Professional Documents
Culture Documents
Chapter 5 - Consolidated Financial Statements (Part 2)
Chapter 5 - Consolidated Financial Statements (Part 2)
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
Unrealized gross profit 4,500 6,000 10,500
a
(40,000 x 20%) = 8,000
1
Requirement (c):
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
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
Amortization of the deferred gain
(12,000 gain on sale ÷ 4 years) (3,000)
Consolidated depreciation expense 49,000
2
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
3
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
Unamortized deferred gain (Downstream only) - (Step 1) (9,000)
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.
4
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
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
3. Solutions:
Step 1: Analysis of effects of intercompany transaction
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
5
Step 2: Analysis of net assets
Acquisition Consolidation Net
Subsidiary date date change
Net assets at carrying amts. 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
6
Step 6: Consolidated profit or loss
Parent Subsidiary Consolidated
Profits before adjustments 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 adjustments (75,000) - (75,000)
Profits before FVA 400,000 132,000 532,000
Depreciation of FVA ( - ) ( - ) ( - )
Impairment loss on goodwill ( - ) ( - ) ( - )
Consolidated profit 400,000 132,000 532,000
4. Solutions:
Step 1: Analysis of effects of intercompany transaction
7
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 -
9
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
Profit for the year 150,000
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
Sale price of intercompany sale 16,000
Cost of intercompany sale (12,000)
Profit from intercompany sale 4,000 10,000a
Multiply by: Unsold portion as of yr.-end ½ 1/4
Unrealized gross profit 2,000 2,500 4,500
a
(60,000 ÷ 120%) x 20% = 10,000
10
Less: Intercompany sales during the yr. (16,000 + 60,000) (76,000)
Add: Unrealized profit in ending inventory 4,500
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory (Step 2) -
Consolidated cost of sales 678,500
Requirement (c):
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
Carrying amount of equipment sold in Night's books (54,000)
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
11
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
12
Step 5: Consolidated retained earnings
Day's retained earnings – Dec. 31, 20x1 132,000
Consolidation adjustments:
Day's share in the net change in Night's net assets (a) 45,000
Unamortized deferred gain (Downstream only) - (Step 1) (10,800)
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable to Parent -
Net consolidation adjustments 34,200
Consolidated retained earnings – Dec. 31, 20x1 166,200
(a)
Net change in Night’s net assets (Step 2) of ₱60,000 x 75% = ₱45,000.
Requirement (d):
Consolidated
ASSETS
Investment in subsidiary (at cost) - eliminated -
Equipment - net (Requirement 'b') 697,200
13
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)
Gain on sale of equipment (eliminated) -
Profit for the year 337,200
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
14
Step 3: Goodwill computation
We can leave out this step because the information is insufficient.
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
2. A
Solution:
Cost of sales of Parent 300,000
Cost of sales of Subsidiary 220,000
Less: Intercompany sales during the yr. (see prev. sol’n) (64,000)
Add: Unrealized profit in ending inventory (squeeze) 6,000
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory -
Consolidated cost of sales 462,000
3. C
Solution:
Cost of sales of Parent 400,000
Cost of sales of Subsidiary 350,000
Less: Intercompany sales during the yr. (250,000)
Add: Unrealized profit in ending inventory -*
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory -
Consolidated cost of sales 500,000
*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
8. D
Solution:
Saul's net assets at fair value – 12/31/20x9 (6M+ 550K–165K) 6,385,000
Multiply by: NCI percentage 20%
Total 1,277,000
Add: Goodwill to NCI net of accumulated impairment losses* 50,000
Non-controlling interest in net assets – 12/31/20x9 1,327,000
9. C
Solution:
Total consolidated current assets before elimination 320,000
Unrealized profit on purchases from Kent (48K x 60/240) (12,000)
Consolidated current assets 308,000
20
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.
21