CHAPTER 10

SUGGESTED ANSWERS
EXERCISES
Exercise 10 - 1
1. Assets, other than goodwill
Goodwill
Liabilities
Ordinary Share Capital
Net asset contribution
Goodwill contribution
Average earnings
Normal earnings
Excess earnings
Capitalization rate
Goodwill
Total contribution
Stock distribution

550,000
196,000
230,000
516,000
Co. A
P 90,000

Co. B
P120,000

Co. C
P110,000

Total
P320,000

P 16,000
10,800
P 5,200
10%
P 52,000
P142,000
14,200 sh

P 20,000
14,400
P 5,600
10%
P 56,000
P176,000
17,600 sh

P 22,000
13,200
P 8,800
10%
P 88,000
P198,000
19,800 sh

196,000
P516,000
51,600 sh

2. Assets
Liabilities
Ordinary Share Capital
Co. A
142,000/516,000 x 32,000 sh
Co. B
176,000/516,000 x 32,000 sh
Co. C
198,000/516,000 x 32,000 sh
Exercise 10 - 2
Total contribution (P50,000 / 10%)
Net asset contribution equal to preference shares issued
Goodwill contribution equal to ordinary shares issued
Preference Share Capital (P400,000/P100)
Ordinary Share Capital (P100,000/P50)
Exercise 10 - 3
1.
1,500 shares/2,000 shares x 100 shares
2.
1,500 shares x P150
3.
1,000 shares x P150
4.
P500,000/2,000 shares x 100 shares

230,000
320,000
8,806 sh
10,915 sh
12,279 sh
P500,000
400,000
P100,000
4,000 shares
2,000 shares

= 75 shares
= P225,000
= P150,000
= P 25,000

Exercise 10 - 4
Cost (10,000 sh x P120 = P1,200,000 + P75,000)
Fair value of net assets acquired
Goodwill
Exercise 10 - 5

550,000

P1,275,000
450,000
P 825,000

Chapter 10 - Suggested Answers (AA2.2006)

1.

2.

page 2

Cost
FMV of net assets acquired
Negative Goodwill

P 50,000
60,000
P 10,000

Negative goodwill is immediately recognized as income.

Exercise 10 -6
Requirement 1
Accounts Receivable
Inventories
Property. Plant, and Equipment
Cash
Profit or Loss/Gain on Business Combination
Current Liabilities
Cost (P500,000 + P5,000)
FMV of net assets acquired
Negative Goodwill
Requirement 2
Cash
Current Liabilities
Accounts Receivable
Inventories
Property, Plant, and Equipment
Retained Earnings
Ordinary Share Capital
Retained Earnings
Cash
Exercise 10 7
1. Expenses of Business Combination
Cash
Current Assets
Plant Assets
Patents
Profit or Loss/Gain on Business Combination
Current Liabilities
Long-Term Liabilities
Cash
Ordinary Share Capital
Additional Paid-in Capital
Cost
FMV of net assets acquired
Negative Goodwill

Exercise 10 - 8
1. Assets
Goodwill
Liabilities
Ordinary Share Capital (325,000 x P10)

120,000
140,000
300,000
505,000
5,000
50,000
P505,000
510,000
P 5,000
500,000
50,000
120,000
100,000
280,000
50,000
200,000
300,000
500,000
75,000
75,000
575,000
1,200,000
50,000
75,000
300,000
450,000
300,000
250,000
450,000
P1,000,000
1,075,000
P 75,000

6,000,000
550,000
1,675,000
3,250,000

Chapter 10 - Suggested Answers (AA2.2006)

page 3

Paid-In Capital in Excess of Par (325,000 x P5)

Cost (325,000 x P15)
FMV of net assets acquired (P6,000,000 - P1,675,000)
Goodwill
2.

Assets
Goodwill
Liabilities
Ordinary Share Capital (475,000 x P5)
Additional Paid-in Capital (475,000 x 7)
Cost (475,000 x 12)
FMV of net assets acquired
(P10,000,000 4,525,000)
Goodwill

1,625,000
P4,875,000
4,325,000
P 550,000
10,000,000
225,000
4,525,000
2,375,000
3,325,000
P 5,700,000
P

5,475,000
225,000

PROBLEMS
Problem 10 - 1
Net tangible assets
Expected annual earnings
Rate of return on net tangible
assets
Ratio of earnings distribution
before consolidation
Stock distribution (earnings
capitalized at 8%)
Preferred stock
Common stock
Earnings distribution:
Preferred stock
a.
b.
c.

Company A
P400,000
60,000

Company B
P200,000
40,000

Company C
P1,000,000
100,000

Total
P1,600,000
200,000

15%

20%

10%

30%

20%

50%

4,000 sh
3,500 sh

2,000 sh
3,000 sh

10,000 sh
2,500 sh

16,000 sh
9,000 sh

P20,000
20,000
32,000

P10,000
10,000
16,000

P50,000
50,000
80,000

P 80,000
80,000
128,000

100%

Common stock

a.
b.
c.

P 7,778
17,500
28,000

P 6,667
15,000
24,000

P 5,555
12,500
20,000

P 20,000
45,000
72,000

Total

a.
b.
c.

P27,778
37,500
60,000

P16,667
25,000
40,000

P55,555
62,500
100,000

P100,000
125,000
200,000

Ratio of earnings distribution

after consolidation
a.
b.
c.
Problem 10 - 2
Requirement 1

27.78%
30.00%
30.00%

16.67%
20.00%
20.00%

55.55%
50.00%
50.00%

100%
100%
100%

Plan A
Assets, other than Goodwill
Goodwill
Ordinary Share Capital, P10 par

6,000,000
1,000,000
7,000,000

Chapter 10 - Suggested Answers (AA2.2006)

Net asset contribution

Goodwill contribution
Est. annual earnings
Normal earnings
Excess earnings
Capitalization rate
Goodwill
Total contribution
Ordinary share distribution

page 4

Co.D
P3,000,000

Co. E
P1,500,000

Co. F
P1,500,000

Total
P6,000,000

P 300,000
240,000
P 60,000
12%
P 500,000
P3,500,000
350,000 sh

P 165,000
120,000
P 45,000
12%
P 375,000
P1,875,000
187,500 sh

P 135,000
120,000
P 15,000
12%
P 125,000
P1,625,000
162,500 sh

1,000,000
P7,000,000
700,000 sh

Plan B
Assets, other than Goodwill
Goodwill
Preference Share Capital, P10 par
Ordinary Share Capital, P10 par

6,000,000
2,000,000
6,000,000
2,000,000
Co. D

Total contributions
(Earnings/8%)
Net asset contribution
Goodwill contribution
Preference share dist.
equal to NA contribution
Ordinary share distribution
equal to earnings cont.

P4,000,000
3,750,000
P 250,000

Co. E

Co. F

P2,200,000
2,062,500
P 137,500

Total

P1,800,000
1,687,500
P 112,500

P8,000,000
7,500,000
P 500,000

375,000 sh

206,250 sh

168,750 sh

750,000 sh

25,000 sh

13,750 sh

11,250 sh

50,000 sh

Requirement 2
Plan A
Co. D
Co. E
Co. F

350,000/700,000 x P600,000
187,500/700,000 x P600,000
162,500/700,000 x P600,000

P300,000
160,714
139,286
P600,000
Plan B
Preference
P450,000
112,500

Regular dividends at 6%
Balance P120,000 x 7,500/8,000
P120,000 x 500/8,000
Total
P562,500
Dividends per share
P .75
Co. D
Co. E
Preference Share Capital
P281,250.00
P154,687.50
Ordinary Share Capital
18,750.00
10,312.50
Total
P300,000.00
P165,000.00

Ordinary
P 30,000
7,500
P37,500
P .75
Co. F
P126,562.50
8,437.50
P135,000.00

Total
P480,000
112,500
7,500
P600,000
TOTAL
P562,500.00
37,500.00
P600,000.00

Problem 10 - 3
Cost
FMV of NA acquired
Cash
Accounts recl

(a)
P160,000
P 3,000
8,000

(b)
P120,000
P 3,000`
8,000

(c )
P 60,000
P 3,000
8,000

Chapter 10 - Suggested Answers (AA2.2006)

Inventories
Noncurrent MS
Property, plant & eqt.
Land
Current liabilities
Long-term liabilities
Goodwill(Neg. Goodwill)

20,000
55,000
50,000
28,000
( 4,000)
(20,000)

140,000
P 20,000

page 5

20,000
55,000
50,000
28,000
( 4,000)
(20,000)

Problem 10 - 4
1.
Cash
Accounts Receivable
Inventory
Goodwill
Land
Long-term Investment in Marketable Securities
Equipment
Accounts Payable
Ordinary Share Capital (6,000 @ 50)
APIC
Cash (20,000 + 40,000 + 80,000 + 60,000)
Cost (P750,000 + P200,000)
FMV of net assets acquired
(P830,000 - P115,000)
Goodwill
Expenses
Cash
2.

140,000
P(20,000)

20,000
55,000
50,000
28,000
( 4,000)
(20,000)

100,000
150,000
140,000
235,000
120,000
140,000
180,000
115,000
300,000
450,000
200,000
P950,000
715,000
P235,000
3,000
3,000

Investment in Canada Co. (6,000 x P125)

Ordinary Share Capital (6,000 x P50)
Additional Paid - In Capital (6,000 x P75)

750,000

Investment in Canada Co.

Expenses
Cash

200,000
3,000

300,000
450,000

203,000

Problem 10 - 5
1
FMV of net assets of Commander Co. [(P200,000 + P800,000) - P200,000]
MV of stocks of General Co.
No. of shares to be issued
Stock exchange ratio (20,000 sh/10,000 sh)
2

Investment in Commander Co. (20,000 x P40)

Ordinary Share Capital (20,000 x P10)
Paid - In Capital in Excess of Par (20,000 x P30)

Problem 10 - 6
1. Assets
Liabilities

140,000
P(80,000)

P800,000
P40
20,000 sh
2:1

800,000
200,000
600,000
1,370,000
600,000

Chapter 10 - Suggested Answers (AA2.2006)

page 6

Common Stock (75,000 x P10)

Retained Earnings

Capital stock
Additional paid-in capital
Retained earnings
2.

750,000
20,000
Combiners
Balances
P 450,000
210,000
110,000
P 770,000

Reassignment
+ P300,000
- 210,000
90,000

Assets
Goodwill
Liabilities
Ordinary Share Capital
Additional Paid-in Capital

3.
Capital stock
Additional paid-in capital
Retained earnings

Issuers
Balances
P 750,000
---20,000
P 770,000

1,500,000
150,000
600,000
750,000
300,000
Combiners
Balances
P 450,000
210,000
110,000
P 770,000

Reassignment
- P50,000
+ 50,000

Issuers
Balances
P 400,000
260,000
110,000
P 770,000

MULTIPLE CHOICE
6. B
7. B
8. C
9. D
10. C

10- A.

1.
2.
3.
4.
5.

D
B
C
C
D

10 B.

1.

Average earnings
Normal earnings (P300,000 x 8%)
Excess earnings
Goodwill (P26,000/10%)

P 50,000
24,000
P 26,000
P260,000

2.

Average earnings
Normal earnings (P400,000 x 8%)
Excess earnings
Goodwill (P48,000/10%)
Net asset contribution
Total contribution

P 80,000
32,000
P 48,000
P480,000
400,000
P880,000

- 1.

JPE = [P25,000 (P250,000 x 6%)]/10%

P 100,000

FPJ = [P14,000 (P150,000 x 8%)]/10%

Total goodwill

50,000
P 150,000

10
C.

10 D

1.

Average earnings
Normal earnings (P1,200,000 x 10%)
Excess earnings

P300,000
120,000
P180,000

Chapter 10 - Suggested Answers (AA2.2006)

page 7

Rate of capitalization
Goodwill
2.

10 E

1.

25%
P720,000

Cost
FMV of net assets acquired
(P520,000 + P1,480,000 P800,000)
Goodwill

C
Expected annual earnings
Rate of capitalization
Total contribution
Asset contribution equal to
preference shares
Goodwill equal to OS issued
Par value of ordinary shares
Ordinary shares distributed

10 - F

10 G

1.
2.

1.

B
D

1.

1,200,000
P 300,000

Abner
P 36,000
8%
P450,000

Bertha
P 80,000
8%
P1,000,000

Charlie
P 96,000
8%
P1,200,000

400,000
P 50,000
P10
5,000 sh

800,000
P 200,000
P10
20,000 sh

800,000
P 400,000
P10
40,000 sh

(P3,800,000 - P2,500,000)/P100
Excess earnings = P481,000 (P1,300,000 x 15%)
Goodwill equal to par value of ordinary share
to be issued = P286,000/20%
Premium on ordinary share = P1,430,000 x 50%

C
Earnings contribution
Normal
earnings
(6%)
Excess earnings
Rate of capitalization
Goodwill
Asset contribution
Total contribution
Stock distribution
290/1,200 x 1,000
360/1,200 x 1,000
550/1,200 x 1,000

10 H

P1,500,000

13,000 sh
P 286,000
P1,430,000
P 715,000

Frannie
P 30,000
12,000

Giselle
P 30,000
18,000

Hazel
P 40,000
30,000

Total
P 100,000
60,000

P 18,000
20%
P 90,000
200,000
P290,000

P 12,000
20%
P 60,000
300,000
P360,000

P 10,000
20%
P 50,000
500,000
P550,000

242 sh
300 sh
458 sh

1,000 sh
Total
P
150,000
90,000

Polar
P 41,250

Quickie
P 75,000

Robot
P 33,750

Normal
earnings
22,500
(6%)
Excess earnings
P 18,750
Rate of capitalization
20%
Goodwill
P 93,750
Asset contribution
375,000
Total contribution
P458,750
Stock distribution %
458,750/1,800,000
26%
900,000/1,800,000

45,000

22,500

P 30,000
20%
P150,000
750,000
P900,000

P 11,250
20%
P 56,250
375,000
P431,250

Estimated earnings

40,000
20%
P 200,000
1,000,000
P1,200,000

50%

60,000
20%
P 300,000
1,500,000
P1,800,000

Chapter 10 - Suggested Answers (AA2.2006)

431,250/1,800,000
10 I

1.

Ordinary Share Capital

Par value per share
Number of shares issued
4,000 sh / 5,000 sh

10 J

1.

FMV of net assets equal of MV of stocks issued

MV per share
Number of shares to be issued

10 K

1.

Cost
Fair market value of net assets acquired
Negative Goodwill

10 L

1.

Cost (P2,650,000 + 5,000)

FMV of net assets
(P1,890,000 + P2,900,000 P1,140,000)
Credit to profit and loss

10 M

1.

page 8

24%

Cost (P3,068,000 + 338,000)

FMV of net assets acquired
(P3,239,600 171,600)
Goodwill

P250,000
P50
5,000
.80
P2,000,000
P100
20,000 sh
P80,000
90,000
P10,000
P2,655,000
3,650,000
P 995,000
P3,406,000
P

3,068,000
338,000

10 N

1.

Under the purchase of interest method, the Retained Earnings of the

surviving company remains the same since no part of the acquired
companys Retained Earnings is recorded upon combination.

10 O

1.

Total assets of Pacino before the combination

Assets acquired from Lucky
Goodwill recorded upon combination**
Total assets after the combination

P1,097,500
1,733,250
850,000
P3,680,750

** Cost (200,000 sh @ P11)

Net assets acquired (P1,733,250 P383,250)
Goodwill

P2,200,000
1,350,000
P 850,000

10 P

1.

The retained earnings of the acquiring company

2.

APIC in shares issued to the 3 acquired co. (P100,000 x 2)

APIC of Co. U
10 Q

1.

P200,000
15,000
P215,000

Amount paid plus the contingent consideration that is recognized since the
contingent consideration is probable and can be reasonably estimated at the
date of acquisition.