Chapter 3 IFRS 10 Consolidated Financial Statements Part 2

Separate and Consolidated
Financial Statements –
Subsequent to Date of
Acquisition
CHAPTER 3
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Introduction
This chapter examines procedures for consolidating the financial statements of parent and subsidiary companies.
Some differences in the consolidation process result from different methods of parent-company accounting for
subsidiary investments. Investments in voting stock of other companies may be consolidated, or they may be
separately reported in the financial statements at cost, at fair value, or carrying value of equity. The method of
reporting adopted depends on a number of factors including the size of the investment, the extent to which the
investor exercises control over the activities of the investee, and the marketability of the securities. Investor
refers to a business entity that holds an investment in voting stock of another company. Investee refers to a
corporation that issued voting stock held by an investor/s.
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Consolidated Statements Subsequent to Date of Acquisition
The preparation of consolidated financial statements:

• after acquisition is not materially different in concept from preparing them at the acquisition date in the sense that
reciprocal accounts are eliminated and remaining balances are combined
• The process is more complex, however, because time has elapsed and business activity has taken place between the date
of acquisition and the date of consolidated statement preparation.
On the date of acquisition, the only relevant financial statement is the consolidated balance sheet; after acquisition, a
complete set of consolidated financial statements – statement of comprehensive income, and retained earnings statement.
Separate Financial Statements

• PAS 27 paragraph 4 defines separate financial statements as “those presented by a parent, an investor in an associate
or a venturer in a jointly controlled entity, in which the investments are accounted for on the basis of the direct equity
interest rather than on the basis of the reported results and net assets of the investees”.
In other words, the asset on the investor’s balance sheet is the direct interest in the investment itself
The following level of reporting is described in Table 3.1, wherein a parent company produces its own single economic
financial statements or consolidated financial statements: FR
Table 3.1: Summarizes the Accounting Treatment required at each Levels of Reporting for Consolidated Financial
Statements (CFS) Purposes
Required
Investor’s Separate Financial Consolidated Financial treatment in
Investment Criteria Statements statements Group Accounts (CFS)
PAS 27 - Investment is carried at:
PFRS 10
1. Cost; or
Investment is eliminated and
Control 2. In accordance
Subsidiary net assets of subsidiary are Full Consolidation
(51% or more) with PFRS 9**
consolidated with those of the
( financial Instrument)
parent
3. Using the Equity method
PAS 27/28 Investment is carried at:
1. Cost; or
PAS 28/PFRS 10 Equity accounting
Significant influence 2. In accordance
Associate Investment is accounted for
(20% -50%) with PFRS 9**
using the equity method
(financial Instrument)
PAS 27/28; PFRS11 Investment is
carried at:
*Contractual
1. Cost; or PAS 28/PFRS10/PFRS11
arrangement or joint Equity accounting
Joint Venture 2. In accordance Investment is accounted for
control
with PFRS 9** using the equity method
(20% - 50%)
(financial Instrument)
Investment
Asset held for As for single company
which is none PFRS 9 PFRS 9
accretion of wealth accounts
of the above
* A contractual arrangement must exist which establishes joint control.

** Fair Value Option
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Accounting for Subsidiaries, Associates and Joint Ventures in the Parent’s Separate
Financial Statements
A parent will usually produce its own single company financial statements and these should be prepared in accordance
with PAS 27, Separate Financial Statements. In these statements, investments in subsidiaries, associates and joint
ventures included in the consolidated financial statements should be either:
I. At cost, or
II. In accordance with PFRS 9 (Fair Value Option), or
III. Using equity method as described in PAS 28.
Where subsidiaries are classified as held for sale, they should be accounted in accordance with PFRS 5.
The equity method will be discussed in detail on the later part of this chapter.
The approach in accordance with PFRS 9 refers to the fair value option/model will be discussed on the later part of this
chapter
Although there appears to be significant differences between cost model, equity method and fair value option/method, the
main difference is timing. Table 3.2 shows a comparison of the three methods FR
Table 3.2: Pro-forma Entries/Comparison - Accounting for Subsidiaries, Associates and Joint Ventures in the Books of the
Acquirer/Investor:
Cost Model Equity Method Fair Value Option

Cost of Investment Investment…………. xx Investment………….. xx Investment………….. xx
Various credits….. xx Various credits….. xx Various credits….. xx
Results of Operations:
a. Net Income of No entry Investment………….. xx No entry
Subsidiary Subsidiary/
Investment Income xx
b. Cash dividend of Cash/Dividend Cash/Dividend Cash/Dividend
Subsidiary receivable………… xx receivable………. .... xx receivable…………. xx
Dividend Income/ Subsidiary/ Dividend Income/
Subsidiary/ Investment Income xx Subsidiary/
Investment Income xx Investment Income xx
c. Amortization of No entry Subsidiary/ No entry (no special treatment is
Allocated Excess Investment Income... xx accorded for the allocated excess)
Investment………… xx
d. Impairment of No entry Subsidiary/ No entry
Goodwill Investment Income... xx
Investment………… xx
The First Method: Cost Model (formerly Cost Method or Initial Value Method)
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PAS 27 does not define “cost” except in the specific set of circumstances of certain types of group
reorganization and in first-time transition to PFRS.
In PFRS 3, the term “cost” no longer refers to cost of an acquisition, so the relevant measure will be:
1. The consideration transferred discussed in Chapter 1.

2. Another point of reference might be PAS 32 – Financial Instruments: Presentation – and PFRS 9.
Investments in subsidiaries, associates and joint ventures, while outside the scope of PAS 32 and PFRS 9, are
clearly financial assets (and therefore financial instruments) as defined in those standards.
The cost model (method) of accounting for inter-corporate investments is consistent with historical cost basis
for most other assets.
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Under the COST Model:
1. Is subject to the usual criticisms leveled against historical cost
2. The cost model (method) does conform more closely to the traditional accounting and legal views of the
realization of income.
3. Is the most common method used in practice by parent companies.
Typically, the correct income of the subsidiary is not known until after the end of the accounting period.
Awaiting its determination would delay the parent company’s closing procedures.
It should be noted than for purposes of preparing consolidated statements, companies that use the COST
MODEL should be converted to EQUITY METHOD.
When the cost model is used:

• the investment in subsidiary account is retained at its original cost of acquisition balance.
• No adjustments are made to the account for income as it is earned by the subsidiary.
• Income on the investment is limited to dividends received from the subsidiary.
The cost model is acceptable for subsidiaries that are to be consolidated because, in the consolidation process:
• The investment account is eliminated entirely. FR
• Results of Operations: Cost Model – Dividends Declared/Paid
Under this model:
The only result of operation that should be recognized is only the cash dividend declared / paid
PFRS 3 paragraph 38A states that: “An entity shall recognize a dividend from a subsidiary, joint venture, or
associate in profit or loss in its separate financial statements when its right to receive the dividends is established”.
The effect of these changes is that all dividends paid or payable by a subsidiary to a parent to be recognized as
revenue by the parent.
Remember, the cost model, equity method and fair value option (later part of this chapter) are methods to record the
investments after acquisition and their differences of these methods depends on the subsequent entries for:
• net income from subsidiary’s own operations
• dividends declared/paid
• amortization of allocated excess
• impairment of goodwill, and
• intercompany sales of inventory (Chapter 4) and fixed/plant assets (Chapter 5).
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The Second Method: Equity Method
The equity method of accounting is essentially accrual accounting for equity investments that enable the investor to
exercise significant influence over the investee.
Results of Operations: Equity Method – Net income, Dividends Declared/Paid, Amortization of Allocated Excess
and Impairment of Goodwill [Intercompany profit in inventory (Chapter 4) and Unrealized gain or losses on
intercompany sales of property and equipment (Chapter 5)]
Under this method:
• Record the investments at cost, adjust for earnings, losses, dividends declared/paid, amortization of allocated
excess (over-undervaluation) and goodwill impairment, if any.
• The investor reports its share of the investee’s earnings as investment income and its share of the investee’s losses
as investment loss.
✔ Increase the investment account for investment income and decrease it for investment losses
✔ Dividends received from investees are disinvestments under the equity method, and they are recorded as
decreases in the investment account
• Investment income under the equity method reflects the investor’s share of the net income of the investee, and
the investment account reflects the investor’s share of the investee’s net assets
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Although the equity method:
• is not a substitute for consolidation.
• the income reported by a parent in its separate income statement under the equity method of accounting is
generally the same as the parent’s share of (or controlling interest in) consolidated net income reported in
consolidated financial statements for a parent and its subsidiary. This is the same with the reported net
income determined under the equity method.
The equity method of accounting is often called a one-line consolidation

• The name comes about because the investment is reported in a single amount on one line of the investor’s
balance sheet, and
• investment income (equity in subsidiary income) is reported in a single amount on one line of the investor’s
income statement (except when the investee has extraordinary or other “below-the-line” items that require
separate disclosure).
• “One-line consolidation” also means that a parent-company/investor’s income and stockholders’ equity are
the same when a subsidiary company/investee is accounted for under a complete and correct application of
the equity method and when the financial statements of a parent and subsidiary are consolidated.
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Consolidated financial statements show the same income and the same net assets but include the details of
revenues and expenses and assets and liabilities.
The equity method creates many complexities:

• It requires the same computational complexities encountered in preparing consolidated financial statements.
• The parallel one-line consolidation/consolidation coverage permits us by making alternative
computations of such key financial statement items as controlling interest (or parent’s share) in
consolidated net income and consolidated retained earnings.
• Basic accounting procedures for applying the equity method are the same whether the investor has the
ability to exercise significant influence or joint control over the investee (20 percent to 50 percent
ownership) or the ability to control the investee (more than 50 percent ownership). This is important because
investments of more than 50 percent are consolidations and require preparation of consolidated financial
statements.
• Thus, the accounting principles that apply to the acquisition method of accounting for business combinations
also apply to accounting for investments of 51 percent or greater under the equity method.
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Table 3.3:
Comparison of Worksheet Approach between Cost Model and Equity Method:
Item Cost Model Equity Method
Investment balance Cost Cost + parent % of sub (income –
dividends – amortization of allocated
excess) – goodwill impairment loss (in
case of partially-owned subsidiary – it
depends on full or partial-goodwill
approach)
Adjustment needed to Convert to equity method as of the date of None
eliminate acquisition first year not needed)
Elimination entry Eliminate beginning–of-year balance Eliminate beginning –of-year balance
Allocated excess distribution Original amount from schedule of Remaining unamortized balance from
determination and allocation of excess schedule of determination and allocation
excess
Amortization of excess Prior year retained earnings; current year Only current year to nominal accounts.
to nominal accounts
Goodwill impairment loss Prior year retained earnings; current Only current year to nominal accounts.
year to nominal accounts
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The amounts in the consolidated financial statements are amounts appearing in the books of parent company
under the equity method which ensure particularly the following aspects:
1. The parent company’s net income as reported is exactly equal to the controlling interest in consolidated
net income on the consolidated financial statements.
2. The parent company’s retained earnings is exactly equal to the consolidated retained earnings on the
consolidated financial statements.
3. The parent company’s common stock is exactly equal to the consolidated common stock on the
consolidated financial statements.
4. The parent company’s additional paid-in capital is exactly equal to the consolidated additional paid-in
capital on the consolidated financial statements.
5. The parent company’s dividends declared or paid is exactly equal to the consolidated dividends declared
or paid on the consolidated financial statements.
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Determination of the Method Being Used
Before you attempt to prepare a consolidated worksheet, you need to know which of the two methods is being used by the
parent to record its investment in the subsidiary. You cannot begin to eliminate the investment in subsidiary until it is
determined. The most efficient approach is as follows:
1. Test for the use of the cost model (method), if:
a. The investment account will be at the original cost shown on the schedule of determination and
allocation of excess.
b. The parent will have recorded as its share of subsidiary income its ownership interest times the
subsidiary dividends declared or paid by the subsidiary. In most cases, this income will be called
“subsidiary dividend income”, but some may call it “subsidiary income” or “dividend income”.
Therefore, do not rely on the title of the account.
2. If the method is not a cost model (method), check for the use of equity method as follows:
a. The investment account will not be at the original cost
b. The parent will have recorded as investment income its ownership percentage times the reported net
income of the subsidiary less the amortizations of excess and goodwill impairment loss for the current
period (if any).
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Choosing between Cost Model (Method) and Equity Method
Consolidated financial statement amounts are the same, regardless of whether a parent company uses the cost
model or equity method to account for a subsidiary’s operations.
Although there appears to have significant differences between the cost model and equity methods, the:
1. Main difference is one of timing.

2. Eventually, the flows of income that flow from each method are the same.
3. The cost model is slower in recognizing income.
4. The working paper eliminations used in the two methods are different, as illustrated in subsequent sections
of this chapter.
The following table shows the impact of the basis of measurement on goodwill impairment tests. FR
Table 3-4: Basis of measurement of non-controlling interests and goodwill impairment
Non-controlling interests as a
Non-controlling interests at proportion of identifiable assets
Item fair value at acquisition date at acquisition date
(Full-goodwill) (Partial-goodwill)
Goodwill in consolidated Includes non-controlling Does not include non-controlling
financial statements interests’ share of goodwill interests’ share of goodwill
Carrying amount of Goodwill is allocated to Goodwill has to be grossed-up to
cash-generating unit cash-generating unit without include non-controlling interests’
further adjustments share
Notionally adjusted goodwill =

recognized goodwill/parent’s
interest
Impairment loss Impairment loss is shared Impairment loss is borne only by
between parent and parent as goodwill for
non-controlling interests on non-controlling interests is not
same basis on which profit or recognized
loss is allocated
One item to be recognized under equity method is that the parent company might opted not to record the goodwill
impairment loss (refer to Illustrations 3-2, 3-4, and 3-6 for further illustration).
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Goodwill Impairment Tests
PAS 36 Impairment of Assets requires goodwill to be reviewed annually for impairment loss. Because goodwill
is an integral asset in a business unit, it is not assessed for impairment as a stand-alone asset but is reviewed for
impairment as part of a cash-generating unit.
As discussed in Chapter 2, PFRS 3 allows two bases of measurement of non-controlling interests as of

acquisition date, i.e. either:
• Option 1: NCI are measured at full-fair value (Full-goodwill approach or Fair Value Basis), or
• Option 2: NCI are measured at proportionate share of full-goodwill (Partial-goodwill approach or
Proportional Basis)
How is Goodwill Impairment Losses Accounted under Equity Method for Consolidation Purposes?
How is Goodwill Impairment Loss Handled? How is Goodwill Impairment Loss Recorded? FR
The impairment loss is reported in the consolidated income statement for the period in which it occurs. It is presented on a
before-tax basis as part of continuing operations and may appear under the caption “other gains and losses”.
The parent company could handle the impairment loss in two ways:
1. The parent could record the impairment loss on its books and credit the investment in subsidiary account
This would mean that the impairment loss would already exist before consolidation procedures start. The NCI share of
the loss (in case of full-goodwill approach) would be recorded on the worksheet.
The procedure used in this text will be to follow Option 1 (NCI at Full-fair Value/Full Goodwill) and directly adjust the
investment account on the parent’s books. This approach will be discussed in Illustration 3 -2, 3-4, and 3-6.
2. The impairment loss could be recorded only on the consolidated worksheet.

The investment account, resulting goodwill, and the controlling retained earnings would be overstated. Thus, on
the worksheet, an adjustment reducing the goodwill account and the controlling retained earnings would be needed
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Consolidated Statements Subsequent to Date of Acquisition
The preparation of consolidated financial statements after acquisition is not materially different in concept
from preparing them at the acquisition date in the sense that reciprocal accounts are eliminated and
remaining balances are combined.
On the date of acquisition, the only relevant financial statement is the consolidated balance sheet; after
acquisition, a complete set of consolidated financial statements–statement of comprehensive income and
retained earnings statement.
FR
Workpaper Format
Accounting workpapers are used to accumulate, classify, and arrange data for a variety of accounting
purposes, including the preparation of financial reports and statements. Although workpaper style and
technique vary among firms and individuals, we have adopted a three-section workpaper for illustrative purposes
in this book. The format includes a separate section for each of three basic financial statements - income
statement, retained earnings statement, and balance sheet.
In some cases the input to the workpaper comes from the individual financial statements of the affiliates to be
consolidated, in which case the three-section workpaper (refer to illustrations below) is particularly appropriate.
Nature of Eliminating Entries
• The investment account must be eliminated in the consolidated financial statements because from a single entity
viewpoint a company cannot hold an investment in itself. The subsidiary’s stock and the related stockholders’ equity
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accounts must be eliminated because the subsidiary’s stock is held entirely within the consolidated entity and none
represents claims by outsiders.
• From a somewhat different viewpoint, the investment account on the parent’s books can be thought of as a single
account representing the parent’s investment in the net assets of the subsidiary, a so-called one-line consolidation.
In full consolidation, the subsidiary’s individual assets and liabilities are combined with those of the parent. Including both
the net assets of the subsidiary, as represented by the balance in the investment account, and the subsidiary’s individual
assets and liabilities would be double-count the same set of assets.
Therefore, the investment account is eliminated and not carried to the consolidated balance sheet. To achieve the elimination
of the investment account, eliminating entries are required.
Eliminating entries are used in the consolidation worksheet to adjust the totals of the individual account balances of the
separate consolidation companies to reflect the amounts that would appear if all the legally separate companies were actually
a single company.
Eliminating entries appear only in the consolidation worksheets and do not affect the books of the separate companies.
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Consolidated financial statements should include only balances resulting from transactions with
outsiders. Eliminating techniques are designed to accomplish this end.
Consolidated Income Statement
The consolidated income statement is essentially a combination of the revenue, expense, gain, and loss
accounts of all consolidated affiliates after elimination of amounts representing the effect of
transactions among the affiliates.
The combined income of the affiliates, after eliminating any intercompany transactions, is referred to as
consolidated net income.
This amount is allocated to the controlling and non-controlling interests. In the workpaper, consolidated
net income is reduced by the non-controlling interest’s share (if any) of the net income of the
subsidiaries to arrive at the controlling interest in consolidated net income.
Consolidated Net Income (under the Entity Theory)
• All revenues and expenses of the individual consolidating companies arising from transactions and actions with unaffiliated
companies are included in the consolidated financial statements
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The consolidated income statement includes 100 percent of the revenues and expenses regardless of the parent's percentage ownership.
As with single-company financial statements, where the difference between revenues and expenses equals net income, revenues minus
expenses in the consolidated financial statements equals consolidated net income.
• If all subsidiaries are wholly owned, all of the consolidated net income accrues to the parent company, or the controlling interest.
• If one or more of the consolidated subsidiaries is less than wholly owned, apportion of the consolidated net income accrues to
non-controlling shareholders.
Consolidated Retained Earnings Statement
The consolidated retained earnings statement consists of:

• beginning consolidated retained earnings plus
• the controlling interest in consolidated net income (or minus the controlling interest in a consolidated net loss), minus
• parent company dividends declared. The net balance represents consolidated retained earnings at the end of the period.
• The non-controlling interest in net assets is reflected as a separate component of equity.
Non-Controlling Interest
The non-controlling interest of a less-than-wholly owned subsidiary have a claim on the income and net assets of the subsidiary even
though the subsidiary is consolidated with its parent and, perhaps, other subsidiaries.
Workpaper Observations FR
Several observations should be noted concerning the workpaper presented in the succeeding illustrations:
Each section of the workpaper represents one of three consolidated financial statements:
1. Elimination of the investment account
2. Allocated excess (the difference between fair value of subsidiary and book value). The fair value and the
consideration transferred of a subsidiary might have exceeded the book value for several reasons, such as the
following:
a. Excess of fair value over book value of the subsidiary’s net identifiable assets. This valuation may be accomplished
each period in the consolidated worksheet; and
b. Existence of goodwill.
The second elimination entry is also identical to that which would have been made at the date of acquisition. It serves to
distribute the difference between the fair value of the subsidiary and book values of subsidiary equity to the appropriate
account(s), in this case to goodwill.
3. Intercompany dividends
4. Non-controlling interest in consolidated net income
The eliminations columns in each section do not balance, since individual eliminations made involve more than one
section. The total eliminations for all three sections, however, must be in balance.
Consolidated Financial Statements with Partially-Owned Subsidiary
The consolidation process for a partially-owned subsidiary is the same as for a wholly-owned subsidiary except that the
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claims of the non-controlling interests must be included.
Illustration 3-1: 80%-Owned Subsidiary: Cost Model – Partial-Goodwill Approach
Assume that on January 1, 20x4, Perfect Company acquires 80% of the common stock of Son Company for P310,000. At that
time, the fair value of the 20% non-controlling interest is estimated to be P77,500. On that the following assets and liabilities
of Son Company had book values that were different from their respective market values:
Son Co. Son Co.

Book value Fair value
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P20,000 25,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000
Equipment 150,000 150,000
Accumulated depreciation-equipment . . . . . . . . . . . . . . . . . ( 80,000)
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 120,000
Accumulated depreciation-buildings . . . . . . . . . . . . . . . . . . . ( 160,000)
Bonds payable (4 years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 96,000
All other assets and liabilities had book values approximately equal to their respective fair values. On January 1, 20x4, the
equipment and buildings had a remaining life of 8 and 4 years, respectively. Inventory is sold in 20x4 and FIFO inventory
costing is used. Goodwill, if any, is reduced by a P3,125 impairment loss during 20x4 based on the fair value basis (or
full-goodwill), meaning the management has determined that the goodwill arising in the acquisition of Son Company relates
proportionately to the controlling and non-controlling interests, as does the impairment. Trial balances for the companies for
the year ended December 31, 20x4 are as follows:
Debits Perfect Co. Son Co.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P194,000
75,000
100,000
P75,000
50,000
75,000
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Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000 -
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 115,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 15,000
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____60,000 ____30,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,974,000 P1,020,000
Credits
Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . P 112,500 P 80,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 337,500 240,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 100,000
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 200,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 100,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 200,000
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____24,000 -
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,974,000 P1,020,000
From the trial balances presented above the

following summary for 20x4 results of operations are as follows:
Perfect Co. Son Co.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 400,000 P 200,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 115,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 230,000 P 85,000
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 15,000
Net income from its own separate operations . . . . . . . . . P 140,000 P 50,000
Add: Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 164,000 P 50,000
The resulting ownership situation can be viewed in the schedule of determination and allocation of excess.
Schedule of Determination and Allocation of Excess (Partial-goodwill)
Date of Acquisition – January 1, 20x4 FR
Fair value of Subsidiary (80%)
Consideration transferred . . . . . . . . . . . . . . . . . . . . . . . . . P 310,000
Less: Book value of stockholders’ equity of Son:
Common stock (P200,000 x 80%) . . . . . . . . . . . . . . . . . . P 160,000
Retained earnings (P100,000 x 80%) . . . . . . . . . . . . . . . . 80,000 240,000
Allocated excess (excess of cost over book value) . . . . . . . P 70,000
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P5,000 x 80%). . . . . . . . . . . . . . . . P 4,000
Increase in land (P6,000 x 80%) . . . . . . . . . . . . . . . . . . . . 4,800
Increase in equipment (P80,000 x 80%) . . . . . . . . . . . . . 64,000
Decrease in buildings (P20,000 x 80%) . . . . . . . . . . . . . . ( 16,000)
Decrease in bonds payable (P4,000 x 80%) . . . . . . . . . 3,200 60,000
Positive excess: Partial-goodwill (excess of cost over
fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 10,000
The over/under valuation of assets and liabilities are summarized as follows

Son Co. Son Co. (Over) Under
Book value Fair value Valuation
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . P 20,000 P 25,000 P 5,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000 6,000
Equipment (net) . . . . . . . . . . . . . . . . . . . . . 70,000 150,000 80,000
Buildings (net) . . . . . . . . . . . . . . . . . . . . . . . 140,000 120,000 (20,000)
Bonds payable . . . . . . . . . . . . . . . . . . . . . . (100,000) ( 96,000) 4,000
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 170,000 P 245,000 P 75,000
The buildings and equipment will be further analyzed for consolidation purposes as follows:
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . P150,000 P150,000 P 0
Less: Accumulated depreciation . . . . . . . __80,000 _____ -- _ 80,000
Net book value . . . . . . . . . . . . . . . . . . . . . . P 70,000 P150,000 P 80,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . P300,000 P 120,000 P ( 180,000)
Less: Accumulated depreciation . . . . . . . _160,000 ________- _( 160,000)
Net book value . . . . . . . . . . . . . . . . . . . . . . P140,000 P 120,000 P( 20,000)
A summary or depreciation and amortization adjustments is as follows:
Over/ Annual Current
Account Adjustments to be amortized Under Life Amount Year(20X4) 20X5
Inventory . . . . . . . . . . . . . . . . . . . . . . P 5,000 1 P 5,000 P 5,000 P -
Subject to Annual Amortization
Equipment (net) . . . . . . . . . . . . . . . . 80,000 8 10,000 10,000 10,000
Buildings (net) . . . . . . . . . . . . . . . . . . (20,000) 4 ( 5,000) ( 5,000) (5,000)
Bonds payable . . . . . . . . . . . . . . . . 4,000 4 1,000 1,000 1,000
P 11,000 P 11,000 P 6,000
The goodwill impairment loss of P3,125 based on 100% fair value would be allocated to the controlling interest and the NCI based on the
percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is
FR
computed as follows:
Consideration transferred: Cash (80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 310,000
Fair value of NCI (given) (20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,500
Fair value of Subsidiary (100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 387,500
Less: Book value of stockholders’ equity of Son (P300,000 x 100%) . . . . . . . . . . . __300,000
Allocated excess (excess of cost over book value) . . . . . . . . . . . . . . . . . . . . . . . P 87,500
Add (deduct): (Over) under valuation of assets and liabilities
(P75,000 x 100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Positive excess: Full-goodwill (excess of cost over
fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 12,500
In this case, the goodwill was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as follows:
Value % of Total
Goodwill applicable to parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P10,000 80.00%
Goodwill applicable to NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 20.00%
Total (full) goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P12,500 100.00%
The goodwill impairment loss would be allocated as follows:
Value % of Total
Goodwill impairment loss attributable to parent or controlling
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 2,500 80.00%
Goodwill applicable to NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625 20.00%
Goodwill impairment loss based on 100% fair value or full-
goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 3,125 100.00%
When cost model is used, only two journal entries are recorded by Perfect Company during 20x4 related to its investment in Son Company.
First Year after Acquisition
FR
Parent Company Cost Model Entry
When the cost model is used, only two journal entries are recorded by Perfect Company during 20x4 related to its investment in Son
Company. Entry (1) records Perfect Company’s purchase of Son Company’s stock, entry (2) recognizes dividend income based on the
P32,000 (P40,000 x 80%) of dividends received during the period.
January 1, 20x4:
(1) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000
Acquisition of Son Company.
January 1, 20x4 – December 31, 20x4:

(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000
Dividend income (P40,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . 32,000
Record dividends from Son Company.
On the books of Son Company, the P40,000 dividend paid was recorded as follows:
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Dividends paid by Son Co
The dividends paid (or declared) account is a temporary account that is closed to retained earnings at year-end. An alternative is to debit
retained earnings directly when dividends are paid or declared.
No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4.
FR
Consolidation Workpaper – Year of Acquisition
The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet
eliminating entries on January 1, 20x4
(E1) Common stock – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Retained earnings – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.000
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
Non-controlling interest (P300,000 x 20%) . . . . . . . . . . . . . . . . . . . . 60,000
To eliminate intercompany investment and equity accounts
of subsidiary on date of acquisition; and to establish non-controlling
interest (in net assets of subsidiary) on date of acquisition.
(E2) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000

Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . . . . . 80,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . . . . . 160,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Non-controlling interest (P75,000 x 20%) . . . . . . . . . . . . . . . . . . . . . 15,000
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
To allocate excess of cost over book value of identifiable assets
acquired, with remainder to goodwill; and to establish non-
controlling interest (in net assets of subsidiary) on date of acquisition.
(E3) Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,000
1,000
FR
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . . 10,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
To provide for 20x4 impairment loss and depreciation and
amortization on differences between acquisition date fair value and
book value of Son’s identifiable assets and liabilities as follows:
Cost of Depreciation/
Goods Amortization Amortization
Sold Expense -Interest Total
Inventory sold P 5,000
Equipment P 10,000
Buildings ( 5,000)
Bonds payable _______ _______ P 1,000
Totals P 5,000 P 5,000 P1,000 P11,000
It should be observed that the goodwill computed above was proportional to the controlling interest of 80% and non-controlling interest of
20% computed as follows:
Value % of Total
Therefore, the goodwill impairment loss of P3,125 based on 100% fair value or full-goodwill would be allocated as follows:
Value % of Total
interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …. P 2,500 80.00%
Goodwill impairment loss applicable to NCI . . . . . . . . . . . . . . . . . ….. 625 20.00%
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . … P 3,125 100.00%
FR
(E4) Dividend income - Perfect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
Non-controlling interest (P30,000 x 20%) . . . . . . . . . . . . . . . . . . . . 6,000
Dividends paid – Son . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
To eliminate intercompany dividends and non-controlling
interest share of dividends.
(E5) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . . 7,800

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,800
To establish non-controlling interest in subsidiary’s adjusted net
income for 20x4 as follows:
Net income of subsidiary . . . . . . . . . . . . . . . . . P 50,000

Amortization of allocated excess [(E3)] . . . . . . ( 11,000)
P 39,000
Multiplied by: Non-controlling interest % . . . . . 20%
Non-controlling Interest in Net Income (NCINI) P 7,800
Subsidiary accounts are adjusted to full fair value regardless of the controlling interest percentage or option used to value non-controlling
interest or goodwill.
The trial balance data for Perfect and Son Company are entered in the consolidation workpaper, the separate financial statements of the two
companies, the eliminating entries, and the consolidated totals for the financial statements on December 31, 20x4 as shown in Figure 3-9.
Figure 3–1: Worksheet for Consolidated Financial Statements, December 31, 20x4
Cost Model (Partial-goodwill) /80%-Owned Subsidiary / December 31, 20x4 (First Year after Acquisition)
Income Statement
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..
Perfect Co
P400,000
Son Co.
P200,000
Dr. Cr. Consolidated
P 600,000
FR
Dividend income . . . . . . . . . . . . . . . . . .. 24,000 - (4) 24,000 _________
Total Revenue. . . . . . . . . . . . . . . . . .. P424,000 P200,000 P 600,000
Cost of goods sold . . . . . . . . . . . . . . . . . . P170,000 P115,000 (3) 5,000 P 290,000
Depreciation expense. . . . . . . . . . . . . . . 50,000 20,000 (3) 5,000 75,000
Interest expense. . . . . . . . . . . . . . . . . .. . . - - (3) 1,000 1,000
Other expenses. . . . . . . . . . . . . . . . . .. . . 40,000 15,000 55,000
Goodwill impairment loss. . . . . . . . . . . . . - - (3) 2,500 2,500
Total Cost and Expenses. . . . . . . . . . . P260,000 P150,000 P423,500
Net Income. . . . . . . . . . . . . . . . . . . . . . . . P164,000 P 50,000 P176,500
NCI in Net Income - Subsidiary. . . . . . . . - - (5) 7,800 ( 7,800)
Net Income to Retained Earnings. . . . P164,000 P 50,000 P168,700
Statement of Retained Earnings
Retained earnings, 1/1
Perfect Company. . . . . . . . . . . . . . . . P300,000 P 300,000
Son Company. . . . . . . . . . . . . . . . . .. P100,000 (1) 100,000
Net income, from above. . . . . . . . . . . .. 164,000 50,000 168,700
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . P464,000 P150,000 P468,700
Dividends paid. . . . . . . . . . . .. . . . . . . . . .
Perfect Company. . . . . . . . .. . . . . . . . 60,000 60,000
Son Company. . . . . . . . .. . . . . . . . . . - 30,000 (4) 30,000 _ ________
Retained earnings, 12/31 to Balance
Sheet P404,000 P120,000 P 408,700
Balance Sheet
Cash……………………….………….. . . . .. P 194,000 P 75,000 P 269,000
Accounts receivable……..………….. . . . 75,000 50,000 125,000
Inventory………………….………….. . . . . . 100,000 75,000 (2) 5,000 (3) 5,000 175,000
Land…………………………….………….. . 175,000 40,000 (2) 6,000 221,000
Equipment …………………….………….. . 200,000 150,000 350,000
Buildings…………………….………….. . . . . 600,000 450,000 (2) 180,000 870,000
Discount on bonds payable….…………. (2) 4,000 (3) 1,000 3,000
Goodwill……………………….……………. (2) 10,000 (3) 2,500 7,500
Investment in Son Co………….…………. 310,000 (1) 240,000
_________ ________ (2) 70,000 __________-
Total…………………………….………….. . P1,654,000 P840,000 P2,020,500
Accumulated depreciation
- equipment……………………... P 112,500 P 80,000 (2) 80,000 (3) 10,000 P122,500
Accumulated depreciation 337,500 240,000 (2) 160,000
- buildings…………………………. (3) 5,000 412,500
Accounts payable……………………. 100,000 100,000 200,000
Bonds payable………………………… 200,000 100,000 300,000
Common stock, P10 par……………… 500,000 500,000
Common stock, P10 par……………… 200,000 (1) 200,000
Retained earnings, from above ……. 404,000 120,000 408,700
Non-controlling interest………………. (2) 6,000 (1) 60,000
(2) 15,000
_________ _________ __________ (5) 7,800 ____76,800
Total P1,654,000 P840,000 P 621,300 P 621,300 P2,020,500
FR
The consolidated net income and non-controlling interests in consolidated net income which can be verified in Figure 3-1 can also be
Consolidated Net Income for 20X4

Net income from own/separate operations
Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P140,000
Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __50,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P190,000
Less: Non-controlling Interest in Net Income* . . . . . . . . . . . . . . . . . . . . . . . . P 7,800
Amortization of allocated excess (refer to amortization above) . . . . . . . 11,000
Goodwill impairment (impairment under partial-goodwill approach). . . 2,500 21,300
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P168,700
Add: Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . ___7,800
Consolidated Net Income for 20X4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P176.500
*Non-controlling Interest in Net Income (NCINI) for 20x4

Net income of Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 50,000
Less: Amortization of allocated excess / goodwill impairment
(refer to amortization table above) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000
P 39,000
Multiplied by: Non-controlling interest % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . . . . P 7,800
FR
Since NCI share of goodwill is not recognized, no adjustment is required for the impairment loss on goodwill and impairment losses are not
shared with NCI. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings,
thus:
Consolidated Retained Earnings, January 1, 20x4
Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) . . . . . . . . . . . . . P300,000
On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:
Consolidated Retained Earnings, December 31, 20x4

Add: Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,700
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P468,700
Less: Dividends paid – Parent Company for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __60,000
Consolidated Retained Earnings, December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P408,700
Non-controlling interest (partial-goodwill), January 1, 20x4

Common stock – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000
Retained earnings – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Stockholders’ equity – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 300,000
Adjustments to reflect fair value - (over) undervaluation of assets and liabilities 75,000
Fair value of stockholders’ equity of subsidiary, January 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . P 375,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Non-controlling interest (partial ), January 1, 20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
FR
The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable
assets and goodwill attributable to NCI share is not recognized.
Non-controlling interest (partial-goodwill), December 31, 20x4
Common stock – Subsidiary Company, December 31, 20x4 . . . . . . . . . . . . . . . . P 200,000
Retained earnings – Subsidiary Company, December 31, 20x4
Retained earnings – Subsidiary Company, January 1, 20x4 . . . . . . . . . . . . . . P100,000
Add: Net income of subsidiary for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P150,000
Less: Dividends paid – 20x4 30,000 120,000
Stockholders’ equity – Subsidiary Company, December 31, 20x4 P 320,000

Adjustments to reflect fair value - (over) undervaluation of assets and
liabilities, date of acquisition (January 1, 20x4) 75,000
Amortization of allocated excess (refer to amortization above) – 20x4 ( 11,000)
Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P 384,000
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial-goodwill)………………………………….. P 76,800
Alternatively, NCI on December 31, 20x4 may also be computed as follows:

Non-controlling interest (partial-goodwill), January 1, 20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
Add: NCINI– 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,800
Less: Dividends - Son, 20x4 (P30,000 x 20%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____6,000
Non-controlling interest (partial), December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 76,800
Second Year after Acquisition FR
Assume the following information available for Perfect and Son Company for the year 20x5:
Perfect Co. Son Co.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 450,000 P 300,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 160,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 270,000 P 140,000
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 45,000
Net income from its own separate operations . . . . . . . . P 160,000 P 75,000
Add: Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 192,000 P 75,000
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000 P 40,000

Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000
Dividend income (P40,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000
Record dividends from Son Company
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Dividends paid by Son Co.
The trial balance data for Perfect and Son Company are entered in the consolidation workpaper on December 31, 20x5, as shown in Figure
3-1.
Consolidation Workpaper – Second Year after Acquisition
The working paper eliminations (in journal entry format) on December 31, 20x5, are as follows
FR
(E1) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Retained earnings – Perfect Company . . . . . . . . . . . . . . . . . . . . . . . 16,000
To provide entry to convert from the cost method to the equity
method or the entry to establish reciprocity at the beginning of the
year, 1/1/20x5, computed as follows:
Retained earnings – Son Company, 1/1/20x5 P120,000

Retained earnings – Son Company, 1/1/20x4 _100,000
Increase in retained earnings…….. P 20,000
Multiplied by: Controlling interest % _____80%
Retroactive adjustment P 16,000
Why is an adjustment to the “beginning” retained earnings required? In the statement of changes in equity, the opening balance of retained earnings has to be adjusted
to arrive at the same balance that was reported in the previous financial statements
This entry may be viewed as either the entry to convert from the cost model to the equity method to establish reciprocity at the beginning of the year. The following two
points explain these essentially complementary views of the entry:
1. The reciprocity entry adjusts Perfect Company’s beginning retained earnings balance on the workpaper to the appropriate beginning consolidated retained earnings
amount. As indicated earlier, consolidated retained earnings on January 1, 20x5, consists of Perfect Company’s reported retained earnings plus Perfect Company’s share
of the undistributed earnings (income less dividends) of Son Company from the date of stock acquisition to the beginning of 20x4.
2. If this entry is viewed as a conversion to the equity method, the following question might well arise: Why should we convert to the equity method if all methods are
acceptable and all yield the same final results? Recall that under the equity method, the parent records its investment income in its income statement and ultimately in
its retained earnings.
If we consider the two accounts in the conversion entry, it is true that the investment is going to be eliminated to zero anyway; but the retained earnings account of the
parent company, which must ultimately reflect the investment income, will not be eliminated. Instead, it needs to be adjusted if the cost model (cost method) is used.
Although it is true that the investment account must be eliminated after it is adjusted, the reciprocity (conversion) entry facilitates this elimination.
The amount needed for the workpaper entry to establish reciprocity can be most accurately computed by multiplying the parent company’s percentage of ownership times
the increase or decrease in the subsidiary’s retained earnings from the date of stock acquisition to the beginning of the current year
(E2) Common stock – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Retained earnings – Son Co., 1/1/20x5 . . . . . . . . . . . . . . . . . . . . . . . . . 120.000
Investment in Son Co (P320,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest (P320,000 x 20%) . . . . . . . . . . . . . . . . . . . . .
256,000
64,000 FR
of subsidiary and to establish non-controlling interest
(E3) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000

Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . . . . . . 80,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . . . . . . 160,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Non-controlling interest (P75,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . 15,000
acquired, with remainder to goodwill; and to establish NCI.
(E4) Retained earnings – Perfect Company, 1/1/20x5

[(P11,000 x 80%) + P2,500, impairment loss on partial-goodwill] . . . . . . 11,300
Non-controlling interests (P11,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
To provide for years 20x4 and 20x5 depreciation and amortization on
differences between acquisition date fair value and book value of
Son’s identifiable assets and liabilities as follows:
Year 20x4 amounts are debited to Perfect’s retained earnings &NCI;
Year 20x5 amounts are debited to respective nominal accounts.
(20x4) Depreciation/
Retained Amortization Amortization
earnings, Expense -Interest
Equipment 10,000 P 10,000
Buildings (5,000) ( 5,000)
Bonds payable 1,000 ________ P 1,000
Sub-total P11,000 P 5,000 P 1,000
Multiplied by: 80%
To Retained earnings P 8,800
Impairment loss 2,500
Total P 11,300
FR
(E5) Dividend income - Perfect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000

Non-controlling interest (P40,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Dividends paid – Son . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
To eliminate intercompany dividends and non-controlling interest
share of dividends.
(E6) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . . . . . . 13,800

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,800
Net income of subsidiary . . . . . . . . . . . . . . . . . . . P 75,000

Amortization of allocated excess [(E4)] . . . . . . . . ( 6,000)
P 69,000
Multiplied by: Non-controlling interest % . . . . . . . 20%
Non-controlling Interest in Net Income (NCINI) . . P 13,800
The separate financial statements of the two companies, the eliminating entries, and the consolidated totals for the financial
statements on December 31, 20x5, are shown in Figure 3-2.
Figure 3-2: Worksheet for Consolidated Financial Statements, December 31, 20x5.
Cost Model (Partial-goodwill)/80%-Owned Subsidiary/December 31, 20x5 (Second Year after Acquisition)
Income Statement
Sales . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend income . . . . . . . . . . . . . . . . .
Total Revenue . . . . . . . . . . . . . . . . .
Perfect Co
P450,000
32,000
P482,000
Son Co.
P300,000
-
P300,000
(5)
Dr.
32,000
Cr. Consolidated
P 750,000
___________
P 750,000
FR
Cost of goods sold . . . . . . . . . . . . . . . . P180,000 P160,000 P 340,000
Depreciation expense . . . . . . . . . . . . . 50,000 20,000 (4) 5,000 75,000
Interest expense . . . . . . . . . . . . . . . . . - - (4) 1,000 1,000
Other expenses . . . . . . . . . . . . . . . . . . 60,000 45,000 105,000
Goodwill impairment loss . . . . . . . . . . . - - -
Total Cost and Expenses . . . . . . . . . P290,000 P225,000 P 521,000
Net Income . . . . . . . . . . . . . . . . . . . . P192,000 P 75,000 P 229,000
NCI in Net Income - Subsidiary . . . . . . - - (6) 13,800 ( 13,800)
Net Income to Retained Earnings . . . P192,000 P 75,000 P 215,200
Perfect Company . . . . . . . . . . . . . . . . P404,000 (2) 11,300 (1) 16,000 P 408,700
Son Company . . . . . . . . . . . . . . . . . . . P 120,000 (1) 120,000
Net income, from above . . . . . . . . . . . . 192,000 75,000 215,200
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P596,000 P195,000 P 623,900
Dividends paid
Perfect Company . . . . . . . . . . . . . . . . 60,000 60,000
Son Company . . . . . . . . . . . . . . . . . . . - 40,000 (5) 40,000 _ ________
Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . P536,000 P155,000 P 563,900
Balance Sheet
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 221,000 P 85,000 P 306,000
Accounts receivable . . . . . . . . . . . . . . . . 150,000 80,000 230,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 90,000 (3) 5,000 (4) 5,000 270,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (3) 6,000 221,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000 350,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000 (3) 180,000 870,000
Discount on bonds payable . . . . . . . . . . (3) 4,000 (4) 2,000 2,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) 10,000 (4) 2,500 7,500
Investment in Son Co . . . . . . . . . . . . . . . . 310,000 (1) 16,000 (2) 256,000
_________ ______ (3) 70,000 _________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,836,000 P895,000 P2,256,500
- equipment . . . . . . . . . . . . . . . . . . . P 125,000 P 85,000 (3) 80,000 (4) 20,000 P150,000
Accumulated depreciation (3) 160,000 (4)
- buildings . . . . . . . . . . . . . . . . . . . . . 375,000 255,000 10,000 460,000
Accounts payable . . . . . . . . . . . . . . . . . . 100,000 100,000 200,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . 200,000 100,000 300,000
Common stock, P10 par . . . . . . . . . . . . . 500,000 500,000
Common stock, P10 par . . . . . . . . . . . . . 200,000 (2) 200,000
Retained earnings, from above . . . . . . 536,000 155,000 563,900
Non-controlling interest . . . . . . . . . . . . . . (5) 8,000
(1) 2,200 (2) 64,000 (3)
15,000
__________ _________ __________ (6) 13,800 ____82,600
Total 1,836,000 P895,000 P 684,300 P 684,300 P2,256,500
FR
The consolidated net income, non-controlling interests in consolidated net income, consolidated retained earnings and
non-controlling interests which can be verified in Figure 3-2 can also be computed as follows:
Consolidated Net Income for 20x5

Net income from own/separate operations:
Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P160,000
Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P235,000
Less: Non-controlling Interest in Net Income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P13,800
Amortization of allocated excess (refer to amortization above) . . . . . . . . . . . . 6,000 19,800
equity holders of parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P215,200
Add: Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . . . . . . 13,800
Consolidated Net Income for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P229,000

Net income of Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
Less: Amortization of allocated excess / goodwill impairment for 20x5

(refer to amortization table above) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
P 69,000
Multiplied by: Non-controlling interest % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
Non-controlling Interest in Net Income (NCINI) for 20x5 . . . . . . . . . . . . . . . . . . . P 13,800
FR
Retained earnings - Parent Company, January 1, 20x5 (cost model . . . . . . . . P404,000
Adjustment to convert from cost model to equity method for purposes of
consolidation or to establish reciprocity:/Parent’s share in adjusted net
increased in subsidiary’s retained earnings:
Retained earnings – Subsidiary, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . . P 120,000
Less: Retained earnings – Subsidiary, January 1, 20x4 . . . . . . . . . . . . . . . . 100,000
Increase in retained earnings since date of acquisition . . . . . . . . . . . . . . P 20,000
Less: Amortization of allocated excess – 20x4 . . . . . . . . . . . . . . . . . . . . . . . 11,000
P 9,000
Multiplied by: Controlling interests % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80%
P 7,200
Less: Goodwill impairment loss (full-goodwill), net (P3,125 – P625)* or
(P3,125 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 4,700
Consolidated Retained earnings, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . . . . . P 408,700
equity holders of parent for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,200
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P623,900
Less: Dividends paid – Parent Company for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Consolidated Retained Earnings, December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . P563,900
*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,125 by 80%. There might be
situations where the controlling interests on goodwill impairment loss would not be proportionate to NCI acquired.
FR
Common stock – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . . . . . . . P 200,000
Retained earnings – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . . . .
Retained earnings – Subsidiary Company, January 1, 20x5 . . . . . . . . . . . . . . . . P120,000
Add: Net income of subsidiary for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P195,000
Less: Dividends paid – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 155,000
Stockholders’ equity – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . . P 355,000
liabilities, date of acquisition (January 1, 20x4) . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Amortization of allocated excess (refer to amortization above) :
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 11,000
20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 ( 17,000)
Fair value of stockholders’ equity of subsidiary, December 31, 20x5 . . . . . . . . . . . P 413,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . 20
Non-controlling interest (partial goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 82,600
Alternatively, NCI on December 31, 20x5may also be computed as follows:

Add: NCINI– 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,800
Less: Dividends - Son, 20x5 (P40,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____8,000
Non-controlling interest (partial-goodwill), December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . .. P 82,600
FR
Illustration 3-2: 80%-Owned Subsidiary:

Equity Method, Partial-goodwill, With Goodwill Impairment Loss Recognized in the books of Subsidiary
Assume that on January 1, 20x4, Perfect Company acquires 80% of the common stock of Son Company for P310,000. At that time, the fair
value of the 20% non-controlling interest is estimated to be P77,500. On that the following assets and liabilities of Son Company had book
values that were different from their respective market values:
Son Co. Son Co.

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P20,000 25,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 150,000
Accumulated depreciation-equipment . . . . . . . . . . . . . . ( 80,000)
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 120,000
Accumulated depreciation-buildings . . . . . . . . . . . . . . . . ( 160,000)
Bonds payable (4 years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 96,000
All other assets and liabilities had book values approximately equal to their respective fair values. On January 1, 20x4, the equipment and buildings had
a remaining life of 8 and 4 years, respectively. Inventory is sold in 20x4 and FIFO inventory costing is used. Goodwill, if any, is reduced by a P3,125
impairment loss during 20x4 based on the fair value basis (or full-goodwill), meaning the management has determined that the goodwill arising in the
acquisition of Son Company relates proportionately to the controlling and non-controlling interests, as does the impairment. Trial balances for the
FR
companies for the year ended December 31, 20x4 are as follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 194,000 P 75,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 50,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 75,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . 314,700 -
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 115,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . - -
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 15,000
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 30,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,978,700 P1,020,000
Credits
Accumulated depreciation – equipment . . . . . . . . . . . . . P 112,500 P 80,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . 337,500 240,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 100,000
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 200,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 100,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 200,000
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,700 -
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,978,700 P1,020,000
From the trial balances presented above the following summary for 20x4 results of operations are as follows:
Perfect Co. Son Co.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 400,000 P 200,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 115,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 230,000 P 85,000
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 15,000
Add: Investment income/Equity In Subsidiary Income . . . . . 28,700 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 168,700 P 50,000

Date of Acquisition – January 1, 20x4
FR
Common stock (P200,000 x 80%) . . . . . . . . . . . . . . . . . . P 160,000
fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 10,000
The over/under valuation of assets and liabilities are summarized as follows:

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . P 20,000 P 25,000 P 5,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000 6,000
Equipment (net) . . . . . . . . . . . . . . . . . . . . . 70,000 150,000 80,000
Buildings (net) . . . . . . . . . . . . . . . . . . . . . . . 140,000 120,000 (20,000)
Bonds payable . . . . . . . . . . . . . . . . . . . . . . (100,000) ( 96,000) 4,000
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 170,000 P 245,000 P 75,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . P150,000 P150,000 P 0
Less: Accumulated depreciation . . . . . . . __80,000 - - _ 80,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . P300,000 P 120,000 P ( 180,000)
Less: Accumulated depreciation . . . . . . . _160,000 __ - _( 160,000)
Inventory . . . . . . . . . . . . . . . . . . . . . . P 5,000 1 P 5,000 P 5,000 P -
Equipment (net) . . . . . . . . . . . . . . . . 80,000 8 10,000 10,000 10,000
Buildings (net) . . . . . . . . . . . . . . . . . . (20,000) 4 ( 5,000) ( 5,000) (5,000)
Bonds payable . . . . . . . . . . . . . . . . 4,000 4 1,000 1,000 1,000
P 11,000 P 11,000 P 6,000
The goodwill impairment loss of P3,125 based on 100% fair value would be allocated to the controlling interest and the NCI based on the FR
(P75,000 x 100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 12,500
Value % of Total
The goodwill impairment loss would be allocated as follows:
Value % of Total
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 2,500 80.00%
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 3,125 100.00%
As previously mentioned about the goodwill impairment, the following should further be noted: FR
1. Using Option 1: NCI at fair value. Non-controlling interest measured at fair value When a non-controlling interest exists
in the CGU (cash-generating unit), any goodwill impairment loss is allocated to the controlling and non-controlling
interest either on a rational basis (consistent with US GAAP), or on the same basis as that on which profit or loss is
allocated (generally based on relative ownership interests).
Non-controlling interest measured at its share of the fair value of the acquiree’s net identifiable assets. The recoverable
amount of the CGU includes goodwill attributable to both the controlling and non-controlling interests.
2. Using Option 2: NCI at proportionate share of full-goodwill. Non-controlling interest at its share of the fair value of the
acquiree’s net identifiable assets, the carrying amount of the CGU includes goodwill attributable only to the controlling
interest. Therefore, the carrying amount of the CGU is adjusted to include the goodwill attributable to the non-controlling
interest.
The adjusted carrying amount of the CGU is then compared to the recoverable amount to determine whether the CGU is
impaired. Any goodwill impairment loss is allocated to the controlling and non-controlling interest either on a rational basis,
or on the same basis as that on which profit or loss is allocated (generally based on relative ownership interests). However,
because goodwill is recognized only to the extent of the controlling interest, only the goodwill impairment loss allocated to
the controlling interest is recognized.
Parent Company Equity Method Entry FR
The following are entries recorded by the parent in 20x4 in relation to its subsidiary investment:
January 1, 20x4:
(1) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000
(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
Investment in Son Company (P30,000 x 80%) . . . . . . . . . . . . . . . . . . 24,000
December 31, 20x4:
(3) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Investment income (P50,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Record share in net income of subsidiary.
December 31, 20x4:
(4) Investment income/ESI [(P11,000 x 80%) + P2,500, goodwill
impairment loss)] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,300
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,300
Record amortization of allocated excess of inventory, equipment, buildings and bonds
payable and goodwill impairment loss.
Thus, the investment balance and investment income in the books of Perfect Company:
Investment in Son
Cost, 1/1/x4 310,000 24,000 Dividends – Son (30,000x 80%)
NI of Son Amortization &
(50,000 x 80%) 40,000 11,300 impairment
Balance, 12/31/x4 314,700
Investment Income / Equity in Subsidiary Income
Amortization & NI of Son
Impairment 11,300 40,000 (P50,000 x 80%)
28,700 Balance, 12/31/x4
FR
Consolidation Workpaper – First Year after Acquisition
The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries on
January 1, 20x4:

Retained earnings – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.000
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000
To eliminate investment on January 1, 20x4 and equity accounts
of subsidiary on date of acquisition; and to establish non-
controlling interest (in net assets of subsidiary) on date of
acquisition.
(E2) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000

Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . . . . . 80,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . . . . . 160,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Non-controlling interest (P75,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . 15,000
To eliminate investment on January 1, 20x4 and allocate excess of
cost over book value of identifiable assets acquired, with remainder
to goodwill; and to establish non- controlling interest (in net assets of
subsidiary) on date of acquisition.
(E3) Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,000
1,000
FR
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . . . 10,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Goods Amortization Amortization
Sold Expense -Interest Total
Equipment P 10,000
Buildings ( 5,000)
Bonds payable _______ _______ P 1,000
Totals P 5,000 P 6,000 P1,000 12,000
It should be observed that the goodwill computed above was proportional to the controlling interest of 80% and non-controlling interest of
20% computed as follows:
Value % of Total
Therefore, the goodwill impairment loss of P3,125 based on 100% fair value or full goodwill would be allocated as follows:
Value % of Total
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 2,500 80.00%
Goodwill impairment loss applicable to NCI . . . . . . . . . . . . . . . . . . . . _ 625 _20.00%
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 3,125 100.00%
(E4) Investment income/ Equity In Subsidiary Income . . . . . . . . . . . .. . . .
Non-controlling interest (P30,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid – Son . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,700
6,000
30,000
FR
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,700
To eliminate intercompany dividends and investment income under equity
method and establish share of dividends, computed as follows:
Investment in Son Investment Income / Equity In Subsidiary Income
NI of Son 24,000 Dividends - Son NI of Son
(50,000 x 80%) 40,000 Amortization & Amortization (50,000 x 80%)
11,300 impairment impairment 11,300 40,000
4,700 28,700
After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment account is totally
eliminated. Thus,
Investment in Son
(50,000 x 80%) 40,000 11,300 impairment
Balance, 12/31/x4 314,700 240,000 (E1) Investment, 1/1/20x4
70,000 (E2) Investment, 1/1/20x4
4,700 (E4) Investment Income
and dividends
314,700 314,700
Percentage of goodwill for amortization purposes:
Value % of
Total
Goodwill applicable to parent . . . . . . . P10,000 80.00%
Goodwill applicable to NCI . . . . . . . . . . 2,500 20.00%
Total (full) goodwill . . . . . . . . . . . . . . . . . P12,500 100.00%
The goodwill impairment loss of P3,125 based on 100% fair value or full-goodwill would be allocated as follows:
Value % of Total
Goodwill impairment loss attributable
to parent or controlling Interest . . . . . .. .. . . . . . . P 2,500 80.00%
Goodwill impairment loss applicable to NC………. 625 _20.00%
Goodwill impairment loss based on 100%
fair value or full-goodwill . . . . . . . . . .. . . . . . . . . P 3,125 100.00%
FR
(E5) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . . . . . . . . 7,800

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,800
Net income of subsidiary . . . . . . . . . . . . . . . . . . . . . . P 50,000
Amortization of allocated excess [(E3)] . . . . . . . . . . ( 11,000)
P 39,000
Multiplied by: Non-controlling interest % . . . . . . . . . 20%
Non-controlling Interest in Net Income (NCINI). . . . P 7,800
Subsidiary accounts are adjusted to full fair value regardless of the controlling interest percentage or what option used to
value non-controlling interest or goodwill.
The trial balance data for Perfect and Son Company are entered in the consolidation workpaper, the separate financial
statements of the two companies, the eliminating entries, and the consolidated totals for the financial statements on December
31, 20x4 as shown in Figure 3-3.
Figure 3–3: Worksheet for Consolidated Financial Statements, December 31, 20x4.
Equity Method (Partial-goodwill)/80%-Owned Subsidiary (First Year after Acquisition)
Income Statement
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income /ESI . . . . . . . . . . . . .
Perfect Co
P400,000
28,700
Son Co.
P200,000
- (4)
Dr.
28,700
Cr. Consolidated
P 600,000
_________
FR
Total Revenue . . . . . . . . . . . . . . . . . . . P428,700 P200,000 P 600,000
Depreciation expense . . . . . . . . . . . . . . . 50,000 20,000 (3) 5,000 75,000
Interest expense . . . . . . . . . . . . . . . . . . . . - - (3) 1,000 1,000

Other expenses . . . . . . . . . . . . . . . . . . . . 40,000 15,000 55,000
Goodwill impairment loss . . . . . . . . . . . . - - (3) 2,500 2,500
Total Cost and Expenses . . . . . . . . . . P260,000 P150,000 P423,500
Net Income . . . . . . . . . . . . . . . . . . . . . . . . P168,700 P 50,000 P176,500
NCI in Net Income - Subsidiary . . . . . . . - - (5) 7,800 ( 7,800)
Net Income to Retained Earnings . . . . P168,700 P 50,000 P168,700
Statement of Retained Earnings Perfect Co Son Co. Dr. Cr. Consolidated
Retained earnings, 1/1 . . . . . . . . . . . . . .
Perfect Company . . . . . . . . . . . . . . . . P300,000 P 300,000
Son Company . . . . . . . . . . . . . . . . . . P100,000 (1) 100,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P468,700 P150,000 P468,700
Dividends paid
Perfect Company . . . . . . . . . . . . . . . . 60,000 60,000
Son Company . . . . . . . . . . . . . . . . . . . - 30,000 (4) 30,000 _ ________
Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . P408,700 P120,000 P 408,700
Balance Sheet
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 194,000 P 75,000 P 269,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 75,000 (2) 5,000 (3) 5,000 175,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (2) 6,000 221,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000 350,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000 (2) 180,000 870,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 10,000 (3) 2,500 7,500
Investment in Son Co . . . . . . . . . . . . . . . . 314,700 (1) 240,000
(2) 70,000
__________ ________ (4) 4,700 _________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,658,700 P840,000 P2,020,500
-equipment . . . . . . . . . . . . . . . . . . . . P 112,500 P 80,000 (2) 80,000 (3) 10,000 P122,500
-buildings . . . . . . . . . . . . . . . . . . . . . . . (2) 5,000 412,500
Bonds payable . . . . . . . . . . . . . . . . . . . . . 200,000 100,000 300,000
Non-controlling interest . . . . . . . . . . . . . . (2) 6,000 (1) 60,000 (2)
15,000
_________ _________ __________ (5) 7,800 ____76,800
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,658,700 P840,000 P 626,000 P 626,000 P2,020,500
The consolidated net income and non-controlling interests in consolidated net income which can be verified in Figure 3-3 can also be
FR
Consolidated Net Income for 20X4
Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P140,000
Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P190,000
Less: Non-controlling Interest in Net Income* . . . . . . . . . . . . . . . . . . . . . . . . P 7,800
Amortization of allocated excess (refer to amortization above) . . . . . . . 11,000
Goodwill impairment (impairment under partial-goodwill approach). . . 2,500 21,300
equity holders of parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P168,700
Add: Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . 7,800
Consolidated Net Income for 20X4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P176.500

Net income of Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 50,000
Less: Amortization of allocated excess / goodwill impairment
(refer to amortization table above) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,000
P 39,000
Multiplied by: Non-controlling interest % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . . . . P 7,800
Since NCI share of goodwill is not recognized, no adjustment is required for the impairment loss on goodwill and impairment losses are not
shared with NCI. On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings,
thus:
FR

equity holders of parent for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,700
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P468,700
Less: Dividends paid – Parent Company for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Consolidated Retained Earnings, December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P408,700
Non-controlling interest (partial-goodwill), January 1, 20x4

Common stock – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000
Retained earnings – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Stockholders’ equity – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 300,000
Adjustments to reflect fair value - (over) undervaluation of assets and liabilities 75,000
Fair value of stockholders’ equity of subsidiary, January 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . P 375,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Non-controlling interest (partial ), January 1, 20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
The goodwill recognized on consolidation purely relates to the parent’s share. NCI is measured as a proportion of identifiable assets and FR
goodwill attributable to NCI share is not recognized.

Common stock – Subsidiary Company, December 31, 20x4 . . . . . . . . . . . . . . . . P 200,000
Retained earnings – Subsidiary Company, January 1, 20x4 . . . . . . . . . . . . . . P100,000
Add: Net income of subsidiary for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P150,000
Less: Dividends paid – 20x4 30,000 120,000
liabilities, date of acquisition (January 1, 20x4) 75,000
Amortization of allocated excess (refer to amortization above) – 20x4 ( 11,000)
Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… P384,000
Multiplied by: Non-controlling Interest percentage…………... 20
Non-controlling interest (partial-goodwill)………………………………….. P 76,800

Add: NCINI– 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,800
Less: Dividends - Son, 20x4 (P30,000 x 20%). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _6,000
Non-controlling interest (partial), December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 76,800
The consolidated net income, consolidated retained earnings on January 1, 20x4 and December 31, 20x4, non-controlling interests on
January 1, 20x4 and December 31, 20x4 is the same with Illustration 3-1.
Second Year after Acquisition
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Perfect Co.
P 450,000
Son Co.
P 300,000
FR
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 160,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 270,000 P 140,000
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 45,000
Net income from its own separate operations . . . . . . . . . . P 160,000 P 75,000
Add: Investment income/ Equity in Subsidiary Income… 55,200 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 215,200 P 75,000
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000 P 40,000
No goodwill impairment loss for 20x5.

Parent Company Equity Method Entry
(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000
Investment in Son Company (P40,000 x 80%) . . . . . . . . . . . . . . . . . . . . . 32,000
December 31, 20x5:
(3) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Investment income (P75,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
December 31, 20x5:
(4) Investment income/ESI (P6,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800
Record amortization of allocated excess of inventory, equipment, buildings and bonds
payable
Thus, the investment balance and investment income in the books of Perfect Company is as follows:
Investment in Son
Cost, 1/1/x5 314,700 32,000 Dividends – Son (40,000x
80%)
NI of Son Amortization
(75,000 x 80%) 4,800 (P6,000 x 80%)
60,000
Balance, 12/31/x5 337,900

Amortization NI of Son
(6,000 x 80%) 60,000 (75,000 x 80%)
4,800
55,200 Balance, 12/31/x4
FR
The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet
eliminating entries:
(E1) Common stock – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Retained earnings – Son Co, 1/1/x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120.000
Investment in Son Co (P320,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . 256,000
Non-controlling interest (P320,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . 64,000
controlling interest (in net assets of subsidiary) on 1/1/20x5.
(E2) Accumulated depreciation – equipment (P80,000 – P10,000) . . . . . . . 70,000

Accumulated depreciation – buildings (P160,000 + P5,000) . . . . . . . . . 165,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Discount on bonds payable (P4,000 – P1,000) . . . . . . . . . . . . . . . . . . . . . . 3,000
Goodwill (P10,000 – P2,500) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Non-controlling interest [(P75,000 – P11,000) x 20%] . . . . . . . . . . . . . . 12,800
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,700
to the original amount of goodwill; and to establish NCI on 1/1/20x5.
FR
(E3) Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
To provide for 20x5 depreciation and amortization on differences
between acquisition date fair value and book value of Son’s
identifiable assets and liabilities as follows:
Depreciation/
Amortization Amortization
Expense -Interest Total
Inventory sold
Equipment P 10,000
Buildings ( 5,000)
Bonds payable _______ P 1,000
Totals P 5,000 P1,000 P6,,000
(E4) Investment income/Equity in Subsidiary Income . . . . . . . . . . . . . . . . .. . . . . 55,200

Non-controlling interest (P40,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Dividends paid – Son . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,200
To eliminate intercompany dividends and investment income under
equity method and establish share of dividends, computed as
follows:
Investment in Son Investment Income / ESI

NI of Son 32,000 Dividends – Son NI of Son
(75,000 Amortization Amortization (75,000
x 80%)……. 60,000 4,800 (P6,000 x 80%) (P6,000 x 80%) 4,800 60,000 x 80%)
23,200 55,200
FR
After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view
the investment account is totally eliminated. Thus,
Investment in Son
(75,000 x 80%) 60,000 4,800 (6,000 x 80%)
58,700 (E2) Investment, 1/1/20x5
and dividends
337,900 337,900
(E5) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . . . . . . . . . 13,800

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,800
To establish non-controlling interest in subsidiary’s adjusted net income:

Amortization of allocated excess [(E3)] . . . . . . . ( 6,000)
P 69,000
Multiplied by: Non-controlling interest % . . . . . . 20%
statements on December 31, 20x5, are shown in Figure 3-4.
Equity Method (Partial-goodwill) - 80%-Owned Subsidiary(Second Year after Acquisition)
Income Statement
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment income/ESI . . . . . . . . . . . . . .
Perfect Co
P450,000
55,200
Son Co.
P300,000
- (4)
Dr.
55,200
Cr. Consolidated
P 750,000
___________
FR
Cost of goods sold . . . . . . . . . . . . . . . . . . P180,000 P160,000 P 340,000
Other expenses . . . . . . . . . . . . . . . . . . . . 60,000 45,000 105,000
Goodwill impairment loss . . . . . . . . . . . . - - -
Total Cost and Expenses . . . . . . . . . . P290,000 P225,000 P 521,000
Net Income . . . . . . . . . . . . . . . . . . . . . . . . P215,200 P 75,000 P 229,000
Net Income to Retained Earnings . . . . P215,200 P 75,000 P 215,200
Son Company . . . . . . . . . . . . . . . . . . . P120,000 (1) 120,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P623,900 P195,000 P 623,900
Dividends paid . . . . . . . . . . . . . . . . . . . . .
Perfect Company . . . . . . . . . . . . . . . . 60,000 60,000
Son Company . . . . . . . . . . . . . . . . . . . - 40,000 (4) 40,000 _ ________
Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . P563,900 P155,000 P 563,900
Balance Sheet
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 221,000 P 85,000 P 306,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 90,000 270,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (2) 6,000 221,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000 350,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000 (3) 180,000 870,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 7,500 7,500
(2) 58,700
_________ ________ (4) 23,200 _________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,863,900 P895,000 P2,256,500
Accumulated depreciation (2) 70,000
-equipment . . . . . . . . . . . . . . . . . . . . . P 125,000 P 85,000 (3) 10,000 P150,000
-buildings . . . . . . . . . . . . . . . . . . . . . . . . . . (3) 5,000 460,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . 200,000 100,000 300,000
(2) 64,000
(2) 12,800
___ _____ _________ __________ (5) 13,800 ____82,600
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,863,900 P895,000 P 662,000 P 662,000 P2,256,500
FR
The consolidated net income, consolidated retained earnings, and non-controlling interests on December 31, 20x5 is the same with
Illustration 3-1.
The consolidated net income, non-controlling interests in consolidated net income, consolidated retained earnings and non-controlling
interests which can be verified in Figure 3-4 can also be computed as follows:

Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P160,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P235,000

P 69,000
Retained earnings of Parent Company (under equity method)/ Consolidated
Retained earnings, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 408,700
FR
equity holders of parent for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,200
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 623,900
Less: Dividends paid—Parent Company for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Retained Earnings, December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 563,900

Retained earnings – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P195,000
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 11,000
20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 ( 17,000)

Add: NCINI– 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,800
Less: Dividends - Son, 20x5 (P40,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____8,000
Non-controlling interest (partial-goodwill), December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . .. P 82,600

Retained earnings, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 408,700
equity holders of parent for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,200
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 623,900
Less: Dividends paid—Parent Company for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Retained Earnings, December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 563,900
FR
Illustration 3-3: 80%-Owned Subsidiary: Cost Model – Full-Goodwill Approach

Son Co. Son Co.

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P20,000 25,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000
Equipment 150,000 150,000
Accumulated depreciation-equipment . . . . . . . . . . . . . . . . . ( 80,000)
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 120,000
Accumulated depreciation-buildings . . . . . . . . . . . . . . . . . . . ( 160,000)
Bonds payable (4 years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 96,000
All other assets and liabilities had book values approximately equal to their respective fair values. On January 1, 20x4, the equipment and buildings had a
remaining life of 8 and 4 years, respectively. Inventory is sold in 20x4 and FIFO inventory costing is used. Goodwill, if any, is reduced by a P3,125 impairment
loss during 20x4 based on the fair value basis (or full-goodwill), meaning the management has determined that the goodwill arising in the acquisition of Son FR
Company relates proportionately to the controlling and non-controlling interests, as does the impairment.
Trial balances for the companies for the year ended December 31, 20x4 are as follows:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P194,000 P75,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 50,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 75,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000 -
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 115,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 15,000
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____60,000 ____30,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,974,000 P1,020,000
Credits
Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . P 112,500 P 80,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . 337,500 240,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 100,000
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 200,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 100,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 200,000
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____24,000 -
From the trial balances presented above the following
Totals . . . . summary
. . . . . . . . . . . . .for
. . . . 20x4
. . . . . . . results
. . . . . . . . . of
. . . operations
....... are asP1,974,000
follows: P1,020,000
Perfect Co. Son Co.

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 400,000 P 200,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 115,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 230,000 P 85,000
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 15,000
Net income from its own separate operations . . . . . . . . . P 140,000 P 50,000
Add: Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 164,000 P 50,000
The resulting ownership situation can be viewed in the schedule of determination and allocation of excess. FR
Schedule of Determination and Allocation of Excess
Fair value of Subsidiary (80%) . . . . . . . . . . . . . . . . . . . . . . . . . .
Consideration transferred (80%) . . . . . . . . . . . . . . . . . . . P 310,000
Fair value of NCI (given) (20%) . . . . . . . . . . . . . . . . . . . . 77,500
Fair value of Subsidiary (100%) . . . . . . . . . . . . . . . . . . . . P 387,500
Common stock (P200,000 x 100%) . . . . . . . . . . . . . . . . . P 200,000
Retained earnings (P100,000 x 100%) . . . . . . . . . . . . . . 100,000 300,000
Allocated excess (excess of cost over book value) . . . . . . P 87,500
Increase in inventory (P5,000 x 100%) . . . . . . . . . . . . . . P 5,000
Increase in land (P6,000 x 100%) . . . . . . . . . . . . . . . . . . . 6,000
Increase in equipment (P80,000 x 100%) . . . . . . . . . . . . 80,000
Decrease in buildings (P20,000 x 100%) . . . . . . . . . . . . . ( 20,000)
Decrease in bonds payable (P4,000 x 100%) . . . . . . . . 4,000 75,000
fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 12,500

Account Adjustments to be amortized under Life Amount Year(20x4) 20x5
Inventory . . . . . . . . . . . . . . . . . . . . . . P 5,000 1 P 5,000 P 5,000 P -
Equipment (net) . . . . . . . . . . . . . . . . 80,000 8 10,000 10,000 10,000
Buildings (net) . . . . . . . . . . . . . . . . . . (20,000) 4 ( 5,000) ( 5,000) (5,000)
Bonds payable . . . . . . . . . . . . . . . . . 4,000 4 1,000 1,000 1,000
P 11,000 P 11,000 P 6,000
FR
When the cost model is used, only two journal entries are recorded by Perfect Company during 20x4 related to its investment in Son
Company. Entry (1) records Perfect Company’s purchase of Son Company’s stock, Entry (2) recognizes dividend income based on the
P32,000 (P40,000 x 80%) of dividends received during the period.
January 1, 20x4:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000
Acquisition of Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000
Dividend income (P40,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000
Record dividends from Son Company . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Dividends paid by Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The dividends paid (or declared) account is a temporary account that is closed to retained earnings at year-end. An alternative is to debit
retained earnings directly when dividends are paid or declared.
No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4.
Consolidation Workpaper – First Year after Acquisition FR
January 1, 20x4:
of subsidiary on date of acquisition; and to establish non-controlling
interest (in net assets of subsidiary) on date of acquisition.
(E2) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Non-controlling interest (P75,000 x 20%) + [(P12,500, full –
P10,000, partial goodwill)] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500
acquired, with remainder to goodwill; and to establish non-
controlling interest (in net assets of subsidiary) on date of acquisition.
Since the set-up entry in (E2) NCI at fair value, non-controlling interests have a share of entity goodwill and are exposed to impairment loss
on goodwill, PAS 36 requires the impairment loss to be pro-rated between the parent and NCI on the same basis as that on which profit or
loss is allocated. In other words, the impairment loss is not pro-rated in accordance with the proportion of goodwill recognized by parent and
NCI.
FR
(E3) Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,125
Goods Sold Amortization Amortization
Expense -Interest
Inventory sold . . . . . P 5,000
Equipment . . . . . . . . . P10,000
Buildings . . . . . . . . . . ( 5,000)
Bonds payable . . . . . _______ _______ P 1,000
Totals . . . . . . . . . . . . . . P 5,000 P 5,000 P1,000
(E4) Dividend income - Perfect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
FR
Non-controlling interest (P30,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
share of dividends.
(E5) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . . . . . . . 7,175

Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,175
Income less NCI on goodwill impairment loss on full-goodwill
for 20x4 as follows:

Amortization of allocated excess [(E3)] . . . . . . . ( 11,000)
P 39,000
Multiplied by: Non-controlling interest % . . . . . . 20%
P 7,800
Less: Non-controlling interest on impairment
loss on full-goodwill (P3,125 x 20%) or
(P3,125 impairment on full-goodwill less
P2,500, impairment on partial-goodwill)* 625
*this procedure would be more appropriate, instead of multiplying the full-goodwill
impairment loss of P3,125 by 20%. There might be situations where the NCI on goodwill
impairment loss would not be proportionate to NCI acquired
Subsidiary accounts are adjusted to full fair value regardless of the controlling interest percentage or option used to value
non-controlling interest or goodwill.
The trial balance data for Perfect and Son Company are entered in the consolidation workpaper, the separate financial statements of the two FR
companies, the eliminating entries, and the consolidated totals for the financial statements on December 31, 20x4 as shown in Figure 3-5. The
consolidated net income and non-controlling interests in consolidated net income which can be verified in Figure 3-5 can also be computed as
follows:
Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P140,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P190,000
Less: Non-controlling Interest in Net Income* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 7,175
Amortization of allocated excess (refer to amortization above) . . . . . . . . . . . . 11,000
Goodwill impairment (impairment under full-goodwill approach) . . . . . . . . . . 3,125 21,300
Add: Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . . . . . 7,175
Consolidated Net Income for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P175.875

Net income of Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 50,000
Less: Amortization of allocated excess (refer to amortization table above) . . . . 11,000
P 39,000
Multiplied by: Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 7,800
Less: Non-controlling interest on impairment loss on full-goodwill (P3,125 x 20%)
or (P3,125 impairment on full-goodwill less P2,500, impairment on
partial-goodwill)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625
Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 7,175
*this procedure would be more appropriate, instead of multiplying the full goodwill impairment loss of P3,125 by 20%. There might be situations where the NCI
on goodwill impairment loss would not be proportionate to NCI.
Cost Model (Full-goodwill)/80%-Owned Subsidiary (First Year after Acquisition)
Income Statement
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend income . . . . . . . . . . . . . . . . . . .
Perfect Co
P400,000
24,000
Son Co.
P200,000
- (4)
Dr.
24,000
Cr. Consolidated
P 600,000
_________
FR
Other expenses . . . . . . . . . . . . . . . . . . . . 40,000 15,000 55,000
Net Income . . . . . . . . . . . . . . . . . . . . . . . . P164,000 P 50,000 P175,875
Net Income to Retained Earnings . . . P164,000 P 50,000 P168,700
Son Company . . . . . . . . . . . . . . . . . . . P100,000 (1) 100,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P464,000 P150,000 P468,700
Dividends paid
Perfect Company . . . . . . . . . . . . . . . . 60,000 60,000
Son Company . . . . . . . . . . . . . . . . . . . - 30,000 (4) 30,000 _ ________
Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . P404,000 P120,000 P 408,700
Balance Sheet
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 194,000 P 75,000 P 269,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 75,000 (2) 5,000 (3) 5,000 175,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (2) 6,000 221,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000 350,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000 (2) 180,000 870,000
Discount on bonds payable . . . . . . . . . (2) 4,000 (3) 1,000 3,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 12,500 (3) 3,125 9,375
Investment in Son Co . . . . . . . . . . . . . . . . 310,000
(1) 240,000
_________ ________
(2) 70,000 _________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,654,000 P840,000 P2,022,375
- equipment . . . . . . . . . . . . . . . . . P 112,500 P 80,000 (2) 80,000 (3) 10,000 P122,500

- buildings . . . . . . . . . . . . . . . . . . . . . 337,500 240,000 (3) 5,000 412,500
Bonds payable . . . . . . . . . . . . . . . . . . . . . 200,000 100,000 300,000
Common stock, P10 par . . . . . . . . . . . . . . 200,000 (1)200,000
Retained earnings, from above . . . . . . . 404,000 120,000 408,700
Non-controlling interest . . . . . . . . . . . . . . (4) 6,000 (1 ) 60,000
(2) 17,500
_________ _________ __________ (5) 7,175 ____78,675
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,654,000 P840,000 P 623,800 P 623,800 P2,022,375
FR
On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus:

Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) . . . . . . . . . . . . . . P300,000

equity holders of parent for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,700
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P468,700
Less: Dividends paid – Parent Company for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Consolidated Retained Earnings, December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P408,700
Non-controlling interest (full-goodwill), January 1, 20x4
Common stock – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000
Retained earnings – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Stockholders’ equity – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 300,000
Adjustments to reflect fair value - (over) undervaluation of assets and liabilities . . . . . . . . . . 75,000
Fair value of stockholders’ equity of subsidiary, January 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 375,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Non-controlling interest (partial-goodwill), !/1/20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
Add: Non-controlling interests on full goodwill, 1/1/20x4 (P12,500, full-goodwill – P10,000, partial
goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____2,500
Non-controlling interest (full-goodwill), 1/1/20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 77,500
Non-controlling interest (full-goodwill), December 31, 20x4
Common stock – Subsidiary Company, December 31, 20x4 . . . . . . . . . . . . . . . . . .
P 200,000 FR
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P150,000
Amortization of allocated excess (refer to amortization above) – 20x4 . . . . . . . . ( 11,000)
Fair value of stockholders’ equity of subsidiary, December 31, 20x4 . . . . . . . . . . . P384,000
Non-controlling interest (partial-goodwill, 12/31/20x4 . . . . . . . . . . . . . . . . . . . . . . . P 76,800
Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4:
[(P12,500 full – P10,000, partial = P2,500) – P625 impairment loss . . . . . . . . . 1,875
Non-controlling interest (full-goodwill), 12/31/20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . P 78,675

Non-controlling interest (full-goodwill), January 1, 20x4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 77,500
Add: NCINI– 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,175
Less: Dividends - Son, 20x4 (P30,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Non-controlling interest (full-goodwill), December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . .. . . . P 78,675

Perfect Co. Son Co.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 450,000 P 300,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __180,000 __160,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 270,000 P 140,000
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ___60,000 ___45,000
Add: Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ___32,000 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 192,000 P 75,000
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000 P 40,000
Only a single entry is recorded by the parent in 20x5 in relation to its subsidiary investment:
FR
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000
Dividend income (P40,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000
Record dividends from Son Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The trial balance data for Perfect and Son Company are entered in the consolidation workpaper on December 31, 20x5, as shown in Figure
3-14.

The working paper eliminations (in journal entry format) on December 31, 20x5, are as follows:
(E1) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Retained earnings – Perfect Company . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
To provide entry to convert from cost method to the equity method
or the entry to establish reciprocity at the beginning of the year,
1/1/20x5.
Retained earnings – Son Company, 1/1/20x5 . . . . . . P120,000

Retained earnings – Son Company, 1/1/20x4 . . . . . . 100,000
Increase in retained earnings . . . . . . . . . . . . . . . . . . . P 20,000
Multiplied by: Controlling interest % . . . . . . . . . . . . . . 80%
Retroactive adjustment . . . . . . . . . . . . . . . . . . . . . . . . P 16,000
(E2) Common stock – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000

Retained earnings – Son Co., 1/1/20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120.000
Investment in Son Co (P320,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256,000
Non-controlling interest (P320,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,000
of subsidiary and to establish non-controlling interest (in net assets of
subsidiary) on January 1, 20x5.
(E3) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160,000
6,000
4,000
FR
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
P10,000, partial goodwill)] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500
Investment in Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
To allocate excess of cost over book value of identifiable assets acquired,
with remainder to goodwill; and to establish non- controlling interest (in net
assets of subsidiary) on January 1, 20x5.
(E4) Retained earnings – Perfect Company, 1/1/20x5
(P14,125 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,300
Non-controlling interests (P14,125 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,825
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,125
To provide for years 20x4 and 20x5 depreciation and amortization on
differences between acquisition date fair value and book value of Son’s
Year 20x4 amounts are debited to Perfect’s retained earnings and NCI.
Year 20x5 amounts are debited to respective nominal accounts.
(20x4) Depreciation/
Retained Amortization Amortization
earnings, expense -Interest
Inventory sold . . . . . . . . P 5,000
Equipment . . . . . . . . . . . 10,000 P 10,000
Buildings . . . . . . . . . . . . (5,000) ( 5,000)
Bonds payable . . . . . . . 1,000 P 1,000
Impairment loss . . . . . . 3,125
Totals . . . . . . . . . . . . . . . . P 14,125 P 5,000 P1,000
Multiplied by: CI% . . . . . 80%
To Retained earnings . . P11,300
FR
(E5) Dividend income - Perfect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000
share of dividends.

Net income of subsidiary . . . . . . . . . . . . . . . . . . . . . . .. P 75,000

Amortization of allocated excess [(E4)] . . . . .. . . . . . ( 6,000)
P 69,000
P 13,800
Less: NCI on goodwill impairment loss on full–
Goodwill ______ 0
Non-controlling Interest in Net Income (NCINI). . . . P 13,800
statements on December 31, 20x5, are shown in Figure 3-6
FR
The consolidated net income and non-controlling interests in consolidated net income which can be verified in Figure 3-6 can
also be computed as follows:

Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P160,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P235,000
Amortization of allocated excess (refer to amortization above) . . . . . . . . . . . . 6,000
Goodwill impairment (impairment under full-goodwill approach) . . . . . . . . . . 0 19,800
Add: Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . . . . 13,800

Net income of Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
Less: Amortization of allocated excess (refer to amortization table above) . . . . . 7,000
P 69,000
Multiplied by: Non-controlling interest % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20%
P 13,800
Less: NCI on goodwill impairment loss on full-goodwill . . . . . . . . . . . . . . . . . . . . . . . 0
Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 13,800
Income Statement Perfect Co Son Co. Dr. Cr. Consolidated
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P450,000 P300,000 P750,000
Dividend income . . . . . . . . . . . . . . . . . . . 32,000 - (5) 32,000 ___________
Total Revenue . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . .
Depreciation expense . . . . . . . . . . . . . . .
P482,000
P180,000
50,000
P300,000
P160,000
20,000 (4) 5,000
FR
P750,000
P340,000
75,000
Other expenses . . . . . . . . . . . . . . . . . . . . 60,000 45,000 105,000
Net Income . . . . . . . . . . . . . . . . . . . . . . . . P192,000 P 75,000 P229,000
Perfect Company . . . . . . . . . . . . . . . . P404,000 (2) 11,300 (4) 16,000 P 408,700
Son Company . . . . . . . . . . . . . . . . . . . P 120,000(2) 120,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P596,000 P195,000 P623,900
Dividends paid
Figure 3–7: Worksheet for Consolidated Perfect Company . . . . . . . . . . . . . . . . 60,000 60,000
Son Company . . . . . . . . . . . . . . . . . . . - 40,000 (6) 40,000 _ ________
Financial Statements, Retained earnings, 12/31 to Balance Sheet . . . . . . . . . . P536,000 P155,000 P 563,900
Balance Sheet
December 31, 20x5. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 221,000 P 85,000 P 306,000
Cost Model (Full-goodwill)/ 80%-Owned Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 90,000 (3) 5,000 (4) 5,000 270,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (3) 6,000 221,000
Subsidiary (Second Year after Acquisition) Equipment . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000 350,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000 (3) 180,000 870,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . (3) 12,500 (4) 3,125 9,375
Investment in Son Co . . . . . . . . . . . . . . . . 310,000
(1) 16,000 (2) 256,000
__________ ________
(2) 70,000 _________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,836,000 P895,000 P2,258,375
- equipment . . . . . . . . . . . . . . . . . . P 125,000 P 85,000 (3) 80,000 (4) 20,000 P150,000
- buildings . . . . . . . . . . . . . . . . . . . . . (4) 10,000 460,000
Accounts payable . . . . . . . . . . . . . . . . . 100,000 100,000 200,000
Bonds payable . . . . . . . . . . . . . . . . . . . . 200,000 100,000 300,000
Common stock, P10 par . . . . . . . . . . . . 500,000 500,000
Common stock, P10 par . . . . . . . . . . . . 200,000 (2) 200,000
Retained earnings, from above . . . . . 536,000 155,000 563,900
Non-controlling interest . . . . . . . . . . . . . (5) 8,000
(2) 2,825 (2) 64,000
(3) 17,500
___ _____ _________ __________ (6) 13,800 ____84,475
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,836,000 P895,000 P 687,425 P 687,425 P2,258,375
FR
The consolidated retained earnings and non-controlling interests which can be verified in Figure 3-7 can also be computed as
follows:
Retained earnings - Parent Company, January 1, 20x5 (cost model) . . . . . . . . . . P404,000
Adjustment to convert from cost model to equity method for purposes of
consolidation or to establish reciprocity:/Parent’s share in adjusted net
increased in subsidiary’s retained earnings:
Retained earnings – Subsidiary, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . . . . P 120,000
Less: Retained earnings – Subsidiary, January 1, 20x4 . . . . . . . . . . . . . . . . . . 100,000
Increase in retained earnings since date of acquisition . . . . . . . . . . . . . . . . P 20,000
Less: Amortization of allocated excess – 20x4 . . . . . . . . . . . . . . . . . . . . . . . . 11,000
P 9,000
Multiplied by: Controlling interests % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80%
P 7,200
Less: Goodwill impairment loss (full-goodwill), net (P3,125 – P625)* or
(P3,125 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ___2,500 ____4,700
Consolidated Retained earnings, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . P 408,700
equity holders of parent for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,200
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P623,900
Less: Dividends paid – Parent Company for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . __60,000
Consolidated Retained Earnings, December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . . . P563,900
*this procedure would be more appropriate, instead of multiplying the full goodwill impairment loss of P3,125 by 80%. There might be situations where the controlling interests on goodwill impairment loss
would not be proportionate to NCI
FR
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P195,000
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 11,000
20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 ( 17,000)
Add: Non-controlling interest on full goodwill , net of impairment loss
Non-controlling interest (full-goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 84,475

Non-controlling interest (fulll-goodwill), January 1, 20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 78,675
Add: NCINI – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,800
Less: Dividends - Son, 20x5 (P40,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____8,000
The consolidated income statement and balance sheet on December 31, 20x4 and 20x5 for Illustration 3-8 (full-goodwill) are as follows:
Figure 3-8: Consolidated Income Statement – December 31, 20x4
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 600,000
FR
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290,000
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 310,000
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 310,000
Less: Expenses
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __55,000 133,500
Consolidated Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 176,500
Net Income Attributable to:
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 7,800
Controlling interests (owners of the parent) . . . . . . . . . . . . __168,700
Consolidated Net Income Figure . . . . . . . .3-9:
. . . . Consolidated
. . . . . . . . . . . . . . Balance
.... Sheet – December 31, 20x4 P 176,500
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 269,000
Accounts receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 870,000
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . 412,500 457,500
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 350,000
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . 122,500 227,500
Goodwill (full) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _____9,375
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,484,375
Liabilities and Stockholders’ Equity
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 300,000
Less: Discount on bonds payable . . . . . . . . . . . . . . . . . . . ____3,000 297,000
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 497,000
Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . P 500,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ___408,700
Parent’s Stockholders’ Equity/Equity Attributable to the
Owners of the Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 908,700
Non-controlling interest (full)** . . . . . . . . . . . . . . . . . . . . . . . . . ____78,675
Total Stockholders’ Equity (Total Equity) . . . . . . . . . . . . . . . . . P 987,375
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . P1,484,375
Figure 3-10: Consolidated Income Statement – December 31, 20x5
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P 750,000
340,000
FR
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 310,000
Less: Expenses
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,000 181,000
Controlling interests (owners of the parent) . . . . . . . . . . . . . 215,200
Figure 3-11: Consolidated Balance Sheet – December 31, 20x5

Assets
Cash* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 306,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 870,000
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . 460,000 410,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 350,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _____9,375
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,646,375
Liabilities
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 300,000
Less: Discount on bonds payable . . . . . . . . . . . . . . . . . . . . 2,000 298,000
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 498,000
Stockholders’ Equity
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 500,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 563,900
Owners of the Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,063,900
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _84,475
Total Stockholders’ Equity (Total Equity) . . . . . . . . . . . . . . . . . P1,148,375
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . P1,646,375
FR
Illustration 3-4: 80%-Owned Subsidiary: Equity Method, Full-goodwill, With Goodwill Impairment Loss Recognized
in the books of Subsidiary
Son Co. Son Co.

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P20,000 25,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 150,000
Accumulated depreciation-equipment . . . . . . . . . . . . . . ( 80,000)
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 120,000
Accumulated depreciation-buildings . . . . . . . . . . . . . . . . ( 160,000)
Bonds payable (4 years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 96,000
All other assets and liabilities had book values approximately equal to their respective fair values. On January 1, 20x4, the equipment and buildings had a
remaining life of 8 and 4 years, respectively. Inventory is sold in 20x4 and FIFO inventory costing is used. Goodwill, if any, is reduced by a P3,125 impairment
loss during 20x4 based on the fair value basis (or full-goodwill), meaning the management has determined that the goodwill arising in the acquisition of Son
FR
Company relates proportionately to the controlling and non-controlling interests, as does the impairment.
Trial balances for the companies for the year ended December 31, 20x4 are as follows:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 194,000 P 75,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 50,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 75,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . 314,700 -
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 115,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . - -
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 15,000
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 30,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,978,700 P1,020,000
Credits
Accumulated depreciation – equipment . . . . . . . . . . . . . P 112,500 P 80,000
Accumulated depreciation – buildings . . . . . . . . . . . . . . . 337,500 240,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 100,000
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000 200,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000 100,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000 200,000
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,700 -
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,978,700 P1,020,000
From the trial balances presented above, the following summaries for 20x4 results of operations are as follows:
Perfect Co. Son Co.

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 400,000 P 200,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000 115,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 230,000 P 85,000
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 15,000
Add: Investment income/Equity in Subsidiary Income . . 28,700 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 168,700 P 50,000
FR
Common stock (P200,000 x 80%) . . . . . . . . . . . . . . . . . . P 160,000
fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 10,000
The over/under valuation of assets and liabilities are summarized as follows:
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . P 20,000 P 25,000 P 5,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 46,000 6,000
Equipment (net) . . . . . . . . . . . . . . . . . . . . . 70,000 150,000 80,000
Buildings (net) . . . . . . . . . . . . . . . . . . . . . . . 140,000 120,000 (20,000)
Bonds payable . . . . . . . . . . . . . . . . . . . . . . (100,000) ( 96,000) 4,000
Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 170,000 P 245,000 P 75,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . P150,000 P150,000 P 0
Less: Accumulated depreciation . . . . . . . __80,000 - - _ 80,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . P300,000 P 120,000 P ( 180,000)
Less: Accumulated depreciation . . . . . . . _160,000 __ - _( 160,000)

Inventory . . . . . . . . . . . . . . . . . . . . . . P 5,000 1 P 5,000 P 5,000 P -
Equipment (net) . . . . . . . . . . . . . . . . 80,000 8 10,000 10,000 10,000
Buildings (net) . . . . . . . . . . . . . . . . . . (20,000) 4 ( 5,000) ( 5,000) (5,000)
Bonds payable . . . . . . . . . . . . . . . . 4,000 4 1,000 1,000 1,000
P 11,000 P 11,000 P 6,000
The goodwill impairment loss of P3,125 based on 100% fair value would be allocated to the controlling interest and the NCI based on the FR
(P75,000 x 100%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
fair value) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 12,500
Value % of Total
The goodwill impairment loss would be allocated as follows
Value % of Total
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 2,500 80.00%
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 3,125 100.00%
FR
January 1, 20x4:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000
(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
December 31, 20x4:
(3) Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Investment income (P50,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
December 31, 20x4:
(4) Investment income/ESI [(P11,000 x 80%) + (P3,125 – P625)*,
goodwill impairment loss)] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,300
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,300
Record amortization of allocated excess of inventory, equipment, buildings and
bonds payable and goodwill impairment loss.
*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment loss of P3,125 by 80%. There might be situations where the controlling interests on
goodwill impairment loss would not be proportionate to NCI acquired
Thus, the investment balance and investment income in the books of Perfect Company is as follows:
Investment in Son
(50,000 x 80%) 40,000 11,300 Impairment
Balance, 12/31/x4 314,700

Amortization & NI of Son
Impairment 11,300 40,000 (P50,000 x 80%)
28,700 Balance, 12/31/x4
FR
Consolidation Workpaper – First Year after Acquisition
January 1, 20x4:
To eliminate investment on January 1, 20x4 and equity accounts of subsidiary on date of acquisition;
and to establish non-controlling interest (in net assets of subsidiary) on date of acquisition.
(E2) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,500
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
P10,000, partial goodwill)] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,500
To eliminate investment on January 1, 20x4 and allocate excess of cost over book value of identifiable
assets acquired, with remainder to goodwill; and to establish non- controlling interest (in net assets of
subsidiary) on date of acquisition.
(E3) Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,000
5,000
FR
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,125
Goods Sold Amortization Amortization
Equipment P 10,000
Buildings ( 5,000)
Bonds payable _______ _______ P 1,000
Totals P 5,000 P 6,000 P1,000 12,000
It should be observed that the goodwill computed above was proportional to the controlling interest of 80% and non-controlling interest of 20% computed as
follows:
Value % of Total
Therefore, the goodwill impairment loss of P3,125 based on 100% fair value or full-goodwill would be allocated as follows:
Goodwill impairment loss attributable to parent or controlling P 2,500 80.00%
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment loss applicable to NCI . . . . . . . . . . . . . . . . . . 625 20.00%
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 3,125 100.00%
(E4) Investment income /Equity in Subsidiary Income. . . . . . . . . . 28,700
Non-controlling interest (P30,000 x 20%) . . . . . . . . . . . . . . . . . .
Dividends paid – Son . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . .
6,000
30,000
4,700
FR
To eliminate intercompany dividends and investment income
under equity method and establish share of dividends, computed
as follows:
Investment in Son Investment Income / Equity in Subsidiary Income

NI of Son 24,000 Dividends – Son NI of Son
(50,000 Amortization & Amortization & (50,000
x 80%)……. 40,000 11,300 Impairment Impairment 11,300 40,000 x 80%)
4,700 28,700
After the eliminating entries are posted in the investment account, it should be observed that from consolidation point of view the investment
account is totally eliminated. Thus,
Investment in Son
(50,000 x 80%) 40,000 11,300 Impairment
70,000 (E2) Investment, 1/1/20x4
and dividends
314,700 314,700
Percentage of goodwill for amortization purposes:

Value % of Total
Goodwill applicable to parent . . . . . . . . . P10,000 80.00%
Goodwill applicable to NCI . . . . . . . . . . . . 2,500 20.00%
Total (full) goodwill . . . . . . . . . . . . . . . . . . . . P12,500 100.00%
The goodwill impairment loss of P3,125 based on 100% fair value or full-goodwill would be allocated as follows:
Goodwill impairment loss attributable
to parent or controlling Interest . . . . . . P 2,500 80.00%
Goodwill impairment loss applicable to
NCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 625 _20.00%
Goodwill impairment loss based on
100% fair value or full-goodwill . . . . . . P 3,125 100.00%
(E5) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . . . . . . . . 7,175
FR
Net income of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 50,000

Amortization of allocated excess [(E3)] . . . . . . . . . . . . . . . . . . . ( 11,000)
P 39,000
Multiplied by: Non-controlling interest % . . . . . . . . . . . . . . . . . . 20%
Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . P 7,800
Less: Non-controlling interest on impairment
loss on full-goodwill (P3,125 x 20%) or
(P3,125 impairment on full-goodwill less
P2,500, impairment on partial-goodwill)* 625
Non-controlling Interest in Net Income (NCINI) . . . . . . . . . . . . P 7,175
*this procedure would be more appropriate, instead of multiplying the full-goodwill impairment
loss of P3,125 by 20%. There might be situations where the NCI on goodwill impairment loss
would not be proportionate to NCI acquired
Subsidiary accounts are adjusted to full fair value regardless of the controlling interest percentage or option used to value non-controlling
interest or goodwill.
The separate financial statements of the two companies, the eliminating entries, and the consolidated totals for the financial statements on
December 31, 20x4, are shown in Figure 3-11.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P400,000 P200,000 P 600,000
Investment income/ESI . . . . . . . . . . . . . . 28,700 - (4) 28,700 _________
Total Revenue . . . . . . . . . . . . . . . . . . .
P428,700
P170,000
50,000
P200,000
P115,000
20,000
(3)
(3)
5,000
5,000
FRP 600,000
P 290,000
75,000
Other expenses . . . . . . . . . . . . . . . . . . . . 40,000 15,000 55,000
Net Income . . . . . . . . . . . . . . . . . . . . . . . . P168,700 P 50,000 P175,875
Son Company . . . . . . . . . . . . . . . . . . . P100,000 (1) 100,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P468,700 P150,000 P468,700
Dividends paid
Perfect Company . . . . . . . . . . . . . . . . 60,000 60,000
Figure 3-11: Son Company . . . . . . . . . . . . . . . . . . . - 30,000 (4) 30,000 _ ________
Worksheet for Consolidated Financial Retained earnings, 12/31 to Balance Sheet . . . . . . . . . P408,700 P120,000 P 408,700
Balance Sheet Perfect Co Son Co. Dr. Cr. Consolidated
Statements, Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 194,000 P 75,000 P 269,000
December 31, 20x4. Accounts receivable . . . . . . . . . . . . . . . . 75,000 50,000 125,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 75,000 (2) 5,000 (3) 5,000 175,000
Equity Method (Full-goodwill)/80%-Owned Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (2) 6,000 221,000
Subsidiary Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000 350,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000 (2) 180,000 870,000
(First Year after Acquisition) Discount on bonds payable . . . . . . . . . . (2) 4,000 (3) 1,000 3,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 12,500 (3) 3,125 9,375
(2) 70,000
__________ _______ (4) 4,700 __________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,658,700 P840,000 P2,022,375
-equipment . . . . . . . . . . . . . . . . . . . . . P 112,500 P 80,000 (2) 80,000 (3) 10,000 P122,500
-buildings . . . . . . . . . . . . . . . . . . . . . . . (2) 5,000 412,500
Bonds payable . . . . . . . . . . . . . . . . . . . . . 200,000 100,000 300,000
Non-controlling interest . . . . . . . . . . . . . . (4) 6,000 (1 ) 60,000
(2) 17,500
_________ _________ __________ (5) 7,175 ____78,675
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,658,700 P840,000 P 628,500 P 628,500 P2,022,375
On date of acquisition the retained earnings of parent should always be considered as the consolidated retained earnings, thus:
Retained earnings - Parent Company, January 1, 20x4 (date of acquisition) . . . . . . . . . . . . . .

P300,000
FR
equity holders of parent for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,700
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P468,700
Less: Dividends paid – Parent Company for 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Consolidated Retained Earnings, December 31, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P408,700
Non-controlling interest (full-goodwill), January 1, 20x4
Common stock – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 200,000
Retained earnings – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Stockholders’ equity – Subsidiary Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 300,000
Adjustments to reflect fair value - (over) undervaluation of assets and liabilities . . . . . . . . . . 75,000
Fair value of stockholders’ equity of subsidiary, January 1, 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 375,000
Multiplied by: Non-controlling Interest percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Non-controlling interest (partial-goodwill), !/1/20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 75,000
Add: Non-controlling interests on full goodwill, 1/1/20x4 (P12,500, full-goodwill – P10,000, partial
goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____2,500
Non-controlling interest (full-goodwill), 1/1/20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 77,500
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P150,000
Amortization of allocated excess (refer to amortization above) – 20x4 . . . . . . . . ( 11,000)
Fair value of stockholders’ equity of subsidiary, December 31, 20x4 . . . . . . . . . . . P384,000
Non-controlling interest (partial-goodwill, 12/31/20x4 . . . . . . . . . . . . . . . . . . . . . . . P 76,800
Add: Non-controlling interest on full goodwill , net of impairment loss, 12/31/x4:
Non-controlling interest (full-goodwill), 12/31/20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . P 78,675

Add: NCINI– 20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,175
Less: Dividends - Son, 20x4 (P30,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
The consolidated net income, consolidated retained earnings on January 1, 20x4 and December 31, 20x4, non-controlling interests on January 1, 20x4 and December 31, 20x4 is the same
with Illustration 3-3.
Assume the following information available for Perfect and Son Company for the year 20x5: FR
Perfect Co. Son Co.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 450,000 P 300,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 160,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 270,000 P 140,000
Less: Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 20,000
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 45,000
Net income from its own separate operations . . . . . . . . . . . . . . P 160,000 P 75,000
Add: Investment income/ESI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,200 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 215,200 P 75,000
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 60,000 P 40,000

(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000
December 31, 20x5:
(3) Investment in Son Company . . . . . . . . . . . . …….. . . . . . . . . . . . . . . . . . . . . . 60,000
Investment income /ESI (P75,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
December 31, 20x5:
(4) Investment income /ESI (P6,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800
Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800
Record amortization of allocated excess of inventory, equipment,
buildings and bonds payable
Perfect Company’s P10,000 portion of the differential related to goodwill related to goodwill is not adjusted on the parent’s books following Option 2 (NCI at Partial
Goodwill/Proportionate Goodwill) as referred to above for goodwill impairment loss, even though the goodwill of the consolidated entity is impaired. Thus, the investment balance and
investment income in the books of Perfect Company is as follows:
Investment in Son
(75,000 x 80%) 60,000 4,800 (P6,000 x 80%)
Balance, 12/31/x5 337,900
Amortization NI of Son
(6,000 x 80%) 4,800 60,000 (75,000 x 80%)
55,200 Balance, 12/31/x4
The schedule of determination and allocation of excess presented above provides complete guidance for the worksheet eliminating entries.
FR
Retained earnings – Son Co, 1/1/x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120.000
Investment in Son Co (P320,000 x 80%) . . . . . . . . . . . . . . . . . . . . . . . 256,000
controlling interest (in net assets of subsidiary) on 1/1/20x5.
(E2) Accumulated depreciation – equipment (P80,000 – P10,000) . . . . . . 70,000

Accumulated depreciation – buildings (P160,000 + P5,000) . . . . . . . . 165,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Discount on bonds payable (P4,000 – P1,000) . . . . . . . . . . . . . . . . . . . 3,000
Goodwill (P12,500 – P3,125) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,375
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Non-controlling interest [(P75,000 – P11,000) x 20%] +
[P2,500, full goodwill - [(P3,125, full-goodwill impairment
– P2,500, partial- goodwill impairment)*
or (P3,125 x 20%)] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,675
to the original amount of goodwill; and to establish non- controlling
interest (in net assets of subsidiary) on 1/1/20x5.
*this procedure would be more appropriate, instead of multiplying the full goodwill impairment loss of
P3,125 by 20%. There might be situations where the NCI on goodwill impairment loss would not be
proportionate to NCI acquired
Normally, if the parent used the equity method to account for its investment in subsidiary, the debit to retained earnings on that date is
P120,000 [refer to (E1)]. Once the amount of Son Company’s beginning retained earnings is eliminated, Perfect Company’s beginning
retained earnings become consolidated retained earnings on that date. Thus, beginning retained earnings will be overstated unless, it is
reduced by the parent’s share (P3,125 x 80%) of the 20x4 impairment loss.
(E3) Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation – equipment . . . . . . . . . . . . . . . . . . . . .
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,000
10,000
1,000
FR
To provide for 20x5 depreciation and amortization on differences
between acquisition date fair value and book value of Son’s
Depreciation/
Amortization Amortization
Inventory sold
Equipment P 10,000
Buildings ( 5,000)
Bonds payable _______ P 1,000
Totals P 5,000 P1,000 P6,,000
(E4) Investment income/ Equity in Subsidiary Income . . . . . . . . . . . . . . . . . 55,200

Investment in Son Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,200
To eliminate intercompany dividends and investment income under
equity method and establish share of dividends, computed as
follows:
Investment in Son Investment Income/ Equity in Subsidiary Income

NI of Son 32,000 Dividends - Son NI of Son
(75,000 Amortization Amortization (75,000 x 80%)
x 80%)……. 60,000 4,800 (P6,000 x 80%) (P6,000 x 80%) 4,800 60,000
23,200 55,200
After the eliminating entries are posted in the investment account, it should be observed
that from consolidation point of view the investment account is totally eliminated. Thus,
Investment in Son
(75,000 x 80%) 60,000 4,800 (6,000 x 80%)
58,700 (E2) Investment, 1/1/20x5
and dividends
337,900 337,900
FR

Net income of subsidiary . . . . . . . . . . . . . . . . . . . . . . P 75,000

Amortization of allocated excess [(E3)] . . . . . . . . . . ( 6,000)
P 69,000
Non-controlling Interest in Net Income (NCINI). . . P 13,800
Less: NCI on goodwill impairment loss on full-
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Non-controlling Interest in Net Income (NCINI) . . . P 13,800
The separate financial statements of the two companies, the eliminating

entries, and the consolidated totals for the financial statements on December
31, 20x5, are shown in Figure 3-12.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P450,000 P300,000 P 750,000
Investment income /ESI.. . . . . . . . . . . . . . 55,200 - (4) 55,200 ___________
Total Revenue . . . . . . . . . . . . . . . . . . .
P505,000
P180,000
50,000
P300,000
P160,000
20,000 (3) 5,000
FR
P 750,000
P 340,000
75,000
Other expenses . . . . . . . . . . . . . . . . . . . . 60,000 45,000 105,000
Total Cost and Expenses . . . . . . . . . . P290,000 P225,000 P 521,000
Net Income . . . . . . . . . . . . . . . . . . . . . . . . P215,200 P 75,000 P 229,000
Net Income to Retained Earnings . . . . P215,200 P 75,000 P 215,200
Son Company . . . . . . . . . . . . . . . . . . . P120,000 (1) 120,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P623,900 P195,000 P 623,900
Dividends paid
Figure 3-12: Perfect Company . . . . . . . . . . . . . . . . 60,000 60,000
Worksheet for Consolidated Financial Son Company . . . . . . . . . . . . . . . . . . . - 40,000 (4) 40,000 _ ________
Retained earnings, 12/31 to Balance Sheet . . . . . . . P563,900 P155,000 P 563,900
Statements, December 31, 20x5. Balance Sheet
Equity Method Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 221,000 P 85,000 P 306,000
(Full-goodwill)/80%-Owned Subsidiary Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 90,000 270,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175,000 40,000 (2) 6,000 221,000
(Second Year after Acquisition) Equipment . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 150,000 350,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 450,000 (3) 180,000 870,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . (2) 9,375 9,375
(2) 58,700
_________ ________ (4) 23,200 _________-
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,863,900 P895,000 P2,258,375
-equipment . . . . . . . . . . . . . . . . . . . . . P 125,000 P 85,000 (3) 10,000 P150,000
Accumulated depreciation 375,000 255,000(2) 165,000
-buildings . . . . . . . . . . . . . . . . . . . . . . . (3) 5,000 460,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . 200,000 100,000 300,000
Retained earnings, from above . . . . . . . 563,900 155,000 563,900
(1) 64,000
(2) 14,675
___ _____ _________ __________ (5) 13,800 ____84,475
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,863,900 P895,000 P 663,875 P 663,875 P2,258,375
The consolidated net income, consolidated retained earnings, and non-controlling interests on December 31, 20x5 is the same with
Illustration 3-4.
FR
The consolidated net income, retained earnings and non-controlling interests which can be verified in Figure 3-20 can also be computed as
follows:
Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P160,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P235,000
P 69,000
Consolidated Retained earnings, January 1, 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . P 408,700

equity holders of parent for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215,200
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P623,900
Less: Dividends paid – Parent Company for 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Consolidated Retained Earnings, December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . . . P563,900
*this procedure would be more appropriate, instead of multiplying the full goodwill impairment loss of P3,125 by
80%. There might be situations where the controlling interests on goodwill impairment loss would not be
proportionate to NCI acquired.
Common stock – Subsidiary Company, December 31, 20x5 . . . . . . . . . . . . . . . . . .
P 200,000 FR
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P195,000
20x4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 11,000
20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 ( 17,000)
Add: Non-controlling interest on full goodwill , net of impairment loss
Non-controlling interest (full-goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 84,475

Add: NCINI – 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,800
Less: Dividends - Son, 20x5 (P40,000 x 20%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____8,000
The consolidated net income, and consolidated retained earnings on December 31, 20x5 is the same with Illustration 3-3 under cost model.
Also, the consolidated income statement and consolidated balance sheet presented in the said illustration are also the same.
Therefore, regardless of the method used in the separate financial statement of parent, the consolidated balance (which is under equity
method) is always the same.
FR
Treatment of Other Comprehensive Income
PAS 1 requires disclosure of the following items as allocation of net income or loss for the period in the statement of
comprehensive income:
1. Net income or loss for the period attributable to:

a. Non-controlling interests, and
b. Controlling interests (Owners of the parent); and
2. Total comprehensive income for the period attributable to:
a. Non-controlling interests, and
b. Controlling interests (Owners of the parent); and
Alternatively, this information may be reported in the separate income statement if the two statement alternative is adopted
for reporting comprehensive income.
FR
Reporting “comprehensive income”, requires that companies separately report under comprehensive income, which:
• includes all revenues, expenses, gains and losses that under GAAP are excluded from net income
• other comprehensive income elements include foreign currency translation adjustments, unrealized gains and losses
on certain derivatives and investments in certain types of securities, and certain minimum pension liability adjustments
Comprehensive income is the sum of net income and other comprehensive income. Accounting standards permits several
different options for reporting comprehensive income, but the consolidation process is the same regardless of the reporting
format.
Other comprehensive income accounts are temporary accounts that are closed at the end of each period.
Instead of being closed to Retained Earnings as revenue and expense accounts are, other comprehensive income accounts
are closed to a special stockholders’ equity account, Accumulated Other Comprehensive Income (AOCI).
Other Comprehensive Income FR
Regardless of the option used in recognizing goodwill, the results are still the same in the consolidated statement of comprehensive
income.
The single statement presentation of the statement of comprehensive income is presented in Figure 3-13. The analysis of expenses classified
by function is presented in the statement of comprehensive income, as encouraged by paragraph 100 of PAS 1, rather in the notes.
Figure 3-13: Single Statement Presentation of Statement of Comprehensive Income (in relation to Figure 3-12)
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 750,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 410,000
Less: Expenses
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,000 181,000
Consolidated Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 229,000
Other Comprehensive Income- Unrealized gain on investments ___10,000
Total Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . P 239,000

Total Comprehensive Income Attributable to:
Non-controlling interest* . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 15,800
Controlling interests (owners of the parent) . . . . . . . . . . . . __223,200
Total Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . P 239,000
*P13,800 + (P10,000 x 20%) = P15,800
Figure 3-14 illustrates the presentation of statement of comprehensive income in two statements: a separate income statement and a statement
displaying other components of comprehensive income. The analysis of expenses classified by nature is presented in the separate income
statements, rather in the notes. FR
Figure 3-14: (Two Statements Presentation of Statement of Comprehensive Income)
(in relation to Figure 12)
Consolidated Income Statement

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 750,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 410,000
Less: Expenses
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,000 181,000
Consolidated Statement of Comprehensive Income

Consolidated Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 229,000
Other Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Total Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 239,000
Total Comprehensive Income Attributable to:
Non-controlling interest* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 15,800
Controlling interests (owners of the parent) . . . . . . . . . . . . . . . . . . . . . . __223,200
Total Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 239,000
*P13,800 + (P10,000 x 20%) = P15,800
The amount of the other comprehensive income allocated to the controlling interest is carried to the Accumulated Other Comprehensive
Income that is reported in the consolidated balance sheet, while the non-controlling interests share is included in the Non-controlling Interests
amount in the consolidated balance sheet.
The IASB requires that the amount of each other comprehensive income element allocated to the controlling and non-controlling interests be
disclosed in the consolidated statements or notes.
Figure 3-15: Consolidated Balance Sheet - Partial-goodwill approach.
FR
Assets
Cash* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 286,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,000
Investment in Available-for-Sale Securities . . . . . . . . . . . . . . . 30,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 870,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 350,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _____7,500
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,654,500
Liabilities
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 300,000
Less: Discount on bonds payable . . . . . . . . . . . . . . . . . . . . 2,000 ___298,000
Accumulated Other Comprehensive Income** . . . . . . . . 8,000
Non-controlling interest** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____84,600
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . P1,654,500
*P306,000 – P20,000 of available for-sale securities acquired
**P10,000 x 80%
***P82,600 + (P10,000 x 20%)
Figure 3-16: Consolidated Balance Sheet - Full-goodwill approach.
FR
Assets
Cash* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 286,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,000
Investment in Available-for-Sale Securities . . . . . . . . . . . . . . . 30,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 870,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 350,000
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,375
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,656,375
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 300,000
Less: Discount on bonds payable . . . . . . . . . . . . . . . . . . . . 2,000 298,000
Accumulated Other Comprehensive Income** . . . . . . . . 8,000
Non-controlling interest** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,475
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . P1,656,375
*P306,000 – P20,000 of available for-sale securities acquired
**P10,000 x 80%
***P84,475 + (P10,000 x 20%)
Comparison of Cost, Equity, and Consolidation Methods
Table 3-5 provides a comparison of the financial statements of parent under the three different policies for reporting the investment in Subsidiary. The first
column shows Parent’s separate entity financial statements with the investment in Subsidiary reported on the cost basis.
FR
The second column shows Parent’s separate-entity financial statements prepared on the equity basis. Note that the first two columns are identical except for the
investment in Subsidiary and reported earnings from Subsidiary. As a result, the reported net income and retained earnings of Parent differs significantly
between the first and second columns.
The third column of Table 3-6 shows Parent’s consolidated financial statements. Almost all of the amounts in the third column are different from those in the
first two.
Table 3-5: Financial Statements using Different Reporting Methods
Balance Sheet (Assumed Amounts)

December 31, 20x4
Cost Basis Equity Basis Consolidated
Assets
Current assets:
Cash…………………………………………………. P 70,000 P 70,000 P 110,000
Accounts Receivable……………………………. 200,000 200,000 310,000
Receivable from Subsidiary……………………. 60,000 60,000 -
Inventories…………………………………………. __150,000 __150,000 ___270,000
P 480,000 P 480,000 P 690,000
Property, Plant, and equipment
Land………………………………………………… P 100,000 P 100,000 P 100,000
Buildings and Equipment ……………………… 1,000,000 1,000,000 1,450,000
Accumulated depreciation…………………… ( 300,000) ( 300,000) (__400,000)
P 800,000 P 800,000 P 1,150,000
Other assets
Investment in Subsidiary………………………… P 80,000 P 150,000 -
Total Assets……………………………………………… P 1,360,000 P 1,430,000 P 1,840,000
Liabilities and shareholders’ equity

Liabilities:
Current accounts payable……………………….. P 120,000 P 120,000 P 200,000
Long-term notes payable…………………………. - - 300,000
Deferred income taxes…………………………….. ___140,000 ___140,000 ___170,000
Total Liabilities………………………………………….. P 260,000 P 260,000 P 670,000
Shareholders’ equity:
Common Shares…………………………………….. P 300,000 P 300,000 P 300,000
Retained Earnings…………………………………… 800,000 870,000 870,000
Total stockholders’ equity……………………………. P1,100,000 P1,170,000 P1,170,000
Total liabilities and stockholders’ equity………….. P1,360,000 P1,430,000 P1,840,000
FR
Statement of Comprehensive Income

Year Ended December 31, 20x4
Sales Revenue………………………………………….. P 800,000 P 800,000 P 1,100,000
Cost of sales…………………………………………….. P 480,000 P 480,000 P 660,000
Depreciation expense………………………………… 130,000 130,000 160,000
Income Tax expense………………………………….. 32,000 32,000 52,000
Other expenses………………………………………… P 110,000 P 110,000 ___150,000
Cost of sales and expenses…………………………. P 752,000 P 752,000 P 1,022,000
Net Income from operations………………………… P 48,000 P 48,000 P 78,000
Dividend Income………………………………………. 20,000
Investment Income/ Equity in Subsidiary Income _ - _ 30,000 __ -
Net Income……………………………………………… P 68,000 P 78,000 P78,000
Statements of Changes in Equity-Retained Earnings Section

Year Ended December 31, 20x4
Net Income……………………………………………… P 68,000 P 78,000 P78,000
Retained Earnings, December 31, 20x3…………… 762,000 822,000 822,000
Dividend declared………………………….. (30,000) (30,000) (30,000)
Retained Earnings, December 31, 20x4…………… P800,000 P 870,000 P 870,000
FR
Additional Considerations in Consolidation
Subsidiary Valuation Accounts at Acquisition
PFRS 3 indicates that all assets and liabilities acquired in a business combination should be valued at their acquisition-date fair values and no
valuation accounts are to be carried over.
While the application of this rule is clear-cut in the acquisition of net assets (Chapter 1) type of business combinations, its application in
consolidation following a stock acquisition the valuation of asset accounts to fair value will be adjusted by eliminating the existing
accumulated depreciation accounts and set-up the difference either an increase or decrease in the related asset account.
Negative Retained Earnings of Subsidiary at Acquisition
A parent company may acquire a subsidiary with a negative or debit balance in its retained earnings account. An accumulated deficit of a
subsidiary at acquisition causes no special problems in the consolidation process. The basic investment account elimination entry is the
same in the consolidation worksheet except that the debit balance in the subsidiary’s Retained Earnings account is eliminated with a credit
entry.
Other Stockholders’ Equity Accounts
FR
The discussion of consolidated statements up to this point has dealt with companies having stockholders’ equity consisting only of retained earnings and a single
class of capital stock issued at par.
Typically, companies have more complex stockholders’ equity structures, often including preferred stock and various types of additional paid-in capital. In
general, all stockholders’ equity accounts accruing to the common stockholders receive the same treatment as common stock and are eliminated at the time
common stock is eliminated.
De-consolidation or Discontinuance of Consolidation or De-recognition of Subsidiary
PFRS 10 considers that when a parent’s ownership interest in a subsidiary decreases to the point that it no longer controls that subsidiary, a significant event
occurs.
A parent that has been including a subsidiary in its consolidated financial statements should exclude that company from future consolidation if the parent
can no longer exercise control over it.
Control might be lost for a number of reasons, such as the parent sell some or all of its interest in the subsidiary, the subsidiary issues additional common stock,
the parent enters into an agreement to relinquish control, or the subsidiary comes under the control of the government or other regulator.
If a parent loses control of a subsidiary:

1. And no longer holds an equity interest in the former subsidiary, it recognizes a gain or loss for the difference between any proceeds received from the
event leading to loss of control (e.g., sale of interest, expropriation of subsidiary) and the carrying amount of the parent's equity interest.
2. But maintains a non-controlling equity interest in the former subsidiary, it must recognize in income a gain or loss for the difference, at the date
control is lost, between
3. An interest is retained, that interest is measured at fair value, and this is factored into the calculation of the gain or loss on disposal.
FR
The gain or loss on disposal is therefore calculated as follows:
Fair value of the proceeds (if any) from the transaction that resulted to the loss of control
+: Fair value of any retained non-controlling equity investment in the former subsidiary, at the date control is lost.
+: Carrying value of the non-controlling interest in the former subsidiary (including accumulated other
comprehensive income attributable to it) at the date control is lost.
-: Carrying value of the former subsidiary’s net assets at the date control is lost.
+/-: Any amounts included in other components of equity, which relate to the subsidiary, that would be required
to be reclassified to profit or loss or another component of equity if the parent had disposed of the related
assets and liabilities.
When control is lost:

1. The parent derecognizes all assets, liabilities and non-controlling interest at their carrying amount.
2. Any retained interest in the former subsidiary is recognized at its fair value at the date of control is lost
3. If the loss of control of the former subsidiary involves the distribution of equity interests to owners of the parent acting in their
capacity of owners, that distribution is recognized at the date control is lost
4. A gain or loss of control is recognized as the net of the proceeds, if any, and these transactions. Any such gain or loss is recognized in
profit or loss attributable to the parent
It should be noted that this change applies also to situations in which an entity loses joint control of, or significant influence over, another
entity
FR
Illustration 3-5: Deconsolidation or De-recognition of Subsidiary
Parent Corporation owns an 85% interest in Subsidiary Corporation. On December 31, 20x4 in the Parent’s consolidated financial statements
the carrying value of Subsidiary’s net assets is P1,000,000 and the carrying value of the non-controlling interest in Subsidiary (including the
non-controlling interest’s share of accumulated other comprehensive income) is P100,000. On January 1, 20x5, Parent Corporation decided
to sell a 50% interest in Subsidiary to a third party in exchange for cash of P600,000. As a result of this transaction, Parent loses control of
Subsidiary but retains a 35% interest in the former subsidiary, valued at P350,000 on that date. Parent Corporation classifies its remaining
35% in subsidiary as an FVTOCI investment.
Parent’s gain on sale of subsidiary stock is computed as follows:
Cash proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 600,000 50%

Fair value of retained non-controlling interest equity investment. . .. . . . .. 350,000 35%
Carrying value of the non-controlling interest before deconsolidation
(15% or prior outside non-controlling interest in Subsidiary) . . . . . . 100,000 15%
Fair value of 100% of Parent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P1,050,000 100%
Less: Carrying value of Subsidiary’s net assets . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 100%
Gain on deemed sale of Parent (disposal or deconsolidation). . . . . . . . . . P 50,000 100%
Parent Company reports the P50,000 gain in 20x5 income. Incidentally, the journal entry is as follows:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 600,000
Investment in Subsidiary Corp. (FVTOCI Investment) . . . . . . . . . .. . 450,000
Investment in Subsidiary Corp. (Investment in Subsidiary). . . . . . . 1,000,0000
Gain on Deemed Sale of Subsidiary Corp. . . . . . . . . . . . . . . . . . 50,000
Sale of Subsidiary – Not Resulting in Loss of Control (Dilution) FR
Under PAS 27 changes in ownership interest in a subsidiary that does not result to the loss of control are accounted for as transfers within
equity.
Illustration 3-6: Sale of Subsidiary – Not Resulting in Loss of Control (Dilution) – no additional shares Issued.
Pare Company owns 80,000 shares of Sare Corporation’s 100,000 outstanding common shares, acquired at book value. The December 31,
20x4, consolidated balance sheet presented by Pare and Sare included net assets of Sare in the amount of P600,000. On January 1, 20x5, Pare
sells 10,000 shares (10%) of its Sare stock to unrelated parties for P70,000.
Pare Company’s additional paid-in capital arising sale of subsidiary shares is computed as follows:
Cash proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 70,000

Less: Carrying value of non-controlling interest (P600,000* x 10%). . . .. . . __ 60,000
“Gain” – transfer within equity in “Additional paid-in capital” account. . P 10,000
*the P600,000 is already the gross-up amount since it is the amount presented in
the consolidated balance sheet
Because Pare Company continues to have the ability to control Sare Company, the sale of Sare’s shares is treated as an equity transaction.
Therefore, no gain or loss is recognized. Instead, Pare Company’s additional paid-in capital increases by P10,000.
Illustration 3-7: Sale of Subsidiary–Not Resulting in Loss of Control (Dilution)–with additional shares Issued.
Pare Company owns 80,000 shares of Sare Corporation’s 100,000 outstanding common shares, acquired at book value. The December 31, 20x4, consolidated
balance sheet presented by Pare and Sare included net assets of Sare in the amount of P600,000. On January 1, 20x5, Sare issues 25,000 additional shares of
common stock to unrelated parties for P175,000.
FR
Pare Company’s additional paid-in capital arising sale of subsidiary shares is computed as follows:
Cash proceeds from issuance of additional shares ….. P 175,000

Less: Carrying Value of non-controlling from issuance
of additional shares:
Non-controlling interest prior to issuance
Book value of SHE before issuance………. P600,000
x: Non-controlling interest………………….. 20%* P 120,000
Non-controlling interest after issuance of
additional shares:
Book value of SHE before issuance………. P600,000
Additional issuance…………………..……… 175,000
BV of SHE after issuance……………………. P775,000
x: Non-controlling interest…………….......... 36%** 279,000 159,000
“Gain” – transfer within equity in Additional paid-in
capital” account.……................................................. P 16,000
*(100,000 – 80,000) / 100,000 = 20% ownership before additional issuance of shares.

** [(20,000 + 25,000) / (100.000 + 25,000)] = 36% ownership after additional issuance of shares
Or, alternatively:
Carrying value of 80% ownership before issuance
Stockholders’ equity of Sare Co. . . . . . . . . . . . . . . . . . . . . . . . . .. P600,000
X: Ownership interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____80% P 480,000
Carrying value of 64% ownership after issuance
Stockholders’ equity of Sare Co. (P600,000 + P175,000). . . . . . . P775,000
X: Ownership interests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ____64% _496,000
Additional paid-in capital.. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 16,000
The Third Method: The Fair Value Option/Model
PAS 27 requires companies holding investments in common stock of other companies to use this option to measure the investments.
FR
Under this fair value option, the investor measures those investments to its fair value at the end of each period. The change in value is then recognized in
income for the period.
Although the current standard does not specify how to account for dividends received from the investment, normally the investor recognizes dividend income
in the same manner as under the cost model.
Illustration 3-8: Fair Value Option/Model: Journal Entries

To illustrate the use of the fair value model, assume that Pair Company purchases 75% of Share Company’s common stock on January 1, 20x4, for P200,000.
Pair prepares financial statements at the end of each calendar quarter. On March 1, 20x4, Pair receives a cash dividend of P1,500 (P2,000 dividends declared and
paid x 75%) from Share Company. On March 31, 20x4, Pair Company determines the fair value of its investment in Share to be P207,000. During the first
quarter of 20x4, Pair records the following entries on its books in relation to its investment in Share.
Parent Company Fair Value Model Entry

There are three entries is recorded by the parent in 20x in relation to its subsidiary investment:
January 1, 20x4:
(1) Investment in Share Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Record purchase of Share Company stock
March 1, 20x4:
(2) Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Record dividends from Share Company
March 31, 20x4:

(3) Investment in Share Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Unrealized gain on Share stock . . . . . . . . . . . . . . . . . . . . . . . . 7,000
Record increase in fair value of Share Company
Illustration 3-9: Comparison – Cost Model, Equity Method, Fair Value through Profit and Loss, and Fair Value Through Other Comprehensive Income
On January 1, 20x4, Anton Corp. purchased 20% of the outstanding ordinary shares of International Company at a cost of P950,000. International reported profit of P900,000 and paid
FR
dividends of P600,000 for the year ended December 31, 20x4. The market value of Anton’s 20% interest in International was P990,000 at December 31, 20x4. On June 30, 20x5, Deng paid
dividends of P350,000. On July 2, 20x5 Anton sold its investment in International Company for P1,005,000. International did not prepare financial statements for 20x5 until early in 20x6.
The journal entries for Anton Corp. for 20x4 and 20x5 for the:
Cost Model Equity Method FVTPL FVTOCI

January, 1, 20x4:
Investment in International 950,000 950,000 950,000 950,000
Cash (950,000) (950,000) (950,000) (950,000)
To record acquisition of 20% of International
December 31, 20x4:

Investment in International 180,000
Investment income (180,000)
Share in net income
Cash (20% x P600,000) 120,000 120,000 120,000 120,000

Dividend income (120,000) (120,000) (120,000)
Investment in International (120,000)
Receipt of dividend from International
Investment in International (P990,0000-P950,000) 40,000 40,000

Unrealized gain (reported in net income) ( 40,000)
OCI (Other Comprehensive Income) ( 40,000)
To record investment at fair value
June 30, 20x5:

Cash (20% x P350,000) 70,000 70,000 70,000 70,000
Dividend income (70,000) (70,000) (70,000)
Investment in International (70,000)
Receipt of dividend from International
July 2, 20x5:
Cash 1,005,000 1,005,000 1,005,000 1,005,000
Investment in International ( 950,000) ( 940,000) ( 990,000) ( 990,000)
Gain on sale (reported in net income) ( 55,000) ( 65,000) ( 15,000)
OCI – unrealized gains ( 15,000
Record sale of investment
Accumulated OCI (reclassification to RE) 55,000

Retained Earnings/Accumulated P&L ( 55,000)
Clear
Note: accumulated
Credit OCInoted
entries are to RE in brackets
RE – retained earnings
FVTPL – fair value through profit and loss
FVTOCI – fair value through other comprehensive income
The schedule to show the net income or profit, OCI, comprehensive income, and change in retained earnings for Anton for 20x4, 20x5, and the total of the
changes for 20x4 and 20x5 under the four methods:
(in P000s) Cost Model Equity Method FVTPL FVTOCI
FR
Yr 1 Yr 2 Total Yr 1 Yr 2 Total Yr 1 Yr 2 Total Yr 1 Yr 2 Total
Net income/profit 120 125 245 180 65 245 160 85 245 120 70 245
OCI 40 15 55
Comprehensive income 120 125 245 180 65 245 160 85 245 160 85 245
Changes in Ret. Earnings 120 125 245 180 65 245 160 85 245 120 125 245
Further, the schedule to compare the change in cash with change in net income or profit, comprehensive income, and retained earnings for Anton for the sum of
the two years under the four methods:
(in P000s) Cost Model Equity Method FVTPL FVTOCI
Cash received
Dividends in 20x4 120 120 120 120
Dividends in 20x5 70 70 70 70
Sales proceeds in 20x5 1,005 1,005 1,005 1,005
Total cash received 1,195 1,195 1,195 1,195
Cash paid for investment 950 950 950 950

Change in cash 245 245 245 245
= Change in profit 245 245 245 190
= Change in Comprehensive income 245 245 245 245
= Change in retained earnings 245 245 245 245
The similarities and differences in financial reporting for the four methods:
Similarities
• Change in cash is the same for all methods.
• Profit for the two years in total is the same for the first three methods and comprehensive income is the same for all methods.
• Change in retained earnings for the two years in total is the same for all methods.
• Change in cash is equal to change in profit for the two years in total for the first three methods.
• Change in cash is equal to comprehensive income for the two years in total for the two years in total for all methods.
• Change in cash is equal to change in retained earnings for the two years in total for all methods.
Differences
• Timing of income recognition is different.
• Gains from appreciation go through net income or profit for first three methods but never got reported in net income or profit for the FVTOCI investment.
Summary of Reporting Methods
Table 3-6 summarizes the reporting methods for inter-corporate equity investments applicable to publicity accountable and private enterprises, respectively.
Table 3-6: Accounting for Strategic Inter-corporate Investments FR
Investment Type Publicly Accountable Enterprises Private Enterprises
Method of Balance Impact on Net Income
Accounting Sheet OCI
Fair value through Fair value Fair value Share of dividends and gain/loss Fair value if quote market
profit and loss on revaluation to fair value price
(FVTPL) from carrying value available, otherwise can use
cost;
dividends and
gain/losses in net income.
Fair value through Fair value Fair value Share of Gain/loss on
OCI (FVTOCI) Dividends revaluation
to fair value
from carrying
value
Significantly Equity Initial cost Share of OCI items of Equity method
influenced method plus adjusted investee’s earnings investee not required;
associated cumulative adjusted for added to can use the cost
companies unremitted amortizations and OCI of model of fair
earnings intercompany Investor value if quoted
unrealized & realized price available;
profits gain/losses same method
(fair value – should be used for
carrying value) all investments
Joint ventures Equity Same as Same as above Same as Proportionate
method Above for each above consolidation
method cost model, or
equity method
same method
should be
used of all joint
ventures
Subsidiaries and Consolidation Investment Revenue and expense items Same as In addition to
controlled account of investee added Above consolidation,
structured entity replaced by assets to investor’s can use either
also known as and liabilities of revenue and the cost or equity
Variable Interests investee expense item on SCI method; for value
Entity (VIE) or adjusted for if quoted
Special-purpose amortization and market price
Entity (SPE) intercompany available; same method
unrealized and should be
realized profits used for all
subsidiaries

Chapter 3 IFRS 10 Consolidated Financial Statements Part 2

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Chapter 3 IFRS 10 Consolidated Financial Statements Part 2

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Separate and Consolidated

The preparation of consolidated financial statements:

Separate Financial Statements

* A contractual arrangement must exist which establishes joint control.

Cost Model Equity Method Fair Value Option

1. The consideration transferred discussed in Chapter 1.

When the cost model is used:

The equity method of accounting is often called a one-line consolidation

The equity method creates many complexities:

Choosing between Cost Model (Method) and Equity Method

1. Main difference is one of timing.

Notionally adjusted goodwill =

Goodwill Impairment Tests

As discussed in Chapter 2, PFRS 3 allows two bases of measurement of non-controlling interests as of

2. The impairment loss could be recorded only on the consolidated worksheet.

Consolidated Statements Subsequent to Date of Acquisition

Consolidated Income Statement

Consolidated Retained Earnings Statement

The consolidated retained earnings statement consists of:

Son Co. Son Co.

From the trial balances presented above the

The over/under valuation of assets and liabilities are summarized as follows

January 1, 20x4 – December 31, 20x4:

(E2) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000

(E5) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . . 7,800

Net income of subsidiary . . . . . . . . . . . . . . . . . P 50,000

Consolidated Net Income for 20X4

*Non-controlling Interest in Net Income (NCINI) for 20x4

On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:

Consolidated Retained Earnings, December 31, 20x4

Non-controlling interest (partial-goodwill), January 1, 20x4

Stockholders’ equity – Subsidiary Company, December 31, 20x4 P 320,000

Alternatively, NCI on December 31, 20x4 may also be computed as follows:

Parent Company Cost Model Entry

Retained earnings – Son Company, 1/1/20x5 P120,000

(E3) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000

(E4) Retained earnings – Perfect Company, 1/1/20x5

(E5) Dividend income - Perfect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,000

(E6) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . . . . . . 13,800

Net income of subsidiary . . . . . . . . . . . . . . . . . . . P 75,000

Consolidated Net Income for 20x5

*Non-controlling Interest in Net Income (NCINI) for 20x5

Less: Amortization of allocated excess / goodwill impairment for 20x5

Alternatively, NCI on December 31, 20x5may also be computed as follows:

Non-controlling interest (partial-goodwill), January 1, 20x5. . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 76,800

Illustration 3-2: 80%-Owned Subsidiary:

Son Co. Son Co.

Fair value of Subsidiary (80%)

The over/under valuation of assets and liabilities are summarized as follows:

The goodwill impairment loss would be allocated as follows:

(E1) Common stock – Son Co . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000

(E2) Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000

(E5) Non-controlling interest in Net Income of Subsidiary . . . . . . . . . . . . . . . . 7,800

Depreciation expense . . . . . . . . . . . . . . . 50,000 20,000 (3) 5,000 75,000

Interest expense . . . . . . . . . . . . . . . . . . . . - - (3) 1,000 1,000

*Non-controlling Interest in Net Income (NCINI) for 20x4

On subsequent to date of acquisition, consolidated retained earnings would be computed as follows:

Consolidated Retained Earnings, December 31, 20x4