CHAPTER 7

CHAPTER 7
Home Office, Branch and Agency Accounting

1. What is the difference between a Sales Agency 4. What are Intracompany accounts?
and a Branch?
These accounts are used to record the
Branch Sales Agency transactions between the home office and the
branch. These accounts are reciprocal accounts
Carries stocks of YES. NO.
merchandise Merchandise it between the home office and branch which
available for sale? carries is for means that if the books are completely up to
sample or display date, the balance in a reciprocal account on the
purposes. home office books will be equal but opposite of
Sells goods YES. NO.
that of the related reciprocal account in the
directly to It merely takes branch books.
customers? orders from
customers to be The Home Office or Home Office Current
approved by the account is recorded by the branch to take the
home office.
place of the customary capital accounts. Its
Has authority to YES. NO. reciprocal account on the home office books is
engage in It operates under the Investment in Branch or Branch Current.
transactions as an the direct
independent supervision of the
business unit? home office.
5. What are the transactions that affect the
Maintains a YES. NO. intracompany accounts?
complete set of Agency
books? transactions are (Home Office
recorded in home Books)
office books. Investment in (Branch Books)
Branch Home Office

XXX Asset transfers to XXX

2. How do you account for the operations of an
branch
agency? XXX Asset transfers XXX
from branch
A sales agency neither keeps a complete set of XXX Branch profit XXX
books nor uses a double entry system of XXX Branch loss XXX
accounts. Ordinarily, a record of sales to
customers and a list of cash payments
supported by vouchers are sufficient. An 6. What are the instances when reciprocal
imprest system is usually adopted by the home accounts will not show identical balances?
office for the working fund of the sales agency.
1. Transactions have been recorded by the branch
If the home office wants to determine the net but not by the home office.
income of each of its agencies separately, it will  Debits in the home office account
maintain separate revenue and expense without corresponding credits in the
accounts for the individual sales units. If the branch current account.
home office elects not to determine agency e.g. cash remittance of the branch to
operations separately, the transactions of the home office in transit;
agency are recorded in the home office’s own  Credits in the home office account
revenue and expense accounts. without corresponding debits in the
branch current account.
3. How do you account for the operations of a e.g correction of account for the
branch? understatement of net income for the
preceding period
Normally, the branch maintains a separate 2. Transactions have been recorded by the home
accounting system and a full set of books with office but not by the branch.
complete self-balancing accounts since it  Debits in the branch current account
operates like an independent business unit. without corresponding credits in the
home office account.
1
 CHAPTER 7
e.g. shipment of merchandise in transit (acquired
from HO)
 Credits in the branch current account
Over-
without corresponding debits in the valuation of
home office account. branch cost
e.g. branch’s accounts receivable of goods
collected by the home office sold xxx
3. Bookkeeping or mechanical errors on either set
of books.
Or, alternatively:

7. May the home office bill merchandise to

Branch sales Pxxx
branch other than at cost?
Branch cost of sales at cost (xxx)
Gross profit xxx
Yes. Merchandise shipments may be billed at
Operating expenses (xxx)
cost plus an arbitrary percentage, otherwise
Actual branch profit Pxxx
known as billed price. Under this method, the
profit recognized by the branch will be less than
its actual profit because its cost of goods sold is 9. What are the transactions that occur between
overstated insofar as the home office is branches?
concerned.

Allowance for Interbranch transactions like transfers of cash

Cost + Overvaluation
(% of Cost)
8. What are the problems involving billing of
merchandise to branch above cost?
1. Computation of branch inventory at cost.
Billed and merchandise occur between branches. A
=
Price branch does not maintain a reciprocal account
with another branch butrecords the transfer in
the Home Office account.
10. How do you account for the freight costs
incurred in interbranch transfers?

Branch inventory acquired from
home office at billed price
Divide by billing percentage of cost
Branch inventory at cost
2. Computation of the actual or true branch profit
insofar as the home office is concerned.
Branch profit (loss) as reported
Add: Overvaluation of branch cost
of goods sold
Actual branch profit insofar as the
home office is concerned
P xxx Freight costs incurred because of indirect
routing does not increase the cost of
% inventories. The amount of freight costs
P xxx properly included in inventories at a branch is
limited to the cost of shipping the merchandise
directly from the home office to its present
location. Excess freight costs are recognized as
expenses of the home office.
P xxx
% 11. What are the necessary procedures for the
preparation of the combined financial
P xxx statements of the home office and the branch?

Prepare entries in the working paper to

Allowance
Billed Percent eliminate:
for Over-
Price ÷ of Cost = Cost
valuation
Branch  Reciprocal accounts
inventory,  Inter-company transfer accounts
beginning  Overvaluation in branch inventory
(acquired
from HO) Pxxx Pxxx Pxxx Pxxx
Add:
Shipments
during the
Prepare Combined Statement of Financial
period xxx xxx xxx xxx
Total before Position and Statement of Financial
adjustment xxx Performance.
Less: Branch
inventory,
end xxx xxx xxx xxx

Report to external users

2
 CHAPTER 7

3
 CHAPTER 7

REVIEW PROBLEMS

On April 1, 2014, Flores Company established an agency

in Quezon City, sending its merchandise samples costing
P82,500 and a working fund of P65,000 to be Cortez Trading Co. operates a branch in Tuguegarao
maintained on a imprest basis. City. At close of the business on December 31, 2014, the
 During the month of April, the agency Home Office Current account in the books of
transmitted to the home office sales orders that Tuguegarao branch showed a credit balance of
cost P468,750. However, the home office was P928,100. The interoffice accounts were in agreement
able to fill up only 80% of the orders. at the beginning of the year. For purposes of reconciling
 Collections from customers amounted to the interoffice accounts, the following facts were
P250,000. ascertained:
 A home office disbursement chargeable to the a) Freight charge of P4,200 on merchandise
sales agency includes the acquisition of shipped to the branch was paid by the home
equipment for Quezon City, P180,000 to be office and was recorded in the branch books as
depreciated at 10% per annum. P420.
 Payments made by the agency during April b) Home office debit memo for P6,900 was
were as follows: advertising expense worth recorded twice by the branch by debiting the
P15,000; utilities amounting to P12,000; annual Home Office Current account.
rent of P90,000 and miscellaneous expenses of c) The branch failed to take up a P4,000 debit
P9,200. memo from the home office.
 The agency samples are good until February 28, d) Branch store insurance premiums of P3,200
2015. were paid by the home office. The home office
 It was estimated that the gross profit on goods debited Insurance Expense and credited Cash in
shipped to bill agency sales orders averages its books. The branch recorded the amount of
25%. P32,000 as a liability.
e) A branch customer remitted P5,000 to the
1. Compute for the net income (loss) of the agency home office. The home office recorded this as a
for the month ended April 30, 2014. cash collection of its own receivable on
a. P (19,200) December 23, 2014. Upon notification on the
b. 72,300 same year, the branch debited the amount to
c. (2,700) Receivable from Home Office and credited
d. 55,800 Home Office Current.
f) A P35,000 shipment, charged by the home
ANSWERS AND SOLUTIONS office to Tuguegarao branch, was actually sent
to and retained by Ilagan branch.
1. B g) On December 27, 2014, the branch sent a check
Sales (P468,750 x 80%) / 75% P500,000 for P4,500 to its suppliers. The branch
Cost of Sales (P468,750 x 80%) (375,000) erroneously recorded the transaction as a
Gross Profit P125,000
remittance to the home office and sent a copy
Expenses:
Advertising expense P15,000 of the debit memo to the home office. The
Utilities expense 12,000 home office recorded this upon receiving the
Rent expense (P90,000/12) 7,500 debit memo on January 2, 2015.
Miscellaneous expense 9,200 h) The home office allocated advertising and rent
Depreciation of equipment 1,500
(P180,000 x 10%)/12
expense totaling P6,000 to Tuguegarao branch.
Amortization of samples 7,500 (P52,700) The home office charged the said expenses to
(P82,500/11) Aparri branch by mistake. Tuguegarao branch
Net income P72,300 had not entered the allocation at year end.
4
 CHAPTER 7

i) Inventory costing P13,000 was sent to the j. 21,000

branch by the home office on December 12, Adjusted balance 1,004,480(2) 1,004,480(4)
2014. The branch recognized a liability by
crediting Accounts Payable upon the receipt of
the inventory.
j) A branch customer remitted P21,000 to the During 2014, goods were shipped to the branch at 120%
home office. The home office recorded this cash above cost. The reciprocal account in the income
collection on December 21,2014. Upon statement of the home office amounted to P237,500.
receiving a credit memo, the branch recorded The balance of the contra branch current account
the transaction twice on December 23,2014. reports a balance of P375, 000 before adjustment. The
beginning inventory of the branch from the home office
2. The adjusted balance of the Home Office at cost is P360,000 and from outsiders, P93,000. The
Current account. branch purchase goods from outside suppliers during
a. P 1,004,480 the year amounting to P125,200.
b. 928,100 The ending inventory of the branch as reported in the
c. 1,408,500 combined statement of financial position is P345,000,
d. 974,300 20% of which are purchased from outside suppliers.

3. The unadjusted balance of the Branch Current 5. The cost of goods sold to be reported in the
account. branch’s income statement ended December
a. P 928,100 31, 2014.
b. 1,056,900 a. P 514,500
c. 1,035,280 b. 551,075
d. 1,294,200 c. 542,025
d. 525,305
4. The adjusted balance of the Branch Current
account. 6. The cost of goods sold of the branch to be
a. P 1,408,500 reported in the combined income statement.
b. 974,300 a. P 470,700
c. 1,056,900 b. 328, 900
d. 1,004,480 c. 394, 500
d. 455,200
ANSWERS AND SOLUTIONS
7. The amount of the Allowance for Overvaluation
2. A realized for the current year.
3. C a. P 294,625
4. D b. 80,375
Home Office Branch Current c. 95,225
Current (Home Office d. 148,075
(Branch books) books)
Unadjusted balance P928,100 1,035 280(3) ANSWERS AND SOLUTIONS
Adjustments:
a. 3,780
b. 6,900 5. B
c. (4,000) Beginning inventory:
d. 35,200 3,200 from outside suppliers P93,000
e. (10,000) (5,000) from home office
f. (35,000) Cost 360,000
g. 4,500 allowance for overvaluation 90,000 P543,000
h. 6,000 6,000 Purchases 125,200
i. 13,000 Shipments from HO
Cost P237,500
5
 CHAPTER 7

allowance for account balances on the books of home office and its
overvaluation 285,000 522,500 branch as of December 31,2014:
Ending inventory
from outside suppliers P69,000
from home office (current Home office Branch books
year shipments) books
cost 237,500 Inventory, January 1 P5,000 P14,000
allowance for
overvaluation 285,000
Shipments from HO - 37,700
from beginning Purchases 225,000 50,000
inventory* Shipments to Branch 36,250
Cost 38,500 Branch Inventory
allowance for Allowance 13,125 -
overvaluation 9,625 (639,625)
Cost of goods sold to be Sales 300,000 180,000
reported in the branch’s Operating expenses 2,500 27,500
income statement P551,075
*Since the cost of the ending inventory of the Per physical count, the ending inventory of the branch is
branch from home office of P276,000 P10,500 including goods from outside purchases of
(P345,000x80%) exceeds the cost shipments to the P6,925.
branch for the current year of P237,500, then the The ending inventory of the home office is P30,000.
excess should have come from the beginning branch
shipments amounting to P38,500. 8. The branch beginning inventory in 2014 that
came from outside purchases.
6. A a. P 9,750
Beginning inventory: b. 7,500
from outside suppliers P93,000
from home office @ cost 360,000 P453,000
c. 2,250
Purchases 125,200 d. 4,250
Shipments from HO @cost 237,500
Ending inventory 9. The amount of the unrealized profit in the
from outside suppliers P69,000 separate books of the home office on January 1,
from home office @ cost
(current year shipments) 237,500 2011.
from beginning inventory a. P 10,000
@cost 38,500 (345,000) b. 3,000
Cost of goods sold to be c. 9,425
reported in the combined
income statement P470,700
d. 2,250

7. B 10. Cost of goods available for sale of the branch.

Allowance for a. P 101,000
Overvaluation b. 100,250
Branch inventory, beginning (acquired c. 111,125
from HO) P90,000
d. 10,550
Add: Shipments during the period 285,000
Total before adjustment 375,000
Less: Branch inventory, end (acquired 11. The total ending inventory to be shown on the
from HO) 294,625 combined financial statements.
Overvaluation of branch cost of goods a. P 46,925
sold/ realized Allowance for
Overvaluation P80,375
b. 40,500
c. 43,500
The home office bills its branch for merchandise d. 48,650
shipments at 30% above cost. The following are some
12. The amount of the Branch Inventory Allowance
realized for the current year
6
 CHAPTER 7

a. P 13,125
b. 9,425
c. 10,875 11. A
d. 10,125 Ending inventory of the home office P30,000
Total branch ending inventory from home office at
cost 10,000
13. The combined net income for the year. Ending inventory of the branch from outside
a. P 128,250 purchases 6,925
b. 136,250 The total ending inventory to be shown on the
c. 135,175 combined financial statements P46,925
d. 144,250
12. D
Allowance for
ANSWERS AND SOLUTIONS Overvaluation
Branch inventory, beginning (acquired from
8. D HO) P2,250
Unrealized profit incurrent branch shipments Add: Shipments during the period 10,875
(P36,250x30%) P10,875 Total before adjustment 13,125
Less: Branch inventory allowance 13,125 Less: Branch inventory, end (acquired from
Unrealized profit in branch beginning inventory 2250 HO) 3,000
Divide by billing percentage 30% Overvaluation of branch cost of goods sold P10,125
Cost of branch beginning inventory from home
office 7,500 13. C
Multiplied by billing percentage of cost 130%
Sales of home office P300,000
Branch beginning inventory from home office at
Cost of sales of home
billed price 9,750
office:
Less: total branch beginning inventory 14,000
Inventory, January 1 P5,000
Branch beginning inventory that came from outside
Purchases 225,000
purchases P4,250
Shipments to Branch (36,250)
Inventory,
9. B December 31 (30,000) (163,750)
Branch ending inventory from home office at billed Operating expenses (72,500)
price per physical count (P10,500-P6,925) P3575 Net income of home
Add: Shipments to branch in transit * 9,425 office 63,750
Total branch ending inventory from home office at True branch income:
billed price 13,000 Sales P180,000
Divide by billing percentage of cost 130% Cost of sales
Total branch ending inventory from home office at Cost of goods
cost 10,000 available for sale P111,125
Multiplied by billing percentage 30% Inventory,
Unrealized profit in the separate books of the December 31
home office on January 1, 2011 P3,000 (10,500+9,425) (19,925) (91,200)
*Since the total of Shipments to Branch account and the Operating expenses (27,500)
Branch Inventory
Unrealized profit in current branch shipments of
Allowance realized 10,125 71,425
P47,125 (P36,250 + P10,875 or P36,250x130%) exceed Combined net
the recorded amount of Shipments from HO account of income P135,175
P37,700, then there must be shipments in transit at the
end of the period amounting P9,425 at billed price Or, alternatively:
(P47,125- P37,700) Sales (P300,000+ P180,000) P480,000
Cost of sales at cost
Inventory, January 1
10. C (5,000+7,500+4250) P16,750
Inventory, January 1 P14,000
Purchases
Shipments from HO 37,700
(225,000+50,000) 275,000
Purchases 50,000
Inventory, December 31 (46,925) (244,825)
Shipments to branch in transit 9,425
Operating expenses
Cost of goods available for sale of the branch P111,125
(72,500+27,500) (100,000)
7
 CHAPTER 7

Combined net income P135,175 17. The amount charged by the home office as
expense as a result of the interbranch transfer.
a. P 3,000
On November 2, 2014, the home office of Queen Babies b. 1,000
Sports Companies recorded a shipment of merchandise c. 1,500
to its Cagayan branch as follows: d. 2,000

Investment in branch-Cagayan P 60,000 ANSWERS AND SOLUTIONS

Shipments to branch 50,000
Allowance for overvaluation of 14. A
Branch inventory 8,000 Shipments from home office at billed price P58,000
Cash (for freight charges) 2,000 Unsold at year end x 60%
Ending inventory P34,800
Freight in (P2000 x 60%) 1,200
The Cagayan branch sells 40% of the merchandise to Unsold merchandise included in the Cagayan
outside customers during the rest of the period. The branch inventory P36,000
books of the home office are closed on December 31 of 15. B
each year. Shipments from HO (P58,000 /2) P29,000
On January 10, 2015, the Cagayan branch transfer half Freight in 2,000
Cash 1,000
of the original shipment to the Isabela branch, and the Amount charged to Home Office Current P32,000
Cagayan branch pays P1,000 freight for the shipment. If
the shipment had been made by the home office to 16. D
Isabela branch, the freight charges would have been Shipments from HO P29,000
P1,500. Freight in 1,500
Amount charged to Home Office Current P30,500
14. The amount of the unsold merchandise at 17. C
Freight cost from home office to Cagayan branch P2,000
December 31, 2014 to be included in the
Freight cost from Cagayan to Isabela branch 1,000
Cagayan branch inventory. Total freight cost incurred P3,000
a. P 36,000 Less: Freight cost from home office to Isabela branch 1,500
b. 34,800 Excess freight cost P1,500
c. 35,400
d. 35,520

15. The amount debited by the Cagayan branch to

the Home Office Current account on January
10,2015.
a. P 29,000
b. 32,000
c. 31,000
d. 30,000

16. The amount credited by the Isabela branch to

the Home Office Current account on January
10,2015.
a. P 32,000
b. 29,000
c. 32,000
d. 30,500

8
 CHAPTER 7

CHAPTER 8
Business Combinations-Statutory Mergers and Statutory Consolidations

1. What is Business Combination?

Business combinations are transactions or
events in which an acquirer obtains control of
one or more businesses.(IFRS (2008))

2. How to acquire control?

4. What are the steps in the Purhase Method?
ACQUISITION OF CONTROL

ACQUISITION OF ASSETS STOCK ACQUISITION

 Assets are acquired  A controlling interest (50% or

and in most cases, more) of another company
liabilities are is acquired.
assumed. PARENT=ACQUIRER
SUBSIDIARY= ACQUIREE

CONSOLIDATION MERGER
A+B=C A+B=A/B

3. What are the methods of acquisition?

METHODS OF ACQUISITION

PURCHASE OR POOLING
ACQUISITION METHOD OF
INTEREST
 Assets and liabilities  Assets and liabilities
acquired are acquired are measured
measured and and recorded at Book
recorded at Fair value.
value. ELIMINATED BY IFRS 3

9
 CHAPTER 7

It occurs when one unit of an entity is involved

in a transaction with another unit of the same
5. How to recognize changes in values of
entity.
provision and contingent considerations?

PURCHASE OR ACQUISITION METHOD

WITHIN
GOODWILL
MEASUREMENT STEP 1: IDENTIFY It is the company:
OR GAIN ON
PERIOD
ACQUISITION
THE ACQUIRER  Transferring cash
ON THE DATE
 Issuing voting stocks
OF
STEP 2: Date where the acquirer obtains
ACQUISITION
OUTSIDE DETERMINE THE control of the acquiree.
PROFIT OR ACQUISITION
MEASUREMENT LOSS DATE
PERIOD
STEP 3: The consideration transferred may
DETERMINE THE take a number of forms, such as:
WITHIN CONSIDERATION  Cash or other asset given
MEASUREMENT GIVEN up
PROFIT
PERIOD  Liabilities assumed
AFTER THE OR
 Issuance of equity
DATE OF LOSS instruments
ACQUISITION OUTSIDE  Contingent consideration
MEASUREMENT
PERIOD STEP 4: At acquisition date, net assets shall
CLASSIFYING AND be measured at fair value. In
MEASURING THE addition to the net assets acquired,
NET ASSETS the acquirer shall recognize any
ACQUIRED non- controlling interest (NCI) either

6. How to compute estimated impairment loss? at:

CARRYING AMOUNT OF NET ASSETS
ON DATE OF MEASUREMENT
(INCLUDING GOODWILL)
ESTIMATED RECOVERABLE
AMOUNT OF CGU (VALUE IN USE)
ESTIMATED IMPAIRMENT LOSS
JOURNAL ENTRY
GOODWILL IMPAIRMENT LOSS
GOODWILL
7. What are intercompany profit transactions?
 Fair value
 NCI’s proportionate share
of the acquirer’s
identifiable assets
NOTE:
 Direct and indirect costs
XXX are expensed
 Cost to issue or register
stocks are debited to
XXX
Share Premium
XXX
 Cost to issue bonds are
debited to bond issue cost
EXCEPTIONS (not measured at FV):
 Income taxes- IAS12
xxx
 Employee benefits- IAS 19
 Share-Based Payments
xxx Awards- IFRS 2
 Assets held for sale- fair
value less cost to sell
“NEW” GOODWILL
PRICE PAID > FV OF NET ASSETS
ACQUIRED
BARGAIN ON PURCHASE
PRICE PAID < FV OF NET ASSETS
ACQUIRED
10
 CHAPTER 7

1. Upstream direction of the

intercompany transaction impacts the
INTERCOMPANY
worksheet eliminations only because of
TRANSACTIONS
the requirement to distribute a
percentage of subsidiary net income to
Downstream Lateral Upstream the noncontrolling interest and the
Transaction transaction transaction corresponding measurement of the
An non-controlling Interest disclosed on
intercompany An An the consolidated balance sheet.
transaction intercompany intercompany 2. The elimination of the unrealized
flowing from transaction transaction intercompany profit must reduce the
flowing from flowing from
the parent to interests of both ownership groups
the subsidiary one subsidiary the subsidiary
each period until the profit is confirmed
to another to the parent
by resale to the inventory to a
subsidiary
nonaffiliated party.
3. Consolidated net income computation.

8. Directions of intercompany transactions. Reported net incomes:

Parent company xxx
PARENT COMPANY
Subsidiary xxx
xxx
Adjustments:
UPSTREAM DOWNSTREAM UPSTREAM Investment Income (xxx)
All current period income effects
relating to intercompany transactions ±xxx
SUBSIDIARY A SUBSIDIARY B Consolidated net income xxx
Less: non-controlling interest in net income of
LATERAL
Subsidiary (xxx)
Consolidated net income xxx
9. What is the purpose of consolidating Financial
Statements and eliminating intercompany
profits?

Present, primarily for the benefit of the

shareholders and creditors of the parent
company, the results of operations and the
financial position of a parent company and its
subsidiaries essentially as if the group were a
single company with one or more branches or
divisions.

10. Difference between the impact of

upstream and downstream transactions to the
working papers.

11
 CHAPTER 7

REVIEW PROBLEMS

Winterfell Company and Kingslanding Company are two family, while the Baratheon family owns Kingslanding
family owned ice cream producing companies in Company. The Stark family has only one son, and he is
Cagayan. Winterfell Company is owned by the Stark engaged to be married to the
CARRYING
FAIR VALUE daughter of Baratheon family. Because the son is
AMOUNT
Accounts receivable P 20,000 P 20,000 currently managing Winterfell Company, it is proposed
Inventory 140,000 125,000 that he be allowed to manage both companies after the
Land 620,000 840,000
Buildings (net) 530,000 550,000 wedding. As a result, it is agreed by the two families
Farm equipment (net) 360,000 364,000 that Winterfell Company should take over the assets of
Irrigation equipment (net) 220,000 225,000
Kingslanding Company on January 1, 2014.
Vehicles (net) 160,000 172,000
TOTAL ASSETS P2,050,000

Accounts payable P 80,000 80,000

Loan-metrobank 480,000 480,000 The balance sheet of Kingslanding Company
Share capital 670,000
immediately prior to the takeover is as follows:
Retained earnings 820,000
TOTAL LIABILITIES AND
CAPITAL P2,050,000
12
 CHAPTER 7

Winterfell Company issued 200,000 shares of its P1 par Goodwill (see no. 1) P 23,448,000
Decrease in contingent
value stock when the fairvalue of the stock is P125. At
consideration (184,000 - 170,000) (14,000)
the acquisition date, a provisional fair value of the farm Increase in provisional value of the
equipment was P 364,000. An additional valuation farm equipment (364,000 - 400,000) ( 36,000)
received on November 30, 2014 increased the GOODWILL, Dec 31, 2011 P 23,398,000
provisional value to P 400,000 and on April 30, 2014 this
fair value was finalized to P 450,000. It was further
agreed that Winterfell Company would pay additional TheDub Co.had these accounts at the time it was
amount on January 1, 2016 if the average income acquired by Bush Co.:
during the 2-year period of 2014-2015 exceeded P
80,000 per year. The expected value of this Cash------ ----------------------------------------------------36,000
consideration was calculated as P 184,000. On August Accounts receivable-------------------------------------457,000
31, 2014, the contingent consideration happens to be P Inventories-------------------------------------------------120,000
170,000; the measurement period is 1 year. Plant, property and equipment-----------------------696,400
Liabilities---------------------------------------------------350,800
1. What amount will be recorded as goodwill (gain Bush paid P1, 400,000 for 100% of the stock of Dub Co.
on bargain purchase) on January 2014?
it was determined that fair market values of inventories
a. P 23,434,000
and Plant, property and equipment were P 133,000 and
b. (1,352,000)
c. 23,264,000 P 900,000, respectively.
d. 23,448,000
3. Goodwill from the transaction.
2. What amount of goodwill (gain on bargain a. P 296,800
purchase) will be recorded in December 2014? b. 237,800
a. P 23,398,000 c. 224,800
b. 23,348,000 d. 238,900
c. 23,362,000
d. 23,376,000 4. Net assets of the subsidiary on the date of
acquisition
ANSWERS AND SOLUTIONS a. P 1,175,200
b. 1,175,600
c. 1,852,330
1. D
Consideration transferred: d. 1,172,380
Shares: (200,000 x 125/share) P 25,000,000
Contingent consideration 184,000 P25,184,000 5. Assuming Bush paid P 1,000,000. How much is
Less: Fair value of net assets acquired: the goodwill or gain on bargain purchase to be
Accounts receivable P 20,000 recorded?
Inventory 125,000 a. Goodwill 175,200
Land 840,000 b. gain on bargain purchase 175,200
Buildings 550,000 c. gain on bargain purchase 189,300
Farm equipment 364,000
d. goodwill 189,300
Irrigation equipment 225,000
Vehicles 172,000
Accounts payable (80,000) ANSWERS AND SOLUTIONS
Loan-metrobank (480,000) 1,736,000
GOODWILL P 23,448,000 3. C
Acquisition cost P1,400,000
2. A FV of assets acquired:
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 CHAPTER 7

Cash 36,000 LLL’s current assets and plant and equipment have fair
Accounts receivable 457,000
values of P3,000,000 and P5,000,000, respectively. LLL
Inventories 133,000
Plant, property & equipment 900,000
purchases KKK’s net assets for P 3,068,000.
Liabilities (350,800) (1,175,200)
Goodwill P 224,800
6. How much is the goodwill?
a. P 3,068,000
4. A b. 33,800
Acquisition cost P1,400,000 c. –o--
Goodwill 224,800 d. 33,700
Total assets P1,175,200
7. How much is the increase in the assets of LLL?
5. B a. P 2,927,600
b. 3,068,000
Acquisition cost
P1,000,000
c. 2,730,000
FV of assets acquired: d. 2,455,000
Cash 36,000
Accounts receivable 457,000 8. How much is the total assets of LLL?
Inventories 133,000 a. P 11,068,000
Plant, property & equipment 900,000 b. 10,010,000
Liabilities (350,800) (1,175,200) c. 5,000,000
Gain on bargain purchase P(175,200) d. 6,492,000

ANSWERS AND SOLUTIONS

KKK was merged into LLL Inc. in a combination properly
accounted for as acquisition of interests. Their 6. C
Acquisition cost P3,068,000
condensed balance sheets before combination show:
FMV of net assets acquired:
Currents assets P 1,653,600
LLL KKK Plant
Currents asset P 2,288,000 P1,627,600 and

Plant and
equipment, net
4,654,000 1,040,000
Patents - 260,000
Total assets P6,492,000 P2,927,600

Liabilities P2,704,000 171,600

Capital stock,
par 100 2,600,000 1,300,000
Share premium
390,000 390,000
Retained
earnings 1,248,000 1,066,000

Total liabilities
and equity P6,942,000 P2,927,600
equipment 1,248,000
Per independent appraiser’s report, KKK assets have Patents 338,000
FMV’s of P 1,653,600 for currents assets, P 1,248,000 Liabilities (171,600) (3,068,000)
Goodwill -0-
for plant and equipment and P 338,000 for patents.
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 CHAPTER 7

d. 1,500
7. B
FMV of assets acquired P3,068,000
ANSWERS AND SOLUTIONS
8. B
9. A
LLL’s assets at book value:
Consideration
Current assets P 2,288,000
transferred:
Plant and equipment,
4,654,000 P40
net Cash
0
LLL’s Total assets P6,942,000
Shares (10 x 36) 360
FMV of assets
P3,068,000 P76
acquired Total
Total assets P10,010,000 0
Less: fair value of assets
acquired:
F acquires assets and liabilities of M Company on Cash P80
January 2014. To obtain these shares, F pays P 400 and Receivables 160
issues 10 shares of P20 par value common shares on Inventory 300
this date. F stock had FV of P36 on this date. F also pays Land 130
Buildings (net) 280
P15 to a local investment firm for arranging the
Equipment (net) 75
transaction. An additional P10 was paid by F in stock
Trademark 40
issuance costs. Accounts payable (60)
The book values for both F and M as of January 2014 Long-term liabilities (300) 705
follow. In addition, M holds a fully amortized trademark Goodwill P55
that still retains a P40 value.
10. B
F Company M Company F common stock before acquisition 1,200
BOOKVALUE FAIRVALUE
Add: issued shares (10 x 20) 200
Cash P 900 P80 P80
Receivables 480 180 160 Total common stock 1,400
Inventory 660 260 300
Land 300 120 130
Buildings (net) 1,200 220 280
Equipment (net) 360 100 75 M Company acquired P Company through exchange of
Accounts payable 480 60 60
Long term common shares. All of P’s assets and liabilities were
liabilities 1,140 340 300 immediately transferred to M. M’s common stock was
Common stock 1,200 80
Retained earnings 1,080 480
trading at P20 per share at the time of exchange.
Following selected information is also available.

9. Goodwill is
a. P 55
b. 115
Before After
c. 45
acquisition acquisition
d. 50 Par value of shares
outstanding P 200,000 250,000
10. Total common stock is Share premium 350,000 550,000
a. P 1,400
b. 1,450 11. Shares issued at the time of exchange
c. 1,350 a. P 12,500

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 CHAPTER 7

b. 12,000 of P20,000. At December 2014, half of this merchandise

c. 12,300 is included in Pdjsdms’ inventory. Separate incomes for
d. 12,350 Pdjsdms and Snxnjsnd for 2013 and 2014 are
summarized as follows:
12. Par value of M’s common stock
a. P 4 2014
b. 6 Pdjsdms
c. 20
Snxnjsnd
d. 5
Sales P500,000 P300,000
13. If goodwill of P56,000 is recorded, what is the Cost of sales (250,000) (200,000)
fair value of net assets acquired? Gross profit P250,000 P100,000
a. P 250,000 Operating expenses (125,000) ( 40,000)
b. 155,000 Separate incomes P125,000 P 60,000
c. 194,000 2013
d. 395,000 Sales P600,000 P200,000
Cost of sales (250,000) (100,000)
ANSWERS AND SOLUTIONS
Gross profit P350,000 P100,000
11. A Operating expenses (125,000) ( 40,000)
Share premium and par value Separate incomes P225,000 P 60,000
before issuance (200,000 + 350,000) 550,000
Share premium and par value
after issuance (250,000 + 550,000) 800,000 14. Consolidated sales for 2013 and 2014
Share premium of share issued a. P 800,000; P 800,000
at the time of exchange 250,000 b. 700,000; 800,000
Divided by: fair value of stock 20 c. 900,000; 700,000
Shares issued 12,500 d. 600,000; 500,000

12. A 15. Consolidated net income for 2013 and 2014

Par value of shares outstanding
a. P 100,000; P 100,000
before issuance 200,000
b. 100,000; 257,000
Par value of shares outstanding
after issuance 250,000
c. 257,000; 100,000
Par value of additional d. 257,000; 257,000
shares issued P50,000
Divided by: no. of shares issued (no. 1) 12,500 16. Consolidated cost of sales for 2013 and 2014
Par value P 4.00 a. P 270,000; P 360,000
b. 360,000; 270,000
13. C
Consideration P 250,000
c. 500,000; 300,000
Less: goodwill 56,000 d. 600,000; 700,000
FV of assets acquired P194,000
17. NCI in net income for 2013 and 2014
a. P 8,000; P 7,000
Pdjsdms Company owns an 80% interest in Snxnjsnd b. 6,000; 7,000
Company.At December 31, 2013, Pdjsdms investment in c. 10,000; 8,000
Snxnjsnd on a cost basis was equal to 80% of Snxnjsnd d. 8,000; 10,000
stockholder’s equity. During 2013, Snxnjsnd sold
ANSWRES AND SOLUTIONS
merchandise to Pdjsdms for P 100,000 at a gross profit
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14. B d. 6,000
Total sales 800,000 800,000
Less: intercompany sales 100,000 -
19. Consolidated cost of sales for 2014
Consolidated sales P700,000 P800,000
a. P 500,000
b. 620,000
15. C
Snxnjsndnet income 60,000 60,000 c. 700,000
Less: unrealized intercompany profit 20,000 10,000 d. 230,000
Balance 40,000 50,000
Multiplied by: % of parent’s share ___80% 80% 20. Profit attributable to equity holders for 2014.
32,000 40,000 a. P 99,000
Add: parent’s income from b. 102,000
own operations 225,000 60,000 c. 98,000
Consolidated net income P257,000 P100,000 d. 85,000

16. A ANSWRES AND SOLUTIONS

Total COGS P 350,000 P450,000
Less: intercompany cogs 100,000 18. A
100,000Add: unrealized profit 20,000 SSS net income from operation P10,000
10,000 Multiplied by NCI% 20%
Consolidated cogs P270,000 P360,000 NCI’s share in net income P2,000

17. D 19. D
Snxnjsnd net income (see no.2) 40,000 50,000 Total COGS P260,000
Multiplied by: nci % 20% 20% Less: intercompany purchases 40,000
NCI in net income P8,000 P10,000 Add: unrealized profit 10,000
Consolidated COGS P230,000
The separate incomes (which do not include investment
income) of PPP Corporation and SSS Corporation, its 20. C
PPP net income from operations P100,000
80% owned subsidiary, for 2014 were determined as Less: unrealized profit 10,000
follows: Add: PPP’s share in SSS’ net income
(10,000 x 80%) 8,000
Profit attributable to equity holders for 2014 P98,000
PPP SSS
Sales P400,000 P100,000
Cost of sales (200,000) (60,000)
Gross profit 200,000 40,000
Other expenses (100,000) (30,000)
Separate incomes P 100,000 P10,000

During 2014, PPP sold merchandise that cost P 20,000

to sell for P 40,000, and at December 21, 2014 half of
these inventory items remained unsold by SSS.

18. Minority interest in net income for 2014.

a. P 2,000
b. 3,000
c. 5,000
17