Practical

Accounti
ng 2

P2 06

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
Capital Stock, P10 par
Additional Paid-In Capital
Retained Earnings
Total Liabilities & Equities

P 50,000
500,000
50,000
100,000
P 700,000

P 60,000
200,000
140,000
100,000
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 Companys common stock has a current market value of P40 per share. The DAF
Companys Statement of Financial Position prior to the acquisition is shown below:
DAF Company
Statement of Financial Position
January 1, 2015
Assets:
Current Assets
Plant & Equipment

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P 320,000
880,000

Liabilities & Equity

Liabilities
Common Stock
Addl Paid-in Capital
Retained Earnings

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P 400,000
80,000
320,000
400,000

Practical
Accounti
ng 2

P2 06

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 Companys 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
Cash and cash equivalents
Accounts Receivable
Inventory
Equipment
Investment in Gloria Company
Goodwill
Total
Accounts Payable
Bonds payable
Common Stock
Retained Earnings
Non-controlling Interest
Total

PINOY Corp.
P 100,000
80,000
200,000
500,000
?

Gloria Co.
P 40,000
20,000
100,000
200,000

Consolidated
P 140,000
100,000
340,000
800,000

P360,000

10,000
P1,390,000

P 40,000

70,000
300,000
?
567,000
0
P
?

150,000
170,000
0
P360,000

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

1. 70%
2. 75%
3. 60%
6.
7.
8.

110,000
300,000
250,000
?
163,000
P1,390,000

4. 65%

What is the fair value of Glorias net assets at January 2, 2015?

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

4. P430,000

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

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

4. P300,000

What is the allocation of Goodwill?

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Accounti
ng 2

P2 06

JONATHAN M.
TIPAY, CPA

1.
2.
3.
4.

Controlling Interest
P6,500
P8,000
P6,000
P7,000

NCI
P3,500
P2,000
P4,000
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 Companys 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
Non-controlling Interest

21,000
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 Companys 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.
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Accounti
ng 2

P2 06

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
Cash
Accounts Receivable, net
Inventories
Equipment, net
Patents
Total Assets
Liabilities
Accounts Payable
Bonds Payable
Common Stock, P10 par
Additional paid-in capital
Retained Earnings
Total Liabilities and Equities

Parent Company
30,900
34,200
22,900
179,000
267,000

Subsidiary Company
37,400
9,100
16,100
40,000
10,000
112,600

4,000
100,000
100,000
15,000
48,000
267,000

6,600
50,000
15,000
41,000
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)
Equipment (net, remaining life 4 years)
Patents (remaining life 10 years)
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
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17,100
48,000
13,000

Practical
Accounti
ng 2

P2 06

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
Parent Company
Subsidiary Company

Net Income
15,000
4,000

30,200
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
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Practical
Accounti
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 Corporations 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
SSs net assets was P1,000,000. The fair value of SSs 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

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Practical
Accounti
ng 2

P2 06

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 Companys 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, Stars 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
Sales
Dividend Income
Cost of goods sold
Other Expenses
Total
Net Income

Star Corporation
400,000
25,000
425,000
250,000
70,000
(320,000)
105,000

200,000
200,000
120,000
35,000
(155,000)
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
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Accounti
ng 2

P2 06

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 Companys 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
2010
2011
2011

Purchased
by
Sarsi
Sarsi
Pepsi

Purchase
Price
120,000
90,000
140,000

Sold to

Sales Price

Pepsi
Pepsi
Sarsi

Unsold
at Year sold to
End of Year outsiders
180,000
45,000
2010
135,000
30,000
2011
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

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Practical
Accounti
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.
Parents net income from its own operations was P100,000 in 2010 and P120,000 in 2011. Subs 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

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