BUSINESS COMBINATION AND CONSOLIDATED FIINANCIAL STATEMENTS Exam – Saint Paul School of Business & law

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ZDSFFSDF 21212 BUSINESS COMBINATION AND CONSOLIDATED FIINANCIAL STATEMENTS Exam 2022 – Saint Paul School of Business & law 14. Which of the following statements is TRUE? A. The intercompany ... profit in inventory transfer between affiliates is computed by multiplying the inventory held by the buying affiliate which was acquired from the selling affiliate by the gross profit rate based on sales of the buying affiliate. B. The income and expenses of a subsidiary are included in the consolidated financial statements from the acquisition date. C. Recognition of the realized profit in the beginning requires a working paper debit to cost of goods sold. D. The non-controlling interest in profit is affected by the bargain purchase or gain on acquisition. 15. Which of the following statements is TRUE? A. Downstream and upstream sales affects the computation of the consolidated net income and consolidated sales and cost of goods sold. B. Amortization of excess affects the computation of consolidated operating expenses. C. In case of downstream sales, unrealized profits are charged to consolidated net income and non-controlling interest net income. D. Under the acquisition method of accounting for business combination, the stockholders’ equity of any acquired company is eliminated in the working paper. 16. Which of the following is TRUE? A. When a subsidiary has borrowed cash from the parent company, the related receivable and payable are eliminated in their own set of books in preparing a consolidated statement of financial position B. In a purchase-type business combination, the stockholders’ equity section of a consolidated statement of financial position for a parent and its partially owned subsidiary consists of the parent’s stockholders’ equity accounts only. C. Parent company owns 75% of Subsidiary company. During 2016, Parent sold goods with a 30% gross profit to subsidiary. Subsidiary sold all of these goods in 2016. For 2016 consolidated financial statements, sales and cost of goods sold should be reduced by 75% of the intercompany sales. D. Amortization of excess affects the computation of non-controlling interest in net assets and the non-controlling interest in profit. Problem 17. Marie Co. acquired inventories on May 1,2015, from its 70% owned subsidiary, Paz Company. The inventories were sold for P94,000, including the 25% mark up on cost. Out of these inventories, 65% were sold to outsiders. During the year, Marie reported net income of P215,000 and Paz reported net income of P140,000. How much is the realized profit to be allocated to non-controlling interest in 2016? A. P6,580 C. P2,467.50 B. P1,974 D. P3,666 Problem 18. The L Company owns 75% of the V Company. On December 31, 2016, the last day of the accounting period, V sold to L a non-current asset for P200,000. The asset originally cost P500,000 and at the end of the reporting period its carrying amount in V’s books was P160,000. The group’s consolidated statement of financial position has been drafted without any adjustments in relation to this non-current asset. What adjustments should be made to the consolidated statement of financial position figures for retained earnings and non-controlling interest? Retained Earnings Non-controlling interest A. Increase by P225,000 Increase by P75,000 B. Increase by P300,000 No change C. Reduce by P30,000 Reduce by P10,000 D. Reduce by P40,000 No change Numbers 19 and 20. On January 2, 2015, the Statement of Financial Position of Perry and Sassy Company prior to the combination are: Perry Company Sassy Company Cash P 900,000 P 30,000 Inventories 600,000 60,000 Property and equipment (net) 1,500,000 210,000 Total Assets 3,000,000 300,000 Current Liabilities P 180,000 P 30,000 Ordinary shares, P100 par 300,000 30,000 Share premium 900,000 60,000 Retained Earnings 1,620,000 180,000 Total Liabilities and Stockholder’s Equity 3,000,000 300,000 The fair value of Sassy Company’s equipment is P306,000 Assume the following independent cases: 19. Assuming Perry Company acquired 80% of the outstanding ordinary shares of Sassy Company for P273,600 excluding control premium of P36,000. Non-controlling interest in measured at fair value, how much is the consolidated assets on the date of acquisition? A. P3,412,800 B. P3,139,200 C. P3,073,200 D. P3,103,200 20. Assuming Perry Company acquired 90% of the outstanding ordinary shares of Sassy Company for P312,000 including control premium of P72,000 and Non-controlling interest is measured at fair value, how much is the total consolidated stockholders’ equity on the date of acquisition? A. P2,837,400 B. P2,874,000 C. P2,820,000 D. P3,103,200 Problem 21. P Corporation acquired 70% of the voting common stock of S Co.’s book values and fair values were equal. Separate incomes of P Corporation and S Co. for 2016 are as follows: P Corporation S Corporation Sales P 700,000 P 400,000 Cost of Goods Sold 400,000 200,000 Operating Expenses 120,000 100,000 Separate Incomes P 180,000 P 100,000 Intercompany sales from Parent to Subsidiary for 2015 and 2016 are summarized as follows: Cost Selling Price Unsold at year-end Intercompany Sales-2015 P250,000 P390,000 40% Intercompany Sales-2016 P175,000 P275,000 50% The 2016 consolidated income statement will show (1) sales revenue and (2) cost of goods sold of: A. (1) P825,000 (2) P319,000 C. (1) P900,000 (2) P340,000 B. (1) P750,000 (2) P350,000 D (1) P825,000 (2) P419,000 Problem 22. Parent Company acquires 25% of Subsidiary Company’s common stock for P380,000 cash and carries the investment using the cost method.. After three months, Parent purchases another 55% of Subsidiary’s common stock for P1,100,000. On this date, Subsidiary reports identifiable assets with carrying value of P1,800,000 and fair value of P2,300,000 and it has liabilities with a book value and a fair value of P700,000. The fair value of the 20% non-controlling interest is P360,000. Goodwill valued on the fair value basis: A. P350,000 B. P320,000 C. P360,000 D. P330,000 Problem 23. Entity P has a 90% controlling interest in Entity S. On December 31,2015, the carrying value of Entity S’s net assets in Entity P’s consolidated financial statements is P450,000 and the carrying amount attributable to the non-controlling interest’s in Entity S (including the non-controlling interest’s share of accumulated other comprehensive income) is P45,000. On January 1,2016, Entity P sells 80% of the share in Entity S to a third party for cash proceeds of P540,000. As a result of the sale, Entity P losses control of Entity S but retains a 10% non-controlling interest in Entity S. The fair value of the retained interest on that date is P54,00. Determine the gain or loss on disposal (deconsolidation) A. P144,000 gain B. P189,000 gain C. P144,000 loss D. P189,000 loss FOREIGN CURRENCY TRANSACTIONS/TRANSLATION/HEDGING AND DERIVATIVES Problem 24. The A Company has the pesos at its functional currency. On October 16, 2016 A ordered some inventory from a foreign supplier and agreed a purchase price of $160,000. The inventory was received on November 15, 2016. At December 31,2016 the inventory remained on hand and the trade payable balance for the inventory purchase remained outstanding. The supplier was paid on January 27,2017 and the inventory was sold on January 31, 2017. The following information about exchange rates is available: October 16,2016 P1: $2.60 November 15,2016 P1: $2.50 December 31,2016 P1: $2.40 January 27, 2017 P1: $2.25 At what amount should the trade payable balance due to the supplier be presented in the statement of financial position of A at December 31,2016? A. P61,538 C. P64,000 B. P66,667 D P71,111 Problem 25. Virgo Company acquired 65% of the share capital of a foreign entity on August 31,2016. The fair value of the net assets of the foreign entity at that date was 8.24 million yen. This value was 2.64 million higher than the carrying value of the net assets of the foreign entity. The excess was due to the increase in value of non-depreciable land. The functional currency of the entity is Philippine Peso. The financial year-end of the company is December 31,2016. The exchange rates at August 31,2016 were Yen 2= Php 1 and Yen 1.25=Php 1 respectively. What figure for the fair value adjustment should be included in the group financial statements for the year ended December 31,2016? A. P4,284,800 C. P2,678,000 B. P2,112,000 D. P1,320,000 Problem 26. On November 1, 2016, Galaxy Philippines took delivery from a Thailand firm of inventory costing 225,000 baht. Payment is due on January 30,2017. Concurrently, Galaxy Philippines paid P2,025 cash to acquire 90-day call option for 225,000 Thailand baht. 11/1/2016 12/31/2016 1/30/2017 Spot rate (market price) P1.20 P1.22 P1.23 Strike price (exercise price) 1.20 1.20 1.20 Fair value of call option P2,025 P4,950 P6,750 The gain or loss on option contract (hedging instrument due to change in time value on December 31,2016 if changes in the value will be excluded from the assessment of hedge effectiveness should be: The gain or loss on option contract (hedging instrument) due to change in intrinsic value on December 31,2016. If changes in the time value will be excluded from the assessment of hedge effectiveness should be: A. P1,575 loss ; P4,500 gain C. P4,500 loss ; P2,925 gain B. P2,925 gain ; p1,575 loss D P4,500 gain ;P1,575 gain Problem 27. On November 1, 2016 SG Company entered into a firm commitment to acquire a equipment. The equipment is customized for the operations of SG Company. The said commitment is binding to both SG Company and the manufacturer. Delivery and passage of title would be on February 28, 2016 at the price of $7,000 Singapore dollars. On the same date, to hedge against unfavorable changes in the exchange rate, SG entered into a 120-day forward contract with China Bank for $7,000 Singapore dollars. Exchange rate were as follows: Rate for immediate delivery Rate for future delivery Nov. 01, 2016 P36.25 P34.30 Dec. 31, 2016 37.40 36.70 Feb. 28, 2017 39.50 39.50 How much is the fair value of the derivative instrument on December 31, 2016? A. P4,900 positive B. P16,800 negative C. No fair value D. P16,800 positive Problem 28. On December 31, 2016 a foreign subsidiary in Hongkong submitted the following accounts stated in foreign Currency: Total Assets HK$ 245,000 Total Liabilities 49,000 Common Stock 122,500 Retained Earnings 73,500 The exchange rate are: Current rate, P8.75 ; Historical rate, P8.10 ; Weighted average rate, P8.50. Assuming that the retained earnings of the subsidiary in December 31, 2016 translated to peso is P472,500. How much is the cumulative translation adjustment (dr)/(cr) on December 31, 2016? A. P(250,250) B. P127,400 C. P(127,400) D. P250,250 Problem 29. On December 12, 2015, Winning Co. entered into a forward exchange contract to purchase 100,000 euros in 90 days. The relevant exchange rates are as follows: Spot rate Forward rate (for March 12,2016) November 30,2015 P0.87 P0.89 December 12,2015 0.88 0.90 December 31,2015 0.92 0.93 The purpose of this forward contract is to hedge a purchase of inventory on account in November 30, 2015, payable in March 2016. How much is the fair value of the derivative instrument on its inception date? A. P89,000 B. P90,000 positive C. –nil- D. P90,000 negative Problem 30. On December 1, 2016, M company made a credit sale to N Company. The amount of sale was 200,000 Korean Won. M will collect the account on January 01, 2017. On December 1, the spot rate was 25 Korean won for one Philippine peso. Also on December 1, M entered into a futures contract to sell 200,000 Korean won on January 01, 2017 at a forward rate of 50 Korean Won for one Philippine peso. If the spot rate for one Philippine peso on December 31, 2016 is 40 Korean won, how much is the foreign exchange gain or loss on hedging instrument- forward contract? A. P3,000 gain C. P1,000 gain B. P3,000 loss D. P1,000 loss 31. Which of the following statements is FALSE? A. On the balance sheet date, the account Forward Contract Receivable which is the receivable from the bank is credited to recognize foreign exchange loss for the decrease in the forward rate under a derivative instrument which is forward contract to purchase foreign currency. B. Assuming CG Company a Philippine Company acquired an “at the money” foreign currency call option contract, under a fair value hedge, if the spot rate decreases from transaction date to year-end then the intrinsic value at year-end is also equal to the gain on derivatives as to the effective portion which affects current earnings or profit and loss. C. A Philippine Company sold and delivered merchandise on account to a customer in another country in 2016, the transaction is denominated in that country’s local currency to be settled in 2017, the said transaction is not automatically a hedged item even if the bid spot rate is decreasing. D. On the settlement date, in the books of XYZ Company a Philippine Company with importing transaction which is also a hedged item and a forward contract to buy foreign currency which is also a hedging instrument, the amount of cash debited is measured in pesos but denominated in a foreign currency. 32. Which of the following statements is FALSE? A. On the transaction date of a forward contract to sell foreign currency, both the receivable from the bank and the payable to the bank are measured in pesos, but only the liability to the bank is denominated in a foreign currency. B. If at given date whether transaction date, balance sheet date or settlement date, the spot price is higher than the strike price then an option contract “to buy” is said to be “in the money”, a situation whereby the holder may exercise his right to buy since it is favorable to him. C. The premium paid in acquiring an option contract to buy or sell a foreign currency within specified days at a specified price is always equal to the fair value of the derivative asset on the first day, it may also be equal to the time value or ineffective portion on the first day of the contract. D. A transaction involving a 120-day forward contract derivative instrument on October 1, 2016 used in a speculation to sell foreign currency for a price set today, delivery of which is on a specified future date, results to a gain at year-end if the forward rate increases from the 120-day futures on the transaction date to the 30-day futures on the balance sheet date. SPECIAL TOPICS Problem 68. Banks J and K (the parties) agreed to combine their corporate, investment banking, asset management and service activities by establishing a separate vehicle (Bank Q). Both parties expect the arrangement to benefit them in different ways. (IFRS 11) Transactions for year 2015: Investments: Bank J P6,250,000 Bank K P6,250,000 Revenues P1,250,000 Cost and Expenses P 750,000 Dividends Paid- Bank Q P - What is the interest of Bank J in the joint arrangement at December 31, 2015? A. P6,250,000 B. P6,450,000 C. P6,050,000 D. P5,000,000 Problem 69. An insurance contract can contain both deposit and insurance elements. An example might be a reinsurance contract where the cedent receives a repayment of the premiums at a future time if there are no claims under the contract. Effectively this constitute a loan by the cedent that will be repaid in the future. IFRS 4 requires that A. Each payment by the cedent is accounted for as a loan advance and as a payment for insurance cover. B. The insurance premium is accounted for as a revenue item in the statement of income. C. The premium is accounted for under PAS 18 D. The premium paid is treated purely as a loan, and it is accounted for under PAS 39 Problem 70. An operator builds a road at a cost of P100 M, the fair value of construction services is P110 M, the total operating costs of the road are P70 M and total cash inflows over the life of the concession are P200 M. Applying IFRIC 12, Service Concession Arrangement, by how much is total revenue under the intangible asset model higher or lower than the total revenue under the financial asset model over the life of the concession? A. No difference B. P10M C. P110M D. (P110M) [Show More]

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