ACC 113: Accounting for Business Combinations

Student Activity Sheet #18

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Lesson title: Consolidated Financial Statements (Part 3) Materials:

Lesson Targets: Student Activity Sheet; Columnar
At the end of the learning session, notebook; calculator; textbook;
1. I can account for the effect of impairment of goodwill on the LCD Projector
consolidated financial statements. References:
2. I can determine the effects of changes in ownership interests Millan, Zeus Vernon B.; Accounting
that results in loss of control and does not result in loss of for Business Combinations; 2019
control. Edition;
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 18th 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. When is goodwill impaired?

2. How do we account for

impairment of goodwill?

3 What are the effects of changes

in ownership interests that results in
loss of control and does not result
in loss of control?

B.MAIN LESSON

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #18

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

1) Activity 2: Content Notes (15 mins)

Impairment of Goodwill:

Change in the parent’s ownership interest in the subsidiary:

Gain or loss on the deconsolidation is computed as follows:

Date Particulars Debit Credit

Cash or other assets (consideration received) xx
Investment account (Investment retained) xx
NCI xx
Liabilities of former subsidiary xx
Assets of former subsidiary xx
Goodwill xx
Gain on disposal of controlling interest (squeeze) xx
Or

Consideration received (at fair value) xxx

Investment retained in the former subsidiary (at fair value) xxx
NCI (carrying amount) xxx
Total xxx
Less: Former subsidiary’s net identifiable assets (carrying amount) (xxx)
Goodwill (carrying amount) (xxx)
Gain or loss on disposal of controlling interest xxx
2) Activity 3: Skill-building Activities (35 mins)
Answer the following:

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #18

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

1. On January 1, 20x1, Bright Co. acquired 75% interest in Dull Co for P180,000. On this date, the carrying
amount of Dull’s net identifiable assets was P160,000, equal to fair value. Non-controlling interest was
measured at fair value of P60,000. The financial statements of the entities on December 31, 20x1 show the
following information:

ASSETS Bright Co. Dull Co.

Investment at subsidiary (at cost) 180,000 -
Other assets 600,000 235,000
TOTAL ASSETS 780,000 235,000
LIABILITIES & EQUITY
Liabilities 70,000 25,000
Share capital 600,000 100,000
Retained earnings 110,000 110,000
Total equity 710,000 210,000
TOTAL LIABILITIES & EQUITY 780,000 235,000

Bright Co. Dull Co.

Revenues 300,000 80,000
Operating expenses (60,000) (30,000)
Profit for the year 240,000 50,000

Additional information:
• No dividends were declared by either entity during 20x1 and there were no inter-company
transactions.
• However, it was determined by year-end that goodwill was impaired by P10,000.
Requirements:
Prepare a draft of the December 31, 20x1 consolidated statements of financial position and
consolidated statement of profit or loss.
1

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #18

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Consolidated statement of financial position

Consolidated statement of profit or loss

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

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

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

1. On January 1, 20x1, Day Co. acquired 75% interest in Night Co for P216,000. On this date, the carrying
amount of Night’s net identifiable assets was P192,000, equal to fair value. Non-controlling interest was
measured at fair value of P72,000. The financial statements of the entities on December 31, 20x1 show the
following information:

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #18

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

ASSETS Day Co. Night Co.

Investment at subsidiary (at cost) 216,000 -
Other assets 720,000 282,000
TOTAL ASSETS 936,000 282,000
LIABILITIES & EQUITY
Liabilities 84,000 30,000
Share capital 720,000 120,000
Retained earnings 132,000 132,000
Total equity 852,000 252,000
TOTAL LIABILITIES & EQUITY 936,000 282,000

Day Co. Night Co.

Revenues 360,000 96,000
Operating expenses (72,000) (36,000)
Profit for the year 288,000 60,000

Additional information:
• No dividends were declared by either entity during 20x1 and there were no inter-company
transactions.
• However, it was determined by year-end that goodwill was impaired by P8,000.
Requirements:
Prepare a draft of the December 31, 20x1 consolidated statements of financial position and
consolidated statement of profit or loss.

Consolidated statement of financial position

Consolidated statement of profit or loss

This document is the property of PHINMA EDUCATION

 ACC 113: Accounting for Business Combinations
Student Activity Sheet #18

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

C. LESSON WRAP-UP

1) Activity 6: Thinking about Learning (5 mins)

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. What is the effect when the change of ownership interest by a parent in a subsidiary does not result to loss
of control?
In particular, therefore, when a parent increases or decreases its stake in an existing subsidiary without
losing control, no adjustment is made to goodwill or any other assets or liabilities, and no gain or loss is
reported.
2. What is the effect when the change of ownership interest by a parent in a subsidiary results to loss of control?
The subsidiary is consolidated in the income statements for the year in which control is lost, until control
is lost. At the date control is lost, the entity derecognises the assets and liabilities at their carrying amounts
(including goodwill) together with the carrying amount of any non-controlling interests in the former

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #18

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

subsidiary (including any components of other comprehensive income attributable to them).

KEY TO CORRECTIONS

Activity 3
1. Solutions:
Step 1: Analysis of effects of intercompany transaction
There were no inter-company transactions during the year.

Step 2: Analysis of net assets

Subsidiary Co. Acquisition date Consolidation date Net change
Total net assets at carrying amounts 160,000 210,000
Fair value adjustments at acquisition date - -
Subsequent depreciation of FVA NIL -
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 160,000 210,000 50,000

Step 3: Goodwill computation

Formula #2 - NCI measured at fair value
Consideration transferred 180,000
Less: Previously held equity interest in the acquiree -
Total 180,000
Less: Parent's proportionate share in the net assets of subsidiary (₱160,000 acquisition-date fair
value x 75%) (120,000)
Goodwill attributable to owners of parent – Jan. 1, 20x1 60,000
Less: Parent’s share in goodwill impairment (₱10,000 x 75%) (7,500)
Goodwill attributable to owners of parent – Dec. 31, 20x1 52,500

Fair value of NCI (see given) 60,000

Less: NCI's proportionate share in the net assets of subsidiary (₱160,000 acquisition-date fair
value x 25%) (40,000)
Goodwill attributable to NCI – Jan. 1, 20x1 20,000
Less: NCI’s share in goodwill impairment (₱10,000 x 25%) (2,500)
Goodwill attributable to NCI – Dec. 31, 20x1 17,500
Goodwill, net – Dec. 31, 20x1 70,000

Step 4: Non-controlling interest in net assets

Sub.'s net assets at fair value – Dec. 31, 20x1 (Step 2) 210,000
Multiply by: NCI percentage 25%
Total 52,500
Add: Goodwill to NCI net of accumulated impairment losses 17,500
Non-controlling interest in net assets – Dec. 31, 20x1 70,000

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #18

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Step 5: Consolidated retained earnings

Parent's retained earnings – Dec. 31, 20x1 110,000
Consolidation adjustments:
Parent's share in the net change in Sub.'s net assets (a)
37,500
Unamortized deferred gain (Downstream only) -
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable to Parent (7,500)
Net consolidation adjustments 30,000
Consolidated retained earnings – Dec. 31, 20x1 140,000

(a)
Net change in Sub.’s net assets (Step 2) of ₱50,000 x 75% = ₱37,500.

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits before adjustments 240,000 50,000 290,000
Consolidation adjustments:
Unamortized def. gain - (Step 1) ( - ) ( - ) ( - )
Dividend income from subsidiary ( - ) N/A ( - )
Gain or loss on extinguishment
of bonds ( - ) ( - ) ( - )
Net consolidation adjustments ( - ) ( - ) ( - )
Profits before FVA 240,000 50,000 290,000
Depreciation of FVA ( - ) ( - ) ( - )
Impairment loss on goodwill (7,500) (2,500) (10,000)
Consolidated profit 232,500 47,500 280,000

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

Owners of parent NCI Consolidated
Parent's profit before FVA (Step 6) 240,000 N/A 240,000
Share in Sub.’s profit before FVA (c)
37,500 12,500 50,000
Depreciation of FVA ( - ) ( - ) ( - )
Share in impairment loss on goodwill (7,500) (2,500) (10,000)
Totals 270,000 10,000 280,000
Shares in Sub.’s profit before FVA (Step 6): (50,000 x 75%); (50,000 x 25%)
(c)

Requirement (d):
Consolidated
ASSETS
Investment in subsidiary (at cost) – eliminated -
Other assets (600,000 + 235,000) 835,000
Goodwill – net (Step 3) 70,000
TOTAL ASSETS 905,000

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #18

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

LIABILITIES AND EQUITY

Liabilities (70,000 + 25,000) 95,000
Share capital (Parent's only) 600,000
Retained earnings (Step 5) 140,000
Equity attributable to owners of the parent 740,000
Non-controlling interest (Step 4) 70,000
Total equity 810,000
TOTAL LIABILITIES AND EQUITY 905,000

Consolidated
Revenues (300,000 + 80,000) 380,000
Operating expenses (60,000 + 30,000) (90,000)
Impairment loss on goodwill (10,000)
Profit for the year 280,000

Profit attributable to owners of the parent (Step 7) 270,000

Profit attributable to NCI (Step 7) 10,000
Profit for the year 280,000

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #18

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Activity 5
1. Solutions:
Step 1: Analysis of effects of intercompany transaction
There were no intercompany transactions during the period.

Step 2: Analysis of net assets

Night Co. Acquisition date Consolidation date Net change
Total net assets at carrying amounts 192,000 252,000
Fair value adjustments at acquisition date - -
Subsequent depreciation of FVA NIL -
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 192,000 252,000 60,000

Step 3: Goodwill computation

Formula #2 - NCI measured at fair value
Consideration transferred 216,000
Less: Previously held equity interest in the acquiree -
Total 216,000
Less: Parent's proportionate share in the net assets of subsidiary (₱192,000 acquisition-date fair
value x 75%) (144,000)
Goodwill attributable to owners of parent – Jan. 1, 20x1 72,000
Less: Parent’s share in goodwill impairment (₱8,000 x 75%) (6,000)
Goodwill attributable to owners of parent – Dec. 31, 20x1 66,000

Fair value of NCI (see given) 72,000

Less: NCI's proportionate share in the net assets of subsidiary (₱192,000 acquisition-date fair
value x 25%) (48,000)
Goodwill attributable to NCI – Jan. 1, 20x1 24,000
Less: NCI’s share in goodwill impairment (₱8,000 x 25%) (2,000)
Goodwill attributable to NCI – Dec. 31, 20x1 22,000
Goodwill, net – Dec. 31, 20x1 88,000
Step 4: Non-controlling interest in net assets
Night's net assets at fair value – Dec. 31, 20x1 (Step 2) 252,000
Multiply by: NCI percentage 25%
Total 63,000
Add: Goodwill to NCI net of accumulated impairment losses 22,000
Non-controlling interest in net assets – Dec. 31, 20x1 85,000

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 (a)
45,000

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #18

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Unamortized deferred gain (Downstream only) -

Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable to Parent (6,000)
Net consolidation adjustments 39,000
Consolidated retained earnings – Dec. 31, 20x1 171,000
(a)
Net change in Night’s net assets (Step 2) 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 def. gain ( - ) ( - ) ( - )
Dividend income from subsidiary ( - ) N/A ( - )
Gain or loss on extinguishment
of bonds ( - ) ( - ) ( - )
Net consolidation adjustments ( - ) ( - ) ( - )
Profits before FVA 288,000 60,000 348,000
Depreciation of FVA ( - ) ( - ) ( - )
Impairment loss on goodwill (6,000) (2,000) (8,000)
Consolidated profit 282,000 58,000 340,000

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

Owners of parent NCI Consolidated
Day's profit before FVA (Step 6) 288,000 N/A 288,000
Share in Night’s profit before FVA(c)
45,000 15,000 60,000
Depreciation of FVA ( - ) ( - ) ( - )
Share in impairment loss on goodwill (6,000) (2,000) (8,000)
Totals 327,000 13,000 340,000
(c)
Shares in Night’s profit before FVA (Step 6): (60,000 x 75%); (60,000 x 25%)

Requirement (d):
Consolidated
ASSETS
Investment in subsidiary (at cost) – eliminated -
Other assets (720,000 + 282,000) 1,002,000
Goodwill – net (Step 3) 88,000
TOTAL ASSETS 1,090,000

LIABILITIES AND EQUITY

Liabilities (84,000 + 30,000) 114,000
Share capital (Day's only) 720,000
Retained earnings (Step 5) 171,000

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 ACC 113: Accounting for Business Combinations
Student Activity Sheet #18

Name: ______________________________________________________ Class number: ______

Section: ____________ Schedule: ________________________________ Date: _____________

Equity attributable to owners of the parent 891,000

Non-controlling interest (Step 4) 85,000
Total equity 976,000
TOTAL LIABILITIES AND EQUITY 1,090,000

Consolidated
Revenues (360,000 + 96,000) 456,000
Operating expenses (72,000 + 36,000) (108,000)
Impairment loss on goodwill (Step 3) (8,000)
Profit for the year 340,000

Profit attributable to owners of the parent (Step 7) 327,000

Profit attributable to NCI (Step 7) 13,000
Profit for the year 340,000

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