TECHNOLOGICAL INSTITUTE OF THE PHILIPPINES

Cubao, Quezon City

AFAR (PRACTICAL ACCOUNTING 2) Integrated Review

BUSINESS COMBINATION M.C. Cerda, CPA,MBA,RCA
O2020

MODULE 1

For questions 1 to 4
On December 31, 2020, Armstrong Company acquired 100% of Viena
Corporation’s ordinary shares for P600,000. FS information of Viena just period
to the acquisition is given below:

Cash and receivables P 70,000 Accounts payable P130,000

Inventory 150,000 Bonds payable 300,000
Land 200,000 Ordinary share capital 200,000
Building & equipment 440,000 Retained earnings 230,000
Total assets P860,000 Total liabilities & equity P860,000
======= =======
At the date of combination, Viena’s net assets and liabilities approximated fair
values, except for inventory, which had a fair value of P120,000, land which had a
fair value of P250,000, and building & equipment which had fair value of
P500,000..

1. The amount of inventory to be included in the consolidated statement of financial

position immediately following the acquisition is:
A. 30,000 B. 90,000 C. 120,000 D. 150,000
2. The amount of goodwill to be included in the consolidated statement financial
position immediately following acquisition is:
A. 30,000 B. 60,000 C. 90,000 D. 170,000
3. The amount to be included ias Investment in Viena in the consolidated statement
of financial position immediately following the acquisition is:
A. 0 B. 510,000 C. 600,000 D. 790,000
4. The amount of differential that will be reflected in the consolidation working
paper to prepare a consolidated statement of financial position immediately
following the acquisition is:
A. 0 B. 30,000 C. 90,000 D. 170,000

For questions 5 to 13

Pontiac Company acquired 70% of Sony Corporation’s ordinary shares on December 31,
2020. The following data are available immediately following the acquisition:
Pontiac Sony
Cash P 88,000 P 60,000
Accounts receivable 220,000 90,000
Inventory 260,000 140,000
Land 160,000 50,000
Building & equipment 1,000,000 800,000
Less: Accumulated depreciation ( 446,000 ) (330,000)
Investment in Sony 301,000 0___
Total assets P1,583,000 P810,000
======= ======
 Accounts payable P123,000 P 56,000
Taxes payable 190,000 74,000
Bonds payable 560,000 400,000
Ordinary shares 300,000 100,000
Retained earnings 410,000 180,000
Total liabilities & SHE P1,583,000 P810,000
======= =======
At the date of combination, the book values of Sony’s net assets and liabilities
approximated their values, except for inventory which had a fair value of
P170,000 and land which had a fair value of P90,000. The fair value of the non-
controlling interest was P129,000 on December 31, 2020.

In the consolidated statement of financial position prepared after the combination:

5. The amount of inventory to be reported is:

A. 358,000 B. 400,000 C. 420,000 D. 430,000
6. The amount of goodwill ( partial ) to be reported is:
A. 56,000 B. 80,000 C. 104,000 D. 112,000
7. The amount of goodwill ( full ) to be reported is:
A. 0 B. 56,000 C. 80,000 D. 104,000
8. Total assets to be reported is:
A. 2,162,000 B. 2,242,000 C. 2,393,000 D.2,463,000
9. Total liabilities to be reported is:
A. 530,000 B. 873,000 C. 1,244,000 D.1,403,000
10. The amount to be reported as NCI ( partial ) is:
A. 105,000 B. 121,800 C. 129,000 D. 131,000
11. The amount to be reported as NCI ( full ) is:
A. 84,000 B. 105,000 C. 121,800 D. 129,000
12. The amount to be reported as retained earnings is:
A. 410,000 B. 464,000 C. 536,000 D. 590,000
13. The amount to be reported as total shareholder’s equity is:
A. 710,000 B. 794,000 C. 839,000 D. 990,000

14. The net assets of Lee Company have a book value of P600,000 and a fair value
of P720,000. Jet Company paid P1,000,000 cash for all the net assets of Lee. Jet
also paid P200,000 to an investment house as finder’s fee.

The goodwill to be recorded in Jet’s books in the acquisition of Armstrong is:

A. 200,000 B. 280,000 C. 480,000 D.1,000,000

15. On January 2, 2020. Jacky Company acquired the net assets of Chan Corporation
by issuing 600,000 shares of its P20 par value ordinary shares. Subsequently,
Chan was liquidated and its net assets merged into Jacky. The ordinary shares of
Jacky was selling for P100 per share on January 2, 2020. The amount of goodwill
recorded by Jacky in connection with the combination was P12,240,000. Jacky
also incurred P600,000 of legal and brokerage fees associated with the
combination and P60,000 of share issuance costs.

The fair value of Chan’s net assets and the amount of increase in Jacky’s
shareholder’s equity as a result of the combination, respectively, are:
A. 47,760,000 & 59,940,000 C. 48,360,000 & 59,940,000
B. 47,760,000 & 60,000,000 D. 48,360,000 & 60,000,000
 16. Cynthia Corporation issued ordinary shares with par value of P900,000 and a
market value of P1,400,000 to acquire the net assets of Luster Company in a
business combination. Cynthia reported assets of P4,000,000 and liabilities of
P1,084,000 immediately before the business combination. Luster’s assets and
liabilities, had book values of P920,000 & P374,000, respectively. The fair values
of Luster’s assets and liabilities were P1,200,000 and P376,000, respectively.

The amount to be reported as total assets of the combined entities immediately

following the business combination is:
A. 3,740,000 B. 4,316,000 C. 5,200,000 D.5,776,000

17. John Company acquired Travolta Company’s net assets by issuing its own
ordinary shares. John had the following acquisition-related costs:
Brokerage fees P100,000
Pre-acquisition audit fee 80,000
General administrative costs 30,000
Legal fees for the combination 64,000
Audit fee for SEC registration of shares issue 92,000
SEC registration costs for shares issue 10,000
Other acquisition costs 12,000

The acquisition–related costs should be debited to Expense and Share Premium,

respectively at:
A. 22,000 & 10,000 C. 286,000 & 102,000
B. 42,000 & 102,000 D. 286,000 & 156,000

18. Presented below are the balances of the accounts in the condensed statement of
financial position of Newton Company as of December 31, 2020:
Book Value Fair Value
Current assets P400,000 P450,000
Noncurrent assets 600,000 800,000
Liabilities 300,000 250,000
Ordinary share capital, par P20 100,000
Share premium 200,000
Retained earnings 400,000

On January 2, 2020, Olivia Company issues 10,000 shares of its P20 par value
ordinary shares with a market value of P100 per share for the net assets of
Newton.

Total shareholder’s equity of Olivia after the acquisition of Newton is:

A. 700,000 B. 900,000 C. 1,000,000 D.1,700,000

For questions 19 & 20

Sexbomb Company is acquiring the net assets of Rochelle Company for an
agreed-upon price of P1,800,000 on July 1, 2020. The value tentatively assigned
to the accounts of Rochelle are as follows:
Current assets P 200,000
Land 100,000
Equipment ( 5-year life ) 400,000
Building ( 20-year life ) 1,000,000
Current liabilities 300,000
Goodwill 400,000
Values were subject to change during the measurement period. Depreciation is
taken to the nearest month. The measurement period expires on July 1, 2021, at
which time the fair values of the equipment and building as of the acquisition date
were P360,000 and P1,100,000, respe4ctively.
 19. The depreciation expense to be recorded in 2020 is:
A. 123,000 B. 130,000 C. 127,000 D. 131,000
20. The goodwill to be presented in the 2020 statement of financial position is:
A. 340,000 B. 360,000 C. 400,000 D. 460,000

For questions 21 & 22

Alonzo Corporation purchases 8,000 shares of Bea Company for P128 per share.
Just prior to the purchase, Bea has the following accounts in its statement of
financial position:
Assets:
Cash P 40,000
Inventories 560,000
Equipment 800,000
Goodwill 200,000
P1,600,000
========
Liabilities & Equity:
Current liabilities P 500,000
Ordinary share capital, P10 par 100,000
Share premium 260,000
Retained earnings 740,000
P1,600,000
========
Alonzo believes that the inventories has a fair value of P800,000 and that the
equipment is worth P1,000,000.

21. The non-controlling interest in the consolidated statement of financial position on

the date of acquisition is:
A. 240,000 B. 250,000 C. 256,000 D. 268,000
22. The amount of goodwill/(gain from acquisition) to be reported in the consolidated
statement of financial position is:
A. 48,000 B. (48,000) C. 60,000 D. ( 60,000)

MODULE 2

23. Andrew Company purchased 80% of Blatche Company’s outstanding ordinary

shares for P520,000, which is P120,000 above the underlying book value on
January 2, 2020, The fair value of Blatche’s net assets approximated book value.

On the December 31, 2020 statement of financial position, non-controlling

interest should be reported at:
A. 84,000 B. 120,000 C. 130,000 D. 150,000

24. Jason Corporation purchased 80% of Castro Company’s voting ordinary shares
for P520,000, which is P120,000 above the underlying book value on January 2,
2020. Any excess is amortized over 10 years.

The effect of the excess on the 2020 consolidated net income is:
A. A decrease of P12,000. C. An increase of P12,000.
B. A decrease of P36,000. D. An increase of P24,000.
 25. On January 2, 2020, Terrence Corporation acquired 60% of the outstanding
ordinary shares of Romeo Company for P1,000,000. In addition, Terrence paid
acquisition-related costs of P80,000. The book and fair values of these chares
was P960,000.
Any excess of the investment over the book value of interest acquired has a
maximum life of 20 years. For 2016, Sims reported net income of P400,000 and
paid dividends of P160,000.

Under the cost and equity methods, respectively, the balance of the Investment in
Sims Company account in the books of Charms at December 31, 2020, are:
A. 1,000,000 & 1,142,000 C. 1,222,000 & 1,222,000
B. 1,142,000 & 1,320,000 D. 1,224,000 & 1,204,000

26. For the year ended February 28, 2020, Ranidel Company, the 90% owned-
purchased subsidiary of Ocampo Corporation declared a dividend of P200,000
and had net income of P600,000. Also for that year, amortization of the current
fair value difference of Ocampo’s identifiable net assets was P120,000.

The balance of NCNIS account on February 28, 2020 is:

A. 40,000 B. 42,000 C. 48,000 D. 49,800

27. The post-closing balances of the Retained Earnings accounts Ray Corporation and
its 80% owned subsidiary, Parks Company, on February 28, 2020, were as
follows ( there were no inter-company profits or losses ):
Ray Corporation:
Retained earnings P3,200,000
Retained earnings of subsidiary 160,000
Parks Company:
Retained earnings 920,000

Under the equity method, the consolidated retained earnings on Feb. 28, 2020 is:
A. 3,200,000 B. 3,360,000 C. 3,936,000 D.4,120,000

28. James Corporation purchased 90% of the outstanding ordinary shares of Norwood
Corporation on March 21, 2020, at book value. Norwood reported net income of
P160,000 for the year 2020 and paid no dividends. Prior to the acquisition by
James, Norwood had 2020 revenues of P190,000 and expenses of P144,000.
James reported net income of P280,000 from its own operations for 2016.
Consolidated net income attributable to parent for 2020 is:
A. 308,800 B. 382,600 C. 394,000 D. 424,000

MODULE 3

29. Junmar Corporation owns an 80% interest in Fajardo Company, and at December
31, 2020, Junmar’s investment in Fajardo under the cost method was equal to
80% of Fajardo’s shareholder’s equity. During 2020, Fajardo sells merchandise to
Junmar for P200,000, at a gross profit to Fajardo of P40,000. At December 31,
2020, half of this merchandise is included in Junmar’s inventory. Separate
incomes for Junmar and Fajardo for 2020 are summarized as follows:
Junmar Fajardo
Sales P1,000,000 P600,000
Cost of sales 500,000 400,000
Operating expenses 250,000 80,000
In the consolidated income statement for 2020, the NCI in net income of
subsidiary is:
A. 20,000 B. 22,000 C. 24,000 D. 28,000
 30. Troy Company acquired a 60% interest in Rosario Company on January 2, 2020
for P720,000, when Rosario’s net assets had a book value and fair value of
P1,200,000. During 2020, Troy sold inventory items that cost P1,200,000 to
Rosario for P1,600,000, and Rosario’s inventory at December 31, 2020 included
one-fourth of this merchandise. Troy reported separate income from its own
operations ( excluding investment income ) of P600,000, and Rosario reported a
net loss of P300,000 for 2020.
Consolidated net income for 2020 is:
A. 200,000 B. 320,000 C. 360,000 D. 520,000

31. On January 2, 2020, Jeff Company purchased 75% of the outstanding ordinary
shares of Chan Company at book value. During 2020, Chan sold inventory items
costing P100,000 to Jeff for P150,000. Jeff resold 60% of this inventory to
outsiders during the year for P200,000. For the year 2020, Jeff had net income
from its own operations of P400,000 and paid dividends of P240,000. Chan’s net
income for the year was P220,000 and paid dividends of P80,000.
The consolidated net income attributable to parent for 2020 is:
A. 546,000 B. 550,000 C. 552,000 D. 600,000

32. Several years ago, Ryan Company acquired 70% of Reyes Company at book
value. Relevant data for 2020 are as follows:
Ryan Reyes
Net income from its own operations P800,000 P500,000
Dividends and declared in 2016 540,000 220,000
Merchandise from inter-company sales in
Ryan’s inventory:
January 1, 2020 80,000
December 31, 2020 140,000
Gross profit rate on sales:
2029 70% 40%
2020 75% 30%
Consolidated net income for 2020 is:
A. 1,034,000 B. 1,143,000 C. 1,250,000 D.1,290,000

For questions 33 to 35
Franklin Company purchased 60% of Drilon Company’s voting ordinary shares
for P504,000 on January 2, 2019. Drilon reported total shareholders equity of
P800,000 at the time of acquisition. The excess is allocated to equipment with an
expected life of 10 years from date of acquisition.

During 2020, Franklin purchased inventory for P40,000 and sold the full amount
to Drilon for P60,000. On December 31, 2020, Drilon’s ending inventory
included P12,000 of items purchased from Franklin. Also in 2016, Drilon
purchased inventory for P100,000 and sold the units to Franklin for P160,000.
Franklin included P40,000 of its purchased goods from Drilon in ending inventory
on December 31, 2020.
Summary income statement data for the two companies for 2020 are as follows::
Franklin Drilon
Sales P800,000 P400,000
Dividend income 50,000
Cost of goods sold 500,000 240,000
Other expenses 140,000 70,000
 33. The amount to be reported as sales in the 2020 consolidated income statement is:
A. 900,000 B. 980,000 C. 1,100,000 D.1,200,000
34. The amount to be reported as cost of goods sold in the 2020 consolidated
comprehensive income is:
A. 201,000 B. 210,000 C. 318,000 D. 539,000
35. The consolidated net income that will be assigned to Franklin in the 2020
consolidated comprehensive income is:
A. 191,600 B. 197,000 C. 198,600 D. 227,000

For questions 36 & 37

On December 31, 2019, Joel Company purchased 70% of the outstanding

ordinary shares of Villanueva Company for P490,000. On that date, Villanueva
had P200,000 of ordinary shares and P500,000 of retained earnings.

For 2020, Joel had income ofP400,000 from its own operations and paid
dividends of P200,000. For 2020, Villanueva reported income of P60,000 and
paid dividends of P40,000. All assets and liabilities of Villanueva have book
values approximately equal to their fair values.

The beginning inventory of Joel includes P12,000 of merchandise purchased from

Villanueva on December 31, 2019 at 150% of cost. The ending inventory of Joel
includes P18,000 of merchandise purchased from Villanueva at the same markup.
Joel uses FIFO inventory costing.

36. The consolidated net income attributable to parent for the year 2020 is:
A. 440,600 B. 458,000 C. 460,000 D. 500,000
37. The non-controlling interest for the year 2020 is:
A. 210,000 B. 215,400 C. 221,400 D. 234,000

For questions 38 & 39

Tito Company is a wholly-owned subsidiary of Sotto Company. During 2020,

Tito sold all of its production to Sotto for P800,000, a price that include a 20%
gross profit. This is the first year of inter-company sales. By year-end, Sotto sold
80% of all the goods it had purchased for P832,000. The balance of the inter-
company goods, remained in the ending inventory and was adjusted to a lower
value of P140,000. The adjustment was charged to cost of goods sold.

38. The gross profit on sales recorded by Tito and Sotto, respectively, are:
A. 100,000 & 152,000 C. 160,000 & 172,000
B. 140,000 & 192,000 D. 180,000 & 160,000

39. The gross profit to be shown in the 2020 consolidated comprehensive income is:
A. 300,000 B. 320,000 C. 340,000 D. 360,000

40. On January 2, 2020, Ping Company sold equipment to Lacson Company, its
wholly owned subsidiary, for P800,000. The equipment had cost Ping P1,000,000,
with the accumulated depreciation at time of sale was P500,000. Ping used a 10-
year life, no salvage value and straight line depreciation.

In the consolidated December 31, 2020 statement of financial position, the cost
and accumulated depreciation, respectively, should be reported at:
A. 500,000 & 100,000 C. 800,000 & 160,000
B. 800,000 & 100,000 D. 1,000,000 & 600,000
41. On January 2, 2019, James Company acquired 70% of Gordon Inc., at book value.
On December 31, 2020, Gordon sold a computer to James for P180,000. Gordon
acquired the computer at a cost of P120,000. James will use a 10-year life, no
salvage value, and straight line depreciation. For 2020, James reported net income
of P200,000.

The NCI in net income of subsidiary for year is:

A. 42,000 B. 60,000 C. 76,200 D. 98,000

42. Ralph Company owns 60% of the outstanding ordinary shares of Recto Company,
which it purchased for P100,000 above the underlying book value of P1,440,000
on December 31, 2019. For the year 2020, Recto included in its net income
P180,000 of unrealized gain on a year-end sale of depreciable assets to Ralph..
The NCI of Recto was P24,000 of income in the 2020 consolidated financial
statements. The excess allocated to equipment is amortized over 20 years.
The net income reported by Recto for 2020 is:
A. 240,0000 B. 250,000 C. 300,000 D. 310,000