ACCOUNTING FOR BUSINESS COMBINATION - PRELIM EXAMINATION

1st Semester, A. Y. 2020- 2021

BSA 3

Instruction: Choose the letter of your choice and submit your supporting computation. Each item is worth 2
points. Answers without supporting computation will be marked as INCORRECT.

START….

Here are the pre- acquisition balance sheets of Father Company and Son Company on December 31, 20x5:

Father Company Son Company

Book Value Book Value Market Value
Current Assets P 5,000,000 P 2,000,000 P 1,500,000
Investments 1,000,000 500,000 500,000
Land 10,000,000 5,000,000 6,000,000
Buildings, net 40,000,000 25,000,000 12,000,000
Equipment, net 25,000,000 10,000,000 2,000,000
Total Assets P 81,000,000 P 42,500,000

Current liabilities P 4,000,000 1,500,000 1,500,000

Long- term liabilities 20,000,000 10,000,000 10,000,000
Common Stock, P10 par 5,000,000 1,000,000
Additional paid- in capital 40,000,000 20,000,000
Retained Earnings 12,000,000 10,000,000
Total liabilities and equity P 81,000,000 P 42,500,000

In addition to the above, Son Company has identifiable intangibles with a fair market value of P 5,000,000, not
recognized on its books but appropriately capitalized by Father Company.

On January 1, 20x6, Father Company issues 400,000 shares of its stock, with a par value of P 10/share and a
market value of P100/ share, to acquire Son Company’s assets and liabilities. SEC registration fees are P
1,000,000 pain in cash.

1. How much is the goodwill on the business combination?

a. P22,500,000 b. P23,500,000 c. P24,500,000 d. P25,500,000

2. How much is the total assets after the acquisition?

a. P132,500,000 b. P103,500,000 c. P130,500,000 d. P123,500,000

3. How much is the total liabilities after the acquisition?

a. P37,500,000 b. P36,500,000 c. P38,500,000 d. P35,500,000

4. How much is the total additional paid- in capital after the acquisition?
a. P74,900,000 b. P60,000,000 c. P76,000,000 d. P75,000,000

5. How much is the total retained earnings after the acquisition?

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 a. P22,000,000 b. P12,000,000 c. P11,000,000 d. P21,000,000

6. How much is the total shareholders’ equity after the acquisition?

a. P 95,900,000 b. P 96,000,000 c. P 95,000,000 d. P 96,900,000

7. Assuming that Father Company issued 90,000 shares of stock at a market value of P100 per share with
contingent cash consideration amounted to P500,000 that is present obligation and reliably measurable,
expected present value of the earnout agreement of P200,000 and probability present value of stock price
contingency agreement of P300,000. SEC registration fees are P 1,000,000 pain in cash. How much is the
consideration transferred at the acquisition date?
a. P 9,500,000 b. P 9,200,000 c. P 9,800,000 d. P 10,000,000

8. In relation to question No. 7, how much is the total goodwill after the acquisition?
a. P (8,000,000) b. P (7,000,000) c. P (6,000,000) d. P (5,000,000)

9. In relation to question No. 7, how much is the total assets after the acquisition?
a. P 111,460,000 b. P 102,000,000 c. P 80,460,000 d. P 105,000,000

10. In relation in question No.7, how much is the additional paid- in capital after the acquisition?
a. P 47,000,000 b. P 47,400,000 c. P 48,240,000 d. P 48,400,000

On December 31, 20x4, Father Company acquired the assets and liabilities of Son Company. Father Company will
maintain Son Company as a wholly owned subsidiary with its own legal and accounting entity. The consideration
transferred to the owner of Son Company included 50,000 newly issued Father Company shares (P25 market
value, P5 par value) and an agreement to pay an additional P130,000 cash if Son Company meets certain project
completion goals by December 31, 20x5. Father Company estimates a 60 percent probability that Son Company
will be successful in meeting these goals and uses a 4 percent discount rate to represent the time value of
money. Immediately prior to the acquisition, the following data were available for both firms:

Father Company Son Company

Book Value Book Value Market Value
Revenues (P1,200,000)
Expenses 875,000
Net income (P325,000)
Retained earnings, 1/1/20x4 (950,000)
Net income (325,000)
Dividends paid 90,000
Retained earnings, 12/31/20x4 (P1,185,000)
Cash P85,000 P85,000
Receivables and Inventory 190,000 150,000
PPE 450,000 750,000
Trademarks 300,000 160,000 180,000
Total assets P2,560,000 P885,000
Liabilities (P500,000) (P180,000) (P180,000)
Additional paid- in capital (400,000) (200,000)
Common stock (475,000) (70,000)
Retained earnings (1,185,000) (435,000)
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 Total liabilities and equity (P2,560,000) (P885,000)

In addition, Father assessed a research and development project under way at Son to have a fair value of
P150,000. Father paid P9,000 in stock issue and registration costs. Use a 0.961538 present value factor where
applicable.

11. The consideration transferred amounted to

a. P 1,250,000 b. P 1,328,000 c. P 1,062,500 d. P 1,325,000

12. The goodwill after the business combination amounted to

a. P 77,500 b. P 190,000 c. P 193,000 d. P 115,000

13. The additional paid in capital after combination amounted to

a. P 1,400,000 b. P 1,141,000 c. P 1,409,000 d. P 1,391,000

14. The expenses for 20x4 amounted to

a. P 875,000 b. P 890,000 c. P 0 d. P 884,000

15. The net income for 20x4 amounted to

a. P 0 b. P 310,000 c. P 316,000 d. P 325,000

16. The retained earnings on December 31, 20x4 amounted to

a. P 435,000 b. p 1,620,000 c. P 1,185,000 d. P 1,170,000

17. The total equity on December 31, 20x4 amounted to

a. P 3,301,000 b. P 3,286,000 c. P 3,736,000 d. P 2,551,000

18. Assuming that on June 15, 20x5, the contingent performance obligation was revised to P97,500 due to facts and
information that exists on December 31, 20x4, determine the amount of goodwill.
a. P 190,000 b. P 283,750 c. P 212,500 d. P 167,500

19. In relation to No. 17, assuming that on July 31, 20x6, the contingent performance obligation was revised to
P100,000 due to facts and information that exists on December 31, 20x4, determine the amount of goodwill.
a. P 190,000 b. P 215,000 c. P 212,500 d. P 187,500

20. In relation to No. 17, assuming that on July 31, 20x6, the contingent performance obligation was revised to
P100,000 due to facts and information that exists on December 31, 20x4, determine the amount of the
obligation.
a. P 80,000 b. P 97,500 c. P 100,000 d. P 75,000

21. If the value implied by the purchase price of an acquired company exceeds the fair value of identifiable net
assets, the excess should be

a. Allocated goodwill
b. Allocated to reduce any previously recorded goodwill and classify any remainder as an ordinary gain
c. Allocated to reduce current and long- lived assets

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 d. Allocated to reduce long- lived assets

22. Under PFRS 3, when is a gain recognized in consolidating financial information?

a. In a combination created in the middle of fiscal year
b. In an acquisition when the value of all assets and liabilities cannot be determined
c. When any bargain purchase is created
d. When the amount of a bargain purchase exceeds the value of the applicable expense (other than certain
exceptions) held by the acquired company

23. When the acquisition price of an acquired firm is less than the fair market value of the identifiable net assets, all
the following are recorded at fair value except
a. Assumed liabilities b. Current assets
c. Long- lives assets d. Each of the above is recorded at fair value

24. With an acquisition, direct and indirect expenses are

a. capitalized and amortized over a discretionary period
b. considered a part of the total cost of the acquired company
c. charged to retained earnings when incurred
d. expensed in the period incurred

25. In recording acquisition costs, which of the following procedures is correct?

a. Registration costs are expensed and not charged against the fair value of the securities issued.
b. Consulting fees are expensed.
c. Indirect costs are charged against the fair value of the securities issued.
d. None of the procedures is correct.

26. What is a statutory merger?

a. A business combination in which only one company continues to exist as a legal entity
b. A merger approved by the Securities and Exchange Commission
c. An acquisition involving the purchase of both stock and assets
d. A takeover completed within one year of the initial tender offer

27. How should the cost of issuing debt in an acquisition be recognized?

a. Expensed
b. Amortized over the term of the debt
c. Deducted from shareholders’ equity
d. Deducted from the value of the debt

28. Which of the following contingencies may change the cost of an acquisition?
a. Future acquiree earnings
b. Future value of acquiree stock
c. Future value of acquirer stock
d. Future value of acquirer debt

29. Which of the following forms of business combination is not subject to laws specific to business combinations?
a. Statutory merger
b. Statutory consolidation

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 c. Asset for asset acquisition
d. All three are subject to laws

30. Father Ltd. To buy shares from the existing shareholders of Son Co. at a premium price. The current management
and board of directors of Son have let the Son shareholders know that they do not approve of this. This is an
example of a(n)
a. Open market purchase b. hostile takeover
c. Poison pill strategy d. reverse takeover

31. One reason for conglomerate combinations is that management has become more aware that it helps
accomplish which of the following?
a. It helps increase market share in the industry
b. It helps assure a constant supply of raw materials
c. It helps increase income stability provided by diversifying the asset base of an entity
d. A conglomerate combination helps accomplish all three
32. Generally, the Retained Earnings account of the acquiring company in a business combination is
a. To be debited
b. To be credited
c. To be debited and credited
d. Neither debited nor credited

33. Negative goodwill in a combination should be

a. Offset against goodwill of the acquiring company
b. Credited to the acquiring company’s Profit or Loss account
c. Credited to the acquiring company’s Additional Paid- in Capital account
d. Credited to a Deferred Credit account

34. Which of the following accounts would be subject to impairment when recorded in a combination?
a. Inventories b. Goodwill c. Patents d. Equipment

35. A merger is a business combination in which

I. An established company acquires all the voting ordinary share capital of one or more established
companies, which are then liquidated
II. A new company acquires all the voting ordinary share capital of two or more established companies,
which are then liquidated
Which of the following is correct?
a. I only b. II only c. I and II d. neither I nor II

36. Son Company had common stock of P350,000 and retained earnings of P490,000. Father Company had common
stock of P700,000 and retained earnings of P980,000. On January 1, 20x4, Father Company issued 24,000 shares
of common stock with P12 par value and P35 fair value for all of Son Company’s net assets. This combination was
accounted for as an acquisition. Immediately after the combination, what are the consolidated net assets?
a. P 2,870,000 b. P 2,520,000 c. P 2,030,000 d. P 1,680,000

Father Company acquired Son Company through an exchange of common shares. All of Son’s assets and
liabilities were immediately transferred to Father. Father Company’s common stock was trading at P20 per share
at the time of exchange. The following selected information for Father Company is also available:

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 Before Acquisition After Acquisition
Par value of shares outstanding P 400,000 P 550,000
Additional paid- in capital P 500,000 P 600,000

37. What is the par value of Father’s common stock?

a. P4 b. P10 c. P12 d. P8

38. What is the fair value of Son’s net assets, if gain on bargain purchase of P56,000 is recorded?
a. P 194,000 b. P244,000 c. P300,000 d. P306,000

39. Magnetic Corporation exchanges 150,000 shares of newly issued P1 par value common stock with a fair market
value of P25 per share for all of the outstanding P5 par value common stock of Greatwich Company and
Greatwich is then dissolved. Magnetic paid the following cost and expenses related to the business combination:
Costs of special shareholders’ meeting to vote on the merger P13,000
Registering and issuing securities P14,000
Accounting and legal fees P9,000
Salaries of Magnetic’s employees assigned to the
Implementation of the merger P15,000
Cost of closing duplicate facilities P11,000

In the business combination of Magnetic Corporation and Greatwich Company:

a. The cost of registering and issuing the securities are included as part of the purchase price for Greatwich
b. Only the salaries of Magnetic’s employees assigned to the merger are treated as expenses
c. All of the costs except those of registering and issuing the securities are included in the purchase price of the
Greatwich.
d. None is included in the purchase price of Greatwich.

40. The acquisition costs such as the fees of accountants and lawyers that were necessary to negotiate and
consummate the purchase are
a. Recorded as a deferred asset and amortized over a period not to exceed 15 years
b. Expensed if immaterial but capitalized and amortized if over 2% of the acquisition price
c. Included as part of the price paid for the company purchased
d. Expensed in the period of the purchase

GOODLUCK 

Prepared by:

JASON B. CERCADO, CPA, MBA

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