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ADVANCED ACCOUNTING
Module 6: Accounting for Business Combinations

Module 6.2: Business Combination (Stock Acquisition) – Subsequent to Date of Acquisition

Focus notes:

 MAIN CONCERN: Computation of the consolidated net income and breaking it down into the share of the parent and the
share of the NCI.
 Notice that this topic is exclusively for business combinations through stock acquisition. This is because in
ACQUISITION OF NET ASSETS, consolidation does not recur after the date of acquisition. The moment the assets
and liabilities of the acquiree are acquired and transferred to the books of the acquirer, the acquiree ceases to operate. The
acquirer and acquiree will and will always be ONE COMPANY with ONE SET OF BOOKS at ANY GIVEN
POINT IN TIME.
 However, for STOCK ACQUISITIONS, it‟s a different story. Although the parent already controls the subsidiary, the
two continue to operate separately. They are considered to be distinct accounting entities with separate sets of financial
statements. At the end of the accounting period, the two books are then consolidated for external reporting purposes. In
other words, consolidation is done every accounting period.
• How is consolidation done? By instinct, one might think that the process of consolidation is simply adding the balances in
the books of the parent and the subsidiary. Well, it‟s a little bit more complicated than that. Similar to accounting for
home office and branches, there are certain amounts that we need to eliminate/recognize to conform to financial
reporting standards.
 The process (or the „how‟ aspect) of consolidation becomes easier and more digestible when its „why‟ aspect is understood.
Why do we need to consolidate? The following KEY CONCEPTS are CRUCIAL for you to understand the reason
behind the computations for consolidation:
1. In the separate books, the income/loss of the parent and the subsidiary are closed to their respective retained earnings
account. In the consolidated books, the income/loss of the parent and the subsidiary should be allocated to the
parent (as the owner of the subsidiary) and the NCI (as the minority shareholders of the subsidiary).
2. In the separate books, NCI, as an equity account, is not recognized. NCI only arises upon consolidation.
3. Goodwill is not recorded in the separate books. Goodwill only arises when the consolidated books are prepared.
Consequently, any goodwill impairment loss will only be recognized upon consolidation.
4. Since the “Investment in Subsidiary” account in the separate books of the parent is usually carried using the cost
method, dividends given by the subsidiary to the parent are recorded by the parent as “Dividends Income” in its
separate books. Upon consolidation, it would be improper for such dividends to be classified as income in the
consolidated income statement since it constitutes a mere intercompany transfer of cash.
5. The assets and liabilities of the subsidiary at the date of acquisition are still recorded at book value in its separate
books. These assets and liabilities are only adjusted to their fair values when consolidation is made to comply
with IFRS 3 requirements.
6. Depreciable assets of the subsidiary at the DATE OF ACQUISITION are being depreciated at their book value in
the separate books. In the consolidated books, these assets are revalued to fair value. This means that there is either
unrecognized depreciation (if FV > BV) or excess depreciation (if BV > FV) to be recognized or eliminated in the
consolidated books, as the case may be.
7. The inventory of the subsidiary at the DATE OF ACQUISITION will become cost of goods sold at book value at
the point of sale in the separate books (following a FIFO assumption). In the consolidated books, the cost of goods
sold should be the fair value of the inventory sold. This means that there is either unrecognized COGS (if FV > BV)
or excess COGS (if BV > FV) to be recognized or to be eliminated in the consolidated books, as the case may be.

 So, why do we need to consolidate? It is for us to recognize certain accounts (such as goodwill and NCI) that are absent in
the separate books and eliminate amounts (such as intercompany income) that should not be present in the consolidated
financial statements. Ultimately, the goal is to present the parent and all its subsidiaries as a SINGLE COMPANY based on
financial reporting standards.
 In computing consolidated net income, the logic is to get the sum of the parent‟s and the subsidiary‟s net incomes (losses)
and eliminate or recognize any item of income or expense to comply with generally accepted accounting principles “as if”
the parent and the subsidiary are one company ever since control is obtained by the parent. To facilitate this process, the
following table is useful:

ADVACC (Acctg 630) – MODULE 6: ACCOUNTING FOR BUSINESS

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Parent’s share in the NCI in the net
Consolidated Net income of the Explanation
Income (CNI-P) subsidiary (NCINIS)

Net income (loss) of the The NCI has no share

parent in its separate XXX - in the parent‟s net
books (NI-P) income (loss).
The NI-S is allocated
Net income (loss) of the
to the parent and the
subsidiary in its XXX XXX
NCI using their
separate books (NI-S)
ownership ratios.
To eliminate dividend
Dividends received by income recognized by
the parent from the (XXX) - the parent in its books
subsidiary (DIV-S) that came from its own
subsidiary.
To allocate any excess or
insufficient depreciation
Amortization of fair or amortization of
value-book value depreciable assets to the
XXX/(XXX) XXX/(XXX)
differences parent and the NCI using
(FV-BV AMORT) their ownership ratios.

To allocate any
impairment loss to the
Goodwill impairment
(XXX) (XXX) parent and the NCI
loss (IMP LOSS)
using their
GOODWILL ratios.*

TOTAL XXXX XXXX CNI-P + NCINIS =

CNI

*The GOODWILL RATIO pertains to the ratio of goodwill attributed to parent equity and goodwill attributed to NCI using the
three-column goodwill table at the date of acquisition.

1. PARTIAL GOODWILL – there is partial goodwill when only the parent has a share in the goodwill that is presented
in the consolidated balance sheet. This arises when the NCI is valued at its proportionate share in the fair value of the
subsidiary‟s net assets (FVNA). When there is partial goodwill, any goodwill impairment loss is fully allocated to
CNI- P.
2. TOTAL/FULL GOODWILL – there is total goodwill when both the parent and the NCI have shares in the goodwill
amount. This arises when then the NCI is valued at assumed fair value (i.e. grossed-up amount) or explicit fair value,
and the amount is greater than the NCI‟s share in the FVNA of the subsidiary. When there is total goodwill, any
goodwill impairment loss is allocated to CNI-P and NCINIS using the goodwill ratios.

Take note that the sum of the parent‟s share in the CNI and the NCI‟s share is equal to the TOTAL CONSOLIDATED NET
INCOME. Notice also that intercompany sales transactions are not yet incorporated in the CNI table above. A more
comprehensive CNI table is presented in Module 5.4: Business Combination – Intercompany Sales Transactions.

ADVACC (Acctg 630) – MODULE 6: ACCOUNTING FOR BUSINESS

COMBINATIONS
Ateneo de Zamboanga University – School of Management and Accountancy
Practice problems (Business Combination – Subsequent Date): 3

Problem 1: On January 1, 2015, Perry Corporation purchased 80% of Sub Company's common stock for P3,240,000. P150,000
of the excess is attributable to goodwill and the balance to an undervalued depreciable asset with a remaining useful life of ten
years. Non-controlling interest is measured at its fair value on date of the acquisition. On the date of acquisition, stockholders'
equity of the two companies are as follows:
Perry Corporation Sub Company
Common stock P5,250,000 P 1,200,000
Retained earnings 7,800,000 2,100,000
13,050,000 3,300,000

On December 31, 2015, Sub Company reported net income of P525,000 and paid dividends of P225,000. Perry reported net
income of P1,605,000 and paid dividends of P690,000. Goodwill had been impaired and should be reported at P30,000 on
December 31, 2015.

Questions:

a. What is the non-controlling interest in net income of Sub Company (NCINIS)? P69,000
PP 3,240,000 NCI @FV:
NCI 810,000
COI 4,050,000 Implied FVNCI = = 810,000
FVNA (3,300,000)
Excess of FV over BV (600,000)
(squeeze)
Goodwill 150,000

Total Parent NCI

COI 4,050,000 3,240,000 810,000
FVNA 3,900,000 3,120,000 783,000
GW/Gain on BP 150,000 120,000 30,000
(80%) (20%)

Amort. Purch. Differentials (FV adjust):

2022
Depreciable Asset 600,000 (60,000) (600k/10yrs) Dividends (80%) 180,000
NCI (20%) 45,000
R/E (100%) 225,000

Group Parent NCI

Net Income – Parent (NI-P) 1,605,000 1,605,000
Net Income – Subsidiary (NI-S) 525,000 420,000 105,000
Div. from Sub. (P‟s share only) (180,000) (180,000)
+/- Amort. Of Purch. Diff. (60,000) (48,000) (12,000)
- Impair. Loss on Goodwill (120,000) (96,000) (24,000)
+ Gain on BP (only in yr of acquis.) - -
1,770,000 1,701,000 69,000
CNI CNI-P NCINIS

b. What is the consolidated net income attributable to parent shareholders (CNI-P)?

₱ 1,701,000
c. What is the consolidated net income (CNI) to be presented in the consolidated income statement at year-end?
₱ 1,770,000
d. What is the consolidated retained earnings (CRE) to be presented in the consolidated statement of financial
position at year-end?
Conso. R/E, beg 7,800,000
CNI – P 1,701,000
Div. Dec. & Paid (690,000)
Cons. R/E, end 8,811,000
e. What is the non-controlling interest in the net assets of the subsidiary (NCINAS) to be presented in the
consolidated statement of financial position at year-end?
NCI, beg 810,000
NCINIS 2015 69,000
Div. from sub. (45,000)
NCI, end/NCINAS 834,000
ADVACC (Acctg 630) – MODULE 6: ACCOUNTING FOR BUSINESS
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Problem 2: Periwinkle Corporation acquired 80% of the outstanding common stock of Strawberry Company on June 1, 2015
for P2,345,000. At the date of acquisition, the fair value of the non- controlling interest was P470,000.
 Strawberry Company's stockholder's equity components at December 31, 2015 are as follows: Common stock 100
par, P1,000,000, APIC P450,000, Retained Earnings P890,000.
 All the assets of Strawberry were fairly valued except for inventories, which are overstated by P44,000, and
equipment, which was understated by P60,000. The equipment has a remaining useful life of 4 years. The straight-line
method for depreciation is used.
 Stockholder's equity of Periwinkle on June 1, 2015 is composed of Common stock P3,000,000, APIC P700,000,
Retained Earnings P2,100,000.
 Goodwill, if any, should be written down by 56,900 at year-end.
 Net income for the first year of parent and subsidiary are P300,000 and P170,000, respectively.
 The parent and the subsidiary declared and paid dividends amounting to P80,000 and P60,000, respectively.
 During the year, there was no issuance of new ordinary shares for both companies.

What is the balance of the non-controlling interest in net assets of subsidiary on December 31, 2015?
A. P580,670 B. P508,970 C. P496,970 D. P487,670

R/E – S, end 890,000 Total Parent NCI

NI – S less Div. dec. – S (110,000) COI 2,815,000 2,345,000 470,000
Total R/E – S 780,000 FVNA (2,246,000) (1,796,800) 449,200
Share Capital – S 1,000,000 GW 569,000 548,200 20,800
Share Premium 450,000 96.34% 3.66%
BVNA 2,230,000 Amort. of Purchase Differentials
FV adjustments: Dec. 2015
Inventory (overstated) (44,000) Inventory (44,000) 44,000
Equipment (understated) 60,000 Equipment 60,000 (8,750) (60k/4yrs=15kx7/12)
FVNA 2,246,000 35,250

Group Parent NCI

Net Income – Parent (NI-P) 300,000 300,000
Net Income – Subsidiary (NI-S) 170,000 136,000 105,000
Div. from Sub. (P‟s share only) *(48,000) (48,000)
+/- Amort. Of Purch. Diff. 35,250 28,200 7,050
- Impair. Loss on Goodwill (56,900) (54,820) (2,080)
+ Gain on BP (only in yr of acquis.) - -
400,350 361,380 38,970
CNI CNI-P NCINIS

*Div. from sub 48,000 NCI, beg 470,000

NCI 12,000 NCINIS 38,970
R/E 60,000 Div. from sub. (12,000)
NCINAS/NCI, end 496,970

What is the consolidated shareholder‟s equity on December 31, 2015?

A. P6,081,380 B. P6,569,050 C. P6,569,050 D. P6,578,350

Conso. R/E Conso. Total Contributed Capital Conso. Shareholder‟s Equity

Conso. R/E, beg 2,100,000 Share Capital 3,000,000 Conso. R/E 2,381,380
CNI – P 361,380 Share Premium 700,000 Conso. TCC 3,700,000
Div. dec. & paid (80,000) Conso. TCC 3,700,000 NCINAS 496,970
Conso. R/E, end 2,381,380 Conso. SHE 6,578,350

ADVACC (Acctg 630) – MODULE 6: ACCOUNTING FOR BUSINESS

COMBINATIONS
Ateneo de Zamboanga University – School of Management and Accountancy
Problem 3: P Company purchased 75% of the capital stock of S Company on December 31, 2010 at P126,000 more than5the
book value of its net assets. The excess was allocated to equipment in the amount of P56,250 and to goodwill for the balance.
The equipment has an estimated useful life of 10 years and goodwill was not impaired. For four years, S Company reported
cumulative earnings of P567,000 and paid P163,800 in dividends. On January 1, 2015, non-controlling interest in net asset of
S Company amounts to P236,250. Assuming NCI is measured at estimated fair value, what is the price paid by P Company on
the date of acquisition?

A. P423,225 B. P420,525 C. P504,000 D. P532,350

Amort. of Purch. Diff: Div. from sub. (75%) 122,850

Equip. 56,250/10yrs = 5,625 NCI (25%) 40,950
R/E (100%) 163,800

NI – S (25%) 141,7050 NCI, beg 141,075 (work back)

Amort. from Purch. Diff. (5,625) NCINIS 136,125
Impairment loss on GW - Div. from sub. (40,950)
NCINIS 136,125 NCINAS 236,250

Implied FVNCI = = 141,075

Price Paid = 141,075/25%

= 564,300 x 75%
= 423,225

ADVACC (Acctg 630) – MODULE 6: ACCOUNTING FOR BUSINESS

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Module 6.3: Business Combination – Intercompany Sales Transactions

Focus notes:

 MAIN CONCERN: Eliminating the effects of intercompany transactions on consolidated net income.
 What are intercompany sales transactions? These are sales transactions between a parent and its subsidiary. An
intercompany sales transaction can either be:
1. Downstream – the parent sells an asset to the subsidiary
o (i.e. PARENT = SELLING AFFILIATE; SUBSIDIARY = BUYING AFFILIATE)
2. Upstream – the subsidiary sells an asset to the parent
o (i.e. SUBSIDIARY = SELLING AFFILIATE; PARENT = BUYING AFFILIATE)
 Why do I need to know if it is a downstream or upstream transaction? Identifying whether an intercompany sales
transaction is downstream or upstream is crucial in the allocation of the intercompany income or loss to the CNI-P and
the NCINIS.

Type of transaction Treatment

Any intercompany income/loss is allocated

DOWNSTREAM
entirely to the CNI-P.

Any intercompany income/loss is allocated

between the CNI-P and the NCINIS using
UPSTREAM
the ownership percentages of the parent and
the NCI.

• What is the effect of intercompany sales transactions on consolidation, specifically on consolidated net income? The effect
of an intercompany sales transaction will depend on the type of asset sold.

A. INTERCOMPANY SALE OF INVENTORY

Intercompany sales of inventory give rise to intercompany gross profit. In the separate books of the selling affiliate, this gross
profit may be valid for internal purposes. However, in the consolidated books (or for external reporting), such gross profit is
considered unrealized unless it is sold to an unrelated party. The following consolidating items are incorporated in our CNI
table:

1. Unrealized profit in ending inventory (UPEI) – gross profit that is considered unrealized in the ending inventory of
the buying affiliate since the inventory from intercompany sales is still unsold to unrelated parties. There are multiple
ways of computing UPEI, but the most common is:
Ending/Unsold inventory from intercompany sales x GP ratio of selling affiliate
Accounting treatment: UPEI is a DEDUCTION in the CNI table since it represents fictitious or overstatement of gross
profit that should be eliminated in consolidation.

2. Realized profit in beginning inventory (RPBI) – due to a FIFO cost flow assumption, the RPBI of this year is
simply equal to any UPEI last year.
Accounting treatment: RPBI is an ADDITION in the CNI table since it represents incremental gross profit had the
inventory been sold by its original owner to unrelated parties.

ADVACC (Acctg 630) – MODULE 6: ACCOUNTING FOR BUSINESS

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Illustration: Parent Corp. acquired 80% of Subsidiary Inc. at book value. No goodwill or bargain purchase gain was
recognized. During 2015, Parent Corp. sold goods costing P80,000 to Subsidiary Inc. for P100,000 (i.e. downstream sale),
40% of which remained unsold to unrelated parties at the end of the year. Also, on the same year, an upstream sale of
inventory for P120,000 occurred with a gross profit rate on sales of 25%, all of which was unsold at the end of 2015. At the
end of 2015, the parent and the subsidiary reported separate net incomes of P300,000 and P100,000, respectively. No
dividends were declared by both companies.

Question 1: What is the UPEI for 2015?

Solution: For the downstream sale, the UPEI is P8,000, computed using any of the two alternatives:
Alternative 1: Gross profit from intercompany sale x % unsold
P100,000 – P80,000 = P20,000 x 40% = P8,000
Alternative 2: Sales price x unsold inventory x GP ratio on sales
P100,000 x 40% x 20% = P8,000
Since it is a downstream sale, the P8,000 is allocated entirely to CNI-P in the CNI table as a deduction.
For the upstream sale, the UPEI is P30,000. Computed as follows: P120,000 x 25% x 100% unsold. Since it is an upstream
sale, the P30,000 is allocated to CNI-P and NCINIS using the ownership percentages. Total UPEI for the year is P38,000.

Question 2: What is the RPBI for 2016?

Solution: The RPBI for next year is simply equal to the UPEI of last year. The rule of allocation for upstream and downstream
transactions still applies. Consequently, RPBI for 2015 is zero since the problem does not mention of any intercompany sale
of inventory during 2014.

Question 3: What is the CNI-P, NCINIS and CNI for 2015?

Solution:
CNI-P (80%) NCINIS (20%)
NI-P P300,000 -
NI-S 80,000 20,000
UPEI (Downstream) (8,000) -
UPEI (Upstream) (24,000) (6,000)
RPBI - -
TOTAL P348,000 P14,000

Consolidated Net Income (CNI) = P348,000 + P14,000 = P362,000

B. INTERCOMPANY SALE OF DEPRECIABLE ASSETS

When a depreciable asset is sold by the parent to the subsidiary (and vice versa), the book value of the asset is derecognized in
the books of the seller, while the buyer records the asset purchased at its selling price. This results to two things: (1) an
unrealized gain (loss) on sale in the consolidated books, since the sale is not to an unrelated party, and (2) a change in the
periodic depreciation recognized on such asset since the buying affiliate records the asset at its new purchase price. The
following consolidating items are incorporated in our CNI table:

1. Unrealized gain/loss on sale (UG/UL) – equal to the gain or loss on sale arising from the intercompany sale (i.e.
Selling price less book value). In our CNI table, the UG/UL is only recognized at the year of the intercompany sale
(i.e. the first year). Any UG/UL recognized on the year of the intercompany sale is no longer recognized in subsequent
periods since it no longer affects net income in those periods.

Accounting treatment: Unrealized gains (UG) are a DEDUCTION in the CNI table since they represent fictitious
gains that should be eliminated in consolidation. On the contrary, unrealized losses (UL) are an ADDITION in the
CNI table since they represent fictitious losses.

ADVACC (Acctg 630) – MODULE 6: ACCOUNTING FOR BUSINESS

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2. Realized gain/loss (RG/RL) – equal to the change in the periodic depreciation due to the intercompany sale. There
are multiple ways of computing RG/RL, but the most common is:

Unrealized gain (loss) / Remaining life of the depreciable asset from the point of sale

The periodic realization of the unrealized gain or loss is (surprisingly or not) equal to the change in the periodic
depreciation of the depreciable asset (try figuring this out through journalizing the transactions). HOWEVER, if the
asset is sold to unrelated parties before it is fully depreciated, any remaining unrealized gain or loss that arose
from its intercompany sale is immediately recognized.
Accounting treatment: Realized gains (RG) is an ADDITION in the CNI table since it represents excess depreciation
expense that should be eliminated. On the other hand, realized losses (RL) is a DEDUCTION in the CNI table since
it represents insufficient depreciation that should be recognized in the consolidated books.

Illustration: P Co. owns 70% of S Inc. The acquisition was at book value. No goodwill or bargain purchase gain was
recorded. On January 1, 2015, P Co. sold machinery to S Inc. for a gain of P100,000. The machinery has a remaining useful
life of 5 years on that date. Also, on July 1, 2016, S Inc. sold a delivery truck to P Co. for P200,000. The truck had a book
value of P250,000 and has a remaining life of 10 years from the date of sale. No other intercompany transactions occurred for
2015 and 2016. Net income of P Co. and S Inc. for 2015 is P500,000 and P200,000, respectively; for 2016, P400,000 and
P150,000, respectively. No dividends were declared by both companies for 2015 and 2016.

Question 1: What is the CNI-P, NCINIS and CNI for 2015 and 2016?
FOR 2015:
CNI-P (70%) NCINIS (30%) Explanation/Computation
NI-P P500,000 - Net income of parent
NI-S 140,000 P60,000 P200,000 is allocated using 70:30 ratio.
UG (100,000) - The unrealized gain of P100,000 is only
deducted in the CNI-P column since it is
downstream.
RG 20,000 - 100,000 / 5 years, this pertains to
EXCESS DEPRECIATION arising from
the intercompany downstream sale that
should be eliminated in the consolidated
books every period until the asset is fully-
depreciated or until the asset is sold to
unrelated parties.
UL - - N/A
RL - - N/A
TOTAL P560,000 60,000 CNI (2015) = P620,000
FOR 2016:
CNI-P (70%) NCINIS (30%) Explanation/Computation
NI-P P400,000 - Net income of parent
NI-S 105,000 P45,000 P150,000 is allocated using 70:30 ratio.
UG - - The UG last year will no longer be
eliminated in the consolidated books this
year since it no longer affects the net
income of both companies this year.
RG 20,000 - 100,000 / 5 years, same explanation as
above
UL 35,000 15,000 The unrealized loss of P50,000 is
allocated to CNI-P and NCINIS since it is
upstream.
RL (1,750) (750) 50,000 / 10 years x 6/12 = P2,500,
this pertains to INSUFFICIENT
DEPRECIATION arising from the
intercompany upstream sale that

ADVACC (Acctg 630) – MODULE 6: ACCOUNTING FOR BUSINESS

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should be recognized in the
consolidated books.
TOTAL P558,250 P59,250 CNI (2016) = P617,500

Question 2: If the machinery was sold on January 1, 2017 to unrelated parties, what is the amount of realized gain for 2017
attributed to the sale of this asset to be included in the CNI table?

Unrealized gain during intercompany sale P100,000

Cumulative realized gains (P20,000 + P20,000) (40,000)
Realized gain – 2017 P60,000
INTERCOMPANY SALE OF NON-DEPRECIABLE ASSET
The effect is similar to an intercompany sale of depreciable asset, except that depreciation is not affected. The effect is an
unrealized gain or loss on sale, as the case may be. The amount will always be unrealized since no periodic realization occurs,
unless the non-depreciable asset is sold to unrelated parties.

COMPREHENSIVE CNI TABLE:

Consolidating items CNI-P NCINIS Things to remember:

NI – P XXX - Fully to CNI-P
NI – S XXX XXX Allocated using ownership percentages
Dividends paid by S x % ownership of parent;
Div Income from S (XXX) - Note: If NI-P is from own or separate
operations, no need to deduct this amount.
XXX/
FV-BV Amortization XXX/(XXX) Allocated using ownership percentages
(XXX)
Allocated using GOODWILL ratios if total
GW Imp. Loss (XXX) (XXX) goodwill. If partial goodwill, allocated only
to CNI-P
UPEI
(XXX)
(End inv. x GP%)
RPBI If DOWNSTREAM, entire amount is
XXX to CNI-P only.
(Beg. inv. x GP%)
UG If UPSTREAM, amount is
(XXX) allocated to CNI-P and
(SP > BV)
RG NCINIS using ownership
(UG/Rem. Life) x XXX percentages.
fraction of time *UG and UL are only recognized once
UL on the year of the intercompany sale of
XXX the asset.
(SP < BV)
RL
(UL/Rem. Life) x (XXX)
fraction of time
TOTAL XXXX XXXX CNI-P + NCINIS = CNI

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TOO… MUCH… INFORMATION... SIR, HOW DO YOU EXPECT ME TO REMEMBER ALL OF THESE?!

Well, the only way that you can only absorb all these is if you understand the concept behind. Luckily, the inclusion of the
UPEI, RPBI, UG, UL, RG, and RL in the CNI table follows a single underlying concept: Obtaining consolidated net income
(CNI) assuming that NO INTERCOMPANY TRANSACTIONS occurred.

As what I‟ve mentioned at the beginning of this module, accounting for business combinations are fundamentally procedural.
However, due to the bulk of the procedures, it is almost impossible to retain everything in one sitting. That‟s when conceptual
learning comes in. Again, the “how” will only make sense if you understand the “why”. Just remember:

ADVACC (Acctg 630) – MODULE 6: ACCOUNTING FOR BUSINESS

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The PARENT and the SUBSIDIARY are ONE and THE

SAME COMPANY, and that the HEART of
CONSOLIDATION is the PREVENTION of
FRAUDULENT FINANCIAL REPORTING.

Practice problems:
Problem 1: GV Company purchased 70% ownership of DL Company on January 1, 2013 at underlying book value. While
each company has its own sales forces and independent product lines, there are substantial intercompany sales of inventory
each period. The following intercompany sales occurred during 2014 and 2015:

Selling Cost of Buying Sales Unsold at Year Sold to

Year affiliate goods sold affiliate Price year-end Outsiders
2014 GV Co. P448,000 DL Co. P640,000 P140,000 2015
2015 DL Co. P312,000 GV Co. P480,000 P77,000 2016
2015 GV Co. P350,000 DL Co. P437,500 P63,000 2016

The following data summarized the results of their financial operations for the year ended,
December 31, 2015:
GV Company DL Company
Sales P3,850,000 P1,680,000
Gross Profit 1,904,000 504,000
Operating Expenses 770,000 280,000
Ending Inventories 336,000 280,000
Dividend Received from affiliate 126,000 -
Dividend Received from non-affiliate - 70,000

For the year ended 2015, compute:

1. Consolidated sales and Consolidated cost of goods sold

A. P4,612,500; P2,457,550 C. P4,612,500; P2,202,050
B. P4,612,500; P2,206,950 D. P5,530,000; P2,202,050

2. Consolidated net income attributable to parent‟s shareholders equity and non-controlling interest in net income
A. P1,301,335; P59,115 C. P1,476,335; P80,115
B. P1,476,335; P59,115 D. P1,350,335; P80,115

Problem 2: A Co. acquired 60% of the outstanding ordinary shares of B Co. on January 1, 2014. A Co. acquired it at book
value which is the same as its fair value at the date of acquisition. Income statements of A Co. and B Co. for 2015 were as
follows:
A B
Net Sales P875,000 P350,000
Cost of Sales 525,000 210,000
Gross Profit P350,000 P140,000
Operating expenses 105,000 52,500
Operating income P245,000 P87,500
Dividend income 56,000 -
Net income P301,000 P87,500
 There was an upstream sales of P112,000 in 2014 and P168,000 in 2015.

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 The buying affiliate reported inventory on December 31, 2014 amounting to P70,000 of which 20% comes from the
selling affiliate and inventory on December 31, 2015 amounting to P84,000 of which 30% comes from the selling
affiliate.
 A Co. uses 30% mark up on cost and B Co. uses 25% mark up on cost for their selling prices.
 A Co. and B Co. declared and paid dividends in 2015 amounting to P84,000 and P70,000 respectively.
 On January 1, 2015, B Co. has ordinary shares of P320,000; share premium of P120,000 and retained earnings of
P160,000.

How much is the non-controlling interest in the net assets of the subsidiary (NCINAS) at the end of 2015?
A. P296,156 B. P244,984 C. P246,104 D. P245,024
Problem 3: On January 1, 2015, RDJ Company purchased 80% of the stocks of MCD Corporation at book value. The
stockholders‟ equity of MCD Corporation on this date showed: Common stock - PI,140,000 and Retained earnings -
P980,000.
 On April 30, 2015, RDJ Company acquired a used machinery for P168,000 from MCD Corp. that was being carried
in the latter's books at P210,000. The asset still has a remaining useful life of 5 years.
 On the other hand, on August 31, 2015, MCD Corp. purchased an equipment that was already 20% depreciated from
RDJ Co. for P690,000. The original cost of this equipment was P750,000 and had a remaining life of 8 years.
 Net income of RDJ Co. and MCD Corp. for 2015 amounted to P720,000 and P310,000. Dividends paid totaled to
P230,000 and P105,000 for RDJ Co. and MCD Corp, respectively.
Net income attributable to parent's shareholders equity and non-controlling interest net income:
A. P826,870; P69,280 C. P834,150; P62,000
B. P826,870; P62,000 D. P834,150; P59,280

Non-controlling interest in net assets and carrying value of the Property and equipment:
A. P472,280; P810,000 C. P465,000; P757,000
B. P465,000; P810,000 D. P472,280; P757,000

Problem 4: On January 1, 2015, P Corporation purchased 80% of S Company's outstanding stock for P3,100,000. At that
date, all of S Company's assets and liabilities had market values approximately equal to their book values and no goodwill
was included in the purchase price.

 The following information was available for 2015: Income from own operations of P Corporation, P750,000 ;
Operating loss of S Company, P100,000
 Dividends paid in 2015 by P Corporation, P375,000; by S Company to P Corporation, P60,000.
 On July 1, 2015, there was a downstream sale of equipment at a gain of P125,000. The equipment is expected to
have a remaining useful life of 10 years from the date of sale.
 Also, on January 2, 2015, there was an upstream sale of furniture at a loss of P37,500. The furniture is expected to
have a useful life of five years from the date of sale.
 Non-controlling interest is measured at fair market value.

How much is the consolidated net income attributable to parent shareholders' equity?

A. P486,250 B. P575,250 C. P561,250 D. P515,250

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Ateneo de Zamboanga University – School of Management and Accountancy
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Comprehensive problem:

On January 1, 2014, Parent Corporation acquired 70% of the common stock of Subsidiary Corporation by issuing 150,000
shares (P2 par value, P10 market value) and paying cash of P2,000,000. The shareholders‟ equity balances of the two
companies at the acquisition date are given below:

Parent Corporation Subsidiary Corporation

Common stock P2,000,000 P1,500,000
Additional paid-in capital 4,000,000 2,750,000
Retained earnings 890,000 180,000
Upon appraisal, the following has been determined:
a. Non-controlling interest is valued at P1,400,000.
b. The subsidiary‟s land is overvalued by P200,000
c. One of the subsidiary‟s machinery has a book value and fair value of P300,000 and P400,000, respectively.
The machinery has a remaining useful life of 4 years.
d. The inventory of the subsidiary is undervalued by P30,000.
For the year 2014 and 2015, the parent and the subsidiary reported the following figures in their separate books:
Parent Corporation Subsidiary Corporation
YEAR 2014
Sales P1,500,000 P650,000
Cost of goods sold (1,125,000) (520,000)
Operating expenses (169,000) (32,400)
Other income (other losses) _91,500_ -
Net income (Net loss) 297,500 97,600
Dividends declared and paid 40,000 45,000

YEAR 2015
Sales P1,275,000 P480,000
Cost of goods sold (892,500) (360,000)
Operating expenses (60,500) (189,700)
Other income (other losses) _39,000_ _(20,000)_
Net income (Net loss) 361,000 (89,700)
Dividends declared and paid 45,000 20,000

During 2014, the subsidiary sold inventory to the parent for P150,000. The parent was able to sell 70% of the inventory to
outsiders before the end of 2014. There was also a downstream sale of inventory costing P45,000, half of which remained in
the ending inventory of the buying affiliate. The gross profit rates (on sales) of the parent and subsidiary averaged 25% and
20%, respectively. On October 1, 2014, a delivery truck with a remaining life of 5 years on that date was sold by the parent to
the subsidiary for P100,000, resulting to a gain of P60,000. Goodwill, if any, is impaired by P50,000.

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On February 23, 2015, there was a downstream sale of land costing P300,000. The sale resulted to a gain of P25,000. On
March 31, 2015, the subsidiary sold to its parent machinery with a book value of P80,000 for P20,000 loss. The machinery
has a remaining life of 4 years on that date. Towards the end of the year, an upstream sale of inventory occurred for P100,000.
The sale resulted to a P30,000 increase in gross profit in the books of the selling affiliate. Only 10% of the inventory was sold
to outsiders. An assessment of intangibles indicated that goodwill is impaired to P450,000 at the end of 2015.

Required: Prepare the consolidated income statement of Parent Corporation and Subsidiary Corporation.

Appendix (Other Formulas):

Assets of the acquirer (parent) at BOOK VALUE XXX

Assets of the acquiree (subsidiary) at FAIR VALUE XXX
Cash consideration/Purchase price (XXX)
Non-monetary assets given as consideration at FAIR VALUE (XXX)
Payment for acquisition-related costs (XXX)
Goodwill arising from acquisition XXX_
Total consolidated assets – DATE OF ACQUISITION XXXX

Liabilities of the acquirer (parent) at BOOK VALUE XXX

Liabilities of the acquiree (subsidiary) at FAIR VALUE XXX
Acquisition-related costs INCURRED BUT NOT YET PAID XXX
Liabilities assumed as consideration at FAIR VALUE/PRESENT VALUE XXX
Contingent consideration payable (CCP) XXX_
Total consolidated liabilities - DATE OF ACQUISITION XXXX

Cost of goods sold – Parent XXX

Cost of goods sold – Subsidiary XXX
Intercompany sales (XXX)
FV-BV amortization of inventory XXX/(XXX) UPEI (current year)
XXX
RPBI (current year, which is the UPEI last year) (XXX)
Consolidated COGS for the year XXXX

Sales – Parent XXX

Sales – Subsidiary XXX
Intercompany sales (XXX)
Consolidated Sales for the year XXXX

Operating expenses – Parent XXX

Operating expenses – Subsidiary XXX
FV-BV amortization of depreciable assets XXX/(XXX)
Realized gain on intercompany sale of plant assets (XXX)
Realized losses on intercompany sale of plant assets XXX
Consolidated Operating Expenses for the year XXXX

Retained earnings, parent (at date of acquisition) XXX

Cumulative consolidated net income (loss) – parent (CNI-P) XXX
Cumulative dividends declared by the parent (XXX)
Consolidated retained earnings (CRE), end XXXX
Or
Consolidated retained earnings, beginning XXX
Consolidated net income (loss) – parent (CNI-P) XXX
Dividends declared by the parent (XXX)
Consolidated retained earnings (CRE), end XXXX

NCI (at date of acquisition) XXX

Cumulative NCI in the net income (loss) of the subsidiary (NCINIS) XXX
Cumulative dividends paid to NCI (XXX)

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Ateneo de Zamboanga University – School of Management and Accountancy
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NCI in the net assets of the subsidiary (NCINAS), end XXXX
Or
NCINAS, beginning XXX
NCINIS XXX
Dividends paid to NCI (XXX)
NCI in the net assets of the subsidiary (NCINAS), end XXXX

Shareholders‟ equity – PARENT XXX

Bargain purchase gain (date of acquisition) XXX
Consolidated retained earnings (CRE) XXX
Non-controlling interest in the net assets of the subsidiary (NCINAS) XXX
Consolidated shareholders’ equity, end XXXX

ADVACC (Acctg 630) – MODULE 6: ACCOUNTING FOR BUSINESS

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Ateneo de Zamboanga University – School of Management and Accountancy