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Advanced Accounting I Business Combination Subsequent
TO DATE OF Acquisition
Bachelor of Science in Accountancy (University of Saint Louis)
Studocu is not sponsored or endorsed by any college or university
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lOMoARcPSD|12076918
Junior Philippine Institute of Accountants
Discussion Review in Advanced Accounting
Business Combination
Disclaimer: This handout is not meant to replace the prescribed book of the college. No part of this
handout may be reproduced or sold for personal gain without permission from the preparers but may be
reproduced for academic purposes only.
Special thanks are dedicated to all of the professors and students, in the UST-AMV College of
Accountancy, and to God.
Preparers: Edilmar R. Fontanilla, CPA
Mark Stephen A. Asido, CPA
Sources: IFRS 3 – Business Combination
IFRS 10 – Consolidated Financial Statements
IAS 39 – Financial Instruments, Recognition and Measurement
IFRS 9 – Financial Instruments
Intermediate Accounting vol. 2 – Empleo and Robles
Advanced Accounting vol. 2 – Dayag
Theory of Accounts vol. 2 - Valix
UST-AMV College of Accountancy Professors
ADVANCED ACCOUNTING I – BUSINESS COMBINATION
STOCK ACQUISITION – TRANSACTIONS SUBSEQUENT TO ACQUISITION
KEY POINTS TO CONSIDER:

The preparation of consolidated financial statements at the date the acquirer company (parent)
acquires more than 50% of the stock of the acquired company (subsidiary) is not different when
preparing consolidated financial statements subsequent to acquisition, except for the fact that
there are transactions between the parent and the subsidiary occurred after the acquisition date,
which were already recorded in their books.

Transactions between the two entities must eliminated when preparing consolidated financial
statements because, although they are legally viewed as separate entities, they are economically
viewed as one entity.

The transactions between the parent and subsidiary are eliminated only in the working papers
for consolidation purposes. Those transactions remain in their respective separate books.

The parent’s control of the subsidiary due to the stock acquisition is the main reason why there
are items in the separate statement of comprehensive income, which will be shared by both the
controlling interest and the non-controlling interest.

If the result of the business combination is goodwill and the NCI has its share on the total
goodwill (full goodwill approach), the share of the controlling and non-controlling interest for
further impairment of goodwill may not be always based on the control percentage acquired
by the acquirer (parent).

In intercompany profit transactions, there are two types of sale of assets, namely, upstream or
downstream sales. In upstream sale, the selling affiliate is the subsidiary, while in downstream
sale, the selling affiliate is the parent. It is very important to know what type of intercompany
profit transactions occur between the parent and the subsidiary because it will greatly affect the
consolidated net income attributable to the controlling and non-controlling interest.

If the sale is upstream, the controlling interest will have to share in such adjustment to
the subsidiary’s net income equivalent to the control % of the parent because those
adjustments will affect the net income of the subsidiary, of which was already shared
between the controlling interest and non-controlling interest.
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Junior Philippine Institute of Accountants
Discussion Review in Advanced Accounting
Business Combination

If the sale is downstream, only the consolidated net income attributable to the
controlling interest will be affected because those items will only affect the net income
of the parent.

For the preparation of the consolidated financial statements, in the working paper:

The investment in subsidiary account of the parent is eliminated.

The equity (ordinary shares, additional paid-in capital, retained earnings, etc) of the
subsidiary is eliminated.

Assets and liabilities of the subsidiary are updated to their fair values less any subsequent
amortization in excess of the fair value over the books, or plus the amortization of excess
of book value over the fair value, if any, and if applicable.

Non-controlling interest in net assets (NCINAS) of the subsidiary is established
representing the percentage of ownership of subsidiary not acquired, if the not whollyowned by parent plus the consolidated net income attributable to subsidiary, less any
dividends declared to shareholders other than the parent.

All the of the intercompany transactions between the parent and subsidiary are
eliminated because in their consolidated financial statements, they are viewed as one
economic entity.

In business combination problems, the following items must be considered (and mostly asked in
the problems)


Consolidated sales

Consolidated cost of goods sold
consolidated Net income of the

Consolidated gross profit
subsidiary (NCINIS)

Consolidated operating expenses

Consolidated dividend income

Consolidated net income (CNI)

Consolidated
net

Non-controlling interest in the
Non-controlling interest in the
net assets of the subsidiary

income
Consolidated
stockholder’s
equity
attributable to parent (CNI-P)
THE CONSOLIDATED NET INCOME ATTRIBUTABLE TO PARENT AND NCI
The consolidated net income of the parent includes the net income of the parent, the net income
of the subsidiary from the date of acquisition, any adjustments to their net income such as adjustment
for the depreciation expense previously recognized already in the books of subsidiary, all intercompany
transactions that resulted to a gain or loss, or declaration of dividends, profit arising from the
intercompany sale of inventories, and the impairment of goodwill that arose only from the business
combination, if any. In other words, it is basically the combination of their revenues, expenses, gains,
losses, and other income earned and incurred only from the unaffiliated companies and individuals.
Table 2.1 –Consolidated net income attributable to controlling and non-controlling interest
ITEMS IN THE INCOME STATEMENT
PARENT
NCI
Net income of the parent per books
xx
Net income of the subsidiary per books
xx
xx
(xx)
(xx)
liabilities of subsidiary
xx
xx
Intercompany dividends
(xx)
(xx)
Impairment of goodwill**
(xx)
(xx)
Amortization of excess of fair over book value of assets and
liabilities of subsidiary
Amortization of excess of book over fair value of assets and
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Junior Philippine Institute of Accountants
Discussion Review in Advanced Accounting
Business Combination
Gain on acquisition**
xx
Unrealized (gain) / loss in the sale of plant assets (upstream)*
(xx) / xx
(xx) / xx
Realized gain / (loss) in the sale of plant assets (upstream)*
xx / (xx)
xx / (xx)
Unrealized (gain) / loss in the sale of plant assets (downstream)*
(xx) / xx
Realized gain / (loss) in the sale of plant assets (downstream)*
xx / (xx)
Unrealized profit in ending inventory (UPEI) – upstream*
(xx) / xx
Unrealized profit in ending inventory (UPEI) – downstream*
(xx)
Realized profit in the beginning inventory (RPBI) – upstream*
xx
Realized profit in the beginning inventory (RPBI) – downstream*
xx
Adjusted net income for consolidated income statement
(xx) / xx
XX
xx
XX
*not included in the quiz 5 for advanced accounting I subject
**there can be only one result of the business combination. Gain on acquisition is included only in the
consolidated net income in the year of acquisition only.
ITEMS IN THE CONSOLIDATED NET INCOME
Net income of the parent per books - it is the net income based on the separate financial statements of
the parent. Remember that this item is fully attributable to controlling interest only.
Net income of the subsidiary per books - it is the net income based on the separate financial statements
of the subsidiary. For consolidation purposes, the parent has a share of the of its net income based on
the percentage of ownership of stocks owned by the parent and what is attributable to subsidiary is the
percentage of ownership attributable to the non-controlling interest.
Amortization of excess in fair over book value / book over fair value of assets and liabilities of the
subsidiary - these items pertain to the increases or decreases in assets and liabilities of the subsidiary
not recorded in the books of the subsidiary but recognized in the working paper for consolidated
financial statements at the date of acquisition. In the books of the subsidiary, some of the expenses (CGS,
depreciation, amortization, etc.) included in the net income of the subsidiary are based on the book values
of subsidiary’s assets and liabilities. Thus, these expenses are either understated or overstated, because
for consolidation purposes, these expenses must be based on their fair values relevant to the reporting
period. This is the reason why there is an additional amortization for consolidation purposes. The
following are the common items that are mostly revalued at the date of acquisition and how are they
being amortized for consolidation:

Depreciable assets (PPE, intangibles, investment property accounted for at cost model, leased
assets) – the difference between the fair value and the book value shall be amortized based on
the remaining useful life from the date of acquisition because the excess pertains to the
overstatement (book over fair) or understatement (fair over book) of the depreciation expense
being included in the net income of the subsidiary.
Table 2.2 – amortization of excess – depreciable assets
Amortization
Working paper entries
of excess of
depreciable
assets
Reason for
adjustment
Year of acquisition
Subsequent years
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Junior Philippine Institute of Accountants
Discussion Review in Advanced Accounting
Business Combination
FAIR VALUE > Dep. Expense
BOOK VALUE
xx
Accumulated dep.
xx
Retained earnings
xx
Depreciation
is
Depreciation exp.
xx
understated
because
depreciation
in
Accumulated dep.
xx
books
is
the
recorded
based on the book
value
of
depreciable
asset
FAIR VALUE < Accumulated dep.
BOOK VALUE
xx
Accumulated dep.
Depreciation expense xx
xx
Depreciation
is
Depreciation expense xx
overstated
because
Retained earnings
depreciation
in
xx
books
is
the
recorded
based on the book
value
of
depreciable
asset

Non-depreciable assets (land, inventories, intangibles with indefinite useful life) – the excess of
the fair over book, or book over fair values shall only be amortized if already sold to the outside
parties. The excess shall be considered in the consolidated net income, because when those items
are already sold to the outside parties, the gain or loss (for non-depreciable non-current assets),
or the cost of goods sold pertaining to the inventories revalued at the date of acquisition, are
either overstated or understated, thus, amortizing these excess amounts will bring them to
their correct amount for consolidated financial statements. If there is a partial sale of those
assets mentioned above, the excess to be amortized must be proportionate only to the sold
assets (e.g. if 20% of inventories sold during the year, 20% of the total excess must be amortized.)
Table 2.3 – amortization of excess – -non-depreciable assets
Working paper entries
Subsequent years (if there
Amortization
of excess of
inventory
Year of acquisition
are inventories already
Reason for
existing at DOA still unsold
adjustment
as of the end of the year of
acquisition
FAIR VALUE > CGS
BOOK VALUE
xx
inventory
xx
CGS
(pertains to last
pertains to the excess
year CGS
xx
BOOK VALUE
xx
CGS xx
attributable
to
portion
of acquisition
inventory existed at
(pertains to last
the date of acquisition
Year CGS
xx
CGS
xx
inventory
of
the
NCI, date
Inventory
FAIR VALUE < inventory
is
understated,
Consolidated RE
the
which was already sold
xx
xx
CGS
is
overstated,
CGS
xx
pertains to the excess
Consolidated RE
xx
attributable
NCI
xx
portion
to
of
the
the
inventory existed at
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Junior Philippine Institute of Accountants
Discussion Review in Advanced Accounting
Business Combination
the date of acquisition
which was already sold
Intercompany dividends - these arise because when the subsidiary declares a dividend, a major part of it
are received by the parent company, or when there are shares of stock of the parent owned by the
subsidiary, the latter as well received dividends from the parent. The controlling interest portion of the
dividends declared by subsidiary is deducted from the consolidated net income attributable to the
controlling interest because it was included as an income of the parent in the books. Also, retained
earnings of the subsidiary is credited in the amount of dividends received by the parent from the
subsidiary in the working paper because the balance of the retained earnings of the subsidiary was
already affected by the subsidiary’s dividend declaration. Dividends declared for subsidiary’s other
shareholders (also represented by the non-controlling interest), will be accounted for as a deduction in
the NCINAS in the equity portion of the parent in the consolidated financial statements.
Table 2.4 – intercompany dividends
Dividends
Working paper entries
Reason for adjustment
Dividend income
xx
Dividend
NCI
xx
recorded by parent at the date of declaration of the
declared by
subsidiary
RE – subsidiary
xx
income
eliminated
represents
income
subsidiary.
The portion of NCI represents dividend declared by
subsidiary to other shareholders.
The effect of dividend declaration to the retained
earnings because it must appear that the subsidiary only
declares dividends to other shareholders at the date of
declaration.
Impairment of goodwill - goodwill is not amortized, but is tested for impairment annually. If the parent
company determined that the goodwill arising from the business combination is impaired, the
impairment shall be allocated proportionately on the basis on the share of the controlling interest and
the NCI on the goodwill at the date of acquisition, if the acquisition resulted in goodwill and the fair
value of the NCI at the date of acquisition is based only on fair value of the NCI (given or approximated
based on the cost of investment of parent), which is higher than proportionate share of NCI in the net
assets of the subsidiary (minimum amount of NCI). In short, the subsidiary will only share in the
impairment of goodwill if there is a part of goodwill allocated to the NCI at the date of acquisition (full
goodwill approach). It must be noted, however, that if the parent already has goodwill before the date of
acquisition, then its impairment is already reflected in the separate books in the parent, and is solely
attributable to the controlling interest, as it arose from a different transaction before the acquisition. The
following table summarizes how the goodwill will be allocated between the CI and NCI.
Table 2.5 – summary of allocation of impairment goodwill between CI and NCI
How NCI was measured at the date Allocation of goodwill
of acquisition
Estimated FV
Controlling and non-controlling
percentage or share of CI and NCI
in goodwill
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Junior Philippine Institute of Accountants
Discussion Review in Advanced Accounting
Business Combination
Given fair value
share of CI and NCI in goodwill
Proportionate FV
Goodwill
impairment
is
fully
attributable to CI
To illustrate, PARIS CAT corporation acquired 80% of the stocks of SURFER CAT corporation for
3,500,000 on January 1, 2016. At the date of acquisition, the fair value of the net assets of Surfer
cat corporation amounted to 4,000,000. During the year, goodwill is tested for impairment and
PARIS CAT corporation determined it has been impaired by 27,000.
Case 1: NCI is measure at fair value, no fair value of the non-controlling interest provided.
In this case, NCI will be measured at its estimated fair value of 875,000, since it is higher than the
proportionate fair value of NCI amounting to 800,000. The business combination resulted to a
goodwill of 375,000 ((3,500,000 / 80%)-4,000,000). Also, because the estimated FV of NCI is higher
than its proportionate amount, the NCI will share in the subsequent impairment of goodwill. Note
that the share of CI and NCI in the goodwill is the same as the percentage of ownership controlled
by the parent. Thus, if the fair value of NCI is based on estimated FV, the impairment loss to be
attributable to the controlling interest is equal to the percentage of ownership of the parent.
Table 2.6 – allocation of the impairment of goodwill to controlling and non-controlling interest
Allocation of Goodwill to controlling and non- Working Paper Entries
controlling interest
DATE
OF
CI
ACQUISITION Cost
of
assets
TOTAL
3,500,000
875,000
4,375,000
(3,200,000)
(800,000)
(4,000,000)
300,000
75,000
375,000
investment
FV of net
NCI
GOODWILL
SUBSEQUENT Share of controlling interest in the goodwill
Goodwill 375,000
Investment
In subsidiary
300,000
NCI
75,000
Impairment loss 27,000
TO DATE OF impairment
Goodwill
ACQUISITION Controlling interest:
27,000
27,000 x (300/375) = 21,600
Non-controlling interest 27,000 c (75/375) = 5,400
Case 2: NCI is measure at fair value; the fair value of the non-controlling interest is 750,000.
In this case, the fair value of the non-controlling interest is lower than its proportionate fair value,
thus, the fair value given cannot be used because the non-controlling interest must be recorded
at its proportionate fair value based on the fair value of the net assets of the subsidiary, at a
minimum. Thus, the goodwill of 300,000 must be attributable only to the controlling interest
because the NCI is recorded at minimum amount.
Table 2.7 – goodwill attributable to the controlling interest only
Allocation of Goodwill to controlling and non- Working Paper Entries
controlling interest
DATE
OF
CI
ACQUISITION Cost
of
investment
NCI
3,500,000
TOTAL
800,000
4,300,000
Goodwill 300,000
Investment
In subsidiary
300,000
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Junior Philippine Institute of Accountants
Discussion Review in Advanced Accounting
Business Combination
FV of net
assets
(3,200,000)
(800,000)
(4,000,000)
300,000
0
300,000
GOODWILL
SUBSEQUENT Share of controlling interest in the goodwill
Impairment loss 27,000
TO DATE OF impairment
Goodwill
ACQUISITION Controlling interest:
27,000
27,000
Non-controlling interest: 0
Case 3: NCI is measure at fair value; the fair value of the non-controlling interest is 860,000.
In this case, since the fair value of NCI is higher than the proportionate FV (850,000 > 800,000),
the NCI will be recorded at fair value, resulting to goodwill of 350,000, both attributable to
controlling and non-controlling interest, since the reflected NCI in the consolidated financial
statement is higher that its minimum amount (proportionate FV). Note that the allocation of
goodwill to both controlling and non-controlling interest must be based on the goodwill
allocated to CI and NCI at the date of acquisition. In contrast to the case 1, The ownership %
cannot be used because the fair value of NCI is based on cost of investment of the acquirer
(parent) to the acquire (subsidiary).
Table 2.8 – allocation of the impairment of goodwill to controlling and non-controlling interest
Allocation of Goodwill to controlling and non- Working Paper Entries
controlling interest
DATE
OF
CI
ACQUISITION Cost
of
investment
FV of net
assets
GOODWILL
NCI
TOTAL
3,500,000
860,000
4,360,000
(3,200,000)
(800,000)
(4,000,000)
300,000
60,000
360,000
SUBSEQUENT Share of controlling interest in the goodwill
TO DATE OF impairment
Goodwill 360,000
Investment
In subsidiary
NCI
60,000
Impairment loss 27,000
Goodwill
ACQUISITION Controlling interest:
300,000
27,000
27,000 x (300/360) = 22,500
Non-controlling interest 27,000 x (60/360) = 4,500
Intercompany sale of plant assets. Any gain or loss on sale of those assets of the selling affiliate are
unrealized until those assets are either depreciated or sold to the outside parties, and must be
eliminated in the working paper in the net income of the selling affiliate, and recognized as realized
on the consolidated net income of the parent when depreciated or sold to outside parties. The realization
of gains and losses depends whether the plant assets are non-depreciable (land), or depreciable (e.g.
machinery, equipment). Also, the whether the parent will share in the adjustment to the net income of
the subsidiary and such adjustment is fully attributable to parent only will depend if the sale is upstream
or downstream sale.

In intercompany sale of land, because land is not depreciated over time, any unrealized gains or
losses from the intercompany sale of land remains unrealized until sold to outside parties.

In intercompany sale of depreciable assets, the unrealized gains and losses are eliminated in the
working paper, and such gains or loss is realized in the net income periodically based on
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Junior Philippine Institute of Accountants
Discussion Review in Advanced Accounting
Business Combination
remaining useful life from the date of sale in the form of adjusting depreciation expense and
accumulated depreciation in the working paper, in order to bring the depreciation expense and
accumulated depreciation to the amount based on the carrying amount of the equipment of the
selling affiliate as if no sale was occurred between the two parties, and as if the selling affiliate
is still the owner of the said depreciable asset. If the realized gain or losses is not adjusted, the
resulting depreciation expenses in the consolidated income statement is either understated (loss
on sale) or overstated (gain on sale).
Table 2.9 – intercompany sale of plant assets
Working paper entries
Intercompany Result
sale of plant
of
Year of
Subsequent to the
assets
sale
acquisition
year of acquisition
Unrealized gain xx
Land
xx
Retained earnings
xx
Land
Reason for adjustment
Unless sold to unaffiliated parties, there
xx
should be no gain to be recognized and
the working paper entry restores the
GAIN
land to its carrying value before the
sale.
LAND
Land
xx
Land
Unrealized loss xx
xx
Retained earnings
xx
LOSS
Accu. Dep.
xx
Unrealized gain xx
Dep. asset
GAIN
xx
Accu dep.
Dep. asset
Accu. Dep
ASSETS
xx
Either gain or loss, the first entry at the
Dep. expense
xx
year of acquisition restores the carrying
Retained earnings xx
amount of depreciable asset as if no
sale has occurred and as if the selling
xx
Dep. expense
DEPRECIABLE
Accu. Dep.
Unrealized
affiliate is the owner. The second
xx
xx
Dep. expense
xx
Retained earnings xx
gain
Accu. Dep.
entry adjusts the depreciation expense
xx
and accumulated depreciation to the
xx
amount as if no sale has occurred
between the affiliates. However, when
xx
that depreciable asset is already sold to
LOSS
Dep. expense
Accu. Dep.
xx
unaffiliated companies, the remaining
xx
unrealized gain or loss must be
recognized in the working paper in
the year that sale occurred.
Intercompany sale of inventories - subsequent to acquisition date, there may be intercompany sale of
inventories between the affiliated parties (parent and subsidiary) of which the inventory of the buying
affiliate includes profit from sale of the selling affiliate. Those profits must be eliminated for consolidation
purposes until the inventory from the selling affiliate is sold to unaffiliated companies and individuals. By
eliminating these profits as well as intercompany sale of inventory, in the consolidated financial
statements: (1) the consolidated sales and cost of goods sold will include only sales and cost of goods
sold to unaffiliated parties; and (2) the inventory balance to be included by the buying affiliate in the
consolidated financial statements will include only cost of inventory to the selling affiliate (either
parent or subsidiary). Also, like in the intercompany sale of plant assets, any profit recorded in the books
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Discussion Review in Advanced Accounting
Business Combination
of the selling affiliate will only be realized when the inventory coming from the selling affiliate has
been sold to unaffiliated parties.
Intercompany Sale of inventories between the affiliated parties may be upstream (subsidiary to parent),
downstream (parent to subsidiary), or horizontal sales (subsidiary to another subsidiary). However,
for consolidation purposes, only downstream or upstream sales are of concern by the consolidating entity
such that the determination of upstream or downstream sale may affect the consolidated net income
attributable to the controlling and non-controlling interest. If the sale is upstream Two items are of
concern of the consolidating parent in intercompany transactions:

Unrealized profit in ending inventory (UPEI) – These are the profits of the selling affiliate included
in the unsold inventory of the buying affiliate which previously arose from the intercompany sale.
What is eliminated in the working paper is the profit from the inventories coming from the
selling affiliate such that those profits are reverted to being unrealized. Because of higher
inventory ending balance of the buying affiliate to the unrealized profit, the cost of goods sold
in its books is understated. It can be adjusted by debiting CGS and crediting inventory in the
working paper.

Realized profit in the beginning inventory (RPBI) - These are the profits of the selling affiliate
included in the beginning inventory (overstating the total goods available for sale) of the
buying affiliate which was previously eliminated in the working paper, because the related
inventory was unsold in the year of intercompany sale. Those profits are already recognized
in the books of the selling affiliate in the year of intercompany sale, but for consolidation
purposes, those profit must be only recognized in the consolidated net income in the year
the inventories coming from the selling affiliate are already sold to outside parties.
Table 2.9 summarizes the intercompany sale of inventories, their adjustments to consolidated financial
statements, and summarized rationale for the accounting treatment for those items. It must be noted
that when the sale is upstream sale, both the controlling and non-controlling interest will share in
such adjustment because it is the profit of the subsidiary. If such sale is downstream sale, only the
controlling interest’s share in the consolidated net income will be adjusted, because it is the profit of the
parent. However, whether downstream of upstream sale, there is no need to allocate such adjustment of
CNI-P and NCINIS to determine the consolidated net income.
Table 2.10 – intercompany sale of inventories
Inter-
Adjustments of selling affiliate’s profit to
comp
P/L or to B/S accounts in the working
any
Working paper
sale of
entries
invent
paper
CGS
CNI
-ories
To
eliminate
intercompany
Reason for adjustment /
Ending
Retained
inventory
earnings
the
If there is no 1st entry, it has
sale
still
transactions:
Sales
CGS
UPEI
explanation
no
effect
consolidated
xx
net
in
the
income,
but both the consolidated
xx
sales and CGS is overstated
To eliminate the profit
add
Deduct
deduct
N/A
for consolidation purposes
included in the ending
because at the time of the
inventory
intercompany
buying
coming
of
the
selling
affiliate
from
the
affiliate
the
recorded
sales and the buying affiliate
selling affiliate:
CGS
sale,
recorded
xx
CGS
in
their
respective books.
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Discussion Review in Advanced Accounting
Business Combination
Ending inventory xx
The amount of profit to be
eliminated in the 2nd entry is
profit
the
/
markup
included by the selling
affiliate
to
affiliate
the
its
buying
sale
of
inventories to the latter.
To recognize the profit
The realized profit must be
included in the sold
deducted from CGS because
inventory
in the books of the buying
that
was
eliminated in the year
of
affiliate, when such inventory
intercompany
is sold to unaffiliated /
transaction:
Consolidated RE
CGS
outside parties, the profit
xx
has been included in its
xx
RPBI
Deduct
add
N/A
inventory, making the CGS
deduct
overstated. Consolidated RE
is debited to avoid double
counting of such realized
profit as such profit (form of
reduction to consolidated
CGS)
will
eventually
be
closed to consolidated RE.
THE CONSOLIDATED ITEMS IN THE CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED NET INCOME (CNI) ITEMS
The following items appear in consolidated net income are revenues, expenses, gains, and losses after
the necessary adjustments discussed earlier. In addition, accruals made
Consolidated interest income
Consolidated Sales
Sales of the parent
xx
Interest
Sales of the subsidiary
xx
parent
(xx)
Interest
Intercompany sale
Consolidated sales
xx
income
of
the
income
of
the
subsidiary
Intercompany
income
Consolidated CGS
CGS- parent
xx
Consolidated
CGS - subsidiary
xx
income
Intercompany sale
interest
interest
(xx)
xx
Consolidated dividend income
fair value over the book
Dividend income - Parent
value / (book value over
Dividend
xx/(xx)
UPEI
xx
RPBI
(xx)
Consolidated CGS
xx
(xx)
Amortization of excess of
the fair value) of inventory
xx
xx
income
xx
-
subsidiary
Intercompany dividends
Consolidated
income
dividend
xx
(xx)
xx
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lOMoARcPSD|12076918
Junior Philippine Institute of Accountants
Discussion Review in Advanced Accounting
Business Combination
Consolidated operating expenses (OPEX)
OPEX- parent
xx
OPEX- subsidiary
xx
Consolidated loss on sale
Amortization of excess of
loss on sale of the parent
fair value over the book
loss
value / (book value over
subsidiary
the
fair
value)
of
xx/(xx)
depreciable assets
Realized loss on the sale of
xx
depreciable assets
Realized gain on the sale
(xx)
of depreciable assets
Consolidated OPEX
xx
on
sale
of
the
Unrealized loss
Consolidated gain on sale
Gain
on
sale
of
xx
the
xx
subsidiary
Unrealized gain
xx
Consolidated interest expenses
Interest expense of the
parent
Interest expense of the
Intercompany
Gain on sale of the parent
xx
(xx)
subsidiary
Consolidated Gain on sale
xx
interest
expense
Consolidated
interest
expense
xx
xx
(xx)
xx
(xx)
Consolidated gain on sale
xx
CONSOLIDATED BALANCE SHEET ITEMS
The items in the consolidated balance sheet of the consolidating entity comprise of the balance sheet
items in the books of both the parent and the subsidiary after all the adjustments discussed above
which may affect the consolidated asset and liability accounts. Note that the investment in
subsidiary account should be eliminated in the working papers, because, again, they are economically
viewed as one entity. Aside from the adjustments mentioned above, some items below, if not eliminated
in the working paper, may overstate or understate some items in the balance sheet.
Intercompany receivables and payables. Intercompany receivables / payables arise when:

the sales of the selling affiliate to the buying affiliate are on credit or on account in the
ordinary course of business (accounts receivable / accounts payable, notes receivable / payable
– trade, advances to suppliers / advances from customers);

when either of the affiliate grants a loan to the other affiliate not in the ordinary course of
business (notes receivable / payable – non-trade);

when there are accrued interest arising from the notes (interest receivable / payable).
The intercompany receivable is the amount remained unpaid by the debtor affiliate to the creditor
affiliate as of the balance sheet date. It must be also eliminated because if not eliminated, it will
overstate both the total assets and liabilities in the consolidated balance sheet. Generally, the entry
to eliminate intercompany receivables and payables are as follows:
Payables
Receivables
xx
xx
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lOMoARcPSD|12076918
Junior Philippine Institute of Accountants
Discussion Review in Advanced Accounting
Business Combination
Consolidated Cash
Consolidated depreciable assets*
Cash of the parent
xx
Depreciable asset, net of
Cash of the subsidiary
xx
the parent
Consolidated Cash
xx
Depreciable asset, net of
the subsidiary
receivables
of
the
subsidiary
Intercompany receivables
Intercompany
xx
xx
(xx)
book value / (book over
fair value) of depreciable
asset of subsidiary at the
date of acquisition
xx / (xx)
dividend
receivables
Consolidated receivables
xx
Excess of the fair over
Consolidated Receivables
Receivables of the parent
xx
(xx)
Amortization of excess of
xx
(fair over book value) /
book over fair value of
depreciable assets of the
Consolidated inventory
Inventory of the parent
xx
subsidiary
inventory of the subsidiary
xx
(Unrealized gain) /
(xx) / xx
Excess of the fair over
unrealized loss
book value / (book over
Realized gain / (realized
fair value) of inventory of
loss)**
subsidiary at the date of
acquisition
(xx) / xx
xx / (xx)
Consolidated depreciable
xx / (xx)
assets
xx
Amortization of excess of
*applies to building, machinery, equipment,
(fair over book value) /
intangibles with definite useful life, investment
property accounted for at cost model, and
other depreciable assets
**in the form of lower depreciation expense for
realized gain, and higher depreciation expense
for the realized loss
book over fair value of
inventory of subsidiary
UPEI
Consolidated inventories
(xx) / xx
(xx)
xx
Consolidated land
land of the parent
xx
Land of the subsidiary
xx
Consolidated Goodwill
Goodwill of the parent
Excess of the fair over
before
book value / (book over
combination
fair value) of land of
Goodwill arising from the
subsidiary at the date of
acquisition
xx / (xx)
the
business
xx
business combination
Impairment
of
goodwill
Amortization of excess of
arising from the business
(fair over book value) /
combination
book over fair value of
Consolidated goodwill
land of the subsidiary
UPEI
Consolidated land
(xx) / xx
(xx)
xx
xx
(xx)
xx
Note: goodwill of the subsidiary should be
eliminated in the working paper because it is
not identifiable unlike other intangible assets of
the subsidiary and it does not have fair value.
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lOMoARcPSD|12076918
Junior Philippine Institute of Accountants
Discussion Review in Advanced Accounting
Business Combination
Consolidated liabilities
Consolidated SHE
Liabilities of the parent
xx
Ordinary and preference
Liabilities of the subsidiary
xx
shares of the parent
Intercompany payables
(xx)
Dividend payable to the
parent
(xx)
Consolidated liabilities
xx
Consolidated RE
RE, beginning*
xx
CNI - Parent
xx
Dividends declared
Consolidated RE, end
(xx)
xx
*if it is the year of acquisition, the
consolidated RE after the business
combination at the date of acquisition.
xx
Additional paid-in capital
of the parent
xx
Consolidated RE, end
xx
NCINAS, end
xx
Items in OCI of the parent
xx
Consolidated SHE
xx
Consolidated Assets
Total assets of the parent
Total
assets
of
xx
the
subsidiary
xx
Investment in subsidiary
(xx)
Goodwill of the subsidiary
(xx)
Goodwill arising from the
business combination, net
Non-controlling interest in the Net Assets of the
subsidiary (NCINAS)
of accumulated impairment
loss,
if
the
result
NCINAS, beg*
xx
goodwill
NCINIS
xx
Unrealized (gain) / loss in
Dividends
declared
the sale of plant assets
(excluding dividends to be
received by parent)
NCINAS, end
is
xx
(xx) / xx
Realized gain / (loss) in the
(xx)
xx
*if it is the year of acquisition, the NCINAS
after the business combination at the date of
acquisition.
sale of plant assets
xx / (xx)
Unrealized profit in ending
inventory (UPEI)
(xx)
Excess of fair over book
value / (book over fair
value of assets)
xx / (xx)
Amortization of excess of
fair over book value /
(book over fair value) of
assets of subsidiary
Intercompany receivables
Consolidated Assets
(xx) / xx
(xx)
xx
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