UNIVERISTY OF MAKATI

INSTITUTE OF ACCOUNTANCY
ACCOUNTING FOR BUSINESS COMBINATION J. JAVIER

BUSINESS COMBINATION

REVIEW NOTES:

BUSINESS COMBINATION
 “A transaction or other event in which an acquirer obtains control of one or more businesses.” IFRS
3
o NET ASSET ACQUISITION - The acquirer purchases the assets and assumes the liabilities of
the acquiree in exchange for cash or other non-cash consideration.
 Merger – a contractual and statutory process by which one corporation (the surviving
corporation) acquires all of the assets and liabilities of another corporation (the
merged corporation), causing the merged corporation to become defunct.
 Consolidation – a contractual and statutory process by which two or more
corporations jointly become a completely new corporation (the successor
corporation), the original corporations cease to exist and to do business, and the
successor corporation acquires all of the assets and liabilities of the original (now
defunct) corporations.
o STOCK ACQUISITION - The acquirer obtains control over the acquire by acquiring majority of
ownership interest in the voting rights of the acquire.

ACCOUNTING FOR BUSINESS COMBINATION

 IFRS 3 par. 4 states that an entity shall account for each business combination by applying the
acquisition method.
1. Identify the acquirer
2. Determine the acquisition date
3. Determine the consideration given by the acquirer
4. Recognize and measure the identifiable assets acquired, the liabilities assumed and any non-
controlling interest in the acquiree. Any resulting goodwill or gain from a bargain purchase
should be recognized.
 Goodwill – difference between consideration (including control premium, previously
held interest and FV or Implied Value or Proportionate Share in INA) over the
identifiable net asset.
 Bargain Purchase (Gain on acquisition) – difference the identifiable net asset over the
consideration (including control premium, previously held interest and FV or Implied
Value or Proportionate Share in INA).

MEASURING THE CONSIDERATION TRANSFERRED

 Assets transferred by the acquirer
o Cash
o Non – Cash Assets
 Previously held interest (PHI) – interests already acquired prior to acquisition of
control; Re-measured at Fair Value and difference should be treated as Gain or Loss
on measurement (effect on Profit or Loss).
 Liabilities incurred by the acquirer to the former owners of the acquiree
o Contingent consideration – additional consideration which is dependent in future event.
 Equity interests issued by the acquirer
 A business or a subsidiary of the acquirer

BUSINESS COMBINATION Page 1 of 12

 UNIVERISTY OF MAKATI
INSTITUTE OF ACCOUNTANCY
ACCOUNTING FOR BUSINESS COMBINATION J. JAVIER

ADDITIONAL TERMINOLOGIES
 Acquisition Related Costs – costs incurred to effect business combination
o Direct and Indirect Costs – costs such as general administrative costs, broker’s fees,
accounting, legal, and other professional fees are not included in the consideration
transferred and are expensed immediately.
o Stock issuance costs (SIC) – costs such as SEC registration fees, documentary stamp tax and
newspaper publication shall be treated as a direct charge to share premium arising from
related share issuance.
 In case the said share premium is insufficient to absorb such SIC, the excess shall be
debited to SIC account. The SIC shall be reported as a contra-equity account as a
deduction from the following in the order of priority:
1. Share premium from previous share issuance
2. Retained earnings
o Debt Issuance Costs (DIC) – costs such as documentary stamp tax and other documentation
necessary to issue debt such as bonds are accounted for under IAS 32 and IFRS 9.

IFRS 3 DOES NOT APPLY TO:

 The formation of a joint venture
 The acquisition of an asset or group of assets that is not a business
 Combinations of entities or businesses under common control
 Acquisitions by an investment entity of a subsidiary that is required to be measured at fair value
through profit or loss under IFRS 10 Consolidated Financial Statements.

ACCOUNTING FOR CHANGES IN VALUE

 During the measurement period, values assigned to accounts recorded as part of acquisition may be
adjusted to better reflect the value of the accounts as of the date of acquisition. Values assigned to
accounts as part of acquisition are considered “provisional”.
 Changes that relate to facts and circumstances that existed at the acquisition date and that occur
within the one-year measurement period shall be recognized as retroactive adjustments against the
result of the business combination at the acquisition date.
 Changes that result from events after the acquisition date are not measurement period adjustments.
These changes are recognized in profit or loss.

ACCOUNTING FOR CHANGES IN CONTINGENT CONSIDERATION

 Changes that relate to facts and circumstances that existed at the acquisition date and that occur
within the one-year measurement period shall be recognized as retroactive adjustments against the
result of the business combination at the acquisition date. However, changes resulting from events
after the acquisition date, such as meeting an earnings target, reaching a specified share price or
reaching a milestone on a research and development project, are not measurement period
adjustments.

BUSINESS COMBINATION Page 2 of 12

 UNIVERISTY OF MAKATI
INSTITUTE OF ACCOUNTANCY
ACCOUNTING FOR BUSINESS COMBINATION J. JAVIER

STOCK ACQUISITION
 A controlling interest of another company’s voting common stock is acquired. A controlling interest
is more than 50% of a company’s voting common stock.
 In a stock acquisition, the acquiring company (acquirer) deals only with existing shareholders of the
acquired company (acquiree) not the company itself.
 The acquiring company is called the parent (or the acquirer) and the acquired company is called
the subsidiary (or the acquiree). Both remain separate legal entities and maintain their own
accounting books. However, they are required for external financial accounting purposes to combine
their separate financial statements into a single set of consolidated financial statements.

STOCK ACQUISITION PROCESS:

 At date of acquisition of stocks, the acquirer makes the following journal entry to record the
acquisition of stocks:

Investment in Subsidiary XX
Cash/Various Accounts XX

 On the date of acquisition of stocks, no goodwill or gain from bargain purchase is recorded by the
acquirer. These are to be recognized only in the consolidated financial statements.
 Investment in Subsidiary account is presented as a long-term investment on the acquirer’s Separate
Statement of Financial Position but does not appear on the Consolidated Statement of Financial
Position. This is because the investment account is eliminated in the process of consolidation.
 Consolidated financial statements are prepared on the date of acquisition and on a date subsequent
to acquisition. Only the Consolidated Statement of Financial Position is required to be prepared on
the date of acquisition of stocks.

NATURE OF CONSOLIDATED FINANCIAL STATEMENTS

 The consolidated financial statements present the financial statements of the parent and its
subsidiary as those of a single economic entity.

NATURE OF THE CONSOLIDATION PROCESS

 The basic procedure to consolidate the statement of financial position is to eliminate the Investment
account on the parent company’s statement of financial position against the stockholders’ equity
accounts in the statement of financial position of the subsidiary company.
 Intercompany adjustments and eliminations are made on the consolidation working papers in the
form of journal entries. These entries do not alter the individual or separate statements of the
parent and the subsidiary companies.
 Elimination entries appear only on the consolidation working papers, they are not recorded on the
books of either the parent or subsidiary company.

SUBSIDIARY
 A subsidiary may be wholly-owned or partially-owned. Parent has a 100% ownership over a wholly-
owned subsidiary while the parent has less than 100% ownership over a partially-owned subsidiary.
 The consolidation of a parent company and its partially-owned subsidiary differs from the
consolidation of a wholly-owned subsidiary in one major respect – the recognition of non-controlling
interest (formerly called minority interest).

NON-CONTROLLING INTEREST (NCI)

 NCI is defined as the equity in a subsidiary not attributable, directly or indirectly, to a parent.
 The non-controlling interest in the subsidiary’s net assets is shown in the consolidated statement of
financial position in total and is not broken down into common stock, APIC, and retained earnings.
The NCI is shown as a separate line item under stockholders’ equity.

BUSINESS COMBINATION Page 3 of 12

 UNIVERISTY OF MAKATI
INSTITUTE OF ACCOUNTANCY
ACCOUNTING FOR BUSINESS COMBINATION J. JAVIER

MEASUREMENT OF NCI
 IFRS 3 provides two options of measuring NCI in an acquiree:
(1) At fair value, or
(2) At the NCI’s proportionate share of the acquiree’s identifiable net assets
 Under (1), any goodwill that arises at the time of acquisition is allocated between the parent
and the NCI
 Under (2), any goodwill that arises at the time of acquisition is assigned only to the parent.

PRE-EXISTING GOODWILL
 If the acquired subsidiary has goodwill on its books at the date of acquisition, that goodwill shall be
excluded in the computation and allocation of excess.
 If the acquirer has goodwill on its books at the date of acquisition, that goodwill is included in the
computation of consolidated goodwill.

CONTROL PREMIUM
 An additional payment given by the acquirer for acquiring control of the subsidiary company.
 Control premium is included in the consideration transferred regardless of the method used to
measure NCI (Fair Value approach or Proportionate share basis).
 In the computation of implied fair value of NCI where the assessed fair value of NCI is not available,
the control premium shall be excluded for the reason it may distort the implied fair value of NCI if
such amount is included.

STEP ACQUISITION
 Purchases of shares are made at different points in time.
 Previously held securities shall be remeasured at fair value at the date when control is obtained,
that is, the date of acquisition. Disposition of gain or loss arising from the remeasurement depends
on the classification of previously held securities prior to the acquisition date:
(1) Fair value through profit or loss – gain or loss arising from the remeasurement is recognized in
profit or loss.
(2) Fair value through other comprehensive income – gain or loss arising from the remeasurement is
recognized in OCI and then subsequently disposed to retained earnings (IFRS 9)
(3) Investment in associate – gain or loss arising from the remeasurement is recognized in profit or
loss.

SUBSEQUENT TO DATE OF ACQUISITION

CONSOLIDATION PERIOD
 Consolidation begins from the date the investor obtains control of the investee and ceases when the
investor loses control of the investee.

MEASUREMENT
1. Income and expenses
 For purposes of presentation of items in the consolidated financial statements, income and
expenses of the subsidiary are based on the amounts of the assets and liabilities recognized in
the consolidated financial statements at the acquisition date. (i.e., depreciation expense in the
consolidated financial statements is based on the related asset’s fair value on the date of
acquisition rather than its carrying amount in the subsidiary’s accounting records.

2. Investment in Subsidiary
 Investment in subsidiaries is accounted for in the parent’s separate financial statements either:
a. At cost.
b. In accordance with IFRS 9 Financial Instruments; or
c. Using the equity method

BUSINESS COMBINATION Page 4 of 12

 UNIVERISTY OF MAKATI
INSTITUTE OF ACCOUNTANCY
ACCOUNTING FOR BUSINESS COMBINATION J. JAVIER

Measurement at cost
 INITIAL MEASUREMENT:
INTERCOMPANY The value
SALE OF PROPERTY, assigned
PLANT AND to the consideration transferred at the acquisition date.
EQUIPMENT
 SUBSEQUENT
 IntercompanyMEASUREMENT: The also
sales of PPE are valueidentified
assigned to
as the consideration
either downstream transferred at the
or upstream acquisition
because only
date unless
upstream the affect
sales investment becomes impaired.
non-controlling interest.

Measurement in accordance with IFRS 9 Financial Instruments

Accounting procedures:
a. Any gainMEASUREMENT:
 INITIAL The and
or loss is deferred value assigned to the consideration transferred at the acquisition date.
SUBSEQUENT
 i. MEASUREMENT:
Recognized only whenFair
the Value every
asset is soldyear-end.
to an unrelated party or otherwise derecognized, if
the asset is non-depreciable.
Measurement
ii. using the equity
Amortized method
over the asset’s remaining useful life, if the asset is depreciable.
 INITIAL MEASUREMENT: The
b. If the asset is subsequently sold value
to assigned to the
an unrelated consideration
party, transferred
the unamortized at the
balance acquisition
of the deferreddate.
gain
 SUBSEQUENT MEASUREMENT: Carrying
or loss is recognized in profit or loss. value adjusted for the investor’s share in the changes in the
c. investee’s equity.sale, the gain or loss is adjusted to the controlling interest only. Therefore, NCI is
In a downstream
not affected.
NON-CONTROLLING
d. In an upstream INTERESTS
sale, the (NCI)
adjustments for the gain or loss are shared between the controlling and
1. NCI in the net assets
non-controlling interest. of the subsidiary
Therefore, NCI is affected.
 Presented in the consolidated statement of financial position within equity, separately from the
e. In any case,
equity ofthe
theunamortized
owners of the balance
parent.of the deferred gain or loss is eliminated when the consolidated
financial statements
 It consists of: are prepared.
a. The amount determined at the acquisition date in accordance with IFRS 3 Business
Combination; and
b. The NCI’s share of changes in equity since the acquisition date.

2. NCI in the comprehensive income

 The profit or loss and each component of OCI in the consolidated statement of comprehensive
income are attributed to the following:
a. Owners of the parent
b. Non-controlling interests
 Total comprehensive income is attributed to the owners of the parent and NCI even if this results
in the non-controlling interests having a deficit balance.

INTERCOMPANY TRANSACTIONS
The parent may enter into transactions with its subsidiary. These intercompany transactions must be
eliminated when preparing consolidated financial statements because the parent and its subsidiary are
viewed as a single reporting entity.

 The following are the common intercompany transactions that should be eliminated when preparing
consolidated financial statements:
1. Intercompany dividends
2. Intercompany sale of inventory
3. Intercompany sale of property, plant and equipment

INTERCOMPANY SALES
 Intercompany sales are either:
1. Downstream – the parent sells to the subsidiary or the subsidiary purchases from the parent.
2. Upstream – the subsidiary sells to the parent or the parent purchases from the subsidiary.

It is important to identify whether an intercompany sale is downstream or upstream because only upstream
sales affect NCI. The entity that recognizes profit from a sale transaction is the seller.
 In a downstream sale, the parent recognizes the profit. NCI is not affected because the profit
pertains solely to the owners of the parent.
In an upstream sale, the subsidiary recognizes the profit. NCI is affected because the profit pertains to
both the owners of the parent and the NCI.

BUSINESS COMBINATION Page 5 of 12

 UNIVERISTY OF MAKATI
INSTITUTE OF ACCOUNTANCY
ACCOUNTING FOR BUSINESS COMBINATION J. JAVIER

DISCUSSION PROBLEMS

PROBLEM 1
Better Company has gained control over the operations of Calm Corporation by acquiring its net assets for
P2,580,000 cash. The following was ascertained on the date of acquisition for Calm Corporation:

Calm Better
Cash 128,000.00 3,541,500.00
Accounts Receivables 325,000.00 300,000.00
Inventories 360,000.00 550,000.00
Prepaid Expenses 125,000.00 148,500.00
Land 879,000.00 2,350,000.00
Building 558,000.00 1,560,000.00
Equipment 185,000.00 300,000.00
Goodwill 300,000.00
Total Assets 2,860,000.00 8,750,000.00

Accounts Payable 253,000.00 675,000.00

Notes Payable 730,000.00 1,400,000.00
Capital Stock, P50 par 800,000.00 3,400,000.00
Additional Paid in Capital 600,000.00 1,575,000.00
Retained Earnings 477,000.00 1,700,000.00
Total Credits 2,860,000.00 8,750,000.00

 The value of receivables and equipment has decreased by P25,000 and P14,000 respectively.
 The fair value of inventories is now P436,000 whereas the value of land and building has increased by
P471,000 and P107,000 respectively.
 There was an unrecorded accounts payable amounting to P27,000 and fair value of notes is P738,000.

Required:
1. Compute Goodwill or Gain on Bargain Purchase.
2. Prepare Consolidated Balance Sheet immediately after business combination.

PROBLEM 2
On January 2, 2023, the Statement of Financial Position of Panther and Fox Company prior to the combination
are:

Panther Co. Fox Co.

Cash 450,000.00 15,000.00
Inventories 300,000.00 30,000.00
PPE (net) 750,000.00 105,000.00
Total Assets 1,500,000.00 150,000.00

Current Liabilities 90,000.00 15,000.00

Common Stock, P100 par 150,000.00 15,000.00
APIC 450,000.00 30,000.00
Retained Earnings 810,000.00 90,000.00
Total Liabilities and SHE 1,500,000.00 150,000.00

Fox Co.’s Assets and Liabilities book value are the same with their respective fair value, except for equipment
whose fair value is Php 153,000.

BUSINESS COMBINATION Page 6 of 12

 UNIVERISTY OF MAKATI
INSTITUTE OF ACCOUNTANCY
ACCOUNTING FOR BUSINESS COMBINATION J. JAVIER

Assume the following independent cases:

 Assuming Panther Company acquired 70% of the outstanding common stock of Fox Company for
Php105,000 and Non-controlling interest is measured at fair value of Php61,000, how much is the
goodwill (gain on acquisition)?
 Assuming Panther Company acquired 80% of the outstanding common stock of Fox Company for
Php136,800 and Non-controlling interest is measured at Non-controlling interest’s proportionate share
of Fox Company’s identifiable net assets, how much is the goodwill (gain on acquisition)?
 Assuming Panther Company acquired 90% of the outstanding common stock of Fox Company for Php
243,000 and Non-controlling interest is measured at fair value, how much is the goodwill (gain on
acquisition)?

PROBLEM 3
Better Company has gained control over the operations of Calm Corporation by acquiring 85% of its
outstanding capital stock for P2,125,000 cash. Acquisition expenses paid, direct and indirect, amount to
P83,000 and P42,000 respectively.

Better Calm
Cash 3,541,500.00 128,000.00
Accounts Receivables 300,000.00 325,000.00
Inventories 550,000.00 360,000.00
Prepaid Expenses 148,500.00 125,000.00
Land 2,350,000.00 879,000.00
Building 1,560,000.00 558,000.00
Equipment 300,000.00 185,000.00
Goodwill 300,000.00
Total Assets 8,750,000.00 2,860,000.00

Accounts Payable 675,000.00 253,000.00

Notes Payable 1,400,000.00 730,000.00
Capital Stock, P50 par 3,400,000.00 800,000.00
Additional Paid in Capital 1,575,000.00 600,000.00
Retained Earnings 1,700,000.00 477,000.00
Total Credits 8,750,000.00 2,860,000.00

 The value of receivables and equipment has decreased by P25,000 and P14,000 respectively.
 The fair value of inventories is now P436,000 whereas the value of land and building has increased by
P471,000 and P107,000 respectively.
 There was an unrecorded accounts payable amounting to P27,000 and fair value of notes is P738,000.

Required:
1. Compute Goodwill or Gain on Bargain Purchase.
2. Prepare Consolidated Balance Sheet immediately after business combination.
3. Assuming that Better Company has gained control over the operations of Calm Corporation by
acquiring 85% of its outstanding capital stock by issuing 19,000 shares with FV of P85 and paid
P30,000 control premium, compute Goodwill or Gain on Bargain Purchase

BUSINESS COMBINATION Page 7 of 12

 UNIVERISTY OF MAKATI
INSTITUTE OF ACCOUNTANCY
ACCOUNTING FOR BUSINESS COMBINATION J. JAVIER

PROBLEM 4
Better Company has gained control over the operations of Calm Corporation by acquiring total of 85% of its
outstanding capital stock. Better previously owned 40% of the stocks and just acquired Jan 1, 2020
additional 45% by issuing 17,250 shares of P60 FV. In addition, Better paid P50,000 control premium.
Acquisition expenses paid, direct and indirect, amount to P83,000 and P42,000 respectively.
Better Calm
Cash 2,641,500.00 128,000.00
Accounts Receivables 300,000.00 325,000.00
Inventories 550,000.00 360,000.00
Prepaid Expenses 148,500.00 125,000.00
Investment in Calm 900,000.00
Land 2,350,000.00 879,000.00
Building 1,560,000.00 558,000.00
Equipment 300,000.00 185,000.00
Goodwill 300,000.00
Total Assets 8,750,000.00 2,860,000.00
Accounts Payable 675,000.00 253,000.00
Notes Payable 1,400,000.00 730,000.00
Capital Stock, P50 par 3,400,000.00 800,000.00
Additional Paid in Capital 1,575,000.00 600,000.00
Retained Earnings 1,700,000.00 477,000.00
Total Credits 8,750,000.00 2,860,000.00

 The value of receivables and equipment has decreased by P25,000 and P14,000 respectively.
 The fair value of inventories is now P436,000 whereas the value of land and building has increased by
P471,000 and P107,000 respectively.
 There was an unrecorded accounts payable amounting to P27,000 and fair value of notes is P738,000.

Required:
1. Compute Goodwill or Gain on Bargain Purchase.
2. Prepare Consolidated Balance Sheet immediately after business combination.

BUSINESS COMBINATION Page 8 of 12

 UNIVERISTY OF MAKATI
INSTITUTE OF ACCOUNTANCY
ACCOUNTING FOR BUSINESS COMBINATION J. JAVIER

PROBLEM 5
On January 1, 2023, Nanay Corporation has gained control over the operations of Dalaga Corporation by
acquiring 90% by issuing 30,000 ordinary shares. The fair value of shares of Nanay Corporation is Php81, while
the fair value of non-controlling interest is Php150,000.

The remaining value of building of both corporations should be depreciated using 20 years.

Nanay Dalaga Dalaga

Book Value Book Value Fair Value
Cash 1,000,000.00 200,000.00
Inventories 500,000.00 40,000.00 35,000.00
Land 2,000,000.00 450,000.00 500,000.00
Building (net) 1,500,000.00 1,000,000.00 950,000.00
Total Assets 5,000,000.00 1,690,000.00
Accounts Payable 100,000.00 20,000.00
Ordinary shares, P10 par 2,000,000.00 200,000.00
Share Premium 2,200,000.00 300,000.00
Retained Earnings 700,000.00 1,170,000.00
Total Liabilities & SHE 5,000,000.00 1,690,000.00

Following are the financial statements as of December 31, 2023:

Nanay Dalaga
Invty, Beginning Balance 500,000.00 40,000.00
Add: Net Purchases 1,000,000.00 70,000.00
Goods Available for Sale 1,500,000.00 110,000.00
Less: Invty, Ending Balance 200,000.00 10,000.00
Cost of Sales 1,300,000.00 100,000.00

Sales 3,250,000.00 250,000.00

Less: Cost of Sales 1,300,000.00 100,000.00
Gross Profit 1,950,000.00 150,000.00
Less: Operating Expenses 487,500.00 37,500.00
Operating Income 1,462,500.00 112,500.00
Investment Income 100,000.00
Total Income 1,562,500.00 112,500.00

Retained Earnings, Beg. 700,000.00 1,170,000.00

Add: Income 1,562,500.00 112,500.00
Total 2,262,500.00 1,282,500.00
Less: Dividends Paid 625,000.00 78,750.00
Retained Earnings, End. 1,637,500.00 1,203,750.00

Nanay Dalaga
Cash 2,292,500.00 323,750.00
Inventories 200,000.00 10,000.00
Land 2,000,000.00 450,000.00
Building (net) 1,425,000.00 950,000.00
Investment in Dalaga 2,430,000.00
Total Assets 8,347,500.00 1,733,750.00

Accounts Payable 80,000.00 30,000.00

Ordinary shares, P10 par 2,300,000.00 200,000.00
Share Premium 4,330,000.00 300,000.00
Retained Earnings 1,637,500.00 1,203,750.00
Total Liabilities & SHE 8,347,500.00 1,733,750.00

REQUIRED: Prepare Consolidated FS

BUSINESS COMBINATION Page 9 of 12

 UNIVERISTY OF MAKATI
INSTITUTE OF ACCOUNTANCY
ACCOUNTING FOR BUSINESS COMBINATION J. JAVIER

PROBLEM 6
On January 1, 2023, Nanay Corporation has gained control over the operations of Dalaga Corporation by
acquiring 90% by issuing 30,000 ordinary shares. The fair value of shares of Nanay Corporation is Php81, while
the fair value of non-controlling interest is Php150,000. NANAY COMPANY USES EQUITY METHOD IN
ACCOUNTING FOR ITS INVESTMENT IN SUBSIDIARY.

The remaining value of building of both corporations should be depreciated using 20 years.

Nanay Dalaga Dalaga

Book Value Book Value Fair Value
Cash 1,000,000.00 200,000.00
Inventories 500,000.00 40,000.00 35,000.00
Land 2,000,000.00 450,000.00 500,000.00
Building (net) 1,500,000.00 1,000,000.00 950,000.00
Total Assets 5,000,000.00 1,690,000.00
Accounts Payable 100,000.00 20,000.00
Ordinary shares, P10 par 2,000,000.00 200,000.00
Share Premium 2,200,000.00 300,000.00
Retained Earnings 700,000.00 1,170,000.00
Total Liabilities & SHE 5,000,000.00 1,690,000.00

Following are the financial statements as of December 31, 2023:

Nanay Dalaga
Invty, Beginning Balance 500,000.00 40,000.00
Add: Net Purchases 1,000,000.00 70,000.00
Goods Available for Sale 1,500,000.00 110,000.00
Less: Invty, Ending Balance 200,000.00 10,000.00
Cost of Sales 1,300,000.00 100,000.00

Sales 3,250,000.00 250,000.00

Less: Cost of Sales 1,300,000.00 100,000.00
Gross Profit 1,950,000.00 150,000.00
Less: Operating Expenses 487,500.00 37,500.00
Operating Income 1,462,500.00 112,500.00
Investment Income 130,375.00
Total Income 1,592,875.00 112,500.00

Retained Earnings, Beg. 700,000.00 1,170,000.00

Add: Income 1,592,875.00 112,500.00
Total 2,292,875.00 1,282,500.00
Less: Dividends Paid 625,000.00 78,750.00
Retained Earnings, End. 1,667,875.00 1,203,750.00

BUSINESS COMBINATION Page 10 of 12

 UNIVERISTY OF MAKATI
INSTITUTE OF ACCOUNTANCY
ACCOUNTING FOR BUSINESS COMBINATION J. JAVIER

Nanay Dalaga
Book Value Book Value
Cash 2,292,500.00 323,750.00
Inventories 200,000.00 10,000.00
Land 2,000,000.00 450,000.00
Building (net) 1,425,000.00 950,000.00
Investment in Dalaga 2,460,375.00
Total Assets 8,377,875.00 1,733,750.00

Accounts Payable 80,000.00 30,000.00

Ordinary shares, P10 par 2,300,000.00 200,000.00
Share Premium 4,330,000.00 300,000.00
Retained Earnings 1,667,875.00 1,203,750.00
Total Liabilities & SHE 8,377,875.00 1,733,750.00

REQUIRED:
1. Prepare Consolidated FS
2. Assuming instead of P150,000, the Fair Value of NCI is 607,500 and by the end of the year Goodwill
was impaired by P500,000, compute the consolidated net income.

PROBLEM 7
Pretty Company owns 80% of the common stock of Smart Company. Pretty sells merchandise to Smart at 20%
above cost while Smart sells merchandise to Pretty at 30% gross profit on sales. During 2018, intercompany
downstream sales amounted to P1,080,000 and intercompany upstream sales of P800,000. At the end of 2018,
Smart had one-fifth of the goods purchased that year from Pretty in its ending inventory while Pretty had 30%
of the goods purchased that year from Smart in its ending inventory. There were no intercompany sales prior
to 2018.

Neither company declared dividends in 2018.

Pretty and Smart reported the following on their separate financial statements on December 31, 2018:

Pretty Company Smart Company

Sales 12,000,000.00 7,500,000.00
Cost of goods sold 7,800,000.00 6,000,000.00
Gross profit 4,200,000.00 1,500,000.00
Operating expenses 3,480,000.00 1,100,000.00
Net income 720,000.00 400,000.00

Ending inventory 575,000.00 480,000.00

During 2019, intercompany downstream sales amounted to P1,200,000 and intercompany upstream sales of
and P1,020,000. Pretty’s 2019 ending inventory contained two-fifths of that year’s purchases from Smart while
Smart’s 2019 ending inventory contained one-fourth of that year’s purchases from Pretty.

Neither company declared dividends in 2019.

Pretty and Smart reported the following on their separate financial statements on December 31, 2019:

Pretty Company Smart Company

Sales 15,000,000.00 10,000,000.00
Cost of goods sold 10,500,000.00 7,000,000.00
Gross profit 4,500,000.00 3,000,000.00
Operating expenses 3,740,000.00 2,540,000.00
Net income 760,000.00 460,000.00

Ending inventory 795,000.00 620,000.00

Compute the Consolidated Sales, Cost of Goods Sold and Inventory for the years 2018 and 2019

BUSINESS COMBINATION Page 11 of 12

 UNIVERISTY OF MAKATI
INSTITUTE OF ACCOUNTANCY
ACCOUNTING FOR BUSINESS COMBINATION J. JAVIER

PROBLEM 8
ABC owns 60% of DEF’s voting stocks. The following intercompany transactions involving sale of land occurred
between ABC and DEF:
 On March 1, 2018, ABC sold a parcel of land, which was purchased on January 1, 2014 at a cost of
P2,000,000, to DEF for P3,000,000. DEF sold the said land to an unrelated party for P4,500,000 on
November 30, 2019.
 On April 30, 2018, DEF sold land (cost, P500,000) to ABC for P300,000. ABC classified this land as part
of its PPE.
 On June 1, 2018, ABC sold another parcel of land (cost, P1,500,000) to DEF for P900,000. DEF classified
this land as part of its PPE.
 On October 31, 2018, DEF sold another land (cost, P2,100,000) to ABC for P2,800,000. ABC sold the
said land to an unrelated party for P3,200,000 on December 31, 2019.

ABC reported net income of P5,000,000 in 2018 and P6,000,000 in 2019. DEF reported net income of
P7,000,000 in 2018 and P8,000,000 in 2019. Neither company declared dividends in either year.

ABC reported land of P10,000,000 and P25,000,000 in 2018 and 2019, respectively while DEF reported land of
P2,000,000 and P6,000,000 in 2018 and 2019, respectively.

Compute the Consolidated Income and Land for the year 2018 and 2019

PROBLEM 9
SHELDON Company owns 75% outstanding shares of COOPER Corp. Information resulting from intercompany
sales of equipment are summarized below:

Date of sale Seller Selling Price Carrying Value Remaining life

(from date of sale)
31-Mar-18 SHELDON 90,000.00 75,000.00 5 years
30-Jun-18 COOPER 150,000.00 125,000.00 10 years
01-Jan-18 SHELDON 20,000.00 40,000.00 4 years
01-Jan-18 COOPER 15,000.00 30,000.00 8 years

Both companies use the straight-line method to depreciate equipment. SHELDON Company reported profit of
P350,000 each year while COOPER Corp. reported profit of P220,000 in 2018 and P240,000 in 2019. Neither
company declared dividends.

Assuming that the equipment sold by COOPER was later on sold by SHELDON to outside party in year 2019,
compute the consolidated net income for the year 2018 and 2019.

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BUSINESS COMBINATION Page 12 of 12