Joe Company acquired 100% of the net assets of Jak Company for P1,000,000 cash and P 500,000

one-year non-interest-bearing notes. Applicable discount rate is 10%. The financial records of both
companies were as follows before the business combination:

Joe Company Jak Company

Current Assets 2,560,000 1,800,000

Non-Current Assets 5,000,000 550,000
Total Assets 7,560,000 2,350,000

Liabilities 2,000,000 1,250,000

Ordinary Shares 4,000,000 800,000
Share Premium 500,000 100,000
Retained Earnings 1,060,000 200,000
Total Liabilities and SHE 7,560,000 2,350,000

All assets and liabilities of Jak Company are fairly valued except for machinery that has a book value of P
300,000 and a fair value of P 250,000 and accounts receivable with book value of P 150,000 and a net
realizable value of P 130,000. Use three decimal places in your computation.

1.​ Total acquisition cost amounts to:

a.​ P 1,500,000​ ​ ​ c. P 1,454,500
b.​ P 1,545,500​ ​ ​ d. P 1,050,000

2.​ Fair value of net assets acquired amounts to:

a.​ P 1,030,000​ ​ ​ c. P 1,003,000
b.​ P 1,300,000​ ​ ​ d. P 1,330,000

3.​ Goodwill or gain to be recognized amounts to:

a.​ P 424,500 Goodwill​ ​ c. P 442,500 Goodwill
b.​ P 424,500 Gain​​ ​ d. P 442,500 Gain

4.​ After the combination, total assets will amount to:

a.​ P 9,246,500​ ​ ​ c. P 8,081,500
b.​ P 9,264,500​ ​ ​ d. P 8,810,500

5.​ Consolidated retained earnings after the business combination amounts to:
a.​ P 1,600,000​ ​ ​ c. P 1,006,000
b.​ P 1,660,000​ ​ ​ d. P 1,060,000

MULTIPLE CHOICE

Use the problem to answer the next 2 questions.

Riki Co. acquires the entire share capital of Doom Co. by issuing 100,000 new P1 ordinary shares at a fair value
at the acquisition date of P2.50. The professional fees associated with the acquisition are P20,000 and the issue
costs of the shares are P10,000. The carrying value of the net assets of Doom Co. at the time of acquisition is
P150,000, which is equal to its fair value.

Other information related to the acquisition includes the following:

a)​ If Doom’s profits for the first full year following acquisition exceed P2 million, Riki Co. will pay additional
consideration of P6 million in cash three months after that year end. It is doubtful whether Doom Co. will
achieve this profit, hence the acquisition-date fair value of this contingent consideration is P100,000.
b)​ A contract exists whereby Riki Co. will buy certain components from Doom Co. over the next five years. The
contract was signed when market prices for these components were markedly higher than they are at the
acquisition date. At the acquisition date the fair value of the amount by which the contract prices are
expected to exceed market prices over the next five years is P1.5 million.

1.​ What amount should Riki present for goodwill in its statement of financial position at December 31, 2011,
according to IFRS3 Business combinations?
a. P250,000​ b. P230,000​ c. P200,000​ d. P190,000

2.​ Using the data given above and assuming that Doom Co. achieves its earnings target, how should the
difference of the additional consideration and its acquisition date fair value treated?
a.​ The difference should be added to the consideration transferred, but not addition to goodwill
b.​ The difference should be added to the consideration transferred, but added to the amount of goodwill initially
recognized.
c.​ The difference should be recognized as an income.
d.​ The difference should be recognized as an expense in profit or loss.

3.​ On July 1, 2010 The Magna Company acquired 100% of The Natural Company for a consideration
transferred of P160,000. At the acquisition date the carrying amount of Natural's net assets was P100,000. At
the acquisition date a provisional fair value of P120,000 was attributed to the net assets. An additional
valuation received on May 31, 2011 increased this provisional fair value to P135,000 and on July 30, 2011
this fair value was finalized at P140,000. What amount should Magna present for goodwill in its statement of
financial position at December 31, 2011, according to IFRS3 Business combinations?
a. P20,000​ b. P40,000​ c. P25,000​ d. P60,000

4.​ At the acquisition date, an acquirer has established fair values for items recognized as an expense in profit or
loss by the acquiree and is trying to decide whether they can be classified as identifiable assets.
a)​ In-process development of new compounds for food flavoring – P500,000
b)​ Patents developed internally – P2,500,000
c)​ Selling efforts leading to an order backlog – P3,000,000
d)​ Franchise agreements developed internally – P700,000.

What is the amount to be recognized as identifiable intangible asset?

a. P0​ b. P3,200,000​ c. P6,200,000​ d. P6,700,000

5.​ SGV acquired ABS on 30 June 2010. By 31 December 2010, the end of its 2010 reporting period, SGV had
provisional fair values for the following:
●​ Trademarks effective in certain foreign territories of P400,000. These had an average remaining useful life of
10 years at the acquisition date. The acquisition date fair value was finalized at P500,000 on 31 March 2011.
●​ Trading rights in other foreign territories of P600,000. These had an average remaining useful life of 5 years
at the acquisition date. The acquisition date fair value was finalized at P300,000 on 30 September 2011.
Based on the information above, which of the following statement is correct?
a.​ In SGV’s 2010 financial statements, amortization of trademarks and trading rights amounts to P160,000
b.​ In SGV’s 2010 financial statements, amortization of trademarks and trading rights amounts to P55,000
c.​ The difference between the initial and finalized fair value of the trading rights is recognized in profit or loss
prospectively from 30 September 2011.
d.​ The difference between the initial and finalized fair value of the trading rights is recognized in as either
adjustment to goodwill or gain on bargain purchase
6.​ TV5 acquired an 80% interest in GMA for P900,000. The carrying amounts and fair values of DEF’s
identifiable assets and liabilities at the acquisition date were as follows:

Carrying amount Fair value

Tangible non-current assets 375,000 350,000
Intangible non-current assets 0 200,000
Current assets 400,000 350,000
Liabilities (300,000) (300,000)
Contingent liabilities ​ 0 (30,000)
475,000 ​ 570,000
If TV5 has decided to measure the non-controlling interest at its share of DEF’s identifiable net assets, what
is the amount of gain on bargain purchase?
a. P444,000​ b. P555,000​ c. P666,000​ d. P0

7.​ The Lampard Company acquired a 70% interest in The Ohau Company for P1,960,000 when the fair value of
Ohau's identifiable assets and liabilities was P700,000 and elected to measure the non- controlling interest at
its share of the identifiable net assets. Annual impairment reviews of goodwill have not resulted in any
impairment losses being recognized. Ohau's current statement of financial position shows share capital of
P100,000, a revaluation reserve of P300,000 and retained earnings of P1,400,000. Under IFRS3 Business
combinations, what figure in respect of goodwill should now be carried in Lampard's consolidated statement
of financial position?
a. P160,000​ b. P700,000​ c. P1,260,000​ d. P1,470,000

8.​ The National Company acquired 80% of The Local Company for a consideration transferred of P100,000.
The consideration was estimated to include a control premium of P24,000. Local's net assets were P85,000
at the acquisition date. Which of the following statements is in accordance to IFRS3 Business combinations?
I.​ Goodwill should be measured at P32,000 if the non-controlling interest is measured at its share of Local's net
assets.
II.​ Goodwill should be measured at P34,000 if the non-controlling interest is measured at fair value.

a.​ I only​ b. II only​ c. Both I and II​ d. Neither I nor II

9.​ The Mooneye Company acquired a 70% interest in The Swain Company for P1,420,000 when the fair value
of Swain's identifiable assets and liabilities was P1,200,000. Mooneye acquired a 65% interest in The Hadji
Company for P300,000 when the fair value of Hadji's identifiable assets and liabilities was P640,000.
Mooneye measures non-controlling interests at the relevant share of the identifiable net assets at the
acquisition date. Neither Swain nor Hadji had any contingent liabilities at the acquisition date and the above
fair values were the same as the carrying amounts in their financial statements. Annual impairment reviews
have not resulted in any impairment losses being recognized. Under IFRS3 Business combinations, what
figures in respect of goodwill and of gains on bargain purchases should be included in Mooneye's
consolidated statement of financial position?
a.​ Goodwill: P580,000;​ Gain on bargain purchase: P116,000
b.​ Goodwill: 0;​ Gain on bargain purchase: P116,000
c.​ Goodwill: 0;​ Gain on bargain purchase: 0
d.​ Goodwill: P580,000;​ Gain on bargain purchase: 0

10.​ On October 1, 2010 The Tingling Company acquired 100% of The Greenbank Company when the fair value
of Greenbank's net assets was P116,000 and their carrying amount was P120,000. The consideration
transferred comprised P200,000 in cash transferred at the acquisition date, plus another P60,000 in cash to
be transferred 11 months after the acquisition date if a specified profit target was met by Greenbank. At the
acquisition date there was only a low probability of the profit target being met, so the fair value of the
additional consideration liability was P10,000. In the event, the profit target was met and the P60,000 cash
was transferred. What amount should Tingling present for goodwill in its statement of consolidated financial
position at December 31, 2011, according to IFRS3 Business combinations?
a. P94,000
b. P80,000
c.​ P84,000
d. P144,000

11.​ 100% of the equity share capital of The Raukatau Company was acquired by The Sweet Company on June
30, 2010. Sweet issued 5,000 new P100 par ordinary shares which had a fair value of P800 each at the
acquisition date. In addition the acquisition resulted in Sweet incurring fees payable to external advisers of
P200,000 and share issue costs of P180,000. In accordance with IFRS3 Business combinations, goodwill at
the acquisition date is measured by subtracting the identifiable assets acquired and the liabilities assumed
from
a. P4.00 million​ b. P4.18 million​ c. P4.20 million​ d. P4.38 million

12. IFRS 3:
A.​ Allows either the uniting of interest method, or the acquisition method.
B.​ Allows only the uniting of interest method.
C.​ Allows only the acquisition method.

13. Under IFRS 3, acquired contingent liabilities are:

A.​ Always included in the cost of combination.
B.​ Included in the cost of combination, only if they can be reliably measured.
C.​ Included in goodwill.

14. Goodwill should be:

A.Tested annually for impairment.
B. Held at cost.
C. Amortized.

15. Gain on Bargain Purchase should be:

A.​ Matched to future losses.
B.​ Allocated to non-current assets.
C.​ Recorded in the income statement.

16. The result of nearly all combinations is that the:

A.​ ‘Acquirer’ obtains control of the ‘acquiree’.
B.​ ‘Acquiree’ obtains control of the ‘acquirer’.
C.​ ‘Acquirer’ is a partner of the ‘acquiree’.

17. A combination may involve:

(i)​ The acquisition of the equity of another undertaking.
(ii)​ The acquisition of all the net assets of another undertaking.
(iii)​ The assumption of the liabilities of another undertaking.
(iv)​ The acquisition of some of the net assets of another undertaking, that together form one or more
businesses.
(v)​ The acquisition of assets from a firm in liquidation.

A.​ i – ii
B.​ i – iii
C.​ ii – iii
D.​ i – iv
E.​ i–v

18. Applying the acquisition method involves the following steps:

i​ ​ Identifying an acquirer.
ii ​ ​ Measuring the cost of the combination.
iii ​ Allocating, at the acquisition date, the cost of the combination to the assets acquired and liabilities and
contingent liabilities assumed.
iv​ Amortizing the goodwill.

A.​ i – ii
B.​ i – iii
C.​ ii – iii
D.​ i – iv

19.​ Control is the power:

1.​ To govern the financial and operating policies of an undertaking.
2.​ To control more than 40% of the ordinary shares.
3.​ Appoint board members in proportion to your shareholding.

20. To identify an acquirer, indications that one exists are:

i​ If the fair value of one of the undertakings is greater than that of the other, the greater is likely to be the
acquirer.
ii​ If the combination is effected through an exchange of voting ordinary equity instruments for cash or other
assets, the undertaking giving up cash or other assets is likely to be the acquirer.
iii​ If the combination results in the management of one of the undertakings being able to run the combined
undertaking, the undertaking whose management is able to dominate is likely to be the acquirer.
iv​ In a combination effected through an exchange of shares, the undertaking that issues the shares is
normally the acquirer.

v​ In a combination effected through an exchange of shares, the older undertaking is normally the acquirer.

A.​ i – ii
B.​ i – iii
C.​ ii – iii
D.​ i – iv
E.​ i–v

21. When a new undertaking is formed to effect a combination:

A.​ There will be no acquirer.
B.​ 0ne of the undertakings that existed before the combination must be identified as the acquirer.
C.​ The new undertaking will be the acquirer.

22. The cost of a combination includes:

(i)​ Liabilities incurred or assumed by the acquirer.
(ii)​ Professional fees paid to accountants.
(iii)​ Legal advisers’ fees.
(iv)​ Valuers’ fees.
(v)​ General administrative costs

A. i – ii
B.​ i – iii
C.​ ii – iii
D.​ i – iv
E.​ i–v

23. Future losses are:

a.​ Liabilities incurred for control of the acquiree.
b.​ Included as part of the cost of the combination.
c.​ Neither 1 nor 2.
 24. For an adjustment to the cost of the combination contingent on future events, the acquirer must include
the amount of that adjustment in the cost of the combination at the acquisition date, if the adjustment is:
A.​ Probable and can be measured reliably.
B.​ Certain and exactly measurable.
C.​ Payable within one year.

25. The acquirer may be required to make a subsequent payment to the seller, as compensation for a
reduction in the value of the shares issued for control of the acquiree.
In such cases:
A.​ An increase in the cost of the combination is recorded.
B.​ The fair value of the additional payment is offset by an equal reduction in the value, attributed to the
shares initially issued.
C.​ An increase in goodwill is recorded.

26. The acquirer must allocate the cost of a combination, by recording the acquiree’s identifiable:
(i)​ Assets.
(ii)​ Liabilities
(iii)​ Contingent liabilities.
(iv)​ Non-current assets that are as ‘held for sale’.
(v)​ Non-current liabilities that are as ‘held for sale’.

A. i – ii
B. i – iii
C. ii – iii
D. i – iv
E. i – v

27. The method required under PFRS 3 to be used in accounting for business combinations is
a. Purchase method ​ ​ c. Acquisition method
b. Buy method​ ​ ​ d. Combination method

28. Should the following costs be included in the consideration transferred in a business combination,
according to PFRS 3 Business Combinations?
I.​ Costs of maintaining an acquisitions department.
II.​ Fees paid to accountants to effect the combination.
a. No No​ ​ b. No Yes​ c. Yes No​ d. Yes Yes

29. PFRS 3 requires that the contingent liabilities of the acquired entity should be recognized in the
balance sheet at fair value. The existence of contingent liabilities is often reflected in a lower purchase
price. Recognition of such contingent liabilities will
a.​ Decrease the value attributed to goodwill, thus decreasing the risk of impairment of goodwill.
b.​ Decrease the value attributed to goodwill, thus increasing the risk of impairment of goodwill.
c.​ Increase the value attributed to goodwill, thus decreasing the risk of impairment of goodwill.
d.​ Increase the value attributed to goodwill, thus increasing the risk of impairment of goodwill.

30. Are the following statements about an acquisition true or false, according to PFRS 3 Business
combinations?
I.​ The acquirer should recognize the acquiree's contingent liabilities if certain conditions are met.
II.​ The acquirer should recognize the acquiree's contingent assets if certain conditions are met.
a. False, False​ b. False, True​ c. True, False​ d. True, True