Ch05 beechy ism

CHAPTER 5
Consolidation of Non-Wholly Owned
Subsidiaries
The function of this chapter is to extend the discussion in the previous two chapters to
subsidiaries that are acquired in a business combination but where a non-controlling
interest continues to be held by outside parties. The discussion of non-controlling or
minority interest has purposely been delayed to this point in the text in order to try to
prevent students from becoming confused between alternative approaches to consolidation
on the one hand and alternative approaches to reporting non-controlling interest on the
other. This chapter begins with a discussion of why a parent corporation may own less
than 100% of a subsidiary’s shares. The chapter then introduces alternative methods for
consolidating non-wholly owned subsidiaries, including a conceptual discussion of the
alternatives.
The chapter then presents consolidations using the current IFRS approach recommended
in IFRS 3 and IFRS 10. The chapter illustrates consolidation at the date of acquisition and
in the two subsequent years using the MEAR steps to consolidation, and is parallel to the
consolidations illustrated in Chapters 3 and 4 for wholly owned subsidiaries. The same
example is used in both Chapters 4 and 5 so that students can compare the results and see
the impact of a non-controlling interest on the consolidated statements.
The existence of a non-controlling interest raises the issue of how to report this interest on
the consolidated statement of financial position of the majority shareholder, and this is the
focus of the last part of the chapter.
Chapter 5 has two appendices that focus on the effect of changes in ownership interest by
the investor corporation. Appendix 5A discusses the impact of an increase in ownership
interest and then, using an example, the approach. Appendix 5B identifies and discusses
circumstances which may result in a decrease in or loss of an investor’s ownership interest
and the accounting for this decrease or loss, with an example. In this document, solutions
for review questions and problems in the appendices are included after the solutions to the
problems in the main part of the chapter.
Copyright © 2014 Pearson Canada Inc. 212

SUMMARY OF ASSIGNMENT MATERIAL
Case 5-1: Metro Utility Workers’ Union
This case requires students to play the role of an accounting advisor to a labor union that
is planning for impending wage negotiations with the employer, a public limited company.
The advisor is provided with preliminary cost basis financial statements of the employer
and is required to appropriately account for its 40% ownership of another company. The
advisor is required to analyze the provided financial statements and the statements
prepared by him/her and advice the union on the true financial situation of the employer
and the appropriate stance to adopt during the wage negotiation. The advisor is also
required to elaborate on the different motivating factors and objectives which might drive
the employer while preparing its financial statements to be issued to the public for the
year.
Case 5-2: McIntosh Investments Ltd.
This is a case that involves interrelationships between two significantly influenced investee
corporations. This case includes a purchase price allocation for an equity investment and
raises the issue of how to treat unrealized profits between the two significantly influenced
entities.
Case 5-3: Simpson Ltd.
In this case, students must decide what fair values must be assigned to the buildings
acquired as part of a business combination; two different appraised values are given. The
selection of fair values should be consistent with the parent’s reporting objectives.
Students are asked to determine the impact of the business combination on the parent’s
SFP, but a consolidated statement is not required.
Case 5-4: Proctor Industries
The student is placed in a unique role of having to report to the audit committee on
significant accounting issues. One of these issues involves a business combination and the
allocation of negative goodwill. If desired, the required could be altered to ask for
accounting and auditing issues to provide a case that integrates more than one syllabus
area.
P5-1 (25 minutes, easy)
This problem presents six independent cases and requires students to calculate for each
case the 1) gain from bargain purchase, if present, 2) net fair value adjustment, 3) fair
value adjustment allocated to net identifiable assets, and 4) goodwill.
In this problem students are required to provide the balance in the investment account at
the end of the first year in relation to a 20% shareholding in another company assuming
the investment is classified as 1) a FVTPL investment, 2) an investment in an associate,
and 3) a FVTOCI investment. The problem also requires students to calculate the total
income reported in net income and OCI, including the gain on the sale of the entire
investment, by the investor in year 3 assuming that the investment is classified as above.

P5-3 (50 minutes, medium)
This problem illustrates (1) the difference between a purchase of assets and a purchase of
75% of the shares, and (2) the different approaches to consolidation when a non-
controlling interest exists.
Calculation of the consolidated balances of land, goodwill and non-controlling interest
immediately after purchase of 70% of a subsidiary. There is negative goodwill on the
combination that must be allocated.
Preparation of a simple consolidated statement of financial position at date of acquisition
of 70% interest, under both entity and parent-company extension methods.
Calculation of selected balances on a consolidated statement of financial position
immediately following acquisition of 70% ownership and an explanation of what non-
controlling interest represents.
This problem is a simple illustration of consolidating indirect holdings (i.e., a subsidiary of
a subsidiary) by focusing on a single item: Non-controlling interest in the parent’s
statement of financial position.
Prepare eliminating entries for consolidation of a 70%-owned subsidiary one year after
acquisition. The problem focuses on the amortization of FVIs and goodwill.
In this problem a consolidated statement of comprehensive income and selected statement
of financial position amounts are required at the end of the first year after acquisition. It
includes upstream and downstream inventory sales and an upstream sale of land.
A consolidated statement of comprehensive income and selected statement of financial
position accounts are required for the second year after the acquisition of a 90% owned
subsidiary.
P5-11 (85 minutes, difficult)
A bargain purchase is present in the problem. Students are first required to prepare
consolidated statements at the time of acquisition under the proportionate method for a
80% owned subsidiary. Next, students are required to calculate the consolidated retained
earnings and the non-controlling interests balance two years after acquisition. Finally,
students are required to calculate the adjusted incomes of the parent and the subsidiary
respectively for the second year after acquisition.

This problem is the same as P4-6 except that the subsidiary is now 80% owned. The
problem is set two years after acquisition; it requires computation of selected amounts,
including consolidated earnings and equity basis earnings. It does not require consolidated
statements.
A consolidated statement of comprehensive income has been provided which needs to be
corrected. There is an upstream unrealized profit on a capital asset sale and a downstream
unrealized profit on inventory.
An investment classified as a fair value through OCI investment in the first year becomes a
significantly influenced investment in the second year. Associated entries and calculations
are required in both years. This problem tests students’ grasp of concepts relating to
FVTOCI and significantly influenced investments, and can be used as an exam question.
Select SCI and SFP amounts, such as NCI interest in income, separate entity net income
of the parent, NCI balance, investment account under the equity method are required to be
calculated in relation to a 75% investment made two years ago. This problem tests
students’ grasp of concepts relating to the reporting of an investment in a non-wholly
owned subsidiary two years after such investment, and can be used as an exam question.
This problem is the same as P4-10 except that the subsidiary is now 80% owned. No
consolidated financial statements are required in this problem. Nonetheless, this is a
difficult problem since it requires the calculation of many consolidation and equity method
related amounts relating to the first two years after acquisition.
P5-A1 (15 minutes, easy)
This is an exercise in the reporting of an investment in common shares when there has
been a two-step acquisition. Appropriate reporting under the cost, fair value, and equity
methods is required.
P5-A2 (30 minutes, medium)
The balance in the investment account is required using the equity method after an
increase in share ownership.
P5-A3 (40 minutes, medium)
The balances in the patent, goodwill and non-controlling interest accounts are required
following a two-step purchase. Also required is the balance in the investment account
using the equity method.
P5-B1 (20 minutes, medium)
This problem is basically quite simple. What increases its level of difficulty is that at least
half of the information presented in the problem is irrelevant, and students must be able to
identify which information is relevant. Some students will get very frustrated!

The consolidated net income, gain/loss on sale of shares and consolidated retained
earnings must be calculated two years after purchase. The question is complicated by a
reduction in share ownership.
The balance in the investment account is required using the equity method after a decrease
in share ownership. In addition, the required asks for the calculation of the gain/loss on the
sale of the shares.
Three unrelated changes in subsidiary shares are described, (1) a stock split, (2) a new
issue of subsidiary shares, and (3) a subsidiary’s retirement of its own shares. The first two
are easy, but the third requires some thought, as it is not explicitly dealt with in the text.
ANSWERS TO REVIEW QUESTIONS
Q5-1:
a. Non-controlling interest is the general term for shareholders that do not enable the
shareholder to control the enterprise. Usually this will be less than 50% of the voting
shares.
b. Non-controlling interest was formerly called minority interest. This term is no longer
used in IFRS. Minority interest is a narrower definition of non-controlling interest
where less than 50% of the voting shares of a subsidiary are owned by shareholders
outside of the consolidated entity. Minority interest is the most common type of non-
controlling interest.
c. When proportionate consolidation is used, a subsidiary’s assets, liabilities, revenues
and expenses are combined with the parent’s only to the extent of the parent’s
ownership interest. If only 60% is owned, then only 60% is included in the parent’s
financial statements. This is one of the two alternatives currently allowed under IAS 31
to report joint ventures, the other being the equity method. However, under IFRS 11,
the equity method is the only appropriate method available to report joint ventures.
d. Under the parent-company method of consolidating financial statements, all of the
subsidiary’s assets, liabilities, revenues and expenses are combined with those of the
parent. However, to the extent that the assets and liabilities have fair values on the date
of acquisition that differ from the subsidiary’s book values, only the parent’s
proportionate share of those fair value increments or decrements is reported in the
consolidated amounts.
e. Under the parent-company extension method of consolidating financial statements,
the subsidiary’s identifiable assets and liabilities at fair values, and revenues and
expenses are combined with those of the parent. However, goodwill is included only to

the extent of the parent’s proportionate share.
f. Under the entity method of consolidating financial statements, all of the subsidiary’s
assets and liabilities, including goodwill, at fair values, and revenues and expenses are
combined with those of the parent.
Q5-2: Less than full ownership enables the parent to obtain the benefits of control without
having to invest the full amount of the subsidiary’s capital base. It may also allow the
parent to spread the ownership risk, provide an avenue to develop links with other
corporate shareholders and maintain a market for the subsidiary’s shares.
Q5-3: While the parent does not own 100% of the subsidiary’s shares, it can control the
resources within the subsidiary. The consolidated statements are intended to portray
substance over form or control over resources, not just ownership interest.
Q5-4: Recognition of less than 100% ownership is given by allocating to the non-
controlling interest its proportionate share of the separate-entity earnings of the subsidiary,
after making suitable consolidation related adjustments.
Q5-5: Under a “pure” application of the entity method, goodwill on the consolidated
statement of financial position is “grossed up” to assign a value to the goodwill for non-
controlling interest that is proportional to the value of the goodwill purchased by the
controlling interest.
Q5-6: The parent-company extension approach modifies the entity approach by not
allocating or assigning any value to goodwill for the non-controlling interest. The reasons
are that (1) the controlling interest’s goodwill was actually paid for, while there has been
no similar transaction to establish the value of goodwill for the non-controlling interest,
and (2) the controlling interest’s goodwill can be ascribed to the value of gaining control,
while there is no comparable benefit to the non-controlling shareholders and thus no
implicit goodwill relating to the non-controlling interest.
Q5-7: The parent-company approach is a strict application of the historical cost basis of
accounting. It shows a) the historical cost of the parent’s separate entity assets (book
value), b) the historical cost to the parent of its share of the subsidiary’s assets (fair value)
and c) the historical cost to the subsidiary of the net assets not purchased by the parent
(book value).
Q5-8: Under the entity method, at the date of acquisition, non-controlling interest is
measured at its proportionate share of the fair value of the acquired company’s net assets,
including goodwill. In contrast, on the date of acquisition, the non-controlling interest is
measured at its proportionate share of the fair value of the acquired company’s net assets,
excluding goodwill, under the parent-company extension method.
Q5-9: One year after the date of acquisition, the non-controlling interest will consist of the
proportionate share of the net fair value of the subsidiary’s net assets at the date of
acquisition (using the entity method), plus the NCI share of the subsidiary’s net adjusted
income less dividends for the year just ended, plus/minus the NCI’s proportionate share of

the amortization of the FVI. The only difference under the parent-company extension
method is that the NCI value on the SFP will disregard the value of its share of goodwill
and any related impairment losses if any.
Q5-10: Any unrealized profit on upstream sales is removed from the consolidated
earnings. Therefore, the amount allocated to the NCI as its share of the adjusted separate
entity earnings of the subsidiary will also be reduced by the NCI’s share of the unrealized
profit on the upstream sales.
Q5-11: Unrealized profits from downstream sales do not affect the NCI’s share of
earnings because the profit is effectively being deducted from the parent’s earnings, not
the subsidiary’s.
Q5-12: The non-controlling shareholders should not react at all because the reduction
does not actually affect their equity in the subsidiary. The non-controlling shareholders
will evaluate the subsidiary’s performance by using the financial statements of the
subsidiary, not those of the parent. There is no impact on the subsidiary’s statements from
eliminations made for consolidation purposes by the parent company.
Q5-13: Since unrealized profit in beginning inventories is normally realized during the
ensuing year, the impact on the NCI is for its allocated share of the current year earnings
to increase by the proportionate share of the previously unrealized profit on upstream
sales.
Q5-14: The portion of dividends that is paid by the subsidiary to shareholders other than
the parent represents a payment to the non-controlling interest and is deducted therefrom.
Subsidiary dividends will not appear at all on the parent’s consolidated statement of
retained earnings, although the dividends paid to non-controlling interests will appear on
the consolidated cash flow statement as an outflow of cash from the consolidated entity.
Q5-15: Under both the parent-company method and the parent-company extension
method, the subsidiary’s assets and liabilities are fully consolidated. However, under the
parent-company method any discrepancies between carrying values and fair values of the
individual assets and liabilities (FVIs) at the date of acquisition are included in the
consolidated net assets only to the extent of the parent’s ownership share. Under the
parent-company extension method, while the full extent of the FVIs, relating to the net
identifiable assets at the date of acquisition, including the parent’s and the NCI’s share, are
included in the consolidated statements, only the parent’s share of goodwill is included in
the consolidated statements. Therefore, under both methods, the total consolidated
amount will vary (due to the fair value increments and decrements) depending on the
percentage share purchased by the parent.
CASE NOTES
Case 5-1 Metro Utility Workers’ Union (MUWU)

Role:
MUWU is a not-for-profit workers’ union, whose members can be assumed to be
moderately sophisticated users of accounting information. My task, as required by Ms.
François Dubois, is to prepare the financial statements of MU that appropriately accounts
for its investment in OU, and to advice the union on the financial status of MU such that
they can obtain as good a wage settlement as possible. Before I do this I have to elaborate
on the various users of MU’s financial statements and their objectives. Next, I will then
detail the basis of my choice of accounting to account for MU’s investment in OU. Finally,
I will explain the implications of the accounting choices made by MU and my choice on
the financial situation of MU and its implications on MUWU’s aim to get the best wage
settlement possible.
MU (Note that the question requires the following analysis only in relation to MU
and not MUWA):
Critical Success Factors:
Arriving at a wage settlement which favors MUWU or at best a fair wage settlement.
Constraints:
MU as well as OU are public limited companies. Therefore, IFRS is a constraint. There do
not appear to exist other constraints. Tax law is not assumed to be a constraint, since in all
probability MU will maintain separate books to that extent.
Users & Objectives
Investors
Their shares are presumably traded widely on the TSX. Therefore, MU’s and OU’s
investors are important users of MU’s and OU’s financial statements. Since they are
retired these investors depend on the regular dividends paid by these companies for the
cash flow needs. Therefore, their main objective in looking at the FS of these two
companies would be cash flow prediction mainly, followed by performance evaluation and
evaluation of the management of MU and OU respectively.
In addition, MU will also be a user of OU’s FS since the former owns 40% of the latter.
However, MU may also have access to other books of OU given its significant
shareholding in the latter and representation on the BOD of the latter. At first glance, it
appears that MU has significant influence on OU.
Top Management of MU
The top management of MU gets a bonus based on its net income. Thus, other things
being equal, these individuals will be interested in maximizing net income to increase their
bonuses. They also have the goal of stewardship reporting to their investors. To that
extent they may want to portray as positive a picture as possible about their managerial
ability. Further, they also know that MUWU will make use of the financial statements of
MU during wage negotiations in 20X9. Therefore, to dissuade MUWU from adopting too
aggressive a wage negotiation stance, the management of MU may be interested in
portraying as negative a picture as possible about MU’s operations and financial situation.
To the extent IFRS based FS are used for tax purposes, tax minimization will also be a
goal. Since MU is an established company income smoothing can also be a reporting

objective of MU’s management. Finally, minimum compliance does not appear to be an
important goal of the management given the wide shareholding of MU’s shares. Thus,
obviously, the goals of the top management of MU conflict with each other.
MUWU
MUWU is an important user of MU’s FS. They would like to obtain as clear a picture as
possible of MU’s true affairs so that they can bargain for a fair wage settlement. However,
it is not necessarily the case that MU will view MUWU as an important user. Even if it
does, MU may in fact try to conceal its true status as discussed above (i.e. portray a more
negative picture of MU than existing) vis-à-vis MUWU to weaken the latter’s bargaining
position.
Others
A bank loan may exist and to that extent the bank would be a user.
Ranking of Users and Objectives:
Note that this ranking is being done from the viewpoint of MU. If MU’s management
adopts aggressive accounting measures they benefit by obtaining higher bonuses. This may
fool unsophisticated investors into thinking that MU is doing better than it actually is.
Aggressive accounting will also benefit the union since it can ask for a better wage
settlement. Thus, adopting aggressive accounting measures to boost short term profits
may not be optimal in the long run. Investors may not like it if the management ends up
making too many concessions to the union. Thus, management may make use of
conservative accounting measures to portray a negative picture of MU; however, this will
cost them in terms of reduced bonuses. Therefore, alternatively, they may try and take a
big bath in 20X8 so that they can use these FS to enter into a wage settlement which
favors MU, hoping to earn bigger bonuses in the future (they could also have increased
20X7 profits at the cost of 20X8 profits). Finally, instead of being overly aggressive or
conservative they may decide that the best course is to provide as correct a picture of MU
as possible, since this will be the best long term solution for all concerned. Given the CSF
above, MU’s management will either be conservative or use the correct accounting
choices. However, it is hard to decide which of these alternatives will be actually chosen
by MU’s management. Therefore, I will keep the above discussion in mind while offering
my advice. MUWU should also remember this point at the time of actual wage
negotiation.
MU’s investment in OU [see Exhibit 1 for the FS]:
MU owns 40% of OU. It has also been buying 70% of OU’s output. Finally, MU controls
one of the eight BOD of OU. Under IFRS this strongly suggests the presence of
significant influence. However, it would be very difficult to conclude that control exists
based on these facts. While 70% of OU’s sales are to MU, this by itself does not suggest
the existence of control. Further, the availability of new markets means that OU will be
free to sell to others in North America. Further, since MU owns only 40% of OU, and also
given that it controls only one of the eight BOD of OU, MU appears incapable of
controlling OU without the cooperation of the other shareholders of OU. Therefore, it is

safe to assume that MU has significant influence over OU. Under IFRS public companies
should account for their significantly influenced investments using the equity method. This
means that MU will include its portion of OU’s accumulated and current year’s earnings
on its FS. Its portion of OU’s current year earnings will be included as equity in the
earning s of OU on its IS. MU’s investment in OU will be valued at the original purchase
consideration plus MU’s portion of OU’s adjusted unremitted earnings. If current year’s
dividends have been accounted for as income, such income has to be eliminated. Finally,
MU’s retained earnings should also be adjusted for its portion of OU’s adjusted
unremitted earnings. Thus, in total, the equity method will mean adjustments to four
accounts on MU’s FS: Equity in earnings of OU, dividend income from OU, investment in
OU, and retained earnings. This is also known as a one-line consolidation, since MU’s
investment in OU is shown on MU’s FS via a single account – investment in OU account.
We call this a one line consolidation since we make all adjustments needed under regular
consolidation which would affect the income statement and retained earnings of MU in a
single account—equity in the earnings of the associate.
MU has in good faith provided MUWU with its separate entity financial statements
wherein it has accounted for its investment in OU under the cost method. It is not clear
why it provided you with these financial statements. This choice would make sense if OU
is making a lot of profits, much of which is not being remitted via dividends; and the
management of MU prefers to show relatively less income on its FS. In this scenario,
under the cost basis the dividend income from OU recognized by MU would be much less
than the amount it might have to recognize under the equity method. However the truth is
the opposite. In 20X8, the unadjusted net income of OU is $11,200. In contrast, OU
declared a dividend of $20,000. Further, when all required adjustments needed under the
equity method are done, OU’s adjustment income actually becomes negative so much so
that MU’s portion of the OU’s income is ($2,391). This is compounded by the negative
unremitted retained earnings of OU. MU’s portion after all adjustments is a ($50,591).
This suggests that MU may have overpaid for its investment in OU. It also appears that
MU did indeed provide its cost basis FS to MUWU in good faith. In any case, the
performance of OU appears to be irrelevant for MUWU’s objective of obtaining a fair
wage settlement. MU’s workers should be paid on the operating performance of MU and
not on the results of its investment activity, which in the present case is not very good.
Therefore, MUWU would be better off during wage negotiations by using the separate
entity FS provided by MU, in which its investment in OU is accounted for using the cost
basis. Do understand though that the management of MU will point out that the $8,000
dividend income from OU should be eliminated while assessing the profitability of MU
since it does not pertain to MU’s operation.
The information provided suggests that OU now will attempt to sell its output to other
customers. This may mean that MU itself will have to pay more to get its raw materials.
Therefore, in future the operations of MU may in fact deteriorate. Therefore, the results of
20X8 should not be used to extrapolate into the future to predict MU’s operating results
in the future.
Financial Statements/Calculations:
Equity in earnings of OU:

40% share of unadjusted earnings $4,480
40% share of amortization of FVA allocated to capital assets (3,200)
40% share of amortization of FVA allocated to patents (4,000)
40% share of excess depreciation on capital asset sold upstream 1,600
40% share of realized profit on upstream sale of inventory in the previous year 3,911
40% share of unrealized profit on upstream sale of inventory sold in the current
year remaining unsold at the end of the year (5,182)
Equity in earnings of OU ($2,391)
Note: Since the loan to OshKosh has not being eliminated, the corresponding interest
expense is also not being eliminated. This would offset the interest income shown on
MU’s IS and therefore would be a wash anyway.
Share of adjusted change in retained earnings of OU in previous years
40% share of retained earnings 20X7 end $22,720
40% Share of retained earnings at acquisition 34,000
40% share of change in RE since acquisition (11,280)
Less 40% share of amortization of FVA allocated to inventory (13,000)
Less 40% share of amortization of FVA allocated to capital assets (6,400)
Less 40% share of amortization of FVA allocated to patents (8,000)
Less 40% share of unrealized gains on upstream sale of capital assets in previous
year (8,000)
Less 40% share of unrealized profit in beginning inventory (3,911)
Share of adjusted change in retained earnings of OU ($50,591)
Adjusting entry required to report under the equity method given recording is under the
cost method:
Dividends revenue 8,000
Retained earnings 50,591
Equity in earnings of OU 2,391
Investment in OU 60,982
Equity Basis Separate Entity Statement of Comprehensive Income of OshKosh Utility
for 20X8
Revenues $800,000
Cost of goods sold 625,000
Gross profit 175,000
Depreciation 50,000
Other expenses 45,000
Interest expense 50,000
Equity in earnings of OU 2,391
Net income before taxes 27,609
Taxes 11,400

Net income 16,209
Beginning retained earnings $137,809
Dividends 15,000
Ending retained earnings $139,018
Assets
Cash $300,000
AR 225,000
Inventory 95,000
Loan to OshKosh 200,000
Capital assets 450,000
Investment in OshKosh Utility 119,018
TOTAL ASSETS
$1,389,01
8
Liabilities and Owners’ Equity
Current liabilities $400,000
Long-term liabilities 600,000
Shareholders' equity 250,000
TOTAL LIABILITIES AND OWNERS’ EQUITY
$1,389,01
8
Case 5-2: McIntosh Investments Ltd.
Objectives of the Case
This case incorporates the purchase of a 30% interest in a company that is a supplier of
another investee subject to significant influence. There are a number of intercompany
transactions between the two enterprises. Fair value increments and goodwill on the
purchase must be determined.
Objectives of Financial Reporting
McIntosh Investments Ltd. (MIL) is a publicly traded investment company. Although 30%
of the shares are publicly held, the remaining 70% are owned by the president and her
brothers, giving virtually complete control of the company to Loraine McIntosh.
Compliance reporting will be an objective due to the public holdings of the shares and
possibly due to the existence of at least some bank loans. Cash flow prediction could be an
objective, but due to the nature of the company as essentially a personal holding company,
such an objective is not likely. The tax status of an investment company, in terms of its
taxable income, is fairly clear, and thus tax deferral is not likely to be an important

objective except in controlling (or influencing) dividend flows from the investee
companies.
Impact of EAPI on MIL Financial Statements
MIL clearly has significant influence, but not control, over the affairs of EAPI. The
significant influence is demonstrated by MIL’s involvement in increasing EAPI’s efficiency
and increased business with CCC. MIL does not control EAPI: it cannot control EAPI
without the cooperation of others since its interest is only 30%. Therefore, equity
reporting of the investment would be appropriate. The objectives of compliance with
contracts and minimum disclosure may be the only really meaningful reporting objectives
in this case, and would call for adherence to IFRS requirements. Using accounting
standards for private enterprises is not an option since 30% of the shares of MIL are
widely held.
While the use of the equity method may be appropriate, it is not completely clear how it
would be applied. Certainly a starting point for the equity pick-up of earnings would be
30% of EAPI’s reported net income of $300,000 or $90,000.
Adjustments to that figure will be necessary, however, for amortization of the fair value
increment on the equipment, long-term investment, and debentures, disposition of the fair
value increment on beginning inventory and perhaps unrealized profit. The amortization of
the fair value increments on equipment and debentures is fairly straightforward, and
depends on the remaining lives of these items and the depreciation and amortization
methods being used. The fair value increment on the long-term investment will be adjusted
when the investment is sold or there is an impairment. The fair value increment of the
inventory at the date of acquisition will be charged to operations for fiscal 20X7.
Therefore, MIL’s share of EAPI’s net income will decrease by 30% of $(40,000), or
$12,000.
Another issue that students will have to evaluate is the treatment of unrealized profits.
There are no transactions between MIL and EAPI; the transactions are between CCC and
EAPI. CCC (Candide Cars Corporation) is another significantly-influenced affiliate of
MIL; CCC is 40% owned by MIL. The question is whether profits generated by sales
between significantly-influenced investee corporations should be eliminated if the items
sold are still unsold to outside third parties or are unused. Since MIL was not a party to
the transactions between EAPI and CCC, and since there is also no direct ownership link
between EAPI and CCC, there is no clear obligation to eliminate unrealized profits, as
long as the transactions that did occur can be viewed as arm’s-length transactions. If MIL
has profit maximization as a reporting objective, then it would make sense to leave the
profits in EAPI without adjustment.
A contrary view is that while there is no direct link between EAPI and CCC, the case
makes it quite clear that MIL’s management is actively involved in both affiliates. The
spectre of income manipulation arises because of the dramatic increase in inventories
purchased by CCC from EAPI during the year. If unrealized profits are not eliminated,
then MIL could bolster its earnings (as well as the earnings of EAPI) by “influencing”

CCC to acquire excess inventory from EAPI. In view of the manipulative possibilities and
the compliance reporting objective, elimination seems appropriate.
If the unrealized earnings are eliminated, then one must decide what percentage applies to
MIL: the 30% interest in EAPI or the 40% interest in CCC. The answer is really quite
straightforward, although it may not be obvious to the students. What is being eliminated
is profit that MIL may report as its equity in an affiliate’s earnings. The unrealized profits
in CCC’s ending inventory have been recorded as profits on the books of EAPI, and MIL
picks up 30% of EAPI’s earnings; as a result, the elimination of unrealized profit would be
30% of the 35% gross profit on $300,000 inventory, or $31,500. The beginning inventory
was acquired before MIL acquired its interest in EAPI. The unrealized profit in EAPI’s
opening inventory therefore need not be given any consideration in the determination of
MIL’s share of earnings in EAPI.
In summary, MIL’s equity in the earnings of EAPI can be determined as follows:
30% of EAPI earnings available to common shareholders $90,000
Adjustments:
FVI – Beginning inventory (12,000)
Unrealized profit (before income tax) (31,500)
Tax effect ($31,500 x EAPI’s tax rate) ?
Amortization of FVI on equipment ?
Amortization of debenture FVI ?
MIL’s equity in the earnings of EAPI ???
The equity pick-up will be reported on MIL’s statement of comprehensive income and will
increase the investment account on the statement of financial position. The dividend
received by MIL will be treated as a distribution of MIL’s investment and, therefore,
credited to the Investment in EAPI account, in the amount of: $1.50 x 18,000 shares =
$27,000
Case 5-3: Simpson Ltd.
This is a business combination question. It contains a few variables, however, to see if
candidates are able to apply their knowledge rather than simply replicate the textbook
approach. Specifically, a decision is required on which value within a feasible range to
assign to buildings; the decision will affect the amount of goodwill. The decision should
relate to the owner’s stated objective of maximizing net income.
Allocating FVI when fair value of buildings is $8,400,000, no bargain purchase,
goodwill present:
Purchase consideration $6,000,000
Grossed-up value of Ong based on purchase price $ 8,571,429
Carrying value of Ong net assets $ 4,700,000
Fair value increment $ 3,871,429

FVI Allocation:
Ong Book FMV FVI FVI Allocated
Assets
Cash $ 200,000 $ 200,000 $ - $ -
Accounts receivable $ 100,000 $ 100,000 $ - $ -
Inventories -- raw materials and
supplies $1,200,000 $ 1,180,000 $ (20,000) $ (20,000)
Buildings $7,000,000 $ 8,400,000 $1,400,000 $ 1,400,000
Accumulated depreciation $(1,400,000) $ - $1,400,000 $ 1,400,000
Equipment $3,000,000 $ 1,980,000 $(1,020,000) $ (1,020,000)
Total Assets $8,900,000 $11,860,000 $2,960,000 $ 2,960,000
Liabilities & Shareholders'
equity
Accounts payable $ 350,000 $ 340,000 $ (10,000) $ (10,000)
Accrued expenses $ 50,000 $ 50,000 $ - $ -
Bank loan payable $2,700,000 $ 2,700,000 $ - $ -
Deferred income taxes $1,100,000 $ 1,100,000 $ - $ -
Total liabilities $4,200,000 $ 4,190,000 $ (10,000) $ (10,000)
FVI Allocated to net identifiable assets $ 2,970,000
Goodwill @ 100% $ 901,429
Therefore, the NCI value will be 30% × $8,571,429 = $2,571,429.
Allocating FVI when fair value of buildings is $9,500,000, gain on bargain purchase
of $139,000 present:
Purchase consideration $6,000,000
Fair value of 70% of net identifiable assets: $6,139,000
Gain on bargain purchase $ 139,000
FVI Allocation:
Ong Book FMV FVI FVI Allocated
Assets
Cash $ 200,000 $ 200,000 $ - $ -
Accounts receivable $ 100,000 $ 100,000 $ - $ -
Inventories -- raw materials and
supplies $1,200,000 $ 1,180,000 $ (20,000) $ (20,000)
Buildings $7,000,000 $ 9,500,000 $2,500,000 $ 2,500,000
Equipment $3,000,000 $ 1,980,000 ($1,020,000) $ (1,020,000)
Accumulated depreciation $ (1,200,000) $ - $1,200,000 $ 1,200,000
Total Assets $8,900,000 $12,960,000 $4,060,000 $ 4,060,000
Liabilities & Shareholders'
equity
Accounts payable $ 350,000 $ 340,000 $ (10,000) $ (10,000)
Accrued expenses $ 50,000 $ 50,000 $ - $ -
Bank loan $2,700,000 $ 2,700,000 $ - $ -
Future income taxes $1,100,000 $ 1,100,000 $ - $ -
Total liabilities $4,200,000 $ 4,190,000 $ (10,000) $ (10,000)
FVI Allocated to net identifiable assets $4,050,000
If the maximum value for the fair value of the buildings is chosen, a negative goodwill of

$139,000 arises, which must be recognized as a gain on bargain purchase in the
consolidated financial statements in the year of the acquisition.
The value of NCI now will be 30% of the fair value of the net identifiable assets, i.e. 30%
of $8,770,000 or $2,631,000. No gain on bargain purchase is attributed to the NCI.
Both buildings and equipment will be amortized over their respective remaining useful
lives. Equipment has a remaining life of approximately six years if it is being amortized on
a straight line basis since it is 40% depreciated. The buildings have been depreciated for
approximately six years (assuming a straight line basis) (1,400 / (7,000/30)), so have 24
years remaining.
Annual amortization would be:
Buildings Equipment
Fair value $ 9,500,000 $ 1,980,000
Depreciation per year $ 395,833 $ 330,000
Fair value $ 8,400,000
Depreciation per year $ 350,000
If the lower value is chosen, there will be goodwill of $631,000, which is not amortized
but tested for impairment on an annual basis. Assuming there is no impairment, the charge
to the statement of comprehensive income will be less. Therefore, the objective of
maximizing earnings will be achieved if the minimum fair value is assigned to the buildings
and the remainder allocated to goodwill.
Simpson’s individual consolidated assets and liabilities would be increased by 100% of the
fair value increments and decrements of Ong’s assets and liabilities (and by the goodwill, if
any of the purchase price is allocated to goodwill). The offsetting changes would be to
decrease cash by $1.5 million and increase long-term liabilities by $4.5 million, the
purchase price of acquiring Ong. Specifically, the impact on Simpson’s statement of
financial position would be as follows (assuming there is no allocation to goodwill):
Acquisition cost:
Cash $1,500,000 cr.
Secured debt 4,500,000 cr.
$6,000,000
The acquisition-related adjusting and eliminating entries (not required) will be as follows:
When FMV of buildings is $9,500,000
Common shares 1,000,000
Retained earnings 3,700,000

Buildings 2,500,000
Buildings -- accumulated depreciation 1,400,000
Equipment -- accumulated depreciation 1,200,000
Accounts payable 10,000
Inventories - raw materials and supplies 20,000
Equipment 1,020,000
Cash 1,500,000
Secured debt 4,500,000
Non-controlling interest 2,631,000
Gain on bargain purchase 139,000
Total 9,810,000 9,810,000
When FMV of buildings is $8,400,000
Common shares 1,000,000
Retained earnings 3,700,000
Buildings 1,400,000
Buildings – accumulated depreciation 1,400,000
Equipment – accumulated depreciation 1,200,000
Accounts payable 10,000
Goodwill 901,429
Inventories—raw materials and supplies 20,000
Equipment 1,020,000
Cash 1,500,000
Secured debt 4,500,000
Total $ 9,611,429 $ 9,611,429
Therefore, regardless of whether or not there is a bargain purchase, the net identifiable
assets of Ong are always included at their fair market values in the consolidated financial
statements. Therefore, for each asset and liability line item, the impact of Ong’s assets and
liabilities will be as follows, when the building FMV is $8,400,000:
Ong FMV

Identifiable Assets
Cash $ 200,000
Accounts receivable 100,000
Inventories -- raw materials and supplies 1,180,000
Buildings 8,400,000
Accumulated depreciation —
Equipment 1,980,000
Total Identifiable Assets $11,860,000
Identifiable Liabilities
Accounts payable $ 340,000
Accrued expenses 50,000
Bank loan 2,700,000
Future income taxes 1,100,000
Total Identifiable liabilities $ 4,190,000
Goodwill $ 901,429
The above will be matched by these other line-item changes on the consolidated financial
statements:
Non-controlling interest $ 2,571,429
Secured debt $ 4,500,000
Decrease in cash $ 1,500,000
When the building FMV is instead 9,500,000, the line-item changes will be as follows:
Ong. FMV
Identifiable Assets
Cash $ 200,000
Accounts receivable 100,000
Inventories -- raw materials and supplies 1,180,000
Buildings 9,500,000
Equipment 1,980,000
Total Identifiable Assets $12,960,000
Identifiable Liabilities
Accounts payable $ 340,000
Accrued expenses 50,000
Bank loan 2,700,000
Future income taxes 1,100,000
Total liabilities $ 4,190,000
Matched by these other line-item changes on the consolidated financial statements:
Non-controlling interest $ 2,631,000
Secured debt $ 4,500,000
Decrease in cash $ 1,500,000
Increase in retained earnings due to gain on bargain purchase $ 139,000

Case 5-4: Proctor Industries
Objectives of the Case
This case asks the students to consider accounting issues to report to the audit committee.
The students will carefully have to think about their role and realize that even though audit
terminology is being used and that they are the auditor of PI, they are asked to provide
accounting advice. The issues involve accounting policies for investments and accounting
for a business combination.
Objectives of Financial Reporting
PI requires audited financial statements therefore IFRS is a constraint. PI is a large public
company. Therefore, it is likely that compliance with securities legislation is an objective.
With its recent acquisition of CI it is possible that it has some creditors that are interested
in cash flow prediction.
Accounting Issues
Minor Inc.
The results of MI will need to be consolidated with PI. PI has a 60% interest that indicates
control. The non-controlling interest of 40% must be recorded on the SFP. PI will require
a clean opinion on MI unless their operations are immaterial to PI. Therefore, the revenue
recognition issue will need to be resolved. IFRS requires the use of uniform accounting
policies for reporting similar transactions and other events in similar circumstances.
Therefore, if an entity within a group uses accounting policies different from those
adopted in the consolidated financial statements for similar transactions and events in
similar circumstances, appropriate adjustments are required to be carried out during the
consolidation procedure.
However, it is not necessary that the revenue recognition policy for PI and MI be the
same. There may be valid reasons why there are different risks and rewards, e.g. different
country, different products. Nevertheless, it appears that MI is being very aggressive with
the revenue recognition policy being when goods are produced. Even though there may be
a high demand there are potential risks until delivery, and uncertainty in prices. It would
be easier if MI had the same policy as PI for consolidation. This issue must be resolved as
soon as possible. If this cannot be resolved and it is material to PI’s operations, suitable
adjustments to match up with PI’s revenue recognition policy will have to be made during
the consolidation process. A $320,000 loss would be recorded in the consolidated
financial statements. PI will not have to take a hit for the entire loss however: 40% of the
loss will be attributed to the non-controlling interest.
Chemicals Inc.
PI purchased 100% of CI’s common shares. Therefore, its results will be consolidated
with PI using the acquisition method. The large discrepancy between the purchase price

and the present net carrying value must be investigated and a reason documented. The
allocation of this amount will have a large impact on the consolidated financial statements.
Assuming that the SFP did not change significantly from the date of purchase two months
ago and assuming the carrying values fairly approximate fair values the difference is:
Net carrying value $1,300,000
Purchase price 100,000
Negative goodwill $1,200,000
The negative goodwill of $1.2 million should be recognized as a gain on a bargain
purchase. However, the chemical dumping could be the reason for the negative goodwill
and some should be allocated to this contingent liability, thereby reducing the gain on the
bargain purchase. In any case, the fair values of all the identifiable assets and liabilities
have to be determined, and the full fair value decrement relating to such identifiable net
assets have to be first allocated to be before determining the gain from bargain purchase.
The difference in year-end dates is a minor issue. PI may want to arrange for CI to change
its year-end date to be consistent with that of PI to make it easier for consolidation. If not
changed, following IAS 27, CI will have to prepare, for consolidation purposes, additional
financial statements on the financial statements date of PI, unless preparation of such
additional statements is not practical. Notwithstanding the previous, the difference of a
month between the reporting dates of the two companies is within the three month
maximum difference allowed under IFRS. If additional statements are not prepared by CI,
adjustments have to be carried out during consolidation to remove the effects of
significant transactions or events that occurred between CI’s reporting date and that of CI.
Further, details regarding the different reporting date of CI and the reason for using a
different date should be disclosed in the consolidated financial statements.
Legal Letter
The chemical dumping is a contingent liability. This letter needs to be followed up on.
Contingent liabilities are not recognized under IAS 37. Rather, IAS 37 requires entities to
disclose contingent liabilities, unless the possibility of an outflow of economic resources is
remote. CI has denied these allegations, which do not appear to be determinable.
However, it sold the company for $1.2 million less than the financial statements indicate it
is worth.
Allowance for Doubtful Accounts
Our assessment indicates that this allowance is understated. The amount and possible
impact needs to be discussed with the audit committee. Our best estimate is that it should
be at least $250,000. PI may not want to make an adjustment to this account. It may argue
that it is just an estimate and it is a matter of judgment.
Buy-Back of CI
A note must be included in PI’s financial statements disclosing the possible buy back
provision for CI.

SOLUTIONS TO PROBLEMS
P5-1
Fair value of percentage acquired $100 $64 $120 $96 $80 $80
Is there a gain from a bargain purchase? No No Yes Yes No No
Amount of gain from bargain purchase $20 $16 $0
Extrapolated fair value/fair value of net
indefinable assets $120
$15
0 $120
$12
0 $100 $100
Carrying value of 100% of net
identifiable assets 80 100 80 100 120 120
Net fair value increment/(fair value
decrement) $40 $50 $40 $20
($20
)
($20
)
Fair value adjustment allocation to net
identifiable assets 20 (20) 40 20 (40) (20)
Goodwill $20 $70 $0 $0 $20 $0
P5-2
1.
a.
FV end of year 1: $22 × 25,000 shares = $550,000
b.
Cost $500,000
Add Income:
Year 1 $400,000
20% of Year 1 Income × 20% 80,000
Less Dividends:
Year 1 200,000
20% of Year 1 Dividends × 20% (40,000)
Less share of amortization of FVA relating to Year 1:
$50,000 x 20% = $10,000 (10,000)
Balance in investment account end of Year 1: $530,000
c.
FV end of year 1: $22 × 25,000 shares = $550,000
2.
a.

Year 1 Year 2 Year 3
Dividends $40,000 $16,000 $30,000
Unrealized gains 50,000 (25,000) 50,000
Total net income $90,000 ($9,000) $80,000
b.
Share of net income of Panther $80,000 ($20,000) $50,000
Less: Share of amortization of FVA (10,000) (10,000) (10,000)
Share of adj. net income 70,000 (30,000) 40,000
Gain on sale of associate 81,000
Total share of net income of associate $70,000 ($30,000) $121,000
c.
Dividends $40,000 $16,000 $30,000
Total net income 40,000 16,000 30,000
OCI:
Unrealized & realized gains 50,000 (25,000) 50,000
P5-3
Case 1. Perk purchases the net assets of Scent
Analysis of purchase transaction:
Book value Fair Value Increment
Cash $200,000 $200,000
Accounts receivable 600,000 600,000
Inventory 800,000 600,000 $(200,000)
Capital assets (net) 3,400,000 5,000,000 1,600,000
Current liabilities (200,000) (200,000)
Long-term liabilities (800,000) (1,100,000) (300,000)
$4,000,000 $5,100,000 $1,100,000
Purchase price 5,500,000
Goodwill $400,000 400,000
$1,500,000
Perk Company
Statement of Financial Position
December 31, 20X5

Current assets:
Cash $1,700,000
Accounts receivable 1,600,000
Inventory 1,900,000 $5,200,000
Capital assets (net) 11,700,000
Goodwill 400,000
Total assets
$17,300,00
0
Current liabilities $3,200,000
Long-term liabilities 5,100,000 $8,300,000
Shareholders’ equity:
Common shares $5,000,000
Retained earnings 4,000,000 9,000,000
Total liabilities and equities
$17,300,00
0
Detailed calculation:
Perk Scent Perk
Current assets: Carrying Carrying SFP
Cash
$7,000,00
0 $200,000
($5,500,000
)
$1,700,00
0
Accounts receivable 1,000,000 600,000 1,600,000
Inventory 1,300,000 800,000 (200,000) 1,900,000 $5,200,000
3,400,00
0 1,600,000 11,700,000
Goodwill 400,000
Total assets
$17,300,00
0
Current liabilities
$3,000,00
0 $200,000
$3,200,00
0
Long-term liabilities 4,000,000 800,000 300,000 5,100,000 $8,300,000
Common shares 5,000,000 5,000,000
Retained earnings 4,000,000 4,000,000 9,000,000
Total liabilities and
equities
$17,300,00
0
Case 2. Perk purchases 75% of Scent’s voting shares
Book value Fair Value FVI Book value Fair Value FVI
75% 75% 75% 100% 100% 100%

Cash $150,000 $150,000 $0 $200,000 $200,000 $0
Accounts receivable 450,000 450,000 0 600,000 600,000 0
Inventory 600,000 450,000 (150,000) 800,000 600,000 (200,000)
Capital assets (net) 2,550,000 3,750,000 1,200,000 3,400,000 5,000,000 1,600,000
Current liabilities (150,000) (150,000) 0 (200,000) (200,000) 0
Long-term liabilities (600,000) (825,000) (225,000) (800,000) (1,100,000) (300,000)
$3,000,000 $3,825,000 $825,000 $4,000,000 $5,100,000 $1,100,000
Purchase Price for 75% $4,500,000
Goodwill 75% $675,000
Grossed-up value of 100% of Scent based on purchase price paid by Perk $6,000,000
Goodwill 100% $900,000
Perk Company
Consolidated Statements of Financial Position
December 31, 20X5
1 2 3 4
Proportionate
consolid.
Parent
company
Parent co.
extension. Entity
Cash $2,650,000 $2,700,000 $2,700,000 $2,700,000
Accts. receivable 1,450,000 1,600,000 1,600,000 1,600,000
Inventory 1,750,000 1,950,000 1,900,000 1,900,000
Capital assets (net) 10,450,000 11,300,000 11,700,000 11,700,000
Goodwill 675,000 675,000 675,000 900,000
Total assets $16,975,000 $18,225,000 $18,575,000 $18,800,000
Current liabilities $3,150,000 $3,200,000 $3,200,000 $3,200,000
Long-term liability 4,825,000 5,025,000 5,100,000 5,100,000
Common shares 5,000,000 5,000,000 5,000,000 5,000,000
Non-controlling interest — 1,000,000 1,275,000 1,500,000
Retained earnings 4,000,000 4,000,000 4,000,000 4,000,000
Total liabilities and equities $16,975,000 $18,225,000 $18,575,000 $18,800,000
Detailed calculations:
Proportionate Consolidation
Perk Scent Perk
Current assets: Carrying Carrying Adjustment Consolidated
Cash $7,000,000 $150,000
($4,500,000
)
$2,650,00
0

Inventory 1,300,000 600,000 (150,000) 1,750,000 $5,850,000
2,550,00
0 1,200,000 10,450,000
Goodwill 675,000
Total assets $16,975,000
Current liabilities $3,000,000 $150,000
$3,150,00
0
Common shares 5,000,000 5,000,000
Total liabilities and equities $16,975,000
Parent Company
Perk Scent Perk
Cash
$7,000,00
0 $200,000
($4,500,000
)
$2,700,00
0
Inventory 1,300,000 800,000 (150,000) 1,950,000 $6,250,000
3,400,00
0 1,200,000 11,300,000
Goodwill 675,000
Current liabilities
$3,000,00
0 $200,000
$3,200,00
0
Common shares 5,000,000 5,000,000
Parent Company Extension
Perk Scent Perk
Cash
$7,000,00
0 $200,000
($4,500,000
)
$2,700,00
0

Inventory 1,300,000 800,000 (200,000) 1,900,000 $6,200,000
3,400,00
0 1,600,000 11,700,000
Goodwill 675,000
Current liabilities
$3,000,00
0 $200,000
$3,200,00
0
Common shares 5,000,000 5,000,000
Entity
Perk Scent Perk
Cash
$7,000,00
0 $200,000
($4,500,000
)
$2,700,00
0
Inventory 1,300,000 800,000 (200,000) 1,900,000 $6,200,000
3,400,00
0 1,600,000 11,700,000
Goodwill 900,000
Current liabilities
$3,000,00
0 $200,000
$3,200,00
0
Common shares 5,000,000 5,000,000
P5-4
Purchase Price $190,000
Net carrying value of net assets 101,500

(100,000 + 60,000 – 15,000) x 70%
FVA
Land $150,000
Building 60,000
Equipment (30,000)
Goodwill (20,000)
Bonds Payable 10,000
$170,000 x 70% 119,000
Negative Goodwill (30,500)
Recognize as gain on bargain purchase 30,500
$ NIL
a. Land:
100% Carrying value
$ 30,000
100% of FVI
150,000
$180,000
b. Goodwill:
$ 0
c. Non-controlling interest:
30% of FV of Zoe’s net identifiable assets of
$315,000 (carrying value of $145,000 plus FVI of $170,000)
$ 94,500
Note: The value of goodwill (of zero) and the NCI are the same under both the entity and
the parent-company extension methods given that there is a gain on bargain
purchase. Further, land is valued at its full fair value under both the entity and the
parent-company extension methods and is thus same under both methods.

P5-5
Fair value of Lethbridge's net identifiable assets @ 100% $427,500
Fair value of Lethbridge's net identifiable assets @ 70% 299,250
Purchase price for 70% 315,000
Goodwill @ 70% $15,750
Therefore, there is no bargain purchase
Grossed-up value of Goodwill @ 100% $22,500
Grossed-up value of 100% of Lethbridge based on purchase price of $315,000
for 70%
$450,000
Allocation of fair value adjustment:
Carrying
value Fair Value
FVI
Adjustment
Current assets $210,000 $210,000 $0
Land 135,000 225,000 90,000
Building, net 322,500 300,000 (22,500)
Equipment, net 90,000 135,000 45,000
Current liabilities (105,000) (105,000) 0
Bonds payable (315,000) (337,500) (22,500)
$337,500 $427,500 $90,000
Fair value of Lethbridge's 100% net
identifiable assets
$427,50
0
Goodwill @ 100% under entity method $22,500
Goodwill @ 70% under parent-
company extension method $15,750
Entity-method SFP:
July 1, 20X5
Red Deer
Carrying
Lethbridge
Carrying Adjustments Consolidated
Current assets $210,000 $210,000 $420,000
Capital assets
Land 600,000 135,000 90,000 825,000
Building, net 825,000 322,500 (22,500) 1,125,000
Equipment, net 540,000 90,000 45,000 675,000
Investment in Lethbridge Ltd. 315,000 (315,000) 0
Goodwill 600,000 22,500 622,500

$3,090,000 $757,500 ($180,000) $3,667,500
Current liabilities 90,000 105,000 195,000
Bonds payable 300,000 315,000 22,500 637,500
Common shares 1,500,000 150,000 (150,000) 1,500,000
Retained earnings, July 1,
20X5 1,200,000 187,500 (187,500) 1,200,000
Non-controlling interest 135,000 135,000
$3,090,000 $757,500 ($180,000) $3,667,500
Parent-company extension method SPF:
July 1, 20X5
Red Deer
Carrying
Lethbridge
Carrying Adjustments Consolidated
Current assets $210,000 $210,000 $420,000
Capital assets
Land 600,000 135,000 90,000 825,000

Building, net 825,000 322,500 (22,500) 1,125,000
Equipment, net 540,000 90,000 45,000 675,000
Investment in Lethbridge Ltd. 315,000 (315,000) 0
Goodwill 600,000 15,700 615,700
$3,090,000 $757,500 ($186,750) $3,660,750
Current liabilities 90,000 105,000 195,000
Bonds payable 300,000 315,000 22,500 637,500
Common shares 1,500,000 150,000 (150,000) 1,500,000
Retained earnings, July 1,
20X5 1,200,000 187,500 (187,500) 1,200,000
Non-controlling interest 128,250 128,250
$3,090,000 $757,500 ($186,750) $3,660,750

P5-6
Measure:
Maui Ltd.’s identifiable assets & liabilities at fair values:
Current assets $170,000 Current liabilities $130,000
Land 150,000 Bonds payable 140,000
Building (net) 360,000
Equipment (net) 60,000
Total $740,000 $270,000
Fair value of net identifiable assets $470,000
Fair value of 70% of net identifiable assets $329,000
Purchase Price paid by Oahu for its 70% 371,000
Goodwill @ 70% $42,000
Goodwill @ 100% $60,000
Grossed-up value of Maui Ltd. $530,000
1.
a. Goodwill (100%) $60,000
b. Land (100% FMV of Maui Ltd.) 150,000
c. Equipment (100% FMV of Maui Ltd.) 60,000
d. Common shares (of Oahu Ltd.) 960,000
e. Retained earnings (of Oahu Ltd.) 1,420,000
f. NCI @ 30% of $530,000 159,000

2.
Oahu Ltd. includes in its consolidated statement of financial position all the net assets over
which it has control, including 100% of Maui’s net assets. However, Oahu actually owns
only 70% of Maui’s shares. Since all of the net assets are consolidated, these must be
partially offset by a non-controlling interest that represents the outside owners’ 30%
equity in the consolidated Maui net assets. The NCI does not represent a liability to Oahu
or a part of Oahu’s ownership; it is an outside ownership interest in assets controlled by
but not owned by Oahu Ltd.
P5-7
Non-controlling interest on Huge’s consolidated statement of financial position will
consist of two components:
1. 40% non-controlling interest in Tinier, plus
2. 20% non-controlling interest in Tiny.
40% non-controlling interest in Tinier:
Tinier
Purchase price $1,395,000
Grossed-up value based on price paid $2,325,000
Income less dividends during the year 390,000
Total $2,715,000
Non-controlling interest in Tinier on Dec. 31, 20X5 $1,086,000

20% non-controlling interest in Tiny:
Tiny net income on cost basis $900,000
Less Tiny's portion of dividends from Tinier 36,000
Tiny's separate entity earnings for the year 864,000
Add share of income of Tinier 270,000
Consolidated earnings attributable to shareholders of Tiny 1,134,000
100% Initial value of Tiny based on price paid by Big 2,625,000
Updated value of Tiny including earnings as of Dec. 31, 20X5 3,759,000
Less dividends paid by Tiny 150,000
Updated value of Tiny less dividends $3,609,000
Non-controlling interest in Tiny on Dec. 31, 20X5 $721,800
Therefore, non-controlling interest in the consolidated statements of Big:
Non-controlling interest in Tinier on Dec. 31, 20X5 $1,086,000
Non-controlling interest in Tiny on Dec. 31, 20X5 721,800
Total non-controlling interest on Dec. 31, 20X5 $1,807,800

P5-8
Measure:
Purchase consideration $ 553,000
Grossed-up value of Sub based on purchase price $ 790,000
Carrying value of Sub net assets $ 540,000
Fair value increment $ 250,000
FVI Allocation:
Sub Book FMV FVI FVI Allocated
Assets
Cash $ 40,000 $ 40,000 $ - $ -
Inventory 40,000 30,000 (10,000) (10,000)
Equipment, net 120,000 100,000 (20,000) (20,000)
Building, net 300,000 360,000 60,000 60,000
Land 50,000 160,000 110,000 110,000
Total Assets $ 550,000 $ 690,000 $ 140,000 $ 140,000
Liabilities
Liabilities $ 10,000 $ 14,000 $ 4,000 $ 4,000
Total liabilities $ 10,000 $ 14,000 $ 4,000 $ 4,000
FVI Allocated to net identifiable assets $ 136,000
Goodwill @ 100% $ 114,000
Amortize FVIs:
FVI Allocated Amort. Period
Amort.
per year
Amort./
impairment loss
during 20X5
Balance of
FVI remaining
at the end of
20X5
Inventory $ (10,000) $ (10,000) $ 0
Equipment (20,000) 10 $ (2,000) (2,000) (18,000)
Building 60,000 20 3,000 3,000 57,000
Land 110,000 110,000
Goodwill 114,000 114,000
Liabilities (4,000) (4,000) 0
Total $ 250,000 ($13,000) $263,000
Note: The various adjustments and eliminations are being presented as entries below.
The at-the-time-of-acquisition adjusting and eliminating entries are:
Building $ 60,000
Land 110,000
Common shares 250,000
Goodwill 114,000
Investment in Sub Ltd. $553,000
Inventory 10,000
Equipment 20,000
Liabilities 4,000
Non-controlling interest 237,000

The consolidation related adjustments and eliminations for the current year of 20X5 are:
Inventory 10,000
Cost of Sales 10,000
Depreciation expense 1,000
Accumulated depreciation – equipment 2,000
Accumulated depreciation – building 3,000
Liabilities 4,000
Income Summary/Expenses (20X5) 4,000
Note: The adjustment for the liabilities fair value debit decrement may cause some
confusion. If the liability was liquidated at $14,000 as the fair value implies, then the entry
to record the payment on the books of Sub would appear as follows:
Liability $10,000
Loss (or increase of expense) 4,000
Cash $14,000
The consolidation worksheet adjustment then offsets the recorded loss of $4,000. If the
liability was actually settled for $10,000, then the $14,000 fair value estimate was wrong
and the fair value debit must be charged to income when the error is detected in 20X5.
Thus, regardless of the actual amount for which the liability is settled, the fair value
increment must be credited to 20X5 net income.
P5-9
1.
Measure Step:
Purchase consideration $906,400
Grossed-up value of Sub based on purchase price $1,133,000
Carrying value of Sub net assets 1,048,000
Fair value adjustment 85,000
FVA Allocation:
Sub
Carrying FMV FVA
FVA
Allocated
Assets
Cash $160,000 $160,000 $0 $0
Accounts receivable 200,000 240,000 40,000 40,000
Inventory 300,000 380,000 80,000 80,000

Capital assets, net 900,000 750,000 (150,000) (150,000)
Total Assets $1,560,000 $1,530,000 ($30,000) ($30,000)
Liabilities
Liabilities $150,000 $130,000 ($20,000) ($20,000)
Bonds payable 362,000 362,000 0 0
Total Liabilities $150,000 $130,000 ($20,000) ($20,000)
FVA Allocated to net
identifiable assets ($10,000)
Goodwill @ 100% $95,000
Non-controlling interest $226,600
Eliminate Intercompany Transactions:
Downstream sale of inventory by Par to Sub $ (140,000)
Upstream sale of inventory by Sub to Par (250,000)
Eliminate Unrealized Gains:
Calculation of unrealized gain on downstream sale:
Sale price $ 140,000
Cost 100,000

Gross profit 40,000
Inventory remaining unsold 20%
Unrealized gain on downstream sale 8,000
Calculation of unrealized gain on upstream sale:
Cost 200,000
Gross profit 50,000
Inventory remaining unsold 30%
Unrealized gain on upstream sale 15,000
Therefore, the following unrealized gains have to be eliminated:
Unrealized gain on downstream sale $ (8,000)
Unrealized gain on upstream sale (15,000)
Unrealized gain on upstream sale of land by Sub to Par (60,000)
Amortize FVIs:
FVA
Allocated
Amort.
Period
Amort.
per year
Amort./
impairment loss
during 20X5
Balance of FVA
remaining at the
end of 20X5
Accounts receivable $ 40,000 $ 40,000 $ -
Inventory 80,000 80,000 0
Capital assets, net (150,000) 10
$
(15,000) (15,000) (135,000)
Current liabilities 20,000 20,000 -
Goodwill 95,000 95,000
Total $ 85,000 $ 125,000 $ (40,000)
To clarify the treatment of the fair value decrement relating to current liabilities, note that
its carrying value in Sub’s books is $150,000, however, if its fair market value of
$130,000 is accurate, Sub. will recognize a gain of $20,000 on retiring the liability at its
FMV of $130,000. However, from the consolidated perspective there is no gain since the
carrying value at the consolidated level is already at $130,000. Therefore, the amortization
expense relating to the fair value decrement of $20,000 will offset the gain of $20,000
recognized by the Sub.
Recognize NCI share of earnings:
Unadjusted income of Sub. $74,000
Unrealized gain on upstream sale of inventory
(15,000
)
Unrealized gain on upstream sale of land
(60,000
)

Amortization of FVI allocated to Inventory
(80,000
)
Amortization of FVD allocated to capital assets 15,000
Amortization of FVD allocated to current liabilities
(20,000
)
Amortization of FVI allocated to accounts receivable
(40,000
)
$
(200,000)
Adjusted income of Sub.
$
(126,000)
Non-controlling interest share $ (25,200)
We also need to remember to eliminate Sub.’s at-the-time of acquisition share equity
accounts and Par.’s Investment in Sub. account.
[Par Ltd. owns 80% of Sub Ltd.—Direct Method]
Consolidated Statement of Comprehensive Income
Year Ended December 31, 20X5
Sales [2,000,000 + 2,000,000 – 140,000 – 250,000] $3,610,000
Cost of sales [1,400,000 + 1,700,000 – 140,000 – 250,000 +15,000 + 8,000 +
80,000] 2,813,000
Gross Margin 797,000
Depreciation Expense [100,000 + 90,000 – 15,000] 175,000
Interest expense [63,000 + 44,000] 107,000
Other expenses [124,000 +78,000 + 20,000 + 40,000] 262,000
Total Expenses 544,000
253,000
Investment Income [37,000 + 60,000 – 60,000] 37,000
290,000
Income Tax [140,000 + 74,000] 214,000
Net Income and Comprehensive Income $ 76,000
Net income attributable to:
Owners of the parent $101,200
Non-controlling interests (25,200)
Retained Earnings Section of the Consolidated Statement of Changes in Equity
Retained earnings Jan. 1. 20X5* $2,001,000
Net income 101,200
Retained earnings Dec. 31 20X5 $2,102,200
* Note: Beginning retained earnings is a calculated amount based on the income for 20X5

and the ending retained earnings for 20X5 given in the problem. Thus, beginning retained
earnings equals $2,211,000 – $210,000 = $2,001,000.
2. Consolidated SFP amounts, December 31, 20X5
a.
Net capital assets: (Buildings and equipment)*
Par $1,200,000
Sub 900,000
FMV Increment (150,000)
Amortization 15,000
Less: gain (60,000)
$1,905,000
*assume land is included in this line item
b.
Goodwill:
Par $ 0
Sub 0
FMV Increment 95,000
$95,000
c.
Retained Earnings
Par Ltd. $2,211,000
Plus Sub’s post- acq.
R/E
31-Dec-X5 922,000
01-Jan-X5 (848,000)
74,000 × 0.80 59,200
Unrealized profit:
Ending inventory
Downstream (8,000)
Upstream (15,000) × 0.80 (12,000)
Land (60,000) × 0.80 (48,000)
FMV Amortization:
Accounts receivable (32,000)
Inventory (64,000)
Current liabilities (16,000)
Capital assets (net) 12,000
Consolidated Retained Earnings $2,102,200

P5-10
Note:
Measure Step:
Purchase consideration $972,000
Grossed-up value of Sub based on purchase price $ 1,080,000
Carrying value of Sub net assets 1,020,000
Fair value adjustment $60,000
FVA Allocation:
Sub Book FMV FVA
FVA
Allocated
Assets
Cash $60,000 $60,000 $0 $0
Inventory 180,000 220,000 40,000 40,000
Capital assets, net 1,500,000 1,350,000 (150,000) (150,000)
Goodwill 100,000 (100,000) (100,000)
Total Assets $1,960,000 $1,790,000 ($170,000) ($170,000)
Liabilities
Current liabiliies $140,000 $140,000 $0 $0
Bonds payable 800,000 850,000 50,000 50,000
Total liabilities $940,000 $990,000 $50,000 $50,000
FVI Allocated to net
identifiable assets (220,000)
Goodwill @ 100% $ 280,000
Non-controlling interest @ 10% of $ 1,080,000 $ 108,000

Eliminate Intercompany Transactions:
Downstream sale of inventory by Parent to Sub ($ 275,000)
Dividends paid by Sub ($60,000)
Eliminate Unrealized Gains & Recognize Realized Gains:
Calculation of unrealized gain on downstream sale:
Cost 200,000
Gross profit 75,000
Inventory remaining unsold by end of 20X5 35%
Unrealized gain on downstream sale 26,250
Calculation of realized gain in 20X5 on upstream sale made in 20X4:
Cost 260,000
Gross profit 60,000
Inventory remaining unsold by end of 20X4 25%
Profit in beginning inventory realized in 20X5 15,000
Therefore, the following unrealized gains have to be eliminated:
Unrealized gain on downstream sale $ (26,250)
Realized gain on upstream sale 15,000
Amortize FVIs:
FVI
Allocated
Amort.
Period
Amort.
Amort./
impairment
in previous
years of
20X4
Amort./
impairment
loss during
20X5
Balance of
FVI
remaining
at the end
of 20X5per year
Accounts receivable $40,000 $40,000 $0

Inventory 40,000 40,000 0
Capital assets, net (150,000) 10 (15,000) (15,000) (15,000) (120,000)
Liabilities (50,000) 10 (5,000) (5,000) (5,000) (40,000)
Goodwill 280,000 280,000
Total $160,000 $60,000 ($20,000) $120,000
Recognize NCI share of earnings:
Unadjusted income of Sub. $ (172,000)
Realized gain on upstream sale of inventory $ 15,000
Amortization of FVD allocated to capital assets 15,000
Amortization of FVD allocated to bonds payable 5,000 $35,000
Adjusted income of Sub. $ (137,000)
Non-controlling interest share $ (13,700)

1. [Parent Ltd. owns 90% of Sub Ltd.—Direct Method]
Sales (9,865,000 + 1,650,000 – 275,000 – 54,000) $11,186,000
Cost of sales (8,040,000 + 1,140,000 – 15,000 – 275,000 + 26,250) 8,916,250
Gross profit 2,269,750
Expenses:
Depreciation (106,000 + 104,000 – 15,000) 195,000
Other (369,000 + 808,000 – 5,000) 1,172,000
Total Expenses 1,367,000
902,750
Gain on Sale of Building 230,000
Net Income and Comprehensive Income $1,132,750
Owners of the parent $1,146,450
Non-controlling interests (13,700)
2.
a.
Goodwill:
Parent $ 0
Sub 100,000
Elimination: Carrying value of Sub.’s goodwill of 100,000 (100,000)
Acquisition amount 280,000
$280,000
b.
Capital Assets, Net
Parent $2,631,000
Sub 1,863,000
Fair Market Value Decrement (150,000)
Amortization (150,000)/10 = 15,000 x 2 = 30,000
$4,374,000
c.

Bonds Payable
Parent $0
Sub 800,000
Fair Market Value Increment 50,000
Amortization (50,000)/10 = 5,000 x 2 = (10,000)
$840,000
d.
Alternate 1:
NCI balance at time of acquisition $ 108,000
Change in retained earnings during 20X4:
R/E 20X4 ending (1,385,000 + 60,000 dividends
paid during the year) 1,445,000
R.E at the time of acquisition 620,000
825,000 × .1 82,500
Amortization of FVI/FVD in 20X4:
Inventory (40,000)
Capital assets, net 15,000
Bonds payable 5,000
Share of amortization of FVI/FVD during 20X4 (60,000) × .1 (6,000)
Unrealized gains on upstream sale of inventory in
20X4 (15,000) × .1 (1,500)
Share of adjusted change in retained earnings in
20X4 75,000
Share of adjusted earnings in 20X5 (13,700)
Share of dividends in 20X5 (6,000)
Ending NCI balance in 20X5 $ 163,000
Alternate 2:
Non-controlling interest on the SFP
At acquisition $ 108,000
Post acquisition earnings prior to 20X5:
R/E 20X5 beginning balance (1,385,000 + 60,000
dividends paid during the year) 1,445,000
R.E at the time of acquisition 620,000
Change in retained earnings prior to 20X5 825,000 × .1 82,500
Add/(less) FVI/(FVD) in 20X4 & 20X5
Inventory (40,000)
Capital assets ($15,000 x 2) 30,000

Bonds payable ($5,000 x 2) 10,000
(40,000) × .1 (4,000)
Plus equity pickup for 20X5
Sub’s loss (172,000) × .1 (17,200)
169,300
Less dividends 60,000 × .1 (6,000)
Ending NCI balance in 20X5 $163,300
Alternate 3:
Common shares of Sub. Inc. $ 400,000
Retained earnings balance of Sub. Inc. after deducting
current year dividends 1,385,000
Current year earnings of Sub. Inc. (172,000)
Share of carrying value of Sub. Inc. at the end of 20X5 1,613,000 × .1 $161,300
Add unamortized fair value increment at the end of the
year 123,000 × .1 12,000
Less carrying value of Sub.'s goodwill (100,000) × .1 (10,000)
NCI balance at the end of 20X5 $163,000
P5-11
1.
Share of fair value of Marble ($1 Million × 80%) $800,000
Purchase price 700,000
Gain on bargain purchase $100,000
Marble
Granite 80% of FV
Consolidated
FS
Assets
Cash $350,000 $350,000
Inventory 300,000 200,000 500,000
Land 300,000 200,000 500,000
Building 400,000 400,000 800,000
Patent 200,000 200,000
Total Assets $2,350,000
Liabilities
Bonds payable 300,000 200,000 500,000

Common stock 800,000 800,000
Retained Earnings 950,000 100,000 1,050,000
Total liabilities and owners' equity $2,350,000
Marble Marble
100% of
FV 100% of BV FVA
Cash
Inventory $250,000 $200,000 $50,000
Land 250,000 200,000 50,000
Building 500,000 470,000 30,000
Patent 250,000 230,000 20,000
Bonds payable 250,000 200,000 50,000
Net assets 1,000,000 900,000 100,000
2.
FVA Useful life
Amortz. /
Yr. 20X1 20X2 Balance
Inventory $50,000 $50,000 $0
Land 50,000 50,000
Building 30,000 10 3,000 3,000 3,000 24,000
Patent 20,000 10 2,000 2,000 2,000 16,000
Bonds Payable (50,000) 5 (10,000) (10,000) (10,000) (30,000)
Total amortization $45,000 ($5,000) $60,000
20X1 upstream sale of inventory
Sale price $150,000
Cost 100,000
Gross profit 50,000
% remaining unsold 50%
Unrealized profit $25,000
20X1 upstream sale of land
Sale price $150,000
Cost 100,000
Gross profit $50,000

20X2 downstream stream sale of inventory
Sale price $120,000
Cost 80,000
Gross profit 40,000
% remaining unsold 25%
Unrealized profit $10,000
a.
Separate entity RE of Granite end of 20X2 $1,450,000
Less: Unrealized gain on downstream sale 20X2 (10,000)
Add: Portion of adjusted change in retained earnings of Marble
till end of 20X2:
RE of Marble end of 20X2 $680,000
RE of Marble at time of acquisition 400,000
Change in RE 280,000
Less Amortization of FVA 20X1-20X2 (40,000)
Less gain on sale of land upstream (50,000)
Adjusted change in RE 20X1-20X2 $190,000
Granite's share @ 80% $152,000
Add: Gain on bargain purchase 100,000
Consolidated RE of Granite at the end of 20X2 $1,692,000
b.
Alternate 1:
NCI balance end of 20X2
Carrying value of Marble end of 20X2:
Common stock $500,000
Retained earnings end of 20X2 680,000
Add: Unamortized FVA 60,000
Less Unrealized gain on upstream sale of land (50,000)
Total value of Marble end of 20X2 1,190,000
NCI share 20% 20%
NCI balance end of 20X2 $238,000
Alternate 2:
Beginning Balance $200,000
Share of Change in RE 56,000
FVI Amortz. 20X1 ($45,000)
FVI Amortz. 20X2 5,000

Unrealized gain on up st. Land (50,000) (18,000)
$238,000
Alternate 3:
Beginning Balance $200,000
NCI's 20% share of adj. change in RE $190,000 38,000
$238,000
c.
Adjusted Income of Marble for 20X2:
Separate entity income of Marble 20X2 $120,000
Add: Realized gain on upstream sale 20X1 25,000
Less: Amortization of AD in 20X2 5,000
Adjusted income of Marble 20X2 $150,000
Adjusted Income of Granite for 20X2:
Separate entity income of Granite 20X2 $150,000
Less: Unrealized gain on downstream sale 20X2 (10,000)
Less: Share of Dividends from Marble in 20X2 (24,000)
Adjusted income of Marble 20X2 $116,000
P5-12
Check to ensure there is no gain on bargain purchase:
Purchase price paid for 80% $1,200,000
FMV of 80% of net identifiable assets of Stylish 912,000
Purchase price > FMV $288,000
Therefore, no gain on bargain purchase
Measure:
Purchase consideration for 80% of Stylish $1,200,000
Grossed-up value of Stylish
based on purchase price $1,500,000
Carrying value of Stylish
net assets 950,000
Fair value adjustment $550,000
FVA Allocation:
Stylish
Book FMV FVA
FVI
Allocate
d
FVI
Allocated
Assets
Cash $50,000 $50,000 $0 $0
Inventories 300,000 280,000 (20,000) (20,000)

Land 300,000 420,000 120,000 120,000
Depreciable capital assets 580,000 500,000 40,000 (120,000) 40,000
Accumulated depreciation (120,000) 0 120,000
Total Assets
$1,225,00
0 $1,390,000
$165,00
0 $125,000 $40,000
Liabilities &
Shareholders' equity
Current liabilities $275,000 $250,000 $25,000 $25,000
Total liabilities $275,000 $250,000 $25,000 $25,000
FVI Allocated to net
identifiable assets $190,000
Goodwill @ 100% $360,000
Eliminate:
Eliminate Inter-Company Transactions & Balances:
20X3:
Upstream sales $180,000
Downstream sales 200,000
Inter-company dividends 15,000
20X4:
Upstream sales $250,000
Downstream sales 150,000
Inter-company dividends 20,000
Eliminate/Recognize Unrealized/Realized Profits:
20X3:
Upstream sales (20% of $30,000) ($6,000)
Downstream sales (30% of $50,000) (15,000)
20X4:
Upstream sales (20% of $100,000) ($20,000)
Downstream sales (25% of $50,000) (12,500)
Upstream sales in 20X3 (20% of $30,000) $6,000
Downstream sales in 20X3 (30% of $50,000) 15,000
Amortize:
FVA Jan.
1, 20X3
Useful
Life
Amortiz./
year
FVA
Amortiz.
20X3
FVA
Amortiz.
in 20X4
FVA
Balance
Dec. 31,
20X4

Accounts receivable $25,000 $25,000 $0 $0
Inventory (20,000) (20,000) 0 0
Land 120,000 120,000
Depreciable capital
assets 40,000 10 4,000 4,000 4,000 32,000
Current liabilities 25,000 25,000 0
Goodwill 360,000 360,000
Total $550,000 $4,000 $34,000 $4,000
$512,00
0
1 Equity method income from Sub for 20X3:
Change in Stylish retained earnings in 20X3:
20X4 balance $780,000
Less 20X4 net income (130,000)
Add 20X4 dividends 20,000
Less balance at acquisition (500,000)
Change in RE 20X3
$
170,000
Add 20X3 dividends 15,000
20X3 book net income
$
185,000
FVI: Accounts receivable (25,000)
Inventory 20,000
Capital asset amortization (4,000)
Unrealized profits in inventory upstream sales: (6,000)
Adjusted income of Stylish $145,000
Plain's 80% share of adjusted income of Stylish $116,000
Unrealized profits in inventory downstream sales: (15,000)
Equity method income from Stylish for 20X3: $101,000
2 Adjusted earnings of Plain Ltd. in 20X3:
Plain Ltd. retained earnings end of 20X4 $2,000,000
Less SE net income of Plain Ltd. for 20X4 (110,000)
Add dividends declared by Plain Ltd. in 20X4 25,000
Plain Ltd. retained earnings beginning of 20X3 (1,650,000)
Change in RE 20X3 $ 265,000

Add dividends declared by Plain Ltd in 20X3 20,000
20X3 net income of Plain Ltd. $ 285,000
Less dividends received from Stylish Ltd. (12,000)
Less unrealized gain on downstream sales 20X3 (15,000)
Adjusted earnings of Plain Ltd. in 20X3 $ 258,000
3 Consolidated net income for 20X4:
Plain Ltd. net income $110,000
Unrealized profits, end of year downstream sales: (12,500)
Unrealized profits, beg. of year downstream sales: 15,000
Dividends revenue from Stylish (16,000)
Adjusted income of Plain 96,500
Stylish Ltd. net income $130,000
Unrealized profits, end of year upstream (20,000)
Unrealized profits, beg. of year upstream: 6,000
Amortizations:
Capital asset FVI (4,000)
Adjusted income of Stylish 112,000
Consolidated net income for 20X4 $208,500
4 Consolidated RE balance at the end of 20X4:
Alternate 1:
Separate entity RE of Plain Ltd. end of 20X4 $2,000,000
Less Unrealized profits, end of year downstream sales (12,500)
Separate entity RE of Stylish Ltd. end of 20X4 $780,000
Separate entity RE of Stylish Ltd. at the time of its acquisition (500,000)
Change in RE of Stylish Ltd. from its acquisition to end of 20X4 $280,000
Less FVA amortization:
Inventory 20,000
Capital asset amortization ($4,000 x 2) = (8,000)
Less Unrealized profits, end of year upstream sales (20,000)
Adjusted Change in RE of Stylish Ltd. $222,000
Plain Ltd.'s 80% share of adj. change in RE of Stylish Ltd. 177,600
Consolidated RE balance at the end of 20X4 $2,165,100
4 Consolidated RE balance at the end of 20X4:

Retained earnings balance of Plain Ltd. 20X3 Beg. $1,650,000
Plain's 80% share of adjusted income of Stylish 116,000
Adjusted earnings of Plain Ltd. in 20X3 258,000
Less dividends declared by Plain Ltd in 20X3 (20,000)
Consolidated RE balance at the beginning of 20X4 $2,004,000
Plain Ltd.'s 80% share of adjusted Inc. of Stylish 20X4 89,600
Adjusted income of Plain Ltd. 20X4 96,500
Less dividends declared by Plain Ltd in 20X4 (25,000)
Consolidated RE balance at the end of 20X4 $2,165,100
5 NCI balance at the end of 20X4:
Alternate 1:
Stylish Ltd. carrying value at the end of 20X4:
Unamortized FVA relating to Stylish at end of 20X4 512,000
$1,722,000
NCI balance at the end of 20X4 @ 20% $344,400
Alternate 2:
NCI balance at the time of acquisition $300,000
20% of adjusted income of Stylish in 20X3 29,000
20% of dividends declared by Stylish in 20X3 (3,000)
Adjusted income of Stylish in 20X4
SE income of Stylish in 20X4 $130,000
FVA amortization in 20X4 (4,000)
Less unrealized profits, end of year upstream sales (20,000)
Add realized profits, beginning of year upstream sales 6,000
Adjusted income of Stylish in 20X4 $112,000
NCI's 20% share of adjusted income of Stylish in 20X4 22,400
NCI's 20% of dividends paid by Stylish in 20X4 (4,000)
Alternate 3:
Add 20% share of adjusted change in RE of Stylish till 20X4 44,400

6 Investment in Stylish Account Balance at the End of 20X3 under Equity Method:
Alternate 1:
Stylish Ltd. carrying value at the end of 20X4:
Unamortized FVA relating to Stylish at end of 20X4 516,000
$1,630,000
Plain's share at the end of 20X4 @ 80% $1,304,000
Less Unrealized profits, end of year downstream sales (15,000)
Investment in Stylish Account Balance at the End of 20X4 $1,289,000
Alternate 2:
Purchase price of 80% of Stylish $1,200,000
Less Plain's 80% share of dividends from Stylish in 20X3 (12,000)
Plain Ltd.'s 80% share of adj. change in RE of Stylish Ltd. 101,000
Investment in Stylish Account Balance at the End of 20X4 $1,289,000
P5-13
The consolidated statement of comprehensive income prepared by the accounting clerk
has the following three mistakes:
1. The dividend of $20,000 received from BTM recognized as investment income in the
books of TOP has not been eliminated.
2. The gain on the sale of capital assets of $50,000 sold by BTM to TOP is unrealized
and therefore should have been eliminated.
3. Finally, the excess depreciation of $10,000 recognized by TOP in relation to the
capital assets purchased from BTM should also have been eliminated.
4. The correct consolidated statement of comprehensive income is provided below:
[Top Corporation owns 80% of Bottom Company —Direct Method]
Sales ($900,000 + $400,000 – $60,000) $1,240,000
Gain on sale of capital assets ($50,000 – $50,000) 0
Investment income ($20,000 – $20,000) 0

1,240,000
Cost of goods sold ($600,000 + $200,000 – $60,000 + $10,000) 750,000
Gross profit 490,000
Expenses
Selling and administrative ($120,000 + $90,000) 210,000
Depreciation ($50,000 + $40,000 – $10,000) 80,000
290,000
200,000
Income taxes ($60,000 + 48,000) 108,000
Net income and comprehensive Income $92,000
Owners of the parent $85,600
Non-controlling interests [$72,000 – $50,000 + $10,000] × (0.20) $6,400
P5-14
Jan. 1, 20X8 FVTOCI investment
300,00
0
Cash 300,000
Dec. 31, 20X8 Cash 12,500
Dividend Income 12,500
Dec. 31, 20X8 FVTOCI investment
150,00
0
OCI 150,000
To revalue FVTOCI investment to fair value
Measure step on conversion to significant influence on Jan. 1, 20X9
Purchase price for 25% $ 450,000
Imputed value based on purchase price $1,800,000
Less shareholder equity of Lee Chan (1,500,000)
Fair value adjustment 300,000
Allocated to Inventory (decrement since overvalued in Lee Chan’s
books) 100,000
Building $400,000
Amortization of FVI allocated to building:
FVI Life Amortization per year
Building $400,000 10 $40,000

Calculation of Mallik’s Share of Lee Chin’s Income 20X9
Lee Chan Income in 20X9
$200,00
0
Add Inventory FVD Amortization 100,000
Less Building FVI Amortization (40,000)
Unrealized gain on inventory ($50,000 × 0.50) (25,000)
Lee Chan adjusted income
$235,00
0
Mallik 25% share $58,750
Mallik’s 25% share of the dividend $18,750
Jan. 1, 20X9 Investment in Lee Chin
450,00
0
FVTOCI investment
450,00
0
Dec. 31, 20X9 Investment in Lee Chin 58,750
Income from Lee Chin 58,750
Dec. 31, 20X9 Cash 18,750
Investment in Lee Chin 18,750
Dec. 31, 20X9 Investment in Lee Chin 6,250
Income from Lee Chin 6,250
Unrealized gain on inventory now realized since
investment in Lee Chin sold ($50,000 × 0.50 ×
0.25)
Dec. 31, 20X9 Cash
360,00
0
Loss on sale of investment
136,25
0
Investment in Lee Chin
496,25
0
P5-15
Measure Step:
Purchase price for 75% of Szabo
$637,50
0

Ownership interest 75%
Grossed-up value based on purchase price paid for Penny’s
75% share
$850,00
0
Less carrying value:
Common shares
$550,00
0
Retained earnings 125,000 675,000
Fair value increment 175,000
Allocated to inventory (decrement since overvalued) 85,000
Balance allocated to buildings
$260,00
0
PPD amortization schedule for buildings:
Carrying
value/FVA
Allocated
Amort.
period
Amort. in
20X1
Amort. in
20X2
Balance
remaining at
end of 20X2
Penny carrying $150,000 15 $10,000 $10,000 $130,000
Szabo carrying 75,000 10 7,500 7,500 60,000
Szabo FVA 260,000 10 26,000 26,000 208,000
$398,000
Szabo Dividends
20X1 20X2
Szabo Dividend
$30,00
0 $20,000
NCI Share 7,500 5,000
Penny Share 22,500 15,000
1.
20X1 20X2
Income $50,000 $65,000
Amortization of FVD Inventory 85,000
Amortization of FVI Building (26,000) (26,000)
$109,00
0 $39,000
NCI Share $27,250 $9,750
Penny $81,750 $29,250
2.
20X1 20X2
Penny equity basis income $ 60,000 $ 70,000
Penny share of Szabo income (81,750) (29,250)

(21,750) 40,750
Add dividend income 22,500 15,000
Penny cost basis income $750 $55,750
3.
Penny retained earnings 20X2— equity method $250,000
Less equity basis income for 20X2 (70,000)
Less equity basis income 20X1 (60,000)
Retained earnings 20X0 not adjusted for dividends 120,000
Add cost basis net income for 20X1 750
Add dividends paid in 20X2 60,000
Retained earnings balance in 20X1—cost method $180,750
4.
NCI beginning of 20X1 $212,500
Add NCI share of 20X1 income 27,250
Less share of 20X1 dividend (7,500)
NCI balance at the end of 20X1 232,250
Add NCI share of 20X2 income 9,750
Less share of 20X2 dividend (5,000)
5.
Beginning investment in Szabo balance $ 637,500
Add share of income in 20X1 81,750
Less share of dividend in 20X1 (22,500)
Ending investment in Szabo balance in 20X1 696,750
Add share of income in 20X2 29,250
Less share of dividend in 20X2 (15,000)
Ending investment in Szabo balance in 20X2 $711,000
6.
Szabo balance from 5. above $711,000
Imputed value at end of 20X2 [$711,000 × (100%/75%)] $948,000
Less Szabo common shares
$550,00
0
Less Szabo retained earnings ($125,000 + $50,000 – $30,000
+ $65,000 – $20,000) 190,000 (740,000)
Unamortized FVI 208,000
Add Penny buildings carrying value (net) 130,000
Add Szabo buildings carrying value (net) 60,000
Total buildings (net) $398,000

P5-16
Check to ensure there is no bargain purchase:
FV of 100% of net identifiable assets $825,000
FV of 80% of net identifiable assets 660,000
Purchase price for 80% $800,000
Measure:
1.FV of 100% of Sub. based on purchase price for 80%
$1,000,00
0
Less carrying value of 100% of net identifiable assets (600,000)
Net fair value adjustment $400,000
FVA Allocation:
Carrying Fair Adj. Adj.
Total
Adj.
Cash $250,000 $250,000 $0 $0
Accounts Receivable 150,000 150,000 0 0
Inventory 175,000 250,000 75,000 75,000
Land & Building 550,000 550,000 (250,000) 250,000 0
Less accumulated
depreciation (250,000) 0 250,000 250,000
Investments 115,000 150,000 35,000 35,000
Goodwill 160,000 0 (160,000)
(160,000
)
Accounts Payable (225,000)
(200,000
) 25,000 25,000
Total FVA allocated
to net identifiable
assets
($225,000
)
Goodwill 175,000
NCI balance @ 20% of fair value of 100% of sub $200,000
FVA Amortization Schedule:
FVI Allocated
Useful
Life
Amortz./
Year 20X1 20X2 Balance

Inventory $75,000 $75,000 $0
Land & buildings 250,000 5 50,000 50,000 50,000 150,000
Investments 35,000 35,000
Accounts Payable 25,000 25,000 0
Goodwill 175,000 175,000
Total $560,000 $150,000 $50,000 $360,000
2.Eliminate Unrealized and Recognize Realized Gains
20X1:
Unrealized gains on upstream sales of inventory
Goods sold $250,000
Profit % 30%
Profit 75,000
Unsold portion/percentage 0.33
Unrealized gains on upstream sales of inventory $25,000
Unrealized gains on downstream sales of inventory
Goods sold $300,000
Profit % 25%
Profit 75,000
Unrealized gains on downstream sales of inventory $37,500
20X2:
Unrealized gains on upstream sales of inventory
Goods sold $200,000
Profit % 30%
Profit 60,000
Unrealized gains on upstream sales of inventory $30,000
Unrealized gains on downstream sales of inventory
Goods sold $350,000
Profit % 25%
Profit 87,500
Unrealized gains on downstream sales of inventory $35,000
Unrealized gain on sale of investments by sub to parent 20X2
Sale price $145,000
Gain on sale of investments (per sub's SE SCI) (30,000)

Carrying value of subs investments $115,000
Therefore, sub did not buy any other investment after its acquisition by parent
Unrealized gain on upstream sale of investment in 20X2 30,000
3. NCI Balance at the End of 20X1:
RE of subsidiary at the beginning of 20X2 $275,000
Less RE of subsidiary at the time of acquisition 150,000
Change in RE from acquisition till end of 20X1 $125,000
Less/Add Consolidation adjustments:
Unrealized gain on upstream sale of inventory in 20X1 (25,000)
Amortization of FVI in 20X1 from schedule (150,000)
Adj. change in RE of subsidiary in 20X1 ($50,000)
Share of NCI @ 20% ($10,000)
Parent's share @ 80% ($40,000)
NCI balance at end of 20X1
Less NCI share of change in RE of sub in 20X1 (10,000)
4. Consolidated RE at the End of 20X1:
Separate entity of parent end of 20X1 $900,000
Less unrealized gain on downstream sale of inv. In 20X1 (37,500)
Less share of adj. RE of sub in 20X1 (40,000)
Consolidated RE at the end of 20X1 $822,500
5. Adjusted Income of Sub in 20X2:
Subsidiary Inc. in 20X2 $250,000
Add realized gain on upstream sale in 20X1 25,000
Less unrealized gain on upstream in 20X2 (30,000)
Less unrealized gain on upstream sale of investments in 20X2 (30,000)
Less amortization of FVI in 20X2 (50,000)
Adjusted income of sub in 20X2 $165,000
NCI share @ 20% $33,000
Parent's share @ 80% $132,000
6. Adjusted Income of Parent in Year 2:

Parents separate entity income in 20X2 $400,000
Less parent's dividend income from sub (80,000)
Add realized gain on downstream sale in 20X1 37,500
Less unrealized gain on downstream sale in 20X2 (35,000)
Adjusted income of parent in 20X2 $322,500
Consolidated Income in Year 2:
Adjusted income of parent 20X2 $322,500
Adjusted income of sub 20X2 165,000
Consolidated income in 20X2 $487,500
Allocation
7. NCI share @ 20% of $165,000 $33,000
8. Parent's share @ 80% $454,500
9. Consolidated RE End of Year 2:
Consolidated RE end of 20X1 $822,500
Add share of consolidated Inc 20X2 454,500
Less dividend income (150,000)
Consolidated RE end of 20X2
$1,127,00
0
10. NCI Balance at the End of Year 2:
NCI share of adjusted income in 20X2 33,000
NCI share of dividends in 20X2 (20,000)

Appendix 5A
ANSWERS TO REVIEW QUESTIONS
5A-1: A step purchase is the acquisition of significant influence or control over another
company by a series of two or more purchases of shares rather than by a single purchase.
5A-2: Under the acquisition method, an acquired entity is valued at its fair market value
on the date control is obtained. Any fair value increment/decrement determined on that
date is allocated to the acquired entity’s identifiable assets and liabilities on that date, and
the remaining FVI if any is attributed to goodwill. Therefore, in the present case, goodwill
relating to the acquisition of S Inc. will be determined on April 1, 20X5 when P Ltd
presumably obtained control over S Inc. Further, increases/decreases in the share
ownership in S Inc. by P Ltd., which do not lead to change in control, are reported as
equity transactions, and thus do not lead to further changes in the value of the goodwill.
5A-3: When a step acquisition has occurred, the subsidiary’s net assets are measured at
their fair values only on the date on which control is obtained over the subsidiary. Further
step acquisitions, which do not lead to a change in control, are reported as equity
transactions, and therefore, the subsidiary’s net assets are not re-measured to their fair
market values on the dates of such step acquisitions. Note that control can be lost despite
purchasing additional shares, if substantially more shares are issued to third parties thereby
changing the status of the parent from a majority to a minority shareholder.
5A-4: The acquisition of the additional 20% gives P Corp. a 60% interest in S. Instead of
reporting its investment in S on the equity basis, P will now have to consolidate S.
5A-5: The fair value increments and goodwill for the entire 42% are determined on the
date of the second purchase which results in P Inc. gaining significant influence over S
Corp.
SOLUTIONS TO PROBLEMS
P5A-1
Since Sap Ltd. has 100,000 shares outstanding, Pine initially purchased 30,000 shares @
$2.33 per share on January 1, 20X3, and an additional 35,000 shares @ $3.14 per share
on January 1, 20X4.
Cost method of recording:
January 1, 20X3:
Investment in Sap 70,000
Cash 70,000

January 1, 20X4:
Cash 110,000
Equity method of recording:
January 1, 20X3:
Cash 70,000
December 31, 20X3:
Equity in earnings of Sap 21,000
($70,000 NI × 30%)
January 1, 20X4:
Cash 110,000
December 31, 20X4:
Equity in earnings of Sap 52,000
($80,000 × 65%)
Fair value method of recording:
January 1, 20X3:
Cash 70,000
Dec 31, 20X3
Gain on revaluation to fair valuea
24,200

[($30,000 × $3.14) – $70,000]
January 1, 20X4:
Cash 110,000
December 31, 20X4
Gain on revaluation to fair valuea
7,150
[$65,000 × ($3.25 – $3.14)]
Note:
a
Where the gain on revaluation to fair value is taken to depends on the classification of
the investment. If the investment is considered a fair value through profit & loss
investment, the gain is taken to net income. On the other hand if it is irrevocably classified
as a fair value through OCI investment, the gain is taken to OCI.
P5A-2
Measure:
Consideration given
$295,00
0
Carrying value of net assets:
Common shares $100,000
Percentage acquired 350,000
60% $210,000
Ownership in FV increments:
Inventory ($50,000 × 60%) $ (30,000)
Capital assets, net ($100,000 × 60%) 60,000
Accounts payable ($25,000 × 60%) (15,000) 15,000 225,000
Goodwill $70,000
FVI Amortization:
Inventory 30,000 in 20X4
Capital assets, net ($60,000/10 years) 60,000/year
Accounts payable (15,000) in 20X4
Investment in SL:
Cost of investment-Dec. 31, 20X3 $295,000
Income—20X4 (0.60 × $60,000) 36,000
Dividends—20X4 (0.60 × $5,000) (3,000)

Amortizations—20X4
Inventory
$30,00
0
Capital assets, net (6,000)
Accounts payable 15,000 (39,000)
Fair value of investment in SL updated and adjusted to Dec. 31, 20X4 $289,000
Updated fair value of 100% of SL ($289,000 × (100%/60%) $481,667
Add proceeds of additional $6,000 shares issued to PC 130,000
Net assets of SC updated for issue of 6,000 additional shares $611,667
Value of PC's 75%* share $458,750
Less carrying value of investment in SL including additional investment 419,000
Positive adjustment to equity $39,750
Value of PC's 75% share from above $458,750
Income-20X5 (0.75* × $70,000) 52,500
Dividends-20X5 (0.75* × $10,000) (7,500)
Amortizations-20X5:
Capital assets, net [($100,000/10) × 0.75 (7,500)
Investment in SL Limited account, Dec. 31, 20X5 $496,250
* 6,000+6,000 = 0.75
10,000+6,000
P5A-3
Measure:
Consideration given $558,000
Carrying value of net assets:
Common shares $100,000
500,000
Percentage acquired 60% $300,000
Ownership in FV adjustments:
Patent ($55,000 × 60%) 33,000 33,000 333,000
Goodwill @ 60% $225,000
Patent Amortization per year:
Carrying value ($110,000/11) $10,000
FVI ($55,000/11) 5,000

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