Chapters 5-6 Classroom Discussion Answer Key

ACCOUNTING FOR BUSINESS COMBINATIONS
CHAPTERS 5 AND 6
CHAPTER 5
PROBLEM 2: FOR CLASSROOM DISCUSSION
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)
Profit from intercompany sale 18,000 8,000a
Multiply by: Unsold portion as of yr.-end (9.5/38) 3/4
10,50
Unrealized gross profit
4,500 6,000 0
a (40,000 x 20%) = 8,000
Cost of sales of 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 -
Consolidated cost of sales 682,500
Requirement (c):
Ending inventory of Parent 300,000

Ending inventory of Subsidiary 80,000
Less: Unrealized profit in ending inventory (10,500)
Consolidated ending inventory 369,500
2. Solutions:
Requirement (a):
Historical cost 120,000
Accumulated dep'n. 1/1/x1 (72,000)
Depreciation based on historical cost (12,000)
Carrying amount 36,000
The solution above is based on the notion that it is as if the intercompany

sale never happened.
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
Equipment - net (Bright Co.) 400,000

Equipment - net (Dull Co.) 190,000
Carrying amount of equipment sold in Dull's books (45,000)
Carrying amount of equipment sold in Bright's books if the
sale never happened 36,000
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
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
Step 1: Analysis of effects of intercompany transaction

The intercompany sale is downstream because the seller is the parent
(Bright Co.).
The unamortized balance of the deferred gain is computed as follows:
Deferred gain on sale - Jan. 1, 20x1 [60K – (120K - 72K)] 12,000

Multiply by: (3 yrs. remaining as of Dec. 31, 20x1 over 4 yrs.) 3/4
Deferred gain on sale - Dec. 31, 20x1 9,000
Step 2: Analysis of net assets

Acquisition
Consolidation Net
Dull Co.
date change
date
Total net assets at carrying amounts 160,000 210,000
Fair value adjustments at acquisition
date - -
Subsequent depreciation of FVA NIL -
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 160,000 210,000 50,000
Step 3: Goodwill computation

Consideration transferred 180,000
Non-controlling interest in the
40,000
acquiree (160K x 25%)
Previously held equity interest in the
-
acquire
Total 220,000
Fair value of net identifiable assets
(160,000)
acquired
Goodwill 60,000
Step 4: Non-controlling interest in net assets

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

share.
Step 5: Consolidated retained earnings
Bright's retained earnings – Dec. 31, 20x1 110,000
Consolidation adjustments:
Bright's share in the net change in Dull's net assets (a) 37,500
(9,000
Unamortized deferred gain (Downstream only) - (Step 1) )
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable to Parent -
Net consolidation adjustments 28,500

Consolidated retained earnings – Dec. 31, 20x1 138,500
(a) Net change in Dull’s net assets (Step 2) of ₱50,000 x 75% = ₱37,500.
Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits before adjustments 240,000 50,000 290,000
Unamortized def. gain - (Step 1) (9,000) ( - ) (9,000)
( -
Dividend income from subsidiary ) N/A ( - )
Gain or loss on extinguishment ( -
of bonds ) ( - ) ( - )
Net consolidation adjustments (9,000) ( - ) (9,000)
Profits before FVA 231,000 50,000 281,000
( -
Depreciation of FVA ) ( - ) ( - )
( -
Impairment loss on goodwill ) ( - ) ( - )
Consolidated profit 231,000 50,000 281,000
Step 7: Profit or loss attributable to owners of parent and NCI

Owners of
parent NCI Consoli-dated
Bright's profit before FVA
(Step 6) 231,000 N/A 231,000
Share in Dull’s profit
before FVA (c) 37,500 12,500 50,000
Depreciation of FVA ( - ) ( - ) ( - )
Share in impairment loss on
goodwill ( - ) ( - ) ( - )
Totals 268,500 12,500 281,000
(c)Shares in Dull’s profit before FVA (Step 6): (50,000 x 75%); (50,000
x 25%)
Requirement (d):
Consolidated
ASSETS
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 + 25,000) 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') (49,000)
Other expenses (32,000 + 18,000) (50,000)
Gain on sale of equipment (eliminated) -
Profit for the year 281,000
Profit attributable to owners of the parent (Step 7) 268,500

Profit attributable to NCI (Step 7)
12,500
3. Solutions:
The dividends declared by the subsidiary 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

Acquisition
Consolidation Net
Subsidiary
date change
date
Net assets at carrying amts. 240,000 320,000
date - -

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

Sub.'s net assets at fair value – Dec. 31, 20x1 (Step 2) 320,000
Total 80,000
Add: Goodwill to NCI net of accumulated impairment losses -

Parent's retained earnings – Dec. 31, 20x1 280,000
Parent's sh. in the net change in Sub.'s net assets (a) 60,000
Unrealized profits (Downstream only) -
(a) ₱80,000 Net change in subsidiary’s assets (Step 2) x 75%
The dividends received from the subsidiary are 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.

Unrealized profits - - -
(75,000
Dividend income from subsidiary ) N/A (75,000)
Gain or loss on extinguishment
of bonds - - -
(75,000
Net consolidation adjustments ) - (75,000)
( -
( -
Owners of
Parent's profit before FVA
(Step 6) 400,000 N/A 400,000
Share in Sub.’s profit
before FVA (c) 99,000 33,000 132,000
Depreciation of FVA (Step
6) ( - ) ( - ) ( - )
goodwill ( - ) ( - ) ( - )
Totals 499,000 33,000 532,000
(c)Shares in Sub.’s profit before FVA (Step 6) – (132,000 x 75%);

(132,000 x 25%)
SUMMARY OF ANSWERS TO REQUIREMENTS:

a. NCI in the net assets = 80,000 (Step 4)
b. Consolidated retained earnings = 340,000 (Step 5)
c. Consolidated profit = 532,000 (Step 6)
Attributable to owners of parent = 499,000 (Step 7)
Attributable to NCI = 33,000 (Step 7)
4. Solutions:
Requirement (a): Gain (loss) 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 300,000
Portion acquired by Subsidiary (300,000)
Consolidated total bonds payable -

Acquisition
Consolidation Net
Subsidiary
date change
date
Net assets at carrying amounts 200,000 270,000
date - -

Consideration transferred (cost of investment in sub.) 180,000
Non-controlling interest in the acquiree (200K x 25%) 50,000
Previously held equity interest in the acquire -
Total 230,000
Fair value of net identifiable assets acquired (200,000)
Goodwill 30,000

Total 67,500
Add: Goodwill to NCI net of accumulated impairment losses -

Parent's share in the net change in Sub.'s net assets
(a) 52,500
Unrealized profits (Downstream only) -
Gain on extinguishment of bonds (Step 1) 50,000
(a)Net change in Subsidiary’s net assets (Step 2) of ₱70,000 x 75% =

₱52,500.
( -
Unrealized profits ) ( - ) ( - )
( -
Gain on extinguishment of bonds 50,000 ( - ) 50,000
Net consolidation adjustments 50,000 ( - ) 50,000
( -
( -

Owners of
(Step 6) 130,000 N/A 130,000
before FVA (c) 15,000 5,000 20,000
goodwill ( - ) ( - ) ( - )
Totals 145,000 5,000 150,000
(c)Shares in Sub.’s profit before FVA (Step 6): (20,000 x 75%); (20,000
x 25%)
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)
30,000

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

Consolidated
Revenues (300,000 + 120,000) 420,000
Operating expenses (217,000 + 100,000) (317,000)
Interest expense (3,000* + 0)
(3,000)
Gain on extinguishment of bonds (Step 1) 50,000

5,000
*The interest expense is not eliminated because the interest expense was
paid to unrelated parties, the previous holder of the bonds (i.e., the
bonds were acquired by the subsidiary only at year-end.
SUMMARY OF ANSWERS TO REQUIREMENTS

a. Gain (loss) on extinguishment of bonds = 50,000 gain (Step 1)
b. Consolidated bonds payable = 0 (Step 1)
c. Consolidated financial statements (See above)
CHAPTER 6
PROBLEM 2: FOR CLASSROOM DISCUSSION

1. Solutions:
There were no inter-company transactions during the year.

Acquisition
Consolidation Net
Subsidiary Co.
date change
date
Total net assets at carrying amounts 160,000 210,000
date - -

Formula #2 - NCI measured at fair value
Consideration transferred 180,000
Less: Previously held equity interest in the acquiree -
Total 180,000
Less: Parent's proportionate share in the net assets of
subsidiary (₱160,000 acquisition-date fair value x 75%) (120,000)
Goodwill attributable to owners of parent – Jan. 1, 20x1 60,000
Less: Parent’s share in goodwill impairment (₱10,000 x 75%) (7,500)
Goodwill attributable to owners of parent – Dec. 31, 20x1 52,500
Fair value of NCI (see given) 60,000

Less: NCI's proportionate share in the net assets of subsidiary
(₱160,000 acquisition-date fair value x 25%) (40,000)
Goodwill attributable to NCI – Jan. 1, 20x1 20,000
Less: NCI’s share in goodwill impairment (₱10,000 x 25%) (2,500)

Goodwill attributable to NCI – Dec. 31, 20x1 17,500
Goodwill, net – Dec. 31, 20x1 70,000

Total 52,500
Add: Goodwill to NCI net of accumulated impairment losses 17,500

Parent's share in the net change in Sub.'s net assets (a) 37,500
Unamortized deferred gain (Downstream only) -
(7,500
Impairment loss on goodwill attributable to Parent )
(a) Net change in Sub.’s net assets (Step 2) of ₱50,000 x 75% = ₱37,500.

( -
Unamortized def. gain - (Step 1) ) ( - ) ( - )
( -
Gain or loss on extinguishment ( -
of bonds ) ( - ) ( - )
( -
Net consolidation adjustments ) ( - ) ( - )
( -
Impairment loss on goodwill (7,500) (2,500) (10,000)

Owners of
(Step 6) 240,000 N/A 240,000
before FVA (c) 37,500 12,500 50,000
goodwill (7,500) (2,500) (10,000)
Totals 270,000 10,000 280,000
(c)Shares in Sub.’s profit before FVA (Step 6): (50,000 x 75%); (50,000
x 25%)
Requirement (d):
Consolidated
ASSETS
Investment in subsidiary (at cost) – eliminated -
Other assets (600,000 + 235,000) 835,000
Goodwill – net (Step 3) 70,000

Liabilities (70,000 + 25,000) 95,000
Share capital (Parent's only) 600,000
Retained earnings (Step 5) 140,000
Equity attributable to owners of the parent 740,000
Non-controlling interest (Step 4) 70,000
Consolidated
Revenues (300,000 + 80,000) 380,000
Operating expenses (60,000 + 30,000) (90,000)
Impairment loss on goodwill (10,000)

10,000
2. D
3. D
4. C
Solution:
Owners of Net assets of
% parent % NCI XYZ
75
Before the transaction % 112,500 25% 37,500 150,000 a
95
After the transaction % 142,500 5% 7,500 150,000
Change – Inc./ (Decrease) 30,000 (30,000) -
aThe fair value of Plastic Co.’s net assets on January 1, 20x1 is computed
as follows:
Plastic, FV of net
Rubber Co. Inc. Consolidated assets
(d) = (c) -
(a) (b) (c) (a)
Investment in sub. 112,500 - - -
Other assets 514,500 186,000 709,500 195,000
Goodwill - - 12,000
TOTAL ASSETS 627,000 186,000 721,500 195,000
Accounts payable 109,500 45,000 154,500 45,000
NET ASSETS 517,500 141,000 567,000 150,000
ANSWER: NCI in net assets after the additional acquisition = 7,500
5. B
Solution:
The entry in Rubber’s separate books is as follows:
Jan. Investment in subsidiary 100,000
1, Cash in bank 100,000
20x2 to record the acquisition of additional
interest in Plastic, Inc.
The consolidation journal entry is as follows:
Jan. NCI (the decrease computed above) 30,000
1, Retained earnings – Rubber Co. (squeeze) 70,000
20x2 Investment in subsidiary 100,000
Consolidated retained earnings before additional acquisition 177,000

(70,000
Decrease in retained earnings )
Consolidated retained earnings after additional acquisition 107,000
6. A
Solution:
The fair value of Plastic’s net identifiable assets is computed as follows:
Plastic, FV of net
Rubber Co. Inc. Consolidated assets
(d) = (c) -
(a) (b) (c) (a)
Investment in sub. 112,500 - - -
Other assets 514,500 186,000 709,500 195,000
Goodwill - - 12,000
TOTAL ASSETS 627,000 186,000 721,500 195,000
Accounts payable 109,500 45,000 154,500 45,000
NET ASSETS 517,500 141,000 567,000 150,000
The gain or loss on the sale is computed as follows:

Jan. Cash (Consideration received) 120,000
1, Held for trading securities* 30,000
20x2 Accounts payable – Plastic, Inc. 45,000
Non-controlling interest 37,500
Other assets – Plastic, Inc. 195,000
Goodwill 12,000
Gain on disposal (squeeze) 25,500
*(120,000 ÷ 60%) x 15% = 30,000
OR
Consideration received 120,000
Investment retained in the former subsidiary (at fair value) 30,000
NCI (carrying amount - see consolidated financial statements) 37,500
Total 187,500
(150,000
Less: Plastic’s net identifiable assets (see computation above)
)
Goodwill (see consolidated financial statements) (12,000)
Gain or loss on disposal of controlling interest 25,500

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ACCOUNTING FOR BUSINESS COMBINATIONS

PROBLEM 2: FOR CLASSROOM DISCUSSION

a (40,000 x 20%) = 8,000

Cost of sales of Parent 400,000

Ending inventory of Parent 300,000

The solution above is based on the notion that it is as if the intercompany

Equipment - net (Bright Co.) 400,000

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, 20x1 [60K – (120K - 72K)] 12,000

Step 2: Analysis of net assets

Step 3: Goodwill computation

Step 4: Non-controlling interest in net assets

*No goodwill is attributed to NCI because NCI is measured at proportionate

Net consolidation adjustments 28,500

Step 6: Consolidated profit or loss

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

LIABILITIES AND EQUITY

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

Total dividends declared ₱100,000

Step 2: Analysis of net assets

Step 3: Goodwill computation

Step 4: Non-controlling interest in net assets

Step 5: Consolidated retained earnings

(a) ₱80,000 Net change in subsidiary’s assets (Step 2) x 75%

Step 6: Consolidated profit or loss

(c)Shares in Sub.’s profit before FVA (Step 6) – (132,000 x 75%);

SUMMARY OF ANSWERS TO REQUIREMENTS:

Requirement (a): Gain (loss) 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

Step 3: Goodwill computation

Step 4: Non-controlling interest in net assets

Step 5: Consolidated retained earnings

(a)Net change in Subsidiary’s net assets (Step 2) of ₱70,000 x 75% =

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

Requirement (c): Consolidated financial statements

LIABILITIES AND EQUITY

Share capital (Parent only) 200,000

TOTAL LIABILITIES AND EQUITY 580,000

Profit attributable to owners of the parent (Step 7) 145,000

SUMMARY OF ANSWERS TO REQUIREMENTS

PROBLEM 2: FOR CLASSROOM DISCUSSION

Step 2: Analysis of net assets

Step 3: Goodwill computation

Fair value of NCI (see given) 60,000

Less: NCI’s share in goodwill impairment (₱10,000 x 25%) (2,500)

Goodwill, net – Dec. 31, 20x1 70,000

Step 4: Non-controlling interest in net assets

Step 5: Consolidated retained earnings

Step 6: Consolidated profit or loss

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

LIABILITIES AND EQUITY

Profit attributable to owners of the parent (Step 7) 270,000

Change – Inc./ (Decrease) 30,000 (30,000) -

Accounts payable 109,500 45,000 154,500 45,000

NET ASSETS 517,500 141,000 567,000 150,000