Consolidation Assignment:

Case 1

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CONSOLIDATION ASSIGNMENT: CASE 1

The companies A and B belong to a group of companies where A is the parent.

- Company A purchased 80% of the shares of B on the 1st January X2 at a price of

450.000€. At that moment, the equity of B was 400.000 € (Capital: 300.000 €. and
Retained Earnings: 100.000€)

- At the moment of B acquisition, the following valuation differences are found in

B: one of the properties has a fair value of 120.000€ when the cost recorded by
the company is 100.000€

- A has also a stake of 25% in the shares of C. This stake was purchased on the 1st
January X5 at a price of 65.000€. At that time, equity in C was 150.000€ (Capital:
100.000€, Retained Earnings: 50.000€). On the 31st December X5 the value of C is
290.000€ (Capital: 100.000€, Retained Earnings: 190.000€)

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CONSOLIDATION ASSIGNMENT: CASE 1

During the year X5 the following internal transactions have taken place between
the companies:

a) "B" sold in X5 a piece of land to A at a selling Price of 600.000€ The cost of B

had been of 500.000€. On the 31st of December X5 the land is still in the balance
sheet of A.

b) "A" sold inventories to B on the first of January X5 at a selling price of 26.000€.

The cost for A had been 22.000. During X5 50% of the inventories were sold to
third parties. At the end of X5 the rest of the inventories remain in the warehouse
of B.

c) “A” has given a loan to B dated 31st December X5 of 200.000€.

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CONSOLIDATION ASSIGNMENT: CASE 1

BALANCE SHEETS 31.12.X5

A B

Property Plant and Equipment 1.200.000 365.000

Investment in B 450.000
Investment in C 65.000
Loans to group companies 200.000
Inventories 550.000 235.000
Trade Receivables 35.000 132.000
Cash 120.000 44.000

Total Assets 2.620.000 776.000

Capital 1.000.000 300.000

Retained Earnings A 500.000
Retained Earnings B 174.000
Share Premium 300.000
Other Reserves A 105.000
Long Term Debt 450.000 75.000
Loans group companies 200.000
Short term debt 102.000 22.000
Suppliers 163.000 5.000

Total liabilities plus equity 2.620.000 776.000

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GOODWILL

▪ A → 80% B (Subsidiary: Full Consolidation)

▪ Price paid for shares: 450.000

▪ Equity of B at Acquisition date: (300.000+100.000+20.000) * 0,8 = 336.000

▪ Goodwill: + 114.000

▪ NCI?
Non controlling interests will be → (100% - 80%) = 20%

They have to be calculated at the consolidation date (or at acquisition date +/- any
changes to the Equity of B during the period). Then:

1. First, we proceed with all the adjustments for intra-group transactions

2. As the last step, we calculate final NCI and consolidated reserves

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INTERNAL TRANSACTION a)

1. First, we proceed with all the adjustments for intra-group transactions

a) " B " sold in X5 a piece of land to A at a selling Price of 600.000€ The cost of B had
been of 500.000€. On the 31st of December X5 the land is still in the balance
sheet of A.

Balance Sheet Dr Cr
Land 100.000
Ret. Earnings B 100.000*

*This Adjustment affects the Equity of B. Keep it mind when calculating final NCI
and Reserves at the consolidation date!! Equity of B will have to be updated.
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INTERNAL TRANSACTION b)

b) "A" sold inventories to B on the first of January X5 at a selling price of

26.000€. The cost for A had been 22.000. During X5 50% of the inventories were
sold to third parties. At the end of X5 the rest of the inventories remain in the
warehouse of B.

Balance Sheet Dr Cr
Inventories 2.000
Ret. Earnings A 2.000

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INTERNAL TRANSACTION c)

c) “A” has given a loan to B dated 31st December X5 of 200.000€.

Balance Sheet Dr Cr
Loans group companies (Loan A) 200.000
Loans group companies (Loan B) 200.000

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NCI

2. Next, we calculate final NCI and Consolidated Reserves Subsidiary

A → 80% B

Price paid for shares: 450.000

Equity of B at Acquisition date: (300.000+100.000+20.000) * 0,8 = 336.000
Goodwill: + 114.000

▪ NCI
Given that we have to consolidate at the post-acquisition date, we are calculating NCI on
the equity of B AFTER the intra-group transactions adjustments.

We have to subtract 100.000 from RE of B derived from adjustment a) to PPE

(Why do we not consider adj. b) and c) as well? → Because they do not affect the Equity of B!!)

NCI = (capital B + Ret. Earn. B + FV increase – Adj. a) to PPE) * 0,2

= (300.000 + 174.000 + 20.000 – 100.000) * 0,2
= 78.800
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CONSOLIDATED RESERVES

▪ Consolidated Reserves:

Initial Equity B = (capital B + Ret. Earn. B + FV increase)

(1/1/X2) = (300.000 + 100.000 + 20.000)
= 420.000

Final Equity B = (capital B + Ret. Earn. B + FV increase – Adj. a) to PPE)

(31/12/X5) = (300.000 + 174.000 + 20.000 – 100.000)
= 394.000

Change in Equity of B= (394.000 – 420.000) = - 26.000

The Equity of B has decrease by 26.000!

Then,
Consolidated Reserves= -26.000 * 0,8 = -20.800*

*It will represent negative consolidated reserves in the final consolidated Balance Sheet
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CONSOLIDATION ADJUSTMENT

Balance Sheet Debit Credit

Investment in B 450.000
Capital B Consolidation Date 300.000
Ret. Earn. B Consolidation Date 74.000*
Goodwill 114.000
PPE FV increase 20.000
Non controlling interests 78.800
Consolidated Reserves (negative) 20.800
528.800 528.800

* We only have 74.000 of RE left as we already eliminated 100.000 with adj. a) to PPE
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GOODWILL FOR ASSOCIATE

▪ A → 25% C (Associate: Equity Method)

▪ Price paid for shares: 65.000

▪ Equity of C at Acquisition date: (100.000+50.000) * 0,25 = 37.500

▪ Goodwill: + 27.500**

65.000 is the value of the investment in C that will appear in the Balance Sheet
of A at the acquisition date (to be updated, later, by subsequent FV changes)

**Note: Goodwill from associates is NOT disclosed as a separate item in the

Consolidated Balance Sheet!
However, we will inform about it in the NOTES to the Consolidated Statements.

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ASSOCIATE ADJUSTMENT

We now proceed with the adjustment for the associate C

Balance Sheet Debit Credit

Investment in C 65.000
Equity Investment in C 100.000
Consolidated Reserves Associate 35.000
(or Retained Earnings Group)
100.000 100.000

Equity Investment in C= [65.000 + ((190.000 - 50.000) * 0,25)] = 100.000

Consolidated Reserves Associate (or R.E. Group) = (190.000 - 50.000) * 0,25 = 35.000

As we can observe, the “Equity Investment in C" is TIPPED UP by the corresponding share (25%)
of new retained earnings, so it becomes “Equity Investment in C” equal to:
= 65.000 (Initial Investment in C) + 35.000 =100.000

NOTE: The new “Equity Investment in C” (100.000) comprises also goodwill of 27.500, given the
initial “Investment in C” (65.000) already included it.
Thefore, goodwill is not separately disclosed (as it is in Full Consolidation) but included and
carried forward in the “Equity Investment in C” item in the Consolidated Balance Sheet 13
CONSOLIDATED BALANCE SHEET

BALANCE SHEETS 31.12.X5 ADJUSTMENTS

CONSOLIDATED
A B A+B REF DEBIT CREDIT SoFP
PPE and Land 1200000 365000 1565000 1&4 20000 100000a) 1485000
Investment in B 450000 450000 4 450000
Investment in C 65000 65000 5 65000
Equity Investments 5 100000 100000
Loans to group companies 200000 200000 3 200000c)
Inventories 550000 235000 785000 2 2000b) 783000
Trade Receivables 35000 132000 167000 167000
Cash 120000 44000 164000 164000
Goodwill 4 114000 114000
Total Assets 2620000 776000 3396000 2813000

Capital 1000000 300000 1300000 4 300000 1000000

Retained Earnings A 500000 500000 2 2000b) 498000
Retained Earnings B 174000 174000 1 & 4 100000a) + 74000
Share Premium 300000 300000 300000
Other Reserves A 105000 105000 105000
Long Term Debt 450000 75000 525000 525000
Loans group companies 200000 200000 3 200000c)
Short term debt 102000 22000 124000 124000
Suppliers 163000 5000 168000 168000

NCI 4 78800 78800

Cons. Reserves Subs. 4 20800 -20800
Cons. Reserves Assoc. 5 35000 35000
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Total Equity and Liabilities 2620000 776000 3396000 930800 930800 2813000