Home Office Branch and Agency Transaction Business Combination 1
Home Office Branch and Agency Transaction Business Combination 1
Home Office Branch and Agency Transaction Business Combination 1
AFAR, Review
Instruction: Write the letter of the correct answer on the space provided. Support your answer
with computations.
________1. What is the adjusted balance of Branch Current account in Home Office books?
Solution:
BRANCH ACCOUNT
200,000 3,375
78,750 10,000
3,500 15,000
20,500
1,025
303,775 28,375
275,400
________2. What is the adjusted Home Office Current account in the Branch books?
Solution:
0, because there is no home office account in the home office book.
________3. At what percentage of cost did the Home Office bill the Branch for merchandise
shipped to it?
a. 100% c. 140% e. None of the choices
b. 120% d. 150%
Solution:
Beginning, inventory P 70,000
Add: shipments from home office 350,000
Total 420,000
Less: ending, inventory 84,000
COGS Shipments P 336,000
________4. What is the balance of the Allowance for Overvaluation in the Branch Inventory on
December 31, 2022?
Solution:
84,000 x 40/140 = 24,000 Allowance for overvaluation after adjustment
________5. Black Polo Inc. opened an agency in Marikina. The following are transactions for
July 2022, Samples worth P10,000, advertising materials of P5,000 and checks for P50,000
were sent to the agency. Agency sales amounted to P220,000 (cost P150,000). The collection
for agency amounted to P176,400 net of 2% discount. The agency’s working fund was
replenished for the following expenses incurred: rent for 2 months P10,000, delivery expenses
of P2,500 and miscellaneous expenses of P2,000. Home Office charges the following to agency
after analysis of accounts recorded in the books: salaries and wages P15,000 and commission
which is 5% of sales. The agency sample inventory at the end of July is 25% of the quantity
shipped. The agency has used 20% of the advertising materials sent by the home office.
What is the amount if agency net income for the month of July?
a. 17,400 c. 22,400 e. None of the choices
b. 21,000 d. 66,400
Solution:
Sales P 220,000
Less: sales discount (3,600)
Net sales 216,400
Less: cost of sales (150,000)
Gross profit 66,400
Less: other expenses
Sample expense P 7,500
Advertising expense 1,000
Rent expense 5,000
Delivery expense 2,500
Miscellaneous expense 15,000
Salaries and wages 11,000 44,000
Net income P 22,400
________6. Pail Company pays P100,000,000 in cash for Salt Company’s assets and liabilities.
Pail records goodwill of:
a. 50,000,000 c. 72,500,000 e. None of the choices
b. 66,800,000 d. 77,500,000
Solution:
Pail company cash P 100,000,000
Current Assets P1,500,000
Plant and Equipment (net) 35,000,000
Patents 2,000,000
Completed technology 10,000,000
Licensing agreements 4,000,000 P52,500,000
Less: liabilities (30,000,000) (22,500,000)
Goodwill P 77,500,000
________7. Now assume Pail Company pays P10,000,000 in cash to acquire the assets and
liabilities of Salt Company. Pail records a bargain purchase gain on acquisition of:
a. 0 c. 17,500,000 e. None of the choices
b. 12,500,000 d. 28,500,000
Solution:
Pail company cash P 10,000,000
Current Assets P1,500,000
Plant and Equipment (net) 35,000,000
Patents 2,000,000
Completed technology 10,000,000
Licensing agreements 4,000,000 P52,500,000
Less: liabilities (30,000,000) (22,500,000)
Gain or loss on acquisition P 12,500,000
________8. Pail paid P100,000,000 in cash for Salt. Three months later, Salt’s patents are
determined to have been worthless as of the date of acquisition. The entry to record this
information includes:
a. A debit to Loss of P2,000,000
b. A debit to Patents of P2,000,000
c. A debit to Goodwill of P2,000,000
d. A debit to Retained Earnings of P2,000,000
Solution:
The correcting entry, within the measurement period (as of the date of acquisition means it exist
on the date of acquisition), is
Goodwill 2,000,000
Patents 2,000,000]
________9. Pail paid P10,000,000 in cash for Salt. Three months later, it is determined that
Salt’s acquisition date (as of the date of acquisition) liabilities omitted a pending lawsuit valued
at P2,000,000. The entity to record this information includes:
a. A debit to Bargain Purchase on Acquisition of P2,000,000.
b. A debit to Liabilities of P2,000,000.
c. A debit to Goodwill of P2,000,000.
d. A debit to Retained Earnings of P2,000,000.
Solution:
The correcting entry, within the measurement period (as of the date of acquisition means it exist
on the date of acquisition), is
Gain on acquisition 2,000,000
Liabilities 2,000,000
For Numbers 10 to 14
_______10. What number of shares did Zykel issue for this acquisition?
a. 80,000 c. 30,000 e. None of the choices
b. 50,000 d. 17,500
Solution
Common stock - combined P 125,000
Common – Zykel 100,000
Common stock issued P 25,000
Divided by: par value common stock 2
Zykel shares to acquire Globe P12,500
_______11. At what price was Zykel stock trading when stock was issued for this acquisition?
a. 2.00 c. 6.00 e. None of the choices
b. 5.63 d. 8.00
Solution:
Par value of common stock Zykel P2
Add: share premium/APIC per share (P245,000-65,000)/12,500 14.4
Fair value per share when stock was issued 16.4
12. What was the fair value of the net assets held by Globe Tattoo at the date of combination?
a. 115,000 c. 270,000 e. None of the choices
b. 227,000 d. 497,000
Solution:
Net identifiable assets of Zykel before acquisition
Cash P 65,000
Accounts Receivable 72,000
Inventory 33,000
Buildings and Equipment (net) 400,000
Less: Accounts Payable P 50,000
Bonds Payable 250,000 (300,000)
Total P 270,000
FV of the net identifiable assets held by Globe Tattoo at date of acquisition P 227,000
______13. What amount of goodwill will be reported by the combined entity immediately
following the combination?
a. 13,000 c. 173,000 e. None of the choices
b. 125,000 d. 413,000
Solution:
Consideration transferred (12,500 x P16.4) P 205,000
Less: FV of the net identifiable assets 227,000
Goodwill P 22,000
_______14. What balance in retained earnings will the combined entity report immediately
following the combination?
a. 35,000 c. 105,000 e. None of the choices
b. 70,000 d. 175,000
Solution:
Acquirer - Zykel (at book value) P 105,000
Acquiree - Globe tattoo (not acquired) 0
Retained earnings P 105,000
There was no bargain purchase gain and acquisition related cost, that is why it affects retained
earnings on the acquisition date.
_______15. Ruben Inc. is to acquire James Corp. by absorbing all the assets and assuming all
the liabilities of the latter in exchange for the shares of the former’s stock.Below are the balance
sheets of the two companies, with the corresponding appraised
value increment for James Corp:
Ruben James
Assets, per books P4,000,000 P2,500,000
Assets, appraisal increase 300,000
Liabilities 1,500,000 800,000
Common Stock (No par, P100 par) 2,000,000 1,000,000
Additional Paid in Capital 700,000 300,000
Retained Earnings (Deficit) (200,000) 400,000
Total Equities P4,000,000 P2,500,000
The parties agree to use the appraised values, against which the fair market value of the shares
will be matched. Ruben Inc.’s common stock is currently selling at P100 per share. The number
of shares to be issued by Ruben Inc. is:
_______16. Sicat Co. will issue share of P10-par common stock for the net assets of Max Co.
Sicat’s common stock has a current market value of P40 per share. Max balance sheet
accounts follow:
Max current assets and property and equipment, respectively, are appraised at P400,000 and
P1,600,000; its liabilities are fairly valued. Accordingly, Sicat Co. issued shares of its common
stock with the total market value equal to that of Max net assets. To recognize goodwill of
P200,000, how many shares were issued?
a. 40,000 c. 50,000 e. None of the choices
b. 45,000 d. 55,000
Solution:
FV of net identifiable assets acquired:
Current asset P 400,000
Property plant and equipment 1,600,000
Liabilities (400,000)
FMV of net assets 1,600,000
Add: goodwill 200,000
Consideration transferred 1,800,000
Divided by: current mv per share 40
Number of issued shares P 45,000
_______17. Philip Company will issue shares of its P10 par value stock for all of the outstanding
stock of the Siylay Company. Philip Company stock has a market value of P40 per share. Siylay
Company balance sheet appears below:
Solution:
Current assets P 200,000
Property,plant and equipment 800,000
Total asset at current value: P1,000,000
Less: liabilities
Current liabilities P 50,000
Long-term debt 150,000 200,000
Net asset at CV (market) P 800,000
Divided by: MV of Philip stock 40
Issued shares by Philip 20,000
_______18. Companies A and B decide to consolidate. Asset and estimated annual earnings
contributions are as follows:
Co. A Co. B Total
Net asset contribution P300,000 P400,000 P700,000
Estimated annual earnings contribution 50,000 80,000 130,000
Stockholders of the two companies agree that a single class of stock be issued, that their
contributions be measures by net assets plus allowances for goodwill, and that 10% be
considered as a normal rate of return. Earnings in excess of the normal rate of return shall be
capitalized at 20% in calculating goodwill. It was also agreed that the authorized capital stock of
the new corporation shall be 20,000 shares with a par value of P100 a share.
The amount of goodwill credited to Co. A, and the total contribution of Co. B (net assets plus
goodwill) is:
a. 100,000; 400,000 c. 100,000; 600,000 e. None of the choices
b. 150,000;500,000 d. 200,000; 600,000
Solution:
Company A Company B
Net asset contributions P300,000 P400,000
Add: goodwill
Average/annual earnings 50,000 80,000
Less: normal earnings (10% on net asset) 30,000 40,000
Excess earnings P 20,000 P 40,000
Divided by: capitalized at 20% 20%
Goodwill P 100,000 P 200,000
Total contribution (issued stock) P 400,000 P 600,000
The parties collectively agreed that the new corporation, AA Co., will issue a single class of
stock based on the earnings ratio. What is the stock distribution ratio to Companies X, Y, and Z,
respectively?
a. 20:30:50 c. 30:40:30 e. None of the choices
b. 30:30:40 d. 40:40:20
Solution:
Fraction
X: P 60,000 6/20 = 30%
Y: 60,000 6/20 = 30%
Z: 80,000 8/20 = 40%
P200,000 100%
_______20. Bats Inc., a new corporation formed and organized because of the recent
consolidation of II Inc. and JJ Inc., shall issue 10% participating preferred stocks with a par
value of P100 for II and JJ net assets contributions, and common shares with a par value of P50
for the difference between the total shares to be issued and the preferred shares to be issued.
The total shares to be issued by Bats shall be equivalent to average annual earnings capitalized
at 10%. Relevant data on II and JJ follows:
II JJ
Total Assets P720,000 P921,600
Total Liabilities 432,000 345,600
Annual Earnings (average) 46,080 69,120
The total preferred shares to be issued and the amount of goodwill to be recognized by Bats
are:
a. 8,640; 288,000 c. 2,880; 864,000 e. None of the choices
b. 5,760, 288,000 d. 7,280; 864,000
Solution:
Average annual earnings (P46,080+P69,120) P 115,200
Divided by: capitalized at 10%
Total stock to be issued P 1,152,000
Less: net assets (for P/S) 864,000
Goodwill (for common stock) P 288,000