INVESTMENT IN SUBSIDIARY
Problem A - Equity Model and Cost Model
Lovelle Inc. acquired 80% of the ordinary shares of Rachelle Co. for P300,000 on January 1, 2022. At the
end of the year, Rachel Co. reported net income of P200,000 and paid dividends of P150,000 to its
shareholders.
Requirements:
1. Prepare the journal entries in 2022, assuming Lovelle Inc. uses equity model.
2. Prepare the journal entries in 2022, assuming Lovelle Inc. uses cost model.
3. On December 31, 2022, what amount of Investment in Subsidiary will be reported assuming
Lovelle uses the equity or cost model.
Solutions for 1 and 2:
EQUITY MODEL COST MODEL
Investment in Subsidiary 300,000 Investment in Subsidiary 300,000
Cash 300,000 Cash 300,000
To record acquisition To record acquisition
Investment in Subsidiary 160,000 No entry
Income from Subsidiary 160,000
To record share in net income
Cash 120,000 Cash 120,000
Investment in Subsidiary 120,000 Dividend Income 120,000
To record share in dividends To record share in dividends
Note: Investment account will be increased by the proportionate Note: The parent does not record any share in the net income from
share in net income and decreased by the share in dividends. In the subsidiary and treats dividends received as an income. The only
essence equity method is accounting for the investment on an owner events that can potentially affect the investment account is
perspective. impairment of the additional share acquisition or the sales of shares.
Solutions for 3:
Why is it important to determine investment income (IFS)/ dividend income (DI)?
➢ Investment income / Dividend income from the subsidiary is considered as intragroup income.
➢ In the consolidation process such income from the subsidiary must be eliminated because
consolidated net income should only reflect the amount of income earned by the group from
external sources.
Dannah Lush
Sales P5,000,000 P1,500,000
Income from Subsidiary 153,750
Gross Revenue P5,153,750 P1,500,000
Less: Cost of Sales 3,200,000 800,000
Gross Profit P1,953,750 P700,000
Less: Operating Expense
Depreciation – Building 500,000 240,000
Depreciation – Equipment 250,000 60,000
Other Expense 300,000 100,000
Net Income P903,750 P300,000
Problem B – Amortization of Overvaluation / Undervaluation of Net Assets
Dannah acquired 75% of the ordinary shares of Lush on January 1, 2022. On the same date, the
following data taken from the records of Lush Company:
Book Value Fair Value (OVA) / UVA
Inventories P500,000 P575,000 P75,000
Buildings – net 1,200,000 1,350,000 150,000
Equipment – net 600,000 500,000 (100,000)
The building and equipment had remaining life of 5 years and 10 years respectively. The undervalued
inventory was sold by December 31, 2022.
Lush reported the following condensed income statement, on December 31, 2022.
Sales P1,500,000
Less: Cost of Sales 800,000
Gross Profit 700,000
Less: Operating Expense
Depreciation - Bldg 240,000
Depreciation – Equipment 60,000
Other Expenses 100,000
Net Income P300,000
Requirements:
1. What amount of income from subsidiary will be reported by the parent?
Solutions:
➢ If the assets are overvalued or undervalued, their related expenses are as well overvalued and
undervalued, respectively. If the fair values were used in computing the expenses they would
conform to consolidated amounts as follows:
➢ The adjusted net income of P205,000 is not reflected on the subsidiary’s financial statements.
The figure is only for the computation of income from subsidiary on the parent’s book.
CONSOLIDATED NET INCOME AND INCOME STATEMENT
Problem C – Consolidated Net Income and Income Statement
Dannah acquired 75% of the ordinary shares of Lush on January 1, 2022. At the date of acquisition, the
only assets of Lush whose fair values were different from the carrying amount were the following:
Book Value Fair Value
Inventories P500,000 P575,000
Buildings – net 1,200,000 1,350,000
Equipment – net 600,000 500,000
The building and equipment had remaining life of 5 years and 10 years respectively. The undervalued
inventory was sold by December 31, 2022.
The following are separate condensed income statements on December 31, 2022 of Dannah and Lush.
Dannah Lush
Sales P5,000,000 P1,500,000
Income from Subsidiary 153,750
Gross Revenue P5,153,750 P1,500,000
Less: Cost of Sales 3,200,000 800,000
Gross Profit P1,953,750 P700,000
Less: Operating Expense
Depreciation – Building 500,000 240,000
Depreciation – Equipment 250,000 60,000
Other Expense 300,000 100,000
Net Income P903,750 P300,000
Dannah uses the equity model in accounting for investment in subsidiary. Lush declared dividends of
P160,000 in 2022.
Requirements:
1. Compute the amount of consolidated net income (CNI), profit attributable to parent (PAP) and
non-controlling interest income (NCII) to be presented in December 31, 2022 consolidated
income statement if Dannah uses the equity model in accounting for investment in subsidiary
and Lush declared dividends of P160,000 in 2022. Prepare the consolidated income statement.
2. Compute the amount of consolidated net income (CNI), profit attributable to parent (PAP) and
non-controlling interest (NCII) to be presented in December 31, 2022 consolidated income
statement if parent uses cost model and the dividend income is P120,000.
Solutions for Requirement No. 1
Steps to Compute for the Consolidated Net Income
1. Eliminate investment income then add IFOOP and SNI.
2. Determine the amortization of over / undervaluation
3. Adjust for amortization.
IFRS 10 requires that the portion of the consolidated profits that relate to the parent’s equity must be
presented separately from the share in the profits of non-controlling interest. The presentation of
results of the group’s operations do not end after consolidated net income. We have to present what
part of the income will accrue to the equity of the parent known as profit attributable to the parent
(PAP) and what part of it is non-controlling interest income
Solutions for Requirement No. 2
Consolidated Income Statement
