Advanced Financial Accounting and Reporting

Consolidated Financial Statement

Controlling Interest or Parent is a entity

- who owns more than 50% voting rights over the subsidiary.
- who has the power to govern the financial or operating policies of the subsidiary.
- who appoints or removes majority of the board of directors.
- who has the power to cast majority votes at meetings of the board of directors.

Noncontrolling interest can be measured either at

- Fair value
- Proportionate share of the NCI in the acquiree’s (subsidiary’s) identifiable net assets.

Note:
 The consolidation process is performed independently each year
 All elimination entries are working paper only
- They are not posted to the general ledger of parent nor the subsidiary

Equity Method Cost Method

Every change in Subsidiary’s The investment account
Equity is recorded on a pro-rata remains at its original cost-of-
basis in the investment account acquisition balance
Recognize Parent’s share of Investment in Sub. Xx N/A
Subsidiary’s net income Income from Sub. xx
Receipt of dividends Cash xx Cash xx
Investment in Sub. xx Dividend Income xx

 Excess allocated to net asset of subsidiary will be adjusted to the net income of the subsidiary
- Excess allocated to inventories will have an effect only on the first year of operation. This is under
the assumption that these inventories will ALL be sold on the first year. This will be adjusted to the
Cost of Sales.
- Excess allocated to depreciable asset will have an effect through the useful life of the asset. The
excess allocated will be amortized over the remaining useful life of the asset. This will be adjusted
to the Depreciation Expense.
- Excess allocated to non-depreciable asset (LAND) will have no effect on the income statement
thus no adjustment to income must be made.
- Goodwill recognized is subject for impairment.

Total Parent NCI

Unadjusted Net Income of Subsidiary xx xx xx
Excess allocation
 in Inventory (total amount = to increase COS) (xx) (xx) (xx)
 in Inventory (total amount = to decrease COS) xx xx xx
 in Depreciable assets (amount / remaining useful life = to increase (xx) (xx) (xx)
depreciation)
 in Depreciable assets (total amount / remaining useful life = to decrease xx xx xx
depreciation)
 in Non-depreciable assets (no income adjustment) - - -
 in Non-depreciable assets (no income adjustment) - - -
Impairment of Goodwill (if NCI is valued at fair value) (xx) (xx) (xx)
Impairment of Goodwill (if NCI is valued at proportionate share) (xx) (xx)
Adjusted Net Income of Subsidiary xx Xx Xx
Net Income of Parent (own operation) xx Xx
Consolidated Net Income xx Xx xx

Intercompany transactions
 These are the sales transactions between the parent and its subsidiary.
 There are three common intercompany sales transactions
- Sale of inventory
- Sale of depreciable asset
- Sale of non-depreciable asset

Sale of Inventory
 Intercompany sales revenue should be eliminated
 Cost of Sales should be adjusted based on the original cost of the inventory sold to outside party
 Profit is realized when the goods are sold to an outside party
 Inventory balance should be adjusted based on the original cost of the inventory

Sale of Depreciable Asset

 Gain or Loss on sale of asset should be eliminated
 Gain or Loss on sale should be amortized over the remaining useful life of the asset. Under the
assumption that the buyer affiliate continues to use the depreciation policy of the seller affiliate. The
amortization should be adjusted to depreciation expense.
 Asset value should be adjusted back to its original cost.
 Accumulated depreciation should be adjusted back to its original valuation plus adjustment to the date
of reporting.
 Gain or Loss on intercompany sale should be recorded back, less the amortized portion, once the asset
has been sold to an outside party.

Sale of Non-depreciable Asset

 Gain or Loss on sale of asset should be eliminated
 No amortization of gain or loss should be adjusted.
 Asset value should be adjusted back to its original cost.
 Gain or Loss on intercompany sale should be recorded back once the asset has been sold to an outside
party.

Upstream or Downstream
 Upstream sale is an intercompany sale made by the Subsidiary to its Parent.
- Both the Parent and NCI share in Subsidiary’s Net Income will be affected.
 Downstream sale is an intercompany sale made by the Parent to its Subsidiary.
- Only the Parent share in Subsidiary’s Net Income will be affected.

Total Parent NCI

Unadjusted Net Income of Subsidiary xx xx xx
Intercompany transaction
 of Inventory (gross profit of unsold goods current) (xx) (xx) (xx)
 of Inventory (gross profit of unsold goods prior year) xx xx xx
 of Inventory (gross profit of unsold goods current) (xx) (xx)
 of Inventory (gross profit of unsold goods prior year) xx xx
 of Depreciable assets (gain) (xx) (xx) (xx)
Piecemeal amortization (gain / remaining useful life) xx xx xx
Year of sale to outside party (gain – total piecemeal amortized) xx xx xx
 of Depreciable assets (loss) xx xx xx
Piecemeal amortization (loss / remaining useful life) (xx) (xx) (xx)
Year of sale to outside party (loss – total piecemeal amortized) (xx) (xx) (xx)
 of Depreciable assets (gain) (xx) (xx)
Piecemeal amortization (gain / remaining useful life) xx xx
Year of sale to outside party (gain – total piecemeal amortized) xx xx
 of Depreciable assets (loss) xx xx
Piecemeal amortization (loss / remaining useful life) (xx) (xx)
Year of sale to outside party (loss – total piecemeal amortized) (xx) (xx)
 of Non-depreciable assets (gain) (xx) (xx) (xx)
Year of sale to outside party (gain) xx xx xx
 of Non-depreciable assets (loss) xx xx xx
Year of sale to outside party (loss) (xx) (xx) (xx)
 of Non-depreciable assets (gain) (xx) (xx)
Year of sale to outside party (gain) xx xx
 of Non-depreciable assets (loss) xx xx
Year of sale to outside party (loss) (xx) (xx)
Adjusted Net Income of Subsidiary xx xx xx
Net Income of Parent (own operation) xx xx
Consolidated Net Income xx xx xx

Problem 1
Statement of financial position for Han Corporation and Solo Corporation before acquisition on December
31, 2016 are given below:
Han Corporation Solo Corporation
Cash and cash equivalent P 220,000 P 100,000
Inventory 100,000 60,000
Property and equipment 400,000 220,000
Goodwill 80,000 20,000
Total assets 800,000 P 400,000

Current liabilities P 150,000 P 100,000

Long-term liabilities 180,000 90,000
Share Capital 220,000 100,000
Share Premium 120,000 60,000
Retained Earnings 130,000 50,000
Total Equities P 800,000 P 400,000

Han Corporation purchased for cash 80% ownership of Solo Corporation on December 31, 2016, for
P200,000. On that date, Solo’s inventory had a fair value of P40,000, while its property and equipment had
a fair value of P50,000 more than the book value shown.

1. How much is the goodwill to be reported in the consolidated financial position?

2. How much is the value of NCI to be reported in the consolidated financial position?
 3. If in December 31, 2016, the NCI has a fair value of P48,000, how much should be reported as
goodwill to be reported in the consolidated financial position?
4. If in December 31, 2016, the NCI has a fair value of P40,000, how much should be reported as
goodwill to be reported in the consolidated financial position?

Problem 2
On January 2, 2017, Polo Corporation purchase 80 percent of Seed Company’s common stock for
P216,000. P10,000 of the total excess is attributable to goodwill and the balance to a depreciable asset
with an economic life of ten years. On the date of acquisition Seed reported common stock outstanding of
P80,000 and retained earnings of P140,000, and Polo reported common stock outstanding of P350,000
and retained eanings of P520,000.

On December 31, 2017, Seed reported comprehensive income of P35,000 and paid dividends of P15,000,
Polo reported comprehensive income from its separate operations of P95,000 and paid dividends of
P46,000.

1. How much is the consolidated net income to be reported by Polo?

2. How much is the NCI to be reported in the consolidated financial statement?
3. If, at the time of acquisition, NCI is valued equivalent to its proportionate share in the subsidiary’s
net assets, how much will be the balance of NCI to be reported in the consolidated financial
statement?

Problem 3
Parent Company owns 90% of Subsidiary Company stocks. During 2016, Parent purchased inventory for
P120,000 and sold 60% to Subsidiary for a 20% mark-up on cost. Subsidiary then sold 75% of this inventory
to their customers for a 30% mark-up on cost. Parent also has third-party customers which they sell goods
for a 20% gross profit rate. Parent’s Consolidated Balance Sheet reports inventory value of P20,000.
1. How much is the total Sales reported by Parent?
2. How much is the total Sales reported in the Consolidated Income Statement?
3. How much is eliminated in the Cost of Sales in Consolidation?

Problem 4
Pepsi Corporation purchased 70% of Sarsi Company’s voting stock on December 31, 2014, at underlying
book value. The companies reported the following data with respect to intercompany sales in 2015 and
2016:
Purchased Purchased Sold Sale Unsold at Year Sold to
Year by Price To Price End of year Outsiders
2015 Sarsi P 12,000 Pepsi P 18,000 P 4,500 2016
2016 Sarsi 9,000 Pepsi 13,500 3,000 2017
2016 Pepsi 14,000 Sarsi 28,000 11,000 2017

Pepsi reported operating income (excluding dividend income) of P16,000 and P22,000 in 2015 and 2016,
respectively. Sarsi reported operating income of P9,000 and P8,500 in 2015 and 2016, respectively.

1. What is the amount of consolidated comprehensive income attributable to parent for 2015?
2. What amount of inventory related to these transactions is to be reported in the consolidate statement
of financial position at December 31, 2016?
3. What amount of cost of goods sold related to these transactions is to be included in the consolidated
income statement for 2016?
4. What is the amount of consolidated comprehensive income for 2016?

Problem 5
Pal Corporation purchased 60 percent of the voting shares of Sea Company on December 31, 2014, at
underlying book value. Sea sells some of its output to Pal at 25 percent above cost. Selected information
on the operations of the companies over the past three years is as follows:
Sea Company Pal Corporation
Sales to Operating Inventory, Dec 31 Operating
Year Pal Corp Income Purchased from Sea Income

2015 97,600 48,800 34,160 73,200

2016 85,400 43,920 51,240 117,120
2017 109,800 78,080 58,560 146,400

Year Sea Company’s Pal Corporation’s Sea Company’s Pal Corporation’s

Total Sales Total Sales Total Cost of Sales Total Cost of Sales
2015 366,000 732,000 158,600 341,600
2016 488,000 915,000 195,200 451,400
2017 549,000 1,195,600 231,800 561,200

1. How much of the consolidated sales in 2015?

2. How much of the consolidated cost of sales in 2015?
3. How much of the consolidated net income is attributable to parent for 2015?
4. How much of the consolidated net income is attributable to NCI for 2015?
5. How much of the consolidated sales in 2016?
6. How much of the consolidated cost of sales in 2016?
7. How much of the consolidated net income is attributable to parent for 2016?
8. How much of the consolidated net income is attributable to NCI for 2016?

9. How much of the consolidated sales in 2017?

10. How much of the consolidated cost of sales in 2017?
11. How much of the consolidated net income is attributable to parent for 2017?
12. How much of the consolidated net income is attributable to NCI for 2017?

Problem 6
On January 1, 2014 (acquisition date), discrepancy between subsidiary interest and the implied value of
the subsidiary yielded an adjustment to subsidiary’s equipment for P100,000 with a remaining useful life of
5 years. Income information for 2016 taken from the separate company financial statement of Peras and
its 75% owned subsidiary, Star, is presented as follows:
Peras Star
Sales P 1,000,000 P 560,000
Loss on sale of building (20,000)
Dividend income 75,000
Cost of goods sold (500,000) (260,000)
Depreciation expense (100,000) (60,000)
Other operating expenses (200,000) (40,000)
Net income 275,000 180,000

Star’s loss on sale of building relates to a building with a historical cost of P112,000 that was sold to Peras
for 60,000 on July 1, 2016. Remaining useful life of the building is 10 years.

1. How much is Consolidated net income in 2016?

2. How much is the consolidated net income attributable to parent?
3. How much is the depreciation expense in the consolidated income statement?
4. How much should be the balance of Accumulated Depreciation of the Building in the consolidated
financial position?

Assume further that in December 31, 2017, the building was sold by Peras to an outside party for P53,000.
Net Income of Peras (including dividend income) amounted to P300,000 and Net Income of Star amounted
to P200,000. Peras and Star paid dividend amounting to P150,000 and P120,000, respectively.

5. How much is Consolidated net income in 2017?

6. How much is the consolidated net income attributable to parent?