Chapter 2 - MC
Chapter 2 - MC
Chapter 2 - MC
1. c -
Cash consideration transferred P 300,000
Contingent performance obligation __15,000
Fair value of Subsidiary P 315,000
Less: Book value of SS Company (P90,000 + P100,000) 190,000
Allocated excess P125,000
Less: Over/under valuation of assets and liabilities:
Increase in building: P40,000 x 100% P 40,000
Increase in customer list: P22,000 x 100% 22,000
Increase in R&D: P30,000 x 100% 30,000 __92,000
Goodwill P 33,000
Investment in SS Company 315,000
Cash 300,000
Estimated Liability on Contingent Consideration 15,000
Acquisition Expense (or Retained earnings) 10,000
Cash 10,000
Not Required: The working paper eliminating entry on the date of acquisition, 6/30/20x4 would be:
Receivables 80,000
Inventory 70,000
Buildings 115,000
Equipment 25,000
Customer list 22,000
Capitalized R&D 30,000
Goodwill 33,000
Current liabilities 10,000
Long-term liabilities 50,000
Investment in SS Company 315,000
31. b
Fair value of subsidiary (100%):
Consideration transferred P 600,000
FV of NCI 147,300
Control premium 27,600
P 774,900
Less: Book value of stockholders’ equity
(net assets) – Son Company
(P180,000 + P165,000 + P90,000) x 100% __435,000
Allocated excess P 339,900
Less: Over/undervaluation of assets and liabilities:
Increase in land (P420,000 – P264,000) x 100% P156,000
Increase in building: P96,000 x 100% __96,000 __252,000
Positive excess: Goodwill P 87,900
32. c
Fair value of subsidiary (100%):
Consideration transferred P 600,000
Less: Control premium 44,400
P555,600/80% P 694,500
Add: Control premium __44,400
P 738,900
Less: Book value of stockholders’ equity
(net assets) – Son Company
(P180,000 + P165,000 + P90,000) x 100% __435,000
Allocated excess P 303,900
Less: Over/undervaluation of assets and liabilities:
Increase in land (P420,000 – P264,000) x 100% P156,000
Increase in building: P96,000 x 100% __96,000 __252,000
Positive excess: Goodwill P 51,900
33. b
FV of S: CT - Acquisition cost P 13,000,000
Less: Book value (P20,000,000 + P36,000,000) 56,000,000
Allocated Excess of book value over cost P(43,000,000)
Add: Existing goodwill 40,000,000
Adjusted Allocated excess P( 3,000,000)
Less: Over/undervaluation of A & L __________-0-
Bargain purchase gain/Gain on acquisition P( 3,000,000)
36. b
Non-controlling interest (refer to No. 34)
Book value of stockholders’ equity of subsidiary…………. P 6,000,000
Adjustments to reflect fair value (over/ undervaluation
of assets and liabilities): (P8,400,000 – P6,000,000)…. 2,400,000
Fair value of stockholders’ equity of subsidiary…………….P 8,400,000
Multiplied by: Non-controlling Interest percentage........... 40%
Non-controlling interest (partial)………………………………..P 3,360,000
37. c -
Non-controlling interest
Non-controlling interest (partial) – refer to No. 36…………P 3,360,000
Add: Non-controlling interest on full -goodwill
(P3,960,000 – P2,520,000 partial-goodwill)………….. 1,440,000
Non-controlling Interest (full)…………………………………..P 4,800,000
40. b -
Non-controlling interest
Book value of stockholders’ equity of subsidiary…………..P 7,200,000
Adjustments to reflect fair value (over/ undervaluation
of assets and liabilities): (P9,600,000 – P7,200,000)…. 2,400,000
Fair value of stockholders’ equity of subsidiary……………P 9,600,000
Multiplied by: Non-controlling Interest percentage........... 25%
Non-controlling interest (partial)……………………………….P 2,400,000
41. c -
Non-controlling interest
Non-controlling interest (partial) – refer to No. 40…………P 2,400,000
Add: Non-controlling interest on full -goodwill
(P2,040,000 – P1,800,000 partial-goodwill)………..... 240,000
Non-controlling Interest (full)…………………………………..P 2,640,000
44. b
Non-controlling interest
Book value of stockholders’ equity of subsidiary…………..P 2,400,000
Adjustments to reflect fair value (over/ undervaluation
of assets and liabilities): (P3,840,000 – P2,400,000)…. 1,440,000
Fair value of stockholders’ equity of subsidiary……………P 3,840,000
Multiplied by: Non-controlling Interest percentage............ 25%
Non-controlling interest (partial)………………………………P 960,000
45. c
Non-controlling interest
Non-controlling interest (partial) –refer to No. 44.…………P 960,000
Add: Non-controlling interest on full -goodwill
(P480,000 – P360,000 partial-goodwill)…………....... 120,000
Non-controlling Interest (full)……………………………………P 1,080,000
54. a
Total Assets of Gulliver (Jonathan) P610,000
Less: Investment in Sea-Gull Corp. (160,000)
P 450,000
Book value of assets of Sea Corp. 230,000
Book value reported by Gulliver/Jonathan and Sea P 680,000
Increase in inventory (P45,000 – P40,000) 5,000
Increase in land (P60,000 – P40,000) 20,000
Goodwill (full)* 15,000
Total assets reported P 720,000
56. c
FV of SHE of S:
Book value of SHE of S (P40,000 + P120,000)………………….P 160,000
Adjustments to reflect fair value [(P45,000 + P60,000) -
(P40,000 + P40,000)………….……………………………… 25,000
FV of SHE of S……………………………………………………… P 185,000
Multiplied by: NCI%.................................................................... 20%
FV of NCI (partial)………………………………………………….P 37,000
Add: NCI on full goodwill (P15,000 – P12,000)……………….. 3,000
FV of NCI (full-goodwill)*………………………………………… P 40,000
* same with the NCI given per problem
Partial Goodwill
Fair value of Subsidiary:
Consideration transferred P160,000
Less: BV of SHE of S (P40,000 + P120,000) x 80% _128,000
Allocated excess P 32,000
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P5,000 x 80%) P 4,000
Land (P20,000 x 80%) 16,000 __20,000
Goodwill – partial P 12,000
If partial-goodwill:
Total Assets of P. P1,278,000
Less: Investment in S Corp. (440,000)
P 838,000
Book value of assets of S Corp. 542,000
Book value reported by P and S P1,380,000
Increase in inventory (P60,000 – P38,000) 22,000
Increase in land (P60,000 – P32,000) 28,000
Increase in plant assets [P350,000 – (P300,000 – P60,000)] 110,000
Goodwill (partial)* 20,000
Total assets reported P1,540,000
*[P440,000 – (P702,000 – P142,000) x 75%]
61. d P215,000 = P130,000 + P70,000 + (P85,000 - P70,000)
62. a
Partial Goodwill
Fair value of Subsidiary:
Consideration transferred P150,500
Less: BV of SHE of SSD (P50,000 + P90,000) x 70% __98,000
Allocated excess P 52,500
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P15,000 x 70%) P 10,500
Land (P20,000 x 70%) 14,000 24,500
Goodwill – partial P 28,000
63. c
Full-goodwill:
Fair value of Subsidiary:
Consideration transferred P150,500
Add: FV of NCI **64,500 P215,000
Less: BV of SHE of SS (P50,000 + P90,000) x 100% 140,000
Allocated excess P 75,000
Less: Over/under valuation of A and L: Inc. (Dec.)
Inventory (P70,000 – P85,000) x 100% P 15,000
Land (P25,000 – P45,000) x 100% 20,000 35,000
Goodwill – full P 40,000
**given amount, but it should not be lower than the fair value of SHE – subsidiary amounting to
P52,500 computed as follows :
FV of SHE of SS:
Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000
Adjustments to reflect fair value (P15,000 + P20,000)… 35,000
FV of SHE of SS……………………………………………… P 175,000
Multiplied by: NCI%.......................................................... 30%
FV of NCI (partial)……………………………………………..P 52,500
64. b
Total Assets of Power Corp. P 791,500
Less: Investment in Silk Corp. (150,500)
P 641,000
Book value of assets of Silk Corp. 405,000
Book value reported by Power and
Silk P1,046,000
Increase in inventory (P85,000 - P70,000) 15,000
Increase in land (P45,000 - P25,000) 20,000
Goodwill (full) 40,000
Total assets reported P1,121,000
If partial-goodwill:
Total Assets of Power Corp. P 791,500
Less: Investment in Silk Corp. (150,500)
P 641,000
Book value of assets of Silk Corp. 405,000
Book value reported by Power and
Silk P1,046,000
Increase in inventory (P85,000 - P70,000) 15,000
Increase in land (P45,000 - P25,000) 20,000
Goodwill (partial) 28,000
Total assets reported P1,109,000
65. D P701,500 = (P61,500 + P95,000 + P280,000) + (P28,000 + P37,000
+ P200,000)
66. a
Non-controlling interest (partial-goodwill): P52,500
NCI
FV of SHE of SSD:
Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000
Adjustments to reflect fair value (P15,000 + P20,000)… 35,000
FV of SHE of SSD P 175,000
Multiplied by: NCI%.......................................................... 30%
FV of NCI (partial)……………………………………………..P 52,500
67. D
Non-controlling interest (fulll-goodwill): P64,500
NCI
FV of SHE of SSD:
Book value of SHE of SS (P50,000 + P90,000)…………….P 140,000
Adjustments to reflect fair value (P15,000 + P20,000)… 35,000
FV of SHE of SSD P 175,000
Multiplied by: NCI%.......................................................... 30%
FV of NCI (partial)……………………………………………..P 52,500
Add: NCI on full-goodwill (P40,000 – P12,000)…………... 12,000
FV of NCI (full)…………………………………………………..P 64,500
71. c
Consideration transferred (P60,000 ÷ 80%).......................................................................... P75,000
Less: Strand's book value ...................................................................................................... (50,000)
Fair value in excess of book value ........................................................................................ P25,000
Excess assigned to inventory (60%) ........................................................................P15,000
Excess assigned to goodwill (40%) ..........................................................................P10,000
72. a
Park current assets.................................................................................................................... P 70,000
Strand current assets................................................................................................................. 20,000
Excess inventory fair value...................................................................................................... 15,000
Consolidated current assets...................................................................................................... P105,000
73. c
Park noncurrent assets............................................................................................................. P 90,000
Strand noncurrent assets.......................................................................................................... 40,000
Excess fair value to goodwill (partial).................................................................................... ___8,000
Consolidated noncurrent assets............................................................................................... P140,000
74. d
Park noncurrent assets.............................................................................................................. P 90,000
Strand noncurrent assets........................................................................................................... 40,000
Excess fair value to goodwill (full).......................................................................................... __10,000
Consolidated noncurrent assets................................................................................................ P140,000
75. b Add the two book values and include 10% (the P6,000 current portion) of the loan taken out by Park to
acquire Strand.
76. b Add the two book values and include 90% (the P54,000 noncurrent portion) of the loan taken out by Polk
to acquire Strand.
77. b
Park stockholders' equity......................................................................................................... P80,000
NCI (partial):
BV of SHE – S ……………………………………………………………..P50,000
Adjustments to reflect fair value (inventory)………………………. 15,000
FV of SHE – S………………………………………………………………P65,000
x: Multiplied by: NCI%........................................................................ 20% 13,000
Total stockholders' equity....................................................................................................... P93,000
78. c
Park stockholders' equity..................................................................................... …………. P80,000
NCI (full):
BV of SHE – S ……………………………………………………………..P50,000
Adjustments to reflect fair value (inventory)………………………. 15,000
FV of SHE – S………………………………………………………………P65,000
x: Multiplied by: NCI%......................................................................... 20%
NCI (partial)………………………………………………………………P13,000
Add: NCI on full-goodwill (P10,,000 – P8,000)……………………… 2,000
Non-controlling interest at fair value (20% × P75,000)………… 15,000
Total stockholders' equity P95,000
The following discussions focus on the books of parent entity regarding direct acquisition-related costs.
Currently, the Interpretation Committee (IFRIC) of IASB is discussing the topic of Contingent Pricing of Property, Plant and Equipment and
Intangible Assets. The scope of those deliberations does not include the cost of investment in associate, joint venture or subsidiary but it is
possible that the scope of the project might be expanded in future. (IGAAP 2013 under IFRS by Ernst and Young, page 530,)
This raises the question of the treatment of the transaction costs as, under PFRS 3 these costs are usually recognized as expenses in the
consolidated accounts.
Revised PAS 27 does not define what is meant by “cost”, but in the glossary to PFRS provides an over-riding definition of “cost” as “the
amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or
construction”
As a general rule under PFRS, “cost” includes the purchase price and other costs directly attributable to the acquisition or issuance of the
asset such as professional fees for legal services, transfer taxes and other transaction costs”
* Answer d – P1,600,000 (P1,500,000 + P100,000) – Position of Ernst and Young (EY). Given that Revised PAS 27 does not separately
define “cost”, it is appropriate to apply the general meaning of “cost” to separate financial statements. Therefore, in the opinion of EY, the
cost of investment in subsidiary in the separate financial statements includes any costs incurred even if such costs are expensed in the
consolidated financial statements.
The view of EY, maybe based on the assumption that under the revised PAS 27 since it applies only to “Separate Financial Statements” not
consolidated statements; therefore PFRS 3 which is a standard for business combination/consolidation will not be the basis for the
definition of “cost”). Unlike before the revision of PAS 27 and implementation of PFRS 10, the basis of the old PAS 27, which is
“Consolidated and Separate Statements”, is PFRS 3, wherein the definition of “cost” was clearly defined. That is why the general rule in the
definition of “cost” was applied. This view is also as suggest by the IASB since they introduced the requirement to expense acquisition
costs within PFRS 3, it only applies to financial statements in which a business combination is accounted for under PFRS 3. It follows
that this requirement does not extend to the individual (or separate) financial statements of the investing or parent entity.
So, it seems that the basis of the general rule applies to PAS 16 (Property, Plant and Equipment) and PAS 38 (Intangible Assets) wherein
the direct costs is capitalized in the books of parent entity and eventually become expense through eliminating entry to prepare
consolidated statements.
** Answer c – P1,500,000; In Revised PAS 27 “Separate Financial Statements” in relation to PFRS 3 par. 33, which refers to any
acquisition-related costs incurred by the acquirer in relation to the business combination (for example legal costs, due diligence costs – such
as finder’s fee are expensed off and not included in the consideration transferred. The key reasons given for this approach are provided in
paragraph BC366:
Acquisition-related costs are not part of the fair value exchange between the buyer and seller.
They are separate transactions for which the buyer pays the fair value for the services received.
These amounts do not generally represent assets of the acquirer at acquisition date because the benefits obtained are consumed as
the services are received.
The PFRS 3 accounting for these outlays is a result of the decision to record the identifiable assets acquired and liabilities assumed at fair
value. In contrast, under PAS 16 and PAS 38, the assets acquired are initially recorded at cost . The following items are worth noting to
justify the use of this approach:
1. This view is supported by Hilton and Herauf in their book Modern Advanced Accounting in Canada, 7 th Edition (2013) which is
an IFRS based discussion, in the solution they presented in one of their end-of-chapter problems, they expensed the direct costs in
recording the investment in subsidiary in the book of parent company
2. Similar with No. 1 above, in the book Applying IFRS, 3 rd edition (2013), by Picker, et al (which is also Ernst and Young book,
which seems to contradict their position in the discussion above) in chapter 24 end-of-the chapter problems, the direct costs (or
“costs incurred in undertaking taking the acquisition” as the term used in the book) were not part of the investment in subsidiary
as evidenced by the amount in the eliminating entry.
3. One respected author in accounting even commented that, despite the above analysis capitalizing the direct costs seems to be
correct and have basis since the segregation of old PAS 27 to Revised PAS 27 and PFRS 10, the problem is, if the parent records
the direct costs as part of Investment in subsidiary, it may be a problem when there will be an impairment test which will reveal
the costs are in fact unrecoverable and thus that there must be an impairment charge at the parent level (in which the direct costs
is included as part the investment), which would have the effect of bringing the parent’s accounting (with the impairment
investment including the direct costs) in line with what would later appear on the consolidated financial statements.
The author believes that the there is logic on the basis of applying the general rule in interpreting the definition of “costs” in PAS 27 wherein
the basis are PAS 16 and PAS 38, giving rise to an effect wherein the direct costs will be part of the investment in the books of parent
entity. But because of the three reasons mentioned above, the author believes that the direct costs still be considered as expenses
applying PFRS 3, aside from the fact that in substance the ultimate objective is to consolidate, even though there was a separation of
standard between Revised PAS 27 and PFRS 10.
95. a
96. d – Since, CC Corp. is not a subsidiary, no elimination of intercompany accounts will be made. Therefore, the
P200,000 remains to be a receivable. On the other hand, WW Corp. is a consolidated subsidiary, so the
P300,000 intercompany account will be eliminated.
97. d
98. c – In the combined financial statements (which normally used to described financial statements in a “common
control” situation), intercompany accounts are eliminated in full.
99. a
100. d – In consolidating the subsidiary's figures, all intercompany balances must be eliminated in their entirety for
external reporting purposes. Even though the subsidiary is less than fully owned, the parent nonetheless
controls it.
101. d
The acquisition method consolidates assets at fair value at acquisition date regardless of the parent’s percentage
ownership.
102. c
An asset acquired in a business combination is initially valued at 100% acquisition-date fair value and
subsequently amortized its useful life.
Patent fair value at January 1, 2009....................................................................................... P45,000
Amortization for 2 years (10 year life).................................................................................. (9,000)
Patent reported amount December 31, 2010.......................................................................... P36,000
103. a
PP - building ..........................................................................................................P510,000
TT building acquisition-date fair value P300,000
Amortization for 3 years (10-year life) (90,000) 210,000
Consolidated buildings ............................................................................................................. P720,000
-OR-
PP - building .......................................................................................................................... 510,000
TT building 12/31/x4 P182,000
Excess acquisition-date fair value allocation 40,000
Excess amortization for (P40,000/ 10 x 3 years) (12,000) 210,000
Consolidated buildings ............................................................................................................. P720,000
104. b
Target not met: 100,000 shares x .75 share x P10 = P750,000
Target met: 100,000 shares x .8 x P10 = P800,000
105. c
Target not met: 250,000 shares x 1.50 share x P30 = P11,250,000
Target met: 250,000 shares x 1.8 x P30 = P13,500,000
106. c
500,000 shares x 1.7 exchange ratio x P25 = P21,250,000
The investment value does not change as a result of a change in the share prices.
107. d
Cost of Investment (40 shares* x P40)………………………………………………………P 1,600
Less: Book value of SHE – Pedro Ltd (P300 + P800) x 100%...................................... 1,100
Allocated excess………………………………………………………………………………P 500
Less: Over/Under valuation of Assets and Liabilities:
Increase in Non-current assets: [(P1,500 – P1,300) x 100% x 70%..................... 140
Goodwill………………………………………………………………………………………….P 360
100%
* Pedro Ltd Santi Ltd
Currently issued…………………… 100 40% 40 40%
Additional shares issued……….. 150 60%** 60 / 60%
Total shares………………………… 250 100
**150/250
FV of net assets [P.5M + P1.5M – P.7M)] P1.3M P ?
BV of net assets (same with FV)……….. 1.1 M ?
Fv per share of stock……………………… P 16 P 40
Pedro ltd issues 2 ½ shares in exchange for each ordinary share of Santi Ltd. All of Santi Ltd’s shareholders
exchange their shares for Pedro Ltd. Pedro Ltd therefore issues 150 shares (60 x 2 ½) for the 60 shares in Santi
Ltd.
Pedro Ltd is now the legal parent of the subsidiary Santi Ltd. However, analyzing the shareholding in Pedro Ltd
shows that it consists of the 100 shares existing prior to the merger and 150 new shares held by former
shareholders in Santi Ltd. In essence, the former shareholders of Santi Ltd now control both entities Pedro Ltd
and Santi Ltd. The former Santi Ltd shareholders have a 60% interest in Pedro Ltd [150/(100+150]. The IASB
argues that there has been a reverse acquisition, and that Santi Ltd is effectively the acquirer of Pedro Ltd.
Reverse acquisition occurs when the legal subsidiary has this form of control over the legal parent. The usual
circumstance creating a reverse acquisition is where an entity (the legal parent) obtains ownership of the equity
of another entity (the legal subsidiary) but, as part of the exchange transaction, it issues enough voting equity as
consideration for control of the combined entity to pass to the owners of the legal subsidiary.
The key accounting effect of deciding that Santi Ltd is the acquirer is that the assets and liabilities of Pedro ltd
are to be valued at fair value. This is contrary to normal acquisition accounting, based on Pedro Ltd being the
legal parent of Santi Ltd, which would require the assets and liabilities of Santi Ltd to be valued at fair value.
Theories
1. c 6. B 11. c 16. d 21. b 26. D 31 c 36. d
2. a 7. b 12. c 17. c 22. a 27. C 32. d 37. d
3. e 8. A 13. d 18. b 23. a 28. C 33. b 38. c
4. e 9. D 14. d 19. c 24. b 29. D 34. d 39. b
5. b 10, a 15, b 20. c 25. c 30. B 35. d 40. c