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NAME: Date:
Professor: Section: Score:

ACCOUNTING FOR BUSINESS COMBINATIONS

FINAL EXAMINATION

1. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets,
liabilities, and contingent liabilities over cost” (i.e., 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.

2. 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 measurementof the credit to share capital account
d. b and c

3. Goodwill may be capitalized

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

4. 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

5. 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

6. 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
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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

7. Contingent liabilities acquired in a business combination are initially recognized by the acquirer
using the provisions of which of the following standards?
a. PAS 37
b. PFRS 3
c. PFRS 37
d. PFRS 7

8. You are an accountant. Your client acquired another business in a business combination
transaction during the year. Your client asked you for an advice regarding the preparation of
consolidated financial statements. Your advice to your client would most likely be based on
which of the following standards?
a. PFRS 3
b. PFRS 10
c. PAS 27
d. PAS 36

9. Goodwill acquired in a business combination is initially and subsequently measured using

which of the following standards?
Initial measurement Subsequent measurement
a. PFRS 3 PFRS 10
b. PAS 36 PFRS 3
c. PFRS 3 PAS 36
d. PFRS 3 PFRS 5

Use the following information for the next three questions:

On January 1, 20x1, Laughter Co. issued equity instruments in exchange for 75% interest in Tears
Co. Tears Co.’s net identifiable assets have carrying amount and fair value of ₱300,000 and ₱360,000,
respectively. The difference is attributable to a building with a remaining useful life of 6 years.

The December 31, 20x1 statements of profit or loss of Laughter Co. and Tears Co. are summarized
below:

Statements of profit or loss

For the year ended December 31, 20x1
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Laughter Co. Tears Co.

Revenues 1,200,000 480,000
Operating expenses (960,000) (400,000)
Profit for the year 240,000 80,000

10. How much is the consolidated profit in 20x1?

a. 301,000 c. 320,000
b. 310,000 d. 336,000

11. How much is the consolidated profit attributable to owners of the parent in 20x1?
a. 292,500 c. 320,000
b. 310,000 d. 232,500

12. How much is the consolidated profit attributable to non-controlling interest in 20x1?
a. 6,500 c. 57,500
b. 17,500 d. 77,500

13. After restatement in accordance with PAS 29, the financial statements of an entity operating
under a hyperinflationary economyare translated using which of the following procedures?
a. all amounts (i.e., assets, liabilities, equity items, income and expenses, including
comparatives) are translated at the closing rate.
b. comparatives are not restated anymore to the purchasing power current at the end of
reporting period, although they are also translated at the closing rate.
c. non-monetary items are translated at the closing rate while income and expenses are
translated at the average rates.
d. a and b

Use the following information for the next two questions:

You are an auditor. ABC Philippines Co., your client, is not sure on what to disclose in its financial
statements as its functional currency. Relevant information follows:

ABC Philippines Co. is a branch of ABC U.S. Co. ABC Philippines operates in a Philippine Economic
Zone Authority (PEZA) Special Economic Zone. ABC Philippines is engaged in the apparel business.
All of its raw materials are imported from the main office in the U.S. and all of its finished products
are exported directly to U.S. customers. The U.S. customers remit payments to the U.S. main office.
The U.S. main office will then provide the Philippine branch its working capital needs. None of ABC
Philippines Co.s’ finished products are sold in the Philippines. The raw materials imported and
finished goods exported are denominated in U.S. dollars.
14. What is ABC Philippines Co.’s functional currency?
a. Philippine peso
b. U.S. dollar
c. a or b
d. none of these

15. ABC Philippines Co. is required to file audited financial statements with the Philippine
Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR). What is
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the presentation currency for the financial statements to be filed with the said government
agencies?
a. Philippine peso
b. U.S. dollar
c. a or b
d. none of these

16. Theseare those which do not give rise to a right to receive (or an obligation to deliver) a fixed or
determinable amount of money.
a. Monetary items
b. Non-monetary items
c. Financial items
d. Non-financial items

17. On December 1, 20x1, you imported a machine from a foreign supplier for $100,000, due for
settlement on January 6, 20x2. Your functional currency is the Philippine peso. When preparing
the December 31, 20x1 statement of financial position, which of the following will you translate
to the closing rate?
a. machine
b. accounts payable
c. a and b
d. none of these

18. Use the information in the immediately preceding problem. The relevant exchange rates are as follows:
Dec. 1, 20x1 Dec. 31, 20x1 Jan. 6, 20x2
₱50:$1 ₱52:$1 ₱47:$1

How much foreign exchange gain (loss) will you recognize on December 31, 20x1?
a. 200,000 c. 100,000
b. (200,000) d. (100,000)

19. According to the PFRS for SMEs, It is the currency of the primary economic environment in
which the entity operates.
a. Presentation currency c. Inflationary currency
b. Functionality currency d. Functional currency

20. ABC Co. has a net investment in a foreign operation that it needs to hedge. How should ABC
Co. hedge this item?
a. as a fair value hedge c. a or b
b. similar to a cash flow hedge d. neither a nor b

21. A highly probable forecast transaction is mostly hedged through a

a. futures contract c. fair value hedge
b. cash flow hedge d. any of these
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22. Which of the following is not among the conditions for hedge accounting?
a. formal designation and documentation at the start of the hedge
b. hedge is actually highly effective as of the inception of the hedge
c. for cash flow hedges, the hedged forecast transaction must be highly probableand must
present an exposure to variations in cash flows that could ultimately affect profit or loss
d. effectiveness can be measured reliably

23. Which of the following is included among the conditions for hedge accounting?
a. formal designation and documentation at the end of the hedge
b. hedge is expectedto be highly effective
c. for cash flow hedges, the hedged forecast transaction must be highly impossibleand must
present an exposure to variations in cash flows that could ultimately affect profit or loss;
d. effectiveness cannot be measured reliably

24. Under fair value hedges, which of the following is measured at fair value?
a. the hedging instrument c. both a and b
b. the hedged item d. either a or b

25. Under a cash flow hedge of a highly probable forecast transaction, the hedged item is recognized
a. using other relevant PFRSs
b. only on the date of actual transaction
c. never recognized if settled on a net cash basis
d. a and b

26. Discontinuance of hedging relationships is accounted for

a. prospectively c. either a or b
b. retrospectively d. partly a and partly b

27. Gains and losses from changes in the fair value of a derivative designated and qualified as a fair
value hedge should be:
a. Disregarded until the derivative is settled.
b. Recognized as a deferred debit or deferred credit in the balance sheet until the derivative is
settled.
c. Recognized in current net income in the period in which the fair value of the derivative
changes.
d. Recognized as a component of other comprehensive income in the period in which the fair
value of the derivative changes.

28. A derivative designated as a fair value hedge must be:

I. Specifically identified to the hedged asset, liability or unrecognized firm commitment.
II. Expected to be highly effective in offsetting changes in the fair value of the hedged item.
a. I only. c. Both I and II.
b. II only. d. Neither I nor II.

29. Fair value disclosure of financial instruments may be made in the:

Body of financial statements Footnotes to financial statements
a. No No
b. No Yes
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c. Yes No
d. Yes Yes

30. Disclosures about the following kinds of risks are required for most financial instruments.
Credit risk Market risk
a. Yes Yes
b. Yes No
c. No Yes
d. No No

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