BusinessCombi (Chapter 5)

Narag, Richmond B.
BSMA-3
PROBLEM 1
1. A 6. B
2. C 7. B
3. A 8. B
4. A 9. C
5. B 10. A
PROBLEM 2
Requirement (a)
Sales of Parent 1,000,000

Sales of Subsidiary. 700,000
Less: Intercompany sales during the year ( 38,000 + 40,000) (78,000)
Consolidated sales 1,622,000
Requirement (b)
The unrealized profits in ending inventory are computed as follows:

Downstream Upstream Total
Sale price
intercompany sale 38,000
Cost of
intercompany sale (20,000)
Profit from
intercompany sale 18,000 8,000
Multiply by: unsold
portion as of yr. (9.5/38) 3/4
end.
Unrealized Gross P 4,000 6,000 P 10,000
profit
Cost of sales parent 400,000

Cost of sales of subsidiary 350,000
Less: Intercompany sales during the yr. (38,000 + 40, 000) (78,000)
Add: Unrealized Profit in ending inventory 10,500
Less: Realized Profit in beginning inventory -
Add: depreciation of FVA on inventory -
Consolidate cost of sales 682,500
Requirement (c):
Ending inventory of parent
Ending inventory of subsidiary
Narag, Richmond B.
BSMA-3
Less: Unrealized profit in ending inventory (10,500)
Consolidated Ending Inventory 369,500
Requirement (a)
Historical Cost 120,000

Accumulated Dep’n. 1/1/1x1 (72,000)
Depreciation based on historical cost (12,000)
Carrying Amount 36,000
Requirement (b):
Equipment- net (Bright Co.) 400,000

Equipment- net (Dull Co.) 190,000
Unamortized deferred gain(see step 1 below) (9,000)
Consolidated equipment- net 581,000
Requirement (c)
Depreciation expense (Bright Co.) 40,000

Depreciation expense (Dull Co.) 12,000
Amortization of the deferred gain (12,000 gain on sale / 4 years) (3,000)
Consolidated depreciation expense 49,000
Step 1: Analysis of effects of intercompany transaction
The unamortized balance of the deferred gain is computed as follows:

Deferred gain on sale – Jan. 1, 2021 (60,000-(120000- 72000) 12,000
Multiply by: (3yrs. Remaining as of Dec. 31, 2021 over 4 yrs.) ¾
Deferred gain on sale – Dec. 31, 2021 9,000
Step 2: Analysis of net assets

Dull co. Acquisition date Consolidation date Net Change
Total net assets at
carrying amounts fair
value adjustments at
acquisition date 160,000 210,000
Fair value adjustment at
acquisition date - -
Subsequent Dep’n of NIL -
FVA
Unrealized profit NIL -
(upstream only)
Narag, Richmond B.
BSMA-3
Subsidiary’s net assets 160,000 210,000 50,000
at fair value
Step 3: Goodwill computation
Consideration transferred 180,000

Non- controlling interest in the acquiree (160k x 25%) 40,000
Previously held equity interest in the acquiree. —
Total 220,000
Fair value of net identifiable assets acquired (160,000)
Goodwill 60,000
Step 4: Non- controlling interest assets
Dull’s net assets at fair value – Dec. 31, 2021(step 2) 210,000

Multiply by: NCI percentage 25%
Total 52,500
Add: Goodwill to NCI net of accumulated impairment losses -
Non- controlling interest in net assets – Dec 31, 2021 52,500
Step 5: Consolidated retained earnings
Bright’s retained earnings – Dec 31, 2021 110,000

Consolidation adjustments:
Bright’s share in the net change in Dull’s net assets 37,500
Unamortized deferred gain (Downstream only) step 1 (9,000)
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attribute to parent -
Net consolidation adjustment 28,500
Consolidated retained earnings – Dec 31, 2021 138,000
Step 6: Consolidated profit or loss
Parent Subsidiary Consolidated

Profit before adjustments 240,000 50,0000 290,000
Consolidation Adjustment: (9,000) (-) ( 9,000 )
unamortized def. gain – (Step 1)
Dividend income from subsidiary (-) N/A (-)
Gain or loss on extinguishment
of bonds (-) (-) (-)
Net Consolidation Adjustment ( 9,000 ) (-) ( 9,000 )
Profit before FVA 231,000 50,000 281,000
Narag, Richmond B.
BSMA-3
Depreciation of FVA (-) (-) (-)
Impairment loss on goodwill (-) (-) (-)
Consolidated profit 231,000 50,000 281,000
Step 7: Profit or Loss attributed to owners of parent and NCI
Owners of Parent NCI Consolidated

Bright’s Profit before FVA (step 6 ) 231,000 N/A 231,000
Share in Dull’s profit before FVA (b) 37,500 12,500 50,000
Share in impairment loss on goodwill (-) (-) (-)
Totals 268,500 12,500 281,000
Requirement (d):
ASSETS Consolidated
Investment in subsidiary (at cost) – eliminated --
Equipment – net (Requirement b) 581,000
Other assets (200,000 + 45,000) 245,000
Goodwill (step 3) 60,000
Total Assets 886,000
Liabilities and Equity

Liabilities (70,000 + 45,000) 95,000
Share capital (Bright’s only) 600,000
Retained earnings (step 5) 138,500
Equity attributable to owners of the parent 738,500
Non- controlling interest (step 4) 52,500
Total equity 791,000
Total Liabilities and Equity 886,000
Consolidated
Revenues (300,000 + 80,000) 380,000
Depreciation expense (Requirement c) (45,000)
Other expenses (32,000 + 18,000) (50,000)
Gain on sale of equipment (eliminated) -
Profit for the year P 285,000
Profit attributable to the owners of the parent (Step 7) 268,500

Profit attributed to NCI (Step 7) 12,500
PROFIT FOR THE YEAR 281,000
Narag, Richmond B.
BSMA-3
3. Solution:
Total dividends declared ₱100,000

Allocation:
Owner of the parent (100,000 x 75%) 75,000
Non-controlling interest (100,000 x 25%) 25,000
As allocated
100,000
SUBSIDIARY ACQUISITION CONSOLIDATION NET CHANGE

DATE DATE
Net assets at carrying amounts. 240,000 320,000
Fair value adjustments at
Acquisition date - -
Subsequent depreciation
Of FVA NIL -
Unrealized profits (upstream
Only) NIL -
Subsidiary’s net assets at fair value 240,000 320,000 80,000
Step 3: Goodwill Computation
We can leave out this page because the information is insufficient.
Step 4: Non- controlling interest in net assets
Sub’s net assets at fair value – Dec. 31, 2021 (step 2) 320,000
Total 80,000
Non- controlling interest in net assets – Dec. 31, 2021 80,000
STEP 5: Consolidated retained earnings
Parents retained earnings- Dec. 31,2021 280,000

Consolidated adjustments:
Narag, Richmond B.
BSMA-3
Parents sh. In the net change in sub.’s net assets 60,000
Unrealized profits (downstream only) -
Gain or loss on extinguishment of bonds
Impairments loss on goodwill attributable to parent -
Net consolidation adjustments 60,000
Consolidated retained earnings – Dec. 31, 2021 340,000
Step 6: Consolidation profit or loss

Parent subsidiary consolidated
Profit before adjustment 475,000 132,000 607,000
Consolidation Adjustments:
Unrealized Profits - - -
Dividend Income from Subsidiary (75,000) N/A (75,000)
Gain or loss on extinguishment of bonds - - -
Net consolidation Adjustment (75,000) - (75,000)
Profit before FVA (40,000) 132,000 532,000
Consolidation profit 400,000 132,000 532,000
Step 7: Profit or loss attributable to owners of parent and NCI
Owners of parent NCI Consolidated

Parent’s profit before FVA (step 6) 400,000 N/A 400,000
Share in sub’s profit before FVA 99,000 33,000 132,000
Depreciation of FVA (Step 6) - - -
Share in impairment loss on goodwill - - -
Totals 499,000 33,000 532,000
4. SOLUTION:
Requirement (a): Gain on extinguishment of bonds
The gain or loss on the extinguishment of bonds is computed as:

Acquisition cost of bonds (assumed retirement price) 250,000
Carrying amount of bonds payable (300,000)
Gain on extinguishment of bonds 50,000
Requirement (b): Consolidated total bonds payable

Bonds payable (at face amount) – issued by parent P 300,000
Narag, Richmond B.
BSMA-3
Portion acquired by subsidiary (300,000)
Consolidated total bonds payable --
Subsidiary Acquisition Consolidation Net change

Date Date
Net assets at carrying amounts 200,000 270,000

Fair value adjustments at acquisition
Date - -
Subsequent depreciation of FVA NIL -
Unrealized profits (upstream only) NIL -
Subsidiary’s net asset at fair value 200,000 270,000 70,000
Consideration transferred (cost of investment in sub.) 180,000

Non-controlling interest in the acquiree (200k x25%) 50,000
Previously held equity interest in the acquire -
Total 230,000
GOODWILL 30,000
Step 4: Non-controlling interest in net assets
Sub.’s net assets at fair value – Dec. 31, 2021 (step 2) 270,000
Total 67,500
Non-controlling interest in net assets – Dec. 31, 2021 67,500

Narag, Richmond B.
BSMA-3
Parent’s retained earnings- Dec. 31, 2021 140,000
Parent’s share in the net change in sub.’s net assets 52,000
Unrealized profits (downstream only) -
Gain on extinguishment of bonds (step 1) 50,000
Impairment loss o goodwill attributable to parent -
Consolidated retained earnings – Dec. 31, 2021 242,500
STEP 6: Consolidated profit or loss

Parent Subsidiary consolidated
Profit before adjustment 80,000 20,000 100,000
Consolidation adjustments
Unrealized profits - - -
Dividend income from subsidiary - N/A (-)
Gain on extinguishment of bonds 50,000 - 50,000
NET CONSOLIDATION ADJUSMENTS: 50,000 - 50,000
PROFIT BEFORE FVA 130,000 20,000 150,000

Consolidated profit 130,000 20,000 150,000
STEP 7: profit or loss attributable to the owners of parent and NCI

Owners of NCI consolidated
parent
Parent profit before FVA (step 6) 130,000 N/A 130,000
share in sub.’s profit before FVA 15,000 5,000 20,000
Share in impairment loss on goodwill (-) (-) (-)
TOTALS 145,000 5,000 150,000
Narag, Richmond B.
BSMA-3
Requirement (c): consolidated financial statements

CONSOLIDATED:
ASSETS
INVESTMENT IN SUBSIDIARY (AT COST) - ELIMINATED -
INVESTMENT IN BONDS - ELIMINATED -
OTHER ASSETS( 500,000 + 50,000) 550,000
GOODWILL (STEP 3) -
Total assets 580,000
LIABILITIES AND EQUITY

Accounts payable (40,000 + 30,000) 70,000
Bonds payable (at face amount) - eliminated -
Total liabilities 70,000
Share capital (parent only) 200,000

Retained earnings (step 5) 242,500
Equity attributable to owners of parent 442,500

NCI in net assets (step 4) 67,500
Total equity 510,000
TOTAL LIABILITIES AND EQUITY 580,000
Consolidated
Revenues (300,000 + 120,000) 420,000
Operating expenses (217,000 + 100,000) (317,000)
Interest expenses (3,000 + 0 ) (3,000)
Gain on extinguishment of bonds (step 1) 50,000
Profit for the year 150,000
Narag, Richmond B.
BSMA-3
Profitable attributed to owner of the parent (step 7) 145,000
Profit attributed to NCI (step &) 5,000
PROBLEM 3
1. SOLUTION:
Requirement (a):
Sales of parent 1, 000,000
Sales of subsidiary 700,000
Less: intercompany sales during the year (16K + 60K) (76,000)
Consolidated sales 1,624,000
Requirement (b):
Downstream Upstream Total

Sales price of intercompany sale 16,000
Cost of intercompany sale (12,000)
Profit from intercompany sale 4,000 10,000
Multiply by: unsold portion as of yr. end ½ ¼
Unrealized gross profit 2,000 2,500 4,500
Cost of intercompany sale (12,000)

Profit from intercompany sale 4,000 10,000
Multiply by: unsold portion as of year
End ½ ¼
UNREALIZED GROSS PROFIT 2,000 2,500 4,500
Cost of sales of parent 400,000

Less: Intercompany sales during the yr. (76,000)
Add: Unrealized profit in ending inventory 4,500
Narag, Richmond B.
BSMA-3
Less: Realized profit (beginning inventory) -
Add: Depreciation of FVA on inventory -
CONSOLIDATED COST OF SALES 678,500
Requirement ©
Ending inventory of parent 300,000
Ending inventory of subsidiary 80,000
Less: Unrealized profit in ending inventory (4,500)
CONSOLIDATED ENDING INVENTORY 375,500
2. Solutions:
Requirement (a)
Historical cost 144,000
Accumulated depreciation (86,400)
Depreciation based on historical cost (14,400)
CARRYING AMOUNT 43,200
Requirement (b)
Equipment – net (day co.) 480,000
Equipment – net (night co.) 228,000
Unamortized deferred gain (10,800)
CONSOLIDATED EQUIPMENT – NET 697,200
Requirement ©
Depreciation expense (day co.) 48,000
Depreciation expense (night co.) 14,400
Amortization of the deferred gain (3,600)
CONSOLIDATED DEPRECIATION EXPENSE 58,800

Deferred gain on sale- Jan. 1 [72,000-(144,000-86,400)] 14,400
Multiply by: (3 years over 4 years) ¾
Deferred gain on sale- Dec. 31 10,800

Night Co. Acquisition date Consolidation date Net change
Total net assets in
Carrying amount 192,000 252,000
Fair value adjustments
At acquisition date - -
Subsequent depreciation
Of FVA NIL -
Unrealized profits NIL -
Subsidiary’s net assets at FV 192,000 252,000 60,000
Narag, Richmond B.
BSMA-3
Non- controlling interest
the acquiree (192,000x25%) 48,000
Previously held equity interest
in the acquire -
TOTAL 264,000
GOODWILL 72,000

Night’s net asset at FV- Dec. 31 252,000
TOTAL 63,000
Add: Goodwill to NCI -
NON CONTROLLING INTEREST IN NET ASSETS DEC. 31 63,000

Day’s retained earnings – Dec 31 1 32,000
Day’s share in the net change in Night’s assets 45,000
Unamortized deferred gain (10,800)
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable to parent –
Consolidated retained earnings Dec. 31 166,200

Profits before adjustments 288,000 60,000 348,000
Unamortized def. gain (10,800) - (10,800)
Dividend income from
subsidiary - - -
of bonds - - -
Net consolidation
adjustments (10,800) - (10,800)
PROFITS BEFORE FVA 277,200 60,000 337,200
Depreciation of FVA - - -
Impairment loss on goodwill - - -
Narag, Richmond B.
BSMA-3
CONSOLIDATED PROFIT 277,200 60,000 337,200

Day’s profit before FVA 277,200 N/A 277,200
Share in Night’s profit before FVA 45,000 15,000 60,000
Share in impairment loss on
Goodwill - - -
TOTAL 322,200 15,000 337,200
Requirement (d)
Consolidated
Revenues (360,000+96,000) 456,000
Depreciation expense (requirement c) (58,800)
Other expenses (38,400+21,600) (60,000)
Gain on sale of equipment(eliminated) -
Profit attributable to owners of the parent 337,200
Profit attributable to NCI 15,000
3. Solutions
Total dividends declared 150,000
Allocation:
Owners of the parent (150,000x75%) 112,500
Non- controlling interest(150,000x25%) 37,500
As allocated 150,000

Subsidiary Acquisition date Consolidation date Net change
Net assets of
Carrying amounts 360,000 480,000 –
Subsequent dept’n
Of FVA NIL - -
Unrealized profit NIL - -
SUBSIDIARY’S NET
assets at fair value 360,000 480,000 120,000
Step 4: Non- controlling interest in net assets

Sub’s net assets at FV- Dec. 31 480,000
Narag, Richmond B.
BSMA-3
TOTAL 120,000
Add: Goodwill to NCI net of
accumulated impairment loss -
NON-CONTROLLING INTEREST IN
NET ASSETS- Dec. 31 120,000

Parent’s retained earnings- Dec. 31 420,000
Parent’ share in the net change
In sub’s net assets 90,000
unrealized profits -
of bonds –
Impairment loss on goodwill
attributable to parent -
Consolidated retained earnings Dec. 31 510,000

Profits before
Adjustments 712,500 198,000 910,500
Dividend income from
subsidiary (112,500) N/A (112,500)
Gain or loss on extinguishments
of bonds - - -
NET CONSOLIDATION
ADJUSTMENTS (112,500) - (112,500)
Profits before FVA 600,000 198,000 798,000
Consolidation profit 600,000 198,000 798,000

Parent’s profit before FVA 600,000 N/A 600,000
Share in sub’s profit before FVA 148,500 49,500 198,000
Share in impairment loss on goodwill - - -
TOTAL 748,500 49,500 798,000
4. Solutions:
Narag, Richmond B.
BSMA-3
Requirement (a): Gain on extinguishment of bonds
Acquisition cost of bonds 320,000
Carrying amount of bonds payable (300,000)
Loss on extinguishment of bonds (20,000)
Step 2: Analysis net assets

Subsidiary Acquisition date Consolidation date Net change
Net assets of carrying amounts 208,000 234,000
Fair value adjustments at
acquisition date - -
Subsequent depreciation of FVA NIL -
Unrealized depreciation
of FVA NIL -
Unrealized profits NIL -
Subidiary’s net assets
at Fair Value 208,000 243,000 26,000

Non- controlling interest in the acquiree 52,000
Previously held equity interest
in the acquiree -
TOTAL 286,000
Fair value of net identifiable
Assets acquired (208,000)
GOODWILL 78,000

Sub’s net assets at fair value- Dec. 31 234,000
TOTAL 58,500
Add: Goodwill to NCI net of
Accumulated impairment losses -
Non- controlling interest in net assets- Dec.31 58,500

Parent’s retained earnings Dec. 31 182,000
Parent’s share in the net change in
sub’s net assets 19,500
Unrealized profits -
Gain on extinguishment of bonds (20,000)
Impairment loss on goodwill
Narag, Richmond B.
BSMA-3
attributable to parent -
Net consolidation adjustments (500)
CONSOLIDATED RETAINED EARNINGS-DEC.31 181,500

Profits before adjustments 104,900 26,000 130,900
Dividend income from subsidiary - - -
Loss on extinguishment of
bonds (20,000) - (20,000)
Net consolidation adjustments (20,000) - (20,000)
Profits before FVA 84,9000 26,000 110,900
CONSOLIDATED PROFIT 84,900 26,000 110,900
Requirement © Consolidated financial statements

ASSETS
Investment in subsidiary (at cost) -
Investment in bonds -
Other assets (650,000+65,000) 714,000
Goodwill 78,000
TOTAL ASSETS 792,000
LIABILITIES AND EQUITY

Accounts payable (52,000+150,000) 202,000
Bonds payable -
TOTAL LIABILITIES 202,000
Share capital (parent only) 350,000
Retained earnings 181,500
Equity attributable to owners of the parent 531,500
NCI in net assets 58,500
Total Equity 590,000
TOTAL LIABILITIES AND EQUITY 792,000
Consolidated
Revenues (390,000+156,000) 546,000
Operating expenses (282,000+130,000) (412,100)
Interest expense (3,000) (3,000)
Loss on extinguishment of bonds (20,000)
Profit attributable to owners of the parent 104,400

Profit attributable to NCI 6,500
Narag, Richmond B.
BSMA-3
PROBLEM 4:
1. D
Sales by Parent 400,000
Sales by subsidiary 280,000
Less: Intercompany sales during the year (64,000)
CONSOLIDATED 616,000
2. A
Cost of sales of Parent 300,000
Consolidated sales 616,000
3. C
Cost of sales of parent 400,000
Add: Unrealized profit in ending inventory -
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory -
CONSOLIDATED COST OF SALES 500,000
4. C
Ending inventory of Banks Co. 235,000
Ending inventory of Lamm Co. 250,000
Less: Unrealized in El (15,000)
CONSOLIDATED ENDING INVENTORY 470,000
5. B
Kidd’s net assets at fair value 120,000
Multiply by NCI percentage 25%
TOTAL 30,000
NON CONTROLLING INTEREST IN NET ASSETS 30,000
6. B- common stock of the parent
7. B
Narag, Richmond B.
BSMA-3
8. D
Saul’s net assets at fair value 6,385,000
TOTAL 1,277,000
Add: goodwill to NCI net of accumulated impairment losses 50,000
Non- Controlling interest in net assets 1,327,000
9. C
Total consolidated current assets before elimination 320,000
Unrealized profit on purchases from Kent (12,000)
COSOLIDATED CURRENT ASSETS 308,000
10. A
Carrying amount 1,075,000
Settlement amount 975,000
GAIN ON EXTINGUISHMENT 100,000

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Narag, Richmond B.

Sales of Parent 1,000,000

Cost of sales parent 400,000

Historical Cost 120,000

Equipment- net (Bright Co.) 400,000

Depreciation expense (Bright Co.) 40,000

Step 1: Analysis of effects of intercompany transaction

The unamortized balance of the deferred gain is computed as follows:

Step 2: Analysis of net assets

Step 3: Goodwill computation

Consideration transferred 180,000

Step 4: Non- controlling interest assets

Dull’s net assets at fair value – Dec. 31, 2021(step 2) 210,000

Step 5: Consolidated retained earnings

Bright’s retained earnings – Dec 31, 2021 110,000

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated

Step 7: Profit or Loss attributed to owners of parent and NCI

Owners of Parent NCI Consolidated

Liabilities and Equity

Profit attributable to the owners of the parent (Step 7) 268,500

Step 1: Analysis of effects of intercompany transaction

Total dividends declared ₱100,000

Step 2: Analysis of net assets

SUBSIDIARY ACQUISITION CONSOLIDATION NET CHANGE

Subsidiary’s net assets at fair value 240,000 320,000 80,000

Step 3: Goodwill Computation

We can leave out this page because the information is insufficient.

Step 4: Non- controlling interest in net assets

STEP 5: Consolidated retained earnings

Parents retained earnings- Dec. 31,2021 280,000

Step 6: Consolidation profit or loss

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

Owners of parent NCI Consolidated

Step 1: Analysis of effects of intercompany transaction

Requirement (a): Gain on extinguishment of bonds

The gain or loss on the extinguishment of bonds is computed as:

Requirement (b): Consolidated total bonds payable

Step 2: Analysis of net assets

Subsidiary Acquisition Consolidation Net change

Net assets at carrying amounts 200,000 270,000

Subsidiary’s net asset at fair value 200,000 270,000 70,000

Step 3: Goodwill computation

Consideration transferred (cost of investment in sub.) 180,000

Step 4: Non-controlling interest in net assets

Step 5: Consolidated retained earnings

STEP 6: Consolidated profit or loss

PROFIT BEFORE FVA 130,000 20,000 150,000

STEP 7: profit or loss attributable to the owners of parent and NCI

Requirement (c): consolidated financial statements

LIABILITIES AND EQUITY

Share capital (parent only) 200,000

Equity attributable to owners of parent 442,500

TOTAL LIABILITIES AND EQUITY 580,000

Downstream Upstream Total

Cost of intercompany sale (12,000)

Cost of sales of parent 400,000

Step 1: Analysis of effects of intercompany transaction