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    Chapter 5 MILLAN

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    Jaira Ebron

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    © All Rights Reserved
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    of 37
    ate Financial Statements (Part 2) 189 cons Chapter 5 consolidated Financial Statements (Part 2) cing Objective be are consolidated financial statements after eliminating the Le ee, ' effects of intercompany transactions. | Prep’ intercompany transactions intercompany transactions are transactions between a parent and asubsidiary- The effects of these transactions are eliminated when reparing consolidated financial statements because the parent and the subsidiary are viewed as a single reporting entity. This is like the statement “You cannot transact with your own self.” To exemplify, let me tell you a story. © ° Story: The Bear Group | During 20x1, Papa Bear buys a pair of sandals for P100 from | Goldilocks, an unrelated party. The sandals don’t fit Papa Bear's enormous feet so Papa Bear sells them to Mama Bear for P150. | Question: From the point of view of the Bear Family, how much “household income” is realized? Answer: Obviously, none. The family can’t get rich even if the Papa and the Mama sells to each other all day long! #© bi entries in the separate books of Papa and Mama are as follows; Books : of Papa Bear Books of Mama Bear Inventory +100 ‘0 record the purchase of inventory Inventory. Cash. 050 to record the purchase from = Financial Statements (Part 2) cot 191 ote" 7 Nt oth sales and cost of sales are elinrin tough Papa Bear's cost of sales ig g adjusted = . the Unrealized profit simplifies e consolidation process if This method repared (se Tradionl counting meg : msolidation entries are 0). yf the sale was made on account, the int ‘df fer receivable and accounts payable shall also fede coon iminated, ¢ Weaan reconcile the computed amounts ui Foi \ulas: ae at the sale price even at cost, Cost Of sales is e ie price of intercompany sale in current year Cost of intercompany sale in current year ao profit from intercompany sale in current year 5 Multiply Py: Unsold portion of inventory as of year-end ito, unrealized gross profit in ending inventory - current yr. 50 Ending inventory of Parent (Papa Bear) : Ending inventory of Subsidiary (Mama Bear) 150 Less: Unrealized pro} it in ending inventor, (50) 100 Consolidated ending inventory Sales of Parent (Papa Bear) 150 Sales of Subsidiary (Mama Bear) - Tess: Intercompany sales during the current period (150) Consolidated sales 2 Cost of sales of Parent (Papa Bear) 100 Cost of sales of Subsidiary (Mama Bea”) : i: Less: Intercompany sales during the current period ey ing inventory Add: Unrealized profit in end z Consolidated cost of sales Consolidated gross profit Traditional accounting method lidation journal entries (CJE): CJE #1 | Sales Cost of sales to eliminate the intercompany sale ’ CJE #2 | Cost of sales 30 Inventory todliminate the unrealized profit and adjust the ending inoentory to its original cost Bear Family Consolidation Working Paper December 31, 20x1 | Papa | Mama Inventory TL -_{_ 150 | | Sales 1s0 | = | (150) cen Cost of sales L@00) | - 150+(50) SA & #2 Gross profit | ite Again, the consolidation journal entries are not record in either of Papa’s or Mama’s books. CJE’s are used onl facilitate the preparation of the consolidation working paper, ; consequently the consolidated financial statements, According Papa’s sale to Mama and Mama’s purchase from Papa will still Presented in the individual financial tatements of Papa si en fo, ade ee | Story: The Bear Group (Part2) | To be honest, I actual! | © Scenario #1: Mama bear " sells thy | ane the current year (20x1). Ta * Scenario #2: Mama bea: h Lb ia bern ny the sandals to an unrelated Pa! sed Finantial Statements (Part 2) 193 a con 2 7 seo arty in 2081 anid (the right) to an unrelated party in 20xT and the other sandal (the left) in 20x2 seenario #1: Realized gross profit - Year of transaction ihe end of 20x1, Mama Bear was able to sell the pair of sandals | o Bad Wolf, an unrelated party, for P180, | ‘ 5 lost From the point of view of the Bear Family, how much oh ousehold income” is realized? | Amster: P80 (P180 sale price to external party, Big Bad Wolf, less urchase price from external party, Goldilocks). : | 9100p ‘The entries in the separate books of Papa and Mama are as follows: caren Books of Papa Beai Books of Mama Bear vst | Inventory.. 100 mi Inventory..........150 Cash..... Cost of sales. Inventory. .180 vee 180 fo record the sale fo an unrelated party [20x Cost of sales....150 Inventory: The 20x1 year-end individual financial statements of the entities show the following: Papa Mama Inventory : = —_$ Sales 150 180 Cost of sales (100)__(150 Gross profit 50 30 —— The intercompany transaction shall still be eli in, However, the transactions with the unrelated Pattieg te Goldilocks and Big Bad Wolf) shall be incorporateq consolidated financial statements. Thus: > the consolidated sales is £180 (i.e., sale to Big Bad Wolf) > the consolidated cost of sales is P100 (i.e., purchase p,.. Goldilocks), and the consolidated inventory is zero. in Price ft v We can reconcile the amounts using formulas: Sale price of intercompany sale in.current year Cost of intercompany sale in current year Profit from intercompany sale in current year Multiply by: Unsold portion of inventory as of year-end. Unrealized gross profit in ending inventory — current yr. Ending inventory of Parent (Papa Bear) Ending inventory of Subsidiary (Mama Bear) Less: Unrealized i profit in ending inventory Sales of Parent (Papa Bear) Sales of Subsidiary (Mama Bear) Less: Intercompany sales during the i current Consolidated sate = ae jaated 195 jidated financial information is id on? rafted as fol] re lOWs: Consolidi 5-150 i ; ~Ousolidated oo OF 150-150 inferco. COS-O unrealized profi ip : (ot 180-150 intercompany sale) — eS eens to of sales 100 * 150-150 inferco, sale +0 unteatized profit a ofit a oss Ps 80 Spear #2: Realized gross Profit - Subsequent year vem Bear sells the pair of sandals for P180 to Big Bad Wol ww oated party, in 20x2. olf, an | usin From the point of view of the Bear Family, how much household income” is realized in 20x1 and 20x2, respectively? | Answer: None in 20x1 and P80 in 20x2 (P180 - P100). 7 The 20x1 consolidated financial statements will have the same amounts as those in Part 1 of the story, while the 20x2 consolidated financial statements will show consolidated sales of 7180, consolidated cost of sales of P100 and consolidated inventory of zero (same with Part 2, Scenario #1). The entries in the separate books of Papa and Mama in | Uyx2 are: | Books of Papa Bear Books of Mama Bear | m2 Cash.. | No entry Sales. os (The intercompany sale occurred in to record the sale fo | 20x1) unrelated party | Cost of sales....150 | Inventory. In the 20x2 consolidation, there is 0 intercompany sale to climinate because the intercompany transaction occurred in 20x1. tt 5 ee a ete oa in ending inventory to gy. ad profit in ending MOENTOTY to gi : ue sold during the year, "in, books of Papa and Mam, valiz Also, there is "0 ee e because the entire inventOF) . ; 1, the separa’ 2 MA tay Howeve profit from the 20x1 intercon ed gross ‘ the unrealized 8 nie Sasol The effects are as fol 's retained earnings j,, sari lance of Papa's = ae Tee oe ie point of view of the group decay, cinerea ‘rom the intercompany sale in 20x1, a d.profit f See or of sales in 20x2 is overstated because b. Mama's ice recognized the inventory at the purchase price from Pap, a Ma a, ma We will modify our formulas to reflect the realized : i 8 profit in the 20x2 beginning inventory. Sale price of intercompany sale in prior year Cost of intercompany sale in prior year Profit from intercompany sale in prior year Multiply by: Unsold portion of inventory as of beg. of year Realized ross profit in beginning inventory - current year 18) Ending inventory of Parent (Papo Bear) Sales of Parent (Papa Bear) 150 Sales of Subsidiary (Mama Bear) 180 Less: Intercompany sales during the current period (150) Consolidated sales Cost of sales of Parent — 20x2 Cost of sales of Subsidiary ~ 20,2 Less; Intercompany sales — 20x2 Add: Unrealized profit in ending inventory Less: Realized p ofit in begi i Consolidated cost of sai inning invento nancial Statements (Part 2. ») yiated ot 197 | | | No aoe seed pened Profit in 29,7 Was si od and tecogri Y in 20%2 when it was realized qari #3: Partly Realized; Partly Unrealized ‘ Bear sells half of the pair of sandals to Ogte, an My for PLO in 201 and the other halo pee oe re ated party, for P90 in 20x2, Ss Fiona, an wu | | ; From the point of view of the Be 7 yestion: e ee fear Family, hy Cineshold income” is realized in 20x1 and 20x2, repectvaye aysver: P60 in 20x1 [PL10 ~ (P100 x p100x 2). i ee ee oo | %)] and P40 in 20x2 [P90 - The consolidated financial statements will show the fol = 2x1: consolidated sales of F110, consolidated cost and consolidated inventory of P50. © 20x2: consolidated sales of P90, consolidated cost of sales of P50 and consolidated inventory of zero. lowing: of sales of P50 | % 20x consolidation: Sale price of intercompany sale in current year 150 Cost of intercompany sale in current year (100) Profit from intercompany sale in current year 50 Multiply by: Unsold portion of inventory as of year-end 50% Umealized gross profit in ending inventory - current yr. i eure ae | Ending inventory of Parent (Papa Bear) . Ending inventory of Subsidiary (Mama Ber) % Sof Parent apa Ben) a | Sof Subsidiary (Mama Bear) al (150) ; 110 "solid: ted sales Cost of sales of Parent Lest Intercomp? tized profit | , i profit in beginning inventory tnadee & 20x2 consolidation: ce of intercompany sale in prior year y sale in prior year ior year tory as of beg. of year ry — current year Sale pri Cost of intercompan tercompany sale in pri Multiply by: Unsold portion of inven Realized gross profit in beginning invento Profit from in Ending inventory of Parent (Papa Bear) Ending inventory of Subsidiary (Mama Bear) Less Unrealized profit in ending invento! “Consolidated ending invento' Sales of Parent - 20x2 Sales of Subsidiary - 20x2 _Less: intercompany sales - 20x2 Consolidated sales ~ 20x2 Cost of sales of Parent ~ 20x2 Cost of sales of Subsidiary ~ 20x2 4 Less: Intercompany sales - 20x2 : Ade: Unrealized profit in ending inventory test Realized profit in beginning inventory idated cost of sales - 20x2 Liiopd as ct ee a illustrations from the previous “* Procedures involvin, with a good foundation on the consolidata 8 intercompany transactions. This is ‘ have py - anc ts (Part 2) wal inancial Staterner? art 2) 199 wag the additional concepts and _proced: i 8 sions ndeia bo P lures in the lovin are the common intercompany transactions that are mad when preparing consolidated financial statements: eee mpany sale of inventory : rer any sale of property, plant, and equipment b any dividends el company bond transactions 4B mpan sale of inventory ere sales are either: m - the parent sells to the subsidiary the subsidiary sells to the parent 1 1 Upstream — Parent (Investor) ‘ t Upstream Subsidiary (Investee) identify whether an intercompany sale is Ly upstream sales affect non- Downstream It is important to stream or upstream because o”t downs controlling interests. The entity that recognizes profit from a sale transaction is theseller. * zes the profit. NCI is + Ina downstream sale, the parent recogni: not affected because the profit pertains solely to the owners of the parent. ‘+ Inan upstream sale, the subsidiary recognizes the profit. NCI is affected because the profit pertains to both the owners of the parent (because of their interest in the subsidiary) and the NCI (the other owners of the subsidiary). Parent says, “What is mine is mine alone (downstream). What is yours is ours (upstream).” © Illustration: Consolidation - Intercompany sale of invent, On January 1, 20x1, ABC Co. acquired 80% interest in Xyz P y : a jan, 1, 20x1 (acquisition date): assets have a carrying an, £ 90,000. The difference is q Information ont I e XYZ's net identifiable a 74,000 and fair value o} re ed following: : 0 Carrying Fair Fa pal value dj amount 20,000 40,000 “Inventory Equipment, net Totals © The remaining useful life of the equipment is 6 years. « ABC measured the NCI at ‘proportionate share’. Information on Dec.31, 20x1 (consolidation date): Statements of financial position ‘As at December 31, 20x1 ABC Co. ASSETS Cash 41,000 67, Accounts receivable 73,000 n9 Inventory 97,000 1y Investment in subsidiary (at cost) 75,000 f Equipment, net 140,000 304 TOTAL ASSETS 228,000 LIABILITIES AND EQUITY Accounts payable Total liabilities Share capital Share premium 170,000 Total equit 2 — 5, — TOTAL LIABILITIES AND EQUITY nancial Statements (Part 2) ; itl Fin a { ; profit or loss 5 of PTO) ste ended December 31, 20x1 y ed : ABC Co, XYZ, Inc 330,000 150,750 (185,000) gales old oft 145,000 54,150 (40,000) Gms nse or ean OP (20,000) ie foll owin intercompany transactions occurred in 20x1; Co. sold goods costing P12,000 to XYZ, Inc, for cash, at a ABC ae markup of 40% on selling price. XYZ held one-fourth of the gods at year-end. ABC CO- acquired inventory from XYZ, Inc. for P12,000 cash. XYZ, Inc. uses 4 normal markup of 25% above its cost. ABC's ending inventory included P4,000 from this purchase. Requirement: Prepare the December 31, 20x1 consolidated financial statements. Solutions: Again, we since the acquisition date and this ti analysis the effects of intercompany transactions. need to analyze the changes in the subsidiary’s net assets ime we need to include in our Step 1: Analysis of effects of intercompany transaction Transaction (a) is downstream because the seller is the parent (ABC Co), while transaction (b) is upstream because the seller is the subsidiary (XYZ, Inc.). The unrealized gross profits in ending determined as follows: inventory are Uaeahzed GP in ET —_ ‘The consolidated ending inventory, sales, COst Of sales . ¢ The St gross profit are computed as follow: Ending inventory of ABC cS ora Ending inventory of XYZ, Inc. 104 Less: Unrealized profit in ending inventory (2,000 + 800) aq Add: FVA, net - 12/31/x1 Consolidated inventory _ SESE agg Sales by ABC Co. a Sales by XYZ, Inc. 50m Less: Intercompany sales during 20x1 (20,000 + 12,000) 2 7 Consolidated sales 000 Se ta aw Cost of sales of ABC Co. Cost of sales of XYZ, Inc. 185, fase Intercompan i 96,60 ly sales di 6 Add: Unrealized profit in Sane 22x! 00+ 12000 (32,00 Less: Realized profit inbeginningsyee 00 * 800) a Add: Depreciation o FVA ‘8 inventory [a ie On inventory (a onsolidated cost of ‘sales 404 Consolidated Gross profie cial Statements (Part 2) of 203, id ysis of subsidiary’s net assets Jan.1, 20x1 Dec. 31, 20:4 Net Grcartyine amount 74,000 oer change ss adjustments (EVA) — 16,000 = 19,9990 ! a call 7 at at fait value 90,000 109,350 19,350 gee omputations above. yet : i __ ay recognizes profit only from upstream sal psidiaty ghey sales. Thus, onl WA i on sales affect the subsidiary’s net assets, and consequently 7 up? xc ill computation 3, Goodw! 7 eration transferred (equal to cost of investment in subsidiary) 75,000 “ controlling interest in the acquire (90K x 20%) - Step2 18,000 vous held equity interest in the acquiree 7 sail = 93,000 air value of net identifiable assets acquired (see Step 2) (90,000) 20x1 3,000 Goodieill - Jan. 1, : Less: ‘Accumulated impairment losses Goodwill - Dec. 31, 20x1 3,000 step 4: Non-controlling interest in net assets Subsidiary's net assets at fair value — Dec. 31, 20%1 (see Step 2) 109,350 Multiply by: Nat percentage : 20% 31, 20x1 21,870 Non-controlling interest in net assets - Dec. Step 5: Consolidated retained earnings Parent's retained earnings - Dec. 31, 20x1 120,000 Unealized profit (Downstream only) - (St) (2,000) 15,480 Tarent's share in the net change in subsidi 's net assets Consolidated retained earnings - Dec. 31, 20x1 133,480 transactions are ‘Nol: Unreali . : alized profits from wpstream i while unrealized *usied to the subsidiary’s net assets (Step 2) sactions are adjusted to the i downstream tran! profits from retained earnings (Step 5). @ Net change in XYZ’s net assets (See Step 2) "si tin XYZ Multiply by: ABC's interest / ABC's share in the net change XYZ’s net assets Step 6: Consolidated profit or loss Step 6: Consolidated profit or loss Parent Subsidiay Consony Profits before adjustments 70,000 26,150 oa Effects of intercompany transactions: profits (Step 1) The consolidated ic ais Profit is attributed Parent and NCI as follows: Hibuted to the Owners of : Owne: P i TS OF Share ig oe FV (see above) cen NCI Consolida in xyz. ; Deprecsge Pht before FVA 0 NIA reciation of FVA a 20.280 5,079 ) inant Statements (Part 2) SEH aso} at oh 205 ABC Group consolidated statement of financial posi As of December 31, 2 os: Position 3 9 +6750) «counts receivable (75,000 + 22,000) 108,750 iqvertory (#8 previous computation using formula) 97,000 ipment, net (140,000 + 30,000 + 10,000 FVA net, Step 2) 104,600 ‘00% will (Step 3) 180,000 3,000 [ABILITIES AND EQUITY ants payable (73,000 + 30,000) Ace Acco! Total liabilities . Share capital (Parent only) 103,000 Share premium (Parent only) tom Retained earnings (Parent ‘only ~ Step 5) 133, 480 Owners of parent : 368480 [Todegity SY [ToraL LiABmLTTIES AND EQUITY RS f ABC Group Statement of profit or loss For the year ended December 31, 20x1 Sales (see previous computation using formula) 448,750 Cost of goods sold (see previous computation using mule (256,400) Gross profit 192,350 Distribution costs (35,000 + 18,000) oo apie ———————«d| Profit attributable to: 83,480 Owners of the parent (Step © 3870 Non-controlling interests (Step plant and equipment lant, and equipment 4, f property, P) ke ete one Alea or er because : ie eas ' sae sales affect non-controlling interest Intercompany sale of property, ‘Accounting procedures: . i is deferred and i: ee asset's remaining life, if the L cable. ; ii, aH if the asset is non-depreciable. b. If the asset is subsequently sold to an unrelated Party otherwise derecognized, the unamortized balance of deferred gain or loss is recognized in profit or loss, c Ina downstream sale, the gain or loss is adjusted to controlling interest only. Therefore, NCI is not affected, |. In an upstream sale, the adjustments for the gain or loss shared between the controlling interest and NCI. Theres NCL is affected. The unamortized balance of the deferred gain or loss eliminated when consolidated financial statements, Prepared. Asset Illustration: Consolidation — Intercompany PPE transaction On January 1, 20x1, ABC Co, acquired 80% interest in XYZ, Inc. Information on Jan. 1, 20%1 (acquisition date): * XYZ’s net identifiable as: , sets have a carrying amount 74,000 and a fair value of P90,000. The difference is due to following: Fair value XYZ, Inc, Carrying Fair adjustments Amounts values (FVA) Hae ; 20,000 24,000 4,000 50,000 7 000 Accumulated depreciation sama Totals (10,000) (18,000) 8,000) 60,000 76,000 16,000 _ aie 207 ne remaining useful life of the q ed the NCI até.“ Wipment ABC measur Tat ‘propor et is6 ‘ Porti Years, : i Onate oe spformation hemes 31, 20x1 (consotidatio, eaters of financial position ” date), sat December 31, 20x1 ETS ABC Co, ss eC tne cash 7 Accounts receivable pd 45000 Inventory a 105,000 22,000 Investment in subsidiary (at cost) 75,000 15,000 | Equipment ee 190.0 ‘Accumulated depreciation 66 ie 62,000 TOTALASSETS a 7 = 1,000 LIABILITIES AND EQUITY Accounts payable 73000000 Total liabilities 3 73,000 30,000 Share capital 170,000 40,000 Share premium: 65,000 10,000 Retained earnings 116,000 41,000 Total equity 351,000 91,000 121,000 TOTAL LIABILITIES AND EQUITY £24,000 Statements of profit or loss For th ber 31, 20x1 e year ended Decem apcco., XYZ lnc 300 00 1,000 Cost of goods sold om 8000 Gross profit (38000) (13,000) Depreciation expense (35,000) 1800) Distribution costs Gain on sale of equipment On January 1, 20x1, ABC Co. sold equipment with a historic of P10,000 and accumulated depreciation of P2,000 to xy7 Zh P12,000, on cash basis. The equipment's remaining usefy) ite! years. Cal g Requirement: Prepare the December 31, 20x1 consolidateg fina, statements. Ni Solutions: Step 1: Analysis of effects of intercompany transaction The intercompany sale is downstream because the seller jg parent (ABC Co.). The entries in ABC’s and XYZ’s books are Teconstructeq follows: ABC's books XYZ’s books Vilx1 Vi1lx1 Cash 12,000 Equipment 12,000 Accum. depn. 2,000 Cash Equipment 10,000 Gain 4,000 12/31/x1 12/31/x1 Noentry Depreciation (12K + 4 yrs.) 3,000 Accumulated depn. 3 Let us analyze the effects.of the intercompany séle usi the concept that it is as if the intercompany sale never occurret Because of the sale |Had there been no sale | Effect on combin: financial statemen before adjustments ‘a. ABC Co. recognized | a. No gain should a. Profit is overst a gain of P4,000. have been 4,000. Tecognized. b. The equipment’s b. The equipment’s b. The equipments new cost is P12,000. historical cost is cost is overstatil P10,000. ¢. Accumulated c. Accumulated a depreciation on Jan. depreciation on Jan. idated squtcrat vialements (Part 2) i y 209 nme | Ler 1, 20x1 is understi : lerstated| precognized | d. ABC should have pg 2 id depreciation of Tecognized ' Depreciation is | 93,000 in 20x1. depreciation of Overstated by ‘lia 2,000 in 20x1 P1,000. Therefore, | (P8,000 carryin Profit is understated 8 | | _amount +4 yrs), by P1000 | . Accumul Geumulated e. mulated : je | aeprecaion onde | Seema | 31,20%1 5 P3,000 (PO | 31,20x1 should have] Dec 31, amet | eg + £3,000 been P4,000 (P2,000 understated b depreciation). beg. + P2,000 pate = depreciation). ivi Let us use consolidation journal entries to further analyze how the effects of the intercompany transaction will be eliminated: CJE #1: To eliminate the gain on the intercompany sale pec. | Gain on sale of equipment 4,000 j 3. Equipment 2,000 a Accumulated depreciation - Jan. 1 2,000 JE #2: To eliminate the overstatement in depreciation Dec. | Accumulated depreciation 1,000 lai Depreciation expense 1,000 The consolidated amounts are computed as follows: Equipment at cost (190,000 + 62,000) fea Overstatement (CJE #1) — Equipment before FVA 20,000 FVA, 12/31/x1 (see computations below) Fanon! Consolidated equipment Accumulated depreciation (66,000 + 23,000) Understatement (CJE #1 & #2) Accumulated depreciation before FVA EVA, 12/31/x1 (se computations belo) Consolidated accumulated depreciation Consolidated equipment, net - Depreciation (38,000 + 13,000) Overstatement (CJE #2) Depreciation before FVA FVA depreciation - 20x1 (see computations below) Consolidated depreciation Inventory 4000 | Equipment ue 4,000 Acc. Depn, jidatedt Financial Statements (Part 2 1) i! cons 21 4; Goodwill Computation ster oration transferred (equq) sideration tra © equal tcosto y . - ontrolling, interest in the Aeauire cog Subsidiary) 75,000 pal ously held equity interest in the ag quiree tep2 18,000 val eae = parvalue of Met dentable asset 2qUited eso y 93000" conti Jan. 1, 200 72) (90000) ins: Accumulated impairment losses 3,000 Goodwill - Dec. 31, 20x1 Paar : ;, 3.00 ~~ step 4: Non-controlling interest in net assets gubsidiary's net assets at fair value — Dec. 31, 29; Multiply by: NCI percenta, 1 (see Step 2) “mn Nott-controlling interest in net Assets - Dec, 31, 20x1 20, aa step 5: Consolidated retaineg earnings Parent's retained. earnings— Dec, 31, 20x1 116,000 Deferred gain, 12/31/x1 (4,000 - Bainon sale x3 yrs /4 yrs) @ (3,000) i inge in subsidiary's net assets —_§.809 Consolidated retained earnings = Dec. 31, 20x1 121,800 © The gain on the intercompany sale is deferred and amortized over the equipment’s remaining useful life of 4 years. The amortization is done by eliminating only the unamortized balance; the amortized Portion remains. “Net change in XYZ’s net assets (se Step 2) 11,000 Multiply by: ABC’s interest in XYZ 80% ABC's share in the net change in XYZ’s net assets —8:800_ Step 6; Consolidated profit or loss Parent Subsidiary Consolidated Folia tascam att tains Comoldated | Pools before adjustments 66,000 17,000 83,000 's of intercompany transactions: fey : 3,000) Deferred gain (Sip 5) (3,000) Gs Profits before Fin 63,000 17,000 ( 80,000 212 2k Depreciation of FVA® (4,800) (1,200) idated profit $24 © (6,000 80% = 4,800 share of ABC); (6K x 20% = 1,200 share of 2), S The ?3,000 deferred £4 net overstatement of profit - (94 understatement due to the overstated depr portion remains in the accounts. The consolidated profit is at parent and NCI as follows: in that is eliminated is equal 00 overstatement due t0 the gai, to n ciation). The P1,000 am, Pg Ottizg tributed to the owners 1 of ‘Owners of parent NCI Consol date Parent's profit before FVA (s ior) «63,000 N/A 008 share in XYZ's profit before FVA ® 13,600 3400 47, oe Depreciation of FVA (see above) 4,800) _ (1,200 ed as A (@) (17,000 see above x 80% = 13,600); (17,000 x 20% = 3,400). ‘The consolidated financial statements are prepared as follows: ABC Group Consolidated statement of financial position As of December 31, 20x1 © ASSETS ‘Cash (35,000 + 45,000) 80,000 Accounts receivable (75,000 + 22,000) or. laventery. (105,000 + 15,000 + 0 FVA net, Step 1) 120col tuto (190K + 62K -2K over + 20K FVA, Step 1) 270 ccum. depreciation (56K + 23K + 1K e d 00 Goodwill (Step 3) ee ee oa TOTAL ASSETS ut LIABILITIES AND EQUITY Accounts payable (73,000 + 30,000) 10300 Total liabilities 7103.9 yr ee lid rated Financial Statements (Part 2) colt 213 . capital (Parent only) |e remitim (Parent only) 170,000 on ne d earnings (Parent only ~ Step 5) 65,000 se ofparent 121,800 ouner prolling interest (Step 4 356,800 | | oxen s0200) Fil el SiliES aNDE a LIA! UITY : oe 480,000 be a dea, Statement of profit or loss For the year ended December 31, 20x1 | sales (800,000 + 120,000) | 420,000 Gross profit 179,000 Depreciation (38K + 13K - 1K over + 2K dep’n. of FVA on equipt.) (52,000) | Distribution costs (5000+ 18000) (53,000) | | Profit, for the year 74,000 Profit attributable to: Owners of the parent (Step 6) 71,800 Non-controlling interests (Step 6) 2,200 74,000 Reconciliations using formulas: Total assets of ABC Co. 424,000 Total assets of XYZ, Inc. 121,000 Investment in subsidiary (75,000) FVA-net 10,000 Goodwill net . 3,000 Effect of interco. transaction - unamortized dey ad gain (3,000) Consolidated total assets 480,000 Total liabiliti 73,000 liabilities of ABC Co. sn0d Total liabilities of XYZ, Inc. FVA - net Equity Non-controlll itributable 10 own li g interest: nds ; t in subsidiary 15 measured at cos Or # dividends received from the subsig Idi Intercompany divider When the investmen accordance with PERS 9, are recognized in profit or loss. When the investment in subsidiary is measured ysin, equity method, dividends received from the subsidia, t recognized as reduction to the carrying amount of the inve ry a In any case, the dividends must be eliminated Stineng consolidated financial statements are prepared. It is as jj When iat received the dividends. Therefore: Sif the pare a. If the divi i. 7 dividends were recognized in profit or loss, elimin, the dividend income in the id the i te consolidated statement of Profit it Illustration: ¢ " Onlatianys Onsolidation ~ Intereo, * Hy 1, 20x1, ABC ac mpany dividend transactio ‘quired 80%, interest in XYZ Inc. oe solidated Financial Statements (Pay 2 | 215 Carry; ee javentory 20,000 ms adjustment (EVA) Equil ment, net 40,000 San “4,000 Totals 60,000 76,000 12,000 itt : 16,000 «The remaining useful life of the equi 7 + ABC measured the NCI at ‘proportie nt 18 6 years, «The business combination re nate share’ ulted to goodwill of 93,009, Information on subsequent Teporting date (Dec, 31 20x1): Statements of financial position z : As at December 31, 20x1 ASSETS ABC Co, Inc, Cash 2, Accounts receivable sain a Tventorys. gee 2 105,000 15,000 Investment in subsidiary (at cost) 75,000 Equipment, net 140,000 30,000 TOTAL ASSETS 422,300 118,000 LIABILITIES AND EQUITY Accounts payable 73,000 30,000 Total liabilities 73,000 30,000 Share capital 170,000 40,000 Share premium 65,000 10,009 Retained earnings 114,800 38,000 Total equity 349,800 88,000 TOTAL LIABILITIES AND EQUITY £22,800 118,000 Statements of profit or loss F 31, 20x1 or the year ended December ABCCo. XYZ, Inc. Sales 300,000 120,000 165,000) 72,000) Cost of goods sold 135,000 48,000 Gross profit (40,000) (35,000) 4,800 vidends of P6,000 in 20,7. XYZ, Inc. declared and paid dit . ‘ ; Prepare the Jecember 3t, 20x1 consolidated finan, Requirement: re statements. Solutions: i transaction is fects of intercompany aoe pecs by XYZ are allocated as follows; dividends des as xa ~= 4,800 share of ABC); (6,000 x 20% = 1,200 share of Ne , The investment in subsidiary is measured Therefore, ABC recognized the ®4,800 dividends in Profi (as dividend income). We will eliminate this in Step 5 (cg profit or loss) below, ¥ If the dividends are not yet settled, the elated dividend receivable and dividends payable will also need to be eliminated, at cog t OF log solid Net assets at carrying amount Fair value adjustments (FVA) Net assets at fair value 74,000 16,000 90,000 88,000 10,000 98,000 lidated Financial Statements-(Part 2) cit e 27 me Goodwill StF oplem states that the goodwifl ; e : s P3, Zh qh ve d in the consolidated financial os on This is the amount F apairment ents because there is 10 4, Non-controlling interest in net aéeets - aary's net assets at fair val psidiary's ne! alue ~ Dee. 31, stp by: NCL percentage + 20x1 (e Step2) 98,000 ; 20% N ion-controllin: interést in net assets - Dec. 31, 20x1 79,600 step 5: Consolidated retained earnings parent’ retained earnings - Dec. 31, 20x1 114,800 parent's share in the net change in subsidiary's net assets 6,400 Consolidated retained earnings ~ Dec. 31, 20x1 721,200 w Net change in XYZ’s net assets (See Step 2) 8,000 Multiply by: ABC's interest in XYZ, 80% ABC's share in the net change in XYZ's net assets ~~ 6400_ The #4,800 dividend income is eliminated only in profit or Joss but not in retained earnings. This is because if we assume that the intercompany dividend did not happen, the ®4,800 dividend would remain in the retained earnings attributable to the owners of the parent. Step 6: Consolidated profit or loss Parent Subsidiary Consolidated Profits before adjustments 64,800 20,000 84,800 Effects of intercompany transactions: Dividend income (step 1) (4,800) s (4,800) 60,000 20,000 80,000 Profits before FVA Depreciation of FVA (4,800) (1,200) (6,000) 74,000 Consolidated profit © (6.00 x 80% = 4800 share of ABC); (6K x 20% = 1200 share of XY2) irs of parent NCTE 60,000 N/A Sigs 16,000, 4.000 5 4,800) (1,200) 71200 2,899 ~~ $y Parent's profit before FVA (sce above) Share in XYZ's profit before FVA Depreciation of FVA® Totals _—_—__—— (GOK x A's = 16/000 share of ABC); 20K x 20% = 4,000 share of xy. ~ ——————_aeGoup Consolidated statement of financial position As of December 31, 20x1 | ASSETS Cash (27,800 +51,000) 7 | Accounts receivable (75,000 + 22,000) | Inventory (105,000 + 15,000 +0 FVA net, Step 2) 04 | Investment in subsidiary (Eliminated) _ Equipment, net (140,000 + 30,000 + 10,000 FVA net, Step 2) 1899 | Goodwill (Step 3) [ TOTAL ASSETS f | LIABILITIES AND EQUITY | Accounts payable (73,000 + 30,000) [Total liabilities [Share capital Parent only) | Share premium (Parent only) | Retained earnings (Parent only - Step 5) | Owners of parent | Non-controlling interest (Step 4) [Total equity TOTAL LIABILITIES AND EQUITY | ABC Group | Statement of profit or loss : For the year ended December 31, 20x1 Sales (300,000 + 120,000) Cost of goods sold (165k + 72K +4K d Gross profit Depreciation expense (40K + 10K + 2K dep’n. of FVA ‘on equipt.) lep'n. of FVA on inventory) vy conse! - vancial State jdated Financial Statements (Part 2) oa 7 attributable to: profit of the parent (Step 6 ‘ 71,200 interests (Step 6) 2.800 — 74.0 eo Oe atercompany bond transaction When 2 parent or a subsidiary acquires bonds issued by the other, poth the investment in bonds and the bonds payable are eliminated in the consolidated financial statements. The bonds payable are considered extinguished from the point of view of the group. Therefore: a. The difference between acquisition cost of the investment in bonds and the carrying amount of the bonds payable on the acquisition date is recognized as gain or loss in the consolidated statement of profit or loss; and b. Any interest expense and interest income recognized after the intercompany transaction are eliminated in the consolidated financial statements. Non-controll Illustration: Consolidation — Intercompany bond transaction On January 1, 20x1, ABC acquired 80% interest in XYZ, Inc. Information on acquisition date (Jan, 1, 20x1): * XYZ’s net identifiable assets have a carrying amount of P74,000 and fair value of P90,000. The difference is due to the following: Carrying Fair Fair value amount __value __adjustment (FVA) _ lnventory 20,000 24,000 4,000 Totals 60,000 76,000 16,000 Ras 60,000 76,000 16,000 The remaining useful life of the equipment is 6 years. ABC measured the NCI at ‘proportionate share’. Se ted tO goodwill of ®3,000, (Dec. 31, 20x1): psequent . A SS ncial position hi at 31, 20x1 hive ASSETS ee Cash zon ‘Accounts receivable an r 8 tise in subsidiary (at cost) 5, 000 Investment in bonds Be Equipment, net LIABILITIES AND EQUITY ‘Accounts payable Bonds payable (at. face amount) Total liabilities Share capital 170,000 40.0 Share premium 65,000 Retained earnings 110,000 Total equity 345,000 TOTAL LIABILITIES AND EQUITY 418,000 124, Statements of profit or loss For the year ended December, 31, 20x1 ABCCo, XYZ, Ine Sales Cost of goods sold 300,000 10,0 Gross profit Depreciation expense 735,000 Distribution costs (40,000) Interest expense (32,000) a Interest income any Profit yidated Financial Statements (Part 2) cons 221 January 1, 20x1, XYZ, Inc. Oratanding bonds of ABC Co, § Purchased 50% of the at amortized cost and recogiuZe’ income in : ‘ Mportization of the bond discount. 20x1, including solutions: 4; Analysis of effects of intercompany transaction The intercompany transaction is eliminated as follows: _ The portion of the bonds acquired by XYZ is considered extinguished as from the date XYZ made the purchase. The gain or loss on the extinguishment is computed as follows: a Carrying amount of bonds payable acquired (30,000 x 50%) 15,000 Acquisition cost of bonds (assumed retirement price) (12,500) Gain on extinguishment of bonds 2,500 There is gain because the liability is settled at a lower price. |b. Both the interest income recognized by XYZ (ie., 2,000) and the interest expense recognized by ABC relating to the bonds held by XYZ (i.e., #3,000 x 50% = 1,500) are eliminated. If the accrued interest is not yet paid (received), the related interest payable and interest receivable are also eliminated. Step 2: Analysis of subsidiary’s net assets. 5; let XYZ, Inc. Jan.1, 20x1 Dec. 31, 20x1 change Net assets at carrying amount 74,000 94,000 : Fair value adjustments (FVA) 16,000 10,000 Interest income (2,000) 102,000 12,000 Net assets at fair value 90,000 ‘ Chapie ee ee fe Depreciation FVA 7 2 FVA, 1x1 ust as i 7000 28 6 2,000 6,000 Step 3: Goodwill as stated in the problem. ‘The goodwill is P3,000, ing i st in net assets : Non-controlling interes i etays net assets at fair value ~ Dec. 31, 20x1 (see Step 2) ul Multiply by: NCI percentage Non-controtlin g interest Dec. 31, 20x1_ o Step 5: Consolidated retained earnings Parent's retained earnings — Dec. 31, 20x1 Tog Interest expense af Gain on extinguishment of bonds a Parent's share in the net change in subsidiary's net assets 9 gq) Consolidated i retained d earnings 5 — Dec. 31, 20x1___ ac 7 © The gain is attributed solely to the parent because the parent the issuer. If the subsidiary is the issuer, the gain or loss attributed to both the parent and NCI. @ Net change in XYZ's net assets (See Step 2) 12,00 Multiply by: ABC's interest in XYZ ot ABC's share in the net change in XYZ’s net assets 9,60 Step 6: Consolidated profit or loss Parent Subsidiary _ Consolidated Profits before adjustments 60,000 20,000 80,00 Effects of intercompany transactions: Interest income (Step 1) (2,000) Interest expense (Step 1) 1,500 Gain on extinguishment (Step 1) 2,500 Profits before FVA 64,000 18,000 inancial Statements (Part 2) gto ma cot ion f BVA (4809 : (1.209) dated profit . (6,000) a 76,000 0 x 80% = 4,800 share of ABC); (6K x 299, - 1,200 share of xyz), 0G Owners oj arent Ni CI Consolidated ig profit before FVA (see above) 64 009 N/A 64,000 seen XYZ's profit before FVAW 14.499 3,600 18.000 sn jan of EVA he 4,800) (1,200) (6,000) is 73,600 2,400 76,000 48k x 80% = 14,400 share of ABC); (18K X 20% = 3,600 share of XYZ). « ABC Group Consolidated statement of financial Position As of December 31, 20x1 ASSETS Cash (23,000 + 44,000) 67,000 ‘Accounts receivable (75,000 + 22,000) 97,000 Inventory (105,000 + 15,000 + 0 FVA net Step 2) 120,000 Investment in subsidiary (eliminated) Investment in bonds (eliminated) Equipment, Net (140,000 + 30,000 + 10K EVA net Step 2) 180,000 Goodwill (Step 3) 3,000 [Toran assers ar | UABILITIES AND EQUITY Accounts payable (43,000 + 30,000) 73,000 Total liabilities —_ Share premium Parent only) 65,000 Retained earnings Parent only ~ Step 5) 123,600 Total eguis 379,000 ae tees ma "ABC Group es f profit or loss December 31, 20x1 ae Statement Oo! For the year ended Sales (300,000 + 120,000) ji s sold asso) 72000+4K dep. of FVAOR Inv.) (24) Cost of goods sold (165.00*7 Gross profit | Depreciatio | Distribution costs G24 terest expense (3,000 1.500 int (eliminated Interest income Gain on extinguishment of debt (Step ) Profit for the yeat expense (40K + 10K *2K depn. of FVA on equipt) (5) 000 + 20,000) (qt company interest Step 1) 4 Int Profit attributable to: Owners of the parent (Step o Non-controlling interests (Step 6) Reconciliations using formulas: Total assets of ABC Co. Total assets of XYZ, Inc. Investment in subsidiary FVA net Goodwill - net Effect of intercompany transaction ~ (Investment in bonds) (13,00 467) Consolidated total assets Total liabilities of ABC Co. 73 Total liabilities of XYZ, Inc. 30 FVA net Effect of intercompany transaction ~ (Bonds pa Consolidated total liabilities Share capital of ABC Co. Share premium of ABC Co. vy ed Financial Statements (Part 2) ia gone! i dat ed retained earnin, os bu table to owners of the pareng 123,600 ia trolling interests em wr dated total equi 25400 ‘8 379,000 chapter 5: Summary ; proomparty sale of inventory i je price of intercompany sale in current year Cost of intercompany sale in current year profit from intercompany sale in current year = sultipy by: Unsold portion of inventory as of year-end xx% unrealized gross profit in ending inventory - current yr. xx sale price of intercompany sale in prior year Bod Cost of intercompany sale in prior year (x) Profit from intercompany sale in prior year aca Multiply by: Unsold portion of inventory as of beg. of yr. Xx% Realized gross profit in beginning inventory —current yr. ax Xx Ending inventory of Parent x Ending inventory of Subsidiary xx Less: Unrealized profit in ending inventory (oy) Consolidated ending inventory a Sales of Parent x Sales of Subsidiary : x Consolidated sales esa Cost of sales of Parent = Cost of sales of Subsidiary i Less: Intercompany sales during the current period (x) Add: Unrealized profit in ending inventory tis Less: Realized profit in beginning inventory ; (xx) | Adi: Deprecation of fai value adjustment (FVA) on inventory _xx_ |

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