BUSINESS COMBINATION AND CONSOLIDATION OF FINANCIAL STATEMENTS

BUSINESS COMBINATION – ACQUISITION OF NET ASSETS

Problem A. The following are the Statement of Financial Position of LET Corporation and Go Corporation
on January 2, 2031, just before they entered into a business combination:

LET Corporation GO Corporation

Book Value Fair Value Book Value Fair Value
Assets
Cash P77,500 P77,500 P 8,750 P 8,750
Accounts receivable 18,750 18,750 17,500 17,500
Merchandise Inventory 50,000 62,500 12,500 19,500
Property and Equipment 100,000 112,500 25,000 31,000
Accumulated depreciation (25,000) (6,250)
Goodwill - 12,500
Total Assets P221,250 P70,000

Liabilities and Stockholder’s Equity

Accounts payable P 31,250 P 31,250 P 17,500 P 17,500
Bonds payable 50,000 56,250 7,500 10,500
Ordinary shares, P30 par value 52,500
Ordinary shares, P20 par value 12,500
Share Premium 12,500 15,000
Retained Earnings 75,000 17,500
Total Liabilities and Stockholder’s
Equity P221,250 P70,000

LET Corporation acquired the net assets of GO Corporation by paying cash of P2,500 and issuing 625
shares of its P30 par value common stock. Additional cash payments (acquistion-related costs) made by
LET Corporation in completing the acquisition were:

Professional fees to effect the business combination such as legal fees,

Audit fees and broker fees P26,250
Stock issuance cost such as printing of stock certificates, and SEC
Registration fees P18,750

LET Corporation also agreed to pay an additional P25,000 on January 2, 2033, if the average income for
the 2-year period of 2031 and 2032 exceeds P20,000 per year. The expected value is estimated as
P12,500 based on the 50% probability of achieving the target average income.

Required:
1. Record the acquisition of the net assets of GO Corporation in the books of LET Corporation
under the following cases:
Case 1: The stock issued by LET Corporation has a fair value of P64 per share.
Case 2: The stock issued by LET Corporation has a fair value of P34 per share.
 2. Prepare a statement of financial position of LET Corporation after the business combination
under the two cases above.

Problem B. The following statement of financial position were prepared for HIJ Corp. and NOP Co. on
January 1, 2031, just before they entered into a business combination.

HIJ Corp. NOP Co.

Cash P210,000 P 5,000
Accounts receivable 75,000 20,000
Merchandise Inventory 200,000 50,000
Building and equipment 400,000 100,000
Accumulated depreciation (100,000) (25,000)
Goodwill 50,000
Total Assets P785,000 P200,000

Accounts payable P125,000 P 70,000

Bonds payable 200,000 30,000
Ordinary shares, P30 par value 210,000
Ordinary shares, P20 par value 50,000
Additional paid-in capital 50,000 10,000
Retained earnings 200,000 40,000
Total Liabilities and Stockholder’s equity P785,000 P200,000

On that date, the fair market value of NOP’s inventions and building and equipment were P78,000 and
P124,000 respectively, while bonds payable has a fair value of P42,000. The fair market values of all
other assets and liabilities of NOP (except for goodwill) were equal to their book values. HIJ Corp.
acquired the net assets of NOP Co. by issuing 2,500 shares of its P30 par value common stock (current
fair value P36 per share) and purchase price in cash amounting to P12,000. Contingent consideration
that is determinable (probable and reasonably estimated) amount to P2,000. Additional cash payments
made by HIJ Corp. in completing the acquisition were: Legal fees for contract business combination,
P8,000 ; Accounting and legal fees for SEC registration, P11,000; Printing costs of stock certificates,
P6,000; Finder’s fee, P7,000; Indirect cost, P5,000.

1. As a result of the business combination, the amount of total assets and total liabilities,
respectively, in the books of the surviving company.

2. As a result of the business combination, the amount of common stock, additional paid-in capital
and retained earnings, respectively, in the books of the surviving company.

BUSINESS COMBINATION – ACQUISTION OF STOCKS

Problem C. The following are the statement of financial position of GBC and RPS Company as of
December 31, 2030.
GBC RPS
Cash P 250,000 P 50,000
Receivables 175,000 37,500
Inventories 200,000 62,500
Land 187,500 250,000
Building (net) 800,000 250,000
Equipment (net) 625,000 600,000
Total Assets P 2,237,500 P 1,250,000
Accounts payable P 462,500 P 350,000
Ordinary Shares 1,250,000 500,000
Share Premium 125,000 150,000
Retained Earnings 400,000 250,000
Total Liabilities and Equity P 2,237,500 P 1,250,000

GBC decided to acquire 16,000 outstanding shares of RPS on January 1, 2031. GBC will pay P600,000
cash and will issue 8,000 ordinary shares with market value of P30 per share in exchange for the 16,000
outstanding shares of RPS. GBC and RPS ordinary shares both have a par value of P25 per share. The
book values reflect fair values except for building of GBC, which has a net realizable value of P1,050,000
and inventories and Land of RPS which have a net realizable value of P87,500 and P325,000, respec
tively. GBC also paid costs of registering and issuing securities amounting to P50,000 and direct costs of
combination amounting to P62,500.

1. Compute for the consolidated assets

2. Compute for the consolidated stockholder’s equity

ACQUISITION OF STOCKS – DATE OF ACQUISITION

CONSOLIDATED FINANCIAL STATEMENTS

Problem B. On January 2, 2031, MAGULANG CORPORATION purchased 70% of the outstanding ordinary
shares of ANAK COMPANY for P4,200,000 in cash. The non-controlling interest is measured at fair value.
Statement of financial position of the companies on January 2, 2031 are as follows:

MAGULANG CORPORATION ANAK COMPANY

Book Value Fair Value Book Value Fair Value
Cash P 600,000 P 600,000 P 600,000 P 600,000
Receivables 1,200,000 1,120,000 900,000 900,000
Inventories 900,000 890,000 780,000 880,000
Land 300,000 320,000 480,000 640,000
Building, net 1,800,000 1,800,000 1,200,000 1,160,000
Long-investment 600,000 600,000 720,000 840,000
Investment in ANAK CO. 4,200,000 4,200,000
TOTAL ASSETS P 9,600,000 P4,680,000

Accounts payable P 1,160,000 P1,000,000 P 300,000 P 300,000

Ordinary shares 2,400,000 1,200,000
Additional paid-in capital 1,240,000 360,000
Retained earnings 4,800,000 2,820,000
TOTAL LIABILITIES & SHE P 9,600,000 P 4,680,000

1. Required: As a result of business combination, compute for the following:

a. Consolidated assets
b. Consolidated liabilities
 c. Consolidated shareholder’s equity
d. Non-controlling interest in assets

2. Same requirment for each of the following cases:

Price paid Interest Liabilities of Fair Value of NCI
MAGULANG
A. P4,800,000 80% P1,760,000 Use relevant share
B. 4,320,000 90% 1,280,000 P 540,000
C. 5,400,000 75% 2,360,000 900,000
D. 3,400,000 80% 360,000 720,000

CONSOLIDATED FINANCIAL STATEMENTS – SUBSEQUENT TO THE DATE OF ACQUISITION

Problem H. On January 1, 2031 P. Company acquires 75% of the outstanding stocks of S Company for
P675,000, At the time the common stock, additional paid-in capital, and retained earnings of S Company
are P200,000, P80,000 and P548,500 respectively. On January 1, 2031, examination of subsidiary’s assets
and liabilities revealed that all assets and liabilities are recorded at fair value except for the following:
book value of inventory is P60,000 while its fair value is P68,000; land’s fair value is P80,000 more than
its book value; and the book of the equipment exceeds its fair value in the amount of P50,000. The
equipment’s economic life is 5 years and the companies use the straight-line method. The non-
controlling interest is measured at fair value. The following is the unconsolidated statement of financial
positions of P and S Company on December 31, 2031 and December 31, 2032, respectively:
P Company S Company
2031 2032 2031 2032
Cash 580,000 630,000 180,000 200,000
Accounts receivable 90,000 320,000 50,000 30,000
Inventories 85,500 90,000 95,000 110,000
Equipment, net 326,000 118,000 250,000 320,000
Land 898,000 898,000 530,000 530,000
Investment in S Company 675,000 675,000
TOTAL ASSETS 2,654,500 2,731,000 1,105,000 1,190,000

Accounts payable 180,000 150,000 95,000 105,000

Notes payable 367,500 368,000 110,000 120,000
Common stock 800,000 800,000 200,000 200,000
Additional-paid in capital 500,000 500,000 80,000 80,000
Retained earnings 807,000 913,000 620,000 685,000
TOTAL LIABILITIES AND SHE 2,654,500 2,731,000 1,105,000 1,190,000

Additional Information:
 For the year ended 2031, the net income of P and S Company are P135,000 and P86,500,
respectively, while the dividends declared by P and S Company are P23,000 and 15,000,
respectively.
 For the year ended 2032, the net income of P and S Company are P156,000 and P93,000,
respectively, while dividends declared by P and S Company are P50,000 and P28,000,
respectively.
 In 2031, goodwill was impaired in the amount of P12,000, while in 2032, it was impaired in the
amount of P9,000. They were recognized in their respective year of impairment.
Requirement:
 1. Compute the following for the years ended 2031 and 2032 under the cost method:
1. Consolidated cash
2. Consolidated accounts receivable
3. Consolidated Inventories
4. Consolidated equipment,net
5. Consolidated Land
6. Consolidated total assets
7. Consolidated accounts payable
8. Consolidated notes payable
9. Consolidated total liabilities
10. Consolidated common stock
11. Consolidated additional paid-in capital
12. Consolidated retained earnings
13. Non-controlling interest in net assets
14. Consol. Net income attributable to parent
15. Non-controlling interest in net income
16. Consolidated stockholder’s equity

COMPLETE SET OF FINANCIAL STATEMENTS – SUBSEQUENT TO THE DATE OF ACQUISITION

Problem I. On January 1, 2031 P Company acquires 75% of the outstanding stocks of S Company for
P675,000 which is inclusive of control premium amounting to P25,000. On the same lay, P Company paid
P100,000 for the acquisition-related costs. Furthermore, examination of subsidiary’s assets and liabilities
revealed that all assets and liabilities are recorded at fair value except for the following: book value of
inventory is P60,000 while its fair value is P68,000 (90% of these merchandise were sold in 2031); land’s
fair value is P30,000 more than its book value; and the book value of the equipment exceeds its fair
value in the amount of P50,000. The equipment’s economic life is 5 years and the companies use the
straight-line-method. The non-controlling interest is measured at fair value in the amount of P220,000.
The following are the Statement of Financial Position of both entities as at January 1, 2031 right before
the business combination happened:
P Company S Company
Cash P 1,250,000 P 120,000
Accounts receivable 27,000 56,000
Inventories 80,000 60,000
Equipment 330,000 312,500
Land 898,000 530,000
TOTAL ASSETS P 2,585,000 P 1,078,500

Accounts payable P 190,000 P 120,000

Notes payable 400,000 130,000
Ordinary shares 800,000 200,000
Share premium 500,000 80,000
Retained earnings 695,000 548,500
TOTAL LIABILITY AND EQUITY P 2,585,000 P 1,078,500

During the years 2031 and 2032, the results of operations for both companies revealed the following:
 P Company S Company
2031 2032 2031 2032
Sales P 800,000 P 810,000 P 500,000 P490,000
Less: Cost of sales (500,000) (530,000) (220,000) (250,000)
Gross profit P 300,000 P 280,000 P 280,000 P240,000
Other Income 50,000 80,000 20,000 50,000
Operating expenses (215,000) (204,000) (213,500) (197,000)
NET INCOME P 135,000 P 156,000 P 86,500 P 93,000

Additional Information:
 Operating expenses presented by P Company in 2031 includes the acquisition-related costs
incurred at January 1, 2031.
 In 2031, goodwill was impaired in the amount of P12,000, while in 2032, it was impaired in the
amount of P9,000. They were recognized in their respective year of Impairment.

Continuation of Problem I
The following are the unconsolidated statement of financial positions of P and S Company on December
31, 2031 and December 31, 2032, respectively:
P Company S Company
2031 2032 2031 2032
Cash 580,000 630,000 180,000 200,000
Accounts receivable 90,000 320,000 50,000 30,000
Inventories 85,500 90,000 95,000 110,000
Equipment, net 326,000 118,000 250,000 320,000
Land 898,000 898,000 530,000 530,000
Investment in S Company 675,000 675,000
TOTAL ASSETS 2,654,500 2,731,000 1,105,000 1,190,000

Accounts payable 180,000 150,000 95,000 105,000

Notes payable 387,500 368,000 110,000 120,000
Common stock 800,000 800,000 200,000 200,000
Additional paid-in capital 500,000 500,000 80,000 80,000
Retained earnings 807,500 913,000 620,000 685,000
TOTAL LIABILITIES AND SHE 2,654,500 2,731,000 1,105,000 1,190,000

Additional Information:
Requirement:
1. Compute the following for the years ended 2031 and 2032 under the cost method:
1. Consolidated cash
2. Consolidated accounts receivable
3. Consolidated Inventories
4. Consolidated equipment,net
5. Consolidated Land
6. Consolidated total assets
7. Consolidated accounts payable
8. Consolidated notes payable
9. Consolidated total liabilities
10. Consolidated common stock
 11. Consolidated additional paid-in capital
12. Consolidated retained earnings
13. Non-controlling interest in net assets
14. Consol. Net income attributable to parent
15. Non-controlling interest in net income
16. Consolidated stockholder’s equity

CONSOLIDATED FINANCIAL STATEMENTS – INTERCOMPANY SALE OF MERCHANDISE

Problem J. Peter Corporation owns 75% of the outstanding stocks of Simon Company acquired at book
value in 2031. Selected information from the accounts of both entities for 2031 and 2032 follow:

PETER Corporation SIMON Company

2031 2032 2031 2032
Sales P800,000 P900,000 P400,000 P500,000
Cost of goods sold 480,000 540,000 248,000 310,000
Operating expenses 80,000 90,000 40,000 45,000
Ending Inventories 120,000 180,000 80,000 100,000
 In 2031, SIMON Company sold merchandise to PETER Corp. for P50,000 at a profit of P16,000.
30% of these merchandise remained at the account balance of PETER Corp. at the end of 2031.
In the same year, PETER Corp. sold its own merchandise costing P50,000 to SIMON Comp. at a
gross profit of 20%. P15,000 remained in the ending inventories of SIMON Comp. at the end of
2031.

 In 2032, SIMON Comp. sold merchandise again to PETER Corp. for P60,000 at a profit of P19,200.
P20,000 of these merchandise remained in the inventories balance of PETER Corp. at the end of
2032. At the same time, PETER Corp. sold merchandise costing P72,250 to SIMON Comp. at a
gross profit of 15%. P15,000 remained in the ending inventories of SIMON Comp. at the end of
2032.

REQUIRED: Compute for the following items:

1. Consolidated sales in 2031 and 2032
2. Consolidated cost of goods sold in 2031 and 2032
3. Consolidated net income
4. Non-controlling interest in the net income of SIMON Comp.
5. Consolidated ending inventories in 2031 and 2032 (Balance Sheet)

Problem K. Peter Corporation owns 60% of the outstanding stocks of Simon Company acquired at book
value in 2031. Selected information from the accounts of both entities for 2031 and 2032 follow:

PETER Corporation SIMON Company

2031 2032 2031 2032
Sales P 800,000 P 900,000 P 400,000 P 500,000
Cost of goods sold 480,000 540,000 248,000 310,000
Operating expenses 80,000 90,000 40,000 45,000
Ending inventories 120,000 180,000 80,000 100,000
  In 2031. SIMON Comp. sold merchandise to PETER Corp. for P50,000 at a profit of P16,000. 3\4 of
these merchandise inventories were sold by PETER Corp. to customers in 2031. At the end of the
year, the entire receivables from PETER Corp. were collected by SIMON Comp.

 In 2032, PETER Corp. sold merchandise costing P72,250 to SIMON Comp. at a gross profit of 15%.
1\5 of the merchandise remained in the ending inventory of SIMON Comp. at the end of the
year. As of the end of the year; 50% of the receivables from SIMON has been collected.

REQUIRED: Compute for the following items:

1. Consolidated sales in 2031 and 2032
2. Consolidated cost of goods sold in 2031 and 2032
3. Consolidated net income and NCI in the net income of SIMON Comp.
4. Consolidated ending inventories in 2031 and 2032 (Balance Sheet)

CONSOLIDATED FINANCIAL STATEMENTS – INTERCOMPANY SALE OF FIXED ASSETS

Problem L. Peter Corporation owns 80% of the outstanding stocks of SIMON Company acquired at book
value during 2031. Selected information from the accounts of both entities for 2031 and 2032 are as
follows:

PETER Corporation SIMON Company

2031 2032 2031 2032
Sales P 800,000 P 900,000 P 450,000 P 500,000
Cost of goods sold (480,000) (540,000) (248,000) (310,000)
Operating expenses (180,000) (190,000) (140,000) (145,000)
Loss on sale of equipment ( 30,000) ( 20,000) ( 20,000) ( 10,000)
Gain on sale of land 50,000 60,000 65,000 75,000
Gain on sale of patent 10,000 12,000 5,000 7,000
Equipment 1,180,000 900,000 820,000 700,000
Accumulated depreciation (320,000) (260,000) (200,000) (170,000)
Land 2,800,000 2,500,000 1,500,000 1,100,000
Patent 560,000 480,000 520,000 420,000
Accumulated amortization (80,000) (90,000) (110,000) ( 70,000)

 On April 30, 2031, PETER Corp. sold equipment to SIMON Comp. for P120,000. The said
equipment was carried in the books at P132,000 and its estimated useful life on the date of sale
was five years.

 Then on September 30, 2031, SIMON Comp. sold patent to PETER Corp. for P90,000. The said
patent was carried in the books at P84,000 and its estimated useful life on the date of sale was
three years.

 On December 31, 2031, SIMON Comp. sold land to PETER Corp. for P500,000. The said land was
carried in the books at P450,000.

 On February 28, 2032, PETER Corp. sold another set of equipment to SIMON Comp. for P85,000.
The set of equipment was carried in the books at P88,000 and the estimated remaining useful
life was two years from the date of sale.
  ASSUME that any fixed assets acquired from affiliates were not sold in any of the reporting
period.

REQUIRED: For the years 2031 and 2032, compute for the following items to be presented in the
consolidated financial statements:
1. Consolidated operating expenses
2. Consolidated loss on sale of equipment
3. Consolidated gain on sale of land
4. Consolidated gain on sale of patent
5. Consolidated net income attributable to controlling interest
6. Consolidated equipment, land and patents, net

PROBLEM SOLVINGS

Problem A. On January 1, 2030, GRC acquired 90% of the equity share capital of UST in a share exchange
in which GRC issued two new shares for every three shares it acquired in UST. Additionally, on
December 31, 2030, GRC will pay the shareholders of UST P13.2 per share acquired. GRC’s cost of capital
is 10% per annum. At the date of acquisition, shares in GRC and UST had a stock market value of P48.75
and P18.75 each, respectively. Income statements for the year ended September 30, 2030.

GRC UST

Revenue P 4,845,000 P 2,850,000

Cost of sales (3,840,000) (1,950,000)
Gross profit 1,005,000 900,000
Distribution costs (102,000) (130,500)
Administrative expenses (285,000) (180,000)
Investment income 37,500 -------
Finance costs ( 31,500) -------
Profit before tax 624,000 589,500
Income tax expense (210,000) (120,000)
Profit for the year 414,000 469,500

Equity as at October 1, 2015

Equity shares of P7.50 each 1,800,000 562,500
Retained earnings 4,050,000 2,625,500

At the date of acquisition, the fair values of UST’s assets were equal to their carrying amounts with the
exception of Land which had a fair value of P135,000 above its carrying amount. Also, UST had a
contingent liability which GRC estimated to have a fair value of P337,500. This has not changed as at 30
September 2030. UST has not incorporated these fair value changes into its financial statements. GRC’s
policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose,
UST’s share price at that date can be deemed to be representative of the fair value of the shares held by
the non-controlling interest.
 1. CALCULATE THE FAIR VALUE OF NET ASSET OF SUBSIDIARY ON THE DATE OF ACQUISITION.

2. HOW MUCH IS THE FV OF NCI ON THE DATE OF ACQUISITION?

3. COMPUTE THE GOODWILL (GAIN ON ACQUISITION) RESULTING ON THE DATE OF ACQUISITION.

4. CONSOLIDATED RETAINED EARNINGS ON THE DATE OF ACQUISITION?

Problem D. On January 2, 2030, Fever Company acquired 60% of the outstanding shares of Benz. Inc.
resulting to an income from acquisition in the amount of P330,000. During 2030 and 2031,
intercompany sales amounted to P8,600,000 and P4,500,000, respectively. Fever Company consistently
recognized a 30% gross profit on sales while Benz Inc. had a 40% gross profit on sales. The inventories of
the buying affiliate were as follows: 3\4 of the beginning inventory came from intercompany
transactions and 1\3 of the ending inventory came from outsiders. The December 31, 2030 inventory of
Fever and Benz amount to P480,000 and P225,000, respectively. The December 31, 2031 inventory of
Fever and Benz amount to P570,000 and P150,000, respectively.

On September 1, 2030, Benz Inc. purchased a piece of land costing P3,500,000 from Fever Company for
P5,250,000. On November 2, 2031, the buying affiliate sold this land to Jam Co. for P7,800,000. On the
other hand, on May 1, 2031, Benz Inc. sold a machinery with a carrying value of P430,000 and remaining
life of 4 years to Fever Company for P190,000. Benz Inc. declared dividends on 2031 in the amount of
P600,000. Separate Statement of Comprehensive Income for the two companies for the year 2031
follow:
Fever Company Benz Inc.
Sales P21,500,000 P10,000,000
Cost of Sales (13,500,000) (6,200,000)
Gross Profit P8,000,000 P3,800,000
Operating expenses (3,240,000) (1,100,000)
Operating Profit P4,760,000 P2,700,000
Gain on sale of land 2,550,000
Loss on sale of Machinery (240,000)
Dividend Revenue 450,000 110,000
Net income P5,210,000 P5,120,000

COMPUTE THE FOLLOWING AMOUNTS FOR\AS OF DECEMBER 31, 2031

13. CONSOLIDATED GROSS PROFIT
14. CONSOLIDATED NET INCOME ATTRIBUTABLE TO PARENT
15. CONSOLIDATED OPERATING EXPENSES
16. CONSOLIDATED ENDING INVENTORY
17. CONSOLIDATED LAND
18. CONSOLIDATED MACHINERY AT BOOK VALUE.