Business Combination and Consolidated FS 2020 PDF

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BUSINESS COMBINATION & CONSOLIDATED FSTHEORIES: An entity acquired all the share capital of a foreign entity at a consideration of 9 million baht on June 30, 20 20. The fair value of the net assets of the foreign entity at that date was 6 million baht. The functional currency of the entity is th...

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BUSINESS COMBINATION & CONSOLIDATED FS THEORIES: 1. An entity acquired all the share capital of a foreign entity at a consideration of 9 million baht on June 30, 2020. The fair value of the net assets of the foreign entity at that date was 6 million baht. The functional currency of the entity is the peso. The financial year-end of the entity is December 31, 2020. The exchange rates at June 30, 2020, and December 31, 20 20, were 1.5 baht = P1 and 2 baht = P1 respectively. What figures for goodwill should be included in the financial statements for the year ended December 31, 2020? a. 2,000,000 b. 1,500,000 c. 3,000,000 d. 3,500,000 Answer: B P9,000,000 6,000,000 3,000,000

Less: Fair value of net assets acquired Goodwill Divided by current rat on the balance sheet for purposes of translation under current rate method Goodwill in the consolidated balance sheet

2 baht per peso P1,500,000

2. Morny Corporation sold equipment to its 80% owned subsidiary, Morrie Corporaiton on January 1, 2020. Morny sold the equipment for P110,000 when its book value was P85,000 and it had a 5year remaining useful life with no expected salvage value. Separate balance sheets for Morny and Morrie included the following equipment and accumulated depreciation amounts on December 31, 2020:

Equipment Less: Accumulated depreciation Equipment, net

Morny P750,000 (200,000) P550,000

Morrie P300,000 (50,000) P250,000

Consolidated amounts for equipment and accumulated depreciation at December 31, 2020, were respectively. a. P1,025,000 and P250,000 b. P1,050,000 and P250,000 c. P1,025,000 and P245,000 d. P1,045,000 and P245,000 Answer: C Combined equipment amounts Less: Gain on sale Consolidated equipment balance

P1,050,000 25,000 P1,025,000

Combined accumulated depreciation Less: Depreciation on gain Consolidated accumulated depreciation

P250,000 5,000 P245,000

3. Rommel, Inc. acquired a 60% interest in Mikee Company several years ago. During 20 20, Mikee sold inventory costing P75,000 to Rommel for P100,000. A total of 16% of this inventory was not sold to outsider until 2021. During 2021, Mikee sold inventory costing P96,000 to Rommel for P120,000. A total of 35% of this inventory was not sold to outsiders until 20 22. In 20 21, Rommel reported cost of sales of P380,000 while Mikee reported P210,000. What is the consolidated cost of sales? a. 522,400 b. 474,400 c. 473,400 d. 594,400 Answer: B Cost of sales of Rommel Cost of sales of Mikee Less: Intercompany sales 2021 Mark-up on beginning inventory (100,000 – 75,000) x 16% Add: Mark-up on ending inventory (120,000 – 96,000) x 35% Consolidated cost of sales

P380,000 210,000 (120,000) (4,000) 8,400 P474,400

4. The Ludel Company acquired the net assets of the Girl Conrad Company on January 1, 20 18, and made the following entry to record the purchases: Current assets P100,000 Equipment 150,000 Land 50,000 Buildings 300,000 Goodwill 100,000 Liabilities 80,000 Common stock, P1 par 100,000 Paid-in capital in excess of par 520,000 Assuming that additional shares on January 1, 2020 would be issued on that date to compensate for any fall in the value of Ludel common stock below P16 per share. The settlement would be to cure the deficiency by issuing added shares based on their fair value on January 1, 20 20. The fair price of the shares on January 1, 2020 was P10. What is the additional number of shares issued on January 1, 2020 to compensate for any fall in the value of the stock? a. 60,000 b. 100,000 c. 10,000 d. 160,000 Answer: A Deficiency (P16-P10) x 100,000 shares issued to acquire Divided by : Fair value of share Added number of shares to issue

P600,000 10 P 60,000

Amount of paid-in capital in excess of par on January 1, 2021 immediately after the additional shares were issued. P520,000-P60,000 = P460,000

Changes resulting from events after the acquisition date are not measurement period adjustments. Such changes are accounted for separately from the business combination. The acquirer accounts for changes in the fair value of contingent consideration that are not measurement period adjustments as follows: a. Contingent consideration classified as equity is not measured and its subsequent settlement is accounted for within equity. b. Contingent consideration classified as an asset or liability. 5. The Jonnie Company owns 75% of the Junior Company. On December 31, 20 20, the last day of the accounting period, Junior sold to Jonnie a non-current asset for P200,000. The asset originally cost P500,000 and at the end of the reporting period its carrying amount in Junior’s books was P160,000. The group’s consolidated statement of financial position has been drafted without any adjustments in relation to this non-current asset. What adjustments should be made to the consolidated statement of financial position figures for retained earnings and non-controlling interest? a. Retained earnings (Reduce by P30,000); Non-controlling interest (Reduce by P10,000) b. Retained earnings (Increase by P300,000); Non-controlling interest (No change) c. Retained earnings (Reduce by P40,000); Non-controlling interest (No change) d. Retained earnings (Increase by P225,000); Non-controlling interest (Increase by P75,000) Answer: B Upstream sales: Selling price of non-current asst Less: Book/carrying value date of sale Gain on intercompany sale

P200,000 160,000 P 40,000

The eliminating entry would be as follows: Retained earnings – parent (65% x P40,000) Non-controlling interest (35% x P40,000) Non-current asset

26,000 14,000 40,000

Profit on intragroup assets to be eliminated in full. Only the group share of the profits of the subsidiary are taken to group retained earnings. This is because the subsidiary sold the asset to the parent. This gain is not realized from a group perspective and must be removed in full. It is then allocated between the shareholders of the subsidiary, in the form of retained earnings (group share of the gain) and the non-controlling interest. 6. Baste Company owns an 80% controlling interest in the Bastion Company. Bastion regularly sells merchandise to Baste, which then sold to outside parties. The gross profit on all such sales is 40%. On January 1, 2019, Baste sold land and a building to Bastion. The value of the parcel is 20% to land and 80% to structures. The data are the following:

Internally generated net income, 2019 Internally generated net income, 2020 Intercompany merchandise sales, 2019 Intercompany merchandise sales, 2020 Intercompany inventory, December 31, 2019 Intercompany inventory, December 31, 2020 Cost of real estate sold on January 1, 2019 Sales price of real estate on January 1, 2019

Baste P1,560,000 10,320,000

1,800,000 2,400,000

Bastion P750,000 705,000 300,000 360,000 45,000 60,000

Depreciable life of building

20 years

For 2019, what is the consolidated comprehensive income attributable to controlling interest? a. 1,575,000 b. 1,597,500 c. 1,569,600 d. 1,875,000 Answer: Internally generated net income, 2019 – parent Gain on sale of real estate, 1/1/2019 Realized gain, 12/31/2019 ((80% x P600,000)/20) Adjusted internally generated net income Internally generated net income, 2019 Subsidiary Unrealized profit in ending inventory (40% x P45,000) Consolidated net income NCI net income (20% x P732,000) Attributable to controlling interest

P1,560,000 (60,000) 24,000 P984,000 P750,000 (18,000)

732,000 P1,716,000 146,400 P1,569,600

7. Par Company owns 60% of Sub Corp’s outstanding capital stock. On May 1, 2020, Par advanced Sub P70,000 in cash, which was still outstanding at December 31, 2020. What portion of this advance should be eliminated in the preparation of the December 31, 2020 consolidated balance sheet? a. 70,000 b. 0 c. 42,000 d. 28,000 Answer: A In a consolidated balance sheet, reciprocal balances, such as receivables and payables, between a parent and a consolidated subsidiary should be eliminated in its entire amount regardless of the portion of the subsidiary’s stock held by the parent. Thus, the entire P70,000 advance should be eliminated in the preparation of the year-end consolidated balance sheet. 8. On January 1, 2020, P Company purchased 32,000 shares of the 40,000 outstanding shares of S Company at a price of P1,2000,000 with an excess of P30,000 over the book value of S Company’s net assets. P13,000 of the excess is attributed to an undervalued equipment with a remaining useful life of eight years from the date of acquisition and the rest of the amount is attributed to goodwill. For the year 2020, P Company reported a net income of P750,000 and paid dividends of P180,000. While S Company reported a net income of P240,000 and paid dividends to P Company amounting to P39,000. Goodwill has not impaired in 20 20. The retained earnings of P Company at the end of 2020 per books is P1,025,000. P Company uses the cost method to account for its investment in S Company. Non-controlling interest is measured at fair market value. What is the non-controlling interest in net assets a. 339,875 b. 337,925 c. 334,525 d. 336,475 Answer: B

32,000 shares/40,000 shares = 80% Purchase price NCI (1,200,000/80%) Acquisition cost Book value Excess Allocation Goodwill

P1,200,000 300,000 P1,500,000 1,470,000 P 30,000 (13,000) P 17,000

Shareholder’s equity Net income, S Allocation of equipment Goodwill Dividend, S (39,000 / 80%) Amortization Total

P1,470,000 240,000 13,000 17,000 (48,750) (1,625) P1,689,625 20% P337,925

NCA

9. The Josh Company acquired an 80% interest in The Earl Company when Earl’s equity comprised share capital of P100,000 and retained earnings of P500,000. Earl’s current statement of financial position shows share capital of P100,000, a revaluation reserve of P400,000 and retained earnings of P1,400,000. Under PAS 27 Consolidated and separate financial statements, what figure in respect of Earl’s retained earnings should be included in the consolidated statement of financial position? a. 720,000 b. 1,520,000 c. 1,040,000 d. 1,440,000 Answer: A This is the parent company’s share of the post-acquisition retained earnings of the subsidiary. This is determined by deducting (i) the parent company’s share of the retained earnings of the subsidiary at the date of acquisition from (ii) the parent company’s share of the retained earnings of the subsidiary at the end of the current reporting period. Earl’s retained earnings, date of acquisition Less: Earl’s retained earnings, end of the current reporting period Multiply by Controlling interest Earl’s retained earnings included in the consolidated balance sheet

P 500,000 1,400,000 900,000 80% P 720,000

10. The Sylvia Company acquired a 70% interest in The Clarke Company for 1,420,000 when the fair value of Clarke’s identifiable assets and liabilities was P1,200,000. Sylvia acquired a 65% interest in The Homer Company for P300,000 when the fair value of Homer’s identifiable assets and liabilities was P640,000. Sylvia measures non-controlling interest at the relevant share if the identifiable net asset at the acquisition date. Neither Clarke nor Homer has any contingent liabilities at the amounts in their financial statements. Annual impairment reviews have not resulted in any impairment losses being recognized.

Under PFRS 3 Business Combinations, what is the goodwill that should be included in Sylvia’s consolidated statement of financial position? a. 580,000 b. 0 c. 600,000 d. 540,000 Answer: A Fair value of subsidiary – Clarke Consideration transferred Less: FV of identifiable net assets of Clarke (70% x P1.2 million) Goodwill (partial)

P1,420,000 840,000 P 580,000

Goodwill is carried as an asset in the consolidated statement of financial position. Sylvia measures noncontrolling interest at the relevant share of the identifiable net assets at the acquisition date: therefore partial goodwill is in effect. 11. Selected information from the separate and consolidated income statements of Shell Corporation and as subsidiary, Petron Company for the year ended December 31, 20 20 are as follows:

Sales Cost of goods sold Gross profit

Shell P600,000 450,000 P150,000

Petron P420,000 330,000 P 90,000

Consolidated P924,000 693,000 P231,000

During 2020, Shell Corporation sold goods to Petron Company at the same mark-up on cost that Shell uses for all sales. At December 31, 2020, Petron had not paid all of these goods and still held 37.5% of them in inventory. What is the original cost of goods in Petron’s inventory acquired from Shell Corporation? a. 36,000 b. 18,000 c. 27,000 d. 9,000 Answer: C Intercompany sales from parent to subsidiary: Sales – Parent Sales – Subsidiary Total sales Consolidated sales Intercompany sales Unsold to outsiders Ending inventory of subsidiary from parent Cost ratio of parent (P450,000/P600,000) Cost of inventory of subsidiary acquired from parent

P 600,000 420,000 1,020,000 924,000 96,000 37.5% P 36,000 75% P 27,000

12. The Eddie Corporation acquired a 70% interest in the Edwin Company for P1,420,000 when the fair market value of Edwin’s identifiable net assets was P1,200,000. Eddie also acquired a 65% interest in the Homer Company for P300,000, when the fair value of Homer’s identifiable assets and liabilities was P640,000. Eddie measures non-controlling interests at their relevant share of the identifiable net assets at the acquisition date.

Calculate what amounts in respect of Goodwill, and of Gains on bargain purchases, recognized at the date of acquisition a. Goodwill (P0); Gain on bargain purchases (P116,000) b. Goodwill (P0); Gain on bargain purchases (P0) c. Goodwill (P580,000); Gain on bargain purchases (P116,000) d. Goodwill (P580,000); Gain on bargain purchases (P0) Answer: D Fair value of subsidiary – Swan Consideration transferred Less: Fair value of identifiable assets and liabilities of Swan (70% x P1.2 million) Goodwill (partial)

P1,420,000 840,000 P 580,000

Goodwill is carried as an asset in the consolidated statement of financial position. Fair value of subsidiary – Homer Consideration transferred Less: Fair value of identifiable assets and liabilities of Swan (65% x P640,000) Goodwill (partial)

P300,000 416,000 P580,000

Gain on a bargain purchase is recognized in profit or loss not on the statement of financial position. 13. Elizabeth Company acquired 100% of Louie Inc. on January 5, 2020. During 2020, Elizabeth sold Louie for P2,400,000 goods that cost P1,800,000. Louie still owned 40% of the goods at the end of the year. Cost of goods sold was P10,800,000 for Elizabeth and P6,400,000 for Louie. What was consolidated cost of goods sold? a. 17,200,000 b. 14,800,000 c. 14,560,000 d. 15,040,000 Answer: D Cost of goods sold (Elizabeth) Cost of goods sold (Louie) Intercompany sales Unrealized Profit in Ending Inventory of Louie (2,400,000 x 40% x 25%); (2,400-1,800) / 2,400) Consolidated cost of goods sold

P10,800,000 6,400,000 P17,200,000 (2,400,000) 240,000 P15,040,000

The eliminating entries are as follows: 1. Sales

2,400,000 Cost of goods sold (purchases)

2. Cost of goods sold (ending inventory in income statement) Inventory (ending inventory in balance sheet)

2,400,000 240,000 240,000

14. Patrick Company acquired the assets (except for cash) and assumed the liabilities of Steve Company o January 2, 20 20 and Steve Company is dissolved. As compensation, Patrick Company gave 24,000 shares of its common stock, 12,000 shares of its 8% preferred stock, and cash of P240,000 to the stockholders of Steve Company. On the date of acquisition, Patrick Company had the following characteristics: Common, par value P5; fair value, P20 Preferred, par value P100; fair value, P100 Immediately prior to acquisition, Steve Company’s balance sheet was as follows: Cash Accounts receivable (net of P4,000 allowance) Inventory Land Building and equipment, net Total

P132,000 170,000 200,000 384,000 1,032,000 P1,918,000

Current liabilities Bonds payable, 10% Common stock, P5 par value Additional paid in capital Retained earnings Total

P228,000 400,000 600,000 380,000 310,000 P1,918,000

An appraisal of Steve Company showed that the fair values of its assets and liabilities were equal to their book values except for the following, which had fair values as indicated: Accounts receivable Inventory Land Bonds payable

P158,000 412,000 540,000 448,000

How much must be the goodwill recognized as a result of this business combination? a. 322,000 b. 94,000 c. 454,000 d. 0 Answer: C Cost of investment Common shares (24,000 x 20) Preferred shares (12,000 x 100) Cash Fair value of identifiable net assets acquired Accounts receivable Inventory Land Buildings and equipment Current liabilities Bonds payable Goodwill from business combination

P480,000 1,200,000 240,000

P158,000 412,000 540,000 1,032,000 (228,000) (448,000)

P1,920,000

1,466,000 P 454,000

15. On 1/3/2020, PLDT sold equipment costing P100,000 to its 100% owned subsidiary, Idion, for P80,000. At the time of the sale, the equipment had been 50% depreciated using the straight-line method and an assigned life of 10 years. Idion continued depreciating the equipment by using the straight-line method over a remaining life of 5 years. What is the amount of the intercompany profit or loss that must be deferred at 12/31/2020? a. 6,000 b. 24,000 c. 14,000 d. 16,000 Answer: B Cost and accumulated depreciation of equipment Original cost Accumulated depreciation, 1/1/2020 (100,000 x 50%) Add: Additional depreciation (P100,000 – P50,000) / 5 years Accumulated depreciation, 12/31/2020 Sales price Less: Book value Cost (100,000) Less: Accumulated depreciation (50% x P100,000) Unrealized gain on sale Less: Realized gain – depreciation (P30,000/5 years) Net unrealized gain, 12/31/2020

P100,000 (50,000) 10,000 P 60,000 P80,000

50,000 P30,000 6,000 P24,000

16. On January 1, 2020, the fair values of Pink Conrad’s net assets were as follows: Current assts Equipment Land Buildings Liabilities

P100,000 150,000 50,000 300,000 80,000

On January 1, 2020, Blue George Company purchased the net assets of the Pink Conrad Company by issuing 100,000 shares of its P1 par value stock when the fair value of the stock was P6.20. It was further agreed that Blue George would pay an additional amount on January 1, 20 22, if the average income during the 2-year period of 2020-2021 exceeded P80,000 per year. The expected value of this consideration was calculated as P184,000; the measurement period is one year. What amount will be recorded as goodwill on January 1, 2020? a. 284,000 b. 180,000 c. 100,000 d. 0 Answer: A Consideration transferred Shares (100,000 shares x P6.20) Contingent consideration Total Less: Fair value of net identifiable assets acquired

P620,000 184,000 P804,000

Current assets Equipment Land Buildings Liabilities Total Goodwill

P100,000 150,000 50,000 300,000 (80,000) P520,000 P284,000

The P284,000 is one classical example of contingencies is where the future income of the acquirer is regarded as uncertain; the agreement contains a clause that requires the acquirer to provide additional consideration to the acquire if the income of the acquirer is not equal to or exceeds a specified amount over some specified period. Assuming that on August 1, 2020, the contingent consideration happens to be P170,000, what amount will then be recorded as goodwill on the said date? Goodwill, January 1, 2020 Less: Adjustment on contingent consideration (P184,000 – P170,000) Goodwill

P284,000 14,000 P270,000

Changes that are the result of the ac...