Chapter 16

Chapter 16
Consolidated Financial Statements (Part 1)
PROBLEM 16-1: THEORY
1. A 6. B
2. D 7. D
3. C 8. A
4. A 9. C
5. B 10. C
11. A
PROBLEM 16-2: COMPUTATIONAL

1. Solutions:
Requirement (a):
Goodwill is computed as follows:
Consideration transferred 300,000
NCI in the acquiree (380K – 80K) x 40% 120,000
Previously held equity interest in the acquire -
Total 420,000
Fair value of net identifiable assets acquired (300,000)
Goodwill 120,000
CJE #1: To eliminate investment in subsidiary and recognize goodwill

Jan. 1, Land (250K – 200K) 50,000
20x1
Share capital – Rainy 250,000
Ret. earnings – Rainy (Carrying amt.) 40,000
Goodwill 120,000
Inventory (120K – 80K) 40,000
Investment in subsidiary 300,000
Non-controlling interest 120,000
to adjust the subsidiary’s assets to
acquisition-date fair values, to eliminate the
investment in subsidiary and subsidiary’s
pre-combination equity, and to recognize
goodwill and non-controlling interest in the
consolidated financial statements
1
Sunny Group
Consolidation Worksheet
CJE Consolidation CJE ref.

Sunny Co. Rainy Co. ref. #
Consolidated
adjustments #
ASSETS Dr. Cr.
Cash 80,000 50,000 130,000
Inventory 400,000 120,000 1 40,000 480,000
Investment in subsidiary 300,000 - 300,000 1 -
Land 600,000 200,000 1 50,000 850,000
Goodwill - - 1 120,000 120,000
TOTAL ASSETS 1,380,000 370,000 1,580,000
LIABILITIES AND EQUITY

Accounts payable 200,000 80,000 280,000
Share capital 1,000,000 250,000 1 250,000 1,000,000

Retained earnings 180,000 40,000 1 40,000 180,000
Non-controlling interest - - 120,000 1 120,000
Total equity 1,180,000 290,000 1,300,000
TOTAL LIABILITES & EQUITY 1,380,000 370,000 460,000 460,000 1,580,000
2
2. Solutions:
Step 1: Analysis of effects of intercompany transaction

There were no intercompany transactions during the period.
Step 2: Analysis of net assets

Acquisition Consolidation Net
Axion, Inc. date date change
Share capital 250,000 250,000
Retained earnings 40,000 60,000
Totals at carrying amounts 290,000 310,000
Fair value adjustments at acq’n. date 10,000 10,000
Subsequent depreciation of FVA NIL 30,000*
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 300,000 350,000 50,000
*The subsequent depreciation of fair value adjustments (FVA) is

determined as follows:
Fair value Divide by Subsequent
adjustments useful life depreciation
Inventory (40,000) N/A 40,000
Building – net 50,000 5 (10,000)
Totals 10,000 30,000
Step 3: Goodwill computation

Formula #1: NCI is measured at NCI’s proportionate share
Non-controlling interest in the acquiree (300K x 40%) – (Step 2) 120,000
Previously held equity interest in the acquiree -
Total 420,000
Fair value of net identifiable assets acquired (Step 2) (300,000)
Goodwill at acquisition date 120,000
Accumulated impairment losses since acquisition date -
Goodwill, net – current year 120,000
Step 4: Non-controlling interest in net assets

Axion's net assets at fair value – Dec. 31, 20x1 (Step 2) 350,000
Multiply by: NCI percentage 40%
Total 140,000
Add: Goodwill to NCI net of accumulated impairment losses -*
Non-controlling interest in net assets – Dec. 31, 20x1 140,000
*No goodwill is attributed to NCI because NCI is measured at proportionate

share. Goodwill is attributed to NCI only if NCI is measured at fair value.
3
Step 5: Consolidated retained earnings
Joy's retained earnings – Dec. 31, 20x1 243,000
Consolidation adjustments:
Joy's share in the net change in Axion's net assets (a) 30,000
Unrealized profits (Downstream only) -
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable to Parent -
Net consolidation adjustments 30,000
Consolidated retained earnings – Dec. 31, 20x1 273,000
(a)
Net change in Axion’s net assets (Step 2) 50,000

Multiply by: Joy’s interest in Axion 60%
Joy’s share in the net change in Axion’s net assets 30,000
Step 6: Consolidated profit or loss

Parent Subsidiary Consolidated
Profits before adjustments 63,000 20,000 83,000
Unrealized profits ( - ) ( - ) ( - )
Dividend income from subsidiary ( - ) N/A ( - )
Gain or loss on extinguishment
of bonds ( - ) ( - ) ( - )
Net consolidation adjustments ( - ) ( - ) ( - )
Profits before FVA 63,000 20,000 83,000
Depreciation of FVA (b) 18,000 12,000 30,000
Impairment loss on goodwill ( - ) ( - ) ( - )
Consolidated profit 81,000 32,000 113,000
(b)
The shares in the depreciation of fair value adjustments (FVA) are
computed as follows:
Total subsequent depreciation of fair value (Step 2) 30,000
Allocation:
Parent’s share in depreciation of fair value (30,000 x 60%) 18,000
NCI’s share in depreciation of fair value (30,000 x 40%) 12,000
As allocated 30,000
Step 7: Profit or loss attributable to owners of parent and NCI

Owners Consoli-
of parent NCI dated
Joy's profit before FVA (Step 6) 63,000 N/A 63,000
Share in Axion’s profit before FVA (c) 12,000 8,000 20,000
Depreciation of FVA (Step 6) 18,000 12,000 30,000
Share in impairment loss on goodwill ( - ) ( - ) ( - )
Totals 93,000 20,000 113,000
4
(c)
The shares in Axion’s profit before FVA are computed as follows:
Profit of Axion before fair value adjustments (Step 6) 20,000
Allocation:
Joy’s share (20,000 x 60%) 12,000
NCI’s share (20,000 x 40%) 8,000
As allocated: 20,000
Joy Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS
Cash (143,000 + 60,000) 203,000
Inventory (440,000 + 160,000 – 40K FVA + 40K depn) 600,000
Building – net (560K + 160K + 50K FVA – 10K depn) 760,000
Goodwill (Step 3) 120,000
TOTAL ASSETS 1,683,000

Accounts payable (200,000 + 70,000) 270,000
Share capital (Parent only) 1,000,000

Retained earnings (Step 5) 273,000
Owners of parent 1,273,000
Non-controlling interest (Step 4) 140,000
Total equity 1,413,000
TOTAL LIABILITIES AND EQUITY 1,683,000
Joy Group
Statement of profit or loss
For the year ended December 31, 20x1
Sales (300,000 + 120,000) 420,000
Cost of goods sold (165,000 + 72,000 – 40K depn of FVAa) (197,000)
Gross profit 223,000
Depreciation expense (40,000 + 10,000 + 10K depn of FVA) (60,000)
Distribution costs (32,000 + 18,000) (50,000)
Profit for the year 113,000
Profit attributable to:
Owners of the parent (Step 7) 93,000
Non-controlling interests (Step 7) 20,000
113,000
5
a This represents the depreciation of the fair value adjustment to the
inventory.
PROBLEM 16-3: MULTIPLE CHOICE: COMPUTATIONAL

1. A
Solution:
Consideration transferred (cost of investment) 430,000
NCI in the acquiree (400,000 x 20%) 80,000
Total 510,000
Fair value of net identifiable assets acquired (400,000)*
Goodwill 110,000
* (310,000 + 40,000 + 50,000 fair value adjustment) = 400,000
2. B
Solution:
Total assets of parent 2,000,000
Total assets of subsidiary 750,000
Investment in subsidiary (430,000)
Fair value adjustments - net 50,000
Goodwill – net (See preceding question) 110,000
Effect of intercompany transactions -
Consolidated total assets 2,480,000
3. A
Solution:
Share capital of parent 1,000,000
Retained earnings or parent 250,000
Equity attributable to owners of the parent 1,250,000
Non-controlling interests (400,000 x 20%) 80,000
Consolidated total equity 1,330,000
4. C (See solution in preceding question)
5. A
Solution:
NCI in the acquiree -
Total 430,000
6
Fair value of net identifiable assets acquired (400,000)*
Goodwill 30,000
* (310,000 + 40,000 + 50,000 fair value adjustment) = 400,000
6. D
Solution:
Fair value adjustments - net 50,000
Goodwill – net (See preceding question) 30,000
7. C
Solution:
Total liabilities of parent 750,000
Total liabilities of subsidiary 400,000
Fair value adjustments - net -
Consolidated total liabilities 1,150,000
8. D
Solution:
Share capital of parent 1,000,000
Retained earnings or parent 250,000
Non-controlling interests -
9. A
Solution:
Consideration transferred (investment in subsidiary) 300,000
Non-controlling interest in the acquiree (360K x 20%) 72,000
Total 372,000
Goodwill 12,000
10. C
7
Solution:
Fair value adjustments – net* 24,000
Goodwill – net** 12,000
* The FVA, net is computed as follows:

 Inventory (₱124,000 FV - ₱92,000 CA) = 32,000 excess fair value;
 Equipment (₱192,000 FV - ₱160,000) = 32,000 excess fair value
 Total FVA at acquisition date = 64,000
 64,000 – (32,000 dep’n. on inventory + (32,000 ÷ 4 yrs., dep’n. on

equipment) = 64,000 – (32,000 + 8,000) = 64,000 – 40,000 = 24,000
11. B
Solution:
Analysis of net assets

Acquisition Consoli- Net
Subsidiary date dation date change
Net assets at carrying amts. 296,000 376,000
FVA at acquisition 64,000 64,000
Subsequent depn. of FVA NIL (40,000)
Net assets at fair value 360,000 400,000 40,000
NCI in net assets

Circle's net assets at fair value – Dec. 31, 20x1 400,000
Total 80,000
Add: Goodwill to NCI net of accumulated impairment losses -
12. C
Solution:
Consolidated retained earnings
Square's retained earnings – Dec. 31, 20x1 440,000
Square's share in the net change in Circle's
net assets (a) 32,000
8
Impairment loss on goodwill attributable
-
to parent
Consolidated ret. earnings – Dec. 31, 20x1 472,000
(a) (40,000 net change in net assets x 80%) = 32,000
13. D
Solution:
Share capital of parent 940,000

Consolidated retained earnings – (see above) 472,000
Non-controlling interests - (see above) 80,000
14. B
Solution:
of bonds ( - ) ( - ) ( - )
Depreciation of FVA* (18,200) (7,800) (26,000)

 Inventory = ₱10,000 excess fair value;
 Building (₱80,000 FV ÷ 5 years) = 16,000
 Total FVA depreciation = 10,000 + 16,000 = 26,000
 Share of parent = 26,0000 x 70% = 18,200
 Share of NCI = 26,000 x 30% = 7,800
15. C
Solution:
Owners Consoli-
of parent NCI dated
9
Parent's profit before FVA 400,000 N/A 400,000
Sh. in Sub.’s profit before FVA (c) 56,000 24,000 80,000
Depreciation of FVA (18,200) (7,800) (26,000)
Totals 437,800 16,200 454,000
(c)
The shares in Subsidiary’s profit before FVA are computed as
follows:
Profit of Subsidiary before fair value adjustments 80,000
Allocation:
Original’s share (80,000 x 70%) 56,000
NCI’s share (80,000 x 30%) 24,000
16. B (See solution in previous question)
17. A – same as the parent
18. A
Solution:
Consideration transferred (cost of investment in sub.) 300,000
Total 300,000
Less: Parent's proportionate share in the net assets of
subsidiary (360,000 x 75%) (270,000)
Goodwill attrib. to owners of parent - acquisition date 30,000
Less: Parent's share in goodwill impairment -
Goodwill attrib. to owners of parent 30,000
Fair value of NCI [(300,000 ÷ 75%) x 25%] 100,000

Less: NCI's proportionate share in net assets
(90,000)
of subsidiary (360,000 x 25%)
Goodwill attributable to NCI - acquisition date 10,000
Less: NCI's share in goodwill impairment -
Goodwill attributable to NCI – current year 10,000
Goodwill, net – current year 40,000
19. C
Solution:
10
Fair value adjustments – net* 50,000
Goodwill – net 40,000
*(360,000 – 300,000) = 60,000 – (60,000 ÷ 6) = 50,000
20. B
Solution:
Analysis of net assets
Acquisition Consoli- Net
Subsidiary date dation date change
Net assets at carrying amts. 300,000 376,000
FVA at acquisition 60,000 60,000
Subsequent depn. of FVA NIL (10,000)
Net assets at fair value 360,000 426,000 66,000
NCI in net assets

XYZ's net assets at fair value – Dec. 31, 20x1 426,000
Total 106,500
Add: Goodwill to NCI net (see goodwill computation above) 10,000
NCI in net assets – Dec. 31, 20x1 116,500
21. A
Solution:
Consolidated retained earnings
Parent's retained earnings – Dec. 31, 20x1 440,000
Parent's share in the net change in Sub.'s net
assets (a) 49,500
Impairment loss on goodwill attributable
-
to parent
Consolidated ret. earnings – Dec. 31, 20x1 489,500
(a) (66,000 net change in net assets x 75%) = 49,500
11
22. A
Solution:
Share capital of parent 940,000
Consolidated retained earnings – (see above) 489,500
Non-controlling interests - (see above) 116,500
23. B
Solution:
of bonds ( - ) ( - ) ( - )
Depreciation of FVA* (7,500) (2,500) (10,000)
*(360,000 – 300,000) = 60,000 ÷ 6) = 10,000

(10,000 x 75%) = 7,500;
(10,000 x 25%) = 2,500
24. A
Solution:
Owners Consoli-
of parent NCI dated
Parent's profit before FVA 240,000 N/A 240,000
Sh. in Sub.’s profit before FVA (c) 60,000 20,000 80,000
Depreciation of FVA (7,500) (2,500) (10,000)
Totals 292,500 17,500 310,000
(c)
The shares in Subsidiary’s profit before FVA are computed as
follows:
Profit of Subsidiary before fair value adjustments 80,000
Allocation:
12
NCI’s share (80,000 x 25%) 20,000
25. B (See solution in previous question)
PROBLEM 16-4: EXERCISES: COMPUTATIONAL
1. Solutions:
Requirement (a):
Goodwill is computed as follows:
NCI in the acquiree 240,000
Total 600,000
Goodwill 290,000
CJE #1: To eliminate investment in subsidiary and recognize goodwill

Jan. 1, Land (250K – 240K) 10,000
20x1
Share capital – Taxi 300,000
Ret. earnings – Taxi (Carrying amt.) 48,000
Goodwill 290,000
Inventory (144K – 96K) 48,000
Investment in subsidiary 360,000
Non-controlling interest 240,000
to adjust the subsidiary’s assets to
acquisition-date fair values, to eliminate the
investment in subsidiary and subsidiary’s
pre-combination equity, and to recognize
goodwill and non-controlling interest in the
consolidated financial statements
13
Jeep Group
Consolidation Worksheet
CJE Consolidation CJE ref.

Sunny Co. Rainy Co. ref. #
Consolidated
adjustments #
ASSETS Dr. Cr.
Cash 96,000 60,000 156,000
Inventory 480,000 144,000 48,000 1 576,000
Investment in subsidiary 360,000 - 360,000 1 -
Land 720,000 240,000 1 10,000 970,000
Goodwill - - 1 290,000 290,000
TOTAL ASSETS 1,656,000 444,000 1,992,000

Accounts payable 240,000 96,000 336,000
Share capital 1,200,000 300,000 1 300,000 1,200,000
Retained earnings 216,000 48,000 1 48,000 216,000
Non-controlling interest - - 240,000 1 240,000
Total equity 1,416,000 348,000 1,656,000
TOTAL LIABILITES & EQUITY 1,656,000 444,000 648,000 648,000 1,992,000
14
2. Solutions:
Step 1: Analysis of effects of intercompany transaction

There were no intercompany transactions during the period.
Step 2: Analysis of net assets

Acquisition Consolidation Net
Pirated, Inc. date date change
Share capital 300,000 300,000
Retained earnings 48,000 118,000
Totals at carrying amounts 348,000 418,000
Fair value adjustments at acq’n. date (38,000) (38,000)
Subsequent depreciation of FVA NIL 46,750*
Subsidiary's net assets at fair value 310,000 426,750 116,750

Fair value Divide by Subsequent
adjustments useful life depreciation
Inventory (48,000) N/A 48,000
Building – net 10,000 8 (1,250)
Totals (38,000) 46,750
Step 3: Goodwill computation

Formula #2: NCI is measured at Fair Value
Consideration transferred (see given) 360,000

Total 360,000
Less: Parent's proportionate share in the net assets of
subsidiary (₱310,000 acquisition-date fair value x 60%) (186,000)
Goodwill attributable to owners of parent – Jan. 1, 20x1 174,000
Less: Parent’s share in goodwill impairment -
Goodwill attributable to owners of parent – Dec. 31, 20x1 174,000
Fair value of NCI (see given) 240,000
Less: NCI's proportionate share in the net assets of
subsidiary (₱310,000 acquisition-date fair value x 40%) (124,000)
Goodwill attributable to NCI – Jan. 1, 20x1 116,000
Less: NCI’s share goodwill impairment -
Goodwill attributable to NCI – Dec. 31, 20x1 116,000
Goodwill, net – Dec. 31, 20x1 290,000
15
Step 4: Non-controlling interest in net assets
Pirated's net assets at fair value – Dec. 31, 20x1 (Step 2) 426,750
Total 170,700
Add: Goodwill to NCI net of accumulated impairment losses 116,000
Step 5: Consolidated retained earnings

Original's retained earnings – Dec. 31, 20x1 316,000
Original's share in the net change in Pirated's net
assets (a) 70,050
Impairment loss on goodwill attributable to Parent -
Consolidated retained earnings – Dec. 31, 20x1 386,050
(a)
Net change in Pirated’s net assets (Step 2) 116,750

Multiply by: Original’s interest in Pirated 60%
Original’s sh. in the net change in Pirated’s net assets 70,050
Step 6: Consolidated profit or loss

of bonds ( - ) ( - ) ( - )
Depreciation of FVA (b) 28,050 18,700 46,750
(b)
The shares in the depreciation of fair value adjustments (FVA) are
computed as follows:
Total subsequent depreciation of fair value (Step 2) 46,750
Allocation:
Parent’s share in depreciation of fair value (46,750 x 60%) 28,050
NCI’s share in depreciation of fair value (46,750 x 40%) 18,700
16
As allocated 46,750
Step 7: Profit or loss attributable to owners of parent and NCI

Owners Consoli-
of parent NCI dated
Original's profit before FVA (Step 6) 100,000 N/A 100,000
Sh. in Pirated’s profit before FVA (c) 42,000 28,000 70,000
Depreciation of FVA (Step 6) 28,050 18,700 46,750
Totals 170,050 46,700 216,750
(c)
The shares in Pirated’s profit before FVA are computed as follows:
Profit of Pirated before fair value adjustments (Step 6) 70,000
Allocation:
NCI’s share (70,000 x 40%) 28,000
Original Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS
Cash (120,000 + 160,000) 280,000
Inventory (440,000 + 180,000 – 48K FVA + 48K depn) 620,000
Building – net (630K + 210K + 10K FVA – 1,250 depn) 848,750
Goodwill (Step 3) 290,000
TOTAL ASSETS 2,038,750

Accounts payable (34,000 + 132,000) 166,000
Share capital (Parent only) 1,200,000

Retained earnings (Step 5) 386,050
Owners of parent 1,586,050
Non-controlling interest (Step 4) 286,700
Total equity 1,872,750
TOTAL LIABILITIES AND EQUITY 2,038,750
17
Original Group
Statement of profit or loss
For the year ended December 31, 20x1
Sales (300,000 + 120,000) 420,000
Cost of goods sold (165,000 + 72,000 – 40K depn of FVAa) (197,000)
Gross profit 223,000
Depreciation expense (40,000 + 10,000 + 10K depn of FVA) (60,000)
Distribution costs (32,000 + 18,000) (50,000)
Profit for the year 113,000
Profit attributable to:
Owners of the parent (Step 7) 93,000
Non-controlling interests (Step 7) 20,000
113,000
a This represents the depreciation of the fair value adjustment to the

inventory.
18

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Consolidated Financial Statements (Part 1)

PROBLEM 16-1: THEORY

PROBLEM 16-2: COMPUTATIONAL

CJE #1: To eliminate investment in subsidiary and recognize goodwill

CJE Consolidation CJE ref.

LIABILITIES AND EQUITY

Share capital 1,000,000 250,000 1 250,000 1,000,000

Step 1: Analysis of effects of intercompany transaction

Step 2: Analysis of net assets

*The subsequent depreciation of fair value adjustments (FVA) is

Step 3: Goodwill computation

Step 4: Non-controlling interest in net assets

*No goodwill is attributed to NCI because NCI is measured at proportionate

Net change in Axion’s net assets (Step 2) 50,000

Step 6: Consolidated profit or loss

Step 7: Profit or loss attributable to owners of parent and NCI

LIABILITIES AND EQUITY

Share capital (Parent only) 1,000,000

PROBLEM 16-3: MULTIPLE CHOICE: COMPUTATIONAL

* (310,000 + 40,000 + 50,000 fair value adjustment) = 400,000

4. C (See solution in preceding question)

* (310,000 + 40,000 + 50,000 fair value adjustment) = 400,000

* The FVA, net is computed as follows:

 64,000 – (32,000 dep’n. on inventory + (32,000 ÷ 4 yrs., dep’n. on

Analysis of net assets

NCI in net assets

Share capital of parent 940,000

*The subsequent depreciation of fair value adjustments (FVA) is

16. B (See solution in previous question)

17. A – same as the parent

Fair value of NCI [(300,000 ÷ 75%) x 25%] 100,000

Goodwill, net – current year 40,000

*(360,000 – 300,000) = 60,000 – (60,000 ÷ 6) = 50,000

NCI in net assets

*(360,000 – 300,000) = 60,000 ÷ 6) = 10,000

25. B (See solution in previous question)

PROBLEM 16-4: EXERCISES: COMPUTATIONAL

CJE #1: To eliminate investment in subsidiary and recognize goodwill

CJE Consolidation CJE ref.

LIABILITIES AND EQUITY

Step 1: Analysis of effects of intercompany transaction

Step 2: Analysis of net assets

*The subsequent depreciation of fair value adjustments (FVA) is

Step 3: Goodwill computation

Consideration transferred (see given) 360,000

Step 5: Consolidated retained earnings

Net change in Pirated’s net assets (Step 2) 116,750

Step 6: Consolidated profit or loss

Step 7: Profit or loss attributable to owners of parent and NCI

LIABILITIES AND EQUITY

Share capital (Parent only) 1,200,000

a This represents the depreciation of the fair value adjustment to the

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