BUSINESS COMBINATION – MIDTERM EXAMINATION

01. The method of accounting for investments in subsidiary that is appropriate for the acquisition method
of combination is:
a. The cost method c. The equity method
b. The market value method d. The poling method

02. Under the cost method of accounting for investment, depreciation and amortization of the allocated
excess between the fair value s and carrying values of a acquired subsidiary’s identifiable net assets is
debited to the:
a. Subsidiary’s expense account c. Subsidiary’s retained earnings account
b. Parent’s expense account d. Parent company’s investment account

03. If a parent company uses the cost method of accounting for a partially-owned subsidiary and there are
no inter-company profit or losses eliminated for the computation of consolidated comprehensive
income, consolidated retained earnings is equal to the balance of the parent’s
a. Retained earnings
b. Retained earnings plus balance of the subsidiary’s retained earnings.
c. Retained earnings plus the parent’s share of the subsidiary’s retained earnings
d. Retained earnings plus the parent’s share of the net increase in the subsidiary’s retained
earnings subsequent to the date of acquisition.

04. Panzer Company owns 100% of the outstanding ordinary shares of the Suez Corporation. During
2021, Panzer sold merchandise to Suez that the latter, in turn, sold to unrelated firms. There were no
such goods in Suez’s ending inventory. However, some of the inter-company purchases had not been
paid. Which of the following will be incorrect in the consolidated financial statements if no
elimination entries are made?
a. Inventory, accounts payable, comprehensive income
b. Inventory, sales, cost of goods sold, accounts receivable
c. Sales, cost of goods sold, accounts receivable, accounts payable
d. Accounts receivable, accounts payable

05. PPI Inc. owned 80% of SSI Corporation. During 2021, PPI sold goods with a 40% gross profit to
SSI. SSI sold all of the goods in 2021. For 2021 consolidated financial statements, how much
summation of PPI and SSI comprehensive income statement items be adjusted?
a. Sales and cost of goods sold should be reduced by the inter-company sales.
b. Sales and cost of goods sold should be reduced by 80% of the inter-company sales.
c. Comprehensive income should be reduced by 80% of the gross profit on inter-company sales.
d. No adjustment is necessary.

06. On January 2, 2021, Prince Corporation acquired 80% of Squire Company’s ordinary shares for
P3,240,000. P150,000 of the excess is attributable to goodwill and the balance to a depreciable asset
with an economic life of ten years. Non-controlling interest (NCI) is measured at its fair value on the
date of acquisition. On the date of acquisition, shareholders’ equity of the two companies are as
follows:
Prince Squire
Ordinary share P5,250,000 P1,200,000
Retained earnings 7,800,000 2,100,000

On December 31, 2021, Squire Company reported comprehensive income of P525,000 and paid
dividends of P180,000 to Prince. Prince reported comprehensive income from its own operations of
P1,425,000 and paid dividends of P690,000. Goodwill has been impaired and should be reported at
P30,000 on December 31, 2021.

What is the non-controlling interest in comprehensive income of Squire Company on December 31,
2021?
a. P93,750 b. P93,000 c. P105,000 d. P69,000

07. Using the same information in no. 6, what is the consolidated retained earnings attributable to the
parent company on December 31, 2021?
a. P8,811,000 b. P8,790,000 c. P8,787,000 d. P10,398,750

08. Wright Corporation acquired 80% of the outstanding ordinary shares of Strow Company on June 1,
2021 for P2,345,000.

 Strow Company’s shareholders’ equity components at the end of this year are as follows:
Ordinary shares – P1,000,000; Share premium – P450,000; retained earnings – P890,000.
  Non-controlling interests is measured a fair value.

 All of the assets of Strow were fairly valued, except for inventories which are overstated by
P44,000 and equipment which was understated by P60,000. Remaining useful life of equipment
is four years.

 Both companies use straight-line method for depreciation and amortization. Shareholders’ equity
of Wright on January 1, 2021 is composed of ordinary shares – P3,000,000; Share premium –
P700,000; Retained earnings – P2,100,000.

 Fair value of NCI on the date of acquisition is P470,000.

 Goodwill, if any, should be written down by P56,900 at year-end.

 Comprehensive income for the first year of parents and subsidiary are P300,000 and P170,000
(from date of acquisition), respectively.

 Dividends declared at the end of the year amounted to P80,000 and P60,000 for Wright
corporation and Strow Company, respectively. During the year, there was no issuance of new
ordinary shares

What is the balance of the non-controlling interest in the net assets of Strow Company on December
31, 2021?
a. P580,670 b. P508,970 c. P496,970 d. P487,670

09. Using the same information in no. 8, what is the amount of consolidated shareholders’ equity on
December 31, 2021?
a. P6,081,380 b. P6,569,050 c. P6,559,050 d. P6,578,350

10. Procter Corporation acquired on January 1, 2021 75% of the outstanding ordinary shares of Rambler
Company for P207,000. On that date, Rambler’s statement of financial position showed shareholders’
equity of:
Ordinary shares, par P100 P200,000
Retained earnings 50,000

The excess between the price paid and the book value of subsidiary’s net assets is allocated to
equipment which has an estimated remaining useful life of ten years. For the year ended December
31, 2021, Rambler reported net profit of P60,000 and paid cash dividends of P20 per share of its
ordinary share. Proctor Corporation reported comprehensive income of P100,000 on its own
operations.
What is the consolidated comprehensive income attributable to the parent company?
a. P145,000 b. P143,000 c. P113,050 d. P145,500

11. On June 30, 2021, PJ Corporation issued 150,000 shares of its P20 par ordinary shares for which it
received all of SG Company’s ordinary shares. The fair value of the ordinary shares issued equal to
the book value of SG Company’s net assets. Both companies continued to operate as separate
businesses, maintaining accounting records with years ending December 31. Comprehensive income
from own operations and dividends paid were:
PJ SJ
Net income:
Six months ended June 30, 2021 P750,000 P225,000
Six months ended December 31, 2021 825,000 375,000

Dividends paid:
March 23, 2021 950,000 -
November 15, 2021 - 300,000

On December 31, 2021, SG held in its inventory merchandise acquired from PJ on December 1, 2021
for P150,000, which included a P45,000 markup. What is the amount of consolidated comprehensive
income on December 31, 2021?
a. P1,650,000 b. P1,905,000 c. P1,950,000 d. P2,130,000
12. Ace Corporation owns 90% of the Bailey Company’s ordinary shares and 80% of Chrome
Company’s ordinary shares. Baily sells exclusively to Chrome. Chrome buys exclusively from
Baily, and Chrome sells exclusively to unrelated customers. Selected 2021 information for Baily and
Chrome follows:

Baily Chrome
Sales P130,000 P91,000
Cost of sales 100,000 65,000
Beginning inventory - -
Ending inventory - 65,000

What amount should be reported as gross profit in Baily and Chrome’s combined statement of
comprehensive income for the year ended December 31, 2021?
a. P26,000 b. P41,000 c. P47,800 d. P56,000

13. During 2021, PP Corporation sold goods to its 80%-owned subsidiary, SS Company. On December
31, 2021, one-half of these goods were included in SS Company’s ending inventory. Reported 2021
were selling expenses were P110,000 and P40,000 for PP and SS, respectively. PP’s selling expenses
included P5,000 freight-out costs for goods sold to SS.

What amount of selling expenses should be reported in PP’s consolidated statement of comprehensive
income?
a. P150,000 b. P148,000 c. P147,500 d. P145,000

14. Selected information from the separate and consolidated statements of financial position and income
statements of RHI and its subsidiary, CAC as of December 31, 2021, and for the year ended are as
follow:

RHI CAC Consolidated

SFP Accounts:
Accounts Receivable P 52,000 P 38,000 P 78,000
Inventory 60,000 50,000 104,000

Income Statement Accounts:

Sales 400,000 280,000 616,000
Cost of Goods Sold 300,000 220,000 462,000

During 2021, RHI sold goods to CAC at the same markup on cost that RHI uses for all sales. In RHI
consolidated worksheet, what amount of unrealized intercompany profit was eliminated?
a. P6,000 b. P12,000 c. P58,000 d. P64,000

15. Pears Corporation acquired 70% interest in Spears Company in 2019. During 2020, Spears sold
merchandise to Pears for P10,000 at a gross profit of P2,000. The merchandise was resold during
2021 by Pears for P15,000. Sears reported a comprehensive income for 2020 and 2021 of P80,000
and P90,000, respectively.

Compute the NCI in Sear’s total comprehensive income for 2020 and 2021.
2020 2021 2020 2021
a. P24,000 P27,000 c. P23,400 P28,200
b. P23,400 P26,400 d. P24,600 P27,600