Advanced Financial

Accounting
An IFRS® Standards Approach, 4e

Pearl Tan, Chu Yeong Lim and Ee Wen Kuah

Solutions Manual

Chapter 6
Group Reporting V:
Equity Accounting under IAS 28
Joint Arrangements under IFRS 11

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 Advanced Financial Accounting (Tan, Lim & Kuah)
Chapter 6 solutions

Problem 6.1

(a) Prepare consolidation journal entries for the year ended 31 Dec 02

1. Elimination of investment in Opal Ltd

Dr Share capital 300000
Dr Opening retained earnings 120000
Dr Goodwill on consolidation 114000
Cr Investment 450000
Cr Non-controlling interests 84000

2. Goodwill impairment (past and present) in Opal Ltd

Dr Opening retained earnings 50000
Dr Impairment of goodwill (Group's P&L) 40000
Cr Goodwill on consolidation 90000

3. Elimination of dividends declared by Opal

Dr Dividend income from Opal (Jewel's P/L) 30000
Dr Non-controlling interests (B/S) 5850
Cr Tax expense (Jewel's P/L) 6600
Cr Dividends declared, net (Opal's P/L) 29250

4. Adjustment of unrealised profits in closing inventories as at 31 Dec 02

Dr Sales (Jewel's) 100000
Cr Cost of Sales (Jewel's) 70000
Cr Closing Inventory (Opal's B/S) 30000

Dr Prepaid tax 6000 (20%*30K)

Cr Tax expense (Jewel's) 6000

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Chapter 6 solutions

Problem 6.1
5. Non-controlling interests - Change in post-acq RE to beginning of year
Dr Opening Retained Earnings 18000
Cr Non-controlling interests (B/S) 18000
Non-controlling interests at 1.1.2002
Retained earnings, 1 Jan 20x2 210000
Retained earnings, 1 Jan 20x0 -120000
Change in retained earnings 90000
NCI's share of change in RE 18000

6. NCI's share of profit afer tax for 2002

Dr Non-controlling interests (P/L) 24960
Cr Non-controlling interests (B/S) 24960
Non-controlling interest share of Opal's profit after tax for 2002

Movement
Opening NCI 84000
NCI's share of post-acq RE to 1 Jan 20x2 18000
NCI's share of profit after tax 24960
Dividends, net of tax -5850
Closing NCI 121110

Check:
Shareholders' equity of Opal Ltd as at 31 Dec 20x2 605550
NCI's share @ 20% 121110

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Chapter 6 solutions

Problem 6.1
(1) Investment in Opal account (equity accounting)
Investment account
Acquisition costs 450000 Dividends (Note 3) 23400
Post-acq bf RE (Note 1) 72000 Past goodwill impairment 40000
Profit after tax (Note 2) 48640 Bal at the end of 20x2 507240
570640 570640

Note 1: Post acquisition RE

RE at 1 Jan 20x2 210000
RE at acquisition date 120000
Change in RE 90000
Share of change in post acquisition RE 72000

Note 2: Share of change in profit after tax

Opal's profit after tax (unadjusted) 124800
Less goodwill impairment -40000
Less unrealized profit on intercompany sale -30000
Add back tax on unrealized profit on intercompany s 6000
Opal's profit after tax (adjusted) 60800
Share of Opal's profit 48640

Note 3: Dividends received 23400 80%*29250

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Chapter 6 solutions

Problem 6.1
Reconciliation:
Net assets of Opal 31.12.20x2 605550

Jewel's share of Opal's net assets 484440 (80%*605550)

Less unrealized profit (after-tax) -19200 (80%*30000-6000)
Goodwill (note 3) 42000

Investment in Opal per reconciliation 507240

Note 3: Goodwill
Investment in Opal 450000
Share of identifiable net assets -336000 80%*420000
Goodwil implicit in investment in Opal 114000
Goodwill impairment = 80% * 90000 -72000
Goodwil implicit in investment in Opal 42000

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Chapter 6 solutions

Problem 6.1
(2) Equity method versus consolidation:

Essentially this question requires an analysis of the link between information and risk/value.
You first need to understand the differences in impact on financial statements
Equity accounting Consolidation
Sales Parent sales Group Sales
Net profit after tax and NCSame figure Same figure
Total assets Parent's assets + Investment Group assets
under equity accounting
Total liabilities Parent's liabilities Group liabilities
Cash flow from operationsSame figure Same figure

Some issues

(a) No direct cash flow effect but is there an indirect effect on contracting costs?
(b) Will impact on contracting costs have any effect on capital market's assessment?
(c) Equity accounting is less informative - are investors able to reconstruct the full info.
or "undo" the effects of equity accounting. What is the impact of information costs
on capital market's assessment of risk?
(d) Any difference in the assessment of future cash flows from Opal under the
differing assumptions of "control" and "significant influence"?

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Chapter 6 solutions

Problem 6.2
(1) Equity accounting entries

E(1)
Dr Investment in Sapphire 44080
Dr Share of tax expense 11020
Cr Share of profit of Sapphire 55100
Equity accounted profits for the current year

Workings for E(1)

Profit after tax 60000
Regrossed, profit before tax (using tax rate of 20%) (60K/0.8) 75000
Add previous year's unrealised profit now realised (15000-10000) 5000
Less current year's unrealised profit 40% * (60k-40k) -8000
Less depreciation on undervalued building (See E2C) -3125
Adjusted profit before tax 68875
Share of Sapphire's profit before tax 55100

Tax expense of Sapphire (20% of profit before tax) 15000

Less tax effects on unrealized profit on inventory 20%*(5000-8000) -600
Less tax effects on under-depreciation 20%*$3,125 -625
Adjusted tax expense 13775
Share of Sapphire's tax expense 11020

E(2)
Dr Investment in Sapphire 112800
Cr Opening retained earnings 112800
Equity accounted post-acq profits to beginning of year

RE at start of year 300000

RE at date of acquisition -150000
Change in RE 150000
Less unrealized profit from previous year -5000
Add tax on unrealized profit from previous year 1000 (20%*5,000)
Less share of past cumulative depreciation on under-
valued buildings -6250 31250/10*2
Add tax on share of past cumulative depreciation 1250 (20%*6,250)
Adjusted change in RE 141000

Share of Sapphire's post-acq RE 112800

Alternatively, three separate entries can be prepared to show the effects of E2

E(2A)
Dr Investment in Sapphire 120000
Cr Opening retained earnings 120000
Equity accounted post-acq profits to beginning of year

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Chapter 6 solutions

Problem 6.2
RE at start of year 300000
RE at date of acquisition -150000
Change in RE 150000
Prism's share 120000

E(2B)
Dr Opening retained earnings 3200
Cr Investment in Sapphire 3200
Adjustment for unrealized profit at start of year (15000-10000)*80%*80%

E(2C)
Dr Opening retained earnings 4000
Cr Investment in Sapphire 4000
Share of past cumulative depreciation on undervalued buildings, after tax
(80%*2.5K*2)

Excess of fair value over book value of buildings

Investment in Sapphire 300000
Share capital of Sapphire 200000
Retained earnings at acquisition date 150000
Book value at acquisition date 350000
Prism's share @ 80% 280000
Differential (FV-BV), after tax 20000
Regrossed
Before tax undervaluation of buildings and equipment 25000 31250
Deferred tax liability on FV-BV of buildings/equipt -5000 -6250
FV-BV, after tax 20000 25000

Depreciation on undervaluation 2500 3125

Tax on depreciation 500 625

E(4)
Dr Dividend income 16000
Cr Investment in Sapphire 16000
Reclassification of dividend income to reduction of investment account

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Chapter 6 solutions

Problem 6.2
(2) Analytical check of Investment in Sapphire

Investment in Sapphire (equity method)

Acquisition costs 300000 Dividend received (E4) 16000
Share of post-acq RE (E2) 112800
Share of current profit (E1) 44080 Balance at the end of the year 440880

456880 456880

Shareholders' equity of Sapphire at 31 Dec 20x9 540000

Net book value of fair value adjustment, after tax (Note 1) 17500
Unrealized profit on upstream sale -8000
Tax on unrealized profit on upstream sale 1600

Adjusted shareholders' equity of Sapphire at 31 Dec 20x9 551100

Prism's share @ 80% 440880

Note 1:
Balance of under-valuation of building 31250*7/10*0.8 (7 years remaining)
after-tax effects

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Chapter 6 solutions

Problem 6.3
Part 1 (a) and (b)

A-Co

Profit before tax 6,000,000

Tax 1,500,000
Profit after tax 4,500,000
Dividends -150,000
Retained profit 4,350,000

Investment in Associate 10,000,000

% ownership 30%

Cost method Equity accounting

Dividends 45,000 (note 1) 0
Share of profit in A Co 0 1,350,000

After-tax income 45,000 1,350,000

Investment in A 10,000,000 11,305,000

Note 1: Tax-exempt, the position assumed in the text.

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Chapter 6 solutions

Problem 6.3 Part 2 (a)

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Chapter 6 solutions

Problem 6.3 Part 2 (a)

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Chapter 6 solutions

Problem 6.4
1. Prepare the equity accounting entries for 20x5

EA1: Recognize share of post-acq RE of A

Dr Investment in A 21,000
Cr Opening RE 21,000
RE of A as at 1 Jan 20x5 100,000
RE of A as at date of acquisition 30,000
Change in RE 70,000
Share of A's change in RE 21,000

EA2: Recognize share of impairment loss on intangible asset

Dr Opening RE 4,800
Cr Investment in A 4,800 30%*50%*80%*40000

EA3: Adjustment of after-tax unrealized profit on sale of inventory from 20x4.

Dr Opening RE 1,200 30%*80%*5000
Cr Investment in A 1,200

(EA1,2 and 3 can be combined)

EA4: Reclassify dividend income as a reduction of investment

Dr Dividend income 6,000 30%*20000
Cr Investment in A 6,000

EA5: Recognize share of current profit after tax of A

Dr Investment in A 49,200
Cr Share of profit after tax of A 49,200

Alternative presentation:
Dr Investment in A 49,200
Dr Share of tax of A 12,300 30%*41000
Cr Share of profit of A 61,500 30%*205000

NPBT of A 200,000
Add realized profit on sale 5,000
Adjusted NPBT of A 205,000

Tax expense of A 40,000

Add tax on realized profit on sale 1,000
Adjusted tax expense of A 41,000

2. Analytical check of Investment in A:

Book value of shareholders' equity of A 340,000
Unimpaired balance of intangible asset (after-tax) 16,000 80%*50%*40000
356,000
P's share of A's identifiable net assets 106,800 30%*356000
Implicit goodwill in investment in A:
Investment in A 200,000
BV of net assets of A at acq 130,000
Unrecognized intangible (after-tax) 32,000
FV of net assets of A at acq 162,000
Less Share of FV of net assets of A at acq 48,600
Goodwill in A implicit in the investment in A 151,400
258,200
Investment in A, at cost 200,000
EA1: Share of post-acq RE 21,000
EA2:Share of impairment loss -4,800
EA3:Adjustment for unrealized profit (after-tax) -1,200

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Chapter 6 solutions

Problem 6.4
EA4:Dividend received -6,000
EA5:Share of current profit after tax 49,200

Investment in A as at 31 Dec 20x5 258,200

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Chapter 6 solutions

Problem 6.5 (1)

Part (1): Consolidation adjustments

CJE1: Allocate cost of business combination to goodwill and fair value adj
Dr Share capital (S Co) 300,000
Dr Retained earnings (S Co) 120,000
Dr Goodwill 1,780,000
Dr In-process R&D 1,000,000
Dr Inventory 50,000
Cr Contingent liability 50,000
Cr Deferred tax liability 200,000
Cr Investment in S Co 2,100,000
Cr Non-controlling interests 900,000
3,250,000 3,250,000

Fair value of consideration transferred (1) 2,100,000

Fair value of net assets as at date of acquisition 1,420,000

DTL on fair value adjustments=20%*(1m+50K-50K) -200,000
Fair value of net assets after DTL (4) 1,220,000
Fair value of non-controlling interests as at date of acquisition (2) 900,000
Fair value of consideration and non-controlling interests (3)=(1)+(2) 3,000,000
Entity goodwill (3)-(4) 1,780,000

Goodwill attributable to P 1,246,000

Goodwill attributable to non-controlling interests 534,000
1,780,000
CJE2a: Recognize past impairment of in-process R&D
Dr Opening retained earnings 70,000
Dr Non-controlling interests 30,000
Cr In-process R&D 100,000

CJE2(b): Recognize tax expense on past impairment of in-process R&D

Dr Deferred Tax Liability 20,000
Cr Opening RE 14,000
Cr Non-controlling interests 6,000

CJE3a: Recognize past increase in cost of sales of undervalued inventory

Dr Opening retained earnings 35,000
Dr Non-controlling interests 15,000
Cr Inventory 50,000

CJE3b: Recognize tax expense on past increase in cost of sales

Dr Deferred tax liability 10,000
Cr Opening retained earnings 7,000
Cr Non-controlling interests 3,000

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Chapter 6 solutions

Problem 6.5 (1)

CJE4a: Adjust expensing off contingent liability to avoid double-counting
and to show that the contingent liability in CJE 1 has been settled
Dr Contingent liability 50,000
Cr Claims expense 50,000

What is What should be

S's books Dr Claims expense
50000 Dr Contingent Liab 50000
Cr Cash 50000 Cr Cash 50000
Group Contingent liability already
provided in CJE1
CJE4b: Recognize tax effect on contingent liability
Dr Tax expense 10,000
Cr Deferred tax liability 10,000

CJE5: Adjust unrealized profit from upstream sale included in opening RE

Dr Opening retained earnings 2,800
Dr Non-controlling interests 1,200
Cr Cost of sales 4,000

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Chapter 6 solutions

Problem 6.5 (1)

CJE6: Adjust tax on unrealized profit from upstream sale incl. in opening RE
Dr Tax expense 800
Cr Opening retained earnings 560
Cr Non-controlling interests 240

CJE7: Adjust unrealized profit from upstream sale in 20x3

Dr Sales 200,000
Cr Cost of Sales 184,000
Cr Inventory 16,000

CJE8: Adjust tax on unrealized profit from upstream sale in 20x3

Dr Deferred Tax Asset 3,200
Cr Tax expense 3,200

CJE9: Allocate current profit after tax to Non-controlling interests

Dr Income to Non-controlling interests 119,520
Cr Non-controlling interests 119,520
Net profit after tax (S) 368,000
Less unrealized profit for 20x3 -16,000
Add tax on unrealized profit for 20x3 3,200
Add realized profit from 20x2 4,000
Less tax on realized profit from 20x2 -800
Add back claims expense (contingent liability) (after-tax) 40,000
Adjusted profit after tax 398,400
NCI's share @30% 119,520

CJE 10: Eliminate dividend income against dividend declared

Dr Dividend income 70,000
Dr Non-controlling interests 30,000
Cr Dividend declared by S 100,000

CJE11: Recognize NCI's share of post-acq RE to 1 Jan 20x3

Dr Opening RE 39,000
Cr Non-controlling interests 39,000
RE at 1 Jan 20x3 250,000
RE at acquisition date 120,000
Change in RE 130,000

EA1: Recognize share of post-acq RE of A

Dr Investment in A 16,000
Cr Opening RE 16,000

RE of A as at 1 Jan 20x3 160,000

RE of A as at date of acquisition 120,000
Change in RE 40,000
Share of A's change in RE 16,000

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Chapter 6 solutions

Problem 6.5 (1)

EA2: Adjusment for unrealized profit in beginning inventory

Dr Opening RE 1,920
Cr Investment in A 1,920

Unrealized profit from P's sales to A in 20x2 6,000 (20K * 30%)

Tax on unrealized profit -1,200
Unrealized profit after-tax 4,800
P's share of unrealized profit after-tax 1,920

EA3: Adjustment for past depreciation on under-valued FA

Dr Opening RE 2,560 (40K/5*40%*80%)
Cr Investment in A 2,560

(Note: EA1 to EA3 may be combined)

EA4: Reclassify dividend income as a reduction of investment

Dr Dividend income 24,000
Cr Investment in A 24,000 (40%*60K)

EA5: Recognize share of current profit after tax of A

Dr Investment in A 192,800
Cr Share of profit after tax of A 192,800

Alternatively:
Dr Investment in A 192,800
Dr Share of tax of A 54,400
Cr Share of profit of A 247,200

Profit before tax of A 620,000

Less depreciation on undervalued fixed asset (40k/5) -8,000
Add realized profit from 20x2 (P's transfer to A) 6,000
Adjusted profit before tax of A 618,000
Share of adjusted profit before tax of A 247,200

Tax expense of A 136,400

Less tax on depreciation on undervalued fixed asset -1,600
Add tax on realized profit from 20x2 (P's transfer to A) 1,200
Adjusted tax of A 136,000
Share of adjusted tax of A 54,400

Part (2) see worksheets attached

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Chapter 6 solutions

Problem 6.5 (2)

(2) Consolidation Worksheets

Income Statement for y/e 31 Dec 20x3 P Co S Co Consolidation adjusments TOTAL

Dr Cr
Sales 5,000,000 3,500,000 200,000 8,300,000
Cost of sales -4,000,000 -3,000,000 184,000 -6,812,000
4,000
Gross profit 1,000,000 500,000 1,488,000
Other income 140,000 30,000 70,000 76,000
24,000
Operating expenses -150,000 -70,000 50,000 -170,000
Share of associate's profit 192,800 192,800
Net profit before tax 990,000 460,000 1,586,800
Tax expense -198,000 -92,000 800 3,200 -297,600

10,000
Net profit after tax 792,000 368,000 1,289,200
Income to non-controlling interests 119,520 -119,520

Dividends declared -50,000 -100,000 100,000 -50,000

Net profit attributable to
shareholders 742,000 268,000 1,119,680
Retained earnings, 1 Jan 20x3 2,500,000 250,000 39,000 560 2,516,280
1,920 16,000
120,000 14,000
70,000 7,000
35,000
2,800
2,560
Retained earnings, 31 Dec 20x3 3,242,000 518,000 695,600 571,560 3,635,960
Statement of Financial Position as at 31 Dec 20x3

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Chapter 6 solutions

Problem 6.5 (2)

P Co S Co DR CR TOTAL
Investment in S Co 2,100,000 2,100,000
Investment in A Co 200,000 16,000 1,920 380,320
24,000
192,800 2,560
Goodwill 1,780,000 1,780,000
In-process R&D 1,000,000 100,000 900,000
Fixed assets 4,000,000 40,000 4,040,000
Inventory 2,000,000 450,000 50,000 16,000 2,434,000
50,000
Deferred tax asset 3,200 3,200
Accounts receivable 1,000,000 350,000 1,350,000
Cash 120,000 40,000 160,000
9,420,000 880,000 3,042,000 2,294,480 11,047,520

Deferred tax liability 20,000 200,000 180,000

10,000 10,000
Contingent liability 50,000 50,000 0
Accounts payable 3,178,000 62,000 3,240,000
Share capital 3,000,000 300,000 300,000 3,000,000
Retained earnings 3,242,000 518,000 695,600 571,560 3,635,960
Non-controlling interests 30,000 240 991,560
30,000 119,520
15,000 39,000
1,200 900,000
6,000
3,000
9,420,000 880,000 1,151,800 1,899,320 11,047,520
See check under consolidation adjustments. 4,193,800 4,193,800

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Chapter 6 solutions

Problem 6.5(3)
Part (3) Analytical check of Non-controlling interests
CJE1: NCI at acquisition date 900,000
CJE2: Share of past impairment loss -30,000
CJE2b: Share of tax on past impairment loss 6,000
CJE3:Share of past COS adj on under-val inventory -15,000
CJE3b: Share of tax on past COS 3,000
CJE5: Share of adj of unrealized profit in begg inventory -1,200
CJE6: Share of adj of tax effects of CJE5 240
CJE9: Share of adjusted current profit after tax 119,520
CJE10: Dividends paid to NCI -30,000
CJE11: NCI's share of post-acq RE 39,000
NCI as at 31 Dec 20x3 991,560

Book value of net assets of S Co as at 31 Dec 20x3 818000

Unrealized profit included in net assets of S Co (after-tax) -12,800
Adjusted book value of net assets of S Co 805,200
Unimpaired balance of in-process R&D (after-tax) 720,000
Adjusted net assets of S Co as at 31 Dec 20x3 1,525,200

NCI's share of identifiable net assets as at 31 Dec 20x3 457,560

NCI's share of goodwill 534,000
NCI as at 31 Dec 20x3 991,560

Part (3):Analytical check of Investment in A:

Book value of shareholders' equity of A 783,600
(No unrealized profit adjustment for RE at year-end)
Balance of fair value adjustment (fixed assets) 19,200
802,800
P's share of A's identifiable net assets 321,120

Implicit goodwill in investment in A:

Investment in A 200,000
Less Share of FV of net assets of (after-tax) 140,800
Goodwill in A implicit in the investment in A 59,200
Investment in A, equity method 380,320
(DTL=40%*20%*40000)
Investment in A, at cost 200,000
EA1: Share of post-acq RE 16,000
EA2: Adjustment for unrealized profit (after-tax) in beginning RE -1,920
EA3: Adjustment for past depreciation on under-valued FA -2,560
EA4:Dividend received -24,000
EA5:Share of current profit after tax 192,800

Investment in A as at 31 Dec 20x3 380,320

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Chapter 6 solutions

Problem 6.6
Part (1): Consolidation and equity accounting entries for 20X5

CJE1: Elimination of investment in X Co

Dr Share capital 500,000
Dr Retained earnings 1,000,000
Dr Inventory 50,000
Dr Goodwill 460,000
Cr Deferred tax liability 10,000
Cr Investment in X 1,800,000
Cr Non-controlling interests 200,000
2,010,000 2,010,000

Fair value of consideration 1,800,000

Fair value of non-controlling interests 200,000
2,000,000
Fair value of identifiable net assets (after deferred tax) -1,540,000
Goodwill 460,000

Goodwill attributable to P 414,000

Goodwill attributable to non-controlling interests 46,000
460,000

CJE2: Cost of sales adjustment for under-valued inventory to opening RE

Dr Opening RE 45,000
Dr Non-controlling interests 5,000
Cr Inventory 50,000

CJE3: Tax effects of CJE2

Dr Deferred tax liability 10,000
Cr Opening RE 9,000
Cr Non-controlling interests 1,000

CJE4: Adjustment for unrealized profit on transfer of fixed assets in opening RE

Reinstate to original cost and accumulated depreciation prior to transfer
Dr Opening RE 72,000
Dr Non-controlling interests 8,000
Cr Fixed assets 20,000
Cr Accumulated depreciation 60,000
Shd be What is Adjustmt
Fixed assets, cost 100,000 120,000 -20,000
Accumulated depreciation -60,000 0 -60,000
Net book value 40,000 120,000 -80,000

CJE5: Adjustment for tax on unrealized profit on transfer of fixed assets in opening RE
Dr Deferred tax asset 16,000
Cr Opening RE 14,400
Cr Non-controlling interests 1,600

CJE6: Adjustment of current and past depreciation of transferred fixed asset

Dr Accumulated depreciation 80,000
Cr Depreciation 40,000
Cr Opening RE 36,000
Cr Non-controlling interests 4,000
Depreciation before transfer 20,000
Depreciation after transfer 60,000
Annual over-depreciation to be corrected (20X4&20X5) -40,000

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Chapter 6 solutions

Problem 6.6
CJE7: Tax effects on CJE6
Dr Tax expense 8,000
Dr Opening RE 7,200
Dr Non-controlling interests 800
Cr Deferred tax asset 16,000

CJE8: Allocate share of post-acq RE to NCI

Dr Opening RE 60,000
Cr NCI (BS) 60,000
RE at 1 Jan 20X5 1,600,000
RE at date of acquisition 1,000,000
Change in RE 600,000
NCI's share 60,000

CJE9: Eliminate dividends declared by X Co

Dr Dividend income 216,000
Dr Non-controlling interests 24,000
Cr Dividend declared 240,000

CJE10: Adjust unrealized profit from ending inventory

Dr Sales 30,000
Cr Cost of sales 10,000
Cr Inventory 20,000

CJE11: Adjust tax on unealized profit in ending inventory

Dr Deferred tax asset 4,000
Cr Tax expense 4,000

CJE12: Allocate share of current income to NCI

Dr Income to NCI 403,200
Cr NCI (BS) 403,200

NPAT of X Co 4,000,000
Add correction of excess depreciation 40,000
Less tax on excess depreciation -8,000
Adjusted NPAT 4,032,000

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Chapter 6 solutions

Problem 6.6
EA1: Recognize share of post-acq RE of Z
Dr Investment in Z 60,000
Cr Opening RE 60,000

RE of Z as at 1 Jan 20X5 1,000,000

RE of Z as at date of acquisition 800,000
Change in RE 200,000 Can be
combined
Share of Z's change in RE 60,000

EA2: Adjustment for unrealized profit in beginning inventory

Dr Opening RE 480
Cr Investment in Z 480
Unrealized profit from P's sales to Z in 20X4 2,000 (20K * 10%)
Tax on unrealized profit -400
Unrealized profit after-tax 1,600
P's share of unrealized profit after-tax 480

EA3: Reclassify dividend income as a reduction of investment

Dr Dividend income 30,000
Cr Investment in Z 30,000 (30%*100K)

EA4: Recognize share of current profit after tax of Z

Dr Investment in Z 290,160
Cr Share of profit after tax 290,160

Alternatively:
Dr Investment in Z 290,160
Dr Share of tax of Z 57,540
Cr Share of profit of Z 347,700

Profit before tax of Z 1,200,000

Less impairment of intangible -40,000
Add realized profit from 20X4 (P's transfer to Z) 2,000
Less unrealized profit from 20X5 (Z's transfer to P) -3,000
Adjusted profit before tax of Z 1,159,000
Share of adjusted profit before tax of Z 347,700

Tax expense of Z 200,000

Less tax on impairment of intangible -8,000
Add tax on realized profit from 20X4 (P's transfer to Z) 400
Less tax on unrealized profit from 20X5 (Z's transfer to P) -600
Adjusted tax of Z 191,800
Share of adjusted tax of Z 57,540

Part (2): Analytical check of Non-controlling Interests:

Book value of net assets as at 31 Dec 20X5 5,860,000
Unamortized balance of FV adjustment 0
Adjustment for unrealized profit on fixed assets 0 (fully depreciated)
Adjusted identifiable net assets as at 31 Dec 20X5 5,860,000
NCI's share of identifiable net assets 586,000
NCI's share of goodwill 46,000
NCI balance as at 31 Dec 20x5 632,000

CJE1: NCI at date of acquisition 200,000

CJE2: Adjustment for cost of sales of over-valued inventory -5,000
CJE3: Tax effects of CJE2 1,000
CJE4: Adjustment for gain on sale of FA -8,000

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Chapter 6 solutions

Problem 6.6
CJE5:Adjustment for tax on gain on sale of FA 1,600
CJE6:Adjustment for depreciation on gain on sale 4,000
CJE7:Adjustment for tax on depreciation -800
CJE8: Share of post-acq RE 60,000
CJE9: Dividends received -24,000
CJE12: Allocate share of current income to NCI 403,200
NCI balance as at 31 Dec 20X5 632,000

Part (3): Analytical check of Investment in Z:

Book value of shareholders' equity of Z 2,200,000

Adjustment to RE for unrealized profit at year-end (after-tax) -2,400
Unimpaired balance of intangible asset (after-tax) 128,000
2,325,600

P's share of Z's identifiable net assets 697,680

Implicit goodwill in investment in Z:

Investment in Z 500,000
BV of net assets of Z at acq 1,100,000
Unrecognized intangible (after-tax) 160,000
FV of net assets of Z at acq 1,260,000
Less Share of FV of net assets of Z at acq 378,000

Goodwill in Z implicit in the investment in Z 122,000

819,680

Investment in Z, at cost 500,000

EA1: Share of post-acq RE 60,000
EA2: Adjustment for unrealized profit (after-tax) in beginning RE -480
EA3:Dividend received -30,000
EA4:Share of current profit after tax 290,160
Investment in Z as at 31 Dec 20X5 819,680

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Chapter 6 solutions

Problem 6.7
CJE1: Elimination of investment in Y Co
Dr Share capital 500,000
Dr Retained earnings 1,000,000
Dr Intangible asset 200,000
Dr Goodwill 320,000
Cr Deferred tax liability 40,000
Cr Investment in Y Co 1,800,000
Cr Non-controlling interests 180,000
2,020,000 2,020,000

Fair value of identifiable net assets (after deferred tax) 1,660,000

Goodwill = Fair value of business combination + Fair value of NCI - Fair value of
identifiable net assets at date of acquisition

Goodwill attributable to P Co 306,000 =1800000-90%*1660000

Goodwill attributable to NCI 14,000 =180000-10%*1660000
320,000

CJE2: Adjustment for unrealized profit on transfer of fixed assets

Reinstate to original cost and accumulated depreciation prior to transfer
Dr Gain on sale 102,000
Cr Fixed assets 30,000
Cr Accumulated depreciation 72,000

Shd be What is Adjustmt

Fixed assets, cost 120,000 150,000 -30,000
Accumulated depreciation -72,000 0 -72,000
Net book value 48,000 150,000 -102,000

CJE3: Adjustment for tax on unrealized profit on transfer of fixed assets

Dr Deferred tax asset 20,400
Cr Tax expense 20,400

CJE4: Adjustment of current depreciation on transferred fixed asset

Dr Accumulated depreciation 34,000
Cr Depreciation 34,000

Remaining useful life is changed to 3 years from 1 Jan 20x5.

Excess depreciation =Gain on sale/remaining useful life
34,000
Alternatively, compare the revised depreciation if no transfer is made and
depreciation after transfer
Depreciation before transfer 48000/3 16,000
Depreciation after transfer 150000/3 50,000
Annual over-depreciation to be corrected (20x5) -34,000

CJE5: Tax effects on CJE5

Dr Tax expense 6,800
Cr Deferred tax asset 6,800

CJE6: Allocate share of post-acq RE to NCI

Dr Opening RE 50,000
Cr NCI (BS) 50,000
RE at 1 Jan 20x5 1,500,000
RE at date of acquisition 1,000,000
Change in RE 500,000
NCI's share 50,000

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Chapter 6 solutions

Problem 6.7
CJE7: Eliminate dividends declared by Y Co
Dr Dividend income 180,000
Dr Non-controlling interests 20,000
Cr Dividend declared 200,000

No adjustment is required for the transfer of inventory at a loss.

Since the transfer price was at market price, the loss on transfer
is indicative of an impairment loss and no reversal is required of the loss.

CJE8: Allocate share of current income to NCI

Dr Income to NCI 98,560
Cr NCI (BS) 98,560

NPAT of Y Co 1,040,000
Less Gain on sale of FA -102,000
Add tax on gain on sale of FA 20,400
Add depreciation on gain on sale of FA 34,000
Less tax expense on gain on sale of FA -6,800
Adjusted NPAT 985,600

Analytical check of Non-controlling Interests:

Book value of net assets as at 31 Dec 20x5 2,840,000
Adjustment for unrealized gain on FA (after-tax) -54,400
2,785,600
Unamortized balance of FV adjustment (after-tax) 160,000
Adjusted net assets as at 31 Dec 20x5 2,945,600
NCI's share 294,560
NCI's share of goodwill 14,000
Total NCI 308,560

CJE1: NCI at date of acquisition 180,000

CJE6: Share of post-acq RE 50,000
CJE7: Dividends received -20,000
CJE8: Allocate share of current income to NCI 98,560
NCI balance as at 31 Dec 20x5 308,560

EA1: Recognize share of post-acq RE of Z Co

Dr Investment in Z Co 60,000
Cr Opening RE 60,000

RE of Z Coas at 1 Jan 20x5 900,000

RE of Z Co as at date of acquisition 700,000
Change in RE 200,000
Share of Z Co's change in RE 60,000

EA2: Reclassify dividend income as a reduction of investment

Dr Dividend income, gross 30,000
Cr Investment in Z Co 30,000 (30%*100K)

EA3: Recognize share of current profit after tax of Z Co

Dr Investment in Z Co 308,400
Cr Share of profit after tax of Z Co 308,400

Alternatively:
Dr Investment in Z Co 308,400
Dr Share of tax of Z Co 84,600
Cr Share of profit of Z Co 393,000

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Chapter 6 solutions

Problem 6.7
Profit before tax of Z Co 1,400,000
Less impairment of intangible -90,000
Adjusted profit before tax of Z Co 1,310,000

Tax expense of Z Co 300,000

Less tax on impairment of intangible -18,000
Adjusted tax expense of Z Co 282,000

Analytical check of Investment in Z Co:

Book value of shareholders' equity of Z Co 2,200,000
Unimpaired balance of intangible asset (after-tax) 168,000
2,368,000
P's share of Z's identifiable net assets 710,400

Implicit goodwill in investment in Z Co:

Investment in Z Co 500,000
BV of net assets of Z Co at acq 1,000,000
Unrecognized intangible (after-tax) 240,000
FV of net assets of Z Co at acq 1,240,000
Less Share of FV of net assets of Z Co at acq 372,000
Goodwill in Z Co implicit in the investment in Z Co 128,000
838,400

Investment in Z Co, at cost 500,000

EA1: Share of post-acq RE 60,000
EA2:Dividend received -30,000
EA3:Share of current profit after tax 308,400
Investment in Z Co as at 31 Dec 20x5 838,400

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Chapter 6 solutions

Problem 6.8 (1)

CJE1: Elimination of investment in Y Co
Dr Share capital 1,000,000
Dr Retained earnings 500,000
Dr Inventory 100,000
Dr Goodwill 520,000
Cr Deferred tax liability 20,000
Cr Investment in Y Co 1,900,000
Cr Non-controlling interests 200,000
2,120,000 2,120,000

Goodwill attributable to P Co 478,000

Goodwill attributable to Non-controlling interests 42,000
520,000
CJE2: Sale of under-valued inventory
Dr Opening RE 90,000 (90%*100,000)
Dr Non-controlling interests 10,000 (10%*100,000)
Cr Inventory 100,000

CJE3: Tax effects of sale of under-valued inventory

Dr Deferred tax liability 20,000
Cr Opening RE 18,000
Cr Non-controlling interests 2,000

CJE4: Adjustment for unrealized profit on upstream transfer in opening RE

Dr Opening RE 129,600 (90%*90%*160,000)
Dr Non-controlling interest 14,400 (10%*90%*160,000)
Cr Cost of sales 128,000 (80%*160,000)
Cr Inventory 16,000 (10%*160,000)

CJE5: Adjustment for tax on unrealized profit on CJE4

Dr Tax expense 25,600 (20%*128,000)
Dr Deferred tax asset 3,200 (20%*16,000)
Cr Opening RE 25,920 (20%*129,600)
Cr Non-controlling interests 2,880 (20%*14,400)

CJE6: Allocate share of post-acq RE to NCI

Dr Opening RE 40,000
Cr NCI (BS) 40,000
RE at 1 Jan 20x5 900,000
RE at date of acquisition 500,000
Change in RE 400,000
NCI's share@10% 40,000

CJE7: Eliminate dividends declared by Y Co

Dr Dividend income 180,000
Dr Non-controlling interests 20,000
Cr Dividend declared 200,000

CJE8: Allocate share of current income to NCI

Dr Income to NCI 106,240
Cr NCI (BS) 106,240
NPAT of Y Co 960,000
Add realized sale on inventory 128,000
Less tax on gain on realized sale -25,600
Adjusted NPAT 1,062,400

CJE9: Eliminate intercompany payable and receivable

Dr Intercompany payable 200,000

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Chapter 6 solutions

Problem 6.8
Cr Intercompany receivable 200,000

EA1: Recognize share of post-acq RE of Z

Dr Investment in Z 36,480
Cr Opening RE 36,480
RE of Z as at 1 Jan 20x5 560,000
RE of Z as at date of acquisition 400,000
Change in RE 160,000
Less past amortization of intangible asset (after-tax) -38,400 (240K/5)*80%
Adjusted change in RE 121,600
Share of Z's change in RE@30% 36,480

EA2: Reclassify dividend income as a reduction of investment

Dr Dividend income from associate 18,000
Cr Investment in Z 18,000 (30%*60,000)

EA3: Recognize share of current profit after tax of Z

Dr Investment in Z 137,040
Cr Share of profit of Z 137,040

Dr Investment in Z 137,040
Dr Share of tax of Z 26,760 (30%*89,200 below)
Cr Share of profit of Z 163,800 (30%*546,000 below)

NPBT 600,000
Less unrealized profit -8,000 Given
Add realization through depreciation 2,000 Below
Less amortization of intangible asset (fair value adjustment) -48,000 (240,000/5)
Adjusted NPBT of Z 546,000

Tax expense of Z 100,000

Less tax on unrealized profit and depreciation -1,200 20%*-6000
Less tax on amortization of intangible asset -9,600
Adjusted tax expense of Z 89,200

Depreciation before transfer 72,000 (360,000/5)

Depreciation after transfer 74,000 (296,000/4)
Annual over-depreciation to be corrected -2,000

Part 2: See worksheets attached

Part 3: Analytical check of Non-controlling Interests:

Book value of net assets of Y Co as at 31 Dec 20x5 2,660,000
Adjustment for unrealized gain on inventory (after-tax) -12,800 (80%*10%*160,000)
Adjusted net assets as at 31 Dec 20x5 2,647,200
NCI's share 264,720

Goodwill attributable to NCI 42,000

306,720

CJE1: NCI at date of acquisition 200,000

CJE2: Adjustment for sale of under-valued inventory -10,000
CJE3: Tax effects of CJE2 2,000
CJE4: Adjustment for unrealized profit at start of year -14,400
CJE5: Adjustment for tax on unrealized profit at start of year 2,880
CJE6: Share of post-acq RE 40,000
CJE7: Dividends received -20,000
CJE8: Allocate share of current income to NCI 106,240

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Chapter 6 solutions
Problem 6.8 (1)

NCI balance as at 31 Dec 20x5 306,720

Analytical check of Investment in Z:

Book value of shareholders' equity of Z 1,200,000
Less undepreciated profit on sale of fixed asset as at end of 20x5, after-tax -4,800 (8K-2K)*0.8
Unamortized balance of intangible asset (fair value adjustment) after-tax 115,200 (240K-96K)*80%
1,310,400
P's share of Z's identifiable net assets 393,120
Implicit goodwill in investment in Z:
Investment in Z 600,000
BV of net assets of Z at acq 600,000
Intangible asset (after-tax) 192,000
FV of net assets of Z at acq 792,000
Less Share of FV of net assets of Z at acq 237,600
Goodwill in Z implicit in the investment in Z 362,400
755,520

Investment in Z, at cost 600,000

EA1: Recognize share of post-acq RE of Z 36,480
EA2: Reclassify dividend income as a reduction of investment -18,000
EA3: Recognize share of current profit after tax of Z 137,040

Investment in Z as at 31 Dec 20x5 755,520

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Chapter 6 solutions

Problem 6.8
Income Statement for year ended 31 December 20x5
P Co Y Co Dr Cr Total
Profit before tax (including dividend income) 3,000,000 1,200,000 180,000 128,000 4,267,040
18,000 137,040

Tax (600,000) (240,000) 25,600 (865,600)

Profit after tax 2,400,000 960,000 3,401,440

Dividends declared (300,000) (200,000) 200,000 (300,000)

Profit retained 2,100,000 760,000 3,101,440

Income to NCI 106,240 (106,240)

Retained earnings, 1 Jan 20x5 1,000,000 900,000 500,000 36,480 1,220,800

90,000 25,920
40,000 18,000
129,600

Retained earnings, 31 Dec 20x5 3,100,000 1,660,000 1,089,440 545,440 4,216,000

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Chapter 6 solutions

Problem 6.8
Statement of Financial Position P Co Y Co Dr Cr Total
as at 31 December 20x5

Fixed assets, net book value 3,200,000 1,500,000 0 4,700,000

Goodwill 520,000 520,000

Investment in Y Co, at cost 1,900,000 1,900,000

Investment in Z Co, at cost 600,000 36,480 18,000 755,520

137,040

Deferred tax 3,200 3,200

Inventory 800,000 600,000 100,000 100,000 1,384,000

16,000

Intercompany receivable 200,000 200,000 0

Accounts receivable 530,000 300,000 830,000

Cash 20,000 80,000 100,000

7,050,000 2,680,000 796,720 2,234,000 8,292,720

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Chapter 6 solutions

Problem 6.8
P Co Y Co Dr Cr Total
Accounts payable 2,750,000 20,000 2,770,000

Deferred tax liability 20,000 20,000 0

Intercompany payable 200,000 200,000 0

Share capital 1,000,000 1,000,000 1,000,000 1,000,000

Retained earnings 3,100,000 1,660,000 1,089,440 545,440 4,216,000

Non-controlling interests 10,000 200,000 306,720

2,000
20,000 40,000
14,400 2,880
106,240
7,050,000 2,680,000 2,353,840 916,560 8,292,720

3,150,560 3,150,560

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Chapter 6 solutions

Problem 6.9
CJE1: Elimination of investment in Y Co
Dr Share capital 500,000
Dr Retained earnings 700,000
Dr Inventory 100,000
Dr Goodwill 260,000
Cr Deferred tax liability 20,000
Cr Investment in Y Co 1,400,000
Cr Non-controlling interests 140,000
1,560,000 1,560,000

Goodwill atttributed to P Co 248,000 =1400000-90%*(1300000-20000)

Goodwill atttributed to NCI 12,000 =140000-10%*(1300000-20000)
260,000

CJE2: Sale of under-valued inventory

Dr Opening RE 90,000
Dr Non-controlling interests 10,000
Cr Inventory 100,000

CJE3: Tax on sale of under-valued inventory

Dr Deferred tax liability 20,000
Cr Opening RE 18,000
Cr Non-controlling interests 2,000

CJE4: Adjustment for unrealized profit on upstream transfer in opening RE

Dr Opening RE 43,200
Dr Non-controlling interest 4,800
Cr Cost of sales 36,000
Cr Inventory 12,000

CJE5: Adjustment for tax on unrealized profit on CJE4

Dr Tax expense 7,200
Dr Deferred tax asset 2,400
Cr Opening RE 8,640
Cr Non-controlling interests 960

CJE6: Allocate share of post-acq RE to NCI

Dr Opening RE 10,000
Cr NCI (BS) 10,000
RE at 1 Jan 20x6 800,000
RE at date of acquisition 700,000
Change in RE 100,000
NCI's share 10,000

CJE7: Eliminate dividends declared by Y Co

Dr Dividend income 108,000
Dr Non-controlling interests 12,000
Cr Dividend declared 120,000

CJE8: Allocate share of current income to NCI

Dr Income to NCI 98,880
Cr NCI (BS) 98,880
NPAT of Y Co 960,000
Add realized sale on inventory 36,000
Less tax on gain on realized sale -7,200
Adjusted NPAT 988,800
CJE9: Adjustment for downstream sale of inventory
Dr Sales (P) 100,000

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Chapter 6 solutions

Problem 6.9
Dr Inventory 4,000
Cr Cost of Sales (P&S) 104,000

CJE10: Adjustment for tax effects on CJE9

Dr Tax expense 800
Cr Deferred tax liability 800

CJE11: Eliminate intercompany payable and receivable

Dr Intercompany payable 40,000
Cr Intercompany receivable 40,000

CJE12: Eliminate intercompany interest expense and interest income

Dr Interest income (P) 1,500
Cr Interest expense (S) 1,500

EA1: Recognize share of post-acq RE of Z

Dr Investment in Z 90,000
Cr Opening RE 90,000
RE of Z as at 1 Jan 20x6 700,000
RE of Z as at date of acquisition 400,000
Change in RE 300,000
Share of Z's change in RE 90,000

EA2: Recognize share of past amortization of intangible asset (after-tax)

Dr Opening RE 14,400 30%*300000/5*80%
Cr Investment in Z 14,400

EA3: Reclassify dividend income as a reduction of investment

Dr Dividend income 30,000
Cr Investment in Z 30,000

EA4: Recognize share of current profit after tax of Z

Dr Investment in Z 106,560
Cr Share of profit of Z 106,560

Alternatively:
Dr Investment in Z 106,560
Dr Share of tax of Z 19,140
Cr Share of profit of Z 125,700

NPBT 500,000 Transfer price 172,000

Less unrealized profit -28,000 Cost 180,000
Add realization through depreciation 7,000 Acc Dep -36,000 144,000
Less amortization of intangible asset -60,000 Unrealized profit 28,000
Adjusted NPBT of Z 419,000

Tax expense of Z 80,000

Less tax on unrealized profit and depreciation -4,200
Less tax on amortization of intangible asset -12,000
Adjusted tax expense of Z 63,800

Depreciation before transfer 36,000

Depreciation after transfer 43,000
Annual over-depreciation to be corrected (20x6) -7,000

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Chapter 6 solutions

Problem 6.9
Analytical check of Non-controlling Interests:
Book value of net assets as at 31 Dec 20x6 2,140,000
Adjustment for unrealized gain on inventory (after-tax) -9,600
Adjusted net assets as at 31 Dec 20x6 2,130,400
NCI's share at 10% 213,040
NCI's goodwill 12,000
225,040

CJE1: NCI at date of acquisition 140,000

CJE2: Adjustment for sale of under-valued inventory -10,000
CJE3: Adjustment for tax on sale of under-valued inventory 2,000
CJE4: Adjustment for unrealized profit at start of year -4,800
CJE5: Adjustment for tax on unrealized profit at start of year 960
CJE6: Share of post-acq RE 10,000
CJE7: Dividends received -12,000
CJE8: Allocate share of current income to NCI 98,880
NCI balance as at 31 Dec 20x6 225,040

Analytical check of Investment in Z:

Book value of shareholders' equity of Z 1,220,000

Less unrealized profit as at end of 20x6 (after depreciation) after-tax -16,800
Unamortized balance of intangible asset (after-tax) 144,000
1,347,200
P's share of Z's identifiable net assets 404,160

Implicit goodwill in investment in Z:

Investment in Z 500,000
BV of net assets of Z at acq 600,000
Unrecognized intangible (after-tax) 240,000
FV of net assets of Z at acq 840,000
Less Share of FV of net assets of Z at acq 252,000
Goodwill in Z implicit in the investment in Z 248,000
652,160

Investment in Z, at cost 500,000

EA1: Share of post-acq RE 90,000
EA2: Past amortization of intangible asset -14,400
EA3:Dividend received -30,000
EA4:Share of current profit after tax 106,560
Investment in Z as at 31 Dec 20x6 652,160

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Chapter 6 solutions

Problem 6.9
Income Statement for year ended 31 December 20x6
P Co Y Co Dr Cr Total
Profit before tax 2,800,000 1,200,000 108,000 36,000 4,008,560
30,000 106,560
100,000 104,000
1,500 1,500

Tax -560,000 -240,000 7,200 -808,000

800

Profit after tax 2,240,000 960,000 3,200,560

Dividends declared -200,000 -120,000 120,000 -200,000

Profit retained 2,040,000 840,000 3,000,560

Income to NCI 98,880 -98,880

Retained earnings, 1 Jan 20x6 2,800,000 800,000 700,000 90,000 2,859,040

90,000 18,000
10,000 8,640
43,200
14,400
Retained earnings, 31 Dec 20x6 4,840,000 1,640,000 1,203,980 484,700 5,760,720

SFP as at 31 Dec 20x6 P Co Y Co Dr Cr Total

Fixed assets, net book value 2,340,000 1,000,000 3,340,000

Goodwill 260,000 260,000

Investment in Y Co, at cost 1,400,000 1,400,000

Investment in Z Co, at cost 500,000 90,000 30,000 652,160
106,560 14,400

Deferred tax 2,400 800 1,600

Inventory 560,000 550,000 100,000 100,000 1,102,000
4,000 12,000
Intercompany receivable 40,000 40,000 0
Accounts receivable 1,200,000 800,000 2,000,000
Cash 30,000 100,000 130,000
6,030,000 2,490,000 562,960 1,597,200 7,485,760

Accounts payable 100,000 350,000 450,000

Amount owing to Z Co 40,000 40,000
Intercompany payable 50,000 40,000 10,000
Deferred tax liability 20,000 20,000 0
Share capital 1,000,000 500,000 500,000 1,000,000
Retained earnings 4,840,000 1,640,000 1,203,980 484,700 5,760,720

Non-controlling interests 10,000 140,000 225,040

2,000
12,000 10,000
4,800 960
98,880

6,030,000 2,490,000 1,790,780 756,540 7,485,760

2,353,740 2,353,740

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Chapter 6 solutions

Problem 6.10
CJE1: Elimination of investment in Y Co
Dr Share capital 800,000
Dr Retained earnings 900,000
Dr Inventory 100,000
Dr Goodwill 610,000
Cr Deferred tax liability 20,000
Cr Investment in Y Co 2,200,000
Cr Non-controlling interests 190,000
2,410,000 2,410,000

Fair value paid by P Co 2,200,000

Fair value attributable to NCI 190,000

Goodwill attributable to P Co 598,000 2200000-90%*(1800000-20000)

Goodwill attributable to NCI 12,000 190000-10%*(1800000-20000)
610,000

CJE2: Sale of under-valued inventory

Dr Opening RE 90,000
Dr Non-controlling interests 10,000
Cr Inventory 100,000

CJE3: Tax on sale of under-valued inventory

Dr Deferred tax liability 20,000
Cr Opening RE 18,000
Cr Non-controlling interests 2,000

CJE4: Adjustment for unrealized profit on transfer of fixed assets from prior year
Reinstate to original cost and accumulated depreciation prior to transfer
Dr Opening RE 16,200
Dr Non-controlling interests 1,800
Dr Fixed assets 18,000
Cr Accumulated depreciation 36,000

Shd be What is Adjustmt

Fixed assets, cost 180,000 162,000 18,000
Accumulated depreciation (36,000) 0 (36,000)
Net book value 144,000 162,000 (18,000)

CJE5: Adjustment for tax on unrealized profit on transfer of fixed assets

Dr Deferred tax asset 3,600
Cr Opening RE 3,240
Cr Non-controlling interests 360

CJE6: Adjustment of past and current depreciation on transferred fixed asset

Dr Accumulated depreciation 8,000
Cr Depreciation 4,000
Cr Opening RE 3,600
Cr Non-controlling interests 400
Depreciation before transfer 32,000
Depreciation after transfer 36,000
Annual over-depreciation to be corrected (4,000)
Alternatively:
Unrealized profit 18,000
Remaining useful life 5
Excess depreciation 4,000

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Chapter 6 solutions

Problem 6.10
CJE7: Tax effects on CJE6
Dr Tax expense 800
Dr Opening RE 720
Dr Non-controlling interests 80
Cr Deferred tax asset 1,600

CJE8: Allocate share of post-acq RE to NCI

Dr Opening RE 30,000
Cr NCI (BS) 30,000
RE at 1 Jan 20x6 1,200,000
RE at date of acquisition 900,000
Change in RE 300,000
NCI's share 30,000

CJE9: Eliminate dividends declared by Y Co

Dr Dividend income 270,000
Dr Non-controlling interests 30,000
Cr Dividend declared 300,000

CJE10: Allocate share of current income to NCI

Dr Income to NCI 144,320
Cr NCI (BS) 144,320

NPAT of Y Co 1,440,000
Add depreciation on gain on sale of FA 4,000
Less tax expense on gain on sale of FA (800)
Adjusted NPAT 1,443,200

CJE11: Elimination of downstream sale

Dr Sales 50,000
Cr Cost of Sales 50,000

CJE12: Eliminate intercompany payable and receivable

Dr Intercompany payable 100,000
Cr Intercompany receivable 100,000

EA1: Recognize share of post-acq RE of Z

Dr Investment in Z 90,000
Cr Opening RE 90,000
RE of Z as at 1 Jan 20x6 700,000
RE of Z as at date of acquisition 400,000
Change in RE 300,000
Share of Z's change in RE 90,000

EA2: Adjustment of unrealized profit from 20x5

Dr Opening RE 5,760
Cr Investment in Z 5,760

EA3: Reclassify dividend income as a reduction of investment

Dr Dividend income 30,000
Cr Investment in Z 30,000

EA4: Recognize share of current profit after tax of Z

Dr Investment in Z 168,720
Cr Share of profit of Z 168,720

Alternatively:
Dr Investment in Z 168,720

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Chapter 6 solutions

Problem 6.10
Dr Share of tax of Z 46,680
Cr Share of profit of Z 215,400
NPBT 600,000
Add back contingent liability expense 100,000
Add realized profit from intercompany transfer 18,000
Adjusted NPBT of Z 718,000

Tax expense of Z 132,000

Add tax on write back of contingent liability exp. 20,000
Add tax on realized profit 3,600
Adjusted tax of Z 155,600

Part (2): Analytical check of Non-controlling Interests:

Book value of net assets as at 31 Dec 20x6 3,140,000
Adjustment for unrealized gain on FA (after-tax) (8,000)
Adjusted net assets as at 31 Dec 20x6 3,132,000
NCI's share 313,200
NCI's goodwill 12,000
325,200

CJE1: NCI at date of acquisition 190,000

CJE2: Adjustment for sale of under-valued inventory (10,000)
CJE3: Adjustment for tax on sale of under-valued inventory 2,000
CJE4: Adjustment for unrealized profit on FA transfer (1,800)
CJE5: Tax on unrealized profit on FA transfer 360
CJE6: Adjustment for past depreciation on FA 400
CJE7: Adjustment for tax effects on past depreciation (80)
CJE8: Share of post-acq RE 30,000
CJE9: Dividends received (30,000)
CJE10: Allocate share of current income to NCI 144,320
NCI balance as at 31 Dec 20x6 325,200

Analytical check of Investment in Z:

Book value of shareholders' equity of Z 1,268,000
Less unrealized profit as at end of 20x6 (4,800)
Fair value adjustments 0
1,263,200
P's share of Z's identifiable net assets 378,960
Implicit goodwill in investment in Z:
Investment in Z 800,000
BV of net assets of Z at acq 600,000
Contingent liability (after-tax) (80,000)
FV of net assets of Z at acq 520,000
Less Share of FV of net assets of Z at acq 156,000
Goodwill in Z implicit in the investment in Z 644,000
1,022,960
Investment in Z, at cost 800,000
EA1: Share of post-acq RE 90,000
EA2: Unrealized profit in opening RE (5,760)
EA3:Dividend received (30,000)
EA4:Share of current profit after tax 168,720
Investment in Z as at 31 Dec 20x6 1,022,960

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Chapter 6 solutions

Problem 6.10
Part 3 (Worksheets): Income Statement for year ended 31 December 20x6
P Co Y Co Dr Cr Total
Profit before tax 4,200,000 1,800,000 270,000 4,000 5,872,720
30,000 168,720
50,000 50,000
Tax (840,000) (360,000) 800 (1,200,800)

Profit after tax 3,360,000 1,440,000 4,671,920

Dividends declared (400,000) (300,000) 300,000 (400,000)

Profit retained 2,960,000 1,140,000 4,271,920

Income to NCI 144,320 (144,320)

Retained earnings, 1 Jan 20x6 1,200,000 1,200,000 900,000 90,000 1,472,160

90,000 3,600
30,000 3,240
16,200 18,000
720
5,760
Retained earnings, 31 Dec 20x6 4,160,000 2,340,000 1,537,800 637,560 5,599,760

SFP as at 31 Dec 20x6 P Co Y Co Dr Cr Total

Fixed assets, net book value 2,800,000 2,200,000 18,000 36,000 4,990,000
8,000

Goodwill 610,000 610,000

Investment in Y Co, at cost 2,200,000 2,200,000

Investment in Z Co, at cost 800,000 90,000 30,000 1,022,960

168,720 5,760
Deferred tax 3,600 1,600 2,000

Inventory 760,000 500,000 100,000 100,000 1,260,000

Intercompany receivable 100,000 100,000 0
Amount due from Z Co 60,000 60,000
Accounts receivable 600,000 700,000 1,300,000
Cash 45,000 100,000 145,000
7,265,000 3,600,000 998,320 2,473,360 9,389,960

Accounts payable 1,805,000 460,000 2,265,000

Intercompany payable 100,000 100,000 0
Deferred tax liability 20,000 20,000 0
Share capital 1,200,000 800,000 800,000 1,200,000
Retained earnings 4,160,000 2,340,000 1,537,800 637,560 5,599,760
Non-controlling interests 10,000 190,000 325,200
1,800 2,000
30,000 30,000
80 144,320
360
400
7,265,000 3,600,000 2,499,680 1,024,640 9,389,960
3,498,000 3,498,000

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Chapter 6 solutions

Problem 6.10

Explanatory note on unrealized loss that is an impairment loss

P's books:
Dr Cost of Sales 60,000
Cr Inventory 60,000

Dr Amount due from Y 50,000

Cr Sales 50,000

S's books:
Dr Cost of Sales 45,000
Cr Inventory 45,000

Consolidation:
Unrealized sale
Dr Sales 5,000
Cr Cost of Sales 5,000 (not 6000)
(do not remove the impairment loss of $1K in inventory)

Realized sale
Dr Sales 45,000
Cr Cost of Sales 45,000

Combined effect
Dr Sales 50,000
Cr Cost of Sales 50,000

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Chapter 6 solutions

Problem 6.10 Retained Earnings Check

P's RE as at 31 December 20x6 4,160,000.000

P's share of post-acquisition RE of

Y Co 1,296,000.000
Z Co 200,400.000

P's share of cumulative amortization of FV-BV of:

Y Co (72,000.000)
Z Co 24,000.000

P's share of unrealized profit as at 31 December 20x6

Y Co (7,200.000)
Z Co (1,440.000)

Consolidated Retained Earnings as at 31 December 20x6 5,599,760

Per worksheet 5,599,760

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Chapter 6 solutions

Problem 6.11
PART 1. Consolidation and Equity Accounting Entries for the year ended 31 Dec 20x6
CJE1: Elimination of investment in Y Co
Dr Share capital 500,000
Dr Retained earnings 600,000
Dr Goodwill 260,000
Dr Deferred tax asset 10,000
Cr Provision for impairment losses/AR 50,000
Cr Investment in Y Co 1,200,000
Cr Non-controlling interests 120,000
1,370,000 1,370,000

Fair value of Y Co as entity 1,320,000

Fair value paid by P Co 1,200,000
Fair value attributable to NCI 120,000

Goodwill attributable to P Co 246,000

Goodwill attributable to NCI 14,000
260,000

CJE2: Write-off of impaired accounts receivable

Dr Provision for impairment losses 50,000
Cr Opening retained earnings 45,000
Cr Non-controlling interests 5,000

CJE3: Tax effects of write-off of impaired accounts receivable

Dr Opening retained earnings 9,000
Dr Non-controlling interests 1,000
Cr Deferred tax asset 10,000

CJE4: Adjustment for unrealized profit on transfer of fixed assets

Reinstate to original cost and accumulated depreciation prior to transfer
Dr Gain on sale 80,000
Cr Fixed assets 20,000
Cr Accumulated depreciation 60,000
Shd be What is Adjustmt
Fixed assets, cost 100,000 120,000 -20,000
Accumulated depreciation -60,000 0 -60,000
Net book value 40,000 120,000 -80,000

CJE5: Adjustment for tax on unrealized profit on transfer of fixed assets

Dr Deferred tax asset 16,000
Cr Tax expense 16,000

CJE6: Adjustment of current depreciation on transferred fixed asset

Dr Accumulated depreciation 40,000
Cr Depreciation 40,000
Depreciation before transfer 20,000
Depreciation after transfer 60,000
Annual over-depreciation to be corrected (20x4&20x6) -40,000

CJE7: Tax effects on CJE6

Dr Tax expense 8,000
Cr Deferred tax asset 8,000

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Chapter 6 solutions

Problem 6.11
CJE8: Allocate share of post-acq RE to NCI
Dr Opening RE 20,000
Cr NCI (BS) 20,000
RE at 1 Jan 20x6 800,000
RE at date of acquisition 600,000
Change in RE 200,000
NCI's share 20,000

CJE9: Eliminate dividends declared by Y Co

Dr Dividend income 126,000
Dr Non-controlling interests 14,000
Cr Dividend declared 140,000

CJE10: Allocate share of current income to NCI

Dr Income to NCI 68,800
Cr NCI (BS) 68,800
NPAT of Y Co 720,000
Less Gain on sale of FA -80,000
Add tax on gain on sale of FA 16,000
Add depreciation on gain on sale of FA 40,000
Less tax expense on gain on sale of FA -8,000
Adjusted NPAT 688,000

CJE11: Elimination of sale from P Co to Y Co

Dr Sales 120,000
Dr Inventory 9,000
Cr Cost of Sales 129,000

CJE12: Tax effects of CJE11

Dr Tax expense 1,800
Cr Deferred tax liability 1,800

CJE13: Elimination of intercompany payable and receivable

Dr Intercompany payable 40,000
Cr Intercompany receivable 40,000

EA1: Recognize share of post-acq RE of Z

Dr Investment in Z 30,000
Cr Opening RE 30,000
RE of Z as at 1 Jan 20x6 500,000
RE of Z as at date of acquisition 400,000
Change in RE 100,000
Share of Z's change in RE 30,000

EA2: Recognize past cost of sales of undervalued inventory (after-tax)

Dr Opening RE 12,000
Cr Investment in Z 12,000
(This is a combined entry. Alternatively, an entry each for the profit
and tax adjustments can be passed.)

EA3: Adjust unrealized profit from past transfer

Dr Opening RE 3,840
Cr Investment in Z 3,840

EA4: Reclassify dividend income as a reduction of investment

Dr Dividend income 24,000

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Chapter 6 solutions

Problem 6.11
Cr Investment in Z 24,000

EA5: Recognize share of current profit after tax of Z

Dr Investment in Z 183,840
Cr Share of profit of Z 183,840

Dr Investment in Z 183,840
Dr Share of tax of Z 30,960
Cr Share of profit of Z 214,800
NPBT 700,000
Add realized profit from sale of inventory 16,000
Adjusted NPBT of Z 716,000
Tax expense of Z 100,000
Add tax on realized profit from inventory sale 3,200
Adjusted tax expense of Z 103,200

PART 2: Analytical check on Non-controlling Interests:

Book value of net assets as at 31 Dec 20x6 1,880,000
Adjustment for unrealized gain on FA (after-tax) -32,000
Adjusted net assets as at 31 Dec 20x6 1,848,000
NCI's share 184,800
NCI's goodwill 14,000
198,800

CJE1: NCI at date of acquisition 120,000

CJE2: Adjustment for impairment loss on AR 5,000
CJE3: Adjustment for tax effects on impairment loss -1,000
CJE8: Share of post-acq RE 20,000
CJE9: Dividends received -14,000
CJE10: Allocate share of current income to NCI 68,800
NCI balance as at 31 Dec 20x6 198,800

PART 2: Analytical check on Investment in Z:

Book value of shareholders' equity of Z 1,320,000
Excess of FV over BV of inventory 0
1,320,000
P's share of Z's identifiable net assets 396,000
Implicit goodwill in investment in Z:
Investment in Z 300,000
BV of net assets of Z at acq 700,000
Under-valued inventory, after-tax 40,000
FV of net assets of Z at acq 740,000
Less Share of FV of net assets of Z at acq 222,000
Goodwill in Z implicit in the investment in Z 78,000
474,000
Investment in Z, at cost 300,000
EA1: Share of post-acq RE 30,000
EA2:Adjustment for past COS on undervalued inventory -12,000
EA3:Adjustment for unrealized profit from prior-year -3,840
EA4:Dividend received -24,000
EA5:Share of current profit after tax 183,840
Investment in Z as at 31 Dec 20x6 474,000

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Chapter 6 solutions

Problem 6.11
PART 3: Analytical check on Consolidated Retained Earnings as at 31 December 20x6
Reconciliation

P's RE 2,600,000
P's share of Y's post-acquisition RE 702,000
P's share of Z's post-acquisition RE 186,000

P's share of reversal of impairment loss of Y 36,000 50000*80%*90%

P's share of cost of sales of undervalued inventory of Z (12,000) 50000*80%*30%

P's unrealized loss on downstream sale 7,200 30000*30%*80%

P's share of unrealized profit on upstream sale (28,800) 80000/2*80%*90%

3,490,400

Listings per worksheet (see below) 3,490,400

PART 4: Consolidation Worksheets

Income Statement for year ended 31 December 20x6
P Co Y Co Dr Cr Total
Profit before tax 2,500,000 900,000 80,000 40,000 3,402,840
126,000 129,000
120,000 183,840
24,000

Tax -500,000 -180,000 8,000 16,000 -673,800

1,800

Profit after tax 2,000,000 720,000 2,729,040

Dividends declared -300,000 -140,000 140,000 -300,000

Profit retained 1,700,000 580,000 2,429,040

Income to NCI 68,800 -68,800

Retained earnings, 1 Jan 20x6 900,000 800,000 600,000 45,000 1,130,160

9,000
20,000 30,000
12,000
3,840
Retained earnings, 31 Dec 20x6 2,600,000 1,380,000 1,073,440 583,840 3,490,400

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Chapter 6 solutions

Problem 6.11
SFP as at 31 Dec 20x6 P Co Y Co Dr Cr Total

Fixed assets, net book value 2,500,000 1,250,000 40,000 20,000 3,710,000
60,000
Goodwill 260,000 260,000

Investment in Y Co, at cost 1,200,000 1,200,000

Investment in Z Co, at cost 300,000 30,000 12,000 474,000
183,840 24,000
3,840
Intercompany receivable 40,000 40,000 0
Amount due from Z Co 30,000 30,000
Deferred tax asset 16,000 8,000 8,000
10,000 10,000
Inventory 750,000 500,000 9,000 1,259,000

Accounts receivable 420,000 150,000 50,000 50,000 570,000

Cash 50,000 100,000 150,000
5,250,000 2,040,000 598,840 1,427,840 6,461,000
Accounts payable 1,610,000 160,000 1,770,000
Intercompany payable 40,000 40,000 0
Deferred tax liability 1,800 1,800
Share capital 1,000,000 500,000 500,000 1,000,000
Retained earnings 2,600,000 1,380,000 1,073,440 583,840 3,490,400
Non-controlling interests 1,000 120,000 198,800
5,000
14,000 20,000
68,800
5,250,000 2,040,000 1,628,440 799,440 6,461,000
2,227,280 2,227,280

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Chapter 6 solutions

Problem 6.12
Part (1): Consolidation entries for 20x6
CJE1: Elimination of investment in Silver Co
Dr Share capital 400,000
Dr Retained earnings 520,000
Dr Intangible assets 280,000
Dr Goodwill 796,000
Cr Deferred tax liability 56,000
Cr Investment in Silver Co 1,760,000
Cr Non-controlling interests 180,000
1,996,000 1,996,000

CJE2: Past impairment loss to opening RE and current amortization of intangible asset
Dr Opening RE 199,800 90%*((280000/20*3)+180000)
Dr Non-controlling interests 22,200 10%*((280000/20*3)+180000)
Dr Amortization 3,412 (160000-102000)/17
Cr Accumulated amortization 225,412
Legal Economic
Carrying amount 102,000 340,000
Recoverable amount as at 31 December 20x5 160,000 160,000 (Higher of FV and Value In Use)
Impairment loss 0.00 180,000
Revised carrying amount on 1 Jan 20x6 102,000 160,000
Remaining useful life 1 Jan 20x6 17 17
Revised amortization 6,000 9,412

CJE3: Tax effects of CJE2

Dr Deferred tax liability 45,082 20%*225412
Cr Opening RE 39,960
Cr Non-controlling interests 4,440
Cr Tax expense 682

CJE4: Adjustment of unrealized profit on transfer of equipment

Dr Opening RE 36,000 90%*40000
Dr NCI 4,000 10%*40000
Cr Fixed assets 40,000
40,000 40,000
Workings
Transfer price invoiced by Silver Co to Prism Co 31/12/20x4 240,000
Original cost 200,000

Net book value 200,000

Profit on sale 40,000
Original useful life as at 1 Jan 20x5 10.00
Excess depreciation during 20x6 40000/10 4,000

CJE5: Adjustment for tax on unrealized profit on transfer of equipment

Dr Deferred tax asset 8,000 20%*40000
Cr Opening RE 7,200 20%*36000
Cr NCI 800 20%*4000

CJE6: Adjustment for excess depreciation on transferred equipment

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Chapter 6 solutions
Problem 6.12

Dr Accumulated depreciation 8,000

Cr Opening RE 3,600 90%*40000*1/10
Cr NCI 400 10%*40000*1/10
Cr Depreciation 4,000 CJE4 workings

CJE7: Tax effects of CJE6

Dr Opening RE 720
Dr NCI 80
Dr Tax expense 800
Cr Deferred tax asset 1,600

CJE8: Allocate share of post-acq RE to NCI

Dr Opening RE 8,000
Cr NCI (BS) 8,000
RE at 1 Jan 20x6 600,000
RE at date of acquisition 520,000
Change in RE 80,000
NCI's share 8,000

CJE9: Eliminate dividends declared by Silver Co

Dr Dividend income 90,000
Dr Non-controlling interests 10,000
Cr Dividend declared 100,000

CJE10: Allocate share of current income to NCI

Dr Income to NCI 104,047
Cr NCI (BS) 104,047
NPAT of Silver Co 1,040,000
Less amortization (3,412)
Add tax on amortization 682
Add excess depreciation on equipment 4,000
Less tax on excess depreciation on equipment (800)
Adjusted NPAT 1,040,471

CJE11: Elimination of intercompany balances

Dr Amount due to Silver Co 120,000
Cr Amount due from Prism Co 120,000

CJE12: Elimination downstream sales

Dr Sales 50,000
Dr Inventory 9,000
Cr Cost of sales 59,000
Legal Economic Difference
entity entity
OC 45,000 67,500
NRV 54,000 54,000
LCNRV 45,000 54,000 9,000
CJE13: Tax effects of CJE12
Dr Tax expense 1,800

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Chapter 6 solutions

Problem 6.12
Cr DTL 1,800

Part (2): Equity accounting entries for 20x6

EA1: Recognition of share of post-acq RE of Amber

Dr Investment in Amber 24,000
Cr Opening RE 24,000
RE of Amber as at 1 Jan 20x6 900,000
RE of Amber as at date of acquisition 820,000
Change in RE 80,000
Share of Amber's change in RE 24,000

EA2: Adjust expense on provision for environmental damages

Dr Investment in Amber 43,200 80%*30%*180000
Cr Opening RE 43,200

EA3: Adjust for unrealized profit on inventory

Dr ORE 6,720 70%*30%*80%*40000
Cr Investment in Amber 6,720

EA4: Recognize share of OCI

Dr Investment in Amber 9,000
Dr Share of current OCI 6,000
Cr Opening OCI 15,000

EA5: Reclassify dividend income as a reduction of investment

Dr Dividend income 36,000
Cr Investment in Amber 36,000 30%*120000

EA7: Recognize share of current profit after tax of Amber

Dr Investment in Amber 442,680
Cr Share of profit of Amber 442,680

Alternatively:
Dr Investment in Amber 442,680
Dr Share of tax of Amber 117,420
Cr Share of profit of Amber 560,100

Profit before tax of Amber 1,800,000

Add expense of environmental damages 40,000
Add realized profit on transferred inventory 24,000
Add back excess impairment loss on transferred inventory 3,000
Adjusted profit before tax of Amber 1,867,000
Share of adjusted profit before tax of Amber 560,100

Tax expense of Amber 378,000

Add tax on expense on environmental damages 8,000
Add tax on realized profit on transferred inventory 4,800
Add tax on excess impairment loss on transferred inventory 600

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Chapter 6 solutions

Problem 6.12
Adjusted tax of Amber 391,400
Share of adjusted tax of Amber 117,420

Realized profit on transferred inventory 60% sold 24,000

60%*(120000-80000)
Group Legal entity Difference
Net realizable value at 31 Dec 20x6 9,000 9,000
Cost 8,000 12,000
Lower of cost and NRV 8,000 9,000
Impairment loss 0 3,000 3,000

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Chapter 6 solutions

Problem 6.12
Part (3): Non-controlling interests as at 31 Dec 20x6
Book value of net assets as at 31 Dec 20x6 1,940,000
Remaining balance of intangible asset, after tax 43,671 Note 1
Adjustment for unrealized profit in equipment, after tax (25,600) Note 2
Adjusted net assets as at 31 Dec 20x6 1,958,071
NCI's share of net assets 195,807
NCI's share of goodwill 65,600 Note 3
NCI balance as at 31 Dec 20x6 261,407
Note 1: (160000-102000)*16/17*80%
Note 2: 40000*8/10*80%
Note 3: 180000-10%*(1200000-(20%*280000))

CJE1: Elimination of investment in Silver Co 180,000

CJE2: Past impairment loss to opening RE and current amortization of intangible asset (22,200)
CJE3: Tax effects of CJE2 4,440
CJE4: Adjustment of unrealized profit on transfer of equipment (4,000)
CJE5: Adjustment for tax on unrealized profit on transfer of equipment 800
CJE6: Adjustment for excess depreciation on transferred equipment 400
CJE7: Tax effects of CJE6 (80)
CJE8: Allocate share of post-acq RE to NCI 8,000
CJE9: Eliminate dividends declared by Silver Co (10,000)
CJE10: Allocate share of current income to NCI 104,047
NCI balance as at 31 Dec 20x6 0 261,407

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Chapter 6 solutions

Problem 6.12
Part (4): Analytical check of Investment in Amber:

Book value of shareholders' equity of Amber 3,202,000

Less unrealized profit on unsold inventory, after tax (800)
3,201,200
P's share of Amber's identifiable net assets 960,360
Implicit goodwill in investment in Amber:
Investment in Amber 900,000
BV of net assets of Amber at acq 1,790,000
Less provision for impairment loss (176,000)
FV of net assets of Amber at acq 1,614,000
Less Share of FV of net assets of Amber at acq 484,200
Goodwill in Amber implicit in the investment in Amber 415,800
1,376,160

Investment in Amber, at cost 900,000

EA1: Recognition of share of post-acq RE of Amber 24,000
EA2: Adjust expense on provision for environmental damages 43,200
EA3: Adjust for unrealized profit on inventory (6,720)
EA4: Recognize share of OCI 9,000
EA5: Reclassify dividend income as a reduction of investment (36,000)
EA7: Recognize share of current profit after tax of Amber 442,680
Investment in Amber as at 31 Dec 20x6 0 1,376,160

PART (5): Analytical Check on Consolidated Retained Earnings

P's RE 2,352,000
P's share of Silver's post-acq RE 918,000
P's share of Amber's post-acq RE 414,600

P's share of Silver's cumulative amortization of intangible asset, after tax (162,296)
P's share of Amber's cumulative expensing of provision, after tax 52,800

P's share of unrealized profit in upstream sale of equipment, after tax (23,040)
P's unrealized loss from downstream sales, after tax 7,200
P's share of unrealized profit in Amber, after tax (240)

Consolidated Retained Earnings as at 31 Dec 20x6 3,559,024

P's RE 2,352,000
S' RE 1,540,000
CJE1: Elimination of investment in Silver Co (520,000)
CJE2: Past impairment loss to opening RE and current amortization of intangible asset (199,800)
CJE2: Past impairment loss to opening RE and current amortization of intangible asset (3,412)
CJE3: Tax effects of CJE2 39,960
CJE3: Tax effects of CJE2 682
CJE4: Adjustment of unrealized profit on transfer of equipment (36,000)
CJE5: Adjustment for tax on unrealized profit on transfer of equipment 7,200
CJE6: Adjustment for excess depreciation on transferred equipment 3,600
CJE6: Adjustment for excess depreciation on transferred equipment 4,000

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Chapter 6 solutions

Problem 6.12
CJE7: Tax effects of CJE6 (720)
CJE7: Tax effects of CJE6 (800)
CJE8: Allocate share of post-acq RE to NCI (8,000)
CJE9: Eliminate dividends declared by Silver Co 10,000
CJE10: Allocate share of current income to NCI (104,047)
CJE12: Elimination downstream sales 9,000
CJE13: Tax effects of CJE12 (1,800)
EA1: Recognition of share of post-acq RE of Amber 24,000
EA2: Adjust expense on provision for environmental damages 43,200
EA3: Adjust for unrealized profit on inventory (6,720)
EA5: Reclassify dividend income as a reduction of investment (36,000)
EA7: Recognize share of current profit after tax of Amber 442,680
3,559,024

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Chapter 6 solutions

Problem 6.13
Part (1): Consolidation entries for 20x6

CJE1: Elimination of investment in Silver Co

Dr Share capital 620,000
Dr Retained earnings 520,000
Dr Fixed assets 250,000
Dr Goodwill 660,000
Cr Deferred tax liability 50,000
Cr Investment in Silver Co 1,820,000
Cr Non-controlling interests 180,000
2,050,000 2,050,000

CJE2: Past and current depreciation of undervalued fixed asset

Dr Opening RE 33,750 90%*(250000/20*3)
Dr Non-controlling interests 3,750
Dr Depreciation 12,500 250000/20
Cr Accumulated depreciation 50,000

CJE3: Tax effects of CJE2

Dr Deferred tax liability 10,000
Cr Opening RE 6,750
Cr Non-controlling interests 750
Cr Tax expense 2,500

CJE4: Adjustment of unrealized profit on transfer of intangible asset

Dr Opening RE 63,000 90%*70000
Dr NCI 7,000 10%*70000
Cr Intangible assets 70,000
70,000 70,000
Workings
Transfer price invoiced by Silver Co to Prism Co 350,000
Carrying amount at date of sale 280,000
Profit on sale 70,000
Original useful life as at 1 Jan 20x5 10.00
Excess amortization during 20x6 70000/10 7,000

CJE5: Adjustment for tax on unrealized profit on transfer of software

Dr Deferred tax asset 14,000 20%*70000
Cr Opening RE 12,600 20%*63000
Cr NCI 1,400 20%*7000

CJE6: Adjustment for excess amortization on transferred software

Dr Accumulated amortization 27,333
Cr Opening RE 19,800 Note 1
Cr NCI 2,200 Note 2
Cr Amortization 5,333 Note 3
Legal entity Econ entity Difference
Carrying amount 315,000 252,000
Recoverable amount 300,000 300,000

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Problem 6.13
Adjusted carrying amount 300,000 252,000
Impairment loss as at 31 Dec 20x5 15,000 0 15,000
Amortization (20x6) 33,333 28,000 5,333 Note 3

Note 1: 90%*((70000*1/10)+15000)
Note 2: 10%*((70000*1/10)+15000)

CJE7: Tax effects of CJE6

Dr Opening RE 3,960
Dr NCI 440
Dr Tax expense 1,067
Cr Deferred tax asset 5,467

CJE8: Allocate share of post-acq RE to NCI

Dr Opening RE 20,000
Cr NCI (BS) 20,000
RE at 1 Jan 20x6 720,000
RE at date of acquisition 520,000
Change in RE 200,000
NCI's share 20,000

CJE9: Eliminate dividends declared by Silver Co

Dr Dividend income 90,000
Dr Non-controlling interests 10,000
Cr Dividend declared 100,000

CJE10: Allocate share of current income to NCI

Dr Income to NCI 98,967
Cr NCI (BS) 98,967
NPAT of Silver Co 995,400
Less depreciation of undervalued fixed assets (12,500)
Add tax on depreciation of undervalued fixed asset 2,500
Add excess amortization on software 5,333
Less tax on excess amortization (1,067)
Adjusted NPAT 989,667

CJE11: Elimination of intercompany balances

Dr Amount due to Silver Co 150,000
Cr Amount due from Prism Co 150,000

CJE12: Elimination downstream sales

Dr Inventory 667
Dr Cost of sales 5,333
Cr Opening RE 6,000

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Chapter 6 solutions

Problem 6.13

Legal Economic Difference

entity entity
OC 72,000 85,500
NRV 78,000 78,000
LCNRV 72,000 78,000 6,000

CJE13: Tax effects of CJE12

Dr Opening RE 1,200
Cr Tax expense 1,067
Cr DTL 133

Part (2): Equity accounting entries for 20x5

EA1: Recognition of share of post-acq RE of Amber

Dr Investment in Amber 54,000
Cr Opening RE 54,000
RE of Amber as at 1 Jan 20x6 850,000
RE of Amber as at date of acquisition 670,000
Change in RE 180,000
Share of Amber's change in RE 54,000

EA2: Adjust expense on provision for litigation loss

Dr Investment in Amber 43,200 80%*30%*180000
Cr Opening RE 43,200

EA3: Adjust for unrealized profit on inventory

Dr ORE 3,600 60%*30%*80%*25000
Cr Investment in Amber 3,600

EA4: Recognize share of OCI

Dr Investment in Amber 12,000
Dr Share of current OCI 3,000
Cr Opening OCI 15,000

EA5: Reclassify dividend income as a reduction of investment

Dr Dividend income 42,000
Cr Investment in Amber 42,000 30%*140000

EA7: Recognize share of current profit after tax of Amber

Dr Investment in Amber 422,988
Cr Share of profit of Amber 422,988

Alternatively:
Dr Investment in Amber 422,988
Dr Share of tax of Amber 112,122
Cr Share of profit of Amber 535,110

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Chapter 6 solutions

Problem 6.13
Profit before tax of Amber 1,700,000
Add litigation loss expense 70,000
Add realized profit on transferred inventory 12,500
Add back excess impairment loss on transferred inventory 1,200
Adjusted profit before tax of Amber 1,783,700
Share of adjusted profit before tax of Amber 535,110

Tax expense of Amber 357,000

Add tax on litigation loss expense 14,000
Add tax on realized profit on transferred inventory 2,500
Add tax on excess impairment loss on transferred inventory 240
Adjusted tax of Amber 373,740
Share of adjusted tax of Amber 112,122
Realized profit on transferred inventory 50% sold 12,500
50%*(100000-75000)
Group Legal entity Difference
Net realizable value at 31 Dec 20x6 8,800 8,800
Cost 7,500 10,000
Lower of cost and NRV 7,500 8,800
Impairment loss 0 1,200 1,200

Part (3): Non-controlling interests as at 31 Dec 20x6

Book value of net assets as at 31 Dec 20x6 2,235,400
Remaining balance of Fixedasset, after tax 160,000 Note 1
Adjustment for unrealized profit in software, after tax (34,133) Note 2
Adjusted net assets as at 31 Dec 20x6 2,361,267
NCI's share of net assets 236,127
NCI's share of goodwill 46,000 Note 3
NCI balance as at 31 Dec 20x6 282,127
Note 1: (350000-100000)*16/20*80%
Note 2: (300000-252000)*8/9*80%
Note 3: 180000-10%*(1390000-(20%*250000))

CJE1: Elimination of investment in Silver Co 180,000

CJE2: Past and current depreciation of undervalued fixed asset (3,750)
CJE3: Tax effects of CJE2 750
CJE4: Adjustment of unrealized profit on transfer of intangible asset (7,000)
CJE5: Adjustment for tax on unrealized profit on transfer of software 1,400
CJE6: Adjustment for excess amortization on transferred software 2,200
CJE7: Tax effects of CJE6 (440)
CJE8: Allocate share of post-acq RE to NCI 20,000
CJE9: Eliminate dividends declared by Silver Co (10,000)
CJE10: Allocate share of current income to NCI 98,967
NCI balance as at 31 Dec 20x6 0 282,127

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Chapter 6 solutions

Problem 6.13
Part (4): Analytical check on Investment in Amber:

Book value of shareholders' equity of Amber 3,113,000

Less unrealized profit on unsold inventory, after tax (8800-7500)*80% (1,040)
3,111,960
P's share of Amber's identifiable net assets 933,588
Implicit goodwill in investment in Amber:
Investment in Amber 860,000
BV of net assets of Amber at acq 1,690,000
Less provision for impairment loss (200,000)
FV of net assets of Amber at acq 1,490,000
Less Share of FV of net assets of Amber at acq 447,000
Goodwill in Amber implicit in the investment in Amber 413,000
1,346,588

Investment in Amber, at cost 860,000

EA1: Recognition of share of post-acq RE of Amber 54,000
EA2: Adjust expense on provision for litigation loss 43,200
EA3: Adjust for unrealized profit on inventory (3,600)
EA4: Recognize share of OCI 12,000
EA5: Reclassify dividend income as a reduction of investment (42,000)
EA7: Recognize share of current profit after tax of Amber 422,988

Investment in Amber as at 31 Dec 20x6 0 1,346,588

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Problem 6.13
Part (5) Consolidated retained earnings as at 31 Dec 20x6
P's RE 2,050,000
P's share of S' RE 985,860
P's share of A's RE 414,900

P's share of depreciation of undervalued fixed assets (36,000)

P's share of expensing of litigation loss 60,000

P's share of unrealized profit in software, after tax (30,720)

P's share of unrealized profit in unsold inventory, after tax (312)
P's unrealized loss in inventory, after tax 533
3,444,261

P's RE 2,050,000
S's RE 1,615,400
CJE1: Elimination of investment in Silver Co (520,000)
CJE2: Past and current depreciation of undervalued fixed asset (46,250)
CJE3: Tax effects of CJE2 9,250
CJE4: Adjustment of unrealized profit on transfer of intangible asset (63,000)
CJE5: Adjustment for tax on unrealized profit on transfer of software 12,600
CJE6: Adjustment for excess amortization on transferred software 25,133
CJE7: Tax effects of CJE6 (5,027)
CJE8: Allocate share of post-acq RE to NCI (20,000)
CJE9: Eliminate dividends declared by Silver Co 10,000
CJE10: Allocate share of current income to NCI (98,967)
CJE12: Elimination downstream sales 667
CJE13: Tax effects of CJE12 (133)
EA1: Recognition of share of post-acq RE of Amber 54,000
EA2: Adjust expense on provision for litigation loss 43,200
EA3: Adjust for unrealized profit on inventory (3,600)
EA5: Reclassify dividend income as a reduction of investment (42,000)
EA7: Recognize share of current profit after tax of Amber 422,988

3,444,261

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Chapter 6 solutions

Problem 6.14
Part (1): Consolidation entries
CJE1: Elimination of investment in X Co
Dr Share capital 500,000
Dr Retained earnings 300,000
Dr Inventory 60,000
Dr Goodwill 252,000
Cr Deferred tax liability 12,000
Cr Investment in X 1,000,000
Cr Non-controlling interests 100,000 8
1,112,000 1,112,000

CJE2: Past cost of sales in retained earnings and current profit

Dr Opening RE 37,800 90%*70%*60000 1
Dr Non-controlling interests 4,200 10%*70%*60000 1
Dr Cost of sales 16,000 (20%*60000)+4000 2
Cr Inventory 58,000 (60000-2000) 3

Legal entity Group Difference

Cost of remaining inventory 10,000 16,000
NRV 12,000 12,000
LCNRV 10,000 12,000 2,000
Impairment loss 0 4,000 4,000

CJE3: Tax effects of CJE2

Dr Deferred tax liability 11,600 20%*58000 2
Cr Opening RE 7,560 20%*37800 1
Cr Non-controlling interests 840 20%*4200 1
Cr Tax expense 3,200 20%*16000 1

CJE4: Adjustment of unrealized profit on transfer of inventory

Dr Opening RE 27,000 90%*60%*50000
Dr NCI 3,000 10%*60%*50000
Cr Cost of sales 25,000 50%*50000
Cr Inventory 5,000 10%*50000 4
30,000 30,000

CJE5: Adjustment for tax on unrealized profit on transfer of inventory

Dr Tax expense 5,000 20%*25000
Dr Deferred tax asset 1,000 20%*5000
Cr Opening RE 5,400 20%*27000
Cr NCI 600 20%*3000 4

CJE6: Allocate share of post-acq RE to NCI

Dr Opening RE 22,000
Cr NCI (BS) 22,000 2
RE at 1 Jan 20x2 520,000
RE at date of acquisition 300,000
Change in RE 220,000
NCI's share 22,000

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Problem 6.14

CJE7: Eliminate dividends declared by X Co

Dr Dividend income 36,000
Dr Non-controlling interests 4,000
Cr Dividend declared 40,000 3

CJE8: Adjust unrealized loss on downstream sale

Dr Fixed Assets 50,000
Cr Loss on sale 10,000
Cr Accumulated depreciation 40,000 Includes impairment loss
90000-80000 5
50,000 50,000

Legal entity Group Difference

Fixed assets 70,000 120,000 50,000
Accumulated depreciation and impairment 40,000 (40,000)
Net book value 70,000 80,000
Fair value 80,000 80,000

CJE9: Tax effects of CJE8

Dr Tax expense 2,000 2
Cr DTL 2,000

CJE10: Adjustment of depreciation on unrealized loss

Dr Depreciation 500 2
Cr Accumulated depreciation 500

CJE11: Tax effects of CJE10

Dr DTL 100 2
Cr Tax expense 100

CJE12: Allocate share of current income to NCI

Dr Income to NCI 64,720
Cr NCI (BS) 64,720 2
NPAT of X Co 640,000
Less cost of sales on under-valued inventory (16,000)
Add tax on cost of sales 3,200
Add realized profit on transfer of inventory 25,000
Less tax on profit on transfer of inventory (5,000)
Adjusted NPAT 647,200 6

CJE13: Elimination of intercompany balances

Dr Amount due to X Co 100,000
Cr Amount due from P Co 100,000 2

CJE14: Elimination of maintenance income

Dr Rental income 45,000 2
Cr Rental expense 45,000

PART (2): Equity Accounting Entries

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Problem 6.14

EA1: Recognize share of post-acq RE of Z

Dr Investment in Z 18,000 2
Cr Opening RE 18,000
RE of Z as at 1 Jan 20x2 300,000
RE of Z as at date of acquisition 240,000
Change in RE 60,000
Share of Z's change in RE 18,000

EA2: Adjust for past depreciation on under-valued fixed assets

Dr ORE 9,600 30%*80%*200000*2/10 3
Cr Investment in Z 9,600

EA3: Adjust for unrealized profit in fixed assets

Dr ORE 7,200 30000*30%*80% 3
Cr Investment in Z 7,200

EA4: Adjust for past depreciation in unrealized profit in fixed assets

Dr Investment in Z 720 30000/5*1/2*30%*80% 3
Cr ORE 720

EA5: Recognize share of OCI

Dr Investment in Z 6,000 4
Dr Share of current OCI 15,000
Cr Opening OCI 21,000

EA6: Reclassify dividend income as a reduction of investment

Dr Dividend income 30,000 2
Cr Investment in Z 30,000 (30%*100000)

EA7: Recognize share of current profit after tax of Z

Dr Investment in Z 209,940
Cr Share of profit after tax 209,940
OR
Dr Investment in Z 209,940
Dr Share of tax of Z 55,860
Cr Share of profit of Z 265,800 3

Profit before tax of Z 900,000

Add back excess depreciation 6,000 30000/5
Less depreciation on under-valued fixed assets (20,000) 200000/10
Adjusted profit before tax of Z 886,000 4
Share of adjusted profit before tax of Z 265,800

Tax expense of Z 189,000

Add tax on excess depreciation 1,200
Less tax on depreciation on under-valued fixed assets (4,000)
Adjusted tax of Z 186,200 4
Share of adjusted tax of Z 55,860

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Chapter 6 solutions

Problem 6.14

Part (3): Analytical check of Non-controlling interests:

Book value of net assets as at 31 Dec 20x2 1,620,000 1
Under-valued inventory remaining as at 31 Dec 20x2 1,600 Note 1 2
Adjustment for unrealized profit in inventory (4,000) Note 2 2
Adjusted net assets as at 31 Dec 20x2 1,617,600
NCI's share of net assets 161,760
NCI's share of goodwill 15,200 Note 3 2
NCI balance as at 31 Dec 20x2 176,960 1

Note 1: (12000-10000)*80%
Note 2: 50000*10%*80%
Note 3: 100000-10%*(860000-(20%*60000))

CJE1: Elimination of investment in X Co 100,000

CJE2: Past cost of sales in retained earnings and current profit (4,200)
CJE3: Tax effects of CJE2 840
CJE4: Adjustment of unrealized profit on transfer of inventory (3,000)
CJE5: Adjustment for tax on unrealized profit on transfer of inventory 600
CJE6: Allocate share of post-acq RE to NCI 22,000
CJE7: Eliminate dividends declared by X Co (4,000)
CJE12: Allocate share of current income to NCI 64,720
NCI balance as at 31 Dec 20x2 0 176,960 3

Part (4): Analytical check of Investment in Z:

Book value of shareholders' equity of Z 1,711,000 1
Adjustment for unrealized profit in fixed assets 30000*3.5/5*80% (16,800) 2
Add remaining under-valuation of fixed assets 80%*(300000-100000)*7/10 112,000 2
1,806,200

P's share of Z's identifiable net assets 541,860

Implicit goodwill in investment in Z:
Investment in Z 600,000
BV of net assets of Z at acq 1,020,000
Under-valued fixed assets 160,000 (300000-100000)*80%
FV of net assets of Z at acq 1,180,000
Less Share of FV of net assets of Z at acq 354,000
Goodwill in Z implicit in the investment in Z 246,000 3
787,860 1

Investment in Z, at cost 600,000

EA1: Recognize share of post-acq RE of Z 18,000
EA2: Adjust for past depreciation on under-valued fixed assets (9,600)
EA3: Adjust for unrealized profit in fixed assets (7,200)
EA4: Adjust for past depreciation in unrealized profit in fixed assets 720
EA5: Recognize share of OCI 6,000
EA6: Reclassify dividend income as a reduction of investment (30,000)
EA7: Recognize share of current profit after tax of Z 209,940

Investment in Z as at 31 Dec 20x2 0 787,860 3

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Chapter 6 solutions

Problem 6.14

Part (5): Consolidated Retained Earnings

Listings approach

P Co's RE as at 31 December 20x6 3,120,000

X Co's RE as at 31 December 20x6 1,120,000

CJE1: Elimination of investment in X Co (300,000)

CJE2: Past cost of sales in retained earnings and current profit (53,800)
CJE3: Tax effects of CJE2 10,760
CJE4: Adjustment of unrealized profit on transfer of inventory (2,000)
CJE5: Adjustment for tax on unrealized profit on transfer of inventory 400
CJE6: Allocate share of post-acq RE to NCI (22,000)
CJE7: Eliminate dividends declared by X Co 4,000
CJE8: Adjust unrealized loss on downstream sale 10,000
CJE9: Tax effects of CJE8 (2,000)
CJE10: Adjustment of depreciation on unrealized loss (500)
CJE11: Tax effects of CJE10 100
CJE12: Allocate share of current income to NCI (64,720)
EA1: Recognize share of post-acq RE of Z 18,000
EA2: Adjust for past depreciation on under-valued fixed assets (9,600)
EA3: Adjust for unrealized profit in fixed assets (7,200)
EA4: Adjust for past depreciation in unrealized profit in fixed assets 720
EA6: Reclassify dividend income as a reduction of investment (30,000)
EA7: Recognize share of current profit after tax of Z 209,940
4,002,100

Analytical check

P's RE as at 31 Dec 20x6 3,120,000

P's share of X Co's RE as at 31 Dec 20x6 738,000
P's share of Z Co's RE as at 31 Dec 20x6 201,300

P's share of cost of sales of undervalued inventory (41,760)

P's share of depreciation of undervalued fixed assets (14,400)

P's share of unrealized profit in ending inventory (US) (3,600)

P's share of unrealized loss in fixed assets (DS) 7,600
P's share of unrealized profit in fixed assets (Assoc) (5,040)

Consolidated RE as at 31 Dec 20x6 4,002,100 -

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Problem 6.15
Part (1): Consolidation entries for year ended 31 December 20x6

CJE1: Elimination of investments

Dr Share capital 500,000
Dr Retained earnings 120,000
Dr Goodwill 676,000
Dr Equity investments 30,000
Cr DTL 6,000
Cr Investment in Silver Co 1,200,000
Cr Non-controlling interests 120,000
1,326,000 1,326,000

NCI's share of goodwill 55,600 120000-10%*(650000-6000)

CJE2: Adjustment of sale of under-valued equity investments

Dr Profit on sale of equity investments 10,000
Dr Loss on sale of equity investments 8,000
Cr Equity investments 18,000
Legal entity Group entity
Sales proceeds 160,000 160,000
Carrying amount 150,000 168,000
Profit on sale / (Loss on sale) 10,000 (8,000)

CJE3: Tax on CJE2

Dr Deferred tax liability 3,600
Cr Tax expense 3,600

CJE4: Adjustment of year end unrealized difference on equity investments

Dr Fair value gain 5,000
Dr Fair value loss 7,000
Cr Equity investments 12,000
Legal entity Group entity
Fair value 105,000 105,000
Carrying amount 100,000 112,000
Gain (loss) 5,000 (7,000)

CJE5: Tax effects on CJE4

Dr Deferrred tax liability 2,400
Cr Tax expense 2,400

CJE6: Adjustment for unrealized loss on transfer of fixed assets (20x5)

Reinstate to original cost and accumulated depreciation prior to transfer
Dr Fixed assets 250,000
Cr Accumulated depreciation 240,000 222000+(148000-130000)
Cr Opening RE 9,000
Cr NCI 1,000
Shd be What is Adjustment
Fixed assets, cost 370,000 120,000 250,000
Accumulated depreciation (222,000) 0 (222,000)
Net book value 148,000 120,000 28,000
Provision for impairment loss 18,000
TP 120,000
NBV 148,000
FV 130,000
Artificial loss 10,000

CJE7: Adjustment for tax on unrealized loss on transfer of fixed assets

Dr Opening RE 1,800

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Problem 6.15
Dr NCI 200
Cr DTL 2,000

CJE8: Adjustment of current depreciation on transferred fixed asset

Dr Opening RE 4,500
Dr NCI 500
Dr Depreciation expense 5,000
Cr Accumulated depreciation 10,000
Depreciation before transfer 65,000
Depreciation after transfer 60,000
Annual under-depreciation to be corrected 5,000

CJE9: Tax effects on CJE8

Dr DTL 2,000
Cr Tax expense 1,000
Cr Opening RE 900
Cr NCI 100

CJE10: Allocate share of post-acq RE to NCI

Dr Opening RE 18,000
Cr NCI 18,000
RE at 1 Jan 20x6 300,000
RE at date of acquisition 120,000
Change in RE 180,000
NCI's share 18,000

CJE11: Eliminate dividends declared by Silver Co

Dr Dividend income 36,000
Dr Non-controlling interests 4,000
Cr Dividend declared 40,000

CJE12: Allocate share of current income to NCI

Dr Income to NCI 57,200
Cr NCI (BS) 57,200
NPAT of Silver Co 600,000
Less adjustment of profit on under-valued equity investments (18,000)
Add tax expense on adjustment of profit 3,600
Less adjustment of unrealized profit on under-valued equity investments (12,000)
Add tax expense on adjustment of profit 2,400
Less under-depreciation on gain on sale of FA (5,000)
Add tax expense on gain on sale of FA 1,000
Adjusted NPAT 572,000

CJE13: Adjustment of unrealized profit in 20x6

Dr Sales 320,000
Cr Cost of sales 320,000
S' books Group
Inventory 32,000 30,000
NRV 26,000 26,000
Impairment loss 6,000 4,000
LCNRV 26,000 26,000

Cost of sales comprises of:

COS (P) 30,000 Unsold portion reversed
COS (S) 288,000 Sold portion eliminated
Reversal of impairment loss 2,000
320,000

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Problem 6.15
CJE14: Elimination of intercompany balance
Dr Payable to P Co 200,000
Cr Receivable from Silver Co 200,000

Part (2): Analytical check of Non-controlling Interests

Book value of net assets as at 31 Dec 20x6 1,360,000

Undervalued equity investments 0
Adjusted net assets as at 31 Dec 20x6 1,360,000
NCI's share 136,000
NCI's share of goodwill 55,600
NCI at year-end 191,600

CJE1: NCI at date of acquisition 120,000

CJE6: Adjustment for unrealized loss on transfer of fixed assets (20x5) 1,000
CJE7: Adjustment for tax on unrealized loss on transfer of fixed assets (200)
CJE8: Adjustment of current depreciation on transferred fixed asset (500)
CJE9: Tax effects on CJE8 100
CJE7: Share of post-acq RE 18,000
CJE8: Dividends received (4,000)
CJE9: Allocate share of current income to NCI 57,200

NCI balance as at 31 Dec 20x6 191,600 0

Part (3): Equity accounting entries for the year ended 31 December 20x6

EA1: Recognize share of post-acq RE of Ruby Co

Dr Investment in Ruby 60,000
Cr Opening RE 60,000
RE of Ruby Co as at 1 Jan 20x6 420,000
RE of Ruby Co as at date of acquisition 220,000
Change in RE 200,000
Share of Ruby Co's change in RE 60,000

EA2: Recognize past impairment of intangible asset, after-tax

Dr Opening RE 9,600 30%*80%*40000
Cr Investment in Ruby Co 9,600

Legal entity Econ entity

Carrying amount 120,000 200,000
Recoverable amount 160,000 160,000
Impairment loss 0 40,000

EA3: Adjust unrealized profit from past transfer of inventory, after-tax

Dr Opening RE 9,720 (120000-75000)*90%*80%*30%
Cr Investment in Ruby Co 9,720

EA4: Adjust unrealized profit from transfer of debt securities, after-tax

Dr Opening RE 3,035 30%*80%*(972000-959355)
Cr Investment in Ruby Co 3,035

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Chapter 6 solutions

Problem 6.15
Original purchase price 950,000
Add amortized discount for 20x5 9,355
Unamortized balance as at 1 Jan 20x6 959,355
Transfer price 972,000
Profit on transfer 12,645
Investor's share, after tax 3,035

EA5: Adjust past interest income on transferred debt securities, after tax
Dr Investment in Ruby Co 699
Cr Opening RE 699
"New" interest income 26,730
"Old" interest income 29,644
Interest income 2,914
Investor's share, after tax 699

EA6: Reclassify dividend income as a reduction of investment

Dr Dividend income 24,900
Cr Investment in Ruby Co 24,900

EA7: Recognize share of current profit after tax of Ruby Co

Dr Investment in Ruby Co 299,886
Cr Share of profit of Ruby Co 299,886

Alternatively:
Dr Investment in Ruby Co 299,886
Dr Share of tax of Ruby Co 59,972
Cr Share of profit of Ruby Co 359,858
NPBT 1,200,000
Less impairment loss of intangible asset (20,000) (160000-140000)
Add realized profit from sale of inventory (downstream) 31,500 70%*45000
Add difference in interest income 3,027 29942-26915
Less unrealized gain in inventory during year of transfer (24,000) (200000-160000)*60%
Add back impairment loss in inventory 9,000 60%*(200000-185000)
Adjusted NPBT of Ruby Co 1,199,527

Tax expense of Ruby Co 200,000

Less tax on impairment loss of intangible asset (4,000)
Add tax on realized profit from inventory sale 6,300
Add tax on difference in interest income 605
Less tax on unrealized gain in inventory (4,800)
Add tax on impairment loss in inventory 1,800
Adjusted tax expense of Ruby Co 199,905

Amortization of debt securities based on original effective interest

Eff interest Coupon interest Amortization Carrying amount
3.09%
1 Jan 20x4 950,000
1 Jan 20x5 29,355 20,000.00 9,355 959,355
1 Jan 20x6 29,644 20,000.00 9,644 968,999
1 Jan 20x7 29,942 20,000.00 9,942 978,941
1 Jan 20x8 30,249 20,000.00 10,249 989,190
1 Jan 20x9 30,566 20,000.00 10,566 999,756 Rounding up errors

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Chapter 6 solutions

Problem 6.15
Amortization of debt securities based on new effective interest rate
Eff interest Coupon interest Amortization Carrying amount
2.75%
1 Jan 20x5 972,000
1 Jan 20x6 26,730 20,000.00 6,730 978,730
1 Jan 20x7 26,915 20,000.00 6,915 985,645
1 Jan 20x8 27,105 20,000.00 7,105 992,750
1 Jan 20x9 27,301 20,000.00 7,301 1,000,051 Rounding up errors

Part (4): Analytical check of Investment in Ruby Co:

Book value of shareholders' equity of Ruby Co 2,037,000

Unrealized profit in inventory (downstream 20%*80%*(120000-75000) (7,200)
Unrealized profit in inventory (upstream) 60%*80%*(185000-160000) (12,000)
Unrealized profit in debt securities (985645-978941)*80% (5,363)
2,012,437
P's share of Ruby Co's adjusted identifiable net assets 603,731

P's share of unimpaired intangible asset 30%*80%*(140000-120000) 4,800

Implicit goodwill in investment in Ruby Co:

Investment in Ruby Co 600,000
BV of net assets of Ruby Co at acq 920,000
Excess of FV over BV of intangible asset (after-tax) 64,000
FV of net assets of Ruby Co at acq 984,000
Less Share of FV of net assets of Ruby Co at acq 295,200
Goodwill in Ruby Co implicit in the investment in Ruby Co 304,800
913,331

Investment in Ruby Co, at cost 600,000

EA1: Recognize share of post-acq RE of Ruby Co 60,000
EA2: Recognize past impairment of intangible asset, after-tax (9,600)
EA3: Adjust unrealized profit from past transfer of inventory, after-tax (9,720)
EA4: Adjust unrealized profit from transfer of debt securities, after-tax (3,035)
EA5: Adjust past interest income on transferred debt securities, after tax 699
EA6: Reclassify dividend income as a reduction of investment (24,900)
EA7: Recognize share of current profit after tax of Ruby Co 299,886

Investment in Ruby Co as at 31 Dec 20x6 913,331 0

Part (5) : Reconcile consolidated retained earnings as at 31 December 20x6

Listing approach
P's RE 2,180,000
S's RE 860,000
CJE1: Elimination of investments (120,000)
CJE2: Adjustment of sale of under-valued equity investments (18,000)
CJE3: Tax on CJE2 3,600
CJE4: Adjustment of year end unrealized difference on equity investments (12,000)
CJE5: Tax effects on CJE4 2,400
CJE6: Adjustment for unrealized loss on transfer of fixed assets (20x5) 9,000
CJE7: Adjustment for tax on unrealized loss on transfer of fixed assets (1,800)
CJE8: Adjustment of current depreciation on transferred fixed asset (9,500)
CJE9: Tax effects on CJE8 1,900
CJE10: Allocate share of post-acq RE to NCI (18,000)

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Chapter 6 solutions

Problem 6.15
CJE11: Eliminate dividends declared by Silver Co 4,000
CJE12: Allocate share of current income to NCI (57,200)
EA1: Recognize share of post-acq RE of Ruby Co 60,000
EA2: Recognize past impairment of intangible asset, after-tax (9,600)
EA3: Adjust unrealized profit from past transfer of inventory, after-tax (9,720)
EA4: Adjust unrealized profit from transfer of debt securities, after-tax (3,035)
EA5: Adjust past interest income on transferred debt securities, after tax 699
EA6: Reclassify dividend income as a reduction of investment (24,900)
EA7: Recognize share of current profit after tax of Ruby Co 299,886
3,137,731
Analytical approach
P's RE 2,180,000
P's share of post-acquisition RE of Silver 666,000
P's share of post-acquisition RE of Ruby Co 335,100

Share of profit/(loss) on sale of undervalued equity investments, after tax (21,600) 90%*80%*30000
Share of past impairment of intangible asset, after tax (14,400) 30%*80%*60000

Share of unrealized profit from debt securities, after tax (1,609) 30%*5363
Share of unrealized profit from inventory transfers with associate, after tax (5,760) 30%*19200
3,137,731 0

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Chapter 6 solutions

Problem 6.16
Part (1): Consolidation entries for year ended 31 December 20x6

CJE1: Elimination of investment in Sapphire Co

Dr Share capital 720,000
Dr Retained earnings 400,000
Dr Provision for claims 50,000
Dr Goodwill 1,040,000
Cr Deferred tax liability 10,000
Cr Investment in Sapphire Co 2,000,000
Cr Non-controlling interests 200,000
2,210,000 2,210,000
NCI's share of goodwill 84,000 200000-10%*(1170000-(20%*50000))

CJE2: Adjustment to expense on past settlement on claims

Dr Opening RE 45,000
Dr Non-controlling interests 5,000
Cr Provision for claims 50,000

The entries on the contract can be analyzed into the different entries below or combined:

CJE3: Tax effects of CJE2

Dr DTL 10,000
Cr Opening RE 9,000
Cr Non-controlling interests 1,000

CJE4: Adjustment for unrealized profit in buildings

Dr Opening RE 90,000 90%*100000
Dr Non-controlling interests 10,000 10%*100000
Cr Contract asset 100,000

CJE5: Adjustment for tax on unrealized profit on CJE4

Dr Deferred tax asset 20,000
Cr Opening RE 18,000
Cr Non-controlling interests 2,000

CJE6: Adjustment of current unrealized profit in contract asset

Dr Construction revenue 720,000
Cr Construction expense 600,000
Cr Contract asset 120,000

CJE7: Adjustment of tax on current unrealized profit in contract asset

Dr Deferred tax asset 24,000 20%*120000
Cr Tax expense 24,000

CJE8: Reclassification of remaining balance of contract asset to building

Dr Building 60,000
Cr Contract asset 60,000

S Co P Co Group CJE8 adjustment

Contract asset 280,000
CJE 4 adjustment (100,000)
CJE 6 adjustment (120,000)
Remaining balance 60,000 0 (60,000)

Building 1,100,000 1,160,000 60,000

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Chapter 6 solutions

Problem 6.16
Alternatively, the entries can be combined as follows:

Adjustment for profit, elimination of contract asset and reclassification to buildings

Dr Opening RE 90,000
Dr Non-controlling interests 10,000
Dr Construction revenue 720,000
Dr Building 60,000
Cr Construction expense 600,000
Cr Contract asset 280,000
880,000 880,000

S Co P Co Group Consol. Adj

Contract asset 280,000 0 (280,000)
Building 1,100,000 1,160,000 60,000

Combined entry for tax adjustments

Dr Deferred tax asset 44,000
Cr Tax expense 24,000
Cr Opening RE 18,000
Cr Non-controlling interest 2,000
44,000 44,000

CJE9: Adjustment of excess depreciation on building

Dr Depreciation 2,143
Cr Accumulated depreciation 2,143

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Chapter 6 solutions

Problem 6.16

S Co P Co Group Difference
Asset reported on BS Cont. asset Fixed assets Fixed assets
Cost of warehouse 1,100,000 1,160,000
Depreciation 39,286 41,429 2,143
1100000/14*0.5 1160000/14*0.5
Accumulated depreciation 39,286 41,429
Carrying amount 280,000 1,060,714 1,118,571 -222,143

CJE10: Tax effects of CJE9

Dr Deferred tax asset 429
Cr Tax expense 429

CJE11: Allocate share of post-acq RE to NCI

Dr Opening RE 27,000
Cr NCI (BS) 27,000
RE at 1 Jan 20x6 670,000
RE at date of acquisition 400,000
Change in RE 270,000
NCI's share 27,000

CJE12: Eliminate dividends declared by Sapphire Co

Dr Dividend income 77,400
Dr Non-controlling interests 8,600
Cr Dividend declared 86,000

CJE13: Adjustment for artificial loss on upstream transfer of inventory

Dr Sales 250,000
Dr Inventory 6,000 81000-75000
Cr Cost of sales 256,000
Re-instate inventory to fair value from artificially low TP
Legal entity Group entity
OC 75,000 90,000
NRV 81,000 81,000
LCNRV 75,000 81,000

CJE14: Tax effects of CJE13

Dr Tax expense 1,200
Cr DTL 1,200

CJE15: Allocate share of current income to NCI

Dr Income to NCI 70,709
Cr NCI (BS) 70,709
NPAT of Sapphire Co 800,000
Less unrealized construction profit (120,000)
Less tax on unrealized profit 24,000
Less additional depreciation on building (2,143)
Add tax on additional depreciation 429
Add back unrealized loss on inventory transfer 6,000
Less tax on unrealized loss on inventory transfer (1,200)
Adjusted NPAT 707,086

CJE16: Eliminate intercompany payable and receivable

Dr Intercompany payable 480,000
Cr Intercompany receivable 480,000

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Chapter 6 solutions

Problem 6.16
Part (2): Analytical check of Non-controlling interests

Book value of net assets as at 31 Dec 20x6 2,104,000

Add back unrealized loss in ending inventory 80%*(81000-75000) 4,800
Adjustment for unrealized profit in building 80%*(220000+2143) (177,714)
Adjusted net assets as at 31 Dec 20x6 1,931,086
NCI's share 193,109
Add NCI's goodwill 84,000
277,109

CJE1: Elimination of investment in Sapphire Co 200,000

CJE2: Adjustment to expense on past settlement on claims (5,000)
CJE3: Tax effects of CJE2 1,000
CJE4: Adjustment for unrealized profit in buildings (10,000)
CJE5: Adjustment for tax on unrealized profit on CJE4 2,000
CJE11: Allocate share of post-acq RE to NCI 27,000
CJE12: Eliminate dividends declared by Sapphire Co (8,600)
CJE15: Allocate share of current income to NCI 70,709
NCI balance as at 31 Dec 20x6 0 277,109

Part (3): Equity accounting entries for the year ended 31 December 20x6

EA1: Recognize share of post-acq RE of Amber Co

Dr Investment in Amber Co 66,000
Cr Opening RE 66,000
RE of Amber Co as at 1 Jan 20x6 400,000
RE of Amber Co as at date of acquisition 180,000
Change in RE 220,000
Share of Amber Co's change in RE 66,000

EA2: Adjustment of unrealized architects' fees from project WIP (after-tax)

Dr Opening RE 33,600 140000*30%*80%
Cr Investment in Amber Co 33,600

EA3: Recognize share of past cost of sale on under-valued inventory (after-tax)

Dr Opening RE 3,360 (320000-280000)*35%*80%*30%
Cr Investment in Amber Co 3,360

EA4: Recognize adjustment of past unrealized profit on transfer of fixed assets (after-tax)
Dr Opening RE 7,200 30000*80%*30%
Cr Investment in Amber Co 7,200
Transfer price 380,000
Cost 420,000
Acc Dep (70,000) 350,000
Unrealized profit 30,000
After-tax 24,000
P's share 7,200

EA5: Recognize adjustment to past depreciation on unrealized profit

Dr Investment in Amber 720 30000/5*1/2*80%*30%
Cr Opening RE 720
Depreciation before transfer 35,000 350000/5*0.5
Depreciation after transfer 38,000 380000/5*0.5
Half-year depreciation (3,000)
Alternatively: 30000/5*0.5
After tax (2,400)
Share at 30% (720)

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Chapter 6 solutions

Problem 6.16

No entries required for impairment loss

Legal Group Adjustment Equity accounting
Carrying amount 75,000 65,000
NRV 60,000 60,000
LCNRV 60,000 60,000 0 0

EA6: Reclassify dividend income as a reduction of investment

Dr Dividend income 23,400
Cr Investment in Amber Co 23,400

EA7: Recognize P Co's share of current profit after tax of Amber Co

Dr Investment in Amber Co 192,180
Cr Share of profit of Amber Co 192,180

Alternatively:
Dr Investment in Amber Co 192,180
Dr Share of tax of Amber Co 51,120
Cr Share of profit of Amber Co 243,300
NPBT 820,000
Add realization through depreciation on fixed assets 6,000 30000/5
Add excess depreciation on building 5,000 140000/14*0.5
Less higher cost of sales from under-valued inventory (20,000) (320000-280000)*50%

Adjusted NPBT of Amber Co 811,000

Tax expense of Amber Co 172,200

Add tax on excess depreciation 1,200
Add tax on excess depreciation on building 1,000
Less tax on amortization of intangible asset (4,000)

Adjusted tax expense of Amber Co 170,400

EA9: Recognition of share of OCI from Amber Co

Dr Investment in Amber Co 45,000
Cr Share of current OCI 15,000
Cr OCI 30,000

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Chapter 6 solutions

Problem 6.16
Part (4): Analytical check of Investment in Amber Co:

Book value of shareholders' equity of Amber Co 1,619,800

Less unrealized profit after depreciation after tax 30000/5*3.5*80% (16,800)
Balance of under-valued inventory (after-tax) 40000*15%*80% 4,800
Less unrealized profit from building (after-tax) 140000*80%*13.5/14 (108,000)

1,499,800
P's share of Z's identifiable net assets 449,940
Implicit goodwill in investment in Amber Co:
Investment in Amber Co 1,200,000
BV of net assets of Amber Co at acq 680,000
Undervalued inventory (after-tax) 32,000
FV of net assets of Amber Co at acq 712,000
Less Share of FV of net assets of Amber Co at acq 213,600
Goodwill in Amber Co implicit in the investment in Amber Co 986,400
1,436,340

Investment in Amber Co, at cost 1,200,000

EA1: Recognize share of post-acq RE of Amber Co 66,000
EA2: Adjustment of unrealized architects' fees from project WIP (after-tax) (33,600)
EA3: Recognize share of past cost of sale on under-valued inventory (after-tax) (3,360)
EA4: Recognize adjustment of past unrealized profit on transfer of fixed assets (after-tax) (7,200)
EA5: Recognize adjustment to past depreciation on unrealized profit 720
EA6: Reclassify dividend income as a reduction of investment (23,400)
EA7: Recognize P Co's share of current profit after tax of Amber Co 192,180
EA9: Recognition of share of OCI from Amber Co 45,000
Investment in Amber Co as at 31 Dec 20x6 0 1,436,340

Part (5): Analytical check on Consolidated Retained Earnings

Listings approach

P Co's RE as at 31 December 20x6 3,050,000

Sapphire Co's RE as at 31 December 20x6 1,384,000

Pre-acquisition retained earnings (400,000)

Settlement of past claims (45,000)
Tax effects 9,000
Unrealized profit in buildings (90,000)
Tax effects 18,000
Unrealized profit in Contract asset (120,000)
Tax effects 24,000
Excess depreciation on building (2,143)
Tax effects 429
Post-acquisition RE to NCI (27,000)
Dividend elimination 8,600
Artificial loss 6,000
Tax effects (1,200)
Income to NCI (70,709)
Post-acquisition RE of Amber 66,000
Unrealized architect's fees (33,600)
Past cost of sale of under-valued inventory (3,360)
Past unrealized profit on transfer of fixed assets (7,200)
Past depreciation on unrealized profit 720
Reclassification of dividend income (23,400)
Share of profit of Amber 192,180
3,935,317

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Chapter 6 solutions

Problem 6.16

Analytical check on Consolidated Retained Earnings

P's RE as at 31 Dec 20x6 3,050,000

P's share of Sapphire's RE as at 31 Dec 20x6 885,600
P's share of Amber's RE as at 31 Dec 20x6 236,940

P's share of past expensing of litigation loss (36,000)

P's share of past cost of sales of undervaluation (8,160)

P's share of unrealized loss in ending inventory 4,320

P's share of unrealized profit in building (159,943) 90%*177714

P's share of unrealized profit in fixed assets (5,040) 16800*30%

P's share of unrealized profit in buildings (32,400) 108000*30%

Consolidated RE as at 31 Dec 20x6 3,935,317

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Chapter 6 solutions

Problem 6.17
PART (1): Equity accounting entries for the year ended 31 December 20x4
EA1: Recognize share of post-acq RE of Z
Dr Investment in Z 30,000
Cr Opening Retained Earnings (RE) 30,000
RE of Z as at 1 Jan 20x4 300,000
RE of Z as at date of acquisition 200,000
Change in RE 100,000
Share of Z's change in RE 30,000

EA2: Adjust for past cost of sales on under-valued inventory

Dr Opening RE 2,880 60%*80%*30%*(200000-180000)
Cr Investment in Z 2,880

EA3: Adjust for unrealized profit in fixed assets

Dr Opening RE 4,800 (60000-40000)*30%*80%
Cr Investment in Z 4,800

EA4: Adjust for past depreciation in unrealized profit in fixed assets

Dr Investment in Z 480 20000/5*1/2*30%*80%
Cr Opening RE 480

EA5: Recognize share of revaluation reserves

Dr Share of current revaluation reserves 12,000
Cr Revaluation reserves 9,000
Cr Investment in Z 3,000

EA6: Reclassify dividend income as a reduction of investment

Dr Dividend income 30,000
Cr Investment in Z 30,000 (30%*100000)

EA7: Recognize share of current profit after tax of Z

Dr Investment in Z 212,340
Cr Share of profit of Z 212,340
OR
Dr Investment in Z 212,340
Dr Share of tax of Z 56,460
Cr Share of profit of Z 268,800

Profit before tax of Z 900,000

Add back excess depreciation 4,000 =20000/5
Less cost of sales on under-valued inventory (6,000) 30%*20000
Less impairment loss (2,000)
Adjusted profit before tax of Z 896,000
Share of adjusted profit before tax of Z 268,800

Tax expense of Z 189,000

Add tax on excess depreciation 800
Less tax on cost of sales of under-valued inventory (1,200)
Less tax on impairment loss (400)

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Chapter 6 solutions

Problem 6.17
Adjusted tax of Z 188,200
Share of adjusted tax of Z 56,460

Legal entity Group entity

Net realizable value 6,000 6,000
Carrying amount 18,000 20,000
LCNRV 6,000 6,000
Impairment loss 12,000 14,000 2,000

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Problem 6.17
PART (2): Analytical check of Investment in Z:

Book value of shareholders' equity of Z 1,711,000

Adjustment for unrealized profit in equipment 80%*20000*3.5/5 (11,200)

1,699,800

P's share of Z's identifiable net assets 509,940

Implicit goodwill in investment in Z:
Investment in Z 600,000
BV of net assets of Z at acq 1,010,000
Under-valued inventory 16,000 (200000-180000)*80%
FV of net assets of Z at acq 1,026,000
Less Share of FV of net assets of Z at acq 307,800
Goodwill in Z implicit in the investment in Z 292,200
802,140

Investment in Z, at cost 600,000

EA1: Recognize share of post-acq RE of Z 30,000
EA2: Adjust for past cost of sales on under-valued inventory (2,880)
EA3: Adjust for unrealized profit in fixed assets (4,800)
EA4: Adjust for past depreciation in unrealized profit in fixed assets 480
EA5: Recognize share of revaluation reserves (3,000)
EA6: Reclassify dividend income as a reduction of investment (30,000)
EA7: Recognize share of current profit after tax of Z 212,340

Investment in Z as at 31 Dec 20x4 0 802,140

PART (3): Ignore (1) and (2). P Co applies the equity method to determine the Investment
in Associate account in its separate financial statements from date of initial investment.

(a) Determine the Investment in Associate balance as at 31 December 20x3.

Book value of shareholders' equity of Z

Share capital 700,000
Retained earnings 300,000
Revaluation reserves 140,000
1,140,000
Less unrealized profit in equipment, after-tax 20000/5*4.5*80% (14,400)
Add under-valued inventory at 31 December 20x3 80%*40%*20000 6,400
Adjusted shareholders' equity as at 31 December 20x3 1,132,000

P's share of Z's identifiable net assets 30%*1132000 339,600

Implicit goodwill in investment in Z:
Investment in Z 600,000
BV of net assets of Z at acq 1,010,000
Under-valued inventory 16,000 (200000-180000)*80%
FV of net assets of Z at acq 1,026,000
Less Share of FV of net assets of Z at acq 307,800
Goodwill in Z implicit in the investment in Z 292,200

631,800

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Problem 6.17
(b) Prepare the journal entries to apply the equity method in the current year ended 31 December 20x4

JE1: Equity accounting of current share of profit (See workings in EA7 above)
Dr Share of profit after tax 212,340
Cr Investment 212,340

JE2: Equity accounting of current share of revaluation reserves

Dr Share of revaluation reserves 12,000
Cr Investment in Z 12,000

JE3: Recognition of dividend as repayment of profit

Dr Cash 30,000
Cr Investment in Z 30,000

(c) Check for balance in associate as at 31 December 20x4

Investment in Associate, 1 January 20x4 (Equity Method) 631,800

JE1: Share of current profit 212,340
JE2: Share of current revaluation reserves (12,000)
JE3: Repayment of profit (30,000)

Investment in Associate, 31 December 20x4 802,140 -

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Problem 6.18
Part (1): Equity Accounting Entries for the year ended 31 December 20x6
EA1: Recognize post-acquisition retained earnings to 1 January 20x5
Dr Investment in Amber Co 6,000
Cr Opening RE 6,000
RE of Amber Co as at 1 Jan 20x6 720,000
RE of Amber Co as at date of acquisition 700,000
Change in RE 20,000
Share of Amber Co's change in RE 6,000

EA2: Recognize share of past amortization and impairment loss of intangible asset (after-tax)
Dr Opening RE 48,000 (800000/10+120000)*80%*30%
Cr Investment in Amber Co 48,000

31 Dec 20x5 31 Dec 20x6 31 Dec 20x6 (assuming no impairment)

NBV of intangible asset 720000 533,333 640,000 800000/10*8
Recoverable amount 600000 630,000 630,000
Impairment loss (reversal) 120000 96,667

EA3: Recognize adjustment of past unrealized profit on transfer of fixed assets (after-tax)
Dr Opening RE 19,200 80000*80%*30%
Cr Investment in Amber Co 19,200
Transfer price 500,000
Cost 520,000
Acc Dep (100,000) 420,000
Unrealized profit 80,000
After-tax 64,000
P's share 19,200

EA4: Recognize adjustment to past depreciation on unrealized profit

Dr Investment in Amber 2,400 80000/4*1/2*80%*30%
Cr Opening RE 2,400
Depreciation before transfer 52,500 420000/4*0.5
Depreciation after transfer 62,500 500000/4*0.5
Half-year depreciation (10,000)
Alternatively: 80000/4*0.5
After tax (8,000)
Share at 30% (2,400)

EA5: Reclassify dividend income as a reduction of investment

Dr Dividend income 27,000
Cr Investment in Amber Co 27,000

EA6: Recognize P Co's share of current profit after tax of Amber Co

Dr Investment in Amber Co 222,000
Cr Share of profit after tax of Amber Co 222,000

Dr Investment in Amber Co 222,000

Dr Share of tax of Amber Co 63,000
Cr Share of profit of Amber Co 285,000
NPBT 900,000
Add realization through depreciation on fixed assets 20,000 80000/4
Less amortization of intangible asset (66,667) 600000/9
Add reversal of impairment loss on intangible asset 96,667 Workings
Adjusted NPBT of Amber Co 950,000

Tax expense of Amber Co 200,000

Add tax on excess depreciation 4,000
Less tax on amortization (13,333)

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Problem 6.18
Add tax on reversal of impairment of intangible asset 19,333
Adjusted tax expense of Amber Co 210,000

EA7: Recognition of share of revaluation reserves from Amber Co

Dr Investment in Amber Co 42,000
Cr Share of current revaluation reserves 36,000
Cr Opening revaluation reserves 6,000

Analytical check of Investment in Amber Co:

Book value of shareholders' equity of Amber Co 2,050,000
Less unrealized profit after depreciation after tax 80000/4*2.5*80% (40,000)
Unamortized balance of intangible asset (after-tax) 630000*80% 504,000
2,514,000
P's share of Amber's identifiable net assets 754,200
Implicit goodwill in investment in Amber Co:
Investment in Amber Co 1,100,000
BV of net assets of Amber Co at acq 1,280,000
Unrecognized intangible (after-tax) 640,000
FV of net assets of Amber Co at acq 1,920,000
Less Share of FV of net assets of Amber Co at acq 576,000
Goodwill in Amber Co implicit in the investment in Amber Co 524,000
1,278,200

Investment in Amber Co, at cost 1,100,000

EA1: Recognize post-acquisition retained earnings to 1 January 20x5 6,000
EA2: Recognize share of past amortization and impairment loss of intangible asset (after-tax) (48,000)
EA3: Recognize adjustment of past unrealized profit on transfer of fixed assets (after-tax) (19,200)
EA4: Recognize adjustment to past depreciation on unrealized profit 2,400
EA5: Reclassify dividend income as a reduction of investment (27,000)
CJE17:Share of current profit after tax 222,000
EA7: Recognition of share of revaluation reserves from Amber Co 42,000
Investment in Amber Co as at 31 Dec 20x6 0 1,278,200

PART (3) Ignore (1) and (2)

(a) Determine the Investment in Associate balance as at 31 December 20x5.

Shareholders' equity as at 31 December 20x5

Share capital 500,000
Retained earnings 720,000
Revaluation reserves 100,000
1,320,000
Less unrealized profit as at 31 December 20x5, after tax (56,000)

Add unimpaired intangible asset, after tax 480,000

Adjusted shareholders' equity as at 31 December 20x5 1,744,000

P Co's share of identifiable net assets as at 31 December 20x5 523,200

Implicit goodwill in investment in Amber Co:

Investment in Amber Co 1,100,000
BV of net assets of Amber Co at acq 1,280,000
Unrecognized intangible (after-tax) 640,000
FV of net assets of Amber Co at acq 1,920,000
Less Share of FV of net assets of Amber Co at acq 576,000
Goodwill in Amber Co implicit in the investment in Amber Co 524,000

Investment in associate as at 31 December 20x5 1,047,200

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Problem 6.18

(b) Prepare the journal entries to apply the equity method in the current year ended 31 December 20x6

JE1: Equity accounting of current share of profit (See workings in EA6 above)
Dr Share of profit after tax 222,000
Cr Investment 222,000

JE2: Equity accounting of current share of revaluation reserves

Dr Investment in Amber 36,000
Cr Revaluation reserves 36,000

JE3: Recognition of dividend as repayment of profit

Dr Cash 27,000
Cr Investment in Z 27,000

(c): Check for balance in associate as at 31 December 20x6

Investment in Associate, 1 January 20x6 (Equity method) 1,047,200

JE1: Share of current profit 222,000
JE2: Share of revaluation reserves 36,000
JE3: Repayment of profit (27,000)

Investment in Associate, 31 December 20x6 1,278,200 -

Investment in Associate, 31 December 20x6 (Part 2) 1,278,200

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Problem 6.19
PART (1): Prepare the journal entry to record the effects of the joint operations on P Co's financial
statements

Workings: The amounts attributable to each joint operator is as follows

P Co T Co Total

Share of fixed assets 1,520,000 380,000 1,900,000

Share of inventory - 300,000 300,000
Share of accounts receivable 200,000 200,000 400,000
Share of cash 10,000 10,000 20,000

Share of current liabilities (1,088,000) (272,000) (1,360,000)

Share of long-term liabilities (230,000) (230,000) (460,000)

Net assets attributable to each operator 412,000 388,000 800,000

Initial investment 0 0
Share of revenue 1,500,000 1,500,000
Share of expenses (1,000,000) (1,000,000)
Share of taxes (100,000) (100,000)

Net equity attributable to each operator 400,000 400,000

Management fee (expense) paid to P Co 12,000 (12,000)

Dr Fixed assets 1,520,000

Dr Accounts receivable 200,000
Dr Cash 10,000
Dr Expenses 1,000,000
Dr Taxes 100,000
Cr Revenue 1,500,000
Cr Management fee income 12,000
Cr Current liabilities 1,088,000
Cr Long-term liabilities 230,000
2,830,000 2,830,000

PART (2): Show the combined financial statements of P Co for the year ended 31 December 20x5 after
incorporating the effects of the joint operations.

Income Statement and Statement of Changes in Equity (extract)

for the year ending 31 December 20x5 Combined
P Co Z financial statements
Revenues 6,000,000 3,000,000 7,500,000
Management fee from joint operations 12,000
Expenses (4,000,000) (2,000,000) (5,000,000)
Profit before tax 2,000,000 1,000,000 2,512,000
Tax (400,000) (200,000) (500,000)
Profit after tax 1,600,000 800,000 2,012,000
Dividends (300,000) (300,000)
Profit retained 1,300,000 800,000 1,712,000
Retained earnings, 1 Jan 20x5 1,200,000 0 1,200,000
Retained earnings, 31 Dec 20x5 2,500,000 800,000 2,912,000

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Problem 6.19
Statement of Financial Position as at 31 December 20x5 Combined
P Co Z financial statements
Fixed assets, net book value 3,500,000 1,900,000 5,020,000
Other long-term assets 500,000 500,000
Inventory 800,000 300,000 800,000
Accounts receivable 520,000 400,000 720,000
Cash 100,000 20,000 110,000
5,420,000 2,620,000 7,150,000

Current liabilities 420,000 1,360,000 1,508,000

Long-term liabilities 500,000 460,000 730,000
Initial capital 2,000,000 0 2,000,000
Retained earnings 2,500,000 800,000 2,912,000
5,420,000 2,620,000 7,150,000

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Problem 6.20
If the joint arrangement in P6.19 is a joint venture with ownership interests of 50% each in Z,
show the equity accounting entries and the final balance in the Investment in Z for the
year ended 31 December 20x5.

As a joint venture, 50% of Z's profit will be equity accounted by P Co.

The provision of guarantees for lending serves as a basis of capital funding for Z.

Equity accounting entries:

EA1: Recognize the share of profit of Z Co
Dr Investment in Z Co 400,000
Cr Share of profit after tax 400,000

Income Statement and Statement of Changes in Equity (extract)

for the year ending 31 December 20x5 P Co (with
P Co Z equity accounting)
Revenues 6,000,000 3,000,000 6,000,000
Expenses (4,000,000) (2,000,000) (4,000,000)
Share of profit of Z 400,000
Profit before tax 2,000,000 1,000,000 2,400,000
Tax (400,000) (200,000) (400,000)
Profit after tax 1,600,000 800,000 2,000,000
Dividends (300,000) (300,000)
Profit retained 1,300,000 800,000 1,700,000
Retained earnings, 1 Jan 20x5 1,200,000 0 1,200,000
Retained earnings, 31 Dec 20x5 2,500,000 800,000 2,900,000

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Problem 6.20
Statement of Financial Position as at 31 December 20x5 P Co (with
P Co Z equity accounting)
Fixed assets, net book value 3,500,000 1,900,000 3,500,000
Investment in Z 400,000
Other long-term assets 500,000 500,000
Inventory 800,000 300,000 800,000
Accounts receivable 520,000 400,000 520,000
Cash 100,000 20,000 100,000
5,420,000 2,620,000 5,820,000

Current liabilities 420,000 1,360,000 420,000

Long-term liabilities 500,000 460,000 500,000
Initial capital 2,000,000 0 2,000,000
Retained earnings 2,500,000 800,000 2,900,000
5,420,000 2,620,000 5,820,000

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Problem 6.21
Part (1): Consolidation entries for 20x6
CJE1: Elimination of investment in Silver Co
Dr Share capital 620,000
Dr Retained earnings 420,000
Dr Revaluation reserves 70,000
Dr Fixed assets 80,000
Dr Goodwill 806,000
Cr Deferred tax liability 16,000
Cr Investment in Silver Co 1,800,000
Cr Non-controlling interests 180,000
1,996,000 1,996,000

CJE2: Past and current depreciation of undervalued fixed asset

Dr Opening RE 10,800 90%*(80000/20*3)
Dr Non-controlling interests 1,200
Dr Depreciation 4,000
Cr Accumulated depreciation 16,000

CJE3: Tax effects of CJE2

Dr Deferred tax liability 3,200
Cr Opening RE 2,160
Cr Non-controlling interests 240
Cr Tax expense 800

CJE4: Adjustment of unrealized profit on upstream transfer

Dr Opening RE 324,000 90%*360000
Dr NCI 36,000 10%*360000
Cr Intangible assets Note 1 360,000
360,000 360,000

Note 1: The asset should be properly described as "Intangible Asset"

It's not proper classification to call it "Development Project - Vaccine" or "Fixed Assets"

Workings
Transfer price invoiced by Silver Co to Prism Co 31/12/20x4 1,000,000
Costs incurred 640,000
640,000
Profit on sale 360,000

Original useful life as at 1 Jan 20x5 10.00

Excess amortization during 20x6 360000/10 36,000

CJE5: Tax effects of CJE4

Dr Deferred tax asset 72,000 20%*360000
Cr Opening RE 64,800 20%*324000
Cr NCI 7,200 20%*36000

CJE6: Adjust capitalized interest amount

Dr Intangible Assets 10,000

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Problem 6.21
Cr ORE Note 2 10,000
Interest expense capitalized by S that should be eliminated 20,000
Interest expense incurred by P that should be capitalized 30,000
(10,000)
Note 2: Since the profit originates from P, it is a downstream sale. The "unrealized loss" is incurred by P, not S.
There is no consequential impact on NCI, using our usual accounting for downstream transactions.

CJE7: Tax effects of capitalized interest

Dr ORE 2,000
Cr DTL 2,000

CJE8: Adjustment for excess amortization from upstream transfer

Dr Accumulated amortization 72,000
Cr Opening RE 32,400 Note 1
Cr NCI 3,600 Note 2
Cr Amortization 36,000 Note 3
Note 1: 90%*((360000*1/10))
Note 2: 10%*((360000*1/10))

CJE9: Tax effects of CJE8

Dr Opening RE 6,480
Dr NCI 720
Dr Tax expense 7,200
Cr Deferred tax asset 14,400

CJE10: Adjustment of excess amortization from downstream transfer

Dr Opening RE 1,000
Dr Amortization 1,000
Cr Accumulated amortization 2,000

CJE11: Tax effects of CJE10

Dr DTL 400
Cr ORE 200
Cr Tax expense 200

CJE12: Allocate share of post-acquisition RE to NCI

Dr Opening RE 28,000
Cr NCI (BS) 28,000
RE at 1 Jan 20x6 700,000
RE at date of acquisition 420,000
Change in RE 280,000
NCI's share 28,000

CJE13: Eliminate dividends declared by Silver Co

Dr Dividend income 90,000
Dr Non-controlling interests 10,000
Cr Dividend declared 100,000

CJE14: Allocate share of current income to NCI

Dr Income to NCI 101,310

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Problem 6.21
Cr NCI (BS) 101,310
NPAT of Silver Co 987,500
Less depreciation of undervalued fixed assets (4,000)
Add tax on depreciation of undervalued fixed asset 800
Add excess amortization 36,000
Less tax on excess amortization (7,200)
Adjusted NPAT 1,013,100

CJE15: Allocation of revaluation reserves to NCI

Dr Opening revaluation reserves to NCI 8,000 10%*(150000-70000)
Cr Current revaluation reserves to NCI 3,000 10%*(120000-150000)
Cr NCI 5,000

CJE16: Elimination of interest income and interest expense

Dr Interest income (P) 30,000
Cr Interest expense (S) 30,000

CJE16: Elimination of intercompany balances

Dr Amount due to Prism 1,500,000
Cr Amount due from Silver' 1,500,000

Part (2) follows after Part (3)

Part (3): Non-controlling interests as at 31 Dec 20x6
Book value of net assets as at 31 Dec 20x6 2,327,500
Remaining balance of FV-BV of fixed assets, after tax 51,200 Note 1
Adjustment for unrealized profit in intangible asset, after tax (230,400) Note 2
Adjusted net assets as at 31 Dec 20x6 2,148,300
NCI's share of net assets 214,830
NCI's share of goodwill 62,600 Note 3
NCI balance as at 31 Dec 20x6 277,430
Note 1: (200000-120000)*16/20*80%
Note 2: 360000*8/10*80%
Note 3: 180000-(10%*(1190000-(20%*80000)))

CJE1: Elimination of investment in Silver Co 180,000

CJE2: Past and current depreciation of undervalued fixed asset (1,200)
CJE3: Tax effects of CJE2 240
CJE4: Adjustment of unrealized profit on upstream transfer (36,000)
CJE5: Tax effects of CJE4 7,200
CJE8: Adjustment for excess amortization from upstream transfer 3,600
CJE9: Tax effects of CJE8 (720)
CJE12: Allocate share of post-acquisition RE to NCI 28,000
CJE13: Eliminate dividends declared by Silver Co (10,000)
CJE14: Allocate share of current income to NCI 101,310
CJE15: Allocation of revaluation reserves to NCI 5,000
NCI balance as at 31 Dec 20x6 0 277,430

Part (2): Equity accounting adjustments

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Problem 6.21

EA1: Recognition of share of post-acquisition RE of Amber

Dr Investment in Amber 27,900
Cr Opening RE 27,900
RE of Amber as at 1 Jan 20x6 543,000
RE of Amber as at date of acquisition 450,000
Change in RE 93,000
Share of Amber's change in RE 27,900

EA2: Adjust expense on provision for litigation loss

Dr Investment in Amber 43,200 80%*30%*180000
Cr Opening RE 43,200

EA3: Adjust for unrealized profit on inventory

Dr ORE 5,760 60%*30%*80%*40000
Cr Investment in Amber 5,760

EA4: Reclassify dividend income as a reduction of investment

Dr Dividend income 39,000
Cr Investment in Amber 39,000 30%*130000

EA5: Recognize share of current profit after tax of Amber

Dr Investment in Amber 418,080
Cr Share of profit in Amber 418,080
OR
Dr Investment in Amber 418,080
Dr Share of tax of Amber 104,520
Cr Share of profit of Amber 522,600

Profit after tax of Amber 1,320,000

Add litigation loss expense, after-tax 56,000 (250000-180000)*80%
Add realized profit on transferred inventory, after-tax 16,000 50%*40000*80%
Add back excess impairment loss on transferred inventory, after-tax 1,600
Adjusted profit after tax of Amber 1,393,600

Profit before tax of Amber 1,650,000

Add litigation loss expense 70,000
Add realized profit on transferred inventory 20,000
Add back excess impairment loss on transferred inventory 2,000
Adjusted profit before tax of Amber 1,742,000
Share of adjusted profit before tax of Amber 522,600

Tax expense of Amber 330,000

Add tax on litigation loss expense 14,000
Add tax on realized profit on transferred inventory 4,000
Add tax on excess impairment loss on transferred inventory 400
Adjusted tax of Amber 348,400
Share of adjusted tax of Amber 104,520
Realized profit on transferred inventory 50% sold 20,000

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Problem 6.21
Group Legal entity Difference
Net realizable value at 31 Dec 20x6 10,000 10,000
Cost 8,000 12,000
Lower of cost and NRV 8,000 10,000
Impairment loss 0 2,000 2,000

Part (4): Analytical check on Investment in Amber:

Book value of shareholders' equity of Amber 2,683,000

Less unrealized profit on unsold inventory, after tax (10000-8000)*80% (1,600)
2,681,400
P's share of Amber's identifiable net assets 804,420
Implicit goodwill in investment in Amber:
Investment in Amber 800,000
BV of net assets of Amber at acquisition 1,400,000
Less provision for litigation loss (200,000)
FV of net assets of Amber at acquisition 1,200,000
Less Share of FV of net assets of Amber at acq 360,000
Goodwill in Amber implicit in the investment in Amber 440,000
1,244,420

Investment in Amber, at cost 800,000

EA1: Recognition of share of post-acquisition RE of Amber 27,900
EA2: Adjust expense on provision for litigation loss 43,200
EA3: Adjust for unrealized profit on inventory (5,760)
EA4: Reclassify dividend income as a reduction of investment (39,000)
EA5: Recognize share of current profit after tax of Amber 418,080

Investment in Amber as at 31 Dec 20x6 0 1,244,420

Part (5): Perform the Analytical check on consolidated retained earnings

Consolidated RE as at 31 Dec 20x6
RE of P 1,646,800
RE of S 1,587,500
CJE1: Elimination of investment in Silver Co (420,000)
CJE2: Past and current depreciation of undervalued fixed asset (14,800)
CJE3: Tax effects of CJE2 2,960
CJE4: Adjustment of unrealized profit on upstream transfer (324,000)
CJE5: Tax effects of CJE4 64,800
CJE6: Adjust capitalized interest amount 10,000
CJE7: Tax effects of capitalized interest (2,000)
CJE8: Adjustment for excess amortization from upstream transfer 68,400
CJE9: Tax effects of CJE8 (13,680)
CJE10: Adjustment of excess amortization from downstream transfer (2,000)
CJE11: Tax effects of CJE10 400
CJE12: Allocate share of post-acquisition RE to NCI (28,000)
CJE13: Eliminate dividends declared by Silver Co 10,000
CJE14: Allocate share of current income to NCI (101,310)
EA1: Recognition of share of post-acquisition RE of Amber 27,900

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Problem 6.21
EA2: Adjust expense on provision for litigation loss 43,200
EA3: Adjust for unrealized profit on inventory (5,760)
EA4: Reclassify dividend income as a reduction of investment (39,000)
EA5: Recognize share of current profit after tax of Amber 418,080

Consolidated RE as at 31 Dec 20x6 2,929,490

Analytical check:
P's RE as at 31 December 20x6 1,646,800

P's share of S's post-acquisition RE 90%*(1587500-420000) 1,050,750

P's share of A's post-acquisition RE 30%*(1733000-450000) 384,900

P's share of cumulative amortization of FV-BV, after tax of S 90%*80%*16000 (11,520)

P's share of cumulative amortization of FV-BV, after tax of A 30%*80%*250000 60,000

P's unrealized loss as at 31 December 20x6, after-tax 80%*(30000-20000)*8/10 6,400

P's share of S's unrealized profit as at 31 December 20x6, after-tax 90%*80%*360000*8/10 (207,360)
P's share of A's unrealized profit as at 31 December 20x6, after-tax 30%*80%*2000 (480)

Consolidated RE as at 31 Dec 20x6 2,929,490

0

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Problem 6.22
Part (1): Prepare the consolidation entries

CJE1: Elimination of investment in Silver Co

Dr Share capital 1,000,000
Dr Retained earnings 800,000
Dr Inventory 30,000
Dr Goodwill 1,696,000
Cr Deferred tax liability 6,000
Cr Investment in Silver Co 3,200,000
Cr Non-controlling interests 320,000
3,526,000 3,526,000

NCI's share of goodwill 137,600 320000-10%*(1830000-(20%*30000))

CJE2: Adjustment of past COS and current impairment loss of under-valued inventory
Dr Opening RE 18,900 90%*21000
Dr Non-controlling interests 2,100
Dr Impairment loss 9,000
Cr Inventory 30,000

Workings: Impairment loss Legal entity Group entity

Ending balance of undervalued inventory 66,000 75,000 30%*250000
FV of undervalued inventory 66,000 66,000 0
Impairment loss 0 9,000

CJE3: Tax effects of CJE2

Dr DTL 6,000 20%*30000
Cr Tax expense 1,800
Cr Opening RE 3,780
Cr Non-controlling interests 420

CJE4: Adjustment for unrealized profit in buildings

Dr Opening RE 180,000 90%*200000
Dr Non-controlling interest 20,000 10%*200000
Cr Building 200,000

CJE5: Adjustment for tax on unrealized profit on CJE4

Dr Deferred tax asset 40,000
Cr Opening RE 36,000
Cr Non-controlling interests 4,000

CJE6: Adjustment of current unrealized profit in construction

Dr Construction revenue 800,000
Cr Construction costs 700,000
Cr Building 100,000

CJE7: Adjustment of tax on current unrealized profit in construction WIP

Dr Deferred tax asset 20,000 20%*100000
Cr Tax expense 20,000

CJE8: Adjustment of excess depreciation in building

Dr Accumulated depreciation 3,750 300000/20*0.25
Cr Depreciation expense 3,750
Legal entity Econ entity Change
Depreciation expense 17,500 13,750 3,750

CJE9: Tax effects of CJE8

Dr Tax expense 750 20%*3750
Cr Deferred tax asset 750

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Chapter 6 solutions
Problem 6.22

CJE10: Allocate share of post-acq RE to NCI

Dr Opening RE 80,000
Cr NCI (BS) 80,000
RE at 1 Jan 20x6 1,600,000
RE at date of acquisition 800,000
Change in RE 800,000
NCI's share 80,000

CJE11: Eliminate dividends declared by Silver Co

Dr Dividend income 90,000
Dr Non-controlling interests 10,000
Cr Dividend declared 100,000

CJE12: Allocate share of current income to NCI

Dr Income to NCI 151,580
Cr NCI (BS) 151,580
NPAT of Silver Co 1,600,000
Less unrealized construction profit (100,000)
Less tax on unrealized profit 20,000
Add back depreciation expense 300000*0.25/20 3,750
Less tax on depreciation expense (750)
Less impairment loss on undervalued inventory Workings (9,000)
Add tax on impairment loss on undervalued inventory 1,800
Adjusted NPAT 1,515,800

Part (2): Prepare the equity accounting entries

EA1: Recognize share of post-acq RE of Amber Co

Dr Investment in Amber Co 6,000
Cr Opening RE 6,000
RE of Amber Co as at 1 Jan 20x6 720,000
RE of Amber Co as at date of acquisition 700,000
Change in RE 20,000
Share of Amber Co's change in RE 6,000

EA2: Adjustment of unrealized profit from construction activity

Dr Opening RE 24,000 100000*30%*80%
Cr Investment in Amber Co 24,000

EA3: Recognize share of past amortization and impairment loss of intangible asset (after-tax)
Dr Opening RE 48,000 (800000/10+120000)*80%*30%
Cr Investment in Amber Co 48,000

31 Dec 20x5 31 Dec 20x6 31 Dec 20x6 (assuming no impairment)

NBV of intangible asset 720000 533,333 640,000 800000/10*8
Recoverable amount 600000 630,000 630,000
Impairment loss (reversal) 120000 96,667

EA7: Reclassify dividend income as a reduction of investment

Dr Dividend income 27,000
Cr Investment in Amber Co 27,000

EA8: Recognize P Co's share of current profit after tax of Amber Co

Dr Investment in Amber Co 217,500

Cr Share of profit after tax of Amber Co 217,500

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Chapter 6 solutions

Problem 6.22
Dr Investment in Amber Co 217,500
Dr Share of tax of Amber Co 61,875
Cr Share of profit of Amber Co 279,375

NPBT 900,000
Less amortization of intangible asset (66,667) 600000/9
Add reversal of impairment loss on intangible asset 96,667 Workings
Add excess depreciation on building 1,250 100000*0.25/20
Adjusted NPBT of Amber Co 931,250

Tax expense of Amber Co 200,000

Less tax on amortization (13,333)
Add tax on reversal of impairment of intangible asset 19,333
Add back tax on excess depreciation 250
Adjusted tax expense of Amber Co 206,250

EA9: Recognition of share of OCI from Amber Co

Dr Investment in Amber Co 42,000
Cr Share of current OCI 36,000
Cr OCI 6,000

Part (3): Prepare the Analytical check on Non-controlling interests:

Book value of net assets as at 31 Dec 20x6 4,100,000

Adjustment for under-valued ending inventory (66000-66000)*80% (0)
Adjustment for unrealized profit in building 300000*80%*19.75/20 (237,000)
Adjusted net assets as at 31 Dec 20x6 3,863,000
NCI's share 386,300
Add NCI's goodwill 320000-10%*(1830000-(20%*30000)) 137,600
523,900

CJE1: Elimination of investment in Silver Co 320,000

CJE2: Adjustment of past COS and current impairment loss of under-valued inventory (2,100)
CJE3: Tax effects of CJE2 420
CJE4: Adjustment for unrealized profit in buildings (20,000)
CJE5: Adjustment for tax on unrealized profit on CJE4 4,000
CJE10: Allocate share of post-acq RE to NCI 80,000
CJE11: Eliminate dividends declared by Silver Co (10,000)
CJE12: Allocate share of current income to NCI 151,580
NCI balance as at 31 Dec 20x6 0 523,900

Part (4): Prepare the Analytical check on Investment in Amber Co

Book value of shareholders' equity of Amber Co 2,050,000

Unamortized balance of intangible asset (after-tax) 630000*80% 504,000
Less unrealized profit from building (after-tax) (100000)/20*19.75*80% (79,000)
2,475,000
P's share of Z's identifiable net assets 742,500
Implicit goodwill in investment in Amber Co:
Investment in Amber Co 1,100,000
BV of net assets of Amber Co at acq 1,280,000
Unrecognized intangible (after-tax) 640,000
FV of net assets of Amber Co at acq 1,920,000
Less Share of FV of net assets of Amber Co at acq 576,000
Goodwill in Amber Co implicit in the investment in Amber Co 524,000
1,266,500

Investment in Amber Co, at cost 1,100,000

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Chapter 6 solutions

Problem 6.22
EA1: Recognize share of post-acq RE of Amber Co 6,000
EA2: Adjustment of unrealized profit from construction activity (24,000)
EA3: Recognize share of past amortization and impairment loss of intangible asset (after-tax) (48,000)
EA7: Reclassify dividend income as a reduction of investment (27,000)
CJE17:Share of current profit after tax 217,500
EA9: Recognition of share of OCI from Amber Co 42,000
Investment in Amber Co as at 31 Dec 20x6 1,266,500

Part (5): Perform the Analytical check on consolidated retained earnings

Listings approach
P's RE 7,680,000
S's RE 3,100,000
CJE1: Elimination of investment in Silver Co (800,000)
CJE2: Adjustment of past COS and current impairment loss of under-valued inventory (27,900)
CJE3: Tax effects of CJE2 5,580
CJE4: Adjustment for unrealized profit in buildings (180,000)
CJE5: Adjustment for tax on unrealized profit on CJE4 36,000
CJE6: Adjustment of current unrealized profit in construction (100,000)
CJE7: Adjustment of tax on current unrealized profit in construction WIP 20,000
CJE8: Adjustment of excess depreciation in building 3,750
CJE9: Tax effects of CJE8 (750)
CJE10: Allocate share of post-acq RE to NCI (80,000)
CJE11: Eliminate dividends declared by Silver Co 10,000
CJE12: Allocate share of current income to NCI (151,580)
EA1: Recognize share of post-acq RE of Amber Co 6,000
EA2: Adjustment of unrealized profit from construction activity (24,000)
EA3: Recognize past amortization and impairment loss (after-tax) (48,000)
EA7: Reclassify dividend income as a reduction of investment (27,000)
EA8: Recognize P Co's share of current profit after tax of Amber Co 217,500
9,639,600

Analytical check:
P's RE at 31 December 20x6 7,680,000
P's share of Silver's post-acquisition retained earnings 2,070,000
P's share of Amber's post-acquisition retained earnings 189,000

P's share of Silver's cost of sales of under-valued inventory, after-tax (21,600)

P's share of Amber's amortization and impairment of intangible asset, after-tax (40,800)

P's share of upstream unrealized profit, after-tax, with Silver (213,300)

P's share of unrealized profit from building, after-tax with Amber (23,700)

9,639,600

0
Part (6): Eliminate the construction transactions for the year ended 31 December 20x5
Dr Construction revenue 600,000
Cr Construction expense 400,000
Cr Contract asset 100,000
Cr Fixed asset in progress 100,000

Fixed asset in progress (Group) 400,000

Fixed asset in progress (Customer) 500,000
Adjustment to fixed asset in progress (100,000)

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Chapter 6 solutions

Problem 6.23
Part (1): Consolidation entries for 20x6
CJE1: Elimination of investment in Silver Co
Dr Share capital 600,000
Dr Retained earnings 320,000
Dr Revaluation reserves 65,000
Dr Fixed assets 70,000
Dr Goodwill 774,000
Cr Deferred tax liability 14,000
Cr Investment in Silver Co 1,650,000
Cr Non-controlling interests 165,000
1,829,000 1,829,000

CJE2: Past and current depreciation and impairment of undervalued fixed asset
Dr Opening RE 9,450 90%*(80000/20*3)
Dr Non-controlling interests 1,050
Dr Depreciation 3,500
Dr Impairment loss 41,000
Cr Accumulated depreciation and impairment 55,000

Group Legal
Recoverable amount 31 Dec 20x6 135,000 135,000
Net book value 176,000 120,000
Impairment loss 41,000 0

CJE3: Tax effects of CJE2

Dr Deferred tax liability 11,000
Cr Opening RE 1,890
Cr Non-controlling interests 210
Cr Tax expense 8,900

CJE4: Elimination of upstream transfer

Dr Opening RE 90%*60%*25000 13,500
Dr NCI 10%*60%*25000 1,500
Cr Cost of sales 45%*25000 11,250
Cr Inventory 15%*25000 3,750
15,000 15,000

CJE5: Tax effects of CJE4

Dr Tax expense 2,250
Dr DTA 750
Cr Opening RE 2,700
Cr NCI 300
3,000 3,000

CJE6: Adjustment of unrealized profit on downstream construction work for Silver Co

Dr Opening RE 30,000
Dr Contract revenue 350,000
Cr Contract expense 270,000
Cr Fixed assets 110,000
380,000 380,000

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Chapter 6 solutions

Problem 6.23
CJE7: Tax effects of CJE6
Dr Deferred tax asset 22,000 20%*110000
Cr Opening RE 6,000
Cr Tax expense 16,000

CJE8: Adjustment for excess depreciation from downstream transfer

Dr Accumulated depreciation 2,750 110000/20*1/2
Cr Depreciation 2,750

Original useful life as at 30 June 20x6 20.00

Expired life during 20x6 0.50
Excess depreciation during 20x6 2,750
Calculated as unrealized profit over remaining useful life 110000/20*1/2
Alternatively, calculate the difference between the legal entity depreciation and the group depreciation
Legal entity (S) Group Difference
Cost 600,000 490,000
Depreciation 15,000 12,250 2,750

CJE9: Tax effects of CJE8

Dr Tax expense 550
Cr Deferred tax asset 550

CJE10: Allocate share of post-acquisition RE to NCI

Dr Opening RE 16,000
Cr NCI (BS) 16,000
RE at 1 Jan 20x6 480,000
RE at date of acquisition 320,000
Change in RE 160,000
NCI's share 16,000

CJE11: Eliminate dividends declared by Silver Co

Dr Dividend income 67,500
Dr Non-controlling interests 7,500
Cr Dividend declared 75,000

CJE12: Allocate share of current income to NCI

Dr Income to NCI 89,340
Cr NCI (BS) 89,340
NPAT of Silver Co 920,000
Less depreciation and impairment loss of undervalued fixed assets, after tax 2800+32800 (35,600)
Add realized profit from prior year transfer 9,000
Adjusted NPAT 893,400

CJE15: Allocation of revaluation reserves to NCI

Dr Opening revaluation reserves to NCI 8,000
Cr Current revaluation reserves to NCI 2,500
Cr NCI 5,500

CJE16: Elimination of intercompany balances

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Chapter 6 solutions

Problem 6.23
Dr Amount due to Prism Co 150,000
Cr Amount due from Silver Co 150,000

Part (2) follows after Part (3)

Part (3): Non-controlling interests as at 31 Dec 20x6
Book value of net assets as at 31 Dec 20x6 2,045,000
Remaining balance of fixed assets, after tax 12,000 Note 1
Adjustment for unrealized profit, after tax (3,000) Note 2
Adjusted net assets as at 31 Dec 20x6 2,054,000
NCI's share of net assets 205,400
NCI's share of goodwill 60,900 Note 3
NCI balance as at 31 Dec 20x6 266,300

Note 1: (135000-120000)*80%
Note 2: 80%*15%*25000
Note 3: 165000-(10%*(1055000-(20%*70000)))

CJE1: Elimination of investment in Silver Co 165,000

CJE2: Past and current depreciation and impairment of undervalued fixed asset (1,050)
CJE3: Tax effects of CJE2 210
CJE4: Elimination of upstream transfer (1,500)
CJE5: Tax effects of CJE4 300
CJE10: Allocate share of post-acquisition RE to NCI 16,000
CJE11: Eliminate dividends declared by Silver Co (7,500)
CJE12: Allocate share of current income to NCI 89,340
CJE15: Allocation of revaluation reserves to NCI 5,500
NCI balance as at 31 Dec 20x6 0 266,300

Part (2): Equity accounting entries

EA1: Recognition of share of post-acquisition RE of Amber
Dr Investment in Amber 33,000
Cr Opening RE 33,000
RE of Amber as at 1 Jan 20x6 510,000
RE of Amber as at date of acquisition 400,000
Change in RE 110,000
Share of Amber's change in RE 33,000

EA2: Recognize past amortization of intangible asset, after tax

Dr Opening RE 2,400 30%*80%*150000*2/30
Cr Investment in Amber 2,400

EA3: Reclassify dividend income as a reduction of investment

Dr Dividend income 30,000
Cr Investment in Amber 30,000 30%*100000

EA4: Recognize share of current profit after tax of Amber

Dr Investment in Amber 326,160
Cr Share of profit in Amber 326,160
OR

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Chapter 6 solutions

Problem 6.23
Dr Investment in Amber 326,160
Dr Share of tax of Amber 81,540
Cr Share of profit of Amber 407,700

Profit after tax of Amber 1,088,000

Less amortization of intangible asset, after tax Note 1 (4,000)
Add unrealized loss on transferred inventory, after-tax Note 2 3,200
Adjusted profit after tax of Amber 1,087,200
Note 1 80%*150000/30
Note 2
Group Legal entity Difference
Original cost 48000.00 40000.00
NRV 44000.00 44000.00
LCNRV 44000.00 40000.00 4,000
After tax 3,200
Alternatively:
Profit before tax of Amber 1,360,000
Less amortization of intangible asset (5,000)
Add unrealized loss on transferred inventory 4,000
Adjusted profit before tax of Amber 1,359,000
Share of adjusted profit before tax of Amber 407,700

Tax expense of Amber 272,000

Add tax on impairment write-bacl (1,000)
Less tax on unrealized profit on transferred inventory 800
Adjusted tax of Amber 271,800
Share of adjusted tax of Amber 81,540

Part (4): Analytical check on Investment in Amber:

Book value of shareholders' equity of Amber 2,398,000

Add unrealized loss on unsold inventory, after tax 80%*4000 3,200
Add intangible asset, after tax 80%*150000*27/30 108,000
2,509,200
P's share of Amber's identifiable net assets 752,760
Implicit goodwill in investment in Amber:
Investment in Amber 800,000
BV of net assets of Amber at acquisition 1,300,000
Add intangible asset, after-tax 120,000
FV of net assets of Amber at acquisition 1,420,000
Less Share of FV of net assets of Amber at acquisition 426,000
Goodwill in Amber implicit in the investment in Amber 374,000
1,126,760

Investment in Amber, at cost 800,000

EA1: Recognition of share of post-acquisition RE of Amber 33,000
EA2: Recognize past amortization of intangible asset, after tax (2,400)
EA3: Reclassify dividend income as a reduction of investment (30,000)
EA4: Recognize share of current profit after tax of Amber 326,160

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Chapter 6 solutions

Problem 6.23

Investment in Amber as at 31 Dec 20x6 0 1,126,760

Part (5): Analytical check on consolidated retained earnings

Consolidated RE as at 31 Dec 20x6
RE of P 1,506,000
RE of S 1,325,000
CJE1: Elimination of investment in Silver Co (320,000)
CJE2: Past and current depreciation and impairment of undervalued fixed asset (53,950)
CJE3: Tax effects of CJE2 10,790
CJE4: Elimination of upstream transfer (2,250)
CJE5: Tax effects of CJE4 450
CJE6: Adjustment of unrealized profit on downstream construction work for Silver Co (110,000)
CJE7: Tax effects of CJE6 22,000
CJE8: Adjustment for excess depreciation from downstream transfer 2,750
CJE9: Tax effects of CJE8 (550)
CJE10: Allocate share of post-acquisition RE to NCI (16,000)
CJE11: Eliminate dividends declared by Silver Co 7,500
CJE12: Allocate share of current income to NCI (89,340)
EA1: Recognition of share of post-acquisition RE of Amber 33,000
EA2: Recognize past amortization of intangible asset, after tax (2,400)
EA3: Reclassify dividend income as a reduction of investment (30,000)
EA4: Recognize share of current profit after tax of Amber 326,160

Consolidated RE as at 31 Dec 20x6 2,609,160

Analytical check:
P's RE as at 31 December 20x6 1,506,000

P's share of S's post-acquisition RE 90%*(1325000-320000) 904,500

P's share of A's post-acquisition RE 30%*(1498000-400000) 329,400

P's share of cumulative amortization of FV-BV, after tax of S 90%*80%*55000 (39,600)

P's share of cumulative amortization of FV-BV, after tax of A 30%*80%*150000*3/30 (3,600)

P's unrealized profit as at 31 December 20x6, after-tax 80%*110000*19.5/20 (85,800)

P's share of S's unrealized profit as at 31 December 20x6, after-tax 90%*80%*15%*25000 (2,700)
P's share of A's unrealized loss as at 31 December 20x6, after-tax 30%*80%*40%*(110000-100000) 960

Consolidated RE as at 31 Dec 20x6 2,609,160

0

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Chapter 6 solutions

Problem 6.24
Part (1): Consolidation entries for 20x6
CJE1: Elimination of investment in Silver Co
Dr Share capital 620,000
Dr Retained earnings 348,000
Dr Revaluation reserves 70,000
Dr Fixed assets 40,000
Dr Goodwill 910,000
Cr Deferred tax liability 8,000
Cr Investment in Silver Co 1,800,000
Cr Non-controlling interests 180,000
1,988,000 1,988,000

CJE2: Past and current depreciation of undervalued fixed asset

Dr Opening RE 5,400 90%*(40000/20*3)
Dr Non-controlling interests 600
Dr Depreciation 3,400 40000/20*17*1/10
Cr Accumulated depreciation 9,400

CJE3: Tax effects of CJE2

Dr Deferred tax liability 1,880
Cr Opening RE 1,080
Cr Non-controlling interests 120
Cr Tax expense 680

CJE4: Elimination of upstream transfer of inventory

Dr Opening RE 90%*70%*20000 12,600
Dr NCI 10%*70%*20000 1,400
Cr Cost of sales (50%*20000) 10,000
Cr Inventory 20%*20000 4,000
14,000 14,000

CJE5: Tax effects of CJE4

Dr Tax expense 2,000
Dr DTA 800
Cr Opening RE 2,520
Cr NCI 280
2,800 2,800

CJE6: Adjustment of unrealized profit on interest capitalization

Dr Opening RE 95,000
Dr Interest revenue 200,000
Cr interest expense 140,000
Cr Fixed assets 155,000
295,000 295,000

CJE7: Tax effects of CJE6

Dr Deferred tax asset 31,000 20%*155000
Cr Opening RE 19,000
Cr Tax expense 12,000

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Chapter 6 solutions

Problem 6.24
CJE8: Adjustment for excess depreciation from interest capitalization
Dr Accumulated depreciation 3,875 155000/20*1/2
Cr Depreciation 3,875

Original useful life as at 30 June 20x6 20.00

Expired life during 20x6 0.50
Excess depreciation during 20x6 3,875
Calculated as unrealized profit over remaining useful life 155000/20*1/2
Alternatively, calculate the difference between the legal entity depreciation and the group depreciation
Legal entity (S) Group Difference
Cost 500,000 345,000
Depreciation 12,500 8,625 3,875

CJE9: Tax effects of CJE8

Dr Tax expense 775
Cr Deferred tax asset 775

CJE10: Allocate share of post-acquisition RE to NCI

Dr Opening RE 17,200
Cr NCI (BS) 17,200
RE at 1 Jan 20x6 520,000
RE at date of acquisition 348,000
Change in RE 172,000
NCI's share 17,200

CJE11: Eliminate dividends declared by Silver Co

Dr Dividend income 61,200
Dr Non-controlling interests 6,800
Cr Dividend declared 68,000

CJE12: Allocate share of current income to NCI

Dr Income to NCI 96,528
Cr NCI (BS) 96,528
NPAT of Silver Co 960,000
Depreciation of undervalued fixed assets, after tax 80%*3400 (2,720)
Realized profit from prior year transfer 80%*50%*20000 8,000
Adjusted NPAT 965,280

CJE15: Allocation of revaluation reserves to NCI

Dr Opening revaluation reserves to NCI 8,000
Cr Current revaluation reserves to NCI 3,000
Cr NCI 5,000

CJE16: Elimination of intercompany balances

Dr Amount due to Prism Co 150,000
Cr Amount due from Silver Co 150,000

Part (2) follows after Part (3)

Part (3): Non-controlling interests as at 31 Dec 20x6

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Chapter 6 solutions

Problem 6.24
Book value of net assets as at 31 Dec 20x6 2,152,000
Remaining balance of fixed assets, after tax 24,480 Note 1
Adjustment for unrealized profit, after tax (3,200) Note 2
Adjusted net assets as at 31 Dec 20x6 2,173,280
NCI's share of net assets 217,328
NCI's share of goodwill 73,000 Note 3
NCI balance as at 31 Dec 20x6 290,328

Note 1: (200000-160000)*17/20*9/10*80%
Note 2: 80%*20%*20000
Note 3: 180000-(10%*(1078000-(20%*40000)))

Listing for NCI:

CJE1: Elimination of investment in Silver Co 180,000
CJE2: Past and current depreciation of undervalued fixed asset (600)
CJE3: Tax effects of CJE2 120
CJE4: Elimination of upstream transfer of inventory (1,400)
CJE5: Tax effects of CJE4 280
CJE10: Allocate share of post-acquisition RE to NCI 17,200
CJE11: Eliminate dividends declared by Silver Co (6,800)
CJE12: Allocate share of current income to NCI 96,528
CJE15: Allocation of revaluation reserves to NCI 5,000
NCI balance as at 31 Dec 20x6 0 290,328

Part (2): Prepare the equity accounting entries

EA1: Recognition of share of post-acquisition RE of Amber
Dr Investment in Amber 24,000
Cr Opening RE 24,000
RE of Amber as at 1 Jan 20x6 490,000
RE of Amber as at date of acquisition 410,000
Change in RE 80,000
Share of Amber's change in RE 24,000

EA2: Reclassify dividend income as a reduction of investment

Dr Dividend income 39,000
Cr Investment in Amber 39,000 30%*130000

EA4: Recognize share of current profit after tax of Amber

Dr Investment in Amber 333,120
Cr Share of profit in Amber 333,120
OR
Dr Investment in Amber 333,120
Dr Share of tax of Amber 83,280
Cr Share of profit of Amber 416,400

Profit after tax of Amber 1,160,000

Impairment loss, after tax Note 1 (40,000)
Unrealized profit on transferred inventory, after-tax Note 2 (9,600)
Adjusted profit after tax of Amber 1,110,400

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Chapter 6 solutions

Problem 6.24

Note 1 80%*(250000-200000)
Note 2 80%*60%*(145000-125000)

Alternatively:
Profit before tax of Amber 1,450,000
Less impairment loss (50,000)
Less unrealized profit on transferred inventory (12,000)
Adjusted profit before tax of Amber 1,388,000
Share of adjusted profit before tax of Amber 416,400

Tax expense of Amber 290,000

Add tax on impairment write-bacl (10,000)
Less tax on unrealized profit on transferred inventory (2,400)
Adjusted tax of Amber 277,600
Share of adjusted tax of Amber 83,280

Part (4): Analytical check on Investment in Amber:

Book value of shareholders' equity of Amber 2,470,000

Less unrealized profit on unsold inventory, after tax 80%*60%*(145000-125000) (9,600)
Add intangible asset, after tax 80%*200000 160,000
2,620,400
P's share of Amber's identifiable net assets 786,120
Implicit goodwill in investment in Amber:
Investment in Amber 800,000
BV of net assets of Amber at acquisition 1,360,000
Less intangible asset, after tax 200,000
FV of net assets of Amber at acquisition 1,560,000
Less Share of FV of net assets of Amber at acquisition 468,000
Goodwill in Amber implicit in the investment in Amber 332,000
1,118,120
Listing approach for investment in associate:
Investment in Amber, at cost 800,000
EA1: Recognition of share of post-acquisition RE of Amber 24,000
EA2: Reclassify dividend income as a reduction of investment (39,000)
EA4: Recognize share of current profit after tax of Amber 333,120

Investment in Amber as at 31 Dec 20x6 0 1,118,120

Part (5): Analytical check on consolidated retained earnings

Listing approach for RE:
Consolidated RE as at 31 Dec 20x6
RE of P 1,490,000
RE of S 1,412,000
CJE1: Elimination of investment in Silver Co (348,000)
CJE2: Past and current depreciation of undervalued fixed asset (8,800)
CJE3: Tax effects of CJE2 1,760
CJE4: Elimination of upstream transfer of inventory (2,600)

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Chapter 6 solutions

Problem 6.24
CJE5: Tax effects of CJE4 520
CJE6: Adjustment of unrealized profit on interest capitalization (155,000)
CJE7: Tax effects of CJE6 31,000
CJE8: Adjustment for excess depreciation from interest capitalization 3,875
CJE9: Tax effects of CJE8 (775)
CJE10: Allocate share of post-acquisition RE to NCI (17,200)
CJE11: Eliminate dividends declared by Silver Co 6,800
CJE12: Allocate share of current income to NCI (96,528)
EA1: Recognition of share of post-acquisition RE of Amber 24,000
EA2: Reclassify dividend income as a reduction of investment (39,000)
EA4: Recognize share of current profit after tax of Amber 333,120

Consolidated RE as at 31 Dec 20x6 2,635,172

Analytical check:
P's RE as at 31 December 20x6 1,490,000

P's share of S's post-acquisition RE 90%*(1412000-348000) 957,600

P's share of A's post-acquisition RE 30%*(1520000-410000) 333,000

P's share of cumulative amortization of FV-BV, after tax of S Note 1 (6,768)

P's share of cumulative amortization of FV-BV, after tax of A 30%*80%*(250000-200000) (12,000)

P's unrealized profit as at 31 December 20x6, after-tax 80%*155000*19.5/20 (120,900)

P's share of S's unrealized profit as at 31 December 20x6, after-tax 90%*80%*20%*20000 (2,880)
P's share of A's unrealized profit as at 31 December 20x6, after-tax 30%*80%*60%*20000 (2,880)

Consolidated RE as at 31 Dec 20x6 2,635,172

0
Note 1 90%*80%*((40000/20*3)+(40000/20*17*1/10))

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Chapter 6 solutions

Problem 6.25
Part (1): Consolidation entries for 20x6
CJE1: Elimination of investment in X Co
Dr Share capital 500,000
Dr Retained earnings 350,000
Dr Intangible assets 50,000
Dr Goodwill 210,000
Cr Deferred tax liability 10,000
Cr Investment in X 1,000,000
Cr Non-controlling interests 100,000
1,110,000 1,110,000

CJE2: Past accumulated amortization to opening RE (20x3,20x4,20x5) and current (20x6)

Dr Opening RE 34,200 90%*((50000*3/5)+8000)
Dr Non-controlling interests 3,800 10%*((50000*3/5)+8000)
Dr Amortization 6,000
Cr Write back of impairment 4000.00
Cr Accumulated amortization 40000.00
44,000 44,000
Legal entity Group entity Difference
Recoverable amount as at 31 Dec 20x5 112,000 112,000
Remaining net book value 100,000 120,000
Impairment loss 0 8000.00 8000.00
New carrying amount 100,000 112000.00 12000.00
Remaining useful life 1 Jan 20x6 2 2.00
Amortization during 20x6 50,000 56,000 6000.00
Revised carrying amount at 31 Dec 20x6 50,000 56,000
Recoverable amount as at 31 Dec 20x6 70,000 70000.00
Carrying amount without impairment loss (Note1) 50,000 60000.00
Write back 0 4000.00 4000.00
Note 1 300000/5

CJE3: Tax effects of CJE2

Dr Deferred tax liability 8,000 20%*40000
Cr Tax expense 400 20%*(6000-4000)
Cr Opening RE 6840.00 20%*34200
Cr Non-controlling interests 760.00 20%*3800

CJE4: Adjustment of unrealized profit on transfer of inventory

Dr Opening RE 9,000 90%*40%*25000
Dr NCI 1,000 10%*40%*25000
Cr Cost of sales 7,500 30%*25000
Cr Inventory 2,500 10%*25000
10,000 10,000

CJE5: Adjustment for tax on unrealized profit on transfer of inventory

Dr Tax expense 1,500 20%*7500
Dr Deferred tax asset 500 20%*2500
Cr Opening RE 1,800 20%*9000
Cr NCI 200 20%*1000

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Chapter 6 solutions

Problem 6.25
CJE6: Allocate share of post-acquisition RE to NCI
Dr Opening RE 17,000
Cr NCI (BS) 17,000
RE at 1 Jan 20x6 520,000
RE at date of acquisition 350,000
Change in RE 170,000
NCI's share 17,000

CJE7: Eliminate dividends declared by X Co

Dr Dividend income 36,000
Dr Non-controlling interests 4,000
Cr Dividend declared 40,000

CJE8: Allocate share of current income to NCI

Dr Income to NCI 64,440
Cr NCI (BS) 64,440
NPAT of X Co 640,000
Less amortization (6,000)
Add tax on amortization 1,200
Add back write back of impairment 4,000
Less tax on write back of impairment (800)
Add realized profit on transfer of inventory 7,500
Less tax on profit on transfer of inventory (1,500)
Adjusted NPAT 644,400

CJE9: Elimination of intercompany balances

Dr Amount due from X Co 1,000,000
Cr Amount due to P Co 1,000,000

CJE10: Elimination of past capitalized profit in downstream transfer

Dr ORE 15,000 50000-35000
Cr Equipment 15,000

CJE11: Tax effects of CJE10

Dr DTA 3,000
Cr ORE 3,000

CJE12: Adjustment of depreciation on constructed fixed asset

Dr Accumulated depreciation 4,500 15000/5*1.5
Cr Depreciation expense 3,000
Cr ORE 1,500

CJE13: Tax effects on CJE12

Dr ORE 300
Dr Tax expense 600
Cr DTA 900

CJE15: Elimination of interest in current year

Dr Interest income 90,000

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Chapter 6 solutions

Problem 6.25
Cr Interest expense 90,000

Part (2) follows after Part (3)

Part (3): Analytical check on Non-controlling interests:
Book value of net assets as at 31 Dec 20x6 1,620,000
Remaining balance of intangible asset (net of tax) 8,000 Note 1
Adjustment for unrealized profit in inventory (2,000) Note 2
Adjusted net assets as at 31 Dec 20x6 1,626,000
NCI's share of net assets 162,600
NCI's share of goodwill 11,000 Note 3
NCI balance as at 31 Dec 20x6 173,600

Note 1: (60000-50000)*80%
Note 2: 25000*10%*80%
Note 3: 100000-10%*(900000-(20%*50000))

Listings approach
CJE1: Elimination of investment in X Co 100,000
CJE2: Past accumulated amortization to opening RE (20x3,20x4,20x5) and current (20x (3,800)
CJE3: Tax effects of CJE2 760
CJE4: Adjustment of unrealized profit on transfer of inventory (1,000)
CJE5: Adjustment for tax on unrealized profit on transfer of inventory 200
CJE6: Allocate share of post-acquisition RE to NCI 17,000
CJE7: Eliminate dividends declared by X Co (4,000)
CJE8: Allocate share of current income to NCI 64,440
NCI balance as at 31 Dec 20x6 0 173,600

Part (2): Equity accounting entries for the year ended 31 Dec 20x6

EA1: Recognize share of post-acquisition RE of Z

Dr Investment in Z 30,000
Cr Opening RE 30,000
RE of Z as at 1 Jan 20x6 300,000
RE of Z as at date of acquisition 200,000
Change in RE 100,000
Share of Z's change in RE 30,000

EA2: Adjust for past cost of sales on under-valued inventory

Dr ORE 3,360 70%*80%*30%*(200000-180000)
Cr Investment in Z 3,360

EA3: Recognize share of OCI

Dr Share of current OCI 12,000
Cr OCI 9,000
Cr Investment in Z 3,000

EA4: Reclassify dividend income as a reduction of investment

Dr Dividend income 30,000
Cr Investment in Z 30,000 (30%*100000)

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Chapter 6 solutions

Problem 6.25

EA5: Recognize share of current profit after tax of Z

Dr Investment in Z 205,500
Cr Share of profit of Z 205,500
OR
Dr Investment in Z 205,500
Dr Share of tax of Z 54,750
Cr Share of profit of Z 260,250

Profit before tax of Z 900,000

Less unrealized profit on fixed asset transfer (30,000)
Add back excess depreciation 1,500 30000/10*1/2
Less cost of sales on under-valued inventory (4,000) 20%*20000
Adjusted profit before tax of Z 867,500
Share of adjusted profit before tax of Z 260,250

Tax expense of Z 189,000

Less tax on unrealized profit on transfer of fixed assets (6,000)
Add tax on excess depreciation 300
Less tax on cost of sales of under-valued inventory (800)
Adjusted tax of Z 182,500
Share of adjusted tax of Z 54,750

Part (4): Analytical check of Investment in Z:

Book value of shareholders' equity of Z 1,711,000

Add undervaluation of inventory 80%*10%*20000 1,600
Adjustment for unrealized profit in equipment 80%*30000*9.5/10 (22,800)

1,689,800

P's share of Z's identifiable net assets 506,940

Implicit goodwill in investment in Z:
Investment in Z 600,000
BV of net assets of Z at acq 1,010,000
Under-valued inventory 16,000 (200000-180000)*80%
FV of net assets of Z at acq 1,026,000
Less Share of FV of net assets of Z at acq 307,800
Goodwill in Z implicit in the investment in Z 292,200
799,140

Investment in Z, at cost 600,000

EA1: Recognize share of post-acquisition RE of Z 30,000
EA2: Adjust for past cost of sales on under-valued inventory (3,360)
EA3: Recognize share of OCI (3,000)
EA4: Reclassify dividend income as a reduction of investment (30,000)
EA5: Recognize share of current profit after tax of Z 205,500

Investment in Z as at 31 Dec 20x6 0 799,140

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Chapter 6 solutions

Problem 6.25
Part (5): Consolidated Retained Earnings as at 31 Dec 20x6

P's retained earnings as at 31 Dec 20x6 3,120,000

P's share of X Co's post acq RE to 31 Dec 20x6 90%*(1120000-350000) 693,000
P's share of Z Co's post acq RE to 31 Dec 20x6 30%*(911000-200000) 213,300

P's share of amortization and impairment of intangible assets 90%*80%*40000 (28,800)

P's share of cost of sales of undervalued inventory 30%*80%*((90%*20000)) (4,320)

P's share of unrealized profit

Upstream sale 90%*80%*10%*25000 (1,800)
Downstream sale 80%*3.5/5*15000 (8,400)
Sale to Z Co 30%*80%*30000*9.5/10 (6,840)
3,976,140

Listings approach:
P's Retained Earnings as at 31 Dec 20x6 3,120,000
S's Retained Earnings as at 31 Dec 20x6 1,120,000
CJE1: Elimination of investment in X Co (350,000)
CJE2: Past accumulated amortization to opening RE (20x3,20x4,20x5) and current (20x6) (36,200)
CJE3: Tax effects of CJE2 7,240
CJE4: Adjustment of unrealized profit on transfer of inventory (1,500)
CJE5: Adjustment for tax on unrealized profit on transfer of inventory 300
CJE6: Allocate share of post-acquisition RE to NCI (17,000)
CJE7: Eliminate dividends declared by X Co 4,000
CJE8: Allocate share of current income to NCI (64,440)
CJE10: Elimination of past capitalized profit in downstream transfer (15,000)
CJE11: Tax effects of CJE10 3,000
CJE12: Adjustment of depreciation on constructed fixed asset 4,500
CJE13: Tax effects on CJE12 (900)
EA1: Recognize share of post-acquisition RE of Z 30,000
EA2: Adjust for past cost of sales on under-valued inventory (3,360)
EA4: Reclassify dividend income as a reduction of investment (30,000)
EA5: Recognize share of current profit after tax of Z 205,500

0.00 3,976,140

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