MARY THE QUEEN COLLEGE (PAMPANGA)

Accounting for Business Combination

FINALS EXAMINATION
1st Semester, A.Y. 2021-2022
PROBLEM 1:
On January 1, 2022, Parent Corporation purchased 80% of the outstanding shares of
Subsidiary Company for a consideration of P19,000,000. Including in the price paid is
control premium in the amount of P500,000. At that date, Subsidiary had P16,000,000
of ordinary shares outstanding and retained earnings of P6,400,000. Subsidiary’s
equipment with a remaining life of 5 years had a book value of P9,000,000 and a fair
value of P10,520,000. Subsidiary’s remaining assets had book values equal to their fair
values. The income and dividend figures for both Parent and Subsidiary are as follows:
Net income of Parent in 2022 is P3,600,000. Net income of Subsidiary in 2022 is
P1,360,000. Dividends declared by Parent in 2022 is P880,000. Dividends declared by
Subsidiary in 2022 is P280,000. Parent’ retained earnings balance at the date of
acquisition was P13,800,000.

PROBLEM 2:
Parent Corporation acquired an 80% interest in Subsidiary Company on January 1,
2022 for P10,080,000. On this date, the share capital and retained earnings of the two
companies follow:
Parent Corp. Subsidiary Co.
Share Capital P24,000,000 P9,000,000
Retained Earnings 12,000,000 1,800,000

On January 1, 2022, the assets and liabilities of Subsidiary Co. were stated at their
fair values except for machinery which is undervalued by P900,000 (remaining life is
3 years). On September 30, 2022, Subsidiary sold merchandise to Parent at an inter-
company profit of P600,000; 1/4 was still unsold at year-end. Likewise, on October 1,
2023, Subsidiary purchased merchandise from Parent for P14,400,000. The selling
affiliate included a 20% mark-up on cost on this sale. Only 3/4 of these purchases had
been sold to unrelated parties as of December 31, 2023. As of December 31, 2023,
goodwill was determined to be impaired by P240,000.
The following is the summary of the 2023 transactions of the affiliated companies:

Parent Corp. Subsidiary Co.

Net Income P6,000,000 P2,400,000
Dividends declared and paid 2,400,000 720,000
PROBLEM 3:
On January 1, 2022, Parent Company purchased 80% of the outstanding shares of
Subsidiary Corporation at book value. The stockholders’ equity of Subsidiary Corporation
on this date showed: Ordinary shares – P4,560,000 and Retained earnings – P3,920,000.
On April 30, 2022, Parent Company acquired a used machinery for P672,000 from
Subsidiary Corp. that was being carried in the latter’s books at P840,000. The asset still
has a remaining useful life of 5 years. On the other hand, on August 31, 2022, Subsidiary
Corp. purchased an equipment that was already 20% depreciated from Parent Co. for
P2,760,000. The original cost of this equipment was P3,000,000 and had a remaining life
of 8 years. Net income of Parent Co. and Subsidiary Corp. for 2022 amounted to
P2,880,000 and P1,240,000. Dividends paid totaled to P920,000 and P420,000 for Parent
Co. and Subsidiary Corp., respectively.

PROBLEM 4:
Condensed Statements of Financial Position of Acquirer Corp. and Acquiree Corp. as of
December 31, 2022 are as follows:

Acquirer Acquiree
Current assets P 175,000 P 65,000
Noncurrent assets 725,000 425,000
Total assets 900,000 490,000

Liabilities 65,000 35,000

Ordinary Shares, P20 par 550,000 300,000
Share Premium 35,000 25,000
Retained earnings 250,000 130,000

On January 1, 2023, Acquirer Corp. issued 35,000 shares with a market value of
P25/share for the assets and liabilities of Acquiree Corp. The book value reflects the
fair value of the assets and liabilities, except that the non-current assets of Acquiree
have fair value of P630,000 and the noncurrent assets of Acquirer are overstated by
P30,000. Contingent consideration, which is determinable, is equal to P15,000.
Acquirer also paid for the stock issuance costs worth P34,000 and other acquisition
costs amounting to P19,000.

PROBLEM 5:
On January 1, 2021, ABC Inc. paid a premium to acquire a put option from a writer. This is
in relation to a forecasted sale of merchandise worth $65,000. (option price = P4.965)

1/1/2021 3/31/2021 6/20/2021

Spot rate P4.934 P4.908 P4.75
Fair value of option P9,800 P11,400 P13,975

PROBLEM 6:
On December 6, 2021, XYZ Co. entered into a forward exchange contract to purchase
225,000 euros in 90 days. The relevant exchange rates are as follows:
Spot rate Forward rate (for March 6, 2022)
November 15, 2021 P64.82 P64.89
December 6, 2021 P64.84 P64.80
December 31, 2021 P64.87 P64.83

The purpose of this derivative instrument is to hedge a liability exposure in

November 2021, payable in March 2022.
PROBLEM 7:
Malolos Company sold merchandise for 315,000 pounds to a customer in London on
October 01, 2021. Collection in British pounds was due on January 30, 2022. On the same
date, Malolos entered into a 120-day forward contract to sell 315,000 pounds to a writer.
Direct exchange rates for pound on different dates are as follows:

Oct. 1 Dec. 31 Jan. 30

Spot rate 52.6 52.1 51.8
30-day forward 50.2 52.3 50.4
60-day forward 52.2 52.4 53.1
90-day forward 51.7 52.1 52.5
120-day forward 52.5 52.5 53.3

PROBLEM 8:
On September 1, S Company entered into a firm commitment to sell a machinery. Delivery
and passage of title would be on January 30, 2021 at the price of $15,750 Singapore dollars.
On the same date, S Company entered into a 150-day forward contract with China bank to
sell the $15,750 Singapore dollars. Direct exchange rates were as follows:

Spot Rate Forward Rate

Sept. 01, 2020 36.25 34.30
Dec. 31, 2020 37.40 36.70
Jan. 31 2021 39.50 39.50

PROBLEM 9:
Certain Statement of Financial Position accounts of a foreign subsidiary of the Manila Co.
had been stated in Philippine pesos on December 31 as follows:
Stated at Current Historical
Rates Rates
Accounts receivable — current P 280,000 P 308,000
Accounts receivable — long -term 140,000 154,000
Prepaid insurance 70,000 77,000
Goodwill 112,000 119,000
Totals P 602,000 P 658,000

PROBLEM 10:
A subsidiary of Porter Inc., a Philippine company, is located in a foreign country. The
functional currency of this subsidiary was the Stickle (§) which is the local currency
where the subsidiary is located. The subsidiary acquired inventory on credit on
November 1, 2020, for §120,000 that was sold on January 17, 2021 for §156,000. The
subsidiary paid for the inventory on January 31, 2021. Currency exchange rates between
the dollar and the Stickle were as follows:

November 1, 2020 P.19 = §1

December 31, 2020 P.20 = §1
January 1, 2021 P.22 = §1
January 31, 2021 P.23 = §1
Average for 2021 P.24 = §1
PROBLEM 11:
On December 31, 2020 a foreign subsidiary in Hongkong submitted the following accounts
stated in its local currency which is the functional currency of the foreign operation. The
subsidiary in Hongkong acquired in 2020 is not integrated with the operations of the
parent in the Philippines. Moreover, its cash flows do not directly affect the parent
company. The foreign operation is self-sufficient and is not dependent on the parent
company for financing.

Total Assets HK$ 245,000

Total liabilities 49,000
Ordinary Shares 122,500
Retained Earnings 73,500

The exchange rates are: Current rate, P8.75 ; Historical rate, P8.10 ; Weighted average
rate, P8.50.

PROBLEM 12:

On November 1, 2020, an entity acquired on account goods from a foreign supplier at a cost
of $1,000. The accounts payable are paid on January 30, 2021.

On December 1, 2020, an entity sold on account the said goods to a foreign customer at a
selling price of $1,500. The accounts receivable are collected on February 28, 2021.

The entity is operating in Philippine economy wherein the functional currency is the
Philippine Peso.

The following direct exchange rates are provided:

Buying spot rate Selling spot rate

November 1, 2020 P40 P42

December 1, 2020 39 40
December 31, 2020 45 47

PROBLEM 13:
On November 2, 2020, P Corp entered into a firm commitment with a Japanese firm to
acquire equipment, delivery and passage of title on March 31, 2021, at a price of 4,375 yen.
On the same date, to hedge against unfavorable changes in the exchange rate of the yen, P
Corp. entered into a 150 day forward contract with BPI for 4,375 yen. The relevant
exchange rates were as follows:

11/2/2020 12/31/2020 3/31/2021

Spot Rate P37 P38 P35
Forward Rate P40 P33 P35
PROBLEM 14:
On November 1, 2020, 7D Co. entered into a firm commitment with Toki-Toki Japanese
Company for the export of dried mangoes with a contract price of 10,000 Yen. The goods
will be delivered by 7D Co. on January 30, 2021. On the same day, in order to protect itself
from the risk of changes in fair value of the firm commitment due to changes in underlying
foreign currency, 7D Co. entered into a forward contract with BDO for the sale of 10,000
Yen at the forward rate on November 1, 2020. IAS 39 provides that hedge of the foreign
currency risk of a firm commitment may be accounted for as either fair value hedge or
cash flow hedge. 7D Co. elected to account for the hedge of the firm commitment using fair
value hedge. The following direct exchange rates are provided:

November 1, 2020 December 31, 2020 January 30,

2021
Buying spot rate P10 P13 P12
Selling spot rate P13 P15 P16
Forward buying 90-days P11 P14 P15
Forward selling 90-days P13 P16 P17
Forward buying 60-days P14 P17 P16
Forward selling 60-days P15 P18 P14
Forward buying 30-days P11 P15 P12
Forward selling 30-days P13 P11 P14

PROBLEM 15:
Entity A owns majority of the outstanding ordinary shares of Entity B which is operating in
United States of America wherein the functional currency is the USA $. However, the
presentation currency of Entity B is the Philippine Peso because that is the presentation
currency of Entity A. For the year ended December 31, 2020, Entity B presented its
Statement of Financial Position in its functional currency of USA $:

Current assets $10,000 Current liabilities $10,000

Noncurrent assets 40,000 Noncurrent liabilities
20,000
Ordinary share capital
5,000
Preference share capital 8,000
Retained earnings 7,000
Total Assets $50,000 Total Liabilities and shareholders
$50,000

a. The ordinary shares are issued on January 1, 2019 while the preference shares
are issued on July 1, 2019.

b. B reported $1,000 net income during 2020 and declared dividends in the
amount of $200 on December 1, 2020.

c. The translated amount of retained earnings on December 31, 2019 is P300,000.

The following direct exchange rates are provided:

January 1, 2019 P
4
0
July 1, 2019 4
2

December 31, 2019 4

3
 December 1, 2020 4
1

December 31, 2020 4

5

Average rate 2020 44

PROBLEM 16:
GWA Corporation of Makati paid P1,128,750 for a 35% interest in KYJ Company of Taiwan
on January 1, 2022, when KYJ’s net asset totaled 375,000 NT Dollar and the exchange rate
for NT Dollar was P8.60. A summary of changes in KYJ’s net assets during 2022 is as
follows:

NT Dollar Exchange Rates

Net assets, January 1 375,000 P8.60

Net income for 2022 75,000 8.55
Dividends paid for 2022 25,000 8.54

GWA Corporation anticipated a strengthening of the Philippine peso against the NT Dollar
during the last half of 2022, and it borrowed 150,000 NT Dollar from a Taiwanese bank for
one year at 10% interest on July 1, 2022 to hedge its net investment in KYJ. The loan was
made when the exchange rate for NT Dollar was P8.55. The loan was denominated in NT
dollar and the current exchange rate at December 31, 2022 was P8.50.

PROBLEM 17:
Honda Phil. is a subsidiary of Honda Japan. The functional currency of Honda Phil. is peso
while the presentation currency of its parent, Honda Japan is yen. For the year ended
December 31, 2020, Honda Phil. has the following foreign currency denominated assets:
Accounts Receivable of $1,000 and Prepaid Asset of $100. The historical rates of Accounts
receivable and Prepaid asset are $1=P30 and $1=P20 and P1=2Yen and P1=4Yen,
respectively. The exchange rate on December 31, 2020 is 1$=40 and P1=3Yen.

PROBLEM 18:
On October 2, 2018, Tamayao, Inc. ordered a custom-built passenger van from a Japanese
firm. The purchase order is noncancelable. The purchase price is 1,000,000 yens with
delivery and payment to be on March 31, 2019. On October 2, 2018, Tamayao, Inc. entered
into a forward contract to buy 1,000,000 yens on March 31, 2019 for P.57. On March 31,
2019. the custom-built passenger van was delivered.
10/2/18 12/31/1 3/31/19
8
Spot rate (yen) P .50 P .56 P .57
Forward rate (yen) .53 .58 .57

The December 31, 2018 profit and loss statement, foreign exchange gain or loss (on hedged
item/ commitment) amounted to:
Fair Value Cash Flow Fair Value Cash Flow
Hedge Hedge Hedge Hedge
A. P60,000 loss P50,000 loss C. P50,000 loss P 0
 B. P 0 P50,000 loss D. P50,000 gain P 0

Using the same information above, compute the December 31, 2018, the foreign exchange
gain on forward contract amounted to (income statement or equity):
Fair Value Cash Flow Fair Value Cash Flow
Hedge Hedge Hedge Hedge
A. P50,000 I/S P50,000 equity C. P50,000 I/S Not applicable
B. P50,000 equity P50,000 I/S D. Not applicable P50,000 equity

PROBLEM 19:
Parcon Corporation owns an 80% interest in Shelly Corporation acquired several years
ago. Shelly Corporation regularly sells merchandise to its parent at 125% of Shelly’s cost.
Gross profit data of Parcon and Shelly for the year 2018 are as follows:

Parcon Shelly
Sales P1,000,00 P 800,000
0
Cost of goods sold 800,000 640,000
Gross profit P 200,000 P 160,000

During 2018, Parcon purchased inventory items from Shelly at a transfer price of
P400,000. Parcon’s December 31, 2017 and 2018 inventories included goods acquired
from Shelly of P100,000 and P125,000, respectively.

PROBLEM 20:
Jiminez Limited acquired 80% of the share capital and reserves of Mustang Limited for
P180,000. Share capital was P100,000 and reserves amounted to P50,000. All assets and
liabilities were recorded at fair value except buildings which was recorded at P10,000
below fair value. The fair value of the NCI at the date of Jiminez’s acquisition was P35,000.

If the company tax rate was 30%, the goodwill recorded in relation to this business
combination amounts to:
Partial Goodwill Full Goodwill
a. P52,000 P55,000
b. P54,400 P58,000
c. P54,400 P68,000
d. P52,000 P58,000

Using the same information in the previous number, the NCI share of equity at the date of
acquisition was:

Partial Goodwill Full Goodwill

a. P32,000 P35,600
b. P31,400 P35,000
c. P31,400 P35,600
d. P32,000 P35,000

PROBLEM 21:
On November 1, 2018, Creamline Dairy Corp. concluded that the Thailand baht would
weaken during the next six months because of the coup that transpired recently. In hopes
of reporting a gain, Creamline entered into a foreign exchange forward for speculation on
November 1, 2018, to sell 1,000,000 baht on April 30, 2019 at the forward rate.

11/1/2018 12/31/18 4/30/19

Spot rate (baht) P1.190 P1.180 P1.210
Forward rate (baht) 1.199 1.187 1.210
 In the profit and loss statement, foreign exchange gain or loss on forward contract
amounted to:
2018 2019
a. P12,000 loss P23,000 gain
b. P12,000 gain P23,000 loss
c. P10,000 loss P30,000 gain
d. P 0 P 0

PROBLEM 22:
Davao Company, a Philippine Corporation, bought inventory from a supplier in Japan on
November 2, 2016 for 50,000 yen, when the spot rate was P.4245. On December 31, 2017,
the spot rate was P.4295. On January 15, 2018, Davao bought 50,000 yen at a spot rate of
P.4250 and paid the invoice. How much should Davao report in its income statements for
(1) 2017 and (2) 2018 as foreign exchange gain or (loss)?

a. (1) P250; (2) (P225) c. (1) P0; (2) (P225)

b. (1) (P250); (2) P225 d. (1) P0; (2) P220

PROBLEM 23:
Visayas Corporation, has the following foreign currency transactions during 2018:
1. Merchandise was purchased from a foreign supplier on January 10, 2018, for the
Phil-peso equivalent of P600,000. The invoice was paid on April 20, 2018, at the
Philippine peso equivalent of P608,000.

2. On September 1, 2018, Visayas borrowed the Philippine peso equivalent of

P3,000,000 evidenced by a note that was payable in the lender’s local currency on
September 1, 2019. On December 31, 2018, the Philippine peso equivalent of the
principal amount and accrued interest were P3,200,000 and P120,000 respectively.
Interest on the note is 10%.

PROBLEM 24:
On October 1, 2017, Mindanao Corp. acquired goods from USA Company for $10,000
Payable in US dollars on April 1, 2018. Spot rates on various dates follow:
Transaction date P1 = $0.018
Balance sheet date, 12/31/17 P1 = $0.017
Settlement date P1 = $0.020

PROBLEM 25:
On July 1, 2017, Northern Luzon Company lent P308,000 to a US supplier, evidenced by an
interest-bearing-note due on July 1, 2018. The note is equivalent to $8,000 on the loan
date. The note principal was appropriately included at P328,000 in Northern’s December
31, 2017 balance sheet. The note was repaid to Northern on July 1, 2018. The due date
when the exchange rate was P39 to $1.
a. P0 c. P16,000 gain
b. P26,000 gain d. P16,000 loss

PROBLEM 26:
The accounts of Palawan International, a Philippine company, show P 813,000 accounts
receivable and P 389,000 accounts payable at Dec. 31, 2010 before adjusting entries are
made. An analysis of the balances reveals the following:
 Accounts receivable
o Receivable denominated in Philippine peso P285,000
o Receivable denominated in 200,000 Japanese yen 118,000
o Receivable denominated in 250,000 Thailand baht 410,000
  Accounts payable
o Payable denominated in Philippine peso P 68,500
o Payable denominated in 10,000 Hong Kong dollar 76,000
o Payable denominated in 150,000 Thailand baht 244,000

Current exchange rates on Dec. 31, 2010 are:

Japanese Yen – P 0.66 Thailand Baht – P1.65 Hong Kong dollar – P7.00

PROBLEM 27:
The White Co. has the Philippine pesos as sits functional currency. On Oct. 16, 2009, White
ordered some inventory from a foreign supplier at an agreed purchase price of 160,000
LCU. The inventory was received on Nov. 15, 2009. At Dec. 31, 2009, the inventory
remained on hand and the trade payable balance for the inventory purchase remained
outstanding. The supplier was paid on Jan. 27, 2010 and the inventory was sold on Jan. 31,
2010. The following information about exchange rates is available:
Oct. 6, 2009 P1.00 – 2.60 LCU Dec. 31, 2009 P1.00 – 2.40 LCU
Nov. 15, 2009 P1.00 – 2.50 LCU Jan. 27, 2010 P1.00 – 2.25 LCU
At what amount should the trade payable balance due to the supplier be presented in the
statement of financial position at Dec. 31, 2009?

PROBLEM 28:
On Oct. 1, 2009, a local importer contracted to purchase foreign goods requiring payment
of 100,000 German marks one month after their receipt at the local importer’s business
place. Title to the goods passed on the date of shipment on Dec. 1, 2009. On Dec. 31, 2009,
the goods were still in transit.
The following exchange rates were made available:
Oct. 1, 2009 – P 22.00 Dec. 1, 2009 – P 20.000 Dec. 31, 2009 – P 26.00

PROBLEM 29:
On October 17, 2018, Lee, Inc. purchased from a Thailand firm an inventory costing 10,000
baht. Payment is due on January 15, 2019. Also on October 17, Lee, Inc. entered into a
foreign exchange forward to buy 10,000 baht on January 15, 2019.

10/17/18 12/31/18 1/15/19

Spot rate (baht) P 1.30 P1.42 P1.40

Forward rate (baht) 1.36 1.43 1.40

PROBLEM 30:
San Miguel Corporation acquired 100% of a foreign subsidiary, Sing Sing Ltd on 1 July
20x7. The balance sheet of Sing Sing on that date was as follows:

Balance sheet at 1 July 20x7

Foreign currency Foreign currency
(FC) (FC)
Machinery at
cost 280,000 Share capital 200,000
Investment
property 200,000 General Reserve 100,000
Retained
Receivables 50,000 earnings 300,000
Cash 70,000
600,000 600,000

Balance sheet at 1 July 20x8

Foreign currency Foreign currency
(FC) (FC)
Machinery at carrying
value 150,000 Share capital 200,000

Investment property 200,000 General Reserve 100,000

Retained
Receivables 250,000 earnings 500,000
Accounts
Cash 300,000 payable 85,000
Income tax
payable 15,000

900,000 900,000

(1) If the local currency of the foreign subsidiary is the foreign currency and the
functional currency is Philippine peso, the total assets of FC900,000 would translate
into Philippines pesos as (translate a set of financial statements from local currency
into the functional currency);

(2) If the functional currency of the foreign subsidiary is the foreign currency and the
presentation currency is Philippine pesos, the total assets of FC900,000 would
translate into Philippine pesos as (Translate financial statements into the
presentation currency)

PROBLEM 31:
On December 1, 2018, a Philippine firm, Cris Inc. estimates that at least 5,000 units of
inventory will be purchased from a company in Taiwan during January of 2009 for 500,000
Nt dollars. The transaction is probable, and it is to be denominated in Nt dollar. Sales of the
inventory are expected to occur in the six months following the purchase.
The company enters into a forward contract to purchase 500,000 Nt dollars on January 31,
2019 for P1.01.
Spot rates and forward rates at the January 31, 2019, settlement were as follows (pesos per
Nt dollar):

Spot Rate Forward Rate

for 1/31/19

December 1, 2018 P 1.03 P 1.01

December 31, 2018 1.00 .99

January 31, 2019 .98

PROBLEM 32:
On July 1, 2017, Luzon Corporation borrowed 1,680,000 yen from a Japanese Lender
evidenced by an interest-bearing note due July 1, 2018. The Philippine Peso equivalent of
the note principal was as follows:
July 1, 2017 Date borrowed P210,000
Dec. 31, 2017 Luzon’s year-end 240,000
July 1, 2018 Date repaid 280,000

PROBLEM 33:
Ball Corp. has the following foreign currency transactions during 2009:
 Merchandise was purchased from a foreign supplier on Jan. 20, 2009, for the
Philippine peso equivalent of P 90,000. The invoice was paid on March 20, 2009, at
the Philippine peso equivalent of P 96,000.
 On July 1, 2009, Ball borrowed the Philippine peso equivalent of P 500,000
evidenced by a note that was payable in the lender’s local currency on July 1, 2010.
On Dec. 31, 2009, the Philippine peso equivalents of the principal amount and
accrued interest were P 520,000 and P 26,000, respectively. Interest on the note is
10% per annum.

PROBLEM 34:
Makati Corp. imports merchandise from Abu Dhabi and exports its own products to other
countries. The unadjusted accounts denominated in Dirham at Dec. 31, 2009 are as follows:
 Accounts receivable from the sale of merchandise on Dec. 16 to
Vieta Co. Billing is for 150,000 Dirham and due Jan. 15, 2010 P 103,500
 Accounts payable to Abuds Co. for merchandise received on Dec. 2 and
Payable on Jan. 30, 2010, billing is for 275,000 dirham P 195,250
Exchange rates on selected dates are as follows:
Dec. 31, 2009 - P0.68 Jan. 15, 2010 - P0.675 Jan. 30, 2010 - P0.685