UNIVERSITY OF THE EAST – Caloocan

College of Business Administration

Department of Accountancy, Business Law and Taxation
Accounting for Business Combinations (BSA 3203)
Module 2 – Problem Exercises 1

Name: _________________________________________________Yr. and Section: ____________________

Instructions: In the following questions, provide the best answer that corresponds to the question.
Provide solutions in good form.

Part I – Problems

Problem 1
Irish Company acquired a 30% interest for P5, 000, 000 on January 1, 2021. This cost exceeds the
underlying net assets of the investee by P1, 000, 000 which is attributed to an undervalued equipment
by the investee with useful life of five years.

The investee reported the following information:

Net income Dividends paid
2021 4, 000, 000 3, 000, 000
2022 6, 000, 000 5, 000, 000

Required:
Prepare journal entries on the books of Boorish Company from January 1, 2021 to December 31, 2022.

Problem 2
At the beginning of current year, Cynosure Company purchased 40% of the ordinary shares of another
entity for P3, 500, 000 when the net assets acquired amounted to P7, 000, 000.

At acquisition date, the carrying amounts of the identifiable assets and liabilities of the investee were
equal to their fair value, except for equipment for which the fair value was P1, 500, 000 greater than
carrying amount and inventory whose fair value was P500, 000 greater than cost.

The equipment has a remaining life of 4 years and the inventory was all sold during the current year.
The investee reported net income of P4, 000, 000 and paid P1, 000, 000 dividends during the current
year.

Required:
1. Prepare journal entries for the current year.
2. Compute the investment income for the current year.

Problem 3
At the beginning of current year, Czar Company acquired a 40% interest in Film Company for P1,
700, 000.

Film Company reported the following shareholders’ equity on January 1 and December 31:
January 1 December 31
Share capital 3, 000, 000 3, 000, 000
Revaluation surplus 1, 300, 000
Retained earnings 1, 000, 000 1, 500, 000

On January 1, all the identifiable assets and liabilities of Film Company were recorded at fair value.
Film Company reported profit of P650, 000, after income tax expense of P350, 000 and paid dividends
of P150, 000 to shareholders during the current year.
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The revaluation surplus is the result of the revaluation of land recognized by Film Company on
December 31.

Additionally, depreciation was provided by Film Company on the diminishing balance method
whereas Czar Company use the straight-line.

Had Film Company used the straight-line, the accumulated depreciation would be increased by P200,
000. The tax rate is 30%.

Required:
1. Prepare journal entries for the current year to recognize the transactions relating to the
investment in associate.
2. Determine the carrying amount of the investment in associate on December 31.

Problem 4
At the beginning of current year, Bing Company purchased 30, 000 shares of an investee’s 200, 000
outstanding ordinary shares for P6, 000, 000. On that date, the carrying amount of the acquired
shares was P4, 000, 000.

The entity attributed the excess of cost over carrying amount to patent with remaining useful life of
10 years.

During the year, Bing Company’s officers gained a majority on the investee’s board of directors. The
investee reported earnings of P5, 000, 000 for the year and paid dividend of P3, 000, 000 at year-end.

Required:
1. Prepare journal entries to record the transactions for the current year.
2. Compute the investment income for the current year.
3. Compute the carrying amount of the investment at year-end.

Problem 5
Alpha Company acquired 20, 000 shares of Beta Company on January 1, 2021 at P120 per share. Beta
Company had 80, 000 shares outstanding with a carrying amount of P8, 000, 000.

The difference between the carrying amount and fair value of Beta Company on January 1, 2021 is
attributable to a broadcast license intangible asset.

Alpha Company has a 20-year straight line amortization policy for the broadcast license.

Beta Company recorded earnings of P3, 600, 000 and P3, 900, 000 for 2021 and 2022, respectively, and
paid per-share dividend of P16 in 2021 and P20 in 2022.

Required:
1. Compute the investment income for 2021.
2. Compute the investment income for 2022.
3. Determine the carrying amount of the investment in associate on December 31, 2022.

Problem 6
At the beginning of current year, Divine Company acquired 40% of the outstanding ordinary shares of
an investee for P6, 500, 000. The carrying amount of the net assets of the investee equaled P12, 500,
000.

Any excess of cost over carrying amount is attributable to equipment with remaining useful life of 10
years.

During the year, the investee reported net loss of P4, 000, 000 and paid dividends of P2, 500, 000.
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Required:
1. Prepare journal entries for the current year.
2. Compute the carrying amount of the investment at year-end.

Problem 7
On January 1, 2018, Angelic Company acquired as a long term investment for P7, 000, 000 a 40%
interest in an investee when the fair value of the net assets was P17, 500, 000. The investee reported
the following net losses:
2018 5, 000, 000
2019 7, 000, 000
2020 8, 000, 000
2021 4, 000, 000

On January 1, 2020, Angelic Company made cash advances of P2, 000, 000 to the investee. On
December 31, 2021, it is not expected that Angelic Company will provide further financial support for
the investee.

Required:
Prepare journal entries from 2018 to 2021 in relation to the investment in associate.

Problems 8
On January 1, 2021, Heaven Company acquired 20% of the ordinary shares of an associate for P6,
000, 000. On this date, all identifiable assets and liabilities of the associate were recorded at fair
value.

An analysis of the acquisition showed that goodwill of P300, 000 was acquired.

The net income and dividend of the associate were as follows:

2021 2022
Net income 3, 000, 000 4, 000, 000
Dividend paid 1, 000, 000 1, 500, 000

In December 2021, the associate sold inventory to Heaven Company for P900, 000. The cost of the
inventory was P600, 000.

This inventory remained unsold by Heaven Company on December 31, 2021. However, it was sold by
Heaven Company in 2022.

In December 2022, the associate sold inventory to Heaven Company for P750, 000. The cost of the
inventory was P500, 000. This inventory remained unsold by Heaven Company on December 31, 2022.

Required:
1. Determine the investor’s share in the profit of the associate for 2021?
2. Determine the investor’s share in the profit of the associate for 2022?
3. Prepare journal entries on the books of Heaven Company in relation to the investment in
associate.
4. Determine the carrying amount of the investment in associate on December 31, 2022.

Problem 9
Glorious Company acquired 40% interest in an associate, Alta Company, for P5, 000, 000 on January
1, 2021. At the acquisition date, there were no differences between fair value and carrying amount of
identifiable assets and liabilities.

Alta Company reported net income of P2, 000, 000 for 2021 and P3, 000, 000 for 2022.

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On December 31, 2021 and 2022, Alta Company paid cash dividend of P800, 000 and P1, 000, 000,
respectively.

On January 1, 2021, Alta Company sold an equipment costing P500, 000 to Glorious Company for
P800, 000. Glorious Company applies a 10% straight line depreciation.

On July 1, 2022, Alta Company sold an equipment for P900, 000 to Glorious Company. The carrying
amount of the equipment is P500, 000 at the time of sale.

The remaining life of the equipment is 5 years and Glorious Company used the straight line
depreciation.

On December 1, 2022, Alta Company sold an inventory to Glorious Company for P2, 800, 000.

The inventory had a cost of P2, 000, 000 and was still on hand on December 31, 2022.

Required:
1. Determine the investor’s share in the profit of the associate for 2021.
2. Determine the investor’s share in the profit of the associate for 2022.
3. Prepare journal entries on the books of Glorious Company for 2021 and 2022 in relation to the
investment in associate.
4. Determine the carrying amount of the investment in associate on December 31, 2022.

Problem 10
On January 1, 2021, Interlude Company acquired a 30% interest in an investee at a cost of P3, 200,
000. The equity of the investee on the date of acquisition was P6, 000, 000, consisting of P4, 000, 000
share capital and P2, 000, 000 retained earnings.

All the identifiable assets and liabilities of the investee were recorded at fair value except for an
equipment with a fair value of P3, 000, 000 greater than carrying amount. The remaining useful life of
the equipment is 5 years.

On December 31, 2021, Interlude Company had inventory costing P2, 000, 000 on hand which had
been purchased from the investee. A profit of P600, 000 had been made on the sale.
During the current year, the investee reported net income of P4, 000, 000 and paid dividend of P1,
500, 000.

The shareholder’s equity of the investee on December 31, 2021 showed the following:
Share capital 4, 000, 000
Retained earnings 3, 500, 000
Retained earnings appropriated 1, 000, 000
Revaluation surplus 2, 000, 000

The revaluation surplus arose from a revaluation of land made on December 31, 2021.

The retained earnings appropriated arose from a transfer of unappropriated retained earnings to
retained earnings appropriated for contingencies.

Required:
1. Determine the goodwill arising from the acquisition.
2. Determine the investment income for the current year.
3. Prepare journal entries for the current year.
4. Determine the carrying amount of the investment in associate on December 31, 2021.

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Problem 11
On January 1, 2021, Jam Company reported as long-term investments the following unquoted equity
shares:
Dale Company, 5,000 ordinary shares (1% interest) 1, 250, 000
Ever Company, 10,000 ordinary shares (2% interest) 1, 600, 000
Fox Company, 25, 000 ordinary shares (10% interest) 2, 000, 000

1. On May 1, 2021, Dale Company issued a 10% share dividend.

2. On November 1, 2021, Dale Company paid a cash dividend of P20 per share.
3. On January 1, 2021, Jam Company paid P5, 000, 000 for 50, 000 additional ordinary shares of
Fox Company which represented a 20% investment in Fox Company. The fair value of all
Fox’s identifiable assets net of liabilities was equal to their carrying amount of P20, 000, 000.
Jam Company’s initial 10% interest of 25, 000 ordinary shares of Fox Company was acquired
on January 1, 2020 for P2, 000, 000. The 10% interest was accounted for under cost method.
On January 1, 2021, this 10% existing interest had a fair value of P2, 400, 000.
4. Fox Company reported net income of P6, 000, 000 for 2021 and paid dividend of P20 per share
on December 31, 2021.

Required:
a. Compute the goodwill arising from acquisition on January 1, 2021.
b. Prepare journal entries for 2021.
c. Present the investments in equity securities on December 31, 2021.

Problem 12
On January 1, 2021, Fame Company acquired a 10% interest in an investee for P5, 000, 000. The
investment was accounted for at fair value through other comprehensive income.

The fair value of the investment was P5, 500, 000 on December 31, 2021 and P6, 000, 000 on
December 31, 2022.

On January 1, 2023, the entity acquired a further 20% interest in the investee for P11, 000, 000. On
such date, the carrying amount of the net assets of the investee was P40, 000, 000.

The fair value of the net assets of the investee is equal to carrying amount, except for an equipment
whose fair value exceeds carrying amount by P5, 000, 000. The equipment had a remaining life of 5
years.

The investee reported net income of P9, 000, 000 for 2023 and paid dividend of P4, 000, 000 on
December 31, 2023. No dividends were paid in 2021 and 2022 by the investee.

Required:
1. Compute the goodwill on January 1, 2023.
2. Prepare journal entries for 2021, 2022, and 2023.

“That in all things, GOD maybe glorified”

“Hear; for I will speak of excellent things; and the opening of my lips shall be right things” Proverbs 8:16

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