Advanced Financial Accounting

An IAS and IFRS Approach

Updated Edition
Pearl Tan Hock Neo
Peter Lee Lip Nyean
General Step
1. Elimination of investment, share capital and pre-acquisition retained earnings and
recognition of excess, deferred tax liability/asset and non-controlling interests as at
date of acquisition.
Share capital (Subsidiary)
Retained earnings (Subsidiary at acquisition date)
Goodwill
Identifiable assets (Excess allocation)
Identifiable assets (Excess allocation)
Deferred tax liability
Investment in subsidiary
Non-controlling interest
2. Recognition of excess amortization.
a. Past amortization
b. Current amortization
Retained earnings (subsidiary)
Identifiable expense
Non-controlling interest
Identifiable asset
Identifiable asset
3. Recognition of tax effect from amortization
a. Past tax effect
b. Current tax effect
Deferred tax liability
Deferred tax liability
Retained earnings
Tax expense
Non-controlling interest
4. Allocation of share of change in retained earnings of subsidiary to non-controlling
interests from the date of acquisition to beginning of current period.
Retained earnings (Subsidiary)
Non-controlling interests
5. Allocation of share of current profit after tax of subsidiary to non controlling interest.
Income to non-controlling interest
Non-controlling Interest
6. Elimination of dividends declared by subsidiary.
Dividend income (Parent)
Non-controlling Interest
Dividends declared by subsidiary
7. Elimination of other reciprocal balances (intercompany receivables and payables,
revenues and expenses, etc.

Adjustments to eliminate intercompany transaction

Intercompany transaction - Inventories
1. Elimination of intercompany purchases and sales and unrealized profit
Sales
Cost of Goods Sold
Inventory
2. Adjustment of tax on unrealized profit
Deferred tax asset
Tax expense
3. Recognition of realized profit in beginning inventory
Opening retained earnings
Non-controlling interest
Cost of Goods Sold
4. Adjustment of tax on realized profit in beginning inventory
Tax expense
Opening retained earnings
Non-controlling interest
Intercompany transaction - Fixed Assets
1. Elimination of intercompany purchases and sales and unrealized profit and adjusting
asset value to original cost
a. Current year
b. Next year
Gain on sale
Opening retained earnings
Asset*
Non-controlling interest
Accumulated depreciation
Asset*
Accumulated depreciation
*Debit/Credit depending on the transaction
2. Adjustment of tax on unrealized profit
a. Current year
b. Next year
Deferred tax asset
Deferred tax asset
Tax expense
Opening retained earnings
Non-controlling interest
3. Adjustment of over-depreciation from prior year
Accumulated depreciation
Opening retained earnings
Non-controlling interest
4. Adjustment of tax from over-depreciation from prior year
Tax expense
Opening retained earnings
Non-controlling interest
5. Adjustment of current over-depreciation
Accumulated depreciation
Depreciation expense
6. Adjustment of tax from current over-depreciation
Tax expense
Deferred tax expense

Problem 4.3
Consolidation journal 1 Elimination of investment
Share capital
200,000
Retained earnings (acquisition date)
150,000
Buildings and equipment
31,250
Deferred tax liability
6,250
Investment in Sapphire (acquisition date)
300,000
Non-controlling interests (acquisition date)
75,000
Consideration paid at acquisition date (80 %)
Fair value of subsidiary (100%)
Fair value of non-controlling interests (20%)

300,000
375,000
75,000

Book value of Opal Ltd (Retained earnings + Share capital)

Excess fair value over book value (Allocated to building & equipment)

350,000
25,000

Fair value adjustment (After-tax)

Under-valuation of buildings and equipment (Before-tax)
Tax on under-valuation of buildings and equipment

25,000
31,250
6,250

Consolidation journal 2 Past and current depreciation on undervalued

buildings
Opening retained earnings (31,250/10*2*80%)5,000
Non-controlling interest (31,250/10*2*20%) 1,250
Depreciation expense (31,250/10)
3,125
Accumulated depreciation
9,375
Consolidation journal 3 Tax effect of depreciation on undervalued buildings
Deferred tax liability
1,875
Opening retained earnings (6,250/10*2*80%)
1,000
Non-controlling interests (6,250/10*2*20%)
250
Tax expense (6,250/10)
625
Consolidation journal 4 Eliminate dividend income
Dividend income (80% Parent share)
16,000
Non-controlling interest (20% NCI share)
4,000
Dividends declared
20,000
Consolidation journal 5 NCI share of current income
Income to NCI
11,020
Non-controlling interest
11,020
Profit before adjustment
(+) Prior years unrealised profit on inventory
(-) Current year's unrealised profit on inventory (40%*20,000)
(+) Tax effects on unrealized profit on inventory (1,600-1,000)
(-) Depreciation on undervalued building
(+) Tax effects on depreciation on undervalued building
Adjusted profit
NCI's share
Consolidation journal 6 NCI share of retained earnings difference

60,000
5,000
-8,000
600
-3,125
625
55,100
11,020

Opening retained earnings

Non-controlling interest
*20%*(300,000-150,000)

30,000
30,000

Consolidation journal 7 Recognition of realized profit in beginning inventory

Opening retained earnings (80% Parent share)4,000
Non-controlling interest (20% NCI share)
1,000
Cost of goods sold
5,000
Consolidation journal 8 Elimination of intercompany purchases and sales and
unrealized profit
Sales
60,000
Cost of goods sold
52,000
Inventory (40%*20,000)
8,000
Consolidation journal 9 Adjustment for tax on realized profit in beginning
inventory
Tax expense (20%*5,000)
1,000
Opening retained earnings (80% Parent share)
800
Non-controlling interests (20% NCI share)
200
Consolidation journal 10 Adjustment for tax on unrealized profit
Deferred tax asset
1,600
Tax expense (20%*8,000)
1,600

Non-controlling interests' check:

Shareholders' equity of Sapphire at 31 Dec 20x9
Net book value of fair value adjustment (after-tax)
Unrealized profit on upstream sale
Tax on unrealized profit on upstream sale
Adjusted shareholders' equity of Sapphire at 31 Dec 20x9

540,000
17,500
-8,000
1,600
551,100

NCI's share (20%)

NCI balance in consolidated worksheet

110,200
110,200

Prism

Sapphire

Elimination

Consolidated

Dr

Cr

Income statement
Sales
Cost of goods sold
Dividend income
Depreciation expense
Interest expense
Tax and other expenses
Non-controlling interests
Net income
Retained earnings
statement
Retained earnings, Jan 1

Net income
Dividends declared
Retained earnings, Dec 31
Statement of financial
position
Cash and receivables
Deferred tax asset
Inventory
Land
Buildings and equiptment
Accumulated depreciation
Investment in Sapphire
Total Asset

1,000,000
(640,000)

480,000
(320,000)

60,000

16,000
(100,000)
(72,000)
(44,000)

(10,000)
(14,000)
(76,000)

16,000
3,125

5,000
52,000

1,000

625
1,600

11,020
160,000

60,000

580,000

300,000

160,000
(40,000)
700,000

60,000
(20,000)
340,000

620,000

420,000

150,000
5,000
30,000
4,000

270,000
150,000
200,000
(80,000)

Payables
Deferred tax liability
Share capital
Retained earnings
Non-controlling interests

1,220,000

420,000

Total liability and equity

2,320,000

400,000
700,000

1,000
800

20,000

8,000
31,250
9,375
300,000

960,000

200,000
340,000

960,000

(113,125)
86,000)
(118,775)
(11,020)
188,080

1,600
640,000
260,000
1,500,000
(1,000,000)
300,000
2,320,000

1,420,000
(903,000)

1,875
200,000

6,250

1,250
4,000
1,000

75,000
250
11,020
30,000
200

692,800

188,080
(40,000)
840,880
1,040,000
1,600
902,000
410,000
1,731,250
(1,089,375)
2,995,475
1,640,000
4,375
400,000
840,880
110,220

2,995,475

Problem 4.5
Consolidation journal 1 Elimination of investment
Share capital
500,000
Retained earnings (acquisition date)
600,000
Inventory
50,000
Goodwill
200,000
Deferred tax liability
10,000
Investment in Sapphire (acquisition date)
1,200,000
Non-controlling interests (acquisition date)
140,000
Consideration paid at acquisition date (90 %)
Fair value of non-controlling interests (20%)
Fair value of subsidiary (100%)
Less: Fair value of identifiable assets
Goodwill

1,200,000
140,000
1,340,000
1,140,000
200,000

Parent's share of goodwill (1,200,000-90%*1,140,000)

Non-controlling interests' share of goodwill (140,000-10%*1,140,000)

174,000
26,000

Consolidation journal 2 Adjustment for sale of undervalued inventories (2004)

Opening retained earnings (90% Parent share)45,000
Non-controlling interest (10% NCI share)
5,000
Cost of goods sold
50,000
Consolidation journal 3 Tax effect of sale of undervalued inventories
Deferred tax liability
10,000
Opening retained earnings
9,000
Non-controlling interests
1,000
Consolidation journal 4 Adjustment for unrealized profit on transfer of fixed
assets
Gain on sale
80,000
Fixed assets
20,000
Accumulated depreciation
60,000

Fixed assets
Accumulated depreciation
Net book value

Actual
100,000
-60,000
40,000

After transaction
120,000
0
120,000

Adjustment
-20,000
-60,000
-80,000

Depreciation

20,000

60,000

-40,000

Consolidation journal 5 Adjustment for tax on unrealized profit on transfer of

fixed assets
Deferred tax asset
16,000
Tax expense
16,000
Consolidation journal 6 Adjustment of current depreciation on transferred
fixed asset
Accumulated depreciation
40,000
Depreciation expense
40,000

Consolidation journal 7 Tax effect of sale of depreciation on transferred fixed

asset
Tax expense
8,000
Deferred tax asset
8,000
Consolidation journal 8 NCI share of retained earnings difference
Opening retained earnings
20,000
Non-controlling interest
20,000
*10%*(800,000-600,000)
Consolidation journal 9 Eliminate dividend income
Dividend income (90% Parent share)
126,000
Non-controlling interest (10% NCI share) 14,000
Dividends declared
140,000
Consolidation journal 10 NCI share of current income
Income to NCI
68,800
Non-controlling interest
68,800
Profit before adjustment
(-) Gain on sale of fixed asset
(+) Tax effects of gain on sale of fixed asset
(+) Depreciation on gain on sale of fixed asset
(-) Tax effects of gain on sale of fixed asset
Adjusted profit
NCI's share
Non-controlling interests' check:
Shareholders' equity of Y Co at 31 Dec 20x5
Adjustment for unrealized gain on FA (after-tax)
Adjusted shareholders' equity of Sapphire at 31 Dec 20x9

720,000
-80,000
16,000
40,000
-8,000
688,000
68,800

1,880,000
-32,000
1,848,000

NCI's share (10%)

NCI's share of goodwill
NCI balance as at 31 Dec 20x5

184,800
26,000
210,800

NCI at date of acquisition

Adjustment for sale of under-valued inventory
Tax on adjustment for sale of under-valued inventory
NCI share of retained earnings difference
Dividends income
NCI share of current income
NCI balance as at 31 Dec 20x5

140,000
-5,000
1,000
20,000
-14,000
68,800
210,800