PRACTICAL ACCOUNTING II

ADVANCED FINANCIAL ACCOUNTING II PREWEEK 1

1. Whitney Limited lost $150 on a hedging and had a corresponding gain on the hedged item of
$100. The effectiveness range for these associated transactions is:
A. 100% - 150% B. 0% - 15% C. 20% - 30% D. 66% - 150%

2. A transaction gain or loss at the settlement date:

A. A change in the exchange rate quoted by a foreign exchange trader.
B. Synonymous with the transaction of foreign currency financial statements into peso.
C. The difference between the recorded peso amount of an accounts receivable denominated
in a foreign currency and the amount of pesos received.
D. The difference between the buying and selling rate quoted by a foreign exchange trader at
the settlement date.

3. If the U.S. dollar is the currency in which the foreign affiliate’s books and records are
maintained, and the U.S. dollar is also the functional currency,
A. The translation method should be used for restatement.
B. The remeasurement method should be used for restatement.
C. Either translation or remeasurement could be used for restatement.
D. No restatement is required.

4. An entity has a subsidiary that operates in a country where the exchange rate fluctuates wildly
and there are seasonal variations in the income and expenditure patterns. Which of the
following rates of exchange would probably be used to translate the foreign subsidiary’s income
statement?
A. Year-end spot rate.
B. Average for the year.
C. Average of the quarter-end rates.
D. Average rates for each individual month of the year.

5. On October 1, 2009, Mild Co., a U.S. company, purchased machinery from Grund, a German
company, with payment due on April 1, 2010. If Mild’s 2009 operating income included no
foreign currency transaction gain or loss, the transaction could have
A. Been denominated in foreign currency (Euro).
B. Been denominated in U.S. dollars.
C. Caused a foreign currency gain to be reported as a contra account against machinery.
D. Caused a foreign currency translation gain to be reported in other comprehensive income.

6. Average exchange rates are used to translate certain items from foreign financial statements
into Philippine peso. Such averages are used in order to:
A. Smooth out large translation gains and losses.
B. Eliminate temporary fluctuation in exchange rates that may be reversed in the next fiscal
period.
C. Avoid using different exchange rates for some revenue and expense accounts.
D. Approximate the exchange rate in effect when the items were recognized.

7. Which of the following hedging strategies would a business most likely use?
A. An importer will want to hedge his foreign denominated accounts receivable and will
purchase forward contracts to hedge an exposed net asset position.
B. An importer will want to hedge his foreign denominated accounts payable and will purchase
forward contracts to hedge an exposed net liability position.
C. An exporter will want to hedge his foreign denominated accounts receivable and will
purchase forward contracts to hedge an exposed net liability position.

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 D. An exporter will want to hedge his foreign denominated accounts payable and will purchase
forward contracts to hedge an exposed net liability position.

8. A U.S. company sells merchandise to a foreign company denominated in the foreign currency.
Which of the following statements is true?
A. If the foreign currency appreciates, a foreign exchange gain will result.
B. If the foreign currency depreciates, a foreign exchange gain will result.
C. No foreign exchange gain or loss will result.
D. If the foreign currency appreciates, a foreign exchange loss will result.

9. What is the type of financial risk involved when entities have outstanding purchase
commitments?
A. Price risk
B. Credit risk
C. Interest rate risk
D. Foreign currency risk

10. Exchange gains and losses on accounts receivable and payable that are denominated in a
foreign currency are:
A. Accumulated and reported upon settlement.
B. Deferred and treated as transaction price adjustments.
C. Reported as equity adjustments from translation.
D. Recognized in the periods in which exchange rates change.

11. Under the current rate method

A. All assets and liabilities are translated at the current year’s average exchange rate.
B. Foreign currency translation gains and losses do not affect the income statement.
C. All revenues and expenses are translated using the current exchange rate.
D. The income statement contains a cumulative translation adjustment amount.

12. The value of a derivative is determined by:

A. Central Bank of the Philippines
B. SEC Regulation.
C. The value of the underlying asset.
D. The risk-free rate.

13. The purpose of derivatives is to:

A. Increase the risk so the return is larger.
B. Eliminate risk for both parties in the transaction.
C. Postpone the risk for both parties in the transaction.
D. Transfer the risk from one person to another.

14. An individual who speculates by selling a call option:

A. Wants to bet that the market price of the underlying asset will rise.
B. Wants to bet that the option expires worthless.
C. Wants to bet that the price of the underlying asset will not rise.
D. Wants to bet that the price of the underlying asset will not fall.

15. An appreciation in the value of the Philippine peso against the British pound would tend to:
A. Discourage the British from buying Philippine goods.
B. Discourage Filipinos from buying British goods.
C. Increase the number of peso that could be brought with a pound.
D. Discourage Filipino tourists from traveling to Britain.

16. In the year an 80% owned subsidiary sells equipment to its parent company at a gain, the non-
controlling interest in consolidated income is calculated by multiplying the non-controlling
interest percentage by the subsidiary’s reported net income
A. Plus the intercompany gain considered realized in the current period.
B. Plus the net amount of unrealized gain on the intercompany sale.
C. Minus the net amount of unrealized gain on the intercompany sale.
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 D. Minus the intercompany gain considered realized in the current period.

17. When preparing consolidated financial statement work papers, unrealized intercompany gains,
as a result of equipment or inventory sales by affiliates, are allocated proportionately by percent
of ownership between parent and subsidiary only when the selling affiliate is
A. The parent and the subsidiary is less than wholly owned.
B. A wholly owned subsidiary.
C. The subsidiary and the subsidiary is less than wholly owned.
D. The parent of a wholly owned subsidiary.

18. Lewis Company owns 80 percent of Tomassini Corporation’s stock. You are told that Tomassini
has sold equipment to Lewis and that the following eliminating entry is needed to prepare
consolidated statement for 2009:
Equipment 20,000
Gain on Sale of Equipment 40,000
Depreciation Expense 5,000
Accumulated Depreciation 50,000

Which of the following is incorrect?

A. The parent paid P 40,000 in excess of the subsidiary’s carrying amount to acquire the asset.
B. From a consolidated viewpoint, depreciation expense as Lewis recorded it is overstated.
C. The asset transfer occurred in 2009 before the end of the year.
D. Consolidated net income will be reduced by P 40,000 when this entry is used as an
eliminating entry.

19. Why does the intercompany sale of a building require subsequent adjustments to depreciation
expense?
A. Because the buyer is using a different depreciation method.
B. Because the buyer has changed the estimated useful life.
C. Because immediately after the sale, the balance in accumulated depreciation on the buyer’s
books is zero.
D. Because the book value of the building is the same for the seller and the buyer.

20. When an intercompany gain on sale of land is finally realized by sale of the land to an outsider,
the consolidated gain on sale will equal:
A. The sum of the recorded gain on sale to the outsider and the deferred gain.
B. The difference between the recorded gain on sale to the outsider and the deferred gain.
C. The deferred gain.
D. The gain recorded by the affiliate that resold the asset to the outsider.

PROBLEM SOLVING:
For items 21 to 28, use the following information:
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On January 1, 2014, Parent Company acquired 90% of Subsidiary Company in exchange for 5,400
shares of P10 par ordinary shares having a market value of P120,600. Parent and Subsidiary
condensed balance sheets on January 1, 2014 before the combination were as follows:
Parent Subsidiary
Cash P 30,900 P 37,400
Accounts receivable 34,200 9,100
Inventories 22,900 16,100
Equipment, net 179,000 40,000
Patents ___________ 10,000
Total assets P 267,000 P 112,600

Accounts payable P 4,000 P 6,600

Bonds payable, 10% 100,000
Ordinary share, P10 par 100,000 50,000
Share premium 15,000 15,000
Retained earnings 48,000 41,000
Total liabilities and equities P 267,000 P 112,600

At the date of acquisition, all assets and liabilities of Subsidiary Company have a book value
approximately equal to their respective market values except the following as determined by
appraisals as follows:
Inventories (FIFO method) P 17,100
Equipment, net – 4 years remaining life 48,000
Patents – 10 years remaining life 13,000

21. Compute the amount of partial goodwill on January 1, 2014:

A. P 2,600 B. P 3,800 C. P 14,400 D. P 25,200

22. Compute the non-controlling interests on January 1, 2014:

A. P 10,600 B. P 11,200 C. P 11,800 D. P 13,090

23. Compute the consolidated retained earnings on January 1, 2014:

A. P 48,000 B. P 52,100 C. P 84,900 D. P 89,000

24. Assuming that on December 31, 2014, the following results were given:
Dividend paid Net Income
Parent Company P 15,000 P 30,200
Subsidiary Company 4,000 9,400
Compute the non-controlling interest in net income on December 31, 2014:
A. P -0- B. P 540 C. P610 D. P 940

25. Compute the investment balance on December 31, 2014:

A. P -0- B. P 120,600 C. P 122,160 D. P 125,460

26. Compute the non-controlling interest on December 31, 2014:

A. P 10,600 B. P 11,140 C. P 12,010 D. P 12,300

27. Compute the profit for the period attributable to equity holders of parent on December 31, 2014:
A. P 26,600 B. P 32,090 C. P 32,700 D. P 44,100

28. Compute the consolidated net income on December 31, 2014:

A. P 26,600 B. P 32,090 C. P 32,700 D. P 44,100

29. An entity purchases plant from a foreign supplier for 3 million baht on January 31, 2014, when
the exchange rate was 2 baht = P1. At the entity’s year-end of March 31, 2014, the amount has
not been paid. The closing rate was 1.5 baht = P1. The entity’s functional currency is the peso.
Which of the following statement is correct?
A. Cost of plant, P 2 million, exchange loss P 0.5 million, trade payable P 1.5 million.
B. Cost of plant, P 1.5 million, exchange loss P 0.6 million, trade payable P 2 million.
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 C. Cost of plant, P 1.5 million, exchange loss P 0.5 million, trade payable P 2 million.
D. Cost of plant, P 2 million, exchange loss P 0.5 million, trade payable P 2 million.

30. An entity acquired all the share capital of a foreign entity at a consideration of 9 million baht on
June 30, 2014. The fair value of the net assets of the foreign entity at that date was 6 million
baht. The functional currency of the entity is the peso. Then financial year-end of the entity is
December 31, 2014. The exchange rates at June 30, 2014, and December 31, 2014, were 1.5
baht = P1 and 2 baht = P1, respectively. What figure for goodwill should be included in the
financial statements for the year ended December 31, 2014?
A. P 2,000,000 B. 1,500,000 baht C. P 1,500,000 D. P 3,000,000

Items 31 – 32 are based on the following information:

On December 31, 2014, Rodolfo Company enters into a forward contract to speculative purposes
to acquire 100,000 Mexican New Peso on March 1, 2015, a currency in which the company has not
receivables, payables or commitments. The firm’s fiscal year ends December 31, 2014. Following
are the spot rates and forward rates at various dates:
12/01/14 12/31/14 03/01/15
Spot rate (New Peso) P 2.35 P 2.40 P 2.42
Forward rate (New Peso) P 2.36 P 2.37 P 2.42
31. The December 31, 2014 profit or loss statement, foreign exchange gain or loss on forward
contract amounted to:
A. P 1,000 loss B. P 1,000 gain C. P 5,000 gain D. P 5,000 loss

32. On March 1, 2015, foreign exchange gain or loss on forward contract amounted to:
A. P 5,000 loss B. P 5,000 gain C. P 2,000 gain D. P 2,000 loss

Items 33 – 34 are based on the following information:

On December 31, 2014, Indo Company, the parent of the 100% owned Japanese subsidiary
expected the yen to weaken by the end of 2015. Accordingly, Indo Company, the parent contacted
with a foreign exchange trader on December 31, 2014, to sell 2,300,000 yens (the subsidiary’s net
asset position at that date) in 365 days at the forward rate of P 0.435. The following direct
exchange rates are as follows:
12/31/14 12/31/15
Spot rate P 0.440 P 0.400
Forward rate P 0.435 P 0.400
The January 1, 2015 balance of the translation reserve (cumulative) debit amounted to P 129,000
and translation reserve loss for 2015 of P 100,000.

33. The December 31, 2015 foreign exchange gain or loss on forward contract to be charged to and
amounted to:
A. P 80,500 gain – equity/OCI
B. P 80,500 gain – earnings
C. P 80,500 loss – equity/OCI
D. P 92,000 gain – equity/OCI

34. The December 31, 2015, translation reserve balance (cumulative translation adjustment)
amounted to:
A. P 148,500 debit
B. P 229,500 debit
C. P 309,500 debit
D. P 148,500 credit
Items 35 – 38 are based on the following information:
On January 1, 2011, entities A and B each acquired 30 percent of the ordinary shares that carry
voting rights at a general meeting of shareholders of Entity Z for P 100,000. The purchase price is
equal to the fair value of 30 percent of entity Z’s identifiable assets less percent of its identifiable
liabilities. Entity A and B immediately agreed to share control over entity Z. For the year ended
December 31, 2011, entity Z recognized a loss of P 600,000. Entities A and B have no constructive
or legal obligation in respect of their jointly controlled entity’s loss and have made no payments on
its behalf. Entity Z recognized profit for the year ended December 31, 2012 of P 800,000. There is
published price quotation for Entity Z.
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35. Using the equity method at December 31, 2011, Entities A and B each recognizes their share of
the losses of the jointly controlled entity amounted to:
A. P -0- B. P 60,000 C. P 100,000 D. P 180,000

36. At December 31, 2011, entities A and B must each report their investment in entity Z (a joint
controlled entity) amounted to:
A. P -0- B. P 60,000 C. P 100,000 D. P 180,000

37. At December 31, 2012, entities A and B each recognizes their share of profit of the jointly
controlled entity amounted to:
A. P 160,000 B. P 100,000 C. P 60,000 D. P -0-

38. At December 31, 2012, entities A and B must each report their investment in entity Z (a jointly
controlled entity) amounted to:
A. P 160,000 B. P 100,000 C. P 60,000 D. P -0-

Items 39 – 42 are based on the following information:

On January 1, 2014, George Fatima, Inc. paid P 16,000 cash to acquire a put foreign exchange
option for 1,000,000 Thailand baht, with an expiration date of December 31, 2014. The option
hedges 2014’s forecasted exporting sales of 1,000,000 baht. George Fatima’s fiscal year ends
June 30. Include the time value element in assessing hedge effectiveness or non-split accounting is
used.
1/1/2014 6/30/2014 12/31/2014
Spot rate (market price) P 1.20 P 1.12 P 1.15
Strike price (exercise price) P 1.19 P 1.19 P 1.19
Fair value of put option at 6/30/14 P 81,000

39. What is the intrinsic value (IV) and time value (TV) option on January 1, 2014?
Intrinsic Value Time Value
A. P 16,000 P -0-
B. P -0- P 16,000
C. P 10,000 P 6,000
D. P 6,000 P 10,000

40. The foreign exchange gain or loss on option contract on June 30, 2014 should be:
A. P 5,000 loss – current earnings
B. P 65,000 gain – OCI
C. P 65,000 loss – OCI
D. P 0 gain – OCI

41. The June 30, 2014 foreign exchange gain or loss to be recognized in current earnings if zero
export sales for 2014:
A. P -0- B. P 26,000 C. P 39,000 D. P 65,000

42. The June 30, 2014 foreign exchange gain or loss to be recognized in current earnings if export
sales of 1,000,000 baht – all occurred in December 2014:
A. P -0- B. P 26,000 C. P 39,000 D. P 65,000

43. Everest Company has historically reported bad debt expense of 5% of sales in each quarter.
For the current year, the company followed the same procedure in the three quarters of the
year. However, in the fourth quarter, the company, in consultation with its auditor, determined
that bad debt expense for the entire year should be P 450,000. Sales in each quarter of the year
were as follows: first quarter, P 2,000,000; second quarter, P 1,500,000; third quarter, P
2,500,000; fourth quarter, P 4,000,000. How much bad debt expense should be recognized for
the fourth quarter?
A. P 200,000 B. P 150,000 C. P 300,000 D. P 400,000

44. Colt Company has four manufacturing divisions, each of which has been determined to be a
reportable segment. Common costs are appropriately allocated on the basis of each division’s
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 sales in relation to Colt’s aggregate sales. Colt’s Delta division accounted for 40% of Colt’s
total sales in the current year. For the current year ended December 31, Delta had sales of P
8,000,000 and traceable costs of P 4,800,000. In the current year, Colt incurred costs of P
800,000 that were not directly traceable to any of the divisions. In addition, Colt incurred
interest expense of P 640,000. In reporting supplementary segment information, how much
should be shown as Delta’s profit for the current year?
A. P 3,200,000 B. P 3,000,000 C. P 2,880,000 D. P 2,624,000

Items 45 – 50 are based on the following information:

On December 1, 2014, Optimum Company paid cash to purchase 90 day “at the money” call option
for 500,000 Thailand baht. The option’s purpose is to protect an exposed liability of 500,000
Thailand baht relating to an inventory purchase receive on December 1, 2014 and to be paid on
March 1, 2015.
12/01/2014 12/31/2014 03/01/2015
Spot rate (market price) P 1.20 P 1.28 P 1.27
Strike price (exercise price) P 1.20 P 1.20 P 1.20
Fair value of call option P 3,000 P 42,000 P 35,000

45. What is the intrinsic value (IV) and time value (TV) of option on December 31, 2014?
Intrinsic Value Time Value
A. P 40,000 P 2,000
B. P 2,000 P 40,000
C. P 42,000 P -0-
D. P -0- P 42,000
46. What is the intrinsic value (IV) and time value (TV) of option on March 1, 2015?
Intrinsic Value Time Value
A. P 42,000 P -0-
B. P 40,000 P 2,000
C. P 35,000 P -0-
D. P -0- P 35,000
47. The foreign exchange gain or loss on option contract (hedging instrument) on December 31,
2014 if changes in the time value will be included from the assessment of hedge effectiveness
(non-split accounting) should be
A. P 1,000 loss B. P 1,000 gain C. P 39,000 gain D. P 40,000 gain

48. The foreign exchange gain or loss on option contract (hedging instrument) on December 31,
2014 if changes in the time value will be excluded from the assessment of hedge effectiveness
(split accounting) should be
A. P 1,000 loss B. P 1,000 gain C. P 39,000 gain D. P 40,000 gain

49. The foreign exchange gain or loss on option contract (hedging instrument) on December 31,
2014 if changes in the intrinsic value will be excluded from the assessment of hedge
effectiveness (split accounting) should be
A. P 1,000 loss B. P 1,000 gain C. P 39,000 gain D. P 40,000 gain

50. The December 31, 2014 foreign exchange gain or loss amounted to:
A. P -0- B. P 1,000 gain C. P 1,000 loss D. P 40,000 gain

PRACTICAL ACCOUNTING II
ADVANCED FINANCIAL ACCOUNTING II QUIZZER 1

ANSWER KEY

1. D 11. B 21. C 31. B 41. A

2. C 12. C 22. C 32. B 42. A
3. D 13. D 23. A 33. A 43. B
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 4. D 14. C 24. C 34. A 44. C
5. B 15. A 25. B 35. C 45. A
6. D 16. C 26. C 36. A 46. C
7. B 17. C 27. B 37. A 47. C
8. A 18. D 28. C 38. A 48. D
9. A 19. C 29. C 39. B 49. A
10. D 20. A 30. C 40. B 50. C

BUSINESS COMBINATION - STOCK ACQUISITION

1. On January 1, 2015, Rogers Inc. sold equipment costing P 2,800,000 with accumulated
depreciation of P 1,680,000 to Cooper Corp., wholly owned subsidiary, for P 1,500,000. Rogers
had owned the equipment for six years and was depreciating the equipment using the straight-
line method over ten years with no salvage value. Cooper will continue to use the straight-line
method over the remaining four years of the equipment’s economic life. In consolidated
statements at December 31, 2015, the cost and accumulated depreciation, respectively, should
be
A. P 2,800,000 and P 1,680,000 C. P 2,800,000 and P 2,055,000
B. P 1,500,000 and P 375,000 D. P 2,800,000 and P 1,960,000

Cost 2,800,000

Accumulated depreciation: 1,680,000

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 Depreciation – 2015 (1,500,000/4years) 375,000
Piecemeal realization (380,000/4years) (95,000) 280,000
Total Accumulated depreciation 1,960,000 (D)

2. In 2012, Einstein Inc. purchase land from its 70%-owned subsidiary for P 125,000. The
subsidiary originally paid P 80,000 for the land several years earlier. In 2014, Einstein Inc.
needed to raise some cash and sold the land to an unrelated third party for P 115,000. What
amount of gain or loss on the sale of the land should be reported in the consolidated income
statement in 2012 and 2014?
2012 2014 2012 2014
A. P 45,000 gain P 35,000 gain C. P -0- P 10,000 loss
B. P 45,000 gain P 10,000 loss D. P -0- P 35,000 gain

Consolidated Income Statement – 2012 -0-

Consolidated Income Statement – 2014 (115,000 – 80,000) 35,000 gain (D)

3. Dark Inc. owns 70% of Light Co.’s common stock. On January 2, 2014, Dark Inc. sold to Light
Co. some equipment for P 90,000. The equipment had a carrying amount of P 60,000. Light is
depreciating the acquired equipment over a fifteen-year remaining useful life by the straight-line
method. The net adjustments to calculate 2014 and 2015 consolidated net income would be an
increase (decrease) of
2014 2015 2014 2015
A. P (28,000) P 2,000 C. P 2,000 P -0-
B. P (24,000) P -0- D. P (6,000) P 24,000

Unrealized Gain on sale of equipment (90,000 – 60,000) 30,000

Piecemeal realization – 2014 (2,000)
Unrealized Gain on sale of equipment 28,000
Piecemeal realization – 2015 2,000 (A)

4. Blue Inc. owns 70% of Green Co.’s outstanding common stock. Blue Inc. reports cost of goods
sold in 2014 of P 850,000 while Green Co. reports P 520,000. During 2014, Blue Inc. sells
inventory costing P 100,000 to Green Co. for 125,000. 40% of these goods are not resold by
Green Co. until the following year. What is the amount of cost of goods sold will be reported in
the consolidated income statement?
A. P 1,395,000 B. P 1,255,000 C. P 1,360,000 D. P 1,235,000

Cost of goods sold – Blue Inc. 850,000

Cost of goods sold – Green Inc. 520,000
Intercompany sales – 2015 (125,000)
Unrealized Profit on Ending Inventory 10,000
Consolidated Cost of Goods Sold 1,255,000 (B)

5. The Slumber Company’s statement of financial position on December 31, 2014 is as follows:
Assets Liabilities and Shareholders’ Equity
Cash P 200,000 Current liabilities P 600,000
Accounts Receivable 400,000 Long-term debt 1,000,000
Inventories 1,000,000 Ordinary Share, P2 par 200,000
PPE 1,800,000 Share premium 400,000
_________ Retained earnings 1,200,000
Total P 3,400,000 Total P 3,400,000

On December 31, 2012, the Plumber Company acquired 75% of the outstanding ordinary
shares of Slumber for P 3,000,000 cash. On that date, the fair market value of Slumber’s
inventories was P 900,000 and fair value of Slumber’s property, plant and equipment was P
2,000,000. The fair values of all assets and liabilities of Slumber were equal to their book
values.

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 As a result of the acquisition of Slumber by Plumber, the consolidated statement of financial
position of Plumber and Slumber should reflect goodwill in the amount of (assume that the non-
controlling interest is measured at fair value and that the consideration transferred includes a
control premium of P 300,000).
A. P 750,000 C. P 1,200,000
B. P 1,000,000 D. P 1,525,000
Acquisition cost 3,000,000
Less: FINA (2,900,000 x 75%) 2,175,000
Goodwill – partial 825,000
Less: Control premium 300,000
Goodwill w/o control premium 525,000
Divide by 75%
Goodwill – full 700,000
Add: Control premium 300,000
Goodwill – with control premium (full) 1,000,000 (B)

6. The statement of financial position of Bob Company as of December 31, 2013 is as follows:

Assets Liabilities and Shareholders’ Equity

Cash P 175,000 Current liabilities P 250,000
Accounts receivable 250,000 Mortgage payable 450,000
Inventories 725,000 Ordinary share capital 200,000
Property, plant & equipment 950,000 Share premium 400,000
________ Accumulated profits 800,000
2,100,000 2,100,000

On December 31, 2013, the Taylor Inc. bought all of the outstanding shares of Bob Company for
P 1,800,000 cash. On the date of acquisition, the fair market value of Bob’s inventories was P
675,000, while the fair value of Bob’s property, plant and equipment was P 1,100,000. The fair
value of all other assets and liabilities of Bob were equal to their book values. In addition, not
included above were costs in-process research and development of Bob Company amounting
to P 100,000.

Goodwill amounted to:

A. P 400,000 B. P 300,000 C. P 200,000 D. P -0-
Acquisition cost 1,800,000
FINA (included the in-process research and development) 1,600,000
Goodwill 200,000 (C)

7. Condensed Statement of Financial Position of Dolce Inc. and Galvez Inc. as of December 31,
2013 were as follows:
Dolce Galvez
Current assets P 275,000 P 65,000
Noncurrent assets 625,000 425,000
Total Assets 900,000 490,000

Liabilities 65,000 35,000

Ordinary shares, P 23 par 549,700 296,700
Share premium 35,300 28,300
Accumulated profits (losses) 250,000 130,000
Total Liabilities and SHE 900,000 490,000

On January 1, 2014, Dolce Inc. issued 30,000 shares with market value of P 25 per share for
the assets and liabilities of Galvez Inc. Dolce Inc. also paid P 125,000 cash. The book value
reflects the fair value of the assets and liabilities, except that the noncurrent assets of Galvez
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 Inc. have a fair value of P 630,000 and the noncurrent assets of Dolce Inc. are overstated by P
30,000. Contingent consideration, which is determinable, is equal to P 15,000. Dolce paid for
the share issuance costs only amounting to P 74,000 and incurred other acquisition costs
amounting to P 19,000.
As a result of acquiring the net assets of Galvez Inc., compute for the total liabilities in the books
of Dolce.
A. P 100,000 B. P 115,000 C. P 134,000 D. P 65,000
Liabilities – Dolce 65,000
Liabilities – Galvez 35,000
Contingent consideration 15,000
Unpaid other acquisition costs 19,000
Total liabilities 134,000 (C)

Duck Corporation acquired a 70% interest in Whistle Corporation on January 1, 2013, when
Whistle’s book values were equal to their fair values. During 2013, Duck sold merchandise that cost
P 75,000 to Whistle for P 110,000. On December 31, 2013, three-fourths of the merchandise
acquired from Duck remained in Whistle’s inventory. Separate incomes of Duck and Whistle are as
follows:
Duck Whistle
Sales Revenue P 150,000 P 200,000
Cost of Goods Sold 90,000 70,000
Operating Expenses 12,000 15,000
Separate Incomes P 48,000 P 115,000

8. What amount of sales to be reported in the consolidated income statement as of December 31,
2013?
A. P 350,000 B. P 240,000 C. P 200,000 D. P 40,000

Sales – Duck 150,000

Sales – Whistle 200,000
Intercompany sales (110,000)
Consolidated Sales 240,000 (B)

9. What amount of non-controlling interest income to be reported in the consolidated financial

statement as of December 31, 2013?
A. P 34,500 C. P 60,000 C. P 24,000 D. P 49,500
Separate Income – Whistle 115,000
Multiply by 20%
NCI Income 34,500 (A)

10. What is the consolidated net income to be reported in the consolidated financial statement as of
December 31, 2013?
A. P 163,000 B. P 88,750 C. P 136,750 D. P 136,700

Separate Income – Duck 48,000

Separate Income – Whistle 115,000
Unrealized Profit on Ending Inventories (26,250)
Consolidated Net Income 136,750 (C)

Plastic Corporation acquired Shaldan Corporation’s common stock on January 1, 2010 for P
210,000 cash. The stockholders’ equity of Shaldan at this time consisted of P 150,000 capital stock
and P 50,000 retained earnings. The difference between the price paid by Plastic and the
underlying equity acquired in Shaldan was due to P 12,500 undervaluation of Shaldan’s inventory,
a P 25,000 undervaluation of Shaldan’s equipment and to goodwill. The undervalued inventory
items were sold by Shaldan during 2010, and the undervalued equipment had a remaining useful
life of five years. Straight-line depreciation is used. Any goodwill is not amortized.

Goodwill was tested for impairment, and it was determined that an impairment loss of P 10,000
must be recognized in 2012.
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semester AY 2015-2016 Page 11 of 13 KTTegio
Some balance sheet and income statement accounts of Plastic and Shaldan Corporations at end
for the year ended December 31, 2013 are presented below:

Plastic Shaldan

Income Statement

Depreciation expense P 40,000 P 20,000

Net Income 54,500 40,000

Balance Sheet

Dividends receivable 8,000

Building 65,000 70,000
Equipment – net 200,000 100,000
Dividends payable 100,000 10,000
Capital stock 300,000 150,000
Retained earnings 107,500 100,000

Additional information:
Retained earnings, January 1, 2013 75,000 80,000
Dividends 40,000 20,000

Determine the amounts that would appear in the consolidated financial statements of
Plastic Corporation and Subsidiary for each of the following items:
A. Goodwill at December 31, 2013
B. Consolidated depreciation expenses for 2013
C. Non-controlling interest income for 2013
D. Consolidated net income for 2013
E. Consolidated retained earnings at December 31, 2013
F. Non-controlling interest at December 31, 2013

A. Acquisition cost 210,000

BINA (200,000X80%) (160,000)
Excess of cost over book value 50,000
Inventory (12,500x80%) (10,000)
Equipment (25,000x80%) (20,000)
Goodwill – partial 20,000
Impairment loss – 2012 (10,000)
Goodwill – partial 12/31/13 10,000

B. Depreciation expense – Plastic 40,000

Depreciation expense – Shaldan 20,000
Depreciation – undervalued equipment 5,000
Consolidated depreciation expense 65,000

C. Net Income – Shaldan 40,000

Amortization – equipment (5,000)
Adjusted Net Income 35,000
x 20%
Non-controlling interest income 7,000
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semester AY 2015-2016 Page 12 of 13 KTTegio
 D. Net Income – Plastic 54,500
Dividend Income (16,000)
Net Income – Shaldan 40,000
Amortization – equipment (5,000)
Consolidated Net Income 73,500

E. RE, 1/1/10 50,000

RE, 1/1/13 80,000
Increase in RE 30,000
Amortization:
Inventory (12,500)
Equipment (15,000)
FV adjustment – PY’s 2,500
x 80%
2,000
Impairment loss – 2012 (10,000)
Adjustment in RE (8,000)

Retained earnings – P, beg. 75,000

PAP 66,500
Adjustment (8,000)
Dividends (40,000)
Retained earnings – P, end 93,500

F. Ordinary shares 150,000

Retained earnings 100,000
Unamortized balance 5,000
Total SHE-S @FV 255,000
x 20%
NCI – proportionate basis 51,000

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