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463505443 - Lecture notes 3
Introductory Financial Acct (Xavier University)
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NAME:
Professor:
Date:
Score:
Section:
ACCOUNTING FOR BUSINESS COMBINATIONS
SECOND GRADING EXAMINATION
1. On January 1, 20x1, ABC Co. acquired 75% interest in XYZ, Inc. for ₱2,500,000 cash. ABC Co.
incurred transaction costs of ₱250,000 for legal, accounting and consultancy fees in negotiating
the business combination. ABC Co. elected to measure NCI at the NCI’s proportionate share in
XYZ, Inc.’s identifiable net assets. The carrying amounts and fair values of XYZ’s assets and
liabilities at the acquisition date were as follows:
Assets
Cash in bank
Accounts receivable
Inventory
Equipment – net
Goodwill
Total assets
Liabilities
Payables
Carrying amounts
25,000
425,000
1,300,000
2,500,000
250,000
4,500,000
Fair values
25,000
300,000
875,000
2,750,000
50,000
4,000,000
1,000,000
1,000,000
How much is the goodwill (gain on a bargain purchase)?
a. 140,000
c. 278,500
b. 287,500
d. 264,500
Solution:
Fair value of identifiable assets acquired excluding
goodwill (4,000,000 total assets – 50,000 goodwill)
Less: Fair value of liabilities assumed
Fair value of identifiable net assets acquired
3,950,000
(1,000,000)
2,950,000
Fair value of identifiable net assets acquired
Multiply by: Non-controlling interest (100% - 75%)
NCI’s proportionate share in identifiable net assets
2,950,000
25%
737,500
 Goodwill (Negative goodwill) is computed as follows:
Consideration transferred
NCI in the acquiree
Previously held equity interest in the acquiree
Total
Less: Fair value of identifiable net assets acquired
Goodwill
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2,500,000
737,500
3,237,500
(2,950,000)
287,500
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The ₱250,000 transaction costs are expensed. Acquisition-related costs do not affect the
measurement of goodwill.
2. On January 1, 20x1, HISTRIONAL Co. acquired all of the identifiable assets and assumed all of
the liabilities of THEATRICAL, Inc. by paying cash of ₱4,000,000. On this date, the identifiable
assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000,
respectively.
As of January 1, 20x1, HISTRIONAL holds a building and a patent which are being rented out to
THEATRICAL, Inc. under operating leases. HISTRIONAL has determined that the terms of the
operating lease on the patent compared with market terms are unfavorable. The fair value of the
differential is estimated at ₱80,000. How much is the goodwill (gain on bargain purchase)?
a. 1,080,000
b. 1,280,000
c. 1,120,000
d. 1,200,000
B
Solution:
A liability shall be recognized because the terms of the operating lease where the acquiree is the lessee
is unfavorable.
The fair value of net identifiable assets acquired is computed as follows:
Fair value of identifiable assets acquired
Fair value of liabilities assumed, including liability on the
operating lease with unfavorable terms (₱3.6M + ₱80K)
6,400,000
(3,680,000)
Fair value of net identifiable assets acquired
2,720,000
Goodwill (gain on bargain purchase) is computed as follows:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
4,000,000
4,000,000
(2,720,000)
1,280,000
Use the following information for the next three questions:
On January 1, 20x1, CONJUNCTION Co., and UNION, Inc. entered into a business combination
effected through exchange of equity instruments. The combination resulted to CONJUNCTION
obtaining 100% interest in UNION. Both of the combining entities are publicly listed. As of this date,
CONJUNCTION’s shares have a quoted price of ₱400 per share. CONJUNCTION Co. recognized
goodwill of ₱300,000 on the business combination. No acquisition-related costs were incurred.
Additional selected information at acquisition date is shown below:
CONJUNCTION Co.
Combined entity
(before acquisition)
(after acquisition)
Share capital
2,400,000
2,800,000
Share premium
1,200,000
4,800,000
Totals
3,600,000
7,600,000
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3. How many shares were issued by CONJUNCTION Co. in the business combination?
a. 40,000
b. 20,000
c. 12,000
d. 10,000
D
Solution:
Share capital
Share premium
Totals
COLLOQUY Co.
2,400,000
1,200,000
3,600,000
Combined entity
2,800,000
4,800,000
7,600,000
Fair value of shares transferred
Divide by: ABC’s fair value per share
Number of shares issued
Increase
400,000
3,600,000
4,000,000
4,000,000
400
10,000
4. What is the par value per share of the shares issued?
b. 40
c. 12
d. 32
a. 10
B
Solution:
Increase in share capital account (see table above)
Divide by: Number of shares issued
Par value per share
400,00
0
10,00
0
40
5. What is the acquisition-date fair value of the net identifiable assets of UNION?
a. 3,700,000
b. 3,200,000
c. 2,800,000
d. 2,400,000
A
Solution:
Consideration transferred (see previous computation)
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (squeeze)
Goodwill (given information)
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4,000,000
4,000,000
(3,700,000)
300,000
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6. On January 1, 20x1, FORTITUDE Co. acquired 15% ownership interest in ENDURANCE, Inc. for
₱400,000. The investment was accounted for under PFRS 9. From 20x1 to the end of 20x3,
FORTITUDE recognized net fair value gains of ₱200,000.
On January 1, 20x4, FORTITUDE acquired additional 60% ownership interest in ENDURANCE, Inc.
for ₱3,200,000. As of this date, FORTITUDE has identified the following:
a. The previously held 15% interest has a fair value of ₱720,000.
b. ENDURANCE’s net identifiable assets have a fair value of ₱4,000,000.
c. FORTITUDE elected to measure non-controlling interests at the non-controlling interest’s
proportionate share of ENDURANCE’s identifiable net assets.
The previously held interest was initially classified as FVOCI. How much is the goodwill (gain on
bargain purchase)?
a. 200,000
b. 420,000
c. 920,000
d. 540,000
C
Solution:
Consideration transferred
Non-controlling interest in the acquiree (1M x 25%)
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
3,200,000
1,000,000
720,000
4,920,000
(4,400,000)
920,000
7. On January 1, 1990, Poe Corp. sold a 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 a ₱100,000 salvage value and depreciated the machine on the straightline method over 20 years, a policy which Saxe continued. In Poe's December 31, 1990,
consolidated balance sheet, this machine should be included in cost and accumulated
depreciation as:
Cost
Accumulated depreciation
a. 1,100,000
300,000
b. 1,100,000
290,000
c.
900,000
40,000
d.
850,000
42,500
A
Solution:
The machine should be shown on the consolidated statements at Poe's cost of ₱1,100,000. Depreciation should
continue as if the sale had not occurred. Depreciation for the current year is ₱50,000 [(1,100,000 − 100,000) / 20].
Accumulated depreciation at 12/31/90 is ₱300,000 (250,000 + 50,000).
8. Zest Co. owns 100% of Cinn, Inc. On January 2, 1999, Zest sold equipment with an original cost
of ₱80,000 and a carrying amount of ₱48,000 to Cinn for ₱72,000. Zest had been depreciating the
equipment over a five-year period using straight-line depreciation with no residual value. Cinn
is using straight-line depreciation over three years with no residual value. In Zest's December 31,
1999, consolidating worksheet, by what amount should depreciation expense be decreased?
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a.
b.
c.
d.
₱0
₱8,000
₱16,000
₱24,000
B
Solution:
Depreciation after intercompany sale = (72,000 ÷ 3 yrs.) = 24,000
Depreciation as if the sale did not take place = (80,000 ÷ 5 yrs.) = 16,000
Excess depreciation = (24,000 – 16,000) = 8,000
Use the following information for the next six questions:
Owl Co. paid ₱150,000 for its 75% interest in Owlet Co. Owl elected to value NCI at fair value.
Owlet’s net identifiable assets approximated their fair values at acquisition date. The acquisition
resulted in a goodwill attributable to NCI of ₱10,000.
Since the acquisition date, Owlet has made accumulated profits of ₱200,000. There have been no
changes in Owlet’s share capital since acquisition date. The group determined that goodwill has
been impaired by ₱8,000.
A summary of the individual statements of financial positions of the entities as at the end of
reporting period is shown below:
Owl Co.
Owlet Co.
Total assets
1,000,000
500,000
Total liabilities
Share capital
Retained earnings
Total liabilities and equity
200,000
300,000
500,000
1,000,000
120,000
100,000
280,000
500,000
9. How much is the fair value assigned to NCI at date of acquisition?
a. 112,000
b. 98,000
c. 76,000
d. 55,000
D Solution:
Analysis of net assets
Owlet Co.
date
Share capital
Retained earnings (280K – 200K)
Totals at carrying amounts
Fair value adjustments at acquisition date
Subsequent depreciation of FVA
Unrealized profits (Upstream only)
Acquisition Consolidation
date
100,000
80,000
180,000
NIL
NIL
100,000
280,000
380,000
-
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Net change
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Subsidiary's net assets at fair value
180,000
380,000
200,000
The fair value of NCI at acquisition date is computed as follows:
(The solution below is based on a portion of Goodwill computation Formula #2.)
Fair value of NCI
NCI's proportionate share in net assets of subsidiary
Goodwill attributable to NCI - acquisition date (given)
a
55,000
(45,000)a
10,000
(squeeze)
(start)
(₱180,000 see above x 25%) = ₱45,000
10. How much is the goodwill at the end of reporting period?
a. 17,000
b. 15,000
c. 13,000
d. 9,000
A Solution:
Consideration transferred (given)
Less: Previously held equity interest in the acquiree
Total
Less: Parent's proportionate share in the net assets of subsidiary (₱180,000 acquisitiondate fair value x 75%)
Goodwill attributable to owners of parent – acquisition date
Less: Parent’s share in goodwill impairment (₱8,000 x 75%)
Goodwill attributable to owners of parent – current year
Fair value of NCI (see Requirement ‘a’)
Less: NCI's proportionate share in the net assets of subsidiary (₱180,000 acquisition-
150,000
150,000
(135,000)
15,000
(6,000)
9,000
55,000
Goodwill attributable to NCI – current year
(45,000)
10,000
(2,000)
8,000
Goodwill, net – current year
17,000
date fair value x 25%)
Goodwill attributable to NCI – acquisition date
Less: NCI’s share in goodwill impairment (₱8,000 x 25%)
11. How much is the NCI in net assets?
a. 95,000
b. 89,000
c. 103,000
d. 112,000
C Solution:
Owl's net assets at fair value – current year (see ‘Analysis’ above)
Multiply by: NCI percentage
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380,000
25%
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95,000
8,000
103,000
Total
Add: Goodwill attributable to NCI – current yr. (see solution above)
Non-controlling interest in net assets – current year
12. How much is the consolidated retained earnings?
a. 644,000
b. 702,000
c. 556,000
d. 628,000
A Solution:
Owl's retained earnings – current year
Consolidation adjustments:
Owl's share in the net change in Owlet's net assets (a)
Owl’s share in goodwill impairment
Net consolidation adjustments
Consolidated retained earnings – current year
(a)
500,000
150,000
(6,000)
144,000
644,000
Net change in Owlet’s net assets (see ‘Analysis’) ₱200,000 x 75% = ₱150,000.
13. How much is the consolidated total assets?
a. 1,298,000
b. 1,367,000
c. 1,387,000
d. 1,402,000
B Solution:
Total assets of Owl
Total assets of Owlet
Investment in subsidiary (consideration transferred)
Fair value adjustments - net
Goodwill – net
Effect of intercompany transactions
Consolidated total assets
14. How much is the consolidated total equity?
a. 872,000
b. 998,000
c. 1,036,000
d. 1,047,000
D Solution:
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1,000,000
500,000
(150,000)
17,000
1,367,000
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Share capital of Owl
Share premium of Owl
Consolidated retained earnings
Equity attributable to owners of the parent
Non-controlling interests
Consolidated total equity
300,000
644,000
944,000
103,000
1,047,000
Use the following information for the next six questions:
On June 30, 20x1, Cockroach Co. acquired 75,000 of Nymph Co.'s 100,000 outstanding shares with
par value per share of ₱1 for ₱4 per share. At this time, Nymph’s shares have a quoted price of ₱3.50
per share and Nymph’s retained earnings is ₱80,000.
Additional information:
 Nymph’s total assets include land classified as investment property at a cost of ₱180,000. The
land’s fair values are ₱200,000 on acquisition date and ₱320,000 on June 30, 20x3. Nymph uses
the cost model for its investment properties. However, the group uses the fair value model.
 On acquisition date, Nymph's building classified as property, plant, and equipment had a fair
value of ₱30,000 in excess of its carrying amount. The building's remaining useful life is 5 years.
The group uses the straight-line method of depreciation.
 The current accounts on June 30, 20x3 include intercompany receivables and payables of ₱10,000.
 An impairment test on June 30, 20x3 concluded that goodwill is impaired by ₱20,000.
 NCI is measured at fair value.
 There are no subsequent changes in Nymph’s outstanding shares.
The June 30, 20x3 individual financial statements of the entities show the following information:
Total assets
Cockroach Co.
1,000,000
Nymph Co.
500,000
200,000
300,000
500,000
1,000,000
120,000
100,000
280,000
500,000
Total liabilities
Share capital
Retained earnings
Total liabilities and equity
15. How much is the goodwill in the June 30, 20x3 consolidated financial statements?
a. 153,700
b. 169,300
c. 145,500
d. 137,500
D Solution:
Analysis of net assets
Nymph Co.
Share capital (100,000 sh. x ₱1)
Retained earnings
Acquisition date
100,000
80,000
Consolidation date
100,000
280,000
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Net change
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Totals at carrying amounts
FVA on investment property
FVA on building
a
Subsequent depreciation of FVA b
Subsidiary's net assets at fair value
180,000
20,000
30,000
NIL
230,000
380,000
140,000
30,000
(12,000)
538,000
308,000
a
FVA on acquisition date (₱200,000 - ₱180,000 = ₱20,000); FVA on June 30, 20x3 (₱320,000 - ₱180,000 = ₱140,000). These
FVA’s are not subsequently depreciated because depreciation is prohibited under the fair value model.
b
The depreciation of FVA pertains only to the building (see discussion above) (₱30,000 x 2/5 = ₱12,000).
Consideration transferred (75,000 sh. x ₱4)
Less: Previously held equity interest in the acquiree
Total
Less: Parent's proportionate share in the net assets of subsidiary (₱230,000 acquisitiondate fair value x 75%)
Goodwill attributable to owners of parent – acquisition date
Less: Parent’s share in goodwill impairment (₱20,000 x 75%)
Goodwill attributable to owners of parent – current year
Fair value of NCI (25,000 sh. x ₱3.50)
Less: NCI's proportionate share in the net assets of subsidiary (₱230,000 acquisition-
300,000
300,000
(172,500)
127,500
(15,000)
112,500
87,500
Goodwill attributable to NCI – current year
(57,500)
30,000
(5,000)
25,000
Goodwill, net – current year
137,500
date fair value x 25%)
Goodwill attributable to NCI – acquisition date
Less: NCI’s share in goodwill impairment (₱20,000 x 25%)
16. How much is the NCI in net assets?
a. 159,500
b. 163,500
c. 149,500
d. 195,500
A Solution:
Nymph's net assets at fair value – 6/30/x3 (see ‘Analysis’ above)
Multiply by: NCI percentage
Total
Add: Goodwill attributable to NCI – 6/30/x3 (see Requirement ‘a’)
Non-controlling interest in net assets – June 30, 20x3
17. How much is the consolidated retained earnings?
a. 668,000
b. 702,000
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538,000
25%
134,000
25,000
159,500
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c. 716,000
d. 772,000
C Solution:
Cockroach's retained earnings – 6/30/x3
Consolidation adjustments:
Share in the net change in Nymph's net assets (a)
Cockroach's share in goodwill impairment
Net consolidation adjustments
Consolidated retained earnings – June 30, 20x3
(a)
500,000
231,000
(15,000)
216,000
716,000
Net change in Nymph’s net assets (see ‘Analysis’) ₱308,000 x 75% = ₱231,000.
18. How much is the consolidated total assets?
a. 1,485,500
b. 1,498,800
c. 1,514,500
d. 1,569,500
A Solution:
Total assets of Cockroach
Total assets of Nymph
Investment in subsidiary
Fair value adjustments – net (140K + 30K – 12K) see ‘Analysis’
Goodwill – net
Effect of intercompany transactions (Intercompany receivable)
Consolidated total assets
1,000,000
500,000
(300,000)
158,000
137,500
(10,000)
1,485,500
19. How much is the consolidated total liabilities?
a. 290,000
b. 310,000
c. 326,000
d. 348,000
B Solution:
Total liabilities of Cockroach
Total liabilities of Nymph
Fair value adjustments - net
Effect of intercompany transactions (Intercompany payable)
Consolidated total liabilities
20. How much is the consolidated equity?
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200,000
120,000
(10,000)
310,000
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a.
b.
c.
d.
1,175,500
1,289,500
1,198,500
1,167,500
A Solution:
Share capital of Cockroach
Share premium of Cockroach
Consolidated retained earnings
Equity attributable to owners of the parent
Non-controlling interests
Consolidated total equity
300,000
716,000
1,016,000
159,500
1,175,500
Use the following information for the next six questions:
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares with fair
value of ₱60 per share and par value of ₱40 per share.
XYZ’s shareholders’ equity as of January 1, 20x1 comprises the following:
(at carrying amounts)
Share capital
200,000
Retained earnings
96,000
Total equity
296,000
On January 1, 20x1, the fair values of the assets and liabilities of XYZ, Inc. were determined by
appraisal, as follows:
XYZ, Inc.
Carrying amounts
Fair values
Fair value increment
Cash
20,000
20,000
48,000
48,000
Accounts receivable
Inventory
92,000
124,000
32,000
200,000
240,000
40,000
Equipment
Accumulated depreciation
(40,000)
(48,000)
(8,000)
(24,000)
(24,000)
Accounts payable
Net assets
296,000
360,000
64,000
The remaining useful life of the equipment is 4 years.
During 20x1, no dividends were declared by either ABC or XYZ. There were also no inter-company
transactions.
The group determined that goodwill is impaired by ₱4,000.
ABC’s and XYZ’s individual financial statements at year-end are shown below:
Statements of financial position
As at December 31, 20x1
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ABC Co.
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XYZ, Inc.
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ASSETS
Cash
Accounts receivable
Inventory
Investment in subsidiary
Equipment
Accumulated depreciation
TOTAL ASSETS
92,000
300,000
420,000
300,000
800,000
(240,000)
1,672,000
228,000
88,000
60,000
200,000
(80,000)
496,000
LIABILITIES AND EQUITY
Accounts payable
Bonds payable
Total liabilities
Share capital
Share premium
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
172,000
120,000
292,000
680,000
260,000
440,000
1,380,000
1,672,000
120,000
120,000
200,000
176,000
376,000
496,000
ABC Co.
1,200,000
(660,000
XYZ, Inc.
480,000
Statements of profit or loss
For the year ended December 31, 20x1
Sales
Cost of goods sold
Gross profit
)
540,000
(160,000
Depreciation expense
)
(128,000
Distribution costs
)
(12,000
Interest expense
Profit for the year
)
240,000
(288,000)
192,000
(40,000)
(72,000)
80,000
Case #1: On acquisition date, ABC Co. elected to measure non-controlling interest as its
proportionate share in XYZ, Inc.’s net identifiable assets.
21. How much is the consolidated profit for 20x1?
a. 296,000
b. 280,000
c. 208,000
d. 276,000
D Solution:
Solutions:
Step 1: Analysis of effects of intercompany transaction
There are no intercompany transactions in the problem.
Step 2: Analysis of net assets
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Acquisition Consolidation
date
date
296,000
376,000
64,000
64,000
NIL
(40,000)*
NIL
360,000
400,000
XYZ, Inc.
Total equity at carrying amounts
Fair value adjustments at acquisition date
Subsequent depreciation of FVA
Unrealized profits (Upstream only)
Subsidiary's net assets at fair value
Net change
40,000
* ₱32,000 dep’n. of FVA on inventory + ₱8,000 [(₱40,000 - ₱8,000) ÷ 4 yrs.] dep’n. of FVA on equipment = ₱40,000
Step 3: Goodwill computation
Case #1: Formula #1 - NCI measured at proportionate share
Consideration transferred (5,000 sh. x ₱60)
Non-controlling interest in the acquiree (360K x20%) -(Step 2)
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (Step 2)
Goodwill at acquisition date
Accumulated impairment losses since acquisition date
Goodwill, net – Dec. 31, 20x1
300,000
72,000
372,000
(360,000)
12,000
(4,000)
8,000
Step 4: Non-controlling interest in net assets
Case #1
400,000
XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2)
Multiply by: NCI percentage
Total
20%
80,000
80,000
Add: Goodwill attributable to NCI – Dec. 31, 20x1 (Step 3)
Non-controlling interest in net assets – Dec. 31, 20x1
Step 5: Consolidated retained earnings
Case #1
ABC's retained earnings – Dec. 31, 20x1
Consolidation adjustments:
440,000
ABC's share in the net change in XYZ's net assets (a)
Unrealized profits (Downstream only)
32,000
-
Gain on extinguishment of bonds
Impairment loss on goodwill attributable to
parent (Step 3))
Net consolidation adjustments
(4,000)
28,000
468,000
Consolidated retained earnings – Dec. 31, 20x1
(a)
Net change in XYZ’s net assets (Step 2) of ₱40,000 x 80% = ₱32,000.
Step 6: Consolidated profit or loss
Case #1
Profits before adjustments
Consolidation adjustments:
Unrealized profits
Dividend income from subsidiary
Gain or loss on extinguishment
of bonds
Net consolidation adjustments
Profits before FVA
Depreciation of FVA (c)
Goodwill impairment (Step 3)
Consolidated profit
(c)
Parent
Subsidiary
Consolidated
240,000
80,000
320,000
-
N/A
-
-
-
-
240,000
(32,000)
(4,000)
204,000
80,000
(8,000)
72,000
320,000
(40,000)
(4,000)
276,000
Shares in the depreciation of FVA: (40,000 x 80%); (40,000 x 20%)
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Step 7: Profit or loss attributable to owners of parent and NCI
Owners
ConsoliCase #1
of parent
NCI
dated
ABC's profit before FVA (Step 6)
240,000
N/A
240,000
Share in XYZ’s profit before FVA (d)
64,000 16,000
80,000
(8,000
(32,000)
(40,000)
Depreciation of FVA (Step 6)
)
Share in goodwill impairment (Step 3)
Totals
(d)
(4,000)
-
(4,000)
268,000
8,000
276,000
Shares in XYZ’s profit before FVA (Step 6) – (80,000 x 80%); (80,000 x 20%)
22. How much is the consolidated total assets as of December 31, 20x1?
a. 1,900,000
b. 1,907,000
c. 1,903,000
d. 1,904,000
A
Solution:
Total assets of ABC Co.
Total assets of XYZ, Inc.
Investment in subsidiary
FVA, net (16K - 10K) (Step 2)
Goodwill, net (Step 3)
Effect of intercompany transaction
Consolidated total assets
Case #1
(proportionate)
1,672,000
496,000
(300,000)
24,000
8,000
1,900,000
23. How much is the consolidated total equity as of December 31, 20x1?
a. 1,492,000
b. 1,415,000
c. 1,488,000
d. 1,491,000
C
Solution:
Case #1
(proportionate)
Share capital of ABC Co.
Share premium of ABC Co.
680,000
260,000
468,000
1,408,000
80,000
1,488,000
Consolidated retained earnings (Step 5)
Equity attributable to owners of the parent
Non-controlling interests (Step 4)
Consolidated total equity
Case #2:
On acquisition date, ABC Co. elected to measure non-controlling interest at fair value. A value of
₱75,000 is assigned to the non-controlling interest.
24. How much is the consolidated profit for 20x1?
a. 296,000
b. 280,000
c. 278,000
d. 276,000
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D
Solution:
Step 1: Analysis of effects of intercompany transaction
There are no intercompany transactions in the problem.
Step 2: Analysis of net assets
XYZ, Inc.
Total equity at carrying amounts
Fair value adjustments at acquisition date
Subsequent depreciation of FVA
Unrealized profits (Upstream only)
Subsidiary's net assets at fair value
Acquisition Consolidation
date
date
296,000
376,000
64,000
64,000
NIL
(40,000)*
NIL
360,000
400,000
Net change
40,000
* ₱32,000 dep’n. of FVA on inventory + ₱8,000 [(₱40,000 - ₱8,000) ÷ 4 yrs.] dep’n. of FVA on equipment = ₱40,000
Step 3: Goodwill computation
Case #2: Formula #2 - NCI measured at fair value
Consideration transferred (5,000 sh. x ₱60)
Less: Previously held equity interest in the acquiree
Total
Less: Parent's proportionate share in the net assets of subsidiary (₱90,000 acquisition-
300,000
300,000
(288,000)
date fair value x 80%)
Goodwill attributable to owners of parent – Jan. 1, 20x1
Less: Parent’s share in goodwill impairment (₱4,000 x 80%)
Goodwill attributable to owners of parent – Dec. 31, 20x1
Fair value of NCI (see given)
Less: NCI's proportionate share in the net assets of subsidiary (₱360,000 acquisitiondate fair value x 20%)
Goodwill attributable to NCI – Jan. 1, 20x1
Less: NCI’s share in goodwill impairment (₱4,000 x 20%)
Goodwill attributable to NCI – Dec. 31, 20x1
Goodwill, net – Dec. 31, 20x1
12,000
(3,200)
8,800
75,000
(72,000)
3,000
(800)
2,200
11,000
Step 4: Non-controlling interest in net assets
XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2)
Multiply by: NCI percentage
Total
Add: Goodwill attributable to NCI – Dec. 31, 20x1 (Step 3)
Non-controlling interest in net assets – Dec. 31, 20x1
Case #2
400,000
20%
80,000
2,200
82,200
Step 5: Consolidated retained earnings
Case #2
ABC's retained earnings – Dec. 31, 20x1
Consolidation adjustments:
440,000
ABC's share in the net change in XYZ's net assets (a)
Unrealized profits (Downstream only)
32,000
-
Gain on extinguishment of bonds
Impairment loss on goodwill attributable to
parent (Step 3) (b)
Net consolidation adjustments
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(3,200)
28,800
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Consolidated retained earnings – Dec. 31, 20x1
(a)
468,800
Net change in XYZ’s net assets (Step 2) of ₱40,000 x 80% = ₱32,000.
(b)
Again, goodwill impairment is attributed only to the parent if NCI is measured at proportionate share (Case #1) while it is
shared between the parent and NCI if NCI is measured at fair value (Case #2).
Step 6: Consolidated profit or loss
Case #2
Profits before adjustments
Consolidation adjustments:
Unrealized profits
Dividend income from subsidiary
Gain or loss on extinguishment
of bonds
Net consolidation adjustments
Profits before FVA
Depreciation of FVA
Goodwill impairment (Step 3)
Consolidated profit
Parent
Subsidiary
Consolidated
240,000
80,000
320,000
-
N/A
-
-
-
-
240,000
(32,000)
(3,200)
204,800
80,000
(8,000)
(800)
71,200
320,000
(40,000)
(4,000)
276,000
25. How much is the consolidated total assets as of December 31, 20x1?
a. 1,900,000
b. 1,907,000
c. 1,903,000
d. 1,904,000
C
Solution:
Total assets of ABC Co.
Total assets of XYZ, Inc.
Investment in subsidiary
FVA, net (16K - 10K) (Step 2)
Goodwill, net (Step 3)
Effect of intercompany transaction
Consolidated total assets
Case #2
(fair
value)
1,672,000
496,000
(300,000)
24,000
11,000
1,903,000
26. How much is the consolidated total equity as of December 31, 20x1?
a. 1,492,000
b. 1,415,000
c. 1,488,000
d. 1,491,000
D
Solution:
Share capital of ABC Co.
Share premium of ABC Co.
Consolidated retained earnings (Step 5)
Equity attributable to owners of the parent
Non-controlling interests (Step 4)
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Case #2
(fair
value)
680,000
260,000
468,800
1,408,800
82,200
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Consolidated total equity
1,491,000
Use the following information for the next two questions:
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares with fair
value of ₱60 per share and par value of ₱40 per share. XYZ’s net identifiable assets have a fair value
of ₱360,000. Goodwill has been computed under each of the available options under PFRS 3 as
follows:
Case #1
Case #2 (fair
(proportionate)
(1
)
(2
)
(3
)
value)
Consideration transferred
300,000
300,000
Non-controlling interest in the acquiree
72,000
75,000
-
-
372,000
(360,000)
12,000
375,000
(360,000)
15,000
Previously held equity interest in the
acquire
Total
Fair value of net identifiable assets acquired
Goodwill
As of December 31, 20x1, XYZ, Inc. increased its net assets (after fair value adjustments) by ₱40,000
to ₱400,000. The NCI in net assets is updated as follows:
Case #1
Case #2
NCI at acquisition date – Jan. 1, 20x1
Subsequent increase (20% x ₱40,000)
Carrying amount of NCI – Jan. 1, 20x2
(proportionate)
72,000
8,000
80,000
(fair value)
75,000
8,000
83,000
On January 1, 20x2, ABC Co. acquired all of the remaining 20% NCI in XYZ for ₱120,000.
27. If NCI is measured at “proportionate share,” how much is the gain or loss on the transaction to
be recognized in the consolidated financial statements?
a. 80,000
b. (80,000)
c. (83,000)
d. 0
D None. The transaction is accounted for as equity transaction because it does not result to loss of
control.
28. If NCI is measured at “fair value,” how much is the gain or loss on the transaction to be
recognized in the consolidated financial statements?
a. (83,000)
b. 83,000
c. (80,000)
d. 0
D None. The transaction is accounted for as equity transaction because it does not result to loss of
control.
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29. MIME TO IMMITATE Co. initially tested its goodwill for impairment on September 30, 20x1.
When should MIME perform its second impairment testing on its goodwill?
a. on or before September 30, 20x2
b. on or before December 31, 20x2
c. at any date not earlier than September 30, 20x2
d. at any date during 20x2
30. When NCI is measured at fair value,
a. goodwill is attributed only to the owners of the parent.
b. goodwill is attributed to both the owners of the parent and NCI.
c. goodwill impairment is allocated to both the owners of the parent and NCI.
d. b and c
31. According to PAS 27, which of the following is required to present separate financial statements?
a. A publicly-listed entity
b. A parent
c. An entity with an investment in associate
d. None of these
32. According to PAS 27, investments in subsidiaries, associates or joint ventures are accounted for
in the separate financial statements
a. at cost.
b. in accordance with PFRS 9 Financial Instruments.
c. using the equity method under PAS 28 Investments in Associates and Joint Ventures.
d. any of these, as a matter of accounting policy choice.
33. When restating financial statements in accordance with PAS 28 Financial Reporting in
Hyperinflationary Economies,
a. Only monetary items are restated
b. Only non-monetary items are restated
c. Both monetary and non-monetary items are restated.
d. Only non-monetary items, statement of financial position amounts not already expressed in
terms of the measuring unit current at the end of the reporting period, are restated.
34. Under constant peso accounting,
a. all items in the statement of profit or loss and other comprehensive income are restated.
b. some items in the statement of profit or loss and other comprehensive income are restated.
c. items in the statement of profit or loss and other comprehensive income are not restated.
d. none of these
35. Information on a country’s inflation rate is shown below:
Year
CPI
Change in CPI
(a)
(b)
Jan. 1, 20x1
400
Dec. 31, 20x1
520
120
Dec. 31, 20x2
720
200
Dec. 31, 20x3
880
160
Annual inflation rate
% = (b ÷ a) x 100%
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30.00%
38.46%
22.22%
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What is the cumulative inflation rate in 20x3 to be used in determining if there is hyperinflation?
a. 90.68%
b. 120%
c. 133.33%
d. 220%
B Solution:
Current year CPI (Dec. 31, 20x3)
Less: CPI in base year (Jan. 1, 20x1)
Cumulative increase in CPI
Divide by: CPI in base year (Jan. 1, 20x1)
Cumulative inflation rate for the previous 3 years
880
(400)
480
400
120%
36. Which of the following is a monetary asset?
a. Financial assets held for trading
b. Advances to suppliers
c. Property, plant, and equipment
d. Investment in bonds measured at amortized cost
37. Which of the following is a monetary liability?
a. Share dividends payable
b. Retained earnings
c. Income tax payable
d. Cash
38. The following information pertains to each unit of merchandise purchased for resale by Vend
Co.:
March 1, 20x8
Purchase price………………………………₱ 8
Selling price…………………………………₱12
Price level index…………………………….110
December 31, 20x8
Replacement cost…………………………..₱10
Selling price…………………………………₱15
Price level index…………………………….121
Under current cost accounting, what is the amount of Vend’s holding gain on each unit of this
merchandise?
a. 0
b. 0.80
c. 1.20
d. 2.00
D
Solution:
Replacement cost (another term for current cost) - 12/31/x8
Purchase price
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10.00
8.00
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Holding gain per unit
2.00
39. Information with respect to Bruno Co.'s cost of goods sold for 20x5 is as follows:
Historical cost
Units
Inventory 1/1/x5
1,060,000
20,000
Production during 20x5
5,580,000
90,000
6,640,000
110,000
Inventory 12/31/x5
2,520,000
40,000
Cost of goods sold
4,120,000
70,000
Bruno estimates that the current cost per unit of inventory was ₱58 at January 1, 20x5, and ₱72 at
December 31, 20x5. The cost of goods sold for 20x5, restated to current cost, should be
a. 5,040,000
b. 4,550,000
c. 4,410,000
d. 4,060,000
B
Solution:
Units sold
Average current cost [(72 + 58) ÷ 2]
Cost of good sold - current cost
70,000
65
4,550,000
40. Kerr Company purchased a machine for ₱115,000 on January 1, 20x2, the company's first day of
operations. At the end of the year, the current cost of the machine was ₱125,000. The machine
has no residual value, a five-year life, and is depreciated by the straight line method. For the
year ended December 31, 20x2, the amount of the current cost depreciation expense is:
a. 14,000
b. 23,000
c. 24,000
d. 25,000
C
Solution:
Current cost at year-end
Historical cost
Total
Divide by:
Average current cost
Divide by: Useful life
Current cost depreciation
125,000
115,000
240,000
2
120,000
5
24,000
“Therefore, do not worry saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ For after
all these things the Gentiles seek. For your heavenly Father knows that you need all these things. But seek first the
kingdom of God and His righteousness, and all these things shall be added to you. Therefore, do not worry about
tomorrow, for tomorrow will worry about its own things. Sufficient for the day is its own trouble.” – (Matthew 6:31-34)
- END -
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