Practical

Accounti
P2 – 06
ng 2
JONATHAN M.
TIPAY, CPA

Business Combinations

Phase 1 (Date of Acquisition) – Acquisition of Stocks and Acquisition of Net Assets

Problem 1: Use the information below for items 1 and 2

The condensed Statement of Financial Position for Johnny and Depp Corporations at December 31, 2014 are
as follows:
Johnny Corp. Depp Corp.
Current Assets P130,000 P 60,000
Non-Current Assets 570,000 440,000
Total Assets P700,000 P500,000

Current Liabilities P 50,000 P 60,000

Capital Stock, P10 par 500,000 200,000
Additional Paid-In Capital 50,000 140,000
Retained Earnings 100,000 100,000
Total Liabilities & Equities P 700,000 P 500,000

On January 2, 2015, Johnny issued 30,000 shares of its stock with a market value of P20 per share for the
assets and liabilities of Depp Corporation, which subsequently is dissolved. The book values reflect their fair
values except for the non-current assets of Johnny , which have a market value of P400,000 and the current
assets of Depp which have a net realizable value of P100,000.

Johnny paid the following expenses in connection with the business combination:
Costs of registering and issuing securities issued P15,000
Direct acquisition costs 25,000

The agreement states that a contingent payment of P150,000 cash will be paid on January 2, 2018, if the
average earnings of Johnny during the next two years will exceed P1,500,000 per year. Johnny estimates that
there is a 50% chance that the P150,000 payment will be required.

1. What is the total assets of Johnny Corporation after the combination?

1. P1,435,000 2. P1,395,000 3. P 1,265,000 4. P1,410,000

2. What is the total stockholders’ Equity of Johnny Corporation after the acquisition?
1. P1,210,000 2 P1,080,000 3. P1,225,000 4. P1,250,000

Problem 2: Use the information below for items 3 and 4

The PDAF Company will issue shares of P10 par value common stock for all the assets and liabilities of the
DAF Company. PDAF Company’s common stock has a current market value of P40 per share. The DAF
Company’s Statement of Financial Position prior to the acquisition is shown below:

DAF Company
Statement of Financial Position
January 1, 2015

Assets: Liabilities & Equity

Current Assets P 320,000 Liabilities P 400,000
Plant & Equipment 880,000 Common Stock 80,000
Add’l Paid-in Capital 320,000
Retained Earnings 400,000
1 of 9 Pampanga CPA Review - October 2016 CPA Exam

“Producing World Class CPAs”

 Practical
Accounti
P2 – 06
ng 2
JONATHAN M.
TIPAY, CPA

Total Assets P1,200,000 Total Liabilities & Equity P1,200,000

The fair value of the current assets is P400,000 while that of the plant and equipment is P1,600,000. All the
liabilities are correctly stated. PDAF Company issued sufficient shares of stock so that the fair value of the
stock issued equal the fair value of PAF Company’s net assets.

3. To have an income from acquisition of P100,000, the number of shares to be issued by PDAF
Company should be:
1. 37,500 2. 37,000 3. 42,500 4. 42,000

4. To have a goodwill of P200,000, the number of shares to be issued by PDAF Company should be:
1. 40,000 2. 44,500 3. 36,000 4. 45,000

Probem 3: Use the following information for items 5 to 8

Pinoy Corporation acquired the majority of the stock of Gloria Company on January 2, 2015, and a
consolidated statement of financial position was prepared. Partial statements of financial position for Pinoy,
Gloria and the consolidated entity follow:

Pinoy Corporation and Gloria Company

Partial Statements of Financial Position
January 2, 2015

Accounts PINOY Corp. Gloria Co. Consolidated

Cash and cash equivalents P 100,000 P 40,000 P 140,000
Accounts Receivable 80,000 20,000 100,000
Inventory 200,000 100,000 340,000
Equipment 500,000 200,000 800,000
Investment in Gloria Company ?
Goodwill 10,000
Total P ? P360,000 P1,390,000

Accounts Payable P 70,000 P 40,000 P 110,000

Bonds payable 300,000 300,000
Common Stock ? 150,000 250,000
Retained Earnings 567,000 170,000 ?
Non-controlling Interest 0 0 163,000
Total P ? P360,000 P1,390,000

5. What percentage of ownership of Gloria does Pinoy hold?

1. 70% 2. 75% 3. 60% 4. 65%

6. What is the fair value of Gloria’s net assets at January 2, 2015?

1. P420,000 2. P460,000 3. P329,000 4. P430,000

7. What amount did Pinoy pay to acquire the stock of Gloria?

1. P332,000 2. P322,000 3. P307,000 4. P300,000

8. What is the allocation of Goodwill?

2 of 9 Pampanga CPA Review - October 2016 CPA Exam

“Producing World Class CPAs”

 Practical
Accounti
P2 – 06
ng 2
JONATHAN M.
TIPAY, CPA

Controlling Interest NCI

1. P6,500 P3,500
2. P8,000 P2,000
3. P6,000 P4,000
4. P7,000 P3,000

Phase 2 (Subsequent to Date of Acquistion)

Problem 4: Use the following information for items 9 to 12

Mateo Doh Corporation purchased 70% of Stephie Choi Company’s ownership on January 1, 2013 and paid
P231,000. At that time, Stephie Choi reported the book value of its net assets as P280,000. The purchase
difference is allocated to a depreciable asset with remaining useful life of 10 years. The companies reported
the following data for 2014:
Retained Earnings 2014 2014
January 01, 2014 Net Income Dividends
Mateo Doh Corp. P520,000 P120,000 P50,000
Stephie Choi Co. 230,000 25,000 10,000

Mateo Doh uses the cost method in accounting for its investment in Stephie Choi. The following entry was
included in the eliminating entries used to prepare the consolidated financial statement at December 31, 2014:

E(3) Retained Earnings, 1/1 – Stephie Choi 21,000

Non-controlling Interest 21,000

9. What amount of retained earnings did Stephie report on January 1, 2013?

1. P155,000 2. P160,000 3. P165,000 4. P170,000

10. What amount should be reported as consolidated retained earnings at January 1, 2014?
1. P569,000 2. P574,000 3. P590,000 4. P750,000

11. What amount should be reported as consolidated net income for 2014?
1. P133,000 2. P138,000 3. P145,000 4. P140,000

12. What amount should be reported as consolidated retained earnings at December 31, 2014?
1. P646,000 2. P652,000 3. P696,000 4. P690,000

Problem 5: Use the following information for items 13 to 15

On January 2, 2011, Polo Corporation purchased 80 percent of Seed Company’s common stock for P216,000.
P10,000 of the excess is attributed to Goodwill and the balance to a depreciable asset with an economic life of
ten years. On the date of acquisition, Seed reported common stock outstanding of P80,000 and retained
earnings of P140,000, and Polo reported common stock outstanding of P350,000 and retained earnings of
P520,000.

On December 31, 2011, Seed reported net income of P35,000 and paid dividends of P15,000, Polo reported
earnings from its separate operations of P95,000, and paid dividends of P46,000. Goodwill had been impaired
and should be reported at P2,000 on December 31, 2011.

3 of 9 Pampanga CPA Review - October 2016 CPA Exam

“Producing World Class CPAs”

 Practical
Accounti
P2 – 06
ng 2
JONATHAN M.
TIPAY, CPA

13. What is the consolidated net income for 2011?

1. P118,250 2. P118,000 3. P126,000 4. P124,000

14. What is the consolidated Retained Earnings on December 31, 2011?

1. P586,000 2. P585,800 3. P587,400 4. P591,800

15. What is the balance of the NCI on December 31, 2011?

1. P54,750 2. P57,200 3. P55,600 4. P48,500

Problem 6: Use the following information for items 16 to 28

On January 1, Parent Company acquired 90% of Subsidiary Company in exchange for 5,400 shares of P10
par common stock having a market value of P120,600. Parent and Subsidiary condensed balance sheets on
January 1, were as follows:

Assets Parent Company Subsidiary Company

Cash 30,900 37,400
Accounts Receivable, net 34,200 9,100
Inventories 22,900 16,100
Equipment, net 179,000 40,000
Patents - 10,000
Total Assets 267,000 112,600

Liabilities
Accounts Payable 4,000 6,600
Bonds Payable 100,000
Common Stock, P10 par 100,000 50,000
Additional paid-in capital 15,000 15,000
Retained Earnings 48,000 41,000
Total Liabilities and Equities 267,000 112,600

At the date of acquisition (using partial goodwill approach), all assets and liabilities of Subsidiary Company
have book value approximately equal to their respective market values except the following as determined by
appraisal as follows:

Inventories (FIFO method) 17,100

Equipment (net, remaining life 4 years) 48,000
Patents (remaining life 10 years) 13,000

16. The amount of goodwill on January 1:

1. 2,600
2. 3,800
3. 14,400
4. 25,200

17. The non-controlling interest on January 1:

1. 10,600
2. 11,200
3. 11,800
4. 13,090
4 of 9 Pampanga CPA Review - October 2016 CPA Exam

“Producing World Class CPAs”

 Practical
Accounti
P2 – 06
ng 2
JONATHAN M.
TIPAY, CPA

18. The equity holder of parent – retained earnings on January 1

1. 48,000
2. 52,100
3. 84,900
4. 89,000

19. The consolidated retained earnings on January 1

1. 48,000
2. 52,100
3. 84,900
4. 89,000

For the year ended December 31, the following results were given:

Dividends Paid Net Income

Parent Company 15,000 30,200
Subsidiary Company 4,000 9,400

20. The investment balance on December 31

1. 0
2. 120,600
3. 122,160
4. 125,460

21. Using the same information in number 20, compute for the Dividend Income for the year
1. 0
2. 3,600
3. 4,000
4. 8,400

22. Using the same information in number 20, the non-controlling interest in net income on December
31
1. 0
2. 540
3. 610
4. 940

23. Using the same information in number 20, the non-controlling interest on December 31
1. 10,600
2. 11,140
3. 12,010
4. 12,300

24. Using the same information in number 20, the profit attributable to equity holders of parents in
consolidated net income on December 31
1. 26,600
2. 32,090
3. 36,000

5 of 9 Pampanga CPA Review - October 2016 CPA Exam

“Producing World Class CPAs”

 Practical
Accounti
P2 – 06
ng 2
JONATHAN M.
TIPAY, CPA

4. 44,100

25. Using the same information in number 20, the Consolidated/Group Net Income on December 31
1. 26,600
2. 32,090
3. 32,700
4. 44,100

26. Using the same information in number 20, the equity holder of parent - retained earnings on
December 31
1. 64,760
2. 65,090
3. 69,400
4. 69,800

27. Using the same information in number 20, the consolidated retained earnings on December 31
1. 64,760
2. 65,090
3. 69,400
4. 69,800

28. Using the same information in number 20, the consolidated total equity on December 31
1. 108,090
2. 300,690
3. 312,700
4. 317,410

Problem 7: Use the following information for items 29 and 30

On January 1, 2014, RR Corporation acquired 80 percent of SS Corporation’s P10 par common stock for
P956,000. On this date, the fair value of the non-controlling interest was P239,000, and the carrying amount of
SS’s net assets was P1,000,000. The fair value of SS’s identifiable assets and liabilities were the same as their
carrying values except for plant assets (net) with a remaining life of 20 years, which were P100,000 in excess
of their carrying amount. For the year ended December 31, 2014, SS had net income of P190,000 and paid
cash dividends totalling P125,000.

29. In the January 1, 2014, consolidated balance sheet, the amount of goodwill reported should be
1. 0
2. 76,000
3. 95,000
4. 156,000

30. In the December 31, 2014, consolidated balance sheet, the amount of non controlling interest
reported should be
1. 200,000
2. 239,000
3. 251,000
4. 252,000

6 of 9 Pampanga CPA Review - October 2016 CPA Exam

“Producing World Class CPAs”

 Practical
Accounti
P2 – 06
ng 2
JONATHAN M.
TIPAY, CPA

Inter-company Transactions

Problem 8: Use the following information for items 31 to 33

Polo Company purchased 60 percent of Star Company’s voting stocks for P252,000 on January 1,
2008. Star reported total stockholders’ equity of P400,000 at the time of acquisition. The excess is
allocated to equipment with an expected life of 10 years from the date of acquisition.

During 2011, Polo purchased inventory for P20,000 and sold the full amount to Star Company for
P30,000. On December 31, 2011, Star’s ending inventory included P6,000 of items purchased from
Polo. Also in 2011, Star purchased inventory for P50,000 and sold the units to Polo for P80,000. Polo
included P20,000 of its purchase from Star in ending inventory on December 31, 2011.

Summary income statement data for the two companies revealed the following:

Polo Corporation Star Corporation

Sales 400,000 200,000
Dividend Income 25,000
425,000 200,000
Cost of goods sold 250,000 120,000
Other Expenses 70,000 35,000
Total (320,000) (155,000)
Net Income 105,000 45,000

31. What is the amount to be reported as sales in the 2011 consolidated income statement?
1. 490,000
2. 450,000
3. 600,000
4. 550,000

32. What is the amount to be reported as cost of goods sold in the 2011 consolidated income
statement?
1. 100,500
2. 105,000
3. 269,500
4. 159,000

33. What amount of consolidated net income will be assigned to parent company in the 2011
consolidated income statement?
1. 98,500
2. 113,500
3. 99,300

7 of 9 Pampanga CPA Review - October 2016 CPA Exam

“Producing World Class CPAs”

 Practical
Accounti
P2 – 06
ng 2
JONATHAN M.
TIPAY, CPA

4. 95,800

Problem 9: Use the following information for items 34 to 36

Pepsi Corporation purchased 70 percent of Sarsi Company’s voting stock on May 18, 2007, at
underlying book value. The companies reported the following data with respect to intercompany sales
in 2010 and 2011:

Year Purchased Purchase Sold to Sales Price Unsold at Year sold to

by Price End of Year outsiders
2010 Sarsi 120,000 Pepsi 180,000 45,000 2010
2011 Sarsi 90,000 Pepsi 135,000 30,000 2011
2011 Pepsi 140,000 Sarsi 180,000 110,000 2011

Pepsi reported operating income (excluding dividend income) of P160,000 and P220,000 in 2010 and
2011, respectively. Sarsi reported net income of P90,000 and P85,000 in 2010 and 2011, respectively.

34. What is the amount of consolidated net income attributable to parent for 2010?
1. 212,500
2. 235,000
3. 190,000
4. 210,500

35. What is the amount of inventory balance to be reported in the consolidated statement of
financial position at December 31, 2011 pertaining to inter-company transactions?
1. 75,000
2. 70,000
3. 95,000
4. 75,000

36. What amount of inter-company transaction will be included in the consolidated cost of
goods sold for 2011?
1. 185,000
2. 180,000
3. 181,000
4. 180,500

37. What is the amount of consolidated net income for 2011?

1. 228,000
2. 255,000
3. 212,000
4. 232,000

8 of 9 Pampanga CPA Review - October 2016 CPA Exam

“Producing World Class CPAs”

 Practical
Accounti
P2 – 06
ng 2
JONATHAN M.
TIPAY, CPA

Problem 10: Several years ago, Parent Corporation acquired 80% of Sub Co. Analysis of data
relative to this purchase indicates that goodwill of P60,000 was acquired in this purchase.

On October 1, 2010, Sub sold to Parent a used car for P32,000 in cash. Sub had originally paid
P55,000 for the car; on the day of the sale, the car had a book value of P23,000. Parent estimated
the remaining life of the car at 3 years.

Parent’s net income from its own operations was P100,000 in 2010 and P120,000 in 2011. Sub’s net
income was P60,000 in 2010 and P75,000 in 2011.

38. The consolidated net income attributable to parent for 2010 and 2011 are:
1. 138,000 and 179,400, respectively
2. 138,400 and 195,000, respectively
3. 138,000 and 179,000, respectively
4. 141,400 and 182,400, respectively

9 of 9 Pampanga CPA Review - October 2016 CPA Exam

“Producing World Class CPAs”