Junior Philippine Institute of Accountants

Philippine School of Business Administration Manila

General Evaluation-Midterms

Accounting 7
Advance Accounting II

1. An economic advantage of a business combination 5. Consolidated financial statements are designed to

includes provide:
a. Utilizing duplicative assets. a. informative information to all shareholders.
b. the results of operations, cash flow, and the balance
b. Creating separate management teams.
sheet as if there was a single entity.
c. Coordinated marketing campaigns. c. the results of operations, cash flow, and the balance
d. Horizontally combining levels within the marketing sheet in an understandable and informative manor for
chain. creditors.
d. subsidiary information for the subsidiary
2. A tax advantage of business combination can occur shareholders.
when the existing owner of a company sells out and
receives: 6. The FASB Exposure Draft assumes consolidation
a. stock to defer the taxable gain as a "tax-free financial statements are appropriate even without a
reorganization." majority of controlling share if which of the following
exists:
b. cash to defer the taxable gain as a "tax-free
a. the parent company has the right to appoint a
reorganization. majority of the members of the subsidiary's board of
c. cash to create a taxable gain. directors through a large minority voting interest.
d. stock to create a taxable gain. b. the subsidiary has the right to appoint member's of
the parent company's board of directors.
3. A controlling interest in a company implies that the c. the subsidiary owns a large minority voting interest in
parent company the parent company.
a. owns all of the subsidiary's stock. d. The parent company has an ability to assume the role
b. has paid cash for a majority of the subsidiary's stock. of general partner in a limited partnership with the
c. has influence over a majority of the subsidiary's approval of the subsidiary's board of directors.
assets.
d. has transferred common stock for a majority of the
subsidiary's outstanding bonds and debentures. 7. The SEC and FASB has recommended that a parent
corporation should consolidate the financial statements
of the subsidiary into its financial statements when it
4. Which of the following is a potential abuse that may
exercises control over the subsidiary, even without
arise when a business combination is accounted for as a
majority ownership. In which of the following situations
pooling of interests?
would control NOT be evident?
a. Earnings of the pooled entity may be increased
because of the combination only and not as a result of a. The subsidiary does not determine compensation for
efficient operations. its main employees.
b. Assets of the buyer may be overvalued when the b. Dividend policy is set by the parent.
price paid by the investor is allocated among specific
assets. c. Access to subsidiary assets is available to all
c. Liabilities may be undervalued when the price paid by shareholders.
the investor is allocated to specific liabilities. d. Substantially all cash flows of the subsidiary flow to
d. An undue amount of cost may be assigned to the controlling shareholders.
goodwill, thus potentially allowing an understatement
of pooled earnings.
8. The goal of the consolidation process is for: value of the equipment as part of goodwill.
a. asset acquisitions and stock acquisitions to result in b. reduce retained earnings for the excess of the fair
the same balance sheet. value of the equipment over its book value.
b. goodwill to appear on the balance sheet of the c. report the excess of the fair value over the book value
consolidated entity. of the equipment as part of the plant and equipment
c. the assets of the noncontrolling interest to be account.
predominately displayed on the balance sheet. d. make no adjustment for the excess of the fair value
d. the investment in the subsidiary to be properly of the equipment over book value. Instead, it is an
valued on the consolidated balance sheet. adjustment to expense over the life of the equipment.

9. A subsidiary was acquired for cash in a business 10. Which of the following costs of a business
combination on December 31, 20X1. The purchase price combination are included in the value charged to paid-
exceeded the fair value of identifiable net assets. The in-capital in excess of par?
acquired company owned equipment with a fair value a. stock issue costs if stock is issued as consideration
in excess of the book value as of the date of the b. direct acquisition costs
combination. A consolidated balance sheet prepared on c. direct acquisition costs and stock issue costs if stock is
December 31, 20X1, would issued as consideration
a. report the excess of the fair value over the book d. direct and indirect acquisition costs

PROBLEM 1

Parent and Sub Inc had the following balance sheets on December 31, 2016:

Parent Sub
Current Assets P60,000 P10,000
Fixed Assets (net) 100,000 60,000
Total Assets 160,000 70,000
Current Liabilities 42,000 35,000
Bonds Payable 20,000 12,000
Common Shares 20,000 12,000
Retained Earnings 8,000 11,000
Total Liabilities and Equity 160,000 70,000

On January 1, 2017 Parent purchased all of Sub Incs Common Shares for P40,000 in cash. On that date, Subs Current
assets and Fixed assets were worth P26,000 and P54,000, respectively. Assuming that consolidated Financial statements
were prepared on that date, answer the following:

1. Current assets of the combined entity should be valued at:_______________

2. The fixed assets of the combined entity should be valued at:______________
3. Goodwill arising from the business combination would be:_______________
4. The share holders equity section of the consolidated balance sheet would show what amount?___________

PROBLEM 2

RR corporation acquired 80 percent of the stock of GG Company by issuing shares of its common stock with a fair value
of P192,000. At that time, the fair value of non-controlling interest was estimated to be P48,000 and the fair values of its
identifiable assets and liabilities were P310,000 and P95,000, respectively. GGs assets and liabilities had book values of
P220,000 and P95,000. Respectively.
Required: Compute the following amounts to be reported immediately after the combination:
5. Investment in GG reported by RR:____________
6. Increase in identifiable assets of the combined entity:_____________
7. Increase in total liabilities of the combined entity:____________
8. Full goodwill for the combined entity:________________
9. Non-controlling interest (full goodwill) reported in the consolidated balance sheet:_________

PROBLEM 3

On 4/1/x6, parrco acquired 60% of subbcos outstanding common stock. Both entities have December 31 year ends.
Selected data for each company for 20x6 follow:

Parrco Subbco
net incom from own separate operations
(excludes equity in net income of subsidiary
and amortization of cost inexcess of book value)
3 months ended 3/31/x6 P200,000 P180,000
9 months ended 12/31/x6 700,000 200,000
900,000 380,000

20x6 amortization of cost in excess of book value

(recorded in the general ledger) P30,000
dividends declared:
3 months ended 3/31/x6 P 100,000 P40,000
9 months ended 12/31/x6 300,000 120,000
400,000 160,000
10. determine the consolidated net income for 20x6 under the economic unit concept.
11. Determine the consolidated net income to be reported for 20x6 under the parent company concept.
12. Determine the amount of dividends to be reported in the consolidated statement of retained earnings for 20x6.

PROBLEM 4

On 10/1/x6, Plyco issued shares of its voting common stock in exchange for 100% of slycos outstanding common stock
in a business combination appropriately accounted for under the purchase method. Both companies have a December
31 year-end. Selected information for each company follows:

Plyco Slyco
net incom from own separate operations
(excludes of earnings recorded under the
equity method or the cost method)
9 months ended 9/30/x6 P2,500,000 P500,000
3 months ended 12/31/x6 1,000,000 400,000
3,500,000 900,000

dividends declared:
9 months ended 9/30/x6 P1,000,000 300,000
3 months ended 12/31/x6 400,000 100,000
1,400,000 400,000

amortization of cost in excess

of book value for 2016
(recorded in the general ledger) P33,000
13. Determine the parents net income for 20x6 under the cost method.
14. Determine the parents net income for 20x6 under the equity method.
15. Determine the consolidated net income for 20x6.

PROBLEM 5

On December 31,20x5, Paper Co purchased 60% of the outstanding common shares of book ltd. For P760,000 in shares
and P200,000 in cash. The statements of financial position of paper ad book immediately before the acquisition and
issuance of the notes payable were as follows:

Paper book
Book Value Fair Value Book Value Fair Value
cash 360,000 360,000 P200,000 P200,000
accounts receivable 520,000 500,000 380,000 380,000
inventory 800,000 880,000 400,000 360,000
capital assets 1,820,000 2,000,000 1,420,000 1,640,000
3500000 P2,400,000

accounts payable P380,000 P380,000 260,000 260,000

long term liabilities 1,200,000 1,200,000 1,000,000 1,000,000
common shares 500,000 600,000
retained earnings 1,420,000 540,000
P3,500,000 P2,400,000
The difference in the carrying value and the fair value of the capital assets for book relates to its office building. This
building has an estimated 20 years remaining of useful life. During 20x6, the year following the acquisition, the following
occurred:

Throughout the year, Book purchased merchandise of P800,000 from Paper. Papers gross margin is 30% of
selling price. At December 31, 20x6, Book still owed Paper P250,000 on this merchandise, 75% of this
merchandise was resold by Book prior to December 31, 20x6.
Throughout the year, Book sold merchandise to Paper totalling P500,000. The gross margin in these products is
25%. At the end of 20x6, Paper had not yet resold 60% of this merchandise.
Management fees were paid to paper from Book totalling P250,000.
Book Paid dividends of P250,000 at the end of 20x6 and Paper paid dividends of P500,000.

During 20x7, the following occurred:

Throughout the year, Book purchased merchandise of P1,000,000 from Paper. Papers gross margin is 30% of
selling price. At December 31, 20x6, Book still owed Paper P150,000 on this merchandise. 85% of this
merchandise was resold by Book prior to December 31, 20x7.
Throughout the year, Book sold merchandise to Paper totalling P650,000. The gross margin in these products is
25%. At the end of 20x6, Paper had not yet resold 40% of this merchandise.
Management fees were paid to paper from Book totalling P250,000.
Book Paid dividends of P250,000 at the end of 20x7 and Paper paid dividends of P500,000.

Paper uses the cost method to report its investment in Book.

 Statements of Financial Position
as at december 31, 20x7
Assets Paper Book
cash 50,000 210,000
Accounts Receivable 575,000 410,000
inventories 825,000 430,000
Capital assets, net 2,870,000 1,760,000
Investment in Book 960,000
Total assets 5,280,000 2,810,000

Liabilities
accounts payable 465,000 325,000
long term liabilities 1,290,000 950,000
Common shares 1,260,000 600,000
retained earnings 2,265,000 935,000
total liabilities and shareholders equity 5,280,000 2,810,000

statements of comprehensive icome

For the year ended December 31, 20x7
Paper Book
Sales 2,520,000 2,400,000
Management Fees 250,000
Dividend Income 150,000
2,920,000 2,400,000
Cost of sales 800,000 1,200,000
Depreciation and amortization expenses 670,000 325,000
management fees expenses 250,000
other expenses 460,000 135,000
1,930,000 1,910,000
Net income 990,000 490,000

Statement of changes in Equity-retained earnings section

For the year ended December 31, 20x7
Paper Book
Retained earnings, december 31,20x6 1,775,000 P695,000
net income 990,000 490,000
dividends declared -500,000 -250,000
retained earnings, december 31, 20x7 2,265,000 935,000

16. the amount of goodwill on December 31, 20x7 amounted to:____________________

17. The non-controlling interests on December 31,20x8 amounted to:__________________
18. The consolidated retained earnings on December 31, 20x6 amounted to:______________
19. The consolidated retained earnings on December 31, 20x7 amounted to:______________
20. What is the impairment loss:____________________