100% Owned Subsidiary: Computation of Consolidated Balances

Following are pre-acquisition financial balances for PP Company and SS Company as of

December 31. Also included are fair values for SS Company accounts.
PP Company SS Company
Book Values Book Values Fair Values
12/31 12/31 12/31
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P440,000 P120,000 P120,000
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 300,000 300,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410,000 210,000 260,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 130,000 110,000
Building and equipment (net) . . . . . . . . . . . . . 600,000 270,000 330,000
Franchise agreements . . . . . . . . . . . . . . . . . . 220,000 190,000 220,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . (190,000) (120,000) (120,000)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . (90,000) (30,000) (30,000)
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . (900,000) (510,000) (510,000)
Common stock—P20 par value . . . . . . . . . . . . . (660,000)
Common stock—P5 par value . . . . . . . . . . . . . (210,000)
Additional paid-in capital . . . . . . . . . . . . . . . . . (70,000) (90,000)
Retained earnings, 1/1 . . . . . . . . . . . . . . . . . . . (390,000) (240,000)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (960,000) (330,000)
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 920,000 310,000

Note: Parentheses indicate a credit balance.

On December 31, PP acquired SS’s outstanding shares by paying P360,000 in cash and issuing
10,000 shares of its own ordinary shares with a value of P40 per share. PP paid legal and
accounting fees of P20,000 as well as P5,000 in stock issuance costs.

Required: In the following situation, determine the value that would be shown in the
consolidated financial statements for each of the accounts listed.

1. Inventory 6. Revenues
2. Land 7. Additional paid-in capital
3. Buildings and equipment 8. Expenses
4. Franchise agreements 9. Retained earnings, 1/1
5. Goodwill

Answers:

In acquisitions, the fair values of the subsidiary's assets and liabilities are consolidated with the
Parent. (there are a limited number of exceptions). Goodwill is reported as P80,000, the amount
that the P760,000 consideration transferred exceeds the P680,000 fair value of SS’s identifiable
net assets.

1. Inventory = P670,000 (P's book value plus S’s fair value)

2. Land = P710,000 (P's book value plus S's fair value)
3. Buildings and equipment = P930,000 (P's book value plus S's fair value)
4. Franchise agreements = P440,000 P's book value plus S's fair value)
5. Goodwill = P80,000 (calculated above)
6. Revenues = P960,000 (only parent company operational figures are reported at date of
acquisition)
7. Additional Paid-in Capital = P265,000 (P's book value add resulting APIC from shares issued
less stock issuance costs)
8. Expenses = P940,000 (only parent company operational figures plus acquisition-related costs
are reported at date of acquisition)
9. Retained Earnings, beg. = P390,000 (P's book value)

Detailed Solution:

Aggregate amount of:

Price paid:
Cash P360,000
FV of shares issued (10,000 x P40) 400,000
Total Consideration P760,000

SHE of SS Co./BV of Identifiable Net Assets:

Ordinary shares P210,000
Share premium 90,000
Retained earnings, 12/31 260,000 P560,000
Add: Undervalued excess of inventory 50,000
Undervalued excess of Bldg & Equip 60,000
Undervalued excess of Franchise 30,000
Less: Overvalued excess of land (20,000)
Identifiable NA at FV 680,000
Goodwill 80,000
Consolidated Assets:
Total Assets of Acquirer at BV P2,340,000
Total Assets of Acquired at FV 1,340,000
Add: Resulting GW 80,000
Less: Cash Payment ( 385,000) P 3,375,000
Consolidated Liabilities:
Total Liabilities of Acquirer at BV P1,180,000
Total Liabilities of Acquired at FV 660,000 P 1,840,000

Consolidated SHE:
SHE of Acquirer, 12/31
Common stock P 660,000
APIC 70,000
RE,12/31 430,000
Add: shares issued at par 200,000
Add: resulting APIC 200,000
Less: Legal and accounting fees (expense) (20,000)
Less: Stock issuance cost ( share issue cost) ( 5,000) P 1,535,000

Entry in the Books of PP:

12/31

Investment in SS 760,000
Cash 360,000
Common Stock 200,000
APIC 200,000

Expense 20,000
APIC 5,000
Cash 25,000

Working Paper Entries: To facilitate the preparation of Consolidated Financial

Statements on the Date of Acquisition (not in the books)

a. To eliminate the SHE of the acquired company:

 Common Stock 210,000
APIC 90,000
Retained Earnings 260,000
Investment in SS 560,000

b. To recognize FV differentials

Inventory 50,000
Building and Equipment 60,000
Franchise Agreement 30,000
Land 20,000
Investment in SS 120,000

c. To recognize the resulting goodwill

Goodwill 80,000
Investment in SS 80,000

-end of problem-