_PROBLEMS_

I - 80%-Owned Subsidiary: Cost Model - Consolidated Financial Statements

Partial Goodwill or Proportionate Basis Approach / Full Goodwill or Fair Value Basis
Assume that on January 1, 20x4, P Company acquires 80% of the common stock of S Company for
P372,000. On that date the following assets and liabilities of S Company had book values that were
different from their respective market values:
S Co. S Co.
Book value Fair value
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P24,000 30,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000 55,200
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 180,000
Accumulated depreciation-equipment . . . . . . . . . . . . . . . ( 96,000)
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,000 144,000
Accumulated depreciation-buildings . . . . . . . . . . . . . . . . ( 192,000)
Bonds payable (4 years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 115,200
All other assets and liabilities had book values approximately equal to their respective fair values.
On January 1, 20x4, the equipment and buildings had a remaining life of 8 and 4 years, respectively.
Inventory is sold in 20x4 and FIFO inventory costing is used. Goodwill, if any, is reduced by a P3,750
impairment loss during 20x4 based on the fair value basis (or full-goodwill), meaning the management
has determined that the goodwill arising in the acquisition of S Company relates proportionately to the
controlling and non-controlling interests, as does the impairment.
Trial balances for the companies for the year ended December 31, 20x4 are as follows:
Debits P Co. S Co.
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 232,800 P 90,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 60,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 90,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210,000 48,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 180,000
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720,000 540,000
Investment in S Company . . . . . . . . . . . . . . . . . . . . . . . . . . 372,000 -
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,000 138,000
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . - -
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 24,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000 18,000
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . . - -
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000 36,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P2,368,800 P1,224,000
Credits
Accumulated depreciation – equipment . . . . . . . . . . P 135,000 P 96,000
Accumulated depreciation – buildings . . . . . . . . . . 405,000 288,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 120,000
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240,000 120,000
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 240,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360,000 120,000
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480,000 240,000
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,800 -
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P2,368,8 00 P1,224,000

Required: Using cost model:

.

1. Prepare journal entry to record investment in the books of the acquirer company.
 2. Prepare schedule for determination and allocated excess.
3. Prepare the working paper eliminating entries for 20x4 for purposes of preparing consolidated
balance sheet.
4. Prepare a consolidated workpaper on December 31, 20x4 .

Cost Model
80% Partial Goodwill - Cost Model – First Year
1. 20x4: First Year after Acquisition
Parent Company Cost Model Entry
January 1, 20x4:
(1) InvestmentinSCompany…………………………………………… 372,00
0
Cash…………………………………………………………….. 372,00
0
Acquisition of S Company.
January 1, 20x4 – December 31, 20x4:
(2) Cash……………………… 28,800
Dividend income (P36,000 x 80%)……………. 28,800
Record dividends from S Company.
On the books of S Company, the P36,000 dividend paid was recorded as follows:
Dividends paid………… 36,000
Cash……. 36,000
Dividends paid by S Co..
2. Schedule of Determination and Allocation of Excess (Partial-goodwill)
Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (80%)
Consideration
transferred……………………………….. P 372,000
Less: Book value of stockholders’ equity of S:
Common stock (P240,000 x 80%)……………………. P192,000
Retained earnings (P120,000 x 80%)………………... 96,000 288,000
Allocated excess (excess of cost over book value)….. P 84,000
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P6,000 x 80%)……………… P 4,800
Increase in land (P7,200 x 80%)……………………. 5,760
Increase in equipment (P96,000 x 80%) 76,800
Decrease in buildings (P24,000 x 80%)………..... ( 19,200)
Decrease in bonds payable (P4,800 x 80%)…… 3,840 72,000
Positive excess: Partial-goodwill (excess of cost over
fairvalue)………………………………………………... P 12,000

80% Owned: Partial/Proportionate-Goodwill

The over/under valuation of assets and liabilities are summarized as follows:
(Over)
S Co. S Co. Under
Book value Fair value Valuation
 P
Inventory………………….…………….. P 24,000 30,000 P 6,000
Land……………………………………… 48,000 55,200 7,200
Equipment (net)......... 84,000 180,000 96,000
Buildings (net) 168,000 144,000 (24,000)
(
Bonds payable………………………… (120,000) 115,200) 4,800
P
Net……………………………………….. P 204,000 294,000 P 90,000

Amortization Table: A summary or depreciation and amortization adjustments is as follows:

Current
Account Adjustments to be Over/ Lif Annual Year(20x4
amortized under e Amount ) 20x5
P P P
Inventory 6,000 1 6,000 P 6,000 -
Subject to Annual Amortization
96,00 12,00
Equipment (net)......... 0 8 12,000 12,000 0
(24,00 (6,000
Buildings (net) 0) 4 ( 6,000) ( 6,000) )
Bonds payable… 4,800 4 1,200 1,200 1,200
P P
13,200 P 13,200 7,200
12/31/20x4:
CI-CNI
Consolidated Net Income for 20x4
Net income from own/separate operations
P Company P168,000
S Company 60,000
Total P228,000
Less: Non-controlling Interest in Net Income* P 9,360
Amortization of allocated excess (refer to amortization above) 13,200
Goodwill impairment (impairment under partial-goodwill approach) 3,000 25,560
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent………….. P202,440
Add: Non-controlling Interest in Net Income (NCINI) 9,360
Consolidated Net Income for 20x4 P211.800
NCI-CNI
*Non-controlling Interest in Net Income (NCINI) for 20x4
Net income of S Company P 60,000
Less: Amortization of allocated excess / goodwill impairment
(refer to amortization table above) 13,200
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
9,360

. Consolidation Workpaper Elimination Entries– 20x4 Year of Acquisition (Partial-goodwill)

(E1) Common stock – S Co………………………………………… 240,000
Retained earnings – S Co…………………………………… 120.000
Investment in S Co…………………………………………… 288,000
Non-controlling interest (P360,000 x 72,000
20%)………………………..
To eliminate intercompany investment and equity accounts
of subsidiary on date of acquisition; and to establish non-controlling
 interest (in net assets of subsidiary) on date of acquisition.

(E2) 6,000
Inventory………………………………………………………………….
Accumulated depreciation – equipment……………….. 96,000
Accumulated depreciation – buildings………………….. 192,00
0
Land……………………………………………………………………….
7,200
Discount on bonds payable…………………………………………. 4,800
Goodwill………………………………………………………………….
12,000
Buildings……………………………………….. 216,00
0
Non-controlling interest (P90,000 x 20%)……………………….. 18,000
Investment in S Co………………………………………………. 84,000
To allocate excess of cost over book value of identifiable assets
acquired, with remainder to goodwill; and to establish non-
controlling interest (in net assets of subsidiary) on date of acquisition.
(E3) Cost of Goods Sold……………. 6,000
Depreciation expense……………………….. 6,000
Accumulated depreciation – buildings………………….. 6,000
Interest expense………………………………… 1,200
Goodwill impairment loss………………………………………. 3,000
Inventory………………………………………………………….. 6,000
Accumulated depreciation – equipment……………….. 12,000
Discount on bonds payable………………………… 1,200
Goodwill…………………………………… 3,000
To provide for 20x4 impairment loss and depreciation and
amortization on differences between acquisition date fair value and
book value of Son’s identifiable assets and liabilities as follows:
Cost of Depreciation/
Goods Amortization Amortization
Sold Expense -Interest Total
Inventory sold P 6,000
Equipment P 12,000
Buildings ( 6,000)
Bonds payable ______ _______ P 1,200
_
Totals P 6,000 P 6,000 P1,200 13,20
0

It should be observed that the goodwill computed above was proportional to the controlling interest of
80% and non-controlling interest of 20% computed as follows:
Value % of Total
Goodwill applicable to parent………………… P12,000 80.00%
Goodwill applicable to NCI…………………….. 3,000 20.00%
Total (full) goodwill……………………………….. P15,000 100.00%
Therefore, the goodwill impairment loss of based on 100% fair value or full-goodwill would be allocated
as follows:
Value % of Total
Goodwill impairment loss attributable to P or controlling P 3,000 80.00%
Interest
Goodwill impairment loss applicable to NCI…………………….. 750 20.00%
 Goodwill impairment loss based on 100% fair value or full-
P 3,750 100.00%
Goodwill

(E4) Dividend income - P………. 28,800

Non-controlling interest (P36,000 x 20%)……………….. 7,200
Dividends paid – S…………………… 36,000
To eliminate intercompany dividends and non-controlling interest
share of dividends.

(E5) Non-controlling interest in Net Income of Subsidiary………… 9,360

Non-controlling interest ………….. 9,360
To establish non-controlling interest in subsidiary’s adjusted net
income for 20x4 as follows:
Net income of subsidiary…………………….. P 60,000
Amortization of allocated excess [(E3)]…... ( 13,200)
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
Non-controlling Interest in Net Income (NCINI) P 9,360

6. Worksheet for Consolidated Financial Statements, December 31, 20x4.

Cost Model (Partial-goodwill)
80%-Owned Subsidiary
December 31, 20x4 (First Year after Acquisition)
Income Statement P Co S Co. Dr. Cr. Consolidated
Sales P480,000 P240,000 P 720,000
Dividend income 28,800 - (4) 28,800 _________
Total Revenue P508,800 P240,000 P 720,000
Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000
Depreciation expense 60,000 28,000 (3) 6,000 90,000
Interest expense - - (3) 1,200 1,200
Other expenses 48,000 18,000 66,000
Goodwill impairment loss - - (3) 3,000 3,000
Total Cost and Expenses P310,000 P180,000 P508,200
Net Income P196,800 P 60,000 P211,800
NCI in Net Income - Subsidiary - - (5) 9,360 ( 9,360)
Net Income to Retained Earnings P196,800 P 60,000 P202,440

Statement of Retained Earnings

Retained earnings, 1/1
P Company P360,000 P 360,000
S Company P120,000 (1) 120,000
Net income, from above 196,800 60,000 202,440
Total P552,800 P180,000 P562,440
Dividends paid
P Company 72,000 72,000
S Company - 36,000 (4) 36,000 _ ________
Retained earnings, 12/31 to Balance
Sheet P484,800 P144,000 P 490,440

Balance Sheet
Cash………………………. P 232,800 P 90,000 P 322,800
Accounts receivable…….. 90,000 60,000 150,000
Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000
Land……………………………. 210,000 48,000 (2) 7,200 265,200
Equipment 240,000 180,000 420,000
Buildings 720,000 540,000 (2) 216,000 1,044,000
 Discount on bonds payable (2) 4,800 (3) 1,200 3,600
Goodwill…………………… (2) 12,000 (3) 3,000 9,000
Investment in S Co……… 372,000 (1) 288,000
(2) 84,000 -
P1,008,00
Total P1,984,800 0 P2,424,600

Accumulated depreciation
- equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000
Accumulated depreciation 405,000 288,000 (2) 192,000
- buildings (3) 6,000 495,000
Accounts payable…………… 120,000 120,000 240,000
Bonds payable………………… 240,000 120,000 360,000
Common stock, P10 par……… 600,000 600,000
Common stock, P10 par……… 240,000 (1) 240,000
Retained earnings, from above 484,800 144,000 490,440
Non-controlling interest………… (4) 7,200
(1 ) 72,000
________ (2) 18,000
_________ _ __________ (5) 9,360 ____92,160
P1,008,00 P P
Total P1,984,800 0 745,560 745,560 P2,424,600

80% Full-Goodwill - Cost Model – First Year

3. 20x4: First Year after Acquisition
Parent Company Cost Model Entry
January 1, 20x4:
(1) Investment in S Company………………………………………… 372,000
Cash…………………………………………………………….. 372,000
Acquisition of S Company.
January 1, 20x4 – December 31, 20x4:
(2) Cash……………………… 28,800
Dividend income (P36,000x 80%)……………. 28,800
Record dividends from S Company.
On the books of S Company, the P36,000 dividend paid was recorded as follows:
Dividends paid………… 36,000
Cash……. 36,000
Dividends paid by S Co..
No entries are made on the P’s books to depreciate, amortize or write-off the portion of the allocated
excess that expires during 20x4.

4. Schedule of Determination and Allocation of Excess (Full-goodwill)

Date of Acquisition – January 1, 20x4
Fair value of Subsidiary (80%)
Consideration transferred (80%)…………….. P 372,000
Fair value of NCI (given) (20%)……………….. 93,000
Fair value of Subsidiary (100%)………. P 465,000
Less: Book value of stockholders’ equity of Son:
Common stock (P240,000 x 100%)………………. P 240,000
Retained earnings (P120,000 x 100%)………... 120,000 360,000
Allocated excess (excess of cost over book value)….. P 105,000
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P6,000 x 100%)……………… P 6,000
Increase in land (P7,200 x 100%)……………………. 7,200
 Increase in equipment (P96,000 x 100%) 96,000
Decrease in buildings (P24,000 x 100%)………..... ( 24,000)
Decrease in bonds payable (P4,800 x 100%)…… 4,800 90,000
Positive excess: Full-goodwill (excess of cost over
fair value)………………………………………………... P 15,000

A summary or depreciation and amortization adjustments is as follows:

Current
Account Adjustments to be Over/ Lif Annual Year(20x4
amortized under e Amount ) 20x5
P P P
Inventory 6,000 1 6,000 P 6,000 -
Subject to Annual Amortization
96,00 12,00
Equipment (net)......... 0 8 12,000 12,000 0
(24,00 (6,000
Buildings (net) 0) 4 ( 6,000) ( 6,000) )
Bonds payable… 4,800 4 1,200 1,200 1,200
P P
13,200 P 13,200 7,200

. Consolidation Workpaper Elimination Entries– 20x4 Year of Acquisition (Full-goodwill)

(E1) Common stock – S Co………………………………………… 240,000
Retained earnings – S Co…………………………………… 120.000
Investment in S Co…………………………………………… 288,000
Non-controlling interest (P360,000 x 72,000
20%)………………………..

(E2) Inventory…………………………………………………………………. 6,000

Accumulated depreciation – equipment……………….. 96,000
Accumulated depreciation – buildings………………….. 192,000
Land………………………………………………………………………. 7,200
Discount on bonds payable…………………………………………. 4,800
Goodwill…………………………………………………………………. 15,000
Buildings……………………………………….. 216,000
Non-controlling interest (P90,000 x 20%) + [(P15,000, full
– P12,000, partial goodwill)]………… 21,000
Investment in S Co………………………………………………. 84,000
(E3) Cost of Goods Sold……………. 6,000
Depreciation expense……………………….. 6,000
Accumulated depreciation – buildings………………….. 6,000
Interest expense………………………………… 1,200
Goodwill impairment loss………………………………………. 3,750
Inventory………………………………………………………….. 6,000
Accumulated depreciation – equipment……………….. 12,000
Discount on bonds payable………………………… 1,200
Goodwill…………………………………… 3,750
 Cost of Goods Depreciation/ Amortization Amortization
Sold Expense -Interest
Inventory sold P 6,000
Equipment P12,000
Buildings ( 6,000)
Bonds payable _______ _______ P 1,200
Totals P 6,000 P 6,000 P1,200
(E4) Dividend income - 28,800
Non-controlling interest (P36,000 x 20%)……………….. 7,200
Dividends paid – S…………………… 36,000
(E5) Non-controlling interest in Net Income of Subsidiary………… 8,610
Non-controlling interest ………….. 8,610
Net income of subsidiary…………………….. P 60,000
Amortization of allocated excess [(E3)]…... ( 13,200)
P 46,800
Multiplied by: Non-controlling interest %.......... 20%
P 9,360
Less: Non-controlling interest on impairment
loss on full-goodwill (P3,750 x 20%) or
(P3,750 impairment on full-goodwill less
P3,000, impairment on partial-goodwill)* 750
Non-controlling Interest in Net Income (NCINI) P 8,610

. Worksheet for Consolidated Financial Statements, December 31, 20x4.

Cost Model (Full-goodwill)
80%-Owned Subsidiary
December 31, 20x4 (First Year after Acquisition)
Income Statement P Co S Co. Dr. Cr. Consolidated
Sales P480,000 P240,000 P 720,000
Dividend income 28,800 - (4) 28,800 _________
Total Revenue P508,800 P240,000 P 720,000
Cost of goods sold P204,000 P138,000 (3) 6,000 P 348,000
Depreciation expense 60,000 24,000 (3) 6,000 90,000
Interest expense - - (3) 1,200 1,200
Other expenses 48,000 18,000 66,000
Goodwill impairment loss - - (3) 3,750 3,750
Total Cost and Expenses P312,000 P180,000 P508,950
Net Income P196,800 P 60,000 P211,050
NCI in Net Income - Subsidiary - - (5) 8,610 ( 8,610)
Net Income to Retained Earnings P196,800 P 60,000 P202,440
Statement of Retained Earnings
Retained earnings, 1/1
P Company P360,000 P 360,000
S Company P120,000 (1) 120,000
Net income, from above 196,800 60,000 202,440
Total P556,800 P180,000 P562,440
Dividends paid
P Company 72,000 72,000
S Company - 36,000 (4) 36,000 _ ________
Retained earnings, 12/31 to Balance
Sheet P484,800 P144,000 P 490,440
Balance Sheet
Cash………………………. P 232,800 P 90,000 P 322,800
Accounts receivable…….. 90,000 60,000 150,000
Inventory…………………. 120,000 90,000 (2) 6,000 (3) 6,000 210,000
Land……………………………. 210,000 48,000 (2) 7,200 265,200
Equipment 240,000 180,000 420,000
Buildings 720,000 540,000 (2) 216,000 1,044,000
Discount on bonds payable (2) 4,800 (3) 1,200 3,600
Goodwill…………………… (2) 15,000 (3) 3,750 11,250
Investment in S Co……… 372,000 (1) 288,000 -
 (2) 84,000
P1,008,00
Total P1,984,800 0 P2,426,850
Accumulated depreciation
- equipment P 135,000 P 96,000 (2) 96,000 (3) 12,000 P147,000
Accumulated depreciation 405,000 288,000 (5) 192,000
- buildings (6) 6,000 495,000
Accounts payable…………… 120,000 120,000 240,000
Bonds payable………………… 240,000 120,000 360,000
Common stock, P10 par……… 600,000 600,000
Common stock, P10 par……… 240,000 (1) 240,000
Retained earnings, from above 484,800 144,000 490,440
Non-controlling interest………… (7) 7,200(1 ) 72,000
________ (2) 21,000
_________ _ __________ (5) 8,610 ____94,410
P1,984,80 P P
Total P1,984,800 0 748,560 748,560 P2,426,850