Consolidated Financial Statement-Part 3

1. On January 1, 20x1, Bright Co. acquired 75% interest in Dull Co. for P180,000. On this date, the
carrying amount of Dull’s net identifiable assets was P160,000, equal to fair value.
Non-controlling interest was measured at fair value of P60,000.
The financial statements of the entities on December 31, 20x1 show the following information:
Bright Co. Dull Co.
Assets
Investment in subsidiary (at cost) 180,000 -
Other assets 600,000 235,000
Total Assets 780,000 235,000
=======================
Liabilities and Equity
Liabilities 70,000 25,000
Share Capital 600,000 100,000
Retained earnings 110,000 110,000
Total equity 710,000 210,000
Total liabilities and equity 780,000 235,000
========================

Revenue 300,000 80,000

Operating expenses (60,000) (30,000)
Profit for the year 240,000 50,000

Additional Information:
● No dividends were declared by either entity during 20x1 and there were no intercompany
transactions
● However, it was determined by year-end that goodwill was impaired by P10,000.
Requirement: Prepare a draft of the December 31, 20x1 consolidated statements of financial position and
consolidated statement of profit or loss

Solution:
Step 1: Analysis of effects of intercompany transaction
There were no inter-company transactions during the year.

Step 2: Analysis of net assets

Acquisition
Subsidiary Co. Consolidation
date Net change
date
Total net assets at carrying amounts 160,000 210,000
Fair value adjustments at acquisition date - -
Subsequent depreciation of FVA NIL -
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 160,000 210,000 50,000

Step 3: Goodwill computation

Formula #2 - NCI measured at fair value
Consideration transferred 180,000
Less: Previously held equity interest in the acquiree -
Total 180,000
Less: Parent's proportionate share in the net assets of subsidiary (₱160,000 acquisition-date fair
value x 75%) (120,000)
Goodwill attributable to owners of parent – Jan. 1, 20x1 60,000
Less: Parent’s share in goodwill impairment (₱10,000 x 75%) (7,500)
Goodwill attributable to owners of parent – Dec. 31, 20x1 52,500

Fair value of NCI (see given) 60,000

Less: NCI's proportionate share in the net assets of subsidiary (₱160,000 acquisition-date fair
value x 25%) (40,000)
Goodwill attributable to NCI – Jan. 1, 20x1 20,000
Less: NCI’s share in goodwill impairment (₱10,000 x 25%) (2,500)
Goodwill attributable to NCI – Dec. 31, 20x1 17,500

Goodwill, net – Dec. 31, 20x1 70,000

Step 4: Non-controlling interest in net assets

Sub.'s net assets at fair value – Dec. 31, 20x1 (Step 2) 210,000
Multiply by: NCI percentage 25%
Total 52,500
Add: Goodwill to NCI net of accumulated impairment losses 17,500
Non-controlling interest in net assets – Dec. 31, 20x1 70,000

Step 5: Consolidated retained earnings

Parent's retained earnings – Dec. 31, 20x1 110,000
Consolidation adjustments:
Parent's share in the net change in Sub.'s net assets (a) 37,500
Unamortized deferred gain (Downstream only) -
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable to Parent (7,500)
Net consolidation adjustments 30,000
Consolidated retained earnings – Dec. 31, 20x1 140,000
(a)
Net change in Sub.’s net assets (Step 2) of ₱50,000 x 75% = ₱37,500.

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits before adjustments 240,000 50,000 290,000
Consolidation adjustments:
Unamortized def. gain - (Step 1) ( - ) ( - ) ( - )
Dividend income from subsidiary ( - ) N/A ( - )
Gain or loss on extinguishment
of bonds ( - ) ( - ) ( - )
Net consolidation adjustments ( - ) ( - ) ( - )
Profits before FVA 240,000 50,000 290,000
Depreciation of FVA ( - ) ( - ) ( - )
Impairment loss on goodwill (7,500) (2,500) (10,000)
Consolidated profit 232,500 47,500 280,000
Step 7: Profit or loss attributable to owners of parent and NCI
Owners Consoli-
of parent NCI dated
Parent's profit before FVA (Step 6) 240,000 N/A 240,000
Share in Sub.’s profit before FVA (c) 37,500 12,500 50,000
Depreciation of FVA ( - ) ( - ) ( - )
Share in impairment loss on goodwill (7,500) (2,500) (10,000)
Totals 270,000 10,000 280,000
(c)
Shares in Sub.’s profit before FVA (Step 6): (50,000 x 75%); (50,000 x 25%)

Consolidated
ASSETS
Investment in subsidiary (at cost) – eliminated -
Other assets (600,000 + 235,000) 835,000
Goodwill – net (Step 3) 70,000
TOTAL ASSETS 905,000

LIABILITIES AND EQUITY

Liabilities (70,000 + 25,000) 95,000
Share capital (Parent's only) 600,000
Retained earnings (Step 5) 140,000
Equity attributable to owners of the parent 740,000
Non-controlling interest (Step 4) 70,000
Total equity 810,000
TOTAL LIABILITIES AND EQUITY 905,000

Consolidated
Revenues (300,000 + 80,000) 380,000
Operating expenses (60,000 + 30,000) (90,000)
Impairment loss on goodwill (10,000)
Profit for the year 280,000

Profit attributable to owners of the parent (Step 7) 270,000

Profit attributable to NCI (Step 7) 10,000
Profit for the year 280,000

Use the following information for the next five questions:

Rubber Co. owns 75% interest in Plastic Inc. The statement of financial position of the entities on Janaury
1, 20x1 are shown below:
Rubber Co. Plastic Inc. Consolidated
Investment in subsidiary 112,500 - -
Other Assets 514,500 186,000 709,500
Goodwill - - 12,000
Total Assets 627,000 186,000 721,500
====================================
Accounts Payable 109,500 45,000 154,500
Share Capital 352,500 75,000 352,500
Retained Earnings 165,000 66,000 177,000
Equity attributable to owners of parent 529,500
Non-controlling interest 37,500
Total equity 517,000 141,000 567,000
Total liabilities and equity 627,000 186,000 721,500
===================================
1. On January 20x1, Rubber Co. acquired the remaining 25% interest in Plastic Inc. for
P80,000. How much is the gain or loss on the acquisition to be recognized in the consolidated
financial statements?
a. 42,500 c. (17,500)
b. (42,500) d. 0

2. On January 1, 20x2, Rubber Co. acquired the remaining 25% interest for P100,000.
Non-controlling interests were measured using the proportionate share method. How much is
non-controlling interest in the net assets f the acquire in the consolidated financial statements
prepared immediately after the acquisition?
a. 42,500 c. 25,000
b. 37,500 d. 0

3. On January 1, 20x2, Rubber Co. acquired additional 20% interest for P100,000.
Non-controlling interest were measured using the proportionate share method. How much is
non-controlling interest in the net assets of the acquire in the consolidated financial
statements prepared immediately after the acquisition?
a. 37,500 c. 7,500
b. 30,000 d. 0

4. On January 1, 20x2, Rubber Co. acquired additional 20% interest for P100,000.
Non-controlling interest were measured using the proportionate share method. How much is
consolidated retained earnings immediately after the acquisition?
a. 70,000 c. 130,000
b. 107,000 d. 137,500

5. On January 1, 20x2, Rubber Co. sold 60% out of its 75% interest in Plastic Inc for P120,000.
The sale resulted to a loss of control. The remaining interest is classified as held for trading.
How much is the gain or loss on the sale?
a. 25,500 c. 48,500
b. 37,500 d. 137,500

Answer: (solution)
1. D

2. D

3. C
Solution:
Owners of
% parent % NCI Net assets of XYZ
Before the transaction 75% 112,500 25% 37,500 150,000 a
After the transaction 95% 142,500 5% 7,500 150,000
Change – Inc./ (Decrease) 30,000 (30,000) -
a
The fair value of Plastic Co.’s net assets on January 1, 20x1 is computed as follows:
Rubber Co. Plastic, Inc. Consolidated FV of net assets
(a) (b) (c) (d) = (c) - (a)
Investment in sub. 112,500 - - -
Other assets 514,500 186,000 709,500 195,000
Goodwill - - 12,000
TOTAL ASSETS 627,000 186,000 721,500 195,000

Accounts payable 109,500 45,000 154,500 45,000

NET ASSETS 517,500 141,000 567,000 150,000

ANSWER: NCI in net assets after the additional acquisition = 7,500

4. B
Solution:
The entry in Rubber’s separate books is as follows:
Jan. 1, Investment in subsidiary 100,000
20x2 Cash in bank 100,000
to record the acquisition of additional interest in Plastic, Inc.

The consolidation journal entry is as follows:

Jan. 1, NCI (the decrease computed above) 30,000
20x2
Retained earnings – Rubber Co. (squeeze) 70,000
Investment in subsidiary 100,000

Consolidated retained earnings before additional acquisition 177,000

Decrease in retained earnings (70,000)
Consolidated retained earnings after additional acquisition 107,000

5. A
Solution:
The fair value of Plastic’s net identifiable assets is computed as follows:
Rubber Co. Plastic, Inc. Consolidated FV of net assets
(a) (b) (c) (d) = (c) - (a)
Investment in sub. 112,500 - - -
Other assets 514,500 186,000 709,500 195,000
Goodwill - - 12,000
TOTAL ASSETS 627,000 186,000 721,500 195,000

Accounts payable 109,500 45,000 154,500 45,000

NET ASSETS 517,500 141,000 567,000 150,000

The gain or loss on the sale is computed as follows:

Jan. 1, Cash (Consideration received) 120,000
20x2
Held for trading securities* 30,000
Accounts payable – Plastic, Inc. 45,000
 Non-controlling interest 37,500
Other assets – Plastic, Inc. 195,000
Goodwill 12,000
Gain on disposal (squeeze) 25,500

*(120,000 ÷ 60%) x 15% = 30,000

OR
Consideration received 120,000
Investment retained in the former subsidiary (at fair value) 30,000
NCI (carrying amount - see consolidated financial statements) 37,500
Total 187,500
Less: Plastic’s net identifiable assets (see computation above) (150,000)
Goodwill (see consolidated financial statements) (12,000)
Gain or loss on disposal of controlling interest 25,500