XXX
Consolidated shareholders’ equity, end XXXX

ADVACC (Acctg 630) – MODULE 5: ACCOUNTING FOR BUSINESS COMBINATIONS

Ateneo de Zamboanga University – School of Management and Accountancy