ACC 113: Accounting for Business Combinations

Student Activity Sheet #15

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Lesson title: Consolidated Financial Statements (Part 2) Materials:

Lesson Targets: Student Activity Sheet; Columnar
At the end of the learning session, notebook; calculator; textbook;
1. I can account inter-company transactions between a parent LCD Projector
and a subsidiary. References:
2. I can prepare consolidated financial statements after Millan, Zeus Vernon B.; Accounting
eliminating the effects of inter-company transactions. for Business Combinations; 2019
3. I can account for intercompany bond transactions. Edition; pp. 24-41
Dayag, Antonio J.; Advanced
Financial Accounting and
Reporting, 2016 Edition

Productivity Tip:
Keep away anything that might be a possible source of distraction. You can also go to a quiet and comfortable
place to keep our concentration focused.

A. LESSON PREVIEW/REVIEW
Introduction (5 mins)
Welcome back to ACC 113.

Let’s continue our 15th day in Accounting for Business Combination by activating your prior knowledge
through answering the What I know Chart, part 1 in Activity 1. Do not worry if you answer the questions
incorrectly that only means you do not have prior knowledge of the subject.

1) Activity 1: What I Know Chart, part 1

Before proceeding with our main lesson, let us first answer the first column of the chart below:

What I Know Questions: What I Learned (Activity 4)

1. What do we mean by inter-

company a bond transaction?

2. How does inter-company

dividends differ from inter-company
bonds transactions?
3 How do we account for inter-
company bond transactions?

B.MAIN LESSON

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #15

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

1) Activity 2: Content Notes (15 mins)

Intercompany Bond transaction

When a parent or a subsidiary acquires bonds issued by the other, both the investment in bonds
and the bonds payable are eliminated in the consolidated financial statements.

The bonds payable are considered extinguished from the group’s point of view.

Any interest expense/interest income recognized by the parent and the subsidiary on each other
is eliminated in the consolidated financial statements.

2) Activity 3: Skill-building Activities (35 mins)

Answer the following:
1. On January 1, 20x1, Sing Co. acquired 75% interest in Dance Co. On this date, Sing Co.’s net identifiable
assets have a carrying amount of P200,000, equal to fair value. Non-controlling interest was measured using
the proportionate share method. On December 31, 20x1, Dance Co. purchased all of the outstanding bonds
of Sing Co. from the open market for P250,000. There were no other intercompany transaction during the
year. The year-end individual financial statements show the following information:

ASSETS Sing Co. Dance Co.

Investment at subsidiary (at cost) 180,000 -
Investment in bonds - 250,000
Other assets 500,000 50,000
TOTAL ASSETS 680,000 300,000
LIABILITIES & EQUITY
Accounts payable 40,000 30,000
Bonds payable (at face amount) 300,000 -
Total liabilities 340,0000 30,000
Share capital 200,000 100,000
Retained earnings 140,000 170,000
Total equity 340,000 270,000
TOTAL LIABILITIES & EQUITY 680,000 300,000

Sing Co. Dance Co.

Revenues 300,000 120,000
Operating expenses (217,000) (100,000)
Interest expense (3,000) -
Profit for the year 80,000 20,000

Requirements:
a. Compute for the gain or loss on extinguishment of bonds to be recognized in the 20x1
consolidated statement of profit or loss.
b. Compute for the consolidated total bonds payable.
c. Prepare a draft of the 20x1 consolidated statement of financial position and statement of profit or
loss.

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #15

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Requirement (a):
1,622,000

Requirement (b):
1,622,000

Requirement (c):

3) Activity 4: What I Know Chart, part 2

This time, let us go back to Activity 1 and fill out the third column for what we now know about the
lesson.

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #15

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

4) Activity 5: Check for Understanding (5 mins)

1. On January 1, 20x1, Walk Co. acquired 75% interest in Run Co. On this date, Run Co.’s net identifiable
assets have a carrying amount of P208,000, equal to fair value. Non-controlling interest was measured using
the proportionate share method. On December 31, 20x1, Run Co. purchased all of the outstanding bonds of
Walk Co. from the open market for P320,000. There were no other intercompany transaction during the year.
The year-end individual financial statements show the following information:

ASSETS Walk Co. Run Co.

Investment at subsidiary (at cost) 234,0000 -
Investment in bonds - 320,000
Other assets 650,000 64,000
TOTAL ASSETS 884,000 384,000
LIABILITIES & EQUITY
Accounts payable 52,000 150,000
Bonds payable (at face amount) 300,000 -
Total liabilities 352,000 150,000
Share capital 350,000 150,000
Retained earnings 182,000 84,000
Total equity 532,000 234,000
TOTAL LIABILITIES & EQUITY 884,000 384,000

Walk Co. Run Co.

Revenues 390,000 156,000
Operating expenses (282,100) (130,000)
Interest expense (3,000) -
Profit for the year 104,900 26,000

Requirements:
a. Compute for the gain or loss on extinguishment of bonds to be recognized in the 20x1
consolidated statement of profit or loss.
b. Compute for the consolidated total bonds payable.
c. Prepare a draft of the 20x1 consolidated statement of financial position and statement of profit or
loss.

Requirement (a):
1,622,000

Requirement (b):

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #15

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

1,622,000

Requirement (c):

C. LESSON WRAP-UP
1) Activity 6: Thinking about Learning

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #15

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Congratulations for finishing this module! You can now tract your progress by shading the number of
the module that you finished. It’s just the start but by being consistent, you’ll be shading Day 31 as
scheduled.

Did you have challenges learning the concepts in this module? If none, which parts of the module

helped you learn the concepts?

__________________________________________________________________________________
__________________________________________________________________________________

FAQs
1. How will the accounting be if a parent acquires a bond previously issued by a subsidiary on the open
market?
Despite the intercompany nature of this transaction, the debt remains an outstanding obligation of the
original issuer but is recorded as an investment by the acquiring company. Thereafter, even though
related parties are involved interest payments pass periodically between the two organizations. Although
the individual companies continue to report both the debt and the investment, from a consolidation
viewpoint this liability is retired as of the acquisition date. From that time forward the debt is no longer
owed to a party outside the business combination.
2. Following the questions above, how will the entity account for the subsequent interest payments?
Subsequent interest payments are simply intercompany cash transfers. To create consolidated
statements, worksheet entries must be developed to adjust the various balances to report the debt’s
effec-tive retirement.

KEY TO CORRECTIONS

Activity 3
Intercompany bond transaction
1. Solutions:
Step 1: Analysis of effects of intercompany transaction
Requirement (a): Gain (loss) on extinguishment of bonds

The gain or loss on the extinguishment of bonds is computed as:

Acquisition cost of bonds (assumed retirement price) 250,000
Carrying amount of bonds payable (300,000)
Gain on extinguishment of bonds 50,000

Requirement (b): Consolidated total bonds payable

Bonds payable (at face amount) - issued by Parent 300,000
Portion acquired by Subsidiary (300,000)
Consolidated total bonds payable -

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #15

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Step 2: Analysis of net assets

Subsidiary Acquisition date Consolidation date Net change
Net assets at carrying amounts 200,000 270,000
Fair value adjustments at acquisition date - -
Subsequent depreciation of FVA NIL -
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 200,000 270,000 70,000

Step 3: Goodwill computation

Consideration transferred (cost of investment in sub.) 180,000
Non-controlling interest in the acquiree (200K x 25%) 50,000
Previously held equity interest in the acquire -
Total 230,000
Fair value of net identifiable assets acquired (200,000)
Goodwill 30,000

Step 4: Non-controlling interest in net assets

Sub.'s net assets at fair value – Dec. 31, 20x1 (Step 2) 270,000
Multiply by: NCI percentage 25%
Total 67,500
Add: Goodwill to NCI net of accumulated impairment losses -
Non-controlling interest in net assets – Dec. 31, 20x1 67,500

Step 5: Consolidated retained earnings

Parent's retained earnings – Dec. 31, 20x1 140,000
Consolidation adjustments:
Parent's share in the net change in Sub.'s net assets (a)
52,500
Unrealized profits (Downstream only) -
Gain on extinguishment of bonds (Step 1) 50,000
Impairment loss on goodwill attributable to Parent -
Net consolidation adjustments 102,500
Consolidated retained earnings – Dec. 31, 20x1 242,500
(a)
Net change in Subsidiary’s net assets (Step 2) of ₱70,000 x 75% = ₱52,500.

Step 6: 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 ( - )

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #15

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Gain 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

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

Owners of parent NCI Consoli-dated
Parent's profit before FVA (Step 6) 130,000 N/A 130,000
Share in Sub.’s profit before FVA (c)
15,000 5,000 20,000
Depreciation of FVA ( - ) ( - ) ( - )
Share in impairment loss on goodwill ( - ) ( - ) ( - )
Totals 145,000 5,000 150,000
(c)
Shares in Sub.’s profit before FVA (Step 6): (20,000 x 75%); (20,000 x 25%)

Requirement (c): Consolidated financial statements

Consolidated
ASSETS
Investment in subsidiary (at cost) - eliminated -
Investment in bonds - eliminated -
Other assets (500,000 + 50,000) 550,000
Goodwill (Step 3) 30,000
TOTAL ASSETS 580,000

LIABILITIES AND EQUITY

Accounts payable (40,000 + 30,000) 70,000
Bonds payable (at face amount) - eliminated -
Total liabilities 70,000
200,000
Share capital (Parent only)
Retained earnings (Step 5) 242,500
Equity attributable to owners of parent 442,500
NCI in net assets (Step 4) 67,500
Total equity 510,000
TOTAL LIABILITIES AND EQUITY 580,000
Consolidated
Revenues (300,000 + 120,000) 420,000
Operating expenses (217,000 + 100,000) (317,000)
Interest expense (3,000* + 0) (3,000)
Gain on extinguishment of bonds (Step 1) 50,000

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #15

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Profit for the year 150,000

Profit attributable to owners of the parent (Step 7) 145,000

Profit attributable to NCI (Step 7) 5,000
Profit for the year 150,000

*The interest expense is not eliminated because the interest expense was paid to unrelated parties, the
previous holder of the bonds (i.e., the bonds were acquired by the subsidiary only at year-end.

SUMMARY OF ANSWERS TO REQUIREMENTS

a. Gain (loss) on extinguishment of bonds = 50,000 gain (Step 1)
b. Consolidated bonds payable = 0 (Step 1)
c. Consolidated financial statements (See above)

Activity 5
1. Solutions:
Step 1: Analysis of effects of intercompany transaction
Requirement (a): Gain (loss) on extinguishment of bonds
The gain or loss on the extinguishment of bonds is computed as:
Acquisition cost of bonds (assumed retirement price) 320,000
Carrying amount of bonds payable (300,000)
Loss on extinguishment of bonds ( 20,000)

Requirement (b): Consolidated total bonds payable

Bonds payable (at face amount) - issued by Parent 300,000
Portion acquired by Subsidiary (300,000)
Consolidated total bonds payable -

Step 2: Analysis of net assets

Acquisition Consolidation
Subsidiary Net change
date date
Net assets at carrying amounts 208,000 234,000
Fair value adjustments at acquisition date - -
Subsequent depreciation of FVA NIL -
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 208,000 234,000 26,000

Step 3: Goodwill computation

Consideration transferred (cost of investment in sub.) 234,000
Non-controlling interest in the acquiree (208K x 25%) 52,000
Previously held equity interest in the acquire -
Total 286,000

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #15

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Fair value of net identifiable assets acquired (208,000)

Goodwill 78,000

Step 4: Non-controlling interest in net assets

Sub.'s net assets at fair value – Dec. 31, 20x1 (Step 2) 234,000
Multiply by: NCI percentage 25%
Total 58,500
Add: Goodwill to NCI net of accumulated impairment losses -
Non-controlling interest in net assets – Dec. 31, 20x1 58,500

Step 5: Consolidated retained earnings

Parent's retained earnings – Dec. 31, 20x1 182,000
Consolidation adjustments:
Parent's share in the net change in Sub.'s net assets (a)
19,500
Unrealized profits (Downstream only) -
Gain on extinguishment of bonds (Step 1) (20,000)
Impairment loss on goodwill attributable to Parent -
Net consolidation adjustments (500)
Consolidated retained earnings – Dec. 31, 20x1 181,500
(a)
Net change in Subsidiary’s net assets (Step 2) of ₱26,000 x 75% = ₱19,500.

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits before adjustments 104,900 26,000 130,900
Consolidation adjustments:
Unrealized profits ( - ) ( - ) ( - )
Dividend income from subsidiary ( - ) N/A ( - )
Loss on extinguishment of bonds (20,000) ( - ) (20,000)
Net consolidation adjustments (20,000) ( - ) (20,000)
Profits before FVA 84,900 26,000 110,900
Depreciation of FVA ( - ) ( - ) ( - )
Impairment loss on goodwill ( - ) ( - ) ( - )
Consolidated profit 84,900 26,000 110,900

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

Owners of parent NCI Consoli-dated
Parent's profit before FVA (Step 6) 84,900 N/A 84,900
Share in Sub.’s profit before FVA (c)
19,500 6,500 26,000
Depreciation of FVA ( - ) ( - ) ( - )
Share in impairment loss on goodwill ( - ) ( - ) ( - )
Totals 104,400 6,500 110,900
(c)
Shares in Sub.’s profit before FVA (Step 6): (26,000 x 75%); (26,000 x 25%)

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #15

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Requirement (c): Consolidated financial statements

Consolidated
ASSETS
Investment in subsidiary (at cost) - eliminated -
Investment in bonds - eliminated -
Other assets (650,000 + 64,000) 714,000
Goodwill (Step 3) 78,000
TOTAL ASSETS 792,000

LIABILITIES AND EQUITY

Accounts payable (52,000 + 150,000) 202,000
Bonds payable (at face amount) - eliminated -
Total liabilities 202,000
Share capital (Parent only) 350,000
Retained earnings (Step 5) 181,500
Equity attributable to owners of the parent 531,500
NCI in net assets (Step 4) 58,500
Total equity 590,000
TOTAL LIABILITIES AND EQUITY 792,000

Consolidated
Revenues (390,000 + 156,000) 546,000
Operating expenses (282,100 + 130,000) (412,100)
Interest expense (3,000 + 0) (3,000)
Loss on extinguishment of bonds (Step 1) (20,000)
Profit for the year 110,900

Profit attributable to owners of the parent (Step 7) 104,400

Profit attributable to NCI (Step 7) 6,500
Profit for the year 110,900

SUMMARY OF ANSWERS TO REQUIREMENTS

a. Gain (loss) on extinguishment of bonds = (20,000) loss (Step 1)
b. Consolidated bonds payable = 0 (Step 1)
c. Consolidated financial statements (See above)

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