BSA E1

AFAR, Review

Activity | Home Office, Branch Accounting & Business Combination

A.Y. 2021 – 2022

Name: Dee One Mae C. Mendez Date: March 2, 2022

Instruction: Write the letter of the correct answer on the space provided. Support your answer
with computations.

________1. What is the adjusted balance of Branch Current account in Home Office books?

a. 0 c. 187,125 e. None of the choices

b. 185,375 d. 274,375

Solution:
BRANCH ACCOUNT

200,000 3,375

78,750 10,000

3,500 15,000

20,500

1,025

303,775 28,375

275,400

Annual depreciation 20,500 x 5% = 1,025

________2. What is the adjusted Home Office Current account in the Branch books?

a. 0 c. 187,125 e. None of the choices

b. 185,375 d. 274,375

Solution:
0, because there is no home office account in the home office book.

________3. At what percentage of cost did the Home Office bill the Branch for merchandise
shipped to it?
a. 100% c. 140% e. None of the choices
b. 120% d. 150%

Solution:
Beginning, inventory P 70,000
Add: shipments from home office 350,000
Total 420,000
Less: ending, inventory 84,000
COGS Shipments P 336,000

True net income of Home Office P 156,000

Branch net income as reported (60,000)
Overvaluation of COGS (P 96,000)

The total actual cost P 240,000

COGS Shipments P 336,000

Divided by: actual cost 240,000
Percentage of cost 1.40 or 140%

________4. What is the balance of the Allowance for Overvaluation in the Branch Inventory on
December 31, 2022?

a. 10,000 c. 24,000 e. None of the choices

b. 16,000 d. 34,000

Solution:
84,000 x 40/140 = 24,000 Allowance for overvaluation after adjustment

________5. Black Polo Inc. opened an agency in Marikina. The following are transactions for
July 2022, Samples worth P10,000, advertising materials of P5,000 and checks for P50,000
were sent to the agency. Agency sales amounted to P220,000 (cost P150,000). The collection
for agency amounted to P176,400 net of 2% discount. The agency’s working fund was
replenished for the following expenses incurred: rent for 2 months P10,000, delivery expenses
of P2,500 and miscellaneous expenses of P2,000. Home Office charges the following to agency
after analysis of accounts recorded in the books: salaries and wages P15,000 and commission
which is 5% of sales. The agency sample inventory at the end of July is 25% of the quantity
shipped. The agency has used 20% of the advertising materials sent by the home office.

What is the amount if agency net income for the month of July?
a. 17,400 c. 22,400 e. None of the choices
b. 21,000 d. 66,400

Solution:
Sales P 220,000
Less: sales discount (3,600)
Net sales 216,400
Less: cost of sales (150,000)
Gross profit 66,400
Less: other expenses
Sample expense P 7,500
Advertising expense 1,000
Rent expense 5,000
Delivery expense 2,500
Miscellaneous expense 15,000
Salaries and wages 11,000 44,000
Net income P 22,400

Collection of 176,400/98% x 2% discount = 3,600

Sample expense 10,000 x 75% used portion = 7,500
(100% - 25% ending inventory = 75%)
Advertising expense 5,000 x 20% used portion = 1,000
Rent expense 10,000/2months = 5,000
Commission expense 220,000 sales x 5% = 11,000

________6. Pail Company pays P100,000,000 in cash for Salt Company’s assets and liabilities.
Pail records goodwill of:
a. 50,000,000 c. 72,500,000 e. None of the choices
b. 66,800,000 d. 77,500,000

Solution:
Pail company cash P 100,000,000
Current Assets P1,500,000
Plant and Equipment (net) 35,000,000
Patents 2,000,000
Completed technology 10,000,000
Licensing agreements 4,000,000 P52,500,000
Less: liabilities (30,000,000) (22,500,000)
Goodwill P 77,500,000

________7. Now assume Pail Company pays P10,000,000 in cash to acquire the assets and
liabilities of Salt Company. Pail records a bargain purchase gain on acquisition of:
a. 0 c. 17,500,000 e. None of the choices
b. 12,500,000 d. 28,500,000

Solution:
Pail company cash P 10,000,000
Current Assets P1,500,000
Plant and Equipment (net) 35,000,000
Patents 2,000,000
Completed technology 10,000,000
Licensing agreements 4,000,000 P52,500,000
Less: liabilities (30,000,000) (22,500,000)
Gain or loss on acquisition P 12,500,000

________8. Pail paid P100,000,000 in cash for Salt. Three months later, Salt’s patents are
determined to have been worthless as of the date of acquisition. The entry to record this
information includes:
a. A debit to Loss of P2,000,000
b. A debit to Patents of P2,000,000
c. A debit to Goodwill of P2,000,000
d. A debit to Retained Earnings of P2,000,000

Solution:
The correcting entry, within the measurement period (as of the date of acquisition means it exist
on the date of acquisition), is
Goodwill 2,000,000
Patents 2,000,000]

________9. Pail paid P10,000,000 in cash for Salt. Three months later, it is determined that
Salt’s acquisition date (as of the date of acquisition) liabilities omitted a pending lawsuit valued
at P2,000,000. The entity to record this information includes:
a. A debit to Bargain Purchase on Acquisition of P2,000,000.
b. A debit to Liabilities of P2,000,000.
c. A debit to Goodwill of P2,000,000.
d. A debit to Retained Earnings of P2,000,000.

Solution:
The correcting entry, within the measurement period (as of the date of acquisition means it exist
on the date of acquisition), is
Gain on acquisition 2,000,000
Liabilities 2,000,000

For Numbers 10 to 14
_______10. What number of shares did Zykel issue for this acquisition?
a. 80,000 c. 30,000 e. None of the choices
b. 50,000 d. 17,500
Solution
Common stock - combined P 125,000
Common – Zykel 100,000
Common stock issued P 25,000
Divided by: par value common stock 2
Zykel shares to acquire Globe P12,500

_______11. At what price was Zykel stock trading when stock was issued for this acquisition?
a. 2.00 c. 6.00 e. None of the choices
b. 5.63 d. 8.00

Solution:
Par value of common stock Zykel P2
Add: share premium/APIC per share (P245,000-65,000)/12,500 14.4
Fair value per share when stock was issued 16.4

12. What was the fair value of the net assets held by Globe Tattoo at the date of combination?
a. 115,000 c. 270,000 e. None of the choices
b. 227,000 d. 497,000

Solution:
Net identifiable assets of Zykel before acquisition
Cash P 65,000
Accounts Receivable 72,000
Inventory 33,000
Buildings and Equipment (net) 400,000
Less: Accounts Payable P 50,000
Bonds Payable 250,000 (300,000)
Total P 270,000

Net identifiable assets in the combined balance sheet:

Cash P 90,000
Accounts Receivable 94,000
Inventory 88,000
Buildings and Equipment (net) 650,000
Less: Accounts Payable P 75,000
Bonds Payable 350,000 (425,000)
Total P 497,000

FV of the net identifiable assets held by Globe Tattoo at date of acquisition P 227,000

______13. What amount of goodwill will be reported by the combined entity immediately
following the combination?
a. 13,000 c. 173,000 e. None of the choices
b. 125,000 d. 413,000

Solution:
Consideration transferred (12,500 x P16.4) P 205,000
Less: FV of the net identifiable assets 227,000
Goodwill P 22,000

_______14. What balance in retained earnings will the combined entity report immediately
following the combination?
a. 35,000 c. 105,000 e. None of the choices
b. 70,000 d. 175,000

Solution:
Acquirer - Zykel (at book value) P 105,000
Acquiree - Globe tattoo (not acquired) 0
Retained earnings P 105,000

There was no bargain purchase gain and acquisition related cost, that is why it affects retained
earnings on the acquisition date.

_______15. Ruben Inc. is to acquire James Corp. by absorbing all the assets and assuming all
the liabilities of the latter in exchange for the shares of the former’s stock.Below are the balance
sheets of the two companies, with the corresponding appraised
value increment for James Corp:

Ruben James
Assets, per books P4,000,000 P2,500,000
Assets, appraisal increase 300,000
Liabilities 1,500,000 800,000
Common Stock (No par, P100 par) 2,000,000 1,000,000
Additional Paid in Capital 700,000 300,000
Retained Earnings (Deficit) (200,000) 400,000
Total Equities P4,000,000 P2,500,000

The parties agree to use the appraised values, against which the fair market value of the shares
will be matched. Ruben Inc.’s common stock is currently selling at P100 per share. The number
of shares to be issued by Ruben Inc. is:

a. 10,000 c. 17,000 e. None of the choices

b. 13,000 d. 20,000
Solution:
Assets at appraised value (P2,500,000 + 300,000) P 2,800,000
Less: liabilities (800,000)
Net assets at appraised value P 2,000,000
Divided by: selling stock 100
Number of issued shares P 20,000

_______16. Sicat Co. will issue share of P10-par common stock for the net assets of Max Co.
Sicat’s common stock has a current market value of P40 per share. Max balance sheet
accounts follow:

Current Assets P320,000 Common stock, par P4 (80,000)

Property and Equipment 880,000 Additional paid in capital (320,000)
Liabilities (400,000) Retained Earnings (400,000)

Max current assets and property and equipment, respectively, are appraised at P400,000 and
P1,600,000; its liabilities are fairly valued. Accordingly, Sicat Co. issued shares of its common
stock with the total market value equal to that of Max net assets. To recognize goodwill of
P200,000, how many shares were issued?
a. 40,000 c. 50,000 e. None of the choices
b. 45,000 d. 55,000

Solution:
FV of net identifiable assets acquired:
Current asset P 400,000
Property plant and equipment 1,600,000
Liabilities (400,000)
FMV of net assets 1,600,000
Add: goodwill 200,000
Consideration transferred 1,800,000
Divided by: current mv per share 40
Number of issued shares P 45,000

_______17. Philip Company will issue shares of its P10 par value stock for all of the outstanding
stock of the Siylay Company. Philip Company stock has a market value of P40 per share. Siylay
Company balance sheet appears below:

Current Assets P160,000 Current Liabilities P50,000

Property, Plant, and Equipment 440,000 Long Term Debt 150,000
Common Stock, P4 par 40,000
Paid in capital in excess ofPar 160,000
Retained Earnings 200,000
Total P600,000 Total P600,000
Philip Company estimated that the current value of the current assets would be P200,000 and
the property, plant, and equipment, P800,000; the liabilities were correctly stated. Accordingly,
Philip Company issued sufficient shares of its stock so that the market value of the stock issued
equaled the market value of Siylay Company’s net assets. Compute the stock exchange ratio
for Philip shares to Siylay shares:
a. 1:2 c. 3:1 e. None of the choices
b. 2:1 d. 1:3

Solution:
Current assets P 200,000
Property,plant and equipment 800,000
Total asset at current value: P1,000,000
Less: liabilities
Current liabilities P 50,000
Long-term debt 150,000 200,000
Net asset at CV (market) P 800,000
Divided by: MV of Philip stock 40
Issued shares by Philip 20,000

Shares outstanding of Siylay (P40,000/P4) 10,000

Stock exchange ratio: Philip to Siylay (20,000/10,000) 2:1

_______18. Companies A and B decide to consolidate. Asset and estimated annual earnings
contributions are as follows:
Co. A Co. B Total
Net asset contribution P300,000 P400,000 P700,000
Estimated annual earnings contribution 50,000 80,000 130,000

Stockholders of the two companies agree that a single class of stock be issued, that their
contributions be measures by net assets plus allowances for goodwill, and that 10% be
considered as a normal rate of return. Earnings in excess of the normal rate of return shall be
capitalized at 20% in calculating goodwill. It was also agreed that the authorized capital stock of
the new corporation shall be 20,000 shares with a par value of P100 a share.

The amount of goodwill credited to Co. A, and the total contribution of Co. B (net assets plus
goodwill) is:
a. 100,000; 400,000 c. 100,000; 600,000 e. None of the choices
b. 150,000;500,000 d. 200,000; 600,000

Solution:
Company A Company B
Net asset contributions P300,000 P400,000
Add: goodwill
Average/annual earnings 50,000 80,000
Less: normal earnings (10% on net asset) 30,000 40,000
Excess earnings P 20,000 P 40,000
Divided by: capitalized at 20% 20%
Goodwill P 100,000 P 200,000
Total contribution (issued stock) P 400,000 P 600,000

_______19. Companies X, Y and Z, parties to a consolidation, have the following data:

X Co. Y Co. Z Co.

Net assets P400,000 P600,000 P1,000,000
Average annual earnings 60,000 60,000 80,000

The parties collectively agreed that the new corporation, AA Co., will issue a single class of
stock based on the earnings ratio. What is the stock distribution ratio to Companies X, Y, and Z,
respectively?
a. 20:30:50 c. 30:40:30 e. None of the choices
b. 30:30:40 d. 40:40:20

Solution:
Fraction
X: P 60,000 6/20 = 30%
Y: 60,000 6/20 = 30%
Z: 80,000 8/20 = 40%
P200,000 100%

_______20. Bats Inc., a new corporation formed and organized because of the recent
consolidation of II Inc. and JJ Inc., shall issue 10% participating preferred stocks with a par
value of P100 for II and JJ net assets contributions, and common shares with a par value of P50
for the difference between the total shares to be issued and the preferred shares to be issued.
The total shares to be issued by Bats shall be equivalent to average annual earnings capitalized
at 10%. Relevant data on II and JJ follows:

II JJ
Total Assets P720,000 P921,600
Total Liabilities 432,000 345,600
Annual Earnings (average) 46,080 69,120

The total preferred shares to be issued and the amount of goodwill to be recognized by Bats
are:
a. 8,640; 288,000 c. 2,880; 864,000 e. None of the choices
b. 5,760, 288,000 d. 7,280; 864,000

Solution:
Average annual earnings (P46,080+P69,120) P 115,200
Divided by: capitalized at 10%
Total stock to be issued P 1,152,000
Less: net assets (for P/S) 864,000
Goodwill (for common stock) P 288,000

Preferred stock (same with net assets)

P 864,000 / P 100 par P 8,640