MONILLAS, Sophia Anne

ACCTG 6: ACCOUNTING FOR BUSINESS COMBINATION SAINT LOUIS COLLEGE

MIDTERM QUIZ #2 JOHN LORENZ MARQUEZ, CPA

I. Multiple Choice – Write the CAPITAL LETTER of the correct answer for the questions
below.

1. A

Entity A acquired 80% interest in Entity B on December 31, 2021. How much Entity B’s profit
will be included in the December 31, 2021 Consolidated Statement of Profit or Loss?

a) 100%
b) 80%
c) 20%
d) 40%

2. B

One of the essential elements of control is power. According to PFRS 10, an investor has power
if:

a) The investor holds less than half of the outstanding shares of the investee
b) The investor has existing rights that give it the current ability to direct the investee’s
relevant
activities
c) The investor’s interest in the earnings of the investee is not fixed but rather varies depending
on the level of the earnings
d) The investor does not have right to appoint or remove members of the investee’s key
management personnel

For 3-5
Basketball Co. wholly owns Volleyball Co. During the year, basketball purchased inventory from
Volleyball. Volleyball has marked-up at the goods at 20% above cost. Assumed that the
questions below pertains to the year-end of the year of acquisition.

3. D

How should the group compute for the consolidated sales?

a) Sales of Basketball plus sales of Volleyball

b) Sales of Basketball plus sales of Volleyball minus the intercompany sale
c) Sales of Basketball plus sales of Volleyball plus the intercompany sale
d) Sales of Basketball plus sales of Volleyball minus the unrealized gross profit from
intercompany sales
MONILLAS, Sophia Anne
ACCTG 6: ACCOUNTING FOR BUSINESS COMBINATION SAINT LOUIS COLLEGE
MIDTERM QUIZ #2 JOHN LORENZ MARQUEZ, CPA
4. D

How should the group compute for the consolidated cost of sales?

a) Cost of sales of Basketball plus Cost of sales of Volleyball

b) Cost of sales of Basketball plus Cost of sales of Volleyball minus the intercompany sale
c) Cost of sales of Basketball plus Cost of sales of Volleyball plus the intercompany sale
d) Sales of Basketball plus sales of Volleyball minus the intercompany sale plus the unrealized
gross profit from intercompany sales

5. A

How should the group compute for the consolidated inventory?

a) Ending inventory of Basketball plus Ending inventory of Volleyball

b) Ending inventory of Basketball plus Ending inventory of Volleyball minus the intercompany
sale
c) Ending inventory of Basketball plus Ending inventory of Volleyball minus unrealized profit in
the ending inventory
d) Ending inventory of Basketball plus Ending inventory of Volleyball plus unrealized profit in
the ending inventory

II. Problem Solving – Solve and provide what is required

MONILLAS, Sophia Anne
ACCTG 6: ACCOUNTING FOR BUSINESS COMBINATION SAINT LOUIS COLLEGE
MIDTERM QUIZ #2 JOHN LORENZ MARQUEZ, CPA
1.

On January 1, 2021, Weak Co. acquired 70% interest in the Strong Co. The financial statements of the
combining entities right after the business combination are as follows:

ASSETS Weak Strong

Cash
Accounts receivable 100,000 20,000
Inventory 120,000 40,000
Investment in Subsidiary (Cost) 400,000 100,000
Prepaid Assets 560,000 -
Equipment, net 30,000 10,000
TOTAL ASSETS 1,200,000 400,000
2,410,000 570,000
LIABILITY AND EQUITY
Accounts Payable Php70,000 Php90,000
Total Liabilities 70,000 90,000

Share Capital 1,000,000 200,000

Share Premium 350,000 50,000
Retained Earnings 990,000 230,000
Total Equity 2,340,000 480,000
TOTAL LIABILITIES & EQUITY 2,410,000 570,000

Weak Strong
Sales 640,000 230,000
Cost of Sales (448,000) (138,000)
Gross Profit 192,000 92,000
Depreciation Expense (70,000) (50,000)
Other Expense (15,000) (12,000)
Profit (Loss) for the year 107,000 30,000

The carrying amount of Strong’s assets and liabilities approximate the acquisition-date fair values
except the following:

CA FV FVA
Accounts Receivable 40,000 20,000 (20,000)
Equipment, net 400,000 540,000 140,000
120,000
MONILLAS, Sophia Anne
ACCTG 6: ACCOUNTING FOR BUSINESS COMBINATION SAINT LOUIS COLLEGE
MIDTERM QUIZ #2 JOHN LORENZ MARQUEZ, CPA
FVA USEFUL LIFE DEPRECIATION
Accounts Receivable (20,000) N/A (20,000)
Equipment, net 140,000 8 17,500
120,000 (2,500)

Weak measured the NCI at proportionate share. Equipment's remaining life at January 1, 2021 is 8
years. No share issuances and dividend declaration during the year. Strong’s Accounts Receivable
was also the same receivable that is outstanding in January 1, 2021.

REQUIREMENT:
CA FV FVA
20
Accounts Receivable 40,000 ,000 (20,000)
540
Equipment, net 400,000 ,000 140,000
120,000
FVA USEFUL LIFE DEPRECIATION

Accounts Receivable (20,000) N/A (20,000) -

Equipment, net 140,000 8 17,500 122,500

120,000 (2,500) 122,500

S 01/01/2022 31/12/2022 Net change

480
Net Assets at carrying amount 480,000 ,000

FVA 120,000 122,500

602
Net Assets at Fair Value 600,000 ,500 2,500

a) Amount of Goodwill from the Business Combination (2 point)

Consideration transferred 560,000

NCI (600,000 x .30) 180,000
TOTAL 740,000
MONILLAS, Sophia Anne
ACCTG 6: ACCOUNTING FOR BUSINESS COMBINATION SAINT LOUIS COLLEGE
MIDTERM QUIZ #2 JOHN LORENZ MARQUEZ, CPA
Less: FV of net assets acquired (600,000)
GOODWILL 140,000

Share Capital 200,000

Share Premium 50,000
Retained Earnings 230,000
Net assets CA 480,000
FVA 120,000
CA NET ASSETS 600,000

b) Balance of Investment in Subsidiary after Consolidation (1 point)

INVESTMENT IN SUBSIDIARY 560,000

c) Consolidated Accounts Receivable (2 points)

Accounts receivable- w 100,000

Accounts receivable- s 20,000
Less: FVA (20,000)
CONSOLIDATED ACCOUNTS RECEIVABLE 100,000

d) Consolidated Depreciation Expense (2 points)

Depreciation Expense - w 70,000

Depreciation Expense - s 50,000
Depreciation Expense (140,000/8) 17,500
CONSOLIDATED DEPRECIATION EXPENSE 137,500

e) Strong’s profit after the effect of the Fair Value Adjustment (2 points)

Strong’s Profit - Unadjusted 30,000

Less: Adjustment (2,500)
PROFIT FOR DISTRIBUTION 27,500

f) Weak’s share in Strong’s Profit (1 point)

MONILLAS, Sophia Anne
ACCTG 6: ACCOUNTING FOR BUSINESS COMBINATION SAINT LOUIS COLLEGE
MIDTERM QUIZ #2 JOHN LORENZ MARQUEZ, CPA

SHARE OF WEAK IN STRONG’S PROFIT 19,250

g) NCI share in Strong’s Profit (1 point)

Retained Earnings - S 27,500

Retained Earnings - W 19,250
NON-CONTROLLING INTEREST (27,500-19,250) 8,250

h) Consolidated Retained Earnings (2 point)

Parents Retained earnings- 12 /31

990,000
Parents share in the net changes in subsidiary net assets
1,750
CONSOLIDATED RETAINED EARNINGS
991,750

i) Balance of NCI after Consolidation (2 points)

180,
NCI, Beginning
000
8,
Share in Profit
250
188,
NCI, ENDING
250

2.

On January 1, 2021 Bright Co. acquired 75% interest in Dull Co. for Php180,000. On this date, the
carrying amount of Dull’s net identifiable asset was Php160,000, equal to fair value. Non-
controlling interest was measured using the proportionate share method.
MONILLAS, Sophia Anne
ACCTG 6: ACCOUNTING FOR BUSINESS COMBINATION SAINT LOUIS COLLEGE
MIDTERM QUIZ #2 JOHN LORENZ MARQUEZ, CPA
Bright Dull
ASSETS
Investment in Subsidiary (Cost) 180,000 -
Equipment, net 445,600 145,000
Other Assets 128,000 99,500
TOTAL ASSETS 753,600 244,500

LIABILITY AND EQUITY

Liabilities 70,000 25,000
Share Capital 600,000 100,000
Retained Earnings 83,600 119,500
Total Equity 683,600 219,500
TOTAL LIABILITIES & EQUITY 753,600 244,500

Bright Dull
Revenue 300,000 80,000
Depreciation Expense - 54,400 - 14,500
Other Expenses - 32,000 - 18,000
Gain on sale of Equipment 12,000
Profit for the year 213,600 59,500

Additional Information:

No dividends were declared by either entity during 2021 and there is no impairment of goodwill

On January 1, 2021, right after the business combination Dull sold equipment with historical cost
of Php120,000 and accumulated depreciation Php60,000 to Bright Co. for Php72,000. Dull has
been depreciating this equipment over a useful life of 10 years using straight line depreciation.
Bright has decided to continue depreciate the equipment over its remaining useful life.

REQUIREMENT:

a) Carrying amount of the equipment sold by Dull Co. to Bright in Bright’s Stand-Alone
Balance Sheet (2 points)

Historical amount 120,000

Less: Accumulated depreciation (60,000)
Depreciation base on historical cost (12,000)
CARRYING AMOUNT OF THE EQUIPMENT 48,000
 MONILLAS, Sophia Anne
ACCTG 6: ACCOUNTING FOR BUSINESS COMBINATION SAINT LOUIS COLLEGE
MIDTERM QUIZ #2 JOHN LORENZ MARQUEZ, CPA

b) Balance of Consolidated Equipment (2 points)

Equipment, net- bright 445,600

Equipment, net- dull 145,000
Unamortized Deferred gain 9,600
CONSOLIDATED EQUIPMENT-NET 600,200

c) Balance of Consolidated Depreciation Expense (2 points)

Depreciation expense (Bright) 54,400

Depreciation expense (Dull) 14,500
Less: Depreciation in Dull's book (72,000/5) (14,400)
Depreciation in Bright's book if the sale never happened (120,000/10) 12,000
CONSOLIDATED DEPRECIATION EXPENSE 66,500

d) Dull’s Profit for Distribution (2 points)

Deferred gain on sale (72,000-(120-60) 12,000

Multiply: 4/5 0.80
DEFERRED GAIN ON SALE 9,600

e) Balance of Non-Controlling Interest in Balance Sheet (2 points)

Bright Dull Consolidated

Profits before adjustment 213,600 59,500 273,100
Consolidated adjustments: (unamortized gain) -
(unamortized gain) (9,600) - (9,600)
Dividend income from subsidiary - NA -
Gain or loss on extinguishment of bonds - - -
Net consolidated Adjustment (9,600) (9,600)
 MONILLAS, Sophia Anne
ACCTG 6: ACCOUNTING FOR BUSINESS COMBINATION SAINT LOUIS COLLEGE
MIDTERM QUIZ #2 JOHN LORENZ MARQUEZ, CPA

Profit before FVA 204,000 59,500 263,500

Depreciation of FVA - -
Impairment loss on goodwill - -
Consolidated Profit 204,000 59,500 263,500

Owners of parent NCI Consolidated

Bright’s profit before FVA 204,000
Share in Dull’s profit before FVA 44,625 14,875 59,500
Depreciation on FVA - -
Share in impairment loss - -
Total 248,625 14,875 59,500

Dull's net asset FV 210,000

Multiply by: NCI 25%
NCI IN BALANCE SHEET 52,500

3.

Ice Co. owns 75% interest in Fire Co. On acquisition date, the carrying amount of Fire Co.’s net identifiable
assets was Php240,000 equal to fair value. Non-controlling interest was measured using the proportionate
share method.

In 2021, Fire Co. declared Php100,000 dividends. Selected information on the entities on December 31, 2021
is shown below:

Ice Fire
 MONILLAS, Sophia Anne
ACCTG 6: ACCOUNTING FOR BUSINESS COMBINATION SAINT LOUIS COLLEGE
MIDTERM QUIZ #2 JOHN LORENZ MARQUEZ, CPA
Share Capital 800,000 200,000
Retained Earnings 280,000 120,000
Total Equity 1,080,000 320,000

Ice Fire
Revenue 640,000 260,000
Expenses (240,000) (80,000)
Dividend Income 75,000 -
475,000.0
Profit for the year 180,000
0

REQUIREMENT:

Acquisition Cons NET CHANGE

CA 240000 320,000 80,000

Parent RE 280,000
Share in net change (80,000 x .75) 60,000
Consolidated RE 340,000

Ice Fire
Profits before adjustment 475,000 180,000 655,000
Consolidated adjustments: (unamortized
-
gain)
(unamortized gain) - - -
Dividend income from subsidiary (75,000) NA (75,000)
Gain or loss on extinguishment of bonds - - -
Net consolidated Adjustment (75,000) - (75,000)

Profit before FVA 400,000 180,000 580,000

Depreciation of FVA - -
Impairment loss on goodwill - -
Consolidated Profit 400,000 180,000 580,000
 MONILLAS, Sophia Anne
ACCTG 6: ACCOUNTING FOR BUSINESS COMBINATION SAINT LOUIS COLLEGE
MIDTERM QUIZ #2 JOHN LORENZ MARQUEZ, CPA

Owners of
NCI Consolidated
parent
Bright’s profit before FVA 400,000
Share in Fire’s profit before FVA 135,000 45,000 180,000
Depreciation on FVA - -
Share in impairment loss - -
Total 535,000 45,000 180,000

a. Share of Ice in Fire’s Net Income (1 point)

SHARE OF ICE IN FIRER’S NET INCOME 45,000

b. Balance of Consolidated Owners of Parent in Equity (2 points)

Share Capital 800,000

Retained Earning 340,000
BALANCE OF CONSOLIDATED OWNERS OF PARENT IN EQUITY 1,140,000

c. Balance of Non-Controlling interest in Net Assets in Equity (2 points)

Subsidiary net assets 320,000

NCI % 0.25
NON-CONTROLLING INTEREST IN NET ASSETS IN EQUITY 80,000