University of Rizal System – Binangonan Campus

College of Accountancy

Final Examination – Accounting for Business Combination

I. Theories. Write the letter of the correct answer.

1. These are the financial statements of a group in which the assets, equity, income, expenses and
cash flows of the parent and its subsidiaries are presented as those of a single economic entity.

A. Consolidated financial statements

B. General purpose financial statements
C. Separate financial statements
D. Group financial statements

2. Consolidated financial statements are typically prepared when one entity has a controlling
financial interest in another unless

A. The subsidiary is a finance entity

B. The fiscal year-ends of two entities are more than three months apart.
C. Such control is likely to be temporary.
D. The two entities are in unrelated industries, such as manufacturing and real estate

3. Consolidated financial statements are typically prepared when one entity has a
controlling financial interest in another unless

A. The subsidiary is a finance entity

B. The fiscal year-ends of the two entities are more than the months
apart. C. The investee is in bankruptcy.
D. The two entities are in unrelated industries such as manufacturing and real estates

4. This is defined as the financial statements presented by a parent in which the investments are
accounted for on the basis of the direct equity interest.

A Single financial statements

B Combined financial statements
C Separate financial statements
D. Consolidated financial statements
5. A "group" for consolidation purposes is
A. A parent and all of its subsidiaries
B. An entity that has one or more subsidiaries
C. An entity, including an unincorporated entity such as partnership that is controlled by another
entity.
D. An entity that obtains control over other entities or businesses

6. It is the entity that controls one or more entities

A. Investor
B. Parent
C. Associate
D. Affiliate

7. It is an entity that is controlled by another entity

A. Subsidiary
B. Associate
C. Investee
D. Affiliate

8. Which of the following is not a valid condition that will exempt an entity from preparing
consolidated financial statements?

A. The parent entity is a wholly owned subsidiary of another entity or partially owned and the
other owners do not object to the nonconsolidation.
B. The parent entity's debt or equity capital is not traded on the stock exchange C. The ultimate
parent entity produces consolidated financial statements available for public use that comply
with IFRS
D. The parent entity is in the process of filing financial statements with a securities commission
for the purpose of issuing any class of instruments in a public market.

9. A parent is exempted from preparing consolidated financial statements if all of the following
conditions exist, except

A. The parent is wholly or partially owned and the owners do not object to the nonconsolidation
B. The parent does not have any debt or equity instruments publicly traded C. The parent
reports one class of share capital in the statement of financial position D. The ultimate parent
prepares consolidated financial statements that comply with IFRS,
10. A subsidiary shall be excluded from consolidation when
A. The investor is a venture capital organization, mutual fund, unit trust or similar entity. B.
The business activities of the subsidiary are dissimilar from those of the other entities within
the group
C. The subsidiary is acquired with the intention to dispose of it within twelve months from date
of acquisition
D. The subsidiary is operating under severe long-term restrictions that significantly impair its
ability to transfer funds to the parent.

11. Which condition is required to exclude a subsidiary from consolidation?

A. The other owners object to the nonconsolidation.

B. The parent makes an election not to consolidate
C. The other owners do not object to the nonconsolidation and the subsidiary does not have
any publicly traded debt or equity instruments.
D. The parent must own 100% of the subsidiary.

12. A parent entity controls 100% of an overseas subsidiary. Because of exchange controls, it is
difficult to transfer funds out of the country to the parent entity. How should the subsidiary be
accounted for?

A. The subsidiary should be excluded from consolidation and the equity method should be used.
B. The subsidiary should be excluded from consolidation and measured at cost. C. The
subsidiary should be excluded from consolidation and accounted for as financial asset D. The
subsidiary is not permitted to be excluded from consolidation because control is not lost

13 An entity acquired an investment in a subsidiary with the view to dispose of the investment
within six months. The investment in the subsidiary has been classified as held for sale. How
should the investment in the subsidiary be treated in the financial statements?

A. Acquisition accounting should be used

B. Equity accounting should be used
C. The subsidiary should not be consolidated but IFRS 5 should be used.
D. The subsidiary should be derecognized.

14. A manufacturing group has just acquired a controlling interest in a football club that is listed
on a stock exchange. The management of the manufacturing group wishes to exclude the football
club from the consolidated financial statements on the ground that the activities are dissimilar.
How should the football club be accounted for?
A. The entity should be consolidated as there is no exemption from consolidated on the ground
of dissimilar activities.
B. The entity should not be consolidated using the acquisition method but should be consolidated
using equity method
C. The entity should not be consolidated and should appear as an investment in the
group accounts
D. The entity should not be consolidated and details should be disclosed in the financial
statements

15. Control is presumed to exist when the parent owns directly or indirectly through subsidiaries

A. More than half of the equity of an entity

B. More than half of the ordinary shares of an entity
C. More than half of the preference and ordinary shares of an entity
D. More than half of the voting power of an entity

16. Control exists even the parent owns half or less of the voting power of an entity under
which of the following circumstances

A. Power over more than half of the voting rights by virtue of contractual agreement with other
entities
B. Power to govern the financial and operating policies of the entity under a statute C. Power
to appoint or remove the members of the board of an entity or the power to cast the majority
of votes at meetings of the board of directors
D. Under all of these circumstances

17. How does IFRS 10 define control?

A. An investor controls an investee when the investor is exposed, or has rights, to variable
returns from its involvement with the investee and has the day to affect those returns through its
power over the investee
B. An investor controls an investee when it has the power to govern the financial and operating
decisions of the investee
C. An investor controls an investee when it owns more than 50% of the ordinary shares of the
investee
D. An investor controls an investee when it has the power participate in the financial and
operating decisions of the investee
18. Noncontrolling interest shall be presented

A. Separately from liabilities and the parent shareholders’ equity

B. Within equity, separately from the parent shareholders’ equity
C. As noncurrent liability
D. As component of the parent shareholders' equity
19. The noncontrolling interest should be recorded at what amount?

A. The fair value of the shares held by the acquirer

B. The fair value of the shares not held by the acquirer or the proportionate share of the fair value
of net identifiable assets of the acquiree
C. The proportionate share of the carrying amount of net identifiable assets of the
acquiree D. The fair value of the shares held by the noncontrolling interest plus goodwill

20. What is the initial measurement of the retained investment in subsidiary when control is lost?

A. Fair value at the date when control is lost

B. Fair value at the beginning of the reporting period
C. Carrying amount at the date when control is lost
D. Carrying amount at the beginning of the reporting period

21. The subsidiary fiscal year-end is June 30 and the parent fiscal year-end is December 3. What
is required in preparing the consolidated financial statements?

A. The subsidiary should be consolidated using more recent interim financial

statements B. The subsidiary should not be consolidated but disclosed only.
C. The subsidiary should be consolidated using the June 30 financial statements D.
The subsidiary should not be consolidated by accounted for using equity method

22. Penn Company, a manufacturing entity owns 75% of Sell Company. Sell Company, an
investment entity, owns 60% of Vane Company, an insurance entity. In Penn Company's
consolidated financial statements, how should the investments in Sell Company and Vane
Company be accounted for?

A Consolidated for Sell and equity method for Vane

B Consolidated for both Sell and Vane
C. Equity method for Sell and consolidated for Vane
D. Equity method for both Sell and Vane
23. Parent Company owns 80% of Subsidiary Company. During the current year, Parent sold
goods with a 40% gross profit to Subsidiary. Subsidiary sold all of these goods in the current
year. For the consolidated financial statements, how should the summation of 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 sold should be reduced by 80% of the intercompany sales. C. Net
income should be reduced by 80% of the gross profit of intercompany sales. D. No
adjustment is necessary.
24. Water Company owns 80% of the outstanding ordinary shares of Fire Company. At the end
of the current year, Fire sold equipment to Water Company at a price in excess of Fire's carrying
amount, but less than the original cost. In the consolidated statement of financial position at the
current year-end, the carrying amount of the equipment should be reported at

A Water's original cost

B. Fire's original cost
C. Water's original cost less Fire's recorded gain
D. Water's original cost less 80% of Fire's recorded gain

25, Fortune Company owns 100% of Salem Company. At the beginning of current year, Fortune
sold Salem delivery equipment at a gain. Fortune 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 the current year
should be decreased by

A 20% of the gain on sale

B. 33 1/3% of the sale sale
C. 50% of the gain on sale
D. 100% of the gain on sale
II. Problems. Write the letter of the correct answer. (2 points each)

Numbers 26 and 27

On January 1, 2018, Entity A acquired 70% of outstanding ordinary shares of Entity B at a price
of P420,000. The result of the business combination on the date of acquisition was 42,000 gain
on bargain purchase. On January 1, 2018, Entity A reported retained earnings of P4,000,000
while Entity B reported retained earnings of P400,000.

All the assets and liabilities of Entity B are fairly valued except machinery which is undervalued
by P160,000 and inventory which is overvalued by P20,000. The said machinery has remaining
useful life of four years while 40% of the said inventory remained unsold at the end of 2018.

For the year ended December 31, 2018, Entity A reported net income of P2,000,000 and declared
dividends of P300,000 in the separate financial statements while Entity B reported net income of
P300,000 and declared dividends of P40,000 in the separate financial statements.

Entity A accounted the investment in Entity B using cost method in the separate financial
statements.
26. What is the noncontrolling interest in net income on December 31, 2018?

A. 90,000
B. 98,400
C. 69,600
D. 81,600

27. What is the consolidated net income attributable to parent shareholders for the year ended
December 31, 2018?

A. 2,204,400
B. 2,324,400
C. 2,282,400
D. 2,190,400
Number 28 and 29

On January 1, 2019, Entity A acquired 60% of outstanding ordinary shares of Entity B at a gain
on bargain purchase of P80,000. For the year ended December 31, 2020, Entity A and Entity B
reported sales revenue of P4,000,000 and P2,000,000 in their respective separate income
statements. At the same year, Entity A and Entity B reported cost of goods sold of P2,400,000
and P1,400,000 in their respective separate income statements.

During 2019, Entity A sold inventory to Entity B at a selling price of P560,000 with gross profit
rate of 40% based on cost. On the other hand, Entity B sold inventory to Entity A at a selling
price of P800,000 with gross profit rate of 30% based on sales during 2020.

On December 31, 2019, 25% of the goods coming from entity remained in Entity B’s inventory
but all were eventually sold to third persons.

For the year ended December 31, 2020, Entity A reported net income of P1,120,000 while Entity
B reported net income of P400,000 and distributed dividends of P100,000. Entity A accounted
for its inventory in Entity B using cost method in its separate financial statements.

28. What is the consolidated sales revenue for the year ended December 31, 2020?

A. 5,200,000
B. 4,640,000
C. 6,000,000
D. 5,440,000
29. What is the consolidated cost of goods sold for the year ended December 31, 2020?

A. 3,800,000
B. 3,104,000
C. 2,896,000
D. 3,904,000
Number 30 and 31

On January 1, 2019, Entity A acquired 80% of outstanding ordinary shares of Entity B at a gain
on bargain purchase of P360,000. The following intercompany transactions occurred for between
the two entities:

∙ On January 1, 2019, Entity B sold a land to Entity A with a cost of P2,000,000 at a

selling price of P2,200,000. The land was eventually sold by Entity A to third persons
during 2020.
∙ On January 1, 2019, Entity A sold a white machinery to Entity B with a cost of P400,000
and accumulated depreciation of P80,000 at a selling price of P360,000. The remaining
life of the machinery from the date of sale was 16. The residual value of white machinery
is immaterial.
∙ On July 1, 2020, Entity B sold a black machinery to Entity A with a cost of P540,000 and
accumulated depreciation of P360,000 at a selling price of 120,000. The remaining useful
life of machinery from the date of sale was 3. The residual value of black machinery is
immaterial.

For the year ended December 31, 2020, Entity A reported net income of P1,600,000 while Entity
B reported net income of P1,000,000 and distributed dividends of P300,000. Entity A accounted
for its inventory in Entity B using cost method in its separate financial statements.

30. What is the noncontrolling interest in net income for 2020?

A. 248,000
B. 210,000
C. 250,000
D. 208,000

31. What is the consolidated net income attributable to parent shareholders for 2020?

A. 2,412,500
B. 2,650,500
C. 2,197,500
D. 2,362,500

32. The following transactions occurred for the period ended regarding Entity A and its two
subsidiaries, Entity B and Entity C:
∙ On January 1, 2020, Entity A acquired 60% of the outstanding common stocks of Entity
B. On April 1, 2020, Entity A acquired 70% of the outstanding common stocks of Entity
C. It is the policy of Entity A to account all its investment in subsidiary using cost
method in its separate financial statements.
∙ On May 1, 2020, Entity A sold inventory to Entity C at a price of P100,000. On June 1,
2020, Entity C resold the inventory coming from Entity A at a price of P150,000 as
follows: 80% to unrelated parties and 20% to Entity B.
∙ On July 1, 2020, Entity B sold a new set of inventory to Entity C at a price of P200,000.
On August 1 ,2020, Entity C resold the inventory coming from Entity B at a price of
P300,000 as follows: 80% to unrelated parties and 20% to Entity A.
∙ For the period ended December 31, 2020, the affiliates reported the following sales
revenues in their separate income statement:

o Entity A – P3,000,000
o Entity B – P2,000,000
o Entity C – P1,000,000

What is the consolidated sales revenue to be reported by Entity A in its consolidated income
statement for the year ended December 31, 2020?

A. 5,700,000
B. 5,870,000
C. 5,490,000
D. 5,620,000

33. The following transactions occurred for the years ended December 31, 2020 and December
31, 2021 regarding Entity A and its two subsidiaries, Entity B and Entity C:

∙ On January 1, 2020, Entity A acquired 75% of the outstanding common stocks of Entity B.
On this date, the equipment of Entity B with remaining useful life of five (5) years has
book value of P200,000 but its fair value is estimated to be P250,000.
∙ On April 1, 2020, Entity A acquired 62% of the outstanding common stocks of Entity C. ∙
On January 1, 2021, Entity B sold his undervalued equipment to Entity A at a price of
P150,000
∙ On April 1, 2021, Entity A resold the said equipment to Entity C at a price of P300,000. ∙
On July 1, 2021, Entity C resold the said equipment to Entity D at a price of P180,000. ∙ It
 is the policy of Entity A to account its Investment in Subsidiary using Cost Method in its
separate financial statements.
What is the consolidated gain on sale of equipment to be reported by Entity A in its consolidated
income statement for the year ended December 31, 2021?

A. 40,000
B. 25,000
C. 30,000
D. 5,000

Number 34 and 35

The following transactions occurred for the year ended December 31, 2020 regarding Entity A
and its two subsidiaries, Entity B and Entity C:

∙ On January 1, 2020, Entity A acquired 90% of the outstanding common stocks of Entity B
at a gain on bargain purchase of P100,000.
∙ On April 1, 2020, Entity A acquired 80% of the outstanding common stocks of Entity C
at goodwill of P50,000.
∙ On July 1, 2020, C borrowed P1,000,000 from Entity B with annual interest of 10% per
annum.
∙ On August 1, 2020, Entity A leased a building to Entity B at annual rental of P360,000. ∙
On September 1, 2020, Entity C rendered advertising services to Entity A in the amount of
P200,000.
∙ On October 1, 2020, Entity A rendered management services to Entity C in the amount of
P400,000.
∙ It is the policy of Entity A to account its Investment in Subsidiary using cost method in
its separate financial statements.
∙ The following relevant data are provided from the separate financial statements of Entity
A, Entity B and Entity C for the year ended December 31, 2020:
Entity A Entity B Entity C

2020 Net Income P5,000,000 P3,000,000 P2,000,000

2020 Dividends declared 1,000,000 500,000 400,000

34. What is the consolidated net income attributable to parent’s stockholders to be reported in the
consolidated income statement of Entity A for the year ended December 31, 2020?
A. 8,120,000
B. 9,250,000
C. 7,460,000
D. 7,930,000
35. What is the noncotrolling interest in net income to be reported in the consolidated income
statement of Entity for the year ended December 31, 2020?

A. 720,500
B. 583,500
C. 647,500
D. 521,500

---End---

Prepared by:

GABRIEL GUNO, CPA

Instructor