Accounting for Business Combinations

Midterm Exam

True or False
1. An agency has no merchandise inventory but is still considered as an outlying selling unit of the home office. Its main
purpose is to display goods called samples. It does not require a complete set of books and has no records of receipts
and disbursements. FALSE
2. If the periodic inventory system is used by both the home office and the branch, the reciprocal ledger accounts used
by the branch are the Home Office and Shipments from Home Office accounts. The latter is added to the home office’s
purchases account in determining home office cost of goods sold. FALSE
3. If the Shipments from the Home Office account and the Shipments to the Branch Office account are kept on a reciprocal
basis and the home office charges a mark-up on these shipments, two adjustments to the Inventory Allowance account
will be needed at the end of the period. One adjustment will be needed to adjust the Shipments to Branch account
down to its cost basis, and a second adjustment will be needed to transfer any unrealized inventory profits to the
Branch Profit account. FALSE
4. A closing entry prepared by a branch will adjust the Inventory Allowance account and record branch profit or loss in the
home office account. Unrealized profits from transactions between a home office and its branch are eliminated in
preparing combined financial statements for the enterprise. TRUE
5. The acquisition date is the date on which the acquirer pays in cash to the acquiree regardless of the consideration
agreed upon by the parties. FALSE

Multiple Choice Questions

1. Which of the following pertains to agency
a. It prepares the entry to record its own expenses out of petty cash funds when incurred by debiting an expense
account and crediting cash.
b. It prepares the entry to record receipt of a working fund by debiting petty cash funds and crediting cash.
c. It prepares the entry to record its own sale by debiting account receivable and crediting sales
d. B and C only.
e. None of the above.

2. The home office ledger account in the accounting records of a branch is best described as:
a. A revenue account
b. A sundry account
c. An adjunct account
d. An equity account
e. None of the above

3. The branch current account is decreased:

a. For remittances from the branch.
b. For goods transferred to the branch
c. For branch losses.
d. A and C only.
e. None of the above.

4. Which of the following entries is incorrect when preparing a combined financial statement?
a. Home office current account is debited.
b. Allowance for overvaluation is credited.
c. Shipments to Branch account is debited.
d. Merchandise Inventory is credited.
e. None of the above.

5. The inventory allowance account is debited:

a. When the home office ships merchandise at a billed price above cost.
b. When the home office permanently closes the account at the end of an accounting period on its book.
c. When the branch ships merchandise at a billed price above cost.
d. When the branch permanently closes the account at the end of an accounting period on its book.
e. None of the above.
6. In net asset acquisition, an acquirer should at the acquisition date recognize goodwill acquired in a business
combination as an asset. Goodwill should be accounted for as follows:
a. Recognized as an intangible asset and amortized over its useful life.
b. Written off against retained earnings.
c. Recognized as an intangible asset and impairment test when a trigger event occurs.
d. Recognized as an intangible asset and tested annually for possible impairment (or more frequently if
impairment is indicated).
 e. None of the above.

7. Which of the following is not a true statement with regard to a statutory merger?
a. One entity continues to exist.
b. One entity ceases to exist.
c. The name of the new entity is not the same as either of the entities.
d. A and C only.
e. None of the above.

8. Which of the following is a vertical combination?

a. A combination where the two entities are unrelated.
b. A combination where the two entities are competitors in the same industry.
c. A combination where the two entities have a potential buyer/seller relationship.
d. None of the above describes a vertical combination
e. None of the above.

9. Which of the following is correct when comparing acquisition date worksheet eliminations for 100 percent ownership
and less than 100 percent ownership when there is a separate accumulated depreciation account?
a. The 100 percent ownership and the less than 100 percent ownership will each result in same
adjustments to plant assets and accumulated depreciation accounts
b. The 100 percent ownership will result in the same adjustment to the plant asset account but the accumulated
depreciation adjustment for the 100 percent ownership will be greater than the adjustment for the less than
100 percent ownership
c. The 100 percent ownership will result in the same adjustment to the accumulated depreciation account but
the adjustment to plant assets for the 100 percent ownership will be greater than the adjustment for the less
than 100 percent ownership
d. The 100 percent ownership will have greater adjustment amounts than the less than 100 percent ownership
for both the plant assets and the accumulated depreciation accounts
e. None of the above.

10. Which of the following methods must be applied in accounting for business combinations under IFRS 3?
a. Acquirer method
b. Acquisition method
c. Purchase method
d. Pooling of interest
e. None of the above.

Problem I
On January 31, 2021, ABC Company established a sales agency by sending merchandise samples costing 693,000 and a
working fund of 30,000. A month after, ABC acquired equipment for the agency amounting to 180,000 to be depreciated at
10% per annum. The agency transmitted sales orders to the home office with a total cost of 2,400,000. The agency paid
expenses of 25,000 and received replenishment thereof from the home office. For the year 2021, the home office reported
income from agency sales amounting to 578,500. The agency reports a 25% gross profit margin on sales. All sales orders in
the year 2021 were filled up by the home office.

1. What is the net realizable value of merchandise samples 1 year after the establishment of the agency?

100% Filled-up Sales 3,200,000

75% Cost 2,400,000
25% Gross Profit 800,000
Depreciation (15,000)
Cash Expenses (25,000)
Advertising (181,500)
Net Income 578,500

Samples, Jan 2021 693,000

Expenses (198,000)
Samples, Jan 2022 495,000

Problem II
Manila Corporation has operated a branch in Cebu for one year. Shipments are billed to the branch at cost. The branch carries
its own accounts receivable, makes its own collections, and pays its own expenses. The transactions for the year are given
effect to in the trial balance below:

Accounts Debit Credit

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,040
Home Office Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 21,000
Purchases from outsiders . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Shipments from Home Office . . . . . . . . . . . . . . . . . . . . . . . 56,216
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . … 15,360
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 684
Gain on sale of equipment. . . . . . . . . . . . . . . . . . . .. . . . . . 8,800
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ________ _80,000
P109,800 P109,800

The branch reported the following inventory on December 31, 2015: Outsiders, P3,391; and Home office, P7,625

2. On January 1, 2016, what is the balance of the branch current account in the home office books?
P31,416 = P21,000 + P10,416

3. On January 1, 2016, what is the balance of the shipments to branch account in the home office books?
Zero, since it is a nominal account

Problem III
Makati Corporation has been operating a branch in Pampanga for a year. Shipments are billed to the branch at cost. The
branch carries its own accounts receivable, makes its own cash collections, and pays its own expenses. The branch has the
following data on its trial balance: Cash 200,000; Sales 1,950,000; Shipments 1,600,000; Accounts Receivable 300,000; Home
Office Current 420,000; and Expenses (?). The branch inventory on December 31, 2019 is 260,000.

4. On December 31, 2019, the net income of the branch is: 340,000 (1,950,000 - 1,600,000 + 260,000 - 270,000)

Problem IV
The following entries are reflected in the intra-company accounts of a home office and its lone branch for June 2019:

Investment in Branch

Date Transaction Debit Credit

6/01 Balance, Beginning 50,000

6/02 Remittance 10,000

6/08 Collection of Branch Receivable 500

6/12 Inventory Shipment 12,000

6/25 Advertising Allocation to Branch (50% incurred) 4,000

6/27 Equipment Purchased by Branch 7,000

6/28 Inventory Shipment 14,000

6/30 Depreciation Allocation 2,000

6/30 Balance, Ending 64,500

Home Office Current

Date Transaction Debit Credit

 6/01 Balance, Beginning 50,000

6/02 Remittance 10,000

6/10 Collection of Home Office Receivable 2,000

6/16 Inventory Shipment 12,000

6/24 Purchase of Equipment carried on HO Books 7,000

6/28 Advertising Allocation 400

6/29 Remittance 15,000

6/30 Inventory returned to HO 1,000

6/30 Depreciation Allocation 2,000

6/30 Balance, Ending 29,400

Except for the error by the branch in recording its share of allocated advertising expense and depreciation allocation, all
differences are timing differences.

5. Compute the adjusted balance of the reciprocal accounts on June 30, 2019. P50,500

Problem V
On December 31, 2019 the Branch Current ledger account in the accounting records of the home office of Grace Company
shows a debit balance of 55,500. You ascertained the following facts in analyzing this account:
a. On December 31, 2019, merchandise billed at 5,800 was in transit from the home office to the branch. The periodic
inventory system is used by both the home office and the branch.
b. The branch had collected home office trade accounts receivable of 560; the home office was not notified.
c. On December 29, 2019, the home office had mailed a check for 2,000 to the branch, but the accountant for the home
office had recorded the check as a debit to the Charitable Contribution Expense ledger account; the branch had not
received the check as of December 31.
d. Branch net income for December 2019, was recorded erroneously by the home office at 840 instead of 480. The credit
was recorded by the home office in the Branch Income Summary ledger account.
e. On December 28, 2019, the branch had returned supplies costing 220 to the home office; the home office had not
recorded the receipt of the supplies. The home office records acquisitions of supplies in the Office Supplies Ledger
account.
f. Acquisition of equipment by the branch, 1,500. The equipment account is to be maintained in the home office books.
The home office had not been notified of the acquisition.
g. A branch customer erroneously remitted 1,000 to the home office. The home offIce recorded this cash collection on
December 29, 2019. Meanwhile, back at the branch, no entry has been made yet.

6. The unadjusted balance of the Home Office Current Account on the books of the branch as of December 31, 2019 is:
49,180
7. The adjusted balance of the reciprocal account on December 31, 2019 is: 55,980

Problem VI
The following are some of the account balances appearing on the book of DEF Home Office and its branch as of December
31.

Home Office Books Branch Books

Inventory, January 1 2,220,000 332,500

Shipments 1,240,000 1,543,800

Purchases 2,500,000 600,000

Inventory Allowance 357,700

 Sales 4,000,000 2,500,000

Operating Expense 910,000 155,000

The ending inventory of the branch is 528,500 including goods from outside purchases of 155,000; the ending inventory of
the home office is 520,000.

8. What is the true net income of the branch? 681,400

BP Cost Allowance MU%
Beg Inv of Br 332,500 53,900
Shipments 1,543,800 1,240,000 303,800 24.5%
COGAS 1,876,300 357,700
Ending Inv of Br 373,500 73,500
CGS 1,502,800 284,200

Sales 2,500,000
CGS 1,947,800 (1,502,800 + 600,00 - 155,000)
OPEX 155,000
NI 397,200
Adj 284,200
True NI 681,400

9. What is the combined net income for the year? 811,400 (681,400 + 130,000)

Problem VII

On January 01, 2021, P Company decided to purchase all the net assets of S Company. The acquiring company issued 9,000
shares of its P10 par value common stock with a market value of P30 each. The acquirer paid professional fees of 7,000 to
accomplish the acquisition plus 1,000 stock issuance costs. The following are the records of the companies at the date of
acquisition:

P Company at S Company at
BV BV

Cash 100,000 20,000

Marketable Securities 40,000 30,000

Inventory 80,000 50,000

Land 50,000 100,000

Buildings 150,000 100,000

Current Liabilities 60,000 25,000

Ordinary Shares 90,000 50,000

Accu Dep - Bldg 30,000 20,000

Share Premium 180,000 100,000

Retained Earnings 60,000 105,000

After careful assessment of S Company’s net assets, it was determined that Marketable Securities will be increased by 3,000;
Inventory will be increased to 55,000; and the Building will be increased by 5,000 above its carrying value.
10. What is the Total Assets after acquisition?

Assets of P at BV 390,000
Assets of S at FV 293,000
 Goodwill 2,000
Cash Payment (8,000)
Total Assets 677,000

11. What is the Total Shareholder’s Equity after acquisition?

Ordinary Shares of P 90,000

Shares Issued 90,000
Share Premium 359,000 (180,000 + 180,000 - 1,000)
Retained Earnings of P 53,000 (60,000 - 7000)
Total SHE 592,000

Problem VIII
On January 1, 2021, DIMINUTIVE Co. acquired all of the assets and assumed all of the liabilities of SMALL, Inc. As
of this date, the carrying amounts and fair values of the assets and liabilities of SMALL acquired by
DIMINUTIVE are shown below:
Assets Carrying amounts Fair values
Cash in bank 20,000 20,000
Receivables 400,000 240,000
Allowance for probable losses on
(60,000)
receivables
Inventory 1,040,000 700,000
Building – net 2,000,000 2,200,000
3,400,000 3,160,000

Liabilities
Payables 750,000 750,000

In the negotiation for the business combination, DIMINUTIVE Co. paid in cash transaction costs amounting to
500,000 for legal, accounting, and consultancy fees.

12. If DIMINUTIVE Co. paid total cash of 3,500,000 in relation to the business combination, how much is the
resulting goodwill (gain on bargain purchase)? 590,000 (Hint: 3,500,000 cash payment includes the
500,000 for expenses.)
13. If DIMINUTIVE Co. paid 2,000,000 cash as consideration for the assets and liabilities of SMALL, Inc., how
much is the goodwill (gain on bargain purchase) on the business combination? 410,000

Problem IX
On August 31, 2021, P Company acquired S Company by purchasing 70% of its issued ordinary shares, P1 par
value for 200,000. The fair value of the interest not acquired is 18,000. P Company paid 5,000 acquisition-related
expenses. The following data before acquisition are available:

P Company S Company

Share Premium 220,000 -

Other Current Assets 70,000 40,000

Non-current Assets 500,000 120,000

Non-current Liabilities 100,000 -

Ordinary Shares 120,000 120,000

Current Liabilities 30,000 10,000

Cash 180,000 -

Treasury Shares, at cost 30,000

 Retained Earnings 250,000 30,000

14. What is the amount of goodwill to be recognized in the consolidated financial statement?

Price Paid 200,000

NCI (Min) 45,000
FV of NA (150,000)
Goodwill 95,000

15. What is the consolidated retained earnings assuming the price paid is 100,000?

Price Paid 100,000

NCI (Min) 45,000
FV of NA (150,000)
Gain (5,000)

RE of Parent 250,000
Expense (5,000)
Gain 5,000
Conso RE 250,000

Problem X
On January 01, 2017, GBX and PSP companies decided to combine their business. GBX has the following data from its
balance sheet prior to acquisition: Receivables 180,000; Inventories 200,000; Equipment (net) 625,000; Accounts Payable
547,500; Share Premium 40,000; Cash 850,000; Building (net) 800,000; Ordinary Shares 1,250,000; Land 187,500 and
Retained Earnings 1,005,000. On the other hand, PSP has: Accounts Payable 350,000; Share Premium 150,000; Retained
Earnings 250,000; Land 250,000; Inventories 62,500; Cash 50,000; Building (net) 250,000; Receivables 37,500; and
Equipment (net) 600,000. GXB decided to acquire 16,000 of the outstanding shares of PSP. GBX will pay 500,000 cash and
will issue 8,000 ordinary shares with market value of 30 per share in exchange for the 16,000 outstanding shares of PSP. GBX
and PSP’s ordinary shares both have a part value of 25 per share. The book values reflect fair values except for building of
GBX which has a net realizable value of 1,050,000 and inventories and land of PSP which have a net realizable value of 87,500
and 325,000, respectively. GBX also paid costs of registering and issuing securities amounting to 90,000 and direct costs of
combination amounting to 62,500.

16. What is the reported total asset in the consolidated financial statement?

Assets of GBX 2,190,000

Assets of PSP 1,350,000
Consolidated 3,540,000

17. What is the reported retained earnings in the consolidated financial statement?

Cash 500,000
OS 240,000
NCI 200,000
FV (1,000,000)
Gain 60,000

RE of Parent 1,005,000
Expense (72,500) *62,500 direct cost + 10,000 from stock issuance cost
Gain 60,000
Conso RE 992,500
Conso Assets 3,540,000
Conso Liabilities 897,500
Conso Equity 2,642,500

Ordinary Shares 1,450,000

Share Premium 0
Retained Earnings 992,500
NCI 200,000
Total Equity 2,642,500