Module PROFE03 ACCOUNTING FOR BUSINESS COMBINATIONS

CHAPTER 5 CONSOLIDATED FS INTERCOMPANY TOPICS

Learning Objectives:

Prepare the consolidated financial statements eliminating the effects of

intercompany transactions.

Intercompany sale of Inventory

Unrealized gross profit in ending inventory

Intercompany sale of Inventory

Consolidated Sales

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Intercompany sale of Inventory

Consolidated Cost of Sales

Intercompany sale of Inventory

Consolidated Ending Inventory

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Intercompany sale of PPE

Consolidated PPE

Intercompany sale of PPE

Consolidated Depreciation Expense

Intercompany Dividends

The dividends must be eliminated when the consolidated financial statements are
prepared. It is as if the parent never received the dividends. Therefore:

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• If the dividends were recognized in profit or loss (if the investment is measured
at cost or at fair value), eliminate the dividend income in the consolidated
statement of profit or loss.

• If the dividends were recognized as reduction to the investment account (if the
investment is measured using the equity method), add back the dividends to the
investment account.

Intercompany Bond transaction

• When a parent or a subsidiary acquires bonds issued by the other, both the
investment in bonds and the bonds payable are eliminated in the consolidated
financial statements.

• The bonds payable are considered extinguished from the group’s point of view.

• Any interest expense/interest income recognized by the parent and the

subsidiary on each other is eliminated in the consolidated financial statements.

Sample Problem:

On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000
shares with fair value of ₱15 per share. On this date, XYZ’s equity comprised of

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₱50,000 share capital and ₱24,000 retained earnings. NCI was measured at its
proportionate share in XYZ’s net identifiable assets.

XYZ’s assets and liabilities on January 1, 20x1 approximate their fair values except for
the following:

Fair value
XYZ, Inc. Carrying Fair adjustments
amounts values (FVA)

Inventory 23,000 31,000 8,000

Equipment (4 yrs.
remaining life) 50,000 60,000 10,000

Accumulated
depreciation (10,000) (12,000) (2,000)

Totals 63,000 79,000 16,000

XYZ, Inc. declared and paid dividends of ₱6,000 during 20x1. There was no impairment
in goodwill. The year-end individual statements of profit or loss are shown below:

Statements of profit or loss

For the year ended December 31, 20x1

ABC Co. XYZ, Inc.

Sales 300,000 120,000

Cost of goods sold (165,000) (72,000)

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Gross profit 135,000 48,000

Depreciation expense (40,000) (10,000)

Distribution costs (32,000) (18,000)

Interest expense (3,000) -

Dividend income 4,800 -

Profit for the year 64,800 20,000

How much is the profit attributable to

Owners of the parent NCI

Solution:

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated

Profits before adjustments 64,800 20,000 84,800

Consolidation adjustments:

Unrealized profits - - -

Dividend income from

subsidiary (4,800) N/A (4,800)

Gain or loss on

extinguishment of bonds - - -

Net consolidation adjustments (4,800) - (4,800)

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Profits before FVA 60,000 20,000 80,000

Depreciation of FVA (b) (8,000) (2,000) (10,000)

Impairment loss on goodwill ( - ) ( - ) ( - )

Consolidated profit 52,000 18,000 70,000

(b)
₱8,000 dep’n. of FVA on inventory + ₱2,000 [(₱10,000 - ₱2,000) ÷ 4 yrs.] dep’n. of
FVA on equipment = ₱10,000

Shares in the depreciation of FVA: (10,000 x 80%); (10,000 x 20%)

Step 7: Profit or loss attributable to owners of parent and NCI

Owners
of Consoli-
parent NCI dated

ABC's profit before FVA

(Step 6) 60,000 N/A 60,000

Share in XYZ’s profit before

FVA (c) 16,000 4,000 20,000

Depreciation of FVA (Step

6) (8,000) (2,000) (10,000)

Share in impairment loss on ( - ( -

goodwill ( - ) ) )

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Totals 68,000 2,000 70,000

(c)
Shares in XYZ’s profit before FVA (Step 6) – (20,000 x 80%); (20,000 x 20%)

Reference:

ACCOUNTING FOR BUSINESS COMBINATIONS (ADVANCE ACCOUNTING 2) LECTURE

AID 2018 BY ZEUS VERNON B. MILLAN

Lecture Notes Compilation of Dean Rene Boy R. Bacay, CPA, CrFA, CMC, MBA, FRIAcc

For further discussion please refer to the link provided:

Intercompany Sale of Inventory- https://www.youtube.com/watch?v=-Bd_JSWu_ys

Intercompany Transaction on Inventories- https://www.youtube.com/watch?v=2QDV_fvtjX4

Intercompany Transaction on Property, Plant and Equipment- https://www.youtube.com/watch?v=uQiAnL4RC7k