Business Combi And Conso Handout.pdf

AFAR REVIEW NOTES Business combinations and consolidated financial statements CONTROL PREMIUM  Additional investment  Part of purchase price  Affects goodwill/(gain)  Ignored in computing NCI CONTINGENT CONSIDERATION ERRATUM: Sorry, sets 4 and 2, mali nasabi ko sa klase. Measurement period is always one year. Adjustments to goodwill (gain) can be done in the measurement period. Beyond the measurement period, any adjustment to the ELCC will now affect P/L instead of goodwill (gain). WORKING PAPER ELIMINATION ENTRIES: 



DIVIDEND RECEIVED Dividend income Partial NCI Dividends declared - Subsidiary SUBSIDIARY-SHE Ordinary Share - Subsidiary Share Premium - Subsidiary Retained Earnings - Subsidiary Investment in Subsidiary NCI

xx xx xx xx xx xx xx xx



OVERVALUATION OF ASSETS (OVA), UNDERVALUATION OF ASSETS (UVA), GOODWILL Equipment xx Inventory xx Goodwill xx Investment in Subsidiary xx NCI xx



AMORTIZATION OF IMPAIRMENT LOSS Operating Expense PPE, net





xx xx

Impairment Loss Goodwill

xx

Cost of Sales Inventory

xx

INTERCOMPANY SALES AND PURCHASES Sales Cost of Sales

xx xx xx xx

UNREALIZED PROFIT IN ENDING INVENTORY (UPEI) Cost of Sales xx Inventory xx

Patrick Louie E. Reyes, CPA

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

REALIZED PROFIT IN BEGINNING INVENTORY (RPBI) Retained Earnings – Parent xx NCI (only for upstream sales) xx Cost of Sales xx

COMPUTATION OF INCOME (I call it the “mega formula”) Parent

Subsidiary

SUBSEQUENT TO DATE OF ACQUISITION 1. Parent net income (full) xx 2. Dividend received (Dividend-Subsidiary x Controlling interest rate) (xx) INCOME FROM OPERATIONS OF PARENT / SEPARATE INCOME - PARENT xx 3. Subsidiary Net Income (fractional year, if applicable) xx xx 4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) (xx) (xx) 5. Amortization of OVA (OVA/remaining life x fractional year, if applicable) xx xx 6. Gain xx xx 7. Impairment Loss (xx) (xx) INTERCOMPANY SALE OF INVENTORY 8. UPEI – downstream (xx) 9. UPEI – upstream (xx) (xx) 10. RPBI – downstream xx 11. RPBI – upstream xx xx INTERCOMPANY SALE OF PPE 12. Unrealized gain – down (year of sale) (xx) 13. Unrealized gain – up (year of sale) (xx) (xx) 14. Unrealized loss – down (year of sale) xx 15. Unrealized loss – up (year of sale) xx xx rd 16. Realized gain – down (depreciation, sale to 3 party) xx rd 17. Realized gain – up (depreciation, sale to 3 party) xx xx 18. Realized loss – down (depreciation, sale to 3rd party) (xx) 19. Realized loss – up (depreciation, sale to 3rd party) (xx) (xx) INTERCOMPANY SALE OF LAND 20. Unrealized gain – down (year of sale) (xx) 21. Unrealized gain – up (year of sale) (xx) (xx) 22. Unrealized loss – down (year of sale) xx 23. Unrealized loss – up (year of sale) xx xx 24. Realized gain – down (sale to 3rd party) xx 25. Realized gain – up (sale to 3rd party) xx xx 26. Realized loss – down (sale to 3rd party) (xx) 27. Realized loss – up (sale to 3rd party) (xx) (xx) NET INCOME (CNI-P and NCI-NI) xx xx Other Comprehensive Income xx xx COMPREHENSIVE INCOME (CCI-P and NCI-CI) xx xx Consolidated Net Income = CNI-P + NCI-NI ; Consolidated Comprehensive Income = CCI-P + NCI-CI Other Formulae: Non-controlling Interest, beginning Non-controlling Interest – Net Income Dividend Share Non-controlling Interest, end Retained Earnings – Parent (date of acquisition) Consolidated Net Income – Parent Dividends declared by Parent Consolidated Retained Earnings Ordinary Share – Parent Share Premium – Parent Consolidated Retained Earnings Non-controlling Interest Consolidated Shareholder’s Equity Patrick Louie E. Reyes, CPA

₱xx xx (xx) ₱xx ₱xx xx (xx) ₱xx ₱xx xx xx xx ₱xx

Sales – Parent Sales – Subsidiary Intercompany Sales & Purchases at Selling Price Consolidated Sales Cost of Sales – Parent Cost of Sales – Subsidiary Intercompany Sales & Purchases at Selling Price Unrealized Profit in Ending Inventory (UPEI) Realized Profit in Beginning Inventory (RPBI) Amortization of Undervalued Assets Amortization of Overvalued Assets Consolidated Cost of Sales

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₱xx xx (xx) ₱xx ₱xx xx (xx) xx (xx) xx (xx) ₱xx

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Shareholder’s Equity - Subsidiary, end Net Income of Subsidiary Dividends declared by Subsidiary Shareholder’s Equity – Subsidiary, at book value Overvalued Assets (OVA) Undervalued Assets (UVA) Amortization of OVA Amortization of UVA Net Assets at fair value Inventory – Parent, at book value Inventory – Subsidiary, at book value Undervaluation of Inventory Amortization of Undervaluation of Inventory Overvaluation of Inventory Amortization of Undervaluation of Inventory UPEI Consolidated Inventory

₱xx xx (xx) ₱xx (xx) xx xx (xx) ₱xx ₱xx xx xx (xx) (xx) xx xx ₱xx

Consolidated Sales Consolidated Cost of Sales Consolidated Gross Profit

₱xx (xx) ₱xx

Expenses – Parent Expenses – Subsidiary Amortization of UVA Amortization of OVA Realized Loss – Depreciation Realized Gain – Depreciation Consolidated Expense

₱xx xx xx (xx) xx (xx) ₱xx

Sample problem: #119-122, Practical Accounting 2 (2013 ed.) by Antonio J. Dayag On January 1, 2013, Bristol Company acquired 80% of Animation Company’s common stock for P280,000 cash. At that date, Animation rfeported (sic) common stock outstanding of P200,000 and retained earnings of P100,000 and the fair value of the non-controlling interest was P70,000. The book values and fair values of Animation’s assets and liabilities were equal, except for other intangible assets which had a fair value of P50,000 greater than book value and an 8-year remaining life. Animation reported the following data for 2013 and 2014: Year 2013 2014

Net Income P 25,000 35,000

Comprehensive Income P 30,000 45,000

Dividends Paid P 5,000 10,000

Bristol reported separate net income from own operations of P100,000 and paid dividends of P30,000 for both the years. 119. What is the amount of consolidated comprehensive income reported for 2013? a. 125,000 b. 123,750 c. 118,750 d. 130,000 120. Using the same information in No. 120 (sic), what is the amount of comprehensive income attributable to the controlling interest for 2013? a. 123,750 b. 118,750 c. 119,000 d. 104,000 121. Using the same information in No. 120 (sic), what is the amount of consolidated comprehensive income for 2014? a. 145,000 b. 135,000 c. 138,750 d. 128,750 122. Using the same information in No. 120 (sic), what is the amount of comprehensive income attributable to the controlling interest for 2014? a. 138,750 b. 131,000 c. 128,750 d. 135,000 Solution: Fair value of consideration given Fair value of NCI Fair value of Subsidiary Book value of Subsidiary’s SHE (200,000 + 100,000) Allocated excess Increase in intangible assets  undervaluation Goodwill

Patrick Louie E. Reyes, CPA

280,000 Amortization of 70,000 undervaluation of 350,000 assets: (300,000) 50,000 (50,000) 0

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50,000/8 years = 6,250 per year

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(using the “mega formula”) FOR YEAR 2013: Parent

Subsidiary

100,000 (xx) xx 20,000 (5,000) xx xx (xx)

5,000 (1,250) xx xx (xx)

SUBSEQUENT TO DATE OF ACQUISITION 1. Parent net income (full) 2. Dividend received (Dividend-Subsidiary x Controlling interest rate) INCOME FROM OPERATIONS OF PARENT / SEPARATE INCOME - PARENT 3. Subsidiary Net Income (fractional year, if applicable) 4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) 5. Amortization of OVA (OVA/remaining life x fractional year, if applicable) 6. Gain plus other comprehensive income 7. Impairment Loss INTERCOMPANY SALE OF INVENTORY 8. UPEI – downstream 9. UPEI – upstream 10. RPBI – downstream 11. RPBI – upstream INTERCOMPANY SALE OF PPE 12. Unrealized gain – down (year of sale) 13. Unrealized gain – up (year of sale) 14. Unrealized loss – down (year of sale) 15. Unrealized loss – up (year of sale) 16. Realized gain – down (depreciation, sale to 3rd party) 17. Realized gain – up (depreciation, sale to 3rd party) 18. Realized loss – down (depreciation, sale to 3rd party) 19. Realized loss – up (depreciation, sale to 3rd party) INTERCOMPANY SALE OF LAND 20. Unrealized gain – down (year of sale) 21. Unrealized gain – up (year of sale) 22. Unrealized loss – down (year of sale) 23. Unrealized loss – up (year of sale) 24. Realized gain – down (sale to 3rd party) 25. Realized gain – up (sale to 3rd party) 26. Realized loss – down (sale to 3rd party) 27. Realized loss – up (sale to 3rd party) NET INCOME Other Comprehensive Income COMPREHENSIVE INCOME

(xx) (xx) xx xx (xx) (xx) xx xx xx xx (xx) (xx)

(xx) xx (xx) xx xx (xx)

(xx) (xx) xx xx xx xx (xx) (xx) 115,000 4,000 119,000

(xx) 3,750 1,000 4,750

Parent

Subsidiary

100,000 (xx) xx 28,000 (5,000) xx xx (xx)

7,000 (1,250) xx xx (xx)

(xx) xx xx

Consolidated Net Income: 115,000 + 3,750 = 118,750 Consolidated Comprehensive Income: 119,000 + 4,750 = 123,750 (using the “mega formula”) FOR YEAR 2014: SUBSEQUENT TO DATE OF ACQUISITION 1. Parent net income (full) 2. Dividend received (Dividend-Subsidiary x Controlling interest rate) INCOME FROM OPERATIONS OF PARENT / SEPARATE INCOME - PARENT 3. Subsidiary Net Income (fractional year, if applicable) 4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) 5. Amortization of OVA (OVA/remaining life x fractional year, if applicable) 6. Gain plus other comprehensive income 7. Impairment Loss INTERCOMPANY SALE OF INVENTORY 8. UPEI – downstream 9. UPEI – upstream 10. RPBI – downstream 11. RPBI – upstream INTERCOMPANY SALE OF PPE Patrick Louie E. Reyes, CPA

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(xx) (xx) xx xx

(xx) xx

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12. Unrealized gain – down (year of sale) 13. Unrealized gain – up (year of sale) 14. Unrealized loss – down (year of sale) 15. Unrealized loss – up (year of sale) 16. Realized gain – down (depreciation, sale to 3rd party) 17. Realized gain – up (depreciation, sale to 3rd party) 18. Realized loss – down (depreciation, sale to 3rd party) 19. Realized loss – up (depreciation, sale to 3rd party) INTERCOMPANY SALE OF LAND 20. Unrealized gain – down (year of sale) 21. Unrealized gain – up (year of sale) 22. Unrealized loss – down (year of sale) 23. Unrealized loss – up (year of sale) 24. Realized gain – down (sale to 3rd party) 25. Realized gain – up (sale to 3rd party) 26. Realized loss – down (sale to 3rd party) 27. Realized loss – up (sale to 3rd party) NET INCOME Other Comprehensive Income COMPREHENSIVE INCOME

(xx) (xx) xx xx xx xx (xx) (xx) (xx) (xx) xx xx xx xx (xx) (xx) 123,000 8,000 131,000

(xx) xx xx (xx) (xx) xx xx (xx) 5,750 2,000 7,750

Consolidated Net Income: 123,000 + 5,750 = 128,750 Consolidated Comprehensive Income: 131,000 + 7,750 = 138,750 INTER-COMPANY SALES OF INVENTORY 2 goals of Working Paper Elimination Entries:  

Elimination of the effects in the Statement of Comprehensive Income of the inter-company sale in the period of sale, removing the sales revenue from the intercompany sale and the related cost of goods sold recorded by the selling affiliate. Elimination from the inventory on the Statement of Financial Position of any profit or loss on the intercompany sale that has not been realized by resale of said inventories to outside parties.

Unrealized Profit in Ending Inventory (UPEI) – merchandise purchased from affiliated company (either parent or subsidiary) that remains unsold on the Balance Sheet date results in the overstatement of the purchaser’s ending inventory. Working Paper Elimination Entry: see page 1 Realized Profit in Beginning Inventory (RPBI) – on a FIFO basis, the UPEI in the previous year gets realized through sales to outside parties in the next year. Working Paper Elimination Entry: see page 2 Nota bene: RPBI HAS NO IMPACT ON CONSOLIDATED INVENTORY Sample problem: #133-135, ibid. Income statement information for the year 2012 for Perfect Corporation and its 60% owned subsidiary, Seven Corporation is as follows: Perfect 900,000 (400,000) 500,000 (250,000)

Sales Cost of Sales Gross Profit Operating expenses Seven’s Net Income Perfect’s Net Income Patrick Louie E. Reyes, CPA

Seven 350,000 (250,000) 100,000 (50,000) 50,000

250,000 http://bit.ly/afarconso

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Intercompany sales for 2012 are upstream (from Seven to Perfect) and total 100,000. Perfect’s December 31, 2011 and December 31, 2012 inventories contain unrealized profits of 5,000 and 10,000, respectively. 133. The consolidated sales for 2012: a. 900,000 b. 1,150,000 c. 1,190,000 d. 1,250,000 134. The consolidated cost of sales for 2012: a. 545,000 b. 550,000 c. 555,000 d. 560,000 135. The profit attributable to equity holders of parent or CNI contributable to Controlling Interests for 2012: a. 277,000 b. 280,000 c. 282,000 d. 305,000 Solution (using other formulae): Sales – Parent Sales – Subsidiary Intercompany Sales & Purchases at Selling Price Consolidated Sales

₱900,000 350,000 (100,000) ₱1,150,000

Cost of Sales – Parent Cost of Sales – Subsidiary Intercompany Sales & Purchases at Selling Price Unrealized Profit in Ending Inventory (UPEI) Realized Profit in Beginning Inventory (RPBI) Amortization of Undervalued Assets Amortization of Overvalued Assets Consolidated Cost of Sales

₱400,000 250,000 (100,000) 10,000 (5,000) xx (xx) ₱555,000

Solution (using the “mega formula”) SUBSEQUENT TO DATE OF ACQUISITION 1. Parent net income (full) 2. Dividend received (Dividend-Subsidiary x Controlling interest rate) INCOME FROM OPERATIONS OF PARENT / SEPARATE INCOME - PARENT 3. Subsidiary Net Income (fractional year, if applicable) 4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) 5. Amortization of OVA (OVA/remaining life x fractional year, if applicable) 6. Gain 7. Impairment Loss INTERCOMPANY SALE OF INVENTORY 8. UPEI – downstream 9. UPEI – upstream 10. RPBI – downstream 11. RPBI – upstream INTERCOMPANY SALE OF PPE 12. Unrealized gain – down (year of sale) 13. Unrealized gain – up (year of sale) 14. Unrealized loss – down (year of sale) 15. Unrealized loss – up (year of sale) 16. Realized gain – down (depreciation, sale to 3rd party) 17. Realized gain – up (depreciation, sale to 3rd party) 18. Realized loss – down (depreciation, sale to 3rd party) 19. Realized loss – up (depreciation, sale to 3rd party) INTERCOMPANY SALE OF LAND Patrick Louie E. Reyes, CPA

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Parent

Subsidiary

xx (xx) 250,000 30,000 (xx) xx xx (xx)

20,000 (xx) xx xx (xx)

(xx) (6,000) xx 3,000 (xx) (xx) xx xx xx xx (xx) (xx)

(4,000) 2,000 (xx) xx xx (xx)

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20. Unrealized gain – down (year of sale) 21. Unrealized gain – up (year of sale) 22. Unrealized loss – down (year of sale) 23. Unrealized loss – up (year of sale) 24. Realized gain – down (sale to 3rd party) 25. Realized gain – up (sale to 3rd party) 26. Realized loss – down (sale to 3rd party) 27. Realized loss – up (sale to 3rd party) NET INCOME (CNI-P and NCI-NI) Other Comprehensive Income COMPREHENSIVE INCOME (CCI-P and NCI-CI)

(xx) (xx) xx xx xx xx (xx) (xx) 277,000 xx xx

(xx) xx xx (xx) 18,000 xx xx

INTER-COMPANY SALES OF LAND The selling entity’s gain must be eliminated since the land owned by a combined must be reported at original/historical cost, regardless of who (between the parent and subsidiary) holds the land. SALE Downstream Upstream – wholly owned Upstream – partially owned

ELIMINATION Against controlling interest Against controlling interest Proportionately against controlling interest and NCI

Working Paper Elimination Entries: Gain on sale of land Land

xx xx

If subsequently sold to outside parties, Retained earnings Gain on sale of land

xx xx

INTER-COMPANY SALES OF PPE OR DEPRECIABLE ASSETS The working paper elimination entries must be able to:   

Eliminate the gain Restore the accumulated depreciation Restore the cost of asset

In short, the working paper elimination entries restores the asset to its value AS IF THE INTER-COMPANY SALES DIDN’T HAPPEN. Example: The seller sells an equipment costing P90,000 and 30% (Useful life of 10 years, 3 years has passed) depreciated to a buyer who is an affiliate for P70,000. Entries to recognize the inter-company sales: Seller Cash Accumulated depreciation Equipment Gain on sale of equipment

Buyer Equipment Cash

70,000 27,000

70,000 70,000

90,000 7,000

Working Paper Elimination Entry: Gain on sale of equipment 7,000 Equipment 20,000 Accumulated Depreciation 27,000 Patrick Louie E. Reyes, CPA

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MORE SAMPLE PROBLEMS TO TEST THE “OTHER FORMULAE” AND OTHER PARTS OF THE “MEGA FORMULA” Problems 94-106, ibid. (names of companies changed) On January 1, 2011, Patrick Company acquired 90% of Star Company in exchange for 5,400 shares of P10 par common stock having a market value of 120,600. Patrick and Star condensed balance sheets were as follows: Patrick Company and Star Company Balance Sheets at January 1, 2011 (before combination) Patrick Company ASSETS Cash Accounts receivable, net Inventories Equipment, net Patents TOTAL ASSETS

267,000

LIABILITIES AND STOCKHOLDERS’ EQUITY Accounts payable Bonds payable, 10% Common stock, P10 par Additional paid-in capital Retained earnings TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

4,000 100,000 100,000 15,000 48,000 267,000

Star Company

30,900 34,200 22,900 179,000

37,400 9,100 16,100 40,000 10,000 112,600 6,600 50,000 15,000 41,000 112,600

At the date of acquisition, all assets and liabilities of Star Company have book value approximately equal to their respective market values except the following as determined by appraisal as follows: Inventories (FIFO method) Equipment, net (remaining life: 4 years) Patents (remaining life: 10 years) Goodwill (no impairment)

17,100 48,000 13,000

94. Compute for the amount of partial goodwill on January 1, 2011. a. 2,600 b. 3,800 c. 14,400 d. 25,200 95. Using the same information in No. 94, compute the non-controlling interests (in net assets) on January 1, 2011. a. 10,600 b. 11,200 c. 11,800 d. 13,090 96. Using the same information in No. 94, compute the consolidated retained earnings, January 1, 2011. a. 48,000 b. 52,100 c. 84,900 d. 89,000 97. Using the same information in No. 94, compute the equity holders of parent – retained earnings, January 1, 2011. a. 48,000 b. 52,100 c. 84,900 d. 89,000 In addition to the information in No. 94, assuming that on December 31, 2011, the following results were given: Dividends Paid Net Income Patrick Company 15,000 30,200 Star Company 4,000 9,400 98. Using cost method to record results of operations, compute the investment in Star Company balance on December 31, 2011. a. 0 b. 120,600 c. 122,160 d. 125,460 Patrick Louie E. Reyes, CPA

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99. Using the same information in Nos. 94 and 98, compute the dividend income for 2011 using the cost method. a. 0 b. 3,600 c. 4,000 d. 8,400 100. Using the same information in Nos. 94 and 98, compute the non-controlling interest in net income on December 31, 2011. a. 0 b. 540 c. 610 d. 940 101. Using the same information in Nos. 94 and 98, compute the non-controlling interest on December 31, 2011. a. 10,600 b. 11,140 c. 12,010 d. 12,300 102. Using the same information in Nos. 94 and 98, compute the profit for the period attributable to equity holders of parent on December 31, 2011. a. 26,600 b. 32,090 c. 36,000 d. 44,100 103. Using the same information in Nos. 94 and 98, compute the consolidated group net income on December 31, 2011. a. 26,600 b. 32,090 c. 32,700 d. 44,100 104. Using the same information in Nos. 94 and 98, compute the consolidated retained earnings, December 31, 2011. a. 64,760 b. 65,090 c. 69,400 d. 69,800 105. Using the same information in Nos. 94 and 98, compute the Equity holders of Parent – Retained earnings, December 31, 2011. a. 64,760 b. 65,090 c. 69,400 d. 69,800 106. Using the same information in Nos. 94 and 98, compute the consolidated total equity (stockholders’ equity on December 31, 2011. a. 108,090 b. 300,690 c. 312,700 d. 317,410 Solutions: 94. Remember my PowerPoint presentation?

Let’s use the same formula: FV of consideration transferred Book value of net assets (106,000 x 90%) Allocated excess OVA [(1,000+8,000+3,000) x 90%] Partial goodwill Patrick Louie E. Reyes, CPA

120,600 (95,400) 25,200 (10,800) 14,400 http://bit.ly/afarconso

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95.

96, 97.

FV of net assets acquired: 118,000 NCI % 10% NCI 11,800 Retained Earnings – Parent (date of acquisition) Consolidated Net Income – Parent Dividends declared by Parent Consolidated Retained Earnings, 1/1/2011

₱48,000 xx (xx) ₱48,000

98. FV of consideration given by parent: 120,600 (cost method) 99. Dividend received by parent = dividend paid by subsidiary = 4,000 x NCI % 90% Dividend Income = 3,600 100. Use the “mega formula” SUBSEQUENT TO DATE OF ACQUISITION 1. Parent net income (full) 2. Dividend received (Dividend-Subsidiary x Controlling interest rate) INCOME FROM OPERATIONS OF PARENT / SEPARATE INCOME - PARENT 3. Subsidiary Net Income (fractional year, if applicable) 4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) 5. Amortization of OVA (OVA/remaining life x fractional year, if applicable) 6. Gain 7. Impairment Loss INTERCOMPANY SALE OF INVENTORY 8. UPEI – downstream 9. UPEI – upstream 10. RPBI – downstream 11. RPBI – upstream INTERCOMPANY SALE OF PPE 12. Unrealized gain – down (year of sale) 13. Unrealized gain – up (year of sale) 14. Unrealized loss – down (year of sale) 15. Unrealized loss – up (year of sale) 16. Realized gain – down (depreciation, sale to 3rd party) 17. Realized gain – up (depreciation, sale to 3rd party) 18. Realized loss – down (depreciation, sale to 3rd party) 19. Realized loss – up (depreciation, sale to 3rd party) INTERCOMPANY SALE OF LAND 20. Unrealized gain – down (year of sale) 21. Unrealized gain – up (year of sale) 22. Unrealized loss – down (year of sale) 23. Unrealized loss – up (year of sale) 24. Realized gain – down (sale to 3rd party) 25. Realized gain – up (sale to 3rd party) 26. Realized loss – down (sale to 3rd party) 27. Realized loss – up (sale to 3rd party) NET INCOME (CNI-P and NCI-NI) Other Comprehensive Income COMPREHENSIVE INCOME (CCI-P and NCI-CI)

Parent

Subsidiary

30,200 (3,600) xx 8,460 (2,970) xx xx (xx)

940 (330)* xx xx (xx)

(xx) (xx) xx xx (xx) (xx) xx xx xx xx (xx) (xx) (xx) (xx) xx xx xx xx (xx) (xx) 32,090 xx xx

(xx) xx (xx) xx xx (xx) (xx) xx xx (xx) 610 xx xx

* Amortization of UVA: Inventories: 1,000/year Equipment: 8,000/4 years Patent: 3,000/10 years

Patrick Louie E. Reyes, CPA

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101.

Shareholder’s Equity – Subsidiary, end (50,000+15,000+41,000) Net Income of Subsidiary Dividends declared by Subsidiary Shareholder’s Equity – Subsidiary, at book value Overvalued Assets (OVA) Undervalued Assets (UVA) (1,000+8,000+3,000) Amortization of OVA Amortization of UVA Net Assets at fair value NCI in net assets: 120,000 x 10% = 12,010

₱106,000 9,400 (4,000) ₱111,400 (xx) 12,000 xx (3,300) ₱120,100

102. Refer to “mega formula” (No. 100) 103. Consolidated Net Income = CNI-P + NCI-NI = 32,090 + 610 = 32,700 104, 105.

106.

Retained Earnings – Parent (date of acquisition) Consolidated Net Income – Parent (see No. 103) Dividends declared by Parent Consolidated Retained Earnings, 12/31/2011

₱48,000 32,090 (15,000) ₱65,090

Ordinary Share – Parent (100,000 + consideration: 5,400 shares x 10 par) Share Premium – Parent (15,000 + APIC on consideration: 120,600-54,000) Consolidated Retained Earnings (see No. 104, 105) Non-controlling Interest (see No. 101) Consolidated Shareholder’s Equity

₱154,000 81,600 65,090 12,010 ₱312,700

Problem 160-162, ibid. Saul is a 90%-owned subsidiary of Paul Corporation, acquired at book value several years ago. Comparative separate company income statements for these affiliated corporation for 2012 are as follows: Paul Corp. 1,500,000 108,000 30,000 1,638,000 1,000,000 300,000 1,300,000 338,000

Sales Dividend income Gain on sale of building Income credits Cost of sales Operating expenses Income debits Net income credits over debits

Saul Corp. 700,000 700,000 400,000 150,000 550,000 150,000

On January 5, 2012, Paul sold a building with a 10-year remaining useful life to Saul at a gain of 30,000. Saul paid dividends of 120,000 during 2012. 160. The NCI-NI for 2012 is a. 12,000 c. 15,000

b. d.

12,300 15,300

161. The profit attributable to equity holders of Parent or CNI-P for 2012 is a. 342,000 b. 340,700 c. 338,000 d. 335,000 162. The Consolidated/group net income for 2012 is a. 342,000 b. 353,000 c. 380,000 d. 443,000

Patrick Louie E. Reyes, CPA

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Solutions (using the “mega formula”) SUBSEQUENT TO DATE OF ACQUISITION 1. Parent net income (full) 2. Dividend received (Dividend-Subsidiary x Controlling interest rate) INCOME FROM OPERATIONS OF PARENT / SEPARATE INCOME - PARENT 3. Subsidiary Net Income (fractional year, if applicable) 4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) 5. Amortization of OVA (OVA/remaining life x fractional year, if applicable) 6. Gain 7. Impairment Loss INTERCOMPANY SALE OF INVENTORY 8. UPEI – downstream 9. UPEI – upstream 10. RPBI – downstream 11. RPBI – upstream INTERCOMPANY SALE OF PPE 12. Unrealized gain – down (year of sale) 13. Unrealized gain – up (year of sale) 14. Unrealized loss – down (year of sale) 15. Unrealized loss – up (year of sale) 16. Realized gain – down (depreciation, sale to 3rd party) 17. Realized gain – up (depreciation, sale to 3rd party) 18. Realized loss – down (depreciation, sale to 3rd party) 19. Realized loss – up (depreciation, sale to 3rd party) INTERCOMPANY SALE OF LAND 20. Unrealized gain – down (year of sale) 21. Unrealized gain – up (year of sale) 22. Unrealized loss – down (year of sale) 23. Unrealized loss – up (year of sale) 24. Realized gain – down (sale to 3rd party) 25. Realized gain – up (sale to 3rd party) 26. Realized loss – down (sale to 3rd party) 27. Realized loss – up (sale to 3rd party) NET INCOME (CNI-P and NCI-NI) Other Comprehensive Income COMPREHENSIVE INCOME (CCI-P and NCI-CI)

Parent

Subsidiary

338,000 (108,000) 230,000 135,000 (xx) xx xx (xx)

15,000 (xx) xx xx (xx)

(xx) (xx) xx xx (30,000) (xx) xx xx 3,000 xx (xx) (xx) (xx) (xx) xx xx xx xx (xx) (xx) 338,000 xx xx

(xx) xx (xx) xx xx (xx) (xx) xx xx (xx) 15,000 xx xx

Consolidated Net Income = CNI-P + NCI-NI = 338,000 + 15,000 = 353,000 Problems 163-166, ibid. Silver Corporation is a 90% owned subsidiary of Proto Corporation, acquired several years ago at book value. For the years 2011 and 2012, Proto and Silver report the following: Proto’s separate income (IFOOP/SIP) Silver’s net income

2011 300,000 80,000

2012 400,000 60,000

The only inter-company profit transaction between Proto and Silver during 2011 and 2012 was the January 1, 2011 sale of land. The land had a book value of 20,000 and was sold inter-company for 30,000, its appraised value at the time of sale. 163. If the land was sold by Proto to Silver (downstream sales) and that Silver still owns the land at December 31, 2012, compute the CNI-P for 2011 and 2012. a. 363,000; 454,000 b. 362,000; 454,000 c. 372,000; 460,000 d. 362,000; 460,000

Patrick Louie E. Reyes, CPA

http://bit.ly/afarconso

Page 12 of 16

164. Using the same information in No. 163, the Consolidated/group net incomes for 2011 and 2012 are: a. 362,000; 454,000 b. 380,000; 460,000 c. 370,000; 460,000 d. 372,000; 460,000 165. Using the same information in No. 163, except that the land was sold by Silver to Proto (upstream sales) and Proto still owns the land at December 31, 2012, compute the CNI-P for 2011 and 2012. a. 363,000; 454,000 b. 362,000; 454,000 c. 370,000; 460,000 d. 363,000; 460,000 166. Using the same information in No. 165, the Consolidated/group net incomes for 2011 and 2012 are: a. 362,000; 454,000 b. 380,000; 460,000 c. 370,000; 460,000 d. 372,000; 460,000 Solutions (mega formula) 2011 - downstream Parent

Subsidiary

xx (xx) 300,000 72,000 (xx) xx xx (xx)

8,000 (xx) xx xx (xx)

SUBSEQUENT TO DATE OF ACQUISITION 1. Parent net income (full) 2. Dividend received (Dividend-Subsidiary x Controlling interest rate) INCOME FROM OPERATIONS OF PARENT / SEPARATE INCOME - PARENT 3. Subsidiary Net Income (fractional year, if applicable) 4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) 5. Amortization of OVA (OVA/remaining life x fractional year, if applicable) 6. Gain 7. Impairment Loss INTERCOMPANY SALE OF INVENTORY 8. UPEI – downstream 9. UPEI – upstream 10. RPBI – downstream 11. RPBI – upstream INTERCOMPANY SALE OF PPE 12. Unrealized gain – down (year of sale) 13. Unrealized gain – up (year of sale) 14. Unrealized loss – down (year of sale) 15. Unrealized loss – up (year of sale) 16. Realized gain – down (depreciation, sale to 3rd party) 17. Realized gain – up (depreciation, sale to 3rd party) 18. Realized loss – down (depreciation, sale to 3rd party) 19. Realized loss – up (depreciation, sale to 3rd party) INTERCOMPANY SALE OF LAND 20. Unrealized gain – down (year of sale) 21. Unrealized gain – up (year of sale) 22. Unrealized loss – down (year of sale) 23. Unrealized loss – up (year of sale) 24. Realized gain – down (sale to 3rd party) 25. Realized gain – up (sale to 3rd party) 26. Realized loss – down (sale to 3rd party) 27. Realized loss – up (sale to 3rd party) NET INCOME (CNI-P and NCI-NI) Other Comprehensive Income COMPREHENSIVE INCOME (CCI-P and NCI-CI)

(xx) (xx) xx xx (xx) (xx) xx xx xx xx (xx) (xx) (10,000) (xx) xx xx xx xx (xx) (xx) 362,000 xx xx

(xx) xx (xx) xx xx (xx) (xx) xx xx (xx) 8,000 xx xx

Consolidated Net Income = CNI-P + NCI-NI = 362,000 + 8,000 = 370,000

Patrick Louie E. Reyes, CPA

http://bit.ly/afarconso

Page 13 of 16

2012 - downstream Parent

Subsidiary

xx (xx) 400,000 54,000 (xx) xx xx (xx)

6,000 (xx) xx xx (xx)

SUBSEQUENT TO DATE OF ACQUISITION 1. Parent net income (full) 2. Dividend received (Dividend-Subsidiary x Controlling interest rate) INCOME FROM OPERATIONS OF PARENT / SEPARATE INCOME - PARENT 3. Subsidiary Net Income (fractional year, if applicable) 4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) 5. Amortization of OVA (OVA/remaining life x fractional year, if applicable) 6. Gain 7. Impairment Loss INTERCOMPANY SALE OF INVENTORY 8. UPEI – downstream 9. UPEI – upstream 10. RPBI – downstream 11. RPBI – upstream INTERCOMPANY SALE OF PPE 12. Unrealized gain – down (year of sale) 13. Unrealized gain – up (year of sale) 14. Unrealized loss – down (year of sale) 15. Unrealized loss – up (year of sale) 16. Realized gain – down (depreciation, sale to 3rd party) 17. Realized gain – up (depreciation, sale to 3rd party) 18. Realized loss – down (depreciation, sale to 3rd party) 19. Realized loss – up (depreciation, sale to 3rd party) INTERCOMPANY SALE OF LAND 20. Unrealized gain – down (year of sale) 21. Unrealized gain – up (year of sale) 22. Unrealized loss – down (year of sale) 23. Unrealized loss – up (year of sale) 24. Realized gain – down (sale to 3rd party) 25. Realized gain – up (sale to 3rd party) 26. Realized loss – down (sale to 3rd party) 27. Realized loss – up (sale to 3rd party) NET INCOME (CNI-P and NCI-NI) Other Comprehensive Income COMPREHENSIVE INCOME (CCI-P and NCI-CI)

(xx) (xx) xx xx (xx) (xx) xx xx xx xx (xx) (xx) (xx) (xx) xx xx xx xx (xx) (xx) 454,000 xx xx

(xx) xx (xx) xx xx (xx) (xx) xx xx (xx) 6,000 xx xx

Consolidated Net Income = CNI-P + NCI-NI = 454,000 + 6,000 = 460,000

Patrick Louie E. Reyes, CPA

http://bit.ly/afarconso

Page 14 of 16

2011 - upstream Parent

Subsidiary

xx (xx) 300,000 72,000 (xx) xx xx (xx)

8,000 (xx) xx xx (xx)

SUBSEQUENT TO DATE OF ACQUISITION 1. Parent net income (full) 2. Dividend received (Dividend-Subsidiary x Controlling interest rate) INCOME FROM OPERATIONS OF PARENT / SEPARATE INCOME - PARENT 3. Subsidiary Net Income (fractional year, if applicable) 4. Amortization of UVA (UVA/remaining life x fractional year, if applicable) 5. Amortization of OVA (OVA/remaining life x fractional year, if applicable) 6. Gain 7. Impairment Loss INTERCOMPANY SALE OF INVENTORY 8. UPEI – downstream 9. UPEI – upstream 10. RPBI – downstream 11. RPBI – upstream INTERCOMPANY SALE OF PPE 12. Unrealized gain – down (year of sale) 13. Unrealized gain – up (year of sale) 14. Unrealized loss – down (year of sale) 15. Unrealized loss – up (year of sale) 16. Realized gain – down (depreciation, sale to 3rd party) 17. Realized gain – up (depreciation, sale to 3rd party) 18. Realized loss – down (depreciation, sale to 3rd party) 19. Realized loss – up (depreciation, sale to 3rd party) INTERCOMPANY SALE OF LAND 20. Unrealized gain – down (year of sale) 21. Unrealized gain – up (year of sale) 22. Unrealized loss – down (year of sale) 23. Unrealized loss – up (year of sale) 24. Realized gain – down (sale to 3rd party) 25. Realized gain – up (sale to 3rd party) 26. Realized loss – down (sale to 3rd party) 27. Realized loss – up (sale to 3rd party) NET INCOME (CNI-P and NCI-NI) Other Comprehensive Income COMPREHENSIVE INCOME (CCI-P and NCI-CI)

(xx) (xx) xx xx (xx) (xx) xx xx xx xx (xx) (xx) (xx) (9,000) xx xx xx xx (xx) (xx) 363,000 xx xx

(xx) xx (xx) xx xx (xx) (1,000) xx xx (xx) 7,000 xx xx

Consolidated Net Income = CNI-P + NCI-NI = 363,000 +7,000 = 370,000 2012 – upstream, same with 2011 – upstream Consolidated Net Income = CNI-P + NCI-NI = 454,000 + 6,000 = 460,000

Patrick Louie E. Reyes, CPA

http://bit.ly/afarconso

Page 15 of 16

Problem 140, ibid. Power Co. is a manufacturer and Slack Co., its 100%-owned subsidiary, is a retailer. The companies are vertically integrated. Thus, Slack purchases all of its inventory from Power. On January 1, 2012, Slack’s inventory was 30,000. For the year ended December 31, 2012, its purchases were 150,000, and its cost of sales was 166,500. Power’s sales to Slack reflect a 50% mark-up on cost. Slack then resells the goods to outside entities at a 100% mark-up on cost. At what amount should the intercompany inventory purchased from power be reported in the consolidated balance sheet at December 31, 2012? a. 3,000 b. 9,000 c. 13,500 d. 46,000 Solution (other formulae) Inventory – Parent, at book value Inventory – Subsidiary, at book value (30,000+150,000-166,500) Undervaluation of Inventory Amortization of Undervaluation of Inventory Overvaluation of Inventory Amortization of Undervaluation of Inventory UPEI (Ending inventory of 13,500/150% x 50% Consolidated Inventory

₱xx 13,500 xx (xx) (xx) xx 4,500 ₱9,000

Problem 193, ibid. During 2012, Pard Corp. sold goods to its 80% owned subsidiary, Seed Corp. At December 31, 2012, ½ of these goods were included in Seed’s ending inventory. Reported 2012 selling expenses were 1,100,000 and 400,000 for Pard and Seed, respectively. Pard’s selling expenses included 50,000 in freight-out costs for goods sold to Seed. What amount of selling expenses should be reported in the consolidated financial statements? a. 1,500,000 b. 1,480,000 c. 1,475,000 d. 1,450,000 Solution (other formulae) Expenses – Parent Expenses – Subsidiary Amortization of UVA Amortization of OVA Realized Loss – Depreciation Realized Gain – Depreciation Inventoriable cost (not to be included as expense) Consolidated Expense

₱1,100,000 400,000 xx (xx) xx (xx) (50,000) ₱1,450,000

Good luck and God bless sa exams niyo! Sorry this came super late. Alam niyo naman, busy 7 days a week.

Patrick Louie E. Reyes, CPA

http://bit.ly/afarconso

Page 16 of 16