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Business Combination and Consolidated FS Test Prep
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BUSINESS COMBINATION & CONSOLIDATED FSTHEORIES:
1. An entity acquired all the share capital of a foreign entity at a consideration of 9 million baht on June 30, 2020. The fair
value of the net assets of the foreign entity at that date was 6 million baht. The functional currency of the entity is the peso.
The financial year-end of the entity is December 31, 2020. The exchange rates at June 30, 2020, and December 31, 2020,
were 1.5 baht = P1 and 2 baht = P1 respectively.
What figures for goodwill should be included in the financial statements for the year ended December 31, 2020?
a. 2,000,000
b. 1,500,000
c. 3,000,000
d. 3,500,000
Answer: B
P9,000,000
Less: Fair value of net assets acquired 6,000,000
Goodwill 3,000,000
Divided by current rat on the balance sheet for
purposes of translation under current rate method 2 baht per peso
Goodwill in the consolidated balance sheet P1,500,000
2. Morny Corporation sold equipment to its 80% owned subsidiary, Morrie Corporaiton on January 1, 2020. Morny sold the
equipment for P110,000 when its book value was P85,000 and it had a 5-year remaining useful life with no expected salvage
value. Separate balance sheets for Morny and Morrie included the following equipment and accumulated depreciation
amounts on December 31, 2020:
Morny Morrie
Equipment P750,000 P300,000
Less: Accumulated depreciation (200,000) (50,000)
Equipment, net P550,000 P250,000
Consolidated amounts for equipment and accumulated depreciation at December 31, 2020, were respectively.
a. P1,025,000 and P250,000
b. P1,050,000 and P250,000
c. P1,025,000 and P245,000
d. P1,045,000 and P245,000
Answer: C
Combined equipment amounts P1,050,000
Less: Gain on sale 25,000
Consolidated equipment balance P1,025,000
Combined accumulated depreciation P250,000
Less: Depreciation on gain 5,000
Consolidated accumulated depreciation P245,000
3. Rommel, Inc. acquired a 60% interest in Mikee Company several years ago. During 2020, Mikee sold inventory costing
P75,000 to Rommel for P100,000. A total of 16% of this inventory was not sold to outsider until 2021. During 2021, Mikee
sold inventory costing P96,000 to Rommel for P120,000. A total of 35% of this inventory was not sold to outsiders until
2022. In 2021, Rommel reported cost of sales of P380,000 while Mikee reported P210,000. What is the consolidated cost
of sales?
a. 522,400
b. 474,400
c. 473,400
d. 594,400
Answer: B
Cost of sales of Rommel P380,000
Cost of sales of Mikee 210,000
Less: Intercompany sales 2021 (120,000)
Mark-up on beginning inventory (100,000 – 75,000) x 16% (4,000)
Add: Mark-up on ending inventory (120,000 – 96,000) x 35% 8,400
Consolidated cost of sales P474,400
4. The Ludel Company acquired the net assets of the Girl Conrad Company on January 1, 2018, and made the following entry
to record the purchases:
Current assets P100,000
Equipment 150,000
Land 50,000
Buildings 300,000
Goodwill 100,000
, Liabilities 80,000
Common stock, P1 par 100,000
Paid-in capital in excess of par 520,000
Assuming that additional shares on January 1, 2020 would be issued on that date to compensate for any fall in the value of
Ludel common stock below P16 per share. The settlement would be to cure the deficiency by issuing added shares based
on their fair value on January 1, 2020. The fair price of the shares on January 1, 2020 was P10.
What is the additional number of shares issued on January 1, 2020 to compensate for any fall in the value of the stock?
a. 60,000
b. 100,000
c. 10,000
d. 160,000
Answer: A
Deficiency (P16-P10) x 100,000 shares issued to acquire P600,000
Divided by : Fair value of share 10
Added number of shares to issue P 60,000
Amount of paid-in capital in excess of par on January 1, 2021 immediately after the additional shares were issued.
P520,000-P60,000 = P460,000
Changes resulting from events after the acquisition date are not measurement period adjustments. Such changes are accounted for
separately from the business combination. The acquirer accounts for changes in the fair value of contingent consideration that are
not measurement period adjustments as follows:
a. Contingent consideration classified as equity is not measured and its subsequent settlement is accounted for within equity.
b. Contingent consideration classified as an asset or liability.
5. The Jonnie Company owns 75% of the Junior Company. On December 31, 2020, the last day of the accounting period, Junior
sold to Jonnie 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 Junior’s books was P160,000. The group’s consolidated statement of financial position has been
drafted without any adjustments in relation to this non-current asset. What adjustments should be made to the
consolidated statement of financial position figures for retained earnings and non-controlling interest?
a. Retained earnings (Reduce by P30,000); Non-controlling interest (Reduce by P10,000)
b. Retained earnings (Increase by P300,000); Non-controlling interest (No change)
c. Retained earnings (Reduce by P40,000); Non-controlling interest (No change)
d. Retained earnings (Increase by P225,000); Non-controlling interest (Increase by P75,000)
Answer: B
Upstream sales:
Selling price of non-current asst P200,000
Less: Book/carrying value date of sale 160,000
Gain on intercompany sale P 40,000
The eliminating entry would be as follows:
Retained earnings – parent (65% x P40,000) 26,000
Non-controlling interest (35% x P40,000) 14,000
Non-current asset 40,000
Profit on intragroup assets to be eliminated in full. Only the group share of the profits of the subsidiary are taken to group retained
earnings.
This is because the subsidiary sold the asset to the parent. This gain is not realized from a group perspective and must be removed
in full. It is then allocated between the shareholders of the subsidiary, in the form of retained earnings (group share of the gain) and
the non-controlling interest.
6. Baste Company owns an 80% controlling interest in the Bastion Company. Bastion regularly sells merchandise to Baste,
which then sold to outside parties. The gross profit on all such sales is 40%. On January 1, 2019, Baste sold land and a
building to Bastion. The value of the parcel is 20% to land and 80% to structures. The data are the following:
Baste Bastion
Internally generated net income, 2019 P1,560,000 P750,000
Internally generated net income, 2020 10,320,000 705,000
Intercompany merchandise sales, 2019 300,000
Intercompany merchandise sales, 2020 360,000
Intercompany inventory, December 31, 2019 45,000
Intercompany inventory, December 31, 2020 60,000
Cost of real estate sold on January 1, 2019 1,800,000
Sales price of real estate on January 1, 2019 2,400,000
Depreciable life of building 20 years
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