CONSOLIDATION SUBSEQUENT TO ACQUISITION

THEORY. Use date column

1. When parent uses the equity method, Income over Subsidiary and Investment in Stocks of
Subsidiary will both be affected by subsidiary net income (net loss) and dividends.
When parent uses the cost method, the investment account will be affected by the
subsidiary’s adjusted profit or loss.
a. Only the first statement is true.
b. Both statements are true.
c. Only the second statement is true.
d. Both statements are false.
2. Under the equity method, the following will affect the investment account
a. Goodwill from consolidation, gain from bargain purchase, subsidiary profit or loss
b. Gain from bargain purchase, subsidiary profit or loss, subsidiary dividends
c. Goodwill from consolidation, subsidiary profit or loss, subsidiary dividends
d. Gain from bargain purchase, goodwill from consolidation, subsidiary dividends
3. Equity over Subsidiary Income is a nominal account appearing in the
a. Separate income statement of the parent
b. In the consolidated income statement
c. In the parent’s separate income statement and in the consolidated income statement.
d. Separate income statement of the subsidiary
4. Under the cost method, the share of the parent in the consolidated net income is determined by
adding all the nominal accounts of parent and subsidiary item per item, eliminating the
dividend income, making adjustments for revalued assets and deducting the share of NCI.
Under the cost method, the net income of the parent in its individual income statement is not
the same as the share of the parent in the consolidated net income.
a. Only the first statement is true.
b. Both statements are true.
c. Only the second statement is true.
d. Both statements are false.
5. Consolidated retained earnings end of the year is the sum of the beginning retained earnings of
the parent who is using the equity method + parent’s share in the consolidated net income less
dividends of the subsidiary.
If the acquisition date of the controlling interest is other than the beginning of the year, the
parent and the subsidiary company should share in the subsidiary net income based only on
post acquisition earnings.
a. Only the first statement is true.
b. Both statements are true.
c. Only the second statement is true.
d. Both statements are false.
6. One of these will appear both in the parent’s separate income statement and in the
consolidated income statement :
a. Combination expenses
b. Gain on Bargain Purchase
c. Adjustment for patent revalued
d. Adjustment for inventory
7. One of these will appear in the consolidated income statement om the second year of
consolidation
a. Combination expenses
b. Gain on Bargain Purchase
c. Adjustment for patent revalued
d. Adjustment for inventory
8. An upward revaluation of subsidiary’s inventory by P10,000 and a downward revaluation of
patent by P15,000 with a remaining life of 5 years will require, for consolidation purposes, a
(upward adjust in cost of sales 10 and downward adjust of amortization 3)

a. P7,000 upward adjustment in subsidiary’s reported net income at the end of the first
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 year.
b. P7,000 downward adjustment in subsidiary’s reported net income at the end of the
first year.
c. P3,000 downward adjustment in subsidiary’s net income at the end of the second year.
d. P7,000 downward adjustment at the end of the second year.
Which of the above statements is correct?
9. An upward revaluation of subsidiary’s land will affect consolidated balance sheet but not
affect consolidated net income.
Depreciable assets with a fair value of P100,000 but at a cost of P75,000 will require an
upward adjustment of P25,000 which will appear in the consolidated balance at acquisition
date and subsequently at a diminishing amount considering its useful life.
a. Only the first statement is true.
b. Both statements are true.
c. Only the second statement is true.
d. Both statements are false.
10. You are given the following consolidated income statement of P Company and its 80%
owned subsidiary company :
Consolidated Net Income P51,000
Share of NCI 3,000
Share of Parent P48,000

Parent is using the cost method. What is parent’s net operating income?
3,000 / .2 = P15,000 NI of Subsidiary – 51,000= P36,000 operating income (NI of P Co less dividend
income)
11. You are given the following consolidated income statement of P Company and its 75%
owned subsidiary company :
Consolidated Net Income P60,000
Share of NCI 6,000
Share of Parent P54,000
How much is parent’s operating income if it is using the equity method?
6,000/.25= 24,000 net income of subsidiary x .75= P18,000 income over subsidiary
NI of P Co under equity method is also P54,000 – 18,000= P36,000 Operating Income of P Co
Or 24,000 net income of subsidiary – CNI 60,000= P36,000 operating income of P Co
PROBLEM A. Parrot Corp. and Sherlock Corp. agreed to a consolidation on January 1, 2017
with Parrot acquiring 4,500 Sherlock shares by issuing 1,450 of its own share at a market price of
P75. The following are their trial balance for two years.

2017 2018
Parrot Sherlock Parrot Sherlock
Cash and Receivables ? ? ? ?
Inventories 111,250 35,000 80,000 44,000
Equipment, net 284,000 125,000 276,000 106,000
Investment in Sherlock Corp ? ?
Cost of Sales 246,000 112,300 237,500 170,000
Operating Expenses 128,000 30,000 107,500 80,000
Dividends 24,500 50,000 80,000 20,000
Liabilities 180,000 40,000 195,000 75,000
Share Capital, par P50 and P10 250,000 60,000 250,000 60,000
Share Premium 36,250 42,000 36,250 42,000
Retained Earnings, Jan 1 64,000 28,000 ? ?
Sales 410,000 226,300 450,000 298,000
Income from Subsidiary ? ?
Fair values of the net assets are the same as the book values except for inventories which
should be decreased by P25,000 and equipment which should be increased by P30,000. The
equipment has a remaining life of 5 years. Cash and receivables will be your balancing
figure. Use Parent approach for goodwill or gain.
Required: Problem A on the left side of your worksheet.
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 2017 a) Prepare a table for determination and allocation of excess.
b) In T acct-Update the investment account and income from subsidiary.
c) Prepare a working paper
2018 a) In T acct- Update the investment account and income from subsidiary.
b) Prepare working paper entries
c) Prepare a consolidated income statement
d) Prepare a consolidated statement of retained earnings
e) Compute for: consolidated equipment (net), total non controlling
interest and consolidated SHE.

Working paper for Consolidation: Adjustments/Eliminations

Income Statement: Parrot Sherlock Debit Credit NCI Consolidated
Sales
Cost of Sales
Expenses
Operating Income
Income from Sherlock

Net Income
Share of NCI
Net Income to RE

Statement of RE
Jan 1
Net Income brought
Dividends
Dec 31

Balance Sheet
Cash and Recbles
Inventories
Equipment, net
Investment in Sherlock a)

Total Assets

Liabilities
Captl Stock, Parrot
Sherlock
APIC
Ret Earnings, Parrot
Sherlock
Share of NCI in ______
NCI 12/31
Total Liab & SHE

A. On January 1, 2017 Michael acquired majority voting shares of Scott for P420,000 when Scott’s
trademark was understated by P10,000. The intangible has an estimated useful life of 5 years.
Additional info coming from 2017 follow:

Michael Scott
Net Income P420,000 P350,000
Dividends 260,000 200,000
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Required for 2017 Worksheet right side.
a. Table for determination and allocation of excess. Be guided by the trial balance at the end of
the second year to reconstruct the SHE of parent and subsidiary as at 1/1/17 specially its
retained earnings.
b) Prepare the working paper entries for the year ending 2017.
c) Compute for consolidated net income, share of NCI and share of Parent.
d) Compute for consolidated: retained earnings and stockholders’ equity,in detail

The following are the account balances end of 2018:

Michael Scott
Current Assets P430,000 P300,000
Investment in Scott 420,000
Trademarks 230,000 300,000
Patents 410,000 350,000
Liabilities 390,000 120,000
Capital Stock 500,000 300,000
Retained Earnings, 1/1 420,000 480,000
Sales 900,000 400,000
Cost and Expenses 500,000 300,000
Dividend income 30,000
Dividends 250,000 50,000
Prepare a working paper for consolidation for the second year ending Dec 31, 2018.
Adjustment/ Elimination
Income Statement: Michael Scott Debit Credit NCI Consolidated
Sales
Cost and Expenses
Operating Income
Dividend Income

Net Income
Share of Minority
Share of Parent

Statement of RE
Jan 1, Michael Co 420,000
Jan 1, Scott Co 480,000
Net Income
Dividends
Dec 31

Balance Sheet
Current Assets
Investment in Scott
Trademarks
Patents

Total Assets

Liabilities
Captl Stock
Ret Earnings
Share of NCI in ____
NCI 12/31
Total Liab & SHE

Solution to Parrot Problem

2017: Ownership interest 4,500/6,000= 75%
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 Consideration 1,450 x P75= P108,750
Income from Subsidiary= share in adjusted NI 75% of 103,000 (84,000 + 25,000- 6,000)
= 77,250
Investment balance= acquisition cost of 108,750 + income from subsidiary 77,250
– share in dividends 37,500 (50,000 x .75) = P148,500
100% 75% 25% Adjustment
Implied value (108.75 + 33.75) 142,500 108,750 33,750 (135 x .25)
Subsidiary Interest (130,000) (97,500) (32,500)
Excess 12,500 11,250 1,250
Revaluation -Inventory 25,000 CoS 25,000
Equipment 30,000 ( 5,000) (3,750) ( 1,250) Depn 6,000
Goodwill 7,500 7,500 0
Working paper for Consolidation: Adjustments/Eliminations
Income Statement: Perry Sherry Debit Credit NCI Consolidated
Sales 410,000 226,300 636,300
Cost of Sales 246,000 112,300 d)25,000 333,300
Expenses 128,000 30,000 e) 6,000 164,000
Operating Income 36,000 84,000 139,000
Income from Sherry 77,250 a) 77,250
Consolidated Net Inc 139,000
Share of NCI 25,750 25,750
Net Income to RE 113,250 84,000 25,750 113,250
Statement of RE
Jan 1 64,000 28,000 b)21,000 7,000 64,000
Net Income brought 113,250 84,000 25,750 113,250
Dividends 24,500 50,000 a)37,500 12,500 24,500
Dec 31 152,750 62,000 20,250 152,750
Balance Sheet
Cash and Recbles 75,250 44,000 119,250
Inventories 111,250 35,000 d)25,000 b)25,000 146,250
Equipment, net 284,000 125,000 b)30,000 d) 6,000 433,000
Investment in Sherry 148,500 e)108,750 -
b) 39,750
Goodwill b. 7,500 7,500
Total Assets 619,000 204,000 706,000

Liabilities 180,000 40,000 220,000

Captl Stock,Perry 250,000 250,000
Sherry 60,000 b)45,000 15,000
APIC 36,250 42,000 b)31,500 10,500 36,250
Ret Earnings,Perry 152,750 20,250 152,750
Sherry 62,000
Share of NCI in AR* f) 1,250 1,250
NCI 12/31 47,000 47,000
Total Liab & SHE 619,000 204,000 706,000
 Increase by 30- decrease by 25=increase by 5 x .25= 1,250

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 2018
Income from Subsidiary: share in adjusted net income 75% of P42,000 (48 NI of S – 6) = P31,500
Investment balance= 148,500 + Income from S 31,500 – dividend share 15,000 (30 x 75)=P165,000
Income from Sherlock 31,500
Dividends, Sherlock 15,000
Investment in Sherlock 16,500
165,-16.5= 148,500 beg balance
SHE, Sherlock (60+42+62)=164 x .75 123,000
Equipment (30-6) 24,000
Goodwill 7,500
Share of NCI over AR (24 x .25) 6,000
Investment in Stocks (123+18 +7.5) 148,500
SHE, Sherlock 41,000
Share of NCI over AR 6,000
NCI, 1/1 47,000
Depreciation Expense 6,000
Equipment 6,000
Consolidated Income Statement
Sales 748,000
Cost of Sales 407,500
Expenses 107.5+80+6 193,500
Consolidated Net Income 147,000
Share of NCI .25 x (48 – 6) 10,500
Net Income of Parent P136,500
NCI, Beg P 47,000
Add share in CNI (Net Income of Sherlock)10,500
Less share in dividends (.25 x 20,000) ( 5,000)
NCI Dec 31, 2018 P52,500
RE, Jan 1 P152,750
Share of Parrot in CNI 136,500
Dividends (80,000)
Dec 31 209,250
Consolidated: equipment (276 + 106 + 24- 6) = P400,000
SHE (250+36.25+ 209.25 + 52.5 NCI) P548,000
PROBLEM B Percent of ownership= from dividend income (30/50) = 60%
RE P Co RE 1/1/18 420 + 260 div 2017 – 420 NI 2017= P260,000 1/1/17
S Co RE 1/1/18 480 + 200 div 2017 – 350 NI 2017= P330,000 1/1/7
TABLE 100% 60% 40% Adjustment
Implied value 700,000 420,000 280,000
Subsidiary Interest (300 + 330) (630,000) (378,000) (252,000)
Excess 70,000 42,000 28,000
Revaluation - Trademark (10,000) (6,000) ( 4,000) Amort P2,000
Goodwill 60,000 36,000 24,000

Dividend Income 120,000

Dividends, Scott 120,000
SHare Capital, Scott 180,000
RE, Scott (330 x .6) 198,000
Trademark 10,000
Goodwill 60,000
Share of NCI over AR/GW 28,000
Investment in Stocks 420,000

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SHare Capital, Scott 120,000
RE, Scott 132,000
Share of NCI over AR 28,000
NCI, 1/1 280,000

Amortization Expense 2,000

Trademark 2,000

CNI: Michael’s (420 NI-120 Div) + Scott (350 NI-2 Amort) P648,000
Share of NCI 40% of 348,000 (350 – 2) 139,200
Share of Michael P508,800
If you use equity method: Income from Scott= .6 (348,000) P208,800
Investment of 420,000 +208,800 – 120,000 = P508,800

NCI 12/31/17= 280,000 + 139,200 share in NI of S - 80,000 div (200 x .4) = P339,200
Consolidated RE (260 + 508.8 – 260) = P508,800
For 2018 , 12/31/17 parent investment and retained earnings should be adjusted by debiting
investment and crediting retained earnings (420 1/1/18 -508.8 12/31/17)= 88,800
Or dividend income against income from subsidiary or investment under cost against investment
under equity.

Adjustment/ Elimination
Income Statement: Michael Scott Debit Credit NCI Consolidated
Sales 900 400 1,300,000
Cost and Expenses 500 300 e) 2,000 802,000
Operating Income 400 498,000
Dividend Income 30 a) 30

Net Income 430 100

Share of Minority 39,200 ( 39,200)
Share of Parent 458,800

Statement of RE
Jan 1, Michael Co 420 b) 88.8 508,800
Jan 1, Scott Co 480 b) 288 d) 192
Net Income 430 100 39.2 458,800
Dividends (250) ( 50) a) 30 (20) (250,000)
Dec 31 600 530 211.2 717,600

Balance Sheet
Current Assets 430 300 730,000
Investment in Scott 420 b) 88.8 c) 508.8
Trademarks 230 300 c) 8 e) 2 536,000
Patents 410 350 760,000
Goodwill c) 60 60,000
Total Assets 1,490 950 2,086,000

Liabilities 390 120 510,000

Captl Stock 500 300 c) 180 d) 120 500,000
Ret Earnings 600 530 211.1 717,600
Share of NCI in ____ c) 27.2 27.2
NCI 12/31 358.4 358,400
Total Liab & SHE 1,490 950 2.086,000

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