BUSINESS COMBINATION
1. On December 2015, Killua Ltd. acquired all the assets and liabilities of Gon Ltd. with Killua Ltd. issuing 100,000
shares to acquire these net assets. The fair value of Gon Ltd.’s assets and liabilities at this date were:
Cash
P50, 000
Furniture and Fittings
20, 000
Accounts Receivable
5, 000
Plant
125, 000
Accounts Payable
15, 000
Current Tax Liability
8, 000
Provision for annual leave
2, 000
The financial year for Killua Ltd. is January- December.
The fair value of each Killua Ltd. share at acquisition date is 1.90. At acquisition date, the acquirer could only
determine a provisional fair value for the plant. On March 1, 2016, Killua Ltd. received the final value from the
independent appraisal, the fair value at acquisition date being P131, 000. Assuming the plant had a further five
year life from the acquisition date.
The amount of goodwill arising from the business combination at December 1, 2015 ?
a. P15, 000
c. P5, 000
b.
9, 000
d.
0
ANSWER: B
Consideration transferred (100, 000 x 1.90)
Less: Fair Value of net identifiable assets acquired
Cash
Furniture & Fittings
Accounts Receivable
Plant
Accounts Payable
Current tax liability
Liabilities
Goodwill
P190, 000
P50, 000
20, 000
5, 000
131, 000
(15, 000)
(8, 000)
(2, 000)
181, 000
P9, 000
2. The E. Vendivel Company acquired the net assets of the Vivar Company on January 1, 2015 and made the
following entry to record the purchase:
Current Assets……………………………………… 100, 000
Equipment…………………………………………… 150, 000
Land…………………………………………………….. 50, 000
Buildings………………………………………………. 300, 000
Goodwill………………………………………………. 100, 000
Liabilities………………………………….
80, 000
Common Stock, P1 par…………….
100, 000
Paid-in capital in excess of par…
520, 000
Assuming that the additional shares on January 1, 2017 would be issued on that date to compensate for any fall
in the value of E. Vendivel common stock below P16 per share, the settlement would be to cure the deficiency by
issuing added shares based on their fair values on January 1, 2017. The fair price of the shares on January 1,
2017 was P10.
What is the additional number of shares issued on January 1, 2017 to compensate for any fall in the value of the
stock?
a. P160, 000
b. 100, 0000
c. 60, 000
d. 10, 000
ANSWER: C
Deficiency (16-10) x 100, 000shares issued to acquire………………………………. P600, 000
Divided by: Fair value of the share………………………………………………………
10
Additional number of shares to issued…………………………………………………. P60, 000
3. X Company acquires all of Y Company in an acquisition properly accounted for as an asset acquisition. X
issues 80,000 shares of common stock with a fair value of P8,000,000 for Y’s net assets. The fair values of Y’s
assets and liabilities approximate their book values, except Y has customer lists valued at P3,000,000 that are not
reported on its balance sheet, and its plant assets are overvalued by P5,000,000. Here are the balance sheets of
X and Y prior to the acquisition:
X Company
Y Company
Assets
P30,000,000
P10,000,000
Liabilities
P16,000,000
P 6,000,000
Common stock, $1 par
1,000,000
100,000
Additional paid-in capital
9,000,000
2,900,000
Retained earnings
4,000,000
1,000,000
P30,000,000
P10,000,000
How much goodwill is recognized for this acquisition?
a.
b.
c.
d.
P 2,000,000
P 3,000,000
P 6,000,000
P 11,000,000
ANS:
C
Cost
Fair value of net assets acquired
Reported assets
Customer lists
Liabilities
Goodwill
P8,000,000
P 5,000,000
3,000,000
(6,000,000)
2,000,000
P6,000,000
4 .P acquires all of the voting shares of S by issuing 500,000 shares of P1 par common stock valued at
P10,000,000. Included in the agreement is a contingency guaranteeing the former shareholders of S that
P's shares will be worth at least P18 per share after one year. If the shares are worth less, P will pay the
former shareholders of S enough cash to reimburse them for the decline in value below P18 per share. P
estimates that there is a 5% chance that the stock value will be P16 at the end of one year, and a 95%
chance that the stock value will be P18 per share or higher. A discount rate of 10% is appropriate. What
is the value of the stock price contingency at the date of acquisition?
a.
b.
c.
d.
P 1,000,000
P 45,455
P 50,000
P 863,636
ANS:
B
Rationale: [(P18 - P16) x 500,000] x .05 = P50,000/1.10 = P45,455
5. P purchased all of the outstanding shares of S for P1,300,000 at a time when the underlying book value of
S was P1,200,000. S's assets and liabilities consist of the following:
Fair value
Cash, receivables
Book value
P250,000
P250,000
Inventory
360,000
380,000
Equipment
900,000
600,000
30,000
30,000
Liabilities
The gain on acquisition is:
a.
b.
c.
d.
P140,000
P180,000
P220,000
P260,000
ANS: B
Rationale:
Cost
P1,300,000
Book value
1,200,000
Excess of cost over book value
P 100,000
Excess
Inventory
P(20,000)
Equipment
300,000
Gain
280,000
P 180,000
For questions 6-7:
P Company acquired all of the net assets of S Company. The balance sheet of S Company immediately prior to
the acquisition, along with market values of its assets and liabilities, is as follows:
Accounts
Current assets
Plant & equipment (net)
Patents
Identifiable intangible: brand names
Skilled work force
Goodwill
Liabilities
Common stock, $10 par
Additional paid-in capital
Retained earnings
S Company
book value
market value
P 800,000
P 1,000,000
28,000,000
35,000,000
100,000
2,000,000
0
13,000,000
0
4,000,000
200,000
700,000
21,000,000
20,000,000
2,000,000
3,000,000
3,100,000
6. P Company pays P40,000,000 in cash for S Company, in an acquisition properly reported as a statutory
merger. P records goodwill of:
a.
b.
c.
d.
P18,000,000
P17,300,000
P 9,000,000
P 4,300,000
ANS: C
Rationale: P9,000,000 = P40,000,000 – (P1,000,000 + P35,000,000 + P2,000,000 + P13,000,000 P20,000,000).
7. Now assume P Company pays P30,000,000 in cash to acquire S Company, in an acquisition properly reported
as a statutory merger. P records a gain on acquisition of:
a.
Zero
b. P1,000,000
c. P1,700,000
d. P 5,700,000
ANS: B
Rationale: P(1,000,000) = P30,000,000 – (P1,000,000 + P35,000,000 + P2,000,000 + P13,000,000 P20,000,000).
8.Bats Inc, a new corporation formed and organized because of the recent consolidation of II Inc, and JJ Inc.,
shall issue 10% participating preferred stocks with a par value of P100 for II and JJ net assets contribution, and
common shares with a par value of P50 for the difference between the total shares to be issued and the preferred
shared issued. The total shares to be issued by Bats shall be equivalent to average annual earnings capitalized at
10%. Relevant data on II and JJ follows:
II
P720,000
432,000
46,080
Total assets
Total liabilities
Annual earnings(average)
JJ
P921,600
345,600
69,120
The total preferred shares to be issued and the amount of goodwill to be recognized by Bats are:
a.
b.
c.
d.
Preferred shares: 8,640
Preferred shares: 5,760
Preferred shares: 2,880
Preferred shares: 7,280
Goodwill: P288,000
Goodwill: P288,000
Goodwill: P864,000
Goodwill: P864,000
ANSWER: A
II
P 46,080
Average annual earnings
Divided by: Capitalized at
Total stock to be issued
Goodwill (for Common Stock)
JJ
P 69,120
Preferred stock (same with Net Assets):
864,000/P100 par
TOTAL
P 115,200
10%
P1,152,000
864,000
8,640 shares
9.Companies A and B decide to consolidate. Asset and estimated annual earnings contributions are as follows:
Net asset contribution
Estimated annual earnings
contribution
Co.A
Co. B
Co.C
P300,000
50,000
P400,000
80,000
P700,000
130,000
Stockholders of the two companies agree that a single class of stock be issued, that their contributions be
measured by net assets plus allowances for goodwill, and that 10% be considered as a normal rate of return.
Earnings in excess of the normal rate of return shall be capitalized at 20% in calculating goodwill. It was also
agreed that authorizes capital stock of the new company shall be 20,000 shares with a par value of P100 a
share.
What is amount of goodwill credited to Co. A, and the total contribution of Co.B(net assets plus goodwill)”
a. P100,000; P400,000
b. P150,000;P500,000
c. P100,000; P600,000
d. P200,000; P600,000
ANSWER: C
Company A
Company B
Net Asset Contribution
Add:
Goodwill Average/Annual Earnings
Less: Normal Earnings (10%of net
asset)
Excess earnings
Divided by: Capitalized at
Goodwill
P300,000
P50,000
P400,000
P80,000
30,000
40,000
P20,000
20%
P100,000
P40,000
20%
P200,000
Total contribution(stock to be issued
P400,000
P600,000
10. Malakas Company acquired all of Maganda Corporation's assets and liabilities on January 2,2013, in a
business combination. At that date, Maganda reported assets with a book value of P624,000 and liabilities of
P356,000. Malakas noted that Maganda had P40,000 of research and development costs on its books at the
acquistion date that did not appear to be of value. Malakas also determined that patents developed by Maganda
had a fair value of P120,000 but had not been recorded by Maganda. Except for building and equipment, Malakas
determined the fair value of all other assets and liabilities reported by Maganda approximated Malakas recorded
amounts. In recording the transfer of assets and liabilities to its books, Malakas recorded goodwill of P93,000.
Malakas paid P517,000 to acquire Maganda's asset and liabilities.
If the book value of Maganda's buildings and equipment was P341,000 at the date of acquisition, what was their
fair value?
a. P441,000
b. P417,000
c. P341,000
d. P417,000
Answer: B.
Solution
Computation of Fair Value
Amount paid
P517,000
Book Value of assets
P624,000
Book Value of liabilities.
(356,000)
Book Value of net assets. P268,000
Adjustment for RandD costs. (40,000)
Adjusted book value.
P228,000
Fair value of patent.
120,000
Goodwill recorded.
93,000 (441,000)
Fair value increment of
building and equipment
P76,000
Book value of building and Equipment. 341,000
Fair Value of buildings and equipment P417,000
11. Richard Ltd. and Liway Ltd. are two family owned ice cream producing companies in Pampanga. Richard Ltd.
is owned by the Melad family, while the Basilio family owns Liway Ltd. The Melad family has only one son. and he
is engaged to be married to the daughter of Basilio family. Because the son currently managing Liway Ltd., it is
proposed that he be allowed to manage both companies after the wedding. As a result, it is agreed by the two
families that Richard and Ltd. should take over the net assets of Liway Ltd.
The balance sheet at Liway Ltd. immediately prior to the takeover is as follows:
Accounts receivable
Inventory
Land
Buildings (net)
Farm equipment (net)
Irrigation equipment (net)
Vehicles (net)
Total assets
Accounts payable
Loan-Metrobank
Share capital
Retained earnings
Total
Carrying Amount
Fair Value
P20,000
140,000
620,000
530,000
360,000
220,000
160,000
P2,050,000
P 20,000
125,000
840,000
550,000
364,000
225,000
172,000
P80,000
480,000
670,000
820,000
P2,050,000
P 80,000
480,000
The takeover agreement specified the following details:
* Richard Ltd. is to acquire all the assets of Liway Ltd. and except one of the vehicles (having a carrying amount
of P45,000 and of fair value of P48,000) and assume all the liabilities except for the loan from Metrobank. Liway
Ltd. is then to go, into liquidation.
* Cash at P20,000, half to be paid on date of exchange and half in one year's time. The incremental borrowing
rate is 10% per annum (present value for P1 at 10% for 1 period is 0.909091).
* Supply of a patent relating to the manufacture of ice cream. This has a fair value of P60,000 but has not been
recognized in the records of Liway Ltd. because it resulted from an internally generated research project.
* Richard Ltd. is to supply sufficient cash to enable the debt to Metrobank to be paid for and to cover the
liquidation costs of P5,500. it will also give P150. 000 to be distributed to Mr. an Mrs. Melad to assists in paying
the wedding costs.
* Richard Ltd. is also to give a piece of its own prime land to Liway Ltd. to be distributed to Mr and Mrs. Melad,
this eventually being available to be given to any offspring of the forthcoming marriage. The piece of land in
question has a carrying amount of P80,000 and a fair value of P220,000.
* Richard Ltd. is to issue 90,000 shares, these having a fair value of P14 per share, to be distributed via Liway
Ltd. to the soon to-be-married-daughter of Mr. and Mrs. Melad, who is currently a shareholder in Liway Ltd.
The takeover proceeded as per the agreement with Richard Ltd. incurring incidental acquisition costs of P25,000,
while there were P 18,000 share issue costs.
The amount of goodwill or (bargain purchase gain):
a. P45.682
b. 70,682
c. 118,682
d. P(109,818)
Answer: A
Solution
Consideration transferred:
Shares: (90.000 x P14 per share)
P1,260,000
Cash: Payable Now
20,000
Deferred (P20,000 x 0.909091)
18,182
Patent
60,000
Cash (to Metrobank)
480,000
Liquidation costs
5,500
Wedding costs
150,000
Land
220,000
Less: Fair value of net identifiable assets acquired.
Accounts receivable
P20,000
Inventory
125,000
Land
840,000
Buildings
550,000
Farm equipment
364,000
Irrigation equipment
225,000
Vehicles ( P172,000 - P480,000)
124,000
Accounts payable
(80,000)
Goodwill
P2,213,682
2,168,000
P45,682
12. The Boy George, Company acquired the net assets of the Girl Conrad Company on January 1, 2015, and
made the following entry to record the purchase:
Current Assets100,000
Equipment 150,000
Land 50,000
Buildings 300,000
Goodwill 100,000
Liabilities 80,000
Common stock,P1 par 100.000
Paid in capital in excess at par 520,000
Assuming that additional shares on January 1, 2017 would be issued on that date to compensate for any fall in
the value at Boy George common stock below P16 per share. The settlement would be to cure the deficiency by
issuing added shares based on their fair value on January 1,2017. The fair price of the shares on January 1, 2017
was P10.
What is the additional number of shares issued on January 1, 2017 to compensate for any fall in the value at the
stock?
a. 160,000
b. 100,000
c. 60,000
d. 10,000
Answer: C
Solution
Deficiency: (P16 - P10) x100,000 shares issued to acquire
Divided by: fair value of share
P600,000
P 10
Additional number of shares to issued
60,000
Another example at contingencies is where the acquirer issues to the acquiree and the acquiree is concerned
that the issue of these shares may make the market price at the acquirer ’s shares decline over time.
Therefore the acquirer may offer additional cash or shares if the market price falls below specified amount over a
specific period of time.
13. Fay acquires assets and liabilities of May Company on January 1,2016. To obtain these shares, Fay pays
P400,000 and issues 10,000 shares of P20 par value common stock on this date. Fay's stock had a fair value of
P36 per share on that date. Fay also pays P15,000 to a local investment firm for arranging the transaction. An
additional P10,000 was paid by Fay in stock issuance costs.
The book values for both Fay and May as of January 1,2016 follow. The fair value of each of Fay and May
accoubts is also included. In addition, May holds a fully amortized trademark that still retains P40,000 value. The
figures below are in thousands. Any related questions also in thousands.
May Company
Fay, Inc. Book Value Fair Value
Cash
P900
P80
P80
Receivables
480
180
160
Inventory
660
260
300
Land
300
120
130
Buildings(net)
1,200
220
280
Equipment(net)
360
100
75
Accounts Payable
480
60
60
Long-term liabilities
1,140
340
300
Common Stock
1,200
80
Retained earnings
1,080
480
Assuming the combination is accounted for as an acqusition, immediately after the acquisition, in the balance
sheet of Fay:
What amount will be reported for goodwill?
a. P55
c. P70
b. 65
d. 135
Answer: A.
Consideration Transferred:
Cash
P400
Shares (10,000x36)
360
Total
Less: Fair value of net iden. assets acquired
Cash
P80
Receivables
160
Inventory
300
Land
130
Buildings(net)
280
Equipment(net)
75
Trademark
40
Accounts Payable
(60)
Long-term liabilities
(300)
Goodwill
P760
705
P 55
14. Using the same information in No. 1, what amount will be reported for retained earnings?
a. P1,065
c. P1,525
b. 1,080
d. 1,560
Answer: A.
Acquirer - Fay (at book value)
Less: Acquisition-related costs
Acquiree - May (not acquired)
Retained Earnings
P1,080
15
0
P1,065
15. Using the same information in No. 1, what amount will be reported for cash after the purchase transaction?
a. P980
c. P875
b. P900
d. P555
Answer: D.
Acquirer - Fay (at book value)
Less: Cash paid to acquire net assets of May
Acquisition-related costs
Stock issuance costs
Acquiree - May (fair value)
Cash
P900
400
15
10
80
P555
16.Villena Company issued its common stock for the net assets of Wynona Company in a business combination
treated as an acquisition. Villena's common stock issued was worth P 1,500,000. At the date of combination,
Villena's net assets had a book value of P 1,600,000 and a fair value of P 2,000,000 ; Wynona's net assets had a
book value of P 950,000 and a fair value of P 1,100,000. Immediately following the combination, the net assets of
the combined company should have been reported at what amount?
a. P 3,500,000
b. P 3,100,000
c. P 4,200,000
d. P 2,550,000
Answer: b. P 3,100,000
Solution:
Acquisition Cost
P 1,500,000
Less: Fair Value of Identifiable
Assets Acquired
Goodwill
1,100,000
P 400,000
Villena's Net Assets at Book Value
1,600,000
Wynona's Net Assets at Fair Value
1,100,000
Total Assets After Combination
P 3,100,000
17. On July 1, 2014, Trence Company acquired the net assets of the Yasser Company for a price of P
42,000,000. At the acquisition date the carrying value of Yasser's net asset was P 35,000,000. At the acquisition
date a provisional fair value of the net assets was P 37,000,000. An additional valuation received on April 30,
2015 increased the provisional value to P 38,500,000 and on July 31, 2015 this fair value was finalized at P
40,000,000.
What amount should Trence Company present the goodwill in its statement of financial position at December 31,
2015?
a. P 2,000,000
b. P 7,000,000
c. P 3,500,000
d. P 5,000,000
Answer: c. P 3,500,000
Solution:
Acquisition Cost
P 42,000,000
Fair Value of Identifiable Assets
Acquired
38,500,000
Goodwill
P 3,500,000
Items 18-19 are based on the following data:
Statement of financial position position reflecting uniform accounting procedures l, as well as faire value that are
to be used as basis of the combination are prepared on September 1, 2016 as follows:
Company AceCompany BeeCompany CidAssets
P5,250,000P6,800,000P900,000Liabilities P3,900,000P2,600,000 P480,000Capital stock, all P15 par 1,900,000
1,400,000475,000Additional paid-in capital 400,00040,000Retained earnings(deficit) (450,000)
2,400,000(95,000)Total equitiesP5,250,000P6,800,000P900,000
Ace Company shares have a market value of P22 per share. Market values is not available for shares of Bee
Company and Cid Company .
On September 1, 2016 Ace Company acquires all of the assets and assumes the liability of Bee Company and
Cid Company by issuing P200,000 shares of its stock to Bee Company andpaid 29,000 shares of its stock to Cid
Company. Ace Company pays P10,000 for registering and issuing securities and P20,000 for other acquisition
costs combination.
18. What is the goodwill to be recorded Ace Company on September 1, 2016?
a.
b.
c.
d.
P448,000
P220,000
P400,000
P418,000
19. What is the total stockholders equity in the combined statement of financial position after combination on
September 1, 2016?
a. P6,488,000
b. P3,252,000
c. P6,468,000
d. P6,458,000
Solution #18
Answer: D
Bee Company
Price paid
Net assets.
Goodwill
P4,400,000
4,200,000
P 200,000
Cid Company
Price paid
Net assets
Goodwill.
Total goodwill
P638,000
420,000
P218,000
P418,000
Solution #19
Answer: A
Total Equity
Additional share issuance
Additional paid-in capital.
Registering and issuing fee.
Other acquisition costs .
Total stockholders equity
P1,450,000
3,435,000
1,603,000
(10,000)
(20,000)
P6,458,000
20. The statement of financial position of B.o.B. Company as of December 31, 2013 is as follows:
Assets
Liabilities and Shareholder’s Equity
Cash
175,000
Current Liabilities
250,000
Accounts Receivable
250,000
Mortgage payable
450,000
Inventory
725,000
Ordinary Share Capital 200,000
Property, plant and equipment 950,000
Share Premium
400,000
2,100,000
Accumulated Profits
800,000
2,100,000
On December 31, 2013 the Taylor Swift Inc. bought all of the outstanding shares of B.o.B. Company for P
1,800,000 cash. On the date of acquisition, the fair market value of B.o.B.’s inventories was P 675,000, while the
fair value of B.o.B.’s property, plant equipment was P 1,100,000. The fair value of all other assets and liabilities of
B.o.B. were equal to their book values. In addition, not included above were costs in-process research and
development of B.o.B Company amounting to P 100,000.
Goodwill amounted to:
a. P 400,000
b. P 300,000
Ans. C
Consideration Transferred
Book Value of Net Assets:
c. P 200,000
d. P -0-
P1,800,000
Ordinary Share Capital
Share Premium
Accumulated Profits (P800k+P100k)
Allocable excess
Increase/Decrease in assets:
Inventory (675k-725k)
P.P.E (1100k-P950K)
P200,000
P400,000
P900,000
P300,000
P50,000
(P150,000)
P200,000
21.Bruno Mars Company acquired Billboard Company’s net assets by issuing its own P 14 par value ordinary
shares totaling 50,000 shares at market price of P 14.55. Bruno Mars Company had the following expenditures
incurred:
Finder’s fee paid
Pre-acquisition audit fee,
30% was paid
General administrative costs
Doc stamp paid on issuance
for the combination
Legal fees for the
combination paid
Audit fees for SEC
registration of share issue
SEC registration for the
share issue paid
Share issuance costs paid
(inclusive of taxes paid)
sOther indirect costs paid
P 50,000
40,000
15,000
3,500
32,000
46,000
10,000
10,000
16,000
The total amount debited to expense should be
a. P 153,000
b. P 156,500
c. P 195,000
d. P 191,500
Ans. D
Finder’s fee paid
Pre-acquisition audit fee,
30% was paid
Doc stamp paid on issuance
for the combination
Legal fees for the
combination paid
Audit fees for SEC
registration of share issue
SEC registration for the
share issue paid
Share issuance costs paid
(inclusive of taxes paid)
P 50,000
40,000
3,500
32,000
46,000
10,000
10,000
P191,500
22. On 1 December 2015, Casio Ltd. acquired all the assets and liabilities of Aurora Ltd. With Casio Ltd. Issuing
100, 000 shares to acquire these net assets. The fair value of Aurora Ltd.’s assets and liabilities at this date were:
Cash
Furniture and fittings
Accounts receivable
P50, 000
20, 000
5, 000
Plant
Accounts payable
Current tax liability
Provision for annual leave
125, 000
15, 000
8, 000
2, 000
The financial year for Casio Ltd. is January – December.
The fair value of each Casio Ltd. Share at acquisition date is P1.90. At acquisition date, the acquirer could only
determine a provisional fair value for the plant. On 1 March 2016, Casio Ltd. received the final value from the
independent appraisal, the fair value at acquisition date being P131, 000. Assuming the plant had further five-year
life from the acquisition date.
The amount of goodwill arising from the business combination of December 1, 2015:
a. P15, 000
b. P9, 000
c. P5, 000
d. 0
Ans: B
Solution:
Consideration transferred (100, 000 shares x P1.90)
Less: fair value of net identifiable assets acquired:
Cash
Furniture and fittings
Accounts receivable
Plant
Accounts payable
Current tax liability
Liabilities
Goodwill
P190, 000
P50, 000
2, 000
5, 000
131, 000
(15, 000)
(8, 000)
(2, 000)
181, 000
P9, 000
One of the problems that may arise in measuring the assets and liabilities of the acquiree is that the initial
accounting for the business combination may be incomplete by the end of the reporting period. For example, the
acquisition date may be August 18 and the end of reporting period may be August 31.
In this situation, in accordance with par. 45, the acquirer must report provisional amounts in its financial
statements. The provisional amounts will be best estimates and will need to be adjusted to fair values when those
amounts can be determined after the end of the reporting period. The measurement period in which the
adjustments can be made cannot exceed one year after the acquisition date.
The carrying amount of the plant must be calculated as if its fair value at the acquisition date has been recognized
from that date, with an adjustment to goodwill.
If the plant had a 5-year life from the acquisition dates. Casio Ltd. would have charged depreciation for 1 month in
2015. Extra depreciation of P100 being P6, 000 ÷ 5 years x 1/12 is required in 2016.
The adjusting entry at March 1, 2016 is:
(Adjustment for provisional accounting)
Plant6, 000
Goodwill6, 000
(Adjustment to depreciation due to provisional accounting)
Retained earnings, 1/1/16100
Accumulated depreciation100
If depreciation has been calculated monthly for 2016, further adjustments would be required.
23. Jane Ltd., a supplier of snooker equipment, agreed to be acquire the business of a rival firm, Mercy Ltd. taking
over all assets and liabilities as at 1 June 2016.
The price agreed upon was P40, 000, payable P20, 000 cash and the balance by the issue to the selling company
of P16, 000 fully paid shared in Jane Ltd. these shares having a fair value of P2.5 per share.
The trial balances of the two companies as at 1 June 2016 were as follows (in thousand peso):
Jane Ltd.
Dr.
Share capital
Retained earnings
Accounts payable
Cash
Plant (net)
Inventory
Accounts receivable
Government bonds
Goodwill
P30
50
14
8
12
P114
Mercy Ltd.
Cr.
Dr.
P100
12 P24
2
30
26
20
10
P114 P110
Cr.
P90
20
P110
All the identifiable net assets of Mercy Ltd. were recorded by Mercy Ltd. at fair value except for the inventory
which was considered to be worth P28, 000. The plant had an expected remaining life of five years.
The business combination was completed and Mercy Ltd. went into liquidation. Cost of liquidation amounted to
P1, 000. Jane Ltd. incurred incidental costs of P500. Cost of issuing shares in Jane Ltd. were P400.
The amount of goodwill:
a. P0
b. P2, 000
c. P2, 900
d. P3, 900
Ans. :B
Solution:
Consideration transferred:
Cash
Shares:16, 000 shares x P2.50
Less: fair value of net identifiable assets acquired:
Plant
Inventory
Accounts receivable
Plant
Accounts payable
Goodwill
P20, 000
40, 000
30, 000
28, 000
5, 000
20, 000
(20, 000)
P60, 000
58, 000
P2, 000
It should be noted that acquisition-related costs is not the same with liquidation-related costs even though the
consequence of acquisition is liquidation of the acquiree. Any costs of liquidation or of similar item paid or
supplied by the acquirer should be part of the consideration transferred for reason that it was intended to
complete the process of liquidation. The reason for such inclusion is that the consideration received from the
acquirer may be used to pay for liabilities not assumed by the acquirer and for liquidation expenses which is
tantamount for unrecorded liabilities from liquidation point of view. These items should not be confused with
acquisition-related costs as noted earlier which are considered outright expenses. Further, any liquidation costs or
similar item which was not of the same situation as mentioned above should be treated as expenses.
When it liquidates, costs of liquidation paid by the acquiree should be for the account of the acquire and will be
eventually transferred to stockholders’ equity account. This payment made should considered expenses by the
acquiree in the process of liquidation not unlike payment supplied and made by the acquirer which is intended for
any unrecorded expenses.
Faith Company is acquiring the net assets of Love Company for an agreed upon price of P1000,000 on
April 1,2014. The value was tentatively assigned as follows:
Current Assets
Land
Equipment - 5 year life
Building -20 year life
Current Liabilities
Goodwill
P 100,000
70,000
300,000
500,000
(200,000)
230,000
Values were subject to change during the measurement period. Depreciation is taken to the nearest
month. The measurement period expired on April 1, 2015 at which time the fair value of the equipment
and building as of acquisition date were revised to 280,000 and 600,000, respectively.
24.How much total depreciation expense will be recorded for 2015.
a. 85,000
b. 86,000
c. 83,500
d. 86,500
Ans. B
Equipment 280,000/5
Building 600,000/20
56,000
30,000
86,000
25.How much goodwill is presented in 2015 statement of financial position?
a. 230,000
b. 180,000
c. 150,000
d. 200,000
Ans. C
Agreed price
Less: fair value of net assets
(1,050,000-200,000)
1,000,000
850,000
150,000
26. Westport Ltd. a suplier of snooker equipment, agreed to acquire the business of a rival firm, Manukau Ltd.
taking over all assets and liabilities as at 1June 20x4.
The price agreed upon was P40,000, payable P20,000 cash and the balance by the issue to the selling company
of P16,000 fully paid shares in Westport Ltd. these shares having a fair value of P2.50 per share.
The trial balances of the two companies aa at 1 June 20x4 were as follows:
Westport Ltd
Manukau Ltd.
Share capital
Retained earning
Accounts payables
Cash
P100,000
12,000
2,000
P 30,000
P 90,000
P 24,000
20,000
-
Plant
Inventory
Accounts receivable
Government bonds
Goodwill
50,000
14,000
8,000
12,000
---P 114,000
P 114,000
30,000
26,000
20,000
10,000
P 110,000
P 110,000
All the identifiable net assets of Manukau Ltd. were recorded by manukau Ltd. At fair value except for the
inventory which was considered to be worth P28,000. The plant had an expected remaining life of five years.
The business combination was completed and Manukau Ltd. went into liquidation. Westport Ltd. Incurred
incidental costs of P500 in relation to the acquisition cost. Cost of issuing shares in Wesport Ltd. were P400. The
amount of goodwill to:
A. Nil or zero
B. P2,509
C. P2,900
D. P3,900
ANSWER: B
Cost of investment {20,000 + (16,000
shares x P2.50) + 500 incidental cost}
Less: markt value of net assets acquired:
Plant
Inventory
Account receivable
Plant
Accounts payable
Goodwill
P 60,500
P 30,000
28,000
5,000
20,000
(20,000)
58,000
P 2,500
27. Bats Inc., a new corporation formed and organized because of the recent consolidationof II Inc. and JJ Inc.,
shall issue 10% participating preferred stocks with a par value of P100 for all II andJJ net assets contributions,
and common shares with a par value of P50 for the difference between the total shares to be issued and the
preffered shared to be issued. The total shares to be issued by Bats shall be equivalent to average annual
earnings capitalized at 10%. Relevant data on II and JJ follows:
II
JJ
Total assets....................................
P720,000
P921,600
Total liabilities................................
432,000
345,600
Annual earnings (average)............ 46,080
69,120
The total preferred shares to be issued and the amount of goodwill to be recognized by Bats are:
A. Preferred shares: 8,640
B. Preferred shares: 5,760
C. Preferred shares: 2,880
D. Preferred shares: 7,280
Goodwill: P288,000
Goodwill: P288,000
Goodwill: P864,000
Goodwill: P864,000
ANSWER: A
Average annual arnings
Divided by: capitalized at
Total stock to be issued
II
P 46,080
JJ
P 69,120
Total
P 115,200
10%
P 1,152,000
Less: net assets (for P/S)
Goodwill (for common stock)
Preferred stock (same with
Net assets):864,000/100
864,000
P 288,000
8,640 shares
28. Cormorant Corporatlon paid 800,000 for a 40% Interest in Plumage Company on January 1, 2005 when
Plumage's stockholder's equity was as follows:
10% cumulative preferred stock, $100 par S 500,000
Common stock, $10 par value
S 300,000
Other paid-In capital
S 400,000
Retained earnings
S 800,000
Total stockholders’ equity
S 2,000,000
On this date, the book values of Plumage's assets and liabilities equaled their fair values and there were no
dividends In arrears. Goodwill from the investment is
a.S 0.
b. 150,000.
c. 200,000.
d. None of the above ls correct.
Answer: d
Cost of Cormorant's investment:
$ 800,000
Less: book value acquired:
Total equity
$ 2,000,000
Less: Preferred equity
$ 500,000
Net common equity
$ 1,500,000
x percent acquired
40%
= Plumage book value
$ 600,000
$ 600,000
Goodwill
$ 200,000
29. On February 5, Pryor Corporation paid $1,600,000 for all the issued and outstanding common stock of Shaw,
Inc., in a transaction properly accounted for as an acquisition. The book values and fair values of Shaw's assets
and liabilities on February 5 were as follows:
Cash
Receivables (net)
Inventory
Plant and equipment (net)
Book Value
$ 160,000
180,000
315,000
820,000
Fair Value
$160,000
180,000
300,000
920,000
Liabilities
Net assets
(350,000)
$1,125,000
(350,000)
$1,210,000
What is the amount of goodwill resulting from the business combination?
a) $-0-.
b) $475,000.
c) $85,000.
d) $390,000.
Answer: d
FV of consideration transferred
Less: FV of Net Assets
Goodwill
$ 1,600,000
$ 1,210,000
$ 390,000
On January 1, 20x5, the fair values of Crème’s net assets were as follows:
Current Asset
Equipment
Land
Buildings
Liabilities
P100,000
150,000
50,000
300,000
80,000
30. On January 1, 20x5, Brulee Company purchased the net assets of the Crème Company by issuing 100,000
shares of its P1 par value stock when the fair value of the stock was P6.20. It was further agreed that Brulee
would pay an additional amount on January 1, 20x7, if the average income during the 2-year period of 20x5-20x6
exceeded P80,000 per year. The expected value of this consideration was calculated as P184,000; the
measurement period is one year. What amount will be recorded as goodwill on January 1, 20x5?
a. Zero
c. P180,000
b. P100,000
d. P284,000
Ans: d
Consideration transferred
Shares: (100,000 shares x P6.20)
consideration
Total
Less: Current Assets (at fair values)
Equipment
Land
Buildings
Liabilities
Goodwill
P620,000
Contingent
184,000
P804,000
P100,000
150,000
50,000
300,000
( 80,000)
520,000
P284,000
31.On July 1, 20x5 The Straw Company acquired 100% of the Berry Company for a consideration transferred of
P160 Million. At the acquisition date the carrying amount of Berry’s net assets was P100 Million. At the acquisition
date a provisional fair value of P120 Million was attributed to the net assets. An additional valuation received on
May 31, 20x6 increased this provisional fair to P135 Million and on July 30, 20x6 this fair value was finalized at
P140 Million. What amount should Straw present for goodwill in its statement of financial position on December
31, 20x6, according to PFRS 3 Business Combinations?
a. P20 million
c. P50 million
b. P25 million
d. P60 million
Ans: b
Consideration transferred
Fair Value on May 31, 20x6
Goodwill
P160 million
135 million
P 25 million
32.Hazel Corp. was merged into Sebastian Corp. in a combination properly accounted for as acquisition of
interest. Their condensed sheets before the combination show:
Current assets……………………………………………..
Plant and equipment, net………………………………...
Patents……………………………………………………..
Sebastian
P1,144,000
2,327,000
-
Hazel
P 813,800
520,000
130,000
Total assets………………………………………………..
P3,471,000
P1,463,800
Liabilities…………………………………………………...
Capital stock, par P100…………………………………..
Additional paid-in capital………………………………..
Retained earnings……………………………………......
P1,352,000
1,300,000
195,000
624,000
P
Total Liabilities and Equity……………………………….
P3,471,000
P1,463,800
85,800
650,000
195,000
533,000
Per independent appraiser’s report, Hazel’s assets have fair market values of P826, 800 for current assets, P624,
000 for plant and equipment and P169, 000 for patents. Hazel’s liabilities are properly valued. Sebastian
purchases Hazel’s net assets for P1, 534,000. How should the difference between the book value of Hazel’s net
assets and the consideration paid by Sebastian be considered?
a.
b.
c.
d.
Goodwill: P
0 ; Increase in Assets: P156,000
Goodwill: P
0 ; Increase in Assets: P312,000
Goodwill: P169,000 ; Increase in Assets: P156,000
Goodwill: P169,000 ; Increase in Assets: P 78,000
ANSWER: (a)
Consideration transferred………………...
Less: Market value of net assets acquired, excluding GW:
Current assets……………………...
P826,800
Plant and equipment……………….
624,000
Patents………………………………
169,000
Liabilities…………………………….
(85,800)
Goodwill……………………………………
Current Assets……………….
Plant and Equipment………..
Patents………………………..
Increase in assets……………
Book
Value
P813,800
520,000
130,000
P1,534,000
1,534,000
P
Fair
Value
P826,800
624,000
169,000
-0-
(a)
Increase
(Decrease)
P 13,000
104,000
39,000
P156,000
(a)
33.On December 2015, Agulan Co. acquired all the assets and liabilities of Toquero Co. with Agulan Co.
issuing 150,000 shares to acquire these net assets. The fair value of Toquero Co.’s assets and liabilities
at this date were:
Cash……………………………………………………………
Accounts receivable………………………………………….
Fix and Furnitures…………………………………………….
Plant and Equipment…………………………………………
Accounts payable……………………………………………..
Current tax liability…………………………………………….
Provision for annual leave……………………………………
P75,000
7,500
30,000
187,500
22,500
12,000
3,000
The financial year for Agulan Co. is January – December.
The fair value of each Agulan Co. share at acquisition date is P2. At acquisition date, the acquirer could
only determine a provisional fair value for the plant and equipment. On March 1, 2016, Agulan Co.
received the final value from the independent appraisal, the fair value at acquisition date being P196,500.
Assuming the plant and equipment had a further five-year life from the acquisition date.
The amount of goodwill arising from the business combination at December 1, 2015:
a.
b.
c.
d.
P
0
P18,750
P37,500
P30,500
ANSWER: (c)
Consideration transferred (150,000 shares x P2)
Less: Fair value of net identifiable assets acquired:
Cash…………………………………………….
Accounts receivable…………………………..
Fix and Furniture………………………………
Plant and Equipment…………………………
Accounts payable……………………………..
Current tax liability……………………………
Liabilities……………………………………….
Goodwill………………………………………………
P300,000
P 75,000
7,500
30,000
187,500
( 22,500)
( 12,000)
(
3,000)
262,500
P37,500
34. Homer Ltd. is seeking to expand its share of the widgets market and has negotiated to take over the
operations of Tan Ltd. on January 1, 20x4. The balance sheets of the two companies as at December 31, 20x4
were as follows:
Homer
Tan
Cash
P 23,000
P 12,000
Receivables
25,000
34,700
Inventory
35,500
27,600
Freehold Land
150,000
100,000
Buildings (net)
60,000
30,000
Plant and equipment (net)
65,000
46,000
Goodwill
25,000
2,000
Accounts payable
Mortgage loan
Debentures
Common stock, 100,000 shares
Common stock, 60,000 shares
Additional paid-in capital
Retained earnings
P383,500
P252,300
P 56,000
50,000
100,000
100, 000
P 43,500
40,000
50,000
28,500
49,000
P 383,500
60,000
26,800
32,000
P 252,300
Homer Ltd. is to acquire all the assets, except cash of Tan Ltd. The assets of Tan are all recorded at fair value
except:
Fair Value
Inventory
P 39,000
Freehold land
130,000
Buildings
40,000
ln exchange, Homer Ltd. is to provide sufficient extra cash to allow Tan Ltd. to repay all of its outstanding debts
and its liquidation costs of P2,400, plus two fully paid shares in Homer Ltd. for every three shares held in Tan Ltd.
The fair value of a share in Hastings Ltd. is P320. An investigation by the liquidator of Tan Ltd. reveals that on
December 31, 20x3, the followmg outstanding debts were outstanding but had not been recorded:
Accounts payable
Mortgage interest
P1,600
4,000
The debentures issued by Tan Ltd. are to be redeemed at a 5% premium. Costs of issuing the shares were
P1,200.
The excess of fair value of net assets over cost or gain on acquisition that will be recognized immediately in the
income statement is:
a. Nil or Zero
b. P17,700
c. P29,700
d. P34,300
ANSWER: C
Consideration transferred:
Shares: 2/3 x 60,000 x P3.20.
Cash
Accounts payable.
Mortgage and interest
Debentures and premium
Liquidation expenses
Cash held
Less: Fair value of assets and liabilities acquired:
128,000
45,100
44,000
52,500
2,400
144,000
(12,000)
132,000
260,000
Accounts receivable
Inventory
Freehold land
Buildings
Plant and equipment
Bargain Purchase Gain
P34,700
39,000
130,000
40,000
46,000
289,700
P 29,700
35.. Westport Ltd., a supplier of snooker equipment, agreed to acquire the business of a rival firm, Manukau Ltd.
taking over all assets and liabilities as at 1 June 20x4.
The price agreed upon was P40,000, payable P20,000 cash and the balance by the issue to the selling company
of 16,000 fully paid shares in Westport Ltd. these shares having a fair value of P2.50 per share.
The trial balances of the two companies as at 1 June 20x4 were as follows.
Share capital
Retained earnings
Accounts payable
Cash
Plant (net)
Inventory
Accounts receivable
Government bonds
Goodwill
.
Westport Ltd.
Dr.
Cr.
P100,000
12,000
2,000
P30,000
50,000
14,000
8,000
12,000
-
Manukau Ltd.
Dr.
Cr.
P 90,000
P 24,000
20,000
30,000
26,000
20,000
-
P114,000
P114,000
P110,000
P110,000
All the identifiable net assets of Manukau Ltd. were recorded by Manukau Ltd. at fair value except for the
inventory which was considered to be worth P28,000. The plant had an expected remaining life of five years.
The business combination was completed and Manukau Ltd. went into liquidation. Westport Ltd. incurred
incidental costs of P500 in relation to the acquisition costs. Costs of issuing shares in Westport Ltd. were P400.
The amount of goodwill to:
a. Nil or zero
b. P2,500
c. P2,900
d. P3,900
ANSWER: B
Cost of Investment
[P20,000 + (16,000 shares x P2.50) + P500, incidental costs)
Less: Market value of net assets acquired:
Plant
Inventory
Accounts receivable
P 60,500
P 30,000
28,000
5,000
Plant
Accounts payable
Goodwill
20,000
( 20,000)
58,000
P 2,500
When it liquidates, costs of liquidation paid by the acquiree should be for the liquidation account of the acquiree
and will eventually be transferred to shareholders’ equity account. Any costs of liquidation paid or
supplied by the acquirer should be capitalized as cost of acquisition which stent with the cost model under PFRS
No. 3 in measuring the cost of the combination.
Any direct costs of acquisition should be capitalizable under the cost model reiterated in PFRS No. 3 Phase I.
This model in PFRS No. 3 will be amended under Phase II (pending implementation possibly until early 2008),
wherein all direct costs will be outright expense. Costs of issuing shares will be debited to share premium or
APIC account.
Any costs of liquidation paid or supplied by the acquirer should be capitalized as cost of acquisition which is
consistent with the cost model under PFRS No. 3 in measuring the cost of the combination. The fair values of
liabilities undertaken are best measured by the present values of future cash outflows. Intangible assets are
recognized when its fair value can be measured reliably. Assets other than intangible assets must be recognized
if it is probable that the future economic benefits will flow to the acquirer and its fair value can be measured
reliably.
36.Mango Company acquired Apple Company on January 2, 2016 by issuing common shares. All of Apple’s
assets and liabilities were immediately transferred to Mango Company which reported total par value of shares
outstanding of P218,400 and P327,600 and additional paid-in capital of P370,000 and P650,800 immediately
before and after the business combination, respectively.
Assuming that Mango’s common stock had a market of P25 per share at the time of acquisition, what number of
shares was issued?
a.
b.
c.
d.
15,600
10,000
15,600
10,000
Answer: C
Par value of shares outstanding following merger
Paid-in capital following merger
Total fair value of paid-in capital
Par value of shares outstanding before merger
Paid-in capital before merger
Increase in par value and paid-in capital
Divided by price per share
Number of shares issued
P327,600
650,800
P978,400
P218,400
370,000
(588,400)
P390,000
P25
15,600
37.The stockholder’s equities of Milkita Corporation and Keanu Company at June 1,2016 before
combination were as follows:
Milkita
Keanu
Capital Stock, P100 par value
APIC
P10,000,000
50,000
P3,000,000
-
Retained Earnings
5,000,000
1,000,000
37.On June 2,2016, Milkita Corporation issued 50,000 of its unissued shares with a market value of P103 per
share for the assets and liabilities of Keanu Company. On the same day Milkita Corporation paid P100,000 for
legal fees, documentary stamp tax of P20,000 and P190,000 for SEC registration fees of equity securities.
Shareholder’s equity would include :
a.
b.
c.
d.
P15,000,000 Capital Stock ; P4,900,000 Retained earnings ; P10,000 Stock issuance cost
P15,000,000 Capital stock ; P10,000 APIC ; P4,880,000 Retained earnings
P15,150,000 Capital Stock ; P50,000 APIC ;P 4,690,000 Retained earnings
P15,000,000 Capital Stock ; P200,000 APIC ; P4,690,000 Retained earnings
Answer : A
Capital stock:
Before combination
Issued at par (50,000 x P100)
APIC:
Before combination
Issuance (P3 x 50,000)
Documentary stamp tax
SEC Registration fees
Retained earnings:
Before combination
Legal fees
Stock issuance cost (P190,000+20,000-200,000)
Stockholder’s equity
P10,000,000
5,000,000
50,000
150,000
( 20,000 )
( 180,000)
5,000,000
( 100,000 )
P15,000,000
--0—
4,900,000
( 10,000 )
P19,890,000
38.Red Company issued its common stock for the net assets of Blue Company in a business combination
treated as acquisition. Red’s common stock issued was worth P1,500,000. At the date of combination,
Red’s net assets had a book value of P1,600,000 and a fair value of P1,800,000. Blue’s net assets had a
book value of P700,000 and a fair value of P850,000. Immediately following the combination, the net
assets of the combined company should have been reported at what amount?
a. P3,000,000
b. P2,400,000
c. P3,100,000
d. P1,850,000
ANSWER: C
Rationale
Acquisition Cost
Net assets acquired
Goodwill
Red’s net assets @BV
Blue’s net assets @FV
Total net assets
P1,500,000
850,000
650,000
1,600,000
850,000
P3,100,000
39.Mata Inc. purchased all of the net assets of Torralba Company on February 1,2015 by issuing 8,000
shares of its P20 par common stock. At the time, the stock was selling for P40 per share. Direct costs
associated with consummating the combination totalled P5,000. Under IFRS 3, what total amount should
the net assets acquired be recorded by Mata Inc. Assuming the contingent consideration of P7,000 is
determined?
ANSWER: C
Rationale (8,000 shares X 40 = P320,000 + 7,000 contingent consideration = P327,000)
40.Payla Co. Will issue share of P12par common stock for the net assets of Talisay Co. Payla’s common stock
has a current market value of P40 per share. Talisay balance sheet accounts follow:
Current Assets P500 000
Common stock, parP4 (P80 000)
Property and equipment 1 500 000
Additional paid-in-capital (320 000)
Liabilities (400 000)
Retained earnings (400 000)
Talisay current assets and property and equipment, respectively, are appraised of P 400 000 and P1600 000; it’s
liabilities are fairly valued. Accordingly, Payla Co. Issued shares of it’s common stock with total market value
equal to that of Max net assets. To recognize goodwill of P200 000, how many shares were issued?
a. 55 000
c. 40 000
b. 45 000
d. 50 000
Solution:
ANS: B
Fair value of net identifiable assets acquired:
Current assets
P 500 000
Property and equipment
1 500 000
Liabilities
(400 000)
FMV of net assets
P1 600 000
Add: Goodwill
200 000
Consideration transferred
P1 800 000
Divided By: Current market value per share
P 40
Number of shares issued
45 000
41. Companies of P and J decide to consolidate. Asset and estimated annual earnings contributions are as
follows:
Co. P
Co. J
Total
Net asset contribution
P400 000
P350 000
P750 000
Estimated annual earnings contribution
80 000
70 000
150 000
Stockholders of the two companies agree that a single class of stock be issued, that their contributions be
measured by net assets plus allowances for goodwill, and that 10% be considered as a normal rate of return.
Earnings in excess of the normal rate of return shall be capitalized at 20% in calculating goodwill. It was also
agreed that the authorized capital stock of the new corporation shall be 20,000 shares with a par value of P100 a
share.
(1)The total contribution of Co. J(net assets plus goodwill), and (2)The amount of goodwill credited to Co. A:
a.(1)P475 000;(2)P100 000
c.(1)P525 000;(2)P200 000
b.(1)P500 000;(2)P150 000
d.(1)P600 000;(2)P100 000
Solution:
ANS: C
Company A
Company B
Net Asset Contributions
P400 000
P350 000
Add: Goodwill
Average/Annual Earnings
P 80 000
P 70 000
Less: Normal Earnings
(10% on Net Asset)
40 000
35 000
Excess Earnings
P 40 000
P 35 000
Divided by: Capitalized at
20%
20%
Goodwill
P 200 000(c) P 175 000
Total Contribution (stock to be issued)
P 400 000
P 600 000(c)
42. AB Corporation was merged into CD Corporation in a combination properly accounted for as acquisition of
interests. Their balance sheets before the combination are as follows:
AB Corp.
Current Assets................................................................ P 8,352,950
Plant and Equipment,net................................................ 6,450,700
Patents............................................................................ Total Assets.................................................................... P 14,803,650
Liabilities....................................................................... P 5,713,650
Capital Stock,par P100.................................................. 4,600,000
Additional paid-in capital.............................................. 950,000
Retained Earnings.......................................................... 3,540,000
Total Liabilities and Equity........................................P14,803,650
CD Corp.
Current Assets............................................................... .P 7,505,000
Plant and Equipment,net............................................... 3,130,450
Patents........................................................................... 153,800
Total Assets....................................................................P10,789,250
Liabilities.......................................................................P
Capital stock,par P100....................................................
Additional paid-in capital...............................................
Retained Earnings...........................................................
939,000
3,400,000
950,000
5,500,250
Total Liabilities and Equity........................................ PP10,789,250
Per-independent appraiser’s report, the fair market value of CD’s current assets is P7,808,000; plant and
eqipment is P3,452,000; and patents P286,900. Liabilities of CD Corporation are properly valued. AB Corporation
purchases the net assets of CD Corporation for P10,607,900. How should the difference between the book value
of CD Corporation’s net assets and the consideration paid by AB Corporation be considered?
A. Goodwill: P 286,900; Increase in Assets: P 757650
B. Goodwill: P 286,900; Increase in Assets: P 303,000
C. Goodwill: P
0; Increase in Assets: P 303,000
D. Goodwill: P
0; Increase in Assets: P 757,650
Answer: D
Consideration Transferred.................................................................................................P10,607,900
Less: Market value of net assets acquired, excluding GW:
Current Assets..........................................................P7,808,000
Plant and Equipment............................................... 3,452,000
Patents...................................................................... 286,900
Liabilities................................................................. ( 939,000)
10,607,900
Goodwill............................................................................
P
-0-
(D)
Book value
Fair Value
Current Assets
Plant and Equipment
P 7,505,000
P 3,130,450
7,808,000
3,452,000
Increase(Decrease)
in assets
P 303,000
P 321,550
Patents
P 153,800
286,900
P 133,100
Current Assets
P 303,000
Plant and Equipment 321,550
Patents
133,100
Increase in Assets
P 757,650 (D)
43.Companies XX, YY, and ZZ decide to consolidate. The parties to a consolidation have the following data:
Net Assets
Average annual earnings
XX Co...................... P 6,800,000
P 680,000
YY Co. .................... 3,000,000
400,000
ZZ Co. .................... 10,200,000
920,000
The parties collectively agreed that the new corporation, RR Co. Will issue a single class of stock based on the
earnings ratio. What is the stock distribution ratio to companies XX, YY,and ZZ respectively?
A. 34:15:51
B. 33:15:52
C. 34:20:46
D. 33:21:46
Answer: C
XX: P 680,000
YY: 400,000
ZZ: 920,000
P 2,000,000
680,000/2,000,000 = 34%
400,000/2,000,000 = 20%
920,000/2,000,000 = 46%
100%
44.Pak company’s owns 50% of Ganern Company’s cumulative preference shares and 30% of its ordinary
shares.Ganern’s shares outstanding at December 31, 2016 include of 10% cumulative preference shares and
P40,000,000 of ordinary shares.
Ganern reported profir of P8,000,000 for the year ended December 31,2016. Ganern declared and paid
P1,500,000 preference shares during 2016. Ganern paid no preference shares dividend during 2015. On January
31,2017, prior to the date that the financial statements are authorized to issue, Ganern distributed 10% ordinary
share dividend.
How much is the total amount to be recognized by Pak Company in its 2016 profit and loss related to these
investment?
a. P2,450,000
b. P2,600,000
c. P2,700,000
d. P2,850,000
Answer: D
Solution:
Ganern profit
P8,000,000
Multiplied by: pak company’s interest
Pak Company share in Ganern’s profit
Dividends declared and paid
Multiplied by: pak company’s interest
Dividend income
30%
P2,400,000
1,500,000
30%
450,000
P2,850,000
45. Companies T, G, B, parties to consolidation have the following data:
Net Assets…………………..
Average annual earnings….
T Co.
P400, 000
60, 000
G. Co.
P600, 000
60, 000
B. Co
P1, 000, 000
80, 000
The parties collectively agreed that the new corporation, RC Co. will issue a single class of stocks based on the
earnings ratio. What is the stock distribution ratio to companies T, G, B, respectively?
a. 20:30:50
b. 30:30:40
c. 30:40:30
d. 40:40:30
ANSWER:
Fraction
P60, 000
6/20
= 30%
60, 000
6/20
=30%
80, 000
8/20
=40%
P200, 000
100%
46. When should a business combination be undertaken?
A. When a positive net present value is generated to the shareholders of an acquiring firm.
B. When the two firms are in the same line of business, but economies of scale cannot be attained by the
acquiror.
C. When two firms are in different lines of business, creating diversification.
D. When cash will be paid for the acquired firm's stock.
T:
G:
B:
Answer: A.
A business combination is beneficial when the result is a positive NPV. This effect results from synergy, which
exists when the value of the combined firm exceeds the sum of the values of the separate firms. It can be
determined by using the risk-adjusted rate to discount the change in cash flows of the newly formed entity. If a
positive net present value is generated, a combination is indicated.
Answer (B) is incorrect because a combination is indicated if economies of scale can be attained. Answer (C)
is incorrect because diversification may or may not result in a positive NPV. Answer (D) is incorrect because
some beneficial combinations involve exchanges of stock.
47.Which of the following statements is most correct?
a. A firm acquiring another firm in a horizontal merger will not have its required rate of return affected because the
two firms will have similar betas
b. In most mergers, the benefits of synergy and the price premium the acquirer pays over market price are
summed and then divided equally between the shareholders of the acquiring and target firms
c. Financial theory says that the choice of how to pay for a merger is really irrelevant because, although it may
affect the firm’s capital structure, it will not affect the firm’s overall required rate of return
d. The primary rationale for any operating merger is synergy, but it is also possible that mergers can include
aspects of both operating and financial mergers
Answer : D
48.A gain should be reported on an acquisition if:
a.
b.
c.
d.
The fair value of the consideration paid is less than the book value of the net assets acquired.
The fair value of the consideration paid plus the present value of any earnings contingency is less
than the book value of the net assets acquired.
The fair value of the consideration paid is less than the fair value of net assets acquired plus the
fair value of identifiable intangibles acquired.
The fair value of the consideration paid plus the present value of any earnings contingency is less
than the fair value of identifiable net assets acquired.
ANS: D
49. The following statements pertaining to business combination are not true except:
a. The pooling of interest method recorded the assets and liabilities of the acquired company at their fair values.
b. Statutory merger refers to the combining of two or more existing legal entities into one new legal entity wherein
the previous companies are dissolved and are then replaced by the new continuing company.
c. In a stock acquisition, the parent and the subsidiary has their own separate financial records and statements for
external financial reporting purposes.
d. The acquiring enterprise may inherit the acquired firm's inefficiencies and problems together with its inadequate
resources.
Answer: d
50. The cost of registering equity securities in a business combination should be recorded as;
a. An income of the period
b. an expense of the period
c. Deduction from additional paid in capital
d. Part of the cost of the stock acquired
Answer: C
DATE OF ACQUISITION
1. Jericel Company had common stock of P350,000 and retained earnings of P490,000. Cathrene Inc. had
common stock of P700,000 and retained earnings of P980,000. On January 1, 2016, Cathrene issued
24,000 shares of common stock with a P12 par value and a P35 fair value for all of Jericel company’s
common stock. This combination was accounted for as an acquisition. Immediately after the combination,
what was the consolidated net asset?
a. P280,000
b. P2,520,000
c. P1,680,000
d. P1,190,000
ANS: A
Consolidated Stockholder’s Equity
Acquirer (Parent-Cathrene), book value
(P700,000 + P980,000)
Add: Newly issued shares
(34,000 x P35 fair value)
Acquiree (Subsidiary-Jericel) eliminated
P1,680,000
1,190,000
in preparing consolidated balance sheet.
0
P2,870,000
2 .On January 1, 2016, Park Corporation and Strand Corporation and their condensed balance sheet are as
follows:
Current Assets………………………………….
Non-current Assets…………………………….
Total Assets……………………………………
Current Liabilities……………………………..
Long term debt………………………………..
Stockholders’ Equity………………………….
Total Liabilities and Equities
Park Corp.
-----------------70,000
90,000
-----------------160,000
30,000
50,000
80,000
-----------------160,000
Strand Corp.
--------------------20,000
40,000
--------------------60,000
10,000
50,000
--------------------60,000
On January 2, 2016.Park Corporation borrowed 60,000 and used the proceeds to obtain 80% of the outstanding
common shares of Strand Corporation. The acquisition price was considered proportionate to Strand’s fair value.
The 60,000 debt is payable in 10 equal annual principal payments, plus interest, beginning December 31, 2016.
The excess fair value of the investment over the underlying book value of the acquired net assets is allocated to
inventory (60%) and to goodwill (40%).
On a consolidated balance sheet as of January 2, 2016, what should be the amount for each of the following?
The amount of goodwill using proportionate basis (partial):
A. Using the same information in No.60, the amount of goodwill using full fair value.(full/gross-up) basis:
a. P 0
b. 8,000
c. 10,000
d. 20,000
ANS:C
Fair value of Subsidiary:
Fair value of consideration given: 60,000 x 80%
Less :Book value of Net Assets/ Stockholders’
Equity of Subsidiary
Allocated Excess
Less: Over/ Undervaluation of Assets and Liabilities:
Increase in Inventory (25,000 x 60%= 15,000 x 100%)
Goodwill (full/gross-up)
75,000
50,000
25,000
------------15,000
------------10,000
-------------------------
*100% increase of inventory should amount to 15,000/80%
B .Using the same information in No.60, the amount of stockholders’ equity using full fair value (full/gross up
goodwill) proportionate basis to determine non-controlling interest should be:
a. 80,000
b. 93,000
c. 95,000
d. 130,000
ANS:C
Park stockholders equity
Non-controlling interest (full goodwill)
Strand stockholders’ equity
Add: Adjustments to reflect fair value inventory
Strand stockholders’ equity at FV
Non-Controlling interests
80,000
50,000
15,000
------------65,000
20%
-------------
Non-Controlling interests (partial)
Add: Non-Controlling interest in full goodwill
(10,000-8,000)
13,000
------------93,000
2,000
-----------Consolidated Stockholders’ Equity
95,000
----------------------3.On January 2, 2011, Pare Co. purchased 75% of Kidd Co’s outstanding common stock. On that date, the fair
value of the 25% noncontrolling interest was P35,000. During 2011, Kidd had net income of P20,000. Selected
balance sheet data at December 31,2011, is as follows:
Total assets
Liabilities
Common stock
Retained Earnings
Pare
P420,000
P120,000
100,000
200,000
Kidd
P180,000
P60,000
50,000
70,000
During 2011 Pare and Kidd paid cash dividends of P25,000 and P5,000 respectively, to their shareholders. There
were no other intercompany transactions.
In Pare’s December 31,2011 consolidated balance sheet, what amount should be reported as noncontrolling
interest in net assets?
a.
b.
c.
d.
P30,000
P35,000
P38,750
P40,000
ANSWER: C
Fair value of noncontrolling interest
Plus: Share of net income (25% x 20,000)
Less: Share of dividends (25% x 5,000)
Noncontrolling interest
P35,000
5,000
(1,250)
P38,750
4.When it purchased Sutton, Inc. on January 1, 20x1 Pavin Corporation issued 500,000 shares of its P5 par
voting common stock. On that date the fair value of those shares totaled P4,200,000. Related to the acquisition,
Pavin had payments to the attorneys and accountants of P200,000, and stock issuance fees of P100,000.
Immediately prior to the purchase, the equity sections of the two firms appeared as follows:
Common Stock
Paid in capital in excess of par
Retained earnings
Total
Pavin
P4,000,000
7,500,000
5,500,000
P17,000,000
Sutton
P700,000
900,000
500,000
P2,100,000
Immediately after the purchase, the consolidated balance sheet should report paid in capital in excess of par of.
a.
b.
c.
d.
P8,900,000
P9,100,000
P9,200,000
P9,300,000
ANSWER: B
FV, stocks issued
Less: Par value of stocks issued (500,000 shares x P5)
APIC
Add: APIC of P
Less: Stock issuance cost
P 4,200,000
2,500,000
P 1,700,000
7,500,000
100,000
P 9,100,000
5 .The Moon Company acquired a 70% interest In The Swan Company for P1,420,000 when the fair value of
Swan's identifiable assets and labilities was P1,200,000. Moon acquired a 65% interest In The Homer
Company for P300,000 when the fair value of Homer's identifiable assets and liabilities was P640,000. Moon
measures non-controlling interest at the relevant share of the identifiable net assets at the acquisition date.
Neither Swan nor Homer had any contingent liabilities at the acquisition date and the above fair values were
the same as the carrying amounts in their financial statements. Annual impairment reviews have not resulted In
any impairment losses being recognized.
Under PFRS 3 Bussiness combinations, what figures in respect of goodwill and of gains on bargain
purchases should be included in Moon's consolidated statement of financial position?
a. Goodwill: P580,000: Gains on the bargain purchases: P116,000
b. Goodwill: Nil or zero: Gains on the bargain purchases: P116,000
c. Goodwill: Nil or zero; Gains on the bargain purchases: Nil or zero
d. Goodwill: P580,000: Gains on the bargain purchases: Nil or zero
Answer: D
Solution
Fair value of subsidiary - Swan
Consideration transferred
P1,420.000
less: Fair value at identifiable assets and liabilities of Swan
(70% x P1.2 million)
840.000
Goodwill (partial)
P580,000
"Goodwill is carried as on asset in the consolidated statement of financial position."
Fair value of Subsidiary Homer
Consideration transferred
less: Fair value at identifiable assets and Liabilities of Homer
(65% x P640 000)
Gain on bargain purchases
6.
Questions A and B are based on the following:
Winston has the following account balances as of February 1, 2014:
P 300. 000
416,000
P(116,000)
Inventory
P 600,000
Land
500,000
Buildings (net) (FV P1,000,000) 900,000
Expenses
500,000
Common stock (P10 par value) P 800,000
Retained earnings, Jan. 1,2014 1,100,000
Revenues
600,000
Arlington pays P1.4 million cash and issues 10,000 shares of is P30 par value common stock (valued at P80
per share) for all of Winston’s outstanding stock and Winston is dissolved. Stock issuance costs amount to
P30,000. Prior to recording these newly issued shares, Arlington reports a Common Stock account of
P900,000 and Additional Paid-in Capital of P500,000.
A. Determine the goodwill that would be Included in the February 1, 2014, financial statement of Arlington.
a. P200,000 b. P230,000
c. P100,000
Answer: C.
Cost of acquiring Winston
Cash
Shares of stocks ( 10,000 x 80)
Fair value of net assets acquired:
Inventory
Land
Building
Goodwill
d. P130,000
P1,400,000
800,000
P600,000
500,000
1,000,000
2,200,000
(2,100,000)
P100,000
B. Assume that Arlington pays cash of P20 million. No stock is issued. An additional 40,000 Is paid In direct
combination costs, determine the net gain from business combination.
a. P100,000
b, P200,000
c. 260,000
d. 60,000
Answer: D.
Gain from business combination must be
Cost of acquiring Winston
Fair value of net assets acquired
Additional Cost
Net gain from business combination
P60,000.
P2,000,000
2,100,000
(40,000)
P60,000
7. On December 31, 2015, Seco Company paid P 950,000 for 95% of the outstanding common stock of Sana
Company. The remaining 5% was held by a stockholder who was unwilling to sell the stock. Sana's net assets
had a book value of P 810,000 and a fair market value of P 900,000 when it was acquired by Seco. If Sana
uses push- down accounting, the non- controlling interest should be reported at:
a. P 40,500 b. P 50,000
c. P 47,500
Answer: b. P 50,000
Solution:
Acquisition Cost
Divided by:
Total
Multiplied by:
P 950,000
95%
P 1,000,000
5%
d. P 45,000
Non- controlling Interest
P 50,000
8. Ambrose Company acquires a controlling interest in Monica Company in the open market for P 220,0
00. The P 200 par value capital stock of Monica Company at the date of acquisition is P 250,000 and its
retained earnings amounts to P 100,000. The market value per share of Monica Company is P 220 per share.
In the consolidated statement of financial position on the date of acquisition, non- controlling interest would
show a balance of:
a. P 55,000
b. P 60,000
c. P 62,500
d. P 50,000
Answer: a. P 55,000
Solution:
Controlling (Parent) Interest:
Shares Acquired ( P 220,000/ P 220)
1,000 shares
Divided by Shares Outstanding ( P 250,000/ P 200)/ 1,250
Parent's Interest
80%
P 220,000/ 80% = P 275,000
Non- controlling/ Minority Interest in Net Assets of Subsidiary:
( P 275,000 x 20% ) = P 55,000
9. On August 31, 2016, Company P acquires 75% (750,000 ordinary shares) of Company S for P7,500,000
(P10 per share). In the period around the acquisition date, Company S's shares are trading at about P8 per
share. Company P pays premium over market because of the synergies it believes it will get. It is therefore
reasonable to conclude that the fair value of Company S as a whole may not be P10,000,000. In fact, an
independent valuation shows that the value of Company S is P9,700,000 ( fair value of Company S). Assuming
that the fair value of the net identifiable assets is P8,000,000 (carrying value is P6,000,000)
Goodwill arisung on consolidation is to be valued on the proportionate basis or "Partial" Goodwill:
a. P200,000
b. P1,500,000
c. P1,700,000
d. P2,000,000
Answer: B
Fair value of subsidiary:
Consideration transferred:.
Less:book value of Net assets
(P6,000,000 x 75%).
Allocates excess.
Less: over/under valuation of Assets and
Liabilities ((P8,000,000 - P6,000,000) x75%
Goodwill(partial).
P7,500,000
4,500,000
P3,000,000
1,500,000
P1,500,000
10. Mark, a private limited company, has arranged filorman, a public limited company, to acquire it as a means
of obtaining a stock exchange listing. Man issue 15 million shares acquire the whole of the share capital of
Mask (6 million shares). The fair value of the net assets of Mask and Man are P30 million and P18 million
respectively. The fair value of each of the share of Mask is P6 and the quoted market price of Man's share is
P2. The share capital of Man is P25 million shares of acquisition. Compute the value of goodwill in the above
acquisition.
a.
b.
c.
d.
P16 million
P12 million
P 6 million
P10 million
Answer: C
Consideration transferred (4,000,000 shares* x P6)
Less: book value of equity — Man .
(P18,000,000 x 100%).
Allocated excess
Less: over/under valuation of assets and
liabilities( book value sme fair value).
Goodwill
100%
Man –––––> Mask
Currently issued .
Additional shares issued.
P24,000,000
18,000,000
P 6,000,000
0
P 6,000,000
15M 60%** 6M 60%
10M 40% <—–4M /40%
Total shares.
25M.
10M
11. Condensed Statement of Financial Position of Dolce Inc. and Gabbana Inc. as of 12/31/2011 were as
follows:
Dolce
Gabbana
Current assets
275,000
P65,000
Noncurrent
625,000
425,000
assets
Total assets
900,000
490,000
Liabilities
65,000
35,000
Ordinary shares, 549,700
296,700
P23 Par
Share Premium
35,300
28,300
Accumulated
250,000
130,000
Profits (losses)
On January 1, 2012, Dolce Inc. issued 30,000 shares with market value of P25/share for the assets and
liabilities of Gabbana Inc. Dolce Inc. also paid P125,000 cash. The book value reflects the fair value of the
assets and liabilities, except that the non-current assets of Gabbana Inc. have fair value of P630,000 and the
noncurrent assets of Dolce Inc. are overstated by P30,000. Contingent consideration, which is determinable, is
equal to P15,000. Dolce paid for the share issuance costs only amounting to P74,000 and incurred other
acquisition costs amounting to P19,000.
As a result of acquiring the net assets of Gabbana Inc., compute for the total liabilities in the books of Dolce.
a. P 100,000
b. P 115,000
c. P 134,000
Ans. C
Liabilities of Dolce
Liabilities of Gabbana
P65,000
P35,000
d. P 65,000
Contingent Consideration
Acquisition Cost Incurred
Total liabilities
P15,000
P19,000
P134,000
12. On Dec. 31,2013, P Inc. paid P495,000 cash for all the outstanding stock of S Company. S’s assets and
liabilities on that day were as follows:
Cash
Inventory
P.P.E (net of accumulated dep. of P100,000)
Liabilities
P60,000
150,000
350,000
70,000
On the day of business combination the fair value of the inventory was P125,000 and the fair value of
P.E (net) was P385,000. The goodwill (income from acquisition) resulting from this acquisition amounts
to:
a. (P5,000)
b. P85,000
c. P40,000
d. P5,000
Ans. A
Acquisition cost
Less: Book value of interest acquired (P560,000 – P70,000)
Difference
Allocation:
Inventory
P 25,000
Property and equipment
( 35,000)
Income from acquisition
P495,000
490,000
5,000
(10,000)
P( 5,000)
13.The balance sheets of Pedro Ltd. and Santi Ltd. on June 30, 2016 were as follows:
Pedro Ltd
Current assets
Non-current assets
Total assets
Share capital:
100 shares
60 shares
Retained earnings
Current liabilities
Non-current liabilities
Total equity and liabilities
P500
Santi Ltd
P700
1, 300
P1, 800
3, 000
P3, 700
P300
800
P1, 100
P300
400
P700
P1, 800
P600
1, 400
P2, 000
P600
1, 100
P1, 700
P3, 700
On July 1, Pedro Ltd. acquired all the issued shares of Santi Ltd. giving in exchange 2 ½ Pedro Ltd. shares for
each ordinary share of Santi Ltd. Pedro Ltd, thus issued 150 shares to acquire the 60 shares issued by Santi
Ltd.
The fair value of each ordinary share of Santi Ltd. on July 1, 2016 is P40, while the quoted market price of
Pedro Ltd.’s ordinary shares is P16. The fair values of Pedro Ltd.’s identifiable assets and liabilities at
acquisition date are the same as their carrying amounts except for the non-current assets whose fair value was
P1, 500. The tax rate is 30%.
The amount of goodwill acquired on July 1, 2016:
a. P1, 160
b. P856
c. PP400
d. P360
Ans. : D
Solution:
Consideration transferred (40 shares* x P40)
Less: Book value of SHE – Pedro Ltd. (P300 + P800) x 100%
Allocated excess
Less: Over/under valuation of Assets and Liabilities:
Increase in Non-current assets: [(P1,500 – P1,300) x 100% x 70%]
Goodwill
P1, 600
1,100
P500
140
P360
100%
Currently issued
Additional shares issued
Total shares
Pedro Ltd.
150
60%**
100
40%
250
Santi Ltd.
60
60%
40
40%
100
**150/250
Pedro Ltd, issued 2 ½ shared in exchange for each ordinary share of Santi Ltd. All of Santi Ltd.’s shareholders
exchange their shares for Pedro Ltd. Pedro Ltd. Therefore issues 150 shares (60 x 2 ½) for the 60 shares in
Santi Ltd.
Pedro Ltd. is now the legal parent of the subsidiary, Santi Ltd. However, analyzing the shareholding in Pedro
Ltd. shows that it consists of the 100 shares existing prior to the merger and 150 new shares held by former
shareholders in Santi Ltd. In essence, the former shareholders of Santi Ltd. now control both entities Pedro Ltd.
and Santi Ltd. The former Santi Ltd. shareholders have a 60% interest in Pedro Ltd [150/(100 + 150)]. The
IASB argues that there has been a reverse acquisition, and that Santi Ltd. is effectively the acquirer of Pedro
Ltd.
The key accounting effect of deciding that Santi Ltd. is the acquirer is that the assets and liabilities of Pedro
Ltd. are to be valued at fair value. This is contrary to normal acquisition accounting, based on Pedro Ltd. being
the legal parent of Santi Ltd., which would require the assets and liabilities of Santo Ltd. to be valued at fair
value.
14. Mask, a private limited company, has arranged for Man, a public limited company, to acquire it as a means
of obtaining a stock exchange listing. Man issues 15 million shares to acquire the whole of the share capital of
Mask (6 million shares). The fair value of the net assets of Mask and Man are P30 million and P18 million
respectively. The fair value of each of the shares of Mask is P6 and the quoted market price of Man’s share is
P2. The share capital of Man is 25 million shares after the acquisition. Calculate the value of goodwill in the
above acquisition.
a. P16 million
b. P12 million
c. P10 million
d. P6 million
Ans. : D
Solution:
Consideration transferred (4, 000, 000 shares x P6)
Less: Book value of SHE – Man: P18, 000, 000 x 100%
Allocated excess
Less: Over/Under valuation of Assets and Liabilities
(book value same fair value)
Goodwill
P24, 000, 000
18, 000, 000
P6, 000, 000
0
P6, 000, 000
15. Clarisse Company acquires a controlling interest in Mimi Company in the open market for P120,000. The
P100 par value capital stock of Mimi Company at the date of acquisition is P125,000 and it’s retained earnings
amounts to P50,000. The market value per share of Mimi Company is P120 per share. In the consolidated
statement of financial position on the date of acquisition. Non controlling interest would show a balance of:
a.
b.
c.
d.
P30,000
P40,000
P25,000
P17
Ans. A
Controlling (Parent) interest:
Shares acquired (P120,000 / P120)
Divided shares outstanding (P125,000 /P100)
Parent’s interest
Minority interest in net assets of subsidiary (P150,000 x 20%)
1,000 shares
÷1,250
80%
P30,000
16.On the day of acquisition Anne Inc. had the following assets and liabilities:
Book Value
Fair Value
Current assets
P100,000
P100,000
Plant assets(net)
220,000
260,000
Liabilities)
(40,000)
(40,000)
Sean Company paid P450,000 for 90% of the outstanding voting stock of Anne. The goodwill in the
consolidated statement of financial position at acquisition is:
P190,000
P120,000
P180,000
P230,000
Ans. C
Parent Company Interest
NCI
Consideration
Less: Fair value of net assets
Goodwill
P450,000
50,000
P500,000
320,000
P180,000
17. Seminarian. Inc. has 100,000 shares of P2 par value stock outstanding. Priests Corporation acquired
30,000 shares of Seminarian’s shares on January 1, 20x4 for Pl20000 when Seminarian’s net assets had a
total fair value of P350000. On July 1, 20x7, Priests agreed to buy an additional 60,000 shares of Seminarian
from single stockholder for P6 per share“ Although Seminarian’s share 5. were selling in the P5 range around
July 1, 20x7. Priests forecasted that obtaining control of Seminarian would produce significant revenue
synergies to justify the premium price paid. if Seminarian‘s net identifiable assets had a fair value of P500000
on July i, 20x7, how much goodwill on full fair value basis should Priests report in its, post-combination
consolidated balance sheet?
A. P -0B. P 60,000
C. P 90,000
D. P 100,000
ANSWER: B
60% FV, stocks issued: 60,000 shares x P6, fair value
30% FV, of previously held equity interest: 30,000 shares x P5 fair
value
10% FV of NCI (100,000-60,000-30,000) x P4, fair value
100% FV of subsidiary
Less: fair value of net asset of subsidiary
P 360,000
150,000
40,000
P 560,000
500,000
19. Robin Corporation purchased 150,000 previously unissued shares of Nest Company's $10 par value
common stock directly from Nest tor $3,400,000. Nest's stockholder's equity immediately before the investment
by Robin consisted of $3,000,000 of capital stock and $2,600,000 in retained earnings. What is the book
value of Robin's investment in Nest?
a. $1,500,000.
b. $1,680,000.
c. $2,800,000.
d. $3,000,000.
Answer: d
Shares outstanding before new shares are issued
Shares issued to Robin
Total shares outstanding
Percentage owned by Robin equals 150,000/450,000=
$ 300,000
$ 150,000
$ 450,000
33.33%
Stockholders' equity before new shares are issued
+lnvestment by Robin
=Stockholders' equity after Robin investment
x Robin's percentage ownership
=Book value of Robin's interest
$ 5,600,000
$ 3,400,000
$ 9,000,000
33.33%
$ 3,000,000
20. Pogi Corporation paid P 100,000 cash for the net assets of Ganda Corporation which consisted of the
following:
Current Assets
Property and Equipment
Liabilities assumed
Book Value
Fair Value
P 98,000
P 120,000
P 350,000
P 400,000
P 100,000
P 110,000
The property and equipment acquired in this business combination should be recorded at what amount?
a. P 100,000
b. P 80,000
c. P 350,000
d. P 400,000
Answer: d
The Property and equipment should be recorded at its Fair Value of P 400,000
21.Ice, a private limited company, has arranged for Cream, a public limited company, to acquire it as a means
of obtaining a stock exchange listing. Cream issues 15 million shares to acquire the whole of the share capital
of Ica (6 million shares). The fair value of the net assets of Ice and Cream are P30 million and P18 million
respectively. The fair value of each of the shares of Ice is P6 and the quoted market price of Cream’s shares is
P2. The share capital of Man is 25 million shares after the acquisition. Calculate the value of goodwill in the
above acquisition.
a. P16 million
c. P10 million
b. P12 million
d. P 6 million
Ans: d
Consideration transferred (4 million shares* x P6)
Less: BV of SHE – Cream: P18 million x 100%
Allocated excess
Less: Over/Under valuation of Assets and Liabilities
(book value same fair value)
Goodwill
P24,000,000
18,000,000
P 6,000,000
0
P 6,000,000
22.Red, Inc. has 100,000 shares of P2 par value stock outstanding. Velvet Corporation acquired 30,000 shares
of Red’s shares on January 1, 20x5 for P120,000 when Red’s net assets had a total fair value of P350,000. On
July 1, 20x8, Velvet agreed to buy an additional 60,000 shares od Red from single stockholder for P6 per
share. Although Red’s shares were selling in the P5 range around July 1, 20x8, Velvet forecasted that
obtaining control of Red would produce significant revenue synergies to justify the premium price paid. If Red’s
net identifiable assets had a fair value of P500,000 on July 1, 20x8, how much goodwill on full fair value basis
should Velvet report in its post-combination consolidated balance sheet?
a. P
0
c. P 90,000
b. P60,000
d. P100,000
Ans: b
(60%) Fair value of consideration given
Shares: 60,000 shares x P6, fair value
(30%) Fair value on previously held equity interest
30,000 shares x P5, fair value
(10%) Fair value of non-controlling interest
(100,000 – 60,000 – 30,000) x P5, fair value
(100%) Fair value of Subsidiary
Less: Fair value of Net Assets (SHE of Subsidiary)
Goodwill (Full/Gross-up)
P 360,000
150,000
50,000
P 560,000
500,000
P 60,000
23.Aquino Corp. acquired all the assets and liabilities of Binay Corp. by issuing shares of its common stock on
January 1, 2016. Partial balance sheet data for the companies prior to the business combination and
immediately following the combination is provided:
Aquino
Book Value
P 130,000
144,000
66,000
800,000
Binay
Book Value
P 50,000
40,000
90,000
300,000
Total Assets……………………………….
P1,140,000
P480,000
P
Accounts payable…………………………
Bonds payable…………………………….
Common stock, P2 par…………………..
Additional paid-in capital…………………
Retained earnings………………………..
P 100,000
500,000
200,000
130,000
210,000
P 50,000
200,000
50,000
40,000
140,000
P 150,000
700,000
320,000
490,000
?
Total Liabilities and Equities……….........
P1,140,000
P480,000
P
Cash……………………………………….
Accounts receivable……………………..
Inventory…………………………………..
Plant and equipment, net………………..
Goodwill……………………………………
Combination
P 180,000
188,000
176,000
1,300,000
?
?
?
What number of shares and in what price did Aquino issue for this acquisition, as well as the amount of
goodwill to be reported by the combined entity immediately following the combination?
a. P80,000; P8; P450,000
b. P60,000; P8; P454,000
c. P40,000; P6; P456,000
d. P20,000; P6; P460,000
ANSWER: (b)
Common stock – combined…………………………
P320,000
Common – Acquirer Aquino………………………..
200,000
Common stock issued………………………………
P120,000
Divided by: Par value of common stock…………..
P
2
Number of Aquino shares to acquire Binay………
60,000 (b)
Paid-in capital books of Aquino (P200,000 + P130,000)…
Paid-in capital in the combined balance sheet
(P320,000 + P490,000)………………………………..
Paid in capital from the shares issued to acquire Binay….
Divided by the number of shares……………………………
Fair value per shares when sock is issued………..............
Net identifiable assets of Aquino before acquisition:
(P130,000 + 144,000 + 66,000 + 800,000 100,000 – 500,000)…………………………...........
Net identifiable assets in the combined balance sheet:
(P180,000 + 188,000 + 176,000 + 1,300,000 150,000 – 700,000…………………………………..
Fair value of the net identifiable assets held by Binay
at the date of acquisition…………………………………
P330,000
810,000
P480,000
60,000
P
8
(
b
)
P540,000
994,000
P454,000
(
b
)
24. Richard, Inc. is to acquire Raymond Corp. by absorbing all the assets and assuming all the liabilities to the
latter in exchange for shares of the former’s stock. Below are the balance sheets of the two companies with the
corresponding appraised value increment for Raymond Corp.
Richard
P2,000,000
Raymond
P1,250,000
150,000
Liabilities……………………………………………
Common stock (No par; P100 par)………………
Additional paid-in capital………………………….
Retained earnings (deficit)……………………….
P 750,000
1,000,000
350,000
(100,000)
P 400,000
500,000
150,000
200,000
Total Equities………………………………………
P2,000,000
P1,250,000
Assets, per books…………………………………
Assets, appraised increase………………………
The parties agree to use the appraised values, against which the fair market value of the shares will be
matched. Richard, Inc.’s common stock is currently selling at P100 per share. The number of share to
be issued by Richard, Inc. is:
a. 20,000
b. 15,000
c. 13,000
d. 10,000
ANSWER: (d)
Assets at appraised value (P1,250,000 + P150,000)…………………
P1,400,000
Less: Liabilities…………………………………………………………….
400,000
Net assets at appraised values………………………………………….
Divided by: Current selling price per share……………………………..
P1,000,000
100
Number of shares issued………………………………………………….
10,000
25. On July 1, 2016, Parent Ltd. acquired all the issued share capital of Sub Ltd. giving in exchange of
100,000 shares in Parent Ltd. these having a fair value of P5 per share. At acquisition date, the balance
sheets of Parent Ltd. and Sub Ltd. and the fair values of Sub Ltd's assets and liabilities, were as follows:
Parent Ltd.
Carrying Amount
Sub Ltd.
Carrying Amount
Fair Value
EQUITY AND LIABILITIES
Equity
Share Capital
Retained earnings
Total equity
Liabilities
Provisions
Payables.
Tax liabilities
Total liabilities
Total equity and liabilities
P550,000
350,000
P900,000
P300,000
140,000
P440,000
P 30,000
27,000.
10,000
P 67,000
P967,000
P 60,000
34,000.
6,000
P100,000
P540,000
P 60,000
34,000
6,000
ASSETS
Land
Equipment
Accumulated depreciation
Investment in subsidiary
P120,000
620,000
(180,000)
500,000
P150,000
480,000
(170,000)
P170,000
330,000
Inventory.
Cash
Total Assets
92,000
15,000
P967,000
75,000
5,000
P540,000
80,000
5,000
At acquisition date, Sub Ltd.has an unrecorded patent with a fair value of P20,000 and a contingent liability of
with a fair value of P15,000. The tax rate is 30%.
The amount of goodwill acquired on July 1, 2016:
a. P25,000
b. P15,000
c. P10,000
d. Zero
ANSWER: A
Consideration transferred (100,000 shares x P5)
Less. Book value of SHE - S: P440,000 x 100℅
Allocated excess
Less: Over/Under validation of Assets and Liabilities
Increase in Land: P20,000 x 100% x 70%
Increase in Equipment: P20,000 x 100% x 70%
Increase in Inventory: P5,000 x 100% x 70%
Increase in Parent: P20,000 x 100% x 70%
Increase in Provision: P(15,000) x 100% x 70%
Goodwill
P500,000
440,000
P 60,000
P14,000
14,000
3,500
14,000
(10,500)
35,000
P 25,000
26. Oh January 1, 2016, Park Corporation and Stand Corporation and their condenser balance sheet are
as follows:
Park Corp.
Strand Corp.
Current Assets
P 70,000
P 20,000
Non-current Assets
90,000
40,000
Total Assets
P160,000
P 60,000
Current Liabilities
P30,000
10,000
Long-term Debt
50,000
Stockholders' Equity
80,000
50,000
Total Liabilities and Equities
P160,000
P60,000
On January 2, 2016, Park Corporation borrowed P60,000 and used the proceeds to obtain 80% of the
outstanding common shares of Strand Corporation. The acquisition price was considered proportionate to
Stand's fair value.
The P60,000 debt is payable in 10 equal annual principals, plus interest, beginning December 31, 2016. The
excess fair value of the investment over the underlying book value of the acquired net assets is allocated to
inventory (60%) and to goodwill (40%).
On the consolidated balance sheet as of January 2, 2016, what should be the amount of each of goodwill using
proportionate basis (partial)?
a. P 0
b. P8,000
c. P10,000
d. P20,000
ANSWER: B
Fair Value of consideration given
Less: Book value of net assets (P50,000 x 80%)
Allocated excess
Less: Over/Under validation of Assets and Liabilities
Increase in Inventory (P20,000 x 60% = P12,000 / 80%
= P15,000 increase in inventory x 80%
Goodwill (partial).
P60,000
40,000
P20,000
12,000
P 8,000
27. On June 12, 2015 Don Company purchases 8,000 shares of Sam Company for P68 per share.
Just prior to the purchase, Sam Co. has the following statement of financial position.
ASSETS
Cash
P 20,000
Inventory
280,000
Equipment
400,000
Goodwill
100,000
Total Assets P 800,000
Liabilities & Equity
Current liabilities
P 250,000
Common Stock, P5 par
50,000
APIC
130,000
Retained Earnings
370,000
Total Liabilities and EquityP 800,000
On June 12,2015 Sam’s inventory has a fair value of P450,000 and that the equipment is worth
P600,000. What is the amount of non controlling interest in the consolidated statement of financial
position on the date of acquisition?
a. P128,000
b. P150,000
c. P164,000
d. P120,000
ANSWER: C
Rationale
Cash
P 20,000
Inventory
450,000
Equipment
600,000
Total Assets 1,070,000
Liablities
(250,000)
Net Assets
P820,000
X 20%
NCI
P164,000
28. Using the data in the preceding number what is the amount of goodwill (gain on acquisition) to be
reported in the consolidated statement of financial position on the date of acquisition?
a. P98,000
b. P100,000
c. P112,000
d. P106,000
ANSWER: C
Rationale
Acquisition Cost (8000 x 68)
NCI
Total
Less: Net Assets
Gain on Acquisition
P544,000
164,000
P708,000
P820,000
(P112,000)
29. The balance sheets of Min Ltd. and Kim Ltd on June 30,2017 were as follows:
Min Ltd
Kim Ltd
Current assets
P 600
P 800
Non-current assets
1 200
2 900
Total assets
P1 800
P3 700
Current Liabilities
Non-current liabilities
Share Capital
100 shares
60 shares
Retained Earnings
Total equity and liabilities
P 250
450
P700
P 700
1 000
P 1 700
P 300
P 600
1 400
P2 000
P3 700
800
P1 100
P1 800
On July , 2017, Min Ltd acquired all the issued shares of Kim Ltd giving in exchange 21/2 Min Ltd shares for
each ordinary share of Kim Ltd. Min Ltd thus issued 150 shares to acquire the 60 shares issued by Kim Ltd.
The fair value of each ordinary share of Kim Ltd on July 1,2017is P40, while the quoted market price of Min
Ltd’s ordinary shares is P16. The fair values of Min Ltd’s identifiable assets and liabilities at acquisition date are
the same as their carrying amounts except for the non-current assets whose fair value was P1 500. The tax
rate is 30%.
The amount of goodwill acquired on July 1,2016 is
a. P1 160
c. P400
b. P 856
d. P360
Solution:
ANS: D
Consideration transferred (40 shares* x P40)
Less: Book value of SHE-Pedro Ltd (P300 + P800) x 100%
Allocated Excess
Less: Over/Under valuation of Assets and Liabilities:
Increase in Non-current assets: [(P1 500 – P1 300) x
100% x 70%
Goodwill
Currently issued
Additional shares issued
100%
Min Ltd
150 60%
100 40%
P1 600
1 100
P 500
P
Kim Ltd
60 60%
40 / 40%
140
360
Total shares
250
100
**150/250
Min Ltd issues 21/2 shares in exchange for each ordinary share of Kim Ltd. all of Min Ltd’s shareholders
exchange their shares for Min Ltd. Min Ltd therefore issues 150 shares (60 x 21/2) for the 60 shares in Kim Ltd.
Min Ltd is now the legal parent of the subsidiary, Kim Ltd. however, analyzing the shareholding in Min Ltd
shows that it consists of the 100 shares existing prior to the merger and 150 new shares held by former
shareholders in Kim Ltd. In essence, the former shareholders of Kim Ltd now control both entities Min Ltd and
Kim Ltd. The former Kim Ltd shareholders have a 60% interest in Min Ltd[150/(100+150)]. The IASB argues
that there has been a reverse acquisition, and that Kim Ltd is effectively the acquirer of Min Ltd.
30. On July 1,2016, Naly Co. Acquired all the issued share capital of Lito Co. giving in exchange of 120,000
shares in Naly Co. these having a fair value of P5 per share. At acquisition date, the balance sheets of Naly
Co. And Lito Co. And the fair values of Lito Co.’s assets and liabilities were as follows:
Naly Co.
Lito Co.
Carrying Amount
Carrying Amount
Fair Value
ASSETS
Cash
P 15,000
P 5,000
P 5,000
Inventory
92,000
75,000
80,000
Investment in Subsidiary
(Shares in Lito Co.)
500,000
Equipment
620,000
480,000
330,000
Accumulated depreciation
(180,000)
(170,000)
Land
120,000
150,000
170,000
TOTAL ASSETS
P967,000
P540,000
LIABILITIES AND EQUITY
Liabilities
Payables
Tax liabilities
Provisions
Total liabilities
Equity
Share capital
Retained earnings
Total equity
TOTAL EQUITY AND LIABILITIES
P 27,000
10,000
30,000
P 67,000
P34,000
6,000
P550,000
350,000
P900,000
P967,000
P360,000
140,000
P500,000
P540,000
P34,000
6,000
P 40,000
At acquisition date, Lito Co. Has an unrecorded patent with a fair value of P20,000 and a contingent liability
with a fair value of P15,000. The tax rate is 30%.
The amount of goodwill acquired on July 1,2016:
a. P65,000
c. P50,000
c. P45,000
d. Zero
Solution:
ANS: A
Consideration transferred (120,000 shares x P5)
Less: Book value of SHE-Lito P500,000 x 100%
Allocated excess
Less: Over/Under valuation of Assets and Liabilities:
Increase in Land: P20,000 x 100% x 70%
Increase in Equipment: P20,000 x 100% x 70%
Increase in Inventory: P5,000 x 100% x 70%
Increase in Patent: P20,000 x 100% x 70%
P600,000
500,000
P100,000
P14,000
14,000
3,500
14,000
Decrease in Provision : (P20,000) x 100% x 70%
Goodwill
( 10,500)
35,000
P 65,000
The net fair value of the subsidiary could be calculated by revaluing the assets and liabilities of the subsidiary
from the carrying amounts to fair value, remembering that under PAS No. 12 Income Taxes revaluation of
assets requires a recognition of the tax effect of the revaluation because there is a difference between the
carrying amount and the tax base caused by the revaluation.
31. On January 1, 2016, Park Corporation and Strand Corporation and their condensed balance sheet
are as follows:
Park Corporation
Strand Corporation
Current Assets………………………………..
P70,000
P20,000
Non-current Assets…………………………..
90,000
40,000
Total Assets…………………………………..
P160,000
P60,000
Current Liabilities…………………………….
Long term debt……………………………….
Stockholder’s Equity…………………………
Total Liabilities and Equities………………..
P30,000
50,000
80,000
P160,000
P10,000
50,000
P60,000
On January 2, 2016, Park Corporation borrowed P60,000 and used the proceeds to obtain 80% of the
outstanding common shares of Strand Corporation. The acquisition price was considered proportionate
to Strand’s fair value. The P60,000 debt is payable in 10 equal annual principal payments, plus
interest, beginning December 31,2016. The excess fair value of the acquired net assets is allocated to
inventory (60%) and to goodwill (40%).
On a consolidated balance sheet as of January 2, 2016, what should be the amount of goodwill using
proportionate basis (partial)?
a.
b.
c.
d.
P0
P8,000
P10,000
P20,000
Answer: B
Fair value of consideration given
Less: Book value of net assets (P50,000 x 80%)
Allocated excess
P60,000
40,000
P20,000
Less: Increase in inventory (P20,000x60%)/80%
=P15,000 increase in inventory x 80%
Goodwill (partial)
12,000
P8,000
32.Pita Company acquires a controlling interest in Soda Company in the open market for P120,000.
The P100 par value capital stock of Soda Company at the date of acquisition is P100,000 and its
retained earnings amounts to P50,000. The market value per share of Soda Company is P150 per
share. In the consolidated statement of financial position, non-controlling interest would show a
balance of:
a.
b.
c.
d.
P80,000
P5,000
P30,000
P35,000
Answer: C
Controlling (Parent) interest:
Shares acquired (P120,000 / P150)
800 shares
÷1,000
Divided shares outstanding (P100,000 /P100)
Parent’s interest
80%
Minority interest in net assets of subsidiary (P120,000 / 80% x 20%)
P30,000
33.AA Company acquired all the issued share capital of BB Company on March 31,2016 giving in exchange of
100,000 shares in AA Co. These having a fair value of P5 per share. At acquisition date, the balance sheets of
AA Co and BB Co. And fair values of BB Co.’s assets and liabilities,were as follows:
AA Co.
BB Co.
Carrying Amount
Carrying Amount
Fair Value
Assets:
Cash .................................................................. P 15,000
P 5,000
Inventory...........................................................
75,000
80,000
330,000
92,000
P 5,000
Investment in Subsidiary
(Shares in BB Co.) ........................................
500,000
Equipment ......................................................
620,000
480,000
Accumulated depreciation .............................
(180,000)
(170,000)
Land ..............................................................
120,000
150,000
Total Assets..................................................
P 967,000
P 540,000
170,000
Liabilities and Equities:
Liabilities
Tax Liabilities ............................................. P 10,000
P 6,000
P 6,000
Payables....................................................... 27,000
Provisions.................................................
30,000
34,000
60,000
Total Liabilities .......................................... P 67,000
P100,000
Equity
Share Capital ............................................. P 550,000
Retained Earnings ..................................... 350,000
P 900,000
P440,000
P300,000
140,000
Total Liabilities and Equity ...........................
P540,000
P 967,000
34,000
60,000
At acquisition date, BB Co. Has an unrecorded patent with a fair value of P20,000 ,contingent liability with a fair
value of P15,000, and one of the payables is a dividend payable of P8,000. AA Co. acquires the shares of BB
Co. On a cum div basis or “dividends-on” arrangement.The tax rate is 30%. The amount of goodwill acquired
on March 31,2016:
A.P 16,000
B. P 17,000
C.P 18,000
D.P 19,000
Answer: B
Consideration transferred[(100,000 shares x P5) - P8,000] ................................................. P 492,000
Less:Book Value of Shareholders Equity-BB Co:
P440,000 x 100% .................................................................................................. 440,000
Allocated Excess................................................................................................................. P 52,000
Less: Over/Under valuation of Assets and Liabilities:
Increase in Land: P20,000 x 100% x 70%..........................P 14,000
Increase in Equipment: P20,000 x 100% x 70%.................. 14,000
Increase in Inventory: P5,000 x 100% x 70%...................... 3,500
Increase in Patent:P20,000 x 100% x 70%...........................14,000
Increase in Provision: P(15,000) x 100% x 70%.................(10,500)
35,000
Goodwill .................................................................................................................... P 17,000 (B)
34.What would be the effect on the consolidated financial statements if an unconsolidated subsidiary is
accounted for by the cost method of accounting, but consolidated financial statements are prepared for other
subsidiaries?
a. All the unconsolidated subsidiary's ledger account balances would be included individually in the
consolidated financial statements.
b. Consolidated net income would not include any amounts for the unconsolidated subsidiary.
c. Consolidated net income would be the same as if the subsidiary had been included in the consolidation.
d. Dividend revenue from the unconsolidated subsidiary would be included in consolidated net income.
Answer: D
35. Under SFAS 141R, what value of the assets and liabilities is reflected in the financial statements on the
acquisition date of a business combination?
a. Carrying value
b. Fair value
c. Book value
d. Average value
Answer: b
36.The parent company owned 65% of subsidiary’s net assets. On the consolidated statement of financial
position of the combined entity, the retained earnings has amount equal to:
a.
b.
c.
d.
The subsidiary’s retained earnings.
The 65% of the subsidiary’s retained earnings plus parent company’s retained earnings.
The 100% of the subsidiary’s retained earnings plus parent company’s retained earnings.
The parent company’s retained earnings.
ANSWER: (d)
Only the parent company’s retained earnings will appear on the consolidated statement of financial
position.
37.Which is not true about the working paper for consolidated statement of financial position on the date of
acquisition?
a. The amounts in the consolidated column reflects the financial position of single economic entity comprising
two legal entities, after eliminating all intercompany balances
b. Consolidated retained earnings include only the retained earnings of the parent company
c. The elimination entry is recorded in the parent and subsidiary’s accounting records
d. The consolidated paid-in capital amounts are those of the parent company only.
Ans. C
38.On December 31,2013, Palo Company paid P990,000 for 99% of the outstanding coomon stock of Sota
Company. The remaining 1% was held by a stockholder who was unwilling to sell the stock. Sota’s net assets
had a book value of P850,000 and a fair market value of P900,000 when it was acquired by Palo. If Sota uses
push-down accounting, the non-controlling interest should be reported at:
a. P8,500
b. P9,000
c.P9,900
d. P10,000
Ans. B
Solution:
P900,000 x 1%= P9000
39. Rizal Corporation paid P 100,000 cash for the net assets of Bonifacio Corporation which consisted of the
following:
Current Assets
Property and Equipment
Liabilities assumed
Book Value
Fair Value
P 98,000
P 120,000
P 350,000
P 400,000
P 100,000
P 110,000
The property and equipment acquired in this business combination should be recorded at what amount?
a. P 400,000
b. P 80,000
c. P 350,000
d. P 100,000
Answer: A
40. The Property and equipment should be recorded at its Fair Value of P 400,000
On January 2, 2011, Bulalo Co. purchased 75% of Pares Co’s outstanding common stock. On that date, the
fair value of the 25% noncontrolling interest was P35,000. During 2011, Pares had net income of P20,000.
Selected balance sheet data at December 31,2011, is as follows:
Total assets
Liabilities
Common stock
Retained Earnings
Bulalo
P420,000
P120,000
100,000
200,000
Pares
P180,000
P60,000
50,000
70,000
During 2011 Bulalo and Pares paid cash dividends of P25,000 and P5,000 respectively, to their shareholders.
There were no other intercompany transactions.
In Bulalo’s December 31,2011 consolidated balance sheet, what amount should be reported as noncontrolling
interest in net assets?
a.
b.
c.
d.
P30,000
P35,000
P38,750
P40,000
ANSWER: C
Fair value of noncontrolling interest
P35,000
Plus: Share of net income (25% x 20,000)
5,000
Less: Share of dividends (25% x 5,000)
(1,250)
Noncontrolling interest
P38,750
SUBSIQUENT DATE OF ACQUISITION
1. Watkins Inc. acquires all of the outstanding stock of Guen Corporation on January 1, 2016. At that date,
Guen owns only three assets and has no liabilities:
Book Value
Fair Value
Inventory
P40, 000
P50, 000
Equipment
80, 000
75, 000
Building
200, 000
300, 000
If Walkins pays P450, 000in cash for Guen, what amount would be represented at the subsidiary’s building in a
consolidation at December 31, 2018, assuming the book value at that date is still P200. 000?
a. 200, 000
c. 285, 000
b. 255, 000
d. 300, 000
ANSWER:
Building, book value
P200, 000
Increase to fair value (300, 000- 200, 000)
100, 000
Amortization of allocated excess (100, 000/20 x 3 years)
(15, 000)
Consolidated building, 12/31/2018
P285, 000
2. On January 1, 2016, Harry Inc. reports net assets of P880, 000 although a patent (with a 10-year life) having
a book value of 330, 000is now worth P400, 000. Newt Corporation pays P840, 000 on that date for an 80%
ownership in Newt. On December 31, 2017, Harry reports total expenses of P621, 000 while Newt reports
expenses of P714, 000. What is the consolidated total expense balance on December 31, 2017?
a. 1, 197, 800
c. 1, 342, 000
b. 1, 335, 000
d. 1, 349, 000
ANSWER:
Harry expense
Newt expense
P621, 000
P714, 000
Amortization of allocated excess
(400, 000 – 330,000) / 10 years
7, 000
721, 000
Consolidated total expense for 2017
P1, 342, 000
3. Keep,Inc., a calendar year corporation, acquires 70% of George Company on September 1, 20x4 and an
additional 10% on April 1, 20x5. Total annual amortization of P6,000 relates to the first acquisition. George
reports the following figures for 20x5:
Revenues
P500,000
Expenses
400,000
Retained earnings, 1/1/20x5
300,000
Dividends paid
50,000
Common Stock
200,000
Without regard for this investment,Keefe earns P300,000 in net income during 20x5. All net income is earned
evenly throughout the year. What is the controlling interest in consolidated net income for 20x5?
a.
b.
c.
d.
P371,500
P372,850
P373,300
P394,000
ANSWER: B
Net income from own operations;
Parent – Keefe
Subsidiary - George (P500,000 – P400,000)
Less: Amortization of allocated excess
Impairment of goodwill (if any)
Consolidated/Group Net Income
Less: Non-controlling interest in Net Income
Subsidiary net income from own operations:
1/1/20y0 - 4/1/20y0 (3 months):
P100,000 x 3/12 = P25,000 x 30%
4/1/20y0 – 12/31/20y0 (9 months):
P100,000 x 9/12 = P75,000 x 20%
Total
Less: Amortization of allocated excess:
1/1/20y0 – 4/1/20y0 (3 months)
P6,000 x 3/12 = P1,500 x 30%
4/1/20y0 – 12/31/20y0 (9 months)
P6,000 x 9/12 = P4,500 x 20%
Impairment of goodwill (if any):
First 3 months: P 0 x 30%
0
Remaining 9 months: P 0 x 20%
0
CNI attributable to the controlling interest (CI-CNI)/ Profit
attributable to equity holders of parent
P 300,000
100,000
P 400,000
6,000
0
P 394,000
P 7,500
15,000
P 22,500
450
900
21,150
P372,850
4.On April 1, Narz Inc. exchages P430,000 fair value consideration fot 70% of the outstanding stock of Anne
Corporation. The remaining 30% of the outstanding shares continued to trade at a collective fair value of
P165,000. Anne’s identifiable assets and liabilities each had book values that equated their fair values on April
1 for a net total of P500,00. During the remainder of the year, Anne generates revenues of P600,000 and
expenses of P360,000 and paid no dividends. On a December 31 consolidated balance sheet, what amount
should be reported as a non-controlling interest on a full fair value basis?
a. P219,000
b. P237, 000
c. P287,000
d. P250,000
ANS: A
Book value of Stockholder’s Equity of Subsidiary 4/1/16
Add: Net income for 9 months
(P600,000-P360,000= P240,000 x 9/12)
Book value of Stockholder’s Equity of Subsidiary 12/31/16
Add: Adjustments to reflect fair value
Fair value of Stockholder’s Equity of Subsidiary 12/31/16
Multiplied by: Non-controlling interes percentage
Non-controlling interest (partial goodwill)
Add: Non-controlling interest in Full Goodwill
(P95,000 full -P80,000 partial)
Non-controlling Interest (full)
Partial Goodwill
Fair value of Subsidiary:
Fair value of consideration transferred: Cash
Less: Book value of Net Assets (Stockholder’s EquitySubsidiary): (P500,000x 70%)
Partial Goodwill
Full-goodwill
(70%) Fair value of consideration transferred: Cash
(30%) Fair value of non-controlling interests
(100%) Fair value of subsidiary
Less: Book value of Net Assets
(Stockholder’s Equity- Subsidiary)
Goodwill (Full/Gross-up)
P500,000
180,000
P680,000
0
P680,000
30%
P204,000
15,000
P219,000
P430,000
350,000
P80,000
P430,000
165,000
P595,000
500,000
P95,000
5.On January 3, 2016, Ali Company acquired 80% of Frazer Corp.’s common stock for P344,000 in cash. At
the acquisition date, the book values and fair values of Frazer’s assets and liabilities were equal, and the fair
value of the non-controlling interest was equal to 20% of the book value of Frazer. The stockholders’ equity
accounts of the two companies at the acquisition date are:
Common stock, P5 par value
Additional paid in capital
Retained Earnings
Total Stockhoders’ Equity
Ali
P500,000
300,000
350,000
P1,150,000
Frazer
P200,000
80,000
150,000
P430,000
Non-controlling interest was assigned income of P11,000 in Ali’s consolidated income statement in
2016.
What will be the amount of net income reported by Frazer Corp. in 2016?
a.
b.
c.
d.
P44,000
P55,000
P66,000
P36,000
ANS: B
Full-goodwill Presentation (work back approach)
Non-controlling interest in net income
Divided by: Non-controlling interest
Subsidiary-Frazer Net Income from his own operations
P11,000
20%
P55,000
6. At the end of 2016, Micah Company’s stockholders equity includes common stock of 500,000 and additional
paid in capital of 300,000.Paper purchased a 70% interest in Slick Company on January 1, 2016, when the
non-controlling interest in Slick had a fair value of 90,000. No differential arose from the business combination.
During 2016, Slick report net income of 20,000 and declares dividend of 5,000. The 2016 consolidated balance
sheet includes retained earnings of 630,000 (controlling interest portion).
Determine the consolidated equity on December 31, 2011:
a. 1,430,000
b. 1,457,000
c. 1,524,500
d. 1,526,000
ANS:C
Consolidated Equity:
Attributable to Equity Holders’ of Parent/ Controlling Interest:
Common stock
Additional paid-in capital
Retained earnings
Equity Holders of Parent/Controlling Interest
Non- Controlling interest:
(90,000+(20,000-5,000) X 30%
Consolidated Equity
500,000
300,000
630,000
-------------1,430,000
94,500
-------------1,524,500
7. Erhlyn’s Company acquired an 80% interest in the Aira Company when Aira’s equity comprised share capital
of 100,000 and retained earnings of 500,000. Aira’s current statement of financial position shows share capital
of 100,000, a revaluation reserve of 400,000 and retained earnings of 1400,000.
What figure in respect of Aira’s retained earnings should be included in the consolidated statement of financial
position?
a. 720,000
b. 1,440,000
c. 1,040,000
d. 1,520,000
ANS:A
This is the parent company’s share of the post acquisition retained earnings of the subsidiary. This is
determined by deducting (i) the parent company’s share of the retained earnings of the subsidiary of the date of
acquisition from (ii) the parent company’s share of the retained earnings of the subsidiary at the end of the
current reporting period.
Aira’s retained earnings, date of acquisition
Less: Aira’s retained earnings, end of the current reporting period
X: Controlling interest %
Aira’s retained earnings included in the consolidated financial position
500,000
1,400,000
900,000
80%
720,000
8. Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter
rival, by issuing bonds with a par value and fair value of P150,000. Immediately prior to the acquisition. Beta
reported total assets of P500,000, liabilities of P280,000, and stockholders' equity at P220,000. At that date,
Standard Video reported total assets at P400,000, liabilities of P250,000., and stockholders' equity of
P150,000. Included in Standard's liabilities was an account payable to Beta in the amount at P20,000 which
Beta included in its accounts receivable.
Based on the preceding information: (1) what amount of total assets did Beta report in its balance sheet
immediately after the acquisition: (2) what amount of assets was reported in the consolidated balance sheet
immediately after the acquisition?
a. (1) P650,000; (2) P650,000
b. (1) P650.000; (2) P800,000
c. (1) P800,000; (2) P650,000
d. (1) P800.000: (2) P800000
Answer: B
Solution
Beta's Balance Sheet
Total assets of Beta Company before issuance of shares
Add: Investment in Subsidiary (at fair value)
Total asset in the balance sheet of Beta Company
P 500,000
150,000
P 650,000
Consolidated Balance sheet:
Beta's(parent) assets
Standard Video's(subsidiary) assets
Total assets before eliminations
Investment in subsidiary
A/R from Standard
Consolidated Total assets
P 650,000
400,000
P 1,050,000
(150,000)
(20,000)
P 880,000
9. Montero Company is contemplating the purchase of the net assets of Toyota Company for P800,000 cash.
To complete the transaction, direct acquisition costs are P15,000. The balance sheet of Toyota Company on
the purchase date is as follows:
Toyota Company
Balance Sheet
December 31, 2014
Assets
Liabilities and Equity
Current assets
P 80,000
Liabilities
P100,000
Land
50,000
Common Stock, P10 par
100,000
Building
450,000
Paid-in capital
150,000
Acc.depreciation
(200,000)
Retained earnings
230,000
Equipment
300,000
Acc. depreciation
(100,000)
Total
P580,000
Total
P580,000
The following fair values were obtained for Toyota’s assets and liabilities:
Current assets
P100,000
Equipment
P275,000
Land
75,000
Liabilities
102,000
Building
300,000
Determine the increase in assets that resulted from the business combination.
A. P 887,000
B. P 902,000
C. P 917,000
D. P 747,000
Answer: A
Solution
Fair value of assets acquired
P750,000
Goodwill (800,000 - 648,000)
152,000
OPC
(15,000)
Increase in Assets
P887,000
10 . DMCI Company acquired 80% capital interest of STONERICH Company. DMCI paid P1,240,000 for the
80% interest and paid P88,000 for legal assistance (related to the acquisition). STONERICH net assets valued
at P1,200,000 composed of capital stock, P600,000; additional paid-in capital of P180,000, and retained
earnings of P420,000. At the time of acquisition, STONERICH building is undervalued by P100,000 and has
still a remaining life of 30 years. Any other excess is allocated to goodwill. STONERICH Company reported net
income of P140,000 and paid dividends of P20,000 during the year.
How much is the income from investment under the equity method?
a. P 109,333
b. P 112,000
c. P 99,733
d. P 108,667
Answer: A.
Cost of investment (1,240,000 + 88,000)
Book value of investment (1,200,000 x 80%)
Excess of cost over book value
Income from investment:
Share (140,000 x 80%)
Amortization allocated to building
(100,000 x 80%/30 yrs.)
P 1,328,000
960,000
P 368,000
P 112,000
2,667
P 109,333
11. Western Company, buys all of the outstanding stock of Abenson Company on January 1, 2014. Annual
excess amortizaton of P12,000 results from this purchase transaction. 0n the date of the takeover, Western
reported retained earnings of P400,000 while Ahenson reported a P200,000 balance. Western reported income
of P40,000 in 2014 and P50,000 in 2015 and paid 10,000 in dividends each year. Abenson reported net
income of P20,000 in 2014 and P30,000 in 2015 and paid P5,000 in dividends each year.
Assume that Western's reported income does indude income derived from the subsidiary.
If the parent uses the cost method of accounting investment in subsidiary, what are the consolidated retained
earnings on December 31, 2015?
a. P470,000
b. P510,000
c. P446,00
d. 486,000
Answer: D.
Western's retained eamlngs at the date of takeover
Add: Reponed net income of Wetem: 2014 and 2015 (40,000+50,000)
Less: Dividends paid for 2 years (10,000 x 2)
Add: Undistributed nt Income of Abenson for 2 years
(20,000 + 30,000-5,000-5,000)
Annual excess amortization for 2 years (12,000 X 2)
Consolidated Retained Earnings, December 31,2015
P400,000
90,000
( 20,000)
40,000
24,000
P486,000
12. Coco Company 's CI during the year was P 250,000, it declared dividends of P 90,000 and the depreciation
and amortization of current fair value excess was P 50,000. If it was acquired last year by Nut Company as its
wholly owned subsidiary, the NCI in CI of subsidiary under the cost method of accounting for the current year
is:
a. P 150,000
b. P 160,000
c. P 200,000
d. P -0-
Answer: d. P -0Because there is no NCI in a wholly owned subsidiary.
13. Alonte Corporation holds 80% of Ronnie Company and uses the cost method in accounting for its
investment. During 2015, Ronnie Company reported CI of P 80,000 and paid dividends of P 60,000. There was
no purchase difference at the time of investment. What amount of Consolidated CI attributable to parent will be
reported in 2015?
a. P 144,000
b. P 164,000
c. P 156,000
d. P 80,000
Answer: b. P 164,000
Solution:
Alonte CI
Parent's share of Subsidiary Net Income
( P 80,000 x 80% )
Less: Dividends Received by Alonte
( P 50,000 x 80% )
Consolidated CI Attributable to Parent
P 140,000
64,000
40,000
P 164,000
14. On January 1, two years ago, Pab Corporation purchased all of the outstanding common stock of Shaw
Company for P220,000 cash. On that date, Shaw's net assets had a book value of P148,000. Equipment with
an 8-year life was undervalued by P20,000 in Shaw's financial records. Shaw has a database that is valued at
P52,000 and will be amortized over ten years. Shaw reported net income of P25,000 in the year of acquisition
and P32,500 in the following year. Dividends of P2,500 were declared and paid in each of those two years.
The third year of operations is now complete. For each of the two companies, selected account balances as of
December 31 for this third year are as follows:
What is consolidated retained earnings at January 1 of the third year if the parent company uses the initial
value method?
a. P191,100
b. P192,500
c. P187,000
d. P134,600
Answer: D
Pab Company' s retained earnings at january 1 of third year. P150,000
Additional equity: first year (P25,000 – P2,500).
22,500
Additional equity: second year (P32,500 – P2,500).
30,000
Amortization for 2 years (P7,700/2years).
(15,400)
Consolidated Retained Earnings at january 1 of 3rd year
P187,100
15. Peter, Inc. owns 100% of The Rock Company. The book value of the Goodwill is P300,000. When Peter
made its investment, The Rock had a fair value of P2,800,000. Today, the value of The Rock has fallen to
P2,250,000. An appraisal of The Rock's net assets reveals a fair value of P2,075,000. How much "impairment"
should Peter record related to its investment in The Rock?
a.
b.
c.
d.
P550,000
P175,000
P0
P125,000
Answers: D
Fair value of Pink' s investment
Fair value of the Red' s Assets.
Goodwill
Carrying amount of Goodwill.
Goodwill Impairment.
P 2,250,000
P 2,075,000
P 175,000
(300,000)
( P 125,000 )
16. Leslie Products, Inc purchased 60% of the stock of Edz Cream Company on Jan. 2, 2016 for P180,000. On
that date Edz reported retained earnings of P100,000 and had P200,000 of stock outstanding. Leslie’s retained
earnings was P400,000 at acquisition. Leslie accounts for its investment in Edz under the cost method. The
companies recorded the following results for 2016 and 2017:
2016: CI
Dividends paid
2017: CI
Dividends paid
Leslie
P70,000
P25,000
P90,000
P30,000
Edz
P35,000
P30,000
P40,000
P15,000
What amount of consolidated CI attributable to parent and consolidated retained earnings will be reported in
2017?
a. P121,000 and P523,000, respectively
b. P105,000 and P523,000, respectively
c. P105,000 and P525,000, respectively
d. P121,000 and P533,000, respectively
Ans. C
Consolidated net income – 2017
Net income – Leslie
Dividend income (P15,000 x 60%)
Edz’ net income
MINIS (P40,000 x 40%)
Consolidated net income attributable to parent – 2017
Consolidated retained earnings – 2017
Retained earnings, Jan. 2, 2016- Leslie
Consolidated net income attributable to parent– 2016:
Net income – Leslie
Dividend income (P30,000 x 60%)
Edz’ net income
MINIS (P35,000 x 40%)
Dividends paid, 2016– Leslie
Consolidated retained earnings, Dec. 31, 2016
Consolidated net income attributable to parent– 2017
Dividends paid. 2017 – Leslie
Consolidated retained earnings, Dec. 31, 2017
P 90,000
(9,000)
40,000
(16,000)
P105,000
P 400,000
P70,000
(18,000)
35,000
( 14,000)
75,000
(25,000)
P450,000
105,000
(30,000)
P525,000
17. For the year ended Feb. 28, 2016, S Company, the 90% owned purchased subsidiary of P Corporation,
declared a dividend of P100,000 and had CI of P300,000. Also for that year, amortization of the current fair
value differences of S’s identifiable net assets was P60,000. The balance of NCI in CI of Subsidiary account on
Feb. 28, 2016, is:
a. P24,000
b. P21,000
c. P24,900
d. P20,000
Ans. A
S’s net income
Amortization of allocated difference
Adjusted net income of S
P300,000
( 60,000)
P240,000
Minority interest in net income of subsidiary (P240,000 x 10%)
P 24,000
18. On January 1, 2015, Wilhelm Corporation acquired 90% of Kaiser Company’s voting stock, at underlying
book value. The fair value of the non-controlling interest was equal to 10% of the book value of Kaiser at that
date. Wilhelm uses the equity method in accounting for its ownership of Kaiser. On December 31, 2016, the
trial balances of the two companies are as follows:
DebitCreditDebitCredit
Current assetsP200, 000P140, 000
Depreciable assets350, 000250, 000
Investment in Kaiser Company162, 000
Depreciation expense27, 00010, 000
Other expenses95, 00060, 000
Dividends declared20, 00010, 000
Accumulated depreciationP118, 000P80, 000
Current liabilities100, 00080, 000
Long-term debt100, 00050, 000
Common stock100, 00050, 000
Retained earnings150, 000100, 000
Sales 250, 000
Income from Subsidiary36, 000
P854, 000P854, 000P470, 000P470, 000
Based on the preceding information, what amount would be reported retained earnings in the consolidated
balance sheet prepared at December 31, 2016?
a. P424, 000
b. P314, 000
c. P294, 000
d. P150, 000
Ans. : C
Solution:
Parent’s (Wilhelm) Retained earnings, 1/1/2015*P150, 000
Add: CNI attributable to the controlling interest (CNI – CI)/
Profit attributable to equity holders of parent164, 000
Less: Dividends – Parent (Wilhelm)20, 000
Parent’s (Wilhelm) Retained earnings, 12/31/3015
(Equity method) or Consolidated Retained EarningsP294, 000
Net income from own operations:
ParentP128, 000
Subsidiary40, 000
P168, 000
Less: Amortization of allocated excess
Impairment of full-goodwill (if any)
Consolidated/Group Net Income
Less: Non-controlling interest in Net Income:
Subsidiary income from own operationsP40, 000
Less: Amortization of allocated excess
Impairment of full-goodwill (if any)
P40, 000
X Non-controlling interests10%4, 000
CNI attributable to the controlling interest (CNI – NI)/
Profit attributable to equity holders of parentP164, 000
Net income from own operations
Parent Subsidiary
SalesP250, 000P110, 000
Other expenses95, 00060, 000
Depreciation expense27, 00010, 000
Net income from own operationsP128, 000P40, 000
*It should be noted that since equity method was used, the retained earnings on January 1, 2015 is also
considered as the consolidated retained earnings.
19. On January 1, 2016, Plimsol Company acquired 100% of Shipping Corporation’s voting shares, at
underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping’s
retained earnings were P75, 000 on the date of acquisition. On December 31, 2016, the trial balance data for
the two companies are as follows:
DebitCreditDebitCredit
Current assetsP100, 000P75, 000
Depreciable assets (net)200, 000150, 000
Investment in Shipping Company125, 000
Depreciation expense20, 00015, 000
Other expenses60, 00045, 000
Dividends declared25, 00015, 000
Current liabilities40, 00025, 000
Long-term debt75, 00050, 000
Common stock100, 00050, 000
Retained earnings150, 00075, 000
Sales150, 000100, 000
Dividends income15, 000
P530, 000P530, 000P300, 000P300, 000
Based on the information provided what amount of retained earnings will be reported in the consolidated
balance sheet prepared on December 31, 2016?
a. P310, 000
b. P235, 000
c. P225, 000
d. P210, 000
Ans. B
Solution:
Parent’s (Plimsol) Retained earnings, 1/1/2016*P150, 000
Add: CNI attributable to the controlling interest (CNI- NI)/
Profit attributable to equity holders of parent**110, 000
Less: Dividends – Parents (Plimsol)25, 000
Parent’s (Plimsol) Retained earnings, 12/31/2016
(Equity method) or Consolidated Retained EarningsP235, 000
Or alternatively. Consolidated Retained Earnings can also be determined by using the Retained Earnings of
Parent on December 31, 2016 under cost method (model). Then adjust the Retained Earnings of Parent under
the cost method (model) on December 31, 2016 from cost to equity method from the date of acquisition to
arrive at Retained Earnings of Parent on December 31, 2016 under the equity method, which will eventually be
considered as the Consolidated Retained Earnings on December 31, 2016. Thus, the computation is as
follows:
Parent’s (Plimsol) Retained Earnings, 1/1/2016*P150, 000
Add: Reported Net Income of Parent – 2016 (cost model):
Net income of Parent from its own operationsP70, 000
Add: Dividend Income15, 00085, 000
Less: Dividends declared – Parent (Plimsol)25, 000
Parent’s (Plimsol) Retained Earnings, 12/31/2016 (cost model)P210, 000
Retroactive adjustment to convert cost model to equity method since the date of acquisition for purposes of
consolidation / Parent’s share of adjusted net increase is subsidiary’s retained earnings:
Retained earnings – Subsidiary, 1/1/2016P75, 000
Retained earnings – Subsidiary, 12/31/2016:
Retained earnings – Subsidiary, 1/1/2016P75, 000
Add: Net income of Subsidiary – 201640, 000
Less: Dividends declared15, 000100, 000
Increase in retained earnings or cumulative net income less cumulative dividends25, 000
Parent’s (Plimsol) Retained Earnings (equity method) or Consolidated Retained Earnings, 12/31/2016P235,
000
*It should be noted that on the date of acquisition, the retained earnings of parent is considered also as the
consolidated retained earnings regardless of the method (cost or equity) used, but not on subsequent years.
**Net income from own operations:
ParentP70, 000
Subsidiary40, 000
P110, 000
Less: Amortization of allocated excess
Impairment of full-goodwill (if any)
Consolidated/Group Net IncomeP110, 000
Less: Non-controlling interest in Net Income:
Subsidiary net income from own operations
Less: Amortization of allocated excess
Impairment of full-goodwill (if any)
P40, 000
X Non-controlling interest 0%
CNI attributable to the controlling interest (CN – NI) / Profit attributable to equity holders of parentP110, 000
Net income from own operations
ParentSubsidiary
SalesP150, 000P100, 000
Other expenses60, 00045, 000
Depreciation expense20, 00015, 000
Net income from own operationsP70, 000P40, 000
20. Jay Corporation holds 70 percent of Shane Company and uses the cost method in accounting for it’s
investment. During 2015, Shane Company reported CI of P70,000 and paid dividends of P40,000. Jay reported
CI (including dividend income) of P130,000 and paid dividends of P50,000. There was no purchase difference
at the time of investment. What amount of consolidated CI attributable to parent will be reported for 2015?
a.
b.
c.
d.
P151,000
P172,000
P102,000
P 70,000
Ans. B
Net income – Pablo
Dividend income (P40,000 x 70%)
Sito’s net income
MINIS (P70,000 x 30%)
Consolidated net income attributable to parent
P130,000
(28,000)
70,000
(21,000)
P151,000
21. Denver Co. acquired 60% ot the common stock of Kailey Corp. on September 1, 20x4. For 20x4, Kailey
reported revenues of P800,000 and expenses at P620,000. The annual amount of amortization related to this
acquisition was P15,000. Denver Co. accounts for its consolidations according PFRS 3.
In consoiidation. the totai amount of expenses related to Kailey and to . Denver‘s acquisition at Kailey tor 20x4
is determined to be
A. P206,667
B. P211,667
C. P620,000
D. P635,000
ANSWER: B
As a general rule, if problem is silent it is assumed that expenses are generated evenly throughout the
year, thus:
Expenses (9/1/20x4-12/31/20x4): P620,000 x 4/12
P206,667
Amortization of allocated excess: P15,000 x 4/12
5,000
P 211,667
22. Pelican Corporation acquired a 30% interest in Crustacean Incorporated at book value several years ago.
Crustacean declared $100,000 dividends in 2005 and reported its income for the year as follows:
Income from continuing operations $ 700,000
Loss on discontinued division
(100,000)
Net income
$ 600,000
Pelican‘s Investment in Crustacean account for 2005 should increase by
a. S 150,000
b. S 160,000
c. S 180,000
d. S 210,000
Answer: a
Pelican’s share of income
equals $600,000x 30% =
Pelican’s share of
dividends = $100,000 x 30%
Increase in investment account
$ 180,000
$ (30,000)
$ 150,000
23. Xing Corporation owns 80 percent of the voting common shares of Adams Corporation. Noncontrolling
interest was assigned $24,000 of income in the 2009 consolidated income statement. What amount of net
income did Adams Corporation report for the year?
a. $ 150,000
b. $ 96,000
c. $ 120,000
d. $ 30,000
Answer: a
NCI share in income $ 24,000
Divided by NCI:
20%
Adams Net Income $ 120,000
Teri Corporation acquired 80% of Yaki Company’s stock on January 1, 20x5. At the acquisition date, Yaki had
the following account balances:
Cash and Receivables
Inventory
Plant Assets (net)
Liabilities
Common Stock
Retained Earnings
Book Value
P 30,000
100,000
250,000
150,000
10,000
220,000
Market Value
P 30,000
120,000
290,000
160,000
Remaining Life
3 months
5 months
8 years
5 years
Yaki has income of P80,000 and pays dividends of P20,000 during 20x6. Assuming there is no goodwill
impairment, what is the amount of income allocated to the non-controlling interest for 20x6?
a. P15,400
b. P19,400
c. P14,600
d. P18,600
Ans: c
Net Income
Less: Plant Assets
Liabilities
P80,000
P290,000 (MV)
250,000 (BV)
P 40,000/8 yrs
P160,000
150,000
P 10,000/5 yrs
Consolidated Income
NCI rate
Income allocated to NCI
(5,000)
(2,000)
P73,000
20%
P14,600
SD 2.
French Industries acquired an 80% interest in Fries Company by purchasing 24,000 of its 30,000 outstanding
shares of common stock at book value of P105,000 on January 1, 20x4. Fries reported net income in 20x4 of
P45,000 and in 20x5 of P60,000 earned evenly throughout the respective years. French received P12,000
dividends from Fries in 20x4 and P18,000 in 20x5. French uses the equity method to record its investment.
What is the balance of French’s Investment account in Fries account at December 31,20x5?
a. P105,000
b. P138,600
c. P159,000
d. P165,000
Ans: c
Investment (1/1/20x4)
Add: Share in net income – 20x4 (P45,000 x 80%)
Less: Dividends received
Investment (12/31/20x4)
Add: Share in net income – 20x5 (P60,000 x 80%)
Less: Dividends received
Investment (12/31/20x5)
P105,000
36,000
12,000
P129,000
48,000
18,000
P159,000
26.On January 1, 2016, Speed Co. purchased 75% of the common stock of Slow Co. for P632,000. On
this date, Slow Co. had common stock, other paid-in capital, and retained earnings of P80,000,
P240,000, and P380,000, respectively. Speed Co.’s common stock amounted to P1,000,000 and
retained earnings of P400,000.
On January 1, 2016, the only tangible assets of Slow Co. that were undervalued were inventory and
equipment. Inventory, for which FIFO is used, was worth P10,000 more that cost. The inventory was
sold in 2016. Equipment, which was worth P30,000 more than book value, has a remaining life of 8
years, and straight-line method is used. Any remaining excess is full-goodwill with an impairment for
2016 amounting to P6,000. Slow Co. reported net income of P 100,000 and paid dividends of P40,000.
Compute the Consolidated Net Income Attributable to Controlling Interest and Non-controlling interest
respectively using Full-Goodwill:
a.
b.
c.
d.
P250,812.50; P21,937.50
P254,812.50; P20,937.50
P250,000.00; P21,000.00
P255,000.00; P25,000.00
ANSWER: (a)
Net income from own operations:
Speed [P200,000 – (P20,000 x 75%)]………………………
Slow…………………………………………………………….
P
P
Less: Amortization of allocated excess……………………..
Impairment of full-goodwill……………………………..
Consolidated/Group Net Income…………………………….
Less: Non-controlling interest in Net Income
Slow net income from own
operations………………………….
P100,000
Less: Amortization of allocated excess…….
6,250
Impairment of full-goodwill
6,000
87,750
x: Non-controlling interest……………………
25%
CNI attributable to the controlling interest
P
185,000
100,000
285,000
6,250
6,000
272,750
P 21,937.50
P250,812.50
27. On January 1, 2016, Steven Corp. acquired 80% of Kevin Corp. in exchange for 2,700 shares of
P10 par common stock having a market value of P60,300. Steven Corp. and Kevin Corp. condensed
balance sheets were as follows:
Steven Corporation and Kevin Corporation
Balance Sheets at January 1, 2016
(before combination)
Steven
Corp.
Assets:
Cash………………………………………………………….
Accounts receivable (net)………………………………….
Inventories……………………………………………………
Building……………………………………………………….
Patents………………………………………………………..
Total assets………………………………………………
Liabilities and Equities:
Accounts payable…………………………………………….
Bonds payable, 10%.........................................................
Common stock, P10 par……………………………………..
Additional paid-in capital…………………………………….
Retained earnings…………………………………………….
Total liabilities and equities……………………………...
Kevin
Corp.
P15,450
17,100
11,450
89,500
P133,500
P18,700
4,550
8,050
20,000
5,000
P56,300
P
P 3,300
25,000
7,500
20,500
P56,300
2,000
50,000
50,000
7,500
24,000
P133,500
At the date of acquisition, all assets and liabilities of Kevin Corp. have book value approximately equal
to their respective market values except the following as determined by appraisal as follows:
Inventories (FIFO method)…………………………..
Building (net – remaining life – 4 years)……………
Patents (remaining life 10 years)……………………
Goodwill (no impairment)…………………………….
P 8,550
24,000
6,500
In what amount of partial goodwill on January 1, 2016:
a. P13,000
b. P13,100
c. P12,900
d. P12,100
ANSWER: (b)
Consideration given…………………………………………
Less: Book Value of SHE – Kevin Corp. 1/1/2016:
C/S – K: P25,000 x 80%........................................
APIC – K P7,500 x 80%.........................................
RE – K P 20,500 x 80%..........................................
Allocated Excess…………………………………………….
Less: Over/Under valuation of Assets and Liabilities:
*Increase in Inventories (P500 x 80%)……………..
*Increase in Building (P4,000 x 80%)….……………
*Increase in Patents (P1,500 x 80%)………………..
P60,300
P20,000
6,000
16,400
42,400
P17,900
P400
3,200
1,200
4,800
Goodwill – partial………………………………………………
*Inventories……………………
Building……………………….
Patents………………………..
Book Values
P 8,050
20,000
5,000
P13,100
Fair Values
P 8,550
24,000
6,500
Increase
P 500
4,000
1,500
P6,000
28. The Pony Company acquired all of the outstanding stock of Stag Company on January I, 2011, for
P206,000 in cash. Stag had a book value of only P140,000 on that date. However, equipment (having an eightyear life) as undervalued by P40,000 on Stag’s financial records. A building with a 20-year life was overvalued
by 10,000. Subsequent to the acquisition, Stag reported the following:
2011
2012
2013
CI
50,000
50,000
30,000
Dividends Paid
10,000
40,000
20,000
In accounting for this investment Pony has used the cost method. Selected accounts taken from the financial
records of these two companies as of December 31, 2013, are as follows:
Revenues - Operating
Expenses
Equipment (net)
Buildings (net)
Common stock
Retained Earnings, 12/31/2013 Balance
Pony Company
P310,000
198,000
320,000
220,000
290,000
410,000
Stag Company
P104,000
74,000
50,000
68,000
50,000
160,000
What amount should be reporter as consolidated retained earnings at December 31, 2013?
a. P136,500
b. P137,500
c. P142,000
d. P122,000
ANSWER: B
Consolidated Net Income
Net income from own operations - Pony
(P310,000 – P198,000)
Net income from own operations - Stag
(P104,000 – P74,000)
Amortization: Equipment (P40,000/8)
Buildings (P10,000/20)
Consolidated net income
P 112,000
30,000
P5,000
(500)
( 4,500)
P 137,500
29. Reyes Corporation holds 70% of Oyama Company, and uses the cost method in accounting for its
investment. During 2016, Oyama Company reported CI of P80,000 and paid dividends of P50,000.
Reyes reported CI (including dividend income) of P250,000 and paid dividends of P50,000. There was
no purchase difference at the time of investment. What amount of consolidated CI attributable to parent
will be reported for 2016?
a.
b.
c.
d.
P295,000
P271,000
P215,000
P80,000
Answer: B
Net income from own operations - Reyes
P250,000
Less: Dividend income (P50,000 x 70%)
(35,000)
Oyama’s net income
80,000
NCI in Oyama’s net income (P80,000 x 30%)
(24,000)
Consolidated net income attributable to parent
P271,000
30. Fave Inc., purchased 80% of Gade Company’s outstanding common stock for P280,000, P80,000
above the underlying book value on January 2,2015. The fair value of Gade’s net assets approximated
book value. On the December 31’ 2015 consolidated statement of financial position, NCI should be
reported at:
a. P52,000
b. P46,000
c. P70,000
d. P64,000
ANSWER: C
Rationale
Consideration Transferred
Divided by: % of ownership
Total FV of Gade’s assets
Multiplied by: % of NCI
NCI
P280,000
80%
P350,000
20%
P70,000
31.If a wholly owned subsidiary’s CI was P150,000, the subsidiary declared dividends of P80,000 and the
depreciation and amortization of current fair value excess was P20,000, the NCI in CI of subsidiary under
the cost method of accounting is:
a. P100,000
b. P70,000
c. P-0d. P130,000
ANSWER: C
Zero because there is no NCI in a wholly owned subsidiary.
32. on January 1,2016, Bullet Company acquired 80 percent of Electric Company’s common stock for P300,000
cash. At that date, Electric reported common stock outstanding of P200,000 and retained earnings of P100,000,
and the fair value of the noncontrolling interest was P75,000. The book values and fair values of Electric’s assets
and liabilities were equal, except for other intangible assets which had a fair value P75,000 greater than book
value and a 6-year remaining life. Electric reported the following data for 2015 and 2016:
Year
Net Income
Comprehensive Income
Dividends Paid
2016
P 25,000
P30,000
P 5,000
2017
40,000
45,000
10,000
Bullet reported separate net income from own operations of P130,000 and paid dividends of P30,000 for both
years.
What is the amount of consolidated comprehensive income reported for 2016?
a. P145,000
c. P118,500
b. P147,500
d. P130,000
Solution:
ANS: B
Fair value of consideration given
P300,000
Fair value of noncontrolling interest
75,000
Fair value of the Subsidiary
P375,000
Less: Book Value of Stockholder’s equity of subsidiary
(P200,000 + P100,000)
300,000
Allocated excess
P 75,000
Less: Over/Under valuation of Assets and Liabilities:
Increase in Intangible Assets
75,000
Amortization of allocated excess: P75,000/6years
P 12,500
Note: Since the allocated excess is attributable to undervalued intangible asset, it does not make sense, whether
partial or full goodwill method is used.
Consolidated Comprehensive Income:
Net income from own operations:
Parent-Bullet
Subsidiary-Electric
Less: Amortization of allocated excess
Impairment of full-goodwill (if any)
Consolidated/Group Net Income
Add: Other Comprehensive Income
(P30,000 – P25,000)
Consolidated Comprehensive Income
P130,000
25,000
P155,000
12,500
0
P142,500
5,000
P147,000
33.On March 31,2016, Apple Inc. exchanges P580,000 fair value consideration for 80% of the outstanding stock
of Cherry Inc. The remaining 20% of the outstanding shares continued to trade at a collective fair value of
P165,000. Cherry’s identifiable assets and liabilities each had book values that equaled their fair values on March
31 for a net total of P500,000. During the remainder year, Cherry generates revenues of P900,000 and expenses
of P360,000 and paid no dividends. On a December 31 consolidated balance sheet, what amount should be
reported as non-controlling interest on a full-fair value basis?
A.P246,000
B.P181,000
C.P 65,000
D.P165,000
Answer: A
Book value of Stockholders Equity of Subsidiary 3/31/16................................................P 500,000
Add: Net income ( P900,000 - P360,000= P540,000x 9/12) ............................................. 405,000
Book value of SHE of Subsidiary 12/31/16.......................................................................P 905,000
Add: Adjustments to reflect fair value ................................................................................
0
Fair value of SHE of Subsidiary 12/31/16..........................................................................P 905,000
Multiplied by Non-controlling interests percentage............................................................ 20%
Non-controlling interest (Partial Goodwill)....................................................................... P 181,000
Add:Non-controlling interest in Full Goodwill[P245,000(full)-P180,000(partial)
................................................................
65,000
Non-controlling Interest (Full)..................................................................................... P246,000 (A)
Computation and allocation of Goodwill:
Total Fair Value
Parent Price(80%)
NCI Value(20%)
Company Fair Value
P745,000
P580,000
P165,000
Fair Value of net assets excluding
500,000
400,000
100,000
goodwill
GOODWILL
P 245,000
P 180,000
P 65,000
34.On December 31,2016, Long Company’s stockholders’ equity includes common stock of P1,000,000 and
additional paid-in capital of P600,000. Long Co. Purchased a 90% interest in Short Co. on January 1,2016, when
the non-controlling interest in Short Co. Had a fair value of P230,000. No differential arose from the business
combination . During 2016, Short Co. Reports net income of P20,000 and declares dividend of P5,000. The 2016
consolidated balance sheet includes retained earnings of P630,000(controlling interest portion). The consolidated
equity on December 31,2016:
A.P2,230.000
B.P2,254,500
C.P2,253,000
D.P2,205,500
Answer: B
Consolidated Equity:
Attributable to Parent/Contolling Interest:
Common Stock...............................................................................................P1,000,000
Additional paid-in capital.............................................................................. 600,000
Retained Earnings........................................................................................ 630,000
Equity Holders’ of Parent/Controlling Interest.............................................P 2,230,000
Non-controlling Interest:
[(P230,000 + (P20,000-P5,000] x 10% ...................................................
24,500
Consolidated Equity...........................................................................................P 2,254,500 (B)
35. On January 1, 2016, Parent Company purchased 80% of the common stock of Subsidiary Company for P316,
000. On this date, Subsidiary Company had a common stock, other paid-in capital, and retained earnings of P40,
000, P120, 000, P190, 000, respectively. Parent Company’s common stock amounted to P500, 000 and retained
earnings of P200, 000.
On January 1, 2016, the only tangible assets of Subsidiary that were undervalued were inventory and building.
Inventory, for which FIFO is used, was worth P5, 000 more than cost. The inventory was sold in 2016. Building
which was worth P15, 000 more than book value, has a remaining life of 8 years and straight-line depreciation is
used. Any remaining excess is full-goodwill with impairment for 2016 amounting to P3, 000. Subsidiary Company
reported net income of P50, 000 and paid dividends of P10, 000 in 2016 while the parent’s reported net income
amounted to P100, 000 and paid dividends of P20, 000.
Determine the Consolidated Net Income Attributable to Controlling Interest/ Profit Attributable to Equity Holders of
Parent.
a. 142, 000
c. 126, 500
b. 132, 125
d. 124, 100
ANSWER:
Full-Goodwill:
Net income from own operations:
Parent (P100, 000- (10, 000 x 80%)
P92, 000
Subsidiary
50, 000
P142, 000
Less: Amortization of allocated excess
*6, 875
Impairment of full-goodwill (if any)
3, 000
Consolidated Net Income
P132, 125
Less: NCI in Net income:
Subsidiary net income from own operation
P50, 000
Less: Amortization of allocated excess
6, 875
Impairment of full-goodwill (if any)
3, 000
P40, 125
Multiply by: NCI
20%
8, 025
Consolidated Net Income attributable to controlling interest
P124, 100
*Amortization of allocated excess:
Increase in inventory: 5, 000(sold in 2016)
Increase in buildings: 15, 000 / 8 years
Total
P5, 000
1, 875
P6, 875
36. On January 2, 2013, Pascual Corporation purchased 80% of Suazon Company’s P10 par common stock for
P975, 000. On this date, the book value of Suazon’s net assets was P1, 000, 000. The fair value of Suazon’s
identifiable net assets and liabilities were the same as their carrying amounts except for plant assets (10 year life),
which were P100, 000 excess of the carrying amount. For the year ended December 31, 2013, Suazon had a
comprehensive income of P190, 000and paid cash dividends totaling P125, 000. In the December 31, 2013
consolidated statement of financial position, non-controlling interest (NCI) should be reported at:
a. 200, 000
c. 254, 750
b. 236,000
d, 182, 750
ANSWER:
NCI, 01/02/2013 (975, 000/80%% x 20%
P243, 750
NCI, dividends (125, 000 x 20%)
(25, 000)
NCI, adjusted net of subsidiary (190, 000 –* 10, 000) x 20%
36, 000
*100, 000/10 years = 10, 000
NCI, December 31, 2013
P254, 750
37. The following are the features of the consolidated working paper for the second year after acquisition except,
a. Elimination of the total equity accounts of subsidiary against the investment account (parent’s
interest) and NCI.
b. Allocation of excess by adjusting the assets of the subsidiary to fair values.
c. Recognition of NCI in the CI of the parent company, adjusted for amortization and depreciation.
d. Amortization of the allocated excess.
ANSWER: C. Because the recognition of NCI should be in the CI of subsidiary and not the parent company.
38.Which of the following observations is not consistent with the use of push-down accounting?
a. The revaluation capital account is part of the subsidiary’s stockholders’ equity.
b. Eliminating entries related to the differential are needed in the workpapers
c. No differential arises in the consolidation process
d. Revaluation Capital account is eliminated in preparing consolidated statements
Ans: b
39. The method of accounting for investment in subsidiary that is appropriate for the acquisition method of
combination is:
a. The cost method
b. The market value method
c. The equity method
d. The pooling method
Answer: C
40.If the parent company uses the cost method of accounting for a partially owned subsidiary and there are no
intercompany profit or losses eliminated for the computation of consolidated CI, Consolidated retained earnings
is equal to the balance of the parent company’s:
a. Retained Earnings
b. Retained Earnings plus the parent’s share of the balance of the subsidiary’s retained earnings
c. Retained earnings plus the parent’s share of the net increase in the subsidiary’s retained earning’s
subsequent to the date of acquisition
d. Retained earnings plus the balance of the retained earnings
Ans. C
INTERCOMPANY TRANSACTIONS- INVENTORIES
1.Bruce Company owns 80% of Lee Corp.’s common stock. During October 2016, Lee sold merchandise to Bruce
for 100,000. At December 31, 2026, one-half of the merchandise remained in Bruce inventory. For 2016, gross
profit percentages were 30% for Bruce and 40% for Lee. The amount of unrealized intercompany profit in ending
inventory at December 31, 2016 that should be eliminated in consolidation is:
a. 40,000
b. 20,000
c. 16,000
d. 15,000
ANS:B
Sales to Bruce
Ending Inventory
100,000
1\2
Merchandise inventory of Bruce 12/31/2016
inclusive of profits
GP rate of Lee (the seller)
Unrealized profit in ending inventory
50,000
40%
20,000
2. The Maroons Company holds a 70% interest in the Haena Company. At the current year end Maroons holds
inventory purchased from Haena for 270,000 at a cost plus 20%. The group’s consolidated statement of financial
position has been drafted without any adjustments in relation to this holding of inventory.
What adjustments should be made to the draft consolidated statement of financial position figures for noncontrolling interest and retained earnings?
Non-Controlling interest
a. No change
b. No change
c. Reduce by 16,200
d. Reduce by 13,500
Retained Earnings
Reduce by 45,000
Reduce by 54,000
Reduce by 37,800
Reduce by 31,500
ANS:D
Ending Inventory of Maroons (parent)- upstream sales
Mark up of Subsidiary
Unrealized profit in ending inventory of Maroons (parent company)
270,000
20/120
45,000
Non Controlling interest
13,500
(30% X 45,000)
Controlling interest (70% X 45,000)
31,500
3.X-Beams Inc, owned 70% of the voting common stock of Kent Corp. During 20x4, Kent made several sales of
inventory to X-Beams. The total selling price was P180,000 and the cost P100,000. At the end of the year, 20%of
the goods were still in X-Beams’ inventory. Kent’s reported income was P300,000.
What was the non-controlling interest Kent’s net income?
a. P90,000
b. P85,200
c. P54,000
d. P98,800
e. P86,640
ANSWER: B
Net Income from own operations:
X-Beams (parent) Kent
(subsidiary), 70%:30%
Unrealized Profit in EI of Parent
(X-Beams):
P180,000x 20% = P36,000 x
Parent
210,000
Subsidiary
90,000
( 11,200)
( 4,800)
(180-100/180) = P16,000,
70%:30%
Non-controlling Interest in Kent’s
Net Income
85,200
4.During 2011, Pard Corp. sold goods to its 80% owned subsidiary, Seed Corp. At December 31, one half of
theses goods were included in Seed’s ending inventory. Reported 2011 selling expense were P1,100,000 and
P400,000 for Pard and Seed, respectively. Pard’s selling expenses included P50,000 in freight out costs for
goods to Seed. What amount of selling expenses should be reported in Pard’s 2011 consolidated income
statement?
a. P1,500,000
b. P1,480,000
c. P1,475,000
d. P1,450,000
ANSWER: D
The requirement is to determine the amount of selling expenses to be reported in Pard’s 2011 consolidated
income statement. Pard’s selling expenses for 2011 include P50,000 in freight out costs for goods sold to Seed,
its subsidiary. This P50,000 becomes part of Seed’s inventory because it is a cost directly associated with
bringing the goods to a salable condition. None of the P50,000 represents a selling expense for the consolidated
entity, and P1,450,000(P1,100,000+P400,000-P50,000) should be reported as selling expenses in consolidated
income statement.
5. On January 1, 2013, Eron Company purchased 90% of Bessy Company for P400, 000. On that day Bessy
Company’s equity consisted of P100, 000 of capital stock and P300, 000 of retained earnings. Assets and
liabilities were fairly valued. In 2013 Bessy had sales of P500, 000 and cost of sales of P300, 000. One half of the
sales were to Eron. Bessy”s pricing policy has not changed for several years. At January 1, 2013, Eron’s
inventory contained P40, 000of Bessy’s merchandise purchased in 2012. Eron’s December 31, 2013, inventory
included P25, 000 of Bessy’s merchandise. Both companies use FIFO.
For 2013 Eron had CI from its own operations of P200, 000 and paid dividends of P80, 000. Bessy’s CI was P75,
000; it paid P30, 000 dividends during the year.
For 2013, consolidated CI attributable to parent is:
a. 270, 900
c. 271, 000
b. 272, 900
d. 271, 900
ANSWER:
Sales
500, 000
Cost of sales
300, 000
Gross Pofit
200,000
Gross Profit Rate(Bessy) = 200, 000/500, 000
= 40%
Net income from own operation – Eron
P200, 000
Adjusted net income – Bessy
Net income from own operation
P75, 000
Realized profit beginning inventory (40, 000 x 40%)
16, 000
Unrealized profit ending inventory (25, 000 x 40%)
(10, 000)
81, 000
Consolidated Net Income
281, 000
Attributable to NCI (81, 000 X 10%)
8, 100
Attributable to Parent
P272, 900
6. Parry Co. owns 80% interest in Starry Co. acquired several years ago. Starry regularly sells merchandise to its
parent at 123% of Starry’s cost. Gros profit data of Parry and Starry for the year 2016 are as follows:
Sales
Parry
Starry
1, 000, 000
800, 000
800, 000
640, 000
Cost of goods sold
Gross profit
P200, 000
P160, 000
During 2016, Parry purchased inventory items from Starry at a transfer price of P400, 000. Parry’s December 31,
2015 and 2016 inventories included goods acquired from Starry of P100, 000 and P125, 000, respectively. The
consolidated cost of goods sold of Parry and subsidiary for 2016 was:
a. 1, 024, 000
c. 1, 052, 000
b. 1, 045, 000
d. 1, 056, 000
ANSWER:
Cost of sales of:
*Gross profit rate
Parry
800, 000
Starry
640, 000
160, 000/ 800, 000 = 20%
P1, 440, 000
Less: Intercompany sales
Realized profit in beginning inventory
(400, 000)
(20, 000)
(100, 000 x *20%)
Add: unrealized profit in ending inventory
25, 000
(125, 000 x *20%)
Consolidated cost of goods sold
P1, 045, 000
7.Xyril Corp. owns an 80% interest in Erica Corp. acquired several years ago. Erica regularly sells merchandise to
its parent at 125% of Erica’s cost. Gross profit data of Xyril and Erica for the year 2016 are as follows:
Sales
Cost of goods sold
Gross Profit
Xyril
P1,000,000
800,000
P200,000
Erica
P800,000
640,000
P160,000
During 2016, Xyril purchased inventory items from Erica at a transfer price of P400,000. Xyril’s December 31,
2015 and 2016 inventories included goods acquired from Erica of P100,000 abd P125,000, respectively. The
consolidated sales of Xyril Corp. and subsidiary for 2016 were:
a.
b.
c.
d.
P1,800,000
P1,425,000
P1,400,000
P1,240,000
ANS: C
Consolidated Sales
Sales of:
Xyril
P1,000,000
Erica
800,000
Total
P1,800,000
Less: Intercompany Sales
400,000
Consolidated Sales
P1,400,000
8.Using the same information in No. 137, the unrealized profits in the year-end 2015 and 2016 inventories were:
a.
b.
c.
d.
P100,000 and P125,000 respectively
P800,000 and P100,000 respectively
P20,000 and P25,000 respectively
P16,000 and P20,000 respectively
ANS: C
Realized Profit in beginning inventory of Xyril (Upstream)
P100,000 x 20% (160/80), GP of Erica
Unrealized Profit in ending inventory of Xyril
P125,000 x 20%, GP of Erica
P20,000
P25,000
9. Francis Company owns 100℅ of the capital stock of both Gem Company and Robin Company. Francis
purchases merchandise inventory from Robin Company at 140℅ of Robin's cost. During 2016, merchandise that
cost Robin P40,000 was sold to Gem. Gem sold all of this merchandise to unrelated customers for 8,200 during
2016. In preparing combined financial statements for 2016 Francis' bookkeeper disregarded the common
ownership of Gem Company and Robin Comapany. By what amount was unadjusted reveneu overstated in thr in
the combined income statement for 2016 and the amount that should be eliminated from cost of good sold in the
combined income statement for 2016?
Overstated Unadjusted Reveneu
a.
P16,000.
b.
40,000.
c.
56,000.
d
. 81,200.
Answer: C
Solution
Cost of Good sold to be eliminated
P16000
40,000
56,000
56,000
Overstated Unadjusted Revenue:
When computing combined revenue the objective is to restate the accounts as it the intercompany transaction
had not- occurred. Assuming that there was no sale between Gem and Robin the correct amount of combined
revenue is overstated by the P56,000(40,000x140℅) intercompany reveneu recognized by Robin(the seller).
Cost of goods sold to be eliminated:
When computing combined cist of goods sold, the objective is to restate the accounts as if the intercompany
transactions had not occurred. Assuming there was no sale between Gem and Robin, the correct amount of
combined cost of goods sold would be P40,000 the original cost of the merchandise to Robin(the seller).
However, Robin, recognized P40,000 for CGS and Gem recognized P56,000(40,000x140℅) for a total of
P96,000. Thus, 56,000(96,000-40,000) should be eliminated from CGS in he combined income statement for
2016.
Incidentally, the entry for th above items eliminating the intercompany transaction s would be:
Sales
56,000
CGS(or purchases).
56,000
10. Ryan Retail Company sells goods for cash, on normal credit (2/10, n/30). However, on July 1, 2014, the
company sold a used computer for P22,000; the inventory carrying value was P4,40O. The company collected
P2,000 cash and agreed to let the customer make payments on the P20,000 whenever possible during the next
12 months. The company management stated that it had no reliable basis for estimating the probability of default.
The following additional data are available: (a) collections on the instalment receivable during 2014 were P3,000
and during 2015 were P2,000, and (b) on December 1, 2015, Ryan Retail repossessed the computer (estimated
net realizable value P7,000).
Determine the realized gross profit on lnstalment sales for the year 2014.
A. P 1,600
B. P 4,000
C. P 2,400
D. P 5,600
Answer: B
Solution
Total collections made in 2014:
Downpayment
P2,000
Installment
3,000
P5,000
Gross profit rate (22,000 - 4,400/ 22,000)
x80℅
Gross profit realized:
P4,000
11. Peter Corporation owns 70% of John Conpany's common stock, acquired January 1, 2015. Goodwill from the
Investment is not amortized. John regularly sells merchandise to Peter at 150 percent of John's cost. Peter's
December 31,2015 and 2016 inventories include goods purchased intercompany of P112,500 and P33,000,
respectively. The separate incomes (do not include investment income) of Peter and John for 2016 are
summarized as follows:
Peter
John
Sales
1,200,000
800,000
Cost of Sales
(600,000)
(500,000)
Other Expenses
(400,000)
(100,000)
Separate Income
P200,000
P200,000
Total consolidated income should be allocated to net income to retained earnings and minority interest in the
amounts of:
a. 358,550 and 67,950, respectively
b. 378,550 and 60,000, respectively
c. 366,500 and 60,000, respectively
d. 366,500 and 67,950, respectively
Answer: A.
Separate Income (200,000 + 200,000)
Add: realized mark-up on beginning inventory (112,500 x 1/3)
Less: unrealized mark up on ending inventory (33,000 x 1/3)
Consolidated net income
Minority interest income [(200,000+37,500-11,000)x 30%]
Net Income to Retained Earnings
400,000
37,500
(11,000)
426,500
(67,950)
358,550
12. Selected information from the separate and consolidated balance sheets and income statements of Pass Inc.,
and its subsidiary, Success Co., as of Dec. 31,2014, and for the year then ended is as follows:
Pass Inc
Success co.
Consolidated
Balance Sheet accounts
Accounts Receivable
52,000
38,000
78,000
Inventory
60,000
50,000
104,000
Income Statement accounts
Revenues
400,000
280,000
616,000
Cost of Goods Sold
300,000
220,000
462,000
Gross Profit.
100,000
60,000
154,000
Additional Information:
During 2014, Pass sold goods to Success at the same mark-up on cost that Pass uses for all sales. How
much is the correct cost of the merchandise acquired by Success from Pass?
a. 64,000
b. 48,000
c. 24,000
d. 18,000
Answer: B.
Intercompany Sale
Total Sales (400,000+280,000)
Consolidated Sales
Less: Mark-up (64,000 x 1/4)
Cost of merchandise transferred
680,000
(616,000)
64,000
(16,000)
48,000
13. Evan Corporation owns 75% of the outstanding stock of Jewel Company, acquired at book value during 2012.
During 2015 Jewel Company sold merchandise to Evan for P 150,000 at a gross profit rate of 40%. At the end of
2015, Evan still owed P 75,000 to Jewel for the merchandise. On December 31, 2015 inventory amounting to P
60,000 from the intercompany purchases remained at Evan. The amount of unrealized profit of Evan that should
be eliminated in consolidation is:
a. P 24,000
b. P 36,000
c. P 30,000
d. P 6,000
Answer: a. P 24,000
Solution:
Ending Inventory, Evan
Multiplied by Gross Profit Rate
Unrealized Profit, Evan
P 60,000
40%
P 24,000
14. Mong Corporation purchased 90% of the stock of Go Company on January 1, 2014. On that date, the book
value of Go's net assets approximated fair value. As a result of the purchase, Mong recognized P 50,000 of
goodwill.
During 2014, Go sold inventory to Mong. On December 31, 2014, Go had unrealized profits on its books of P
8,000. By December 31, 2015, all of the inventory left on Mong's books had been sold to outside parties. During
2015, Mong sold inventory to Go and had P 12,000 of unrealized profits left on its books at the end of 2015. For
2015, Mong reported operating income of P 450,000, and Go reported CI of P 310,000. What is the consolidated
CI attributable to parent for 2015?
a. P 736,200
b. P 717,000
c. P 724,200
d. P 731,800
Answer: c. P 724,200
Solution:
Net Income from own operation- Mong
Unrealized Profit in Ending Inventory- downstream
Realized Separate Net Income- Mong
Mong's share of Go's Adjusted Net Income:
Net Income
P 310,000
Realized Profit in Beg. Inventory
8,000
Minority Interest in Subsidiary
( P 318,000 x 10% )
Attributable to Parent
P 450,000
( 12,000)
P 438,000
318,000
( 31,800)
P 724,200
15. During the fiscal year ended May 31, 2003, Swope Company, the 80%-owned subsidiary of Pone
Corporation, sold merchandise to its parent company at billed prices totaling P360,000, representing a 220%
markup on Swope's cost. On May 31, 2003, Pone's inventories included merchandise totaling P54,000 purchased
from Swope—a P12,000 increase over the comparable June 1, 2002, amount.
The total amount to be eliminated for consolidated costs of goods sold of Pone Corporation and subsidiary for the
fiscal year ended May 31, 2003, is:
a. P58,000
b. P60,000
c. P300,000
d. Some other amount
Ans: D
Feedback: (P368,000 x 5/6) + (P348,000 x 1/6) = P358,000
16. Several years ago Ruby Company acquired 70% of Riza company at book value. Relevant data for 2013 are
as follows:
CI from it’s own operations
Dividends declared and paid in 2013
Merchandise from intercompany sales
in Ruby’s inventory:
Jan. 1, 2013
Dec. 31, 2013
Gross profit rate on sales:
2012
Ruby
400,000
270,000
Riza
250,000
110,000
40,000
70,000
70%
40%
2013
75%
30%
Consolidated CI for 2013 is:
a. 645,000
b. 625,000
c. 517,000
d. 571,000
Ans. A
Net income from own operation – Pip
Adjusted net income of Sol:
Net income
Realized profit in beginning inventoryUpstream (P40,000 x 40%)
Unrealized profit in ending inventoryUpstream (P70,000 x 30%)
Consolidated net income - 2008
P 400,000
P 250,000
16,000
( 21,000)
245,000
P 645,000
17. Sailing Company owns 100% of the capital stock of both Twill Corp. and Webb Corp. Twill purchases
merchandise inventory from Webb at 140% of Webb’s cost. During 2016, merchandise that cost Webb P40, 000
was sold to Twill. Twill sold all of this merchandise to unrelated customers for P81, 200 during 2016. In preparing
combined financial statements for 2016, Sailing’s bookkeeper disregarded the common ownership of Twill and
Webb. By what amount was unadjusted revenue overstated in the combined income statements for 2016 and the
amount that should be eliminated from cost of goods sold in the combined income statement for 2016?
Overstated Unadjusted Revenue Cost of goods sold to be eliminated
a. P16, 000 P16, 000
b. P40, 000 P40, 000
c. P56, 000 P56, 000
d. P81, 200 P56, 000
Ans. : C
Solution:
Overstated Unadjusted Revenue:
When computing combined revenue, the objective is to restate the accounts as if the intercompany transaction
had not occurred. Assuming that there was no sale between Twill and Webb, the correct amount of combined
revenue would be P81, 200 sold to unrelated customers. Thus, unadjusted revenue is overstated by the P56, 000
(P40, 000 x 140%) intercompany revenue recognized by Webb (the seller).
Cost of goods sold:
When computing combined cost of goods sold, the objective is to restate the accounts as if the intercompany
transactions had not occurred. Assuming there was no sale between Twill and Webb, the correct amount of
combined cost of goods sold would be P40, 000 the original cost of merchandise to Webb (the seller). However,
Webb recognized P40, 000 for CGS and Twill recognized P56, 000 (P40, 000 x 140%) for a total of P96, 000.
Thus, P56, 000 (P96, 000 – P40, 000) should be eliminated from CGS in the combined income statement for
2016.
Incidentally, the entry for the above items eliminating the intercompany transactions would be:
Sales56, 000
Cost of goods sold (Purchase) 56, 000
18.On January 1, 2016 , Joy Company purchased 75% of the outstanding stock of Mae Company at book value.
During 2016 Mae sold inventory items costing P50,000 to Joy for P75,000.Joy resold 60% of this inventory to
outsiders during the year for P100,000. For the year 2016 Joy had CI from it’s own operations of P200,000 and
paid dividends of P120,000.Mae ‘s CI for the year was P110,000, it paid P40,000 in dividends. What is the
consolidated CI attributable to parent for 2016?
a.
b.
c.
d.
P273,000
P279,000
P300,000
P275,000
Ans.D
Net income from own operation – Joy
Mae ’s adjusted net income:
Net income
Unrealized profit in ending inventoryUpstream (P25,000 x 40%)
Consolidated net income
MINIS (P100,000 x 25%)
Attributable to parent
P 200,000
P110,000
( 10,000)
100,000
P 300,000
(25.000)
P 275,000
19. On January 1,2016, Kiel Company purchased 90% of Ron Company for P400,000. On that day Ron
Company’s equity consisted of P100,000 of capital stock and P300,000 of retained earnings,. Assets and
liabilities were fairly valued.
In 2016 Ron had sales of P500,000 and cost of sales of P300,000.One half of the sales were to Kiel. Ron’s
pricing policy has not changed for several years.
At January 1.2016, Kiel’s inventory contained P40,000 of Ron’s merchandise purchased in 2015.Kiel’s
Dec.31,2016 inventory included P25,000of Ron’s merchandise. Both companies use FIFO.
For 2016 Kiel had CI from it’s own operations of P200,000 and paid dividends of P80,000.Ron’s CI for
2016 was P75,000. It paid P30,000 dividends during the year.
For 2016.consolidated CI attributable to parent is:
a.
b.
c.
d.
P270,900
P272,900
P273,000
P271.900
Ans. B
Gross profit rate of Sit (P200,000 / P500,000)
Net income from own operations – Kiel
Adjusted net income of Ron :
Net income
Realized profit in beginning inventoryUpstream (P40,000 x 40%)
Unrealized profit in ending inventoryUpstream (P25,000 x 40%)
Consolidated net income
MINIS (P281,000 x 10%)
Attributable to parent
40%
P 200,000
P 75,000
16,000
( 10,000)
81,000
P 281,000
( 8,100)
P 272,900
20.GLYSDI Corporation purchased inventory from GBY Corporation for P 120,000 on September 20, 20x4 and
resold 80 percent of the inventory to unaffiliated Companies prior to December 31,20x4, for P140,000. Dresser
produced the inventory sold to GLSDI Corp. for P75,000 owns 70 percent of GBY’s voting common stock. The
companies had no other transactions during 20x4.
What amount of Consolidated net income will be assigned to non controlling interest for 20x4?
A. P20,000
B. P30,800
C. P44,000
D. P45,000
E. P69,200
ANSWER: E
Consolidated sales
Cost of goods sold
Consolidated net income
Income to GLYSDI’S Non controlling interest:
Sales
Reported cost of sales
Report income
Portion realized
Realized net income
Portion to non controlling interest
Income to non controlling interest
Income to controlling interest
P 140,000
(60,000)
P 80,000
P 120,000
175,000
P 45,000
x .80
P 36,000
x .30
(10,800)
P 69,200
21. Kristel Inc. acquired 100% of Gaspard Farms on January 5, 20x3. During 20x3, Kristel sold Gaspard Farms
for P625,000 goods which had cost P425,000. Gaspard Farms still owned 12% of the goods at the end of the
year. In 20x4, Kristel sold goods with a cost of P800000 to Gaspard Farms for P1000000 and Gaspard Farms still
owned 10% of the goods at year end. For 20x4, cost of goods sold was P1,200,000 for Gaspard Farms and
P5,400,000 for Kristel. What was consolidated cost of goods sold for 20x4?
A. P6,600,000
B. P5,596,000
C. P6,596,000
D. P5,625,000
E. P5,620,000
ANSWER: B
K Company (p)
G Company (s)
Total
Less: Intercompany sales
Realized profit [P625,000x12%=75,000x(625-425)/625]
Add: Unrealized profit [1000,000x10%=100,000x (1000-800)/1000]
Consolidated
Cost of sales
P 5,400,000
1,200,000
6,600,000
1000,000
24,000
_20,000
5,596,000
22. Blue Company owns 80 percent of the common stock of White Corporation. During the year, Blue reported
sales of $1,000,000, and White reported sales of $500,000, including sales to Blue of $80,000. The amount of
sales that should be reported in the consolidated income statement for the year is:
a. $ 500,000.
b. $ 1,300,000.
c. $ 1,420,000.
d. $ 1,500,000.
Answer: c
Blue Sales
White Sales
Less: Intercompany Sales
Consolidated Sales
$ 1,000,000
$ 500,000
$ 80,000
$ 1,420,000
23. Pepe Corporation owns an 80% interest in Sisa Company, and t December 31,2012, Pepe's investment in
Sisa under the cost method was equal to 80% of Sisa's stockholders equity. During 2013, Sisa sells merchandise
to Pepe for P 100,000, at a gross profit to Sisa of P 20,000. At December 31, 2013 half of this merchandise is
included to Pepe's inventory. Separate incomes for Pepe and Sisa for 2013 are summarized as follows:
Sales
Cost of sales
Operating Expenses
CI from own operations
Pepe
P 500,000
(250,000)
(125,000)
P 125,000
Sisa
P 300,000
(200,000)
(40,000)
P 60,000
In the cosolidated statement of CI for 2013, NCI in CI of subsidiary is:
a. P 12,000
b. P 11,000
c. P 10,000
d. P 14,000
Answer: c
Net income-Sisa
Unrealized profit in ending inventory
upstream Adjusted net income Sisa
NCI proportionate share
NCI in net income of subsidiary
P 60,000
(10,000)
P 50,000
20%
P 10,000
24. Sand Company owns 80% of Wich Corp.’s common stock. During October 20x6, Wich sold merchandise to
Sand for P100,000. At December 31, 20x6, one-half of the merchandise remained in Sand inventory. For 20x6,
gross profit percentages were 30% for Sand and 40% for Wich. The amount of unrealized intercompany profit in
ending inventory at December 31, 20x6 that should be eliminated in consolidation is:
a. P40,000
c. P16,000
b. P20,000
d. P15,000
Ans: b
Sales to Sand
x: Ending Inventory
Merchandise Inventory of Sand, 12/31/2016
inclusive of profits
x: GP rate of Wich (seller)
Unrealized profit in ending inventory
P100,000
1/2
P 50,000
40%
P 20,000
25. On January 1, 2014, Diamond Co. purchased 80% of the outstanding shares of Star Co. by paying
P170,000, the Star Co.’s common stock and retained earnings on this date amounted to P75,000 and
P115,000 respectively. Also on this date, an equipment is undervalued by P10,000 with a remaining life of
5 years.
On January 1, 2016, Star Co. had P75,000 of capital stock and P300,000 of retained earnings. Also on
the same date. Diamond Co. had P500,000 of capital stock and P350,000 of retained earnings.
During the year, Diamond Co. sol merchandise to Star Co. for P30,000 and in turn, purchased P20,000
from Star Co. Inter-company sales of merchandise were made at the following gross profit rates:
Sales made by parent………………………………………….
25% based on cost
Sales made by subsidiary………………………………………
20% based on sales
On December 31,2016, 30% of all inter-company sales remain in the ending inventory of the purchasing
affiliate.
The beginning inventory of Diamond Co. includes P1,250 worth of merchandise acquired from Star Co.
on which Star Co. reported a profit of P500. While, the beginning inventory of Star Co. also includes
P1,500 of merchandise acquired from Diamond Co. at 35% mark-up.
Using the cost method the following selected results of operations for 2016 were as follows:
Diamond Co.
Star Co.
Dividends paid………………………….
P30,000
P5,000
Net income from own operations…….
P50,000
P15,000
Add: Dividend income…………………
4,000
Net income……………………………..
P54,000
P15,000
The balance of Investment in Star Co. and the Non-controlling Interest in Net Income as of December 31,
2016, should be:
a. P170,000; P2,360
b. P136,000; P2,360
c. P136,000; P2,460
d. P170,000; P2,460
ANSWER: (d)
Investment in Star Co. = P170,000 since cost model method is in effect.
Net income of Subsidiary……………………………………………….
Add: Realized profit in beg. Inventory of Parent
(upstream)………………………………………………………….
Less: Unrealized profit in ending inventory of parent (upstream)
(P20,000 x 30% = P6,000 x 25/125)…………………………….
Less: Amortization of allocated excess (P8,000/80%)/5 years………
Multiplied by: Non-controlling interest…………………………………
Non-controlling interest in net income…………………………………
P 15,000
500
1,200
2,000
12,300
20%
P 2,460
26. Large Corp. acquired 75% interest in Small Corp. in 2015. For the year ended December 31, 2015
and 2016, Small Corp. reported net income of P80,000 and P90,000, respectively. During 2015, Small
Corp. sol merchandise to Large Corp. for P10,000 at a profit of P2,000. The merchandise was later resold
to Large Corp. to outsider for P15,000 during 2016. For consolidation purposes, what is the noncontrolling interest’s share of Small’s net income for 2015 and 2016, respectively?
2015
2016
a.
b.
c.
d.
P20,000
P19,500
P20,500
P19,000
P22,500
P22,000
P23,000
P22,000
ANSWER: (b)
Small’s net income from own operation*………………
Unrealized profit in ending inventory
of Small – 2015……………………………………..
2015
P80,000
2016
P90,000
(2,000)
(2,000)
P78,000
P88,000
Multiplied by: Non-controlling interest..………………..
25%
25%
Non-controlling interest in Net Income………………..
P19,500
P22,000
27. Colton Company acquired 80 percent ownership of Mota Company's voting shares on January 1, 2008, at
underlying book value. The fair value of the noncontrolling interest on that date was equal to 20 percent of the
book value of Mota Company. During 2008, Colton purchased inventory for $30,000 and sold the full amount to
Mota Company for $50,000. On December 31, 2008, Mota's ending inventory included $10,000 of items
purchased from Colton. Also in 2008, Mota purchased inventory for $80,000 and sold the units to Colton for
$100,000. Colton included $30,000 of its purchase from Mota in ending inventory on December 31, 2008.
Summary income statement data for the two companies revealed the following:
What amount of income will be assigned to the noncontrolling shareholders in the 2008 consolidated income
statement?
a. $ 6,200
b. $ 5,400
c. $ 5,800
d. None of the above
ANSWER: B
Reported net income of Mota Company
$ 33,000
Unrealized profit on sale to Colton Company
$20,000 x ($30,000 / $100,000)
Realized net income
Noncontrolling interest's share
Income assigned to noncontrolling interest
(
6,000)
$ 27,000
x 0.20
$ 5,400
28. Hunter Company and Moss Company both produce and purchase fabric for resale each period and frequently
sell to each other. Since Hunter Company holds 80 percent ownership of Moss Company, Hunter's controller
compiled the following information with regard to intercompany transactions between the two companies in 2007
and 2008:
Compute the amount of cost of goods sold to be reported in the consolidated income statement for 2008.
a. $184,250
b. $202,250
c. $217,000
d. None of the above
ANSWER: A
29. Czarina Corporation acquired an 80% interest in Grace Corporation in 2015. For the year ended December
31, 2015 and 2016, Grace reported net income of P140,000 and P150,000, respectively. During 2015, Grace sold
merchandise to Czarina Corp. for P20,000 at a profit of P4,000. The merchandise was later resold by Czarina
Corp. to outsider for P30,000 during 2016. For consolidation purposes, what is the non-controlling interest’s share
of Grace’s net income for 2015 and 2016, respectively?
a. P27,200; P30,800
b. P32,000 ; P36,000
c. P32,000 ; P30,800
d. P27,200 ; P36,000
Answer: A
2015
Grace’s net income from own operation
2016
P140,000
P150,000
Unrealized profit in ending inventory
( 4,000 )
-
Realized profit in beginning inventory
-
4,000
P136,000
P154,000
20%
20%
P27,200
P30,800
Multiplied by
Non-controlling interest in Net income
30. On January 1, 2016, CG Company purchased 80% of the stock outstanding of JJ Company at a price that
included P25,000 of excess due to undervaluation of land.
On December 31, 2016, CG Company had in its inventories P22,000 of merchandise purchased from JJ
Company at 125% of cost. On the same date, JJ Company’s inventories included P15,000 of merchandise which
were purchased from CG Company at 120% of cost. The NCI reported on the consolidated statement of financial
position at December 31,2016 was P82,420. For 2016, CG Company reported income of P215,600 computed
under the equity method. NCI net income was P26,180.
The net assets of JJ Company as at December 31,2016 is:
a. P281,200
b. P416,500
c. P270,500
d. P831,300
Answer: B
NCI on December 31,2016 consolidated financial position
P82,420
NCI in unrealized profit on merchandise sold to CG
(P22,000 x 25/125) x 20%
NCI in net assets of JJ as of December 31,2016
880
P83,300
Divided by:
Net assets of JJ on December 31, 2016
20%
P416,500
On January 1,2015, Blue Company purchased 80% of the outstanding shares of Grey Company by paying
P340,000, the Grey Company’s common stock and retained earnings on this date amounted to P150,000 and
P230,000 respectively. Also on this date, an equipment is undervalued by P20,000 with a remaining life of 10
years.
On January 1,2017, Grey Company had P150,000 of capital stock and P300,000 of retained earnings. Also on the
same date, Blue Company had P1,000,000 of capital stock and P700,000 of retained earnings.
During the year, Blue Company sold merchandise to Grey for P60,000 and in turn, purchased P40,000 from Grey
Company. Inter-company sales of merchandise were made at the following gross profit rates:
Sales made by parent
25% based on cost
Sales made by subsidiary
20% based on sales
On December 31,2017, 30% of all inter-company sales remain in the ending inventory of the purchasing affiliate.
The beginning inventory of Blue Company includes P2,500 worth of merchandise acquired from Grey Company
on which Grey Company reported a profit of P1,000. While the beginning inventory of Grey also includes P3,000
of merchandise acquired from Blue Company at 35% mark-up.
Using the cost method the following selected results of operations for 2017 were as follows:
Blue Company Grey Company
Dividends paid
Net Income from own operations
Add: Dividend Income
Net income
32. The stockholder’s equity of subsidiary on December 31,2017 should be:
a. P450,000
c. P481,600
b. P470,000
d. P484,000
33.} The consolidated stockholder’s equity on December 31,2017 using proportionate basis (or partial goodwill
approach):
a. P1,911,000
b. P1,905,920
c. P1,906,000
d. P1,740,000
Solutions:
1} ANS: B
Non-controlling interests (in net assets):
Common stock of Subsidiary,12/31/2017
Retained earnings of Subsidiary, 12/31/2017:
Retained earnings of Subsidiary 1/1/2017
P300,000
Add: Net income of Subsidiary
30,000
Less: Dividends of Subsidiary
10,000
Book value of stockholders’ equity of
Subsidiary, 12/31/2017
Adjustments to reflect fair value of net assets:
Increase in equipment,1/1/2015
Accumulated amortization (P2,000 x 3 years)
Fair value of Net Assets/SHE of Subsidiary, 12/31/2017
Less: UPEI of Blue—2017
Realized Stockholders’ Equity Of Subsidiary, 12/31/2017
Multiplied by: Non-controlling interest
Non-controlling interest (in net assets) – partial goodwill
Add: Non-controlling interest on full goodwill
(P25,000 – P20,000)
Non-controlling interest (in net assets) – full goodwill
2} ANS: B
Consolidated Stockholders’ Equity, 12/31/2017:
Controlling interest/ Parent’s Interest/ Parent’s Portion/
Equity Holders of Blue in Stockholders’Equity,12/31/2017:
Common stock of Parent
Retained earnings of Parent (equity method),
12/31/2017
Controlling Interest / Parent’s Stockholders’ Equity,
12/31/2017
Non-controlling interest, 12/31/2017 (partial goodwill)
Consolidated Stockholders’’ Equity, 12/31/2017
320,000
P470,000
20,000
( 6,000)
P484,000
2,400
P481,600
20%
P 96,320
5,000
P101,320
P1,000,000
809,680
P1,809,680
96,320
P1,906,000
34. Nokia Co. owns 75% of Samsung Co.’s common stock. For the year 2016, income statement of Nokia Co.and
Samsung Co. Is as follows:
Nokia Co.
Samsung Co.
Sales....................................................................................P 4,500,00
Cost of sales...................................................................... 2,800,00
P1,750,000
850,000
Gross Profit....................................................................... P 1,700,000
Operating Expense.............................................................. 980,000
P 900,000
645,000
Net Income.........................................................................P 720,000
P 255,000
Intercompany sales for 2016 are upsream and total P650,000. Nokia’s December 31,2015 and December
31,2016 inventories contain unrealized profits of P98,000 and P120,000,respectively. The consolidated cost of
sales for 2016:
A.P2,978,000
B.P3,672,000
C.P3,022,000
D.P2,798,000
Answer: C
Combined cost of sales(P2,800,000+P850,000)......................................................................P3,650000
Less: Intercompany purchases.................................................................................................. 650,000
Add: Unrealized profit from ending inventory ........................................................................ 120,000
Less:Unrealized profit in beginning inventory......................................................................... 98,000
Consolidated cost of sales.................................................................................................... P3,022,000 (C)
35. One Co. acquired a 60% interest in Two Co.in 2015. For the year ended December 31,2015 and 2016, Two
Co.reported net income of P560,000 and P590,000,respectively. During 2015, Two Co.sold merchandise to One
Co.for P50,000 at a profit of P10,000. The merchandise was later resold by One Co. To outsider for P60,000
during 2016. For consolidation purposes, what is the non-controlling interest’s share of Two’s net income for
2016?
A.P240,000
B.P236,000
C.P232,000
D.P323,000
Answer: A
Two’s net income from own operation ...............................................P590,000
P600,000
Multiplied by NCI percentage.......................................................... 40%
Non-controlling interest in Net Income.......................................
P 240,000 (A)
*Intercompany: Plant Assets
35. On January 1,2016, Red Inc.sold equipment with a four-year remaining useful life and a book value of
P350,000 to its 65%-owned subsidiary for a price of P530,000. In consolidation working papers for the year ended
December 31,2016, the elimination entry concerning this transaction will include:
A.A debit to equipment for P180,000
B.A credit to depreciation expense for P180,000
C.A debit to cash for P350,000
D.A debit to gain on equipment for P180,000
Answer: D
100% unrealized gain and restore the original book value ,date of sale 1/1/16
Gain on sale ........................................................P180,000
Equipment.......................................
P180,000
The entry made in the books of subsidiary on the date of sale:
Equipment..........................................................P 530,000
Cash................................................
P530,000
The entry made in the books of parent on the date of sale:
Cash...................................................................P530,000
Equipment.....................................
P350,000
Gain on Sale..................................
180,000
From consolidated point of view, there should be no gain. Therefore, to eliminate the gain should be debited and
equipment should be reduce accordingly.
For depreciation:
Accumulated depreciation.................................P45,000
Depreciation expense (P180,000/4 years) P45,000
36. Bruce Company owns 80% of Lee Co.’s common stock. During October 2016, Lee sold merchandise to Bruce
for 100, 000. At December 31, 2016, one-half of the merchandise remained in Bruce inventory. For 2016, gross
profit percentages were 30% for Bruce and 40% for Lee. The amount of unrealized profit in ending inventory at
December 31, 2016 that should be eliminated in consolidation is:
a. 40, 000
c. 16, 000
b. 20, 000
d. 15, 000
ANSWER:
Sales to Bruce
Multiply by: Ending inventory
Merchandise inventory of Bruce, 12/31/2016 inclusive of profits
Multiply by: GP rate of Lee
Unrealized Profit in ending inventory
P100, 000
1/2
50, 000
40%
P20, 000
37. Consolidated net income for a parent and its 80 percent owned subsidiary should be computed by eliminating:
a. all unrealized profit in downstream intercompany inventory sales, and unrealized profit in upstream
intercompany inventory sales made during the current year.
b. all unrealized profit in downstream intercompany inventory sales, and the noncontrolling interest's share of
unrealized profit in upstream inventory sales made during the current year.
c. the controlling interest's share of unrealized profit in downstream intercompany sales, and the controlling
interest's share of unrealized profit in upstream sales made during the current year.
d. all unrealized profit in downstream intercompany sales, and the noncontrolling interest's share of unrealized
profit in upstream sales made during the current year.
Answer: A
38.The material sale of inventory items by a parent company to an affiliated company:
a. Enters the consolidated revenue computation only if the transfer was the result of arm’s length
bargaining.
b. Affects consolidated net income under a periodic inventory system but not under a perpetual inventory
system.
c. Does not result in consolidated income until the merchandise is sold to outside entities.
d. Does not require a working paper adjustment if the merchandise was transferred at cost.
ANS: C
39.Consolidated net income for a parent and its 80 percent owned subsidiary should be computed by eliminating:
a. all unrealized profit in downstream intercompany inventory sales, and unrealized profit in upstream
intercompany inventory sales made during the current year.
b. all unrealized profit in downstream intercompany inventory sales, and the noncontrolling interest's share
of unrealized profit in upstream inventory sales made during the current year.
c. the controlling interest's share of unrealized profit in downstream intercompany sales, and the controlling
interest's share of unrealized profit in upstream sales made during the current year.
d. all unrealized profit in downstream intercompany sales, and the noncontrolling interest's share of
unrealized profit in upstream sales made during the current year.
ANSWER: A
40.A subsidiary made sales of inventory to its parent at a profit this year. The parent, in turn, sold all but 20
percent of the inventory to unaffiliated companies, recognizing a profit. The amount that should be reported as
cost of goods sold in the consolidated income statement prepared for the year should be:
A. the amount reported as intercompany sales by the subsidiary.
B. the amount reported as intercompany sales by the subsidiary minus unrealized profit in the ending inventory of
the parent.
C. the amount reported as cost of goods sold by the parent minus unrealized profit in the ending inventory of the
parent.
D. the amount reported as cost of goods sold by the parent.
ANSWER: B
INTERCOMPANY TRANSACTIONS- PLANT ASSETS
1. On January 1, 2016, Jan Co. purchased 90% equity of Jo Co.. On January 3, 2016, Jo sold equipment
(with original cost of P750,000 and carrying cost of P375,000) to Jan for P540,000. The equipment have
a remaining life of three (3) years and was depreciated using the straight line method by both companies.
In Jan consolidated balance sheet as of December 31, 2016, the cost, accumulated depreciation and
book value should be reported at:
a.
b.
c.
d.
Cost
Accumulated Depreciation
P750,000
375,000
750,000
750,000
P500,000
375,000
750,000
500,000
Net Book Value
P375,000
-0-0250,000
ANS: D
Cost
Less: Accumulated Depreciation, 12/31/16
Accumulated Depreciation, 1/1/16
Depreciation Expense-2016:
(P750,000-P375,000)/3years
Net Book Value, 12/31/16
2.
P750,000
P375,000
125,000
500,000
P250,000
Kestrel Company acquired an 80% interest in Reptile Corporation on January 1, 2004. On
January 1, 2005, Reptile sold a building with a book value of $50,000 to Kestrel for $80,000.
The building had a remaining useful life of ten years and no salvage value. The separate
balance sheets of Kestrel and Reptile on December 31, 2005 included the following balances:
Buildings
Accumulated Depreciation Buildings
$
Kestrel
400,000
120,000
$
Reptile
250,000
75,000
The consolidated amounts for Buildings and Accumulated Depreciation - Buildings that
appeared, respectively, on the balance sheet at December 31, 2005, were
a.
b.
c.
d.
$620,000 and $192,000.
$620,000 and $195,000.
$650,000 and $192,000.
$650,000 and $195,000.
ANSWER:
Combined building amounts
Less: Intercompany gain
Consolidated building amounts
$
$
650,000
30,000 )
620,000
Combined Accumulated Depreciation
Less: Piecemeal recognition of gain
$
195,000
(
(
3,000 )
Consolidated accumulated depreciation
$
2.
192,000
Pied Imperial-Pigeon Corporation acquired a 90% interest in Offshore Corporation in 2003
when Offshore’ book values were equivalent to fair values. Offshore sold equipment with a
book value of $80,000 to Pied Imperial-Pigeon for $130,000 on January 1, 2005. Pied
Imperial-Pigeon is fully depreciating the equipment over a 4-year period by using the straightline method. Offshore’ reported net income for 2005 was $320,000. Pied Imperial-Pigeon’s
2005 net income from Offshore was
a.
b.
c.
d.
$249,250.
$250,500.
$254,250.
$288,000.
ANSWER:
Pied Imperial-Pigeon’s share of Roger’s income =
($320,000 x 90%) =
Less: Profit on intercompany sale ($130,000 $80,000) x 90% =
Add: Piecemeal recognition of deferred profit
($50,000/4 years) x 90% =
Income from Offshore
$
288,000
(
$
45,000
11,250
254,250
4.The Roel Company acquired equipment January 1, 2013 at accost of 800,000, depreciating it over 8 years with
a nil residual value. On January 1, 2016. The Muldon Company acquired 100% of Roel and estimated the fair
value of the equipment at 460,000, with a remaining life of 5 years. This fair value was not incorporated into
Roel’s book and the depreciation expense continued to be calculated by reference to original cost.
What adjustment should be made to the depreciation expense for the year and the statement of financial position
carrying amount in preparing the consolidated financial statements for the year ended December 31, 2017?
Depreciation Expense
a. Increase by 8,000
b. Increase by 8,000
c. Decrease by 8,000
d. Decrease by 8,000
Carrying Amount
Increase by 24,000
Decrease by 24,000
Increase by 24,000
Decrease by 24,000
ANS:D
Fair value adjustments under PFRS 3 par.36 not reflected in the books must be adjusted for on consolidation.
Annual depreciation expense:
Roel’s depreciation: (800,000-0)/8 years
Muldon’s depreciation (460,000/5)
100,000
92,000
8,000
Net carrying/book value, 12/31/2017:
Roel’s book value (800,000-(800,000/8 years X 5yrs)
300,000
Muldon’s book value (note) (460,000-(460,000/5 X 3years) 276,000
Decrease
24,000
5.. On January 1, 2016. Poe Corporation sold machine for 900,000 to Saxe Corp. its wholly owned subsidiary.
Poe paid 1,100,000 for this machine, which had accumulated depreciation of 250,000 . Poe estimated of 100,000
salvage value and depreciated the machine on the straight line method over 20 years, a policy which Saxe
continued, In Poe’s December 31, 2016, consolidated balance sheet, this machine should be included in cost and
accumulated depreciation as:
a.
b.
c.
d.
COST
1,100,000
1,100,000
900,000
850,000
ACCUMULATED DEPRECIATION
300,000
290,000
40,000
42,500
ANS: A
When preparing consolidated financial statements, the objective is to restate the accounts as if the intercompany
transactions had not occurred. Therefore, the 2016 gain on sale of machine of 50,000 (900,000-(1,100,000250,000) must be eliminated, since the consolidated entity has not realized any gain. In effect, the machine must
be reflected on the consolidated balance sheet at 1/1/2016 at Poe’s cost of 1,100,000 and accumulated
depreciation of 250,000 instead of at a new “cost” of 900,000.For consolidated statement purposes, 2016
depreciation is based on the original amounts (1,100,000-100,000) X 1/20= 50,000).
Therefore, in the 12/31/2016 consolidated balance sheet, the machine is shown at a cost of 1,100,000 less
accumulated depreciation of 300,000 (250,000+50,000).
6. Peregrine Corporation acquired a 90% interest in Cliff Corporation in 2004 at a time when Cliff’s book values
and fair values were equal to one another. On January 1, 2005, Cliff sold a truck with a P45,000 book value to
Peregrine for P90,000. Peregrine is depreciating the truck over 10 years using the straight-line method. Separate
incomes for Peregrine and Cliff for 2005 were as follows:
Sales
Sales
Gain on sale of truck
Cost of Goods Sold
Depreciation expense
Peregrine
P 1,800,000
(750,000)
(450,000)
Cliff
P 1,050,000
45,000
(285,000)
(135,000)
Other expense
Separate incomes
(180,000)
420,000
(450,000)
225,000
Peregrine’s investment income from Cliff for 2005 was:
a.
b.
c.
d.
P 161,550.
P162,000.
P166,050.
P202,500.
ANSWER: C
Cliff reported income
Less: Intercompany gain on truck
Plus: Piecmeal recognition of gain=P45,000/10years
Cliff adjusted income
Majority Percentage
Income from Cliff
P225,000
(45,000)
4,500
184,500
90%
P166,050
7.Falcon Corporation sold equipment to its 80%-owned subsidiary, Rodent Corp., on January 1, 2005. Falcon
sold the equipment for P110,000 when its book value was P85,000 and it had a 5-year remaining useful life with
no expected salvage value. Separate balance sheets for Falcon and Rodent included the following equipment and
accumulated depreciation amounts on December 31, 2005:
Equipment
Less: Accumulated Depreciation
Equipment-net
Falcon
P 750,000
(200,000)
P550,000
Rodent
P300,000
(50,000)
P250,000
Consolidated amount for equipment and accumulated depreciation at December 31, 2005 were respectively:
a. P1,025,000 and P245,000
b. P1,025,000 and P250,000
c. P1,025,000 and P245,000
d. P1,050,000 and P250,000
ANSWER: A
Combined equipments amount
Less: Gain on sale
Consolidated equipment balance
P1,050,000
(25,000)
P1,025,000
Combined Accumulated depreciation
Less: Depreciation on gain
Consolidated Accumulated Depreciation
P250,000
(5,000)
P245,000
8. Monica purchased equipment from Its 85% owned subsidiary, Eloisa Company for P150,000 on january 2015
and the equipment and Its accumulated depreciation were carried on the books Eloisa at 200,00 and P100,000,
respectively. Monica estimates a remaining life of the equipment to be 5 years, at which time no salvage value ls
expected to exist. Straight-line depreciation is used. Eloisa reported a net income for 2015 of P150,000.
What portion of the depreciation recorded by Monica must be eliminated for consolidation purpose?
A. 20% of the gain on sale
C. 33-1/3% of the gain on sale
B. 40% of the gain on sale
D. 66-2/3% of the gain on sale
Answer: A
Solution
Intercompany seiling price
Net book value carried on the books of Eloisa Company
Intercompany gain on sale
Amortized for 5 years the remaining life (50,000/5 years)
Portion of the gain eliminated from depreciation (10/50)
P150,000
(100 000)
P50,000
P10,000
20℅
9. On January 1, 2009, Pili, Inc. purchased 75% of Sili Co. for P500,000. On that date the equity of Sili consisted
of capital stock of P300,000 and retained earnings of P200,000. All assets and liabilities of Sili were fairly valued.
Goodwill, if any, is not amortized.
By January 2,2012, the reatined earnings of Sili had increased to P500,000. For 2012 Sili reported CI of P60,000
and paid dividends of P10,000. For 2013 Sili reported CI of P70,000 and paid dividends of 20,000.
On April 1,2012, Pili sold a land and an old office building on it. Pili's original cost for the land was P20,000;
the office building had a book value of P50,000. Sili paid P35,000 for the land and P40,000 for tge building. It
estimates that the building has a remaining life of 5 years.
For 2013, what is the balance in Pili's equity method Investment in Sili account?
a. P760,250
c. P775,000
b. P829,000
d. P791,500
Answer: D.
Investment in Sili Company stock – Equity method
Price paid
Investment income net of dividends – 2007 to 2010:
Increase in earnings (P500,000 – P200,000) x 75%
Investment income, Dec. 31, 2010:
Share of Sili’s net income (P60,000 x 75%)
45,000
Unrealized gain on sale of land – Downstream
(15,000)
Unrealized loss on sale of building – Downstream
10,000
Realized loss on sale of building (P10,000 / 5) x 75% ( 1,500)
Investment income, Dec. 31, 2011:
Share of Sili’s net income (P70,000 x 75%)
52,500
Realized loss (P10,000 / 5)
(2,000)
Dividends received:
2010: (P10,000 x 75%)
7,500
2011: (P20,000 x 75%)
15,000.
Investment in Sili Company stock, Dec. 31, 2011
P500,000
225,000
38,500
50,500
(22,500)
P791,500
10. On January 1, 2014 Jel'z Corporation sells an equipment with a P 30,000 book value to its subsidiary Jom'z
Company for P 40,000. Jom'z intends to use the equipment for 5 years. On December 31, 2015 Jom'z sells the
equipment to an outside party for P 25,000. What amount of gain ( loss ) for the sale of assets is reported on the
consolidated financial statements?
a. loss of P 5,000 b. loss of P 1,000 c. gain of P 7,000 d. gain of P 25,000
Answer: c. gain of P 7,000
Solution:
Equipment Book Value
Depreciation ( P 30,000 x 2/5 )
Carrying Value
P 30,000
12,000
P 18,000
Selling Price
Carrying Value
Gain
P 25,000
18,000
P 7,000
11. Pie Inc. owns 80% of Cake Company's outstanding common stock. Pie reports
cost of goods sold in the current year of P425,000 while Cake Co. reports P260,000. During the current year, Pie
Inc. sells inventory costing P125,000 to Cake Co. for P187,500. 60% of these goods are not resold by Cake
Company until the following year. What is consolidated cost of goods sold ?
a. P685,000
b. P497,500
c. P460,000
d. P535,000
Answer: D
Intercompany gross profit (P187,500 – P125,000)
Inventory remaining at year end
Unrealized Intercompany gross profit at 12/31.
Cost of good sold – Pie Inc.
Cost of good sold – Cake Co.
Remove intercompany sales
Deferred unrealized gross profit.
Consolidated cost of good sold
P62,500
60%
P37,500
P425,000
260,000
187,500
37,500
P535,000
12. Presented below are several figures reported for Post Inc. and Mary Co. as of December 31 of the current
year which was the second year of owning Mary.
Two years ago, Post Inc. acquired 80% of Mary Co.'s outstanding common stock on January 1. The entire
difference between the amount paid and the fair value of Mary's net assets is attributed to a previously
unrecorded patent with a fair value of P112,500. The patent is being amortized over 20 years. During the first
year, Mary sold Post inventory costing P60,000 for P70,000. 30% of this inventory was not sold to external parties
until the following year. During the second year, Mary sold inventory costing P90,000 to Post for P115,000. Of this
inventory, 25% remained unsold on December 31 of the second year.
What is the amount of consolidated sales for the second year?
a. P815,000
b. P535,000
c. P608,000
d. P585,000
Answer:B
Post Incorporation's reported sales.
Mary Corporation's reported sales
Elimination of Intercompany sales
Consolidated sales
P450,000
250,000
115,000
P 585,000
13.On Jan. 1, 2016, Angelica Corporation acquired 90% of Ehrlyn Company. Angelica uses the cost method.
Analysis of data relative to this purchase indicates that goodwill of P50,000 was acquired in this purchase. The
goodwill is unimpaired.
On July 1, 2018, Ehrlyn sold a patent to Angelica. The sale price was P100,000; Angelica’s book value was
P50,000. Ehrlyn estimates that the patent has a life of 5 years and no salvage value. It will use straight-line
depreciation.
For 2018, Angelica CI P400,000 from its own operations. Ehrlyn had CI of P100,000.
Consolidated CI for 2018 is:
a. P455,000
b. P450,000
c. P449.500
d. P440,000
Ans. A
Net income from own operations – Pipe
P400,000
Pipe’s share of Smoker’s adjusted net income:
Net income
P100,000
Unrealized gain, July 1, 2018 – Upstream
(50,000)
Realized gain, Dec. 31, 2018 (P50,000/5)x ½
5,000
55,000
Consolidated net income, Dec. 31, 2018
P455,000
14.Several years ago Parent Corporation acquired 80% of Sub Corporation. Analysis of data relative to this
purchase indicates that goodwill of P60,000 was acquired in this purchase.
On Oct.1, 2016, Sub sold to Parent a used car for P32,000 in cash. Sub had originally paid P55,000 for the car;
on the day of the sale, the car had a book value of P23,000. Parent estimated the remaining life of the car at 3
years.
Parent’s CI from its own operations was P100,000 in 2016 and P120,000 in 2017. Sub’s CI was P60,000 in 2016
and P75,000 in 2017.
Consolidated CI attributable to parent for 2016 and 2017 are:
a. P138,000 and P179,400, respectively
b. P138,400 and P195,000, respectively
c. P138,000 and P179,000, respectively
d. P141,400 and P182,400, respectively
Ans. D
2016
2017
Net income from operations – Parent
P100,000
P120,000
Parent’s share of adjusted net income of Sub:
Net income
P 60,000
P 75,000
Unrealized gain – Upstream
( 9,000)
Realized gain: 2016 (P9,000/3) x ¼
750
2017 (P9,000/3)
Adjusted net income
Consolidated net income
MINIS
Attributable to parent
P 51,750
P151,750
(10,350)
P141,400
3,000
P 78,000
P198,000
(15,600)
P182,400
15. On January 1, 2015, Pure Company purchased 80% of the outstanding shares of Sure Company at a cost of
P1, 000, 000. On that date, Sure Company had P400, 000 of capital stock and P600, 000 of retained earnings.
On July 1, 2015, Sure Company sold equipment with a book value of P60, 000 to Pure Company for P80, 000.
For 2015 and 2016, the results of their operations are:
20152016
Pure Co.Sure Co.Pure Co.Sure Co.
Net income from own operationsP400, 000P200, 000P300, 000P150, 000
Dividends paid100, 00050, 00080, 00020, 000
The intercompany gain is included in the net income of Sure Company. The equipment sold is expected to have a
useful life of five years from date of sale.
The non-controlling interests on December 31:
20152016
a. P226, 400
b. P226, 400
c. P226, 000
d. P230, 000
P256, 800
P253, 200
P252, 400
P256, 000
Ans. : B
20152016
Capital stock – Sure, December 31P400, 000P400, 000
Retained earnings – Sure, December 31:
Retained earnings – Sure, January 1P600, 000P750, 000*
Add: Net income200, 000150, 000
TotalP800, 000P900, 000
Less: Dividends50, 000750, 000*20, 000880, 000
Stockholders’ equity – Sure, 12/31P1, 150, 000P1, 280, 000
Less: Unrealized gain (upstream sales)20, 000*18, 000*
P1, 130, 000P1, 262, 000
Add: Realized gain thru depreciation (upstream sales): (P20, 000 / 5 x 6/12)2, 0004, 000
Realized stockholders’ equity – Sure, 12/31P1, 132, 000P1, 266, 000
Multiplied by: Non-controlling interest %20%20%
Non-controlling interests, December 31P226,400P253,200(b)
There is no step-up value in fair value of net assets, so adjustment would not be necessary. The excess of cost
over book represents goodwill which has no bearing in the computation of non-controlling interest (minority
interest).
There was a goodwill arising from acquisition amounting to P200, 000 [P1, 000, 000 – (P1, 000, 000 x 80%)], any
impairment losses arising from this goodwill should be ignored for purposes of computing minority interests. But
any adjustments to reflect fair value less amortization should be recognized.
In an upstream sales (subsidiary is the seller) the unrealized gain on sale of equipment amounting to P20, 000
was included in the P200, 000 net income and since it was on intercompany gain, so there is a need to eliminate
such gain from consolidated point of view.
However, in subsequent year – 2016, the retained earnings of Sure for January 1, 2016 includes the unrealized
gain of P18, 000 (P20, 000 – P2, 000) for reason that P200, 000 net income of 2015 was carried over to 2016,
therefore, there is a need to reflect such deduction of P18, 000 for consolidated point of view.
16. On January 1, 2016, P Company purchased 80% of the outstanding shares of S Company by paying P700,
000. On that date, S Company had P300, 000 capital stock and P500, 000 of retained earnings. An undervalued
asset attributable to building amounting to P75, 000 with a remaining useful life of 25 years. All other assets and
liabilities of S Company had book value approximated their fair market value.
On January 1, 2017, P’s common stock and retained earnings amounted to P1, 000, 000 and P800, 000,
respectively, while S Company’s retained earnings is P600, 000.
The 2017 net income and dividends using cost (or initial value) model was as follows:
Net incomeDividends
P CompanyP340, 000P100, 000
S CompanyP150, 000P50, 000
On April 1, 2017, S Company sold equipment with a book value of P30, 000 to P Company for P60, 000. The gain
on sale is included in the net income of S Company indicated above. The equipment is expected to have a
remaining useful life of five years from the date of the sale.
On September 30, 2017, P Company sold machinery with a book value of P40, 000 to S Company for P75, 000.
The gain on the sale is also included in the net income of P Company indicated above. The machinery is
expected to last for ten years from the date of sale.
The non-controlling interest in net income for 2017:
a. P30, 000
b. P25, 500
c. P24, 900
d. P24, 300
Ans.: D
Solution:
Net income of subsidiaryP150, 000
Less: Unrealized gain on sale of equipment (upstream) – year of sale30, 000
Amortization of allocated excess3, 000
P117, 000
Add: Realized gain on sale of equipment (upstream) – 20174, 500
P121, 500
Multiplied by: Non-controlling interests20%
Non-controlling interests in net incomeP24, 300
FV of Subsidiary:
Consideration transferredP700, 000
Less: Book value of SHE – S, 1/1/2016
[(P300, 00 + P500, 000) x 80%]640, 000
Allocated excess60, 000
Less: Over/Under Valuation of Assets and Liabilities:
Increase in buildings: P75, 000 x 80%60, 000
GoodwillP0
Note: As a consequence to determined excess, there is no goodwill (full or partial) arising therefrom:
Amortization of allocated excess: P75, 000 / 25 yearsP3, 000
Upstream Sale of Equipment (date of sale – 4/1/2017):
Sales
Less: Book value of equipment
Unrealized Gain (on sale of equipment)
Realized gain on sale of equipment:
2017 P30, 000/ 5 years = P6, 000 x 9/12
(4/1/2017 – 12/31/2017)
2018
Downstream Sale of Machinery ( date of sale – 9/30/17):
Sales
Less: Book value of machinery
Unrealized Gain (on sale of machinery)
Realized gain on sale of machinery:
2017:P35, 000 / 10 years = P3, 500 x 3/12
(9/1/2017 – 12/31/2017)
2018
P60, 000
30, 000
30, 000
P4, 500
P6, 000
P75, 000
40, 000
P35, 000
P875
P3500
17. On January 1,2015,Alex Corporation sold equipment to Arse Company, it’s owned subsidiary, for
P680,000.Alex had paid P1000,000 for this equipment , for which the depreciation to the date of intercompany
sale totalled P360,000.Both companies use the straight line method of depreciation for their depreciable assets.
The equipment had a 10 year life when purchased and an expected salvage value of P100,000. What amount
should be included in the consolidated statement of financial position at December 31, 2015, for the equipment
cost and accumulated depreciation?
a.
b.
c.
d.
P1000,000 and P360,000
P680,000 and P450,000
P1000, 000 and P450,000
P680,000 and P360,000
Ans. C
Equipment – at original cost
Accumulated depreciation:
Time of sale
Current depreciation (P900,000 /10)
P1,000,000
P360,000
90,000
P 450,000
18. On January 1, 2016, Les Company purchased 80% of the outstanding stock of Noriel Company at a cost of
P720,000. On the date, Noriel Company had P400,000 of capital stock and P500,000 of retained earnings .
For 2016, Noriel Company reported income of P180,000 and paid dividends of P60,000. All the assets and
liabilities of Noriel Company are at fair market value.
On December 31,2016, Les Company sold equipment to Noriel Company for P75,000 that had a cost of P45,000.
The equipment is expected to have a useful life of 10 years from this date. Les uses the cost method to account
for it’s investment in Noriel.
The amount of consolidated CI attributable to parent on December 31, 2016 is:
a.
b.
c.
d.
P320,000
P200,000
P314,000
P200,000
Ans. C
Net income – Po
Unrealized gain, Dec. 31 – DS
Net income from own operation – Po
Net income of So
P200,000
(30,000)
270,000
180,000
Consolidated net income, Dec. 31, 2016
MINIS (P180,000 x 20%)
Attributable to parent
P350,000
(36,000)
P314,000
19. Dalton Corp. owned 70% at the outstanding common stock of Shrugs lnc. On January 1, 20x4. Dalton
acquired a building with a ten-year life for P420,000 No salvage value was anticipated and the building was to be
depreciated on the straight-line basis. On January 1, 20x6. Dalton sold this building to Shrugs for P392000. At
that time, the building had a remaining life of eight years but still no expected salvage value. ln preparing financial
statements for 20x6, how does this transfer affect the calculation of Daltons share at consolidated net income?
A. Consolidated net income must be reduced by P44.800
B. Consolidated net income must be reduced by P50.400
C. Consolidated net income must be reduced by P49.000
D. Consolidated net income must be reduced by P56.000
ANSWER: C
Unrealized gain on sale of equipment
Realized gain on sale of equipment(upstream salaes)
through depreciation
Net
Selling price
Less: book value1/1/20x6
Cost 1/1/20x2
Less: accumulated depreciation:P 420,000/10yrs. x 2yrs.
Unrealized gain on sale of equipment
Realized gain – depreciation: P56,000/8yrs.
20X6
(56,000)
7,000
(49,000)
P 392,000
P 420,000
84,000
336,000
P 56,000
P 7,000
20. On January 1, 20x4, GG Company purchased a computer with an expected economic life of five years.
On January l, 20x6, GG sold the computer, to TLK Corporation and recorded. the following entry:
Cash .................................................................. 39,000
Accumulated Depreciation ................................ 16.000
Computer Equipment .............................. 40,000
Gain on Sale of Equipment ..................... 15,000
TLK Corporation holds 60 percent of GG's voting shares. GG reported net income of P45,000. And TLK reported
income from its own operations of P85,000 for 20x6. There is no change in the estimated economic life of the
equipment as a result of the intercorporote transfer. In the preparation of the 20x6 consolidated income
statement. depreciation expense will be:
A. Debited for P5,000 in the eliminating entries
B. Credited for P5,000 in the eliminating entries
C. Debited for P13,000 in the eliminating entries.
D. Credited for P13.000 in the eliminating entries
ANSWER:
The P39,000 paid to (36 Company will be charged to depreciation expense by TLK Corporation over the
remain'ng 3 years of ownership. As a result. TLK Corporation wil debit depreciation expense for Pl3,000 each
year. (36 Company had charged Plé.000 to accumulated depreciat'on in 2 years, for an annual rate of P8000.
Depreciation expense therefore must be reduced by P5,000 (P13.000 P8,000] in preparing the consolidated
statements
21. Pied Imperial-Pigeon Corporation acquired a 90% interest in Offshore Corporation in 2003 when Offshore'
book values were equivalent to fair values. Offshore sold equipment with a book value of $80,000 to Pied
Imperial-Pigeon for $130,000 on January 1, 2005. Pied Imperial-Pigeon is fully depreciating the equipment over a
4year period by using the straight-line method. Offshore' reported net income for 2005 was $320,000. Pied
lmperial-Pigeon's 2005 net income from Offshore was
a. $249,250.
b. $250,500.
c. $254,250.
d. $288,000.
Answer: c
Pied lmperial-Pigeon's share of Roger's
income = (320,000 x 90%) =
Less: Profit on intercompany sale
(130,000 - 80,000) x 90% =
Add: Piecemeal recognition of
deferred profit ($50,000/4 years) x 90% =
Income from Offshore
$ 288,000
( 45,000 )
$ 11,250
$ 254,250
22.Root Corp. owns 100% of Beer Corp.’s common stock. On January 2, 20x5, Root sold to Beer for P40,000
machinery with a carrying amount of P30,000. Beer is depreciating the acquired machinery over a five year life by
the straight-line method. The net adjustments to compute 20x5 and 20x6 Profit Attributable to Equity Holders of
Parent or CNI Attributable to Controlling Interests before income tax would be an increase (decrease) of:
a.
b.
c.
d.
20x5
P( 8,000)
( 8,000)
(10,000)
(10,000)
20x6
P 2,000
0
2,000
0
Ans: a
Unrealized gain on sale of machinery
Realized gain on sale of machinery
P10,000/5
Net adjustments
20x5
20x6
2,000
P( 8,000)
P 2,000
P 2,000
P(10,000)
23.The Pine Company owns 65% of The Apple Company. On the last day of the accounting period Apple sold to
Pine a non-current asset for P200,000. The asset originally cost P500,000 and at the end of the reporting period
its carrying amount in Apple’s books was P160,000. The group’s consolidated statement of financial position has
been drafted without any adjustments in relation to this non-current asset.
What adjustment should be made to the consolidated statement of financial position figures for non-current assets
and retained ernings?
a.
b.
c.
d.
Non-current assets
Increase by P300,000
Reduce by P40,000
Reduce by P40,000
Increase by P300,000
Retained earnings
Increase by P195,000
Reduce by P26,000
Reduce by P40,000
Increase by P300,000
Ans: b
Upstream Sales:
Selling price of non-current assets
Less: Book/carrying value, date of sale
Gain on intercompany sale
Eliminating Entries would be:
P200,000
160,000
P 40,000
Retained Earnings – Parent (65% x P40,000)
P26,000
Non-controlling interest (35% x P40,000)
14,000
Non-current asset
P40,000
24. Steve Co. is 80% - owned subsidiary of Peter Co., acquired at book value several years ago.
Comparative separate company income statements for these affiliated corporations for 2016 are as
follows:
Peter Co.
Steve Co.
Sales…………………………………………….
P3,000,000
P1,400,000
Dividend income……………………………….
216,000
Gain on building……………………………….
60,000
Income credits………………………………….
P3,276,000
P1,400,000
Cost of sales…………………………………..
P2,000,000
P 800,000
Operating expenses…………………………..
600,000
300,000
Income debits…………………………………..
P2,600,000
P1,100,000
Net income……………………………………...
P 676,000
P 300,000
On January 5, 2016 Peter Co. sold a building with a 8-year remaining useful life to Steve Co. as a gain of
P60,000. Steve Co. paid dividends of P240,000 during 2016.
The Non-controlling interest in net income and CNI Attributable to Controlling Interests for 2016, should
be:
a. P80,000; P640,000
b. P80,000; P647,500
c. P60,000; P647,500
d. P60,000; P640,000
ANSWER: (c)
Profit Attributable to Equity holders of parent – 2016
Net income from own operation:
Peter Co.:
Net income………………………………….
Less: Dividend Income…………………….
Steve Co.
Less: Unrealized gain on sale of building………………..
Add: Piecemeal recognition of excess depreciation/……
Realized gain thru depreciation (P60,000/8-yrs.)…
Less: Amortization of allocated excess…………………..
Non-controlling interests in net income
(P300,000 x 20%)…………………………………….
Profit Attributable to Equity Holders of parent……………
P676,000
216,000
P460,000
300,000
P760,000
60,000
7,500
P707,500
0
60,000
P647,500
(c)
(c)
25. On January 1, 2013, P Company purchased 80 percent of the outstanding shares of S Company at a cost of
P700,000. On that date, S Company had P300,000 of capital stock and P500, 000 of retained earnings.
For 2013, P Company had CI of P300,000 from its own operations and paid dividends of P 100,000. For 2013, S
Company reported a CI of P 150, 000 and paid dividends of P50,000. All of the assets and liabilities of S
Company had book values approximately equal to their respective market values.
On April 1, 2013, S Company sold equipment with a book value of P30,000 to P Company for P60,000. The gain
on the sale is included in the Cl of S Company indicated above. The equipment is expected to have a useful life of
five years from the date of the sale.
Consolidated CI attributable to parent for 2013 is:
a. P397,200
b. P423,600
c. P400,800
d. P399,600
ANSWER: D
Consolidated Net Income
Net income from own operations - P Company
Adjusted net income of S Company:
Net income - S
Unrealized gain, 4/1/11 – Upstream
Realized gain, 12/31/11 (P30,000/5) x 9/12
Consolidated net income
Attributable to NCI (P124,500 x 20%)
Attributable to parent
P300,000
P150,000
( 30,000)
4,500
124,500
424,500
(24,900)
P399,600
26. Apex, Inc., and Small, Inc., formed a business combination on January 1, 2007, when Apex acquired a 60
percent interest in the common stock of Small for P372,000. The book value of Small on that day was P350,000.
Patents held by the subsidiary (with a 12-year remaining life) were undervalued within the company‘s accounting
records by P120,000. Any goodwill indicated by the acquisition price is not amortized.
Intercompany inventory sales between the two companies have been made as follows:
Year
2007
2008
2009
2010
2011
2012
2013
Cost to Apex
P60,000
70,000
80,000
100,000
90,000
120,000
112,000
Transfer Price
to Small
P72,000
84,000
100,000
125,000
120,000
150,000
160,000
Ending Balance
(at transfer price)
15,000
25,000
20,000
40,000
30,000
50,000
40,000
Small sold a building to Apex on January 1, 2011, for P80,000. The building had a net book value of P30,000 on
that date and a five-year life. No salvage value was expected for this asset which was being depreciated by the
straight-line method.
The individual financial statements for these two companies as of December 31,2013 and the year then ended
follow:
Apex
Small
Inc.
Inc.
Sales
Cost of goods sold
Operating expenses
Dividend income (from Small)
P 700,000
( 460,000)
( 170,000)
3,000
P 73,000
P300,000
( 205,000)
( 70.000)
-0P 25,000
Retained earnings, January 1, 2013
CI (above)
Dividends paid
Retained earnings, December 31, 2013
P 690,000
73,000
( 45,000)
P 718,000
P400,000
25,000
(
5,000)
P 420,000
P 275,000
233,000
372,000
308,000
220,000
-0P1,408,000
P142,000
229,000
-0202,000
86,000
20,000
P679,000
Cash and receivables
Inventory
Investment in Small Company
Buildings (net)
Equipment (net)
Patents (net)
Total assets
Liabilities
Common stock
Retained earnings, December 31, 2013
Total liabilities and equities
P 390,000
300,000
713,000
P1,408,000
P159,000
100,000
420,000
P 679,000
What is the consolidated balance of retained earnings, December 31, 2013?
a. P612,000
b. P602,000
c. P620,000
d. None of the above
ANSWER: B
Consolidated Retained Earnings, December 31, 2013
Retained earnings, Jan. 1, 2013 Apex
P 690,000
Amortization of patents 2007 to 2013 (P10,000 x 6)
( 60,000)
Unrealized profit on inventory, 2013 - Downstream
( 10,000)
Unrealized gain on sale of building, 12/31/13 - Upstream (P30,000 x 60%) ( 18,000)
Consolidated retained earnings, Dcember 31, 2013.
P 602,000
27. Gray Corporation is a 90% owned subsidiary of Green Corporation acquired several years ago at
book value equal to fair value. For the years 2015 and 2016, Proto and Silver report the following:
2015
Green’s separate income………………………………………… P250,000
Gray’s net income…………………………………………………
100,000
2016
P350,000
80,000
The only intercompany transaction between Green and Gray during 2015 and 2016 was the January 1,
2015 sale of land. The land had a book value of P20,000 and was sold intercompany for P30,000, its
appraised value at the time of sale.
If the land was sold by Green to Gray and that Gray still owns the land at December 31, 2016, compute
the profit attributable to equity holders of parent for 2015 and 2016.
a.
b.
c.
d.
P340,000 ; P422,000
P330,000 ; P422,000
P340,000 ; P480,000
P330,000 ; P480,000
Answer: B
2015
2016
Green’s net income from own operation
P250,000
P350,000
Unrealized gain on sale of land
( 10,000)
Total
P240,000
P350,000
Gray’s net income attributable to parent:
2015 (P80,000 x 90%)
90,000
2016 (P60,000 x 90%)
Total net income attributable to parent
72,000
P330,000
P422,000
28.On January 1, 2016, King Company purchases 80% of the outstanding stock of Star Company at s
cost of P800,000. On that date, Star Company’s shareholder’s equity amounted to P800,000.
On April 1, 2016, King Company sold equipment with a book value of P50,000 to Star Company for
P90,000. The gain included in the 2016 net income of King Company. The equipment is expected to have
a remaining useful life of five years.
For 2016, the net income from own operations are:
King Company
P500,000
Star Company
262,500
King Company used the equity method to account for its investment in Star Company.
For 2016, what is the balance of Investment income account in the books of King Company?
a. P172,000
b. P176,000
c. 271,000
d. P170,000
Answer: B
Share in Star’s income (P262,500 x 80%)
P210,000
Unrealized gain (P90,000 – P50,000)
( 40,000 )
Realized gain (P40,000/5) x 9/12
Investment Income account balance, 12/31/16
6,000
P176,000
29. Basilio Corporation owns 100% of Longalong’s Corporations common stock. On January
1,
2016, Basilio sold to Longalong for P440,000 machinery with the carrying amount of P30,000. Longalong
is depreciating the acquired machinery over a five year life by straight-line method. The net adjustments
to compute 2016 and 2017 Profit Atrributable to Equity Holders of Parent or CNI Attributable to
Controlling Interest before income tax would be an increase (decrease):
2016
2017
a.
P(8,000)
P2,000
b.
P(8,000)
-0c.
P(10,000)
P2,000
d.
P(10,000)
-0ANSWER; A
Rationale
Unrealized Gain on sale of machinery
Realized Gain on sale of m,achinery (10,000/5)
Net Adjustments
2016
P(10,000)
2,000
P(8,000)
2017
P2,000
P2,000
30. On January 1,2016 Yellow Company purchase 80% of the outstanding shares of Orange Company at
a cost of P1,000,000. On that date, Orange Co. had P400,000 of capital stock and P600,000 of retained
earnings.
On July 1,2016 Orange Company sold an equipment with a book value of P60,000 to Yellow Co. for
P80,000
For 2016 and 2017, the results of their operations are:
2016
2017
Yellow
Orange
Yellow
Orange
Net income from own operations
P400,000 P200,000
P300,000
P150,000
Dividends paid
100,000
50,000
80,000
20,000
The intercompany gain is included in the net income of Orange Co.. The equipment sold is expected to
have a useful life of five years from the date of sale.
The non-controlling interest on December 31:
a.
b.
c.
d.
2016
P226,400
P226,400
P226,000
P230,000
2017
P256,800
P253,200
P252,400
P256,000
ANSWER:B
Rationale
Capital stock-Orange 12/31
Retained Earnings, Orange 12/31:
Retained Earnings, Orange 1/1 P600,000
Add: Net Income
200,000
Total
P800,000
Less: Dividends
50,000
Stockholder’s Equity- Orange, 12/31
Less: Unrealized Gain (Upstream Sales)
Total
Add: Realize gain thru Depreciation
(upstream sales): P20,000/ 5 x 6/12)
Realized Stockholder’s Equity- Orange, 12/31
Multiplied by: Non-controlling Interest %
Non-controlling Interests, December 31
2016
P400,000
750,000
P1,150,000
20,000
P1,130,000
2017
P400,000
P750,000
150,000
P900,000
20,000
2,000
P1,132,000
20%
P226,400
880,000
P1,280,000
18,000
P1,262,000
4,000
P1,266,000
20%
P253,200
31. On January 1,2016, P Company purchased 80 percent of the outstanding shares of S Company by paying
P700,000. On that date, S Company had P300,000 capital stock and P500,000 of retained earnings. An
undervalued asset attributable to building amounting to P75,000 with a remaining life of 25 years. All other assets
and liabilities of S Company has book value approximated their fair market value.
On January 1,2017, P’s common stock and retained earnings amounted to P1,000,000 AND P800,000,
respectively, while S Company’s retained earnings is P600,000.
The 2017 net income and dividends using cost (initial value) model was as follows:
Net Income
Dividends
P Company
P340,000
P100,000
S Company
P150,000
P 50,000
On April 1,2017, S Company sold equipment with a book value of P30,000 to P Company for P60,000. The gain
on the sale is included in the net income of S Company indicated above. The equipment is expected to have a
remaining useful life of five years from the date of the sale.
On September 30,2017, P Company sold machinery with a book value of P40,000 to S Company for P75,000.
The gain on the sale is also included in the net income of P Company indicated above. The machinery is
expected to last for ten years from the date of sale.
The non-controlling interest in Net Income for 2017:
a. P30,000
c. P24,900
b. P25,500
d. P24,300
Solution:
ANS: D
Net income of Subsidiary
P150,000
Less: Unrealized gain on sale of equipment (upstream)year of sale
30,000
Amortization of allocated excess
3,000
P117,000
Add: Realized gain on sale of equipment (upstream) – 2017
4,500
P121,500
Multiplied by: Non-Controlling Interests
20%
Non-controlling interests in net income
P 24,300
FV of Subsidiary:
Consideration transferred
P700,000
Less: Book value of SHE-S,1/1/2016
[(P300,000 + P500,000) x 80%]
640,000
Allocated excess
P 60,000
Less: Over/Under Valuation of A and L:
Increase in Buildings:P75,000 x 80%
60,000
Goodwill
P
0
Note: As a consequence to determine excess, there is no goodwill (full or partial) arising therefrom.
Amortization of allocated excess: P75,000 / 25years
P3,000
Upstream sale of Equipment (date of sale-4/1/2017):
Sales
P60,000
Less: Book Value of equipment
30,000
Unrealized Gain (on sale of equipment)
P30,000
Realized gain on sale of equipment:
2017:P30,000/5years=P6,000 x 9/12
(4/1/2017-12/31/2017)
P 4,500
2018
Downstream sale of machinery (date of sale-9/30/2017):
Sales
Less: Book Value of machinery
Unrealized Gain (on sale of machinery)
Realized gain on sale of machinery:
2017:P35,000/10years=P3,500 x 3/12
(9/30/2017-12/31/2017)
P 6,000
P75,000
40,000
P35,000
P
875
2018
P 3,500
32. On January 1,2016, Edi Company purchased 80 percent of the outstanding shares of Lyn Company at a cost
of P1,000,000. On that date, Lyn Company had P400,000 of capital stock and P600,000 of retained earnings.
On July 1,2016, Lyn Company sold an equipment with a book value of P60,000 to Edi Company for P80,000.
For 2016 1nd 2017, the results of their operations are:
2016
2017
Edi Co.
LynCo.
Edi Co.
LynCo
Net income from own operations
P400,000
P200,000
P300,000
P150,000
Dividends paid
100,000
50,000
80,000
20,000
The intercompany gain is included in the net income of Lyn Company. The equipment sold is expected to have a
useful life of five years from the date of sale.
The Non-controlling interests on December 31:
2015
2016
a.
P226,400
P256,800
b.
P226,400
P253,200
c.
P226,000
P252,400
d.
P230,000
P256,000
solution:
ANS: B
2016
2017
Capital stock-Lyn, December 31
P400,000
P400,000
Retained earnings-Lyn, December 31:
Retained earnings-Lyn,January1 P600,000
P750,000
Add: Net Income
200,000
150,000
Total
P800,000
P900,000
Less: Dividends
50,000
750,000
20,000
880,000
Stockholders;’equity-Lyn,12/31
P1,150,000
P1,280,000
Less: Unrealized gain (upstream sales)
20,000
18,000
P1,130,000
P1,262,000
Add: Realized gain thru depreciation
(upstream sales): P20,000/5x6/12
Realized StockholdersÉquity-Lyn,12/31
Muti[lied by: Non-controlling Interest %
Non-controlling interests, December 31
2,000
P1,132,000
20%
P 226,400
4,000
P1,266,000
20%
P 253,000
There is no step-up value of net assets, so adjustment would not be necessary. The excess of cost over book
represents goodwill which have no bearing in the computation of minority interests.
There was a goodwill arising from acquisition amounting to P200,000 [P1,000,000-(80% x P1,000,000)], any
impairment losses arising from this goodwill should be ignored for purposes of computing minority interests. But
any adjustments to reflect fair value less amortization should be recognized.
In an upstream sales, the unrealized gain on sale of equipment amounting to P20,000 was included in the
P200,000 net income and since it was an intercompany gain, so there is a need to eliminate such gain from
consolidated point of view.
However, in subsequent year 2017, the Retained Earnings of Lyn for January 1,2017 includes the net unrealized
gain of P18,000(P20,000-P2,000) for reason that P200,000 net income of 2016 was carried over to 2017,
therefore, there is a need to reflect such deduction of P18,000 for consolidation point of view.
33. On January 1,2016, Red Inc.sold equipment with a four-year remaining useful life and a book value of
P350,000 to its 65%-owned subsidiary for a price of P530,000. In consolidation working papers for the year ended
December 31,2016, the elimination entry concerning this transaction will include:
A.A debit to equipment for P180,000
B.A credit to depreciation expense for P180,000
C.A debit to cash for P350,000
D.A debit to gain on equipment for P180,000
Answer: D
100% unrealized gain and restore the original book value ,date of sale 1/1/16
Gain on sale ........................................................P180,000
Equipment.......................................
P180,000
The entry made in the books of subsidiary on the date of sale:
Equipment..........................................................P 530,000
Cash................................................
P530,000
The entry made in the books of parent on the date of sale:
Cash...................................................................P530,000
Equipment.....................................
P350,000
Gain on Sale..................................
180,000
From consolidated point of view, there should be no gain. Therefore, to eliminate the gain should be debited and
equipment should be reduce accordingly.
For depreciation:
Accumulated depreciation.................................P45,000
Depreciation expense (P180,000/4 years) P45,000
34. The Reyes Co.acquired equipment on January 1,2015 at a cost of P1,500,000,depreciating it over 7 years
with a nil residual value. On January 1,2018. The Santos Co.acquired 100% of Reyes and estimated the fair value
of the equipment at P900,000, with a remaining life of 4 years. This fair value was not incorporated into Reyes’
books and the depreciation expense continued to be calculated by reference to original cost. The carrying amount
of the statement of financial position in preparing the consolidated financial statement for the year ended
December 31,2019:
A.Increase by P418,000
B.Decrease by P418,000
C.Decrease by P225,000
D.Increase by P225,000A
Answer: B
Net carrying /book value 12/31/17:
Reyes Co.’s book value [P1,500,000-(P1,500,000/7 years x 4years)]....................P643,000
Santos Co;s book value [P900,000-(P900,000/4years x 3 years)]....................... 225,000
Decrease........................................................................................................... P418,000 (B)
35.
Kestrel Company acquired an 80% interest in Reptile Corporation on January 1, 2004. On
January 1, 2005, Reptile sold a building with a book value of $50,000 to Kestrel for $80,000.
The building had a remaining useful life of ten years and no salvage value. The separate
balance sheets of Kestrel and Reptile on December 31, 2005 included the following balances:
Kestrel
Buildings
$
Accumulated Depreciation -
400,000
120,000
Reptile
$
250,000
75,000
Buildings
The consolidated amounts for Buildings and Accumulated Depreciation - Buildings that
appeared, respectively, on the balance sheet at December 31, 2005, were
a. $620,000 and $192,000.
b. $620,000 and $195,000.
c. $650,000 and $192,000.
d. $650,000 and $195,000.
ANSWER:
Combined building amounts
$
650,000
Less: Intercompany gain
Consolidated building amounts
Combined Accumulated Depreciation
Less: Piecemeal recognition of gain
$
(
30,000 )
620,000
$
195,000
(
3,000 )
Consolidated accumulated depreciation
$
192,000

36. The Roel Company acquired equipment January 1, 2013 at accost of 800,000, depreciating it over 8
years with a nil residual value. On January 1, 2016. The Muldon Company acquired 100% of Roel and estimated
the fair value of the equipment at 460,000, with a remaining life of 5 years. This fair value was not incorporated
into Roel’s book and the depreciation expense continued to be calculated by reference to original cost.
What adjustment should be made to the depreciation expense for the year and the statement of financial position
carrying amount in preparing the consolidated financial statements for the year ended December 31, 2017?
Depreciation Expense
a. Increase by 8,000
b. Increase by 8,000
c. Decrease by 8,000
d. Decrease by 8,000
Carrying Amount
Increase by 24,000
Decrease by 24,000
Increase by 24,000
Decrease by 24,000
ANS:D
Fair value adjustments under PFRS 3 par.36 not reflected in the books must be adjusted for on consolidation.
Annual depreciation expense:
Roel’s depreciation: (800,000-0)/8 years
Muldon’s depreciation (460,000/5)
100,000
92,000
8,000
Net carrying/book value, 12/31/2017:
Roel’s book value (800,000-(800,000/8 years X 5yrs)
300,000
Muldon’s book value (note) (460,000-(460,000/5 X 3years) 276,000
Decrease
24,000
37. Sales of fixed assets between members of an affiliated group may result in the recognition of gain or loss by
the seller.
Statement 1: For each period, adjust depreciation expense and accumulated depreciation to reflect the original
BV of the asset.
Statement 2.For periods subsequent to the year of sale, restore the carrying amount of the asset to its original BV
and eliminate the gain (loss) recorded by the seller.
A.Statement 1 is false; Statement 2 is true
B.Both statements are correct
C.Statement 1 is true; Statement 2 is false
D.Both statements are false
Answer: C
38. Marcelino’s Co.:D owned 80% of Sarah’s Corp. During 2016, Marcelino’s sold to Sarah’s land with a book
value of 48,000. The selling price was 70,000. In its accounting records, Marcelino’s should.
a. Not recognized a gain on the sale of the land since it was made to a relative party.
b. Recognized a gain of 17,600
c. Defer recognition of the gain until Sarah’s sells the land to a third party.
d. Recognize a gain of 22,000
ANS: D
It should be noted that the gain of 22,000 (70,000-48,000) should be recorded in the Marcelino’s (Parent)
accounting records, but eliminated in the Consolidated Financial Statement.
39.In reference to the downstream or upstream sale of depreciable assets, which of the following statements is
correct?
a. Upstream sales from the subsidiary to the parent company always result in unrealized gains or losses.
b. The initial effect of unrealized gains and losses from downstream sales of depreciable assets is different from
the sale of non-depreciable assets.
c. Gains, but not losses, appear in the parent-company accounts in the year of sale and must be eliminated by the
parent company in determining its investment income under the equity method of accounting.
d. Gains and losses appear in the parent-company accounts in the year of sale and must be eliminated by the
parent company in determining its investment income under the equity method of accounting.
ANSWER: D
HOME OFFICE,BRANCH AND AGENCY ACCOUNTING
1.Lacoste Philippines has two merchandise outlets, its main store in Manila and in Cebu City branch. For control
purposes, all purchases are made by the main store, and shipmentsto the Cebu City branch are at cost plus 10%.
On January 01, 2016, the inventories of the main store and Cebu City branch were P13,600 and P3,960,
respectively. During 2016, the main office purchased merchandize costing P40,000 and shipped 40% of these to
the Cebu City branch.
At December 31, 2016, the following journal entry was made to prepare the Cebu City branch books for the next
accounting period:
Sales
32,000
Inventory
4,840
Inventory
3,960
Shipments from the main store
17,600
Expenses
10,480
Main store
4,800
[1]what was the actual branch income of 2016 on a cost basis, assuming the use of the provisions of the PAS,
and [2] if the main store has P11,200 worth of inventory on hand at the end of 2016, the total inventory that should
appear on the combined balance sheet at December 31, 2016?
a. [1] P4,800 [2] P15,600
c. [1] P6,320 [2] P15,600
b. [1]
d. [1] 6,480 [2]
6,320 [2] 15,160
16,040
Ans: C
[1]
actual branch income:
Sales……………………………………………………………………………..32,000
Less: Costs of Goods Sold
Inventory, Jan. 1, at billed price…………………..P 3,960
Shipments from Main store, at billed price……… 17,600
Cost of goods available for sale, at billed
Price………………………………………..P 21,560
Less: inventory, December 31, at billed
Price ………………………………………. 4,840
Cost of goods sold at billed price………………....P 16,720
Multiplied by: cost ratio ……………………………. 100/110
15,200
Gross Profit……………………………………………………………………P 16,800
Less: Expenses………………………………………………………………. 10,480
True Branch Net Income…………………………………………………….P 6,320 (c)
[2] Ending Inventory at Cost:
Home office……………………………………………….P 11,200
Branch: (P4,840 x 100/110)…………………………….
4,400
Combined ending inventory at cost……………………P 15,600 (c)
2.Barros Corporations shipments to and from its Brazil City branch are billed at 120% of cost. On December 31,
Brazil branch reported the following data at billed prices: inventory, January 1 of 33,600; shipments received from
home office of 840,000; shipment returned of 48,000; and inventory; December 31, of 36,000.
What is the balance of the allowance for over valuation of branch inventory on December 31 before adjustments?
a. 5,600
b. 137,600
c. 6000
d. 145,600
ANS:B
Inventory, January 1
Add: Shipments from office, net o returns
(840,000-48,000)
33,600
792,000
Cost of goods available for sale
Multiplied by: Mark up
Allowance for overvaluation before adjustments
825,600
20/120
137,600
3.Philippine Overseas Corporation has operated a branch in Jordan for one year . shipments are billed to the
branch at cost. The branch carries its own expenses. The transactionsfor the year are given effect to in the trial
balance below:
Accounts
Debit
Credit
Cash
P4,200
Home office Current
P17,500
Shipments From Home Office
67,680
Accounts Receivable
12,800
Expenses
6,820
Sales
74,000
P91,500
P91,500
The branch reported on inventory on December 31, 20x5 of P9,180.
The net profit of the Jordan Branch for 20x5 was:
a. P8,680
c.P6,718
b. P9,180
d. Some other answer.
ANSWER: A
Sales
Less: Cost of goods sold:
SFHO
Less: Inventory, ending
Gross profit
Less: Expenses
Net Profit
P 74,000
P67,680
9,180
58,500
P 15,500
6,820
P 8,680
4.The Clark branch of Freeport Corp. submitted the following trial balance as of 30 June 2016:
Cash
Accounts Receivable
Shipments from home office
Home-office current
Sales
Expenses
Total
Debit
P 28,600
173,800
462,000
__ 29,700
P694,100
Credit
P324,500
369,600
________
P694,100
Clark reported an ending inventory of P138,600, Shipments are billed at a mark-up of 40% on cost. What is the
real net income of Clark Branch?
a. P70,000
b. P92,400
c. P100,000
d. P108,900
ANS: D
Sales
Less: Cost of Goods Sold
Shipments from Home Office,
at cost (P462,000 x 100/140) P330,000
Less: Ending Inventory,
at cost (P138,600 x 100/140)
99,000
Gross Profit
Less: Expenses
Real Net Income of the Branch
P369,600
231,000
P138,600
29,700
P108,900
5.Tillman Textile Co. has a single branch in Bulacan. On march 1, 2016, the Home Office accounting records
included an Allowance for Overvaluation of Inventories-Bulacan Branch ledger account with a credit balance of
P32,000. During March, merchandise costing P36,000 was shipped to the Bulacan Branch and billed at a price.
On March 31, 2016, the branch prepared an income statement indicating a net loss of P11,500 for march and
ending inventories at a billed prices of P25,000. What is the amount of adjustment for Allowance for Overvaluation
of Inventories to reflect the true branch net income?
a. P39,257 debit
b. P46,000 credit
c. P39,333 debit
d. P46,000 debit
ANS: D
Merchandise Inventory, March 1, 2016
Add: Shipments (P36,000/60% = 60,000 x 40%)
Note: Mark-up is based on billed price
Cost of Goods available for sale
Less: Merchandise inventory, March 31, 2016
(25,000 x 40%)
Overvaluation of CGS/Realized the Gross Profit on Branch Sales
P32,000
24,000
P56,000
10,000
P46,000
6. As you begin to audit the books of the FIL-EM Company. YOU notice a discrepancy between the balance in the
Investment in Branch (P136,020 Dr.) and the Home Office (P175,400 Cr.) accounts. The followmg Information is
available:
A. The home office bills goods shipped to the branch at 150% of cost. At the beginning of the year, branch
inventory was stated at P7S,000 after the annual physical count, and the home office unrealized profit account
had a credit balance of PS,000. You find that a shipment with a billed value of P60,000 made toward the end of
the prior year had not been recorded by the home office.
B. On December 31 of the year under review, the branch mailed to the home office a check for 925,000 and a
notice that the branch had collected P4,380 on a home office account receivable. These items had not been
recorded by the home office. .
C. The branch was opened during the preceding year and its operating loss of P42,800 for the year was
capitalized by the branch as a start-up costs by the following entry:
Start-up Cost (Intangible Asset) 42,800
Income Summary ' 42,800
The account is not being amortized by the branch, and no entry was made by the home office to record the net
loss.
How much must be the adjusted balance of reciprocal accounts
A. P175,400
B. P192,600
C. P115,400
D. P132,600
Answer: D
Investment ln Branch
Unreconciled balance
P136,020
1) Unrecorded shipment
60,000
2) Unrecorded remittance ( 25,000)
2) Accounts collected
4380
3) Net loss
( 42,800)
Adjusted balance
P132,600
Home Office
P175,400
( 42,800)
P132,600
7. On September 1, 2014, Ricky Company established two branches: Naga and Cebu City branches. The home
office transferred P80,000 worth of cash and P 350,000 worth of inventory to its Naga branch and instructed Naga
to transfer 3/4 of the goods and cash received to Cebu City. In addition, on November 1, 2014, shipments from
home office were received by Naga amounting to P125,000 and the branch paid freight costs amounting to
P6,500. 3/5 of the said shipments were sold to outsiders. On December 1, 2014, Naga transferred half of the
remaining November shipments from the home office to Cebu City, with Cebu City branch paying freight costs of
P 2,500. Had the merchandise been shipped from the home office to Cebu City branch, only P 1,900 worth of
freight would have been incurred. How much is the balance of the Cebu City branch account in the home office
books?
a. 349,400
b. 348,800
c. 206,200
d. 346,900
Answer: D
Solution:
Branch Current - Naga
9/1 430,000
9/1 (322,500)
11/1 125,000
12/1. (26,300)
Balance 206,200
Branch Current - Cebu, City
9/1. 322,500
12/1. 24,400
Balance 346,900
8. The Ray Company was organized in 2014. Shortly after opening its doors to the public t the main store, Ray
Company establish branch in another city. At the end of the second year of operations, the home office received
the following condensed income statement from the branch:
Revenues
Cost of Goods Sold
Gross Margin
Selling and Administrative expenses
140,000
110,000
30,000
25,000
Net Income
5,000
The management at the home office questioned the accuracy of these figures and assigned you the task of
verifying the branch data. Your review of the records uncovered the following facts:
1. The beginning of the year balance in Unrealized Profit to Branch was 6,000
2. During the period, the home office shipped goods to the branch taht had cost the main store P75,000.
However, your review of the branch receiving reports revealed that a number ofshipments from the home office
had been recorded twice by the branch accountant.
3. The branch is billed a uniform 25% above costand receives inventory only from te home office.
4. The branch ending inventory was correctly reported at a billed price of P21,750.
5. When reconciling reciprocal accounts, you found that the branch had not recorded 2,000 og services performed
by the home office and billed to the branch. All other selling and adminitrative expenses were correctly reported
by the branch.
Compute the correct net income of the branch.
a. 31,400
b. 33,400
c. 25,400
d. 11,000
Answer: A.
Correct Net Income
Revenue
COGS
Beg. Inv. at cost (60,000/25%) 24,000
Add: Shipments at cost
75,000
Less: End. Inv. at cost
(21,750/125%)
(17,400)
Gross Margin
Selling and Admin. Exp (25,000+2,000)
Net Income
140,000
(81,600)
58,400
(27,000)
31,400
9. The after closing balances of Denise Corporation's home office and its branch at January 1,2014 were as
follows:
Home Office
Branch
Cash
P 7,000
P 2,000
Accounts Receivable-net
10,000
3,500
Inventory.
15,000
5,500
Plant Assets, net
45,000
20,000
Branch
28,000
Total Assets
P 105,000
P 31,000
Accounts Payable
P 4,500
P 2,500
Other liabilities
Unrealized Profit- Branch inv.
Home Office
Capital Stock
Retained Earnings
Total Equities
3,000
500
500
28,000
P 31,000
80,000
17,000
P 105,000
A summary of the operations of the home office and branch for 2014 follows:
Home Office sales: P 100,000, including ,P 33,000 to the branch. A standard 10% mark up on cost applies to all
sales to the branch. Branch sales to iys customers totaled P 50,000.
Purchases from outside entities: Home Office, P 50,000; Branch P 7,000
Collections from sales: Home Office P 98,000 (including P 30,000 from branch); Branch Collections; P 51,000
Payments on account; Home Office, P 51,000; Branch P 4,000
Operating expenses paid; Home Office, P 20,000; Branch P6,000
Depreciation on Plant Assets; Home Office, P 4,000; Branch P 1,000
Home Office expenses allocated to the branch, P 2,000
At December 31,2014, the Home Office inventory is P 11,000 and the Branch inventory is P 11,000 and the
Branch inventory is P 6,000 of which P 1,050 was acquired from outside suppliers.
The combined net income amounted to
a. 0
b. 4,550
c. 21,000
d. 25,550
Answer: D.
Sales
Cost of Sales (20,000+57,000-16,000)
Gross Profit
Operating Expenses (26,000+5,000)
Consolidated Net Income
117,500
(60,450)
56,550
(31,000)
25,550
10. Rea Company operates a branch in Pangasinan. Shipments are billed to the branch at cost. The branch
carries its own accounts receivable, makes its own collections and pays its own expenses. On December 31,
2015, the branch books shows the following balances:
Cash
P 6,500
Home Office
33,000
Shipments from Home Office
133,000
Accounts Receivable
23,000
Sales
145,000
Expenses
11,500
The branch inventory on December 31, 2015 is P 16,500. What is the balance of the investment in Branch
account in the books of the Home Office on January 1, 2016?
a. P 33,000
b. P 52,000
c. P 50,000
d. P 53,000
Answer: c. P 50,000
Solution:
Home Office
Net Income:
Sales
Shipments from Home Office
Inventory, End
Gross Profit
Less: Expenses
Investment in Branch
P 33,000
P 145,000
P 133,000
( 16,500) 116,500
28,500
(11,500)
17,000
P 50,000
11. Capistrano Corporation ships merchandise to its branch at 25% above cost. On its
books the branch shows a beginning inventory of home office merchandise amounting to P 20,000 and shipments
from Home Office of P 115,000. Its ending inventory of Home Office Merchandise is P 10,000. What amount
should the home office, Capistrano Corporation adjust the allowance for overvaluation of branch inventory
account?
a. P 20,000
b. P 25,000
c. P 100,000
d. P 50,000
Answer: b. P 25,000
Solution:
Home Office Merchandise, beg.
Shipments from Home Office
P 20,000/ 125%= P 16,000
115,000/ 125%= 92,000
Less: Home Office Merchandise, end.
10,000/ 125%=
8,000
P 4,000
23,000
P 27,000
(2,000)
P 25,000
12. The Best acoustic. bills merchandise shipments its Cavite City branch at 125% of cost. The branch, in turn,
sells the merchandise it receives from home office at 25% above the billing price. On August @, 2016, all the
branch' s merchandise stock was destroyed by fire. The branch record that were recovered showed the following:
Inventory, Jan 1, 2016.
Shipments received from home office,
January to July(at billed price
Purchase at cost, from outside sources,
all resold at a 20% mark-up
Sales
Sales returns and allowances
P165,000
110,000
10,200
169,000
3,750
The Best Co. will file an insurance claim. How much is the estimated cost of the merchandise destroyed by fire?
a. P120,000.
b. P130,000.
c. P140,000
d. P 150,000
Answer: A
Inventory, Jan. 1, at billed price.
Shipments received from home office at billed price
Cost of good available for sale at billed price.
Less: cost of good sold, ffrom home office
P165,000
110,000
P275,000
at billed price
Sales.
Less: sales return and allowance.
Sales price of merchandise purchased
from outsiders (P7,500 x 120%).
Net sales of merchandise acquired
from home office.
Multiplied by: Intercompany cost ratio. 100/125
Inventory, Aug. 1, 2016, at billed price.
Multiplied by cost ratio.
Merchandise inventory at cost destroyed by fire.
P169,000
3,750
9,000
P156,250
125,000
P150,000
100/150
P120,000
13. The home office of Irby Company bills merchandise to branches at 20% above home office cost. Information
taken from the accounting records of Kipp Branch is as follows:
Beginning Inventories (at billed prices) P17,000Shipmnlents from home office P42,500Ending inventories
P20,000Net loss P 1,500
The net income or net loss of Kipp Branch, based on home office cost of branch merchandise, is:
a. P7,900 net income
b. P9,400 net loss
c. P6,400 net income
d. P7,000 net income
Answer: C
Cost of sale
Mark up%.
Total
Less: net loss
Net income
P39,500
20%
P 7,900
1,500
P 6,400
For question no. 14-15
Ruby Corporation shipped inventory to its Licab branch, costing P375,000 plus freight. Ruby bills inventory to its
branches at 120% of original cost, plus the actual amount of shipping charges. At the end of the year, the Licab
branch had resold 50% of the inventory from the home office. Shipping cost paid by Ruby were P2,000.
14. What amount should the inventory will be reported in the branch statement of financial position?
a. P197,500
b. P188,500
c. P377,000
d. P287,500
Ans. B
Cost
Add: shipping cost
Total
Multiply by :
P375,000
P2,000
P377,000
50%
P188,500
15. Using the data above, what amount should the branch inventory from the home office be reported in the
financial position of Ruby Corp. As a whole?
a.
b.
c.
d.
P157,250
P188,500
P198,500
P377,000
Ans. A
Cost
Divided by:
Add: shipping cost
Total
Less: Resold
P375,000
120%
P312,500
P2,000
P314,000
P157,250
P157,250
16. On July 31, 2013, the home office in Manila establishes a sales agency in Bulacan. The following assets are
sent to the agency:
Cash (working fund to be operated under the imprest system)
P22, 000
Samples of merchandise
36, 000
During the month of August, the following transactions occurred:
The sales agency submits sales order of P272, 000, sales per invoice was billed at P268, 000. Cost of sales to
customers is P124, 000.
Collections during the month amount to P58, 200, net of 3% discount.
Home office disbursements chargeable to the agency are as follows:
Furniture
P40, 000.
Salaries for the month
21, 600
Annual rent of office space
36, 000
On August 31, the sales agency working fund is replenished. Paid vouchers submitted by the sales agency
amounting to P17, 925. Samples are useful until December 31, 2013, which at this time, are believed to have a
salvage value of 15% of cost. Furniture is depreciated at 18% per annum.
What is the total comprehensive income of the sales agency for the month of August?
a. P91, 425
b. P93, 225
c. P92, 955
d. P58, 425
Ans.: C
Solution:
Sales
Sales discount(P58, 200 ÷ 97%) x 3%
Net sales
Cost of expenses:
Cost of sales
Salaries
Rent expense(P36, 000 x 1/12)
Expenses
Samples(P36, 000 x 85%) x 1/5
Depreciation(P40, 000 x 18% x 1/12)60
Net income
P268, 000
1800
266, 200
P124, 000
21, 600
3000
17, 925
6, 120
173, 245
P92, 955
17. The account balances shown below were taken from the trial balances submitted to Bon-Apetit Corporation by
its Alabang Branch:
2015
2016
Petty cash fund
P1500
P1500
Accounts receivable
43, 800
49,140
Inventory37, 170
Sales
173, 180
195, 120
Shipments from home (140% of cost)
107, 450
136, 080
Expenses
51, 260
57, 930
Accounts written off
1, 220
1, 920
All branch collections are remitted to the home office. All branch expenses are paid out of the petty cash fund.
When the petty cash fund is replenished, the branch debits appropriate expense accounts and credits Home
Office Current. The petty cash is counted every December 31, and its composition was as follows:
12/31/1512/31/16
Currency and coinsP580P860
Expense vouchers920640
The branch inventory on December 31, 2016 was P41, 370. The correct branch net income for 2016 was:
a. P3, 390
b. P3, 670
c. P41, 070
d. P41, 350
Ans.: D
Solution:
Sales
Less: Cost of goods sold:
Inventory, 1/1/16, at cost (37, 170 x 100/140)
Add: Shipments, at cost (P136, 080 x 100/140)
Cost of goods available for sale
Less: Inventory, 12/31/16, at cost(P41, 370 x 100/140)
Gross profit
Less: Expenses(P57, 930 + P1, 920* – P280** )
Correct branch net income
P195, 120
26,550
97,200
P123, 750
29,550
94,200
100, 920
59, 570
P41, 350
*Direct write-off was used in recording doubtful accounts since there is no allowance account given in the trial
balance.
**There was P280 reduction on unreimbursed petty cash expense vouchers, incidentally, the entry for the
adjustment would be:
Petty cash 280
Expense
280
18.A branch’s ending inventory of merchandise shipped by the home office and purchased from outside vendor’s
amounts to P100,000. The post closing balance in the unrealized gross profit in branch inventory account is
P12,000 due to the home office practice of shipping merchandise at 20% above cost. The merchandise
purchased from outside vendors contained in the ending inventory of the branch amounts to:
a. 38,000
b. 30,000
c.
14,000
d. 28,000
Ans. D
Unrealized gross profit 12,000/ 20% =
Unrealized gross profit
Total Inventory cost
Branch Ending Inventory
Less: Inventory cost
Total branch ending inventory
60,000
12,000
72,000
100,000
72,000
28,000
19. Items below are taken from the unadjusted trial balance of Anjie Company and its branch on December
31,2015.
Home office books
Branch books
Shipment to branch
500,000
Allowance for overvaluation of branch inventory
99,900
Shipments from home office
590,000
Merchandise Inventory, Jan.1
64,500
Merchandise Inventory, Dec.31
48,750
Sales
600,000
Expenses
81,000
It is the company’s policy to bill all branches for merchandise shipments at 30% above cost.
How much of the branch inventory on January 1 represents purchases from outsides?
a.
b.
c.
d.
11,700
42,000
12,870
27,600
Ans. D
Inventory, Jan.1
Less: (99,900-(590,000-500,000)
(9,900/30%)
Total Inventory
64.500
9,900
33,000
27,600
20. On December 3, 2016. the home or recorded a shipment of merchandise to its Davao Branch as follows,
Davao Branch ...................................................... 30,000
Shipments to Branch ............................... 25,000
Unrealized Profit in Branch inventory………4,000
Cash (for freight charges)…………………….1,000
The Davao branch sells 40% of the merchandise to outside entities during the rest of December 2016. The books
at the home office and Kathy Office Supply are closed on December 31 of each year.
On January 5, 2017 , the Davao branch transfer 'half of the original shipment to the Baguio branch, and the
Davao branch pays P500 as the shipment.
At what amount should the 60% of the merchandise remaining unsold at December 31, 2016 be included in (1)
inventory of the Davao branch at Decmbr 31, 2016 and (2) the published balance sheet of Kathy office supply
Company at December 31, 2016 shows inventory at:
A. (1)P15,600(2) P18,000
B. (1)P17,400(2) P15,000
C. (1)P18,000(2)P15,600
D. (1)P18,400(2)P16,000
ANSWER: C
[1] Inventory of Davao branch at December 31, 2016:
Shipment from home office at billed price………………………………….. P 29,000
Multiplied by: ending inventory………………………………………………
60%
P 17,400
Add: freight in (1000 x 60%) …………………………………………………
600
P 18,000 (c)
[2] inventory at published (external reporting) balance sheet at cost:
Shipment at cost……………………………………………………………… P 25,000
Multiplied by: ending inventory………………………………………………
60%
P 15,000
Add: freight in (1000 x 60%) …………………………………………………
600
P 15,600 (c)
21. Macoy starts a branch operation on January 1, 2013. Inventory costing P 72,000 is shipped to this branch at a
transfer price of P 100,000. Freight is an additional P6,000. The branch sells 70 percent of this inventory for P
110,000 and remits P 70,000 in cash to the home office. On Macoy's financial statements for this period, what
appropriate Cost of Goods Sold figure?
a. P 50,400
b. P 54,600
c. P 70,000
d. P 74,200
Answer: b
Shipment to branch, at cost
Ending inventory, at cost (P72,000 x 30%)
Cost of goods sold
Freight (P6000 x P50,400/P72,000)
Total
P 72,000
(21 600)
P 50,400
P 4,200
P 54,600
22. Power Corporation shipped inventory to its Bacolod branch, costing P 375,000 plus freight. Power bills
inventory to its branches at 120 percent of original cost, plus the actual amount of shipping charges. At the end of
the year, the Bacolod branch had resold 50 percent of the inventory from the home office. Shipping costs paid by
Power were P 2,000. What amount should the inventory be reported in the branch's statement of financial
position?
a. P 187,500
b. P 188,500
c. P 226,000
d. P 377,000
Answer: b
Shipment to branch, at billed price
Shipping cost
Total cost
Sold (50%)
Inventory
P 375,000
P 2,000
P 377,000
P 188,500
P 188,500
23. Lobster Trading bills its Nueva Ecija branch for shipments of goods at 25% above cost. All the close of
business on October 31, 20x6, a fire gutted the branch warehouse and destroyed 60% of the merchandise stock
stored therein. Therefore, the following data were gathered:
January 1 inventory, at billed price
Shipments from home office to Oct. 31
Not sales to Oct. 31
If undamaged merchandise recovered are marked to sell for P30,000, the estimated cost of the merchandise
destroyed by fire was:
a. P14,400
c. P24,000
b. 21,600
d. 27,500
Ans: b
Inventory, January 1 at billed price
Add: Shipments from home office, at billed price
Cost of Goods Available for Sale at billed price
Divided by: Cost of Goods Available for sale
at sales price:
Net Sales
Add:
Inventory before the fire:
Undamaged merchandise
Divided by: Recovery Percentage
Percentage of Billing Price to Selling Price
P 50,000
130,000
P180,000
P225,000
P 30,000
40%
75,000
Estimated cost of merchandise destroyed by fire:
Inventory before the fire at selling price (P30,000/40%)
x: % of damaged merchandise
Damaged merchandise at selling price
x: % of Billing Price to Selling Price
Damaged Merchandise at Billed Price
x: Cost Ratio
Cost of Merchandise destroyed by fire
300,000
60%
P 75,000
60%
P 45,000
60%
P 27,000
100/125
P 21,600
24.On August 31, 20x6, a fire destroyed totally the rented “bodega” or stockroom of Adobo Company. The
following are some of the data of the company:
Merchandise Inventory, Dec. 31, 20x5
For the period Jan. 1 – Aug. 31, 20x6:
Purchases
Freight In
Purchases returns
Sales
Sales returns and allowances
P110,000
560,500
5,600
10,200
695,000
7,500
Using a 20% gross profit rate, the cost of the merchandise lost in the fire was:
a. P 90,700
c. P88,400
b. 115,900
d. 63,200
Ans: b
Merchandise inventory, 12/31/20x5
Add:
Net Purchases
Purchases
Add: Freight-in
P110,000
P560,500
5,600
Total
Less: Purchase returns
Cost of Goods Available for Sale
Less: Cost of Goods Sold:
Net Sales (P695,000 – P7,500)
x: Cost Ratio
Merchandise inventory, 8/31/20x6
loss due to fire
P566,100
10,200
555,900
P665,900
P687,500
80%
550,000
P115,900
25. The Lewis Co. bills merchandise shipments in its Quezon City branch at 120% of cost. The branch, in
turn, sells the merchandise it receives from the home office at 20% above the billing price. On July 31,
2016, all of the branch’s merchandise stock was destroyed by fire. The branch records that were
recovered showed the following:
Inventory, January 1, 2016 (at billed price)………………..
P330,000
Shipments received from home office,
January to June (at billed price)……………………….
220,000
Purchases, at cost, from outside sources,
All re-sold at a 25% mark-up…………………………..
15,000
Sales…………………………………………………………..
338,000
Sales return and allowances………………………………...
7,500
The Lewis Co. will file an insurance claim. How much is the estimated cost of that merchandise destroyed
by the fire?
a. P290,792
b. P259,792
c. P232,166
d. P230,166
ANSWER: (c)
Inventory, January 1, at billed price……………………………………….
Shipments received from home office at billed price……………………
Cost of goods available for sale at billed price…………………………..
Less: Cost of goods sold, from home office at billed price
Sales……………………………………………………..
P338,000
Less: Sales return and allowances…………………..
7,500
Sales price of merchandise purchased
from outsiders (P15,000 x 125%)…………
18,750
Net sales of merchandise acquired
From home office……………………………………….
P311,750
Multiplied by: Intercompany cost ratio………………………
100/120
Inventory, July 31, 2016, at billed price……………………..
Multiplied by: Cost ratio……………………………………….
Merchandise inventory at cost destroyed by fire…………..
P330,000
220,000
P550,000
259, 792
290,208
100/120
P232,166
26. Pascual Branch was billed by Home Office for merchandise at 140% of cost. At the end of its first
month, Pascual branch submitted among other things the following data:
Merchandise from Home Office (at billed price)……………
Merchandise purchased locally by branch………………….
Inventory, December 31 of which P14,000 are of
Local purchase…………………………………………..
Net sales for month……………………………………………
P196,000
80,000
56,000
360,000
The branch inventory at cost and the gross profit of the branch as far as the home office is concerned are:
a.
b.
c.
d.
Gross Profit
P184,000
P184,000
P140,000
P154,000
Ending Inventory of Branch at Cost
P154,000
P176,000
P176,000
P140,000
ANSWER: (b)
Net sales
Less: Cost of good sold:
Purchases
Shipments from home office, at cost
(P196,000 x 100/140)
Cost of goods available for sale
Less: Inventory, December 31
[(P56,000 – P14,000) x 100/140 + 14,000]
Gross profit
P360,000
P 80,000
140,000
P220,000
P 44,000
(b)
176,000
P184,000
(b)
27. Ryder Corporation has one branch operation located 500 miles away from the home office. The branch office
sells merchandise which is shipped to it from the home office. The merchandise is transferred at cost but the
branch pays reasonable freight charges. The branch office makes sales and incurs and pays operating expenses.
At the end of the current accounting period the true adjusted balance for the home office account on the branch’s
books and the branch office account on the home office’s books is P500,000.
The following items may or may not be reconciling items.
 The current year is 20x4.
 The home office has shipped merchandise to the branch office which cost P1O, 000 and which incurs
P500 freight charges paid by the home office but charged to the branch. This merchandise is received by
the branch on January 5, 20x5.
 The branch has transmitted P17, 000 in cash back to the home office as a partial payment on such
purchased merchandise. This cash is received by the home office on January 6th, 20x5.
 The branch office returns some defective merchandise to the home office. The cost of the returned
merchandise is P750. The branch office pays P25 of freight costs which will be charged back to the home
office.
 On December 1, 20x4, the home office sends a check for P25,000 to replenish the branch’s working
capital. The check is received on January 4, 20x5.
 The branch pays an advertising expense of P800 that should have been paid by the home office since it
applied to advertising fees incurred by the home office for its own benefit.
 The home office allocated P12,000 of general and administrative expenses to the branch. The branch
had not entered the allocation as of the end of the year.
 The home office pays insurance premiums on the branch store. The amount paid by the home office is
P1,000 but the branch erroneously records It as P776.00
Compute the unadjusted balances for the branch and home office accounts as of December 31, 20x4.
a.
b.
c.
d.
Home Office Current
P481,425
P500,000
P452,276
P518,575
Branch Current
P433,701
P500,000
P518,575
P452,276
ANSWER: C
Unadjusted balance (SQUEEZED)
Add (deduct) adjustments:
In transit
Remittance
Returns
Cash in transit
Expenses - HO
Expenses - Branch
Error
Adjusted balance
Home Office Books
(Branch Current - Dr. Bal)
P518,575
Branch Books
(Home Office Current - Cr. Bal)
P452,276
10,500
(17,000)
( 775)
25,000
(
800)
P500,000
12,000
224
P500,000
28. At December 31, 20x5, the following information has been collected by Maxwell Company's office and branch
for reconciling the branch and home office accounts.

The home office's branch account balance at December 31, 20x5 is P590,000. The branch’s home office
account balance is P506,700.
 On December 30, 20x5, the branch sent a check for P40,000 to the home office to settle its account. The
check was not delivered to the home office until January 3, 20x6.
 On December 27, 20x5, the branch returned P15,000 of seasonal merchandise to the home office for the
January clearance sale. The merchandise was not received by the home office until January 6, 20x6.
 The home office allocated general expenses of P28,000 to the branch. The branch had not entered the
allocation at the year-end.
 Branch store insurance premiums of P900 were paid by the home office. The branch recorded the
amount at P600.
The correct balance of the reciprocal account amounted to:
a. P575,000
b. P535,000
c. P534,700
d. P501,000
ANSWER: B
Unadjusted balance
Add (deduct) adjustments:
Remittance
Returns
Error by the branch
Expenses - Branch
Adjusted balance
Home Office Books
(Branch Current - Dr. Bal)
P590,000
Branch Books
(Home Office Current - Cr. Bal)
P506,700
(40,000)
(15,000)
P535,000
300
28,000
P535,000
29.Tarlac Branch of Quezon City Company, at the end of its first quarter of operations, submitted the
following statement of comprehensive income:
Sales
P300,000
Cost of sales:
Shipments from Home Office
P280,000
Local Purchases
30,000
Total
P310,000
Inventory at end
50,000
Gross Margin on Sales
260,000
P40,000
Expenses
35,000
Comprehensive Income
P5,000
Shipments to the Branch were billed at 140% of cost. The branch inventory as at September 30
amounted to P50,000 of which P6,600 was locally purchased. Markup on local purchases is 20% over
cost. Branch expenses incurred by Head Office amounted to P2,500.
On September 30, the inventory at cost and the net income realized by the home office from the Tarlac
branch operation are:
Branch inventory at cost
Net income realized
a. P37,600
b. P50,000
c. P31,600
d. P37,600
P72,600
P55,000
P 5,000
P70,100
Answer: D
Acquired from Home Office:
Billed price (P50,000-P6,600)
Divide by billing percentage on cost
Local Purchases
P43,400
140%
P31,000
6,600
Branch inventory at cost (September 30)
P37,600
Branch net income (P5,000 - P2,500 expenses)
P2,500
Add: Overvaluation of Branch Cost of Sales:
Shipment from Home Office:
Billed price
P280,000
Cost (P280,000/140%)
200,000
P80,000
Less: Inventory end
Billed price(P50,000 – P6,600)
P43,400
Cost (P43,400/140%)
31,000
12,400
Branch net income realized by Home Office
67,600
P70,100
30. Nariza Company opened its Tuguegarao branch on January 1. Merchandise shipments from home
office during the month, billed at 120% of cost, is P125,000. Branch returned damaged merchandise
worth P15,620. On January 31, the branch reported a net loss of (P2,270) and an Inventory of P84,000.
What is the net income (loss) of the branch to be taken up in the books of the Home Office?
a. (P1,690)
b. P6,500
c. (P2,270)
d. P1,960
ANSWER: D
Rationale
Net income (loss) per branch books
Add: Realized profit from sale made by branch/
Overvaluation of cost of goods sold:
Beginning Inventory
Add: Shipments
Less: Returns
Cost of goods available for sale at billed price
Less: Ending Inventory, at billed price
Cost of goods sold at billed price
Multiplied by: Mark-up
Adjusted Branch Net Income
P(2,270)
P
125,000
15,620
P109,380
84,000
P25,380
20/120
P1,960
31. The ZG Corp. established its Bulacan Branch in January 2016. During its first year of operations,
home office shipped to its Bulacan branch merchandise worth P130,000 which included a mark up of
15% on cost. Sales on account totalled P250,000 while cash sales amounted to P80,000. Bulacan
reported operating expenses of P38,000 and ending inventory of P15,000, at billed price. In so far as the
home office is concerned, the real net income of Bulacan is:
a. P82,000
b. P147,000
c. P177,000
d. P192,000
ANSWER: D
Rationale
Sales (P250,000 + P80,000)
Less: Cost of goods sold:
Shipments from office
P330,000
P130,000
Less: Ending Inventory
15,000
Cost of goods sold at billed price P115,000
Multiplied by: Cost ratio
100/115
Gross Profit
Less: Operating Expenses
Net Income of the branch in so far as the
Home office is concerned
100,000
P230,000
38,000
P192,000
32. Selected accounts from the December 31,2016 trial balance of Sarang Trading Co. And it’s Baguio Branch
follow:
Debits
Manila
Baguio Branch
Inventory, January 1,2016
P 25,000
P 11,550
Baguio branch
58,300
Purchases
200,000
105,000
Freight in from home office
5,500
Expenses
40,000
27,500
Credits
Home office
P P 53,300
Sales
160,000
150,000
Sales to branch
110,000
Allowance for overvaluation of
branch inventory at Jan. 1,2016
1,000
Additional Information:
1. The Baguio City branch gets all of its merchandise from the home office. The home office bills the goods
at cost plus a 10% mark-up. At December 31,2016 a shipment with a billed amount of P5,000 was still in
transit. Freight on this shipment was P300 and is to be treated as part of the inventory.
2. Inventories on December 31,2016, excluding the shipment in transit, follow:
Home office, at cost
P30,000
Branch. At billed price(excluding freight of P520)
10,000
Compute the (1)net income of the home office from own operations, and (2)the net income of the branch in so far
as home office is concerned.
a. (1)P25,000; (2) P 770
b. (1)P20,000; (2) P10,470
c. (1)P20,000; (2) P 770
d. (1)P25,000; (2) P20,970
SOLUTION:
ANS: D
(1) Net income of the home office from own operations:
Sales
P160,000
Less: Cost of goods sold:
Inventory, January 1,2016
P 25,000
Add: Purchases
200,000
Cost of goods available for sale
P225,000
Less: Shipments to branch at cost
100,000
Cost of goods available for home office
Sale
P125,000
Less: inventory, December 31,2016
30,000
95,000
Gross Profit
P 65,000
Less: Expenses
40,000
Net Income
P 25,000
(2) True Branch Income:
Sales
Less: Cost of goods sold:
Inventory, Jan.1,2016, at cost
(P11,550-P1,000 mark-up)
Add: Purchases from home office, at cost
(P105,000+ P5,000 in transit) x
100/110
Freight-In (P5,500+P300 freight-in
transit)
Cost of goods available for sale
Less: Inventory, Dec. 31,2016, at cost from
Home Office:(P10,400 + P5,000)
X 100/110
P14,000
Add: Freight-In (P520+P300)
820
Gross Profit
Less: Expenses
Net Income of the branch in so far as the
Home Office is concerned
P150,000
P 10,550
100,000
5,800
P116,350
14,820
101,530
P 48,470
27,500
P 20,970
33. On December 31,2016, the Investment in Branch account on the home office’s books has a balance of
P175,000. In analyzing the activity in each of these accounts for December, you find the following differences:
1. A P14,000 branch remittance to the home office initiated on December 28,2016, was recorded on the
home office books on January 2, 2017.
2. A home office inventory shipment to the branch on December 27,2016 was recorded by the branch on
January 4,2017; the billing of P26,000 was at cost.
3. The home office incurred P13,500 of advertising expenses and allocated P5,500 of this amount to the
branch on December 15,2016. The branch has not recorded this transaction.
4. A branch customer erroneously remitted P3,600 to the home office. The home office recorded this cash
collection on December 23,2016. Meanwhile, back at the branch, no entry has been made yet.
5. Inventory costing P51,600 was sent to the branch by the home office on December 11,2016. The billing
was at cost, but the branch recorded the transaction at P40,800.
Compute the balance as of December 31,2016:
Unadjusted Balance
Adjusted
Of The Home Office Account
Balance Of The Reciprocal Account
a.
P84,300
P143,000
b.
P122,300
P 96,000
c.
P151,200
P139,200
d.
P122,300
P161,000
Solution:
ANS: D
Investment in
Home Office
Branch Account
Current
Unadjusted balance(s), December 31,2016
P175,000
P122,300*
Add (deduct); adjustments:
1. Branch remittance not yet recorded by
the home office in 2016
( 14,000)
2. Shipments not yet recorded by the
Branch in 2016
26,000
3. Unrecorded branch expenses
5,500
4. Branch customers’ remittance recorded
by the home office nut not yet recorded
by the branch
( 3,600)
5. Erroneous recording of branch shipments
(P51,600 – P40,800)
10,800
Adjusted Balance(s) December 31,2016
P161,000
P161,000
*The P52,800 is computed by simply working back with P90,000 adjusted balance as the starting point
34. Nueva Ecija Branch of Malabon Company, at the end of its first quarter of operations has the following income
statement:
Sales......................................................................................................
Cost of Sales:
Shipments from Home Office ......................................................P285,000
Local Purchases.......................................................................... 50,000
P650,000
Total......................................................................................... P335,000
Inventory end.......................................................................... 80,000
Gross profit on sales.............................................................
Expenses..............................................................................
Net Income..............................................................................
255,000
P395,000
150,000
P245,000
Shipments to the branch were billed at 140% of cost. The branch inventory at September 30 amounted to
P50,000 of which P6,600 was locally purchased . Mark up on local purchases, 20% over cost. Branch expenses
incurred by head office amounted to P2,500 not yet recorded by the branch. In the combined income statement,
true branch net income:
A.P245,000
B.P314,029
C.P311,529
D.P314,029
Answer: C
Branch net income as reported................................................................................. P245,000
Add(Deduct):
Overvaluation of cost of goods sold/realized profit
From sales made by branch:
Shipments from home office...........................P285,000
Less:Ending inventory,at billed price
(50,000-6600)........................................... 43,400
Cost of goods sold from home office at
Billed price..............................................P 241,600
Multiplied by: Mark-up.................................... 40/140
Unrecorded branch expenses.............................................
69,029
(2,500)
True Branch Net Income.........................................................
P 311,529(C)
i.35.Which
represents the proper journal entry for a periodic inventory system that should be made on the books
of the home office when goods that cost the home office $100,000 to manufacture are shipped to a branch at a
transfer price of $125,000 and the billed price is not recorded in the shipments to branch account?
A.
Branch office
$100,000
Shipments to branch
B.
Branch office
$100,000
$125,000
Shipments to branch
C.
Branch office
$125,000
$125,000
Shipments to branch
$100,000
Unrealized profit
D.
Shipment to branch
Unrealized profit
25,000
$100,000
25,000
Shipments from home office
$125,000
ii36.Which
represents the proper journal entry for a periodic inventory system that should be made on the books of
the branch when goods that cost the home office $100,000 to manufacture are shipped to the branch at a price of
$125,000?
A.
Shipments from home office
$100,000
Home office
B.
Shipments from home office
$100,000
$125,000
Home office
C.
D.
Shipments from home office
$125,000
$125,000
Unrealized profit
$ 25,000
Home office
100,000
Shipments to branch
Unrealized profit
Shipments from home office
$100,000
25,000
$125,000
i.
35.REQUIRED: The home office journal entry to reflect merchandise shipments at cost plus a markup.
DISCUSSION: (C) When goods are shipped from a home office to a branch at a transfer price that reflects
original cost plus a markup, the branch must record the shipment at the transfer price. The home office most
often reflects the shipments to branch at original cost. To maintain a reciprocal relationship between the
home office and the branch office accounts, an unrealized profit in branch inventories account reflects the
markup.
Answers (A) and (B) are incorrect because neither reflects the unrealized profit. Answer (A) is incorrect
because the branch office should be recorded at $125,000. Answer (B) is incorrect because the shipments to
branch should be recorded at original cost of $100,000. Answer (D) is incorrect because it is the work sheet
entry necessary to eliminate this intercompany transaction in the preparation of the financial statements.
Answer () is incorrect because
ii.
36.REQUIRED: The journal entry on the branch book s to reflect the receipt of merchandise shipments at a
transfer price that reflects cost plus a markup.
DISCUSSION: (B) In a periodic system, when merchandise is received by a branch from the home office, the
merchandise should be reflected as a shipment from the home office in the amount of the transfer price, with
a corresponding entry to the home office account to indicate the equity of the home office in the net assets of
the branch.
Answer (A) is incorrect because the shipments should be reflected at the transfer price. Answer (C) is
incorrect because the home office equity should be reflected at the transfer price. Answer (D) is incorrect
because it is the worksheet entry used to eliminate this intercompany transaction in the preparation of the
enterprise’s financial statements.
37. Ошибка! Только основной документ.A gain should be reported on an acquisition if:
a. The fair value of the consideration paid is less than the book value of the net assets acquired.
b. The fair value of the consideration paid plus the present value of any earnings contingency is less than the
book value of the net assets acquired.
c. The fair value of the consideration paid is less than the fair value of net assets acquired plus the fair value
of identifiable intangibles acquired.
d.The fair value of the consideration paid plus the present value of any earnings contingency is less than the
fair value of identifiable net assets acquired.
ANS: D
38. In accounting for branch transactions, it is improper for home office to,
A. Credit cash received from a branch to the investment in Branch ledger account.
B. Maintain common stock and retained earnings ledger accounts for only the home office
C. Debit shipments of merchandise to the branch from the home office to the Investment in Branch Ledger
account.
D. Credit shipments of merchandise to the branch to the sales ledger account.
Answer: D
39.Aca, Inc. has several branches. Goods costing P10,000 were transferred by the head office to Cebu
Branch with the latter paying P600 for freight cost. Subsequently, the head office authorized Cebu
Branch to transfer the goods to Davao branch for which the was billed fot the P10,000 cost of the goods
and freight charge of P200 for the transfer. If the head office had shipped the goods directly to Davao
branch, the freight charge would have been P700. The P100 difference in freight cost would be
disposed of as follows:
a.
b.
c.
d.
Considered as savings
Charged to Cebu Branch
Charged to Davao Branch
Charged to the Head Office
ANS: D
In arriving at the cost of the merchandise inventory at the end of the period, freight charges are
properly recognized as part a part of the cost. But a branch should not be charged with
excessive freight charges when, because of indirect routing, excessive cost are incurred. Under
such circumstances, the branch acquiring the goods should be charged for no more than the
normal freight from the usual shipping point. The office directing the interbranch transfers are
responsible for the excessive cost should absorb the excess as an expense because it
represents management mistakes or inefficiencies.
40.Jayhawk Company has numerous branches in the state of Kansas. The home office purchases merchandise
and makes shipments to branches from a central warehouse at the request of branch managers. Which of the
following would be an improper accounting practice?
a. The Investment in Branch ledger account is debited in the accounting records of the home office
when merchandise is shipped to a branch, and the Shipments to Branch account is credited (assume
use of the periodic inventory system).
b. The home office debits Trade Accounts Receivable and credits Sales when merchandise is shipped
to a branch.
c. Cash received from a branch is credited to the Investment in Branch ledger account by the home
office.
d. Only the home office maintains a Common Stock ledger account and a Retained Earnings account.
Answer: B