LOA: AFAR Review AY 2019-2020

Lyceum of Alabang
Bachelor of Science in Accountancy – College of Business Management Education
Review materials in PFRS 3, Business Combinations
A. Net Asset Acquisition

Problem 1 - Net Asset Acquisition:

The following Statement of Financial Position were prepared for SYNTAX and ERROR Company on
January 1, 2016 just before they entered into business combination:

Syntax Error
Book Value Fair Value Book Value Fair Value
Cash and Receivables 450,000 500,000 225,000 250,000
Inventory 900,000 1,000,000 150,000 250,000
Building and Equipment 1,687,500 1,500,000 450,000 525,000
Accounts Payable 225,000 200,000 60,000 45,000
Bonds Payable 675,000 450,000 75,000 105,000
Common Stocks
P20 par value 1,200,000
P10 par value 300,000
Additional Paid in Capital 225,000 75,000
Retained Earnings 712,500 315,000

Syntax Company acquired Error Company by issuing 15,000 shares of common stocks and paying cash
amounting to 450,000. In addition, the following were incurred: Legal fees, Cost of SEC registration,
Cost of issuing stock certificates and General Administrative costs were incurred and paid costing the
Syntax Company of 37,500; 37,500; 15,000 and 22,500 respectively.

I. If the market stock price of the Syntax and Error Company are P25 and P14, respectively at the time
of acquisition:

1. How much is the Goodwill or (income from acquisition) ?

a. 25,000 b. (25,000) c. 50,000 d. (50,000)

2. How much is the Combined Common Stock after the acquisition?

a. 1,200,000 b. 1,500,000 c. 1,522,500 d. 1,575,000

3. How much is the Combined Additional Paid in Capital after the acquisition?
a. 247,500 b. 300,000 c. 305,000 d. 322.500

Advance Financial Accounting and Reporting by Joshua S. Umali, CPA Page 1 of 12

Dream… Believe… Survive…
LOA: AFAR Review AY 2019-2020

4. How much is the Combined Total Retained Earnings after the acquisition?
a. 652,500 b. 702,500 c. 712,500 d. 1,027,500

5. How much is the Combined Total Liabilities after the acquisition?

a. 900,000 b. 1,000,000 c. 1,050,000 d. 1,052,500

6. How much is the Combined Total Assets after the acquisition?

a. 3,037,500 b. 3,500,000 c. 3,525,000 d. 3,550,000

7. How much is the gain or (loss) on sale?

a. (50,000) b. 50,000 c. 135,000 d. (135,000)

II. If the market stock price of SYNTAX and ERROR Company are P30 and P13, respectively at the time
of acquisition:

1. How much is the Goodwill or (Income from Acquisition)?

a. 25,000 b. (25,000) c. 50,000 d. (50,000)

2. How much is the Combined Common Stock after the acquisition?

a. 1,200,000 b. 1,500,000 c. 1,522,500 d. 1,575,000

3. How much is the Combined Additional Paid in Capital after the acquisition?
a. 247,500 b. 300,000 c. 305,000 d. 322,500

4. How much is the Combined Total Retained Earnings after the acquisition?
a. 652,500 b. 702,500 c. 712,500 d. 1,027,500

5. How much is the Combined Total Liabilities after the acquisition?

a. 900,000 b. 1,000,000 c. 1,050,000 d. 1,052,500

6. How much is the Combined Total Assets after the acquisition?

a. 3,037,500 b. 3,500,000 c. 3,525,000 d. 3,550,000

Problem 2 – Net Asset Acquisition with Contingent Consideration:

On January 1 2017, Factyao Corporation and Ginkey Company decided to enter into business
combination. Factyao Corporation’s book shows assets and liabilities amounting to P1,350,000 and
P300,000 respectively The shareholder’s equity is composed of P300,000 common stocks (10 par);
P150,000 APIC and P600,000 retained earnings. The book value asset of Factyao is understated by
P150,000 while its liability is overstated by P75,000.

Ginkey Company’s assets inclusive of P15,000 goodwill amounted to P500,000 while its liabilities
amounted to P150,000. The shareholder’s equity is composed of P120,000 common stocks (10 par);

Advance Financial Accounting and Reporting by Joshua S. Umali, CPA Page 2 of 12

Dream… Believe… Survive…
LOA: AFAR Review AY 2019-2020

P105,000 APIC and P125,000 retained earnings. The Fair Value assets without goodwill and liabilities
should be reduced both by P75,000.

Factyao Company acquired the net assets of Ginkey Company by issuing 25,000 shares and cash of
10,000. Moreover, a contingent consideration of P80,000 will be paid when the market price per share
exceeded P15 or the average income for 2 years will amount to P1,500,000. The determinable amount
of the said contingent consideration at the date of combination amounted to P50,000. The current
market price of Factyao stock is traded at P12 per share.

Factyao Corporation paid the following as a result of business combination

Finder’s fee P50,000

Legal accounting and other consulting fees 50,000
Cost of stockholder’s meeting to vote on the acquistion 20,000
SEC registration of the business combination 15,000
General administrative cost 15,000
Cost of printing stock certificates 10,000
Accountants fee related to the stock issuance 20,000
SEC Registration 20,000
Stock listing application fees 10,000
Underwriting cost 10,000

1. How much is the result of the combination on January 1, 2017?

a. 10,000 goodwill c. 25,000 goodwill
b. (10,000) income d. (25,000) income
2. How much is the Combined Common Stock?
a. 420,000 c. 670,000
b. 550,000 d. 720,000
3. How much is the Combined APIC?
a. 130,000 c. 235,000
b. 150,000 d. 255,000
4. How much is the Combined RE?
a. 350,000 c. 425,000
b. 375,000 d. 450,000
5. How much is the Combined total liability?
a. 350,000 c. 425,000
b. 375,000 d. 450,000
6. How much is the Combined Total Asset?
a. 1,330,000 c. 1,555,000
b. 1,500,000 d. 1,575,000

If on March 31, 2017, the fair value of contingent consideration increased to 60,000 when the per
share price is 13.5 Then the market price reaches 16 per share the next day.

Advance Financial Accounting and Reporting by Joshua S. Umali, CPA Page 3 of 12

Dream… Believe… Survive…
LOA: AFAR Review AY 2019-2020

7. What will be the result of the combination as of December31, 2016?

a. 15,000 goodwill c. 35,000 goodwill
b. 25,000 goodwill d. 55,000 goodwill

If on June 30, 2017, the fair value of contingent consideration decreased to 20,000 and subsequently
increased by 20,000 on January 2, 2018 when the market price reaches 13.5.

8. What will be the result of the combination as of December 31, 2017?

a. 5,000 goodwill c. 15,000 goodwill
b. (5,000) income d. (15,000) income
9. How much is the estimated liability on contingent consideration (ELCC) to be reported in 2017?
a. 20,000 c. 40,000
b. 30,000 d. 50,000
10. How much is the gain or (loss) on contingent consideration to be reported in 2017 if the
average income as of December 31, 2017 amounted to 2,000,000?
a. 40,000 c. (40,000)
b. 60,000 d. (60,000)
11. How much is the gain or (loss) on contingent consideration to be reported in 2017 if the market
price did not exceed 15 per share and the average income only amounted to 1,490,000.
a. 20,000 c. 40,000
b. (20,000) d. (40,000)

If on February 1, 2017, the fair value of contingent consideration is determined at 55,000 but
subsequently decreased by 15,000 on June 1, 2017 based on facts existing at the date of acquisition.

12. What will be the result of the combination as of December 31, 2017?
a. 15,000 goodwill c. 30,000 goodwill
b. 20,000 goodwill d. 45,000 goodwill
13. How is the gain or (loss) to be reported in 2017?
a. 0 c. (15,000)
b. (5,000) d. 15,000

Problem 3 - Net Asset Acquisition with Provisional Fair Value:

On January 1, 2017, EXO Corporation and BTS Company decided to enter into a business combination.
EXO Corporation SFP shows the following:

EXO Corporation and BTS Company decided to enter into a business combination. EXO Corporation SFP
shows the following:

Assets Book Value Fair Value

Cash and Receivables 560,000
Inventory 200,000 230,000
Land 325,000 445,000
Liabilities

Advance Financial Accounting and Reporting by Joshua S. Umali, CPA Page 4 of 12

Dream… Believe… Survive…
LOA: AFAR Review AY 2019-2020

Accounts Payable 460,000

Notes Payable 100,000 50,000* (provisional)
Equity
Common Stock 200,000
APIC 105,000
RE 220,000

BTS Company’s SFP shows the following

Assets Book Value Fair Value

Cash and Receivables 100,000
Inventory 100,000 120,000
Land 200,000 230,000* provisional
Liabilities
Accounts Payable 50,000
Notes Payable 50,000 30,000
Equity
Common Stock 100,000
APIC 50,000
RE 150,000

EXO Company acquired the net assets of Toyota Company by paying cash of 350,000. The direct and
indirect cost paid by EXO to effect the combination amounted to 45,000 and 15,000 respectively.

1. How much is the result of combination on January 1, 2017?

a. 20,000 goodwill b. (20,000) income c. 30,000 goodwill d. (30,000) income

If on February 1, 2017, the fair value of BTS’ inventory and land amounted to 100,000 and 190,000
respectively, while the fair value of Subaru’s inventory and land increased by 10,000 and 20,000
respectively.

2. How much is the result of the combination to be reported in 2017?

a. 20,000 goodwill b. (20,000) income c. 40,000 goodwill d. (40,000) income

3. How much is the combined land to be reported in 2017?

4. How much is the combined inventory to be reported in 2017?

If on February 15, 2017, the fair value of Toyota’s land decreased to 200,000 but subsequently
increased to 25,000 on June 30, 2017 due to fact existing at the date of combination.

5. How much is the result of the combination to be reported in 2016?

a. 10,000 goodwill b. (10,000) income c. 40,000 goodwill d. (40,000) income

Advance Financial Accounting and Reporting by Joshua S. Umali, CPA Page 5 of 12

Dream… Believe… Survive…
LOA: AFAR Review AY 2019-2020

6. How much is the gain or (loss) due to change in fair value in 2016?

a. 0 b. 50,000 c. (50,000) d. (70,000)

B. Stock Acquisition:

Problem 4 - Stock Acquisition:

Problem 2: The January 1, 2017 statement of Financial position of Solo Corporation at book and market
values were as follows:

Book Value Fair Value

Current Assets 1,200,000 1,125,000
PPE 1,350,000 1,500,000

Current Liability 450,000 450,000

Long term Liab 750,000 690,000
Common Stock 150,000
APIC 300,000
RE 900,000
Polo Corp paid 1425,000 in cash for 80% if Solo Corporation’s common stock.

I. The Fair value of NCI is assessed to be 345,000.

1. . How much is the allocated excess?

a. 297,000 b. 345,000 c. 372,000 d. 420,000

2. 2. How much is the Full Goodwill?

a. 237,000 b. 285,000 c. 297,000 d. 420,000

3. How much is the Partial Goodwill?

a. 237,000 b. 285,000 c. 297,000 d. 420,000

4. How much of the total goodwill (income from acquisition) is attributable to parent?
a. 48,000 b. 237,000 c. 285,000 d. 420,000

5 How much of the total goodwill (income from acquisition) is attributable to non-controlling
interest?
a. 48,000 b. 237,000 c. 285,000 d. 420,000

II. If the fair value of NC (Non-Controlling Interest) is assessed to be 295,000.

1. How much is the allocated excess?

a. 297,000 b. 372,000 c. 420,000 d. 431,250

2. How much of the total goodwill (income from acquisition) is attributable to parent?
a. 0 b. 237,000 c. 285,000 d. 420,000

Advance Financial Accounting and Reporting by Joshua S. Umali, CPA Page 6 of 12

Dream… Believe… Survive…
LOA: AFAR Review AY 2019-2020

3. How much of the total goodwill (income from acquisition) is attributable to Non-Controlling
Interest?
a. 0 b. 237,000 c. 285,000 d. 420,000

III. If there is no available fair value of NCI (Non-Controlling Interest):

1. How much is the allocated excess?

a. 297,000 b. 345,000 c. 420,000 d. 431,250

2. How much is the Full Goodwill?

a. 237,000 b. 285,000 c. 296,250 d. 420,000

3. How much of the total goodwill (income from acquisition) is attributable to Parent?
a. 48,000 b. 237,000 c. 285,000 d. 420,000

4. How much is the Partial Goodwill?

a. 48,000 b. 237,000 c. 285,000 d. 420,000

Problem 5 – Stock Acquisition with Control Premium:

On June 1, 2017, Faye Company acquired 80% (800,000 shares) of Honey Corporation for 8,400,000.
A control premium of 400,000 is included in the consideration paid by Faye. The carrying and fair
value of net identifiable assets of Honey amounted to 8,000,000 and 9,500,000 respectively.

1. How much is the amount of goodwill under proportionate share basis or partial goodwill?
a. 800,000 c. 1,000,000
b. 900,000 d. 2,400,000
2. How much is the amount of goodwill under full fair value basis or full goodwill?
a. 800,000 c. 900,000
b. 850,000 d. 1,000,000
3. Assume that the fair value NCI is assessed at 1,950,000, how much is the amount of goodwill
under gross up value basis?
a. 800,000 c. 900,000
b. 850,000 d. 1,000,000

Problem 6 – Step Acquisition:

On January 5, 2017, EXB Company acquires 10% of BEX Company’s common stock for 500,000 cash
and carries the investment as a fair value through OCI investment. On March 3, 2017, EXB purchases
additional 70% of BEX Company’s stock for 3,780,000. At that date, BEX Company reports identifiable
asset with book value and fair value of 5,900,000 and 7,300,000, while the liabilities with book and
fair value of 2,600,000. The fair value of NCI is 950,000.

Advance Financial Accounting and Reporting by Joshua S. Umali, CPA Page 7 of 12

Dream… Believe… Survive…
LOA: AFAR Review AY 2019-2020

1. How much is the amount of Fair value net assets of the subsidiary?
a. 3,300,000 c. 4,320,000
b. 4,700,000 d. 5,400,000
2. How much is the allocated excess?
a. 1,430,000 c. 1,960,000
b. 1930,000 d. 1,970,000
3. How much is the amount of gain or (loss) recognized due to additional shares acquired?
a. 0 c. 35,000 gain
b. 40,000 loss d. 40,000 gain
4. How much is the amount of goodwill under full fair value basis or full goodwill?
a. 530,000 c. 570,000
b. 560,000 d. 1,970,000

Problem 7 - Sales of Investment in subsidiary without loss of control:

CDO company owns 75% of the 200,000 stocks of CPI bank. The investment in CPI bank has a carrying
value of 18,000,000 while the fair value net assets of CPI bank amounted to 25,000,000. The CDO
Company sold 25,000 shares to outside parties.

1. How much is the gain or loss on the sale of shares to be recognized in the profit or loss
agreement?
a. 0 c. 125,000 gain
b. 100,000 gain d. 250,000 gain
2. If the stocks were sold at 130 per share in the market, how much is the amount to be credited
to share premium or APIC?
a. 0 c. 125,000
b. 100,000 d. 250,000

Problem 8 - Sale of Investment in subsidiary with loss of control: Deconsolidation:

Kim Company has 80% interest in Joshua Corporation on December 31, 2017. The investment in
subsidiary is with carrying value of 800,000. The carrying amount attributable to the 20% non-
controlling interest is 200,000. On January 4, 2017., Kim sold 50% ownership to unrelated party for a
cash proceeds of 600,000 which resulted to loss of control. Kim, however, retained 30% interest in
Josh Corporation with fair value of 360,000 on that date.

1. How much is the gain or (loss) on sale of stocks?

a. 0 c. 160,000 gain
b. 100,000 gain d. 260,000 gain

2. Assuming that the fair value of the 30% retained interest in Josh Corporation amounted to
320,000, which of the following is true?
a. Ikaw lang ang mahal nya.
b. Magiging kayo rin balang araw.

Advance Financial Accounting and Reporting by Joshua S. Umali, CPA Page 8 of 12

Dream… Believe… Survive…
LOA: AFAR Review AY 2019-2020

c. May forever.
d. The amount of 120,000 should be credited as gain on disposal.

Problem 9 - Subsequent to date Acquisition:

The following Statement of Final Position were prepared by Popoy and Sasha Company on January 1,
2015 just before they entered into business combination:

POPOY Company SASHA Company

Book Value Fair Value Book Value Fair Value
Cash and Receivables P900,000 900,000 160,000 160,000
Inventory 600,000 800,000 100,000 130,000
Building (5 year life) 1,125,000 1,400,000 300,000 400,000
Equipment (5 year life) 300,000 400,000 250,000 200,000
Accounts Payable 450,000 400,000 50,000 50,000
Bond’s Payable 750,000 750,000 40,000 40,000
Common Stocks
P20 per value 750,000
P10 per value 200,000
Additional paid in capital 150,000 50,000
Retained earnings 825,000 470,000
On the same day, Popoy purchased 70 percent common shares outstanding of Sasha for P600,000.
For two years ended December 31, Popoy Company and Sasha Company reported on their separate
income statement the following results:

Net Income
Popoy Company Sasha Company
2015 P262,500 P200,000
2016 P165,500 P115,000
As Christmas Bonus to the stockholders, it is the policy of both companies to declare dividends every
25th of December and pay such after 15 days.

Dividends
Popoy Company Sasha Company
2015 P50,000 P25,000
2016 P100,000 P50,000
Additional information:

• The fair value of Non-controlling interest (30%) assessed at P250,000.

• Popoy issued additional 10,000 shares at market price of P25 per share in 2016.
• The impairment test shows that goodwill is impaired at 10% yearly starting 2016.
• Popoy paid half of its accounts payable in 2016 while Sasha’s bonds payable matures in 2016.

Advance Financial Accounting and Reporting by Joshua S. Umali, CPA Page 9 of 12

Dream… Believe… Survive…
LOA: AFAR Review AY 2019-2020

Questions:

1. How much is the amount of goodwill (income from acquisition) to be presented in the 2015
consolidated financial statement?
a. P40,000 c. P120,000
b. P50,000 d. P130,000
2. How much is the amount of allocated excess?
a. P40,000 c. P120,000
b. P50,000 d. P130,000
3. How much is the amount of the net amortization of excess to be adjusted to the net income of
the subsidiary in 2015 and 2016?
a. P40,000 and P10,000 c. (P40,000) and (P10,000)
b. (P40,000) and P10,000 d. P40,000 and (P10,000)
4. How much is the Non-Controlling interest in the Net Income of Subsidiary in 2015?
a. P48,000 c. P60,000
b. P50,000 d. P72,000
5. How much is the consolidated net income in 2015?
a. P357,000 c. P422,500
b. P406,000 d. P482,500
6. How much is the amount of NCI in Net assets of the subsidiary as of December 31, 2015?
a. P250,000 c. P290,500
b. P257,500 d. P298,000
7. How much is the consolidated retained earnings in 2015?
a. P825,000 c. P1,182,000
b. P1,132,000 d. P1,602,000
8. How much is the consolidated shareholder’s equity in 2015?
a. P2,032,000 c. P2,372,500
b. P2,322,500 d. P2,502,000
9. How much is the consolidated liabilities in 2015?
a. P1,290,000 c. P1,340,000
b. P1,315,000 d. P1,347,500
10. How much is the consolidated assets in 2015?
a. P3,322,000 c. P3,662,500
b. P3,612,000 d. P3,670,000
11. How much is the consolidated Net income in 2016?
a. P200,500 c. P235,500
b. P230,500 d. P280,500
12. How much is the non-controlling interest in the Net Income of the Subsidiary in 2016?
a. P30,500 c. P31,350
b. P31,500 d. P33,500
13. How much is the non-controlling interest in the 2016 Consolidated Net Income?
a. P30,500 c. P31,350
b. P31,500 d. P33,500

Advance Financial Accounting and Reporting by Joshua S. Umali, CPA Page 10 of 12

Dream… Believe… Survive…
LOA: AFAR Review AY 2019-2020

14. How much is the controlling interest in the 2016 Net Income of the subsidiary?
a. P69,500 c. P200,500
b. P73,500 d. P235,500
15. How much of the consolidated Net Income is attributable to the parent in 2016?
a. P200,000 c. P230,500
b. P204,000 d. P235,500
16. How much is the consolidated retained earnings as of 2016?
a. P1,132,000 c. P1,237,500
b. P1,232,000 d. P1,267,500
17. How much is the Non-Controlling Interest in the Net Assets of the Subsidiary (NCINAS) as of
2016?
a. P290,500 c. P306,000
b. P305,500 d. P307,500
18. How much is the consolidated shareholder’s equity as of 2016?
a. P2,438,000 c. P2,689,500
b. P2,688,000 d. P2,690,000
19. How much is the consolidated liability as of 2016?
a. P1,140,000 c. P1,365,000
b. P1,215,000 d. P1,440,000
20. How much is the consolidated assets as of 2016?
a. P3,683,000 c. P3,753,000
b. P3,684,500 d. P3,828,000

Problem 10 – Intercompany Transactions:

On January 1, 2016, Pulpy company purchased 80% stocks of Suzzy Company for 820,000.
The fair value of the non-controlling interest is assessed at 220,000 while the proportionate
share basis amounted to 200,000. The excess of total value of subsidiary over its book value
of 950,000 is attributable to goodwill and equipment with 5 year remaining life.

On March 3, 2016, Pulpy sold merchandise costing 500,000 to Felbie Company for 750,000.
On the same day, Pulpy sold merchandise to Suzzy costing 280,000 for 350,000.

On the other hand, Pulpy Company paid 400,000 for the purchase of merchandise from
Suzzy on June 30, 2016 with the latter imposing mark up of 25%.

In the perspective of Pulpy Company, the remaining inventory from inter-company

transaction as of year-end amounted to (3/4) due to sale of such merchandise to outside
party for 150,000. While the records of Suzzy company shows that (1/2) of the inventory
from intercompany transaction were sold to unrelated party for 250,000. The following
shows the net income and dividends declared by both company in 2016:

Advance Financial Accounting and Reporting by Joshua S. Umali, CPA Page 11 of 12

Dream… Believe… Survive…
LOA: AFAR Review AY 2019-2020

Pulpy Company Suzzy Company

Net income 386,000 175,000
Dividends 50,000 20,000
The shareholders equity of pulpy is compose of common stocks, APIC, and Retained
Earnings of 1,750,000; 250,000; and 2,000,000 respectively.

1. How much is the Fair Value Net Asset of the Subsidiary?

2. How much is the amount of goodwill and amortization of equipment?
3. How much is the amount of net income of the parent from own operation?
4. What is the downstream and upstream mark up on sales?
5. How much is the downstream unrealized profit in ending inventory?
6. How much is the upstream unrealized profit in ending inventory?
7. How much is the consolidated net income?

Problem 11 – Intercompany Transactions:

On January 1, 2016, Popo Company acquired 90% ownership of Solo Corporation, at

underlying book value. The fair value of the NCI at the date of acquisition was equal to 10
percent of the book value of Solo Corp. On March 17, 2016, Solo Purchased inventory
from Popo for 90,000. Solo sold the 80% inventory to an unaffiliated company for 100,000
on November 21, 2016. Popo had produced the inventory sold for Solo for 62,000. The
companies had no other transactions during 2016.

1. Based on the information given above, what amount of sale will be reported in the
2016
consolidated income statement?

a. 162,000 c. 62,000
b. 100,000 d. 38,000

2. What amount of cost of goods sold will be reported in the 2016

consolidated income statement?

a. 49,600 c. 62,000
b. 58,000 d. 90,000

3. What amount of consolidated net income will be assigned to the controlling

shareholders for 2016?

a. 58,000 c. 47,600
b. 52,200 d. 45,200

- Don’t give yourself limitations. You can do everything in God’s will-

Advance Financial Accounting and Reporting by Joshua S. Umali, CPA Page 12 of 12

Dream… Believe… Survive…