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NAME: Date:
Professor: Section: Score:

ACCOUNTING FOR BUSINESS COMBINATIONS

SECOND GRADING EXAMINATION

1. On January 1, 20x1, ABC Co. acquired 75% interest in XYZ, Inc. for ₱2,500,000 cash. ABC Co.
incurred transaction costs of ₱250,000 for legal, accounting and consultancy fees in negotiating
the business combination. ABC Co. elected to measure NCI at the NCI’s proportionate share in
XYZ, Inc.’s identifiable net assets. The carrying amounts and fair values of XYZ’s assets and
liabilities at the acquisition date were as follows:

Assets Carrying amounts Fair values

Cash in bank 25,000 25,000
Accounts receivable 425,000 300,000
Inventory 1,300,000 875,000
Equipment – net 2,500,000 2,750,000
Goodwill 250,000 50,000
Total assets 4,500,000 4,000,000
Liabilities
Payables 1,000,000 1,000,000

How much is the goodwill (gain on a bargain purchase)?

a. 140,000 c. 278,500
b. 287,500 d. 264,500

Solution:
Fair value of identifiable assets acquired excluding
goodwill (4,000,000 total assets – 50,000 goodwill) 3,950,000
Less: Fair value of liabilities assumed (1,000,000)
Fair value of identifiable net assets acquired 2,950,000

Fair value of identifiable net assets acquired 2,950,000

Multiply by: Non-controlling interest (100% - 75%) 25%
NCI’s proportionate share in identifiable net assets 737,500

 Goodwill (Negative goodwill) is computed as follows:

Consideration transferred 2,500,000

NCI in the acquiree 737,500
Previously held equity interest in the acquiree -
Total 3,237,500
Less: Fair value of identifiable net assets acquired (2,950,000)
Goodwill 287,500
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The ₱250,000 transaction costs are expensed. Acquisition-related costs do not affect the
measurement of goodwill.

2. On January 1, 20x1, HISTRIONAL Co. acquired all of the identifiable assets and assumed all of
the liabilities of THEATRICAL, Inc. by paying cash of ₱4,000,000. On this date, the identifiable
assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000,
respectively.

As of January 1, 20x1, HISTRIONAL holds a building and a patent which are being rented out to
THEATRICAL, Inc. under operating leases. HISTRIONAL has determined that the terms of the
operating lease on the patent compared with market terms are unfavorable. The fair value of the
differential is estimated at ₱80,000. How much is the goodwill (gain on bargain purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000

B
Solution:
A liability shall be recognized because the terms of the operating lease where the acquiree is the lessee
is unfavorable.

The fair value of net identifiable assets acquired is computed as follows:

Fair value of identifiable assets acquired 6,400,000
Fair value of liabilities assumed, including liability on the (3,680,000)
operating lease with unfavorable terms (₱3.6M + ₱80K)
Fair value of net identifiable assets acquired 2,720,000

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred 4,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired (2,720,000)
Goodwill 1,280,000

Use the following information for the next three questions:

On January 1, 20x1, CONJUNCTION Co., and UNION, Inc. entered into a business combination
effected through exchange of equity instruments. The combination resulted to CONJUNCTION
obtaining 100% interest in UNION. Both of the combining entities are publicly listed. As of this date,
CONJUNCTION’s shares have a quoted price of ₱400 per share. CONJUNCTION Co. recognized
goodwill of ₱300,000 on the business combination. No acquisition-related costs were incurred.
Additional selected information at acquisition date is shown below:
CONJUNCTION Co. Combined entity
(before acquisition) (after acquisition)
Share capital 2,400,000 2,800,000
Share premium 1,200,000 4,800,000
Totals 3,600,000 7,600,000
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3. How many shares were issued by CONJUNCTION Co. in the business combination?
a. 40,000 b. 20,000 c. 12,000 d. 10,000

D
Solution:
COLLOQUY Co. Combined entity Increase
Share capital 2,400,000 2,800,000 400,000
Share premium 1,200,000 4,800,000 3,600,000
Totals 3,600,000 7,600,000 4,000,000

Fair value of shares transferred 4,000,000

Divide by: ABC’s fair value per share 400
Number of shares issued 10,000

4. What is the par value per share of the shares issued?

a. 10 b. 40 c. 12 d. 32

B
Solution:
400,00
Increase in share capital account (see table above)
0
10,00
Divide by: Number of shares issued
0
Par value per share 40

5. What is the acquisition-date fair value of the net identifiable assets of UNION?
a. 3,700,000 b. 3,200,000 c. 2,800,000 d. 2,400,000

A
Solution:
Consideration transferred (see previous computation) 4,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired (squeeze) (3,700,000)
Goodwill (given information) 300,000
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6. On January 1, 20x1, FORTITUDE Co. acquired 15% ownership interest in ENDURANCE, Inc. for
₱400,000. The investment was accounted for under PFRS 9. From 20x1 to the end of 20x3,
FORTITUDE recognized net fair value gains of ₱200,000.

On January 1, 20x4, FORTITUDE acquired additional 60% ownership interest in ENDURANCE, Inc.
for ₱3,200,000. As of this date, FORTITUDE has identified the following:
a. The previously held 15% interest has a fair value of ₱720,000.
b. ENDURANCE’s net identifiable assets have a fair value of ₱4,000,000.
c. FORTITUDE elected to measure non-controlling interests at the non-controlling interest’s
proportionate share of ENDURANCE’s identifiable net assets.

The previously held interest was initially classified as FVOCI. How much is the goodwill (gain on
bargain purchase)?
a. 200,000 b. 420,000 c. 920,000 d. 540,000

C
Solution:
Consideration transferred 3,200,000
Non-controlling interest in the acquiree (1M x 25%) 1,000,000
Previously held equity interest in the acquiree 720,000
Total 4,920,000
Fair value of net identifiable assets acquired (4,400,000)
Goodwill 920,000

7. On January 1, 1990, Poe Corp. sold a machine for ₱900,000 to Saxe Corp., its wholly-owned
subsidiary. Poe paid ₱1,100,000 for this machine, which had accumulated depreciation of
₱250,000. Poe estimated a ₱100,000 salvage value and depreciated the machine on the straight-
line method over 20 years, a policy which Saxe continued. In Poe's December 31, 1990,
consolidated balance sheet, this machine should be included in cost and accumulated
depreciation as:
Cost Accumulated depreciation
a. 1,100,000 300,000
b. 1,100,000 290,000
c. 900,000 40,000
d. 850,000 42,500

A
Solution:
The machine should be shown on the consolidated statements at Poe's cost of ₱1,100,000. Depreciation should
continue as if the sale had not occurred. Depreciation for the current year is ₱50,000 [(1,100,000 − 100,000) / 20].
Accumulated depreciation at 12/31/90 is ₱300,000 (250,000 + 50,000).

8. Zest Co. owns 100% of Cinn, Inc. On January 2, 1999, Zest sold equipment with an original cost
of ₱80,000 and a carrying amount of ₱48,000 to Cinn for ₱72,000. Zest had been depreciating the
equipment over a five-year period using straight-line depreciation with no residual value. Cinn
is using straight-line depreciation over three years with no residual value. In Zest's December 31,
1999, consolidating worksheet, by what amount should depreciation expense be decreased?
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a. ₱0
b. ₱8,000
c. ₱16,000
d. ₱24,000

B
Solution:
Depreciation after intercompany sale = (72,000 ÷ 3 yrs.) = 24,000
Depreciation as if the sale did not take place = (80,000 ÷ 5 yrs.) = 16,000
Excess depreciation = (24,000 – 16,000) = 8,000

Use the following information for the next six questions:

Owl Co. paid ₱150,000 for its 75% interest in Owlet Co. Owl elected to value NCI at fair value.
Owlet’s net identifiable assets approximated their fair values at acquisition date. The acquisition
resulted in a goodwill attributable to NCI of ₱10,000.

Since the acquisition date, Owlet has made accumulated profits of ₱200,000. There have been no
changes in Owlet’s share capital since acquisition date. The group determined that goodwill has
been impaired by ₱8,000.

A summary of the individual statements of financial positions of the entities as at the end of
reporting period is shown below:
  Owl Co. Owlet Co.
Total assets 1,000,000 500,000

Total liabilities 200,000 120,000

Share capital 300,000 100,000
Retained earnings 500,000 280,000
Total liabilities and equity 1,000,000 500,000

9. How much is the fair value assigned to NCI at date of acquisition?

a. 112,000
b. 98,000
c. 76,000
d. 55,000

D Solution:
Analysis of net assets
Acquisition Consolidation
Owlet Co. Net change
date date
Share capital 100,000 100,000
Retained earnings (280K – 200K) 80,000 280,000
Totals at carrying amounts 180,000 380,000  
Fair value adjustments at acquisition date - -
Subsequent depreciation of FVA NIL -
Unrealized profits (Upstream only) NIL -
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Subsidiary's net assets at fair value 180,000 380,000 200,000

The fair value of NCI at acquisition date is computed as follows:

(The solution below is based on a portion of Goodwill computation Formula #2.)

Fair value of NCI 55,000 (squeeze)

NCI's proportionate share in net assets of subsidiary (45,000)a
Goodwill attributable to NCI - acquisition date (given) 10,000 (start)

a
(₱180,000 see above x 25%) = ₱45,000

10. How much is the goodwill at the end of reporting period?

a. 17,000
b. 15,000
c. 13,000
d. 9,000

A Solution:

Consideration transferred (given) 150,000

Less: Previously held equity interest in the acquiree -
Total 150,000
Less: Parent's proportionate share in the net assets of subsidiary (₱180,000 acquisition-
date fair value x 75%) (135,000)
Goodwill attributable to owners of parent – acquisition date 15,000
Less: Parent’s share in goodwill impairment (₱8,000 x 75%) (6,000)
Goodwill attributable to owners of parent – current year 9,000

Fair value of NCI (see Requirement ‘a’) 55,000

Less: NCI's proportionate share in the net assets of subsidiary (₱180,000 acquisition-
date fair value x 25%) (45,000)
Goodwill attributable to NCI – acquisition date 10,000
Less: NCI’s share in goodwill impairment (₱8,000 x 25%) (2,000)
Goodwill attributable to NCI – current year 8,000

Goodwill, net – current year 17,000

11. How much is the NCI in net assets?

a. 95,000
b. 89,000
c. 103,000
d. 112,000

C Solution:

Owl's net assets at fair value – current year (see ‘Analysis’ above) 380,000
Multiply by: NCI percentage 25%
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Total 95,000
Add: Goodwill attributable to NCI – current yr. (see solution above) 8,000
Non-controlling interest in net assets – current year 103,000

12. How much is the consolidated retained earnings?

a. 644,000
b. 702,000
c. 556,000
d. 628,000

A Solution:

Owl's retained earnings – current year   500,000

Consolidation adjustments:
Owl's share in the net change in Owlet's net assets (a) 150,000
Owl’s share in goodwill impairment (6,000)
Net consolidation adjustments 144,000
Consolidated retained earnings – current year   644,000 
(a)
Net change in Owlet’s net assets (see ‘Analysis’) ₱200,000 x 75% = ₱150,000.

13. How much is the consolidated total assets?

a. 1,298,000
b. 1,367,000
c. 1,387,000
d. 1,402,000

B Solution:
Total assets of Owl 1,000,000
Total assets of Owlet 500,000
Investment in subsidiary (consideration transferred) (150,000)
Fair value adjustments - net -
Goodwill – net 17,000
Effect of intercompany transactions -
Consolidated total assets 1,367,000

14. How much is the consolidated total equity?

a. 872,000
b. 998,000
c. 1,036,000
d. 1,047,000

D Solution:
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Share capital of Owl 300,000

Share premium of Owl -
Consolidated retained earnings 644,000
Equity attributable to owners of the parent 944,000
Non-controlling interests 103,000
Consolidated total equity 1,047,000

Use the following information for the next six questions:

On June 30, 20x1, Cockroach Co. acquired 75,000 of Nymph Co.'s 100,000 outstanding shares with
par value per share of ₱1 for ₱4 per share. At this time, Nymph’s shares have a quoted price of ₱3.50
per share and Nymph’s retained earnings is ₱80,000.

Additional information:
 Nymph’s total assets include land classified as investment property at a cost of ₱180,000. The
land’s fair values are ₱200,000 on acquisition date and ₱320,000 on June 30, 20x3. Nymph uses
the cost model for its investment properties. However, the group uses the fair value model.
 On acquisition date, Nymph's building classified as property, plant, and equipment had a fair
value of ₱30,000 in excess of its carrying amount. The building's remaining useful life is 5 years.
The group uses the straight-line method of depreciation.
 The current accounts on June 30, 20x3 include intercompany receivables and payables of ₱10,000.
 An impairment test on June 30, 20x3 concluded that goodwill is impaired by ₱20,000.
 NCI is measured at fair value.
 There are no subsequent changes in Nymph’s outstanding shares.

The June 30, 20x3 individual financial statements of the entities show the following information:

  Cockroach Co. Nymph Co.

Total assets 1,000,000 500,000
Total liabilities 200,000 120,000
Share capital 300,000 100,000
Retained earnings 500,000 280,000
Total liabilities and equity 1,000,000 500,000

15. How much is the goodwill in the June 30, 20x3 consolidated financial statements?
a. 153,700
b. 169,300
c. 145,500
d. 137,500

D Solution:

Analysis of net assets

Nymph Co. Acquisition date Consolidation date Net change
Share capital (100,000 sh. x ₱1) 100,000 100,000
Retained earnings 80,000 280,000
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Totals at carrying amounts 180,000 380,000

a
FVA on investment property 20,000 140,000
FVA on building 30,000 30,000
Subsequent depreciation of FVA b NIL (12,000)
Subsidiary's net assets at fair value 230,000 538,000 308,000

a
FVA on acquisition date (₱200,000 - ₱180,000 = ₱20,000); FVA on June 30, 20x3 (₱320,000 - ₱180,000 = ₱140,000). These
FVA’s are not subsequently depreciated because depreciation is prohibited under the fair value model.

b
The depreciation of FVA pertains only to the building (see discussion above) (₱30,000 x 2/5 = ₱12,000).

Consideration transferred (75,000 sh. x ₱4) 300,000

Less: Previously held equity interest in the acquiree -
Total 300,000
Less: Parent's proportionate share in the net assets of subsidiary (₱230,000 acquisition-
date fair value x 75%) (172,500)
Goodwill attributable to owners of parent – acquisition date 127,500
Less: Parent’s share in goodwill impairment (₱20,000 x 75%) (15,000)
Goodwill attributable to owners of parent – current year 112,500

Fair value of NCI (25,000 sh. x ₱3.50) 87,500

Less: NCI's proportionate share in the net assets of subsidiary (₱230,000 acquisition-
date fair value x 25%) (57,500)
Goodwill attributable to NCI – acquisition date 30,000
Less: NCI’s share in goodwill impairment (₱20,000 x 25%) (5,000)
Goodwill attributable to NCI – current year 25,000

Goodwill, net – current year 137,500

16. How much is the NCI in net assets?

a. 159,500
b. 163,500
c. 149,500
d. 195,500

A Solution:
Nymph's net assets at fair value – 6/30/x3 (see ‘Analysis’ above) 538,000
Multiply by: NCI percentage 25%
Total 134,000
Add: Goodwill attributable to NCI – 6/30/x3 (see Requirement ‘a’) 25,000
Non-controlling interest in net assets – June 30, 20x3 159,500

17. How much is the consolidated retained earnings?

a. 668,000
b. 702,000
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c. 716,000
d. 772,000

C Solution:

Cockroach's retained earnings – 6/30/x3   500,000

Consolidation adjustments:
Share in the net change in Nymph's net assets (a) 231,000
Cockroach's share in goodwill impairment (15,000)
Net consolidation adjustments 216,000
Consolidated retained earnings – June 30, 20x3   716,000 
(a)
Net change in Nymph’s net assets (see ‘Analysis’) ₱308,000 x 75% = ₱231,000.

18. How much is the consolidated total assets?

a. 1,485,500
b. 1,498,800
c. 1,514,500
d. 1,569,500

A Solution:

Total assets of Cockroach 1,000,000

Total assets of Nymph 500,000
Investment in subsidiary (300,000)
Fair value adjustments – net (140K + 30K – 12K) see ‘Analysis’ 158,000
Goodwill – net 137,500
Effect of intercompany transactions (Intercompany receivable) (10,000)
Consolidated total assets 1,485,500

19. How much is the consolidated total liabilities?

a. 290,000
b. 310,000
c. 326,000
d. 348,000

B Solution:

Total liabilities of Cockroach 200,000

Total liabilities of Nymph 120,000
Fair value adjustments - net -
Effect of intercompany transactions (Intercompany payable) (10,000)
Consolidated total liabilities 310,000

20. How much is the consolidated equity?

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a. 1,175,500
b. 1,289,500
c. 1,198,500
d. 1,167,500

A Solution:

Share capital of Cockroach 300,000

Share premium of Cockroach -
Consolidated retained earnings 716,000
Equity attributable to owners of the parent 1,016,000
Non-controlling interests 159,500
Consolidated total equity 1,175,500

Use the following information for the next six questions:

On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares with fair
value of ₱60 per share and par value of ₱40 per share.

XYZ’s shareholders’ equity as of January 1, 20x1 comprises the following:

  (at carrying amounts)
Share capital 200,000
Retained earnings 96,000
Total equity 296,000

On January 1, 20x1, the fair values of the assets and liabilities of XYZ, Inc. were determined by
appraisal, as follows:
XYZ, Inc. Carrying amounts Fair values Fair value increment
Cash 20,000 20,000 -
Accounts receivable 48,000 48,000 -
Inventory 92,000 124,000 32,000
Equipment 200,000 240,000 40,000
Accumulated depreciation (40,000) (48,000) (8,000)
Accounts payable (24,000) (24,000) -
Net assets 296,000 360,000 64,000

The remaining useful life of the equipment is 4 years.

During 20x1, no dividends were declared by either ABC or XYZ. There were also no inter-company
transactions.

The group determined that goodwill is impaired by ₱4,000.

ABC’s and XYZ’s individual financial statements at year-end are shown below:

Statements of financial position

As at December 31, 20x1
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ABC Co. XYZ, Inc.

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ASSETS
Cash 92,000 228,000
Accounts receivable 300,000 88,000
Inventory 420,000 60,000
Investment in subsidiary 300,000 -
Equipment 800,000 200,000
Accumulated depreciation (240,000) (80,000)
TOTAL ASSETS 1,672,000 496,000

LIABILITIES AND EQUITY

Accounts payable 172,000 120,000
Bonds payable 120,000 -
Total liabilities 292,000 120,000
Share capital 680,000 200,000
Share premium 260,000 -
Retained earnings 440,000 176,000
Total equity 1,380,000 376,000
TOTAL LIABILITIES AND EQUITY 1,672,000 496,000
Statements of profit or loss
For the year ended December 31, 20x1

ABC Co. XYZ, Inc.

Sales 1,200,000 480,000
(660,000
(288,000)
Cost of goods sold )
Gross profit 540,000 192,000
(160,000
(40,000)
Depreciation expense )
(128,000
(72,000)
Distribution costs )
(12,000
-
Interest expense )
Profit for the year 240,000 80,000

Case #1: On acquisition date, ABC Co. elected to measure non-controlling interest as its
proportionate share in XYZ, Inc.’s net identifiable assets.

21. How much is the consolidated profit for 20x1?

a. 296,000 b. 280,000 c. 208,000 d. 276,000

D Solution:
Solutions:
Step 1: Analysis of effects of intercompany transaction
There are no intercompany transactions in the problem.

Step 2: Analysis of net assets

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Acquisition Consolidation
XYZ, Inc. date date
Net change
Total equity at carrying amounts 296,000 376,000  
Fair value adjustments at acquisition date 64,000 64,000
Subsequent depreciation of FVA NIL (40,000)*
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 360,000 400,000 40,000
* ₱32,000 dep’n. of FVA on inventory + ₱8,000 [(₱40,000 - ₱8,000) ÷ 4 yrs.] dep’n. of FVA on equipment = ₱40,000

Step 3: Goodwill computation

Case #1: Formula #1 - NCI measured at proportionate share
Consideration transferred (5,000 sh. x ₱60) 300,000
Non-controlling interest in the acquiree (360K x20%) -(Step 2) 72,000
Previously held equity interest in the acquiree -
Total 372,000
Fair value of net identifiable assets acquired (Step 2) (360,000)
Goodwill at acquisition date 12,000
Accumulated impairment losses since acquisition date (4,000)
Goodwill, net – Dec. 31, 20x1 8,000

Step 4: Non-controlling interest in net assets

Case #1
XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2) 400,000
Multiply by: NCI percentage 20%
Total 80,000
Add: Goodwill attributable to NCI – Dec. 31, 20x1 (Step 3) -
Non-controlling interest in net assets – Dec. 31, 20x1 80,000

Step 5: Consolidated retained earnings

Case #1
ABC's retained earnings – Dec. 31, 20x1 440,000
Consolidation adjustments:
ABC's share in the net change in XYZ's net assets (a) 32,000
Unrealized profits (Downstream only) -
Gain on extinguishment of bonds -
Impairment loss on goodwill attributable to
parent (Step 3)) (4,000)
Net consolidation adjustments 28,000
Consolidated retained earnings – Dec. 31, 20x1 468,000
(a)
Net change in XYZ’s net assets (Step 2) of ₱40,000 x 80% = ₱32,000.

Step 6: Consolidated profit or loss

Case #1 Parent Subsidiary Consolidated
Profits before adjustments 240,000 80,000 320,000
Consolidation adjustments:
Unrealized profits - - -
Dividend income from subsidiary - N/A -
Gain or loss on extinguishment
- - -
of bonds
Net consolidation adjustments - - -
Profits before FVA 240,000 80,000 320,000
Depreciation of FVA (c) (32,000) (8,000) (40,000)
Goodwill impairment (Step 3) (4,000) - (4,000)
Consolidated profit 204,000 72,000 276,000
(c)
Shares in the depreciation of FVA: (40,000 x 80%); (40,000 x 20%)
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Step 7: Profit or loss attributable to owners of parent and NCI

Owners Consoli-
Case #1
of parent NCI dated
ABC's profit before FVA (Step 6) 240,000 N/A 240,000
Share in XYZ’s profit before FVA (d) 64,000 16,000 80,000
(8,000
(32,000) (40,000)
Depreciation of FVA (Step 6) )
Share in goodwill impairment (Step 3) (4,000) - (4,000)
Totals 268,000 8,000 276,000
(d)
Shares in XYZ’s profit before FVA (Step 6) – (80,000 x 80%); (80,000 x 20%)

22. How much is the consolidated total assets as of December 31, 20x1?
a. 1,900,000 b. 1,907,000 c. 1,903,000 d. 1,904,000

A
Solution:
Case #1
  (proportionate)
Total assets of ABC Co. 1,672,000
Total assets of XYZ, Inc. 496,000
Investment in subsidiary (300,000)
FVA, net (16K - 10K) (Step 2) 24,000
Goodwill, net (Step 3) 8,000
Effect of intercompany transaction -
Consolidated total assets 1,900,000

23. How much is the consolidated total equity as of December 31, 20x1?
a. 1,492,000 b. 1,415,000 c. 1,488,000 d. 1,491,000

C
Solution:
Case #1
  (proportionate)
Share capital of ABC Co. 680,000
Share premium of ABC Co. 260,000
Consolidated retained earnings (Step 5) 468,000
Equity attributable to owners of the parent 1,408,000
Non-controlling interests (Step 4) 80,000
Consolidated total equity 1,488,000

Case #2:
On acquisition date, ABC Co. elected to measure non-controlling interest at fair value. A value of
₱75,000 is assigned to the non-controlling interest.

24. How much is the consolidated profit for 20x1?

a. 296,000 b. 280,000 c. 278,000 d. 276,000
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D
Solution:
Step 1: Analysis of effects of intercompany transaction
There are no intercompany transactions in the problem.

Step 2: Analysis of net assets

Acquisition Consolidation
XYZ, Inc. date date
Net change
Total equity at carrying amounts 296,000 376,000  
Fair value adjustments at acquisition date 64,000 64,000
Subsequent depreciation of FVA NIL (40,000)*
Unrealized profits (Upstream only) NIL -
Subsidiary's net assets at fair value 360,000 400,000 40,000
* ₱32,000 dep’n. of FVA on inventory + ₱8,000 [(₱40,000 - ₱8,000) ÷ 4 yrs.] dep’n. of FVA on equipment = ₱40,000

Step 3: Goodwill computation

Case #2: Formula #2 - NCI measured at fair value
Consideration transferred (5,000 sh. x ₱60) 300,000
Less: Previously held equity interest in the acquiree -
Total 300,000
Less: Parent's proportionate share in the net assets of subsidiary (₱90,000 acquisition-
date fair value x 80%) (288,000)
Goodwill attributable to owners of parent – Jan. 1, 20x1 12,000
Less: Parent’s share in goodwill impairment (₱4,000 x 80%) (3,200)
Goodwill attributable to owners of parent – Dec. 31, 20x1 8,800
Fair value of NCI (see given) 75,000
Less: NCI's proportionate share in the net assets of subsidiary (₱360,000 acquisition-
(72,000)
date fair value x 20%)
Goodwill attributable to NCI – Jan. 1, 20x1 3,000
Less: NCI’s share in goodwill impairment (₱4,000 x 20%) (800)
Goodwill attributable to NCI – Dec. 31, 20x1 2,200
-
Goodwill, net – Dec. 31, 20x1 11,000

Step 4: Non-controlling interest in net assets

Case #2
XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2) 400,000
Multiply by: NCI percentage 20%
Total 80,000
Add: Goodwill attributable to NCI – Dec. 31, 20x1 (Step 3) 2,200
Non-controlling interest in net assets – Dec. 31, 20x1 82,200

Step 5: Consolidated retained earnings

Case #2
ABC's retained earnings – Dec. 31, 20x1 440,000
Consolidation adjustments:
ABC's share in the net change in XYZ's net assets (a) 32,000
Unrealized profits (Downstream only) -
Gain on extinguishment of bonds -
Impairment loss on goodwill attributable to
parent (Step 3) (b) (3,200)
Net consolidation adjustments 28,800
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Consolidated retained earnings – Dec. 31, 20x1 468,800

(a)
Net change in XYZ’s net assets (Step 2) of ₱40,000 x 80% = ₱32,000.
(b)
Again, goodwill impairment is attributed only to the parent if NCI is measured at proportionate share (Case #1) while it is
shared between the parent and NCI if NCI is measured at fair value (Case #2).

Step 6: Consolidated profit or loss

Case #2 Parent Subsidiary Consolidated
Profits before adjustments 240,000 80,000 320,000
Consolidation adjustments:
Unrealized profits - - -
Dividend income from subsidiary - N/A -
Gain or loss on extinguishment
- - -
of bonds
Net consolidation adjustments - - -
Profits before FVA 240,000 80,000 320,000
Depreciation of FVA (32,000) (8,000) (40,000)
Goodwill impairment (Step 3) (3,200) (800) (4,000)
Consolidated profit 204,800 71,200 276,000

25. How much is the consolidated total assets as of December 31, 20x1?
a. 1,900,000 b. 1,907,000 c. 1,903,000 d. 1,904,000

C
Solution:
Case #2 (fair
  value)
Total assets of ABC Co. 1,672,000
Total assets of XYZ, Inc. 496,000
Investment in subsidiary (300,000)
FVA, net (16K - 10K) (Step 2) 24,000
Goodwill, net (Step 3) 11,000
Effect of intercompany transaction -
Consolidated total assets 1,903,000

26. How much is the consolidated total equity as of December 31, 20x1?
a. 1,492,000 b. 1,415,000 c. 1,488,000 d. 1,491,000

D
Solution:
Case #2 (fair
  value)
Share capital of ABC Co. 680,000
Share premium of ABC Co. 260,000
Consolidated retained earnings (Step 5) 468,800
Equity attributable to owners of the parent 1,408,800
Non-controlling interests (Step 4) 82,200
 P a g e | 18

Consolidated total equity 1,491,000

Use the following information for the next two questions:

On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares with fair
value of ₱60 per share and par value of ₱40 per share. XYZ’s net identifiable assets have a fair value
of ₱360,000. Goodwill has been computed under each of the available options under PFRS 3 as
follows:
Case #1 Case #2 (fair
    (proportionate) value)
(1
Consideration transferred 300,000 300,000
)
(2
Non-controlling interest in the acquiree 72,000 75,000
)
(3 Previously held equity interest in the
- -
) acquire
  Total 372,000 375,000
Fair value of net identifiable assets acquired (360,000) (360,000)
  Goodwill 12,000 15,000

As of December 31, 20x1, XYZ, Inc. increased its net assets (after fair value adjustments) by ₱40,000
to ₱400,000. The NCI in net assets is updated as follows:
Case #1 Case #2
  (proportionate) (fair value)
NCI at acquisition date – Jan. 1, 20x1 72,000 75,000
Subsequent increase (20% x ₱40,000) 8,000 8,000
Carrying amount of NCI – Jan. 1, 20x2 80,000 83,000

On January 1, 20x2, ABC Co. acquired all of the remaining 20% NCI in XYZ for ₱120,000.

27. If NCI is measured at “proportionate share,” how much is the gain or loss on the transaction to
be recognized in the consolidated financial statements?
a. 80,000 b. (80,000) c. (83,000) d. 0

D None. The transaction is accounted for as equity transaction because it does not result to loss of
control.

28. If NCI is measured at “fair value,” how much is the gain or loss on the transaction to be
recognized in the consolidated financial statements?
a. (83,000) b. 83,000 c. (80,000) d. 0

D None. The transaction is accounted for as equity transaction because it does not result to loss of
control.
 P a g e | 19

29. MIME TO IMMITATE Co. initially tested its goodwill for impairment on September 30, 20x1.
When should MIME perform its second impairment testing on its goodwill?
a. on or before September 30, 20x2
b. on or before December 31, 20x2
c. at any date not earlier than September 30, 20x2
d. at any date during 20x2

30. When NCI is measured at fair value,

a. goodwill is attributed only to the owners of the parent.
b. goodwill is attributed to both the owners of the parent and NCI.
c. goodwill impairment is allocated to both the owners of the parent and NCI.
d. b and c

31. According to PAS 27, which of the following is required to present separate financial statements?
a. A publicly-listed entity
b. A parent
c. An entity with an investment in associate
d. None of these

32. According to PAS 27, investments in subsidiaries, associates or joint ventures are accounted for
in the separate financial statements
a. at cost.
b. in accordance with PFRS 9 Financial Instruments.
c. using the equity method under PAS 28 Investments in Associates and Joint Ventures.
d. any of these, as a matter of accounting policy choice.

33. When restating financial statements in accordance with PAS 28 Financial Reporting in
Hyperinflationary Economies,
a. Only monetary items are restated
b. Only non-monetary items are restated
c. Both monetary and non-monetary items are restated.
d. Only non-monetary items, statement of financial position amounts not already expressed in
terms of the measuring unit current at the end of the reporting period, are restated.

34. Under constant peso accounting,

a. all items in the statement of profit or loss and other comprehensive income are restated.
b. some items in the statement of profit or loss and other comprehensive income are restated.
c. items in the statement of profit or loss and other comprehensive income are not restated.
d. none of these

35. Information on a country’s inflation rate is shown below:

Year CPI Change in CPI Annual inflation rate
  (a) (b) % = (b ÷ a) x 100%
Jan. 1, 20x1 400
Dec. 31, 20x1 520 120 30.00%
Dec. 31, 20x2 720 200 38.46%
Dec. 31, 20x3 880 160 22.22%
 P a g e | 20

What is the cumulative inflation rate in 20x3 to be used in determining if there is hyperinflation?
a. 90.68% b. 120% c. 133.33% d. 220%

B Solution:

Current year CPI (Dec. 31, 20x3) 880

Less: CPI in base year (Jan. 1, 20x1) (400)
Cumulative increase in CPI 480
Divide by: CPI in base year (Jan. 1, 20x1) 400
Cumulative inflation rate for the previous 3 years 120%

36. Which of the following is a monetary asset?

a. Financial assets held for trading
b. Advances to suppliers
c. Property, plant, and equipment
d. Investment in bonds measured at amortized cost

37. Which of the following is a monetary liability?

a. Share dividends payable
b. Retained earnings
c. Income tax payable
d. Cash

38. The following information pertains to each unit of merchandise purchased for resale by Vend
Co.:
March 1, 20x8
Purchase price………………………………₱ 8
Selling price…………………………………₱12
Price level index…………………………….110

December 31, 20x8

Replacement cost…………………………..₱10
Selling price…………………………………₱15
Price level index…………………………….121

Under current cost accounting, what is the amount of Vend’s holding gain on each unit of this
merchandise?
a. 0 b. 0.80 c. 1.20 d. 2.00

D
Solution:
Replacement cost (another term for current cost) - 12/31/x8 10.00
Purchase price 8.00
 P a g e | 21

Holding gain per unit 2.00

39. Information with respect to Bruno Co.'s cost of goods sold for 20x5 is as follows:
  Historical cost Units
Inventory 1/1/x5 1,060,000 20,000
Production during 20x5 5,580,000 90,000
  6,640,000 110,000
Inventory 12/31/x5 2,520,000 40,000
Cost of goods sold 4,120,000 70,000

Bruno estimates that the current cost per unit of inventory was ₱58 at January 1, 20x5, and ₱72 at
December 31, 20x5. The cost of goods sold for 20x5, restated to current cost, should be
a. 5,040,000 b. 4,550,000 c. 4,410,000 d. 4,060,000

B
Solution:
Units sold 70,000
Average current cost [(72 + 58) ÷ 2] 65
Cost of good sold - current cost 4,550,000

40. Kerr Company purchased a machine for ₱115,000 on January 1, 20x2, the company's first day of
operations. At the end of the year, the current cost of the machine was ₱125,000. The machine
has no residual value, a five-year life, and is depreciated by the straight line method. For the
year ended December 31, 20x2, the amount of the current cost depreciation expense is:
a. 14,000 b. 23,000 c. 24,000 d. 25,000

C
Solution:
Current cost at year-end 125,000
Historical cost 115,000
Total 240,000
Divide by: 2
Average current cost 120,000
Divide by: Useful life 5
Current cost depreciation 24,000

“Therefore, do not worry saying, ‘What shall we eat?’ or ‘What shall we drink?’ or ‘What shall we wear?’ For after
all these things the Gentiles seek. For your heavenly Father knows that you need all these things. But seek first the
kingdom of God and His righteousness, and all these things shall be added to you. Therefore, do not worry about
tomorrow, for tomorrow will worry about its own things. Sufficient for the day is its own trouble.” – (Matthew 6:31-34)

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