Total liabilities and SHEquity P100,489

SPENCER CO.
Combined Income Statement for Home Office and Branch
For Month Ended December 31, 20x4

Sales ………………………………………………………………………………………………………… P64,850

Cost of goods sold:
Merchandise Inventory, December 1 …………………………………… P43,900
Purchases ……………………………………………………………………… 31,700
Merchandise available for sale …………………………………………… P75,600
Less merchandise inventory, December 31 ……………………………. 36,850
Cost of goods sold ………………………………………………………….. 38,750
Gross profit ……………………………………………………………………………… P26,100
Operating Expenses:
Advertising Expense ………………………………………………………… P 5,650
Salaries and Commissions expense ……………………………………… 6,600
Store supplies expense …………………………………………………….. 840
Miscellaneous selling expense …………………………………………… 2,900
Rent expense ………………………………………………………………… 4,200
Depreciation Expense – F&F ………………………………………………. 121
Miscellaneous general expense …………………………………………. 3,415
Total operating expense ………………………………………………………………………. 23,726
Net Income ………………………………………………………………………………………………… P 2,374

4. Adjusting and Closing Entries

(a) Branch Books

Dec 31 Income Summary …………………………………………….. 14,400

Merchandise Inventory …………………………….. 14,400

31 Merchandise Inventory ……………………………………… 14,600

Merchandise inventory, December 1................................................ P 31,500

Purchases.............................................................................................. 27,600
Merchandise available for sale.......................................................... P 59,100
Less: Shipments to branch................................................................... 8,500
Merchandise available for own sales................................................ P 50,600
Less: Merchandise Inventory, December 31..................................... 24,200
Cost of goods sold.......................................................................................... 26,400
Gross profit................................................................................................................................. P 18,450
Operating expenses:
Advertising expense............................................................................. P 2,850
Salaries and commissions expense..................................................... 4,250
Store supplies expense......................................................................... 560
Miscellaneous selling expense............................................................ 1,850
Rent expense........................................................................................ 2,700
 Depreciation expense – furniture and fixtures.................................. 85
Miscellaneous general expense......................................................... 2,510
Total operating expenses............................................................................. 14,805
Net income from own operations......................................................................................... P 3,645
Less: Branch net loss................................................................................................................ 1,271
Total income............................................................................................................................ P 2,374

2. Refer to Word Document Worksheet

3, Combined Statements

SPENCER CO.

Combined Balance Sheet for Home Office and Branch

December 31, 20x4

Assets Liabilities and Stockholders’ Equity

Cash ………………………………. P 14,500 Liabilities

Accounts Receivable ………… 39,050 Accounts Payable ……….. P39,600

Merchandise Inv ………………. 36,850 Accrued Expenses ………. 365 P 39,965

Store Supplies ………………….. 680 Stockholders’ Equity

Prepaid Expenses …………….. 470 Capital Stock ……………… P65,000

Furniture & Fixtures ……… P12,100 Less deficit …………………. 4,476 60,524

Less accumulated

Depreciation …... 3,161 8,939

Total assets ……………………… P100,489 Total liabilities and SHEquity P100,489

SPENCER CO.
Combined Income Statement for Home Office and Branch
For Month Ended December 31, 20x4

Sales ………………………………………………………………………………………………………… P64,850

Cost of goods sold:
Merchandise Inventory, December 1 …………………………………… P43,900
Purchases ……………………………………………………………………… 31,700
 Merchandise available for sale …………………………………………… P75,600
Less merchandise inventory, December 31 ……………………………. 36,850
Cost of goods sold ………………………………………………………….. 38,750
Gross profit ……………………………………………………………………………… P26,100
Operating Expenses:
Advertising Expense ………………………………………………………… P 5,650
Salaries and Commissions expense ……………………………………… 6,600
Store supplies expense …………………………………………………….. 840
Miscellaneous selling expense …………………………………………… 2,900
Rent expense ………………………………………………………………… 4,200
Depreciation Expense – F&F ………………………………………………. 121
Miscellaneous general expense …………………………………………. 3,415
Total operating expense ………………………………………………………………………. 23,726
Net Income ………………………………………………………………………………………………… P 2,374

4. Adjusting and Closing Entries

(a) Branch Books

Dec 31 Income Summary …………………………………………….. 14,400

Merchandise Inventory …………………………….. 14,400

31 Merchandise Inventory ……………………………………… 14,600

eliminations:

750
Cost of merchandise returned by branch: P750/1.20= P625.
Entry Made Correct/Should be Entry
Sales Returns……………… 750 Shipments to Branch………. 625
Branch Current……… 750 Unrealized Int. Inv Profit…… 125
Branch Current…………. 750
Results of Branch Operations:
A. Branch Net Income/Loss from its own operations:
Branch Income Summary............................................................................... 2,600
Branch Current…................................................................................ 2,600
B. Adjustment: Overvaluation of Merchandise inventory, December 1................................................ P
31,500
Purchases.............................................................................................. 27,600
Merchandise available for sale.......................................................... P 59,100
Less: Shipments to branch................................................................... 8,500
Merchandise available for own sales................................................ P 50,600
Less: Merchandise Inventory, December 31..................................... 24,200
Cost of goods sold.......................................................................................... 26,400
Gross profit................................................................................................................................. P 18,450
Operating expenses:
Advertising expense............................................................................. P 2,850
Salaries and commissions expense..................................................... 4,250
Store supplies expense......................................................................... 560
Miscellaneous selling expense............................................................ 1,850
Rent expense........................................................................................ 2,700
Depreciation expense – furniture and fixtures.................................. 85
Miscellaneous general expense......................................................... 2,510
 Total operating expenses............................................................................. 14,805
Net income from own operations......................................................................................... P 3,645
Less: Branch net loss................................................................................................................ 1,271
Total income............................................................................................................................ P 2,374

2. Refer to Word Document Worksheet

3, Combined Statements

SPENCER CO.

Combined Balance Sheet for Home Office and Branch

December 31, 20x4

Assets Liabilities and Stockholders’ Equity

Cash ………………………………. P 14,500 Liabilities

Accounts Receivable ………… 39,050 Accounts Payable ……….. P39,600

Merchandise Inv ………………. 36,850 Accrued Expenses ………. 365 P 39,965

Store Supplies ………………….. 680 Stockholders’ Equity

Prepaid Expenses …………….. 470 Capital Stock ……………… P65,000

Furniture & Fixtures ……… P12,100 Less deficit …………………. 4,476 60,524

Less accumulated

Depreciation …... 3,161 8,939

Total assets ……………………… P100,489 Merchandise inventory, December

1................................................ P 31,500
Purchases.............................................................................................. 27,600
Merchandise available for sale.......................................................... P 59,100
Less: Shipments to branch................................................................... 8,500
Merchandise available for own sales................................................ P 50,600
Less: Merchandise Inventory, December 31..................................... 24,200
Cost of goods sold.......................................................................................... 26,400
Gross profit................................................................................................................................. P 18,450
Operating expenses:
Advertising expense............................................................................. P 2,850
Salaries and commissions expense..................................................... 4,250
Store supplies expense......................................................................... 560
Miscellaneous selling expense............................................................ 1,850
Rent expense........................................................................................ 2,700
Depreciation expense – furniture and fixtures.................................. 85
Miscellaneous general expense......................................................... 2,510
Total operating expenses............................................................................. 14,805
Net income from own operations......................................................................................... P 3,645
Less: Branch net loss................................................................................................................ 1,271
Total income............................................................................................................................ P 2,374

2. Refer to Word Document Worksheet

3, Combined Statements

SPENCER CO.

Combined Balance Sheet for Home Office and Branch

December 31, 20x4

Assets Liabilities and Stockholders’ Equity

Cash ………………………………. P 14,500 Liabilities

Accounts Receivable ………… 39,050 Accounts Payable ……….. P39,600

Merchandise Inv ………………. 36,850 Accrued Expenses ………. 365 P 39,965

Store Supplies ………………….. 680 Stockholders’ Equity

Prepaid Expenses …………….. 470 Capital Stock ……………… P65,000

Furniture & Fixtures ……… P12,100 Less deficit …………………. 4,476 60,524

Less accumulated

Depreciation …... 3,161 8,939

Total assets ……………………… P100,489 Merchandise inventory, December

1................................................ P 31,500
Purchases.............................................................................................. 27,600
Merchandise available for sale.......................................................... P 59,100
Less: Shipments to branch................................................................... 8,500
Merchandise available for own sales................................................ P 50,600
Less: Merchandise Inventory, December 31..................................... 24,200
Cost of goods sold.......................................................................................... 26,400
Gross profit................................................................................................................................. P 18,450
Operating expenses:
Advertising expense............................................................................. P 2,850
Salaries and commissions expense..................................................... 4,250
Store supplies expense......................................................................... 560
Miscellaneous selling expense............................................................ 1,850
Rent expense........................................................................................ 2,700
Depreciation expense – furniture and fixtures.................................. 85
Miscellaneous general expense......................................................... 2,510
Total operating expenses............................................................................. 14,805
Net income from own operations......................................................................................... P 3,645
Less: Branch net loss................................................................................................................ 1,271
Total income............................................................................................................................ P 2,374

2. Refer to Word Document Worksheet

3, Combined Statements

SPENCER CO.

Combined Balance Sheet for Home Office and Branch

December 31, 20x4

Assets Liabilities and Stockholders’ Equity

Cash ………………………………. P 14,500 Liabilities

Accounts Receivable ………… 39,050 Accounts Payable ……….. P39,600

Merchandise Inv ………………. 36,850 Accrued Expenses ………. 365 P 39,965

Store Supplies ………………….. 680 Stockholders’ Equity

Prepaid Expenses …………….. 470 Capital Stock ……………… P65,000

Furniture & Fixtures ……… P12,100 Less deficit …………………. 4,476 60,524

Less accumulated

Depreciation …... 3,161 8,939

Total assets ……………………… P100,489CGS/Allowance for Overvaluation of Branch Inventory/

Unrealized Intercompany Inventory Profit:
Unrealized Intercompany Inventory Profit.................................................... 4,125
Branch Income Summary.................................................................. 4,125
Unrealized Profit
Cost (Billing Price Minus
Billing Price (Billing/1.20) Cost)
Inventory, December 1 P 0 P 0 P 0
Shipments during December 42,000 35,000 7,000
Less: Returns _____750 ____625 ____125
Available for Sale (before adjustment) P 41,250 P 34,375 P 6,875
Less: Inventory, Dec. 31 (after adjustment) 16,500 13,750 __2,750
Reduction in unrealized profit account- adjustment
to branch profit for overstated of cost of goods sold
(adjustment) P 24,750 P 20,625 *P 4,125
*or, P24,750 x 20/120 = P4,125;
Decrease in Unrealized Intercompany Inventory Profit:
Balance prior to adjustment, 12/31, P7,000 – P125................... P6,875
Balance required in account, 12/31,P16,500 – (P16,500/1.20).. 2,750
Decrease in Allowance................................................................. P4,125
 Branch Income Summary (P4,125 – P2,600)....................................................1,525
Income Summary.................................................................................... 1,525

Therefore, the Real/True/Adjusted Branch Net Income/Branch Net Income in so far as HO is concerned,
amounted to P1,525, computed as follows:

Branch net loss as reported/unadjusted……………………………………………………(P2,600)

Add: Overvaluation of branch inventory/Realized profit from branch sales……….. 4,125

Real/True/Adjusted Branch Net Income or Branch NI in so far as HO is concerned P1,525

Problem III

a. Unrealized Intercompany Inventory Profit has a credit balance of P9,450 before adjustment on December 31,
calculated as follows:
Unrealized Profit
Cost (Billing Price Minus
Billing Price (Billing/1.35) Cost)
Inventory, December 1 P 16,200 P 12,000 P 4,200
Shipments during December __20,250 _ 15,000 __ 5,250
Available for Sale (before adjustment) P 36,450 P 35,625 P 9,450
Less: Inventory, Dec. 31 (after adjustment) __18,900 _14,000 __4,900
Reduction in unrealized profit account- adjustment
to branch profit for overstated of cost of goods sold
(adjustment) P 17,550 P 21,625 *P 4,550
* or, P17,550 x 35/135 = P4,550

b. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/ Unrealized

Intercompany Inventory Profit (refer to “a” for computation):
Unrealized Intercompany Inventory Profit.................................................... 4,550
Branch Income Summary.................................................................. 4,550
c.
Home Office Books Branch Books

Shipments to Branch 400 Home Office Current 540

Unrealized Int Inv. Pr 140 Shipments to Branch 540

Branch Current 540

Cost of merchandise returned: P540/1.35, or P400.

Problem IV

1. The branch Inventory, December 1 P 16,200 P 12,000 P 4,200

Shipments during December __20,250 _ 15,000 __ 5,250
Available for Sale (before adjustment) P 36,450 P 35,625 P 9,450
Less: Inventory, Dec. 31 (after adjustment) __18,900 _14,000 __4,900
Reduction in unrealized profit account- adjustment
to branch profit for overstated of cost of goods sold
(adjustment) P 17,550 P 21,625 *P 4,550
* or, P17,550 x 35/135 = P4,550
b. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/ Unrealized
Intercompany Inventory Profit (refer to “a” for computation):
Unrealized Intercompany Inventory Profit.................................................... 4,550
Branch Income Summary.................................................................. 4,550
c.
Home Office Books Branch Books

Shipments to Branch 400 Home Office Current 540

Unrealized Int Inv. Pr 140 Shipments to Branch 540

Branch Current 540

Cost of merchandise returned: P540/1.35, or P400.

Problem IV

1. The branch office inventory as of December 1 considered of:

Shipments from Home Office (see below)............................................................. P 12,000**
Purchases from outsiders (balance of inventory).................................................. 3,000
Total inventory........................................................................................................... P 15,000

Goods acquired from home office and included in branch inventory at billed price are calculated as follows:
Unrealized Profit
Cost (Billing Price Minus
Billing Price (Billing/1.20) Cost)
Inventory, December 1 **P 12,000 *P 10,000 P 2,000
Branch Income Summary.......................................................... 2,200

Problems V

(1) Individual Statements

SPENCER CO.
Balance Sheet for Branch
December 31,20x4
Assets Liabilities____________________
Cash..................................................... P 2,650 Accounts payable................................... P 4,200
Accounts receivable........................ 12,850 Accrued expenses................................... 105
Merchandise inventory..................... 14,600 Home office............................................... 29,239
Store supplies...................................... 300
Prepaid expenses............................... 120
Furniture and fixtures.............. P 3,600
Less: Accumulated
depreciation.............. 576 3,024 ________
Total assets....................................... P 33,544 Total liabilities............................................ P 33,544

SPENCER CO.
Income Statement for Branch
For Month Ended December 31, 20x4
Sales........................................................................................................................................... P 20,000
Cost of goods sold:
Merchandise inventory, December 1................................................ P 14,400
Purchases.............................................................................................. 4,100
Shipments from home office............................................................... 10,200
Merchandise available for sale.......................................................... P 28,700
Less: Merchandise Inventory, December 31..................................... 14,600
 Cost of goods sold....................................................................................................... 14,100
Gross profit................................................................................................................................. P 5,900
Operating expenses:
Advertising expense............................................................................. P 2,800
Salaries and commissions expense..................................................... 2,350
Store supplies expense......................................................................... 280
Miscellaneous selling expense............................................................ 1,050
Rent expense........................................................................................ 1,500
Depreciation expense – furniture and fixtures.................................. 36
Miscellaneous general expense......................................................... 905
Total operating expenses.......................................................................................... 8,921
Net loss...................................................................................................................................... P 3,021

SPENCER CO.
Balance Sheet for Home Office
December 31, 20x4
Assets Liabilities and Stockholder’s Equity_______
Cash..................................................... P10,350 Liabilities
Cash in transit..................................... 1,500 Accounts payable................ P 35,400
Accounts receivable........................ 26,200 Accrued expenses............... 260 P 35,660
Merchandise inventory..................... 24,200 Stockholders’ Equity
Store supplies...................................... 380 Capital Stock......................... P 65,000
Prepaid expenses............................... 350 Less deficit.............................. 4,476 60,524
Furniture and fixtures.............. P 8,500
Less: Accumulated
depreciation.............. 2, 585 5,915
Branch..................................... P29,239
Less: Unrealized intercompany
inventory profit............ 1,950 27,289 Total liabilities and ________
Total assets........................................ P 96,184 stockholder’s equity............................... P 96,184

SPENCER CO.
Income Statement for Home Office
For Month Ended December 31, 20x4
Sales........................................................................................................................................... P 44,850
Cost of goods sold:
Income Summary ……………………………………. 14,600

31 Store Supplies Expense ………………………………………. 280

Store Supplies ………………………………………… 280

Store supplies used: P580 – P300, or P280

Dec. 31 Prepaid Expenses ………………………………………………… 120

Miscellaneous General Expense ……………………. 120

31 Miscellaneous General Expense ……………………………… 105

 Accrued Expenses …………………………………….. 105

31 Depreciation Expense – F&F ………………………………….. 36

Accumulated Depreciation ………………………… 36

Depreciation: 1% of P3,600

31 Miscellaneous General Expense …………………………….. 220

Home Office Current………………………………… 220

31 Sales ……………………………………………………………… 20,000

Income Summary …………………………………….
20,000

31 Income Summary ……………………………………………… 22,221

Purchases ……………………………………………… 4,100

Shipments from Home Office ……………………… 10,200

Advertising Expense …………………………………. 2,800

Salaries and Commissions Expense ………………. 2,350

Store Supplies Expense ……………………………… 280

Miscellaneous Selling Expense …………………….. 1,050

Rent Expense …………………………………………. 1,500

Depreciation Expense – F&F ………………………. 36

Miscellaneous General Expense …………………. 905

31 Home Office Current………….………………………………. 3,021

Income Summary …………………………………….. 3,021

(b) Home Office Books

Dec 31 Income Summary ………………………………………………. 31,500

Merchandise Inventory ………………………………. 31,500

 31 Merchandise Inventory ………………………………………... 24,200

Income Summary ……………………………………… 24,200

31 Store Supplies Expense …………………………………………. 560

Store Supplies …………………………………………… 560

Store supplies used: P940 – P380, or : 560

Branch Income Summary.......................................................... 2,200

Problems V

(1) Individual Statements

SPENCER CO.
Balance Sheet for Branch
December 31,20x4
Assets Liabilities____________________
Cash..................................................... P 2,650 Accounts payable................................... P 4,200
Accounts receivable........................ 12,850 Accrued expenses................................... 105
Merchandise inventory..................... 14,600 Home office............................................... 29,239
Store supplies...................................... 300
Prepaid expenses............................... 120
Furniture and fixtures.............. P 3,600
Less: Accumulated
depreciation.............. 576 3,024 ________
Total assets
3, Combined Statements

SPENCER CO.

Combined Balance Sheet for Home Office and Branch

December 31, 20x4

Assets Liabilities and Stockholders’ Equity

Cash ………………………………. P 14,500 Liabilities

Accounts Receivable ………… 39,050 Accounts Payable ……….. P39,600

Merchandise Inv ………………. 36,850 Accrued Expenses ………. 365 P 39,965

Store Supplies ………………….. 680 Stockholders’ Equity

Prepaid Expenses …………….. 470 Capital Stock ……………… P65,000

Furniture & Fixtures ……… P12,100 Less deficit …………………. 4,476 60,524
 Less accumulated

Depreciation …... 3,161 8,939

Total assets ……………………… P100,489 Total liabilities and SHEquity P100,489

SPENCER CO.
Combined Income Statement for Home Office and Branch

For Month Ended December 31, 20x4

Sales ………………………………………………………………………………………………………… P64,850

Cost of goods sold:
Merchandise Inventory, December 1 …………………………………… P43,900
Purchases ……………………………………………………………………… 31,700
Merchandise available for sale …………………………………………… P75,600
Less merchandise inventory, December 31 ……………………………. 36,850
Cost of goods sold ………………………………………………………….. 38,750
Gross profit ……………………………………………………………………………… P26,100
Operating Expenses:
Advertising Expense ………………………………………………………… P 5,650
Salaries and Commissions expense ……………………………………… 6,600
Store supplies expense …………………………………………………….. 840
Miscellaneous selling expense …………………………………………… 2,900
Rent expense ………………………………………………………………… 4,200
Depreciation Expense – F&F ………………………………………………. 121
Miscellaneous general expense …………………………………………. 3,415
Total operating expense ………………………………………………………………………. 23,726
Net Income ………………………………………………………………………………………………… P 2,374

4. Adjusting and Closing Entries

(a) Branch Books

Dec 31 Income Summary …………………………………………….. 14,400

Merchandise Inventory …………………………….. 14,400

31 Merchandise Inventory ……………………………………… 14,600

Income Summary ……………………………………. 14,600

31 Store Supplies Expense ………………………………………. 280

Store Supplies ………………………………………… 280

 Store supplies used: P580 – P300, or P280

Dec. 31 Prepaid Expenses ………………………………………………… 120

Miscellaneous General Expense ……………………. 120

31 Miscellaneous General Expense ……………………………… 105

Accrued Expenses …………………………………….. 105

31 Depreciation Expense – F&F ………………………………….. 36

Accumulated Depreciation ………………………… 36

Depreciation: 1% of P3,600

31 Miscellaneous General Expense …………………………….. 220

Home Office Current………………………………… 220

31 Sales ……………………………………………………………… 20,000

Income Summary …………………………………….
20,000

31 Income Summary ……………………………………………… 22,221

Purchases ……………………………………………… 4,100

Shipments from Home Office ……………………… 10,200

Advertising Expense …………………………………. 2,800

Salaries and Commissions Expense ………………. 2,350

Store Supplies Expense ……………………………… 280

Miscellaneous Selling Expense …………………….. 1,050

Rent Expense …………………………………………. 1,500

Depreciation Expense – F&F ………………………. 36

Miscellaneous General Expense …………………. 905

31 Home Office Current………….………………………………. 3,021

 Income Summary …………………………………….. 3,021

(b) Home Office Books

Dec 31 Income Summary ………………………………………………. 31,500

Merchandise Inventory ………………………………. 31,500

31 Merchandise Inventory ………………………………………... 24,200

Income Summary ……………………………………… 24,200

31 Store Supplies Expense …………………………………………. 560

Store Supplies …………………………………………… 560

Store supplies used: P940 – P380, or : 560

(a) To eliminate reciprocal accounts, Home Office and Branch.

(b) To eliminate shipments to Branch and Shipments to Home Office. Difference between the two balances is debited to
Unrealized Intercompany Inventory profit (20% of P8,500, or P1,700).
(c) To eliminate unrealized profit in beginning inventory balances : P3,700 balance per trial balance, less P1,700
adjustment per entry (b) or P2,000
(d) To reduce ending inventory cost: Branch inventory form home office at billed price ……………….
P11,700
Branch inventory from home office at cost, P11,700/1.20 ………
9,750
Inventory reduction
…………………………………………………….. P 1,950

Chapter 13

Problem I

1.
Home Office Books Branch Books
 Branch Current 55,000 Shipm from Home Office 55,000

Estimated Liability for Contingent Consideration 135,000

Gain on Contingent Consideration 135,000

Problem V

Current Assets 362,000

Long-term Assets (P1,890,000 + P20,000) + (P98,000 + P5,000) 2,013,000
Goodwill * 395,000
Liabilities 119,000
Long-term Debt 491,000
Common Stock (144,000 P5) 720,000
PIC - par (144,000 x P15 - P5)) 1,440,000

* (144,000 P15) – [P362,000 + P2,013,000 – (P119,000 + P491,000)] = P395,000

Total shares issued (P700,000 / P5) + P20,000 / P5) 144,000

Fair value of stock issued (144,000P15) = P2,160,000

Problem VI

Case A
Consideration transferred P130,000
Less: Fair Value of Net Assets 120,000
Goodwill P 10,000

Case B
Consideration transferred P110,000
Less: Fair Value of Net Assets 90,000
Goodwill P 20,000

Case C
Consideration transferred P15,000
Less: Fair Value of Net Assets 20,000
Gain (P 5,000)

Assets Liabilities Retained Earnings

Goodwill Current Assets Long-Lived Assets (Gain)
Case A P10,000 P20,000 P130,000 P30,000 0
Case B 20,000 30,000 80,000 20,000 0
Case C 0 20,000 40,000 40,000 5,000

Problem VII
Present value of maturity value, 20 periods @ 6%: 0.3118 x P600,000 = P187,080
Present value of interest annuity, 20 periods @ 6%: 11.46992 x 30,000 = 344,098
Total Present value P531,178
Par value 600,000
Discount on bonds payable P 68,822

Cash 114,000
Accounts Receivable 135,000
Inventory 310,000
 Land 315,000
Buildings 54,900
Equipment 39,450
Bond Discount (P40,000 + P68,822) 108,822
Current Liabilities 95,300
Bonds Payable (P300,000 + P600,000) 900,000
Gain on Acquisition of Stalton (ordinary) 81,872

Computation of Excess of Net Assets Received Over Cost

Consideration transferred (P531,178 plus liabilities assumed of P95,300
andP260,000) P886,478
Less: Total fair value of assets received _968,350
Excess of fair value of net assets over cost (P 81,872)

Problem VIII
Acquisition Method—Entry to record acquisition of Sampras
Consideration transferred P300,000
Estimated Liability for contingent Consideration 15,000
Consideration transferred (fair value) 315,000
Fair value of net identifiable assets 282,000
Goodwill P33,000

Receivables 80,000
Inventory 70,000
Buildings 115,000
Equipment 25,000
Customer list 22,000
IPRD 30,000
Goodwill 33,000
Current liabilities 10,000
Long-term liabilities 50,000
Estimated liability for contingent consideration 15,000
Cash 300,000

Acquisition related-expenses 10,000

Cash 10,000

Problem IX
1.
a. The computation of goodwill is as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 30% probability 36,000
Total P 966,000
Less: Fair value of identifiable assets acquired and
liabilities assumed:
Cash P 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
 In-process research and development 60,000
Accounts payable ( 72,000)
Other liabilities ( 168,000) 864,000
Positive Excess – Goodwill P 102,000

b. The journal entries by Peter Corporation to record the acquisition is as follows:

Cash 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Goodwill 102,000
Accounts payable 62,000
Other liabilities 168,000
Notes payable 180,000
Estimated Liability for Contingent Consideration 36,000
Common stock (P10 par x 30,000 shares) 300,000
Paid-in capital in excess of par
[(P25 – P10) x 30,000 shares] 450,000
Acquisition of Saul Company.

Acquisition-related expenses 78,000

Cash 78,000
Acquisition related costs – direct costs.

Paid-in capital in excess of par 32,400

Cash 32,400
Acquisition related costs – costs to issue and register
stocks.

Acquisition-related expenses 27,600

Cash 27,600
Acquisition related costs – indirect costs.

c. The balance sheet of Pure Corporation immediately after the acquisition is as follows:

Pure Corporation
Balance Sheet
December 31, 20x4

Assets
Cash P 162,000
Receivables – net 144,000
Inventories 360,000
Land 348,000
Buildings – net 840,000
Equipment – net 732,000
In-process research and development 60,000
Goodwill 102,000
 Total Assets P2,748,000

Liabilities and Stockholders’ Equity

Liabilities
Accounts payable P 288,000
Other liabilities 408,000
Notes payable 180,000
Estimated liability for contingent consideration 36,000
Total Liabilities P 912,000
Stockholders’ Equity
Common stock, P10 par P 1,020,000
Paid-in capital in excess of par1 657,600
Retained earnings2 158,400
Total Stockholders’ Equity P1,836,000
Total Liabilities and Stockholders’ Equity P2,748,000
1
P240,000 + P446,400 – P32,400
2
P264,000 - P78,000 – P27,600

It should be noted that under PFRS 3, in-process R&D is measured and recorded at fair value as an asset on the acquisition date. This
requirement does not extend to R&D in contexts other than business combinations.

2.
a. Assets that have been provisionally recorded as of the acquisition date are retrospectively adjusted in value
during the measurement period for new information that clarifies the acquisition-date value. The adjustments
affect goodwill since the measurement period is still within one year (i.e., eight months) from the acquisition
date. Therefore, the goodwill to be reported then on the acquisition should be P78,000 (P102,000 – P24,000).

b.
Buildings 24,000
Goodwill 24,000
Adjustment to goodwill due to measurement date.

3.
a. The goodwill to be reported then on the acquisition should be P126,000 (P102,000 + P24,000).

b. The adjustment is still within the measurement period, the entry to adjust the liability would be:
Goodwill 24,000
Estimated liability for contingent consideration 24,000
Adjustment to goodwill due to measurement date.

c.
c.1. The goodwill remains at P126,000, since the change of estimate should be done only once (last August 31,
20x5).

c.2. On November 1, 20x5, the probability value of the contingent consideration amounted to P48,000, the entry
to adjust the liability would be:

Estimated liability for contingent consideration 12,000

Gain on estimated contingent consideration 12,000
Adjustment after measurement date.

In this case, the measurement period ends at the earlier of:

 one year from the acquisition date, or
 the date when the acquirer receives needed information about facts and circumstances (or learns
that the information is unobtainable) to consummate the acquisition.
c.3.
c.3.1. The goodwill remains at P126,000, since the change of estimate should be done only once (last
August 31, 20x5).
c.3.2. On December 15, 20x5, the entry would be:
Loss on estimated liability contingent consideration 30,000
Estimated liability for contingent consideration 30,000
Adjustment after measurement date.

c.3.3.
c.3.3.1. P126,000.
c.3.3.2. On January 1, 20x7, Saul’s average income in 20x5 is P270,000 and 20x6 is P260,000, which means that the
target is met, Peter Corporation will make the following entry:
Estimated liability for contingent consideration 78,000
Loss on estimated contingent consideration 42,000
Cash 120,000
Settlement of contingent consideration.
4.
a.The amount of goodwill on acquisition will be recomputed as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 35% probability x (1/[1 + .04]*) 40,385
Total P 970,385
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Goodwill P 106,385
b. The journal entries by Pure Corporation to record the acquisition is as follows:
Cash 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Goodwill 106,386
Accounts payable 62,000
Other liabilities 168,000
Notes payable 180,000
Estimated Liability for Contingent Consideration 40,385
Common stock (P10 par x 30,000 shares) 300,000
Paid-in capital in excess of par
[(P25 – P10) x 30,000 shares] 450,000
c.
c.1. Goodwill remains at P106,385.
c.2. Theentry for Pure Corporation on December 31, 20x5 to record such occurrence would be:
Estimated liability for contingent consideration 40,385
Gain on estimated contingent consideration 40,385
Adjustment after measurement date.

Since the contingent event does not happen, the position taken by PFRS 3 is that the conditions that
prevent the target from being met occurred in a subsequent period and that Peter had the information to
 measure the liability at the acquisition date based on circumstances that existed at that time. Thus the
adjustment will flow through income statement in the subsequent period.

d. The entry by Peter Corporation on January 1, 20x7 for the payment of the contingent consideration would be:
Estimated liability for contingent consideration 36,000
Loss on estimated contingent consideration 66,000
Cash [(P78,000 + P84,000)/2 – P30,000] x 2 102,000
Settlement of contingent consideration.

5.
a. The amount of goodwill on acquisition will be recomputed as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (cash contingency):
P120,000 x 30% probability 36,000
Contingent consideration (stock contingency) 18,000
Total P 984,000
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Positive Excess – Goodwill P 120,000

b. The journal entries by Pure Corporation to record the acquisition is as follows:

Cash 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Goodwill 120,000
Accounts payable 72,000
Other liabilities 168,000
Notes payable 180,000
Estimated Liability for Contingent Consideration 36,000
Paid-in capital for Contingent Consideration 18,000
Common stock (P10 par x 30,000 shares) 300,000
Additional paid-in capital [(P25 – P10) x 30,000 shares] 450,000
Acquisition of Saul Company.

c. PureCorporation will make the following entry for the issuance of 1,200 additional shares:
Paid-in capital for Contingent Consideration 18,000
Common stock (P10 par x 1,200 shares) 12,000
Paid-in capital in excess of par 6,000
Settlement of contingent consideration.

6. On January 1, 20x7, the average income amounted to P132,000 (the contingent event occurs). Thus, the entry
record the occurrence of such event to reassign the P750,000 original consideration to 36,000 shares (30,000
original shares issued + 6,000 additional shares due to contingency) would be:
Paid-in capital in excess of par 60,000
Common stock (P10 par x 6,000 shares) 60,000
Settlement of contingent consideration.
7. On January 1, 20x7, the contingent event happens since the fair value per share fall below P25. Thus, the entry
record the occurrence of such event to reassign the P750,000 original consideration to 37,500 shares (30,000
original shares issued + 7,500* additional shares due to contingency) would be:
Paid-in capital in excess of par 75,000
Common stock (P10 par x 7,500 shares) 75,000
Settlement of contingent consideration.
* Deficiency: (P25 – P20) x 25,000 shares issued to acquire...P150,000
Divide by fair value per share on January 1, 20x7………….P 20
Added number of shares to issue………………………………. 7,500
8. The amount of goodwill on acquisition will be recomputed as follows:
Consideration transferred;
Common shares: 30,000 shares x P25 P 750,000
Notes payable 180,000
Contingent consideration (stock contingency):
[(P750,000 – P510,000) x 40% probability
x (1/[1 + .04]*) 92,308
Total P1,022,308
Less: Fair value of identifiable assets acquired and
liabilities assumed (refer to 1a above) 864,000
Positive Excess – Goodwill P 158,308
* present value of P1 @ 4% for one period.
The journal entries by Pure Corporation to record the acquisition is as follows:
Cash 24,000
Receivables – net 48,000
Inventories 72,000
Land 240,000
Buildings – net 360,000
Equipment – net 300,000
In-process research and development 60,000
Goodwill 158,308
Accounts payable 62,000
Other liabilities 168,000
Notes payable 180,000
Paid-in capital for Contingent Consideration 92,308
Common stock (P10 par x 25,000 shares) 300,000
Paid-in capital in excess of par[(P25 – P10) x 30,000 shares] 450,000
On December 31, 20x5, the contingent event occurs, wherein Peter’s stock price had fallen to P20, thus requiring
Peter to issue additional shares of stock to the former owners of Saul Corporation. The entry for Peter
Corporation on December 31, 20x5 to record such occurrence such event to reassign the P750,000 original
consideration to 37,500 shares (30,000 original shares issued + 7,500* additional shares due to contingency)
would be:

Paid-in capital for Contingent Consideration 92,308

Common stock, P10 par 75,000
Paid-in capital in excess of par 17,308
Settlement of contingent consideration.
* Deficiency: (P25 – P20) x 30,000 shares issued to acquire....P150,000
Divide by fair value per share on December 31, 20x5……P 20
Added number of shares to issue……………………………… 7,500

Problem X
1.
Consideration transferred:
 Shares: 2/3 x 60,000 x P3.20 128,000
Cash
Accounts payable 45,100
Mortgage and interest 44,000
Debentures and premium 52,500
Liquidation expenses 2,400
144,000
Cash held (12,000) 132,000
260,000
Less: Fair value of assets and liabilities acquired:
Accounts receivable P34,700
Inventory 39,000
Freehold land 130,000
Buildings 40,000
Plant and equipment 46,000 289,700
Bargain Purchase Gain 29,700

Homer Ltd
Accounts Receivable 34,700
Inventory 39,000
Freehold Land 130,000
Buildings 40,000
Plant and Equipment 46,000
Payable to Tan Ltd 132,000
Common stock, P1 par x 40,000 shares 40,000
Additional paid-in capital 88,000
Gain on acquisition 29,700
(Acquisition of net assets of
Tan Ltd and shares issued)

Payable to Tan Ltd 132,000

Cash 132,000
(Being payment of cash consideration)

Paid-in capital in excess of par 1,200

Cash 1,200
(Being costs of issuing shares)
2.
Tan LTD
General Ledger
Liquidation
P P
Accounts Receivable 34,700 Additional paid in capital 26,800
Inventory 27,600 Retained earnings 32,000
Freehold Land 100,000 Receivable from Homer Ltd 260,000
Buildings 30,000
Plant and Equipment 46,000
Goodwill 2,000
Interest Payable 4,000
Liquidation Expenses 2,400
Premium on Debentures 2,500
Accounts Payable 1,600
Shareholders’ Distribution 68,000
318,800 318,800

Liquidator’s Cash
P P
Opening Balance 12,000 Liquidation Expenses 2,400
Receivable from Homer Ltd 132,000 Mortgage and Interest 44,000
Debentures and Premium 52,500
Accounts Payable 45,100
144,000 144,000

Shareholders’ Distribution
P P
Shares in Homer Ltd 128,000 Common stock 60,000
Liquidation 68,0000
128,000 128,000

Problem XI
Cash 20,000
Accounts Receivable 112,000
Inventory 134,000
Land 55,000
Plant Assets 463,000
Discount on Bonds Payable 20,000
Goodwill* 127,200
Allowance for Uncollectible Accounts 10,000
Accounts Payable 54,000
Bonds Payable 200,000
Deferred Income Tax Liability 67,200
Cash 600,000

Consideration transferred P600,000

Less: Fair value of net assets acquired
(P784,000 – P10,000 – P54,000 – P180,000 - P67,200*) 472,800
Goodwill P127,200
 * Increase in net assets
Increase inventory, land, and plantassets to fair value
P52,000 + P25,000 + P71,000) P148,000
Decrease bonds payable to fair value(20,000)
Increase in net assets P168,000
Establish deferred income tax liability(P168,000 x 40%)P67,200

Multiple Choice Problems

1. c
Acquisition-related costs. Acquisition-related costs are costs the acquirer incurs to effect a business
combination. Those costs include finder’s fee; advisory, legal, accounting, valuation and other
professional or consulting fees; general administrative costs, including the costs of maintaining an internal
acquisitions department; and costs of registering and issuing debt and equity securities. Under PFRS 3
(2008), the acquirer is required to recognize acquisition-related costs as expenses in the periods in which
the costs are incurred and the services are received, with one exception, i.e. the costs to issue debt or
equity securities are recognized in accordance with PAS 32 (for equity) and PAS 39 (for debt).

2. P2,240,000, No answer available

Consideration transferred : FMV of shares issued by Robin (80,000 sh ×P28) = P2,240,000

3. P520,000, no answer available

Considerationtrasnferred P2,240,000
Less: Fair value of Hope’s net assets (P2,720,000+P200,000–P1,200,000) 1,720,000
Goodwill P 520,000

4. c
Acquisition related-expenses 20,000
Accounts Receivable 180,000
Inventory 400,000
Land 50,000
Building 60,000
Equipment 70,000
Patent 20,000
CurrentLiabilities 70,000
Long-termDebt 160,000
Cash 520,000
Gain on Acquisition 50,000

Considerationtrasnsferred : Cash P500,000

Less : Fair value of West’s net assets
 (P180,000 + P400,000 + P50,000
+ P60,000 + P P70,000 + P20,000
– P70,000 - P160,000) 550,000
BargainPurchase Gain (P50,000)

5.d
Accounts Receivable (net of P33,000 allowance) 198,000
Inventory 330,000
Land 550,000
Buildings and Equipment 1,144,000
Goodwill 848,000
Current Liabilities 275,000
Bonds Payable 450,000
Premium on Bonds Payable (P495,000 - P450,000) 45,000
Preferred Stock (15,000 x P100) 1,500,000
Common Stock (30,000 x P10) 300,000
PIC - par (P25 - P10) x 30,000 450,000
Cash 50,000

Consideration transferred: (P1,500,000 + P750,000 + P50,000) P2,300,000

Less: Fair value of net assets (198,000 + 330,000 + 550,000 +
1,144,000 – 275,000 – 495,000) = 1,452,000
Goodwill P 848,000

6.d
Current Assets 960,000
Plant and Equipment 1,440,000
Goodwill 336,000
Liabilities 216,000
Cash 2,160,000
Estimated Liability for Contingent Consideration 360,000

7.c
Cash 1,400
Receivables 650
Investments 1,000
Maintenance supplies 400
Flight equipment 12,000
International routes 500
Leases 800
Goodwill 450
Current liabilities 3,200
Long-term debt 6,000
Cash 8,000

8. c
The amount of the contingency is P500,000 (10,000 shares at P50 per share)
Goodwill 500,000
Paid-in-Capital for Contingent Consideration - Issuable 500,000

9. c
 Paid-in-Capital for Contingent Consideration – Issuable 500,000
Common Stock (P10 par) 100,000
Paid-In-Capital in Excess of Par 400,000
Platz Company does not adjust the original amount recorded as equity.

10.c
Accounts Receivable (net) 220,000
Inventory 320,000
Land 1,508,000
Buildings 1,392,000
Goodwill 230,000
Accounts Payable 270,000
Note Payable 600,000
Cash 2,600,000
Estimated Liability for Contingent Consideration 200,000

Consideration transferred (2,600,000 + 200,000)………………..P2,800,000

Fair value of net assets acquired(P3,440,000 – P870,000)……. 2,570,000
Goodwill………………………………………………………………...P230,000

Or, alternatively:
Accounts Receivable 240,000
Inventory 320,000
Land 1,508,000
Buildings 1,392,000
Goodwill 30,000
Allowance for Uncollectible Accounts 20,000
Accounts Payable 270,000
Note Payable 600,000
Cash 2,600,000

Consideration transferred P2,600,000

Fair value of net assets acquired
(P3,440,000 – P870,000) 2,570,000
Goodwill P 30,000

Goodwill 200,000
Estimated Liability for Contingent Consideration 200,000

1/1/20x6:
Estimated Liability for Contingent Consideration 200,000
Gain on Contingent Consideration 200,000

11. c
In accounting for the combination of NT and OTG, the fair value of the acquisition is allocated to each
identifiable asset and liability acquired with any remaining excess attributed to goodwill.

Consideration transferred (shares issued) P750,000

Fair value of net assets acquired:
Cash P29,000
Receivables 63,000
Trademarks 225,000
Record music catalog 180,000
In-process R&D 200,000
Equipment 105,000
 Accounts payable (34,000)
Notes payable (45,000) 723,000
Goodwill P27,000

Entry by NT to record combination with OTG:

Cash 29,000
Receivables 63,000
Trademarks 225,000
Record Music Catalog 180,000
Capitalized R&D 200,000
Equipment 105,000
Goodwill 27,000
Accounts Payable 34,000
Notes Payable 45,000
Common Stock (NewTune par value) 60,000
PIC - par 690,000
(To record merger with OTG at fair value)

PIC - par 25,000

Cash 25,000
(Stock issue costs incurred)

Post-Combination Balance Sheet:

Assets Liabilities and Owners’ Equity

Cash P 64,000 Accounts payable P 144,000
Receivables 213,000 Notes payable ___415,000
Trademarks 625,000 Total liabilities P 559,000
Record music catalog 1,020,000
Capitalized R&D 200,000 Common stock 460,000
Equipment 425,000 Paid-in capital - par 695,000
Goodwill 27,000 Retained earnings 860,000
Total P2,574,000
Total P2,574,000

12. P559,000, no answer available – refer to No. 11

13. d – refer to No. 11
14.c – refer to No. 11
15.c – refer to No. 11

16. d
Correction: …completion goals by December 31, 20x5 not 20x4.
Entry to record the acquisition on Pacifica’s records:
Cash 85,000
Receivables and inventory 180,000
PPE 600,000
Trademarks 200,000
IPRD 100,000
Goodwill 77,500
Liabilities 180,000
Common Stock (50,000 xP5) 250,000
Paid-In Capital in excess of par (50,000 xP15) 750,000
Contingent performance obligation 62,500
 The goodwill is computed as:
Consideration transferred: 50,000 shares x P20 P1,000,000
Contingent consideration:
P130,000 payment x 50% probability x 0.961538 62,500
Total P1,062,500
Less: Fair value of net assets acquired
(P85,000 + P180,000 + P600,000 + P200,000
+ P100,000 - P180,000) 985,000
Goodwill P 77,500

Acquisition related-expenses 15,000

Cash 15,000

PIC - par 9,000

Cash 9,000

Note: The following amounts will appear in the income statement and statement of retained earnings after
business combination:
PP Inc.
Revenues (1,200,000)
Expenses (P875,000 + P15,000) 890,000
Net income (310,000)
Retained earnings, 1/1 (950,000)
Net income (310,000)
Dividends paid 90,000
Retained earnings, 12/31 *(1,170,000)
* or, P1,185,000 – P15,000 = P1,170,000

17. c – refer to No. 16 (P400,000 + P750,000 – P9,000 = P1,141,000)

18. d – refer to No. 16
19. b – refer to No. 16
20. b – refer to No. 16
21. d – refer to No. 16 [P77,500 + (P75,000 – P62,500)] = P90,000
22.b – refer to No. 16. It should be noted that goodwill can only be revised once, so, the goodwill remains at
P90,000, but the liability will be adjusted to P80,000, the entry would be
Loss on contingent consideration…………………………………. 5,000
Contingent performance obligation………………………. 5,000

23. a
10,000,000 x P5 x 0.20 P 10,000,000
15,000,000 x P5 x 0.10 ___7,500,000
P 17,500,000
17,500,000/(1.12)4 P 11,121,566

24. a – at fair value

25. a
26.a – (P100,000 x ½ = P50,000 x 1/1.05) or P50,000 x 0.909091 = P45,454
27. c
Fair value of Subsidiary
Consideration transferred………………………………………………………P 200 million
Add: Fair value of contingent consideration……………………………… 10 million
Fair value of subsidiary………………………………………………………… P 210 million
Less: Fair value of identifiable assets and liabilities of Homer...............… 116 million
Goodwill…………………………………………………………………………… P 94 million
 Note: The consideration transferred should be compared with the fair value of the net assets acquired,
per PFRS3 par. 32. The contingent consideration should be measured at its fair value at the acquisition
date; any subsequent change in this cash liability comes under PAS 39 Financial instruments:
recognition and measurement and should be recognized in profit or loss, even if it arises within the
measurement period. See PFRS3 pars. 39, 40 and 58.

28. b
29. b
30. d
P77,500,000 = P100,000,000 – (P1,500,000 + P35,000,000 + P2,000,000 + P10,000,000 + P4,000,000 -
P30,000,000).
31. b
P(12,500,000) = P10,000,000 – (P1,500,000 + P35,000,000 + P2,000,000 + P10,000,000 + P4,000,000 -
P30,000,000).
32. c
The correcting entry, within the measurement period, is:
Goodwill 2,000,000
Patents 2,000,000

33. a
The correcting entry, within the measurement period, is:
Gain on acquisition 2,000,000
Liabilities 2,000,000

34. c
Goodwill 400,000
Estimated lawsuit liability 400,000

35.b
Loss on lawsuit 400,000
Estimated lawsuit liability 400,000

36.b
Assets 570,000,000
Liabilities 100,000,000
Capital stock 400,000,000
Cash 50,000,000
PIC-stock contingency 20,000,000

37. b - P350,000,000 – (P12 x 25,000,000) = P50,000,000/P12 = 4,166,667 additional shares

38. c
The contingency was originally recorded in equity at the amount of P20,000,000. However, changes in the
value of stock price contingencies do not affect the acquisition price or income. Any changes in value are
adjustments in equity.

PIC- stock contingency 20,000,000

PIC-other 30,000,000
Common stock 50,000,000

39. b
40. c
41. c
42. b – [(P47 x 12,000 shares) – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000)
= P104,000
43. d
APIC: P20,000 + [(P42 – P5) x12,000 = P464,000
Retained earnings: P160,000, parent only
44. b
Inventory: PP230,000 + P210,000 = P440,000
Land: P280,000 + P240,000 = P520,000
45. b – [P480,000 – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000)] = P20,000
46. c AA records new shares at fair value
Value of shares issued (51,000 × P3)............................................................................ P153,000
Par value of shares issued (51,000 × P1)...................................................................... 51,000
Additional paid-in capital (new shares) ....................................................................... P102,000
Additional paid-in capital (existing shares) ................................................................. 90,000
Consolidated additional paid-in capital........................................................................ P192,000

At the date of acquisition, the parent makes no change to retained earnings.

47. a – at fair value

48. c
Depreciation expense:
Building, at book value (P200,000 – P100,000) / 10 years P 10,000
Building, undervaluation (P130,000, fair value
– P100,000, book value) / 10 years3,000
Equipment, at book value (P100,000 – P50,000) / 5 years 10,000
Equipment, undervaluation (P75,000, fair value
- P50,000, book value) / 5 years 5,000
Total depreciation expense= P 28,000

49. c - [(24,000 shares x P30) – P686,400] = P33,600

50. d - [(24,000 shares x P30) – (P270,000 + P726,000 – P168,000)] = P108,000, gain
51. c
A bargain purchase is a business combination in which the net fair value of the identifiable assets acquired and
liabilities assumed exceeds the aggregate of the consideration transferred.

It should be noted that bargain purchase gain would arise only in exceptional circumstances. Therefore,
before determining that gain has arisen, the acquirer has to:
1. Reassess whether it has correctly identified all of the assets acquired and all of the liabilities
assumed. The acquirer should recognize any additional assets or liabilities that are identified in that
review.
2. Any balance should be recognized immediately in profit or loss.

52. b – no valuation to be recorded in the books of the acquirer

Cost P180,000
Less: Accumulated depreciation (P180,000/30 years = P6,000/year x 3 yrs 18,000
Net book value P162,000
53. c
Net Assets [P100,000 + P50,000 + P162,000 (No. 54)] P312,000
Less: Shares issued at par (15,000 shares x P10 par) 150,000
APIC P162,000
Or: since, there is no excess, the P312,000 represents the amount of consideration transferred, therefore the
APIC should be P162,000 [P312,000 / 15,000 shares = P20,80 – P15 = P10.80 x 15,000 shares)
54. c
 The consideration transferred should be compared with the fair value of the net assets acquired, per PFRS3
par. 32. The gain of P8 million results from a bargain purchase and should be recognized in profit or loss, per
PFRS3 par. 34.

55. c
Consideration transferred:
Shares: 2/3 x 60,000 x P3.20 128,000
Cash
Accounts payable 45,100
Mortgage and interest 44,000
Debentures and premium 52,500
Liquidation expenses 2,400
144,000
Cash held (12,000) 132,000
260,000
Less: Fair value of assets and liabilities acquired:
Accounts receivable P34,700
Inventory 39,000
Freehold land 130,000
Buildings 40,000
Plant and equipment 46,000289,700
Bargain Purchase Gain 29,700
56. d
PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are measured at their
acquisition-date fair values.
57.c
Selling price P 110,000
Less: Book value of Comb (P50,000 + P80,000 + P40,000
- P30,000) 140,000
Loss on sale of business by the acquiree (Comb) P( 30,000)

58. d P215,000 = P130,000 + P85,000

59. b P23,000 = P198,000 – (P405,000 - P265,000 + P15,000 + P20,000)

60. c P1,109,000 = Total Assets of TT Corp. P 844,000 
Less: Investment in SS Corp.    (198,000)
Book value of assets of TT Corp. P 646,000 
Book value of assets of SS Corp. 405,000 
Total book value P1,051,000 
Payment in excess of book value
(P198,000 - P140,000)     58,000 
Total assets reported P1,109,000 
61. c P701,500 = (P61,500 + P95,000 + P280,000) + (P28,000 + P37,000
+P200,000)

62. d P257,500 = The amount reported by TT Corporation

63. a P407,500 = The amount reported by TT Corporation

64. c
Par value of shares outstanding before issuance P200,000
Par value of shares outstanding after issuance 250,000
Par value of additional shares issued P 50,000
 Divided by: No. of shares issued* __12,500
Par value of common stock P 4

*Paid-in capital before issuance (P200,000 + P350,000) P 550,000

Paid-in capital after issuance (P250,000 + P550,00)800,000
Paid-in capital of share issued at the time of exchangeP250,000
Divided by: Fair value per share of stockP 20
Shares issued 12,500

65. a
Consideration transferred: Shares – 12,500 shares P250,000
Less: Goodwill 56,000
Fair value of identifiable net assets acquiredP194,000

66. a –
Blue Town:
Stockholders’ equity before issuance of shares (P700,000 + P980,000) P1,680,000
Issued shares: 34,000 shares x P35 1,190,000
Consolidated SHE/Net Assets P2,870,000
67. d

68. c
Common stock – combined…………………………………………………………P 160,000
Common – Acquirer Zyxel………………………………….. …………………….… 100,000
Common stock issued………………………………………………………………...P 60,000
Divided by: Par value of common stock………………………………………….P 2
Number of Zyxel shares to acquire Globe Tattoo………………………….....… 30,000
69. d
Paid-in capital books of Zyxel (P100,000 + P65,000)………………………........P 165,000
Paid-in capital in the combined balance sheet
(P160,000 + P245,000)…………………………………………………….… 405,000
Paid-in capital from the shares issued to acquire Globe Tattoo…………... P 240,000
Divided by: No. of shares issued (No. 31)……………………………………..... 30,000
Fair value per share when stock was issued………………………………….... P 8

Or,
Par value of common stock of Zyxel……………………………………… P 2
Add: Share premium/APIC per share from the additional
issuance of shares (P245,000 – P65,000)/30,000…………............ 6
Fair value per share when stock was issued……………………………....... P 8

70.b
Net identifiable assets of Zyxel before acquisition:
(P65,000 + P72,000 + P33,000 + P400,000 – P50,000
- P250,000)……………………………………………………………………. P270,000
Net identifiable assets in the combined balance sheet:
(P90,000 + P94,000 + P88,000 + P650,000 – P75,000 - P350,000)….......... 497,000
Fair value of the net identifiable assets held by Globe Tattoo
at the date of acquisition..…………………………………………………….. P227,000

71. a
Consideration transferred (30,000 shares x P8)………………………………… P240,000
Less: Fair value of net identifiable assets acquired (No. 49)……………….... 227,000
Goodwill……………………………………………………………………………….. P 13,000
72. c
Retained earnings:
 Acquirer – Zyxel (at book value)……………………………………….... P105,000
Acquiree– Globe Tattoo (not acquired)……………………………… __ 0
P105,000
It should be noted that, there was no bargain purchase gain and acquisition-related costs which may affect
retained earnings on the acquisition date.

73. a
II ____ _____JJ _ ____Total____
Average annual earnings P 46,080 P 69,120 P 115,200
Divided by: Capitalized at _10%
Total stock to be issued P1,152,000
Less: Net Assets (for P/S) 864,000
Goodwill (for Common Stock) P 288,000
Preferred stock (same with Net Assets):
864,000/P100 par 8,640 shares

Theories
1. True 21. False 41. True 61. c 81. b 101. c 121 a
2. False 22. True 42. False 62. b 82. a 102. d 122. b
3. True 23. False 43. a 63. c 83. d 103. d 123. b
4. True 24. True 44. c 64. d 84. a 104. d 124. c
5. False 25, True 45, b 65, d 85. c 105. c 125. b
6. True 26. False 46. b 66. a 86. d 106. d 126. c
7. False 27. True 47. d 67. a 87. c 107. d 127. c
8. True 28. False 48. c 68. d 88. a 108. d

9. True 29. True 49. c 69. a 89. c 109. b

10. True 30, True 50, b 70, b 90, d 110, c

11. True 31. False 51. a 71. c 91. b 111. c

12. True 32. True 52. b 72. A 92. a 112. c

13. False 33. True 53. c 73. c 93. C 113. a

14. False 34. False 54. a 74. c 94. B 114. d

15. False 35. True 55. c 75. a 95. D 115. d

16. True 36. True 56. b 76. d 96. A 116. c

17. False 37. False 57. a 77. a 97. A 117. b

18. True 38. True 58. c 78. d 98. c 118. b

19. True 39. False 59. a 79. b 99. d 119. b

20. False 40, False 60, c 80, c 100, d 120. a

Note for the following numbers:

2. A horizontal combination occurs when management attempts to dominate an industry.
5. A vertical combination exists when an entity purchases another entity that could have a buyer-seller
relationship with the acquirer. The combination described here is a horizontal combination.
7. A conglomerate combination is one where an unrelated or tangentially related business is acquired. A
vertical combination occurs when a supplier is acquired.
13. Greenmail is the payment of a price above market value to acquire stock back from a potential acquirer.
15. The sale of the crown jewels results when a target sells assets that would be particularly valuable to the potential acquirer.
The scorched earth defense results when a target generally sells large amounts of assets without regard to the
specific desirability to the potential acquirer.
17. Golden parachutes are generally given only to top executives of the acquiree.
20. Control over the net assets of an entity can be accomplished by purchasing the net assets or by purchasing the acquiree
voting common stock that represents ownership of the assets.
21. The amount of cash will always equal the net assets recorded by the acquirer. As a result, the acquirer book value will not
change due to an acquisition.
23. There is no exchange of stock in an asset for asset acquisition so there cannot be a change in ownership structure of
either entity.
26. The acquiree corporation becomes an acquirer stockholder, not the acquiree stockholders.
28. A combination that results in one of the original entities in existence after the combination is a statutory
merger.
31. The combination results in the stockholders of one entity controlling the other entity. The Retained
Earnings of the entity acquiring control is carried forward to the newly formed corporation.
34. The stock of the acquiree company must be purchased by the acquirer, but the value transferred to the
acquiree stockholders does not have to be in stock. Payment may be in another asset or the issuance of
debt.
37. The consideration to be given by the acquirer is sometimes not completely known because the
consideration is based partially on acquiree future earnings or the market value of acquirer debt or
stock.
39. Any change in the number of shares of acquirer stock given returns the purchase price to the agreed
level. The adjustment is to stock and additional paid-in capital. The investment account is unchanged.
40. The acquiree stockholders must continue to have an indirect ownership interest in the acquiree net
assets. Preferred stock or a nonvoting class of stock qualifies as an indirect ownership as well as voting
common stock.
42. A net operating loss carryforward cannot be acquired. They are only available to the acquirer if the
combination qualifies as a nontaxable exchange.