Home Office and Branch Accounting, Insurance Contracts, Joint Venture-SME and Business Combinatio n: Date of Acquisition

UNIVERSITY OF SAINT LOUIS

TUGUEGARAO CITY, CAGAYAN
SCHOOL OF ACCOUNTANCY, BUSINESS AND HOSPITALITY
ADVANCED FINANCIAL ACCOUNTING AND REPORTING, PART 2

10. _________ is the aggregate of (i) the value of the consideration transferred (generally
at fair value), (ii) the amount of any non-controlling interest (NCI, see below), and (iii)
in a business combination achieved in stages, the acquisition-date fair value of the
acquirer's previously-held equity interest in the acquiree, and the net of the
acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed (measured in accordance with IFRS 3).

MIDTERM EXAMINATION_SUMMER 2016

PROBLEM SOLVING. Answer what is asked. Write your answers in your worksheets in good
form. Emphasize your final answers.
NAME: _________________________________________

SCORE: ______/50

SIMPLE RECALL. Identify what is asked. Strictly no erasures or altering of answers. 1

point each. Write your answers on the space provided.
1. [IFRS 11.Appendix C2-C13] ___________ are included for:
transition from proportionate consolidation to the equity method for joint ventures
transition from the equity method to accounting for assets and liabilities for joint
operations
transition in an entity's separate financial statements for a joint operation previously
accounted for as an investment at cost.
2. The classification of a joint arrangement as a joint operation or a joint venture
depends upon the ____________ of the parties to the arrangement. An entity
determines the type of joint arrangement in which it is involved by considering the
structure and form of the arrangement, the terms agreed by the parties in the
contractual arrangement and other facts and circumstances. [IFRS 11:6, IFRS 11:14,
IFRS 11:17]
3. A separately identifiable financial structure, including separate legal entities or entities
recognised by statute, regardless of whether those entities have a legal personality is
called ____________
4. IFRS 11 superseded SIC No. ____
5. There is a _________ that an insurer's financial statements will become less relevant
and reliable if it introduces an accounting policy that reflects future investment
margins in the measurement of insurance contracts. [IFRS 4.27]
6. When an insurer changes its accounting policies for insurance liabilities, it may
reclassify some or all financial assets as at ________. [IFRS 4.45]
7. A revised version of IFRS 3 was issued in January 2008 and applies to business
combinations occurring in an entity's first annual period beginning on or after _____.
8. An integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return in the form of dividends, lower costs or
other economic benefits directly to investors or other owners, members or participants
is called ___________
9. ______ principle states that Identifiable assets acquired, liabilities assumed, and noncontrolling interests in the acquiree, are recognised separately from goodwill.

Problem 1
Asset and estimated annual earnings contributions of Companies M,N,O, parties to a
consolidation are as follows: (asset contributions are at fair value)

Co. M
Co. N
Asset contributions
P1,000,000
P2,000,000
Estimated annual earnings
100,000
200,000

Co. O
P2,000,000
240,000

TOTAL
P5,000,000
540,000

Parties agree to the following: a single class of stock P10 par, is to be issued by the new
corporation; stock is to be exchanged for net assets as indicated plus allowance for goodwill
represented by annual earnings in excess of 10% on net asset contributions as above,
capitalized at 10%
Required:
a. What entry is made by the new corporation assuming that stock is issued whose amount is
equal to the sum of assets and goodwill? How is the stock distributed among the constituent
companies? (4 points)
b. What entry is made assuming that stock of 5,000,000 is issued, goodwill calculations being
made simply to assure the equitable allotment of this stock? How is the stock distributed
among the constituent companies?(2 points)
c. Assume that two classes of stock are to be issued by the new corporation, 5% fully
participating preferred stock and common stock, both issues with a par value of P10 per share.
Preferred is to be issued to each company in the amount equal to the asset contribution as
shown. Earnings are to be capitalized at 10% in determining the total of preferred stock and
common to be issued to each company. Common stock is to be issued for the difference
between totals so determined and the preferred stock to which each company is entitled. State
the number of shares of preferred stock and common stock of the new corporation to be
issued to stockholders of Companies M, N, and O. (4 points)
Problem 2

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Home Office and Branch Accounting, Insurance Contracts, Joint Venture-SME and Business Combinatio n: Date of Acquisition

Envigo Corporation acquired all the assets and liabilities of CFC Corporation by issuing
shares of its common stock on January 1, 2009. Partial balance sheet data for the companies
prior to the business combination and immediately following the combination is provided:

Cash
Accounts Receivable
Inventory
Buildings and Equipment (net)
Goodwill
Total Assets

Envigo
CFC
Combination
Book Value
Book Value
P 65000P 25,000
P88,000
72000
20000
94000
33000
45000
88000
400000
150000
650000
?
P570,000
P240,000
P ?

Accounts Payable
Bonds Payable
Common stock, P2 par
Additional Paid in Capital
Retained earnings
Total Liabilities and Equities

P50,000
250000
100000
65000
105000
P570000

P25,000
100000
25000
20000
70000
P240000

P87,000
350000
160000
243000
?
P ?

Envigo incurred P12,000 for professional fees to arrange the business combination to be paid
next month. Another out of pocket cost that was paid on a business combination was printers
charges for printing securities and SEC registration, P2000. Record the acquisition in the
books of Envigo and CFC. (10 points)
Problem 3
At the beginning of the earliest period presented, an entity recognised the following amounts in
its financial statements in accordance with its previous accounting policies:
Deferred acquisition costs
150
Intangible assets arising from business combination
200
Insurance contract liability
(900)
On the date of transition, the entity estimates:
(a) the insurance contract liability at the sum of the net expected present value of the cash
flows (600), risk adjustment (10) and contractual service margin (30), i.e. as 640; and (b) the
amount to be recognised in a separate component of equity (accumulated amount of other
comprehensive income) to equal 100. That amount is calculated as the difference between:
(i) 600, being the expected present value of the cash flows at the date of transition which was
determined using current discount rates; and
(ii) 500, being the expected present value of the cash flows at the date of transition, discounted
using the discount rates that applied when the portfolios were recognised.
The entity also concludes that the part of the intangible assets that arose from the previous
business combination and that do not qualify as intangible assets equals 125.
As a result, the entity recognizes:
a. a decrease in the insurance contract liability of _____ (3)

b.
c.

a total decrease in assets of ___________(3)

total increase in Retained earnings of _____(4)

Problem 4
A balance sheet for the Lady Eagles Sales Co. as of January 1, 2016, is given below.
ASSETS
Cash
Accounts Receivable
Less: Allow. For bad debts
Merchandise Inventory
Furniture and Fixtures
Less: Accum. Depn.
TOTAL ASSETS

15,000
42,000
1,200
15,000
4,600

LIABILITIES AND SHAREHOLDERS EQUITY

Accrued Expenses
Accounts Payable
Ordinary Share
Accumulated Profits and Losses
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY112,200

40,800
46,000
10,400
112,200
250
33,750
50,000
28,200

On this date a branch sales office is established in Zamboanga Sibugay. The branch is sent
the following assets by the home office upon its organization.
1) Cash 1,500
2) Merchandise @ cost 10,200
3) Store furniture and fixtures previously used by the home office cost 3,000; age 2 years;
depreciation rate used in the past, 10% a year. The cost of shipment and installation, 900, is
paid by the branch. This cost is to be written off over the remaining life of the asset. The
equipment accounts are to be carried on the books of the home office.
4) Accounts Receivable 2,600. Accounts arose from sales by the home office to customers in
Zamboanga Sibugay. The branch is authorized to take over the accounts and make
collections.
Home office and branch transactions with outsiders during January were:
Sales on account
Collections on own accounts
Purchases on account
Payments on account
Payments of expenses

Home Office
34,600
40,000
31,600
36,200

Branch
6,200
2,600
3,000
1,450

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Home Office and Branch Accounting, Insurance Contracts, Joint Venture-SME and Business Combinatio n: Date of Acquisition

(including Jan1 accrual)

9,200

1,250

The following took place with respect to accounts received by the branch from the home office;
collections of 1,600 were made; accounts of 150 were uncollectible and were written off; it is
believed that remaining accounts of 850 are collectible.
Interoffice transactions during January were:
Merchandise shipments to branch, cost
Cash remittance to home office

1,250
1,000

The following information is to be recorded on January 31:

a) Merchandise costing 600 was shipped by the home office to the branch on January 31; this
merchandise is in transit and will not reach the branch until February 2. (This shipment is not
included intransfers previously mentioned.)
b) Expenses paid by the home office during the month that are chargeable to the branch total
475. (These are included in the 9,200 amount)
c) Depreciation on furniture and fixtures is recorded at the rate of 10% a year.
d) Merchandise inventories, excluding merchandise in transit, are home office 44,500;
branch 9,800
e) Accrued expenses are: home office 750, branch 350
Required:
Prepare the individual income statements of the home office and branch for the month of
January 2016 in good form (10 points)
SIMPLE RECALL:

1
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10
Prepared by:
Rommel Royce V. Cadapan, CPA, CIB

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