ADVANCED FINANCIAL ACCOUNTING & REPORTING
Consolidated Statements
LECTURE NOTES
Consolidated financial statements- are the financial
statements of a group presented as those of a single
economic entity.
Group is a parent and all of its subsidiaries.
Separate financial statements – are those presented by a
parent, an investor in an associate, or a venturer in a
jointly controlled entity, in which the investments are
accounted for on the basis of the direct equity interest
rather than on the basis of the reported credits, and the
net assets of the investee.
PRESENTATION OF CONSOLIDATED FINANCIAL
STATEMENTS
A parent shall present consolidated financial statements,
except when
 The parent is itself a wholly-owned subsidiary, or is a
partially-owned subsidiary of another entity
 The parent’s debt or equity instruments are not traded
in a public market
 The parent did not file, nor is in the process of filing,
its financial statements with a securities commission
for the purpose of issuing any class of instruments in a
public market
 The ultimate parent produces consolidated financial
statements available for public use
CONSOLIDATION PROCEDURES
 The carrying amount of the parent’s investment in
each subsidiary and the parent’s portion of equity of
each subsidiary are eliminated
 Non-controlling interests in the profit or loss of
consolidated subsidiaries for the reporting period are
identified
 Non-controlling interests in the net assets of
consolidated subsidiaries are identified separately from
the parent shareholders’ equity in them. Non-
controlling interests in the net assets consist of:
1. The amount of those non-controlling interests at
the date of the original combination
2. The non-controlling share of changes in equity
since the date of the combination
ACCOUNTING FOR INVESTMENTS IN SUBSIDIARIES,
JOINTLY CONTROLLED ENTITIES AND ASSOCIATES IN
SEPARATE FINANCIAL STATEMENTS
For separate financial statements investment in
subsidiaries, jointly controlled entities and associates, that
are not classified as held for sales, shall be accounted for
either:
 at cost, or
 in accordance with IAS 39
Summary of Critical Points:
1. Consolidated statements are prepared from the
separate statements of the acquiring company and
acquired company(ies) from the standpoint of a single
economic entity.
2. Consolidation procedures are necessary whenever a
parent and a subsidiary relationship existed, except if
the parent is exempted under PAS 27 to present
consolidated financial statements.
3. The acquiring company, generally, is a parent if it
owns, directly and indirectly, more than 50% of the
outstanding voting shares of the acquired company. If
the controlling interest is not 100%, the difference
would represent the non-controlling interest.0
4. The following steps summarize the consolidation
worksheet procedures.
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a. Prepare a schedule of excess to determine if there
is either goodwill, or, income from acquisition. This
will also be the basis in formulating the working
paper elimination entries.
b. If the working paper is to prepare post acquisition
consolidated statements, computations must show
the amortization of increase/decrease in value of
net assets of the acquired company.
DETERMINATION OF GOODWILL
An important aspect of accounting for business
combination, especially when control is less than 100%, is
the computation of goodwill or excess in combination.
Goodwill is computed as follows:
Goodwill = Fair value of consideration transferred +
Amount of non-controlling interest (NCI)* +
Fair value of previously-held equity interest LESS
net identifiable assets of the acquiree
* Under revised provisions of IFRS3, the non-controlling
interest may be measured at either: (1) fair value or (2)
as a proportionate share of identifiable net assets at the
date of acquisition. These allowed alternatives result in
goodwill being computed in two different amounts. If
non-controlling interests are measured at full fair value,
goodwill recognized in the consolidated financial
statements will include a share for non-controlling
interests. In that case, goodwill is said to be grossed-up.
Under the second alternative, goodwill will be for the
parent only, i.e. not grossed-up. Unless otherwise
indicated, the fair value approach is preferable to
determine goodwill.
5. Increase/decrease to fair value of net asset items and
GOODWILL, if the NCI is measured at FAIR VALUE, are
recognized in full regardless of the extent of the non-
controlling interest. Such re-measurement and
resulting amortization/impairment loss affect both the
controlling interest and the non-controlling interests.
Please note that goodwill is no longer amortized but
subjected to annual tests for impairment losses.
Recognized goodwill belongs to the parent only, as
well as any impairment loss thereon, if the NCI is
measured at its proportionate share of the identifiable
net assets at FAIR VALUE
6. Working paper elimination entries orchestrate the
items and balances that must comprise the
consolidated statements. Their two basic objectives
are (1) to eliminate intercompany balances and (2) to
make adjustments to or set-up some items in order to
conform with purchase principles.
7. In purchase combination, for example, working paper
elimination entries aim to accomplish the following:
a. Eliminate inter-company balances
b. Make adjustments for acquired assets and
assumed liabilities to comply with fair value
considerations.
c. Set up goodwill or income from acquisition into
the consolidated statements.
d. Amortize increase/decrease in value of net assets
and measure their effects in the consolidated
financial statements,
e. Make adjustments to consolidated amounts as a
result of inter-company transactions.
f. And for a variety of other consolidation
requirements.
8. Basically, in the working papers, similar items from the
parent’s records and from the subsidiary’s records are
 simply combined, plus/minus any working paper
adjustments affecting such items.
STRAIGHT PROBLEMS

Problem 1 – (Wholly-owned subsidiary)

On January 1, 2010, P Company purchased interest in S The following financial statements pertain to the two
companies for the year ended December 31, 20x9
Company. On this date the book values and the fair
values of S Company were as follows: Income Statement for the year ended December 31, 20x9
Fair Market Pet Co Show Ent
Book Values Values Operating profit P160,000 P 60,000
Cash P 240,000 Dividend income from
Accounts receivable 144,000 Show 18,900 -
Merchandise Net profit before tax 178,900 60,000
inventory 576,000 720,000 Tax expense (48,900) (18,000)
Building (net) 1,488,000 1,536,000 Net profit after tax 130,000 42,000
Equipment 480,000 384,000 Retained earnings,
Long term inv. in January 1 110,000 38,200
MS 960,000 1,392,000 Dividends declared (100,000) (31,500)
P3,888,000 Retained earnings,
Current liabilities P 480,000 December 31 P140,000 P 48,700
Bonds payable 1,008,000 1,248,000
Common stock 960,000 Balance as at December 31, 20x9
Retained earnings 1,440,000 Pet Co Show Ent
P 3,888,000 Investment in Saturn Co,
Requirements: cost P117,000 P -
Prepare the following: Other assets 520,200 265,230
A. Assuming that P Company paid P 2,736,000 for a Total assets P637,200 P265,230
100% interest Share capital P270,000 P 80,000
B. Assuming that P Company paid P 2,200,000 for a Retained earnings 140,000 48,700
80% interest. NCI is measured at FV. Long-term liabilities 166,000 120,000
C. Assuming that P Company paid P 2,200,000 for a Current liabilities 61,200 16,530
80% interest. NCI is measured as a proportion of Total equities P637,200 P265,230
the FV of the acquiree’s net assets.
D. Assuming that P Company paid P 2,100,000 for a Required:
80% interest. 1. Show the consolidation working paper entries for the
1. Determination and distribution of excess schedule year ended December 31, 20x9.
2. Working paper elimination entries 2. Perform an analytical check on the non-controlling
interests as at December 31, 20x9.
3. Prepare the consolidated income statement and
consolidated balance sheet for 20x9.
Problem 2
Pluto Company acquired a 60% interest in Saturn Co on 2 Problem 4 (Consolidation WPEE one year after date of
January, 2010. Book and fair values at the date of acquisition)
acquisition were close to each other. The fair value of non- On December 31, 20x1, P Co purchased 90% of S Co’s
controlling interests as at the date of acquisition is outstanding ordinary shares from S Co’s present
P60,000. A control premium was paid by Pluto to acquire shareholders for P8,260,000 cash and issuance of 1 million
Saturn. shares of P Co’s ordinary shares, which had a market
The following balance sheets relate to Pluto and Saturn value of P5,000,000. The balance sheets of S Co and P Co
right after the combination: at the date of acquisition (also the financial year-end) are
Pluto Co Saturn Co shown below. Assume that all fair value adjustments have
Investment in Saturn Co, cost P93,600 P 0 tax effects and give rise to either a deferred tax liability or
Other assets 462,400 235,760 deferred tax asset. However, goodwill impairment loss
Total assets P556,000 P235,760 does not have tax effects. Fair value of non-controlling
Share capital P240,000 P 64,000 interests at acquisition date was P1,400,000. Tax rate was
Retained earnings 112,000 24,000 20% throughout. Assume an accounting policy where the
Long-term liabilities 160,000 120,320 non-controlling interests are recognized at fair value on
Current liabilities 44,000 27,440 acquisition date.
Total equities P556,000 P235,760 S Company P Company
Book Value Fair Value Book Value
Assets
Required: Land P 780,000 P 1,170,000 P 1,560,000
Leased bldg. 5,200,000 6,500,000 10,400,000
1. Determination and distribution of excess schedule at
Equipt. – net 2,600,000 2,210,000 9,100,000
the date of acquisition. Inv. in S Co 13,260,000
2. Consolidation working paper entries at the date of Inventories 650,000 780,000 1,170,000
acquisition. AR – net 390,000 390,000 910,000
3. Consolidated balance sheet at the date of acquisition. Other CA 520,000 520,000 780,000
Cash 260,000 260,000 1,690,000
Problem 3 P10,400,000 P11,830,000 P38,870,000
Pet Company acquired a 60% interest in Show Enterprises
Equity and liabilities
on 2 January 20x2 when Show’s share capital and retained
Ordinary sh. P 6,500,000 P25,870,000
earnings were P80,000 and P30,000 respectively. The net RE 1,170,000 P 8,970,000* 5,590,000
assets of Show were fairly valued on that date. The fair Other liab. 910,000 910,000 2,600,000
value of non-controlling interest as at the date of Loan payable 1,820,000 1,820,000 4,810,000
acquisition is P78,000. Contingent liab. 130,000

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 P10,400,000 P11,830,000 P38,870,000
Information on S Co’s net profit after tax and dividends
declared during 20x2 are as follows:
P Co’s dividend income from S Co P409,500
S Co’s net profit after tax 728,000
S Co’s dividend declared 455,000
There were no other changes to equity.
In 20x2, the following information applies to undervalued
and overvalued assets and goodwill:
 Undervalued inventories of P130,000 – sold in 20x2
 Undervalued land of P390,000 – still held by S Co – no
depreciation
 Undervalued buildings of P1,300,000 – useful life 50
years from 1 January 20x2
 Overvalued equipment of P390,000 – useful life 5
years from 1 January 20x2
 Contingent liabilities of P130,000 – materialized (paid-
off in 20x2)
 Goodwill – impairment loss of P520,000 recognized in
20x2.
Requirements:
1. Prepare consolidation adjustments for 20x2.
2. Reconcile the non-controlling interests’ balance from
the consolidation adjustments with the NCI’s share of
the net assets of the subsidiary.
Problem 5
On January 1, 20x9, P Company purchased an 80%
interest in S Company for P340,000. On this date, S
Company had Capital Stock of P150,000 and Retained
Earnings of P100,000. An examination of S Company’s
assets and liabilities revealed that book values were equal
to market values for all except the following:
Book value Market value
Plant and equipment (net) 300,000 400,000
Merchandise inventory 80,000 100,000
The plant and equipment had an expected remaining life
of 5 years, and the inventory should be sold in 20x9. P
Company’s income was P250,000 in 20x9 and P290,000 in
20x0. S Company’s income was P120,000 in 20x9 and P
180,000 in 20x0. S Company paid cash dividends of
P50,000 in 20x9 and P60,000 in 20x0.
P Company uses the cost method in accounting for its
investment in stocks of S Company.
Requirements:
1. Calculate the investment income of P Company from S
Company in 20x9 and in 20x0.
2. Elimination entries for consolidated statement working
papers on January 1, 20x9, December 31, 20x9 and
December 31, 20x0.
3. Calculation of minority interest in net income of
subsidiary for 20x9 and 20x0
4. Calculation of consolidated net income for 20x9 and
20x0.
5. Calculation of minority interest in net assets as of
January 1, 20x9, December 31, 20x9 and December
31, 20x0.
Problem 6 (Upstream Merchandise Transfer)
S Company, a 75% owned subsidiary of P Company, sold
merchandise during 2009 to its parent company for P
150,000. The merchandise cost S Company P 110,000,
25% of the transferred merchandise remained in P
Company’s ending inventory. For the year 2009, S
Company reported a net income of P 150,000 and P
Company reported net income (including dividend income
of P 60,000) of P 275,000.
Requirements:
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1. Calculate P Company’s investment income from S
Company in 2009.
2. Elimination entries for 2009
3. Determine non-controlling interests in the net income
of the subsidiary for 2009.
4. Show consolidated net income for 2009, and allocate
to Controlling interests and Non-controlling interests.
Problem 7 (Downstream Land Transfer)
During 2008 P Company sold land with a cost of P150,000
to its 80% owned subsidiary, S Company, for P 200,000.
The subsidiary sold the land in 2010 to an outsider for
P280,000. The subsidiary and the parent reported net
income as follows:
Parent Subsidiary
2008 351,000 154,000
2009 335,000 149,000
2010 315,000 165,000
The reported income of the parent company includes P
51,000 of dividend income each year.
Requirements:
1. Calculate P Company’s investment income from S
Company in 2008, 2009, and 2010.
2. Elimination entries for 2008, 2009, and 2010
3. Determine non-controlling interest in the net income
of the subsidiary in 2008, 2009 and 2010
4. Show the consolidated net income for 2008, 2009 &
2010. Allocate each to Controlling and non-controlling
interests.
Problem 8 (Upstream depreciable asset transfer)
On January 1, 2009, S Company a 90% owned subsidiary
of P Company transferred equipment to its parent in
exchange for P75,000 cash. At the date of transfer, the
subsidiary’s record carried the equipment at a cost of
P106,000 less accumulated depreciation of P45,000. The
equipment has an estimated remaining life of 7 years.
The subsidiary reported net income for 2009 and 2010 of
P 132,000 and P197,000, respectively. The parent
company reported income of P 220,000 (including
dividend income of P 45,000) and P295,000 (including
dividend income of P45,000) for 2009 and 2010,
respectively.
Requirements
1. Calculate P Company’s investment income from S
Company in 2009 and in 2010.
2. Elimination entries for 2009 and for 2010.
3. Determine non-controlling interest in the net income
of the subsidiary for 2009 and for 2010.
4. Show the consolidated net income for 2009 and 2010.
Allocate each to Controlling and Non-controlling
interests.
Problem 9 (Intercompany Transactions)
On January 1, 2009, P Company acquired 75% of the
outstanding shares of S Company at a fair value
differential of P50,000, represented by understated plant
assets with a 10-year remaining life. During 2010, P
Company purchased merchandise from S Company in the
amount of P 400,000 at billed prices. S Company shipped
the merchandise at 40% above its cost, and this pricing
policy was also used for shipments made in 2009 to P
Company. The inventories of P Company included
merchandise at billed prices from S Company as follows:
January 1, 2010 112,000
December 31, 2010 84,000
Also, in 2009 P Co sold land to S Co for P200, 000. The
cost of the land to P Co was P150, 000. S Co sold the land
to an outsider for P230, 000 in 2010.
Furthermore, on January 1, 2010 S Co sold equipment to Gain on sale of equipment _________ 14,000
P Co for P75, 000 cash at the date of the transfer, the Net income P 480,000 P 224,000
equipment is carried at a cost of P106, 000 less
accumulated depreciation of P45, 000. The equipment has Requirements:
an estimated remaining life of 7 years. 1. Calculate the non-controlling interests in the
consolidated net income in 2010.
Income statements for the two companies for the year 2. Calculate the controlling interest in the consolidated
2010 are as follows: net income in 2010.
P Company S Company 3. Prepare working paper elimination entries for the
Sales P2,000,000 P1,000,000 above information at December 31, 2010.
Cost of sales 800,000 500,000 4. Prepare a consolidated income statement for the year
Gross profit 1,200,000 500,000 ended December 31, 2010.
Operating expenses 720,000 320,000
Operating income 480,000 180,000
Gain on sale of land 30,000 - end –

MULTIPLE CHOICE

Daito Corporation owns 100% of Prince Enterprises. On b. P 60,000 d. P 65,000

January 1, 2010, Daito sold Prince delivery equipment at
a gain. Daito had owned the equipment for two years and On January 1, 2010. SABINA Corporation purchased 75%
used a five-year straight-line depreciation rate with no of the common stock of ARGO Company. Separate balance
residual value. Prince is using a three-year straight-line sheet data for the companies at the combination date
depreciation rate with no residual value for the
equipment.
are given below:
Sabina Argo
1. In the consolidated income statement, Prince recorded
Cash 12,000 103,000
depreciation expense on the equipment for 2010 will Accounts Receivables 72,000 13,000
be decreased by: Inventory 66,000 19,000
a. 20% of the gain on sale Land 39,000 16,000
b. 33.33% of the gain on sale Plant Assets 350,000 150,000
c. 50% of the gain on sale Accum. Depreciation (120,000) (30,000)
d. 100% of the gain on sale Invesment in Argo 196,000 _______-
Parker Corporation sells equipment with a book value of Total Assets 615,000 271,000
P80,000 to Sheaffer Enterprises, its 75%-owned Accounts Payable 103,000 71,000
subsidiary, for P100,000 on January 1, 2010. Sheaffer Capital Stock 400,000 150,000
determines that the remaining useful life of the equipment Retained Earnings 112,000 50,000
is four years and that straight-line depreciation is Total Equities. 615,000 271,000
appropriate. The December 31, 2010 separate company
financial statements of Parker and Sheaffer show At the date of combination the book values of ARGO’s net
equipment-net of P500,000 and P300,000, respectively. assets was equal to the fair value of the net assets except
2. The consolidated equipment-net will be: for ARGO’s inventory which has a fair value of P30,000.
a. P800,000 c. P780,000 5. What amount of goodwill will be reported?
b. P785,000 d P650,000 a. P15,667 c. P21,000
b. P37,750 d. P50,333

Balance sheet data for P Corporation and S Company on 6. What amount of total liability will be reported?
December 31, 2010, are given below: a. P174,000 c. P213,000
P Corporation S Company b. P284,333 d. P 90,667
Cash P 70,000 P 90,000
Merchandise 7. What is the amount of total assets?
Inventory 100,000 60,000 a. P590,667 c. P751,333
Property and b. P686,000 d. P738,750
equipment (net) 500,000 250,000
Investment in S On January 1, 2009, Paul Company purchased 90% of the
Company 260,000 ________ common stock of Bryan Company for P81,000 over the
Total assets P930,000 P400,000 book value of the shares acquired. All of the differential
was related to land held by Bryan. On May 1, 2010, Bryan
Current liabilities P180,000 P 60,000
sold the land at a gain of P145,000. For the year 2010,
Long term liabilities 200,000 90,000
Bryan reported net income of P331,000 and paid dividends
Common stock 300,000 100,000
of P80,000. Paul reported income from its own separate
Retained earnings 250,000 150,000
Total liabilities & SE P930,000 P400,000 operations of P659,000 and paid no dividends.
9. Consolidated net income for 2010 was
P Corporation purchased 80% interest in S Company on a. P 824,000 c. P 1,005,400
December 31, 2010 for P260,000. S Company’s property b. P 875,900 d. P 900,000
and equipment had a fair value of P50,000 more than the
book value shown above. All other book values On January 1, 2009 the Blumentritt Corporation sold
approximated fair value. In the consolidated balance sheet equipment to its wholly-owned subsidiary, Morayta
on December 31, 2010. Enterprises, for P1,800,000. The equipment cost
3. The amount of total stockholders’ equity to be reported Blumentritt P2,000,000; accumulated depreciation at the
will be time of the sale of P500,000. Blumentritt was depreciating
a. P 550,000 c. P 750,000 the equipment on the straight-line-method over twenty
b. P 610,000 d. P 615,000 years with no salvage value, a procedure that Morayta
continued.
4. The amount of non-controlling interest will be
a. P 50,000 c. P 110,000

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10. On the consolidated balance sheet at December 31, December 31, 2009 separate financial statements of CORN
2009 the cost and accumulated depreciation, and BEANS show equipment-net of P1,000,000 and
respectively, should be: P600,000, respectively.
a. P1,500,000 and P600,000 13. Consolidated equipment-net will be
b. P1,800,000 and P100,000 a. P1,236,500 c. P1,623,500
c. P1,800,000 and P500,000 b. P1,326,500 d. P1,523,600
d. P2,000,000 and P600,000
RICH Corporation paid P1,125,000 for an 80% interest in
P Company acquired a 65% interest in S company in HARD Corporation on January 1, 2009 at a price P37,500
2008. For years ended December 31, 2009 and 2010, S in excess of underlying book value. The excess was
reported net income of P325,000 and P390,000, allocated P15,000 to undervalued equipment with a ten-
respectively. During 2009, S sold merchandise to P for year remaining useful life and P22,500 to goodwill which
P70,000 at a cost of P54,000. Two-fifths of the was not impaired during the year. During 2009, HARD
merchandise was later resold by P to outsiders for P38,000 Corporation paid dividend of P60,000 to RICH Corporation.
during 2010. In 2010, P sold merchandise to S for The income statements of RICH and HARD for 2009 are
P98,000 at a profit of P24,000. One-fourth of the
merchandise was resold by S to outsiders for P30,000
given below:
RICH HARD
during 2010.
Sales P2,500,000 P1,000,000
11. Minority interest net income in 2009 is
Cost of sales (1,250,000) (500,000)
a. P115,100 c. P111,510
Depreciation
b. P151,110 d. P110,510
expense (250,000) (150,000)
Other expense (500,000) (225,000)
12. Minority interest net income in 2010 is
Net income P500,000 P125,000
a. P138,740 c. P134,780
14. Consolidated net income for 2009 is
b. b. P143,870 d. P137,480
a. P632,125 c. P623,125
b. P263,125 d. P632,215
CORN Corporation sells equipment with a book value of
P200,000 to BEANS Company, its 75% owned subsidiary
15. Non-controlling interest in net assets at December 31,
for P160,000 on April 1, 2009. BEANS determines that the
2009.
remaining useful life of the equipment is four years and
a. P290,785 c. P270,985
that the straight-line depreciation is appropriate. The
b. P209,785 d. P290,875

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