PRACTICE PROBLEMS IN ADVANCED ACCOUNTING 2

Prepared by and compiled by: Khim L Anonuevo, CPA

“You must have to courage to take the risk and sacrifice time to acquire
your CPA title and it will be yours forever”

Winston has the following account balances as of February 1, 2011:

Inventory P 600,000 Common stock (P10 par value)
P 800,000
Land 500,000 Retained earnings, Jan.
1,2011 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 Paid-in Capital of
P500,000.

1. Determine the goodwill that would be included in the February 1, 2011,

financial statement of Arlington.
a. P200,000 b. P230,000 c. P100,000
d. P130,000

2. 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 gain
from business combination.
a. P100,000 b. P200,000 c. P260,000
d. P60,000

3. The Gorgeous Company will issue share at P10 par value common stock for
all the net assets of the 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

4. Zildjan Inc. acquired on January 1, 2011 all the issued and outstanding
common shares of Violin Inc. for P310,000. On this day, the net assets of
Violin Inc., amounts to P270,000 including goodwill of P50,000. Per
appraisal, plant and equipment and merchandise inventory were undervalued
by P30,000 and overvalued by P15,000, respectively. What is the amount of
goodwill resulting from this transaction?
a. P125,000 b. P25,000 c. P75,000 d. P0

Questions 49 and 50 are based on the following:

On January 1, 2011, Marc 2000 Company acquired all the net assets of
Jerome Company in exchange for 9,000 newly issued common shares of Marc
2000 with a par value of P10 and a market value of P25. Immediately prior

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 to the combination, on January 1, 2011, the book values and fair values of
Jerome were presented in the following balance sheet:
Book value Fair value
Cash P 10,000 P 10,000
Inventory 30,000 30,000
Plant and equipment (net) 165,000 200,000
Total assets P205,000 P240,000
Notes payable P 20,000 P 20,000
Common stock 100,000
Excess over par 25,000
Retained earnings 60,000
Total equities P205,000
In addition, Marc 2000 Company incur additional out of pocket cost of
P5,000 for issuing and registering the stocks and P10,000 other
combination costs.
As part also of the combination plan, Marc 2000 agreed to give additional
consideration to Jerome if certain future events or transactions occur.

5. Assume Marc 2000 agreed to issue 1,000 additional shares of common stock
to the former stockholders of Jerome if Marc 2000’s total net income for
the next two years exceeds a specific amount. Assume the contingency is
met and that the market price of Marc 2000’s common shares at the end of
the contingency period is P30 per share, how much is the total goodwill
recorded by Marc 2000 as a result of business combination?
a. P15,000 b. P50,000 c. P45,000 d. P35,000

*5, 000
6. Assume Marc 2000 agreed to issue additional shares of common stock for any
difference between the P25 assigned to the securities at the combination
date and the market price of the securities at end of one year. The market
price of Marc 2000’s stock at the end of the contingency period was P20,
how much additional paid-in capital Marc 2000 recorded as a result of the
business combination?
a. P180,000 b. P175,000 c. P112,500 d.
P107,500

7. On January 1, 2010, Norman, Inc., reports net assets of P760,000 although

equipment (with a four-year life) having a book value of P440,000 is
worth P500,000. Hope Corporation pays P692,000 on that date for an 80
percent ownership in Norman. What is the consolidated goodwill balance on
December 31, 2011?
a. P20,800 b. P28,800 c. P34,200 d. P36,000

8. On January 1, 2009, 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, 2011, 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

9. Herbert, Inc., buys all of the outstanding stock of Rambis Company on

January 1, 2010. Annual excess amortization of P12,000 results from this
purchase transaction. On the date of the takeover, Herbert reported
retained earnings of P400,000 while Rambis reported a P200,000 balance.

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 Herbert reported income of P40,000 in 2010 and P50,000 in 2011 and paid
P10,000 in dividends each year. Rambis reported net income of P20,000 in
2010 and P30,000 in 2011 and paid P5,000 in dividends each year.
Assume that Herbert’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, 2011?
a. P470,000 b. P510,000 c. P446,000
d. P486,000

10. On January 1, 2007, French Company purchased 80 percent of the

outstanding shares of Sago Company for P600,000 in cash. On that date,
Sago had P200,000 of capital stock and P500,000 of retained earnings. All
of the assets and liabilities of Sago Company were fairly valued.
Goodwill, if any, is not amortized. The January 1, 2011, inventory of Sago
includes P10,000 of merchandise purchased from French in year 2010 at 125
percent of cost. The December 31, 2011, inventory of Sago includes P16,000
of merchandise purchased from French at the same markup. Sago’s
inventories are on a FIFO basis. For year 2011, Sago reported net income
of P80,000 and paid dividends of P40,000. Patata’s income from its own
operations is P400,000; it paid dividends of P250,000. If French uses the
cost method on its books, what will be its consolidated net income to
retained earnings compared with its book income?
a. P32,000 higher b. P30,800 higher c. P29,800 higher d.
P1,200 lower

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