Book 11

PAX & SAX COMPANY Up-stream
On January 1, 2010, Pax Company acquired 80% of the outstanding 80% of the outstanding common stock of Sax Co. for
P 640,000. On that date, the retained earnings of Sax Company were P 200,000 and there have no changes in its capital
stock and additional paid in capital.
All of the assets and liabilities of Sax Company had book values approximately equal to their respective market
values, except for equipment, which has a market value P 100,000 higher than the book value.
Pax uses the cost method to account for this investment. The equipment has a useful life of 8 years from the date of
acquisition.
On August 1, 2013, Sax Company sold an equipment to Pax Company at a loss of P 36,000. Sax made the following entry
on its books:
Cash 30,000
Loss on sale of equipment 36,000
Equipment-net 66,000
The equipment is estimated to have a remaining life of three years from the date of the sale.
The financial statement of the companies for the year ended December 31, 2013 are shown below:
A BALANCE SHEET PAX CO. SAX CO.

Cash 74,000 50,000
Accounts receivable 90,000 30,000
Inventories 60,000 40,000
Equipment 287,200 690,000
Investment in SAT Company 640,000 0
Total assets 1,151,200 810,000
Accounts payable 160,000 40,000

Ordinary shares 400,000 300,000
Share premium - 200,000
Retained earnings 591,200 270,000
Total liabilities & equity 1,151,200 810,000
B INCOME STATEMENT
Sales 800,000 200,000
Cost of sales 400,000 150,000
Gross income 400,000 50,000

Dividend income -
Total income 400,000 50,000

Operating expenses 220,000 44,000
Loss on sale of equipment - 36,000
NET INCOME 180,000 (30,000)
C RETAINED EARNINGS STATEMENT

Retained earnings, Jan 1, 2013 491,200 300,000
Add: Net income 180,000 (30,000)
671,200 270,000
Less Dividends 80,000 -
Retained earnings, Dec 31, 2013 591,200 270,000
REQUIRED: From the data given above, prepare a consolidation working paper.
SOLUTION: 80% 20%

A COMPUTATION OF COST/BOOK VALUE DIFFERENTIAL 100% AMOUNT PARENT MINORITY
Acquisition cost
Less: Book value acquired
DIFFERENCE (due to)

Increase in equipment
GOODWILL/SHARE OF MINORITY
B CONSOLIDATED NET INCOME

Share in subsidiary income
Increase in depreciation - /
Unrealized loss on sale UPSTREAM
Realized loss on sale UPSTREAM
Adjusted income from subsidiary/Minority interest net income

Add: PARENT's separate net income
CONSOLIDATED NET INCOME
C RETAINED EARNINGS
Retained earnings, Jan 1, 2007 of subsidiary
Retained earnings, Jan 1, 2005 of subsidiary
Parent's percentage interest in subsidiary
Parent's share in the increase of building depreciation for
Adjustment of parent's Retained earnings January 1, 2008 to convert to EQUITY METHOD -
D ELIMINATION ENTRIES: CONSOLIDATED NET INCOME - SUBSEQUENT YEARS DEBIT CREDIT

1 b Retained earnings, Jan 1
Ordinary share
Share premium
Investment in Sax
Minority interest
2c Equipment-net
Investment in Sax
Minority interest
3a Investment in Sax
Retained earnings, Jan 1
Dividend income
Minority interest
Dividends
4d Expenses
Equipment-net
Sales
Cost of goods sold
5e Minority interest
Minority interest income
upstream
6f Equipment-net
Loss on sale of equipment
7g Expenses
Equipment-net
E WORKING PAPER
ELIMINATIONS CONSOLI
BALANCE SHEET PAX CO. SAX CO. DEBIT CREDIT BS
Cash 74,000 50,000
Accounts receivable 90,000 30,000
Inventories 60,000 40,000
Equipment 287,200 690,000 C - D -
F - G -
INVESTMENT IN SAX 640,000 0 A - B -
C -
Goodwill 0 0
Total assets 1,151,200 810,000
Accounts payable 160,000 40,000

Ordinary shares 400,000 300,000 B -
Share premium 200,000 B -
Retained earnings 591,200 270,000
MINORITY INTEREST (MINAS) E - B -

C -
Total liabilities & equity 1,151,200 810,000
INCOME STATEMENT
Sales 800,000 200,000
Cost of sales 400,000 150,000
Gross income 400,000 50,000

Loss on sale of equipment 0 0
Total income 400,000 50,000

Operating expenses 220,000 44,000 D -
G -
Loss on sale of equipment - 36,000 F -
NET INCOME 180,000 (30,000)
Minority Interest Net Income E -
Consolidated Net Income
RETAINED EARNINGS STATEMENT

Retained earnings, Jan 1, 2013 491,200 300,000 B - A -
Add: Net income 180,000 (30,000)
671,200 270,000
Less Dividends 80,000 -
Retained earnings, Dec 31, 2013 591,200 270,000 - -

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PAX & SAX COMPANY Up-stream

A BALANCE SHEET PAX CO. SAX CO.

Accounts payable 160,000 40,000

Gross income 400,000 50,000

Total income 400,000 50,000

NET INCOME 180,000 (30,000)

C RETAINED EARNINGS STATEMENT

SOLUTION: 80% 20%

DIFFERENCE (due to)

B CONSOLIDATED NET INCOME

Adjusted income from subsidiary/Minority interest net income

CONSOLIDATED NET INCOME

Parent's percentage interest in subsidiary

Parent's share in the increase of building depreciation for

Adjustment of parent's Retained earnings January 1, 2008 to convert to EQUITY METHOD -

D ELIMINATION ENTRIES: CONSOLIDATED NET INCOME - SUBSEQUENT YEARS DEBIT CREDIT

Total assets 1,151,200 810,000

Accounts payable 160,000 40,000

Retained earnings 591,200 270,000

MINORITY INTEREST (MINAS) E - B -

Total liabilities & equity 1,151,200 810,000

Gross income 400,000 50,000

Total income 400,000 50,000

Minority Interest Net Income E -

Consolidated Net Income

RETAINED EARNINGS STATEMENT

Retained earnings, Dec 31, 2013 591,200 270,000 - -

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