CPA REVIEW SCHOOL OF THE PHILIPPINES

MANILA
ADVANCED FINANCIAL ACCOUNTING & REPORTING
ACQUISITION OF NET ASSETS AND ACQUISITION OF STOCKS GUERRERO/GERMAN/DE JESUS/LIM/FERRER/LACO/VALIX

PROBLEM 1. IDEAL Corporation is a company involved in manufacturing mining equipment. At

the beginning of the year, the board of directors of the said company has decided to enter into
a business combination with SUPERIOR Corporation and BRIGHT Corporation, top suppliers of
materials in the mining industry which they use in production. The said acquisition is expected
to result in producing higher quality mining equipment with lower total of cost. The deal was
closed on February 28, 2016 and the following information was gathered from the books of the
entities:

IDEAL SUPERIOR BRIGHT

Current Assets P8,250,000 P2,340,000 P1,560,000

Noncurrent Assets 18,750,000 15,300,000 10,200,000
Total Assets P27,000,000 P17,640,000 P11,760,000

Liabilities P1,950,000 P1,260,000 P840,000

Ordinary shares, P100 16,491,000 10,681,200 7,120,800
par
Share premium 1,059,000 1,018,800 679,200
Retained earnings 7,500,000 4,680,000 3,120,000
Total equities P27,000,000 P17,640,000 P11,760,000

IDEAL, who has the legal and economic entity, will issue 135,000 of its ordinary shares in
exchange for the acquisition of SUPERIOR and 67,200 of its ordinary shares in exchange for the
acquisition of BRIGHT. The fair value of IDEAL’s shares is P150. In addition, the following
adjustments should be made to the current assets of Superior and Bright which has a fair value
of P2,700,000 and P1,380,000, respectively. The noncurrent assets has a fair value of
P12,900,000 and P11,850,000 for Superior and Bright, respectively.

Compute for the following balances in the books of the surviving company on the date of
acquisition:

1. Stockholders’ equity
A. 25,050,000
B. 55, 380, 000
C. 53,070,000
D. 57,690,000

2. Assets
A. 61,740,000
B. 55,440,000
C. 55,830,000
D. 56,400,000
PROBLEM 2. The statement of Financial Position of LUMINA Corporation on June 30, 2016 is
presented below:

Current Assets P195,000

Land 1,320,000
Building 660,000
Equipment 525,000
Total Assets P2,700,000

Liabilities 525,000
Ordinary shares, P5 par 900,000
Share premium 825,000
Retained earnings 450,000
Total equities P2,700,000

All the assets and liabilities of Lumina assumed to approximate their fair values except for land
and building. It is estimated that the land have a fair value of P2,100,000 and the fair value of
the building increased by P480,000. Enigma Corporation acquired 80% of Lumina’s outstanding
shares for P3,000,000. The non- controlling interest is measured at fair value.

1. Assuming the consideration paid includes control premium of P852,000, how much is the
goodwill/(gain on acquisition) on the consolidated financial statement?
A. 315,000
B. (750,000)
C. 102,000
D. 252,000

2. Assuming the consideration paid excludes control premium of P138,000 and the fair value of
the non controlling interest is P736,500, how much is the goodwill/(gain on acquisition) on the
consolidated financial statement?
A. 469,500
B. 439,500
C. 301,500
D. 448,500

3. Assuming the consideration paid includes control premium of P222,000, how much is the
goodwill/(gain on acquisition) on the consolidated financial statement?
A. 259,500
B. 439,500
C. 340,500
D. 410,100
PROBLEM 3. Great Company has gained control over the operations of Superb Corporation by
acquiring 85% of its outstanding capital stock for P15,480,000. This amount includes a control
premium of P180,000. Acquisition expenses, direct and indirect, amounted to P498,000 and
P252,000 respectively.

Great Superb

Book Value Book Value

Cash P21,249,000 P768,000
Accounts receivable 1,800,000 1,950,000
Inventories 3,300,000 2,160,000
Prepaid expenses 891,000 750,000
Land 14,100,000 5,274,000
Building 9,360,000 3,348,000
Equipment 1,800,000 1,110,000
Goodwill 1,800,000
Total assets P52,500,000 P17,160,000

Accounts payable 4,050,000 1,518,000

Notes payable 8,400,000 4,380,000
Ordinary shares, 50 par 20,400,000 4,800,000
Share premium 9,450,000 3,600,000
Retained earnings 10,200,000 2,862,000
Total equities P52,500,000 P17,160,000

The following were ascertained on the date of acquisition for the Acquired Corporation:

 The value of receivables and equipment has decreased by P150,000 and P84,000
respectively.
 The fair value of inventories are now P2,616,000 whereas the value of land and building
have increased by P2,826,000 and P642,000 respectively.
 There was an unrecorded accounts payable amounting to P162,000 and the fair value of
notes is P4,428,000.

Compute for the following balances to be presented in the consolidated statement of

financial position on the date of business combination:
1. Total Assets
A. 73,500,000
B. 60,558,000
C. 61,308,000
D. 76,788,000

2. Total shareholder’s equity

A. 42,000,000
B. 45,000,000
C. 39,300,000
D. 40,050,000
 CPA REVIEW SCHOOL OF THE PHILIPPINES
MANILA
ADVANCED FINANCIAL ACCOUNTING & REPORTING
CONSOLIDATED FINANCIAL STATEMENTS – SUBSEQUENT TO ACQUISITION & INTERCOMPANY TRANSACTIONS
GUERRERO/GERMAN/DE JESUS/LIM/FERRER/LACO/VALIX

PROBLEM 1. Galaxy Corporation acquired 80% of the outstanding shares of United

Company on June 1, 2016 for P3,517,000. United Company’s stockholder’s equity
components at the end of this year are as follows: Ordinary shares, P100 par, P1,500,000.
Share premium P675,000 and Retained Earnings P1,335,000. Non- controlling interest is
measured at fair value and the fair value is P705,000. The assets of United were fairly
valued, except for inventories, which are overstated by P66,000, and equipment , which was
understated by P90,000. Remaining useful life of equipment is 4 years. Stockholder’s equity
of Galaxy on January 1, 2016 is composed of Ordinary shares P4,500,000. Share premium
P1,050,000. Retained Earnings P3,150,000. Goodwill, if any , should be written down by
P85,350 at year-end. Net Income for the first year of parent is P450,000 and the net income
of subsidiary from the date of acquisition is P255,000. Dividends declared at the end of the
year amounted to P120,000 and P90,000. During the year, there was no issuance of new
ordinary shares .
1. How much is the non-controlling interest in net assets on December 31, 2016?
A. 871,005
B. 763,455
C. 745,455
D. 731,505
2. What is the amount of consolidated shareholder’s equity?
A. 9,122,070
B. 9,853,575
C. 8,773,575
D. 9,867,525
PROBLEM 2. On January 2, 2016, Fever Company acquired 60% of the outstanding shares of
Benz Inc. Resulting to an income from acquisition in the amount of P330,000. During 2016
and 2017, intercompany sales amounted to P6,800,000 and P9,400,000, respectively. Fever
Company consistently recognized a 30% gross profit on sales while Benz Inc. had a 40%
gross profit on sales. The inventories of the buying affiliate were as follows: 3/4 of the
beginning inventory came from intercompany transactions and 1/3 of the ending inventory
came from outsiders. The December 31, 2016 inventory of Fever and Benz amount to
P840,000 and P350,000, respectively. The December 31, 2017 inventory of Fever and Benz
amount to P570,000 and P150,000, respectively.
On September 1, 2016, Benz Inc. purchased a piece of land costing P3,500,000 from Fever
Company for P5,250,000. On November 2, 2017, the buying affiliate sold this land to Jam
Co. for P7,500,000. On the other hand, on May 1, 2017, Benz Inc., sold a machinery with a
carrying value of P430,000 and remaining life of 4 years to Fever Company for P190,000.
Benz Inc. declared dividends in 2017 in the amount of P600,000. Separate Statement of
Comprehensive Income for the two companies for the year 2017 follow:
 Fever Company Benz.Inc.
Sales P21,500,000 P10,000,000
Cost of Sales (13,500,000) (6,200,000)
Gross Profit P8,000,000 P3,800,000
Operating Expenses (3,240,000) (1,100,000)
Operating Profit P4,760,000 P2,700,000
Gain on sale of Land 2,250,000
Loss on Sale of Machinery (240,000)
Dividend Revenue 450,000 110,000
Net Income P5,210,000 P4,820,000
PROBLEM 6. On January 1, 2016, VECTOR acquired 90% of the equity share capital of FERN in a
share exchange in which Vector issued two new shares for every three shares it acquired in
Fern. Additionally, on December 31, 2016, Vector will pay the shareholders of Fern P13.2 per
share acquired. Vector’s cost of capital is 10% per annum. At the date of acquisition, shares in
Vector and Fern had a stock market value of P48.75 and P18.75 each, respectively. Income
statements for the year ended September 30, 2016

Vector Fern

Revenue P4,845,000 2,850,000

Cost of sales (3,840,000) (1,950,000)

Gross profit 1,005,000 900,000

Distribution costs (102,000) (130,500)

Administrative expenses (285,000) (180,000)

Investment income 37,500 ----

Finance costs (31,500) ----

Profit before tax 624,000 589,500

Income tax expense (210,000) (120,000)

Profit for the year 414,000 469,500

Equity as at October 1, 2015

Equity shares of P7.50 each 1,800,000 562,500

Retained earnings 4,050,000 2,625,000

At the date of acquisition, the fair values of Fern’s assets were equal to their carrying amounts
with the exception of Land which had a fair value of P135,000 above its carrying amount. Also,
Fern had a contingent liability which Vector estimated to have a fair value of P337,500. This has
not changed as at 30 September 2016. Fern has not incorporated these fair value changes into
its financial statements. Vector’s policy is to value the non- controlling interest at fair value at
the date of acquisition. For this purpose, Fern’s share price at that date can be deemed to be
representative of the fair value of the shares held by the non- controlling interest.
Compute the goodwill (gain on acquisition) resulting on the date of acquisition
A. (160,500)
B. (310,125)
C. 159,375
D. 42,000
PROBLEM 4. On January 2, 2016, the Statement of Financial Position of Arden Company and
Wonder Company immediately before the combination are:

Arden Co. Wonder Co.

Cash P2,700,000 P90,000
Inventories 1,800,000 180,000
Property and equipment (net) 4,500,000 630,000
Total Assets P9,000,000 P900,000
Current Liabilities P540,000 P90,000
Ordinary shares, P100 par 900,000 90,000
Share premium 2,700,000 180,000
Retained earnings 4,860,000 540,000
Total Liabilities and Stockholder’s Equity P9,000,000 P900,000

The fair value of Wonder Company’s equipment is P918,000.

Assume the following independent cases:
1. Assuming Arden Company acquired 80% of the outstanding shares of Wonder Company for
P820,800 and non-controlling interest is measured at the proportionate share of Wonder
Company’s identifiable net assets, how much is the consolidated stockholder’s equity on the
date of acquisition?
A.8,460,000
B.8,517,600
C 8,679,600
D.8,737,200
2. Assuming Arden Company acquired 90% of the outstanding shares of Wonder Company for
P1,458,000 and non-controlling interest is measured at fair value, how much is the total
consolidated assets on the date of acquisition?
A. 952,000
B. 10,710,000
C. 10,422,000
D. 8,964,000

PROBLEM 5. Clark Company’s stockholders’ equity as of December 31, 2015 is P7,308,000. On

January 1, 2016 Clark acquires 30% of Rome Company’s ordinary shares for P540,000 cash and
by issuing its own shares with fair value of P1,350,000. Clark acquired significant influence over
Rome as a result of the stock acquisition. After four months, Clark purchases another 60% of
Rome’s ordinary shares for a cash payment of P3,942,000. On this date, Rome reports
identifiable assets with carrying value of P6,480,000 and fair value of P11,520,000 and it has
liabilities with a book value and a fair value of P3,240,000.
At the acquisition date, net loss reported by Rome for the four-month ended amounted to
P900,000. The fair value of the 10% non- controlling interest is P1,296,000. Non-controlling
interest is valued using the proportionate basis. Clark also paid the following: P900,000 for legal
fees, P72,000 for finder’s fee, P77,400 for accountant’s fee, P64,800 for audit fee for SEC
registration of stock issued and P19,800 for printing of stock certificates.
Immediately after the business combination, how much is the consolidated total equity?
A. 9,954,000
B. 10,782,000
C. 10,431,000
D. 9,243,000