Big Picture C

Week 6-7: Unit Learning Outcomes (ULO a): At the end of the unit, you are expected to:

a. Apply accounting standards and procedures in accounting for stock acquisition

subsequent to date of acquisition.

Big Picture in Focus: Apply accounting standards and procedures in

accounting for stock acquisition subsequent to date of acquisition.

Metalanguage
In this section, the essential terms relevant to accounting for business combination. ULOb
will be operationally defined to establish a standard frame of reference. You will encounter these
terms as we go through this course. Please refer to these definitions in case you will face difficulty
in understanding the accounting concepts concepts.

Separate financial statements- are those presented by an entity in which the entity could elect,
subject to the requirements in this Standard, to account for its investments in subsidiaries, joint
ventures and associates either at cost, in accordance with IFRS 9 Financial Instruments, or using
the equity method as described in IAS 28 Investments in Associates and Joint Ventures.

Consolidated financial statements- The financial statements of a group in which the assets,
liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are
presented as those of a single economic entity

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first two (2) weeks of
the course, you need to fully understand the following essential knowledge that will be laid down in
the succeeding pages. Please note that you are not limited to refer to these resources exclusively.
Thus, you are expected to utilize other books, research articles, and other resources that are
available in the university’s library, e.g., e-brary, search.proquest.com, etc.

IAS 27 Separate Financial Statements

The objective of the Standard is to prescribe the accounting and disclosure requirements for
investments in subsidiaries, joint ventures and associates when an entity prepares separate
financial statements. The Standard shall be applied in accounting for investments in subsidiaries,
joint ventures and associates when an entity elects, or is required by local regulations, to present
separate financial statements.

Separate financial statements are those presented by a parent (ie an investor with control of a
subsidiary) or an investor with joint control of, or significant influence over, an investee, in which
the investments are accounted for at cost or in accordance with IFRS 9 Financial Instruments.

When an entity prepares separate financial statements, it shall account for investments in
subsidiaries, joint ventures and associates either:
a) at cost, or
b) in accordance with IFRS 9
c) Using equity method as described in PAS 28.

The entity shall apply the same accounting for each category of investments. Investments
accounted for at cost shall be accounted for in accordance with IFRS 5 Non-current Assets Held
for Sale and Discontinued Operations when they are classified as held for sale (or included in a
disposal group that is classified as held for sale). The measurement of investments accounted for
in accordance with IFRS 9 is not changed in such circumstances.

IFRS 10 Consolidated Financial Statements

The objective of this IFRS is to establish principles for the presentation and preparation of
consolidated financial statements when an entity controls one or more other entities. To meet the
objective, this IFRS:
a) requires an entity (the parent) that controls one or more other entities (subsidiaries) to present
consolidated financial statements;
b) defines the principle of control, and establishes control as the basis for consolidation;
c) sets out how to apply the principle of control to identify whether an investor controls an investee
and therefore must consolidate the investee; and
d) sets out the accounting requirements for the preparation of consolidated financial statements.

Preparation of consolidated financial statements –

A parent prepares consolidated financial statements using uniform accounting policies for like
transactions and other events in similar circumstances. However, a parent need not present
consolidated financial statements if it meets all of the following conditions:
 it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its
other owners, including those not otherwise entitled to vote, have been informed about, and
do not object to, the parent not presenting consolidated financial statements
 its debt or equity instruments are not traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets)
 it did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organization for the purpose of issuing any class of
instruments in a public market, and
 its ultimate or any intermediate parent of the parent produces consolidated financial
statements available for public use that comply with IFRSs. - Furthermore, post-
employment benefit plans or other long-term employee benefit plans to which IAS 19
Employee Benefits applies are not required to apply the requirements of IFRS 10.

Consolidation procedures – Consolidated financial statements:

 combine like items of assets, liabilities, equity, income, expenses and cash flows of the
parent with those of its subsidiaries
 offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the
parent's portion of equity of each subsidiary (IFRS 3 Business Combinations explains how
to account for any related goodwill)
  eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows
relating to transactions between entities of the group (profits or losses resulting from
intragroup transactions that are recognized in assets, such as inventory and fixed assets,
are eliminated in full).
 An entity must use uniform accounting policies for reporting like transactions and
other events in similar circumstances.
 The parent and subsidiaries are required to have the same reporting dates, or
consolidation based on additional financial information prepared by subsidiary,
unless impracticable. Where impracticable, the most recent financial statements of
the subsidiary are used, adjusted for the effects of significant transactions or events
between the reporting dates of the subsidiary and consolidated financial statements.
The difference between the date of the subsidiary's financial statements and that of
the consolidated financial statements shall be no more than three months
 Non-controlling interests in subsidiaries must be presented in the consolidated
statement of financial position within equity, separately from the equity of the owners
of the parent.
Consolidated Financial Statements at the date of acquisition

 The preparation of consolidated financial statements at the date the acquirer company
(parent) acquires more than 50% of the stock of the acquired company (subsidiary) is not
different when preparing consolidated financial statements subsequent to acquisition,
except for the fact that there are transactions between the parent and the subsidiary
occurred after the acquisition date, which were already recorded in their books.

 Transactions between the two entities must eliminated when preparing consolidated
financial statements because, although they are legally viewed as separate entities, they
are economically viewed as one entity

 The transactions between the parent and subsidiary are eliminated only in the working
papers for consolidation purposes. Those transactions remain in their respective separate
books. 

 The parent’s control of the subsidiary due to the stock acquisition is the main reason why
there are items in the separate statement of comprehensive income, which will be shared
by both the controlling interest and the non-controlling interest.

 If the result of the business combination is goodwill and the NCI has its share on the total
goodwill (full goodwill approach), the share of the controlling and non-controlling interest for
further impairment of goodwill may not be always based on the control percentage acquired
by the acquirer (parent).

 For the preparation of the consolidated financial statements, in the working paper:

 The investment in subsidiary account of the parent is eliminated.

 The equity (ordinary shares, additional paid-in capital, retained earnings, etc) of the
subsidiary is eliminated.  Assets and liabilities of the subsidiary are updated to their
fair values less any subsequent amortization in excess of the fair value over the
books, or plus the amortization of excess of book value over the fair value, if any,
and if applicable.
 Non-controlling interest in net assets (NCINAS) of the subsidiary is established
representing the percentage of ownership of subsidiary not acquired, if the not
whollyowned by parent plus the consolidated net income attributable to subsidiary,
less any dividends declared to shareholders other than the parent.
 All the of the intercompany transactions between the parent and subsidiary are
eliminated because in their consolidated financial statements, they are viewed as
one economic entity

THE CONSOLIDATED NET INCOME ATTRIBUTABLE TO PARENT AND NCI

The consolidated net income of the parent includes the net income of the parent, the net income of
the subsidiary from the date of acquisition, any adjustments to their net income such as
adjustment for the depreciation expense previously recognized already in the books of subsidiary,
all intercompany transactions that resulted to a gain or loss, or declaration of dividends, profit
arising from the intercompany sale of inventories, and the impairment of goodwill that arose only
from the business combination, if any. In other words, it is basically the combination of their
revenues, expenses, gains, losses, and other income earned and incurred only from the
unaffiliated companies and individuals.
ITEMS IN THE CONSOLIDATED NET INCOME

Net income of the parent per books - it is the net income based on the separate financial
statements of the parent. Remember that this item is fully attributable to controlling interest only.

Net income of the subsidiary per books - it is the net income based on the separate financial
statements of the subsidiary. For consolidation purposes, the parent has a share of the of its net
income based on the percentage of ownership of stocks owned by the parent and what is
attributable to subsidiary is the percentage of ownership attributable to the non-controlling interest.

Amortization of excess in fair over book value / book over fair value of assets and liabilities
of the subsidiary - these items pertain to the increases or decreases in assets and liabilities of
the subsidiary not recorded in the books of the subsidiary but recognized in the working paper for
consolidated financial statements at the date of acquisition. In the books of the subsidiary, some of
the expenses (CGS, depreciation, amortization, etc.) included in the net income of the subsidiary
are based on the book values of subsidiary’s assets and liabilities. Thus, these expenses are
either understated or overstated, because for consolidation purposes, these expenses must be
based on their fair values relevant to the reporting period. This is the reason why there is an
additional amortization for consolidation purposes. The following are the common items that are
mostly revalued at the date of acquisition and how are they being amortized for consolidation:

 Depreciable assets (PPE, intangibles, investment property accounted for at cost model,
leased assets) – the difference between the fair value and the book value shall be
amortized based on the remaining useful life from the date of acquisition because the
excess pertains to the overstatement (book over fair) or understatement (fair over book) of
the depreciation expense being included in the net income of the subsidiary

 Non-depreciable assets (land, inventories, intangibles with indefinite useful life) – the
excess of the fair over book, or book over fair values shall only be amortized if already sold
to the outside parties. The excess shall be considered in the consolidated net income,
because when those items are already sold to the outside parties, the gain or loss (for non-
depreciable non-current assets), or the cost of goods sold pertaining to the inventories
revalued at the date of acquisition, are either overstated or understated, thus, amortizing
 these excess amounts will bring them to their correct amount for consolidated financial
statements. If there is a partial sale of those assets mentioned above, the excess to be
amortized must be proportionate only to the sold assets (e.g. if 20% of inventories sold
during the year, 20% of the total excess must be amortized.)

 Intercompany dividends - these arise because when the subsidiary declares a dividend, a
major part of it are received by the parent company, or when there are shares of stock of
the parent owned by the subsidiary, the latter as well received dividends from the parent.
The controlling interest portion of the dividends declared by subsidiary is deducted from the
consolidated net income attributable to the controlling interest because it was included as
an income of the parent in the books. Also, retained earnings of the subsidiary is credited in
the amount of dividends received by the parent from the subsidiary in the working paper
because the balance of the retained earnings of the subsidiary was already affected by the
subsidiary’s dividend declaration. Dividends declared for subsidiary’s other shareholders
(also represented by the non-controlling interest), will be accounted for as a deduction in
the NCINAS in the equity portion of the parent in the consolidated financial statements.

Impairment of goodwill - goodwill is not amortized, but is tested for impairment annually. If the
parent company determined that the goodwill arising from the business combination is impaired,
the impairment shall be allocated proportionately on the basis on the share of the controlling
interest and the NCI on the goodwill at the date of acquisition, if the acquisition resulted in goodwill
and the fair value of the NCI at the date of acquisition is based only on fair value of the NCI (given
or approximated based on the cost of investment of parent), which is higher than proportionate
share of NCI in the net assets of the subsidiary (minimum amount of NCI). In short, the subsidiary
will only share in the impairment of goodwill if there is a part of goodwill allocated to the NCI at the
date of acquisition (full goodwill approach). It must be noted, however, that if the parent already
has goodwill before the date of acquisition, then its impairment is already reflected in the separate
books in the parent, and is solely attributable to the controlling interest, as it arose from a different
transaction before the acquisition. The following table summarizes how the goodwill will be
allocated between the CI and NCI.

Consolidated Financial Statements with Wholly-Owned Subsidiary

Illustration 1- 100%- Owned subsidiary: Cost Model

Assume that Perfect Company acquires all of Son Company’s common stock on January 1, 2014
for P 387,500 an amount P 87,500 in excess of the book value. The acquisition price includes
cash of P 300,000 and a 30-day note for P 87,500 (paid at maturity during 2014). At the end of
2014, Perfect management determines that a 3,000 goodwill impairment loss should be
recognized in the consolidated income statement.

The following assets and liabilities had book values that were different from their respective fair
market values:

All other assets and liabilities had book values approximately equal to their respective fair values.
On January 1, 2014, the equipment and buildings had a remaining life of 8 and 4 years,
respectively. Inventory is sold in 2014 and FIFO inventory costing is used.
Trial balances for the companies for the year ended December 31, 2014 are as follows:

From the trial balances presented above the following summary for 2014 results of operations are
as follows:
Schedule and allocation of excess- Jan 1, 2014

A summary of depreciation of amortization adjustments is as follows:

First year of Acquisition

Parent Company Cost Model Entry

Consolidation Workpaper- First year of acquisition

Consolidated net income for 2014

Consolidated retained earnings

Worksheet for Consolidated Financial Statements, December 31, 2014 – Cost Model 100%
Owned subsidiary
Consolidated Income Statement-December 31,2014

Consolidated Income Balance Sheet-December 31,2014

Second year after Acquisition
Assume the following information available for Perfect and Son Company for the 2015.

Parent Company Cost Model Entry

Consolidation Working paper- Second year of Acquisition

Worksheet for Consolidated Financial Statements, December 31, 2015 – Cost Model 100%
Owned subsidiary
Consolidated Income Statement-December 31,2015
EQUITY METHOD
First year after acquisition
Parent Company Equity Method Entry
Income statement of Perfect and Son for 2014

Investment in Son Company balance as of December 31,2014

Consolidation Working paper -First year of Acquisition (Equity Method)

Worksheet for Consolidated Financial Statements, December 31, 2014 – Equity Model 100%
Owned subsidiary
Second year of Acquisition
Income statement of Perfect and Son for 2015

Parent Company Equity Method Entry

Investment in Son Company balance as of December 31,2015

Consolidation Working paper -Second year of Acquisition (Equity Method)

Worksheet for Consolidated Financial Statements, December 31, 2015 – Equity Model 100%
Owned subsidiary
Illustration- 80% Owned Subsidiary Cost Model-Partial Goodwill Approach

Assume that on January 1, 2014, Perfect Company acquires 80% of the common stock of Son
Company for P 310, 000. At that time, the fair value of the 20% non-controlling interest is
estimated to be P 77, 500. On that the following assets and liabilities of Son Company had book
values that were different from their respective market values.

All other assets and liabilities had book values approximately equal to their respective fair values.
On January 1, 2014, the equipment and buildings had a remaining life of 8 years and 4years,
respectively. Inventory is sold in 2014 and FIFO inventory costing on the fair value basis (or full-
goodwill), meaning the management has determined that the goodwill arising in the acquisition of
Son Company relates proportionately to the controlling and non-controlling interest, as does the
impairment.

Trial balance for the companies for the year ended December 31, 2014 are as follows:
From the trial balances presented above the following summary for 2014 results of operations are
as follows:

Schedule of Determination and Allocation of Excess (Partial-goodwill)

Date of Acquisition – January 1, 2014

The goodwill impairment loss of P 3, 125 based on 100% fair value would be allocated to the
controlling interest and the NCI based on the percentage of total goodwill each equity interest
received. For purpose of allocating the goodwill impairment loss, the full goodwill is computed as
follows:
In this case, the goodwill was proportional to the controlling interest of 80% and non-controlling
interest of 20% computed as follows:

The goodwill impairment loss would be allocated as follows:

First Year after Acquisition

Parent Company Cost Model Entry

Consolidation Workpaper – Year of Acquisition

It should be observed that the goodwill computed above was proportional to the controlling interest
of 80% and non-controlling interest computed as follows

Therefore, the goodwill impairment loss of P 3, 125 based on 100% fair value of full-goodwill
would be allocated as follows:
Worksheet for Consolidated Financial Statements, December 31, 2014.

Cost Model (Partial-goodwill)- 80%-Owned Subsidiary

The consolidated net income and non-controlling interest in consolidated net income which can be
verified can also be computed as follows:

The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as
a proportion of identifiable assets and goodwill attributable to NCI share is not recognized.
Alternatively, NCI on December 31, 2014 may also be computed as follows:

Consolidated Income Statement

Consolidated Balance Sheet-2014 (Partial Goodwill)

Second Year after Acquisition

Assume the following information available for Perfect and Son Company for the year 2015:

No goodwill impairment loss for 2015.

Parent Company Cost Model Entry

Only a single entry is recorded by the parent in 2015 in relation to its subsidiary investment.
On the books of Son Company, the P40,000 dividend paid was recorded as follows:
Worksheet for Consolidated Financial Statements, December 31, 2015

Cost Model (Partial-goodwill)- 80%-Owned Subsidiary

Alternatively, NCI on December 31, 2015 may also be computed as follows:

Consolidated Income Statement-2015

Consolidated Balance Sheet-2015- Partial Goodwill

EQUITY METHOD- (Partial goodwill)

First year of Acquisition
Parent Company Equity Method Entry
Consolidation Workpaper- First year of Acquisition
Worksheet for Consolidated Financial Statements, December 31, 2014.

Equity Model (Partial-goodwill)- 80%-Owned Subsidiary

Second year of Acquisition
Income statement of Perfect and Son for 2015

Parent Company Equity Method Entry

Consolidation Workpaper- Second year after Acquisition

Worksheet for Consolidated Financial Statements, December 31, 2015.

Equity Model (Partial-goodwill)- 80%-Owned Subsidiary

Illustration: 80%- Owned Subsidiary: Cost Model – Full- Goodwill Approach

Schedule of Determination and Allocation of Excess

Date of Acquisition – January 1, 2014

First Year after Acquisition

Parent Company Cost Model Entry

When the cost model is used, only two journal entries are recorded by Perfect Company during
2014 related to its investment in Son Company. Entry (1) records Perfect Company’s purchase of
Son Company’s stock, Entry (2) recognizes dividend income based on the P 32, 000 (P 40,
000*80%) of dividends received during the period.

On the books of Son Company, the P 40, 000 dividend paid was recorded as follows:

Consolidation Workpaper – First Year after acquisition

The schedule of determination and allocation of excess presented above provides complete
guidance for the worksheet eliminating entries on January 1, 2014:
*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss
of P 3, 125 by 20%. There might be situations where the NCI on goodwill impairment loss would
not be proportionate to NCI acquired.

Worksheet for Consolidated Financial Statements, December 31, 2014.

Cost Model (Full-goodwill)80% Owned Subsidiary (First Year after Acquisition)

Alternatively, NCI on December 31, 2014 may also be computed as follows:
Consolidated Income Statement-2014

Consolidated Balance Sheet 2014-Full Goodwill

Second Year After Acquisition

No goodwill impairment loss for 2015.

Parent Company Cost Model Entry

Only a single entry is recorded by the parent in 2015 in relation to its subsidiary investment:

Consolidation Workpaper- Second Year after Acquisition

The working paper eliminations (in journal entry format) on December 31, 2015, are as follows:
Worksheet of Consolidated Financial Statement, December 31, 2015.

Cost Model (Full-goodwill) 80%- Owned Subsidiary (Second Year after Acquisition)

The consolidated retained earnings and non-controlling interest which can be verified can also be
computed as follows:
Consolidated Income Statement-2015
Consolidated Balance Sheet – December 31,2015 (Full goodwill)

EQUITY METHOD- (Full goodwill)

First year of Acquisition
Parent Company Equity Method Entry
Consolidation Working Paper- First year of Acquisition
Worksheet for Consolidated Financial Statements, December 31, 2014.

Equity Model (Full-goodwill)- 80%-Owned Subsidiary

Second year of Acquisition
Income statement of Perfect and Son for 2015

Parent Company Equity Method Entry

Consolidation Workpaper-Second year of Acquisition

Worksheet for Consolidated Financial Statements, December 31, 2015.

Equity Model (Full-goodwill)- 80%-Owned Subsidiary

Self Help: You can also refer to the sources below to help you further
understand the lesson:
Dayag, A. J. (2015). Advanced financial accounting: A comprehensive and procedural
approach(2016 ed., Vol. 2). Manila: Lajara pub. house.

Dayag, A. (2013). CPA examination in practical accounting 2. Manila:

GIC Enterprises & Co., Inc.

Guerrero, P., & Peralta, J. (2013). Advance accounting (Vol. 2.). Manila: GIC
Enterprise & Co., Inc.

Let’s Check
Activity 1. Encircle the letter of your answer.

1. If Mister Company acquires 80 percent of the stock of Missus Company on January 1, 2017,
immediately after the acquisition:
a. Consolidated retained earnings will be equal to the combined retained earnings of the
two companies
b. Goodwill will be reported in the consolidated balance sheet
c. Mister Company’s additional paid-in capital may be reduced to permit the carry forward
of Missus Company retained earnings
d. Consolidated retained earnings and Mister Company retained earnings will be the same

2. Lisa Co. paid cash for all the voting common stock of Victoria Corp. Victoria will continue to
exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be
recorded in
a. Lisa’s general journal
b. Victoria’s secret consolidation journal
c. A worksheet
d. Victoria’s general journal
3. Consolidated net income for a parent company and its partially owned subsidiary is best
defined as the parent company’s
a. Recorded net income
b. Recorded net income plus the subsidiary’s recorded net income
c. Recorded net income plus the parent’s share in subsidiary’s recorded income
d. Income from independent operations plus subsidiary’s income resulting from
transactions with outside parties
4. A 70 percent owned subsidiary company declares and pays a cash dividend. What effect does
the dividend have on the retained earnings and non-controlling interest balances in the parent
company’s consolidated balance sheet?
a. No effect on either retained earnings or non-controlling interest
b. No effect on retained earnings and a decrease in non-controlling interest
c. Decreases in both retained earnings and non-controlling interest
d. A decrease in retained earnings and no effect on non-controlling interest

On January 1, 2014, Añonuevo Corp. acquired 80% of the outstanding stocks of Sy Corp. for
P2,500,000. Sy Corp.’s stockholders’ equity is as follows: Ordinary shares, P80 par P2,000,000,
Share premium P500,000, and Retained Earnings P300,000. The fair value of the non-controlling
interest is P685,000. All the assets of Sy were fairly valued except for its inventories which are
overvalued by P90,000, Land which is undervalued by P50,000, and Patent which is undervalued
by P125,000. The said patent has a remaining useful life of five years. Both companies use the
straight line method for depreciation and amortization. Shareholders’ equity of Añonuevo Corp. on
January 1, 2014 is composed of: Ordinary shares, P50 par P3,500,000, Share premium P750,000,
and Retained Earnings P2,460,000. Goodwill, if any, should be decreased by P22,500 at the end
of 2014. No additional issuance of capital stocks occurred.
For the two years ended, December 31, 2014 and 2015, Añonuevo Corp. and Sy Corp. reported
the following:

Añonuevo Corp. Sy Corp.

2014 2015 2014 2015
Net income from own P525,000 P550,000 P485,000 P520,000
operations
Dividends declared at year- P 50,000 P 35,000 P 35,000 P 50,000
end
On December 31, 2014, compute for the following to be presented in the consolidated financial
statement

5. Non-controlling interest in net assets of subsidiary

a. P779,900
b. P786,380
c. P 781,000
d. P 685,000

6. Retained earnings
a. P 3, 485,600
b. P 3,360,600
c. P 2,460,600
d. P 3,375,600

On December 31, 2015, compute for the following to be presented in the consolidated financial
statement

7. Non-controlling interest in net assets of subsidiary

a. P868,900
b. P898,600
c. P 998,600
d. P 828,400
8. Retained earnings
a. P 4,271,600
b. P 4,231,600
c. P 4,651,600
d. P 4,321,600

BAHAY-PARE CORPORATION purchases all the outstanding shares of SINAG-TALA COMPANY

on January 2, 2015 for P385,000 cash. On this date the stockholders equity of SINAG-TALA is as
follows:
Share capital, P10 par P175,000
Paid-in capital in excess of par 87,500
Retained earnings 175,000
Any excess of the fair value of net assets over the fair value of the investment is attributable to
SINAG-TALA's building which is currently overstated in its books. All other net asset items of the
acquired company are fairly valued at the acquisition date. The building has an estimated life of 10
years from January 2, 2015 without salvage value.
The condensed trial balances of the affiliated companies on December 31, 2015 appear as
follows:
BAHAY-PARE SINAG-TALA
Current assets P420,000 P302,750
 Land 210,000 210,000
Building (net) 1,050,000 283,500
Investment in SINAG-TALA 385,000
Current liabilities (708,750) (367,500)
Ordinary shares, P3 par (525,000)
Share capital, P10 par - (175,000)
Paid-in capital in excess of par (315,000) ( 87,500)
Retained earnings, Jan. 2, 2015 (446,250) (175,000)
Sales (367,500) ( 70,000)
Cost of goods sold 210,000 61,250
Operating expenses 78,750 17,500
Dividends declared 8,750 --
Totals -- --
9. Compute the consolidated net income for 2015.
A. P70,525 C. P75,250
B. P72,550 D. P75,520
10. Compute the consolidated Retained Earnings at December 31, 2015.
A. P512,750 C. P517,250
B. P515,270 D. P525,170

Let’s Analyze
Activity 1. In this activity, you are required to elaborate on your answer to each question below.

5. Distinguish Cost and Equity Model in accounting for Investment account in parent company’s
separate financial statement..
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6. Discuss the effect if intercompany sale is not eliminated.

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In a Nutshell

Problem 1
Peer, Inc. acquires 60 percent of Sea-breeze Corporation for P454,000 cash on January 1, 2016.
The remaining 40 percent of the Sea-breeze shares traded near a total value of P276,000 both
before and after the acquisition date. On January 1, 2016, Sea-breeze had the following assets
and liabilities:

Book Value Fair Value

Current Assets P 150,000 P 150,000
Land 200,000 200,000
Building (net) – 6-year- 300,000 360,000
year life
Equipment (net) – 4-year 300,000 280,000
life
Patent (10-year life) -0- 100,000
Liabilities (400,000) (400,000)
Net P 550,000 P 690,000
Common Stock P 480,000
Retained Earnings P 70,000

The companies’ financial statements for the year ending December 31, 2016 using cost method
are as follows:
Peer Sea-Breeze
Revenue P (600,000) P (300,000)
Operating expenses 410,000 210,000
Dividend Income (42,000) 0
Net Income P (232,000) P (90,000)

Peer Sea-Breeze
Retained earnings, 1/1/16 P (650,000) P (70,000)
Net Income (232,000) ( 90,000)
Dividends paid 92,000 70,000
Retained earnings, P (790,000) P (90,000)
12/31/16

Current Assets P 240,000 P 70,000

Land 220,000 200,000
Building (net) 700,000 200,000
Equipment (net) 400,000 500,000
Investment in Sea-breeze 454,000
Total Assets P 2,014,000 P 970,000

Liabilities P (500,000) P (400,000)

Common Stock (724,000) (480,000)
Retained Earnings, (790,000) (90,00)
12/11/16
Total Liabilities & Equities P 2,014,000 P (970,000)

Required:
a. Provide the consolidation workpaper journal entries for 2016
b. Prepare the consolidation working paper for 2016.

PROBLEM 2
Perfecto Corporation acquired a 60% interest in Serafica Corporation for P200,000 cash on
January 1, 2014 when the stockholders’ equity of Serafica consisted of P200,000 capital stock and
P25,000 retained earnings. The book and fair values of Serafica’s assets and liabilities are equal
except of PPE which is undervalued by P50,000. The undervalued machinery is being depreciated
over four years and goodwill is not amortized.

Financial Statements for Perfecto and Serafica Corporations for 2015 are summarized as follows:
Combined Income and Retained Earnings Statement for the Year Ended December 31, 2015

Perfecto Serafica
Net sales 900,000.00 300,000.00
Dividends from Serafica 6,000.00
Cost of goods sold (600,000.00) (150,000.00)
Operating expenses (190,000.00) (90,000.00)
Net income 116,000.00 60,000.00
Add: Retained earnings, January 112,000.00 50,000.00
1, 2015
Deduct: Dividents (100,000.00) (20,000.00)
Retained earnings, December 128,000.00 90,000.00
31, 2015

Financial Position at December

31, 2015
Cash 26,000.00 15,000.00
Accounts receivables – net 26,000.00 20,000.00
Inventories 82,000.00 60,000.00
Other current assets 80,000.00 5,000.00
Land 160,000.00 30,000.00
Plant and equipment – net 340,000.00 230,000.00
Investment in Serafica 200,000.00
Total assets 914,000.00 360,000.00
Accounts payable 24,000.00 15,000.00
Dividends payable 10,000.00
Other liabilities 62,000.00 45,000.00
Share capital 700,000.00 200,000.00
Retained earnings 128,000.00 90,000.00
Total liabilities and stockholders’ 914,000.00 360,000.00
equity
Additional information:

a. A P10,000 dividend was declared by Serafica on December 30, 2015 but not recorded by
Perfecto
b. Perfecto’s accounts receivable includes P5,000 due from Serafica
Determine the following account balances that would appear in the consolidated Financial
Statements of Perfecto and its 60%-owned subsidiary on December 31, 2015:

1. Operating expenses
2. Net income
3. Non-Controlling Interest in the Subsidiary Net Income
4. Dividends
5. Current Assets
6. Non-Current Assets
7. Total Liabilities
8. Share Capital
9. Non-Controlling Interest in the Subsidiary Net Assets
10. Total Stockholders’ Equity

Question & Answer (Q&A)

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below. These questions or concerns may also be raised in the LMS or other modes. You
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Questions/Issues Answers

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Keywords

 Consolidated net income attributable to parent+

 Non-Controlling interest in net income
 Cost Method
 Equity Method