BUSINESS COMBINATION PRELIM REVIEWER

1.Use the following information for the next five questions:

On January 1, 20x1, Bass Co. issued equity instruments in exchange for 75% interest in Guitar
Co. On acquisition date, Bass Co. elected to measure non-controlling interest at fair value. Bass
Co.’s management believes that the fair value of the consideration transferred correlates to the
fair value of the controlling interest acquired and that the fair value of the controlling interest is
proportionate to the fair value of the remaining interest. Guitar Co.’s net identifiable assets have
carrying amount and fair value of ₱300,000 and ₱360,000, respectively. The difference is
attributable to a building with a remaining useful life of 6 years.
The December 31, 20x1 statements of financial position of Bass Co. and Guitar Co. are
summarized below:

No dividends were declared by

either entity during year. There were
also no inter-
company transactions and
impairment in goodwill.
41. What amount of goodwill is
presented in the consolidated
statement of financial position on
December 31, 20x1?
a. 40,000
b. 35,000
No dividends were declared by either entity during year. There were also no inter-company
transactions and impairment in goodwill.41.
What amount of goodwill is presented in the consolidated statement of financial position on
December 31, 20x1?
a. 40,000
b. 35,000
c. 20,000
d. 15,000

How much is the consolidated total assets as of December 31, 20x1?

a. 1,867,000
b. 1,907,000
c. 1,958,000
d. 1,974,000

How much is the non-controlling interest in the net assets of the subsidiary on December 31,
20x1?
a. 106,500
b. 116,500
c. 136,500
d. 146,500

How much is the consolidated retained earnings on December 31, 20x1?

a. 489,500
b. 498,500
c. 534,500
d. 543,500

How much is the consolidated total equity on December 31, 20x1?

a. 1,546,000
b. 1,564,000
c. 1,642,000
d. 1,624,000

Use the following information for

the next three questions:
On January 1, 20x1, Laughter Co.
issued equity instruments in
exchange for 75%
interest in Tears Co. Tears Co.’s net
identifiable assets have carrying
amount and fair
value of ₱300,000 and ₱360,000,
respectively. The difference is
attributable to a
building with a remaining useful life
of 6 years.
The December 31, 20x1 statements
of profit or loss of Laughter Co. and
Tears Co. are
summarized below:
2.Use the following information for the next three questions:
On January 1, 20x1, Laughter Co. issued equity instruments in exchange for 75% interest in
Tears Co. Tears Co.’s net identifiable assets have carrying amount and fair value of ₱300,000
and ₱360,000, respectively. The difference is attributable to a building with a remaining useful
life of 6 years.
The December 31, 20x1 statements of profit or loss of Laughter Co. and Tears Co. are
summarized below:
3.Par Company owns 60% of Sub Corp’s outstanding capital stock. On May 1,2008, Par
advanced Sub P70,000 in cash which was still outstanding at December 31, 2008. What portion
of this advance should be eliminated in the preparation of the December 31, 2008 consolidated
balance sheet?
a. 70,000
b. 0
c. 42,000 Investment in Subsidiary must be eliminated
d. d. 28,000
On January 1, 2014, the fair values of Pink Conrad’s net assets were as follows:

Current Assets P100,000

Equipment 150,000
Land 50,000
Buildings 300,000
Liabilities 80,000

On January 1, 2014 Blue George Company purchased the net assets of the Pink Conrad by
issuing 100,000 shares of its P1 par value stock when the fair value of the stock was P6.20. It
was further agreed the Blue George would pay an additional amount on January 1, 2016, if the
average income during the 2-year period 2014-2015 exceeded P80,000 per year. The expected
value of this consideration was calculated as P184,000; the measurement period is one year.
What amount will be recorded as goodwill on January 1, 2014?

a. 284,000
b. 180,000
c. 100,000
d. 0
a. 284,000
b. 180,000
c. 100,000
d. 0

On January 1, 2015, CC Inc. acquired the identifiable net assets of DD, Co. On this date, the
identifiable assets acquired and liabilities assumed have fair values of P 7,680,000 and P
4,320,000, respectively. CC Inc. incurred the following acquisition-related costs: legal fees - P
48,000; due diligence costs - P 480,000; and general and administrative costs of maintaining an
internal acquisition - P 96,000. As consideration, CC Inc. transferred 9,600 of its own shares
with par value and fair value per share of P 400 and P 500, respectively to DD's former owners.
Costs of registering the shares (previously and newly issued) amounted to P 192,000 (P 24,000
pertains tolisting fess of previously issued shares). How much is the goodwill (gain on bargain
purchase) on the business combination?
a. P667,200
b. P720,000
c. P1,440,000
d. None of the above
Based on the data given on item no. 9, how much is the total amount charged to profit or loss in
relation to the transaction above?
a. P 624,200
b. P 648,000
c. P 816,000
d. None of the above
Using the same data in item no. 9, but ignoring the consideration and issue costs, instead, CC
Inc. issued bonds with face value and fair value of P 4,800,000 before incurring the transaction
costs. Transaction costs in issuing the bonds amounted to P 240,000. How much is the goodwill
(gain on bargain purchase) on the business combination?
a. P 667,200
b. P 720,000
c. P 1,440,000
d. None of the above

Company Y is purchased by Company X, and the purchase price is P 2,500,000 greater than the
fair values of the identifiable net assets acquired. One of the assets acquired is a building,
originally valued at P 1,000,000 at the date of purchase. Six months after the acquisition, it is
discovered that the building was really only worth P 200,000 at the date of acquisition. What
entry is made to reflect this new information?
a. debit to goodwill, credit to building for P 800,000
b. debit to loss on building, credit to building for P 800,000
c. debit to other contributed capital, credit to building for P 800,000
d. debit to retained earnings, credit to building for P 800,000
On October 1, 2014, the Tingling Company acquired the net assets of Greenbank Company when
the fair value of Greenbank's net assets was P 116 million and their carrying amount was P 120
million. The consideration transferred comprised P 200 million cash transferred at acquisition
date, plus another P 60 million in cash to be transferred 11 months after the acquisition date if a
specified profit target was met by Greenbank. At the acquisition date, there was only a low
probability of the profit target being met, so the fair value of the additional consideration liability
was P 10 million. In the event, the profit target was met and P 60 million cash was transferred.
What amount should Tingling present for goodwill in the statement of consolidated financial
position on December 31, 2014 according to PFRS 3 Business Combinations?
a. P 80 million
b. P 84 million
c. P 94 million
d. P 144 million
Dosmann Inc. acquired net assets of Lizzi Corporation on January 1, 2014 for P 700,000 in cash.
This portion of the consideration transferred results in a fair value allocation of P 35,000 to
equipment and goodwill of P 88,000. At the acquisition date, Dosmann also agrees to pay Lizzi's
previous owners an additional P 110,000 on January 1, 2016, if Lizzi earns a 10% return on he
fair value of its assets in 2014 and 2015. Lizzi's profits exceed this threshold in both years.
Which of the following is true?
a. the additional P 110,000 payment is a reduction in retained earnings
b. the fair value of the expected contingent payment increases goodwill at the acquisition
date
c. goodwill as of January 1, 2016 increased by P 110,000
d. the P 110,000 is recorded as an expense in 2016
Salt Company has the following assets and liabilities at fair values:
Current assets - P 1,500,000
Plant and equipment (net) - P 35,000,000
Patents - P 2,000,000
Completed technology - P 10,000,000
Broader customer base - P 16,000,000
Technically skilled workforce - P 3,000,000
Potentially profitable future contracts - P 2,000,000
Licensing agreements - P 4,000,000
Potential contracts with new customers - P 1,500,000
Advertising jingles - P 1,000,000
Future cost savings - P 1,800,000
Goodwill - P 700,000
Liabilities - P 30,000,000.
Pail Company pays P 100,000,000 for Salt Company's assets and liabilities. Pail records
goodwill of
a. P 50,800,000
b. P 66,800,000
c. P 72,500,000
d. P 76,500,000
Questions 1 & 2 are based on the following information.
On February 14, 2012, Therese Company established a sales agency in Tagbilaran. Upon
establishment of the sales agency, the home office sent samples costing P8,000 and a working
fund of P3,000 to be maintained on the imprest basis. During the six months period, the sales
agency reported to the home office sales orders. These were billed at P70,000 of which of
P40,000 was collected) the sales agency paid expenses of P5,800 but was reimbursed by the
home office. On August 15, 2012, the sales agency samples were valued at P2,000. It was
estimated that the gross profit on goods shipped to fill sales order averaged 40% of cost. 1.The
cost of sales of the sales agency for the six months period is
a. P42,000
b. P44,000
c. P48,000
d. P50,000
2.The net income of the sales agency for the six months period is
a. P16,200
b. P14,200
c. P10,200
d. P8,200

A branch’s ending inventory of merchandise shipped by the home office and purchased from
outside vendors amounts to P 50,000. The post-closing trial balance in the Unrealized Gross
Profit in Branch Inventory account is P 6,000 due to the home office practice of shipping
merchandise at 20% above cost. The merchandise purchased from outside vendors contained in
the ending inventory of the branch amounts to:
a. P 38,000
b. P 18,000
c. P 30,000
d. P 14,000
After effecting the necessary adjustments, the Home Office ascertained the true net income of
the Branch to be P156,000.
What is the balance of the Allowance for Overvaluation in the branch inventory at December 31,
2013?
a. P10,000
b. P24,000
c. P16,000
d. P34,000

What is the realized profit in branch inventory?

a. P21,000
b. P31,200
c. P22,533
d. P24,7007.
What is the amount of branch merchandise beginning inventory that was acquired from the home
office?
a. P14,000
c. P15,600
b. P19,000
d. P20,800

Questions 11 and 12 are based on the following information.

Yul Trading Corp. operates a branch in Talisay City. At the close of business on December 31,
2012, Talisay Branch account in the home office books showed a debit balance of P225,770. The
interoffice accounts were in agreement at the beginning of the year. For purposes of reconciling
the interoffice accounts, the following facts were ascertained:
1.An office equipment costing the home office P3,5000 was picked up by the branch as P350.
2.Insurance premium of P675 charged by the home office was taken up twice by the branch.
3.Freight charges on merchandise made by the home office for P1,125 were recorded in the
branch book as P1,215.
4.Home office credit memo representing a discount on merchandise for P800 was not recorded
by the branch.
5.The branch failed to take up a P700 debt memo from the home office representing the share of
the branch in the advertising.
6.The home office inadvertently recorded a remittance for P3,000 from the Cebu branch as a
remittance from its Talisay branch.

What is the balance of the Home Office account before adjustment as of December 31, 2012?
a. P225,000
b. 225,770
c. P228,485
d. 226,485
What is the adjusted balance of the Home Office account as of December 31, 2012?
a. P225,000
b. P 226,485
c. P225,770
d. P 228,770
Kulas Corporation has one branch operation located 500 miles away from the home office. The
branch office sales merchandise which is shipped to it from the home office. The merchandise is
transferred at cost but the branch pays reasonable freight charges. The branch office makes sales
and incurs and pays operating expenses. At the end of the current accounting period the true
adjusted balance for the home office account on the branch’sbooks and the branch office account
on the home office’s books is P500,000. The following items may or may not be reconciling
items. The current year is 2012.
1)The home office has shipped merchandise to the branch office which cost P10,000 and which
incurs P500 freight charges paid by the home office but charged to the branch. This merchandise
is received by the branch on January 5, 2012.
2)The branch has transmitted P17,000 in cash back to the home office as a partial payment on
such purchased merchandise. This cash is received by the home office on January 6, 2012.
3)The branch office returns some defective merchandise to the home office. The cost of the
returned merchandise is P750. The branch office pays P25 of freight costs which will be charged
back to the home office.
4)On December 1, 2012, the home office sends a check for P25,000 to replenish the branch’s
charged back to the home office.
5)The branch pays an advertising expense of P800 that should have been paid by the home
office sinceit applied to advertising fees incurred by the home office of its own benefit.
6)The home office allocated P12,000 of general and administrative expenses to the branch. The
branchhad not entered the allocation as of the end of the year.
7)The home office pays insurance premiums on the branch store. The amount paid by the home
office is P1,000 but the branch erroneously records it as P776.001.

What is the unadjusted balance of the Home Office account?

a. P481,425
b. 452,276
c. P500,000
d. 518,57516.
What is the unadjusted balance of the Branch account?
a. P433,701
b. 500,000
c. P518,575
d. 452,276
How much of the December 1 inventory of the branch represent purchases from outsiders and
goods shipped from home office
a. Home office, P5,000 and Outsiders, P10,000
b. Home office, P15,000 and Outsiders, P00,000
c. Home office, P8,000 and Outsiders, P7,000
d. Home office, P12,000 and Outsiders, P3,000

The net income reported by the branch is

a. P4,500
b. P5,600
c. P3,500
d. P2,500

The combined net income for Home office and branch operations is
a. P22,500
b. P24,600
c. P25,100
d. P21,500
May Corporation operate two stores: the Head Office store and Rose branch. On December 31,
2012, the Rose Branch account in the home office books has a balance of P340,000. Both stores
use a standard 120% markup on cost. However May’s home office ships merchandise to the
branches at cost. Rose’s ending inventory includes P20,000 of merchandise received from home
office
Rose branch remitted P15,000 to home office on December 30, 2012. The Home office will not
receive the remittance until January 4, 2013. The Home office allocated P5,000 general expenses
to each of the branches but Rose branch have not yet recorded the expenses at year-end)
Rose branch paid P2,000 for advertising “after Christmas” sales that were to be allocated equally
between the two stores. The Home office has not recorded its share in the expenses.
The unadjusted balance of the Home office account in the books of Rose branch is
a. P324,000
b. P319,000
c. P323,000
d. P318,000
Questions 23 & 24 are based on the following information.
On December 31, 2012, the home office account on the branch books shows a balance of P9,735.
The following reconciling data are determined in accounting for the difference.
a. Merchandise billed at P615 shipped by the home office to the branch on December 28 is still
in transit.
b. The branch collected a home office accounts receivable of P2,500, but failed to notify the
home office of this collection.
c. The home office recorded the branch net income for November at P1,125. This was in error, as
the branch reported net income was P1,215.
d. The home office was charged P640 when the branch returned merchandise to the home office
on December 31. The merchandise is in transit.

The unadjusted balance of Branch account is

a. P9,735
b. P10,350
c. P10,990
d. P8,400
The adjusting entry to correct branch net income for November is
a. Debit, Branch profit and loss P90 and Credit, Branch account P90
b. Debit, Home office account P90 and Credit, Branch profit and loss P90
c. Debit, Branch account P90 and Credit, Branch profit and loss P90
d. Debit, Branch profit and loss P90 and Credit, Home office account P90
In accounting for branch transactions, it is improper for the home office to:
a. Credit cash received from a branch to the Investment in Branch ledger account.
b. Maintain Common Stock and Retained Earnings ledger accounts for only the home office.
c. Debit shipments of merchandise to the branch from the home office to the Investment in
Branch ledger account.
d. Credit shipments of merchandise to the branch to the Sales ledger account.

The Home Office ledger account in the accounting records of the Tahoe Branch had a credit
balance of $12,000 at the end of April, and the Investment in Branch account in the
accounting records of the home office had a debit balance of $15,000. The most likely reason
for the discrepancy in the two ledger account balances is:

a. Merchandise shipped by the home office to the branch had not been recorded by the
branch.
b. The home office had not recorded the branch net income for April.
c. The branch had just collected home office trade accounts receivable in the amount of
$3,000.
d. The branch had not yet recorded the home office net income for April.

3. Jayhawk Company has numerous branches in the state of Kansas. The home office
purchases merchandise and makes shipments to branches from a central warehouse at the
request of branch managers. Which of the following would be an improper accounting
practice?

a. The Investment in Branch ledger account is debited in the accounting records of the home
office when merchandise is shipped to a branch, and the Shipments to Branch account is
credited (assume use of the periodic inventory system).
b. The home office debits Trade Accounts Receivable and credits Sales when merchandise is
shipped to a branch.
c. Cash received from a branch is credited to the Investment in Branch ledger account by the
home
office.
d.Only the home office maintains a Common Stock ledger account and a Retained Earnings
account.

4. Neither the Palmer Branch nor the home office of Rupert Company had completed any
intracompany transactions during the last half of May, yet the credit balance of the branch’s
Home Office ledger account on May 31 was larger than the debit balance of the home
office’s Investment in Palmer Branch account. The most likely reason for this discrepancy is:
a. The home office reported a net loss for the month of May.
b. The branch reported a net loss for the month of May.
c. The branch returned merchandise to the home office.
d. The branch reported a net income for the month of May.

Which of the following ledger accounts is displayed in the combined financial statements for
a home office and branch?
a. Shipments to Branch
b. Home Office
c. Dividends Declared
d. Allowance for Overvaluation of Inventories: Branch

The home office of Irby Company bills merchandise to branches at 25% above home office
cost.

Information taken from the accounting records of Kipp Branch is as follows:

Beginning inventories (at billed prices) $17,000

Shipments from home office (at billed prices) 42,500
Ending inventories (at billed prices) 20,000
Net loss for accounting period 1,500

The net income or net loss of Kipp Branch, based on home office cost of branch
merchandise, is:

a. $7,900 net income

b. $9,400 net loss
c. $6,400 net income
d. 7,000 net income

[($39,500 x 0.20) – $1,500 = $6,400

When an equipment is purchased by the branch and carries in the home office books, which of
the following occurs?
a. A debit to Equipment account
b. A credit to Cash
c. A credit to Home Office account
d. None of the above
2. Statement 1: The "shipments to branch" account is added to the home office's purchases
account in determining home office's cost of goods sold.
Statement 2: The "shipments from branch" account is added to the branch's purchases account in
determining branch's cost of goods sold.
a. S1 - True; S2 - True
b. S1 - True; S2 - False
c. S1 - False; S2 - False
d. S1 - False; S2 - True
3. Remittances from a branch to its home office are recognized by the branch as:

4. Statement 1: When a home office pays the expenses of a branch and notifies the branch of the
expenditure, home office account would decrease. Statement 2: When a home office incurs
expenses and allocated to the branch, investment in branch account would decrease.
a. S1 - True; S2 - True
b. S1 - True; S2 - False
c. S1 - False; S2- False
d. S1 - False; S2 - True

5. The home office ships merchandise to its branch above cost. What journal entry should the
home office make to record the transfer of merchandise?
A. Investment in Branch
Shipment to Branch
B. Shipment to Branch
Investment in Branch
C. Investment in Branch
Shipment to Branch
Allowance for overvaluation of inventory
D. Shipment from home office
Home office