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St.

Paul University Philippines


School of Business, Accountancy and Hospitality Management
Bachelor of Science in Accountancy
Advanced Financial Accounting and Reporting

Business Combination

1. On September 18, 2013, DG Co. acquired all the AX Inc.s P2,150,000


identifiable assets and P530,000 liabilities. Book values of the AXs
assets and liabilities equal to their fair values except for the
overvalued furniture and fixtures. As a consideration, DG issued its
own shares of stock with a market value of P1,715,000 and cash
amounting to P375,000

Contingent consideration is determined to be P148,000 on the date of


acquisition. The merger resulted into P647,000 goodwill. Assuming DG
Co. had P4,890,000 total assets and P2,731,000 total liabilities prior
to the combination and no additional cash payments were made, but
expenses were incurred for related cost amounting to P28,000.

a. After the merger, how much is the combined total assets in the books
of the acquirer?

b. After the merger, how much is the increase in liabilities in the


books of the acquirer?

2. On February 1, 2014, the Primex Co. acquired 100% of T&R Co. when the
fair value of the latters net assets was P29M. The consideration
transferred comprised of P22M cash paid at the acquisition date plus
another P10M cash to be paid after February 1 provided a specified
profit target was met by T&R. At the acquisition date, there was only
low probability of the profit target being met, so the fair value of
the contingent consideration liability was P1.5M. Before the year
ended, the profit target was met and P10M cash was transferred. As a
result of all foregoing transactions, how much will retained earnings
change?

3. Acquirer Company acquires 25% of Acquired Companys common stock for


P190,000 cash and carries the investment using the cost method. After
three months, Parent purchases another 60% of Subsidiarys common stock
for P540,000. On this date, acquired company reports identifiable net
assets with carrying value of P720,000 and fair value of P920,000. The
liabilities of the acquired company has a book value and a fair value
of P280,000. The fair value of the 15% non-controlling interest is
P125,000. How much the goodwill or (gain on acquisition)?

4. On January 2, 2014, the Statement of Financial Position of Body and


Shop Company prior to the combination are:

Body Co. Shop Co.


Cash P 675,000 P22,500
Inventories 450,000 45,000
Property and equipment 1,125,000 157,500
Total Assets P2,250,000 P 225,000
Current Liabilities P 135,000 P 22,500
Ordinary Shares, P100 par 225,000 22,500
Share premium 675,000 45,000
Retained Earnings 1,215,000 135,000
Total Liabilities and Stockholders Equity P2,250,000 P225,000

The fair value of Shop Companys equipment is P229,500.

Assume the following independent cases:


a. Assuming Body Co. acquired all of the outstanding stock of Shop Co.
resulting to a goodwill of P99,000, contingent consideration is
P54,000, how much is the price paid of Shop Companys stock?
b. Assuming Body Co. acquired 70% of the outstanding common stock of
Shop Company for P157,500 and Non-controlling interest is measured
at fair value of P91,500, how much is the goodwill (gain on
acquisition)?
c. Assuming Body Co. acquired 80% of the outstanding common stock of
Shop Company for P205,200, and NCI is measured at NCIs
proportionate share of Shop Companys identifiable net assets, how
much is the consolidated stockholders equity on the date of
acquisition?
d. Assuming Body Company acquired 90% of the outstanding common stock
of Shop Company for P364,500 and NCI is measured at fair value, how
much is the total consolidated assets on the date of acquisition?

5. On July 1, 2014, Giordano, Inc. acquired most of the outstanding common


stock of Esprit Company for cash. The incomplete working paper
elimination entries on that date for the consolidated statement of
financial position of Giordano, Inc. and its subsidiary are shown
below:

Stockholders equity Esprit P2,437,500


Investment in Esprit P1,584,375
Non-controlling interest 853,125

Inventories P 62,500
Equipment 312,500
Patent 61,250
Goodwill ?
Investment in Esprit P 468,750
Non-controlling interest ?

Included in the purchase price is a control premium of P68,750.


The amount of goodwill to be reported in the consolidated statement of
financial position on July 1, 2014:
a. Assuming non-controlling interest is measured at fair value
b. Assuming non-controlling interest is measured at the proportionate
or relevant share
c. Assuming non-controlling interest is measured at fair value. The
fair value of the non-controlling interest is P1,150,000.

6. On January 2, 2014, Arrow Corporation acquired 80% of CEO Companys


ordinary shares for P3,240,000. P150,000 of the excess is attributable
to goodwill and the balance to a depreciable asset with an economic
life of ten years. Non-controlling interest is measured at its fair
value on date of acquisition. On the date of acquisition, stockholders
equity of the two companies were as follows:

Arrow Corporation CEO Company


Ordinary shares P5,250,000 P1,200,000
Retained earnings 7,800,000 2,100,000

On December 31, 2014, CEO Company reported net income of P525,000 and
paid dividends of P180,000 to Arrow, Arrow reported earnings from its
separate operation of P1,425,000 and paid dividends of P690,000.
Goodwill had been impaired and should be reported at P30,000 on
December 31, 2014.
a. How much is the non-controlling interest in profit of CEO Company on
December 31, 2014?
b. How much is the consolidated profit on December 31, 2014?
c. How much is the consolidated retained earnings attributable to
parents shareholders equity in December 31, 2014?
d. What amount of non-controlling interest is presented in the
consolidated statement of financial position on December 31, 2014?

7. YSL Corporation acquired 80% of the outstanding shares of GBX Company


on June 1, 2014 for P586,250. GBX Companys stockholders equity
components at the end of this year were as follows: Ordinary shares,
P100 par, P250,000; Share premium, P112,500; Retained earnings,
P222,500.

Non-controlling interest is measured at fair value. All the assets of


GBX were fairly valued, except for inventories, which is overstated by
P11,000, and equipment, which is understated by P15,000. Remaining
useful life of equipment is 4 years. Both companies use the straight-
line method for depreciation and amortization.

Stockholders equity of YSL on January 1, 2014 is composed of Ordinary


shares P750,000, Share premium P175,000, Retained earnings P525,000.

Fair value of non-controlling interest on the date of acquisition of


P117,500. Goodwill, if any, should be written down by P14,225, at year-
end. Net Income for the first year of parent and subsidiary are P75,000
and P42,500 (from date of acquisition) respectively. Dividends declared
at the end of the year amounted to P20,000 and P15,000. During the
year, there was no issuance of new ordinary shares.
a. What is the amount if the non-controlling interest in net assets of
GBX Company on December 31, 2014?
b. What is the amount of consolidated shareholders equity?

8. On July 1, 2014, Issue Company purchased 80% of the outstanding shares


of Intrigue Company at a cost of P1,600,000 on that date, intrigue had
P1,000,000 of capital stock and P1,400,000 of retained earnings. For
2014, Issue had income of P560,000 from its separate operations and
paid dividends of P300,000. For 2014, Intrigue Company had income of
P130,000 and paid dividends of P60,000. All the assets and liabilities
of Intrigue have book values equal to their respective fair market
values. Assume income was earned evenly throughout the year except for
the intercompany transaction on October 1. On October 1, 2014, Issue
purchased an equipment from Intrigue for P200,000. The book value of
the equipment on that date was P240,000. The loss of P40,000 is
reflected in the income of Intrigue indicated above. The equipment is
expected to have a useful life of 5 years from the date of sale. In the
December 31, 2014 consolidated statement of financial position, how
much is the consolidated net income attributable to the parent company?

9. Pure Corporation acquired an 80% interest in Sincere Company on January


2, 2013 for P2,520,000. On this date, the share capital and the
retained earnings of the two companies follow:

Pure Corp. Sincere Co.


Share Capital P 6,000,000 P 2,250,000
Retained Earnings 3,000,000 450,000

On January 2, 2013 the asset and liabilities of Sincere Co. were stated
a their fair values except for machinery which is undervalued by
P225,000 (remaining life is 3 years). On September 30, 2013, Sincere
sold merchandise to Pure at an intercompany profit of P150,000; 25% was
still unsold at year-end. Likewise, on October 2, 2014, Sincere
purchased merchandise from Pure for P3,600,000. The selling affiliate
included a 20% mark-up on cost on this sale. Only 75% of these
purchases had been sold to unrelated parties as of December 31, 2014.
As of December 31, 2014, goodwill was determined to be impaired by
P60,000.

The following is the summary of the 2014 transactions of the affiliated


companies:

Pure Corp. Sincere Co.


Net Income P 1,500,000 P 600,000
Dividends declared and paid 600,000 180,000

On the 2014 consolidated financial statements, how much would be the:


a. Net income attributable to Parent
b. Non-controlling interest in net income

10. On January 2, 2013, Power Company acquired 90% of the outstanding


shares of Solar Inc. at book value. During 2013 and 2014, intercompany
sales amounted to P2,000,000 and P4,000,000, respectively. Power
Company consistently recognized a 25% mark-up based on cost while Solar
Inc. had a 25% gross profit on sales. The inventories of the buying
affiliate, which all came from intercompany transactions show:

December 31, 2013 December 31, 2014


Power P240,000 P160,000
Solar 100,000 40,000

On October 1, 2013, Solar Inc. purchased a piece of land costing


P1,000,000 from Power Company for P1,500,000. On the other hand, on
July 1, 2014, Solar Inc., sold a used photo-copier with a carrying
value of P60,000 and remaining life of 3 years to Power Company for
P42,000.

Separate Statement of Comprehensive Income for the two companies for


the year 2014 follow:

Power Company Solar Inc.


Sales P25,000,000 P14,000,000
Cost of Sales (15,000,000) (8,400,000)
Gross Profit P10,000,000 P 5,600,000
Operating Expenses (6,000,000) (3,800,000)
Operating Profit P4,000,000 P1,800,000
Loss on Sale of Office Equipment (18,000)
Dividend Revenue ____________ 40,000
Net Income P4,000,000 P 1,822,000

Compute for the following amounts for/as of December 31, 2014:


1. Consolidated Gross Profit
2. Consolidated Net Income attributable to Parent
3. Non-controlling interest in Net Income
4. Consolidated Operating Expense

11. On January 1, 2014, P Corporation purchased 80% of S Companys


outstanding stock for P620,000. At that date, all of S, Companys
assets and liabilities had market values approximately equal to their
book values and no goodwill was included in the purchase price. The
following information was available for 2014: Income from own
operations of P Corporation, P150,000; Operating loss of S Company,
P20,000. Dividends paid in 2014 by P Corporation, P75,000; by S
Corporation to P Corporation, P12,000.

On July 1, 2014, there was a downstream sale of equipment at a gain of


P25,000. The equipment is expected to have a remaining useful life of
10 years from the date of sale. Also, on January 1, 2014, there was an
upstream sale of furniture at a loss of P7,500. The furniture is
expected to have a useful life of five years from the date of sale.
Non-controlling interest is measured at fair market value.
How much is the consolidated net income attributable to parent
shareholders equity?

12. The following are the condensed Statement of Financial


Position of GM and SR on January 1, 2014:
GM SR
Total Assets P 10,250,000 P 3,057,500

Liabilities P 2,775,000 P 800,000


Ordinary 3,100,000 1,295,000
Shares
Share Premium 1,250,000 100,000
Retained 3,125,000
Earnings

SD Corp. acquired the net assets of both GM and SR. Paying cash
in the amount of P185,000 and by issuing 198,500 shares to GM.
Paying cash in the amount of P72,000 and by issuing 54,350 shares
to SR. The par value of these shares is P35/share and market
value as of January 1, 2014 is P40/share. SD Corp. also incurred
the following unpaid expenses:
GM SR
Indirect Costs P 93,750 P101,250
Finders Fee 66,250 35,000
Accounting and legal 343,750 362,500
fees for SEC
registration
Printing costs of 125,000 93,750
stock certificates
SDs retained earnings has a balance of P10,750,000 on January
1, 2014, immediately before the acquisition.

As a result of the merger, compute for the amount of:


1. Goodwill
2. Net increase or (net decrease) in retained earnings in the
statement of financial position of SD Corporation
3. Net increase or (net decrease) in the stockholders equity of
SD Corporation
4. Net increase or (net decrease) in the identifiable assets of
SD Corporation

13. ABC Company acquired all of JKL Corporations assets and


liabilities on October 2, 2013, in a business combination at that
date. JKL reported assets with a book value of P998,400 and
liabilities of P569,600. ABC noted that JKL included the amount
of P64,000 obsolete merchandise at the acquisition date that did
not appear of any value. ABC also determined that an old delivery
van previously used by JKL had a fair value of P192,000, but not
had been recorded by JKL. Except for machinery and equipment, ABC
determined the fair value of all other assets and liabilities
reported by JKL approximated the recorded amounts. In recording
the transfer of assets and liabilities in its books, ABC recorded
gain on acquisition of P148,800. ABC paid P327,200 to acquire
JKLs assets and liabilities.
If the book value of JKLs machinery and equipment was P345,600,
what was their fair value?
Using the information presented but assuming ABC recorded
goodwill of P402,000. ABC paid P1,037,000 to acquire JKLs assets
and liabilities. If the book value of JKLs machinery and
equipment was P516,500, what was their fair value?

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