BUSINESS COMBINATION (PFRS 3) AND CONSOLIDATED FINANCIAL STATEMENTS (PFRS 10)

PRELIM EXAM
1. Boot Co. has a 66 percent holding in Shoe Co and a 25 percent holding in Scandal Co. Boot Co. sold
goods with a value of 15,000 to each of Shoe Co. and Scandal Co. Boot Co. had a revenue of 88,000 and
the other two companies 20,000 each in the year.
What is the consolidated revenue?
a) 83,000
b) 86,200
c) 93,000
d) 98,000

2. Trench Co. holds a 90% equity investment in Hill Co and has done for a number of years. In the year
ended 31 December 20x6, Hill Co sold goods to Trench Co for 450,000, charging a mark-up of 25%. At
the year end, a quarter of these goods were still in Trench’s warehouse. In the individual financial
statements of Trench Co, cost of sales is reported as 1,950,000 and in the individual financial statements
of Hill Co, it is reported as 1,340,000.
What is consolidated cost of sales in the year ended 31 December 20x6?
a) 2,817,500
b) 2,862,500
c) 2,868,125
d) 3,020,000

3. Talbot Co. purchased 80% of the equity share capital of Perkins Co on 1 January 20x2. On 31 December
20x2 Perkins Co. sold on an item of non-depreciable plant with a net carrying amount of 120,000 to Talbot
Co. for 150,000. The profit for the year in the financial statements of Perkins Co. at 31 December 20x2
was 2,000,000. The tax rate is 30%.
What is the non-controlling interest in consolidated profit?
a) 394,000
b) 395,800
c) 1,970,000
d) 1,979,000

4. Jenny Co acquired 80% per cent of the equity share capital of Smith Co on 1 October 20x3. The
consideration given was 2,000,000 in cash and 400,000 equity shares of Jenny Co. On 1 October 20x3 the
market value of each Jenny Co’s shares was 3 and the fair value of Smith Co’s net tangible assets was
2,000,000. The non-controlling interest was measured at proportionate share of the acquirer’s net assets.
Due to poor trading conditions the goodwill arising on the acquisition of Smith Co, goodwill was
determined to be impaired by 25% by reporting date of 31 March 20x4.
What is the amount of goodwill reported in Jenny Co’s consolidated accounts at March 20x4?
a) Nil
b) 300,000
c) 900,000
d) 1,200,000
 5. On January 1, 20x4, Park Corporation and Strand Corporation and their condensed balance sheet as
follows:
Park Corp Strand Corp
Current Assets 70,000.00 20,000.00
Non-current Assets 90,000.00 40,000.00
Total Assets 160,000.00 60,000.00

Current Liabilities 30,000.00 10,000.00

Long-term debt 50,000.00
Shareholder's Equity 80,000.00 50,000.00
Total Liabilities and Equities 160,000.00 60,000.00
On January 4, 20x4, Park Corporation borrowed 60,000 and used proceeds to obtain 80% of outstanding
shares of Strand Corporation. The 60,000 debt is payable in 10 equal annual principal payments, plus
interest, beginning December 31, 20x4. The excess fair value of investment over the underlying book
value of the acquired net asset is allocated to inventory 60% and to goodwill 40%.
On the consolidated balance sheet as of January 2, 20x4, what should be the amount for each of the
following?
(5)Current assets should be;
(6) Non-current asset using proportionate basis (partial) in computing goodwill should be;
(7) Stockholder’s equity using full fair value (full/gross-up goodwill) proportionate basis of determinate
non-controlling interest should be:
a) (5)105,000 (6)138,000 (7)95,000
b) (5)105,000 (6)138,000 (7)93,000
c) (5)102,000 (6)140,000 (7)95,000
d) (5)102,000 (6)140,000 (7)93,000

Michael Company acquired 60% of Scott Company for 300,000 when Scott’s book value was 400,000. The newly
comprised 40% non-controlling interest had an assessed fair value of 180,000. Also at the date of acquisition,
Scott had a trademark (with a 10-year life) that was undervalued in the financial records by 60,000. Also, patented
technology (with a 5-year life) was undervalued by 40,000. Two years later, the following figures are reported by
these 2 companies (stockholder’s equity accounts have been omitted)

Michael Scott Scott

Company Company Company
Book Value Book Value Fair Value
Current Assets 620,000.00 300,000.00 320,000.00
Trademarks 260,000.00 200,000.00 280,000.00
Patented technology 410,000.00 150,000.00 150,000.00
Liabilities (390,000.00) (120,000.00) (120,000.00)
Revenues (900,000.00) (400,000.00)
Expenses 500,000.00 300,000.00
Investment Income Not given
8. (8)What is the consolidated net income prior to the reduction for the non-controlling interest’s share of
the subsidiary’s income?
(9) What is the consolidated trademarks balance
a) (8) 451,600; (9)508,000
b) (8) 486,000; (9)508,000
c) (8) 486,000; (9)460,000
d) (8) 500,000; (9)514,000

10. Assuming Scott Company has paid no dividends,

(10)what are the non-controlling interest’s share of the subsidiary’s income and
(11)the ending balance of the non-controlling in the subsidiary?
a) (10)26,000 and (11)230,000
b) (10)28,800 and (11) 252,000
c) (10)34,400 and (11) 280,800
d) (10)40,000 and (11)252,000

12. Chain Co. owned all of the voting common stock of Shannon Corp. The corporation’s balance sheets dated
December 31, 20x4, include the following balance for land: Chain – 416,000 and for Shannon – 256,000.
On the original date of acquisition, the book value of Shannon’s land was equal to its fair value. On April
4, 20x5, Chain sold to Shannon a parcel of land with a book value of 65,000. The selling price was 83,000.
There were no other transactions which affected the company’s land accounts during 20x5. What is the
consolidated balance for land on the 20x5 balance sheet?
a) 672,000
b) 690,000
c) 737,000
d) 755,000

13. A parent owns 80% of its subsidiary. At the beginning of 20x4, the subsidiary sells new equipment carried
on its books at 40,000 to parent for 65,000. The equipment has 5-year remaining life at the time of sale,
and straight-line depreciation is appropriate. It is now the end of 20x4. The parent and subsidiary report
the following balances related to equipment:
Parent Subsidiary
Equipment 65,000.00
Accumulated Depreciation 13,000.00
Gain on sale of equipment 25,000.00

What should be reported on the consolidated statements for 20x4, with respect to this equipment?
a) Equipment P65,000: Accumulated Depreciation, P8,000; Gain, P0.
b) Equipment P40,000: Accumulated Depreciation, P13,000; Gain, P0.
c) Equipment P60,000: Accumulated Depreciation, P8,000; Gain, P5,000.
d) Equipment P40,000: Accumulated Depreciation, P8,000; Gain, P0.
Southern Company’s balance sheet is as follows:
Current Assets P12,000,000.
Plant and Equipment 150,000,000
Total P162,000,000

Liabilities P130,000,000
Common Stock, P1 par 400,000

Additional Paid in Capital 23,800,000

Retained Earnings (10,000,000)
Treasury Stock, 6,000 shares (400,000)
Accumulated OCI 18,200,000
Total 162,000,000

Pecan Corporation is in the process of acquiring Southern. Its research reveals that Southern’s current assets are
carried at P2,000,000 more than book value, its plant and equipment is carried at P60,000,000 more than book
value, and it has the following unreported intangibles:
Fair Value
Non-Competition Agreement P8,000,000
Skilled Employees 4,000,000
Business from Prospective Customers 16,000,000
Order backlog, e,iI customer Related Contract 30,000,000

Pecan includes an earnings contingency, with a present value of P1,000,000, as part of acquisition agreement.

14. Pecan finances the acquisition with bonds. If Southern’s shareholders are to receive P72 per share in cash
on acquisition, how much cash must Pecan generate from the sale of bonds?
a. P28,368,000.
b. P26,368,000.
c. P28,800,000.
d. P30,368,000.
15. How much cash must Pecan generate from the sale of bonds, if it wants to report P40,000,000 in goodwill?
a. P47,800,000.
b. P48,800,000.
c. P49,000,000.
d. P47,000,000.

16. Olione Co. Owns 100% of the equity share of capital of its subsidiary Comet Co. During the year, Olione
Co sold goods to Comet Co for P2,400, representing cost plus 20%. At the period of end three quarters of
the goods were still in the inventory. What is the unrealized profit for the purposes of consolidation?
a. P360.
b. P300.
c. P400.
d. P480.
17. Genesis Co is the sole subsidiary of Exodus Co. The cost of sales figures for 20x6 for Exodus Co and
Genesis Co were P15,000,000 and P12.000,000 respectively. During 20x6, Exodus Co sold goods that
had cost P3,000,000 to Genesis Co for P4,000,000. Genesis Co has not yet sold the goods. What is the
consolidated cost of sales figures for 20x6?
a. P23,000,000.
b. P24,000,000.
c. P26,000,000.
d. P27,000,000.

18. Grape Co is a wholly subsidiary of Orange Co. Inventory in the individual statements of financial position
at the period end for Grape co and Orange Co are P120,000 and 60,000, respectively. Sales by orange Co
to Grape Co during the year were invoiced at P45,000 which included a profit to Orange Co of 25% on
cost. Two thirds of these goods were in inventory at the period end. What amount is inventory reported in
the consolidated financial position?
a. P171,000.
b. P172,500.
c. P174,500.
d. P174,000.

19. Wind Co owns 80% of its subsidiary, Rain Co. In December 20x1, Rain Co sells inventory costing
P100,000 to Wind Co for P120,000. Draft consolidated profit attributable to the group for the year 2021,
before the adjustments for unrealized profit was P150,000. 25% of the inventory remains unsold by the
Wind Co at December 20x1. Ignoring deferred tax what is the correct consolidated profit attributable to
the group for 20x1.?
a. P130,000.
b. P134,000.
c. P145,000.
d. P146,000.

20. At the year end H Co has 90,000 of inventory. Its 80% owned subsidiary, S Co. has 50,000 of inventory.
There are goods in transit from S Co. to H Co. with a value of 5,000. This amount does not include any
unrealized profit.
What is the carrying amount of inventory in consolidated statement of financial position?
a) 90,000
b) 135,000
c) 140,000
d) 145,000

21. Which of the following balances appear in a consolidated statement of financial position?
a) Investment in subsidiary
b) Subsidiary share capital
c) Loans to the subsidiary from the parent
d) The parent company’s bank balance 50,000 and the subsidiary company’s bank overdraft 50,000
22. On 31 December 20x0 H Co has a non-current asset that cost 94,000 and was depreciated by 3 years out
of its life of 10 years. On January 1, 20x1 it was sold to H Co’s 75% owned subsidiary for 96,000. The
subsidiary decided the non-noncurrent asset had remaining life of 8 years.
At 31December 20x1 what adjustment is made to non-current assets in the consolidated statement of
financial position?
a) 18,200
b) 27,600
c) 30,000
d) 39,600

23. A parent sells inventory costing 119,000 at a mark-up of 11% to wholly owned subsidiary. At the end of
reporting period half of this inventory remains unsold. Ignoring deffered tax which one of the following
is the required consolidation adjustment?
a) Increas group inventory by 59,500 as half of the inventories remain unsold
b) No adjustment is needed because intra-group trading cancels consolidation
c) Reduce group inventory 119,000 as the sale was not made to third party
d) Reduce group inventory by 6,545 and reduce the group profits by 6,545 to eliminate the unrealized
profit in inventory

24. Time Co. acquired an 80% stake in the equity share capital of Watch Co. on February 20x1. On
acquisition, fair value adjustments increased the value of Watch’s inventory by 19,000. None of this had
been sold by 31 December 20x1 when the group accounts were being prepared. In addition, In March
20x1, Watch Co. sold Time Co 47,000 of goods. All of these goods had been sold by Time Co by 31
December 20x1. Time Co. had cost of sales for the year ended 31 December 20x1 of 300,000 and Watch
Co. 240,000.
What is the group cost of sales for the year ending 31 December 20x1?
a) 473,000
b) 492,000
c) 493,000
d) 520,000

25. Shell Co purchased 100% of software business for a cost of 1,000,000. The book value of the assets
acquired and fair values (where these were different) were as follows:
Book value Fair value
000 000
Plant and equipment 530 0
Trademarks 29 45
Purchased goodwill 60
Inventories 290 310
The tax base of the assets is the same as their book value and fair value where relevant. In accordance
with IFRS 3,
(25)What is the goodwill arising from purchase?
a) 235,000
b) 271,000
c) 295,000
d) 0
 (26)What is the gain on bargain purchase?
a) 235,000
b) 271,000
c) 295,000
d) 0

27. On 1 January 20x2 Big Co. purchased 100% of the equity shares in Small Co. for 2,000,000. At the date
fair value of the identifiable net assets were as follows:
000
Plant and equipment 1,300
Inventory 425
Trade receivables 100
Trade payables and loans 500
The tax base of above assets and liabilities was equl to their fair value. Small Co. disclosed a contingent
liability with fair value of 150,000 in its financial statements, liability was contingent as it was probable
that the outflow of resources would occur. Tax revenue will be given on the 150,000 as and when it is
paid. The tax rate is 30%.
(28)What is the amount of recognized goodwill at 1 January 20x2?
a) (220,000)
b) 675,000
c) 780,000
d) 0

(29)What is the amount of recognized gain on bargain purchase at 1 January 20x2?

a) (220,000)
b) 675,000
c) 780,000
d) 0

30. Layla Co. purchased 100% of the equity shares of Lamina Co on March 20x8 for 1,500,000. The statement
of financial position of Lamina Co. on 31 March 20x8 disclosed the following:
Goodwill 100,000.00
Patents 130,000.00
Property Plant and Equipment 680,000.00
Current Assets (400,000.00)
Current Liabilities 1,310,000.00

The fair value of the property, plant and equipment of Lamina Co. amounted to 710,000 on the date of
purchase (tax base 690,000). In respect of other items book value was equal to the fair value and taxbase.
The tax rate is 30%.
(30)What is the goodwill arising on purchase of Lamina Co.?
a) 190,000
b) 260,000
c) 266,000
d) 0
 (31) What is the gain on bargain purchase of Lamina Co.?
a) 190,000
b) 260,000
c) 266,000
d) 0

32. Which of the following is NOT a business combination within the scope of IFRS 3?
a) Company W is merged into Company X
b) Company T and Company U transfer their assets to a newly formed entity. Company V
c) The shareholders of Company Y and Company Z sell the shares of Company Z to Company Y.
d) An unincorporated entity transfers its net assets to a company in exchange for consideration.

33. (1) Pecan pays P60,000,000 in cash to the former shareholders of Southern. Assume the fair values of
Southern’s identifiable net assets are as originally stated. Within the measurement period, additional
information of Southern’s expected future performance at the date of acquisition reveals that the earnout
had a fair value P200,000.at the date of acquisition. The entry to record the new information includes a
credit of P800,000 to;
(2) Pecan pays P60,000,000 in cash to the former shareholders of Southern. Assume the fair values of
Southern’s identifiable net assets are originally as stated. Subsequently increases in the demand for
Southern’s products requires that the earnout be revalued to P1,800,000. The entry to record the new
information includes a debit to:
a) (1) Intangible assets; (2) Loss on contingency.
b) (1) Good will; (2) Loss on contingency.
c) (1) Good will; (2) Good will.
d) (1) Loss on contingency (2) Good will.

34. An entity elects to account for its investments in subsidiaries at cost in the separate financial statements
by applying IAS 27.10.
o The entity holds an initial investment in another entity (investee).
o The Investment is an investment in an equity instrument as defined in IAS 32.11.
o The investee is not an associate, jointly venture or subsidiary of the entity and, accordingly, the
entity applies
o IFRS 9 in accounting for its initial investment (Initial interest).
o The entity subsequently acquires an additional interest in the investee, which results in the entity
obtaining control of the investee-e.i., the investee becomes a subsidiary of the entity.

How should the cost of the entity’s investment in the subsidiary of the entity.
a) Fair value as deemed cost approach.
b) Accumulated cost approach.
c) Either A or B.
d) Neither A or B.
35. To which of the following transactions should acquisition accounting be applied?
o The purchase of net assets of the food retail division of a conglomerate company
o The purchase of equity shares in another entity that results in the acquire having significant
influence
o The purchase of the property, plant and equipment of Company Y and by Company Z on the
liquidation of Company Y
o The transfer of the shares in Company V and Company W by their respective shareholders to a
new company. Company X, in return for shares in Company X.
a) 1 and 3 only
b) 1 and 4 only
c) 2 and 3 only
d) 3 and 4 only

36. Jenny Co. acquired 80% of equity capital of Smith Co. on 1 October 20x3. The consideration given was
2,000,000 in cash and 400,000 equity shares of Jenny Co. On 1 October 20x3, the market value of each
Jenny Co.’s shares was 3 and the fair value of Smith Co.’s net tangible assets was 2,000,000. The non-
controlling interest was measured at proportionate share of acquirer’s net assets. Due to poor trading
conditions the goodwill arising on the acquisition of Smith Co, goodwill was determined to be impaired
by 25% by reporting date of March 20x4.
(36)What is the amount of goodwill reported in Jenny Co.’s consolidated accounts at March 20x4?
a) 1,600,000
b) 300,000
c) 900,000
d) 1,200,000

(37)What is the amount of goodwill reported in Jenny Co.’s consolidated accounts at 31 October 20x4?
a) 1,600,000
b) 300,000
c) 900,000
d) 1,200,000

38. Rainbow Co. acquired a controlling interest in Cloud Co. on 1 August 20x4, recognizing goodwill of
210,000 on acquisition. The benefit of the goodwill was expected to last for 10 years from acquisition
date, however increased competition mean that goodwill was determined to be impaired 15% at 31 July
20x6.
What amount is recognized in the profit or loss in the year ended July 20x6 in respect to goodwill?
a) 21,000
b) 28,350
c) 31,500
d) 0

39. Which of the following standard relevant to group accounting specifically requires disclosures that enable
users to evaluate the financial effects of adjustments recognized in the current reporting period that relate
to acquisition that occurred in the current or previous reporting periods?
a) IFRS 3
b) IFRS 10
c) IFRS 11
d) IFRS 12
40. In accordance with IFRS 10 Consolidated Financial Statements in which of the following situations does
the investor have power over the investee?
o Company Apple holds 40% on the voting shares in Company Banana and has an option to acquire
a further 20% of voting shares at any time without restriction. The options are considered to be
substantive.
o Company Cherry holds 25% of the voting shares in Company Damson and has a contractual right
to make decisions about Company Damson’s core profit making operations.
a) 1 only
b) 2 only
c) Both 1 and 2
d) Neither 1 and 2

41. Cinderella Company owns 65% of the Royal Company. On the last day of the accounting period, Royal
sold David a non-current asset for P100,000. The asset originally cost P250,000 and at the end of the
reporting period, its carrying amount in Royal’s book was P80,000. The group’s consolidated statement
of financial position has drafted without any adjustments in relation to this non-current asset.
Under PAS 27, consolidated and separate financial statements, what adjustments should be made to the
consolidated statement of financial position figures for non-current asset?
a) Increase by P150,000.
b) Reduce by P20,000.
c) Reduce to P20,000.
d) Increase to P150,000.

42. Using the information above, what adjustments should be made to the consolidated statement of
financial position figures for retained earnings?
a) Increase by 97,500.
b) Reduce by 13,000.
c) Reduce by 20,000.
d) Increase by P150,000.

43. Panda Corporation purchased 95% of the shares of Silicon Company on January 2018. On that date, the
book value of Silicon’s net assets approximated fair value. As a result of the purchase, Panda recognized
P600,000 goodwill.
During 2018, Silicon sold inventory to Panda. On December 31,2018, Silicon had unrealized profits on
its books of P100,000. By December 31,2019, all of the inventories left on Panda’s book has been sold
outside parties. During 2019, Panda sold inventory to Silicon and had P150,000 of unrealized profits left
on its books at the end of 2019. For 2019, Panda reported net operating income of P5, 000,000 and
Silicon reported operating income of P3, 600,000.
What is the Consolidated income attributable to shareholders of parent for 2019?
a) 8,550,000.
b) 8,330,000.
c) 8,330,500.
d) 8,365,000.
44. SGV Company owns 100% of the capital stock of both RT Corporation and ISLA corporation. RT
purchases merchandise inventory from ISLA at 125% of ISLA ‘s cost. During 2018, Isla sold inventory
to RT that it had purchased for P25, 000. RT sold all merchandise to unrelated customers for P56,892
during 2018. In preparing be combined financial statements for 2018, SGV bookkeeper disregarded the
common ownership of RT dnd ISLA.
What amount should be eliminated from cost of goods sold in the combined Income statement for 2018!
a) 31,250.
b) 25,000.
c) 56,892.
d) 6,250.

45. AIG Company acquired 70% interest in EASTWEST Company for ₱1,960,000 when the fair value of
EASTWEST’s identifiable assets and liabilities was ₱700,000 and elected to measure the non-
controlling interest at its share of the identifiable net assets. Annual impairment reviews of goodwill
have not resulted in any impairment losses being recognized. EASTWEST’s current statement of
financial position shows share capital of ₱100,000, a revaluation reserve of ₱300,000 and retained
earnings of ₱1,400,000. Under IFRS 3, Business Combinations, what figure in respect of goodwill
should now be carried in AIG’s consolidated statement of financial position?
a) 1,470,000
b) 160,000
c) 1,260,000
d) 700,000

46. Which of the following is included as part of the consideration given?

A. Indirect cost and acquisition related expenses
B. All direct expenses relating to the acquisition
C. Contingent consideration
D. Cost related to the issuance of stocks.

47. An entity debited Retained Earnings to record registration fees paid to issue equity securities. What is
the effect of this to the Stockholder’s Equity and Legal Capital respectively?
A. Understated, Understated
B. Understated, No effect
C. No effect, Understated
D. No effect, No effect

48. An entity purchased 100% of the net assets of another entity. On the acquiree’s books, which of the
following accounts is NOT usually debited?
A. Common Stock
B. Share Premium
C. Retained Earnings
D. Goodwill
49. On January 1, 2015, P Corporation purchased 80% of S Company’s outstanding shares for ₱620,000. At
that date, all of S Company’s assets and liabilities had market values approximately equal to their book
values and no goodwill was included in the purchase price. The following information was available for
2015: Income from own operations of P Corporation, ₱150,000; Operating loss of S Company, ₱20,000.
Dividends paid in 2015 by P Corporation, ₱75,000; by S Company to P Corporation, ₱12,000.
On July 1, 2015, there was a downstream sale of equipment at a gain of ₱25,000. The equipment is
expected to have a remaining useful life of 10 years from the date of sale. Also, on January 1, 2015,
there was an upstream sale of furniture at a loss of ₱7,500. The furniture is expected to have a useful life
of five years from the date of sale. Non-controlling interest is measured at fair market value.

How much is the consolidated net income attributable to parent shareholders’ equity?
a) 97,250
b) 115,050
c) 112,250.
d) 103,050

50. The general guideline 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 price of finished goods less both costs to
complete and costs of disposal.
C. Finished goods to be valued at replacement cost.
D. Finished goods to be valued at estimated selling price less both cost of disposal and a reasonable
profit allowance.