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Illustrative Problem 4-1

1. On January 1, 2017, Parent Ltd acquired all shares of Subsidiary Ltd for 230,000. Journal entries were made to record the acquisition. 2. An allocation of the excess of fair values over book values was done, with amounts allocated to inventory, land, equipment and goodwill. 3. Consolidated working papers were prepared to eliminate intragroup balances and combine account balances. Consolidated statement of financial position, results of operations and retained earnings were prepared.

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51 views6 pages

Illustrative Problem 4-1

1. On January 1, 2017, Parent Ltd acquired all shares of Subsidiary Ltd for 230,000. Journal entries were made to record the acquisition. 2. An allocation of the excess of fair values over book values was done, with amounts allocated to inventory, land, equipment and goodwill. 3. Consolidated working papers were prepared to eliminate intragroup balances and combine account balances. Consolidated statement of financial position, results of operations and retained earnings were prepared.

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Boa Hancock
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ATENEO DE NAGA UNIVERSITY

COLLEGE OF BUSINESS AND ACCOUNTANCY

ACCOUNTING FOR BUSINESS COMBINATION STOCK ACQUISITION (CONSOLIDATED


FINANCIAL STATEMENTS-
SUBSEQUENT TO DATE OF ACQUISITION)

ILLUSTRATIVE PROBLEM I – Wholly owned subsidiary


On January 1, 2017, Parent Ltd acquired all the share capital of Subsidiary Ltd for 230,000. At this date, the
following information was available:
Parent Book values Fair market
Subsidiary values

Cash 450,000 50,000 50,000 Accounts receivable 200,000 40,000 40,000


Inventory 500,000 27,000 35,000 Land 700,000 75,000 90,000 Equipment (net)
120,000 50,000 60,000 Investment in S 230,000
TOTALS 2,200,000 242,000

Accounts payable 100,000 20,000 20,000 Mortgaged payable 200,000 36,000


36,000 Common stock 400,000 100,000
Additional paid-in capital 500,000 50,000
Retained earnings 1,000,000 36,000
TOTALS 2,200,000 242,000

Requirements:
A. On January 1, 2017 (date of acquisition), prepare the following:
a. Journal entry/ies pertaining to the acquisition of control in the books of Parent Company
b. Schedule of Allocation of Excess
c. Working paper elimination entries
d. Consolidated working paper
e. Determine the following balances in the consolidated financial statements
i. Cash
ii. Accounts receivable
iii. Inventory
iv. Land
v. Equipment
vi. Investment in S
vii. Accounts payable
viii. Mortgaged payable
ix. Commons stock
x. Additional paid-in capital
xi. Retained earnings
xii. Total assets
xiii. Total liabilities
xiv. Parents’ stockholders’ equity
xv. Total stockholders’ equity
xvi. Non-controlling interest

P a g e | 1 ACCM453-302
JANUARY 1, 2017
1. Journal Entry in Parent in relation to acquisition of control

2. Schedule of Allocation of Excess


Fair market value of S
Less: BV of SHE-S
CS
APIC
RE
Allocated Excess
Less: O/U MV of NIA-S
Inv.
Land
Equip.
Goodwill

3. Working Paper Elimination Entries

4. Consolidated Working Paper Elimination Entries

WPEN
Parent Subsidiary CONSOLIDATED
DR CR

Cash P 450,000 P 50,000


Accounts receivable 200,000 40,000
Inventory 500,000 27,000
Land 700,000 75,000
Equipment (net) 120,000 50,000
Goodwill
Investment in S 230,000

TOTALS P 2,200,000 P 242,000

Accounts payable P 100,000 P 20,000


Mortgaged payable 200,000 36,000
Common stock 400,000 100,000
Additional paid-in capital 500,000 50,000
Retained earnings 1,000,000 36,000
TOTALS P 2,200,000 P 242,000

P a g e | 2 ACCM453-302
The following Statements of results of operations for the period ending on December 31, 2017 are presented
below:
Parent Subsidiary
Sales P 400,000 P 200,000
Dividend revenue 30,000
Total revenue P 430,000 P 200,000

Cost of goods sold P 170,000 P 115,000


Operating expenses 50,000 20,000
Other expenses 40,000 15,000
Total costs and expenses P 260,000 P 150,000
Net income P 170,000 P 50,000

The following Statements of Retained Earnings as of December 31, 2017 are presented
below: Parent Subsidiary
Retained earnings, Jan 1 P 1,000,000 P 36,000
Net Income 170,000 50,000
Total P 1,170,000 P 86,000
Less:
Dividends declared 60,000 30,000
Retained earnings, Dec 31 P 1,110,000 P 56,000

The following Statements of Financial Positions as of December 31, 2017 are presented
below: Parent Subsidiary
ASSETS
Cash P 590,000 P 70,000
Accounts receivable 250,000 60,000
Inventory 500,000 27,000
Land 700,000 75,000
Equipment (net) 110,000 45,000
Investment in S 230,000
TOTALS P 2,380,000 P 277,000

LIABILITIES AND SHE


Accounts payable P 170,000 P 35,000
Mortgaged payable 200,000 36,000
Common stock 400,000 100,000
Additional paid-in capital 500,000 50,000
Retained earnings 1,110,000 56,000
TOTALS P 2,380,000 P 277,000

Additional information:
The equipment is expected to have a further ten-year life. The entire inventory was sold by December 2017.
Goodwill was impaired by P10,000.

A. On December 31, 2017 (one year subsequent to date of acquisition), prepare the following: a. Journal
entry/ies pertaining to the acquisition of control in the books of Parent Company b. Schedule
of Allocation of Excess
c. Schedule of amortization of excess
d. Working paper elimination entries
e. Consolidated working paper
f. Schedule of Income Distribution
g. Determine the following balances in the consolidated financial statements
i. Cash
ii. Accounts receivable
iii. Inventory
iv. Land
v. Equipment
vi. Investment in S
vii. Accounts payable
viii. Mortgaged payable
ix. Commons stock
x. Additional paid-in capital
xi. Retained earnings
xii. Total assets
xiii. Total liabilities
xiv. Parents’ stockholders’ equity
xv. Total stockholders’ equity
xvi. Non-controlling interest
xvii. Sales
xviii. Cost of goods sold
xix. Operating expenses
xx. Other expenses
xxi. Dividends declared
xxii. Profit attributable to controlling interest
xxiii. Non-controlling interest in net income of Subsidiary
xxiv. Consolidated net income
P a g e | 3 ACCM453-302
December 31, 2017(One year subsequent to date of acquisition) 1. Journal

Entry in Parent in relation to acquisition of control

2. Schedule of Allocation of Excess

Fair market value of S


Less: BV of SHE-S
CS
APIC
RE
Allocated Excess
Less: O/U MV of NIA-S
Inv.
Land
Equip.
Goodwill

3. Schedule of allocation of amortization of excess

4. Working Paper Elimination Entries

5. Consolidated Working Paper Elimination Entries


P a g e | 4 ACCM453-302
Parent Corporation and Subsidiary
Working Paper for Consolidated Financial Statements
Year Ended December 31, 2012

WPEN
Parent Subsidiary CONSOLIDATED
DEBIT CREDIT
Statement of Results of Operations
Sales 400,000 200,000
Dividend revenue 30,000
Total revenue 430,000 200,000

Cost of goods sold 170,000 115,000


Operating expenses 50,000 20,000
Other expenses 40,000 15,000
Total costs and expenses 260,000 150,000
Net income 170,000 50,000

Statement of Retained Earnings


Retained earnings, Jan 1 1,000,000 36,000
Net Income 170,000 50,000
Total 1,170,000 86,000
Less:
Dividends declared 60,000 30,000
Retained earnings, Dec 31 1,110,000 56,000

Statement of Financial Position


ASSETS
Cash 590,000 70,000
Accounts receivable 250,000 60,000
Inventory 500,000 27,000
Land 700,000 75,000
Equipment (net) 110,000 45,000
Goodwill
Investment in S 230,000

TOTALS 2,380,000 277,000

LIABILITIES AND STOCKHOLDERS' EQUITY


Accounts payable 170,000 35,000
Mortgaged payable 200,000 36,000
Common stock 400,000 100,000
Additional paid-in capital 500,000 50,000
Retained earnings 1,110,000 56,000
TOTALS 2,380,000 277,000
P a g e | 5 ACCM453-302

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