Northern CPA Review Co.

(NCPAR)
NCPAR CUP – September 2012

Easy round
1. The ceiling of the threshold for total assets of an SME qualifier is
a. 400M b. 3M c. 350M d. 250M
C
2. PFRS 6 applies to expenditures incurred
a. When searching for an area that may warrant detailed exploration, even though the entity has
not yet obtained the legal rights to explore a specific area.
b. When the legal rights to explore a specific area have been obtained, but the technical
feasibility and commercial viability of extracting a mineral resource is not yet demonstrable.
c. When a specific area is being developed and preparations for commercial extraction are
being made.
d. In extracting mineral resources and processing the resource to make it marketable or
transportable.
B
3. To which of the following is the capital gains tax required to be filed? (Select the exception.)
a. Authorized Agent Bank under the jurisdiction of the RDO where the seller is required to
register
b. Revenue collection officer
c. Duly authorized City or Municipal Treasurer of the RDO where the seller is required to
register
d. Office of the Commissioner of Internal Revenue
D
4. The objective of tests of details of transactions performed as tests of controls is to
a. Monitor the design and use of entity documents such as prenumbered shipping forms.
b. Determine whether internal control structure policies and procedures have been placed in
operation.
c. Detect material misstatements in the account balances of the financial statements.
d. Evaluate whether internal control structure procedures operated effectively.
D
5. Which of the following internal control activities most likely would prevent direct labor hours
from being charged to manufacturing overhead?
a. Periodic independent counts of work in process for comparison to recorded amounts.
b. Comparison of daily journal entries with approved production orders.
c. Use of time tickets to record actual labor worked on production orders.
d. Reconciliation of work-in-process inventory with periodic cost budgets.
C
6. The management of an entity completes draft financial statements for the year to December 31,
20x1 on February 28, 20x2. On March 18, 20X2, the board of directors reviews the financial
statements and authorizes them for issue. The entity announces its profit and selected other
financial information on March 19, 20x2. The financial statements are made available to
shareholders and others on April 1, 20x2. The shareholders approve the financial statements at
their annual meeting on May 15, 20x2 and the approved financial statements are then filed with a

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regulatory body on May 17, 20x2. For purposes of PAS 10 Events after the reporting period, the
financial statements are authorized for issue on
a. March 18, 20x2
b. March 19, 20x2
c. April 1, 20x2
d. May 15, 20x2
e. May 17, 20x2
A
7. An entity’s first financial statements that conform to the PFRS for SMEs are presented for the
year ended 31 December 20X4. Those financial statements include only one year of comparative
information (i.e., 20X3). The entity’s financial statements for the year ended 31 December 20X3
were presented in accordance with local GAAP. The entity is required to explain how the
transition from the previous financial reporting framework to the PFRS for SMEs affected its
reported financial position, financial performance and cash flows. To comply with this
requirement, an entity’s first financial statements that conform to the PFRS for SMEs must
present a number of reconciliations. Which one of the following four reconciliations is not
required to be disclosed?
a. A reconciliation of its profit or loss in accordance with its previous financial reporting
framework for 20X3 to its profit or loss in accordance with the PFRS for SMEs for 20X3.
b. A reconciliation of its profit or loss in accordance with its previous financial reporting
framework for 20X4 to its profit or loss in accordance with the PFRS for SMEs for 20X4.
c. A reconciliation of its equity under its previous financial reporting framework to its equity in
accordance with the PFRS for SMEs at 1 January 20X3.
d. A reconciliation of its equity under its previous financial reporting framework to its equity in
accordance with the PFRS for SMEs at 31 December 20X3.
B
8. S1 acquires 30% interest in S2 on January 1, 20x1. P acquires 25% interest in S2 on January 1,
20x2. P acquires 80% interest in S1 on January 1, 20x4. In accordance with PFRS 3, the
acquisition dates of S1 and S2, respectively are
S1 S2
a. January 1, 20x1 January 1, 20x4
b. January 1, 20x4 January 1, 20x1
c. January 1, 20x1 January 1, 20x1
d. January 1, 20x4 January 1, 20x4
D
9. If an entity breaches the threshold floor or ceiling during an accounting period and the change is
considered “significant and continuing,” the entity should transition to the applicable financial
reporting framework
a. immediately and prospectively
b. immediately with restatement of prior period financial statements
c. after two years following the breach of threshold
d. in the next accounting period
D
10. LOONEY CRAZY FOOLISH Co. operates in a hyperinflationary environment. At the start of
the year, LOONEY had monetary assets of P100M and monetary liabilities of P150M. At the
end of the year, LOONEY had monetary assets of P200M and monetary liabilities of P300.

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Which of the following statements is correct when LOONEY prepares its year-end financial
statements?
a. LOONEY will recognize a purchasing power loss in profit or loss.
b. LOONEY will recognize a purchasing power gain in profit or loss.
c. LOONEY will recognize a purchasing power gain in other comprehensive income.
d. None of these if LOONEY qualifies as an SME.
B

Moderate round:
1. The Khaki Company sells merchandise for P8,000 to a customer on 31 December 20x7. The
terms of the sale agreement state that payment is due in one year's time. Khaki has an imputed
rate of interest of 9%. Under IAS18 Revenue, how much revenue should Khaki recognize in
profit or loss for the year ended 31 December 20x7?

Answer: 7,339 (8,000 / 1.09)

2. The ledger of ABC Co. as of December 31, 20x1 includes the following:
Liabilities
Bank overdraft 5,000
Trade accounts payable (net of P5,000 debit balance in accounts) 20,000
Notes payable (due in 20 semi-annual payments of P2,000) 40,000
Interest payable 15,000
Bonds payable (due on March 31, 20x2) 35,000
Discount on bonds payable (15,000)
Dividends payable 5,000
Share dividends payable 6,000
Deferred tax liability (expected to reverse in 20x2) 18,000
Income tax payable 22,000
Contingent liability 50,000
Reserve for contingencies 14,000
Totals 215,000

Requirement: Compute for total current liabilities.

Answer: P96,000
Solution:
Current liabilities
Bank overdraft 5,000
Trade accounts payable (P20,000 + P5,000) 25,000
Notes payable (P2,000 semi-annual instalment x 2) 4,000
Interest payable 15,000
Bonds payable (due on March 31, 20x2) 35,000
Discount on bonds payable (15,000)
Dividends payable 5,000
Income tax payable 22,000

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 Northern CPA Review Co. (NCPAR)
Total current liabilities 96,000

3. The Blade Division of Dana Co. produces hardened steel blades. One third of the Blade
Division’s output is sold to the Lawn Products Division of Dana; the remainder is sold to
outside customers. The Blade Division’s estimated sales and standard cost data for the fiscal year
ending June 30, are as follows:
Lawn Products Outsiders
Sales P15,000 P40,000
Variable cost 10,000 20,000
Fixed cost 3,000 6,000

Sales units 10,000 20,000

The Lawn Division has an opportunity to purchase 10,000 identical quality from an outside
supplier at a cost of P1.25 per unit on a continuing basis. Assume that the Blade Division can
not sell any additional products to outside customers.

Should Dana allow its Lawn Products Division to purchase the blades from the outside supplier?

Answer: No
Reason: Making the blades would save P2,500

4. A company manufactures and sells a single product. Planned and actual production in 2008, its
first year of operation, was 100,000 units. Planned and actual costs in 2008 were as follows:
Manufacturing Non-manufacturing
Variable P600,000 P500,000
Fixed 400,000 300,000

The company sold 85,000 units of product in 2008 at a selling price of P30 per unit.

Using variable costing, how much is the company’s operating income in 2008?

Answer: 840,000

5. On January 1, 20x1, ABC Co. acquired 15% ownership interest in XYZ, Inc. for P100,000. The
investment was accounted for under PFRS 9. From 20x1 to the end of 20x3, ABC recognized
net fair value gains of P50,000.

On January 1, 20x4, ABC acquired additional 60% ownership interest in XYZ, Inc. for P800,000. As
of this date, ABC has identified the following:
a. The previously held 15% interest has a fair value of P180,000.
b. XYZ’s net identifiable assets have a fair value of P1,000,000.
c. ABC elected to measure non-controlling interests at the non-controlling interest’s proportionate
share of XYZ’s identifiable net assets.

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 Northern CPA Review Co. (NCPAR)
Requirement: Compute for goodwill under each of the scenarios below.

Answer: 230,000
Solution:
Goodwill (gain on bargain purchase) is computed as follows:
(1) Consideration transferred 800,000
(2) Non-controlling interest in the acquiree (P1M x 25%) 250,000
(3) Previously held equity interest in the acquiree 180,000
Total 1,230,000
Fair value of net identifiable assets acquired (1,100,000)
Goodwill 230,000

6. On December 31, 20x1, ABC Co. declares P1,000,000 cash dividends to shareholders of record
as of January 15, 20x2 for distribution on January 31, 20x2. Since ABC is undergoing liquidation,
80% of the dividends declared are liquidating dividends.

Requirement: What is the entry to be made on date of declaration?

Solution:
Dec. 31, 20x1 Retained earnings (1M x 20%) 200,000
(Date of declaration) Capital liquidated (1M x 80%) 800,000
Cash dividends payable 1,000,000

7. ABC Co. had 100,000 ordinary shares outstanding throughout 20x0. On January 1, 20x1, ABC
issued 100,000 rights to acquire one ordinary share at P50 in the ratio of 1 new share for every 5
rights held.

The market price of one ordinary share immediately before exercise on April 1, 20x1 is P110. ABC
reported the following profits:
Year
20x0 900,000
20x1 1,000,000
20x2 1,200,000

Requirement: Compute for the basic earnings per share in 20x1.

Answer: 8.51
Solution:
Fair value of share right-on - Subscription price
Value of 1 right =
Number of rights to purchase one share + 1
Value of 1 right = (110 – 50) ÷ (5 + 1)
Value of 1 right = 10

Fair value of shares selling right-on 110

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 Northern CPA Review Co. (NCPAR)
Value of 1 right ( 10)
Theoretical ex-rights fair value per share 100

Adjustment factor = 110/100

January 1 Ordinary shares outstanding

(100K x 110/100 x 3/12) 27,500
April 1Outstanding shares after exercise of rights
(120K x 9/12) 90,000
Weighted average # of outstanding ordinary shares 117,500

Profit for the year 1,000,000

Divide by: Weighted average # of outstanding shares
(27,500 + 90,000) 117,500
Basic earnings per share – 20x1 8.51

8. On January 1, 20x1, ABC Company had monetary assets of P2,000,000 and monetary liabilities
of P1,000,000. During 20x1, ABC's monetary inflows and outflows were relatively constant and
equal so that it ended the year with net monetary assets of P1,000,000. Assume that the
Consumer Price Index was 200 on January 1, 20x1, and 220 on December 31, 20x1.

Requirement: Compute for the purchasing power gain (loss) on net monetary items. Indicate if your
answer is gain or loss.

Answer: (100,000) loss

Solution:
Net monetary assets, end (Historical) 1,000,000 (given)
Net monetary assets, end (Restated) (1,000,000 x 220/200) (1,100,000)
Purchasing power loss (100,000)

9. ABC Co. owns 20% of the ordinary shares of XYZ, Inc. The records of ABC as of December
31, 20x1 show the following information before any necessary year-end adjustments.

Investment in associate P 200,000

Trade accounts receivable – XYZ 300,000
Investment in preference shares – XYZ 100,000
Advances to associate – XYZ 50,000
Loans receivable, secured - XYZ 120,000

XYZ reported loss of P1,400,000 in 20x1, P500,000 in 20x2 and P100,000 in 20x3. Also in 20x3,
ABC incurred constructive obligation in favor of XYZ in the amount of P120,000 and made
P80,000 payments in behalf of XYZ.

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Requirement: Compute for the share in loss to be recognized by ABC in 20x3.

Answer: 200,000

10. On January 1, 20x1, ABC Company had the following borrowings made for general purposes
and a part of the proceeds was used to finance the construction of a qualifying asset.

Principal
12% short-term note P 10,000,000
14% bank loan (3-year) 18,000,000
16% note payable (5-year) 22,000,000

The construction of the qualifying asset was started on immediately and expenditures incurred on
the qualifying asset were as follows:
Jan. 1 P 4,800,000
Mar. 31 2,200,000
July 30 3,500,000
October 1 5,400,000
December 31 300,000

Requirement: Compute for the capitalizable borrowing cost.

Answer: 1,340,000

Difficult round:

1. A manufacturer gives warranties at the time of sale to purchasers of its product. Under the terms
of the contract of sale, the manufacturer undertakes to make good, by repair or replacement,
manufacturing defects that become apparent within one year from the date of sale. On the basis
of experience, it is probable (i.e., more likely than not) that there will be some claims under the
warranties.

Sales of P10 million were made evenly throughout 20X1.

At December 31, 20x1 the expenditures for warranty repairs and replacements for the product sold
in 20x1 are expected to be made 50% in 20x1 and 50% in 20x2. Assume for simplicity that all the
20x2 outflows of economic benefits related to the warranty repairs and replacements take place on
June 30, 20x2.

Experience indicates that 95% of products sold require no warranty repairs; 3% of products sold
require minor repairs costing 10% of the sale price; and 2% of products sold require major repairs or

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replacement costing 90% of sale price. The entity has no reason to believe future warranty claims
will be different from its experience.

At December 31, 20x1, the appropriate discount factor for cash flows expected to occur on June 30,
20x2 is 0.95238. Furthermore, an appropriate risk adjustment factor to reflect the uncertainties in
the cash flow estimates is an increment of 6 per cent to the probability-weighted expected cash
flows.

Requirement: Compute for the warranty provision at December 31, 20x1.

Answer: 106,000
Solution:
10M x 3% x 10% 30,000
10M x 2% x 90% 180,000
Total 210,000
Multiply by: Discount rate (given) 0.95238
Total 200,000
Multiply by: Risk adjustment (100% + 6%) 106%
Total 212,000
Multiply by: Amount to be settled in 20x2 50%
Warranty provision – Dec. 31, 20x1 106,000

2. On January 1, 20x1, ABC Co. issued share options to its employees. The fair value of the share
options on grant date is P500,000. The share options vest in three years.

ABC is subject to a tax rate of 30% and is allowed a tax deduction for the intrinsic value of the share
options.

If the intrinsic value of the share options on December 31, 20x1 is P600,000, how much is the
income tax benefit to be recognized in equity?

Answer: 10,000
Solution:
The cumulative allowed tax deduction as of December 31, 20x1 recognized on the share options is
computed as follows:
Dec. Intrinsic value of share options at Dec. 31, 20x1 (given) 600,000
31, Multiply by: Vesting pd. passed over Total vesting pd. 1/3
20x1 Cumulative allowed tax deduction - Dec. 31, 20x1 200,000

The cumulative salaries expense as of December 31, 20x1 recognized on the share options is
computed as follows:
Dec. Fair value of share options at grant date (given) 500,000
31, Multiply by: Vesting pd. passed over Total vesting pd. 1/3
20x1 Cumulative salaries expense to date - Dec. 31, 20x1 166,667

The excess tax benefit to be recognized in equity is computed as follows:

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 Northern CPA Review Co. (NCPAR)
Cumulative allowed tax deduction – Dec. 31, 20x1 200,000
Cumulative salaries expense to date – Dec. 31, 20x1 166,667
Cumulative excess tax deduction 33,333
Excess tax deduction recognized in previous periods ( 0)
Excess tax deduction recognized for the period 33,000
Multiplied by: Tax rate 30%
Income tax benefit, 20x1 (equity) 10,000

3. On January 1, 20x1, XYZ, Inc., an unlisted company, acquires ABC Co., a publicly listed entity,
through an exchange of equity instruments. ABC Co. issues 5 shares in exchange for each
ordinary share of XYZ, Inc. All of XYZ’s shareholders exchange their shares in ABC Co.
Therefore, ABC Co. issues 40,000 ordinary shares in exchange for all 8,000 ordinary shares of
XYZ, Inc.

The fair value of each ordinary share of XYZ at January 1, 20x1 is P200. The quoted market price of
ABC’s ordinary shares at that date is P40.

The statements of financial position of the combining entities immediately before combination are
shown below:
ABC Co. XYZ, Inc.
(legal parent, accounting (legal subsidiary, accounting
acquiree) acquirer)
Identifiable assets 1,600,000 2,400,000
Total assets 1,600,000 2,400,000

Liabilities 1,300,000 700,000

Share capital:
10,000 ordinary shares, P10 par 100,000
8,000 ordinary shares, P100 par 800,000
Retained earnings 200,000 900,000
Total liabilities and equity 1,600,000 2,400,000

The fair value of ABC’s identifiable assets and liabilities at January 1, 20x1 are the same as their
carrying amounts.

Requirement: Compute for goodwill (gain on bargain purchase).

Answer: 100,000
Solution:

Accounting acquiree (ABC Co.) issues shares – Legal form:

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Actual %
ABC's currently issued shares 10,000 20%
Shares to be issued to XYZ (5 sh. x 8,000 sh.) 40,000 80%
Total shares of ABC Co. after the combination 50,000

Accounting acquirer (XYZ, Inc.) issues shares – Substance:

Reverse %
XYZ's currently issued shares 8,000 80%
Shares to be issued to ABC's shareholders to enable them to
have the same interest in XYZ, Inc. [(8,000 ÷ 80%) x 20%] 2,000 20%
Total 10,000

Goodwill (gain on bargain purchase) is computed as follows:

(1) Consideration transferred (2,000 x P200) 400,000
(2) Non-controlling interest in the acquiree -
(3) Previously held equity interest in the acquiree -
Total 400,000
Fair value of net identifiable assets acquired (1.6M – 1.3M) (300,000)
Goodwill 100,000

4. Owl Co. paid P150,000 for its 75% interest in Owlet Co. Owl elected to value NCI at fair value.
Owlet’s net identifiable assets approximated their fair values at acquisition date. The acquisition
resulted in a goodwill attributable to NCI of P10,000.

Since the acquisition date, Owlet has made accumulated profits of P200,000. There have been no
changes in Owlet’s share capital since acquisition date. The group determined that goodwill has been
impaired by P8,000.

A summary of the individual statements of financial positions of the entities as at the end of
reporting period is shown below:

Owl Co. Owlet Co.

Total assets 1,000,000 500,000

Total liabilities 200,000 120,000

Share capital 300,000 100,000
Retained earnings 500,000 280,000
Total liabilities and equity 1,000,000 500,000

Requirement: Compute for the NCI in net assets

Answer: 103,000

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Solution:
Net assets of Owlet – current year 380,000
Multiply by: NCI percentage 25%
Total 95,000
Add: Goodwill to NCI net of accumulated impairment losses 8,000
Non-controlling interest in net assets – current year 103,000

5. On January 1, 20x1, Rooster Co. acquired 75% interest in Cockerel Co. for P150,000. At this
time, Cockerel's net identifiable assets have a carrying amount of P180,000 which approximates
fair value. NCI was assigned a fair value of P55,000.

During 20x1, Rooster sold goods to Cockerel for P150,000, having bought them for P120,000. A
quarter of these goods remain unsold at year-end. Goodwill on acquisition of Cockerel has been
tested for impairment and found to be impaired (in total) by P8,000 for the current year.

The individual statements of profit or loss and other comprehensive income of the entities for the
year ended December 31, 20x1 are shown below:
Rooster Co. Cockerel Co.
Revenue 1,000,000 700,000
Cost of sales (400,000) (300,000)
Gross profit 600,000 400,000
Dividend income from Cockerel Co. 10,000
Distribution costs (200,000) (100,000)
Administrative costs (80,000) (50,000)
Profit before tax 330,000 250,000
Income tax expense (96,000) (75,000)
Profit after tax 234,000 175,000
Other comprehensive income 74,000 25,000
Comprehensive income 308,000 200,000

Requirement: Compute for the profit attributable to owners of the parent.

Solutions:
Consolidated profit and comprehensive income
Rooster Cockerel
Co. Co. Consolidated
Profit after tax before adjustment 234,000 175,000 409,000
Consolidation adjustments:
Unrealized profit ( 7,500) ( - ) ( 7,500)
Dividend received from subsidiary (10,000) N/A (10,000)
Net consolidation adjustments (17,500) ( - ) (17,500)

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Profits before impairment loss 216,500 175,000 391,500
Share in impairment loss on
goodwill (6,000) (2,000) ( 8,000)
Consolidated profit 210,500 173,000 383,500
Other comprehensive income 74,000 25,000 99,000
Comprehensive income 284,500 198,000 482,500

Owners
of
parent NCI Consolidated
Rooster's profit before impairment
loss 216,500 N/A 216,500
Share in Cockerel’s profit before
impairment loss (175K x 75%); (175K
x 25%) 131,250 43,750 175,000
Share in impairment loss on goodwill (6,000) (2,000) (8,000)
Profit attributable to 341,750 41,750 383,500
Rooster's other comprehensive
income 74,000 N/A 74,000
Share in Cockerel’s other
comprehensive income (25K x 75%);
(25K x 25%) 18,750 6,250 25,000
Comprehensive income attributable to 434,500 48,000 482,500

6. On January 1, 20x1, ABC Co. grants 1,000 share options to each of its 100 key employees
conditional upon each employee remaining in ABC’s employ over the next three years. ABC
estimates that the fair value of each share option is P15.

On the basis of a weighted average probability, ABC Co. estimates on January 1, 20x1 that 20 per
cent of employees will leave during the three-year period and therefore forfeit their rights to the
share options.

During 20x1, 2 employees left. The entity revised its estimate of total employee departures over the
three-year period from 20 per cent to 15 per cent.

During 20x2, additional 3 employees left. The entity revised its estimate of total employee departures
over the three-year period from 15 per cent to 12 per cent.

During 20x3, additional 5 employees left. Hence, a total of 10 employees forfeited their rights to the
share options during the three-year period, and a total of 90,000 share options (90 employees x 1,000
options per employee) vested at the end of 20x3.

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Requirement: Compute for the salaries expense in 20x3.

Answer: 470,000
Solution:
Dec. Fair value of share options at grant date
31, 90,000 x 15 1,350,000
20x3 Multiply by: Vesting period passed over Total vesting period 3/3
Cumulative salaries expense to date 1,350,000
Salaries expense recognized in previous periods
(100 x 88%) x 1,000 x 15 x 2/3 (880,000)
Salaries expense for current year - 20x3 470,000

7. ABC Co. follows a fiscal year that ends in June 30. On January 1, 20x1, there has been a change
in the tax rate in the jurisdiction where ABC Co. operates. The tax rate prior to January 1, 20x1
is 30% while the newly enacted tax rate that will apply from January 1, 20x1 onwards is 35%.
ABC reported pretax profit of P320,000 for the fiscal year ended June 30, 20x1. The only
temporary difference pertains to a P4,000, one-year fire insurance premium taken by ABC on its
building on January 1, 20x1. The premium paid is tax deductible in full upon payment. There
were no temporary differences as of July 1, 20x0. There were also no payments for income tax
during the year.

Requirement: Compute for the income tax expense for the fiscal year ended June 30, 20x1.

Answer: 104,050
Solution:
Tax
Description of items
rate
Pretax income START 320K
Permanent
-
differences
Acctg. profit subj. to SQUEEZE
320K N/A ITE 104.050
tax
Insurance
(FI>TI)a (2K) 35% DTL (700)
Taxable profit 318K N/A b CTE 103,350

a
Insurance expense recognized for financial reporting
(P4K x 6/12) 2,000
Insurance expense recognized for taxation (4,000)
Taxable temporary difference, TTD (FI>TI) (2,000)
b
Current tax expense is computed as follows:
Taxable profit – July 1 to Dec. 31, 20x0 (318,000 x 6/12) 159,000
Tax rate applicable during the period - 20x0 30%
Current tax expense - 1st half of fiscal year 47,700
Taxable profit – Jan. 1 to June 30, 20x1 (318,000 x 6/12) 159,000

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Tax rate applicable during the period - 20x1 35%
Current tax expense - 2nd half of fiscal year 55,650
Current tax expense for the fiscal year 103,350

8. On September 30, 20x1, ABC Co. acquired all of the identifiable assets and assumed all of the
liabilities of XYZ, Inc. by paying cash of P1,000,000. On this date, the identifiable assets
acquired and liabilities assumed have fair values of P1,600,000 and P900,000, respectively.

On November 1, 20x2, the internal auditors of ABC discovered an error on the recorded identifiable
assets acquired from XYZ on the business combination. A patent with a fair value of P100,000 and
a remaining useful life of 4 years as of September 30, 20x1 was omitted from the valuation listing.

Requirement: Compute for the adjusted goodwill.

Answer: 200,000
Solution:
The adjusted fair value of net identifiable assets acquired is computed as follows:
Fair value of identifiable assets acquired 1,600,000
Fair value of unrecorded patent 100,000
Adjusted fair value of identifiable assets acquired 1,700,000
Fair value of liabilities assumed ( 900,000)
Adjusted fair value of net identifiable assets acquired 800,000

The adjusted goodwill is computed as follows:

Unadjusted Adjusted
(1) Consideration transferred 1,000,000 1,000,000
(2) Non-controlling interest in the acquiree - -
Previously held equity interest in the
(3) acquiree - -
Total 1,000,000 1,000,000
Fair value of net identifiable assets
acquired (700,000) (800,000)
Goodwill 300,000 200,000

9. ABC Co. owns 80% of the ordinary shares of a foreign subsidiary, XYZ, Inc., a company based
in Korea. XYZ, Inc.'s functional currency is won. The subsidiary was acquired at the start of the
reporting period for 1,500,000 wons, when the subsidiary's retained earnings were 800,000 wons.

At the date of the acquisition the fair value of the net assets of the subsidiary were 1,400,000 wons.
This included a fair value adjustment in respect of land.

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ABC Co. elected to measure non-controlling interest at the NCI’s proportionate share of the fair
value of the subsidiary‘s net assets. The group determined at year-end that goodwill is not impaired.
There were no changes in the share capital of the subsidiary during the year.

The relevant exchange rates are as follows:

Date Exchange rates
Jan. 1, 20x1………………………………….P0.03: KRW 1
Average for the year………………………....P0.04: KRW 1
Dec. 31, 20x1………………………………..P0.05: KRW 1

A summary of the individual financial statements of the entities at the end of reporting period are
shown below:

Statements of financial position

As at December 31, 20x1
ABC Co. XYZ, Inc.
ASSETS (pesos) (wons)
Investment in subsidiary 45,000
Other assets 2,000,000 1,300,000
TOTAL ASSETS 2,045,000 1,300,000

LIABILITIES AND EQUITY

Liabilities 400,000 60,000
Share capital 1,000,000 200,000
Retained earnings 645,000 1,040,000
Total equity 1,645,000 1,240,000
TOTAL LIABILITIES AND
EQUITY 2,045,000 1,300,000

Statements of profit or loss

For the year ended December 31, 20x1
ABC Co. XYZ, Inc.
(pesos) (wons)
Revenues 900,000 600,000
Expenses (540,000) (360,000)

Profit for the year 360,000 240,000

Requirement: How much is the goodwill stated in Philippine pesos?

Answer: 19,000

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 Northern CPA Review Co. (NCPAR)

Solution:
Analysis of net assets
Acquisition
Consolidation Net
Table 1: XYZ, Inc.’s net assets date
date (wons) change
(wons)
Share capital 200,000 200,000
Retained earnings 800,000 1,040,000
Total at carrying amounts 1,000,000 1,240,000
FVA at acquisition date a 400,000 400,000
Subsequent
depreciation/amortization of FVA NIL -
Subsidiary's net assets at fair value (in
wons) 1,400,000 1,640,000 240,000

a
The fair value adjustment at acquisition date is determined as follows:
Acquisition-date fair value of XYZ's net assets 1,400,000
Acquisition-date carrying amount of XYZ's net assets (1,000,000)
Excess of fair value attributable to undervalued land (in wons) 400,000

Computation of goodwill
(wons)
Consideration transferred 1,500,000
Non-controlling interest in the acquiree [1.4M x 20%] 280,000
Previously held equity interest in the acquiree -
Total 1,780,000
Fair value of net identifiable assets acquired (see table 1) (1,400,000)
Goodwill – in wons 380,000
Multiply by: Closing rate P0.05
Goodwill – in pesos P19,000

10. ABC Co. owns 80% of the ordinary shares of a foreign subsidiary, XYZ, Inc., a company based
in Korea. XYZ, Inc.'s functional currency is won. The subsidiary was acquired at the start of the
reporting period for 1,500,000 wons, when the subsidiary's retained earnings were 800,000 wons.

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 Northern CPA Review Co. (NCPAR)
At the date of the acquisition the fair value of the net assets of the subsidiary were 1,400,000 wons.
This included a fair value adjustment in respect of land.

ABC Co. elected to measure non-controlling interest at the NCI’s proportionate share of the fair
value of the subsidiary‘s net assets. The group determined at year-end that goodwill is not impaired.
There were no changes in the share capital of the subsidiary during the year.

The relevant exchange rates are as follows:

Date Exchange rates
Jan. 1, 20x1………………………………….P0.03: KRW 1
Average for the year………………………....P0.04: KRW 1
Dec. 31, 20x1………………………………..P0.05: KRW 1

A summary of the individual financial statements of the entities at the end of reporting period are
shown below:

Statements of financial position

As at December 31, 20x1
ABC Co. XYZ, Inc.
ASSETS (pesos) (wons)
Investment in subsidiary 45,000
Other assets 2,000,000 1,300,000
TOTAL ASSETS 2,045,000 1,300,000

LIABILITIES AND EQUITY

Liabilities 400,000 60,000
Share capital 1,000,000 200,000
Retained earnings 645,000 1,040,000
Total equity 1,645,000 1,240,000
TOTAL LIABILITIES AND
EQUITY 2,045,000 1,300,000

Statements of profit or loss

For the year ended December 31, 20x1
ABC Co. XYZ, Inc.
(pesos) (wons)
Revenues 900,000 600,000
Expenses (540,000) (360,000)

Profit for the year 360,000 240,000

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 Northern CPA Review Co. (NCPAR)
Requirement: How much is the NCI in net assets as of December 31, 20x1 stated in Philippine pesos?
Answer: 16,400

Analysis of net assets

Acquisition
Consolidation Net
Table 1: XYZ, Inc.’s net assets date
date (wons) change
(wons)
Share capital 200,000 200,000
Retained earnings 800,000 1,040,000
Total at carrying amounts 1,000,000 1,240,000
FVA at acquisition date a 400,000 400,000
Subsequent
depreciation/amortization of FVA NIL -
Subsidiary's net assets at fair value (in
wons) 1,400,000 1,640,000 240,000

a
The fair value adjustment at acquisition date is determined as follows:
Acquisition-date fair value of XYZ's net assets 1,400,000
Acquisition-date carrying amount of XYZ's net assets (1,000,000)
Excess of fair value attributable to undervalued land (in wons) 400,000

NCI in net assets

Net assets of XYZ – fair value at Dec. 31, 20x1 (see Table
1) 1,640,000
Multiply by: NCI percentage 20%
Total 328,000
Add: Goodwill to NCI net of accumulated impairment
-
losses
NCI in net assets – Dec. 31, 20x1 (in wons) 328,000
Multiply by: Closing rate P0.05
NCI in net assets – Dec. 31, 20x1 (in pesos) 16,400

- END -

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