Business Combination and Consolidation (Date of Acquisition)

Drills

Problem 1
De Lima Company is to be acquired by Rody Company. Below is the Statement of Financial Position of the
former.

De Lima Company
Statement of Financial Position
June 30, 2021

Cash 200,000.00 Current liabilities 125,000.00

Marketable Securities 300,000.00 Bonds Payable 500,000.00
Inventory 500,000.00
Land 150,000.00 Common Stock (P1 par) 50,000.00
Building (net) 750,000.00 APIC 700,000.00
Equipment (net) 400,000.00 Retained Earnings 925,000.00
Total Assets 2,300,000.00 Total liabilities and equity 2,300,000.00

Fair values of all accounts have been measured as of June 31, 2021 as follows:

Cash 200,000.00
Marketable Securities 330,000.00
Inventory 550,000.00
Land 360,000.00
Building (net) 900,000.00
Equipment (net) 700,000.00
Unrecognized receivables 225,000.00 3,265,000.00

Current liabilities 125,000.00

Bonds Payable 500,000.00
Premiums on Bonds Payable 20,000.00 645,000.00
Fair value of net identifiable assets 2,620,000.00

Case 1: (Price paid exceeds FV of identifiable assets acquired)

Rody Co. issues 80, 000 shares of its P10 par value common stock with a market values of P40 each for De
Lima Co.’s net assets. Rody pays professional fees and stock issuance cost amounting to P55, 000 and P25,
000 respectively. Compute for any goodwill or gain on acquisition and make necessary entries to effect
the transaction.
Case 2: (Price paid is less than the FV of identifiable assets acquired)
Rody Co. issues 20, 000 shares of its P115 par value common stock with a market values of P120 each for
De Lima Co.’s net assets. Rody pays professional fees and stock issuance cost amounting to P50, 000 and
P130, 000 respectively. Compute for any goodwill or gain on acquisition and make necessary entries to
effect the transaction.

Page 1 of 9 M.S.M.C.
Case 3: (Contingent Consideration)
Assume that Rody Co. issued 80, 000 of its shares with a market value of P3.2M. In addition to the stock
issued, Rody also agreed to pay an additional P250, 000 on January 1, 2022, if the average income for the
2-year period covering 2020 and 2021 exceeds P160, 000 per year. The expected value estimated is at
P100, 000 based on high probability of achieving the target average income. Rody pays professional fees
and stock issuance cost amounting to P55, 000 and P25, 000 respectively. Compute for any goodwill or
gain on acquisition and make necessary entries to effect the transaction.
Case 4: (Changes in Contingent Consideration)
In connection to Case 3, if during the measurement period, the contingent consideration was revalued to
P160, 000, what would be the appropriate entries?
Case 5: (Changes in Contingent Consideration)
In connection to Case 3 and 4, if after the measurement period, the contingent consideration was revalued
to P200, 000, what would be the appropriate entries?

Problem 2

Paps Company acquired the net assets of Soy Inc. on December 31,2021. Below information pertaining
to both companies were made available.
Paps Company Soy Inc.
Statement of Financial
Position Statement of Financial Position
December 31,2021 December 31,2021
ASSETS Book value Fair value Book value Fair value
Cash 800,000.00 400,000.00
Accounts Receivable 40,000.00 42,000.00 24,000.00 28,000.00
Inventories 94,000.00 99,000.00 16,000.00 19,000.00
Equipment (net) 142,000.00 138,000.00 54,000.00 46,000.00
Land (net) 2,000,000.00 2,000,000.00 -
Building (net) 1,840,000.00 1,600,000.00 920,000.00 888,000.00
Goodwill 320,000.00 72,000.00
Total 5,236,000.00 1,486,000.00

LIABILITIES
Accounts payable 136,000.00 210,000.00 210,000.00
Notes payable - 128,000.00 128,000.00
Bonds Payable 400,000.00 -
Mortgage Payable 787,000.00 -
Total 1,323,000.00 338,000.00

SHAREHOLDERS' EQUITY
Ordinary Shares 1,620,000.00 631,000.00
Share Premium 1,422,000.00 287,000.00
Retained Earnings 871,000.00 230,000.00
Total 3,913,000.00 1,148,000.00

Page 2 of 9 M.S.M.C.
Additional Information:
▪ Paps Company’s ordinary shares are traded at P15 in the market with a P12 marked at Par while
Soy Inc.’s par value per share is currently at P8 with a market value of P11.
▪ Paps Company issued 52,000 shares plus P155,000 cash in acquiring Soy Inc. on December
31,2021.

Required:
• Compute for the Consolidated Assets, consolidated liabilities and consolidated shareholders’
equities on the date of acquisition.

Problem 3

Acquisition of wholly owned subsidiary (100% interest)

Purdue Co. is acquiring Jeck Company. Below shows their respective Statement of Financial Position.

Purdue Co. Jeck Co.

Assets
Cash 250,000.00 -
Accounts Receivable 40,000.00 42,000.00
Inventory 50,000.00 30,000.00
Equipment (net) 180,000.00 158,000.00
Total 520,000.00 230,000.00

Liabilities and Equity

Accounts Payable 300,000.00 130,000.00
Common Stock 100,000.00 50,000.00
Additional Paid in Capital 80,000.00 30,000.00
Retained Earnings 40,000.00 20,000.00
Total 520,000.00 230,000.00

Case 1: Acquisition at Book Value

Purdue Co. acquires all of Jeck Co.’s outstanding common stock for P100, 000 cash. Compute for any
goodwill or gain on acquisition and provide necessary journal entries to effect the transaction and the
elimination entry that should take place on the working paper towards consolidation.
Case 2: Acquisition at more than Book Value
Purdue Co. acquires all of Jeck Co.’s outstanding common stock for P110, 000 cash. Compute for any
goodwill or gain on acquisition and provide necessary journal entries to effect the transaction and the
elimination entry that should take place on the working paper towards consolidation.
Case 3: Acquisition at less than Book Value
Purdue Co. acquires all of Jeck Co.’s outstanding common stock for P80, 000 cash. Compute for any
goodwill or gain on acquisition and provide necessary journal entries to effect the transaction and the
elimination entry that should take place on the working paper towards consolidation.

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Acquisition of partially owned subsidiary (Less than 100% interest)

Parent Company is acquiring Son Co. Below shows their respective Statement of Financial Position with
son having its accounts at fair value.
Parent Company
Statement of Financial Position
December 1, 2021
Assets Liabilities and Equity
Current Assets Liabilities
Cash 318,000.00 Accounts payable 260,000.00
Accounts Receivable 44,000.00 Bonds Payable 450,000.00
Inventory 260,000.00 Total Liabilities 710,000.00
Total 622,000.00

Non-current assets Stockholders' Equity

Land 300,000.00 Common Stock, P10 par value 500,000.00
Building (net) 940,000.00 APIC 400,000.00
Equipment (net) 300,000.00 Retained Earnings 552,000.00
Total 1,540,000.00 Total Equities 1,452,000.00

Total Assets 2,162,000.00 Total Liabilities and Equity 2,162,000.00

Son Company
Statement of Financial Position
December 1, 2021
Assets Book Value Fair Value
Accounts Receivable 50,000.00 50,000.00
Inventory 120,000.00 140,000.00
Land 90,000.00 130,000.00
Buildings (net) 310,000.00 500,000.00
Equipment (net) 90,000.00 120,000.00
Total Assets 660,000.00 940,000.00

Liabilities and Equity

Accounts payable 90,000.00 90,000.00
Bonds Payable 220,000.00 220,000.00
Total Liabilities 310,000.00 310,000.00

Stockholders' Equity
Common Stock, P1 par 40,000.00
APIC 190,000.00
Retained Earnings 120,000.00
Total Equity 350,000.00 -

Net Assets 350,000.00 630,000.00

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Case 1: Acquisition at more than Fair value with Adjustment of Subsidiary accounts.
Assume that instead of paying cash, Parent Company issued 17, 000 shares of its P10 par value common
stock for 80% of the outstanding shares of Son Company. The fair value of Parent Company’s stock is P60
and the fair value of the 20% NCI is assessed to be P190, 000. Parent Company also pays P40, 000 in
professional fees to accomplish the acquisition.

• Journal entries to record the acquisition of Son Company.

• Computation of any goodwill or gain on acquisition.
• Preparation of Determination and Allocation of excess schedule (D & A).
• Working paper elimination entries.

Case 2: Acquisition at less than Fair value with Adjustment of Subsidiary accounts.

Using the same data, except that Parent Company issued 7, 000 shares of its P10 par value common
stock of Son Company and NCI has no pending assessment. The fair value of a share of Parent
Company is P60. Parent Company also pays P50, 000 in professional fees to complete the
combination.

• Journal entries to record the acquisition of Son Company.

• Compute for the value of NCI.
• Computation of any goodwill or gain on acquisition.
• Preparation of Determination and Allocation of excess schedule (D & A).
• Working paper elimination entries.

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 Consolidation (Sub. to Date of Acquisition) and Intercompany Transactions

Drills

Problem 1
The following are the Statements of Financial Position of both entities as at January 1,2021 right before
the business combination happened:
P Company S Company
Cash 1,250,000.00 120,000.00
Accounts Receivable 27,000.00 26,000.00
Inventories 80,000.00 90,000.00
Equipment, net 330,000.00 312,500.00
Land 898,000.00 530,000.00
TOTAL ASSETS 2,585,000.00 1,078,500.00

Accounts Payable 190,000.00 120,000.00

Notes Payable 400,000.00 130,000.00
Ordinary shares 800,000.00 200,000.00
Share premium 500,000.00 80,000.00
Retained earnings 695,000.00 548,500.00
TOTAL LIABILITIES AND SHE 2,585,000.00 1,078,500.00

Additional Information:
• On January 1,2021 (date of acquisition), P Company incurred and paid P10,000 for accounting,
legal and other professional fees related to business combination, this amount is not yet deducted
from the “Cash” item presented on the Statement of Financial Position.
• S Company did not acquire nor dispose any equipment during 2021. All assets and liabilities are
updated in accordance to their respective fair values.
• Parent and Subsidiary declared and paid dividends of P40,000 and 20,000 for 2018 and P60,000
and P40,000 for 2022, respectively. This is not yet properly reflected on the Comprehensive
income statement of both entities.

Furthermore, both companies presented their separate statement of comprehensive income for the years
ended December 31,2021 and December 31,2022 as follows:
P Company S Company
2021 2022 2021 2022
Sales 800,000.00 810,000.00 500,000.00 490,000.00
Less: Cost of Sales (500,000.00) (530,000.00) (220,000.00) (250,000.00)
Gross Profit 300,000.00 280,000.00 280,000.00 240,000.00
Other Income 50,000.00 80,000.00 20,000.00 50,000.00
Expenses (215,000.00) (204,000.00) (213,500.00) (197,000.00)
NET INCOME 135,000.00 156,000.00 86,500.00 93,000.00
*NOTE: Expenses presented by P Company in 2021 does not include the acquisition related costs incurred at January 1,2021.

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Requirement:
1. Prepare consolidated statements of financial position as at January 1,2021, December 31,2021
provided:
- that P Company purchased 100% interest of S Company for P900,000 cash on January 1,2021.
- that P Company purchased 80% interest of S Company for P600,000 cash on January 1,2021.
2. Prepare consolidated Statements of Comprehensive income for the years ended December
31,2021 provided:
- that P Company purchased 100% interest of S Company for P900,000 cash on January 1,2021.
- that P Company purchased 80% interest of S Company for P600,000 cash on January 1,2021.

Problem 2

Downstream Transaction – Inventory

Case 1
On March 1, 2021, Parent Co. sold merchandise costing P16,000 to Son Inc., an 80% owned subsidiary, for
P20,000 or at a gross profit of 20% of sales. Assume further that on September 8,2021, Son Inc. sells the
merchandise to outsiders for P25,000. Furthermore, Parent Co.’s net income from its own operation and
excluding dividend income from Son Inc., amounted to P60,000 while Son Inc.’s income from own
operation totaled P30,000.
Prepare the following:
• Entries on the books of Parent Co.
• Entries on the books of Son Inc.
• Working paper elimination entries
• Computation of CCI, NCINIS, CIATP

Case 2
Assuming Parent Co. on April 12,2021 sold the merchandise to Son Inc. costing P16,000 for P20,000 or at
a gross of 20%, out of which, P5,000 remained unsold by Son Inc. on December 31,2021. Gross profit of
the latter ‘s sales transaction to outsider is 25%.
Prepare the following:
• Entries on the books of Parent Co.
• Entries on the books of Son Inc.
• Working paper elimination entries
• Computation of CCI, NCINIS, CIATP

Case 3
In connection to previous illustration, assuming that during 2022, Parent Co. sold again merchandise to
Son Inc. for P30,000, at a gross profit of 20% of Sales. Of this merchandise, P8,000 remains in the ending
inventories of Son Inc. on December 31,2021. Gross profit of the latter ‘s sales transaction to outsider is
25%.
Prepare the following:
• Entries on the books of Parent Co.
• Entries on the books of Yema Inc.
• Working paper elimination entries
• Computation of CCI, NCINIS, CIATP

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Upstream Transaction – Inventory

Case 4
Assume that Son Inc. (an 80% owned subsidiary) during the year ended December 31,2021 sold
merchandise to Parent Co. at a gross margin of 20% based on sales. Sales by Son Inc. to Parent Co. for the
year totaled P20,000, of which P5,000 remained unsold by Parent Co. on December 31,2021. Parent Co.
makes 25% based on sales whenever it transacts with the outside customers.
Prepare the following:

• Entries on the books of Son Co.

• Entries on the books of Parent Inc.
• Working paper elimination entries
• Computation of CCI, NCINIS, CIATP

Case 5
Using the same information in the Case 3 except that it is an upstream transaction;
Prepare the following:
• Entries on the books of Son Co.
• Entries on the books of Parent Inc.
• Working paper elimination entries
• Computation of CCI, NCINIS, CIATP

Intercompany Profit Transaction – Fixed Assets

Intercompany Gain on Sale of Non – Depreciable Fixed Assets

Case 6
Assume that on June 1,2021, Parent Co. sold land costing P150,000 to its subsidiary, Son Inc. for P210,000.
Prepare the following:

• Entries on the books of Parent Co.

• Entries on the books of Son Inc.
• Working paper elimination entries

Case 7
Assume that Parent Co. owns 80 percent of the common stock of Son Inc. Parent and Son reported
comprehensive income from their own operations amounting to P600,000 and 400,000, respectively.
Included in the CI of the selling affiliate is an unrealized gain of P50,000 on the intercompany sale of non
– current assets.

• If the sale is a downstream sale, COMPUTE for NCINIS and CIATP?

• If the sale is an upstream sale, COMPUTE for NCINIS and CIATP?

Case 8
Assume that Parent Co. sells equipment to Son Co. on December 31,2021 for P140,000. The equipment
originally cost Parent P180,000 when purchased three years ago and is being depreciated over a total life
of 10 years using straight-line depreciation with no residual value.
Prepare the following:

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 • Computation of Book value and Gain on sale of Equipment on the intercompany sale
• Entries on the books of Parent Co.
• Entries on the books of Son Inc.
• Working paper elimination entries

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