ADVANCED FINANCIAL ACCOUNTING AND REPORTING: CONSOLIDATION

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ILLUSTRATIVE PROBLEMS

Problem 1
Consolidation at Date of Acquisition
The financial statements of Parent Company and Subsidiary Company as of December 31, 2017 are shown
below:

Parent Fair value Subsidiary Fair value Useful Life

Cash P 8,000 P 6,000 P 1,000 P 1,000
Receivables 4,000 4,000 3,000 3,000
Inventory 3,000 3,500 2,000 2,500
Land 8,000 10,000 6,000 8,000
Building, net 10,000 10,000 5,000 6,000 10 years
Equipment, net 6,000 7,000 3,000 2,000 4 years
Total assets P 39,000 P 20,000

Payables P 20,000 20,000 P 5,000 5,000

Ordinary shares 15,000 10,000
Share premium 2,000 3,000
Retained earnings 2,000 2,000
Total liabilities and P 39,000 P 20,000
equity

On January 1, 2010, Parent Company purchased 80% of Subsidiary by issuance of P10,000 par value shares
with P15,000 fair value. Stock issue costs on the issuance were 500. Direct acquisition costs were P1,000
while indirect acquisition cost were P500. Both Parent and Subsidiary uses FIFO method for inventories. The
non-controlling interest has fair value of P5,000.

Required: Prepare a consolidated statement of financial position as of the date of acquisition.

1. Assuming the use of fair value method
2. Assuming the use of proportionate basis.

Problem 2
Consolidation Subsequent to Date of Acquisition (no inter-company transactions)
During 2014, there is no inter-company transaction between the two companies except for dividends declared
by the subsidiary. As of December 31, 2014, the financial statements of the two companies are shown below:

Balance sheet as of Parent Subsidiary

12/31/2014
Cash P 2,000 P 3,500
Receivables 7,500 6,500
Investment in subsidiary 15,000 -
Inventory 4,500 6,000
Land 8,000 6,000
Building 10,800 4,500
Equipment 4,800 2,500
Total assets P 52,600 P 29 ,000

Payables P 16,100 P 14,000

Ordinary shares 25,000 10,000
Share premium 6,500 3,000
Retained earnings 5,000 2,000
Total liabilities and equity P 52,600 P 20,000

2014 Income Statement Parent Subsidiary

Sales P 50,000 P 20,000
Less: cost of sales 30,000 14,000
Gross Profit P 20,000 P 6,000
Dividend income 2,000 -
Less: Expenses 15,000 5,000
Profit P 7,000 P 1,000

Required: Prepare consolidated financial statement on December 31, 2014, assuming the dividend represents
80% of the total dividends and that 1/2 is still unpaid as of December 31, 2015. Assume the use of
proportionate basis.

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ADVANCED FINANCIAL ACCOUNTING AND REPORTING: CONSOLIDATION

DRILL PROBLEMS
Problem 1
POGI Corprporation acquired 70% of the outstanding common stock of Sexy Corporation

Sexy
POGI Book Fair
Book Value Value Value
Assets
Cash P 32,000 P 20,000 P 20,000
Receivable – net 80,000 30,000 30,000
Inventories 70,000 30,000 50,000
Land 100,000 50,000 60,000
Building – net 110,000 70,000 90,000
Equipment – net 80,000 40,000 30,000
Investment in Sea Breeze 178,000 -- --
Total P650,000 P240,000 P280,000

Liabilities and Stockholders’ Equity

Accounts payable P 90,000 P 80,000 P 80,000
Other liabilities 10,000 50,000 40,000
Capital stock, P10 par 500,000 100,000
Retained earnings 50,000 10,000
Total P650,000 P240,000

 Compute the Consolidated Total Assets on January 1, 2008:

a. P 712,000 b. P813,000 c. P 818,000 d. P930,000

 Compute the Minority Interests on the date of acquisition:

a. P 33,000 b. P45,000 c. P 48,000 d. P72,000

Problem 2
On December 31, 2007, POGI Corporation issued 57,000 shares of its P1 par common stock (ordinary share)
with a current fair market value of P20 a share to stockholders of Sexy Company in exchange for 38,000 of
the 40,000 outstanding share’s of Sexy’s P10 par common stock (ordinary share). There was no contingent
consideration. Out-of-pocket costs of the combination paid in cash by Panther on December 31, 2007, were
as follows:
Finder’s fee and legal fees relating to business combinationP 52,250
Cost associated with SEC registration statement 72,750
Total out-of-pocket costs of business combination P125,000

On December 31, 2007, prior to the business combination, the following data are available:
POGI Sexy
Corporation Company
Common stock/ordinary share, P1 par P1,000,000
Common stock/ordinary share, P10 par P400,000
Additional paid-in capital/share premium 550,000 235,000
Retained earnings/Accumulated profits 1,050,000 334,000

On the same date, the current fair values of Sexy Company’s identifiable assets and liabilities were the
same as their carrying values except for the following assets:
Increase
Inventories (first-in, first-out method) P 26,000
Plant assets (net):
Land P 60,000
Building (economic life, 20 years) 80,000
Machinery (economic life, 5 years) 50,000 190,000
Leasehold (economic life, 6 years) 30,000

The following results of operations under cost method were as follows:

2008 2009
Panther Sexy Panther Sexy
Net income P 458,000 P 90,000 P 319,350 P 105,000
Dividend declared 158,550 40,000 158,550 50,000

Goodwill was not impaired for the year 2008 and 2009.

Required:
1. Compute the Investment account balance on December 31, 2009
2. Compute the Equity Holders of Parent – Retained Earnings on December 31, 2008
3. Compute the Equity Holders of Parent – Retained Earnings on December 31, 2009

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ADVANCED FINANCIAL ACCOUNTING AND REPORTING: CONSOLIDATION

Problem 3
The consolidated income statement of PP Company and its 80% owned subsidiary follows:

Sales P 402,000
Cost of goods sold 246,000
Gross profit P 156,000
Operating expenses 81,000
Consolidated net income P 75,000
Less: Minority interest net income 6,000
Profit attributable to Equity Holders of Parent P 69,000

Last year, the PP Company sold an inventory at a billed price of P50,000 at a mark-up of P10,000. ½ of
these were unsold at year-end. During the year PP Company sold another shipment at the same mark-up
rate and was billed at P100,000. ¼ of these were unsold at year-end. The subsidiary also sold
merchandise costing P20,000 at a gain of P5,000 to PP. 20% of these were not resold by PP by year-end.

Required: Compute the Net income from own operations of the subsidiary, and PP Company,
respectively.

Problem 4
Abbreviated trial balances of Burnham and Session Corporation at December 31, 2014 follow:

Burnham Session
Current assets P 240,000 P
130,000
Land 300,000 50,000
Plant and equipment, net 1,000,000 450,000
Investment in Session, 410,000
90%
Cost of sales 1,000,000 300,000
Other expenses 250,000 120,000
Dividends 100,000
50,000
P 3,300,000 P
1,100,000

Current liabilities P 225,000 P

100,000
Common stocks 1,000,000 300,000
Retained earnings 500,000 200,000
Sales 1,500,000 500,000
Dividend income 45,000 -
-
P 3,300,000 P
1,100,000

Burnham acquired a 90 percent interest in Session for P410,000 cash on January 1, 2005 when Session’s
stockholders’ equity consisted of P300,000 capital stocks and P100,000 retained earnings. Any difference
between investment cost and book value acquired relates to equipment with a ten-year life from January
1, 2005.

 Consolidated net income for 2009 is:

a. P 324,444 b. P 317,000 c. P 330,000 d. P 362,000

 Minority interest in Session at December 31, 2009 is:

a. P 50,000 b. P 58,000 c. P 45,777 d. P 55,777

 Dividend to the minority stockholders for 2009 must be:

a. P 50,000 b. P 20,000 c. P 10,000 d. P 5,000

Problem 5
On January 1, 2014, Parent Company purchased 90% of Subsidiary Company for P4,500,000. The
stockholder’s equity of Subsidiary as of the date of acquisition were P4,000,000, inclusive of P500,000
retained earnings. All assets of Subsidiary approximate their fair values, except for the following items:

Useful Life Book Fair value

value
Inventory - P P
200,000 250,000
Equipment 10 3,000,000 2,600,000
Patent 5 2,000,000 2,500,000

As of December 31, 2014, the separate financial statement of Parent and Subsidiary reported the following:

Parent Subsidiary

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ADVANCED FINANCIAL ACCOUNTING AND REPORTING: CONSOLIDATION

Total assets P P
25,000,000 12,000,000
Total liabilities 14,000,000 7,800,000
Net income 3,500,000 600,000

The change in equity of Subsidiary represents dividends and profit.

Required: Compute for the consolidated balance of the following as of 12/31/2014:

1. Total assets ___________ 4. NCI-NI __________

2. Total liabilities ___________ 5. NCI-NA, 1/1/2009 __________
3. Profit ___________ 6. NCI-NA, 12/31/2009 __________

INTER-COMPANY TRANSACTIONS
Illustrative: Parent acquired its 90% Subsidiary on January 1, 2014 at a premium of P700,000 distributed as
follows: P180,000 to inventories, P450,000 to an equipment with 5 year remaining useful life and the balance
to goodwill. Parent and Subsidiary reported the following in 2009 and 2010:

2014 2015
Parent Subsidiary Parent Subsidiary
Sales P P P10,000,00 P
8,000,000 4,000,000 0 5,000,000
Cost of sales 4,000,000 2,500,000 6,000,000 3,500,000
Net income 2,000,000 500,000 1,000,000 900,000
Inventory 800,000 600,000 900,000 700,000

Additional information:
1. During 2014, Parent sold inventories costing P600,000 to Subsidiary. ½ of these remained in Subsidiary
inventory. Subsidiary also sold goods billed for P800,000 to Parent. 4/5 of these were resold by Parent to
customers at year-end.
2. During 2015, Parent sold to Subsidiary inventories costing P600,000. ¼ of these remained in Subsidiary
inventory. Subsidiary also sold inventory to Parent billed at P500,000. ¼ of these remained in Parent
inventory.

Required: Compute the consolidated balance of the following:

2014 2015
1. Sales ___________ ___________
2. Cost of goods sold ___________ ___________
3. Consolidated profits ___________ ___________
4. Non-controlling interest in profit ___________ ___________
5. Inventory ___________ ___________

DRILL PROBLEMS
Problem 1
POGI Corporation owns an 80% interest in SEXY Corporation acquired several years ago. SEXY regularly sells
merchandise to its parent at 125% of SEXY’s cost. Gross profit data of POGI and SEXY for the year 2012 are
as follows:
POGI SEXY
Sales P 1,000,000 P 800,000
Cost of goods sold 800,000 640,000
Gross profit P 200,000 P 160,000

1. During 2012, POGI purchased inventory items from SEXY at a transfer price of P400,000. POGI’s
December 31, 2011 and 2012 inventories included goods acquired from SEXY of P100,000 and P125,000,
respectively. The consolidated sales from POGI Corporation and subsidiary of 2012 were:
a. P1,800,000 c. P1,400,000
b. P1,425,000 d. P1,240,000

2. The Unrealized profits in the year-end 2011 and 2012 inventories were:
a. P100,000 and P125,000, respectively c. P20,000 and 25,000, respectively
b. P800,000 and P100,000, respectively d. P16,000 and P20,000, respectively

3. Consolidated cost of goods sold of POGI and subsidiary for 2012 was:
a. P1,024,000 c. P1,052,800
b. P1,045,000 d. P1,056,000

Problem 2
POGI Corp. acquired a 70% interest in Sexy Co. in 2007. For the year ended December 31, 2008 and 2009,
Sexy Co. reported net income of P160,000 and P180,000, respectively. During 2008, Sexy sold merchandise
to POGI Corp. for P20,000 at a profit of P4,000. The merchandise was later resold by POGI Corp. to outsider
for P30,000 during 2009. For consolidation purposes, what is the minority interest’s share of Sexy’s net
income for 2008 and 2009, respectively?
2008 2009 2008 2009
a. P46,800 P55,200 c. P49,000 P52,800

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ADVANCED FINANCIAL ACCOUNTING AND REPORTING: CONSOLIDATION

b. P48,000 P54,000 d. P53,200 P50,000

Problem 3
Subsidiary Corporation is a 90% owned subsidiary of Parent Corporation acquired several years ago at book
value equal to fair value. For the years 2011 and 2012, Parent and Subsidiary report the following:

2011 2012
Parent’s separate income P300,000 P400,000
Subsidiary’s net income 80,000 60,000

The only intercompany transaction between Parent and Subsidiary during 2011 and 2012 was the January 1,
2011 sale of land. The land had a book value of P20,000 and was sold intercompany for P30,000, its appraised
value at the time of sale.

1. If the land was sold by Parent to Subsidiary (downstream sales) and that Subsidiary still owns the land at
December 31, 2012, compute the Profit Attributable to Equity Holders of Parent for 2011 and 2012:

2011 2012 2011 2012

a. P363,000 P454,000 c. P 372,000 P460,000
b. 362,000 454,000 d. 362,000 460,000

2. The consolidated/group net income for 2011 and 2012:

2011 2012 2011 2012

a. P362,000 P454,000 c. P 370,000 P460,000
b. 380,000 460,000 d. 372,000 460,000

3. Assume further that the the land was sold by Subsidiary to Parent (upstream sales) and Parent still owns
the land at December 31, 2012, compute the Profit Attributable to Equity Holders of Parent or CNI
Attributable to Controlling Interests for 2011 and 2012:

2011 2012 2011 2012

a. P 363,000 P454,000 c. P370,000 P460,000
b. 362,000 454,000 d. 363,000 460,000

4. The Consolidated/group net income for 2011 and 2012:

2011 2012 2011 2012

a. P 362,000 P 454,000 c. P370,000 P460,000
b. 380,000 460,000 d. 372,000 460,000

Intercompany Transactions
Problem 1
ABC Company and its 80% subsidiary DEF Company reported the following during the year:
Since the acquisition date, ABC Company and DEF Company reported the following:

2008 2009 2010

ABC Company:
Net Income P 300,000 P 400,000 P 200,000
Dividend 200,000 200,000 -
DEF Company:
Net Income P 100,000 P 150,000 P 250,000
Dividend 50,000 100,000 150,000

ABC and DEF has no inter-company sales of inventories except for fixed assets as follows:
 On January 1, 2008, ABC Company sold an item of equipment with carrying amount of P50,000 for
P70,000 to DEF Company. The equipment is depreciated over a period of 5 years.
 On July 1, 2009, DEF Company sold equipments with a carrying amount of P80,000 for P120,000. The
machineries were depreciated by ABC Company over 10 years.
 On October 1, 2009, ABC Company sold a vacant lot costing P100,000 for P150,000.
 On March 30, 2010, DEF Company sold a delivery truck with carrying amount of P100,000 for P80,000.
The truck has a 4 year remaining useful life.

Required: Supply the following information:

2008 2009 2010
Consolidated net income ________ _________ _________
_
- Attributable to parent ________ _________ _________
_
- Attributable to non-controlling ________ _________ _________
interest _

DRILL PROBLEMS:

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ADVANCED FINANCIAL ACCOUNTING AND REPORTING: CONSOLIDATION

Illustration 1
Income information for 2008 taken from the separate company financial statements of POGI Corporation and
its 75% owned subsidiary, SEXY Corporation is presented as follows:

POGI SEXY
Sales P1,000,000 P 460,000
Gain on sale of building 20,000 --
Dividend income 75,000 --
Cost of goods sold ( 500,000) ( 260,000)
Depreciation expense ( 100,000) ( 60,000)
Other expenses ( 200,000) ( 40,000)
Net income P 295,000 P 100,000

POGI gain on sale of building relates to a building with a book value of P40,000 and a 10-year remaining
useful life that was sold to SEXY for P60,000 on January 1, 2008.

 At what amount will the gain on sale of building appear on the consolidated/group income statement
of POGI and SEXY for the year 2008 should be:
a. Zero b. P5,000 c. P15,000 d. P20,000

 The Consolidated/group depreciation expense for 2008 should be:

a. P158,000 b. P160,000 c. P162,000 d. P180,000

 The Profit Attributable to Equity Holders of Parent for 2008 should be:
a. P295,000 b. P277,000 c. P275,000 d. P220,000

 The Consolidated/group net income for 2008 should be:

a. P277,000 b. P302,000 c. P320,000 d. P348,000

Illustration 2
Sexy Corp. is an 80 percent owned subsidiary by POGI Liner, Inc. On January 1, 2001, Sexy paid P100,000 for
a truck with an expected economic life of 10 years and no anticipated residual value. Sexy sold the truck to
POGI Liner Inc., on January 1, 2007. During preparation of the consolidation workpaper for 2007, the
following workpaper entry was made to eliminate the effects of the intercompany truck sale:

Truck 48,000
Gain on Sale of Truck 12,000
Depreciation Expense 3,000
Accumulated Depreciation 57,000

Required:
1. What amount did POGI Liner, Inc. pay Sexy for the truck?
a. P43,000 b. P60,000 c. P28,000 d. P52,000

2. What amount will be reported for trucks and accumulated depreciation in the December 31, 2007,
consolidated balance sheet, respectively?
a. P 40,000; P 10,000 c. P 52,000; P 13,000
b. P 100,000; P 70,000 d. P 100,000; P 73,000

3. What amount of depreciation was recorded by POGI Liner during 2007?

a. P 13,000 b. P10,000 c. P3,000 d. P16,000

4. If Sexy reports net income of P50,000 in 2007, what amount of income will be assigned to the non-
controlling interest in the 2007 consolidated income statement?
a. P 8,200 b. P11,800 c. P10,000 d. P10,600

5. If Sexy reports net income of P60,000 in 2008, what amount of income will be assigned to the non-
controlling interest in the 2008 consolidated income statement?
a. P 12,000 b. P10,200 c. P12,600 d. P11,400

Illustration 3
On January 1, 2012, POGI Company purchased 90% equity of Sexy Company. On January 3, 2012, Sexy sold
equipment with original cost of P750,000 and carrying cost of P375,000) to POGI for P540,000. The
equipment has a remaining life of three years and was depreciated using the straight-line method by both
companies. In POGI consolidated balance sheet as of December 31, 2012, the cost, accumulated depreciation
and book value should be reported at:

Cost Accumulated Depreciation Net Book Value

a. P 750,000 P500,000 P375,000
b. 375,000 375,000 -0-
c. 750,000 750,000 -0-
d. 750,000 500,000 250,000

Illustration 5

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ADVANCED FINANCIAL ACCOUNTING AND REPORTING: CONSOLIDATION

As January 1, 2012, Johnson Corporation sold equipment with a three-year remaining useful life and a book
value of P10,000 to its 70%-owned subsidiary for a price of P11,500. In the consolidation working papers for
the year ended December 31, 2012, the elimination entry concerning this transaction will include:
a. A debit to equipment for P1,500.
b. A debit to gain on equipment for P1,500.
c. A credit to depreciation expense for P1,500.
d. A debit to gain on equipment sale for P1,000.

Illustration 6
As January 1, 2012, Par Corp. sold a warehouse with a book value of P80,000 and a 20-year remaining useful
life to its wholly-owned subsidiary, Strata Corporation, for P120,000. Both Par and Strata use the straight-line
depreciation method. On December 31, 2012, the separate company financial statements contained the
following balances connected with the warehouse:

Par Strata
Gain on sale of warehouse P40,000
Depreciation expense P 6,000
Warehouse 120,000
Accumulated depreciation 6,000

A working paper entry to consolidate the financial statements of Par and Strata on December 31, 2012 will
include:
a. A debit to gain on sale of warehouse for P38,000.
b. A debit to gain on sale of warehouse for P40,000.
c. A debit to accumulated depreciation for P2,000.
d. A credit to depreciation expense for P6,000.

ENHANCEMENT PROBLEMS

Problem 1
POGI Company held 80% of Villegas and 70% of Laco. During the year,
POGI Company sold goods costing P3,000 to Laco for P5,000. Laco
also sold to Villegas costing P4,000 at a profit of P2,000. Villegas sold goods
to Laco costing P3,000 for P6,000 and goods costing P4,000
for P5,000 to POGI Company.

The three companies reported the following figures for 2009:

POGI Villegas Laco

Sales P 150,000 P 80,000 P 60,000
Cost of sales 100,000 40,000 36,000
Administrative & selling 30,000 25,000 15,000
expense
Profit 20,000 15,000 9,000

Required: Prepare consolidated income statement.

Problem 2
POGI holds 80% of Villegas, while Villegas owns 90% of Laco

The separate income of Love, Charity and Liberty was P300,000, P200,000 and P100,000, respectively.

Required: Compute consolidated net income, profit attributable to parent and NCI-NI.

AFAR by Jonas POGI Reyes, CPA Page 7