UNIVERSITY OF MINDANAO

Tagum College

Department of Accounting Education

Accountancy Program

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for Self-Directed Learning (SDL)

Course/Subject: ACP312 – Accounting for Business Combination

Name of Teacher: Jon D. Inocentes, CPA

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR REPRODUCTION AND
DISTRIBUTION OUTSIDE OF ITS INTENDED USE. THIS IS INTENDED ONLY FOR THE
USE OF THE STUDENTS WHO ARE OFFICIALLY ENROLLED IN THE
COURSE/SUBJECT.
EXPECT REVISIONS OF THE MANUAL.
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Table of Contents

Page

Part 1. Course Outline and Policies................................................................. 1

Part 2. Instruction Delivery

CC’s Voice............................................................................………….. 5

Course Outcomes................................................................................. 5

Big Picture A: Unit Learning Outcomes ............................................... 5

Big Picture in Focus:ULOa……………………………………………….. 5

Metalanguage....................................................................................... 5

Essential Knowledge............................................................................ 6

Self-Help............................................................................................... 22

Let’s Check........................................................................................... 22

Let’s Analyze......................................................................................... 27

In a Nutshell.......................................................................................... 28

Q&A List................................................................................................ 30

Keywords Index.................................................................................... 30

Big Picture B: Unit Learning Outcomes ............................................... 31

Big Picture in Focus:ULOa……………………………………………….. 31

Metalanguage....................................................................................... 31

Essential Knowledge............................................................................ 31

Self-Help............................................................................................... 45

Let’s Check........................................................................................... 45

Let’s Analyze......................................................................................... 48

In a Nutshell.......................................................................................... 49

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Q&A List................................................................................................ 50

Keywords Index.................................................................................... 51

Big Picture in Focus:ULOb……………………………………………….. 51

Metalanguage....................................................................................... 51

Essential Knowledge............................................................................ 51

Self-Help............................................................................................... 78

Let’s Check........................................................................................... 79

Let’s Analyze......................................................................................... 84

In a Nutshell.......................................................................................... 84

Q&A List................................................................................................ 85

Keywords Index.................................................................................... 86

Big Picture C: Unit Learning Outcomes ............................................... 86

Big Picture in Focus:ULOa……………………………………………….. 86

Metalanguage....................................................................................... 86

Essential Knowledge............................................................................ 86

Self-Help............................................................................................... 153

Let’s Check........................................................................................... 154

Let’s Analyze......................................................................................... 157

In a Nutshell.......................................................................................... 159

Q&A List................................................................................................ 159

Big Picture D: Unit Learning Outcomes ............................................... 160

Big Picture in Focus:ULOa……………………………………………….. 160

Metalanguage....................................................................................... 160

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Essential Knowledge............................................................................ 160

Self-Help............................................................................................... 166

Let’s Check........................................................................................... 167

Let’s Analyze......................................................................................... 169

In a Nutshell.......................................................................................... 170

Q&A List................................................................................................ 171

Keywords Index.................................................................................... 171

Big Picture in Focus:ULOb……………………………………………….. 172

Metalanguage....................................................................................... 172

Essential Knowledge............................................................................ 172

Self-Help............................................................................................... 177

Let’s Check........................................................................................... 177

Let’s Analyze......................................................................................... 179

In a Nutshell.......................................................................................... 180

Q&A List................................................................................................ 180

Keywords Index.................................................................................... 180

Part 3. Course Schedule................................................................................. 181

Online Code of Conduct...................................................................... 182

Monitoring of OBD and DED............................................................... 184

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Course Outline: Accounting 8- Accounting for Business combination

Course Coordinator : Jon D. Inocentes,CPA

Email : jdinocentes@yahoo.com.ph
Student Consultation : by appointment
Mobile Number : 09127813586
Phone Number : (084) 655 9591 Local 116
Date of Effectivity : August 2020
Mode of Delivery : Distance Education Delivery (DED)
Time Frame : 54 Hours
Student Workload : Expected Self-Directed Learning
Requisites : Acctng 7
Credit : 3-unit Lecture
Attendance Requirements : Minimum of 95% attendance in all scheduled virtual or
face to face sessions and the Learning Management System
(LMS)

Course Outline Policy

Areas of Concern Details

Contact and Non-contact This 3-unit course self-instructional manual is designed for
Hours blended learning mode of instructional delivery with
scheduled face to face or virtual sessions. The expected
number of hours will be 54, including the face to face or
virtual meetings. A Learning Management System (LMS),
Quipper, will be used to facilitate your learning. Other
sessions may also be conducted through online
communication channels such as Facebook, Messenger,
WhatsApp, Viber, E-mail, Line, Zoom, Skype, or any other
similar applications. You may also contact the course
coordinator through a mobile number or telephone.
Assessment Task Submission of assessment tasks shall be on the 3rd, 5th, 7th,
Submission and 9th week of the term. The assessment paper shall be
attached with a cover page indicating the title of the
assessment task (if the task is a performance), the name of
the course coordinator, date of submission, and the name of
the student. The document should be e-mailed to the course
coordinator. It is also expected that you already paid your
tuition and other fees before the submission of the
assessment task.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

If the assessment task is done in real-time through the

features in the Learning Management System, the schedule
shall be arranged ahead of time by the course coordinator.
Turnitin submission To ensure honesty and authenticity, all assessment tasks
(if necessary) are required to be submitted through Turnitin with a
maximum similarity index of 30% allowed. This means that
if your paper goes beyond 30%, the students will either opt
to redo her/his paper or explain in writing addressed to the
course coordinator the reasons for the similarity. Also, if the
document has reached a more than 30% similarity index, the
student may be called for disciplinary action following the
University’s OPM on Intellectual and Academic Honesty.

Please note that academic dishonesty such as cheating and

commissioning other students or people to complete the
task for you have severe punishments (reprimand, warning,
expulsion).
Penalties for Late The score for an assessment item submitted after the
Assignments / Assessments designated time on the due date, without an approved
extension of time, will be reduced by 5% of the possible
maximum score for that assessment item for each day that
the assessment item is late.

However, if the late submission of the assessment paper

has a valid reason, a letter of explanation should be
submitted and approved by the course coordinator. If
necessary, you will also be required to present/attach pieces
of evidence.
Return of Assignments / Assessment tasks will be returned to you within two (2)
Assessments weeks after the submission. This will be returned through e-
mail or via the Quipper.

For group assessment tasks, the course coordinator will

require some or few of the students for online or virtual
sessions to ask clarificatory questions to validate the
originality of the assessment task submitted and to ensure
that all the group members are involved.
Assignment Resubmission You should request in writing addressed to the course
coordinator your intention to resubmit an assessment task.
The resubmission is premised on the student’s failure to
comply with the similarity index and other reasonable
grounds such as academic literacy three (3) standards or
other reasonable circumstances, e.g., illness, accident
financial constraints.
Re-marking of Assessment You should request in writing addressed to the course
Papers and Appeal coordinator your intention to appeal or contest the score
given to an assessment task. The letter should explicitly
explain the reasons/points to contest the grade. The course
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

coordinator shall communicate with you on the approval and

disapproval of the request.

If disapproved by the course coordinator, you can elevate

your case to the program head or the dean with the original
letter of request. The final decision will come from the dean
of the college.
Grading System Your grades will be based on the following:

Examinations
First to Third 30%
Final 30% = 60%
Class Participations
Quizzes 10%
Assignments 5%
Research/Requirements 15%
Oral Recitation 10% = 40%
Total = 100%

Submission of the final grades shall follow the usual

University system and procedures.
Preferred Referencing Style Use the general practice of the APA 6th Edition.
Student Communication You are required to have an e-mail account, which is a
requirement to access the LMS portal. Then, the course
coordinator shall enroll the students to have access to the
materials and resources of the course.

You may call or send SMS to your course coordinator

through his/her phone number. Online communication
channels, such as those stated above, may be used.

You can also meet the course coordinator in person through

the scheduled face to face sessions to raise your issues and
concerns.
Contact Details of the Dean Dr. Gina Fe G. Israel
Dean of College
E-mail: deansofficetagum@umindanao.edu.ph
Phone: 0915 832 5092 / 0909 994 2314

Marck Lester L. Navales, CPA, MBA

Assistant Dean
E-mail: navalesmarck@umindanao.edu.ph
Phone: 0975 0517 851
Contact Details of the For Accountancy:
Program Head
Mary Cris L. Luzada, CPA, MSA
Email: luzadacris@umindanao.edu.ph
Mobile: 09228321794
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

For Accounting Technology:

Maria Teresa A. Ozoa, CPA, MBA

Email: ozoamateresa@umindanao.edu.ph
Mobile: 09472657119

Students with Special Students with special needs shall communicate with the
Needs course coordinator about the nature of his or her special
needs. Depending on the nature of the need, the course
coordinator with the approval of the program head may
provide alternative assessment tasks or extension of the
deadline for submission of assessment tasks. However, the
alternative assessment tasks should still be in the service of
achieving the desired course learning outcomes.
Library Contact Details Clarissa R. Donayre, MSLS
E-mail: lictagum@umindanao.edu.ph
Phone: 0927 395 1639
Well-being Welfare Support Rochen D. Yntig, RGC
Help Desk Contact Details GSTC Head
E-mail: chenny.yntig@gmail.com
Phone: 0932 771 7219

Mersun Faith A. Delco, RPm

Psychometrician
E-mail: mersunfaithdelco@gmail.com
Phone: 0927 608 6037

Alfred Joshua M. Navarro

Facilitator
E-mail: is40fotb@gmail.com
Phone: 0977 341 6064

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Course Information – See or download the course syllabus in Quipper

CC’s Voice : Hello, future Certified Public Accountants! Welcome to this course,
Accounting for Business Combination. This course will cover home office and
branch accounting and accounting for business combinations. This course
will help you prepare consolidated financial statements for home office and
branches and consolidated financial statements for business combination at
and subsequent to the date of acquisition.

Course outcome:

As a student of this course you are expected to:

1. Apply accounting for branches and agencies.

2. Apply advanced accounting standards and principles in accounting for business
combination: statutory merger and statutory consolidation.
3. Apply accounting procedures for preparing consolidated financial statements
subsequent to date of acquisition and elimination of intercompany transactions

Let us begin!

BIG PICTURE A

Week 1-3: Unit Learning Outcomes (ULO a): At the end of the unit, you are expected to:

a. Apply accounting standards and procedures for in accounting for home office and
branch.

Big Picture in Focus: Apply accounting standards and procedures for in accounting
for home office and branch.

Metalanguage

In this section, the essential terms relevant to the home office and branch accounting
of demonstrate ULOa 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.

 Sales agency- A person or a company that acts as a sales agent on behalf of the
exporting company (principal), introducing its products to potential buyers in the
external market, in exchange for a commission based on the value of the business
deals arranged and paid to the principal.

 Home office- Headquarters of a firm that establish its policy and perform management
and control functions for most or all segments of the business
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

 Branch accounting- a system in which separate books of accounts are maintained

for each branch.

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.

Distinction between Sales Agency and Branch

The difference between a sales agency and a branch most often has to do with the degree
of autonomy.

 A sales agency, sometimes referred to simply as an “agency,” usually is not an

autonomous operation but acts on behalf of the home office. The agency may display
and demonstrate sample merchandise, take orders, and arrange for delivery. The
orders typically are filled by the home office because a sales agency usually does not
stock inventory. Merchandise selection, advertising, granting of credit, collection on
accounts, and other aspects of operating the business usually are conducted by the
home office.

 By contrast, a branch office usually has more autonomy and provides a greater range
of services than a sales agency does, although the degree differs with the individual
company. A branch typically stocks merchandise, makes sales to customers, passes
on customer credit, collects receivables, incurs expenses, and performs other
functions normally associated with the operations of a separate business enterprise.

Accounting for Sales Agencies

From an accounting standpoint, the sales agency’s accounts are carried on the books of the
home office. Transactions are recorded in accounts that identify the particular sales agency,
for example, Sales-Ambo Agency; Rent Expense-Ambo Agency. For some types of
transactions, the entries recorded by the home office are based on source documents
generated by the agency.

a. March 1. Receipt of petty cash fund from home office

Petty cash-Ambo Agency………………………..1,000

Cash…………………………………………………..1,000

b. March 1-31. Fill sales orders from sales agency.

Accounts receivable…………………………….5,000

Sales-Ambo Agency………………………………….5,000

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

c. March 1-31. Collections by home office on agency sales

Cash…………………………………………….3,000

Accounts receivable…………………………………3,000

d. March 1-31. Pay bills received by home office for expenses of Ambo agency.
Salaries Expense- Ambo Agency………………..450

Office Supplies- Ambo Agency…………………450

Cash…………………………………………………..900

e. March 31. Replenish sales agency petty cash fund.

Miscellaneous expense- Ambo Agency…………550

Cash…………………………………………………550

f. March 31. Record end-of-period adjusting entries:

Cost of Goods Sold- Ambo Agency………….3,500

Office supplies expense- Ambo Agency………..150

Merchandise shipments- Ambo Agency…………..3,500

Office supplies- Ambo Agency……………………...150

g. March 31. Record end-of-period closing entries:

Sales- Ambo Agency………………………….5,000

Income- Ambo Agency…………………………….5,000

Income- Ambo Agency……………………..4,650

Cost of goods sold- Ambo Agency…………………3,500

Salaries expense- Ambo Agency……………………...450

Office supplies expense- Ambo Agency………………150

Miscellaneous expense- Ambo Agency……………….550

Income- Ambo Agency………………………350

Income summary……………………………………350

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Accounting for Branch Operations

Occasionally, accounting for branch operations is centralized at the home office, and the
procedures followed are similar to those for a sales agency.

Under a centralized accounting system, an outlying location does not maintain a

separate general ledger in which to record its transactions. If such an approach is
used, the branch maintains only limited accounting records and submits source
documents for transactions to the home office for entry in the centralized accounting
system.
Normally, however, and especially with larger branches, the home office and branch
maintain separate accounting systems. Under a decentralized accounting system, an
outlying location maintains a separate general ledger in which to record its
transactions. In such a decentralized accounting system, each maintains a full set of
books with a complete self-balancing set of accounts and records its transactions with
external parties in its own accounting system. These transactions are recorded in the
normal manner, and no special treatment is needed.

In addition, the home office and branch both must record transactions with one another
in their respective accounting systems. Even though the home office and each branch
maintain separate books, all accounts are combined for external reporting in such a
way that the external financial statements represent the company as a single
economic enterprise.

Reciprocal (Intracompany) Ledger Accounts

A key element both in identifying home office/branch situations and in providing the needed
accounting is the presence of reciprocal accounts.

Reciprocal accounts have equal and offsetting balances on both the home office and
branch books. They are used by both business units to record those transactions
between the units or made on behalf of one unit by the other.
Transactions with external parties are recorded in the normal manner. Transactions
between the home office and a branch also are treated in the normal manner except
that they are recorded in intracompany accounts. These accounts are reciprocal
accounts between the home office and the branch. When the books of both the home
office and the branch are completely up to date, the balance in an intracompany
account on the home office books will be equal but opposite that of the related
intracompany account on the branch books.
The intracompany account on the books of the home office often is called Investment
in Branch, while the reciprocal account on the branch books may be labeled Home
Office. When a company has more than one branch, a separate investment account
for each branch is maintained on the home office books.
The balance of the Investment in Branch account indicates the extent of the home
office’s investment in a particular branch through contributions of cash and the transfer
of assets to the branch.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

The reciprocal Home Office account on the books of the branch represents the home office’s
equity in the branch, and the balance is shown in place of owners’ equity in the separate
financial statements of the branch prepared for internal reporting purposes.

The reciprocal nature of the Investment in Branch and the Home Office accounts, and the
way in which they are affected by various transactions, can be shown as follows:

Merchandise Shipments to Branches

 Purchases of merchandise from external parties are recorded by the branch in the
normal manner. For example, if ABC Company’s Ambo branch purchases Br.5,000 of
merchandise from an independent wholesaler, and the branch uses a perpetual
inventory system, the transaction is recorded by the branch as follows:

Inventory 5,000

Cash (or Accounts Payable) 5,000

 When inventory is transferred from the home office to a branch, both the home office
and the branch must record the transfer. The money value assigned to the inventory
that is transferred is referred to as a transfer price. Three alternative methods are
available to the home office for billing merchandise shipped to its branches.

The shipments may be billed (1) At home office cost,

(2) At a percentage above home office cost, or

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

I. Merchandise Shipments Billed at Cost:

Assume that ABC’s home office transfers inventory with a cost of Br.8,000 to its Ambo branch.

Home Office Books Branch Books

Investment in Ambo Branch…8,000 Shipments from Home
Shipments to Office…8,000
Branch……………..8,000 Home
Office…………………...8,000

The transfer is recorded on the home office books with the following entry:
Investment in Ambo Branch…........................8,000
Inventories…………………………...........................8,000

The branch records the merchandise as an asset in the same inventory account
used to record purchases from external parties and also recognizes the home
office’s increased equity in its net assets with the following entry:
Inventories…………………….8,000
Home Office…………………….8,000

Whereas, when the home office and branch use periodic inventory accounting, shipments
are recorded in two additional offsetting reciprocal accounts called Shipments to Branch and
Shipments from Home Office instead of debiting and crediting directly to inventory accounts
as in the case of perpetual inventory system, as follows:

Freight Charges on Merchandise Shipments: Freight costs on merchandise purchases or

shipments from the home office attach to the merchandise and are inventoriable costs.

 When the branch pays the freight cost no entry is made by the home office. In contrast,
payment of the freight by the home office requires additional entries to assign the
freight cost to the branch.
 For example, assume that ABC Corporation’s home office pays Br.100 to transport
Br.8,000 of merchandise to the Ambo branch. The transfer is recorded by the home
office with the following entry:

10
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Allocation of Expenses incurred by Home Office to Branches

In some cases, these costs might be apportioned against branch income and recorded only
on the books of the home office. Often, however, the branch to which the costs are
apportioned is notified of the apportioned amounts and records the expenses on its own
books. In this way, the income computed by the branch on its books includes all expenses
deemed related to the branch.

Example:

Assume that ABC’s home office incurs utilities expenses of Br.14,000 related to its Ambo
branch. ABC’s home office already has recorded these expenses in the normal manner, as
if they related to the home office. The home office records the following entry upon notifying
the Ambo branch of the Br.14,000 of apportioned expenses:

Without these entries, the home office income would be understated and the branch income
overstated. While omission of these entries has no effect on the income of the company as
a whole, the separate income amounts of the home office and branch may be important for
internal reporting purposes.

Accounting for Branch Fixed Assets

If the fixed assets are purchased by the home office for the branch and the branch records
the fixed assets on its books, an entry is required on the books of both the home office and
the branch.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Example:

Assume that ABC’s home office purchases Br.30,000 of store equipment for the Ambo
branch.

 Some companies account for branch fixed assets on the books of the home office rather
than on the books of the branch.
For example, if ABC’s home office purchases Br.30,000 of store equipment for the Ambo
branch, and the equipment is recorded on the books of the home office rather than the
branch, the home office records the purchase as follows:

 If the branch purchases fixed assets that are recorded on the books of the home office,
entries are needed by both the home office and the branch.

Assume that ABC’s Ambo branch purchases Br.30,000 of store equipment to be used by the
branch but carried on the home office books. The branch records the purchase with the
following entry:

The purchase is recorded by the home office as follows:

Because the branch purchases an asset that is carried on the home office books, the
balances of both the Home Office account and the Investment in Ambo Branch account are
reduced. The transaction is treated as if the branch had purchased equipment for the home
office.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Combined Financial Statements for Home Office and Branch

At the end of an accounting period, three types of end-of-period procedures are required in
home office/branch accounting.

1. The accountant must determine that the offsetting balances in the reciprocal accounts
are equal, as intended. If discrepancies exist, the reciprocal accounts are reconciled and
their balances adjusted accordingly.

2. To account for the operations of the period, conventional closing entries are made on the
home office and branch books.

3. The accountant prepares combined financial statements for the home office, often using
a working paper to facilitate their preparation.

A working paper for combined financial statements has three purposes: (1) to combine ledger
account balances for like revenues, expenses, assets, and liabilities, (2) to eliminate any
intracompany profits or losses, and (3) to eliminate the reciprocal accounts.

Example:

Assume that on January 1, 2015 ABC Company establishes a new branch at Ambo and bills
merchandise to the branch at home office cost. The branch maintains complete accounting
records except that fixed assets are recorded by the home office and prepares its own
financial statements. Both the home office and the branch use the perpetual inventory
system. The following transactions took place with respect to Ambo Branch’s first year of
operations for the fiscal year ending on December 31, 2015:

A. Home office sent a check to Ambo Branch for Br.1,000.

B. Merchandise with a home office cost of Br.60,000 was sent to the Ambo Branch.
C. Equipment was purchased by Ambo Branch to be carried at home office for Br.500
D. Branch sales on credit amounted to Br.80,000; the branch’s cost of the merchandise
sold was Br.45,000.
E. Branch collections on account from customers amounted to Br.62,000.
F. Payments for operating expenses by Ambo Branch totaled Br.20,000.
G. Cash of Br.37,500 was remitted by Ambo Branch to the home office.
H. The home office allocated operating expenses of Br.3,000 to Ambo Branch.

The journal entries to record these transactions and the working paper for preparation of
combined financial statements for ABC Company and its Ambo Branch are shown below.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

In the accounting records of Metu Branch, the Home Office account has a balance of
Br.26,000, as shown below:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

At the end of the year the branch prepares financial statements as shown below:

The home office prepares its own financial statements to show home office operations. The
accountants prepare combined financial statements to show overall performance (home
office and branches). The following working paper provides the information for the combined
financial statements of ABC Company. Assume that the perpetual inventories of Br.15,000
at the end of 2015 for Ambo Branch had been verified by a physical count. The working paper
for ABC Company is based on the previous transactions and events for Ambo Branch and
additional assumed data for the home office trial balance. All the routine year-end adjusting
entries (except the home office entries for branch operating results) are assumed to have
been made, and the working paper began with the adjusted trial balances of the home office
and Ambo Branch.

In the eliminations column, elimination

(a) offsets the balance of the Investment in Ambo Branch account against the balance of the
Home Office account. This elimination appears in the working paper only; it is not entered in
the accounting records of either the home office or Ambo Branch because its only purpose
is to facilitate the preparation of combined financial statements. A convenient starting point
in the preparation of a combined balance sheet consists of the adjusted trial balances of the
home office and of the branch.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

a) To eliminate reciprocal ledger account balances.

The working paper for combined financial statements of Home Office & Ambo Branch would
be the basis for preparing the financial statements of the firm as a single reporting entity. The
combined financial statements for the home office and branch are shown below.

16
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

The home office’s equity-method adjusting and closing entries for branch operating results
and the branch’s closing entries on December 31, 2015, are shown below:

Shipments to Branch Billed in Excess of Cost: the home office of some business
enterprises bill merchandise shipped to branches at home office cost plus a markup
percentage (or alternatively at branch retail selling prices). Because both these methods
involve similar modifications of accounting procedures, a single example illustrates the key
points involved, using the same data as in the previous illustration for ABC Company and its
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Ambo Branch except that the merchandise shipped to the branch is billed at a markup of 50%
above home office cost, or 331/2% of billed price. Under this assumption, the journal entries
for the first year’s transactions by the home office and Ambo Branch are the same as those
presented except for the journal entries for shipments of merchandise from the home office
to Ambo Branch. These shipments (Br.60,000 +50% markup on cost=Br.90,000) are
recorded under the perpetual inventory system as follows:

In the accounting records of the home office, the Investment in Ambo Branch account below
now has a debit balance of Br.56,000 before closing the accounting records as shown below

The balance of the Investment in Ambo Branch account is Br.30,000 larger than the Br.26,000
balance in the prior illustration. The increase represents the 50% markup over cost
(Br.60,000) of the merchandise shipped to Ambo Branch.

In the accounting records of Ambo Branch, the Home Office account now has a credit balance
of Br.56,000, before closing the accounting records as shown below:

Ambo Branch recorded the merchandise received from the home office at billed prices of
Br.90,000; the home office recorded the shipment by credits of Br.60,000 to Inventories and
Br.30,000 to Allowance for Overvaluation of Inventories-Ambo Branch. Use of the allowance
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

account enables the home office to maintain a record of the cost of merchandise shipped to
Ambo Branch as well as the amount of the unrealized gross profit on the shipments.

At the end of the accounting period, Ambo Branch reports its inventories (at billed prices) at
Br.22,500. The cost of these inventories is Br.15,000 (Br.22,5001.50=Br.15,000). In the
home office accounting records, the required balance of the Allowance for Overvaluation of
Inventories-Ambo Branch account is Br.7,500 (Br.22,500-Br.15,000=Br.7,500); thus, this
account balance must be reduced from its present amount of Br.30,000 to Br.7,500. The
reason for this reduction is that the 50% markup of billed prices over cost has become
realized gross profit to the home office with respect to the merchandise sold by the branch.
Consequently, at the end of the year the home office reduces its allowance for overvaluation
of the branch inventories to the Br.7,500 excess valuation contained in the ending inventories.

 The debit adjustment of Br.22,500 in the allowance account is offset by a credit to the
Realized Goss Profit-Ambo Branch Sales account, because it represents additional gross
profit of the home office resulting from sales by the branch. These matters are reflected
in the home office end-of-period adjusting and closing entries.
 When a home office bills merchandise shipments to branches at prices above home office
cost, preparation of the working paper for combined financial statements is facilitated by
an analysis of the flow of merchandise to a branch, such as the following for Ambo Branch
of ABC Company:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

The home office prepares its own financial statements to show home office operations. The
accountants prepare combined financial statements to show overall performance (home
office and branches). The following working paper provides the information for the combined
financial statements of Anchor Company.

The home office’s equity-method adjusting and closing entries for branch operating results
and the branch’s closing entries on December 31, 2015, would be as follows:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

After the foregoing journal entries have been posted, the ledger accounts in the home office
general ledger used to record branch operations are as follows:

In the separate balance sheet for the home office, the Br.7,500 credit balance of the
Allowance for Overvaluation of Inventories- Ambo Branch account is deducted from the
Br.45,500 debit balance of the Investment in Ambo Branch account, thus reducing the
carrying amount of the investment account to a cost basis with respect to shipments of
merchandise to the branch. In the separate income statement for the home office, the
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Br.22,500 realized gross profit on Ambo Branch sales may be displayed following gross
margin on sales.

After the closing entries for the branch are posted, the following Home Office account in the
accounting records of Ambo branch has a credit balance of Br.45,000, the same as the debit
balance of the Investment in Ambo Branch account in the accounting records of the home
office:

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. When home office ships merchandise at a billed price, effect on branch books will be:
a. overstatement on gross profit and net profit.
b. overstatement in cost of sales and home office equity.
c. overstatement in cost of sales and unsold inventory.
d. understatement in profit and home office equity.
2. The following will be debited to the home office equity account except
a. expenses paid by branch for the home office.
b. loss from branch operation.
c. cash transfers made to home office.
d. assets transferred to branch by home office.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

3. Plant assets of branch are controlled and maintained in the books of the home
office.The accounting treatment if branch bought the plant asset will include the
following:
a. home office credits investment in branch, branch debits plant asset.
b. home office debits branch assets, branch credits cash or accounts payable.
c. home office credits cash or accounts payable, branch debits home office equity.
d. home office debits branch asset, branch prepares a memo entry.
4. Expenses were paid by home office and some were allocated to branch This will include
the following accounting treatment:
a. home office debits investment in branch, branch debits expenses.
b. home office debits investment in branch, branch credits cash.
c. home office credits cash, branch credits home office equity.
d. no entry by home office, branch debits expenses and credits home office.
5. Home office may charge the branch interest for capital invested in branch. The
accounting treatment will be
a. home office debits interest receivable and credits interest income while branch
debits interest payable and credits interest expense.
b. home office debits investment and credits interest income while branch debits
interest expense and credits interest payable.
c. home office debits investment and credits interest income while branch debits
interest expense and credits the reciprocal account.
d. combined financial statements will show the interest accounts.
6. Home office ships merchandise P50,000 with a P5,000 freight FOB Shipping
Destination. The accounting treatment for this will be
a. branch debits shipments from home office P55,000 and credits home office equity
for the same amount.
b. branch debits shipments from home office and credits home office equity for
P50,000.
c. branch debits shipments for P50,000 and freight P5,000 and credits home office
equity for P50,000 and cash for P5,000.
d. branch debits shipments for P50,000 and freight P5,000 and credits the reciprocal
account for P55,000.
7. Cash in transit from home office to branch, if unrecorded by branch, will create the
following error:
a. home office equity will be overstated, while cash will be understated.
b. home office equity and cash will both be overstated
c. home office equity will be understated, while cash will be overstated.
d. both home office equity and cash will be understated.
8. Home office maintains and controls all plant assets. To record depreciation, the
accounting treatment will include the following:
a. Branch debits depreciation and credits home office equity.
b. Home office debits depreciation and credits investment in branch.
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

c. Branch debits depreciation, home office credits the investment account.

d. Branch debits home office equity and home office credits the accumulated
depreciation.

9. Which of the following ledger accounts is displayed in the combined financial statements
for a home office and branch?
a. Shipments to Branch
b. Home Office
c. Dividends Declared
d. Allowance for Overvaluation of Inventories: Branch

10. How many of the following statements below are true?

I. Both the Home Office ledger account and the Investment in Branch account
are displayed in the combined financial statements for the home office and the
branch.
II. The Investment in Branch ledger account is displayed as a noncurrent asset
in the separate balance sheet of the home office, and the Home Office
account is displayed as a long-term liability in the separate balance sheet of
the branch.
III. In a working paper for combined financial statements of a home office and
branches, the balance of the Shipments to Branch ledger account is
eliminated against the balance of the Home Office account.
IV. In a separate balance sheet for a home office, the balance of the Allowance
for Overvaluation of Inventories: Branch ledger account is deducted from the
balance of the Investment in Branch ledger account.

a. 1 b. 2 c. 3 d. 4

11. During May 1, 2016, the home office in Manila establishes a branch in Cebu to act as a
sales agency. The following assets are sent to the sales agency on that date.
Cash (for the working fund to be operated under the imprest system P 100,000
Samples from the merchandise stock 240,000

During May, the sales agency submits sales on account of P1,500,000 duly approved by the
home office. Cost of merchandise shipped to fill the orders from customers obtained by the
sales agency is P800,000. Home Office disbursements chargeable to the sales agency are
as follows: Furniture and fixtures, P150,000: manager’s and salesmen’s salaries, P 88,000:
and rent for two months, P 70,000. On May 1, the sales agency working fund is replenished;
paid vouchers submitted by the sales agency amounted to P 42,000. Sales agency samples
are useful until December 31, 2016, which at this time, are believed to have a salvage value
of 15% of cost. Furniture and fixtures are depreciated at 30% per annum.
What is the net profit of the sales agency for the month of May?
a. P505,750 c. P 327,250
b. P 470,750 d. P 292,250

24
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

12. Manila Company, Inc has been operating a branch in Cavite for a year. Shipments are
billed to the branch at cost. The branch carries its own accounts receivable, makes its
own collections, and pays its own expenses. On December 31, 2008, the branch books
shows the following balances:
Cash P8,500
Home Office 35,000
Shipments from home office 135,000
A/R 25,000
Sales 147,000
Expenses 13,500

The branch inventory on December 31, 2008 is P18,500.

On January 1, 2009, what are the balances of the following accounts in the books of the
Home Office?
Investment in Branch Shipments to Branch
a. P52,000 0
b. P52,000 135,000
c. P35,000 0
d. P35,000 135,000

A reconciliation of the branch current account in the head office of Davao Company and the
home office current account carried on the branch books showed the following discrepancies
at December 31, 2007:

a. Collection of branch accounts receivable by the home office, P800. The branch
was not notified.
b. Shipment in transit to branch on December 31, 2007, P3, 200.
c. Acquisition of furniture by the branch, P1, 200. The furniture account is to be
maintained on the home office books. The home office had not been notified of
the acquisition.
d. Return of excess merchandise by the branch but not received yet by the H.O.,
P1, 500.
e. Cash remittance by the branch on December 31, 2007, P500. This was still
transit.
The home office current account on the branch books has a credit balance of P44, 000 at
December 31, 2007

13. The unadjusted balance of the branch current account on the home office books
atDecember 31, 2007 was:
a.P49, 600 b.P47, 400 c.P50, 100 d.P48, 400

14. The adjusted balance of the reciprocal accounts on December 31, 2007 was:
a.P47,200 b.P46,400 c.P40,000 d.P46,800

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Selected information from the trial balances for the home office and the branch of Lalay
Company at December 31, 2012 is provided. The branch acquires merchandise from the
home office and outside suppliers.

Home Office Branch

Sales P60,000 P30,000

Shipments to branch 8,000

Allowance for overvaluation of branch inventory 3,600

Shipments from home office 10,000

Purchase (outsiders) 35,000 5,500

Merchandise inventory 12.01.12 20,000 15,000

Expenses 14,000 6,000

Additional information:

Merchandise inventory, December 31, 2012:

Home office P20,000

Branch (P7,500 from home office and P2,500 from outsiders) 10,000

15. The billing rate of home office to branch for merchandise shipments is

a. 120% of cost c. 130% of cost

b. 125% of cost d. 135% of cost

16. How much of the December 1 inventory of the branch represent purchases from
outsiders and goods shipped from home office
a. Home office, P5,000 and Outsiders, P10,000
b. Home office, P8,000 and Outsiders, P7,000
c. Home office, P15,000 and Outsiders, P00,000
d. Home office, P12,000 and Outsiders, P3,000
17. The net income reported by the branch is

a. P4,500 c. P3,500

b. P5,600 d. P2,500

26
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

18. The combined net income for Home office and branch operations is

a. P22,500 c. P25,100

b. P24,600 d. P21,50

Selected accounts from the December 31, 2011 trial balances of Betty Star Co. and its branch
follow:

5 - Star Branch
Inventory, Jan.1 P46,000 P23,100
Branch Current P116,600 -
Purchases P380,000 -
Shipments from home office - P209,000
Freight in - P10,450
Expenses P104,000 P58,100
Home Office Current - (P106,600)
Sales (P310,000) (280,000)
Shipments to branch (P200,000) -
Branch merchandise (P22,000) -
markup
As of December 31, 2011, a shipment with a billing price P11,000 was in transit to the branch.
Freight cost, typically 5% of the billing price, is inventoriable. Merchandise on hand at year-
end were: at home office, P64,000 at cost; at branch. P33,000 at billing price. Compute the :

19. Branch net income in so far as home office is concerned,

a. P40,900 b. P32,100 c. P32,000 d. P33,000

20. Combined net income,

a. P84,900 b. P76,100 c. P76,000 d. P77,000

Let’s Analyze

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

1. Distinguish sales agency and branch.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

______________________________________________________________________
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______________________________________________________________________
____________________________________________

2. What are reciprocal accounts? Explain example of reciprocal accoun

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In a Nutshell

Problem 1
On June 1, 2013, Ellaine Co. established an agency in Davao, sending samples costing
P4,200,000 which are useful until May 31,2014 and have a salvage value of 20% of cost. A
working fund of P3,412,500 is to be maintained using the imprest basis. During 2013, the
agency submitted to the home office sales order amounting to P35,437,500. Sales per invoice
were P27,562,500 which were duly approved by the home office. Collections during the year
amounted to P14,784,000 net of 4% sales discount. The cost of merchandise sold during the
year is equal to 70% of the gross selling price. Vouchers for expenses amounted to
P1,837,500. How much net income would be reported by the agency on December 31,2013?

Problem 2
Selected balances from the BACOLOD COMPANY'S SILAY BRANCH and TALISAY
BRANCH are as follows:

SILAY BRANCH TALISAY

BRANCH

Merchandise Inventory, January 1, 2014 P16,800 P15,200

Imprest Branch Fund 1,600 1,200

Merchandise Inventory, December 31, 2014 15,200 9,600

Accounts receivable, January 1, 2014 44,000 34,800

Shipment from Home Office 48,800 37,600

Accounts receivable, December 31, 2014 56,000 ?

28
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Cash collections 68,000 56,000

Sales 80,000 64,000

Cash expenses 16,800 11,440

All sales, collections, and expenses are handled at the branch. AH cash received from
sales and collections are sent directly to the home office. Expenses are paid by the
branch from the imprest fund and immediately reimbursed by the home office and
credited to the Home Office account. All expenses paid by the branch are recorded by
the branch.

Required: Calculate the balance of the Home Office account (1) on January 1, 2014 in the
books of Silay Branch and (2) on December 31, 2014 in the books of Talisay Branch

Problem 3

The income statement submitted by the General Santos City branch to the Home office for
the month of December, 2014 is shown below. After effecting the necessary adjustments
the true net income of branch was ascertained to be P156,000.

Sales P600,000

Cost of sales

Inventory, December 80,000

Shipments from home office 350,000

Local purchases 30,000

Total Available for sale 460,000

Inventory, December 31 100,000 360,00

Gross margin 240,000

Operating expenses (180,000)

Net income 60,000

The branch inventories were: Dec. 01,2014 Dec.31,2014

Merchandised from home office 70,000 84,000

Local purchases 10,000 16,000

Total 80,00

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Problem 4
Sure Buy Corporation has two branches to which merchandise is transferred at cost plus
20% plus charges. On November 30, 2016 Sure Buy shipped merchandise that cost P
11,000 to its Basilan Branch and the P 400 shipping charges were paid by Sure Buy. On
December 15, 2016 the Zamboanga branch encountered an inventory shortage and the
Basilan branch shipped the merchandise to the Zamboanga Branch at a freight cost of P
320 paid by the Basilan Branch. Shipping charges from the Home office to the Zamboanga
Branch would have been P 350.

Required: Prepare journal entries to record the inter branch transfers.

Question & Answer (Q&A)

You are free to list down all the emerging questions or issues in the provided spaces
below. These questions or concerns may also be raised in the LMS or other modes. You may
answer these questions on your own after clarification. The Q&A portion helps in the review
of concepts and essential knowledge.

Questions/Issues Answers

1.

2.

3.

4.

5.

Keywords

 Home office
 Branch
 Agency
 Allowance for overvaluation

30
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Big Picture B

Week 4: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to:

a. Apply accounting standards and procedures in accounting for statutory merger

b. Apply accounting standards and procedures in accounting for stock acquisition at the
date of acquisition

a. Big Picture in Focus: Apply accounting standards and procedures in accounting for
statutory merger
b.

Metalanguage
In this section, the essential terms relevant to accounting for business combination.
ULOa 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.

Business combination- a transaction in which the acquirer obtains control of

another business (the acquiree)

Statutory merger a business combination in which one of the combining entities continues
in existence as a legal entity

Acquiree - The business or businesses that the acquirer obtains control of in a business
combination

Acquirer - The entity that obtains control of the acquiree

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.

Business Combination
Transaction or other events, in which, an acquirer obtains control of one or more
businesses. Transaction sometimes referred to as ‘true mergers’ or ‘mergers of
equals’ are also business combinations as that term is used in this IFRS. [IFRS
3(2008) (Appendix A)]

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

MODES OF BUSINESS COMBINATION:

1. Merger. This is where an acquirer wholly purchases a company. As a result, the acquiring
company will remain as a LEGAL entity while the acquired company will be totally
dissolved. This can be viewed as (A+B=A), where A is the acquirer and B is the acquiree.

2. Stock Acquisition. This mode of business combination is where the acquirer purchases
certain shares of a company for the purpose of obtaining control. According to IFRS 10
(Consolidated Financial Statements), an investor controls an investee when it is exposed,
or has rights, to variable returns from its involvement with the investee and has the ability
to affect those returns through its power over the investee.
According to US GAAP, an entity obtains control when it holds more than 50% over the
investee company. Thus, a parent-subsidiary relationship exists. However, there can be
no both entities having control in each other. It must be settled among the entities who
has the controlling interest and if it cannot be settled, IFRS 11 (Joint Arrangement) will
apply.

(Note: A 100% stock acquisition is not a merger. In a 100% stock acquisition, the legal
entity of the acquiree will still remain unlike in a merger where the acquiree is dissolved
after acquisition.)

Acquisition Method
An entity shall account for each business combination by applying the Acquisition Method
[IFRS 3 Paragraph 4]

Step 1 Determining whether the transaction or event is a business combination

Step 2 Identify the acquirer*
Step 3 Determining the acquisition date*
Step 4 Recognizing and measuring the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree*
Step 5 Measuring consideration and determining what is part of the business
combination

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Step 6 Recognizing and measuring goodwill or a gain from a bargain purchase

Step 7 Subsequent measurement and accounting

Identifying the Acquirer

Acquirer – the entity that obtains control of another entity

Existence of Control
 An investor controls an investee when it is exposed, or has rights, to variable returns
from its involvement with the investee and has the ability to affect those returns through
its power over the investee. [IFRS 10 (amended) Paragraph 6]

 Control is the power to govern the financial and operating policies of an entity so as to
obtain benefits from its activities. [IAS 27(2008).4]

Presumption of Control

 Control is generally presumed to exist when the parent owns, directly or indirectly
through subsidiaries, more than half of the voting power of an entity. [see also IAS 27
(2008) Par 13] [note: IAS 27 (2008) was superseded by IAS 27 (2011), IFRS 10, and
IFRS 12]
Special Case: Combinations effected by creating a new entity [IFRS 3 Appendix B Paragraph
18]
 If new entity issues its equity instrument in exchange for equity instrument of the
combining entities, then one of the combining entities must be identified as the
acquirer in accordance with the guidance in IFRS 3 and IAS 27.
 If the new entity transfers cash (or other assets) in exchange for equity instruments of
the combining entities, then the NEW entity may be identified as the acquirer.

Acquisition Date
 The date in which the acquirer obtains control over the acquiree.
 Generally the date on which the acquirer legally transfers the consideration,
acquires the assets and assumes the liabilities of the acquiree—the closing date.
[IFRS 3 Paragraph 8-9]

Consideration Transferred to effect Combination [Purchase Price]

The consideration transferred in a business combination shall be measured at fair
value, which shall be calculated as the sum of the acquisition-date fair values of the
assets transferred by the acquirer, the liabilities incurred by the acquirer to former
owners of the acquiree and the equity interests issued by the acquirer.

Contingent Consideration
The consideration the acquirer transfers in exchange for the acquiree includes
any asset or liability resulting from a contingent consideration arrangement (see
paragraph 37). The acquirer shall recognize the acquisition-date fair value of

33
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

contingent consideration as part of the consideration transferred in exchange

for the acquiree. [IFRS 3 Paragraph 39]

Measurement Period [Refer to IFRS 3 Paragraph 45]

- The period within which the acquirer shall finalize the Acquisition-date fair
values of the assets acquired, liabilities assumed, and consideration
transferred.
- Not to exceed one year from acquisition date
- Adjustments relating to the acquisition date fair values brought by
information determined during the measurement period shall be adjusted to
goodwill or gain recognized at acquisition date.

Acquisition-Related Costs
Accounted for as expenses; however, cost to issue debt or equity securities
shall be recognized in accordance with IAS 32 and IFRS 9.
The transaction costs of an equity transaction are accounted for as a deduction
from equity (net of any related income tax benefit) to the extent they are
incremental costs directly attributable to the equity transaction that otherwise
would have been avoided. [IAS 32 Paragraph 37]

Net Assets Acquired

As of the acquisition date, the acquirer shall recognize, separately from goodwill, the
identifiable assets acquired, the liabilities assumed and any non-controlling interest
in the acquiree. [IFRS 3 Paragraph 10]
The acquirer shall measure the identifiably assets acquired and the liabilities assumed
at their acquisition-date fair values. [IFRS 3 Paragraph 18]
Liabilities assumed shall include Contingent Liabilities. [IFRS 3 Paragraph 23]

Non-Controlling Interest (NCI)

 For each business combination, the acquirer shall measure at the acquisition date
components of non-controlling interests in the acquiree that are present ownership
interests and entitle their holders to a proportionate share of the entity’s net assets
in the event of liquidation at either:
a. Fair value; or,
b. The present ownership instruments’ proportionate share in the recognized
amounts of the acquiree’s identifiable net assets.
All other components of non-controlling interests shall be measured at their
acquisition-date fair values, unless another measurement basis is required by
IFRSs. [IFRS 3 Paragraph 18-19]

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Fair Value of NCI

Basis:

a. Quoted price in an active market for the equity shares

b. Other valuation techniques (if no active market for the equity shares) [IFRS
3 par. 19]
The fair values of the acquirer’s interest in the acquiree and the non-controlling
interest on a per-share basis might differ primarily due to the inclusion of a
control premium in the per-share fair value of the acquirer’s interest in the
acquiree.

Goodwill and Gain Recognition and Measurement

Goodwill or Gain shall be recognized as the difference of
a. The aggregate of:
i. The consideration transferred measured in accordance with this IFRS,
which generally requires acquisition-date fair value (see paragraph 37);
ii. The amount of any non-controlling interest in the acquiree measured in
accordance with this IFRS; and,
iii. In a business combination achieved in stages (see paragraphs 41 and 42),
the acquisition-date fair value of the acquirer’s previously held equity
interest in the acquiree.
b. The net of the acquisition-date amounts of the identifiable assets acquired and
the liabilities assumed measured in accordance with this IFRS. [IFRS 3
Paragraph 32]
Therefore,

Consideration Transferred XX
Non-Controlling Interest XX
Fair Value of Previously Held Equity XX
Interest
Net Assets – Acquiree (XX)
Goodwill/(Bargain Purchase Gain) XX

Subsequent Measurement

Contingent Consideration
The acquirer shall account for changes in the fair value of contingent
consideration that are not measurement adjustment as follows:
 Contingent consideration classified as equity shall not be re-measured and its
subsequent settlement shall be accounted for within equity.
Contingent consideration classified as an asset or a liability that:
i. Is a financial instrument and is within the scope of IFRS 9 or IAS 39
shall be measured at fair value, with any resulting gain or loss
recognized either in profit or loss or in other comprehensive income
in accordance with IFRS 9.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

ii. Is not within the scope of IFRS shall be accounted for in accordance
with IAS 37 or other IFRSs as appropriate. [IFRS 3 Paragraph 58]
 Contingent Liabilities
Higher of:
a. The amount that would be recognized in accordance with IAS 37
(Provisions, Contingent Liabilities, and Contingent Assets); and,
b. The amount initially recognized less, if appropriate, cumulative amortization
recognized in accordance with IAS 18 (revenue)
 Non-Controlling Interest
Subsequently adjusted; by the non-controlling interests’ share of changes in
equity, from the date of the combination. [IAS 27 (2008).18(c)]
 Reacquired Rights
A reacquired right recognized as an intangible asset shall be amortized over
the remaining contractual period of the contract in which the right was granted
 Indemnification Assets
At the end of each subsequent reporting period, the acquirer shall measure an
indemnification asset that wa s recognized at the acquisition date on the same
basis as the indemnified liability or asset

Financial Statements Following the Acquisition of Net Assets.

Statements of Financial Position. Under the acquisition method, the Statements of

Financial Position of Acquirer, Inc. after the combination includes all the assets and liabilities
of the J & J Company at fair values.

Statements of Comprehensive Income. The statement of Comprehensive Income of the

acquirer for the accounting period in which business combination occurred includes the
operating results of the acquire after the date of acquisition only.

APPLYING THE ACQUISITION METHOD

As mentioned earlier, control of another company may be achieved either by the acquisition
of net assets or by acquisition of stocks.

ACQUSITION OF NET ASSETS

Let us assume that the company to be acquired by Acquirer, Inc., has the following Statement
of Financial Position on June 30, 2017:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Fair values for all accounts have been measured as of June 30, 2017 as follows:

BOOKS OF THE ACQUIRER

Accounting Procedures in Recording the Acquisitions

The basic accounting procedures to record the acquisition of net asset are as follows:

 All accounts identified are measured at estimated fair value. This is always the case
even if the consideration given for a company is less than the sum of the fair values of

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

the net assets acquired (assets less liabilities assumed, P 2, 620, 000in the
illustration).
 If the total consideration given for a company exceeds the fair value of its net
identifiable asset (P 2, 620, 000), the excess price paid is recorded as goodwill.
 If the total consideration given for a company is less than the fair value of its net
identifiable assets (P 2, 620, 000), the excess of net assets over the price paid is
recorded as gain on acquisition (bargain purchase) in the period of the purchase.
 All acquisition-related costs are expensed in the period in which the cost are incurred,
with one exception. The cost to issue equity securities are recognized as a reduction
from the value assigned to additional paid in capital account.
Before recording the acquisition, the acquirer should calculate the difference between the
price paid and the fair value of the assets acquired.

Case 1: Price paid exceeds the fair value of net identifiable assets acquired.

Acquirer., issues 80, 000 shares of its P 10 par value common stocks with a market value of
P 40 each for J and J Company’s net assets. Acquirer, Inc. pays professional fees of P 50,
000 to accomplish the acquisition and stock issuance costs of P 30, 000.

Analysis:

Entries recorded by the Acquirer, Inc. are as follows:

(1) To record the net assets acquired including the new goodwill:
Cash 200,000
Marketable securities 330,000
Inventory 550,000
Land 360,000
Building 900,000
Equipment 700,000
Receivable-trade 225,000
Goodwill 580,000

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Current liabilities 125,000

Bonds payable 500,000
Premium on bonds payable 20,000
Common stock (P 10 par 80,000 shares issued) 800,000
Additional paid in capital (P 30 x 800,000 shares) 2,400,000

(2) To record acquisition-related costs:

Acquisition
expense 50,000
Additional paid in capital
30,000
Cash
80,000

Case 2: Price paid is less than fair value of net identifiable assets acquired:

Acquired, Inc. issues 20, 000 shares of its P115 par value common stock with a market
value of P120 each for J & J Company’s net asset. Acquirer, Inc. pays professional fees of
P 50, 0000 to accomplish the acquisition and stock issuance costs of P 130, 000.

Analysis:

Price paid (consideration given), 20,000 shares x P 120

market value 2,400,000
Fair value of net identifiable assets acquired from J & J
Company (2,620,000)

Gain on acquisition ( Bargain 220,000

purchase)

Professional fees
(expense) 50,000
Stock issuance costs (reduction from additional paid in capital)
130,000

Entries recorded by Acquirer, Inc. to record the acquisition and related costs are as follows:

39
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

(1) To record the acquisition of net assets:

Cash
200,000
Marketable securities
330,000
Inventory
550,000
Land
360,000
Building
900,000
Equipment
700,000
Receivables-trade
225,000
Current liabilities
125,000
Bonds payable
500,000
Premium on bonds payable
20,000
Common stock (20,000 shares x P 115 par)
2,300,000
Additional paid in capital (20,000 shares x P5)
100,000
Gain on acquisition
220,000

(2) To record acquisition-related costs:

Acquisition
expense 50,000
Additional paid in capital
100,000
Stock issuance
costs 30,000
Cash
180,000

The following should be noted from the entries of the acquirer.

 The stock issuance costs exceed the additional paid in capital recorded at acquisition
with the excess being debited to “Stock Issuance Costs”. This account should be
treated as a contra account from retained earnings under the equity section of the
statement of financial position.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

 The gain must be reported as a separate line item in the statement of

comprehensive income of the acquirer in the period of the acquisition.
Recording Contingent Consideration in Acquisition of Net Assets

Using the data in J & J Company (Case 1), assume that Acquirer, Inc., issued 80, 000 shares
with a market value of P 3, 200, 000. In addition to the stock issued, the acquirer agreed to
pay an additional P 200, 000 on January 1, 2018, if the average income for the 2-year period
of 2016 and 2017 exceeds P 160, 000 per year. The expected value is estimated at P 100,
000 based on the 50% probability of achieving the target average income.

Analysis

Total price paid:

Stock issued at market
value 3,200,000
Estimated value of contingent consideration
100,000 3,300,000
Fair value of net assets acquired from J & J
Company 2,620,000

Goodw
ill 680,000

Acquisition-related costs:
Professional fees (expense)
50,000
Stock issuance costs (reduction from APIC)
30,000

Entries to record the acquisition of net assets and the acquisition-related costs are as follows:

(1) To record the net assets acquired at fair value including the new goodwill:
Cash 20,000
Marketable securities 330,000
Inventory 550,000
Land 360,000
Building 900,000
Equipment 700,000
Receivables-trade 225,000
Goodwill 680,000
Current liabilities 125,000
Bonds payable 500,000

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Premium on bonds payable 20,000

Contingent consideration payable 100,000
Common stock, P 10 par 800,000
Additional paid in capital 2,400,000

(2) To record acquisition-related costs:

Acquisition expense
50,000
Additional paid in capital
30,000
Cash
80,000

Recoding Changes in Contingent Consideration

Changes that are the result of the acquirer obtaining additional information about facts and
circumstances that existed at the acquisition date, and that occur within the measurement
period (which may be a maximum of one year from the acquisition date) are recognized as
adjustment against the original accounting for the acquisition (and so may affect goodwill).

Changes resulting from events after the acquisition (e.g. meeting an earnings target) are not
measurement period adjustment. Accounting for such change depends on whether the
additional consideration is an equity instrument or cash or other assets paid or owed. If it is
equity, the original amount is not remeasured. If the additional consideration is cash or other
assets paid or owed, the changed amount is recognized in profit or loss.

If during the measurement period, the contingent consideration was revalued based on
additional information, the estimated liability and the goodwill (or gain on acquisition) would
be adjusted. For example, if within the measurement period, the estimate was revised to P
160, 000 increased would be adjusted as follows:

Goodwill 60,000
Contingent consideration payable 60,000

If the estimate is gain revised after the measurement period, the adjustment is included in
profit or loss of the later period. For example, if the estimate was revised to P 200, 000 after
the measurement period, the P 40, 000 increase would be recorded as follows:

Loss on contingent consideration 40,000

Contingent consideration payable 40,000

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

The illustrated procedure applies to any contingent consideration payable in cash or other
assets other than issuing additional shares of stocks. An arrangement to issue additional
stock upon the occurrence of future event is treated to be a change in the estimated value of
the shares issued. No liability is recorded at the acquisition date. The only entry made is at
the date when additional shares are issued.

Using the example of the acquisition of J & J Company for P 3, 200, 000, assume that there
was an agreement to issue 20, 000 additional shares if the average income during the 2-year
period of 2016 and 2017 exceeded P 160, 000 per year. There would be no change in the
entry in Case 1 to record the acquisition on June 30, 2017.

Assuming the contingent event occurs, the following entry would be made after December
2019, to issue the additional 20, 000 shares.

Additional paid in capital (20, 000 shares x P 10) 200, 0000

Common stock, P 10 par 200, 0000

Recording Changes in Value During Measurement Period

During the measurement period, values assigned to accounts recorded as a part of the
acquisition may be adjusted to better reflect the value of the accounts as of the acquisition
date. Changes in value caused by events that occur after the acquisition date are not a part
of this adjustments. They would be adjusted to income in the period they occur.

The value recorded on the acquisition date are considered “provisional”. They must be used
in financial statements with dates prior to the end of the measurement period. The
measurement period ends when the improved information is available or it is obvious that no
better information is available. In no case can be measurement period exceed one year from
the acquisition date.

Let us return to the acquisition of the J & J Company for P 3, 200, 000 in Case 1. Assume
now that the value assigned to the building is provisional. The 2017 financial year will include
the statement of comprehensive income accounts for the acquired, J & J Company, starting
as of the acquisition date, June 30. The values assigned to building and resulting adjustments
to income for 2017 and projected for 2018 are as follows:

Provisional
900,000
Depreciation method:
20-year straight-line with P 660, 000 residual
value.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

P 240,000/20 yeas = P 12,000 per year, P 1,000 per

month.

Recorded in 2017 6,000

(6months)
Projected in
2018 12,000

Better estimates of value for the building become available in early 2018. The new values
and revised depreciation are as follows:

Revised Value
950,000
Depreciation
method:
20-year straight-line with P 590,000 residual
value.
P 360,000/20 years =P 18,000 per year, P 1, 500 per
month.

Adjusted amount for 2017

(6months) 9,000
Amount to be recorded in
2018 18,000

The recorded values are adjusted during 2018 as follows:

Building (P 950,000 – P 900, 000) 50,000

Goodwill 50,000

Goodwill would absorb the impact of the adjustment. Had there been a gain on the original
acquisition date, the gain would be adjusted at the end of the measurement period. Since the
gain was recorded in the prior periods, the entry to adjust the gain would be made to retained
earnings.

The depreciation for the period must also be adjusted retroactively. The entry made in 2018
would be as follows:

Retained earnings 3,000

Accumulated depreciation-buildings 3, 000

44
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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. It is a transaction or other event in which an acquirer obtains control of one or more

businesses.
a. Business combination
b. Merger
c. Consolidation
d. Intercorporate directorship
2. The application of the acquisition method of accounting for a business combination
requires all of the following (choose the incorrect one)
a. Identifying the acquirer
b. Determining the acquisition date
c. Recognizing and measuring the identifiable assets acquired, the liabilities
assumed and any noncontrolling interest in acquiree.
d. Not recognizing goodwill or gain from bargain purchase
3. In a business combination, goodwill is measured as the excess of
a. The consideration transferred over the identifiable net assets acquired.
b. The total of the consideration transferred and the amount of any noncontrolling
interest in the acquiree over the identifiable net assets acquired.
c. The total of the consideration received and the fair value of the previously held
interest in the acquiree over the identifiable net assets acquired.
d. The total consideration received, the amount of any noncontrolling interest in the
acquiree and the fair value of previously held interest in the acquiree over the
identifiable net assets acquired.

4. A statutory merger is a(n)

a. Business combination in which only one of the two companies continues to exist as
a legal corporation
b. Business combination in which both companies continues to exist
c. Acquisition of a competitor
d. Legal proposal to acquire outstanding shares of the target's stock

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

5. Under PFRS 3:
a. Both direct and indirect costs are to be capitalized
b. Both direct and indirect costs are to be expensed
c. Direct costs are to be capitalized and indirect costs are to be expensed
d. Indirect costs are to be capitalized and direct costs are to be expensed

6. Michangelo Co. paid P100,000 in fees to its accountants and lawyers in acquiring Florence
Company. Michangelo will treat the P100,000 as
a. a prior period adjustment to retained earnings.
b. additional cost to investment of Florence on the consolidated balance sheet.
c. an expense for the current year.
d. a reduction in paid-in capital

7. Which of the following is included as part of the consideration given?

a. All expenses and liabilities relating to the acquisition
b. Indirect costs and contingent consideration
c. Direct and indirect acquisition costs attributable to the acquisition
d. Contingent consideration

8. When does the measurement period end for a business combination in which there was
incomplete information on the date of acquisition?
a. On the final date when all contingencies are resolved
b. Thirty days from the date of acquisition
c. At the end of the reporting period in the year of acquisition
d. When the acquirer receives the information or one year from the acquisition date,
whichever occurs earlier.

9. Company B has properly treated as expense P200,000 of research and development

costs that resulted in a patent. When Company A acquired Company B in a transaction
accounted for by the purchase method, it was determined that the patent had a value of
P500,000. Whichof the following statements is true?
a. The cost of the patent on the books of Company A should be the same as on the
books of Company B.
b. The cost of the patent on the books of Company A should be represented by the
legal costs involved in the patent process.
c. On the books of Company A, the patent should have a value of P200,000
because that was the cost to produce it.
d. The cost of the patent on the books of Company A should be P500,000.

10. Which of the following situations best describes a business combination to be accounted
for as a statutory merger?
a. One company transfers assets to another company it has created
b. Two companies combine to form a new third company, and the original two
companies are dissolved.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

c. Only one of the combining companies survives and the other loses its separate
identity.
d. Both companies in a combination continue to operate as separate, but related,
legal entities.

Summary information is given for P Company and S Company at July 1 , 2014. The quoted
market price of P Co.’s stock on July 1,2014 is P 32 per share.

P Company per S Company S Company Fair Values

books per books
Current Assets P 19,200,000 P 6,400,000 P 7,200,000
Plant assets 20,800,000 17,600,000 20,800,000
Liabilities 12,000,000 4,000,0000
Common stock 16,000,000 8,000,000
P 10 par
Additional paid in 800,000 800,000
capital
Retained earnings 11,200,000 11,200,000

Assume that the company issues 1,000,000 shares of its own stock for the net assets of S
Company on July 1,2014, in a purchase combination in which S Company is dissolved.
P Company incurred the following costs.
Legal fees to arrange the business combination P 20,000
Cost of SEC registration 9,600
Cost of printing and issuing stock certificates 2,400
Indirect cost of combining 16,000

11. The goodwill from the business combination is

a. P 10,000,000 b. P 10,025,000 c. P 10,040,000 d. P 8,000,000

12. The total RE of P Company immediately after the business combination is

a. P 13,980,000 b. P 14,000,000 c. 13,955,000 d. P 11,164,000

13. The total assets of P Company immediately after the business combination is
a. 68,000,000 b. 67,952,000 c. 76,000,000 d. 75,952,000

Bruno Mars Company acquired Billboard Company’s net assets by issuing its own P 14 par
value ordinary shares totaling 50,000 shares at market price of P 14.55. Bruno Mars
Company had the following expenditures incurred:

Finder’s fee paid P 50,000

Pre-acquisition audit fee, 30% was paid 40,000

General administrative costs 15,000

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Legal fees for the combination paid 32,000

Audit fees for SEC registration of share issue 46,000

SEC registration for the share issue paid 10,000

Share issuance costs paid 10,000

Other indirect costs paid 16,000

14. The total amount debited to expense should be

a. P 191,500 c. P 156,500
b. P 163,500 d. P 153,000

15. Palawan Co. issued 120,000 shares of P25 par ordinary shares for all the outstanding
stock of Sorsogon Co. inbusiness combination consummated on July 1, 2015. Palawan’s
ordinary shares were selling at P40 per shares at the time of the combination. In additional
cash payment of P200,000 was made and a deferred cash payment of P1,500,000
payable on July 1, 2016. Market rate of interest is 10%. Sorsogon’s net assets were P3.8
million at book value. Out of pocket costs of the combination were as follows: Legal and
accounting fees related with the issuance of shares – P 12,000; printing cost for stock
certificates – P9,400. A contingent consideration guaranteed by Palawan over ,the market
value of its issued shares not falling under a minimum amount is measured at P50,200.
The total cost of the investment is
a. P 6,363,637
b. P 6,413,837
c. P 6,388,200
d. P 6,366,147
Let’s Analyze

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

1. Distinguish statutory merger and statutory consolidation.

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48
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

______________________________________________________________________
______________________________________________________________________
____________________________________________

2. Discuss acquisition method in accounting for busines combination.

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In a Nutshell

PROBLE M 1

Agdao corporation paid P5,000,000 to purchase NCR corporation on January 2, 2013, and
NCR was dissolved. The purchase price consisted of 100,000 shares of agdao’s common
stock with a market value of P4,000,000 plus P1,000,000 cash. In addition, Agdao paid
100,000 for registering and issuing the 100,000 shares and P200,000 for other costs in
consummating the combination. The statement of Financial Position for the companies
immediately before combination is summarized as follows;

Agdao NCR

Book Fair Book Fair

Value value Value Value

Cash 6,000,000 6,000,000 480,000 480,000

Accounts Receivable (net) 2,600,000 2,450,000 720,000 720,000

Notes Receivable,(net) 3,000,000 2,900,000 600,000 600,000

Inventories 5,000,000 6,000,000 840,000 1,000,000

Other current assets 1,400,000 1,500,000 360,000 400,000

Land 4,000,000 6,000,000 200,000 400,000

Buildings, (net) 18,000,000 17,000,000 1,200,000 2,400,000

Equipment,(net) 20,000,000 18,550,000 1,600,000 1,200,000

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Total Assets 60,000,000 60,350,000 6,000,000 7,200,000

Accounts payable 2,000,000 2,000,000 600,000 600,000

Mortgage payable, 10% 10,000,000 10,500,000 1,400,000 1,200,000

Capital stock, P10 par 20,000,000 2,000,000

Additional Paid-in capital 16,000,000 1,200,000

Retained Earnings 12,000,000 800,000

Total Liabilities and

Shareholder's Equity 60,000,000 6,000,000

Compute for the following immediately after the business combinaton

a. Goodwill
b. Total assets
c. Total Liabilities
d. Total Equity

Question & Answer (Q&A)

You are free to list down all the emerging questions or issues in the provided spaces
below. These questions or concerns may also be raised in the LMS or other modes. You may
answer these questions on your own after clarification. The Q&A portion helps in the review
of concepts and essential knowledge.

Questions/Issues Answers

6.

7.

8.

9.

10.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Keywords

 Business Combination
 Statutory merger
 Goodwill

Big Picture in Focus: Apply accounting standards and procedures in

accounting for stock acquisition at the 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.

Parent- a company that has a controlling interest in another company, giving it control of its
operations

Subsidiary- a company that is owned or controlled by another company, which is called the parent
company, parent, or holding company.

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.

STOCK ACQUISITION

As far as the topic is concerned, the consideration given up to affect the business combination in
a stock acquisition is the same as the consideration given in a merger as previously discussed.
But in a stock acquisition, as the term itself, is the purchase of the stocks to gain control over an
entity. Note that in a stock acquisition, the parent acquires stocks from the shareholders of the
subsidiary and not directly from the company. If the acquired company issued shares to the
acquirer resulting to a control of the purchaser, the effect is a reverse acquisition. As a result, the
purchaser gained control over the company.

To start with a stock acquisition, the following must be determined:

a. The acquiring company and the company whose stock are being acquired;
b. The date of acquisition;
c. The control the acquirer gained as a result of the stock acquisition.
d. The fair value of the net identifiable assets.
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 DEPARTMENT OF ACCOUNTING EDUCATION
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Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

e. The method of measuring goodwill and non-controlling interest

In a stocks acquisition, the acquiring company deals only with existing shareholders of the
acquired company not the company itself. To illustrate, assume that on December 31, 2017, P
Company acquired all 10, 000 issued and outstanding shares of S Company’s P 100 par value
common stock for P 2, 000, 000 cash. In addition, P Company paid professional fees to accomplish
the combination of P 100, 000. The journal entries to record the acquisition of stock and the
acquisition-related cost in the books of P Company on December 31, 2017 are as follows:

(1) To record the acquisition of stock from S Company:

Investment in subsidiary S Company 2, 000, 000

Cash 2, 000, 000

(2) To record the acquisition-related costs:

Acquisition expense 100, 000

Cash 100, 000

The above entries do not record the individual underlying assets and liabilities over which control
is achieved. Instead, the acquisition is recorded in an Investment account that represents the
controlling interest in the net assets of the subsidiary. On the date of acquisition of stock, no
goodwill or income from acquisition is recorded by the acquirer. These are to be recognized only
in the consolidated financial statements. After the acquisition, S Company will not be dissolved. A
relationship now exists that of parent/subsidiary relationship. P Company is now the parent and S
Company is now the subsidiary.

If no further action is taken, the Investment in Subsidiary account would appear as a long-term
investment on P Company’s Separate Statement of Financial Position. However, such
presentation is permitted only if consolidation were not required (i.e., when control does not exist).

Assuming consolidated statements are required (i.e., when control exist), the Statement of
Financial Position of the two companies must be combined into a single Consolidated Statement
of Financial Position. Consolidated financial statements are accounting process in the preparation
of consolidation statements will be discussed in the chapter that follow.

52
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

METHOD OF MEASURING GOODWILL AND NON-CONTROLLING INTEREST

1. Full-Goodwill Approach or Fair Value Option – in this method, goodwill will be recognized
and allocated in the part of the non-controlling interest.

2. Partial-Goodwill Approach or Proportionate Basis of Goodwill – the goodwill/(gain on

acquisition) will only allocated to the controlling interest.

If the problem is silent, the Full-Goodwill Approach is used whenever it is applicable. But there are
instances that the Full-Goodwill approach is inapplicable. According to IFRS 3, paragraph 32, the
acquirer shall recognize goodwill as of the acquisition date measured as the excess of the (a) over
(b):

a. The aggregate of:

1. Consideration transferred
2. Non-controlling interest
b. Fair value of the net assets

And if the amount of the Fair value of net assets is in excess of the aggregate amount of the
consideration transferred and the non-controlling interest, the business combination will result into
a gain on acquisition:

Note: In the separate allocation of goodwill, the amount of the fair value of the net assets
attributable to the controlling interest can be in excess of the consideration transferred, but, the
fair value of the net assets attributable to the non-controlling interest can NEVER be in excess of
the FV of the non-controlling interest.

If the company resulted into a gain on acquisition, no part of the gain shall be allocated to the non-
controlling interest.

Reason: The parent acquires the subsidiary because the acquired company has worth to the
acquiring company. Thus, we should never assess the fair value of the non-controlling interest
lower than the fair value of the net assets attributable to the non-controlling interest.

Case 1: To further illustrate, assume that JN Corporation acquired MM Company at a price of

P4,000,000 for a 80% interest in the company. The fair value of the net identifiable assets of MM
amounts to P3,000,000. In this case, the fair value of the non-controlling interest is not given and
it is silent on what measurement approach is used. Then we should use the Fair value approach
if possible and assume an amount of the fair value of non-controlling interest from the
consideration transferred.

53
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

You will notice that the assumed fair value of non-controlling interest is not lower than the fair value
of the net assets attributable to the non-controlling interest. Therefore, the amount of the fair value
of the non-controlling interest is valid.

Total Goodwill from business combination: 2,000,000

Amount of non-controlling interest: 1,000,000

Assume further that the company uses the proportionate basis in measuring the goodwill and the
FV of NCI.

Case 2: Assume that JN Corporation acquired MM Company at a price of P4,000,000 for a 80%
interest in the company. The fair value of the net identifiable assets of MM amounts to P3,000,000.
The fair value of the non-controlling interest as of the date of acquisition amounts to P650,000.

54
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

There is no need to assume a fair value of non-controlling interest because it is already determined
as of the date of acquisition.

Total goodwill from business combination: 1,650,000

Amount of non-controlling interest: 650,000

Assume further that the company uses the proportionate basis in measuring the goodwill and the
FV of NCI.

We will still refer to the method used by the entity despite the determined fair value of
noncontrolling interest.

Case 3: Assume that JN Corporation acquired MM Company at a price of P4,000,000 for a 80%
interest in the company. The fair value of the net identifiable assets of MM amounts to P3,000,000.
The fair value of the non-controlling interest as of the date of acquisition amounts to P550,000.

In this scenario, we cannot use the given fair value of the non-controlling interest because it is
lower than the fair value of the net assets attributable to the non-controlling interest. Always be
reminded that there should never be a negative goodwill attributable to the non-controlling interest.
Even if the company will use the fair value approach, it is inappropriate in this scenario. Therefore
we should use the proportionate approach.

Important: In every problem, always and all the time, check if the fair value attributable to the non-
controlling interest exceeds in the amount of the fair value of net asset.

55
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Case 4: Assume that JN Corporation acquired MM Company at a price of P4,000,000, including

a P500,000 control premium, for a 80% interest in the company. The fair value of the net
identifiable assets of MM amounts to P3,000,000.

Control premium – the excess amount over the market acquisition price that the buyer is willing
to pay in order to gain control.

It should be accounted for as part of the controlling interest only, therefore we should avoid
allocating any part of this control premium in accounting for the fair value of the non-controlling
interest. If we will assume an amount of the non-controlling interest, we should exclude the amount
of the control premium in the consideration transferred.

If the amount of the control premium in already excluded in the consideration transferred, the
whole P4,000,000 will be considered in assuming the fair value of the non-controlling interest

Case 5: Assume that JN Corporation acquired MM Company at a price of P4,000,000, including

a P500,000 control premium, for a 80% interest in the company. The fair value of the net
identifiable assets of MM amounts to P4,500,000. Controlling Interest(80%) N

In this scenario, we cannot use the assumed fair value of non-controlling interest of P875,000
because it is lower than the fair value of net asset attributable to the non-controlling interest.
Therefore, we will use the proportionate approach.

56
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

STEP ACQUISITION

Business combination may be achieved in stages. When a transaction results into gaining of
control from no control, because of additional stocks purchased, the event is considered to be a
step acquisition. For example, an investment in equity securities or an investment in associate
becomes an investment in subsidiary by purchasing additional stocks of the subsidiary.

According to IFRS 3, paragraph 42, in a business combination achieved in stages, the acquirer
shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value
and recognize the resulting gain or loss, if any, in profit or loss or other comprehensive income,
as appropriate.

To illustrate further, these are two independent scenarios when a company gains control over an
entity in a step acquisition.

Case 1: From investment in equity securities to investment in subsidiary Pause Corporation

acquires 15% of Stop Company for P500,000 on January 1, 2017. After 5 months, Pause acquired
an additional 55% interest for P2,750,000. The fair value of the 30% noncontrolling interest as of
this date amounts to P1,600,000.

The fair value of the net assets of Stop Company amounts to P4,500,000. In this scenario, the
business combination has effected from the purchase of additional stocks for another 55% interest.
The P500,000 equity security will be remeasured to P750,000 (P2,750,000/55% x 15%) before
the business combination. The gain of P250,000 will be taken to profit or loss if the equity security
previously held is measure as fair value through profit or loss. But if it is measured previously at
fair value through other comprehensive income, the gain is taken into other comprehensive
income.

The determination of goodwill are as follows:

Case 2: From investment in associate to investment in subsidiary. Pause Corporation has an

investment in associate on January 1, 2017 with a book value of P2,400,000. This equity
investment represents 25% interest from Stop Company. On March 1, 2017, Stop company
57
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

declared and gave Pause Corporation a dividend of P250,000. On July 1, 2017, Pause
Corporation acquired stocks and gained another 35% interest of Stop Company for P3,850,000
and a business combination took place. The net income of Stop Company for the 6- month period
amounts to P1,500,000. The fair value of net assets of Stop Company as of the business
combination amounts to P10,000,000 while the fair value of the non-controlling interest is
P4,200,000.

The investment in associate should be adjusted first to its updated book value as of July 1, 2017.
The computation are as follows:

The adjusted book value will be remeasured to the fair value of P2,750,000 (P3,850,000/35% x
25%). The difference of P225,000 will be taken into the profit and loss portion of the statement of
comprehensive income. The goodwill from business combination should be therefore computed
as follows:

INITIAL ELIMINATING ENTRIES PERTINENT TO A STOCK ACQUISITION

The purpose of eliminating entries in the working papers during a business combination by stock
acquisition is to consolidate the companies for the presentation of the consolidated financial
statements. The eliminating entries are as follows:

58
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Illustration 1: Date of Acquisition- 100 % Owned Subsidiary

Peer Company acquires all of Sky Company’s outstanding stock on January 1, 2014, by paying
P 340, 000 cash, and immediately prepares a consolidated balance sheet. The separate balance
sheets of the two companies immediately prepared before the consolidation with acquiree’s fair
value were presented as follows:

59
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Schedule of Determination and Allocation of Excess

Date of Acquisition- January 1, 2014

60
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Peer Company records the stock acquisition on its books with the following entry on the
date of acquisition:

The schedule of determination and allocation of excess provides complete guidance for the
worksheet eliminating entries on January 1, 2014:

61
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Balance Sheet, January 1, 2014. Date of Acquisition; 100%-
Owned Subsidiary.

62
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Illustration 2: Subsidiary has a recorded goodwill at acquisition date

Using the same illustration in Illustration 1 except that the consideration transferred consist of
P240,000 cash and 10,000 common shares of Peer Co. with a fair value of 12 per share. The
following cost were incurred:

Indirect cost P 10,000

Cost to issue and register stocks 7,000
The separate balance sheet of Sky Co. immediately prepared before the consolidation with fair
values were presented as follows:

63
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Schedule of Determination and Allocation of Excess

64
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Peer Company records the stock acquisition on its books with the following entry on the
date of acquisition:

The schedule of determination and allocation of excess provides complete guidance for the
worksheet eliminating entries on January 1, 2014:

65
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Balance Sheet, January 1, 2014. Date of Acquisition; 100%-
Owned Subsidiary.

66
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Illustration 3: Bargain purchase gain

Using the same information in Illustration I, except that Peer Company acquired the issued
shares of Sky Company giving in exchange of 20,000 shares in Peer Company with a fair value
of 14 per share. At acquisition date, Sky has an unrecorded patent with a fair value of P 20,000
and a contingent liability with a fair value of P 15,000. This contingent liability relates to a loan
guarantee made by Sky Company which did not recognize a liability in its records because it did
not consider it could be measure reliably.

67
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Schedule of Determination and Allocation of Excess

Peer Company records the stock acquisition on its books with the following entry on the date
of acquisition

The schedule of determination and allocation of excess provides complete guidance for the
worksheet eliminating entries on January 1, 2014:

68
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Balance Sheet, January 1, 2014. Date of Acquisition; 100%-
Owned Subsidiary.

69
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Consolidation Balance Sheet: The use of Workpapers (Partially-owned)

Illustration 4: 80%- Owned Subsidiary

Peer Company acquires 80% of Sky Company’s outstanding stock on January 1, 2014 by paying
P 300, 000 cash, and immediately prepares a consolidated balance sheet. Peer also pay P 12,
000 indirect costs to accomplish the purchase. The separate balance sheets of the two companies
immediately prepared before the consolidation with acquiree’s fair value were presented as
follows:

Assets Peer Co. Sky Co. Sky Co.

Book Value Book Value Fair Value
Cash 350,000 50,000 50,000
Accounts receivable 75,000 50,000 50,000
Inventory 100,000 60,000 75,000
Land 175,000 40,000 100,000
Buildings and equipment 800,000 600,000 290,000
Accumulated depreciation - 400,000 - 300,000
70
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Total Assets 1,100,000 500,000 565,000

Liabilities and Stockholders' Equity

Accounts payable 100,000 100,000 100,000
Bonds payable 200,000 100,000 135,000
Common stock, P10 par 500,000 200,000
Paid in capital in excess of par 50,000 20,000
Retained earnings 250,000 80,000

Stockholders' Equity 1,100,000 500,000

Partial- goodwill Approach

Under the partial-goodwill approach, the NCI is measured at the NCI’s proportionate share
of the acquiree’s identifiable net assets. The NCI therefore does not get a share of any equity
relating to goodwill. The only goodwill recognized is that acquired by the parent in the business
combination – hence, the term “partial-goodwill”.

According to PFRS 3, using the measurement of the NCI share of equity based on the NCI’s
proportionate share of the acquiree’s identifiable net assets. The resulting ownership situation can
be viewed in the schedule of determination and allocation of excess.

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

Date of Acquisition- January 1, 2014

Fair value of Subsidiary (80%)

Consideration transferred
300,000
Less: Book value of stockholders' equity of Sky:
Common stock
(P200,000X80%) 160,000
Paid-in capital in excess of par (P200,000x80%)
16,000
Retained earnings (80,000x80%)
64,000 240,000
Allocated excess (excess of costs over book value)
60,000
Less: Over/under valuation of assets and liabilities:

71
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Increase in inventory (P15,000x80%)

12,000
Increase in land
(P60,000x80%) 48,000
Decrease in buildings and equipment
(P10,000x80%) -
8,000
Increase in bonds payable (P35,000x80%) -
28,000 24,000
Positive excess: Partial-goodwill (excess of cost over
fair
value) 36,000

Peer Company records the stock acquisition on its books with the following entries on the
date of acquisition:

The schedule of determination and allocation of excess provides complete guidance for the
worksheet eliminating entries on January 1, 2014

72
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Balance Sheet, January 1, 2014. Date of Acquisition: 80%-
Owned Subsidiary (Partial-goodwill).

73
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Peer Company and Subsidiary

Consolidated Balance Sheet
January 1, 2014

74
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Schedule of Determination and Allocation of Excess (Full-goodwill) Date of Acquisition-

January 1, 2014

Peer Company records the stock acquisition on its books with the following entries on the
date of acquisition:

75
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

The schedule of determination and allocation of excess provides complete guidance for the
worksheet eliminating entries on January 1, 2014.

76
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Balance Sheet, January 1, 2014. Date of Acquisition: 80%-
Owned Subsidiary (Full-goodwill)

77
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Peer Company and Subsidiary

Consolidated Balance Sheet

January 1, 2014

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.

78
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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. This is defined as "the financial statements presented by a parent in which the investments
are accounted for on the basis of the direct equity interest".
a. Single financial statements
b. Separate financial statements
c. Combined financial statements
d. Consolidated financial statements

2. Control is the
I – Power to govern the financial and operating policies of an entity so as to obtain benefits
from its activities.
II – Power to participate in the financial and operating policy decisions of the investee.
a. I only c. Both I and II
b. II only d. Neither I nor I

3. 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

4. Consolidated financial statements are

I. The financial statements of a group presented as those of a single economic entity.
II. Those presented by a parent, an investor in an associate, or a venture in jointly
controlled
entity, in which the investments are accounted for on the basis of the direct equity
interest rather than on the basis of the reported results and net assets of the
investee.
a. I only c. Both I and II
b. II only d. Neither I nor II

79
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

5. In a business combination achieved in stages, the acquirer shall

A. Not remeasure the previously held equity interest.
B. Remeasure the previously held interest at fair value with any resulting gain or loss
included in profit or loss.
C. Remeasure the previously held interest at fair value with any resulting gain or loss
included in other comprehensive income.
D. Remeasure the previously held interest at fair value with any resulting gain or loss
included in retained earnings.
6. A parent entity is acquiring a majority holding in an entity whose shares are dealt in on a
recognized market. Under PFRS 3, which of the following measurement bases may be used
in measuring the noncontrolling interest at the acquisition date?
I. Fair value of the noncontrolling interest in the acquiree
II. A proportionate share of the acquiree’s identifiable net assets.
A. I only C. Both I and II
B. II only D. Neither I nor I

7. Control is presumed to exist when the parent owns directly or indirectly through subsidiaries
a. More than half of the equity of an entity.
b. More than half of the ordinary shares of an entity.
c. More than half of the preference and ordinary shares of an entity
d. More than half of the voting power of an entity.

8. Noncontrolling interest shall be presented in the consolidated statement of financial

position
A. Separately from liabilities and the parent shareholders’ equity.
B. Within equity, separately from the parent shareholders’ equity.
C. As noncurrent liability
D. As component of the parent shareholders’ equity

9. Consolidated financial statements are

I. The financial statements of a group presented as those of a single economic entity.
II. Those presented by a parent, an investor in an associate, or a venture in jointly
controlled entity, in which the investments are accounted for on the basis of the direct
equity interest rather than on the basis of the reported results and net assets of the
investee.
a. I only
b. II only
c. Both I and II
d. Neither I nor II

80
The statemet of financial Position of Lancer Corporation on June 30, 2013 is presented
below:

Current Assets 32,500

Land 220,000
Building 110,000
Equipment 87,500
Total Assets 450,000

Liabilities 87,500
Capital stock, P5 par 150,000
Additional paid in capital 137,500
Retained earnings 75,000
Total Equities P450,000
All the assets and liabilities of Lancer assumed to approximate their fair values except for
land and building. It is estimated that the land have a fair value of P350,000 and the fair
value of the building increased by P80,000. Krista Corporation acquired 80% of Lancer’s
capital stock for P500,000. The fair value of non-controlling interest was 130,000 on June
30, 2013.
10. What amount of goodwill (partial) will be reported?
a. P57,500 c. P67,500
b. P42,000 d. P 40,000
11. What amount of goodwill (full) will be reported?
a. P57,500 c. P67,500
b. P42,000 d. P40,000
12. What amount will be reported as non-controlling interest (partial)?
a. P114,500 c. P130,000
b. P 125,000 d. P 72,500
13. What amount will be reported as non-controlling interest (full-goodwill)?
a. P114,500 c. P 130,000
b. P125,000 d. P 72,500

On January 1, 2016, Ashley Corp. purchased 80% of the common stock of Racks Corp.
Separate balance sheet data for the companies at the combination date are given below:
Ashley Racks
Cash P 84,000 P721,000
Trade Receivable 504,000
91,000
Merchandise Inventory 462,000
133,000
Land 273,000
112,000
Plant Assets 2,450,000
1,050,000
Accumulated Depreciation (840,000)
(210,000)
Investment in Racks 1,372,000

81
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Total Assets P4,305,000 P1,897,00

0

Accounts Payable P 721,000 P

497,000
Capital Stock 2,800,000
1,050,000
Retained Earnings 784,000
350,000
Total Equities P4,305,000 P
1,897,000

At the date of combination the book values of Racks net assets was equal to the fair value
of the net assets except for Rack’s inventory which has a fair value of P210,000..
14. What amount will be reported as total stockholders’ equity in the consolidated balance
sheet prepared immediately after the business combination?
a. 3,584,000 b. P 4,984,000 c. P 1,400,000 d. 3,927,000

15. What amount of goodwill (full) be reported in the separate financial statement of
Ashley Corporation?
a. 0 b. 315,000 c. 238,000 d. 200,000

16. What amount of total assets be reported in the consolidated balance sheet prepared
immediately after the business combination?
a. P 6,202,000 b. 4,830,000 c. 4,907,000 d. P 5,145,000

Minor Corporation reports net assets of P300,000 at book value. These assets have an
estimated market value of P350,000. If Major Corporation buys 80 percent ownership of
Minor for P275,000,

17. Goodwill will be reported in the consolidated balance sheet in the amount of:
a. P0 b. P25,000 c. P35,000 d. P40,000

18. The non-controlling interest will be reported in the amount of:

a. P55,000 b. P60,000 c. P70,000 d. P68,750

Best Company has gained control over the operations of Cure Corporations by acquiring
85% of its outstanding capital stock for P 2,580,000. This amounts includes a control
premium of P30,000. Acquisition expenses, direct and indirect, amounted to P83,000 and
P42,000 respectively.

82
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Best Cure
Book Value Book Value Fair Value
Cash P3,541,500 P128,000
Accounts Receivable 300,000 325,000
Inventories 550,000 360,000
Prepaid Expense 148,500 125,000
Land 2,350,000 879,000
Building 1,560,000 558,000
Equipment 300,000 185,000
Goodwill 300,000
Total Assets P8,750,000 P2,860,000

Accounts Payable 675,000 253,000

Notes Payable 1,400,000 730,000
Capital Stock,50 Par 3,400,000 800,000
Additional Pain in Capital 1,575,000 600,000
Retained Earnings 1,700,000 477,000
Total Equities P8,750,000 P2,860,000

The following was ascertained on the date of acquisition for Cure Corporation:
 The value of receivables and equipment has decreased by P25,000 and
P14,000 respectively.
 The fair value of inventories is now P436,000 whereas the value of land anfair
value of and building has increased by P471,000 and P107,000 respectively.
There was an unrecorded accounts payable amounting to P27,000 and the fair value of
notes is P738,000.
Compute for the following balances to be presented in the consolidated statement of
financial position at the date of business combination:
19. Total assets
A. P9,875,000
B. P10,093,000
C. P10,112,000
D. P9,215,000

20. Shareholder’s equity

A. P7,000,000
B. P7,500,000
C. P8,200,000
D. P8,000,00

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Let’s Analyze

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

1. Distinguish full and partial methods in measuring goodwill and non-controlling interest.
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2. Discuss the consolidation process at the date of acquisition.

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In a Nutshell

PROBLEM 1
On September 1, 2016, Paul acquires 75% (750,000 ordinary shares) of Salas Company for
P7,500,000 when Salas’ shares are trading at P8 per share at the stock market. An
independent appraiser estimated that the fair value of Salas is P9,700,000. Assuming that
the net identifiable assets with a carrying value of P6,000,000 has a fair value of P8,000,000
determine the following:

a. Non-controlling interest and Goodwill/gain if the non-controlling interest is to be valued

at the proportionate allocation of acquiree’s net assets.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

b. Non-controlling interest and Goodwill/gain if the non-controlling interest is to be valued

at the fair value of shares held by NCI.

PROBLEM 2
The Statement of Financial Position of Iyay Corporation on June 30, 2016 is presented below:

Current assets P32,500

Land 220,000
Building 110,000
Equipment 87,500
Total Assets P450,000

Liabilities 87,500
Capital stock, 5 par 150,000
Additional paid in capital 137,500
Retained earnings 75,000
Total equities P450,000
All the assets and liabilities of Iyay assumed to approximate their fair values except for Land
and Building. It is estimated that the land have a fair value of P350,000 and the fair value of
the building increased by P80,000.

Hubert Corporation acquired 80% of Iyay’s capital stock for P500,000.

Required

1. Assuming the consideration paid includes control premium of P142,000, how much is
the goodwill/(gain on acquisition) on the consolidated financial statement?
2. Assuming the consideration paid excludes control premium of P23,000 and the fair
value of the non-controlling interest is P122,750, how much is the goodwill/(gain on
acquisition) on the consolidated financial statemen7t?
3. Assuming the consideration paid includes control premium of P37,000, how much is
the goodwill/(gain on acquisition) on the consolidated financial statement if NCI is
valued using the proportionate basis?

Question & Answer (Q&A)

You are free to list down all the emerging questions or issues in the provided spaces
below. These questions or concerns may also be raised in the LMS or other modes. You may
answer these questions on your own after clarification. The Q&A portion helps in the review
of concepts and essential knowledge.

Questions/Issues Answers

1.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

2.

3.

4.

5.

Keywords

 Separate financial statements

 Consolidated financial statements
 Full goodwill
 Partial goodwill

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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 –

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

 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.)

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
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Telefax: (084)655-9591 Local 116

 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.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

First year of Acquisition

Parent Company Cost Model Entry

Consolidation Workpaper- First year of acquisition

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Consolidated net income for 2014

Consolidated retained earnings

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Consolidated Income Statement-December 31,2014

Consolidated Income Balance Sheet-December 31,2014

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
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Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Financial Statements, December 31, 2015 – Cost Model 100%
Owned subsidiary

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
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Consolidated Income Statement-December 31,2015

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
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EQUITY METHOD
First year after acquisition
Parent Company Equity Method Entry

Income statement of Perfect and Son for 2014

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
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Investment in Son Company balance as of December 31,2014

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Financial Statements, December 31, 2014 – Equity Model 100%
Owned subsidiary

Second year of Acquisition

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
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Income statement of Perfect and Son for 2015

Parent Company Equity Method Entry

Investment in Son Company balance as of December 31,2015

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
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Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Financial Statements, December 31, 2015 – Equity Model 100%
Owned subsidiary

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 DEPARTMENT OF ACCOUNTING EDUCATION
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Mabini Street, Tagum City
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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:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
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Mabini Street, Tagum City
Davao del Norte
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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

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Consolidation Workpaper – Year of Acquisition

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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:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
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Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Financial Statements, December 31, 2014.

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
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Mabini Street, Tagum City
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The consolidated net income and non-controlling interest in consolidated net income which can be
verified can also be computed as follows:

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 DEPARTMENT OF ACCOUNTING EDUCATION
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Mabini Street, Tagum City
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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

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Bachelor of Science in Accountancy
Mabini Street, Tagum City
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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.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
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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:

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Bachelor of Science in Accountancy
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
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Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Financial Statements, December 31, 2015

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

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Mabini Street, Tagum City
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
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Alternatively, NCI on December 31, 2015 may also be computed as follows:

Consolidated Income Statement-2015

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Consolidated Balance Sheet-2015- Partial Goodwill

EQUITY METHOD- (Partial goodwill)

First year of Acquisition
Parent Company Equity Method Entry

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Consolidation Workpaper- First year of Acquisition

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Financial Statements, December 31, 2014.

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Second year of Acquisition

Income statement of Perfect and Son for 2015

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Parent Company Equity Method Entry

Consolidation Workpaper- Second year after Acquisition

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Financial Statements, December 31, 2015.

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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

Schedule of Determination and Allocation of Excess

Date of Acquisition – January 1, 2014

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

*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.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Financial Statements, December 31, 2014.

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Alternatively, NCI on December 31, 2014 may also be computed as follows:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Consolidated Income Statement-2014

Consolidated Balance Sheet 2014-Full Goodwill

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet of Consolidated Financial Statement, December 31, 2015.

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

The consolidated retained earnings and non-controlling interest which can be verified can also be
computed as follows:

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Consolidated Income Statement-2015

145
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Consolidated Balance Sheet – December 31,2015 (Full goodwill)

EQUITY METHOD- (Full goodwill)

First year of Acquisition
Parent Company Equity Method Entry

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Consolidation Working Paper- First year of Acquisition

147
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Financial Statements, December 31, 2014.

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

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Second year of Acquisition

Income statement of Perfect and Son for 2015

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Parent Company Equity Method Entry

Consolidation Workpaper-Second year of Acquisition

150
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

151
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Worksheet for Consolidated Financial Statements, December 31, 2015.

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

152
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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.

153
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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:
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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:
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

___________________________________________________________________________
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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
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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
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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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)

You are free to list down all the emerging questions or issues in the provided spaces
below. These questions or concerns may also be raised in the LMS or other modes. You may
answer these questions on your own after clarification. The Q&A portion helps in the review
of concepts and essential knowledge.

Questions/Issues Answers

1.

2.

3.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

4.

5.

Keywords

 Consolidated net income attributable to parent+

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

Big Picture D

Week 8-9: Unit Learning Outcomes (ULO ): At the end of the unit, you are expected to:

a. Apply accounting standards and procedures in accounting for intercompany

sale of inventories
b. Apply accounting standards and procedures in accounting for intercompany
sale of plant assets

Big Picture in Focus: Apply accounting standards and procedures in

accounting for intercompany sale of inventories

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.

Upstream sale- sales from subsidiary to parent

Downstream sale- sales from parent to subsidiary

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.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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 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.

The table below 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

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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.

162
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Illustration 1
Percy Company owns 80% of the common stock of Smyth Company. Percy sells
merchandise to Smyth at 20% above cost. During 2018 and 2019, intercompany sales
amounted to P1,080,000 and P1,200,000 respectively. At the end of 2018, Smyth had one-
fifth of the goods purchased that year from Percy in its ending inventory. Smyth’s 2019 ending
inventory contained one-fourth of that year’s purchases from Percy. There were no
intercompany sales prior to 2018. Percy reported net income from its own operations of
P720,000 in 2018 and P760,000 in 2019. Smyth reported net income of P400,000 in 2018
and P460,000 in 2019. Neither company declared dividends in either year

Required:
a. Prepare in general journal form all entries necessary on the consolidated statements
workpapers to eliminate the effects of the intercompany sales for both 2018 and 2019.

b. Calculate controlling interest in consolidated net income for 2018 and 2019.

163
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

164
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Illustration 2
Payton Company owns 90% of the common stock of Sanders Company. Sanders Company
sells merchandise to Payton Company at 25% above cost. During 2018 and 2019 such sales
amounted to P800,000 and P1,020,000, respectively. At the end of each year, Payton
Company had in its inventory one-fourth of the amount of goods purchased from Sanders
Company during that year. Payton Company reported income of P1,500,000 from its
independent operations in 2018 and P1,720,000 in 2019. Sanders Company reported net
income of P600,000 in each year and did not declare any dividends in either year. There
were no intercompany sales prior to 2018.

Required:

a. Prepare, in general journal form, all entries necessary on the 2018 and 2019 consolidated
statements work paper to eliminate the effects of intercompany sales.
b. Calculate the amount of noncontrolling interest to be deducted from consolidated income
in the consolidated income statement in 2018 and 2019.
c. Calculate controlling interest in consolidated net income for 2018 and 2019.

165
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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:

166
 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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. Non-controlling interest in consolidated income is never affected by

b. Upstream sales
c. Non-controlling interest is affected by all sales
d. Downstream sales
e. Depending on the situation

2. The material sale of inventory items by a parent company to an affiliated company:

a. Enters the consolidated revenue computation only if the transfer was the result of
arm’s length bargaining
b. Affects consolidated net income under a periodic inventory system but not under a
perpetual inventory system
c. Does not result in consolidated income until the merchandise is sold to outside parties
d. Does not require a working paper adjustment if the merchandise was transferred at
cost

3. Failure to eliminate intercompany sales would result in an overstatement of consolidated

a.Net income b. Gross profit c. Cost of sales d. All of these

4. Which of the following describes the impact on consolidated financial statements of

upstream and downstream transfer?
a. No difference exists in consolidated financial statements between upstream and
downstream transfers
b. Downstream transfers affect the computation of the non-controlling interest’s share
of the subsidiary’s income but upstream transfers do not
c. Upstream transfers affect the computation of the non-controlling interest’s share of
the subsidiary’s income but downstream transfers do not
d. Downstream transfers can be ignored because the parent company makes them

P Company acquires a 90% in corporation at book value on January 1, 2015. Intercompany

purchases and sales and inventory data for 2015, 2016 and 2017 are as follows:

Sales by S to P Intercompany profit in P’s inventory at

December 31
2015 P 2,000,000 P 150,000
2016 P 1,500,000 P 120,000
2017 P 3,000,000 P 240,000

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Selected data from the financial statements of P and S for the year ended December 31,
2017

Income Statement P S
Sales P 9,000,000 P 6,000,000
Cost of Sales P 6,250,000 P 3,000,000
Expenses P 2,250,000 P 1,500,000
Income from S P1,242,000
5. Consolidated sales for 2017 must be
a.15,000,000 b. 12,000,000 c. 9,000,000 d. 6,000,000
6. Consolidated cost of sales for 2017 must be
a.9,250,000 b. 6,250,000 c. 6,490,000 d. P 6,370,000
7. Consolidated net income for 2017 must be
a.P 1,242,000 b. 1,742,000 c. 2,000,000 d. 1,880,000

On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. At this time, Piglet's net
identifiable assets have a carrying amount of ₱720,000 which approximates fair value.

During the last month of the year, Piglet sold goods to Pig for ₱324,000. Piglet had marked
up these goods by 50% on cost. One-third of these goods remain unsold at year-end. The
group assessed that there is no impairment loss on goodwill for the current year.

The individual statements of profit or loss of the entities for the year ended December 31,
20x1 are shown below:

Pig Co. Piglet Co.

Revenue 4,000,000 2,880,000

Cost of sales (1,600,000) (1,200,000)

Gross profit 2,400,000 1,680,000

Distribution costs (800,000)

Administrative costs (320,000) (180,000)

Profit before tax 1,280,000 1,100,000

Income tax expense (384,000) (380,000)

Profit after tax 896,000 720,000

All of Piglet’s income and expenses (including profit from inter-company sale) were earned
and incurred evenly during the year.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

8. How much is the consolidated sales?

a. 6,556,000 b. 4,852,000 c. 4,786,000 d. 4,636,000

9. How much is the consolidated cost of sales?

a. 1,712,000 b. 2,530,000 c. 1,730,000 d. 1,876,000

10. How much is the profit attributable to owners of the parent and NCI, respectively?
Owners of Parent NCI
a. 1,040,000 60,000
b. 1,049,000 51,000
c. 1,036,000 544,000
d. 1,049,000 311,000
Let’s Analyze

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

1. Distinguish upstream sale and downstream sale.

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2. Discuss the effect if intercompany sale is not eliminated.

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

In a Nutshell

PROBLEM 1
Petrel Corporation acquired a 60% interest in Salt Corporation on January 1, 2018, at a
cost equal to book value and fair value. Salt reports net income of P880,000 for 2018.
Petrel regularly sells merchandise to Salt at 120% of Petrel’s cost. The intercompany sales
information for 2018 is as follows:
Intercompany sales at selling price P 672,000
Value of merchandise remaining unsold by Salt 132,000

Required:
1. Determine the unrealized profit in Salt’s inventory at December 31, 2018.
2. Compute Petrel’s income from Salt for 2018.

PROBLEM 2

Colton Company acquired 80 percent ownership of Mota Company's voting shares on

January 1, 2018, at underlying book value. The fair value of the noncontrolling interest on
that date was equal to 20 percent of the book value of Mota Company. During 2018, Colton
purchased inventory for P30,000 and sold the full amount to Mota Company for P50,000. On
December 31, 2018, Mota's ending inventory included P10,000 of items purchased from
Colton. Also in 2018, Mota purchased inventory for P80,000 and sold the units to Colton for
P100,000. Colton included P30,000 of its purchase from Mota in ending inventory on
December 31, 2018. Summary income statement data for the two companies revealed the
following:

Colton Company Mota Company

Sales P 300,000 P 172,000
Income Subsidiary 39,000
P 339,000 P 172,000
Cost of goods sold 190,000 110,000
Other Expenses 45,000 29,000
Net Income P 104,000 P 33,000
Required:
a. Compute the amount to be reported as sales in the 2018 consolidated income statement.
b. Compute the amount to be reported as cost of goods sold in the 2018 consolidated income
statement.
c. What amount of income will be assigned to the noncontrolling shareholders in the 2018
consolidated income statement?
d. What amount of income will be assigned to the controlling interest in the 2018 consolidated
income statement?

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 DEPARTMENT OF ACCOUNTING EDUCATION
Bachelor of Science in Accountancy
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Question & Answer (Q&A)

You are free to list down all the emerging questions or issues in the provided spaces
below. These questions or concerns may also be raised in the LMS or other modes. You may
answer these questions on your own after clarification. The Q&A portion helps in the review
of concepts and essential knowledge.

Questions/Issues Answers

1.

2.

3.

4.

5.

Keywords
 Upstream sale
 Downstream sale
 Selling affiliate
 Buying affiliate

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 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Big Picture in Focus: Apply accounting standards and procedures in accounting for
intercompany sale of inventories

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.

Carrying amount - is the cost of an asset less accumulated depreciation.

Plant assets- an asset with a useful life of more than one year that is used in
producing revenues in a business's operations.

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 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).

172
DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

173
 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Illustration 1
Spiniflex Pigeon Company owns 90% of the outstanding stock of Waterhole
Corporation. This interest was purchased on January 1, 2009, when Waterhole’s
book values were equal to its fair values. The amount paid by Spiniflex Pigeon
included P10,000 for goodwill.
On January 1, 2013, Spiniflex Pigeon purchased equipment for P100,000 which had
no salvage value with a useful life of 8 years. on a straight-line basis. On January 1,
2018, Spiniflex Pigeon sold the truck to Waterhole Corporation for P40,000. All
affiliates use the straight-line depreciation method.
Required:

Prepare all relevant entries with respect to the truck.

1. Record the journal entries on Spiniflex Pigeon’s books for 2018.
2. Record the journal entries on Waterhole’s books for 2018.
3. Give all eliminating entries needed to prepare a consolidation workpaper for
2018 and 2019.
Requirement 1: Spiniflex Pigeon’s books

Requirement 2: Waterhole’s books

Requirement 3: Consolidation working paper 2018 and 2019

174
 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Illustration 2
Pringle Company owns 80% of the shares outstanding of Seely Corporation. Seely
Corporation sold equipment to Pringle Company on January 1, 2018 for P740,000.
The equipment was originally purchased by Seely Corporation on January 1, 2014 for
P1,280,000 and at that time its estimated depreciable life was 8 years. The equipment
is estimated to have a remaining useful life of four years on January 1, 2018. Both
companies use the straight-line method to depreciate equipment. In 2019 Pringle
Company reported net income from its independent operations of P3,270,000 for 2018
and 4,250,000 for 2019 respectively, and Seely Corporation reported net income of
P820,000 for 2018 and P 950,000 for 2019 respectively.

Required:
A. Prepare, in general journal form, the workpaper entries relating to the intercompany
sale of equipment that are necessary in the December 31, 2018 and December
31,2019 consolidated financial statements workpapers.

B. Calculate the amount of noncontrolling interest to be deducted from consolidated

net income in the consolidated income statement for 2019.

C. Calculate controlling interest in consolidated net income for 2019.

175
DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

176
 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

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. Gain or loss resulting from an intercompany sale of equipment between a parent

and a subsidiary is
a. Recognized in the consolidated statements in the year of the sale
b. Considered to be realized over the remaining useful life of the equipment as
an adjustment to depreciation in the consolidated statements
c. Considered to be unrealized in the consolidated statements until the
equipment is sold to a third party
d. Amortized over a period not less than 2 years and not greater than 40 years

2. Which of the following statements is true concerning an intercompany transfer of a

depreciable asset?
a. Non-controlling interest in subsidiary’s net income is never affected by a
gain on the transfer
b. Non-controlling interest in subsidiary’s net income is always affected by a
gain on the transfer
c. Non-controlling interest in subsidiary’s net income is affected by a
downstream gain only
d. Non-controlling interest in subsidiary’s net income is affected only when the
transfer is upstream
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 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

3. On November 8, 2016, Poppy Corp. sold land to Peppy Co., its wholly-owned
subsidiary. The land cost P61,500 and was sold to Peppy for P89,000. From the
perspective of the combination, when is the gain on the sale of the land realized?
a. Proportionately over a designated period of years
b. When Peppy Co. sells the land to a third party
c. No gain can be recognized
d. As Peppy uses the land

4. Blue Company owns 70 percent of Black Company's outstanding common stock.

On December 31, 2008, Black sold equipment to Blue at a price in excess of
Black's carrying amount, but less than its original cost. On a consolidated balance
sheet at December 31, 2008, the carrying amount of the equipment should be
reported at:
a. Blue's original cost.
b. Black's original cost.
c. Blue's original cost less Black's recorded gain.
d. Blue's original cost less 70 percent of Black's recorded gain.

5. A parent and its 80 percent owned subsidiary have made several intercompany
sales of noncurrent assets during the past two years. The amount of income
assigned to the noncontrolling interest for the second year should include the
noncontrolling interest's share of gains:
a. unrealized in the second year from upstream sales made in the second
year.
b. realized in the second year from downstream sales made in both years.
c. realized in the second year from upstream sales made in both years.
d. both realized and unrealized from upstream sales made in the second
year.

On January 1, 2007, Servant Company purchased a machine with an expected

economic life of five years. On January 1, 2009, Servant sold the machine to Master
Corporation and recorded the following entry:

Cash 45,000
Accumulated depreciation 28,000
Machine 70,000
Gain on sale of equipment 3,000
Master Corporation holds 75 percent of Servant's voting shares. Servant reported
net income of P50,000, and Master reported income from its own operations of
P100,000 for 2009. There is no change in the estimated economic life of the
equipment as a result of the intercorporate transfer.

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 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116
6. Based on the preceding information, in the preparation of the 2009 consolidated
income statement, depreciation expense will be:
a. Debited for P1,000 in the eliminating entries.
b. Credited for P1,000 in the eliminating entries.
c. Debited for P15,000 in the eliminating entries.
d. Credited for P15,000 in the eliminating entries.

7. Based on the preceding information, in the preparation of the 2009 consolidated

balance sheet, machine will be:
a. debited for P1,000
b. debited for P15,000 .
c. credited for P45,000.
d. debited for P25,000.

8. Based on the preceding information, consolidated net income for 2009 will be:
A. P150,000. B. P100,000. C. P148,000. D. P130,000.

Blue Corporation holds 70 percent of Black Company's voting common stock. On

January 1, 2010, Black paid P500,000 to acquire a building with a 10-year expected
economic life. Black uses straight-line depreciation for all depreciable assets. On
December 31, 2015, Blue purchased the building from Black for P180,000. Blue
reported income, excluding investment income from Black, of P140,000 and
P162,000 for 2015 and 2016, respectively. Black reported net income of P30,000
and P45,000 for 2015 and 2016, respectively.
9. Based on the preceding information, the amount to be reported as consolidated
net income for 2015 will be:
a. P190,000. b. P170,000. c. P175,000. d.P150,000.
10. Based on the preceding information, the amount of income assigned to the
controlling shareholders in the consolidated income statement for 2016 will be:
a. P207,000. b.P202,000. c. P212,000. d. P190,000.

Let’s Analyze

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

1. From a consolidated point of view, when should profit be recognized on

intercompany sales of depreciable assets? Nondepreciable assets?

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________________________________________________________________
________________________________________________________________
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 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________

2. Why is it important to distinguish between up-stream and downstream sales in the

analysis of intercompany profit eliminations?.
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In a Nutshell

PROBLEM 1
Pike Company owns 90% of the outstanding common stock of Sanka Company. On
January 1, 2018, Sanka Company sold equipment to Pike Company for $300,000.
Sanka Company had purchased the equipment for $450,000 on January 1, 2006 and
has been depreciating it over a 10 year life by the straight-line method. The
management of Pike Company estimated that the equipment had a remaining life of
5 years on January 1, 2018. In 2018, Pike Company reported $225,000 and Sanka
Company reported $150,000 in net income from their independent operations.

Required:
A. Prepare in general journal form the workpaper entries relating to the
intercompany sale of equipment that are necessary in the December 31, 2018 and
2019 consolidated statements workpapers. Pike Company uses the cost method to
record its investment in Sanka Company.

B. Calculate equity in subsidiary income for 2018 and noncontrolling interest in net
income for 2018.

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 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

PROBLEM 2
PROBLEM 1
Separate income statements of Nightjar Corporation and its 90%-owned subsidiary,
Branch Inc., for 2019 were as follows:
Nightjar Branch
Sales Revenue $ 2,000,000 $ 1,200,000
Cost of sales ( 1,200,000 ) ( 800,000 )
Other expenses ( 400,000 ) ( 200,000 )
Gain on equipment 80,000
Income from Branch 180,000
Net income $ 660,000 $ 200,000

Additional information:
1. Nightjar acquired its 90% interest in Branch Inc. when the book values were
equal to the fair values.
2. The gain on equipment relates to equipment with a book value of $120,000 and
a 4-year remaining useful life that Branch sold to Nightjar for $200,000 on
January 2, 2019. The straight-line depreciation method is used.
3. In 2018 Nightjar sold inventory to Branch of which the remainder was sold in
2019.
2018 2019
Intercompany sales $ 300,000 200,000
Cost of intercompany sales 180,000 120,000
Percentage unsold at year-end 40 50
Required:
Prepare a consolidated income statement for Nightjar Corporation and Subsidiary for
the year ended December 31, 2019.

Question & Answer (Q&A)

You are free to list down all the emerging questions or issues in the provided
spaces below. These questions or concerns may also be raised in the LMS or other
modes. You may answer these questions on your own after clarification. The Q&A
portion helps in the review of concepts and essential knowledge.

Questions/Issues Answers

1.

2.

3.

4.

181
 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

5.

Keywords

 Excess Depreciation
 Non-depreciable assets
 Depreciable assets

Course Schedules
Activities Date Where to Submit
Big Picture (Week 1-3) ULOc: Let’s Check and September 2, CF email/Quipper
Lets Analyze Activities 2020
Big Picture (Week 1-3) ULOc: In a Nutshell September 3, CF email/Quipper
Activity 2020
FIRST EXAM September 4, Quipper
2020
Big Picture (Week 4-5) ULOa: Let’s Check and September 9, CF email/Quipper
Lets Analyze Activities 2020
Big Picture (Week 4-5) ULOa: In a Nutshell September 12, CF email/Quipper
Activity 2020
Big Picture (Week 4-5) ULOb: Let’s Check and September 16, CF email/Quipper
Lets Analyze Activities 2020
Big Picture (Week 4-5) ULOb: In a Nutshell September 17, CF email/Quipper
Activity 2020
SECOND EXAM September 18, Quipper
2020
Big Picture (Week 6-7) ULOa: Let’s Check and September 26, CF email/Quipper
Lets Analyze Activities 2020
Big Picture (Week 6-7) ULOa: In a Nutshell September 28, CF email/Quipper
Activities 2020
THIRD EXAM October 2, 2020 Quipper

Big Picture (Week 8-9) ULOa: Let’s Check and October 6, 2020 CF email/Quipper
Lets Analyze Activities
Big Picture (Week 8-9) ULOa: In a Nutshell October 7, 2020 CF email/Quipper
Activities
Big Picture (Week 8-9) ULOb: Let’s Check and October 9, CF email/Quipper
Lets Analyze Activities 2020
Big Picture (Week 8-9) ULOb: In a Nutshell October 10, CF email/Quipper
Activities 2020
Big Picture (Week 8-9) ULOb: Let’s Check and October 12, CF email/Quipper
Lets Analyze Activities 2020

182
 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116
Big Picture (Week 8-9) ULOb: In a Nutshell October 13, CF email/Quipper
Activities 2020
FINALS October 15-16, Quipper
2020

Online Code of Conduct

1) All teachers/Course Facilitators and students are expected to abide by an

honor code of conduct, and thus everyone and all are exhorted to exercise
self-management and self-regulation.

2) Faculty members are guided by utmost professional conduct as learning

facilitators in holding OBD and DED conduct. Any breach and violation shall
be dealt with properly under existing guidelines, specifically on social media
conduct (OPM 21.15) and personnel discipline (OPM 21.11).

3) All students are likewise guided by professional conduct as learners in

attending OBD or DED courses. Any breach and violation shall be dealt with
properly under existing guidelines, specifically in Section 7 (Student
Discipline) in the Student Handbook.

4) Professional conduct refers to the embodiment and exercise of the

University’s Core Values, specifically in the adherence to intellectual honesty
and integrity; academic excellence by giving due diligence in virtual class
participation in all lectures and activities, as well as fidelity in doing and
submitting performance tasks and assignments; personal discipline in
complying with all deadlines; and observance of data privacy.

5) Plagiarism is a serious intellectual crime and shall be dealt with accordingly.

The University shall institute monitoring mechanisms online to detect and
penalize plagiarism.

6) All borrowed materials uploaded by the teachers/Course Facilitators shall be

properly acknowledged and cited; the teachers/Course Facilitators shall be
professionally and personally responsible for all the materials uploaded in the
online classes or published in SIM/SDL manuals.

7) Teachers/Course Facilitators shall devote time to handle OBD or DED

courses and shall honestly exercise due assessment of student performance.
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 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

8) Teachers/Course Facilitators shall never engage in quarrels with students

online. While contentions intellectual discussions are allowed, the
teachers/Course Facilitators shall take the higher ground in facilitating and
moderating these discussions. Foul, lewd, vulgar and discriminatory
languages are absolutely prohibited.

9) Students shall independently and honestly take examinations and do

assignments, unless collaboration is clearly required or permitted. Students
shall not resort to dishonesty to improve the result of their assessments (e.g.
examinations, assignments).

10) Students shall not allow anyone else to access their personal LMS account.
Students shall not post or share their answers, assignment or examinations
to others to further academic fraudulence online.

11) By handling OBD or DED courses, teachers/Course Facilitators agree and

abide by all the provisions of the Online Code of Conduct, as well as all the
requirements and protocols in handling online courses.

12) By enrolling in OBD or DED courses, students agree and abide by all the
provisions of the Online Code of Conduct, as well as all the requirements and
protocols in handling online courses.

Monitoring of OBD and DED

(1) The Deans, Asst. Deans, Discipline Chairs and Program Heads shall be
responsible in monitoring the conduct of their respective OBD classes through
the Blackboard LMS. The LMS monitoring protocols shall be followed, i.e.
monitoring of the conduct of Teacher Activities (Views and Posts) with
generated utilization graphs and data. Individual faculty PDF utilization reports
shall be generated and consolidated by program and by college.

(2) The Academic Affairs and Academic Planning & Services shall monitor the
conduct of LMS sessions. The Academic Vice Presidents and the Deans shall
collaborate to conduct virtual CETA by randomly joining LMS classes to check
and review online the status and interaction of the faculty and the students.

(3) For DED, the Deans and Program Heads shall come up with monitoring
instruments, taking into consideration how the programs go about the conduct
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 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116
of DED classes. Consolidated reports shall be submitted to Academic Affairs
for endorsement to the Chief Operating Officer.

Course prepared by:

JON D. INOCENTES, CPA

Name of Course Facilitator/Faculty

Course reviewed by:

MA. TERESA A. OZOA, CPA, MBA

Program Head, Accounting Technology

MARY CRIS L. LUZADA, CPA, MSA

Program Head, Accountancy

Approved by:

GINA FE G. ISRAEL, EdD

Name of Dean

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 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116

Work Plan for Lecture

Days
Monday Tuesday Wednesday Thursday Friday Saturday Sunday
Asynchronou
Modality Synchronous Asynchronous Synchronous Asynchronous Synchronous
s
Type of  Teacher to Teacher to
 Learner to Learner to Learner to  Learner to
interactio Learner Learner
Content Learner Content Content
n
 Uploading of  Utilization of  Group  Utilization of  Discussion  Utilization
Learning SIM Sharing SIM (Clarification or of SIM
Materials a. Collab New lessons)
 Videos b. Forum  Videos a. Collab  Videos
 Discussion c. Zoom b. Forum
a. Collab  Self-directed  Self- c. Zoom  Self-
b. Forum Activities  Consultation directed directed
Suggeste c. Zoom Activities  Supplementary Activities Rest Day
d Activities
Activities  Giving of
Formative  Quiz
Assessment
 Consultation
 Giving of
Performance
Task

Prepared by: Reviewed by: Approved by:

JON D. INOCENTES, CPA MARIA TERESA A. OZOA, CPA, MBA GINA FE G. ISRAEL, EdD

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 DEPARTMENT OF BUSINESS ADMINISTRATION EDUCATION
Bachelor of Science in Tourism Management Program
Mabini Street, Tagum City
Davao del Norte
Telefax: (084)655-9591 Local 116
Faculty Program Head Dean of College

187