ACTP4: ACCOUNTING FOR BUSINESS COMBINATIONS

IFRS 10: CONSOLIDATION - SUBSEQUENT TO THE DATE OF ACQUISITION

Part I – Theory of Accounts

1. PFRS 10 defines them as the financial statements of a group in which the assets, liabilities, equity,
income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single
economic unit.
a. Consolidated financial statements
b. Separate financial statements
c. Group financial statements
d. Combined financial statements

2. Consolidated FS shall include the financial statements of the

a. Parent company and all of its domestic associates
b. Parent company and all of its domestic subsidiaries
c. Parent company and all of its domestic and foreign associates
d. Parent company and all of its domestic and foreign subsidiaries

3. Under PFRS 10, an investor controls an investee if the investor has the:
I. Power over the investee, i.e., the investor has existing rights that give it the ability to direct the
relevant activities (the activities that significantly affect the investee’s returns)
II. Exposure, or rights, to variable returns from its involvement with the investee
III. Ability to use its power over the investee to affect the amount of the investor’s returns.
a. I and II
b. I and III
c. II and III
d. I, II and III

4. Which of the following income items shall affect both CNI to Parent/ (CONSO RE) and
NCINI/(NCINAS) in reconciliation from cost method to acquisition method?
a. Gain on bargain purchase arising from business combination.
b. Unrealized/realized income/expense arising from transactions between two subsidiaries owned by
the same parent.
c. Unrealized/realized income/expense arising from downstream transactions or from parent to
subsidiary.
d. Impairment loss of goodwill from business combination initially measured using proportionate
share of fair value of net asset acquired.

5. Which of the following consolidation items will affect only the Consolidated Net Income
Attributable to the Parent’s Shareholders but not the Non-controlling Interest in Net Income?
a. Amortization of difference between fair value over book value of the assets or liabilities of the
subsidiary.
b. Impairment loss of the total goodwill arising from business combination
c. Gain on bargain purchase arising from business combination
d. Unrealized or realized gain/loss on upstream transactions

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Part II – Problems

Problem 1

On January 1, 2022, JINBEI Inc. acquired 70% of the outstanding shares of stocks of WHO’S WHO
Inc. for P1,500,000. The book value of the net assets of JINBEI at the date of acquisition was
P3,000,000 of which the retained earnings amounted to P1,800,000. On the other hand, the book
value of the net assets of WHO’S WHO at the date of acquisition was P2,800,000. The non-controlling
interest is measured at the minimum.

The book value of the assets and liabilities of WHO’S WHO equal the fair values except an inventory
which had an excess of fair over book value in the amount of P60,000; an equipment which had an
excess of book over fair value in the amount of P80,000; and a note payable bearing an interest of 5%
which was understated by P10,000.

30% of the above inventory was sold in the current year and the rest was sold in 2023. The equipment
had a remaining life of 2 years. The note payable was issued on January 1, 2020 and it had a remaining
term of 5 years. The following data were also ascertained:

2022 2023
Net income – JINBEI 500,000 600,000
Net income – WHO’S WHO 320,000 280,000
Dividend declared – JINBEI 110,000 150,000
Dividend declared – WHO’S WHO 70,000 60,000

1. What is the consolidated net income attributable to JINBEI on December 31, 2022?
a. P1,143,050
b. P1,098,250
c. P1,129,050
d. P1,092,500

2. What is the non-controlling interest net income on December 31, 2022?

a. P96,000
b. P102,450
c. P89,550
d. P102,750

3. What is the non-controlling interest net asset on December 31, 2022?

a. P918,450
b. P912,450
c. P933,450
d. P912,750

4. What is the consolidated retained earnings on December 31, 2022?

a. P2,819,050
b. P2,833,050
c. P2,782,500
d. P2,788,250

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5. What is the non-controlling interest net asset on December 31, 2023?
a. P983,700
b. P978,450
c. P979,200
d. P977,700

6. What is the consolidated retained earnings on December 31, 2023?

a. P3,421,300
b. P3,860,300
c. P3,424,800
d. P3,463,300

Problem 2

On January 1, 2022, LAW Corporation purchased 80% of the outstanding shares of VERGO
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, VERGO had P16,000,000 of ordinary shares outstanding and
retained earnings of P6,400,000. VERGO’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. VERGO’s remaining assets had book values
equal to their fair values. The income and dividend figures for both LAW and VERGO are as follows:
Net income of LAW in 2022 is P3,600,000. Net income of VERGO in 2022 is P1,360,000. Dividends
declared by LAW in 2022 is P880,000. Dividends declared by VERGO in 2022 is P280,000. LAW’s
retained earnings balance at the date of acquisition was P13,800,000.

1. What is the consolidated retained earnings attributable to controlling interest in 2022?

a. 18,156,800
b. 17,140,800
c. 17,276,800
d. 17,763,200

2. What is the non-controlling interest in net income in 2022?

a. 211,200
b. 238,400
c. 272,000
d. 332,800

3. What is the consolidated profit in 2022?

a. 4,568,000
b. 4,689,600
c. 4,432,000
d. 5,016,000

4. What is the non-controlling interest in net assets at the end of 2022?

a. 4,905,200
b. 4,780,200
c. 4,784,000
d. 4,939,200

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Problem 3

On January 1, 2022, SANJI Co. acquired 60% of the outstanding shares of stocks of QUEEN Co. for
P3,000,000. The book value of the net assets of SANJI at the date of acquisition consisted of Ordinary
shares in the amount of P1,000,000; Additional paid in capital in the amount of P2,500,000; retained
earnings in the amount of P2,400,000. On the other hand, the book value of the net assets of QUEEN
at the date of acquisition was P2,200,000 including a goodwill in the amount of P250,000. The non-
controlling interest is measured at fair value in the amount of P1,300,000.

The book value of the assets and liabilities of QUEEN equal the fair values except an inventory which
was overstated in the amount of P45,000 and a machine which was understated by P200,000.

The machine had a remaining life of 8 years. If the result of the business combination was goodwill,
it was impaired in the amount of P75,000 in the current year. The net income of SANJI was P700,000
and the net income of QUEEN was P430,000 at the end of the year. Dividends declared by SANJI
was P220,000, but only P200,000 was paid. On the other hand, dividends declared by QUEEN was
P130,000, but only P100,000 was paid.

1. What is the consolidated net income attributable to SANJI on December 31, 2022?
a. P832,649
b. P808,649
c. P847,000
d. P910,649

2. What is the non-controlling interest net income on December 31, 2022?

a. P150,000
b. P148,351
c. P164,351
d. P134,000

3. What is the non-controlling interest net asset on December 31, 2022?

a. P1,398,000
b. P1,464,351
c. P1,395,351
d. P1,412,351

4. What is the consolidated retained earnings on December 31, 2022?

a. P3,027,000
b. P3,012,649
c. P3,032,649
d. P2,988,649

END

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