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Advanced Accounting I Business Combination Subsequent

TO DATE OF Acquisition
Bachelor of Science in Accountancy (University of Saint Louis)

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Junior Philippine Institute of Accountants

Discussion Review in Advanced Accounting
Business Combination

Disclaimer: This handout is not meant to replace the prescribed book of the college. No part of this
handout may be reproduced or sold for personal gain without permission from the preparers but may be
reproduced for academic purposes only.

Special thanks are dedicated to all of the professors and students, in the UST-AMV College of
Accountancy, and to God.

Preparers: Edilmar R. Fontanilla, CPA

Mark Stephen A. Asido, CPA

Sources: IFRS 3 – Business Combination

IFRS 10 – Consolidated Financial Statements
IAS 39 – Financial Instruments, Recognition and Measurement
IFRS 9 – Financial Instruments
Intermediate Accounting vol. 2 – Empleo and Robles
Advanced Accounting vol. 2 – Dayag
Theory of Accounts vol. 2 - Valix
UST-AMV College of Accountancy Professors

ADVANCED ACCOUNTING I – BUSINESS COMBINATION

STOCK ACQUISITION – TRANSACTIONS SUBSEQUENT TO ACQUISITION

KEY POINTS TO CONSIDER:

 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).
 In intercompany profit transactions, there are two types of sale of assets, namely, upstream or
downstream sales. In upstream sale, the selling affiliate is the subsidiary, while in downstream
sale, the selling affiliate is the parent. It is very important to know what type of intercompany
profit transactions occur between the parent and the subsidiary because it will greatly affect the
consolidated net income attributable to the controlling and non-controlling interest.
 If the sale is upstream, the controlling interest will have to share in such adjustment to
the subsidiary’s net income equivalent to the control % of the parent because those
adjustments will affect the net income of the subsidiary, of which was already shared
between the controlling interest and non-controlling interest.

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Discussion Review in Advanced Accounting
Business Combination

 If the sale is downstream, only the consolidated net income attributable to the
controlling interest will be affected because those items will only affect the net income
of the 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 wholly-
owned 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.
 In business combination problems, the following items must be considered (and mostly asked in
the problems)
 Consolidated sales  Non-controlling interest in the
 Consolidated cost of goods sold consolidated Net income of the
 Consolidated gross profit subsidiary (NCINIS)
 Consolidated operating expenses  Non-controlling interest in the
 Consolidated dividend income net assets of the subsidiary
 Consolidated net income (CNI)  Consolidated stockholder’s
 Consolidated net income equity
attributable to parent (CNI-P)

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.

Table 2.1 –Consolidated net income attributable to controlling and non-controlling interest
ITEMS IN THE INCOME STATEMENT PARENT NCI
Net income of the parent per books xx
Net income of the subsidiary per books xx xx
Amortization of excess of fair over book value of assets and
liabilities of subsidiary (xx) (xx)
Amortization of excess of book over fair value of assets and
liabilities of subsidiary xx xx
Intercompany dividends (xx) (xx)
Impairment of goodwill** (xx) (xx)

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Gain on acquisition** xx
Unrealized (gain) / loss in the sale of plant assets (upstream)* (xx) / xx (xx) / xx
Realized gain / (loss) in the sale of plant assets (upstream)* xx / (xx) xx / (xx)
Unrealized (gain) / loss in the sale of plant assets (downstream)* (xx) / xx
Realized gain / (loss) in the sale of plant assets (downstream)* xx / (xx)
Unrealized profit in ending inventory (UPEI) – upstream* (xx) / xx (xx) / xx
Unrealized profit in ending inventory (UPEI) – downstream* (xx)
Realized profit in the beginning inventory (RPBI) – upstream* xx xx
Realized profit in the beginning inventory (RPBI) – downstream* xx
Adjusted net income for consolidated income statement XX XX
*not included in the quiz 5 for advanced accounting I subject
**there can be only one result of the business combination. Gain on acquisition is included only in the
consolidated net income in the year of acquisition only.

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.

Table 2.2 – amortization of excess – depreciable assets

Amortization Working paper entries Reason for
of excess of adjustment
depreciable
Year of acquisition Subsequent years
assets

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Discussion Review in Advanced Accounting
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FAIR VALUE > Dep. Expense xx Retained earnings xx Depreciation is

BOOK VALUE Accumulated dep. xx Depreciation exp. xx understated because
Accumulated dep. xx depreciation in the
books is recorded
based on the book
value of depreciable
asset
FAIR VALUE < Accumulated dep. xx Accumulated dep. xx Depreciation is
BOOK VALUE Depreciation expense xx Depreciation expense xx overstated because
Retained earnings xx depreciation in the
books is recorded
based on the book
value of depreciable
asset

 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.)

Table 2.3 – amortization of excess – -non-depreciable assets

Working paper entries
Subsequent years (if there
Amortization
are inventories already Reason for
of excess of
Year of acquisition existing at DOA still unsold adjustment
inventory
as of the end of the year of
acquisition
FAIR VALUE > CGS xx Consolidated RE CGS is understated,
BOOK VALUE inventory xx (pertains to last pertains to the excess
year CGS xx attributable to the
NCI, date portion of the
of acquisition inventory existed at
(pertains to last the date of acquisition
Year CGS xx which was already sold
CGS xx
Inventory xx
FAIR VALUE < inventory xx inventory xx CGS is overstated,
BOOK VALUE CGS xx CGS xx pertains to the excess
Consolidated RE xx attributable to the
NCI xx portion of the
inventory existed at

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Discussion Review in Advanced Accounting
Business Combination

the date of acquisition

which was already sold

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.

Table 2.4 – intercompany dividends

Dividends Working paper entries Reason for adjustment
declared by
subsidiary Dividend income xx Dividend income eliminated represents income
NCI xx recorded by parent at the date of declaration of the
RE – subsidiary xx subsidiary.
The portion of NCI represents dividend declared by
subsidiary to other shareholders.
The effect of dividend declaration to the retained
earnings because it must appear that the subsidiary only
declares dividends to other shareholders at the date of
declaration.

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.

Table 2.5 – summary of allocation of impairment goodwill between CI and NCI

How NCI was measured at the date Allocation of goodwill
of acquisition
Estimated FV Controlling and non-controlling
percentage or share of CI and NCI
in goodwill

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Given fair value share of CI and NCI in goodwill

Proportionate FV Goodwill impairment is fully
attributable to CI

To illustrate, PARIS CAT corporation acquired 80% of the stocks of SURFER CAT corporation for
3,500,000 on January 1, 2016. At the date of acquisition, the fair value of the net assets of Surfer
cat corporation amounted to 4,000,000. During the year, goodwill is tested for impairment and
PARIS CAT corporation determined it has been impaired by 27,000.

Case 1: NCI is measure at fair value, no fair value of the non-controlling interest provided.
In this case, NCI will be measured at its estimated fair value of 875,000, since it is higher than the
proportionate fair value of NCI amounting to 800,000. The business combination resulted to a
goodwill of 375,000 ((3,500,000 / 80%)-4,000,000). Also, because the estimated FV of NCI is higher
than its proportionate amount, the NCI will share in the subsequent impairment of goodwill. Note
that the share of CI and NCI in the goodwill is the same as the percentage of ownership controlled
by the parent. Thus, if the fair value of NCI is based on estimated FV, the impairment loss to be
attributable to the controlling interest is equal to the percentage of ownership of the parent.

Table 2.6 – allocation of the impairment of goodwill to controlling and non-controlling interest
Allocation of Goodwill to controlling and non- Working Paper Entries
controlling interest
DATE OF CI NCI TOTAL Goodwill 375,000
ACQUISITION Cost of Investment
3,500,000 875,000 4,375,000
investment In subsidiary 300,000
FV of net NCI 75,000
(3,200,000) (800,000) (4,000,000)
assets
GOODWILL 300,000 75,000 375,000
SUBSEQUENT Share of controlling interest in the goodwill Impairment loss 27,000
TO DATE OF impairment Goodwill 27,000
ACQUISITION Controlling interest: 27,000 x (300/375) = 21,600
Non-controlling interest 27,000 c (75/375) = 5,400

Case 2: NCI is measure at fair value; the fair value of the non-controlling interest is 750,000.
In this case, the fair value of the non-controlling interest is lower than its proportionate fair value,
thus, the fair value given cannot be used because the non-controlling interest must be recorded
at its proportionate fair value based on the fair value of the net assets of the subsidiary, at a
minimum. Thus, the goodwill of 300,000 must be attributable only to the controlling interest
because the NCI is recorded at minimum amount.

Table 2.7 – goodwill attributable to the controlling interest only

Allocation of Goodwill to controlling and non- Working Paper Entries
controlling interest
DATE OF CI NCI TOTAL Goodwill 300,000
ACQUISITION Cost of Investment
3,500,000 800,000 4,300,000
investment In subsidiary 300,000

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Business Combination

FV of net
(3,200,000) (800,000) (4,000,000)
assets
GOODWILL 300,000 0 300,000
SUBSEQUENT Share of controlling interest in the goodwill Impairment loss 27,000
TO DATE OF impairment Goodwill 27,000
ACQUISITION Controlling interest: 27,000
Non-controlling interest: 0

Case 3: NCI is measure at fair value; the fair value of the non-controlling interest is 860,000.
In this case, since the fair value of NCI is higher than the proportionate FV (850,000 > 800,000),
the NCI will be recorded at fair value, resulting to goodwill of 350,000, both attributable to
controlling and non-controlling interest, since the reflected NCI in the consolidated financial
statement is higher that its minimum amount (proportionate FV). Note that the allocation of
goodwill to both controlling and non-controlling interest must be based on the goodwill
allocated to CI and NCI at the date of acquisition. In contrast to the case 1, The ownership %
cannot be used because the fair value of NCI is based on cost of investment of the acquirer
(parent) to the acquire (subsidiary).

Table 2.8 – allocation of the impairment of goodwill to controlling and non-controlling interest
Allocation of Goodwill to controlling and non- Working Paper Entries
controlling interest
DATE OF CI NCI TOTAL Goodwill 360,000
ACQUISITION Cost of Investment
3,500,000 860,000 4,360,000
investment In subsidiary 300,000
FV of net NCI 60,000
(3,200,000) (800,000) (4,000,000)
assets
GOODWILL 300,000 60,000 360,000
SUBSEQUENT Share of controlling interest in the goodwill Impairment loss 27,000
TO DATE OF impairment Goodwill 27,000
ACQUISITION Controlling interest: 27,000 x (300/360) = 22,500
Non-controlling interest 27,000 x (60/360) = 4,500

Intercompany sale of plant assets. Any gain or loss on sale of those assets of the selling affiliate are
unrealized until those assets are either depreciated or sold to the outside parties, and must be
eliminated in the working paper in the net income of the selling affiliate, and recognized as realized
on the consolidated net income of the parent when depreciated or sold to outside parties. The realization
of gains and losses depends whether the plant assets are non-depreciable (land), or depreciable (e.g.
machinery, equipment). Also, the whether the parent will share in the adjustment to the net income of
the subsidiary and such adjustment is fully attributable to parent only will depend if the sale is upstream
or downstream sale.
 In intercompany sale of land, because land is not depreciated over time, any unrealized gains or
losses from the intercompany sale of land remains unrealized until sold to outside parties.
 In intercompany sale of depreciable assets, the unrealized gains and losses are eliminated in the
working paper, and such gains or loss is realized in the net income periodically based on

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remaining useful life from the date of sale in the form of adjusting depreciation expense and
accumulated depreciation in the working paper, in order to bring the depreciation expense and
accumulated depreciation to the amount based on the carrying amount of the equipment of the
selling affiliate as if no sale was occurred between the two parties, and as if the selling affiliate
is still the owner of the said depreciable asset. If the realized gain or losses is not adjusted, the
resulting depreciation expenses in the consolidated income statement is either understated (loss
on sale) or overstated (gain on sale).

Table 2.9 – intercompany sale of plant assets

Intercompany Result Working paper entries

sale of plant of Year of Subsequent to the Reason for adjustment

assets sale acquisition year of acquisition
Unrealized gain xx Retained earnings xx Unless sold to unaffiliated parties, there
Land xx Land xx should be no gain to be recognized and
GAIN the working paper entry restores the
land to its carrying value before the
sale.
LAND
Land xx Land xx
Unrealized loss xx Retained earnings xx

LOSS

Accu. Dep. xx Accu. Dep. xx Either gain or loss, the first entry at the
Unrealized gain xx Dep. expense xx year of acquisition restores the carrying
Dep. asset xx Retained earnings xx amount of depreciable asset as if no
GAIN
sale has occurred and as if the selling
Accu dep. xx
affiliate is the owner. The second
Dep. expense xx
entry adjusts the depreciation expense
Dep. asset xx Dep. expense xx
DEPRECIABLE Accu. Dep xx Retained earnings xx and accumulated depreciation to the
ASSETS Unrealized gain Accu. Dep. xx amount as if no sale has occurred
xx between the affiliates. However, when
LOSS that depreciable asset is already sold to
Dep. expense xx unaffiliated companies, the remaining
Accu. Dep. xx unrealized gain or loss must be
recognized in the working paper in
the year that sale occurred.

Intercompany sale of inventories - subsequent to acquisition date, there may be intercompany sale of
inventories between the affiliated parties (parent and subsidiary) of which the inventory of the buying
affiliate includes profit from sale of the selling affiliate. Those profits must be eliminated for consolidation
purposes until the inventory from the selling affiliate is sold to unaffiliated companies and individuals. By
eliminating these profits as well as intercompany sale of inventory, in the consolidated financial
statements: (1) the consolidated sales and cost of goods sold will include only sales and cost of goods
sold to unaffiliated parties; and (2) the inventory balance to be included by the buying affiliate in the
consolidated financial statements will include only cost of inventory to the selling affiliate (either
parent or subsidiary). Also, like in the intercompany sale of plant assets, any profit recorded in the books

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of the selling affiliate will only be realized when the inventory coming from the selling affiliate has
been sold to unaffiliated parties.
Intercompany Sale of inventories between the affiliated parties may be upstream (subsidiary to parent),
downstream (parent to subsidiary), or horizontal sales (subsidiary to another subsidiary). However,
for consolidation purposes, only downstream or upstream sales are of concern by the consolidating entity
such that the determination of upstream or downstream sale may affect the consolidated net income
attributable to the controlling and non-controlling interest. If the sale is upstream Two items are of
concern of the consolidating parent in intercompany transactions:
 Unrealized profit in ending inventory (UPEI) – These are the profits of the selling affiliate included
in the unsold inventory of the buying affiliate which previously arose from the intercompany sale.
What is eliminated in the working paper is the profit from the inventories coming from the
selling affiliate such that those profits are reverted to being unrealized. Because of higher
inventory ending balance of the buying affiliate to the unrealized profit, the cost of goods sold
in its books is understated. It can be adjusted by debiting CGS and crediting inventory in the
working paper.
 Realized profit in the beginning inventory (RPBI) - These are the profits of the selling affiliate
included in the beginning inventory (overstating the total goods available for sale) of the
buying affiliate which was previously eliminated in the working paper, because the related
inventory was unsold in the year of intercompany sale. Those profits are already recognized
in the books of the selling affiliate in the year of intercompany sale, but for consolidation
purposes, those profit must be only recognized in the consolidated net income in the year
the inventories coming from the selling affiliate are already sold to outside parties.
Table 2.9 summarizes the intercompany sale of inventories, their adjustments to consolidated financial
statements, and summarized rationale for the accounting treatment for those items. It must be noted
that when the sale is upstream sale, both the controlling and non-controlling interest will share in
such adjustment because it is the profit of the subsidiary. If such sale is downstream sale, only the
controlling interest’s share in the consolidated net income will be adjusted, because it is the profit of the
parent. However, whether downstream of upstream sale, there is no need to allocate such adjustment of
CNI-P and NCINIS to determine the consolidated net income.

Table 2.10 – intercompany sale of inventories

Inter- Adjustments of selling affiliate’s profit to
comp P/L or to B/S accounts in the working
any Working paper paper Reason for adjustment /
sale of entries explanation
Ending Retained
invent CGS CNI
inventory earnings
-ories
To eliminate the If there is no 1st entry, it has
intercompany sale still no effect in the
transactions: consolidated net income,
Sales xx
but both the consolidated
CGS xx
sales and CGS is overstated

To eliminate the profit

for consolidation purposes
UPEI add Deduct deduct N/A
included in the ending because at the time of the
inventory of the intercompany sale, the
buying affiliate selling affiliate recorded
coming from the sales and the buying affiliate
selling affiliate: recorded CGS in their
CGS xx respective books.

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Ending inventory xx The amount of profit to be

eliminated in the 2nd entry is
the profit / markup
included by the selling
affiliate to the buying
affiliate its sale of
inventories to the latter.
To recognize the profit The realized profit must be
included in the sold deducted from CGS because
inventory that was in the books of the buying
eliminated in the year
affiliate, when such inventory
of intercompany
is sold to unaffiliated /
transaction:
outside parties, the profit
Consolidated RE xx
CGS xx has been included in its
RPBI Deduct add N/A deduct inventory, making the CGS
overstated. Consolidated RE
is debited to avoid double
counting of such realized
profit as such profit (form of
reduction to consolidated
CGS) will eventually be
closed to consolidated RE.

THE CONSOLIDATED ITEMS IN THE CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED NET INCOME (CNI) ITEMS

The following items appear in consolidated net income are revenues, expenses, gains, and losses after
the necessary adjustments discussed earlier. In addition, accruals made

Consolidated Sales Consolidated interest income

Sales of the parent xx Interest income of the
xx
Sales of the subsidiary xx parent
Intercompany sale (xx) Interest income of the
xx
Consolidated sales xx subsidiary
Intercompany interest
(xx)
Consolidated CGS income
CGS- parent xx Consolidated interest
xx
CGS - subsidiary xx income
Intercompany sale (xx)
Amortization of excess of Consolidated dividend income
fair value over the book Dividend income - Parent xx
value / (book value over Dividend income -
xx
the fair value) of inventory xx/(xx) subsidiary
UPEI xx Intercompany dividends (xx)
RPBI (xx) Consolidated dividend
xx
Consolidated CGS xx income

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Consolidated operating expenses (OPEX)

OPEX- parent xx
OPEX- subsidiary xx Consolidated loss on sale
Amortization of excess of loss on sale of the parent xx
fair value over the book loss on sale of the
xx
value / (book value over subsidiary
the fair value) of Unrealized loss (xx)
xx/(xx)
depreciable assets Consolidated gain on sale xx
Realized loss on the sale of
xx
depreciable assets Consolidated interest expenses
Realized gain on the sale Interest expense of the
(xx) xx
of depreciable assets parent
Consolidated OPEX xx Interest expense of the
xx
subsidiary
Consolidated Gain on sale Intercompany interest
(xx)
Gain on sale of the parent xx expense
Gain on sale of the Consolidated interest
xx xx
subsidiary expense
Unrealized gain (xx)
Consolidated gain on sale xx

CONSOLIDATED BALANCE SHEET ITEMS

The items in the consolidated balance sheet of the consolidating entity comprise of the balance sheet
items in the books of both the parent and the subsidiary after all the adjustments discussed above
which may affect the consolidated asset and liability accounts. Note that the investment in
subsidiary account should be eliminated in the working papers, because, again, they are economically
viewed as one entity. Aside from the adjustments mentioned above, some items below, if not eliminated
in the working paper, may overstate or understate some items in the balance sheet.

Intercompany receivables and payables. Intercompany receivables / payables arise when:

 the sales of the selling affiliate to the buying affiliate are on credit or on account in the
ordinary course of business (accounts receivable / accounts payable, notes receivable / payable
– trade, advances to suppliers / advances from customers);
 when either of the affiliate grants a loan to the other affiliate not in the ordinary course of
business (notes receivable / payable – non-trade);
 when there are accrued interest arising from the notes (interest receivable / payable).
The intercompany receivable is the amount remained unpaid by the debtor affiliate to the creditor
affiliate as of the balance sheet date. It must be also eliminated because if not eliminated, it will
overstate both the total assets and liabilities in the consolidated balance sheet. Generally, the entry
to eliminate intercompany receivables and payables are as follows:

Payables xx
Receivables xx

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Junior Philippine Institute of Accountants

Discussion Review in Advanced Accounting
Business Combination

Consolidated Cash Consolidated depreciable assets*

Cash of the parent xx Depreciable asset, net of
xx
Cash of the subsidiary xx the parent
Consolidated Cash xx Depreciable asset, net of
xx
the subsidiary
Consolidated Receivables Excess of the fair over
Receivables of the parent xx book value / (book over
receivables of the fair value) of depreciable
xx
subsidiary asset of subsidiary at the
Intercompany receivables (xx) date of acquisition
Intercompany dividend xx / (xx)
receivables (xx) Amortization of excess of
Consolidated receivables xx (fair over book value) /
book over fair value of
Consolidated inventory depreciable assets of the
Inventory of the parent xx subsidiary (xx) / xx
inventory of the subsidiary xx (Unrealized gain) /
Excess of the fair over unrealized loss (xx) / xx
book value / (book over Realized gain / (realized
fair value) of inventory of loss)** xx / (xx)
subsidiary at the date of Consolidated depreciable
xx / (xx) assets xx
acquisition
Amortization of excess of *applies to building, machinery, equipment,
(fair over book value) / intangibles with definite useful life, investment
book over fair value of property accounted for at cost model, and
inventory of subsidiary (xx) / xx other depreciable assets
UPEI (xx) **in the form of lower depreciation expense for
Consolidated inventories xx realized gain, and higher depreciation expense
for the realized loss
Consolidated land
land of the parent xx Consolidated Goodwill
Land of the subsidiary xx Goodwill of the parent
Excess of the fair over before the business
book value / (book over combination xx
fair value) of land of Goodwill arising from the
subsidiary at the date of business combination xx
xx / (xx)
acquisition Impairment of goodwill
Amortization of excess of arising from the business
(fair over book value) / combination (xx)
book over fair value of Consolidated goodwill xx
land of the subsidiary (xx) / xx Note: goodwill of the subsidiary should be
UPEI (xx) eliminated in the working paper because it is
Consolidated land xx not identifiable unlike other intangible assets of
the subsidiary and it does not have fair value.

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Junior Philippine Institute of Accountants

Discussion Review in Advanced Accounting
Business Combination

Consolidated liabilities Consolidated SHE

Liabilities of the parent xx Ordinary and preference
Liabilities of the subsidiary xx shares of the parent xx
Intercompany payables (xx) Additional paid-in capital
Dividend payable to the of the parent xx
parent (xx) Consolidated RE, end xx
Consolidated liabilities xx NCINAS, end xx
Items in OCI of the parent xx
Consolidated SHE xx
Consolidated RE
RE, beginning* xx
Consolidated Assets
CNI - Parent xx
Total assets of the parent xx
Dividends declared (xx)
Total assets of the
Consolidated RE, end xx
subsidiary xx
*if it is the year of acquisition, the
Investment in subsidiary (xx)
consolidated RE after the business
combination at the date of acquisition. Goodwill of the subsidiary (xx)
Goodwill arising from the
business combination, net
Non-controlling interest in the Net Assets of the
of accumulated impairment
subsidiary (NCINAS)
loss, if the result is
NCINAS, beg* xx goodwill xx
NCINIS xx Unrealized (gain) / loss in
Dividends declared the sale of plant assets (xx) / xx
(excluding dividends to be Realized gain / (loss) in the
received by parent) (xx) sale of plant assets xx / (xx)
NCINAS, end xx Unrealized profit in ending
*if it is the year of acquisition, the NCINAS inventory (UPEI) (xx)
after the business combination at the date of
Excess of fair over book
acquisition.
value / (book over fair
value of assets) xx / (xx)
Amortization of excess of
fair over book value /
(book over fair value) of
assets of subsidiary (xx) / xx
Intercompany receivables (xx)
Consolidated Assets xx

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