QUESTIONNAIRE

INSTRUCTION: Read and analyze each problems or statements carefully. For statements
requiring one answer among many choices, write the letter of your chosen answer in UPPER
CASE. For problems requiring computation or calculation, write the result of your calculations
accurately – with proper currency, units or other applicable descriptors. All final answers must
be written in the answer sheet provided on the previous page. ANY FORM OF ERASURE VOIDS
THE WRITTEN ANSWER.
TEST 1 – MULTIPLE CHOICE (CONCEPTS)

1. In a business combination, how should long-term debt of the acquired company generally be recognized on
acquisition date?
a. Fair value c. Carrying amount
b. Amortized cost d. Fair value less costs to sell

2. In a business combination accounted for under the acquisition method, the fair value of the net identifiable
assets acquired exceeded the consideration transferred. How should the excess fair value be reported?
a. As negative goodwill, recognized in profit or loss in the period the business combination occurred.
b. As an extraordinary gain.
c. As a reduction of the values assigned to noncurrent assets and an extraordinary gain for any unallocated
portion.
d. As positive goodwill.

3. 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

4. The costs of issuing debt securities in a business combination are

a. expensed
b. included in the initial measurement of the debt securities issued
c. accounted for like a “discount” on liability
d. b and c

5. A business combination is accounted for properly as an acquisition. Direct costs of combination, other than
registration and issuance costs of equity securities, should be:
a. Capitalized as a deferred charge and amortized.
b. Deducted directly from the retained earnings of the combined corporation.
c. Deducted in determining the net income of the combined corporation for the period in which the costs
were incurred.
d. Included in the acquisition cost to be allocated to identifiable assets according to their fair values.

6. PDX Corp. acquired 100% of the outstanding common stock of Sea Corp. in an acquisition transaction. The cost
of the acquisition exceeded the fair value of the identifiable assets and assumed liabilities. The general
guidelines for assigning amounts to the inventories acquired provide for:
a. Raw materials to be valued at original cost.
b. Work in process to be valued at the estimated selling prices of finished goods, less both costs to complete
and costs of disposal.
c. Finished goods to be valued at replacement cost.
d. Inventories to be valued at acquisition-date fair values.

7. A business combination is accounted for as an acquisition. Which of the following expenses related to the
business combination should be included, in total, in the determination of net income of the combined
corporation for the period in which the expenses are incurred?
Fees of finders and Registration fees
consultants for equity securities issued
a. Yes Yes
b. Yes No
c. No Yes
d. No No

8. Easton Company acquired Lofton Company in a business combination. Easton was able to acquire Lofton at a
bargain price. The fair value of the net identifiable assets acquired exceeded the consideration transferred to
 Lofton. After revaluing noncurrent assets to zero, there was still some "negative goodwill." Proper accounting
treatment by Easton is to report the amount as
a. an extraordinary gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.

9. Goodwill may be capitalized

a. only when it arises in a business c. only when it is purchased
combination. d. on any of these cases.
b. only when it is created internally.

10. 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

11. 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

12. 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 c. (A+C) – (D x %)
b. A – (D x %) d. (A+B) – [(D x %) – B]

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

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

15. 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.

16. 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 c. True, False
b. False, True d. True, True

17. The company that obtains control over another company in a business combination transaction is referred to
as the
a. acquirer c. subsidiary
b. parent d. a and b
18. 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 c. issuance costs of debt instruments
costs d. none of these
b. issuance costs of equity securities

19. 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

20. 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

21. Which of the following factors is used as multiplier of super profits in valuation of goodwill of a business?
a. Average capital employed in the business d. Normal rate of return
b. Simple profits e. Normal profits.
c. Number of years’ purchase

22. Consolidated financial statements are typically prepared when one company has a controlling financial interest
in another unless:
a. The subsidiary is a finance company.
b. The fiscal year-ends of the two companies do not coincide.
c. The two companies are in unrelated industries, such as manufacturing and real estate.
d. The parent is in itself a subsidiary of another entity, its debt or equity instruments are not traded in a
public market, and its ultimate parent produces consolidated general-purpose financial statements that
comply with PFRSs.

23. MIME TO IMMITATE Co. initially tested its goodwill for impairment on September 30, 20x1. When should MIME
perform its second impairment testing on its goodwill?
a. on or before September 30, 20x2
b. on or before December 31, 20x2
c. at any date not earlier than September 30, 20x2
d. at any date during 20x2

24. When consolidating the financial statements of a parent and its subsidiary, which of the following is
eliminated?
a. Goodwill c. Investment in subsidiary
b. NCI in net assets d. All of these

25. When NCI is measured at proportionate share,

a. goodwill is attributed only to the owners of the parent.
b. goodwill is attributed to both the owners of the parent and NCI.
c. goodwill impairment is allocated to both the owners of the parent and NCI.
d. b and c

26. When NCI is measured at fair value,

a. goodwill is attributed only to the owners of the parent.
b. goodwill is attributed to both the owners of the parent and NCI.
c. goodwill impairment is allocated to both the owners of the parent and NCI.
d. b and c

27. According to PAS 27, which of the following is required to present separate financial statements?
a. A publicly-listed entity c. An entity with an investment in associate
b. A parent d. None of these

28. According to PAS 27, investments in subsidiaries, associates or joint ventures are accounted for in the separate
financial statements
a. at cost.
b. in accordance with PFRS 9 Financial Instruments.
c. using the equity method under PAS 28 Investments in Associates and Joint Ventures.
d. any of these, as a matter of accounting policy choice.
29. These are those presented in addition to consolidated financial statements or the financial statements of an
entity with an investment in associate or joint venture that is accounted for using equity method in accordance
with PAS 28.
a. Individual financial statements c. Consolidate financial statements
b. Separate financial statements d. Equity financial statements

30. Entity A acquired an investment in associate for ₱1M many years ago. At the end of the current reporting
period, the investment has a fair value of ₱2.9M. If the equity method is used, the investment would have a
current carrying amount of ₱2.6M. In Entity A’s separate financial statements, the investment should be valued
at
a. 1,000,000.
b. 2,600,000.
c. 2,900,000.
d. any of these, as a matter of an accounting policy choice

TEST 2 – MULTIPLE CHOICE (PROBLEM SOLVING)

1. 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) d. 580,000

Use the following information for the next five questions:

On January 1, 20x1, COLLOQUY Co. acquired all of the identifiable assets and assumed all of the liabilities of
CONVERSATION, Inc. by issuing its own ordinary shares. Information at acquisition date is shown below:
COLLOQUY Co. CONVERSATION, Co. Combined entity
(carrying amounts) (fair values)
Identifiable assets 9,600,000 6,400,000 16,000,000
Goodwill - - ?
Total assets 9,600,000 6,400,000 ?
Liabilities 2,800,000 3,600,000 6,400,000
Share capital 2,400,000 1,200,000 2,800,000
Share premium 1,200,000 1,000,000 4,800,000
Retained earnings 3,200,000 600,000 ?
Total liabilities & equity 9,600,000 6,400,000 ?

Additional information:
 COLLOQUY’s share capital consists of 60,000 ordinary shares with par value of ₱40 per share.
 CONVERSATION’s share capital consists of 3,000 ordinary shares with par value of ₱400 per share.

2. How much is the fair value of consideration transferred on the business combination?
a. 4,000,000 b. 2,400,000 c. 4,400,000 d. 4,800,000

3. How many shares were issued in the business combination?

a. 40,000 b. 12,000 c. 36,000 d. 10,000

4. How much is the acquisition-date fair value per share?

a. 400 b. 440 c. 280 d. 360

5. How much goodwill was recognized on acquisition date?

a. 980,000 b. 1,200,000 c. 1,280,000 d. 1,080,000

6. What is the retained earnings of the combined entity immediately after the business combination?
a. 3,120,000 b. 3,320,000 c. 3,280,000 d. 3,200,000

7. 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:
 The previously held 15% interest has a fair value of ₱720,000.
 ENDURANCE’s net identifiable assets have a fair value of ₱4,000,000.
 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

8. 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 ₱4,000,000. NOISY chose to measure non-controlling interest at the non-controlling
interest’s proportionate share of the acquiree’s identifiable net assets.

How much is the goodwill?

a. 4,000,000 b.0 c. a or c d. This is not a business combination

9. 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:
 After the business combination, TRANSPARENT will enter into liquidation and DIAPHANOUS agreed to
reimburse TRANSPARENT for liquidation costs estimated at ₱80,000.
 DIAPHANOUS agreed to reimburse TRANSPARENT for the appraisal fee of a building included in the
identifiable assets acquired. The agreed reimbursement is ₱40,000.
 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.
 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.
 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
10. On September 30, 20x1, INNOCUOUS Co. acquired all of the identifiable assets and assumed all of the liabilities
of HARMLESS, 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.

INNOCUOUS engaged an independent valuer to appraise a building acquired from HARMLESS. However, the
valuation report was not received by the time INNOCUOUS authorized for issue its financial statements for the
year ended December 31, 20x1. As such, the building was assigned a provisional amount of ₱2,800,000. Also,
the building was tentatively assigned an estimated useful life of 10 years from acquisition date. INNOCUOUS
uses the straight line method of depreciation and recognized three months’ depreciation on the building for
20x1.

On July 1, 20x2, INNOCUOUS finally received the valuation report from the independent valuer which shows
that the fair value of the building as of September 30, 20x1 is ₱2,000,000 and remaining useful from that date
is 5 years.

How should INNOCUOUS account for the new information obtained?

a. As a retrospective adjustment to the provisional amount of the building resulting to increase in goodwill by
₱800,000.
b. As a retrospective adjustment to the provisional amount of the building resulting to decrease in goodwill by
₱800,000.
c. As a retrospective restatement to the provisional amount of the building resulting to increase in goodwill
by ₱800,000. The adjustment is treated as a correction of a prior period error.
d. The new information obtained is ignored. No adjustment to goodwill is necessary.
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 A Entity B
Cash in bank 12,000 6,000
Accounts receivable 36,000 14,400
Inventory 48,000 27,600
Investment in subsidiary 90,000 -
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.

11. How much is the consolidated total assets on January 1, 20x1?

a. 430,800 b. 440,800 c. 428,600 d. 465,800

12. How much is the consolidated total equity on January 1, 20x1?

a. 330,800 b. 340,800 c. 328,600 d. 363,600

Use the following information for the next six questions:

On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares with fair value of ₱60
per share and par value of ₱40 per share.

XYZ’s shareholders’ equity as of January 1, 20x1 comprises the following:

(at carrying
amounts)
Share capital 200,000
Retained earnings 96,000
Total equity 296,000

On January 1, 20x1, the fair values of the assets and liabilities of XYZ, Inc. were determined by appraisal, as
follows:
XYZ, Inc. Carrying amounts Fair values Fair value increment
Cash 20,000 20,000 -
Accounts receivable 48,000 48,000 -
Inventory 92,000 124,000 32,000
Equipment 200,000 240,000 40,000
Accumulated depreciation (40,000) (48,000) (8,000)
Accounts payable (24,000) (24,000) -
Net assets 296,000 360,000 64,000

The remaining useful life of the equipment is 4 years.

During 20x1, no dividends were declared by either ABC or XYZ. There were also no inter-company transactions.

The group determined that goodwill is impaired by ₱4,000.

 ABC’s and XYZ’s individual financial statements at year-end are shown below:

Statements of financial position

As at December 31, 20x1
ABC Co. XYZ, Inc.
ASSETS
Cash 92,000 228,000
Accounts receivable 300,000 88,000
Inventory 420,000 60,000
Investment in subsidiary 300,000 -
Equipment 800,000 200,000
Accumulated depreciation (240,000) (80,000)
TOTAL ASSETS 1,672,000 496,000

LIABILITIES AND EQUITY

Accounts payable 172,000 120,000
Bonds payable 120,000 -
Total liabilities 292,000 120,000
Share capital 680,000 200,000
Share premium 260,000 -
Retained earnings 440,000 176,000
Total equity 1,380,000 376,000
TOTAL LIABILITIES AND EQUITY 1,672,000 496,000

Statements of profit or loss

For the year ended December 31, 20x1
ABC Co. XYZ, Inc.
Sales 1,200,000 480,000
Cost of goods sold (660,000) (288,000)
Gross profit 540,000 192,000
Depreciation expense (160,000) (40,000)
Distribution costs (128,000) (72,000)
Interest expense (12,000) -

80,000
Profit for the year 240,000

Case #1: On acquisition date, ABC Co. elected to measure non-controlling interest as its proportionate
share in XYZ, Inc.’s net identifiable assets.

13. How much is the consolidated profit for 20x1?

a. 296,000 b. 280,000 c. 208,000 d. 276,000

14. How much is the consolidated total assets as of December 31, 20x1?
a. 1,900,000 b. 1,907,000 c. 1,903,000 d. 1,904,000

15. How much is the consolidated total equity as of December 31, 20x1?
a. 1,492,000 b. 1,415,000 c. 1,488,000 d. 1,491,000

Case #2:
On acquisition date, ABC Co. elected to measure non-controlling interest at fair value. A value of ₱75,000 is
assigned to the non-controlling interest.

16. How much is the consolidated profit for 20x1?

a. 296,000 b. 280,000 c. 278,000 d. 276,000

17. How much is the consolidated total assets as of December 31, 20x1?
a. 1,900,000 b. 1,907,000 c. 1,903,000 d. 1,904,000

18. How much is the consolidated total equity as of December 31, 20x1?
a. 1,492,000 b. 1,415,000 c. 1,488,000 d. 1,491,000

Use the following information for the next two questions:

On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing 5,000 shares with fair value of ₱60 per
share and par value of ₱40 per share. XYZ’s net identifiable assets have a fair value of ₱360,000. Goodwill has
been computed under each of the available options under PFRS 3 as follows:
Case #1 Case #2 (fair
(proportionate) value)
(1
Consideration transferred 300,000 300,000
)
(2 Non-controlling interest in the
72,000 75,000
) acquiree
(3 Previously held equity interest in the
- -
) acquire
Total 372,000 375,000
Fair value of net identifiable assets
(360,000) (360,000)
acquired
Goodwill 12,000 15,000

As of December 31, 20x1, XYZ, Inc. increased its net assets (after fair value adjustments) by ₱40,000 to
₱400,000. The NCI in net assets is updated as follows:
Case #1 Case #2
(proportionate) (fair value)
NCI at acquisition date – Jan. 1, 20x1 72,000 75,000
Subsequent increase (20% x ₱40,000) 8,000 8,000
Carrying amount of NCI – Jan. 1, 20x2 80,000 83,000
On January 1, 20x2, ABC Co. acquired all of the remaining 20% NCI in XYZ for ₱120,000.

19. If NCI is measured at “proportionate share,” how much is the gain or loss on the transaction to be recognized
in the consolidated financial statements?
a. 80,000 b. (80,000) c. (83,000) d. 0

20. If NCI is measured at “fair value,” how much is the gain or loss on the transaction to be recognized in the
consolidated financial statements?
a. (83,000) b. 83,000 c. (80,000) d. 0

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