ADVANCED FINANCIAL ACCOUNTING & REPORTING

Consolidated Statements
LECTURE NOTES

Consolidated financial statements- are the financial a. Prepare a schedule of excess to determine if there
statements of a group presented as those of a single is either goodwill, or, income from acquisition. This
economic entity. will also be the basis in formulating the working
paper elimination entries.
Group is a parent and all of its subsidiaries. b. If the working paper is to prepare post acquisition
Separate financial statements – are those presented by a consolidated statements, computations must show
parent, an investor in an associate, or a venturer in a the amortization of increase/decrease in value of
jointly controlled entity, in which the investments are net assets of the acquired company.
accounted for on the basis of the direct equity interest
rather than on the basis of the reported credits, and the DETERMINATION OF GOODWILL
net assets of the investee. An important aspect of accounting for business
combination, especially when control is less than 100%, is
PRESENTATION OF CONSOLIDATED FINANCIAL the computation of goodwill or excess in combination.
STATEMENTS Goodwill is computed as follows:
A parent shall present consolidated financial statements, Goodwill = Fair value of consideration transferred +
except when Amount of non-controlling interest (NCI)* +
 The parent is itself a wholly-owned subsidiary, or is a Fair value of previously-held equity interest LESS
partially-owned subsidiary of another entity net identifiable assets of the acquiree
 The parent’s debt or equity instruments are not traded
in a public market * Under revised provisions of IFRS3, the non-controlling
 The parent did not file, nor is in the process of filing, interest may be measured at either: (1) fair value or (2)
its financial statements with a securities commission as a proportionate share of identifiable net assets at the
for the purpose of issuing any class of instruments in a date of acquisition. These allowed alternatives result in
public market goodwill being computed in two different amounts. If
 The ultimate parent produces consolidated financial non-controlling interests are measured at full fair value,
statements available for public use goodwill recognized in the consolidated financial
statements will include a share for non-controlling
CONSOLIDATION PROCEDURES interests. In that case, goodwill is said to be grossed-up.
 The carrying amount of the parent’s investment in Under the second alternative, goodwill will be for the
each subsidiary and the parent’s portion of equity of parent only, i.e. not grossed-up. Unless otherwise
each subsidiary are eliminated indicated, the fair value approach is preferable to
 Non-controlling interests in the profit or loss of determine goodwill.
consolidated subsidiaries for the reporting period are 5. Increase/decrease to fair value of net asset items and
identified GOODWILL, if the NCI is measured at FAIR VALUE, are
 Non-controlling interests in the net assets of recognized in full regardless of the extent of the non-
consolidated subsidiaries are identified separately from controlling interest. Such re-measurement and
the parent shareholders’ equity in them. Non- resulting amortization/impairment loss affect both the
controlling interests in the net assets consist of: controlling interest and the non-controlling interests.
1. The amount of those non-controlling interests at
the date of the original combination Please note that goodwill is no longer amortized but
2. The non-controlling share of changes in equity subjected to annual tests for impairment losses.
since the date of the combination Recognized goodwill belongs to the parent only, as
well as any impairment loss thereon, if the NCI is
ACCOUNTING FOR INVESTMENTS IN SUBSIDIARIES, measured at its proportionate share of the identifiable
JOINTLY CONTROLLED ENTITIES AND ASSOCIATES IN net assets at FAIR VALUE
SEPARATE FINANCIAL STATEMENTS
For separate financial statements investment in 6. Working paper elimination entries orchestrate the
subsidiaries, jointly controlled entities and associates, that items and balances that must comprise the
are not classified as held for sales, shall be accounted for consolidated statements. Their two basic objectives
either: are (1) to eliminate intercompany balances and (2) to
 at cost, or make adjustments to or set-up some items in order to
conform with purchase principles.
 in accordance with IAS 39
7. In purchase combination, for example, working paper
elimination entries aim to accomplish the following:
Summary of Critical Points:
a. Eliminate inter-company balances
1. Consolidated statements are prepared from the
b. Make adjustments for acquired assets and
separate statements of the acquiring company and
assumed liabilities to comply with fair value
acquired company(ies) from the standpoint of a single
considerations.
economic entity.
c. Set up goodwill or income from acquisition into
2. Consolidation procedures are necessary whenever a
the consolidated statements.
parent and a subsidiary relationship existed, except if
d. Amortize increase/decrease in value of net assets
the parent is exempted under PAS 27 to present
and measure their effects in the consolidated
consolidated financial statements.
financial statements,
3. The acquiring company, generally, is a parent if it
e. Make adjustments to consolidated amounts as a
owns, directly and indirectly, more than 50% of the
result of inter-company transactions.
outstanding voting shares of the acquired company. If
f. And for a variety of other consolidation
the controlling interest is not 100%, the difference
requirements.
would represent the non-controlling interest.0
8. Basically, in the working papers, similar items from the
4. The following steps summarize the consolidation
parent’s records and from the subsidiary’s records are
worksheet procedures.

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 simply combined, plus/minus any working paper
adjustments affecting such items.
STRAIGHT PROBLEMS

Problem 1 – (Wholly-owned subsidiary)

On January 1, 2010, P Company purchased interest in S The following financial statements pertain to the two
companies for the year ended December 31, 20x9
Company. On this date the book values and the fair
values of S Company were as follows: Income Statement for the year ended December 31, 20x9
Fair Market Pet Co Show Ent
Book Values Values Operating profit P160,000 P 60,000
Cash P 240,000 Dividend income from
Accounts receivable 144,000 Show 18,900 -
Merchandise Net profit before tax 178,900 60,000
inventory 576,000 720,000 Tax expense (48,900) (18,000)
Building (net) 1,488,000 1,536,000 Net profit after tax 130,000 42,000
Equipment 480,000 384,000 Retained earnings,
Long term inv. in January 1 110,000 38,200
MS 960,000 1,392,000 Dividends declared (100,000) (31,500)
P3,888,000 Retained earnings,
Current liabilities P 480,000 December 31 P140,000 P 48,700
Bonds payable 1,008,000 1,248,000
Common stock 960,000 Balance as at December 31, 20x9
Retained earnings 1,440,000 Pet Co Show Ent
P 3,888,000 Investment in Saturn Co,
Requirements: cost P117,000 P -
Prepare the following: Other assets 520,200 265,230
A. Assuming that P Company paid P 2,736,000 for a Total assets P637,200 P265,230
100% interest Share capital P270,000 P 80,000
B. Assuming that P Company paid P 2,200,000 for a Retained earnings 140,000 48,700
80% interest. NCI is measured at FV. Long-term liabilities 166,000 120,000
C. Assuming that P Company paid P 2,200,000 for a Current liabilities 61,200 16,530
80% interest. NCI is measured as a proportion of Total equities P637,200 P265,230
the FV of the acquiree’s net assets.
D. Assuming that P Company paid P 2,100,000 for a Required:
80% interest. 1. Show the consolidation working paper entries for the
1. Determination and distribution of excess schedule year ended December 31, 20x9.
2. Working paper elimination entries 2. Perform an analytical check on the non-controlling
interests as at December 31, 20x9.
3. Prepare the consolidated income statement and
consolidated balance sheet for 20x9.
Problem 2
Pluto Company acquired a 60% interest in Saturn Co on 2 Problem 4 (Consolidation WPEE one year after date of
January, 2010. Book and fair values at the date of acquisition)
acquisition were close to each other. The fair value of non- On December 31, 20x1, P Co purchased 90% of S Co’s
controlling interests as at the date of acquisition is outstanding ordinary shares from S Co’s present
P60,000. A control premium was paid by Pluto to acquire shareholders for P8,260,000 cash and issuance of 1 million
Saturn. shares of P Co’s ordinary shares, which had a market
The following balance sheets relate to Pluto and Saturn value of P5,000,000. The balance sheets of S Co and P Co
right after the combination: at the date of acquisition (also the financial year-end) are
Pluto Co Saturn Co shown below. Assume that all fair value adjustments have
Investment in Saturn Co, cost P93,600 P 0 tax effects and give rise to either a deferred tax liability or
Other assets 462,400 235,760 deferred tax asset. However, goodwill impairment loss
Total assets P556,000 P235,760 does not have tax effects. Fair value of non-controlling
Share capital P240,000 P 64,000 interests at acquisition date was P1,400,000. Tax rate was
Retained earnings 112,000 24,000 20% throughout. Assume an accounting policy where the
Long-term liabilities 160,000 120,320 non-controlling interests are recognized at fair value on
Current liabilities 44,000 27,440 acquisition date.
Total equities P556,000 P235,760 S Company P Company
Book Value Fair Value Book Value
Assets
Required: Land P 780,000 P 1,170,000 P 1,560,000
Leased bldg. 5,200,000 6,500,000 10,400,000
1. Determination and distribution of excess schedule at
Equipt. – net 2,600,000 2,210,000 9,100,000
the date of acquisition. Inv. in S Co 13,260,000
2. Consolidation working paper entries at the date of Inventories 650,000 780,000 1,170,000
acquisition. AR – net 390,000 390,000 910,000
3. Consolidated balance sheet at the date of acquisition. Other CA 520,000 520,000 780,000
Cash 260,000 260,000 1,690,000
Problem 3 P10,400,000 P11,830,000 P38,870,000
Pet Company acquired a 60% interest in Show Enterprises
Equity and liabilities
on 2 January 20x2 when Show’s share capital and retained
Ordinary sh. P 6,500,000 P25,870,000
earnings were P80,000 and P30,000 respectively. The net RE 1,170,000 P 8,970,000* 5,590,000
assets of Show were fairly valued on that date. The fair Other liab. 910,000 910,000 2,600,000
value of non-controlling interest as at the date of Loan payable 1,820,000 1,820,000 4,810,000
acquisition is P78,000. Contingent liab. 130,000

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 P10,400,000 P11,830,000 P38,870,000 1. Calculate P Company’s investment income from S
Company in 2009.
Information on S Co’s net profit after tax and dividends 2. Elimination entries for 2009
declared during 20x2 are as follows: 3. Determine non-controlling interests in the net income
of the subsidiary for 2009.
P Co’s dividend income from S Co P409,500 4. Show consolidated net income for 2009, and allocate
S Co’s net profit after tax 728,000 to Controlling interests and Non-controlling interests.
S Co’s dividend declared 455,000
Problem 7 (Downstream Land Transfer)
There were no other changes to equity.
During 2008 P Company sold land with a cost of P150,000
In 20x2, the following information applies to undervalued
to its 80% owned subsidiary, S Company, for P 200,000.
and overvalued assets and goodwill:
The subsidiary sold the land in 2010 to an outsider for
 Undervalued inventories of P130,000 – sold in 20x2
 Undervalued land of P390,000 – still held by S Co – no P280,000. The subsidiary and the parent reported net
depreciation income as follows:
 Undervalued buildings of P1,300,000 – useful life 50 Parent Subsidiary
years from 1 January 20x2 2008 351,000 154,000
 Overvalued equipment of P390,000 – useful life 5 2009 335,000 149,000
years from 1 January 20x2 2010 315,000 165,000
 Contingent liabilities of P130,000 – materialized (paid-
off in 20x2) The reported income of the parent company includes P
 Goodwill – impairment loss of P520,000 recognized in 51,000 of dividend income each year.
20x2.
Requirements:
Requirements: 1. Calculate P Company’s investment income from S
1. Prepare consolidation adjustments for 20x2. Company in 2008, 2009, and 2010.
2. Reconcile the non-controlling interests’ balance from 2. Elimination entries for 2008, 2009, and 2010
the consolidation adjustments with the NCI’s share of 3. Determine non-controlling interest in the net income
the net assets of the subsidiary. of the subsidiary in 2008, 2009 and 2010
4. Show the consolidated net income for 2008, 2009 &
Problem 5 2010. Allocate each to Controlling and non-controlling
On January 1, 20x9, P Company purchased an 80% interests.
interest in S Company for P340,000. On this date, S
Company had Capital Stock of P150,000 and Retained Problem 8 (Upstream depreciable asset transfer)
Earnings of P100,000. An examination of S Company’s On January 1, 2009, S Company a 90% owned subsidiary
assets and liabilities revealed that book values were equal of P Company transferred equipment to its parent in
to market values for all except the following: exchange for P75,000 cash. At the date of transfer, the
subsidiary’s record carried the equipment at a cost of
Book value Market value P106,000 less accumulated depreciation of P45,000. The
Plant and equipment (net) 300,000 400,000 equipment has an estimated remaining life of 7 years.
Merchandise inventory 80,000 100,000 The subsidiary reported net income for 2009 and 2010 of
P 132,000 and P197,000, respectively. The parent
The plant and equipment had an expected remaining life company reported income of P 220,000 (including
of 5 years, and the inventory should be sold in 20x9. P dividend income of P 45,000) and P295,000 (including
Company’s income was P250,000 in 20x9 and P290,000 in dividend income of P45,000) for 2009 and 2010,
20x0. S Company’s income was P120,000 in 20x9 and P respectively.
180,000 in 20x0. S Company paid cash dividends of Requirements
P50,000 in 20x9 and P60,000 in 20x0. 1. Calculate P Company’s investment income from S
Company in 2009 and in 2010.
P Company uses the cost method in accounting for its 2. Elimination entries for 2009 and for 2010.
investment in stocks of S Company. 3. Determine non-controlling interest in the net income
Requirements: of the subsidiary for 2009 and for 2010.
1. Calculate the investment income of P Company from S 4. Show the consolidated net income for 2009 and 2010.
Company in 20x9 and in 20x0. Allocate each to Controlling and Non-controlling
2. Elimination entries for consolidated statement working interests.
papers on January 1, 20x9, December 31, 20x9 and
December 31, 20x0. Problem 9 (Intercompany Transactions)
3. Calculation of minority interest in net income of On January 1, 2009, P Company acquired 75% of the
subsidiary for 20x9 and 20x0 outstanding shares of S Company at a fair value
4. Calculation of consolidated net income for 20x9 and differential of P50,000, represented by understated plant
20x0. assets with a 10-year remaining life. During 2010, P
5. Calculation of minority interest in net assets as of Company purchased merchandise from S Company in the
January 1, 20x9, December 31, 20x9 and December amount of P 400,000 at billed prices. S Company shipped
31, 20x0. the merchandise at 40% above its cost, and this pricing
Problem 6 (Upstream Merchandise Transfer) policy was also used for shipments made in 2009 to P
S Company, a 75% owned subsidiary of P Company, sold Company. The inventories of P Company included
merchandise during 2009 to its parent company for P merchandise at billed prices from S Company as follows:
150,000. The merchandise cost S Company P 110,000,
25% of the transferred merchandise remained in P January 1, 2010 112,000
Company’s ending inventory. For the year 2009, S December 31, 2010 84,000
Company reported a net income of P 150,000 and P
Company reported net income (including dividend income Also, in 2009 P Co sold land to S Co for P200, 000. The
of P 60,000) of P 275,000. cost of the land to P Co was P150, 000. S Co sold the land
to an outsider for P230, 000 in 2010.
Requirements:

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Furthermore, on January 1, 2010 S Co sold equipment to Gain on sale of equipment _________ 14,000
P Co for P75, 000 cash at the date of the transfer, the Net income P 480,000 P 224,000
equipment is carried at a cost of P106, 000 less
accumulated depreciation of P45, 000. The equipment has Requirements:
an estimated remaining life of 7 years. 1. Calculate the non-controlling interests in the
consolidated net income in 2010.
Income statements for the two companies for the year 2. Calculate the controlling interest in the consolidated
2010 are as follows: net income in 2010.
P Company S Company 3. Prepare working paper elimination entries for the
Sales P2,000,000 P1,000,000 above information at December 31, 2010.
Cost of sales 800,000 500,000 4. Prepare a consolidated income statement for the year
Gross profit 1,200,000 500,000 ended December 31, 2010.
Operating expenses 720,000 320,000
Operating income 480,000 180,000
Gain on sale of land 30,000 - end –

MULTIPLE CHOICE

Daito Corporation owns 100% of Prince Enterprises. On b. P 60,000 d. P 65,000

January 1, 2010, Daito sold Prince delivery equipment at
a gain. Daito had owned the equipment for two years and On January 1, 2010. SABINA Corporation purchased 75%
used a five-year straight-line depreciation rate with no of the common stock of ARGO Company. Separate balance
residual value. Prince is using a three-year straight-line sheet data for the companies at the combination date
depreciation rate with no residual value for the
equipment.
are given below:
Sabina Argo
1. In the consolidated income statement, Prince recorded
Cash 12,000 103,000
depreciation expense on the equipment for 2010 will Accounts Receivables 72,000 13,000
be decreased by: Inventory 66,000 19,000
a. 20% of the gain on sale Land 39,000 16,000
b. 33.33% of the gain on sale Plant Assets 350,000 150,000
c. 50% of the gain on sale Accum. Depreciation (120,000) (30,000)
d. 100% of the gain on sale Invesment in Argo 196,000 _______-
Parker Corporation sells equipment with a book value of Total Assets 615,000 271,000
P80,000 to Sheaffer Enterprises, its 75%-owned Accounts Payable 103,000 71,000
subsidiary, for P100,000 on January 1, 2010. Sheaffer Capital Stock 400,000 150,000
determines that the remaining useful life of the equipment Retained Earnings 112,000 50,000
is four years and that straight-line depreciation is Total Equities. 615,000 271,000
appropriate. The December 31, 2010 separate company
financial statements of Parker and Sheaffer show At the date of combination the book values of ARGO’s net
equipment-net of P500,000 and P300,000, respectively. assets was equal to the fair value of the net assets except
2. The consolidated equipment-net will be: for ARGO’s inventory which has a fair value of P30,000.
a. P800,000 c. P780,000 5. What amount of goodwill will be reported?
b. P785,000 d P650,000 a. P15,667 c. P21,000
b. P37,750 d. P50,333

Balance sheet data for P Corporation and S Company on 6. What amount of total liability will be reported?
December 31, 2010, are given below: a. P174,000 c. P213,000
P Corporation S Company b. P284,333 d. P 90,667
Cash P 70,000 P 90,000
Merchandise 7. What is the amount of total assets?
Inventory 100,000 60,000 a. P590,667 c. P751,333
Property and b. P686,000 d. P738,750
equipment (net) 500,000 250,000
Investment in S On January 1, 2009, Paul Company purchased 90% of the
Company 260,000 ________ common stock of Bryan Company for P81,000 over the
Total assets P930,000 P400,000 book value of the shares acquired. All of the differential
was related to land held by Bryan. On May 1, 2010, Bryan
Current liabilities P180,000 P 60,000
sold the land at a gain of P145,000. For the year 2010,
Long term liabilities 200,000 90,000
Bryan reported net income of P331,000 and paid dividends
Common stock 300,000 100,000
of P80,000. Paul reported income from its own separate
Retained earnings 250,000 150,000
Total liabilities & SE P930,000 P400,000 operations of P659,000 and paid no dividends.
9. Consolidated net income for 2010 was
P Corporation purchased 80% interest in S Company on a. P 824,000 c. P 1,005,400
December 31, 2010 for P260,000. S Company’s property b. P 875,900 d. P 900,000
and equipment had a fair value of P50,000 more than the
book value shown above. All other book values On January 1, 2009 the Blumentritt Corporation sold
approximated fair value. In the consolidated balance sheet equipment to its wholly-owned subsidiary, Morayta
on December 31, 2010. Enterprises, for P1,800,000. The equipment cost
3. The amount of total stockholders’ equity to be reported Blumentritt P2,000,000; accumulated depreciation at the
will be time of the sale of P500,000. Blumentritt was depreciating
a. P 550,000 c. P 750,000 the equipment on the straight-line-method over twenty
b. P 610,000 d. P 615,000 years with no salvage value, a procedure that Morayta
continued.
4. The amount of non-controlling interest will be
a. P 50,000 c. P 110,000

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10. On the consolidated balance sheet at December 31, December 31, 2009 separate financial statements of CORN
2009 the cost and accumulated depreciation, and BEANS show equipment-net of P1,000,000 and
respectively, should be: P600,000, respectively.
a. P1,500,000 and P600,000 13. Consolidated equipment-net will be
b. P1,800,000 and P100,000 a. P1,236,500 c. P1,623,500
c. P1,800,000 and P500,000 b. P1,326,500 d. P1,523,600
d. P2,000,000 and P600,000
RICH Corporation paid P1,125,000 for an 80% interest in
P Company acquired a 65% interest in S company in HARD Corporation on January 1, 2009 at a price P37,500
2008. For years ended December 31, 2009 and 2010, S in excess of underlying book value. The excess was
reported net income of P325,000 and P390,000, allocated P15,000 to undervalued equipment with a ten-
respectively. During 2009, S sold merchandise to P for year remaining useful life and P22,500 to goodwill which
P70,000 at a cost of P54,000. Two-fifths of the was not impaired during the year. During 2009, HARD
merchandise was later resold by P to outsiders for P38,000 Corporation paid dividend of P60,000 to RICH Corporation.
during 2010. In 2010, P sold merchandise to S for The income statements of RICH and HARD for 2009 are
P98,000 at a profit of P24,000. One-fourth of the
merchandise was resold by S to outsiders for P30,000
given below:
RICH HARD
during 2010.
Sales P2,500,000 P1,000,000
11. Minority interest net income in 2009 is
Cost of sales (1,250,000) (500,000)
a. P115,100 c. P111,510
Depreciation
b. P151,110 d. P110,510
expense (250,000) (150,000)
Other expense (500,000) (225,000)
12. Minority interest net income in 2010 is
Net income P500,000 P125,000
a. P138,740 c. P134,780
14. Consolidated net income for 2009 is
b. b. P143,870 d. P137,480
a. P632,125 c. P623,125
b. P263,125 d. P632,215
CORN Corporation sells equipment with a book value of
P200,000 to BEANS Company, its 75% owned subsidiary
15. Non-controlling interest in net assets at December 31,
for P160,000 on April 1, 2009. BEANS determines that the
2009.
remaining useful life of the equipment is four years and
a. P290,785 c. P270,985
that the straight-line depreciation is appropriate. The
b. P209,785 d. P290,875

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