CHAPTER 6 - CONSOLIDATED FINANCIAL STATEMENTS (PART 3)
PROBLEMS- THEORY
1. Consolidated financial statement are typically prepared when one company has a controlling
financial interest in another unless:
a.The subsidiary is a finance company.
b. The fiscal year-ends of the two companies do not coincide.
c.The two companles are in unrelated industries, such as manufacturing and real estate.
d. The parent is in itself a subsidiary of another entity,its debt or equity instruments are not
traded in a public market, and its uItimate parent produces consolidated general-purpose
financial statements that comply with PFRSs.
2. If non-controlling interest is measured at 'proportionate share'
a. There is goodwill attributable to NCI
b. There is no goodwill attributable to NCI
c. There is an indirect holding adjustment
d. The computation for goodwill would be very complex
3. If the impairment of the value of goodwill is seen to have reversed, then the company may
a. Reverse the impairment charge and credit income for the period.
b. Reverse the impairment charge and credit retained earnings.
c. Not reverse the impairment charge.
d. Reverse the impairment charge only if the original circumstances that led to the
impairment no longer exist and credit retained earnings.
4. When NCI is measured at proportionate share,
a. goodwill is attributed only to the owners of the parent.
b. goodwill is attributed to both the owners of the parent and NCI.
c. goodwill impairment is allocated to both the owners of the parent and NCI.
d. b and c
5. If the parent's ownership interest in a subsidiary changes but control is not lost, the change
a. Is accounted for as a gain or loss transaction
b. Is accounted for retrospectively
c. Is accounted for as equity transaction
d. Is not accounted for
PROBLEMS: COMPUTATIONAL
1. On January 1, 20x1, Hoon Co. acquired 80% interest in Sun, Inc. by issuing 5,000 shares with
fair value of P15 per share. On this date, Sun's total equity was P74,000.The investment in
subsidiary is measured at cost.
Sun's assets and liabilities approximate their fair values on January 1, 20x1 except for the
following:
Sun Inc. Carrying Amounts Fair Values Fair Value
Adjustments
Inventory 23, 000 31, 000 8, 000
Equipment (4 yrs. 40, 000 48, 000 8, 000
remaining life)
Total 73, 000 79, 000 16, 000
There were no intercompany transactions during 20x1. However,it was determined that goodwill
is Impaired by P1,000.
How much is the goodwill attributable to NCI as of December 31,20x1?
a.550
b.2,220
c.620
d. 1,280
Suggested solution:
Consideration transferred (5.000 sh.xP15) 75, 000
Less:Previously held equity interest in the
acquiree
Total 75, 000
Less:Parent's proportionate share in the net (72, 000)
assets of subsidiary (P90,000 acquisition date
fair value x 80%)
Goodwill attributable to owners of parent 3, 000
-Jan.1.20x1
Less:Parent's share in goodwill impairment (800)
(P1,000 x 80%)
Goodwill attributable to owners of parent - 2, 200
Dec. 31, 20x1
Fair Value (see given) 18, 750
Less: NCI's proportionate share in the net (18, 000)
assets of subsidiary (P1,000 acquisition-date
fair value x 20%)
Goodwill attributable to NCI -Jan. 1, 20x1 750
Less: NCI's share in goodwill impairment (200)
(P1, 000 x 20%)
Goodwill attributable to NCI- Dec. 31, 20x1 550
Goodwill, net- December 31, 20x1 2, 750
*74.000+16,000 FVA=90,000 fair value
2. On January 1, 20x2, Rad Co. sells 60% out of its 80% interest in Ali, Inc. for P100,000. Rad's
remaining 20% interest in Ali has a fair value of P25,000. This gives Rad significant influence
over Ali. The statement of financial position immediately before the sale are shown below:
Statement of financial position
As at January 1, 20x2
RAD Co. ALI Inc. Consolidated
ASSETS
Cash 23, 000 57, 000 80, 000
Accounts receivable 75, 000 22, 000 97, 000
Inventory 105, 000 15, 000 120, 000
Investment in 75, 000 - -
Subsidiary
Equipment 200, 000 50, 000 260, 000
Accumulated (60, 000) (20, 000) (84, 000)
depreciation
Goodwill - - 3, 000
TOTAL ASSETS 418, 000 124, 000 476, 000
LIABILITIES AND
EQUITY
Accounts Payable 43, 000 30, 000 73, 000
Bonds payable 30, 000 - 30, 000
Total liabilities 73, 000 30, 000 103, 000
Share capital 170, 000 50, 000 170, 000
Share premium 65, 000 - 65, 000
Retained earnings 110, 000 44, 000 118, 000
Non-controlling - - 20, 000
interest
Total equity 345, 000 94, 000 373, 000
TOTAL LIABILITY 418, 000 124, 000 476, 000
AND EQUITY
How much is the gain (loss) on disposal?
a. 38, 000
b. 42, 000
c. 62, 000
d. 78, 000
Suggested Solution:
Step 1: We will identify the carrying amounts of XYZ's assets and liabilities in theconsolidated
financial statements as at the date control was lost.
Statements of financial position
As at January 1,20x2
RAD Co. ALI Co. Consolidated Carrying
amount of
XYZ's net
assets
ASSETS (a) (b) (c) = (b)-(a)
Cash 23, 000 57, 000 80, 000 57, 000
Accounts 75, 000 22, 000 97, 000 22, 000
receivable
Inventory 105, 000 15, 000 120, 000 15, 000
Investment in 75, 000 - - -
Subsidiary
Equipment 200, 000 50, 000 (260, 000) 60, 000
Accumulated (60, 000) (20, 000) (84, 000) (24, 000)
depreciation
Goodwill - - 3, 000
TOTAL ASSETS 418, 000 124, 000 476, 000 130, 000
LIABILITIES
AND EQUITY
Accounts 43, 000 30, 000 73, 000 30, 000
payable
Bonds payable 30, 000 - 30, 000 -
Total liabilities 73, 000 30, 000 103, 000 30, 000
Share capital 170, 000 50, 000 170, 000
Share premium 65, 000 - 65, 000
Retained 110, 000 44, 000 118, 000
earnings
Non-controlling - - 20, 000
interest
Total equity 345, 000 94, 000 373, 000 100, 000
TOTAL LIAB & 418, 000 124, 000 476, 000
EQUITY
*The consolidated retained earnings pertains to the parent only. Thus, no retained earnings is
allocated to XYZ.
Step 2: We will prepare the deconsolidation journal entries (DJE):
DJE #1: To recognize the gain or loss on the disposal of controlling interest
Jan. 1, 20x2 Cash - RAD Co. (Consideration 100, 000
received)
Investment in associate (Investment 25, 000
retained)
Accounts Payable 30, 000
Accumulated depreciation- ALI, Inc. 24, 000
Non-controlling interest 20, 000
Cash- ALI, Inc. 57, 000
AR- ALI, Inc. 22, 000
Inventory- ALI, Inc. 15, 000
Equipment- ALI, Inc. 60, 000
Goodwill 3, 000
Gain on disposal(squeeze) 42, 000
3. At December 31, 1989, Ohm, Inc. Owned 90% of Winn Corp., a consolidated subsidiary, and
20% of Carr Corp., an investee in which Ohm cannot exercise signiticant influence. On the same
date, Ohm had receivables of 300, 000 from Winn and P200, 000 from Carr. In its December 31,
1989 consolidated balance sheet, Ohm should report accounts receivable from affiliates of:
a. 500,000
b. 340, 000
c. 230, 000
d. 200, 000
Suggested solution:
D. The receivable from Winn will be eliminated in the consolidation. Thereceivable from Carr will
not be eliminated (Carr is not a subsidiary), thus, it remains. Ohm reports accounts receivable
from affiliates (Carr) of P200,000 in its consolidated balance sheet.
4. Flower, Inc. is a wholly owned subsidiary of Rose, Inc. On June 1, 1993, Patton declared and
paid a P1 per share to stockholders of record on May 15, 1993. On May 1, 1993, Flower bought
10,000 shares of Rose's Common stock for P700,000 on the open market, when the book value
per share was P30. What amount of gain should Rose report from this transaction in its
consolidated income statement for the year ended December 31, 1993?
a. 0
b. 390,000
c. 400,000
d. 410,000
Suggested solution:
A - The purchase by the member of a consolidated group of stock of another member of the
consolidated group is treated as a treasury stock transaction. This follows the theory of
consolidated financial statements presenting one economic entity. (You cannot make money
selling stock to yourself.)
5. Selected information from the separate and consolidated balance sheets and income
statements of Mare, Inc. and its subsidiary, Jac Co., as of December 31, 1994, and for the year
then ended is as follows:
Mare Jac Consolidated
Balance sheet
accounts:
Accounts receivable 52, 000 38, 000 78, 000
Inventory 60, 000 50, 000 104, 000
Income statements
accounts:
Revenues 400, 000 280, 000 616, 000
Cost of goods sold 300, 000 220, 000 462, 000
Gross profit 100, 000 60, 000 154, 000
Additional information:
During 1994, Mare sold goods to Jac at the same markup on cost that Mare uses for all the
sales.
At December 31, 1994, what was the amount of Jac's payable to Mare for intercompany sales?
a. 6, 000
b. 12, 000
c. 58, 000
d. 64, 000
Suggested solution:
Accounts Receivable of Parent 52, 000
Accounts receivable of subsidiary 38, 000
Less: Intercompany receivable/payable (12, 000)
(squeeze)
Consolidated accounts receivable 78, 000
6. Bright Corp. has several subsidiaries that are incuded consolidated financial statements. In
its December 31, 1992 trial balance, Wright had the following intercompany balance before
eliminations:
Debit Credit
Current receivable due from 32, 000
Star, Co.
Noncurrent receivable from 114, 000
Star
Cash advance to Corn corp. 6, 000
Cash advance from Queen Co. 15, 000
Intercompany payable to 101, 000
Queen
In its December 31, 1992, consolidated balance sheet, what amount should Wright report as
intercompany receivable?
a. 152, 000
b. 146, 000
c. 36, 000
d. 0
CHAPTER 7 - CONSOLIDATED FINANCIAL STATEMENTS (PART 4)
PROBLEMS: THEORY
1. This type of group arises when a parent's subsidiary has its own subsidiary (sometimes
referred to as 'sub-subsidiary').
a. Vertical group
b. Horizontal group
c. Simple group
d. D-shaped group
2. This type of group arises when a parent has a direct controlling interest in at least one
subsidiary. In addition, both the parent and the subsidiary together hold a controlling interest in
another entity.
a. Vertical group
b. Horizontal group
c. Complex group
d. D-shaped group
3. Which of the following statements is true regarding push-down accounting?
a. The Philippine SEC requires push-down accounting if a subsidiary is "substantially
wholly-owned," i.e., parent's ownership interest is at least 95%.
b. The Philippine SEC encourages push-down accounting if a parent's ownership interest is 80%
to less than 95%.
c. The Philippine SEC prohibits push-down accounting if a parent's ownership interest is less
than 80%.
d. All of these are incorrect
PROBLEMS: COMPUTATIONAL
1. On January 1, 1993, James Corp, acquired all of Luna Corpcommon stock for P1,200,000. On
that date, the fair values of Luna's assets and liabilities equaled their carrying amounts of
P1,320,000 and P320,000, respectively. During 1993, Luna paid cash dividends of P20,000.
Selected information from the separate balance sheets and income statements of James and
Luna as of December 31, 1993, and for the year then ended follows:
JAMES LUNA
Balance sheet accounts:
Investment in subsidiary 1, 300, 000
(equity method)
Retained earnings 1, 240, 000 540, 000
Total equity 2, 620, 000 1, 100, 000
Income statement accounts:
Operating Income 420, 000 200, 000
Equity in earnings of Sharp 120, 000
Net Income 400, 000 120, 000
In Owen's December 31, 1993, consolidated balance sheet, what amount should be reported as
total retained earnings?
a. 1, 240, 000
b. 1, 360, 000
c. 1, 380, 000
d. 1, 800, 000
Suggested solution:
A - 1,240,000- If the investment in subsidiary is measured under the equity method, the
consolidated retained earnings is equal to the parent's retained earnings.
2. On January 1, 1991, Texas, Inc. acquired 80% of Taylor, Inc. outstanding common stock. On
that date, the carrying amounts of Taylor's assets and liabilities approximated their fair values.
Non- controlling interest was measured using the proportionate share method.
During 1991, Taylor paid P5,000 cash dividends to its stockholders.
Summarized balance sheet information for the two compariesfollows:
TEXAS TAYLOR
12/31/1991 12/31/1991 1/1/1991
Investment in Style 132, 000
(equity method)
Other Assets 138, 000 115, 000 100, 000
Total 270, 000 115, 000 100, 000
Common stock 50, 000 20, 000 20, 000
Additional paid-in 80, 250 44, 000 44, 000
capital
Retained earnings 139, 750 51, 000 36, 000
Totals 270, 000 115, 000 100, 000
How much is the goodwill on the business combination?
a. 20, 000
b. 22, 000
c. 32, 000
d. 40, 000
Suggested solution:
Consideration transferred 120, 000
Non-controlling interest in the acquiree (100K 20, 000
x 20%)
Previously held equity interest in the acquiree -
Total 140, 000
Fair value of net identifiable assets acquired (100, 000)
Goodwill acquisition date 40, 000
Accumulated impairment losses since -
acquisition date
Goodwill, net - current year 40, 000
3. The following transactions occurred on January 1, 20x1:
P acquired 80% interest in S1 for P400,000 when the retained earnings of S1 were
P120,000. NCI in S1 has a fair value of P100,000.
S1 acquired 60% interest in S2 for P200,000 when the retained earnings of S2 were
P40,000. NCI in S2 (direct and indirect) has a fair value of P160,000.
The carrying amounts of the net identifiable assets of S1 and S2 approximate their fair values
on January 1, 20x1. The group determined on December 31, 20x1 that goodwill has been
impaired by 20%. There have been no changes in the share capitals of S1 and S2 during the
year.
A summary of the individual financial statement of the entities is shown below:
Statements of financial position
As at December 31, 20x1
P S1 S2
Investment in 400, 000 200, 000 -
Subsidiary
Other assets 800, 000 480, 000 320, 000
Total assets 1, 200, 000 680, 000 320, 000
Liabilities 120, 000 152, 000 8, 000
Share capital 480, 000 320, 000 200, 000
Retained earnings 600, 000 208, 000 112, 000
Total Liabilities and 1, 200, 000 680, 000 320, 000
equity
Statements of profit or loss
For the year ended December 31, 20x1
Revenues 720, 000 408, 000 192, 000
Expenses (400, 000) (320, 000) (120, 000)
Profit 320, 000 88, 000 72, 000
How much is the goodwill as of December 31, 20x1?
a. 144, 000
b. 132, 600
c. 112, 000
d. 128, 000
Suggested solution:
The impairment loss on goodwill is determined as follows:
Formula #1 S1 Total
Consideration 400, 000 200, 000
transferred (given)
Indirect holding (40, 000)
adjustment
NCI in the acquiree -at 100, 000 160, 000
fair value (given)
Prev. held equity - -
interest in the
acquiree
Total 500, 000 320, 000
Fair value of net (440, 000) ((240, 000)
assets acquired (see
solution below)
Goodwill at 60, 000 80, 000
acquisition date
Multiply by: 20% 20%
impairment (given)
Impairment loss on 12, 000 16, 000 28, 000
goodwill - 20x1
S1 S2
Acqn. Date Cons. Date Net Change Acqn. Date Cons. Date Net change
Share 320, 000 320, 000 200, 000 200,000
capital
Ret. 120, 000 208, 000 40,000 40,000
Earnings
Totals at 440, 000 528, 000 240, 000 240, 000
carrying
amts.
FVA at - - - -
acquisition
date
Net assest 440, 000 528, 000 88, 000 240, 000 240, 000 72, 000
at FV
An indirect holding adjustment is made because the consideration transferred to S2 is not
wholy made by P but rather partly by P (80%) and partly by S1 (20%). Only the portion effectively
transferred by (P200,000 x 80% =P160,000) enters into the computation of goodwill.
The indirect holding adjustment is computed as follows:
Total consideration transferred to S2 200, 000
Multiply by:NCI in S1 20%
Indirect holding adjustment 40, 000
The indirect holding adjustment affects both the computations of goodwill and NCI.
Since the NCI's are measured at fair value, there must be goodwill attributable to the NCI's.
These are computed as follows:
Formula #2 S1 S2
Consideration transferred (given) 400, 000 200, 000
Indirect holding adjustment (40, 000)
Less: Prev. Held interest in the - -
acquiree
Total 400, 000 160, 000
Less: P proportionate sh. In the net (352, 000) (115, 200)
assets of S1 & S2 (440k x 80%) (240k
x 48%)
Goodwill attributable to owners of P- 48, 000 44, 800
Jan. 1, 20x1
Less: P's share in goodwill impairment (9, 600) (7, 680)
(12k x 80%) & ((16k x 48%)
Goodwill attributable to owners of P- 38, 400 37, 120
Dec.31, 20x1
Fair value of NCI (given) 100, 000 160, 000
Less: NCI's proportionate sh. in the net (88, 000) (124, 800)
assets of S1 and S2
(440k x 20%) & (240k x 52%)
Goodwill attributable to NCI- Jan. 1, 12, 000 35, 200
20x1
Less: NCI's share in goodwill (2, 400) (8, 320)
impairment (12k x 20%) & (16k x 52%)
Goodwill attributable to NCI- Dec. 31, 9, 600 26, 880
20x1
Goodwill, net- Dec. 31, 20x1 48, 000 64, 000
4. The following transactions occurred during 20x1:
On January 1, 20x1, Q acquired 80% interest in D1 for 400, 000.
On December 31, 20x1, D1 acquired 60% interest in D2 for 200, 000
The following information has been determined
Retained earnings D1 D2
January 1, 20x1 120, 000 40, 000
December 31, 20x1 208, 000 112, 000
Fair value of NCI
January 1, 20x1 100, 000 192, 000
December 31, 20x1 112, 000 168, 000
The summary of the individual statement of finacial position of the entities as at December 31z
20x1 is shown below:
Q D1 D2
Investment in 400, 000 200, 000 -
Subsidiary
Other assets 800, 000 480, 000 320, 000
Total assets 1, 200, 000 680, 000 320, 000
Liabilities 120, 000 152, 000 8, 000
Share capital 480, 000 320, 000 200, 000
Retained earnings 600, 000 208, 000 112, 000
Total Liabilities and 1, 200, 000 680, 000 320, 000
equity
Statement of profit or loss
For the year ended December 31, 20x1
Revenues 720, 000 408, 000 192, 000
Expenses (400, 000) (320, 000) (120, 000)
Profit 320, 000 88, 000 72, 000
The carrying amounts of the net identifiable assets of S1 and S2 approximate their fair values at
their acquisition dates. The group determined that the goodwill to S1 has been impaired by
P40,000 as at December 31, 20x1. There have been no changes in the share capitals of S1 and
S2 during the year.
How much is the consolidated profit or loss in 20x1?
a. 368, 000
b. 640, 000
c. 637, 780
d. 639, 880
Suggested solution:
Q D1 D2 Consolidated
Profirs before adj. 320, 000 88, 000 - 408, 000
Cons.
Adjustment:
Unrealized profits - - - -
Dividend income - N/A N/A -
Extinguishment - - - -
of bonds
Net cons. - - - -
Adjustment
Profits before 320, 000 88, 000 - 408, 000
FVA
Depreciation of (-) (-) (-) (-)
FVA
Goodwill (32, 000) (8, 000) - (40, 000)
impairment
Consolidated 288, 000 80, 000 - 368, 000
profit
None of D2's profit is included in the 20x1 consolidated financial statements because D2 was
acquired only on December 31, 20x1.
4. The following transactions occured on January 1, 20x1
P acquired 64, 000 shares in S1 for 400, 000 and 12, 500 shares in S2 for 160, 000
S1 acquired 15, 000 shares in S2 for 200, 000
Additional information:
S1 S2
Retained earnings- Jan. 1, 20x1 120, 000 40, 000
Fair value of NCI- January 1, 20x1 100, 000 160, 000
The carrying amounts of the net identifiable assets od S1 and S2 approximate their fair values
on January 1, 20x1. The group determined on December 31, 20x1 that there is no impairment of
goodwill. There have been no changes in the share capitals of S1 and S2 during the year.
A summary of the individual financial statements of the entities on December 31, 20x1 is shown
below:
Statements of financial position
As of December 31,20x1
P S1 D2
Investment in 560, 000 200, 000 -
Subsidiary
Other assets 800, 000 480, 000 320, 000
Total assets 1, 360, 000 680, 000 320, 000
Liabilities 280, 000 152, 000 8, 000
Share capital (4.00 480, 000 320, 000 200, 000
par value)
Retained earnings 600, 000 208, 000 112, 000
Total Liabilities and 1, 360, 000 680, 000 320, 000
equity
Statements of profit or loss
For the year ended December 31,20x1
Revenues 720, 000 408, 000 192, 000
Expenses (400, 000) (320, 000) (120, 000)
Profit 320, 000 88, 000 72, 000
The profits above do not include intercompany investment income.
How much is the consolidated profit or loss in 20x1?
a. 368, 000
b. 356, 600
c. 480, 000
d . 452, 000
Suggested solution:
P S1 S2 Consolidated
Profits before adj. 320, 000 88, 000 72, 000 480, 000
Cons.
Adjustment:
Unrealized profits - - - -
Dividend income - N/A N/A -
Extinguishment - - - -
of bonds
Net cons. - - - -
Adjustment
Profits before 320, 000 88, 000 72, 000 480, 000
FVA
Depreciation of (-) (-) (-) (-)
FVA
Goodwill (32, 000) (8, 000) - (40, 000)
impairment
Consolidated 288, 000 80, 000 - 480, 000
profit
Consolidated statement of profit or loss
For the year ended December 31, 20x1
Revenues (720k + 408k + 192k) 1, 320, 000
Expenses (400k + 320k + 120k) (840, 000)
Impairment loss on goodwill -
Consolidated profit 480, 000
CHAPTER 8 - SEPARATE FINANCIAL STATEMENTS
PROBLEMS: THEORY
1. Which of the following are required under PAS 27 to produce separate financial statements?
a. A listed entity with at least one wholly owned subsidiary
b. A listed entity with at least one subsidiary, whether wholly or partially owned.
c. An entity, whether listed or unlisted, with at least one affiliate (e.g., a subsidiary, an associate
or an interest in a joint venture)
d. PAS 27 does not mandate which entities should produce separate financial statements.
2. These are the financial statements of a group in which the assets, liabilities, equity, income,
expenses and cash flows of the parent and its subsidiaries are presented as those of a single
economic entity.
a. General purpose financial statements
b. Consolidated financial statements
c. Individual financial statements
d. Separate financial statements
3. These are those presented by a parent (i.e, an investor with control of a subsidiary) or an
investor with joint control of, or significant influence over, an investee, in which the investments
are accounted for at cost or in accordance with PFRS 9 Financial Instruments.
a. General purpose financial statements c. Individual financial statements
b. Consolidated financial statements d. Separate financial statements
4. In the separate financial statements of a parent entity, investments in subsidiaries that are
not classified as held for sale should be accounted for
a. At cost.
b. In accordance with PFRS 9.
c. Using the equity method.
d. a or b
PROBLEMS- COMPUTATIONAL
1. Use the following information for the next four questions:
Bandolin Co. had the following investment transactions during 20x1:
Acquired 80% interest in Zaskar, Inc. for P4,000,000 on January 1, 20x1. Zaskar reported
profit of P40M and declared dividends of P1,200,000 during 20x1. The fair value of the
investment on December 31, 20x1 is P4.8M.
Acquired 20% interest in Goat Co. for P400,000 on July 1, 20x1. Transaction costs
incurred amounted to P80,000. Goat reported profit of P8M for the six months ended
December 31, 20x1 and declared year-end dividends of P800,000, The fair value of the
investment on December 31,20x1 is P420,000,
Bandolin's policy is to measure investments in subsidiaries at cost and investments in
associates at fair value through profit or loss in the separate financial statements.
1. How much is the carrying amount of the investment in subsidiary in the December 31, 20xl
consolidated financial statements?
a. 4,000,000
b, 4.800,000
c. 36,000,000
d, 0
2. How much is the carrying amount of the investment in subsidiary in the December 31, 20xl
separate financial statements?
a, 4.000,000
b. 4,800,000
c. 36,000,000
d. 0
Suggested solution:
Investment in subsidiary (XYZ, Inc.) - at cost = 4, 000, 000
3. How much is the carrying amount of the investment in associate in the December 31, 20xl
separate financial statements?
a. 480,000
b. 420,000
c.1,920,000
d. 0
Suggested solution:
Investment in associate (Alphabets Co.) - at fair value = 420, 000
4. How much is net investment income recognized in the 20x1 separate financial statements for
the investments referred to above?
a. 100,000
b, 180,000
c. 33,600,000
d. 1,060,000.
Suggested solution:
Investment in subsidiary (XYZ, Inc.)
Dividend revenue (1, 200, 000 x 80%) = 960, 000
Investment in associate (Alphabet Co.)
Dividend revenue (800, 000 x 20%) = 40, 000
Unrealized gain on change in FV (420, 000 - 400, 000) = 20, 000
Transaction costs expensed immediately (80, 000)
Net investment Income = 100, 000
(960, 000+ 100, 000) = 1, 060, 000
2. On January 2, Well Co. purchased 10% of Rea, Inc's outstanding common shares for
P400,000. Well is the largest single shareholder in Rea, and all of Well's officers are on Rea's
board of directors. Rea reported net income of P500,000 for 1993, and paid dividends of
P150,000. The fair value of the investment on December 31, 1993 is P450,000. In its December
31, 1993, separate balance sheet, what amount should Well report as investment in Rea?
a. 450,000
b. 435,000
C. 400,000
d. Any of these
Suggested solution:
at cost = 400,000
at fair value = 450,000
using equity method = 400,000 + (500,000 x 10%) - (150,000 x 10%) = 435,000
3. The following relates to the transactions of YOI MIXTURE Company during 20x1:
Directors' and officers' remuneration 4,000,000
Post-employment benefits of officers 400, 000
Fringe benefits in the form of housing 10, 000, 000
assistance to directors and officers
Share options granted to officers 600, 000
Officers' expenses on travels, representation 200, 000
and entertainment subjed to liquid ation and
reimbursement
Loans to directors and officers 6, 000, 000
Sales to related entities 20, 000, 000
Determine the amount of related party disclosures on YOI's separate financial statements.
Suggested solution:
Key management personnel compensation:
Directors' and officers' remuneration 4,000,000
Post-employment benefits of officers 400, 000
Fringe benefits in the form of housing assistance 10, 000, 000
to directors and officers
Share options granted to officers 600, 000
15, 000,000
Related party transactions and outstanding
balances:
Loans to directors and officers 6, 000, 000
Sales to related entities 20, 000, 000
26, 000, 000
Total 20, 500, 0000
Advances to officers for necessary expenses of the entity and subject to liquidation are not
treated as key management personnel compensation.
CHAPTER 9 - FINANCIAL REPORTING IN HYPERINFLATIONARY
ECONOMIES
PROBLEMS: THEORY
1. An entity is trying to determine which assets and which liabilities are monetary and
nonmonetary. Which of following assets or liabilities are nonmonetary?
a. Trade receivables.
b. Prepaid assets
c. Accrued expenses and other payable
d. Taxes payable
2. In case of hyperinflation, holding which of the following is more favorable to the entity?
a. monetary assets
b. monetary liabilities
c. money
d. any of these
3. PAS 29 applies only in case of
a. Inflation
b. Deflation
c. Hyperinflation
d. Foreign operation
PROBLEMS: COMPUTATIONAL
1. The following assets were among those that appeared on Diamond Co.'s books at the end of
the year:
Demand bank deposits 650, 000
Net long term receivables 400, 000
Patents and trademarks 150, 000
In preparing constant peso financial statements, how much should Diamond Co. classify as
monetary assets?
Suggested solution:
Demand bank deposits 650, 000
Net long-term receivables 400, 000
Total 1, 050, 000
2. In December 20x7, the Pearl Corporation purchased land for 300, 000. The land was held until
December 20x8, when it was sold for 400, 000. The historical cost/constamt peso statement of
profit or loss for the year ended December 21, 20x8, should include how much gain or loss on
this sale?
a. 20, 000
b. 20, 000 general price level loss
c. 50, 000 gain
d. 100, 000 gain
Suggested solution:
Net proceeds 400, 000
Restated carrying amount (300,000 x 140/120) (350, 000)
Gain on sale 50, 000
3. On January 1, 20x6, Amethyst Company purchased equipment for 300, 000. The equipment
was being depreciated over an estimated life of 10 years on the straight line method, with no
estimated residual value. On December 31, 20x9, the equipment was sold for 200, 000. The
historical cost/constant peso statement of profit or loss prepared for the year ended December
31, 20x9, should include how much hain or loss from this sale?
a. 10, 600 loss
b. 16, 000 gain
c. 20, 000 gain
d. 52, 000 loss
Suggested solution:
Net proceeds 200, 000
Restated carrying amount (300,000 x (252, 000)
140/100* x 6/12)
Loss on sale 52, 0000
The problem states that the general price indices are as of the end of each year and that the
equipment was purchased on January 1, 20x6. Thus, the denominator used is 100 -the general
price index on December 31, 20x5.
4. The Evolution Company reported sales of 2,000,000 in 20x6 and 3, 000, 000 in 20x7 made
evenly throughout each year. The consumer price index during 20x5 remained constant at 100,
and at the end of 20x6 and 20x7 it was 102 and 104, respectively. What should Evolution report
as sales for 20x7, restated for general price-level changes?
a. 3, 000, 000
b. 3, 029, 126
c. 3, 058, 821
d. 3, 120, 000
Suggested solution:
Sales (nominal cost) 3, 000, 000
Multiply by: Current price index over Average 1.0097087
price index in 20x7 {104/ [(102 + 104) ÷ 2]}
Sales (constant pesos) 3, 029, 126
5. At both the beginning and end of the year, Jake Co.'s monetary assets exceed monetary
liabilities by 3, 000, 000. On January 1, the general price level was 125. On December 31, the
general price level was 150. How much was Jake purchasing power loss on net monetary items
during the year?
a. 0
b. 600, 000
c. 750, 000
d. 1, 125, 000
Suggested solution:
Net monetary asset, end (Historical) (given) 3, 000, 000
Net monetary asset, end (Restated) (3, 000, 3, 600, 000
000 x 150/125)
Purchasing Power loss (600, 000)
6. Hee Co. operates under a hyperinflationary economy. Hee computed the increase in current
cost of inventory as follows:
Increase in current cost (nominal pesos) 15, 000
Increase in current cost (constant pesos) 12, 000
What amount should Hila disclose as the inflation component of the increase in current cost of
inventories?
a. 3, 000
b. 12, 000
c. 15, 000
d. 27, 000
Suggested solution:
15, 000 - 12, 000 = 3, 000
CHAPTER 10 - THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
PROBLEMS: THEORY
1. The following are ways of conducting foreign activities
a. engaging in foreign currency-denominated transactions
b. having foreign operations
C sending personnel abroad for trainings and conferences
d. a and b
2. According to PAS 21, a reporting entity is
a. required to identify its functional currency
b. encouraged to identify its functional currency
c required to identify its presentation currency
d. a and c
3. When several exchange rates are available, the rate used is
a. the selling rate
b. the buying rate
c. either a or b as a matter of accounting policy choice
d. that at which the future cash flows represented by the transaction or balance could have
been settled if those cash flows had occurred at the measurement date
PROBLEMS: COMPUTATIONAL
1. Silver Spoon Co. acquired a fixed asset for $36.000 on November 1, 20xl when the exchange
rate was $1.00 = P23.00. At December 31, 20x1, the entity's year-end, the supplier of the fixed
asset has not been paid and the exchange rate at that time was $1.00 = P25.00. On the
December 31, 20x1 statement of financial position, what will be the values for the fixed asset
and the creditor who was unpaid?
Fixed Assets Creditors
a. 900, 000 900, 000
b. 900, 000 828, 000
c. 828, 000 828, 000
d. 828, 000 900, 000
Suggested solution:
Fixed assets: (36, 000 x 23) = 828, 000
Creditor (Accounts Payable): (36, 000 x 25) = 900, 000
2. Little Boy Blue Co. acquired inventory from a foreign entity on November 28, 20x1 for 10,000
foreign currency units (FCU). Little Boy Blue paid the bill on January 2, 20x2 when the spot rate
was PO.45. The spot rate was P0.60 on November 28, 20x1 and was 0.55 on December 31,
20x2, Little Boy Blue should report a foreign exchange gain of
a. 0
b. 500
C. 1,000
d. 1,500
Suggested solution:
(0.45 - 0.55) × 10, 000 = 1, 000
3. Jong Co. sold goods worth $10,000 to a foreign entity. On June 30, 20x1, Jong Co.'s reporting
period cut-off date, the exchange rate was P26.60. On August 15, 20x1, payment was received
through bank transfer whereby Jong Co.'s account was credited P265,400 before any charges.
At the time entity accepted the merchandise, the exchange rate was P26.75. At what exchange
rate is the sale from the transaction would most likely be recognized?
a. 26.60
b. 26.54
C. 26.63
d. 26.75
Suggested solution:
26. 75 - The exchange rate when the title to the goods passed to the huyer.
4. Engine Co. had the following foreign currency transacions during 20x1:
Merchandise was purchased from a foreign supplier on January 20, 20x1, for the
Philippine peso equivalent of P90,000. The invoice was paid on March 20, 20x1 at the
Philippine peso equivalent of P96,000.
On July 1, 20x1, Glass Co. borrowed the Philippine peso equivalent of P500,000
evidenced by a note that was payable in the lender's local currency on July 1, 20x2. On
December 31, 20x1, the Philippine peso equivalents of the principal amount and accrued
interest were P520,000 and P26,000, respectively. Interest on the note is 10% per annum.
In Engine 20x1 profit or loss, what amount should be included as foreign exchange loss?
a. 0
b. 6,000
c. 21,000
d. 27,000
Suggested solution:
1st transaction: (96, 000 - 90, 000) = (6, 000) loss
2nd transaction: 500, 000 + (500, 000 x 10% x 6/12) = 525, 000 - (520, 000 + 26, 000) = (21, 000)
(6, 000) + (21, 000) = 27, 000 total loss
5. On October 1, 20x1, a local importer contracted to purchase foreign goods requiring payment
of 100,000 German marks one month after their receipt at the local importer' s business place.
Title to the goods passed on the date of shipment on December 1, 20x1. On December 31, 20x1,
the goods were still in transit. The following exchange rates were made available:
October 1, 20x1 P22.00
December 1, 20x1 20.00
December 31, 20x1 26.00
How should the exchange fluctuation in 20x1 be accounted by this local importer?
Transactions gain (loss) Translation adjustment
a. (400, 000) 0
b. 600, 000 200, 000
c. (600, 000) 200, 000
d. (600, 000) 0
Suggested solution:
26 - 20 x 100, 000 = (600, 000) FOREX loss recognized in profit or loss
