ABC Chapter 5 - Accounting for Business Combinations by Millan 2020 PDF

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Chapter 5Chapter 5ConsolidaConsolidated Financial Statements (Part ted Financial Statements (Part 2)2)PROBLEM 1: MULTIPLE CHOICE - THEORYPROBLEM 1: MULTIPLE CHOICE - THEORY11.. AA 66.. BB22.. CC 77.. BB33.. AA 88.. BB44.. AA 99.. CC55.. BB 1100.. AAPROBLEM 2: FOR CLASSROOM DISCUSSIONPROBLEM 2: FOR C...

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

Chapter 5

Consolida Consolidated ted Financial Statements (Pa

PROBLEM 1: MULTIPLE CHOICE - THEORY 1. 2.

A C

6. 7.

B B

3.

A

8.

B

4.

A

9.

C

5.

B

10.

A

PROBLEM 2: FOR CLASSROOM DISCUSSION 1.

Solutions:

Requirement (a): Sales of Parent Sales of Subsidiary Less: Intercompany sales during the year(38,000 +

1,00 70

40,000)

(78 1,62

Consolidated sales Requirement (b):

The unrealized profits in ending inventory are computed as follows: Downstream Upstream 

Sale price of intercompany sale Cost of intercompany sale Prof ofiit from interc ercom omp pany sal ale e Multiply by:Unsold portion as of yr.end Unrealized gross profit

38,000 (20,000) 18, 18,000

8, 8,0 000a

(9.5/38) 4,500



3/4 6,00 1 0



a

(40,000 x 20%) = 8,000



Less: Realized profit in beginning inventory Add: Depreciation of FVA on inventory 68 Consolidated cost of sales

Requirement (c): Ending inventory of Parent Ending inventory of Subsidiary Less: Unrealized profit in ending inventory Consolidated ending inventory

30 8 (10 369

2. Solutions: Requirement (a): Historical cost Accumulated dep'n. 1/1/x1 1/1/x1 Depreciation based on historical cost Carrying amount

120,0 (72,00 (12,00 36,00

The solution above is based on the notion that it is as if the interc sale never happened. Requirement (b): Equipment - net (Bright Co.) Equipment - net (Dull Co.) Unamortized deferred gain (see Step 1 below) Consolidated equipment - net



400,00 190,00 (9,00 581,00

OR Equipment - net (Bright Co.) Equipment - net (Dull Co.) Carrying amount of equipment sold in Dull's books Carrying amount of equipment sold in Bright's books if the sale never happened

40 19 (4 3

Consolidated equipment - net

58



 (12,000 gain on sale ÷ 4 years)

(3,000)

OR Depreciation expense (Bright Co.)

4

Depreciation expense (Dull Co.) Depreciation in Dull's books (60,000 ÷ 4 yrs.) Depreciation in Bright's books if the sale never happened (120,000 ÷ 10 yrs.)

1 (1 1

Step 1: Analysis Analysis of of effects effects of of intercompany intercompany transaction transaction The The inte interc rcom ompa pany ny sa sale le is down downst strea ream m beca becaus use e the sell selle er parent (Bright Co.). The unamortized balance of the deferred gain is computed as fol

Deferred gain on sale - Jan. 1, 20x1 [60K – (120K -



72K)]

1

Multiply by: (3 yrs. remaining as of Dec. 31, 20x1 over 4 yrs.) Deferred gain on sale - Dec. 31, 20x1 Step 2: Analysis of net assets

Total net assets at carrying amounts Fair value adjustments at acquisition date Subsequent depreciation of FVA Unrealized profits (Upstream only)

Step 3: Goodwill computation Consideration transferred

160,000

210,000

NI L

-

NIL

-

180,00

Non-controlling interest in the acquiree (160K x 25%) Previously held equity interest in the acquire

40,00



Dull's net assets at fair value – Dec. 31, 20x1 (Step 2) Multiply by: NCI percentage Total Add: Goodwill to NCI net of accumulated impairment losses Non-controlling interest interest in in net net assets assets –– Dec. Dec. 31, 31, 20x1

21 5  52

*No No goodwill goodwill is is attributed attributed to to NCI NCI because because NCI NCI is is measured measured at atproportiona proportion Step 5: Consolidated retained earnings Bright's retained earnings – Dec. 31, 20x1 Consolidation adjustments: Bright's share in the net change in Dull's net assets

110 37,500

(a)

Unamortizeddeferred gain(Downstream only) - (Step

(9,000) -

1)

Gain or loss on extinguishment of bonds Impairment loss on goodwill attributable to Parent

 2

Net consolidation adjustments Consolidated retained earnings – Dec. 31, 20x1



13

(a)

Net change in Dull’s net assets (Step 2) of ₱50,000 x 75% = ₱37, ₱37,5 5

Step 6: Consolidated profit or loss Subsidiar Parent y Consolida Profits before adjustments Consolidation adjustments: Unamortized def. gain - (Step 1) Dividend income from subsidiary Gain or loss on extinguishment of bonds

Net consolidation

240,000

50,000

290,

(9,000 - ) ) ( ) (9,000 (

( -

)

N/ A (

- )

(9,0 ( (

adjustments

Profits before FVA

) 231,00 0

(

- )

50 000

(9,0 281



Step 7: Profit Profit or or loss loss attributable attributable to to owners owners of of parent parent and N

Bright's profit before FVA (Step 6) Share in Dull’s profit before FVA

(c)

231,000 37,500

N/A 12,500

Depreciation of FVA

(

- )

(

- )

Share in impairment loss on goodwill

(

- )

(

- )

2

(c)

Shares in Dull’s profit before FVA ( Step 6): (50,000 (50,000 xx 75%); 75%); (50,000 (50,000

Requirement (d): ASSETS Investment in subsidiary (at cost) - eliminated Equipment - net net(Requirement 'b') O Otther assets (200,000 + 45,000) Goodwill (Step 3)

LIABILITIES AND EQUITY Liabilities (70,000 + 25,000)

TOTAL LIABILITIES AND EQUITY

Consolidate 581,000 245,000  60,000

95,000

886,000

Revenues (300,000 + 80,000) Depreciation expense (Requirement 'c')

380,000 (49,000)





Profit attributable to NCI (Step 7)

3.

0 12,50 0

Solutions:

Stepdividends 1: Analysis Analysis of of effects effects of ofsubsidiary intercompany intercompany transaction transaction The declared by the are allocated as follo Total dividends declared ₱1 Allocation: Owners of the parent (100,000 x 75%)  Non-controlling interest (100,000 x 25%)  As allocated ₱100,000

Step 2: Analysis of net assets

Net assets at carrying amts. Fair value adjustments at acquisition date

Subsequent depreciation of FVA Unrealized profits (Upstream only)

240,000 NIL NIL

320,000 -

Step 3: Goodwill computation We can leave out this step because the information is insufficie

Step 4: Non-controlling interest in net assets Sub.'s net assets at fair value – Dec. 31, 20x1 (Step 2)

32



Step 5: Consolidated retained earnings Parent's retained earnings – Dec. 31, 20x1 Consolidation adjustments: Parent's sh. in the net change in Sub.'s net assets

280

60,000 -

(a)

Unrealized profits (Downstream only) Gain or loss on extinguishment of bonds Impairment loss on goodwill attributable to Parent

 6

Net consolidation adjustments Consolidated retained earnings – Dec. 31, 20x1



34

(a)

₱80,000 ₱80,000Net change in subsidiary’s assets (Step 2)x 75%

The divi divide dend nds s rece receiv ive ed fr from om the subs subsid idia iarry are are not se adjusted in the formula above because their effect is autom eliminated by including only the parent’s share in the net ch the subsidiary’s net assets.

Step 6: Consolidated profit or loss Subsidiar Parent y Consolida Profits before adjustments Consolidation adjustments: Unrealized profits Dividend income from subsidiary

475,000 (75,000 )

132,000 N/A

607, (75,0

Gain or loss on extinguishment of bonds

Net consolidation

(75 000

-



(

-

Impairment loss on goodwill ) Consolidated profit 400,000

( - ) 132,000

( 532,0

Step 7: Profit Profit or or loss loss attributable attributable to to owners owners of of parent parent and N Owners Co  of parent N CI  d Parent's profit before FVA (Step 6) 400,000 N/A 4 Share in Sub.’s profit before FVA (c) 99,000 33,000 1 Depreciation of FVA (Step 6) ( - ) ( - ) ( Share in impairment loss on goodwill

Totals

(

- )

499,000

(

- )

(

33,000 

5

(c)

Shares in Sub.’s profit before FVA ( Step 6) – (132,000 x 75%);

(132,000 x 25%)

SUMMARY OF ANSWERS TO REQUIREMENTS: a. b. c.

NCI in the net assets = 80,000 (Step 4) Consolidated retained earnings = 340,000 (Step 5) Consolidated profit = 532,000 (Step 6) Attributable of parent = 499,000 (Step 7) Attributable to to owners NCI NCI = 33,000 (Step 7)

Solutions: Step 1: Analysis Analysis of of effects effects of of intercompany intercompany transaction transaction 4.

Requirement Requirement (a): (a): Gain Gain (loss) (loss) on on extinguishment extinguishment of of bonds bonds The gain or loss on the extinguishment of bonds is computed Acquisition cost of bonds (assumed retirement price) 2 Carrying amount of bonds payable (3 Gain on extinguishment of bonds

5

Requirement Requirement (b): (b): Consolidated Consolidated total total bonds bonds payable payable Bonds payable (at face amount) - issued by Parent

30

Portion acquired by Subsidiary Consolidated total bonds payable

 (300



Net assets at carrying amounts Fair value adjustments at acquisition date

Subsequent depreciation of FVA Unrealized profits (Upstream only) Subsidiary's net assets at fair value

 200,000 270,000 NIL NIL 200,000

270,000

Step 3: Goodwill computation Consideration transferred (cost of investment in sub.) Non-controlling interest in the acquiree (200K x 25%) Previously held equity interest in the acquire Total Fair value of net identifiable assets acquired Goodwill

180 18 5 230 (200 30

Step 4: Non-controlling interest in net assets Sub.'s net assets at fair value – Dec. 31, 20x1 (Step 2) Multiply by: NCI percentage Total Add: Goodwill to NCI net of accumulated impairment losses Non-controlling interest interest in in net net assets assets –– Dec. Dec. 31, 31, 20x1

Step 5: Consolidated retained earnings Parent's retained earnings – Dec. 31, 20x1 Consolidation adjustments: Parent's share in the net change in Sub.'s net assets 

(a)

Unrealized profits(Downstream only) 

Gain on extinguishment of bonds (Step 1) Impairment loss on goodwill attributable to

27 6

6

140 52,500 50,000

Parent Net consolidation adjustments

-

10



Subsidiar Parent y Consolida Profits before adjustments Consolidation adjustments:

80,000 (

Unrealized profits Dividend income from subsidiary

Gain on extinguishment of bonds

20,000

)

(

100,

( -

)

(

)

N/ A

(

50,000

(

- )

50,

50,000 130,00 Profits before FVA 0 ( Depreciation of FVA ) ( ) Impairment loss on goodwill Consolidated profit 130,000

(

- )

50,

20,000

150,

Net consolidation adjustments

Parent's profit before FVA (Step 6) Share in Sub.’s profit before FVA

(c)

Depreciation of FVA Share in impairment loss on goodwill

(

- )

(

( - ) 20,000

130,000 15,000 ( (

- ) - )

( 150,0

N/A 5,000 ( (

1

- ) - )

(c)

Shares in Sub.’s profit before FVA ( Step 6): (20,000 (20,000 xx 75%); 75%); (20,000 (20,000

Requirement Requirement (c): (c): Consolidated Consolidated financial financial statements statements Consoli ASSETS Investment in subsidiary (at cost) - eliminated Investment in bonds - eliminated Other assets (500,000 + 50,000) Goodwill (Step 3)

   

55 3

IABI ITIES AND EQUITY



Retained earnings (Step 5) Equity attributable to owners of parent NCI in net assets (Step 4) Total equity



24 44 6 51



TOTAL LIABILITIES AND EQUITY

58 Consol d

Revenues (300,000 + 120,000) Operating expenses (217,000 + 100,000) Interest expense (3,000* + 0) Gain on extinguishment of bonds (Step 1) Profit for the year

42 (317  

Profit attributable to owners of the parent (Step 7) Profit attributable to NCI (Step 7) Profit for the year

5 15 14

 15

*Thepaid interest expense parties, is not eliminated because theofinterest was to unrelated the previous holder the bond bone the bonds were acquired by the subsidiary only at year-end. SUMMARY OF ANSWERS TO REQUIREMENTS a. b. c.

Ga Gain in (l (los oss) s) on ex exti ting ngui uish shme ment nt of bo bond nds s = 50,000 gain (Step 1) Co Cons nsol olid idat ated ed bo bond nds s paya payabl ble e = 0 (Step 1) Co Cons nsol olid idat ated ed fina financ ncia iall state stateme ment nts s (See above)

PROBLEM 3: EXERCISES 1.

Solutions:

Requirement (a): Sales of Parent Sales of Subsidiary Less: Intercompany sales during the year(16K* + 60K) Consolidated sales

1,00 70 (76 1,62

* (12 000 ÷ 75%) = 16 000



Cost of intercompany sale Prof Profit it from from inte interc rcom ompa pany ny sale sale Multiply by:Unsold portion as of yr.end Unrealized gross profit

(12,000) 4,00 4,000 0

10,0 10,000 00a

½ 2,000



1/4 2,50 4 0

 a

(60,000 ÷ 120%) x 20% = 10,000

Cost of sales of Parent Cost of sales of Subsidiary Less: Intercompany sales salesduring the yr. yr.(16,000 + 60,000) Add: Unrealized profit in ending inventory Less: Realized profit in beginning inventory Add: Depreciation of FVA on inventory (Step 2)

40 35 (7 4

6 Consolidated cost of sales Requirement (c): Ending inventory of Parent Ending inventory of Subsidiary Less: Unrealized profit in ending inventory Consolidated ending inventory 2. Solutions: Requirement (a): Historical cost Accumulated dep'n. 1/1/x1 1/1/x1 Depreciation based on historical cost Carrying amount

30 8 (4 375

14 (8 (14 4

The solution above is based on the notion that it is as if the interc sale never happened. Requirement (b):

Equipment - net (Day Co.) Equipment - net (Night Co.)

48 22 (10...