Chapter 10

CHAPTER 10 SUGGESTED ANSWERS EXERCISES Exercise 10 - 1 1. Assets, other than goodwill Goodwill Liabilities Ordinary Share Capital Net asset contribution Goodwill contribution Average earnings Normal earnings Excess earnings Capitalization rate Goodwill Total contribution Stock distribution

550,000 196,000 230,000 516,000 Co. A P 90,000

Co. B P120,000

Co. C P110,000

Total P320,000

P 16,000 10,800 P 5,200 10% P 52,000 P142,000 14,200 sh

P 20,000 14,400 P 5,600 10% P 56,000 P176,000 17,600 sh

P 22,000 13,200 P 8,800 10% P 88,000 P198,000 19,800 sh

196,000 P516,000 51,600 sh

2. Assets Liabilities Ordinary Share Capital Co. A 142,000/516,000 x 32,000 sh Co. B 176,000/516,000 x 32,000 sh Co. C 198,000/516,000 x 32,000 sh Exercise 10 - 2 Total contribution (P50,000 / 10%) Net asset contribution equal to preference shares issued Goodwill contribution equal to ordinary shares issued Preference Share Capital (P400,000/P100) Ordinary Share Capital (P100,000/P50) Exercise 10 - 3 1. 1,500 shares/2,000 shares x 100 shares 2. 1,500 shares x P150 3. 1,000 shares x P150 4. P500,000/2,000 shares x 100 shares

230,000 320,000 8,806 sh 10,915 sh 12,279 sh P500,000 400,000 P100,000 4,000 shares 2,000 shares

= 75 shares = P225,000 = P150,000 = P 25,000

Exercise 10 - 4 Cost (10,000 sh x P120 = P1,200,000 + P75,000) Fair value of net assets acquired Goodwill Exercise 10 - 5

550,000

P1,275,000 450,000 P 825,000

Chapter 10 - Suggested Answers (AA2.2006)

1.

2.

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Cost FMV of net assets acquired Negative Goodwill

P 50,000 60,000 P 10,000

Negative goodwill is immediately recognized as income.

Exercise 10 -6 Requirement 1 Accounts Receivable Inventories Property. Plant, and Equipment Cash Profit or Loss/Gain on Business Combination Current Liabilities Cost (P500,000 + P5,000) FMV of net assets acquired Negative Goodwill Requirement 2 Cash Current Liabilities Accounts Receivable Inventories Property, Plant, and Equipment Retained Earnings Ordinary Share Capital Retained Earnings Cash Exercise 10 – 7 1. Expenses of Business Combination Cash Current Assets Plant Assets Patents Profit or Loss/Gain on Business Combination Current Liabilities Long-Term Liabilities Cash Ordinary Share Capital Additional Paid-in Capital Cost FMV of net assets acquired Negative Goodwill

Exercise 10 - 8 1. Assets Goodwill Liabilities Ordinary Share Capital (325,000 x P10)

120,000 140,000 300,000 505,000 5,000 50,000 P505,000 510,000 P 5,000 500,000 50,000 120,000 100,000 280,000 50,000 200,000 300,000 500,000 75,000 75,000 575,000 1,200,000 50,000 75,000 300,000 450,000 300,000 250,000 450,000 P1,000,000 1,075,000 P 75,000

6,000,000 550,000 1,675,000 3,250,000

Chapter 10 - Suggested Answers (AA2.2006)

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Paid-In Capital in Excess of Par (325,000 x P5) Cost (325,000 x P15) FMV of net assets acquired (P6,000,000 - P1,675,000) Goodwill 2.

Assets Goodwill Liabilities Ordinary Share Capital (475,000 x P5) Additional Paid-in Capital (475,000 x 7) Cost (475,000 x 12) FMV of net assets acquired (P10,000,000 – 4,525,000) Goodwill

1,625,000 P4,875,000 4,325,000 P 550,000 10,000,000 225,000 4,525,000 2,375,000 3,325,000 P 5,700,000 P

5,475,000 225,000

PROBLEMS Problem 10 - 1 Net tangible assets Expected annual earnings Rate of return on net tangible assets Ratio of earnings distribution before consolidation Stock distribution (earnings capitalized at 8%) Preferred stock Common stock Earnings distribution: Preferred stock a. b. c.

Company A P400,000 60,000

Company B P200,000 40,000

Company C P1,000,000 100,000

Total P1,600,000 200,000

15%

20%

10%

30%

20%

50%

4,000 sh 3,500 sh

2,000 sh 3,000 sh

10,000 sh 2,500 sh

16,000 sh 9,000 sh

P20,000 20,000 32,000

P10,000 10,000 16,000

P50,000 50,000 80,000

P 80,000 80,000 128,000

100%

Common stock

a. b. c.

P 7,778 17,500 28,000

P 6,667 15,000 24,000

P 5,555 12,500 20,000

P 20,000 45,000 72,000

Total

a. b. c.

P27,778 37,500 60,000

P16,667 25,000 40,000

P55,555 62,500 100,000

P100,000 125,000 200,000

Ratio of earnings distribution after consolidation a. b. c. Problem 10 - 2 Requirement 1

27.78% 30.00% 30.00%

16.67% 20.00% 20.00%

55.55% 50.00% 50.00%

100% 100% 100%

Plan A Assets, other than Goodwill Goodwill Ordinary Share Capital, P10 par

6,000,000 1,000,000 7,000,000

Chapter 10 - Suggested Answers (AA2.2006)

Net asset contribution Goodwill contribution Est. annual earnings Normal earnings Excess earnings Capitalization rate Goodwill Total contribution Ordinary share distribution

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Co.D P3,000,000

Co. E P1,500,000

Co. F P1,500,000

Total P6,000,000

P 300,000 240,000 P 60,000 12% P 500,000 P3,500,000 350,000 sh

P 165,000 120,000 P 45,000 12% P 375,000 P1,875,000 187,500 sh

P 135,000 120,000 P 15,000 12% P 125,000 P1,625,000 162,500 sh

1,000,000 P7,000,000 700,000 sh

Plan B Assets, other than Goodwill Goodwill Preference Share Capital, P10 par Ordinary Share Capital, P10 par

6,000,000 2,000,000 6,000,000 2,000,000 Co. D

Total contributions (Earnings/8%) Net asset contribution Goodwill contribution Preference share dist. equal to NA contribution Ordinary share distribution equal to earnings cont.

P4,000,000 3,750,000 P 250,000

Co. E

Co. F

P2,200,000 2,062,500 P 137,500

Total

P1,800,000 1,687,500 P 112,500

P8,000,000 7,500,000 P 500,000

375,000 sh

206,250 sh

168,750 sh

750,000 sh

25,000 sh

13,750 sh

11,250 sh

50,000 sh

Requirement 2 Plan A Co. D Co. E Co. F

350,000/700,000 x P600,000 187,500/700,000 x P600,000 162,500/700,000 x P600,000

P300,000 160,714 139,286 P600,000 Plan B Preference P450,000 112,500

Regular dividends at 6% Balance – P120,000 x 7,500/8,000 P120,000 x 500/8,000 Total P562,500 Dividends per share P .75 Co. D Co. E Preference Share Capital P281,250.00 P154,687.50 Ordinary Share Capital 18,750.00 10,312.50 Total P300,000.00 P165,000.00

Ordinary P 30,000 7,500 P37,500 P .75 Co. F P126,562.50 8,437.50 P135,000.00

Total P480,000 112,500 7,500 P600,000 TOTAL P562,500.00 37,500.00 P600,000.00

Problem 10 - 3 Cost FMV of NA acquired Cash Accounts rec’l

(a) P160,000 P 3,000 8,000

(b) P120,000 P 3,000` 8,000

(c ) P 60,000 P 3,000 8,000

Chapter 10 - Suggested Answers (AA2.2006)

Inventories Noncurrent MS Property, plant & eqt. Land Current liabilities Long-term liabilities Goodwill(Neg. Goodwill)

20,000 55,000 50,000 28,000 ( 4,000) (20,000)

140,000 P 20,000

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20,000 55,000 50,000 28,000 ( 4,000) (20,000)

Problem 10 - 4 1. Cash Accounts Receivable Inventory Goodwill Land Long-term Investment in Marketable Securities Equipment Accounts Payable Ordinary Share Capital (6,000 @ 50) APIC Cash (20,000 + 40,000 + 80,000 + 60,000) Cost (P750,000 + P200,000) FMV of net assets acquired (P830,000 - P115,000) Goodwill Expenses Cash 2.

140,000 P(20,000)

20,000 55,000 50,000 28,000 ( 4,000) (20,000)

100,000 150,000 140,000 235,000 120,000 140,000 180,000 115,000 300,000 450,000 200,000 P950,000 715,000 P235,000 3,000 3,000

Investment in Canada Co. (6,000 x P125) Ordinary Share Capital (6,000 x P50) Additional Paid - In Capital (6,000 x P75)

750,000

Investment in Canada Co. Expenses Cash

200,000 3,000

300,000 450,000

203,000

Problem 10 - 5 1 FMV of net assets of Commander Co. [(P200,000 + P800,000) - P200,000] MV of stocks of General Co. No. of shares to be issued Stock exchange ratio (20,000 sh/10,000 sh) 2

Investment in Commander Co. (20,000 x P40) Ordinary Share Capital (20,000 x P10) Paid - In Capital in Excess of Par (20,000 x P30)

Problem 10 - 6 1. Assets Liabilities

140,000 P(80,000)

P800,000 ÷ P40 20,000 sh 2:1

800,000 200,000 600,000 1,370,000 600,000

Chapter 10 - Suggested Answers (AA2.2006)

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Common Stock (75,000 x P10) Retained Earnings

Capital stock Additional paid-in capital Retained earnings 2.

750,000 20,000 Combiners’ Balances P 450,000 210,000 110,000 P 770,000

Reassignment + P300,000 - 210,000 90,000

Assets Goodwill Liabilities Ordinary Share Capital Additional Paid-in Capital

3. Capital stock Additional paid-in capital Retained earnings

Issuer’s Balances P 750,000 ---20,000 P 770,000

1,500,000 150,000 600,000 750,000 300,000 Combiners’ Balances P 450,000 210,000 110,000 P 770,000

Reassignment - P50,000 + 50,000

Issuer’s Balances P 400,000 260,000 110,000 P 770,000

MULTIPLE CHOICE 6. B 7. B 8. C 9. D 10. C

10- A.

1. 2. 3. 4. 5.

D B C C D

10 – B.

1.

A

Average earnings Normal earnings (P300,000 x 8%) Excess earnings Goodwill (P26,000/10%)

P 50,000 24,000 P 26,000 P260,000

2.

B

Average earnings Normal earnings (P400,000 x 8%) Excess earnings Goodwill (P48,000/10%) Net asset contribution Total contribution

P 80,000 32,000 P 48,000 P480,000 400,000 P880,000

- 1.

C

JPE = [P25,000 – (P250,000 x 6%)]/10%

P 100,000

FPJ = [P14,000 – (P150,000 x 8%)]/10% Total goodwill

50,000 P 150,000

10 C.

10 – D

1.

D

Average earnings Normal earnings (P1,200,000 x 10%) Excess earnings

P300,000 120,000 P180,000

Chapter 10 - Suggested Answers (AA2.2006)

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Rate of capitalization Goodwill 2.

10 – E

1.

B

÷25% P720,000

Cost FMV of net assets acquired (P520,000 + P1,480,000 – P800,000) Goodwill

C Expected annual earnings Rate of capitalization Total contribution Asset contribution equal to preference shares Goodwill equal to OS issued Par value of ordinary shares Ordinary shares distributed

10 - F

10 – G

1. 2.

1.

B D

1.

1,200,000 P 300,000

Abner P 36,000 ÷ 8% P450,000

Bertha P 80,000 ÷ 8% P1,000,000

Charlie P 96,000 ÷ 8% P1,200,000

400,000 P 50,000 ÷ P10 5,000 sh

800,000 P 200,000 ÷ P10 20,000 sh

800,000 P 400,000 ÷ P10 40,000 sh

(P3,800,000 - P2,500,000)/P100 Excess earnings = P481,000 – (P1,300,000 x 15%) Goodwill equal to par value of ordinary share to be issued = P286,000/20% Premium on ordinary share = P1,430,000 x 50%

C Earnings contribution Normal earnings (6%) Excess earnings Rate of capitalization Goodwill Asset contribution Total contribution Stock distribution 290/1,200 x 1,000 360/1,200 x 1,000 550/1,200 x 1,000

10 – H

P1,500,000

A

13,000 sh P 286,000 P1,430,000 P 715,000

Frannie P 30,000 12,000

Giselle P 30,000 18,000

Hazel P 40,000 30,000

Total P 100,000 60,000

P 18,000 ÷ 20% P 90,000 200,000 P290,000

P 12,000 ÷ 20% P 60,000 300,000 P360,000

P 10,000 ÷ 20% P 50,000 500,000 P550,000

P

242 sh 300 sh 458 sh

1,000 sh Total P 150,000 90,000

Polar P 41,250

Quickie P 75,000

Robot P 33,750

Normal earnings 22,500 (6%) Excess earnings P 18,750 Rate of capitalization ÷ 20% Goodwill P 93,750 Asset contribution 375,000 Total contribution P458,750 Stock distribution % 458,750/1,800,000 26% 900,000/1,800,000

45,000

22,500

P 30,000 ÷ 20% P150,000 750,000 P900,000

P 11,250 ÷ 20% P 56,250 375,000 P431,250

Estimated earnings

40,000 ÷ 20% P 200,000 1,000,000 P1,200,000

50%

P

60,000 ÷ 20% P 300,000 1,500,000 P1,800,000

Chapter 10 - Suggested Answers (AA2.2006)

431,250/1,800,000 10 – I

1.

B

Ordinary Share Capital Par value per share Number of shares issued 4,000 sh / 5,000 sh

10 – J

1.

A

FMV of net assets equal of MV of stocks issued MV per share Number of shares to be issued

10 – K

1.

C

Cost Fair market value of net assets acquired Negative Goodwill

10 – L

1.

C

Cost (P2,650,000 + 5,000) FMV of net assets (P1,890,000 + P2,900,000 – P1,140,000) Credit to profit and loss

10– M

1.

A

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24%

Cost (P3,068,000 + 338,000) FMV of net assets acquired (P3,239,600 – 171,600) Goodwill

P250,000 ÷ P50 5,000 .80 P2,000,000 ÷P100 20,000 sh P80,000 90,000 P10,000 P2,655,000 3,650,000 P 995,000 P3,406,000 P

3,068,000 338,000

10 – N

1.

C

Under the purchase of interest method, the Retained Earnings of the surviving company remains the same since no part of the acquired company’s Retained Earnings is recorded upon combination.

10 – O

1.

B

Total assets of Pacino before the combination Assets acquired from Lucky Goodwill recorded upon combination** Total assets after the combination

P1,097,500 1,733,250 850,000 P3,680,750

** Cost (200,000 sh @ P11) Net assets acquired (P1,733,250 – P383,250) Goodwill

P2,200,000 1,350,000 P 850,000

10 – P

1.

A

The retained earnings of the acquiring company

2.

D

APIC in shares issued to the 3 acquired co. (P100,000 x 2)

APIC of Co. U 10 – Q

1.

C

P200,000 15,000 P215,000

Amount paid plus the contingent consideration that is recognized since the contingent consideration is probable and can be reasonably estimated at the date of acquisition.