ATENEO DE NAGA UNIVERSITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

ACCOUNTING FOR BUSINESS COMBINATION Exercise 4-1

PROBLEM 4.1.1

On January 2017, Parent Ltd acquired 90% of the capital of Subsidiary Ltd for 290,160. The equity of
Subsidiary Ltd at this date consisted of:

Share capital 200,000

Retained earnings 80,000

The retained earnings of P as of January 1, 2017 is P100,000.

Results of Operation:

Parents Subsidiary
Net income 100,000 20,000
Dividends Paid 10,000 10,000

The carrying amounts and fair values of the assets and liabilities recorded by Subsidiary Ltd at 1 January
2017 were as follows:

Carrying amount Fair value

Fittings 20,000 20,000
Land 90,000 100,000
Inventory 10,000 12,000
Machinery (net) 200,000 220,000
Liabilities 40,000 40,000

The machinery and fittings have a further ten year life, benefits to be received evenly over this period.
Differences between carrying amounts and fair values are recognized on consolidation.

All inventories on hand at January 1, 2017 are sold by December 31, 2017.

Without preparing the consolidated working paper elimination entries, determine the following
consolidated balances on the following dates:

January 1, 2017 December 31, 2017

Goodwill 10,400 10,400
Machinery (net) 220,000 198,000
Fittings (net) 20,000 18,000
Amortization of excess Not applicable (4,000)
Consolidated/group net income Not applicable 107,000
Profit attributable to equity holders’ of parents Not applicable 105,400
Non-controlling interest in subsidiary net income Not applicable 1,600
Non-controlling interest 32,240 32,840
Retained earnings 100,000 195,400
EXERCISE 4.1.2

Galaxy Corporation acquired 80% of the outstanding shares of United Company on June 1, 2016 for
P3,517,500. United Company’s stockholders’ equity component at the end of the year are as follows:
Ordinary shares, P100 par, P1,500,000, shares premium P675,000 and retained earnings P1,335,000.
Non-controlling interest is measured at fair value and the fair value is P705,000. The assets of United
were fairly valued, except for inventories, which are overstated by P66,000 and equipment which was
understated by P90,000. Remaining useful life of equipment is 4 years. Stockholders’ equity of Galaxy
on January 1, 2016 is composed of ordinary shares, P4,500,000, share premium P1,050,000, and
retained earnings of P3,150,000. Goodwill, if any, should be written down by P85,350 at year-end. Net
income for the first year of parent is P450,000 and the net income of subsidiary from the date of
acquisition is P255,000. Dividends declared at the end of the year amounted to P120,000 and P90,000.
During the year, there was no issuance of new ordinary shares.

1. How much is the non-controlling interest in net assets on December 31, 2016? ANS:
745,455

2. What is the amount of consolidated stockholders’ equity? ANS: 9,867,525

EXERCISE 3

On January 1, 2016, Party Corporation purchased 80% of Spring Company’s ordinary shares for
P810,000. An amount of P37,500 of the excess is attributable to goodwill and the balance to a
depreciable asset with an economic life of ten years. Non-controlling interest is measured at fair value
on date of acquisition. On the date of acquisition, shareholders’ equity accounts of the two companies
were as follows:

Party Corp. Spring Co.

Ordinary shares 1,312,500 300,000
Retained earnings 1,950,000 525,000

On December 31, 2016, Spring Company reported net income of P131,250 and paid dividends of
P45,000 to Party. Party reported earnings from its separate operations of P356,250 and paid dividends
of P172,500. Goodwill had been impaired and should be reported at P7,500 on December 31, 2016.

1. What is the consolidated profit on for 2016? ANS: 442,500.00

2. What is the amount consolidated retained earnings attributable to parent shareholders’ equity
on December 31, 2016? ANS: 2,202,750

3. What is the non-controlling interest in profit of Spring Company on December 31, 2016? ANS:
17,250.00

4. What amount of non-controlling interest is presented in the consolidated financial statements of

financial position on December 31, 2016? ANS: 208,500

5. What is the consolidated profit attributable to parent’s shareholders on December 31, 2016?
ANS: 425,250