Professional Documents
Culture Documents
Chapter 5 Accounting For Business Combinations Solman
Chapter 5 Accounting For Business Combinations Solman
Chapter 5 Accounting For Business Combinations Solman
Chapter 5
Consolidated
Consolidated Financial Statements (Part 2)
1. A 6. B
2. C 7. B
3. A 8. B
4. A 9. C
5. B 10. A
1. Solutions:
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 of intercompany sale 38,000
Cost of intercompany sale (20,000)
Prof
ofiit from inter
erc
com
omp
pany sale
ale 18
18,,000 8,000a
8,0
Multiply by: Unsold portion as of yr.-
end (9.5/38) 3/4
6,00
Unrealized gross profit 4,500 10,500
0
a
(40,000 x 20%) = 8,000
Requirement (c):
2. Solutions:
Requirement (a):
Historical cost 120,000
Accumulated dep'n. 1/1/x1
1/1/x1 (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
OR
Requirement (c):
Depreciation expense (Bright Co.) 40,000
Depreciation expense (Dull Co.) 12,000
OR
Depreciation expense (Bright Co.) 40,000
Depreciation expense (Dull Co.) 12,000
Depreciation in Dull's books (60,000 ÷ 4 yrs.) (15,000)
Depreciation in Bright's books if the sale never happened
(120,000 ÷ 10 yrs.) 12,000
Consolidated depreciation expense 49,000
Dull'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 - *
Non-controlling interest in net assets – Dec. 31,
20x1 52,500
*No goodwill is attributed to NCI because NCI is measured at proportionate
at proportionate share.
share.
1)
Dividend income from ( - ) ( - ) (9,000)
subsidiary ) N/A ( - )
Gain or loss on extinguishment ( -
of bonds ) ( - ) ( - )
Net consolidation (9,000
adjustments ) ( - ) (9,000)
231,00
Profits before FVA 0 50,000 281,000
( -
Depreciation of FVA ) ( - ) ( - )
( -
Impairment loss on goodwill ) ( - ) ( - )
Requirement (d):
Consolidated
ASSETS
Investment in subsidiary (at cost) - eliminated -
Equipment - net
net (Requirement 'b') 581,000
Otther assets (200,000 + 45,000)
O 245,000
Goodwill (Step 3) 60,000
TOTAL ASSETS 886,000
Consolidated
Revenues (300,000 + 80,000) 380,000
Depreciation expense (Requirement 'c') (49,000)
Other expenses (32,000 + 18,000) (50,000)
Gain on sale of equipment (eliminated) -
Profit for the year 281,000
0
12,50
Profit attributable to NCI (Step 7)
0
281,00
Profit for the year
0
3. Solutions:
Step 1: Analysis
The dividends of effects
declared by theofsubsidiary
intercompany transaction
are allocated as follows:
Total dividends declared ₱100,000
Allocation:
Owners of the parent (100,000 x 75%) 75,000
Non-controlling interest (100,000 x 25%) 25,000
As allocated
₱100,000
The divi
divide
dend
ndss rece
receiv
ive
ed fr
from
om the subs
subsid
idia
iarry ar
are
e not separately
adjusted in the formula above because their effect is automatically
eliminated by including only the parent’s share in the net change in
the subsidiary’s net assets.
Depreciation of FVA ) ( - ) ( - )
7
( -
Impairment loss on goodwill ) ( - ) ( - )
Consolidated profit 400,000 132,000 532,000
Attributable
Attributable to
to owners of parent
NCI = 33,000
NCI = 499,000
(Step 7) (Step 7)
4. Solutions:
Step 1: Analysis of effects of intercompany transaction
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 -
70,00
Subsidiary's net assets at fair value 200,000 270,000 0
Subsidiar
Parent y Consolidated
Profits before adjustments 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
adjustments 50,000 ( - ) 50,000
130,00
Profits before FVA 0 20,000 150,000
( -
Depreciation of FVA ) ( - ) ( - )
( -
Impairment loss on goodwill ) ( - ) ( - )
Consolidated profit 130,000 20,000 150,000
*The interest
was paid expense parties,
to unrelated is not eliminated because
the previous theofinterest
holder expense
the bonds (i.e.,
the bonds were acquired by the subsidiary only at year-end.
PROBLEM 3: EXERCISES
1. Solutions:
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):
The unrealized profits in ending inventory are computed as follows:
Downstream Upstream Total
Requirement (c):
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 dep'n. 1/1/x1
1/1/x1 (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 (see Step 1 below) (10,800)
Consolidated equipment - net 697,200
OR
Equipment - net (Day Co.) 480,000
Equipment - net (Night Co.) 228,000
12
(54,000
Carrying amount of equipment sold in Night's books )
Carrying amount of equipment sold in Day's books if the
43,200
sale never happened
Consolidated equipment - net 697,200
Requirement (c):
Depreciation expense (Day Co.) 48,000
Depreciation expense (Night Co.) 14,400
Amortization of the deferred gain
(3,600)
(12,000 gain on sale ÷ 4 years)
Consolidated depreciation expense 58,800
OR
Depreciation expense (Day Co.) 48,000
Depreciation expense (Night Co.) 14,400
Depreciation in Night's books (72,000 ÷ 4 yrs.) (18,000)
Depreciation in Day's books if the sale never happened
14,400
(144,000 ÷ 10 yrs.)
Consolidated depreciation expense 58,800
Requirement (d):
Consolidated
ASSETS
Investment in subsidiary (at cost) - eliminated -
Equipment - net
net (Requirement 'b') 697,200
Other assets (240,000 + 54,000) 294,000
Goodwill (Step 3) 72,000
TOTAL ASSETS 1,063,200
Consolidated
Revenues (360,000 + 96,000) 456,000
Depreciation expense (Requirement 'c') (58,800)
Other expenses (38,400 + 21,600) (60,000)
322,20
Profit attributable to owners of the parent (Step 7)
0
15,00
Profit attributable to NCI (Step 7)
0
337,20
Profit for the year
0
3. Solutions:
Step 1: Analysis of effects of intercompany transaction
The dividends declared by the subsidiary are allocated as follows:
Total dividends declared ₱150,000
Allocation:
Owners of the parent (150,000 x 75%) 112,500
Non-controlling interest (150,000 x 25%) 37,500
As allocated
₱150,000
16
17
(c)
Shares in Sub.’s profit before FVA (Step 6 ) – (198,000 x 75%);
(198,000 x 25%)
Attributable to NCI
NCI = 49,500 (Step 7)
4. Solutions:
Step 1: Analysis of effects of intercompany transaction
Net value
Fair assetadjustments
s at carryingataacquisition
mounts 208,000 234,000
date - -
Subsequent depreciation of FVA NIL -
Unrealized profits (Upstream only) NIL -
26,00
Subsidiary's net assets at fair value 208,000 234,000 0
Total 286,000
Fair value of net identifiable assets acquired (208,000)
Goodwill 78,000
Depreciation of FVA ( - ( - ) ( - )
19
)
( -
Impairment loss on goodwill ) ( - ) ( - )
Consolidated profit 84,900 26,000 110,900
Investment in(bonds
Other assets 650,00-0eliminated
+ 64,000) 714,000-
Goodwill (Step 3) 78,000
TOTAL ASSETS 792,000
Consolidated
Revenues (390,000 + 156,000) 546,000
Operating expenses (282,100 + 130,000)
(412,100)
Interest expense (3,000 + 0)
(3,000)
Loss on extinguishment of bonds (Step 1)
(20,000)
Profit for the year 110,900
20
SUMMARY
a. Gain
Gain (los OFonANSWERS
(loss)
s) ex
exti
ting
ngui
uishshmeTO
ment REQUIREMENTS
nt of bo
bond
nds
s = (20,000) loss (Step 1)
b. Co
Cons
nsol
olid
idat
ated
ed bo
bond
ndss pa
paya yabl
ble
e = 0 (Step 1)
c. Cons
Consol
olid
idat
ated
ed fi
fina
nanc
ncia
iall sta
state
teme
ment
ntss (See above)
2. A
Solution:
Cost of sales of Parent 300,000
Cost of sales of Subsidiary 220,000
Less: Intercompany sales
sales during the yr.
yr. (see prev. (64,000
sol’n) )
Add: Unrealized profit in ending inventory (squeeze) 6,000
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory -
462,00
Consolidated cost of sales 0
3. C
Solution:
Cost of sales of Parent 400,000
Cost of sales of Subsidiary 350,000
(250,000
Less: Intercompany sales
sales during the yr.
yr. )
Add: Unrealized profit in ending inventory -*
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory -
Consolidated cost of sales 500,000
21
*All the inventory were sold to third parties during the year.
4. C
Solution:
Ending inventory of Banks Co. (175,000 + 60,000) 235,000
Ending inventory of Lamm Co. 250,000
Less: Unrealized profit in EI (50,000 x
60,000/200,000) (15,000)
Consolidated ending inventory 470,000
5. B
Solution:
Kidd's net assets at fair value – Dec. 31, 1994 (180K –
60K) 120,000
Multiply by: NCI percentage 25%
Total 30,000
Add: Goodwill to NCI net of accumulated impairment losses -
Non-controlling interest in net assets – Dec. 31,
1994 30,000
6. B – th
the
eccom
ommo
mon
nssto
tock
ck of the
the p
par
aren
entt
7. B – same
same as papare
rent
nt divi
divide
dend
nds
s paid,
paid, sinc
sincee div
divid
iden
ends
ds paid
paid by sub
sub (Kidd
(Kidd))
are 100% eliminated in consolidation.
Interco. dividends paid by Kidd to Pare (5,000 x .75 = 3,750) should
be eliminated.
The dividends paid to the non-c
non-control
ontrolling
ling sharehol
shareholders
ders (5,000 x .25
= 1,250) would decrease their non-controlling interest.
8. D
Solution:
Saul's net assets at fair value – 12/31/20x9 (6M+ 550K– 6,385,00
165K) 0
Multiply by: NCI percentage 20%
1,277,00
Total 0
Add: Goodwill to NCI net of accumulated impairment losses* 50,000
1,327,00
Non-controlling interest in net assets – 12/31/20x9 0
22
No elimination is made on the transaction with Dean because Clark does not
control Dean, and therefore, Dean is not consolidated.
10. A
Solution:
The gain pertains to the owners of the parent only because the issuer of the
bonds is the parent. Therefore, the transaction does not affect NCI.
NCI.
23
24