FINAL EXAMINATION IN ACCOUNTING FOR BUSINESS COMBINATION

12.20.2021

Choose the letter of the correct answer.

1. The method of accounting for investment in subsidiary that is appropriate for the
acquisition method is
a. Cost method
b. Market value method
c. Equity method
d. Pooling method

2. Alat Co. owns a 70% ownership interest in Tamis Co., acquired several years ago at
book value. On December 31 2021, Tamis mailed a check for P10,000 to Alat in part
payment of a P20,000 account with Alat. Alat did not received the check when its books
were closed on December 31. Alat had accounts receivable of P150,000 ( including the
P20,000 from Tamis) and Tamis had accounts receivable of P220,000 at year-end. In
the consolidated balance sheet at December 31, 2021, how much is the accounts
receivable?
a. 370,000
b. 360,000
c. 350,000
d. 304,000

3. The method that increase or decrease the investment in subsidiary stock for the results
of subsidiary’s operation is
a. Equity method
b. Cost method
c. Purchase method
d. Pooling of interest method

4. Curly Co. owns a 75% of Straight Co. The following figures are from their separate
financial statements:

Curly: Trade receivables P1,040,000, including P30,000 due from Straight

Straight: Trade receivables P215,000, including P40,000 due from Curly

What figure should appear for trade receivables in Curly’s consolidated balance sheet?

a. 1,215,000
b. 1,225,000
c. 1,255,000
d. 1,185,000

5. Two methods of arranging business combination

a. Merger and consolidation
b. Merger and acquisition of stock
c. Acquisition and uniting of interests
d. Consolidation and acquisition of stock

6. This distinguishes a business combination from other types of investment transactions

a. Acquisition of assets
 b. Acquisition of stocks
c. Obtaining control
d. All of these

7. Which of the following statement is incorrect regarding the consideration transferred in

a business combination?
a. It includes only those that are transferred to the former owners of the acquiree
b. It includes those that are retained in the combined equity
c. It can be in the form of cash, noncash assets, the acquirer’s own equity
instruments, or a mixture of these.
d. It is measured in fair value

8. The financial statements for Goodwin Co. and Badloss Co. for the year ended December
31 2020, prior to Goodwin’s business combination transaction regarding Badloss, follow
(in thousands):

On December 31, 2020, Goodwin issued a P600 in debt and 30 shares of its P10 par
value common stock to the owners of Badloss to purchase all of the outstanding shares
of that company. Goodwin shares had a fair value of P40 per share. Goodwin paid P25
to a broker for arranging the transaction. Goodwin paid P35 in stock issuance costs.
Badloss’ equipment was actually worth 1,400 but its buildings were only valued at
P560.

What amount is the investment recorded on Goodwin's books?

a. 1,540
b. 1,800
c. 1,825
 d. 1,860

9. Compute the consolidated expenses for 2020

a. 1,980
b. 2,005
c. 2,015
d. 2,040

10. Compute the consolidated revenues for 2020

a. 3,300
b. 2,700
c. 1,540
d. 720

11. Compute the consolidated retained earnings on December 31 2020

a. 2,800
b. 2,825
c. 2,850
d. 3,425

12. Compute the consolidated additional paid in capital on December 31, 2020
a. 810
b. 1,350
c. 1,675
d. 1,910

13. Compute the consolidated common stock account on December 31, 2020
a. 1,080
b. 1,380
c. 1,480
d. 2,280

14. Compute the consolidated goodwill account on December 31, 2020

a. 0
b. 100
c. 125
d. 160

15. Compute the consolidated cash account on December 31, 2020

a. 460
b. 435
c. 425
d. 400

16. Compute the consolidated buildings net account on December 31, 2020
a. 2,700
b. 3,370
c. 3,260
d. 3,300

17. Direct costs incurred in a business combination are

 a. Capitalized
b. Expenses
c. Capitalized except for costs of issuing equity and debt instruments
d. Expensed, except for costs of issuing equity and debt instruments

18. According to PFRS 3, a gain on a bargain purchase is

a. Recognized in profit or loss in the year of acquisition
b. Amortized in profit or loss over the lower of its legal life and estimated useful life
c. Recognized in profit or loss in the year of acquisition nut only after reassessment
of the assets acquired and liabilities assumed in the business combination
d. Any of these

19. Business combination achieved in stages are accounted for

a. Prospectively
b. Retrospectively, as if the acquired entity has been a subsidiary all along
c. Retrospectively if the previously held equity interest was classified as investment
in associate
d. B and C

20. It is the type of business combination wherein an investor, having an existing

investment in the investee, acquires additional interest in order to obtain control over
the investee.
a. Business combination achieved by contract alone
b. Business combination achieved by mere exchanges of equity interests
c. Business combination achieved in stages
d. Baby step combination

21. Provisional amounts recognized in a business combination are adjusted

a. Prospectively for information obtained during the measurement period
b. Retrospectively for information obtained during the measurement period
c. Not adjusted for any information obtained during the measurement period
d. PFRS 3 (revised) outlawed the use of provisional amounts

22. If the initial accounting for a business combination is incomplete by the end of the
reporting period in which the combination has occurred, the acquirer
a. Shall report in its financial statements provisional amounts for the items for
which the accounting is incomplete
b. Shall be exempted from preparing consolidated financial statements until the
accounting for business combination is completed
c. Shall prepare financial statements as if the business combination did not take
place
d. And the acquiree shall be divorced. The acquiree is entitled to one-half of the
acquirer’s net assets and alimony until their children reach the age of eighteen.

23. BB Co. issued 20,000 ordinary shares in exchange for all the outstanding shares of SB
Co. On acquisition date, SB’s net identifiable assets have a carrying amount of
P4,000,000 and a fair value of P2,000,000. The transaction increased BB’s share
premium by P400,000;however, no goodwill resulted from the business combination.

How much is acquisition date fair value per share of the ordinary shares issued by BB?
a. 20
 b. 40
c. 80
d. 100

24. Based on the above information, how much is the par value per share of BB’s ordinary
shares?
a. 20
b. 40
c. 80
d. 100

25. In a business combination achieved in stages, the acquisition date remeasurement of

gain or loss of an acquirer’s previously held interest in the acquiree is recognized
a. In profit or loss
b. In other comprehensive income
c. Directly in equity
d. A or B

26. P Co, purchased term bonds at a premium on the open market. These bonds
represented 20% of the outstanding class of binds issued at a discount by S Co., P’s
wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated
balance sheets, the difference between the bond carrying amounts in the two companies
would be
a. Included as a decrease to the consolidated profit or loss and retained earnings
b. Included as an increase to the consolidated profit or loss and retained earnings
c. Reported as a deferred debit to be amortized over the remaining life of the bonds
d. Reported as a deferred credit to be amortized over the remaining life of the
bonds.

27. A 70%-owned subsidiary company declares and pays a cash dividend. What effect does
the dividend have on the retained earnings and NCI balances in the parent company’s
consolidated balance sheet?
a. No effect on either retained earnings or NCI
b. No effect on the retained earnings and a decrease in NCI
c. Decreases in both retained earnings and NCI
d. A decrease in retained earnings and no effect on NCI

Use the following information for the next thee questions:

BOLA co. wholly owns LABO co. During the year, BOLA purchased inventory from
LABO. LABO has marked up the goods at 20% above cost.

28. How should the group compute for the consolidated sales?
a. Sales of BOLA plus sales of LABO
b. Sales of BOLA plus sales of LABO minus the intercompany sale
c. Sales of BOLA plus sales of LABO plus the intercompany sale
d. Sales of BOLA plus sales of LABO minus the unrealized gross profit from
intercompany sale

29. How should the group compute for the consolidated cost of sales?
a. COS of BOLA plus COS of LABPO
 b. COS of BOLA plus COS of LABO minus intercompany sales
c. COS of BOLA plus COS of LABO minus intercompany sales plus unrealized
profit in ending inventory and minus realized profit in the beginning inventory
d. COS of BOLA plus COS of LABO minus intercompany sales minus unrealized
profit in ending inventory and plus realized profit in the beginning inventory

30. ABC Co. acquired all the assets and liabilities of CBA Co. for P2,600,000. On
acquisition date, CBA’s identifiable assets and liabilities have fair values of P5,900,000
and P3,500,000, respectively. Relevant information follows:
• ABC is renting out a building to CBA Co. on an operating lease. The terms of the
lease compared with market terms are favorable. The fair value of the differential
is P90,000.
• CBA is a defendant on a pending lawsuit. No provision was recod=gnized
because CBA’s legal counsel believed that they will successfully defend the case.
The fair value of settling the lawsuit is P10,000.

How much is the goodwill (gain n bargain purchase)?

a. 120,000
b. 140,000
c. 200,000
d. 180,000

31. How should the group compute for the consolidated ending inventory?
a. Ending inventory of BOLA plus ending inventory of LABO minus unrealized
profit in ending inventory
b. Ending inventory of BOLA plus ending inventory of LABO plus unrealized profit
in ending inventory
c. Ending inventory of BOLA plus ending inventory of LABO minus intercompany
sales minus unrealized profit in ending inventory and plus realized beginning
inventory
d. Ending inventory of BOLA plus ending inventory of LABO minus intercompany
sales plus unrealized profit in ending inventory and minus realized beginning
inventory

32. On January 1, 2021, the fair values of Puto’s net assets were as follows:
Current assets 100,000
Equipment 150,000
Land 50,000
Buildings 300,000
Liabilities 80,000

On January 1, 2021, Seko Co. purchased the net assets of Puto by issuing 100,000
shares of its P1 par value stock when the fair value of the stock was P6.20. It was
futher agreed that Seko would pay an additional amount on January 1, 2023 if the
average income during the 2-year period of 2021-2022 exceeded P80,000 per year. The
expected value of this consideration was calculated as P184,000; The measurement
period is one year.

What will be recorded as goodwill on January 1, 2021?

a. 0
 b. 100,000
c. 180,000
d. 284,000
33. Using the above information, assuming that on August 1, 2021, the contingent
consideration happens to be P170,000, what will then be recorded as goodwill on the
said date?
a. 0
b. 86,000
c. 166,000
d. 270,000

34. On January 1, 2021, Par Company purchased 80% of the outstanding shares of Sub
Company by paying P340,000, the Sub Company’s common stock and retained
earnings on this date amounted to P150,000 and P230,000 respectively. Also on this
date, an equipment is undervalued by P20,000 with a remaining life of 10 years.

On January 1, 2023, Sub had P150,000 capital stock and P300,000 retained earnings.
Also on the same date, Par Company had P1,000,000 of capital stock and P700,000 or
retained earnings.

During the year, Par sold merchandise to Sub for P60,000 and in turn, purchased
P40,000 from Sub. Intercompany sales of merchandise were made at the following gross
profit rates:

Sales made by parent 25% based on cost

Sales made by subsidiary 20% based on sales

On December 31, 2023,30% of all inter-company sales remain in the ending inventory
of the purchasing affiliate.

The beginning inventory of Par includes P2,500 worth of merchandise acquired from
Sub on which Sub reported a profit of P1,000. While, the beginning inventory of Sub
also includes P3,000 of merchandise acquired from Par at 35% mark-up

Using the cost method, the following selected results of operation from 2023 were as
follows:

The dividend income of Par for 2023 should be:

a. 18,330
b. 10,000
c. 8,000
d. 8,200
35. Using information in No. 34, the balance of investment in Sub Company as of December
31, 2023 should be
a. 354,600
b. 351,960
c. 350,330
d. 340,000

36. Using information in No. 34, the NCI Income in 2023 would be
a. 6,280
b. 6,120
c. 5,720
d. 5,320

37. Using information in No. 34, the Profit attributable to Equity Holders of
Parent/Controlling Interest in Net Income for 2023 should be:
a. 122,600
b. 118,730
c. 118,570
d. 118,330

38. Using information in No. 34,the consolidated net income for 2023 should be:
a. 124,050
b. 122,600
c. 118,570
d. 118,330

39. Using information in No. 34, the parent’s portion of consolidated (for controlling
interest/equity holders of parent) retained earnings on December 31, 2023:
a. 700,000
b. 752,000
c. 753,600
d. 809,680

40. Using information in No. 34, the consolidated retained earnings on December 31, 2023:
a. 700,000
b. 752,000
c. 753,600
d. 809,680

41. Using information in No. 34, the stockholder’s equity of subsidiary on December 31,
2023 should be:
a. 450,000
b. 470,000
c. 481,600
d. 484,000

42. On acquisition, all identifiable assets and liabilities, including goodwill, will be allocated
to cash-generating units within the business combination. Goodwill impairment is
assessed within the cash-generating units. If the combined organization has cash
generating units significantly below the level of an operating segment, then the risk of
an impairment charge against goodwill as a result of PFRS 3 is
 a. Significantly decreased because goodwill will be spread across many cash-
generating units
b. Significantly increased because poorly performing units can no longer be
supported by those that are performing well.
c. Likely to be unchanged from previous accounting practice
d. Likely to be decreased because goodwill will be a smaller amount due to the
greater recognition of other intangible assets.

43. PESTER TO ANNOY is involved in a business acquisition on January 1, 20x1. At the

date of acquisition, the deferred tax assets were ₱300,000. On January 1, 20x1, the
directors considered that realization of the deferred tax assets were not probable. What
effect would this decision have on the allocation of the purchase price?

a. The unrecognized deferred tax would be allocated to goodwill, which would

increase by ₱300,000.
b. The value of goodwill would decrease by ₱300,000.
c. There would be no effect on goodwill.
d. Negative goodwill of ₱300,000 would arise.

44. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable
assets, liabilities, and contingent liabilities over cost” (formerly known as 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

45. As January 1, 2021, Johnson Corporation sold equipment with a three-year remaining
useful life and a book value of P10,000 to its 70% owned subsidiary for a price of
P11,500. In the consolidation working papers for the year ended December 31, 2021,
the elimination entry concerning this transaction will include
a. Debit to equipment for P1,500
b. Debit to gain on equipment P1,500
c. Credit to depreciation expense P1,500
d. Debit to gain on equipment P1,000