ADVAC2

Accounting for Business Combination
Tricia Nicole G. Embelino, CPA

Table of Contents
Pages
Module 7: Consolidated Financial Statements (Part Two)
Introduction 99
Learning Outcomes 99
Lesson 1: Definition and Common Transactions of Intercompany 100
Transactions
Lesson 2: Intercompany Sale of Inventory 100
Lesson 3: Intercompany Sale of Property, Plant and Equipment (PPE) 104
Lesson 4: Intercompany Dividends 108
Lesson 5: Intercompany Bond Transaction 110
Assessment Task 7 115
Summary 117
References 118
Module 8: Consolidated Financial Statements (Part Three)

Introduction 119
Lesson 1: Goodwill Impairment 120
Lesson 2: Loss of Control 123
Lesson 3: Entity Theory 125
Summary 128
References 128
Module 9: Consolidated Financial Statements (Part Four)

Introduction 129
Lesson 1: Measurement of Investment in Subsidiary Account Other than 130
Cost
Lesson 2: Push Down Accounting 135
Summary 138
References 138
Module 10: Separate Financial Statements

Introduction 139
Learning Outcomes `139
Lesson 1: Definition of Separate Financial Statements 140
Lesson 2: Preparation of Separate Financial Statements 140
Lesson 3: Illustrative Problem 141
Summary 143
References 143
MODULE 7
CONSOLIDATED FINANCIAL STATEMENTS (PART TWO)
Introduction
This module is still in continuation for our topic regarding the preparation of consolidated
financial statements. This time, we will go through the discussion on how to eliminate
intercompany transactions that occurred between the parent and subsidiary in order to prepare
consolidated financial statements.
Learning Outcomes
After this module, the students should be able to:
1. Define intercompany transactions;

2. Illustrate the process on how to eliminate the effects of intercompany transactions; and
3. Prepare consolidated financial statements after eliminating the effects of intercompany
transactions.
99
Lesson 1. Definition and Common Transactions of Intercompany
Transactions (Millan, 2020)
Intercompany transactions are defined as transactions between a parent and a subsidiary.

In preparing consolidated financial statements, these transactions are eliminated due to the
reason that the parent and subsidiary are considered as a single reporting entity.
The following are the common intercompany transactions that are eliminated in
preparation of consolidated financial statements:
a. Intercompany sale of inventory
b. Intercompany sale of property, plant and equipment
c. Intercompany dividends
d. Intercompany bond transactions
Lesson 2. Intercompany Sale of Inventory (Millan, 2020)
Intercompany sales are either:

1. Downstream sale – the parent sells to the subsidiary
2. Upstream sale – the subsidiary sells to the parent
Proper identification of whether an intercompany sale is downstream or upstream is

essential because only upstream sales affect non-controlling interest (NCI).
The seller is the entity the recognizes profit in a sale transaction:

 Downstream sale – the parent (seller) recognizes the profit. NCI is not affected because
the profit belongs solely to the owners of the parent.
 Upstream sale – the subsidiary (seller) recognizes the profit. NCI is affected because the
profit belongs to both the owners of the parent and the NCI.
For a clear understanding and application of above accounting concepts, Millan (2020)
stated an Illustration 1 below:
Illustration 1: Intercompany sale of Inventory (Millan, 2020)
100
On January 1, 2020, X Co. acquired 80% interest in Y Inc. Information on January 1, 2020
are as follows:
 Y’s net identifiable assets have a carrying amount of P74,000 and fair value of P90,000.
The difference is due to the following:
Carrying Amount Fair Value Fair Value
Adjustment
Inventory 20,000 24,000 4,000
Equipment, net 40,000 52,000 12,000
Totals 60,000 76,000 16,000
 Equipment has a remaining useful life of six (6) years.

 ‘Proportionate share’ method of measuring NCI is used.
The following are the statement of financial position and statement of profit or loss on
December 31, 2020 (consolidation date):
Statements of Financial Position

As of December 31, 2020
X Co. Y Inc.
ASSETS
Cash 41,000 67,750
Accounts Receivable 75,000 22,000
Inventory 97,000 10,400
Investment in Subsidiary (at cost) 75,000
Equipment, net 140,000 30,000
TOTAL ASSETS 428,000 130,150
LIABILITIES AND EQUITY

Accounts Payable 73,000 30,000
Total Liabilities 73,000 30,000
Share Capital 170,000 40,000
101
Share Premium 65,000 10,000
Retained Earnings 120,000 50,150
Total Equity 355,000 100,150
TOTAL LIABILITIES AND EQUITY 428,000 130,150
Statement of Profit/Loss
For the year ended December 31, 2020
X Co. Y Inc.
Sales 330,000 150,750
Cost of Goods Sold (185,000) (96,600)
Gross Profit 145,000 54,150
Depreciation Expense (40,000) (10,000)
Distribution Costs (35,000) (18,000)
Profit for the Year 70,000 26,150
Below are thee intercompany transactions occurred in 2020:

a. X Co. sold goods costing P12,000 to Y Inc., for cash, at a markup of 40% on selling price.
Y held one-fourth of the goods at year-end.
b. X Co. acquired inventory from Y Inc. for P12,000 cash. Y Inc. uses a normal markup of
25% above its cost. X’s ending inventory included P4,000 from this purchase.
Requirement: Prepare the December 31, 2020 consolidated financial statements.
Solutions:
Step 1. Analyze the effect of Intercompany Transaction.
In the above intercompany transactions, (a) is a downstream sale because the selling
affiliate is the parent (X Co.), while (b) is an upstream sale because the selling affiliate is the
subsidiary (Y Inc.).
Unrealized gross profits in ending inventory are calculated as follows:
102
Downstream GPR on Upstream GPR on
SP SP
Sale Price (SP) (12 K / 60%) 20,000 100% SP (provided) 12,000 125%
Cost (provided) (12,000) -60% C (12 K / 125%) (9,600) 100%
Gross Profit (GP) 8,000 40% GP 2,400 25%
Multiply by: Unsold Portion ¼ Multiply by: Unsold Portion 4K/12K

Unrealized GP in EI 2,000 Unrealized GP in EI 800
Computation for the consolidated ending inventory, sales, cost of sales and gross profit
are as follows:
Ending inventory of X Co. 97,000

Ending inventory of Y Inc. 10,400
Less: Unrealized profit in ending inventory (2,000 + 800) (2,800)
Add: FVA, net 12/31/2020 0
Consolidated Ending Inventory 104,600
Sales by X Co. 330,000

Sales by Y Inc. 150,750
Less: Intercompany sale during 2020 (20,000 / 12,000) (32,000)
Consolidated sales 448,750
Cost of Sales of X Co. 185,000

Cost of Sales of Y Co. 96,600
Less: Intercompany sales during 2020 (20,000 / 12,000) (32,000)
Add: Unrealized profit in ending inventory (2,000 / 800) 2,800
Less: Realized profit in beginning inventory 0
Add: Depreciation of FVA on inventory 4,000
Consolidated cost of sales 256,400
Consolidated Gross Profit 192,350
Fair value adjustments and depreciation of FVA:
103
FVA, 1/1/2020 Useful Life Depreciation FVA, 12/31/2020
Inventory 4,000 N/A 4,000 0
Equipment 12,000 6 yrs. 2,000 10,000
Totals 16,000 6,000 10,000
Step 2: Analyze the subsidiary’s net assets

Y Inc. Jan. 1, 2020 Dec. 31, 2020 Net Change
Net assets at CA 74,000 100,150
FVA 16,000 10,000
Unrealized profit (upstream only) (800)
Net assets at FV 90,000 109,350 19,350
Note: A subsidiary recognizes profit only from upstream sales. Thus, only upstream sales affect
the subsidiary’s net assets and consequently the NCI.
Step 3. Compute for the Goodwill

Consideration Transferred (cost of the investment in subsidiary) 75,000
NCI in the acquiree (90 K x 20%) – Step 2 18,000
Previously held equity interest in the acquiree 0
Total 93,000
FVNIA (90,000)
Goodwill, 1/1/2020 3,000
Less: Accumulated impairment loss 0
Goodwill, 12/31/2020 3,000
Step 4. NCI in Net Assets

Subsidiary’s net assets at FV 12/31/2020 109,350
Multiply by: NCI percentage 20%
NCI in Net Assets 12/31/2020 21,870
Step 5. Consolidated RE
Parent’s RE 12/31/2020 120,000
Unrealized profit (Downstream sale only) (2,000)
104
Parent’s share in the net change in subsidiary’s net assets 15,480
Consolidated RE 12/31/2020 133,480
Note: Unrealized profits from upstream transactions are adjusted to the subsidiary’s net assets
while unrealized profit from downstream transactions are adjusted to the retained earnings.
Net change in Y’s net assets 19,350

Multiply by: X interest in XYZ 80%
X’s share in the net change in Y 15,480
Step 6. Consolidated Profit/Loss

Parent Subsidiary Consolidation
Profits before adjustment 70,000 26,150 96,150
Effect of intercompany transactions:
Unrealized profit (2,000) (800) (2,800)
Profit before FVA 68,000 25,350 93,350
Depreciation of FVA* (4,800) (1,200) (6,000)
Consolidated profit 87,350
* (6,000 x 80% = 4,800 share of X); (6,000 x 20% = 1,200 share of Y).
The consolidated profit attributed to the owners of the parent and NCI as follows:
Owners of parent NCI Consolidated
Parent’s profit before FVA 68,000 n/a 68,000
Share in Y’s profit before FVA** 20,280 5,070 25,350
Depreciation of FVA (4,800) (1,200) (6,000)
Totals 83,480 3,870 87,350
** (25,350 x 80% = 20,280); (25,350 x 20% = 5,070).
105
Lesson 3. Intercompany Sale of Property, Plant and Equipment
(PPE) (Millan, 2020)
Similar to intercompany sale of inventory, proper identification whether the intercompany

sale of PPE is an upstream sale or downstream sale is essential because only upstream sales
affect non-controlling interests.
The following are the accounting procedures in intercompany sale of fixed asset:
a. Gain or Loss are deferred and
a. Depreciable: Amortized over the asset’s remaining useful life
b. Non – depreciable: Not amortized
b. Asset subsequently sold to unrelated party or derecognized: unamortized balance of
deferred gain or loss is recognized in P/L.
c. Downstream Sale: Gain or loss adjusted to controlling interest only; NCI is not affected.
d. Upstream Sale: Gain or loss shared between controlling interest and NCI; NCI is affected.
e. Elimination of the unamortized balance of deferred gain or loss in preparation of
For a clear understanding and application of above accounting procedures, Millan (2020)
stated Illustration 2 below:
Illustration 2: Intercompany Sale of PPE
On January 1, 2020, X Co. acquired 80% interest in Y Inc. Information as of January 1,

2020 (acquisition date) are as follows:
Difference is due to the following:
Carrying Amount Fair Value Fair Value Adjustment
Inventory 20,000 24,000 4,000
Equipment, net 50,000 70,000 20,000
Accumulated Depreciation (10,000) (18,000) (8,000)
Totals 60,000 76,000 16,000
 Equipment’s remaining useful life is 6 years.
106
 ‘Proportionate share’ method of measuring NCI is used
The following are the statement of financial position and statement of profit or loss on
December 31, 2020 (consolidation date):

X Co. Y Inc.
ASSETS
Cash 35,000 45,000
Inventory 105,000 15,000
Investment in Subsidiary (at cost) 75,000
Accumulated Depreciation (56,000) (23,000)
TOTAL ASSETS 424,000 121,000

Total Equity 351,000 91,000
107
X Co. Y Inc.
Sales 300,000 120,000
Gain on sale of equipment 4,000 0
On January 1, 2020, X Co. (parent) sold equipment with a historical cost of P10,000 and
accumulated depreciation of P2,000 to Y Inc. (subsidiary) for a selling price of P12,000 on a cash
basis. Equipment’s remaining useful life is 4 years.
Requirement: Prepare the December 31, 2020 consolidated financial statements.
Solutions:
Step 1. Analyze the effects of intercompany transaction

The above intercompany transaction is classified as a downstream sale because X Co.
(parent) is the selling affiliate. Below are the journal entries in X and Y’s books:
X’s books Y’s books

1/1/2020 1/1/2020
Cash 12,000 Equipment 12,000
Accum.dep. 2,000 Cash 12,000
Equipment 10,000
Gain on sale 4,000
12/31/2020 12/31/2020
No entry Depreciation (12K / 4 yrs.) 3,000
Accum. Dep. 3,000
Millan (2020) stated the following effects of the above intercompany sale of PPE.
108
Because of the sale Had there been no sale Effect on combined financial
statements before
adjustments
a. X Co. recognized a gain of No gain should have been Profit is overstated by P4,000
P4,000 recognized
b. Equipment’s new cost is Equipment’s historical cost is Equipment’s cost is
P12,000 P 10,000 overstated by P2,000
c. Accum. Dep. On Jan. 1, Accum. Dep. on Jan. 1, 2020 Accum. dep. on Jan. 1, 2020
2020 is zero is P2,000 is understated by P2,000
d. Y recognized depreciation X should have recognized Depreciation is overstated by
of P3,000 in 2020. depreciation of P2,000 in 1,000. Consequently, profit is
2020. understated by P1,000.
e. Accum. Depreciation on Accum. Dep. on Dec. 31, Accum. dep. on Dec. 31, 2020
Dec. 31, 2020 is P3,000. 2020 should have been is understated by P1,000.
P4,000.
Millan (2020) stated the following consolidation journal entries to show how the effects of
intercompany sale transactions are eliminated:
CJE #1: Gain on sale of equipment 4,000

To eliminate the gain on Equipment 2,000
intercompany sale. Accum. Dep. – Jan. 1 2,000
CJE #2: Accum. dep. 1,000

To eliminate overstatement in Dep. expense 1,000
depreciation
According to Millan (2020) the consolidated amounts are calculated as follows:

Equipment at cost (190,000 + 62,000) 252,000
Overstatement (CJE #1) (2,000)
Equipment before FVA 250,000
FVA, 12/31/2020 20,000
Consolidated equipment 270,000
109
Accumulated depreciation (56,000 / 23,000) 79,000
Understatement (CJE # 1 and #2) 1,000
Accum. dep. before FVA 80,000
FVA, 12/31/2020 10,000
Consolidated accumulated depreciation 90,000
Consolidated equipment, net 180,000
Depreciation 51,000
Overstatement (CJE #2) (1,000)
Depreciation before FVA 50,000
FVA depreciation – 2020 2,000
Consolidated depreciation 52,000
Fair value adjustments and depreciation of FVA:

Equipment 20,000 6 yrs. 20,000
Accum. Dep (8,000) 2,000 (10,000)
Totals 16,000 6,000 10,000
Millan (2020) stated an alternative solution below:

Parent’s Equipment, net (190,000-56,000) 134,000
Subsidiary’s Equipment, net (62,000 – 23,000) 39,000
FVA – net, 12/31/2020 10,000
Deferred gain (3,000)
Consolidated equipment, net 180,000
Step 2: Analyze the subsidiary’s net assets

FVA 16,000 10,000
Unrealized profit (upstream only) 0
Net assets at FV 90,000 101,000 11,000
110
Consideration Transferred (cost of the investment in subsidiary) 75,000
Total 93,000
FVNIA (90,000)
Goodwill, 1/1/2020 3,000
Less: Accumulated impairment loss 0
Goodwill, 12/31/2020 3,000

Parent’s RE 12/31/2020 116,000
Deferred gain, 12/31/2020 (4,000 gain on sale x 3yrs / 4 yrs. (3,000)
Note: The amortization is done by eliminating only the unamortized balance.


Deferred gain (Step 5) (3,000) 0 (3,000)
Profit before FVA 63,000 17,000 80,000
Depreciation of FVA* (4,800) (1,200) (6,000)
111
Totals 71,800 2,200 74,000
** (17,000 x 80% = 13,600); (17,000 x 20% = 3,400).
Millan (2020) stated the following reconciliations:

Total assets of X Co. 424,000
Total assets of Y Inc. 121,000
Investment in subsidiary (75,000)
FVA – net 10,000
Goodwill – net 3,000
Effect of intercompany transaction – unamortized deferred gain (3,000)
Consolidated total assets 480,000
Total Liabilities of X Co. 73,000

Total Liabilities of Y Inc. 30,000
FVA, net 0
Effect of intercompany transaction 0
Consolidated total liabilities 103,000
Share Capital of X Co. 170,000

Share premium of X Co. 65,000
Consolidated retained earnings 121,800
Equity attributable to owners of the parent 356,800
NCI 20,200
Consolidated total equity 377,000
Lesson 4. Intercompany Dividends (Millan, 2020)
112
The standards of PFRS 9 stated that if the cost model is used in measuring the investment
in subsidiary account, dividends received are recognized in profit or loss.
On the other hand, if the equity method is used, dividends received from the subsidiary
are recorded as a deduction to the carrying amount of the investment.
In any of the above cases, the dividends must be eliminated as if the parent never receives
the dividends. Thus:
a. Cost Method: Elimination of dividend income account on the consolidated statement of
profit or loss
b. Equity Method: Add back the dividends to the investment account.
For a clear understanding, Millan (2020) stated Illustration 3 below:
Illustration 3: Consolidation – Intercompany Dividend Transaction (Millan, 2020)
Cold Co. owns 75% interest in Hot Co. On January 1, 2020, the carrying amount of Hot
Co.’s net identifiable assets were P240,000, equal to fair value. Proportionate method was used
in measuring Non-controlling interest.
In 2020, Hot Co. declared P100,000 dividends. Below is the selected information on the
entities on December 31, 2020:
Cold Co. Hot Co.
Statement of Financial Position accounts
Retained earnings 280,000 120,000
Total equity 1,080,000 320,000
Statement of profit or loss accounts

Revenues 640,000 260,000
Expenses (240,000) (128,000)
Dividend Income 75,000 0
Profit or Loss 475,000 132,000
113
Requirements: Calculate for the following
a. NCI in net assets of the subsidiary at year end.
b. Consolidated RE at year end.
c. Consolidated profit for the year broken down the amounts attributable to the owners of the
parent and attributable to noncontrolling interests.
Solutions:
Step 1: Analyze the effects of intercompany transaction.
The dividends declared by Hot Co. are allocated as follows:

(100,000 x 75% = 75,000 share of Cold Co.); (100,000 x 25% = 25,000 share of NCI)
As you can notice, the investment in subsidiary account is measured at cost due to the
recording of dividend income account in the statement of profit or loss. We will eliminate the said
dividends in Step 5 below.
In circumstances, that dividends are not yet settled, the related dividends receivable and
payable accounts will also need to be eliminated.
Step 2: Analyze the subsidiary’s net assets.

January December 31, Net
Hot Co.
1, 2020 2020 change
Net assets at carrying amts. 240,000 320,000
Fair value adjustments at acquisition date - -
Subsidiary's net assets at fair value 240,000 320,000 80,000
Step 3. Calculate for the Goodwill

We can leave out this step due to insufficiency of the provided information.

Sub.'s net assets at fair value – Dec. 31, 2020 (Step 2) 320,000
114
Total 80,000
Add: Goodwill to NCI net of accumulated impairment losses -
Non-controlling interest in net assets – Dec. 31, 2020 80,000
Step 5: Consolidated RE
Parent's retained earnings – Dec. 31, 2020 280,000
Parent's sh. in the net change in Sub.'s net assets * 60,000
Consolidated retained earnings – Dec. 31, 20x1 340,000
*₱ 80,000 Net change in subsidiary’s assets (Step 2) x 75%
Note: The P75,000 dividend income is eliminated only in profit or loss but not in retained earnings
account. This is due to the assumption that dividends did not take place, the P75,000 dividend
income would remain in the retained earnings attributable to the owners of the parent.
Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits before adjustments 475,000 132,000 607,000
Dividend income from subsidiary (75,000) 0 (75,000)
Profits before FVA 400,000 132,000 532,000
Depreciation of FVA ( - ) ( - ) ( - )
Consolidated profit 400,000 132,000 532,000

Parent's profit before FVA (Step 6) 400,000 N/A 400,000
Share in Sub.’s profit before FVA** 99,000 33,000 132,000
Depreciation of FVA (Step 6) ( - ) ( - ) ( - )
Totals 499,000 33,000 532,000
**Shares in Sub.’s profit before FVA (Step 6) – (132,000 x 75%); (132,000 x 25%)
Lesson 5. Intercompany Bond Transaction (Millan, 2020)

115
When a parent and subsidiary acquire bonds that issued by each other, both the accounts
of investment in bonds and the bonds payable are eliminated in the consolidated financial
statements.
The bonds are deemed extinguished in the group’s perspective. Thus:

a. Difference between acquisition cost of the investment in acquisition date is recognized as
gain or loss in the consolidated statement of profit or loss; and
b. Any interest expense and interest income recorded after the intercompany transaction are
eliminated in the consolidated financial statements.
Illustration:
On January 1, 2020, X Company acquired 80% interest in Y, Inc. Information as of the acquisition
date are as follows:
Inventory 20,000 24,000 4,000
Equipment, net 40,000 52,000 12,000
Totals 60,000 76,000 16,000
 X uses ‘proportionate share’ in measuring NCI.
 Goodwill of P3,000 is recognized as a result of business combination.
Information on subsequent reporting date are as follows:

X Co. Y Inc.
ASSETS
Cash 23,000 44,000
Inventory 105,000 15,000
116
Investment in Subsidiary (at cost) 75,000 0
Investment in Bonds 0 13,000
TOTAL ASSETS 418,000 124,000

Bonds Payable (at face amount) 30,000
Total Equity 345,000 94,000
X Co. Y Inc.
Sales 300,000 120,000
Interest Expense (3,000) 0
Interest Income 0 2,000
 On January 1, 2020, Y, Inc. acquired 50% of the outstanding bonds of X Co. from the open
market for P12,500. Y measured the bonds at amortized cost and record P2,000 interest
income in 2020, including bond discount amortization.
117
Required: Compute for the consolidated amounts needed to prepared the December 31, 2020
Solutions:
Step 1. Analyze the effects of intercompany transaction.
Elimination of the intercompany transaction is as follows:

a. As discussed earlier, when the parent and subsidiary acquired bonds issued by each
other, the acquired bonds are deemed extinguished. Thus, in the example above, from
the date Y (subsidiary) made the purchase of a portion of the bonds, the acquired bonds
are deemed extinguished. The gain or loss on extinguishment is calculated as follows:
CA of the bonds payable acquired (30,000 x 50%) 15,000
Acquisition cost of bonds (12,500)
Gain on extinguishment of bonds 2,500
A gain is recognized due to the settlement of the liability at lower price.
b. Both interest income recorded by Y in the amount of P2,000 and the interest expense
recorded by X relating to the bonds acquired by Y in the amount of P1,500 (P3,000 x 50%)
are eliminated.
In case the accrued interest is not yet paid (received), the related account of interest
payable and interest receivable is eliminated.
Step 2. Analyze the subsidiary’s net assets.

FVA 16,000 10,000
Interest income (2,000)
Net assets at FV 90,000 102,000 12,000

Equipment 12,000 6 yrs. 2,000 10,000
Totals 16,000 6,000 10,000
118
The amount recognized as goodwill is given in the problem in the amount of P3,000.

Parent’s RE 12/31/2020 110,000
Interest expense 1,500
Gain on extinguishment of bonds 2,500
Note: Gain on extinguishment of bonds is attributed solely too the parent because the parent is
the issuer. In case the subsidiary is the issuer, the gain or loss is attributed to both the parent and
the NCI.


Interest income (2,000) (2,000)
Interest expense 1,500 1,500
Gain on extinguishment 2,500 2,500
Profits before FVA 64,000 18,000 82,000
119
Totals 73,600 2,400 76,000
Reconciliation using formulas are as follows:

Total assets of X Co. 418,000
Total assets of Y Inc. 124,000
Investment in subsidiary (75,000)
FVA, net 10,000
Goodwill – net 3,000
Effect of intercompany transaction – (Investment in bonds) (13,000)
Consolidated total assets 467,000
Total liabilities of X Co. 73,000

Total liabilities of Y Co. 30,000
FVA, net 0
Effect of intercompany transaction – (Investment in bonds) (15,000)
Consolidated total liabilities 88,000
Share Capital of X Co. 170,000

Share premium of X Co. 65,000
Consolidated RE 123,600
Total attributable to owners of the parent 358,600
NCI 20,400
Consolidated total equity 379,000
120
Assessment Task 7 (Millan, 2020)
Problem 1
Dream Co. owns 75% interest in Theater Co. The following transactions occurred during the year:
a. Dream Co. sold goods costing P20,000 to Theater Co. for P38,000. Theater Co. held
P9,500 of these goods in its ending inventory.
b. Theater Co. sold goods to Dream Co. for P40,000. The gross profit rate is 20% based on
sale price. Dream Co. sold one-fourth of the goods to unrelated parties during the year.
The individual statements of profit or loss of the entities during the year show the following
information:
Dream Co. Theater Co.
Sales 1,000,000 700,000
Cost of Sales (400,000) (350,000)
Gross Profit 600,000 350,000
The entities held the following inventories at year-end:

Dream Co. Theater Co.
Ending inventory 300,000 80,000
Requirement: Compute for the following:

a. Consolidated sales
b. Consolidated cost of sales
c. Consolidated ending inventory
Problem 2
On January 1, 20x1, Bright Co. acquired 75% interest in Dull Co. for P180,000. On this date, the
carrying amount of Dull’s net identifiable assets was P160,000, equal to fair value. Noncontrolling
interest was measured using the proportionate share method.
The financial statements of the entities on December 31, 20x1 show the following information:
121
Bright Co. Dull Co.
ASSETS
Investment in Subsidiary (at cost) 180,000 0
Equipment-net 400,000 190,000
Other assets 200,000 45,000
TOTAL ASSETS 780,000 235,000
LIABITIES AND EQUITY

Liabilities 70,000 25,000
Total equity 710,000 210,000
TOTAL LIABILITIES 780,000 235,000
Bright Co. Dull Co.

Revenues 300,000 80,000
Other Expenses (32,000) (18,000)
Gain on sale of equipment 12,000 0
Profit for the year 240,000 50,000
Additional information:
 No dividends were declared by either entity during 20x1. There is also no impairment of
goodwill.
 However, on January 1, 20x1, right after the business combination, Bright Co. sold
equipment with historical cost of P120,000 and accumulated depreciation of P72,000 to
Dull Co. for P60,000. Bright Co. had been depreciating this equipment over a useful life of
10 years using the straight-line method. Dull Co. decided to continue this accounting policy
and depreciate the equipment over its remaining useful life of 4 years.
Requirement:
122
a. What is the carrying amount of the equipment sod by Bright Co. to Dull Co. in the
consolidated financial statements?
b. How much is the consolidated Equipment – net?
c. How much is the consolidated Depreciation expense?
Problem 3
On January 2, 2020, Pare Co. acquired 75% of Kidd Co’s outstanding common stock. On the
acquisition date, the book outstanding common stock. On the acquisition date, the book value of
Kidd’s assets and liabilities equaled their fair values. Noncontrolling interest was measured using
the proportionate share method. Selected balance sheet data at December 31, 2020 is as follows:
Pare Kidd
Total assets 420,000 180,000

Common stock 100,000 50,000
Total liabilities and equity 420,000 180,000
During 2020, Pare and Kidd paid cash dividends of P25,000 and P5,000 respectively, to their
shareholders. There were no other intercompany transactions.
Questions:
3.1 In the December 31, 2020 consolidated balance sheet, what amount should be reported as
non-controlling interest in net assets?
a. 0 c. 45,000
b. 30,000 d. 105,000
3.2 In the December 31, 2020 consolidated balance sheet, what amount should be reported as
common stock?
a. 50,000 c. 137,500
b. 100,000 d. 150,000
123
3.3 In the December 31, 2020 consolidated statement of retained earnings, what amount should
be reported as dividends paid?
a. 5,000 c. 26,250
b. 25,000 d. 30,000
Summary (Millan, 2020)
 Intercompany sale of inventory
Sale price of intercompany sale in the current year xx

Cost of intercompany sale in the current year (xx)
Profit from intercompany sale in current year xx
Multiply by: Unsold portion of inventory as of year-end xx%
Unrealized gross profit in ending inventory – current year xx
Sale price of intercompany sale in the prior year xx

Cost of intercompany sale in the prior year (xx)
Profit from intercompany sale in prior year xx
Multiply by: Unsold portion of inventory as of beginning of the year xx%
Realized gross profit in beginning inventory – current year xx
Ending inventory of Parent xx

Ending inventory of Subsidiary xx
Less: Unrealized profit in ending inventory (xx)
Consolidated ending inventory xx
Sales of Parent xx
Sales of Subsidiary xx
Less: Intercompany sales during the current period (xx)
124
Consolidated sales xx
Cost of sales of Parent xx

Cost of sales of Subsidiary xx
Less: Intercompany sales during the current period (xx)
Add: Unrealized profit in ending inventory xx
Less: Realized profit in beginning inventory (xx)
Add: Depreciation of fair value adjustment (FVA) on inventory xx
Consolidated cost of sales xx
 Intercompany sale of PPE

The unamortized deferred gain or loss is eliminated when consolidated financial
statements are prepared
 Intercompany dividends
If the parent recognized the dividend as dividend income, the dividend income is
eliminated from the consolidated profit or loss.
 Intercompany bond transaction

The bonds are considered extinguished. A gain or loss is recognized in the
Reference
Millan, Z.V. B. (2020). Accounting for Business Combinations. Baguio City. Bandolin
Enterprises
125
MODULE 8
CONSOLIDATED FINANCIAL S
TATEMENTS-PART THREE
Introduction
This module is still in continuation for our topic regarding the preparation of
consolidated financial statements. This time, we will go through the discussion on how to
account in case there is a recognized impairment of goodwill. Also, we will cover how to record
transactions involving deconsolidation or in ‘loss of control’ of the parent company to its
subsidiary. Lastly, we will discuss the “entity theory” which is the basis of current consolidation
standards (Millan, 2020).
Learning Outcomes

1. Account for the effects of impairment of goodwill on the consolidated financial
statements;
2. Determine the effects of changes in ownership interest that; and
a. Results in loss of control and
b. Does not result in loss of control
3. Explain the ‘entity theory’ as the basis on consolidation.
126
Lesson 1. Goodwill Impairment (Millan, 2020)
Measurement of NCI Goodwill is attributed to: Impairment of Goodwill is

attributed to:
a. Proportionate Share Owners of the parent Owners of the parent
Method
b. Fair Value Method Both the owners of the Both the owners of the parent
parent and NCI and NCI
To illustrate the accounting concepts above, see the example below:

On January 1, 2020, X acquired 80% interest in Y, Inc. by the issuance of 5,000 shares at a
fair value of P15 per share. Information as of acquisition date (January 1, 2020) are as
follows:
 Y identifiable net assets is at a carrying amount of P74,000 and a fair value of
P90,000. The following is the reason for the difference:
Inventory 20,000 24,000 4,000
Equipment, net 40,000 52,000 12,000
Totals 60,000 76,000 16,000

 X measured the investment in subsidiary at cost
Information subsequent to reporting date are as follows:

X Co. Y Inc.
Total assets 418,000 124,000
Total liabilities 73,000 30,000
Share capital 170,000 40,000
Share premium 65,000 10,000
Total equity 345,000 94,000
127
 No intercompany transactions during the year. However, the goodwill is determined
impaired by P1,000.
Requirement: Compute for the consolidated amount needed in consolidated financial

statements under the assumption of:
 Case 1: NCI is measured using proportionate share method
 Case 2: NCI is measured at fair value. The NCI’s fair value on acquisition date is
P18,750.
Solutions:
Step 1. Analyze the effects of intercompany transactions
Not applicable, there are no intercompany transaction recorded during the year.
Step 2. Analyze the subsidiary’s net assets.

FVA 16,000 10,000
Net assets at FV 90,000 104,000 14,000
FVA, 1/1/2020 Useful Life Depreciation FVA,

12/31/2020
Equipment 12,000 6 yrs. 2,000 10,000
Totals 16,000 6,000 10,000
Case 1. Using Proportionate Share Method:

Consideration Transferred (5,000 sh x P15) 75,000
128
Total 93,000
FVNIA (90,000)
Goodwill, 1/1/2020 3,000
Less: Accumulated impairment losses since acquisition date (1,000)
Goodwill, 12/31/2020 2,000
Case 2. Using Fair Value Method:

Consideration Transferred (5,000 sh x P15) 75,000
Less: Previously held equity interest in the acquiree 0
Total 75,000
Less: Parent’s proportionate share in net assets of subsidiary (90K x (72,000)
80%)
Goodwill attributable to the owners of the parent, 1/1/2020 3,000
Less: Parent’s share in goodwill impairment (P1,000 x 80%) (800)
Goodwill attributable to owners of the parent, 12/31/2020 2,200
FV of NCI (provided) 18,750

Less: NCI proportionate share in net assets of subsidiary (90K x 20%) (18,000)
Goodwill attributable to NCI, 1/1/ 2020 750
Less: NCI’ share in goodwill impairment (P1,000 x 20%) (200)
Goodwill attributable to NCI, 12/31/2020 550
Goodwill, net – December 31, 2020 2,750

Case 1: Case 2:
Subsidiary’s net assets at FV 12/31/2020 104,000 104,000
Multiply by: NCI percentage 20% 20%
NCI in Net Assets 12/31/2020 20,800 20,800
Add: Goodwill attributable to NCI – 12/31/2020 0 550
NCI in net assets – 12/31/2020 20,800 21,350
129
Case 1: Case 2:
Parent’s RE 12/31/2020 110,000 110,000
Parent’s share in the net change in subsidiary’s net 11,200 11,200
assets (14,000 x 80%)
Impairment loss on goodwill attributable to parent (1,000) (100)
Consolidated RE 12/31/2020 120,200 120,400

Profits of X and Y (60K +20K) 80,000
Depreciation of FVA (6,000)
Impairment of Goodwill (1,000)
Case 1: Owners of parent NCI Consolidated
Impairment of goodwill (1,000) (1,000)
Totals 70,200 2,800 73,000
Case 2: Owners of parent NCI Consolidated

Impairment of goodwill (800) (200) (1,000)
Totals 70,400 2,600 73,000
Reconciliation using formulas are as follows:
130
Case 1: Case 2:
Total assets of X Co. 418,000 418,000
Total assets of Y Inc. 124,000 124,000
Investment in subsidiary (75,000) (75,000)
FVA, net 10,000 10,000
Goodwill – net 2,000 2,750
Consolidated total assets 479,000 479,750
Case 1: Case 2:
Total liabilities of X Co. 73,000 73,000
Total liabilities of Y Co. 30,000 30,000
Consolidated total liabilities 103,000 103,000
Case 1: Case 2:
Share Capital of X Co. 170,000 170,000
Share premium of X Co. 65,000 65,000
RE 120,200 120,400
Total attributable to owners of the parent 355,200 355,400
NCI 20,800 21,350
Consolidated total equity 376,000 376,750
Lesson 2. Loss of Control (Millan, 2020)
Parent can lose control of its subsidiary through with or without change in absolute or
relative ownership levels and with without the investor being involve. Examples are:
a. Without a change in the parent’s ownership interest – control is lost when the
subsidiary becomes subject to the control of the government, court, administrator or
regulator, or as a result of contractual agreement.
b. Without parents being involved – when the decision-making rights previously granted
to the parent have elapsed.
c. Control is lost if the parent ceases to be entitled to receive returns.
d. Control is lost is the parent’s previous status as principal changes to an agent
131
The following are procedures performed when a parent loses control over its subsidiary:
a. Derecognize all the assets and liabilities of the former subsidiary from the
consolidated statement of financial position.
b. Recognize any investment retained in the former subsidiary at its fair value at the
date of control is lost and subsequently account for the investment in accordance
with relevant PFRs.
c. Recognize the gain or loss associated with the loss of control in profit or loss. This is
attributed to the former controlling interest
The gain or loss on disposal of controlling interest is calculated as follows:

Consideration received (at FV) xxx
Investment retained in the former subsidiary (at FV) xxx
NCI (carrying amount) xxx
Total xxx
Less: Former subsidiary’s net identifiable asset (carrying amount) (xxx)
Goodwill (carrying amount) (xxx)
Gain or loss on disposal of controlling interest xxx
OR
Cash or other assets (consideration received) xxx
Investment account (investment retained) xxx
NCI xxx
Liabilities of former subsidiary xxx
Assets of former subsidiary xxx
Goodwill xxx
Gain on disposal of controlling interest (squeeze) xxx
Lesson 3. Derecognition of Other Comprehensive Income
Loss of control results to derecognition of the amounts previously recognized in other

comprehensive income such as:
Type of OCI Accounting
a. Revaluation surplus Directly in equity
132
b. Actuarial gains or loss on defined benefits plans Directly in equity
c. Unrealized gains or losses on foreign operations Directly in equity
d. Translation gains or loss in foreign operations Profit or loss
e. Effective portion of cash flow hedge Profit or loss
Illustration:
On January 1, 2020, X Co. acquired 80% interest in Y Inc. On this date, Y’s identifiable net
assets has a fair value of P90,000. NCI is measured using proportionate share method.
Goodwill of P3,000 is recognized as a result of business combination.
During the year 2020, Y’s net assets increased by P13,000 after the fair value adjustments.
The details of the recorded increase is as follows:
Net Changes (at fair value) – Jan. 2020 90,000

Subsequent changes:
Profit or loss after fair value adjustments 10,000
Other comprehensive income:
Gain on property revaluation 2,000
Gain on translation of foreign operation 1,000
Increase in net assets in 2020 13,000
Net assets (at fair value) – Dec. 31, 2020 103,000
NCI in net assets are updated as follows:

NCI 1/1/2020 (90,000 x 20%) 18,000
NCI’s share in net assets (13,000 x 20%) 2,600
NCI 12/31/2020 20,600
The following comprises the accumulated OCI attributable to the owners of the parent in the
consolidated financial statements:
Gain on property revaluation (P2,000 x 80%) 1,600
Gain on translation of foreign operation (P1,000 x 80%) 800
Consolidated other components of equity – 12/31/2020 2,400
133
On January 1. 2021, X Co. sells 60% out of its 80% interest in Y Inc. for P100,000. X’s
remaining 20% interest in Y has a fair value of P25,000. This does not give X significant
influence over Y.
Required:
1. Compute for the gain or loss on disposal of ownership interest
2. Prepare the deconsolidation journal entries for the accumulated OCI in the
consolidated financial statements
Solutions:
Requirement #1:
Consideration received (at FV) 100,000
Investment retained in the former subsidiary (at FV) 25,000
NCI (carrying amount) 20,600
Total 145,600
Less: Former subsidiary’s net identifiable asset (carrying amount) (103,000)
Goodwill (carrying amount) (3,000)
Gain or loss on disposal of controlling interest 39,600
Requirement #2:
Transaction Deconsolidation Journal Entries

1. Transfer directly retained Revaluation surplus 1,600
earnings the parent’s share in the Retained Earnings – X Co. 1,600
subsidiary’s revaluation surplus
2. Record the reclassification Cumulative exchange difference 800

adjustment of parent’s share in Gain on translation (profit or 800
cumulative gain on translation of loss)
foreign operation
134
 The total effect of the sale transaction on profit or loss is as follows:
Gain on disposal of controlling interest 39,600
Gain on translation 800
Total effect on profit or loss 40,400
Lesson 3. Entity Theory of Consolidation (Millan, 2020)
This theory is also based on "control." Advocates of this concept believe that the parent
and the subsidiary are members of a group (the consolidated entity). Therefore, consolidated
financial statements should be prepared from the viewpoint of the group.
All of the subsidiary's net identifiable assets are included in the consolidated financial
statements, irrespective of the parent's ownership interest in the subsidiary. Accordingly, NCI
is included in the consolidated financial statements within equity but separate from the equity
of the owners of the parent.
Unique characteristics of the entity theory are as follows:

i. 100% of the subsidiary’s net identifiable assets are included in the consolidated
financial statements at carrying amounts plus the total FVA at the acquisition date.
ii. NCI is measured at either proportionate share or fair value and presented in the
consolidated financial statements within equity but separate from the equity of the
owners of the parent.
iii. Goodwill pertains to both the owners of the parent and NCI (also called 'full goodwill'),
particularly when NCI is measured at fair value.
iv. Consolidated profit combines the parent's and subsidiary's profits in total, irrespective
of the parent's ownership interest in the subsidiary. The consolidated profit is then
attributed to the (a) owners of the parent and (b) NCI. Similar treatment is made for
comprehensive income. In other words, consolidated profit or comprehensive income
pertains to both the owners of the parent and NCI.
v. Unrealized gains and losses from upstream sales are eliminated in full.
The current standards required the use of entity theory.
135
Assessment Task 8
Part 1. Multiple Choice – Theories

1. If noncontrolling interest is measured at ‘proportionate share’,
a. There is goodwill attributable to NCI
b. There is no goodwill attributable to NCI
c. There is an indirect holding adjustment
d. The computation of goodwill would be very complex
2. Which of the following statements is correct?
a. Consolidation begins when control is obtained and ceases when control is lost
b. Consolidation begins at the earliest comparative period presented if business
combination occurred during the current period
c. Consolidation begins when there is no non-controlling interest left in the
subsidiary.
d. None of these
3. If the parent’s ownership interest in a subsidiary changes but control is not lost, the
change
a. Is accounted for as a gain or loss transaction
b. Is accounted for retrospectively
c. Is accounted for as equity transaction
d. Is not accounted for
4. When a parent loses control over a subsidiary, the parent shall
a. Derecognized the net identifiable assets of the former subsidiary from the
consolidated financial statements and shall recognize the gain or loss
associated with the loss of control attributable to the former controlling interest.
b. Restate the consolidated financial statements presented in previous years
c. Derecognize the net identifiable assets of the former subsidiary from the
consolidated financial statements and shall recognize the gain or loss directly
within equity
d. B and C
5. When a parent-subsidiary relationship exists, consolidated financial statements are
prepared in recognition of accounting concepts of:
136
a. Reliability
b. Materiality
c. Economic entity
d. Legal entity
Part 2. Problem Solving

Problem 1
Rubber Co. owns 75% interest in Plastic, Inc. The statements of financial position of the
entities in January 1, 20x1 are shown below:
Rubber Co. Plastic Inc. Consolidated
Investment in 112,500 0 0
Susidiary
Other Assets 514,500 186,000 709,500
Goodwill 0 0 12,000
TOTAL ASSETS 627,000 186,000 721,500
Accounts Payable 109,500 45,000 154,500
Share capital 352,500 75,000 352,500

Retained earnings 165,000 66,000 177,000
Equity attributable to the owners of parent 529,500
NCI 37,500
Total Equity 517,500 141,000 567,000
TOTAL LIABILITIES 627,000 186,000 721,500

AND EQUITY
1.1 On January 1, 20x2, Rubber Co. acquired the remaining 25% interest in Plastic Inc. for
P80,00. How much is the gain or loss on the acquisition to be recognized in the consolidated
financial statements?
a. 42,500
b. (42,500)
137
c. (17,500)
d. 0
1.2 On January 1, 20x2 Rubber Co. acquired the remaining 25% interest for P100,000. NCI
were measured using the proportionate share method. How much is NCI in net assets of the
acquiree in the consolidated financial statements prepared immediately after the acquisition?
a. 42,500
b. 37,500
c. 25,000
d. 0
1.3 On January 1, 20x2, Rubber Co. acquired additional 20% interest for P100,000. NCI were
measured using the proportionate share method. How much is NCI in net assets of the
acquiree in the consolidated financial statements prepared immediately after the acquisition?
a. 37,500
b. 30,000
c. 7,500
d. 0
1.4 On January 1, 20x2, Rubber Co. acquired additional 20% interest for P100,000. NCI were
measured using the proportionate share method. How much is the consolidated retained
earnings immediately after the acquisition?
a. 70,000
b. 107,000
c. 130,000
d. 137,500
1.5 On January 1, 20x2, Rubber Co. sold 60% out of its 75% interest in Plastic Inc for
P120,000. The sale resulted to loss of control. The remaining interest is classified as held for
trading. How much is the gain or loss on the sale?
a. 25,500
b. 37,500
c. 48,500
d. 137,50
Summary
 Impairment of goodwill is
138
a. Attributed to the parent only, if NCI is measured at proportionate share
b. Attributed to both the parent and NCI, if NCI is measured at fair value.
 A change in the parent’s ownership interest in the subsidiary that:
a. Does not result to loss of control is accounted for as equity transaction
b. Results to loss of control is accounted for as deconsolidation
 The gain or loss on deconsolidation is calculated as follows:
Consideration received (at FV) xxx
Investment retained in the former subsidiary (at FV) xxx
NCI (carrying amount) xxx
Total xxx
Less: Former subsidiary’s net identifiable asset (carrying amount) (xxx)
Goodwill (carrying amount) (xxx)
Gain or loss on disposal of controlling interest xxx
OR
Cash or other assets (consideration received) xxx
Investment account (investment retained) xxx
NCI xxx
Liabilities of former subsidiary xxx
Assets of former subsidiary xxx
Goodwill xxx
Gain on disposal of controlling interest (squeeze) xxx
Reference
Enterprises
139
MODULE 9
CONSOLIDATED FINANCIAL
STATEMENTS - PART FOUR
Introduction
This module is the last part of our discussion in consolidated financial statements. In
here, we will cover the topic regarding measuring the investment in subsidiary account using
other measurement basis aside from measuring ‘at cost’. Also, we will tackle a simple
discussion regarding ‘push-down accounting’.
Learning Outcomes
1. Prepare consolidated financial statements wherein the investment in subsidiary is

measured at other than cost.
2. Define ‘push down accounting.’
Lesson1. Measurement of Investment in Subsidiary Account

Other than Cost (Millan, 2020)
Initially, investment in subsidiary are measured equal to the value assigned to the
consideration transferred at the acquisition date and subsequently measured either:
a. At cost
b. In accordance with PFRS 9 Financial Instruments or
c. Using equity method
140
Illustration: Investment in Subsidiary is measured at Fair Value
On January 1, 2020, X acquired 80% interest in Y Inc. for P75,000. Information on acquisition
 Y’s net identifiable assets are at carrying amount of P74,000 and fair value of P90,000.

Inventory 20,000 24,000 4,000
Equipment, net 40,000 52,000 12,000
Totals 60,000 76,000 16,000

 X measured the NCI using proportionate method
Information on subsequent reporting date:

X Co. Y Inc.
ASSETS
Investment in subsidiary (at FV) 100,000
Other assets 343,000 124,000
TOTAL ASSETS 443,000 124,000
LIABILITIES and EQUITY

TOTAL LIABILITIES and EQUITY 443,000 124,000

Compute for the consolidated amounts needed on consolidated financial statements on
December 31, 2020.
141
Solutions:
Step 1. Analyze the effects of fair value measurement.

Initial cost of investment (consideration transferred) 75,000
Carrying amount of investment – Dec. 31 (fair value) 100,000
Unrealized gain recognized in profit or loss 25,000
Eliminate the unrealized gain from the following:
a. Carrying amount of investment in subsidiary;
b. Consolidated RE; and
c. Consolidated Profit or Loss
Step 2. Analyze the subsidiary’s net assets

FVA 16,000 10,000
Net assets at FV 90,000 104,000 14,000

Equipment 12,000 6 yrs. 2,000 10,000
Totals 16,000 6,000 10,000
Consideration Transferred 75,000

Total 93,000
FVNIA (90,000)
Goodwill, 1/1/2020 3,000
Less: Accumulated impairment losses 0
Goodwill, 12/31/2020 3,000

142
Parent’s RE 12/31/2020 135,000
(14,000 x 80%)
Unrealized gain on change in fair value (25,000)

Profits of X and Y (85K +20K) 105,000
Unrealized gain on change in fair value (25,000)
Share in Y’s profit before FVA* 16,000 4,000 20,000
Depreciation of FVA** (4,800) (1,200) (6,000)
Unrealized gain on change in fair value (25,000) n/a (25,000)
Totals 71,200 2,800 74000
*(20,000 x 80% = 16,000) ; (20,000 x 20% = 4,000)
**(6,000 x 80% = 4,800 share of X); (6,000 x 20% = 1,200 share of Y).
ASSETS
Investment in subsidiary (Eliminated) 0
Other assets (343,000 +124,000 +10,000 FVA net) 477,000
Goodwill 3,000
TOTAL ASSETS 480,000

Liabilities (73,000 + 30,000) 103,000
Share capital (Parent only) 235,000
143
Retained earnings (Parent only) 121,200
Owners of parent 356,200
NCI 20,800
Total equity 377,000
TOTAL LIABILITIES AND EQUITY 480,000
Illustration: Investment in Subsidiary – Equity Method

On January 1, 2020, X acquired 80% interest in Y Inc. for P75,000. Information on acquisition
 Y’s net identifiable assets are at carrying amount of P74,000 and fair value of P90,000.
Inventory 20,000 24,000 4,000
Equipment, net 40,000 52,000 12,000
Totals 60,000 76,000 16,000

 X measured the NCI using proportionate method
Information on subsequent reporting date:

X Co. Y Inc.
ASSETS
Investment in subsidiary (equity method) 100,000
Other assets 343,000 124,000
TOTAL ASSETS 443,000 124,000
LIABILITIES and EQUITY

TOTAL LIABILITIES and EQUITY 429,200 124,000
144
Revenues 180,000 100,000
Net share in profit of Y Inc. 11,200 0
Expenses (120,000) (80,000)
Compute for the consolidated amounts needed on consolidated financial statements on

December 31, 2020.
Step 1. Analyze the effects of equity method
Under the equity method, the investment is initially measured at cost and subsequently
adjusted for changes in equity of the investee and depreciation of any undervaluation or
overvaluation in the identifiable assets and liabilities of the investee. Dividends received from
the investee are not recognized as income but as a deduction of the carrying amount of the
investment.
Below is the T-account used to analyze the relevant accounts are as follows:
Investment in Subsidiary
Initial cost 75,000
Share in profit of Y Inc* 16,000 0 Dividends received
Share in the
amortization of
undervaluation of
4,800 assets**
86,200 Dec. 31, 2020
*(20,000 x 80% = 16,000)
**(6,000 x 80% = 4,800)
 The FVA are determined as follows:

FVA, 1/1/2020 Useful Life Depreciation FVA,
12/31/2020
145
Equipment 12,000 6 yrs. 2,000 10,000
Totals 16,000 6,000 10,000
Net share in the profit of

Y Inc.
16,000 Share in profit of Y Inc
Share in the 4,800
amortization of
undervaluation of
assets
11,200
Step 2. Analyze the subsidiary’s net assets

FVA 16,000 10,000
Net assets at FV 90,000 104,000 14,000
Consideration Transferred 75,000

Total 93,000
FVNIA (90,000)
Goodwill, 1/1/2020 3,000
Less: Accumulated impairment losses 0
Goodwill, 12/31/2020 3,000

146
Parent’s RE 12/31/2020 121,200
Parent’s share in the net change in subsidiary’s net 11,200
assets (14,000 x 80%)
Less: Net share in profit of subsidiary (11,200)
Add: Dividend received from subsidiary 0

Profits of X and Y (71.2K +20K) 91,200
Net share in profit of subsidiary (11,200)
Share in Y’s profit before FVA* 16,000 4,000 20,000
Depreciation of FVA** (4,800) (1,200) (6,000)
Net share in profit of subsidiary (11,200) n/a (11,200)
Totals 71,200 2,800 74,000
*(20,000 x 80% = 16,000); (20,000 x 20% = 4,000)
**(6,000 x 80% = 4,800 share of X); (6,000 x 20% = 1,200 share of Y).
ASSETS
Investment in subsidiary (Eliminated) 0
Other assets (343,000 +124,000 +10,000 FVA net) 477,000
Goodwill 3,000
TOTAL ASSETS 480,000

Liabilities (73,000 + 30,000) 103,000
Share capital (Parent only) 235,000
Retained earnings (Parent only) 121,200
147
Owners of parent 356,200
NCI 20,800
Total equity 377,000
TOTAL LIABILITIES AND EQUITY 480,000
Regardless of measurement basis used to recognized the investment in subsidiary

account, the consolidated accounts result to the same amounts. This is due to the elimination
of the effects of its measurement basis and the investment in subsidiary account.
Lesson 2. Push Down Accounting (Millan, 2020)
In our previous illustrations, we assigned the fair adjustments (FVA) to the subsidiary's
net identifiable through consolidation computations (or consolidation entries) which are not
recorded in the separate books of either the subsidiary or the parent.
Another approach to assigning FVA to a subsidiary's identifiable assets is push-down

accounting. Under this approach, FVA are directly recorded in the subsidiary's books
Therefore, FVA are reflected in the subsidiary's individual financial statements. In other words,
FVA are "pushed down" to the subsidiary's statements. This procedure makes the
consolidation process simplified.
Authoritative status of push-down accounting SEC in the U.S
The SEC in the U.S.

a. Requires push-down accounting if a subsidiary is "substantially wholly-owned, " i.e.,
parent's ownership interest is at least 95%;
b. Encourages push-down accounting if a parent's ownership interest is 80% to less than-
95%; and
c. Prohibits push-down accounting if a parent's ownership interest is less than 80%.
But, if the subsidiary has outstanding public debt or preference shares, the U.S. SEC
encourages, but does not require, the use of push down accounting.
148
It should be noted though that the PFRSs do not address push-down accounting.
Neither does the Philippine SEC require the use of the push-down accounting.
Assessment Task 9
Problem 1
On January 1, 2020 Owen Corp. acquired all of Sharp Corp.’s common stock for
P1,200,000. On that date, the fair values of Sharp assets and liabilities equaled their
carrying amounts of P1,320,000 and P320,000, respectively. During 2020, Sharp paid cash
dividends of P20,000. Selected information from the separate balance sheets and income
statements of Owen and Sharp as of December 31, 2020 and for the year then ended as
follows:
Owen Sharp
Balance sheet accounts:
Investment in subsidiary (equity method) 1,300,000 0
Retained earnings 1,240,000 540,000

Total equity 2,620,000 1,100,000
Income statement accounts

Operating income 420,000 200,000
Equity in retained earnings of Sharp 120,000 0
Net income 400,000 120,000
In Owen’s December 31, 2020, consolidated balance sheet, what amount should be
reported as total retained earnings?
a. 1,240,000
b. 1,360,000
149
c. 1,380,000
d. 1,800,000
Problem 2:
On January 1, 2020, Dallas Inc. acquired 80% of Style, Inc.’s outstanding common stock.
On that date, the carrying amounts of Style’s assets and liabilities approximated their fair
values. NCI was measured using the proportionate share method.
During 2020, Style paid P5,000 cash dividends to its stockholders. Summarized balance
sheet information for the two companies follows:
Dallas Style
12.31.2020 12.31.2020 1.1.2020
Investment in Style (equity method) 132,000
Other Assets 138,000 115,000 100,000
Totals 270,000 115,000 100,000
Common Stock 50,000 20,000 20,000

Additional Paid in Capital 80,250 44,000 44,000
Retained earnings 139,750 51,000 36,000
Totals 270,000 115,000 100,000
2.1 What amount should Dallas report as earnings from subsidiary, in its 2020 income
statement?
a. 12,000
b. 15,000
c. 16,000
d. 20,000
2.2 How much is the acquisition cost of the investment on January 1, 2020?
a. 120,000
b. 132,000
c. 150,000
150
d. 160,000
2.3 How much is the goodwill on the business combination?
a. 20,000
b. 22,000
c. 32,000
d. 40,000
2.4 How much is the NCI in net assets of Style on December 31, 2020?
a. 20,000
b. 23,000
c. 26,000
d. None of these
2.5 How much is the consolidated retained earnings on December 31, 2020?
a. 190,750
b. 139,750
c. 51,000
d. 36,000
2.6 How much is the total assets in the consolidated statement of financial position as of
December 31, 2020?
a. 293,000
b. 280,000
c. 270,000
d. 253,000
2.7 What amount of equity attributable to the owners of the parent should be reported in
Dallas’ December 31, 2020, consolidated statement?
a. 270,000
b. 286,000
c. 293,000
d. 385,000
151
Summary
 Investment in subsidiary are measured equal to the value assigned to the

consideration transferred at the acquisition date and subsequently measured either:
a. At cost
c. Using equity method
 Another approach to assigning FVA to a subsidiary's identifiable assets is push-down

accounting. Under this approach, FVA are directly recorded in the subsidiary's books
Therefore, FVA are reflected in the subsidiary's individual financial statements. In other
words, FVA are "pushed down" to the subsidiary's statements. This procedure makes
the consolidation process simplified.
Reference
Enterprises
152
MODULE 10
SEPARATE FINANCIAL STATEMENTS
Introduction
Standards of PAS 27 Separate Financial Statements sets out the accounting and
disclosure requirements for investment in subsidiaries, associates and joint ventures when an
entity prepares separate financial statements.
PAS 27 does not requires which specific entities should issue separate financial
statements. PAS 27 is applied when an entity decides, or is required by law, to present
separate financial statements in compliance with PFRSs.
Learning Outcomes
1. Illustrate the applicability of PAS 27.

2. Describe the measurement bases allowed under PAS 27.
Lesson 1. Definition of Separate Financial Statements

(Millan, 2020)
Separate financial statements are presented in addition to:

a. Consolidated financial statements; or
153
b. The financial statements of an entity with an investment in associate or joint venture
that is accounted for using equity method in accordance with PAS 28 Investment in
Associates and Joint Ventures
Those entities that exempted from preparing consolidated financial statements present
separate financial statements as their only financial statements.
Lesson 2. Preparation of Financial Statements (Millan, 2020)
Separate financial statements are presented under the standards of applicable

PFRSs. However, investment in subsidiaries, associates or joint ventures are accounted for
either:
a. At cost
c. Using the equity method under PAS 28 Investment in Associates and Joint Ventures
Cost Method
If investment in equity securities are recorded using the cost method:

a. Initial measurement: Investment is measured at transaction price plus transaction cost
directly related to the acquisition.
Subsequent Measurement: At cost
Subsequent Changes in FV: Ignored
b. Dividends: Recognized in Profit or Loss upon the date of declaration
c. Share from the profit of the investee: Not recognized
Fair value method
In accordance with PFRS 9 Financial Instruments, equity instruments can either be

classified at fair value through profit or loss (FVPL) or other comprehensive income (FVOCI).
This is discussed in your Intermediate Accounting 1.
If investment in equity securities are recorded using the fair value method:
154
a. Initial measurement: FVPL – At transaction price whereby transaction cost are
expensed immediately; FVOCI - at transaction price plus transaction cost directly
related to the acquisition
b. Subsequent measurement: at Fair value; Changes in Fair Value are recognized
through profit or loss if FVPL and recognized in other comprehensive income if FVOCI
c. Dividends: Recognized in Profit or Loss upon the date of declaration
d. Share from the profit of the investee: Not recognized
Equity Method
Under this method, initially, the investment is recorded at cost and subsequently
adjusted for the investor’s share in the changes in investee’s equity. Dividends are recognized
as deduction to the carrying amount of the investment.
Lesson 3. Illustrative Problem (Millan, 2020)
X Co. had the following investment transactions during 20x1:

 Acquired 80% interest in Y Inc. for P1,000,000 on January 1, 20x1. Y reported a profit
of P10M and dividends amounting to P300,000 are declared during the year. The fair
value of the investment on December 31, 20x1 is P1.2M.
 Acquired 20% interest in W Co. for P100,000 on July 1, 20x1. Transaction cost
amounting to P20,000 are incurred. W reported a profit of P2M for the six months
ended December 31, 20x1 and declared a year-end dividends of P200,000. The fair
value of investment on December 31, 20x1 is P105,000.
X Co.’s policy is to measure investments in subsidiaries at cost and investment in associates

at FVPL in the separate financial statements.
Required: Compute for the following:

a. Carrying amount of the investment in subsidiary in the 20x1 consolidated financial
statements
b. Carrying amount of investments in subsidiary and associate in 20x1 separate financial
statements
155
c. Net investment income recognized in the separate financial statements for each
investments.
Solutions:
Requirement (a):
None, the investment in subsidiary account is eliminated and not presented in the
Requirement (b):
Investment in subsidiary (Y Inc.) at cost – P1,000,000
Investment in associate ( W Co.) at FV on December 31, 20x1 – P105,000
Requirement (c):
Investment in subsidiary (Y Inc.)

Dividend Revenue (P300,000 x 80%) P 240,000
Investment in associate (W Co.)

Dividend revenue P 40,000
Unrealized gain on change in fair value (P105,000 – 100,000) 5,000
Transaction cost expensed immediately (20,000)
Net investment income P25,000
156
Assessment Task 10
1. According to PAS 27, which of the following should produce separate financial statements?
a. Subsidiaries
b. Associates
c. Both A and B
d. Neither A nor B
2. According to PAS 27, these are the financial statements of a group in which the assets,
liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are
presented as those of a single economic entity.
a. Consolidated financial statements
b. Combined financial statements
c. a or b
d. neither a nor b
3. According to PAS 27, these are those presented by a parent (i.e., an investor with control
of a subsidiary) or an investor with joint control of, or significant influence over, an investee,
in which the investments are accounted for at cost or in accordance with PFRS 9.
a. Separate financial statements
b. PFRS 9 financial statements
c. Held for trading financial statements
d. Historical financial statements
4. Which of the following pertains to separate financial statements as defined under PAS 27?
a. the financial statements of a branch
b. the financial statements of an entity who does not have any investment in other
entities, but is a subsidiary of another entity.
c. the financial statements of an investor in an associate Wherein the equity method is
used to account for the investment
d. the financial statements of a parent in which the investment in subsidiary is accounted
for at fair value through profit or loss.
5. Investments in subsidiaries, joint ventures, and associates are accounted for in the separate
financial statements
a. at cost
157
b. at fair value in accordance with PFRS 9
c. using the equity method
d. any of these
6. Which of the following are required under PAS 27 separate financial statements?
a. A listed entity with at least one wholly owned subsidiary

b. A listed entity with at least one subsidiary, whether wholly or partially owned.
c. An entity, whether listed or unlisted, with at least one affiliate (e.g., a subsidiary, an
associate or an interest in a joint venture)
d. PAS 27 does not mandate which entities should produce separate financial
statements.
7. These are the financial statements of a group in which the assets, liabilities, equity, income,
expenses and cash flows of the parent and its subsidiaries are presented as those of a single
economic entity.
a. General purpose financial statements
b. Consolidated financial statements
c. Individual financial statements
d. Separate financial statements

8. These are those presented by a parent (i.e., an investor with control of a subsidiary) or an
investor with joint control of, or significant influence over, an investee, in which the investments
are accounted for at cost or in accordance with PFRS 9 Financial Instruments.
a. General purpose financial statements
b. Consolidated financial statements
c. Individual financial statements
d. Separate financial statements
9. In the separate financial statements of a parent entity, investments in subsidiaries that are
not classified as held for sale should be accounted for
a. At cost
b. In accordance with PFRS 9
c. Using the equity method.
158
d. a or b
10. On January 2, 2020, Well Co. purchased 10% of Rea, Inc.'s outstanding common shares
for P400,000. Well is the largest single shareholder in Rea, and all of Well's officers are on
Rea's board of directors. Rea reported net income of P500,000 for 2020, and paid dividends
of P150,000. The fair value of the investment on December 31, 2020 is P450,000. In its
December 31, 2020, separate balance sheet, what amount should Well report as investment
in Rea?
a. 450,000
b. 435,000
c. 400,000
d. Any of these
Summary
 Separate financial statements are presented in addition to:

a. Consolidated financial statements; or
b. The financial statements of an entity with an investment in associate or joint
venture that is accounted for using equity method in accordance with PAS 28
Investment in Associates and Joint Ventures
 Separate financial statements are presented under the standards of applicable

PFRSs. However, investment in subsidiaries, associates or joint ventures are
accounted for either:
a. At cost
c. Using the equity method under PAS 28 Investment in Associates and Joint
Venture
Reference
159
Enterprises
160

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Accounting for Business Combination

Tricia Nicole G. Embelino, CPA

Module 8: Consolidated Financial Statements (Part Three)

Module 9: Consolidated Financial Statements (Part Four)

Module 10: Separate Financial Statements

After this module, the students should be able to:

1. Define intercompany transactions;

Intercompany transactions are defined as transactions between a parent and a subsidiary.

Lesson 2. Intercompany Sale of Inventory (Millan, 2020)

Intercompany sales are either:

Proper identification of whether an intercompany sale is downstream or upstream is

The seller is the entity the recognizes profit in a sale transaction:

Illustration 1: Intercompany sale of Inventory (Millan, 2020)

 Equipment has a remaining useful life of six (6) years.

Statements of Financial Position

LIABILITIES AND EQUITY

Below are thee intercompany transactions occurred in 2020:

Requirement: Prepare the December 31, 2020 consolidated financial statements.

Step 1. Analyze the effect of Intercompany Transaction.

Multiply by: Unsold Portion ¼ Multiply by: Unsold Portion 4K/12K

Ending inventory of X Co. 97,000

Sales by X Co. 330,000

Cost of Sales of X Co. 185,000

Consolidated Gross Profit 192,350

Fair value adjustments and depreciation of FVA:

Step 2: Analyze the subsidiary’s net assets

Step 3. Compute for the Goodwill

Step 4. NCI in Net Assets

Net change in Y’s net assets 19,350

Step 6. Consolidated Profit/Loss

** (25,350 x 80% = 20,280); (25,350 x 20% = 5,070).

Similar to intercompany sale of inventory, proper identification whether the intercompany

Illustration 2: Intercompany Sale of PPE

On January 1, 2020, X Co. acquired 80% interest in Y Inc. Information as of January 1,

 Equipment’s remaining useful life is 6 years.

Statements of Financial Position

LIABILITIES AND EQUITY

Requirement: Prepare the December 31, 2020 consolidated financial statements.

Step 1. Analyze the effects of intercompany transaction

X’s books Y’s books

CJE #1: Gain on sale of equipment 4,000

CJE #2: Accum. dep. 1,000

According to Millan (2020) the consolidated amounts are calculated as follows:

Consolidated equipment, net 180,000

Fair value adjustments and depreciation of FVA:

Millan (2020) stated an alternative solution below:

Step 2: Analyze the subsidiary’s net assets

Step 3. Compute for the Goodwill

Step 4. NCI in Net Assets

Note: The amortization is done by eliminating only the unamortized balance.

Net change in Y’s net assets 11,800

Step 6. Consolidated Profit/Loss

** (17,000 x 80% = 13,600); (17,000 x 20% = 3,400).

Millan (2020) stated the following reconciliations:

Total Liabilities of X Co. 73,000

Share Capital of X Co. 170,000

For a clear understanding, Millan (2020) stated Illustration 3 below:

Illustration 3: Consolidation – Intercompany Dividend Transaction (Millan, 2020)

Statement of profit or loss accounts