I - 80%-Owned Subsidiary: Equity Model - Consolidated Financial Statements

Partial Goodwill or Proportionate Basis Approach / Full Goodwill or Fair Value Basis
Assume that on January 1, 20x4, P Company acquires 80% of the common stock of S Company for
P372,000. On that date the following assets and liabilities of S Company had book values that were
different from their respective market values:
S Co. S Co.
Book value Fair value
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P24,000 30,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000 55,200
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 180,000
Accumulated depreciation-equipment . . . . . . . . . . . . . . . ( 96,000)
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,000 144,000
Accumulated depreciation-buildings . . . . . . . . . . . . . . . . ( 192,000)
Bonds payable (4 years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 115,200
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 P3,750
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 S 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 P Co. S Co.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 232,800 P 90,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 60,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 90,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,000 48,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 180,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720,000 540,000
Investment in S Company . . . . . . . . . . . . . . . . . . . . . . . . . . 372,000 -
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,000 138,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 24,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000 18,000
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . . - -
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000 36,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P2,368,800 P1,224,000
Credits
Accumulated depreciation – equipment . . . . . . . . . . P 135,000 P 96,000
Accumulated depreciation – buildings . . . . . . . . . . 405,000 288,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 120,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 120,000
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 240,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,000 120,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480,000 240,000
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,800 -
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P2,368,8 00 P1,224,000

Required: Using equity model:

.

1. Prepare journal entry to record investment in the books of the acquirer company.
2. Prepare schedule for determination and allocated excess.
3. Prepare the working paper eliminating entries for 20x4 for purposes of preparing consolidated
balance sheet.
4. Prepare a consolidated workpaper on December 31, 20x4 .
80% Partial Goodwill – Equity Method – First Year

3. 20x4: First Year after Acquisition

Parent Company Equity Model Entry
January 1, 20x4:
(1) Investment in S Company…………………………………………… 372,000
Cash…………………………………………………………………….. 372,000
Acquisition of S Company.

January 1, 20x4 – December 31, 20x4:

(2) Cash……………………… 28,800
Investment in S Company (P36,000 x 80%)……………. 28,800
Record dividends from S Company.

December 31, 20x4:

(3) Investment in S Company 48,000
Investment income (P60,000 x 80%) 48,000
Record share in net income of subsidiary.

December 31, 20x4:

(4) Investment income [(P13,200 x 80%) + (P3,750 – P750)*, 13,560
goodwill impairment loss)]
Investment in S Company 13,560
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 P Company is as follows:

Investment in S
Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%)
NI of S Amortization &
(60,000 x 80%) 48,000 13,560 Impairment
Balance, 12/31/x4 377,640

Investment Income
Amortization & NI of S
Impairment 13,560 48,000 (P60,000 x 80%)
34,440 Balance, 12/31/x4
4. Schedule of Determination and Allocation of Excess (Partial-goodwill)

Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (80%)
Consideration transferred……………………………….. P 372,000
Less: Book value of stockholders’ equity of S:
Common stock (P240,000 x 80%)……………………. P192,000
Retained earnings (P120,000 x
80%)………………... 96,000 288,000
Allocated excess (excess of cost over book value)….. P 84,000
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P6,000 x 80%)……………… P 4,800
Increase in land (P7,200 x 80%)……………………. 5,760
Increase in equipment (P96,000 x 80%) 76,800
Decrease in buildings (P24,000 x 80%)………..... ( 19,200)
Decrease in bonds payable (P4,800 x 80%)…… 3,840 72,000
Positive excess: Partial-goodwill (excess of cost over
fair value)………………………………………………... P 12,000
 The over/under valuation of assets and liabilities are summarized as follows:
S Co. S Co. (Over) Under
Book value Fair value Valuation
Inventory………………….…………….. P 24,000 P 30,000 P 6,000
Land……………………………………… 48,000 55,200 7,200
Equipment (net)......... 84,000 180,000 96,000
Buildings (net) 168,000 144,000 (24,000)
Bonds payable………………………… (120,000) ( 115,200) 4,800
Net……………………………………….. P 204,000 P 294,000 P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows:
S Co. S Co. Increase
Book value Fair value (Decrease)
Equipment .................. 180,000 180,000 0
Less: Accumulated depreciation….. 96,000 - ( 96,000)
Net book value………………………... 84,000 180,000 96,000
S Co. S Co.
Book value Fair value (Decrease)
Buildings................ 360,000 144,000 ( 216,000)
Less: Accumulated depreciation….. 192,000 - ( 192,000)
Net book value………………………... 168,000 144,000 ( 24,000)

A summary or depreciation and amortization adjustments is as follows:

Account Adjustments to be Over/ Lif Annual Current
amortized Under e Amount Year(20x4) 20x5
P P
Inventory 6,000 1 6,000 P 6,000 P -
Subject to Annual Amortization
Equipment (net)......... 96,000 8 12,000 12,000 12,000
(24,00
Buildings (net) 0) 4 ( 6,000) ( 6,000) (6,000)
Bonds payable… 4,800 4 1,200 1,200 1,200
P
13,200 P 13,200 P 7,200

. Consolidation Workpaper – 20x4 Year of Acquisition (Partial-goodwill)

(E1) Common stock – S Co………………………………………… 240,000
Retained earnings – S Co…………………………………… 120.000
Investment in S Co…………………………………………… 288,000
Non-controlling interest (P360,000 x 72,000
20%)………………………..
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…………………………………………………………………. 6,000

Accumulated depreciation – equipment……………….. 96,000
Accumulated depreciation – buildings………………….. 192,000
Land………………………………………………………………………. 7,200
Discount on bonds payable…………………………………………. 4,800
 Goodwill…………………………………………………………………. 12,000

Buildings……………………………………….. 216,000
Non-controlling interest (P90,000 x 18,000
20%)………………………..
Investment in S 84,000
Co……………………………………………….
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……………. 6,000
Depreciation expense……………………….. 6,000
Accumulated depreciation – buildings………………….. 6,000
Interest expense………………………………… 1,200
Goodwill impairment 3,000
loss……………………………………….
Inventory………………………………………………………….. 6,000
Accumulated depreciation – 12,000
equipment………………..
Discount on bonds payable………………………… 1,200
Goodwill…………………………………… 3,000
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 / Amortizatio
Sold Amortization n Total
expense -Interest
Inventory P 6,000
sold
Equipmen P 12,000
t
Buildings ( 6,000)
Bonds ______ _______ P 1,200
payable _
Totals P 6,000 P 6,000 P1,200 13,20
0

(E4) Investment income 34,440

Non-controlling interest (P36,000 x 20%)……………….. 7,200
Dividends paid – S…………………… 36,000
 Investment in S Company 5,640
To eliminate intercompany dividends and investment
income under
equity method and establish share of dividends, computed
as
follows:

Investment in S Investment Income

NI of S 28,800 Dividends - S NI of S
(60,000 Amortization & Amortization (60,000
x 80%)……. 48,000 13,560 impairment impairment 13,560 48,000 x 80%)
5,640 34,440
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 S
Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%)
NI of Son Amortization &
(60,000 x 80%) 48,000 13,560 impairment
Balance, 12/31/x4 377,640 288,000 (E1) Investment, 1/1/20x4
84,000 (E2) Investment, 1/1/20x4
5,640 (E4) Investment Income
and dividends
377,640 377,640

(E5) Non-controlling interest in Net Income of Subsidiary………… 9,360

Non-controlling interest ………….. 9,360
To establish non-controlling interest in subsidiary’s adjusted net
income for 20x4 as follows:

Net income of subsidiary…………………….. P 60,000

Amortization of allocated excess [(E3)]…... ( 13,200)
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 9,360

Worksheet for Consolidated Financial Statements, December 31, 20x4.

Equity Method (Partial-goodwill)
80%-Owned Subsidiary
December 31, 20x4 (First Year after Acquisition)
Income Statement P Co S Co. Dr. Cr. Consolidated
Sales P480,000 P240,000 P 720,000
Investment income 34,440 - (4) 34,440 _________
Total Revenue P514,440 P240,000 P 720,000
Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000
Depreciation expense 60,000 24,000 (3) 6,000 90,000
Interest expense - - (3) 1,200 1,200
Other expenses 48,000 18,000 66,000
Goodwill impairment loss - - (3) 3,000 3,000
Total Cost and Expenses P312,000 P180,000 P508,200
Net Income P202,440 P 60,000 P211,800
NCI in Net Income - Subsidiary - - (5) 9,360 ( 9,360)
Net Income to Retained Earnings P202,440 P 60,000 P202,440

Statement of Retained Earnings

Retained earnings, 1/1
P Company P360,000 P360,000
S Company P120,000 (1) 120,000
Net income, from above 202,440 60,000 202,440
Total P562,440 P180,000 P562,440
 Dividends paid
P Company 72,000 72,000
S Company - 36,000 (4) 36,000 -
Retained earnings, 12/31 to Balance
Sheet P490,440 P144,000 P490,440
Balance Sheet
Cash………………………. P 232,800 P 90,000 P 322,800
Accounts receivable…….. 90,000 60,000 150,000
Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000
Land……………………………. 210,000 48,000 (2) 7,200 265,200
Equipment 240,000 180,000 420,000
Buildings 720,000 540,000 (2) 216,000 1,044,000
Discount on bonds payable (2) 4,800 (3) 1,200 3,600
Goodwill…………………… (2) 12,000 (3) 3,000 9,000
Investment in S Co……… 377,640 (2) 288,000

(2) 84,000

(4) 5,640 -

P1,008,00
Total P1,990,440 0 P2,424,600

Accumulated depreciation
P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000
- equipment
405,000 288,000 (2)
Accumulated depreciation (3)
- 192,000 495,000
buildings 6,000
Accounts payable…………… 120,000 120,000 240,000

Bonds payable………………… 240,000 120,000 360,000

Common stock, P10 par……… 600,000 600,000

Common stock, P10 par……… 240,000 (1) 240,000

Retained earnings, from above 490,440 144,000 490,440

Non-controlling interest………… (4)

7,200 (1 ) 72,000
(2) 18,000
________
_________ _ __________ (5) 9,360 ____92,160

P1,008,00 P P
Total P1,990,440 0 751,200 751,200 P2,424,600

80% Full-Goodwill – Equity Method – First Year

3. 20x4: First Year after Acquisition

Parent Company Equity Method Entry
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (80%)
Consideration transferred (80%)…………….. P 372,000
 Fair value of NCI (given) (20%)……………….. 93,000
Fair value of Subsidiary (100%)………. P 465,000
Less: Book value of stockholders’ equity of Son:
Common stock (P240,000 x 100%)………………. P 240,000
Retained earnings (P120,000 x 100%)………... 120,000 360,000
Allocated excess (excess of cost over book value)….. P 105,000
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P6,000 x 100%)……………… P 6,000
Increase in land (P7,200 x 100%)……………………. 7,200
Increase in equipment (P96,000 x 100%) 96,000
Decrease in buildings (P24,000 x 100%)………..... ( 24,000)
Decrease in bonds payable (P4,800 x 100%)…… 4,800 90,000
Positive excess: Full-goodwill (excess of cost over
fair value)………………………………………………... P 15,000

A summary or depreciation and amortization adjustments is as follows:

Account Adjustments to be Over/ Lif Annual Current
amortized under e Amount Year(20x4) 20x5
P P
Inventory 6,000 1 6,000 P 6,000 P -
Subject to Annual Amortization
Equipment (net)......... 96,000 8 12,000 12,000 12,000
(24,00
Buildings (net) 0) 4 ( 6,000) ( 6,000) (6,000)
Bonds payable… 4,800 4 1,200 1,200 1,200
P
13,200 P 13,200 P 7,200

20x4: First Year after Acquisition

Parent Company Equity Method Entry
The following are entries recorded by the parent in 20x4 in relation to its subsidiary investment:
January 1, 20x4:
(1) Investment in S Company…………………………………………… 372,000
Cash…………………………………………………………………….. 372,000
Acquisition of S Company.

January 1, 20x4 – December 31, 20x4:

(2) Cash……………………… 28,800
Investment in S Company (P36,000 x 80%)……………. 28,800
Record dividends from S Company.

December 31, 20x4:

(3) Investment in S Company 48,000
Investment income (P60,000 x 80%) 48,000
Record share in net income of subsidiary.

December 31, 20x4:

(4) Investment income [(P13,200 x 80%) + (P3,750 – P750)*, 13,560
goodwill impairment loss)]
Investment in S Company 13,560
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 P Company is as follows:
Investment in S
Cost, 1/1/x4 372,000 28,800 Dividends – S (36,000x 80%)
NI of S Amortization &
(60,000 x 80%) 48,000 13,560 Impairment
Balance, 12/31/x4 377,640

Investment Income
Amortization & NI of S
Impairment 13,560 48,000 (P60,000 x 80%)
34,440 Balance, 12/31/x4

. Consolidation Workpaper – 20x4 Year of Acquisition (Full-goodwill)

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 – S Co………………………………………… 240,000

Retained earnings – S Co…………………………………… 120.000
Investment in S Co…………………………………………… 288,000
Non-controlling interest (P360,000 x 72,000
20%)………………………..
(E2) Inventory…………………………………………………………………. 6,000
Accumulated depreciation – equipment……………….. 96,000
Accumulated depreciation – buildings………………….. 192,000
Land………………………………………………………………………. 7,200
Discount on bonds payable…………………………………………. 4,800
Goodwill…………………………………………………………………. 15,000
Buildings……………………………………….. 216,000
Non-controlling interest (P90,000 x 20%) + [(P15,000, full
– 21,000
P12,000, partial goodwill)]…………
Investment in S Co………………………………………………. 84,000
(E3) Cost of Goods Sold……………. 6,000
Depreciation expense……………………….. 6,000
Accumulated depreciation – buildings………………….. 6,000
Interest expense………………………………… 1,200
Goodwill impairment loss………………………………………. 3,750
Inventory………………………………………………………….. 6,000
Accumulated depreciation – equipment……………….. 12,000
Discount on bonds payable………………………… 1,200
Goodwill…………………………………… 3,750

Cost of Depreciation
Goods / Amortizatio
Sold Amortization n Total
Expense -Interest
Inventory P 6,000
sold
Equipmen P 12,000
t
 Buildings ( 6,000)
Bonds ______ _______ P 1,200
payable _
Totals P 6,000 P 6,000 P1,200 13,20
0
(E4) Investment income 34,440
Non-controlling interest (P36,000 x 20%)……………….. 7,200
Dividends paid – S…………………… 36,000
Investment in S Company 5,640

(E5) Non-controlling interest in Net Income of Subsidiary………… 8,610

Non-controlling interest ………….. 8,610
Net income of subsidiary…………………….. P 60,000
Amortization of allocated excess [(E3)]…... ( 13,200)
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 9,360
Less: Non-controlling interest on impairment
loss on full-goodwill (P3,750 x 20%) or
(P3,750 impairment on full-goodwill less
P3,000, impairment on partial-goodwill)* 750
Non-controlling Interest in Net Income (NCINI) P 8,610

. Worksheet for Consolidated Financial Statements, December 31, 20x4.

Equity Method (Full-goodwill)
80%-Owned Subsidiary
December 31, 20x4 (First Year after Acquisition
Income Statement P Co S Co. Dr. Cr. Consolidated

Sales P480,000 P240,000 P 720,000

Investment income 34,440 - (4) 34,440 _________

Total Revenue P514,440 P240,000 P 720,000

Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000

Depreciation expense 60,000 24,000 (3) 6,000 90,000

Interest expense - - (3) 1,200 1,200

Other expenses 48,000 18,000 66,000

Goodwill impairment loss - - (3) 3,750 3,750

Total Cost and Expenses P312,000 P180,000 P508,950

Net Income P202,440 P 60,000 P211,050

NCI in Net Income - Subsidiary - - (5) 8,610 ( 8,610)

Net Income to Retained Earnings P202,440 P 60,000 P202,440

Statement of Retained Earnings

Retained earnings, 1/1

P Company P360,000 P360,000

 S Company P120,000 (1) 120,000

Net income, from above 202,440 60,000 202,440

Total P562,440 P180,000 P562,440

Dividends paid

P Company 72,000 72,000

S Company - 36,000 (4) 36,000 -

Retained earnings, 12/31 to Balance

Sheet P490,440 P144,000 P490,440

Balance Sheet

Cash………………………. P 232,800 P 90,000 P 322,800

Accounts receivable…….. 90,000 60,000 150,000

Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000

Land……………………………. 210,000 48,000 (2) 7,200 265,200

Equipment 240,000 180,000 420,000

Buildings 720,000 540,000 (2) 216,000 1,044,000

Discount on bonds payable (2) 4,800 (3) 1,200 3,600

Goodwill…………………… (2) 15,000 (3) 3,750 11,250

Investment in S Co……… 377,640 (2) 288,000

(2) 84,000

(4) 5,640 -

P1,008,00
Total P1,990,440 0 P2,426,850

Accumulated depreciation
P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000
- equipment
405,000 288,000
Accumulated depreciation (2) 192,000
- (2) 495,000
buildings 6,000
Accounts payable…………… 120,000 120,000 240,000

Bonds payable………………… 240,000 120,000 360,000

Common stock, P10 par……… 600,000 600,000

Common stock, P10 par……… 240,000 (1) 240,000

Retained earnings, from above 490,440 144,000 490,440

Non-controlling interest………… _________ ________ 4) 7,200 (1 ) 72,000 ____94,410

_ (2) 21,000
 __________ (5) 8,610

P1,008,00 P P
Total P1,990,440 0 754,200 754,200 P2,426,850