Guerrero Chapter 15 Business Combination General Procedures PDF

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KindnessGroup 22019-0025 – Dula, Dave 2019-0121 – Pamintuan, Rica 2019-0087 – Morales, Kella Elaija 2019-0218 – Pangan, JoelTheoretical In stock acquisition resulting in a parent company — subsidiary relationship, differences between current fair values and book values of the subsidiary's identifiab...

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Kindness Group 2 2019-0025 – Dula, Dave 2019-0121 – Pamintuan, Rica 2019-0087 – Morales, Kella Elaija 2019-0218 – Pangan, Joel

Theoretical 1. In stock acquisition resulting in a parent company — subsidiary relationship, differences between current fair values and book values of the subsidiary's identifiable net assets on the date of acquisition are: A. Disregarded B. Entered in the accounting records of the subsidiary C. Accounted for in appropriately titled ledger accounts in the parent company's accounting records. D. Provided in a working paper elimination Answer: D Provided in a working paper elimination 2. Consolidated financial statements are prepared when a parent-subsidiary relationship exists, in recognition of the accounting principle or concept of: A. Materiality B. Entity C. Reliability D. Going concern Answer: B Entity

3. In acquisition of stock resulting in a parent-subsidiary relationship, the parent company's Investment in Subsidiary Stock account balance is: A. Allocated to individual asset and liability accounts in a parent company journal entry B. Eliminated with a working paper elimination for the working paper. C. Displayed among noncurrent assets in the consolidated statement of financial position. D. Used as a basis for adjusting the subsidiary's asset and liability account. balance in the subsidiary's books to current fair values. Answer: B Eliminated with a working paper elimination for the working paper. 4. Working paper eliminations are entered in: a. Both the parent company's and the subsidiary's accounting record b. Neither the parent company's nor the subsidiary's accounting records c. The parent company's accounting records only d. The subsidiary's accounting records only Answer: B Neither the parent company's nor the subsidiary's accounting records

5. On the date of acquisition of stock the difference between the fair values and book values of the subsidiary's identifiable net assets are: a. Included in a working paper elimination b. Recognized in the applicable asset and liability accounts of the subsidiary c. Recognized in the applicable asset and liability accounts of the parent d. Accounted for in some other manner Answer: D Accounted for in some other manner

6. Consolidated financial statements are intended primarily for the use of: a. Stockholders of the parent company b. Taxing authorities c. Management of the parent company d. Creditors of the parent company Answer: D Creditors of the parent company

7. How is the non-controlling interest displayed in a consolidated statement of financial position?

a. As a separate item between liabilities and stockholder’s equity b. As a deduction from goodwill if any c.

By means of a note to consolidated financial statements

d. As a separate item in the stockholders’ equity section Answer: C By means of a note to consolidated financial statements

8. Sulu Company, a subsidiary acquired for cash, owned equipment with a fair value higher than the book value as of the date of acquisition. A consolidated statement of financial position prepared immediately after the acquisition would include this difference in: a. Goodwill b. Retained Earnings c.

Income Statement

d. Equipment

Answer: D Equipment

9. Palawan Company acquired a subsidiary for cash in acquisition combination on January 2, 2013. The price paid was greater than the fair value of the subsidiary's net assets. The subsidiary owned inventory with a fair value greater than its cost. A consolidated statement of financial position prepared immediately after the combination would:

a. Include part of the excess as cost of goods sold b. Include at least some of the excess as part of the inventory c.

Include all the excess as part of goodwill

d. Not include the excess

Answer: C Include all the excess as part of goodwill

10. Pasig corporation acquired a subsidiary in combination accounted for as a purchase. The fair market value of the identifiable net assets acquired exceeds the price paid. Under International Financial Reporting Standard IFRS 3 the difference should be recognized as:

a. Income from acquisition b. A reduction of the amounts to non-current assets c.

Goodwill

d. Pro-rated reduction of the amounts assigned to all assets

Answer: C Goodwill

11. The stockholder’s equity section of a consolidated statement of financial position for a parent and its partially owned subsidiary consists of:

a. The parent’s stockholder’s equity accounts b. The parent’s and the subsidiary’s stockholder’s equity accounts c.

The parent’s equity accounts and the non-controlling interest

d. The parent’s equity accounts, the subsidiary’s equity accounts and the non-controlling interest Answer: A The parent’s stockholder’s equity accounts

12. The retained earnings that appears of the consolidated statement of financial position of a parent company and its 60% owned subsidiary is a. The parent company’s retained earnings plus 100% of the subsidiary’s retained earnings b. The parent company’s retained earnings plus 60% of the subsidiary’s retained earnings. c. The parent company’s retained earnings d. Pooled retained earnings

Answer: D e. Pooled retained earnings

Computational

15-1: On July 1, 2013; Sony Company purchased all the outstanding stock of Aiwa for P4,000,000. At that time, Aiwa's statement of financial position showed net assets of P2,500,000. Aiwa's assets and liabilities had fair market values different from their book values, as follows: Book Value Fair Value Property and equipment - net P P5,000,000 P5,750,000 Other assets 500,000 350,000 Long-term debt 3,000,000 2,800,000 As a result of the combination above, what amount, if any, will be shown as goodwill in the July 1, 2013, consolidated statement of financial position of Sony Company and its wholly owned subsidiary, Aiwa Company? A. P 0 B. P600,000 C. P800,000 D. P700,000 Answer: D Solution: Price paid Less fair value of net assets acquired (P6,100 – P2,800) Goodwill

P4,000,000 3,300,000 P 700,000

15-2: On the day of acquisition Sub Inc. had the following assets and liabilities:

Book Value Fair Value Current assets P100,000 P100,000 Plant assets (net) 220.000 260,000 Liabilities (40,000) (40,000) Pub Company paid P450,000 for 90% of the outstanding voting stock of Sub. The goodwill in the consolidated statement of financial position at acquisition is: A. P180,000 B. P130,000 C. PI 70,000 D. P220,000 Answer: A Solution: Price paid P 450,000 Non-controlling interest (P450,000/90%) x 10% 50,000 Total 500,000 Less fair value of net assets acquired (P360,000 – P40,000) 320,000 Goodwill P 180,000 15-3: On the day of acquisition Pall and Mall had the following assets and liabilities Paul Company Alan Company Book Value Fair value Book Value Fair Value Current assets P140,000 P140,000 P10.000 P10,000 Plant assets (net) 220,000 340,000 130,000 180,000 Liabilities (100,000) (100,000) (50,000) (50,000) Pall Company paid P140,000 in cash for 80% of the outstanding stock of Mall Company. In the consolidated statement of financial position at acquisition, plant assets should be shown at what amount? A. P350,000 B. P390,000 C. P400,000 D. P520,000 Answer: C Solution: Plant assets – Pall Company (at book value) Plant assets – Mall Company (at fair value) Consolidated

P 220,000 180,000 P 400,000

15-4: On December 31, 2013. Ping Inc. paid P495,000 cash for all the outstanding stock of Sing Company. Sing's assets and liabilities on that day were as follows: Cash P60,000 Inventory 150,000 Property and equipment (net of Acc.Dep ofP100,000) 350.000 Liabilities 70,000 On the day of business combination, the fair value of the inventory was P125,000 and the fair value of the property and equipment (net) was P385,000. The goodwill (income from acquisition) resulting from this acquisition amounts to: A. (P5,000) B. P85,000 C. P40,000 D. P 5,000 Answer: A Solution: Price paid Less fair value of net assets acquired:

P 495,000

Cash Inventory Property and equipment Liabilities Gain on acquisition

P 60,000 125,000 385,000 ( 70,000) 500,000 P (5,000)

15-5: On January 1, 2013, Pop Company acquired 80% of the outstanding stock of Sap Company for P350,000 in cash. Relevant information for Sap on this day is as follows: Common' stock, P100 par P220,000 Retained earnings 100,000 Book Value Fair Value Inventory P100,000 P120,000 Land 150,000 240,000 Goodwill 10,000 — Mortgage payable 35,000 30,000 The consolidated statement of financial position on January 1, 2013, should show the following amounts of goodwill. A. P107,500 B. P117,500 C. P 97,500 D. P 0 Answer: A Solution: Price paid Non-controlling interest (P350,000/80%) x 20% Total Less fair value of net assets excluding goodwill Goodwill

P350,000 87,500 437,500 330,000 P107,500

15-6: Panay Company purchased 100 percent of the common stock of Sulu Company on January 1, 2013, for P400,000. Selected accounts from Panay's statement of financial position at the date of combination are as follows: Inventory P360,000 Plant and equipment (net) 500,000 Common stock 420,000 Retained earnings 550,000 Selected accounts from the statement of financial position of Sulu at acquisition are as follows: Inventory 120,000 Plant and equipment (net) 440,000 Common stock 175,000 Additional paid-in capital 225,000 Retained earnings (30,000) On the date of purchase, Sulu's inventory and plant and equipment had fair values of P130,000 and P420,000, respectively. Immediately after the combination, the amounts to be reported for inventory and plant and equipment in the consolidated statement of financial position are: A. P490,000 for inventory and P920,000 for plant and equipment. B. P360,000 for inventory and P940,000 for plant and equipment. C. P480,000 for inventory and P920,000 for plant and equipment D. P490,000 for inventory and P500,000 for plant and equipment.

Answer: A Solution: Inventory (P360,000 + P130,000) Plant and equipment (P500,000 + P420,000)

P490,000 P920,000

15-7: On December 31, 2013, Sisa Company held the following assets. Fair Value Book Value Current assets P190,000 P180,000 Building 180,000 150,000 Land 90,000 70,000 On this date, Pilo Company purchased all of Sisa Company's common stock for P440,000. What amounts will Sisa's building, and land be reported in the consolidated statement of financial position prepared at the date of combination Building Land A. P180,000; P90,000 B. P150,000; P70,000 C. P160,000; P90,000 D. P166,667; P83,333 Answer: A Solution: Building (at fair value) Land (at fair value)

P180,000 P 90,000

15-8: On October 1, 2013, Par Company acquired 80% of the outstanding common stock of Son Company for P480,000. The working paper elimination entry for Par Company and subsidiary on October I, 2013, was as follows: Common stock - Son Company 100,000 APIC - Son Company 120,000 Retained earnings - Son Company 180,000 Plant assets 50,000 Goodwill ? Investment in Son Company 480,000 Non-controlling interest ? Non-controlling interest is recorded at estimated fair value. What amounts of Goodwill and noncontrolling interest (respectively) be reported in the consolidated statement of financial position prepared at the date of acquisition? A. P150,000 P1;20,000 B. P120,000; P 90,000 C. PI 50,000; P 90,000 D. P120,000; P150,000 Answer: A Solution: Price paid NCI [(P480,000/80%) x 20%]

P480,000 120,000

Total Less fair value of net assets acquired Goodwill

600,000 450,000 P150,000

15-9: On July 1, 2013, Pepe Company borrowed P160,000 to purchase 80 percent of the outstanding common stock of Sara Company. This loan, carrying a 12 percent annual rate, is payable in 10 annual installments beginning July 1, 2014. Summarized portions of Pepe's and Sara's statement of financial position as of June 30, 2013, are as follows: Pepe Company Sara Company Total assets P800,000 P300,000 Total liabilities 250,000 155,000 Total stockholders' equity 550,000 145,000 The book values of Sara's assets and liabilities approximated market values except for accounts payable, which had a fair value that was P5,000 more than the book value. Any remaining difference is attributable to goodwill. The amounts to be recorded on the consolidated statement of financial position on July 1, 2013, for total assets and total liabilities respectively are. A. P1,025,000; P586,750 B. P1,100,000; P565,000 C. P1,151, 000; P408,750 D. P1,160, 000; P570,000 Answer: D Solution: Price paid P160,000 Non-controlling interest (P160,000/80%) x 20% 40,000 Total 200,000 Less fair value of net assets acquired (P300,000 – P160,000) 140,000 Goodwill P 60,000 Therefore: Total assets (P800,000 + P300,000 + P60,000) Total liabilities (P250,000 + P155,000 + P160,000 + P5,000)

P1,160,000 570,000

15-10: On December 31, 2013, Palo Company paid P990,000 for 99% of the outstanding common stock of Sota Company. The remaining 1% was held by a stockholder who was unwilling to sell the stock. Sota's nct assets had a book value of P850,000 and a fair market value of P900,000 when it was acquired by Palo. If Sota uses push-down accounting, the non-controlling interest should be reported at: a. P 8,500 b. P9,000 c. P 9,900 d. P10,000 ANSWER: B Solution: P900,000 x 1% = P9,000

15-11: Pita Company acquires a controlling interest in Soda Company in the open market for P120,000. The P100 par value capital stock of Soda Company at the date of acquisition is P125,000 and its retained earnings amounts to P50,000. The market value per share of Soda Company is P120 per share. In the consolidated statement of financial position on the date of acquisition, noncontrolling interest would show a balance of: a. P40,000 b. P35,000 c. P17,500 d. P30,000 ANSWER: D Solution: Number of shares acquired (P120,000/P120)

1,000

Divided by outstanding shares of Soda (P125,000/P100)

1,250

Controlling interest Non-controlling interest [(P120,000/80%) x 20%}

80% P30,000

15-12: On December 1, 2013, Pepsi Company purchased an 80 percent interest in Sarsi Company. On that date, the book values and fair values of Sarsi Company's assets and liabilities were the same. A consolidated statement of financial position prepared on that date is as follows: Assets Current assets

P200,000

Property, plant and equipment (net)

500,000

Goodwill

250,000

Total

P950,000

Liabilities and Stockholders' Equity Current liabilities

P150,000

Non-controlling interest

100,000

Common stock

200,000

Retained earnings

500,000

Total

P950,000

The price paid by Pepsi Company for its 80 percent investment in Soda Company is: a. P700,000 b. P250,000 c. P850,000

d. P600,000 ANSWER: A Solution: Goodwill

SP250,000

FV of net assets acquired excluding goodwill (P700,000 – P150,000) NCI Price paid by the Pepsi Company

550,000 (100,000) P700,000

15-13: On June 1, 2013, Paco, Inc. acquired most of the outstanding common stock of Sota Company for cash. The incomplete working paper elimination entries on that date for the consolidated statement of financial position of Paco, Inc. and its subsidiary are shown below: E(1)

E(2)

Stockholders' Equity - Sota Company

290, 700

Investment in Sota Company

247,095

NCI

43,605

Inventories

6,630

Equipment

48,450

Patent

7,650

Goodwill

?

Investment in Sota Company

69,955

NCI

?

Assuming NCl is measured at fair value, what is the amount of goodwill to be reported in consolidated statement of financial position on June 1, 2013? a. b. c. d.

P20,000 P19,570 P25,000 P10,000

ANSWER: B Solution: Price paid (P247,095 + P69,955) NCI [(P317,050/85%) x 15%*) Total Less net assets at fair value excluding goodwill: Net assets at book value Inventories Plant and equipment Patent Goodwill

P317,050 55,950 373,000 P290,700 6,630 48,450 7,650 353,430 P 19,570

Consider the following information for the questions below: Statement of financial position for Puro Corporation and Sato Company on December 31, 2013, are given below:

Puro Corporation

Sato Company

Cash and cash equivalents

P 70,000

P 90,000

Inventory

100,000

60,000

Property and equipment (net)

500,000

250,000

Investment in Sato Company

260,000

Total assets

P930,000

P400,000

Current liabilities

P180,000

P 60,000

Long-term liabilities

200,000

90,000

Common stock

300,000

100,000

Retained earnings

250,000

150,000

Total liabilities and stockholders' equity

P930,000

P400,000

Puro Corporation purchased 80 percent ownership of Sato Company on December 31, 2013, for P260,000. On that date, Sato Company's property and equipment had a fair value of P50,000 more than the book value shown, while its long-term liabilities has a market value of P150,000. All other book values approximated fair value. In the consolidated statement of financial position on December 31, 2013:

15-14: What amount of total property and equipment will be reported? a. P500,000 b. P750,000 c. P790,000 d. P800,000 ANSWER: D Solution: P500,000 + P300,000 = P800,000

15-15: What amount of goodwill will be reported? a. P

0

b. P85,000 c. P25,000 d. P60,000

ANSWER: B Solution: Price paid NCI [(P260,000/80%) x 20%] Total Less fair value of net acquired (P450,000 – P210,000) Goodwill

P260,000 65,000 325,000 240,000 P 85,000

15-16: What amount of consolidated retained earnings will be reported? a. b. c. d.

P250,000 P280,000 P370,000 P400,000

ANSWER: A. (The retained earnings of the parent only).

15-17: What amount of total stockholders’ equity will be reported?

a. b. c. d.

P550,000 P615,000 P750,000 P800,000

Answer: B Controlling interest (Stockholders’ equity of the parent)

P550,000

Non-controlling interest (per no. 15-15) Stockholders’ equity

15-18: What amount of non-controlling interest will be reported?

a. b. c. d.

P 65,000 P 60,000 P110,000 P160,000

Answer: A (Refer to 15-15)

15-19: What amount of total liabilities will be reported?

65,000 P615,000

a. b. c. d.

P240,000 P290,000 P590,000 P530,000

Answer: C (P380,000 + P210,000) 15-20: What amount of the total assets will be reported?

a. b. c. d.

P1,205,000 P1,070,000 P1,145,000 P1,140,000

Answer: A Cash and cash equivalent (P70,000 + P90,000)

P 160,000

Inventory (P100,000 + P60,000)

160,000

Property and equipment (P500,000 + P300,000)

800,000

Goodwill

85,000

Total assets

P1,205,000

15-21: Pacman Corporation purchased a 10% interest in Hoya Company on January 2,2008, as an available for sale investment for a price of P80,00...