What is the appropriate reason for the difference between the net income reported by the branch in

its separate income statement and true net income reported by the home office for the branch
operation in its general purpose financial statements.

The overstatement of the cost of goods sold reported by the branch due to overvaluation of its
beginning inventory shipment from and ending inventory from the home office.

The understatement of the cost of goods sold reported by the home office for branch operation due
to unrecording of the inventory of the branch from the outside.

The overstatement of the cost of goods sold reported by the branch due to overvaluation of
inventory and purchases from outside sources.

The understatement of the cost of goods sold reported by the home office to its valuation of the
inventory of the branch at billed price.
Ans.
The overstatement of the cost of goods sold reported by the branch due to overvaluation of its
beginning inventory shipment from and ending inventory from the home office.

At the end of Year 1, the branch reported an inventory of 15,625. The home office bills this
branch at 125% of cost. During Year 2, goods costing 300,000 were shipped to the branch.
The account “allowance for overvaluation of branch inventory” after adjustment, shows a
balance of 16,250 at the end of the year
What was the amount of allowance for overvaluation before adjustment?

61,875
78,125
20,312
20,000
Ans.
78,125

At the end of Year 1, the branch reported an inventory of 15,625. The home office bills this
branch at 125% of cost. During Year 2, goods costing 300,000 were shipped to the branch.
The account “allowance for overvaluation of branch inventory” after adjustment, shows a
balance of 16,250 at the end of the year.

The combined statements may be used to present the results of operations of

Entities under
common Commonly
management controlled entities
No Yes
Yes No
No No
Yes Yes
Ans.
Yes
Yes

At the end of Year 1, the branch reported an inventory of 15,625. The home office bills this
branch at 125% of cost. During Year 2, goods costing 300,000 were shipped to the branch.
The account “allowance for overvaluation of branch inventory” after adjustment, shows a
balance of 16,250 at the end of the year.
What was the amount of inventory at January 1, Year 2 at cost?

12,500
15,625
19,531
28,125
Ans.
12,500

At the end of Year 1, the branch reported an inventory of 15,625. The home office bills this
branch at 125% of cost. During Year 2, goods costing 300,000 were shipped to the branch.
The account “allowance for overvaluation of branch inventory” after adjustment, shows a
balance of 16,250 at the end of the year.
What was the amount of ending inventory at billed price?

309,375
247,500
81,250
65,000
Ans.
81,250

On November 2, 2017, the home office of Toby Sports Company recorded a shipment of
merchandise to its Bulacan Branch as follows:
Investment in branch- Bulacan 60, 000
Shipments to Branch 50, 000
Allowance for over valuation of Branch
8, 000
inventory
Cash (for freight charges) 2, 000

The Bulacan branch sells 40% of the merchandise to outside customers during the rest of
the period. The books of the home office are closed on December 31 of each year.

On January 10, 2018, the Bulacan branch transfers half of the original shipment to the
Baguio branch, and the Bulacan branch pays P1, 000 freight for the shipment. If the
 shipment had been made by the home office to Baguio Branch, the freight charges would
have been P1, 500.

What is the entry of the Bulacan branch to record the receipt of the shipment from the
home office on November 2, 2017?

Shipments from Home office 50, 000

Accounts receivable 8, 000
Freight in 2, 000
Home office 60, 000
Shipment from home office 60, 000
Home office 60, 000
Shipment from home office 58, 000
Freight in 2, 000
Home office 60, 000
Shipment from home office 50, 000
Freight out 2, 000
Home office 52, 000
Ans.
Shipment from home office 58, 000
Freight in 2, 000
Home office 60, 000

Swift Corporation , operates number of branches in Metro Manila , On June 30,Year 1,

its San Lorenzo branch showed a home office account balance of 27,350 and the home
office book showed a San Lorenzo branch account balance of 25,550. The following
information may help in reconciling both accounts:
1. A 12,000 shipments , charged by home office to Sn.Lorenzo branch was actually sent
to and retained by Sto.Tomas branch .
2. A 15,000 shipment , intended and charged to San Jose branch was shipped to San
Lorenzo branch and retained by the later
3. A2,000 emergency cash transfer from Sto. Tomas branch was not taken up in the
home office books.
4. Home office collect a San Lorenzo branch accounts receivable of 3,600 and fails to
notify the branch .
5. Home office was charged for 1,200 for merchandise returned by Sn .Lorenzo branch
on June 28,The merchandise is in transit.
6. Home office erroneously recorded Sn. Lorenzo net income for May Year 1 at 16,275.
The branch reported a net income of 12,675

What is the reconciled amount of the home office and Sn. Lorenzo branch reciprocal
account?
21,750
23,750
27,350
20,150
Ans.
23,750

The Baguio branch of a home office in Manila is billed for merchandise it receives at
125% of cost. The branch turns around and sells them at 25% of billed price. On March
15, all branch’s merchandise was destroyed by fire. The branch’s records recovered
shows the following:
Inventory, January 1 (at billed price) 165,000
Shipments, January 1 to the date of fire (at billed
price) 110,000
Purchases (at cost) from outsiders all resold at
markup of 20% 7,500
Sales 16,900
Sales returns and allowances 3,750

What is the cost of merchandise destroyed by fire?

120,00
120,240
130,000
140,000
Ans.
120,240

The AB Trading Co. operates a branch in Iloilo. At close of business on December 31,
Year 2, Home Office account in the branch books showed a credit balance of 372,900.
The interoffice accounts were in agreement at the beginning of the year. For purpose of
reconciling the interoffice accounts, the following facts were ascertained;
a. A branch customer remitted a 19,000 to the home office, The home office recorded
this cash collection on December 22, Year 2. Meanwhile, back at the branch, no entry has
been made yet.
b. Insurance premium of 1,675 charged by the home office was taken up twice by the
branch.
c. The home office inadvertently recorded a remittance for 3,730 from its Ilocos branch
as remittance from its Iloilo branch.
d. The branch writes off uncollectible, accounts of 1,260. The allowance for doubtful
accounts is maintained on the books of the home office. The home office was not yet
notified.
e. Home office credit memo for 9,710 was recorded by the branch at 7,910.
f. Iloilo branch failed to take up a 2,450 debit memo from the home office.
g. A furniture costing the home office 4,600 was picked up by the branch as 460. The
branch will maintain and use the asset.
h. A 14,500 branch remittance to the home office initiated on December 28, Year 2, was
recorded on the home office books on January 2, Year 3.
i. Freight charge on merchandise made by the home office for 2,715 was recorded in
the branch books as 7,215.
j. A home office inventory shipment to Ilocos branch on December 29, Year 2, was
recorded by the branch on January 3, Year 2; the billing of 47,000 was at cost,

Determine the balance of the Investment in Branch account before adjustments:

307,515
319,543
64,545
366,545
Ans.
364,545

The Chivas Regal owns the Royal Crown in Quezon City and a branch in Davao City.
During Year 5, the home office shipped to the branch supplies costing 120,000 at a
billed price of 20% above cost. The inventories of supplies at the branch were as
follows: January 1 – 90,000; December 31 – 108,000. On December 31, Year 5, the
home office holds inventories of 160,500, which includes 10,500 held on consignment.
Both locations use the periodic inventory method.

How much inventories should be reported in the combined balance sheet as of December
31, Year 5?

210,000
240,000
270,000
300,000
Ans.
240,000

As you begin to audit the books of the Bravo [e1] Company, you notice a discrepancy
between the balance in the Investment in Branch (136,020 Dr.) and the Home Office
(175,400 Cr.) accounts. The following information is available:
a. The home office bills goods shipped to the branch at 150% of cost. At the
beginning of the year, branch inventory was stated at 75,000 after the annual physical
count, and the home office unrealized profit account had a credit balance of 5,000.
You find that a shipment with a billed value of 60,000 made toward the end of the
prior year had not been recorded by the home office.
 b. On December 31 of the year under review, the branch mailed to the home
office a check for 25,000 and a notice that the branch had collected 4,380 on a home
office account receivable. These items had not been recorded by the home office.
c. The branch was opened during the preceding year and its operating loss of
42,800 for the year was capitalized by the branch as a start-up costs by the following
entry:
Start-up Cost (Intangible 42,800
Asset)
Income Summary 42,800
The account is not being amortized by the branch, and no entry was made by the
home office to record the net loss.

How much must be the adjusted balance of reciprocal accounts?

175,400192,600115,400132,600As you begin to audit the books of the
Bravo [e1] Company, you notice a discrepancy between the balance in the Investment in
Branch (136,020 Dr.) and the Home Office (175,400 Cr.) accounts. The following
information is available:
a. The home office bills goods shipped to the branch at 150% of cost. At the
beginning of the year, branch inventory was stated at 75,000 after the annual physical
count, and the home office unrealized profit account had a credit balance of 5,000.
You find that a shipment with a billed value of 60,000 made toward the end of the
prior year had not been recorded by the home office.
b. On December 31 of the year under review, the branch mailed to the home
office a check for 25,000 and a notice that the branch had collected 4,380 on a home
office account receivable. These items had not been recorded by the home office.
c. The branch was opened during the preceding year and its operating loss of
42,800 for the year was capitalized by the branch as a start-up costs by the following
entry:
Start-up Cost (Intangible 42,800
Asset)
Income Summary 42,800
The account is not being amortized by the branch, and no entry was made by the
home office to record the net loss.

How much must be the adjusted balance of reciprocal accounts?

175,400
192,600
115,400
132,600
Ans.
132,600

The Manila Branch of the Granite Company is billed for merchandise by the home office
at 20% above cost.
 The branch in turn, prices merchandise for sales purposes at 25% above billed price. On
February 29, all of the branch merchandise branch merchandise is destroyed by fire. No
insurance was maintained. Branch accounts show the following information:
Merchandise inventory, January 1 (at billed
price) 26,400
Shipments from home office (January 1 to
February 29) 20,000
Sales 15,000
sales returns 2,000
Sales allowances 1,000

What was the cost merchandise destroyed by fire?

36,000
30,667
36,800
30,000
Ans.
30,000

On December 31, Year 1, the Home office account on the branch office books had a balance
of 75,000. Investigation showed
a. Merchandise sent to branch 7,000 on Dec. 31 has been received by the branch on Jan.
10, Year 2.
b. The branch collected a home office note receivable of 5,000 but the credit memo
from the branch has not been received by the home office.
c. A check of 18,000 mailed to the branch was not yet received on December 31.
d. The December profit of the branch, 21,000 was recorded by the home office as
12,000.
e. Merchandise returned by branch to home office, 6,000 was recorded by the
bookkeeper as purchases and credited to accounts payable.
The unadjusted balance of Branch account in the Home office books should show:

92,000
100,000
83,000
58,000
Ans.
92,000

Swift Corporation , operates number of branches in Metro Manila , On June 30,2018, its
San Lorenzo branch showed a home office account balance of 27,350 and the home
office book showed a San Lorenzo branch account balance of 25,550. The following
information may help in reconciling both accounts:
1. A 12,000 shipments , charged by home office to Sn.Lorenzo branch was actually sent
to and retained by Sto.Tomas branch .
2. A 15,000 shipment , intended and charged to San Jose branch was shipped to San
Lorenzo branch and retained by the later
3. A2,000 emergency cash transfer from Sto. Tomas branch was not taken up in the
home office books.
4. Home office collect a San Lorenzo branch accounts receivable of 3,600 and fails to
notify the branch .
5. Home office was charged for 1,200 for merchandise returned by Sn .Lorenzo branch
on June 28,The merchandise is in transit.
6. Home office erroneously recorded Sn. Lorenzo net income for May 2018 at 16,275.
The branch reported a net income of 12,675
What is the reconciled amount of the home office and Sn. Lorenzo branch reciprocal
account?

21,750
23,750
27,350
20,150
Ans.
23,750

Selected balances from Davao Company's Branch D and Branch F are as follows:
Branch Branch
D F
Inventory Jan., 1, Year 1 21,000 19,000
Imprest branch fund 2,000 1,500
Inventory, Dec. 31, Year 1 19,000 12,000
Accounts Receivable January 1, 55,000 43,500
Year 1
Shipments from home office 61,000 47,000
Accounts Receivable Dec 31,Year 70,000 53,500
1
Cash Collections 85,000 70,000
Sales 100,000 80,000
Cash expenses 21,000 14,300

All sales, collections, and expenses are handled at the branch. All cash received from
sales ad collections are sent directly to the Home Office. Expenses are paid by the
branch from the imprest fund and immediately reimbursed by the Home Office and
credited to the Home Office account. All expenses paid by the branch are recorded in
the books of the branch. Compute the balance of the home office account on January 1,
Year 1.
D F
76,000 62,500
78,000 64,000
 62,000 52,300
64,000 55,700
Ans.
78,000 64,000

Leila Co. branch submitted the following data for 2018 its first years of operations:
Sales 203,500Cr.
Shipment from Home Office 186, 120Dr.
Operating Expenses 18,755Dr.
Home Office - current 48,125Cr.

Shipment to the branch are billed at cost. The December 31, inventory of the branch was
25,245. What is the correct balance on December 31,2018 of the branch accounts –
current as per Home office books?

46,750
48,125
65,505
71,995
Ans.
71,995

A branch store in Marikina was established by Marco Co. on March. Merchandise was
billed to this branch at 125% of cost. Shipments of merchandise were as follows:
March 5. 120,000 (at billed price)
March 10. 50,000 (at billed price)
March 20. 35,000 (at billed price)

On March 20, the branch returned defective merchandise worth 3,050 and on March 31, it
reported a net loss of 6,200, and merchandise inventory of 85,000.

In the home office books, the cost of merchandise sold by the branch was

93,560
116,950
161,560
161,950
Ans.
93,560

Comparative trial balances of the home office and the two branches of Norway Corporation
at December 31, Year 2 were as follows:
 Home Branch No. Branch No.
office 1 2
Cash 5,000 15,000 22,000
Accounts receivable (net) 80,000 30,000 40,000
Inventories 150,000 60,000 48,000
Branch No. 1 170,000
Branch No. 2 165,000
Plant assets (net) 730,000 250,000 200,000
Purchases 900,000
Shipments from home 300,000 240,000
office
Expenses 300,000 75,000 50,000
Total 2,500,000 730,000 600,000

Accounts payable 100,000 45,000 30,000

Other liabilities 80,000 15,000 5,000
Loading in branch 108,000
inventories
Capital stock, P10 par 500,000
Retained earnings 262,000
Home office 170,000 165,000
Sales 1,000,000 500,000 400,000
Shipments to branches 450,000 0 0
Total 2,500,000 730,000 600,000

Additional information:
Home office and Branch inventories at December 31, Year 2 were:
Home office (at 120,000
cost)
Branch No. 1 72,000
Branch No. 2 96,000
How much is the beginning inventory of Norway Corporation?

150,000
258,000
240,000
90,000
Ans.
240,000

New Era Corp. bills its newly established branch for merchandise at 140% of cost. At the
end of its month, the branch reported, among other things, the following:
Merchandise from home office (at billed price) 28,000
Merchandise purchased locally by branch 10,000
Inventory, September 30, of which 2,000 are of local
purchases 9,000
 Net sales for month 43,500

The branch inventory at cost should be recorded at

38,000
7,000
9,000
None of the above
Ans.
7,000

Trial balances for the home office and for the branch of Toby Co. show the following
accounts before adjustment as of December 31, Year 2. The home office bills
merchandise to the branch at 20% above cost.
H.O Branch
Unrealized intercompany inventory
profit 10,800
Shipments to branch 24,000
Purchases from outsiders 7,500
Shipments from Home Office 28,800
Merchandise inventory, December 1,
Year 2 4,500

What part of the December 1, Year 2 branch inventory represents acquisition from
outsider purchases, and what part represents acquisition from home office?
Outsiders Home Office

9,000 36,000
10,000 35,000
12,000 33,000
15,000 30,000
Ans.
9,000 36,000

The Neneng Corp. established its San Pedro branch in March Year 1. During the first
year of operations, the home office shipped to the branch merchandise which had cost of
120,000. Three-fourths of these merchandise was sold by the branch for 141,000.
Operating expenses of the branch amounted to 27,000. How much net income will the
branch report if merchandise is billed by the home office to the branch at 25% above
cost?

800
1,200
1,500
8,000
Ans.
1,500

Comparative trial balances of the home office and the two branches of Norway Corporation
at December 31, Year 2 were as follows:

Home Branch No. Branch No.

office 1 2
Cash 5,000 15,000 22,000
Accounts receivable (net) 80,000 30,000 40,000
Inventories 150,000 60,000 48,000
Branch No. 1 170,000
Branch No. 2 165,000
Plant assets (net) 730,000 250,000 200,000
Purchases 900,000
Shipments from home 300,000 240,000
office
Expenses 300,000 75,000 50,000
Total 2,500,000 730,000 600,000

Accounts payable 100,000 45,000 30,000

Other liabilities 80,000 15,000 5,000
Loading in branch 108,000
inventories
Capital stock, P10 par 500,000
Retained earnings 262,000
Home office 170,000 165,000
Sales 1,000,000 500,000 400,000
Shipments to branches 450,000 0 0
Total 2,500,000 730,000 600,000

Additional information:
Home office and Branch inventories at December 31, Year 2 were:
Home office (at 120,000
cost)
Branch No. 1 72,000
Branch No. 2 96,000

What is the mark-up rate on merchandise transfers to branch?

20 percent of billed price

25 percent of cost
16-2/3 percent of billed price
25 percent of billed price
Ans.
16-2/3 percent of billed price

New Era Corp. bills its newly established branch for merchandise at 140% of cost. At the
end of its month, the branch reported, among other things, the following:
Merchandise from home office (at billed price) 28,000
Merchandise purchased locally by branch 10,000
Inventory, September 30, of which 2,000 are of local
purchases 9,000
Net sales for month 43,500
The gross profit of the branch in so far as the home office is concerned was

22,500
14,500
22,790
None of the above
Ans.
None of the above

The following is the income statement of XYZ Branch in Cebu City for the six-month
period ending June 30, Year 1:

Sale
s 620,000
Cost of sales
Shipments from H.O 550,000
Purchases 50,000
Total 600,000
Inventory, June 30
From H.O 75,000
From Outsider 10,000
10,000 85,000 515,000
Gross profit 105,000
Expenses 85,000
Net profit 20,000

The inventory of the Branch office in Cebu City, at cost, as of June 30, Year 1 is:

85,000
70,000
60,000
75,000
Ans.
70,000
 A home office has a branch in Metro Manila. The branch buys merchandise from outside
parties and also receives merchandise from the home office for which it is billed at 20%
above cost. Below are excerpts from the trial balances and other data of the home office
and its branch for the month just ended:
Home office:
Cr: Allowance for overvaluation 370,000
Cr: Shipments to branch 850,000
Metro Manila Branch:
Dr
: Beginning inventory 1,440,000
Dr
: Shipments from home office 1,020,000
Dr
: Purchases 410,000
Month-end branch inventory:
From home office, at billed price 1,170,000
From outside parties, at cost 290,000

What is the amount of allowance for overvaluation that was realized because of branch
sales for the month just ended?

175,000
195,000
200,000
370,000
Ans.
175,000

A branch store in Marikina was established by Marco Co. on March. Merchandise was
billed to this branch at 125% of cost. Shipments of merchandise were as follows:
March 5. 120,000 (at billed price)
March 10. 50,000 (at billed price)
March 20. 35,000 (at billed price)

On March 20, the branch returned defective merchandise worth 3,050 and on March 31, it
reported a net loss of 6,200, and merchandise inventory of 85,000

In the home office books, the branch operations resulted in a net income (loss) of

(6,200)
17,190
20,240
23,390
Ans.
17,190
The following is the income statement of XYZ Branch in Cebu City for the six-month
period ending June 30, Year 1:

Sale
s 620,000
Cost of sales
Shipments from H.O 550,000
Purchases 50,000
Total 600,000
Inventory, June 30
From H.O 75,000
From Outsider 10,000
10,000 85,000 515,000
Gross profit 105,000
Expenses 85,000
Net profit 20,000
The home office ships merchandise to, and bills, the Branch office at 125% of cost. The rent
of the branch office for six months, at a monthly rate of 1,000 was paid by the home office.
How much is the true branch profit?

125,000
124,000
139,000
109,000
Ans.
109,000

Selected accounts from the December 31, Year 1 trial balance of Heart Co. and its
branch follow:
Heart Branch
Inventory, Jan. 1 46,000 23,100
Investment in Branch 116,600 -
Purchases 380,000 -
Shipments from home
- 209,000
office
Freight in - 10,450
Expenses 104,000 58,100
Home office - (106,600)
Sales (310,000) (280,000)
Shipments to branch (200,000) -
Branch merchandise mark
(22,000) -
up
 As of December 31, Year 1, a shipment with a billing price of 11,000 was in transit to
the branch. Freight cost, typically 5% of the billing price, is inventories. Merchandise on
hand at year-end were; at home office, 64,000 at cost; at branch, 33,000 at billing price.

What is the combined total comprehensive income of heart Company and its branch for
Year 1?

77,000
84,900
76,000
76,100
Ans.
76,100

The Manila Corp. has its main office in Cebu City and established a branch in Manila.
During Year 1, its first year of operations, the home office in Cebu City shipped goods to
the branch in Manila at a total billing price of 303,050 which was 10% above cost. At
December 31, Year 1, the branch reported a net loss from its own operations of 5,500, and
an ending inventory of 61,050. How much is the branch net income (loss) in so far as the
home office is concerned?

(5,500)
16,500
22,000
27,500
Ans.
16,500

Comparative trial balances of the home office and the two branches of Norway
Corporation at December 31, Year 2 were as follows:
Branch No. Branch No. Home
2 1 office
Cash 22,000 15,000 5,000
Accounts receivable (net) 40,000 30,000 80,000
Inventories 48,000 60,000 150,000
Investment in Branch No. 1 170,000
Investment in Branch No. 2 165,000
Plant assets (net) 200,000 250,000 730,000
Purchases 900,000
Shipments from home office 240,000 300,000
Expenses 50,000 75,000 300,000
Total 600,000 730,000 2,500,000
Accounts payable 30,000 45,000 100,000
Other liabilities 5,000 15,000 80,000
Allowance for overvaluation 108,000
 in Br inventory
Capital stock, 10 par 500,000
Retained earnings 262,000
Home office 165,000 170,000
Sales 400,000 500,000 1,000,000
Shipments to branches 0 0 450,000
Total 600,000 730,000 2,500,000

Additional information:
Home office and Branch inventories at December 31, Year 2 reported in the separate
financial statements were:
Home office 120,000
Branch No. 72,000
1
Branch No. 96,000
2

How much is the correct net income of Branch No. 2 as far as home office is concerned?

94,000
96,000
185,000
190,000
Ans.
190,000
Barros Corporation shipments to and from its Brazil City branch are billed at 120% of cost . On
December 31, Brazil Branch reported the following data at billed prices : inventory, January 1, of
33,600, shipment received from home office of 840,000 shipment return of 48,000 and inventory ,
December 31, of 36,000 . What is the balance of the allowance for over – valuation of branch
inventory on December 31, before adjustment?

5,600
137,600
6,000
145,600
Ans.
137,600

Nalilito,Inc. has several branches . Good costing 10,000 were transferred by the head
office to Cebu branch with later paying 600 for freight cost, subsequently, the head
office authorized Cebu branch to transfer the goods to Davao branch for which the latter
was billed for the 10,000 cost of the goods and freight charges of 200 for the transfer. If
the head office had shipped the goods directly to Davao Branch , the freight charges
would have been 700.The 100 difference in freight cost would be dispose of as follow :

Considered as savings
Charged to Cebu branch
Charged to Davao branch
Charged to head office
Ans.
Charged to head office

On November 2, Year 1, the home office of Toby Sports Company recorded a shipment
of merchandise to its Baguio Branch as follows:
Investment in branch- Baguio 60,000
50
Shipments to Branch
000
Allowance for over valuation of Branch
8,000
inventory
Cash (for freight charges) 2,000

The Baguio branch sells 40% of the merchandise to outside customers during the rest of
the period. The books of the home office are closed on December 31 of each year.

On January 3, , Year 2, immediately after the holidays Baguio branch transfers half of
the original shipment to the Dagsian, and the Baguio branch pays 1,000 freight for the
shipment. If the shipment had been made by the home office to Dagsian Branch, the
freight charges would have been 1,500.

What is the entry in book of Baguio branch to record the transfer on January 2, Year 2?

Baguio branch 31,000

Shipment from home office 31,000
Home office 31,000
Inventory 31,000
Home office 31,000
Inventory 30,000
Cash 1,000
Home office 32,000
Cash 1,000
Freight in 2,000
Shipment from home office 29,000
Ans.
Home office 31,000
Inventory 30,000
Cash 1,000

Mr. Cord owns four corporations. Combined financial statements are being prepared for
these corporations, which have inter-entity loans of 200,000 and inter-entity profits of
 500,000. What amount of these loans and profits should be included in the combined
financial statements?
Inter-
Inter-entity entity
Loans Profits
200,000 0
200,000 500,000
0 0
0 500,000
Ans.
0
0

On December 31, 2018 the following data are in the records of the CEBU City branch of
the Clair Company:
Petty cash 94,500
Accounts receivable , Dec31,2017 85,200
Merchandise inventory , December 31, 75,500
2017
Accounts receivable, December 31, 2018 88,800
Merchandised inventory December 81,000
31,2018
Sales 272,700
Sales return 4,800
Account receivable written of 2,000
Shipments from Home Office 220,600
Expenses ( paid By Home office) 22,500

IF all cash collection in 2018 were remitted to Home Office , the total remittance
amounted to:

262,300
266,800
264,300
267,100
Ans.
262,300

Nalilito Inc. has several branches . Good costing 10,000 were transferred by the head office to Cebu branch
with later paying 600 for freight cost, subsequently, the head office authorized Cebu branch to transfer the
goods to Davao branch for which the latter was billed for the 10,000 cost of the goods and freight charges
of 200 for the transfer. If the head office had shipped the goods directly to Davao Branch , the freight
charges would have been 700.The 100 difference in freight cost would be dispose of as follow
Considered as savings
Charged to Cebu branch
Charged to Davao branch
Charged to head office
Ans.
Charged to head office

The following information pertains to shipments of merchandise from Home Office to

Branch during Year 1:
Home office's cost of merchandise P 160,000
Intracompany billings 200,000
Sales by branch 250,000
Unsold merchandise at branch, 12/31/Y1 20,000
In the combined income statement of Home Office and Branch for the year ended
December 31, Year 1, what amount of the above transactions should be included in
sales?

200,000
180,000
250,000
230,000
Ans.
250,000

A business combination occurs when a company acquires an equity interest in another

entity and has

at least 20% ownership in the entity

more than 50% ownership in the entity
100% ownership in the entity
control over the entity, irrespective of the percentage owned
Ans.
control over the entity, irrespective of the percentage owned

A business combination in which a new corporation is created and two or more existing
corporations are combined into the newly created corporation is called a

merger.
purchase transaction.
pooling-of-interests.
consolidation.
Ans.
consolidation.
 Which of the following expenses related to the business acquisition should be included,
in total, in the determination of net income of the combined corporation for the period in
which the expenses are incurred?

1) Fees of finders and consultants

2) Registration fees for equity securities issued

1) Yes 2) Yes
1) Yes 2) No
1) No 2) Yes
1) No 2) No
Ans.
1) Yes 2) No

In a business combination, when the fair value exceeds the investment cost, which of the
following statements is correct?

A gain from a bargain purchase is recognized for the amount that the fair value of the
identifiable net assets acquired exceeds the acquisition price

the value is allocated first to reduce proportionately (according to market value) non-current
assets, then to non-monetary current assets, and any negative remainder is classified as a
deferred credit.

it is allocated first to reduce proportionately (according to market value) non-current assets,

and any negative remainder is classified as an extraordinary gain.

It is allocated first to reduce proportionately (according to market value) non-current,

depreciable assets to zero, and any negative remainder is classified as a deferred credit.
Ans.
A gain from a bargain purchase is recognized for the amount that the fair value of the identifiable
net assets acquired exceeds the acquisition price

Which of the following situations would require the use of the acquisition method in a
business combination?

The acquisition of a group of assets.

The formation of a joint venture
The purchase of more than 50% of a business
All of the above would require the use of the acquisition method.
Ans.
The purchase of more than 50% of a business
Lebow Corp. acquired control of Wilson Corp. by purchasing stock in steps. Which of the
following regarding this type of acquisition is true?

The cost of acquisition equals the amount paid for the previously held shares plus the fair
value of shares issued at the date of acquisition.

The previously held shares should be remeasured at fair value on the acquisition date, and
any gain on previously held shares should be included in other comprehensive income for
the period.

The previously held shares should be remeasured at fair value on the acquisition date and
the gain recognized in earnings of the period.

The acquisition cost includes only the newly issued shares measured at fair value on the
date of acquisition.
Ans.
The previously held shares should be remeasured at fair value on the acquisition date and the gain
recognized in earnings of the period.

Kennedy Company is acquiring Ross Company in an acquisition. What date should be

used as the acquisition date for the transaction?

The date Kennedy signs the contract to purchase the business.

The date Kennedy obtains control of Ross.
The date that all contingencies related to the transaction are resolved.
The date Kennedy purchased more than 20% of the stock of Ross.
Ans.
The date Kennedy obtains control of Ross.

Goodwill arising from a business combination is

charged to Retained Earnings after the acquisition is completed.

amortized over 40 years or its useful life, whichever is longer.
amortized over 40 years or its useful life, whichever is shorter.
never amortized.
Ans.
never amortized.

Raphael Company paid 2,000,000 for the net assets of Paris Corporation and Paris was
then dissolved. Paris had no liabilities. The fair values of Paris’ assets were 2,500,000.
Paris’s only non-current assets were land and equipment with fair values of 160,000 and
640,000, respectively. At what value will the equipment be recorded by Raphael?
 640,000
240,000
400,000
0
Ans.
640,000

On December 31, Year 2, Saxe Corporation was acquired by Poe Corporation. In the
business combination, Poe issued 200,000 shares of its 10 par common stock, with a
market price of 18 a share, for all of Saxe’s common stock. The stockholders’ equity
section of each company’s balance sheet immediately before the combination was

Poe Saxe
Common stock 3,000,000 1,500,000
Additional paid-in capital 1,300,000 150,000
Retained earnings 2,500,000 850,000
6,800,000 2,500,000

In the December 31, Year 2 consolidated balance sheet, additional paid-in capital should
be reported at

950,000
1,300,000
1,450,000
2,900,000
Ans.
2,900,000

Which of the following is a reason why a company would expand through a

combination, rather than by building new facilities?

A combination might provide cost advantages.

A combination might provide fewer operating delays.
A combination might provide easier access to intangible assets.
All of the other choices are possible reasons that a company might choose a combination.
Ans.
All of the other choices are possible reasons that a company might choose a combination.

A business combination is accounted for appropriately as an acquisition. Which of the

following should be deducted in determining the combined corporation’s net income for
the current period?
1) Direct costs of acquisition
2) General expenses related to acquisition
 1) Yes 2) No
1) Yes 2) Yes
1) No 2) Yes
1) No 2) No
Ans.
1) Yes 2) Yes

In a business combination, an acquirer's interest in the fair value of the net assets
acquired exceeds the consideration transferred in the combination. Under
IFRS3 Business combinations, the acquirer should:

recognise the excess immediately in profit or loss

recognise the excess immediately in other comprehensive income

reassess the recognition and measurement of the net assets acquired and the consideration
transferred, then recognise any excess immediately in profit or loss

reassess the recognition and measurement of the net assets acquired and the consideration
transferred, then recognise any excess immediately in other comprehensive income
Ans.
reassess the recognition and measurement of the net assets acquired and the consideration
transferred, then recognise any excess immediately in profit or loss

Which of the following is not one of those steps in accounting for an acquisition in
business combination?

Prepare pro forma financial statements prior to acquisition

Determine the acquisition date
Identify the acquirer
Expense the costs and general expenses of the acquisition in the period of acquisition.
Ans.
Prepare pro forma financial statements prior to acquisition

On January 1, Year 1, Dabawenyo Company purchased 80 percent of the outstanding shares of

Minero Company for 600,000 in cash. On that date, Minero had 200,000 of capital stock and
500,000 of retained earnings. All of the assets and liabilities of Minero Company were fairly
valued. Goodwill, if any, is not amortized. The January 1, Year 5, inventory of Minero includes
10,000 of merchandise purchased from Dabawenyo in year Year 4 at 125 percent of cost. The
December 31, Year 5, inventory of Minero includes 16,000 of merchandise purchased from
Dabawenyo at the same markup. Minero’s inventories are on a FIFO basis. For year Year 5, Minero
reported net income of 80,000 and paid dividends of 40,000. Dabawenyo’s income from its own
operations is 400,000; it paid dividends of 250,000. If Dabawenyo uses the cost method on its
books, what will be its consolidated net income to retained earnings compared with its book
income?
32,000 higher
30,800 higher
29,800 higher
1,200 lower
Ans.
30,800 higher

Giordano Company purchased the net assets of Hanes Company on January 1, Year 1, and
made the following entry to record the purchase:

Current assets 100,000

Equipment 150,000
Land 50,000
Buildings 300,000
Goodwill 100,000
Liabilities 80,000
Common 100,000
stock, P1 par
Paid-in 520,000
capital in excess of par
A contingent consideration agreement was made on January 1, Year 1, wherein
additional shares would be issued on January 1, Year 3, to compensate for any fall in the
value of Giordano common stock below P6 per share. The settlement would be to cure
the deficiency by issuing added shares based on their fair value on January 1, Year 3.
The market price of the shares on January 1, Year 3, was P4. How many shares will
Giordano still issue on January 1, Year 3?

50,000
100,000
20,000
51,667
Ans.
50,000

On January 1, Year 1, Gulliver Corporation acquired 80 percent of Sea-Gull Company's

common stock for 160,000 cash. The fair value of the non-controlling interest at that date
was determined to be 40,000. Data from the balance sheets of the two companies included
the following amounts as of the date of acquisition:
Jonathan Sea-Gull
Corporation Corporation
Cash 60,000 20,000
Accounts Receivable 80,000 30,000
Inventory 90,000 40,000
Land 100,000 40,000
 Buildings and Equipment 200,000 150,000
Less: Accumulated Depreciation (80,000) (50,000)
Investment in Sea-Gull Corporation 160,000
Stock
Total Assets 610,000 230,000

Accounts Payable 100,000 30,000

Bonds Payable 95,000 40,000
Common Stock 200,000 40,000
Retained Earnings 205,000 120,000
Total Liabilities and Stockholders’ 600,000 230,000
Equity

At the date of the business combination, the book values of Sea-Gull's net assets and
liabilities approximated fair value except for inventory, which had a fair value of 45,000,
and land, which had a fair value of 60,000.
Based on the preceding information, what amount will be reported as total stockholders'
equity in the consolidated balance sheet prepared immediately after the business
combination?

445,000
205,000
565,000
550,000
Ans.
445,000

On January 1, Year 1, Polk Corp. and Strass Corp. had condensed balance sheets as follows:
Polk Strass
Current assets $ 70,000 $20,000
Noncurrent assets 90,000 40,000
Total assets $160,000 $60,000
Current liabilities 30,000 10,000
Long-term debt 50,000 --
Stockholders’ equity 80,000 50,000
Total liabilities and stockholders’ equity 160,000 60,000

On January 2, Year 1, Polk borrowed $60,000 and used the proceeds to purchase 90% of the
outstanding common shares of Strass. This debt is payable in ten equal annual
principal payments, plus interest, beginning December 30, Year 1. The excess cost of the
investment over Strass’ book value of acquired net assets should be allocated 60% to
inventory and 40% to goodwill. On January 1, Year 1, the fair
value of Polk shares held by noncontrolling parties was $10,000.

On Polk’s January 2, Year 1 consolidated balance sheet

Stockholders’ equity including noncontrolling interests should be

$ 80,000
$ 85,000
$ 90,000
$130,000
Ans.
$ 90,000

On October 1, Year 1, Water Corporation acquired all the assets and assumed all the
liabilities of Gulaman Company by issuing 20,000 shares with a fair value of P67.5 per
share and an obligation to pay a contingent consideration with a fair value of P750,000.
In addition, Water paid the following acquisition related costs:

Legal fees P105,600

Audit fee for SEC registration of 320,400
stock issue
Costs of stock certificates 35,000
Broker’s fee 49,000
Other direct cost of acquisition 50,000
General and allocated expenses 14,000

The Statement of Financial Position as of September 30, Year 1 of Water and Gulaman,
together with the fair market value of the assets and liabilities are presented below:

Water Gulaman
Book Value Fair Value Book Value Fair Value
Cash P640,000 P640,000 P45,000 P45,000
Accounts 360,000 335,000 70,000 54,000
receivable
Inventories 475,000 390,000 87,000 78,000
Prepaid 25,000 - 13,500 5,000
expenses
Land 2,000,000 2,900,000 900,000 1,550,000
Building 800,000 900,000 723,000 768,000
Equipment 700,000 585,000 361,500 360,000
Goodwill - - 300,000 -
Total assets P5,000,000 P5,750,000 P2,500,000 P2,860,000

Accounts 312,500 312,500 200,000 200,000

payable
Notes payable 937,500 980,000 700,000 765,000
Capital stock, 2,000,000 850,000
50 par
Additional 1,000,000 400,000
paid in capital
 Retained 750,000 350,000
earnings
Total equities P5,000,000 P2,500,000

Compute for the balances that will be shown on the October 1, Year 1 statement of financial
position of the surviving company:
Retained earnings

480,000
540,000
526,000
475,000
Ans.
526,000

On April 1, Year 1, Dart Co. paid $620,000 for all the issued and outstanding
common stock of Wall Corp. The recorded assets and liabilities of Wall Corp. on
April 1, Year 1, follow:
Cash $ 60,000
Inventory 180,000
Property and equipment (net of accumulated depreciation of $220,000) 320,000
Goodwill 100,000
Liabilities (120,000)
Net assets $ 540,000
On April 1, Year 1, Wall’s inventory had a fair value of $150,000, and the property and equipment
(net) had a fair value of $380,000. What is the amount of goodwill resulting from the business
combination?

$150,000
$120,000
$ 50,000
$ 20,000
Ans.
$150,000

100% of the equity share capital of Richway Company was acquired by Sunlife
Company on 30 June Year 2. Sunlife issued 500,000 new P1 ordinary shares which had a
fair value of 8 each at the acquisition date. In addition the acquisition resulted in Sunlife
incurring fees payable to external advisers of 200,000 and share issue costs of 180,000.

In accordance with IFRS3 Business combinations , goodwill at the acquisition date is

measured by subtracting the identifiable assets acquired and the liabilities assumed from

4,000,000
4,180,000
4,200,000
4,380,000
Ans.
4,000,000

KEV Corporation’s stockholder’s equity at December 31, Year 2 included the following:
8% Preferred stock, 10 par value P 3,500,000
Common stock, no par 20,000,000
Additional paid-in capital 6,500,000
Retained earnings 8,000,000
P 38,000,000

ROF Corporation purchased a 30% interest in KEV’s common stock from other
shareholders on January 1, Year 3 for 11,600,000. What was the book value of ROF’s
investment in KEV?

10,3500,000
11,400,000
11,400,000
10,800,000
Ans.
10,3500,000

Mountain Inc. acquired on January 1, Year 2 all the issued and outstanding common
shares of Racer Inc. for 310,000. On this day, the net assets of Racer Inc., amounts to
270,000 including goodwill of 50,000. Per appraisal, plant and equipment and
merchandise inventory were undervalued by 30,000 and overvalued by 15,000,
respectively.

What is the amount of goodwill resulting from this transaction?

0
25,000
75,000
125,000
Ans.
75,000

On April 1, Year 1, Parson Corp. purchased 80% of the outstanding stock of Sloan Corp. for
$700,000 cash. Parson determined that the fair value of the net identifiable assets was $800,000 on
the date of acquisition. The fair value of Sloan’s stock at date of acquisition was $18 per share.
Sloan had a total of 50,000 shares of stock issued and outstanding prior to the acquisition. What is
the amount of goodwill that should be recorded by Parson at date of acquisition?
$0
$ 60,000
$ 80,000
$120,000
Ans.
$ 80,000

On January 1, Year 1 the fair value of Pink Conrad , net assets were as follows:
Current assets 100,000
Equipment 150,000
Land 50,000
Buildings 300,000
Liabilities 80,000

On January 1, Year 1 Blue George Company purchased the net assets of the pink Conrad
Company by issuing 100,000 shares of its 1 par value stock when the fair value of the
stock was 6.20 . It was further agreed that Blue George would pay an additional amount
on January 1, 2013 , if the average income during the 2 year period of Year 1 – 2012
exceeded 80,000 per year . The expected value of this consideration was calculated as
184,000, the measurement period is one year.
What amount will be recorded as goodwill on January 1, Year 1?

Zero
100,000
180,000
284,000
Ans.
284,000

On 1 January Year 1, Vinculum acquired 75% of Pathways’ equity shares by

means of an immediate share exchange of two shares in Vinculum for five shares in
Pathways. The fair value of Vinculum and Pathways’ shares on 1 January Year 1 were
4.00 and 3.00 respectively. In addition to the share exchange, Vinculum will make a
cash payment of 1.32 per acquired share, deferred until 1 January Year 2. Vinculum
has not recorded any of the consideration for Pathways in its financial statements.
Vinculum’s cost of capital is 10% per annum.
The summarized statements of financial position of the two companies as at 30 June
Year 1 are:
Vinculum Pathways
Assets
Non-current assets (note (ii))
Property, plant and equipment 55,000 28,600
Financial asset equity investments (note 11,500 6,000
(v))
66,500 34,600
Current assets
 Inventory (note (iv)) 17,000 15,400
Trade receivables (note (iv)) 14,300 10,500
Bank 2,200 1,600
33,500 27,500
Total assets 100,000 62,100
Equity and liabilities
Equity
Equity shares of P1 each 20,000 20,000
Other component of equity 4,000 nil
Retained earnings – at 1 July 2014 26,200 14,000
Retained earnings – for year ended 30 24,000 10,000
June Year 1
74,200 44,000
Current liabilities (note (iv)) 25,800 18,100
Total equity and liabilities 100,000 62,100

The following information is relevant:

(i.) Pathways’ business is seasonal and 60% of its annual profit is made in the period 1
January to 30 June each year.
(ii.) At the date of acquisition, the fair value of Pathways’ net assets was equal to their
carrying amounts with the following exceptions:
a. An item of plant had a fair value of P2 million below its carrying value. At
the date of acquisition it had a remaining life of two years.
b. The fair value of Pathways’ investments was P7 million (see also note (v)).
c. Pathways owned the rights to a popular mobile (cell) phone game. At the
date of acquisition, a specialist valuer estimated that the rights were worth P12
million and had an estimated remaining life of five years.
(iii.) Following an impairment review, consolidated goodwill is to be written down by P3
million as at 30 June Year 1.
(iv.) (iv) Vinculum sells goods to Pathways at cost plus 30%. Pathways had P1·8 million of
goods in its inventory at
30 June Year 1 which had been supplied by Vinculum. In addition, on 28 June Year 1,
Vinculum processed the sale of P800,000 of goods to Pathways, which Pathways did not
account for until their receipt on 2 July Year 1. The in-transit reconciliation should be
achieved by assuming the transaction had been recorded in the books of Pathways before the
year end. At 30 June Year 1, Vinculum had a trade receivable balance of P2·4 million due
from Pathways which differed to the equivalent balance in Pathways’ books due to the sale
made on 28 June Year 1.
(v.) At 30 June Year 1, the fair values of the financial asset equity investments of
Vinculum and Pathways were P13·2 million and P7·9 million respectively.
Vinculum’s policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose, Pathways’ share price at that date is representative of the fair
value of the shares held by the non-controlling interest.

Determine the Goodwill / (Gain) recognized at acquisition

19,000
8,000
5,000
(10,000)
Ans.
8,000

Best Company has gained control over the operations of Cure Corporation by acquiring 85%
of its outstanding capital stock for 2,580,000. This amount includes a control premium of
30,000. Acquisition expenses, direct and indirect, amounted to 83,000 and 42,000
respectively.
Best Cure
Book Book Fair
Value Value Value
Cash 3,541,500 128,000
Accounts receivable 300,000 325,000
Inventories 550,000 360,000
Prepaid expenses 148,500 125,000
Land 2,350,000 879,000
Building 1,560,000 558,000
Equipment 300,000 185,000
Goodwill - 300,000
Total assets 8,750,000 2,860,000

Accounts payable 675,000 253,000

Notes payable 1,400,000 730,000
Capital stock, 50 par 3,400,000 800,000
Additional paid in 1,575,000 600,000
capital
Retained earnings 1,700,000 477,000
Total equities 8,750,000 2,860,000

The following was ascertained on the date of acquisition for Cure Corporation:
· The value of receivables and equipment has decreased by 25,000 and 14,000
respectively.
· The fair value of inventories is now P436,000 whereas the value of land and building
has increased by 471,000 and P107,000 respectively.
There was an unrecorded accounts payable amounting to 27,000 and the fair value of notes
is 738,000.
Compute for the following balances to be presented in the consolidated statement of
financial position at the date of business combination:
Total shareholder’s equity

7,000,000
7,500,000
8,200,000
8,000,000
Ans.
7,000,000

On December 31, Year 2, Neal Co. issued 100,000 shares of its 10 par value common
stock in exchange for all of Frey Inc.’s outstanding stock. The fair value of Neal’s
common stock on December 31, Year 2, was 19 per share. The carrying amounts and fair
values of Frey’s assets and liabilities on December 31, Year 2, were as follows:

Carrying amount Fair value

Cash 240,000 240,000
Receivables 270,000 270,000
Inventory 435,,000 405,000
Property, plant, and equipment 1,305,000 1,440,000
Liabilities (525,000) (525,000)
Net assets 1,725,000 1,830,000

What is the amount of goodwill resulting from the business combination?

175,000
105,000
70,000
0
Ans.
70,000

Should the following costs be included in the consideration transferred in a business

combination, according to IFRS3 Business combinations?
(1) Costs of maintaining an acquisitions department.
(2) Fees paid to accountants to effect the combination.
Cost Cost (2)
(1)
No No
No Yes
Yes No
Yes No
Ans.
No No

On December 31, Year 1, Saxe Corporation was acquired by Poe Corporation. In the
business combination, Poe issued 200,000 shares of its $10 par common stock, with a
market price of $18 a share, for all of Saxe’s common stock. The stockholders’ equity
section of each company’s balance sheet immediately before the combination was
 Poe Saxe
Common stock $3,000,000 $1,500,000
Additional paid-in capital 1,300,000 150,000
Retained earnings 2,500,000 850,000
$6,800,000 $2,500,000

In the December 31, Year 1 consolidated balance sheet, common stock should be reported
at

$3,000,000
$3,500,000
$4,000,000
$5,000,000
Ans.
$5,000,000

Mountain Inc. acquired on January 1, Year 1 all the issued and outstanding common
shares of Racer Inc. for 310,000. On this day, the net assets of Racer Inc., amounts to
270,000 including goodwill of 50,000. Per appraisal, plant and equipment and
merchandise inventory were undervalued by 30,000 and overvalued by 15,000,
respectively. What is the amount of goodwill resulting from this transaction?

0
25,000
75,000
125,000
Ans.
75,000

On October 1, Year 1, Water [A1] Corporation acquired all the assets and assumed all the
liabilities of Gulaman Company by issuing 20,000 shares with a fair value of P67.5 per
share and an obligation to pay a contingent consideration with a fair value of P750,000.
In addition, Water paid the following acquisition related costs:

Legal fees P105,600

Audit fee for SEC registration of 320,400
stock issue
Costs of stock certificates 35,000
Broker’s fee 49,000
Other direct cost of acquisition 50,000
General and allocated expenses 14,000

The Statement of Financial Position as of September 30, Year 1 of Water and Gulaman,
together with the fair market value of the assets and liabilities are presented below:
 Water Gulaman
Book Value Fair Value Book Value Fair Value
Cash P640,000 P640,000 P45,000 P45,000
Accounts 360,000 335,000 70,000 54,000
receivable
Inventories 475,000 390,000 87,000 78,000
Prepaid 25,000 - 13,500 5,000
expenses
Land 2,000,000 2,900,000 900,000 1,550,000
Building 800,000 900,000 723,000 768,000
Equipment 700,000 585,000 361,500 360,000
Goodwill - - 300,000 -
Total assets P5,000,000 P5,750,000 P2,500,000 P2,860,000

Accounts 312,500 312,500 200,000 200,000

payable
Notes payable 937,500 980,000 700,000 765,000
Capital stock, 2,000,000 850,000
50 par
Additional 1,000,000 400,000
paid in capital
Retained 750,000 350,000
earnings
Total equities P5,000,000 P2,500,000

Compute for the balances that will be shown on the October 1, Year 1 statement of financial
position of the surviving company:
Total assets
7,015,000
6,980,000
7,118,000
7,491,000
Ans.
7,491,000

Mango Inc. acquired on January 1, 2013 all the issued and outstanding common shares
of Celine Inc. for P310,000 and Celine Inc. is dissolved. On this day, the assets and
liabilities of Celine Inc. show:

Cash 30,000
Merchandise inventory 90,000
Plant and equipment 160,000
Goodwill 50,000
Liabilities (60,000)
 Per appraisal, plant and equipment and merchandise inventory were valued at 190,000
and 75,000, respectively. What is the amount of goodwill resulting from this
transaction?

125,000
40,000
75,000
90,000
Ans.
75,000

In accounting for a business combination, which of the following intangibles should not
be recognized as an asset apart from goodwill?

Trademarks.
Lease agree
Employee quality.
Patents.
Ans.
Employee quality.

In a business combination accounted for as an acquisition the appraised values of the

identifiable assets acquired exceeded the acquisition price. How should the excess appraised
value be reported?

As negative goodwill
As additional paid-in capital
As a reduction of the values assigned to certain assets and an extraordinary gain for any
unallocated portion
As a gain in net income for the period
Ans.
As a gain in net income for the period

On 1 January Year 1, Vinculum acquired 75% of Pathways’ equity shares by

means of an immediate share exchange of two shares in Vinculum for five shares in
Pathways. The fair value of Vinculum and Pathways’ shares on 1 January Year 1 were
4.00 and 3.00 respectively. In addition to the share exchange, Vinculum will make a
cash payment of 1.32 per acquired share, deferred until 1 January Year 2. Vinculum
has not recorded any of the consideration for Pathways in its financial statements.
Vinculum’s cost of capital is 10% per annum.
The summarized statements of financial position of the two companies as at 30 June
Year 1 are:
Vinculum Pathways
Assets
 Non-current assets (note (ii))
Property, plant and equipment 55,000 28,600
Financial asset equity investments (note 11,500 6,000
(v))
66,500 34,600
Current assets
Inventory (note (iv)) 17,000 15,400
Trade receivables (note (iv)) 14,300 10,500
Bank 2,200 1,600
33,500 27,500
Total assets 100,000 62,100
Equity and liabilities
Equity
Equity shares of P1 each 20,000 20,000
Other component of equity 4,000 nil
Retained earnings – at 1 July 2014 26,200 14,000
Retained earnings – for year ended 30 24,000 10,000
June Year 1
74,200 44,000
Current liabilities (note (iv)) 25,800 18,100
Total equity and liabilities 100,000 62,100

The following information is relevant:

(i.) Pathways’ business is seasonal and 60% of its annual profit is made in the period 1
January to 30 June each year.
(ii.) At the date of acquisition, the fair value of Pathways’ net assets was equal to their
carrying amounts with the following exceptions:
a. An item of plant had a fair value of P2 million below its carrying value. At
the date of acquisition it had a remaining life of two years.
b. The fair value of Pathways’ investments was P7 million (see also note (v)).
c. Pathways owned the rights to a popular mobile (cell) phone game. At the
date of acquisition, a specialist valuer estimated that the rights were worth P12
million and had an estimated remaining life of five years.
(iii.) Following an impairment review, consolidated goodwill is to be written down by P3
million as at 30 June Year 1.
(iv.) (iv) Vinculum sells goods to Pathways at cost plus 30%. Pathways had P1·8 million of
goods in its inventory at
30 June Year 1 which had been supplied by Vinculum. In addition, on 28 June Year 1,
Vinculum processed the sale of P800,000 of goods to Pathways, which Pathways did not
account for until their receipt on 2 July Year 1. The in-transit reconciliation should be
achieved by assuming the transaction had been recorded in the books of Pathways before the
year end. At 30 June Year 1, Vinculum had a trade receivable balance of P2·4 million due
from Pathways which differed to the equivalent balance in Pathways’ books due to the sale
made on 28 June Year 1.
(v.) At 30 June Year 1, the fair values of the financial asset equity investments of
Vinculum and Pathways were P13·2 million and P7·9 million respectively.
(vi.) Vinculum’s policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose, Pathways’ share price at that date is representative of the fair
value of the shares held by the non-controlling interest.

How much is the consolidated Retained Earnings at December 31, Year 1?

53,700
53,400
52,800
50,200
Ans.
52,800

Companies A and B decide to consolidate , Asset and estimated annual earnings

contribution are as follows:
Co. A Co. B Total
Net asset contribution 300,000 400,000 700,000
Estimated annual earnings
Contribution 50,000 80,000 130,000

Stock holder of the two companies agreed that a single class of stock be issued that their
contribution be measured by net assets plus allowances for a goodwill, and that 10%
considered as a normal rate of return ,Earnings in excess of the normal rate of return
sales be capitalized at 20% in the 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 100 a shares.

Determine: (1) The amount of goodwill credited to Co. A; and (2) the total contribution
of Co. B

(1) 100,000; (2) 400,000

1) 150,000; (2) 500,000
1)100,000; (2) 600,000
(1) 200,000; (2) 600,000
Ans.
1)100,000; (2) 600,000

Giordano Company purchased the net assets of Hanes Company on January 1, Year 1, and
made the following entry to record the purchase:

Current assets 100,000

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 520,000
par
A contingent consideration agreement was made on Jan. 1, Year 1, wherein an
additional cash payment would be made on Jan. 1, Year 3, equal to twice the amount by
which average annual earnings of the Hanes Division exceed P25,000 per year, prior to
January 1, Year 3. Net income was P50,000 in Year 1 and P60,000 in Year 2. How much
adjustment will be made to goodwill on January 1, Year 3?

P60,000
P120,000
P85,000
None
Ans.
None

A parent entity is acquiring a majority holding in an entity whose shares are dealt in on a
recognised market. Under IFRS3 Business combinations , which of the following measurement
bases may be used in measuring the non-controlling interest at the acquisition date?

The nominal value of the shares in the acquiree not acquired

The fair value of the shares in the acquiree not acquired
The non-controlling interest in the acquiree's assets and liabilities at book value
The non-controlling interest in the acquiree's assets at fair value
Ans.
The fair value of the shares in the acquiree not acquired

On January 1, Year 1, Polk Corp. and Strass Corp. had condensed balance sheets as follows:
Polk Strass
Current assets $ 70,000 $20,000
Noncurrent assets 90,000 40,000
Total assets $160,000 $60,000
Current liabilities 30,000 10,000
Long-term debt 50,000 --
Stockholders’ equity 80,000 50,000
Total liabilities and stockholders’ equity 160,000 60,000

On January 2, Year 1, Polk borrowed $60,000 and used the proceeds to purchase 90% of the
outstanding common shares of Strass. This debt is payable in ten equal annual
principal payments, plus interest, beginning December 30, Year 1. The excess cost of the
investment over Strass’ book value of acquired net assets should be allocated 60% to
inventory and 40% to goodwill. On January 1, Year 1, the fair
value of Polk shares held by noncontrolling parties was $10,000.
On Polk’s January 2, Year 1 consolidated balance sheet
Noncurrent liabilities should be

$115,000
 $109,000
$104,000
$ 55,000
Ans.
$104,000

On December 31, Year 1, Neal Co. issued 100,000 shares of its $10 par value common
stock in exchange for all of Frey Inc.’s outstanding stock. The fair value of Neal’s
common stock on December 31, Year 1, was $19 per share. The carrying amounts and
fair values of Frey’s assets and liabilities on December 31, Year 1, were as follows:

Carrying amount Fair value

Cash 240,000 240,000
Receivables 270,000 270,000
Inventory 435,,000 405,000
Property, plant, and equipment 1,305,000 1,440,000
Liabilities (525,000) (525,000)
Net assets 1,725,000 1,830,000

What is the amount of goodwill resulting from the business combination?

$175,000
$105,000
$ 70,000
$0
Ans.
$ 70,000

Company J acquired all of the outstanding common stock of Company K in exchange for
cash. The acquisition price exceeds the fair value of net assets acquired. How should
Company J determine the amounts to be reported for the plant and equipment and long-
term debt acquired from Company K?
K’s carrying K’s carrying amount
amount
K’s carrying Fair value
amount
Fair value K’s carrying amount
Fair value Fair value
Ans.
Fair value Fair value
 Companies A and B decide to consolidate , Asset and estimated annual earnings
contribution are as follows:
Co. A Co. B Total
Net asset contribution 300,000 400,000 700,000
Estimated annual earnings
Contribution 50,000 80,000 130,000

Stock holder of the two companies agreed that a single class of stock be issued that their
contribution be measured by net assets plus allowances for a goodwill, and that 10%
considered as a normal rate of return ,Earnings in excess of the normal rate of return
sales be capitalized at 20% in the 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 100 a shares.

Determine: (1) The amount of goodwill credited to Co. A; and (2) the total contribution
of Co. B

(1) 100,000; (2) 400,000

(1) 150,000; (2) 500,000
(1)100,000; (2) 600,000
(1) 200,000; (2) 600,000
Ans.
(1)100,000; (2) 600,000

On January 1, Year 1, Michi Corp. purchased 75% of the common stock of Maru Corp.
Separate balance sheet data for the companies at the combination date are given below:
Michi Maru
Cash 84,000 721,000
Trade Receivable 504,000 91,000
Merchandise Inventory 462,000 133,000
Land 273,000 112,000
Plant Assets 2,450,000 1,050,000
Accumulated (840,000) (210,000)
Depreciation
Investment in Maru 1,372,000
Total Assets 4,305,000 1,897,000

Accounts Payable 721,000 497,000

Capital Stock 2,800,000 1,050,000
Retained Earnings 784,000 350,000
Total Equities 4,305,000 1,897,000
 At the date of combination the book values of Maru net assets was equal to the fair value
of the net assets except for Maru’s inventory which has a fair value of 210,000.
On the date of acquisition in the consolidated balance sheet, How much is the total
assets?

3,533,250
4,984,000
5,171,250
6,543,250
Ans.
5,171,250

On December 31, 2018, Neal Co. issued 100,000 shares of its 10 par value common stock in
exchange for all of Frey Inc.’s outstanding stock. The fair value of Neal’s common stock on
December 31, 2018, was 19 per share. The carrying amounts and fair values of Frey’s assets
and liabilities on December 31, 2018, were as follows:

Carrying amount Fair value

Cash 240,000 240,000
Receivables 270,000 270,000
Inventory 435,000 405,000
Property, plant, and 1,305,000 1,440,000
equipment
Liabilities (525,000) (525,000)
Net assets 1,725,000 1,830,000

What is the amount of goodwill resulting from the business combination?

175,000
105,000
70,000
0
Ans.
70,000

TBB issued 120,000 shares of its 25 par ordinary shares for all the net assets of HAF
Company on July 1, Year 2. TBB’s ordinary shares were selling at 30 per share at the
acquisition date. In addition a cash payment of 200,000 was made plus an agreed
deferred cash payment of 990,000 payable on July 1, Year 2. The market rate of interest
at the time is 10%.

TBB also agreed to pay additional cash consideration of 250,000 in the event TBB’s net
income falls below the current level within the next 2 years. TBB’s financial officers
 were 99% sure the current level of income will at least be sustained during the
prescribed period.

The following out-of-pocket costs were paid in cash by TBB.

Legal and accounting fees paid to 8,000

advisers
Broker's fees 4,000
Indirect acquisition costs 3,000
Costs to issue and register the shares 10,400
Total 25,400

Determine the cost of the investment for TBB

4,700,000
3,800,000
5,040,000
4,950,000
Ans.
4,700,000

On January 1, Year 1, Polk Corp. and Strass Corp. had condensed balance sheets as follows:
Polk Strass
Current assets $ 70,000 $20,000
Noncurrent assets 90,000 40,000
Total assets $160,000 $60,000
Current liabilities 30,000 10,000
Long-term debt 50,000 --
Stockholders’ equity 80,000 50,000
Total liabilities and stockholders’ equity 160,000 60,000

On January 2, Year 1, Polk borrowed $60,000 and used the proceeds to purchase 90% of the
outstanding common shares of Strass. This debt is payable in ten equal annual
principal payments, plus interest, beginning December 30, Year 1. The excess cost of the
investment over Strass’ book value of acquired net assets should be allocated 60% to
inventory and 40% to goodwill. On January 1, Year 1, the fair
value of Polk shares held by noncontrolling parties was $10,000.

On Polk’s January 2, Year 1 consolidated balance sheet

Noncurrent assets should be

$130,000
$136,000
$138,000
$140,000
Ans.
$138,000

Michangelo Co. paid $100,000 in fees to its accountants and lawyers in acquiring
Florence Company. Michangelo will treat the $100,000 as

an expense for the current year.

a prior period adjustment to retained earnings.
additional cost to investment of Florence on the consolidated balance sheet.
a reduction in paid-in capital.
Ans.
an expense for the current year.

On 1 January Year 1, Vinculum acquired 75% of Pathways’ equity shares by

means of an immediate share exchange of two shares in Vinculum for five shares in
Pathways. The fair value of Vinculum and Pathways’ shares on 1 January Year 1 were
4.00 and 3.00 respectively. In addition to the share exchange, Vinculum will make a
cash payment of 1.32 per acquired share, deferred until 1 January Year 2. Vinculum
has not recorded any of the consideration for Pathways in its financial statements.
Vinculum’s cost of capital is 10% per annum.
The summarized statements of financial position of the two companies as at 30 June
Year 1 are:
Vinculum Pathways
Assets
Non-current assets (note (ii))
Property, plant and equipment 55,000 28,600
Financial asset equity investments (note 11,500 6,000
(v))
66,500 34,600
Current assets
Inventory (note (iv)) 17,000 15,400
Trade receivables (note (iv)) 14,300 10,500
Bank 2,200 1,600
33,500 27,500
Total assets 100,000 62,100
Equity and liabilities
Equity
Equity shares of P1 each 20,000 20,000
Other component of equity 4,000 nil
Retained earnings – at 1 July 2014 26,200 14,000
Retained earnings – for year ended 30 24,000 10,000
June Year 1
74,200 44,000
Current liabilities (note (iv)) 25,800 18,100
Total equity and liabilities 100,000 62,100
 The following information is relevant:
(i.) Pathways’ business is seasonal and 60% of its annual profit is made in the period 1
January to 30 June each year.
(ii.) At the date of acquisition, the fair value of Pathways’ net assets was equal to their
carrying amounts with the following exceptions:
a. An item of plant had a fair value of P2 million below its carrying value. At
the date of acquisition it had a remaining life of two years.
b. The fair value of Pathways’ investments was P7 million (see also note (v)).
c. Pathways owned the rights to a popular mobile (cell) phone game. At the
date of acquisition, a specialist valuer estimated that the rights were worth P12
million and had an estimated remaining life of five years.
(iii.) Following an impairment review, consolidated goodwill is to be written down by P3
million as at 30 June Year 1.
(iv.) (iv) Vinculum sells goods to Pathways at cost plus 30%. Pathways had P1·8 million of
goods in its inventory at
30 June Year 1 which had been supplied by Vinculum. In addition, on 28 June Year 1,
Vinculum processed the sale of P800,000 of goods to Pathways, which Pathways did not
account for until their receipt on 2 July Year 1. The in-transit reconciliation should be
achieved by assuming the transaction had been recorded in the books of Pathways before the
year end. At 30 June Year 1, Vinculum had a trade receivable balance of P2·4 million due
from Pathways which differed to the equivalent balance in Pathways’ books due to the sale
made on 28 June Year 1.
(v.) At 30 June Year 1, the fair values of the financial asset equity investments of
Vinculum and Pathways were P13·2 million and P7·9 million respectively.
(vi.) Vinculum’s policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose, Pathways’ share price at that date is representative of the fair
value of the shares held by the non-controlling interest.

How much is the Non-Controlling Interest to be presented in the December 31, Year 1
consolidated statement of financial position?

17,500
16,550
15,800
15,000
Ans.
15,800

On December 31, Year 1, Saxe Corporation was acquired by Poe Corporation. In the
business combination, Poe issued 200,000 shares of its $10 par common stock, with a
market price of $18 a share, for all of Saxe’s common stock. The stockholders’ equity
section of each company’s balance sheet immediately before the combination was
Poe Saxe
Common stock $3,000,000 $1,500,000
Additional paid-in capital 1,300,000 150,000
 Retained earnings 2,500,000 850,000
$6,800,000 $2,500,000

In the December 31, Year 1 consolidated balance sheet, additional paid-in capital should be
reported at

$ 950,000
$1,300,000
$1,450,000
$2,900,000
Ans.
$2,900,000

AIG Company acquired a 70% interest in EASTWEST Company for 1,960,000 when the
fair value of EASTWEST’s identifiable assets and liabilities was 700,000 and elected to
measure the non-controlling interest at its share of the identifiable net assets. Annual
impairment reviews of goodwill have not resulted in any impairment losses being
recognized.

EASTWEST's current statement of financial position shows share capital of 100,000, a

revaluation reserve of 300,000 and retained earnings of 1,400,000.

Under IFRS3 Business combinations, what figure in respect of goodwill should now be
carried in AIG’s consolidated statement of financial position?

1,470,000
160,000
1,260,000
700,000
Ans.
1,470,000

Are the following statements about an acquisition true or false, according to IFRS3
(2008) Business combinations?
a. The acquirer should recognise the acquiree's contingent liabilities if certain conditions
are met.
a. The acquirer should recognise the acquiree's contingent assets if certain conditions are
met.
Statement Statement
(1) (2)
False False
False True
True False
True True
Ans.
True False

Patrick Company acquired the assets (except for cash) and assumed the liabilities of
Steve Company on January 2, Year 1 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 240,000 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, P 100

Immediately prior to acquisition, Steve Company’s balance sheet was as follows:

Cash 132,000 Current Liabilities 228,000
Accounts 170,000 Bonds payable, 400,000
Receivable (net of 10%
P4,000 allowance)
Inventory – LIFO 200,000 Common Stock, P5 600,000
cost Par value
Land 384,000 Additional Paid-in 380,000
Capital
Buildings and 1,032,000 Retained Earnings 310,000
Equipment (net)
Total 1,918,000 Total 1,918,000

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 158,000 Land 540,000
receivable
Inventory 412,000 Bonds payable 448,000

How much must be the goodwill recognized as a result of this business combination?

322,000
454,000
94,000
0
Ans.
454,000

The Grand Company will issue share at 10 par value common stock for all the net assets
of the Nuts Company. Grand’s common has current market value of 40 per share. Nuts
balance sheet accounts are shown below:
Current assets 320,000
 Property and equipment 880,000
Liabilities 400,000
Common stock, P4 par 80,000
Additional paid-in capital 320,000
Retained earnings 400,000
The fair value of current assets is 400,000 while that of property and equipment is
1,600,000. All the liabilities are correctly stated. Grand issued sufficient shares so that the
fair market value of the stock equals the fair market value of Nuts net assets plus goodwill
of 200,000. How much must be the cost of investment if goodwill of 200,000 must be
recognized?

2,200,000
1,800,000
1,600,000
200,000
Ans.
1,800,000

On January 1, Year 1, Polk Corp. and Strass Corp. had condensed balance sheets as follows:
Polk Strass
Current assets $ 70,000 $20,000
Noncurrent assets 90,000 40,000
Total assets $160,000 $60,000
Current liabilities 30,000 10,000
Long-term debt 50,000 --
Stockholders’ equity 80,000 50,000
Total liabilities and stockholders’ equity 160,000 60,000

On January 2, Year 1, Polk borrowed $60,000 and used the proceeds to purchase 90% of the
outstanding common shares of Strass. This debt is payable in ten equal annual
principal payments, plus interest, beginning December 30, Year 1. The excess cost of the
investment over Strass’ book value of acquired net assets should be allocated 60% to
inventory and 40% to goodwill. On January 1, Year 1, the fair
value of Polk shares held by noncontrolling parties was $10,000.

On Polk’s January 2, Year 1 consolidated balance sheet

Current liabilities should be

$50,000
$46,000
$40,000
$30,000
Ans.
$46,000
 On 1 October 2013 BDO Company acquired 100% of PCI Company when the fair value
of PCI’s net assets was P116 million and their carrying amount was P120 million. The
consideration transferred comprised P200 million in cash transferred at the acquisition
date, plus another P60 million in cash to be transferred 11 months after the acquisition
date if a specified profit target was met by PCI. At the acquisition date there was only a
low probability of the profit target being met, so the fair value of the additional
consideration liability was P10 million. In the event, the profit target was met and the
P60 million cash was transferred. What amount should BDO present for goodwill in its
statement of consolidated financial position at 31 December 2014, according to IFRS3
Business combinations?

P94 million
P 80 million
P 84 million
P 144 million
Ans.
P94 million

On August 31, Year 2, Wood Corp. issued 100,000 shares of its $20 par value common
stock for the net assets of Pine, Inc., in a business combination accounted for by the
acquisition method. The market value of Wood’s common stock on August 31 was $36
per share. Wood paid a fee of $160,000 to the consultant who arranged this acquisition.
Costs of registering and issuing the equity securities amounted to $80,000. No goodwill
was involved in the purchase. What amount should Wood capitalize as the cost of
acquiring Pine’s net assets?

$3,600,000
$3,680,000
$3,760,000
$3,840,000
Ans.
$3,600,000

A subsidiary, acquired for cash in a business combination, owned inventories with a market
value greater than the book value as of the date of combination. A consolidated balance
sheet prepared immediately after the acquisition would include this difference as part of

Deferred credits
Goodwill
Inventories
Retained earnings
Ans.
Inventories
On November 30, 2018, Parlor, Inc. purchased for cash at 15 per share all 250,000 shares of
the outstanding common stock of Shaw Co. At November 30, 2018, Shaw’s balance sheet
showed a carrying amount of net assets of 3,000,000. At that date, the fair value of Shaw’s
property, plant and equipment exceeded its carrying amount by 400,000. In its November
30, 2018 consolidated balance sheet, what amount should Parlor report as goodwill?

750,000
400,000
350,000
0
Ans.
350,000

In a merger, which of the following will occur?

A merger occurs when one corporation takes over the operations of another business entity,
and the acquired entity is dissolved.

None of the business entities will be dissolved.

The acquired assets will be recorded at book value by the acquiring entity.

None of the above is correct.

Ans.
A merger occurs when one corporation takes over the operations of another business entity,
and the acquired entity is dissolved.

On April 1, Year 1, Parson Corp. purchased 80% of the outstanding stock of Sloan Corp. for
$700,000 cash. Parson determined that the fair value of the net identifiable assets was
$800,000 on the date of acquisition. The fair value of Sloan’s stock at date of acquisition
was $18 per share. Sloan had a total of 50,000 shares of stock issued and outstanding prior
to the acquisition. What is the amount of goodwill that should be recorded by Parson at date
of acquisition?
$0
$ 60,000
$ 80,000
$120,000
Ans.
$ 80,000

On January 1, Year 1, Gulliver Corporation acquired 80 percent of Sea-Gull Company's

common stock for 160,000 cash. The fair value of the non-controlling interest at that date
was determined to be 40,000. Data from the balance sheets of the two companies included
the following amounts as of the date of acquisition:
Jonathan Sea-Gull
Corporation Corporation
Cash 60,000 20,000
Accounts Receivable 80,000 30,000
Inventory 90,000 40,000
Land 100,000 40,000
Buildings and Equipment 200,000 150,000
Less: Accumulated Depreciation (80,000) (50,000)
Investment in Sea-Gull Corporation 160,000
Stock
Total Assets 610,000 230,000

Accounts Payable 100,000 30,000

Bonds Payable 95,000 40,000
Common Stock 200,000 40,000
Retained Earnings 205,000 120,000
Total Liabilities and Stockholders’ 600,000 230,000
Equity

At the date of the business combination, the book values of Sea-Gull's net assets and
liabilities approximated fair value except for inventory, which had a fair value of 45,000,
and land, which had a fair value of 60,000.

Based on the preceding information, what amount of goodwill will be reported in the
consolidated balance sheet prepared immediately after the business combination?

0
40,000
20,000
15,000
Ans.
15,000

The excess of the consideration transferred plus the amount of any non-controlling interest
in the acquiree over the identifiable assets and liabilities recognized is

goodwill
Gain from acquisition
minority interest
cost of acquisition
Ans.
Goodwill
On June 30, 2018, Wyler Corporation acquires Boston Corporation in a transaction properly
accounted for as a business acquisition. At the time of the acquisition, some of the
information for valuing assets was incomplete. How should Corporation Wyler, account for
the incomplete information in preparing its financial statements immediately after the
acquisition?

Do not record the uncertain items until complete information is available.

Record a contra account to the investment account for the amounts involved.
Record the uncertain items at the book value of the acquiree.
Record the uncertain items at a provisional amount measured at the date of acquisition.
Ans.
Record the uncertain items at a provisional amount measured at the date of acquisition.

On April 1, year 1, Parson Corp. purchased 80% of the outstanding stock of Sloan Corp. for
700,000 cash. Parson determined that the fair value of the net identifiable assets was
800,000 on the date of acquisition. The fair value of Sloan’s stock at date of acquisition was
18 per share. Sloan had a total of 50,000 shares of stock issued and outstanding prior to the
acquisition. What is the amount of goodwill that should be recorded by Parson at date of
acquisition?
0
60,000
80,000
120,000
Ans.
80,000

When does the measurement period end for a business combination in which there was
incomplete accounting information on the date of acquisition?

When the acquirer receives the information or one year from the acquisition date, whichever
occurs earlier.

On the final date when all contingencies are resolved.

Thirty days from the date of acquisition.

At the end of the reporting period in the year of acquisition.

Ans.
When the acquirer receives the information or one year from the acquisition date, whichever
occurs earlier.
Which of the following is true pertaining to reverse acquisition?

Legal acquirer is the accounting acquirer

Legal acquirer is the accounting acquiree
Non-controlling interest are shareholders of legal acquirer
Non-controlling interest are shareholders of accounting acquiree
Ans.
Legal acquirer is the accounting acquiree

Which of the following is false relating to reverse acquisition?

Reverse acquisition may transpire only if the consideration transferred includes shares of
stocks of the acquiring entity.

The acquirer in a reverse acquisition is designated as the legal acquiree.

Non-controlling interest shareholders in a reverse acquisition are shareholders of the

accounting acquirer entity

Non-controlling interest in a reverse acquisition may be valued at the fair value of the
shares held by the non-controlling interest shareholders
Ans.
Non-controlling interest in a reverse acquisition may be valued at the fair value of the
shares held by the non-controlling interest shareholders

A subsidiary was acquired for cash in a business combination on January 1, Year 1. The
consideration given exceeded the fair value of identifiable net assets. The acquired company
owned equipment with a market value in excess of the carrying amount as of the date of
combination. A consolidated balance sheet prepared on December 31, Year 1, would

Report the unamortized portion of the excess of the market value over the carrying amount
of the equipment as part of plant and equipment

Report the unamortized portion of the excess of the market value over the carrying amount
of the equipment as part of goodwill

Report the excess of the market value over the carrying amount of the equipment as part of
plant and equipment

Not report the excess of the market value over the carrying amount of the equipment
because it would be expensed in the year of the acquisition
Ans.
Report the unamortized portion of the excess of the market value over the carrying amount
of the equipment as part of plant and equipment
A subsidiary was acquired for cash in a business combination on January 1, 2017. The
consideration given exceeded the fair value of identifiable net assets. The acquired company
owned equipment with a market value in excess of the carrying amount as of the date of
combination. A consolidated balance sheet prepared on December 31, 2017, would

Report the unamortized portion of the excess of the market value over the carrying amount
of the equipment as part of goodwill.

Report the unamortized portion of the excess of the market value over the carrying amount
of the equipment as part of plant and equipment.

Report the excess of the market value over the carrying amount of the equipment as part of
plant and equipment.

Not report the excess of the market value over the carrying amount of the equipment
because it would be expensed in the year of the acquisition
Ans.
Report the unamortized portion of the excess of the market value over the carrying amount
of the equipment as part of plant and equipment.

Andrew owns 100% of the share capital of the following companies. The directors are
unsure of whether the investments should be consolidated.
In which of the following circumstances would the investment NOT be consolidated?

Andrew has decided to sell its investment in Alpha as it is loss-making; the directors believe
its exclusion from consolidation would assist users in predicting the group’s future profits

Beta is a bank and its activity is so different from the engineering activities of the rest of the
group that it would be meaningless to consolidate it

Gamma is located in a country where a military coup has taken place and seized full
ownership of all private entities

Delta is located in a country where local accounting standards are compulsory and these are
not compatible with IFRS used by the rest of the group
Ans.
Gamma is located in a country where a military coup has taken place and seized full
ownership of all private entities

On January 1, Year 2, Carlito Company acquired 80% interests in Harries Company for
P2,000,000 cash. The stockholder’s equity of Harries at the time of acquisition is
P1,875,000. On January 1, Year 2, NCI is measured at its implied fair value. The excess of
cost over books value of interest acquired is allocated to the following assets:

Inventories P100, 000 (sold in Year 2)

Building P200, 000 (5- year remaining life)

During Year 2, Harries Company reported total comprehensive income of P500,000 and
paid dividend for P100,000.

What is the NCI in net assets of subsidiary on December 31, Year 2?

P455,000
P552,000
P495,000
P795,900
Ans.
P552,000

On January 1, Year 2, Carlito Company acquired 80% interests in Harries Company for
P2,000,000 cash. The stockholder’s equity of Harries at the time of acquisition is
P1,875,000. On January 1, Year 2, NCI is measured at its implied fair value. The excess of
cost over books value of interest acquired is allocated to the following assets:

Inventories P100, 000 (sold in Year 2)

Building P200, 000 (5- year remaining life)

During Year 2, Harries Company reported total comprehensive income of P500,000 and
paid dividend for P100,000.

How much goodwill (gain on acquisition) is reported in the consolidated statement of

financial position on 1/1/Year 2?

P325,000
P200,000
P(325,000)
P(375,000)
Ans.
P325,000

On January 1, Year 2, Carlito Company acquired 80% interests in Harries Company for
P2,000,000 cash. The stockholder’s equity of Harries at the time of acquisition is
P1,875,000. On January 1, Year 2, NCI is measured at its implied fair value. The excess of
cost over books value of interest acquired is allocated to the following assets:
 Inventories P100, 000 (sold in Year 2)
Building P200, 000 (5- year remaining life)

During Year 2, Harries Company reported total comprehensive income of P500,000 and
paid dividend for P100,000.

What is the consolidated total comprehensive income attributable to parent on December 31,
Year 2, if Carlito’s net income for Year 2 is P600,000?

876,000
888,000
808,000
948,000
Ans.
808,000

On January 1, Year 2, Carlito Company acquired 80% interests in Harries Company for
P2,000,000 cash. The stockholder’s equity of Harries at the time of acquisition is
P1,875,000. On January 1, Year 2, NCI is measured at its implied fair value. The excess of
cost over books value of interest acquired is allocated to the following assets:

Inventories P100, 000 (sold in Year 2)

Building P200, 000 (5- year remaining
life)

During Year 2, Harries Company reported total comprehensive income of P500,000 and
paid dividend for P100,000.
What was the fair value of NCI on January 1, Year 2?

P500,000
P375,000
P525,000
P400,000
Ans.
P500,000

On January 1, Year 2, Owen Corp. purchased all of Sharp Corp.’s common stock for
P1,200,000. On that date, the fair values of Sharp’s assets and liabilities equaled their
carrying amounts of P1,320,000 and P320,000, respectively. During Year 2, Sharp paid
cash dividends of P20,000. Selected information from the separate balance sheets and
income statements of Owen and Sharp as of December 31, Year 2, and for the year then
ended follows:
Owen Sharp
Balance sheet accounts
 Investment in subsidiary 1,320,000 -
Retained earnings 1,240,000 560,000
Total stockholders’ equity 2,620,000 1,120,000
Income statement accounts
Operating income 420,000 200,000
Equity in earnings of Sharp 140,000 -
Net income 400,000 140,000
In Owen’s December 31, Year 2 consolidated balance sheet, what amount should be
reported as total retained earnings?

P1,240,000
P1,360,000
P1,380,000
P1,800,000
Ans.
P1,240,000

On January 1, 2017, Palm, Inc. purchased 80% of the stock of Stone Corp. for 4,000,000 cash. Prior
to the acquisition, Stone had 100,000 shares of stock outstanding. On the date of acquisition,
Stone’s stock had a fair value of 52 per share. During the year Stone reported 280,000 in net income
and paid dividends of 50,000. What is the balance in the noncontrolling interest account on Palm’s
balance sheet on December 31, 2017?

1,000,000
1,040,000
1,086,000
1,096,000
Ans.
1,086,000

How much is the profit attributable to the Controlling Interest?

40,000
32,000
24,000
8,000
Ans.
24,000

During 2017, Pard Corp. sold goods to its 80%-owned subsidiary, Seed Corp. At December
31, 2017, one-half of these goods were included in Seed’s ending inventory. Reported 2017
selling expenses were 1,100,000 and 400,000 for Pard and Seed, respectively. Pard’s selling
expenses included 50,000 in freight-out costs for goods sold to Seed.
What amount of selling expenses should be reported in Pard’s 2017 consolidated income
statement?

1,500,000
1,480,000
1,475,000
1,450,000
Ans.
1,450,000

Zuma Corporation and its subsidiary reported consolidated net income of P320,000 for the
year ended December 31, Year 1. Zuma owns 80 percent of the common shares of its
subsidiary, acquired at book value. Noncontrolling interest was assigned income of P30,000
in the consolidated income statement for Year 1. What is the amount of separate operating
income reported by Zuma for the year?

P170,000
P150,000
P120,000
P200,000
Ans.
P170,000

Pact acquired 80% of the equity shares of Sact on 1 July Year 1, paying P3.00 for
each share acquired. This represented a premium of 20% over the market price of Sact’s
shares at that date. Sact’s shareholders’ funds (equity) as at 31 March Year 2 were:

Equity shares of P1 each 100,000

Retained earnings at 1 April Year 1 80,000
Profit for the year ended 31 March 40,000 120,000
Year 2
220,000

The only fair value adjustment required to Sact’s net assets on consolidation was a P20,000
increase in the value of its land. Pact’s policy is to value non-controlling interests at fair
value at the date of acquisition. For this purpose the market price of Sact’s shares at that
date can be deemed to be representative of the fair value of the shares held by the non-
controlling interest.

What would be the carrying amount of the non-controlling interest of Sact in

the consolidated statement of financial position of Pact as at 31 March Year 2?
P58,00
P56,000
P54,000
P50,000
Ans.
P56,000

On January 1, Year 1, Wilhelm Corporation acquired 90 percent of Kaiser Company's

voting stock, at underlying book value. The fair value of the noncontrolling interest was
equal to 10 percent of the book value of Kaiser at that date. Wilhelm uses the equity method
in accounting for its ownership of Kaiser. On December 31, Year 2, the trial balances of the
two companies are as follows:
Wilhelm Corporation Kaiser Company
Debit Credit Debit Credit
Current Assets 200,000 140,000
Depreciable Assets 350,000 250,000
Investment in Kaiser Company 162,000
Stock
Depreciation Expense 27,000 10,000
Other Expenses 95,000 60,000
Dividends Declared 20,000 10,000
Accumulated Depreciation 118,000 80,000
Current Liabilities 100,000 80,000
Long-Term Debt 100,000 50,000
Common Stock 100,000 50,000
Retained Earnings 150,000 100,000
Sales 250,000 110,000
Income from Subsidiary 36,000

Based on the preceding information, what amount would be reported as retained earnings in
the consolidated balance sheet prepared at December 31, Year 2?

314,000
294,000
150,000
424,000
Ans.
294,000

Wilmslow acquired 80% of the equity shares of Zeta on 1 April Year 1 when Zeta’s
retained earnings were P200,000. During the year ended 31 March Year 2, Zeta
purchased goods from Wilmslow totalling P320,000. At 31 March Year 2, one quarter of
these goods were still in the inventory of Zeta. Wilmslow applies a mark-up on cost of
 25% to all of its sales. At 31 March Year 2, the retained earnings of Wilmslow and Zeta
were P450,000 and P340,000 respectively.

What would be the amount of retained earnings in Wilmslow’s consolidated statement of

financial position as at31 March Year 2?

P706,000
P546,000
P542,000
P498,000
Ans.
P546,000

Pact acquired 80% of the equity shares of Sact on 1 July Year 1, paying P3.00 for
each share acquired. This represented a premium of 20% over the market price of Sact’s
shares at that date. Sact’s shareholders’ funds (equity) as at 31 March Year 2 were:

Equity shares of P1 each 100,000

Retained earnings at 1 April Year 1 80,000
Profit for the year ended 31 March 40,000 120,000
Year 2
220,000

The only fair value adjustment required to Sact’s net assets on consolidation was a P20,000
increase in the value of its land. Pact’s policy is to value non-controlling interests at fair
value at the date of acquisition. For this purpose the market price of Sact’s shares at that
date can be deemed to be representative of the fair value of the shares held by the non-
controlling interest.

What would be the carrying amount of the non-controlling interest ofSact in the
consolidated statement of financial position of Pact as at 31 March Year 2?

P58,000
P56,000
P54,000
P50,000
Ans.
P56,000

Pact acquired 80% of the equity shares of Sact on 1 July Year 1, paying P3.00 for
each share acquired. This represented a premium of 20% over the market price of Sact’s
shares at that date. Sact’s shareholders’ funds (equity) as at 31 March Year 2 were:

Equity shares of P1 each 100,000

 Retained earnings at 1 April Year 1 80,000
Profit for the year ended 31 March Year 2 40,000 120,000
220,000

The only fair value adjustment required to Sact’s net assets on consolidation was a P20,000
increase in the value of its land. Pact’s policy is to value non-controlling interests at fair
value at the date of acquisition. For this purpose the market price of Sact’s shares at that
date can be deemed to be representative of the fair value of the shares held by the non-
controlling interest. Sub Company sells all its output at 20 percent above cost to Par
Corporation. Par purchases all its inventory from Sub. The incomes reported by the
companies over the past three years are as follows:

Year Sub Company’s Net Income Par Corporation’s Operating Income

Year 1 150,000 225,000
Year 2 135,000 360,000
Year 3 240,000 450,000

Sub Company sold inventory for P300,000, P262,500 and P337,500 in the years Year 1,
Year 2, and Year 3 respectively. Par Company reported ending inventory of P105,000,
P157,500 and P180,000 for Year 1, Year 2, and Year 3 respectively. Par acquired 70 percent
of the ownership of Sub on January 1, Year 1, at underlying book value. The fair value of
the noncontrolling interest at the date of acquisition was equal to 30 percent of the book
value of Sub Company.

What will be the income assigned to controlling interest for Year 2?

P448,375
P495,000
P486,250
P615,37
Ans.
P448,375

On January 1, Year 1, Wilhelm Corporation acquired 90 percent of Kaiser Company's

voting stock, at underlying book value. The fair value of the noncontrolling interest was
equal to 10 percent of the book value of Kaiser at that date. Wilhelm uses the equity method
in accounting for its ownership of Kaiser. On December 31, Year 2, the trial balances of the
two companies are as follows:
Wilhelm Corporation Kaiser Company
Debit Credit Debit Credit
Current Assets 200,000 140,000
Depreciable Assets 350,000 250,000
Investment in Kaiser 162,000
Company Stock
Depreciation Expense 27,000 10,000
 Other Expenses 95,000 60,000
Dividends Declared 20,000 10,000
Accumulated Depreciation 118,000 80,000
Current Liabilities 100,000 80,000
Long-Term Debt 100,000 50,000
Common Stock 100,000 50,000
Retained Earnings 150,000 100,000
Sales 250,000 110,000
Income from Subsidiary 36,000
Based on the preceding information, what amount would be reported as total stockholder's
equity in the consolidated balance sheet at December 31, Year 2?

P412,000
P394,000
P542,000
P348,000
Ans.
P412,000

Roland Company acquired 100 percent of Garros Company's voting shares in Year 1. During Year 2,
Garros purchased tennis equipment for P30,000 and sold them to Roland for P55,000. Roland
continues to hold the items in inventory on December 31, Year 2. Sales for the two companies
during Year 2 totaled P655,000, and total cost of goods sold was P420,000. Which of the following
observations will be true if no adjustment is made to eliminate the intercorporate sale when a
consolidated income statement is prepared for Year 2?

Sales would be overstated by P30,000

Cost of goods sold will be understated by P25,000
Net income will be overstated by P25,000
Consolidated net income will be unaffected
Ans.
Net income will be overstated by P25,000

Scroll, Inc., a wholly owned subsidiary of Pirn, Inc., began operations on January 1, 2017.
The following information is from the condensed 2017 income statements of Pirn and
Scroll:
Pirn Scroll
Sales to Scroll 100,000 --
Sales to others 400,000 300,000
500,000 300,000
Cost of goods sold:
Acquired from Pirn -- 80,000
Acquired from others 350,000 190,000
Gross profit 150,000 30,000
Depreciation 40,000 10,000
 Other expenses 60,000 15,000
Income from operations 50,000 5,000
Gain on sale of equipment to 12,000 --
Scroll
Income before income taxes 62,000 5,000
Additional information
· Sales by Pirn to Scroll are made on the same terms as those made to third
parties.
· Equipment purchased by Scroll from Pirn for 36,000 on January 1, 2017, is
depreciated using the straight-line method over four years.
What amount should be reported as depreciation expense in Pirn’s 2017 consolidated
income statement?

50,000
47,000
44,000
41,000
Ans.
47,000

Planet Company acquired a 70% interest in the Star Company in 2016. For the year ended
December 31, 2017, Star reported net income of 80,000. During 2017, Planet sold merchandise to
Star for 10,000 at a profit of 2,000. The merchandise remained in Star’s inventory at the end of
2017. For consolidation purposes what is the noncontrolling interest’s share of Star’s net income for
2017?

23,400
24,000
24,600
26,000
Ans.
24,000

Baduy Corp. owns 80 percent of the stock of Hiphop Company. At the end of Year 2,
Baduy Corp. and Hiphop Company reported the following partial operating results and
inventory balances:
Baduy Hiphop
Corp. Co.
Total sales 658,000 510,000
Sales to Hiphop Co. 140,000
Sales to Baduy Corp. 240,000
Profit 20,000
Operating Profit (excluding income from 70,000
Hiphop Co.)
Inventory, December 31, Year 2:
Purchases from Hiphop Co. 48,000
 Purchases from Baduy Corp. 42,000

Baduy Corporation regularly prices its products at cost plus a 40 percent mark-up for
profit. Hiphop Company prices its sales at cost plus a 20 percent mark-up. The total
sales reported by Baduy and Hiphop include both intercompany sales and sales to
nonaffiliates.
The consolidated cost of sales for Year 2 must be:
790,000
770,000
535,000
496,333
Ans.
496,333

A subsidiary made sales of inventory to its parent at a profit this year. The parent, in turn,
sold all but 20 percent of the inventory to unaffiliated companies, recognizing a profit. The
amount that should be reported as cost of goods sold in the consolidated income statement
prepared for the year should be:

the amount reported as intercompany sales by the subsidiary.

the amount reported as intercompany sales by the subsidiary minus unrealized profit in the
ending inventory of the parent.

the amount reported as cost of goods sold by the parent minus unrealized profit in the
ending inventory of the parent.

the amount reported as cost of goods sold by the parent.

Ans.
the amount reported as intercompany sales by the subsidiary minus unrealized profit in the
ending inventory of the parent.

Novy Corporation purchased at book value 70 percent of the ownership of Meiji

Corporation and 90 percent of the ownership of Cecille Corporation in Year 1. There are
frequent intercompany transfers among the companies. Activity relevant to Year 4 is
presented below.
Transf Unsold
Producti er at End Year
Year Producer on Cost Buyer Price of Year Sold
Year Meiji Novy Year
3 Corp. 24,000 Corp. 30,000 10,000 4
Year Cecille Meiji Year
3 Corp. 60,000 Corp. 72,000 18,000 4
Year Novy Meiji Year
4 Corp. 15,000 Corp. 35,000 7,000 5
 Year Meiji Cecille Year
4 Corp. 63,000 Corp. 72,000 12,000 5
Year Cecille Novy Year
4 Corp. 27,000 Corp. 45,000 15,000 5

For the year ended December 31, Year 4, Novy Corporation reported P80,000 of income
from its separate operations (excluding income from intercorporate investments). Meiji
Corp. reported net income of P37,500, and Cecille Corporation reported net income of
P20,000.

Compute the amount reported as consolidated net income for Year 4.

P 117,900
P 116,750
P 142,50
P 96,750
Ans.
P 117,900

Parker Corp. owns 80% of Smith Inc.’s common stock. During 2017, Parker sold Smith
250,000 of inventory on the same terms as sales made to third parties. Smith sold all of
the inventory purchased from Parker in 2017. The following information pertains to
Smith and Parker’s sales for 2017:
Parker Smith
Sales 1,000,000 700,000
Cost of sales 400,000 350,000
600,000 350,000

What amount should Parker report as cost of sales in it s 2017 consolidated income
statement?

750,000
680,000
500,000
430,000
Ans.
500,000

Pat Corp. owns 80% for Sir. Inc. common stock. During Year 2, Pat sold Sir P250,000 of
inventory on the same terms as sale made to third parties. Sir sold all of the inventory
purchased from Pat in Year 2. The following information pertains for Sir and Pat’s sales
for Year 2.

Pat Sir
 P1,000,00
Sales P700,000
0
Cost of
400,000 350,000
sales
Gross profit P600,000 P350,000

What amount should Pat report as cost of sales in its Year 2 consolidated statement of
comprehensive income?

P750,000
P680,000
P500,000
P430,000
Ans.
P500,000

Penny Company owns an 80% controlling interest in the Sandy’s Company. Sandy regularly
sells merchandise to Penny, which then sold to outside parties. The gross profit on all such
sales is 40%. On January 1, Year 2, Penny sold land and a building to Sandy. The value of
the parcel is 20% to land and 80% to structures. Pertinent data for the companies is
summarized in the next page.

Penny Sandy
Internally generated net income, Year 2 520,000 250,000
Internally generated net income, Year 3 340,000 235,000
Intercompany merchandise sales, Year 2 100,000
Intercompany merchandise sales, Year 3 120,000
Intercompany inventory, December 31,
Year 2 15,000
Intercompany inventory, December 31,
Year 3 20,000
Cost of real estate sold on January 1, Year
2 600,000
Sales price of real estate on January 1, Year
2 800,000
Depreciable life of building 20 yrs
For Year 3, what is the consolidated comprehensive income attributable to controlling
interest?

534,400
543,000
453,400
543,400
Ans.
534,400
On January 1, Year 1 SST Company purchased a computer with an expected life of 5 years.
On January 1, Year 3 SST Company sold the computer to PMN corporation and recorded
the following entry:
Cash P39, 000
Accumulated
16, 000
Depreciation
Computer Equipment 40, 000
Gain on sale of
15, 000
equipment

PMN Corporation holds 60% of the voting shares of SST Company. SST Company and
PMN Corporation reported income from its own operations of P45, 000 and P85, 000 for
Year 3 respectively. There is no change in the estimated life of the equipment as a result of
intercompany sale.

How much is the income attributable to the Non-Controlling Interest for Year 3?

12,000
14,000
18,000
21,000
Ans.
14,000

Penny Company owns an 80% controlling interest in the Sandy’s Company. Sandy regularly
sells merchandise to Penny, which then sold to outside parties. The gross profit on all such
sales is 40%. On January 1, Year 2, Penny sold land and a building to Sandy. The value of
the parcel is 20% to land and 80% to structures. Pertinent data for the companies is
summarized in the next page.

Penny Sandy
Internally generated net income, Year 2 520,000 250,000
Internally generated net income, Year 3 340,000 235,000
Intercompany merchandise sales, Year 2 100,000
Intercompany merchandise sales, Year 3 120,000
Intercompany inventory, December 31,
Year 2 15,000
Intercompany inventory, December 31,
Year 3 20,000
Cost of real estate sold on January 1, Year
2 600,000
Sales price of real estate on January 1, Year 800,000
 2
Depreciable life of building 20 yrs
For Year 2, what is the consolidated comprehensive income attributable to controlling
interest?

523,200
525,000
625,000
532,500
Ans.
523,200

On January 1, 2018, Poe Corp. sold a machine for 900,000 to Saxe Corp., its wholly
owned subsidiary. Poe paid 1,100,000 for this machine, which had accumulated
depreciation of 250,000. Poe estimated a 100,000 salvage value and depreciated the
machine on the straight-line method over twenty years, a policy which Saxe continued.
In Poe’s December 31, 2018 consolidated balance sheet, this machine should be included
in cost and accumulated depreciation as
1) Cost
2) Accumulated depreciation

1) 1,100,000 2) 300,000
1) 1,100,000 2) 290,000
1) 900,000 2) 40,000
1) 850,000 2) 42,500
Ans.
1) 1,100,000 2) 300,000

AtC Industries manufactures heavy equipment used in construction and excavation. On

January 3, Year 1 AtC sold a piece of equipment from its inventory that cost P180,00 to
its 60% owned subsidiary, JlB Corporation, at AtC’s standard price is twice its cost. Jlb
is depreciating the equipment over six years using straight-line depreciation and no
salvage value.

How much depreciation must be eliminated in preparing the consolidated financial

statement?

60,000
30,000
36,000
0
Ans.
30,000
Port, Inc. owns 100% of Salem, Inc. On January 1, 2018, Port sold Salem delivery
equipment at a gain. Port had owned the equipment for two years and used a five-year
straight-line depreciation rate with no residual value. Salem is using a three-year straight-
line depreciation rate with no residual value for the equipment. In the consolidated income
statement, Salem’s recorded depreciation expense on the equipment for 2018 will be
decreased by

20% of the gain on sale.

33 1/3% of the gain on sale.
50% of the gain on sale.
100% of the gain on sale
Ans.
33 1/3% of the gain on sale.

On January 2, Year 2, PG Corporation sold equipment costing P100,000 with accumulated

depreciation of P25,000 to its wholly-owned subsidiary; SM Inc. the selling price was
P90,000. PG was depreciating the equipment on the straight-line method inventory over
twenty years with salvage value. SM continued this depreciation. What are the cost and
accumulated depreciation, respectively, of this equipment in the December 31, Year 2
consolidated statement of financial position?

P75,000 and P3,750

P90,000 and P4,500
P90,000 and P29,500
P100,000 and P30,000
Ans.
P100,000 and P30,000

On January 1, Year 1, Harny Company purchased an Equipment with an expected useful

life of 5 years and scrap value of P8,000. On January 1, Year 3, Harny Company sold the
truck to Jazel Company and recorded the following entry:
Debit Credit
Cash 50,000
Accumulated 18,000
depreciation
Truck 53,000
Gain on sale of 15,000
truck
 Jazel holds 60% of Harny's voting shares and considered the equipment to have a
remaining useful life of 4 years. Harny reported net income of P55,000, and Jazel
reported separate net income of P98,000 for Year 3.
In preparing the consolidated financial statements for Year 3, depreciation expense
recorded by the Jazel will be:

Increased by 9,000
Reduced by 6,667
Reduced by 1,500
Increased by 5,000
Ans.
Reduced by 1,500

On January 1, Year 1 SST Company purchased a computer with an expected life of 5 years.
On January 1, Year 3 SST Company sold the computer to PMN corporation and recorded
the following entry:
Cash P39, 000
Accumulated Depreciation 16, 000
Computer Equipment 40, 000
Gain on sale of equipment 15, 000

PMN Corporation holds 60% of the voting shares of SST Company. SST Company and
PMN Corporation reported income from its own operations of P45, 000 and P85, 000 for
Year 3 respectively. There is no change in the estimated life of the equipment as a result of
intercompany sale.

What is the consolidated total comprehensive income attributable to parent for Year 3?

P103, 000
P106, 000
P112, 000
P130, 000
Ans.
P106, 000

BigBang Company owns an 80% controlling interest in Sheldon Company. Sheldon

regularly sells merchandise to BigBang, which then sells to outside parties. The gross
profit on all such sales is 40%. On January 1, Year 1, BigBang sold land and a building
to Sheldon. The value of the parcel is 20% to land and 80% to structures. Pertinent data
for the companies is summarized below.
BigBang Sheldon
Internally generated net income, Year 2 340, 000 235, 000
Internally generated net income, Year 1 P520, 000 P250, 000
Intercompany merchandise sales, Year 120, 000
 2
Intercompany merchandise sales, Year
100, 000
1
Intercompany inventory, December 31,
20, 000
Year 2
Intercompany inventory, December 31,
15, 000
Year 1
Cost of real estate sold on January 1,
600, 000
Year 1
Sales price of real estate on January 1,
800, 000
Year 1
Depreciable life of building 20 years.

For Year 2, what is the consolidated comprehensive income attributable to controlling

interest?

453, 400
534, 400
543, 000
543, 400
Ans.
534, 400

Which of the following is not a characteristic of joint arrangement classified as joint operation?

The operators have right to the assets and obligation for the liabilities of the operation

The legal form of the separate vehicle does not confer separation between the operators and the
separate vehicle

The operators have right to the net assets of the operation.

Without a separate vehicle, the joint arrangement is always classified as joint operation
Ans.
The operators have right to the net assets of the operation.

On July 1, Year 1, Eliza, Rochie and Jessa formed a joint arrangement for the sale of
merchandise. Eliza was designated as the managing joint operator. Profits or losses are
to be divided as follows: Eliza, 50%; Rochie, 25%; and Jessa, 25%. On October 1, Year
1, though the joint operation is still uncompleted, the participants agreed to recognize
profit or loss on the venture to date. The cost of inventory on hand is determined at
P25,000. The investment in Joint Operation account has a debit balance of P15,000
before distribution of profit and loss. No separate set of books is maintained for the joint
operation and the participants record in their individual books all venture transactions.
 The joint operation profit (loss) on October 1, Year 1 is:

10,000
25,000
(15,000)
None
Ans.
10,000

Three joint operators are involved in a joint operation that manufactures ships chandlery. At
the beginning of the year the joint operation held P50,000 in cash. During the year the joint
operation incurred the following expenses: Wages paid P20,000, Overheads accrued
P10,000. Additionally, creditors amounting to P40,000 were paid and the joint operators
contributed P15,000 cash each to the joint operation. The balance of cash held by the joint
operation at the end of the year is:

P5,000
P25,000
P35,000
P75,000
Ans.
P35,000

A party to a joint operation sells an asset to the operation. The profit it can realise is:

None
100%
100% - the party’s share, until the asset is sold by the operation
The selling operator’s share
Ans.
100% - the party’s share, until the asset is sold by the operation

IFRS 11 defines joint arrangement as an arrangement over which two or more parties have joint
control which is the contractually agreed sharing of control of an arrangement, which exists only
when the decisions about the relevant activities require the unanimous consent of the parties sharing
control. What is the classification of the joint arrangement if the business formed is not structured
through a separate vehicle?

Joint operation only

Joint venture only
Either Joint operation or Joint venture depending on the substance of the transaction
Jointly controlled entity
Ans.
Joint operation only
Which of the following may not qualify as a joint arrangement:

Entities X and Y jointly publishes accounting and other business books. Per agreement, X
shall recruit authors and obtain exclusive printing and distribution rights; while Y shall
facilitate the actual publication of the books. X and Y shall share in the profits in the ration
of 60% and 40% respectively.

Entities X and Y established a new corporation Z and agrees to a joint control owning 45%
and 35% with the remaining 20% issued in a public offering. Subsequently, Z acquires 80%
ownership of entity A that has a 90% ownership in Y.

Entities X and Y agrees to jointly control entity Z, each owning 40% interest. Entity A is
the parent of Y with a 90% ownership. Entity B, the parent of X with 82% ownership, hold
an investment in Y of 45% designated as fair value through profit or loss.

Entities X and Y acquires and agreed to jointly and equally own a spaceship to establish a
space tourism business. Their initial offering is a round trip to the moon at the very
affordable price of 1million US dollar. The package includes thee month physical training,
latest astronaut space suit (with color options of silver, gold, or ivory), travel insurance,
rental of adventure camera with 360 lens, and dedicated wifi connection to allow immediate
update to facebook, twitter, instagram, and other social networking sites. X and Y agrees to
share in the common revenues and expenses related to the operation and maintenance of the
spaceship.
Ans.
Entities X and Y established a new corporation Z and agrees to a joint control owning 45%
and 35% with the remaining 20% issued in a public offering. Subsequently, Z acquires 80%
ownership of entity A that has a 90% ownership in Y.

K and L[1] join in a venture for the sale of certain merchandise. The participants agree to
the following:
· K shall be allowed a commission of 10% on his net purchase.
· The participants shall be allowed commissions of 25% on their respective sales.
· K and L shall divide the profit or loss 60% and 40%, respectively.
Joint arrangement transactions follows:
Dec.
1 K makes cash purchase of P57,000
3 L pays venture expenses of P9,000.
Sales are as follows: K P48,000; L P36,000. The participants keep
5 their own cash receipts.
6 K returns unsold merchandise and receives P15,000 cash.
15 The participants make cash settlement.
In the distribution of the net profit of the venture, what are the shares of K and L,
respectively?

4,260 3,230
4,680 3,120
4,820 3,430
4,840 4,230
Ans.
4,680 3,120

Apple Inc. and Samsung Inc. Incorporated an entity named Sample Inc. where in the parties
will have voting rights in the decision affecting the relevant activities of the arrangement.
The contract provides that unanimous consent by the parties is necessary for the validity of
Sample’s corporate act. The purpose of the arrangement is for Sample Inc. to manufacture
parts for the parties own manufacturing processes. The assets and liabilities held in Sample
Inc. are in are name of Sample Inc. what is the classification of the interest of Apple Inc.
and Samsung Inc. in Sample Inc. based on Sample Inc.’s Legal form only.

It shall be classified as Investment in Subsidiary because of the presence of control.

It shall be classified as Investment in Associate because f the presence of significant

influence.

It shall be classified as Joint Arrangement accounted for as Investment in Joint Venture

under Equity Method because Sample Inc. holds title over the assets of the venture.

It shall be classified as Joint Arrangement accounted for as Joint Operation because in case
of doubt, it shall be resolved in favour of Joint Operation.
Ans.
It shall be classified as Joint Arrangement accounted for as Investment in Joint Venture
under Equity Method because Sample Inc. holds title over the assets of the venture.

On January 2, Year 1, Abnoy Company and Sibuyas Company formed the DILAWAN
Company, a merchandising joint venture intended to prevent any political identity to sit
in the government without their approval. Each invested P200,000 for a 50% interest in
the joint venture with the agreement that the managing group is awarded first to Abnoy.
The venture’s operation went smoothly as nobody noticed their scheme.
The condensed financial statements for Abnoy Company, Sibuyas Company and for the
joint venture, Dilawan Company are presented below:
Dilawan Company
Abnoy Co. Sibuyas Co. (a joint venture)
Profit or Loss:
Sales P3,000,000 P2,000,000 P1,000,000
 Investment income 125,000 125,000 –
Total 3,125,000 2,125,000 1,000,000
Cost and expense 1,500,000 1,200,000 750,000
Net income P1,625,000 P 925,000 P 250,000

Financial Position:
Assets P3,550,000 P2,850,000 P2,000,000
Investment in Dilawan Company 325,000 325,000 –
Total assets P3,875,000 P3,175,000 P2,000,000
Liabilities P2,100,000 P1,900,000 P1,350,000
Capital stock 1,200,000 P1,000,000 –
Retained earnings 575,000 275,000 –

Ventures, Capital – – 650,000

Total liabilities and capital P3,875,000 P3,175,000 P2,000,000

How much would be the total liabilities to be reported by Sibuyas Company on

December 31, Year 1 is:

P3,250,000
P3,400,000
P2,575,000
P1,900,000
Ans.
P1,900,000

Which of the following is not a characteristics of joint arrangement classified as joint

venture?

The ventures have right t the net assets of the joint venture.

The venturer accounts for its interest in joint venture by recognizing Investment in Joint
Venture and accounting it using Equity Method under IAS 28

With separate vehicle, the joint arrangement is always classified as joint venture

The venture recognizes its share in net income /(net loss from joint venture by
increase/(decrease) in Investment in Joint Venture account and records receipt of
cash/property dividend from the venture with a decrease in Investment in Joint Venture
account.
Ans.
With separate vehicle, the joint arrangement is always classified as joint venture
 On January 1, Year 1, two real estate companies, Woodsgate and Deca, set up a separate
vehicle, Royal Pines Company, for the purpose of acquiring and operating a shopping
center. The contractual arrangement between the parties establishes joint control of the
activities that are conducted in Royal Pines Company. The main feature of Royal Pines’
Legal form is that the entity, not the parties, has rights to the assets, and obligations for
the liabilities, relating to the arrangement. These activiites include the rental of the retail
units, managing the car park, maintaining the center and its equipment, such as lifts, and
building the reputation and customer base for the center as a whole.
As a result, Woodsgate Company paid P1.6 million for 50,000 shares of Royal Pines’
voting common stock, which represents a 40% investment. No allocation to goodwill or
other specific account was mad the joint control over Royal Pines is achieved by this
acquisition and so Woodsgate applies the equity method. Royal Pines’ distributed a
dividend of P2 per share during the year and reported net income of P560,000. What is
the balance in the Investment in Royal Pines account found in Woodsgate’s financial
records as of December 31, Year 1?
1,844,0001,884,0001,724,0001,784,000 On January 1, Year 1, two real estate companies,
Woodsgate and Deca, set up a separate vehicle, Royal Pines Company, for the purpose
of acquiring and operating a shopping center. The contractual arrangement between the
parties establishes joint control of the activities that are conducted in Royal Pines
Company. The main feature of Royal Pines’ Legal form is that the entity, not the parties,
has rights to the assets, and obligations for the liabilities, relating to the arrangement.
These activiites include the rental of the retail units, managing the car park, maintaining
the center and its equipment, such as lifts, and building the reputation and customer base
for the center as a whole.
As a result, Woodsgate Company paid P1.6 million for 50,000 shares of Royal Pines’
voting common stock, which represents a 40% investment. No allocation to goodwill or
other specific account was mad the joint control over Royal Pines is achieved by this
acquisition and so Woodsgate applies the equity method. Royal Pines’ distributed a
dividend of P2 per share during the year and reported net income of P560,000. What is
the balance in the Investment in Royal Pines account found in Woodsgate’s financial
records as of December 31, Year 1?

1,844,000
1,884,000
1,724,000
1,784,000
Ans.
1,724,000

Makati Co. bills its Valenzuela branch for merchandise at 140% of cost. At the end of
January Year 3, the branch reported the following information:

Merchandise
from Home
Office (At
 billed price)
Inventory, January 1 7,560
Shipments received 28,280
Inventory, January 31 8,400

What should be the balance of the allowance account for overvaluation of the branch
inventory at January 31?

2,400
2,160
8,080
None of the above
Ans.
2,400

Best Company has gained control over the operations of Cure Corporation by acquiring 85%
of its outstanding capital stock for 2,580,000. This amount includes a control premium of
30,000. Acquisition expenses, direct and indirect, amounted to 83,000 and 42,000
respectively.
Best Cure
Book Book Fair
Value Value Value
Cash 3,541,500 128,000
Accounts receivable 300,000 325,000
Inventories 550,000 360,000
Prepaid expenses 148,500 125,000
Land 2,350,000 879,000
Building 1,560,000 558,000
Equipment 300,000 185,000
Goodwill - 300,000
Total assets 8,750,000 2,860,000

Accounts payable 675,000 253,000

Notes payable 1,400,000 730,000
Capital stock, 50 par 3,400,000 800,000
Additional paid in 1,575,000 600,000
capital
Retained earnings 1,700,000 477,000
Total equities 8,750,000 2,860,000

The following was ascertained on the date of acquisition for Cure Corporation:
· The value of receivables and equipment has decreased by 25,000 and 14,000
respectively.
· The fair value of inventories is now P436,000 whereas the value of land and building
has increased by 471,000 and P107,000 respectively.
There was an unrecorded accounts payable amounting to 27,000 and the fair value of notes
is 738,000.
Compute for the following balances to be presented in the consolidated statement of
financial position at the date of business combination:
Total assets

9,875,000
10,093,000
10,112,000
9,215,000
Ans.
10,093,000