CPA REVIEW SCHOOL OF THE PHILIPPINES Manila Advanced Financial Accounting Guerrero/German/DeJesus/Lim/Ferrer/Laco/Valix PFRS 10: Consolidated Financial Statements Par ‘heory of Accounts 1. PFRS 10 defines them as the financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic unit. A. Consolidated financial statements B. Separate financial statements C. Group financial statements D. Combined financial statements 2. Which of the following statements concerning the preparation of consolidated financial statements by a parent is incorrect? ‘A. The parent corporation, as a general rule, shall present consolidated financial statements including all its subsidiaries regardless of its industry or dissimilarity. : shall be excluded by a parent from the consolidation simply because the investor organization, mutual fund, unit trust or similar entity. — ere C. An investment entity, which (1) obtains funds from one or more investors, (2) commits to its investors that its business is to invest funds solely for returns/capital appreciation, and (3) ‘measures and evaluates the performance substantially all of its investment on a fair value basis is exempted from preparing consolidated financial statements. D. A parent corporation (1) which is a wholly-owned or partially-owned subsidiary, (2) whose debt or equity instrument are not publicly traded, (3) which is not in the process of initial public offering, and (4) when its immediate or ultimate parent produces consolidated financial statements available for public use is exempted from presenting consolidated financial statements. B. 3. Under PERS 10, parent corporation is the entity that controls one or more entities. How does PFRS 10 define control? A. FE a ee comin emo rs i ins a be fie B. An investor controls an investee when it has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. . An investor controls an investee when it has the ability to influence the financial and operating policies of an entity so as to obtain benefits from its activities. D. An investor controls an investee when it owns more than 50% of all the outstanding cepital stocks, whether common or preferred. 4, Under PERS 10, it refers to the term used to describe the ownership of the largest block of voting rights in a situation where the remaining rights are widely dispersed even if it is less than the majority interest thereby requiring the holder of such interest to prepare consolidated financial ‘Statements? ‘A. De jure control B. C. Legal control D. Nominal control—_— 5, Parent Corporation has 51% interest in listed entity Sub Inc. Sub is a highly-leveraged and started making losses, Parent decided to sell 2% to an investment bank. The post-sale structure shows that Parent Corp. has only 49% interest, investment bank has 2% interest and the remaining 49% interest owned by many shareholders other than the investment bank each with less than 1% of votes and there is no arrangement among them to vote collectively. Upon the sale, Parent Corporation can easily reacquire controlling interest in Sub by buying shares in the market and expects to continue managing Sub through election of directors in Sub’s general meeting, Sub Inc. is listed with deep and liquid market for shares. Is the Parent still required to consolidated Sub Inc. in its consolidated financial statements despite less than majority ownership? A. No because it has no control considering it only has 49% interest in Sub. B. ‘de facto control on the part of Parent Corp. over the relevant activities of } C. No because control is not shown by the relevant facts, D. Yes even if the other shareholders will connive to gain control. 6. An investee’s only business activity is to purchase receivables and service them on a day-to-day basis. Servicing involves collection and passing on of principal and interest payments. Upon default, the investee automatically puts the receivable to investor X as agreed separately in a put agreement with investor X. Is Investor X required to consolidate Investee in its consolidated financial statements? - X controls the investee’s relevant activity that is managing the receivables upon _ which significantly affects the investee’s returns. B. No because there is no statement as regards to majority ownership of stocks. C. Yes but only if X owns 51% or more of voting stocks of investee. D. No because there is no link of power over the investee to the exposure/tight to variable returns of investment. 7. How shall the parent corporation present the Noncontrolling Interest (NCI) in the Consolidated ‘Statement of Financial Position? A ———E—EEEaEe separately from the equity of of the parent. B. It shall be presented as non-current liability. C. It shall be presented as non-current asset. D. It shall be presented as contract-equity account like treasure shares and subscription receivable. 8. Which of the following income items shall affect both CNI to Parent(CONSORE) and ‘NCINI/(NCINAS) in reconciliation from cost method to acquisition method? ‘A. Gain on bargain purchase arising from business combination. arising from transactions between two subsidiaries owned B. C. Unrealized/realized income/expense arising from downstream transactions or from parent to subsidiary. D. Impairment loss of goodwill from business combination initially measured using proportionate share of fair value of net asset acquired. 9. Which of the following income items shall affect CNI to Parent(CONSORE) onl} but not NCINI/(NCINAS) in reconciliation from cost method to acquisition method? A. Amortization of difference between the fair value and book value of the assets and liabilities of the subsidiary. B. Unrealized/realized income/expense arising from upstream transactions or from subsidiary to parent. C. Impairment loss of goodwill from business combination initially measured using fair value offo Page 3 10. PAS 27 as amended defines Separate Financial Statements as those Presented by a parent or an investor with joint control of, or significant influence over, in addition to its consolidated financial Statements. Under PAS 27 as amended, Investment in Subsidiary shall be accounted for by the Parent in its separate financial statements using A. Equity Method under PAS 28 B. Cost Method C, Fair value model under PFRS 9 D. 11. Which of the following statements concerning the requirement of PAS 27 for preparation of Separate Financial Statements is incorrect? A. PAS 27 as amended mandates the entities which shall present separate financial statements, B. PAS 27 does not mandate or require which parent corporation should produce separate financial statements but it shall depend on the laws or rules of a particular jurisdiction. C. Separate financial statements need not be appended to, or accompany, the consolidated financial statements. % D. A parent entity that is exempted from preparing consolidated financial statements in accordance with PFRS 10 provision may present separate financial statements as its only financial ‘statements, a E. When the entity elects either cost method or fair value model, an entity shall recognize a dividend from a subsidiary, a joint venture or an associate in profit or loss in its separate financial statements when its right to receive the dividend is established but in case of equity method, it shall be considered as deduction from investment account. 12. When the parent corporation elects to account its investments in subsidiaries, associates or jointly | Controlled entities in its separate financial statements using cost model or fair value model, how | shall it recognize its dividends from a subsidiary, joint venture or associate? The dividends from a subsidiary, joint venture or associate shall be recognized as deduction from investment account when its right to receive dividend is established. The dividends from a subsidiary, joint venture or associate shall be recognized as dividend income as part of other comprehensive income of separate statement of comprehensive income when its right to receive dividend is established. D. The dividends from a subsidiary, joint venture or associate shall be eliminated through Proportionate consolidation in the separate statement of comprehensive income. 13. When the parent corporation elects to account its investments in subsidiaries, associates or jointly Controlled entities in its separate financial statements using equity method, how shall it recognize its dividends from a subsidiary, joint venture or associate? A. The dividends from a subsidiary, joint venture or associate shall be recognized as dividend income as part of profit or loss of separate statement of comprehensive income when its right to receive divident hes The dividends from a subsidiary, joint venture or associate shall be recognized as dividend income as part of other comprehensive income of separate statement of comprehensive income when its right to receive dividend is established, D. The dividends from a subsidiary, joint venture or associate shall be eliminated through proportionate consolidation in the separate statement of comprehensive income. 8716Part II; Problem Sol PROBLEM 1. Galaxy Corporation acquired 80% of the outstanding shares of United Company on June 1, 2021 for P3,517,500._ United Company’s stockholder’s equity components at the end of this year are as follows: Ordinary shares, P100 par, P1,500,000, Share premium P675,000 and Retained Earnings P1,335,000.Non-controlling interest is measured at fair value and the fair value is P70S,000,. The assets of United were fairly valued, except for inventories, which are overstated by P66,000, and equipment, which was understated by P90,000. Remaining useful life of equipment is 4 years. Stockholder’s equity of Galaxy on January 1, 2021 is composed of Ordinary shares P4,500,000, Share premium P1,050,000, Retained Earnings P3,150,000. Goodwill, if any, should be written down by 85,350 at year-end. Net Income for the first year of parent is P450,000 and the net income of subsidiary from the date of acquisition is P255,000. Dividends declared at the end of the year amounted to P120,000 and P90,000 respectively for Galaxy and United. During the year, there was no issuance of new ordinary shares. 1, How much is the non-controlling interest in net assets on December 31, 2021? A. 871,005 D. 731,505 2, What is the amount of consolidated shareholder’s equity on December 31, 2021? A. 9,122,070 B. 9,858,150 C. 8,773,575 D. 9,867,525 PROBLEM 2. CC Corporation acquired 70% of the shares of stocks of DD Company at book value, ‘The following were in the separate books of CC and DD for 2021: CC Corporation DD Company Sales 700,000 400,000 Cost of sales 400,000 200,000 Operating expenses 120,000 Net income 180,000 The follc i i ti n The following were intercompany sales of inventory from CC Corporation to DD Company: Ending Inventory of GP rate of cost of sellin Buying affiliate Selling price affiliate Y From 2020 sales 210,000 390,000 40% From 2021 sales 270,000 275,000 35% The following were intercompany sales of inventory from DD Company to CC Corporation: Ending Inventory of " : Buying affiliate Selling price Cost Gm From 2020 sales 95,000 265,000 185,500 “7 From 2021 sales 84,000 208,000 93,600 ‘557 1. What is the consolidated net income attributable to parent for the year ended December 31, 2021? A. 227,610 B. 272,390 C. 222,300 D. 229,610 2, What is the consolidated sales for the year ended December 31, 2021? A. 1,100,000 B. 445,000 a D. 1,272,000 RI1G6ounce accumulated depreciation of P40,000 at a sel 3. What is the consolidated cost of goods sold for the year ended December 31, 2021? ‘A. 600,000 B, . 627,700 D. 89,300 PROBLEM 3: On January 1, 2020, Entity A acquired 80% of outstanding ordinary shares of ca at a gain on bargain purchase of P180,000. The following intercompany transactions occurred for * On January 1, 2020, Entity B sold a land to Entity A with a cost of P1,000,000 at a selling price of Upseam 1,100,000. The land was eventually sold by Entity A to third persons during 2021. w 6 © Of jaahey 1, 2020, Entity A sold a white machinery to Entity B with a cost of P200,000 and selling price of P180,000. The machinery is already 4 years old at the date of sale. The residual value of white machinery is immaterial. 2. Sain ‘© On July 1, 2021, Entity B sold a black machinery to Entity A at with a cost of P270,000 and \ipsteam accumulated depreciation of P180,000 at a selling price of P60,000. The machinery is already 6 i inery isi ial, 9° Ins ‘years old at the date of sale. The residual value of black machinery is ee a For the year ended December 31, 2021, Entity A reported net income of 666,660 while Entity B reported net income of P500,000 and distributed dividends of P150,000. Entity A accounted for its inventory in Entity B using cost method in its separate financial statements. 1, What is the consolidated depreciation expense of machinery for 2021? ‘A. 40,000 B. 55,000 C. 61,667 D. 42,333 2, What is the consolidated carrying amount of machinery on December 31, 2021? A. 225,000 B. C. 200,000 D. 210,000 3. What is the non-controlling interest in net income for 2021? A. 124,000 B. 105,000 co D. 104,000 4. What is the consolidated net income attributable to parent shareholders for 2021? A. 1,538,750 B. 1,518,750 C. 1,398,750 D. PROBLEM 4: On July 1, 2020, Density Company purchased 80% of the outstanding shares of Evolve Company at a cost of P4,000,000. On that date, Evolve had P2,00,000 of ordinary shares and 3,500,000 of retained earnings. For 2020, Density had income of P1,400,000 from its separate gperations and paid dividends of 750,000. For 2020, Evolve reported income of P325,000 and ar dividends of P150,000. All the assets and fiabilities of Evolve have book values equal to their respective fair market values. On October 1, 220, there was an upstream sale of machinery for 500,000. The book value of the machinery on that date was P600,000. The machinery is expected to have a useful life of 5 years from the date of sale. In the December 31, 2020 consolidated income statement, how much is the consolidated net income attributable to the controlling interes A. 1,606,000 8716 ane Nous Uren ousPage 6 PROBLEM 5. On January 1, 2020, PARENT Corp. acquired 82% of the outstanding shares of stocks of SUBSIDIARY Co. at book value. The following data were ascertained in 2020: Intercompany sale of merchandise from SUBSIDIARY Co. to PARENT Corp. amounted to P350,000 of which P205,000 was sold by PARENT Corp to XXX Co. for P250,000. Another intercompany sale of merchandise from PARENT Corp. to SUBSIDIARY Co. amounted to P289,000 of which P121,000 was sold by SUBSIDIARY Co to WWW Co, for P150,000. The gross profit rate of PARENT Corp. on the sale wag 35%)and the gross profit rate on sales of SUBSIDIARY Co. was(32%. Net income of PARENT Corp. and SUBSIDIARY Co. were P235,000 and P156,000 respectively. No dividends were declared during this year. ‘The following data were ascertained in 2021: SUBSIDIARY Co. bought an equipment from PARENT Corp, with a carrying amount on June 1, 2021 in the amount of P148,000 for P120,000 with a remaining life of 7 years. PARENT Corp. acquired furniture and. fixtures from SUBSIDIARY Co. on November 30, 2021 for P68,000, The furniture and fixtures were carried in the books of SUBSIDIARY Co. in the amount of P60,000 with a remaining life of 1 year. Net income of PARENT Corp. and SUBSIDIARY Co. were P246,000 and P178,000 respectively. SUBSIDIARY Corp. and PARENT Co. declared dividends in the amount of P34,000 and P56,000 respectively. 1. What is the consolidated net income attributable to parent for the year ended December 31, 20212 A. 508,462 B. 462,542 C. 480,582 D. 247,578 2. What is the non-controlling interest net income for the year ended December 31, 2021? A. (39,072 B. 25,008 C. 30,720 D. 38,952 PROBLEM 6: Superior Company owns 60% of Uptown Corporation, which in tum owns 80% of Newton Company. — Uptown exercises control over Newton and Superior exercises control over Uptown. The following information is available: Superior Uptown Newton Company Company Company Income from Continuing Operations P3,900,000 2,690,000 1,540,000 Cash dividends declared by: 250,000 180,000 110,000 Cash dividends from: Associate(s) 75,000 30,000 -nil- Other investments at fair value -nil- 90,000 40,000 Net unrealized intes-company gains/(ioss) within current P360,000 (220,000) 160,000 year income downstream downstream — Upstream ‘Amortization relating to excess of fair value over book, value /(book value over fair value) of investment (490,000) 140,000 -nil- ‘What is the consolidated net income attributabte to Superior Company stockholders? A. 5,939,400 B. 8,893,600 c D. 5,901,600 -end of handouts- 8716Mis $7lle PRRE 10° Cowolidatee! Financ! 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Decianed Cea) z a aT ’ Eauyment (los) (ar) Mek end tefle) — PTY YES A $4 Tnpeirmenttos —C#LA90)— C720 CE PTT AE Inleconpemy chucks (720) me a ee Sg Cem RO a 7a CREE RAPER GD * Pe ee ee ame ( 3120 /te3,on) x 005.360 + 8120 5 Fla, sa car | Probiom 2 er, Br. . an f 4am ft 20m ar-e prom Art 70a oad Tat N10, Teal? Fin, D- kre oo mero. aes ¥¢3,. mn. Iierco. Cafes eee b= Uper (70.6) Cone. aes RABE CPB DY Y-Resr 19.90 __P5> cee es War2i0 a uper (92,340) CB, ub) Le Mee IS LT) FEB, U10_"p246% SS —— = © White Mochiney —(ToatV] Gyn) =F, Black Mochiniy (Ho.nb / yr) = 70,0 «Consolidated Dip Eypente, 202, Fam Q@ white wachneny C200 em - [4aon 1 (down dyn x2] = Flom BEC Machiney (270.0 Cian ¥ Closm>oyn xGhe Omevidned CA of Machinery, r2py/er — ty — Sl e 71037,500 Biv ar-p NIE Tina ‘Mero, dere Cum), G- Re Land tip Baty + D-Rg - Wie 1250 RU Blk Mocnyneny 24, 009 0) 9 U- RL ~ Bice Machines —_ C4.) Con) Pidet FestDAI ae aT Ns * RAYS CP TPM ‘ion oe tor Cina. WG -AT G0 Dep a) eC ED PEM _ No, 4a 40p 120M (a@m) Cian, Chany Lana Win 25x Yas SM ¢ CUPP Ua a eae Tae 236M PTS Step Pao ie, Wiha Ge Fam, aP WERE —netey C26) p15, 068 arr 246 Tay X32 7= Hedin) HS BEX wt Io “P40 Injeco.diiderd —_ (27.860; JOUfream fale ay Tw Ur 98,08 2 ss ‘nientoy Gray) Inv. D6 S880 z Fok, my X 3c], = 53, EH DC ORL Ba a Parc Uee (S00) CHOY SF Lo. 20% pounieamSite __ (20. Fe Equipment RMN, Bil $749 xy = 2593 Re tee pt patream ale FRA fume 9 Pres host) ss Fae FT WE UI, aa Hea piu income fram oun AE-P L390 ‘Geratens—PI:Bans at 202,40) leone ey ukirero. §f) Cito, thio didend (108,09 “Wither oa. any WEF Ue inkeco che (Heo. Yiadeen _ 1 os ate — 22is.0n ey UR iheco amy Faripaton