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Chapter 13

Problem I

1.

Home Office Books Branch Books

Branch Current 55,000 Shipm from Home Office 55,000

Shipments to Branch 50,000 Home Office Current 55,000

Unrealized Int Inv. Profit 5,000

Billed price P55,000 / 110%

Cost 50,000

Allowance for overvaluation of branch inventory/ _______

Unrealized Intercompany Inventory Profit/Deferred Profit P 5,000

2.

Sales......................................................................................................................................

P140,000

Cost of goods sold:

Merchandise inventory, September 1................................................ P 35,200

Purchases.............................................................................................. 24,000

Shipments from home office............................................................... 55,000

Merchandise available for sale.......................................................... P 114,200

Less: Merchandise Inventory, September 30..................................... 30,000

Cost of goods sold.......................................................................................................

84,200

Gross profit............................................................................................................................P

55,800

Operating expenses:

Selling expenses……………………………………..................................P 8,000

General expenses…………………......................................................... 12,000

Total operating expenses..........................................................................................

20,000
Unadjusted branch net income...................................................................................... P

15,800

3. Results of Branch Operations:

a. Branch Net Income/Loss from its own operations:

Branch Current………………........................................................................... 15,800

Branch Income Summary...................................................................

15,800

b. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch

Inventory/ Unrealized Intercompany Inventory Profit:

Unrealized Intercompany Inventory Profit.................................................... 4,600

Branch Income Summary..................................................................

4,600

Billing Price

Cost

(Billing/1.10)

Unrea

* P35,200 x 50% = P17,600

** P30,000 – P8,000

***or, P50,600 x 10/110 = P4,125; Decrease in Unrealized Intercompany Inventory

Profit:

Therefore, the True/Real/Adjusted Branch Net Income or Branch Net Income in so far

as HO is concerned amounted to:

Unadjusted branch net income...............................................................................P15,800

Add: Allowance for Overvaluation of CGS…………………………………………….

4,600

Adjusted Branch Net

Income……………………………………………………………..P20,400

Problem II

Books of Home Office


Correcting entries:

A. Sales............................................................................................................... 42,000

Shipments to Branch................................................................ …………

35,000

Unrealized Intercompany Inventory Profit........................................... 7,000

Cost of merchandise shipped t branch: P42,000/1.20= P35,000.

Entry Made Correct/Should be Entry

Branch Current…………… 42,000 Branch Current……….. 42,000

Sales…………………… 42,000 Shipments to Branch 35,000

Unrealized Int. Inv Pr. 7,000

B. Shipments to Branch...................................................................................... 625

Unrealized Intercompany Inventory Profit................................................... 125

Sales Returns...........................................................................................

750

Cost of merchandise returned by branch: P750/1.20= P625.

Entry Made Correct/Should be Entry

Sales Returns……………… 750 Shipments to Branch………. 625

Branch Current……… 750 Unrealized Int. Inv Profit…… 125

Branch Current…………. 750

Results of Branch Operations:

A. Branch Net Income/Loss from its own operations:

Branch Income Summary............................................................................... 2,600

Branch Current…................................................................................

2,600

B. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch

Inventory/ Unrealized Intercompany Inventory Profit:

Unrealized Intercompany Inventory Profit.................................................... 4,125

Branch Income Summary..................................................................

4,125
Billing Price

Cost

(Billing/1.20)

Unrealized Profit

(Billing Price Minus

Cost)

Inventory, December 1 P 0 P 0 P 0

Shipments during December 42,000 35,000 7,000

Less: Returns _____750 ____625 ____125

Available for Sale (before adjustment) P 41,250 P 34,375 P 6,875

Less: Inventory, Dec. 31 (after adjustment) 16,500 13,750 __2,750

Reduction in unrealized profit account- adjustment

to branch profit for overstated of cost of goods sold

(adjustment) P 24,750 P 20,625 *P 4,125

*or, P24,750 x 20/120 = P4,125;

Decrease in Unrealized Intercompany Inventory Profit:

Balance prior to adjustment, 12/31, P7,000 – P125................... P6,875

Balance required in account, 12/31,P16,500 – (P16,500/1.20).. 2,750

Decrease in Allowance................................................................. P4,125

Branch Income Summary (P4,125 – P2,600)....................................................1,525

Income Summary....................................................................................

1,525

Therefore, the Real/True/Adjusted Branch Net Income/Branch Net Income in so far as HO is

concerned, amounted to P1,525, computed as follows:

Branch net loss as reported/unadjusted……………………………………………………(P2,600)

Add: Overvaluation of branch inventory/Realized profit from branch sales……….. 4,125

Real/True/Adjusted Branch Net Income or Branch NI in so far as HO is concerned P1,525

Problem III
a. Unrealized Intercompany Inventory Profit has a credit balance of P9,450 before adjustment on

December 31, calculated as follows:

Billing Price

Cost

(Billing/1.35)

Unrealized Profit

(Billing Price Minus

Cost)

Inventory, December 1 P 16,200 P 12,000 P 4,200

Shipments during December __20,250 _ 15,000 __ 5,250

Available for Sale (before adjustment) P 36,450 P 35,625 P 9,450

Less: Inventory, Dec. 31 (after adjustment) __18,900 _14,000 __4,900

Reduction in unrealized profit account- adjustment

to branch profit for overstated of cost of goods sold

(adjustment) P 17,550 P 21,625 *P 4,550

* or, P17,550 x 35/135 = P4,550

b. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/

Unrealized Intercompany Inventory Profit (refer to “a” for computation):

Unrealized Intercompany Inventory Profit.................................................... 4,550

Branch Income Summary..................................................................

4,550

c.

Home Office Books Branch Books

Shipments to Branch 400 Home Office Current 540

Unrealized Int Inv. Pr 140 Shipments to Branch 540

Branch Current 540

Cost of merchandise returned: P540/1.35, or P400.

Problem IV
1. The branch office inventory as of December 1 considered of:

Shipments from Home Office (see below)............................................................. P 12,000**

Purchases from outsiders (balance of inventory).................................................. 3,000

Total inventory........................................................................................................... P 15,000

Goods acquired from home office and included in branch inventory at billed price are

calculated as follows:

Unrealized Profit

Billing Price

Cost

(Billing/1.20)

(Billing Price Minus

Cost)

Inventory, December 1 **P 12,000 *P 10,000 P 2,000

Shipments during December __9,600 _ 8,000 __ 1,600

Available for Sale (before adjustment) P 21,600 P 18,000 P 3,600

Less: Inventory, Dec. 31 (after adjustment) __8,400 __7,000 __1,400

Reduction in unrealized profit account- adjustment

to branch profit for overstated of cost of goods sold

(adjustment) P 13,200 P 11,000 ***P 2,200

*P2,000/20% = P10,000; ***P13,200 x 20/120 = P2,200

2. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/

Unrealized Intercompany Inventory Profit (refer to “a” for computation):

Unrealized Intercompany Inventory Profit......................................... 2,200

Branch Income Summary.......................................................... 2,200

Problems V

(1) Individual Statements

SPENCER CO.

Balance Sheet for Branch

December 31,20x4
Assets

Liabilities____________________

Cash..................................................... P 2,650 Accounts

payable................................... P 4,200

Accounts receivable........................ 12,850 Accrued expenses...................................

105

Merchandise inventory..................... 14,600 Home office...............................................

29,239

Store supplies...................................... 300

Prepaid expenses............................... 120

Furniture and fixtures.............. P 3,600

Less: Accumulated

depreciation.............. 576 3,024

________

Total assets....................................... P 33,544 Total

liabilities............................................ P 33,544

SPENCER CO.

Income Statement for Branch

For Month Ended December 31, 20x4

Sales........................................................................................................................................... P

20,000

Cost of goods sold:

Merchandise inventory, December 1................................................ P 14,400

Purchases.............................................................................................. 4,100

Shipments from home office............................................................... 10,200

Merchandise available for sale.......................................................... P 28,700

Less: Merchandise Inventory, December 31..................................... 14,600

Cost of goods sold.......................................................................................................


14,100

Gross profit................................................................................................................................. P

5,900

Operating expenses:

Advertising expense............................................................................. P 2,800

Salaries and commissions expense..................................................... 2,350

Store supplies expense......................................................................... 280

Miscellaneous selling expense............................................................ 1,050

Rent expense........................................................................................ 1,500

Depreciation expense – furniture and fixtures.................................. 36

Miscellaneous general expense......................................................... 905

Total operating expenses..........................................................................................

8,921

Net loss...................................................................................................................................... P

3,021

SPENCER CO.

Balance Sheet for Home Office

December 31, 20x4

Assets Liabilities and Stockholder’s

Equity_______

Cash..................................................... P10,350 Liabilities

Cash in transit..................................... 1,500 Accounts payable................ P 35,400

Accounts receivable........................ 26,200 Accrued expenses............... 260

P 35,660

Merchandise inventory..................... 24,200 Stockholders’ Equity

Store supplies...................................... 380 Capital Stock......................... P 65,000

Prepaid expenses............................... 350 Less deficit..............................

4,476 60,524

Furniture and fixtures.............. P 8,500


Less: Accumulated

depreciation.............. 2, 585 5,915

Branch..................................... P29,239

Less: Unrealized intercompany

inventory profit............ 1,950 27,289 Total liabilities and

________

Total assets........................................ P 96,184 stockholder’s equity...............................

P 96,184

SPENCER CO.

Income Statement for Home Office

For Month Ended December 31, 20x4

Sales........................................................................................................................................... P

44,850

Cost of goods sold:

Merchandise inventory, December 1................................................ P 31,500

Purchases.............................................................................................. 27,600

Merchandise available for sale.......................................................... P 59,100

Less: Shipments to branch................................................................... 8,500

Merchandise available for own sales................................................ P 50,600

Less: Merchandise Inventory, December 31..................................... 24,200

Cost of goods sold..........................................................................................

26,400

Gross profit................................................................................................................................. P

18,450

Operating expenses:

Advertising expense............................................................................. P 2,850

Salaries and commissions expense..................................................... 4,250

Store supplies expense......................................................................... 560


Miscellaneous selling expense............................................................ 1,850

Rent expense........................................................................................ 2,700

Depreciation expense – furniture and fixtures.................................. 85

Miscellaneous general expense......................................................... 2,510

Total operating expenses............................................................................. 14,805

Net income from own operations......................................................................................... P

3,645

Less: Branch net loss................................................................................................................

1,271

Total income............................................................................................................................ P

2,374

2. Refer to Word Document Worksheet

3, Combined Statements

SPENCER CO.

Combined Balance Sheet for Home Office and Branch

December 31, 20x4

Assets Liabilities and Stockholders’ Equity

Cash ………………………………. P 14,500 Liabilities

Accounts Receivable ………… 39,050 Accounts Payable ……….. P39,600

Merchandise Inv ………………. 36,850 Accrued Expenses ………. 365 P

39,965

Store Supplies ………………….. 680 Stockholders’ Equity

Prepaid Expenses …………….. 470 Capital Stock ……………… P65,000

Furniture & Fixtures ……… P12,100 Less deficit …………………. 4,476

60,524

Less accumulated

Depreciation …... 3,161 8,939

Total assets ……………………… P100,489 Total liabilities and SHEquity P100,489

SPENCER CO.
Combined Income Statement for Home Office and Branch

For Month Ended December 31, 20x4

Sales ………………………………………………………………………………………………………… P64,850

Cost of goods sold:

Merchandise Inventory, December 1 …………………………………… P43,900

Purchases ……………………………………………………………………… 31,700

Merchandise available for sale …………………………………………… P75,600

Less merchandise inventory, December 31 ……………………………. 36,850

Cost of goods sold ………………………………………………………….. 38,750

Gross profit ……………………………………………………………………………… P26,100

Operating Expenses:

Advertising Expense ………………………………………………………… P 5,650

Salaries and Commissions expense ……………………………………… 6,600

Store supplies expense …………………………………………………….. 840

Miscellaneous selling expense …………………………………………… 2,900

Rent expense ………………………………………………………………… 4,200

Depreciation Expense – F&F ………………………………………………. 121

Miscellaneous general expense …………………………………………. 3,415

Total operating expense ………………………………………………………………………. 23,726

Net Income ………………………………………………………………………………………………… P 2,374

4. Adjusting and Closing Entries

(a) Branch Books

Dec 31 Income Summary …………………………………………….. 14,400

Merchandise Inventory …………………………….. 14,400

31 Merchandise Inventory ……………………………………… 14,600

Income Summary ……………………………………. 14,600

31 Store Supplies Expense ………………………………………. 280

Store Supplies ………………………………………… 280

Store supplies used: P580 – P300, or P280


Dec. 31 Prepaid Expenses ………………………………………………… 120

Miscellaneous General Expense ……………………. 120

31 Miscellaneous General Expense ……………………………… 105

Accrued Expenses …………………………………….. 105

31 Depreciation Expense – F&F ………………………………….. 36

Accumulated Depreciation ………………………… 36

Depreciation: 1% of P3,600

31 Miscellaneous General Expense …………………………….. 220

Home Office Current………………………………… 220

31 Sales ……………………………………………………………… 20,000

Income Summary ……………………………………. 20,000

31 Income Summary ……………………………………………… 22,221

Purchases ……………………………………………… 4,100

Shipments from Home Office ……………………… 10,200

Advertising Expense …………………………………. 2,800

Salaries and Commissions Expense ………………. 2,350

Store Supplies Expense ………………………………

Miscellaneous General Expense …………………. 905

31 Home Office Current………….………………………………. 3,021

Income Summary …………………………………….. 3,021

(b) Home Office Books

Dec 31 Income Summary ………………………………………………. 31,500

Merchandise Inventory ………………………………. 31,500

31 Merchandise Inventory ………………………………………... 24,200

Income Summary ……………………………………… 24,200

31 Store Supplies Expense …………………………………………. 560

Store Supplies …………………………………………… 560

Store supplies used: P940 – P380, or : 560

31 Prepaid Expense ………………………………………………… 350


Miscellaneous General Expense …………………… 350

31 Miscellaneous General Expense …………………………….. 260

Accrued Expenses ……………………………………. 260

31 Depreciation Expense ………………………………………….. 85

Accumulated Depreciation – F&F …………………. 85

Depreciation: 1% of P8,500, or P85

31 Cash in Transit …………………………………………………. 1,500

Branch Current………………………………………… 1,500

31 Sales …………………………………………………………… 44,850

Shipments to branch ………………………....................... 8,500

Income Summary …………………………………. 53,350

Dec 31 Income Summary ……………………………………………… 42,405

Purchases ……………………………………………… 27,600

Advertising Expense …………………………………. 2,850

Salaries and Commissions Expense ………………. 4,250

Store Supplies Expense ……………………………… 560

Miscellaneous Selling Expense …………………….. 1,850

Rent Expense …………………………………………. 2,700

Depreciation Expense – F&F ………………………. 85

Miscellaneous General Expense …………………. 2,510

31 Branch Income Summary…………………………………….. 3,021

Branch Current…………………………………………

3,021

31 Unrealized Intercompany Inventory Profit ………………. 1,750

Branch Income Summary………………………… 1,750

Calculation of unrealized profit adjustment:

Balance of unrealized profit account,

December 31 ……………………….. P3,700

Inventory merchandise received from


Home office at billed price on

December 31, P11,700

Inventory at cost: P11,700/ 1.20, or P9,750

Balance of unrealized profit account on

December 31, P11,700 – P9,750 .... 1,950

Required decreased in unrealized profit

Adjustment to branch income for

Overstatement of cost of goods

Sold …………………………………….. P1,750

31 Income Summary …………………………………………… 1,271

Branch Income Summary……………………. 1,271

31 Income Summary …………………………………………… 2,374

Retained Earnings …………………………………. 2,374

Problem VI

1.

Branch

Current

H. Office

Current

Unadjusted balance, 12/31/20x4 P 44,000

P 9,000

Add (Deduct): Adjustments

1 Cash in transit ( 10,000)

2. Merchandise in transit 10,000

3. Branch expenses paid by home office 12,000

4. Cash in transit from home office _______ 3,000

Adjusted balance, 12/31/20x4 P 34,000 P34,000

2. Refer to PDF Copy of the Worsheet

3. Combined Income Statement


Sales [(P350,000 – P105,000) + P150,000)……….......................................................

P395,000

Less: Cost of goods sold [(P220,000 – P84,000) +

(P93,000 + P3,600 – P21,000 – P1,200)]…………………………………….

210,400

Gross profit................................................................................................................... P184,600

Operating expenses (P70,000 + P41,000 + P12,000)................................................ 123,000

Net income................................................................................................................... P 61,600

Problem VII

(1)

PAXTON CO.

Income Statement for Dayton Branch

For Year Ended December 31, 20x5

Sales.............................................................................................................................. P315,000

Cost of goods sold:

Merchandise inventory, January 1, 20x5................................... P 44,500

Shipments from home office...................................................... 252,000

Merchandise available for sale................................................. P296,500

Less: Merchandise Inventory, December 31, 20x5.................. 58,500 238,000

Gross profit................................................................................................................. P 77,000

Operating expenses................................................................................................. 101,500

Net loss....................................................................................................................... P 24,500

PAXTON CO.

Income Statement for Cincinnati Home Office

For Year Ended December 31, 20x5

Sales.............................................................................................................................. P1,060,000

Cost of goods sold:

Merchandise inventory, January 1, 20x5................................... P115,000

Shipments from home office...................................................... 820,000


Merchandise available for sale................................................. P935,000

Less: Shipments to branch.......................................................... 210,000

Merchandise available for own sales....................................... P725,000

Less: Merchandise Inventory, December 31, 20x5.................. 142,500

582,500

Gross profit.................................................................................................................. P477,500

Expenses...................................................................................................................... 382,000

Net income from own operations............................................................................ P 95,500

Add branch net income........................................................................................... 16,650

Total income............................................................................................................... P112,150

(2)

PAXTON CO.

Combined Income Statement for Home Office and Branch

For Year Ended December 31, 20x5

Sales.............................................................................................................................. P1,375,000

Cost of goods sold:

Merchandise inventory, January 1, 20x5...................................P 150,600

Purchases...................................................................................... 820,000

Merchandise available for sale................................................. P970,600

Less: Merchandise Inventory, December 31, 20x5.................. 191,250

779,350

Gross profit.................................................................................................................... P595,650

Operating expenses.................................................................................................... 483,500

Net income................................................................................................................... P112,150

(3) Merchandise Inventory, December 31................................................................ 58,500

Sales.......................................................................................................................... 315,000

Income Summary............................................................................................

373,500

Income Summary......................................................................................................... 398,000


Merchandise Inventory, January 1................................................................

44,500

Shipments from Home Office.........................................................................

252,000

Operating expenses........................................................................................

101,500

Home Office............................................................................................................... 24,500

Income Summary..........................................................................................

24,500

(4) Branch Income Summary........................................................................................ 24,500

Branch Current.....................................................................................................

24,500

Unrealized Intercompany Inventory Profit............................................................... 41,150

Branch Income Summary....................................................................................

41,150

Calculation of unrealized profit adjustment:

Branch inventory, January 1, acquired from home office

at billed price...................................................................................... P 44,500

Less: Cost of inventory (P44,500/1.25)......................................................... 35,600

Unrealized Intercompany Inventory Profit Jan. 1....................................... P 8,900

Add: Increase in unrealized profit for shipments

made during year, billed price of goods,

P252,000, cost of goods, P210,000.................................................... 42,000

P 50,900

Deduct balance to remain in unrealized profit account:

Branch inventory, December 31,

acquired from home office....................................... P 58,500

Less: Cost of inventory to home office,

P58,500/1.20................................................................ 48,750 9,750


Reduction in unrealized profit account- adjustment to

branch income for overstatement of cost of

goods sold.................................................................. 41,150

Branch Income Summary........................................................................................... 16,650

Income Summary............................................................................................

16,650

Merchandise Inventory, December 31...................................................................... 142,500

Sales............................................................................................................................... 1,060,000

Shipments to Branch.................................................................................................... 210,000

Income Summary.............................................................................................

1,412,500

Income Summary......................................................................................................... 1,317,000

Merchandise Inventory, January 1................................................................

115,000

Purchases.........................................................................................................

820,000

Expenses...........................................................................................................

382,000

Income Summary.......................................................................................................... 112,150

Retained Earnings............................................................................................

112,150

Problem VIII

(1)

RUGGLES CO.

Income Statement for Branch

For Year Ended December 31, 20x4

Sales................................................................................................................................ P 78,500

Cost of goods sold:

Merchandise inventory, January 1, 20x4......................................... P 32,000


Shipments from home office........................................... P 40,000

Purchases from outsiders................................................. 20,000 60,000

Merchandise available for sale....................................................... P 92,000

Less: Merchandise Inventory, December 31, 20x4........................ 31,500

Cost of goods sold............................................................................. 60,500

Gross profit.................................................................................................................... P 18,000

Operating expenses.................................................................................................... 12,500

Net income................................................................................................................... P 5,500

RUGGLES CO.

Income Statement for Home Office

For Year Ended December 31, 20x4

Sales.............................................................................................................................. P 256,000

Cost of goods sold:

Merchandise inventory, January 1, 20x4................................... P 80,000

Purchases...................................................................................... 210,000

Merchandise available for sale................................................. P 290,000

Less: Shipments to branch.......................................................... 30,000

Merchandise available for own sales....................................... P 260,000

Less: Merchandise Inventory, December 31, 20x4.................. 55,000

Cost of goods sold............................................................................. 205,000

Gross profit................................................................................................................... P 51,000

Operating Expenses.................................................................................................... 60,000

Net loss from own operations..................................................................................... P ( 9,000)

Add: Adjusted branch net income............................................................................. 13,500

Combine net income.................................................................................................... P 4,500

(2)

RUGGLES CO.

Combined Income Statement for Home Office and Branch

For Year Ended December 31, 20x4


Sales.............................................................................................................................. P 334,500

Cost of goods sold:

Merchandise inventory, January 1, 20x4................................... P 107,500

Purchases...................................................................................... 230,000

Merchandise available for sale.................................................. P 337,500

Less: Merchandise Inventory, December 31, 20x4................... 80,000

Cost of goods sold............................................................................. 257,500

Gross profit.................................................................................................................... P 77,000

Operating expenses.................................................................................................... 72,500

Net income................................................................................................................... P 4,500

(3) Merchandise Inventory......................................................................................... 31,500

Sales.......................................................................................................................... 78,500

Income Summary............................................................................................

110,000

Income Summary......................................................................................................... 104,500

Merchandise Inventory...................................................................................

32,000

Shipments from Home Office.........................................................................

40,000

Purchases.........................................................................................................

20,000

Expenses...........................................................................................................

12,500

Income Summary......................................................................................................... 5,500

Home Office.....................................................................................................

5,500

(4) Branch...................................................................................................................... 5,500

Branch Income................................................................................................

5,500
Unrealized Intercompany Inventory Profit............................................................... 8,000

Branch Income.............................................................................................. 8,000

Calculation of unrealized profit adjustment:

Branch inventory, January 1, acquired from home office

at billed price.................................................................................... P 24,500

Less: Cost of inventory (P24,500/1.225).................................................... 20,000

Unrealized Intercompany Inventory Profit Jan. 1................................... P 4,500

Add: Increase in unrealized profit for shipments

made during year, billed price of goods,

P40,000, cost of goods, P30,000.................................................... 10,000

P 14,500

Deduct balance to remain in unrealized profit account:

Branch inventory, December 31,

acquired from home office....................................... P 26,000

Less: Cost of inventory to home office,

P26,000/1.1/3................................................................ 19,500 6,500

Reduction in unrealized profit account- adjustment to branch

income for overstatement of cost of goods sold........................... 8,000

Branch Income............................................................................................................. 13,500

Income Summary............................................................................................

13,500

Merchandise Inventory................................................................................................ 55,000

Sales............................................................................................................................... 256,000

Shipments to Branch.................................................................................................... 30,000

Income Summary.............................................................................................

341,000

Income Summary......................................................................................................... 350,000

Merchandise Inventory...................................................................................

80,000
Purchases.........................................................................................................

210,000

Expenses...........................................................................................................

60,000

Income Summary.......................................................................................................... 4,500

Retained Earnings............................................................................................

4,500

Problem IX

1.

Branch

Current

H. Office

Current

Unadjusted balance, 12/31/20x4 P 60,000

P 51,500

Add (Deduct): Adjustments

1 Remittance I 1,700)

2. Cash in transit 1,800

3. Shipments in transit 5,800

Adjusted balance, 12/31/20x4 P 57,300 P 57,300

2. Income Statement - Branch

Sales................................................................................................................................ P

140,000

Cost of goods sold:

Merchandise inventory, January 1, 20x4 (P11,550 – P1,000)....... P 10,550

Shipments from home office (P105,000 + P5,000 – P10,000)........ 100,000

Freight-in (P5,500 + P250)…………………………………………….. 5,750

Merchandise available for sale.....................................................P116,300

Less: Merchandise Inventory, December 31, 20x4...................... 14,770


Cost of goods sold.............................................................................

101,530

Gross profit.................................................................................................................... P

38,470

Operating expenses....................................................................................................

24,300

Net income................................................................................................................... P

14,170

Income Statement – Home Office

Sales.............................................................................................................................. P

155,000

Cost of goods sold:

Merchandise inventory, January 1, 20x4................................... P 23,000

Purchases...................................................................................... 190,000

Merchandise available for sale................................................. P 213,000

Less: Shipments to branch.......................................................... 100,000

Merchandise available for own sales....................................... P 113,000

Less: Merchandise Inventory, December 31, 20x4.................. 30,000

Cost of goods sold........................................................................

83,000

Gross profit................................................................................................................... P

72,000

Operating Expenses....................................................................................................

42,000

Net loss from own operations..................................................................................... P

30,000

Add branch net income............................................................................................ 14,170

Combined net income.............................................................................................. P

44,170
3.

Combined Income Statement for Home Office and Branch

For Year Ended December 31, 20x4

Sales.............................................................................................................................. P

295,000

Cost of goods sold:

Merchandise inventory, January 1, 20x4................................... P 33,550

Purchases...................................................................................... 190,000

Freight-in……………………………………………………………… 5,750

Merchandise available for sale.................................................. P 229,300

Less: Merchandise Inventory, December 31, 20x4................... 44,770

Cost of goods sold........................................................................ 184,530

Gross profit.................................................................................................................... P

110,470

Operating expenses.................................................................................................... 66,300

Net income................................................................................................................... P

44,170

Problem X

a. The cost of the merchandise destroyed was P30,000.

Total merchandise acquired from home ofiice, at billed price:

Inventory, January 1...................................................................................... P26,400

Shipments from home office, Jan. 1-17....................................................... 20,000

P46,400

Cost of goods sold, January 1-17, at billed price:

Net sales, P13,000/1.25...................................................................................... 10,400

Merchandise on hand, January 17, at billed price....................................... P36,000

Merchandise on hand, January 17, at cost, P36,000/1.20............................ P30,000

b. Branch Books:

Loss from Fire (or Home Office)............................................................ 36,000


Merchandise Inventory............................................................ 36,000

Home Office Books:

No entry needs to be made on the books of the home office until the end of the fiscal period,

when the branch earnings (including the loss from fire) are recognized and when the balance of

the account Unrealized Intercompany Inventory Profit is adjusted to conform to the branch

ending inventory. If it is desired to recognize the loss from fire on the home office books

immediately, the following entry may be made:

Branch Loss from Fire (or Retained Earnings)...................................... 30,000

Unrealized Intercompany Inventory Profit........................................... 6,000

Branch......................................................................................... 36,000

Problem XI

a. Books of Branch A:

Home Office........................................................................................ 1,500

Cash......................................................................................... 1,500

b. Books of branch B:

Cash...................................................................................................... 1,500

Home Office............................................................................ 1,500

c. Books of Home Office:

Branch B............................................................................................... 1,500

Branch A.................................................................................. 1,500

Problem XII

a. Books of Branch No. 1 :

Home Office ……………………………………………………………. 1,950

Shipments from Home Office…………………………………….. 1,600

Freight In……………………………………………………………… 350

b. Books of branch No. 5:

Shipments from Home Office………………………………………… 1,600

Freight In…………………………………………………………………… 400

Home Office…………………………………………………………. 1,750


Cash…………………………………………………………………… 250

c. Books of the Home Office

Branch No. 5…………………………………………………………….. 1,750

Excess Freight on Inter branch Transfer of Merchandise……….. 200

Branch No. 1………………………………………………………… 1,950

Shipments to Branch No. 1…………………………………………….. 1,600

Shipments to Branch No. 5………………………………………… 1,600

Multiple Choice Problems

1. c - P50,400, billed price x 40/140 = P 14,400

2. b

Ending inventory in the combined income statement:

From Home Office: (P50,000-P6,600) x 100/140 P 31,000

From Outsiders 6,600

P 37,600

3. a

True Branch Net Income

Branch Net Income P 5,000

Add (deduct):

Overvaluation of cost of goods sold/realized profit

from sales made by branch:

Shipments from home office. P 280,000

Less: Ending inventory, at billed

price (P50,000 – P6,600) 43,400

Cost of goods sold from home

office at billed price P 236,600

Multiplied by: Mark-up 40/140 67,600

Unrecorded branch expenses ( 2,500)

True Branch Net Income P 70,100

4. a – P30,000 x (90,000 – 60,000)/90,000


5. a

6. d – (P50,000 – P40,000)/P40,000 = 25% markup on cost

7. c – (P480,000 – P360,000) x (P80,000/P480,000) = P20,000

8. c – P700,000, since the problem stated that the “home office adjusted the intracompany Profit

Deferred account” and the amount of P700,000 is the amount of net income in the adjusted

financial statements of the home office, and therefore it is understood to be combined net

income.

9. b

Reported (unadjusted) branch net income (per branch books) ………………..P 30,000

Branch Income in so far as home office is concerned per home office books. 50,000

Overvaluation of branch cost of goods sold…………………………………………P 20,000

Cost of sales of Home Office…………………………………………………………….P500,000

Cost of sales of Branch…………………………………………………………………… 100,000

Overvaluation of branch cost of sales…………………………………………………( 20,000)

Combined cost of sales…………………………………………………………………...P580,000

10. c – the amount of net income as reported by Home office is considered the combined net

income.

11. a

True Branch Net Income P156,000

Less: branch Net Income as reported by the branch 60,000

Overvaluation of CGS P 96,000

Less: Cost of goods sold from home office at BP

Inventory, December 1 P 70,000

Shipment from HO 350,000

COGAS P 420,000

Less: Inventory, December 31 84,000 336,000

CGS from home office, at cost P 240,000

Billing Price: P336,000 / P240,000 = 140%.

12. b – Allowance for overvaluation after adjustment / for December 31 inventory: P84,000 x
40/140 = P24,000.

13. b

Net Income as reported by the Branch P 20,000

Less: Rental expense charged by the home office

(P1,000 x 6 months) 6,000

Adjusted NI as reported by the Branch P 14,000

Add: Overvaluation of CGS

Billed Price

MI, beginning 0

SFHO 550,000

COGAS 550,000

Less: MI, ending 75,000

CGS, at BP 475,000

X: Mark-up ratio 25/125 95,000

True/Adjusted/Real Branch Net Income P109,000

14. d

Sales (P537,500 + P300,000)……………………………………………….………. P 837,500

Less: Cost of goods sold

Merchandise inventory, beg. [P50,000 + (P45,000 / 1.20)]P 87,500

Add: Purchases…………………………………………………. 500,000

Cost of Goods Available for Sale…………………………... P 587,500

Less: MI, ending [P70,000 + (P60,000 / 1.20)]………………. 120,000 467,500

Gross profit………………………………………………………………. P 370,000

Less: Expenses (P120,000 + P50,000..………………………………. 170,000

Net Income……………………………………………………………… P 200,000

15. d

Overvaluation of Cost of Goods Sold:

Unrealized Profit in branch inventory/ before adjustment……………….P 7,200

Less: Allowance of ending branch inventory (P20,000 x 84% =


P16,800 x 20/120…………………………………………………………. 2,800

Overvaluation of Cost of Goods Sold……………………………………. ….P 4,400

Adjusted branch net income:

Sales………………………………………………………………………………………P60,000

Less: Cost of goods sold:

Inventory, January 1, 2003……………………………….P 30,000

Add: Purchases…………………………………………..... 11,000

Shipments from home office…………………….. 19,200

Cost of Goods available for sale……………………… P 60,200

Less: Inventory, December 31, 2003…………………. 20,000 40,200

Gross profit…………………………………………………………………………….. P19,200

Less: Expenses………………………………………………………………………….. 12,000

Unadjusted branch net income…………………………………………………...P 7,800

Add: Overvaluation of Cost of Goods Sold……………………………………. 4,400

Adjusted branch net income……………………………………………………...P 12,000

16. d

Billed Price Cost Allowance

Merchandise Inventory, 12/31/2005 *P 36,000 P 30,000 P 6,000

Shipments 28,800 24,000 4,800

Cost of goods sold P10,800

From Home at billed price: *P6,000 / 20% = P30,000 + P6,000 = P36,000.

From outsiders: P45,000 – P36,000 = P9,000

17. d

Billed Price Cost Allowance

Merch. Inventory, 12/31/20x4 *P12,000 P10,000 P 2,000

Shipments 9,600 8,000 1,600

Cost of Goods Sold P 3,600

*P2,000 / 20% = P10,000 + P2,000 = P12,000.

Merchandise inventory, December 1, 20x4…………………………………P 15,000


Less: Shipments from home office at billed price*………………………… 12,000

Merchandise from outsiders……………………………………………………P 3,000

18. d

Combined Cost of Goods Sold:

Merchandise Inventory, 1/1/2003:

Home Office, cost……………………………………………… P 3,500

Branch: Outsiders, ……………………………...........................P 300

From Home Office (P2,500 – P300)/110%................. 2,000 2,300 P 5,800

Add Purchases (P240,000 + P11,000)…………………………….. 251,000

COGAS………………………………………………………………… P256,800

Less: Merchandise Inventory, 12/31/2003

Home Office, cost………………………………………………. P 3,000

Branch: Outsiders………………………………………………. P 150

From Home Office (P1,800 – P150)/110%................ 1,500 1,650 4,650

Cost of Goods Sold………………………………………………… P252,150

19. d

100% 60% 40%

Billed Price Cost Allowance

Merchandise inventory, 1/1/x4 32,000

Shipments *60,000 36,000 *24,000

Cost of goods available for sale 56,000

Less: MI, 3/31/x4 (25,000 x 40%) 10,000

Overvaluation of CGS** 46,000

*36,000 cost / 60% = 60,000 x 40% = 24,000. (Note: Markup is based on billed price)

**Realized Profit from Branch Sales

20. d

Billed

Price

Cost Allowance
Merchandise inventory, 8/1/x4 60,000

Shipments (400,000 x 25%) 400,000 *100,,000

Cost of goods available for sale 160,000

Less: MI, 8/31/x4 (160,000 x 25%) 160,000 40,000

Overvaluation of CGS/RPBSales 120,000

21. b

(1) Sales P 40,000

Less: Cost of goods sold:

Inventory, 1/1/2003 (P4,950 / 110%) P 4,500

Add: Shipments (P22,000 / 110%) 20,000

COGAS P 24,500

Less: Inventory, 12/31/2003 (P6,050 / 110%) 5,500 19,000

Gross profit P 21,000

Less: Expenses _ 13,100

Net income from own operations P 7,900

(2) Combined Cost of Goods Sold:

Merchandise Inventory, 1/1/2003:

of Home Office, cost……………………………………………..P 17,000

of Branch, cost: P4,950 / 110%…………………………………. 4,500 P 21,500

Add Purchases…………………………………………………………. 50,000

COGAS………………………………………………………………….. P 71,500

Less: Merchandise Inventory, 12/31/2003

of Home Office, cost……………………………………………… P 14,000

of Branch, cost: P6,050 /100%………………………………….. 5,500 19,500

Cost of Goods Sold……………………………………………………. P 52,000

22. a - P48,000 / 120% = P40,000

23. a – P48,000 x 20/120 = P8,000 (note: adjusted allowance refers to the allowance related to the

ending inventory, so, the allowance related to the CGS, which is P10,00 in this case is

considered to be the adjustments in the books of Home Office to determine the adjusted
branch net income)

120% 100% 20%

Billed Price Cost Allowance

Merchandise inventory, 1/1/x4 0

Shipments 108,000

Cost of goods available for sale 108,000

Less: MI, 12/31/x4 (P60,000 x 80%) 48,000

Overvaluation of CGS (60,000 x 20/120) 60,000 10,000*

24. b

Sales (P148,000 + P44,000) P192,000

Less: Cost of Sales

Inventory, 1/1/20x4 P 0

Purchases 52,000

Shipments from home office 108,000

Cost of goods available for sale P 160,000

Less: Inventory, 12/31/20x4 60,000 100,000

Gross profit P 92,000

Less: Expenses (P76,000 + P24,000) 100,000

Net income, unadjusted P( 8,000)

Add: Overvaluation of CGS 10,000

Adjusted branch net income P 2,000

25. c

125% 100% 25%

Billed Price Cost Allowance

Merchandise inventory, 1/1/x4 40,000

Shipments 250,000

Cost of goods available for sale 290,000

Less: MI, 12/31/x4 (P60,000 x 80%) 60,000

Overvaluation of CGS(230,000x 25/125) 230,000 46,000*


26. b – P326,000

Sales (P600,000 + P300,000) ………………………………………………….. P 900,000

Less: Cost of goods sold

Merchandise inventory, beg.

[P100,000 + (P40,000/1.25)] ………………………. … P 132,000

Add: Purchases…………………………………… 350,000

Cost of goods available for sale………………… P 482,000

Less: MI, ending

[P30,000 + (P60,000/1.25)] ………………………… 78,000 404,000

Gross profit……………………………………………………… P 496,000

Less: Expenses (P120,000 + P50,000)………………………. _ 170,000

Net Income …………………………………………………. P 326,000

27. b

Sales (P537,500 + P300,000) ………………………………………………… P 837,500

Less: Cost of goods sold

Merchandise inventory, beg.

[P50,000 + (P60,000/1.20)]…………………………….. P 87,500

Add: Purchases ……………………………………. 500,000

Cost of goods available for sale………………… P587,500

Less: MI, ending

[P70,000 + (P60,000/1.20)] …………………………. 120,000 467,500

Gross profit…………………………………………………….. P 370,000

Less: Expenses (P120,000 + P50,000)………………………. _ 170,000

Net Income …………………………………………………… P 200,000

28. c

Sales (P120,000 + P60,000)……………………………………… P 180,000

Less: Cost of goods sold:

Merchandise inventory, beg. [P40,000 + P6,000 +

(P24,000 / 1.2)]……………………………… P 66,000


Add: Purchases (P70,000 + P11,000)………………… 81,000

Cost of Goods Available for Sale……………………P 147,000

Less: MI, ending [P40,000 + P3,200 + (P16,800 / 1.20)] 57,200 89,800

Gross profit……………………………………………………… P 90,200

Less: Expenses (P28,000 + P12,000)………………………… 40,000

Net Income……………………………………………………. P 50,200

29. d

Sales (P100,000 – P33,000 + P50,000)…………………………………… P 117,000

Less: Cost of goods sold:

Inventory, beg. [P15,000 + (P5,500/110%) or (P5,500 – P500)] P20,000

Add: Purchases (P50,000 + P7,000)……………………………… 57,000

COGAS……………………………………………………………….. P77,000

Less: Inventory, end [P11,000 + P1,050 +

(P6,000- P1,050)/110%]……………………………………… 16,550 60,450

Gross profit…………………………………………………………………… P 56,550

Less: Expenses (P20,000 + P6,000 + P5,000)……………………………… 31,000

Combined Net income……………………………………………………. P 25,550

30. c

Sales ……………………………………………………………………... P155,000

Less: Cost of Sales

Inventory, 1/1/10…………………………………………….. P 23,000

Purchases …………………………………………………….. 190,000

Cost of goods available for sale ……………………….. P213,000

Less: Shipment/Sales to Branch,

at cost (P110,000/110%)………………………………………… 100,000

Cost of goods available for HO

Sale………………………………………………….. P113,000

Less: Inventory, 12/31/10 ………………………………..... 30,000 83,000

Gross profit ………………………………………………………………... P 72,000


Less: Expenses ……………………………………………………………. 52,000

Net income – home office ……………………………………………. P 20,000

31. a

Sales …………………………………………………………………….... P140,000

Less: Cost of Sales

Inventory, 1/1/x4……………………………………………… P 11,550

Purchases ……………………………………………………. 105,000

Freight-in ……………………………………………………… 5,500

Shipment in transit (P5,000+P250) ………………………. 5,250

Cost of goods available for sale …………………………. P127,300

Less: Inventory, 12/31/x4

(P10,400 + P520 + P5,250) ………………………………………. 16,170 111,130

Gross profit. ……………………………………………………………. P 28,870

Less: Expenses ………………………………………………………… 28,000

Net income per branch books/unadjusted ……………………… P 870

Add: Overvaluation of CGS* ……………………………………….. 9,600

Net Income of Davao Branch, adjusted …………………………. P 10,470

BP Cost Allowance

MI. 1/1/20x4 1,000

Shipments 110,000 100,000 **10,000

Available for sale 11,000

-: MI, 12/31/x4 ***15,400 ****1,400

CGS 9,600

**110,000 x 10/110

***10,400 + 5,000, in transit

****15,400 x 10/110

32. a

Inventory, 1/1 at billed price…………………………………….. P165,000

Add: Shipments at billed price………………………………….. 110,000


Cost of goods available for sale at billed price ……………… P275,000

Less: CGS at BP:

Sales……………………………………………………………… P169,000

Less: Sales returns and allowances ………………….. 3,750

Sales price of merchandise

acquired from outsiders

(P7,500 / 120%)…………………………… 9,000

Net Sales of merchandise acquired from

home office ……………………………………….. P156,250

x: Intercompany cost ratio ………………………………... 100/125 125,000

Inventory, 8/1/2008 at billed price……………………………… P150,000

x: Cost ratio …………………………………………………………….. 100/125

Merchandise inventory at cost destroyed by fire ………………… P120,000

33. d

Freight actually paid by:

Home Office……………………………………………………………………P 500

Branch P………………………………………………………………………… 700

Total………………………………………………………………………………P 1,200

Less: Freight that should be recorded…………………………………………….. 800

Excess freight……………………………………………………………………………P 400

34. d – in arriving at the cost of merchandise inventory at the end of the period, freight charges

are properly recognized as a part of the cost. But a branch should not be charged with

excessive freight charges when, because of indirect routing, excessive costs are incurred.

Under such circumstances, the branch acquiring the goods should be charged for no more

than the normal freight from the usual shipping point. The office directing the inter-branch

transfers are responsible for the excessive cost should absorb the excess as an expense

because it represents management mistakes (or inefficiencies.)

35. c

Inventory of the Branch:


Shipments from home office at billed price.........................................P 37,700

X: Ending inventory %................................................................................ 60%

Ending inventory at billed price……………………………………...……P 22,620

Add: Freight (P1,300 x 60%)………………………………………………...... 780

P 23,400

Or, P39,000 x 60% = P23,400

36. b

Inventory in the published balance sheet, at cost

Shipments at cost…………………………………..........................................P 32,500

X: Ending inventory %.................................................................................... 60%

Ending inventory at billed price……………………………………………….P19,500

Add: Freight (P1,300 x 60%)………………………………………….......…….. 780

P 20,280

37. c

Home Office Books Davao Branch Baguio Branch

Davao Branch…39,000

STB, cost……. 32,500

Unrealized profit 5,200

Cash (freight)…. 1,300

SFHO…………….37,700

Freight-in………. 1,300

HOC………….. 39,000

BC – Baguio……19,630

Excess freight… 520

BC-Davao……. 20,150

HOC……………….20,150

SFHO(50%)… 18,850

Freight-in (50%) 650

Cash…………...... 650
SFHO………18,850

Freight-in.. 780

HOC……... 19,630

38. c – (P300,000 x ¼ = P75,000, ending inventory x (P300,000 – P250,000)/P300,000 = P12,500

39. d

40. d

41. b – refer to No. 21

42. b – refer to No. 21

43. c – refer to No. 21

44. c

45. d

Theories

1. True 6. False 11. False 16. True 21. D

2. False 7. False 12. True 17. True 22. A

3. True 8. False 13. False 18. True 23. d

4. True 9. True 14. True 19. False 24. d

5. False 10. True 15. False 20. d 25. a

26. c

Chapter 14

Problem I

1.(in millions)

Acquisition of assets and liabilities:

Cash 90

Receivables 190

Inventories 7,000

Plant & equipment 40,000

Trademarks 4,000

Brand names 5,000

Secret formulas 7,000


Goodwill 6,120

Current liabilities 400

Long-term liabilities 47,000

Cash 18,000

Common stock, P2 par 1

APIC 500

Cash 500

2.(in millions)

Cash 90

Receivables 190

Inventories 7,000

Plant & equipment 40,000

Trademarks 4,000

Brand names 5,000

Secret formulas 7,000

Noncompetition agreements 10,000

Current liabilities 400

Long-term liabilities 47,000

Cash 18,000

Common stock, P2 par 100

APIC (P4,000 – P100) 3,900

Gain on acquisition 3,880

Consideration transferred:

Cash 18,000,000

Common stock 4,000,000

Consideration transferred 22,000,000

Less: MV of Assets and Liabilities

Acquired:

Cash 90,000
Receivables 190,000

Inventories 7,000,000

Plant & equipment, net 40,000,000

Trademarks 4,000,000

Brand names 5,000,000

Secret formulas 7,000,000

Noncompetition agreement 10,000,000

Current liabilities ( 400,000)

Long-term liabilities (47,000,000) 25,880,000

Negative excess: Gain on Acquisition ( 3,880,000)

Acquisition expenses

Acquisition/merger expenses 1,100

Cash 1,100

Costs to Issue and Register Stocks

APIC/Share Issue Costs 500

Cash 500

3.

Post-Combination Balance Sheet: (requirement 1)

Assets Liabilities and Stockholders’ Equity

Cash P 5,490,000 Current liabilities P 900,000

Receivables 2,190,000 Long-term liabilities 117,000,000

Inventories 27,000,000

Plant and equipment 139,500,000

Trademarks 9,000,000 Common stock 2,100,000

Brand names 5,000,000 Paid-in capital – par 58,400,000

Secret formulas 7,000,000 Retained earnings* 23,900,000

Goodwill __6,120,,000 Treasury stock ( 1,000,000)

Total P201,300,000 Total P 201,300,000

*25,000,000 – 1,100,000, merger expenses = 23,900,000.


Post-Combination Balance Sheet: (requirement 2)

Assets Liabilities and Stockholders’ Equity

Cash P 5,490,000 Current liabilities P 900,000

Receivables 2,190,000 Long-term liabilities 117,000,000

Inventories 27,000,000

Plant and equipment 139,500,000

Trademarks 9,000,000 Common stock 2,100,000

Brand names 5,000,000 Paid-in capital – par 58,400,000

Secret formulas 7,000,000 Retained earnings* 27,780,000

Noncompetition agreement _10,000,,000 Treasury stock __( 1,000,000)

Total P205,180,000 Total P 205,180,000

*25,000,000 – 1,100,000 + 3,880,000 = 27,780,000

Problem II

1. (in millions)

Cash and receivables 200

Inventories 400

Property, plant & equipment 5,500

Customer contracts 25

In-process R&D 300

Goodwill 2,035

Current liabilities 400

Long-term debt 7,300

Warranty liability 10

Estimated liability for Contigent Cons. 50

Capital stock 700

Note: Read the topic “Items included in Goodwill” in Chapter 14 about “Skilled

(assembled) workforce” (they are not identifiable at the date of acquisition) and “Potential

Contracts” (they are not qualified as assets at the acquisition date).

Consideration transferred:
Shares 700,000,000

Estimated liability for Contigent Cons. _50,000,000

Consideration transferred 750,000,000

Less: MV of Assets and Liabilities

Acquired:

Cash and receivables 200,000,000

Inventories 400,000,000

Property, plant & equipment 5,500,000,000

Customer contracts 25,000,000

In-process R&D 300,000,000

Current liabilities ( 400,000,000)

Long-term debt (7,300,000,000)

Warranty liability ( 10,000,000) (1,285,000,000)

Positive excess: Goodwill 2,035,000,000

Acquisition expenses

Acquisition/merger expenses 150

Cash 150

Costs to Issue and Register Stocks

Share Issue Costs 100

Cash 100

2. (in millions)

Goodwill 1,500

Property, plant & equipment 1,500

Problem III

1.

Current assets 1,500,000

Investments 500,000

Land 6,000,000

Buildings 16,000,000
Equipment 2,000,000

Identifiable intangibles 5,000,000

Goodwill 22,500,000

Current liabilities 1,500,000

Long-term liabilities 12,000,000

Common stock 4,000,000

Additional paid-in capital 36,000,000

Cash 1,100,000

Consideration transferred:

Shares (400,000 x P100) 40,000,000

Less: MV of Assets and Liabilities

Acquired:

Current assets 1,500,000

Investments 500,000

Land 6,000,000

Buildings 16,000,000

Equipment 2,000,000

Identifiable intangibles 5,000,000

Current liabilities ( 1,500,000)

Long-term liabilities (12, 000,000) (17,500,000)

Positive excess: Goodwill 22,500,000

Costs to Issue and Register Stocks

Share Issue

Costs/APIC

1,100

Cash 1,100

2.

Current assets 1,500,000

Investments 500,000
Land 6,000,000

Buildings 16,000,000

Equipment 2,000,000

Identifiable intangibles 5,000,000

Current liabilities 1,500,000

Long-term liabilities 12,000,000

Common stock 1,000,000

Additional paid-in capital 9,000,000

Gain on acquisition 7,500,000

Consideration transferred:

Shares (100,000 x P100) 10,000,000

Less: MV of Assets and Liabilities

Acquired:

Current assets 1,500,000

Investments 500,000

Land 6,000,000

Buildings 16,000,000

Equipment 2,000,000

Identifiable intangibles 5,000,000

Current liabilities ( 1,500,000)

Long-term liabilities (12, 000,000) (17,500,000)

Negative excess: Gain on acquisition ( 7,500,000)

Costs to Issue and Register Stocks

Share Issue

Costs/APIC

800

Cash 800

3.

Current assets 1,500,000


Investments 500,000

Land 6,000,000

Buildings 16,000,00

Equipment 2,000,000

Identifiable intangibles 5,000,000

Goodwill 500,000

Current liabilities 1,500,000

Long-term liabilities 12,000,00

Estimated liability for Contigent

Cons.

8,000,000

Common stock 1,000,000

Additional paid-in capital 9,000,000

Consideration transferred:

Shares (100,000 x P100) 10,000,000

Estimated liability for Contigent Cons. _8,000,000

Consideration transferred 18,000,000

Less: MV of Assets and Liabilities

Acquired:

Current assets 1,500,000

Investments 500,000

Land 6,000,000

Buildings 16,000,000

Equipment 2,000,000

Identifiable intangibles 5,000,000

Current liabilities ( 1,500,000)

Long-term liabilities (12, 000,000) (17,500,000)


Positive excess: Goodwill 500,000

Costs to Issue and Register Stocks

Share Issue Costs/APIC 800

Cash 800

4.

(a)

Estimated liability for

Contigent

Cons.

3,000,000

Goodwill 500,000

Gain on acquisition 2,500,000

(b)

Estimated liability for

Contigent

Cons.

3,000,000

Gain on reduction in

liability 3,000,000

Problem IV

1. January 1, 20x4

Accounts Receivable (net) 65,000

Inventory 99,000

Land 162,000

Buildings 450,000

Equipment 288,000

Goodwill 54,000

Accounts Payable 83,000

Note Payable 180,000


Cash 720,000

Estimated Liability for Contingent Consideration 135,000

Consideration transferred (P720,000 + P135,000) P855,000

Total fair value of net assets acquired (P1,064,000 - P263,000) 801,000

Goodwill P 54,000

2. January 2, 20x6

Estimated Liability for Contingent Consideration 135,000

Cash 135,000

3. January 2, 20x6

Estimated Liability for Contingent Consideration 135,000

Gain on Contingent Consideration 135,000

Problem V

Current Assets 362,000

Long-term Assets (P1,890,000 + P20,000) + (P98,000 + P5,000) 2,013,00

Goodwill * 395,000

Liabilities 119,000

Long-term Debt 491,000

Common Stock (144,000 P5) 720,000

PIC - par (144,000 x P15

- P5)) 1,440,000

* (144,000 P15) – [P362,000 + P2,013,000 – (P119,000 + P491,000)] = P395,000

Total shares issued (P700,000 / P5) + P20,000 / P5) 144,000

Fair value of stock issued (144,000 P15) = P2,160,000

Problem VI

Case A

Consideration transferred P130,000

Less: Fair Value of Net Assets 120,000

Goodwill P 10,000

Case B
Consideration transferred P110,000

Less: Fair Value of Net Assets 90,000

Goodwill P 20,000

Case C

Consideration transferred P15,000

Less: Fair Value of Net Assets 20,000

Gain (P 5,000)

Assets Liabilities Retained

Earnings

(Gain)

Goodwill Current Assets Long-Lived Assets

Case A P10,000 P20,000 P130,000 P30,000 0

Case B 20,000 30,000 80,000 20,000 0

Case C 0 20,000 40,000 40,000 5,000

Problem VII

Present value of maturity value, 20 periods @ 6%: 0.3118 x P600,000 = P187,080

Present value of interest annuity, 20 periods @ 6%: 11.46992 x 30,000 = 344,098

Total Present value P531,178

Par value 600,000

Discount on bonds payable P 68,822

Cash 114,000

Accounts Receivable 135,0

Inventory 310,000

Land 315,000

Buildings 54,900

Equipment 39,450

Bond Discount (P40,000 + P68,822) 108,822

Current Liabilities 95,300

Bonds Payable (P300,000 + P600,000) 900,000


Gain on Acquisition of Stalton (ordinary) 81,872

Computation of Excess of Net Assets Received Over Cost

Consideration transferred (P531,178 plus liabilities assumed of P95,300

andP260,000) P886,478

Less: Total fair value of assets received _968,350

Excess of fair value of net assets over cost (P 81,872)

Problem VIII

Acquisition Method—Entry to record acquisition of Sampras

Consideration transferred P300,000

Estimated Liability for contingent Consideration 15,000

Consideration transferred (fair value) 315,000

Fair value of net identifiable assets 282,000

Goodwill P33,000

Receivables 80,000

Inventory 70,000

Buildings 115,000

Equipment 25,000

Customer list 22,000

IPRD 30,000

Goodwill 33,000

Current liabilities 10,000

Long-term liabilities 50,000

Estimated liability for contingent consideration 15,000

Cash 300,000

Acquisition related-expenses 10,000

Cash 10,000

Problem IX

1.

a. The computation of goodwill is as follows:


Consideration transferred;

Common shares: 30,000 shares x P25 P 750,000

Notes payable 180,000

Contingent consideration (cash contingency):

P120,000 x 30% probability 36,000

Total P 966,000

Less: Fair value of identifiable assets acquired and

liabilities assumed:

Cash P 24,000

Receivables – net 48,000

Inventories 72,000

Land 240,000

Buildings – net 360,000

Equipment – net 300,000

In-process research and development 60,000

Accounts payable ( 72,000)

Other liabilities ( 168,000) 864,000

Positive Excess – Goodwill P

102,000

b. The journal entries by Peter Corporation to record the acquisition is as follows:

Cash 24,000

Receivables – net 48,000

Inventories 72,000

Land 240,000

Buildings – net 360,000

Equipment – net 300,000

In-process research and development 60,000

Goodwill 102,000

Accounts payable 62,000


Other liabilities 168,000

Notes payable 180,000

Estimated Liability for Contingent

Consideration

36,000

Common stock (P10 par x 30,000 shares) 300,000

Paid-in capital in excess of par

[(P25 – P10) x 30,000 shares] 450,000

Acquisition of Saul Company.

Acquisition-related expenses 78,000

Cash 78,000

Acquisition related costs – direct costs.

Paid-in capital in excess of par 32,400

Cash 32,400

Acquisition related costs – costs to issue and

register stocks.

Acquisition-related expenses 27,600

Cash 27,600

Acquisition related costs – indirect costs.

c. The balance sheet of Pure Corporation immediately after the acquisition is as follows:

Pure Corporation

Balance Sheet

December 31, 20x4

Assets

Cash P 162,000

Receivables – net 144,000

Inventories 360,000

Land 348,000

Buildings – net 840,000


Equipment – net 732,000

In-process research and development 60,000

Goodwill 102,000

Total Assets P2,748,000

Liabilities and Stockholders’ Equity

Liabilities

Accounts payable P 288,000

Other liabilities 408,000

Notes payable 180,000

Estimated liability for contingent consideration 36,000

Total Liabilities P 912,000

Stockholders’ Equity

Common stock, P10 par P 1,020,000

Paid-in capital in excess of par1 657,600

Retained earnings2

158,400

Total Stockholders’ Equity P1,836,000

Total Liabilities and Stockholders’ Equity P2,748,000

1 P240,000 + P446,400 – P32,400

2 P264,000 - P78,000 – P27,600

It should be noted that under PFRS 3, in-process R&D is measured and recorded at fair value as an asset
on the acquisition date. This

requirement does not extend to R&D in contexts other than business combinations.

2.

a. Assets that have been provisionally recorded as of the acquisition date are retrospectively

adjusted in value during the measurement period for new information that clarifies the

acquisition-date value. The adjustments affect goodwill since the measurement period is

still within one year (i.e., eight months) from the acquisition date. Therefore, the goodwill

to be reported then on the acquisition should be P78,000 (P102,000 – P24,000).


b.

Buildings 24,000

Goodwill 24,000

Adjustment to goodwill due to measurement date.

3.

a. The goodwill to be reported then on the acquisition should be P126,000 (P102,000 +

P24,000).

b. The adjustment is still within the measurement period, the entry to adjust the liability would

be:

Goodwill 24,000

Estimated liability for contingent consideration 24,000

Adjustment to goodwill due to measurement date.

c.

c.1. The goodwill remains at P126,000, since the change of estimate should be done only once

(last August 31, 20x5).

c.2. On November 1, 20x5, the probability value of the contingent consideration amounted to

P48,000, the entry to adjust the liability would be:

Estimated liability for contingent consideration 12,000

Gain on estimated contingent consideration 12,000

Adjustment after measurement date.

In this case, the measurement period ends at the earlier of:

one year from the acquisition date, or

the date when the acquirer receives needed information about facts and

circumstances (or learns that the information is unobtainable) to consummate the

acquisition.

c.3.

c.3.1. The goodwill remains at P126,000, since the change of estimate should be done

only once (last August 31, 20x5).

c.3.2. On December 15, 20x5, the entry would be:


Loss on estimated liability contingent

consideration

30,000

Estimated liability for contingent consideration 30,000

Adjustment after measurement date.

c.3.3.

c.3.3.1. P126,000.

c.3.3.2. On January 1, 20x7, Saul’s average income in 20x5 is P270,000 and 20x6 is P260,000,

which means that the target is met, Peter Corporation will make the

following entry:

Estimated liability for contingent consideration 78,000

Loss on estimated contingent consideration 42,000

Cash 120,000

Settlement of contingent consideration.

4.

a.The amount of goodwill on acquisition will be recomputed as follows:

Consideration transferred;

Common shares: 30,000 shares x P25 P 750,000

Notes payable 180,000

Contingent consideration (cash contingency):

P120,000 x 35% probability x (1/[1 + .04]*) 40,385

Total P 970,385

Less: Fair value of identifiable assets acquired and

liabilities assumed (refer to 1a above) 864,000

Goodwill P 106,385

b. The journal entries by Pure Corporation to record the acquisition is as follows:

Cash 24,000

Receivables – net 48,000

Inventories 72,000
Land 240,000

Buildings – net 360,000

Equipment – net 300,000

In-process research and development 60,000

Goodwill 106,386

Accounts payable 62,000

Other liabilities 168,000

Notes payable 180,000

Estimated Liability for Contingent

Consideration

40,385

Common stock (P10 par x 30,000 shares) 300,000

Paid-in capital in excess of par

[(P25 – P10) x 30,000 shares] 450,000

c.

c.1. Goodwill remains at P106,385.

c.2. Theentry for Pure Corporation on December 31, 20x5 to record such occurrence would

be:

Estimated liability for contingent consideration 40,385

Gain on estimated contingent consideration 40,385

Adjustment after measurement date.

Since the contingent event does not happen, the position taken by PFRS 3 is that the

conditions that prevent the target from being met occurred in a subsequent period and

that Peter had the information to measure the liability at the acquisition date based on

circumstances that existed at that time. Thus the adjustment will flow through income

statement in the subsequent period.

d. The entry by Peter Corporation on January 1, 20x7 for the payment of the contingent

consideration would be:

Estimated liability for contingent consideration 36,000


Loss on estimated contingent consideration 66,000

Cash [(P78,000 + P84,000)/2 – P30,000] x 2 102,000

Settlement of contingent consideration.

5.

a. The amount of goodwill on acquisition will be recomputed as follows:

Consideration transferred;

Common shares: 30,000 shares x P25 P 750,000

Notes payable 180,000

Contingent consideration (cash contingency):

P120,000 x 30% probability 36,000

Contingent consideration (stock contingency) 18,000

Total P 984,000

Less: Fair value of identifiable assets acquired and

liabilities assumed (refer to 1a above) 864,000

Positive Excess – Goodwill P 120,000

b. The journal entries by Pure Corporation to record the acquisition is as follows:

Cash 24,000

Receivables – net 48,000

Inventories 72,000

Land 240,000

Buildings – net 360,000

Equipment – net 300,000

In-process research and development 60,000

Goodwill 120,000

Accounts payable 72,000

Other liabilities 168,000

Notes payable 180,000

Estimated Liability for Contingent

Consideration
36,000

Paid-in capital for Contingent Consideration

18,000

Common stock (P10 par x 30,000 shares) 300,000

Additional paid-in capital [(P25 – P10) x 30,000 shares] 450,000

Acquisition of Saul Company.

c. PureCorporation will make the following entry for the issuance of 1,200 additional shares:

Paid-in capital for Contingent Consideration 18,000

Common stock (P10 par x 1,200 shares) 12,000

Paid-in capital in excess of par 6,000

Settlement of contingent consideration.

6. On January 1, 20x7, the average income amounted to P132,000 (the contingent event

occurs). Thus, the entry record the occurrence of such event to reassign the P750,000 original

consideration to 36,000 shares (30,000 original shares issued + 6,000 additional shares due to

contingency) would be:

Paid-in capital in excess of par 60,000

Common stock (P10 par x 6,000 shares) 60,000

Settlement of contingent consideration.

7. On January 1, 20x7, the contingent event happens since the fair value per share fall below

P25. Thus, the entry record the occurrence of such event to reassign the P750,000 original

consideration to 37,500 shares (30,000 original shares issued + 7,500* additional shares due to

contingency) would be:

Paid-in capital in excess of par 75,000

Common stock (P10 par x 7,500 shares) 75,000

Settlement of contingent consideration.

* Deficiency: (P25 – P20) x 25,000 shares issued to acquire...P150,000

Divide by fair value per share on January 1, 20x7………….P 20

Added number of shares to issue………………………………. 7,500

8. The amount of goodwill on acquisition will be recomputed as follows:


Consideration transferred;

Common shares: 30,000 shares x P25 P 750,000

Notes payable 180,000

Contingent consideration (stock contingency):

[(P750,000 – P510,000) x 40% probability

x (1/[1 + .04]*) 92,308

Total P1,022,308

Less: Fair value of identifiable assets acquired and

liabilities assumed (refer to 1a above) 864,000

Positive Excess – Goodwill P 158,308

* present value of P1 @ 4% for one period.

The journal entries by Pure Corporation to record the acquisition is as follows:

Cash 24,000

Receivables – net 48,000

Inventories 72,000

Land 240,000

Buildings – net 360,000

Equipment – net 300,000

In-process research and development 60,000

Goodwill 158,308

Accounts payable 62,000

Other liabilities 168,000

Notes payable 180,000

Paid-in capital for Contingent Consideration 92,308

Common stock (P10 par x 25,000 shares) 300,000

Paid-in capital in excess of par[(P25 – P10) x 30,000 shares] 450,000

On December 31, 20x5, the contingent event occurs, wherein Peter’s stock price had fallen to

P20, thus requiring Peter to issue additional shares of stock to the former owners of Saul

Corporation. The entry for Peter Corporation on December 31, 20x5 to record such
occurrence such event to reassign the P750,000 original consideration to 37,500 shares

(30,000 original shares issued + 7,500* additional shares due to contingency) would be:

Paid-in capital for Contingent Consideration 92,308

Common stock, P10 par 75,000

Paid-in capital in excess of par 17,308

Settlement of contingent consideration.

* Deficiency: (P25 – P20) x 30,000 shares issued to acquire....P150,000

Divide by fair value per share on December 31, 20x5……P 20

Added number of shares to issue……………………………… 7,500

Problem X

1.

Consideration transferred:

Shares: 2/3 x 60,000 x P3.20 128,000

Cash

Accounts payable 45,100

Mortgage and interest 44,000

Debentures and premium 52,500

Liquidation expenses 2,400

144,000

Cash held (12,000) 132,000

260,000

Less: Fair value of assets and liabilities acquired:

Accounts receivable P34,700

Inventory 39,000

Freehold land 130,000

Buildings 40,000

Plant and equipment 46,000 289,700

Bargain Purchase Gain 29,700

Homer Ltd
Accounts Receivable 34,700

Inventory 39,000

Freehold Land 130,000

Buildings 40,000

Plant and Equipment 46,000

Payable to Tan Ltd 132,000

Common stock, P1 par x 40,000 shares 40,000

Additional paid-in capital 88,000

Gain on acquisition 29,700

(Acquisition of net assets of

Tan Ltd and shares issued)

Payable to Tan Ltd 132,000

Cash 132,000

(Being payment of cash consideration)

Paid-in capital in excess of par 1,200

Cash 1,200

(Being costs of issuing shares)

2.

Tan LTD

General Ledger

Liquidation

PP

Accounts Receivable 34,700 Additional paid in capital 26,800

Inventory 27,600 Retained earnings 32,000

Freehold Land 100,000 Receivable from Homer Ltd 260,000

Buildings 30,000

Plant and Equipment 46,000

Goodwill 2,000

Interest Payable 4,000


Liquidation Expenses 2,400

Premium on Debentures 2,500

Accounts Payable 1,600

Shareholders’ Distribution 68,000

318,800 318,800

Liquidator’s Cash

PP

Opening Balance 12,000 Liquidation Expenses 2,400

Receivable from Homer Ltd 132,000 Mortgage and Interest 44,000

Debentures and Premium 52,500

Accounts Payable 45,100

144,000 144,000

Shareholders’ Distribution

PP

Shares in Homer Ltd 128,000 Common stock 60,000

Liquidation 68,0000

128,000 128,000

Problem XI

Cash 20,000

Accounts Receivable 112,000

Inventory 134,000

Land 55,000

Plant Assets 463,000

Discount on Bonds Payable 20,000

Goodwill* 127,200

Allowance for Uncollectible Accounts 10,000

Accounts Payable 54,000

Bonds Payable 200,000

Deferred Income Tax Liability 67,200


Cash 600,000

Consideration transferred P600,000

Less: Fair value of net assets acquired

(P784,000 – P10,000 – P54,000 – P180,000 - P67,200*) 472,800

Goodwill P127,200

* Increase in net assets

Increase inventory, land, and plantassets to fair value

P52,000 + P25,000 + P71,000) P148,000

Decrease bonds payable to fair value(20,000)

Increase in net assets P168,000

Establish deferred income tax liability(P168,000 x 40%)P67,200

Multiple Choice Problems

1. c

Acquisition-related costs. Acquisition-related costs are costs the acquirer incurs to effect

a business combination. Those costs include finder’s fee; advisory, legal, accounting,

valuation and other professional or consulting fees; general administrative costs,

including the costs of maintaining an internal acquisitions department; and costs of

registering and issuing debt and equity securities. Under PFRS 3 (2008), the acquirer is

required to recognize acquisition-related costs as expenses in the periods in which the

costs are incurred and the services are received, with one exception, i.e. the costs to

issue debt or equity securities are recognized in accordance with PAS 32 (for equity) and

PAS 39 (for debt).

2. P2,240,000, No answer available

Consideration transferred : FMV of shares issued by Robin (80,000 sh ×P28) = P2,240,000

3. P520,000, no answer available

Considerationtrasnferred P2,240,000

Less: Fair value of Hope’s net assets (P2,720,000+P200,000–P1,200,000) 1,720,000

Goodwill P 520,000

4. c
Acquisition related-expenses 20,000

Accounts Receivable 180,000

Inventory 400,000

Land 50,000

Building 60,000

Equipment 70,000

Patent 20,000

CurrentLiabilities 70,000

Long-termDebt 160,000

Cash 520,000

Gain on Acquisition 50,000

Considerationtrasnsferred : Cash P500,000

Less : Fair value of West’s net assets

(P180,000 + P400,000 + P50,000

+ P60,000 + P P70,000 + P20,000

– P70,000 - P160,000) 550,000

BargainPurchase Gain (P50,000)

5.d

Accounts Receivable (net of P33,000 allowance) 198,000

Inventory 330,000

Land 550,000

Buildings and Equipment 1,144,000

Goodwill 848,000

Current Liabilities 275,000

Bonds Payable 450,000

Premium on Bonds Payable (P495,000 - P450,000) 45,000

Preferred Stock (15,000 x P100) 1,500,000

Common Stock (30,000 x P10) 300,000

PIC - par (P25 - P10) x 30,000 450,000


Cash 50,000

Consideration transferred: (P1,500,000 + P750,000 + P50,000) P2,300,000

Less: Fair value of net assets (198,000 + 330,000 + 550,000 +

1,144,000 – 275,000 – 495,000) = 1,452,000

Goodwill P 848,000

6.d

Current Assets 960,000

Plant and Equipment 1,440,000

Goodwill 336,000

Liabilities 216,000

Cash 2,160,00

Estimated Liability for Contingent Consideration 360,000

7.c

Cash 1,400

Receivables 650

Investments 1,000

Maintenance supplies 400

Flight equipment 12,000

International routes 500

Leases 800

Goodwill 450

Current liabilities 3,200

Long-term debt 6,000

Cash 8,000

8. c

The amount of the contingency is P500,000 (10,000 shares at P50 per share)

Goodwill 500,000

Paid-in-Capital for Contingent Consideration -


Issuable

500,000

9. c

Paid-in-Capital for Contingent Consideration – Issuable 500,000

Common Stock (P10 par) 100,000

Paid-In-Capital in Excess of Par 400,000

Platz Company does not adjust the original amount recorded as equity.

10.c

Accounts Receivable (net) 220,000

Inventory 320,000

Land 1,508,000

Buildings 1,392,000

Goodwill 230,000

Accounts Payable 270,000

Note Payable 600,000

Cash 2,600,000

Estimated Liability for Contingent Consideration 200,000

Consideration transferred (2,600,000 + 200,000)………………..P2,800,000

Fair value of net assets acquired(P3,440,000 – P870,000)……. 2,570,000

Goodwill………………………………………………………………...P230,000

Or, alternatively:

Accounts Receivable 240,000

Inventory 320,000

Land 1,508,000

Buildings 1,392,000

Goodwill 30,000

Allowance for Uncollectible Accounts 20,000

Accounts Payable 270,000

Note Payable 600,000


Cash 2,600,000

Consideration transferred P2,600,000

Fair value of net assets acquired

(P3,440,000 – P870,000) 2,570,000

Goodwill P 30,000

Goodwill 200,000

Estimated Liability for Contingent Consideration 200,000

1/1/20x6:

Estimated Liability for Contingent Consideration 200,000

Gain on Contingent Consideration 200,000

11. c

In accounting for the combination of NT and OTG, the fair value of the acquisition is allocated

to each identifiable asset and liability acquired with any remaining excess attributed to

goodwill.

Consideration transferred (shares issued) P750,000

Fair value of net assets acquired:

Cash P29,000

Receivables 63,000

Trademarks 225,000

Record music catalog 180,000

In-process R&D 200,000

Equipment 105,000

Accounts payable (34,000)

Notes payable (45,000) 723,000

Goodwill P27,000

Entry by NT to record combination with OTG:

Cash 29,000

Receivables 63,000

Trademarks 225,000
Record Music Catalog 180,000

Capitalized R&D 200,000

Equipment 105,000

Goodwill 27,000

Accounts Payable 34,000

Notes Payable 45,000

Common Stock (NewTune par value) 60,000

PIC - par 690,000

(To record merger with OTG at fair value)

PIC - par 25,000

Cash 25,000

(Stock issue costs incurred)

Post-Combination Balance Sheet:

Assets Liabilities and Owners’ Equity

Cash P 64,000 Accounts payable P 144,000

Receivables 213,000 Notes payable ___415,000

Trademarks 625,000 Total liabilities P 559,000

Record music catalog 1,020,000

Capitalized R&D 200,000 Common stock 460,000

Equipment 425,000 Paid-in capital - par 695,000

Goodwill 27,000 Retained earnings 860,000

Total P2,574,000 Total P2,574,000

12. P559,000, no answer available – refer to No. 11

13. d – refer to No. 11

14.c – refer to No. 11

15.c – refer to No. 11

16. d

Correction: …completion goals by December 31, 20x5 not 20x4.

Entry to record the acquisition on Pacifica’s records:


Cash 85,000

Receivables and inventory 180,000

PPE 600,000

Trademarks 200,000

IPRD 100,000

Goodwill 77,500

Liabilities 180,000

Common Stock (50,000 xP5) 250,000

Paid-In Capital in excess of par (50,000 xP15) 750,000

Contingent performance obligation 62,500

The goodwill is computed as:

Consideration transferred: 50,000 shares x P20 P1,000,000

Contingent consideration:

P130,000 payment x 50% probability x 0.961538 62,500

Total P1,062,500

Less: Fair value of net assets acquired

(P85,000 + P180,000 + P600,000 + P200,000

+ P100,000 - P180,000) 985,000

Goodwill P 77,500

Acquisition related-expenses 15,000

Cash 15,000

PIC - par 9,000

Cash 9,000

Note: The following amounts will appear in the income statement and statement of retained

earnings after business combination:

PP Inc.

Revenues (1,200,000)

Expenses (P875,000 + P15,000) 890,000

Net income (310,000)


Retained earnings, 1/1 (950,000)

Net income (310,000)

Dividends paid 90,000

Retained earnings, 12/31 *(1,170,000)

* or, P1,185,000 – P15,000 = P1,170,000

17. c – refer to No. 16 (P400,000 + P750,000 – P9,000 = P1,141,000)

18. d – refer to No. 16

19. b – refer to No. 16

20. b – refer to No. 16

21. d – refer to No. 16 [P77,500 + (P75,000 – P62,500)] = P90,000

22.b – refer to No. 16. It should be noted that goodwill can only be revised once, so, the goodwill

remains at P90,000, but the liability will be adjusted to P80,000, the entry would be

Loss on contingent consideration…………………………………. 5,000

Contingent performance obligation………………………. 5,000

23. a

10,000,000 x P5 x 0.20 P 10,000,000

15,000,000 x P5 x 0.10 ___7,500,000

P 17,500,000

17,500,000/(1.12)4 P 11,121,566

24. a – at fair value

25. a

26.a – (P100,000 x ½ = P50,000 x 1/1.05) or P50,000 x 0.909091 = P45,454

27. c

Fair value of Subsidiary

Consideration transferred………………………………………………………P 200

million

Add: Fair value of contingent consideration……………………………… 10 million

Fair value of subsidiary………………………………………………………… P 210

million
Less: Fair value of identifiable assets and liabilities of Homer...............… 116 million

Goodwill…………………………………………………………………………… P 94 million

Note: The consideration transferred should be compared with the fair value of the net

assets acquired, per PFRS3 par. 32. The contingent consideration should be measured

at its fair value at the acquisition date; any subsequent change in this cash liability

comes under PAS 39 Financial instruments: recognition and measurement and should

be recognized in profit or loss, even if it arises within the measurement period. See

PFRS3 pars. 39, 40 and 58.

28. b

29. b

30. d

P77,500,000 = P100,000,000 – (P1,500,000 + P35,000,000 + P2,000,000 + P10,000,000

+ P4,000,000 - P30,000,000).

31. b

P(12,500,000) = P10,000,000 – (P1,500,000 + P35,000,000 + P2,000,000 + P10,000,000

+ P4,000,000 - P30,000,000).

32. c

The correcting entry, within the measurement period, is:

Goodwill 2,000,000

Patents 2,000,000

33. a

The correcting entry, within the measurement period, is:

Gain on acquisition 2,000,000

Liabilities 2,000,000

34. c

Goodwill 400,000

Estimated lawsuit liability 400,000

35.b

Loss on lawsuit 400,000


Estimated lawsuit liability 400,000

36.b

Assets 570,000,000

Liabilities 100,000,00

Capital stock 400,000,00

Cash 50,000,000

PIC-stock contingency 20,000,000

37. b - P350,000,000 – (P12 x 25,000,000) = P50,000,000/P12 = 4,166,667 additional shares

38. c

The contingency was originally recorded in equity at the amount of P20,000,000. However,

changes in the value of stock price contingencies do not affect the acquisition price or

income. Any changes in value are adjustments in equity.

PIC- stock contingency 20,000,000

PIC-other 30,000,000

Common stock 50,000,000

39. b

40. c

41. c

42. b – [(P47 x 12,000 shares) – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 –

P420,000)

= P104,000

43. d

APIC: P20,000 + [(P42 – P5) x12,000 = P464,000

Retained earnings: P160,000, parent only

44. b

Inventory: PP230,000 + P210,000 = P440,000

Land: P280,000 + P240,000 = P520,000


45. b – [P480,000 – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000)] =

P20,000

46. c AA records new shares at fair value

Value of shares issued (51,000 × P3)............................................................... P153,000

Par value of shares issued (51,000 × P1)......................................................... 51,000

Additional paid-in capital (new shares) ....................................................... P102,000

Additional paid-in capital (existing shares) .................................................. 90,000

Consolidated additional paid-in capital....................................................... P192,000

At the date of acquisition, the parent makes no change to retained earnings.

47. a – at fair value

48. c

Depreciation expense:

Building, at book value (P200,000 – P100,000) / 10 years P 10,000

Building, undervaluation (P130,000, fair value

– P100,000, book value) / 10 years3,000

Equipment, at book value (P100,000 – P50,000) / 5 years 10,000

Equipment, undervaluation (P75,000, fair value

- P50,000, book value) / 5 years 5,000

Total depreciation expense= P 28,000

49. c - [(24,000 shares x P30) – P686,400] = P33,600

50. d - [(24,000 shares x P30) – (P270,000 + P726,000 – P168,000)] = P108,000, gain

51. c

A bargain purchase is a business combination in which the net fair value of the identifiable

assets acquired and liabilities assumed exceeds the aggregate of the consideration

transferred.

It should be noted that bargain purchase gain would arise only in exceptional

circumstances. Therefore, before determining that gain has arisen, the acquirer has to:

1. Reassess whether it has correctly identified all of the assets acquired and all of the

liabilities assumed. The acquirer should recognize any additional assets or liabilities
that are identified in that review.

2. Any balance should be recognized immediately in profit or loss.

52. b – no valuation to be recorded in the books of the acquirer

Cost P180,000

Less: Accumulated depreciation (P180,000/30 years = P6,000/year x 3 yrs 18,000

Net book value P162,000

53. c

Net Assets [P100,000 + P50,000 + P162,000 (No. 54)]

P312,000

Less: Shares issued at par (15,000 shares x P10 par) 150,000

APIC P162,000

Or: since, there is no excess, the P312,000 represents the amount of consideration

transferred, therefore the APIC should be P162,000 [P312,000 / 15,000 shares = P20,80 – P15

= P10.80 x 15,000 shares)

54. c

The consideration transferred should be compared with the fair value of the net assets

acquired, per PFRS3 par. 32. The gain of P8 million results from a bargain purchase and

should be recognized in profit or loss, per PFRS3 par. 34.

55. c

Consideration transferred:

Shares: 2/3 x 60,000 x P3.20 128,000

Cash

Accounts payable 45,100

Mortgage and interest 44,000

Debentures and premium 52,500

Liquidation expenses 2,400

144,000

Cash held (12,000) 132,000

260,000
Less: Fair value of assets and liabilities acquired:

Accounts receivable P34,700

Inventory 39,000

Freehold land 130,000

Buildings 40,000

Plant and equipment 46,000289,700

Bargain Purchase Gain 29,700

56. d

PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are

measured at their acquisition-date fair values.

57.c

Selling price P 110,000

Less: Book value of Comb (P50,000 + P80,000 + P40,000

- P30,000) 140,000

Loss on sale of business by the acquiree (Comb) P( 30,000)

58. d P215,000 = P130,000 + P85,000

59. b P23,000 = P198,000 – (P405,000 - P265,000 + P15,000 +

P20,000)

60

c P1,109,00

= Total Assets of TT Corp. P 844,000

Less: Investment in SS Corp. (198,000)

Book value of assets of TT Corp. P 646,000

Book value of assets of SS Corp. 405,000

Total book value P1,051,000

Payment in excess of book value

(P198,000 - P140,000) 58,000


Total assets reported P1,109,000

61

c P701,500 = (P61,500 + P95,000 + P280,000) + (P28,000 +

P37,000

+P200,000)

62

d P257,500 = The amount reported by TT Corporation

63

a P407,500 = The amount reported by TT Corporation

64. c

Par value of shares outstanding before issuance P200,000

Par value of shares outstanding after issuance 250,000

Par value of additional shares issued P 50,000

Divided by: No. of shares issued* __12,500

Par value of common stock P 4

*Paid-in capital before issuance (P200,000 + P350,000) P 550,000

Paid-in capital after issuance (P250,000 + P550,00)800,000

Paid-in capital of share issued at the time of exchangeP250,000

Divided by: Fair value per share of stockP 20

Shares issued 12,500

65. a

Consideration transferred: Shares – 12,500 shares P250,000

Less: Goodwill 56,000

Fair value of identifiable net assets acquiredP194,000

66. a –

Blue Town:
Stockholders’ equity before issuance of shares (P700,000 + P980,000) P1,680,000

Issued shares: 34,000 shares x P35

1,190,000

Consolidated SHE/Net Assets P2,870,000

67. d

68. c

Common stock – combined…………………………………………………………P

160,000

Common – Acquirer Zyxel………………………………….. …………………….…

100,000

Common stock issued………………………………………………………………...P

60,000

Divided by: Par value of common stock………………………………………….P

Number of Zyxel shares to acquire Globe Tattoo………………………….....… 30,000

69. d

Paid-in capital books of Zyxel (P100,000 + P65,000)………………………........P

165,000

Paid-in capital in the combined balance sheet

(P160,000 + P245,000)…………………………………………………….…

405,000

Paid-in capital from the shares issued to acquire Globe Tattoo…………... P 240,000

Divided by: No. of shares issued (No. 31)……………………………………..... 30,000

Fair value per share when stock was issued………………………………….... P 8

Or,

Par value of common stock of Zyxel……………………………………… P 2

Add: Share premium/APIC per share from the additional

issuance of shares (P245,000 – P65,000)/30,000…………............ 6

Fair value per share when stock was issued……………………………....... P 8


70.b

Net identifiable assets of Zyxel before acquisition:

(P65,000 + P72,000 + P33,000 + P400,000 – P50,000

- P250,000)…………………………………………………………………….

P270,000

Net identifiable assets in the combined balance sheet:

(P90,000 + P94,000 + P88,000 + P650,000 – P75,000 - P350,000)…..........

497,000

Fair value of the net identifiable assets held by Globe Tattoo

at the date of acquisition..…………………………………………………….. P227,000

71. a

Consideration transferred (30,000 shares x P8)………………………………… P240,000

Less: Fair value of net identifiable assets acquired (No. 49)……………….... 227,000

Goodwill……………………………………………………………………………….. P

13,000

72. c

Retained earnings:

Acquirer – Zyxel (at book value)………………………………………....

P105,000

Acquiree– Globe Tattoo (not acquired)……………………………… __ 0

P105,000

It should be noted that, there was no bargain purchase gain and acquisition-related costs

which may affect retained earnings on the acquisition date.

73. a

II ____ _____JJ _ ____Total____

Average annual earnings P 46,080 P 69,120 P 115,200

Divided by: Capitalized at _10%

Total stock to be issued P1,152,000

Less: Net Assets (for P/S) 864,000


Goodwill (for Common Stock) P 288,000

Preferred stock (same with Net Assets):

864,000/P100 par 8,640 shares

Theories

1. True 21. False 41. True 61. c 81. b 101. c 121 a

2. False 22. True 42. False 62. b 82. a 102. d 122. b

3. True 23. False 43. a 63. c 83. d 103. d 123. b

4. True 24. True 44. c 64. d 84. a 104. d 124. c

5. False 25, True 45, b 65, d 85. c 105. c 125. b

6. True 26. False 46. b 66. a 86. d 106. d 126. c

7. False 27. True 47. d 67. a 87. c 107. d 127. c

8. True 28. False 48. c 68. d 88. a 108. d

9. True 29. True 49. c 69. a 89. c 109. b

10. True 30, True 50, b 70, b 90, d 110, c

11. True 31. False 51. a 71. c 91. b 111. c

12. True 32. True 52. b 72. A 92. a 112. c

13. False 33. True 53. c 73. c 93. C 113. a

14. False 34. False 54. a 74. c 94. B 114. d

15. False 35. True 55. c 75. a 95. D 115. d

16. True 36. True 56. b 76. d 96. A 116. c

17. False 37. False 57. a 77. a 97. A 117. b

18. True 38. True 58. c 78. d 98. c 118. b

19. True 39. False 59. a 79. b 99. d 119. b

20. False 40, False 60, c 80, c 100, d 120. a

Note for the following numbers:

2. A horizontal combination occurs when management attempts to dominate an industry.

5. A vertical combination exists when an entity purchases another entity that could have a

buyer-seller relationship with the acquirer. The combination described here is a

horizontal combination.
7. A conglomerate combination is one where an unrelated or tangentially related business

is acquired. A vertical combination occurs when a supplier is acquired.

13. Greenmail is the payment of a price above market value to acquire stock back from a potential
acquirer.

15. The sale of the crown jewels results when a target sells assets that would be particularly valuable to
the potential acquirer.

The scorched earth defense results when a target generally sells large amounts of assets without regard
to the

specific desirability to the potential acquirer.

17. Golden parachutes are generally given only to top executives of the acquiree.

20. Control over the net assets of an entity can be accomplished by purchasing the net assets or by
purchasing the acquiree

voting common stock that represents ownership of the assets.

21. The amount of cash will always equal the net assets recorded by the acquirer. As a result, the
acquirer book value will not

change due to an acquisition.

23. There is no exchange of stock in an asset for asset acquisition so there cannot be a change in
ownership structure of

either entity.

26. The acquiree corporation becomes an acquirer stockholder, not the acquiree

stockholders.

28. A combination that results in one of the original entities in existence after the

combination is a statutory merger.

31. The combination results in the stockholders of one entity controlling the other entity.

The Retained Earnings of the entity acquiring control is carried forward to the newly

formed corporation.

34. The stock of the acquiree company must be purchased by the acquirer, but the value

transferred to the acquiree stockholders does not have to be in stock. Payment may be

in another asset or the issuance of debt.

37. The consideration to be given by the acquirer is sometimes not completely known

because the consideration is based partially on acquiree future earnings or the market
value of acquirer debt or stock.

39. Any change in the number of shares of acquirer stock given returns the purchase price

to the agreed level. The adjustment is to stock and additional paid-in capital. The

investment account is unchanged.

40. The acquiree stockholders must continue to have an indirect ownership interest in the

acquiree net assets. Preferred stock or a nonvoting class of stock qualifies as an

indirect ownership as well as voting common stock.

42. A net operating loss carryforward cannot be acquired. They are only available to the

acquirer if the combination qualifies as a nontaxable exchange