Cebu Roosevelt Memorial Colleges

Accounting for Business Combination

Midterm Examination 2021-2022

Instruction: All answers must be in the google form.

Pedro purchased 80% of the common stock of Sanburn Company for P500,000 on January 1, 2020. On that date, the
common stock of Sanburn Company was P300,000 and retained earnings of P200,000. On the purchase date,
inventory of Sanburn Company, which was sold during 2020, was understated by 30,000 and buildings were
undervalued by P40,000, having a 10-year remaining life. Any remaining excess of cost over fair value was attributed
to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired.
The reported income and dividends paid by Sanburn Company were as follows:

2020 2021 2022

Net income 100,000 120,000 130,000
Dividends 40,000 50,000 70,000

1. Assume the cost method is applied. Compute Pedro’s Investment in Sanburn at December 31, 2020.
a. P500,000
b. P542,400
c. P574,400
d. P625,000
2. How much does Pedro report as Income from Sanburn for the year ended December 31, 2022?
a. P50,400
b. P56,000
c. P98,400
d. 100,800
3. Compute the non-controlling interest in the net income of Demers at December 31, 2021.
a. P14,000.
b. P18,400
c. P22,600
d. P23,200
4. Compute the non-controlling interest of Demers using equity method at December 31, 2022.
a. P 80,000
b. P156,600
c. P154,600
d. P160,800

On January 1, 2021, Peppa, Inc. purchased 70% of Seb Corporation for 469,000. On that date the book value of the
net assets of Seb totaled 500,000. Based on the appraisal done at the time of the purchase, all assets and liabilities
had book values equal to their fair values except as follows:

Book Value Fair Value

Inventory 100,000 120,000
Land 75,000 85,000
Equipment (useful life 4 years) 125,000 165,000

The 70,000 of excess of cost over book value was allocated to a patent with a 10-year useful life. During 2021 Peppa
reported net income of 200,000 and Seb had net income of 100,000.
5. What is consolidated net income using the parent approach?
a. 200,000
b. 244,100
c. 263,000
d. 270,000
6. What is consolidated net income if Peppa includes in its net income, income from Seb using the equity method?
a. 200,000
b. 244,100
c. 263,000
d. 270,000
7. What income from subsidiary did Peppa include in its net income if Peppa uses the equity method?
a. 42,000
b. 44,100
 c. 58,100
d. 70,000
8. In consolidated financial statements it is expected that:
a. Dividends declared equals the sum of the total parent company's declared dividends and the total
subsidiary's declared dividends.
b. Retained Earnings equals the sum of the controlling interest's separate retained earnings and the
noncontrolling interest's separate retained earnings.
c. Common Stock equals the sum of the parent company's outstanding shares and the subsidiary's
outstanding shares.
d. Net Income equals the sum of the income distributed to the controlling interest and the income
distributed to the noncontrolling interest.
9. How is the portion of consolidated earnings to be assigned to noncontrolling interest in consolidated financial
statements determined?
a. The net income of the parent is subtracted from the subsidiary's net income to determine the
noncontrolling interest.
b. The subsidiary's net income is extended to the noncontrolling interest.
c. The amount of the subsidiary's earnings recognized for consolidation purposes is multiplied by the
noncontrolling's percentage ownership.
d. The amount of consolidated earnings determined on the consolidated working papers is multiplied by the
noncontrolling interest percentage at the balance-sheet date.

10. Patty Corp. has several subsidiaries (Ata, Bata, and Gata) that are included in its consolidated financial
statements. In its 12/31/2021 separate balance sheet, Patty had the following intercompany balances before
eliminations:

Debit Credit
Current receivable due from Ata 40,000
Noncurrent Receivable due from Bata 100,000
Cash Advance to Bata 26,000
Cash Advance from Gata 75,000
Intercompany Payable to Gata 40,000

In its 12/31/2021 consolidated balance sheet, what amount should Patty report as intercompany
receivables? a. 166,000
b. 51,000
c. 26,000
d. 0

11. If the investment in subsidiary account is increased or decreased by the amount determined by the following
calculation:
Parent ownership percentage x (current balance in the subsidiary's retained earnings minus the subsidiary's
retained earnings balance on the date of acquisition) the investment account is being converted from a. Cost to
Equity
b. Equity to Cost
c. Parent to Entity
d. Entity to Parent

12. Alpha purchased an 80% interest in Beta on June 30, 20X1. Both Alpha's and Beta's reporting periods end
December 31. Which of the following represents the controlling interest in consolidated net income for 20X1? a.
100% of Alpha's July 1-December 31 income plus 80% of Beta's July 1-December 31 income b. 100% of Alpha's July
1-December 31 income plus 100% of Beta's July 1-December 31 income c. 100% of Alpha's January 1-December 31
income plus 80% of Beta's July 1-December 31 income d. 100% of Alpha's January 1-December 31 income plus 80%
of Beta's January 1-December 31 income

13. People Corp. purchased 70% of Son Corp.'s P10 par common stock for P900.000 on January 1, 2021. On this date,
the carrying amount of Son’s net assets was P1,000,000. The fair values of Son’s identifiable assets and liabilities
were the same as their carrying amounts except for plant assets (net), which were P200,000 in excess of the
carrying amount. For the year ended December 31, 2021, Son had net income of P150,000 and paid cash
dividends totaling P90,000. Excess attributable to plant assets is amortized over 10 years. In the December 31,
2021. consolidated balance sheet, non-controlling interest should be reported at.
a. P282.714
b. P300,500
c. P345,500
d. P397,714
14. On January 2, 2021, Pe Corporation purchased an 80% investment in Sy Company. The purchase price was equal
to Pe’s equity in Sy’s net assets at that date. On January 2, 2021, Puzon and Suarez had retained earnings of
 P500,000 and P100,000, respectively. During 2021, (1) Pe had CI of P200,000, which included its equity in Sy’s
dividends, and declared dividends of P50,000; (2) Sy had CI of P40,000 and declared dividends of P20,000; and (3)
there were no other intercompany transactions. On December 31, 2021, the consolidated retained earnings
should be:
a. P650,000
b. P674,000
c. P666,000
d. P770,000

On January 2, 2021, Ponce Corporation purchase 30 percent of Sito Company's common stock for P216,000. P10,000
of the excess is attributed to goodwill and the balance to a depreciable asset with an economic life of ten years. On
the date of acquisition Sito reported common stock outstanding of P80,000 and retained earnings of P140,000, and
Ponce reported common stock outstanding of P350,000 and retained earnings of P520,000.

On December 31, 2021, Sito reported comprehensive income of P35,000 and paid dividends of P15,000, Ponce
reported CI from its separate operations of P95,000 and paid dividends of P46,000. Goodwill had been impaired and
should be reported at P2,000 on December 31, 2021.

15. What is the consolidated CI on December 31, 2021?

a. 118,250
b. 118,000
c. 126,000
d. 124,000

16. What is the consolidated retained earnings on December 31, 2021?

a. 586,000
b. 585,800
c. 587,400
d. 591,800

17. On December 31, 2021, how much is the NCI in CI of the subsidiary?
a. 6,250
b. 4,600
c. 6,200
d. 5,400

18. What is the balance of NCI on December 31, 2021?

a. 54,750
b. 57,200
c. 55,600
d. 48,500

19. Pappy Company owns 100% of the outstanding common stock of the Siel Company. During 20X1, Pappy sold
merchandise to Siel that Siel, in turn, sold to unrelated firms. There were no such goods in Siel's ending
inventory. However, some of the intercompany purchases from Pappy had not yet been paid. Which of the
following amounts will be incorrect in the consolidated statements if no adjustments are made?
a. inventory, accounts payable, net income
b. inventory, sales, cost of goods sold, accounts receivable
c. sales, cost of goods sold, accounts receivable, accounts payable.
d. sales, cost of goods sold

20. The material sale of inventory items by a parent company to an affiliated company
a. enters the consolidated revenue computation only if the transfer was the result of arm's length bargaining
b. affects consolidated net income under a periodic inventory system but not under a perpetual inventory
system
c. does not result in consolidated income until the merchandise is sold to outside entities d.
does not require a working paper adjustment if the merchandise was transferred at cost

21. Petty Corporation regularly sells inventory items to its subsidiary, Silly, Inc. If unrealized profits in Silly’s 2021
year end inventory exceed the unrealized profits in its 2022 year-end inventory, 2021 combined a. cost of sales
will be less than consolidated cost of sales in 2022.
b. gross profit will be greater than consolidated gross profit in 2022.
c. sales will be less than consolidated sales in 2022.
d. cost of sales will be greater than consolidated cost of sales in 2022.
22. Little Company sold inventory with a cost of 40,000 to its 90%-owned subsidiary, Big Corp., for 100,000 in 2021.
Big resold 75,000 of this inventory for 100,000 in 2021. The amount of inventory reported on the consolidated
financial statements at the end of 2021 is _______.
a. 10,000
 b. 18,000
c. 21,000
d. 30,000

23. Dan owns 80% of Lea Company common stock. During October 2021, Lea sold merchandise to Dan for 300,000.
On December 31, 2021, one-half of this merchandise remained in Diller's inventory. For 2021, gross profit
percentages were 30% for Lea and 40% for Dan. The amount of unrealized profit in the ending inventory on
December 31, 2021 that should be eliminated in consolidation is _______.
a. 80,000
b. 60,000
c. 32,000
d. 45,000

Pease Corporation purchased 70 percent of Sade Company's voting stock on May 18, 2017, at underlying book value.
The companies reported the following data with respect to intercompany sales in 2020 and 2021:

Purchase Year sold to

Year Purchased by Price Sold to Sale Price
Outsiders
Unsold at End of year
2020 Sade 120,000 Pease 160,000 45,000 2021
2021 Sade 90,000 Pease 120,000 30,000 2022
2021 Pease 140,000 Sade 280,000 110,000 2022

Pease reported income from its own operation of P160,000 and P220,000 in 2020 and 2021, respectively. Sade
reported CI of P90,000 and P85,000 in 2020 and 2021, respectively.

24. What is the amount of consolidated CI attributable to parent for 2020?

a. P212,500
b. P235,000
c. P221,000
d. P215,125

25. What is the amount of inventory balance to be reported in the consolidated statement of financial position at
December 31, 2021?
a. P77,500
b. P70,000
c. P76,200
d. P75,000

26. What is the amount of consolidated cost of goods sold for 2021?
a. P185,000
b. P186,250
c. P187,000
d. P180,500

27. What is the amount of consolidated CI for 2021?

a. P245,333
b. P255,000
c. P253,750
d. P232,000

28. Elimination entries for intercompany profit in the consolidation working paper in order to:
a. Defer intercompany profit until realized
b. Allocate unrealized profits between controlling and non-controlling interests
c. Reduce consolidated net income
d. Nullify the effect of intercompany transactions on consolidated statements

29. A parent's beginning inventory, containing merchandise purchased above cost from its 80 percent owned
subsidiary, was sold during the current year. The elimination entry in the working paper recognizing this
intercompany profit includes a debit to the subsidiary's beginning retained earnings of:
a. 20 percent of the intercompany profit
b. 80 percent of the intercompany profit
c. 100 percent of the intercompany profit
d. The subsidiary's beginning retained earnings is not affected in this case
30. A parent and its 80 percent owned subsidiary regularly sell merchandise to each other above cost. What percent
of intercompany sales and purchases should be eliminated in the consolidated working paper? a. 80 percent of
both downstream and upstream sales and purchases
b. 100 percent of both downstream and upstream sales and purchases
c. 80 percent of downstream and 100 percent of upstream and downstream
d. 100 percent of downstream and 90 percent of upstream and downstream