CPA REVIEW SCHOOL OF THE PHILIPPINES ‘Advanced Financial Accounting Guerrero/German/DeJesus/Lim/Ferrer/Laco/Valix PERS 10: Consolidated Financial Statements Part I: Theory of Accounts 1. PFRS 10 defines them as the financial statements of a group in which the assets, lighilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of single ‘economic unit ‘A. Consolidated financial statements 1B. Separate financial statements C. Group financial statements D. Combined financial statements 2. Which of the following statements concerning the preparation of consolidated financial statements ‘by a parent is incorrect? ‘A. The parent corporation, as a general rule, shall present consolidated financial statements including al its subsidiaries regardless ofits industry or dissimilarity B. A subsidiary shall be excluded by a parent from the consolidation simply because the investor is a venture capital organization, mutual fund, unit trust or similar entity. €. An investment entity, which (1) obtains funds from one or more investors, (2) commits to its investors that its business is to invest funds solely for retumsicapital appreciation, and (3) ‘measures and evaluates the performance substantially all of its investment on a fair value basis is exempted from preparing consolidated financial statements. D. A parent corporation (1) which is a wholly-owned or partially-owned subsidiary, (2) whose {debt or equity instrument are not publicly traded, (3) which is notin the process of initial public ‘offering, and (4) when its immediate or ultimate parent produces consolidated financial statements available for public use is exempted from presenting consolidated financial satements, 3. Under PFRS 10, parent corporation is the entity that controls one or more entities. How does PERS. 10 define contrat? A. An investor controls an investee when it is exposed, or has right to variable return from the investment wi the invesoe and hus te ably to affect those fetus trough the power over Be invests B.A ivesor controls an investee when it has the power to gover the financial and operating. jes of en ety a0 ao oban benefits from i activites, ¢. Aninvesorconrolsan invests when ithe te abity Yo alongs the nana and opertog policies of nent sas to aban bef rom fs aves. D. An invettr costes an iaveree when it ovns more than 50% of all be oustanding capi Stocks wht common or peered. 4. Under PFRS 10, it refers tothe term used to describe the ovmership of the largest block of voting ts in a situation where the remaining rights are widely dispersed even if itis less than the majority interest thereby requiring the holder of such interest to prepare consolidated financial statements? 2 Dee cont & Beles etc! | D: Nea soa $616Page 2 Parent Corporation has 51% interest in listed entity Sub Inc. Sub is a highly-leveraged and started ‘making losses. Parent decided to sell 296 to an investment bank. The post-sale structure shows that Parent Corp. has only 49% interest, investment beak has 2% interest and the remaining 49% interest owned by many shareholders other than the investment bank each with less than 1% of votes and there is no arrangement among them to vote collectively. Upon the sale, Parent Corporation can easily reacquire contolling interest in Sub by buying shares in the market and ‘expects to continve managing Sub through election of directors in Sub's general meeting. Sub Ine. is listed with deep and liquid mare for shares. Is the Parent still required to consolidated Sub Ine. {nits consolidated financial statements despite less then majority ownership? A. No because it has no contol considering it only has 49% interest in Sub. Yes because there i de facto contro onthe part of Parent Corp. over the relevant activities of ub Ine, C. No because control is not shown by the relevant facts, D. Yes even if the other sharcholders will eannive to gain control. . An investee's only business activity is to purchase receivables and service them on a day-to-day basis. Servicing involves collection and passing on of principal and interest payments. Upon default, the investes automatically puts the receivable to investor X as agreed separately in a put agreement with investor X. Is Investor X required to consolidate lavestee in its consolidated financial statements? A. Yes because X controls the investee’s relevant activity that is managing the receivables upon fault which significantly affects the investee’s returns. . No because there is no statement as regards 1o majority ownership of stocks, Yes but only if X owns 51% or more of voting stocks of investee. No because there is no link of power over the investee to the exposure/right to variable retums of investment. pap How shall the parent corporation present the Noncontrolling Interest (NCI) in the Consolidated Statement of Financial Position? ‘A. It shall be presented within Consolidated Stockholders’ Equity, separately from the equity of the owmers ofthe parent, B. It shall be presented as non-current liability CC. It shall be presented as noa-current asset. D, It shail be presented as contract-equity account like treasure shares and subscription receivable. Which of the following income items shall affect both CNI wo Parent(CONSORE) and NCINI(NCINAS) in reconciliation from cost method to acquisition method? ‘A, Gain on bargain purchase arising from business combination. : B. Unrealized tealized incomelexpense arising from transactions between two subsidiaries owned by the same parent, C. Unreatized/realized income/expense arising tom downstream transactions or from parent 10 subsidiary 'D. Impairment loss of goodwil! froin business combination intially measured using proportionste share of fair value of net asset sequited, Which of the following income items shall affect CNI to Parent(CONSORE) only but not NCINIANCINAS) in reconciliation from cost method to acquisition method? ‘A. Amortization of difference between the fair value and book value of the assets and liabilities of | the subsidiary B. Unvealized parent C. Impairment loss of goodwill ftom business combination initially measured using fair value of NCL . Dividend income of parent coming ftom subsidiary. ed incomelexpense ari from upstream transactions or from subsidiary to 8616Page 3 10. PAS 27 as amended defines Seperate Financial Statements as those presented by a pareat or an investor with joint control of, or significant influence over, in addition to its consolidated financial statements. Under PAS 27 as amended, Investment in Subsidiary shall be accounted for by the arent in its separate financial stztements using ‘A. Equity Method under PAS 28 B. Cost Method C. Fair value model under PFRS 9 D. Any of the above 11, Which of the following statements conceming the requirement of PAS 27 for preparation of Separate Financial Statements is incorrest? A. PAS 27 as amended mandates the entities which shall present separate financial statements. B. PAS 27 docs not mandate or require which parent corporation should produce separate financial statements bt it shall depend on the laws or rules ofa particular juicdition, © Separate financie) statements need not be appended 10, or accompany, the consolidated financial statements D. A parent entity that is exempted from preparing consolidated financial statements in accordance With PFRS 10 provision may present separate financial statements es its only financial Statements, E, When the entity elects either cost method or fair value model, an entity shall recognize a dividend ffom a subsidiary, a joint venture or an associate in profit or loss in its separete financial statements when its right to receive the dividend is established but in ase of equity ‘method, it shall be considered as deduction from investment account. 12. When the parent corporation elects to accouti its investments in subsidiaries, associates or jointly Controlled entities in its separate financial statements using cost model or fair value model, how shall it recognize its dividends from a subsidiary, joint venture or associate? ‘A. The dividends from a subsidiary, joint venture or associate shall be recognized as dividend income as part of profit or loss of separate statement of comprehensive income when its right to receive dividend is established. B. The dividends from a subsidiary, joint venture or associate shall be recognized as deduction from investment account when is right to receive dividend is established ©. The dividends from a subsidiary, joint venture or associate shell be recognized as dividend income as part of other comprehensive income of separate statement of comprehensive income ‘when its right to receive dividend is established. D. The dividends from a subsidiary, joint venture or associate shall be eliminated through proportionate consolidation in the separate statement of comprehensive income. 1S, When the pareat corporation elects to account it investments in subsidiaries, associates or jointly ontrolted entities in its separate financial statements using equity method, how shall it resognize its dividends from a subsidiary, joint venture or associate? ‘A; The dividends from a subsidiary, joint venture or associate shall be recognized as dividend income as part of profit or loss of separate statement of comprehensive income when is right to receive dividend is established. B. The dividends from a subsidiary, joint venture or associate shall be recognized as deduction from investment account when its right to receive dividend is established C. The dividends from a subsidiary, joint venture or associate shall be recognized as dividend {Income as part of other comprehensive income of separate statement of comprehensive income When its right to reveive dividend is established. D. The dividends from a subsidiary, joint venture or associate shall be eliminated through proportionate consolidation in the separate statement of comprehensive income, 8616Page 4 Part Il: Problem Solving PROBLEM 1: On January 1, 2020, Entity A acquired 70% of outstanding ordinary shares of Entity B at a price of P210,000. On the same date, the net assets of Entity B were reported st P260,000. On January 1, 2020 Entity A reported retained earings of P2,000,000 while Entity B reported retained ‘earings of P200,000. All the assets and liabilities of Entity B are fairly valued except machinery which is undervalued by 'P80,000 and inventory which is overvalued by P10,000. The said machinery has remaining useful life of four years while 40% of the said inventory remained unsold atthe end of 2020. For the year ended December 31, 2020, Entity A reported net income of P1,000,000 and declared dividends of P150,000 in the separate finencial statements while Entity B reported net income of 'P150,000 and declared dividends of P20,000 in the separate financial statements, Entity A accounted the investment in Entity B using cost method in the separate financial statements 1, What isthe non-controlting interest in net assets on December 31, 20207 A. 124,800 B. 130,200, ©. 126,000 D. 133,800, 2. What is the consolidated net income attributable to pareat shareholders for the year ended December 31, 2020? ‘A, 1,102,200 B. 1,162,200 . 13141200 . 1,095,200 ‘3. What isthe amount of consolidated retsined earnings on December 31, 2020? ‘A. 3,012,200 B. 2,991,200 CC. 2,982,200 D. 2,945,200 PROBLEM 2. On January 2, 2020, Fever Company acquired 60% of the outstanding shares of Benz Ine. resulting to an income from acquisition in the amount of P330,000. During 2020 and 2021, intercompany sales amounted to 6,800,000 and P9,400,000, respectively. Fever Company consistently recognized a 30% gross profit on sales while Benz Inc. had a 40% gross profit on sales. ‘The inventories of the buying affiliate were as follows: % of the beginning inventory eame from inter- company transactions and 1/3 of the ending inventory came fom outsiders. The December 31, 2020 inventory of Fever and Benz amount to P$40,000 and P350,000, respectively. The December 31, 2021 inventory of Fever and Benz amount to P570,000 and P150,000, respectively. (On September 1, 2020, Benz Inc, purchased a piece of land costing P3,500,000 from Fever Company for P5,250,000. ‘On November 2, 2021, the buying affiliate sold this land to Jam Co, for P7,500,000. (On the other hand, on May 1, 2021, Benz Inc. sold a machinery with a carrying value of P430,000 and remaining life of 4 years to Fever Company for P190,000. Benz inc. declared dividends in 2021 in the amount of P600,000. Separate Statement of Comprehensive Income for the two companies for the ‘year 2021 follow: Fever Company Bonz Ine. Sales 21,500,000 10,000,000 Cost of Sales + 43,500,000) £6.200,000) Gross Profit 8,000,000 3,800,000 Operating Expenses 8,240,000) 4,100,000) Operating Profit P 4,760,000 2,700,000 Gain on sale of Land 2,250,000 ‘Loss on Sale of Machinery ¢ 240,000) Dividend Revenue 450,000 119,000, Net Income 5210.00 4.820.000 8616Page !5 Compute the following amounts fol of December 31, 2021 1. Consolidated Gross Profit © 11,651,250 b. S148,750 11,948,750 a. 3,351,250 2. Consolidated Net Income attributable to Parent a. 11,768,750 b. 9.720.750 ¢, 10,018,750 | 4. 12,118,750 | 3. Consolidated Operating Expense a. 4,340,000 b. 41140,000 © 4,380,000 4. 4300,000 PROBLEM 3: A summary ofthe seperate income statement of Techno Corporation and its 75% ‘owned subsidiary, Duo Company, for 2021 were as follows: Techno Duo Sales 9,000,000 5,400,000 Gain on sale of equipment 180,000 os Cost of goods sold (6,600,000) (2,340,000) Depreciation expense (900.000) ($40,000) Other expenses (1,440,000) (720,000) Income from operations 3,240,000 1,800,000, ‘There was aa upstream sale of equipment with a book value of P720,000 for P1,170,000 on January 2, 2019. At the time of the intercompany sale, the equipment had a remaining useful life of five years. Techno uses straight-line depreciation. The buying affiliate used the equipment until December 31, 2021, at which time it was sold to Genex for P6$8,000. ‘What is the amount of net profit attributable to non-controliing interests for 20217 A, P517,500 B. P472,500 CC. P450,000 D. P562;500 PROBLEM 4: On July 1, 2020, Density Company purchased 80% of the outstanding shares of Evolve} Company at & cost of P4,000,000, On that datc, Evolve hed 2,500,000 of ordinary shares and] 3,500,000 of retained earings. For 2020, Density had income of P1,00,000 from its separate ‘operations and paid dividends of P750,000. For 2020, Evolve reported income of P325,000 and paid dividends of P150,000. All the assets and liabilities of Evolve have book values equal to their respective fair market values. On October 1, 2020, there was an upstream sale of machinery for 500,000, The book value ofthe machinery on that date was P600,000. ‘The machinery is expected to ‘havea useful life of 5 years from the date of sale. In the December 31, 2020 consolidated income statement, how much is the consolidated net income attributable tothe controlling interest? A. 1,606,000 B. 2:326,000 . 2366,000 1 D. 2;406,000 shisPage 6 PROBLEM 5: Superior Company owns 60% of Uptown Corporation, which in tum owns 80% of Newton Company. Uptown exercises control over Newton and Superior exercises control over Uptown. The following information is available: Superior Uptown Newton Company Company Company Income from Continuing Operations 3,900,000 2,660,000 Pi,S40,000 Cash dividends declared by: 250,000 "180,000 "110,000 (Cash dividends from: | Associates) 75,000 $0,000 stil Other investments at fair value -ai- 90,000 40,000 Net unrealized inter-company gains/(oss) within curest _P360,000 (220,000) _ 160,000 year income downstream downstream — Upstream ‘Amortization relating to excess of far value over book ; Value (book value over fair value) of investment 130,000) 140,000 -aile ‘What is the consolidated net income attributable to Superior Company stockholders? ‘A. 5,939,400 B, 8,893,600 5,834,400 D. 5,901,600 -end of handouts- 8616