Chapter 6

Consolidated Financial Statements (Part 3)

PROBLEM 1: MULTIPLE CHOICE - THEORY

1. B
2. A
3. C
4. A
5. D

PROBLEM 2: FOR CLASSROOM DISCUSSION

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

Acquisition Consolidation Net
Subsidiary Co.
date date 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)

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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

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

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Step 7: Profit or loss attributable to owners of parent and NCI
Owners Consoli-
of parent NCI dated
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
(c)
Shares in Sub.’s profit before FVA (Step 6): (50,000 x 75%); (50,000 x 25%)

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

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

2. D

3. D

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4. C
Solution:
Owners Net assets
% of parent % NCI of XYZ
Before the transaction 75% 112,500 25% 37,500 150,000 a
After the transaction 95% 142,500 5% 7,500 150,000
Change – Inc./ (Decrease) 30,000 (30,000) -

a The fair value of Plastic Co.’s net assets on January 1, 20x1 is computed as
follows:
Rubber Plastic, FV of net
Co. Inc. Consolidated assets
(a) (b) (c) (d) = (c) - (a)
Investment in sub. 112,500 - - -
Other assets 514,500 186,000 709,500 195,000
Goodwill - - 12,000
TOTAL ASSETS 627,000 186,000 721,500 195,000

Accounts payable 109,500 45,000 154,500 45,000

NET ASSETS 517,500 141,000 567,000 150,000

ANSWER: NCI in net assets after the additional acquisition = 7,500

5. B
Solution:
The entry in Rubber’s separate books is as follows:
Jan. Investment in subsidiary 100,000
1,
Cash in bank 100,000
20x2
to record the acquisition of additional interest in
Plastic, Inc.

The consolidation journal entry is as follows:

Jan. NCI (the decrease computed above) 30,000
1, Retained earnings – Rubber Co. (squeeze) 70,000
20x2
Investment in subsidiary 100,000

Consolidated retained earnings before additional acquisition 177,000

Decrease in retained earnings (70,000)
Consolidated retained earnings after additional acquisition 107,000

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6. A
Solution:
The fair value of Plastic’s net identifiable assets is computed as follows:
Rubber Plastic, FV of net
Co. Inc. Consolidated assets
(a) (b) (c) (d) = (c) - (a)
Investment in sub. 112,500 - - -
Other assets 514,500 186,000 709,500 195,000
Goodwill - - 12,000
TOTAL ASSETS 627,000 186,000 721,500 195,000

Accounts payable 109,500 45,000 154,500 45,000

NET ASSETS 517,500 141,000 567,000 150,000

The gain or loss on the sale is computed as follows:

Jan. Cash (Consideration received) 120,000
1,
Held for trading securities* 30,000
20x2
Accounts payable – Plastic, Inc. 45,000
Non-controlling interest 37,500
Other assets – Plastic, Inc. 195,000
Goodwill 12,000
Gain on disposal (squeeze) 25,500

*(120,000 ÷ 60%) x 15% = 30,000

OR
Consideration received 120,000
Investment retained in the former subsidiary (at fair value) 30,000
NCI (carrying amount - see consolidated financial statements) 37,500
Total 187,500
Less: Plastic’s net identifiable assets (see computation above) (150,000)
Goodwill (see consolidated financial statements) (12,000)
Gain or loss on disposal of controlling interest 25,500

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PROBLEM 3: EXERCISES
1. Solutions:

Step 1: Analysis of effects of intercompany transaction

There were no intercompany transactions during the period.

Step 2: Analysis of net assets

Acquisition Consolidation Net
Night Co.
date date 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

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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
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 Consoli-
of parent NCI dated
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%)

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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
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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PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL

1. B
Solution:
Accounts receivable of Parent 52,000
Accounts receivable of Subsidiary 38,000
Less: Intercompany receivable/payable (squeeze) (12,000)
Consolidated accounts receivable 78,000

2. D

3. D The receivable from Winn will be eliminated in the consolidation. The

receivable from Carr will not be eliminated (Carr is not a subsidiary),
thus, it remains. Grey reports accounts receivable from affiliates (Carr) of
₱200,000 in its consolidated balance sheet.

4. C

5. A The purchase by the member of a consolidated group of stock of

another member of the consolidated group is treated as a treasury stock
transaction. This follows the theory of consolidated financial statements
presenting one economic entity. (You cannot make money selling stock
to yourself.)

6. D

7. D

8. A
Solution:
Owners Net assets
% of parent % NCI of XYZ
Before the transaction 80% 192,000 20% 48,000 240,000 a
After the transaction 90% 216,000 10% 24,000 240,000
Change – Inc./ (Decrease) 24,000 (24,000) -

a The fair value of Round Co.’s net assets on January 1, 20x1 is computed as
follows:

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 FV of net
Oblong Co. Round, Inc. Consolidated
assets
(a) (b) (c) (d) = (c) - (a)
Investment in sub. 180,000 - - -
Other assets 823,200 297,600 1,135,200 312,000
Goodwill - - 7,200 -
TOTAL ASSETS 1,003,200 297,600 1,142,400 312,000
Accounts payable 175,200 72,000 247,200 72,000

NET ASSETS 828,000 225,600 895,200 240,000

ANSWER: NCI in net assets after the additional acquisition = 24,000

9. C
Solution:
The entry in Oblong’s separate books is as follows:
Jan. Investment in subsidiary 100,000
1,
Cash in bank 100,000
20x2
to record the acquisition of additional interest in
Round, Inc.

The consolidation journal entry is as follows:

Jan. NCI (the decrease computed above) 24,000
1, Retained earnings – Oblong Co. (squeeze) 76,000
20x2
Investment in subsidiary 100,000

Consolidated retained earnings before additional acquisition 283,200

Decrease in retained earnings (76,000)
Consolidated retained earnings after additional acquisition 207,200

10. B
Solution:
The fair value of Round’s net identifiable assets is computed as follows:

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 FV of net
Oblong Co. Round, Inc. Consolidated
assets
(a) (b) (c) (d) = (c) - (a)
Investment in sub. 180,000 - - -
Other assets 823,200 297,600 1,135,200 312,000
Goodwill - - 7,200 -
TOTAL ASSETS 1,003,200 297,600 1,142,400 312,000

Accounts payable 175,200 72,000 247,200 72,000

NET ASSETS 828,000 225,600 895,200 240,000

The gain or loss on the sale is computed as follows:

Jan. Cash (Consideration received) 120,000
1,
Held for trading securities* 40,000
20x2
Accounts payable – Round, Inc. 72,000
Non-controlling interest 48,000
Loss on disposal 39,200
Other assets – Round, Inc. 312,000
Goodwill 7,200

*(120,000 ÷ 60%) x 20% = 40,000

OR
Consideration received 120,000
Investment retained in the former subsidiary (at fair value) 40,000
NCI (carrying amount - see consolidated financial statements) 48,000
Total 208,000
Less: Round’s net identifiable assets (see computation above) (240,000)
Goodwill (see consolidated financial statements) (7,200)
Gain or loss on disposal of controlling interest (39,200)

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