Testbank | ADVANCED FINANCIAL ACCOUNTING & REPORTING - THEORIES BUSINESS COMBINATION - PFRS 3

ADVANCED FINANCIAL ACCOUNTING & REPORTING - THEORIES BUSINESS COMBINATION - PFRS 3 1. It is a transaction or other event in which an acquirer obtains control of one or more businesses. a. Business c ombination b. Merger c. Consolidation d. Intercorporate directorship 2. This is defined as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return directly to investors or other owners, members or participants. a. Business b. Transaction c. Isolated event d. Undertaking 3. Which of the following accounting methods must be applied to all business combinations? a. Pooling method b. Equity method c. Proportionate consolidation d. Acquisition method 4. This is defined as “the entity that obtains control of the acquiree”. a. Acquirer b. Investor c. Parent d. Subsidiary 5. It is the power to govern the financial and operating policies of an entity or business so as to obtain benefits from its activities. a. Significant influence b. Undue influence c. Control d. Managerial dependence 6. An acquirer might obtain control of an acquire in all of the following, except a. By transferring cash, cash equivalents and other assets b. By issuing equity interests c. By contract alone, even without consideration d. By acquiring interest in a joint venture 7. A business combination may be structured in all of the following, except a. One or more businesses become subsidiaries of an acquirer b. One entity transfers its net assets to another entity c. A group of former owners of one of the combining entities obtains control of the combined entity d. An entity acquires assets that are not a business. 8. It is a business combination in which all of the combining entities or businesses are ultimately controlled by the same party or parties both before and after the combination and the control is not transitory. a. Business combination involving entities under common control b. Business combination involving entities under diversified control c. Full business combination d. Business reorganization 9. What is the term for the business combination where all combining entities transfer their net assets to a newly formed entity? a. True merger b. Legal merger c. “Roll up” or ”put together” transaction d. Spin off 10. This is defined as holders of equity interest of investor-owned entities, or members and participants in mutual entities. a. Shareholders b. Investors c. Owners d. Participants 11. The application of the acquisition method of accounting for a business combination requires all of the following (choose the incorrect one) a. Identifying the acquirer b. Determining the acquisition date c. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in acquiree. d. Not recognizing goodwill or gain from bargain purchase 12. Which statement is incorrect concerning an acquirer? a. In a business combination effected by transferring cash or other assets, the acquirer is usually the entity that transfers the cash or other assets. b. In a business combination effected by issuing equity interest, the acquirer is usually the entity that issues the equity interest. c. The acquirer is usually the combining entity whose relative size is significantly greater than that of the combining entity or entities. d. If a new entity is formed to issue equity interests to effect a business combination, the new entity formed is necessarily the acquirer. 13. The following statements relate to an acquisition date of a business combination. Which statement is incorrect? a. The acquisition date is the date on which an acquirer obtains control over the acquiree. b. The acquisition date is normally the “closing date”, meaning the date on which the acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the acquiree. c. Where several dates are key to a business combination, the date on which control passes is the acquisition date. d. The acquisition date can never precede the closing date. 14. The following statements relate to recognition and measurement of a business combination. Which statement is correct? I. As of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. II. The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair value. a. I only b. II only c. Both I and II d. Neither I nor II 15. A parent entity is acquiring a majority holding in an entity whose shares are dealt in on a recognized market. Under PFRS 3, which of the following measurement bases may be used in measuring the non-controlling interest at the acquisition date? I. Fair value of the non-controlling interest in the acquiree II. A proportionate share of the acquiree’s identifiable net assets. b. I only c. II only d. Both I and II e. Neither I nor II 16. The consideration transferred in a business combination shall be measured at a. Fair value b. Carrying amount c. Fair value determined by the acquirer d. Transaction value 17. An acquirer holds 30% equity interest in an acquiree and subsequently purchases another 25% equity interest in order to gain control. This transaction is known as a. Business combination of entities under common control b. Business combination achieved in stages c. Business combination by installment d. Step by step acquisition 18. In a business combination achieved in stages, the acquirer shall a. Not remeasure the previously held equity interest. b. Remeasure the previously held interest at fair value with any resulting gain or loss included in profit or loss. c. Remeasure the previously held interest at fair value with any resulting gain or loss included in other comprehensive income. d. Remeasure the previously held interest at fair value with any resulting gain or loss included in retained earnings. 19. In a business combination, goodwill is measured as the excess of a. The consideration transferred over the identifiable net assets acquired. b. The total of the consideration transferred and the amount of any noncontrolling interest in the acquiree over the identifiable net assets acquired. c. The total of the consideration received and the fair value of the previously held interest in the acquiree over the identifiable net assets acquired. d. The total consideration received, the amount of any noncontrolling interest in the acquiree and the fair value of previously held interest in the acquiree over the identifiable net assets acquired. 20. In a business combination, any “gain on bargain purchase” shall a. Be recognized in profit or loss. b. Be recognized in other comprehensive income. c. Be recognized in retained earnings. d. Not be recognized. 21. The acquisition-related costs in a business combination to be expensed immediately include all of the following, except a. Professional and consulting fees b. Finder’s fees c. Costs of maintaining an internal acquisition department d. Costs of issuing debt securities 22. It is the equity in a subsidiary not attributable directly to a parent. a. Controlling interest b. Subsidiary interest c. Non-controlling interest d. Residual interest 23. The following statements relate to a contingent consideration in a business combination. Which statement is correct? i. The acquirer shall recognize the acquisition-date fair value of any contingent consideration as part of the consideration transferred in a business combination. ii. The acquirer shall not recognize the acquisition-date fair value of any contingent consideration as part of the consideration transferred in a business combination. a. I only b. II only c. Both I and II d. Neither I nor II 24. The acquirer shall classify the obligation to pay the contingent consideration as a. Financial liability only b. Equity only c. Either financial liability or equity in accordance with PAS 32 d. Neither financial liability nor equity 25. In the final settlement of the contingent consideration classified as equity, the amount a. Shall not be remeasured but instead recognized as part of equity. b. Shall be remeasured at fair value with any gain or loss included in profit or loss. c. Shall be remeasured at fair value with any gain or loss included in retained earnings. d. Shall be remeasured at fair value with any gain or loss included in other comprehensive income. 26. In the final settlement of the contingent consideration classified as financial liability, the amount a. Shall not be remeasured. b. Shall be remeasured at fair value with any gain or loss included in profit or loss. c. Shall be remeasured at fair value with any gain or loss included in retained earnings. d. Shall be remeasured at fair value with any gain or loss included in other comprehensive income. CONSOLIDATION- PAS 27 & PFRS 10 1. Consolidated financial statements are i. The financial statements of a group presented as those of a single economic entity. ii. Those presented by a parent, an investor in an associate, or a venture in jointly controlled entity, in which the investments are accounted for on the basis of the direct equity interest rather than on the basis of the reported results and net assets of the investee. b. I only c. II only d. Both I and II e. Neither I nor II 2. A “group” for consolidation purposes is a. A parent and all its subsidiaries. b. An entity that has one or more subsidiaries. c. An entity, including an unincorporated entity such as partnership that is controlled by another entity. d. An entity that obtains control other entities or businesses. 3. It is the entity that has one or more subsidiaries. a. Investor b. Parent c. Associate d. Affiliate 4. It is the equity in a subsidiary not attributable directly or indirectly to a parent. a. Controlling interest b. Subsidiary interest c. Noncontrolling interest d. Residual interest 5. Which of the following is not a valid condition that will exempt an entity from preparing consolidated financial statements? a. The parent entity is a wholly owned subsidiary of another entity. b. The parent entity’s debt or equity capital is not traded on the stock exchange. c. The ultimate parent entity produces consolidated financial statements available for public use that comply with PFRS. d. The parent entity is in the process of filing its financial statements with a securities commission. 6. A subsidiary shall be excluded from consolidation when a. The investor is a venture capital organization, mutual fund, unit trust or similar entity. b. The business activities of the subsidiary are dissimilar from those of the other entities within the group. c. The subsidiary is acquired with the intention to dispose of it within twelve months from date of acquisition. d. The subsidiary is operating under severe long-term restrictions that significantly impair its ability to transfer funds to the parent. 7. Which of the following subsidiaries should be deconsolidated? a. A subsidiary that has been previously excluded from consolidation and is not disposed of within the 12-month period. b. A subsidiary with severe restriction on the repatriation of dividends to the parent. c. Two subsidiaries located in one country that are individually immaterial but collectively material. d. None of the subsidiaries mentioned. 8. Control is presumed to exist when the parent owns directly or indirectly through subsidiaries a. More than half of the equity of an entity. b. More than half of the ordinary shares of an entity. c. More than half of the preference and ordinary shares of an entity d. More than half of the voting power of an entity. 9. Control exists even if the parent owns half or less of the voting power of an entity where there is (choose the incorrect one) a. Power over more than half of the voting rights by virtue of an agreement with other investors. b. Power to govern the financial and operating policies of the entity under a statute or an agreement. c. Power to appoint or remove the key officers an employees of the entity. d. Power to cast the majority of votes at meetings of the board of directors or equivalent governing body. 10. Non-controlling interest shall be presented in the consolidated statement of financial position a. Separately from liabilities and the parent shareholders’ equity. b. Within equity, separately from the parent shareholders’ equity. c. As noncurrent liability d. As component of the parent shareholders’ equity 11. When a parent loses control of a subsidiary, the investment in subsidiary retained by the investor a. Shall continue to be accounted for a investment in subsidiary b. Shall be accounted for an investment property c. Shall be accounted for in accordance with PAS 39 on the measurement of financial asset d. Shall be accounted for as nonmarketable equity security. 12. What is the initial measurement of an investment in subsidiary retained by the investor when control is lost? a. Fair value at the date when control is lost b. Fair value at the beginning of the reporting period c. Carrying amount at the date when control is lost d. Carrying amount at the beginning of the reporting period 13. When separate financial statements are prepared, investments in subsidiaries shall be accounted for at a. Cost b. In accordance with PAS 39 on measurement of financial asset c. Either at cost or in accordance with PAS 39 on measurement of financial asset d. Neither at cost nor in accordance with PAS 39 on measurement of financial asset 14. The following statements relate to consolidated financial statements. Which statement is incorrect? a. A parent shall present consolidated financial statements in which it consolidates its investments in subsidiaries. b. Consolidated financial statements shall include all subsidiaries of the parent. c. A subsidiary is excluded from consolidation if the investor is a venture capital organization, mutual fund, unit trust or similar entity. d. A subsidiary is not excluded from consolidation even if its business activities are dissimilar from those of the other entities within the group. 15. A parent is not required to present consolidated financial statements under all of the following conditions, except a. When the parent is itself a wholly-owned subsidiary, or is partially-owned subsidiary and its owners do not object to the parent not presenting consolidated financial statements. b. When the parent’s debt and equity instruments are not traded in public market. c. When the parent has filed or it is in the process of filing its financial statements with SEC for the purpose of issuing any class of instruments in a public market. d. When the ultimate or any intermediate parent of the parent produces consolidated financial statements for public use that comply with PFRS. 16. A parent loses control of a subsidiary (choose the incorrect one) a. When there is change in absolute or relative ownership level. b. When a subsidiary becomes subject to the control of a government, court, administrator or regulator. c. When the loss of control is the result of a contractual agreement. d. When the subsidiary is operating under severe long-term restrictions that impair its ability to transfer funds to the parent. 17. If a parent loses control of a subsidiary (choose the incorrect one) a. The parent shall derecognize the assets and liabilities of the subsidiary at their carrying amounts. b. The parent shall not derecognize the carrying amount of any noncontrolling interest in the former subsidiary. c. Any gain or loss arising from the recognition shall be included in profit or loss. d. Any amounts that have been recognized in other comprehensive income in relation to the subsidiary shall be reclassified to profit or loss or retained earnings in accordance with relevant accounting standard. 18. Where there is a change in a parent’s ownership interest in a subsidiary that does not result in a loss of control (choose the incorrect one) a. The change shall be accounted for as an equity transaction. b. The carrying amounts of the controlling and noncontrolling interests shall be adjusted to reflect the change in the level of ownership. c. Any difference between the consideration received and the amount of adjustment of the noncontrolling interest shall be recognized directly in equity. d. Any difference between the consideration received and the amount of adjustment of the noncontrolling interests shall be recognized in other comprehensive income. 19. Which is incorrect concerning the preparation of consolidated financial statements? a. The financial statements of the parent ant its subsidiaries shall be consolidated on a line by line basis by adding together like items of assets, liabilities, equity, income and expenses. b. Intragroup balances, transactions, income and expenses shall be eliminated in full. c. When the reporting dates of the parent and a subsidiary are different, the difference shall be no more than six months. d. Consolidated financial statements shall be prepared using uniform accounting policies for like transactions and other events in similar circumstances. 20. Which is incorrect concerning the cost method of accounting? a. The investment is recognized at cost. b. The investor recognizes income from the investment only to the extent that the investor receives distributions from accumulated profits of the investee arising after the date of acquisition. c. Distributions received in excess of profits after acquisition are regarded as a recovery of investment and are recognized as a reduction of the cost of the investment. d. The investment is initially recorded at cost and any changes in value of the investment at each reporting date are recognized in profit or loss. FOREIGN CURRENCY- PAS 21 1. It is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of which are based or conducted in a country or currency other than that of the reporting entity. a. Foreign entity b. Foreign operation c. Domestic operation d. Branch operation 2. Exchange rate is a. The ratio of exchange for two currencies b. The spot exchange rate at the end of reporting period c. The exchange rate for immediate delivery d. The difference resulting from translating a given number of units of one currency into another currency at different exchange rates. 3. Which statement is incorrect? a. Functional currency is the currency of the primary economic environment in which the entity operates. b. Foreign currency is a currency other than the functional currency of the entity. c. Presentation currency is the currency in which the financial statements are presented. d. Net investment in a foreign operation is the amount of the reporting entity’s interest in the total assets of that operation. 4. An entity started trading in country A, whose currency was the dollar. After several years the entity expanded and exported its product to country B, whose currency was the euro. The business was conducted through a subsidiary in country B. The subsidiary is essentially an extension of the entity’s own business, and the directors of the two entities are common. The functional currency of the subsidiary is a. The dollar b. The euro c. The dollar or the euro d. Difficult to determine 5. An entity started trading in country A, whose currency was the dollar. After several years the entity expanded and exported its product to country B, whose currency was the euro, and conducted business through a branch. The functional currency of the group was deemed to be the dollar but by the end of the current year, 80% of the business was conducted in country B using the euro. At the end of prior year, 30% of the business was conducted in the euro. The functional currency should a. Remain the dollar b. Change to the euro at the beginning of the current year c. Change to the euro at the end of the current year d. Change to the euro at the end of the current year if it is considered that the underlying transactions, events and conditions of business have changed. 6. Initially, a foreign currency transaction shall be recorded by applying to the foreign currency amount a. The spot exchange rate at the date of transaction. b. The closing rate at the end of reporting period c. The average exchange rate during the year d. The spot exchange rate at the date of the settlement of the transaction. 7. Foreign currency monetary items are subsequently translated at a. Closing rate b. Historical rate c. Forward rate d. Spot exchange rate 8. Exchange differences arising from foreign currency transactions shall a. Be recognized in profit or loss of the period in which they arise b. Be included in other comprehensive income c. Be deferred and amortized over a reasonable period d. Be charged to retained earnings 9. In translating the financial statements of a foreign operation for inclusion in the reporting entity’s financial statements, assets and liabilities are translated at a. Closing rate b. Historical rate c. Weighted average rat d. Forward rate 10. Income and expense items of a foreign operation shall be translated at a. Exchange rate on the date of transaction (for practical purposes at average rate) b. Spot exchange rate c. Closing rate d. Forward rate 11. If the foreign operation reports in the currency of a hyperinflationary economy, assets, liabilities, income and expenses shall be translated at a. Exchange rate on the date of transaction b. Closing rate c. Forward rate d. Average rate 12. Exchange differences arising from the translation of financial statements of a foreign operation shall be accounted for as a. Translation gain or loss component of other comprehensive income b. Translation gain or loss component of profit or loss c. Transaction gain or loss component of other comprehensive income d. Transaction gain or loss component of other comprehensive income 13. It is the currency of the primary economic environment in which the entity operates. a. Reporting currency b. Functional currency c. Presentation currency d. Foreign currency 14. These are money held and financial assets to be received and financial liabilities to be paid in fixed or determinable amount of money. a. Foreign currency loans b. Long term items c. Monetary items d. Nonmonetary items 15. A foreign currency transaction is a transaction which is denominated or requires settlement in a foreign currency and includes I. Purchase and sale of goods and services whose price is denominated in a foreign currency. II. Borrowing and lending of funds when the amounts payable or receivable are denominated in a foreign currency. a. I only. b. II only. c. Both I and II d. Neither I nor II 16. Nonmonetary items that are measured in terms of the historical cost denominated in a foreign currency shall be reported using the a. Exchange rate at the date of transaction b. Closing rate c. Average rate d. Spot exchange rate 17. Exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation shall be recognized I. In profit or loss in the separate financial statements of the reporting entity or the individual statements of the foreign operation. II. In other comprehensive income in the consolidated financial statements of the reporting entity and the foreign operation and recognized in profit or loss on disposal of the net investment. a. I only. b. II only. c. Both I and II d. Neither I nor II ACQUISITION OF NET ASSETS AND ACQUISITION OF STOCKS PROBLEM 1. STAR Corporation is a company involved in manufacturing cars. On January 1, 2013, the board of directors of the said company has decided to acquire the net assets of NOVA Corporation and RISE Corporation, suppliers of materials they use in production. The merger is expected to result in producing higher quality cars with lower total cost. The deal was closed on February 29, 2013 and the following information was gathered from the books of the entities: STAR NOVA RISE Current Assets P1,375,000 P390,000 P260,000 Noncurrent Assets 3,125,000 2,550,000 1,700,000 Total Assets P4,500,000 P2,940,000 P1,960,000 Liabilities P325,000 P210,000 P140,000 Common stock, P100 par 2,748,500 1,780,200 1,186,800 Additional Paid-in capital 176,500 169,800 113,200 Retained earnings 1,250,000 780,000 520,000 Total equity & liability P4,500,000 P2,940,000 P1,960,000 Star will issue 22,500 of its common stock in exchange for the net assets of Nova and 11,200 of its common stock in exchange for the net assets of Rise. The fair value of Star’s shares is P150. In addition, the following adjustments should be made:  Current assets of Nova and Rise have a fair value of P450,000 and P230,000 respectively.  Noncurrent assets have a fair value of P2,150,000 and P1,975,000 for Nova and Rise, respectively. Compute for the following balances of Star Company on the date of acquisition: Stockholders’ equity A. P6,118,500 B. P7,980,000 C. P3,496,500 D. P9,615,000 Assets A. P10,290,000 B. P9,240,000 C. P10,500,000 D. P9,840,000 PROBLEM 2. Denim Co. merged into Kraft Corp. on July 1, 2013. In exchange for the net assets at fair market value of Denim Co. amounting to P696,450, Kraft issued 68,000 common shares at P9 par value with a market price of P12 per share. Out of pocket costs of the combination were as follows: Legal fees for the contract of business combination P35,600 Audit fee for SEC registration of stock issue 90,000 Printing costs of stock certificates 14,500 Broker’s fee 23,600 Accountant’s fee for pre-acquisition audit 80,000 Other direct cost of acquisition 75,000 General and allocated expenses 43,000 Listing fees in issuing new shares 36,000 Denim will pay an additional cash consideration of P455,000 in the event that Kraft’s net income will be equal or greater than P950,000 for the period ended December 31, 2013. At acquisition date, there is a high probability of reaching the target net income and the fair value of the additional consideration was determined to be P195,000. Actual net income for the period ended December 31, 2013 amounted to P1,250,000. The additional cash consideration was paid. What is the amount of goodwill to be recognized in the statement of financial position as of December 31, 2013? A. P295,450 B. P308,500 C. P314,550 D. P326,550 What is the amount of expense to be recognized in the statement of comprehensive income for the year ended December 31, 2013? A. P257,200 B. P517,200 C. P307,400 D. P412,500 PROBLEM 3. On October 1, 2013, Winner Corporation acquired all the assets and assumed all the liabilities of Getter Company by issuing 20,000 shares with a fair value of P67.5 per share and an obligation to pay a contingent consideration with a fair value of P750,000. In addition, Winner paid the following acquisition related costs: Legal fees P 105,600 Audit fee for SEC registration of stock issue 320,400 Costs of stock certificates 35,000 Broker’s fee 49,000 Other direct cost of acquisition 50,000 General and allocated expenses 14,000 The Statement of Financial Position as of September 30, 2013 of Winner and Getter, together with the fair market value of the assets and liabilities are presented below: Winner Getter Book value Fair value Book value Fair value Cash P640,000 P640,000 P45,000 P45,000 Accounts Receivable 360,000 335,000 70,000 54,000 Inventories 475,000 390,000 87,000 78,000 Prepaid expenses 25,000 - 13,500 5,000 Land 2,000,000 2,900,000 900,000 1,550,000 Building 800,000 900,000 723,000 768,000 Equipment 700,000 585,000 361,500 360,000 Goodwill - - 300,000 - Total Assets 5,000,000 5,750,000 2,500,000 2,860,000 Accounts Payable 312,500 312,500 200,000 200,000 Notes payable 937,500 980,000 700,000 765,000 Capital stock, P50 par 2,000,000 850,000 Additional paid in capital 1,000,000 400,000 Retained earnings 750,000 350,000 Total Liability & Equity 5,000,000 2,500,000 Compute for the balances that will be shown on the October 1, 2013 statement of financial position of the surviving company: Retained earnings A. P480,000 B. P540,000 C. P526,000 D. P475,000 Total Assets A. P7,015,000 B. P6,980,000 C. P7,118,000 D. P7,491,000 PROBLEM 4. The Statement of Financial Position of Luster Corporation on June 30, 2013 is presented below: Current assets P32,500 Land 220,000 Building 110,000 Equipment 87,500 Total Assets P450,000 Liabilities 87,500 Capital stock, P5 par 150,000 Additional paid in capital 137,500 Retained earnings 75,000 Total equities P450,000 All the assets and liabilities of Luster assumed to approximate their fair values except for land and building. It is estimated that the land have a fair value of P350,000 and the fair value of the building increased by P80,000. Kernel Corporation acquired 80% of Luster’s capital stock for P500,000. Assuming the consideration paid includes control premium of P142,000, how much is the goodwill/(gain on acquisition) on the consolidated financial statement? A. P60,000 B. P48,000 C. P42,000 D. P50,000 Assuming the consideration paid excludes control premium of P23,000, and the fair value of the noncontrolling interest is P122,750, how much is the goodwill/(gain on acquisition) on the consolidated financial statement? A. P78,250 B. P73,250 C. P69,500 D. P74,750 Assuming the consideration paid includes control premium of P37,000, how much is the goodwill/(gain on acquisition) on the consolidated financial statement? A. P43,250 B. P73,250 C. P56,750 D. P68,350 PROBLEM 5. Better Company has gained control over the operations of Calm Corporation by acquiring 85% of its outstanding capital stock for P2,580,000. This amount includes a control premium of P30,000. Acquisition expenses, direct and indirect, amounted to P83,000 and P42,000 respectively. Better Calm Book Value Book Value Fair Value Cash P3,541,500 P128,000 Accounts receivable 300,000 325,000 Inventories 550,000 360,000 Prepaid expenses 148,500 125,000 Land 2,350,000 879,000 Building 1,560,000 558,000 Equipment 300,000 185,000 Goodwill 0 300,000 Total Assets P8,750,000 P2,860,000 Accounts Payable 675,000 253,000 Notes payable 1,400,000 730,000 Capital stock, 50 par 3,400,000 800,000 Additional paid in capital 1,575,000 600,000 Retained earnings 1,700,000 477,000 Total equities P8,750,000 P2,860,000 The following was ascertained on the date of acquisition for Calm Corporation:  The value of receivables and equipment has decreased by P25,000 and P14,000 respectively.  The fair value of inventories is now P436,000 whereas the value of land and building has increased by P471,000 and P107,000 respectively.  There was an unrecorded accounts payable amounting to P27,000 and the fair value of notes is P738,000. Compute for the following balances to be presented in the consolidated statement of financial position at the date of business combination: Total Assets A. P9,875,000 B. P10,093,000 C. P10,112,000 D. P9,215,000 Total Shareholders’ Equity A. P7,000,000 B. P7,500,000 C. P8,200,000 D. P8,000,000 PROBLEM 6. On January 2, 2013, the Statement of Financial Position of Pepper and Steak Company prior to the combination are: Pepper Co. Steak Co. Cash P450,000 P 15,000 Inventories 300,000 30,000 PPE, net 750,000 105,000 Total Assets P1,500,000 P150,000 Current Liabilities P 90,000 P 15,000 Common stock, P100 par 150,000 15,000 Additional Paid in capital 450,000 30,000 Retained earnings 810,000 90,000 Total Liabilities and Stockholders’ equity P1,500,000 P150,000 The fair value of Steak Company’s equipment is P153,000. Assume the following independent cases: 1. Assuming Pepper Company acquired 70% of the outstanding common stock of Steak Company for P105,000 and Non-controlling interest is measured at fair value of P61,000, how much is the goodwill (gain on acquisition)? A. P(17,000) B. P17,000 C. P23,100 D. P(23,100) 2. Assuming Pepper Company acquired 80% of the outstanding common stock of Steak Company for P136,800 and non-controlling interest is measured at non-controlling interest’s proportionate share of Steak Company’s identifiable net assets, how much is the consolidated stockholders’ equity on the date of acquisition? A. P1,410,000 B. P1,419,600 C. P1,446,600 D. P1,456,200 3. Assuming Pepper Company acquired 90% of the outstanding common stock of Steak Company for P243,000 and Non-controlling interest is measured at fair value, how much is the total consolidated assets on the date of acquisition? A. P1,542,000 B. P1,785,000 C. P1,737,000 D. P1,494,000 PROBLEM 7. Acquirer Company acquires 25% of Acquired Company’s common stock for P190,000 cash and carries the investment using the cost method. After three months, Parent purchases another 60% of Subsidiary’s common stock for P540,000. On this date, acquired company reports identifiable net assets with carrying value of P720,000 and fair value of P920,000. The liabilities of the acquired company has a book value and a fair value of P280,000. The fair value of the 15% non- controlling interest is P125,000. How much is the goodwill or (gain on acquisition)? A. P(17,000) B. P250,000 C. P(30,000) D. P263,000 PROBLEM 8. Condensed statements of financial position of Care Corp. and Charm Corp. as of December 31, 2012 are as follows: Care Charm Current Assets P 43,750 P 16,250 Noncurrent assets 181,250 106,250 Total assets P225,000 P122,500 Liabilities P 16,250 P8,750 Common stocks, P20 par 137,500 75,000 Additional paid in capital 8,750 6,250 Retained earnings 62,500 32,500 On January 1, 2013, Care Corp. issued 8,750 stocks with a market value of P25/share for the assets and liabilities of Charm Corp. The book value reflects the fair value of the assets and liabilities, except that the noncurrent assets of Charm has a temporary appraisal of P157,500 and the noncurrent assets of Care are overstated by P7,500. Contingent consideration, which is determinable, is equal to P3,750. Care also paid for the stock issuance costs worth P8,500 and other acquisition costs amounting to P4,750. On March 1, 2013, the contingent consideration has a determinable amount of P5,000. On June 1, 2013, the provisional fair value of the noncurrent assets of Charm increased by P2,250. How much is the combined total assets at the end of 2013? A. P435,500 B. P443,000 C. P442,000 D. P444,250 *** END *** BUSINESS COMBINATION – SUBSEQUENT TO ACQUISITION & INTERCOMPANY TRANSACTIONS #0013 PROBLEM 1. On January 2, 2013, Phillips Corporation purchase 80% of Signage Company’s outstanding shares for P648,000. P30,000 of the excess is attributable to goodwill and the balance to an equipment with an economic life of ten years. Non-controlling interest is measured at its fair value on date of acquisition. On the date of acquisition, stockholders’ equity of the two companies were as follows: Phillips Corporation Signage Company Ordinary shares P1,050,000 P 240,000 Retained earnings 1,560,000 420,000 On December 31, 2013, Signage Company reported net income of P105,000 and paid dividends of P36,000 to Philips. Philips reported from its separate operations of P285,000 and paid dividends of P138,000. Goodwill had been impaired and should be reported at P6,000 on December 31, 2013. 1. What is the non-controlling interest in profit of Signage Company on December 31, 2013? A. P21,000 B. P13,800 C. P18,750 D. P18,600 2. What is the consolidated profit attributable to parent shareholders on December 31, 2013? A. P340,200 B. P360,000 C. P336,000 D. P356,400 3. What is the consolidated retained earnings attributable to parent’s shareholders equity on December 31, 2013? A. P1,757,400 B. P2,079,750 C. P1,762,200 D. P1,758,000 4. What amount of non-controlling interest is to be presented in the consolidated statement of financial position on December 31, 2013? A. P164,250 B. P145,500 C. P166,800 D. P154,500 PROBLEM 2. On January 2, 2012, D Corporation purchased 80% of the outstanding shares of C Company for P4,750,000. At that date, C had P4,000,000 of ordinary shares outstanding and retained earnings of P1,600,000.  C’s equipment with a remaining life of 5 years had a book value of P2,250,000 and a fair value of P2,630,000. C’s remaining assets had book values equal to their fair values.  All intangibles except goodwill are expected to have remaining lives of 8 years.  The income and dividend figures for both D and C are as follows: Net income of D in 2012 is P900,000; 2013 is P1,100,000. Net income of C in 2012 is P340,000; 2013 is P510,000.  Dividends of D in 2012 is P220,000; 2013 is P390,000. Dividends of C in 2012 is P70,000; 2013 is P130,000.  D’s retained earnings balance at the date of acquisition was P3,450,000. 1. How much is the consolidated retained earnings attributable to controlling interest in 2013? A. P5,272,400 B. P5,333,200 C. P5,238,400 D. P5,232,400 2. Share of D Corporation in the adjusted and undistributed earnings of C Company in 2012 A. P211,200 B. P155,200 C. P216,000 D. P182,400 3. How much is the consolidated profit in 2013? A. P1,343,200 B. P1,438,000 C. P1,430,000 D. P1,464,000 4. How much is the non-controlling interest in net assets in 2013? A. P1,295,600 B. P1,250,000 C. P1,302,400 D. P1,289,500 PROBLEM 3. Positive Corporation acquired 80% of the outstanding common stock of Synergy Company on June 1, 2013 for P586,250.  Synergy Company’s stockholder’s equity components at the end of this year are as follows: Ordinary shares, P100 par, P250,000, APIC P112,500, Retained Earnings P222,500.  Non-controlling interest is measured at fair value.  All the assets of Synergy were fairly valued, except for inventories, which are overstated by P11,000, and equipment, which was understated by P15,000. Remaining useful life of equipment is 4 years.  Both companies use the straight-line method for depreciation and amortization. Stockholder’s equity of Positive on January 1, 2013 is composed of Ordinary shares P750,000, Share premium P175,000, Retained Earnings P525,000.  Fair value of non-controlling interest on the date of acquisition is P117,500.  Goodwill, if any, should be written down by P14,225 at year-end.  Net income for the first year of parent and subsidiary are P75,000 and P42,500 (from date of acquisition) respectively.  Dividends declared at the end of the year amounted to P20,000 and P15,000. During the year, there was no issuance of new ordinary shares. 1. What is the balance of the non-controlling interest in net assets of subsidiary on December 31, 2013? A. P145,167.50 B. P127,242.50 C. P124,242.50 D. P121,917.50 2. What is the amount of consolidated shareholder’s equity? A. P1,520,345 B. P1,642,262.50 C. P1,462,262.50 D. P1,644,587.50 PROBLEM 4. Pure Corporation acquired an 80% interest in Sincere Company on January 2, 2012 for P2,520,000. On this date, the share capital and retained earnings of the two companies follow: Pure Corp. Sincere Co. Share Capital P6,000,000 P2,250,000 Retained earnings 3,000,000 450,000 On January 2, 2012, the assets and liabilities of Sincere Co. were stated at their fair values except for machinery which is undervalued by P225,000 (remaining life is 3 years). On September 30, 2012, Sincere sold merchandise to Pure at an inter-company profit of P150,000; 25% was still unsold at year-end. Likewise, on October 1, 2013, Sincere purchased merchandise from Pure for P3,600,000. The selling affiliate included a 20% mark-up on cost on this sale. Only 75% of these purchases had been sold to unrelated parties as of December 31, 2013. As of December 31, 2013, goodwill was determined to be impaired by P60,000. The following is the summary of the 2013 transactions of the affiliated companies: Pure Corp. Sincere Co. Net Income P1,500,000 P600,000 Dividends declared and paid 600,000 180,000 On the 2013 consolidated financial statements, how much would be the: 1. Net income attributable to Parent A. P1,638,000 B. P1,708,500 C. P1,608,000 D. P1,686,000 2. Non-controlling interest in net income A. P70,500 B. P100,500 C. P82,500 D. P85,500 PROBLEM 5. On January 2, 2012, Power Company acquired 90% of the outstanding shares of Solar Inc. at book value. During 2012 and 2013, intercompany sales amounted to P2,000,000 and P4,000,000, respectively. Power Company consistently recognized a 25% mark-up based on cost while Solar Inc. had a 25% gross profit on sales. The inventories of the buying affiliate, which all came from inter-company transactions show: December 31, 2012 December 31, 2013 Power P240,000 P160,000 Solar 100,000 40,000 On October 1, 2012, Solar Inc. purchased a piece of land costing P1,000,000 from Power Company for P1,500,000. On December 1, 2013, Solar Inc. sold this land to unrelated party for P1,500,000. On the other hand, on July 1, 2013, Solar Inc. sold a used photo-copier with a carrying value of P60,000 and remaining life of 3 years to Power Company for P42,000. Separate Statement of Comprehensive income for the two companies for the year 2013 follow: Power Company Solar Inc. Sales P25,000,000 P14,000,000 Cost of sales (15,000,000) (8,400,000) Gross Profit P10,000,000 P5,600,00 Operating expenses (6,000,000) (3,800,000) Operating Profit P4,000,000 P1,800,000 Loss on Sale of Office Equipment (18,000) Dividend Revenue 40,000 Net Income P4,000,000 P1,822,000 Compute the following amount s for/as December 31, 2013 1. Consolidated Gross Profit A. P19,632,000 B. P15,712,000 C. P15,632,000 D. P15,584,000 2. Consolidated Net Income attributable to Parent A. P6,183,300 B. P6,369,000 C. P6,169,800 D. P6,191,300 3. Non-controlling interest in Net income A. P189,700 B. P185,700 C. P188,200 D. P184,200 4. Consolidated Operating expense A. P9,800,000 B. P9,788,000 C. P9,803,000 D. P9,789,500 PROBLEM 6. On January 1, 2012, P Corporation purchased 80% of S Company’s outstanding stock for P620,000. At that date, all of S Company’s assets and liabilities had market values approximately equal to their book values and no goodwill was included in the purchase price. The following information was available for 2012: Income from own operations of P Corporation, P150,000; Operating loss of S Company, P20,000. Dividends paid in 2012 by P Corporation, P75,000; by S Company to P Corporation, P12,000. On July 1, 2012, there was a downstream sale of equipment at a gain of P25,000. The equipment is expected to have a remaining useful life of 10 years from the date of sale. Also, on January 1, 2012, there was an upstream sale of furniture at a loss of P7,500. The furniture is expected to have a useful life of five years from the date of sale. Non-controlling interest is measured at fair market value. 1. How much is the consolidated net income attributable to parent shareholders’ equity? A. P97,250 B. P115,050 C. P112,250 D. P103,050 PROBLEM 7. On July 1, 2013, Issue Company purchased 80% of the outstanding shares of Intrigue Company at a cost of P1,600,000. On that date, Intrigue had P1,000,000 of capital stock and P1,400,000 of retained earnings. For 2013, Issue had income of P560,000 from its separate operations and paid dividends of P300,000. For 2013, Intrigue reported income of P130,000 and paid dividends of P60,000. All the assets and liabilities of Intrigue have book values equal to their respective fair market values. Assume income was earned evenly throughout the year except for the intercompany transaction on October 1. On October 1, 2013, Issue purchased an equipment from Intrigue for P200,000. The book value of the equipment on that date was P240,000. The loss of P40,000 is reflected in the income of Intrigue indicated above. The equipment is expected to have a useful life of 5 years from the date of sale. 1. In the December 31, 2013 consolidated statement of financial position, how much is the consolidated net income attributable to the parent company? A. P642,400 B. P930,400 C. P946,400 D. P962,400 *** END *** NEW GOVERNMENT ACCOUNTING SYSTEM & NON-PROFIT ORGANIZATION #0005 New Government Accounting System Budgeted accounts of appropriations and allotments are entered in the registry maintained by DBM (Department of Budget and Management). Allotments and obligations are entered in the registry maintained by the agency. The notice of cash allocation (NCA) received by the agency from the DBM is journalized in the regular agency books (RA books). The other set of books of an agency is the national government books (NG books) for income items they are not authorized to use. The obligations incurred by the agency are not journalized, but posted to the appropriate registry, as follows: For Capital Outlay -RAOCO Personal Services -RAOPS Maintenance & Others -RAOMO Financial Expenses -RAOFE Generally, withheld taxes by the agency are no longer remitted to BIR, but retained and credited to Subsidiary Income from National Government (SING) under the Tax Remittance Advice (TRA) System. The NCA released to the agency is reduced by the amount of estimated withholding taxes pertinent to the allotment covered by the cash allocation. Asset/perpetual inventory method will be followed in the recording of expenditures if it applies to more than one period or when payment is for materials for stock. The expense is taken up when the items are consumed. Costs of assets being constructed are debited to construction in progress account (using construction period theory). This CIP account is closed to the appropriate asset account upon completion. Constructed Public Infrastructures are not shown among the fixed assets on the Statement of Financial Position, rather they are deducted from government equity (as part of closing entries) and transferred out to an appropriate registry. Depreciation on fixed assets are taken up on the month following the month of purchase or completion of construction. A 10% scrap value on the asset is always assumed and the estimated life is prescribed by COA. Income for which the agency is authorized to use for its operation is recorded in the regular agency books. If the authority is with limitations, such as any excess is to be remitted to the National Treasury the collections shall first be recorded in the regular agency books, the expenses journalized, and the excess is to be remitted to the National Treasury and recorded in the agency’s NG books. Two trial balances are prepared: a) Pre-closing trial balance which is also the adjusted trial balance from which the statement of income and expense is prepared. b) Post-closing trial balance from which the statement of financial position is prepared. Adjusting entries at end of period are the same as those recorded in commercial accounting. Closing entries are similar to commercial accounting with some minor differences. Records of the BTR (Bureau of Treasury). Upon receipt of the copy of the NCA from the DBM, the BTR shall enter it in the Registry of NCA and Replenishment (RENREP). It shall also enter the transfer of cash from its bank account(s) to the appropriate MDS account. The obligation is recognized and will be entered in the appropriate RAO when obligation is incurred as evidenced by the approved Allotment and Obligation Slips (ALOBS) Upon receipt of the NCA, the Accountant shall journalize it as “Cash in the Treasury for Modified Disbursement System (MDS)” and “Subsidiary Income from National Government” which in effect identifies the share, of the Agency in the income of the National Government. The accountant shall credit “Cash, National Treasury-MDS” each time a payment is made charged against the NCA and debit the specific account being paid for, either asset or expense account. Note that there is a new expense classification, the financial expenses. They are categorized separately from the MOOE since they are not operating expenses. It shall maintain separate registry for leases from the Special Purpose Fund, the Registry for Special Purpose Funds Appropriation (RESPFA). The DBM shall maintain the Registry of Allotment and NCA (RANCA) for the allotments and the NCA issued to the agency. The RANCA shall be the control and monitoring record of the DBM. The DBM shall furnish the Bureau of Treasury a copy of the NCA. Not for Profit Organization  FINANCIAL STATEMENTS REQUIRED FOR PRIVATE NOT FOR PROFIT ORGANIZATIONS 1. Statement of Financial Position 2. Statement of Activities 3. Statement of Cash Flows 4. Specific for Voluntary Health and Welfare Organizations – Statement of Functional Expenses  Statement of Financial Position – shows assets and liabilities similar to commercial accounting. Net assets are classified into: 1. Unrestricted – no donor imposed restrictions 2. Temporarity restricted – with donor imposed stipulations (expiration of time and fulfilment of use restrictions) 3. Permanently restricted – with donor imposed restrictions that do not expire nor can be removed by NPO activity.  Statement of Activities – show revenues, expenses, gains and losses as well as reclassification among the different types of net assets. The change in net assets for each type is required. Expenses are required (reported) only in unrestricted net assets.  Statement of Cash Flows – similar to the Cash Flows prepared in commercial accounting.  Specific funds used by not for profit organizations: 1. Unrestricted fund – include all the resources that are available for use by authority of the Board of Directors (even though designated for specific purposes) and are not restricted by donors. 2. Restricted fund – accounts for assets available for current use but are not derived from the operations of the NPOs. These assets are transferred to unrestricted funds at the time the designated expenditure is made. 3. Endowment fund a. Permanent – principal is to be maintained indefinitely in revenue providing investments b. Term – principal may be expensed after passage of a period of time c. Quasi-endowment – established by Board of Directors under its control 4. Agency fund – used to account for assets held by NPO as a custodian. 5. Others – like annuity funds, loss funds (for colleges) and plant funds.  Revenues and gains come from own principal and auxiliary activities or from donors.  Contributions – contributions of cash and other assets are recognized when received and credited to contributions revenue (Restricted or Unrestricted). Contributed services and facilities are recognized both as expense and contributions revenues, net of expenses.  Pledges – unconditional pledges are recognized as receivables and contributions revenue (restricted or unrestricted). Appropriate provisions for doubtful pledges are also to be set up.  Expenses and losses – all expenses of the NPO are recognized in the unrestricted fund.  Expenses can be classified into: a. Program – activities that result in the distribution of goods and services to beneficiaries. b. Supporting – all other activities other than program, fund raising and membership development. GOVERNMENT ACCOUNTING 1. The Department of Health received an allotment from Department of Budget and Management for capital outlay P2,300,000; Maintenance and other operating expenses, P740,000; and Personal services P1,100,000. What will be the entry of the DOH in its regular agency books upon receipts of allotment? A. Cash – National Treasury, MDS 4,140,000 Subsidy Income from National Gov’t 4,140,000 B. National Clearing Account 4,140,000 Notice of Cash Allocation 4,140,000 C. Cash Collecting Officer 4,140,000 Cash in Bank – LCCA 4,140,000 D. Memo entry 2. The Department of Foreign Affairs issued purchase order for the acquisition of office equipment costing P1,920,000. The equipment was received with the charge invoice and was subsequently paid by check after withholding taxes of 10%. The DFA remitted the tax withheld to Bureau of Internal Revenue thru an authorized government depository bank. What is the entry of DFA to record the payment? A. Accounts Payable 1,920,000 Cash – Disbursing Officer 1,728,000 Due to BIR 192,000 B. Office Equipment 1,920,000 Cash – Disbursing Officer 1,728,000 Due to BIR 192,000 C. Accounts Payable 1,920,000 Cash – Collecting Officer 1,728,000 Due to BIR 192,000 D. Accounts Payable 1,920,000 Due to BIR 192,000 Cash – National Treasury, MDS 1,728,000 3. On July 28, 2012, Department of Public Works and Highways transfers cash of P5,400,000 to Department of Tourism for a People’s Park project. The project was completed by the implementing agency/department on December 17, 2012. What is the entry of source agency/department to record the completion of the project? A. People’s Park Project 5,400,000 Cash – Check Disbursements-MDS 5,400,000 B. People’s Park Project 5,400,000 Cash – National Treasury-MDS 5,400,000 C. People’s Park Project 5,400,000 Due to National Gov’t-DOT 5,400,000 D. People’s Park Project 5,400,000 Due to National Gov’t-DOT 5,400,000 4. The Department of Education signed a construction contract with ABC Builders Corp. for the construction of Building, P7,500,000. The agency paid 20% of the contract price. After 6 months, the Department of Education received its first billing from ABC Builders Corp., 90% of the contract price. On the 7th month, the company paid the first billing less P1,500,000 withholding tax. What will be the entry of the department on its books upon receiving the first billing? A. Building 6,750,000 Accounts Payable 6,750,000 B. Accounts Payable 6,750,000 Cash National Treasury MDS 5,250,000 Due to BIR 1,500,000 C. Construction in progress 6,750,000 Accounts Payable 5,250,000 Advances from contractors 1,500,000 D. Construction in progress 6,750,000 Advances to contractors 1,500,000 Accounts Payable 5,250,000 5. What is the entry to record the collection of P3,250,000 corporate income tax by the Bureau of Internal Revenue in its national government books? A. Cash National Treasury MDS 3,250,000 Income tax – Corporation 3,250,000 B. Cash – Collecting Officer 3,250,000 Income tax – Corporation 3,250,000 C. Cash in Bank – LCCA 3,250,000 Income tax – Corporation 3,250,000 D. Income tax – Corporation 3,250,000 Cash – Disbursing officer 3,250,000 6. The Department of Labor and Employment received an allotment from the Department of Budget and Management amounting to P25,000,000 which is accompanied by a notice of cash allocation of 90% of the allotment. During the year, the agency incurred an obligation of 90% of the allocation but only 40% of these obligation were paid by the agency. The entry to record the unused NCA is: A. Subsidy Income from National Gov’t12,150,000 Cash – NT, MDS 12,150,000 B. Subsidy Income from National Gov’t14,400,000 Cash – NT, MDS 14,400,000 C. Cash – NT, MDS 12,150,000 Subsidy Income from NG 12,150,000 D. Cash – NT, MDS 14,400,000 Subsidy Income from NG 14,400,000 7. The Department of Justice provided travelling expenses to one of its officers, Mr. Ping for an amount of P25,000. The travelling expenses was granted to Mr. Ping on February 1, 2013. Subsequently, Mr. Ping liquidated its cash advance in the amount of P20,000. The excess were returned to DOJ by Mr. Ping. The entry to record the granting of cash advance to Mr. Ping was: A. Due from Officers and employees 25,000 Cash – NT, MDS 25,000 B. Travelling expenses – Local 25,000 Cash – NT, MDS 25,000 C. Cash Disbursing Officer 25,000 Cash – NT, MDS 25,000 D. Cash Collecting Officer 25,000 Cash – NT, MDS 25,000 8. The Department of Social Welfare and Development’s obligation of rent for four years amounted to 375,000. The entry to record this transaction would be: A. Prepaid Rent 375,000 Cash – NT, MDS 375,000 B. Memorandum entry in RAOMO C. Rent Expense 375,000 Cash – NT, MDS 375,000 D. Prepaid Rent 375,000 Cash Disbursing Officer 375,000 9. The Department of Trade and Industry was granted advances for payroll amounting to P1,500,000. The entry would be: A. Cash Disbursing Officer 1,500,000 Payroll 1,500,000 B. Cash – NT, MDS 1,500,000 Cash Disbursing Officer 1,500,000 C. Memorandum entry in RAOPS D. Cash Disbursing Officer 1,500,000 Cash – NT, MDS 1,500,000 10. Agency ABC collected cash of P200,000 for services rendered. The collection was deposited to PSBank. What is the entry to record the deposit? 11. 11. NON-PROFIT ORGANIZATION 1. QPS Hospital had the following cash receipts and disbursements for the year ended December 31, 2013: Collection from patients P2,500,000 Contribution for an establishment of term endowment 500,000 Tuition from nursing school 1,000,000 Interest received from investment in permanent endowments 175,000 Dividends received from investment in term endowments 200,000 Payment of supporting expenses 750,000 Payment of program expenses 1,075,000 The interest received from permanent endowment is restricted by the donor for acquisition of medical equipment. How much is the net cash provided by operating activities? A. P1,675,000 B. P1,875,000 C. P2,050,000 D. P2,175,000 2. NPC University, a private not-for-profit university, had the following cash inflows during the year ended June 30, 2013: