Afar Section 402: Business Combinations

AFAR
Section 402
Business Combinations
Items 1 -2
Balance sheet information for Sphinx Company at January 1, 2018, is summarized as follows:
Current assets P230, 000 Liabilities P300,000

Plant assets 450,000 Capital stock P10 par 200,000
Retained earnings 180,000
P680,000 P680,000
Sphinx's assets and liabilities are fairly valued except for plant assets that are undervalued by P50, 000. On
January 2, 2018, Pyramid Corporation issues 20,000 shares of its P10 par value common stock for all of
Sphinx's net assets and Sphinx is dissolved. Market quotations for the two stocks on this date are:
Pyramid common: P28.00

Sphinx common: P19.50
Pyramid pays the following fees and costs in connection with the combination:
Finder's fee P10, 000

Legal and accounting fees 6,000
1. What is the Pyramid's investment cost of Sphinx Corporation?

a. P16,000
b. P560,000
c. P390,000
d. P20,000
2. How much the goodwill from the business combination?
a. P120,000
b. P130,000
c. P230,000
d. P50,000
e.
3. On April 7, 2018 Dart Co. paid P620, 000 for all the issued and outstanding common stock of Wall Corp. in a
transaction properly accounted as a purchase. The recorded assets and liabilities of Wall Corp. on April 1, 2009
are: Cash 60,000Inventory 180,000Property and equipment (net of accumulated Depreciation of P220,
000) 320,000Goodwill 100,000Liabilities (120,000) Net assets 540,000
On April 1, 2009, Wall’s inventory had a fair value of P150,000 and the property and equipment (net) had a fair
value of P380,000. What is the amount of goodwill resulting from the business combination?
a. 150,000
b. 120,000
c. 50,000
d. 20,000
4.100% of the he equity share capital of the Roman Co. was acquired by the Sweet Co. on July 30, 2017. Sweet
Co. issued 500, 000 new P1 ordinary shares which had a fair value of P8each at the acquisition date. In addition,
the acquisition resulted in Sweet incurring fees payable to external advisers of P200, 000 and share issue cost of
P80, 000. In accordance with IFRS3,Business Combination, goodwill at the acquisition date is measured by
subtracting the identifiable assets acquired and the liabilities assumed from
a. 4,000,000
b. 4,180,000
c. 4,200,000
d. 4,380,00
5. ABC Co. is acquiring XYZ Inc. XYZ has the following Intangible asset: Patent on a product that is deemed
to have no useful life P10, 000. Customer List with an observable fair value of P50, 000.
A 5-year operating lease with favorable terms with a discounted present value of P8, 000.
Identifiable R & D of P100, 000.
ABC will record how much for acquired Intangible Assets from the Purchase of XYZ Inc?
a. P168,000
b. P58,000
c. P158,000
d. P150,000
JOINT VENTURE
1. Goldman Company reports net income of $140,000 each year and pays an annual cash dividend of $50,000.
The company holds net assets of $1,200,000 on January 1, 2010. On that date, Wallace purchases 40 percent of
the outstanding stock for $600,000, which gives it the ability to significantly influence Goldman. At the
purchase date, the excess of Wallace’s cost over its proportionate share of Goldman’s book value was assigned
to goodwill. What is the Investment in Goldman Company balance (equity method) in Wallace’s financial
records on December 31, 2012?
a. P708,000.
b. P660,000.
c. P600,000.
d. P 690,000
2. ACE Company purchases 40% of Basket Company on January 1 for P500,000 that carry voting rights at a
general meeting of shareholders of Basket Company. Ace Company and Blake Company immediately agreed to
share control (wherein unanimous consent is needed to all the parties involved) over Basket Company. Basket
reports assets on that date of P1,400,000 with liabilities of P500,000. one building with a seven-year life is
undervalued on Basket’s books by P140,000. Also Basket’s book value for its trademark (10-year life) is
undervalued by P210,000. During the year, Basket reports net income of P90,000, while paying dividends of
P30,000. What is the investment in Basket Company balance (equity method) in Ace’s financial records as of
December 31?
a. P504,000 c. P513,900
b. P507,600 d. P516,000
3. On January 1, Puckett Company paid $1.6 million for 50,000 shares of Harrison’s voting common stock,
which represents a 40 percent investment. No allocation to goodwill or other specific account was made.
Significant influence over Harrison is achieved by this acquisition and so Puckett applies the equity method.
Harrison distributed a dividend of $2 per share during the year and reported net income of $560,000. What is
the balance in the Investment in Harrison account found in Puckett’s financial records as of December 31?
a. P 1,784,000.
b. P1,884,000.
c. P1,724,000.
d. 1,844,000.
4. Pioneer, Inc. owns 30 percent of Panner and applies the equity method. During the current year, Pioneer buys
inventory costing P54,000 and then sells its Panner for P90,000. At the end of the year, Panner still holds only
P20,000 of merchandise.
What amount of unrealized gross profit must Pioneer defer in reporting this investment using the equity
method?
a. P 2,400 c. P 8,000
b. P 4,800 d. P 10,800
5. On January 1, 2013, MEGA, Inc. and YOUNG, Inc. (the parties) agreed to combine their businesses by
establishing a separate vehicle (Xylo, Inc.). Both parties expect the arrangement to benefit them in different
ways. MEGA believes that the arrangement could enable it to achieve its strategic plans to increase its size,
offering an opportunity to exploit its full potential for organic growth through an enlarged offering of products
and services. YOUNG expects the arrangement to reinforce its business opportunities by marketing more
products.
As a result, MEGA, Inc. acquired 20% of the outstanding common stock of Xylo, Inc. for P700,000. This
investment gave MEGA the joint control over Xylo. Xylo’s assets on that date were recorded at P3,900,000
with liabilities of P900,000. Any excess of cost over book value of the investment was attributed to patent
having a remaining useful life of 10 years.
In 2013, Xylo reported net income of P170,000. In 2014, Xylo reported net income of P210,000. Dividends of
P70,000 were paid in each of these two years. What is the equity method balance of MEGA’s investment in
Xylo, Inc. at December 31, 2014?
a. P728,000 c. P756,000
b. P748,000 d. P776,000

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AFAR

Current assets P230, 000 Liabilities P300,000

Pyramid common: P28.00

Finder's fee P10, 000

1. What is the Pyramid's investment cost of Sphinx Corporation?

2. How much the goodwill from the business combination?

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