Page |1
Use the following information for the next three questions:
Rainy Afternoon Co. owns 80% interest in Sunny Morning Co. During 20x1, Rainy sold inventories
costing ₱200,000 to Sunny for ₱300,000. One-fourth of the inventories were unsold as of December
31, 20x1 and were included in Sunny’s year-end statement of financial position at the purchase price
from Rainy. The individual financial statements of Rainy and Sunny on December 31, 20x1 show the
following information:
Rainy
Sunny
Inventory
1,260,000
380,000
Sales
Cost of
sales
Gross profit
6,700,000
2,700,000
(3,015,000)
(1,755,000)
3,685,000
945,000
There are no fair value adjustments arising from the business combination date.
1. How much is the consolidated inventory on December 31, 20x1?
a. 1,615,000
b. 1,590,000
c. 1,665,000
d. 1,585,000
2. How much is the consolidated sales?
a. 9,400,000
b. 9,100,000
c. 9,375,000
d. 9,700,000
3. How much is the consolidated cost of sales?
a. 4,695,000
b. 4,495,000
c. 4,565,000
d. 4,545,000
Use the following information for the next two questions:
On January 1, 20x1, Horse Co. acquired 80% interest in Colt Co. by issuing bonds with fair value of
₱250,000. NCI is measured at proportionate share. The following information was determined
immediately before the acquisition:
Horse Co.
Carrying amount
Total assets
Total liabilities
Net assets
1,000,000
(600,000)
400,000
Colt Co.
Carrying amount
400,000
(200,000)
200,000
Included in Colt’s liabilities is an account payable to Horse amounting to ₱20,000.
Colt Co.
Fair value
430,000
(200,000)
230,000
Page |2
4. How much is the total assets in Horse’s separate financial statements immediately after the
combination?
a. 1,000,000
b. 1,400,000
c. 1,250,000
d. 1,430,000
5. How much is the total assets in the consolidated financial statements?
a. 1,476,000
b. 1,580,000
c. 1,465,000
d. 1,528,000
Use the following information for the next two questions:
Lion Co. acquired 80% of Cub Co. on January 1, 20x1 for ₱100,000. The following information was
determined at acquisition date:
Lion Co.
Carrying amt.
Equipment
Accumulated depreciation
Net
Remaining useful life, 1/1/ x1
Cub Co.
Carrying amt.
Cub Co.
Fair value
1,000,000
(200,000)
800,000
500,000
(100,000)
400,000
400,000
(80,000)
320,000
10 yrs.
5 yrs.
5 yrs.
6. How much is the consolidated “Equipment – net” in the December 31, 20x2 financial statements?
a. 880,000
b. 846,000
c. 852,000
d. 832,000
7. The consolidation journal entry for the depreciation of the fair value adjustment on December
31, 20x2 includes which of the following?
a. 16,000 debit to depreciation expense
b. 12,800 credit to retained earnings of Lion
c. 32,000 credit to accumulated depreciation
d. 16,000 credit to depreciation expense
8. On January 1, 20x1, Kangaroo Co. acquired 75% of Joey Co. At that time, Joey’s equipment has a
carrying amount of ₱100,000 and a fair value of ₱120,000. The equipment has a remaining useful
life of 10 years. On December 31, 20x2, Kangaroo and Joey reported equipment with carrying
amounts of ₱500,000 and ₱300,000, respectively. How much is the consolidated “equipment –
net” in the December 31, 20x2 financial statements?
a. 800,000
b. 816,000
c. 784,000
Page |3
d. 826,000
9. On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares with fair
value of ₱15 per share. On this date, XYZ’s equity comprised of ₱50,000 share capital and ₱24,000
retained earnings. NCI was measured at its proportionate share in XYZ’s net identifiable assets.
XYZ’s assets and liabilities on January 1, 20x1 approximate their fair values except for the following:
Fair value
XYZ, Inc.
Carrying
Fair
adjustments
amounts
values
(FVA)
Inventory
23,000
31,000
8,000
Equipment (4 yrs. remaining life)
50,000
60,000
10,000
Accumulated depreciation
(10,000) (12,000)
(2,000)
Totals
63,000
79,000
16,000
XYZ, Inc. declared and paid dividends of ₱6,000 during 20x1. There was no impairment in goodwill.
The year-end individual statements of profit or loss are shown below:
Statements of profit or loss
For the year ended December 31, 20x1
ABC Co.
300,000
(165,000)
135,000
(40,000)
(32,000)
(3,000)
4,800
64,800
Sales
Cost of goods sold
Gross profit
Depreciation expense
Distribution costs
Interest expense
Dividend income
Profit for the year
How much is the profit attributable to
Owners of the parent
a.
b.
c.
d.
68,000
64,800
52,000
57,200
XYZ, Inc.
120,000
(72,000)
48,000
(10,000)
(18,000)
20,000
NCI
2,000
5,200
18,000
12,800
10. ABC Co. owns 80% interest in XYZ, Inc. The individual statements of financial position of the
entities as of December 31, 20x1 are shown below:
Statements of financial position
As at December 31, 20x1
ABC Co.
ASSETS
Cash
Accounts receivable
Inventory
Investment in subsidiary (at cost)
23,000
75,000
105,000
75,000
XYZ, Inc.
44,000
22,000
15,000
-
Page |4
Investment in bonds
Equipment
Accumulated depreciation
TOTAL ASSETS
LIABILITIES AND EQUITY
Accounts payable
Bonds payable (at face amount)
Total liabilities
Share capital
Share premium
Retained earnings
Total equity
TOTAL LIABILITIES AND
EQUITY
200,000
(60,000)
418,000
13,000
50,000
(20,000)
124,000
43,000
30,000
73,000
170,000
65,000
110,000
345,000
30,000
30,000
50,000
44,000
94,000
418,000
124,000
On December 31, 20x1, XYZ, Inc. purchased 50% of the outstanding bonds of ABC Co. from the open
market for ₱13,000. There were no other intercompany transactions during the year.
The consolidation journal entry to eliminate the intercompany bond transaction includes which of
the following?
a. debit to bonds payable for ₱30,000
b. credit to gain on extinguishment of debt for ₱4,000
c. credit to investment in bonds for ₱15,000
d. credit to gain on extinguishment of debt for ₱2,000
“What we think, we become.” (Buddha)
- end -
Page |5
SOLUTIONS TO QUIZ 1:
1. A Solution:
Ending inventory of Rainy
Ending inventory of Sunny
Less: Unrealized profit in ending inventory (300,000 – 200,000) x 1/4
Consolidated ending inventory
1,260,000
380,000
(25,000)
1,615,000
2. B Solution:
Sales by Rainy
Sales by Sunny
Less: Intercompany sales during 20x1 (300,000)
Consolidated sales
6,700,000
2,700,000
(300,000)
9,100,000
3. B Solution:
Cost of sales of Rainy
Cost of sales of Sunny
Less: Intercompany sales during 20x1
Add: Unrealized profit in ending inventory
Less: Realized profit in beginning inventory
Add: Depreciation of FVA on inventory
Consolidated cost of sales
3,015,000
1,755,000
(300,000)
25,000
4,495,000
4. C Solution:
Total assets of Horse before the combination
Investment in subsidiary (fair value of bonds issued)
Total assets of Horse after the combination
1,000,000
250,000
1,250,000
5. A Solution:
Total assets of Horse after the combination (see above)
Total assets of Colt (carrying amount)
Investment in subsidiary
FVA on assets (430K fair value – 400K carrying amount)
Goodwill – net [250K + (230K x 20% NCI)] – 230
Effect of intercompany transactions (intercompany receivable)
Consolidated total assets
1,250,000
400,000
(250,000)
30,000
66,000
(20,000)
1,476,000
Page |6
6. D Solution:
Equipment, net – Lion Co. (800,000 x 8/10)
Equipment, net – Cub Co. (carrying amount) (400,000 x 3/5)
FVA on equipment, net - decrement [(320,000 – 400,000) x 3/5]
Consolidated equipment, net – Dec. 31, 20x2
640,000
240,000
(48,000)
832,000
Alternative solution:
Equipment, net – Lion Co. (800,000 x 8/10)
Equipment, net – Cub Co. (fair value) (320,000 x 3/5)
Consolidated equipment, net – Dec. 31, 20x2
640,000
192,000
832,000
7. D Solution:
Dec.
31,
20x2
Accumulated depreciation (80,000 x 2/5)
Depreciation expense (80,000 ÷ 5)
Retained earnings – Lion Co.*
Retained earnings – Cub Co.*
32,000
16,000
12,800
3,200
*These are the shares of Lion and Cub in the depreciation of the FVA in the prior year, i.e., 20x1 (16,000 x 80% & 20%).
8. B Solution:
Equipment, net – Kangaroo
Equipment, net – Joey
FVA on equipment, net - increment [(120,000 – 100,000) x 8/10]
Consolidated equipment, net – Dec. 31, 20x2
500,000
300,000
16,000
816,000
9. A Solution:
Step 6: Consolidated profit or loss
Parent
Profits before adjustments
Consolidation adjustments:
Unrealized profits
Dividend income from
subsidiary
Gain or loss on
extinguishment of bonds
Net consolidation adjustments
Profits before FVA
Depreciation of FVA (b)
Impairment loss on goodwill
Consolidated profit
Subsidiary
64,800
-
Consolidated
20,000
-
84,800
-
(4,800)
N/A
(4,800)
(4,800)
-
60,000
(8,000)
( - )
20,000
(2,000)
( - )
80,000
(10,000)
( - )
52,000
18,000
70,000
(4,800)
Page |7
₱8,000 dep’n. of FVA on inventory + ₱2,000 [(₱10,000 - ₱2,000) ÷ 4 yrs.] dep’n. of FVA on
equipment = ₱10,000
(b)
Shares in the depreciation of FVA: (10,000 x 80%); (10,000 x 20%)
Step 7: Profit or loss attributable to owners of parent and NCI
Owners
Consoliof parent
NCI
dated
ABC's profit before FVA (Step 6)
60,000
N/A
60,000
(c)
Share in XYZ’s profit before FVA
16,000
4,000
20,000
Depreciation of FVA (Step 6)
(8,000) (2,000)
(10,000)
(c)
Share in impairment loss on goodwill
(
Totals
68,000
- )
(
- )
2,000
(
-
)
70,000
Shares in XYZ’s profit before FVA (Step 6) – (20,000 x 80%); (20,000 x 20%)
10. D Solution:
Acquisition cost of bonds (assumed retirement price)
Carrying amount of bonds payable (₱30,000 x 50%)
Gain on extinguishment of bonds
CJE #1: To recognize the gain on extinguishment of bonds.
Dec. 31,
Bonds payable (30,000 x 50%)
20x1
Investment in bonds
Gain on extinguishment of debt
13,000
(15,000)
2,000
15,000
13,000
2,000
Page |8
NAME:
Professor:
Date:
Score:
Section:
QUIZ 2:
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. The business combination resulted
to goodwill of ₱3,000. On this date, XYZ’s equity comprised of ₱50,000 share capital and ₱24,000
retained earnings. NCI was measured at its proportionate share in XYZ’s net identifiable assets.
XYZ’s assets and liabilities on January 1, 20x1 approximate their fair values except for the following:
Carryin
g
Fair value
XYZ, Inc.
amount
Fair
adjustments
s
values
(FVA)
Inventory
23,000
31,000
8,000
Equipment (4 yrs. remaining life)
50,000
60,000
10,000
Accumulated depreciation
(10,000) (12,000)
(2,000)
Totals
63,000
79,000
16,000
During 20x1, the following intercompany transactions occurred:
a. ABC Co. sold goods costing ₱12,000 to XYZ, Inc., for cash, at a markup of 40% on selling price. A
quarter of these goods are held in inventory by XYZ, Inc. by year-end.
b. ABC Co. acquired inventory from XYZ, Inc. for ₱12,000 cash. XYZ, Inc. uses a normal markup of
25% above its cost. ABC's ending inventory included ₱4,000 from this purchase.
The year-end individual financial statements are shown below:
Statements of financial position
As at December 31, 20x1
ABC Co.
XYZ, Inc.
ASSETS
Cash
Accounts receivable
Inventory
Investment in subsidiary (at cost)
Equipment
Accumulated depreciation
TOTAL ASSETS
41,000
75,000
97,000
75,000
200,000
(60,000)
428,000
50,000
(20,000)
130,150
LIABILITIES AND EQUITY
Accounts payable
Bonds payable
Total liabilities
Share capital
Share premium
Retained earnings
Total equity
43,000
30,000
73,000
170,000
65,000
120,000
355,000
30,000
30,000
50,000
50,150
100,150
67,750
22,000
10,400
Page |9
TOTAL LIABILITIES AND EQUITY
428,000
130,150
ABC Co.
330,000
(185,000)
145,000
(40,000)
(32,000)
(3,000)
70,000
XYZ, Inc.
150,750
(96,600)
54,150
(10,000)
(18,000)
26,150
Statements of profit or loss
For the year ended December 31, 20x1
Sales
Cost of goods sold
Gross profit
Depreciation expense
Distribution costs
Interest expense
Profit for the year
1. How much is the total unrealized gross profit from the intercompany sales of inventory?
a. 2,000
b. 800
c. 2,800
d. 3,600
2. How much is the NCI in net assets as of December 31, 20x1?
a. 15,350
b. 18,350
c. 19,350
d. 21,070
3. How much is the consolidated retained earnings?
a. 130,280
b. 136,720
c. 142,280
d. 146,280
4. How much is the consolidated profit or loss?
a. 83,350
b. 78,750
c. 86,270
d. 79,450
5. How much is the consolidated profit or loss attributable to
Owners of parent
NCI
a. 80,280
3,070
b. 74,460
4,290
c. 82,990
3,280
d. 76,470
2,980
6. How much is the consolidated ending inventory?
a. 104,600
b. 103,800
c. 120,200
P a g e | 10
d. 98,800
7. How much is the consolidated sales?
a. 426,750
b. 428,750
c. 448,750
d. 456,750
8. How much is the consolidated cost of sales?
a. 260,400
b. 248,600
c. 256,400
d. 272,400
9. How much is the consolidated total assets?
a. 448,950
b. 489,350
c. 498,750
d. 502,250
10. How much is the consolidated total liabilities?
a. 98,000
b. 102,000
c. 102,800
d. 103,000
11. How much is the consolidated total equity?
a. 234,550
b. 332,850
c. 368,500
d. 386,350
“This poor man cried out and the Lord heard him and saved him out of all his troubles.” (Psalm 34:6)
-END -
P a g e | 11
SOLUTIONS TO QUIZ 2:
1. B Solution:
Step 1: Analysis of effects of intercompany transaction
Transaction (a) is downstream because the seller is the parent (ABC Co.) while transaction (b) is
upstream because the seller is the subsidiary (XYZ, Inc.).
The unrealized profits in ending inventory are determined as follows:
Downstream
20,000a
(12,000)
8,000
1/4c
2,000
Sale price of intercompany sale
Cost of intercompany sale
Profit from intercompany sale
Multiply by: Unsold portion as of yr.-end
Unrealized gross profit
a
12,000 cost ÷ (100% - 40% profit on selling price) = 20,000
b
12,000 selling price ÷ (100% + 25% profit on cost) = 9,600
c
Given in the problem, “A quarter of these goods are held in inventory..”
d
₱4,000 unsold over ₱12,000 total goods purchased.
Upstream
12,000
(9,600)b
2,400
4/12d
800
Total
2,800
2. D Solution:
Step 2: Analysis of net assets
XYZ, Inc.
Acquisition Consolidation
date
date
Share capital
Retained earnings
Other components of equity
Totals at carrying amounts
Fair value adjustments at acquisition date
Subsequent depreciation of FVA
Unrealized profits (Upstream only)
Subsidiary's net assets at fair value
* ₱8,000 dep’n. of FVA on inventory + ₱2,000 [(₱10,000 - ₱2,000)
50,000
24,000
74,000
16,000
NIL
NIL
90,000
50,000
50,150
100,150
16,000
(10,000)*
(800)**
105,350
Net change
15,350
÷ 4 yrs.] dep’n. of FVA on equipment = ₱10,000
** See ‘Step 1’. Notice that the upstream sale affects XYZ’s equity and consequently the NCI.
Step 3: Goodwill computation
The problem states that goodwill on acquisition date was ₱3,000. This is also the amount at year-end
because there is no impairment of goodwill during the year.
Step 4: Non-controlling interest in net assets
XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2)
Multiply by: NCI percentage
Total
Add: Goodwill to NCI net of accumulated impairment losses
Non-controlling interest in net assets – Dec. 31, 20x1
105,350
20%
21,070
- *
21,070
*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.
P a g e | 12
3. A Solution:
Step 5: Consolidated retained earnings
ABC's retained earnings – Dec. 31, 20x1
Consolidation adjustments:
120,000
ABC's share in the net change in XYZ's net assets (a)
12,280
Unrealized profits (Downstream only) - (Step 1)
Gain or loss on extinguishment of bonds
Impairment loss on goodwill attributable to Parent
Net consolidation adjustments
Consolidated retained earnings – Dec. 31, 20x1
(2,000)
(a)
10,280
130,280
ABC’s share in the net change in XYZ’s net assets is computed as:
Net change in XYZ’s net assets (Step 2)
Multiply by: ABC’s interest in XYZ
ABC’s share in the net change in XYZ’s net assets
15,350
80%
12,280
4. A Solution
Step 6: Consolidated profit or loss
Parent
Profits before adjustments
Consolidation adjustments:
Unrealized profits - (Step 1)
Dividend income from subsidiary
Gain or loss on extinguishment
of bonds
Profits before FVA
Depreciation of FVA (b)
Impairment loss on goodwill
Consolidated profit
Consolidated
26,150
96,150
(2,000)
( - )
(800)
N/A
(2,800)
( - )
( - )
(2,000)
68,000
(8,000)
( - )
60,000
Net consolidation adjustments
(b)
Subsidiary
70,000
(
- )
(800)
25,350
(2,000)
( - )
23,350
( - )
(2,800)
93,350
(10,000)
( - )
83,350
Shares in the depreciation of FVA: (10,000 x 80%); (10,000 x 20%)
5. A Solution:
Step 7: Profit or loss attributable to owners of parent and NCI
Owners
Consoliof parent
NCI
dated
ABC's profit before FVA (Step 6)
68,000
N/A
68,000
Share in XYZ’s profit before FVA (c)
20,280
5,070
25,350
(2,000
Depreciation of FVA (Step 6)
(8,000)
)
(10,000)
(c)
Share in impairment loss on goodwill
(
Totals
80,280
- )
(
- )
3,070
(
-
)
83,350
Shares in XYZ’s profit before FVA (Step 6) – (25,350 x 80%); (25,350 x 20%)
6. A Solution:
Ending inventory of ABC Co.
Ending inventory of XYZ, Inc.
Less: Unrealized profit in ending inventory
Consolidated ending inventory
97,000
10,400
(2,800)
104,600
P a g e | 13
7. C Solution:
Sales by ABC Co.
Sales by XYZ, Inc.
Less: Intercompany sales during 20x1 (20,000 + 12,000)
Consolidated sales
330,000
150,750
(32,000)
448,750
8. A Solution:
Cost of sales of ABC Co.
Cost of sales of XYZ, Inc.
Less: Intercompany sales during 20x1 (20,000 + 12,000)
Add: Unrealized profit in ending inventory (2,000 + 800)
Less: Realized profit in beginning inventory
Add: Depreciation of FVA on inventory (Step 2)
Consolidated cost of sales
185,000
96,600
(32,000)
2,800
8,000
260,400
Consolidated Gross profit
188,350
9. B Solution:
Total assets of ABC Co.
Total assets of XYZ, Inc.
Investment in subsidiary
Fair value adjustments - net (16K FVA - 10K depreciation)
Goodwill – net
Effect of intercompany transactions
Consolidated total assets
428,000
130,150
(75,000)
6,000
3,000
(2,800)
489,350
10. D Solution:
Total liabilities of ABC Co.
Total liabilities of XYZ, Inc.
Fair value adjustments - net
Effect of intercompany transactions
Consolidated total liabilities
73,000
30,000
103,000
11. D Solution:
Share capital of ABC Co.
Share premium of ABC Co.
Consolidated retained earnings
Equity attributable to owners of the parent
Non-controlling interests
Consolidated total equity
ABC Group
Consolidated statement of financial position
As of December 31, 20x1
170,000
65,000
130,280
365,280
21,070
386,350
P a g e | 14
ASSETS
Cash
Accounts receivable
Inventory
Equipment
Accumulated depreciation
Goodwill
TOTAL ASSETS
108,750
97,000
104,600
260,000
(84,000)
3,000
489,350
LIABILITIES AND EQUITY
Accounts payable
Bonds payable
Total liabilities
Share capital
Share premium
Retained earnings
Owners of parent
Non-controlling interest
Total equity
TOTAL LIABILITIES AND EQUITY
73,000
30,000
103,000
170,000
65,000
130,280
365,280
21,070
386,350
489,350
The consolidated statement of profit or loss is shown below:
ABC Group
Statement of profit or loss
For the year ended December 31, 20x1
Sales
Cost of goods sold
Gross profit
Depreciation expense
Distribution costs
Interest expense
Profit for the year
Profit attributable to:
Owners of the parent
Non-controlling interests
448,750
(260,400)
188,350
(52,000)
(50,000)
(3,000)
83,350
80,280
3,070
83,350