BALIUAG UNIVERSITY

College of Business Administration and Accountancy

Advanced Financial Accounting & Reporting
_____________________________________________________________________________________________
Module 2: Business Combination & Consolidation LVC

I. Business Combinations (PFRS 3)

Summary of investment in equity securities:

Interest Acquired Relationship with Investment Accounting Measurement
Investee Account Standards Applied
< 20% Nominal interest Financial asset PFRS 9
FVTPL and FVOCI
20% to 50% Significant Investment in PAS 28
influence associate
Shared interest Joint control Joint venture PFRS 11
> 50% Control Investment in PFRS 3, PFRS 10,
subsidiary PAS 27

✓ Definition
A transaction or other event in which an acquirer obtains control of one or more businesses.
Transactions sometimes referred to as 'true mergers' or 'mergers of equals' are also business
combinations as that term is used in IFRS3.

✓ Acquisition method
The acquisition method (called the 'purchase method' in the 2004 version of IFRS 3) is used for all
business combinations.

✓ Steps in applying the acquisition method are:

1. Identification of the 'acquirer'
2. Determination of the 'acquisition date'
3. Recognition and measurement of the identifiable assets acquired, the liabilities assumed and any
non-controlling interest (NCI, formerly called minority interest) in the acquire
4. Recognition and measurement of goodwill or a gain from a bargain purchase

✓ Acquired assets and liabilities

• Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests
in the acquiree, are recognized separately from goodwill.
• Measurement principle. All assets acquired and liabilities assumed in a business combination are
measured at acquisition-date fair value.

✓ Goodwill
• Goodwill is measured as the difference between:
a. the aggregate of (i) the value of the consideration transferred (generally at fair value), (ii) the
amount of any non-controlling interest (NCI, see below), and (iii) in a business combination
achieved in stages, the acquisition-date fair value of the acquirer's previously-held equity
interest in the acquiree, and
b. the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed.
• Goodwill = Consideration transferred + Amount of NCI + Fair value of previously held equity interest
+
Contingent consideration – Net assets recognized
• If the difference above is negative, the resulting gain is a bargain purchase in profit or loss, which
may arise in circumstances such as a forced seller acting under compulsion.

✓ Choice in the measurement of non-controlling interests (NCI)

a. fair value (full goodwill method), or
b. NCI's proportionate share of net assets of the acquire (partial goodwill method).
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II. Consolidated Financial Statements (IFRS 10)

✓ Control
• An investor controls an investee if and only if the investor has all of the following elements:
1. power over the investee, i.e. the investor has existing rights that give it the ability to direct the
relevant activities (the activities that significantly affect the investee's returns)
2. exposure, or rights, to variable returns from its involvement with the investee
3. the ability to use its power over the investee to affect the amount of the investor's returns.

✓ Preparation of consolidated financial statements

• A parent prepares consolidated financial statements using uniform accounting policies for like
transactions and other events in similar circumstances.
• However, a parent need not present consolidated financial statements if it meets all of the
following conditions:
a. it is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and its other
owners, including those not otherwise entitled to vote, have been informed about, and do not
object to, the parent not presenting consolidated financial statements
b. its debt or equity instruments are not traded in a public market (a domestic or foreign stock
exchange or an over-the-counter market, including local and regional markets)
c. it did not file, nor is it in the process of filing, its financial statements with a securities
commission or other regulatory organization for the purpose of issuing any class of instruments
in a public market, and
d. its ultimate or any intermediate parent of the parent produces financial statements available
for public use that comply with IFRSs, in which subsidiaries are consolidated or are measured
at fair value through profit or loss in accordance with IFRS 10.

✓ Consolidation procedures
• combine like items of assets, liabilities, equity, income, expenses and cash flows of the parent with
those of its subsidiaries
• offset (eliminate) the carrying amount of the parent's investment in each subsidiary and the
parent's portion of equity of each subsidiary (IFRS 3, account for any related goodwill)
• eliminate in full intragroup assets and liabilities, equity, income, expenses and cash flows relating
to transactions between entities of the group (profits or losses resulting from intragroup
transactions that are recognized in assets, such as inventory and fixed assets, are eliminated in full).

✓ Non-controlling interests (NCIs)

• A parent presents non-controlling interests in its consolidated statement of financial position within
equity, separately from the equity of the owners of the parent.
• A reporting entity attributes the profit or loss and each component of other comprehensive income
to the owners of the parent and to the non-controlling interests. The proportion allocated to the
parent and non-controlling interests are determined on the basis of present ownership interests.

✓ Loss of control
• If a parent loses control of a subsidiary, the parent:
a. Derecognizes the assets and liabilities of the former subsidiary from the consolidated
statement of financial position.
b. Recognizes any investment retained in the former subsidiary when control is lost and
subsequently accounts for it and for any amounts owed by or to the former subsidiary in
accordance with relevant IFRSs. That retained interest is remeasured and the remeasured value
is regarded as the fair value on initial recognition of a financial asset in accordance with IFRS 9
Financial Instruments or, when appropriate, the cost on initial recognition of an investment in
an associate or joint venture.
c. Recognizes the gain or loss associated with the loss of control attributable to the former
controlling interest.

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III. Separate Financial Statements (IAS 27)
✓ Requirement for separate financial statements
• IAS 27 does not mandate which entities produce separate financial statements available for public
use. It applies when an entity prepares separate financial statements that comply with IFRS.
• Financial statements in which the equity method (IAS 28) is applied are not separate financial
statements. Similarly, the financial statements of an entity that does not have a subsidiary,
associate or joint venturer's interest in a joint venture are not separate financial statements.
• An investment entity that is required, throughout the current period and all comparative periods
presented, to apply the exception to consolidation for all of its subsidiaries in accordance with IFRS
10 presents separate financial statements as its only financial statements.

✓ Choice of accounting method

• When an entity prepares separate financial statements, investments in subsidiaries, associates, and
jointly controlled entities are accounted for either:
a. at cost
b. in accordance with IFRS 9 Financial Instruments
c. using the equity method as described in IAS 28

✓ Investment entities
• If a parent investment entity is required, in accordance with IFRS 10, to measure its investment in
a subsidiary at fair value through profit or loss in accordance with IFRS 9 or IAS 39, it is required to
also account for its investment in a subsidiary in the same way in its separate financial statements.
• When a parent ceases to be an investment entity, the entity can account for an investment in a
subsidiary at cost (based on fair value at the date of change or status) or in accordance with IFRS 9.

✓ Recognition of dividends
• An entity recognizes a dividend from a subsidiary, joint venture or associate in profit or loss in its
separate financial statements when its right to receive the dividend in established.

➢ Illustration: Consolidation Procedures on the Date of Consolidation

Note: Calculation of Goodwill will depend on the method used in the calculation of NCI (P = Parent; S = Subsidiary)

➢ Illustration: Consolidated Statement of Financial Position – Date of acquisition

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Problem 1: On January 1, Y1, P Company acquired 80% of S Company's outstanding shares by paying P400 and
issuing 100 shares with P6 fair value. P also paid P100 direct acquisition cost. Statements of financial position of P
and S before consolidation are presented as follows:

CASE 1: Full Goodwill Method (NCI is based on fair value)

CASE 2: Full Goodwill Method (Assume that P has existing 5% interest in equity of S classified as PVTPL and the
financial asset has P60 carrying amount and P70 fair value on date of acquisition. The interest acquired by P on
1/1/Y1 was 75% bringing the total ownership to 80%)
CASE 3: Partial Goodwill Method (NCI is based on proportionate share of fair value of S).
CASE 4: Gain on Bargain Purchase (Full goodwill method) Same statement of financial position. Assume that P
Company acquired 80% of S Company's outstanding shares by paying P200 and issuing 100 shares with P5 fair
value. P also paid P100 direct acquisition cost.

Requirements:
1. Goodwill of gain on business combination
2. Noncontrolling interest
3. Elimination entries
4. Consolidated assets
5. Consolidated liabilities
6. Consolidated retained earnings
7. Consolidated shareholders’ equity

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➢ Illustration: Consolidation Procedures Subsequent to the Date of Acquisition (Cost Method)

A. Amortization of fair value adjustment to S assets and liabilities (excess over book):

B. Realized and unrealized profit adjustments to consolidated net income

C. Consolidated Net Income (Indirect Method)

*Gain on business combination is added to the net income reported by the parent company during the first
year of consolidation.

D. Consolidated Sales

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E. Consolidated Cost of Sales

*Intercompany sales are deducted from cost of sales because the sales of selling party becomes the cost of
sales of the buying party.
*For unrealized intercompany profit on inventory, the effect is overstated ending inventory and
understated cost of sales. Thus, added to get the consolidated cost of sales. This is also deducted from the
consolidated cost of ending inventory
* For realized intercompany profit on inventory, the effect is overstated beginning inventory and
overstated cost of sales. Thus, deducted to get the consolidated cost of sales.

F. Consolidated Expenses

*Realized gain on sale of PPE represents excess depreciation in the books of the buyer. Therefore, realized
gain on sale is recorded in the elimination entry as a credit to depreciation expense.
*Realized loss on sale of PPE represents under-depreciation in the books of the buyer. Therefore, realized
loss on sale is recoded in the elimination entry as a debit to depreciation expense.

G. Consolidated Net Income (Direct Method)

*Gain on business combination is added to the consolidated net income attributable to the parent
company during the first year of consolidation.

H. Consolidated Retained Earnings

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I. Noncontrolling Interest

J. PPE through intercompany sale

K. Consolidated Assets

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L. Consolidated Liabilities

M. Consolidated Shareholders’ Equity

*May also include consolidated OCI

Problem 2: Continuation of Problem 1. Presented below are the statements of financial position and income
statements of P and S one year after its consolidation. P company uses cost method for its investment in
subsidiary.

Additional information: Goodwill from business combination will be impaired by 50%. Impairment loss is equal to
P150.

Requirements:
1. Consolidated net income
2. Consolidated net income attributable to P
3. Consolidated net income attributable to NCI
4. Consolidated sales
5. Consolidated cost of sales
6. Consolidated expenses
7. Consolidated retained earnings at 12/31/Y1
8. NCI carrying amount at 12/31/Y1
9. Goodwill carrying amount at 12/31/Y1
10. Consolidated assets at 12/31/Y1
11. Consolidated liabilities at 12/31/Y1
12. Consolidated SHE at 12/31/Y1
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➢ Illustration: Consolidation Procedures Subsequent to the Date of Acquisition (Equity Method)

A. Consolidated Net Income

*The only difference with the cost method is the adjustment to net income reported by parent company.
The investment income from the parent’s share in the adjusted net income of subsidiary is eliminated.
*Gain on bargain purchase is also part of the adjusted net income of parent company.
*Other items such as consolidated sales, cost of sales, other income and expenses are calculated in the same
way as cost method.

B. Carrying Amount of Investment in Subsidiary Account

C. Consolidated Statement of Financial Position

Consolidated assets, liabilities, shareholders’ equity, retained earnings and the ending noncontrolling
interest account are calculated in the same way as the cost method.

Problem 3. Continuation of Problem 1. Presented below are the statements of financial position and income
statements of P and S one year after its consolidation. P company accounts for its investment in subsidiary using
equity method.

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Additional information: Goodwill from business combination will be impaired by 50%. Impairment loss is equal to
P150.

Requirements:
1. Consolidated net income
2. Carrying amount of investment in subsidiary, 12/31/Y1 in P’s separate financial statements
3. Consolidated assets
4. Consolidated liabilities at 12/31/Y1
5. Consolidated SHE at 12/31/Y1

Problem 4 - Intercompany sale of PPE

P acquired 75% of equity interest in S on January 01, Year 1 the fair value of S approximated its carrying amount. P
uses the cost method for its investment in subsidiary. Intercompany transfer of PPE during Year 1 and Year 2 were
as follows:
• S transferred equipment costing P90,000 to P for P56,000 on April 1, Year 1. The equipment was originally
purchased exactly 3 years ago when its useful life was 7 years. The salvage value of the equipment is
P20,000.
• P transferred equipment costing P150,000 to S for P156,000 on January 1, Year 2. The equipment was
originally purchased exactly 2 years ago when its useful life was 8 years. The salvage value of the
equipment is P30,000.
The were no changes in the salvage value and remining useful life of the transferred equipment.

The separate financial records of P and S for Year 1 and Year 2 were as follows:
Year 1 Year 2
P S P S
PPE – Cost P 654,900 P 326,400 P 750,200 P 468,100
Accumulated depreciation 215,600 95,400 258,300 128,500
Depreciation expense 44,400 22,200 55,500 33,300
Net income 250,600 175,100 285,900 187,700
Dividends declared 102,600 70,000 115,800 78,000

Requirements:
1. Consolidated net income for Year 1
2. The carrying amount of the transferred equipment in the Year 1 consolidated financial statements
3. The net carrying amount of PPE in the Year 2 consolidated statement of financial position:
4. Consolidated net income for Year 2.
5. The total carrying amount of the transferred equipment in the Year 2 consolidated financial statements
6. The net carrying amount of PPE in the Year 2 consolidated statement of financial position:

❖ Multiple Choice Questions

1. A horizontal merger is a merger between

a. Two or more firms from different and unrelated markets.
b. Two or more firms at different stages of the production process.
c. A producer and its supplier.
d. Two or more firms in the same market.
2. Snow White Co. is a wholly owned subsidiary of Fantasy Co. Both companies have separate general
ledgers and prepare separate financial statements. Which of the following statement is correct?
a. Consolidated financial statements should be prepared for both Snow White and Fantasy.
b. Consolidated financial statements should only be prepared by Fantasy and not be Snow White.
c. After consolidation, the accounts of both Fantasy and Snow White should be changed to reflect the
consolidated totals for future ease in reporting.
d. After consolidation, the accounts of both Fantasy and Snow White should be combined together into
one general ledger accounting system for future ease in reporting.
3. 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.

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c. There is evidence that control is intended to be temporary because the subsidiary is acquired with the
intention to dispose of it within twelve months from the date of acquisition.
d. The subsidiary is operating under severe long-term restrictions that significantly impair its ability to
transfer funds to the parent.
4. The term “control” means ownership, directly or indirectly through subsidiaries of
a. More than one-half of the outstanding voting stock of another company.
b. At least 20% of the voting stock of another company.
c. At least 50% of the voting stock of another company.
d. At least 10% of the voting stock of another company.
5. Acer Co. has significant investment in three separate entities, These investments are:
1. 40% ownership of the voting stock of King Co.
2. 60% ownership of the voting stock of Queen Co.
3. 100% ownership of the voting stock of Jack Co.
Which of Acer’s investments would be consolidated with Acer in its consolidated financial statements?
a. Jack only
b. Queen and Jack
c. King, Queen and Jack
d. King only
6. Which one of the following is not necessarily a post-combination characteristic of a legal acquisition?
a. The combining firms remain separate legal entities.
b. A parent-subsidiary relationship exist.
c. The acquiring firm owns 100% of the voting stock of the acquired firm.
d. The combining firms are under common economic control.
7. A “group” for consolidation purpose 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 over entities or businesses.
8. It is the portion of profit or loss and net assets of subsidiary attributable to equity interest that are not
owned directly or indirectly through subsidiaries by the parent.
a. Non-controlling interest
b. Controlling interest
c. Residual interest
d. Subsidiary interest
9. It is the entity that has the controlling financial interest.
a. Investor
b. Parent
c. Associate
d. Affiliate
10. Which of the following terms best describes the financial statements of a parent in which the investments
are accounted for on the basis of the direct equity interest?
a. Single financial statements
b. Combined financial statements
c. Separate financial statements
d. Consolidated financial statements
11. In 20X5, Popsie Co. acquired 80% of the voting stock of Sonny Co. in a legal acquisition. Which one of the
following is least likely to be a type of intercompany balance that results from transactions between
Popsie and Sonny during 20X5?
a. Receivable
b. Inventory
c. Goodwill
d. Revenue
12. An entity acquired an investment in a subsidiary with the view to dispose of this investment within six
months. The investment in the subsidiary has been classified as held for sale and is to be accounted for in
accordance with PFRS 5. The subsidiary has never been consolidated. How should the investment in the
subsidiary be treated in the financial statement?
a. Purchased accounting should be used.
b. Equity accounting should be used.
c. The subsidiary should not be consolidated but PFRS 5 should be used.
d. The subsidiary should remain off balance sheet.

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13. X owns 50% of Y’s voting shares. The boards of directors consists of 6 members. X appoints three of them
and Y appoints the other three. The casting vote at meetings always lies with the directors appointed by
X. Dose X have control over Y?
a. No, control is equally split between X and Y.
b. Yes, X holds 50% of the voting power and has the casting vote at board meetings in the event there is
no majority decision.
c. No, X owns only 50% of the entity’s shares and therefore does not have control.
d. No, control can be exercised only through voting power, not through a casting vote.
14. Penn Corp., a manufacturing company, owns 75% of the common stock of Sell Inc., an investment
company. Sell owns 60% of the common stock of Vane Inc., an insurance company. In Penn’s consolidated
financial statements, should consolidation accounting or equity method accounting be used for Sell and
Vane?
a. Consolidation used for Sell and equity method for Vane.
b. Consolidation used for both Sell and Vane.
c. Equity method used for Sell and consolidation for Vane
d. Equity method used for both Sell and Vane.
15. A subsidiary, acquired for cash in business combination, owned inventories with a market value greater
than the book value as of the date of combination. A consolidated balance sheet prepared immediately
after the acquisition would include this difference as part of
a. Deferred credits
b. Goodwill
c. Inventories
d. Retained earnings
16. When a parent-subsidiary relationship exists, consolidated financial statements are prepared in
recognition of the accounting concept of
a. Reliability
b. Materiality
c. Legal entity
d. Economic entity
17. A subsidiary was acquired for cash in a business combination. The purchase price exceeded the fair value
of identifiable net assets. The acquired company owned equipment with a market value in excess of the
carrying amount as of the date of combination. A consolidated balance sheet prepared would
a. Report the unamortized portion of the excess of the market value over the carrying amount of the
equipment as part of goodwill.
b. Report the unamortized portion of the excess of the market value over the carrying amount of the
equipment as part of plant and equipment.
c. Report the excess of the market value over the carrying amount of the equipment as part of plant and
equipment.
d. Not report the excess of the market value over the carrying amount of the equipment because it
would be expensed as incurred.
18. When push-down accounting has been implemented
a. Subsidiary records have been adjusted to reflect the market value increases resulting from the
purchase by a parent company.
b. The minority interest in the subsidiary is shown on its own line in the equity section of the subsidiary
only balance sheet.
c. Any debt incurred by the parent in acquiring the subsidiary is recorded at its market value by the
subsidiary.
d. The issuer and the combiner’s equity sections are merged.
19. The XYZ Corporation, on June 30, 2005 has assets with fair values as follows: current assets, P90,000; and,
non-current assets, P110,000. It had liabilities with fair value of P20,000, and it has no investments in
marketable securities.
On July 1, 20X5, GHI Corporation purchased the net assets of XYZ Corporation for P160,000 cash.
How should the P20,000 difference between the fair value of the net assets acquired and the acquisition
cost be accounted for by XYZ Corporation?
a. Deducted from non-current assets
b. Credited to retained earnings
c. Ratable deducted from current and non-current assets
d. Negative goodwill

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20. On December 31, 2XX4, Saxe Corp. was merged into Poe Corp. In the business combination, Poe issued
200,000 shares of its P10 par common stock, with a market price of P18 per share, for all of Saxe’s
common stock. The stockholders’ equity section of each company’s balance sheet immediately before the
combination was:
_____Poe_____ _____Saxe____
Common stock 3,000,000 1,500,000
Additional paid in capital 1,300,000 150,000
Retained earnings __ 2,500,000___ __ 850,000___
__ 6,800,000___ __ 2,500,000__

Assume that the merger qualifies for treatment as a purchase. In the December 31, 2XX4, consolidated
balance sheet, additional paid in capital should be reported at
a. 950,000
b. 1,300,000
c. 1,450,000
d. 2,900,000
21. The following summarized balance sheets were prepared for Alan Co. and Ritz Co. on December 31, 20X4
prior to their combinations:
Assets: __Alan Co.__ __Ritz Co.__
Current assets 60,000 3,600
Equipment (net) 10,000 3,400
Building (net) __ 50,000___ __ 5,000___
Total assets __ 120,000__ __ 12,000___

Liabilities and stockholders’ equity:

Current liabilities 11,200 1,600
Mortgage payable 30,000 5,000
Common stock, P10 par value 10,000 1,000
Additional paid in capital 36,000 2,400
Retained earnings __ 32,000__ __ 2,000__
Total liabilities & stockholders’ equity __120,000__ __12,000__
The fair market value of the building of Ritz Co. was P10,000.
Assuming that Alan Co. pays P15,000 cash in order to acquire 100% of the common stock of Ritz Co., what
will be the amount of goodwill that would be shown on the consolidated balance sheet?
a. 4,600
b. 9,600
c. 5,000
d. Answer not given
22. On November 30, 20X1, Parlor Inc. purchased for cash at P15 per share all 250,000 shares of outstanding
common stock of Shaw Co. At November 30, 20X1, Shaw’s balance sheet showed a carrying amount of
net assets of P3,000,000. At that date, the fair value of Shaw’s property, plant and equipment exceeded
its carrying amount by P400,000. In its November 30, 20X1, consolidated balance sheet, what amount
should Parlor report as goodwill?
a. 750,000
b. 400,000
c. 350,000
d. 0
23. Rex acquired the net assets of Zeuset Corp. on July 1, 20x1. In exchange for net assets at fair value of Zeuset
Co. amounting to ₱835,740, Rex issued 81,600 shares at Zeuset price of ₱12 per share (₱9 par value)
Out of pocket costs of the combination were as follows:
Legal fees for the contract of business combination ₱10,000
Audit fee for SEC registration of share issue ₱13,000
Cost if shares of stock certificates ₱7,000
Broker’s fee ₱8,000
Other direct cost of acquisition ₱22,000
Listing fee of shares ₱5,000
General and allocated expenses ₱20,000
Rex will pay an additional cash consideration of ₱546,000 in the event that Zeuset’s net income will be equal or
greater than ₱1,140,000 for the period ended December 31, 20x1. At acquisition, there is a high probability of
reaching the target net income and the fair value of the additional consideration was determined to be

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₱234,000. Actual net income for the period ended December 31, 20x1 amounted to ₱1,500,000. The additional
consideration was paid on December 31, 20x1. What is the amount of goodwill to be recognized in the
statement of financial position as of December 31, 20x1?
A. 689,460
B. 377,460
C. 257,040
D. 435,640
24. Pract2 Corporation acquires all of Sisiw Company at an acquisition cost of ₱90,000,000 in cash. Assets and
liabilities of the acquired company are as follows:
Book Value Fair Value
Current assets 500,000 700,000
Land, buildings and equipment (net) 6,000,000 8,000,000
Brand names 0 2,000,000
Technically skilled workforce 0 15,000,000
Potentially profitable future contracts 0 10,000,000
Liabilities 2,000,000 1,750,000
Pract 2 records goodwill of
A. 71,050,000
B. 66,050,000
C. 56,050,000
D. 81,050,000
25. On January 1, 20X1, SMV Corp. issued 200,000 additional shares of P10 par value common stock in
exchange for all of QM Corp.’s common stock. Immediately before this business combinations; SMV’s
stockholders equity was P8,000,000 and QM’s stockholders equity was P4,000,000. On January 1, 20X1,
fair market value of SMV’s common stocks was P20 per share, and fair market value of QM’s net assets
was P4,000,000. SMV’s net income for the year ended December 31, 20X1, exclusive of any consideration
of QM, was P1,250,000. QM’s net income for the year ended December 31, 20X1, was P300,000. During
2014, SMV paid dividends of P450,000. SMV had no business transactions with QM in 20X1. Assuming
that acquisition method was used in this business combination, how much is the consolidated
stockholders’ equity at December 31, 20X1?
a. 8,800,000
b. 9,100,000
c. 13,100,000
d. 13,550,000

On January 1 20X1, Polk Corp. and Strass Corp. had condensed balance sheets as follows:
___Polk___ __Strass__
Current assets 70,000 20,000
Noncurrent assets __ 90,000__ __ 40,000__
Total assets __160,000__ __ 60,000__

Current liabilities 30,000 10,000

Long-term debt 50,000 --
Stockholders’ equity __ 80,000__ __ 50,000__
Total liabilities & stockholders’ equity __160,000__ __ 60,000__
On January 2, 20X1, Polk borrowed P60,000 and used the proceeds to purchase 90% of the outstanding
common shares of Strass. This debt is payable in 10 equal annual principal payments, plus interest,
beginning December 30, 20X1. The excess of cost of the investment over Strass’ book value of acquired
net assets should be allocated 60% to inventory and 40% to goodwill. Non-controlling interest is valued at
P5,000.
On Polk’s January 2, 20X1, consolidated balance sheet,
26. Current assets should be
a. 99,000
b. 96,000
c. 90,000
d. 79,000
27. Noncurrent assets should be
a. 130,000
b. 134,000
c. 136,000
d. 140,000
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28. Current liabilities should be
a. 50,000
b. 46,000
c. 40,000
d. 30,000
29. Noncurrent liabilities should be
a. 115,000
b. 109,000
c. 104,000
d. 55,000
30. Stockholders’ equity should be
a. 80,000
b. 85,000
c. 90,000
d. 130,000

On January 2, 20X1, Pare Co. purchased 75% of Kidd Co.’s outstanding common stock. Selected balance sheet data
at December 31, 20X1 is as follows:
____Pare____ ____Kidd____
Total assets 420,000 180,000

Liabilities 120,000 60,000

Common stock 100,000 50,000
Retained earnings __ 200,000___ ___ 70,000___
__420,000___ _ 180,000___

During 20X1, Pare and Kidd paid cash dividends of P25,000 and 5,000, respectively, to their stockholders. There
were no other intercompany transactions.
31. In its December 31, 20X1 consolidated statement of retained earnings, what amount should Pare report
as dividend paid?
a. 5,000
b. 25,000
c. 26,250
d. 30,000
32. In Pare’s December 31, 20X1 consolidated balance sheet, what amount should be reported as NCI in net
assets?
a. 0
b. 30,000
c. 45,000
d. 105,000
33. In its December 31, 20X1 consolidated balance sheet, what amount should Pare report as common stock?
a. 50,000
b. 100,000
c. 137,500
d. 150,000
34. The Chevy co. owns 75% of the Holden Co. The following figures are from their separate financial
statements:
• Chevy Co. Trade receivables P1,040,000, including P30,000 due from Holden.
• Holden Co. Trade receivables P215,000, including P40,000 due from Chevy.
According to PAS 27, Consolidated and Separate Financial Statements, what figure should appear for
trade receivables in Chevy’s consolidated statement of financial position?
a. 1,215,000
b. 1,225,000
c. 1,255,000
d. 1,185,000
35. Pong Co. owns 70% of Simm Co.’s outstanding common stock. Pong’s liabilities total P450,000, and
Simm’s liabilities total P200,000. Included in Simm’s financial statements is a P100,000 note payable to
Pong. What amount of total liabilities should be reported in the consolidated financial statements?
a. 520,000 c. 590,000
b. 550,000 d. 650,000
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36. Roses Co. acquired a 70% interest in Camia Co. in 20X3. For the year ended December 31, 20X4 and 20X5,
Camia reported an income of P160,000 and P180,000, respectively. During 20X4, Camia sold
merchandises to Roses for P20,000 at a profit of P4,000. The merchandises was later resold by Roses to
outsiders for P30,000 during 20X5.
For consolidated purposes, what is the minority interest’s share of Camia’s net income for 20X4 and 20X5,
respectively?
__20X4__ __20X5__
a. 46,800 55,200
b. 48,000 54,000
c. 49,200 52,800
d. 53,200 50,000
37. Port, Inc. owns 100% of Salem, Inc. On January 1, 20X4, Port sold Salem delivery equipment at a gain. Port
had owned the equipment for 2 years and used a 5-year straight line depreciation rate with no residual
value. Salem is using a 3-year straight line depreciation rate with no residual value for the equipment. In
the consolidated income statement, Salem’s recorded depreciation expense on the equipment for 20X4
will be decreased by
a. 20% of the gain on sale.
b. 33 1/3% of the gain on sale.
c. 50% of the gain on sale.
d. 100% of the gain on sale.
38. The Rodman Co. acquired equipment on January 1, 2X10 at a cost of P800,000, depreciating it over 8
years with a nil salvage value.
On January 1, 2X13, the Mel Co. acquired 100% of Rodman and estimated the fair value of the equipment
at P460,000, with a remaining life of 5 years. This fair value was not incorporated into Rodman’s books
and the depreciation expense continued to be calculated by reference to original cost. Under PAS 27,
Consolidated and Separate Financial Statements, what adjustment should be made to the depreciation
expense for the year and the statement of financial position carrying amount in preparing the
consolidated financial statements for the year ended December 31, 2X14
__Depreciation Expense__ ___Carrying Amount___
a. Increase by P8,000 Increase by P24,000
b. Increase by P8,000 Decrease by P24,000
c. Decrease by P8,000 Increase by P24,000
d. Decrease by P8,000 Decrease by P24,000
39. The Snipe Co. owns 65% of the Genesis Co. On the last day of the accounting year Genesis sold to Snipe a
non-current asset for P200,000. The asset originally cost P500,000 and at the end of the reporting period
its carrying amount in Genesis’ books was P160,000. The group’s consolidated financial statement of
financial position has been drafted without any adjustments in relation to this non-current asset.
Under PAS 27, Consolidated and Separate Financial Statements, what adjustment should be made to the
consolidated statement of financial position figures for non-current assets and retained earnings?
___Non-current assets___ ___Retained Earnings___
a. Increase by P300,000 Increase by P195,000
b. Reduce by P40,000 Reduce by P26,000
c. Reduce by P40,000 Reduce by P40,000
d. Increase by P300,000 Increase by P300,000

Scroll, Inc., a wholly-owned subsidiary of Pirn, Inc. began operations on January 1, 20X4. The following
information is from the condensed 20X4 income statements of Pirn and Scroll:
_____Pirn_____ _____Scroll_____
Sales to Scroll P100,000
Sales to others __P 400,000___ __P 300,000___ _
500,000 300,000
Cost of goods sold:
Acquired from Pirn 80,000
Acquired from others ___ 350,000 _ _ ___ 190,000 ___
Gross profit 150,000 30,000

Depreciation 40,000 10,000

Other expenses __ __60,000 _ _ __ __15,000 __ _
Income from operations 50,000 5,000
Gain on sale of equipment to Scroll _ __ 12,000 _ _ ______________

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Module 2: Business Combination & Consolidation LVC
Income before income taxes __P 62,000__ _ __P 5,000 __
Additional information:
• Sales by Pirn to Scroll are made on the terms as those made to third parties.
• Equipment purchased by Scroll from Pirn for P36,000 on January 1, 20X4 is depreciated using the
straight line method over 4 years.
40. In Pirn’s December 31, 2014 consolidating worksheet, how much intercompany profit should be
eliminated from Scroll’s inventory?
a. 30,000 c. 10,000
b. 20,000 d. 6,000
41. What amount should be reported as depreciation expense in Pirn’s 20X4 consolidated income statement?
a. 50,000
b. 47,000
c. 44,000
d. 41,000
42. Parker Co. owns 80% of Smith, Inc.’s common stock. During 20X4, Parker sold Smith P250,000 of inventory
on the same terms as sales made to third parties. Smith sold all of the inventory purchased from Parker in
20X4. The following information pertains to Smith Parker’s sales for 20X4:
____Parker____ ____Smith____
Sales 1,000,000 700,000
Cost of sales ___ 400,000 _ _ ___ 350,000 __
____600,000 _ _ ___ 350,000 _ _

What amount should Parker report as cost of sales in its 20X4 consolidated income statement?
a. 750,000
b. 680,000
c. 500,000
d. 430,000

On January 01, Year 1, Payat Co. acquired 90% of Slim Co. in exchange of 4,000 of its own P10 par ordinary
shares with market value of P20 per share, and P40,600 cash. Additional costs on stock acquisition incurred
and paid by Payat Co. include: P5,000 due diligence audit fees and P2,000 SEC stocks registration. The
acquisition was accounted by Payat Co. using partial goodwill approach. The condensed balance sheets of
Payat Co. and Slim Co. prior to acquisition follows:
Payat Co. Slim Co.
Assets:
Cash P 50,900 P 37,400
Accounts receivable, net 14,200 9,100
Inventories 22,900 16,100
Equipment, net 179,000 40,000
Patents - 10,000
Total assets P 267,000 P 112,600

Liabilities & Shareholders’ Equity

Accounts payable P 4,000 P 6,600
Bonds payable 100,000 -
Ordinary shares 100,000 50,000
Share premium 15,000 15,000
Retained earnings 48,000 41,000
Total liabilities and shareholders’ equity P 267,000 P 112,600

At the date of acquisition, all assets and liabilities of Slim Co. have book values approximately equal to
their respective fair values except for the following as determined by appraisal:
Inventories P 17,100
Equipment, net (4 years remaining life 48,000
Patents (10 years remaining life) 13,000

43. The consolidated shareholders’ equity after acquisition of Slim Co.

a. 252,800 c. 236,000
b. 254,800 d. 247,800
44. Refer to the preceding problem. The consolidated current assets after acquisition of Slim Co.
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a. 104,000 c. 151,600
b. 111,000 d. 118,400
45. Pito, Inc. acquired 60% interest in Seven, Inc. on January 1, Year 1. The acquisition was accounted by Pito,
Inc. using full goodwill approach and cost method. On the same date, Seven, Inc. had the following account
balances:
Book Value Fair Value
Current assets P 150,000 P 150,000
Land 200,000 200,000
Building (net) with 6-year life 300,000 360,000
Equipment (net) with 4-year life 300,000 280,000
Patent with 10-year life -0- 100,000
Liabilities 400,000 400,000
Ordinary shares 480,000
Retained earnings 70,000
The companies separate statement of financial position as of December 31, Year 1 follows:
Pito, Inc. Seven, Inc.
Assets
Current assets P 330,000 P 70,000
Land 220,000 200,000
Building (net) 700,000 200,000
Equipment (net) 400,000 300,000
Investment in Seven 414,000 -
Total P 2,064,000 P 770,000

Liabilities and Shareholders’ equity

Liabilities P 500,000 P 200,000
Ordinary shares 724,000 480,000
Retained earnings 840,000 90,000
Total P 2,064,000 P 770,000

The result of operations and dividends declaration for Year 1 follows:

Pito, Inc. Seven, Inc.
Net income P 232,000 P 90,000
Dividends declared 92,000 70,000

The total consolidated net income for the year ended December 31, Year 1
a. 307,000 c. 297,000
b. 255,000 d. 265,000
46. Refer to the preceding problem. The non-controlling interest as of December 31, Year 1
a. 278,000 c. 274,000
b. 276,000 d. 306,000
47. Refer to the preceding problem. The consolidated retained earnings as of December 31, Year 1
a. 873,000 c. 843,000
b. 983,000 d. 1,013,000

“Happiness is not something you postpone for the future; it is something you design for the present.” Jim Rohn

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