Here is a thread explaining the 15 working paper entries related to business combination. Sana makatulong 😁
WP 1 is all about the elimination of the SHE of the acquired at the date of acquisition.
Assuming the parent acquired 80% of the subsidiary
RE xx
Share capital xx
Share premium xx
NCINAS xx (20%)
Inv. in Subsidiary xx (80%)
Assuming the parent acquired 80% of the subsidiary
RE xx
Share capital xx
Share premium xx
NCINAS xx (20%)
Inv. in Subsidiary xx (80%)
WP 2 is about recognizing the excess of the IDENTIFIABLE assets of the acquired company.
Merch. Inv xx (undervalued)
Equipment xx (undervalued)
Land (overvalued)
NCINAS xx (20%)
Inv. in Subsidiary xx (80%)
Merch. Inv xx (undervalued)
Equipment xx (undervalued)
Land (overvalued)
NCINAS xx (20%)
Inv. in Subsidiary xx (80%)
In short, get the fair value differential of all the identifiable assets (undervaluation - overvaluation) then multiply it by 80% to get the eliminating credit to Investment in Subsidiary and 20% to give rise to NCINAS
WP 3 is to recognize the result of business combination. ( Either goodwill or gain on bargain purchase)
GW xx
Inv. in Subsidiary xx
NCINAS xx
Note: This time, to get the credit to Investment in Sub. and NCINAS, you need to create a goodwill schedule
GW xx
Inv. in Subsidiary xx
NCINAS xx
Note: This time, to get the credit to Investment in Sub. and NCINAS, you need to create a goodwill schedule
Goodwill schedule:
Parent's share in the total goodwill:
Total consideration transferred - 80% of the FV of the SHE of the acquired (excluding the pre-existing goodwill)
Subsidiary's share in the total goodwill:
NCINAS - 20% of the FV of the SHE of the acquired also exclude GW
Parent's share in the total goodwill:
Total consideration transferred - 80% of the FV of the SHE of the acquired (excluding the pre-existing goodwill)
Subsidiary's share in the total goodwill:
NCINAS - 20% of the FV of the SHE of the acquired also exclude GW
Note that you will also use this schedule to pro-rate the impairment loss between the parent and subsidiary.
Parent's share in impairment loss: Impairment loss x (Parent's share in the goodwill/ Total goodwill)
vice versa for subsidiary's share in impairment
Parent's share in impairment loss: Impairment loss x (Parent's share in the goodwill/ Total goodwill)
vice versa for subsidiary's share in impairment
WP entries 1 to 3 are all related to the date of acquisition and they will always be true for EVERY YEAR.
Except if the result was a gain on bargain purchase.
Entry this year:
Inv. in Subsidiary xx
Gain on bargain purchase xx
NCINAS xx
Except if the result was a gain on bargain purchase.
Entry this year:
Inv. in Subsidiary xx
Gain on bargain purchase xx
NCINAS xx
Entry next year:
Inv. in Sub. xx
RE xx
NCINAS xx
It is now RE since the gain is a nominal account.
Note that gain on bargain purchase is only attributable to the PARENT and the credit to NCINAS is just an adjustment to gain.
Inv. in Sub. xx
RE xx
NCINAS xx
It is now RE since the gain is a nominal account.
Note that gain on bargain purchase is only attributable to the PARENT and the credit to NCINAS is just an adjustment to gain.
After WP entries 1 to 3.
The results are:
1. The investment in sub. account will be eliminated in the BOOKS of the acquirer.
2. NCINAS will be recognized in the CONSO FS.
3. The book values of the asset of the acquired company will be updated to its respective fair values.
The results are:
1. The investment in sub. account will be eliminated in the BOOKS of the acquirer.
2. NCINAS will be recognized in the CONSO FS.
3. The book values of the asset of the acquired company will be updated to its respective fair values.
Reminders: If the total consideration transferred is different from the investment in sub. account in the trial balance, it is because of a control premium. Never forget control premium when computing for the goodwill.
Note that there will only be an NCINAS if the parent acquired less than 100% of the company. If the subsidiary is a wholly owned by the parent, there is no NCINAS and everything will be attributable to the parent.
WP 4 is a consequence of WP entries 2 and 3.
It is to amortize the EXCESS of the fair value differentials of the assets of the acquired.
Refer to WP 2
CGS xx
......Inventory xx
If the problem is silent, it assumed that the inventory is sold in FULL because it is a current asset
It is to amortize the EXCESS of the fair value differentials of the assets of the acquired.
Refer to WP 2
CGS xx
......Inventory xx
If the problem is silent, it assumed that the inventory is sold in FULL because it is a current asset
NOTE:
If the problem says that 1/4 is sold in the subsequent year, it is safe to assume that 3/4 is sold this year.
If the problem says that 1/4 is sold this year, it also safe to assume that 3/4 is sold in the next year.
If the problem says that 1/4 is sold in the subsequent year, it is safe to assume that 3/4 is sold this year.
If the problem says that 1/4 is sold this year, it also safe to assume that 3/4 is sold in the next year.
Refer to WP 2
Opex xx
Equipment xx
Note that LAND will only be amortized in FULL if it is sold to a third person.
To amortize the excess of the book value over fair value in full because of a SALE
Land xx
Gain xx
Opex xx
Equipment xx
Note that LAND will only be amortized in FULL if it is sold to a third person.
To amortize the excess of the book value over fair value in full because of a SALE
Land xx
Gain xx
Refer to WP 3
Impairment loss xx
GW xx
Note that impairment loss is an opex, because goodwill is a result of business combination for the purpose of operating synergy, thus it is an opex.
Impairment loss xx
GW xx
Note that impairment loss is an opex, because goodwill is a result of business combination for the purpose of operating synergy, thus it is an opex.
WP 5 is all about inter company dividends. It is to eliminate the dividends declared by the subsidiary
Div revenue xx
NCINAS xx (20%)
Div. Declared
Debit div. revenue to eliminate the parent's share(80%) from dividends declared by the subsidiary.
Div revenue xx
NCINAS xx (20%)
Div. Declared
Debit div. revenue to eliminate the parent's share(80%) from dividends declared by the subsidiary.
Debit NCINAS to reduce the value, because of the dividends declared to outsiders - 20% (not including parent which is 80%).
WP 6 is to decrease CNI total to CNI controlling, in preparation for Conso RE.
NCINIS xx ( to decrease)
NCINAS xx ( to increase)
NCINIS xx ( to decrease)
NCINAS xx ( to increase)
WP entry 7 is ONLY TRUE for subsequent years. It is to adjust NCINAS.
Since NCINAS is the accumulated effect of NCI in profit (entry 6) which is an addition and the dividends declared to outsiders (entry 5) which is a deduction.
Therefore, WP entry 7 is
RE xx
NCINAS xx
Since NCINAS is the accumulated effect of NCI in profit (entry 6) which is an addition and the dividends declared to outsiders (entry 5) which is a deduction.
Therefore, WP entry 7 is
RE xx
NCINAS xx
Note that working papers are SCRATCH PAPERS only. Therefore, WP for the first year is discarded. Working paper entry 7 is made to adjust the effects of the PREVIOUS YEARS. (namely entries 5 and 6, which is about NCINAS).
WP 7 is only TRUE for subsequent years.
WP 7 is only TRUE for subsequent years.
WP 8 to 11 is all about inter company sale of Merchandise inventory.
WP 8 is
Sales xx
COGS xx
To eliminate the inter company sale, which can either be:
Downstream - parent sold to subsidiary
Upstream - subsidiary sold to parent
WP 8 is
Sales xx
COGS xx
To eliminate the inter company sale, which can either be:
Downstream - parent sold to subsidiary
Upstream - subsidiary sold to parent
WP 9 is to eliminate inter company AR and AP assuming the sale is on account.
AP xx
AR xx
AP xx
AR xx
Logic:
X sold goods to parent
Parent sold the goods to subsidiary
Subsidiary eventually sold it to Y
In the conso income statement, we want to make it appear that
Subsidiary bought the goods from X and Parent sold the goods to Y
X sold goods to parent
Parent sold the goods to subsidiary
Subsidiary eventually sold it to Y
In the conso income statement, we want to make it appear that
Subsidiary bought the goods from X and Parent sold the goods to Y
WP 10 is called RPBI, or Realized Profit Beginning Inventory, and it is only TRUE if there had been an inter company sale in the PRIOR year.
RE xx (Since the profit was recognized in the books LAST YEAR, RE is overstated)
CGS xx (to recognize the profit this year)
RE xx (Since the profit was recognized in the books LAST YEAR, RE is overstated)
CGS xx (to recognize the profit this year)
WP 11 is UPEI or Unrealized Profit Ending Inventory and it is for the CURRENT year.
CGS xx (to remove the profit)
MI xx ( to reduce the mark up of the selling affiliate)
Note that if the BUYING affiliate sold all its inter company purchases, there will not be an entry 11.
CGS xx (to remove the profit)
MI xx ( to reduce the mark up of the selling affiliate)
Note that if the BUYING affiliate sold all its inter company purchases, there will not be an entry 11.
Formulas:
Assuming this year:
Ending inventory of Parent x GP rate of subsidiary = UPEI or RPBI in the next year (Upstream) sub. sold to parent
Ending inventory of subsidiary x GP rate of parent = UPEI or RPBI in the next year (Downstream) - parent sold to sub.
Assuming this year:
Ending inventory of Parent x GP rate of subsidiary = UPEI or RPBI in the next year (Upstream) sub. sold to parent
Ending inventory of subsidiary x GP rate of parent = UPEI or RPBI in the next year (Downstream) - parent sold to sub.
Be careful when looking at the rate given because it may be BASED ON COST.
Example:
25% based on cost.
To solve for GP rate, 25/125 = 20%
Example:
25% based on cost.
To solve for GP rate, 25/125 = 20%
To summarize:
RPBI is recognized in the books last year, but in the conso this year.
UPEI is recognized in the books this year, but in the conso next year, because next year, it becomes RPBI.
RPBI is recognized in the books last year, but in the conso this year.
UPEI is recognized in the books this year, but in the conso next year, because next year, it becomes RPBI.
Downstream sales will only affect the CNI - Controlling
Upstream sales will affect BOTH the CNI - controlling and CNI - non controlling.
Since everything related to the parent is ONLY for the parent.
But everything related to the subsidiary is both for the parent and subsidiary.
Upstream sales will affect BOTH the CNI - controlling and CNI - non controlling.
Since everything related to the parent is ONLY for the parent.
But everything related to the subsidiary is both for the parent and subsidiary.
Reminders, the entries that you need to consider to solve for the Conso CGS and Sales
CGS: 4,8,10,11 + the values in the income statement
Conso Sales: 8 + the values in the income statement
CGS: 4,8,10,11 + the values in the income statement
Conso Sales: 8 + the values in the income statement
WP entries 12 to 15 is about inter company sale of PPE
WP 12 is about unrealized gain.
It is to eliminate the gain of the selling affiliate and to return the PPE to its original carrying value.
Gain xx
Equipment xx
Acc. Dep xx
WP 12 is about unrealized gain.
It is to eliminate the gain of the selling affiliate and to return the PPE to its original carrying value.
Gain xx
Equipment xx
Acc. Dep xx
Example: assuming the cost of the equipment in the books of the parent is 500k and the accum. dep is 100k with a remaining life of 10 years. It was purchased by the subsidiary for 600k.
SP 600k - CV 400k = 200k gain in the BOOKS.
SP 600k - CV 400k = 200k gain in the BOOKS.
Gain 200k (to eliminate the gain)
Equipment 100k (since the new cost is 600k and the old cost is 500k)
Acc. Dep 100k ( to recognize the acc. dep.)
600k cost minus 100k(credit to Equipment) - 100k ( credit to Acc. dep) = 400k or the ORIGINAL Carrying value
Equipment 100k (since the new cost is 600k and the old cost is 500k)
Acc. Dep 100k ( to recognize the acc. dep.)
600k cost minus 100k(credit to Equipment) - 100k ( credit to Acc. dep) = 400k or the ORIGINAL Carrying value
WP 13 is to realize the gain because of usage (over remaining life)
Gain 200k / 10 remaining life: 20k ANNUALY
Acc. Dep. 20k
Dep. Ex 20k ( to recognize the gain)
Gain 200k / 10 remaining life: 20k ANNUALY
Acc. Dep. 20k
Dep. Ex 20k ( to recognize the gain)
Logic:
In the books of the buying affiliate, the depreciation recognized is
600k /10=60k
But in the conso, we want to make it look like the selling affiliate STILL OWNS the equipment, so the depreciation SHOULD BE
400k/10=40k
Therefore there is an overstatement of depreciation
In the books of the buying affiliate, the depreciation recognized is
600k /10=60k
But in the conso, we want to make it look like the selling affiliate STILL OWNS the equipment, so the depreciation SHOULD BE
400k/10=40k
Therefore there is an overstatement of depreciation
Debit Acc. dep to eliminate the overstatement of depreciation
Credit Dep. expense to recognize the gain
Credit Dep. expense to recognize the gain
WP 14 is about Unrealized loss.
Example: assuming the cost of the equipment in the books of the parent is 500k and the accum. dep is 100k with a remaining life of 10 years. It was purchased by the subsidiary for 300k.
SP 300k - CV 400k = 100k loss in the BOOKS.
Example: assuming the cost of the equipment in the books of the parent is 500k and the accum. dep is 100k with a remaining life of 10 years. It was purchased by the subsidiary for 300k.
SP 300k - CV 400k = 100k loss in the BOOKS.
Equipment 200k
Loss 100k
Acc. Dep 100k
Equip. cost 300k + 200k debit - 100k acc. dep = 400k which is the ORIGINAL carrying value.
Entry 14 and 15 follows the same logic of 12 and 13, except that the situation is a loss.
Loss 100k
Acc. Dep 100k
Equip. cost 300k + 200k debit - 100k acc. dep = 400k which is the ORIGINAL carrying value.
Entry 14 and 15 follows the same logic of 12 and 13, except that the situation is a loss.
WP 15 is to realize the loss.
Loss 100k / remaining life 10 = 10k
Dep. expense 10k ( to recognize the loss)
Acc. Dep. 10k (to compensate for the understatement of dep. ex in the BOOKS)
Loss 100k / remaining life 10 = 10k
Dep. expense 10k ( to recognize the loss)
Acc. Dep. 10k (to compensate for the understatement of dep. ex in the BOOKS)
To summarize:
WP entry 1-3 is all about the date of acquisition. ( Which is true and the same for all years, except entry 3 if the result is a GAIN)
Note, in the second year, when you amortize the EXCESS of the fair values, the previous year amortization will be in the form of RE
WP entry 1-3 is all about the date of acquisition. ( Which is true and the same for all years, except entry 3 if the result is a GAIN)
Note, in the second year, when you amortize the EXCESS of the fair values, the previous year amortization will be in the form of RE
WP 4 in the SECOND year
RE xx (% sold last year)
CGS xx (% sold this year)
Merch. Inv. xx (total of year 1 and 2)
Impairment loss xx
RE xx
GW xx(total of year 1 and 2)
RE xx (% sold last year)
CGS xx (% sold this year)
Merch. Inv. xx (total of year 1 and 2)
Impairment loss xx
RE xx
GW xx(total of year 1 and 2)
That's it, 15 working paper entries. Big thanks to Sir German for the entries. Hope this helps. Let us all celebrate knowledge! 😁
In case of sale to third parties
Assuming sold on july
Acc dep. xx
Dep ex. xx
To realize the gain for the use of equipment for 6 months, RG annual x 6/12
Acc. Dep. xx
Gain xx
for the REMAINING UG that has not been realized yet
UG total - realized UG
Assuming sold on july
Acc dep. xx
Dep ex. xx
To realize the gain for the use of equipment for 6 months, RG annual x 6/12
Acc. Dep. xx
Gain xx
for the REMAINING UG that has not been realized yet
UG total - realized UG
If ever may questions regarding the entries pwede ako tanungin. I'll answer to the best of my capabilities. Thank you! 😊
Entries in WP 12 and 13 for the succeeding years.
RE(Gain in the previous yr) x
Equipment x
Acc. Dep. x
Acc. Dep x
RE (realized gain in the previous years) x
Acc. Dep x
Dep. Expense (realized gain) x
RE(Gain in the previous yr) x
Equipment x
Acc. Dep. x
Acc. Dep x
RE (realized gain in the previous years) x
Acc. Dep x
Dep. Expense (realized gain) x
Entry for inter company sale of land (assuming gain)
Gain x
Land x
Assuming sold to a third party in the succeeding year
RE x (To eliminate the gain in the previous year)
Gain x (To recognize the gain in the proper period)
Gain x
Land x
Assuming sold to a third party in the succeeding year
RE x (To eliminate the gain in the previous year)
Gain x (To recognize the gain in the proper period)
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