ACCOUNTING FOR BUSINESS COMBINATIONS

MIDTERM EXAM

NAME: ESPINOZA, DAENIELLE AUDREY M. DATE: Jan 08 2021

Choose the letter of the correct answer

1. IFRS 10 defines them as the financial statements of a group in which the assets, liabilities, equity,
income, expenses and cash flows of the parent and its subsidiaries are presented as those as a single
economic unit.
a. consolidated financial statements
b. separate financial statements
c. group financial statements
d. combined financial statements

2. Under IFRS 10, parent corporation is the entity that controls one or more entities. How those IFRS 10
defines control?
a. an investor controls an investee when it is exposed, or has right to variable return from the
investment with the investee and has the ability to affect those returns through the power over the
investee
b. an investor controls an investee when it has the power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities
c. an investor controls an investee when it has the ability to influence the financial and operating policies
of an entity so as to obtain benefits from its activities
d. an investor controls an investee when it owns more than 50% of all the outstanding capital stocks,
whether common or preferred

3. Under IFRS 10, it refers to the term used to describe the ownership of the largest block of voting
rights in a situation where the remaining rights are widely dispersed even if it is less than the majority
interest thereby requiring the holder of such interest to prepare consolidated financial statements?
a. De jure control
b. De facto control
c. Legal control
d. Nominal control

4. An investee’s only business activity is to purchase receivables and service them on a day-to-day basis.
Servicing involves collection and passing on of principal and interest payments. Upon default, the
investee automatically puts the receivable to investor X. is Investor X required to consolidate Investee in
its consolidated financial statements?
a. Yes because X controls the investee’s relevant activity that is managing the receivables upon default
which significantly affects the investee’s returns.
b. No because there is no statement as regards to majority ownership of stocks.
c. Yes but only if X owns 51% or more of voting stocks of investee
d. No because there is no link of power over the investee to the exposure/right to variable returns of
investment.

5. How shall the parent corporation present the Noncontrolling Interest (NCI) in the consolidated
Statement of Financial Position?
a. It shall be presented within Consolidated Stockholder’s Equity, separately from the equity of the
owners of the parent.
b. It shall be presented as non-current liability.
c. It shall be presented as non-current asset.
d. It shall be presented as contract-equity account like treasure shares and subscription receivable.

6. IAS 27 as amended defines Separate Financial Statements as those presented by a parent or an

investor with joint control of, or significant influence over, in addition to its consolidated financial
statements. Under IAS 27 as amended, Investment in Subsidiary shall be accounted for by the parent in
its separate financial statement using
a. Equity method under IAS 28
b. Cost method
c. Fair value method under IFRS 9
d. Any of the above

7. IFRS 3 defines it a transaction or other event in which an acquirer obtains control of one or more
business.
a. Business combination
b. Consolidation
c. Merger
d. Acquisition of net assets

8. Under IFRS 3, how shall an entity (acquirer) account for each business combination?
a. Pooling of interest method
b. Proportionate consolidation method
c. Acquisition method
d. Equity method

9. Applying acquisition method for business combination requires the following steps, except
a. Identifying the acquirer
b. Determining the acquisition date
c. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquire
d. Recognizing and measuring goodwill or a gain from a bargain purchase
e. Using equity method

10. In different types of business combination which of the following is not considered as an acquirer?
a. The newly formed corporation in case of merger
b. The absorbed corporation in case of consolidation
c. The corporation that acquires more than 50% of the other corporation’s ordinary shares
d. The corporation that controls the acquire

11. It refers to the date on which the acquirer obtains control of the acquire
a. Business combination date
b. Acquisition date
c. Control date
d. Consolidation date

12. As of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable
assets acquired, the liabilities assumed and any noncontrolling interest in the acquire. As a general rule,
the acquirer shall measure the identifiable assets acquired and liabilities assumed at their
a. Acquisition date- Fare value
b. Acquisition date- Book value
c. Acquisition date- Face value
d. Acquisition date- Carrying value

13. What is the measurement of consideration transferred or given up in a business combination?

a. Acquisition date- Fare value
b. Acquisition date- Book value
c. Acquisition date- Face value
d. Acquisition date- Carrying value

14. Under IFRS 3, what is the treatment of acquisition related costs in a business combination under IFRS
3?
a. It shall be expensed as incurred and presented as part of profit or loss
b. It shall be capitalized as part of consideration given up in computation of goodwill or gain on bargain
purchase
c. It shall be debited to share premium
d. It shall be charge directly to retained earnings

15. If the initial accounting for a business combination is complete by the end of the reporting period in
which the combination occurs, the acquirer shall report in its financial statement provisional amounts
for the items for which the accounting is incomplete. What is the maximum term or period of the
measurement period?
a. One year or 12 months from the acquisition date
b. 6 months from the acquisition date
c. 3 months from the acquisition date
d. 1 month from the acquisition date
Problem 1
On January 1, 2020, Equity A acquired 70% of outstanding ordinary shares of Equity B at a price of
210,000. On the same date, the net assets of Equity B were reported at 260,000. On January 1, 2020
Equity A reported retained earnings of 2,000,000 while Entity B were reported retained earnings of
200,000.
All the assets and liabilities of Equity B are fairly valued except machinery which is under valued by
80,000 and inventory which is over valued by 10,000. The said machinery has remaining useful life of
four years while 40% of the said inventory remained unsold at the end of 2020.
For the year ended December 31, 2020, Entity A reported net income of 1,000,000 and declared
dividends of 200,000 in the separate financial statements while Entity B reported net income of 150,000
and declared dividends of 20,000 in the separate financial statements.
1. What is the non-controlling interest in net assets on December 31, 2020?
a. 124,800
b. 130,200
c. 126,000
d. 133,800

2. What is the consolidated net income attributable to parent shareholders for the year ended
December 31, 2020?
a. 1,102,200
b. 1,162,200
c. 1,141,200
d. 1,095,200

3. What is the amount of consolidated retained earnings on December 31,2020?

a. 3,012,200
b. 2,991,200
c. 2,952,200
d. 2,945,200

PROBLEM 2

P Company acquires all of S Company’s outstanding stock on January 1, 2020, by paying 340,000 cash,
and immediately prepares a consolidated balance sheet. The separate balance sheets of the two
companies immediately prepares before the consolidation with acquiree’s fair value were presented as
follows:

Assets P company S Company S Company

Book Value Book Value Fair Value
Cash 350,000 50,000 50,000
Accounts Receivable 75,000 50,000 50,000
Inventory 100,000 60,000 75,000
Land 175,000 40,000 100,000
Building and Equipment (net) 400,000 300,000 290,000
 Total Assets 1,100,000 500,000 565,000

Liabilities and Stockholder’s Equity

Accounts Payable 100,000 100,000 100,000
Bonds Payable 200,000 100,000 135,000
Common Stock, P10 par 500,000 200,000
Paid in capital in excess of par 50,000 20,000
Retained earnings 250,000 80,000
Stockholder’s Equity 1,100,000 500,000

1. What amount of Goodwill will be reported on January 1, 2020?

a. 10,000
b. (10,000)
c. 20,000
d. (20,000)

2. What is the amount of Cash in the Consolidated Balance Sheet on January 1, 2020?
a. 400,000
b. 50,000
c. 60,000
d. 350,000

3. What is the amount of Total Assets in the Consolidated Balance Sheet on January 1, 2020?
a. 1,335,000
b. 1,325,000
c. 1,100,000
d. 1,000,000

4. What is the amount of Non-Current Assets in the Consolidated Balance Sheet on January 1, 2020?
a. 965,000
b. 1,325,000
c. 1,195,000
d. 975,000

Problem 3
P Company acquires 80% of S Company for 10,000,000, carrying value of S Company’s net assets at time
of acquisition being 6,000,000 and fair value of these net identifiable assets being 8,000,000.

1. What is the amount of Goodwill (Partial-goodwill Approach)?

a. 3,600,000
b. 1,600,000
c. 4,500,000
d. 2,500,000
2. What is the amount of Goodwill (Full-goodwill Approach)?
a. 3,600,000
b. 1,600,000
c. 4,500,000
d. 2,500,000

3. What is the amount of Non-controlling Interest (Partial-goodwill Approach)?

a. 3,600,000
b. 1,600,000
c. 4,500,000
d. 2,500,000

4. What is the amount of Non-controlling Interest (Full-goodwill Approach)?

a. 3,600,000
b. 1,600,000
c. 4,500,000
d. 2,500,000

5. What is the amount of Non-controlling Interest on full goodwill?

a. 3,600,000
b. 1,600,000
c. 4,500,000
d. 900,000