Advanced-Accounting-Part 2-Dayag-2015-Chapter-17 PDF

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Chapter 17Problem I1.Consolidated Net Income for 20x P Company’s net income from own/separate operations............. P 760, Realized profit in beginning inventory of S Company (downstream sales) 36, Unrealized profit in ending inventory of S Company (downstream sales)... (_50,000) P Company’s reali...

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Chapter 17 Problem I

1. Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5…………..

P 760,000 36,000 (_50,000) P 746,000 P 460,000 0 ( 0) P 460,000

460,000 P1,206,000 0 P1,206,000 92,000 P 1,114,000

*that has been realized in transactions with third parties.

Beginning inventory: P1,080,000 x 1/5 = P216,000 x 20/120 = P36,000 profit Ending inventory: P1,200,000 x ¼ = P300,000 x 20/120 = P50,000 profit

Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations…………. Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5

P 760,000 36,000 (_50,000) P 746,000 P 460,000 0 ( 0) P460,000

460,000 P1,206,000

P 92,000 0

92,000 P1,114,000 _ 92,000 P 1,206,000

*that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) S Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI) – partial goodwill

P460,000 0 ( 0) P460,000 _____0 P460,000 20% P 92,000

2. Books of Puma (a) Cost Method 20x4 Dividend – Smarte Company: None, since, there is no amount given 20x5 Dividend – Smarte Company: None, since, there is no amount given

(b) Equity Method 20x4 Net income – Smarte Investment in Smarte (400,000 x 80%) Equity in Subsidiary Income Dividend – Smarte Cash/Dividends receivable Investment in Smarte

320,000 320,000 0 0

Amortization of Allocated excess: Equity in Subsidiary Income Investment in Smarte Realized Profit in BI: Investment in Smarte Equity in Subsidiary Income Unrealized Profit in EI: Equity in Subsidiary Income Investment in Smarte 20x5 Net income – Smarte Investment in Smarte (460,000 x 80%) Equity in Subsidiary Income

0 0 0 0 36,000 36,000 368,000 368,000

Dividend – Smarte Cash/Dividends receivable Investment in Smarte

0

Amortization of Allocated excess: Equity in Subsidiary Income Investment in Smarte

0

Realized Profit in BI: Investment in Smarte Equity in Subsidiary Income Unrealized Profit in EI: Equity in Subsidiary Income Investment in Smarte

0

0 36,000 36,000 50,000

50,000

3. Downstream Sales 20x4 Sales…………………………………………………………………………………1,080,000 Purchases (Cost of Goods Sold)……………………………………... 1,080,000 **100% UPEI of S: Cost of Sales (Ending Inventory in Income Statement) [216,000 – (216,000/1.20)]………..………………………………………….. Inventory (Ending Inventory in Balance Sheet)……………………..

36,000 36,000

20x5 100% Interscompany Sales Sales………………………………………………………………………………….1,200,000 Purchases (Cost of Goods Sold)………………………………….. 1,200,000 Downstream Sales: *100% RPBI of S: Retained Earnings – P, beginning………………………………………..... 36,000 Cost of Sales (Beginning Inventory in Income Statement)….. 36,000 **100% UPEI of S: Cost of Sales (Ending Inventory in Income Statement) [300,000 – (300,000/1.20)]………..………………………………………….. 15,000 Inventory (Ending Inventory in Balance Sheet)……………….. 15,000

Problem II 1. Consolidated Net Income for 20x5 P Company’s net income from own/separate operations………….

P 1,720,000 0 (_ 0) P 1, 720,000

Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… Son Company’s realized net income from separate operations*…….….. Total Less: Amortization of allocated excess…………………… Consolidated Net Income for 20x5 Less: Non-controlling Interest in Net Income* * Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5………….. *that has been realized in transactions with third parties.

P 600,000 40,000 ( 51,00 0) P 589,000

589,000 P2,309,000 0 P2,309,000 58,900 P 2,250,100

Beginning inventory: P800,000 x 1/4 = P200,000 x 25/125 = P40,000 profit Ending inventory: P1,020,000 x ¼ = P255,000 x 25/125 = P51,000 profit

Or, alternatively Consolidated Net Income for 20x5 P Company’s net income from own/separate operations………….

P 1,720,000 0 (________0) P1,720,,00 0

Realized profit in beginning inventory of S Company (downstream sales) Unrealized profit in ending inventory of S Company (downstream sales)… P Company’s realized net income from separate operations*…….….. S Company’s net income from own operations…………………………………. Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales)… S Company’s realized net income from separate operations*…….….. Total Less: Non-controlling Interest in Net Income* * Amortization of allocated excess…………………… Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent………….. Add: Non-controlling Interest in Net Income (NCINI) Consolidated Net Income for 20x5

P 600,000 40,000 ( 51,000) P589,000

589,000 P2,309,000

P 58,900 0

__58,900 P2,250,100 _ 58,900 P 2,309,000

*that has been realized in transactions with third parties. **Non-controlling Interest in Net Income (NCINI) for 20x5 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning inventory of P Company (upstream sales) Unrealized profit in ending inventory of P Company (upstream sales) Son Company’s realized net income from separate operations……… Less: Amortization of allocated excess Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

P600,000 40,000 ( 51,000) P589,000 _____0 P589,000 10% P 58,900

2. Books of Pinta (a) Cost Method 20x4 Dividend – Simplex Company: None, since, there is no amount given 20x5 Dividend – Simplex Company: None, since, there is no amount given (b) Equity Method 20x4 Net income – Simplex Investment in Simplex (600,000 x 90%) Equity in Subsidiary Income

540,000 540,000

Dividend – Simplex Cash/Dividends receivable Investment in Simplex

0

Amortization of Allocated excess: Equity in Subsidiary Income Investment in Simplex

0

Realized Profit in BI: Investment in Simplex Equity in Subsidiary Income Unrealized Profit in EI: Investment in Simplex (40,000 x 90%) Equity in Subsidiary Income 20x5 Net income – Simplex Investment in Simplex (600,000 x 90%) Equity in Subsidiary Income

0

0 0 0 36,000 36,000 540,000 540,000

Dividend – Simplex Cash/Dividends receivable Investment in Simplex

0

Amortization of Allocated excess: Equity in Subsidiary Income Investment in Simplex

0

0

0

Realized Profit in BI: Investment in Simplex (40,000 x 90%) Equity in Subsidiary Income

36,000

Unrealized Profit in EI: Investment in Simplex (51,000 x 90%) Equity in Subsidiary Income

45,900

3.

36,000

45,900

Upstream Sales: 100% Interscompany Sales Sales…………………………………………………………………………………1,020,000 Purchases (Cost of Sales)………………………………………. ……. 1,020,000 To eliminate intercompany sales. ***100% RPBI of P: (if equity method Investment in S instead of RE – P, beg.) Retained Earnings – P, beginning (90% x P40,000)……………...…. 36,000 NCI ……………………………………………….…………………………. 4,000 Cost of Sales (Beginning Inventory in Income Statement) 40,000 To recognize unrealized profit in beginning inventory realized during the year. ****100% UPEI of P: Cost of Sales (Ending Inventory in Income Statement)………………51,000 Inventory (Ending Inventory in Balance Sheet)……………… To eliminate unrealized intercompany profit in ending inventory.

51,000

Problem III 1. Non-controlling Interest in Net Income (NCINI) for 20x4 S Company’s net income of Subsidiary Company from its own operations (Reported net income of Son Company) Realized profit in beginning inventory of P Company (upstream sales): P525,000 x 25/125 Unrealized profit in ending inventory of P Company (upstream sales): P1,250,000 x 25/125 Son Company’s realized net income from separate operations……… Less: Amortization of allocated excess

Multiplied by: Non-controlling interest %.......... Non-controlling Interest in Net Income (NCINI)

P3,000,000 105,000 ( 250,000) P 2,855,000 _____0 P3,055,00 0 20% P 571,000

2 .Controlling Interest in Consolidated Net Income or Profit attributable to equity holders of parent – 20x5 – cannot be solved, since there is no net income from separate operations for P Company. Incidentally, the eliminating entries are as follows: Sales 4,000,000 Cost of Goods Sold Cost of Goods Sold Ending Inventory (Balance Sheet) [P1,250,000 - (P1,250,000/1.25)]

4,000,000

250,000

Retained Earnings, beginning – P Company (80%) 84,000 Noncontrolling interest (20%) 21,000 Cost of Goods Sold (Beginning Inventory) [P525,000 – (P525,000/1.25)] = P105,000

250,000

105,000

3. Stockholders’ equity – Subsidiary Company, December 31, 20x4 Adjustments to reflect fair value - (over) undervaluation of assets and liabilities, date of acquisition (January 1, 20x4) Amortization of allocated excess (refer to amortization above) – 20x4 Fair value of stockholders’ equity of subsidiary, December 31, 20x4…… Less: Unrealized profit in ending inventory of P Company (upstream sales) Realized stockholders’ equity of subsidiary, December 31, 20x4……

P5,400,000 0 ( 0) P5,400,000 250,000 P5,150,000

Multiplied by: Non-controlling Interest percentage…………... Non-controlling interest (in net assets)……………………………..

20 P1,030,000

Problem IV Requirements 1 to 4: Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4 Fair value of Subsidiary (80%) Consideration transferred……………………………….. Less: Book value of stockholders’ equity of Son: Common stock (P240,000 x 80%) ……………………. Retained earnings (P120,000 x 80%) ………………... Allocated excess (excess of cost over book value) ….. Less: Over/under valuation of assets and liabilities: Increase in inventory (P6,000 x 80%) ……………… Increase in land (P7,200 x 80%) ……………………. Increase in equipment (P96,000 x 80%) Decrease in buildings (P24,000 x 80%) ………..... Decrease in bonds payable (P4,800 x 80%) …… Positive excess: Partial-goodwill (excess of cost over fair value)………………………………………………...

P 372,000 P 192,000 96,000

288,000 P

84,000

P 4,800 5,760 76,800 ( 19,200) 3,840

72,000 P 12,000

The over/under valuation of assets and liabilities are summarized as follows: SCo. Book value Inventory…………………. …………….. Land……………………………………… Equipment (net)......... Buildings (net) Bonds payable………………………… Net………………………………………..

S Co. Fair value

P 24,000 48,000 84,000 168,000 (120,000) P 204,000

(Over) Under Valuation

P

30,000 55,200 180,000 144,000 ( 115,200) P 294,000

P

6,000 7,200 96,000 (24,000) 4,800 P 90,000

The buildings and equipment will be further analyzed for consolidation purposes as follows: Equipment .................. Less: Accumulated depreciation….. Net book value………………………...

Buildings................ Less: Accumulated depreciation….. Net book value………………………...

S Co. Book value 180,000

S Co. Fair value 180,000

Increase (Decrease) 0

96,000

-

( 96,000)

84,000

180,000

96,000

S Co. Book value 360,000

SCo. Fair value 144,000

(Decrease) ( 216,000)

192,000

-

168,000

144,000

( 192,000) (

24,000)

A summary or depreciation and amortization adjustments is as follows: Account Adjustments to be amortized Inventory Subject to Annual Amortization Equipment (net)......... Buildings (net) Bonds payable…

Over/ Under P 6,000 96,000 (24,00 0) 4800 0

Current Year(20x4)

1

Annual Amount P 6,000

P 6,000

P -

8

12,000

12,000

12,000

4

( 6,000) 1,20 0 P 13,200

( 6,000) 1,200

(6,000) 1,20 0

P 13,200

P 7,200

Life

4

20x5

The goodwill impairment loss of P3,750 based on 100% fair value would be allocated to the controlling interest and the NCI based on the percentage of total goodwill each equity interest received. For purposes of allocating the goodwill impairment loss, the full-goodwill is computed as follows: Fair value of Subsidiary (100%) Consideration transferred: Cash (80%) Fair value of NCI (given) (20%)

P 372,000 93,000

Fair value of Subsidiary (100%) Less: Book value of stockholders’ equity of Son (P360,000 x 100%)

P 465,000 __360,000

Allocated excess (excess of cost over book value)….. Add (deduct): (Over) under valuation of assets and liabilities (P90,000 x 100%) Positive excess: Full-goodwill (excess of cost over fair value)………………………………………………...

P

105,000 90,000 P

15,000

In this case, the goodwill was proportional to the controlling interest of 80% and noncontrolling interest of 20% computed as follows:

Goodwill applicable to parent………………… Goodwill applicable to NCI…………………….. Total (full) goodwill………………………………..

Value P12,000 3,000 P15,000

% of Total 80.00% 20.00% 100.00%

Value P 3,000

% of Total 80.00%

The goodwill impairment loss would be allocated as follows Goodwill impairment loss attributable to parent or controlling Interest Goodwill applicable to NCI…………………….. Goodwill impairment loss based on 100% fair value or fullGoodwill

750

20.00%

P 3,750

100.00%

The unrealized profits on January 1, and on December 31, 20x5, resulting intercompany sales, are as summarized below: Downstream Sales: Year 20x 4 20x 5

Sales of Parent to Subsidiary P150,000 120,000

Intercompany Merchandise in 12/31 Inventory of S Company P150,000 x 60% = P90,000

Unrealized Intercompany Profit in Ending Inventory P90,000 x 20% = P18,000

P120,000 x 80% = P96,000

P96,000 x 25% = P40,000

Intercompany Merchandise in 12/31 Inventory of S Company

Unrealized Intercompany Profit in Ending Inventory

P100,000 x 50% = P25,000

P25,000 x 40% = P10,000

P 62,500 x 40% = P25,000

P25,000 x 20% = P 5,000

Upstream Sales: Year

20x 4 20x 5

Sales of Subsidiary to Parent P 50,000 62,500

20x4: First Year after Acquisition Parent Company Cost Model Entry January 1, 20x4: (1) Investment in S Company……………………………………………

372,000 372,000

Cash…………………………………………………………………….. Acquisition of S Company. January 1, 20x4 – December 31, 20x4: (2) Cash……………………… Dividend income (P36,000 x 80%)……………. Record dividends from S Company.

28,800 28,800

No entries are made on the parent’s books to depreciate, amortize or write-off the portion of the allocated excess that expires during 20x4, and unrealized profits in ending inventory. Consolidation Workpaper – Year of Acquisition (E1) Common stock – S Co………………………………………… Retained earnings – S Co…………………………………… Investment in S Co…………………………………………… Non-controlling interest (P360,000 x 20%) ………………………..

240,000 120.000 288,000 72,000

To eliminate intercompany investment and equity accounts of subsidiary on date of acquisition; and to establish noncontrolling interest (in net assets of subsidiary) on date of acquisition.

(E2) Inventory…………………………………………………………………. Accumulated depreciation – equipment……………….. Accumulated depreciation – buildings………………….. Land………………………………………………………………………. Discount on bonds payable…………………………………………. Goodwill…………………………………………………………………. Buildings……………………………………….. Non-controlling interest (P90,000 x 20%) ……………………….. Investment in Son Co……………………………………………….

6,000 96,000 192,000 7,200 4,800 12,000 216,000 18,000 84,000

To allocate excess of cost over book value of identifiable assets acquired, with remainder to goodwill; and to establish noncontrolling interest (in net assets of subsidiary) on date of acquisition.

(E3) Cost of Goods Sold……………. Depreciation expense……………………….. Accumulated depreciation – buildings………………….. Interest expense………………………………… Goodwill impairment loss………………………………………. Inventory………………………………………………………….. Accumulated depreciation – equipment……………….. Discount on bonds payable………………………… Goodwill……………………………………

6,000 6,000 6,000 1,200 3,000 6,000 12,000 1,200 3,000

To provide for 20x4 impairment loss and depreciation and amortization on differences between acquisition date fair value and book value of S’s identifiable assets and liabilities as follows: Cost of Goods Sold Inventory sold Equipment Buildings Bonds payable Totals

Depreciation/ Amortization Expense

Amortizatio n -Interest

Total

P 6,000

_______ P 6,000

P 12,000 ( 6,000) _______ P 2,000

P 1,200 P1,200

13,20 0

(E4) Dividend income - P………. Non-controlling interest (P36,000 x 20%)……………….. Dividends paid – S……………………

28,800 7,200 36,000

To eliminate intercompany dividends and non-controlling interest share of dividends.

(E5) Sales………………………. Cost of Goods Sold (or Purchases)