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NAME: Date:
Professor: Section: Score:
ACCOUNTING FOR BUSINESS COMBINATIONS
FINAL GRADING EXAMINATION
1. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets,
liabilities, and contingent liabilities over cost” (i.e., negative goodwill) should be
a. Amortized over the life of the assets acquired.
b. Reassessed as to the accuracy of its measurement and then recognized immediately in profit
or loss.
c. Reassessed as to the accuracy of its measurement and then recognized in retained earnings.
d. Carried as a capital reserve indefinitely.
2. The costs of issuing equity securities in a business combination are
a. expensed
b. treated as direct reduction in equity
c. included in the initial measurement of the credit to share capital account
d. b and c
3. Goodwill may be capitalized
a. only when it arises in a business combination.
b. only when it is created internally.
c. only when it is purchased
d. on any of these cases.
4. A contingent liability assumed in a business combination is recognized
a. if it is a present obligation that arises from past events and
b. if its fair value can be measured reliably.
c. even if it has an improbable outflow of resources embodying economic benefits.
d. All of these
5. The acquisition date is
a. the date on which the acquirer obtains control of the acquiree.
b. the opening date.
c. the date the acquirer transfers to the acquiree the consideration in a business combination.
d. any of these
6. On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc. for ₱2,000,000 cash. ABC Co.
incurred transaction costs of ₱100,000 in the business combination. ABC Co. elected to measure
NCI at fair value. An independent valuer assessed the NCI’s fair value at ₱1,080,000. The fair
values of XYZ’s identifiable assets and liabilities at the acquisition date were ₱6,000,000 and
₱3,500,000, respectively. How much is the goodwill (gain on a bargain purchase)?
a. 500,000
b. (478,000)
c. (500,000)
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d. 580,000
7. Contingent liabilities acquired in a business combination are initially recognized by the acquirer
using the provisions of which of the following standards?
a. PAS 37
b. PFRS 3
c. PFRS 37
d. PFRS 7
8. You are an accountant. Your client acquired another business in a business combination
transaction during the year. Your client asked you for an advice regarding the preparation of
consolidated financial statements. Your advice to your client would most likely be based on
which of the following standards?
a. PFRS 3
b. PFRS 10
c. PAS 27
d. PAS 36
9. Goodwill acquired in a business combination is initially and subsequently measured using
which of the following standards?
Initial measurement Subsequent measurement
a. PFRS 3 PFRS 10
b. PAS 36 PFRS 3
c. PFRS 3 PAS 36
d. PFRS 3 PFRS 5
Use the following information for the next two questions:
Fact pattern
On January 1, 20x1, DIMINUTIVE Co. acquired all of the assets and assumed all of the liabilities of
SMALL, Inc. As of this date, the carrying amounts and fair values of the assets and liabilities of
SMALL acquired by DIMINUTIVE are shown below:
Carrying Fair
Assets amounts values
Cash in bank 40,000 40,000
Receivables 800,000 480,000
Allowance for probable losses on
(120,000)
receivables -
Inventory 2,080,000 1,400,000
Building – net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000
Liabilities
Payables 1,600,000 1,600,000
On the negotiation for the business combination, DIMINUTIVE Co. incurred transaction costs
amounting to ₱400,000 for legal, accounting, and consultancy fees.
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10. Case #1: If DIMINUTIVE Co. paid ₱6,000,000 cash as consideration for the assets and liabilities
of SMALL, Inc., how much is the goodwill (gain on bargain purchase) on the business
combination?
a. 1,200,000 b. 1,120,000 c. 1,280,000 d. 1,240,000
11. Case #2: If DIMINUTIVE Co. paid ₱4,000,000 cash as consideration for the assets and liabilities
of SMALL, Inc., how much is the goodwill (gain on bargain purchase) on the business
combination?
a. (800,000) b. (720,000) c. (880,000) d. 1,200,000
12. On January 1, 20x1, LITHE Co. paid cash of ₱6,000,000 in exchange for all of the net assets of
FLEXIBLE, Inc. As of this date, the carrying amounts and fair values of the assets and liabilities
of FLEXIBLE acquired by LITHE are shown below:
Assets Carrying amounts Fair values
Cash 40,000 40,000
Receivables 2,760,000 1,480,000
Allowance for probable losses on receivables (400,000)
Property, plant and equipment 4,000,000 4,400,000
Computer software 400,000 -
Patent - 200,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,200,000
Liabilities
Bonds payable (w/ face amount of ₱1,600,000) 1,600,000 1,800,000
In applying the recognition and measurement principles under PFRS 3, LITHE Co. has identified the
following unrecorded intangible assets:
Fair
Type of intangible asset value
Research and development projects 200,000
Customer list 160,000
Customer contract #1 120,000
Customer contract #2 80,000
Order (production) backlog 40,000
Internet domain name 60,000
Trademark 100,000
Trade secret processes 140,000
Mask works 180,000
Total 1,080,000
Additional information:
The computer software is considered obsolete.
The patent has a remaining useful life of 10 years and a remaining legal life of 12 years.
FLEXIBLE, Inc. recognized the research and development costs as expenses when they were
incurred.
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Customer contract #1 refers to an agreement between FLEXIBLE, Inc. and Numbers Co., a
customer, wherein FLEXIBLE, Inc. is to supply goods to Numbers Co. for a period of 5 years. As
of acquisition date, the remaining period in the agreement is 3 years. LITHE and FLEXIBLE
believe that Numbers Co. will renew the agreement at the end of the current contract. The
agreement is not separable.
Customer contract #2 refers to FLEXIBLE’s insurance segment’s portfolio of one-year motor
insurance contracts that are cancellable by policyholders.
FLEXIBLE, Inc. transacts with its customers solely through purchase and sales orders. As of
acquisition date, has a backlog of customer purchase orders from 60% of its customers, all of
whom are recurring customers. The other 40% of FLEXIBLE’s customers are also recurring
customers. However, as of acquisition date, FLEXIBLE has no open purchase orders or other
contracts with those customers.
The internet domain name is registered.
How much is the goodwill (gain on bargain purchase)?
a. 900,000 b. 600,000 c. 420,000 d. 1,680,000
13. On January 1, 20x1, FORTITUDE Co. acquired 15% ownership interest in ENDURANCE, Inc. for
₱400,000. The investment was accounted for under PFRS 9. From 20x1 to the end of 20x3,
FORTITUDE recognized net fair value gains of ₱200,000.
On January 1, 20x4, FORTITUDE acquired additional 60% ownership interest in ENDURANCE, Inc.
for ₱3,200,000. As of this date, FORTITUDE has identified the following:
a. The previously held 15% interest has a fair value of ₱720,000.
b. ENDURANCE’s net identifiable assets have a fair value of ₱4,000,000.
c. FORTITUDE elected to measure non-controlling interests at the non-controlling interest’s
proportionate share of ENDURANCE’s identifiable net assets.
The previously held interest was initially classified as FVPL. How much is the goodwill (gain on
bargain purchase)?
a. 200,000 b. 420,000 c. 920,000 d. 540,000
14. On January 1, 20x1, DIAPHANOUS Co. acquired all of the identifiable assets and assumed all of
the liabilities of TRANSPARENT, Inc. by paying cash of ₱4,000,000. On this date, the identifiable
assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000,
respectively.
Additional information:
In addition to the business combination transaction, the following have also transcribed during the
negotiation period:
a. After the business combination, TRANSPARENT will enter into liquidation and DIAPHANOUS
agreed to reimburse TRANSPARENT for liquidation costs estimated at ₱80,000.
b. DIAPHANOUS agreed to reimburse TRANSPARENT for the appraisal fee of a building
included in the identifiable assets acquired. The agreed reimbursement is ₱40,000.
c. DIAPHANOUS entered into an agreement to retain the top management of TRANSPARENT for
continuing employment. On acquisition date, DIAPHANOUS agreed to pay the key employees
signing bonuses totaling ₱400,000.
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d. To persuade, Mr. Five-six Numerix, the previous major shareholder of TRANSPARENT, to sell
his major holdings to DIAPHANOUS, DIAPHANOUS agreed to pay an additional ₱200,000
directly to Mr. Numerix.
e. Included in the valuation of identifiable assets are inventories with fair value of ₱360,000. Ms.
Vital Statistix, a former major shareholder of TRANSPARENT, shall acquire title to the goods.
How much is the goodwill (gain on bargain purchase)?
a. 1,680,000 b. 1,640,000 c. 1,760,000 d. 1,240,000
15. This type of business combination occurs when, for example, a private entity decides to have
itself “acquired” by a smaller public entity in order to obtain a stock exchange listing.
a. Step acquisition c. Reverse acquisition
b. Rewind acquisition d. Stock acquisition
Use the following information for the next two questions:
On January 1, 20x1, Entity A acquires Entity B in a business combination. The financial statements of
the combining constituents are shown below:
Entity Entity
A B
Cash in bank 12,000 6,000
Accounts receivable 36,000 14,400
Inventory 48,000 27,600
Investment in
90,000 -
subsidiary
Building, net 216,000 48,000
Total assets 402,000 96,000
Accounts payable 60,000 7,200
Share capital 204,000 60,000
Share premium 78,000 -
Retained earnings 60,000 28,800
Total liabilities and equity 402,000 96,000
Additional information:
Entity B’s assets and liabilities are stated at their acquisition-date fair values, except for the
following:
- Inventory, ₱37,200
- Building, net, ₱57,600
The goodwill determined under PFRS 3 is ₱3,600.
The NCI in the net assets of the subsidiary, also determined under PFRS 3, is ₱21,600.
16. How much is the consolidated total assets on January 1, 20x1?
a. 430,800 c. 428,600
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b. 440,800 d. 465,800
17. How much is the consolidated total equity on January 1, 20x1?
a. 330,800 c. 328,600
b. 340,800 d. 363,600
Use the following information for the next three questions:
On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. On this date, Piglet's net
identifiable assets have a carrying amount of ₱180,000, which approximates fair value.
In December 20x1, Piglet sold goods to Pig for ₱81,000. Piglet had marked up these goods by 50%
based on cost. One-third of these goods remain unsold at year-end. The group assessed that there is
no impairment loss on goodwill for the current year.
The individual statements of profit or loss of the entities for the year ended December 31, 20x1 are
shown below:
Pig Co. Piglet Co.
Revenue 1,000,000 720,000
Cost of sales (400,000) (300,000)
Gross profit 600,000 420,000
Distribution costs (200,000) (100,000)
Administrative costs (80,000) (45,000)
Profit before tax 320,000 275,000
Income tax expense (96,000) (95,000)
Profit after tax 224,000 180,000
All of Piglet’s income and expenses (including profit from intercompany sale) were earned and
incurred evenly during the year.
18. How much is the consolidated gross profit?
a. 689,000
b. 731,000
c. 798,000
d. 792,000
19. How much is the consolidated profit?
a. 275,000
b. 284,000
c. 295,000
d. 302,000
20. How much is the profit attributable to
Owners of the parent NCI
a. 262,000 13,000
b. 224,000 60,000
c. 262,250 12,750
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d. 256,250 45,750
Use the following information for the next five questions:
On January 1, 20x1, Bass Co. issued equity instruments in exchange for 75% interest in Guitar Co.
On acquisition date, Bass Co. elected to measure non-controlling interest at fair value. Bass Co.’s
management believes that the fair value of the consideration transferred correlates to the fair value
of the controlling interest acquired and that the fair value of the controlling interest is proportionate
to the fair value of the remaining interest.
Guitar Co.’s net identifiable assets have carrying amount and fair value of ₱300,000 and ₱360,000,
respectively. The difference is attributable to a building with a remaining useful life of 6 years.
The December 31, 20x1 statements of financial position of Bass Co. and Guitar Co. are summarized
below:
Bass Co. Guitar Co.
ASSETS
Investment in subsidiary (at cost) 300,000 -
Other assets 1,372,000 496,000
TOTAL ASSETS 1,672,000 496,000
LIABILITIES AND EQUITY
Trade and other payables 292,000 120,000
Share capital 940,000 200,000
Retained earnings 440,000 176,000
Total equity 1,380,000 376,000
TOTAL LIABILITIES AND EQUITY 1,672,000 496,000
No dividends were declared by either entity during year. There were also no inter-company
transactions and impairment in goodwill.
21. What amount of goodwill is presented in the consolidated statement of financial position on
December 31, 20x1?
a. 40,000
b. 35,000
c. 20,000
d. 15,000
22. How much is the consolidated total assets as of December 31, 20x1?
a. 1,867,000
b. 1,907,000
c. 1,958,000
d. 1,974,000
23. How much is the non-controlling interest in the net assets of the subsidiary on December 31,
20x1?
a. 106,500 c. 136,500
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b. 116,500 d. 146,500
24. How much is the consolidated retained earnings on December 31, 20x1?
a. 489,500 c. 534,500
b. 498,500 d. 543,500
25. How much is the consolidated total equity on December 31, 20x1?
a. 1,546,000 c. 1,642,000
b. 1,564,000 d. 1,624,000
Use the following information for the next three questions:
On January 1, 20x1, Laughter Co. issued equity instruments in exchange for 75% interest in Tears
Co. Tears Co.’s net identifiable assets have carrying amount and fair value of ₱300,000 and ₱360,000,
respectively. The difference is attributable to a building with a remaining useful life of 6 years.
The December 31, 20x1 statements of profit or loss of Laughter Co. and Tears Co. are summarized
below:
Statements of profit or loss
For the year ended December 31, 20x1
Laughter Co. Tears Co.
Revenues 1,200,000 480,000
Operating expenses (960,000) (400,000)
Profit for the year 240,000 80,000
26. How much is the consolidated profit in 20x1?
a. 301,000 c. 320,000
b. 310,000 d. 336,000
27. How much is the consolidated profit attributable to owners of the parent in 20x1?
a. 292,500 c. 320,000
b. 310,000 d. 232,500
28. How much is the consolidated profit attributable to non-controlling interest in 20x1?
a. 6,500 c. 57,500
b. 17,500 d. 77,500
29. Details of Poe Corp.'s plant assets at December 31, 20x3, are as follows:
Year acquired Percent depreciated Historical cost Estimated current cost
20x1 30 200,000 280,000
20x2 20 60,000 76,000
20x3 10 80,000 88,000
Poe calculates depreciation at 10% per annum, using the straight-line method. A full year's
depreciation is charged in the year of acquisition. There were no disposals of plant assets. The net
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current cost (after accumulated depreciation) of the plant assets at December 31, 20x3 should be
stated as
a. 364,000 b. 336,000 c. 260,000 d. 232,000
30. After restatement in accordance with PAS 29, the financial statements of an entity operating
under a hyperinflationary economy are translated using which of the following procedures?
a. all amounts (i.e., assets, liabilities, equity items, income and expenses, including
comparatives) are translated at the closing rate.
b. comparatives are not restated anymore to the purchasing power current at the end of
reporting period, although they are also translated at the closing rate.
c. non-monetary items are translated at the closing rate while income and expenses are
translated at the average rates.
d. a and b
Use the following information for the next two questions:
You are an auditor. ABC Philippines Co., your client, is not sure on what to disclose in its financial
statements as its functional currency. Relevant information follows:
ABC Philippines Co. is a branch of ABC U.S. Co. ABC Philippines operates in a Philippine Economic
Zone Authority (PEZA) Special Economic Zone. ABC Philippines is engaged in the apparel business.
All of its raw materials are imported from the main office in the U.S. and all of its finished products
are exported directly to U.S. customers. The U.S. customers remit payments to the U.S. main office.
The U.S. main office will then provide the Philippine branch its working capital needs. None of ABC
Philippines Co.s’ finished products are sold in the Philippines. The raw materials imported and
finished goods exported are denominated in U.S. dollars.
31. What is ABC Philippines Co.’s functional currency?
a. Philippine peso
b. U.S. dollar
c. a or b
d. none of these
32. ABC Philippines Co. is required to file audited financial statements with the Philippine
Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR). What is
the presentation currency for the financial statements to be filed with the said government
agencies?
a. Philippine peso
b. U.S. dollar
c. a or b
d. none of these
33. These are those which do not give rise to a right to receive (or an obligation to deliver) a fixed or
determinable amount of money.
a. Monetary items
b. Non-monetary items
c. Financial items
d. Non-financial items
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34. On December 1, 20x1, you imported a machine from a foreign supplier for $100,000, due for
settlement on January 6, 20x2. Your functional currency is the Philippine peso. When preparing
the December 31, 20x1 statement of financial position, which of the following will you translate
to the closing rate?
a. machine
b. accounts payable
c. a and b
d. none of these
35. Use the information in the immediately preceding problem. The relevant exchange rates are as follows:
Dec. 1, 20x1 Dec. 31, 20x1 Jan. 6, 20x2
₱50:$1 ₱52:$1 ₱47:$1
How much foreign exchange gain (loss) will you recognize on December 31, 20x1?
a. 200,000 c. 100,000
b. (200,000) d. (100,000)
36. According to the PFRS for SMEs, It is the currency of the primary economic environment in
which the entity operates.
a. Presentation currency c. Inflationary currency
b. Functionality currency d. Functional currency
37. ABC Co. has a net investment in a foreign operation that it needs to hedge. How should ABC
Co. hedge this item?
a. as a fair value hedge c. a or b
b. similar to a cash flow hedge d. neither a nor b
38. A highly probable forecast transaction is mostly hedged through a
a. futures contract c. fair value hedge
b. cash flow hedge d. any of these
39. Which of the following is not among the conditions for hedge accounting?
a. formal designation and documentation at the start of the hedge
b. hedge is actually highly effective as of the inception of the hedge
c. for cash flow hedges, the hedged forecast transaction must be highly probable and must
present an exposure to variations in cash flows that could ultimately affect profit or loss
d. effectiveness can be measured reliably
40. Which of the following is included among the conditions for hedge accounting?
a. formal designation and documentation at the end of the hedge
b. hedge is expected to be highly effective
c. for cash flow hedges, the hedged forecast transaction must be highly impossible and must
present an exposure to variations in cash flows that could ultimately affect profit or loss;
d. effectiveness cannot be measured reliably
41. Under fair value hedges, which of the following is measured at fair value?
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a. the hedging instrument c. both a and b
b. the hedged item d. either a or b
42. Under a cash flow hedge of a highly probable forecast transaction, the hedged item is recognized
a. using other relevant PFRSs
b. only on the date of actual transaction
c. never recognized if settled on a net cash basis
d. a and b
43. Discontinuance of hedging relationships is accounted for
a. prospectively c. either a or b
b. retrospectively d. partly a and partly b
44. On December 31, 199X, the end of its fiscal year, Smarti Company held a derivative instrument
which it had acquired for speculative purposes during November, 199X. Since its acquisition the
fair value of the derivative had increased materially. On December 31, how should the increase
in fair value of the derivative instrument be reported by Smarti in its financial statements?
a. Recognized as a deferred credit until the instrument is settled.
b. Recognized in current net income for 199X.
c. Recognized as a component of other comprehensive income for 199X.
d. Disregarded until the instrument is settled.
45. Gains and losses from changes in the fair value of a derivative designated and qualified as a fair
value hedge should be:
a. Disregarded until the derivative is settled.
b. Recognized as a deferred debit or deferred credit in the balance sheet until the derivative is
settled.
c. Recognized in current net income in the period in which the fair value of the derivative
changes.
d. Recognized as a component of other comprehensive income in the period in which the fair
value of the derivative changes.
46. A derivative designated as a fair value hedge must be:
I. Specifically identified to the hedged asset, liability or unrecognized firm commitment.
II. Expected to be highly effective in offsetting changes in the fair value of the hedged item.
a. I only. c. Both I and II.
b. II only. d. Neither I nor II.
47. On January 1, 2002, Cougar Company received a two-year $500,000 loan. The loan calls for
payments to made at the end of each year based on the prevailing market rate at January 1 of
each year. The interest rate at January 1, 2002, was 10 percent. Aggie company also has a two-
year $500,000 loan, but Aggie's loan carries a fixed interest rate of 10 percent. Cougar Company
does not want to bear the risk that interest rates may increase in year two of the loan. Aggie
Company believes that rates may decrease and they would prefer to have variable debt. So the
two companies enter into an interest rate swap agreement whereby Aggie agrees to make
Cougar's interest payment in 2003 and Cougar likewise agrees to make Aggie's interest payment
in 2003. The two companies agree to make settlement payments, for the difference only, on
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December 31, 2003. If the interest rate on January 1, 2003 is 8 percent, what will be Cougar's
settlement payment to/from Aggie?
a. $5,000 payment c. $10,000 payment
b. $5,000 receipt d. $10,000 receipt
48. On January 1, 2002, Cougar Company received a two-year $500,000 loan. The loan calls for
payments to made at the end of each year based on the prevailing market rate at January 1 of
each year. The interest rate at January 1, 2002, was 10 percent. Aggie company also has a two-
year $500,000 loan, but Aggie's loan carries a fixed interest rate of 10 percent. Cougar Company
does not want to bear the risk that interest rates may increase in year two of the loan. Aggie
Company believes that rates may decrease and they would prefer to have variable debt.
So the two companies enter into an interest rate swap agreement whereby Aggie agrees to make
Cougar's interest payment in 2003 and Cougar likewise agrees to make Aggie's interest payment
in 2003. The two companies agree to make settlement payments, for the difference only, on
December 31, 2003. If the interest rate on January 1, 2003, is 12 percent, what will be Cougar's
settlement payment to/from Aggie?
a. $5,000 payment c. $10,000 payment
b. $5,000 receipt d. $10,000 receipt
49. Fair value disclosure of financial instruments may be made in the:
Body of financial statements Footnotes to financial statements
a. No No
b. No Yes
c. Yes No
d. Yes Yes
50. Disclosures about the following kinds of risks are required for most financial instruments.
Credit risk Market risk
a. Yes Yes
b. Yes No
c. No Yes
d. No No
“It is paradoxical, yet true, to say, that the more we know, the more ignorant we
become in the absolute sense, for it is only through enlightenment that we become
conscious of our limitations. Precisely one of the most gratifying results of
intellectual evolution is the continuous opening up of new and greater prospects.” –
(Nikola Tesla)
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