ACCOUNTING FOR BUSINESS COMBINATIONS

Consolidated FS – Subsequent to Date of Acquisition

PROBLEM I

On May 1, 2018, Seth Company purchased 80% of the common stock of JP Company for P50,000. Additional
data concerning these two companies for years 2018 and 2019:
2018 2019
Seth JP Seth JP
Common stock P 100,000 P 25,000 P 100,000 P 25,000
Other contributed capital 40,000 10,000 40,000 10,000
Retained earnings, 1/1 80,000 10,000 129,000 53,000
Net income (loss) 64,000 45,000 37,500 (5,000)
Cash dividends (11/30) 15,000 2,000 5,000 -0-

Any difference between book value and the value implied by the purchase price relates to JP Company’s
land. Seth Company uses the cost method to record its investment.

Required:
1. Calculate the controlling interest in consolidated net income for 2018.
2. Calculate the controlling interest in consolidated net income for 2019.
3. Calculate the controlling interest in consolidated retained earnings for 2018.
4. Calculate the controlling interest in consolidated retained earnings for 2019.

ANSWERS: 1) P86,400; 2) P33,500; 3) P151,400; 4) P179,900

PROBLEM II

Julia Company acquires 80% of Edwin Company for P500,000 on January 1, 2016. Edwin reported common
stock of P300,000 and retained earnings of P200,000 on that date. Equipment was undervalued by P30,000
and buildings were undervalued by P40,000, each having a 10-year remaining life. Any excess consideration
transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review,
goodwill has not been impaired. Edwin earns income and pays dividends as follows:
2016 2017 2018
Net income P 100,000 P 120,000 P 130,000
Dividends 40,000 50,000 60,000

Assume the cost model or initial value method is applied.

Required:
1. Compute Julia’s investment in Edwin at December 31, 2016.
2. Compute Julia’s investment in Edwin at December 31, 2017.
3. Compute Julia’s investment in Edwin at December 31, 2018.
4. How much does Julia report as Income from Edwin for the year ended December 31, 2016?
5. How much does Julia report as Income from Edwin for the year ended December 31, 2017?
6. How much does Julia report as Income from Edwin for the year ended December 31, 2018?
7. Compute the non-controlling interest in the net income of Edwin at December 31, 2016.
8. Compute the non-controlling interest in the net income of Edwin at December 31, 2017.
9. Compute the non-controlling interest in the net income of Edwin at December 31, 2018.
10. Compute the non-controlling interest of Edwin at December 31, 2016.
11. Compute the non-controlling interest of Edwin at December 31, 2017.
12. Compute the non-controlling interest of Edwin at December 31, 2018.

ANSWERS: 1) P524,400; 2) P500,000; 3) P500,000; 4) P32,000; 5) P40,000; 6) P48,000;

7) P18,600; 8) P22,600; 9) P24,600; 10) P135,600; 11) P148,200; 12) P160,800
 PROBLEM III

On January 1, 2017, Rizza Company acquired 80% of Jomar Company’s common stock for P280,000 cash.
At that date, Jomar reported common stock outstanding of P200,000 and retained earnings of P100,000,
and the fair value of the non-controlling interest was P70,000. The book values and fair values of Jomar’s
assets and liabilities were equal, except for other intangible assets which had a fair value of P50,000 greater
than book value and an 8-year remaining life. Jomar reported the following data for 2017 and 2018:
Comprehensive Dividends
Net income Income paid
2017 P 25,000 P 30,000 P 5,000
2018 35,000 45,000 10,000

Rizza reported net income of P100,000 and paid dividends of P30,000 for both years.

Questions:
1. What is the amount of consolidated comprehensive income reported for 2017?
2. What is the amount of consolidated comprehensive income reported for 2018?
3. What is the amount of comprehensive income attributable to the controlling interest for 2017?
4. What is the amount of comprehensive income attributable to the controlling interest for 2018?

ANSWERS: 1) P123,750; 2) P138,750; 3) P119,000; 4) P131,000

PROBLEM IV

Cebb Corporation acquired all of the stocks of Karla Corporation by issuing 1,000,000 shares of P1 par stock
with a market value of P40 per share. Registration fees were P800,000 and indirect costs were P1,000,000,
all paid in cash. Karla’s book value at the date of acquisition was P6,000,000.

All of Karla’s assets and liabilities are reported at amounts approximating fair value, except that long-term
debt is overvalued by P500,000. Karla also has unreported identifiable intangible assets, requiring
capitalization per PFRS, valued at P7,000,000, and an unreported pending lawsuit, in which it is the
defendant, which should be reported. The expected present value of the liability related to the lawsuit is
P2,000,000.

1. Elimination due to allocated excess (acquisition differential) reduces Investment in Karla by:
2. Elimination due to allocated excess (acquisition differential) increases goodwill by:

ANSWERS: 1) P34,000,000; 2) P28,500,000

PROBLEM V

Aira, Inc. acquires all of the outstanding stock of Erol Corporation on January 1, 2017. On that date, Erol
owns only three assets and has no liabilities.
Book value Fair value
Inventory P 40,000 P 50,000
Equipment (10-year life) 80,000 75,000
Building (20-year life) 200,000 300,000

Questions:
1. If Aira pays P450,000 in cash for Erol, what amount would be represented as the subsidiary’s
Building in a consolidation at December 31, 2019, assuming the book value at that date is still
P200,000?

2. If Aira pays P400,000 in cash for Erol, what amount would be represented as the subsidiary’s
Building in a consolidation at December 31, 2019, assuming the book value at that date is still
P200,000?
 3. If Aira pays P450,000 in cash for Erol, what amount would be represented as the subsidiary’s
Equipment in a consolidation at December 31, 2019, assuming the book value at that date is still
P80,000?

4. IF Aira pays P450,000 cash for Erol, what allocation should be assigned to the subsidiary’s
Equipment in preparing for consolidation at December 31, 2019, assuming the book value on that
date is still P80,000?

5. If Aira pays P300,000 in cash for Erol, at what amount would the subsidiary’s Building be
represented in a January 2, 2017 consolidation?

ANSWERS: 1) P285,000; 2) P285,000; 3) P76,500; 4) P3,500; 5) P300,000

PROBLEM VI

Jeffrey Company acquired 90% of Joyce Company on January 1, 2017, for P234,000 cash. Joyce’s
shareholders’ equity consisted of common stock of P160,000 and retained earnings of P80,000. An analysis
of Joyce’s net assets revealed the following: Any excess consideration transferred over fair value is
attributable to an unamortized patent with a useful life of 5 years.
Book value Fair value
Buildings (10-year life) P 10,000 P 8,000
Equipment (4-year life) 14,000 18,000
Land 5,000 12,000

Questions:
1. In consolidation at January 1, 2017, what adjustment is necessary for Joyce’s Buildings account?
2. In consolidation at December 31, 2017, what adjustment is necessary for Joyce’s Buildings
account?
3. In consolidation at December 31, 2018, what adjustment is necessary for Joyce’s Buildings
account?
4. In consolidation at January 1, 2017, what adjustment is necessary for Joyce’s Equipment
account?
5. In consolidation at December 31, 2017, what adjustment is necessary for Joyce’s Equipment
account?
6. In consolidation at December 31, 2018, what adjustment is necessary for Joyce’s Equipment
account?
7. In consolidation at January 1, 2017, what adjustment is necessary for Joyce’s Land account?
8. In consolidation at December 31, 2017, what adjustment is necessary for Joyce’s Land account?
9. In consolidation at December 31, 2018, what adjustment is necessary for Joyce’s Land account?
10. In consolidation at January 1, 2017, what adjustment is necessary for Joyce’s Patent account?
11. In consolidation at December 31, 2017, what adjustment is necessary for Joyce’s Patent account?
12. In consolidation at December 31, 2018, what adjustment is necessary for Joyce’s Patent account?

ANSWERS:

1. Decrease in Buildings account:

Fair value…………………………………………… P 8,000
Book value………………………………………….. __10,000
Decrease…………………………………………….P 2,000

2. Decrease in buildings account ………… P 2,000

Less: Increase due to depreciation (P2,000/10)………… 200
Decrease in buildings accounts……………………… P 1,800

3. Decrease in buildings account ………… P 1,800

Less: Increase due to depreciation (P2,000/10)………… 200
Decrease in buildings accounts……………….. P 1,600

4. Increase in Equipment account:

Fair value…………………………………………… P 14,000
Book value………………………………………….. __18,000
Increase………………………………. P 4,000
5. Increase in equipment account ………… P 4,000
Less: Decrease due to depreciation (P4,000/4)…………… 1,000
Increase in equipment accounts……………….. P 3,000

6. Increase in equipment account ………… P 3,000

Less: Decrease due to depreciation (P4,000/4…………… 1,000
Increase in equipment accounts……………………… P 2,000

7. Increase in Land account:

Fair value…………………………………………… P 12,000
Book value………………………………………….. 5,000
Increase…………………………………. P 7,000

8. P7,000 INCREASE
9. P7,000 INCREASE

10. Increase in Patent account:

Fair value…………………………………………… P 11,000
Book value………………………………………….. 0
Increase………………………………… P 11,000

(P234,000/90%) – (P160,000 + P80,000) = P20,000 – (P4,000 – P2,000 + P7,000) = P11,000.

Partial or full-goodwill approach, the amortization remains the same.

11. Increase in patent account ……………… P 11,000

Less: Decrease due to depreciation (P11,000/5).…… 2,200
Increase in patent accounts…………………… P 8,800

12. Increase in patent account ……………… P 8,800

Less: Decrease due to depreciation (P11,000/5).……… 2,200
Increase in patent accounts………………………… P 6,600