ACCOUNTING FOR BUSINESS COMBINATION

Provide thorough explanation and clear format

1. Which of the following is not an element of control?*

a. Power

b. Exposure, or rights to variable returns

c. Major holdings

d. Ability to affect return

2. According to PFRS 10*

a. a parent entity is required to consolidate its subsidiaries

b. a parent entity is encouraged but not required to consolidate its subsidiaries

c. a parent need not consolidate a subsidiary if the subsidiary's business is different from that of the parent

d. a parent entity is required to consolidate its subsidiaries only for internal reporting purposes

3. One of the essential element of control is power. According to PFRS 10, an investor has power if*

a. the investor holds more than half of the outstanding shares of the investee

b. the investor has existing rights that give it the current ability to direct the investee's relevant activities

c. the investor's interest in the earnings of the investee is not fixed but rather varies depending on the level of the earnings

d. the investor's Kelly is bad

4. Which of the following is incorrect regarding consolidated financial statements?*

a. A parent is exempt from consolidation if it is in itself a subsidiary, its securities are not traded, and its parent produces PFRS consolidated financial statements

b. Consolidation involves adding similar assets, liabilities, income and expenses of the parent and its subsidiaries

c. The subsidiary's equity is eliminated and replaced with non-controlling interest

d. The consolidated profit pertains only to the parent

5. How is the non-controlling interest in the subsidiary's net asset presented in the consolidated statement of financial position?*

a. As a mezzanine item between liabilities and equity

b. Within equity but separately from the equity of the owners of the parent

c. Within equity as part of retained earnings

d. Any of these as a matter of accounting policy choice

6. Perez Inc., owns 80% of Senior Inc. During 1992, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in 1992. For 1992 consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted?*

a. Sales and cost of goods sold should be reduced by the intercompany sales

b. Sales and cost of goods should be reduced by 80% of the intercompany sales

c. Net income should be reduced by 80% of the gross profit on intercompany sales

d. No adjustment is necessary

7. P Co. purchased term bonds at a premium on the open market. These bonds represented 20 percent of the outstanding class of bonds issued at a discount by S Co., P's wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying amounts in the two companies would be:*

a. Included as a decrease to the consolidated profit or loss and retained earnings

b. Included as an increase to the consolidated profit or loss and retained earnings

c. Reported as a deferred debit to be amortized over the remaining life of the bonds

d. Reported as a deferred credit to be amortized over the remaining life of the bonds

8. A 70% owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and non-controlling interest balances in the parent company's consolidated balance sheet?*

a. No effect on either retained earnings or non-controlling interest

b. No effect on retained earnings and a decrease in non-controlling interest

c. Decrease in both retained earnings and non-controlling interest

d. A decrease in retained earnings and no effect on non-controlling interest

9. Port, Inc. owns 100% of Salem Inc. On January 1, 1992, Port sold Salem delivery equipment at a gain. Port had owned the equipment for two years and used a five-year straight-line depreciation rate with no residual value. Salem is using a three-year straight-line depreciation rate with no residual value for the equipment. In the consolidated income statement, Salem's recorded depreciation expense on the equipment for 1992 will be decreased by:*

a. 20% of the gain on sale

b. 33 1/3% of the gain on sale

c. 50% on the gain on sale

d. 100% on the gain on sale

10. Sun Co., is a wholly owned subsidiary of Star Co. Both companies have separate general ledgers and prepare separate financial statements. Sun requires stand-alone financial statements. Which of the following is correct?*

a. Consolidated financial statements should be prepared by both Star and Sun

b. Consolidated financial statements should only be prepared by Star and not by Sun

c. After the consolidation, the accounts of both Star and Sun should be changed to reflect the consolidated totals for future ease in reporting

d. After consolidation, the accounts of both Star and Sun should be combined together into one general ledger accounting system for future ease in reporting

PROBLEM S0LVING

1. On January 1, 20x9, Paul Corporation acquired 80% of Saul Corporation's 200,000 shares of the outstanding common stock for P5,000,000. Paul did not pay a control premium in the acquisition. On the date of acquisition, the P6,000,000 book value of Saul's net assets equalled fair value. Non-controlling interest was measured at fair value. During 20x9, Saul reported net income of P550,000 and paid dividends of P165,000. What is the non-controlling interest that will be reported on Paul Corporation's December 31, 20x9 consolidated balance sheet?

2. Wagner, a holder of a P1,000,000 Palmer Inc., bond, collected the interest due on March 31, 1992 and then sold the bond to Seal, Inc., for P975,000. On that date, Palmer, a 75% owner of Seal, had a P1,075,000 carrying amount for this bond. What was the effect of Seal's purchase of Palmer's bond on the retained earnings and non-controlling interest amounts reported in Palmer's March 31, 1992, consolidated balance sheet?