Question
On December 31, 20x5, Paper Co. purchased 60% of the outstanding common shares of Book Ltd. for P760,000 in shares and P200,000 in cash. The
On December 31, 20x5, Paper Co. purchased 60% of the outstanding common shares of Book Ltd. for P760,000 in shares and P200,000 in cash. The statements of financial position of Paper and Book immediately before the acquisition and issuance of the notes payable were as follows (in 000s):
Paper __ ____Book___ _
Book Fair Book Fair
Value Value Value Value
Cash P360 P360 P200 P200
Accounts receivable 520 500 380 380
Inventory 800 880 400 360
Capital assets 1,820 2,000 1,420 1,640
P3,500 P2,400
.
Accounts payable P 380 P380 P260 P260
Long-term liabilities 1,200 1,200 1000 1000
Common shares 500 600
Retained earnings 1,420 540
P3,500 P2,400
The difference in the carrying value and the fair value of the capital assets for Book relates to its office building. This building has an estimated 20 years remaining of useful life.
During 20x6, the year following the acquisition, the following occurred:
- Throughout the year, Book purchased merchandise of P800,000 from Paper. Paper's gross margin is 30% of selling price. At December 31, 20X6, Book still owed Paper P250,000 on this merchandise. 75% of this merchandise was resold by Book prior to December 31, 20x6.
- Throughout the year, Book sold merchandise to Paper totalling P500,000. The gross margin in these products is 25%. At the end of 20X6, Paper had not yet resold 60% of this merchandise.
- Management fees were paid to Paper from Book totalling P250,000.
- Book paid dividends of P250,000 at the end of 20x6 and Paper paid dividends of P500,000.
During 20x7, the following occurred:
- Throughout the year, Book purchased merchandise of P1,000,000 from Paper. Paper's gross margin is 30% of selling price. At December 31, 20x6, Book still owed Paper P150,000 on this merchandise. 85% of this merchandise was resold by Book prior to December 31, 20x7.
- Throughout the year, Book sold merchandise to Paper totalling P650,000. The gross margin in these products is 25%. At the end of 20x6, Paper had not yet resold 40% of this merchandise.
- Management fees were paid to Paper from Book totalling P250,000.
- Book paid dividends of P250,000 at the end of 20x7 and Paper paid dividends of P500,000.
- Paper uses the cost method to report its investment in Book.
Statements of Financial Position
As at December 31,20x7
(in thousands of Pesos)
Assets | Paper | Book |
Cash | P 50 | P 210 |
Accounts Receivable | 575 | 410 |
Inventories | 825 | 430 |
Capital assets, net | 2,870 | 1,760 |
Investment in Book | 960 | _______ |
Total assets | P 5,280 | P 2,810 |
|
|
|
Liabilities |
|
|
Accounts payable | P 465 | P 325 |
Long term liabilities | 1,290 | 950 |
Common shares | 1,260 | 600 |
Retained Earnings | 2,265 | 935 |
Total liabilities and shareholders' equity | P 5,280 | P 2,810 |
Statements of Comprehensive Income
For the year ended December 31, 20x7
(in thousands of Pesos)
| Paper | Book |
Sales | P 2,520 | P 2,400 |
Management fees | 250 |
|
Dividend income | 150 | ______ |
| P 2,920 | 2,400 |
Cost of sales | P 800 | P 1,200 |
Depreciation and amortization expenses | 670 | 325 |
Management fees expense |
| 250 |
Other expenses | 460 | 135 |
| P1,930 | P 1,910 |
Net income | P 990 | P 490 |
Statements of Changes in Equity Retained Earnings Section
For the year ended December 31,20X7
(in thousands of Pesos)
| Paper | Book |
Retained earnings, December 31, 20X6 | P 1,775 | P 695 |
Net income | 990 | 490 |
Dividends declared | ( 500) | ( 250) |
Retained earnings, December 31, 20X7 | P 2,265 | P 935 |
The full-goodwill arising from acquisition on December 31, 20x5 amounted to:
The amount of goodwill on December 31, 20x7 amounted to
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