BUSINESS COMBINATION ✓ IFRS 3 permits 2 methods of measuring non-

Consolidated Financial Statements controlling interest:

▪ Fair value, or
• IFRS 3 establishes principles and requirements for ▪ The proportionate share in the
how the acquirer: recognized acquiree’s net assets.
✓ Recognizes and measures the identifiable
assets acquired, the liabilities assumed and • Step 4: Recognize and measure goodwill or a gain
any non-controlling interest (NCI) in the from a bargain purchase.
acquiree. ✓ Goodwill is an asset representing the future
✓ Recognizes and measures the goodwill economic benefits arising from other assets
acquired in the business combination, or a gain acquired in a business combination that are
from a bargain purchase. not individually identified and separately
✓ Determines what information to disclose recognized.
about the business combination.
▪ It is calculated as a difference between:
Applying the acquisition method o The aggregate of:
• Once the investor acquires a subsidiary, it has to ✓ The fair value of the
account for each business combination by applying consideration transferred.
the acquisition method. ✓ The amount of any non-
controlling interest.
• The acquisition method involves 4 steps: ✓ In a business combination
✓ Identifying the acquirer. achieved in stages: the
✓ Determining the acquisition date. acquisition-date fair value of the
✓ Recognizing and measuring the identifiable acquirer’s previously-held
assets acquired, the liabilities assumed and equity interest in the acquiree;
any non-controlling interest in the acquiree. and
✓ Recognizing and measuring goodwill or a gain ✓ The acquisition-date amounts of
from a bargain purchase. net assets in an acquiree.

• Step 1: Identify the acquirer. ▪ The goodwill can be both positive and
✓ The acquirer is usually the investor who negative:
acquires an investment or a subsidiary. o If the goodwill is positive, then you
shall recognize it as an intangible asset
• Step 2: Determine the acquisition date. and perform annual impairment test.
✓ The date on which the acquirer obtains control o If the goodwill is negative, then it is a
of the acquiree. gain on a bargain purchase. You
✓ The date on which the acquirer legally should:
transfers the consideration (the payment for ✓ Review the procedures for
the investment), acquires the assets and recognizing assets and liabilities,
assumes the liabilities of the acquiree – the non-controlling interest,
closing date. previously held interest and
✓ Can be earlier or later than the closing date, consideration transferred (i.e.
too. It depends on the contractual check whether they are error-
arrangements in the written agreement, if free);
something like that exists. ✓ Recognize a gain on bargain
purchase in profit or loss.
• Step 3: Recognize and measure the identifiable
assets acquired, the liabilities assumed and any non- ▪ Consideration transferred is measured
controlling interest in the acquiree at fair value, including any contingent
consideration. Subsequent change in a
✓ 3.1 Acquired assets and liabilities consideration transferred is accounted for
▪ An acquirer or investor shall recognize depending on the initial recognition of the
all identifiable assets acquired, liabilities contingent consideration.
assumed and non-controlling interests
in the acquiree separately from Control as the basis for consolidation (PFRS 10)
goodwill. • The basic rule is:
▪ All assets and liabilities are measured at ✓ If an investor controls its investee,
acquisition-date fair value. then investor must consolidate.
✓ If an investor does NOT control its investee,
✓ 3.2 Non-controlling interest then investor does NOT consolidate.
▪ Non-controlling interest is the equity in
a subsidiary not attributable, directly or
indirectly, to a parent.
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 • What is control? Parent’s adjusted equity @ Book Value xxxx
✓ An investor controls an investee when the Non-controlling interest of Subsidiary xxxx
investor: Consolidated equity at acquisition date xxxx
✓ Is exposed to, or has right to variable
returns from its involvement with the 5) Consolidated Sales
investee. Reported sales of Parent xxxx
✓ Has the ability to affect those returns. Reported sales of Subsidiary xxxx
✓ Through its power over the investee. Total sales xxxx
Intercompany sale related to inventory
(xxxx)
Accounting requirements of IFRS 10 (upstream & downstream)
Consolidated sales xxxx
• Consolidation procedures
✓ In order to prepare consolidated financial 6) Consolidated Cost of Sales
statements, IFRS 10 prescribes the Reported cost of sales of Parent xxxx
following consolidation procedures: Reported cost of sales of Subsidiary xxxx
▪ Combine like items of assets, liabilities, Intercompany sales (xxxx)
equity, income, expenses and cash flows Unrealized profit in ending inventory xxxx
of the parent with those of its subsidiaries. Realized profit in ending inventory (xxxx)
Depreciation of FVA on inventory xxxx
▪ Offset (eliminate): Consolidated cost of sales xxxx
✓ The carrying amount of the parent’s
investment in each subsidiary; and 7) Consolidated Gross Profit
✓ The parent’s portion of equity of Consolidated sales xxxx
each subsidiary. Consolidated cost of sales (xxxx)
✓ Eliminate in full intragroup assets Consolidated gross profit xxxx
and liabilities, equity, income,
expenses and cash flows relating to 8) Parent’s Adjusted Net Income
transactions between entities of the Reported net income (cost method) xxxx
group. Dividend from Subsidiary (xxxx)
Unrealized profits (xxxx)
FORMULAS MOSTLY USED IN PFRS 3 AND 10 Impairment loss of goodwill (xxxx)
Adjusted Net Income xxxx
1) Goodwill/Gain on a bargain purchase
FV of consideration given up xxxx 9) Subsidiary’s Adjusted Net Income
Non-controlling interest (NCI) xxxx Reported net income (book value) xxxx
FV of previously held interest xxxx Effects of amortization of differences of
Initial carrying amount xxxx BV and FV of Subsidiary’s assets and xxxx/(xxxx)
FV of net assets acquired (xxxx) liabilities
Goodwill (Gain on bargain purchase) xxxx Effect of upstreams transactions xxxx/(xxxx)
Effect of subsidiary-subsidiary xxxx/(xxxx)
transactions
2) Consolidated Assets at Acquisition Date
Impairment loss on total goodwill (xxxx)
Parent’s total assets at acquisition date xxxx
Adjusted net income xxxx
Consideration given up (cash or NCA) (xxxx)
Payments to other costs on acquisition date (xxxx)
Goodwill on business combination xxxx 10) Consolidated Comprehensive Income
Parent’s adjusted total assets @ book value xxxx Net income of Parent xxxx
Subsidiary’s adj. total assets @ fair value xxxx Net income of Subsidiary xxxx
Consolidated assets at acquisition date xxxx Consolidated net income xxxx

3) Consolidated Liabilities at Acquisition Date 11) Consolidated Retained Earning

Parent’s total liabilities @ acquisition date xxxx Consolidated retained earnings, beginning xxxx
Contingent consideration (if asset) xxxx Consolidated net income attributable to
Parent’s adjusted total liabilities @ BV xxxx Parent [Net income of Parent + (Net
xxxx
Subsidiary’s adjusted total liabilities @ FV xxxx income of Subsidiary x controlling interest)]
Consolidated liabilities at acquisition date xxxx Consolidated retained earnings, ending xxxx

4) Consolidated Equity at Acquisition Date 12) Non-controlling Interest

Parent’s Equity at acquisition date xxxx Non-controlling interest, beginning xxxx
Shares issued as consideration at TFV xxxx CNI attributable to non-controlling interest xxxx
Gain on bargain purchase xxxx Dividends declared by Subsidiary to NCI (xxxx)
Acquisition date costs (xxxx) Non-controlling interest, ending xxxx
Stock issuance costs (xxxx)
Remeasurement gain/loss on previously
xxxx/(xxxx)
held interest
Others presented at PL xxxx/(xxxx)
- - End - -

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 BUSINESS COMBINATION

THEORY

1. PFRS 3 defines it as a transaction or event in which an acquirer obtains control of one or more businesses
a. Business combination c. Merger
b. Consolidation d. Acquisition of net assets

2. A business combination whereby the company taking over the properties of other companies retains its
identity and continues operations as a larger unit and the other companies are dissolved is known as a
a. Consolidation c. Pooling of interests
b. Merger d. Quasi-reorganization

3. A business combination in which a new corporation is created, and two or more existing corporations are
combined into the newly created corporation is called a
a. Merger c. Pooling-of-interests
b. Purchase transaction d. Consolidation

4. Under PFRS 3, how should an entity (acquirer) account for each business combination?
a. Pooling of interest method c. Acquisition method
b. Proportionate consolidation method d. Equity method

5. It refers to the date on which the acquirer obtains control of the acquiree
a. Business combination date c. Control date
b. Acquisition date d. Consolidation date

6. The acquisition method of accounting for a business combination requires all of the following, except
a. Identifying the acquirer
b. Determining the acquisition date
c. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and the
noncontrolling interest in the acquiree at carrying amount
d. Recognizing goodwill or gain from bargain purchase

7. 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 non-controlling interest in the
acquiree over the identifiable 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 of the consideration transferred, the amount of any non-controlling interest in the
acquiree and the fair value of previously held interest in the acquiree over the identifiable net assets
acquired

8. Under PFRS 10, an investor controls an investee if the investor has all of the following, except
a. The power over the investee
b. Exposure or rights to variable returns from the involvement with the investee
c. The ability to use the power over the investee to affect the amount of the investor’s returns
d. All of these indicate control

9. Control is presumed to exist when the parent owns directly or indirectly through subsidiaries
a. More than half of the equity of the 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

10. Which of the following statements is(are) correct according to PFRS 10?
a. Consolidated financial statements are 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 entity
b. Separate financial statements are the financial statements by a parent in which the investments are
accounted for on the basis of the direct equity interest
c. Noncontrolling interest is that portion of the profit or loss and net assets of a subsidiary attributable
to equity interests that are not owned directly or indirectly through subsidiaries by the parent
d. All of the above
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 11. How shall the parent corporation present the Noncontrolling Interest (NCI) in the Consolidated Statement
of financial Position?
a. It shall be presented within Consolidated Stockholder’s Equity, separately from the equity of the
owners of the parent
b. It shall be presented as non-current liability
c. It shall be presented as non-current assets
d. It shall be presented as contra-equity account like treasury shares and subscription receivable

PROBLEMS

1. The following are the condensed Statement of Financial Position of X and Y on January 1, 2021:
X Y
Total Assets P10,250,000 P3,057,500
Liabilities P 2,775,000 P 800,000
Ordinary shares 3,100,000 1,295,000
Share premium 1,250,000 100,000
Retained Earnings 3,125,000 862,500

Z Corp. acquired the net assets of both X and Y by paying cash in the amount of P185,000 and by issuing
198,500 shares to X and by paying cash in the amount of P72,000 and by issuing 54,350 shares to Y. The par
value of these shares is P35/share and market value as of January 1, 2021 is P40/share.

Z Corp. also incurred the following unpaid expenses:

X Y
Indirect costs P 93,750 P101,250
Finder’s fee 66,250 35,000
Accounting and legal fees for SEC registration 343,750 362,500
Printing costs of stock certificates 125,000 93,750

Z’s retained earnings has a balance of P10,750,000 on January 1, 2021 immediately before the acquisition.

As a result of the merger, compute for the amount of:

● Goodwill
● Net increase or (net decrease) in retained earnings in the statement of financial position of Z
Corporation
● Net increase or (net decrease) in the stockholders’ equity of Z Corporation
● Net increase or (net decrease) in the identifiable assets of Z Corporation

2. X Corporation acquired 100 percent of Y Company's common stock on January 1, 2021 for P150,000. Balance
sheet data for the two companies immediately following the acquisition follow:

Item X Corporation Y Company

Cash P30,000 P25,000
Accounts Receivable 80,000 40,000
Inventory 150,000 55,000
Land 65,000 40,000
Buildings and Equipment 260,000 160,000
Less: Accumulated Depreciation (120,000) (50,000)
Investment in Y Company Stock 150,000
Total Assets P615,000 P270,000

Accounts Payable P45,000 P33,000

Taxes Payable 20,000 8,000
Bonds Payable 200,000 100,000
Common Stock 50,000 20,000
Retained Earnings 300,000 109,000
Total Liabilities and Stockholder’s Equity P615,000 P270,000
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 At the date of the business combination, the book values of Y’s net assets and liabilities approximated fair
value except for inventory, which had a fair value of P60,000, and land, which had a fair value of P50,000.
The fair value of land for X Corporation was estimated at P80,000 immediately prior to the acquisition.

Question 1: At what amount should total land be reported in the consolidated balance sheet prepared
immediately after the business combination?
a. P130,000 c. P115,000
b. P105,000 d. P120,000

Question 2: What amount of total assets will appear in the consolidated balance sheet prepared
immediately after the business combination?
a. P756,000 c. P750,000
b. P735,000 d. P642,000

Question 3: What amount of goodwill will be reported in the consolidated balance sheet prepared
immediately after the business combination?
a. P0 c. P6,000
b. P21,000 d. P15,000

Question 4: What amount of liabilities will be reported in the consolidated balance sheet prepared
immediately after the business combination?
a. P615,000 c. P300,000
b. P406,000 d. P265,000

Question 5: What amount of retained earnings will be reported in the consolidated balance sheet prepared
immediately after the business combination?
a. P300,000 c. P259,000
b. P409,000 d. P191,000

Question 6: What amount of total stockholder's equity will be reported in the consolidated balance sheet
prepared immediately after the business combination?
a. P300,000 c. P315,000
b. P479,000 d. P350,000

3. On January 1, 2021, X acquired 90% of the equity share capital of Y in a share exchange in which X issued
two new shares for every three shares it acquired in Y. Additionally, on December 31, 2021, X will pay the
shareholders of Y P1.76 per share acquired. X’s cost of capital is 10% per annum. At the date of acquisition,
shares in X and Y had a stock market value of P6.50 and P2.50 each, respectively.

Income statements for the year ended September 30, 2021:

X Y
Revenue 64,600,000 38,000,000
Cost of sales (51,200,000) (26,000,000)
Gross profit 13,400,000 12,000,000
Distribution costs (1,600,000) (1,800,000)
Administrative expenses (3,800,000) (2,400,000)
Investment income 500,000 Nil
Finance costs (420,000) Nil
Profit before tax 8,080,000 7,800,000
Income tax expense (2,800,000) (1,600,000)
Profit for the year 5,280,000 6,200,000

Equity as at October 1, 2020

Equity shares of P1 each 30,000,000 10,000,000
Retained earnings 54,000,000 35,000,000

The following information is relevant:

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 At the date of acquisition, the fair values of Y’s assets were equal to their carrying amounts with the
exception of two items:
● An item of plant had a fair value of P1.8 million above its carrying amount. The remaining life of the
plant at the date of acquisition was three years. Depreciation is charged to cost of sales.
● Y had a contingent liability which X estimated to have a fair value of P450,000. This has not changed
as of September 30, 2021.
● Y has not incorporated these fair value changes into its financial statements.

X’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, Y’s
share price at that date can be deemed to be representative of the fair value of the shares held by the non-
controlling interest.

Calculate the consolidated goodwill at the date of acquisition of Y.

4. On January 2, 2021, the Statement of Financial Position of X and Y Company prior to the combination are:
X Co. Y Co.
Cash P 675,000 P 22,500
Inventories 450,000 45,000
Property and equipment (net) 1,125,000 157,500
Total Assets P 2,250,000 P 225,000

Current Liabilities P 135,000 P 22,500

Ordinary shares, P100 par 225,000 22,500
Share premium 675,000 45,000
Retained Earnings 1,215,000 135,000
Total Liabilities and Stockholder’s Equity P 2,250,000 P 225,000

The fair value of Y Company’s equipment is P229,500.

Assume the following independent cases:

● Assuming X Company acquired all of the outstanding stock of Y Company resulting to a goodwill of
P99,000, contingent consideration is P54,000, how much is the price paid to Y Company’s stock?
● Assuming X Company acquired 70% of the outstanding common stock of Y Company for P157,500
and Non-controlling interest is measured at fair value of P91,500, how much is the goodwill (gain
on acquisition)?
● Assuming X Company acquired 80% of the outstanding common stock of Y Company for P205,200
and Non-controlling interest is measured at Non-controlling interest’s proportionate share of Y
Company’s identifiable net assets, how much is the consolidated stockholder’s equity on the date
of acquisition?
● Assuming X Company acquired 90% of the outstanding common stock of Y Company for P364,500
and Non-controlling interest is measured at fair value, how much is the total consolidated assets on
the date of acquisition?

5. On January 1, 2020, B Company acquired 80 percent of A Company's common stock for P280,000 cash. At
that date, A reported common stock outstanding of P200,000 and retained earnings of P100,000, and the
fair value of the noncontrolling interest was P70,000. The book values and fair values of A’s assets and
liabilities were equal, except for other intangible assets which had a fair value P50,000 greater than book
value and an 8-year remaining life. A reported the following data for 2020 and 2021:

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 A Corporation
Comprehensive
Year Net Income Income Dividends Paid
2020 P25,000 P30,000 P5,000
2021 P35,000 P45,000 P10,000

B reported net income of P100,000 and paid dividends of P30,000 for both the years.

Question 1: What is the amount of consolidated comprehensive income reported for 2020?

Question 2: What is the amount of consolidated comprehensive income reported for 2021?

Question 3: What is the amount of comprehensive income attributable to the controlling interest for 2020?

Question 4: Based on the preceding information, what is the amount of comprehensive income attributable
to the controlling interest for 2021?

6. On January 2, 2021, A Corporation purchase 80% of B Company’s common stock for P810,000. P37,500 of
the excess is attributable to goodwill and the balance to a depreciable asset 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:
A Corp. B Co.
Ordinary shares P1,312,500 P 300,000
Retained earnings 1,950,000 525,000

On December 31, 2021, B Company reported net income of P131,250 and paid dividends of P45,000 to A.
A reported earnings from its separate operations of P356,250 and paid dividends of P172,500. Goodwill
had been impaired and should be reported at P7,500 on December 31, 2021.

Question 1: How much is the consolidated profit on December 31, 2021?

a. P447,187.50 c. P450,000
b. P473,437.50 d. P442,500

Question 2: How much is the consolidated retained earnings attributable to parent’s shareholders equity on
December 31, 2021?
a. P2,202,750 c. P2,196,750
b. P2,197,500 d. P2,599,687.50

Question 3: How much is the non-controlling interest in profit of B Company on December 31, 2021?
a. P23,437.50 c. P26,250
b. P23,250 d. P17,250

Question 4: What amount of non-controlling interest is to be presented in the consolidated statement of

financial position on December 31, 2021?
a. P205,312.50 c. P193,125
b. P208,500 d. P181,875

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 Question 5: How much is the consolidated profit attributable to parent shareholders on December 31, 2021?
a. P420,000 c. P425,250
b. P445,500 d. P450,000

7. On January 2, 2020, X Company acquired 90% of the outstanding shares of Y Inc. at book value. During 2020
and 2021, intercompany sales amounted to P2,000,000 and P4,000,000, respectively. X Company
consistently recognized a 25% mark-up based on cost while Y Inc. had a 25% gross profit on sales. The
inventories of the buying affiliate, which all came from inter-company transactions show:
Dec. 31, 2020 Dec. 31, 2021
X P240,000 P160,000
Y 100,000 40,000
On October 1, 2020, Y Inc., purchased a piece of land costing P1,000,000 from X Company for P1,500,000.
On December 1, 2021, Y Inc., sold this land to unrelated party for P1,500,000. On the other hand, on July 1,
2021, Y Inc. sold a used photocopier with a carrying value of P60,000 and remaining life of 3 years to X
Company for P42,000.

Separate Statement of Comprehensive Income for the two companies for the year 2021 follow:
X Company Y Inc.
Sales P25,000,000 P14,000,000
Cost of Sales (15,000,000) ( 8,400,000)
Gross Profit P10,000,000 P5,600,000
Operating Expenses (6,000,000) (3,800,000)
Operating Profit P 4,000,000 P1,800,000
Loss on Sale of Office Equipment (18,000)
Dividend Revenue 40,000
Net Income P4,000,0000 P1,822,000

Compute the following amounts for/as of December 31, 2021

Question 1: Consolidated Gross Profit

a. P19,632,000 c. P15,632,000
b. P15,712,000 d. P15,584,000

Question 2: Consolidated Net Income attributable to Parent

a. P6,183,300 c. P6,169,800
b. P6,369,000 d. P6,191,300

Question 3: Non-controlling interest in Net Income

a. P189,700 c. P188,200
b. P185,700 d. P184,200

Question 4: Consolidated Operating Expense

a. P9,800,000 c. P9,803,000
b. P9,788,000 d. P9,789,500

8. On January 1, 2021, Entity A acquired 90% of outstanding ordinary shares of Entity B at a price of P900,000.
Entity A paid P20,000 costs related to acquisition of shares.
● At the acquisition date, the net assets of Entity B were reported at P950,000. All the assets of Entity
B are properly valued except for a machinery which is undervalued by P150,000. The machinery has
a remaining useful life of 5 years.
● For the year ended December 31, 2021, Entity B reported net income of P200,000 and declared
dividends in the amount of P30,000.

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 ● The fair value of Investment in Entity B on December 31, 2021 is P1,000,000 while the cost of
disposal is 5%.
● Entity A voluntarily prepared its separate financial statements.

Question 1: If Entity A elects cost method to account its Investment in Entity B in its separate financial
statements, what is the carrying amount of the Investment in Entity B on December 31, 2021?
a. P900,000 c. P1,000,000
b. P920,000 d. P950,000

Question 2: What is the investment income for 2021 if Entity A elects cost method to account its Investment
in Entity B in its separate financial statements?
a. P7,000 c. P180,000
b. P27,000 d. P107,000

Question 3: If Entity A elects fair value model to account its Investment in Entity B in its separate financial
statements, what is the carrying amount of the Investment in Entity B on December 31, 2021?
a. P900,000 c. P1,000,000
b. P920,000 d. P950,000

Question 4: What is the net effect in profit or loss for 2021 if Entity A elects fair value model to account its
Investment in Entity B in its separate financial statements?

9. Entity A acquired 75% of the outstanding common shares of Entity B on January 1, 2020 at an amount equal
to the book value and fair value of identifiable net assets when the shareholders’ equity of B is composed
of capital stock of P3,000,000 and retained earnings of P2,000,000. NCI was elected to be initially measured
at proportionate share of fair value of identifiable net assets.

A summary of the separate 2022 income statements of Entity A and Entity B, were as follows:
Entity A Entity B
Sales P9,000,000 P5,400,000
Gain on sale of equipment 180,000 -
Dividend income 262,500 -
Cost of goods sold (3,600,000) (2,340,000)
Depreciation expense (900,000) (540,000)
Other expenses (1,440,000) (720,000)
Net income P3,502,500 P1,800,000

There was an upstream sale of equipment with a book value of P720,000 for P1,170,000 on January 2, 2020.
At the time of the intercompany sale, the equipment had a remaining useful life of five years. Entity A uses
straight-line depreciation with no residual value. The buying affiliate used the equipment until December
31, 2022, at which time it was sold to a third-party, Entity Z, for P648,000. The balance of retained earnings
of Entity A and Entity B at the beginning of 2022 are P10,000,000 and P5,000,000, respectively, while
dividends declared for the year amounted to P1,500,000 and P350,000 for Entity A and Entity B, respectively.

Question 1: In the December 31, 2022 consolidated statement of financial position, how much is the balance
of retained earnings?
a. P15,340,000 c. P12,340,000
b. P16,090,000 d. P16,452,500

Question 2: In the December 31, 2022 consolidated statement of financial position, how much is the balance
of non-controlling interest?
a. P1,612,500 c. P2,362,500
b. P2,450,000 d. P1,250,000

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 10. The following transactions occurred for the period ended December 31, 2020 regarding Entity A and its two
subsidiaries, Entity B and Entity C:
● On January 1, 2020, Entity A acquired 60% of the outstanding common stock of Entity B and 70% of
the outstanding common stock of Entity C. It is the policy of Entity A to account all its investments
in subsidiary using cost method in its separate financial statements.
● On May 1, 2020, Entity A sold inventory to Entity C with cost of P75,000 at a price of P100,000. On
June 1, 2020, Entity C resold all the inventory coming from Entity A at a price of P150,000 as follows:
80% to unrelated parties and 20% to Entity B.
● On July 1, 2020, Entity B sold a new set of inventory to Entity C with cost of P125,000 at a price of
P200,000. On August 1, 2020, Entity C resold all the inventory coming from Entity B at a price of
P300,000 as follows: 40% to unrelated parties and 60% to Entity A.
● For the period ended December 31, 2020, the Entities A, B and C reported sales revenue of
P3,000,000, P2,000,000 and P1,000,000, respectively, and cost of sales of P1,000,000, P750,000 and
P500,000, respectively, in their separate income statements.

Question 1: What is the amount of sales revenue to be reported in the consolidated income statement for
the year ended December 31, 2020?
a. P5,700,000 c. P5,620,000
b. P5,490,000 d. P5,870,000

Question 2: What is the amount of cost of sales to be reported in the consolidated income statement for
the year ended December 31, 2020?
a. P1,910,000 c. P2,005,000
b. P2,155,000 d. P1,860,000

11. The following transactions occurred for the years ended December 31, 2020 and December 31, 2021
regarding Entity A and its two subsidiaries, Entity B and Entity C:
● On January 1, 2020, Entity A acquired 75% of the outstanding common stock of Entity B. On this
date, the equipment on Entity B with remaining useful life of 5 years has a book value of P200,000
but its fair value is estimated to be P250,000.
● On April 1, 2020, Entity A acquired 62% of the outstanding common stock of Entity C.
● It is the policy of Entity A to account all its investments in subsidiary using cost method in its separate
financial statements.
● On January 1, 2021, Entity B sold his undervalued equipment to Entity A at a price of P150,000.
● On April 1, 2021, Entity A resold the said equipment to Entity C at a price of P300,000.
● On July 1, 2021, Entity C resold the said equipment to a third party at a price of P180,000.

Question 1: What is the consolidated gain on sale of equipment to be reported by Entity A in its consolidated
income statement for the year ended December 31, 2021?
a. P5,000 c. P30,000
b. P25,000 d. P40,000

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