Chapter 18 Consolidated Financial Statements (Part 3)

Multiple Choice Theory

1. B
2. A
3. C
4. A
Multiple Choice Computational
Answers at a glance:
1. D
11. B
2. A
12. C
3. C
13. A
4. D
14. D
5. C
15. A
6. D
16. B
7. D
17. B
8. D
18. D
9. A
19. C
10. B
20. B

21.
22.
23.
24.
25.
26.
27.
28.
29.
30.

A
D
A
B
C
B
D
A
B
D

31.
32.
33.
34.
35.
36.
37.
38.
39.
40.

C
B
A
B
B
D
A
C
A
D

41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.

C
A
A
C
A
D
D
B
C
A
B
A
C

Solutions:
1. D
Solutions:
Step 1: Analysis of effects of intercompany transaction

There are no intercompany transactions in the problem.

Step 2: Analysis of net assets
Acquisition Consolidation Net
date
date
change
Total equity at carrying amounts
296,000
376,000
Fair value adjustments at acquisition date 64,000
64,000
Subsequent depreciation of FVA
NIL
(40,000)*
Unrealized profits (Upstream only)
NIL
Subsidiary's net assets at fair value
360,000
400,000
40,000

XYZ, Inc.

62

* 32,000 depn. of FVA on inventory + 8,000 [(40,000 - 8,000) 4 yrs.]

depn. of FVA on equipment = 40,000
Step 3: Goodwill computation
Case #1: Formula #1 - NCI measured at proportionate share
300,000
Consideration transferred (5,000 sh. x 60)
72,000
Non-controlling interest in the acquiree (360K x20%) -(Step 2)
Previously held equity interest in the acquiree
372,000
Total
(360,000)
Fair value of net identifiable assets acquired (Step 2)
12,000
Goodwill at acquisition date
(4,000)
Accumulated impairment losses since acquisition date
8,000
Goodwill, net Dec. 31, 20x1
Step 4: Non-controlling interest in net assets
Case #1
400,000

XYZ's net assets at fair value Dec. 31, 20x1 (Step 2)

Multiply by: NCI percentage
Total

20%
80,000
80,000

Add: Goodwill attributable to NCI Dec. 31, 20x1 (Step 3)

Non-controlling interest in net assets Dec. 31, 20x1

Step 5: Consolidated retained earnings

Case #1
ABC's retained earnings Dec. 31, 20x1
Consolidation adjustments:

ABC's share in the net change in XYZ's net assets (a)

Unrealized profits (Downstream only)

Gain on extinguishment of bonds

Impairment loss on goodwill attributable to
parent (Step 3))
Net consolidation adjustments
Consolidated retained earnings Dec. 31, 20x1
(a)

440,000
32,000
(4,000)
28,000
468,000

Net change in XYZs net assets (Step 2) of 40,000 x 80% = 32,000.

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Case #1
240,000
80,000
320,000
Profits before adjustments
Consolidation adjustments:
Unrealized profits
Dividend income from subsidiary
Gain or loss on extinguishment
of bonds

Net consolidation adjustments

63

N/A

Profits before FVA

Depreciation of FVA (c)
Goodwill impairment (Step 3)
Consolidated profit
(c)

240,000
(32,000)
(4,000)
204,000

320,000
(40,000)
(4,000)
276,000

80,000
(8,000)
72,000

Shares in the depreciation of FVA: (40,000 x 80%); (40,000 x 20%)

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

Owners
ConsoliCase #1
of parent
NCI
dated
ABC's profit before FVA (Step 6)
240,000
N/A
240,000
(d)
64,000 16,000
80,000
Share in XYZs profit before FVA
Depreciation of FVA (Step 6)
(32,000) (8,000)
(40,000)
Share in goodwill impairment (Step 3)

Totals
(d)

(4,000)

(4,000)

268,000

8,000

276,000

Shares in XYZs profit before FVA (Step 6) (80,000 x 80%); (80,000 x 20%)

2. A
Solution:
Total assets of ABC Co.
Total assets of XYZ, Inc.
Investment in subsidiary
FVA, net (16K - 10K) (Step 2)
Goodwill, net (Step 3)
Effect of intercompany transaction
Consolidated total assets

Case #1
(proportionate)
1,672,000
496,000
(300,000)
24,000
8,000
1,900,000

3. C
Solution:
Case #1
(proportionate)

Share capital of ABC Co.

Share premium of ABC Co.
Consolidated retained earnings (Step 5)
Equity attributable to owners of the parent

Non-controlling interests (Step 4)

Consolidated total equity

680,000
260,000
468,000
1,408,000
80,000
1,488,000

4. D
Solution:
Step 1: Analysis of effects of intercompany transaction

There are no intercompany transactions in the problem.

64

Step 2: Analysis of net assets

Acquisition Consolidation Net
date
date
change
Total equity at carrying amounts
296,000
376,000
Fair value adjustments at acquisition date 64,000
64,000
Subsequent depreciation of FVA
NIL
(40,000)*
Unrealized profits (Upstream only)
NIL
Subsidiary's net assets at fair value
360,000
400,000
40,000

XYZ, Inc.

* 32,000 depn. of FVA on inventory + 8,000

[(40,000 - 8,000) 4 yrs.]

depn. of FVA on equipment = 40,000

Step 3: Goodwill computation

Case #2: Formula #2 - NCI measured at fair value
Consideration transferred (5,000 sh. x 60)
Less: Previously held equity interest in the acquiree
Total
Less: Parent's proportionate share in the net assets of
subsidiary (90,000 acquisition-date fair value x 80%)
Goodwill attributable to owners of parent Jan. 1, 20x1
Less: Parents share in goodwill impairment (4,000 x 80%)
Goodwill attributable to owners of parent Dec. 31, 20x1

Fair value of NCI (see given)

Less: NCI's proportionate share in the net assets of
subsidiary (360,000 acquisition-date fair value x 20%)
Goodwill attributable to NCI Jan. 1, 20x1
Less: NCIs share in goodwill impairment (4,000 x 20%)

Goodwill attributable to NCI Dec. 31, 20x1

Goodwill, net Dec. 31, 20x1

300,000
300,000
(288,000)

12,000
(3,200)
8,800
75,000
(72,000)
3,000
(800)
2,200
11,000

Step 4: Non-controlling interest in net assets

XYZ's net assets at fair value Dec. 31, 20x1 (Step 2)
Multiply by: NCI percentage
Total
Add: Goodwill attributable to NCI Dec. 31, 20x1 (Step 3)

Non-controlling interest in net assets Dec. 31, 20x1

65

Case #2
400,000

20%
80,000
2,200
82,200

Step 5: Consolidated retained earnings

Case #2
ABC's retained earnings Dec. 31, 20x1
Consolidation adjustments:

440,000

ABC's share in the net change in XYZ's net assets (a)

Unrealized profits (Downstream only)

32,000
-

Gain on extinguishment of bonds

Impairment loss on goodwill attributable to
parent (Step 3) (b)
Net consolidation adjustments

(3,200)
28,800
468,800

Consolidated retained earnings Dec. 31, 20x1

(a)

Net change in XYZs net assets (Step 2) of 40,000 x 80% = 32,000.

(b)

Again, goodwill impairment is attributed only to the parent if NCI is measured

at proportionate share (Case #1) while it is shared between the parent and NCI if
NCI is measured at fair value (Case #2).

Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Case #2
240,000
80,000
320,000
Profits before adjustments
Consolidation adjustments:
Unrealized profits
Dividend income from subsidiary
Gain or loss on extinguishment
of bonds

Net consolidation adjustments

Profits before FVA

Depreciation of FVA
Goodwill impairment (Step 3)
Consolidated profit

N/A

240,000
(32,000)
(3,200)
204,800

80,000
(8,000)
(800)
71,200

320,000
(40,000)
(4,000)
276,000

5. C
Solution:
Total assets of ABC Co.
Total assets of XYZ, Inc.
Investment in subsidiary
FVA, net (16K - 10K) (Step 2)
Goodwill, net (Step 3)
Effect of intercompany transaction
Consolidated total assets

66

Case #2
(fair value)
1,672,000
496,000
(300,000)
24,000
11,000
1,903,000

6. D
Solution:
Case #2
(fair value)
680,000
260,000
468,800
1,408,800
82,200
1,491,000

Share capital of ABC Co.

Share premium of ABC Co.
Consolidated retained earnings (Step 5)
Equity attributable to owners of the parent

Non-controlling interests (Step 4)

Consolidated total equity

7. D None. The transaction is accounted for as equity transaction

because it does not result to loss of control.
8. D None. The transaction is accounted for as equity transaction
because it does not result to loss of control.
9. A
Solution:
%
Before the transaction
80%
After the transaction
100%
Change Inc./ (Decrease)

Owners
of parent
320,000
400,000
80,000

%
20%
-

NCI
80,000
(80,000)

Net assets
of XYZ
400,000 a
400,000
-

This represents the fair value of XYZs net assets on December 31, 20x1
(360,000 fair value on acquisition date + 40,000 increase during the year).
Jan.
1,
20x2

NCI (the decrease computed above)

Retained earnings ABC Co. (squeeze)
Investment in subsidiary

80,000
40,000
120,000

10. B
Solution:
%
Before the transaction
80%
After the transaction
100%
Change Inc./ (Decrease)

Owners
of parent
332,000
415,000
83,000

%
20%
-

NCI
83,000
(83,000)

Net assets
of XYZ
415,000 b
415,000
-

When NCI is measured at fair value, the subsidiarys net assets is grossed
up to reflect the goodwill attributable to the NCI (83,000 NCI 20% =

415,000).
Jan.
1,
20x2

NCI (the decrease computed above)

Retained earnings ABC Co. (squeeze)
Investment in subsidiary
67

83,000
37,000
120,000

11. B
Solution:
%
Before the transaction 80%
92%
After the transaction
Change Inc./ (Decrease)

Owners of
parent

320,000
368,000
48,000

NCI

Net assets
of XYZ

20%
8%

80,000
32,000
(48,000)

400,000
400,000
-

The direct adjustment in equity is determined as follows:

Case #1
(proportionate)
Fair value of consideration
80,000
Change in NCI (see table above)
(48,000)
Direct adjustment to equity
32,000
12. C
Solution:
%

Owners
of parent

Before the transaction 80%

92%
After the transaction
Change Inc./ (Decrease)

332,000
381,800
49,800

NCI

Net assets
of XYZ

20%
8%

83,000
33,200
(49,800)

415,000*
415,000
-

*The net assets is grossed up as follows (20,750 NCI 20% = 103,750).

Case #2
(fair value)
80,000
(49,800)
30,200

Fair value of consideration

Change in NCI (see table above)
Direct adjustment to equity
13. A
Solution:
%

Owners
of parent

Before the transaction 80%

70%
After the transaction
Change Inc./ (Decrease)

Fair value of consideration

Change in NCI (see table above)
Direct adjustment to equity

320,000
280,000
(40,000)

NCI

20%
30%

80,000
120,000
40,000

Case #1
(proportionate)
80,000
(40,000)
40,000

68

Net assets
of XYZ

400,000
400,000
-

14. D
Solution:
Owners
of parent

%
Before the transaction 80%
70%
After the transaction
Change Inc./ (Decrease)

332,000
290,500
(41,500)

NCI

20%
30%

83,000
124,500
41,500

Net assets
of XYZ

415,000
415,000
-

*The net assets is grossed up as follows: (83,000 NCI 20% = 415,000).

Case #2
(fair value)
80,000
(41,500)
38,500

Fair value of consideration

Change in NCI (see table above)
Direct adjustment to equity

15. A
Solution:
The change in ABCs ownership interest in XYZ is determined as
follows:
Shares held by ABC
Outstanding shares of XYZ
a

Before
issuance
40,000
50,000

80%

After
issuance
40,000
a
60,000

%
66.67%

(50,000 + 10,000 additional shares issued to NCI = 60,000)

%
Before the transaction
80%
After the transaction
66.67%
Change Inc./ (Decrease)
b

Owners of
parent

320,000
333,332
13,332

%
NCI
20%
80,000
33.33% 166,668

86,668

100,000 + 25,000 proceeds from issuance of additional shares.

The direct adjustment in equity is determined as follows:

Case #1
(proportionate)
Fair value of consideration
100,000
Change in NCI (see table above)
(86,668)
Direct adjustment to equity
13,332

69

Net assets
of XYZ

400,000
500,000

100,000

16. B
Solution:
Owners
of parent
%
NCI
332,000
83,000
Before the transaction
80%
20%
After the transaction
66.67% 343,332 33.33% 171,668
11,332
88,668
Change Inc./ (Decrease)
%

c
d

Net assets
of XYZ

415,000 c
515,000 d
100,000

The net assets is grossed up as follows: (83,000 NCI 20% = 415,000).

(415,000 + 100,000 proceeds from issuance of additional shares = 515,000).

The direct adjustment in equity is determined as follows:

Case #2
(fair value)
100,000
(88,668)
11,332

Fair value of consideration

Change in NCI (see tables above)
Direct adjustment to equity

17. B
Solution:
Step 1: We will identify the carrying amounts of XYZs assets and
liabilities in the consolidated financial statements as at the date
control was lost.
Statements of financial position
As at January 1, 20x2
ABC Co. XYZ, Inc.
ASSETS
Cash
Accounts receivable
Inventory
Investment in subsidiary
Equipment

(a)

Consolidated
(b)

92,000
300,000
420,000
300,000
800,000
Accumulated depreciation (240,000)
Goodwill
1,672,000
TOTAL ASSETS

228,000
320,000
88,000
388,000
60,000
480,000
200,000 1,040,000
(80,000) (336,000)
12,000
496,000 1,904,000

LIABILITIES AND EQUITY

172,000
Accounts payable
120,000
Bonds payable
292,000
Total liabilities
680,000
Share capital
260,000
Share premium
440,000
Retained earnings

120,000
120,000
200,000
176,000

70

292,000
120,000
412,000
680,000
260,000
472,000

Carrying amount
of XYZs net
assets
(c) = (b) (a)

228,000
88,000
60,000
240,000
(96,000)
520,000

120,000
120,000
-

80,000
Non-controlling interest
1,380,000 376,000 1,492,000
Total equity
TOTAL LIAB. & EQTY. 1,672,000 496,000 1,904,000

400,000
-

The consolidated retained earnings pertains to the parent only. Thus, no

retained earnings is allocated to XYZ.

Step 2: We will prepare the deconsolidation journal entries (DJE):

DJE #1: To recognize the gain or loss on the disposal of controlling interest.
Jan.
1,
20x2

Cash ABC Co. (Consideration received)

Investment in associate (Investment retained)
Accounts payable XYZ, Inc.
Accumulated depreciation XYZ, Inc.
Non-controlling interest
Cash XYZ, Inc.
Accounts receivable XYZ, Inc.
Inventory XYZ, Inc.
Equipment XYZ, Inc.
Goodwill

400,000
100,000
120,000
96,000
80,000
228,000
88,000
60,000
240,000
12,000
168,000

Gain on disposal (squeeze)

18. D
Solution:
Jan. Cash ABC Co. (Consideration received)

1,
20x2

400,000

Held for trading securities (Investment retained) 100,000

Non-controlling interest
Net identifiable assets a (see given)
Goodwill

82,400

Gain on disposal (squeeze)

a

412,000
12,000
158,400

Net identifiable assets is also excess of total assets over total liabilities.

19. C
Solution:
Total assets of Dad before the combination
Investment in subsidiary
Total assets of Dad after the combination

4,000,000
1,000,000
5,000,000

20. B
Solution:
Total assets of Dad after the combination (see above)
5,000,000
Total assets of Son (carrying amount)
1,600,000
Investment in subsidiary
(1,000,000)
FVA on assets (430K fair value 400K carrying amount)
120,000
Goodwill net [1M + (920K x 20% NCI)] 920
264,000
Effect of intercompany transactions (intercompany receivable)
(80,000)

71

Consolidated total assets

5,904,000

21. A
Solution:
Analysis of net assets
Acquisition Consolidation
Net
date
date
change

Nymph Co.
Share capital (100,000 sh. x 4)

Retained earnings
Totals at carrying amounts
FVA on investment property a
FVA on building

Subsequent depreciation of FVA b

Subsidiary's net assets at fair value

400,000
320,000
720,000
80,000
120,000
NIL
920,000

400,000
1,120,000
1,520,000
560,000
120,000
(48,000)
2,152,000 1,232,000

FVA on acquisition date (800,000 - 720,000 = 80,000); FVA on June 30,

20x3 (1,280,000 - 720,000 = 560,000). These FVAs are not subsequently
depreciated because depreciation is prohibited under the fair value model.
b

The depreciation of FVA pertains only to the building (see discussion above)
(120,000 x 2/5 = 48,000).

Goodwill at current year

Formula #2:
Consideration transferred (75,000 sh. x 16)
Less: Previously held equity interest in the acquiree
Total
Less: Parent's proportionate share in the net assets of
subsidiary (920,000 acquisition-date fair value x 75%)
Goodwill attributable to owners of parent acquisition date

1,200,000
1,200,000

(690,000)
510,000
Less: Parents share in goodwill impairment (80,000 x 75%) (60,000)
Goodwill attributable to owners of parent current year
450,000

Fair value of NCI (25,000 sh. x 14)

Less: NCI's proportionate share in the net assets of
subsidiary (920,000 acquisition-date fair value x 25%)
Goodwill attributable to NCI acquisition date
Less: NCIs share in goodwill impairment (80,000 x 25%)

Goodwill attributable to NCI current year

Goodwill, net current year

350,000
(230,000)
120,000
(20,000)
100,000
550,000

22. D
Solution:
Nymph's net assets at fair value 6/30/x3 (see Analysis above) 2,152,000

Multiply by: NCI percentage

Total

25%
538,000

72

100,000
638,000

Add: Goodwill attributable to NCI 6/30/x3 (see above)

Non-controlling interest in net assets June 30, 20x3

23. A
Solution:
Cockroach's retained earnings 6/30/x3
2,000,000
Consolidation adjustments:
Share in the net change in Nymph's net assets (a)
924,000
Cockroach's share in goodwill impairment
(60,000)
864,000
Net consolidation adjustments
2,864,000
Consolidated retained earnings June 30, 20x3
(a)

Net change in Nymphs net assets (see Analysis) 1,232,000 x 75% =

924,000.

24. B
Solution:
Total assets of Cockroach
Total assets of Nymph
Investment in subsidiary
Fair value adjustments net
Goodwill net

4,000,000
2,000,000
(1,200,000)
632,000
(560K + 120K 48K) see Analysis
550,000
(40,000)
Effect of intercompany transactions (Intercompany receivable)
5,942,000
Consolidated total assets

25. C
Solution:
Share capital of Cockroach
Share premium of Cockroach
Consolidated retained earnings
Equity attributable to owners of the parent
Non-controlling interests
Consolidated total equity

1,200,000
2,864,000
4,064,000
638,000
4,702,000

26. B
Solution:
Analysis of net assets
Acquisition Consolidation
Net
date
date
change

Bunny Co.

(Jan. 1, 20x3) (Dec. 31, 20x3)

Share capital

Retained earnings
Totals at carrying amounts
Fair value adjustments
Subsequent depreciation of FVA
Subsidiary's net assets at fair value

73

400,000
320,000
720,000
NIL
720,000

400,000
1,120,000
1,520,000
( - )
1,520,000

800,000

Goodwill at current year

Formula #2:
Consideration transferred
Less: Previously held equity interest in the acquiree
Total
Less: Parent's proportionate share in the net assets of
subsidiary (720,000 acquisition-date fair value x 75%*)
Goodwill attributable to owners of parent Jan. 1, 20x3
Less: Parents share in goodwill impairment
Goodwill attributable to owners of parent Dec. 31, 20x3

800,000
400,000
1,200,000
(540,00)
660,000
( - )
660,000

Fair value of NCI

Less: NCI's proportionate share in the net assets of
subsidiary (720,000 acquisition-date fair value x 25%)
Goodwill attributable to NCI Jan. 1, 20x3
Less: NCIs share in goodwill impairment
Goodwill attributable to NCI Dec. 31, 20x3

220,000
(180,000)
40,000
( - )
40,000

Goodwill, net Dec. 31, 20x3

700,000

* (40% previous interest + 35% additional interest acquired on Jan. 1, 20x3)

27. D
Solution:
1,520,000
25%
380,000
40,000
420,000

Bunny's net assets at fair value 12/31/x3 (see Analysis above)

Multiply by: NCI percentage

Total
Add: Goodwill attributable to NCI 6/30/x3 (see above)

Non-controlling interest in net assets Dec. 31, 20x3

28. A
Solution:
Rabbit's retained earnings 12/31/x3
Consolidation adjustments:

2,000,000

Rabbits share in the net change in Bunny's net assets (a)600,000

Rabbit's share in goodwill impairment

Net consolidation adjustments
Consolidated retained earnings Dec. 31, 20x3
(a)

)
600,000
2,600,000

Net change in Bunnys net assets (see Analysis) 800,000 x 75% = 600,000.

29. B
Solution:
Total assets of Rabbit
Total assets of Bunny
Investment in subsidiary (800,000 + 400,000)

74

4,000,000
2,000,000
(1,200,000)

Fair value adjustments net

Goodwill net
Effect of intercompany transactions
Consolidated total assets

700,000
5,500,000

30. D
Solution:
Share capital of Rabbit
Share premium of Rabbit
Consolidated retained earnings
Equity attributable to owners of the parent
Non-controlling interest
Consolidated total equity

1,200,000
2,600,000
3,800,000
420,000
4,220,000

31. C
Solution:
Owners
of parent
866,000
525,000 b

Sheep's profit before FVA

Share in Lambs profit before FVA

Depreciation of FVA

a
b

NCI
N/A
175,000
( - )
a
(8,000)

Share in impairment of goodwill

( - )
(24,000)

Totals

1,367,000 167,000

squeeze
start

Shares in impairment of goodwill: (8,000 x 75%); (8,000 x 25%)

(175,000 25%) = 700,000 Lambs separate profit x 75% = 525,000.

32. B (1,367,000 + 167,000 see computations above) = 1,534,000

33. A (See solution above)
34. B (See Step 1.ii below)
Solutions:
Step 1: Analysis of effects of intercompany transaction
The following are the intercompany transactions during the period:
i. In-transit item (Transaction a)
ii. Intercompany sale of inventory (Transactions b and c)
iii. Intercompany sale of equipment (Transaction d)
iv. Intercompany bond transaction (Transactions e)
v. Intercompany dividend transaction (Transactions f)
i. In-transit item

75

The 4,000 check deposited to Peters account is a valid payment for

Simons account. Therefore, Simons 8,000 account payable to
Peter need not be adjusted.
However, since Peter failed to record the payment, Peters 12,000
accounts receivable from Simon must be adjusted. As to Peter, the
deposit is a bank credit memo.
The adjusting journal entry (AJE) in Peters books is as follows:
Dec.
Cash in bank
4,000
31,
Accounts receivable
4,000
20x1

Unlike CJEs, AJEs are recorded in the separate books. The

remaining balance of 8,000 in the intercompany account
receivable/account payable shall be eliminated through CJE.
Summary of effects on the consolidated financial statements:
Cash: increased by 4,000.

Accounts receivable: decreased by 12,000 (3,000 AJE + 8,000

CJE).

Accounts payable: decreased by 8,000

ii. Intercompany sale of inventory

Transaction (b) is downstream while transaction (c) is upstream.
The unrealized profits in ending inventory are determined as follows:
Downstream Upstream

Sale price of intercompany sale

Cost of intercompany sale
Profit from intercompany sale

60,000
(40,000)
20,000
1/2
10,000

26,000

The related consolidated accounts are computed as follows:

Ending inventory of Peter Co.
Ending inventory of Simon Co.
Less: Unrealized profit in ending inventory
Consolidated ending inventory

440,000
268,000
(26,000)
682,000

Multiply by: Unsold portion as of yr.-end

Unrealized gross profit

128,000
(80,000)
48,000
1/3
16,000

Total

Sales by Peter Co.

Sales by Simon Co.
Less: Intercompany sales during 20x1 (128,000 + 60,000)
Consolidated sales

76

3,728,000
1,020,000
(188,000)
4,560,000

Before we can compute for the consolidated cost of sales, we need to

determine first the depreciation of FVA in 20x1.
FVA on inventory
24,000
16,000
FVA on equipment, net (20,000 5 years)
FVA on patent (20,000 8 years)
10,000
50,000
Depreciation of FVA in 20x1
The consolidated cost of sales is computed as follows:
Cost of sales of Peter Co.
Cost of sales of Simon Co.
Less: Intercompany sales during 20x1
Add: Unrealized profit in ending inventory
Add: Depreciation of FVA on inventory (see computation
above)

Consolidated cost of sales

1,700,000
472,000
(188,000)
26,000
24,000
2,034,000

iii. Intercompany sale of property, plant and equipment

Transaction (d) is upstream. The effects of this transaction are
analyzed as follows:
a)

Unamortized balance of deferred gain (loss) on December 31, 20x1:

Sale price
Carrying amount of equipment on Jan. 1, 20x1

Loss on sale of equipment Jan. 1, 20x1

Multiply by: Ratio of useful life at beg. and end of yr.
Unamortized balance of deferred loss Dec. 31, 20x1
b)

20,000
(24,000)
(4,000)
4/5
(3,200)

Effect on the 20x1 depreciation:

Because of the sale

Peter recognized
depreciation of
4,000 in 20x1

Had there been no sale

Simon should have
recognized depreciation
of 4,800 in 20x1

(20,000 purchase
price 5 yrs.).

(24,000 carrying
amount 5 yrs.).

Effect on combined FS
Depreciation is
understated by 800.

The related consolidated accounts are computed as follows:

Equipment, net Parent
2,576,000
Equipment, net Subsidiary
108,800
Unamortized balance of deferred loss*
3,200
64,000
FVA on equipment, net (80,000 beg. - 16,000 dep'n of FVA)
Consolidated equipment net
2,752,000
*The deferred loss is added because both loss and equipment have a normal debit
balance. Debit and debit results to addition.

Depreciation Peter
Depreciation Simon
Understatement in depreciation

644,000
27,200
800
77

16,000
688,000

Depreciation of FVA on equipment (see computation above

Consolidated depreciation

The 4,000 loss on sale recognized by Simon shall be eliminated in

the consolidated statement of profit or loss.
We need to recognize also the unrecorded patent net of
accumulated amortization.
Patent (unrecognized) (see given)
80,000
Less: Amortization of FVA on patent (see computation above) (10,000)
Consolidated patent net
70,000
A patent amortization expense of 10,000 shall be recognized in
the consolidated financial statements
iv. Intercompany bond transaction
The effects Transaction (e) are analyzed as follows:
a) Gain or loss on extinguishment of bonds:
Carrying amount of bonds payable acquired (400,000 x 50%) 200,000
Acquisition cost of bonds (assumed retirement price)
(240,000)
Loss on extinguishment of bonds
(40,000)
b) Intercompany interest expense and interest income:
Peter paid Simon interest of 10,000 (400K x 50% x 10% x 6/12).
However, Simons interest income is only 8,000 (see Statement of profit
or loss above). The 2,000 difference must be an amortization of the
premium on the investment in bonds. Nonetheless, both Peters
interest expense of 10,000 and Simons interest income of 8,000
shall be eliminated in the consolidated financial statements together
with the related bonds payable and investment in bonds.
Summary of effects on the consolidated financial statements:
Loss on extinguishment of bonds: recognize 40,000.
Interest expense: decreased by 10,000.
Interest income: eliminated

Investment in bonds: eliminated

Bonds payable: decreased by 200,000

v. Intercompany dividend transaction Transaction (f)

The dividends declared by Simon are allocated as follows:
Total dividends declared
Allocation:
Owners of the parent (80,000 x 90%)
Non-controlling interest (80,000 x 10%)

78

80,000
72,000
8,000

As allocated

80,000

Peters 72,000 dividend income shall be eliminated in the

consolidated financial statements.
No consolidation adjustment is needed for the dividends declared by
Peter because the dividends pertain solely to the owners of the parent.

Step 2: Analysis of net assets

Acquisition Consolidation Net
date
change
date
Net assets at carrying amounts
336,000
636,800
Fair value adjustments at acquisition date
184,000
184,000
Subsequent depreciation of FVA a
NIL
(50,000)
Unrealized profit (Upstream) - (Step 1.ii)
NIL
(10,000)
Unamortized def. loss (Upstream) - (Step
3,200
1.ii)
Interest income (Step 1.iv)
(8,000)
Subsidiary's net assets at fair value
520,000
756,000 236,000

Simon Co.

See computation in Step 1.ii.

The unrealized profit on upstream sale on inventory, unamortized

deferred loss on upstream sale of equipment and interest income on
investment in bonds were closed to Simons retained earnings by
year-end. These are eliminated through addition or subtraction, as
appropriate.
Step 3: Goodwill computation
We will use Formula #2 because NCI is measured at fair value.
Consideration transferred (see given)
Previously held equity interest in the acquiree
Total
Less: Parent's proportionate share in the net assets of
subsidiary (520,000 acquisition-date fair value x 90%)
Goodwill attributable to owners of parent Jan. 1, 20x1

488,000
488,000

(468,000)
20,000
c
(7,200)
Less: Parents share in goodwill impairment (8,000 x 90%)
Goodwill attributable to owners of parent Dec. 31, 20x1
12,800
Fair value of NCI (see given)
Less: NCI's proportionate share in the net assets of
subsidiary (520,000 acquisition-date fair value x 20%)
Goodwill attributable to NCI Jan. 1, 20x1
Less: NCIs share in goodwill impairment (8,000 x 10%) c
Goodwill attributable to NCI Dec. 31, 20x1
Goodwill, net Dec. 31, 20x1

60,000
(52,000)
8,000
(800)
7,200
20,000

79

The problem states that goodwill was impaired by 8,000. The impairment
is shared between the parent and NCI because NCI is measured at fair
value.

Step 4: Non-controlling interest in net assets

Simon's net assets at fair value Dec. 31, 20x1 (Step 2)
Multiply by: NCI percentage
Total
Add: Goodwill to NCI net of accumulated impairment (Step 3)
Non-controlling interest in net assets Dec. 31, 20x1
Step 5: Consolidated retained earnings
Peter's retained earnings Dec. 31, 20x1
Consolidation adjustments:

756,000
10%
75,600
7,200
82,800

1,780,000

Peter's share in the net change in Simon's net assets (a) 212,400

Unrealized profits (Downstream only) - (Step 1.ii)

(16,000)
Loss on extinguishment of bonds - (Step 1.iv)
(40,000)
Intercompany interest expense - (Step 1.iv)
10,000
Peters share in goodwill impairment - (Step 3)
(7,200)
Net consolidation adjustments
159,200
Consolidated retained earnings Dec. 31, 20x1
1,939,200
(a)

Net change in Simons net assets (Step 2) of 236,000 x 90% = 212,400.

The deferred loss on the sale of equipment is not included in the

computations above because the sale is upstream.
Step 6: Consolidated profit or loss
Profits before adjustments
Consolidation adjustments:
Unrealized profits - (Step 1.ii)
Unamortized def. loss - (Step 1.iii)
Loss on bonds - (Step 1.iv)
Interest exp./income - (Step 1.iv)
Dividend income - (Step 1.v)
Net consolidation adjustments

Profits before FVA

Depreciation of FVA (b)
Impairment of goodwill - (Step 3)
Consolidated profit
(b)

Parent Subsidiary
1,160,000
380,800
(16,000)
(40,000)
10,000
(72,000)
(118,000)
1,042,000
(45,000)
(7,200)
989,800

Consolidated
1,540,800

(10,000)
3,200
(8,000)
N/A
(14,800)
366,000
(5,000)
(800)
360,200

Shares in the depreciation of FVA: (50,000 x 90%); (50,000 x 10%)

80

(26,000)
3,200
(40,000)
2,000
(72,000)
(132,800)
1,408,000
(50,000)
(8,000)
1,350,000

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

Owners
Consoliof parent
NCI
dated
Peter's profit before FVA - (Step 6) 1,042,000
N/A 1,042,000
(c)
329,400 36,600
366,000
Share in Simons profit before FVA
Depreciation of FVA - (Step 6)
(45,000) (5,000)
(50,000)
Impairment of goodwill - (Step 6)

Totals

(7,200)

(800)

(8,000)

1,319,200

30,800

1,350,000

(c)

Shares in Simons profit before FVA (Step 6): (366,000 x 90%); (366,000 x
10%)

The consolidated financial statements are prepared as follows:

Peter Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS
Cash (1,448,000 + 85,200 + 4,000 Step 1.i)
1,537,200
Accounts receivable (712,000 + 20,000 - 12,000 Step 1.i)
720,000
Inventory (Step 1.ii)
682,000
Investment in bonds (eliminated - Step 1.iv)
Investment in subsidiary (eliminated)
Equipment, net (Step 1.iii)
2,752,000
Patent (Step 1.iii)
70,000
Goodwill, net (Step 3)
20,000
TOTAL ASSETS
5,781,200
LIABILITIES AND EQUITY
Accounts payable (367,200 + 284,000 - 8,000 Step 1.i)
10% Bonds payable (400,000 - 200,000 Step 1.iv)
Total liabilities
Share capital (Parent only)
Retained earnings (Step 5)
Equity attributable to owners of parent
Non-controlling interest (Step 4)
Total equity
TOTAL LIABILITIES AND EQUITY

359,200
200,000
559,200
3,200,000
1,939,200
5,139,200
82,800
5,222,000
5,781,200

Peter Group
Statement of profit or loss
For the year ended December 31, 20x1
Sales (Step 1.ii)
Cost of goods sold (Step 1.ii)

4,560,000
(2,034,000)

81

2,526,000
(400,000)
(688,000)
(30,000)
(10,000)
(40,000)
(8,000)
1,350,000

Gross profit
Interest income (eliminated - Step 1.iv)
Distribution costs
Depreciation expense (Step 1.iii)
Loss on sale of equipment (eliminated - Step 1.iv)
Interest expense (10,000 - 2,500 Step 1.iv)
Dividend income (eliminated - Step 1.v)
Amortization expense on patent (Step 1.iii)
Loss on extinguishment of bonds (Step 1.iv)
Impairment loss on goodwill (Step 3)
Profit for the year

Reconciliation using formulas:

Total assets of Peter Co.
Total assets of Simon Co.
Investment in subsidiary
Fair value adjustments, net (184,000 beg. 50,000 depreciation)

Goodwill net
Effects of intercompany transactions:
Current accounts (elimination of account receivable)
Inventory transactions (unrealized profit in ending inventory)
Equipment transaction (unamortized balance of deferred loss)
Bond transaction (carrying amount of investment in bonds)
Consolidated total assets

5,664,000
720,000
(488,000)
134,000
20,000
(8,000)
(26,000)
3,200
(238,000)
5,781,200

Total liabilities of Peter Co.

Total liabilities of Simon Co.
Fair value adjustments, net
Effect of intercompany transactions:
Current accounts (elimination of account payable)
Bond transaction (carrying amount of bonds payable)
Consolidated total liabilities

(8,000)
(200,000)
559,200

Share capital of Peter Co.

Consolidated retained earnings (Step 5)
Equity attributable to owners of the parent
Non-controlling interest (Step 4)
Consolidated total equity

3,200,000
1,939,200
5,139,200
82,800
5,222,000

35. B (See Step 1.ii above)

36. D (See Step 1.ii above)

82

684,000
83,200
-

37. A (See Step 3 above)

38. C (See Step 4 above)
39. A (See Step 5 above)
40. D (See Step 6 above)
41. C (See Step 7 above)
42. A (See F/S or Reconciliations above)
43. A (See F/S or Reconciliations above)
44. C
Solutions:
All of Big Co.s shares were exchanged
The substance of the transaction is analyzed as follows:
Analyses:
Big Co. lets itself be acquired (legal form) for it to gain control
over the legal acquirer (substance).
Legal form of the agreement: (Big lets itself be acquired)
Small Co. issues 150 ordinary shares (2.5 x 60) in exchange for all of
Bigs 60 shares outstanding.
Substance of the agreement: (Big gains control over legal acquirer)
After the combination, Big gains control because it now owns 60% of
Small Co.
Accounting acquiree (Small Co.) issues shares Actual (Legal):
Small Co.'s currently issued shares
100 40%
Shares to be issued to Big Co. (2.5 sh. x 60 sh.)
150 60%
Total shares of Small Co. after the combination
250
Accounting acquirer (Big Co.) issues shares Reverse (Substance):

Big Co.'s currently issued shares

Shares to be issued to Small Co.'s shareholders to
enable them to have the same interest in Big Co.
[(60 60%) x 40%]

Total
The consideration transferred is computed as follows:
Shares of Big effectively transferred to Small
Multiply by: Fair value per share of Bigs shares
83

60

60%

40
100

20%

40
480

19,200

Fair value of consideration effectively transferred

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred
19,200
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
19,200
Fair value of net identifiable assets acquired (24,000 8,400)
(15,600)
Goodwill
3,600
The consolidated share capital is computed as follows:
Share capital of Big Co. before the reverse acquisition
Add: Consideration transferred
Consolidated share capital

7,200
19,200
26,400

The consolidated retained earnings are computed as follows:

Retained earnings of Big Co. before the reverse acquisition 16,800
Consolidated retained earnings
16,800
The consolidated statement of financial position immediately after the
business combination is shown below:
Small Co.

Big Co.

(legal parent, (legal acquiree,

accounting
accounting
acquiree)
acquirer)

Identifiable assets
Goodwill
Total assets
Liabilities
Share capital:
100 ordinary shares
60 ordinary shares
250 ordinary shares
(7,200 + 19,200)
Retained earnings
Total liabilities and equity

Small Co.
(Consolidated FS
in the name of the
legal parent)

21,600

44,400

21,600

44,400

68,400*
3,600
72,000

7,400

20,400

28,800

3,600
7,200
9,600
21,600

16,800
44,400

26,400
16,800
72,000

*24,000 fair value + 44,400 = 68,400

The equity structure appearing in the consolidated financial
statements (i.e., the number and type of equity interests issued)
reflects the equity structure of Small Co. (the legal parent), including
the equity interests issued by Small Co. to effect the combination, i.e.,
100 sh. + 150 sh.
45. A (See solution above)

84

46. D (See solution above)

47. D (See solution above)
48. B (See solution above)
Case #2: (Refer to fact pattern) Only 54 of Big Co.s shares were
exchanged for Small Co.s shares.
49. C
Solutions:
Only 54 of Big Co.s shares were exchanged
The substance of the transaction is analyzed as follows:
Accounting acquiree (Small Co.) issues shares Actual (Legal):
Small Co.'s currently issued shares
100 42.55%
Shares to be issued to Big Co. (2.5 sh. x 54 sh.)
135 57.45%
Total shares of Small Co. after the combination
235
Accounting acquirer (Big Co.) issues shares Reverse (Substance):
Big Co.'s shares exchanged for Small Co.s shares (given)
Shares to be issued to Small Co.'s shareholders to enable
them to have the same interest in Big Co.
[(54 57.45%) x 42.55%]

Total
The consideration transferred is computed as follows:
Shares of Big effectively transferred to Small
Multiply by: Fair value per share of Bigs shares
Fair value of consideration effectively transferred

54

57.45%

40
94

42.55%
100%

40
480
19,200

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred
19,200
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
19,200
Fair value of net identifiable assets acquired (24,000 8,400)
(15,600)
Goodwill
3,600
Notes:
) Goodwill computation is not affected if some of the accounting
acquirers shareholders do not exchange their shares with the
accounting acquirees shares.
) However, non-controlling interest arises if not all of the
accounting acquirers shares are exchanged.

85

The non-controlling interest is computed as follows:

Total shares of Big Co. before the acquisition
60
Shares of Big Co. exchanged with Small Co.'s shares
(54)
Shares of Big Co. not exchanged with Small Co.'s shares
6
The controlling and NCI effective interests are computed as follows:
Controlling interest (54 sh. 60 sh.)
90%
NCI (6 sh. 60 sh.)
10%
Big Co.'s total equity before acquisition
Multiply by: NCI %
Non-controlling interest

24,000
10%
2,400

The consolidated share capital is computed as follows:

Share capital of Big Co. before the reverse acquisition
Multiply by: Controlling interest %
Total
Add: Consideration transferred
Consolidated share capital

7,200
90%
6,480
19,200
25,680

The consolidated retained earnings are computed as follows:

Retained earnings of Big Co. before the reverse
acquisition

Multiply by: Controlling interest %

Consolidated retained earnings

16,800
90%
15,120

The consolidated statement of financial position immediately after the

business combination is shown below:
Small Co.

Big Co.

(legal parent, (legal acquiree,

accounting
accounting
acquiree)
acquirer)

Identifiable assets
Goodwill
Total assets
Liabilities
Share capital:
100 ordinary shares
60 ordinary shares
235 ordinary shares
(6,480 + 19,200)
Retained earnings
Non-controlling interest
Total liabilities and equity

Small Co.
(Consolidated FS
in the name of the
legal parent)

21,600

44,400

21,600

44,400

68,400
3,600
72,000

8,400

20,400

28,800

3,600
7,200
9,600

16,800

21,600

44,400

50. A (See solutions above)

86

25,680
15,120
2,400
72,000

51. B (See solutions above)

52. A (See solutions above)
53. C (See solutions above)

87