CHAPTER 1

SUGGESTED ANSWERS
EXERCISES

Exercise 1 - 1
1. Direct cost Expense
2. Direct cost Expense
3. Indirect cost Expense
4. Cost of issuing and registering securities Reduction in additional paid in capital
5. Cost of issuing and registering securities Reduction in additional paid in capital
6. Cost of arranging and registering debt Bond issue cost
7. Cost of arranging and registering debt Bond issue cost
8. Indirect cost Expense
9. Direct cost Expense
10. Indirect cost Expense

Exercise 1 - 2
Consideration transferred (10,000 sh x P120) P1,200,000
Fair value of net assets acquired 450,000
Goodwill P 750,000

Exercise 1 - 3
1. Consideration transferred P 500,000
FMV of net assets acquired 600,000
Gain on Bargain Purchase/Negative Goodwill P 100,000

2. Negative goodwill is recognized in the profit or loss.

Exercise 1 - 4
1. Assets 6,000,000
Goodwill 550,000
Liabilities 1,675,000
Ordinary Share Capital (325,000 x P10) 3,250,000
Paid-In Capital in Excess of Par (325,000 x P5) 1,625,000
Consideration transferred (325,000 x P15) P4,875,000
FMV of net assets acquired (P6,000,000 - P1,675,000) 4,325,000
Goodwill P 550,000

2. Assets 10,000,000
Goodwill 225,000
Liabilities 4,525,000
Ordinary Share Capital (475,000 x P5) 2,375,000
Additional Paid-in Capital (475,000 x 7) 3,325,000

Consideration transferred (475,000 x 12) P 5,700,000

FMV of net assets acquired (P10,000,000 – P4,525,000) 5,475,000
Goodwill P 225,000
 Chapter 1 – AA2 (2014 edition) page 2

Exercise 1 -5
Requirement 1
Accounts Receivable 120,000
Inventories 140,000
Property. Plant, and Equipment 300,000
Goodwill 40,000
Cash 550,000
Current Liabilities 50,000

Consideration transferred P550,000

FMV of net assets acquired 510,000
Goodwill P 40,000

Expenses of Business Combination

5,000
Cash

5,000

Requirement 2
Cash 550,000
Current Liabilities 50,000
Accounts Receivable 120,000
Inventories 100,000
Property, Plant, and Equipment 280,000
Retained Earnings 100,000

Ordinary Share Capital 200,000

Retained Earnings 350,000
Cash 550,000

Exercise 1 – 6
1. Accounts Receivable 120,000
Inventories 140,000
Property Plant and Equipment 300,000
Goodwill 60,000
Cash 550,000
Current Liabilities 50,000
Estimated Liability for contingent Consideration 20,000

Consideration transferred P550,000

Contingent consideration P100,000 x 20% 20,000
Total P570,000
FMV of net assets acquired 510,000
Goodwill P 60,000

2. Goodwill (P60,000 – P20,000) 40,000

Estimated Liability for Contingent Consideration 40,000

3. Goodwill 15,000
Estimated Liability for Contingent Consideration 15,000
 Chapter 1 – AA2 (2014 edition) page 3

4. Estimated Liability for Contingent Consideration 5,000

Goodwill 5,000

5. Estimated Liability for Contingent Consideration 70,000

Loss on Estimated Liability for contingent Consideration 30,000
Cash 100,000

Exercise 1 – 7
1. Current Assets 575,000
Plant Assets 1,200,000
Patent 50,000
Current Liabilities 300,000
Long term Liabilities 450,000
Cash 300,000
Ordinary Share Capital 50,000 x 5 par 250,000
Additional Paid in Capital 50,000 x P9 450,000
Gain on Bargain Purchase 75,000

Consideration transferred:
Cash P 300,000
Ordinary Share Capital 50,000 x P14 700,000
Total P1,000,000
FMV of net assets acquired 1,075,000
Gain in Bargain Purchase P 75,000

Expenses of Business Combination 75,000

Additional Paid in Capital 50,000
Cash 125,000

2. Plant Assets (P1,500,000 – P1,200,000) 300,000

Gain on Bargain Purchase 300,000

Consideration transferred:
Cash P 300,000
Ordinary Share Capital 50,000 x P14 700,000
Total P1,000,000
FMV of net assets acquired 1,375,000
Gain in Bargain Purchase P 375,000

3. Current Assets 575,000

Plant Assets 1,200,000
Patent 50,000
Current Liabilities 300,000
Long term Liabilities 450,000
Cash 300,000
Ordinary Share Capital 50,000 x 5 par 250,000
Additional Paid in Capital 50,000 x P9 450,000
Paid in Capital for Contingent Consideration 30,000
Gain on Bargain Purchase 45,000
 Chapter 1 – AA2 (2014 edition) page 4

Consideration transferred:
Cash P 300,000
Ordinary Share Capital 50,000 x P14 700,000
Stock Contingent Consideration 30,000
Total P1,030,000
FMV of net assets acquired 1,075,000
Gain in Bargain Purchase P 45,000

Paid in Capital for Contingent Consideration 30,000

Ordinary Share Capital 5,000 x 5par 25,000
Additional Paid in Capital 5,000

4. Additional Paid in Capital 20,000

Ordinary Share Capital 4,000 x 5par 20,000

Prior to the termination of the contingency, the stock contingency is described

through a footnote.

5. Additional Paid in Capital 100,000

Ordinary Share Capital 20,000 x 5par 100,000
14 – 10 = P4 x 50,000 = P200,000/10 = 20,000 shs.

Prior to the termination of the contingency, the stock contingency is described

through a footnote.

Exercise 1- 8
No. 1 No. 2
Consideration transferred
P50,000,000 P50,000,000
Non-controlling interest
P42,500,000 x 20%
8,500,000
P50,000,000 – P12,000,000/80% x 20%
9,500,000 Total

P58,500,000 P59,500,000
Fair market value of net assets acquired 42,500,000
42,500,000
Goodwill
P16,000,000 P17,000,000

Exercise 1 – 9
1. P4,800,000/60% x 20% = P1,600,000

2. Fair value of net assets P7,700,000

Book value of net assets 6,900,000
Undervaluation of net assets P 800,000

3 Consideration transferred P4,800,000

Fair value of previously held equity interest 1,600,000
 Chapter 1 – AA2 (2014 edition) page 5

Fair value of non controlling interest 1,600,000

Total P8,000,000
FMV of net assets 7,700,000
Goodwill P 300,000

4. Fair value of previously held equity interest P1,600,000

Cost of 20% interest 1,200,000
Gain on the acquisition P 400,000

5. Consideration transferred P4,800,000/

60%
Remeasured fair value of net assets P8,000,000
x 20%
Non controlling interest P1,600,000

Exercise 1 - 10
1. Assets, other than goodwill 550,000
Goodwill 196,000
Liabilities 230,000
Ordinary Share Capital 516,000

Co. A Co. B Co. C Total

Net asset contribution P 90,000 P120,000 P110,000 P320,000
Goodwill contribution
Average earnings P 16,000 P 20,000 P 22,000
Normal earnings 10,800 14,400 13,200
Excess earnings P 5,200 P 5,600 P 8,800
Capitalization rate 10% 10% 10%
Goodwill P 52,000 P 56,000 P 88,000 196,000
Total contribution P142,000 P176,000 P198,000 P516,000
Share capital distribution 14,200 sh 17,600 sh 19,800 sh 51,600 sh

2. Assets 550,000
Liabilities 230,000
Ordinary Share Capital 320,000
Co. A 142,000/516,000 x 32,000 sh 8,806 sh
Co. B 176,000/516,000 x 32,000 sh 10,915 sh
Co. C 198,000/516,000 x 32,000 sh 12,279 sh

Exercise 1 - 11
Total contribution (P50,000 / 10%) P500,000
Net asset contribution equal to preference shares issued 400,000
Goodwill contribution equal to ordinary shares issued P100,000

Preference Share Capital (P400,000/P100) 4,000 shares

Ordinary Share Capital (P100,000/P50) 2,000 shares

Exercise 1 - 12
 Chapter 1 – AA2 (2014 edition) page 6

1. 1,500 shares/2,000 shares x 100 shares = 75 shares

2. 1,500 shares x P150 = P225,000
3. 1,000 shares x P150 = P150,000
4. P500,000/2,000 shares x 100 shares = P 25,000

PROBLEMS
Problem 1 - 1
1. Cash 100,000
Accounts Receivable 150,000
Inventory 140,000
Goodwill 35,000
Land 120,000
Long-term Investment in Marketable Securities 140,000
Equipment 180,000
Accounts Payable 115,000
Ordinary Share Capital (6,000 @ 50) 300,000
APIC 450,000

Consideration transferred P750,000

FMV of net assets acquired 715,000
Goodwill P 35,000

Additional Paid in Capital 63,000

Expenses of Business Combination 140,000
Cash 203,000

2. Investment in Canada Co. (6,000 x P125) 750,000

Ordinary Share Capital (6,000 x P50) 300,000
Additional Paid - In Capital (6,000 x P75) 450,000

Additional Paid in Capital 63,000

Expenses 140,000
Cash 203,000

Problem 1 - 2
1. Land 30,000
Goodwill 30,000

2. Cash 100,000
Accounts Receivable 150,000
Inventory 140,000
Land 120,000
Long term Investment 140,000
Equipment 180,000
Goodwill 135,000
Accounts Payable 115,000
Paid in Capital from Contingent Consideration 100,000
Ordinary Share Capital (6,000 @ 50) 300,000
APIC 450,000

Consideration transferred 6,000 @ 125 P750,000

 Chapter 1 – AA2 (2014 edition) page 7

Stock Contingent Consideration 100,000

Total P850,000
FMV of net assets acquired 715,000
Goodwill P135,000
Additional Paid in Capital 63,000
Expenses of Business Combination 140,000
Cash 203,000

Paid in Capital from Contingent Consideration 100,000

Ordinary Share Capital 1,000 @ P50 50,000
Additional Paid in Capital 50,000

3. Additional Paid in Capital 100,000

Ordinary Share Capital 2,000 @ P50 100,000

Prior to the termination of the contingency, the stock contingency is described through a footnote.

4. Additional Paid in Capital 75,000

Ordinary Share Capital 1,500 @ P50 75,000
125 – 100 = 25 x 6,000 = P150,000/100 = 1,500

Prior to the termination of the contingency, the stock contingency is described through a footnote.

Problem 1 - 3
1. Investment in Share Capital (75,000 @ P14) 1,050,000
Ordinary Share Capital (75,000 @ P10) 750,000
Ordinary Share Premium(75,000 x P4) 300,000

2. Additional Paid-in Capital (40,000 @ P4) = P160,000

Retained Earnings zero

Problem 1 - 4
1. Cash 3,000
Accounts Receivable 8,000
Inventories 20,000
Non Current Marketable Securities 55,000
Property Plant and Equipment 50,000
Land 28,000
Goodwill 52,000
Current Liabilities 4,000
Long Term Debt 20,000
Cash 160,000
Estimated Liability for Contingent Consideration 32,000

Consideration transferred:
Cash P160,000
Contingent Consideration P80,000 x 40% 32,000
 Chapter 1 – AA2 (2014 edition) page 8

Total P192,000
FMV of net assets acquired 140,000
Goodwill P 52,000

2. Goodwill 18,000
Estimated Liability for Contingent Consideration 18,000

3. Goodwill 5,000
Estimated Liability for Contingent Consideration 5,000

4. Goodwill 5,000
Estimated Liability for Contingent Consideration 5,000

5. Estimated Liability for Contingent Consideration 60,000

Loss on Estimated Contingent Consideration 20,000
Cash 80,000

Problem 1 - 5
1 FMV of net assets of Commander Co. [(P200,000 + P800,000) - P200,000] P800,000
MV of share capital of General Co.  P40
No. of shares to be issued 20,000 sh
Share exchange ratio (20,000 sh/10,000 sh) 2:1

2 Investment in Commander Co. (20,000 x P40) 800,000

Ordinary Share Capital (20,000 x P10) 200,000
Paid - In Capital in Excess of Par (20,000 x P30) 600,000
Problem 1 - 6
Company A Company B Company C Total
Net tangible assets P400,000 P200,000 P1,000,000 P1,600,000
Expected annual earnings 60,000 40,000 100,000 200,000
Rate of return on net tangible
Assets 15% 20% 10%
Ratio of earnings distribution
before combination 30% 20% 50% 100%
Share distribution (earnings
capitalized at 8%)
Preference shares 4,000 sh 2,000 sh 10,000 sh 16,000 sh
Ordinary shares 3,500 sh 3,000 sh 2,500 sh 9,000 sh
Earnings distribution:
Preference shares a. P20,000 P10,000 P50,000 P 80,000
b. 20,000 10,000 50,000 80,000
c. 32,000 16,000 80,000 128,000

Ordinary shares a. P 7,778 P 6,667 P 5,555 P 20,000

b. 17,500 15,000 12,500 45,000
c. 28,000 24,000 20,000 72,000

Total a. P27,778 P16,667 P55,555 P100,000

b. 37,500 25,000 62,500 125,000
c. 60,000 40,000 100,000 200,000
 Chapter 1 – AA2 (2014 edition) page 9

Ratio of earnings distribution

after combination a. 27.78% 16.67% 55.55% 100%
b. 30.00% 20.00% 50.00% 100%
c. 30.00% 20.00% 50.00% 100%
Problem 1 - 7
Requirement 1
Plan A

Assets, other than Goodwill 6,000,000

Goodwill 1,000,000
Ordinary Share Capital, P10 par 7,000,000

Co.D Co. E Co. F Total

Net asset contribution P3,000,000 P1,500,000 P1,500,000 P6,000,000
Goodwill contribution
Est. annual earnings P 300,000 P 165,000 P 135,000
Normal earnings 240,000 120,000 120,000
Excess earnings P 60,000 P 45,000 P 15,000
Capitalization rate 12% 12% 12%
Goodwill P 500,000 P 375,000 P 125,000 1,000,000
Total contribution P3,500,000 P1,875,000 P1,625,000 P7,000,000
Ordinary share dist. 350,000 sh 187,500 sh 162,500 sh 700,000 sh

Plan B
Assets, other than Goodwill 6,000,000
Goodwill 2,000,000
Preference Share Capital, P10 par 6,000,000
Ordinary Share Capital, P10 par 2,000,000

Co. D Co. E Co. F Total

Total contributions
(Earnings/8%) P4,000,000 P2,200,000 P1,800,000 P8,000,000
Net asset contribution 3,750,000 2,062,500 1,687,500 7,500,000
Goodwill contribution P 250,000 P 137,500 P 112,500 P 500,000
Preference share dist.
equal to NA cont. 375,000 sh 206,250 sh 168,750 sh 750,000 sh
Ordinary share dist.
equal to earnings cont. 25,000 sh 13,750 sh 11,250 sh 50,000 sh

Requirement 2
Plan A
Co. D 350,000/700,000 x P600,000 P300,000
Co. E 187,500/700,000 x P600,000 160,714
Co. F 162,500/700,000 x P600,000 139,286
P600,000
Plan B
Preference Ordinary Total
Regular dividends at 6% P450,000 P 30,000 P480,000
Balance – P120,000 x 7,500/8,000 112,500 112,500
 Chapter 1 – AA2 (2014 edition) page 10

P120,000 x 500/8,000 7,500 7,500

Total P562,500 P37,500 P600,000
Dividends per share P .75 P .75
Co. D Co. E Co. F TOTAL
Preference Share Capital P281,250.00 P154,687.50 P126,562.50 P562,500.00
Ordinary Share Capital 18,750.00 10,312.50 8,437.50 37,500.00
Total P300,000.00 P165,000.00 P135,000.00 P600,000.00

MULTIPLE CHOICE
1- A. 1. A 6. A 11. D 16. C
2. B 7. A 12. C 17. A
3. C 8. A 13. A 18. B
4. C 9. D 14. C 19. B
5. D 10. C 15. C 20. C

1– B 1. B Consideration transferred P80,000

Fair market value of net assets acquired 90,000
Gain on Bargain Purchase/Negative Goodwill P10,000

1–C 1. C Consideration transferred P2,650,000

FMV of net assets
(P1,890,000 + P2,900,000 – P1,140,000) 3,650,000
Credit to profit and loss P 1,000,000

1– D 1. C Consideration transferred P3,068,000

FMV of net assets acquired
(P3,239,600 – 171,600) 3,068,000
Goodwill Zero

1–E 1. C Retained Earnings of the surviving company remains the same since no
part of the acquired company’s Retained Earnings is recorded upon
combination.

1– F 1. D Total assets of Pacino before the combination P1,097,500

Assets acquired from Lucky 1,733,250
Goodwill recorded upon combination 850,000
Total assets after the combination P3,680,750

Consideration transferred (200,000 sh @ P11) P2,200,000

Net assets acquired (P1,733,250 – P383,250) 1,350,000
Goodwill P 850,000

1-G 1. C Customers Lists P 90,000

Research and Development 220,000
Operating Lease 25,000
Goodwill P335,000

1-H 1. B
 Chapter 1 – AA2 (2014 edition) page 11

1–I 1. A The retained earnings of the acquiring company

2. D APIC in shares issued to the 3 acquired co. (P100,000 x 2) P200,000

APIC of Co. U 15,000
P215,000

1– J 1. B Amount paid plus the contingent consideration that is recognized because

the contingent consideration is probable and can be reasonably estimated
at the date of acquisition.

1- K 1. A P285 – P200 = P85 million

1- L 1. B P200 – P145 = P55 million. The P160 million fair value is beyond the one
year measurement period.

1- M 1. D P2,200,000 – (P2,000,000 x 80%) = P600,000

1- N 1. D (1) P100 + (P85 x 20%)= P117 – P85 = P32 million

(2) (P100 – P24)/80% x 20% = P19 + P100 – P85 = P34 million

1- O 1. D P900,000 – (P1,200,000 x 60%) = P180,000

Gain on bargain purchase is reported in the income statement

1- P 1. C 50,000 @ P18= P900,000

1- Q 1. C P90 – P82 = P8 gain on bargain purchase recognized in profit and loss

1 – R. 1. D Average earnings P 50,000

Normal earnings (P300,000 x 8%) 24,000
Excess earnings P 26,000
Goodwill (P26,000/10%) P260,000

2. D Average earnings P 80,000

Normal earnings (P400,000 x 8%) 32,000
Excess earnings P 48,000
Goodwill (P48,000/10%) P480,000
Net asset contribution 400,000
Total contribution P880,000

1–S 1. D JPE = [P25,000 – (P250,000 x 6%)]/10% P 100,000

FPJ = [P14,000 – (P150,000 x 8%)]/10% 50,000
Total goodwill P 150,000

1–T 1. A Average earnings P300,000

Normal earnings (P1,200,000 x 10%) 120,000
Excess earnings P180,000
Capitalization rate ÷25%
Goodwill P720,000
Chapter 1 – AA2 (2014 edition) page 12

2. A Consideration transferred P1,500,000

FMV of net assets acquired
(P520,000 + P1,480,000 – P800,000) 1,200,000
Goodwill P 300,000

1–U 1. C Abner Bertha Charlie

Expected annual earnings P 36,000 P 80,000 P 96,000
Capitalization rate ÷ 8% ÷ 8% ÷ 8%
Total contribution P450,000 P1,000,000 P1,200,000
Asset contribution equal to
preference shares 400,000 800,000 800,000
Goodwill equal to ord. sh P 50,000 P 200,000 P 400,000
Par value of ord. shares ÷ P10 ÷ P10 ÷ P10
Ordinary shares dist. 5,000 sh 20,000 sh 40,000 sh

1–V 1. B (P3,800,000 - P2,500,000)/P100 13,000 sh

2. D Excess earnings = P481,000 – (P1,300,000 x 15%) P 286,000
Goodwill equal to par value of ordinary share
to be issued = P286,000/20% P1,430,000
Premium on ordinary share = P1,430,000 x 50% P 715,000

1– W 1. C Frannie Giselle Hazel Total

Earnings P 30,000 P 30,000 P 40,000 P 100,000
contribution
Normal earnings 12,000 18,000 30,000 60,000
(6%)
Excess earnings P 18,000 P 12,000 P 10,000 P 40,000
Capitalization rate ÷ 20% ÷ 20% ÷ 20% ÷ 20%
Goodwill P 90,000 P 60,000 P 50,000 P 200,000
Asset contribution 200,000 300,000 500,000 1,000,000
Total contribution P290,000 P360,000 P550,000 P1,200,000
Share capital dist.
290/1,200 x 1,000 242 sh
360/1,200 x 1,000 300 sh
550/1,200 x 1,000 458 sh 1,000 sh

1– X 1. A Polar Quickie Robot Total

Estimated earnings P 41,250 P 75,000 P 33,750 P 150,000
Normal earnings 22,500 45,000 22,500 90,000
(6%)
Excess earnings P 18,750 P 30,000 P 11,250 P 60,000
Capitalization rate ÷ 20% ÷ 20% ÷ 20% ÷ 20%
Goodwill P 93,750 P150,000 P 56,250 P 300,000
Asset contribution 375,000 750,000 375,000 1,500,000
Total contribution P458,750 P900,000 P431,250 P1,800,000
Share capital dist %
458,750/1,800,000 26%
900,000/1,800,000 50%
Chapter 1 – AA2 (2014 edition) page 13

431,250/1,800,000 24%

1–Y 1. B Ordinary Share Capital P250,000

Par value per share ÷ P50
Number of shares outstanding 5,000
4,000 sh / 5,000 sh .80

1–Z 1. D FMV of net assets equal of MV of share capital P2,000,000

MV per share ÷P100
Number of shares to be issued 20,000 sh