Solution Chapter 15

(1)

Chapter 15

Problem I

Investment in Shy Inc. [P2,500,000 + (15,000  P40)] 3,100,000

Cash 2,500,000

Common Stock 30,000

Paid in capital in excess of par (P40 - P2)  15,000 570,000

Paid in capital in excess of par 30,000

Acquisition Expense 67,000

Deferred Acquisition Charges 90,000

Acquisition Costs Payable 7,000

Problem II

Cash consideration transferred P 300,000

Contingent performance obligation __15,000

Fair value of Subsidiary P 315,000

Less: Book value of SS Company (P90,000 + P100,000) 190,000

Allocated excess P125,000

Less: Over/under valuation of assets and liabilities:

Increase in building: P40,000 x 100% P 40,000

Increase in customer list: P22,000 x 100% 22,000

Increase in R&D: P30,000 x 100% 30,000 __92,000

Goodwill P 33,000

Investment in SS Company 315,000

Cash 300,000

Estimated Liability on Contingent Consideration 15,000

Acquisition Expense 10,000

Cash 10,000

Not Required: The working paper eliminating entry on the date of acquisition, 6/30/20x4 would be: Receivables 80,000 Inventory 70,000 Buildings 115,000 Equipment 25,000 Customer list 22,000 Capitalized R&D 30,000 Goodwill 33,000 Current liabilities 10,000 Long-term liabilities 50,000 Investment in SS Company 315,000 Problem III 1. A. Investment in Sewell 675,000 Cash 675,000 B. Investment in Sewell 675,000 Cash 675,000 C. Investment in Sewell 318,000 Cash 318,000 2. A.

Fair value of Subsidiary:

Consideration transferred P675,000

Less: BV of SHE of S (P450,000 + P180,000 + P75,000)x100% 705,000

Allocated excess P( 30,000)

Less: Over/under valuation of A and L: Inc. (Dec.)

Inventory (P30,000 – P20,000) x 100% (P10,000)

(2)

Bargain Purchase Gain – full (P 40,000) B.

Partial Goodwill

Less: BV of SHE of S (P450,000 + P180,000 + P75,000) x 90% 634,500

Allocated excess P 40,500

Inventory (P30,000 – P20,000) x 90% (P9,000)

Land (P50,000 – P70,000) x 90% __18,000 __9,000

Goodwill – partial P 31,500

Full-Goodwill

Consideration transferred (P675,000/90%) P750,000

Less: BV of SHE of S (P450,000 + P180,000 + P75,000)x100% 705,000

Inventory (P30,000 – P20,000) x 100% (P10,000)

Land (P50,000 – P70,000) x 100% __20,000 __10,000

Goodwill – full P 35,000

C.

Less: BV of SHE of S (P620,000 + P140,000 + P20,000) x 80% 624,000

Allocated excess (P306,000)

Inventory (P30,000 – P20,000) x 80% (P 8,000)

Land (P50,000 – P70,000) x 80% __16,000 __8,000

Bargain Purchase Gain – partial (parent only) (P314,000)

Full-Goodwill

Consideration transferred P 318,000

FV of NCI* _158,000

P 476,000 Less: BV of SHE of S (P620,000 + P140,000 + P20,000) x 100% 780,000

Allocated excess (P304,000)

Inventory (P30,000 – P20,000) x 100% (P10,000)

Land (P50,000 – P70,000) x 100% __20,000 _10,000

Bargain Purchase Gain – full (parent only) (P314,000)

*BV of SHE of S P780,000

Adjustments to reflect fair value 10,000

FV of SHE of S P790,000

x: NCI% 20%

FV of NCI P158,000

3. A.

Common Stock – Sewell 450,000

Paid in capital in excess of par – Sewell 180,000

Retained Earnings – Sewell 75,000

Land 20,000

Inventory 10,000

Investment in Sewell 675,000

Retained earnings (gain) – Parent (since balance sheet accounts are being

examined) 40,000

B.

Partial-Goodwill (Proportionate Basis)

(3)

Retained Earnings – Sewell 75,000 Land 20,000 Goodwill 31,500 Inventory 10,000 Investment in Sewell 675,000 Non-controlling Interest 71,500 BV – SHE of Sewell (P450,000 + P180,000 + P75,000) P705,000 Adjustments to reflect fair value 10,000

FV of SHE of Sewell P715,000

x: NCI% 10%

FV of NCI (partial) P 71,500

Full-Goodwill (Fair Value Basis)

Land 20,000 Goodwill 35,000 Inventory 10,000 Investment in Sewell 675,000 Non-controlling Interest 75,000 BV – SHE of Sewell (P450,000 + P180,000 + P75,000) P705,000 Adjustments to reflect fair value 10,000 FV of SHE of Sewell P715,000 x: NCI% 10% FV of NCI (partial) P 71,500 NCI on Full-Goodwill (P35,000 – P31,500) 3,500 FV of NCI (full) P 75,000 C.

Partial-Goodwill (Proportionate Basis)

Land 20,000

Inventory 10,000

Retained earnings (gain)–Parent (refer to 3A) 314,000

Non-controlling Interest 158,000

BV – SHE of Sewell

(P620,000 + P140,000 + P20,000) P780,000 Adjustments to reflect fair value 10,000 FV of SHE of Sewell P790,000

x: NCI% 20%

FV of NCI (partial) P158,000

Full-Goodwill (Fair Value Basis)

Land 20,000

Inventory 10,000

Retained earnings (gain)–Parent (refer to 3A) 314,000

Non-controlling Interest 158,000

BV – SHE of Sewell

(P620,000 + P140,000 + P20,000) P780,000 Adjustments to reflect fair value 10,000 FV of SHE of Sewell P790,000

x: NCI% 20%

FV of NCI (full) P158,000

(4)

1.

January 1, 20x4

Investment in S Company……… 408,000

Cash……….. 408,000

2.

Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4

Fair value of Subsidiary (100%)

Consideration transferred……….. P 408,000

Less: Book value of stockholders’ equity of S:

Common stock (P240,000 x 100%)……….. P 240,000 Paid-in capital in excess of par (P24,000 x 100%)... 24,000

Retained earnings (P96,000 x 100%)………... 96,000 360,000 Allocated excess (excess of cost over book value)…… P 48,000 Less: Over/under valuation of assets and liabilities:

Increase in inventory (P18,000 x 100%)……….. P 18,000 Increase in land (P72,000 x 100%)……… 72,000 Decrease in buildings and equipment

(P12,000 x 100%)………... ( 12,000)

Increase in bonds payable (P42,000 x 100%)…….. ( 42,000) 36,000 Positive excess: Goodwill (excess of cost over fair

value)……….. P 12,000

3.

(E1) Common stock – S Co………. 240,000 Additional paid-in capital – S Co………. 24,000 Retained earnings – S Co………... 96.000

Investment in S Co……… 360,000

Eliminate investment against stockholders’ equity of S Co.

(E2) Inventory………. 18,000

Land………. 72,000

Goodwill………. 12,000

Buildings and equipment……….. 12,000

Premium on bonds payable……… 42,000

Investment in S Co……….. 48,000

Eliminate investment against allocated excess. 4.

Eliminations

Assets P Co. S Co. Dr. Cr. Consolidated

Cash*………. P 12,000 P 60,000 P 72,000

Accounts receivable…….. 90,000 60,000 150,000

Inventory………. 120,000 72,000 (2) 18,000 210,000

Land………. 210,000 48,000 (2) 72,000 330,000

Buildings and equipment (net) 480,000 360,000 (2) 12,000 828,000

Goodwill……… (2) 12,000 12,000

Investment in S Co…………. 408,000 (1) 360,000

(2) 48,000

-Total Assets P1,320,000 P600,000 P1,602,000

Liabilities and Stockholders’ Equity

Accounts payable……… P 120,000 P120,000 P 240,000

Bonds payable……… 240,000 120,000 360,000

Premium on bonds payable (3) 42,000 42,000

Common stock, P10 par……… 600,000 600,000

Common stock, P10 par……… 240,000 (1) 240,000

Paid in capital in excess of par. 60,000 60,000

Paid in capital in excess of par. 24,000 (1) 24,000

Retained earnings……… 300,000 300,000

Retained earnings……… _________ 96,000 (1) 96,000 __________ _________ Total Liabilities and Stockholders’

Equity P1,320,000 P600,000 P 462,000 P 462,000 P1,602,000 (1) Eliminate investment against stockholders’ equity of S Co.

(5)

(2) Eliminate investment against allocated excess. * P420,000 – P408,000 = P12,000. 5. Assets Cash P 72,000 Accounts receivables 150,000 Inventories 210,000 Land 330,000

Buildings and equipment (net) 828,000

Goodwill 12,000

Total Assets P1,602,000

Liabilities and Stockholders’ Equity Liabilities

Accounts payable P 240,000

Bonds payable P 360,000

Premium on bonds payable 42,000 402,000

Total Liabilities P 642,000

Stockholders’ Equity

Common stock, P10 par P 600,000

Paid-in capital in excess of par 60,000

Retained earnings 300,000

Total Stockholders’ Equity P 960,000

Total Liabilities and Stockholders’ Equity P1,602,000 Problem V

1.

January 1, 20x4

(1) Investment in S Company……… 432,000

Cash……….. 288,000

Common stock, P10 par……….. 120,000

Paid-in capital in excess of par………. 24,000 (2) Retained earnings (acquisition-related expense - close to

retained earnings since only balance sheets are being

examined)……… 12,000

Cash………. 12,000

Acquisition- related costs.

(3) Paid-in capital in excess of par……….. 8,400

Cash………. 8,400

Costs to issue and register stocks. 2.

Fair value of Subsidiary (100%) Consideration transferred

Cash………. P 288,000

Common stock: 12,000 shares x P12 per share….. 144,000 P 432,000 Less: Book value of stockholders’ equity of S:

Common stock (P240,000 x 100%)……….. P 240,000 Paid-in capital in excess of par (P96,000 x 100%).. 96,000

Retained earnings (P24,000 x 100%)………... 24,000 360,000 Allocated excess (excess of cost over book value)…… P 72,000 Add: Existing Goodwill of Sky Co. (P6,000 x 100%)……… 6,000

Adjusted allocated excess………. P 78,000

Less: Over/under valuation of assets and liabilities:

(P12,000 x 100%)………... ( 12,000)

value)……….. P 42,000

Alternatively, the unrecorded goodwill may also be computed by ignoring the existing goodwill in the books of the subsidiary, thus:

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Date of Acquisition – January 1, 20x4 (refer to previous table for details of computation) Fair value of Subsidiary (100%)

Consideration transferred……… P 432,000 Less: Book value of stockholders’ equity of S……….. 360,000 Allocated excess (excess of cost over book value)………. P 72,000 Less: Over/under valuation of assets and liabilities……… 36,000 Positive excess: Goodwill (excess of cost over fair value)………... P 36,000

Add: Existing Goodwill……… 6,000

Positive excess: Goodwill (excess of cost over fair

value)……… P 42,000

3.

Eliminations

Cash*……….. P 111,600 P 54,000 P 165,600

Inventory………. 120,000 72,000 (2) 18,000 210,000

Land………. 210,000 48,000 (2) 72,000 330,000

Buildings and equipment (net) 480,000 360,000 (2) 12,000 828,000

Goodwill……… 6,000 (2) 36,000 42,000

Investment in S Co…………. 432,000 (4) 360,000

(5) 72,000

-Total Assets P1,443,600 P600,000 P1,725,600

Accounts payable……… P 120,000 P120,000 P 240,000

Bonds payable……… 240,000 120,000 360,000

Common stock, P10 par**…..… 720,000 720,000

Additional paid in capital*** 75,600 75,600

Additional paid in capital…… 24,000 (1) 24,000

Retained earnings**** 288,000 288,000

Retained earnings……… _________ 96,000 (1) 96,000 __________ _________ Total Liabilities and Stockholders’

Equity P1,443,600 P600,000 P 486,000 P 486,000 P1,725,600 (1) Eliminate investment against stockholders’ equity of Sky Co.

(2) Eliminate investment against allocated excess. * P420,000 – P288,000 – P12,000 – P8,400 = P111,600. * *P600,000 + P120,000 (12,000 shares x p10 par) = P720,000. *** P50,000 + P20,000 – P7,000 = P63,000. ****P300,000 – P12,000 = P288,000. 4. Assets Cash P 165,600 Accounts receivables 150,000 Inventories 210,000 Land 330,000

Goodwill 42,000

Additional paid-in capital in excess of par 75,600

Total Stockholders’ Equity P 1083,600

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Problem VI 1.

Consideration transferred (P408,000 – P6,000)…….. P 402,000 Less: Book value of stockholders’ equity of S:

(P12,000 x 100%)………... ( 12,000)

value)……….. P 6,000

2. Goodwill, P6,000 Problem VII

1.

Fair value of Subsidiary (100%) Consideration transferred:

Common stock: 24,000 shares x P14 per share P 336,000 Less: Book value of stockholders’ equity of Sky:

Retained earnings (P24,000 x 100%)………... 24,000 360,000 Allocated excess (excess of book value over cost)…… (P 24,000) Less: Over/under valuation of assets and liabilities:

(P12,000 x 100%)………... ( 12,000) Increase in patent (P24,000 x 100%)………... 24,000 Increase in contingent liability (P18,000 x 100%)…. ( 18,000)

Increase in bonds payable (P42,000 x 100%)…….. ( 42,000) 42,000 Negative excess: Bargain Purchase Gain (excess of

fair value over cost)……… (P 66,000)

2. Gain on acquisition, P66,000 Problem VIII

Case 1:

Proportionate Basis (Partial-goodwill Approach)  Partial-goodwill

Fair value of subsidiary (80%):

Consideration transferred: Cash………...P12,000,000 (80%) Less: Book value of stockholders’ equity (net assets)

– S Company: P7,200,000 x 80%... 5,760,000 (80%) Allocated excess.………...P 6,240,000 (80%) Less: Over/undervaluation of assets and liabilities:

(P9,600,000 – P7,200,000) x 80%... 1,920,000 (80%) Positive excess: Goodwill (partial)………... P 4,320,000 (80%)  Non-controlling interest

Book Value of stockholders’ equity of subsidiary…………. P 7,200,000 Adjustments to reflect fair value (over/ undervaluation

of assets and liabilities): (P9,600,000 – P7,200,000)….. 2,400,000 Fair value of stockholders’ equity of subsidiary……… P 9,600,000 Multiplied by: Non-controlling interest percentage... 20%

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Non-controlling Interest (partial)……….. P1,920,000 Fair Value Basis (Full-goodwill Approach)

 Full-goodwill

Consideration transferred: Cash (P12,000,000 / 80%).. P15,000,000 (100%) Less: Book value of stockholders’ equity (net assets)

– S Company: P7,200,000 x 100%... 7,200,000 (100%)

Allocated excess.……….. P 7,800,000 (100%)

Less: Over/Undervaluation of assets and liabilities:

(P9,600,000 – P7,200,000) x 100%... 2,400,000 (100%) Positive excess: Goodwill (full)………...P 5,400,000 (100%) The full – goodwill of P5,400,000 consists of two parts:

Full-goodwill………... P 5,400,000 Less: Controlling interest on full-goodwill

or partial-goodwill……….….. 4,320,000 NCI on full-goodwill………...P 1,080,000  Non-controlling interest

Non-controlling interest (partial)………...P1,920,000 Add: Non-controlling interest on full -goodwill

(P5,400,000 – P4,320,000 partial-goodwill) or

(P5,400,000 x 20%)*………... 1,080,000 Non-controlling interest (full)………...P3,000,000 * applicable only when the fair value of the non-controlling interest of subsidiary is not given. Case 2:

Consideration transferred: Cash………...P 7,560,000 (60%) Less: Book value of stockholders’ equity (net assets)

– S Company: P6,000,000 x 60%... 3,600,000 (60%) Allocated Excess.………... P 3,960,000 (60%) Less: Over/undervaluation of assets and liabilities:

(P8,400,000 – P6,000,000) x 60%... 1,440,000 (60%) Positive excess: Goodwill (partial)……….... P 2,520,000 (60%)  Non-controlling interest

Book value of stockholders’ equity of subsidiary…………. P 6,000,000 Adjustments to reflect fair value (over/ undervaluation

of assets and liabilities): (P8,400,000 – P6,000,000)…. 2,400,000 Fair value of stockholders’ equity of subsidiary……….P 8,400,000 Multiplied by: Non-controlling Interest percentage... 40% Non-controlling interest (partial)……….P 3,360,000 Fair Value Basis (Full-goodwill Approach)

 Full-goodwill

Consideration transferred: Cash ………...P 7,560,000 ( 60%) Fair value of NCI (given)……….. 4,800,000 ( 40%) Fair value of subsidiary………...P12,360,000 (100%) Less: Book value of stockholders’ equity (net assets)

– S Company: P6,000,000 x 100%... 6,000,000 (100%) Allocated Excess.………..P 6,360,000 (100%) Less: Over/undervaluation of assets and liabilities:

Full-goodwill………...P 3,960,000 Less: Controlling interest on full-goodwill

or partial-goodwill………. 2,520,000 NCI on full-goodwill………..P 1,440,000

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 Non-controlling interest

Non-controlling interest (partial)………P 3,360,000 Add: Non-controlling interest on full -goodwill

(P3,960,000 – P2,520,000 partial-goodwill)………….. 1,440,000 Non-controlling Interest (full)………..P 4,800,000 Case 3;

Consideration transferred: Cash………..P 9,000,000 (75%) Less: Book value of stockholders’ equity (net assets)

– S Company: P7,200,000 x 75%... 5,400,000 (75%) Allocated Excess.………...P 3,600,000 (75%) Less: Over/undervaluation of assets and liabilities:

(P9,600,000 – P7,200,000) x 75%... 1,800,000 (75%) Positive excess: Goodwill (partial)……….P 1,800,000 (75%)  Non-controlling interest

Book value of stockholders’ equity of subsidiary…………..P 7,200,000 Adjustments to reflect fair value (over/ undervaluation

of assets and liabilities): (P9,600,000 – P7,200,000)…. 2,400,000 Fair value of stockholders’ equity of subsidiary………P 9,600,000 Multiplied by: Non-controlling Interest percentage... 25% Non-controlling interest (partial)……….P 2,400,000 Fair Value Basis (Full-goodwill Approach)

 Full-goodwill

Fair value of subsidiary………. P 11,640,000 (100%) Less: Book value of stockholders’ equity (net assets)

– S Company: P7,200,000 x 100%... 7,200,000 (100%) Allocated Excess.……….P 4,440,000 (100%) Less: Over/undervaluation of assets and liabilities:

Full-goodwill………...P 2,040,000 Less: Controlling interest on full-goodwill

or partial-goodwill……….... 1,800,000 NCI on full-goodwill………. .P 240,000  Non-controlling interest

Non-controlling interest (partial)………P 2,400,000 Add: Non-controlling interest on full -goodwill

(P2,040,000 – P1,800,000 partial-goodwill)…..……... 240,000 Non-controlling Interest (full)………..P 2,640,000 Case 4:

Consideration transferred: Cash………..P 2,592,000 (60%) Fair value of previously held equity interest

in acquiree P2,592,000/60% = P4,320,000 x 15%... 648,000 (15%) Fair value of Subsidiary ..………. P 3,240,000 (75%) Less: Book value of stockholders’ equity (net assets)

– S Company: (P4,680,000 – P2,280,000) x 75%... 1,800,000 (75%) Allocated Excess.………....P 1,440,000 (75%) Less: Over/undervaluation of assets and liabilities:

[(P6,120,000 – P2,280,000) –

(P4,680,000 – P2,280,000)] x 75%... 1,080,000 (75%) Positive excess: Goodwill (partial)………... P 360,000 (75%)

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 Non-controlling interest

Book value of stockholders’ equity of subsidiary…………..P 2,400,000 Adjustments to reflect fair value (over/ undervaluation

of assets and liabilities): (P3,840,000 – P2,400,000)…. 1,440,000 Fair value of stockholders’ equity of subsidiary………P 3,840,000 Multiplied by: Non-controlling Interest percentage... 25% Non-controlling interest (partial)………P 960,000

Fair Value Basis (Full-goodwill Approach)  Full-goodwill

Consideration transferred: Cash………..P 2,592,000 (60%) Fair value of previously held equity interest

in acquiree P2,592,000/60% = P4,320,000 x 15%... 648,000 (15%) Fair value of NCI (given)………. 1,080,000 (25%) Fair value of subsidiary……….P 4,320,000 (100%) Less: Book value of stockholders’ equity (net assets)

– S Company: P2,400,000 x 100%... 2,400,000 (100%) Allocated Excess.………..P 1,920,000 (100%) Less: Over/undervaluation of assets and liabilities:

(P3,840,000 – P2,400,000) x 100%... 1,440,000 (100%) Positive excess: Goodwill (full)………...P 480,000 (100%) The full – goodwill of P480,000 consists of two parts:

Full-goodwill………...P 480,000 Less: Controlling interest on full-goodwill

or partial-goodwill……….… 360,000 NCI on full-goodwill………..P 120,000  Non-controlling interest

Non-controlling interest (partial)………P 960,000 Add: Non-controlling interest on full -goodwill

(P480,000 – P360,000 partial-goodwill)…..…………... 120,000 Non-controlling Interest (full)………P 1,080,000 Problem IX

 Partial-goodwill (Proportionate Basis) Fair value of subsidiary (75%):

Consideration transferred: Cash……….. P270,000 (75%) Less: Book value of stockholders’ equity

(net assets) – S Company:

(P480,000 – P228,000) x 75%... 189,000 (75%) Allocated excess………... P 81,000 (75%) Less: Over/undervaluation of assets and liabilities:

[(P612,000 – P228,000) – (P480,000 – P228,000) x 75% 99,000 (75%) Negative excess: Bargain purchase gain (to controlling

interest or attributable to parent only)………. (P18,000) (75%)  Full-goodwill (Fair Value Basis)

Consideration transferred: Cash……….. P270,000 ( 75%) Fair value of non-controlling interest (given)………… 98,400 ( 25%) Fair value of subsidiary ……… P368,400 (100%) Less: Book value of stockholders’ equity

(net assets) – S Company:

(P480,000 – P228,000) x 100%... 252,000 (100%) Allocated excess………... P116,400 (100%) Less: Over/undervaluation of assets and liabilities:

[(P612,000 – P228,000) – (P480,000 – P228,000) x 100% 132,000 (100%) Negative excess: Bargain purchase gain (to controlling

(11)

Problem X

Partial-goodwill Approach

Schedule of Determination and Allocation of Excess (Partial-goodwill) Date of Acquisition – January 1, 20x4

Consideration transferred……….. P 360,000

Less: Book value of stockholders’ equity of Sky:

Common stock (P240,000 x 80%)………. P 192,000 Paid-in capital in excess of par (P96,000 x 80%).... 76,800

Retained earnings (P24,000 x 80%)……….... 19,200 288,000 Allocated excess (excess of cost over book value)….. P 72,000 Less: Over/under valuation of assets and liabilities:

Increase in inventory (P18,000 x 80%)……… P 14,400 Increase in land (P72,000 x 80%)………. 57,600 Decrease in buildings and equipment

(P12,000 x 80%)………... ( 9,600)

Increase in bonds payable (P42,000 x 80%)………. ( 33,600) 28,800 Positive excess: Partial-goodwill (excess of cost over

fair value)………... P 43,200

The over/under valuation of assets and liabilities are summarized as follows: Sky Co.

Book value Fair valueSky Co. Over/ UnderValuation

Inventory……….……….. 72,000 90,000 18,000

Land……… 48,000 120,000 72,000

Buildings and equipment (net)... 360,000 348,000 ( 12,000)

Bonds payable……… (120,000) (162,000) 42,000

Net……….. 360,000 396,000 36,000

The buildings and equipment will be further analyzed for consolidation purposes as follows: Sky Co.

Book value Fair valueSky Co. (Decrease) Buildings and equipment ... 720,000 348,000 ( 372,000) Less: Accumulated depreciation….. 360,000 - ( 360,000) Net book value………... 360,000 348,000 ( 12,000) The following entry on the date of acquisition in the books of Parent Company:

January 1, 20x4

(1) Investment in Sky Company……… 360,000

Cash……….. 360,000

Acquisition of Sky Company.

(2) Retained earnings (acquisition-related expense - close to retained earnings since only balance sheets are being

Cash………. 14,400

The schedule of determination and allocation of excess provides complete guidance for the worksheet eliminating entries on January 1, 20x4:

(E1) Common stock – Sky Co………. 240,000 Additional paid-in capital – Sky Co………. 24,000 Retained earnings – Sky Co………... 96,000

Investment in Sky Co……… 288,000

Non-controlling interest (P300,000 x 20%)……….. 72,000 Eliminate investment against stockholders’ equity of Sky Co.

Accumulated depreciation………. 360,000

Land………. 72,000

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Investment in Sky Co……….. 72,000

Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned Subsidiary (Partial-goodwill)

Eliminations

Assets Peer Co. Sky Co. Dr. Cr. Consolidated

Cash*………. P 45,600 P 60,000 P 105,600

Inventory………. 120,000 72,000 (2) 18,000 210,000

Land………. 210,000 48,000 (2) 72,000 330,000

Buildings and equipment 960,000 720,000 (2) 372,000 1,308,000

Goodwill……… (2) 43,200 43,200

Investment in Sky Co…………. 360,000 (1) 288,000

(2) 72,000

-Total Assets P1,785,600 P960,000 P 2,146,800

Accumulated depreciation P 480,000 P360,000 (2) 360,000 P 480,000

Accounts payable……… 120,000 120,000 240,000

Bonds payable……… 240,000 120,000 360,000

Retained earnings**……… 285,600 285,600

Retained earnings……… 96,000 (1) 96,000 Non-controlling interest…………

_________ _______ _________ (1 ) 72,000(2) 7,200 _79,200 Total Liabilities and Stockholders’

(2) Eliminate investment against allocated excess. * P420,000 – P360,000 – P14,400 = P45,600. **P300,000 – P14,400 = P285,600.

 Incidentally, the non-controlling interest on the date of acquisition is computed as follows:

Common stock – Sky company……… P 240,000 Paid-in capital in excess of par – Sky co……… 24,000 Retained earnings – Sky Co..………. 80,000 Book value of stockholders’ equity – Sky Co………..………….. P 360,000 Adjustments to reflect fair value (over/ undervaluation

of assets and liabilities)………. 36,000 Fair value of stockholders’ equity of subsidiary……… P 396,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial)……….. P 79,200 The balance sheet:

Peer Company and Subsidiary Consolidated Balance Sheet

January 1, 20x4 Assets Cash P 105,600 Accounts receivables 150,000 Inventories 210,000 Land 330,000

Buildings and equipment 1,308,000

Accumulated depreciation ( 480,000)

Goodwill 43,200

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Total Liabilities P 642,000 Stockholders’ Equity

Parent’s Stockholders’ Equity/Equity Attributable to the

Owners of the Parent P 945,600

Non-controlling interest 79,200

Total Stockholders’ Equity (Total Equity) P 1,024,800 Total Liabilities and Stockholders’ Equity P1,666,800

Full-goodwill Approach

Schedule of Determination and Allocation of Excess (Full-goodwill) Date of Acquisition – January 1, 20x4

Consideration transferred (P360,000 / 80%)………….. P 450,000 Less: Book value of stockholders’ equity of Sky:

Common stock (P240,000 x 100%)………. P 240,000 Paid-in capital in excess of par (P96,000 x 100%).. 96,000

Retained earnings (P24,000 x 100%)……….... 24,000 360,000 Allocated excess (excess of cost over book value)….. P 90,000 Less: Over/under valuation of assets and liabilities:

Increase in inventory (P18,000 x 100%)……… P 18,000 Increase in land (P72,000 x 100%)………. 72,000 Decrease in buildings and equipment

(P12,000 x 100%)………... ( 12,000)

Increase in bonds payable (P42,000 x 100%)……. ( 42,000) 36,000 Positive excess: Full -goodwill (excess of cost over

fair value)………... P 54,000

The following entry on the date of acquisition in the books of Parent Company: January 1, 20x4

(1) Investment in Sky Company……… 360,000

Cash……….. 360,000

Acquisition of Sky Company.

(2) Retained earnings (acquisition-related expense - close to retained earnings since only balance sheets are being

Cash………. 14,400

(E1) Common stock – Sky Co………. 240,000 Additional paid-in capital – Sky Co………. 24,000 Retained earnings – Sky Co………... 96,000

Investment in Sky Co……… 288,000

Non-controlling interest (P300,000 x 20%)……….. 72,000 Eliminate investment against stockholders’ equity of Sky Co.

Accumulated depreciation………. 360,000

Land………. 72,000

Non-controlling interest [(P30,000 x 20%) +

(P45,000 – P36,000)]………. 18,000

Investment in Sky Co……….. 72,000

Eliminate investment against allocated excess.

Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned Subsidiary (Full-goodwill)

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Assets Peer Co. Sky Co. Dr. Cr. Consolidated Cash*………. P 45,600 P 60,000 P 105,600

Inventory………. 120,000 72,000 (2) 18,000 210,000

Land………. 210,000 48,000 (2) 72,000 330,000

Buildings and equipment 960,000 720,000 (2) 372,000 1,308,000

Goodwill……… (2) 54,000 54,000

Investment in Sky Co…………. 360,000 (1) 288,000

(2) 72,000

-Total Assets P1,785,600 P960,000 P 2,157,600

Accumulated depreciation P 480,000 P360,000 (2) 360,000 P 480,000

Accounts payable……… 120,000 120,000 240,000

Bonds payable……… 240,000 120,000 360,000

Retained earnings**……… 285,600 285,600

(2) Eliminate investment against allocated excess. * P420,000 – P360,000 – P14,400 = P45,600. **P300,000 – P14,400 = P285,600.

Non-controlling interest (partial)……….. P 79,200 Add: Non-controlling interest (P54,000, full – P43,200, partial). 10,800 Non-controlling interest (full)………. P 90,000 The balance sheet;

Peer Company and Subsidiary Consolidated Balance Sheet

January 1, 20x4 Assets Cash P 105,600 Accounts receivables 150,000 Inventories 210,000 Land 330,000

Buildings and equipment 1,308,000

Accumulated depreciation ( 480,000)

Goodwill 54,000

Owners of the Parent P 945,600

Total Stockholders’ Equity (Total Equity) P 1,035,600 Total Liabilities and Stockholders’ Equity P1,677,600 Problem XI

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Partial-goodwill Approach (Proportionate Basis)

Schedule of Determination and Allocation of Excess (Proportionate Basis)) Date of Acquisition – January 1, 20x4

Common stock: 12,000 shares x P25 per share…... P 300,000 Less: Book value of stockholders’ equity of S:

Common stock (P12,000 x 80%)………. P 9,600 Paid-in capital in excess of par (P108,000 x 80%)... 86,400

Retained earnings (P72,000 x 80%)……….... 57,600 153,600 Allocated excess (excess of cost over book value)…… P 146,400 Less: Over/under valuation of assets and liabilities:

Increase in inventory (P6,000 x 80%)……… P 4,800 Increase in land (P36,000 x 80%)………. 28,800 Increase in buildings and equipment

(P150,000 x 80%)………... 120,000 Increase in copyrights (P60,000 x 80%)……….. 48,000 Increase in contingent liabilities – estimated

liability for contingencies (P6,000 x 80%)……... ( 4,800) 196,800 Negative excess: Bargain purchase gain to controlling

interest or attributable to parent only)……….. (P 50,400) The over/under valuation of assets and liabilities are summarized as follows:

S Co.

Book value Fair valueS Co. Over/UnderValuation Inventory……….………... P 60,000 P 66,000 P 6,000

Land………. 48,000 84,000 36,000

Buildings and equipment (net)... 222,000 372,000 150,000

Copyright……….. -0- 60,000 60,000

Estimated liability for contingencies.. 0 ( 6,000) ( 6,000) Net undervaluation………. P 330,000 P 576,000 P246,000 The following entry on the date of acquisition in the books of Parent Company

January 1, 20x4

(1) Investment in S Company…...……… 300,000

Common stock, P1 par……… 12,000

Paid-in capital in excess of par (P300,000 – P12,000 par)…….. 288,000 Acquisition of S Company.

(E1) Common stock – S Co………. 12,000 Additional paid-in capital – S Co………. 108,000 Retained earnings – S Co……… 72,000

Non-controlling interest (P192,000 x 20%)……….. 38,400 Eliminate investment against stockholders’ equity of S Co

(E2) Inventory……….. 6,000

Land……….. 36,000

Buildings and equipment……… 150,000

Copyright……….... 60,000

Estimated liability for contingencies……….. 6,000

Investment in S Co………... 146,400

Non-controlling interest (P246,000 x 20%)………. 49,200 Retained earnings (bargain purchase gain - closed to

examined)... 50,400 Eliminate investment against allocated excess.

Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned Subsidiary (Proportionate Basis)

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Cash……… P 334,800 P 334,800

Accounts receivable…….. 86,400 P 24,000 110,400

Inventory………. 96,000 60,000 (2) 6,000 162,000

Land……… 120,000 48,000 (2) 36,000 204,000

Buildings and equipment (net). 744,000 222,000 (2) 150,000 1,116,000

Copyright………... (2) 60,000 60,000

Investment in S Co…….. 300,000

__________ _________ (1) 153,600(2) 146,400

-Total Assets P1,681,200 354,000 P1,987,200

Accounts payable……… P 96,000 42,000 P 138,000

Estimated liability for

contingencies… (2) 6,000 6,000

Bonds payable……… 240,000 120,000 360,000

Common stock, P1 par*…..… 44,160 44,160

Common stock, P1 par……… 12,000 (1) 12,000 Paid-in capital in excess of

par** 723,840 723,840

Paid-in capital in excess of par 108,000(1) (1) 108,000

Retained earnings 577,200 (2) 50,400 627,600

Equity P1,681,200 P354,000 P 444,000 P 444,000 P1,987,200 (1) Eliminate investment against stockholders’ equity of Scud Co.

(2) Eliminate investment against allocated excess. * P32,160 + (12,000 shares xP1 par) = P44,160. **P435,840 + [12,000 shares x (P25 – P1)] = P723,840.

Common stock – S Co……….……… P 12,000

Paid-in capital in excess of par – S Co……….. 108,000

Retained earnings – S Co……… 72,000

Book value of stockholders’ equity – S Co………. P 192,000 Adjustments to reflect fair value (over/ undervaluation

of assets and liabilities)………. 246,000 Fair value of stockholders’ equity of subsidiary……… P 438,000 Multiplied by: Non-controlling Interest percentage…………... 20 Non-controlling interest (partial)……….. P 87,600 The balance sheet:

Assets

Cash P 334,800

Accounts receivables 110,400

Inventories 162,000

Land 204,000

Buildings and equipment (net) 1,116,000

Copyright 60,000

Estimated liability for contingencies 6,000

Bonds payable 360,000

Owners of the Parent P1,395,600

Total Stockholders’ Equity (Total Equity) P1,483,200 Total Liabilities and Stockholders’ Equity P1,987,200

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Full-goodwill Approach (Fair Value Basis)

Schedule of Determination and Allocation of Excess (Full-goodwill or Fair Value Basis) Date of Acquisition – January 1, 20x4

Common stock: 12,000 x P25 (80%)……… P 300,000

Fair value of NCI (given) (20%)………. 90,000

Fair value of subsidiary (100%)………. P 390,000 Less: Book value of stockholders’ equity of S:

Common stock (P12,000 x 100%)………. P 12,000 Paid-in capital in excess of par (P108,000 x 100%). 108,000

Increase in inventory (P6,000 x 100%)……… P 6,000 Increase in land (P36,000 x 100%)……… 36,000 Increase in buildings and equipment

(P150,000 x 100%)……….... 150,000 Increase in copyrights (P60,000 x 100%)……… 6,000 Increase in contingent liabilities – estimated

liability for contingencies (P6,000 x 100%)…….. ( 6,000) 246,000 Negative excess: Bargain purchase gain to controlling

interest or attributable to parent only)……….. (P 48,000) The following entry on the date of acquisition in the books of Parent Company:

January 1, 20x4

(1) Investment in S Company…...……… 300,000

Common stock, P1 par……… 12,000

Paid-in capital in excess of par (P300,000 – P12,000 par)…….. 288,000 Acquisition of S Company.

(E1) Common stock – S Co………. 12,000 Additional paid-in capital – S Co………. 108,000 Retained earnings – S Co……… 72,000

Non-controlling interest (P192,000 x 20%)……….. 38,400 Eliminate investment against stockholders’ equity of S Co

(E2) Inventory……….. 6,000

Land……….. 36,000

Buildings and equipment……… 150,000

Copyright……….... 60,000

Estimated liability for contingencies……….. 6,000

Investment in S Co………... 146,400

Non-controlling interest (P90,000 given – P38,400)……… 51,600 Retained earnings (bargain purchase gain - closed to

examined)... 48,000 Eliminate investment against allocated excess.

Worksheet for Consolidated balance Sheet, January 1, 20x4. Date of Acquisition: 80%-Owned Subsidiary (Fair Value Basis)

Eliminations

Cash……… P 334,800 P 334,800

Accounts receivable…….. 86,400 P 24,000 110,400

Inventory………. 96,000 60,000 (2) 6,000 162,000

Land……… 120,000 48,000 (2) 36,000 204,000

Buildings and equipment (net). 744,000 222,000 (2) 150,000 1,116,000

Copyright………... (2) 60,000 60,000

Investment in S Co…….. 300,000

__________ _________ (1) 153,600(2) 146,400

-Total Assets P1,681,200 P354,000 P1,987,200

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Accounts payable……… P 96,000 42,000 P 138,000 Estimated liability for

contingencies… (2) 6,000 6,000

Bonds payable……… 240,000 120,000 360,000

Common stock, P1 par*…..… 44,160 44,160

Paid-in capital in excess of par** 723,840 723,840

Paid-in capital in excess of par 108,000(2) (1) 108,000

Retained earnings 577,200 (2) 48,000 625,200

Equity P1,681,200 P354,000 P 444,000 P 444,000 P1,987,200 (1) Eliminate investment against stockholders’ equity of Scud Co.

(2) Eliminate investment against allocated excess. * P32,160 + (12,000 shares xP1 par) = P44,160. **P435,840 + [12,000 shares x (P25 – P1)] = P723,840. The balance sheet:

Assets

Cash P 334,800

Accounts receivables 110,400

Inventories 162,000

Land 204,000

Buildings and equipment (net) 1,116,000

Copyright 60,000

Estimated liability for contingencies 6,000

Bonds payable 360,000

Owners of the Parent P1,393,200

Total Stockholders’ Equity (Total Equity) P1,483,200 Total Liabilities and Stockholders’ Equity P1,987,200 Problem XII

1. Inventory P 140,000

2. Land P 60,000

3. Buildings and Equipment P 550,000

4. Goodwill

Fair value of consideration given P 576,000

Less; Book value of SHE 450,000

Allocated excess: P126,000

Increase / decrease in fair value (Fair value increment) for:

Inventory P 20,000

Land (10,000)

Buildings and equipment 70,000 80,000

Goodwill P 46,000

5. Investment in AA Corporation: Nothing would be reported; the balance in the investment account is eliminated.

Problem XIII

1. Inventory (P120,000 + P20,000) P140,000

2. Land (P70,000 – P10,000) P 60,000

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4. Full-Goodwill, P57,500 Fair value of Subsidiary:

Add: FV of NCI 117,500 P587,500

Less: BV of SHE of Slim (P250,000 + P200,000) 450,000

Inventory P 20,000

Land (10,000)

Buildings and equipment (net) 70,000 80,000

or,

Fair value of consideration given by Ford P470,000

Fair value of noncontrolling interest 117,500

Total fair value P587,500

Book value of Slim’s net assets P450,000

Fair value increment for:

Inventory 20,000

Land (10,000)

Fair value of identifiable net assets (530,000)

Goodwill - full P 57,500

Partial Goodwill, P46,000 Fair value of Subsidiary:

Less: BV of SHE of Slim (P250,000 + P200,000) x 80% 360,000

Inventory (P20,000 x 80%) P 16,000

Land (P10,000 x 80%) ( 8,000)

Buildings and equipment (net) (P70,000 x 80%) 56,000 64,000

Goodwill – partial P 46,000

5. Investment in Slim Corporation: None would be reported; the balance in the investment account is eliminated. 6.

Noncontrolling Interest (P587,500 x .20) P117,500

or,

BV – SHE of SS P450,000

Adjustments to reflect fair value (P20,000 – P10,000 +P 70,000) 80,000

FV of SHE of SS P530,000

Multiplied by: NCI % 20%

NCI – partial goodwill P106,000

Add: NCI on full-goodwill (P57,500 – P46,000) 11,500

NCI – full goodwill P117,500

Problem XIV

(Overview of the steps in applying the acquisition method when shares have been issued to create a combination No. 8 includes a bargain purchase.)

1. The fair value of the consideration includes

Fair value of stock issued P1,500,000

Contingent performance obligation 30,000

Fair value of consideration transferred P1,530,000

2. Under the acquisition method, stock issue costs reduce additional paid-in capital. 3. The acquisition method records direct costs such as fees paid to investment banks for

arranging the combination as expenses.

4. The par value of the 20,000 shares issued is recorded as an increase of P20,000 in the Common Stock account. The P74 fair value in excess of par value (P75 – P1) is an increase to additional paid-in capital of P1,480,000 (P74 × 20,000 shares).

5. Fair value of consideration transferred (above) P1,530,000

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Patented technology 700,000

Customer relationships 500,000

IPR&D 300,000

Liabilities (400,000) 1,180,000

Goodwill P 350,000

6. Revenues and expenses of the subsidiary from the period prior to the combination are omitted from the consolidated totals. Only the operational figures for the subsidiary after the purchase are applicable to the business combination. The previous owners earned any previous profits.

7. The subsidiary’s Common Stock and Additional Paid-in Capital accounts have no impact on the consolidated totals.

8. The fair value of the consideration transferred is now P1,030,000. This amount indicates a bargain purchase:

Fair value of consideration transferred (above) P1,030,000

Receivables P 80,000

Patented technology 700,000

Customer relationships 500,000

IPR&D 300,000

Liabilities (400,000) 1,180,000

Gain on bargain purchase P 150,000

Problem XV

In acquisitions, the fair values of the subsidiary's assets and liabilities are consolidated (there are a limited number of exceptions). Goodwill is reported as P80,000, the amount that the P760,000 consideration transferred exceeds the P680,000 fair value of SS’s net assets acquired.

1. Inventory = P670,000 (P's book value plus Sun's fair value) 2. Land = P710,000 (P's book value plus Sun's fair value)

3. Buildings and equipment = P930,000 (P's book value plus S's fair value) 4. Franchise agreements = P440,000 P's book value plus S's fair value) 5. Goodwill = P80,000 (calculated above)

6. Revenues = P960,000 (only parent company operational figures are reported at date of acquisition)

7. Additional Paid-in Capital = P65,000 (P's book value less stock issue costs)

8. Expenses = P940,000 (only parent company operational figures plus acquisition-related costs are reported at date of acquisition)

9. Retained Earnings, 1/1 = P390,000 (P's book value) Problem XVI

1. A total of P210,000 (P120,000 + P90,000) should be reported.

2. As shown in the investment account balance, Beryl paid P110,000 for the ownership of SS. The amount paid was P30,000 greater than the book value of the net assets of SS and is reported as goodwill in the consolidated balance sheet at January 1, 20X5.

3. In determining the amount to be reported for land in the consolidated balance sheet, P15,000 (P70,000 + P50,000 - P105,000) was eliminated. BB apparently sold the land to SS for P25,000 (P10,000 + P15,000).

4. Accounts payable of P120,000 (P75,000 + P55,000 - P10,000) will be reported in the consolidated balance sheet. A total of P10,000 was deducted in determining the balance reported for accounts receivable (P90,000 + P50,000 - P130,000). The elimination of an intercompany receivable must be offset by the elimination of an intercompany payable. 5. The par value of B's stock outstanding is P100,000.

Problem XVII – refer also to Multiple Choice; Nos. 24-32 Cash: P74,000 = P44,000 + P30,000

Accounts receivable: P155,000 = P110,000 + P45,000

Inventory: P215,000 = [P130,000 + P70,000 + (P85,000 – P70,000)] Land: P125,000 = [P80,000 + P25,000 + (P45,000 – P25,000)] Buildings and equipment: P900,000 = P500,000 + P400,000 Accumulated depreciation: P388,000 = P223,000 + P165,000 Goodwill (full-goodwill) = P40,000*

Total Assets = P1,121,000 = (P74,000 + P155,000 + P215,000 + P125,000 + P900,000 – P388,000 + P40,000, or:

Total Assets of Power Corp. P 791,500

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P 641,000

Book value of assets of Silk Corp. 405,000

Book value reported by Power and

Silk P1,046,000

Increase in inventory (P85,000 - P70,000) 15,000

Increase in land (P45,000 - P25,000) 20,000

Goodwill 40,000

Total assets reported (based on

full-goodwill) P1,121,000

Accounts payable: P89,500 = P61,500 + P28,000 Taxes payable P132,000 = P95,000 + P37,000 Bonds payable: P480,000 = P280,000 + P200,000

Total liabilities: P701,500 = P89,500 + P132,000 + P480,000 Common stock: P150,000, parent only

Retained earnings: P205,000, the amount reported by parent Non-controlling interest (full-goodwill): P64,500*

Stockholders’ equity: P419,500 Consolidated SHE:

Common stock P150,000

Retained Earnings 205,000

Parent’s SHE or Equity Attributable to Parent P355,000

NCI (full-goodwill) 64,500

Consolidated SHE P419,500

Computation of Goodwill: Full-goodwill:

Add: FV of NCI **64,500 P215,000

Less: BV of SHE of SS (P50,000 + P90,000) x 100% 140,000

Inventory (P70,000 – P85,000) x 100% P 15,000

Land (P25,000 – P45,000) x 100% 20,000 35,000

**given amount, but it should not be lower than the fair value of SHE – subsidiary amounting to P52,500 computed as follows :

FV of SHE of SS:

Book value of SHE of SS (P50,000 + P90,000)……….P 140,000 Adjustments to reflect fair value (P15,000 + P20,000)… 35,000

FV of SHE of SS P 175,000

Multiplied by: NCI%... 30% FV of NCI (partial)………..P 52,500 or,

Less: BV of SHE of SSD (P50,000 + P90,000) x 70% __98,000

Inventory (P15,000 x 70%) P 10,500 Land (P20,000 x 70%) 14,000 24,500 Goodwill – partial P 28,000 If partial-goodwill: Total Assets = P1,109,000 = (P74,000 + P155,000 + P215,000 + P125,000 + P900,000 – P388,000 + P28,000,

Non-controlling interest (partial-goodwill): P52,500 NCI

FV of SHE of SSD:

Book value of SHE of SS (P50,000 + P90,000)……….P 140,000 Adjustments to reflect fair value (P15,000 + P20,000)… 35,000

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Multiplied by: NCI%... 30% FV of NCI (partial)………..P 52,500 Stockholders’ equity: P419,500 Consolidated SHE: Common stock P150,000 Retained Earnings 205,000

Parent’s SHE or Equity Attributable to Parent P 355,000

NCI (partial-goodwill) 52,500 Consolidated SHE P404,500 Problem XVIII 1. P470,000 = P470,000 - P55,000 + P55,000 2. P605,000 = (P470,000 - P55,000) + P190,000 3. P405,000 = P270,000 + P135,000

4. P200,000 (as reported by GG Corporation) Problem XIX

1. P57,000 = (P120,000 - P25,000) x .60

2. P81,000 = (P120,000 - P25,000) + P40,000 - P54,000 3. P48,800 = (P120,000 - P25,000) + P27,000 - P73,200 Problem XX

1. Investment in Craig Company... 950,000

Cash ... 950,000 2.

Less: BV of SHE of Craig (P300,000 + P420,000) 720,000

Less: Over/under valuation of A and L: Inc (Decrease)

Land (P250,000 fair – P200,000 book value P 50,000

Building (P700,000 fair – P600,000 book value) 100,000 Discount on bonds payable P280,000 fair – P300,000

book value) 20,000

Deferred tax liability (P40,000 fair – P50,000 book value) 10,000

Goodwill P 50,000

3. Adjustments on Craig books:

Land... 50,000 Building... 100,000 Discount on Bonds Payable... 20,000 Goodwill... 50,000 Deferred Tax Liability ... 10,000 Retained Earnings... 420,000

Paid-In Capital in Excess of Par... 650,000 4. Elimination entries:

Common Stock ... 300,000 Paid-In Capital in Excess of Par... 650,000

Investment in Craig Company... 950,000 Problem XXI

Full-Goodwill

Consideration transferred (200 shares x P25) P 5,000

Less: BV of SHE of Public (P200 + P800 + P1,000) _2,000

Fixed assets (P3,000 fair – P2,000 book value) _1,000

Goodwill – full P2,000

(23)

Consideration transferred (200 shares x P25) P 5,000

Less: FV of SHE of Public (P1,0000 + P3,000 – P1,000) _3,000

Goodwill – full P2,000

Note: The currently issued shares of Public Company and its fair value were used for the following reasons (refer to Illustration 15-15 for comparison):

 Total number of shares for Public Company after acquisition – not given  The fair value of share of Private Company – not given.

Public

Company CompanyPrivate

Fair value of net assets………. P3,000 ?

Fair value of common stock per share P25

Public Private

Currently issued 200 40%** ? /40%

Additional shares issued 300 60% 100 /60%

500 ?

15,000 shares / 25,000 shares = 60%

 Values are prior to acquisition (200 shares × P25 market value).

 Subsequent to acquisition, Private Company is the “parent” with 60% ownership; prior to acquisition, Private Company has 0% ownership of Public Company.

 Prior to acquisition, this represents 100% ownership of Public Company; subsequent to acquisition, these holders of 100 shares of Public Company become the 40% NCI.

 Incidentally, the partial goodwill amounted to P1,200 (P2,000 x 60%); FV of NCI on full-goodwill amounted to P800 (P2,000 – P1,200 or P2,000 x 40%). This approach to determine partial goodwill is acceptable as long as there is FV of NCI in the acquirer.

Problem XXII (Assume the use of Full-Goodwill Method)

Note: This solution assumes a difference between the basis of acquired assets for accounting and tax purposes for this stock acquisition.

1. Investment in Seely Company 570,000

Common Stock*** 95,000

Additional Paid-in-Capital 475,000

***Note: Depending on the wording of this exercise, the credit may be cash instead of common stock and additional paid-in-capital. If cash is paid, the credit to cash is P570,000.

2. Common Stock - Seely 80,000

Other Contributed Capital – Seely 132,000

Retained Earnings - Seely 160,000

Inventory 52,000

Land 25,000

Plant Assets 71,000

Discount on Bonds Payable 20,000

Goodwill** 127,200

Deferred Income Tax Liability* 67,200

Investment in Seely Company 570,000

Non-controlling Interest [(P570,000/.95) x .05] 30,000

*(.40 x (P52,000 + P25,000 + P71,000 + P20,000)) Problem XXIII

 HB Country and HCO Media

Consolidation of a variable interest entity is required if a parent has a variable interest that will

 Absorb a majority of the entity's expected losses if they occur

 Receive a majority of the entity's expected residual returns if they occur

Because (1) HCO Media’s losses are limited by contract, and (2) Hillsborough has the right to receive the residual benefits of the sales generated on the HCO Media internet site above P500,000, Hillsborough should consolidate HCO Media.

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 TPC (Nos. 1, 2 and 3 of the requirement are part of the information)

a. The purpose of consolidated financial statements is to present the financial position and results of operations of a group of businesses as if they were a single entity. They are designed to provide information useful for making business and economic decisions—especially assessing amounts, timing, and uncertainty of prospective cash flows. Consolidated statements also provide more complete information about the resources, obligations, risks, and opportunities of an enterprise than separate statements.

b. An entity qualifies as a VIE and is subject to consolidation if either of the following conditions exist.

 The total equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties. In most cases, if equity at risk is less than 10% of total assets, the risk is deemed insufficient.

 The equity investors in the VIE lack any one of the following three characteristics of a controlling financial interest.

1. The direct or indirect ability to make decisions about an entity's activities through voting rights or similar rights.

2. The obligation to absorb the expected losses of the entity if they occur (e.g., another firm may guarantee a return to the equity investors)

3. The right to receive the expected residual returns of the entity (e.g., the investors' return may be capped by the entity's governing documents or other arrangements with variable interest holders).

Consolidation is required if a parent has a variable interest that will  Absorb a majority of the entity's expected losses if they occur

 Receive a majority of the entity's expected residual returns if they occur

Also, a direct or indirect ability to make decisions that significantly affect the results of the activities of a variable interest entity is a strong indication that an enterprise has one or both of the characteristics that would require consolidation of the variable interest entity.

c. Risks of the construction project that has TPC has effectively shifted to the owners of the VIE

 At the end of the 1st five-year lease term, if the parent opts to sell the facility, and the proceeds are insufficient to repay the VIE investors, TPC may be required to pay up to 85% of the project's cost. Thus, a potential 15% risk.

 During construction 11.1% of project cost potential termination loss. Risks that remain with TPC

 Guarantees of return to VIE investors at market rate, if facility does not perform as expected TPC is still obligated to pay market rates.

 If lease is not renewed, TPC must either purchase the facility or sell it on behalf of the VIE with a guarantee of Investors' (debt and equity) balances representing a risk of decline in market value of asset

 Debt guarantees

d. TPC possesses the following characteristics of a primary beneficiary Direct decision-making ability (end of five-year lease term)

 Absorb a majority of the entity's expected losses if they occur (via debt guarantees and guaranteed lease payments and residual value)

 Receive a majority of the entity's expected residual returns if they occur (via use of the facility and potential increase in its market value).

Problem XXIV

1. Implied valuation and excess allocation for S.

Non-controlling interest fair value P 60,000

Consideration transferred by P. 20,000

Total business fair value 80,000

Fair value of VIE net assets 100,000

Excess net asset value fair value P20,000

The P20,000 excess net asset fair value is recognized by PanTech as a bargain purchase. All SoftPlus’ assets and liabilities are recognized at their individual fair values.

(25)

Cash P20,000

Marketing software 160,000

Computer equipment 40,000

Long-term debt (120,000)

Noncontrolling interest (60,000)

Pantech equity interest (20,000)

Gain on bargain purchase (20,000)

-0-2. Implied valuation and excess valuation for Softplus.

Noncontrolling interest fair value 60,000

Consideration transferred by Pantech 20,000

Total business fair value 80,000

Fair value of VIE net identifiable assets 60,000

Goodwill P20,000

When the business fair value of a VIE (that is a business) is greater than assessed asset values, all identifiable assets and liabilities are reported at fair values (unless a previously held interest) and the difference is treated as a goodwill.

Cash P20,000

Marketing software 120,000

Computer equipment 40,000

Goodwill (excess business fair value) 20,000

Long-term debt (120,000)

Noncontrolling interest (60,000)

Pantech equity interest (20,000)

-0-Multiple Choice Problems

1. c – at fair value

2. c [P300,000 – (P35,000 + P60,000 + 125,000 + P250,000 – P65,000 – P150,000)] 3. d

Less: Book value of SHE of S (P100,000 + P115,000) 215,000

Allocated excess (excess of fair value or cost over book value)

- sometimes termed as “Differential” P 85,000

4. a – Investment in subsidiary in the consolidated statements is eliminated in its entirety. 5. d

Less: Book value of SHE of S (P40,000 + P52,000) 92,000

Allocated excess (excess of fair value or cost over book value)

- sometimes termed as “Differential” P 58,000

6. b – [P150,000 – (P173,000 – P40,000 – P5,000)] 7. d - P600,000 - P15,000 - P255,000 = P330,000 8. c - P475,000 - P300,000 = P175,000 debit 9. b – fair value 10. d – fair value 11. d – fair value 12. c -Full-goodwill:

Add: FV of NCI 100,000 P400,000

Less: BV of SHE of Silver (P100,000 + P180,000) x 100% 280,000

Inventory (P65,000 – P70,000) x 100% P( 5,000)

Land (P100,000 – P90,000) x 100% 10,000

Buildings and equipment (P300,000 – P250,00) x 100% 50,000 __55,000

If partial-goodwill, no answer available, computed as follows: Fair value of Subsidiary:

(26)

Less: BV of SHE of Silver (P100,000 + P180,000) x 75% _210,000

Inventory (P65,000 – P70,000) x 75% P( 3,750)

Land (P100,000 – P90,000) x 75% 7,500

Buildings and equipment (P300,000 – P250,00) x 75% 37,500 __41,250

13. a – Investment in Silver will be eliminated in the consolidated balance sheet 14. d

FV of SHE of S:

Book value of SHE of S (P100,000 + P180,000)………..P 280,000 Adjustments to reflect fair value ……… 55,000 FV of SHE of S……… P 335,000 Multiplied by: NCI%... 25% FV of NCI (partial)……….P 83,750 Add: NCI on full goodwill (P65,000 – P48,750)……….. 16,250 FV of NCI (full-goodwill)*………P100,000

* same with the NCI given per problem

15. b – P135,000 = P90,000 + P45,000 16. d

Full-goodwill:

Add: FV of NCI _40,000 P200,000

Less: BV of SHE of Silver (P40,000 + P120,000) x 100% _160,000

Inventory (P45,000 – P40,000) x 100% P 5,000

Land (P60,000 – P40,000) x 100% 20,000 25,000

17. a

Total Assets of Gulliver (Jonathan) P610,000

Less: Investment in Sea-Gull Corp. (160,000)

P 450,000

Book value of assets of Sea Corp. 230,000

Book value reported by Gulliver/Jonathan and Sea P 680,000

Increase in inventory (P45,000 – P40,000) 5,000

Increase in land (P60,000 – P40,000) 20,000

Goodwill (full)* 15,000

Total assets reported P 720,000

18. c – P100,000 + P95,000 + P30,000 + P40,000 = P265,000 19. c

FV of SHE of S:

Book value of SHE of S (P40,000 + P120,000)……….P 160,000 Adjustments to reflect fair value [(P45,000 + P60,000)

-(P40,000 + P40,000)………….……… 25,000

FV of SHE of S……… P 185,000 Multiplied by: NCI%... 20% FV of NCI (partial)……….P 37,000 Add: NCI on full goodwill (P15,000 – P12,000)……….. 3,000 FV of NCI (full-goodwill)*……… P 40,000

* same with the NCI given per problem

Less: BV of SHE of S (P40,000 + P120,000) x 80% _128,000