BUSINESS

COMBINATIONS
CONSOLIDATED FINANCIAL STATEMENTS – SUBSEQUENT TO THE DATE OF
ACQUISITION
What to account for?

1. Income
2. Dividend declaration and payment
3. Amortization of asset over/undervaluation
4. Impairment of goodwill
5. Intercompany transactions
• Inventory
• Fixed Assets

DATE OF ACQUISITION YEAR 1 YEAR 2

Flow Summary CONSOLIDATIO
NNO ELIMINATION
ACQUIREE ENTRIES
NET INCOME LIABILITY CONSOLIDATION IS
DIVIDENDS INVESTMENT AUTOMATIC
OTHER LOSS ON SALE ORDINARY SHARES
TRANSACTIONS ASSETS RETAINED EARNINGS
ACQUIRER INVT IN
GAIN ON
ASSETS SALE SUBSIDIARY
GOODWILL NCI
EQUITY
Net Asset LIABILITY GAIN ON SALE ASSETS (UV)
Acquisitio EQUITY LOSS ON GOODWILL
Business n GAIN ON SALE INVT IN
Combinati PURCHASE SUBSIDIARY
Stock INVESTMENT IN CASH
on INVESTMENT NCI
Acquisitio SUBSIDIARY INVESTMENT GAIN ON
n CASH SHARE PREMIUM DIVIDEND INCOME
PURCHASE
SHARES ORDINARY NCI
SHARE SHARES DIVIDEND
PREMIUM SHARE DECLARATION
NET INCOME PREMIUM
NET INCOME EXPENSE/COGS
DIVIDENDS
DIVIDENDS ASSET/CONTRA-
OTHER
OTHER ASSET
TRANSACTIONS
TRANSACTIONS
NCI IN NET INCOME
NCI
Consolidation - Accounting Procedures

• Combine like items of assets, liabilities, equity, income, expenses

and cash flows of the parent with those of its subsidiaries
• Eliminate the carrying amount of the parent’s investment in each
subsidiary and the parent’s portion of equity of each subsidiary
• Eliminate in full intercompany assets and liabilities, equity, income,
expenses and cash flows relating to transactions between entities of
the group
CONTROL

a) Power over the investee;

b) Exposure, or rights, to variable returns from its investment with
the investee; AND
c) The ability to use its power over the investee to affect the
amount of the investor’s returns
Accounting for Consolidated Comprehensive Income
1. Parent Company Approach
• Wholly-owned – all income of the parent and the subsidiary accrues to the parent
• Partially-owned – a portion of the income accrues to the non-controlling shareholders
• Consolidated Income (and Income added to retained earnings = Total income of entities
consolidated – Income recorded by parent from its subsidiaries – Income assigned to NCI
2. Entity Approach
• Wholly-owned – all income of the parent and the subsidiary accrues to the parent
• Partially-owned – a portion of the income accruing to the non-controlling shareholders is
included in the Consolidated Income
• Consolidated Income = Total income of entities consolidated – Income recorded by parent
from its subsidiaries
• Income added to Retained Earnings = Total income of entities consolidated – Income
recorded by parent from its subsidiaries – Income assigned to NCI
Parent Company Approach - Illustration
Parent Company owns 80% of the stock of Subsidiary Company which was purchased at book
value. During 2013. Subsidiary Company reports comprehensive income of P50,000 while Parent
Company reports comprehensive income of P120,000 including dividend income from Subsidiary
Company of P20,000. What is the consolidated comprehensive income for 2013?

 Consolidated Income (and Income added to retained earnings = Total income of entities
consolidated – Income recorded by parent from its subsidiaries – Income assigned to NCI

Parent – Income P120,000

Dividend Income – from Subsidiary 20,000
Parent Income – Own operations 100,000
Subsidiary Income – Own operations 50,000
Total Income 150,000
NCI in Subsidiary Net Income (20% X 50,000) 10,000
Consolidated comprehensive Income 140,000
 Entity Approach - Illustration
Parent Company owns 80% of the stock of Subsidiary Company which was purchased at book
value. During 2013. Subsidiary Company reports comprehensive income of P50,000 while Parent
Company reports comprehensive income of P120,000 including dividend income from Subsidiary
Company of P20,000. What is the consolidated comprehensive income for 2013?

 Consolidated Income = Total income of entities consolidated – Income recorded by parent from
its subsidiaries

Parent – Income P120,000

Dividend Income – from Subsidiary 20,000
Parent Income – Own operations 100,000
Subsidiary Income – Own operations 50,000
Consolidated comprehensive Income 150,000
NCI in Subsidiary Net Income (20% X 50,000) 10,000
Attributable to Parent 140,000
Accounting for Investment in Subsidiary
1. Cost Method
• Used when acquirer owns more than half of the voting power of an entity, thereby
exercising control
• Investment in Subsidiary account is retained at its cost
• Income on the investment is limited to the dividends received from the subsidiary
2. Equity Method
• Used when the acquirer owns 20% or more (less than 50%) of the voting power of
an entity, thereby exercising significant influence
• Investment in Subsidiary account is initially recorded at cost, increased or
decreased to recognize share in subsidiary’s profit or loss and amortization of
overvaluation/undervaluation of subsidiary’s net assets and decreased to
recognize dividends received from subsidiary
Illustration – Wholly-owned, at book value, Year 1
On January 2, 2013, Parent Corporation acquires all the common stock of Subsidiary Company for P300,000.
Subsidiary Company has P200,000 of common stock outstanding and retained earnings of P100,000. On Dec 31,
2013, here are the account balances of Parent and Subsidiary:
PARENT SUBSIDIARY PARENT CORP AND SUBSIDIARY
Investment in Subsidiary 300,000.00
SALES 400,000.00 200,000.00 CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Cash 300,000.00
DIV. INCOME 30,000.00 AS OF THE YEAR ENDED DEC 31, 2013
COGS (170,000.00) (115,000.00) Cash 30,000.00
GEN. EXP (50,000.00) (20,000.00) Dividend Income 30,000.00 RE, BEGINNING 300,000.00
OTHER EXP (40,000.00) (15,000.00) CONSOLIDATED INCOME 190,000.00
NET INCOME 170,000.00 50,000.00 Ordinary Shares 200,000.00 DIVIDENDS (60,000.00)
Retained Earnings 100,000.00 RE, ENDING 430,000.00
RE, BEG 300,000.00 100,000.00 PARENT CORP AND SUBSIDIARY
NET INCOME 170,000.00 50,000.00 Investment in Sub. 300,000.00 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
DIVIDENDS (60,000.00) (30,000.00) AS OF THE YEAR ENDED DEC 31, 2013
RE, END 410,000.00 120,000.00 Dividend Income 30,000.00
Dividend Declared 30,000.00 CASH 285,000.00
CASH 210,000.00 75,000.00 ACCOUNTS RECEIVABLE 125,000.00
PARENT CORP AND SUBSIDIARY
A/R 75,000.00 50,000.00 INVENTORY 175,000.00
INVENTORY 100,000.00 75,000.00 CONSOLIDATED STATEMENT OF INCOME
PROPERTY & EQUIPMENT 845,000.00
PPE 525,000.00 320,000.00 FOR THE YEAR ENDED DEC 31, 2013 ASSETS 1,430,000.00
INVT IN SUB 300,000.00
SALES 600,000.00 ACCOUNTS PAYABLE 200,000.00
A/P 100,000.00 100,000.00 COST OF GOODS SOLD (285,000.00) BONDS PAYABLE 300,000.00
B/P 200,000.00 100,000.00 GENERAL EXPENSES (70,000.00) ORDINARY SHARES 500,000.00
ORD. SHARES 500,000.00 200,000.00 OTHER EXPENSES (55,000.00) RETAINED EARNINGS 430,000.00
RE, END 410,000.00 120,000.00 NET CONSOLIDATED INCOME 190,000.00 LIABILITY & EQUITY 1,430,000.00
Illustration – Wholly-owned, at book value, Year 1
On Dec 31, 2014, here are the account balances of Parent and Subsidiary:

PARENT SUBSIDIARY PARENT CORP AND SUBSIDIARY

SALES 450,000.00 300,000.00 CONSOLIDATED STATEMENT OF RETAINED EARNINGS
DIV. INCOME 40,000.00 AS OF THE YEAR ENDED DEC 31, 2014
COGS (180,000.00) (160,000.00)
GEN. EXP (50,000.00) (20,000.00) Cash 40,000.00 RE, BEGINNING 430,000.00
OTHER EXP (60,000.00) (45,000.00) Dividend Income 40,000.00 CONSOLIDATED INCOME 235,000.00
NET INCOME 200,000.00 75,000.00 DIVIDENDS (60,000.00)
Ordinary Shares 200,000.00 RE, ENDING 605,000.00
RE, BEG 410,000.00 120,000.00 Retained Earnings 100,000.00
PARENT CORP AND SUBSIDIARY
NET INCOME 200,000.00 75,000.00
Investment in Sub. 300,000.00 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
DIVIDENDS (60,000.00) (40,000.00)
AS OF THE YEAR ENDED DEC 31, 2014
RE, END 550,000.00 155,000.00 Dividend Income 40,000.00
Dividend Declared 40,000.00 CASH 350,000.00
CASH 265,000.00 85,000.00
ACCOUNTS RECEIVABLE 230,000.00
A/R 150,000.00 80,000.00 PARENT CORP AND SUBSIDIARY
INVENTORY 270,000.00
INVENTORY 180,000.00 90,000.00 CONSOLIDATED STATEMENT OF INCOME
PROPERTY & EQUIPMENT 775,000.00
PPE 475,000.00 300,000.00 FOR THE YEAR ENDED DEC 31, 2014
ASSETS 1,625,000.00
INVT IN SUB 300,000.00
SALES 750,000.00 ACCOUNTS PAYABLE 220,000.00
A/P 120,000.00 100,000.00 COST OF GOODS SOLD (340,000.00) BONDS PAYABLE 300,000.00
B/P 200,000.00 100,000.00 GENERAL EXPENSES (70,000.00) ORDINARY SHARES 500,000.00
ORD. SHARES 500,000.00 200,000.00 OTHER EXPENSES (105,000.00) RETAINED EARNINGS 605,000.00
RE, END 550,000.00 155,000.00 NET CONSOLIDATED INCOME 235,000.00 LIABILITY & EQUITY 1,625,000.00
Illustration – Partially-owned, at book value, Year
1
On January 2, 2013, Parent Corporation acquires 80% of the common stock of Subsidiary Company for P240,000.
Subsidiary Company has P200,000 of common stock outstanding and retained earnings of P100,000. On Dec 31,
2013, here are the account balances of Parent and Subsidiary:
PARENT SUBSIDIARY Investment in Subsidiary 240,000.00 FV OF NET ASSETS 300,000.00
SALES 400,000.00 200,000.00 Cash 240,000.00 AMORTIZATION -
DIV. INCOME 24,000.00
INCREASE IN RE 20,000.00
COGS (170,000.00) (115,000.00) Cash 24,000.00
GEN. EXP (50,000.00) (20,000.00) Dividend Income 24,000.00 NET 320,000.00
OTHER EXP (40,000.00) (15,000.00) NONCONTROLLING INTEREST 64,000.00
NET INCOME 164,000.00 50,000.00 FAIR VALUE 80% 20%
FV OF SUB 300,000.00 240,000.00 60,000.00
RE, BEG 300,000.00 100,000.00 NET ASSETS 300,000.00 240,000.00 60,000.00
NET INCOME 164,000.00 50,000.00 EXCESS - - -
DIVIDENDS (60,000.00) (30,000.00)
RE, END 404,000.00 120,000.00 Dividend Income 24,000.00
Non-controlling Interest 6,000.00
CASH 264,000.00 75,000.00 Dividend Declared 30,000.00
A/R 75,000.00 50,000.00
INVENTORY 100,000.00 75,000.00 Ordinary Shares 200,000.00
PPE 525,000.00 320,000.00
Retained Earnings 100,000.00
INVT IN SUB 240,000.00
Investment in Subsidiary 240,000.00
A/P 100,000.00 100,000.00 Non-controlling Interest 60,000.00
B/P 200,000.00 100,000.00
ORD. SHARES 500,000.00 200,000.00 NCI in Net Income 10,000.00
RE, END 404,000.00 120,000.00 Non-controlling Interest 10,000.00
Illustration – Partially-owned, at book value, Year
1
On January 2, 2013, Parent Corporation acquires 80% of the common stock of Subsidiary Company for P240,000.
Subsidiary Company has P200,000 of common stock outstanding and retained earnings of P100,000. On Dec 31,
2013, here are the account balances of Parent and Subsidiary:
PARENT SUBSIDIARY PARENT CORP AND SUBSIDIARY
SALES 400,000.00 200,000.00 CONSOLIDATED STATEMENT OF INCOME PARENT CORP AND SUBSIDIARY
DIV. INCOME 24,000.00 FOR THE YEAR ENDED DEC 31, 2013 CONSOLIDATED STATEMENT OF FINANCIAL
COGS (170,000.00) (115,000.00) POSITION
GEN. EXP (50,000.00) (20,000.00) SALES 600,000.00 AS OF THE YEAR ENDED DEC 31, 2013
OTHER EXP (40,000.00) (15,000.00) COST OF GOODS SOLD (285,000.00)
NET INCOME 164,000.00 50,000.00 GENERAL EXPENSES (70,000.00)
CASH 339,000.00
OTHER EXPENSES (55,000.00)
RE, BEG 300,000.00 100,000.00 NET CONSOLIDATED INCOME 190,000.00 ACCOUNTS RECEIVABLE 125,000.00
NET INCOME 164,000.00 50,000.00 NCI in Net Income 10,000.00 INVENTORY 175,000.00
DIVIDENDS (60,000.00) (30,000.00) Attributable to Parent 180,000.00 PROPERTY & EQUIPMENT 845,000.00
RE, END 404,000.00 120,000.00
ASSETS 1,484,000.00
PARENT CORP AND SUBSIDIARY
CASH 264,000.00 75,000.00
CONSOLIDATED STATEMENT OF RETAINED
A/R 75,000.00 50,000.00 EARNINGS ACCOUNTS PAYABLE 200,000.00
INVENTORY 100,000.00 75,000.00 AS OF THE YEAR ENDED DEC 31, 2013 BONDS PAYABLE 300,000.00
PPE 525,000.00 320,000.00
ORDINARY SHARES 500,000.00
INVT IN SUB 240,000.00
RE, BEGINNING 300,000.00 RETAINED EARNINGS 420,000.00
CI - PARENT 180,000.00 NON-CONTROLLING INTEREST 64,000.00
A/P 100,000.00 100,000.00
B/P 200,000.00 100,000.00 DIVIDENDS (60,000.00)
LIABILITY & EQUITY 1,484,000.00
ORD. SHARES 500,000.00 200,000.00 RE, ENDING 420,000.00
RE, END 404,000.00 120,000.00
Illustration – Partially-owned, at fair value, Year 1
On January 2, 2013, Parent Corporation acquires all the common stock of Subsidiary Company for P300,000.
Subsidiary Company has P200,000 of common stock outstanding and retained earnings of P100,000. Subsidiary’s
inventory and equipment are undervalued by P5,000 and P60,000 respectively at acquisition date. Inventory was sold
at year end. Depreciation method is straight line over 10 years. On Dec 31, 2013, here are the account balances of
Parent and Subsidiary: PARENT SUBSIDIARY Investment in Subsidiary 300,000.00 Cost of Goods Sold 5,000.00
SALES 400,000.00 200,000.00 Cash 300,000.00 Depreciation Expense 6,000.00
Inventory 5,000.00
DIV. INCOME 24,000.00 Cash 24,000.00 Accumulated Depreciation 6,000.00
COGS (170,000.00) (115,000.00) Dividend Income 24,000.00
GEN. EXP (50,000.00) (20,000.00) NCI in Net Income 7,800.00
OTHER EXP (40,000.00) (15,000.00) FAIR VALUE 80% 20%
Non-controlling Interest 7,800.00
FV OF SUBSIDIARY 375,000.00 300,000.00 75,000.00
NET INCOME 164,000.00 50,000.00
NET ASSETS 300,000.00 240,000.00 60,000.00
EXCESS 75,000.00 60,000.00 15,000.00 FV OF NET ASSETS 375,000.00
RE, BEG 300,000.00 100,000.00 Inventory (5,000.00)
NET INCOME 164,000.00 50,000.00 Equipment (60,000.00) AMORTIZATION (11,000.00)
DIVIDENDS (60,000.00) (30,000.00) Goodwill 10,000.00 INCREASE IN RE 20,000.00
RE, END 404,000.00 120,000.00 Dividend Income 24,000.00 NET 384,000.00
Non-controlling Interest 6,000.00
NON-CONTROLLING INTEREST 76,800.00
CASH 204,000.00 75,000.00 Dividend Declared 30,000.00
A/R 75,000.00 50,000.00
Ordinary Shares 200,000.00
INVENTORY 100,000.00 75,000.00
Retained Earnings 100,000.00
PPE 525,000.00 320,000.00 Investment in Subsidiary 240,000.00
INVT IN SUB 300,000.00 Non-controlling Interest 60,000.00

Inventory 5,000.00
A/P 100,000.00 100,000.00
Equipment 60,000.00
B/P 200,000.00 100,000.00 Goodwill 10,000.00
ORD. SHARES 500,000.00 200,000.00 Investment in Subsidiary 60,000.00
RE, END 404,000.00 120,000.00 Non-controlling Interest 15,000.00
Illustration – Partially-owned, at fair value, Year 1
On January 2, 2013, Parent Corporation acquires all the common stock of Subsidiary Company for P300,000.
Subsidiary Company has P200,000 of common stock outstanding and retained earnings of P100,000. Subsidiary’s
inventory and equipment are undervalued by P5,000 and P60,000 respectively at acquisition date. Inventory was sold
at year end. Depreciation method is straight line over 10 years. On Dec 31, 2013, here are the account balances of
Parent and Subsidiary: PARENT SUBSIDIARY PARENT CORP AND SUBSIDIARY PARENT CORP AND SUBSIDIARY
SALES 400,000.00 200,000.00 CONSOLIDATED STATEMENT OF INCOME
DIV. INCOME 24,000.00 CONSOLIDATED STATEMENT OF FINANCIAL
FOR THE YEAR ENDED DEC 31, 2013 POSITION
COGS (170,000.00) (115,000.00)
AS OF THE YEAR ENDED DEC 31, 2013
GEN. EXP (50,000.00) (20,000.00)
SALES 600,000.00
OTHER EXP (40,000.00) (15,000.00)
COST OF GOODS SOLD (290,000.00) CASH 279,000.00
NET INCOME 164,000.00 50,000.00
GENERAL EXPENSES (76,000.00) ACCOUNTS RECEIVABLE 125,000.00
OTHER EXPENSES (55,000.00)
RE, BEG 300,000.00 100,000.00 INVENTORY 175,000.00
NET CONSOLIDATED INCOME 179,000.00
NET INCOME 164,000.00 50,000.00 PROPERTY & EQUIPMENT 899,000.00
NCI in Net Income 7,800.00
DIVIDENDS (60,000.00) (30,000.00) GOODWILL 10,000.00
Attributable to Parent 171,200.00
RE, END 404,000.00 120,000.00 ASSETS 1,488,000.00
PARENT CORP AND SUBSIDIARY
CASH 204,000.00 75,000.00 ACCOUNTS PAYABLE 200,000.00
A/R 75,000.00 50,000.00 CONSOLIDATED STATEMENT OF RETAINED
EARNINGS BONDS PAYABLE 300,000.00
INVENTORY 100,000.00 75,000.00 AS OF THE YEAR ENDED DEC 31, 2013 ORDINARY SHARES 500,000.00
PPE 525,000.00 320,000.00
RETAINED EARNINGS 411,200.00
INVT IN SUB 300,000.00 RE, BEGINNING 300,000.00 NON-CONTROLLING INTEREST 76,800.00
CI - PARENT 171,200.00 LIABILITY & EQUITY 1,488,000.00
A/P 100,000.00 100,000.00
DIVIDENDS (60,000.00)
B/P 200,000.00 100,000.00
RE, ENDING 411,200.00
ORD. SHARES 500,000.00 200,000.00
RE, END 404,000.00 120,000.00
Illustration – Partially-owned, at fair value, Year 2
On Dec 31, 2014, here are the account balances of Parent and Subsidiary:

PARENT SUBSIDIARY Depreciation Expense 6,000.00

SALES 450,000.00 300,000.00 Cash 24,000.00 Retained Earnings, beginning 11,000.00
DIV. INCOME 32,000.00 Inventory 5,000.00
Dividend Income 24,000.00
Accumulated Depreciation 12,000.00
COGS (180,000.00) (160,000.00)
GEN. EXP (50,000.00) (20,000.00) FAIR VALUE 80% 20%
Retained Earnings, beginning 1,800.00
OTHER EXP (60,000.00) (45,000.00) FV OF SUBSIDIARY 375,000.00 300,000.00 75,000.00
Non-controlling Interest 1,800.00
NET ASSETS 300,000.00 240,000.00 60,000.00
NET INCOME 192,000.00 75,000.00
EXCESS 75,000.00 60,000.00 15,000.00
NCI in Net Income 13,800.00
Inventory (5,000.00)
RE, BEG 404,000.00 120,000.00 Non-controlling Interest 13,800.00
Equipment (60,000.00)
NET INCOME 192,000.00 75,000.00 Goodwill 10,000.00
DIVIDENDS (60,000.00) (40,000.00)
RE, END 536,000.00 155,000.00 Dividend Income 32,000.00 FV OF NET ASSETS 375,000.00
Non-controlling Interest 8,000.00
Dividend Declared 40,000.00 AMORTIZATION (17,000.00)
CASH 231,000.00 85,000.00
A/R 150,000.00 80,000.00 Ordinary Shares 200,000.00 INCREASE IN RE 55,000.00

INVENTORY 180,000.00 90,000.00 Retained Earnings 100,000.00 NET 413,000.00

PPE 475,000.00 300,000.00 Investment in Subsidiary 240,000.00
Non-controlling Interest 60,000.00 NON-CONTROLLING INTEREST 82,600.00
INVT IN SUB 300,000.00
Inventory 5,000.00
A/P 100,000.00 100,000.00 Equipment 60,000.00
B/P 200,000.00 100,000.00 Goodwill 10,000.00
ORD. SHARES 500,000.00 200,000.00 Investment in Subsidiary 60,000.00
RE, END 536,000.00 155,000.00 Non-controlling Interest 15,000.00
Illustration – Partially-owned, at fair value, Year 2
On Dec 31, 2014, here are the account balances of Parent and Subsidiary:

PARENT SUBSIDIARY
PARENT CORP AND SUBSIDIARY PARENT CORP AND SUBSIDIARY
SALES 450,000.00 300,000.00
CONSOLIDATED STATEMENT OF INCOME
DIV. INCOME 32,000.00 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
FOR THE YEAR ENDED DEC 31, 2014
COGS (180,000.00) (160,000.00) AS OF THE YEAR ENDED DEC 31, 2014
GEN. EXP (50,000.00) (20,000.00)
SALES 750,000.00
OTHER EXP (60,000.00) (45,000.00)
COST OF GOODS SOLD (340,000.00) CASH 316,000.00
NET INCOME 192,000.00 75,000.00
GENERAL EXPENSES (76,000.00)
ACCOUNTS RECEIVABLE 230,000.00
OTHER EXPENSES (105,000.00)
RE, BEG 404,000.00 120,000.00 INVENTORY 270,000.00
NET CONSOLIDATED INCOME 229,000.00
NET INCOME 192,000.00 75,000.00
NCI in Net Income 13,800.00 PROPERTY & EQUIPMENT 823,000.00
DIVIDENDS (60,000.00) (40,000.00)
Attributable to Parent 215,200.00 GOODWILL 10,000.00
RE, END 536,000.00 155,000.00
ASSETS 1,649,000.00
CASH 231,000.00 85,000.00 PARENT CORP AND SUBSIDIARY
A/R 150,000.00 80,000.00
ACCOUNTS PAYABLE 200,000.00
INVENTORY 180,000.00 90,000.00 CONSOLIDATED STATEMENT OF RETAINED EARNINGS
PPE 475,000.00 300,000.00 AS OF THE YEAR ENDED DEC 31, 2014 BONDS PAYABLE 300,000.00
INVT IN SUB 300,000.00 ORDINARY SHARES 500,000.00
RE, BEGINNING 411,200.00 RETAINED EARNINGS 566,400.00
A/P 100,000.00 100,000.00 CI - PARENT 215,200.00
NON-CONTROLLING INTEREST 82,600.00
B/P 200,000.00 100,000.00 DIVIDENDS (60,000.00)
ORD. SHARES 500,000.00 200,000.00 LIABILITY & EQUITY 1,649,000.00
RE, ENDING 566,400.00
RE, END 536,000.00 155,000.00
Equity Method – Illustration, Year
On January 2, 2013, Parent Corporation acquires all the common stock of Subsidiary Company for P300,000.
1
Subsidiary Company has P200,000 of common stock outstanding and retained earnings of P100,000. Subsidiary’s
inventory and equipment are undervalued by P5,000 and P60,000 respectively at acquisition date. Inventory was sold
at year end. Depreciation method is straight line over 10 years. The goodwill is impaired by P2,500 in 2013. Dec 31,
2013, here are the account balances of Parent and Subsidiary:
Ordinary Shares 200,000.00
PARENT SUBSIDIARY Investment in Subsidiary 300,000.00 Retained Earnings 100,000.00
SALES 400,000.00 200,000.00 Cash 300,000.00 Investment in Subsidiary 240,000.00
INV INCOME 31,200.00 Non-controlling Interest 60,000.00
Cash 24,000.00
COGS (170,000.00) (115,000.00)
Investment in Subsidiary 32,000.00 Inventory 5,000.00
GEN. EXP (50,000.00) (20,000.00)
Equipment 60,000.00
OTHER EXP (40,000.00) (15,000.00) Investment in Subsidiary 40,000.00 Goodwill 10,000.00
NET INCOME 171,200.00 50,000.00 Investment Income 40,000.00 Investment in Subsidiary 60,000.00
Non-controlling Interest 15,000.00
RE, BEG 300,000.00 100,000.00 Investment Income 8,800.00
NET INCOME 171,200.00 50,000.00 Investment in Subsidiary 8,800.00 Depreciation Expense 6,000.00
DIVIDENDS (60,000.00) (30,000.00) Cost of Goods Sold 5,000.00
RE, END 411,200.00 120,000.00 FAIR VALUE 80% 20%
Inventory 5,000.00
FV OF SUBSIDIARY 375,000.00 300,000.00 75,000.00
Accumulated Depreciation 6,000.00
CASH 204,000.00 75,000.00 NET ASSETS 300,000.00 240,000.00 60,000.00
A/R 75,000.00 50,000.00 EXCESS 75,000.00 60,000.00 15,000.00
NCI in Net Income 7,800.00
INVENTORY 100,000.00 75,000.00 Inventory (5,000.00)
Non-controlling Interest 7,800.00
PPE 525,000.00 320,000.00 Equipment (60,000.00)
INVT IN SUB 307,200.00 Goodwill 10,000.00
Goodwill Impairment Loss 2,500.00
Goodwill 2,500.00
Investment Income 31,200.00
A/P 100,000.00 100,000.00
Non-controlling Interest 6,000.00
B/P 200,000.00 100,000.00 FV OF NET ASSETS 375,000.00
Dividend Declared 30,000.00
ORD. SHARES 500,000.00 200,000.00 AMORTIZATION (11,000.00)
Investment in Subsidiary 7,200.00
RE, END 411,200.00 120,000.00 INCREASE IN RE 20,000.00
NET 384,000.00
NON-CONTROLLING INTEREST 76,800.00
Equity Method – Illustration, Year
On January 2, 2013, Parent Corporation acquires all the common stock of Subsidiary Company for P300,000.
1
Subsidiary Company has P200,000 of common stock outstanding and retained earnings of P100,000. Subsidiary’s
inventory and equipment are undervalued by P5,000 and P60,000 respectively at acquisition date. Inventory was sold
at year end. Depreciation method is straight line over 10 years. The goodwill is impaired by P2,500 in 2013. Dec 31,
2013, here are the account balances of Parent and Subsidiary:
PARENT SUBSIDIARY PARENT CORP AND SUBSIDIARY PARENT CORP AND SUBSIDIARY
SALES 400,000.00 200,000.00 CONSOLIDATED STATEMENT OF INCOME
INV INCOME 31,200.00 CONSOLIDATED STATEMENT OF FINANCIAL
FOR THE YEAR ENDED DEC 31, 2013 POSITION
COGS (170,000.00) (115,000.00)
GEN. EXP (50,000.00) (20,000.00) AS OF THE YEAR ENDED DEC 31, 2013
OTHER EXP (40,000.00) (15,000.00) SALES 600,000.00
NET INCOME 171,200.00 50,000.00 COST OF GOODS SOLD (290,000.00)
CASH 279,000.00
GENERAL EXPENSES (76,000.00)
RE, BEG 300,000.00 100,000.00 OTHER EXPENSES (55,000.00) ACCOUNTS RECEIVABLE 125,000.00
NET INCOME 171,200.00 50,000.00 INVENTORY 175,000.00
IMPAIRMENT LOSS (2,500.00)
DIVIDENDS (60,000.00) (30,000.00)
RE, END 411,200.00 120,000.00 NET CONSOLIDATED INCOME 176,500.00 PROPERTY & EQUIPMENT 899,000.00
NCI in Net Income (7,800.00) GOODWILL 7,500.00
CASH 204,000.00 75,000.00 Attributable to Parent 168,700.00 ASSETS 1,485,500.00
A/R 75,000.00 50,000.00
PARENT CORP AND SUBSIDIARY
INVENTORY 100,000.00 75,000.00
PPE 525,000.00 320,000.00 CONSOLIDATED STATEMENT OF RETAINED ACCOUNTS PAYABLE 200,000.00
INVT IN SUB 307,200.00 EARNINGS
BONDS PAYABLE 300,000.00
AS OF THE YEAR ENDED DEC 31, 2013
A/P 100,000.00 100,000.00 ORDINARY SHARES 500,000.00
B/P 200,000.00 100,000.00 RETAINED EARNINGS 408,700.00
RE, BEGINNING 300,000.00
ORD. SHARES 500,000.00 200,000.00 NON-CONTROLLING INTEREST 76,800.00
RE, END 411,200.00 120,000.00 CI - PARENT 168,700.00
DIVIDENDS (60,000.00) LIABILITY & EQUITY 1,485,500.00
RE, ENDING 408,700.00
Equity Method – Illustration, Year
2
On Dec 31, 2014, here are the account balances of Parent and Subsidiary:

PARENT SUBSIDIARY Ordinary Shares 200,000.00

Cash 32,000.00
SALES 450,000.00 300,000.00 Investment in Subsidiary 32,000.00
Retained Earnings 120,000.00
DIV. INCOME 55,200.00 Investment in Subsidiary 256,000.00
Non-controlling Interest 64,000.00
COGS (180,000.00) (160,000.00) Investment in Subsidiary 60,000.00
GEN. EXP (50,000.00) (20,000.00) Investment Income 60,000.00
Equipment 54,000.00
OTHER EXP (60,000.00) (45,000.00) Goodwill 10,000.00
NET INCOME 215,200.00 75,000.00 Investment Income 4,800.00 Investment in Subsidiary 60,000.00
Investment in Subsidiary 4,800.00 Non-controlling Interest 15,000.00
RE, BEG 411,200.00 120,000.00
FAIR VALUE 80% 20%
NET INCOME 215,200.00 75,000.00 Depreciation Expense 6,000.00
FV OF SUBSIDIARY 375,000.00 300,000.00 75,000.00
DIVIDENDS (60,000.00) (40,000.00) Accumulated Depreciation 6,000.00
NET ASSETS 300,000.00 240,000.00 60,000.00
RE, END 566,400.00 155,000.00 EXCESS 75,000.00 60,000.00 15,000.00
NCI in Net Income 13,800.00
Inventory (5,000.00)
Non-controlling Interest 13,800.00
CASH 231,000.00 85,000.00 Equipment (60,000.00)
A/R 150,000.00 80,000.00 Goodwill 10,000.00
Retained Earnings, beginning 2,500.00
INVENTORY 180,000.00 90,000.00 Goodwill 2,500.00
PPE 475,000.00 300,000.00 Investment Income 55,200.00
Non-controlling Interest 8,000.00
INVT IN SUB 300,400.00 Dividend Declared 40,000.00 FV OF NET ASSETS 375,000.00
Investment in Subsidiary 23,200.00 AMORTIZATION (17,000.00)
A/P 100,000.00 100,000.00
INCREASE IN RE 55,000.00
B/P 200,000.00 100,000.00
NET 413,000.00
ORD. SHARES 500,000.00 200,000.00
NON-CONTROLLING INTEREST 82,600.00
RE, END 566,400.00 155,000.00
Equity Method – Illustration, Year
2
On Dec 31, 2014, here are the account balances of Parent and Subsidiary:

PARENT SUBSIDIARY PARENT CORP AND SUBSIDIARY PARENT CORP AND SUBSIDIARY
SALES 450,000.00 300,000.00 CONSOLIDATED STATEMENT OF INCOME CONSOLIDATED STATEMENT OF FINANCIAL
DIV. INCOME 55,200.00 FOR THE YEAR ENDED DEC 31, 2013 POSITION
COGS (180,000.00) (160,000.00)
AS OF THE YEAR ENDED DEC 31, 2013
GEN. EXP (50,000.00) (20,000.00) SALES 750,000.00
OTHER EXP (60,000.00) (45,000.00) COST OF GOODS SOLD (340,000.00)
NET INCOME 215,200.00 75,000.00 GENERAL EXPENSES (76,000.00) CASH 316,000.00
OTHER EXPENSES (105,000.00) ACCOUNTS RECEIVABLE 230,000.00
RE, BEG 411,200.00 120,000.00 IMPAIRMENT LOSS - INVENTORY 270,000.00
NET INCOME 215,200.00 75,000.00 NET CONSOLIDATED INCOME 229,000.00
PROPERTY & EQUIPMENT 823,000.00
DIVIDENDS (60,000.00) (40,000.00) NCI in Net Income (13,800.00)
RE, END 566,400.00 155,000.00 Attributable to Parent 215,200.00 GOODWILL 7,500.00
ASSETS 1,646,500.00
CASH 231,000.00 85,000.00 PARENT CORP AND SUBSIDIARY
A/R 150,000.00 80,000.00 CONSOLIDATED STATEMENT OF RETAINED
EARNINGS ACCOUNTS PAYABLE 200,000.00
INVENTORY 180,000.00 90,000.00
PPE 475,000.00 300,000.00 AS OF THE YEAR ENDED DEC 31, 2013 BONDS PAYABLE 300,000.00
INVT IN SUB 300,400.00 ORDINARY SHARES 500,000.00
RE, BEGINNING 408,700.00 RETAINED EARNINGS 563,900.00
A/P 100,000.00 100,000.00 CI - PARENT 215,200.00 NON-CONTROLLING INTEREST 82,600.00
B/P 200,000.00 100,000.00 DIVIDENDS (60,000.00) LIABILITY & EQUITY 1,646,500.00
ORD. SHARES 500,000.00 200,000.00 RE, ENDING 563,900.00
RE, END 566,400.00 155,000.00
 Step Acquisition - Illustration
Parent Company owns 30% interest (20,000 shares) in Subsidiary Company that Parent
purchased at a prior date for P40 per share. At a later date Parent Company acquires another
100,000 shares (50% interest) for P60 per share
 Adjust the previously held interest to fair value:

Investment in Subsidiary 400,000.00

Unrealized gain on revaluation 400,000.00

30% - previously held 1,200,000.00

50% - newly acquired 6,000,000.00
Total Consideration 7,200,000.00

 Record the acquisition

Investment in Subsidiary 7,200,000.00

Cash 6,000,000.00
Investment in Subsidiary 1,200,000.00
Deconsolidation - Illustration
Parent Company sells 85% interest in a wholly-owned subsidiary as follows:
1. After the sale, the parent accounts for its remaining 15% as held for sale investment
2. The subsidiary did not recognize any amounts In other comprehensive income
3. Net assets of subsidiary before the disposal is P500,000
4. Cash proceeds from the sale of the 85% interest is P750,000
5. Fair value of the 15% interest retained by the parent is P130,000

Available for Sale Investment 130,000.00

Cash 750,000.00
Investment in Subsidiary 500,000.00
Gain on Disposal 380,000.00