BUSINESS COMBINATION 2020 BATCH

MINDANAO STATE UNIVERSITY- FIRST SEMESTER

Use the following information in answering questions

On January 2, 2007, P Company purchased 1,500 shares of the outstanding common stock of S Company for
P140,000 and additional payment of. P4,000 indirect cost and P5,000 direct cost. On that date, the assets
and liabilities of S Company had fair market values as indicated below. Balance sheets of the companies on
January 2, 2007, after acquisition are as follows:

P Company S Company
Book Value Fair value
Cash P 80,000 P 14,000 P 14,000
Accounts Receivable 56,000 28,000 28,000
Inventory 56,000 22,000 28,000
Land 28,000 54,000 60,000
Building, net 163,000 72,000 98,000
Equipment, net 224,000 56,000 39,000
Investments in S Company 149,000
P 756,000 P 246,000

Accounts Payable P 42,000 16,000 16,000

8% Bonds Payable 62,000 52,000
Common Stock – P Company, P40 par 320,000
Common Stock – S Company, P25 par 50,000
Additional Paid-In Capital – P Company 100,000
Additional Paid-In Capital – S Company 56,000
Retained Earnings – P Company 294,000
Retained Earnings – S Company 62,000
P 756,000 P 246,000

1. As a result of business combination, the amount of total net assets is

a. P714,250 b.P764,000 c.P718,250 d.P768,000
2. The Retained earnings balance is
a. P294,000 b.P356,000 c. P294,250 d. P290,000

Use the following information in answering questions

S Co. had net income of P400,000 and paid dividends of P200,000 during the year 2007. S Co.’s stockholders’
equity on December 31, 2006 and December 31, 2007 is summarized as follows:
Dec. 31,2006 Dec. 31, 2007
10% cumulative preferred stock, P100 par P 300,000 P 300,000
Common stock, P1 par 1,000,000 1,000,000
Additional paid-in capital 2,200,000 2,200,000
Retained earnings 500,000 700,000
Stockholders’ Equity P4,000,000 P4,200,000
On January 2, 2007, P Co. purchased 400,000 common shares of S Co. at P4 per share and also paid P50,000
direct cost of acquiring the investment. P uses equity method in accounting for its investment in S.
3. P Co.’s income from Shine for 2007 should be:
a. P160,000 b. P155,000 c. P148,000 d. P143,750
4. The balance of the investment in Shine account at December 31, 2007 should be:
a. P1,725,750 b. P1,730,000 c. P1,650,000 d. P1,742,750

Use the following information in answering questions

Parent Company sells land with a book value of P5,000 to Subsidiary Company for P6,000 in 2004.
Subsidiary Company holds the land during 2005. Subsidiary Company sells the land for P8,000 to an outside
entity in 2006.
5. In 2004 the unrealized gain:
a. To be eliminated is affected by the minority interest percentage.
b. Is initially included in the subsidiary’s accounts and must be eliminated from Parent Company’s income
from Subsidiary Company under the equity method.
c. Is eliminated from consolidated net income by a working paper entry that includes a credit to the land
account for P1,000
d. Is eliminated from consolidated net income by a working paper entry that includes a credit to the land
account for P6,000.
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6. Which of the following statements is true

a. Under the equity method, Parent Company’s investment in Subsidiary account will be P1,000 less than its
underlying equity in Subsidiary throughout 2005.
b. No working paper adjustments for the land are required in 2005 in Parent Company has applied the
equity method correctly
c. A working paper entry debiting gain on sale of land and crediting land will be required each year until the
land is sold outside the consolidated entity.
d. In 2006, the year of Subsidiary’s sale to an outside entity, the working paper adjustment for the land will
include a debit to gain on sale of land for P2,000.

Use the following information in answering questions 11 and 12

Perry Corporation sold machinery to its 80 percent-owned subsidiary, Samuel Corporation, for P100,000 on
December 31, 2006. The cost of the machinery to Perry was P80,000, the book value at the time of sale was
P60,000, and the machinery had a remaining useful life of five years (Perry uses equity in accounting for its
investment in Samuel).

7. How will the intercompany sale affect Perry’s income from Samuel and Perry’s net income for
2006?
Perry’s Income Perry’s Perry’s Income Perry’s
from Samuel Net Income from Samuel Net Income
a. No effect No effect c. Decreased No effect
b. Increased No effect d. Decreased Decreased

8. How will the consolidated assets & consolidated net income for 2006 be affected by the
intercompany sale?
Consolidated Consolidated Net Income Consolidated Net Assets Consolidated Net Income
Net Assets
a. No effect Decreased c. Increased No effect
b. Decreased Decreased d. No effect No effect

Use the following information in answering questions 13 and 14

Punk Corp. manufactures and sells heavy industrial equipment. On July 1, 2006 Punk sold equipment that it
manufactured at a cost of P300,000 to its 100 percent owned subsidiary, Sunk Company, for P400,000. Sunk
is depreciating the equipment over a five-year period using the straight-line method.
9. The equipment and accumulated depreciation that appear in the consolidated balance sheet for Punk and
subsidiary at December 31, 2006 will include amounts related to this transaction of:
a. P300,000 and P30,000 c. P400,000 and P40,000
b. P300,000 and P60,000 d. P400,000 and P80,000
10. If Punk account for its investment in Sunk as a one-line consolidation, working paper entries
to consolidate the financial statements of Punk and Sunk for 2006 will include which of the entries:

a. Sales P100,000 c. Sales P400,000

Cost of Sales P100,000 Cost of Sales P300,000
b. Sales P100,000 Equipment P100,000
Investment in S P100,000 d. Sales P400,000
Cost of Sales P400,000

11. On January 1, 2007, M Products Corp. issues 12,000 shares of its P10 par stock to
acquire the net assets of L Steel Company. Underlying book value and fair value information for the
balance sheet of L Steel Company at the time of acquisition are as follows:
Balance sheet Items Book value Fair value
Cash P60,000 P60,000
Accounts receivable 100,000 100,000
Inventory 60,000 115,000
Land 50,000 70,000
Building and Equipment 400,000 350,000
Less: Accumulated Depreciation (150,000)
Total Assets P520,000

Accounts payable P10,000 10,000

Bonds payable 200,000 180,000
Common stock (P5 par value) 150,000
Additional paid-in capital 70,000
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Retained earnings 90,000

Total Liabilities and Capital P520,000

L Steel shares were selling at P18 and M Product shares were selling at P50 just before the merger
announcement. Additional cash payments made by M Corporation in completing the acquisition were:
Finder’s fee paid to firm that located L Steel P10,000
Audit fee for stock issued by M Products 3,000
Stock registration fee for new shares of M Products 5,000
Legal fees paid to assist in transfer of net assets 9,000
Cost of SEC registration of M Products shares 1,000
How much is the increase in the total assets to be recorded by M Products?
a. P809,000 b. P591,000 c. P781,000 d. P667,000

12. I Inc., K Inc., and E Inc. agreed to a business combination that meets all the requirements
for purchase of interests. Their condensed balance sheets before combination show:
I K E
Assets P7,000,000 P875,000 P9,625,000
Liabilities P4,987,500 P306,250 P2,625,000
Capital stock, par P100 2,625,000 437,500 1,750,000
Additional paid in capital 218,750 700,000
Retained earnings (deficit) (612,500) ( 87,500) 4,550,000
P7,000,000 P875,000 P9,625,000
It was agreed that I Inc. will be the continuing entity and shall issue 4,375 shares to K and 52,500 shares to
E. To what extent will the stockholders equity of I increase after the combination?
a. P7,568,750 b. P2,187,000 c. P5,687,500 d. P875,000

Use the following information in answering questions

On Jan. 1, 2003, PI Co. acquired 75 percent of outstanding shares of SU Co. at book value. For the year
2005, PI Co. purchased merchandise from SU Co. while S also purchased merchandise from PI Co.
Data regarding intercompany sales, inventories and profit percentages are as follows:
PI Co. SU Co.
Intercompany sales P200,000 P75,000
Intercompany inventories:
January 1, 2005 20,000 10,000
December 31, 2005 15,000 20,000
Gross profit percentages on intercompany
As a percentage of selling price 60% 50%
On July 1, 2005, Su Co. sold equipment to PI Co. at a gain of P20,000. This equipment is estimated to have
a useful life of five years from the date of sale.
Income statements for the two companies exclusive of the recording of Equity in Earnings –
Subsidiary for year 2005 are as follows:
PI Co. SU Co.
Sales P 1,500,000 P 400,000
Cost of sales 600,000 200,000
Expenses 300,00 100,000
Gain on sale of equipment . 20,000
P 600,000 P 120,000

13. The consolidated cost of sales is:

a. P800,000 b. P528,500 c. P521,500 d. P527,000
14. The income from investment using equity method:
a. P72,375 b. P71,542 c. P72,750 d. P75,750

15. PC Corp. owns 70 percent pf SO Co.’s common stock acquired January 1, 2004. Total
amortization of excess from the investment is at a rate of P20,000 per year. SO regularly sells merchandise
to PC at 150 percent of SO’s cost. PC’s December 31, 2004 and 2005 inventories include goods purchased
intercompany of P112,500 and P33,000, respectively. The separate incomes (*do not include investment
income) of PC and SO for 2005 are summarized as follows:
PC SO
Sales P 1,200,000 P 800,000
Cost of sales (600,000) (500,000)
Other expenses (400,000) (100,000)
Separate income P 200,000 P P200,000
Total consolidated income should be allocated to Retained Earnings and minority interest income in the
amounts of:
a. P344,550 and P61,950, respectively c. P406,500 and P61,950, respectively
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b. P358,550 and P60,000, respectively d. P338,550 and P67,950, respectively

16. REH Company

Trial Balance as of January 1, 2006
DR CR
Ordinary shares – 30,000 fully shares 30,000
Retained Earnings 50,000
Equipment 42,000
Accumulated Depreciation 12,000
Inventory 20,000
Accounts Receivable 10,000
Patents 15,000
Accounts Payable 8,000
Cash 13,000
100,000 100,000

At this date REH is acquired by BNC with REH going into liquidation
 Ordinary shareholders of REH Company are to receive 2 fully paid ordinary shares in BNC for every
share held or alternatively P2.50 in cash payable half at the exchange date and half in one year
thereafter.
 Accounts Payable and cost of liquidation amounting to P5,000 were paid by REH prior to turnover to
BNC.
 5,000 ordinary shares elect to receive cash
 BNC shares are selling at P1.10
 The incremental borrowing rate of BNC is 10% per annum.

What is the cost of combination?

a. P66,931 b. P67,500 c.P66,000 d.P61,931

Use the following information in answering questions

The following balance sheets were prepared for Avril Corp. and Blink Co. on January 1, 2007, just before they
entered into a business combination.

Avril Corp. Blink Co

Cash P 210,000 P 5,000
Accounts Receivable 75,000 20,000
Merchandise Inventory 200,000 50,000
Building and Equipment 400,000 100,000
Accumulated Depreciation (100,000) (25,000)
Goodwill 50,000
Total Assets P 785,000 P 200,000

Accounts Payable P 125,000 P 70,000

Bonds Payable 200,000 30,000
Common Stock
P30 par value 210,000
P20 par value 50,000
Additional paid-in capital 50,000 10,000
Retained Earnings 200,000 40,000
Total Liabilities & Stockholders’ Equity P 785,000 P 200,000

On that date, the fair market value of Blink’s inventories and building and equipment were P78,000 and
P124,000 respectively, while bonds payable has a fair value of P42,000. The fair values of all other asset and
liabilities of Blink (except for goodwill) were equal to their book values. Avril Corp. acquired the net assets of
Blink Co. by issuing 2,500 shares of its P30 par value common stock (current fair value P36 per share) and
purchase price in cash amounting to P12,000. Contingent consideration that is determinable (probable and
reasonably estimated) amounted to P2,000 (discounted value). Additional cash payment made by Avril Corp.
in completing the acquisition were: Legal fee for contract of business combination, P8,000; Accounting and
legal fees for SEC registration, P11,000; Printing costs of stock certificates, P6,000; Finder’s fee, P7,000;
Indiret cost, P5,000.
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17. As a result of the business combination, the amount of total assets in the books of Avril Company.
a. P1,016,000 b. P963,000 c. P967,000 d. P1,1012,000

18. As a result of the business combination, the amount of retained earnings in the books of Avril Company.
a. P195,000 b.P193,000 c. P200,000 d.P240,000

19. On January 1, 2007, ABC Corporation purchased 75% of the common stock of XYZ Company. Separate
balance sheet data for the companies at the combination date are given below:

ABC XYZ
Cash P 84,000 P 721,000
Trade Receivable 504,000 91,000
Merchandise Inventory 462,000 133,000
Land 273,000 112,000
Plant assets 2,450,000 1,050,000
Accumulated Depreciation (840,000) (210,000)
Investment in XYZ 1,372,000
Total Assets 4,305,000 P 1,897,000

Accounts Payable P 721,000 P 497,000

Capital Stock 2,800,000 1,050,000
Retained Earnings 784,000 350,000
Total Equities 4,305,000 P 1,897,000

On the date of combination the book values of XYZ’s net assets was equal to the fair value of the net assets
except for XYZ’s inventory which has a fair value of P210,000.

On the date of acquisition in the consolidated balance sheet, how much is the total assets?
a. P3,533,250 b. P4,984,000 c. P6,543,250 d. P5,171,250

20. On January 1, 2014, Turner Inc., reports net assets of P480,000 although a building (with a
10-year life) having a book value of P260,000 is now worth P310,000. Plaster Corporation pays P400,000 on
that date for a 70 percent ownership in Turner, On December 31, 2016, Turner reports a Building account of
P245,000 while Plaster reports a Building account of P510,000. What is the consolidated balance of the
Building account?
A. P779,500 B. P783,500 C. P790,000 D. P805,000

21. Winston has the following account balances as of February 1, 2014:

Inventory P 600,000
Common stock (P10 par value) P 800,000
Land 500,000
Retained earnings, Jan. 1,2014 1,100,000
Buildings (net) (fair value P1,000,000) 900,000
Revenues 600,000
Expenses 500,000

Arlington pays P1.4 million cash and issues 10,000 shares of its P30 par value common stock (valued at P80 per
share) for all of Winston's outstanding stock and Winston is dissolved. Stock issuance costs amount to P30,000.
Prior to recording these newly issued shares, Arlington reports a Common Stock account of P900,000 and
Additional Pald-in Capital of P500,000.

22. Determine the goodwill that would be included in the February 1, 2014, financial statement of Arlington.
A. P200,000
B. P230,000
C. P100,000
D. P130,000
23. Assume that Arlington pays cash of P2.0 million. No stock is issued. An additional P40,000 is paid in direct
combination costs, determine the net gain from business combination. A. P100,000
B. P200,000
C. P260,000
D. P60,000
24. The Gorgeous Company will issue share at P10 par value common stock for all the net assets of the
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Mundane Company. Gorgeous' common has current market value of P40 per share. Mundane's balance sheet
accounts are: Current assets, P320,000; Property and equipment, P880,000; Liabilities, P400,000; Common stock,
P4 par, P80,000; Additional paid-in capital, P320,000; and Retained earnings, P400,000

The fair value of current assets is P400,000 while that of property and equipment is P1,600,000. All the liabilities
are correctly stated. Gorgeous issued sufficient shares so that the fair market value of the stock equals the fair
market value of Mundane's net assets. How many shares must Gorgeous Co. issue?
A. 40,000
B. 20,000
C. 80,000
D. 160,000
25. Western Company, buys all of the outstanding stock of Abenson Company on January 1, 2014. Annual
excess amortization of P12,000 results from this purchase transaction. On the date of the takeover, Western
reported retained earnings of P400,000 while Abenson reported a P200,000 balance. Western reported income of
P40,000 in 2014 and P50,000 in 2015 and paid P10,000 in dividends each year. Abenson reported net income of
P20,000 in 2014 and P30,000 in 2015 and paid P5,000 in dividends each year.

Assume that Western's reported income does include income derived from the subsidiary. If the parent uses the
cost method of accounting investment in subsidiary, what are the consolidated retained earnings on December
31, 2015?

A. P 470,000
B. P 510,000
C. P 446,000
D. P486,000
26. Asia Star Company purchased in the open market 60 percent of the capital stock of The Golden Tree
Company on January 1, 2012, at P100,000 more than 60 percent of its book value. The differential was allocated
P40,000 to plant and equipment (net) and P60,000 to goodwill. The plant and equipment had an estimated
remaining life of 10 years, and the goodwill is not amortized. The Golden Tree reported net income of P60,000 in
2012, P50,000 in 2013 and P75,000 in 2014. Fifty percent of the net income was declared as dividends.

On January 1, 2016, minority shareholders in The Golden Tree Company have an equity of P96,000 in the net
assets of the company. Determine the January 1, 2012, cost of investment.

A. P223,000
B. P188,500
C. P247,500
D . P167,500

28. DMCI Company acquired 80% capital interest of STONERICH Company. DMCI paid P1,240,000 for the
nd paid P88,000 for legal assistance (related to the acquisition). STONERICH net assets valued at P1,200,000
composed of capital stock, P600,000; additional paid-in capital of P180,000 and retained earnings of P420,000. At
the time of acquisition, STONERICH building is undervalued by P100,000 and has still a remaining life of 30 years.
Any other excess is allocated to goodwill. STONERICH Company reported net income of P140,000 and paid
dividends of P20,000 during the year.

How much is the income from investment under the equity method?

A. P 109,333
B. P 112,000
C. P 99,733
D. P 108,667

29. Peter Corporation owns 70 percent of John Company's common stock, acquired January 1. 2015. Goodwill
from the investment is not amortized. John regularly sells merchandise to Peter at 150 percent of John's cost.
Peter's December 31, 2015 and 2016 inventories include goods purchased intercompany of P112,500 and
P33,000, respectively. The separate incomes (do not include Investment income) of Peter and John for 2016 are
summarized as follows:
Peter John
Sales P1,200,000 P800,000
Cost of sales ( 600,000) (500,000)
Other expenses (400.000) (100,000)
Separate income P200,000 P200,000

Total consolidated income should be allocated to net income to retained earnings and minority interest income in
the amounts of:
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A. P358,550 and P67,950, respectively

B. P378,550 and P60,000, respectively
C. P366,500 and P60,000, respectively.
D. P366,500 and P67,950, respectively.

30. Montero Company is contemplating the purchase of the net assets of Toyota Company for P800,000 cash.
To complete the transaction, direct acquisition costs are P15,000. The balance sheet of Toyota Company on the
purchase date is as follows:
Toyota Company
Balance Sheet
December 31, 2014
Assets Liabilities & Equity
Current assets P 80,000 Liabilities P100,000
Land 50,000 Common stock, P10 par 100,000
Building 450,000 Paid-in capital in excess of par 150,000
Accumulated depreciation (200,000) Retained earnings 230,000
Equipment 300,000
Accumulated depreciation ( 100,000)
Total P580,000 Total P580.000

The following fair values were obtained for Toyota's assets and liabilities:
Current assets P100,000
Equipment P275,000
Land 75,000
Liabilities 102,000
Building 300,000
Determine the increase in assets that resulted from the business combination.
A. P 887,000
B. P 902,000
C. P 917,000
D. P 747,000

31. A subsidiary company sells equipment with a four-year remaining useful life to its parent at a P12,000 gain
on December 31, 2014. The effect of this Intercompany transaction on the parent's retained earnings for 2014
will be:
A. A decrease of P12,000 if the subsidiary is 100 percent owned.
B. An increase of P9,000 if the subsidiary is 100 percent owned.
C. A decrease of P9,000 if the subsidiary is 100 percent owned.
D. D. A decrease of P3,600 if the subsidiary is 60 percent owned.

32. The Wesley Company acquired the net assets of the Sylene Company on January 1, 2012, and made the
following entry to record the purchase
Current assets P 100,000
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, 2014 would be issued on that date to compensate for any fail in
the value of Wesley 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, 2014. The fair price of the shares on January 1,
2014 was P10.
What is the additional number of shares issued on January 1, 2014 to compensate for any fall in the value of the
stock?
A. 10,000 B. 60,000
C. 100,000 D. 160,000
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