Equity Method

Davis Inc. acquired a controlling interest of 80% of Martin Inc. for P300,000 on January 1,
20x4, when Martin’s common stock and retained earnings were carried at P180,000 and
P60,000 respectively. On that date, Martin’s book values approximated its fair market
values, with the exception of the company’s inventories and a Patent held by Martin. The
patent, which had an estimated remaining useful life of ten years, had a fair market value
which was P20,000 higher than its book value. Martin’s Inventories on January 1, 20x4 were
estimated to have a fair value that was P16,000 higher than their book value. For 20x4,
Davis net income from own operations amounted to P100,000 and dividends declared,
P30,000.
It was predicted that Martin’s goodwill impairment test, which was to be conducted on
December 31, 20x5, would result in a loss equal to 10% of the goodwill (regardless of the
amount) at the date of acquisition being recorded) During 20x4, Martin reported a net
income of P60,000 and paid P12,000 in dividends. Martin’s 20x5 net income and dividends
were P72,000 and P15,000, respectively. Martin uses straight-line amortization for all of its
assets. Davis, Inc. retained earnings on December 1, 20x5, were P80,000. For 20x5, Davis
net income from own operations amounted to P120,000 and dividends declared, P40,000.
Required: Compute the following:
1. Non-controlling interest in profit for 20x4 and 20x5.
2. Consolidated profit attributable to Pen’s shareholders for 20x4 and 20x5
3. Consolidated retained earnings at December 31, 20x5
4. Non-controlling interest at December 31, 20x5.
5. Goodwill balance on December 31, 20x4 and 20x5.
6. Consolidated patents at December 31, 20x5.

1. NCNCI for 20x4, P8,400; NCNCI for 20x5, P12,020

20x4
Consolidated Net Income for 20x4
Net income from own/separate operations
Parent – Davis Company P100,000
Subsidiary - Martin Company 60,000
Total P160,000
Less: Non-controlling Interest in Net Income* P 8,400
Amortization of allocated excess** 18,000
Goodwill impairment _______0 __26,400
Controlling Interest in Consolidated Net Income or Profit
attributable to equity holders of parent………….. P133,600
Add: Non-controlling Interest in Net Income (NCINI) ___8,400
Consolidated Net Income for 20x4 P142,000
*Net income of subsidiary – 20x4 P 60,000
Amortization of allocated excess – 20x4 (P2,000 + P16,000) ( 18,000)
P 42,000
Multiplied by: Non-controlling interest %.......... 20%
P 8,400
Less: Non-controlling interest on impairment loss on full-goodwill _______0
Non-controlling Interest in Net Income (NCINI) P 8,400
*this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired.

** Amortization of allocated excess

Partial-Goodwill Approach:
 Fair value of Subsidiary
Consideration transferred:.................................................................. 300,000
Less: Carrying amount of Martins net assets =
Carrying amount of Martin’s shareholders’ equity
Common/Ordinary shares – Martin (180,000 x 80%)............ 144,000
Retained earnings – Martin (60,000 x 80%)......................... 48,000 192,000
Allocated Excess: Acquisition differential – Jan. 1, 20x4 108,000
Less: Over/under valuation of A/L (Allocated to):
Increase in Inventory (16,000 x 80%)........................................ 12,800
Increase in Patents (20,000 x 80%).......................................... 16,000 28,800
Positive Excess: Goodwill - partial 79,200
Full-Goodwill Approach:
Fair value of Subsidiary P300,000/80%..................................................
Consideration transferred:.................................................................. 375,000
Less: Carrying amount of Martins net assets =
Carrying amount of Martin’s shareholders’ equity
Common/Ordinary shares – Martin (180,000 x 100%)............ 180,000
Retained earnings – Martin (60,000 x 100%)......................... 60,000 240,000
Allocated Excess: Acquisition differential – Jan. 1, 20x4 135,000
Less: Over/under valuation of A/L (Allocated to):
Increase in Inventory (16,000 x 100%)........................................ 16,000
Increase in Patents (20,000 x 100%).......................................... 20,000 36,000
Positive Excess: Goodwill - partial 99,000
A summary or depreciation and amortization adjustments is as follows:
Account Adjustments to be Over/ Annual Current
amortized Under Life Amount Year(20x4) 20x5
Inventory P16,000 1 P 16,000 P 16,000 P -
Subject to Annual Amortization
Patents 20,000 10 2,000 2,000 ___2,000
P
Amortization P 18,000 P 18,000 2,000
_
Impairment of goodwill (full) 99,000 - ________ _____ __9,900
P
P 18,000 P 18,000 11,900
20x5
Consolidated Net Income for 20x5
Net income from own/separate operations
Parent – Davis Company P120,000
Subsidiary - Martin Company 72,000
Total P192,000
Less: Non-controlling Interest in Net Income* P 12,020
Amortization of allocated excess** 2,000
Goodwill impairment ___9,900 __23,920
Controlling Interest in Consolidated Net Income or Profit
attributable to equity holders of parent………….. P168,080
Add: Non-controlling Interest in Net Income (NCINI) __12,020
Consolidated Net Income for 20x5 P180,100
*Net income of subsidiary – 20x5 P 72,000
Amortization of allocated excess – 20x5 ( 2,000)
P70,000
Multiplied by: Non-controlling interest %.......... 20%
P 14,000
Less: Non-controlling interest on impairment loss on full-goodwill (P99,000 x 10%
= ___1,980
P9,900 x 20%)
Non-controlling Interest in Net Income (NCINI) P 12,020
*this procedure would be not be applicable where the NCI on goodwill impairment loss would not be proportionate to NCI acquired.

2. CI – CNI for 20x4, P133,600; CI – CNI for 20x5, P168,080

3. CRE, 12/31/20x5, P208,080
Retained earnings of P Co, 1/1/20x5, equity method (same with P
CRE) 80,000
Add; CI – CNI 168,080
P248,08
0
Less: Dividends of P Company __40,00
0
Retained Earnings of P Co., 12/31/20x4 under equity method P208,08
0

4. NCI, 12/31/20x5
Non-controlling interest, December 31, 20x5
Common stock – Martin Company, December 31, 20x5…… P
180,000
Retained earnings – Martin Company, December 31, 20x4
Retained earnings – Martin Company, January 1, 20x4 P
60,000
Add: NI of Martin for 20x4 and 20x5 (60,000 + 72,000) 132,000
Total P192,00
0
Less: Dividends paid – 20x4 and 20x5 (12,000 + 27,000 165,00
15,000) 0
Stockholders’ equity – S Company, December 31, 20x4 P
345,000
Adjustments to reflect fair value - (over) undervaluation
of
assets and liabilities, date of acquisition (January 1, 20x4) 36,000
(20,000 + 16,000)
Amortization of allocated excess (refer to amortization
above – 20x4 and 20x5 (P2,000 + 16,000 + 2,000) ( 20,00
0)
Fair value of stockholders’ equity of S, December 31, P
20x5…… 361,000
Multiplied by: Non-controlling Interest percentage…………...
20
Non-controlling interest (partial-goodwill), P
12/31/20x5……….. 72,200
Add: Non-controlling interest on full goodwill , net
of
impairment loss, 12/31/x5:[(P99,000 full – 17,820
P79,200, partial
= P19,800) – (P99,000 x 10%, impairment loss x
20%)
Non-controlling interest (full-goodwill), P
12/31/20x5…………….. 90,020

5.
Partial Full (100%)
(80%)
 Goodwill balance, 1/1/20x4 79,200 99,000
Less Impairment – 20x4 ____-0- ____-0-
Goodwill balance, 1/1/20x5 79,200 99,000
Less Impairment – 20x5 (99,000 x 10% = 9,900) _7,920 __9,900
Goodwill balance, 12/31/20x5 71,280 89,100

6.

Patents, 1/1/20x4 20,000

Less: Amortization (20,000/10 years = 2,000 x 2) _4,000
Consolidated Patents, 12/31/20x5 16,000