ACCOUNTING FOR BUSINESS COMBINATION

PRE 7-ACCOUNTING FOR BUSINESS COMBINATION

I THEORY-MULTIPLE CHOICE:
1) In a stock acquisition resulting in a parent company-subsidiary relationship, differences between current
fair values and book values of the subsidiary's identifiable net assets on the date of combination are:
a) disregarded c) accounted for in appropriately entitled ledger
b) entered in the accounting records of the subsidiary accounts in the parent's accounting records
d) provided in a working paper elimination

2) Working paper eliminations are entered in:

a) both the parent company's and subsidiary's accounting records
b) neither the parent company's nor the subsidiary's accounting records
c) the parent company's accounting records only
d) the subsidiary's accounting records only

3) How is the non controlling interest displayed in a consolidated statement of financial position?
a) as a separate item between the liabilities and stockholders' equity
b) as a deduction from goodwill, if any
c) by means of a note to consolidated financial statements
d) as a separate item in the stockholders' equity section

4) Sulu Company, a subsidiary, was acquired for cash when the fair value of its net assets was lower than the
book value at the time of acquisition. A consolidated SFP prepared immediately after the acquisition would
include this difference in:
a) goodwill b) retained earnings c) income statement d) equipment

5) The retained earnings that appears on the consolidated SFP of a parent company and its 60% owned
subsidiary is:
a) the parent company's retained earnings plus 100% of the subsidiary's retained earnings
b) the parent company's retained earnings plus 60% of the subsidiary's retained earnings
c) the parent company's retained earnings
b) pooled retained earnings

6) A parent company that uses the equity method of accounting for 90% owned subsidiary prepared the
following journal entry it its books:
Investment in Subsidiary Stock xx
Income from subsidiary xx

A possible explanation for the above journal entry is:

a) to record 90% of the subsidiary's CI for the year c) to amortize allocated difference
b) to record 90% of the subsidiary's net loss for the year d) to record dividends from subsidiary

7) Under the cost method of accounting for investment, depreciation and amortization of the allocated
excess between the fair values and book values of a purchased subsidiary's identifiable net assets is debited
to the: a) subsidiay's expense accounts c) subsidiary's retained earnings account
b) parent company's expense accounts d) parent company's investment account

8) In the consolidated statement of CI, the NCI's CI should be:

a) subtracted to arrive at the consolidated CI if the subsidiary had net income
b) added to arrive at consolidated net income if the subsidiaty had CI
c) subtracted to arrive at consolidated CI if the subsidiary had a net loss
d) subtracted to arrive at consolidated net loss if both the parent and the subsidiary had a net loss

9) Elimination entries for intercompany profit in the consolidated working paper are prepared in order to:
a) defer intercompany profit until realized
b) allocate unrealized profits between controlling and non controlling interests
c) reduce consolidated net income
d) nullify the effect of intercompany transactions on consolidated net income

10) In the preparation of the consolidated statement of comprehensive income, which of the following items
would not be affected by the direction (upstream or downstream) of the intercompany sales and purchases
of inventory items? a) NCI net income c) consolidated CI
b) consolidated gross profit d) consolidated net loss

11) P Company sells inventory items to its subsidiary, S Company.If unrealized profits in S Company's 2019
year end inventory exceed the unrealized profits in its 2020 year end inventory:
a) combined cost of sales will be less than the consolidated cost of sales In 2020
b) combined cost of sales will be more than the consolidated cost of sales In 2020
c) combined gross profit will be more than the consolidated gross profit in 2020
d)combined sales will be less than the consolidated sales in 2020

12) A parent buys merchandise from its 90% owned subsidiary above cost and does not resell it before
year end. What percent of the unrealized profit in the parent's ending inventory should be removed from
the consolidated CI?
a)90 % b) 100% c) 10% d) 0 percent

13) A parent's beginning inventory, containing merchandise purchased above cost from its 80% owned subsidiary
was sold during the current year. The elimination entry in the working paper recognizing this intercompany
profit includes a debit to the subsidiary's beginning retained earnings of:
a) 20% of the intercompany profit c) 100% of the intercompany profit
b) 80% of the intercompany profit d) the subsidiary's beginning retained earnings is not
affected in this case

14) When an 80% owned subsidiary records a gain on a sale of land to a parent during the current period and the land
is not resold before the end of the period:
a) the full amount of the gain will be excluded from the CI
b) consolidated CI will be increased by the full amount of the gain
c) a proportionate share of the unrealized gain will be excluded from income assigned to NCI
d) the full amount of the unrealized gain will be excluded from income assigned to NCI

15) If an intercompany sale of a depreciable asset occurs on the last day of a fiscal period and results in a gain
to a seller:
a) 100% of a downstream sale must be removed from consolidated CI
b) the proportionate share of an upstream gain must be removed from consolidated CI and the remainder removed
from NCI CI.
c) the asset must be shown on the consolidated balance at its original book value
d) all of the above are true.

16) In the computation of NCI in CI of a partially owned subsidiary,the credit to Depreciation Expense of the parent
in the working paper elimination entry for intercompany gain in a depreciable asset is attributed to CI of:
a) the parent company b) the subsidiary c) the consolidated entity d) the parent and subsidiary

II) PROBLEM SOLVING

1) On Dec.1,2020, Pepsi Company purchased an 80% interest in Sarsi Company. On that date, the book values
and fair values of Sarsi Company's assets and liabilities were the same. A consolidated SFP prepared on that
date is as follows:
Assets: Current assets 200,000
Property, plant and equipment (net) 500,000
Goodwill 250,000
Total 950,000

Liabilities and Stockholders' Equity:

Current Liabilities 150,000
Non controlling interest 100,000
Common stock 200,000
Retained Earnings 500,000
Total 950,000

The price paid by Pepsi Company for its 80% investment in Sarsi Company is ________________

2) Primo Corp. acquired a majority of the stock of Sonia Company on Jan.2,2019 . Partial statement of financial
position for Primo Corp., Sonia Company and and the consolidated entity follow:
Accounts Primo Corp Sonia Co Consolidated
Cash and cash equivalent 100,000 40,000 140,000
Accounts Receivable 80,000 20,000 100,000
Inventory 200,000 100,000 340,000
Equipment 500,000 200,000 800,000
Investment in Sonia Company ?
Goodwill 10,000
? 360,000 1,390,000

Accounts Payable 70,000 40,000 110,000

Bonds Payable 300,000 300,000
Common Stock ? 150,000 ?
Retained Earnings 567,000 170,000 ?
Non Controlling Interest 163,000
Total ? 360,000 1,390,000

1) What amount of retained earnings is reported in the consolidated SFP?

2) What is the fair value of inventory held by Sonia Company at Jan.2,2019?
3) What is the fair value of Sonia Company's net assets at Jan.2,2019?
4) What is the percentage of ownership of Primo Corp.in Sonia Company?
5) What amount did Primo Corp.pay to acquire the stock on Jan.2,2019?

3) Pecson, Inc. purchased 80% of Sison Company's voting common stock for P260,000, which is P60,000
above the underlying book value. Any excess is amortized over 10 years. What is the effect of the excess
on the consolidated CI? Increase/(decrease) of __________________
4) If a wholly owned subsidiary's CI was P150,000 and the subsidiary declared dividends of P80,000 and the
depreciation and amortization of current fair value excess was P20,000, the NCI in CI of subsidiary under the
cost method of accounting is _________________.

5) On Jan.2,2019, Peter Co. acquired 80% of Seller's outstanding common stock for P500,000. Seller's book
value on that date was P500,000; there were no significant differences between the market and book value of
Seller's net assets. Goodwill, if any, is not impaired. During 2019, both companies reported the following:
Peter Co. Seller
Comprehensive Income 1,000,000 200,000
Dividends paid 300,000 120,000

The consolidated CI attributable to parent is _____________.

6) On June 30,2019, Sweet Tooth Company purchased chocolate candies from a foreign supplier for 50,000 foreign
currrency , payable in 60 days. On June 30,1 FC was worth P0.6498. By August 30, one FC was worth P0.6256. The
forward rate on June 30 was P0.6612. Sweet Tooth should record the cost of the chocolates at _____________.

7) On September 1, 2019,Agila,Inc. a Phil. Company, committed to purchase 20,000 units of raw materials for
100,000 FC from a foreign supplier. The delivery date is on Nov.1. Assume that on September 1, the company would
either: 1) acquire a forward contract to buy 100,000 FC on Nov.1
2) acquire an option to buy 100,000 FC on Nov.1 at a strike price of P1,250. The option premium is P2,100.

Spot rates, forward rates and option values are as follows. Assume that the time value component of the
hedging instrument is excluded from the assessment of the hedge effectiveness.

Spot rate Forward rates for Nov.1 Time value of option

Sept.1 1 FC= P1.25 1 FC = P1.27 P2,100
Nov.1 1 FC= P1.32 1 FC = P1.32 0

1) What is the net effect on earnings, if the forward contract was purchased to hedge the purchase commitment?
2) What is the net effect on earnings, if the option contact was purchased to hedge the purchase commitment?
(Note: specify if gain or loss)
8) The following items were included in the calculation of amounts appearing in the balance sheet of Filipino Corp.
on December 31, 2020:

Debit balances:
Accounts receivable from Queens Company of Thailand (billing was for 100,000 baht) 167,000

Forward contract receivable from Metrobank in Phil. Pesos to hedge the receivable
from Queens Company for 30 days from Dec.16, 2020 164,000

Forward contract receivable from Metrobank in Indonesian Rupiah to hedge payable in

Indon Company for 90 days from Dec.2, 2020 75,800

Credit balances:
Forward contract payable to Metrobank in Baht( for Queens hedge) 165,500

Accounts payable to Indon Co. of Indonesia (billing was for 10,000,000 rupiah) 75,500

Forward contract payable to Metrobank in Phil.pesos (for Indon Co. hedge) 76,000
Selected exchange rates for Thailand Baht and Indonesian Rupiah are as follows:

Thailand Baht 12/16/2020 12/31/2020 01/15/2021

Spot rate 1.65 1.67 1.68
Forward rate to sell baht:
on 01/15/2021 1.64 1.655 1.68

Indonesian Rupiah: 12/02/2020 12/31/2020 03/01/2021

Spot rate 0.00754 0.00755 0.0075
Forward rate to buy rupiah:
60-day forward 0.00755 0.00758 0.00755
90-day forward 0.0076 0.00762 0.00761

Required:
1) Prepare journal entries to Jan.15,2021 to record collection of receivable from Queens Company and to settle the
contract with Metrobank.

2) Prepare journal entries on March 1, 2021 to record payment of the account to Indon Company and to settle the
contract with Metrobank.