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Answer Key Quiz - Quiz 1

Accounting (Araullo University)

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ACC 113: Accounting for Business Combinations

Teachers’ Guide Module #8

Name: ______________________________________________________ Class number: _____

Section: ____________ Schedule: ________________________________ Date: _____________

Materials:
Student Activity Sheet, Calculator
References:
QUIZ (Written Assessment) Millan, Zeus Vernon B.; Accounting
for Business Combinations; 2020
Edition;
Dayag, Antonio J.; Advanced
Financial Accounting and Reporting,
2016 Edition
Test I. Multiple Choice Questions.
Encircle the letter of your chpoice.
1. Given the following information, how is goodwill from a business combination computed under PFRS 3?
A = Consideration transferred
B = Non-controlling interest in net assets of subsidiary
C = Previously held equity interest
D = Fair value of net identifiable assets of subsidiary
% = Percentage of ownership acquired by the parent in the subsidiary
a. A+B+C-D b. A – (D x %) c. (A+C) – (D x %) d. (A+B) – [(D x %) – B]

2. 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.

3. 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

4. An acquirer should at the acquisition date recognize goodwill acquired in a business combination as an
asset. Goodwill should be accounted for as follows:

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ACC 113: Accounting for Business Combinations

Teachers’ Guide Module #8

Name: ______________________________________________________ Class number: _____

Section: ____________ Schedule: ________________________________ Date: _____________

a. Recognize as an intangible asset and amortize over its useful life.

b. Write off against retained earnings.
c. Recognize as an intangible asset and impairment test when a trigger event occurs.
d. Recognize as an intangible asset and annually impairment test (or more frequently if impairment is
indicated).

5. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business combination that resulted
to goodwill. By December 31, 20x1, the initial allocation of goodwill is not yet completed. According to PAS 36,
TEPID should
a. complete the initial allocation before the end of December 31, 20x1.
b. complete the initial allocation before the end of December 31, 20x2.
c. complete the initial allocation before the end of November 30, 20x1.
d. complete the initial allocation before the end of September 1, 20x2.

6. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business combination that resulted
to goodwill. By December 31, 20x1, the initial allocation of goodwill is not yet completed. According to PAS 36,
TEPID should
a. complete the initial allocation before the end of December 31, 20x1.
b. complete the initial allocation before the end of December 31, 20x2.
c. complete the initial allocation before the end of November 30, 20x1.
d. complete the initial allocation before the end of September 1, 20x2.

7. Which of the following methods must be applied in accounting for business combinations under PFRS
3?
a. acquirer method b. acquisition method c. purchase method d. a and b

8. The company that obtains control over another company in a business combination transaction is
referred to as the
a. acquirer b. parent c. subsidiary d. a and b

9. According to PFRS 3, which of the following transaction costs would increase the amount of goodwill
from a business combination?
a. legal fees, accounting fees and similar costs c. issuance costs of debt instruments
b. issuance costs of equity securities d. none of these

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ACC 113: Accounting for Business Combinations

Teachers’ Guide Module #8

Name: ______________________________________________________ Class number: _____

Section: ____________ Schedule: ________________________________ Date: _____________

10. This refers to the additional consideration for a business combination to be given to the acquiree upon
the happening of a contingency which is pre-agreed at the acquisition date.
a. Contingent liability c. Contingent consideration
b. Contingent asset d. Additional compensation

Test II. Problem Solving

1. 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:
Assets Carrying amounts Fair values
Cash in bank 20,000 20,000
Receivables 400,000 240,000
Allowance for probable losses on receivables (60,000)
Inventory 1,040,000 700,000
Building – net 2,000,000 2,200,000
Goodwill 200,000 40,000
Total assets 3,600,000 3,200,000
Liabilities
Payables 800,000 800,000

On the negotiation for the business combination, DIMINUTIVE Co. incurred transaction costs amounting to
200,000 for legal, accounting, and consultancy fees.

Case #1: If DIMINUTIVE Co. paid 3,000,000 cash as consideration for the assets and liabilities of SMALL,
Inc., how much is the goodwill (gain on bargain purchase) on the business combination?

Case #2: If DIMINUTIVE Co. paid 2,000,000 cash as consideration for the assets and liabilities of SMALL,
Inc., how much is the goodwill (gain on bargain purchase) on the business combination?

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ACC 113: Accounting for Business Combinations

Teachers’ Guide Module #8

Name: ______________________________________________________ Class number: _____

Section: ____________ Schedule: ________________________________ Date: _____________

Fact pattern
2. On January 1, 20x1, KNAVE acquired 80% of the equity interests of RASCAL, Inc. in exchange for
cash. Because the former owners of RASCAL needed to dispose of their investments in RASCAL by a
specified date, they did not have sufficient time to market RASCAL to multiple potential buyers.

As January 1, 20x1, RASCAL’s identifiable assets and liabilities have fair values of 2,400,000 and 800,000,
respectively.

Case #1:
KNAVE Co. elects the option to measure non-controlling interest at fair value. An independent consultant was
engaged who determined that the fair value of the 20% non-controlling interest in RASCAL, Inc. is 310,000.

If KNAVE Co. paid 2,000,000 cash as consideration for the 80% interest in RASCAL, Inc., how much is the
goodwill (gain on bargain purchase) on the business combination?

Case #2:
KNAVE Co. elects the option to measure non-controlling interest at fair value. An independent consultant was
engaged who determined that the fair value of the 20% non-controlling interest in RASCAL, Inc. is 310,000.

If KNAVE Co. paid 1,200,000 cash as consideration for the 80% interest in RASCAL, Inc., how much is the
goodwill (gain on bargain purchase) on the business combination?

Case #3:
KNAVE Co. elects the option to measure non-controlling interest at fair value. A value of 250,000 is assigned
to the 20% non-controlling interest in RASCAL, Inc. [( 2M ÷ 80%) x 20% = 500,000].

If KNAVE Co. paid 2,000,000 cash as consideration for the 80% interest in RASCAL, Inc., how much is the
goodwill (gain on bargain purchase) on the business combination?

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ACC 113: Accounting for Business Combinations

Teachers’ Guide Module #8

Name: ______________________________________________________ Class number: _____

Section: ____________ Schedule: ________________________________ Date: _____________

Case #4:
KNAVE Co. elects the option to measure the non-controlling interest at the non-controlling interest’s
proportionate share of RASCAL, Inc.’s net identifiable assets

If KNAVE Co. paid 2,000,000 cash as consideration for the 80% interest in RASCAL, Inc. and, how much is
the goodwill (gain on bargain purchase) on the business combination?

3. On January 1, 20x1, CONJUNCTION Co., and UNION, Inc. entered into a business combination
effected through exchange of equity instruments. The combination resulted to CONJUNCTION obtaining 100%
interest in UNION. Both of the combining entities are publicly listed. As of this date, CONJUNCTION’s shares
have a quoted price of 200 per share. CONJUNCTION Co. recognized goodwill of 600,000 on the business
combination. No acquisition-related costs were incurred. Additional selected information at acquisition date is
shown below:

CONJUNCTION Co. Combined entity

(before acquisition) (after acquisition)
Share capital 1,200,000 1,400,000
Share premium 600,000 2,400,000
Totals 1,800,000 3,800,000

Requirements: Compute for the following:

a. Number of shares issued by CONJUNCTION Co. in the business combination.
b. Par value per share of the shares issued.
c. Acquisition-date fair value of the net identifiable assets of UNION.

4. On January 1, 20x1, OBDURATE Co. acquired 30% ownership interest in STUBBORN, Inc. for
200,000. Because the investment gave OBDURATE significant influence over STUBBORN, the investment
was accounted for under the equity method in accordance with PAS 28.

From 20x1 to the end of 20x3, OBDURATE recognized 100,000 net share in the profits of the associate and
20,000 share in dividends. Therefore, the carrying amount of the investment in associate account on January
1, 20x3, is 280,000.

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ACC 113: Accounting for Business Combinations

Teachers’ Guide Module #8

Name: ______________________________________________________ Class number: _____

Section: ____________ Schedule: ________________________________ Date: _____________

On January 1, 20x4, OBDURATE acquired additional 60% ownership interest in STUBBORN, Inc. for
1,600,000. As of this date, OBDURATE has identified the following:
a. The previously held 30% interest has a fair value of 360,000.
b. STUBBORN’s net identifiable assets have a fair value of 2,000,000.
c. OBDURATE elected to measure non-controlling interests at the non-controlling interest’s proportionate
share of STUBBORN’s identifiable net assets.

Requirement: Compute for the goodwill.

5. OBSTREPEROUS Co. and NOISY, Inc. both engage in the same business. On January 1, 20x1,
OBSTREPEROUS and NOISY signed a contract, the terms of which resulted in OBSTREPEROUS obtaining
control over NOISY without any transfer of consideration between the parties.

The fair value of the identifiable net assets of NOISY, Inc. on January 1, 20x1 is 2,000,000. NOISY chose to
measure non-controlling interest at the non-controlling interest’s proportionate share of the acquiree’s
identifiable net assets.

Requirement: Compute for the goodwill.

6. 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 2,000,000. On this date, the identifiable assets acquired
and liabilities assumed have fair values of 3,200,000 and 1,800,000, 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 40,000.
b. DIAPHANOUS agreed to reimburse TRANSPARENT for the appraisal fee of a building included in the
identifiable assets acquired. The agreed reimbursement is 20,000.
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 200,000.

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ACC 113: Accounting for Business Combinations

Teachers’ Guide Module #8

Name: ______________________________________________________ Class number: _____

Section: ____________ Schedule: ________________________________ Date: _____________

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 100,000 directly to Mr.
Numerix.
e. Included in the valuation of identifiable assets are inventories with fair value of 180,000. Ms. Vital
Statistix, a former major shareholder of TRANSPARENT, shall acquire title to the goods.

Requirement: Compute for the goodwill (gain on bargain purchase).

Key to Corrections:

Answers to Multiple Choicer:

1. A 2. D 3. C 4. D 5. B 7. B 8. D 9. C 10. C

1. Solutions:
Case #1
(1) Consideration transferred 3,000,000
(2) Non-controlling interest in the acquiree -

(3) Previously held equity interest in the acquiree -

Total 3,000,000
Fair value of net identifiable assets acquired* (2,360,000)
Goodwill 640,000
* Fair value of identifiable assets acquired excluding goodwill
(3.2M – 40K) 3,160,000
Fair value of liabilities assumed ( 800,000)
Fair value of net identifiable assets acquired 2,360,000
Case #2:
(1) Consideration transferred 2,000,000
(2) Non-controlling interest in the acquiree -
(3) Previously held equity interest in the acquiree -
Total 2,000,000
Fair value of net identifiable assets acquired (2,360,000)
Gain on a bargain purchase (360,000)

2. Solutions:
Case #1:
(1) Consideration transferred 2,000,000
(2) Non-controlling interest in the acquiree 310,000
(3) Previously held equity interest in the acquiree -

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ACC 113: Accounting for Business Combinations

Teachers’ Guide Module #8

Name: ______________________________________________________ Class number: _____

Section: ____________ Schedule: ________________________________ Date: _____________

Total 2,310,000
Fair value of net identifiable assets acquired (1,600,000)
Goodwill 710,000

Case #2:
(1) Consideration transferred 1,200,000
(2) Non-controlling interest in the acquiree 310,000
(3) Previously held equity interest in the acquiree -
Total 1,510,000
Fair value of net identifiable assets acquired (1,600,000)
Gain on a bargain purchase (90,000)

Case #3:
(1) Consideration transferred 2,000,000
(2) Non-controlling interest in the acquiree 500,000
(3) Previously held equity interest in the acquiree -
Total 2,500,000
Fair value of net identifiable assets acquired (1,600,000)
Goodwill 900,000

Case #4:
(1) Consideration transferred 2,000,000
(2) Non-controlling interest in the acquiree* 320,000
(3) Previously held equity interest in the acquiree -
Total 2,320,000
Fair value of net identifiable assets acquired (1,600,000)
Goodwill 720,000

*The non-controlling interest’s proportionate share of acquiree’s identifiable net assets is computed as follows:
Fair value of identifiable assets acquired 2,400,000
Fair value of liabilities assumed ( 800,000)
Fair value of net identifiable assets acquired 1,600,000
Multiply by: Non-controlling interest 20%
Non-controlling interest’s proportionate share in net identifiable assets 320,000

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ACC 113: Accounting for Business Combinations

Teachers’ Guide Module #8

Name: ______________________________________________________ Class number: _____

Section: ____________ Schedule: ________________________________ Date: _____________

3. Solutions:
Requirement (a): Number of shares issued
CONJUNCTION Co. Combined entity Increase
Share capital 1,200,000 1,400,000 200,000
Share premium 600,000 2,400,000 1,800,000
Totals 1,800,000 3,800,000 2,000,000

The fair value The number of shares issued in the business combination is computed as follows:
Fair value of shares transferred 2,000,000
Divide by: CONJUNCTION’s fair value per share 200
Number of shares issued 10,000
of the shares transferred as consideration for the business combination is P2,000,000.

Requirement (b): Par value per share

The par value per share of the shares issued is computed as follows:
Increase in share capital account (see table above) 200,000
Divide by: Number of shares issued 10,000
Par value per share 20

Requirement (c): Acquisition-date fair value of the net identifiable assets acquired
(1) Consideration transferred (see previous computation) 2,000,000
(2) Non-controlling interest in the acquiree -
(3) Previously held equity interest in the acquiree -
Total 2,000,000
Fair value of net identifiable assets acquired (squeeze) (1,400,000)
Goodwill (given information) 600,000

4. Solution:
(1) Consideration transferred 1,600,000
(2) Non-controlling interest in the acquiree (2M x 10%*) 200,000
(3) Previously held equity interest in the acquiree 360,000
Total 2,160,000
Fair value of net identifiable assets acquired (2,000,000)
Goodwill 160,000
*100% minus 90%

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ACC 113: Accounting for Business Combinations

Teachers’ Guide Module #8

Name: ______________________________________________________ Class number: _____

Section: ____________ Schedule: ________________________________ Date: _____________
5. Solution:
(1) Consideration transferred -
(2) Non-controlling interest in the acquiree (2M x 100%) 2,000,000
(3) Previously held equity interest in the acquiree -
Total 2,000,000
Fair value of net identifiable assets acquired (2,000,000)
Goodwill -

6. Solution:
The consideration transferred on the business combination is computed as follows:
Cash payment on business combination 2,000,000
Additional payment to TRANSPARENT’s
former owner 100,000
Consideration transferred on the business combination 3,100,000

The fair value of net identifiable assets acquired is computed as follows:

Fair value of identifiable assets 2,200,000
Acquisition-date fair value of inventory not
transferred to DIAPHANOUS ( 180,000)
Adjusted fair value of identifiable assets acquired 3,020,000
Fair value of liabilities assumed (1,800,000)
Adjusted fair value of net identifiable assets acquired 1,220,000

Goodwill (gain on bargain purchase) is computed as follows:

(1) Consideration transferred 2,100,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 2,100,000
Fair value of net identifiable assets acquired (1,220,000)
Goodwill 880,000

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