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Chapter 13

Problem I

1.

Cost 50,000

Unrealized Intercompany Inventory Profit/Deferred Profit P 5,000

2.

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

P140,000

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

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

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

84,200

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

55,800

Operating expenses:

20,000

15,800

15,800

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

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

4,600

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

Problem II

Books of Home Office

Correcting entries:

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

35,000

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

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

750

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

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

2,600

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

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

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

1,525

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

Cost)

4,550

c.

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

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

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)

Cost)

Problems V

SPENCER CO.

Balance Sheet for Branch

December 31,20x4
Assets

Liabilities____________________

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

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

105

29,239

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

Less: Accumulated

________

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

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

SPENCER CO.

For Month Ended December 31, 20x4

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

20,000

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

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

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

14,100

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

5,900

Operating expenses:

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

8,921

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

3,021

SPENCER CO.

Equity_______

P 35,660

4,476 60,524

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

Less: Accumulated

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

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

________

P 96,184

SPENCER CO.

For Month Ended December 31, 20x4

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

44,850

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

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

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

26,400

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

18,450

Operating expenses:

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

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

3,645

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

1,271

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

2,374

2. Refer to Word Document Worksheet

3, Combined Statements

SPENCER CO.

39,965

60,524

Less accumulated

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

SPENCER CO.
Combined Income Statement for Home Office and Branch

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

Operating Expenses:

Store supplies used: P580 – P300, or P280

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

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

Depreciation: 1% of P3,600

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

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

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

Branch Current…………………………………………

3,021

December 31 ……………………….. P3,700

Home office at billed price on

Problem VI

1.

Branch

Current

H. Office

Current

P 9,000

3. Combined Income Statement

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

P395,000

210,400

Problem VII

(1)

PAXTON CO.

For Year Ended December 31, 20x5

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

PAXTON CO.

For Year Ended December 31, 20x5

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

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

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

582,500

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

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

(2)

PAXTON CO.

For Year Ended December 31, 20x5

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

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

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

779,350

(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

41,150

P 50,900

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

Reduction in unrealized profit account- adjustment to

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

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.

For Year Ended December 31, 20x4

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

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

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

RUGGLES CO.

For Year Ended December 31, 20x4

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

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

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

(2)

RUGGLES CO.

For Year Ended December 31, 20x4

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

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

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

(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

P 14,500

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

P 51,500

1 Remittance I 1,700)

2. Income Statement - Branch

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

140,000

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

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

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

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

83,000

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

72,000

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

42,000

30,000

44,170
3.

For Year Ended December 31, 20x4

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

295,000

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

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

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

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

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

110,470

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

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

44,170

Problem X

P46,400

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

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

Problem XII

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

Cash…………………………………………………………………… 250

2. b

P 37,600

3. a

5. a

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

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

COGAS P 420,000

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

Billed Price

MI, beginning 0

SFHO 550,000

COGAS 550,000

Less: MI, ending 75,000

CGS, at BP 475,000

14. d

15. d

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

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

16. d

17. d

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

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

18. d

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

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

19. d

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

21. b

COGAS P 24,500

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

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

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)

Merchandise inventory, 1/1/x4 0

Shipments 108,000

24. b

Less: Cost of Sales

Inventory, 1/1/20x4 P 0

Purchases 52,000

25. c

Merchandise inventory, 1/1/x4 40,000

Shipments 250,000

26. b – P326,000

27. b

28. c

(P24,000 / 1.2)]……………………………… P 66,000

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

29. d

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

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

30. c

Cost of goods available for HO

Sale………………………………………………….. P113,000

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

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

31. a

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

BP Cost Allowance

-: 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

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

33. d

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

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

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

35. c

Inventory of the Branch:

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

P 23,400

36. b

P 20,280

37. c

Home Office Books Davao Branch Baguio Branch

Davao Branch…39,000

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

39. d

40. d

44. c

45. d

Theories

26. c

Chapter 14

Problem I

1.(in millions)

Acquisition of assets and liabilities:

Cash 90

Receivables 190

Inventories 7,000

Goodwill 6,120

Cash 18,000

Common stock, P2 par 1

APIC 500

Cash 500

2.(in millions)

Cash 90

Receivables 190

Inventories 7,000

Cash 18,000

Gain on acquisition 3,880

Consideration transferred:

Cash 18,000,000

Less: MV of Assets and Liabilities

Acquired:

Cash 90,000
Receivables 190,000

Inventories 7,000,000

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

Acquisition expenses

Cash 1,100

Cash 500

3.

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

Inventories 27,000,000

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

Post-Combination Balance Sheet: (requirement 2)

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

Inventories 27,000,000

Problem II

1. (in millions)

Inventories 400

Property, plant & equipment 5,500

Customer contracts 25

Goodwill 2,035

Long-term debt 7,300

Warranty liability 10

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

Acquired:

Cash and receivables 200,000,000

Inventories 400,000,000

Positive excess: Goodwill 2,035,000,000

Acquisition expenses

Cash 150

Cash 100

2. (in millions)

Goodwill 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

Common stock 4,000,000

Cash 1,100,000

Consideration transferred:

Acquired:

Current assets 1,500,000

Investments 500,000

Land 6,000,000

Buildings 16,000,000

Equipment 2,000,000

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

Gain on acquisition 7,500,000

Consideration transferred:

Acquired:

Current assets 1,500,000

Investments 500,000

Land 6,000,000

Buildings 16,000,000

Equipment 2,000,000

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

Goodwill 500,000

Cons.

8,000,000

Common stock 1,000,000

Consideration transferred:

Acquired:

Current assets 1,500,000

Investments 500,000

Land 6,000,000

Buildings 16,000,000

Equipment 2,000,000

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

Positive excess: Goodwill 500,000

Cash 800

4.

(a)

Contigent

Cons.

3,000,000

Goodwill 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

Cash 720,000

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

Problem V

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

Goodwill * 395,000

Liabilities 119,000

- P5)) 1,440,000

Problem VI

Case A

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

Gain (P 5,000)

Earnings

(Gain)

Problem VII

Cash 114,000

Accounts Receivable 135,0

Inventory 310,000

Land 315,000

Buildings 54,900

Equipment 39,450

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

Gain on Acquisition of Stalton (ordinary) 81,872

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

andP260,000) P886,478

Problem VIII

Fair value of net identifiable assets 282,000

Goodwill P33,000

Receivables 80,000

Inventory 70,000

Buildings 115,000

Equipment 25,000

IPRD 30,000

Goodwill 33,000

Cash 300,000

Cash 10,000

Problem IX

1.

a. The computation of goodwill is as follows:

Consideration transferred;

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

102,000

Cash 24,000

Receivables – net 48,000

Inventories 72,000

Land 240,000

Goodwill 102,000

Accounts payable 62,000

Other liabilities 168,000

Consideration

36,000

Cash 78,000

Cash 32,400

register stocks.

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

Assets

Cash P 162,000

Receivables – net 144,000

Inventories 360,000

Land 348,000

Buildings – net 840,000

Equipment – net 732,000

Goodwill 102,000

Liabilities

Total Liabilities P 912,000

Stockholders’ Equity

Paid-in capital in excess of par1 657,600

Retained earnings2

158,400

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

b.

Buildings 24,000

Goodwill 24,000

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

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

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

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

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:

Cash 120,000

4.

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

Consideration transferred;

Total P 970,385

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

Goodwill P 106,385

Cash 24,000

Receivables – net 48,000

Inventories 72,000
Land 240,000

Goodwill 106,386

Consideration

40,385

c.

c.1. Goodwill remains at P106,385.

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

be:

Gain on estimated contingent consideration 40,385

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

Estimated liability for contingent consideration 36,000

Loss on estimated contingent consideration 66,000

5.

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

Consideration transferred;

Total P 984,000

Cash 24,000

Receivables – net 48,000

Inventories 72,000

Land 240,000

Goodwill 120,000

Consideration
36,000

18,000

Acquisition of Saul Company.

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

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

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

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

Consideration transferred;

Total P1,022,308

Cash 24,000

Receivables – net 48,000

Inventories 72,000

Land 240,000

Goodwill 158,308

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:

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

Problem X

1.

Consideration transferred:

Cash

144,000

260,000

Inventory 39,000

Buildings 40,000

Bargain Purchase Gain 29,700

Homer Ltd
Accounts Receivable 34,700

Inventory 39,000

Buildings 40,000

Cash 132,000

Cash 1,200

2.

Tan LTD

General Ledger

Liquidation

PP

Buildings 30,000

Goodwill 2,000

Interest Payable 4,000

Liquidation Expenses 2,400

Shareholders’ Distribution 68,000

318,800 318,800

Liquidator’s Cash

PP

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

Discount on Bonds Payable 20,000

Goodwill* 127,200

Cash 600,000

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

Goodwill P127,200

Multiple Choice Problems

1. c

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

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

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

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

5.d

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

Inventory 330,000

Land 550,000

Goodwill 848,000

Cash 50,000

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

Goodwill P 848,000

6.d

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

Leases 800

Goodwill 450

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

Issuable

500,000

9. c

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

Cash 2,600,000

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

Cash 2,600,000

(P3,440,000 – P870,000) 2,570,000

Goodwill P 30,000

Goodwill 200,000

1/1/20x6:

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.

Fair value of net assets acquired:

Cash P29,000

Receivables 63,000

In-process R&D 200,000

Equipment 105,000

Goodwill P27,000

Entry by NT to record combination with OTG:

Cash 29,000

Receivables 63,000

Record Music Catalog 180,000

Capitalized R&D 200,000

Equipment 105,000

Goodwill 27,000

Cash 25,000

16. d

Cash 85,000

Receivables and inventory 180,000

PPE 600,000

IPRD 100,000

Goodwill 77,500

Liabilities 180,000

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

Contingent consideration:

Total P1,062,500

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

Goodwill P 77,500

Cash 15,000

PIC - par 9,000

Cash 9,000

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

PP Inc.

Revenues (1,200,000)

Net income (310,000)

Retained earnings, 1/1 (950,000)

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

23. a

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

25. a

27. c

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

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

Gain on acquisition 2,000,000

Liabilities 2,000,000

34. c

Goodwill 400,000

35.b

Loss on lawsuit 400,000

Estimated lawsuit liability 400,000

36.b

Assets 570,000,000

Liabilities 100,000,00

Cash 50,000,000

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

PIC- stock contingency 20,000,000

PIC-other 30,000,000

39. b

40. c

41. c

P420,000)

= P104,000

43. d

44. b

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

47. a – at fair value

48. c

Depreciation expense:

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.

Cost P180,000

53. c

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:

Cash

144,000

Cash held (12,000) 132,000

260,000
Less: Fair value of assets and liabilities acquired:

Inventory 39,000

Buildings 40,000

Bargain Purchase Gain 29,700

56. d

PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are

57.c

Less: Book value of Comb (P50,000 + P80,000 + P40,000

- P30,000) 140,000

P20,000)

60

c P1,109,00

(P198,000 - P140,000) 58,000

Total assets reported P1,109,000

61

P37,000

+P200,000)

62

63

64. c

65. a

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

1,190,000

67. d

68. c

160,000

100,000

60,000

69. d

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

Or,

70.b

(P65,000 + P72,000 + P33,000 + P400,000 – P50,000

- P250,000)…………………………………………………………………….

P270,000

497,000

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:

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

73. a

Less: Net Assets (for P/S) 864,000

Goodwill (for Common Stock) P 288,000

Theories

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

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

indirect ownership as well as voting common stock.

42. A net operating loss carryforward cannot be acquired. They are only available to the