Chapter 12 - Consolidated Financial Statements Subsequent to Date of Acquisition 115

CHAPTER 12
CONSOLIDATED AND SEPARATE FINANCIAL STATEMENTS
SUBSEQUENT TO DATE OF ACQUISITION

Subsequent to a business combination, the newly affiliated companies continue to

maintain their separate accounting records. IAS 27/PAS 27 prescribes the
accounting treatment for investments in the separate financial statements of the
parent or investor in an associate or jointly controlled entities when an entity
elects or is required by local regulations to present separate financial statements.
It requires that in the parent’s/investor’s individual financial statements,
investments in subsidiaries, associates, and jointly controlled entities should be
accounted for either:

 at costs; or

 in accordance with IAS 39.

Such investments may not be accounted for by the equity method in the
parent’s/investor’s separate statements.

The Standard retains an alternative for accounting for these investments in an

investor’s separate financial statements. However, the Standard stipulates that when an
entity accounts for investment in unconsolidated subsidiaries in accordance with IAS 39
in its consolidated financial statements, it must also do so in its separate financial
statements.

METHODS OF ACCOUNTING FOR INVESTMENTS

The Cost Method is an accounting method whereby the investment is recorded at

cost. The Statement of Recognized Income and Expenses (income statement) reflects
income from the investment only to the extent that the investor receives distributions
from accumulated net profits of the investee arising subsequent to the date of acquisition.

Although IAS 27/PAS 27 provides for the use of the cost method, or in
accordance with IAS 39, in accounting for investments in an investor’s separate financial
statements, discussions on the equity method will also be presented.

The Equity Method is an accounting method whereby the investment is initially

recorded at cost and adjusted thereafter for the post acquisition change in the investor’s
share of net assets of the investee. The Statement of Recognized Income and Expenses
reflects the investor’s share of the results of operations of the investee.
 116 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

Adoption of the cost method of accounting for investment will give account
balances that differ from those which result from the use of the equity method of
accounting. Thus, eliminations appropriate to the method of accounting employed will
have to be applied in the development of a Consolidated Statement of Financial Position.

In developing working papers for a Consolidated Statement of Financial Position,

the accounting method used in carrying the investment must be known. This will
determine the nature of the eliminations to be made.

Regardless of the accounting method used in carrying the investment, the

development of the Consolidated Statement of Financial Position is based on the
assumption that the parent and the subsidiary constitute a single economic entity.
Whether the investment is carried by the cost method or the equity method, the result of
the consolidating process must be the same. The resulting Consolidated Statement of
Financial Position has to be the same regardless of the accounting method employed.

Under the provisions of IAS 39, the accounting for debt and equity securities held
as investments is dependent upon the issue of “management intent” which is manifested
in the four-fold distinction of investments into the following categories:

1. those held for trading;

2. those available for sale albeit not held for trading purposes;
3. those intended to be held to maturity; and,
4. loans and receivables originated or acquired by the enterprise, which are
not for trading.

Figure 12 – 1 summarizes the relationship between methods used to report

intercorporate investments in capital share and levels of ownership.

Level of Ownership

0% 20% 50% 100%

Influence Significant
Not Significant Influence Control

Cost Method Equity Method Consolidation

Figure 12 – 1 Financial Reporting Basis by Level of Ownership

Chapter 12 - Consolidated Financial Statements Subsequent to Date of Acquisition 117

Significant Influence is the power of the investor to participate in the financial and
operating policy decisions of the investee; however, this is less than the ability to control
those policies. If an investor holds, directly or indirectly, 20% or more of the voting
power of the investee, it is presumed that the investor does have significant influence,
unless it can be clearly demonstrated that this is not the case.

Conversely, if the investor holds, directly or indirectly, less than 20% of the
voting power of the investee, it is presumed that the investor does not have significant
influence, unless such influence can be clearly demonstrated. A substantial or majority
ownership by another investor does not necessarily preclude an investor from having
significant influence.

The existence of significant influence by an investor is usually evidenced in one

or more of the following ways:

1. Representation on the board of directors or equivalent governing body of

the investee;
2. Participation in policy making processes, including participation in
decisions about dividends or other distributions;
3. Material transactions between the investor and the investee;
4. Interchange of managerial personnel; or
5. Provision of essential technical information.

Control is the power to govern the financial and operating policies of an

enterprise so as to obtain benefits from its activities. It is presumed to exist when the
parent acquires more than half of the voting rights of the enterprise.

However, even when more than half of the voting rights is not acquired, control
may be evidenced by power:

1. Over more than one half of the voting rights by virtue of an agreement
with other investors; or
2. To govern the financial and operating policies of the enterprise under a
statute or an agreement; or
3. To appoint or remove majority members of the board of directors; or
4. To cast the majority votes at a meeting of the board of directors.

COST METHOD OF ACCOUNTING

The cost method is based on the theory that the accounting for an investment in a
subsidiary should be the same as accounting for any other long-term investment in
securities. Although there may be economic unity between the parent and the subsidiary,
the accounting system should record the legal status of transactions arising from the
 118 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

relationship. The parent company accounts for an investment in a subsidiary just like it
would for any other long-term investment in stocks.

 Only the original cost of the stock of a subsidiary is reported in the

investment account.
 No entries are made for the parent’s equity in subsidiary net income or
loss, nor impairments/amortization or depreciation on the differential
(difference between investment cost and book value of the investor’s
proportionate share of the underlying net assets of the investee).
 The parent merely recognizes dividends from the subsidiary through the
Dividend Revenue account.

Under the cost method, an investor records its investment in the investee at cost.
The investor recognizes income only to the extent that it receives distributions from the
accumulated net profits of the investee arising subsequent to the date of acquisition by the
investor. Distributions received in excess of such profits are considered a recovery of
investment and are recorded as a reduction of the cost of the investment.

EQUITY METHOD OF ACCOUNTING

The equity method parallels the accounting approach used in the preparation of
consolidated financial statements. Although there is a legal distinction between a parent
and a subsidiary, the accounting is based on the economic relationship involved. The
parent company prepares entries for its

 Share on the net income or loss of a subsidiary;

 Dividends declared and or paid by a subsidiary; and
 Impairments, amortization or depreciation for the difference between
investment cost and book value.

Under the equity method, the investment is initially recorded at cost and the
carrying amount is increased or decreased to recognize the investor’s share of the profits
or losses of the investee after the date of acquisition. Distributions received from an
investee reduce the carrying amount of the investment.

Adjustments to the carrying amount may also be necessary for alterations in the
investor’s proportionate interest in the investee arising from changes in the investee’s
equity that have not been included in the Statement of Recognized Income and Expenses
(income statement). Such changes include those arising from the revaluation of property,
plant, equipment and investments, from foreign exchange translation differences and
from the adjustment of differences arising on business combinations.
Chapter 12 - Consolidated Financial Statements Subsequent to Date of Acquisition 119

Figure 12 – 2 Summarizes and compares some of the key features of the cost and equity methods.
The comparative summary is shown on the next page.

Item Cost Method Equity Method

Recorded amount of
investment at date of Original cost Original cost
acquisition

Usual carrying amount of Original cost increased

investment subsequent to Original cost (decreased) by share in the
acquisition investee’s net income (loss)
and decreased by dividend
receipts and any impairment/
amortization/depreciation of
the differential.

Differential No adjustment Tested for impairment/

Amortized/depreciated

Income recognition by Dividends distributed by the Share on investee’s earnings

investor investee from earnings since since acquisition, whether
acquisition distributed or not, reduced by
any amortization/depreciation
of the differential

Dividends declared on Reduction in investment

earnings from date of Income carrying value
acquisition

Dividends declared in excess Reduction in Investment Reduction in investment

of earnings from date of
acquisition

Figure 12 – 2 Key Features of the Cost and Equity Methods

 120 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

A summary illustration of parent company entries using the equity method and
the cost method are as follows:

Transactions Cost Method Equity Method

1. Acquisition of stock Investment Investment
Cash/Other Assets/Capital Stock Cash/Other Assets/Capital Stock

2. Net income reported No Entry Investment

by the subsidiary Equity in Subsidiary Income

3. Net loss reported by No Entry Equity in Subsidiary Income

the subsidiary Investment

4. Regular dividends Cash/Other Assets Cash/Other Assets

Paid by the subsidiary Dividend Revenue Investment

5. Liquidating dividends Cash/Other Assets Cash/Other Assets

Paid by the subsidiary Investment Investment

6. Year end adjustment No Entry Equity in Subsidiary Income

for the differential: Investment
Loss on impairment
of goodwill,
amortization of
intangibles other than
goodwill/additional
depreciation on
increase in asset
values or reduction
in depreciation for No Entry Investment
on decrease in asset Equity in Subsidiary Income
values
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 121

To illustrate, assume the same information given for Maricon Corp. and Gloria Co. as
presented in Illustrative Problem C in chapter 10 which is reproduced below.

ILLUSTRATIVE PROBLEM A. The Statements of Financial Position of Maricon Corp.

and Gloria Co. prior to a business combination are presented below. Assume that all the
non-current assets are depreciable assets.
Maricon Corp. Gloria Co.
Book Value FMV Book Value FMV
(if different) (if different)

Cash P25,000 P 5,000

Accounts Receivable 8,000 2,000
Merchandise Inventory 15,000 17,000 8,000 P10,000
Plant and Equipment 42,000 50,000 16,000 19,000
Goodwill 5,000 1,000
Total Assets P95,000 P32,000

Current Liabilities P17,000 P 3,000

Long-Term Liabilities 10,000 11,000
Ordinary Share Capital, P2 par 40,000
Ordinary Share Capital, P1 par 4,000
Paid-In Capital in Excess of Par 10,000 3,000
Retained Earnings 18,000 11,000
Total Liabilities & Shareholders’ Equity P95,000 P32,000

Assume that GTB Corp. share capital has a par value of P4.00 and a market value
of P5.00 while Maricon Corp. share capital has a market value of P2.50.

Also assume that Maricon Corp. acquired 3,600 shares (90% interest) of the 4,000
outstanding shares of Gloria Co. on October 1, 2008 by issuing 8,200 of its P2.00 par and
P2.50 market value stocks. The comparative entries for some given transactions under
both the equity method and cost method are given on the next page.
122 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 123

KEY OBSERVATIONS FROM THE ILLUSTRATION UNDER THE COST METHOD:

 The investment cost of P20,500 is unchanged until December 31, 2006.

 The dividends received from the subsidiary is treated as revenue.

 Only a liquidating dividend can reduce the investment account balance. A liquidating
dividend is a distribution of net income earned prior to acquisition of investment. It is
credited to the investment account to the extent of the parent's interest in a subsidiary.

KEY OBSERVATIONS FROM THE ILLUSTRATION UNDER THE EQUITY METHOD:

 The investment account is similarly affected by transactions that have changes in

subsidiary retained earnings such as net income (loss) and dividends.

 The investment account is increased by the reported subsidiary net income and is
decreased by the reported subsidiary net loss, dividends from the subsidiary and the
adjustment for impairment, amortization and depreciation.

 The excess of cost over the fair value of the interest acquired is treated as goodwill.
The goodwill is tested for impairment.

 The balance of the account Equity in Subsidiary Income is closed to retained earnings
account of the parent.

 Minority net income for 2008 is P1,000 (P40,000 x 10% x 3/12).

 Minority interest at the December 31, 2008 Consolidated Statement of Financial

Position is P5,200, computed as follows:
Subsidiary Shareholders’ Equity (P17,000 + P40,000 – P5,000) P52,000
Asset Adjustment 5,000
Asset adjustment for depreciation and impairment (145)
P56,855
X 10%
Minority interest P 5,685
 124 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

IAS 39 (2003)/PAS 39 – FINANCIAL INSTRUMENTS: RECOGNITION

AND MEASUREMENT

A financial instrument is any contract that gives rise to both a financial asset of
one enterprise and a financial liability or equity instrument to another enterprise. A
financial asset, however, is any asset that is cash, or contractual right to receive cash or
another financial asset from another enterprise, or contractual right to exchange financial
instruments with another enterprise under conditions that are potentially favorable or an
equity or an equity instrument of another enterprise.

A financial liability, on the other hand, is any liability that is a contractual

obligation to deliver cash or another financial asset to another enterprise, or the obligation
to exchange financial instruments with another enterprise under conditions that are
potentially unfavorable. It may also be a contract that will be settled in the entity’s own
equity instruments.

An equity instrument is any contract that evidences a residual interest in the

assets of an enterprise after deducting all of its liabilities. Also, when the financial
instrument does not give rise to a contractual obligation to deliver cash or another
financial asset to another enterprise, or the obligation to exchange financial instruments
with another enterprise under conditions that are potentially unfavorable, this financial
instrument is an equity instrument.

Although the classification of issuers of financial instruments may either be

liability or equity, IAS 39 defined the four categories of financial instruments into:

 Held for trading,

 Available-for-sale,
 Held to maturity, and
 Loans and receivables originated or acquired by the enterprise which are not for
trading.

A financial asset or a financial liability should be recognized, when and only

when, the entity becomes a party to the instrument or contract. Initial measurement is at
fair value of the financial asset or financial liability. Such are to be classified and
measured subsequently as follows:

 Financial assets and liabilities at fair value through profit or loss

including those held for trading are carried at fair value and as current
assets. Any change in fair value resulting to gain or loss is carried to the
Statement of Recognized Income and Expenses (income statement) as
profit or loss.

 Available-for-sale investments for which fair value is reliably

determinable are carried at fair value either as current or non-current
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 125

assets. Any change in fair value resulting to unrealized gain or loss will be
shown in the shareholders’ equity.

 While, available-for-sale for which fair value is not reliably

determinable are carried at cost and any gain or loss on impairment is
carried to the Statement of Recognized Income and Expenses as profit or
loss.

 Held to maturity debt securities are carried at amortized cost and as non-
current assets and any gain or loss on amortization or impairment is
carried to the Statement of Recognized Income and Expenses as profit or
loss.

Held to maturity equity securities whose fair value is not readily

determinable and the investor has less than 20% of voting stock are
carried at cost and shown as non-current assets;

While, equity securities whose fair value is not readily determinable and
the investor has significant influence on the investee will be carried using
equity method and shown as non-current assets. If the equity securities
give the investor the control over the financing and operating policies of
the investee, such is shown as investment in subsidiary, non-current asset,
and consolidation has to be effected.

 Loans and receivables are carried at amortized cost and any gain or loss
on amortization or impairment is carried to the Statement of Recognized
Income and Expenses as profit or loss.

AVAILABLE-FOR-SALE FINANCIAL ASSET

IAS 39 provides that equity securities held as investment assets are recorded at
cost including transactions costs as of the date when the investor entity becomes a party
to the contractual provisions of the instrument. As such, the equity shares are accounted
for at fair value. Transaction costs, though, are excluded from the fair value
determinations. Unless, therefore, there has been an increase in value since acquisition
date, there will often be a loss recognized in the first holding period due to the fact that
when originally recorded transaction costs were included.

When investments are classified as available-for-sale, the changes in fair value

from period to period may either be included in current operating results or recognized
directly in equity through the Statement of Changes in Equity depending as to whether
fair values are not reliably determinable or are reliably determinable.

ILLUSTRATIVE PROBLEM B. Assume that Maricon Corp. purchased 3,000 shares

of Gloria Co. stocks for P10,000 on April 1, 2008 The fair value of the investment at the
 126 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

end of 2008is P9,500. Assume that the management of Maricon Corp. designated the
shares as having been purchased for long term-investment purposes and will thus be
categorized as available-for-sale. Accordingly, the entry to record the purchase is as
follows:

Investment in Gloria Co.- available-for-sale 10,000

Cash 10,000

At year-end, the stock investment is to be adjusted to fair market value. If the

decline is judged to be a temporary market fluctuation because there is no objective
evidence of impairment, the change in fair value resulting to an unrealized loss is carried
in equity rather than in earnings. The entry to adjust the investment account at December
31, 2008 is as follows:

Unrealized Loss on Investment 500

Investment in Gloria Co.- available-for-sale 500

Thus, the change in value of the investment is reflected directly in the

shareholders’ equity, after being reported in equity, via the Statement of Changes in
Equity.

When an entity reports fair value changes on available-for-sale financial assets in

equity, it continues to do so until there is objective evidence of impairment. If objective
evidence of impairment exists, such as the circumstances identified in IAS 39, any
cumulative net loss that has been recognized directly in equity is removed and recognized
in profit or loss for the period.

CONSOLIDATED WORKING PAPER

Subsequent to a business combination, a parent company together with all its

subsidiaries shall continue to maintain their separate accounting records. However,
consolidated financial statements must be presented by the affiliated companies. This
practice is an application of the basic feature of financial accounting of substance over
form wherein the two companies are considered separate and distinct in form but are
considered one in substance.

Prior to the preparation of consolidated financial statements, certain procedures

must be followed which are partly determined by the consolidation method used.
Adjustments and eliminations are recorded in the worksheet or working paper but are
never formally journalized or entered in the books of any of the companies. As a result,
consolidation procedures must be performed every period in which financial statements
are presented.

The working paper which facilitates the preparation of consolidated financial

statements is prepared under the purchase method of accounting only. The reason
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 127

primarily is that a parent-subsidiary relationship suggest acquisition and IFRS 3 requires

the use of purchase accounting. Whether the cost method or the equity method is used,
however, the consolidated financial statements should have the same final results.

As discussed in Chapter 11, two steps are followed in the preparation of working
paper: (1) Prepare the necessary adjusting and elimination entries and (2) Combine
remaining items line by line.

The succeeding paragraphs discuss the different adjusting and elimination entries
that should be recorded in the working paper. It should be remembered, however, that
these entries are prepared only in the working paper for consolidation purposes but never
on the separate books of the parent neither the subsidiary.

PREPARATION OF WORKING PAPER FOR CONSOLIDATED

STATEMENTS - INVESTMENT CARRIED AT COST

The following adjusting and elimination entries are recorded in the working paper
for the preparation of consolidated financial statements:

1. Adjust the carrying amount of the investment account to the equity method
balance at the beginning of the current year. This is done by multiplying the
percentage of ownership interest by the net increase (decrease) in the Retained
Earnings balance of the subsidiary from the date of acquisition to the beginning
of the current period.

 To record net increase in Retained Earnings

Investment in Subsidiary xxx
Retained Earnings, Parent xxx

 To record net decrease in Retained Earnings

Retained Earnings, Parent xxx
Investment in Subsidiary xxx

2. Eliminate the subsidiary shareholders’ equity accounts against the parent’s

investment account based on the parent’s percentage of interest.

Ordinary Share Capital, Subsidiary xxx

Additional Paid-In Capital, Subsidiary xxx
Retained Earnings, Subsidiary xxx
Investment in Subsidiary xxx

3. Eliminate Dividends Revenue received by the parent against dividends

account of
the subsidiary.

Dividends Revenue, Parent xxx

 128 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

Dividends, Subsidiary xxx

4. Allocate the difference between the cost and the book value of the interest in
the
acquired company.

 Increase in the recorded net asset values of the subsidiary

Assets xxx
Investment in Subsidiary xxx

 Decrease in the recorded net asset values of the subsidiary

Investment in Subsidiary xxx

Assets xxx

5. Record the impairment/depreciation/amortization on the difference between cost

and book value of the acquired interest in the subsidiary relating to prior periods
and current period.

 Impairment/depreciation/amortization on the increase in the recorded net

asset values of the subsidiary

Retained Earnings, Parent xxx

Expenses xxx
Assets xxx

 Depreciation on the decrease in the recorded net asset values of the

subsidiary

Assets xxx
Expenses xxx
Retained Earnings, Parent xxx

Recall that under the purchase method, the excess of the investment cost over the
fair market value of the net assets acquired is treated as goodwill which is tested for
impairment at least annually. Also, the recording of the non-monetary assets at fair
market value requires that future depreciation/amortization on the assets be based on their
acquisition price instead of their book values.

ILLUSTRATIVE PROBLEM C. Assume the trial balances at December 31, 2008 for
Pamela Corp. and Sanyo Co., which are on the first two columns of the working paper
presented on the following page. Pamela Corp. acquired 80% interest in Sanyo Co. in
January 2006 for P300,000. On this date, the recorded values of the assets and liabilities
of Sanyo Co. approximate their fair market value, except for the Equipment, which was
undervalued by P100,000. The equipment has an estimated remaining life of 10 years
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 129

depreciated on the straight line basis. Goodwill is tested for impairment. Net income and
dividends of Sanyo Co. are reported as follows:
Year Net Income Dividends Paid
2006 P30,000 P 16,000
2007 26,000 20,000
2008 32,000 10,000
P88,000 P 46,000

The following computations are necessary before preparing the consolidated

working paper. Assume the use of the full economic entity approach.

(1) Determine the book value of the interest acquired in Sanyo Co. at the time
of the 80% stock acquisition, January 2006

Ordinary Share Capital P 40,000

Retained Earnings, Jan. 1, 2006 138,000
Total Shareholders' Equity of Sanyo Co. P 178,000
Interest acquired 80%
Book value of interest acquired P 142,400

RE, Jan. 1, 2008 = RE, Jan. 1, 2006 + Net income – Dividends (06-07)
RE, Jan. 1, 2006 = RE, Jan. 1, 2008 + Dividends - Net income (06-07)
= P158,000 + (P16,000 + P20,000) - (P30,000 + P26,000)
= P138,000

(2) Determine and allocate the excess of cost over book value

Cost P300,000
Book value 142,400
Excess of cost over book value P157,600/
80%
Grossed-up excess P197,000
Increase in equipment 100,000
Goodwill P 97,000

(3) Determine the amount of depreciation on the excess of cost over book
value attributable to equipment and impairment loss on goodwill

(a) Depreciation ( P100,000 /10 years) P10,000

(b) Impairment of goodwill 2,000
P12,000
 130 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

The consolidated working paper under the purchase method, investment carried at
cost is shown on the next page.
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 131

KEY OBSERVATIONS FROM THE ILLUSTRATION:

1. The recorded increases in equipment and goodwill upon elimination represent

the grossed up excess of cost over book value based on investment cost and
subsidiary shareholders' equity balance at date of acquisition.

2. Since recorded goodwill and increase in equipment upon elimination are

based on 100% of fair values at date of acquisition, impairment and
depreciation must be computed from the date of acquisition to the current
year. (The impairment loss on goodwill is only an assumed amount)

3. Prior years’ impairment and depreciation are charged to parent company's

Retained Earnings while current year depreciation and amortization are
charged to expenses.

4. Dividends revenue from subsidiary is eliminated to avoid double recognition

of income.
 132 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

PREPARATION OF WORKING PAPER FOR CONSOLIDATED

STATEMENTS - INVESTMENT CARRIED USING THE
EQUITY METHOD

The procedures involved in the preparation of consolidated working paper are the
same in the equity method as in the cost method. Again, regardless of how the
investment is maintained in the parent company's books, the consolidated financial
statements will be exactly the same.

ILLUSTRATIVE PROBLEM D. Assume the trial balances for the Pamela Corp. and
Sanyo Co. except that Pamela Corp. accounts for its investment in Sanyo Co. using the
equity method. Under the equity method, the trial balance of Pamela Corp. shows
different balances for the Investment in Sanyo Co., Equity in Subsidiary Income and
Retained Earnings. The account Equity in Subsidiary Income takes the place of Dividend
Revenue from Subsidiary in the cost method.

A T-account analysis of the investment in Sanyo Co. Equity in Subsidiary Income

and Retained Earnings will help us understand the trial balance figures of the Pamela
Corp.

Investment in Sanyo Co.

(a) 300,000 (c) 36,800
(b) 70,400 (d) 20,000
(d) 5,000
(e) 10,000
(e) 2,000
Bal 296,600

Equity in Subsidiary Income

(e) 10,000 (b) 25,600
(e) 2,000
Bal. 13,600

Retained Earnings, Pamela Corp.

(d) 20,000 (b) 44,800
(d) 5,000 (f ) 233,200

Bal. 253,000
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 133

(a) Acquisition of 80% interest in Sanyo Co. for cash.

(b) Parent's share in Sanyo Co.'s net income for 2006 to 2008. Retained Earnings is
credited for 80% of Sanyo Co.'s 2006 and 2007 net income. These were
originally credited to the account Equity in Subsidiary Income and closed to
Income Summary then to Retained Earnings.

(c) Dividends from Sanyo Co. for 2006 to 2008 debited to cash.

(d) Impairment and depreciation for 2006 and 2007 for the excess of cost over book
value allocated to increase in Equipment and Goodwill. These were originally
debited to Expenses and closed to Income Summary then to Retained Earnings.

(e) Current year impairment and depreciation.

(f) Pamela Co. Retained Earnings without regard of the income from Sanyo Co.
P262,000 - [80% x (16,000 + 20,000)].

Using the equity method, the following adjusting and elimination entries are
prepared in the working paper for the preparation of consolidated financial statements.
Assume the use of the full economic entity approach.

1. To eliminate the subsidiary shareholders’ equity accounts against the parent’s

investment account at the beginning of the period based on the parent’s percentage
of interest

Ordinary Share Capital, Subsidiary xxx

Additional Paid-In Capital, Subsidiary xxx
Retained Earnings, Subsidiary xxx
Investment in Subsidiary xxx

2. To eliminate Equity in Subsidiary Income against the Investment account of the

parent

Equity in Subsidiary Income xxx

Investment in Subsidiary xxx

3. To eliminate dividends distributed by subsidiary against Investment account of the

parent

Investment in Subsidiary xxx

Dividends, Subsidiary xxx
 134 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

4. To record the allocation of the difference between the cost and book value of the
acquired investment at their remaining book value as of the beginning of the period

a. To record increase in the recorded book value of assets of the subsidiary

Assets xxx
Investment in Subsidiary xxx

b. To record reduction in the recorded book value of assets of the subsidiary

Investment in Subsidiary xxx

Assets xxx

5. To record the related impairment, depreciation or amortization of the difference

between cost and book value of the acquired investment relating to current period

a. To record impairment, depreciation and amortization of the increase in the

recorded book value of assets of the subsidiary

Expenses xxx
Assets xxx

b. To record depreciation on the decrease in the recorded book value of assets

of the subsidiary

Assets xxx
Expenses xxx

6. To eliminate other intercompany account balances

Elimination of other intragroup/intercompany account balances is to be discussed

in detail at the latter part of the chapter.

The consolidated working paper for a purchased subsidiary accounted for using
the equity method is presented on the next page.
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 135
 136 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

KEY OBSERVATIONS FROM THE ILLUSTRATION:

 The recorded increase in equipment and goodwill upon elimination represent the
excess of cost over book value not on the date of acquisition but as of the beginning
of the year January 1, 2008 computed as follows:

Investment account balance, Dec. 31, 2008 P296,600

Elimination of the share on the 2008 subsidiary
net income and 2008 dividends from the
subsidiary ( P13,600 - P8,000) 5,600
Investment account balance Jan. 1, 2008 P291,000
Book value of the interest acquired:
Ordinary Share Capital, Sanyo Co. P 40,000
Retained Earnings, Sanyo Co. 158,000
Total subsidiary shareholder's equity Jan. 1, 2008 P 198,000
80% 158,400
Excess of cost over book value P132,600/
80%
Grossed-up excess P165,750
Change in Minority Interest (P39,400 – P33,150) 6,250
P172,000
Allocation of excess:
Increase in equipment (P100,000 – P20,000) 80,000
Goodwill (P97,000 – P5,000) P 92,000

 The recorded increase in equipment upon elimination represents the undepreciated

amount of equipment and goodwill balance as of the beginning of the year, January 1,
2008.

 The Equity in Subsidiary Income was eliminated to prevent the double counting of
income.

TREATMENT OF SEPARATE ACCUMULATED DEPRECIATION ACCOUNT

In the preceding example, the equipment is recorded net of accumulated

depreciation. This treatment facilitates the comparison between book value and market
value for the initial allocation of excess, and it simplifies the working paper elimination
entries. The analysis remains the same even if a separate accumulated depreciation
account is included in the working paper. However, the elimination entries must be
modified to reflect the two separate components.
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 137

ILLUSTRATIVE PROBLEM D. Assume that the equipment in the earlier problem is

presented as follows:

Book Value Market Value Pamela Corp

1-1-08 1-1-08 Difference 80% Interest
Equipment P180,000 P348,750 P168,750 P135,000
Accum. Depreciation ( 120,000) ( 232,500) ( 112,500) ( 90,000)
Net P 60,000 P116,250 P 56,250 P 45,000

The excess to be allocated to equipment remains at P45,000 (Pamela Corp.'s

proportional interest in the difference between the market value and the book value), but
the working paper elimination entry at December 31, 2008 would be modified in the
following manner:

Equipment 135,000
Accumulated Depreciation – Equipment 90,000
Investment in Sanyo Co. 45,000
To record the allocation of excess.

CONSOLIDATED NET INCOME

All revenues and expenses of the individual consolidating companies arising from
transactions with non-affiliated companies are included in the Consolidated Statement of
Recognized Income and Expenses (income statement). The amount reported as
consolidated net income is that part of the income of the total enterprise that is assigned
to the shareholders of the parent company.
Consolidated net income can be calculated by combining the Statement of
Recognized Income and Expense for the parent and the subsidiary or subsidiaries
(consolidating companies) using either the additive approach or the residual approach.

Under the additive approach, consolidated net income is computed by adding the
parent’s income from own operations and its proportionate share in the income of each of
its subsidiaries adjusted for impairment/depreciation of the difference between the cost
and the book value of the acquired investment. This approach is the same as that used in
computing the net income of the parent using the equity method of accounting. A pro-
forma schedule showing the computation of consolidated net income using the additive
approach is as follows:

Parent Co. net income xxx

Less Dividends from subsidiary xx
Parent Co. net income from own operation xxx
Add Adjusted share in subsidiary net income:
Share in subsidiary net income Xxx
Less depreciation/impairment loss on goodwill Xx xxx
Consolidated net income xxx
 138 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

Under the residual approach, consolidated net income is determined by adding

the reported net income of the parent (in case of the cost method, net of the dividends
received from the subsidiary) and the net income of the subsidiary. From the computed
total, the share of the minority shareholders in the income of the subsidiary is deducted.
The resulting difference is the amount of consolidated net income. Below is a schedule
showing the computation of consolidated net income using the residual approach.

Parent Co. net income xxx

Less Dividends from subsidiary xx
Parent Co. net income from own operations xxx
Add Subsidiary net income xxx
Total income xxx
Less Minority net income xx
Total income after minority income xxx
Less depreciation/impairment loss on goodwill xx
Consolidated net income xxx

Note that both methods of computing consolidated net income will lead to the
same result; the two simply represent different approaches to reaching the same end.

The following schedule may also be helpful especially if the acquired interest is
less than 100%

Minority
Consolidated Interest
Total Net Income Net Income
Net income reported by
Parent xxx xxx
Subsidiary xxx xxx xxx
Impairment loss/depreciation of the
excess of cost over book value
of acquired investment (xxx) (xxx)
Reduction in depreciation
for the excess of book value over xxx xxx
cost of acquired investment
Dividends received from subsidiary
credited to dividend revenue under
the cost method (xxx) (xxx)
Total xxx xxx xxx

Under the equity method of accounting, no dividends are deducted from the
parent company net income in the computation of consolidated net income. This is
because dividends received by the parent are credited to the Investment account rather
than the Dividend Revenue account.
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 139

ILLUSTRATIVE PROBLEM E. Assume that Pamela Corp. owns 80% of the stock of
Sanyo Co. which was purchased at book value. During 2007, Sanyo reports net income
of P100,000, while Pamela Corp. reports earnings of P400,000 from its own operations
and equity method investment income of P80,000. Consolidated net income for 2007
computed under the two approaches is as follows:

Additive approach:
Own operation income of Pamela P400,000
Net income of Sanyo P100,000
Pamela’s proportionate share x 80% 80,000
Consolidated net income P480,000

Residual approach:
Net income of Pamela P480,000
Less Income from subsidiary 80,000 P400,000
Net income of Sanyo 100,000
P500,000
Less Income to minority interest P100,000
Minority interest ownership x 20% 20,000
Consolidated net income P480,000

IAS 27/PAS 27, however, requires that minority interest in the profit or loss
shall be separately disclosed.

CONSOLIDATED RETAINED EARNINGS

Consolidated Retained Earnings must be measured on a basis consistent with that

used in determining consolidated net income. Consolidated Retained Earnings is that
portion of the undistributed earnings of the consolidated enterprise accruing to the
shareholders of the parent company. As with a single company, ending Consolidated
Retained Earnings is equal to the beginning consolidated retained earnings balance plus
consolidated net income, less consolidated dividends.

Only those dividends paid to the owners of the consolidated entity can be
included in the Consolidated Retained Earnings Statement. Because the owners of the
parent company are considered to be the owners of the consolidated entity, only
dividends paid by the parent company to its shareholders are treated as a deduction in the
consolidated retained earnings statement; dividends of the subsidiary are not included.

Consolidated Retained Earning, like consolidated net income, can be computed

using either the additive approach or the residual approach.
 140 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

The additive approach is used by the parent company in computing consolidated

Retained Earnings when it carries its investment in the subsidiary under the equity
method. A proportionate share of the income of the subsidiary, adjusted for the
impairments/ depreciation and amortization of the difference between the cost and the
book value of the acquired investment, is reported as investment income.

Hence, the amount of investment income recorded by the parent is equal to the
subsidiary’s contribution to consolidated net income. The parent’s net income is equal to
the consolidated net income while the parent’s ending retained earnings balance is equal
to the consolidated retained earnings. Assuming the parent company’s retained earnings
is used as the starting point of the additive approach, no adjustments are needed in
computing consolidated retained earnings.

The use of the cost method by the parent, however, leads to a retained earnings
balance for the parent that differs from consolidated retained earnings. Adjustments are
needed for the parent’s proportionate share of any undistributed earnings of the subsidiary
since acquisition and for the cumulative impairments, depreciation and amortization of
any purchase differential.

Under the residual approach, the retained earnings balances of the individual
companies are added together as the starting point in computing Consolidated Retained
Earnings. When the parent uses the equity method to account for its investment in the
subsidiary, the full amount of the retained earnings balance of the subsidiary must be
eliminated in computing consolidated retained earnings. As previously mentioned, parent
company retained earnings equals consolidated retained earnings. Thus, the full balance
of the subsidiary’s retained earnings must be eliminated.

When the parent uses the cost method to account for its investment in a
subsidiary, deductions must be made for (1) the subsidiary’s retained earnings balance at
the date of acquisition, (2) the minority interests share of any undistributed earnings since
acquisition, and (3) the cumulative impairments, depreciation and amortization of any
purchase differential.

ILLUSTRATIVE PROBLEM F. Assume the same data for Pamela Corp. and Sanyo
Co. and the following additional data:

Pamela Corp. Sanyo Co.

Retained earnings, January 1, 2008 P1,600,000 P1,000,000
Income from own operations 400,000 100,000
Investment income – equity method 80,000
Dividends declared in 2008 ( 120,000) ( 40,000)
Retained earnings, December 31, 2008 P1,960,000 P1,060,000
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 141

The computation of consolidated retained earnings using the two approaches are
shown below.

Additive approach:
Retained earnings of Pamela on Dec. 31, 2008 P1,960,000
Reconciling items -----
Consolidated retained earnings P1,960,000

Residual approach:
Retained earnings, Dec. 31, 2008:
Pamela Corp. P1,960,000
Sanyo Co. 1,060,000
Total P3,020,000
Less Retained earnings of Sanyo on Dec. 31, 2008 1,060,000
Consolidated retained earnings P1,960,000

The full retained earnings balance of Sanyo at December 31, 2008, is eliminated
to avoid double counting. The P1,060,000 balance can be viewed as consisting of three
segments, each of which must be eliminated:

Sanyo’s retained earnings on the date of acquisition P1,000,000

Increase in Sanyo’s retained earnings since
acquisition assigned to
Pamela (P60,000 x 80%) 48,000
Minority interest (P60,000 x 20%) 12,000
Total P1,060,000

CONSOLIDATED FINANCIAL STATEMENTS

A Consolidated Statement of Financial Position, a Consolidated Statement of

Recognized Income and Expenses and a Consolidated Retained Earnings Statement are
prepared after a period of subsidiary operations to present a summary of the financial
progress of the affiliated units.

A Consolidated Statement of Recognized Income and Expenses is a summation of

the revenues, expenses, gains and losses of the affiliates after the elimination of the
account balances resulting from intercompany transactions. The process of consolidation
includes a deduction from the combined net income of all the affiliated companies of the
minority interest contained in the net income of the subsidiaries. The result is then
assigned to the majority shareholders and is designated as consolidated net income.
 142 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

The Consolidated Statement of Retained Earnings shows the consolidated

retained earnings at the beginning of the period, increased (decreased) by consolidated
net income (loss) and decreased by the parent company's dividends declared. All these
taken together consists the balance of the consolidated retained earnings at the end of the
accounting period.

In the preparation of a Consolidated Statement Recognized Income and Expenses,

a Consolidated Statement of Retained Earnings, and a Consolidated Statement of
Financial Position, it is useful to select a working paper format in which its organization
facilitates the preparation of all the three statements.

INTERCOMPANY/INTRAGROUP BALANCES AND TRANSACTIONS

Intercompany/intragroup balances and intercompany/intragroup transactions,

including sales, expenses and dividends, are eliminated in full. A summary of
intercompany accounts and the related elimination entries are is as follows.

Intercompany Accounts Elimination Entries

1. Equity in subsidiary income and Equity in Subsidiary Income
Dividends Dividends, Subsidiary Co.
Investment in Subsidiary Co.

2. Equity in subsidiary shareholders' Ordinary Share Capital-Subsidiary Co.

equity accounts Paid-in Capital-Subsidiary Co.
Retained Earnings - Subsidiary Co.
Investment in Subsidiary Co.

3. Intercompany sales Sales

Cost of Sales or Purchases

4. Intercompany receivables and Accounts Payable

Payables Accounts Receivable

5. Intercompany advances Advances from

Advances to

6. Intercompany notes Notes Payable

Notes Receivable

7. Intercompany loans Loans Payable

Loan Receivable

8. Intercompany interest Interest Revenue

Interest Expense
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 143

9. Intercompany accrual of interest Interest Payable

Interest Receivable

10 Intercompany unpaid dividends Dividends Payable

Dividends Receivable

11 Customers note discounted with Notes Receivable Discounted

an affiliated company Notes Receivable from Affiliate

12 Note of an affiliate discounted with Notes Payable to Affiliate

a third party Notes Receivable from Affiliate

Advances from Affiliate

Advances to Affiliate

Notes Receivable Discounted

Notes Payable to Third Party

MINORITY INTERESTS

Minority interests is presented in the Consolidated Statement of Financial Position

within equity separately from the parent shareholders’ equity. Minority interests in the
profit or loss of the group shall also be separately disclosed.
The losses applicable to the minority in a consolidated subsidiary may exceed the
minority interest in the equity of the subsidiary. The excess, and any further losses
applicable to the minority, is charged against the majority interest except to the extent that
the minority has a binding obligation to, and is able to, make good the losses. If the
subsidiary subsequently reports profits, the majority interest is allocated all such profits
until the minority’s share of losses previously absorbed by the majority has been
recovered.

DIFFERENCE IN FISCAL PERIODS

The financial statements of the parent and its subsidiaries used in the preparation
of the consolidated financial statements should all be prepared as of the same reporting
date, unless it is impracticable to do so. If it is impracticable for a particular subsidiary to
prepare its financial statements as of the same date as its parent, adjustments must be
made for the effects of significant transactions or events that occur between the dates of
the subsidiary’s and the parent’s financial statements. And in no case may the difference
be more than three months.
 144 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

ACCOUNTING POLICIES

Consolidated financial statements are to be prepared using uniform accounting

policies for the like transactions and other events in similar circumstances. If it is not
practicable to use uniform accounting policies in preparing the consolidated financial
statements, that fact has to be disclosed together with the proportions of the items in the
consolidated financial statements to which the different accounting policies have been
applied.

In many cases, if a member of the group uses accounting policies other than those
adopted in the consolidated financial statements for like transactions and events in similar
circumstances, appropriate adjustments are made to its financial statements when they are
used in preparing the consolidated financial statements.

SUBSIDIARY WITH OUTSTANDING CUMULATIVE

PREFERENCE SHARE CAPITAL

If a subsidiary has outstanding cumulative preference shares which are held

outside the group, the parent computes its share of profits or losses after adjusting for the
subsidiary's preferred dividends, whether or not dividends have been declared.

DISCLOSURES

Disclosures required in consolidated financial statements:

 the fact that a subsidiary is not consolidated;

 summarized financial information of subsidiaries, either individually or in
groups, that are not consolidated;
 the nature of the relationship between the parent and a subsidiary when the
parent does not own, directly or indirectly through subsidiaries, more than
half of the voting power;
 the reasons why the ownership, directly or indirectly through subsidiaries,
of more than half of the voting or potential voting power of an investee
does not constitute control;
 the reporting date of the financial statements of a subsidiary when such
financial statements are used to prepare consolidated financial statements
and are as of a reporting date or for a period that is different from that of
the parent, and the reason for using a different reporting date or period;
and
 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.
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 145

Disclosures required in separate financial statements that are prepared for a parent
that is permitted not to prepare consolidated financial statements:

 the fact that the financial statements are separate financial statements;
that the exemption from consolidation has been used; the name and
country of incorporation or residence of the entity whose consolidated
financial statements that comply with IFRS have been produced for
public use; and the address where those consolidated financial statements
are obtainable;
 a list of significant investments in subsidiaries, jointly controlled entities,
and associates, including the name, country of incorporation or residence,
proportion of ownership interest and , if different, proportion of voting
power held; and
 a description of the method used to account for the foregoing
investments.

Disclosures required in the separate financial statements of a parent, investor in a

jointly controlled entity, or investor in an associate:

 the fact that the statements are separate financial statements and the
reasons why those statements are prepared if not required by law;
 a list of significant investments in subsidiaries, jointly controlled entities,
and associates, including the name, country of incorporation or residence,
proportion of ownership interest and, if different, proportion of voting
power held; and
 a description of the method used to account for the foregoing investments.

STOCK DIVIDENDS OF SUBSIDIARIES

Occasionally, subsidiary enterprises capitalize retained earnings arising since

acquisition, by means of stock dividends or otherwise. This does not require a transfer to
capital surplus on consolidation, in as much as the retained earnings in the consolidated
financial statements shall reflect the accumulated earnings of the consolidated group not
distributed to the shareholders of, or capitalized by, the parent company.

SUBSIDIARIES ACQUIRED OR DISPOSED OF DURING THE YEAR

The results of operations of a subsidiary for the financial reporting period in

which the subsidiary is acquired are included in the Consolidated Statement of
Recognized Income and Expenses only from the date of its acquisition. Similarly, the
results of operations of a subsidiary are included in consolidated income in the period of
disposal only up to the date of disposal.
 146 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

If one enterprise purchases two or more blocks of stock of another enterprise at

various dates and eventually obtains control of the other enterprise, the date of acquisition
(for the purpose of preparing consolidated statements) depends on the circumstances.

(1) If two or more purchases are made over a period of time, the retained
earnings of the subsidiary at acquisition shall generally be determined on a
step-by-step basis.

(2) However, if small purchases are made over a period of time and then a
purchase is made that results in control, the date of the latest purchase, as a
matter of convenience, may be considered as the date of acquisition.

Thus, there would generally be included in consolidated income for the year in
which control is obtained, the post acquisition income for that year and in consolidated
retained earnings the post acquisition income for prior years, attributable to each block
previously acquired, if not previously recognized by accounting for the investment by the
equity method.

ILLUSTRATIVE PROBLEM G. If a 45% interest was acquired on October 1, 2005

and a further 30% interest was acquired on April 1, 2006, it would be appropriate to
include in consolidated income for the year ended December 31, 2006, 45% of the
earnings of the subsidiary for the three months ended March 31, and 75% of the earnings
for the nine months ended December 31, and to credit consolidated retained earnings in
2005 with 45% of the undistributed earnings of the subsidiary for the three months ended
December 31, 2005, if the investor's equity in those undistributed earnings had not been
recognized previously.

FINANCIAL REPORTING SUBSEQUENT TO A PURCHASE

Financial statements prepared subsequent to an acquisition reflect the combined

entity only from the date of acquisition. When a combination occurs during a fiscal
period, the income earned by the acquired company (subsidiary) before the combination
is not reported in the Statement of Recognized Income and Expenses of the combined
enterprise. If the combined company presents comparative financial statements that
include statements for periods before the combination, those statements include only the
activities and financial position of the acquiring company and not those of the acquired
company.
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 147

ILLUSTRTIVE PROBLEM H. Assume the following information for Maricon Corp

and Gloria Co.
2005 2006
Maricon Corp.:
Separate income (excluding any income
from Gloria Co.) P1,500,000 P1,500,000
Shares outstanding 30,000 40,000

Gloria Co.
Net income P300,000 P300,000

Maricon Corp. acquires all the stock of Gloria Co. at book value on January 1,
2006 by issuing 10,000 shares of Ordinary Share Capital. Subsequently, Maricon Corp.
presents comparative financial statements for the years 2005 and 2006. The net income
and earnings per share that Maricon Corp. presents in its comparative financial
statements for the two years are presented below.

2005:
Net income P1,500,000
Earnings per share (P1,500,000/30,000 shares) P50

2006:
Net income (P1,500,000 + P300,000) P1,800,000
Earnings per share (P1,800,000/40,000 shares) P45

If Maricon Corp. had purchased Gloria Co. stocks in the middle of 2006 instead
of at the beginning of 2006, Maricon Corp. would include only Gloria Co’s earnings
subsequent to acquisition in its 2006 Statement of Recognized Income and Expenses. If
Gloria Co. earned P125,000 in 2006 before acquisition by Maricon and P175,000 after
the combination, Maricon Corp. would report total net income for 2006 of P1,765,000
(P1,500,000 + P175,000).
 148 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

DISCUSSION QUESTIONS

1. Differentiate the equity method from the cost method of accounting for the
investment in stock.

2. How are investments in subsidiaries accounted in a parent’s separate financial

statements?

3. How is the difference between cost and book value of acquired investment
(differential) treated subsequent to the date of acquisition?

4. Why is the entry of the parent recording its share in the subsidiary's net income for
the year reversed in the working paper prior to consolidating financial statements?

5. How is consolidated net income computed if the investment has been accounted for
by the equity method? By the cost method?

6. What is the effect of impairment/depreciation/amortization of the excess of

investment cost over its book value in the computation of consolidated net income?

7. Why are intercompany transactions eliminated in preparing consolidated

statements?

8. Explain why you agree or disagree with the following statement:

“Consolidated statements will be the same whether the cost method or the
equity method is used in accounting for investments in consolidated
subsidiaries.”

9. Customer notes acquired by subsidiary companies of the Beauty Corporation are

discounted by the parent company as a regular practice. The parent collects the
notes at their maturity. (a) What entries are made on the books of a subsidiary
company and the parent upon discounting a note? (b) How are the notes receivable
and the notes receivable discounted balances reported on each company's separate
Statement of Financial Position and on the Consolidated Statement of Financial
Position?

10. Company A, a wholly owned subsidiary of Company B, is unable to borrow cash

from the bank. Accordingly, it requests an accommodation note from the parent.
The parent complies with the request, and the subsidiary then discounts the note at
the bank. (a) What entries will appear on the books of Company B and Company A
as a result of the foregoing? (b) How will these transactions be reported (1) on
Company B's separate Statement of Financial Position, (2) on Company A' separate
Statement of Financial Position, and (3) on the Consolidated Statement of Financial
Position?
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 149

EXERCISES
Exercise 12-1

The Stun Corporation and the Stud Corporation each have 1,000 shares of stock
outstanding, P100 par. Changes in capital from January 1, 2007 to December 31, 2008
were as follows:
Stun Corp. Stud Corp.
Retained earnings (deficit), 1/1/07 P 50,000 (P15,000)
Dividends declared and paid in 12/07 ( 10,000) _______
P 40,000 (P15,000)
Net income (loss) for 2007 30,000 (P 5,000)
Retained earnings (deficit), 12/31/07 P 70,000 (P20,000)
Dividends declared and paid in 6/08 ( 10,000) _________
P 60,000 (P20,000)
Net Income (loss) for 2008 ( 5,000) 15,000
Retained earnings (deficit), 12/31/08 P 55,000 ( P 5,000)

The Panda Corporation acquired 800 shares of the Stun Corporation stock at P200
and 900 shares of the Stud Corporation stock at P100 on July 1, 2007. Assume that all
identifiable assets are stated at their fair values.

Instructions: Determine the amount of goodwill on each investment for purposes of the
Consolidated Statement of Financial Position using the (1) full economic entity approach
and the (2) modified economic entity approach..

Exercise 12-2

On July 1, 2007, Park Corporation acquired 1,500 shares of the outstanding stock
of Stark Co. for P240,000. The Statement of Financial Position of Stark Co. as of
December 31, 2007 was as follows:

Assets P370,000
Liabilities P100,000
Ordinary Share Capital, P100 par 200,000
Additional Paid-in Capital 50,000
Retained Earnings 20,000
Total Equities P370,000

Instructions:
1. Make the entries to record the following under both the cost and the equity
methods, assume impairment losses of P500 and P1,500 for 2007 and 2008,
respectively.
(a) The acquisition of the investment
(b) Stark Company reported a net income of P30,000 for 2007.
(c) At the beginning of 2008, Stark Co. paid dividends of P30,000.
(d) The operations of Stark Co. in 2008 resulted in a net loss of P10,000
 150 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

2. Compute for the book value of the subsidiary stock acquired on date of acquisition.

Exercise 12-3

On January 1, 2008, Pluto Company purchased 80 percent of the outstanding

share capital of Saturn Company at a cost of P800,000. On that date, Saturn Company
had P500,000 of Ordinary Share Capital and P500,000 of Retained Earnings.

For 2008, Saturn Company reported income of P200,000 and paid dividends of
P80,000. All the assets and liabilities of Saturn Company are at fair market value.

Instructions:
1. Prepare entries by Pluto Company to record the purchase of the investment (at
cost), the receipt of dividends, and the equity in subsidiary earnings for 2008 (Pluto
uses the cost method).

2. Compute the balance of the Investment in Saturn Company account on December

31, 2008.

3. Compute minority net income for 2008.

4. Compute the amount to be shown as minority interest on a consolidated statement

as of December 31, 2008.

5. Repeat Nos. 1 to 4 assuming Pluto uses the equity method.

Exercise 12-4

Prepare the entries for Platoon Corp. using the equity method:

(a) Platoon Corp. acquired 750 of the 1,000 outstanding share of Saloon Corp.
at P90 per share at the beginning of 2007.
(b) Saloon Corp. issued a 10% stock dividends on June 1, 2007.
(c) Cash dividend of P5 per share was paid by Saloon Corp. on Dec. 1.
(d) The subsidiary reported a net income of P15,000 for 2007.
(e) A net loss of P6,000 was incurred by the subsidiary in 2008.

Exercise 12-5

Paxton Corporation purchased 40% of the stock of Sundown Company on

January 1, 2006, at underlying book value. The companies reported the following
operating results and dividend payments during the first three years of intercorporate
ownership as shown on the next page.
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 151

Paxton Corporation Sundown Company

Operating Operating
Year Income Dividends Income Dividends
2006 P300,000 P120,000 P210,000 P 90,000
2007 180,000 240,000 120,000 180,000
2008 750,000 360,000 75,000 150,000

Instruction: Compute the net income reported by Paxton Corporation for each of the
three years, assuming it accounts for its Investment in Sundown Company using (a) the
cost method; (b) the equity method.

Exercise 12-6

Pastel Corp. owns 90% interest in Sly Corp. and 70% in Sty Co.

Instructions: Compute for the consolidated net income under each of the following
cases. Assume the use of the full economic entity approach.

Case A: Pastel Corp. and Sly Corp. realized net income of P80,000 and P45,000,
respectively. Sty Company's operations resulted in a net loss of P15,000.

Case B: Pastel Corp. incurred a net loss of P20,000 while Sly Corp. and Sty Co.
realized net income of P50,000 and P70,000 respectively.

Case C: The operations of the three corporations resulted in net income of P40,000
for Pastel Corporation, P30,000 for Sly Corp., and P35,000 for Sty Co.
The cost of the investment in Sly Corp. exceeded the book value of the
stock acquired by Pastel Corp. by P10,000 while the cost of the investment
in Sty Co. stock was less than book value by P5,000. The differences are
depreciated over 5 years.

Exercise 12-7

Pat Corp. acquired 80% interest in Sat Co. three years ago when the shareholders'
equity of the latter consisted of:

Ordinary Share Capital, P100 par P200,000

Retained earnings 50,000

The excess of cost over book value was assigned to an identifiable asset of the
subsidiary and which is being depreciated over 10 years. Assume the use of the full
economic entity approach. The trial balance of the parent and the subsidiary as of
December 31, 2008 are on the next page.
 152 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

Pat Co. Sat Co.

Debit
Cash and Other Assets P 452,000 P 440,000
Investment in Sat Co. Stock 208,000
Cost of Sales 300,000 200,000
Operating Expenses 90,000 50,000
P1,050,000 P 690,000

Credits
Liabilities P 150,000 P 120,000
Ordinary Share Capital, P100 par 300,000 200,000
Retained Earnings 100,000 70,000
Sales 500,000 300,000
P1,050,000 P 690,000

Instructions:
1. Prepare adjustments and eliminations in journal entry form that should be made
prior to the consolidation of the financial statements.

2. Prepare working paper for the consolidation of the statements.

3. Prepare Consolidated Statement of Recognized Income and Expenses. Disregard

income taxes.

4. Prepare Consolidated Statement of Financial Position.

Exercise 12-8

Pallet Co. owns 80% of the stock of Stall Company. In journal form, prepare
the elimination that is required in each of the following cases:

(a) Pallet Company's books: Advances to Stall Company P15,000

Stall Company's books: Advances from Pallet Company 15,000

(b) Pallet Company's books: Notes Receivable Discounted

(discounted by Stall Co.) P10,000

Notes Receivable P20,000

Stall Company's books: Notes Receivable (received
from Pallet Co.) P10,000
Notes Receivable Discounted
(discounted by bank) P8,000

(c) Pallet Company's books Notes Payable (issued to

Stall Co. P5,000
Stall Company's books Notes Receivable (received
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 153

from Pallet Co.) P5,000

Notes Receivable Discounted

(Pallet Co.'s note discounted
by bank) P5,000

(d) Pallet Company's books Dividends Receivable (from

Stall Co.) P1,600

Stall Company's books Dividends Payable P2,000

Exercise 12-9

Following are all details of three ledger accounts of a parent company which uses
the equity method of accounting for its subsidiary's operating results.

Intercompany Dividends Receivable

Aug. 16, 2008 36,000 Aug.27, 2008 36,000

Investment in Subsidiary
Sept.1, 2007 630,000 Aug. 16, 2008 36,000
Aug.31,2008 72,000 Aug. 31, 2008 5,000

Equity in Subsidiary Income

Aug. 31, 2008 5,000 Aug. 31, 2008 72,000

Instructions: Give the most logical explanation for each of the transactions recorded in
the above ledger accounts?
 154 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

PROBLEMS
Problem 12 - 1

On January 1, 2007, Plow Company purchased an 80% interest in Slow Co. for
P280,000. On this date, Slow Company had Ordinary Share Capital of P100,000 and
Retained Earnings of P50,000.

An examination of Slow Company's assets and liabilities revealed that book

values were equal to market values for all except plant and equipment (net) which had a
book value of P200,000 and a market value of P250,000, and inventory which had a
book value of P60,000 and a market value of P80,000. The plant and equipment had an
expected remaining life of 5 years, and the inventory should all be sold in 2007. Plow
Company is to test goodwill for impairment at the end of each year. Assume the use of
the full economic entity approach.

Plow Company's income from its own operations was P70,000 in 2007 and
P80,000 in 2008. Slow Company's income was P60,000 in 2007 and P50,000 in 2008.
Slow Company did not pay any dividends on either year. Goodwill impairment losses
were P5,000 in 2007 and P4,000 in 2008.

Instructions:
(1) Prepare the entries that Plow Company would have made in 2007 and 2008 with
respect to its investment in Slow Company.

(2) Prepare the elimination entries for consolidated statement working papers on
December 31, 2007 and December 31, 2008.

(3) Prepare a schedular calculation of consolidated net income for 2007 and 2008.

Problem 12 - 2

On January 1, 2007, Pink Corporation acquired 2,100 shares of the outstanding

capital shares of Sync Company for P294,000. As of this date, the shareholders' equity of
Sync Company consisted of: Ordinary Share Capital, P100 par, P300,000; Retained
Earnings, P120,000. The investment is accounted for by the equity method.

On July 1, 2008, Pink Corporation sold 300 shares of its investment in Sync
Company stock for P45,000. Changes in the Retained Earnings account of Sync
Company are as follows:
2007 Net income from operations P 84,000
Cash dividends declared, December 2007 63,000

2008 Net income from operations P105,000

Cash dividends declared, December 2008 94,500

Instructions: Compute the balance of the investment account on December 31, 2008
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 155

Problem 12 - 3

On January 1, 2008, Peach Company purchased 40,000 shares of Silver Company

in the open market for P2,280,000. On that date, the assets and liabilities of Silver
Company had book values that approximate their respective fair market values.
Goodwill, if any, is to be tested for impairment at the end of each year. Peach Company
uses the equity method to account for its investment. Assume the use of the full economic
entity approach.

On December 31, 2008, Silver Company owed Peach Company P10,000 on open
account from purchases made last year. Goodwill impairment losses in 2008 is P10,000.
Financial statements for the two corporations for the year ended December 31, 2008 are
shown below.
Peach Co. Silver Co.
Statement of Recognized Income and Expenses
Sales P4,000,000 P2,000,000
Cost of Sales 1,600,000 1,200,000
Gross Profit P2,400,000 P 800,000
Operating Expenses 1,560,000 440,000
Operating Income P 840,000 P 360,000
Equity in Subsidiary Income 278,000 ________
Net income P1,118,000 P 360,000
Minority interest net income _________ ________
Net income - carried forward P1,118,000 P 360,000
Retained Earnings Statement
Balance, January 1, 2008 P6,000,000 P1,600,000
Net income - brought forward 1,118,000 360,000
Total P7,118,000 P1,960,000
Less Dividends declared 800,000 120,000
Balance, December 31, 2008 - carried forward P6,318,000 P1,840,000
Statement of Financial Position
Cash P 600,000 P 200,000
Accounts Receivable 400,000 400,000
Inventories 800,000 600,000
Land 1,200,000
Building (net of accumulated depreciation) 800,000
Equipment (net of accumulated depreciation) 2,456,000 2,000,000
Investment in Silver Company 2,462,000 ________
Totals P8,718,000 P3,200,000
Accounts Payable and Accrued Expenses P 604,000 P 360,000
Bonds Payable (face amount P200,000) 196,000
Ordinary Share Capital – Peach Co. (P100 par) 1,000,000
Ordinary Share Capital - Silver Co. (P20 par) 1,000,000
Additional Paid-in Capital 600,000
Retained Earnings – brought forward 6,318,000 1,840,000
Totals P8,718,000 P3,200,000
 156 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

Instructions:
(1) Prepare a consolidated working paper.

(2) Prepare consolidated financial statements.

Problem 12 - 4

On January 1, 2008, Prose Company purchased 24,000 shares of Slope Company

in the open market for P1,512,000. On that date, the following assets of Slope Company
had book values that were different from their respective market values:

Book Value FMV

Inventories P 80,000 P140,000
Land 300,000 400,000
Building (net) 400,000 600,000
Equipment (net) 900,000 750,000
Patent 80,000

All other assets and liabilities had book values approximately equal to their
respective market values.

On January 1, 2008, the building had a remaining useful life of 20 years.

Equipment and patent had remaining useful lives of 10 years each. FIFO inventory
costing is used. Goodwill, if any is to be tested for impairment. Prose Co. uses the
equity method to account for this investment. Assume the use of the full economic entity
approach.

Trial balances for the companies for the year ended December 31, 2008 are on the
next page. Assume that the 2008 goodwill impairment loss amounts to P5,000.

Prose Co. Slope Co.

Debits
Cash P 400,000 P 200,000
Accounts Receivable 300,000 100,000
Inventories 200,000 80,000
Land 300,000
Building 520,000
Equipment 1,400,000 940,000
Patents
Investment in Slope Co. 1,617,600
Cost of Sales 800,000 300,000
Expenses 720,000 400,000
Dividends paid 200,000 100,000
Totals P5,637,600 P2,940,000
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 157

Credits
Accounts Payable and Accrued Expenses P 248,000 P 380,000
Accumulated Depreciation - Building 120,000
Accumulated Depreciation - Equipment 804,000 40,000
Ordinary Share Capital - (P100 par, P20 par) 400,000 600,000
Additional Paid-in Capital 800,000
Retained Earnings 1,200,000 800,000
Sales 2,000,000 1,000,000
Equity in Subsidiary Income 185,600 _________
Totals P5,637,600 P2,940,000

Instructions:
(1) Prepare an allocation schedule of excess.

(2) Prepare a consolidated working paper using the trial balance approach.

(3) Prepare consolidated financial statements.

Problem 12 - 5

Palma Corp. lent P10,000 on June 1, 2007 to Salman Co., its 90% owned
subsidiary. The note is to be repaid on May 30, 2008 together with 12% interest. The
partial trial balance of Palma Corp. and Salman Co. is as follows:

Palma Corp. Salman Co.

Assets xxx Xxx
Notes Receivable – Salman Co. 10,000
Accrued Interest on Notes Receivable 600
Investment in Salman Co. xxx
Liabilities ( xxx ) ( xxx )
Notes Payable – Palma Corp. ( xxx ) (10,000)
Accrued Interest on Notes Payable ( 600)
Ordinary Share Capital ( xxx ) ( xxx )
Retained Earnings ( xxx ) ( xxx )
Sales (50,000) (20,000)
Interest Revenue ( 600)
Expenses 36,000 17,000
Interest Expense _______ 600
-0 - -0 -

Instructions:
(1) Prepare the elimination entries related to the intercompany note.

(2) Compute the consolidated net income (show the minority interest in net income).
 158 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

Problem 12 – 6

Pentium Corp. acquired 80% of the outstanding stock of Stadium Corp. for
P560,000 cash on January 3, 2007, on which date Stadium’s shareholders’ equity
consisted of Ordinary Share Capital stock of P400,000 and Retained Earnings of
P100,000.

There were no changes in the outstanding stock of either corporation during 2007
and 2008. At December 31, 2008, the adjusted trial balances of Pentium and Stadium
are as follows:

Pentium Corp. Stadium Corp.

Debits
Current Assets P 408,000 P 150,000
Plant Assets – net 800,000 600,000
Investment in Stadium – 80% 672,000 ---
Cost of Goods Sold 500,000 240,000
Other Expenses 100,000 60,000
Dividends 120,000 50,000
P2,600,000 P1,100,000
Credits
Current Liabilities P 324,000 P 100,000
Ordinary Share Capital 1,000,000 400,000
Retained Earnings 400,000 200,000
Sales 800,000 400,000
Income from Stadium 76,000 ---
P2,600,000 P1,100,000

Additional information:

 All of Stadium’s assets and liabilities were recorded at their fair values on
January 3, 2007.
 The current liabilities of Stadium at December 31, 2008 include dividends
payable of P20,000.
 Impairment loss on goodwill are P10,000 and P6,000 for 2007 and 2008,
respectively.
 Assume the use of the full economic entity approach.

Instructions: Determine the amounts that should appear in the consolidated statements
of Pentium Corp. and Subsidiary Stadium Corp. at December 31, 2008 for each of the
following:

1. Minority interest net income

2. Current Assets
3. Income from Stadium
4. Ordinary Share Capital
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 159

5. Investment in Stadium
6. Consolidated net income
7. Excess of investment cost over book value acquired
8. Goodwill in the Consolidated Statement of Financial Position, December 31,
2008
9. Consolidated Retained Earnings, December 31, 2008
10. Minority interest, December 31, 2008
 160 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

MULTIPLE CHOICE
Multiple Choice 12 - A

1. A Retained Earnings of subsidiary account appears in:

a. the consolidating financial statements working papers
b. the parent company's accounting records
c. the subsidiary’s accounting records
d. the consolidating financial statements working papers, the parent company’s
accounting records and the subsidiary’s accounting records

2. A parent company's credit to an intercompany Dividends Revenue account indicates

that, in accounting for the operating results of its subsidiary, the parent company
uses
a. the equity method of accounting
b. the cost method of accounting
c. either a or b
d. neither a nor b

3. Which of the following describes the amount at which a parent company reports its
Investment in a Subsidiary under the cost method for periods subsequent to the
business combination?
a. Original cost of the investment to the parent company
b. Original cost of the investment adjusted for the parent company's share on the
subsidiary's net income, net losses, and dividends
c. Current fair value of the investment adjusted for dividends received
d. Current fair value of the investment.

4. In a parent company's unconsolidated financial statements, which accounts, other

than Cash, are affected when a subsidiary's earnings and dividends are reflected?
a. Dividend Revenue, Intercompany Investment Income, and Retained Earnings
b. Dividend Revenue and Retained Earnings
c. Investment in Subsidiary, Intercompany Investment Income, Dividend
Revenue, and Retained Earnings
d. Investment in Subsidiary , Intercompany Investment Income and Retained
Earnings

5. How is the portion of consolidated earnings to be assigned to minority interest in

consolidated financial statements determined?
a. The net income of the parent company is subtracted from the subsidiary's net
income to determine the minority interest
b. The subsidiary's net income is allocated to the minority interest
c. The amount of the subsidiary's net income recognized for consolidation
purposes is multiplied by the minority's percentage ownership
d. The amount of consolidated net income determined on the consolidating
financial statements working paper is multiplied by the minority interest
percentage at the balance sheet date.
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 161

6. When the cost method of accounting for an investment in a subsidiary is used,

dividends from the subsidiary should be accounted for by the parent company as:
a. revenue, unless paid from retained earnings of the subsidiary earned before
the business combination
b. revenue, if the dividends were declared from retained earnings
c. a reduction in the carrying amount of the investment in Subsidiary account
d. negative goodwill

7. What would be the effect on consolidated financial statements if an unconsolidated

subsidiary is accounted for by the equity method, but other subsidiaries are
consolidated?
a. All the unconsolidated subsidiary's account will be included individually in
the consolidated financial statements.
b. Consolidated retained earnings will not reflect the net income of the
unconsolidated subsidiary
c. Consolidated retained earnings will be the same as if the subsidiary had been
included in the consolidation.
d. The parent company's dividend revenue from the unconsolidated subsidiary
will be reflected in consolidated net income.

Multiple Choice 12 – B

The following Statements of Financial Position as of December 31, 2008 are for
Pole Co. and subsidiary Sole Co.:
Pole Co. Consolidated
Assets
Current Assets P436,000 P 726,000
Plant Assets 186,000 308,000
Investment in Subsidiary 290,000 ---
P912,000 P1,034,000
Equities
Current Liabilities P166,000 P 300,000
Minority Interest --- 58,400
Ordinary Share Capital 640,000 640,000
Retained Earnings 106,000 35,600
P912,000 P1,034,000
Pole Co. uses the cost method of accounting for its investment in 80% of the
capital stock of Sole. Assume the use of the full economic entity approach.

A P14,000 excess of book value acquired over investment cost was allocated to
reduce an overvaluation of Sole’s land account and is included in the above plant assets
valuation.

1. The book value of the interest purchased by Pole is

a. P380,000 c. P318,000
b. P345,000 d. P301,200
 162 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

2. The Shareholders’ Equity of Sole as of December 31, 2008 is

a. P346,000 c. P304,000
b. P318,000 d. P292,000

3. The consolidated working capital as of December 31, 2008 is

a. P290,000 c. P156,000
b. P250,000 d. P134,000

Multiple Choice 12 - C

Parker Company owns 85% interest in Starter Company which is recorded on cost
basis. During the calendar year 2008, Parker Co. had net income of P100,000 and Starter
Co. of P40,000. Intercompany interest on bonds was P700. Starter Co. declared and paid
a P10,000 dividend during the year.

1. The consolidated net profit for the year 2008 amounts to

a. P125,500 c. P124,800
b. P125,000 d. P124,300

Multiple Choice 12 - D

Pentium Corp. acquired an 80% interest in Systems Co. when the shareholders’
equity of the latter, three years ago, consisted of P400,000 of P100 par value capital share
and P100,000 of retained earnings. On December 31, 2008, their trial balances were as
follows:
Pentium Corp. Systems Co.
Cash and Other Assets P 904,000 P 880,000
Investment in Systems Co. Stock 416,000 ---
Liabilities ( 300,000) ( 240,000)
Ordinary Share Capital, P100 par ( 600,000) ( 400,000)
Retained Earnings ( 200,000) ( 140,000)
Sales ( 1,000,000) ( 600,000)
Cost of Sales 600,000 400,000
Operating Expenses 180,000 100,000
Totals P - 0 - P - 0 -

The difference of cost and book value is allocated to an asset of Systems Co. and
is being depreciated over a period of ten years. Pentium uses the cost method.

1. The consolidated net income of Pentium Corp. and Systems Co. for the year ended
December 31, 2007 is
a. P257,500 c. P276,400
b. P275,900 d. P298,400
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 163

Multiple Choice 12 – E

On April 1, 2007, Panel Company paid P756,000 for 16,000 shares of Standel
Company’s 20,000 outstanding ordinary shares. Standel reported net income of P60,000
for 2007, and declared dividends of P50,000 on November 1, 2007. In 2008, Standel
Company reported net income of P36,000, and declared and paid dividends of P50,000.

1. If Panel Company accounts for its investment in Standel Company under the cost
method, what should be the balance of its Investment in Standel Company account
at December 31, 2008?
a. P752,000 c. P756,000
b. P752,800 d. P768,800

2. If Panel Company accounts for its investment in Standel Company under the equity
method, what should it record in its Income from Standel account for 2008?
a. P11,200 debit c. P11,200 credit
b. P28,800 credit d. P40,000 debit

3. If Panel Company accounts for its investment in Standel Company under the cost
method, what should be the balance of its Dividend Revenue account at December
31, 2008?
a. P36,800 c. P40,000
b. P28,800 d. P11,200

4. If Panel Company accounts for its investment in Standel Company under the cost
method, what should be the balance of its Investment in Standel Company account
at December 31, 2008?
a. P752,000 c. P756,000
b. P752,800 d. P768,800

Multiple Choice 12 - F

Parson Company acquired a 90% interest in Stockton Company on December 31,

2007 for P540,000. During 2008, Stockton Company had a net income of P60,000 and
paid a cash dividend of P30,000.

1. Assuming that Parson Company uses the equity method, the Investment in Stockton
Company account at the end of 2008 will show a balance of:
a. P570,000 c. P552,600
b. P567,000 d. P540,000

2. Assuming that Parson Company uses the cost method, the Investment in Stockton
Company account at the end of 2008 will show a balance of
a. P570,000 c. P552,600
b. P567,000 d. P540,000
 164 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

Multiple Choice 12 – G

Abbreviated trial balances of Pingson Corp. and Singson Corp. at December 31,
2008 follow:

Pingson Singson
Current Assets P 480,000 P 260,000
Land 600,000 100,000
Plant and Equipment – net 2,000,000 900,000
Investment in Singson – 90% 820,000 --
Cost of Sales 2,000,000 600,000
Other Expenses 500,000 240,000
Dividends 200,000 100,000
P6,600,000 P2,200,000

Current Liabilities P 510,000 P 200,000

Ordinary Share Capital 2,000,000 600,000
Retained Earnings 1,000,000 400,000
Sales 3,000,000 1,000,000
Dividend Income 90,000 ---
P6,600,000 P2,200,000

Pingson acquired a 90% interest in Singson for P820,000 cash on January 1, 2005,
when Singson’s shareholders’ equity consisted of P600,000 Ordinary Share Capital and
P200,000 Retained Earnings. Any difference between investment cost and book value
acquired relates to equipment with a 10-year life from January 1, 2008. Pingson uses the
cost method.

1. The amount of adjustment needed to convert the investment in Singson account to

an equity basis as of January 1, 2008, is computed
a. 100% (P400,000 – P200,000) – P10,000
b. 90% (P400,000 – P200,000) – P40,000
c. 100% (P400,000 – P200,000) + P40,000
d. 90% (P400,000 – P200,000) + P10,000

2. Consolidated net income for 2008 is

a. P644,000 c. P632,889
b. P634,000 d. P134,000

3. Minority interest in Singson at December 31, 2008 is

a. P100,000 c. P117,111
b. P116,000 d. P106,000

4. Dividends to the minority stockholders for 2008 are

a. P100,000 c. P20,000
b. P 40,000 d. P10,000
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 165

Multiple Choice 12 – H

Print Corp. acquired on January 1, 2008, 75% of the outstanding share capital of
Sprint Corp. for P207,500. On that date, Sprint's Statement of Financial Position showed
shareholders' equity of:

Ordinary Share Capital, P100 par P200,000

Retained Earnings 50,000
Total P250,000

The excess of cost over book value is attributable to an asset which has an
estimated remaining useful life of ten years.

For the year ended December 31, 2008, Sprint reported net income of P60,000
and paid cash dividends of P20 per share on its share capital.

1. The carrying value of Print’s investment in Sprint under the equity method as of
December 31, 2008 was
a. P207,500 c. P219,833
b. P210,500 d. P220,500

Multiple Choice 12 - I

Pastel Co. paid P290,000 for a 90% interest in Staple Co. on January 1, 2007.
The shareholders' equity of Staple Co. included Ordinary Share capital of P200,000 and
Retained Earnings of P100,000.

During 2007, the net income of Staple Co. was P60,000 and dividends paid were
P20,000. During 2008, Staple Co. had a net loss of P20,000 and it paid dividends of
P10,000. Impairment loss on the Goodwill was P800 and P1,200 for 2007 and 2008,
respectively.

(1) The balance of the investment in Staple Co. on December 31, 2008 under the
equity method of accounting was:
a. P280,000 c. P298,000
b. P281,000 d. P297,000

Multiple Choice 12 – J

Paddle Company purchased in the open market 80% of the share capital of Saddle
Company on January 1, 2005 at P50,000 more than the book value of its net assets. The
excess was allocated totally to goodwill, which shall be tested for impairment.

During the following five years, Saddle Company reported cumulative earnings of
P200,000 and paid P50,000 in dividends. On January 1, 2010, minority interest in the
 166 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

net assets of Saddle Company amounts to P70,000. Impairment loss on Goodwill totaled
P12,500 to date.

Paddle Company uses the equity method of accounting. Assume the use of the
modified economic entity approach.

1. The acquisition cost of the investment on January 1, 2005 is:

a. P250,000 c. P280,000
b. P280,000 d. P210,000

2. The carrying value of the Investment in Saddle Company account on December 31,
2010 is
a. P407,500 c. P357,000
b. P420,000 d. P317,500

Multiple Choice 12 - K

The following data are submitted relative to Pentagon Holdings Corp. and its
subsidiary, Slogan Generators Co., whose stocks it acquired on January 1, 2008.
Pentagon Slogan
Holdings Co. Generators Co.
Par value of stock outstanding P500,000 P 75,000
Portion of stock owned by Pentagon 90%
Retained Earnings, January 1, 2008 180,000 45,000
Cost to Pentagon of stock acquired 110,000
Net income from own operations
during 2008 45,000 5,000
Dividends paid during 2008 30,000 4,500

The Pentagon Holdings Corp. has adopted the equity method of accounting for
investment. Any excess is attributable to an asset with a 10 years life.

1. On January 1, 2008, the book value of the Slogan shares acquired by Pentagon
amounted to
a. P67,500 c. P108,000
b. P99,000 d. P110,250

2. In preparing a Consolidated Statement of Financial Position for Pentagon, the

carrying value of the investment in Slogan shares as of the end of 2008 is
a. P103,500 c. P110,000
b. P108,450 d. P110,250

3. During the year 2008, Pentagon should have received its share in the distributed
earnings of Slogan, amounting to
a. P4,000 c. P4,050
b. P4,015 d. P4,500
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 167

4. The Consolidated Retained Earnings of Pentagon and Slogan as of December 31,

2008 would be
a. P195,000 c. P199,500
b. P199,050 d. P199,300

Multiple Choice 12 – L

On January 1, 2008, Pedestal Company purchased 80% of the outstanding shares of

Starlet Company at a cost of P800,000. On that date, Starlet Company had P300,000 of
Ordinary Share Capital and P600,000 of Retained Earnings.

For 2008, Pedestal Company had income of P300,000 from its own operations
and paid dividends of P150,000. On the other hand, Starlet Company reported a net
income of P100,000 and paid dividends of P40,000. All assets and liabilities of Starlet
Company have book values approximately equal to their respective market values.

Pedestal Company uses the equity method to account for its investment in Starlet
Company. Impairment loss on goodwill for 2008 is P4,000.

1. The amount Pedestal Company should record as Equity in Starlet Company

Income for 2008 is
a. P78,000 c. P82,000
b. P80,000 d. P76,000

Multiple Choice 12 – M

The separate Condensed Statements of Financial Position and Statements of

Recognized Income and Expenses of Par Corp. and its wholly-owned subsidiary, Sub
Corp. are as follows:
STATEMENT OF FINANCIAL POSITION
December 31, 2008
Par Sub
Assets
Current assets:
Cash P 150,000 P 50,000
Accounts receivable (net) 190,000 60,000
Inventories 90,000 40,000
Total Current Assets 430,000 P 150,000
Property, Plant and Equipment (net) 365,000 200,000
Investment in Sub (equity method) 315,000 _______
Total Assets P1,110,000 P 350,000
Liabilities & Shareholders' Equity
Current Liabilities:
Accounts Payable P 100,000 P 60,000
Accrued Liabilities 30,000 20,000
Total Current Liabilities P 130,000 P 80,000
 168 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

Shareholders' Equity:
Ordinary Share Capital (P10 par) P 220,000 P 30,000
Additional Paid-in Capital 140,000 100,000
Retained Earnings 620,000 140,000
Total Shareholders' Equity P 980,000 P 270,000
Total Liabilities and Shareholders' Equity P1,110,000 P 350,000

STATEMENT OF RECOGNIZED INCOME AND EXPENSES

For the Year Ended December 31, 2008

Sales P1,000,000 P 300,000

Cost of Goods Sold 770,000 200,000
Gross Margin P 230,000 P 100,000
Other Operating Expenses 130,000 50,000
Operating Income P 100,000 P 50,000
Equity in Earnings of Sub 25,000 _________
Income before Income Taxes P 125,000 P 50,000
Provision for Income Taxes 35,000 17,500
Net Income P 90,000 P 32,500

Additional information:

 On January 1, 2008, Par purchased for P300,000 all of Sub's P10 par voting
capital shares. On January 1, 2008, the fair value of Sub's assets and liabilities
equaled their carrying amounts.

 During 2008, Par and Sub paid cash dividends of P50,000 and P10,000,
respectively. For tax purposes, Par receives the 100% exclusion for dividends
received from Sub.

 There were no intercompany transactions except for Par's receipt of dividends

from Sub, and Par's recording of its share of Sub's earnings.

 On June 30, 2008 , Par issued 2,000 capital shares for P17 per share. There were
no other changes in either Par's or Sub's share capital during 2008.

 Impairment loss of goodwill for 2008 is P5,000.

 Both Par and Sub paid income taxes at the rate of 35%.

1. In the 2008 Consolidated Statement of Recognized Income and Expenses of Par

and its subsidiary Sub, what amount should be reported as consolidated net
income?
a. P60,000 c. P90,000
b. P85,000 d. P115,000
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 169

2. The Consolidated Statement of Financial Position of Par and its subsidiary, Sub,
should report total consolidated assets of
a. P1,110,000 c. P1,192,500
b. P1,145,000 d. P1,460,000

3. The Consolidated Statement of Financial Position for Par and its subsidiary, Sub ,
should report total retained earnings of
a. P620,000 c. P650,000
b. P640,000 d. P760,000

4. In the December 31, 2008 Consolidated Statement of Financial Position of Par and
its subsidiary, Sub, how much should be reported as goodwill?
a. P0 c. P52,500
b. P5,000 d. P47,500

5. In the December 31, 2008 Consolidated Statement of Financial Position of Par and
its subsidiary, Sub, how much should be reported as total stockholders’ equity?
a. P1,250,000 c. P1,460,000
b. P1,100,000 d. P 980,000

Multiple Choice 12 - N

On January 1, 2008 Polo Corp. issued 200,000 additional shares of P10 par value
Ordinary Share Capital in exchange for all ordinary shares of Solo Corp. Immediately
before this business combination, Polo's shareholders' equity was P6,000,000 and Solo's
shareholders equity was P2,000,000. On January 1, 2008, fair market value of Polo's
ordinary share was P20 per share, and fair market value of Solo's net assets was
P4,000,000. The net income of Polo for the year ended December 31, 2008, exclusive of
any consideration of Solo, was P1,250,000. Solo's net income for the year ended
December 31, 2008 was P300,000. During 2008, Polo paid dividends amounting to
P450,000. Polo had no other business transaction with Solo in 2008. Goodwill
impairment loss in 2008 is P100,000.

1. How much is the consolidated shareholders' equity at December 31, 2008?

a. P8,800,000 c. P11,000,000
b. P9,100,000 d. P13,550,000

Multiple Choice 12 - O

On June 30, 2008, Post, Inc. issued 630,000 shares of its P5 par, P8 market value
capital share, for which it received 50% of Shaw Corp.'s P10 par capital share. The
shareholders' equities immediately before the combination were:
 170 Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition

Post Shaw
Ordinary Share Capital P 6,500,000 P2,000,000
Additional Paid-in Capital 4,400,000 1,600,000
Retained Earnings 6,100,000 5,400,000
P17,000,000 P9,000,000

Both corporations continued to operate as separate businesses, maintaining

accounting records with years ending December 31. Assume the use of the full economic
entity approach. Impairment loss on Goodwill for 2008 is P5,100. For 2008, net income
and dividends paid from separate company operations were:

Post Shaw
Net Income
Six months ended 6/30/08 P1,000,000 P 300,000
Six months ended 12/31/08 1,100,000 500,000

Post Shaw
Dividends paid
April 1, 2008 P1,300,000 --
October 1, 2008 P 350,000

1. In the June 30, 2008 Consolidated Statement of Financial Position, Ordinary Share
Capital should be reported at
a. P9,650,000 c. P8,500,000
b. P9,450,000 d. P8,300,000

2. In the June 30, 2008 Consolidated Statement of Financial Position, Additional

Paid-in Capital should be reported at
a. P4,400,000 c. P5,840,000
b. P6,290,000 d. P6,000,000

3. In the June 30, 2008 Consolidated Statement of Financial Position, Retained

Earnings should be reported at
a. P6,100,000 c. P10,960,000
b. P9,660,000 d. P11,500,000

4. In the 2008 Consolidated Statement of Recognized Income and Expenses, net

income should be reported at
a. P2,550,000 c. P2,100,000
b. P2,336,500 d. P2,334,900

5. In the December 31, 2008 Consolidated Statement of Financial Position, total

minority interest should be reported at
a. P4,900,000 c. P5,115,000
b. P4,725,000 d. P4,536,000
Chapter 12 – Consolidated Financial Statements Subsequent to Date of Acquisition 171

Multiple Choice 12 - P

Port Corp. and Sort Co. are sister companies. Port Corp. owns 140,000 shares of
Sort Co.'s outstanding stock of 200,000 shares; on the other hand, Sort Co. owns 120,000
of Port Corp.'s outstanding stock of 600,000 shares.

Port Corp. announced a net income of P84,080 for the year 2008 while Sort Co.
sustained a net loss of P12,000 for the same year. The operating results were arrived
without considering the earnings of the affiliate.

1. The net income (loss) of Port Corp. for 2008 on a consolidated basis was:
a. (P45,600) c. P83,600
b. P63,200 d. P88,000

2. The net income (loss) of Sort Co. for 2008 on a consolidated basis was
a. (P5,200) c. P8,400
b. P5,600 d. P13,600