CHAPTER 5

Consolidated Financial Statements – Subsequent

to Date of Acquisition

Subsequent to the date of acquisition of a subsidiary by a parent, both affiliated

companies continue to maintain independent accounting records from each other. PAS
27 however provides that the parent company must also record in its books the operating
results of the subsidiary – the net income or net loss and dividends declared and paid by
the subsidiary. As a result of which, the consolidated financial statements subsequent to
date of acquisition must also include a consolidated statement of income and
consolidated statement of retained earnings in addition to the consolidated statement of
financial position.

This chapter deals with the procedures to be used in the accounting for results of
operations of the subsidiary as well as preparation of consolidated working papers to
facilitate the preparation of a consolidated statement of financial position, statement of
income and statement of retained earnings subsequent to the date of business
combination.

Methods of Accounting for Stock Investment

When stocks are acquired, the acquirer/investor maintains the investment account
on a continuous basis. In the year immediately following the acquisition and in all
subsequent years, the parent company will account for its investment in subsidiary using
either the Equity method or the Cost method.

Cost Method
PAS 27 provides that under the COST METHOD, an investor’s investment in
the investee account is recognized at cost. The investor recognizes income from the
investment only to the extent that the investor receives distributions from accumulated
profits of the investee arising after the date of acquisition.

Dividend distributions received in excess of such profits are regarded as recovery

of investment and are accounted for as a reduction of the cost of investment like a return
of capital or liquidating dividend.

Equity Method
The equity method is used when the acquirer/investor owns 20% or more (less
than 50%) of the voting power of the investee, thereby exercising significant influence
over the acquired company’s (investee) operations (PAS 28).

Under this method, the Investment in Associate account is initially recorded at

cost and is increased or decreased to recognize the investor’s share of the profit or loss of
the investee after the date of acquisition. Dividends received from an investee reduce the
carrying amount of the investment. Adjustments to the carrying amount of the investment
may also be necessary for changes in the investee’s equity that have not been recognized
 Chapter 4 49
Consolidated Financial Statements – Subsequent to Date of Acquisition

in the investee’s profit or loss. Such changes include those arising from revaluation of
assets and liabilities.

In developing the working papers for the Consolidated Financial Statements, the
method used to account for the business combination must be known as this would
determine the nature of the eliminating entries to be made.

However, regardless of the accounting method used, the consolidation of the

financial statements of the parent and subsidiary should be based on the assumption that
both these companies comprise a single entity. Furthermore, whether the investment
account is accounted for under the cost method or the equity method, the result of the
consolidation process must be the same.

PAS 27 provides that when separate financial statements are prepared, investment
in subsidiaries shall be accounted for at cost. Thus, only the cost method was made used
of in the following illustrations of accounting for a business combination subsequent to
date of acquisition.

Consolidation Of A Wholly Owned Subsidiary Purchased at Book Value

First Year after Combination

Assume that on January 2, 20x8, Parent Company purchases all the ordinary
shares of stock of Subsidiary Company for P500,000. At the time of acquisition,
Subsidiary Company has P400,000 of ordinary shares outstanding and retained earnings
of P100,000. Analysis of the acquisition is as follows:

Investment cost P500,000

Less: Book value of interest acquired (100%)
Ordinary Share Capital P400,000
Retained Earnings 100,000 500,000
Difference P 0

On December 31, 20x8, Subsidiary Company reported the following results of its
operations:

Net income P 200,000

Dividends paid 50,000

Parent Company Entries on Their Own Books

The entries to be made by Parent Company for the year 20x8 under the COST
Method follows:
 50 Business Combinations

Jan. 2 Investment in Subsidiary Company Shares 500,000

Cash 500,000
To record the purchase of Subsidiary
Company Ordinary Shares.

Dec. 31 Cash 50,000

Dividend Income 50,000
To record 100% of the dividends received
from Subsidiary Company.

The above journal entries would result to the following account balances in the
books of Parent Company

Investment in Subsidiary Company Shares P500,000

Dividend Income 50,000

Working Paper Elimination Entries

To consolidate Parent and Subsidiary’s financial statements, the following
working paper eliminating entries should be done.

(1) Eliminate Parent Company’s equity in Subsidiary’s shareholders’ equity at

the date of acquisition.
(2) Eliminate the Dividend Income of Parent Company against the Dividends
Declared by Subsidiary Company.

The following are the eliminating entries to be prepared by Parent Company and
Subsidiary Company for 20x8.

E (1) Ordinary Shares– Subsidiary Company 400,000

Retained Earnings – Subsidiary Company 100,000
Investment in Subsidiary Company Shares 500,000
To eliminate investment and equity accounts
at the date of acquisition.

E (2) Dividend Income 50,000

Dividends Declared – Subsidiary Company 50,000
To eliminate inter-company dividends.

Consolidated Statements Worksheet – First Year

The consolidated statement worksheet for the above problem is presented on the
next page under Illustration 5-1
 Chapter 4 51
Consolidated Financial Statements – Subsequent to Date of Acquisition

Illustration 5-1
Parent Company and Subsidiary Company
Consolidated Statements Worksheet
Year Ended December 31, 20x8 – First Year
Parent Subsidiary Conso-
Debit Credit
Company Company lidated

Income Statement
Sales 900,000 500,000 1,400,000
Dividend Income 50,000 (2) 50,000

Total Revenue 950,000 500,000 1,400,000

Cost of Goods Sold 250,000 200,000 450,000
Operating Expenses 100,000 75,000 175,000
Other Expenses 50,000 25,000 75,000

Total Costs and Expenses 400,000 300,000 700,000

Net Income, carried forward 550,000 200,000 700,000
Statement of Retained
Earnings
Retained Earnings, January 1:
Parent Company 2,000,000 2,000,000
Subsidiary Company 100,000 (1) 100,000
Net Income from above 550,000 200,000 700,000
2,550,000 300,000 2,700,000
Dividends Declared
Parent Company 60,000 60,000
Subsidiary Company 50,000 (2) 50,000
Retained Earnings,
December 31 carried forward 2,490,000 250,000 2,640,000

Balance Sheet
Cash 1,450,000 175,000 1,625,000
Accounts Receivable 520,000 75,000 595,000
Inventory 500,000 80,000 580,000
Property and Equipment (net) 3,520,000 620,000 4,140,000
Investment in Subsidiary
Company Shares 500,000 (2) 500,000

Total Assets 6,490,000 950,000 6,940,000

Accounts Payable 1,000,000 200,000 1,200,000
Bonds Payable 500,000 100,000 600,000
Ordinary Shares:
Parent Company 2,500,000 2,500,000
Subsidiary Company 400,000 (1) 400,000
Retained Earnings from
above 2,490,000 250,000 2,640,000
Total Liabilities and Equity 6,490,000 950,000 550,000 550,000 6,940,000
 52 Business Combinations

Consolidated Statements Worksheet Relationships

The following aspects of the worksheet for consolidated financial statements of
Parent Company and Subsidiary Company should be emphasized:

1. Elimination (1) deals with the elimination of the intercompany investment and
subsidiary equity accounts on the beginning of the period based on the
parent’s percentage of interest. In this illustration, the parents interest is at
100%
2. The consolidated net income and consolidated retained earnings in the
working paper may be verified as follows, to assure their accuracy:

Consolidated Net Income:

Net income of Parent Company P550,000
Add: Parent’s share in Subsidiary Company’s net income
(100%) 200,000
Less: Parent’s dividend income from Subsidiary’s declared
dividends (100%) (50,000)
Consolidated net income P700,000

Consolidated Retained Earnings:

Retained Earnings of Parent Company, December 31 P2,000,000
Add: Consolidated Net Income 700,000
Less: Dividends declared by Parent Corporation (60,000)
Consolidated retained earnings P2,640,000

Consolidated Financial Statements

The consolidated income statement, statement of retained earnings, and balance
sheet of Parent Company and Subsidiary Company for the year ended December 31,
20x8, are presented below. The amounts of the consolidated financial statements are
taken from the consolidated column of the consolidated statements worksheet
(Illustration 5-1).
Parent Company and Subsidiary
Consolidated Income Statement
Year Ended December 31, 20x8
Sales P 1,400,000
Cost and Expenses:
Cost of Goods Sold P 450,000
Operating Expenses 175,000
Other Expenses 75,000 (700,000)
Consolidated Net Income P 700,000
 Chapter 4 53
Consolidated Financial Statements – Subsequent to Date of Acquisition

Parent Company and Subsidiary

Consolidated Statement of Retained Earnings
Year Ended December 31, 20x8

Retained Earnings, January 1 – Parent Company P 2,000,000

Add: Consolidated Net Income 700,000
Total 2,700,000
Less: Dividends – Parent Company 60,000
Consolidated Retained Earnings P 2,640,000

Parent Company and Subsidiary

Consolidated Statement of Financial Position
December 31, 20x8
Assets
Current Assets
Cash P 1,625,000
Accounts Receivable 595,000
Inventory 580,000
Total Current Assets P 2,800,000
Property and Equipment (net) 4,140,000

Total Assets P 6,940,000

Liabilities and Shareholders’ Equity

Liabilities
Accounts Payable P 1,200,000
Bonds Payable 600,000
Total Liabilities P 1,800,000
Shareholders’ Equity
Ordinary Shares P 2,500,000
Retained Earnings 2,640,000 5,410,000
Total Liabilities and Shareholders’ Equity P 6,940,000

From the illustration above, it is to be noted that the consolidated net income is
the result of all revenues and expenses of the individual consolidating companies arising
from transactions with non-affiliated companies. The net income is the part of the total
income of the enterprise that is assigned to the shareholders of the parent.

The consolidated retained earnings on the other hand, is that portion of the
undistributed earnings of the consolidated enterprise accruing to the shareholders of the
parent company.
 54 Business Combinations

Second and Subsequent Years after Combination

The consolidation procedures to be used at the end of the second year and in
periods thereafter are basically the same as those used at the end of the first year.

Consolidation two years after the combination is illustrated by continuing the

example of Parent Company and Subsidiary Company. On December 31, 20x9,
Subsidiary Company reports net income of P225,000 and pays dividends of P60,000.

Parent Company Entries

Parent Company will only record the dividends received from Subsidiary
Company by the following entry on December 31, 20x9:

Cash 60,000
Dividend Income 60,000
To record dividends received from Subsidiary (100%).

On December 31, 20x9, the balances of the Investment in Subsidiary Ordinary

Shares and Dividend Income accounts are:

Investment in Subsidiary Company Shares(at original cost) P500,000

Dividend Income 60,000

Working Paper Elimination Entries

Using the procedures, the two elimination entries to be presented in the
consolidated statements worksheet are as follows:

E (1) Ordinary Shares – Subsidiary Company 400,000

Retained Earnings – Subsidiary Company 250,000
Investment in Subsidiary Company Share 650,000
To eliminate investment and subsidiary’s equity
accounts at the beginning of the year.

E (2) Dividend Income 60,000

Dividends Declared – Subsidiary Company 60,000
To eliminate inter-company dividends.

E (3) Investment in Subsidiary Company Share 150,000

Retained Earnings-Parent Company 150,000
To eliminate the Investment in Subsidiary account
and to reconcile the parent’s retained earnings balance
with the consolidated retained earnings balance .
 Chapter 4 55
Consolidated Financial Statements – Subsequent to Date of Acquisition

Eliminating entry (3) reflects the difference of P150,000 which represents the
share of Parent in the undistributed earnings of Subsidiary in prior years since the
earnings of the subsidiary under the cost method are not recorded by the parent company.

Consolidated Statements Worksheet – Second Year

After posting of elimination entries in the consolidated statements worksheet, the
worksheet is completed in the usual manner as shown below. All the consolidated
statements worksheet relationships discussed in relation with Illustration 5-1 continue in
the second year as well.

Illustration 5-2

Parent Company and Subsidiary Company

Consolidated Statements Worksheet
Year Ended December 31, 20x9 – Second Year
Parent Subsidiary Conso-
Debit Credit
Company Company lidated
Income Statement
Sales 1,000, 000 650, 000 1,650, 000
Dividend Income 60, 000 (2) 60, 000
Total Revenue 1,060, 000 650, 000 1,650, 000
Cost of Goods Sold 350, 000 300, 000 650, 000
Operating Expenses 150, 000 75, 000 225, 000
Other Expenses 50, 000 50, 000 100, 000
Total Costs and Expenses 550, 000 425, 000 975, 000
Net Income, carried forward 510, 000 225, 000 675, 000
Statement of Retained
Earnings
Retained Earnings, January 1:
Parent Company 2,640, 000 (3) 150,000 2,790, 000
Subsidiary Company 250, 000 (1) 250, 000
Net Income from above 510, 000 225, 000 675, 000
3,150, 000 475, 000 3,465, 000
Dividends Declared
Parent Company 90, 000 90, 000
Subsidiary Company 60, 000 (2) 60, 000
Retained Earnings,
December 31 carried forward 3,060, 000 415, 000 3,375, 000
Balance Sheet
Cash 2,482, 000 237, 000 2,719, 000
Accounts Receivable 560, 000 80, 000 640, 000
Inventory 450, 000 90, 000 540, 000
Property and Equipment (net) 3,168, 000 558, 000 3,726, 000
Investment in Subsidiary
Company Share 500, 000 (3) 150,000 (1) 650, 000
Total Assets 7,160, 000 965, 000 7,625, 000

Accounts Payable 1,200, 000 100, 000 1,300, 000

 56 Business Combinations

Bonds Payable 400, 000 50, 000 450, 000

Ordinary Shares:
Parent Company 2,500, 000 2,500, 000
Subsidiary Company 400, 000 (1) 400,000
Retained Earnings from
above 3,060, 000 415, 000 3,375,000
Total Liabilities and Equity 7,160, 000 965, 000 560,000 560, 000 7,625,000

Consolidation: Partially Owned Subsidiary – Purchased at Book Value

When a subsidiary is partially owned by the parent company, the consolidation
procedures must be modified slightly from those discussed earlier to include recognition
of the Non-controlling Interest in Net Assets of Subsidiary (NCINAS) or non-
controlling interest.

First Year after Acquisition

Assume that on January 2, 20x8, Parent Company purchases 80% of the ordinary
shares of Subsidiary Company for P400,000. All other data are the same as those used in
the previous example. The computation of the difference resulting from the ownership
situation is as follows:

Investment cost P400,000

Less: Book value of interest acquired (80%)
Ordinary Share (P400, 000 x 80%) P320,000
Retained Earnings (P100, 000 x 80%) 80,000 400,000
Difference P 0

Parent Company Entries

During 20x8, Parent Company would make the following entries to record its
investment in Subsidiary Company and the receipt of dividends from Subsidiary
Company as follows:

Jan. 1 Investment in Subsidiary Company Share 400, 000

Cash 400, 000
To record the purchase of Subsidiary
Company share.

Dec. 31 Cash 40, 000

Dividend Income 40, 000
To record share in dividends paid by
Subsidiary Company. (P50, 000 x 80%).
 Chapter 4 57
Consolidated Financial Statements – Subsequent to Date of Acquisition

After posting the above entries for 20x8 under the cost method of accounting, the
balance of Investment in Subsidiary Company Share and Dividend Income accounts are
P400,000 and P40,000 respectively.

Consolidated Statements Worksheet Elimination Entries

The elimination procedures used in the previous illustration are the same except
the establishment of the Non-controlling Interest in Net Assets of Subsidiary (NCINAS)
and Non-controlling Interest in Net Income of Subsidiary (MINIS). The consolidated
statements worksheet elimination entries on December 31, 20x8, first year after
acquisition, are as follows:

E (1) Ordinary Shares – Subsidiary Company 400, 000

Retained Earnings – Subsidiary Company 100, 000
Investment in Subsidiary Company Share 400, 000
Non-controlling Interest in Net Assets of Subsidiary 100,000
To eliminate inter-company investment and equity
accounts of subsidiary at date of acquisition and
to establish Non-controlling interest in net assets of
subsidiary.

E (2) Dividend Income (80%) 40,000

Non-controlling Interest in Net Assets of Subsidiary (20%) 10 000
Dividends Declared – Subsidiary Company 50,000
To eliminate inter-company dividends and to
establish Non-controlling interest share.

E (3) Non-controlling Interest in Net Income of Subsidiary 40,000

Non-controlling Interest in Net Assets of Subsidiary 40,000
To establish Non-controlling interest in subsidiary’s net
income for the year 20x8 (P200,000 x 20%).

Consolidated Statements Worksheet – First Year

The worksheet for consolidated statements for Parent Corporation and partially
owned subsidiary for the year ended December 31, 20x8, is shown on the next page
(Illustration 5-3). The following should be noted in the consolidated statements
worksheet:

1. Elimination entry (1) eliminates the investment account balance at its

acquisition cost (P400,000). This results to the elimination of the equity
accounts of Subsidiary Company and the establishment of the Non-controlling
Interest in Net Assets of Subsidiary of P100,000.
 58 Business Combinations

2. Elimination entry (2) eliminates the inter-company dividends and Non-

controlling interest share of dividends paid by Subsidiary Company.
3. Although only 80% of Subsidiary Company stock is owned by Parent
Corporation, 100% of sales, cost of goods sold, and operating expenses are
carried to the consolidated column. This is because the financial statements
are considered to be those of a consolidated entity. This approach requires that
the Non-controlling Interest in Net Income (MINIS) of P40,000 be subtracted
to arrive at the net income attributable to the parent of P660,000.
4. Elimination entry (3) establishes the Non-controlling Interest in Net Income of
Subsidiary (MINIS) for year 2008 which is equal to 20% of the subsidiaries
net income.

Illustration 5-3

Parent Company and Subsidiary Company

Consolidated Statements Worksheet
Year Ended December 31, 20x8

Parent Subsidiary Conso-

Debit Credit
Corporation Company lidated
Income Statement
Sales 900,000 500,000 1,400,000
Dividend Income 40,000 (2) 40,000
Total Revenue 940,000 500,000 1,400,000
Cost of Goods Sold 250,000 200,000 450,000
Operating Expenses 100,000 75,000 175,000
Other Expenses 50,000 25,000 75,000
Total Costs and Expenses 400,000 300,000 700,000
Net Income 540,000 200,000 700,000
Non-controlling Interest in
Net Income of Subsidiary (3) 40,000 (40,000)
Equity holders of the parent
net income 660,000

Statement of Retained
Earnings
Retained Earnings, January 1: 2,000,000 2,000,000
Parent Corporation
Subsidiary Company 100,000 (1) 100,000
Net Income from above 540,000 200,000 660,000
2,540,000 300,000 2,660,000
Dividends Declared
Parent Corporation 60,000 60,000
Subsidiary Company 50,000 (2) 50,000
Retained Earnings,
December 31 carried forward 2,480,000 250,000
Equity holders of parent
retained earnings 2,600,000
 Chapter 4 59
Consolidated Financial Statements – Subsequent to Date of Acquisition

Balance Sheet
Cash 1,540,000 175,000 1,715,000
Accounts Receivable 520,000 75,000 595,000
Inventory 500,000 80,000 580,000
Property and Equipment 3,520,000 620,000 4,140,000
Investment in Subsidiary
Company Share 400,000 (1) 400,000
Total Assets 6,480,000 950,000 7,030,000
Accounts Payable 1,000,000 200,000 1,200,000
Bonds Payable 500,000 100,000 600,000
Ordinary Shares:
Parent Corporation 2,500,000 2,500,000
Subsidiary Company 400,000 (1) 400,000
Retained Earnings from above 2,480,000 250,000 2,600,000
Non-controlling Interest in (1) 100,000
Net Assets of Subsidiary (2) 10,000 (3) 40,000 130,000
Total Liabilities and Equity 6,480,000 950,000 590,000 590,000 7,030,000

5. The Non-controlling interest in net assets of subsidiary of P130,000 in the

consolidated statements worksheet can be verified as:

Subsidiary Company’s stockholders’ equity, December 31, 20x8 P500,000

Subsidiary Company’s undistributed earnings, December 31, 20x8
(P200,000 – P50,000) 150,000
Net assets of Subsidiary Company, December 31, 20x8 P650,000

Non-controlling Interest in Net Assets of Subsidiary (P650,000 x 20%) P 130,000

Consolidated Financial Statements

The consolidated income statement, statement of retained earnings, and balance
sheet of Parent Company and Subsidiary Company for the year ended December 31,
20x8, are shown below. The amounts in the consolidated financial statements are taken
from the Consolidated column in the consolidated statements worksheet Illustration 5-3.
Parent Company and Subsidiary Company
Consolidated Income Statement
Year Ended December 31, 20x8
Sales P 1,400, 000
Cost and Expenses:
Cost of Goods Sold P450, 000
Operating Expenses 175, 000
Other Expenses 75, 000 700, 000
Consolidated Net Income P 700, 000
Attributable to:
Equity holders of the parent net income P 660,000
Non-controlling Interest in Net Income of Subsidiary 40, 000
Consolidated Net Income P 700, 000
 60 Business Combinations

Parent Company and Subsidiary Company

Consolidated Statement of Retained Earnings
Year Ended December 31, 20x8

Retained Earnings, beginning of year P 2,000, 000

Add: Equity holders of parent Net Income 660, 000
Total P 2,660, 000
Less: Dividends 60, 000
Consolidated Retained Earnings, end of year P 2,600, 000

Parent Company and Subsidiary Company

Consolidated Balance Sheet
December 31, 20x8

Assets
Current Assets
Cash P 1,715, 000
Accounts Receivable 595, 000
Inventory 580, 000
Total Current Assets P 2,890, 000
Property and Equipment (net) 4,140, 000
Total Assets P 7,030, 000

Liabilities and Shareholders’ Equity

Liabilities
Accounts Payable P 1,200, 000
Bonds Payable 600, 000

Total Liabilities P 1,800, 000

Shareholders’ Equity
Ordinary Shares P 2,500, 000
Retained Earnings 2,600, 000
Equity attributable to the equity holders of parent 5,100, 000
Non-controlling Interest in Net Assets of Subsidiary 130, 000
Total Liabilities and Shareholders’ Equity P7,030, 000

Accounting Highlights
- The carrying amount of the parent’s investment and its portion of equity in each
subsidiary are eliminated in accordance with the procedures in PFRS No. 3.
- Intercompany account balances and intercompany transactions are eliminated in
full.
- Non-controlling interest in the net assets of consolidated subsidiaries are
identified and presented separately as part of the parent’s equity.
- Non-controlling interest in the profit or loss of subsidiaries are identified but
are not deducted from profit for the period in accordance with PAS 27 stating
that income attributable to Non-controlling interest is separately presented in
 Chapter 4 61
Consolidated Financial Statements – Subsequent to Date of Acquisition

the statement of earnings or operations. This is determined by presenting net

income before Non-controlling interest (equity holders of the parent’s share in
net income), followed by the allocation to the Non-controlling interest net
income in subsidiary then followed by the net income (consolidated net
income).
- Consolidated profits are to be adjusted for the subsidiary’s cumulative preferred
dividends, whether or not dividends have been declared.

Non-controlling Interest
The Non-controlling Interest is presented in Parent’s Consolidated Balance Sheet
as a separate item in the parent’s equity portion in the shareholders’ equity and shall be
separately disclosed.

In the event that the losses applicable to the Non-controlling in a consolidated

subsidiary would exceed the Non-controlling interest in the equity of the subsidiary, the
excess, and any further losses incurred by the Non-controlling interest is to be charged
against the majority interest. An exception however, is when the Non-controlling interest
has a binding obligation to, and is able to recover all the losses it has previously incurred.
If the Non-controlling interest starts to incur profits, the majority interest is to allocate
such profits until such time that all the losses absorbed by the majority interest has been
recovered.

Consolidation: Partially Owned Subsidiary – Purchased at Other than Book Value

In some cases, the investment cost of the parent is not equal to the book value of
interest acquired from the subsidiary. As discussed in the previous chapter, the difference
between the investment cost and the book value of the interest acquired must be allocated
to the specific assets and liabilities of the subsidiary. This allocation must be made in the
consolidation paper each time consolidated statements are prepared. In addition, if the
allocation relates to assets subject to deprecation or amortization, appropriate entries must
be made in the working paper for the depreciation or amortization to reduce consolidated
net income accordingly.

The following elimination procedures may be used to eliminate inter-company

transactions when the investment cost is not equal to the book value of interest acquired:

(1) Eliminate equity accounts of subsidiary and investment account at beginning

of the year.
(2) Allocate the difference to specific assets and liabilities of the subsidiary. The
allocation should be in accordance with the principles discussed in the
previous chapter.
(3) Amortize the allocated difference except goodwill in accordance with
accounting for the asset to which it is assigned.
 62 Business Combinations

(4) Eliminate intercompany dividends and establish Non-controlling interest share

of subsidiary’s dividends declared.
(5) Assign income of subsidiary to Non-controlling interest.

First Year after Combination

Using the data in our previous example, assume that Parent Company purchases
80% of the ordinary shares of Subsidiary Company on January 2, 20x8 for P500,000.
Assume further that on the date of the combination, all assets and liabilities of Subsidiary
Company have fair market values equal to their book values, except for the following:

(Under) Over-
Book Value Fair Value
valuation
Inventory 80, 000 P 85, 000 P ( 5, 000)
Property and Equipment 620, 000 680, 000 (60, 000)
P700, 000 P765, 000 P (65, 000)

The computation and allocation of difference resulting from the above ownership
situation is as follows:

Investment cost P 500, 000

Less: Book value of interest acquired (80%)
Ordinary Share – Subsidiary Co. (P400, 000 x 80%) P320, 000
Retained Earnings – Subsidiary Co. (P100, 000 x 80%) 80, 000 400, 000
Difference P 100, 000
Allocation:
Inventory P (5, 000)
Property and Equipment (60, 000)
Total P(65, 000)
Non-controlling Interest (P65, 000 x 20%) 13, 000 (52, 000)
Goodwill P 48, 000

All of the inventory on January 5, 20x8 to which the difference relates are sold
during 20x8. The property and equipment have a remaining life of 10 years from the date
of acquisition and straight line method of depreciation is used.

For the first year, immediately after the acquisition, Subsidiary Company reports
the following:

Net Income P 200,000

Dividends Paid 50,000
 Chapter 4 63
Consolidated Financial Statements – Subsequent to Date of Acquisition

Parent Company Entries

During 20x8, under the cost method, Parent Company records the following
entries on its books:

Jan. 1 Investment in Subsidiary Company Share 500, 000

Cash 500, 000
To record the purchase of Subsidiary
Company share.

Dec. 31 Cash 40,000

Dividend Income 40,000
To record share in dividends paid by Subsidiary.
(50, 000 x 80%).

On December 31, 20x8, after posting the above entries, Parent Corporation’s
Investment in Subsidiary Company Share and Dividend Income accounts would show
balances of P500, 000 and P40, 000 respectively.

Amortization of Allocated Differences

The amortization of the allocated difference is not recorded on the books of the
parent. The amortization is only a consolidation statements worksheet entry computed
as follows:

Allocated Amortization
Difference 20x8 20x9 to 20x17
Inventory P 5,000 P 5,000 P 0
Plant and Equipment 60,000 6,000 6,000
Goodwill 48,000 - -
Total P 113,000 P 11,000 P 6,000

Since the inventory was totally sold in 20x8, no provision for amortization in
future periods is already needed. The allocated difference to plant and equipment is
amortized over its remaining life of 10 years. Goodwill is not amortized but subject to
impairment.

Consolidated Statements Worksheet Elimination Entries

Using the elimination procedures, the consolidated statements worksheet
elimination entries for Parent Company and Subsidiary Company on December 31, 20x8,
are as follows:
 64 Business Combinations

E (1) Ordinary Shares – Subsidiary Company 400, 000

Retained Earnings – Subsidiary Company 100, 000
Investment in Subsidiary Company Share 400, 000
Non-controlling Interest in Net Assets of Subsidiary 100, 000
To eliminate equity accounts of subsidiary and the
investment account for the parent’s share and
establish Non-controlling interest in net assets of
subsidiary at date of acquisition.
E (2) Inventory 5, 000
Property and Equipment 60, 000
Goodwill 48, 000
Investment in Subsidiary Company Share 100,000
Non-controlling Interest in Net Assets of Subsidiary 13,000
To allocate the difference between investment cost
and the book value of identifiable assets acquired
with remainder to goodwill.
E (3) Cost of Sales 5, 000
Operating Expenses-Depreciation Expense 6, 000
Inventory 5, 000
Property and Equipment 6, 000
To amortize allocated difference of the inventory
and the property and equipment’s book value and
fair value .
E (4) Dividend Income 40, 000
Non-controlling Interest in Net Assets of Subsidiary 10, 000
Dividends Declared – Subsidiary Company 50, 000
To eliminate inter-company dividends and Non-controlling
interest share of dividends (P30, 000 x 20%).
E (5) Non-controlling Interest in Net Income of Subsidiary 37, 800
Non-controlling Interest in Net Assets of Subsidiary 37, 800
To establish Non-controlling interest in subsidiary’s
adjusted net income for 2005 as follows:
Net income of subsidiary P200, 000
Amortization per E (c) 11, 000
Adjusted net income of subsidiary P 189,000

Non-controlling Interest Share (20%) P 37,800

 Chapter 4 65
Consolidated Financial Statements – Subsequent to Date of Acquisition

Consolidated Statements Worksheet – First Year

The worksheet for consolidated statements for Parent Company and partially
owned Subsidiary Company for the year ended December 31, 20x8 showing the five
elimination entries is shown in Illustration 5-4.

Illustration 5-4

Parent Company and Subsidiary Company

Consolidated Statements Worksheet
Year Ended December 31, 20x8
Parent Subsidiary Conso-
Debit Credit
Corporation Company lidated
Income Statement
Sales 900, 000 500, 000 1,400, 000
Dividend Income 40, 000 (4) 40, 000
Total Revenue 940, 000 500, 000 1,400, 000
Cost of Goods Sold 250, 000 200, 000 (3) 5, 000 455, 000
Operating Expenses 100, 000 75, 000 (3) 6, 000 181, 000
Other Expenses 50, 000 25, 000 75, 000
Total Costs and Expenses 400, 000 300, 000 711, 000
Net Income 540, 000 200, 000 689, 000
Non-controlling Interest Net
Income (5) 37, 800 ( 37, 800)
Equity holders of the parent
net income 651,200

Statement of Retained
Earnings
Retained Earnings, January 1: 2,000, 000
Parent Company 2,000, 000
Subsidiary Company 100, 000 (1) 100, 000
Net Income from above 540, 000 200, 000 651,200
Total 2,540, 000 300, 000 2,651,200
Dividends Declared
Parent Corporation 60,000 60, 000
Subsidiary Company 50, 000 (4) 50, 000
Retained Earnings,
December 31 carried forward 2,480, 000 250, 000
Consolidated Retained
Earnings 2,591,200

Balance Sheet
Cash 1,440, 000 175, 000 1,615, 000
Accounts Receivable 520, 000 75, 000 595, 000
Inventory 500, 000 80, 000 (2) 5, 000 (3) 5, 000 580, 000
Property and Equipment 3,520, 000 620, 000 (2) 60, 000 (3) 6, 000 4,194, 000
Investment in Subsidiary (1) 400,000
Company 500, 000 (2) 100,000 -
Goodwill (2) 48, 000 48, 000
Total Assets 6,480, 000 950, 000 7,032, 000
 66 Business Combinations

Accounts Payable 1,000, 000 200, 000 1,200, 000

Bonds Payable 500, 000 100, 000 600, 000
Ordinary Shares:
Parent Corporation 2,500, 000 2,500, 000
Subsidiary Company 400, 000 (1) 400, 000
Retained Earnings 12 /31
from above 2,480, 000 250, 000 2,591,200
Non-controlling Interest (1) 100, 000
in Net Assets of (2) 13, 000
Subsidiary (4) 10, 000 (5) 37, 800 140,800
Total Liabilities and Equity 6,480, 000 950, 000 423, 800 423, 800 7,032, 000

The Non-controlling Interest in Net Assets of Subsidiary, Consolidated Net Income, and
Consolidated Retained Earnings in the consolidated statements worksheet may be
verified by the following computations:

Non-controlling Interest in Net Assets of Subsidiary

(NCINAS) – 20x8
Subsidiary Company’s stockholders’ equity P500, 000
Increase in earnings (P200, 000 – P50, 000) 150, 000
Subsidiary Company’s stockholders’ equity, December 31, 20x8 P 650, 000
Unamortized difference, December 31, 20x8:
Allocated difference P 65, 000
Less: amortization 11, 000 54, 000
Subsidiary Company’s net assets, December 31, 2005 P 704, 000

Non-controlling Interest in Net Assets of Subsidiary (P704, 000 x 20%) P 140, 800

Or:

Non-controlling share in the equity accounts of Subsidiary at date of acquisition P 100,000

Non-controlling share in the allocated difference in book value and fair value of
inventory and property and equipment (65,000 x 20%) 13,000
Non-controlling share in the adjusted net income of Subsidiary 37,800
Non-controlling share in the dividends paid by Subsidiary ( 10,000)
Total Non-controlling Interest in Net Assets of Subsidiary P 140,800
 Chapter 4 67
Consolidated Financial Statements – Subsequent to Date of Acquisition

Equity holders
of parents Consolidated
share in net NCINI Net Income
income (20%)
Parent’s net income P 540,000 P 540,000
Subsidiary’s net income 160,000 P 40,000 200,000
Parent’s share in Subsidiary’s dividends (40,000) (40,000)
Amortization of allocated Inventory (4,000) (1,000) (5,000)
Amortization of allocated Property and Equipment (4,800) (1,200) (6,000)
Total P 651,200 P 37,800 P 689,000

OR

Consolidated
Parent Subsidiary Net Income
Net Income P 540,000 P200,000
Parent’s share in Subsidiary’s dividends (40,000)
Amortization of Inventory (5,000)
Amortization of allocated Property and
Equipment (6,000)
Total P 500,000 P 189,000
80% interest of the Parent (80% x P189,000) 151,200 (151,200)
Total P 651,200 P 37,800 P689,000

Consolidated Retained Earnings (CRE)

Parent’s consolidated retained earnings-20x8 P 2,000,000
Consolidated net income 651,200
Parent’s Dividends Declared (60,000)
Consolidated retained earnings P 2,591,200

Second Year after Combination – 20x9

Consolidation procedures in the second year follow the same procedures in the
first year. From our previous example, assume that on December 31, 20x9, Subsidiary
Company shows the following results of operations:

Net income P 225,000

Dividends paid 60,000
 68 Business Combinations

Parent Company Entries

On December 31, 20x9, before the preparation of consolidated financial

statements, the balance of Parent’s Investment in Subsidiary Company Stock and
Dividend Income are:
Investment in Subsidiary Company Stock P500, 000
Dividend Income 48, 000

Consolidated Statements Worksheet Elimination Entries

Eliminating entries in the consolidated statements worksheet at the end of 20x9
are as follows:

E (1) Ordinary Shares – Subsidiary Company 400, 000

Retained Earnings – Subsidiary Company 250, 000
Investment in Subsidiary Company Share 520, 000
Non-controlling Interest in Net Assets of Subsidiary 130, 000
To eliminate equity accounts of Subsidiary
and investment account and establish Non-controlling
interest in net assets of Subsidiary on the date of
acquisition.

E (2) Property and Equipment 54,000

Goodwill 48,000
Investment in Subsidiary Company Share 91,200
Non-controlling Interest in Net Assets of Subsidiary 10,800
To allocate difference of the non-cash assets’
book value with their fair value .

E (3) Operating Expenses 6,000

Property and Equipment 6,000
To for 20x9 depreciation for the allocated
difference of the Property and Equipment.

E (4) Dividend Income 48, 000

Non-controlling Interest in Net Assets of Subsidiary 12, 000
Dividends Declared – Subsidiary Company 60, 000
To eliminate inter-company dividends and Non-controlling
interest share of dividends paid by Subsidiary
(P60, 000 x 20%).

E (5) Investment in Subsidiary Company Share 111,200

Retained Earnings- Parent 111,200
To close the difference between the Parent’s
Retained earnings and the Consolidated Retained
Earnings on December 31, 20x8.
 Chapter 4 69
Consolidated Financial Statements – Subsequent to Date of Acquisition

E (6) Non-controlling Interest in Net Income of Subsidiary 43, 800

Non-controlling Interest in Net Assets of Subsidiary 43, 800
To establish Non-controlling interest in Subsidiary’s
adjusted net income for 20x9.
(P225, 000 – P6, 000) x 20%

Consolidated Statements Worksheet – Second Year after Acquisition

The working paper to prepare a complete set of consolidated financial statements
for the year 20x9 is presented in the following Illustration 5-5.

Illustration 5-5

Parent Company and Subsidiary Company

Consolidated Statements Worksheet
Year Ended December 31, 20x9 – Second Year

Parent Subsidiary Conso-

Debit Credit
Corporation Company lidated
Income Statement
Sales 1,000, 000 650, 000 1,650, 000
Dividend Income 48, 000 (4) 48, 000 -
Total Revenue 1,048, 000 650, 000 1,650, 000
Cost of Goods Sold 350, 000 300, 000 650, 000
Operating Expenses 150, 000 75, 000 (3) 6,000 231, 000
Other Expenses 50, 000 50, 000 100, 000
Total Costs and Expenses 550, 000 425, 000 981, 000
Net Income 669, 000
Non-controlling Interest Net
Income (6) 43,800 ( 43, 800)
Net Income carried forward 498, 000 225, 000
Equity holders of parent net
income 625,200

Statement of Retained
Earnings
Retained Earnings, January 1:
Parent Company 2,480, 000 (5) 111,200 2,591,200
Subsidiary Company 250, 000 (1) 250, 000
Net Income from above 498, 000 225, 000 625,200
Total 2,978, 000 475, 000 3,216,400
Dividends Declared
Parent Company 90, 000 90,000
Subsidiary Company 60, 000 (4) 60, 000
Retained Earnings,
December 31 carried forward 2,888, 000 415, 000
Consolidated retained
earnings 3,126,400
 70 Business Combinations

Balance Sheet
Cash 2,310, 000 237, 000 2,547, 000
Accounts Receivable 560, 000 80, 000 640, 000
Inventory 450, 000 90, 000 540, 000
Property and Equipment (net) 3,168, 000 558, 000 (2) 54,000 (3) 6,000 3,774, 000
Investment in Subsidiary (1) 520, 000
Company Share 500, 000 (2) 91,200 -
Goodwill (2) 48,000 48, 000
Total Assets 6,988, 000 965, 000 7,549, 000

Accounts Payable 1,200, 000 100, 000 1,300, 000

Bonds Payable 400, 000 50, 000 450, 000
Ordinary Shares:
Parent Corporation 2,500, 000 2,500, 000
Subsidiary Company 400, 000 (1) 400,000
Retained Earnings 12 /31
from above 2,888,000 415, 000 3,126,400
Non-controlling Interest in (1) 130,000
(4) 12,000
Net (2) 10,800
(5) 111,200
Assets of Subsidiary (6) 43,800 172,600
Total Liabilities and Equity 6,988, 000 965, 000 993,000 993, 000 7,549, 000

The following computations should be noted in the consolidated working paper for
verification purposes:

Non-controlling Interest in Net Assets of Subsidiary (NCINAS) – 20x9

Subsidiary’s Company’s stockholders’ equity (net assets), December 31, 20x9 P815, 000
Add: Unamortized difference (P65, 000 – P17, 000) 48, 000
Subsidiary Company’s stockholders’ equity (net assets), December 31, 20x9 863, 000
Non-controlling Interest in Net Assets of Subsidiary (P863, 000 x 20%) P 172, 600

Equity holders
of parents Consolidated
share in net NCINI Net Income
income (20%)
Parent’s net income P 498,000 P 498,000
Subsidiary’s net income 180,000 P 45,000 225,000
Parent’s share in Subsidiary’s dividends (48,000) (48,000)
Amortization of allocated Property and Equipment (4,800) (1,200) (6,000)
Total P 625,200 P43,800 669,000
 Chapter 4 71
Consolidated Financial Statements – Subsequent to Date of Acquisition

OR

Consolidated
Parent Subsidiary Net Income
Net Income P 498,000 P225,000
Parent’s share in Subsidiary’s dividends (48,000)
Amortization of allocated Property and
Equipment (6,000)
Total P 450,000 P 219,000
80% interest of the Parent (80% x P219,000) 175,200 (175,200)
Total P 625,200 P 43,800 P669,000

Consolidated Retained Earnings (CRE)

Equity holders of parent retained earnings-beginning P 2,591,200
Equity holders of parent net income 625,200
Parent’s Dividends Declared (90,000)
Consolidated retained earnings P 3,126,400

Disclosures
The following are the disclosures required in the consolidation of financial
statements between the parent and subsidiary.
• A summary of financial information about the subsidiaries that are not
consolidated (may be done in general or individually)
• The nature of the relationship between the parent and the subsidiary when the
parent does not own directly or indirectly through subsidiaries, more than half of
the voting power.
• Reasons why the investee does not constitute control in spite of owning more than
one half of the voting or potential voting power directly or indirectly through
subsidiaries.
• The nature and extent of any significant restrictions on the ability of subsidiaries
to transfer funds to the parent in the form of cash dividends or to repay loans or
advances.
• Reasons for using a different reporting date or period when the parent’s reporting
period is different for the consolidated reporting period or when the subsidiary’s
reporting period is different from the consolidated reporting period.