The consolidated net income and non-controlling interests in consolidated net income

which can be verified in Figure 4-10 can also be computed as follows:

Consolidated Net Income for 20x5

Perfect Company's net income from own/separate operations P160,000
Realized profit in beginning inventory of S Company (downstream sales) 15,000
Unrealized profit in ending inventory of S Company (downstream sales) (20,000)
Perfect Company's realized net income from separate operations P155,000
Son Company's net income from own operations. 75,000
Realized profit in beginning inventory of P Company (upstream sales) 10,000
Unrealized profit in ending inventory of P Company (upstream sales) (5,000)
Son Company's realized net income from separate operations P80,000 80,000
Total P235,000
Less: Amortization of allocated excess 6,000
Consolidated Net Income for 20x5. P229,000
Less: Non-controlling Interest in Net Income 14,800
Controlling Interest in Consolidated Net Income or Profit attributable to
equity holders of parent - 20x5. P214,200

when the parent company records its investment using the equity method entry (1) in
Illustration 4-3 replaces the cost method entries to establish reciprocity and to eliminate
dividend income (entries (1) and (5) in Illustration 4-3]. Any adjusting/ eliminating entries
made to that account under the equity method is replaced by an entry to the Investment
account.

Equity Method - Analysis of Consolidated Net Income and Consolidated Retained

Earnings
Consolidated net income is the sum of the following components:

 the parent company's net income from its own/separate (independent) operations
that has been realized in transactions with third parties
 plus (minus) reported subsidiary income (loss) that has been realized in
transactions with third parties
 plus or minus adjustments for the period relating to the depreciation,
amortization, and impairment of differences between fair values/implied and book
values.
Under the equity method. no formal calculation consolidated net income is needed.
  The parent company has already made adjustments for realized/unrealized gross
profit depending upon whether or not such profit has been confirmed through
transactions with outsiders.
 The controlling interest in consolidated net income equals the parent company's
recorded income.
When the parent company uses the equity method to record its investment

 the parent company's share of subsidiary income (including any needed

adjustments for intercompany profits) since acquisition is already included in the
parent company's reported retained earnings.
 Consequently, consolidated retained earnings are equal to the parent company's
recorded complete equity basis retained earnings.
The consolidated net income, and non-controlling interests on December 31, 20x5 is the
same with Illustration 4-3 except only in the computation of consolidated retained
earnings presented as follows:

Retained earnings of Parent Company funder equity method) /

Consolidated Retained earnings, January 1, 20x5
P385,700
Add: Controlling Interest in Consolidated Net income or Profit attributable to
equity holders of parent for 20x5 214,200
Total P623,900
Less: Dividends paid - Parent Company for 20x5
60,000
Retained earnings of Parent Company (under equity method) /
Consolidated Retained Earnings. December 31, 20x5
P539,000

Therefore, regardless of the method used in the separate financial statement of parent,
the consolidated balance (which is under equity method) is always the same.
 Illustration 4-6: 80%-Owned Subsidiary: Equity Method, Full-goodwill, With
Goodwill Impairment Loss Recognized in the books of Subsidiary
From the trial balances presented in Illustration 4-5. the following summary for 20x4
results of operations are as follows:

Perfect Co. Son Co.

Sales P400,000 P200,000
Less Cost of goods sold 170,000 115,000
Gross profit P230,000 P85,000
Less: Depreciation expense 50,000 20,000
Other expense 40,000 15,000
Net income from its own separate operations P140,000 P50,000
Add: Investments 5,700 -
Net income P145,700 P50,000

The resulting ownership situation can be viewed in the schedule of determination o

allocation of excess.
The over/under valuation of assets and liabilities is summarized as follows (refer to the
schedule on page for the computation of allocated

Son Co. Book Value Son Co. Fair value (Over) Under Valuation
Inventory P20,000 P25,000 P5,000
Land 40,000 46,000 6,000
Equipment (net) 70,000 150,000 80,000
Buildings (net) 140,000 120,000 (20,000)
Bonds payable (100,000) (96,000) 4,000
Net P170,000 P245,000 P75,000
 Schedule of Determination and Allocation of Excess (Partial-goodwill)

Fair value of Subsidiary (80%)

Consideration transferred P310,000
Less: Book value of stockholders' equity of Son:
Common stock (P200.000 x 80%). 160,000
Retained earnings (P100.000 x 80%) 80,000 240,000
Allocated excess (excess of cost over book value) P70,000
Less: Over/under valuation of assets and liabilities:
Increase in inventory (P5,000 x 80%) P4,000
Increase in land (P6,000 x 80%) 4,800
Increase in equipment (P80.000 x 80%) 64,000
Decrease in buildings (P20,000 x 80%) (16,000)
Decrease in bonds payable (P4.000 x 80%) 3,200 60,000
Positive excess: Partial-goodwill (excess of cost over
Fair value) P10,000

Date of Acquisition - January 1, 20x4

The over/under valuation of assets and liabilities is summarized as follows:

Son Co. Book Value Son Co. Fair value (Over) Under Valuation
Inventory P20,000 P25,000 P5,000
Land 40,000 46,000 6,000
Equipment (net) 70,000 150,000 80,000
Buildings (net) 140,000 120,000 (20,000)
Bonds payable (100,000) (96,000) 4,000
Net P170,000 P245,000 P75,000

The buildings and equipment will be further analyzed for consolidation purposes as
follows:

Son Co. Book Value Son Co. Fair value (Over) Under Valuation
Equipment P150,000 P150,000 0
Less: Accumulated depreciation 80,000 - (80,000)
Net book value 70,000 150,000 80,000
 Son Co. Book Value Son Co. Fair value (Over) Under Valuation
Buildings P300,000 P120,000 (180,000)
Less: Accumulated depreciation 160,000 - (160,000)
Net book value 140,000 120,000 (20,000)

A summary or depreciation and amortization adjustments is as follows:

Accounts to be amortized Over/Under Life Annual Amount Current year(20x4) 20X5

Inventory P5,000 1 P5,000 P5,000 -
Subject to annual amortization
Equipment (net) 80,000 8 10,000 10,000 10000
Buildings(net) (20,000) 4 (5,000) (5,000) (5,000)
Bonds Payable 4,000 4 1,000 1,000 1,000
P11,000 P11,000 P6,000

The goodwill impairment loss of P3,125 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

Fair value of Subsidiary (100%)

Consideration transferred: Cash (80%) P310,000
Fair value of NCI (given) (20%) 77,500
Fair value of Subsidiary (100%) P387,500
Less: Book value of stockholders' equity of Son (P300,000 x 100%) 300,000
Allocated excess (excess of cost over book value) P87,500
Add (deduct): (Over) under valuation of assets and liabilities
(P75.000 x 100%) 75,000
Positive excess: Full-goodwill (excess of cost over
Fair value) P12,500

goodwill is computed as follows:

In this case, the goodwill was proportional to the controlling interest of 80% and non
controlling interest of 20% computed as follows:
The goodwill impairment loss would be allocated as follows:

Value % of Total
Goodwill impairment loss attributable to parent or controlling
Interest P2,500 80%
Goodwill applicable to NCI 625 20%
Goodwill impairment loss based on 100% fair value or full
Goodwill P3,125 100%
 The unrealized profits on January 1. and on December 31, 20x5, resulting intercompany
sales, are summarized as follows:
Downstream Sales:

Year Sales of Parent to Intercompany Merchandise Unrealized intercompany

Subsidiary in 12/31 Inventory of Profit in Ending Inventory
S Company
20x4 P125,000 P125,000X60%=P75,000 P75,000X20%=P15,000
20x5 100,000 P100,000X40%=P25,000 P80,000X25%=P20,000

Upstream Sales:

Year Sales of Parent to Intercompany Merchandise Unrealized intercompany

Subsidiary in 12/31 Inventory of Profit in Ending Inventory
S Company
20x4 P50,000 P100,000X50%=P25,000 P25,000X40%=P10,000
20x5 62,500 P100,000X40%=P25,000 P25,000X20%=P5,000

First Year after Acquisition

Parent Company Equity Method Entry
The following are entries recorded by the parent in 20x4 in relation to its investment:

January 1, 20x4:
(1) investment in Son Company 310,000
Cash 310,000
Acquisition of Son Company.
January 1, 20x4 - December 31, 20x4:
(2) Cash 24,000
Investment in Son Company (P30.000 x 80%) 24,000
Record dividends from Son Company
 Investment in Son
Cost 1/1/x4 310,000 24,000 Dividends – Son
NI of Son
(50,000x80%) 40,000 11,300 Amortization and impairment
15,000 UPEI of Son
8,000 UPEI of Perfect

Balance, 12/31/x4. 291,700

Investment Income
Amortization & Impairment 11,300 40,000 NI of Son(50,000x80%)
UPEI of Son (15,000x100%) 15,000
UPEI of Perfect (10,000x80%) 40,000

5,700 Balance, 12/31/x4

Consolidation Workpaper - First Year after Acquisition

The schedule of determination and allocation of excess presented above provides

complete guidance for the worksheet eliminating entries on January 1, 20x4:

(E1) Common stock - Son Co 200,000

Retained earnings - Son Co 100,000
Investment in Son Co. 240,000
Non-controlling interest (P300,000 x 20%) 60,000
To eliminate investment on January 120x4 and equity accounts
of subsidiary on date of acquisition and to establish non-
controlling interest in net assets of
subsidiary) on date of acquisition.
(E2) Inventory 5,000
Accumulated depreciation – equipment 80,000
Accumulated depreciation – buildings 160,000
Land 6,000
Discount on bonds payable 4,000
Goodwill 12,500
Buildings 180,000
Non-controlling interest (P75,000 x 20%) + [(P12.500, full –
P10,000, partial goodwill 17,500
Investment in Son Co 70,000
To eliminate investment on January 1, 20x4 and allocate excess of
cost over book value of identifiable assets acquired, with remainder
to goodwill and to establish non-controlling interest (in net assets of
subsidiary on date of acquisition

(E3) Cost of Goods Sold 5,000

Depreciation expense 5,000
Accumulated depreciation – buildings 5,000
Interest expense 1,000
Goodwill impairment loss 3,125
Inventory 5,000
Accumulated depreciation – equipment 10,000
Discount on bonds payable 1,000
Goodwill 3,125
To provide for 20x4 impairment loss and depreciation and
amortization on differences between acquisition date fair value and
book value of Son's identifiable assets and liabilities as follows:

Cost of Depreciation Amortization Total

Goods Sold Amortization Expense -Interest
(E4) Investment income
Investment in Son Company
Non-controlling interest (P30,000 x 20%
Dividends paid – Son
To eliminate intercompany dividends and investment income under equity method and
establish share of dividends, computed as follows:

Investment in Son
NI of Son (50,000x80%) 4,000 24,000 Dividends – Son
Amortization &
11,300 Impairment
15,000 UPEI of Son
8,000 UPEI of Perfect
18,300

Investment Income
Amortization 40,000 NI of SON
Impairment 11,300 (30,000x80%)
UPEI of Son 15,000
UPEI of Perfect 8,000
5,700

After the eliminating entries are posted in the investment account, it should be observed
that from consolidation point of view the investment account is tot eliminated. Thus, the
investment balance to be eliminated is as follows:

Investment in Son
Cost, 1/1/x4 310,000 24,000 Dividends – Son (30,000x80%)
NI of Son 11,300 Amortization & Impairment
(50,000x80%) 40,000 15,000 UPEI of Son
8,000 UPEI of Perfect
Balance, 12/31/x4 291,700 240,000 (E1) Investment, 1/1/20x4
(E4) Investment income 70,000 (E2) Investment, 1/1/20x4
And dividends 18,300
310,000 310,000
(E5) Sales 125,000
Cost of Goods Sold (or Purchases) 125,000
To eliminate intercompany downstream sales

(E6) Sales 50,000

Cost of Goods Sold (or Purchases) 50,000
To eliminate intercompany upstream sales.

(E7) Cost of Goods Sold (Ending Inventory - Income Statement) 15,000

Inventory - Balance Sheet 15,000
To defer the downstream sales - unrealized profit in ending inventory

(E8) Cost of Goods Sold (Ending Inventory - Income Statement) 10,000

Inventory - Balance Sheet 10,000
To defer the upstream sales - unrealized profit in ending inventory

(E9) Non-controlling interest in Net Income of Subsidiary 5,175

Non-controlling interest 5,175
To establish non-controlling interest in subsidiary's adjusted net
income for 20x4 as follows:

Net income of subsidiary 50,000

Unrealized profit in ending inventory of P
Company (upstream sales) (10,000)
Son Company's realized net income from
Separate operations 40,000
Less: Amortization of allocated excess [[E3) (11,000)
29,000
Multiplied by: Non-controlling interest % 20%
Non-controlling Interest in Net Income (NCINI)
- partial goodwill 5,800
Less: Non-controlling interest on impairment
loss on full-goodwill (P3.125 x 20%) or
(P3,125 impairment on full-goodwill less
P2,500, impairment on partial-goodwill) 625
Non-controlling Interest in Net Income (NCINI)
- Full goodwill P5,175
 Subsidiary accounts are adjusted to full fair value regardless of the controlling interest
percentage or option used to value non-controlling interest or goodwill.

The separate financial statements of the two companies, the eliminating entries, and the
consolidated totals for the financial statements on December 31, 20x4, are shown in
Figure 4-11.

Figure 4-11: Worksheet for Consolidated Financial Statements, December 31,

20x4. Equity Method (Full-goodwill) 80%-Owned Subsidiary
December 31, 20x4 (First Year after Acquisition)

Income statement Perfect Co. Son Co. Dr. Cr. Consolidated

Sales P400,000 P200,000 (5) 125,000 P425,000
(6) 50,000
Investment income 5,700 (4) 5,700
Total Revenue P405,700 P425,000
Cost of goods sold P170,000 P115,00 (3) 5,000 (5) 125,000 P140,000
(7) 15,000 (6) 50,000
(8) 10,000
Depreciation expense 50,000 20,000 (3) 5,000 75,000
Interest expense - - (3) 1,000 1,000
Other expenses 40,000 15,000 55,000
Goodwill impairment loss - - (3) 3,125 3,125
Total Cost and Expenses 260,000 150,000 P274,125
Net Income P145,700 P50,000 P150,875
NCI in Net Income – Subsidiary - - (9) 5,175 (5,175)
Net Income to Retained Earnings P145,700 P50,000 P145,700

Statement of Retained Earnings

Retained earnings, 1/1
Perfect Company P300,000 P300,000
Son Company P100,000 (1) 100,000
Net income, from above 145,700 50,000 145,700
Total P345,700 P150,000 P345,700
Dividends paid
Perfect Company 60,000 60,000
Son Company 30,000 (4) 30,000
Retained earnings, 12/31 to
Balance Sheet P385,700 P120,000 P385,700
Balance Sheet P194,000 P75,000 P269,000
Cash P194,000 P75,000 P269,000
Accounts receivable 75,000 50,000 125,000
Inventory 100,000 75,000 (3) 5,000 (3) 5,000
(7) 15,000
(8) 10,000 150,000
Land 175,000 40,000 (2) 6,000 221,000
Equipment 200,000 150,000 350,000
Buildings 600,000 450,000 (2) 180,000 870,000
Discount on bonds payable (2) 4,000 (3) 1,000 3,000
Goodwill (2) 12,500 (3) 3,125 9,375
Investment in Son Co 291,700 (4) 18,300 (1) 240,000
(2) 70,000
Total P1,635,700 P840,000 P1,997,375