Practice Problems

Note:

Answers were provided in the following (10) practice problems. I intentionally did not provide any solutions
because I want you to analyze each problem carefully and find out the logic and concept behind in each situation.
Rest assured that I already checked the correctness of the details and information in each problem and also
verified all the answers.

The said problems will help you on how to be CAREFUL in analyzing the given and will also
help you to be CONCEPTUAL.

In case you have questions or clarifications, feel free to message me and I will immediately attend
to your concerns.

-Sir German

Problem 1. The following are the Statement of Financial Position of Rara and Sasa Company as of December 31,
2019.
Rara Sasa
Cash P 437,500 P 87,500
Receivables 306,250 65,625
Inventories 350,000 109,375
Land 328,125 437,500
Building (net) 1,400,000 437,500
Equipment (net) 1,093,750 1,050,000
Total Assets P 3,915,625 P 2,187,500

Accounts Payable P 809,375 P 262,500

Ordinary Shares 2,187,500 875,000
Share Premium 218,750 612,500
Retained Earnings 700,000 437,500
Total Liabilities and Equity P 3,915,625 P 2,187,500

Rara decided to acquire 29,750 outstanding shares of Sasa on January 1, 2020. Rara will issue 44,625 ordinary
shares with market value of P30 per share in exchange for the 29,750 outstanding shares of Sasa. Rara and
Sasa’s ordinary shares both have a par value of P25 per share. Non-controlling interest is measured at fair value.

The book values reflect fair values except for building of Rara, which has a net realizable value of P1,837,500 and
inventories and land of Sasa which have a net realizable value of P153,125 and P568,750, respectively. Rara
also paid costs of registering and issuing securities amounting to P52,500 and direct costs of combination
amounting to P109,375.

Which of the following statements is true on the date of acquisition?

A. The income from acquisition is P525,000
B. The consolidated shareholders’ equity after the combination is P4,729,375
C. The consolidated total assets after the combination is P6,116,250
D. The non-controlling interest in profit is P315,000
Problem 2. On December 31, 2019, the following figures were taken from the trial balances of Empty Company
and Lonely Company:
Empty Lonely
Cash P80,000 P20,000
Receivables 60,000 60,000
Inventory 100,000 70,000
Property and equipment – net 200,000 100,000
Goodwill --- 30,000
Current liabilities 20,000 10,000
Long-term liabilities 70,000 50,000
Ordinary shares 110,000 100,000
Share Premium 20,000 ---
Retained earnings 220,000 120,000

On December 31, 2019, Empty issues 10,000 shares of its P10 par value stock for all of the outstanding shares of
Lonely. Empty’s stock had a P25 per share fair market value. Empty also paid the following: P25,000 for broker’s
fee, P20,000 for pre-acquisition audit fee, P21,500 for legal fees, P18,000 for audit fee for SEC registration of
stock issue and P5,500 for printing of stock certificates . Lonely holds an equipment that is worth P40,000 more
than its current book value. The retained earnings of Lonely on January 1, 2019 amounted to P70,000.

Which of the following statements is false on the date of acquisition?

A. Consolidated share premium is P146,500
B. Consolidated Liabilities is P150,000
C. Consolidated Ordinary shares is P210,000
D. Consolidated Retained Earnings is P130,000

Problem 3. On January 1, 2019, P Corporation purchased 80% of S Company’s outstanding stock for P775,000.
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 2019: Income
from own operations of P Corporation, P187,500 ; Operating loss of S Company, P25,000 ; Dividends paid in
2019 by P Corporation, P93,750 ; by S Company, P18,750. On July 1, 2019, P Corporation sold an equipment to
S Company at a gain of P31,250. The machine is expected to have a remaining useful life of 10 years from the
date of sale. Also, on January 1, 2019, S Company sold a furniture to P Corporation at a loss of P9,375. 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.

How much is the consolidated net income attributable to parent shareholders’ equity and non-controlling interest
in net assets?
A. P143,812.50 ; P186,500 C. P143,812.50 ; P183,500
B. P143,437.50 ; P185,000 D. P143,437.50 ; P183,500

Problem 4. A Co. acquired 60% of the outstanding ordinary shares of B Co. on January 2, 2018. A Co. acquired
it at book value which is the same as its fair value at the date of acquisition. Statement of Comprehensive Income
of A Co. and B Co. for 2019 are as follows:
A B
Net Sales P 218,750 P87,500
Cost of Sales 131,250 52,500
Gross Profit P 87,500 P35,000
Operating expenses 26,250 13,125
Operating income P 61,250 P21,875
Dividend income 14,000
Net Income P 75,250 P21,875
 B Co. made sales to A Co. of P28,000 in 2018 and P42,000 in 2019. A Co. reported inventory on December 31,
2018 amounting to P17,500 of which 20% comes from B Co. and inventory on December 31, 2019 amounting to
P21,000 of which 30% comes from B Co. A Co. uses 30% mark up on cost and B Co. uses 25% mark up on cost
for their selling prices. A Co. and B Co. declared and paid dividends in 2019 amounting to P21,000 and P17,500
respectively. On January 1, 2019, B Co. has ordinary shares of P80,000; share premium of P30,000 and retained
earnings of P40,000.

How much is the consolidated net income attributable to parent shareholders’ equity and non-controlling interest
in net assets?
A. P74,039 ; P61,246 C. P77,539 ; P61,526
B. P77,539 ; P61,246 D. P74,039 ; P61,526

Problem 5. BMW, SARAO and KIA agreed to a business combination. Their condensed Statement of Financial
Position before combination show:
BMW SARAO KIA
Book Value Fair Value Book Value Fair Value
ASSETS P 7,000,000 P 875,000 P950,000 P9,625,000 P9,000,000
Liabilities 4,987,500 307,000 2,625,000
Ordinary shares, P100 par 2,625,000 437,500 1,750,000
Share premium 218,000 700,000
Retained earnings/(deficit) (612,500) (87,500) 4,550,000
LIABILITIES & SHE P 7,000,000 P 875,000 P 9,625,000

It was agreed that BMW will be the surviving entity and shall issue 4,180 shares to SARAO and 60,800 shares to
KIA. Market value of BMW’s share on the date of business combination is P102. Immediately after the business
combination:

The stockholders’ equity of BMW increased by:

A. P6,237,920
B. P9,030,500
C. P7,018,000
D. P6,627,960

Problem 6. On December 31, 2019, the Investment in Branch account on the home office’s books has a balance
of P437,000. In analyzing the activity in each of these accounts for December, you find the following differences:
a. A P39,000 branch remittance to the home office initiated on December 27, 2019, was recorded twice
by the home office in 2019.
b. A home office inventory shipment to the branch of P54,000 on December 29, 2019, was recorded by
the branch on December 31, 2019 at P45,000. The home office transfers merchandise to the branch
at cost.
c. The home office incurred P12,000 of advertising expenses and allocated 1/4 of this amount to the
branch on December 21, 2019. The branch inadvertently recorded half of the advertising expense
allocated by the home office during the year.
d. A home office customer remitted P7,000 to branch. The branch recorded this cash collection on
December 23, 2019. Meanwhile, back at the home office, no entry has been made yet.
e. Inventory costing P11,500 was returned by the branch to the home office on December 19, 2019.
The billing was at cost, but the home office recorded the transaction at P1,150.
Compute the unadjusted balance of the Home Office account as of December 31, 2019:
A. P483,150
B. P472,650
C. P426,150
D. P462,150
Problem 7. The home office in Mandaluyong shipped merchandise costing P21,690 to Caloocan branch and paid
for the freight charges of P4,980. Caloocan Branch was subsequently instructed to transfer the merchandise to
Manila Branch wherein Manila branch paid for P1,250 freight. If the shipment was made directly from
Mandaluyong to Manila, the freight cost would have been P5,500. As a result of the interbranch transfer of
merchandise, How much will the home office debit its Investment in Branch account?
A. P25,940 B. P26,670 C. P21,690 D. P22,940

Problem 8. On January 1, 2019, P Company purchased 28,000 shares of the 40,000 outstanding shares of S
Company at a price of P1,400,000, with an excess of P150,000 over the book value of S Company’s net assets.
P78,000 of the excess is attributed to an undervalued equipment with a remaining useful life of eight years from
the date of acquisition and the rest of the amount is attributed to goodwill. For the year 2019, P Company
reported a net income of P1,650,000 and paid dividends of P380,000. While S Company reported a net income of
P1,140,000 and paid dividends to P Company amounting to P56,000. Goodwill was impaired in the amount of
P15,000 in 2019. The retained earnings of P Company at the end of 2019 per books is P2,425,000. P Company
uses the cost method to account for its investment in S Company. Non-controlling interest is measured at fair
market value.
Non-controlling interest in net assets 2019.
A. P917,775 B. P966,000 C. P910,575 D. P915,075

Problem 9. On January 1, 2019, PJ Company purchased 80% of the outstanding shares of SC Company at a
cost of P720,000. On that date, SC had P400,000 of ordinary shares and P500,000 of retained earnings while PJ
Company had ordinary shares of P1,000,000 and retained earnings for P600,000. All the assets and liabilities of
SC Company have book values equal to their respective market values.
For 2019 PJ Company reported net income of P320,000 and paid dividends of P150,000. For 2019, SC Company
reported net income of P85,000 and paid dividends of P40,000.
On January 1, 2019, PJ Company sold equipment to SC Company for P75,000. The book value of the equipment
on that date was P100,000. The equipment is expected to have a useful life of five years from the date of sale.
Also during that year, SC Company sold merchandise to PJ company amounting to P80,000 which includes a
profit of P20,000. 70% of these merchandise were sold by PJ to outsiders in 2019.

Consolidated Retained Earnings attributable to Parent Company

A. P853,200 B. P837,000 C. P820,000 D. P821,200
Problem 10. On January 1, 2018, Entity A acquired 30,000 out of 100,000 outstanding ordinary shares of Entity B
for P90,000 or 30% interest. For the six months ended June 30, 2018, Entity B reported net income of P40,000.

On July 1, 2018, Entity A acquired additional 60,000 ordinary shares of Entity B or 60% interest at a price of P4
per share or total cost of P240,000. Entity A paid P20,000 acquisition related costs and P10,000 indirect costs of
business combination.

The acquisition price per share of the additional shares clearly reflected the fair value of the existing interest of
Entity A in Entity B. It is the policy of Entity A to initially measure the noncontrolling interest in net assets of the
acquiree at fair value. The fair value of the noncontrolling interest in net assets of the acquiree is reliably
measured at P50,000.

At the acquisition date, the net assets of Entity B were reported at P400,000. An asset of Entity B was overvalued
by P50,000 while one liability wass overvalued by P30,000.

What is the gain on remeasurement of the existing Investment in Entity B as a result of step acquisition?
A. 18,000
B. 30,000
C. 24,000
D. 12,000

What is the goodwill or gain on bargain purchase as a result of the business combination?
A. 18,000 goodwill
B. 20,000 gain on bargain purchase
C. 24,000 goodwill
D. 30,000 goodwill

-End of Materials-