BUSINESS COMBINATION — MERGER/CONSOLIDATION & ACQUISITION

1. On January 2, 2014 P Corporation issues its own P 10 par common stock for all the outstanding
stock of S Corporation, and S is dissolved. In addition, P pays P 20,000 for registering and issuing
securities and P 30,000 for other costs of combination. The market price of P's stock on January 2,
2014 is P 30 per share. Relevant balance sheet information for P and S Corporation on January 1,
2014 just before the business combination, is as follows:

P Corp. S Corp. S Corp

Book values Book values Fair values
Cash P 120,000 P 10,000 P 10,000
Inventories 50,000 30,000 40,000
Other current assets 100,000 90,000 100,000
Land 80,000 20,000 100,000
Plant and equipment-net 650,000 200,000 300,000
P1,000,000 P 350, 000 P550,000
Liabilities P 200,000 P 50,000 P 50,000
Capital stock — P 10 par 500,000 100,000
Additional paid-in capital 200,000 50,000
Retained earnings 100,000 150,000
P 1, 000, 000 P 350,000

Part A: Assume that P issues 25,000 shares of its stock for all of S's outstanding shares.
1) Prepare journal entries to record the business combination of P and S.
2) Prepare a balance sheet for P Corporation immediately after the business combination.

Part B: Assume that P issues 15,000 shares of its stock for all of S's outstanding shares.
1) Prepare journal entries to record the business combination of P and S.
2) Prepare the balance sheet for P Corp. immediately after the business combination.

2. The P Company purchased the net assets of S Company which has the following balance sheet
on the purchase date:

S Company
Balance Sheet
December 31, 2014
Cash P100,000 Accounts payable P85,000
Accounts receivable 155,000 Bonds payable 200,000
Inventory 390,000 Capital stock, P 10 par 300,000
Building, net 750,000 APIC 480,000
Equipment, net 360,000 Retained earnings 735,000
Goodwill 45,000
Total P 1, 800,000 Total P 1,800,000

The following market values have been secured for the assets and liabilities of S Company:
Inventory P 425,000
Building 600,000
Equipment 300,000
Bonds payable 225,000

P Company incurred the following costs and expenses:

Direct acquisition costs
(legal fees for business combination and brokerage fees) 50,000
Indirect costs and general expenses 25,000

Required: On P's books record the purchase of the net assets of S Company in each of the
following cases:
a. Assume the purchase price: is P 1,550,000 aid) 7R)
b. Assume that P Company issued 10,000 of its own shares, P100 par value stock with
market value of P125.00. In addition to the costs and expenses incurred above, the
company incurred the following out-of-pocket costs for stock issuance and registration, P
25,000.

3. The following summarized balance sheets were prepared for the CRC and ACE Corporation on
December 31, 2014.

Assets CRC ACE

Current Assets P350,000 P185,000
Land 80,000 25,000
Buildings (net) 325,000 250,000
Goodwill 120,000 100,000
TOTAL P875, 000 P560,000

Liabilities & Equity

Accounts payable P 115,000 P 85,000
Bonds payable 170,000 150,000
Common stock, P 10 par 150,000 75,000
Paid-in Capital in excess of par 200,000 40,000
Retained earnings 240,000 210,000
TOTAL P 875,000 P 560,000
The appraised values of the ACE Corporation land and buildings are P50,000 and P350,000
respectively. CRC will issue 15,250 shares of its P10 par common stock'with a market value of
P20 each for the net assets of ACE Corporation. CRC will also dig CAP. pay P8,000 in cash for
direct acquisition costs.

Required:
1. Entries on the books of CRC Corporation
2. Balance sheet of CRC Corporation immediately after the combination

4. Barker Corporation has been looking to expand its operations and has decided to acquire the
assets of Verk Company and Kent Company and Vert Company and Kent Company will be
dissolved. Barker will issue 30,000 shares of its P10 par common stock to acquire the net assets of
Verk Company and will issue 10,000 shares to acquire the net assets of Kent Company. Verk and
Kent had the following balance sheets as of December 31, 2014:

Assets Verk Kent

Accounts receivable P200,000 P 80,000
Inventory 150,000 85,000
Property, plant and equipment:
Land 150,000 50,000
Building and equipment 500,000 300,000
Accumulated depreciation ( 150,000) (110,000)
Total assets P850,000 P 405,000

Liabilities and Equity

Current liabilities P160,000 P 55,000
Bonds payable 100,000 100,000
Stockholders' equity:
Common stock (P10 par) 300,000 100,000
Retained earnings 290,000 150,000
Total liabilities and equity P850,000 P405,000

The following fair values are agreed upon by the two firms:

Assets Verk Kent

Inventory P200,000 P100,000
Bonds payable 90,000 95,000
Land 300,000 80,000
Buildings and equipment 450,000 400,000
Barker's stock is currently trading at P40 per share. Barker will incur the following costs:

Verk Kent
Direct acquisition costs P 13,000 P 11,000
Indirect acquisition costs 7,000 6,000
Barker's stockholders' equity is as follows:
Common stock, P10 par P 1,200,000
Paid-in capital in excess of par 800,000
Retained earnings 750,000

Determine the following:

1) The cost of acquisition
2) The goodwill/gain arising from business combination
3) The increase in assets of Barker resulting from business combination
4) The total stockholders equity of Barker after business combination

5. On 1 July 2014 The Magna Company acquired 100% of The Natural Company for a
consideration transferred of PHP160 million. At the acquisition date the carrying amount of
Natural's net assets was PHP100 million. At the acquisition date a provisional fair value of PHP120
million was attributed to the net assets. An additional valuation received on 31 May 2015 increased
this provisional fair value to PHP135 million and on 30 July 2015 this fair value was finalised at
PHP140 million.

1) What amount should Magna present for goodwill in its statement of financial position
at 31 December 2015 according to IFRS3 Business combinations?
2) Journal entries to record the business combination and the necessary adjustments?

6. ABC acquires 100% of XYZ Co. December 31, 2014 when the fair values of assets and liabilities
of XYZ are P7M and P2M respectively. ABC issues 50,000 of its P100 par unissued shares with
fair values of P120 per share. In addition, the combining firms agreed on the following.
II. ABC will pay an additional P1M in cash if the combined income of ABC and
XYZ in 2015 exceeds P5M.
III. ABC guarantees the fair value of its shares by committing to pay the peso
decline in the value within one year.

1) The cost of business combination and goodwill on December 31, 2014?

2) What is the entry needed, if the net income of the combined companies for 2015 is
P7M and the fair value of the shares of ABC at the end of 2015 is P140 per share?
7. ABC acquires 100% of XYZ Co. December 31, 2014 when the fair values of assets and liabilities
of XYZ are P8.5M and P2M respectively. ABC issues 50,000 of its P100 par unissued shares with
fair values of P120 per share. In addition, the combining firms agreed on the following.

I. ABC will pay an additional P1M in cash if the combined income of ABC and XYZ in
2015 exceeds P5M.
II. ABC guarantees the fair value of its shares by committing to pay the peso decline in
the value within one year.

Information as at date of acquisition indicates that it is probable that combined income will be over
5 million and it can be measured reliably and as such the contingent consideration is valued at P
900,000 on acquisition date.

1) The cost of business combination and goodwill on December 31, 2014?

2) What is the entry needed, if the net income of the combined companies for 2015 is
P7M and the fair value of the shares of ABC at the end of 2015 is P 110 per share?

8. ABC acquired 750,000 of the 1 million equity shares of LMN at a price of PHPS each at the
time when the total fair value of LMN's assets less liabilities was PHP4 million. ABC estimated
that the price paid included a premium of PHP0.50 per share in order to gain control over LMN.
Determine the value of Non-Controlling Interest.

9. P Company acquired 80 percent of the outstanding common stock of S Company on January 2,

2014, by issuing 8,000 of its shares to the stockholders of S Company. In connection with this
combination, the following costs were incurred:

Finder's fee P 30,000

Accountant's fee for preacquisition audit 60,000
Legal fee for contract of business combination 80,000
Legal and accounting fees for SEC registration 100,000
Printing cost of stock certificates issued to S
Company shareholders 16,000

Trial balances of the companies on that date, together with ether pertinent information, are:

P Company S Company
Book Value Book value Fair value
Cash P 400,000 P 100,000 P100,000
 Accounts receivable 200,000 150,000 150,000
Inventory 150,000 90,000 100,000
Land 50,000 110,000 135,000
Equipment (net of accumulated
depreciation) 300,000 220,000 200,000
Patents 242,000
Long-term investments 100,000 125,000 130,000
Totals P1,442,000 P795,000

Accounts payable P 175,000 P 115,000 P115,000

Ordinary Shares - P Company (P50 par) 400,000
Ordinary Shares - S Company (P10 par) 100,000
Premium on Ordinary Shares - P Company 200,000
Retained earnings - P Company 667,000
Retained earnings - S Company 580,000
Totals P 1,442,000 P 795,000

The common stock of P Company trades regularly on a stock exchange, and the stock traded at
P100 per share at the time of the acquisition.

Required:

1. Assume that minority interest is measured as the percentage of the fair value of S
Company's identifiable net assets:
a. Prepare the entry on the hooks of P Company to record the business combination.
b. Prepare the consolidated balance sheet of P Company and its 80% subsidiary S
Company on acquisition date. (optional requirement: eliminating entries)
2. Assume that that minority interest is measured on a market based, assuming that S
Company's ordinary shares are selling at P85 per share.
a. Prepare the entry on the books of P Company to record the business combination.
b. Prepare the consolidated balance sheet of P Company and its 80% subsidiary S
Company on acquisition date. (Optional requirement: eliminating entries)

MULTIPLE CHOICE

1. Should the following costs be included in the consideration transferred in a business

combination, according to IFRS3 Business combinations?

(1) Costs of maintaining an acquisitions department.

(2) Fees paid to accountants to effect the combination.
 Cost (1) Cost (2)
a, No No
b. No Yes
c. Yes No
d. Yes Yes

2. Are the following statements about an acquisition true or false, according to IFRS3 Business
combinations?
(1) The acquirer should recognize the acquirer’s contingent liabilities if certain conditions
are met.
(2) The acquirer should recognize the acquirer’s contingent assets if certain conditions
are met.

Statement (1) Statement (2)

a. False False
b. False True
c. True False
d. True True

3. The excess of the consideration transferred plus the amount of any non-controlling interest in
the acquiree over the identifiable assets and liabilities recognized is
a) Goodwill c. Gain from acquisition
b) Minority interest d. cost of acquisition

4. In a business combination, an acquirer's interest in the fair value of the net assets acquired
exceeds the consideration transferred in the combination. Under IFRS3 Business combinations,
the acquirer should (select one answer)
a. recognize the excess immediately in profit or loss
b. recognize the excess immediately in other comprehensive income
c. reassess the recognition and measurement of the net assets acquired and the
consideration transferred, then recognize any excess immediately in profit or loss
d. reassess the recognition and measurement of the net assets acquired and the
consideration transferred, then recognize any excess immediately in other comprehensive
income.

5. A parent entity is acquiring a majority holding in an entity whose shares are dealt in on a
recognized market. Under IFRS3 Business combinations, which TWO of the following
measurement bases may be used in measuring the non-controlling interest at the acquisition date?
a. The nominal value of the shares in the acquiree not acquired
b. The fair value of the shares in the acquiree not acquired
 c. The non-controlling interest in the acquiree's assets and liabilities at book value
d. The non-controlling interest in the acquiree's assets and liabilities at fair value

6. On 1 October 2014 BDO Company acquired 100% of PO Company when the fair value of PCI's
net assets was P116 million and their carrying amount was P120 million. The consideration
transferred comprised P200 million in cash transferred at the acquisition date, plus another P60
million in cash to be transferred 11 months after the acquisition date if a specified profit target was
met by PCI. At the acquisition date there was only a low probability of the profit target being met,
so the fair value of the additional consideration liability was P10 million. In the event, the profit
target was met and the P60 million cash was transferred. What amount should Tingling present for
goodwill in its statement of consolidated financial position at 31 December 2015, according to
IFRS3 Business combinations?
a. P94 million b. P 80 million c. P 84 million d. P144 million

7. 100% of the equity share capital of Richway Company was acquired by Sunlife Company on
30 June 2014. Sunlife issued 500,000 new P1 ordinary shares which had a fair value of P8 each at
the acquisition date. In addition the acquisition resulted in Sunlife incurring fees payable to
external advisers of P200,000 and share issue costs of P180,000. In accordance with IFRS3
Business combinations, goodwill at the acquisition date is Measured by subtracting the identifiable
assets acquired and the liabilities assumed from
a. P4.00 million b. P 4.18 million c. P 4.20 million d. P 4.38 million

8. AIG Company acquired a 70% interest in EASTWEST Company for P1,960,000 when the fair
value of EASTWEST's identifiable assets and liabilities was P700,000 and elected to measure the
non-controlling interest at its share of the identifiable net assets. Annual impairment reviews of
goodwill have not resulted in any impairment losses being recognised. EASTWEST's current
statement of financial position shows share capital of P100,000, a revaluation reserve of P300,000
and retained earnings of P1,400,000.

Under IFRS3 Business combinations, what figure in respect of goodwill should now be carried in
AIG's consolidated statement of financial position?
a. P 1,470,000 b. P 160,000 c. P 1,260,000 d. P 700,000

9. Mango Inc. acquired on January 1, 2014 all the issued and outstanding common shares of Celine
Inc. for P310,000. and Celine Inc. is dissolved. On this day, assets and liabilities of Celine Inc
show:

Cash P 36,000
Merchandise Inventory 90,000
Plant and equipment 160,000
Goodwill 50,000
Liabilities ( 60,000)
Per appraisal, plant and equipment and merchandise inventory were valued at P190,000 and
P75,000, respectively. What is the amount of goodwill resulting from this transaction?
a. P125,000 b. P40,000 c. P75,000 d. P90,000

10. P Corporation used debentures with a par value of P610,000 to acquire 100 percent of the net
assets of S Company on January 1, 2014 and S Company is dissolved. On that date, the fair value
of the bonds issued by P Corp. was P564,000, and the following balance sheet data were reported
by S Co.:
Balance Sheet Item Historical cost Fair value
Cash and Receivables P 55,000 P 50,000
Inventory 105,000 200,000
Land 60,000 100,000
Plant and Equipment 400,000 300,000
Less: Accumulated Depreciation (150,000)
Goodwill 10,000
Total assets P 480,000

Accounts Payable P 50,000 P 50,000

Common Stock 100,000
Additional Paid-in Capital 60,000
Retained Earnings 270,000
Total Liabilities and Equities P48_0,000

P Corporation incurred an out of pocket expenses of P20,000. How much goodwill is to be

recognized on the books of P as a result of the business combination?
a. PO b. P10,000 c. P20,000 d. P30,000

ion.

11. Patrick Company acquired the assets (except for cash) and assumed the liabilities of Steve
Company on January 2, 2014 and Steve Company is dissolved. As compensation, Patrick
Company gave 24,000 shares of its common stock, 12,000 shares of its 8% preferred stock, and
cash of P240,000 to the stockholders of Steve Company. On the date of acquisition, Patrick
Company had the following characteristics:

Common , par value P5; fair value, P20 Preferred, par value P100; fair value, P 100 Immediately
prior to acquisition, Steve Company's balance sheet was as follows:

Cash P 132,000 Current liabilities P 228,000

Accounts receivable Bonds payable, 10% - 400,000
(net of P4,000 allowance) 170,000 Common stock, P5 par value 500,000
 Inventory - LIFO cost 200,000 Additional paid-in capital 380,000
Land 384, 000 Retained earnings 310,000
Buildings and equipt. (net) 1,032,000
P 1,918,000 P 1,918,000

An appraisal of Steve Company showed that the fair values of its assets and liabilities were equal
to their book values except for the following, which had fair values as indicated:
Accounts receivable P158,000 Land P540,000
Inventory 412,000 Bonds payable 448,000

How much must be the goodwill recognized as a result of this business combination?
a. P322,000 b. P454,000 c. P94,000 d. PO

12. The Grand Company will issue share at P10 par value common stock for all the net assets of
the Nuts Company. Grand's common has current market value of P40 per share. Nuts balance sheet
accounts are shown below:

Current assets P320,000

Property and equipment 880,000
Liabilities 400,000
Common stock, P4 par 80,000
Additional paid-in capital 320,000
Retained earnings 400,000

The fair value of current assets is P400,000 while that of property and equipment is P1,600,000.
All the liabilities are correctly stated. Grand issued sufficient shares so that the fair market value
of the stock equals the fair market value of Nuts net assets plus goodwill of P200,000. How much
must be the cost of investment if goodwill of P200,000 must be recognized?
a. 2,200,000 b. 1,800,000 c. 45,000 d. 55,000

Questions 13 and 14 are based on the following:

Giordano Company purchased the net assets of Hanes Company on January 1, 2014, and made the
following entry to record the purchase:

Current assets 100,000

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 of par 520,000

13. A contingent consideration agreement was made on Jan. 1, 2014, wherein an additional cash
payment would be made on Jan. 1, 2016, equal to twice the amount by which average annual
earnings of the Hanes Division exceed P25,000 per year, prior to January 1, 2016. Net income was
P50,000 in 2014 and P60,000 in 2015. How much goodwill will still be recorded on the books on
January 1, 2016?
a. P60,000 b. P120,000 c. P85,000 d. none

14. A contingent consideration agreement was made on January 1, 2014, wherein additional shares
would be issued on January 1, 2016, to compensate for any fall in the value of Giordano common
stock below P6 per share. The settlement would be to cure the deficiency by issuing added shares
based on their fair value on January 1, 2016. The market price of the shares on January 1, 2016,
was P4. How many shares will Giordano still issue on January 1, 2016?
a. 50,000 b. 100,000 c. 20,000 d. 51,667

Questions 15 through 18 are based on the following:

On January 1, 2014, Joshua Company acquired all the net assets of Froilan Company in exchange
for 9,000 newly issued common shares of Joshua with a par value of P100 and a market value of
P250. Immediately prior to the purchase combination, on January 1, 2014, the book values and
fair values of Froilan were presented in the following balance sheet:
Book value Fair value
Cash P 100,000 P 100,000
Inventory 300,000 300,000
Plant and equipment (net) 1,650,000 2,000 000
Total assets P2, 050, 000 P2 400 000.

Notes payable P 200,000 P 200,000

Common stock 1,000,000
Excess over par 250,000
Retained earnings 600,000
P2, 050, 000

As part of the combination plan, Joshua agreed to give additional consideration to Froilan if certain
future events or transactions occur.

15. Assume that Joshua agreed to issue 1,000 additional shares of common stock to the former
stockholders of Froilan if Joshua's total net income for the next two years exceeds a specified
amount. Assume the contingency is met and that the market price of Joshua's common shares at
the end of the contingency period is P300 per share. What entry is to be recorded by Joshua
Company to record the contingency met?
a. Goodwill 300,000 c. Goodwill 300,000
Capital stock 100,000 Cash 300,000
Additional paid-in capital 200,000
b. Additional paid-in capital 300,000 d. Additional paid-in capital 100,000
Cash 300,000 Capital stock 100,000

16. Assume that Joshua agreed to pay P250,000 cash to the former stockholders of Froilan if
Joshua's total net income for the next three years exceeds a specified amount. Assume the
contingency is met, what entry is to be recorded on the books of-Joshua Company?
a. Goodwill 250,000 c. Goodwill 250,000
Capital stock 100,000 Cash 250,000
Additional paid-in capital 270,000
b. Additional paid-in capital 250,000 d. P/L Summary 250,000
Cash 250,000 Capital stock 250,000

17. Assume that Joshua agreed to pay cash to the former stockholders of Froilan for any difference
between the P250 assigned the securities at the combination date and the market price of the
securities at the end of one year. The market price of Joshua's stock at the end of the contingency
period was P200, what entry is to be recorded on the books of Joshua Company?
a. Goodwill 450,000 c. Goodwill 450,000
Capital stock 80,000 Cash 450,000
Additional paid-in capital 270,000
b. Additional paid-in capital 450,000 d. Additional paid-in capital 50,000
Cash 450,000 Capital stock 1450,000

18. Assume that Joshua agreed to issue additional shares of common stock for any difference
between the P250 assigned the securities at the combination date and the market price of the
securities at the end of one year. The market price of Joshua's stock at the end of the contingency
period was P200, what entry is to be recorded on the books of Joshua Company?
a. Goodwill 450,000 c. Goodwill 450,000
Capital stock 180,000 Cash 450,000
Additional paid-in capital 270,000
b. Additional paid-in capital 450,000 d. Additional paid-in capital 225,000
Cash 450,000 Capital stock 225,000

CONSOLIDATED FINANCIAL STATEMENTS AT DATE OF ACQUISITION &

SUBSEQUENT THERETO

Questions 1 and 2 arc based on the following:

On January 1, 2014, R Corporation purchased 80 percent of S Corporation's P10 par common stock
for P975,000. On this date, the carrying amount of S's net assets was P1, 000, 000. The fair values
of S's identifiable assets and liabilities were the same as their carrying amounts except for plant
assets (net), which were P100,000 in excess of the carrying amount and with a remaining life of 5
years. For the year ended December 31, 2014, S had net income of P190,000 and paidcash
dividends totaling P125,000.

1. In the January 1, 2014, consolidated balance sheet, goodwill should be reported at:
a. P0 b. P75,000 c. P95,000 d. P175,000

2. In the December 31,2014, consolidated balance sheet, non-controlling interest should be

reported at
a. P200,000 b. P213,000 c. P229,000 d. P233,000

Questions 3 and 4 are based on the following:

Minor Corporation reports net assets of P300,000 at book value. These assets have an estimated
market value of P350,000. If Major Corporation buys 80 percent ownership of Minor for P275,000,
3. Goodwill will be reported in the consolidated balance sheet in the amount of:
a. PO b. P25,000 c. P35,000 d. P40,000

4. The non-controlling interest will be reported in the amount of:

a. P55,000 b. P60,000 c. P70,000 d. P71,250

5. C Corporation recently purchased 80 percent of the stock of T Decks, Inc., for P232,000. At the
date of purchase the consolidated balance sheet showed P40,000 of goodwill from the acquisition.
The book value of T Deck's net assets at the time of acquisition was:
a. P192,000 b. P232,000 c. P240,000 d. P290,000

Use the following information in answering questions 6 and 7:

Apex Company acquired 70% of the outstanding stock of Nadir Corporation on January 2, 2014.
The consolidated balance sheet prepared immediately after the business combination contained the
following:
Current assets P146,000 Current liabilities P 28,000
Fixed assets — net 370,000 Capital stock 350,000
Goodwill 8,100 Retained earnings 111,000
 Minority interest (MINA) 35,100
Total P524,100 Total P524,100
Of the excess payment for the investment in Nadir, P10,000 was ascribed to undervaluation 'of its
fixed assets; the balance of the excess payment was ascribed to goodwill.
6. How much is the cost of investment paid by Apex in acquiring the 70% interest in Nadir?
a. P117,000 b. P90,000 c. P100,000 d. P135,100

7. How much is the underlying equity of Apex in the net assets of Nadir corporation?
a. P71,900 b. P90,000 c. P63,800 d. P81,900

8. Wright Corp. has several subsidiaries that are included in its consolidated financial statements-
. In its December 31, 2014 trial balance. Wright had the following intercompany balances before
eliminations:

Debit Credit
Current receivable due from Main Co. P 32,000
Noncurrent receivable from Main 114,000
Cash advance tci- Corn Corp. 6,000
Cash advance from King Co. P 15,000
Intercompany payable to King 101,000

In its December 31, 2014 consolidated balance sheet, what amount should Wright report as
intercompany receivabie?
a. P152,000 b. P146,000 c. P36,000 d. PO
9. Primrose Corp. purchased a 70 percent interest in Starman Corp. on January 1, 2012 for
P15,000,000 when Starman's stockholders' equity consisted of P3,000,000 common stock,
P10,000,000 additional paid-in capital, and P2,000,000 retained earnings. Income and dividend
information for Starman for 2012, 2013, and 2014 is as follows: (Any excess is allocated to
depreciable assets and into be amortized over 20-years.)

2012 2013 2014

Net income (or loss) P1,000,000 P200,000 P(500,000)
Dividends 400,000 100,000

Primrose reported separate income of P12,000,000 for 2014. Consolidated net income to retained
earnings kir 2014 is:
a. P11,387,500 b. P11, 500, 000 c. P11,537,500 d. 11,425,000
10. On April 1, 2012, H, Inc., paid P1,700,000 for all the issued and outstanding common stock of
R Corp..on that date, the costs and fair values of R's recorded assets and liabilities were as follows:
Cost Fair values
Cash P 160,000 P 160,000
Inventory 480,000 460,000
Property, plant and equipment (net) 980,000 1,040,000
Liabilities ( 360,000) ( 360,000)
Net assets P1,260,000 P1,300,090

In H's March 31, 2015, consolidated balance sheet, what is the amount of goodwill that should be
reported as a result of this business combination?
a. P370,000 b. P400,000 c. P429,000 d. P340,000
Questions 11 through 13 are based on the following:

On January 2, 2014, P Company purchased 75% of K Company's outstanding common stock.

Selected balance sheet data at December 31, 2014, is as follows:

P Co. K Co.
Total assets P420,000 P180,000
Liabilities P120,000 P 60,000
Common stock 100,000 50,000
Retained earnings 200,000 70,000
P420,000 P180,000

During 2014, P and K paid cash dividends of P25,000 and P5,000, respectively, to their
shareholders. There were no other intercompany transactions. In its December 31, 2014,
consolidated financial statements of P Co. and Subsidiary:

11. What amount should P report as dividends paid?

a. P5,000 b. P25,000 c. P26,250 d. P30,000

12. What amount should be reported as minority interest in net assets?

a. PO b. P30,000 c. P45,000 d. P105,000

13. What amount should P report as common stock?

a. P50,000 b. P100,000 c. P137,500 d. P150,000

Questions 14 through 18 are based on the following:

P Corporation purchased 75 percent of the outstanding voting stock of S Corporation for
P2,500,000 on Jan. 1, 2010. S's stockholders' equity on this date consisted of the following:

Capital stock - P10 par P1,000,000

Additional paid-in capital 600,000
Retained earnings December 31, 2004 400,000
Total stockholders' equity P2,000.000

The excess of investment cost over book value of the net assets acquired was allocated 20 percent
to undervalued inventory (sold in 2010), 30 percent to plant assets with a remaining use life of
eight years, and 50 percent to unidentifiable intangible asset. Comparative trial balances of P Corp.
and S Corp. at Dec. 31, 2014 are as follows:

P Corp. S Corp.
Other assets - net P 3,850,000 P2,600,000
Investment in S - 75% 2,500,000
Expenses (including cost of sales) 3,150,000 600,000
Dividends 500,000 200,000
10,000,000 P3,400,000

Capital stock, P10 par P 3,000,000 P1,000,000

Additional paid-in capital 850,000 600,000
Retained earnings 2,000,000 800,000
Sales 4,000,000 1,000,000
Dividend income 150,000 -
P10,900,000 P3,400,000

14. The amount of goodwill in the consolidated balance sheet of as of Dec. 31, 2014 should be
a. P1,000,000 b. P500,000 c. P250,000 d. P200,000
15. The minority interest income in the consolidated income statement should be reported at
a. P100,000 b. P87,500 c. P32,083 d. P98,750
16. The retained earnings in the consolidated balance sheet of P and Subsidiary at December
31, 2014 should be reported at:
a. P2,000,000 b. P2,562,500 c. P2,450,000 d. P2,100,000

17. The net income in the consolidated income statement of P and Subsidiary for 2014 should
be
a. P1,095,000 b. P1,050,000 c. P1,150,000 d. P1,200,000
18. The minority interest in the consolidated balance sheet at December 31, 2014 should be:
a. P600,000 b. P650,000 c. P687,500 d. P700,000

Use the following information in answering questions 19 through 24:

The following balance sheets as of the current date are for Parent Co. and its subsidiary:

Parent Consolidated
Current assets P218,000 P363,000
Plant assets 93,000 152,250
investment in subsidiary 145,000
P456,000 P515,2512
Current liabilities P 83,000 P150,000
Minority interest 27,450
Capital stock 320,000 320,000
Retained earnings 53,000 17,800
P456,000 P517,000
Parent Company uses the cost method of accounting for its investment in 80 percent of the capital
stock of the subsidiary. A P7,000 excess of book value acquired over investment cost was allocated
to reduce an overvaluation of the subsidiary's land account and is included in the above plant assets
valuation.

19. The stockholders' equity of the subsidiary at the time Parent purchased its interest was:
a. P190,000 b. P172,500 c. P159,000 d. P152,000

20. The balance in the capital stock account of the subsidiary at the time Parent purchased its
interest was:
a. P150,000 b. P125,000 c. P100,000 d. Indeterminable

21. The current stockholders' equity of the subsidiary is:

a. P173,000 b. P154,750 c. P152,250 d. P146,000
22. The current balance in the retained earnings account of the subsidiary is:
a. P152,000 b. P150,000 c. P146,000 d. Indeterminable
23. The current working capital of the subsidiary is:
a. P145,000 b. P125,000 c. P78,000 d. P67,000

24. The total assets as reflected on the books of the subsidiary must be:
a. P199,000 b. P185,000 c. P213,000 d. P197,250
 CONSOLIDATED FINANCIAL STATEMENTS — INTERCOMPANY
TRANSACTIONS

1. Sony Company a wholly owned subsidiary of Philip Corporation. The following are
excerpts from the 2014 condensed income statements of the two companies:

Philip Corp. Sony Co.

Sales to Sony P 500,000
Sales to others 2,000,000 P1,500,000
Cost of goods sold from Philip 400,000
Cost of goods sold from others 1,750,000 950,000
Gross profit P 750,000 P 150,000

The sales of Philip to Sony are made on the same terms as those made to others.

Required: Prepare the consolidated income statement of Philip and Subsidiary for 2014.

2. Steeple Corp. is a 90% subsidiary of Peake Corp. acquired by Peake at book value on January
1, 2014. Separate income statements for Peake and Steeple for 2014 and 2015 are as follows:

Peake Steeple
2014 2015 2014 2015
Sales P1,000,000 P1,200,000 P500,000 P700,000
Cost of sales (600,000) (720,000) ( 250,000) (350,000)
Other expenses (200,000) (250,000) ( 100,000) (200,000)
Net income (own operations) P 200,000 P 230,000 P150,000 P150,000

Intercompany sales were P80,000 during 2014 and P120,000 during 2015. 20% of the 2014
intercompany sales were still unsold at the end of 2014 and 30% of the intercompany sales in 2015
were still unsold at the end of 2015.

Part A: Assume that all intercompany sales are from Steeple to Peake, determine:

1) Consolidated cost of sales for 2014.

a. P776,400 b. P960,000 c. P782,000 d. P778,000

2) Minority interest income for 2014.

a. P15,000 b P14,200 c. P13,800 d. P14,400

3) Consolidated net income for 2014 attributable to the owners of the parent.
a. P328,600 b. P356,000 C. P327,800 d. P324,200
Part B: Assume that all intercompany sales are from Peake to Steeple, determine

4) Consolidated, cost of sales for 2015

a. P776,400 b. P960,000 c. P958,000 d. P956,000

5) Minority interest income for 2015.

a. P15,000 b. P14,000 c. P14,400 d. P14,200

6) Consolidated net income for 2015 attributable to the owners of the parent.
a. P328,600 b. P357,000 c. P356,000 d. P359,000

3. NorthStar Company, a 75% owned subsidiary of Philtranco Company, sold merchandise during
2014 to its parent company for P 150,000. The merchandise cost NorthStar Company P 110,000,
25% of the transferred merchandise remained in Philtranco Company's ending inventory. For the
year 2014, NorthStar Company reported a net income of P 150,000 and Philtranco Company
reported net income (including dividend income of P 60,000) of P 275,000.

Required:
1. Calculate Philtranco Company's investment income from NorthStar
Company in 2014.
2. Elimination entries for 2014
3. Determine non-controlling interests in the net income of the subsidiary for
2014.
4. Show consolidated net income for 2014, and allocate to Controlling interests
and Non-controlling interests.

4. During 2014, Tas Trans Company sold land with a cost of P150,000 to its 80% owned
subsidiary, Jac Company, for P 200,000. The subsidiary sold the land in 2016 to an outsider for
P280:000. The subsidiary and the parent reported net income as follows:
Parent Subsidiary
2014 351,000 154,000
2015 335,000 149,000
2016 315,000 165,000
The reported income of the parent company includes P 51,000 of dividend income each year.
Required:
1. Calculate Tas Trans Company's investment income from Jac Company in 2014,
2015, and 2015.
2. Elimination entries for 2014, 2015, and 2016
3. Determine non-controlling interest in the net income of the subsidiary in 2014, 2015
and 2016
 4. Show the consolidated net income for 2014, 2015 & 2016. Allocate each to Controlling
and non-controlling interests.

5. On January 1, 2014, CRC Company a 90% owned subsidiary of ACE Company transferred
equipment to its parent in exchange for P75,000 cash. At the date of transfer, the subsidiary's record
carried the equipment at a cost of P106,000 less accumulated depreciation of P45,000. The
equipment has an estimated remaining life of 7 years. The subsidiary reported net income for 2014
and 2015 of P 132,000 and P197,000, respectively. The parent company reported income of P
220,000 (including dividend income of P 45,0001 and P295,000 (including dividend income of
P45,000) f' r 2014 and 2015, respectively.

Required:
1. Calculate ACE Company's investment income from CRC Company in 2014
and in 2015.
2. Elimination entries for 2014 and for 2015.
3. Determine non-controlling interest in the net income of the subsidiary for
2014 and for 2015.
4. Show the consolidated net income for 2014 and 2015. Allocate each to
Controlling and Non-controlling interests.
6. On January 1, 2014, P Company acquired 75% of the outstanding shares of S Company at book
value. During 2015, P Company purchased merchandise from S Company in the amount of P
400,000 at billed prices. S Company shipped the merchandise at 40% above its cost, and this
pricing policy was also used for shipments made in 2014 to P Company. The inventories of P
Company included merchandise at billed prices from S Company as follows:

January 1, 2015 112,000

December 31, 2015 84,000

Also, in 2014 P Co sold land to S Co for P200, 000. The cost of the land to P Co was P150, 000.
S Co sold the land to an outsider for P230, 000 in 2015.

Furthermore, on January 1, 2015 S Co sold equipment to P Co for P75, 000 cash at the date of the
transfer, the equipment is carried at a cost of P106, 000 less accumulated depreciation of P45, 000.
The equipment has an estimated remaining life of 7 years.

Income statements for the two companies for the year 2015 are as follows:

P Company S Company
Sales P2,000,000 P1,000,000
Cost of sales 800,000 500,000
Gross profit 1,200,000 500,000
Operating expenses 720,000 320, 000
Operating income 480,000 180,000
Gain on sale of land 30,000
Gain on sale of equipment 14,000
Net income P 480,000 P 224,000

Required:
1. Calculate the non-controlling interests in the consolidated net income in 2015.
2. Calculate the controlling interest in the consolidated net income in 2015.
3. Prepare working paper elimination entries for the above information at December
31, 2015.
4. Prepare a consolidated income statement for the year ended December 31, 2015.

7. C Corporation acquired 90% of the outstanding P10 par value voting common stock of F, Inc.,
on January 1, 2014 in exchange for 25,000 shares of its P10 par value voting common stock. On
December 31, 2013, .C's common stock had a closing market price of P30 per share on the national
stock exchange. On December 31, 2014, the companies had condensed financial statements as
follows:

Income and Retained Earnings Statement:

 C Corp. F Inc.
Net sales P3,800,000 P1,500,000
Dividends from F 36,000
Gain on sale of warehouse 30,000
Cost of goods sold ( 2,360,000) ( 870,000)
Operating expenses (including depreciation) ( 1,100,000) (440,000)
Net income 406,000 190,000
Retained earnings, January 1, 2014 440,000 156,000
Dividends paid (40,000)
Retained earnings, December 31, 2014 P 846,000 306,000

Balance Sheet:
Cash P 566,000 P 150,000
Accounts receivable (net) 860,000 350,000
Inventories 1,060,000 410,000
Land, plant and equipment 1,320,000 680,000
Accumulated depreciation (370, 000) ( 210,000)
Investment in F (at cost) 750,000

Total assets P4,186,000 1, 380, 000

Accounts payable & accrued expenses P1,340,000 P 594,000
Common stock (P10 par) 1,700,000 400,000
Additional paid-in capital 300,000 80,000
Retained earnings 846,000 306,000
Total liabilities and stockholders' equity P4,186,000 1, 380, 000

Additional information:

* There were no changes in the common stock and additional paid-in capital accounts
during 2014 except the one necessitated by C's acquisition of F.
*At the acquisition date, the fair value of F's machinery exceeded its book value by
P54,000. The excess cost will be amortized over the estimated average remaining life of six years.
The fair values of all of F's other assets and liabilities were equal to their book values. Any
goodwill resulting from the acquisition will not be amortized.
*On July 1, 2014, C sold a warehouse facility to F for P129,000 cash. At the date of sale,
C's book values were P33,000 for the land and P66,000 for the undepreciated cost of the building.
Based on a real estate appraisal, F allocated P43,000 of the purchase price to land and P86,000 to
building. F is depreciating the building over its estimated five-year remaining useful life by the
straight-line method with no salvage value.
*During 2014, C purchased merchandise from F at an aggregate invoice price of P180,000,
which included a 100% markup on F's cost. At December 31, 2014, C owed F P86,000 on these
purchases, and P36,000 of this merchandise remained in C's inventory.
Required: Prepare the consolidated financial statement of C Corporation and Subsidiary F Inc. at
and for the year ended December 31, 2014 and the working paper entries
MULTIPLE CHOICE

1. Carlos Bakery owns 60 percent of the stock of Zeus Products acquired several years ago at book
value. On January 1, 2014, inventory reported by Carlos Bakery included 20,000 bags of flour
purchased from Zeus Products at P90 per bag. By December 31, 2014, all these beginning
inventory purchased from Zeus Products had been baked into products and sold to customers by
Carlos Bakery. There were no transactions between Carlos Bakery and Zeus Products during 2014.

Both Carlos Bakery and Zeus Products price their sales at cost plus 50% mark-up for profit. Carlos
Bakery reported income from its baking operations of P3,000,000 and Zeus Products reported net
income of P2,500,000 for 2014. Compute the consolidated net income for 2014.
a. P3,420,000 b. P4,860,000 c. P4,500,000 d. P5,580,000

2. Arvin Manufacturing purchased 80 percent of the stock of Ronnie Mines, Inc., in 2012. In
preparing the consolidated financial statements at the end of 2014, the controller of Arvin
discovered that Arvin Manufacturing had purchased P750,000 of raw materials from Ronnie Mines
during the year and that the parent company had not paid for the last purchase of P120,000. Alf
the inventory purchased was still on hand at year-end. Ronnie Mines had spent P500,000 in
producing the items sold to Arvin Manufacturing. What effect, if any, wil! failure to eliminate or
adjust for these items have on total current assets reported in the consolidated balance sheet on
December 31, 2014?
a. overstated by P250,000 c. overstated by P370,000
b. overstated by P870,000 d. overstated by P750,000

3. Nicolo Manufacturing produced 10,000 kitchen clocks in 2014 for P50 each and sold them
to Miguel Corp. at P150 each. Miguel resold 8,000 units at P220 each in 2014 and held the
remaining units in inventory on December 31, 2014. Miguel owns 70 percent of the stock of Nicolo
Manufacturing. How much gross profit must be included in the consolidated income statement for
2014?
a. P1,360,000 b. P952,000 c. P560,000 d. P1,000,000

4. Boboy, Inc. acquired a 60 percent interest in Homer Co. several years ago. During 2013,
Homer sold inventory costing P75,000 to Boboy for P100,000. A total of 16 percent of this
inventory was not sold to outsider until 2014. During 2014, Homer sold inventory costing P96,000
to Boboy for P120,000. A total of 35 percent of this inventory was not sold to outsiders until 2015.
In 2014, Boboy reported cost of sales of P380,000 while Homer reported P210,000. What is
consolidated cost of sales?
a. P594,400 b. P473,440 c. P474,400 d. PS22,400
5. Tomas Company holds 90 percent of the common stock of Badong Company. In 2014, Tomas
reports sales of P800,000 and cost sales of P600,000. For this same period, Badong has sales of
P300,000 and cost of sales of P180,000. During 2014, Tomas sold merchandise to Badong for
P100,000. The subsidiary still possesses 40 percent of this inventory at the end of 2011. Tomas
had established the transfer price based on its normal markup. What are consolidated sales and
cost of sales?
a. P1,000,000 and P690,000 c. P1,000,000 and P740,000
b. P1,000,000 and P705,000 d. P970,000 and P696,000

6. Use the same information as in problem No. 5 except assume that the transfer were from
Badong Company to Tomas Company. What are the consolidated sales and cost of goods sold for
2014?
a. P1,000,000 and P720,000 c. P1,000,000 and P696,000
b. P1,000,000 and P755,000 d. P970,000 and P712,000

7. Hector, Inc., holds a 90 percent interest in Pablo Co. During 2008, Pablo sold inventory
costing P77,000 to Hector for P110,000. A total of P40,000 of this inventory was not sold to
outsiders until 2014. During 2014, Pablo sold inventory costing P72,000 to Hector for P120,000.
A total of P50,000 of this inventory was not sold to outsiders until 2016. In 2014, Hector reported
net income of P150,000 while Pablo reported P90,000. Determine the minority interest income
(MINI) for 2014?
a. P8,000 b. P8,200 c. P9,000 d. P9,800

8. Hecht's, a 90% owner of Robious, sold merchandise at a sales price of P60,000 to Robious
during the 2014 fiscal year. This represented a markup of 10% on the selling price. Robious' ending
inventory contained 30% of the merchandise purchased during the year from Hecht's. When
preparing the 2014 consolidated statements the accountant failed to adjust for the intercompany
profit in ending inventory. The impact of this omission on consolidated statement was to
a. Overstate net income, P1,800, and understate ending inventory, P1,800.
b. Understate net income, P6,000, and overstate retained earnings, P6,000,
c. Overstate net income, P1,800, and overstate ending inventory, P1,800.
d. Understate net income, P1,800, and overstate ending inventory, P1,800.

Questions 9 and 10 are based on the following:

P Corporation recorded P65,000 investment income from S Corporation, its 80% owned
subsidiary, for the year 2014, and P70,000 for the year 2015. This inventory income represented
80% of S's reported income of P81,250 and P87,500 in 2014 and 2015, respectively. P's net income
(including investment income) for 2014 was P240,000 and for 2015 it was P160,000. During 2014
S sold merchandise to P for P180,000. This merchandise cost S P130,000, and 40% of it was
inventoried by P at December 31, 2014. S sold merchandise that cost P150,000 to P for P210,000
during 2015. The December 31, 2015 inventory of P included P63,000 of this merchandise.

9. The consolidated net income for 2014 must be:

a. P240,000 b. P220,000 c. P289,000 d. 224, 000

10. The consolidated net income for 2015 must be:

a. P161,600 b. P231,600 c. P162,000 d. 160,000