ACCOUNTING FOR BUSINESS COMBINATION
BUSINESS COMBINATION- SUBSEQUENT TO DATE OF ACQUISITION
PROBLEM I: 80%-Owned Subsidiary: Cost Model - Consolidated Financial Statements: Partial Goodwill
or Proportionate Basis Approach / Full Goodwill or Fair Value Basis
Assume that on January 1, 20x4, Pascal Company acquires 80% of the common stock of Sax Company for
P372,000. At that time, the fair value of the 20% non-controlling interest is estimated to be P93,000. On that the
following assets and liabilities of Sax Company had book values that were different from their respective market
values:
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation-equipment . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation-buildings . . . . . . . . . . . . . . . .
Bonds payable (4 years) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sax Co.
Book value
P24,000
48,000
180,000
( 96,000)
360,000
( 192,000)
120,000
Sax Co.
Fair value
30,000
55,200
180,000
144,000
115,200
All other assets and liabilities had book values approximately equal to their respective fair values.
On January 1, 20x4, the equipment and buildings had a remaining life of 8 and 4 years, respectively. Inventory is
sold in 20x4 and FIFO inventory costing is used. Goodwill, if any, is reduced by a P3,750 impairment loss during
20x4 based on the fair value basis (or full-goodwill), meaning the management has determined that the goodwill
arising in the acquisition of Son Company relates proportionately to the controlling and non-controlling interests,
as does the impairment.
Trial balances for the companies for the year ended December 31, 20x4 are as follows:
Debits
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in Sax Company . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill impairment loss . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credits
Accumulated depreciation – equipment . . . . . . . . . .
Accumulated depreciation – buildings . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pascal Co.
P 232,800
90,000
120,000
210,000
240,000
720,000
372,000
204,000
60,000
Sax Co.
P 90,000
60,000
90,000
48,000
180,000
540,000
138,000
24,000
48,000
72,000
P2,368,800
18,000
36,000
P1,224,000
P 135,000
405,000
120,000
240,000
600,000
360,000
480,000
28,800
P2,368,8 00
P
96,000
288,000
120,000
120,000
240,000
120,000
240,000
P1,224,000
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The trial balances for the companies for the year ended December 31, 20x5 are as follows:
Debits
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in Son Company . . . . . . . . . . . . . . . . . . . .
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on bonds payable . . . . . . . . . . . . . . . . . . . . .
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credits
Accumulated depreciation – equipment . . . . . . . . .
Accumulated depreciation – buildings . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock, P10 par . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pascal Co.
P 265,200
180,000
216,000
210,000
240,000
720,000
372,000
216,000
60,000
Sax Co.
P 102,000
96,000
108,000
48,000
180,000
540,000
192,000
24,000
72,000
72,000
P2,623,200
54,000
48,000
P1,392,000
P 150,000
450,000
120,000
240,000
600,000
484,800
540,000
____38,400
P2,623,200
P 102,000
306,000
120,000
120,000
240,000
144,000
360,000
P1,392,000
No goodwill impairment loss for 20x5.
Required: Using cost model:
1. Determine the following items for January 1, 20x4:
a. Consolidated Retained Earnings
b. Non-controlling Interests
c. Consolidated Stockholders’ Equity
2. Determine the following items for December 31, 20x4 and December 31, 20x5 in the Consolidated
Financial Statements:
Page | 2
Consolidated Amounts
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
v.
w.
x.
y.
z1
.
z2
.
Partial Goodwill or
Proportionate
Basis Approach
Full-Goodwill or
Fair Value Basis
* the
term
Cash
Accounts receivable
Inventory
Land
Equipment (net)
Buildings (net)
Investment in Sax
Total Assets
Accounts payable
Bonds payable
Total Liabilities
Common stock/Ordinary share
Retained earnings/Accumulated P&L
Sales
Cost of Goods sold
Gross profit
Expenses
Dividend income
Controlling Interests in Net Income
Non-controlling Interests in Net Income
Net Income
Common stock/Ordinary share*
Retained Earnings/Accumulated P&L*
Controlling Interests / Equity Holders of Parent/
Parent’s Stockholders’ Equity
Non-Controlling Interests
Stockholders’ Equity
Liabilities and Stockholders’ Equity
Common stock (Ordinary Share) of Parent, APIC (or Share Premium) and RE (under Equity Method) of Parent will
exactly be the same with the Consolidated amount under Entity Concept.
3. Prepare journal entry to record investment in the books of the acquirer company.
4. Prepare schedule for determination and allocated excess.
5. Prepare the working paper eliminating entries for 20x4 and 20x5 for purposes of preparing consolidated
balance sheet.
6. Prepare a consolidated working paper on December 31, 20x4 and December 31, 20x5.
PROBLEM II –80%-Owned Subsidiary: Equity Method - Consolidated Financial Statements: Partial
Goodwill or Proportionate Basis Approach / Full Goodwill or Fair Value Basis With Goodwill Impairment
Loss Recognized in the books of Subsidiary
Same data with Problem I, except the following items:
Trial balances for the companies for the year ended December 31, 20x4 are as follows:
Debits
Investment in Sax Company . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credits
Investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pascal Co.
P 377,640
P 2,374,440
P_ 34,440
P 2,374,440
Sax Co.
-
Page | 3
The trial balances for the companies for the year ended December 31, 20x5 are as follows:
Debits
Investment in Sax Company . . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pascal Co.
Sax Co.
P 405,480
P 2,656,680
Credits
Retained earnings . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-
Investment in income. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . .
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
P
490,440
-
P___66,240
P 2,656,680
-
Required: Using equity
method:
1. Determine the following items for January 1, 20x4:
a. Consolidated Retained Earnings
b. Non-controlling Interests
c. Consolidated Stockholders’ Equity
2. Determine the following items for December 31, 20x4 and December 31, 20x5 in the Consolidated
Financial Statements:
Consolidated Amounts
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
v.
w.
x.
y.
z1.
Z2
.
Partial Goodwill or
Proportionate
Basis Approach
* the
term
Full-Goodwill or
Fair Value Basis
Cash
Accounts receivable
Inventory
Land
Equipment (net)
Buildings (net)
Investment in Sax
Total Assets
Accounts payable
Bonds payable
Total Liabilities
Common stock/Ordinary share
Retained earnings/Accumulated P&L
Sales
Cost of Goods sold
Gross profit
Expenses
Investment income/Equity in Subsidiary Income
Controlling Interests in Net Income
Non-controlling Interests in Net Income
Net Income
Common stock/Ordinary share*
Retained Earnings/Accumulated P&L*
Controlling Interests / Equity Holders of Parent/
Parent’s Stockholders’ Equity
Non-Controlling Interests
Stockholders’ Equity
Liabilities and Stockholders’ Equity
Common stock (Ordinary Share) of Parent, APIC (or Share Premium) and RE (under Equity Method) of Parent will
exactly be the same with the Consolidated amount under Entity Concept.
3. Prepare journal entry to record investment in the books of the acquirer company.
4. Prepare schedule for determination and allocated excess.
Page | 4
5. Prepare the working paper eliminating entries for 20x4 and 20x5 for purposes of preparing consolidated
balance sheet.
6. Prepare a consolidated workpaper on December 31, 20x4 and December 31, 20x5.
Page | 5