ACTREV 4 REVIEWER IN BUSINESS COMBINATION

Multiple-Choice Questions

1. On January 1, 2022, Rogers Inc. sold equipment costing P 2,800,000 with accumulated
depreciation of P 1,680,000 to Cooper Corp., wholly owned subsidiary, for P 1,500,000.
Rogers had owned the equipment for six years and was depreciating the equipment using
the straight-line method over ten years with no salvage value. Cooper will continue to use
the straight-line method over the remaining four years of the equipment’s economic life. In
consolidated statements at December 31, 2022, the cost and accumulated depreciation,
respectively, should be
A. P 2,800,000 and P 1,680,000 C. P 2,800,000 and P 2,055,000
B. P 1,500,000 and P 375,000 D. P 2,800,000 and P 1,960,000

2. In 2019, Einstein Inc. purchase land from its 70%-owned subsidiary for P 125,000. The
subsidiary originally paid P 80,000 for the land several years earlier. In 2021, Einstein Inc.
needed to raise some cash and sold the land to an unrelated third party for P 115,000. What
amount of gain or loss on the sale of the land should be reported in the consolidated
income statement in 2019 and 2021?
2019 2021 2019 2021
A. P 45,000 gain P 35,000 gain C. P -0- P 10,000 loss
B. P 45,000 gain P 10,000 loss D. P -0- P 35,000 gain

3. Dark Inc. owns 70% of Light Co.’s common stock. On January 2, 2021, Dark Inc. sold to Light
Co. some equipment for P 90,000. The equipment had a carrying amount of P 60,000. Light
is depreciating the acquired equipment over a fifteen-year remaining useful life by the
straight-line method. The net adjustments to calculate 2021 and 2022 consolidated net
income would be an increase (decrease) of
2021 2022 2021 2022
A. P (28,000) P 2,000 C. P 2,000 P -0-
B. P (24,000) P -0- D. P (6,000) P 24,000

4. Blue Inc. owns 70% of Green Co.’s outstanding common stock. Blue Inc. reports cost of
goods sold in 2021 of P 850,000 while Green Co. reports P 520,000. During 2021, Blue Inc.
sells inventory costing P 100,000 to Green Co. for 125,000. 40% of these goods are not
resold by Green Co. until the following year. What is the amount of cost of goods sold will
be reported in the consolidated income statement?
A. P 1,395,000 B. P 1,255,000 C. P 1,360,000 D. P 1,235,000

5. The Slumber Company’s statement of financial position on December 31, 2021 is as follows:
Assets Liabilities and Shareholders’ Equity
Cash P 200,000 Current liabilities P 600,000
Accounts Receivable 400,000 Long-term debt 1,000,000
Inventories 1,000,000 Ordinary Share, P2 par 200,000
PPE 1,800,000 Share premium 400,000
_________ Retained earnings 1,200,000
Total P 3,400,000 Total P 3,400,000

On December 31, 2019, the Plumber Company acquired 75% of the outstanding ordinary
shares of Slumber for P 3,000,000 cash. On that date, the fair market value of Slumber’s
inventories was P 900,000 and fair value of Slumber’s property, plant and equipment was P
2,000,000. The fair values of all assets and liabilities of Slumber were equal to their book
values.

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As a result of the acquisition of Slumber by Plumber, the consolidated statement of financial

position of Plumber and Slumber should reflect goodwill in the amount of (assume that the
non-controlling interest is measured at fair value and that the consideration transferred
includes a control premium of P 300,000).
A. P 750,000 C. P 1,200,000
B. P 1,000,000 D. P 1,525,000

6. The statement of financial position of Bob Company as of December 31, 2020 is as follows:

Assets Liabilities and Shareholders’ Equity

Cash P 175,000 Current liabilities P 250,000
Accounts receivable 250,000 Mortgage payable 450,000
Inventories 725,000 Ordinary share capital 200,000
Property, plant & equipment 950,000 Share premium 400,000
________ Accumulated profits 800,000
2,100,000 2,100,000

On December 31, 2020, the Taylor Inc. bought all of the outstanding shares of Bob Company
for P 1,800,000 cash. On the date of acquisition, the fair market value of Bob’s inventories
was P 675,000, while the fair value of Bob’s property, plant and equipment was P 1,100,000.
The fair value of all other assets and liabilities of Bob were equal to their book values. In
addition, not included above were costs in-process research and development of Bob
Company amounting to P 100,000.

Goodwill amounted to:

A. P 400,000 B. P 300,000 C. P 200,000 D. P -0-

7. Condensed Statement of Financial Position of Dolce Inc. and Galvez Inc. as of December 31,
2020 were as follows:
Dolce Galvez
Current assets P 275,000 P 65,000
Noncurrent assets 625,000 425,000
Total Assets 900,000 490,000
Liabilities 65,000 35,000
Ordinary shares, P 23 par 549,700 296,700
Share premium 35,300 28,300
Accumulated profits (losses) 250,000 130,000
Total Liabilities and SHE 900,000 490,000

On January 1, 2021, Dolce Inc. issued 30,000 shares with market value of P 25 per share for
the assets and liabilities of Galvez Inc. Dolce Inc. also paid P 125,000 cash. The book value
reflects the fair value of the assets and liabilities, except that the noncurrent assets of
Galvez Inc. have a fair value of P 630,000 and the noncurrent assets of Dolce Inc. are
overstated by P 30,000. Contingent consideration, which is determinable, is equal to P
15,000. Dolce paid for the share issuance costs only amounting to P 74,000 and incurred
other acquisition costs amounting to P 19,000.

As a result of acquiring the net assets of Galvez Inc., compute for the total liabilities in the
books of Dolce.
A. P 100,000 B. P 115,000 C. P 134,000 D. P 65,000

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Duck Corporation acquired a 70% interest in Whistle Corporation on January 1, 2020, when
Whistle’s book values were equal to their fair values. During 2020, Duck sold merchandise that
cost P 75,000 to Whistle for P 110,000. On December 31, 2020, three-fourths of the
merchandise acquired from Duck remained in Whistle’s inventory. Separate incomes of Duck
and Whistle are as follows:
Duck Whistle
Sales Revenue P 150,000 P 200,000
Cost of Goods Sold 90,000 70,000
Operating Expenses 12,000 15,000
Separate Incomes P 48,000 P 115,000

8. What amount of sales to be reported in the consolidated income statement as of December

31, 2020?
A. P 350,000 B. P 240,000 C. P 200,000 D. P 40,000

9. What amount of non-controlling interest income to be reported in the consolidated

financial statement as of December 31, 2020?
A. P 34,500 C. P 60,000 C. P 24,000 D. P 49,500

10. What is the consolidated net income to be reported in the consolidated financial statement
as of December 31, 2020?
A. P 163,000 B. P 88,750 C. P 136,750 D. P 136,700

Comprehensive Problems

Problem A. On January 1, 2017, Parent Company acquired 90% of Subsidiary Company in

exchange for 5,400 shares of P10 par ordinary shares having a market value of P120,600. Parent
and Subsidiary condensed balance sheets on January 1, 2017 before the combination were as
follows:
Parent Subsidiary
Cash P30,900 P37,400
Accounts receivable 34,200 9,100
Inventories 22,900 16,100
Equipment, net 179,000 40,000
Patents ___________ 10,000
Total assets P 267,000 P112,600

Accounts payable P4,000 P 6,600

Bonds payable, 10% 100,000
Ordinary share, P10 par 100,000 50,000
Share premium 15,000 15,000
Retained earnings 48,000 41,000
Total liabilities and equities P267,000 P112,600

At the date of acquisition, all assets and liabilities of Subsidiary Company have a book value
approximately equal to their respective market values except the following as determined by
appraisals as follows:
Inventories (FIFO method) P 17,100
Equipment, net – 4 years remaining life 48,000
Patents – 10 years remaining life 13,000
1. Compute the amount of partial goodwill on January 1, 2017:
2. Compute the non-controlling interests on January 1, 2017:
3. Compute the consolidated retained earnings on January 1, 2017:

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Assuming that on December 31, 2017, the following results were given:
Dividend paid Net Income
Parent Company P 15,000 P 30,200
Subsidiary Company 4,000 9,400

4. Compute the non-controlling interest in net income on December 31, 2017:

5. Compute the investment balance on December 31, 2017:
6. Compute the non-controlling interest on December 31, 2017:
7. Compute the profit for the period attributable to equity holders of parent on December 31,
2017:
8. Compute the consolidated net income on December 31, 2017:

Problem B. Plastic Corporation acquired Shaldan Corporation’s common stock on January 1,

2017 for P 210,000 cash. The stockholders’ equity of Shaldan at this time consisted of P 150,000
capital stock and P 50,000 retained earnings. The difference between the price paid by Plastic
and the underlying equity acquired in Shaldan was due to P 12,500 undervaluation of Shaldan’s
inventory, a P 25,000 undervaluation of Shaldan’s equipment and to goodwill. The undervalued
inventory items were sold by Shaldan during 2017, and the undervalued equipment had a
remaining useful life of five years. Straight-line depreciation is used. Any goodwill is not
amortized.

Goodwill was tested for impairment, and it was determined that an impairment loss of P 10,000
must be recognized in 2019.

Some balance sheet and income statement accounts of Plastic and Shaldan Corporations at end
for the year ended December 31, 2020 are presented below:

Plastic Shaldan
Income Statement
Depreciation expense P 40,000 P 20,000
Net Income 54,500 40,000

Balance Sheet
Dividends receivable 8,000
Building 65,000 70,000
Equipment – net 200,000 100,000
Dividends payable 100,000 10,000
Capital stock 300,000 150,000
Retained earnings 107,500 100,000

Additional information:
Retained earnings, January 1, 2020 75,000 80,000
Dividends 40,000 20,000

Determine the amounts that would appear in the consolidated financial statements of Plastic
Corporation and Subsidiary for each of the following items:
1. Goodwill at December 31, 2020
2. Consolidated depreciation expenses for 2020
3. Non-controlling interest income for 2020
4. Consolidated net income for 2020
5. Consolidated retained earnings at December 31, 2020
6. Non-controlling interest at December 31, 2020

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Problem C. On January 1, 2017, entities A and B each acquired 30 percent of the ordinary
shares that carry voting rights at a general meeting of shareholders of Entity Z for P 100,000.
The purchase price is equal to the fair value of 30 percent of entity Z’s identifiable assets less
percent of its identifiable liabilities. Entity A and B immediately agreed to share control over
entity Z. For the year ended December 31, 2017, entity Z recognized a loss of P 600,000. Entities
A and B have no constructive or legal obligation in respect of their jointly controlled entity’s loss
and have made no payments on its behalf. Entity Z recognized profit for the year ended
December 31, 2018 of P 800,000. There is published price quotation for Entity Z.

Required:
1. Using the equity method at December 31, 2017, Entities A and B each recognizes their share
of the losses of the jointly controlled entity amounted to:
2. At December 31, 2017, entities A and B must each report their investment in entity Z (a
joint controlled entity) amounted to:
3. At December 31, 2018, entities A and B each recognizes their share of profit of the jointly
controlled entity amounted to:
4. At December 31, 2018, entities A and B must each report their investment in entity Z (a
jointly controlled entity) amounted to:

Problem D. Positive Corporation acquired 80% of the outstanding common stock of Synergy
Company on June 1, 2015 for P586,250.

 Synergy Company’s stockholder’s equity components at the end of this year are as follows:
Ordinary shares, P100 par, P250, 000, APIC P112, 500, Retained earnings P222, 500.

 Non-controlling interest is measured at fair value.

 All the assets of Synergy were fairly valued, except for inventories, which are overstated by
P11, 000 and equipment, which was understated by P15,000. Remaining useful life of
equipment is 4 years.

 Both Companies use the straight-line method for depreciation and amortization.
Stockholder’s equity of Positive on January 1, 2015 is composed of Ordinary shares
P750,000, Share premium P175,000, Retained Earnings P525,000.

 Fair value of non-controlling interest on the date of acquisition is P117, 500.

 Goodwill, if any, should be written down by P14, 225 at year-end.

 Net income for the first year of parent and subsidiary are P75, 000 and P42,500 ( from date
of acquisition) respectively.

 Dividends declared at the end of the year amounted to P20, 000 and P15,000. During the
year, there was no issuance of new ordinary shares.

Required:
1. What is the balance of the non-controlling interest in net assets of subsidiary on December
31, 2015?
2. What is the amount of consolidated shareholder’s equity?

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Problem E. Gagala company owns 70% of Gaviola Company, which in turn possesses 60% of
Gaddi Company. The following information is available:

Gagala Company Gaviola Company Gaddi Company

Separately calculated
operating income excluding P600,000 P300,000 P100,000
dividend income
Cash dividends from:
Subsidiary 80,000 50,000 -0-
Associate (s) 20,000 -0- -0-
Other investments at
-0- -0- 30,000
Fair Value
Net deferred inter-company
gains within current year P110,000 80,000 20,000
income
Amortization expense relating
to excess fair value over book 30,000 25,000 -0-
value of investment

1. What is the consolidated net income attributable to Gagala Company stockholders?

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6 Accounting Review Four | Admission Year 2018 - 2019