BOSCOM

CABRIA CPA REVIEW CENTER
ACCOUNTING FOR BUSINESS COMBINATION

LECTURE NOTES
THE NATURE OF BUSINESS COMBINATIONS

 Occurs when one entity gains control over another entity either through the acquisition of net
assets (must be 100%), or the acquisition of common shares (more than 50% of outstanding).
 Business combination requires the bringing together of businesses into a reporting entity. A
reporting entity can be a single entity (acquisition of net assets), or a group comprising a
parent and all of its subsidiaries (acquisition of shares).
 The business combination occurs from the stand point of the acquirer.
 All business combinations must use the purchase method. Pooling of interest method is longer
permitted.
GENERAL STEPS UNDER THE PURCHASE METHOD OF ACCOUNTING FOR THE BUSINESS
COMBINATION
1. Identification of ACQUIRER
a. Fair Value (FV) of an entity is SIGNIFICANTLY greater than the other combining
enterprise
b. the entity who will pay cash or consideration
c. management of one entity is able to dominate selection of management of the
combined entity
2. Measure the cost of the business combination at fair value.
a. The FV of the acquirer's investment cost, and the FV of the non-controlling interest in
the acquire equal the total FV of the acquiree company at the date of acquisition.
3. Measure the fair values of the net assets acquired/assumed together with contingent liabilities
that qualify for recognition
a. - an intangible item acquired in a bus. Combination must be recognize as an asset
separately from goodwill, either separable or arises from contractual or other legal
rights, and its FV can be measured reliably
4. Allocate the cost of business combination to the net assets (including contingent liabilities)
acquired and assumed.
a. -Goodwill is recognized by the acquirer as an asset from the acquisition date and is
initially measured as the excess of the cost of the business combination over the
acquirer’s share of the net FV of the acquiree’s identifiable assets, liabilities and
contingent liabilities
5. These steps result in determining the existence of any goodwill and excess on combination
which must be accounted for.
SPECIFIC REQUIREMENTS OF IFRS 3

a. The use of the purchase method
b. An acquirer to be identified
c. The measurement of the cost of a combination
d. The allocation of the cost of combination to the acquired assets and assumed liabilities and
contingent liabilities.
e. The assets, liabilities and contingent liabilities to be measured initially at fair value.
f. Goodwill acquired to be recognized
g. That goodwill upon recognition i subsequently accounted for as follows:
ACQUIRER NON-SME SME
AMORTIZATION no yes
IMPAIRMENT TEST yes yes
That any excess on combination be accounted for by a reassessment of the assets and liabilities
acquired and, where appropriate, by recognizing any excess immediately in profit and loss. Any such
discount (or premium) accrues only to the acquirer.
h. Disclosures of information that enable IS to evaluate the nature and effect of business
combinations effected i the current period and previous periods, as well as post balance-sheet
dates.
Page | 1 BUSINESS COMBINATION_LECTURE

i. Disclosure of information that enable users to evaluate changes in the carrying amount of
goodwilI.
ACCOUNTING FOR COST OF BUSINESS COMBINATION

The acquirer shall the cost of business combination as the aggregate of
a. The fair values at the date of exchange of assets given, liabilities incurred or assumed and
equity instruments issued by the acquirer in exchange for control of the acquiree; plus
b. Contingent costs of guarantees made, if measurable and probable at the date of acquisition
on: (1) market value of the shares issued; a and/or (2) amount of net income sustained over
a specified period.
c. Direct acquisition costs, if the acquirer is an SME.
1. ACQUISITION of Net Assets

a. Acquiring corporation must negotiate with management to obtain the assets (and
assume liabilities) of the corporation being acquired.
• Statutory MERGER- two or more corporation merge into a single entity which shall
be one of the constituent corporation.
• Statutory CONSOLIDATION- two or more corporation consolidate and form a NEW
company
2. ACQUISITION of STOCKS – an acquiring company may acquire MAJORITY interest of
outstanding common share or control of a corporation and the separate legal entities of each
enterprise are preserved by both continue their legal existence.
Acquisition cost:
• Consideration Paid
cash payment – measured at Face Value
Non- cash – FV of non-cash
Equity securities – Market value of shares
• Contingent consideration
- measured at FV at the date of acquisition
Other Related Costs:
1. Direct Costs – cost incurred related to bus. Combination
e.g. professional fees paid to accountants
- treated as OUTRIGHT expense
2. Indirect Costs – cost incurred not directly related to bus. Combination
e.g. salaries of officers
- treated as OUTRIGHT expense
3. Stock issue costs – when shares are issued for the acquisition of net assets.
- treated as a reduction from the APIC to the extent amount recorded when shares are
issued, any excess is treated as expense.
4. Debt Security cost – costs of issuing Bonds
- treated as part of Bond Issue cost
Pro forma of Formulas:
• Total Assets
Parent asset –measured at Book Value
+Subsidiary asset –measured at FV
+any Goodwill arising from acquisition
Less: Cash payments:
Cash considerations
Direct and Indirect costs
Stock issuance costs PAID
TOTAL ASSETS
Total Liabilities
Parent Liabilities – BV
+ Subsidiary Liabilities – FV
+ Contingent Liabilities
+ Debt Securities Issued
TOTAL LIABILITIES
Total Share Capital
Parent Share Capital – BV
+ Subsidiary share capital – zero (0)
+ Issuance of New share capital at par
TOTAL SHARE CAPITAL
• Total Share Premium
Parent Share premium – BV
+ Subsidiary share premium – zero (0)
+Issuance of New share excess of par
- Stock issuance cost to the extent of amount issued
TOTAL SHARE PREMIUM
• Total Retained Earnings
Parent Retained Earnings – BV
+Subsidiary Retained Earnings – zero (0)
+ any Gain from Acquisition
- Direct and indirect costs
- excess of Stock issuance cost over charged in Share Premium
TOTAL RETAINED EARNINGS
Non-controlling Interest in Net Assets of subsidiary

NCINAS or (MINAS)
-Under PFRS 3, parent entity is acquiring majority holding in an entity whose shares
are dealt in on a recognized market. NCI can be measured using:
1. Fair value of the NCI of acquiree
-should not be lower the proportionate share
2. A proportionate share of the acquiree’s identifiable net assets.
ACCOUNTING TREATMENT ON SOME SPECIFIC COST ITEMS
1. Cash or other monetary assets. The fair value of the cash and cash equivalents dispersed is
usually readily determinable. But if the settlement is deferred to a time subsequent to the
exchange date the fair value of that deferred component shall be the present value at the date
of exchange.
2. Non- monetary assets. These consist of assets such s property, plant a and equipment,
investments, licenses and patents. The acquirer is effectively selling the non-monetary asset
to the acquiree. Hence it is earning revenue equal to the fair value on the sale of the assets
and realizing a gain or incurring a loss if the carrying amount differs from the fair
3. Equity instruments. If an acquirer issues its own shares as consideration it will need to
determine the fair value of those shares at the date of exchange.
4. Liabilities undertaken- - the fair value of the liabilities undertaken al best measured by the
present value of future cash flows. Note that expected future losses and cost, as a result of
the combination are not liabilities of the acquirer and therefore not included ir the calculation
of the fair value of consideration paid.
5. Contingencies - Where the business combination agreement provides for an adjustment to
the cost of the combination contingent on future events, the acquirer shall include the amount
of that adjustment in the cost of the combination at the acquisition date if the adjustment is
probable and can be measured reliably.
6. Directly attributable costs; it includes costs such as professional fees paid to accountants,
legal advisers. valuers and other consultants to effect the combination. Also included in the
cost category are finders fees and brokerage fees. These are recognized as expenses if
acquirer is a non-SME.
7. Other cost that are not directly attributable to the business combination are
a. Cost to issue and register the shares issued by the acquirer are treated as a reduction in
the total fair value of the shares issued and are i recognized in equity and
b. Indirect acquisition costs recognized expenses.
ALLOCATING THE COST OF BUSINESS COMBINATION:

1. Identifiable tangible assets: are recognized if it is probable that any associated future
economic benefits will flow to the acquirer; and its fair value can be measured reliably
2. Intangible assets: are recognized if it's fair value can be measured reliably. Note that, unlike
tangible assets there is no probability test only a reliability test.

3. Liabilities- are recognized if it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and its fair value can be measured reliably.
4. Contingent assets and liabilities
Contingent assets not yet recognized under phase I of IFRS 3
Contingent liabilities the only test for recognition of contingent liabilities is the reliability
test, the probability test is assumed to be met because the fair value measurement
takes the probability factors into consideration. Hence, contingent liabilities not
recognized in the records of the acquiree may be recognized in the records of the
acquirer as a result of the business combination.
-done-
BUSINESS COMBINATION: STATUTORY MERGER AND STATUTORY CONSOLIDATION

(IFRS 3)
On January 1, 2019, NT Company exchanges 15, 000 shares of its ordinary stock for all the
assets and liabilities of OTG Inc. Each of NT’s shares has a P 4 par value and a P 50 fair value.
The fair value of the stock exchanged in the acquisition was considered equal to OTG’s fair
value. NT also paid P 25, 000 in stock registration and issuance costs in connection with the
merger.
Several of OTG’s accounts have fair values that differ from their book value on this date:
Book Value Fair Value
Receivables P 65, 000 P 63, 000
Trademarks 95, 000 225, 000
Record music catalog 60, 000 180, 000
In-process research and development -0- 200, 000
Notes payable 50, 000 45, 000
Pre-combination January 1, 2019, book values for the two companies are as follows:
NT OTG
Cash P 60, 000 P 29, 000
Receivables 150, 000 65, 000
Trademarks 400, 000 95, 000
Record Music Catalog 840, 000 60, 000
Equipment (net) 320, 000 105, 000
Totals P 1, 770, 000 P 354, 000
Accounts Payable P 110 000 P 34, 000
Notes Payable 370, 000 50, 000
Ordinary Shares 400, 000 50, 000
Share Premium 30, 000 30, 000
Retained Earnings 860, 000 190, 000
Totals P 1, 770, 000 P 354, 000
Assume that this combination is a statutory merger so that OTG’s accounts will be transferred
to the records of NT. OTG will be dissolved and will no longer exist as legal entity. Immediately
the business combination using acquisition method, determine:
1. The total assets amounted to:
a. P 2, 124, 000
b. P 2, 547, 000
c. P 2, 574, 000
d. P 2, 599, 000
2. The total liabilities amounted to:
a. P 84, 000
b. P 480, 000
c. P 564, 000
d. P 559, 000
3. The ordinary shares amounted to:
a. P 50, 000
b. P 400, 000
c. P 450, 000
d. P 460, 000
4. The share premium amounted to:
a. P 30, 000

b. P 60, 000
c. P 695, 000
d. P 720, 000
5. The retained earnings amounted to:
a. P 190, 000
b. P 835, 000
c. P 860, 000
d. P 1, 050, 000
Bullen Inc. acquired assets and liabilities of Vicker Inc. on January 1, 20x4. The book value and fair
value of Vickers accounts on that date (prior to creating the combination) follow, along with the
book value of Bullen's accounts:
Bullen Vicker Vicker

Item BV BV FV
Retained Earnings 1/1/x4 P160,000 P240,000 P 70,000
Cash and receivables 170,000 70,000 210,000
Inventory 230,000 170,000 240,000
Land 280,000 220,000 270,000
Buildings (net) 480,000 240,000 90,000
Equipment (net) 120,000 90,000 420,000
Liabilities 650,000 430,000
Common Stock 360,000 80,000
Additional paid-in capital 20,000 40,000
1. Assume that Bullen issued 12,000 shares of common stock with a P5 par value and a P47 fair
value to obtain all of Vicker's outstanding stock. In this transaction how much goodwill should
be recognized?
a. P144,000
b. P104,000
c. P64,000
d. P60,000
e. P-0-
2. Assume that Bullen issued 12.000 shares of common stock with a P5 par value and a P42 fair
value for all of the outstanding shares of Vicker. What will be the Additional Paid-in Capital and
Retained Earnings after the combination?
a. P20,000 and P160,000
b. P20,000 and P260,000
c. P380,000 and P160,000
d. P464,000 and P160,000
e. P380,000 and P260,000
3. Assume that Bullen issued preferred stock with a par value of P 240, 000 and a fair value of P
500, 000 for all of the net assets of Vicker in a business combination. What will be the balance
of Inventory and Land accounts after the business combination?
a. P440, 000; P496, 000
b. P440, 000; P520, 000
c. P425, 000; P505, 000
d. P402,000; P520, 000
e. P427,000; P510, 000
4. Assume that Bullen paid a total of P 480, 000 cash for all the shares of Vicker. In addition,
Bullen paid P 35, 000 to a group of attorneys for their work in arranging the combination to be
accounted for as an acquisition. What will be the balance of goodwill?
a. P-0-
b. P20, 000
c. P35, 000
d. P55, 000
On September 18, 20x4, OL Co. acquired all the TM Inc’s P 2, 000, 000 identifiable assets and P
500, 000 liabilities. Book values of the TM’s assets and liabilities equal to their fair values except
for the overvalued plant and equipment. As a consideration, OL issued its own shares of stock with
a market value of P 1, 600, 000. The merger resulted into P 700, 000 goodwill. Assuming OL had P
5, 000, 000 total assets prior the combination, how much is the combined total assets?
A. P 6, 400, 000
B. P 6, 600, 000
C. P 7, 100, 000
D. P 7, 000, 000
BUSINESS COMBINATION: SEPARATE AND CONSOLIDATED FINANCIAL STATEMETNS -

DATE OF ACQUISITION (IFRS 10)
Conditions for Consolidated Statements
Generally, statements are to be consolidated when a parent company owns over 50% of the voting
common stock of another company thereby having a controlling interest. However, control may be
achieved even with less than 51% of the voting common stock is owned by the parent. In such
case, the consolidated statements may be prepared in view of the unified managerial control.
Techniques of Consolidation
The basic procedure to consolidate the statement of financial position is to eliminate the
Investment account on the parent company’s statement of financial position against the
stockholder’s equity accounts in the statement of financial position of the subsidiary company. After
this, the remaining assets and liabilities of the parent company are then combined with the specific
assets and liabilities of the subsidiary company.
Consideration Paid (Purchase Price) xxx

+ Non-Controlling Interest* xxx
Total Consideration Given xxx
-Book Value of Net Assets** (xxx)
Excess xxx
-Allocation and Determination (diff bet. FMV vs. BV)
Assets (if increase) – reverse effect (decrease)
(if decrease) – reverse effect (increase)
Liabilities direct effect (e.g. increase – increase) (xxx)
Goodwill or (Gain on Acquisition) xxx
Measurement of Non-controlling Interest
IFRS 3 provides two options of measuring non-controlling interest in an acquire:

1. At fair value, or
2. At the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets
Under option 1, any goodwill that arises at the time of acquisition is allocated between the parent
and the non-controlling interest (NCI)
Under option 2, any goodwill that arises at the time of acquisition is assigned only to the parent.
*NCI – if PROBLEM is silent, - use whichever is HIGHER bet. FV vs. Proportionate
ILLUSTRATIVE PROBLEM
On January 2, 2019, AB Co purchased 100% of the outstanding ordinary shares of XY Co for

P813, 000 payable in cash. On that date, the assets and liabilities of XY Co had fair market values
as indicated below. Statements of Financial Position of the companies on January 2, 2019 are also
indicated below. The non – controlling is measured at fair value.
AB XY
Assets Carrying amount Fair Value
Cash P150, 000 P150, 000 P150, 000
Receivables 300, 000 225, 000 225, 000
Inventories 225, 000 195, 000 210, 000
Land 75, 000 120, 000 180, 000
Building – net 450, 000 300, 000 270, 000
Long-term investment in MS 150, 000 187, 500 210, 000
Investment in XY Co 813, 000
Total P 2, 163, 000 P 1, 177, 500
Liabilities and Shareholders’ Equity

Accounts Payable 262, 500 172, 500 172, 500
Ordinary Shares –AB Co 600, 000
Ordinary Shares – XY Co 300, 000
Share Premium – AB 300, 000
R/E – AB Co 1, 000, 500
R/E – XY Co 705, 000
Total P 2, 163, 000 P 1, 177, 500
Required: Prepare journal entries on the books of AB Co. Prepare the determination and allocation
of excess schedule to compute for goodwill/ gain on acquisition. Prepare working paper entries.
Assuming the following independent information:
Price Paid Interest (control) Liabilities of AB FMV of NCI/Proportionate
a. P1, 200, 000 80% P649, 500 -

b. 1, 200, 000 80% P649, 500 use proportionate share basis
c. 1, 080, 000 90% P529, 500 135, 000
d. 1, 350, 000 75% P799, 500 225, 000
e. 750, 000 80% P199, 500 180, 000
MULTIPLE CHOICE PROBLEMS

On January 2, 2020, the Statement of Financial Position of Body and Shop Company prior to the
combination are:
Body Co. Shop Co.
Cash P 675, 000 P 22, 500
Inventories 450, 000 45, 000
PPE (net) 1, 125, 000 157, 500
Total Assets P 2, 250, 000 P 225, 000
Current liabilities P 135, 000 P 22, 500

Ordinary shares P100 par 225, 000 22, 500
Share Premium 675, 000 45, 000
Retained Earnings 1, 215, 000 135, 000
Total Equity P 2, 250, 000 P 225, 000
The fair value of S Co.’s equipment is P229, 500.
1. Assuming Body Company acquired 90% of the outstanding ordinary shares of Shop Company
for P364, 500 and NCI is measured at fair value, how much is the total consolidated assets on
the date of acquisition?
A. P 2, 313, 000
B. P 2, 677, 500
C. P 2, 605, 500
D. P 2, 241, 000
for P 202, 500 cash and NCI is measured at proportionate share, how much is the consolidated
shareholders’ equity on the date of acquisition?
A. P 2, 115, 00
B. P 2, 129, 400
C. P 2, 169, 900
D. P 2, 187, 000
for P 157, 500 cash and NCI is measured at fair value of P 91, 500, how much is the goodwill/(gain
on acquisition)?
A. (P 34, 650)
B. P 25, 500
C. (P 25, 500)
D. P 34, 650
4. Assuming Body Company acquired all of the outstanding shares of Shop Company resulting to
goodwill of P 99, 000, contingent consideration is P 54, 000 how much is the price paid to Shop
Company’s shares?
A. P 373, 500
B. P 319, 500
C. P 472, 500
D. P 427, 500
On January 1, 20x4. Park Corporation and Strand Corporation and their condensed balance sheet
are as follows:
Park Corp Strand Corp
Current Assets P 70,000 P 20,000
Non-current Assets 90,000 40,000
Total Assets P160,000 P60,000
Current Liabilities P 30,000 P 10,000
Long-term Debt 50,000
Stockholders' Equity 80,000 50,000
Total Liabilities and Equities P160,000 P60,000
On January 2, 20x4, Park Corporation borrowed P60,000 and used the proceeds to obtain a 80% of
the outstanding common shares of Strand Corporation. The P60,000 debt is payable in 10 equal
annual principal payments, plus interest, beginning December 31, 20x4. The excess fair value of the
investment over the underlying book value of the acquired net assets is allocated to inventory (60%)
and to goodwill (40%).
On a consolidated balance sheet as of January 2. 20x4, what should be the amount for each of the
following?
1. The amount of goodwill using proportionate basis (partial):

a. P -0-
b. P8,000
c. P10,000
d. P20,000
2. The amount of goodwill using full fair value (full/gross-up) basis:
a. P -0-
b. P8,000
c. P10,000
d. P20,000
3. Current assets should be:
a. P105,000
b. P102,000
c. P100,000
d. P 90,000
4. Non-Current asset using proportionate basis (partial) in computing goodwill should be
a. P130,000
b. P134,000
c. P138,000
d. P140,000
5. Non-current assets using full fair value basis (full/gross-up) in computing goo should be:
a. P130,000
b. P134,000
c. P138,000
d. P140,000
6. Current liabilities should be:
a. P50,00
b. P46,000
c. P40,000
d. P30,000
7. Non-current liabilities should be:

a. P110,000
b. P104,000
c. P 90,000
d. P 50,000
8. Stockholders' equity using proportionate (partial goodwill) basis of determine non-controlling
interest should be:
a. P80,000
b. P93,000
c. P 95,000
d. P130,000
9. Stockholders' equity using full fair value full/gross-up goodwill) proportionate basis of determine
non-controlling interest should be:
a. P80,000
b. P93,000
c. P 95,000
d. P130,000
ACQUISITION OF STOCKS: SEPARATE AND CONSOLIDATED FINANCIAL STATEMENTS-

SUBSEQUENT TO DATE OF ACQUISITION
Consolidated FS are prepared when an entity controls one or more other entities.
Control
An investor, regardless of the nature of its involvement with an entity (the investee), determines
whether it is a parent by assessing whether it controls the investee.
Pre-requisites on control
A. Power over the investee
B. Exposure, or rights, to variable returns for its investment with the investee; and
C. The ability to use its power over the investee to affect the amount of the investor’s returns.
THE CONSOLIDATION PROCESS
The approach followed to prepare a complete set of consolidated financial statements
subsequent to acquisition is quite similar to that used to prepare a consolidated statement of financial
position as of the date of acquisition. However, in addition to the Statement of Financial Position, the
Statement of Comprehensive Income and Retained Earnings Statement of the consolidating
companies must be combined.
ACCOUNTING PROCEDURES
When preparing consolidated financial statements, an entity must use uniform accounting
policies for reporting like transactions and other events in similar circumstances. If a member of the
group uses accounting policies other than those adopted in the consolidated financial statements for
like transactions and events in similar circumstances, appropriate adjustments are made to that
group member's financial statements in preparing the consolidated financial statements to ensure
conformity with the group's accounting policies.
Consolidation of an investee shall begin from the date the investor obtains control of the
investee and cease when the investor losses control of the investee.
Consolidated financial statements are prepared using the following basic accounting
procedures:
a. Combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent
with those of its subsidiaries.
b. Eliminate the carrying amount of the parent's investment in each subsidiary and the parent's
portion of equity of each subsidiary (IFRS3 explains how to account for the difference).
c. Eliminate in full intercompany assets and liabilities, equity, income, expenses and cash flows
relating to transactions between entities of the group (profits or losses resulting from
intercompany transactions that are recognized in assets, such an inventory and fixed assets,
are eliminated in full). Intercompany losses may indicate an impairment that requires
recognition in the consolidated financial statements
Consolidated Comprehensive Income

Because consolidation subsequent to a subsidiary's acquisition involves changes that take
place over time, the resulting financial statements test heavily on the concepts of consolidated
comprehensive income.
Consolidated comprehensive income may be computed using two approaches, the parent company
approach and the entity approach. In the consolidated statement of comprehensive income and
retained earnings, consolidated comprehensive income is allocated to on-controlling interests and
the controlling interest (equity holders of the parent company).
Parent Company Approach

Under the parent company approach, consolidated comprehensive income is that part of the
total enterprise's income that is assigned to the parent company's stockholders. For wholly owned
subsidiary, all income of the parent and its subsidiaries accrues to the Parent company. For partially

owned subsidiary, a portion of its income accrues to its non-controlling shareholders and is excluded
from consolidated net income.
In simple cases, consolidated comprehensive income equals the total earnings for all companies
consolidated, less any income recorded by the parent from the consolidating companies and any
income assigned to NCI.
ACCOUNTING FOR INVESTMENT IN A SUBSIDIARY

When stocks are acquired, the acquirer investor maintains the Investment account on a
continuous basis. The acquirer may choose two methods when accounting for its investment in stock:
the cost method or the equity method.
Cost Method
The cost method is used when the acquirer Parent) owns directly or indirectly more than half
of the voting power of an entity (Subsidiary), thereby exercising control (IAS 27).
Under this method, the Investment in Subsidiary account is retained at its original cost of-acquisition
(consideration given) balance. Income on the investment is limited to dividends received from the
subsidiary.
Equity Method
The equity method is used when the acquirer/investor owns 20% or more (less than 50%) of
the voting power of the investee/acquire, thereby exercising significant influence over the operations
of the investees (IFRS 12).
Under this method, the investment account is initially recorded at cost and is increased or decreased
to recognize the investors share of the income or loss of the investee after the date of acquisition.
Dividends received from an investee reduce the investment account balance. Adjustments to the
investment account may also be necessary for changes arising from revaluation of assets and
liabilities of the investee.
Cost Method and Equity Method Compared

Consolidated statements are the same under both methods. However, the working Paper
eliminating entries used in the two methods are different.
IAS27 – prescribes the use of Consolidated Financial Statements
ILLUSTRATIVE PROBLEM
P Co. acquired 80% of the outstanding ordinary share of S Co. on January 2, 2019 for P1, 437, 000.
S Co. shareholders’ equity on January 2, 2019 were as follows: Ordinary Shares, P100par, P656,
250; Share Premium, P262, 500; Retained Earnings, P525, 000. NCI is measured on January 2,
2019 at fair value. Current fair value of S Co. identifiable net assets exceeded their book values as
follows: Inventories, P78, 750; Plant assets (economic life 10years), P131, 250; Patents (economic
life of 5 years), P52, 500. Both P Co and S Co include depreciation expense and amortization in
operating expenses. Both Companies use the straight-line method for depreciation and amortization.
No impairment of goodwill is to be recognized. Prior to acquisition, Ordinary share of P Co is P900,
000; Share Premium is P375, 000 and Retained earnings are P750, 000.
For two years ended December 31, P Co and S Co reported the following results of operations:
Net Income Dividends

P Co S Co P Co S Co
2019 P262, 500 P210, 000 P65, 625 P26, 250
2020 231, 250 315, 000 210, 000 196, 875
Required:
1. Prepare all journal entries required on the books of P Co during 2019 and 2020 to account for
its Investment in S Co and S Co.’s operating result using the cost method.
2. Prepare working paper elimination entries for consolidated financial statements on December
31, 2019 and December 31, 2020.
3. Compute the following on December 31, 2019 and 2020:
a. NCI in net income of subsidiary - NCINIS
b. Consolidated net income attributable to parent
c. NCI in net assets of subsidiary – NCINAS
d. Consolidated Retained Earnings

Papa Company acquires 80% of Sasa Company for P 500, 000 on January 1, 20x4. Sasa reported
common stock of P 300, 000 and retained earnings of P 200, 000 on that date. Equipment was
undervalued by P 30, 000 and building was undervalued by P 40, 000, each having a 10-year
remaining life. Any excess consideration transferred over fair value was attributed to goodwill with
an indefinite life. Based on an annual review, goodwill has not been impaired. Sasa earns income
and pays dividend as follows:
20x4 20x5 20x6
Net income 100, 000 120, 000 130, 000
Dividends 40, 000 50, 000 60, 000
Assume the cost model or initial value method is applied.
1. Compute Papa’s investment in Sasa at December 31, 20x4
A. P 500, 000
B. P 574, 400
C. P 625, 000
D. P 524, 400
E. P 532, 000
2. How much does Papa report as Income from Sasa for the year ended December 31, 20x4?
A. P 32, 000
B. P 74, 400
C. P 73, 000
D. P 42, 400
E. P 41, 000
A. P 90, 400
B. P 40, 000
C. P 89, 000
D. P 50, 400
E. P 56, 000
A. P 48, 000
B. P 56, 000
C. P 98, 400
D. P 97, 000
E. P 50, 400
5. Compute the NCI in net income of Sasa at December 31, 20x4
A. P 12, 000
B. P 10, 600
C. P 18, 600
D. P 20, 000
A. P 18, 400
B. P 14, 000
C. P 22, 600
D. P 24, 000
E. P 12, 600
A. P 24, 600
B. P 14, 600
C. P 26, 000
D. P 20, 400
E. P 12, 600
8. Compute the NCI of Sasa at December 31, 20x4
A. P 135, 600
B. P 80, 000
C. P 117, 000
D. P 100, 000
E. P 110, 600
A. P 126, 000
B. P 106, 000
C. P 109, 200
D. P 149, 600
E. P 148, 200

A. P107, 800
B. P140, 000
C. P80, 000
D. P50, 000
E. P160, 800
Assume equity method is applied
A. P580, 000
B. P574, 400
C. P548, 000
D. P522, 400
E. P541, 000
A. P577, 200
B. P664, 800
C. P592, 800
D. P580, 000
E. P572, 000
A. P639, 000
B. P643, 200
C. P763, 200
D. P676, 000
E. P620, 000
A. P74, 400
B. P73, 000
C. P42, 400
D. P41, 000
E. P80, 000
A. P 90, 400
B. P 89, 000
C. P 50, 400
D. P 56, 000
E. P 96, 000
A. P50, 400
B. P 56, 000
C. P 98, 400
D. P 97, 000
E. P 104, 000
A. P 20, 000
B. P 12, 000
C. P 18, 600
D. P 10, 600
E. P 14, 400
A. P 18, 400
B. P 14, 000
C. P 22, 600
D. P 24, 000
E. P 12, 600
A. P 24, 600
B. P 14, 000
C. P 26, 600
D. P 20, 400
E. P 12, 600
A. P 135, 600
B. P 117, 000
C. P 112, 000
D. P 100, 000
E. P 110, 600
A. P 107, 000
B. P 126, 000
C. P 109, 200
D. P 149, 600
E. P 148, 200
A. P107, 800
B. P140, 000
C. P165, 800
D. P160, 800
E. P146, 800
On January 2, 2019, Polo Corporation purchases 80% of Son Co. ordinary shares for P324, 000.
P15, 000 of the excess is attributable to goodwill and the balance to a depreciable asset with an
economic life of ten years. Non-controlling interest is measured at its fair value on date of
acquisition. On the date of acquisition, shareholders’ equity of the two companies is as follows:
Polo Co. Son Co.
Ordinary Shares P 525, 000 P 120, 000
Retained Earnings 780, 000 210, 000
On December 31, 2019, Son Company reported net income of P52, 500 and paid dividends of
P18, 000 to Polo. Polo reported earnings from its separate operations of P142, 500 and paid
dividends of P69, 000. Goodwill had been impaired and should be reported at P3, 000 on
December 31, 2019.
1. What is the consolidated net income on December 31, 2019?
A. P178, 875
B. P189, 375
C. P177, 000
D. P180, 000
2. What is the NCI in net income of Son Co. on December 31, 2019?
A. P9, 375
B. P9, 300
C. P10, 500
D. P6, 900
3. What amount of NCI is to be presented in the consolidated statement of financial position on
December 31, 2019?
A. P82, 125
B. P83, 400
C. P77, 250
D. P72, 750
4. What is the consolidated net income attributable to parent shareholders on December 31, 2019?
A. P170, 100
B. P168, 000
C. P178, 200
D. P180, 000
INTERCOMPANY SALE OF INVENTORY
Intercompany Sales at Cost

Merchandise sometimes is sold to related affiliate at the seller's cost. When an intercompany sale
includes no profit or loss, the inventory amounts at the end of the period require no adjustment for
consolidation because purchasing affiliates inventory carrying amount is the same as the cost to the
selling affiliate and the consolidated entity sold by the affiliate making the outside sale is the cost to
the consolidated entity.
Even when the intercompany sale includes no profit or loss, however, an eliminating entry is
needed to remove the intercompany sale and the related cost of goods so recorded by the seller.
This avoids overstating these two accounts. Consolidated comprehensive income is not affected by
the eliminating entry when the intercompany sale is made at cost because both sales revenue and
cost of goods sold are reduced by the same amount.
Intercompany Sales at a Profit or Loss

Companies usually mark-up sale of inventory to affiliates by a certain percentage of cost. The
elimination process must remove the effects of such sales from the consolidated statements.
When intercompany sales include profits or losses, the working paper eliminations needed for
consolidation in the period of sale have two goals:
1. Elimination of the effects in the statement of CI of the intercompany sale in the period of sale,
removing the sales revenue from the intercompany sale and the related costs of goods sold
recorded by the selling affiliate.
2. Elimination from the inventory on the Statement of Financial Position of any profit or loss on
the intercompany sale that has not been confirmed or realized by resale of the inventory to
outsiders.
Inventory reported in the consolidated statement of financial position must be reported at cost to the
consolidated entity. Therefore, if profits or losses have been recorded on the inventory acquired in
an intercompany sale, those profits or losses must be eliminated to state the inventory in the
consolidated statement of financial position at its cost to the consolidated entity.
Effect of Inventory System Used

Most companies use either a perpetual or a periodic inventory system to keep track of
inventory and cost of goods sold. Under a perpetual inventory system, a purchase of merchandise
is debited directly to the Inventory account; a sale requires a debit to Cost of Goods Sold account
and a credit to Inventory account for the cost of the item. When a periodic system is used, a purchase
of merchandise is debited to Purchases account other than to Inventory, and no entry is made to
recognize cost of goods sold until the end of the accounting period.
The choice between periodic and perpetual inventory systems results in a different entry on
the books of the individual companies and, therefore, slightly different working paper eliminating
entries in preparing consolidated financial statements. Because most companies use perpetual
inventory systems, the discussions in the chapter focus on the consolidation procedures used in
connection with perpetual inventories.
DOWNSTREAM SALE OFINVENTORY

Downstream intercompany sales of merchandise are those from a parent company to its
subsidiaries. For consolidation purposes, profits recorded on an intercompany inventory sale are
realized in the period in which the inventory is resold to outsiders.
Until the point of resale, all intercompany profits must be deferred. Consolidated CI must be
based on the realized income of the selling affiliate. If the intercompany sales of merchandise are
made by the parent company or by a wholly owned subsidiary, there is no effect on any NCI in CI or
loss, because the selling affiliate does not have NCI.
When a company sells merchandise to an affiliate, one of two situations results: (1) the
merchandise is resold to outsiders during the same period, and (2) the merchandise is resold to
outsiders during the next period resulting to unrealized profit in ending
UPSTREAMSALE OFINVENTORY
Upstream intercompany sales are those from subsidiaries to the parent company. When an
upstream sale of inventory occurs, and the inventory is resold by the parent to outsider during the
same period, all the parent entries and the eliminating entries in the consolidated working paper are
identical to those in the downstream case.
When the inventory is not resold to outsiders before the end of the period, working paper
eliminating entries are different from the downstream case only by the apportionment of the
unrealized intercompany to both the controlling and NCI. The intercompany profit in an upstream
sale is recognized by the subsidiary and shared between the controlling interest and NCI. Therefore,
the elimination of the unrealized intercompany profit must reduce the interests of both ownership
groups until the profit is realized by resale of the inventory to outsiders.
On January 2, 2018, Par company purchase 80% of the outstanding shares of Sub Company by
paying P340, 000, the Sub company’s common stock and retained earnings on this date amounted
to P150, 000 and P230, 000 respectively. Also, on this date. an equipment is undervalued by
20,000 with a remaining life of 10 years.

On January 1, 2020., Sub Company had P150, 000 of capital stock and P300, 000 of retained
earnings. Also, on the same date, Par Company had P1, 000, 000 of capital stock and P700, 000 of
retained earnings.
During the year, Par Company sold merchandise to Sub for P60, 000 and in turn, purchased P40,000
from Sub Company. Inter-company sales of merchandise were made at the following gross profit
rates:
Sales made by parent... 25% based on cost
Sales made by subsidiary... ... 20% based on sales
December 31, 2020, 30% of all inter-company sales remains in the ending inventory of the
purchasing affiliate. The beginning inventory of Par C Company includes P2,500 worth of
merchandise acquired from Sub Company on which Sub Company reported profit of P 1, 000. While,
the beginning inventory of Sub also includes P3, 000 of merchandise acquired from Par Company
at 35% mark-up. Using cost method, the following selected results of operations were as follows:
Par Company Sub Company
Dividends paid P 60,000 P 10, 000
Net income from own operations P100,000 P 30, 000
Add: Dividend income 8,000
Net income P108, 000 P 30, 000
1. The dividend income for 2020 should be:

A. P18,330
B. P10,000
C. P8,000
D. P8,200
2. The balance of Investment as of December 31, 2020 should be:
A. P354,600
B. P351,960
C. P350,330
D. P340,000
3. The non-controlling Interest in Net Income for 2020, should be:
A. P6,280
B. P6,120
C. P5,720
D. P5,320
4. The profit Attributable to Equity Holders of Parent/Controlling Interest in Net Income for 2020
should be:
A. P122,600
B. P118,730
C. P118,570
D. P118,330
5. The Consolidated Net Income for 2020 should be:
A. P124,050
B. P122,600
C. P118,570
D. P118,330
The stockholders' equity of subsidiary on December 31, 2020 should be
A. P450,000
B. P470,000
C. P481,600
D. P484,000
6. The non-controlling Interest (in Net Assets) on December 31, 2020 using proportionate basis (or
partial goodwill approach) should be:
A. P97,120
B. P96,920
C. P 96,320
D. P73,520
7. The Non-controlling Interest (in Net Assets) on December 31. 2020 using full fair value basis (or
full-goodwill approach) should be:
A. P101,320
B. P 96,920
C. P 96,320
D. P73,520
8. The parent's portion of consolidated retained (or controlling interest/ equity holders of parent
retained earnings) on December 31, 2020:
A. P700,000
B. P752,000
C. P753,600
D. P809,680
9. The consolidated retained earnings on December 31, 2020:
A. P700,000
B. P752,000
C. P753,600
D. P809,680
10. The consolidated stockholders' equity on December 31, 2020 using proportionate basis (or partial
goodwill approach):
A. P1,911,000
B. P1,906,000
C. P1,905,920
D. P1,740,000
11. The consolidated stockholders' equity on December 31, 2020 using full fair value basis (or full-
goodwill approach) should be:
A. P1,911,000
B. P1,906,000
C. P1,905,920
D. P1,740,000
Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases all its
inventory from Sub. The incomes reported by the companies over the past three years are as follow:
Year Sub Company's Net Income Par Corporation 's Operating Income
20x3 P150,000 P 225,000
20x4 135,000 360,000
20x5 240,000 450,000
Silence, Inc. is a 90% - owned subsidiary of Peace Corp. Summarized income statements for the
affiliated companies for the year ended December 31, 2019:
Peace Silence
Sales P1, 500, 000 P500, 000
Cost of sales (750, 000) (200, 000)
Operating expenses (550, 000) (200, 000)
Operating income P200, 000 P100, 000
Dividend Income 10, 000 -
Net Income P210, 000 P100, 000
Inventory, 12/31, 18 P220, 000 P160, 000
During 2019, Peace sold merchandise to Silence for P300, 000; and Silence sold to Peace,
merchandise for P30, 000. The beginning inventory of Peace were all acquired from outside
vendors; while the beginning inventory of Silence contained P30, 000 of goods acquired from
Peace. Twenty percent of the current year’s intercompany sales remained in the respective
ending inventories of the affiliated companies.
1. How much is the consolidated cost of goods sold for 2019?
A. P665, 000
B. P638, 600
C. P680, 000
D. P695, 000
2. How much is the consolidated net income (CNI) for 2019?
A. P288, 600
B. P271, 760
C. P281, 400
D. P291, 400
3. How much is the non-controlling interest in net income of Silence?
A. P10, 840
B. P2, 840
C. P7, 200
D. P9, 640
INTERCOMPANY SALE OF PROPERTY PLANT AND EQUIPMENT

On April 1, 20x4 Wilson Company, a 90% owned subsidiary of Simon Company bought equipment
from Simon for P68,250. On January 1, 20x4, Simon realized that the useful life of the equipment
was longer than originally anticipated, at ten remaining years. The equipment had an original cost to
Simon of P80,000 and a book value of P50,000 with a 10-year remaining life as of January 1, 20x4.
(Assume the use of equity method)
The following data are available pertaining to Wilson's income and dividends:
20x4 20x5 20x6
Net Income P100,000 P120,000 P130,000
Dividends 40,000 50,000 60,000
1. Compute the gain on transfer of equipment reported by Simon for 20x4

A. P19,500
B. P18,250
C. P11,750
D. P38,250
E. P37,500
2. Compute the amortization of gain for 20x4 for consolidation purposes
A. P1,950
B. P1,825
C. P1,500
D. P2,000
E. P5,250
A. P1,950
B. P1,825
C. P2,000
D. P1,500
E. P7,000
A. P1,925
B. P1,825
C. P2,000
D. P1,500
E. P7,000
5. Compute Simon's share of income from Wilson for consolidation for 20x4.
A. P72,000
B. P90,000
C. P73,575
D. P73,800
E. P72,500
6. Compute Simon's share of income from Wilson for consolidation for 20x5
A. P108,000
B. P110,000
C. P106,000
D. P109,825
E. P109,800
7. Compute Simon's share of income from Wilson for consolidation for 20x6.
A. P118,825
B. P115,000
C. P117,000
D. P119,000
E. P118,800
On January 1. 20x4, Smeder Company. an 80% owned subsidiary of Collns, Inc. transferred
equipment with a 10year life (six of which remain with no salvage value) to Colins in exchange for
P84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of P120,
000 less accumulated depreciation of P48,000. Straight-line depreciation is used. Smeder reported
net income of P28,000 and P32,000 for 20x4 and 20x5, respectively. Assume the use of equity
method)
1. Compute the gain recognized by Smeder Company relating to the equipment for 20x4.
A. P36,000
B. P34,000
C. P12,000
D. P10,000
E. P-0-
2. Compute Collins share of Smeders net income for 20x4.
A. P12,400
B. P14,400
C. P11,200
D. P12,800
E. P18,000
3. Compute Colins share of Smeders net income for 20x5.
A. P27,600
B. P23,600
C. P27,200
D. P24,000
E. P34,000
4. For consolidation purposes, what net debit or credit will be made in 20x4 relating to the equipment
transfer?
A. Debit accumulated depreciation, P46,000
B. Debit accumulated depreciation. P48,000
C. Credit accumulated depreciation, P48,000
D. Credit accumulated depreciation, P46,000
E. Debit accumulated depreciation, P2,000
5. What is the net effect on consolidated net income in 20x4, before allocation to controlling and
non-controlling interests, due to the equipment transfer?
A. Increase P2,000
B. Decrease P12,000
C. Decrease P10,000
D. Decrease P14,000
E. Increase P10,000
On January 1, 2014, Subsidiary Company Purchased a delivery truck with an expected useful life
of 5 years and scrap value of P6, 400. On January 1, 2016, Subsidiary Company sold the truck to
Parent Company and recorded the following entry:
Debit Credit
Cash 40, 000
Accumulated Dep’n 14, 400
Truck 42, 400
Gain on Sale of Truck 12, 000
Parent holds 60% of Subsidiary’s voting shares. Subsidiary reported net income of P44, 000,
and Parent reported separate income of P78, 400 for 2016.
1. In preparing the consolidated financial statements for 2016, how much is the depreciation
expense?
A. Debited for P12, 000 in the elimination entries
B. Credited for P12, 000 in the elimination entries
C. Debited for P4, 000 in the elimination entry
D. Credited for P4, 000 in the elimination entry
2. The consolidated net income for 2016 will be:
A. P122, 400
B. P114, 400
C. P100, 000
D. P94, 240

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CABRIA CPA REVIEW CENTER

ACCOUNTING FOR BUSINESS COMBINATION

THE NATURE OF BUSINESS COMBINATIONS

SPECIFIC REQUIREMENTS OF IFRS 3

Page | 1 BUSINESS COMBINATION_LECTURE

ACCOUNTING FOR COST OF BUSINESS COMBINATION

1. ACQUISITION of Net Assets

Non-controlling Interest in Net Assets of subsidiary

ACCOUNTING TREATMENT ON SOME SPECIFIC COST ITEMS

ALLOCATING THE COST OF BUSINESS COMBINATION:

Page | 3 BUSINESS COMBINATION_LECTURE

BUSINESS COMBINATION: STATUTORY MERGER AND STATUTORY CONSOLIDATION

Page | 4 BUSINESS COMBINATION_LECTURE

Bullen Vicker Vicker

BUSINESS COMBINATION: SEPARATE AND CONSOLIDATED FINANCIAL STATEMETNS -

Consideration Paid (Purchase Price) xxx

Measurement of Non-controlling Interest

IFRS 3 provides two options of measuring non-controlling interest in an acquire:

On January 2, 2019, AB Co purchased 100% of the outstanding ordinary shares of XY Co for

Liabilities and Shareholders’ Equity

a. P1, 200, 000 80% P649, 500 -

MULTIPLE CHOICE PROBLEMS

Current liabilities P 135, 000 P 22, 500

1. The amount of goodwill using proportionate basis (partial):

7. Non-current liabilities should be:

ACQUISITION OF STOCKS: SEPARATE AND CONSOLIDATED FINANCIAL STATEMENTS-

Consolidated Comprehensive Income

Parent Company Approach

Page | 9 BUSINESS COMBINATION_LECTURE

ACCOUNTING FOR INVESTMENT IN A SUBSIDIARY

Cost Method and Equity Method Compared

Net Income Dividends

Page | 10 BUSINESS COMBINATION_LECTURE

Page | 11 BUSINESS COMBINATION_LECTURE

INTERCOMPANY SALE OF INVENTORY

Intercompany Sales at Cost

Intercompany Sales at a Profit or Loss

Effect of Inventory System Used

DOWNSTREAM SALE OFINVENTORY

Page | 14 BUSINESS COMBINATION_LECTURE

1. The dividend income for 2020 should be:

INTERCOMPANY SALE OF PROPERTY PLANT AND EQUIPMENT

1. Compute the gain on transfer of equipment reported by Simon for 20x4

Page | 18 BUSINESS COMBINATION_LECTURE

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