Act 5 - Lecture PDF

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Summary

Use the following information for the next three questions:Rainy Afternoon Co. owns 80% interest in Sunny Morning Co. During 20x1, Rainy sold inventoriescosting ₱200,000 to Sunny for ₱300,000. One-fourth of the inventories were unsold as of December31, 20x1 and were included in Sunny’s year-end stat...

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P a g e |1 Use the following information for the next three questions: Rainy Afternoon Co. owns 80% interest in Sunny Morning Co. During 20x1, Rainy sold inventories costing ₱200,000 to Sunny for ₱300,000. One-fourth of the inventories were unsold as of December 31, 20x1 and were included in Sunny’s year-end statement of financial position at the purchase price from Rainy. The individual financial statements of Rainy and Sunny on December 31, 20x1 show the following information: Rainy

Sunny

Inventory

1,260,000

380,000

Sales

6,700,000

2,700,000

Cost of sales

(3,015,000)

(1,755,000)

Gross profit

3,685,000

945,000

There are no fair value adjustments arising from the business combination date. 1. How much is the consolidated inventory on December 31, 20x1? a. 1,615,000 b. 1,590,000 c. 1,665,000 d. 1,585,000 2. How much is the consolidated sales? a. 9,400,000 b. 9,100,000 c. 9,375,000 d. 9,700,000 3. How much is the consolidated cost of sales? a. 4,695,000 b. 4,495,000 c. 4,565,000 d. 4,545,000 Use the following information for the next two questions: On January 1, 20x1, Horse Co. acquired 80% interest in Colt Co. by issuing bonds with fair value of ₱250,000. NCI is measured at proportionate share. The following information was determined immediately before the acquisition: Horse Co. Carrying amount

Total assets Total liabilities Net assets

1,000,000 (600,000) 400,000

Colt Co. Carrying amount

400,000 (200,000) 200,000

Included in Colt’s liabilities is an account payable to Horse amounting to ₱20,000.

Colt Co. Fair value

430,000 (200,000) 230,000

P a g e |2

4. How much is the total assets in Horse’s separate financial statements immediately after the combination? a. 1,000,000 b. 1,400,000 c. 1,250,000 d. 1,430,000 5. How much is the total assets in the consolidated financial statements? a. 1,476,000 b. 1,580,000 c. 1,465,000 d. 1,528,000 Use the following information for the next two questions: Lion Co. acquired 80% of Cub Co. on January 1, 20x1 for ₱100,000. The following information was determined at acquisition date: Lion Co. Carrying amt.

Equipment Accumulated depreciation

Net Remaining useful life, 1/1/ x1

Cub Co. Carrying amt.

Cub Co. Fair value

1,000,000 (200,000)

500,000 (100,000)

400,000 (80,000)

800,000

400,000

320,000

10 yrs.

5 yrs.

5 yrs.

6. How much is the consolidated “Equipment – net” in the December 31, 20x2 financial statements? a. 880,000 b. 846,000 c. 852,000 d. 832,000 7. The consolidation journal entry for the depreciation of the fair value adjustment on December 31, 20x2 includes which of the following? a. 16,000 debit to depreciation expense b. 12,800 credit to retained earnings of Lion c. 32,000 credit to accumulated depreciation d. 16,000 credit to depreciation expense

8. On January 1, 20x1, Kangaroo Co. acquired 75% of Joey Co. At that time, Joey’s equipment has a carrying amount of ₱100,000 and a fair value of ₱120,000. The equipment has a remaining useful life of 10 years. On December 31, 20x2, Kangaroo and Joey reported equipment with carrying amounts of ₱500,000 and ₱300,000, respectively. How much is the consolidated “equipment – net” in the December 31, 20x2 financial statements? a. 800,000 b. 816,000 c. 784,000

P a g e |3 d. 826,000 9. On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares with fair value of ₱15 per share. On this date, XYZ’s equity comprised of ₱50,000 share capital and ₱24,000 retained earnings. NCI was measured at its proportionate share in XYZ’s net identifiable assets. XYZ’s assets and liabilities on January 1, 20x1 approximate their fair values except for the following: XYZ, Inc.

Carrying amounts Inventory 23,000 Equipment (4 yrs. remaining life) 50,000 Accumulated depreciation (10,000) Totals 63,000

Fair values 31,000 60,000 (12,000) 79,000

Fair value adjustments (FVA) 8,000 10,000 (2,000) 16,000

XYZ, Inc. declared and paid dividends of ₱6,000 during 20x1. There was no impairment in goodwill. The year-end individual statements of profit or loss are shown below: Statements of profit or loss For the year ended December 31, 20x1 ABC Co. 300,000 (165,000) 135,000 (40,000) (32,000) (3,000) 4,800 64,800

Sales Cost of goods sold Gross profit Depreciation expense Distribution costs Interest expense Dividend income Profit for the year How much is the profit attributable to Owners of the parent

a. 68,000 b. 64,800 c. 52,000 d. 57,200

XYZ, Inc. 120,000 (72,000) 48,000 (10,000) (18,000) 20,000

NCI

2,000 5,200 18,000 12,800

10. ABC Co. owns 80% interest in XYZ, Inc. The individual statements of financial position of the entities as of December 31, 20x1 are shown below: Statements of financial position As at December 31, 20x1 ABC Co. ASSETS Cash Accounts receivable Inventory Investment in subsidiary (at cost)

23,000 75,000 105,000 75,000

XYZ, Inc. 44,000 22,000 15,000 -

P a g e |4 Investment in bonds Equipment Accumulated depreciation TOTAL ASSETS LIABILITIES AND EQUITY Accounts payable Bonds payable (at face amount) Total liabilities Share capital Share premium Retained earnings Total equity TOTAL LIABILITIES AND EQUITY

200,000 (60,000) 418,000

13,000 50,000 (20,000) 124,000

43,000 30,000 73,000 170,000 65,000 110,000 345,000

30,000 30,000 50,000 44,000 94,000

418,000

124,000

On December 31, 20x1, XYZ, Inc. purchased 50% of the outstanding bonds of ABC Co. from the open market for ₱13,000. There were no other intercompany transactions during the year. The consolidation journal entry to eliminate the intercompany bond transaction includes which of the following? a. debit to bonds payable for ₱30,000 b. credit to gain on extinguishment of debt for ₱4,000 c. credit to investment in bonds for ₱15,000 d. credit to gain on extinguishment of debt for ₱2,000

“What we think, we become.” (Buddha) - end -

P a g e |5 SOLUTIONS TO QUIZ 1: 1. A Solution: Ending inventory of Rainy Ending inventory of Sunny Less: Unrealized profit in ending inventory (300,000 – 200,000) x 1/4 Consolidated ending inventory

1,260,000 380,000 (25,000) 1,615,000

2. B Solution: Sales by Rainy Sales by Sunny Less: Intercompany sales during 20x1 (300,000) Consolidated sales

6,700,000 2,700,000 (300,000) 9,100,000

3. B Solution:

Cost of sales of Rainy Cost of sales of Sunny Less: Intercompany sales during 20x1 Add: Unrealized profit in ending inventory Less: Realized profit in beginning inventory Add: Depreciation of FVA on inventory Consolidated cost of sales

3,015,000 1,755,000 (300,000) 25,000 4,495,000

4. C Solution: Total assets of Horse before the combination Investment in subsidiary (fair value of bonds issued) Total assets of Horse after the combination

1,000,000 250,000 1,250,000

5. A Solution: Total assets of Horse after the combination (see above) Total assets of Colt (carrying amount) Investment in subsidiary FVA on assets (430K fair value – 400K carrying amount) Goodwill – net [250K + (230K x 20% NCI)] – 230 Effect of intercompany transactions (intercompany receivable) Consolidated total assets

1,250,000 400,000 (250,000) 30,000 66,000 (20,000) 1,476,000

P a g e |6 6. D Solution:

Equipment, net – Lion Co. (800,000 x 8/10) Equipment, net – Cub Co. (carrying amount) (400,000 x 3/5) FVA on equipment, net - decrement [(320,000 – 400,000) x 3/5] Consolidated equipment, net – Dec. 31, 20x2

640,000 240,000 (48,000) 832,000

Alternative solution: Equipment, net – Lion Co. (800,000 x 8/10) Equipment, net – Cub Co. (fair value) (320,000 x 3/5) Consolidated equipment, net – Dec. 31, 20x2

640,000 192,000 832,000

7. D Solution: Dec. 31, 20x2

Accumulated depreciation (80,000 x 2/5) Depreciation expense (80,000 ÷ 5) Retained earnings – Lion Co.* Retained earnings – Cub Co.*

32,000 16,000 12,800 3,200

*These are the shares of Lion and Cub in the depreciation of the FVA in the prior year , i.e., 20x1 (16,000 x 80% & 20%).

8. B Solution:

Equipment, net – Kangaroo Equipment, net – Joey FVA on equipment, net - increment [(120,000 – 100,000) x 8/10] Consolidated equipment, net – Dec. 31, 20x2

500,000 300,000 16,000 816,000

9. A Solution:

Step 6: Consolidated profit or loss Parent Profits before adjustments Consolidation adjustments: Unrealized profits Dividend income from subsidiary Gain or loss on extinguishment of bonds Net consolidation adjustments Profits before FVA Depreciation of FVA (b) Impairment loss on goodwill Consolidated profit

Subsidiary

64,800 (4,800)

Consolidated

20,000 -

84,800 -

N/A

(4,800)

-

-

(4,800)

-

-

60,000 (8,000) ( -)

20,000 (2,000) ( - )

80,000 (10,000) ( - )

52,000

18,000

70,000

(4,800)

P a g e |7

(b)

₱8,000 dep’n. of FVA on inventory + ₱2,000 [(₱10,000 - ₱2,000) equipment = ₱10,000

÷ 4 yrs.] dep’n. of FVA on

Shares in the depreciation of FVA: (10,000 x 80%); (10,000 x 20%) Step 7: Profit or loss attributable to owners of parent and NCI Owners Consoliof parent NCI dated ABC's profit before FVA (Step 6) 60,000 N/A 60,000 16,000 4,000 20,000 Share in XYZ’s profit before FVA (c) Depreciation of FVA (Step 6) (8,000) (2,000) (10,000) Share in impairment loss on goodwill

(c)

(

- )

68,000

Totals

(

-)

2,000

(

-

)

70,000

Shares in XYZ’s profit before FVA (Step 6) – (20,000 x 80%); (20,000 x 20%)

10. D Solution:

Acquisition cost of bonds (assumed retirement price) Carrying amount of bonds payable (₱30,000 x 50%) Gain on extinguishment of bonds

13,000 (15,000) 2,000

CJE #1: To recognize the gain on extinguishment of bonds. Dec. 31, 20x1

Bonds payable (30,000 x 50%) Investment in bonds Gain on extinguishment of debt

15,000 13,000 2,000

P a g e |8 NAME: Professor:

Date: Score:

Section:

QUIZ 2: On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. The business combination resulted to goodwill of ₱3,000. On this date, XYZ’s equity comprised of ₱50,000 share capital and ₱24,000 retained earnings. NCI was measured at its proportionate share in XYZ’s net identifiable assets. XYZ’s assets and liabilities on January 1, 20x1 approximate their fair values except for the following: Carryin g Fair value XYZ, Inc. amount Fair adjustments s values (FVA) Inventory 23,000 31,000 8,000 Equipment (4 yrs. remaining life) 50,000 60,000 10,000 Accumulated depreciation (10,000) (12,000) (2,000) 16,000 Totals 63,000 79,000 During 20x1, the following intercompany transactions occurred: a. ABC Co. sold goods costing ₱12,000 to XYZ, Inc., for cash, at a markup of 40% on selling price. A quarter of these goods are held in inventory by XYZ, Inc. by year-end. b. ABC Co. acquired inventory from XYZ, Inc. for ₱12,000 cash. XYZ, Inc. uses a normal markup of 25% above its cost. ABC's ending inventory included ₱4,000 from this purchase. The year-end individual financial statements are shown below: Statements of financial position As at December 31, 20x1 ABC Co. ASSETS Cash Accounts receivable Inventory Investment in subsidiary (at cost) Equipment Accumulated depreciation TOTAL ASSETS LIABILITIES AND EQUITY Accounts payable Bonds payable Total liabilities Share capital Share premium Retained earnings Total equity

XYZ, Inc.

41,000

67,750

75,000 97,000 75,000 200,000 (60,000) 428,000

22,000 10,400 50,000 (20,000) 130,150

43,000

30,000

30,000 73,000 170,000 65,000 120,000 355,000

30,000 50,000 50,150 100,150

P a g e |9 TOTAL LIABILITIES AND EQUITY

428,000

130,150

ABC Co. 330,000 (185,000) 145,000 (40,000) (32,000) (3,000) 70,000

XYZ, Inc. 150,750 (96,600) 54,150 (10,000) (18,000) 26,150

Statements of profit or loss For the year ended December 31, 20x1 Sales Cost of goods sold Gross profit Depreciation expense Distribution costs Interest expense Profit for the year

1. How much is the total unrealized gross profit from the intercompany sales of inventory? a. 2,000 b. 800 c. 2,800 d. 3,600 2. How much is the NCI in net assets as of December 31, 20x1? a. 15,350 b. 18,350 c. 19,350 d. 21,070 3. How much is the consolidated retained earnings? a. 130,280 b. 136,720 c. 142,280 d. 146,280 4. How much is the consolidated profit or loss? a. 83,350 b. 78,750 c. 86,270 d. 79,450 5. How much is the consolidated profit or loss attributable to Owners of parent NCI a. 80,280 3,070 b. 74,460 4,290 c. 82,990 3,280 d. 76,470 2,980 6. How much is the consolidated ending inventory? a. 104,600 b. 103,800 c. 120,200

P a g e | 10 d. 98,800 7. How much is the consolidated sales? a. 426,750 b. 428,750 c. 448,750 d. 456,750 8. How much is the consolidated cost of sales? a. 260,400 b. 248,600 c. 256,400 d. 272,400 9. How much is the consolidated total assets? a. 448,950 b. 489,350 c. 498,750 d. 502,250 10. How much is the consolidated total liabilities? a. 98,000 b. 102,000 c. 102,800 d. 103,000 11. How much is the consolidated total equity? a. 234,550 b. 332,850 c. 368,500 d. 386,350

“This poor man cried out and the Lord heard him and saved him out of all his troubles.” (Psalm 34:6) -END -

P a g e | 11

SOLUTIONS TO QUIZ 2: TAGAL, PRINCESS KRIZHAN B. ACTIVITY 5: SOLUTION 1. B. 800 Step 1: Analysis of effects of intercompany transaction Transaction (a) is downstream because the seller is the parent (ABC Co.) while transaction (b) is upstream because the seller is the subsidiary (XYZ, Inc.). The unrealized profits in ending inventory are determined as follows: Downstream

20,000a (12,000) 8,000 1/4 c 2,000

Sale price of intercompany sale Cost of intercompany sale Profit from intercompany sale Multiply by: Unsold portion as of yr.-end Unrealized gross profit a b

Upstream

12,000 (9,600) b 2,400 4/12d 800

Total

2,800

12,000 cost ÷ (100% - 40% profit on selling price) = 20,000 12,000 selling price ÷ (100% + 25% profit on cost) = 9,600

c

Given in the problem, “A quarter of these goods are held in inventory..”

d

₱4,000 unsold over ₱12,000 total goods purchased.

2. D. 21, 070 Step 2: Analysis of net assets XYZ, Inc.

Acquisition Consolidation date date

Share capital Retained earnings Other components of equity Totals at carrying amounts Fair value adjustments at acquisition date

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

50,000 24,000 74,000 16,000 NIL NIL 90,000

50,000 50,150 100,150 16,000 (10,000)* (800)** 105,350

Net change

15,350

* ₱8,000 dep’n. of FVA on inventory + ₱2,000 [(₱10,000 - ₱2,000) ÷ 4 yrs.] dep’n. of FVA on equipment = ₱10,000 ** See ‘Step 1’. Notice that the upstream sale affects XYZ’s equity and consequently the NCI.

Step 3: Goodwill computation The problem states that goodwill on acquisition date was ₱3,000. This is also the amount at year-end because there is no impairment of goodwill during the year. Step 4: Non-controlling interest in net assets XYZ'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 in net assets – Dec. 31, 20x1

105,350 20% 21,070 -* 21,070

*No goodwill is attributed to NCI because NCI is measured at proportionate share. Goodwill is attributed to NCI only if NCI is measured at fair value.

P a g e | 12 3. A. 130,280 Step 5: Consolidated retained earnings ABC's retained earnings – Dec. 31, 20x1 Consolidation adjustments: ABC's share in the net change in XYZ's net assets (a) Unrealized profits (Downstream only) - (Step 1) Gain or loss on extinguishment of bonds Impairment loss on goodwill attributable to Parent Net consolidation adjustments Consolidated retained earnings – Dec. 31, 20x1

120,000 12,280 (2,000) 10,280 130,280

(a)

ABC’s share in the net change in XYZ’s net assets is computed as: Net change in XYZ’s net assets (Step 2) Multiply by: ABC’s interest in XYZ ABC’s share in the net change in XYZ’s net assets

15,350 80% 12,280

4. A. 86, 270 Step 6: Consolidated profit or loss Parent Profits before adjustments Consolidation adjustments: Unrealized profits - (Step 1) Dividend income from subsidiary Gain or loss on extinguishment of bonds

Profits before FVA Depreciation of FVA (b) Impairment loss on goodwill Consolidated profit

Consolidated

26,150

96,150

(2,000) ( -)

(800) N/A

(2,800) ( - )

( - ) (2,000) 68,000 (8,000) ( - ) 60,000

Net consolidation adjustments

(b)

Subsidiary

70,000

(

- ) (800) 25,350 (2,000) ( - ) 23,350

( - ) (2,800) 93,350 (10,000) ( - ) 83,350

Shares in the depreciation of FVA: (10,000 x 80%); (10,000 x 20%)

5. A. 80,280

3,070

Step 7: Profit or loss attributable to owners of parent and NCI Owners ConsoliNCI of parent dated ABC's profit before FVA (Step 6) 68,000 N/A 68,000 20,280 5,070 25,350 Share in XYZ’s profit before FVA (c) (2,000 Depreciation of FVA (Step 6) (8,000) ) (10,000) Share in impairment loss on goodwill

Totals (c)

(

- )

80,280

(

- )

3,070

(

-

)

83,350

Shares in XYZ’s profit before FVA (Step 6) – (25,350 x 80%); (25,350 x 20%)

6. A Solution: Ending inventory of ABC Co. Ending inventory of XYZ, Inc. Less: Unrealized profit in ending inventory Consolidated ending inventory

97,000 10,400 (2,800) 104,600

P a g e | 13 7. C Solution:

Sales by ABC Co. Sales by XYZ, Inc. Less: Intercompany sales during 20x1 (20,000 + 12,000) Consolidated sales

330,000 150,750 (32,000) 448,750

8. A Solution: Cost of sales of ABC Co. Cost of sales of XYZ, Inc. Less: Intercompany sales during 20x1 (20,000 + 12,000) Add: Unrealized profit in ending inventory (2,000 + 800) Less: Realized profit in beginning inventory Add: Depreciation of FVA on inventory (Step 2) Consolidated cost of sales

185,000 96,600 (32,000) 2,800 8,000 260,400

Consolidated Gross profit

188,350

9. B Solution: Total assets of ABC Co. Total assets of XYZ, Inc. Investment in subsidiary Fair value adjustments - net (16K FVA - 10K depreciation) Goodwill – net Effect of intercompany transactions Consolidated total assets

428,000 130,150 (75,000) 6,000 3,000 (2,800) 489,350