CHAPTER 10

SUGGESTED ANSWERS

EXERCISES

Exercise 10 - 1
1. Assets, other than goodwill 550,000
Goodwill 196,000
Liabilities 230,000
Ordinary Share Capital 516,000

Co. A Co. B Co. C Total

Net asset contribution P 90,000 P120,000 P110,000 P320,000
Goodwill contribution
Average earnings P 16,000 P 20,000 P 22,000
Normal earnings 10,800 14,400 13,200
Excess earnings P 5,200 P 5,600 P 8,800
Capitalization rate 10% 10% 10%
Goodwill P 52,000 P 56,000 P 88,000 196,000
Total contribution P142,000 P176,000 P198,000 P516,000
Stock distribution 14,200 sh 17,600 sh 19,800 sh 51,600 sh

2. Assets 550,000
Liabilities 230,000
Ordinary Share Capital 320,000
Co. A 142,000/516,000 x 32,000 sh 8,806 sh
Co. B 176,000/516,000 x 32,000 sh 10,915 sh
Co. C 198,000/516,000 x 32,000 sh 12,279 sh

Exercise 10 - 2
Total contribution (P50,000 / 10%) P500,000
Net asset contribution equal to preference shares issued 400,000
Goodwill contribution equal to ordinary shares issued P100,000

Preference Share Capital (P400,000/P100) 4,000 shares

Ordinary Share Capital (P100,000/P50) 2,000 shares

Exercise 10 - 3
1. 1,500 shares/2,000 shares x 100 shares = 75 shares
2. 1,500 shares x P150 = P225,000
3. 1,000 shares x P150 = P150,000
4. P500,000/2,000 shares x 100 shares = P 25,000

Exercise 10 - 4
Cost (10,000 sh x P120 = P1,200,000 + P75,000) P1,275,000
Fair value of net assets acquired 450,000
Goodwill P 825,000

Exercise 10 - 5

1. Cost P 50,000
Chapter 10 - Suggested Answers (AA2.2006) page 2

FMV of net assets acquired 60,000

Negative Goodwill P 10,000

2. Negative goodwill is immediately recognized as income.

Exercise 10 -6
Requirement 1
Accounts Receivable 120,000
Inventories 140,000
Property. Plant, and Equipment 300,000
Cash 505,000
Profit or Loss/Gain on Business Combination 5,000
Current Liabilities 50,000
Cost (P500,000 + P5,000) P505,000
FMV of net assets acquired 510,000
Negative Goodwill P 5,000

Requirement 2
Cash 500,000
Current Liabilities 50,000
Accounts Receivable 120,000
Inventories 100,000
Property, Plant, and Equipment 280,000
Retained Earnings 50,000

Ordinary Share Capital 200,000

Retained Earnings 300,000
Cash 500,000

Exercise 10 – 7
1. Expenses of Business Combination 75,000
Cash 75,000
Current Assets 575,000
Plant Assets 1,200,000
Patents 50,000
Profit or Loss/Gain on Business Combination 75,000
Current Liabilities 300,000
Long-Term Liabilities 450,000
Cash 300,000
Ordinary Share Capital 250,000
Additional Paid-in Capital 450,000
Cost P1,000,000
FMV of net assets acquired 1,075,000
Negative Goodwill P 75,000

Exercise 10 - 8
1. Assets 6,000,000
Goodwill 550,000
Liabilities 1,675,000
Ordinary Share Capital (325,000 x P10) 3,250,000
Paid-In Capital in Excess of Par (325,000 x P5) 1,625,000
Chapter 10 - Suggested Answers (AA2.2006) page 3

Cost (325,000 x P15) P4,875,000

FMV of net assets acquired (P6,000,000 - P1,675,000) 4,325,000
Goodwill P 550,000

2. Assets 10,000,000
Goodwill 225,000
Liabilities 4,525,000
Ordinary Share Capital (475,000 x P5) 2,375,000
Additional Paid-in Capital (475,000 x 7) 3,325,000
Cost (475,000 x 12) P 5,700,000
FMV of net assets acquired
(P10,000,000 – 4,525,000) 5,475,000
Goodwill P 225,000

PROBLEMS
Problem 10 - 1
Company A Company B Company C Total
Net tangible assets P400,000 P200,000 P1,000,000 P1,600,000
Expected annual earnings 60,000 40,000 100,000 200,000
Rate of return on net tangible
assets 15% 20% 10%
Ratio of earnings distribution
before consolidation 30% 20% 50% 100%
Stock distribution (earnings
capitalized at 8%)
Preferred stock 4,000 sh 2,000 sh 10,000 sh 16,000 sh
Common stock 3,500 sh 3,000 sh 2,500 sh 9,000 sh
Earnings distribution:
Preferred stock a. P20,000 P10,000 P50,000 P 80,000
b. 20,000 10,000 50,000 80,000
c. 32,000 16,000 80,000 128,000

Common stock a. P 7,778 P 6,667 P 5,555 P 20,000

b. 17,500 15,000 12,500 45,000
c. 28,000 24,000 20,000 72,000

Total a. P27,778 P16,667 P55,555 P100,000

b. 37,500 25,000 62,500 125,000
c. 60,000 40,000 100,000 200,000
Ratio of earnings distribution
after consolidation a. 27.78% 16.67% 55.55% 100%
b. 30.00% 20.00% 50.00% 100%
c. 30.00% 20.00% 50.00% 100%
Problem 10 - 2
Requirement 1
Plan A

Assets, other than Goodwill 6,000,000

Goodwill 1,000,000
Ordinary Share Capital, P10 par 7,000,000

Co.D Co. E Co. F Total

 Chapter 10 - Suggested Answers (AA2.2006) page 4

Net asset contribution P3,000,000 P1,500,000 P1,500,000 P6,000,000

Goodwill contribution
Est. annual earnings P 300,000 P 165,000 P 135,000
Normal earnings 240,000 120,000 120,000
Excess earnings P 60,000 P 45,000 P 15,000
Capitalization rate 12% 12% 12%
Goodwill P 500,000 P 375,000 P 125,000 1,000,000
Total contribution P3,500,000 P1,875,000 P1,625,000 P7,000,000
Ordinary share distribution 350,000 sh 187,500 sh 162,500 sh 700,000 sh

Plan B
Assets, other than Goodwill 6,000,000
Goodwill 2,000,000
Preference Share Capital, P10 par 6,000,000
Ordinary Share Capital, P10 par 2,000,000

Co. D Co. E Co. F Total

Total contributions
(Earnings/8%) P4,000,000 P2,200,000 P1,800,000 P8,000,000
Net asset contribution 3,750,000 2,062,500 1,687,500 7,500,000
Goodwill contribution P 250,000 P 137,500 P 112,500 P 500,000
Preference share dist.
equal to NA contribution 375,000 sh 206,250 sh 168,750 sh 750,000 sh
Ordinary share distribution
equal to earnings cont. 25,000 sh 13,750 sh 11,250 sh 50,000 sh

Requirement 2
Plan A
Co. D 350,000/700,000 x P600,000 P300,000
Co. E 187,500/700,000 x P600,000 160,714
Co. F 162,500/700,000 x P600,000 139,286
P600,000
Plan B
Preference Ordinary Total
Regular dividends at 6% P450,000 P 30,000 P480,000
Balance – P120,000 x 7,500/8,000 112,500 112,500
P120,000 x 500/8,000 7,500 7,500
Total P562,500 P37,500 P600,000
Dividends per share P .75 P .75
Co. D Co. E Co. F TOTAL
Preference Share Capital P281,250.00 P154,687.50 P126,562.50 P562,500.00
Ordinary Share Capital 18,750.00 10,312.50 8,437.50 37,500.00
Total P300,000.00 P165,000.00 P135,000.00 P600,000.00

Problem 10 - 3
(a) (b) (c )
Cost P160,000 P120,000 P 60,000
FMV of NA acquired
Cash P 3,000 P 3,000` P 3,000
Accounts rec’l 8,000 8,000 8,000
Inventories 20,000 20,000 20,000
 Chapter 10 - Suggested Answers (AA2.2006) page 5

Noncurrent MS 55,000 55,000 55,000

Property, plant & eqt. 50,000 50,000 50,000
Land 28,000 28,000 28,000
Current liabilities ( 4,000) ( 4,000) ( 4,000)
Long-term liabilities (20,000) 140,000 (20,000) 140,000 (20,000) 140,000
Goodwill(Neg. Goodwill) P 20,000 P(20,000) P(80,000)

Problem 10 - 4
1. Cash 100,000
Accounts Receivable 150,000
Inventory 140,000
Goodwill 235,000
Land 120,000
Long-term Investment in Marketable Securities 140,000
Equipment 180,000
Accounts Payable 115,000
Ordinary Share Capital (6,000 @ 50) 300,000
APIC 450,000
Cash (20,000 + 40,000 + 80,000 + 60,000) 200,000
Cost (P750,000 + P200,000) P950,000
FMV of net assets acquired
(P830,000 - P115,000) 715,000
Goodwill P235,000

Expenses 3,000
Cash 3,000

2. Investment in Canada Co. (6,000 x P125) 750,000

Ordinary Share Capital (6,000 x P50) 300,000
Additional Paid - In Capital (6,000 x P75) 450,000

Investment in Canada Co. 200,000

Expenses 3,000
Cash 203,000

Problem 10 - 5
1 FMV of net assets of Commander Co. [(P200,000 + P800,000) - P200,000] P800,000
MV of stocks of General Co.  P40
No. of shares to be issued 20,000 sh
Stock exchange ratio (20,000 sh/10,000 sh) 2:1

2 Investment in Commander Co. (20,000 x P40) 800,000

Ordinary Share Capital (20,000 x P10) 200,000
Paid - In Capital in Excess of Par (20,000 x P30) 600,000

Problem 10 - 6
1. Assets 1,370,000
Liabilities 600,000
Common Stock (75,000 x P10) 750,000
Retained Earnings 20,000
Chapter 10 - Suggested Answers (AA2.2006) page 6

Combiners’ Reassign- Issuer’s

Balances ment Balances
Capital stock P 450,000 + P300,000 P 750,000
Additional paid-in capital 210,000 - 210,000 ----
Retained earnings 110,000 - 90,000 20,000
P 770,000 P 770,000

2. Assets 1,500,000
Goodwill 150,000
Liabilities 600,000
Ordinary Share Capital 750,000
Additional Paid-in Capital 300,000

3. Combiners’ Reassign- Issuer’s

Balances ment Balances
Capital stock P 450,000 - P50,000 P 400,000
Additional paid-in capital 210,000 + 50,000 260,000
Retained earnings 110,000 110,000
P 770,000 P 770,000

MULTIPLE CHOICE
10- A. 1. D 6. B
2. B 7. B
3. C 8. C
4. C 9. D
5. D 10. C

10 – B. 1. A Average earnings P 50,000

Normal earnings (P300,000 x 8%) 24,000
Excess earnings P 26,000
Goodwill (P26,000/10%) P260,000

2. B Average earnings P 80,000

Normal earnings (P400,000 x 8%) 32,000
Excess earnings P 48,000
Goodwill (P48,000/10%) P480,000
Net asset contribution 400,000
Total contribution P880,000

10 - 1. C JPE = [P25,000 – (P250,000 x 6%)]/10% P 100,000

C.
FPJ = [P14,000 – (P150,000 x 8%)]/10% 50,000
Total goodwill P 150,000

10 – D 1. D Average earnings P300,000

Normal earnings (P1,200,000 x 10%) 120,000
Excess earnings P180,000
Rate of capitalization ÷25%
Chapter 10 - Suggested Answers (AA2.2006) page 7

Goodwill P720,000

2. B Cost P1,500,000
FMV of net assets acquired
(P520,000 + P1,480,000 – P800,000) 1,200,000
Goodwill P 300,000

10 – E 1. C Abner Bertha Charlie

Expected annual earnings P 36,000 P 80,000 P 96,000
Rate of capitalization ÷ 8% ÷ 8% ÷ 8%
Total contribution P450,000 P1,000,000 P1,200,000
Asset contribution equal to
preference shares 400,000 800,000 800,000
Goodwill equal toOS issued P 50,000 P 200,000 P 400,000
Par value of ordinary shares ÷ P10 ÷ P10 ÷ P10
Ordinary shares distributed 5,000 sh 20,000 sh 40,000 sh

10 - F 1. B (P3,800,000 - P2,500,000)/P100 13,000 sh

2. D Excess earnings = P481,000 – (P1,300,000 x 15%) P 286,000
Goodwill equal to par value of ordinary share
to be issued = P286,000/20% P1,430,000
Premium on ordinary share = P1,430,000 x 50% P 715,000

10 – G 1. C Frannie Giselle Hazel Total

Earnings contribution P 30,000 P 30,000 P 40,000 P 100,000
Normal earnings 12,000 18,000 30,000 60,000
(6%)
Excess earnings P 18,000 P 12,000 P 10,000 P 40,000
Rate of capitalization ÷ 20% ÷ 20% ÷ 20% ÷ 20%
Goodwill P 90,000 P 60,000 P 50,000 P 200,000
Asset contribution 200,000 300,000 500,000 1,000,000
Total contribution P290,000 P360,000 P550,000 P1,200,000
Stock distribution
290/1,200 x 1,000 242 sh
360/1,200 x 1,000 300 sh
550/1,200 x 1,000 458 sh 1,000 sh

10 – H 1. A Polar Quickie Robot Total

Estimated earnings P 41,250 P 75,000 P 33,750 P
150,000
Normal earnings 22,500 45,000 22,500 90,000
(6%)
Excess earnings P 18,750 P 30,000 P 11,250 P 60,000
Rate of capitalization ÷ 20% ÷ 20% ÷ 20% ÷ 20%
Goodwill P 93,750 P150,000 P 56,250 P 300,000
Asset contribution 375,000 750,000 375,000 1,500,000
Total contribution P458,750 P900,000 P431,250 P1,800,000
Stock distribution %
458,750/1,800,000 26%
900,000/1,800,000 50%
431,250/1,800,000 24%
Chapter 10 - Suggested Answers (AA2.2006) page 8

10 – I 1. B Ordinary Share Capital P250,000

Par value per share ÷ P50
Number of shares issued 5,000
4,000 sh / 5,000 sh .80

10 – J 1. A FMV of net assets equal of MV of stocks issued P2,000,000

MV per share ÷P100
Number of shares to be issued 20,000 sh

10 – K 1. C Cost P80,000
Fair market value of net assets acquired 90,000
Negative Goodwill P10,000

10 – L 1. C Cost (P2,650,000 + 5,000) P2,655,000

FMV of net assets
(P1,890,000 + P2,900,000 – P1,140,000) 3,650,000
Credit to profit and loss P 995,000

10– M 1. A Cost (P3,068,000 + 338,000) P3,406,000

FMV of net assets acquired
(P3,239,600 – 171,600) 3,068,000
Goodwill P 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 P1,097,500

Assets acquired from Lucky 1,733,250
Goodwill recorded upon combination** 850,000
Total assets after the combination P3,680,750

** Cost (200,000 sh @ P11) P2,200,000

Net assets acquired (P1,733,250 – P383,250) 1,350,000
Goodwill 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) P200,000

APIC of Co. U 15,000
P215,000

10 – Q 1. C 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.