ABC Chapter 7 - Accounting for Business Combinations by Millan 2020 PDF

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Chapter 7ConsolidatedFinancialStatements(Part4)PROBLEM 1: MULTIPLE CHOICE1 – 1,240,000 - If the investment in subsidiary is measured under the equity method , the consolidated retained earnings is equal to the parent’s retained earnings.2 Solution: R etained earning s –Subsidiary 36,000 1/1/ Dividen...

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Chapter 7

Consolidated Financial Statements (P PROBLEM 1: MULTIPLE CHOICE 1. A – 1,240,000 - If the investment in subsidiary is measured u

equity method , the consolidated retained earnings is equ parent’s retained earnings.

2. C

Solution:

R etained earning s – Subsidiary Dividends

5,000

36,000 20,000

1/1/1991 Profit (squeeze)51

Share in profit of subsidiary = 20,000 x 80% =

16,000 3. A

Solution:

Initial cost (squeeze) Sh. in profit of Sub.

Investment in subsidiary 120,000 16,000

4,000(a) 132,000

Dividends received Share in the amortiz undervaluation of a Dec. 31, 20x1

(a)

(5,000 x 80%) = 4,000 4. D Solution:

Consideration transferred (100K x 20%)

Previously held equity interest in the acquiree Total Fair value of net identifiable assets acquired

(1

5.

B (115,000 x 20%) = 23,000

6. B – equal to parent’s retained earnings

7. A

Solution: Other assets (138,000 + 115,000) Goodwill

253 40

Total assets

293

Common stock (Parent only) Additional paid-in capital (Parent only) Retained earnings (Parent only)

5 8 139

Equity attributable to owners of the parent Non-controlling interest

270 2

Total equity

293

8. A (See previous solution)

PROBLEM 2: MULTIPLE CHOICE 1. B Penn controls Sell; Sell controls Vane; Therefore, Penn controls V

already holds controlling interest in S2 when P acquired S1, the acquisition date for both S1 and S2 is on J anuary 1, 20x 3.

2.D - Since S1

3.D

after P acquired S1, the acquisition dates are: (a) J anuary 1, 20x 1 for S 1 and (b)

4.E - Since S1 acquires S2 only

J anuary 1, 20x 3 for S 2. 5E

Step 1: Analysis of group structure The group structure is analyzed as follows: P’s ownership interest in S1 S1’s ownership interest in S2

80% 60%

P, S1 and S2 all belong to a vertical group. The controlling interest and NCI percentages are calculated a follows:

Ownership over S 1 Direct holdings of P in S1 NCI in S1 (squeeze) Total

80% 20% 100%

Ownership over S 2 Direct holdings of P in S2 Indirect holdings of P in S2 (80% x 60%)* Total holdings of P in S2 NCI in S2 (squeeze)

0% 48% 48% 52%

Total 100% *The indirect holdings of P in S2 is computed by multiplying P interest in S1 (80%) by S1’s interest in S2 (60%). Although the computed total holdings of P is only 48%, i.e., le 50%, it is still presumed that there is control because P cont who in turn controls S2. In substance, it is actually P who has over S2. This is not unusual in practice. The computation only for purposes of mathematical computations during conso procedures. The NCI in S2 is reconciled as follows: Interest in S2 held by outside shareholders in S1 (20% x 60%) Interest in S2 held by outside shareholders in S2 (100% - 60% held by S1)

NCI in S2

The controlling interests and NCI’s are summarized below: O

fP

S1

80%

S2

48%

Step 2: Analysis of net assets

Step 3: Goodwill computation The impairment loss on goodwill is determined as follows: Consideration transferred (given)

Indirect holding adjustment NCI in the acquiree – at fair values (given) Prev. held equity interest in the acquiree

Goodwill at acquisition date Multiply by: Impairment (given)

400,000 200,000 (40,000) 100,000 160,000 -

60,000 20%

80,000 20%

An indirect holding adjustment is made because the consid transferred to S2 is not wholly made by P but rather partly by and partly by S1 (20%). Only the portion effectively transferr (₱200,000 x 80% = ₱160,000) enters into the computation of good The indirect holding adjustment is computed as follows: Total consideration transferred to S2 Multiply by: NCI in S1

Indirect holding adjustment The indirect holding adjustment affects both the computat goodwill and NCI.

Since the NCI’s are measured at fair value, there must be g tt ib t bl t th NCI’ Th t d f ll

Formula #2: Consideration transferred (given)

S1 400,000

Indirect holding adjustment Less: Prev. held equity interest in the acquiree Total Less: P's proportionate sh. in net assets of S1 & S2 (₱440,000 x 80%) & (₱240,000 x 48%) Goodwill attributable to owners of P – Jan. 1, 20x1

400,000 (352,000 ) 48,000

Less: P’s share in goodwill impairment (₱12,000 x 80%) & (₱16,000 x 48%)

Goodwill attributable to owners of P – Dec. 31, 20x1

(9,600) 38,400

100,000 Fair value of NCI (given) Less: NCI's proportionate sh. in the net assets of S1 & S2 (₱440,000 x 20%) & (₱240,000 x 52%) (88,000) Goodwill attributable to NCI – Jan. 1, 20x1 12,000 Less: NCI’s share in goodwill impairment (₱12,000 x 20%) & (₱16,000 x 52%) (2,400) 9,600 Goodwill attributable to NCI – Dec. 31, 20x1

Goodwill, net – Dec. 31, 20x1

48,000

Step 4: Non-controlling interest in net assets S1

S2

Net assets at fair value - 12/31x1 (Step 2) Multiply by: NCI percentage Total Add: Goodwill to NCI - 12/31x1 (Step 3) Indirect holdingadjustment (Step 3)

528,000 20% 105,600 9,600

NCI - Dec. 31, 20x1

115,200

312,000 52% 162,240 26,880

(40,000) 149,120

Notice that the only difference in the goodwill and NCI computation between a simple group structure and a complex group structure is th indirect holding adjustment .

Step 5: Consolidated retained earnings P's retained earnings – Dec. 31, 20x1

Consolidation adjustments: P's share in the net change in S 1's net assets (a)

70,400

Consolidated retained earnings – Dec. 31, 20x1 (a)

Net change in S1’s net assets (Step 2) of ₱88,000 x 80% = ₱70,400.

(b)

Net change in S2’s net assets (Step 2) of ₱72,000 x 48% = ₱34,560.

Step 6: Consolidated profit or loss P Profits before adj. Cons. adjustments: Unrealized profits Dividend income Extinguishment of bonds

Net cons. adjustments

Profits before FVA Depreciation of FVA Goodwill impairment

Consolidated profit

320,000

S1

S2

88,000

72,000

N/A 320,000 88,000 ( - ) ( - ) (17,280) (2,400) 302,720 85,600

Conso

N/A 72,000 ( - ) (8,320) 63,680

48

48 ( (28

452

Step 7: Profit or loss attributable to owners of parent and N P's profit before FVA (Step 6) (c)

Share in S1’s profit before FVA Share in S2’s profit before FVA (d)

Depreciation of FVA Goodwill impairment Totals

Owners

NCI

of P

in S 1

320,00 0 70,400 34,560 ( -)

N/A 17,600

NCI in S2

C

N/A

3

)

37,440 ( - )

(17,280) (2,400)

(8,320)

407,680 15,200

29,120

( -

( 4

(c)

Shares in S1’s profit before FVA (Step 6): (₱88,000 x 80%); (₱88,000 (d) Shares in S2’s profit before FVA (Step 6): (₱72,000 x 48%); (₱72,00

The cons olidated financial statements are prepared as follo

Consolidated statement of financial position As at December 31, 20x 1 Other assets (800,000 + 480,000 + 320,000) Goodwill (48,000 + 64,000) - (Step 3)

1,

Total assets

1,

Liabilities (120 000 + 152 000 + 8 000) Share capital (P only)

Consolidated statement of profit or loss For the year ended December 31, 20x 1 Revenues (720,000 + 408,000 + 192,000) Expenses (400,000 + 320,000 + 120,000) Impairment loss on goodwill - (Step 3)

1 (8

Consolidated profit Profit attributable to: Owners of the parent - (Step 7) Non-controlling interests (15,200 + 29,120) - (Step 7)

8.

B (See Step 4 above) 9.

A (See Step 5 above) 10. D (See Step 6 above) 11. B (See Step 7 above) 12. A (See solutions above) 13. B (See solutions above) 14. D (20,000 + 16,000) = 36,000 See Step 3 below Solutions: Step 1: Analysis of group structure The group structure is analyzed as follows: P’s ownership interest in S1 S1’s ownership interest in S2

80% 60%

P, S1 and S2 all belong to a vertical group. The controlling interest and NCI percentages are calculated a follows:

Ownership over S1 Di

t h ldi

f P i S1

80%

NCI in S2 (squeeze)

52%

Total

100%

The acquisition dates of the subsidiaries are J anuary 1, 20 S 1 and December 31, 20x1 for S 2. Goodwill and NCI on ea and S2 shall be computed separately on their respective acq dates. Their pre-acquisition and post-acquisition reserves a calculated from these dates. The controlling interests and NCI’s are summarized below: Owners of P NCI Total

S1

S2

80% 20% 100%

48% 52% 100%

Step 2: Analysis of net assets Acqn. Date

S1 Cons. Date

Net

Acqn.

S2 Cons

Date

0 change 20,00 20,00 120,000 208,000 Ret. earnings Totals at carrying amts. 440,000 528,000 FVA at acquisition date NIL Depreciation of FVA

200,000 200,0 112,000 112,0 312,000 312,0 NIL -

Net assets at fair value

312,000 312,0

Share capital

3

03

440,000 528,000

88,000

Date

Step 3: Goodwill computation Formula #2: Consideration transferred (given)

S1 400,000

Indirect holding adjustment (₱200,000 x 20%) Less: Prev. held equity interest in the acquiree Total Less: P's proportionate sh. in net assets of S1 & S2 (₱440,000 x 80%) & (₱312,000 x 48%)

Goodwill attributable to owners of P (acq’n. dates)

400,000 (352,000)

48,000

Less P’s sh in goodwill impairment (₱40 000 80%) (32 000) Goodwill attributable to owners of P – Dec 31 20x1 16 000

Goodwill, net – Dec. 31, 20x1

20,000

The fair values of the NCIs are determined on the subsidiaries’ re acquisition dates (i.e., Jan. 1, 20x1 for S1 and Dec. 31, 20x1 for S2).

Step 4: Non-controlling interest in net assets S1 Net assets at fair value - 12/31x1 (Step 2) Multiply by: NCI percentage Total Add: Goodwill to NCI - 12/31x1 (Step 3) Indirect holdingadjustment (Step 3)

NCI - Dec. 31, 20x1

S2

528,000 20% 105,600 4,000

312,000 52% 162,240 5,760

(40,000) 109,600

128,000

Step 5: Consolidated retained earnings P's retained earnings – Dec. 31, 20x1 Consolidation adjustments: 70,400 32,000)

P's share in the net change in S 1's net assets (a) P's share in the net change in S 2's net assets (b) Unrealized profits (Downstream only) Gain or loss on extinguishment of bonds P's sh. in goodwill impairment (Step 3) Net consolidation adjustments Consolidated retained earnings – Dec. 31, 20x1

6

(a)

Net change in S1’s net assets (Step 2) of ₱88,000 x 80% = ₱70,400.

(b)

Net change in S2’s net assets (Step 2) of ₱0 x 48% = ₱0.

Step 6: Consolidated profit or loss Profits before adj. Cons. adjustments: Unrealized profits Dividend income Extinguishment of bonds

320P ,000

88S,1 000

S-2

-

N/A -

N/A -

Co4n0so 8

Net cons adjustments

Profits before FVA

320,000

88,000

-

40...