QUIZ 16

1. Terry Corporation acquired 80 percent of Vegas Company’s stock on January 1, 20x5. At the
acquisition date, Vegas had the following account balances.

Book Value Market Value Remaining Life

Cash and Receivables P 50,000 P 50,000 3 months
Inventory 160,000 200,000 5 months
Plant Assets (net) 450,000 550,000 10 years
Liabilities 300,000 280,000 5 years
Common Stock 20,000
Retained Earnings 340,000
Vegas has income of P150,000 and pays dividends of P60,000 during 20x6. Assuming there is no
goodwill impairment, what is the amount of investment income (using cost method) on Terry
Corporation’s financial records for 20x6?
a. P76,800 c. P115,200
b. P108,800 d. P140,800

Answer:
Net Income of Vegas, 20x6 P 150,000
Less: Plant Assets (net) (MV-BV/10) (10,000)
Less: Liabilities (MV-BV/5) (4,000)
Multiply: Controlling interest 80%
Investment income P 108,800

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2. Mary Corporation acquired 70 percent of Phoenix Company’s stock on October 1, 20x5. At the

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acquisition date, Phoenix had the following account balances.

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Book Value Market Value Remaining Life
Cash and Receivables P 40,000 P 40,000 3 months

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Inventory 100,000 130,000 5 months
Plant Assets (net)
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350,000 350,000 10 years
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Cost of Goods Sold 160,000
Operating Expenses 50,000
Liabilities 200,000 215,000 5 years
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Common Stock 20,000

Retained Earnings 230,000
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Sales 250,000
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Phoenix has net income of P110,000 and pays dividends of P10,000 during 20x5. Assuming there is
no goodwill impairment, what is the amount of investment income (using equity model) on Mary
Corporation’s financial records for 20x5?
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Answer:
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Net Income of Phoenix, 20x5 P 110,000

Less: Sales P 250,000
Cost of Goods Sold (160,000)
Operating expenses (50,000) (40,000)
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Less: Inventory [(MV-BV/)(⅗)] (18,000)

Add: Liabilities [(MV-BV/5) (3/12)] 750
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Multiply by: Controlling Interest 70%

Investment income P 36,925

3. Hi Rise Enterprises acquired 70 percent of Low Rent Company on January 1, 20x5 for P500,000. At
that date, Low Rent’s inventory and plant assets (net) had market values in excess of book values in
the amounts of P55,000 and P200,000, respectively. The estimated remaining life of the inventory
and plant assets were four months and eight years, respectively. Assume that Low Rent has 20x5
income and dividends of P110,000 and P30,000, respectively and 20x6 income and dividends of
P130,000 and P40,000, respectively. What is the amount of the Investment in Low Rent account
balance at December 31, 20x6 using equity method?
Answer:
Cost of Acquisition P 500,000
Add: Income, 20x5 P 110,000
Income, 20x6 130,000
Less: Dividends, 20x5 (30,000)
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 QUIZ 16
Dividends, 20x6 (40,000) 170,000
Less: Inventory, MV (55,000)
Plant Assets [(MV/8) (2)] (50,000)
Multiply by: Controlling Interest 70%
Investment in Low Rent P 545,500

4. Metro Corporation acquired 80 percent of Local Company on January 1, 20x5 for P320,000. At that
date Local had inventory and plant assets with market values greater than book values in the
amount of P35,000 and P75,000 respectively. The inventory and plant assets were assigned a
remaining life of six months and five years respectively. Assuming that Local has 20x5 income and
dividends of P100,000 and P40,000, respectively and 20x6 income and dividends of P140,000 and
P50,000, respectively, what is the Investment in Local account balance (using cost method) at
December 31, 20x6?

Answer:
Cost of Acquisition P 320,000
Add: Income, 20x5 P 100,000
Income, 20x6 140,000
Less: Dividends, 20x5 (40,000)
Dividends, 20x6 (50,000) 150,000
Less: Inventory, MV (35,000)
Plant Assets [(MV/5) (2)] (30,000)

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Multiply by: Controlling Interest 80%

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Investment in Low Rent P 388,000

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5. Perry Corporation acquired 80 percent of Sammy Company’s stock on January 1, 20x5. At the

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acquisition date, Sammy had the following account balances.
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Book Value Market Value Remaining Life
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Cash and Receivables P 30,000 P 30,000 3 months
Inventory 100,000 120,000 5 months
Plant Assets (net) 250,000 290,000 8 years
Liabilities 150,000 160,000 5 years
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Common Stock 10,000

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Retained Earnings 220,000

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Sammy has income of P80,000 and pays dividends of P20,000 during 20x6. Assuming there is no
goodwill impairment, what is the amount of income allocated to the non-controlling interest for
20x6?
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Answer:
Net Income of Sammy, 20x6 P 80,000
Less: Plant Assets (net) (MV-BV/10) ( 5,000)
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Add: Liabilities (MV-BV/5) 2,000

Multiply: Non-controlling interest 20%
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Investment income P 15,400

6. Ace Corporation acquired 70 percent of Base Company’s stock on September 1, 20x5. At the
acquisition date, Base had the following account balances.

Book Value Market Value Remaining Life

Cash and Receivables P 70,000 P 70,000 3 months
Inventory 160,000 190,000 5 months
Plant Assets (net) 400,000 520,000 10 years
Cost of Goods Sold 300,000
Operating Expenses 90,000
Liabilities 350,000 380,000 5 years
Common Stock 20,000
Retained Earnings 180,000
Sales 470,000
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 QUIZ 16
Base has net income of P150,000 and pays dividends of P30,000 during 20x5. Assuming there is no
goodwill impairment, what is the amount of income allocated to non-controlling interest for 20x5?

Answer:
Net Income of Base, 20x5 P 150,000
Less: Sales P 470,,000
Cost of Goods Sold (300,000)
Operating expenses (90,000) (80,000)
Less: Inventory [(MV-BV/)(⅘ )] (24,000)
Plant Assets (net) (MV-BV/10(4/12) (4,000)
Add: Liabilities [(MV-BV/5) (4/12)] 2,000
Multiply by: Non-controlling Interest 30%
Investment income P 13,200

7. Powell Enterprises acquired 80 percent of Sullivan Company on January 1, 20x5 for P250,000. At
that date, Sullivan’s inventory and plant assets (net) had market values in excess of book values in
the amounts of P30,000 and P80,000, respectively. The estimated remaining life of the inventory
and plant assets were four months and eight years, respectively. Assume that Sullivan has 20x5
income and dividends of P75,000 and P25,000, respectively and 20x6 income and dividends of
P90,000 and P50,000, respectively. What is the balance in the non-controlling Interest account at
December 31, 20x6?

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Use the following information for questions 8 and 9:

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Ramana Corporation purchased 70 percent of the outstanding stock of Knapp Company on January 1,

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20x5. The following information existed for Knapp at the date of acquisition.
Book Value Market Value

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Cash and Receivables P 70,000 P 70,000
Inventory
rs e 240,000 300,000
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Plant Assets (net) 560,000 700,000
Other Noncurrent Assets 80,000 80,000
Current Liabilities (90,000) (90,000)
Long-term Debt (400,000) (400,000)
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Stockholders’ Equity (460,000)

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Answer:
Cost of Acquisition P 250,000
Divide: Controlling interest 80% P 312,500
Add: Income, 20x5 75,,000
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Income, 20x6 90,000

Less: Dividends, 20x5 (25,000)
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Dividends, 20x6 (50,000) 90,000

Less: Inventory, MV (MV(4/12) (10,000)
Plant assets [(MV/8) (2)] (20,000)
Multiply by: Non controlling Interest 20%
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Investment in Low Rent P 74,500

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At the acquisition date, Ramana assigns a remaining estimated life of 4 month to the inventory and
seven years the plant assets.

8. What is the amount of purchase differential amortization included in the calculation of Investment
Income on Ramana’s books in 20x5 and 20x6?
Answer:
20x5 20x6
Inventory (300,000 -240,000)*70% P 42,000 P
0
Plant assets (700,000 - 560,000)/7*70% 14,000
14,000
Purchase differential amortization to invest income P 56,000 P 14,000

9. What amounts appear on the income statement portion of the 20x5 consolidation worksheet with
regard to the purchase differential amortizations?
Answer:
Cost of Goods Sold (300,000 - 240,000) ) P 60,000
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 QUIZ 16
Depreciation Expense (700,000 - 560,000)/7 20,000

10. Sandpiper Inc. acquired a 75% interest in Shore Corporation for P27,000 cash on January 1, 20x5,
when Shore’s stockholders’ equity consisted of P30,000 of capital stock and P20,000 of retained
earnings. Shore Corporation reported net income of P18,000 for 20x5. The allocation of the P12,000
excess of cost over book value acquired on January 1 is shown below, along with information
relating to the useful lives of the items:

Overvalued receivables (collected in 20x5) P 600

Undervalued inventories (sold in 20x5) 2,400
Undervalued building (6 years’ useful life remaining at
January 3,600
1, 20x5)
Undervalued land 900
Unrecorded patent (8 years’ economic life remaining at 3,200
January 1, 20x5)
Undervalued accounts payable (paid in 20x5) 300
Total of excess allocated to identifiable assets and 7,200
liabilities
Goodwill ___2,800
Excess cost over book value acquired P 12,000

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Determine Sandpiper’s investment income from Shore for 20x5.

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Answer:

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Sandpiper’s share of Shore net income (18,000 x 25%) P 13,500
Add: Overvalued accounts receivable collected in 20x5 600

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Underva;ued accounts payable paid in 20x5 300
Less:
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Undervalued inventories sold in 20x5
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(2,400)
Depreciation on building undervaluation 3,600/6 (600)
Amortization on patent 3,200/8 (400)
Income from Shore P 11,000
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Use the following information for questions 11 to 13:

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

Parrco Subbco
Net income from own separate operations
(excludes equity in net income of subsidiary
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and amortization of cost in excess of book value):

3 months ended 3/31/x6 P 200,000 P 180,000
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9 months ended 12/31/x6 700,000 200,000

P 900,000 P 380,000
20x6 Amortization of cost in excess of book value
(recorded in the general ledger) P 30,000
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Dividends declared:
3 months ended 3/31/x6 P 100,000 P 40,000
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9 months ended 12/31/x6 300,000 120,000

P 400,000 P 160,000

11. Determine the consolidated net income for 20x6 under the economic unit concept.
Answer:
Parrco’s income from its own separate operations for 20x6 P 900,000
Subbco’s net income for the nine months ended 12/31/x6 200,000
Less: Amortization of cost in excess of book value (30,000/60%)
(50,000)
Consolidated net income for 20x6 (economic unit concept) P 1,050,000
To Parrco’s stockholders P
990,000
To Subbco’s stockholders 60,000
Consolidated net income P 1,050,000

12. Determine the consolidated net income to be reported for 20x6 under the parent company concept.
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 QUIZ 16
Answer:
Parrco’s income from its own separate operations for 20x6 P 900,000
Parco’s equity in net income of Subbco Company (200,000 * 60%) 120,000
Less: Parrco’s amortization of cost in excess of book value (30,000)
Consolidated net income for 20x6 (parent company concept) P 990,00

13. Determine the amount of dividends to be reported in the consolidated statement of retained
earnings for 20x6.
Answer:

Dividends declared:
3 months ended 3/31/x6 P 100,000
9 months ended 12/31/x6 300,000
Dividends to be reported P 400,000
Use the following information for questions 14 to 16:
On 10/1/x6, Plyco issued shares of its voting common stock in exchange for 100% of Slyco’s
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 income from own separate operations
(exclusive of earnings recorded under the

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equity method or the cost method):

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9 months ended 9/30/x6 P 2,500,000 P 500,000

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3 months ended 12/31/x6 1,000,000 400,000

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P 3,500,000 P 900,000
Dividends declared:

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9 months ended 9/30/x6 P 1,000,000 P 300,000
3 months ended 12/31/x6
rs e 400,000 100,000
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P 1,400,000 P 400,000
Amortization of cost in excess
of book value for 20x6
(recorded in the general ledger) P 33,000
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14. Determine the parent’s net income for 20x6 under the cost method.
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Answer:
Plyco’s separate earnings for 20x6 P 3,500,000
Add: Dividend income from Slyco 100,000
Plyco’s 20x6 net income P 3,600,000
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15. Determine the parent’s net income for 20x6 under the equity method.
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Answer:
Plyco’s separate earnings for 20x6 P 3,500,000
Add: Plyco’s equity in net income of Slyco 400,000
Less: Amortization of cost in excess of BV (33,000)
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Plyco’s 20x6 net income P 3,867,000

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16. Determine the consolidated net income for 20x6.

Answer:
Plyco’s separate earnings for 20x6 P 3,500,000
Add: Plyco’s equity in net income of Slyco 400,000
Less: Amortization of cost in excess of BV (33,000)
Consolidated net income P 3,867,000

17. P Company purchased 80% of the outstanding common stock of S Company on May 1, 20x5, for a
cash payment of P318,000. S Company’s December 31, 20x4 balance sheet reported common stock
of P200,000 and retained earnings of P180,000. During the calendar year 20x5, S Company earned
P210,000 evenly throughout the year and declared a dividend of P75,000 on November 1. What is
the amount needed to establish reciprocity under the cost method in the preparation of a
consolidated workpaper on December 31, 20x5?
Answer:
Net income of S (210,000 x 8/12) P 140,000
Less: Dividend 75,000
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 QUIZ 16
Cumulative net income less dividends 65,000
Multiply by: Controlling Interest 80%
Amount needed to establish reciprocity P 52,000

18. Raider Corporation acquired 70 percent of Bulldog Enterprises on January 1, 20x5. At that date,
Bulldog had equipment (ten year remaining life) with a market value and book value of P80,000 and
P60,000 respectively. Bulldog’s income in 20x5 and 20x6 were P15,000 and P22,000, respectively
while dividends paid were P6,000 and P9,000, respectively. Raider accounts for the investment
under the cost method. What amount of adjustment to the investment account is necessary to
convert the cost method investment account to the equity method balance at December 31, 20x6?
Answer:
Bulldog’s Income, 20x5 P 15,000
Bulldog’s Income, 20x6 22,000

Less: Equipment (MV-BV/10*2) (4,000)

Dividends Paid (6,000 + 9,000) (15,000)
Multiply by: Controlling Interest 70%
Amount needed to establish reciprocity P 12,600

Use the following information for questions 19 to 21:

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Pinta Company purchased 40% of Snuggie Corporation on January 1, 20y4 for P150,000. Snuggie
Corporation’s balance sheet at the time of acquisition was as follows:

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Cash P30,000 Current Liabilities P 40,000
Accounts Receivable 120,000 Bonds Payable 200,000

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Inventory 80,000 Common Stock 200,000
Land
rs e 150,000 Additional Paid in Capital 40,000
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Buildings & 300,000 Retained Earnings 80,000
Equipment
Less: Acc. (120,000) _______
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Depreciation
Total Assets P560,000 Total Liabilities and P560,000
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Equities
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During 20y4, Snuggie Corporation reported net income of P30,000 and paid dividends of P9,000. The
fair values of Snuggie’s assets and liabilities were equal to their book values at the date of acquisition,
with the exception of Building and Equipment, which had a fair value of P35,000 above book value. All
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buildings and equipment had a remaining useful life of five years at the time of the acquisition. The
amount attributed to goodwill as a result of the acquisition in not impaired.
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19. What amount of investment income will Pinta record during 20y4 under the equity method of
accounting?
Answer:
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Pinta Company 20y4 Equity Method Income

Proportionate share of reported income (30,000 *40%) P
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12,000
Amortization of differential assigned to:
Buildings and equipment (35,000*40%/5)
(2,800)
Goodwill 0
Investment Income P 9,200

20. What amount of income will Pinta record during 20y4 under the cost method of accounting?
Answer:
Dividend income, 20y4 (9,000 x 4-%) P 3,600

21. What will be the balance in the investment account on December 31, 20y4 under the cost and
equity method of accounting?
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 QUIZ 16
Answer:
Cost method account balance (unchanged) P 150,000
Equity method account balance:
Balance, Jan 1 20y4 150,000
Investment income 9,200
Dividends received (3,600)
Balance, Dec 31, 20y4 P 155,600

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