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BUSINESS COMBINATION 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 acquisi tion 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
P190, 000 P50, 000 20, 000 5, 000 131, 000 (15, 000) (8, 000) (2, 000)
181, 000
Goodwill
P9, 000
2. The E. Vendivel C ompany acquired the net assets of the Vivar C ompany on January 1, 2015 and made the following entry to record the purchase: Current Assets……………………………………… 100, 000 Equipment…………………………………………… 150, 000 Land…………………………………………………….. Land……………………………………… …………….. 50, 000 Buildings………………………………………………. Buildings…………………………………………… …. 300, 000 Goodwill………………………………………………. 100, 000 Liabilities…………………………………. Common Stock, P1 par……………. Paid-in capital in excess of par…
80, 000 100, 000 520, 000
Assuming that the additional shares shares on January 1, 2017 would be issued issued on that date to compensate 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. T he fair price of the shares on January Ja nuary 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
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ANSWER: C
Deficiency (16-10) x 100, 000shares issued to acquire………………………………. P600, 000 10 Divided by: Fair value of the share……………………………………………………… Additional number of shares to issued…………………………………………………. P60, 000
3. X Company acquires all of Y Company in an acquisition properly properly accounted for as an asset acquisition. X issues 80,000 shares of common stock with a fair value of P 8,000,000 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. 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 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
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former shareholders of S enough cash to reimburse them 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. 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 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
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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 bal ance 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 28,000,000 100,000 0 0 200,000 21,000,000 2,000,000 3,000,000 3,100,000
P 1,000,000 35,000,000 2,000,000 13,000,000 4,000,000 700,000 20,000,000
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 Com pany pays P30,000,000 in cash to acquire S Company, in an acquisition properly reported
as a statutory merger. merger. P records a gain on acquisition of: a. Zero b. P1,000,000 c. P1,700,000
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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 b ecause 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 annual earnings contributions are as follows: 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 si ngle 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 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)”
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a. P100,000; P400,000 b. P150,000;P500,000
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c. P100,000; P600,000 d. P200,000; P600,000
ANSWER: C
Net Asset Contribution Add: Goodwill Average/Annual Earnings Less: Normal Earnings (10%of net asset) Excess earnings Divided by: Capitalized at Goodwill Total contribution(stock to be issued
Company A P300,000 P50,000
Company B P400,000 P80,000
30,000
40,000
P20,000 20% P100,000
P40,000 20% P200,000
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 b ook 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 buil dings 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) (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 s on currently managing Liway Ltd., it is
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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 l iabilities 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 suppl y 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 iss ue 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)
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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 iden tifiable 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
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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 that date to compensate for any fall 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 com pensate 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
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Additional number of shares to issued
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60,000
Another example at contingencies is where where the acquirer issues to the acquiree and the 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 liabil ities of May Company on January 1,2016. T o 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 had a fair value of P36 per share on that date. Fay Fa y 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 accounted for as an acqusition, immediately 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.
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Acquirer - Fay (at book value) value) Less: Acquisition-related costs Acquiree - May (not acquired) acquired) Retained Earnings
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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) value) Cash
P900 400 15 10 80 P555
16.Villena Company issued its common stock for the net assets of Wynona C ompany in a business combination com bination treated as an acquisition. Villena's comm on stock issued was worth P 1,500,000. At the d ate 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 nd 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 Com pany 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 g oodwill in its statement of financial position at December 31, 2015?
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a. P 2,000,000
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b. P 7,000,000
c. P 3,500,000
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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 follo wing 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 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 Market values is not available for shares of Bee Company and Cid Company .
On September 1, 2016 Ace Company acquires al l 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 equit y 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
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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 -0P1,800,000
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Ordinary Share Capital Share Premium Accumulated Profits (P800k+P100k) Allocable excess Increase/Decrease in assets: Inventory (675k-725k) P.P.E (1100k-P950K)
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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 li abilities of Aurora Ltd. With Casio Ltd. Issuing 100, 000 shares to acquire these net assets. T he 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
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Plant Accounts payable Current tax liability Provision for annual leave
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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. recei ved 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. F or example, the acquisition date may be August 18 and the end of reporting period may be August 31. In this situation, in accordance with p ar. 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 th ose 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.
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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 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 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
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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 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 acquisiti on 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 -
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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
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P 110,000
All the identifiable net assets of Manukau Manukau Ltd. were recorded by manukau Ltd. At fair value except 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 r elation 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 al l 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................... assets............................... ................. ..... P720,000 P921,600 Total liabilities......................... liabilities................................ ....... 432,000 345,600 Annual earnings (average)............ (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
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Less: net assets (for P/S) Goodwill (for common stock) Preferred stock (same with Net assets):864,000/100
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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 preferred stock, stock, $100 $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 of Shaw's assets and liabilities on February 5 were as follows: Book Value
Fair Value
Cash Receivables (net) Inventory Plant and equipment (net)
$ 160,000 180,000 315,000 820,000
$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-.
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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
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32.Hazel Corp. was merged into Sebastia n Corp. in a combination properly properl y 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……………………………………… 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………………...
P1,534,000
Less: Market value of net assets acquired, excluding GW: P826,800 Current assets……………………... 624,000 Plant and equipment………………. Patents……………………………… 169,000 Liabilities……………………………. (85,800) P
Goodwill……………………………………
Current Assets………………. Plant and Equipment……….. Patents……………………….. Increase in assets……………
Book Value P813,800 520,000 130,000
1,534,000
Fair Value P826,800 624,000 169,000
-0- (a)
Increase (Decrease) P 13,000 104,000 39,000 P156,000 (a)
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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…………………………………………… Furnit ures…………………………………………….. Plant and Equipment………………………………………… Equipm ent………………………………………… Accounts payable…………………………………………….. payable…………………………………………….. Current tax liabilit y…………………………………………… y…………………………………………….. 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 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
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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
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60,000 26,800 32,000
28,500 49,000 P 383,500
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
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Accounts receivable Inventory Freehold land Buildings Plant and equipment Bargain Purchase Gain
P34,700 39,000 130,000 40,000 46,000
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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 P114,000
P114,000
Manukau Ltd. Dr. Cr. P 90,000 P 24,000 20,000 30,000 26,000 20,000 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
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Plant Accounts payable Goodwill
20,000 ( 20,000)
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58,000 P 2,500
When it liquidates, costs of liquidation paid by the acquiree should be for the liquidation account of the 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 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 m arket of P25 per share at the time t ime 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: Capital Stock, P100 par value APIC
Milkita
Keanu
P10,000,000
P3,000,000
50,000
-
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Retained Earnings
5,000,000
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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 da y 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 P4,900,000 Retained earnings ; P10,000 Stock issuance cost cost P15,000,000 Capital stock ; P10,000 APIC APIC ; P4,880,000 Retained Retained earnings P15,150,000 Capital Stock ; P50,000 P50,000 APIC ;P 4,690,000 4,690,000 Retained Retained earnings P15,000,000 Capital Stock ; P200,000 P200,000 APIC ; P4,690,000 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 r eported 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
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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 p er 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 Property and equipment Liabilities FMV of net assets Add: Goodwill Consideration transferred Divided By: Current market value per share Number of shares issued
P 500 000 1 500 000 (400 000) P1 600 000 200 000 P1 800 000 P 40 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 si ngle class of stock be issued, that their contributions be measured by net assets plus allowances for go odwill, 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 P1 00 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:
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AB Corp. Current Assets................... Assets.............................. ..................... ...................... ....................... ............. P 8,352,950 Plant and Equipment,net......................... Equipment,net..................................... ....................... ........... 6,450,700 Patents............................................................................ Total Assets.................... Assets............................... ...................... ..................... ..................... ................ ..... P 14,803,650 Liabilities...................... Liabilities.................................. ...................... ..................... ....................... ................ .... P 5,713,650 Capital Stock,par P100........................... P100........................................ ....................... .......... 4,600,000 Additional paid-in capital.................... capital............................... ....................... ............... ... 950,000 Retained Earnings............................... Earnings......................................... ...................... ................. ..... 3,540,000 Total Liabilities and Equity...................... Equity................................. ..................P14,803,650 .......P14,803,650 CD Corp. Current Assets................... Assets.............................. ..................... ...................... ....................... ........... .P 7,505,000 Plant and Equipment,net........................... Equipment,net..................................... .................... .......... 3,130,450 Patents................... Patents.............................. ...................... ..................... ...................... ....................... ............. 153,800 Total Assets.................... Assets............................... ........................ ........................ ..................... .............P10,789,250 ...P10,789,250 Liabilities...................... Liabilities.................................. ...................... ..................... ....................... ................P ....P Capital stock,par P100............................... P100......................................... ..................... ........... Additional paid-in capital.................... capital................................ ....................... ............... .... Retained Earnings............................... Earnings......................................... ...................... .................. ......
939,000 3,400,000 950,000 5,500,250
Total Liabilities Li abilities and Equity................................. 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 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................ Transferred............................ ....................... ...................... ...................... ...................... ....................... ....................... .............P10,607,900 ..P10,607,900 Less: Market value of net assets acquired, excluding GW: Current Assets.................... Assets.............................. ..................... ....................... .................P7,808,000 .....P7,808,000 Plant and Equipment......................... Equipment.................................... ..................... ............ 3,452,000 Patents................... Patents............................... ...................... ..................... ....................... .................. ...... 286,900 Liabilities....................... Liabilities................................... ...................... ..................... .................... ......... ( 939,000) 10,607,900 Goodwill...................... Goodwill................................. ..................... ...................... .......................... ..................... .......
P
-0-
(D)
Book value Fair Value
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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
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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................... 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 3 0% 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
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Multiplied by: pak company’s interest Pak Company share in Ganern’s profit
Dividends declared and paid Multiplied by: pak company’s interest
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30% P2,400,000
1,500,000 30%
Dividend income
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: T: G: B:
P60, 000 60, 000 80, 000 P200, 000
Fraction 6/20 = 30% 6/20 =30% 8/20 =40% 100%
46. When should a business combination be undertaken? A. When a positive net present value is generated to the shareholders shareholders of an acquiring firm. B. When the two firms are 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. 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 in dicated 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 n ot 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 ma y 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
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48.A gain should be reported on an acquisition if: a. b.
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.
c. d.
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 toge ther 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 P 980,000. 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 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
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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: Park Corp. -----------------Current Assets…………………………………. Non-current Assets…………………………….
70,000 90,000
Total Assets…………………………………… Current Liabilities…………………………….. Long term debt……………………………….. Stockholders’ Equity………………………….
160,000 30,000 50,000 80,000
------------------
Total Liabilities and Equities
-----------------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%
75,000
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)
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
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ANS:C Park stockholders equity Non-controlling interest (full goodwill) Strand stockholders’ equity
Add: Adjustments to reflect reflect fair value inventory Strand stockholders’ equity at FV
Non-Controlling interests
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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 5 00,000 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
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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 T he 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)
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Inventory P 600,000 Land 500,000 Buildings (net) (FV P1,000,000) 900,000 Expenses 500,000
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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 par value common stock (valued at P80 per share) for all of Winst on’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 Included in the February 1, 2014, financial 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- c ontrolling interest should be reported at: a. P 40,500 b. P 50,000 c. P 47,500 d. P 45,000 Answer: b. P 50,000 Solution: Acquisition Cost Divided by: Total Multiplied by:
P 950,000 95% P 1,000,000 5%
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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 Sub sidiary: ( P 275,000 x 20% ) = P 55,000 9. On August 31, 2016, Company P acquires 75% (750,000 ordinary shares) of Company C ompany S for P7,500,000 (P10 per share). In the period around the acquisition date, Company S's shares are trading at a bout P8 per share. Company P pays premium over market because of the s ynergies 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 val ue 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 sh are of Mask is P6 and the quoted market price of Man's share is
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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 an d 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 s hare 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., 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
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Contingent Consideration Acquisition Cost Incurred Total liabilities
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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 (i ncome from acquisition) resulting from this acquisition am ounts 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 (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
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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, anal yzing 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 liabi lities 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 va lue 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:
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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
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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 the outstanding voting stock of Anne. 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 Priests agreed to buy an additional 60,000 shares shares of Seminarian from single stockholder for P6 per share“ Although Seminarian’s share 5. were selling in the P5 range around
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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: in terest: 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 sto ck 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 Gand a 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
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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 previously held held equity equity interest 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:
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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 – Acquirer Aquino……………………….. Common – Acquirer 200,000 Common stock issued…………………………… 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. b y 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
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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)………………… Less: Liabilities………………………………………………………… Liabilities……………………………………………………………. ….
P1,400,000 400,000
Net assets at appraised values…………………………………………. Divided by: Current selling price per share……………………………..
P1,000,000 100
Number of shares issued…………………………………………………. 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 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. Inventory. Cash Total Assets
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92,000 15,000 P967,000
75,000 5,000 P540,000
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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)?
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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
t hat the equipment is worth On June 12,2015 Sam’s inventory has a fair value of P450,000 and that 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
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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)
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b. P100,000 c. P112,000 d. P106,000
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 2 1/2 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 m arket 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 500 140 P 360 Kim Ltd 60 60% 40 / 40%
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Total shares
250
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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 l egal 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 b y former shareholders in Kim Ltd. In essence, the former shareholders of Kim Ltd now control both entities Min Ltd a nd 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. Carrying Amount ASSETS Cash Inventory Investment in Subsidiary (Shares in Lito Co.) Equipment Accumulated depreciation Land TOTAL ASSETS
Lito Co. Carrying Amount Fair Value
P 15,000 92,000
P 5,000 75,000
P 5,000 80,000
500,000 620,000 (180,000) 120,000 P967,000
480,000 (170,000) 150,000 P540,000
330,000 170,000
LIABILITIES AND EQUITY Liabilities
Payables Tax liabilities Provisions Total 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
Equity
Share capital Retained earnings Total equity TOTAL EQUITY AND LIABILITIES
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
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Decrease in Provision : (P20,000) x 100% x 70% Goodwill
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( 10,500)
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35,000 P 65,000
The net fair value of the subsidiary su bsidiary could be calculated by revaluing the assets and liabilities of the subsidiary from the carrying amounts to fair value, remembering that under PAS No. 1 2 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 P70,000 P20,000 Current Assets……………………………….. Non-current Assets………………………….. 90,000 40,000 P160,000 P60,000 Total Assets………………………………….. 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 equa l 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:
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a. b. c. d.
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P80,000 P5,000 P30,000 P35,000
Answer: C Controlling (Parent) interest: Shares acquired (P120,000 / P150)
800 shares
Divided shares outstanding (P100,000 /P100)
÷1,000
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,wer e as follows:
AA Co. Carrying Amount
BB Co. Carrying Amount
Fair Value
Assets: Cash ..................... ................................ ..................... ...................... ....................... ............. P 15,000
P 5,000
Inventory............... Inventory........................... ...................... ...................... ...................... ..........
75,000
80,00 0
480,000
330,000
92,000
P 5,000
Investment in Subsidiary (Shares in BB Co.) ...................... ................................ .................. ........ 500,000 Equipment ...................... ................................ ..................... ..................... ............
620,000
Accumulated depreciation .............. ......................... ............... .... (180,000)
(170,000)
Land ..................... ............................... ........................ ........................ ................. .......
120,000
150,000
Total Assets.................. Assets............................. ....................... ..................... .........
P 967,000
P 540,000
170,000
Liabilities and Equities: Liabilities Tax Liabilities ...................... ................................ ...................... .............. P 10,000
P 6,000
P 6,000
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Payables............... Payables......................... ...................... ......................... .................. ..... 27,000 Provisions.................... 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 ...................... ........................... ..... P 967,000
P540,000
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34,000 60,000
At acquisition date, BB Co. Has an unrecorded patent with a fair value of P20,000 ,contingent liability 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.................. Excess............................. ...................... ..................... ....................... ....................... ..................... ..................... ....................... ................... ...... P 52,000 Less: Over/Under valuation of Assets and Liabili ties: Increase in Land: P20,000 x 100% x 70%..................... 70%..........................P .....P 14,000 Increase in Equipment: P20,000 x 100% x 70%.................. 70%.................. 14,000 Increase in Inventory: P5,000 x 100% x 70%............... 70%...................... ....... 3,500 Increase in Patent:P20,000 x 100% x 70%........................... 70%...........................14,000 14,000 Increase in Provision: P(15,000) x 100% x 70%.................(10,500) 70%.................(10,500) 35,000 P 17,000 (B) Goodwill ..................... ................................. ......................... ....................... ...................... ....................... ...................... ...................... ...................... ............... .... 34.What would be the effect on the consolidated fin ancial statements if an unconsolidated subsidiary is accounted for by the cost method of accounting, but consolidated financial statements are prepared for other
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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 h as 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 reflects the financial position of single economic 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 are those of the parent company only. Ans. C 38.On December 31,2013, 31,2013, Palo Company paid P990,000 for 99% of the 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
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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, 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
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Less: Share of dividends (25% x 5,000)
(1,250)
Noncontrolling interest
P38,750
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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, (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, 0 00 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, H arry 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
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Consolidated total expense for 2017
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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
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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 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 Goodwill (P95,000 full -P80,000 partial) Non-controlling Interest (full)
P500,000 180,000 P680,000 0 P680,000 30% P204,000 15,000 P219,000
Partial Goodwill
Fair value of Subsidiary: Fair value of consideration transferred: Cash
P430,000
Less: Book value of Net Assets (Stockholder’s Equity-
Subsidiary): (P500,000x 70%) Partial Goodwill
350,000 P80,000
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)
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
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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 in terest 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’ Holder s’ of Parent/ Controlling Interest: Int erest:
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 retaine d 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 consolid ated 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 subsidiar y 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 consolidat ed 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' equit y at P220,000. At that date,
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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 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 To yota Company on the purchase date is as follows: Toyota Company Balance Sheet December 31, 2014 Assets Current assets Land Building Acc.depreciation Equipment Acc. depreciation Total
P 80,000 50,000 450,000 (200,000) 300,000 (100,000) P580,000
Liabilities and Equity Liabilities P100,000 Common Stock, P10 par 100,000 Paid-in capital 150,000 Retained earnings 230,000
Total
The following fair values were obtained for Toyota’s assets and liabilities:
Current assets Equipment Land Liabilities Building
P100,000 P275,000 75,000 102,000 300,000
P580,000
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Determine the increase in assets that resulted from the business com bination. 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) P 1,328,000 Book value of investment (1,200,000 x 80%) 960,000 Excess of cost over book value P 368,000 Income from investment: Share (140,000 x 80%) P 112,000 Amortization allocated to building (100,000 x 80%/30 yrs.) 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, W estern 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 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) (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
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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 m ethod 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 Ronni e 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 no w complete. For each of the two companies, selected account balances as of December 31 for this third year are as fol lows: 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
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c. P187,000 d. P134,600 Answer: D Pab Company' s retained earnings at january 1 of third year. year. P150,000 Additional equity: first year (P25,000 (P25,000 – P2,500). 22,500 Additional equity: second year (P32,500 – P2,500). 30,000 Amortization for 2 years 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 m ethod. 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
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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 – 2016: Consolidated net income attributable to parent – 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 p urchased 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 1 0% 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
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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 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 equit y method was used, the retained earnings on J anuary 1, 2015 is also considered as the consolidated retained earnings. 19. On January 1, 2016, Plimsol Company acquired 100% of Shipping Corporation’s voting shar es, 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
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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 retaine d 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 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 e quity method from the date of acquisition to arrive at Retained Earnings of Parent on December 31, 2016 under the equity m ethod, 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 retain ed 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 o f parent is considered also as the consolidated retained earnings regardless regardless of the method (cost or equity) used, but not on subsequent years. years. **Net income from own operations: ParentP70, 000
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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. T here 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, 2 0x4. 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 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 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.
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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% =
$ 180,000
Pelican’s share of
dividends = $100,000 x 30% Increase in investment account
$ (30,000) $ 150,000
23. Xing Corporation owns 80 percent of th e 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
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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 am ounted 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
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ANSWER: (a) Net income from own operations: Speed [P200,000 – (P20,000 x 75%)]……………………… Slow…………………………………………………………….
P 185,000 100,000 P 285,000 6,250 6,000 P 272,750
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…………………………. Less: Amortization of allocated excess……. Impairment of full-goodwill
P100,000 6,250 6,000 87,750
x: Non-controlling interest……………………
25%
CNI attributable to the controlling interest
P 21,937.50 P250,812.50
27. On January 1, 2016, Steven Corp. acquired 80% of Kevin Corp. in exchange for f or 2,700 shares of P10 par common stock having a market m arket 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.
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 2,000 50,000 50,000 7,500 24,000 P133,500
P 3,300 25,000 7,500 20,500 P56,300
Assets: Cash…………………………………………………………. Accounts receivable (net)…………………………………. Inventories…………………………………………………… Building………………………………………………………. Patents……………………………………………………….. Total assets…………………………………… assets……………………………………………… …………
Liabilities and Equities: Accounts payable……………………………………………. Bonds payable, 10%................... 10%............................... ....................... ..................... ............... ..... Common stock, P10 par…………………………………….. Additional paid-in capital……………………………………. Retained earnings……………………………………………. Total liabilities and equities……………………………...
At the date of acquisition, all assets and liabilities of Kevin Corp. have 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
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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%.................... 80%.............................. .................... .......... APIC – K P7,500 x 80%..................... 80%............................... .................... .......... RE – K P 20,500 x 80%..................... 80%............................... ..................... ........... Allocated Excess…………………………………………….
P60,300 P20,000 6,000 16,400
42,400 P17,900
Less: Over/Under 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%)………………..
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 eight year life) as undervalued by P40,000 on Stag’s fin ancial records. A building with a 20-year life was overvalued by 10,000. Subsequent to the acquisition, Stag reported the followin g:
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?
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a. P136,500 b. P137,500 c. P142,000 d. P122,000 ANSWER: B Consolidated Net Income
Net income from own operations - Pon y (P310,000 – P198,000) Net income from own operations - Stag (P104,000 – P74,000) Amortization: Equipment (P40,000/8) (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 O yama Company, and uses the cost method i n 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
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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
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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 incom e 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) Allocated excess Less: Over/Under valuation of Assets and Liabilities: Increase in Intangible Assets Amortization of allocated excess: P75,000/6years P75,000/6years
300,000 P 75,000 75,000 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 Income (P30,000 – P25,000) Consolidated Comprehensive Income
P130,000 25,000 P155,000 12,500 0 P142,500 5,000 P147,000
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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 Equit y of Subsidiary Subsidiar y 3/31/16............................ 3/31/16...................................... ....................P ..........P 500,000 Add: Net income ( P900,000 - P360,000= P360,000= P540,000x 9/12) ............... .......................... ..................... ................... ......... 405,000 Book value of SHE of Subsidiary 12/31/16...................... 12/31/16................................ ..................... ..................... ....................... ..................P .....P 905,000 Add: Adjustments to reflect fair value ................. ............................. ...................... ...................... ...................... ....................... ................... ...... 0 Fair value of SHE of Subsidiary 12/31/16............................ 12/31/16....................................... ..................... ...................... ....................... .............P ..P 905,000 Multiplied by Non-controlling interests percentage..................... percentage................................. ....................... ....................... ................ .... 20% Non-controlling interest (Partial Goodwill)....................... Goodwill)................................. .................... ...................... ............................ ................ P 181,000 Add:Non-controlling interest in Full Goodwill[P245,000(full)-P180,000(partial) Goodwill[P245,000(full)-P180,000(partial) ................................................................ 65,000 Non-controlling Interest (Full)..................... (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 i n Short Co. on January 1,2016, when the non-controlling interest in Short Co. Ha d a fair value of P230,000. No differential arose from the business
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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: Interest: Common Stock................... Stock............................. ...................... ......................... ........................ ....................... ...................... ..................P1,000,000 ........P1,000,000 Additional paid-in capital.................... capital.............................. ..................... ....................... ....................... ..................... .............. .... 600,000 Retained Earnings..................... 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.................... 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 so ld 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
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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 f or 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) shoul d 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 subsidiary to fair values. c. Recognition of NCI in the CI of of the parent company, adjusted for amortization amortization and depreciation. depreciation. d. Amortization of the allocated excess.
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ANSWER: C. Because the recognition of 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 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 earnings plus the balance of the retained earnings Ans. C
INTERCOMPANY INTERCOMPANY TRANSACTIONSTRANSACTIONS- 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% f or Lee. The amount of unrealized intercompany profit in e nding 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
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Merchandise inventory of Bruce 12/31/2016 inclusive of profits GP rate of Lee (the seller) Unrealized profit in ending inventory
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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 (30% X 45,000)
13,500
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 pr ice 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 P arent (X-Beams): P180,000x 20% = P36,000 x
Parent 210,000
Subsidiary 90,000
( 11,200)
( 4,800)
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(180-100/180) = P16,000, 70%:30% Non-controlling Interest in Kent’s Net Income
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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 sa lable 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 an d
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 B essy’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%
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Net income from own operation – Eron
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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 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
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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
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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 Comapan y. By what amount was unadjusted reveneu overstated in thr in the combined income statement for 2016 and the am ount 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 Ro bin(the seller).
Cost of goods sold to be eliminated: When computing combined cist of goods sold, the objective is to restate the a ccounts as if the intercompany transactions had not occurred. Assuming there was no sale between Gem and Robin, the co rrect amount of
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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 Jul y 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 probabilit y 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 Retai l 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 x80℅ Gross profit rate (22,000 - 4,400/ 22,000) 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
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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 Pas s 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) 680,000 Consolidated Sales (616,000) Less: Mark-up (64,000 x 1/4) Cost of merchandise transferred
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
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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. p arties. 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, a nd Go reported CI of P 310,000. W hat 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 P 450,000 Unrealized Profit in Ending Inventory- downstream ( 12,000) Realized Separate Net Income- Mong P 438,000 Mong's share of Go's Adjusted Net Income: Net Income P 310,000 Realized Profit in Beg. Inventory 8,000 318,000 Minority Interest in Subsidiary ( P 318,000 x 10% ) ( 31,800) Attributable to Parent 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, P one'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 Com pany 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
Ruby 400,000 270,000
Riza 250,000 110,000
in Ruby’s inventory:
Jan. 1, 2013 Dec. 31, 2013 Gross profit rate on sales: 2012
40,000 70,000 70%
40%
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2013
75%
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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 sa le between Twill and W ebb, 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 W ebb (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 W ebb, 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 0 00 x 140%) for a total of P96, 000. Thus, P56, 000 (P96, 000 – P40, 000) should be el iminated from CGS in the combined incom e 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
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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 P4 0,000 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 9 0% of Ron Company for P400,000. On that d ay 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 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
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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
P 140,000 (60,000) P 80,000
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 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 [1000,000x10%=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.
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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 Dec ember 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
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25. On January 1, 2014, Diamond Co. p urchased 80% of the outstanding shares of Star Co. b y 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 P 75,000 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 20% based on sales Sales made by subsidiar y………………………………… y……………………………………… …… 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% m ark-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 P50,000 P15,000 Net income from own operations……. 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……………………………………………….
P 15,000
Add: Realized profit in beg. Inventory Inventory of Parent (upstream)………………………………………………………….
500
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…………………………………
1,200 2,000 12,300 20% P 2,460
26. Large Corp. acquired 75% interest in Sm all 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. F or consolidation purposes, what is the noncontrolling interest’s share of Small’s net income for 2015 and 2016, respectively? 2015
2016
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a. b. c. d.
P20,000 P19,500 P20,500 P19,000
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P22,500 P22,000 P23,000 P22,000
ANSWER: (b) Small’s net income from own operation*………………
2015 P80,000
2016 P90,000
Unrealized profit in ending inventory of Small – 2015……………………………………..
(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
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Reported net income of Mota Company
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$ 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
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29. Czarina Corporation acquired an 80% in terest in Grace Corporation in 2015. For the year ended December 31, 2015 and 2016, Grace reported net income of P140,000 and P150,000, respectivel y. 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 c onsolidation purposes, what is the non -controlling interest’s share of Grace’s net income for 2015 and 2016, respectively?
a. b. c. d.
P27,200; P30,800 P32,000 ; P36,000 P32,000 ; P30,800 P27,200 ; P36,000
Answer: A 2015
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
Grace’s net income from own operation
Multiplied by Non-controlling interest in Net income
30. On January 1, 2016, CG Company Com pany 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
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position at December 31,2016 was P82,420. For 2016, CG Company reported income of P215,600 com puted 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:
20%
Net assets of JJ on December 31, 2016
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 c apital 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: be:
a. P450,000 b. P470,000
c. P481,600 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
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c. P1,906,000
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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 Add: Net income of Subsidiary Less: Dividends of Subsidiary
P300,000 30,000 10,000
320,000
Book value of stockholders’ equity of
Subsidiary, 12/31/2017 Adjustments to reflect fair value of net assets: assets: Increase in equipment,1/1/2015 Accumulated amortization (P2,000 (P2,000 x 3 years) Fair value of Net Assets/SHE of Subsidiary, 12/31/2017 Less: UPEI of Blue —2017 Realized Stockholders’ Equit y Of Subsidiary, 12/31/2017 Multiplied by: Non-controlling interest Non-controlling interest (in net assets) – partial goodwill Add: Non-controlling interest on on full goodwill (P25,000 – P20,000) Non-controlling interest (in net assets) – full goodwill 2} ANS: B
P470,000
20,000 ( 6,000) P484,000 2,400 P481,600 20% P 96,320 5,000 P101,320
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
P1,000,000 809,680
Controlling Interest / Parent’s Stockholders’ Equity,
12/31/2017 Non-controlling interest, 12/31/2017 (partial goodwill) Consolidated Stockholders’’ Equity, 12/31/2017
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...................... Sales................................. ..................... ...................... ....................... ..................... ..................P ........P 4,500,00 Cost of sales...................... sales................................. ..................... ...................... ....................... ............... .... 2,800,00
P1,750,000 850,000
Gross Profit................. Profit............................. ...................... ..................... ....................... ..................... ......... P 1,700,000 Operating Expense................... Expense............................... ...................... ..................... ..................... .......... 980,000
P 900,000 645,000
Net Income................... Income.............................. ....................... ...................... ...................... .....................P .........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 P 98,000 and P120,000,respectively. The consolidated cost of sales for 2016: A.P2,978,000 B.P3,672,000
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C.P3,022,000 D.P2,798,000 Answer: C
Combined cost of sales(P2,800,000+P850,000).... sales(P2,800,000+P850,000)................ ...................... ..................... ....................... ....................... .....................P3 ..........P3,650000 ,650000 Less: Intercompany purchases................... purchases............................. ....................... ....................... ...................... ....................... ...................... ..................... ............ .. 650,000 Add: Unrealized profit from ending ending inventory ................... ............................. ..................... ..................... ....................... ...................... ......... 120,000 Less:Unrealized profit in beginning inventory.................... inventory.............................. ...................... ....................... ....................... .................... ........ 98,000 Consolidated cost of sales.................... sales................................ ...................... ..................... ....................... ....................... ..................... ...................... .............. ..
P3,022,000 (C)
35. One Co. acquired a 60% interest in Two Co.in 2015. For the year ended December 31,2015 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................. percentage............................. ........................ ....................... ................. ...... 40% Non-controlling interest in Net Income............................... 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 pa pers 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
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100% unrealized gain and restore the original book value ,date of sale 1/1/16 Gain on sale ...................... ................................... ........................ .....................P180, ..........P180,000 000 Equipment....................................... P180,000 The entry made in the books of subsidiary on the date of sale: Equipment.................... Equipment.............................. ...................... ......................... ................P ...P 530,000 Cash................................................ P530,000 The entry made in the books of parent on the date of sale: Cash...................... Cash.................................. ....................... ..................... ......................P53 ............P530,000 0,000 Equipment..................................... P350,000 Gain on Sale...................... 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................ depreciation.......................... .................P45,000 .......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% f or Lee. The amount of unrealized unreali zed 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
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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 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 transferred at cost. 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 intercompany inventory sales, and unrealized profit in upstream intercompany inventory sales made during the current year. b. all unrealized profit in downstream 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 controlling interest's share of unrealized profit in downstream intercompany sales, and the controlling interest's share of unrealized profit in upstream sales m ade during the current year. d. all unrealized profit in downstream downstream intercompany sales, and 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. T he 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 reported as intercompany sales by the 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 sol d by the parent minus unrealized profit i n the ending inventory of the parent. D. the amount reported as cost of goods sold by the parent. ANSWER: B
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INTERCOMPANY INTERCOMPANY TRANSACTIONS- PLANT PL ANT ASSETS
1. On January 1, 2016, Jan Co. purchased 90% equity of Jo Co.. On January 3, 2016, Jo sold equipment 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 l ine 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
Net Book Value
P750,000 375,000 750,000 750,000
P500,000 375,000 750,000 500,000
P375,000 -0-0250,000
ANS: D
Cost Less: Accumulated Depreciation, 12/31/16 Accumulated Depreciation, 1/1/16 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.
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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 equipm ent January 1, 2013 at accost of 800,000, depreciating it o ver 8 years with a nil residual value. On January 1, 2016. The Muldon Company acquired 100% of Roel and estimated the fai r 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 fin ancial 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
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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) 3years) 276,000 Decrease 24,000
5.. On January 1, 2016. Poe Corporation sold machine for 900,000 to Saxe Corp. i ts wholly owned subsidiary. Poe paid 1,100,000 for this machine, m achine, 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 e ntity 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 straight-li ne 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)
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Other expense Separate incomes
(180,000) 420,000
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(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. F alcon 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 subsidiar y, Eloisa Company for P150,000 on januar y 2015 and the equipment and Its accumulated depreciation were carried on the books Eloisa at 200,00 and P100,000,
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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 co nsolidation 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 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 Si li 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
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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 of P 1,000 c. gain of P 7,000 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 P ost 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 e ntire 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.
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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 this purchase indicates that goodwill of P50,000 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 sal e, 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 Net income from operations – Parent
2016 P100,000
2017 P120,000
P 60,000 ( 9,000) 750
P 75,000 -
Parent’s share of adjusted net income of Sub:
Net income Unrealized gain – Upstream Realized gain: 2016 (P9,000/3) x ¼
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2017 (P9,000/3) Adjusted net income Consolidated net income MINIS Attributable to parent
P 51,750 P151,750 (10,350) P141,400
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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 (upstream sales): (P20, 000 000 / 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 com putation 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 shoul d 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.
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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 o ver 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, 0 00 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 Com pany for P75, 000. The gain on the sale is also included in the net income of P Com pany 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) (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
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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
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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
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Consolidated net income, Dec. 31, 2016 MINIS (P180,000 x 20%) Attributable to parent
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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 Januar y 1, 20x6. Dalton sold this building buil ding 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 Da ltons share at consolidated net income? A. Consolidated net income must be reduced by P44.800 B. Consolidated net income must m ust 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 com puter 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 Equipm ent ............................. ............................... 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 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 e quipment over a 4year period by using the straight-line s traight-line method. Offshore' reported net income for 2005 was $320,000. Pied lmperial-Pigeon's 2005 net income from Offshore was
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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 20x5 P(10,000)
Unrealized gain on sale of machinery Realized gain on sale of machinery P10,000/5 Net adjustments
20x6
2,000
P 2,000
P( 8,000)
P 2,000
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 thi s 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
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Retained Earnings – Parent (65% x P40,000) Non-controlling interest (35% x P40,000) Non-current asset
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P26,000 14,000 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. P3,000,000 P1,400,000 Sales……………………………………………. 216,000 Dividend income………………………………. 60,000 Gain on building………………………………. Income credits…………………………………. P3,276,000 P1,400,000 P2,000,000 P 800,000 Cost of sales………………………………….. Operating expenses………………………….. 600,000 300,000 P2,600,000 P1,100,000 Income debits………………………………….. P 676,000 P 300,000 Net income……………………………………... 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…………………..
P676,000 216,000
P460,000 300,000 P760,000 60,000 7,500 P707,500 0
Non-controlling interests in net income (P300,000 x 20%)……………………………………. Profit Attributable to Equit y Holders of parent……………
60,000 (c) P647,500 (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, 00 0 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.
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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: 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
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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
Cash and receivables Inventory Investment in Small Company Buildings (net) Equipment (net) Patents (net) Total assets
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
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, 31, 2013 Retained earnings, Jan. 1, 2013 Apex Amortization of patents 2007 to 2013 (P10,000 x 6) Unrealized profit on inventory, 2013 - Downstream Unrealized gain on sale of building, 12/31/13 - Upstream (P30,000 x 60%) Consolidated retained earnings, Dcember 31, 2013.
P ( ( (
690,000 60,000) 10,000) 18,000)
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………………………………………… income………………………………………… P250,000 Gray’s net income…………………………………………………
100,000
2016 P350,000 80,000
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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 b y 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 Compan y 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 C ompany. 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
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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
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6,000 P176,000
1, 2016, Basilio sold to Longalong for P440,000 machinery with the carrying am ount 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) -029. Basilio Corporation owns 100% of Longalong’s Corporations common stock. On January
ANSWER; 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 i n 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
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ANSWER:B Rationale 2016 P400,000
Capital stock-Orange 12/31 Retained Earnings, Orange 12/31: Retained Earnings, Orange 1/1 P600,000 P750,000 Add: Net Income 200,000 150,000 Total P800,000 P900,000 Less: Dividends 50,000 750,000 20,000 Stockholder’s Equity- Orange, 12/31 P1,150,000 Less: Unrealized Gain (Upstream Sales) 20,000 Total P1,130,000 Add: Realize gain thru Depreciation (upstream sales): P20,000/ 5 x 6/12) 2,000 P1,132,000 Realized Stockholder’s Equity- Orange, 12/31 Multiplied by: Non-controlling Interest % 20% Non-controlling Interests, December 31 P226,400
2017 P400,000
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 P40,0 00 to S Company for P75,000. The gain on the sale is also included in the net income of P Com pany 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) (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
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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 P75,000 / 25years P3,000 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:P30,000/5years=P6,000 x 9/12 (4/1/2017-12/31/2017) 2018
P60,000 30,000 P30,000 P 4,500 P 6,000
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)
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
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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
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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 shoul d 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 P 20,000 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 R etained 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, 2 017, 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 pa pers 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 ..P180,000 Equipment....................................... P180,000 The entry made in the books of subsidiary on the date of sale: Equipment.................... Equipment.............................. ...................... ...................... ................P ......P 530,000 Cash................................................ P530,000 The entry made in the books of parent on the date of sale: Cash...................... Cash.................................. ....................... ..................... ......................P53 ............P530,000 0,000 Equipment..................................... P350,000 Gain on Sale....................... 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.................. depreciation............................. ...............P45,000 ....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
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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 b y 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: 4years)]....................P643,000 ....P643,000 Reyes Co.’s book value [P1,500,000 -(P1,500,000/7 years x 4years)]................ Santos Co;s book value [P900,000-(P900,000/4years x 3 years)].............. years)]....................... ......... 225,000 Decrease.................... 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
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Less: Intercompany gain Consolidated building amounts Combined Accumulated Depreciation Less: Piecemeal recognition of gain
( $
30,000 ) 620,000
$
195,000 (
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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 e quipment 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) 3years) 276,000 Decrease 24,000 37. Sales of fixed assets between m embers of an affiliated group may result in the recognition of gain or loss by by the seller. Statement 1: For each period, adjust depreciation expense a nd 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 Statement 2 is true B.Both statements are correct C.Statement 1 is true; Statement 2 is false
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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 i ts 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 com pany 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 b y 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 m ain store and Cebu City branch were P13,600 and P3,960, respectively. During 2016, the main office purchased merchandize costing P40,000 a nd shipped 40% of these to the Cebu City branch. At December 31, 2016, the following journal entry was made to prepare prepare the Cebu City branch books for the next accounting period:
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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 ha s 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] 6,320 [2] 15,160
d. [1] 6,480 [2] 16,040
Ans: C
[1]
actual branch income: Sales……………………………………………………………………………..32,000
Less: Costs of Goods Sold Inventory, J an. 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 15,200 Multiplied by: cost ratio ……………………………. 100/110 Gross Profit………………………………… Profit ……………………………………………………………………P …………………………………P 16,800 Less: Expenses…………………………………… Expenses………………………………………………………………. …………………………. 10,480 True Branch Net Income……………………………………………… Income……………………………………………………. ……. P 6,320 (c)
[2] Ending Inventory at Cost: Home office……………………………………………….P 11,200 Branch: (P4,840 x 100/110)……………………………. 100/ 110)……………………………. 4,400 Combined ending inventory at cost…………………… P 15,600 (c)
2.Barros Corporations shipments to and from its Brazil Cit y branch are billed at 120% of cost. On December 31, Brazil branch reported the following data at billed prices: inventory, January 1 of 3 3,600; 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
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Cost of goods available for sale Multiplied by: Mark up Allowance for overvaluation before adjustments adjustments
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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 o wn 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
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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) 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 m arch 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 t he 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 bille d prices of P25,000. What is the amount of adjustment for Allowance for Overvaluation of Inventories to reflect the true branch net income? a. b. c. d.
P39,257 debit P46,000 credit P39,333 debit 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.
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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 op erating 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 Home Office Unreconciled balance P136,020 P175,400 1) Unrecorded shipment 60,000 2) Unrecorded remittance ( 25,000) 2) Accounts collected 4380 3) Net loss ( 42,800) ( 42,800) Adjusted balance P132,600 P132,600 7. On September 1, 2014, Ricky Company e stablished 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 recei ved to Cebu City. In addition, on November 1, 2014, shipments sh ipments 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 p aying freight costs of P 2,500. Had the merchandise been shipped from the home office to Cebu City Cit y 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
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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 second year of operations, the home 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
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Other liabilities Unrealized Profit- Branch inv. Home Office Capital Stock Retained Earnings Total Equities
3,000 500
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500 28,000 P 31,000
80,000 17,000 P 105,000
A summary of the operations operations of the home office and branch for 2014 follows: follows: Home Office sales: P 100,000, including ,P 33,000 to the branch. A standard 10% m ark 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 Home Office inventory is P 11,000 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 o wn 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 W hat 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
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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 i nventory of Home Office Merchandise is P 10,000. W hat 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 Less: Home Office Merchandise, end.
P 20,000/ 125%= P 16,000 115,000/ 125%= 92,000 10,000/ 125%= 8,000
P 4,000 23,000 P 27,000 (2,000) P 25,000
12. The Best acoustic. bills merchandise m erchandise 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
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at billed price Sales. P169,000 Less: sales return and allowance. 3,750 Sales price of merchandise purchased from outsiders (P7,500 x 120%). 9,000 Net sales of merchandise acquired from home office. P156,250 Multiplied by: Intercompany cost ratio. 100/125 125,000 Inventory, Aug. 1, 2016, at billed price. P150,000 Multiplied by cost ratio. 100/150 Merchandise inventory at cost destroyed by fire.
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 L icab branch, costing P375,000 plus freight. Ruby bills inventory to its branches at 120% of original cost, plus t he actual amount of shipping charges. At the end of the year, the Licab branch had resold 50% of the inventory i nventory 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?
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a. b. c. d.
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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 fol lowing 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 agenc y 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 an num. 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
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17. The account balances shown below were taken from the trial balances submitted to Bon-Apetit Corporation by its Alabang Branch: 2015
Petty cash fund Accounts receivable InventorySales Shipments from home (140% of cost) Expenses Accounts written off
2016
P1500 43, 800 37, 170 173, 180 107, 450 51, 260 1, 220
P1500 49,140 195, 120 136, 080 57, 930 1, 920
All branch collections are remitted to the home office. All 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
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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 C ompany 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 Ja nuary 1 represents purchases from outsides? a. b. c. d.
11,700 42,000 12,870 27,600
Ans. D Inventory, Jan.1 64.500 Less: (99,900-(590,000-500,000) 9,900 (9,900/30%) 33,000 27,600 Total Inventory 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% 60% of the merchandise remaining remaining unsold at December 31, 2016 be included in (1) inventory of the Davao branch at Decm br 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
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D. (1)P18,400(2)P16,000 (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 60% Multiplied by: ending endin g inventory………………………………………………
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 i nventory……………………………………………… … Multiplied by: ending inventory…………………………………………… 60%
P 15,000 600 Add: freight in (1000 x 60%) ………………………………………………… ………………………………………………… 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 7 0 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
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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 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
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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
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P566,100 10,200
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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 m erchandise 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…………………………..
P330,000 220,000 P550,000
Less: Cost of goods sold, from home office at billed price Sales…………………………………………………….. Less: Sales return and allowances…………………..
P338,000 7,500
from outsiders (P15,000 x 125%)…………
18,750
Sales price of merchandise purchased
Net sales of merchandise acquired From home office………………………………………. Multiplied by: Intercompany cost ratio……………………… Inventory, July 31, 2016, at billed price…………………….. Multiplied by: Cost ratio………………………………………. Merchandise inventory at cost destroyed by fire…………..
P311,750 100/120
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………………….
P196,000 80,000
Inventory, December 31 of which P14,000 are of Local purchase…………………………………… purchase………………………………………….. …….. Net sales for m onth………………………………………… onth…………………………………………… …
56,000 360,000
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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 m akes sales and incurs and pays pa ys operating expenses. At the end of the t he current accounting period the true adjusted balance for the home office of fice 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 m ay 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 to the home 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. office. The cost of the returned returned merchandise is P750. The branch office pays P25 of freight costs which will be charged ch arged 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 the home office since it applied to advertising fees incurred by the home office for its own benefit. The home office allocated allocated P12,000 of general and administrative expenses to the branch. branch. The branch had not entered the allocation as of the end of the year. The home office office pays insurance premiums premiums on the 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 a nd 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
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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) 12,000 224 P500,000
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 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 expenses of P28,000 to the branch. The branch had not entered the allocation at the year-end. Branch store store insurance premiums of P900 were 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) 300 28,000 P535,000
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:
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Sales
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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 in ventory 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: 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 Branch Cost of Sales: Shipment from Home Office:
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Billed price
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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 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 m erchandise worth P130,000 which included a m ark up of 15% on cost. Sales on account totalled P250,000 while cash sales amounted am ounted to P80,000. Bulacan reported operating expenses of P38,000 and ending in ventory 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
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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
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100,000 P230,000 38,000 P192,000
32. Selected accounts from the De cember 31,2016 trial balance of Sarang Trading Co. And it’s Baguio Branch follow: Debits
Inventory, January 1,2016 Baguio branch Purchases Freight in from home office Expenses
Manila
Baguio Branch
P 25,000 58,300 200,000 40,000
P 11,550 105,000 5,500 27,500
P 160,000 110,000
P 53,300 150,000 -
Credits
Home office Sales Sales to branch 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 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:
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Sales Less: Cost of goods sold: Inventory, Jan.1,2016, at cost (P11,550-P1,000 mark-up) Add: Purchases from home 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
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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 follo wing differences: 1. A P14,000 branch remittance to the home office initiated on December 28,2016, was recorded recorded on the home office books on January 2, 2017. 2. A home office inventory shipment to to the branch on December 27,2016 27,2016 was recorded by the branch on January 4,2017; the billing of P26,000 was at cost. 3. The home office office incurred P13,500 of advertising expenses and allocated P5,500 P5,500 of this this amount to the branch on December 15,2016. The branch has not rec orded this transaction. 4. A branch customer erroneously remitted remitted P3,600 to the 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 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 Of The Home Office Account
a. b. c. d. Solution: ANS: D
P84,300 P122,300 P151,200 P122,300
Adjusted Balance Of The Reciprocal Account
P143,000 P 96,000 P139,200 P161,000 Investment in Branch Account
Unadjusted balance(s), December 31,2016 Add (deduct); adjustments: 1. Branch remittance not yet recorded by the home office in 2016 2. Shipments not yet recorded by the Branch in 2016 3. Unrecorded branch expenses 4. Branch customers’ remittance recorded by the home office nut not yet recorded by the branch 5. Erroneous recording of branch shipments (P51,600 – P40,800) Adjusted Balance(s) December 31,2016
P175,000
Home Office Current
P122,300*
( 14,000) 26,000 5,500 ( 3,600) P161,000
10,800 P161,000
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*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...................................................................................................... P650,000 Cost of Sales: Shipments from Home Office .................... ................................ ....................... ..................... ...........P285,000 .P285,000 Local Purchases..................... Purchases................................ ...................... ...................... ....................... .................... ........ 50,000 Total..................... Total............................... ...................... ....................... ....................... ...................... ..................... ............. .. P335,000 Inventory end..................... end................................ ..................... ...................... ....................... .................... ......... 80,000 Gross profit on sales..................... sales............................... ...................... ........................ .................. ...... Expenses.............................................................................. Net Income................... 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................. reported............................. ......................... ........................ ...................... ....................... ................. ..... P245,000 Add(Deduct): Overvaluation of cost of goods sold/realized profit From sales made by branch: Shipments from home office................. office...........................P ..........P285,000 285,000 Less:Ending inventory,at billed price (50,000-6600)................ (50,000-6600)............................ ....................... ............... .... 43,400 Cost of goods sold from home office at Billed price.................... price................................. ....................... .............P ...P 241,600 Multiplied by: Mark-up.................. Mark-up............................. .................. ....... 40/140 Unrecorded branch expenses................... expenses.............................. ....................... ............... ... True Branch Net Income................. Income............................. ....................... ...................... ................. ......
i.35.Which
69,029 (2,500) P 311,529(C)
represents the proper journal entry for a periodic inventory system that should be made on the books book s 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.
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Branch office
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
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$100,000
Shipments to branch B.
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25,000 $100,000 25,000
Shipments from home office
$125,000
ii 36.Which
represents the proper journal entry for a periodic inventory system that should be m ade 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 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
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i.
35.REQUIRED: The home office journal 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 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 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 because
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36.REQUIRED: The journal entry on the branch book s to reflect the receipt of merchandise 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 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. Error! Main Document Only. A 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 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
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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 account is debited in the accounting records 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 credits Sales when merchandise is shipped to a branch. c. Cash received from a branch 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
