afar drills & exercises 1 business combinations (part 1)

AFAR Drills & Exercises1

Business Combinations (Part 1)

Multiple Choice – Computational Measuring goodwill / gain on bargain purchase

Use the following information for the next two questions:

Fact pattern

On January 1, 20x1, DIMINUTIVE Co. acquired all of the assets and assumed

all of the liabilities of SMALL, Inc. As of this date, the carrying

amounts and fair values of the assets and liabilities of SMALL acquired by

DIMINUTIVE are shown below:

Assets Carrying amounts

Fair values

Cash in bank 40,000

40,000

Receivables 800,000

480,000

Allowance for probable losses on

receivables (120,000)

-

Inventory 2,080,000

1,400,000

Building – net 4,000,000

4,400,000

Goodwill 400,000

80,000

Total assets 7,200,000

6,400,000

Liabilities

Payables 1,600,000

1,600,000

On the negotiation for the business combination, DIMINUTIVE Co. incurred

transaction costs amounting to ₱400,000 for legal, accounting, and consultancy fees.

1. Case #1: If DIMINUTIVE Co. paid ₱6,000,000 cash as consideration for the assets and liabilities of SMALL, Inc., how much is the goodwill (gain on

bargain purchase) on the business combination?

a. 1,200,000 b. 1,120,000 c. 1,280,000 d. 1,240,000

2. Case #2: If DIMINUTIVE Co. paid ₱4,000,000 cash as consideration for the assets and liabilities of SMALL, Inc., how much is the goodwill (gain on

bargain purchase) on the business combination?

a. (800,000) b. (720,000) c. (880,000) d. 1,200,000

Non-controlling interests

Use the following information for the next four questions:

Fact pattern

On January 1, 20x1, KNAVE acquired 80% of the equity interests of RASCAL,

Inc. in exchange for cash. Because the former owners of RASCAL needed to

dispose of their investments in RASCAL by a specified date, they did not

have sufficient time to market RASCAL to multiple potential buyers.

As January 1, 20x1, RASCAL’s identifiable assets and liabilities have fair values of ₱4,800,000 and ₱1,600,000, respectively.

Case #1: Non-controlling interest measured at fair value

3. KNAVE Co. elects the option to measure non-controlling interest at fair

value. An independent consultant was engaged who determined that the

1 From Advanced Accounting by V.Z.MILLAN

fair value of the 20% non-controlling interest in RASCAL, Inc. is

₱620,000.

If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in RASCAL, Inc., how much is the goodwill (gain on bargain purchase) on the

business combination?

a. 800,000 b. 2,060,000 c. 1,440,000 d. 1,420,000



value. An independent consultant was engaged who determined that the

fair value of the 20% non-controlling interest in RASCAL, Inc. is

₱620,000.



a. (180,000) b. (800,000) c. (160,000) d. (200,000)



value. A value of ₱1,000,000 is assigned to the 20% non-controlling interest in RASCAL, Inc. [(₱4M ÷ 80%) x 20% = 1,000,000].



a. 200,000 b. 1,800,000 c. 2,440,000 d. 1,440,000

Case #4: Non-controlling interest’s proportionate share in net assets 6. KNAVE Co. elects the option to measure the non-controlling interest at

the non-controlling interest’s proportionate share of RASCAL, Inc.’s net identifiable assets

If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in RASCAL, Inc. and, how much is the goodwill (gain on bargain purchase) on

the business combination?

a. 1,440,000 b. 800,000 c. 1,400,000 c. 960,000

Transaction costs


Fact pattern

On January 1, 20x1, SMUTTY acquired all of the identifiable assets and

assumed all of the liabilities of OBSCENE, Inc. On this date, the

identifiable assets acquired and liabilities assumed have fair values of

₱6,400,000 and ₱3,600,000, respectively.

SMUTTY incurred the following acquisition-related costs: legal fees,

₱40,000, due diligence costs, ₱400,000, and general administrative costs of maintaining an internal acquisitions department, ₱80,000. 7. Case #1: As consideration for the business combination, SMUTTY Co.

transferred 8,000 of its own equity instruments with par value per share

of ₱400 and fair value per share of ₱500 to OBSCENE’s former owners. Costs of registering the shares amounted to ₱160,000. How much is the goodwill (gain on bargain purchase) on the business combination?

a. 716,000 b. 556,000 c. 600,000 d. 1,200,000

8. Case #2: As consideration for the business combination, SMUTTY Co.

issued bonds with face amount and fair value of ₱4,000,000. Transaction costs incurred in issuing the bonds amounted to ₱200,000. How much is the goodwill (gain on bargain purchase) on the business combination?

a. 716,000 b. 556,000 c. 600,000 d. 1,200,000

Restructuring provisions

9. On January 1, 20x1, ENTREAT Co. acquired all of the identifiable assets

and assumed all of the liabilities of BEG, Inc. by paying cash of

₱4,000,000. On this date, the identifiable assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000, respectively. ENTREAT Co. has estimated restructuring provisions of

₱800,000 representing costs of exiting the activity of BEG, costs of terminating employees of BEG, and costs of relocating the terminated

employees. How much is the goodwill (gain on bargain purchase)?

a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000

Specific recognition principles – Operating leases Fact pattern

On January 1, 20x1, HISTRIONAL Co. acquired all of the identifiable assets

and assumed all of the liabilities of THEATRICAL, Inc. by paying cash of

₱4,000,000. On this date, the identifiable assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000, respectively.

Case #1: Acquiree is the lessee – terms are favorable 10. As of January 1, 20x1, HISTRIONAL holds a building and a patent which

are being rented out to THEATRICAL, Inc. under operating leases.

HISTRIONAL has determined that the terms of the operating lease on the

building compared with market terms are favorable. The fair value of the

differential is estimated at ₱80,000. How much is the goodwill (gain on bargain purchase)?

a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000

Case #2: Acquiree is the lessee – terms are unfavorable 11. As of January 1, 20x1, HISTRIONAL holds a building and a patent which

are being rented out to THEATRICAL, Inc. under operating leases.

HISTRIONAL has determined that the terms of the operating lease on the

patent compared with market terms are unfavorable. The fair value of the

differential is estimated at ₱80,000. How much is the goodwill (gain on bargain purchase)?

a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000

Case #3: Acquiree is the lessor

12. As of January 1, 20x1, HISTRIONAL is renting a building and a patent

from THEATRICAL, Inc. under operating leases. HISTRIONAL has determined

that the terms of the operating lease on the building compared with

market terms are favorable. The fair value of the differential is

estimated at ₱80,000. How much is the goodwill (gain on bargain purchase)?

a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000

Intangible assets – separability and contractual-legal criteria 13. On January 1, 20x1, LITHE Co. paid cash of ₱6,000,000 in exchange for

all of the net assets of FLEXIBLE, Inc. As of this date, the carrying

amounts and fair values of the assets and liabilities of FLEXIBLE

acquired by LITHE are shown below:


Fair values

Cash 40,000

40,000

Receivables 2,760,000

1,480,000



Property, plant and equipment 4,000,000

4,400,000

Computer software 400,000

-

Patent - 200,000

Goodwill 400,000

80,000


6,200,000

Liabilities

Bonds payable (w/ face amount of

₱1,600,000) 1,600,000

1,800,000

In applying the recognition and measurement principles under PFRS 3, LITHE

Co. has identified the following unrecorded intangible assets:

Type of intangible asset Fair value

Research and development projects 200,000

Customer list 160,000

Customer contract #1 120,000

Customer contract #2 80,000

Order (production) backlog 40,000

Internet domain name 60,000

Trademark 100,000

Trade secret processes 140,000

Mask works 180,000

Total 1,080,000

Additional information:

The computer software is considered obsolete.

The patent has a remaining useful life of 10 years and a remaining legal

life of 12 years.

FLEXIBLE, Inc. recognized the research and development costs as expenses

when they were incurred.

Customer contract #1 refers to an agreement between FLEXIBLE, Inc. and

Numbers Co., a customer, wherein FLEXIBLE, Inc. is to supply goods to

Numbers Co. for a period of 5 years. As of acquisition date, the

remaining period in the agreement is 3 years. LITHE and FLEXIBLE

believe that Numbers Co. will renew the agreement at the end of the

current contract. The agreement is not separable.

Customer contract #2 refers to FLEXIBLE’s insurance segment’s portfolio of one-year motor insurance contracts that are cancellable by

policyholders.

FLEXIBLE, Inc. transacts with its customers solely through purchase and

sales orders. As of acquisition date, has a backlog of customer purchase

orders from 60% of its customers, all of whom are recurring customers.

The other 40% of FLEXIBLE’s customers are also recurring customers.

However, as of acquisition date, FLEXIBLE has no open purchase orders or

other contracts with those customers.

The internet domain name is registered.

How much is the goodwill (gain on bargain purchase)?

a. 900,000 b. 600,000 c. 420,000 d. 1,680,000

Other recognition and measurement principles

14. On January 1, 20x1, SUBTERFUGE Co. acquired all of the identifiable

assets and assumed all of the liabilities of DECEPTION, Inc. by paying

cash of ₱4,000,000. On this date, the identifiable assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000, respectively.


SUBTERFUGE intends to sell immediately a factory plant included in the

identifiable assets of DECEPTION. All of the “held for sale” classification criteria under PFRS 5 are met. As of January 1, 20x1,

the factory plant has a fair value of ₱1,200,000 and a carrying amount of ₱1,000,000 in the books of DECEPTION. Costs to sell the factory plant is ₱80,000.

Not included in the identifiable asset of DECEPTION is a research and

development intangible asset that SUBTERFUGE does not intend to use. The

fair value of this asset is ₱200,000. Also, not included in the identifiable asset of DECEPTION is a customer

list, with an estimated value of ₱40,000, in the form of a database where the nature of the information is subject to national laws

regarding confidentiality.


a. 1,200,000 b. 1,280,000 c. 1,080,000 d. 1,040,000

Contingent liabilities

15. On January 1, 20x1, CHIDE Co. acquired 90% of the identifiable assets

and assumed all of the liabilities of SCOLD, Inc. by paying cash of

₱4,000,000. On this date, SCOLD’s identifiable assets and liabilities have fair values of ₱6,400,000 and ₱3,600,000, respectively. Non-controlling interest has a fair value of ₱320,000.

As of January 1, 20x1, SCOLD had the following which were not included in

the acquisition-date fair value measurement of liabilities:

SCOLD has an existing contract with a customer to deliver products at a

specified future date. In accordance with the agreement, SCOLD shall pay

a penalty for failure to deliver the said goods. CHIDE determined that

the fair value of the penalty is ₱40,000. However, because CHIDE expects to comply with the agreement, it was assessed that payment of penalty is

improbable.

SCOLD has guaranteed a bank loan of a third party. CHIDE shall replace

SCOLD as the guarantor. If the third party defaults on the loan, CHIDE

will be held liable for the guarantee. CHIDE determined that the fair

value of the guarantee is ₱120,000. However, both SCOLD and CHIDE believe that the third party will not default on its loan from the bank.

There is a pending unresolved litigation filed by a third party against

SCOLD. CHIDE determined that the fair value of settling the litigation

is ₱200,000. However, because the legal counsels of both CHIDE and SCOLD strongly believe that they will win the case, it was assessed that

payment for the settlement of the litigation is improbable.


a. 1,880,000 b. 1,200,000 c. 1,560,000 d. 1,520,000

Consideration transferred and indemnification asset

16. On January 1, 20x1, PRODIGIOUS Co. acquired all of the identifiable

assets and assumed all of the liabilities of EXTRAORDINARY, Inc. by

paying cash of ₱4,000,000. On this date, the identifiable assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000, respectively.

The terms of the business combination agreement are shown below:

Half of the ₱4,000,000 agreed consideration shall be paid on January 1, 20x1 and the other half on December 31, 20x5. The prevailing market rate

as of January 1, 20x1 is 10%.

In addition, PRODIGIOUS agrees to provide for the following:

a. A piece of land with a carrying amount of ₱2,000,000 and fair value of ₱1,200,000 shall be transferred to the former owners of EXTRAORDINARY.

b. After the combination, EXTRAORDINARY’s activities shall be continued by PRODIGIOUS. PRODIGIOUS agrees to provide a patented technology for

use in the activities of EXTRAORDINARY. The patented technology has a

carrying amount of ₱240,000 in the books of PRODIGIOUS and a fair value of ₱320,000.

Included in the liabilities assumed is an estimated liability on a

pending lawsuit filed against EXTRAORDINARY by a third party with an

acquisition-date fair value of ₱400,000. The carrying amount of the liability in EXTRAORDINARY’s books immediately before the business

combination is ₱480,000. EXTRAORDINARY guarantees to indemnify PRODIGIOUS for any settlement amount of the liability in excess of

₱480,000.


a. 1,721,843 b. 1,561,843 c. 1,641,843 d. 2,320,000

Deferred taxes

17. On January 1, 20x1, ATTAINDER Co. acquired all of the assets and

assumed all of the liabilities of DISHONOR, Inc. As of this date, the

carrying amounts and fair values of the assets and liabilities of

DISHONOR acquired by ATTAINDER are shown below:


Fair values

Cash in bank 40,000

40,000

Receivables 800,000

480,000



Inventory 2,080,000

1,400,000


4,400,000

Goodwill 400,000

80,000


6,400,000

Liabilities

Payables 1,600,000

1,600,000

ATTAINDER Co. paid ₱6,000,000 cash as consideration for the assets and liabilities of DISHONOR, Inc. It was determined on acquisition date that

DISHONOR, Inc. has an unrecorded patent with a fair value of ₱120,000 and a contingent liability with fair value of ₱80,000.

Although adjustments are to be made to the carrying amounts of the assets

and liabilities, no adjustments shall be made to their tax bases. All

adjustments to the carrying amounts of assets and liabilities result to

temporary differences. ATTAINDER’s tax rate is 30%.

How much is the goodwill (gain on bargain purchase) on the business

combination?

a. 1,148,000 b. 1,108,000 c. 1,028,000 d. 1,240,000

Consideration transferred – Dividends on 18. On January 1, 20x1, FARCICAL Co. acquired all of the assets and

liabilities of ABSURD, Inc. for ₱6.4M. As of this date, the carrying amounts and fair values of the assets and liabilities of ABSURD are

shown below:


Fair values

Cash in bank 40,000

40,000

Receivables 800,000

480,000



Inventory 2,080,000

1,400,000


4,400,000

Goodwill 400,000

80,000


6,400,000

Liabilities

Dividends payable 400,000 400,000

Other payables 1,600,000 1,600,000

2,000,000

2,000,000

The dividends payable pertain to dividends declared by ABSURD, Inc. on

December 28, 20x0 to shareholders of record on January 15, 20x1. The

dividends will be distributed on January 31, 20x1.


a. 1,280,000 b. 2,080,000 c. 2,480,000 d. 1,680,000


Multiple Choice – Computational

Consideration transferred – Measurement Use the following information for the next five questions:

On January 1, 20x1, COLLOQUY Co. acquired all of the identifiable assets

and assumed all of the liabilities of CONVERSATION, Inc. by issuing its

own ordinary shares. Information at acquisition date is shown below:

COLLOQUY Co. CONVERSATION, Co.

Combined

entity

(Carrying

amounts) (Fair values)

Identifiable assets 9,600,000 6,400,000 16,000,000

Goodwill - - ?

Total assets 9,600,000 6,400,000 ?

Liabilities 2,800,000 3,600,000 6,400,000

Share capital 2,400,000 1,200,000 2,800,000

Share premium 1,200,000 1,000,000 4,800,000

Retained earnings 3,200,000 600,000 ?

Total liabilities &

equity 9,600,000 6,400,000 ?


COLLOQUY’s share capital consists of 60,000 ordinary shares with par value of ₱40 per share.

CONVERSATION’s share capital consists of 3,000 ordinary shares with par value of ₱400 per share.

1. How much is the fair value of consideration transferred on the business

combination?

a. 4,000,000 b . 2,400,000 c. 4,400,000 d. 4,800,000

2. How many shares were issued in the business combination?

a. 40,000 b. 12,000 c. 36,000 d. 10,000

3. How much is the acquisition-date fair value per share?

a. 400 b. 440 c. 280 d. 360

4. How much goodwill was recognized on acquisition date?

a. 980,000 b. 1,200,000 c. 1,280,000 d. 1,080,000

5. What is the retained earnings of the combined entity immediately after

the business combination?

a. 3,120,000 b. 3,320,000 c. 3,280,000 d. 3,200,000

Fair value of acquirer’s shares is reliably determinable Use the following information for the next three questions:

On January 1, 20x1, CONJUNCTION Co., and UNION, Inc. entered into a

business combination effected through exchange of equity instruments. The

combination resulted to CONJUNCTION obtaining 100% interest in UNION. Both

of the combining entities are publicly listed. As of this date,

CONJUNCTION’s shares have a quoted price of ₱400 per share. CONJUNCTION Co. recognized goodwill of ₱300,000 on the business combination. No acquisition-related costs were incurred. Additional selected information

at acquisition date is shown below:

CONJUNCTION Co. Combined entity

(before acquisition) (after acquisition)

Share capital 2,400,000 2,800,000

Share premium 1,200,000 4,800,000

Totals 3,600,000 7,600,000

6. How many shares were issued by CONJUNCTION Co. in the business

combination?

a. 40,000 b. 20,000 c. 12,000 d. 10,000

7. What is the par value per share of the shares issued?

a. 10 b. 40 c. 12 d. 32

8. What is the acquisition-date fair value of the net identifiable assets

of UNION?

a. 3,700,000 b. 3,200,000 c. 2,800,000 d. 2,400,000

Business combination achieved in stages – from PFRS 9 Use the following information for the next two questions:

Fact pattern

On January 1, 20x1, FORTITUDE Co. acquired 15% ownership interest in

ENDURANCE, Inc. for ₱400,000. The investment was accounted for under PFRS 9. From 20x1 to the end of 20x3, FORTITUDE recognized net fair value gains

of ₱200,000.

On January 1, 20x4, FORTITUDE acquired additional 60% ownership interest

in ENDURANCE, Inc. for ₱3,200,000. As of this date, FORTITUDE has identified the following:

a. The previously held 15% interest has a fair value of ₱720,000. b. ENDURANCE’s net identifiable assets have a fair value of ₱4,000,000. c. FORTITUDE elected to measure non-controlling interests at the non-

controlling interest’s proportionate share of ENDURANCE’s identifiable net assets.

9. Scenario #1: The previously held interest was initially classified as

FVPL. How much is the goodwill (gain on bargain purchase)?

a. 200,000 b. 420,000 c. 920,000 d. 540,000

10. Scenario #2: The previously held interest was initially classified as

FVOCI. How much is the goodwill (gain on bargain purchase)?

a. 200,000 b. 420,000 c. 920,000 d. 540,000

Business combination achieved in stages – from PAS 28 11. On January 1, 20x1, OBDURATE Co. acquired 30% ownership interest in

STUBBORN, Inc. for ₱400,000. Because the investment gave OBDURATE significant influence over STUBBORN, the investment was accounted for

under the equity method in accordance with PAS 28.

From 20x1 to the end of 20x3, OBDURATE recognized ₱200,000 net share in the profits of the associate and ₱40,000 share in dividends. Therefore, the carrying amount of the investment in associate account on January 1,

20x3, is ₱560,000.

On January 1, 20x4, OBDURATE acquired additional 60% ownership interest in

STUBBORN, Inc. for ₱3,200,000. As of this date, OBDURATE has identified the following:

a. The previously held 30% interest has a fair value of ₱720,000. b. STUBBORN’s net identifiable assets have a fair value of ₱4,000,000.

c. OBDURATE elected to measure non-controlling interests at the non-

controlling interest’s proportionate share of STUBBORN’s identifiable

net assets.

How much is the goodwill?

a. 320,000 b. 240,000 c. 280,000 d. 360,000

Business combination achieved without transfer of consideration

12. OBSTREPEROUS Co. and NOISY, Inc. both engage in the same business. On

January 1, 20x1, OBSTREPEROUS and NOISY signed a contract, the terms of

which resulted in OBSTREPEROUS obtaining control over NOISY without any

transfer of consideration between the parties.

The fair value of the identifiable net assets of NOISY, Inc. on January 1,

20x1 is ₱4,000,000. NOISY chose to measure non-controlling interest at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets.


a. 4,000,000 b.0 c. a or c d. This is not a business combination

Business combination achieved without transfer of consideration

13. BUCOLIC Co. owns 36,000 shares representing 40% ownership interest in

RURAL, Inc.’s 90,000 outstanding ordinary shares. BUCOLIC accounts for the investment under the equity method.

On January 1, 20x1, RURAL reacquired 30,000 of its own shares from other

investors so that BUCOLIC shall obtain control over RURAL. The following

were determined as of acquisition date:

a. The previously held 40% interest has a fair value of ₱720,000. b. RURAL’s net identifiable assets have a fair value of ₱4,000,000. c. BUCOLIC elected to measure non-controlling interests at the non-

controlling interest’s proportionate share of RURAL’s identifiable net assets.


a. (1,680,000) b. (1,320,000) c. (880,000) d. 0

Provisional amounts – identifiable assets acquired Use the following information for the next three questions:

Fact pattern

On September 30, 20x1, INNOCUOUS Co. acquired all of the identifiable

assets and assumed all of the liabilities of HARMLESS, Inc. by paying cash

of ₱4,000,000. On this date, the identifiable assets acquired and

liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000, respectively.

Case #1: Identifiable asset recognized at provisional amount

14. INNOCUOUS engaged an independent valuer to appraise a building

acquired from HARMLESS. However, the valuation report was not received

by the time INNOCUOUS authorized for issue its financial statements for

the year ended December 31, 20x1. As such, the building was assigned a

provisional amount of ₱2,800,000. Also, the building was tentatively

assigned an estimated useful life of 10 years from acquisition date.

INNOCUOUS uses the straight line method of depreciation and recognized

three months’ depreciation on the building for 20x1.

On July 1, 20x2, INNOCUOUS finally received the valuation report from the

independent valuer which shows that the fair value of the building as of

September 30, 20x1 is ₱2,000,000 and remaining useful from that date is 5 years.

How should INNOCUOUS account for the new information obtained?

a. As a retrospective adjustment to the provisional amount of the

building resulting to increase in goodwill by ₱800,000. b. As a retrospective adjustment to the provisional amount of the

building resulting to decrease in goodwill by ₱800,000. c. As a retrospective restatement to the provisional amount of the

building resulting to increase in goodwill by ₱800,000. The adjustment is treated as a correction of a prior period error.

d. The new information obtained is ignored. No adjustment to goodwill is

necessary.

Case #2: Unrecorded identifiable asset acquired

15. On July 1, 20x2, INNOCUOUS obtained new information that HARMLESS has

an unrecorded patent which was not identified on September 30, 20x1. It

was believed that the unrecorded patent had a fair value of ₱400,000 and a remaining useful life of 4 years as of September 30, 20x1.


a. As a retrospective adjustment to record the previously unrecorded

patent resulting to increase in goodwill by ₱400,000. b. As a retrospective adjustment to record the previously unrecorded

patent resulting to decrease in goodwill by ₱400,000. c. As a retrospective restatement to record the previously unrecorded

patent resulting to decrease in goodwill by ₱400,000. The adjustment is treated as a correction of a prior period error.


necessary.

Case #3: Information obtained beyond measurement period 16. On November 1, 20x2, the internal auditors of INNOCUOUS discovered an

error on the recorded identifiable assets acquired from HARMLESS on the

business combination. A patent with a fair value of ₱400,000 and a remaining useful life of 4 years as of September 30, 20x1 was omitted

from the valuation listing.


a. As a retrospective adjustment to record the previously unrecorded

patent resulting to increase in goodwill by ₱400,000. b. As a retrospective adjustment to record the previously unrecorded

patent resulting to decrease in goodwill by ₱400,000. c. As a retrospective restatement to record the previously unrecorded

patent resulting to decrease in goodwill by ₱400,000. The adjustment is treated as a correction of a prior period error.


necessary.

Provisional amounts – consideration transferred 17. On September 30, 20x1, RIBALD Co. acquired all of the identifiable

assets and assumed all of the liabilities of OFFENSIVE, Inc. by issuing

10,000 shares with par value of ₱20 per share.

On this date, RIBALD’s shares were assigned a provisional value of ₱400 per share. Also, because some identifiable assets acquired and liabilities

assumed have fair values that were not readily available, a provisional

amount of ₱2,800,000 was assigned to OFFENSIVE’s net identifiable assets.

On April 1, 20x2, after RIBALD’s 20x1 financial statements were issued, new information was obtained confirming that the fair value of RIBALD’s shares on September 30, 20x1 is ₱440 per share and that the fair value of OFFENSIVE’s net identifiable assets as of September 30, 20x1 is

₱3,600,000. On July 1, 20x2, two competitors of RIBALD have also merged which led to

RIBALD believing that the merger with OFFENSIVE is not as profitable as

expected. RIBALD now wants to decrease the amount assigned to the

consideration transferred to OFFENSIVE on September 30, 20x1 to ₱360 per share and the value of OFFENSIVE’s net identifiable assets to ₱1,600,000.

How should RIBALD account for the new information obtained on July 1,

20x2?

a. As a retrospective adjustment resulting to increase in goodwill by

₱400,000. b. As a retrospective adjustment resulting to decrease in goodwill by

₱400,000. c. As a retrospective restatement resulting to decrease in goodwill by

₱400,000. The adjustment is treated as a correction of a prior period error.


necessary.

Determining what is part of the business combination transaction

18. On January 1, 20x1, DIAPHANOUS Co. acquired all of the identifiable

assets and assumed all of the liabilities of TRANSPARENT, Inc. by paying

cash of ₱4,000,000. On this date, the identifiable assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000, respectively.


In addition to the business combination transaction, the following have

also transcribed during the negotiation period:

a. After the business combination, TRANSPARENT will enter into liquidation

and DIAPHANOUS agreed to reimburse TRANSPARENT for liquidation costs

estimated at ₱80,000. b. DIAPHANOUS agreed to reimburse TRANSPARENT for the appraisal fee of a

building included in the identifiable assets acquired. The agreed

reimbursement is ₱40,000. c. DIAPHANOUS entered into an agreement to retain the top management of

TRANSPARENT for continuing employment. On acquisition date, DIAPHANOUS

agreed to pay the key employees signing bonuses totaling ₱400,000. d. To persuade, Mr. Five-six Numerix, the previous major shareholder of

TRANSPARENT, to sell his major holdings to DIAPHANOUS, DIAPHANOUS agreed

to pay an additional ₱200,000 directly to Mr. Numerix. e. Included in the valuation of identifiable assets are inventories with

fair value of ₱360,000. Ms. Vital Statistix, a former major shareholder of TRANSPARENT, shall acquire title to the goods.


a. 1,680,000 b. 1,640,000 c. 1,760,000 d. 1,240,000

Settlement of pre-existing relationship - Reacquired right

19. On January 1, 20x1, THRALL Co. acquired all of the identifiable

assets and assumed all of the liabilities of SLAVE, Inc. by paying cash

of ₱4,000,000. On this date, SLAVE’s identifiable assets and liabilities have fair values of ₱6,400,000 and ₱3,600,000, respectively.

Prior to business combination, THRALL has sold a license to SLAVE. The

licensing agreement granted SLAVE the right to use THRALL’s patented

technology for a period of 5 years. THRALL received ₱400,000 for the license on grant date and royalty fees based on SLAVE’s sales.

THRALL recognized the license fee as deferred liability and amortized it

over 5 years. The carrying amount of the deferred liability on January 1,

20x1 is ₱240,000.

On the other hand, SLAVE recognized the license fee paid to THRALL as

prepayment and amortized it based on the number of products sold. The

carrying amount of the prepayment on January 1, 20x1 is ₱200,000.

On January 1, 20x1, THRALL has determined that the fair value of the

license agreement is ₱480,000. The fair value determined consists of

₱160,000 “at-market” (based on market participants' estimates) and

₱320,000 “off-market” (based on the excess of fair value derived from cash flow estimates over at-market values; ₱480,000 – ₱160,000) components. The off-market component is favorable to SLAVE and unfavorable to THRALL, as

royalty rates have increased considerably in comparable markets since the

initiation of the contract. The contract does not have any cancellation

clause or any minimum royalty payment requirements.


a. 1,200,000 b. 840,000 c. 980,000 d. 920,000

Settlement of pre-existing relationship – Not a reacquired right 20. MULIEBRITY Co. purchases raw materials from FEMINITY, Inc. under a

five-year supply contract at fixed rates. Currently, the fixed rates are

higher than the rates at which MULIEBRITY could purchase similar raw

materials from another supplier. MULIEBRITY is allowed under the supply

agreement to terminate the contract before the end of the five-year

term, but only by paying a ₱400,000 penalty.

On January 1, 20x1, with three years remaining under the supply contract,

MULIEBRITY Co. acquired all of the identifiable assets and assumed all of

the liabilities of FEMINITY, Inc. by paying cash of ₱4,000,000. On this date, FEMINITY’s identifiable assets and liabilities have fair values of ₱6,400,000 and ₱3,600,000, respectively.

Included in the total fair value of FEMINITY is ₱640,000 related to the fair value of the supply contract with MULIEBRITY. The ₱640,000 represents a ₱280,000 component that is “at market” because the pricing is comparable to pricing for current market transactions for the same or similar items

(selling effort, customer relationships and so on) and a ₱360,000 component for pricing that is unfavorable to MULIEBRITY because it exceeds

the price of current market transactions for similar items. There are no

other assets or liabilities related to the contract in either MULIEBRITY’s or FEMINITY’s books as of acquisition date.


a. 840,000 b. 1,200,000 c. 920,000 d. 980,000

Settlement of pre-existing relationship – Non-contractual 21. On January 1, 20x1, DEMULCENT Co. acquired all of the identifiable

assets and assumed all of the liabilities of EMBARRASSING, Inc. by

paying cash of ₱4,000,000. On this date, EMBARRASSING’s identifiable

assets and liabilities have fair values of ₱6,400,000 and ₱3,600,000, respectively.

As of January 1, 20x1, there is a pending patent infringement suit filed

by EMBARRASSING, Inc. against DEMULCENT Co. DEMULCENT recognized a

probable loss on the lawsuit amounting the ₱520,000. The patent in

question shall be transferred to DEMULCENT after the business combination.

DEMULCENT’s legal advisers determined that the fair value of the

settlement of the pending lawsuit is ₱400,000. How much is the goodwill (gain on bargain purchase)?

a. 840,000 b. 800,000 c. 280,000 d. 920,000

Contingent consideration – Initial and subsequent measurement 22. On January 1, 20x1, VERITY FIRMNESS Co. acquired all of the

identifiable assets and assumed all of the liabilities of FIRMNESS, Inc.

by paying cash of ₱4,000,000. On this date, FIRMNESS’s identifiable

assets and liabilities have fair values of ₱6,400,000 and ₱3,600,000, respectively.

VERITY agrees to pay an additional amount equal to 10% of the 20x1 year-

end profit that exceeds ₱1,600,000. FIRMNESS historically has reported profits of ₱1,200,000 to ₱1,600,000 each year.

After assessing the expected level of profits for the year based on

forecasts and plans, as well as industry trends, VERITY estimated that the

fair value of the contingent consideration is ₱40,000.


a. 1,180,000 b. 1,200,000 c. 1,240,000 d. 980,000

23. Case #1: (Refer to previous problem) The actual profit for the year

is ₱2,200,000. The contingent consideration will be settled on January 15, 20x2. The entry on December 31, 20x1 includes a

a. debit to loss of ₱20,000 to be recognized in profit or loss b. credit to gain of ₱20,000 to be recognized in profit or loss c. debit to loss of ₱20,000 to be recognized in OCI d. credit to gain of ₱20,000 to be recognized in OCI

24. Case #2: (Refer to previous problem) The actual profit for the year

is ₱1,200,000. The entry on December 31, 20x1 includes a a. debit to loss of ₱40,000 to be recognized in profit or loss b. credit to gain of ₱40,000 to be recognized in profit or loss c. debit to loss of ₱40,000 to be recognized in OCI d. credit to gain of ₱40,000 to be recognized in OCI

Contingent consideration – Initial and subsequent measurement 25. On January 1, 20x1, PRECIPITOUS Co. acquired all of the identifiable

assets and assumed all of the liabilities of STEEP, Inc. by issuing

10,000 of its own shares with par value of ₱40 per share. On this date, STEEP’s identifiable assets and liabilities have fair values of

₱6,400,000 and ₱3,600,000, respectively, while PRECIPITOUS’s shares have fair value of ₱400 per share.

In addition, PRECIPITOUS agrees to issue additional 1,000 shares to the

former owners of STEEP if the market price per share of PRECIPITOUS’s shares increases to ₱480 per share as of December 31, 20x1. After consideration for the vesting conditions, PRECIPITOUS estimated that the

fair value of the contingent consideration on January 1, 20x1 is ₱360,000.


a. 1,200,000 b. 840,000 c. 1,560,000 d. 980,000

26. Case #1: (Refer to previous problem) The actual market price of

PRECIPITOUS’s shares on December 31, 20x1 is ₱480. The contingent consideration will be settled on January 15, 20x2. The entry on December

31, 20x1 includes

a. debit to loss of ₱120,000 in profit or loss b. credit gain of ₱120,000 in profit or loss c. debit to loss of ₱120,000 in OCI d. no entry is required

27. Case #2: The actual market price of PRECIPITOUS’s shares on December 31, 20x1 is ₱360. The entry on December 31, 20x1 includes a. debit to loss of ₱120,000 in profit or loss b. credit gain of ₱120,000 in OCI c. a reclassification within equity

d. no entry is required

Contingent payments to employees

28. On January 1, 20x1, MACABRE Co. acquired 90% of the identifiable

assets and assumed all of the liabilities of HORRIBLE, Inc. by paying

cash of ₱4,000,000. On this date, HORRIBLE’s identifiable assets and liabilities have fair values of ₱6,400,000 and ₱3,600,000, respectively. Non-controlling interest has a fair value of ₱320,000.

Five years ago, HORRIBLE appointed Mr. Boss as the CEO under a ten-year

contract. The contract required HORRIBLE to pay the CEO ₱400,000 if HORRIBLE is acquired before the contract expires. On January 1, 20x1, Mr.

Boss was still employed and MACABRE assumes the obligation of paying Mr.

Boss the contracted amount. How much is the goodwill (gain on bargain

purchase)?

a. 1,200,000 b. 1,920,000 c. 1,520,000 d. 1,120,000


Multiple Choice – Computational Applications of the Direct valuation method


UNFLEDGED Co. is contemplating on acquiring IMMATURE, Inc. The following

information was gathered through a diligence audit:

The actual earnings of IMMATURE, Inc. for the past 5 years are shown

below:

Year Earnings

20x1 4,800,000

20x2 5,200,000

20x3 5,400,000

20x4 5,000,000

20x5 7,200,000

Total 27,600,000

Earnings in 20x5 included an expropriation gain of ₱1,600,000. The fair value of IMMATURE’s net assets as of the end of 20x5 is

₱40,000,000. The industry average rate of return is 12%.

Probable duration of “excess earnings” is 5 years.

1. How much is the estimated goodwill using the multiples of average excess

earnings method?

a. 1,600,000 b. 400,000 c. 920,000 d. 2,000,000

2. How much is the estimated goodwill using the capitalization of average

excess earnings method? (Assume a capitalization rate of 25%)

a. 1,600,000 b. 400,000 c. 920,000 d. 2,000,000

3. How much is the estimated goodwill using the capitalization of average

earnings method? (Assume a capitalization rate of 12.5%)

a. 1,600,000 b. 400,000 c. 920,000 d. 2,000,000

4. How much is the estimated goodwill using present value of average excess

earnings method? (Assume a discount rate of 10%)

a. 1,516,136 b. 1,428,789 c. 1,516,316 d. 1,412,308

Applications of the Direct valuation method – Purchase price Use the following information for the next three questions:

ABOMINATE Co. is estimating the goodwill in the expected purchase of

DISLIKE, Inc. in January 20x6. The following information was determined.

Year Earnings

Year-end net

assets

20x1 480,000

1,920,000

20x2 520,000

2,320,000

20x3 540,000

2,160,000

20x4 500,000

2,240,000

20x5 560,000

2,360,000

Total 2,600,000

11,000,000

Case #1: Excess earnings

5. If goodwill is to be measured by capitalizing excess earnings at 30%,

with normal return on average net assets at 10%, how much is the

purchase price in the contemplated business combination? (The year-end

net assets in 20x5 approximate fair value.)

a. 5,440,000 b. 2,360,000 c. 3,360,000 d. 3,250,000

Case #2.1: Average earnings

6. If goodwill is to be measured by capitalizing earnings at 16%, how much

is the purchase price in the contemplated business combination? (The

year-end net assets in 20x5 approximate fair value.)

a. 3,360,000 b. 3,250,000 c. 5,440,000 d. 2,360,000

Case #2.2: Average earnings

7. If goodwill is to be measured by capitalizing earnings at 16%, how much

is the goodwill? (The year-end net assets in 20x5 approximate fair

value.)

a. 890,000 b. 1,000,000 c. 3,080,000 d. 0

Applications of the Direct valuation method – Purchase price 8. CONGEAL Co. acquired the net assets of THICKEN, Inc. THICKEN has one

asset whose fair value exceeds its carrying amount by ₱4,000,000. THICKEN’s equity is ₱36,000,000. CONGEAL estimated that THICKEN’s excess earnings would last for 5 years and that the return on investment is

10%. THICKEN 's average earnings for negotiation purposes is ₱5,200,000 and the industry average rate of return is 12% on the fair value of net

assets.

How much is the purchase price using the "present value of average excess

earnings" approach to goodwill measurement?

a. 1,516,315 b. 3,378,901 c. 43,378,901 d. 41,516,315

Applications of the Direct valuation method – Actual earnings 9. SIBILATE Co. acquired the net assets of HISS, Inc. for ₱41.6M. The

acquisition resulted to a goodwill of ₱1,600,000 measured by capitalizing the annual superior earnings of HISS at 25%. The normal

rate of return is 12% on net assets before recognition of goodwill. How

much is the average earnings of HISS?

a. 4,400,000 b. 4,800,000 c. 5,600,000 d. 5,200,000

Applications of the Direct valuation method

Use the following information for the next three questions:

DREARY Co. and DISMAL, Inc. decided to combine and set up a new entity – Alphabets Corporation. The individual records of the combining

constituents show the following:

DREARY

Co.

DISMAL,

Inc.

Net assets (at

fair values)

1,600,000

2,400,000

Average annual

earnings

320,000

480,000

Alphabets Corporation shall issue 10% preference shares with par value per

share of ₱400 for the net assets contributions of the combining

constituents and ordinary shares with par value per share of ₱200 for the excess of total contributions (net asset contribution plus goodwill) over

net assets contributions.

It was agreed that the normal rate of return is 10% of net assets. Excess

earnings shall be capitalized at 20%.

10. How much are the total contributions by DREARY and DISMAL,

respectively?

DREARY DISMAL

a. 3,600,000 2,400,000

b. 2,400,000 3,600,000

c. 1,600,000 2,400,000

d. 1,800,000 2,200,000

11. How much is the goodwill generated by the contributions of DREARY and

DISMAL, respectively?

DREARY DISMAL

a. 800,000 1,200,000

b. 400,000 600,000

c. 200,000 800,000

d. 920,000 1,360,000

12. What is the ratio of total shares (preference and ordinary) to be

issued to DREARY and DISMAL, respectively?

DREARY DISMAL

a. 20% 20%

b. 60% 40%

c. 25% 75%

d. 40% 60%

Reverse acquisition

13. On January 1, 20x1, ZYX, Inc., an unlisted company, acquires CBA Co.,

a publicly listed entity, through an exchange of equity instruments. CBA

Co. issues 5 shares in exchange for each ordinary share of ZYX, Inc. All

of ZYX’s shareholders exchange their shares in CBA Co. Therefore, CBA Co. issues 40,000 ordinary shares in exchange for all 8,000 ordinary

shares of ZYX, Inc.

The fair value of each ordinary share of ZYX at January 1, 20x1 is ₱800. The quoted market price of CBA’s ordinary shares at that date is ₱160.

The statements of financial position of the combining entities immediately

before combination are shown below:

CBA Co. ZYX, Inc.

(legal parent,

accounting acquiree)

(legal subsidiary,

accounting

acquirer)

Identifiable assets 6,400,000 9,600,000

Total assets 6,400,000 9,600,000

Liabilities 5,200,000 2,800,000

Share capital:

10,000 ordinary shares, ₱40 par 400,000

8,000 ordinary shares, ₱400 par

3,200,000

Retained earnings 800,000 3,600,000

Total liabilities and equity 6,400,000 9,600,000

The fair value of CBA’s identifiable assets and liabilities at January 1, 20x1 are the same as their carrying amounts. How much is the goodwill

(gain on bargain purchase)?

a. (880,000) b. 400,000 c. 540,000 d. 600,000

Combination of mutual entities

14. HOMILY Coop. and SERMON Coop. are cooperative institutions. On

January 1, 20x1, the two entities combined, with HOMILY identified as

the acquirer. HOMILY shall issue member interests to SERMON. As a

result, members of SERMON become members of HOMILY. An estimated cash

flow model indicates an acquisition-date fair valuation of SERMON, as an

entity, at ₱4,000,000. The fair value of SERMON’s identifiable net

assets is ₱3,200,000. How much is the goodwill? a. 800,000 b. (800,000) c. 3,200,000 d. 0

Theory of Accounts (BUSINESS COMBINATION)

1. The method required under PFRS 3 to be used in accounting for business

combinations is

a. Purchase method c. Acquisition method

b. Buy method d. Combination method

2. Should the following costs be included in the consideration transferred

in a business combination, according to PFRS 3 Business Combinations?

I. Costs of maintaining an acquisitions department.

II. Fees paid to accountants to effect the combination.

a. No No b. No Yes c. Yes No d. Yes Yes

3. PFRS 3 requires that the contingent liabilities of the acquired entity

should be recognized in the balance sheet at fair value. The existence

of contingent liabilities is often reflected in a lower purchase price.

Recognition of such contingent liabilities will

a. Decrease the value attributed to goodwill, thus decreasing the risk

of impairment of goodwill.

b. Decrease the value attributed to goodwill, thus increasing the risk


c. Increase the value attributed to goodwill, thus decreasing the risk


d. Increase the value attributed to goodwill, thus increasing the risk


4. Are the following statements about an acquisition true or false,

according to PFRS 3 Business combinations?

I. The acquirer should recognize the acquiree's contingent liabilities

if certain conditions are met.

II. The acquirer should recognize the acquiree's contingent assets if

certain conditions are met.

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

5. Given the following information, how is goodwill from a business

combination computed under PFRS 3?

A = Consideration transferred

B = Non-controlling interest in net assets of subsidiary

C = Previously held equity interest

D = Fair value of net identifiable assets of subsidiary

% = Percentage of ownership acquired by the parent in the subsidiary

a. A+B+C-D c. (A+C) – (D x %) b. A – (D x %) d. (A+B) – [(D x %) – B]

6. 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 PFRS 3 Business Combinations, the acquirer should

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

(Adapted)

7. Which one of the following reasons would not contribute to the creation

of negative goodwill?

a. Errors in measuring the fair value of the acquiree’s net identifiable assets or the cost of the business combination.

b. A bargain purchase.

c. A requirement in an IFRS to measure net assets acquired at a value

other than fair value.

d. Making acquisitions at the top of a “bull” market for shares. (Adapted)

8. The “excess of the acquirer’s interest in the net fair value of

acquiree’s identifiable assets, liabilities, and contingent liabilities over cost” (formerly known as negative goodwill) should be a. Amortized over the life of the assets acquired.

b. Reassessed as to the accuracy of its measurement and then recognized

immediately in profit or loss.

c. Reassessed as to the accuracy of its measurement and then recognized

in retained earnings.

d. Carried as a capital reserve indefinitely.

(Adapted)

9. This type of business combination occurs when, for example, a private

entity decides to have itself “acquired” by a smaller public entity in order to obtain a stock exchange listing.

a. Step acquisition c. Reverse acquisition

b. Rewind acquisition d. Stock acquisition

10. Acquisition accounting requires an acquirer and an acquiree to be

identified for every business combination. Where a new entity (H) is

created to acquire two preexisting entities, S and A, which of these

entities will be designated as the acquirer?

a. H. b. S. c. A. d. A or S.

(Adapted)

11. The aggregate cash flows arising from acquisitions and from disposals

of subsidiaries or other business units resulting to loss or obtaining

of control are presented separately and classified as

a. Operating activities c. Financing activities

b. Investing activities d. Disclosed only

12. Cash flows arising from changes in ownership interests in a

subsidiary that do not result in a loss of control are classified as

cash flows from

a. Operating activities c. Financing activities

b. Investing activities d. Disclosed only

13. PFRS 3 requires the acquirer in a business combination to measure the

acquiree’s identifiable tangible and intangible assets and liabilities at (with some limited exceptions)

a. cost c. fair value less transaction costs

b. acquisition-date fair value d. some other amount

14. Which of the following accounting methods must be applied to all

business combinations under PFRS 3 Business Combinations?

a. Pooling of interests method. c. Acquisition method.

b. Equity method. d. Purchase method.

(Adapted)

15. PESTER TO ANNOY is involved in a business acquisition on January 1,

20x1. At the date of acquisition the deferred tax assets were ₱300,000. On January 1, 20x1, the directors considered that realization of the

deferred tax assets were not probable. What effect would this decision

have on the allocation of the purchase price?

a. The unrecognized deferred tax would be allocated to goodwill, which

would increase by ₱300,000. b. The value of goodwill would decrease by ₱300,000. c. There would be no effect on goodwill.

d. Negative goodwill of ₱300,000 would arise. (Adapted)

16. A parent entity is acquiring a majority holding in an entity whose

shares are dealt in on a recognized market. Under PFRS 3 Business

Combinations, which of the following measurement bases may be used in

measuring the non-controlling interest at the acquisition date?

I. The nominal value of the shares in the acquiree not acquired

II. The fair value of the shares in the acquiree not acquired

III. The non-controlling interest in the acquiree's assets and liabilities

at book value

IV. The non-controlling interest in the acquiree's assets and liabilities

at fair value

a. II only b. I, II and III c. II and IV d. IV only

(Adapted)

17. ASININE STUPID Company acquired a 30% equity interest in OBTUSE

TORPID Company many years ago. In the current accounting period it

acquired a further 40% equity interest in OBTUSE. Are the following

statements true or false, according to PFRS 3 Business Combinations?

I. ASININE's pre-existing 30% equity interest in OBTUSE should be

remeasured at fair value at the acquisition date.

II. ASININE's net assets should be remeasured at fair value at the

acquisition date.

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

True

(Adapted)

18. The SKEWER Company acquired 80% of PIERCE Company for a consideration

transferred of ₱100 million. The consideration was estimated to include a control premium of ₱24 million. PIERCE's net assets were ₱85 million at the acquisition date. Are the following statements true or false,

according to PFRS 3 Business Combinations?

I. Goodwill should be measured at ₱32 million if the non-controlling

interest is measured at its share of PIERCE's net assets.

II. Goodwill should be measured at ₱34 million if the non-controlling interest is measured at fair value.

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

True, True

(Adapted)

19. PFRS 3 requires all identifiable intangible assets of the acquired

business to be recorded at their fair values. Many intangible assets

that may have been subsumed within goodwill must be now separately

valued and identified. Under PFRS 3, when would an intangible asset be

“identifiable”? a. When it meets the definition of an asset in the Conceptual Framework

document only.

b. When it meets the definition of an intangible asset in PAS 38,

Intangible Assets, and its fair value can be measured reliably.

c. If it has been recognized under local generally accepted accounting

principles even though it does not meet the definition in PAS 38.

d. Where it has been acquired in a business combination.

(Adapted)

20. Which of the following examples is unlikely to meet the definition of

an intangible asset for the purpose of PFRS 3?

a. Marketing related, such as trademarks and internet domain names.

b. Customer related, such as customer lists and contracts.

c. Technology based, such as computer software and databases.

d. Pure research based, such as general expenditure on research.

(Adapted)

21. An intangible asset with an indefinite life is one where

a. There is no foreseeable limit on the period over which the asset will

generate cash flows.

b. The length of life is over 20 years.

c. The directors feel that the intangible asset will not lose value in

the foreseeable future.

d. There is a contractual or legal arrangement that lasts for a period

in excess of five years.

(Adapted)

22. An intangible asset with an indefinite life is accounted for as

follows:

a. No amortization but annual impairment test.

b. Amortized and impairment tests annually.

c. Amortize and impairment tested if there is a “trigger event.” d. Amortized and no impairment test.

(Adapted)

23. An acquirer should at the acquisition date recognize goodwill

acquired in a business combination as an asset. Goodwill should be

accounted for as follows:

a. Recognize as an intangible asset and amortize over its useful life.

b. Write off against retained earnings.

c. Recognize as an intangible asset and impairment test when a trigger

event occurs.

d. Recognize as an intangible asset and annually impairment test (or

more frequently if impairment is indicated).

(Adapted)

24. 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.

(Adapted)

25. On acquisition, all identifiable assets and liabilities, including

goodwill, will be allocated to cash-generating units within the business

combination. Goodwill impairment is assessed within the cash-generating

units. If the combined organization has cash-generating units

significantly below the level of an operating segment, then the risk of

an impairment charge against goodwill as a result of PFRS 3 is

a. Significantly decreased because goodwill will be spread across many

cash-generating units.

b. Significantly increased because poorly performing units can no longer

be supported by those that are performing well.

c. Likely to be unchanged from previous accounting practice.

d. Likely to be decreased because goodwill will be a smaller amount due

to the greater recognition of other intangible assets.

(Adapted)

26. The management of an entity is unsure how to treat a restructuring

provision that they wish to set up on the acquisition of another entity.

Under PFRS 3, the treatment of this provision will be

a. A charge in the income statement in the postacquisition period.

b. To include the provision in the allocated cost of acquisition.

c. To provide for the amount and, if the provision is overstated, to

release the excess to the income statement in the postacquisition

period.

d. To include the provision in the allocated cost of acquisition if the

acquired entity commits itself to a restructuring within a year of

acquisition.

(Adapted)

27. MIME TO IMMITATE Co. initially tested its goodwill for impairment on

September 30, 20x1. When should MIME perform its second impairment

testing on its goodwill?

a. on or before September 30, 20x2

b. on or before December 31, 20x2

c. at any date not earlier than September 30, 20x2

d. at any date during 20x2

28. For purposes of impairment testing, PAS 36

a. requires goodwill acquired in a business combination to be allocated

to each of the acquirer’s cash-generating units in the year of

business combination.

b. requires goodwill acquired in a business combination to be allocated

to each of the acquirer’s corporate assets in the year of business combination.

c. requires goodwill acquired in a business combination to be allocated

to each of the acquirer’s cash-generating units 12 months after the date of acquisition.

d. requires goodwill acquired in a business combination to be allocated

to each of the acquirer’s operating segments 3 months after the date of acquisition.

29. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business

combination that resulted to goodwill. By December 31, 20x1, the initial

allocation of goodwill is not yet completed. According to PAS 36, TEPID

should

a. complete the initial allocation before the end of December 31, 20x1.

b. complete the initial allocation before the end of December 31, 20x2.

c. complete the initial allocation before the end of November 30, 20x1.

d. complete the initial allocation before the end of September 1, 20x2.

30. Which of the following is incorrect regarding the accounting for

business combinations in accordance with PFRSs?

a. Any goodwill recognized on acquisition date should be allocated to

the acquirer’s CGUs prior to the end of the year of acquisition. If allocation is incomplete prior to the end of the year of acquisition,

the allocation should be completed prior to the end of the

immediately preceding year.

b. PFRS 3 requires the use of the acquisition method in accounting for


c. Goodwill is computed as the difference between the consideration

transferred and the acquisition-date fair value of net identifiable

assets acquired.

d. In applying the acquisition method, PFRS 3 requires that the acquirer

should be identified.

31. For purposes of impairment testing, PAS 36

a. requires goodwill acquired in a business combination to be allocated

to each of the acquirer’s cash-generating units in the year of


b. requires goodwill acquired in a business combination to be allocated

to each of the acquirer’s corporate assets in the year of business combination.

c. requires goodwill acquired in a business combination to be allocated

to each of the acquirer’s cash-generating units 12 months after the date of acquisition.

d. requires goodwill acquired in a business combination to be allocated

to each of the acquirer’s operating segments 3 months after the date of acquisition.

32. Goodwill must not be amortized under PFRS 3. The transitional rules

do not require restatement of previous balances written off. If an

entity is adopting PFRS for the first time, and it wishes to restate all

prior acquisitions in accordance with PFRS 3, then it must apply the

PFRS to

a. Those acquisitions selected by the entity.

b. All acquisitions from the date of the earliest.

c. Only those acquisitions since the issue of the PFRS 3 and PAS 22,

Business Combinations, to the earlier ones.

d. Only past and present acquisitions of entities that have previously

and currently prepared their financial statements using PFRS.

(Adapted)

33. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business

combination that resulted to goodwill. By December 31, 20x1, the initial

allocation of goodwill is not yet completed. According to PAS 36, TEPID

should

a. complete the initial allocation before the end of December 31, 20x1.

b. complete the initial allocation before the end of December 31, 20x2.

c. complete the initial allocation before the end of November 30, 20x1.

d. complete the initial allocation before the end of September 1, 20x2.

34. PFRS 3 is mandatory for all new acquisitions from March 31, 2004.

Entities have to cease the amortization of goodwill arising from

previous acquisitions. The balance of goodwill arising from those

acquisitions is

a. Written off against retained earnings.

b. Written off against profit or loss for the year.

c. Tested for impairment from the beginning of the next accounting year.

d. Tested for impairment on March 31, 2004.

(Adapted)

35. Which of the following factors is used as multiplier of super profits

in valuation of goodwill of a business?

a. Average capital employed in the business d. Normal rate of

return

b. Simple profits e. Normal profits.

c. Number of years’ purchase (Adapted)

Suggested answers to theory of accounts questions (BUSINESS COMBINATION)

1. C 6. C 11. B 16. C 21. A 26. A 31. A

2. A 7. D 12. C 17. C 22. A 27. A 32. B

3. D 8. B 13. B 18. D 23. D 28. A 33. B

4. C 9. C 14. C 19. A 24. C 29. B 34. C

5. A 10. D 15. A 20. D 25. B 30. C 35. C

Consolidated Financial Statements (Part 1)

Computational

Consolidation – Date of acquisition Fact pattern

On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing

5,000 shares with fair value of ₱60 per share and par value of ₱40 per share. The financial statements of ABC Co. and XYZ, Inc. immediately

before the acquisition are shown below:

ABC Co. XYZ, Inc.

Cash 40,000 20,000

Accounts receivable 120,000 48,000

Inventory 160,000 92,000

Equipment 800,000 200,000

Accumulated depreciation (80,000) (40,000)

Total assets 1,040,000 320,000

Accounts payable 80,000 24,000

Bonds payable 120,000 -

Share capital 480,000 200,000

Share premium 160,000 -

Retained earnings 200,000 96,000

Total liabilities and equity 1,040,000 320,000

On January 1, 20x1, the fair value of the assets and liabilities of XYZ,

Inc. were determined by appraisal, as follows:

XYZ, Inc. Carrying

amounts

Fair

values

Fair

value

increment

Cash 20,000 20,000 -

Accounts

receivable 48,000 48,000 -

Inventory 92,000 124,000 32,000

Equipment 200,000 240,000 40,000

Accumulated

depreciation (40,000) (48,000) (8,000)

Accounts payable (24,000) (24,000) -

Net assets 296,000 360,000 64,000

The equipment has a remaining useful life as of 4 years from January 1,

20x1.

Case #1: NCI measured at proportionate share of parent

ABC Co. elects to measure non-controlling interest as its proportionate

share in XYZ’s net identifiable assets. 1. How much is the consolidated total assets as of January 1, 20x1?

a. 1,436,000 b. 1,439,000 c. 1,736,000 d. 1,376,000

2. How much is the consolidated total equity as of January 1, 20x1?

a. 1,200,000 b. 1,215,000 c. 1,212,000 d. 1,364,000

Case #2: NCI measured at fair value

ABC Co. elects the option to measure non-controlling interest at fair

value and a value of ₱75,000 is assigned to the 20% non-controlling

interest [(₱300,000 ÷ 80%) x 20% = 75,000]. 3. How much is the consolidated total assets as of January 1, 20x1?

a. 1,436,000 b. 1,439,000 c. 1,736,000 d. 1,376,000

4. How much is the consolidated total equity as of January 1, 20x1?

a. 1,200,000 b. 1,215,000 c. 1,212,000 d. 1,364,000

Consolidation subsequent to date of acquisition (Proportionate share) Fact pattern


5,000 shares with fair value of ₱60 per share and par value of ₱40 per share. On acquisition date, ABC Co. elected to measure non-controlling

interest as its proportionate share in XYZ, Inc.’s net identifiable

assets.

XYZ’s shareholders’ equity as of January 1, 20x1 comprises the following:

(at carrying

amounts)

Share capital 200,000

Retained

earnings 96,000

Total equity 296,000

On January 1, 20x1, the fair values of the assets and liabilities of XYZ,


XYZ, Inc. Carrying

amounts

Fair

values

Fair

value

increment

Cash 20,000 20,000 -

Accounts

receivable 48,000 48,000 -

Inventory 92,000 124,000 32,000

Equipment 200,000 240,000 40,000

Accumulated

depreciation (40,000) (48,000) (8,000)


Net assets 296,000 360,000 64,000

The remaining useful life of the equipment is 4 years.

During 20x1, no dividends were declared by either ABC or XYZ. There were

also no inter-company transactions. The group determined that there is no

goodwill impairment.

ABC’s and XYZ’s individual financial statements at year-end are shown

below:

Statements of financial position

As at December 31, 20x1

ABC Co. XYZ, Inc.

ASSETS

Cash 92,000 228,000


Inventory 420,000 60,000

Investment in subsidiary 300,000 -

Equipment 800,000 200,000


TOTAL ASSETS 1,672,000 496,000

LIABILITIES AND EQUITY



Total liabilities 292,000 120,000




Total equity 1,380,000 376,000

TOTAL LIABILITIES AND EQUITY 1,672,000 496,000

Statements of profit or loss

For the year ended December 31, 20x1

ABC Co. XYZ, Inc.

Sales 1,200,000 480,000

Cost of goods sold (660,000) (288,000)

Gross profit 540,000 192,000

Depreciation expense (160,000) (40,000)

Distribution costs (128,000) (72,000)

Interest expense (12,000) -

Profit for the year 240,000 80,000

5. How much is the consolidated profit for 20x1?

a. 208,000 b. 280,000 c. 240,000 d. 296,000

6. How much is the consolidated total assets as of December 31, 20x1?

a. 1,867,000 b. 1,907,000 c. 1,894,000 d. 1,904,000

7. How much is the consolidated total equity as of December 31, 20x1?

a. 1,492,000 b. 1,415,000 c. 1,412,000 d. 1,421,000

Consolidation subsequent to date of acquisition – NCI at Fair value Fact pattern


5,000 shares with fair value of ₱60 per share and par value of ₱40 per share. On acquisition date, ABC Co. elected to measure non-controlling

interest at the non-controlling interest’s fair value. A value of ₱75,000 is assigned to the 20% non-controlling interest [(₱300,000 ÷ 80%) x 20% = ₱75,000].

XYZ’s shareholders’ equity as of January 1, 20x1 comprises the following:

(at carrying amounts)


Retained earnings 96,000




XYZ, Inc. Carrying

amounts

Fair

values

Fair value

increment

Cash 20,000 20,000 -

Accounts receivable 48,000 48,000 -

Inventory 92,000 124,000 32,000

Equipment 200,000 240,000 40,000

Accumulated

depreciation (40,000) (48,000) (8,000)


Net assets 296,000 360,000 64,000



also no inter-company transactions. The group determined that there is no

goodwill impairment.


below:



ABC Co. XYZ, Inc.

ASSETS

Cash 92,000 228,000


Inventory 420,000 60,000

Investment in subsidiary 300,000

Equipment 800,000 200,000


TOTAL ASSETS 1,672,000 496,000








Total equity 1,380,000 376,000




ABC Co. XYZ, Inc.

Sales 1,200,000 480,000


Gross profit 540,000 192,000






a. 208,000 b. 280,000 c. 240,000 d. 296,000


a. 1,867,000 b. 1,907,000 c. 1,894,000 d. 1,904,000


a. 1,492,000 b. 1,415,000 c. 1,412,000 d. 1,495,000



Fair value decrement


Popo Co. acquired 80% of Momo Co. on January 1, 20x1 for ₱800,000. The following information was determined at acquisition date:

Popo Co. Momo Co. Momo Co.

Carrying

amount

Carrying

amount Fair value

Equipment 4,000,000 2,000,000 1,600,000

Accumulated

depreciation (800,000) (400,000) ( 320,000)

Net 3,200,000 1,600,000 1,280,000

Remaining useful life – Jan. 1, 20x1 10 years 5 years 5 years

1. How much is the consolidated “equipment – net” in the December 31, 20x2 financial statements?

a. 3,968,000 b. 3,628,000 c. 3,428,000 d. 3,328,000

2. The consolidation journal entry for the depreciation of the fair value

adjustment on December 31, 20x2 includes

a. debit to accumulated depreciation for ₱128,000 b. credit to accumulated depreciation for ₱128,000 c. debit to depreciation expense for ₱64,000 d. debit to retained earnings of Popo Co. for ₱51,200

Fair value increment

3. On January 1, 20x1, Donkey Co. acquired 75% of Monkey Co. At that time,

Monkey’s equipment has a carrying amount of ₱400,000 and a fair value of ₱480,000. The equipment has a remaining useful life of 10 years. On December 31, 20x2, Donkey and Monkey reported equipment with carrying

amounts of ₱2,000,000 and ₱1,200,000, respectively. How much is the consolidated “equipment – net” in the December 31, 20x2 financial

statements?

a. 3,200,0000 b. 3,384,000 c. 3,264,000 d. 3,124,000

NCI in net assets

Use the following information for the next six questions:

Owl Co. paid ₱600,000 for its 75% interest in Owlet Co. Owl elected to value NCI at fair value. Owlet’s net identifiable assets approximated

their fair values at acquisition date. The acquisition resulted in a

goodwill attributable to NCI of ₱40,000.

Since the acquisition date, Owlet has made accumulated profits of

₱800,000. There have been no changes in Owlet’s share capital since

acquisition date. The group determined that goodwill has been impaired by

₱32,000.

A summary of the individual statements of financial positions of the

entities as at the end of reporting period is shown below:

Owl Co. Owlet Co.

Total assets 4,000,000 2,000,000


Share capital 1,200,000 400,000

Retained earnings 2,000,000 1,120,000


4. How much is the fair value assigned to NCI at date of acquisition?

a. 220,000 b. 250,000 c. 268,000 d. 224,000

5. How much is the goodwill to be presented in the current-year

consolidated financial statements?

a. 72,000 b. 64,000 c. 56,000 d. 68,000

6. How much is the NCI in net assets?

a. 304,000 b. 380,000 c. 412,000 d. 426,000

7. How much is the consolidated retained earnings?

a. 2,600,000 b. 2,480,000 c. 2,576,000 d. 2,276,000

8. How much is the consolidated total assets?

a. 5,468,000 b. 6,068,000 c. 5,400,000 d. 5,620,000

9. How much is the consolidated total equity?

a. 6,188,000 b. 4,188,000 c. 4,156,000 d. 5,622,000

NCI in profit and comprehensive income

Use the following information for the next six questions:

On January 1, 20x1, Rooster Co. acquired 75% interest in Cockerel Co. for

₱600,000. At this time, Cockerel's net identifiable assets have a carrying amount of ₱720,000 which approximates fair value. NCI was assigned a fair value of ₱220,000.

During 20x1, Rooster sold goods to Cockerel for ₱600,000, having bought them for ₱480,000. A quarter of these goods remain unsold at year-end. Goodwill on acquisition of Cockerel has been tested for impairment and

found to be impaired (in total) by ₱32,000 for the current year.

The individual statements of profit or loss and other comprehensive income

of the entities for the year ended December 31, 20x1 are shown below:

Rooster Co. Cockerel Co.

Revenue 4,000,000 2,800,000

Cost of sales (1,600,000) (1,200,000)

Gross profit 2,400,000 1,600,000

Dividend income from Cockerel Co. 40,000


Administrative costs (320,000) (200,000)

Profit before tax 1,320,000 1,000,000

Income tax expense (384,000) (300,000)

Profit after tax 936,000 700,000

Other comprehensive income 296,000 100,000

Comprehensive income 1,232,000 800,000

10. How much is the consolidated sales?

a. 6,200,000 b. 6,350,000 c. 6,650,000 d. 6,180,000

11. How much is the consolidated cost of sales?

a. 2,170,000 b. 2,230,000 c. 2,770,000 d. 2,320,000

12. How much is the consolidated profit?

a. 1,574,000 b. 1,566,000 c. 1,564,000 d. 1,534,000

13. How much is the consolidated comprehensive income?

a. 1,970,000 b. 1,930,000 c. 1,962,000 d. 1,960,000

14. How much is the profit attributable to owners of the parent and NCI,

respectively?

Owners of Parent NCI

a. 1,391,000 175,000

b. 1,367,000 167,000

c. 1,391,000 173,000

d. 1,384,000 190,000

15. How much is the comprehensive income attributable to owners of the

parent and NCI, respectively?


a. 1,663,000 267,000

b. 1,778,000 192,000

c. 1,756,000 206,000

d. 1,738,000 192,000

Acquisition during the year


On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. At this

time, Piglet's net identifiable assets have a carrying amount of ₱720,000 which approximates fair value.

During the last month of the year, Piglet sold goods to Pig for ₱324,000. Piglet had marked up these goods by 50% on cost. One-third of these goods

remain unsold at year-end. The group assessed that there is no impairment

loss on goodwill for the current year.

The individual statements of profit or loss of the entities for the year

ended December 31, 20x1 are shown below:

Pig Co. Piglet Co.

Revenue 4,000,000 2,880,000

Cost of sales (1,600,000) (1,200,000)

Gross profit 2,400,000 1,680,000

Distribution costs (800,000)

Administrative costs (320,000) (180,000)

Profit before tax 1,280,000 1,100,000

Income tax expense (384,000) (380,000)

Profit after tax 896,000 720,000

All of Piglet’s income and expenses (including profit from inter-company sale) were earned and incurred evenly during the year.


a. 6,556,000 b. 4,852,000 c. 4,786,000 d. 4,636,000


a. 1,712,000 b. 2,530,000 c. 1,730,000 d. 1,876,000


a. 1,100,000 b. 1,580,000 c. 1,360,000 d. 1,420,000

19. How much is the profit attributable to owners of the parent and NCI,

respectively?


a. 1,040,000 60,000

b. 1,049,000 51,000

c. 1,036,000 544,000

d. 1,049,000 311,000

Subsidiary’s outstanding cumulative preference shares 20. Bear Co. owns 75% of Cub Co.’s ordinary shares. Cub Co. has 12%,

₱400,000 outstanding cumulative preference shares, none of which are held by Bear Co. The carrying amount of Cub’s net identifiable assets at acquisition date approximates fair value.

Bear and Cub reported individual profits of ₱936,000 and ₱700,000, respectively, for the year ended December 31, 20x1. Neither company

declared dividends. There are 3-year dividends in arrears on the

outstanding cumulative preference shares of Cub Co. It was assessed that

goodwill is not impaired.

How much is the profit attributable to owners of the parent and NCI,

respectively?


a. 1,425,000 163,000

b. 1,377,000 163,000

c. 1,377,000 211,000

d. 1,425,000 211,000


Multiple Choice – Computational Impairment of goodwill


5,000 shares with fair value of ₱60 per share and par value of ₱40 per share.

XYZ’s shareholders’ equity as of January 1, 20x1 comprises the following: (at carrying amounts)


Retained earnings 96,000




XYZ, Inc. Carrying

amounts

Fair

values

Fair value

increment

Cash 20,000 20,000 -


Inventory 92,000 124,000 32,000

Equipment 200,000 240,000 40,000

Accumulated

depreciation (40,000) (48,000) (8,000)


Net assets 296,000 360,000 64,000



also no inter-company transactions.

The group determined that goodwill is impaired by ₱4,000.


below:



ABC Co. XYZ, Inc.

ASSETS

Cash 92,000 228,000


Inventory 420,000 60,000

Investment in subsidiary 300,000 -

Equipment 800,000 200,000


TOTAL ASSETS 1,672,000 496,000








Total equity 1,380,000 376,000

TOTAL LIABILITIES AND

EQUITY 1,672,000 496,000



ABC Co. XYZ, Inc.

Sales 1,200,000 480,000


Gross profit 540,000 192,000





Case #1: On acquisition date, ABC Co. elected to measure non-controlling

interest as its proportionate share in XYZ, Inc.’s net identifiable

assets.


a. 296,000 b. 280,000 c. 208,000 d. 276,000


a. 1,900,000 b. 1,907,000 c. 1,903,000 d. 1,904,000


a. 1,492,000 b. 1,415,000 c. 1,488,000 d. 1,491,000

Case #2:

On acquisition date, ABC Co. elected to measure non-controlling interest

at fair value. A value of ₱75,000 is assigned to the non-controlling

interest.


a. 296,000 b. 280,000 c. 278,000 d. 276,000


a. 1,900,000 b. 1,907,000 c. 1,903,000 d. 1,904,000


a. 1,492,000 b. 1,415,000 c. 1,488,000 d. 1,491,000

Changes in ownership interest not resulting to loss of control Fact pattern


5,000 shares with fair value of ₱60 per share and par value of ₱40 per share. XYZ’s net identifiable assets have a fair value of ₱360,000. Goodwill has been computed under each of the available options under PFRS

3 as follows:

Case #1

(proportionate)

Case #2

(fair value)

(1) Consideration transferred 300,000 300,000

(2) Non-controlling interest in the

acquiree 72,000 75,000

(3) Previously held equity interest

in the acquire - -

Total 372,000 375,000

Fair value of net identifiable

assets acquired (360,000) (360,000)

Goodwill 12,000 15,000

As of December 31, 20x1, XYZ, Inc. increased its net assets (after fair

value adjustments) by ₱40,000 to ₱400,000. The NCI in net assets is updated as follows:

Case #1

(proportionate)

Case #2

(fair value)

NCI at acquisition date – Jan. 1, 20x1 72,000 75,000

Subsequent increase (20% x ₱40,000) 8,000 8,000

Carrying amount of NCI – Jan. 1, 20x2 80,000 83,000

Scenario #1: Acquisition of all remaining NCI

On January 1, 20x2, ABC Co. acquired all of the remaining 20% NCI in XYZ

for ₱120,000.

7. If NCI is measured at “proportionate share,” how much is the gain or loss on the transaction to be recognized in the consolidated financial

statements?

a. 80,000 b. (80,000) c. (83,000) d. 0

8. If NCI is measured at “fair value,” how much is the gain or loss on the transaction to be recognized in the consolidated financial statements?

a. (83,000) b. 83,000 c. (80,000) d. 0

9. If NCI is measured at “proportionate share,” what is the effect of the transaction on the consolidated financial statements?

a. ₱80,000 decrease in NCI and ₱40,000 decrease in retained earnings of ABC Co.

b. ₱83,000 decrease in NCI and ₱37,000 decrease in retained earnings of ABC Co.

c. either a or b

d. No effect on the consolidated financial statements

10. If NCI is measured at “fair value,” what is the effect of the

transaction on the consolidated financial statements?

a. ₱80,000 decrease in NCI and ₱40,000 decrease in retained earnings of ABC Co.

b. ₱83,000 decrease in NCI and ₱37,000 decrease in retained earnings of ABC Co.

c. either a or b

d. No effect on the consolidated financial statements

Scenario #2: Acquisition of part of remaining NCI

On January 1, 20x2, ABC Co. acquired additional 12% equity interest held

by non-controlling interests in XYZ for cash consideration of ₱80,000.

11. If NCI is measured at “proportionate share,” what is the direct

adjustment in equity?

a. 40,000 b. 32,000 c. 30,200 d. 38,500

12. If NCI is measured at “fair value,” what is the direct adjustment in equity?

a. 40,000 b. 32,000 c. 30,200 d. 38,500

Scenario #3: Disposal of part of controlling interest – Control not lost On January 1, 20x2, ABC Co. sold its 10% interest in XYZ, Inc. for

₱80,000. The 70% (80% - 10%) ownership interest retained still gives ABC control over XYZ.



a. 40,000 b. 32,000 c. 30,200 d. 38,500


a. 40,000 b. 32,000 c. 30,200 d. 38,500

Scenario #4: Subsidiary issues additional shares – Control not lost The 80% interest acquired by ABC in XYZ on January 1, 20x1 represents

40,000 shares of XYZ’s 50,000 outstanding shares as of that date.

On January 1, 20x2, XYZ, Inc. issues additional 10,000 shares with par

value per share of ₱4 to other investors for ₱10 per share. Although none of the shares were purchased by ABC, it was determined that the additional

share issuance has no effect on ABC’s control over XYZ.



a. 13,333 b. 11,332 c. 13,200 d. 0


a. 13,332 b. 11,332 c. 13,200 d. 0

Loss of control – Deconsolidation 17. On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by

issuing 5,000 shares with fair value of ₱60 per share and par value of ₱40 per share. ABC elected to measure NCI as its proportionate share in XYZ’s net identifiable assets. The acquisition resulted to goodwill of ₱12,000. There has been no impairment of goodwill.

On January 1, 20x2, ABC Co. sells 60% of its interest in XYZ, Inc. for

₱400,000. ABC’s remaining 20% interest in XYZ has a fair value of

₱100,000. The remaining investment in XYZ, Inc. gives ABC significant

influence over XYZ. The statements of financial position immediately

before the sale are shown below:



ABC Co. XYZ, Inc. Consolidated

ASSETS

Cash 92,000 228,000 320,000

Accounts receivable 300,000 88,000 388,000

Inventory 420,000 60,000 480,000

Investment in subsidiary 300,000 - -

Equipment 800,000 200,000 1,040,000

Accumulated depreciation (240,000) (80,000) (336,000)

Goodwill - - 12,000

TOTAL ASSETS 1,672,000 496,000 1,904,000


Accounts payable 172,000 120,000 292,000

Bonds payable 120,000 - 120,000

Total liabilities 292,000 120,000 412,000

Share capital 680,000 200,000 680,000

Share premium 260,000 - 260,000

Retained earnings 440,000 176,000 472,000

Non-controlling interest - - 80,000

Total equity 1,380,000 376,000 1,492,000

TOTAL LIAB. & EQTY. 1,672,000 496,000 1,904,000

How much is the gain (loss) on the disposal of controlling interest?

a. (168,000) b. 168,000 c. 156,000 d. (156,000)

Loss of control – Derecognition of OCI 18. On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by

issuing 5,000 shares with fair value of ₱60 per share and par value of ₱40 per share. XYZ’s net identifiable assets have a fair value of

₱360,000. ABC elected to measure NCI as its proportionate share in XYZ’s net identifiable assets (i.e., ₱360,000 x 20% = ₱72,000). Accordingly, goodwill of ₱12,000 was recognized on the business combination. There has been no impairment of goodwill.

Subsequent to acquisition date, XYZ, Inc. increased its net assets (after

fair value adjustments) by ₱52,000 to ₱412,000. The movement in XYZ’s net assets is shown below:

Net assets (at fair value) - Jan. 20x1 360,000

Subsequent changes:

Profit or loss after fair value adjustments 40,000

Other comprehensive income:

Gain on property revaluation 8,000

Exchange differences on translation of foreign operation 4,000

Total subsequent change in net assets 52,000

Net assets (at fair value) - Dec. 31, 20x1 412,000

The NCI in net assets is updated as follows:

NCI at acquisition date 72,000

Increase (20% x ₱52,000) 10,400

Carrying amount of NCI – Dec. 31, 20x1 82,400

Accordingly, the accumulated OCI attributable to owners of the parent

presented in the consolidated financial statements comprises the

following:

Gain on property revaluation (8,000 x 80%) 6,400

Exchange differences on translation of foreign operation (4K x 80%) 3,200

Consolidated other components of equity – Dec. 31, 20x1 9,600

On January 1, 20x2, ABC Co. sells 60% of its interest in XYZ, Inc. for

₱400,000. ABC’s remaining 20% interest in XYZ has a fair value of

₱100,000. The remaining investment in XYZ, Inc. does not give ABC significant influence over XYZ.

How much is the gain or loss on disposal of controlling interest to be

recognized in profit or loss?

a. 152,400 b. 156,800 c. 160,200 d. 158,400

Inter-company receivables and payables


On January 1, 20x1, Dad Co. acquired 80% interest in Son Co. by issuing

bonds with fair value of ₱1,000,000. The following information was determined immediately before the acquisition:

Dad Co. Son Co. Son Co.

Carrying amount Carrying amount Fair value

Total assets 4,000,000 1,600,000 1,720,000

Total liabilities (2,400,000) (800,000) (800,000)

Net assets 1,600,000 800,000 920,000

Included in Son’s liabilities is an account payable to Dad amounting to ₱80,000. Dad elected to measure NCI as its proportionate share in Son’s net identifiable assets.

19. How much is the total assets in Dad’s separate financial statements immediately after the combination?

a. 6,304,000 b. 4,000,000 c. 5,000,000 d. 4,920,000

20. How much is the total assets in the consolidated financial

statements?

a. 6,304,000 b. 5,904,000 c. 6,054,000 d. 5,984,000

Group accounting policy

Use the following information for the next five questions:

On June 30, 20x1, Cockroach Co. acquired 75,000 of Nymph Co.'s 100,000

outstanding equity shares with par value per share of ₱4 for ₱16 per share. At the time of acquisition, the retained earnings of Nymph were

₱320,000. The quoted price of Nymph's shares was ₱14 per share at acquisition date.


Included in the total assets of Nymph is land classified as investment

property with a cost of ₱720,000. Its fair value at acquisition date was ₱800,000 and by June 30, 20x3 this had risen to ₱1,280,000. Nymph uses

the cost model for its investment properties. However, the group's

policy for investment properties is the fair value model.

Also at acquisition date, Nymph's building classified as property,

plant, and equipment had a fair value of ₱120,000 in excess of its carrying amount. The building's remaining useful life is 5 years at that

date. The group's depreciation method is straight-line basis.

The inter-company current accounts included receivables and payables of

₱40,000 on June 30, 20x3. An impairment test at June 30, 20x3 concluded that consolidated goodwill

was impaired by ₱80,000. Cockroach elected to measure NCI at the NCI's fair value. There have

been no changes in Nymph’s number of outstanding shares subsequent to date of acquisition.

A summary of the individual statements of financial positions of the

entities as at June 30, 20x3 is shown below:

Cockroach Co. Nymph Co.

Total assets 4,000,000 2,000,000


Share capital 1,200,000 400,000



21. How much is the goodwill to be presented in the June 30, 20x3


a. 550,000 b. 620,000 c. 485,000 d. 530,000


a. 538,000 b. 584,000 c. 624,000 d. 638,000


a. 2,864,000 b. 2,924,000 c. 2,874,000 d. 2,984,000


a. 5,310,000 b. 5,942,000 c. 5,982,000 d. 5,350,000


a. 4,064,000 b. 4,684,000 c. 4,702,000 d. 4,724,000

Business combination achieved in stages (‘Step acquisition’) Use the following information for the next five questions:

On January 1, 20x1, Rabbit Co. acquired 40% of Bunny Co. for ₱160,000. At this time, Bunny's net identifiable assets has a carrying amount of

₱400,000 which approximates fair value. The investment was classified as “investment in associate.”

On January 1, 20x3, Rabbit Co. acquired additional 35% interest in Bunny

Co. for ₱800,000. On this date, the fair value of the existing holdings of Rabbit in Bunny was ₱400,000. Bunny's net identifiable assets on January 1, 20x3, has a carrying amount of ₱720,000 which approximates fair value. Bunny’s net assets comprised of share capital amounting to ₱400,000 and retained earnings amounting to ₱320,000. Rabbit assigned a fair value of ₱220,000 to the NCI.

The group determined on Dec. 31, 20x3 that there is no impairment in

goodwill. A summary of the individual statements of financial positions of

the entities as at December 31, 20x3 is shown below:

Rabbit Co. Bunny Co.

Total assets 4,000,000 2,000,000


Share capital 1,200,000 400,000



26. How much is the goodwill to be presented in the December 31, 20x3


a. 480,000 b. 700,000 c. 300,000 d. 80,000


a. 380,000 b. 340,000 c. 480,000 d. 420,000


a. 2,600,000 b. 2,680,000 c. 2,740,000 d. 2,860,000


a. 5,460,000 b. 5,500,000 c. 4,880,000 d. 5,280,000


a. 4,180,000 b. 4,280,000 c. 4,420,000 d. 4,220,000

Reconstruction of financial information

Use the following information for the next three questions:

On January 1, 20x1, Sheep Co. acquired 75% interest in Lamb Co. for

₱600,000. At this time, Lamb's net identifiable assets have a carrying amount of ₱720,000 which approximates fair value. NCI was assigned a fair value of ₱220,000. There were no inter-company transactions during the year. Goodwill on

acquisition of Lamb has been tested and found to be impaired (in total) by

₱32,000 for the current year.

Sheep's separate financial statements reported profit of ₱866,000 for the year ended December 31, 20x1. Profit attributable to NCI was appropriately

determined at ₱167,000.

31. How much is the profit of Lamb for the year ended December 31, 20x1?

a. 175,000 b. 625,000 c. 700,000 d. 225,000


a. 1,558,000 b. 1,534,000 c. 1,834,000 d. 1,526,000

33. How much is the profit attributable to owners of the parent and to

NCI, respectively?

Parent NCI

a. 1,367,000 167,000

b. 1,391,000 167,000

c. 1,359,000 167,000

d. 1,436,000 398,000

Comprehensive problem

Use the following information for the next ten questions:

On January 1, 20x1, Peter Co. acquired 90% ownership interest in Simon Co.

for ₱488,000. Peter Co. elected to measure NCI at fair value. NCI was assigned a fair value of ₱60,000.



Simon Co. Carrying

amounts

Fair

values

Fair value

increment

Cash 40,000 40,000 -


Inventory 100,000 124,000 24,000

Equipment 240,000 360,000 120,000

Accumulated

depreciation (80,000) (120,000) (40,000)

Patent 80,000 80,000


Net assets 336,000 520,000 184,000

The remaining useful life of the equipment is 5 years while the patent has

a remaining legal and useful life of 8 years. Simon’s share capital has a balance of ₱200,000.

Among the transactions of Peter and Simon during 20x1 were the following:

Peter's accounts receivable include a receivable from Simon amounting to

₱12,000 while Simon's accounts payable include a payable to Peter amounting to ₱8,000. The difference was due to a check amounting to ₱4,000 deposited by Simon directly to Peter's bank account which was not yet recorded by Peter in its books. The check has already cleared in

Simon’s bank account. Peter sold goods costing ₱80,000 to Simon for ₱128,000. One-third of the

inventory remains as of Dec. 31, 20x1.

Simon sold goods costing ₱40,000 to Peter for ₱60,000. One-half of the goods remain in inventory as of December 31, 20x1.

On January 1, 20x1, Simon sold to Peter equipment for ₱20,000. The equipment has a historical cost of ₱40,000 and accumulated depreciation of ₱16,000 and a remaining useful life of 5 years on the date of sale.

On July 1, 20x1, Simon Co. purchased 50% of the outstanding bonds of

Peter Co. from the open market for ₱240,000. The interest income accruing on the bonds for the year was received by Simon from Peter.

The bonds payable carry an interest rate of 10% and were originally

issued by Peter at face amount.

Peter declared dividends of ₱160,000. Simon declared dividends of ₱80,000. Goodwill is impaired by ₱8,000. There have been no changes in Simon’s share capital.

The individual financial statements of the entities at December 31, 20x1

are shown below:



Peter Co. Simon Co.

ASSETS

Cash 1,448,000 85,200


Inventory 440,000 268,000

Investment in bonds 238,000

Investment in subsidiary 488,000

Equipment 4,020,000 200,000

Accumulated depreciation (1,444,000) (91,200)

TOTAL ASSETS 5,664,000 720,000





Share capital 3,200,000 200,000

Retained earnings 1,780,000 436,800

Total equity 4,980,000 636,800




Peter Co. Simon Co.

Sales 3,728,000 1,020,000

Cost of goods sold (1,700,000) (472,000)

Gross profit 2,028,000 548,000

Interest income 8,000

Depreciation expense (644,000)



Loss on sale of equipment - (4,000)

Dividend income 72,000 -

Profit for the year 1,160,000 380,800


a. 4,364,000 b. 4,560,000 c. 4,540,000 d. 4,650,000


a. 1,862,000 b. 2,034,000 c. 2,128,000 d. 1,934,000

36. How much is the consolidated ending inventory?

a. 708,000 b. 634,000 c. 674,000 d. 682,000

37. How much is the goodwill in the December 31, 20x1 consolidated

financial statements?

a. 20,000 b. 18,800 c. 22,000 d. 19,800

38. How much is the NCI in net assets as of December 31, 20x1?

a. 82,080 b. 82,720 c. 82,800 d. 82,880

39. How much is the consolidated retained earnings as of December 31,

20x1?

a. 1,939,200 b. 1,979,000 c. 1,946,400 d. 1,929,200

40. How much is the consolidated profit or loss in 20x1?

a. 1,398,000 b. 1,263,100 c. 1,470,000 d. 1,350,000

41. How much are the profit attributable to the owners of the parent and

to NCI, respectively?

Owners of parent NCI

a. 1,239,500 23,600

b. 1,326,400 71,600

c. 1,319,200 30,800

d. 1,432,600 37,400

42. How much is the total consolidated assets as of December 31, 20x1?

a. 5,781,200 b. 5,797,200 c. 5,823,200 d. 5,689,200

43. How much is the total consolidated liabilities as of December 31,

20x1?

a. 559,200 b. 567,200 c. 526,200 d. 498,600

Reverse acquisition - NCI Fact pattern

On January 1, 20x1, Small Co. issues 2.5 shares in exchange for each

ordinary share of Big Co. The fair value of Big Co.'s shares on January 1,

20x1 is ₱480 while the fair value of Small Co.'s shares is ₱192. The

statements of financial position of the combining entities immediately

before combination show the following information:

Small Co. Big Co.

(legal parent,

accounting acquiree)

(legal subsidiary,

accounting acquirer)

Identifiable assets 21,600 44,400

Total assets 21,600 44,400

Liabilities 8,400 20,400

Share capital:

100 ordinary shares 3,600

60 ordinary shares

7,200


Total liabilities and equity 21,600 44,400

The fair value of Small’s liabilities at January 1, 20x1 is the same as their carrying amount; however, the fair value of Small's identifiable

assets at January 1, 20x1 is ₱24,000.

Case #1: (Refer to fact pattern) All of Big Co.’s shares were exchanged for Small Co.’s shares. 44. How much is the goodwill?

a. 4,800 b. 6,960 c. 3,600 d. 5,733


a. 72,000 b. 49,260 c. 68,443 d. 69,600

46. How much is the consolidated total share capital?

a. 22,800 b. 25,680 c. 16,800 d. 26,400


a. 2,400 b. 3,600 c. 4,800 d. 0

48. How much is the consolidated total retained earnings?

a. 9,600 b. 16,800 c. 15,120 d. 22,240

Case #2: (Refer to fact pattern) Only 54 of Big Co.’s shares were

exchanged for Small Co.’s shares. 49. How much is the goodwill?

a. 4,800 b. 6,960 c. 3,600 d. 5,733


a. 72,000 b. 49,260 c. 68,443 d. 69,600

51. How much is the consolidated total share capital?

a. 22,800 b. 25,680 c. 16,800 d. 26,400


a. 2,400 b. 3,600 c. 4,800 d. 0

53. How much is the consolidated total retained earnings?

a. 9,600 b. 16,800 c. 15,120 d. 22,240


Multiple Choice – Computational Acquisition date – Vertical group Scenario #1:

1. On January 1, 20x1, S1 acquires 60% interest in S2. On January 1, 20x3,

P acquires 80% interest in S1. What is the acquisition date?

a. January 1, 20x1 for S1 only

b. January 1, 20x3 for S2 only

c. January 1, 20x1 for both S1 and S2

d. January 1, 20x3 for both S1 and S2

e. a and b

2. When is goodwill computed? a. January 1, 20x1 for S1 only




e. a and b

Scenario #2:

3. On January 1, 20x1, P acquires 80% interest is S1. On January 1, 20x3,

S1 acquires 60% interest in S2. What is the acquisition date?





e. a and b

Acquisition date – D-shaped group Scenario #1:

4. P acquires 80% interest in S1 on January 1, 20x1. P acquires 25%

interest in S2 on January 1, 20x2. S1 acquires 30% interest in S2 on

January 1, 20x3. What is the acquisition date?



c. January 1, 20x2 for S2

d. a and c

e. a and b

Scenario #2:

5. S1 acquires 30% interest in S2 on January 1, 20x1. P acquires 25%

interest in S2 on January 1, 20x2. P acquires 80% interest in S1 on

January 1, 20x4.




d. a and c

e. a and b

Consolidation of a vertical group – Same acquisition date Use the following information for the next seven questions:

The following transactions occurred on January 1, 20x1:

P acquired 80% interest in S1 for ₱400,000 when the retained earnings of S1 were ₱120,000. NCI in S1 has a fair value of ₱100,000.

S1 acquired 60% interest in S2 for ₱200,000 when the retained earnings of S2 were ₱40,000. NCI in S2 (direct and indirect) has a fair value of ₱160,000.

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 statements of the entities is shown

below:



P S1 S2

Investment in Subsidiary 400,000 200,000 -

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


Total liabilities and equity 1,200,000 680,000 320,000



Revenues 720,000 408,000 192,000

Expenses (400,000) (320,000) (120,000)

Profit 320,000 88,000 72,000

6. How much is the goodwill as of December 31, 20x1?

a. 144,000 b. 132,600 c. 112,000 d. 128,000

7. How much is the total NCI in net assets as of December 31, 20x1?

a. 305,620 b. 264,320 c. 265,220 d. 236,220

8. How much is the consolidated retained earnings as of December 31, 20x1?

a. 687,680 b. 667,280 c. 698,020 d. 688,420


a. 460,320 b. 446,000 c. 484,000 d. 452,000

10. How much is the profit attributable to owners of parent and to NCI,

respectively?

Owners of parent NCI in S1 NCI in S2

a. 406,730 15,480 38,110

b. 407,680 15,200 29,120

c. 407,930 15,380 22,690

d. 408,840 15,120 60,040


a. 1,712,000 b. 1,680,000 c. 1,340,000 d. 1,722,000


a. 1,060,000 b. 1,432,000 c. 1,442,000 d. 1,400,000

Consolidation of a vertical group – Different acquisition dates Use the following information for the next seven questions:

The following transactions occurred during 20x1:

On January 1, 20x1, P acquired 80% interest in S1 for ₱400,000. On December 31, 20x1, S1 acquired 60% interest in S2 for ₱200,000.

The following information has been determined:

Retained earnings S1 S2

January 1, 20x1 120,000 40,000

December 31, 20x1 208,000 112,000

Fair value of NCI S1 S2

January 1, 20x1 100,000 192,000

December 31, 20x1 112,000 168,000

A summary of the individual statement of financial position of the

entities as at December 31, 20x1 is shown below:

P S1 S2


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





P S1 S2

Revenues 720,000 408,000 192,000

Expenses (400,000) (320,000) (120,000)

Profit 320,000 88,000 72,000


approximate their fair values at their acquisition dates. The group

determined that the goodwill to S1 has been impaired by ₱40,000 as at December 31, 20x1. There have been no changes in the share capitals of S1

and S2 during the year.

13. How much is the total goodwill as of December 31, 20x1?

a. 28,000 b. 18,240 c. 34,000 d. 36,000


a. 229,600 b. 237,600 c. 237,088 d. 232,680


20x1?

a. 638,400 b. 640,000 c. 637,780 d. 639,880


a. 368,000 b. 356,600 c. 446,000 d. 452,000

17. How much are the profit attributable to owners of parent and to the

NCIs?

Parent NCI in S1 NCI in S2

a. 348,200 8,400 0

b. 358,400 9,600 0

c. 407,680 15,200 29,120

d. 407,930 15,380 22,690


a. 1,680,000 b. 1,712,000 c. 1,636,000 . d. 1,722,000


a. 1,356,000 b. 1,432,000 c. 1,400,000 d. 1,442,000

Consolidation of a D-shaped (mixed) group

Use the following information for the next seven questions:


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.


S1 S2

Retained earnings – January 1, 20x1 120,000 40,000

Fair value of NCI – January 1, 20x1 100,000 160,000


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:



P S1 S2


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 par value) 480,000 320,000 200,000





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 inter-company investment income.


a. 280,000 b. 300,000 c. 320,000 d. 360,000


a. 232,680 b. 237,600 c. 274,320 d. 229,600


20x1?

a. 638,400 b. 705,680 c. 637,780 d. 698,480


a. 368,000 b. 356,600 c. 480,000 d. 452,000


NCIs?

Parent NCI in S1 NCI in S2

a. 324,800 15,600 27,600

b. 358,400 9,600 -0-

c. 425,680 17,600 36,720

d. 366,480 17,680 67,840


a. 1,900,000 b. 1,712,000 c. 1,636,000 d. 1,722,000


a. 1,356,000 b. 1,282,000 c. 1,460,000 d. 1,272,000

Complex group structure with Associate

Use the following information for the next eight questions:


A acquired 80% interest in B for ₱400,000. A acquired 25% interest in C for ₱160,000. B acquired 30% interest in C for ₱200,000. B acquired 20% interest in E for ₱240,000. C acquired 40% interest in D for ₱320,000.


B C D E

Retained earnings – Jan. 1, 20x1 120,000 40,000 8,000 32,000

Fair value of NCI – Jan. 1, 20x1 100,000 160,000 72,000 192,000

The carrying amounts of the net identifiable assets of each of the

investees approximate their fair values on January 1, 20x1. The group

determined on December 31, 20x1 that there is no impairment in 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:



A B C D E

Investments 560,000 440,000 320,000 - -

Other assets 800,000 480,000 320,000 240,000 280,000

Total assets 1,360,000 920,000 640,000 240,000 280,000

Liabilities 280,000 392,000 328,000 120,000 40,000

Share capital 480,000 320,000 200,000 80,000 160,000

Retained earnings 600,000 208,000 112,000 40,000 80,000

Total liabilities and equity 1,360,000 920,000 640,000 240,000 280,000

The investment accounts pertain solely to the investment transactions

described earlier and are not adjusted for any investment income from

investees.



A B C D E

Revenues 720,000 408,000 192,000 256,000 128,000

Expenses (400,000) (320,000) (120,000) (224,000) (80,000)

Profit 320,000 88,000 72,000 32,000 48,000

Profits do not include income from investments.

27. Assuming the existence of control is based solely on shareholdings,

which of the entities above are considered subsidiaries of A Co.?

a. B and C b. B, C and D c. B only d. A, B, C,

D and E


a. 280,000 b. 300,000 c. 320,000 d. 360,000


a. 282,768 b. 237,600 c. 274,320 d. 229,600


20x1?

a. 638,400 b. 705,680 c. 719,632 d. 698,480


a. 500,560 b. 502,400 c. 489,420 d. 399,272


NCIs? Parent NCI in B NCI in C NCI in D NCI in E a. 439,632 19,520 43,248 0 0

b. 358,400 9,600 0 31,272 0

c. 425,680 17,600 36,720 6,890 2,530

d. 443,932 18,768 37,860 0 0


a. 1,900,000 b. 2,482,400 c. 1,636,000 d. 1,317,600


a. 1,356,000 b. 1,482,400 c. 1,460,000 d. 1,282,000

Theory of Accounts (CONSOLIDATION)

1. The accounting for business combinations is currently prescribed under

a. PAS 22 c. PFRS 3 – revised 2008 b. PFRS 3 d. PAS 27 – revised 2011

2. KINK Co. has acquired an investment in a subsidiary, TWIST Co., with the

view to dispose of this investment within six months. The investment in

the subsidiary has been classified as held for sale and is to be

accounted for in accordance with PFRS 5. The subsidiary has never been

consolidated. How should the investment in the subsidiary be treated in

the financial statements?

a. Purchase accounting should be used.

b. Equity accounting should be used.

c. The subsidiary should not be consolidated but PFRS 5 should be used.

d. The subsidiary should remain off balance sheet.

(Adapted)

3. The consolidation theory currently applied under PFRSs is

a. Proprietary theory/Proportionate consolidation theory/

b. Parent company theory

c. Entity theory/ Contemporary theory

d. Hybrid theory/ Traditional theory

4. The proprietary theory is applied under which of the following

standards?

a. PAS 31 b. PAS 36 c. PFRS 3 d. PAS 27

5. What is the basis for consolidation?

a. significant influence c. control

b. joint control d. variable returns

6. FALLACIOUS Co. controls an overseas entity MISLEADING Co. Because of

exchange controls, it is difficult to transfer funds out of the country

to the parent entity. FALLACIOUS Co. owns 100% of the voting power of

MISLEADING Co. How should MISLEADING Co. be accounted for?

a. It should be excluded from consolidation and the equity method should

be used.

b. It should be excluded from consolidation and stated at cost.

c. It should be excluded from consolidation and accounted for in

accordance with PFRS 9.

d. It is not permitted to be excluded from consolidation because control

is not lost.

(Adapted)

7. TIPPLE has control over the composition of DRINK’s board of directors. TIPPLE owns 49% of DRINK and is the largest shareholder. TIPPLE has an

agreement with Mr. Bartek, which owns 10% of DRINK, whereby Mr. Bartek

will always vote in the same way as TIPPLE. Can TIPPLE exercise control

over DRINK?

a. TIPPLE cannot exercise control because it owns only 49% of the voting

rights.

b. TIPPLE cannot exercise control because it can control only the makeup

of the board and not necessarily the way the directors vote.

c. TIPPLE can exercise control solely because it has an agreement with

Mr. Bartek for the voting rights to be used in whatever manner TIPPLE

wishes.

d. TIPPLE can exercise control because it controls more than 50% of the

voting power, and it can govern the financial and operating policies

of DRINK through its control of the board of directors.

(Adapted)

8. On January 1, 20x1, MIME Co. acquired one-third equity interest in

IMITATE Co. which resulted in MIME having significant influence over

IMITATE Co. On July 1, 20x4, MIME Co. acquired a further one-third

equity interest in IMITATE Co. which resulted in MIME having a

controlling interest over IMITATE. For financial reporting purposes,

which of the following statements is correct?

a. Goodwill shall be computed on July 1, 20x4 and the one-third equity

interest acquired in 20x1 does not affect the goodwill computation.

b. Goodwill shall be computed on July 1, 20x4 and the one-third equity

interest acquired in 20x1 affects the goodwill computation.

c. Goodwill shall be computed both on January 1, 20x1 and July 1, 20x4

because the transactions are considered to constitute a ‘step acquisition.’

d. Goodwill shall be computed only on January 1, 20x1. The subsequent

change in ownership interest which did not result to loss of control

is accounted for directly in equity.

9. LASSITUDE Co. owns 50% of WEARINESS Co.’s voting shares. The board of directors consists of six members; LASSITUDE Co. appoints three of them

and WEARINESS Co. appoints the other three. The casting vote at meetings

always lies with the directors appointed by LASSITUDE Co. Does LASSITUDE

Co. have control over WEARINESS Co.?

a. No, control is equally split between LASSITUDE Co. and FATIGUE Co.

b. Yes, LASSITUDE Co. holds 50% of the voting power and has the casting

vote at board meetings in the event that there is not a majority

decision.

c. No, LASSITUDE Co. owns only 50% of the entity’s shares and therefore does not have control.

d. No, control can be exercised only through voting power, not through a

casting vote.

(Adapted)

10. VOLUBLE TALKATIVE Co. has sold all of its shares to the public. The

company was formerly a state-owned entity. The national regulator has

retained the power to appoint the board of directors. An overseas entity

acquires 55% of the voting shares, but the regulator still retains its

power to appoint the board of directors. Who has control of the entity?

a. The national regulator.

b. The overseas entity.

c. Neither the national regulator nor the overseas entity.

d. The board of directors.

(Adapted)

11. A manufacturing group has just acquired a controlling interest in a

football club that is listed on a stock exchange. The management of the

manufacturing group wishes to exclude the football club from the

consolidated financial statements on the grounds that its activities are

dissimilar. How should the football club be accounted for?

a. The entity should be consolidated as there is no exemption from

consolidation on the grounds of dissimilar activities.

b. The entity should not be consolidated using the purchase method but

should be consolidated using equity accounting.

c. The entity should not be consolidated and should appear as an

investment in the group accounts.

d. The entity should not be consolidated; details should be disclosed in

the financial statements.

(Adapted)

12. On January 1, 20x1, TRICE Co. obtained control of INSTANT Co.

Subsequently, there have changes in the ownership interests over

INSTANT; however, the TRICE’s control over INSTANT was unaffected. Which of the following statements is incorrect?

a. Once control has been achieved, further transactions whereby the

parent entity acquires further equity interests from non-controlling

interests, or disposes of equity interests but without losing

control, are accounted for as equity transactions

b. The carrying amounts of the controlling and non-controlling interests

are adjusted to reflect the changes in their relative interests in

the subsidiary.

c. Any difference between the amount by which the non-controlling

interests is adjusted and the fair value of the consideration paid or

received is recognized directly in equity and attributed to the

owners of the parent.

d. The carrying amount of any goodwill should be adjusted and gain or

loss is recognized in profit or loss.

13. Which of the following exemplifies the application of the ‘entity theory’ of consolidation? a. Consolidated profit = Parent’s separate profit + Share of Parent in

Subsidiary’s profit b. Consolidated profit = Profit of the group

c. Consolidated profit = Profit of the group – NCI profit d. Consolidated profit = Parent’s separate profit + NCI profit

14. Under the ‘entity theory’ of consolidation, the consolidated profit equals

a. Parent’s separate profit + Share of Parent in Subsidiary’s profit b. Profit of the group – NCI profit c. Parent’s separate profit + NCI profit d. Profit attributable to owners of the parent + Profit attributable to

NCI

15. During the year, COMITY Co. sold equipment to its subsidiary, MUTUAL

COURTESY Co., at a gain. The equipment has a remaining useful life of 5

years. Which of the following statements is true in the preparation of

the consolidated financial statements?

a. The gain is recognized immediately.

b. The gain is deferred and recognized only in the period the equipment

is sold to an unrelated party.

c. The carrying amount of the asset and the related depreciation are

adjusted downwards.

d. The carrying amount of the asset and the related depreciation are

adjusted upwards.

16. During the year, BAFFLE Co. sold part of its controlling interest in

TO COFUSE Co. The sale did not affect BAFFLE’s control over TO CONFUSE. Which of the following statements is true?

a. The equity adjustment would be larger if BAFFLE measures NCI at the

NCI’s proportionate share in the subsidiary’s net identifiable assets rather than at fair value.

b. The equity adjustment would be larger if BAFFLE measures NCI at fair

value rather than at the NCI’s proportionate share in the

subsidiary’s net identifiable assets. c. There would be no equity adjustment if the net disposal proceeds

equal the original cost of the interest sold.

d. c and d

17. Which of the following terms best describes the financial statements

of a parent in which the investments are accounted for on the basis of

the direct equity interest?

a. Single financial statements

b. Combined financial statements

c. Separate financial statements

d. Consolidated financial statements

18. Are the following statements true or false?

1. Consolidated financial statements must be prepared using uniform

accounting policies.

2. The non-controlling interest in the net assets of subsidiaries may be

shown by way of note to the consolidated statement of financial

position.

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

19. Which of the following is not a valid condition that will exempt an

entity from preparing consolidated financial statements?

a. The parent entity is a wholly owned subsidiary of another entity.

b. The parent entity’s debt or equity capital is not traded on the stock exchange.

c. The ultimate parent entity produces consolidated financial statements

available for public use that comply with PFRS.

d. The parent entity is in the process of filing its financial

statements with a securities commission.

(Adapted)

20. Where should non-controlling interests be presented in the

consolidated balance sheet?

a. Within long-term liabilities.

b. In between long-term liabilities and current liabilities.

c. Within the parent shareholders’ equity. d. Within equity but separate from the parent shareholders’ equity.

(Adapted)

Chapter 19 - Suggested answers to review theory questions

1. C 6. D 11. A 16. A

2. C 7. D 12. D 17. C

3. C 8. B 13. B 18. C

4. A 9. B 14. D 19. D

5. C 10. C 15. C 20. D

Separate Financial Statements

Multiple Choice – Computational Separate financial statements


Bandolin Co. had the following investment transactions during 20x1:

Acquired 80% interest in Zaskar, Inc. for ₱4,000,000 on January 1, 20x1. Zaskar reported profit of ₱40M and declared dividends of ₱1,200,000 during 20x1. The fair value of the investment on December 31, 20x1 is

₱4.8M. Acquired 20% interest in Goat Co. for ₱400,000 on July 1, 20x1.

Transaction costs incurred amounted to ₱80,000. Goat reported profit of ₱8M for the six months ended December 31, 20x1 and declared year-end dividends of ₱800,000. The fair value of the investment on December 31, 20x1 is ₱420,000.

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, 20x1 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, 20x1 separate financial statements?

a. 4,000,000 b. 4,800,000 c. 36,000,000 d. 0

3. How much is the carrying amount of the investment in associate in the

December 31, 20x1 separate financial statements?

a. 480,000 b. 420,000 c. 1,920,000 d. 0

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

Theory of Accounts Reviewer

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 c. Individual financial statements

b. Consolidated 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. c. Using the equity method.

b. In accordance with PFRS 9. d. a or b

Suggested answers to review theory questions

1. D

2. B

3. D

4. D



Answers at a glance:

1. C 6. A 11. B 16. B

2. B 7. D 12. D 17. B

3. D 8. D 13. B 18. D

4. A 9. D 14. C

5. B 10. C 15. A

Solutions:

1. C

Solution:

Consideration transferred 6,000,000

Non-controlling interest in the acquiree -

Previously held equity interest in the acquiree -

Total 6,000,000

Fair value of net identifiable assets acquired (4,720,000)

Goodwill 1,280,000

2. B

Solution:




Total 4,000,000


Gain on a bargain purchase (720,000)

3. D

Solution:


Non-controlling interest in the acquiree 620,000


Total 4,620,000


Goodwill 1,420,000

4. A

Solution:




Total 3,020,000

Fair value of net identifiable assets acquired (4.8M –1.6M) (3,200,000)

Gain on a bargain purchase (180,000)

5. B

Solution:


Non-controlling interest in the acquiree 1,000,000


Total 5,000,000


Goodwill 1,800,000

6. A

Solution:

Fair value of identifiable assets acquired 4,800,000

Fair value of liabilities assumed (1,600,000)

Fair value of net identifiable assets acquired 3,200,000

Multiply by: Non-controlling interest 20%

NCI’s proportionate share in net identifiable assets 640,000




Total 4,640,000


Goodwill 1,440,000

7. D

Solution:

Consideration transferred (8,000 sh. x ₱500) 4,000,000



Total 4,000,000

Fair value of net identifiable assets acquired (6.4M - 3.6M) (2,800,000)

Goodwill 1,200,000

8. D Solution: Consideration transferred (fair value of bonds) 4,000,000 Non-controlling interest in the acquiree - Previously held equity interest in the acquiree - Total 4,000,000 Fair value of net identifiable assets acquired (6.4M - 3.6M) (2,800,000) Goodwill 1,200,000

9. D Solution: Consideration transferred 4,000,000 Non-controlling interest in the acquiree - Previously held equity interest in the acquiree - Total 4,000,000 Fair value of net identifiable assets acquired (6.4M - 3.6M) (2,800,000) Goodwill 1,200,000

The ₱800,000 restructuring provisions are ignored because these are post-acquisition expenses.

including

intangible asset on the operating lease with favorable terms (₱6.4M + ₱80K)

Fair value of liabilities assumed Fair value of net identifiable assets acquired

6,480,000 (3,600,000)

2,880,000

Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 4,000,000 Non-controlling interest in the acquiree - Previously held equity interest in the acquiree - Total 4,000,000 Fair value of net identifiable assets acquired (2,880,000) Goodwill 1,120,000

11. B Solution: A liability shall be recognized because the terms of the operating

lease where the acquiree is the lessee is unfavorable. The fair value of net identifiable assets acquired is computed as

follows:

10. C Solution: Fair value of identifiable assets acquired,

Fair value of identifiable assets acquired Fair value of liabilities assumed, including liability on the

operating lease with unfavorable terms (₱3.6M + ₱80K) Fair value of net identifiable assets acquired

6,400,000 (3,680,000) 2,720,000

Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 4,000,000 Non-controlling interest in the acquiree - Previously held equity interest in the acquiree - Total 4,000,000 Fair value of net identifiable assets acquired (2,720,000) Goodwill 1,280,000

12. D Solution: No intangible asset or liability is recognized, regardless of terms of

the operating lease, because the acquiree is the lessor. Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 4,000,000 Non-controlling interest in the acquiree - Previously held equity interest in the acquiree - Total 4,000,000 Fair value of net identifiable assets acquired (6.4M - 3.6M) (2,800,000) Goodwill 1,200,000

13. B Solution: The fair value of net identifiable assets acquired is computed as

follows:

Fair value of identifiable assets before recognition of 6,120,000

unrecorded assets, excluding recorded goodwill (6.2M – 80K)

Fair value of unrecorded identifiable intangible assets (all of 1,080,000

the items listed)

Total fair value of identifiable assets acquired 7,200,000

Fair value of liabilities assumed (1,800,000)

Fair value of net identifiable assets acquired 5,400,000

Goodwill (gain on bargain purchase) is computed as follows:




Total 6,000,000


Goodwill 600,000

14. C Solution: Fair value of identifiable assets 6,400,000 Costs to sell of the “held for sale” asset (80,000) Fair value of unrecognized research and development 200,000 Adjusted value of identifiable assets 6,520,000 Fair value of liabilities assumed (3,600,000) Fair value of net identifiable assets acquired 2,920,000

Consideration transferred 4,000,000 Non-controlling interest in the acquiree - Previously held equity interest in the acquiree - Total 4,000,000 Fair value of net identifiable assets acquired (2,920,000) Goodwill 1,080,000

15. A Solution: The adjusted fair value of net identifiable assets acquired is computed as follows: Fair value of identifiable assets acquired 6,400,000 Total fair value of liabilities assumed: Fair value of liabilities assumed 3,600,000

Fair value of contingent liabilities assumed: Contractual contingent liability assumed 40,000 Contractual contingent liability assumed 120,000

Non-contractual contingent liability assumed 200,000 (3,960,000) Fair value of net identifiable assets acquired 2,440,000

Consideration transferred 4,000,000 Non-controlling interest in the acquiree 320,000 Previously held equity interest in the acquiree - Total 4,320,000 Fair value of net identifiable assets acquired (2,440,000) Goodwill 1,880,000

Consideration transferred and indemnification asset 16. B Solution: The fair value of the consideration transferred is determined as follows: Cash payment (₱4M x 50%) Present value of future cash payment (Note payable)

(₱4M x 50% x PV of ₱1 @10%, n=5) Land transferred to former owners of XYZ – at fair value

2,000,000 1,241,843 1,200,000

Fair value of consideration transferred 4,441,843

The fair value of the net identifiable assets acquired is computed as follows: Fair value of assets 6,400,000 Indemnification asset (480,000 – 400,000) 80,000 Total 6,480,000 Fair value of liabilities (3,600,000) Fair value of net identifiable assets acquired 2,880,000

Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 4,441,843 Non-controlling interest in the acquiree - Previously held equity interest in the acquiree - Total 4,441,844 Fair value of net identifiable assets acquired (2,880,000) Goodwill / (Gain on a bargain purchase) 1,561,843

17. B Solution: The deferred tax liability and asset are computed as follows:

Carrying Fair Taxable/ (Deductible) amounts values Temporary difference Cash in bank 40,000 40,000 - Receivables – net 680,000 480,000 200,000 Inventory 2,080,000 1,400,000 680,000 Building – net 4,000,000 4,400,000 (400,000) Patent - 120,000 (120,000) Payables 1,600,000 1,600,000 - Contingent liability - 80,000 80,000

Total taxable temporary difference (400K + 120K) 520,000 Multiply by: Tax rate 30% Deferred tax liability 156,000

Total deductible temporary difference (200K + 680K + 80K) 960,000 Multiply by: Tax rate 30% Deferred tax asset 288,000

The fair value of the net identifiable assets of the acquiree is

computed as follows: Fair value of identifiable assets acquired excluding

recorded goodwill (6.4M – 80K goodwill + 120K unrecorded 6,728,000 patent + 288K deferred tax asset)

Fair value of liabilities assumed (1.6M + 80K contingent (1,836,000)

liability + 156K deferred tax liability)

Fair value of net identifiable assets acquired

4,892,000

Goodwill is computed as follows:




Total 6,000,000


Goodwill 1,108,000

18. D Solution: The consideration transferred is adjusted for the dividends purchased as follows:

Fair value of consideration transferred 6,400,000

Dividends-on (Dividends purchased) (400,000)

Adjusted consideration transferred 6,000,000

Goodwill is computed as follows:




Total 6,000,000

FV of net identifiable assets acquired (6.4M – 80K - 2M) (4,320,000)

Goodwill 1,680,000

Business Combinations (Part 2) Multiple Choice – Computational

Answers at a glance: 1. A 6. D 11. A 16. C 21. B 26. D 2. D 7. B 12. B 17. D 22. C 27. C 3. A 8. A 13. D 18. C 23. A 28. B 4. B 9. C 14. A 19. D 24. B

5. D 10. C 15. B 20. A 25. C

Solution: 1. A Solution: COLLOQUY Co. Combined entity Increase Share capital 2,400,000 2,800,000 400,000

Share premium 1,200,000 4,800,000 3,600,000

Totals 3,600,000 7,600,000 4,000,000

The fair value of the shares transferred as consideration for the

business combination is ₱4,000,000 (i.e., total increase in share

capital and share premium accounts).

2. D Solution: Increase in COLLOQUY’s share capital account (see table above) 400,000

Divide by: ABC’s par value per share 40

Number of shares issued 10,000

3. A Solution: Fair value of consideration transferred 4,000,000

Divide by: Number of shares issued 10,000

Acquisition-date fair value per share 400

4. B

Solution: Consideration transferred 4,000,000 Non-controlling interest in the acquiree -

Previously held equity interest in the acquiree - Total 4,000,000

Fair value of net identifiable assets acquired (6.4M - 3.6M) (2,800,000)

Goodwill 1,200,000

5. D 3,200,000 – COLLOQUY’s retained earnings

6. D Solution: COLLOQUY Co. Combined entity Increase Share capital 2,400,000 2,800,000 400,000

Share premium 1,200,000 4,800,000 3,600,000

Totals 3,600,000 7,600,000 4,000,000

Fair value of shares transferred 4,000,000

Divide by: ABC’s fair value per share 400

Number of shares issued 10,000

7. B

Solution: Increase in share capital account (see table above) 400,000

Divide by: Number of shares issued 10,000

Par value per share 40

8. A

Solution: Consideration transferred (see previous computation) 4,000,000 Non-controlling interest in the acquiree -


Fair value of net identifiable assets acquired (squeeze) (3,700,000)

Goodwill (given information) 300,000

9. C

Solution: Consideration transferred 3,200,000 Non-controlling interest in the acquiree (1M x 25%) 1,000,000

Previously held equity interest in the acquiree 720,000 Total 4,920,000


Goodwill 920,000

10. C Solution: Consideration transferred 3,200,000 Non-controlling interest in the acquiree (1M x 25%) 1,000,000



Goodwill 920,000

11. A Solution: Consideration transferred 3,200,000 Non-controlling interest in the acquiree (1M x 10%) 400,000



Goodwill 320,000

12. B Solution: Consideration transferred - Non-controlling interest in the acquiree (4M x 100%) 4,000,000



Goodwill -

13. D

Solution: Consideration transferred (4M x 60%*) 2,400,000 Non-controlling interest in the acquiree (4M x 40%*) 1,600,000



Goodwill -

*After the business combination, the parent’s ownership interest is

increased to 60% (i.e., 36,000 ÷ 60,000). Consequently, the non-

controlling interest is 40%. 14. A 15. B

16. C 17. D 18. C Solution: The consideration transferred on the business combination is computed as follows: Cash payment on business combination 4,000,000

Additional payment to subsidiary’s former owner 200,000

Consideration transferred on the business combination 4,200,000

The fair value of net identifiable assets acquired is computed as

follows: Fair value of identifiable assets 6,400,000

Fair value of inventory not transferred to DIAPHANOUS (360,000) Adjusted fair value of identifiable assets acquired 6,040,000

Fair value of liabilities assumed (3,600,000) Adjusted fair value of net identifiable assets acquired 2,440,000

Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 4,200,000 Non-controlling interest in the acquiree -


Fair value of net identifiable assets acquired (2,440,000) Goodwill 1,760,000

19. D Solution: The settlement loss to is computed as follows: Settlement loss before adjustment (“off-market” value) 320,000

Carrying amount of deferred liability (240,000) Adjusted settlement loss 80,000

The consideration transferred on the business combination is

computed as follows: Cash payment Payment for the settlement of pre-existing

relationship (‘off-market’ value) Consideration transferred on the business combination

4,000,000 (320,000) 3,680,000

The fair value of net identifiable assets acquired is computed as

follows:

Fair value of subsidiary’s identifiable assets

Intangible asset – reacquired right Carrying amount of asset related to the reacquired rights –

prepayment Adjusted fair value of identifiable assets acquired

Fair value of liabilities assumed Fair value of net identifiable assets acquired

6,400,000

160,000

(200,000) 6,360,000

(3,600,000) 2,760,000




Goodwill 920,000

20. A Solution: The consideration transferred on the business combination is computed as follows: Cash payment 4,000,000 Payment for the settlement of pre-existing relationship

(360,000)

(‘off-market’ value)

Consideration transferred on the business combination 3,640,000



Fair value of net identifiable assets acquired (2,800,000) Goodwill 840,000

21. B Solution: The settlement gain or loss is computed as follows: Payment for the settlement of pre-existing relationship

400,000

(fair value)

(520,000)

Carrying amount of estimated liability on pending lawsuit Settlement gain 120,000

The consideration transferred on the business combination is

computed as follows: Cash payment 4,000,000

Payment for the settlement of pre-existing relationship (400,000)

(fair value) Consideration transferred on the business combination 3,600,000



Fair value of net identifiable assets acquired (1.6M - .9M) (2,800,000)

Goodwill 800,000

22. C Solution: The consideration transferred on the business combination is computed as follows: Cash payment 4,000,000

Fair value of contingent consideration 40,000 Consideration transferred on the business combination 4,040,000



Fair value of net identifiable assets acquired (1.6M - .9M) (2,800,000) Goodwill 1,240,000

23. A Solution: *The unrealized loss on change in fair value is computed as follows: Fair value of liability on January 1, 20x1 40,000

Fair value of liability on December 31, 20x1 60,000

[(2.2M – 1.6M) x 10%]

Increase in fair value of liability (loss) (20,000)

Dec.

31,

20x1

Unrealized loss on change in fair value – P/L 20,000

Liability for contingent consideration 20,000 to recognize loss on change in fair value of liability

assumed for contingent consideration

24. B Solution: Dec. Liability for contingent consideration 40,000

31, Gain on extinguishment of liability – P/L

40,000 20x1

25. C Solution: The consideration transferred on the business combination is computed as follows: Fair value of shares issued (10,000 sh. x ₱400 per sh.) 4,000,000

Fair value of contingent consideration 360,000 Consideration transferred on the business combination 4,360,000



Fair value of net identifiable assets acquired (6.4M –3.6M) (2,800,000) Goodwill 1,560,000

26. D

27. C Solution:

Dec. Share premium – contingent consideration 360,000 31, Share premium 360,000

20x1

28. B Solution:

The adjusted fair value of net identifiable assets acquired is computed

as follows: Fair value of identifiable assets acquired 6,400,000 Fair value of liabilities assumed 3,600,000 -

Fair value of contingent liability assumed 400,000 (4,000,000) Fair value of net identifiable assets acquired 600,000

Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 4,000,000 Non-controlling interest in the acquiree 320,000


Fair value of net identifiable assets acquired (2,400,000) Goodwill 1,920,000

Business Combinations (Part 3) Multiple Choice – Computational

Answers at a glance: 1. D 6. B 11. A 2. A 7. A 12. D 3. A 8. D 13. B 4. C 9. D 14. A

5. C 10. B

Solution: 1. D Solution: Total earnings for the last 5 years

Less: Expropriation gain Normalized

earnings for the last 5 years

Divide by:

(a) Average annual earnings Fair value of acquiree's net assets

Multiply by: Normal rate of return (b) Normal earnings Excess earnings (a) – (b) Multiply by: Probable duration of excess earnings

Goodwill

27,600,000 (1,600,000) 26,000,000

5 5,200,000

40,000,000 12%

4,800,000 400,000

5 2,000,000

2. A Solution: Average earnings (27.6M – 1.6M expropriation gain) ÷ 5 yrs. 5,200,000 Normal earnings in the industry (40M x 12%) (4,800,000)

Excess earnings 400,000 Divide by: Capitalization rate 25% Goodwill 1,600,000

3. A Solution: Average earnings (27.6M – 1.6M expropriation gain) ÷ 5 yrs. 5,200,000

Divide by: Capitalization rate 12.5%

Estimated purchase price 41,600,000 Fair value of XYZ’s net assets (40,000,000) Goodwill 1,600,000

4. C Solution: Average earnings (27.6M – 1.6M expropriation gain) ÷ 5 yrs. 5,200,000 Normal earnings in the industry (40M x 12%) (4,800,000)

Excess earnings 400,000 Multiply by: PV of an ordinary annuity @10%, n=5 3.79079 Goodwill 1,516,316

5. C

Solution: Average earnings (2,600,000 ÷ 5 years) 520,000 Normal earnings on average net assets [10% x (11M ÷ 5)] (220,000)

Excess earnings 300,000 Divide by: Capitalization rate 30%

Goodwill 1,000,000 Add: Fair value of net identifiable assets acquired 2,360,000 Estimated purchase price 3,360,000

6. B

Solution: Average earnings (2,600,000 ÷ 5 years) 520,000 Divide by: Capitalization rate 16%

Estimated purchase price 3,250,000 Fair value of net identifiable assets acquired (2,360,000) Goodwill 890,000

7. A (See solution above)

8. D Solution: Average earnings 5,200,000 Normal earnings (12% x 40M*) (4,800,000)

Excess earnings 400,000 Multiply by: PV of an ordinary annuity @10%, n=5 3.79079 Goodwill 1,516,316

*The fair value of XYZ’s net assets is computed as follows: Carrying amount of equity 36,000,000 Excess of fair value of one asset over its carrying amount 4,000,000 Fair value of XYZ’s net assets 40,000,000

Purchase price (squeeze) 41,516,316 Fair value of net assets acquired (40,000,000) Goodwill 1,516,316

9. D

Solution: Average earnings (squeeze) 5,200,000 (squeeze) Normal earnings on net assets [12% x 40M*] (4,800,000)

Excess earnings 400,000 Divide by: Capitalization rate 25%

(start) Goodwill (given) 1,600,000

*The net assets of XYZ is computed as follows: Purchase price (given) Fair value of net assets acquired (squeeze)

Goodwill (given) 10. B Solution: Goodwill is computed as follows:

Average annual earnings DREARY

320,000

Normal earnings on net assets (160,000) Excess earnings 160,000

Divide by: Capitalization rate 20%

Goodwill 800,000

Total contributions are computed as follows:

DREARY DISMAL Total contributions (squeeze) 2,400,000 3,600,000

Fair value of net assets (1,600,000) (2,400,000)

Goodwill 800,000 1,200,000

41,600,000

(40,000,000)

1,600,000

DISMAL

480,000

(240,000) 240,000

20% 1,200,000

Totals

6,000,000

(4,000,000) 2,000,000


12. D Solution:

DREARY DISMAL Totals

Net asset contributions ,1600,000 2,400,000 4,000,000

Divide by: Par value per share of PS 400 400 400

Number of preference shares issued 4,000 6,000 10,000

Total contributions 2,400,000 3,600,000 6,000,000 Net asset contributions (1,600,000) (2,400,000) (4,000,000)

Excess of total contributions 800,000 1,200,000 2,000,000

Divide by: Par value per share of OS 200 200 200

Number of ordinary shares issued 4,000 6,000 10,000

Total PS and OS issued 8,000 12,000 20,000

Ratio of shares issued 40% 60% 100%

13. B Solution: Analyses:

™ ZYX, Inc. lets itself be acquired (legal form) for it to gain control

over the legal acquirer (substance).

Legal form of the agreement: (ZYX lets itself be acquired) CBA Co. issues 40,000 ordinary shares to ZYX, Inc.’s shareholders in

exchange for all of ZYX, Inc.’s 8,000 shares outstanding.

Substance of the agreement: (ZYX gains control over legal acquirer)

After the combination, ZYX, Inc. gains control because it now owns

80% of CBA Co.

Accounting acquiree (CBA Co.) issues shares – Actual: CBA's currently issued shares 10,000 20%

Shares to be issued to ZYX (5 sh. x 8,000 sh.) 40,000 80%

Total shares of CBA Co. after the combination 50,000

Accounting acquirer (ZYX, Inc.) issues shares – Reverse: ZYX's currently issued shares 8,000 80% Shares to be issued to CBA's shareholders to enable them to have the same interest in ZYX, Inc.

2,000 20% [(8,000 ÷ 80%) x 20%]

Total 10,000

The consideration transferred is computed as follows:

Shares of ZYX effectively transferred to CBA

Multiply by: Fair value per share of ZYX’s shares

Fair value of consideration effectively transferred

2,000 800

1,600,000


Previously held equity interest in the acquiree - Total 1,600,000 Fair value of net identifiable assets acquired (6.4M –

(1,200,000) 5.2M)

Goodwill 400,000

14. A

Solution: Consideration transferred 4,000,000 Non-controlling interest in the acquiree -



Goodwill 800,000

Consolidated Financial Statements (Part 1) Multiple Choice – Computational

Answers at a glance: 1. A 6. D

2. C 7. A 3. B 8. B 4. B 9. B

5. B 10. D

Solution: 1. A Solution: Total assets of parent 1,040,000 Total assets of subsidiary 320,000 Investment in subsidiary - Fair value adjustments - net 64,000 Goodwill – net* 12,000

Effect of intercompany transactions -

Consolidated total assets 1,436,000

*Consideration transferred (5,000 sh. x 60) 300,000 Non-controlling interest in the acquiree (360,000 x 20%) 72,000

Previously held equity interest in the acquire - Total 372,000

Fair value of net identifiable assets acquired (360,000)

Goodwill 12,000

2. C

Solution: Share capital of parent [480,000 + (5,000sh. x 40par)] 680,000 Share premium of parent {160,000 + [5,000sh. x (60 – 40)]} 260,000

Consolidated retained earnings – (parent only) 200,000

Equity attributable to owners of the parent 1,140,000

Non-controlling interests (360,000 x 20%) 72,000 Consolidated total equity 1,212,000

3. B Solution: Total assets of parent 1,040,000 Total assets of subsidiary 320,000 Investment in subsidiary - Fair value adjustments - net 64,000 Goodwill – net* 15,000

Effect of intercompany transactions - Consolidated total assets 1,439,000

*Consideration transferred (5,000 sh. x 60) 300,000 Non-controlling interest in the acquiree 75,000


Fair value of net identifiable assets acquired (360,000) Goodwill 15,000

4. B

Solution: Share capital of parent [480,000 + (5,000sh. x 40par)] 680,000 Share premium of parent {160,000 + [5,000sh. x (60 – 40)]} 260,000

Consolidated retained earnings – (parent only) 200,000 Equity attributable to owners of the parent 1,140,000

Non-controlling interests 75,000 Consolidated total equity 1,215,000

5. B Solution:

Parent Subsidiary Consolidated

Profits before adjustments 240,000 80,000 320,000 Consolidation adjustments:

Unrealized profits ( - ) ( - ) ( - ) Dividend income from subsidiary ( - ) N/A ( - ) Gain or loss on extinguishment

( - ) ( - )

( - )

of bonds Net consolidation adjustments ( - ) ( - ) ( - )

Profits before FVA 240,000 80,000 320,000

Depreciation of FVA* (32,000) (8,000) (40,000) Impairment loss on goodwill ( - ) ( - ) ( - ) Consolidated profit 208,000 72,000 280,000

*The subsequent depreciation of fair value adjustments (FVA) is

determined as follows: Fair value Divide by Subsequent adjustments useful life depreciation

Inventory 32,000 N/A 32,000 Equipment 40,000

Accumulated depreciation (8,000) Equipment – net 32,000 4 8,000

Totals 64,000 40,000

Parent’s share = 40,000 x 80% = 32,000 Subsidiary’s share = 40,000 x 20% = 8,000

6. D Solution: Total assets of parent 1,672,000 Total assets of subsidiary 496,000 Investment in subsidiary (300,000) Fair value adjustments – net (64,000 – 40,000 dep’n.) 24,000 Goodwill – net* 12,000



*Consideration transferred (5,000 sh. x 60) 300,000 Non-controlling interest in the acquiree (360K x 20%) 72,000


Fair value of net identifiable assets acquired (360,000)

Goodwill 12,000

7. A

Solution:

Analysis of net assets

Subsidiary Acquisition Consoli- Net

date dation date change

Share capital (& Share premium) 200,000 200,000

Retained earnings 96,000 176,000 Totals at carrying amounts 296,000 376,000 FVA at acquisition 64,000 64,000 Subsequent depn. Of FVA NIL (40,000) Unrealized profits (Upstream only) NIL - Net assets at fair value 360,000 400,000 40,000

NCI in net assets XYZ's net assets at fair value – Dec. 31, 20x1 400,000

Multiply by: NCI percentage 20% Total 80,000

Add: Goodwill to NCI net of accumulated impairment losses -

Non-controlling interest in net assets – Dec. 31, 20x1 80,000

Consolidated retained earnings ABC's retained earnings – Dec. 31, 20x1 Consolidation adjustments: ABC's share in the net change in XYZ's net

assets (a)

Unrealized profits (Downstream only) Gain or loss on extinguishment of bonds Impairment loss on goodwill attributable

to parent

440,000 32,000

- -

-

Net consolidation adjustments 32,000

Consolidated ret. earnings – Dec. 31, 20x1 472,000

(a)(40,000 net change in net assets x 80%) = 32,000

Share capital of parent 680,000 Share premium 260,000 Consolidated retained earnings – (see above) 472,000 Equity attributable to owners of the parent 1,412,000

Non-controlling interests - (see above) 80,000 Consolidated total equity 1,492,000

8. B Solution:



Unrealized profits ( - ) ( - ) ( - ) Dividend income from subsidiary ( - ) N/A ( - ) Gain or loss on extinguishment of bonds ( - ) ( - ) ( - ) Net consolidation adjustments ( - ) ( - ) ( - )


Depreciation of FVA* (32,000) (8,000) (40,000)

Impairment loss on goodwill ( - ) ( - ) ( - ) Consolidated profit 208,000 72,000 280,000

*The subsequent depreciation of fair value adjustments (FVA) is

determined as follows: Fair value Divide by Subsequent adjustments useful life depreciation

Inventory 32,000 N/A 32,000 Equipment 40,000

Accumulated depreciation (8,000) Equipment – net 32,000 4 8,000

Totals 64,000 40,000

9. B Solution: Total assets of parent 1,672,000 Total assets of subsidiary 496,000 Investment in subsidiary (300,000) Fair value adjustments – net (64,000 – 40,000 dep’n.) 24,000 Goodwill – net* 15,000



* Consideration transferred (5,000 x 60)

Previously held equity interest in the

acquiree Total Less: Parent's proportionate share in the net assets of

subsidiary (360,000 x 80%) Goodwill attrib. to owners of parent - acquisition date

Less: Parent's share in goodwill impairment Goodwill attrib. to owners of parent

Fair value of NCI Less: NCI's proportionate share in net

assets of subsidiary (360,000 x 20%)

300,000

- 300,000

(288,000)

12,000 -

12,000

75,000

(72,000)

Goodwill attributable to NCI - acquisition date 3,000

Less: NCI's share in goodwill impairment -

Goodwill attributable to NCI – current year 3,000

Goodwill, net – current year 15,000

10. B Solution: Analysis of net assets

Subsidiary

Acquisition Consoli- Net date dation date change

Share capital (& Share premium) 200,000 200,000

Retained earnings 96,000 176,000 Totals at carrying amounts 296,000 376,000 FVA at acquisition 64,000 64,000 Subsequent depn. Of FVA NIL (40,000)

Unrealized profits (Upstream only) NIL - Net assets at fair value 360,000 400,000 40,000

NCI in net assets XYZ's net assets at fair value – Dec. 31, 20x1 400,000

Multiply by: NCI percentage 20%

Total 80,000

Add: Goodwill to NCI net (see goodwill computation above) 3,000

NCI in net assets – Dec. 31, 20x1 83,000

Consolidated retained earnings ABC's retained earnings – Dec. 31, 20x1 Consolidation adjustments: ABC's share in the net change in XYZ's net

assets (40,000 x 80%)

Unrealized profits (Downstream only) Gain or loss on extinguishment of bonds Impairment loss on goodwill attributable

to parent

440,000

32,000

- -

-


Consolidated ret. earnings – Dec. 31, 20x1 472,000

Share capital of parent 680,000 Share premium 260,000

Consolidated retained earnings – (see above) 472,000 Equity attributable to owners of the parent 1,412,000

Non-controlling interests - (see above) 83,000

Consolidated total equity 1,415,000



Answers at a glance: 1. D 6. C 11. B 16. D

2. A 7. C 12. D 17. A

3. C 8. A 13. B 18. A

4. A 9. B 14. B 19. B

5. D 10. A 15. D 20. D

Solution: 1. D Solution: Equipment, net – Lion Co. (800,000 x 8/10) 2,560,000

Equipment, net – Cub Co. (fair value) (1,280,000 x 3/5) 768,000

Consolidated equipment, net – Dec. 31, 20x2 3,328,000

2. A Solution: Dec. Accumulated depreciation (320K x 2/5) 128,000

31, Depreciation expense (320K ÷ 5) 64,000 20x2 Retained earnings – Lion Co.* 51,200

Retained earnings – Cub Co.* 12,800

*These are the shares of Lion and Cub in the depreciation of the FVA in the prior year, i.e., 20x1 (64,000 x 80% & 20%).

3. C Solution: Equipment, net – Kangaroo 2,000,000

Equipment, net – Joey 1,200,000

FVA on equipment, net - increment [(480,000 – 400,000) x 8/10] 64,000

Consolidated equipment, net – Dec. 31, 20x2 3,264,000

4. A Solution: Analysis of net assets

Owlet Co. Acquisition Consolidation Net

date date change


Retained earnings (1.12M – 800K) 320,000 1,120,000 Totals at carrying amounts 720,000 1,520,000

Fair value adjustments at acquisition date - -

Subsequent depreciation of FVA NIL - Unrealized profits (Upstream only) NIL - Subsidiary's net assets at fair value 720,000 1,520,000 800,000

The fair value of NCI at acquisition date is computed as follows: (The solution below is based on a portion of Goodwill computation Formula #2.)

Fair value of NCI 220,000 (squeeze)

NCI's proportionate share in net assets of subsidiary (180,000)a

Goodwill attributable to NCI - acquisition date (given) 40,000 (start)

a (₱720,000 see above x 25%) = ₱180,000

5. D Solution: Consideration transferred (given) 600,000 Less: Previously held equity interest in the acquiree - Total 600,000 Less: Parent's proportionate share in the net assets of subsidiary (₱720,000 acquisition-date fair value x 75%) (540,000) Goodwill attributable to owners of parent – acquisition date 60,000

Less: Parent’s share in goodwill impairment (₱32K x 75%) (24,000) Goodwill attributable to owners of parent – current year 36,000

Fair value of NCI (see Requirement ‘a’) 220,000 Less: NCI's proportionate share in the net assets of subsidiary (₱720,000 acquisition-date fair value x 25%) (180,000) Goodwill attributable to NCI – acquisition date 40,000

Less: NCI’s share in goodwill impairment (₱32,000 x 25%) (8,000) Goodwill attributable to NCI – current year 32,000


6. C Solution:

1,520,000 Subsidiary’s net assets at fair value (see above)


Add: Goodwill attributable to NCI (see above) 32,000

NCI in net assets – current year 412,000

7. C Solution:

2,000,000 Parent's retained earnings – current year

Consolidation adjustments: Parent's share in the net change in

subsidiary's net assets (a)

600,000

Parent’s share in goodwill impairment (24,000)


Consolidated retained earnings 2,576,000

(a) Net change in subsidiary’s net assets (see above) ₱800,000 x 75% = ₱600,000.

8. A Solution: Total assets of Parent 4,000,000 Total assets of Subsidiary 2,000,000 Investment in subsidiary (consideration transferred) (600,000) Fair value adjustments - net - Goodwill – net 68,000



9. B Solution: Share capital of Parent 1,200,000 Share premium of Parent -

Consolidated retained earnings 2,576,000 Equity attributable to owners of the parent 3,776,000

Non-controlling interests 412,000


10. A Solution: Sales by Rooster Co. 4,000,000 Sales by Cockerel Co. 2,800,000

Less: Intercompany sales during the current period (600,000)

Consolidated sales 6,200,000

11. B Solution: The unrealized profit in ending inventory is computed as follows: Sale price of intercompany sale 600,000

Cost of intercompany sale (480,000)

Profit from intercompany sale 120,000

Multiply by: Unsold portion as of yr.-end 1/4

Unrealized gross profit in ending inventory 30,000

Cost of sales of Rooster Co. 1,600,000 Cost of sales of Cockerel Co. 1,200,000 Less: Intercompany sales during the current period (600,000) Add: Unrealized gross profit in ending inventory 30,000 Less: Realized profit in beginning inventory -

Add: Depreciation of FVA on inventory -

Consolidated cost of sales 2,230,000

12. D Solution:

Rooster Cockerel Consolidated

Profits before adjustments 936,000 700,000 1,636,000

Consolidation adjustments:

Unrealized profit (Reqmt.’a’) (30,000) - (30,000)

Dividend income (given) (40,000) N/A (40,000)

Net consol. adjustments (70,000) - (70,000)

Profits before FVA 866,000 700,000 1,566,000 Depreciation of FVA - - -

Sh. in goodwill impairment(b)

(24,000) (8,000) (32,000)

Consolidated profit 842,000 692,000 1,534,000

OCI 296,000 100,000 396,000

Comprehensive income 1,138,000 792,000 1,930,000 (b)

Share in goodwill impairment: (₱32,000 x 75%); (₱32,000 x 25%)

13. B (See solution above)

14. B Solution: Owners Consoli-

of parent NCI dated Rooster's profit before FVA

866,000 N/A 866,000 (see above)

Sh. in Cockerel’s profit before FVA (c)

Depreciation of FVA - - -

Sh. in goodwill impairment (see above) (24,000) (8,000) (32,000)

Profit attributable to 1,367,000 167,000 1,534,000 Rooster's OCI 296,000 N/A 296,000

Sh. in Cockerel’s OCI (d)

75,000 25,000 100,000

Comprehensive inc. attributable to 1,738,000 192,000 1,930,000

(c) Share in Cockerel’s profit before FVA: (₱700,000 x 75%); (₱700,000 x 25%)

(d) Share in Cockerel’s OCI: (₱100,000 x 75%); (₱100,000 x 25%)

15. D (See solution above)

16. D Solution: The consolidated sales and cost of sales are computed as follows: Consolidated sales

Sales of Pig Co. 4,000,000 Sales of Piglet Co. from Sept. 1 to Dec. 31 only (₱2.88M x4/12) 960,000

Less: Intercompany sales during the year (324,000)

Consolidated sales 4,636,000

17. A Solution: The unrealized profit in ending inventory is computed as follows:

Sale price of intercompany sale 324,000

Cost of intercompany sale (₱324,000 ÷ 150%) (216,000) Profit from intercompany sale 108,000

Multiply by: Unsold portion as of year-end 1/3

Unrealized gross profit 36,000

Cost of sales of Pig Co. 1,600,000 COS of Piglet Co. from Sept. 1 to Dec. 31 only (₱1.2M x 4/12) 400,000 Less: Intercompany sales during the year (324,000) Add: Unrealized gross profit in ending inventory 36,000 Less: Realized profit in beginning inventory -

Add: Depreciation of FVA on inventory -


18. A Solution:


Profits before adjustments 896,000 240,000a

1,136,000 Consolidation adjustments:

Unrealized profit - (see above) ( - ) (36,000) (36,000) Net consolidation adjustments ( - ) (36,000) (36,000)

Profits before FVA 896,000 204,000 1,100,000

Depreciation of FVA ( - ) ( - ) ( - ) Consolidated profit 896,000 204,000 1,100,000

a (₱720,000 x 4/12 = ₱240,000)

19. B Solution:

Owners Consoli-

of parent NCI dated Pig's profit before FVA (see above) 896,000 N/A 896,000

Share in Piglet’s profit before FVA (c)

153,000 51,000 204,000

Depreciation of FVA ( - ) ( - ) ( - )

Share in goodwill impairment ( - ) ( - ) ( - )

Totals 1,049,000 51,000 1,100,000

(c) Shares in Piglet’s profit before FVA (see above): (₱204K x 75%); (₱204K x 25%)

20. D Solution: Profit or loss attributable to owners of parent and NCI

Owners Consoli-

of parent NCI dated Bear's profit before FVA (given)

Share in Cub’s profit before FVA (a)

Profit attributable to preference

shareholders of Cub (b)

936,000 N/A 936,000

489,000 163,000 652,000

N/A 48,000 48,000

Depreciation of FVA - - -

Share in impairment loss on goodwill - - -

Totals 1,424,960 211,000 1,636,000

(a) The shares in Cub’s profit are computed as follows:

Profit of Cub. Co. 700,000 One-year dividends on cumulative preference sh. (400K x 12%) (48,000)

(b)

Profit of Cub Co. attributable to ordinary shareholders 652,000

Allocation:

Bear's share (₱652,000 x 75%) 489,000

NCI's share (₱652,000 x 25%) 163,000

As allocated: 652,000

NOTE: Answer choice is rounded-off.



Answers at a glance: 1. D 11. B 21. A 31. C 41. C

2. A 12. C 22. D 32. B 42. A

3. C 13. A 23. A 33. A 43. A

4. D 14. D 24. B 34. B 44. C

5. C 15. A 25. C 35. B 45. A

6. D 16. B 26. B 36. D 46. D

7. D 17. B 27. D 37. A 47. D

8. D 18. D 28. A 38. C 48. B

9. A 19. C 29. B 39. A 49. C

10. B 20. B 30. D 40. D 50. A

51. B

52. A

53. C

Solutions: 1. D Solutions: Step 1: Analysis of effects of intercompany transaction

There are no intercompany transactions in the problem.

Step 2: Analysis of net assets

XYZ, Inc. Acquisition Consolidation Net

date date change

Total equity at carrying amounts 296,000 376,000 Fair value adjustments at acquisition date 64,000 64,000

Subsequent depreciation of FVA NIL (40,000)*

Unrealized profits (Upstream only) NIL - Subsidiary's net assets at fair value 360,000 400,000 40,000

* ₱32,000 dep’n. of FVA on inventory + ₱8,000 [(₱40,000 - ₱8,000) ÷ 4 yrs.]

dep’n. of FVA on equipment = ₱40,000

Step 3: Goodwill computation Case #1: Formula #1 - NCI measured at proportionate share

Consideration transferred (5,000 sh. x ₱60) 300,000

Non-controlling interest in the acquiree (360K x20%) -(Step 2) 72,000


Total 372,000

Fair value of net identifiable assets acquired (Step 2) (360,000)

Goodwill at acquisition date 12,000

Accumulated impairment losses since acquisition date (4,000)

Goodwill, net – Dec. 31, 20x1 8,000

Step 4: Non-controlling interest in net assets

Case #1

XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2)

400,000

Multiply by: NCI percentage 20% Total 80,000 Add: Goodwill attributable to NCI – Dec. 31, 20x1 (Step 3) - Non-controlling interest in net assets – Dec. 31, 20x1 80,000

Step 5: Consolidated retained earnings Case #1

ABC's retained earnings – Dec. 31, 20x1 440,000 Consolidation adjustments:

ABC's share in the net change in XYZ's net assets (a)

32,000 Unrealized profits (Downstream only) -

Gain on extinguishment of bonds - Impairment loss on goodwill attributable to

parent (Step 3))

(4,000) Net consolidation adjustments 28,000

Consolidated retained earnings – Dec. 31, 20x1 468,000 (a) Net change in XYZ’s net assets (Step 2) of ₱40,000 x 80% = ₱32,000.

Step 6: Consolidated profit or loss Case #1 Parent Subsidiary Consolidated

Profits before adjustments 240,000 80,000 320,000


Unrealized profits - - - Dividend income from subsidiary - N/A - Gain or loss on extinguishment

- - - of bonds

Net consolidation adjustments - - -


Depreciation of FVA (c)

(32,000) (8,000) (40,000)

Goodwill impairment (Step 3) (4,000) - (4,000)

Consolidated profit 204,000 72,000 276,000

(c) Shares in the depreciation of FVA: (40,000 x 80%); (40,000 x 20%)

Step 7: Profit or loss attributable to owners of parent and NCI

Case #1 Owners Consoli-

of parent NCI dated

ABC's profit before FVA (Step 6) 240,000 N/A 240,000

Share in XYZ’s profit before FVA (d)

64,000 16,000 80,000 Depreciation of FVA (Step 6) (32,000) (8,000) (40,000)

Share in goodwill impairment (Step 3) (4,000) - (4,000)

Totals 268,000 8,000 276,000 (d)

Shares in XYZ’s profit before FVA (Step 6) – (80,000 x 80%); (80,000 x 20%)

2. A Solution: Case #1

(proportionate) Total assets of ABC Co. 1,672,000 Total assets of XYZ, Inc. 496,000 Investment in subsidiary (300,000) FVA, net (16K - 10K) (Step 2) 24,000 Goodwill, net (Step 3) 8,000 Effect of intercompany transaction - Consolidated total assets 1,900,000

3. C Solution: Case #1 (proportionate)

Share capital of ABC Co. 680,000 Share premium of ABC Co. 260,000

Consolidated retained earnings (Step 5) 468,000 Equity attributable to owners of the parent 1,408,000

Non-controlling interests (Step 4) 80,000 Consolidated total equity 1,488,000

4. D Solution: Step 1: Analysis of effects of intercompany transaction

There are no intercompany transactions in the problem.


XYZ, Inc. Acquisition Consolidation Net

date date change

Total equity at carrying amounts 296,000 376,000 Fair value adjustments at acquisition date 64,000 64,000

Subsequent depreciation of FVA NIL (40,000)*

Unrealized profits (Upstream only) NIL - Subsidiary's net assets at fair value 360,000 400,000 40,000

* ₱32,000 dep’n. of FVA on inventory + ₱8,000 [(₱40,000 - ₱8,000) ÷ 4 yrs.]

dep’n. of FVA on equipment = ₱40,000 Step 3: Goodwill computation Case #2: Formula #2 - NCI measured at fair value Consideration transferred (5,000 sh. x ₱60) 300,000 Less: Previously held equity interest in the acquiree - Total 300,000 Less: Parent's proportionate share in the net assets of

subsidiary (₱90,000 acquisition-date fair value x 80%) (288,000) Goodwill attributable to owners of parent – Jan. 1, 20x1 12,000

Less: Parent’s share in goodwill impairment (₱4,000 x 80%) (3,200) Goodwill attributable to owners of parent – Dec. 31, 20x1 8,800

Fair value of NCI (see given) 75,000 Less: NCI's proportionate share in the net assets of

(72,000)

subsidiary (₱360,000 acquisition-date fair value x 20%)

Goodwill attributable to NCI – Jan. 1, 20x1 3,000

Less: NCI’s share in goodwill impairment (₱4,000 x 20%) (800) Goodwill attributable to NCI – Dec. 31, 20x1 2,200 -


Step 4: Non-controlling interest in net assets Case #2

XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2)

400,000


Add: Goodwill attributable to NCI – Dec. 31, 20x1 (Step 3) 2,200 Non-controlling interest in net assets – Dec. 31, 20x1 82,200

Step 5: Consolidated retained earnings Case #2

ABC's retained earnings – Dec. 31, 20x1 440,000 Consolidation adjustments:

ABC's share in the net change in XYZ's net assets (a)

32,000 Unrealized profits (Downstream only) -

Gain on extinguishment of bonds - Impairment loss on goodwill attributable to

parent (Step 3) (b)

(3,200) Net consolidation adjustments 28,800

Consolidated retained earnings – Dec. 31, 20x1 468,800 (a) Net change in XYZ’s net assets (Step 2) of ₱40,000 x 80% = ₱32,000.

(b) Again, goodwill impairment is attributed only to the parent if NCI is measured at proportionate share (Case #1) while it is shared between the parent and NCI if NCI is measured at fair value (Case #2).

Step 6: Consolidated profit or loss Case #2 Parent Subsidiary Consolidated


Unrealized profits - - - Dividend income from subsidiary - N/A - Gain or loss on extinguishment

- - -

of bonds

Net consolidation adjustments - - -


Depreciation of FVA (32,000) (8,000) (40,000)

Goodwill impairment (Step 3) (3,200) (800) (4,000) Consolidated profit 204,800 71,200 276,000

5. C Solution: Case #2

(fair value) Total assets of ABC Co. 1,672,000 Total assets of XYZ, Inc. 496,000 Investment in subsidiary (300,000) FVA, net (16K - 10K) (Step 2) 24,000 Goodwill, net (Step 3) 11,000

Effect of intercompany transaction -


6. D Solution:

Case #2

(fair value) Share capital of ABC Co. 680,000 Share premium of ABC Co. 260,000

Consolidated retained earnings (Step 5) 468,800 Equity attributable to owners of the parent 1,408,800

Non-controlling interests (Step 4) 82,200


7. D None. The transaction is accounted for as equity transaction

because it does not result to loss of control.

8. D None. The transaction is accounted for as equity transaction

because it does not result to loss of control.

9. A Solution:

Owners Net assets

% of parent % NCI of XYZ Before the transaction 80% 320,000 20% 80,000 400,000

a

After the transaction 100% 400,000 - - 400,000

Change – Inc./ (Decrease) 80,000 (80,000) -

a This represents the fair value of XYZ’s net assets on December 31, 20x1 (₱360,000 fair value on acquisition date + ₱40,000 increase during the year).

Jan. NCI (the decrease computed above) 80,000

1, Retained earnings – ABC Co. (squeeze) 40,000

20x2

Investment in subsidiary

120,000

10. B Solution:

Owners Net assets

% of parent % NCI of XYZ Before the transaction 80% 332,000 20% 83,000 415,000

b

After the transaction 100% 415,000 - - 415,000


b When NCI is measured at fair value, the subsidiary’s net assets is grossed up to reflect the goodwill attributable to the NCI (₱83,000 NCI ÷ 20% =

₱415,000).

Jan. NCI (the decrease computed above) 83,000

1, Retained earnings – ABC Co. (squeeze) 37,000 20x2

Investment in subsidiary

120,000

11. B Solution:

Owners of Net assets

% parent % NCI of XYZ

Before the transaction 80% 320,000 20% 80,000 400,000

After the transaction 92% 368,000 8% 32,000 400,000


The direct adjustment in equity is determined as follows: Case #1

(proportionate) Fair value of consideration 80,000

Change in NCI (see table above) (48,000) Direct adjustment to equity 32,000

12. C Solution: Owners Net assets

% of parent % NCI of XYZ

Before the transaction 80% 332,000 20% 83,000 415,000*



*The net assets is grossed up as follows (₱20,750 NCI ÷ 20% = ₱103,750).

Case #2

(fair value) Fair value of consideration 80,000

Change in NCI (see table above) (49,800)

Direct adjustment to equity 30,200

13. A Solution: Owners Net assets




Change – Inc./ (Decrease) (40,000) 40,000 -

Case #1


Change in NCI (see table above) (40,000) Direct adjustment to equity 40,000

14. D Solution:

Owners Net assets




Change – Inc./ (Decrease) (41,500) 41,500 -

*The net assets is grossed up as follows: (₱83,000 NCI ÷ 20% = ₱415,000).

Case #2




15. A Solution: The change in ABC’s ownership interest in XYZ is determined as follows:

Before

% After

% issuance issuance

Shares held by ABC 40,000

80%

40,000

66.67% Outstanding shares of XYZ 50,000 60,000 a

a (50,000 + 10,000 additional shares issued to NCI = 60,000)

Owners of Net assets

% parent % NCI of XYZ Before the transaction 80% 320,000 20% 80,000 400,000

After the transaction 66.67% 333,332 33.33% 166,668 500,000 b

Change – Inc./ (Decrease) 13,332 86,668 100,000

b 100,000 + 25,000 proceeds from issuance of additional shares.

The direct adjustment in equity is determined as follows:

Case #1




16. B Solution:

%

Owners

% NCI

Net assets

of parent of XYZ Before the transaction 80% 332,000 20% 83,000 415,000

c

After the transaction 66.67% 343,332 33.33% 171,668 515,000 d

Change – Inc./ (Decrease) 11,332 88,668 100,000 c The net assets is grossed up as follows: (₱83,000 NCI ÷ 20% = ₱415,000).

d (₱415,000 + ₱100,000 proceeds from issuance of additional shares = ₱515,000).

The direct adjustment in equity is determined as follows: Case #2


Change in NCI (see tables above) (88,668)


17. B Solution: Step 1: We will identify the carrying amounts of XYZ’s assets and

liabilities in the consolidated financial statements as at the date

control was lost.

Statements of financial position As at January 1, 20x2

ABC Co. XYZ, Inc. Consoli-

Carrying amount of XYZ’s net dated assets

ASSETS (a) (b) (c) = (b) – (a)

Cash 92,000 228,000 320,000 228,000

Accounts receivable 300,000 88,000 388,000 88,000

Inventory 420,000 60,000 480,000 60,000

Investment in subsidiary 300,000 - - Equipment 800,000 200,000 1,040,000 240,000

Accumulated depreciation (240,000) (80,000) (336,000) (96,000)

Goodwill - - 12,000

TOTAL ASSETS 1,672,000 496,000 1,904,000 520,000

LIABILITIES AND EQUITY Accounts payable 172,000 120,000 292,000 120,000

Bonds payable 120,000 - 120,000 -

Total liabilities 292,000 120,000 412,000 120,000

Share capital 680,000 200,000 680,000

Share premium 260,000 - 260,000 -

Retained earnings 440,000 176,000 472,000 -

Non-controlling interest - - 80,000 -

Total equity 1,380,000 376,000 1,492,000 400,000

TOTAL LIAB. & EQTY. 1,672,000 496,000 1,904,000 -

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. Cash – ABC Co. (Consideration received) 400,000

1, Investment in associate (Investment retained) 100,000

20x2 Accounts payable – XYZ, Inc. 120,000 Accumulated depreciation – XYZ, Inc. 96,000 Non-controlling interest 80,000 Cash – XYZ, Inc. 228,000 Accounts receivable – XYZ, Inc. 88,000 Inventory – XYZ, Inc. 60,000 Equipment – XYZ, Inc. 240,000 Goodwill 12,000

Gain on disposal (squeeze) 168,000

18. D Solution: Jan. Cash – ABC Co. (Consideration received) 400,000 1, Held for trading securities (Investment retained) 100,000

20x2 Non-controlling interest 82,400

Net identifiable assets a (see given) 412,000

Goodwill 12,000

Gain on disposal (squeeze) 158,400 a Net identifiable assets is also excess of total assets over total liabilities.

19. C Solution: Total assets of Dad before the combination 4,000,000

Investment in subsidiary 1,000,000

Total assets of Dad after the combination 5,000,000

20. B Solution: Total assets of Dad after the combination (see above) 5,000,000 Total assets of Son (carrying amount) 1,600,000 Investment in subsidiary (1,000,000) FVA on assets (430K fair value – 400K carrying amount) 120,000 Goodwill – net [1M + (920K x 20% NCI)] – 920 264,000

Effect of intercompany transactions (intercompany receivable) (80,000)


21. A Solution:


Nymph Co. Acquisition Consolidation Net

date date change

Share capital (100,000 sh. x ₱4) 400,000 400,000

Retained earnings 320,000 1,120,000 Totals at carrying amounts 720,000 1,520,000

FVA on investment property a

80,000 560,000 FVA on building 120,000 120,000

Subsequent depreciation of FVA b

NIL (48,000) Subsidiary's net assets at fair value 920,000 2,152,000 1,232,000

a FVA on acquisition date (₱800,000 - ₱720,000 = ₱80,000); FVA on June 30, 20x3 (₱1,280,000 - ₱720,000 = ₱560,000). These FVA’s are not subsequently depreciated because depreciation is prohibited under the fair value model.

b The depreciation of FVA pertains only to the building (see discussion above) (₱120,000 x 2/5 = ₱48,000).

Goodwill at current year Formula #2: Consideration transferred (75,000 sh. x ₱16) 1,200,000

Less: Previously held equity interest in the acquiree -

Total 1,200,000

Less: Parent's proportionate share in the net assets of

subsidiary (₱920,000 acquisition-date fair value x 75%) (690,000)

Goodwill attributable to owners of parent – acquisition date 510,000

Less: Parent’s share in goodwill impairment (₱80,000 x 75%) (60,000)

Goodwill attributable to owners of parent – current year 450,000

Fair value of NCI (25,000 sh. x ₱14) 350,000

Less: NCI's proportionate share in the net assets of subsidiary (₱920,000 acquisition-date fair value x 25%) (230,000)

Goodwill attributable to NCI – acquisition date 120,000

Less: NCI’s share in goodwill impairment (₱80,000 x 25%) (20,000)

Goodwill attributable to NCI – current year 100,000


22. D Solution:

2,152,000 Nymph's net assets at fair value – 6/30/x3 (see ‘Analysis’ above)

Multiply by: NCI percentage 25%

Total 538,000

Add: Goodwill attributable to NCI – 6/30/x3 (see above) 100,000 Non-controlling interest in net assets – June 30, 20x3 638,000

23. A Solution: Cockroach's retained earnings – 6/30/x3 2,000,000 Consolidation adjustments:

Share in the net change in Nymph's net assets (a)

924,000

Cockroach's share in goodwill impairment (60,000)


Consolidated retained earnings – June 30, 20x3 2,864,000 (a) Net change in Nymph’s net assets (see ‘Analysis’) ₱1,232,000 x 75% = ₱924,000.

24. B Solution: Total assets of Cockroach 4,000,000

Total assets of Nymph 2,000,000

Investment in subsidiary (1,200,000)

Fair value adjustments – net (560K + 120K – 48K) see ‘Analysis’ 632,000

Goodwill – net 550,000

Effect of intercompany transactions (Intercompany receivable) (40,000)


25. C Solution: Share capital of Cockroach 1,200,000 Share premium of Cockroach -

Consolidated retained earnings 2,864,000 Equity attributable to owners of the parent 4,064,000

Non-controlling interests 638,000


26. B Solution:


Bunny Co. Acquisition Consolidation Net

date date change (Jan. 1, 20x3) (Dec. 31, 20x3)


Retained earnings 320,000 1,120,000 Totals at carrying amounts 720,000 1,520,000

Fair value adjustments - - Subsequent depreciation of FVA NIL ( - ) Subsidiary's net assets at fair value 720,000 1,520,000 800,000

Goodwill at current year Formula #2: Consideration transferred 800,000

Less: Previously held equity interest in the acquiree 400,000 Total 1,200,000 Less: Parent's proportionate share in the net assets of subsidiary (₱720,000 acquisition-date fair value x 75%*) (540,00) Goodwill attributable to owners of parent – Jan. 1, 20x3 660,000

Less: Parent’s share in goodwill impairment ( - )

Goodwill attributable to owners of parent – Dec. 31, 20x3 660,000

Fair value of NCI 220,000 Less: NCI's proportionate share in the net assets of

subsidiary (₱720,000 acquisition-date fair value x 25%) (180,000) Goodwill attributable to NCI – Jan. 1, 20x3 40,000

Less: NCI’s share in goodwill impairment ( - )

Goodwill attributable to NCI – Dec. 31, 20x3 40,000


* (40% previous interest + 35% additional interest acquired on Jan. 1, 20x3)

27. D Solution:

Bunny's net assets at fair value – 12/31/x3 (see ‘Analysis’ above) 1,520,000


Add: Goodwill attributable to NCI – 6/30/x3 (see above) 40,000 Non-controlling interest in net assets – Dec. 31, 20x3 420,000

28. A Solution: Rabbit's retained earnings – 12/31/x3 2,000,000 Consolidation adjustments: Rabbit’s share in the net change in Bunny's net assets

(a)600,000

Rabbit's share in goodwill impairment ( - )

600,000

Net consolidation adjustments

Consolidated retained earnings – Dec. 31, 20x3 2,600,000 (a) Net change in Bunny’s net assets (see ‘Analysis’) ₱800,000 x 75% = ₱600,000.

29. B Solution: Total assets of Rabbit 4,000,000 Total assets of Bunny 2,000,000

Investment in subsidiary (₱800,000 + ₱400,000) (1,200,000)

Fair value adjustments – net - Goodwill – net 700,000

Effect of intercompany transactions - Consolidated total assets 5,500,000

30. D Solution: Share capital of Rabbit 1,200,000 Share premium of Rabbit - Consolidated retained earnings 2,600,000 Equity attributable to owners of the parent 3,800,000

Non-controlling interest 420,000 Consolidated total equity 4,220,000

31. C Solution: Owners

of parent NCI Sheep's profit before FVA 866,000 N/A

Share in Lamb’s profit before FVA 525,000 b

175,000 squeeze Depreciation of FVA ( - ) ( - )

Share in impairment of goodwill (24,000) (8,000) a

Totals 1,367,000 167,000 start

a Shares in impairment of goodwill: (₱8,000 x 75%); (₱8,000 x 25%)

b (₱175,000 ÷ 25%) = ₱700,000 Lamb’s separate profit x 75% = ₱525,000.

32. B (1,367,000 + 167,000 ‘see computations above’) = 1,534,000


34. B (See Step 1.ii below)

Step 1: Analysis of effects of intercompany transaction The following are the intercompany transactions during the period: i. In-transit item (Transaction ‘a’) ii. Intercompany sale of inventory (Transactions ‘b’ and ‘c’) iii. Intercompany sale of equipment (Transaction ‘d’) iv. Intercompany bond transaction (Transactions ‘e’) v. Intercompany dividend transaction (Transactions ‘f’)

i. In-transit item

The ₱4,000 check deposited to Peter’s account is a valid payment for

Simon’s account. Therefore, Simon’s ₱8,000 account payable to Peter need not be adjusted.

However, since Peter failed to record the payment, Peter’s ₱12,000 accounts receivable from Simon must be adjusted. As to Peter, the

deposit is a bank credit memo.

The adjusting journal entry (AJE) in Peter’s books is as follows: Dec. Cash in bank 4,000

31, Accounts receivable 4,000 20x1

Unlike CJE’s, AJE’s are recorded in the separate books. The

remaining balance of ₱8,000 in the intercompany account

receivable/account payable shall be eliminated through CJE.

Summary of effects on the consolidated financial statements: • Cash: increased by ₱4,000. • Accounts receivable: decreased by ₱12,000 (₱3,000 AJE + ₱8,000

CJE). • Accounts payable: decreased by ₱8,000

ii. Intercompany sale of inventory Transaction (b) is downstream while transaction (c) is upstream. The unrealized profits in ending inventory are determined as follows:

Downstream Upstream Total Sale price of intercompany sale 128,000 60,000

Cost of intercompany sale (80,000) (40,000) Profit from intercompany sale 48,000 20,000

Multiply by: Unsold portion as of yr.-end 1/3 1/2 Unrealized gross profit 16,000 10,000 26,000

The related consolidated accounts are computed as follows: Ending inventory of Peter Co. 440,000 Ending inventory of Simon Co. 268,000

Less: Unrealized profit in ending inventory (26,000) Consolidated ending inventory 682,000

Sales by Peter Co. 3,728,000 Sales by Simon Co. 1,020,000

Less: Intercompany sales during 20x1 (128,000 + 60,000) (188,000) Consolidated sales 4,560,000

Before we can compute for the consolidated cost of sales, we need to

determine first the depreciation of FVA in 20x1. FVA on inventory 24,000 FVA on equipment, net (20,000 ÷ 5 years) 16,000

FVA on patent (20,000 ÷ 8 years) 10,000

Depreciation of FVA in 20x1 50,000

The consolidated cost of sales is computed as follows: Cost of sales of Peter Co. 1,700,000 Cost of sales of Simon Co. 472,000 Less: Intercompany sales during 20x1 (188,000) Add: Unrealized profit in ending inventory 26,000 Add: Depreciation of FVA on inventory (see computation

24,000 above)


iii. Intercompany sale of property, plant and equipment Transaction (d) is upstream. The effects of this transaction are analyzed as follows: a) Unamortized balance of deferred gain (loss) on December 31, 20x1: Sale price 20,000

Carrying amount of equipment on Jan. 1, 20x1 (24,000) Loss on sale of equipment – Jan. 1, 20x1 (4,000)

Multiply by: Ratio of useful life at beg. and end of yr. 4/5

Unamortized balance of deferred loss – Dec. 31, 20x1 (3,200)

b) Effect on the 20x1 depreciation: Because of the sale Had there been no sale Effect on combined FS

Peter recognized Simon should have Depreciation is

depreciation of recognized depreciation understated by ₱800. ₱4,000 in 20x1 of ₱4,800 in 20x1 (₱20,000 purchase (₱24,000 carrying

price ÷ 5 yrs.). amount ÷ 5 yrs.).

The related consolidated accounts are computed as follows: Equipment, net – Parent 2,576,000 Equipment, net – Subsidiary 108,800 Unamortized balance of deferred loss* 3,200

FVA on equipment, net (80,000 beg. - 16,000 dep'n of FVA) 64,000

Consolidated equipment – net 2,752,000 *The deferred loss is added because both “loss” and “equipment” have a normal debit balance. Debit and debit results to addition.

Depreciation – Peter 644,000 Depreciation – Simon 27,200

Understatement in depreciation 800

Depreciation of FVA on equipment (see computation above 16,000

Consolidated depreciation 688,000

The ₱4,000 loss on sale recognized by Simon shall be eliminated in

the consolidated statement of profit or loss. We need to recognize also the unrecorded patent net of

accumulated amortization. Patent (unrecognized) (see given) 80,000

Less: Amortization of FVA on patent (see computation above) (10,000)

Consolidated patent – net 70,000

A patent amortization expense of ₱10,000 shall be recognized in the

consolidated financial statements iv. Intercompany bond transaction The effects Transaction (e) are analyzed as follows: a) Gain or loss on extinguishment of bonds: Carrying amount of bonds payable acquired (400,000 x 50%) 200,000 Acquisition cost of bonds (assumed retirement price) (240,000) Loss on extinguishment of bonds ( 40,000)

b) Intercompany interest expense and interest income: Peter paid Simon interest of ₱10,000 (400K x 50% x 10% x 6/12). However, Simon’s interest income is only ₱8,000 (see Statement of profit or loss above). The ₱2,000 difference must be an amortization of the premium on the investment in bonds. Nonetheless, both Peter’s interest expense of ₱10,000 and Simon’s interest income of ₱8,000 shall be eliminated in the consolidated financial statements together with the related bonds payable and investment in bonds.

Summary of effects on the consolidated financial statements: • Loss on extinguishment of bonds: recognize ₱40,000. • Interest expense: decreased by ₱10,000. • Interest income: eliminated • Investment in bonds: eliminated • Bonds payable: decreased by ₱200,000

v. Intercompany dividend transaction – Transaction (f) The dividends declared by Simon are allocated as follows: Total dividends declared ₱80,000

Allocation: 72,000

Owners of the parent (80,000 x 90%) Non-controlling interest (80,000 x 10%) 8,000

As allocated ₱80,000

Peter’s ₱72,000 dividend income shall be eliminated in the

consolidated financial statements.

No consolidation adjustment is needed for the dividends declared by

Peter because the dividends pertain solely to the owners of the parent.


Simon Co. Acquisition Consolidation Net

date date change

Net assets at carrying amounts 336,000 636,800 Fair value adjustments at acquisition date 184,000 184,000

Subsequent depreciation of FVA a

NIL (50,000) Unrealized profit (Upstream) - (Step 1.ii) NIL (10,000) Unamortized def. loss (Upstream) - (Step

3,200

1.ii)

Interest income (Step 1.iv) (8,000) Subsidiary's net assets at fair value 520,000 756,000 236,000

a See computation in Step 1.ii.

The unrealized profit on upstream sale on inventory, unamortized

deferred loss on upstream sale of equipment and interest income on

investment in bonds were closed to Simon’s retained earnings by

year-end. These are eliminated through addition or subtraction, as

appropriate.

Step 3: Goodwill computation We will use ‘Formula #2’ because NCI is measured at fair value.

Consideration transferred (see given) 488,000

Previously held equity interest in the acquiree - Total 488,000 Less: Parent's proportionate share in the net assets of subsidiary (₱520,000 acquisition-date fair value x 90%) (468,000) Goodwill attributable to owners of parent – Jan. 1, 20x1 20,000

Less: Parent’s share in goodwill impairment (₱8,000 x 90%) c

(7,200)

Goodwill attributable to owners of parent – Dec. 31, 20x1 12,800

Fair value of NCI (see given) 60,000 Less: NCI's proportionate share in the net assets of subsidiary (₱520,000 acquisition-date fair value x 20%) (52,000) Goodwill attributable to NCI – Jan. 1, 20x1 8,000

Less: NCI’s share in goodwill impairment (₱8,000 x 10%) c (800)

Goodwill attributable to NCI – Dec. 31, 20x1 7,200


c The problem states that goodwill was impaired by ₱8,000. The impairment is shared between the parent and NCI because NCI is measured at fair value.

Step 4: Non-controlling interest in net assets Simon's net assets at fair value – Dec. 31, 20x1 (Step 2) 756,000


Add: Goodwill to NCI net of accumulated impairment (Step 3) 7,200 Non-controlling interest in net assets – Dec. 31, 20x1 82,800

Step 5: Consolidated retained earnings Peter's retained earnings – Dec. 31, 20x1 1,780,000 Consolidation adjustments:

Peter's share in the net change in Simon's net assets (a)

212,400 Unrealized profits (Downstream only) - (Step 1.ii) (16,000) Loss on extinguishment of bonds - (Step 1.iv) (40,000) Intercompany interest expense - (Step 1.iv) 10,000 Peter’s share in goodwill impairment - (Step 3) (7,200) Net consolidation adjustments 159,200

Consolidated retained earnings – Dec. 31, 20x1 1,939,200 (a) Net change in Simon’s net assets (Step 2) of ₱236,000 x 90% = ₱212,400.

The deferred loss on the sale of equipment is not included in the

computations above because the sale is upstream.

Step 6: Consolidated profit or loss Parent Subsidiary Consolidated

Profits before adjustments 1,160,000 380,800 1,540,800


Unrealized profits - (Step 1.ii) (16,000) (10,000) (26,000)

Unamortized def. loss - (Step 1.iii) 3,200 3,200

Loss on bonds - (Step 1.iv) (40,000) - (40,000)

Interest exp./income - (Step 1.iv) 10,000 (8,000) 2,000

Dividend income - (Step 1.v) (72,000) N/A (72,000)

Net consolidation adjustments (118,000) (14,800) (132,800) Profits before FVA 1,042,000 366,000 1,408,000

Depreciation of FVA (b)

(45,000) (5,000) (50,000)

Impairment of goodwill - (Step 3) (7,200) (800) (8,000)

Consolidated profit 989,800 360,200 1,350,000 (b)

Shares in the depreciation of FVA: (50,000 x 90%); (50,000 x 10%)

Step 7: Profit or loss attributable to owners of parent and NCI Owners Consoli-

of parent NCI dated Peter's profit before FVA - (Step 6) 1,042,000 N/A 1,042,000

Share in Simon’s profit before FVA (c)

329,400 36,600 366,000 Depreciation of FVA - (Step 6) (45,000) (5,000) (50,000)

Impairment of goodwill - (Step 6) (7,200) (800) (8,000)

Totals 1,319,200 30,800 1,350,000

(c) Shares in Simon’s profit before FVA (Step 6): (366,000 x 90%); (366,000 x 10%)

The consolidated financial statements are prepared as follows:

Peter Group Consolidated statement of financial position

As of December 31, 20x1 ASSETS Cash (1,448,000 + 85,200 + 4,000 Step 1.i) 1,537,200 Accounts receivable (712,000 + 20,000 - 12,000 Step 1.i) 720,000 Inventory (Step 1.ii) 682,000 Investment in bonds (eliminated - Step 1.iv) - Investment in subsidiary (eliminated) - Equipment, net (Step 1.iii) 2,752,000 Patent (Step 1.iii) 70,000

Goodwill, net (Step 3) 20,000

TOTAL ASSETS 5,781,200

LIABILITIES AND EQUITY Accounts payable (367,200 + 284,000 - 8,000 Step 1.i) 359,200

10% Bonds payable (400,000 - 200,000 Step 1.iv) 200,000

Total liabilities 559,200

Share capital (Parent only) 3,200,000

Retained earnings (Step 5) 1,939,200

Equity attributable to owners of parent 5,139,200

Non-controlling interest (Step 4) 82,800

Total equity 5,222,000

TOTAL LIABILITIES AND EQUITY 5,781,200

Peter Group

Statement of profit or loss


Sales (Step 1.ii) 4,560,000

Cost of goods sold (Step 1.ii) (2,034,000)

Gross profit 2,526,000 Interest income (eliminated - Step 1.iv) - Distribution costs (400,000) Depreciation expense (Step 1.iii) (688,000) Loss on sale of equipment (eliminated - Step 1.iv) - Interest expense (10,000 - 2,500 Step 1.iv) (30,000) Dividend income (eliminated - Step 1.v) - Amortization expense on patent (Step 1.iii) (10,000) Loss on extinguishment of bonds (Step 1.iv) (40,000)

Impairment loss on goodwill (Step 3) (8,000)

Profit for the year 1,350,000

Reconciliation using formulas: Total assets of Peter Co. 5,664,000 Total assets of Simon Co. 720,000 Investment in subsidiary (488,000)

Fair value adjustments, net (184,000 beg. – 50,000 depreciation) 134,000 Goodwill – net 20,000 Effects of intercompany transactions:

Current accounts (elimination of account receivable) (8,000) Inventory transactions (unrealized profit in ending inventory) (26,000) Equipment transaction (unamortized balance of deferred loss) 3,200

Bond transaction (carrying amount of investment in bonds) (238,000)


Total liabilities of Peter Co. 684,000 Total liabilities of Simon Co. 83,200 Fair value adjustments, net - Effect of intercompany transactions:

Current accounts (elimination of account payable) (8,000)

Bond transaction (carrying amount of bonds payable) (200,000)

Consolidated total liabilities 559,200

Share capital of Peter Co. 3,200,000

Consolidated retained earnings (Step 5) 1,939,200

Equity attributable to owners of the parent 5,139,200

Non-controlling interest (Step 4) 82,800


35. B (See Step 1.ii above)

36. D (See Step 1.ii above)

37. A (See Step 3 above) 38. C (See Step 4 above) 39. A (See Step 5 above) 40. D (See Step 6 above) 41. C (See Step 7 above) 42. A (See F/S or Reconciliations above) 43. A (See F/S or Reconciliations above) 44. C Solutions: All of Big Co.’s shares were exchanged The substance of the transaction is analyzed as follows: Analyses: � Big Co. lets itself be acquired (legal form) for it to gain control

over the legal acquirer (substance). Legal form of the agreement: (Big lets itself be acquired) Small Co. issues 150 ordinary shares (2.5 x 60) in exchange for all of

Big’s 60 shares outstanding. Substance of the agreement: (Big gains control over legal acquirer)

After the combination, Big gains control because it now owns 60% of

Small Co. Accounting acquiree (Small Co.) issues shares – Actual (Legal): Small Co.'s currently issued shares 100 40%

Shares to be issued to Big Co. (2.5 sh. x 60 sh.) 150 60%

Total shares of Small Co. after the combination 250

Accounting acquirer (Big Co.) issues shares – Reverse (Substance):

Big Co.'s currently issued shares 60 60% Shares to be issued to Small Co.'s shareholders to

enable them to have the same interest in Big Co.

40 20% [(60 ÷ 60%) x 40%]

Total 100

The consideration transferred is computed as follows: Shares of Big effectively transferred to Small 40

Multiply by: Fair value per share of Big’s shares 480

Fair value of consideration effectively transferred 19,200

Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 19,200 Non-controlling interest in the acquiree - Previously held equity interest in the acquiree - Total 19,200

Fair value of net identifiable assets acquired (24,000 – 8,400) (15,600) Goodwill 3,600

The consolidated share capital is computed as follows: Share capital of Big Co. before the reverse acquisition 7,200

Add: Consideration transferred 19,200 Consolidated share capital 26,400

The consolidated retained earnings are computed as follows: Retained earnings of Big Co. before the reverse acquisition 16,800 Consolidated retained earnings 16,800

The consolidated statement of financial position immediately after the

business combination is shown below: Small Co. Big Co. Small Co.

(legal parent, (legal acquiree, (Consolidated FS accounting accounting in the name of the

acquiree) acquirer) legal parent)

Identifiable assets 21,600 44,400 68,400*

Goodwill 3,600

Total assets 21,600 44,400 72,000

Liabilities 7,400 20,400 28,800 Share capital: 100 ordinary shares 3,600 60 ordinary shares 7,200 250 ordinary shares

26,400 (₱7,200 + ₱19,200)


Total liabilities and equity 21,600 44,400 72,000

*₱24,000 fair value + ₱44,400 = ₱68,400

The equity structure appearing in the consolidated financial

statements (i.e., the number and type of equity interests issued)

reflects the equity structure of Small Co. (the legal parent), including

the equity interests issued by Small Co. to effect the combination, i.e.,

100 sh. + 150 sh.


46. D (See solution above) 47. D (See solution above) 48. B (See solution above) Case #2: (Refer to fact pattern) Only 54 of Big Co.’s shares were

exchanged for Small Co.’s shares. 49. C Solutions: Only 54 of Big Co.’s shares were exchanged The substance of the transaction is analyzed as follows: Accounting acquiree (Small Co.) issues shares – Actual (Legal): Small Co.'s currently issued shares 100 42.55%

Shares to be issued to Big Co. (2.5 sh. x 54 sh.) 135 57.45%

Total shares of Small Co. after the combination 235

Accounting acquirer (Big Co.) issues shares – Reverse (Substance): Big Co.'s shares exchanged for Small Co.’s shares (given) 54 57.45% Shares to be issued to Small Co.'s shareholders to enable

them to have the same interest in Big Co. [(54 ÷ 57.45%) x 42.55%] 40 42.55%

Total

94 100%

The consideration transferred is computed as follows: Shares of Big effectively transferred to Small 40 Multiply by: Fair value per share of Big’s shares 480 Fair value of consideration effectively transferred 19,200

Goodwill (gain on bargain purchase) is computed as follows: Consideration transferred 19,200 Non-controlling interest in the acquiree -

Previously held equity interest in the acquiree - Total 19,200

Fair value of net identifiable assets acquired (24,000 – 8,400) (15,600)

Goodwill 3,600

Notes: Goodwill computation is not affected if some of the accounting

acquirer’s shareholders do not exchange their shares with the accounting acquiree’s shares.

However, non-controlling interest arises if not all of the

accounting acquirer’s shares are exchanged.

The non-controlling interest is computed as follows:

Total shares of Big Co. before the acquisition Shares of Big Co. exchanged with Small Co.'s shares Shares of Big Co. not exchanged with Small Co.'s shares

60

(54) 6

The controlling and NCI effective interests are computed as follows: Controlling interest (54 sh. ÷ 60 sh.) 90%

NCI (6 sh. ÷ 60 sh.) 10%

Big Co.'s total equity before acquisition 24,000

Multiply by: NCI % 10%

Non-controlling interest 2,400

The consolidated share capital is computed as follows: Share capital of Big Co. before the reverse acquisition 7,200

Multiply by: Controlling interest % 90% Total 6,480

Add: Consideration transferred 19,200

Consolidated share capital 25,680

The consolidated retained earnings are computed as follows:

Retained earnings of Big Co. before the reverse 16,800 acquisition

Multiply by: Controlling interest % 90%

Consolidated retained earnings 15,120

The consolidated statement of financial position immediately after the

business combination is shown below: Small Co. Big Co. Small Co.

(legal parent, (legal acquiree, (Consolidated FS accounting accounting in the name of the

acquiree) acquirer) legal parent)

Identifiable assets 21,600 44,400 68,400

Goodwill 3,600

Total assets 21,600 44,400 72,000

Liabilities 8,400 20,400 28,800 Share capital: 100 ordinary shares 3,600 60 ordinary shares 7,200 235 ordinary shares

25,680 (₱6,480 + ₱19,200) Retained earnings 9,600 16,800 15,120

Non-controlling interest 2,400

Total liabilities and equity 21,600 44,400 72,000

50. A (See solutions above)

51. B (See solutions above) 52. A (See solutions above) 53. C (See solutions above)



Answers at a glance: 1. D 6. C 11. A 16. A 21. C 26. C 31. B

2. D 7. B 12. B 17. B 22. B 27. A 32. A

3. E 8. A 13. D 18. C 23. C 28. B 33. B

4. E 9. D 14. B 19. A 24. C 29. A 34. B 5. C 10. B 15. A 20. B 25. A 30. C Solutions: 1. D - Since S1 already holds controlling interest in S2 when P

acquired S1, the acquisition date for both S1 and S2 is on

January 1, 20x3. 2. D 3. E - Since S1 acquires S2 only after P acquired S1, the acquisition

dates are: (a) January 1, 20x1 for S1 and (b) January 1, 20x3

for S2. 4. E 5. C 6. C (48,000 + 64,000) = 112,000 ‘See Step 3 below’ Solutions: Step 1: Analysis of group structure The group structure is analyzed as follows: P’s ownership interest in S1 80%

S1’s ownership interest in S2 60% � P, S1 and S2 all belong to a vertical group.

The controlling interest and NCI percentages are calculated as

follows: Ownership over S1 Direct holdings of P in S1 80%

NCI in S1 (squeeze) 20%

Total 100%

Ownership over S2 Direct holdings of P in S2 0%

Indirect holdings of P in S2 (80% x 60%)* 48% Total holdings of P in S2 48%


Total 100% *The indirect holdings of P in S2 is computed by multiplying P’s

interest in S1 (80%) by S1’s interest in S2 (60%).

Although the computed total holdings of P is only 48%, i.e., less than

50%, it is still presumed that there is control because P controls S1,

who in turn controls S2. In substance, it is actually P who has control

over S2. This is not unusual in practice. The computation is made

only for purposes of mathematical computations during consolidation

procedures.

The NCI in S2 is reconciled as follows: Interest in S2 held by outside shareholders in S1 (20% x 60%) Interest in S2 held by outside shareholders in S2

(100% - 60% held by S1) NCI in S2

The controlling interests and NCI’s are summarized below: S1 S2

Owners of P 80% 48%

NCI 20% 52%

Total 100% 100%


12% 40% 52%

S1 S2 Acqn. Cons. Net Acqn. Cons. Net

Date Date change Date Date change

Share capital 320,000 320,000 200,000 200,000

Ret. earnings 120,000 208,000 40,000 112,000 Totals at carrying amts. 440,000 528,000 240,000 312,000 FVA at acquisition date - - - -

Depreciation of FVA NIL - NIL - Net assets at fair value 440,000 528,000 88,000 240,000 312,000 72,000

Step 3: Goodwill computation The impairment loss on goodwill is determined as follows:

Formula #1: S1 S2 Total Consideration transferred (given) 400,000 200,000

Indirect holding adjustment (40,000) NCI in the acquiree – at fair values (given) 100,000 160,000

Prev. held equity interest in the acquiree - - Total 500,000 320,000

Fair value of net assets acquired (Step 2) (440,000) (240,000) Goodwill at acquisition date 60,000 80,000

Multiply by: Impairment (given) 20% 20% Impairment loss on goodwill - 20x1 12,000 16,000 28,000

An indirect holding adjustment is made because the consideration

transferred to S2 is not wholly made by P but rather partly by P (80%)

and partly by S1 (20%). Only the portion effectively transferred by P

(₱200,000 x 80% = ₱160,000) 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 equity interest in the acquiree - -

Total 400,000 160,000 Less: P's proportionate sh. in net assets of S1 & S2

(352,000)

(₱440,000 x 80%) & (₱240,000 x 48%) (115,200)

Goodwill attributable to owners of P – Jan. 1, 20x1 48,000 44,800 Less: P’s share in goodwill impairment

(9,600) (7,680) (₱12,000 x 80%) & (₱16,000 x 48%) Goodwill attributable to owners of P – Dec. 31, 20x1 38,400 37,120

Fair value of NCI (given) 100,000 160,000 Less: NCI's proportionate sh. in the net assets of

S1 & S2 (₱440,000 x 20%) & (₱240,000 x 52%) (88,000) (124,800)

Goodwill attributable to NCI – Jan. 1, 20x1 12,000 35,200

Less: NCI’s share in goodwill impairment (₱12,000 x 20%) & (₱16,000 x 52%) (2,400) (8,320)

Goodwill attributable to NCI – Dec. 31, 20x1 9,600 26,880

Goodwill, net – Dec. 31, 20x1 48,000 64,000

Step 4: Non-controlling interest in net assets S1 S2 Total

Net assets at fair value - 12/31x1 (Step 2) 528,000 312,000

Multiply by: NCI percentage 20% 52% Total 105,600 162,240 Add: Goodwill to NCI - 12/31x1 (Step 3) 9,600 26,880

Indirect holding adjustment (Step 3) (40,000) NCI - Dec. 31, 20x1 115,200 149,120 264,320

Notice that the only difference in the goodwill and NCI computations

between a simple group structure and a complex group structure is the

indirect holding adjustment.

Step 5: Consolidated retained earnings P's retained earnings – Dec. 31, 20x1 Consolidation adjustments: P's share in the net change in S1's net assets

(a)

P's share in the net change in S2's net assets (b)

Unrealized profits (Downstream only) Gain or loss on extinguishment of bonds P's sh. in goodwill impairment (₱9,600 + ₱7,680)

(Step 3)

600,000

70,400 34,560

- -

(17,280)


Consolidated retained earnings – Dec. 31, 20x1 687,680

(a) Net change in S1’s net assets (Step 2) of ₱88,000 x 80% = ₱70,400.

(b) Net change in S2’s net assets (Step 2) of ₱72,000 x 48% = ₱34,560.

Step 6: Consolidated profit or loss

P S1 S2 Consolidated

Profits before adj. 320,000 88,000 72,000 480,000

Cons. adjustments:

Unrealized profits - - - - Dividend income - N/A N/A -

Extinguishment of bonds - - - -

Net cons. adjustments - - - -

Profits before FVA 320,000 88,000 72,000 480,000

Depreciation of FVA ( - ) ( - ) ( - ) ( - )

Goodwill impairment (17,280) (2,400) (8,320) (28,000)

Consolidated profit 302,720 85,600 63,680 452,000

Step 7: Profit or loss attributable to owners of parent and NCIs Owners NCI NCI Consoli-

of P in S1 in S2 dated P's profit before FVA (Step 6) 320,000 N/A N/A 320,000

Share in S1’s profit before FVA (c)

70,400 17,600 88,000

Share in S2’s profit before FVA (d)

34,560 37,440 72,000


Goodwill impairment (17,280) (2,400) (8,320) (28,000)

Totals 407,680 15,200 29,120 452,000 (c) Shares in S1’s profit before FVA (Step 6): (₱88,000 x 80%); (₱88,000 x 20%)

(d)

Shares in S2’s profit before FVA (Step 6): (₱72,000 x 48%); (₱72,000 x 52%)


Consolidated statement of financial position

As at December 31, 20x1 Other assets (800,000 + 480,000 + 320,000) 1,600,000

Goodwill (48,000 + 64,000) - (Step 3) 112,000


Liabilities (120,000 + 152,000 + 8,000) 280,000 Share capital (P only) 480,000

Retained earnings - (Step 5) 687,680 Equity attributable to owners of parent 1,167,680

Non-controlling interests - (Step 4) 264,320


Total liabilities and equity 1,712,000

Consolidated statement of profit or loss For the year ended December 31, 20x1 Revenues (720,000 + 408,000 + 192,000) 1,320,000 Expenses (400,000 + 320,000 + 120,000) (840,000)

Impairment loss on goodwill - (Step 3) (28,000)

Consolidated profit 452,000

Profit attributable to: Owners of the parent - (Step 7) 407,680

Non-controlling interests (15,200 + 29,120) - (Step 7) 44,320

452,000

7. B (See Step 4 above)

8. A (See Step 5 above)

9. D (See Step 6 above)

10. B (See Step 7 above) 11. A (See solutions above) 12. B (See solutions above) 13. D (20,000 + 16,000) = 36,000 See Step 3 below

Solutions: Step 1: Analysis of group structure The group structure is analyzed as follows: P’s ownership interest in S1 80%

S1’s ownership interest in S2 60% � P, S1 and S2 all belong to a vertical group. The controlling interest and NCI percentages are calculated as

follows: Ownership over S1 Direct holdings of P in S1 80%


Total 100%


Indirect holdings of P in S2 (80% x 60%) 48% Total holdings of P in S2 48%


Total 100%

The acquisition dates of the subsidiaries are January 1, 20x1 for

S1 and December 31, 20x1 for S2. Goodwill and NCI on each of S1

and S2 shall be computed separately on their respective acquisition

dates. Their pre-acquisition and post-acquisition reserves are also

calculated from these dates. The controlling interests and NCI’s are summarized below: S1 S2

Owners of P 80% 48%

NCI 20% 52%

Total 100% 100%

Step 2: Analysis of net assets S1 S2 Acqn. Cons. Net Acqn. Cons. Net


Share capital 320,000 320,000 200,000 200,000

Ret. earnings 120,000 208,000 112,000 112,000 Totals at carrying amts. 440,000 528,000 312,000 312,000

FVA at acquisition date - - - -

Depreciation of FVA NIL - NIL - Net assets at fair value 440,000 528,000 88,000 312,000 312,000 -

Step 3: Goodwill computation Formula #2: S1 S2 Consideration transferred (given) 400,000 200,000 Indirect holding adjustment (₱200,000 x 20%) (40,000)

Less: Prev. held equity interest in the acquiree - - Total 400,000 160,000 Less: P's proportionate sh. in net assets of S1 & S2 (₱440,000 x 80%) & (₱312,000 x 48%) (352,000) (149,760) Goodwill attributable to owners of P (acq’n. dates) 48,000 10,240

Less: P’s sh. in goodwill impairment (₱40,000 x 80%) (32,000) - Goodwill attributable to owners of P – Dec. 31, 20x1 16,000 10,240

Fair value of NCI (given) 100,000 168,000 Less: NCI's proportionate sh. in the net assets of S1 & S2 (₱440,000 x 20%) & (₱312,000 x 52%) (88,000) (162,240) Goodwill attributable to NCI (acquisition dates) 12,000 5,760

Less: NCI’s sh. in goodwill impairment (₱40,000 x 20%) (8,000) - Goodwill attributable to NCI – Dec. 31, 20x1 4,000 5,760


The fair values of the NCIs are determined on the subsidiaries’ respective

acquisition dates (i.e., Jan. 1, 20x1 for S1 and Dec. 31, 20x1 for S2).

Step 4: Non-controlling interest in net assets S1 S2 Total Net assets at fair value - 12/31x1 (Step 2) 528,000 312,000

Multiply by: NCI percentage 20% 52% Total 105,600 162,240 Add: Goodwill to NCI - 12/31x1 (Step 3) 4,000 5,760


Step 5: Consolidated retained earnings P's retained earnings – Dec. 31, 20x1 600,000 Consolidation adjustments:

P's share in the net change in S1's net assets (a)

70,400


- Unrealized profits (Downstream only) - Gain or loss on extinguishment of bonds -

P's sh. in goodwill impairment (Step 3) (32,000)

38,400 Net consolidation adjustments

Consolidated retained earnings – Dec. 31, 20x1 638,400 (a) Net change in S1’s net assets (Step 2) of ₱88,000 x 80% = ₱70,400.

(b) Net change in S2’s net assets (Step 2) of ₱0 x 48% = ₱0.

Step 6: Consolidated profit or loss P S1 S2 Consolidated

Profits before adj. 320,000 88,000 - 408,000

Cons. adjustments:


Extinguishment of bonds - - - -

Net cons. adjustments - - - -

Profits before FVA 320,000 88,000 - 408,000


Goodwill impairment (32,000) (8,000) - (40,000)

Consolidated profit 288,000 80,000 - 368,000

None of S2’s profit is included in the 20x1 consolidated financial

statements because S2 was acquired only on December 31, 20x1.

Step 7: Profit or loss attributable to owners of parent and NCIs Owners NCI in NCI Consoli-

of P S1 in S2 dated P's profit before FVA (Step 6) 320,000 N/A N/A 320,000


70,400 17,600 88,000


- - -


Goodwill impairment (32,000) (8,000) - (40,000)

Totals 358,400 9,600 - 368,000

(c) Shares in S1’s profit before FVA (Step 6): (₱88,000 x 80%); (₱88,000 x 20%)

(d) Shares in S2’s profit before FVA (Step 6): (₱0 x 48%); (₱0 x 52%)


Consolidated statement of financial position


Goodwill (20,000 + 16,000) (Step 3) 36,000



Retained earnings (Step 5) 638,400 Owners of parent 1,118,400




Consolidated statement of profit or loss For the year ended December 31, 20x1 Revenues (720,000 + 408,000) 1,128,000 Expenses (400,000 + 320,000) (720,000)

Impairment loss on goodwill (Step 3) (40,000)


Profit attributable to: Owners of the parent (Step 7) 358,400







18. C (See Step solutions above)

19. A (See Step solutions above)

20. B (See Step 3 below) Solutions: Step 1: Analysis of group structure The group structure is analyzed as follows: P’s ownership interest in S1 (64,000 sh. ÷ 80,000 sh.*) 80%

P’s ownership interest in S2 (12,500 sh. ÷ 50,000 sh.*) 25%

S1’s ownership interest in S2 (15,000 sh. ÷ 50,000 sh.*) 30%

*Share capital divided by ₱1.00 par value per share. � P, S1 and S2 all belong to a D-shaped (mixed) group.

The controlling interest and NCI percentages are calculated as

follows: Ownership over S1

Direct holdings of P in S1 80%


Total 100%


Indirect holdings of P through S1 (80% x 30%) 24% Total holdings of P in S2 49%


Total 100%

The NCI in S2 is reconciled as follows: Interest in S2 held by outside shareholders in S1 (20% NCI in S1 x 30% interest of S1 in S2)

Interest in S2 held by outside shareholders in S2 (100% - 25% held by P - 30% held by S1)

NCI in S2

The controlling interests and NCI’s are summarized below:

6%

45% 51%

S1 S2 Owners of P 80% 49%

NCI 20% 51% Total 100% 100%

Step 2: Analysis of net assets S1 S2 Acqn. Cons. Net Acqn. Cons. Net


Share capital 320,000 320,000 200,000 200,000

Ret. earnings 120,000 208,000 40,000 112,000 Totals at carrying amts. 440,000 528,000 240,000 312,000



Step 3: Goodwill computation Formula #2: S1 S2

Consideration transferred (given) & (₱160K + ₱200K) 400,000 360,000

Indirect holding adjustment (₱200,000 x 20%) (40,000)

Less: Prev. held equity interest in the acquiree - - Total 400,000 320,000 Less: P's proportionate sh. in net assets of S1 & S2 (₱440,000 x 80%) & (₱240,000 x 49%) (352,000) (117,600)

Goodwill attributable to owners of P – Jan. 1, 20x1 48,000 202,400

Less: P’s share in goodwill impairment - - Goodwill attributable to owners of P – Dec. 31, 20x1 48,000 202,400

Fair value of NCI (given) 100,000 160,000 Less: NCI's proportionate sh. in the net assets of S1 & S2 (₱440,000 x 20%) & (₱240,000 x 51%) (88,000) (122,400)

Goodwill attributable to NCI – Jan. 1, 20x1 12,000 37,600

Less: NCI’s share in goodwill impairment - - Goodwill attributable to NCI – Dec. 31, 20x1 12,000 37,600


Step 4: Non-controlling interest in net assets S1 S2 Total

Net assets at fair value - 12/31x1 (Step 2) 528,000 312,000

Multiply by: NCI percentage 20% 51% Total 105,600 159,120

Add: Goodwill to NCI - 12/31x1 (Step 3) 12,000 37,600


Step 5: Consolidated retained earnings P's retained earnings – Dec. 31, 20x1 600,000 Consolidation adjustments: P's share in the net change in S1's net assets

(a) 70,400


35,280 Unrealized profits (Downstream only) - Gain or loss on extinguishment of bonds - P's sh. in goodwill impairment -

105,680

Net consolidation adjustments


(a) Net change in S1’s net assets (Step 2) of ₱88,000 x 80% = ₱70,400.

(b) Net change in S2’s net assets (Step 2) of ₱72,000 x 49% = ₱35,280.

Step 6: Consolidated profit or loss P S1 S2 Consolidated

Profits before adj. 320,000 88,000 72,000 480,000

Cons. adjustments:

Unrealized profits - - - - Dividend income - N/A N/A - Extinguishment of bonds - - - - Net cons. adjustments - - - -



Goodwill impairment ( - ) ( - ) ( - ) ( - )

Consolidated profit 320,000 88,000 72,000 480,000

Step 7: Profit or loss attributable to owners of parent and NCIs Owners NCI in NCI Consoli-

of P S1 in S2 dated P's profit before FVA (Step 6) 320,000 N/A N/A 320,000


70,400 17,600 88,000


35,280 36,720 72,000


Goodwill impairment ( - ) ( - ) ( - ) ( - )

Totals 425,680 17,600 36,720 480,000 (c) Shares in S1’s profit before FVA (Step 6): (₱88,000 x 80%); (₱88,000 x 20%)

(d)

Shares in S2’s profit before FVA (Step 6): (₱72,000 x 49%); (₱72,000 x 51%)

The consolidated financial statements are prepared as follows: Consolidated statement of financial position


Goodwill (60,000 + 240,000) (Step 3) 300,000







Consolidated statement of profit or loss For the year ended December 31, 20x1 Revenues (720,000 + 408,000 + 192,000) 1,320,000

Expenses (400,000 + 320,000 + 120,000) (840,000)

Impairment loss on goodwill -



Non-controlling interests (17,600 + 36,720) (Step 7) 54,320

480,000

21. C (See Step 4 above)




25. A (See solutions above)

26. C (See solutions above)

27. A (See analysis below)

28. B (See Step 3 below) Solutions:

Step 1: Analysis of group structure

A 80% 20%

25% B E

C 30%

40%

D

A, B and C belong to a D-shaped (mixed) group structure. Therefore,

B and C are subsidiaries of A.

C and E are associates of B while D is an associate of C.

The controlling and NCI are analyzed as follows: Ownership over B Direct holdings of A in B 80%

NCI (squeeze) 20%

Total 100%

Ownership over C Direct holdings of A in C 25%

Indirect holdings of A through B (80% x 30%) 24% Total holdings of A 49%

NCI (squeeze) 51%

Total 100%

The NCI in C is reconciled as follows: Interest in C held by outside shareholders in B (20% NCI in B x 30% interest of B in C)

Interest in C held by outside shareholders in C (100% - 25% held by A - 30% held by B)

NCI in C

The controlling interests and NCI’s are summarized below:

6%

45% 51%

B C Owners of A 80% 49%

NCI 20% 51%

Total 100% 100%

Notice that no NCI’s are computed for the investments in associates.

Step 1A: Adjustments for the equity method B and C’s accounts are adjusted using the equity method.

B C Profits before share in associate's profit 88,000 72,000 Share in D's profit (₱32,000 x 40%) N/A 12,800

Share in E's profit (₱48,000 x 20%) 9,600 N/A

Adjusted profits 97,600 84,800

Although C is an associate of B, B’s share in C’s profit is not included

in the computations above because C is a member of the group,

and is therefore accounted for under the ‘acquisition method.’ Only D

and E are accounted for under the ‘equity method.’ B C Total Investment in associate D (purchase cost) 320,000 Investment in associate E (purchase cost) 240,000

Share in associate's profits 9,600 12,800 Investments in associates (adjusted) 249,600 332,800 582,400

B C Retained earnings - 12/31/x1 (unadjusted) 208,000 112,000

Share in associate's profits 9,600 12,800

Retained earnings - 12/31/x1 (adjusted) 217,600 124,800

Step 2: Analysis of net assets B C Acqn. Cons. Net Acqn. Cons. Net


Share capital 320,000 320,000 200,000 200,000 Ret. earnings (Step 1A) 120,000 217,600 40,000 124,800 Totals at carrying amts. 440,000 537,600 240,000 324,800



Step 3: Goodwill computation Formula #2: B C Consideration transferred (given) & (₱160K + ₱200K) 400,000 360,000 Indirect holding adjustment (₱200,000 x 20%) (40,000)

Less: Prev. held equity interest in the acquiree - - Total 400,000 320,000 Less: A's proportionate sh. in net assets of B & C

(352,000) (117,600)

(₱440,000 x 80%) & (₱240,000 x 49%) Goodwill attributable to owners of A – Jan. 1, 20x1 48,000 202,400

Less: A’s share in goodwill impairment - - Goodwill attributable to owners of A – Dec. 31, 20x1 48,000 202,400

Fair value of NCI (given) 100,000 160,000 Less: NCI's proportionate sh. in the net assets of B & C (₱440,000 x 20%) & (₱240,000 x 51%) (88,000) (122,400) Goodwill attributable to NCI – Jan. 1, 20x1 12,000 37,600

Less: NCI’s share in goodwill impairment - - Goodwill attributable to NCI – Dec. 31, 20x1 12,000 37,600


Step 4: Non-controlling interest in net assets A B Total Net assets at fair value - 12/31x1 (Step 2) 537,600 324,800

Multiply by: NCI percentage 20% 51% Total 107,520 165,648

Add: Goodwill to NCI - 12/31x1 (Step 3) 12,000 37,600


Step 5: Consolidated retained earnings A's retained earnings – Dec. 31, 20x1 600,000 Consolidation adjustments:

A's share in the net change in B's net assets (a)

78,080 A's share in the net change in C's net assets

(b) 41,552

Unrealized profits (Downstream only) - Gain or loss on extinguishment of bonds - A's sh. in goodwill impairment -

119,632 Net consolidation adjustments


(a) Net change in B’s net assets (Step 2) of ₱97,600 x 80% = ₱78,080.

(b) Net change in C’s net assets (Step 2) of ₱84,800 x 49% = ₱41,552.

Step 6: Consolidated profit or loss

A B C Consolidated

Profits (Step 1A) 320,000 97,600 84,800 502,400 Cons. adjustments:


Extinguishment of bonds - - - - Net cons. adjustments - - - -


Depreciation of FVA ( - ) ( - ) ( - ) ( - ) Goodwill impairment ( - ) ( - ) ( - ) ( - ) Consolidated profit 320,000 97,600 84,800 502,400

Step 7: Profit or loss attributable to owners of parent and NCIs Owners NCI NCI Consoli-

of A in B in C dated A's profit before FVA (Step 6) 320,000 N/A N/A 320,000

Share in B’s profit before FVA (c)

78,080 19,520 97,600

Share in C’s profit before FVA (d)

41,552 43,248 84,800 Depreciation of FVA ( - ) ( - ) ( - ) ( - ) Goodwill impairment ( - ) ( - ) ( - ) ( - ) Totals 439,632 19,520 43,248 502,400

(c) Shares in B’s profit before FVA (Step 6): (₱97,600 x 80%); (₱97,600 x 20%)

(d) Shares in C’s profit before FVA (Step 6): (₱84,800 x 49%); (₱84,800 x 51%)

Requirement (b): Consolidated financial statements Consolidated statement of financial position As at December 31, 20x1 Investments in associates (Step 1A) 582,400 Other assets (800,000 + 480,000 + 320,000) 1,600,000

Goodwill (60,000 + 240,000) (Step 3) 300,000


Liabilities (280,000 + 392,000 + 328,000) 1,000,000 Share capital (A only) 480,000





Consolidated statement of profit or loss For the year ended December 31, 20x1 Revenues (720,000 + 408,000 + 192,000) 1,320,000 Expenses (400,000 + 320,000 + 120,000) (840,000) Share in profits of associates (12,800 + 9,600) (Step 1A) 22,400

Impairment loss on goodwill -



Non-controlling interests (19,520 + 43,248) (Step 7) 62,768

502,400

29. A (See Step 4 below)

30. C (See Step 5 below)

31. B (See Step 6 below)

32. A (See Step 7 below)

33. B (See solutions above)

34. B (See solutions above)

Separate Financial Statements Multiple Choice – Computational

Answers at a glance:

1. D 2. A 3. B 4. D

Solutions:

1. D

2. A Solution:

₱4,000,000

Investment in subsidiary (XYZ, Inc.) – at cost

3. B

Solution: Investment in associate (Alphabets, Co.) – at Fair value on Dec. 31, 20x1 ₱ 420,000

4. D

Solution: Investment in subsidiary (XYZ, Inc.) Dividend revenue (₱1,200,000 x 80%) ₱ 960,000

Investment in associate (Alphabets Co.)

Dividend revenue (₱800,000 x 20%) ₱ 40,000 Unrealized gain on change in fair value (₱420K – ₱400) 20,000 Transaction costs expensed immediately ( 80,000) Net investment income ₱ 100,000

(960,000 + 100,000) = 1,060,000

afar drills & exercises 1 business combinations (part 1)

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