NATIONAL COLLEGE OF BUSINESS AND ARTS

FIRST SEMESTER SY 2020-2021

PRELIM EXAMINATIONS
In ACCOUNTING FOR BUSINESS COMBINATION

Name Section Exam Date Score

Instructions:
1. Be the best that you can be. GOOD LUCK!
2. Please use the official answer sheet.
3. Please open your camera computer during the conduct of exams.
4. Answer the questions within the time allotted so that your exams would not be invalidated.
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1. On January 1, 20x1, ABC Co. acquired 75% interest in XYZ, Inc. for ₱2,500,000 cash. ABC Co. incurred
transaction costs of ₱250,000 for legal, accounting and consultancy fees in negotiating the business combination.
ABC Co. elected to measure NCI at the NCI’s proportionate share in XYZ, Inc.’s identifiable net assets. The
carrying amounts and fair values of XYZ’s assets and liabilities at the acquisition date were as follows:

Assets Carrying amounts Fair values

Cash in bank 25,000 25,000
Accounts receivable 425,000 300,000
Inventory 1,300,000 875,000
Equipment – net 2,500,000 2,750,000
Goodwill 250,000 50,000
Total assets 4,500,000 4,000,000

Liabilities
Payables 1,000,000 1,000,000

How much is the goodwill (gain on a bargain purchase)?

a. 140,000
b. 278,500
c. 287,500
d. 264,500

2. The management of an entity is unsure how to treat a restructuring provision that they wish to set up on the
acquisition of another entity. Under PFRS 3, the treatment of this provision will be
a. A charge in the income statement in the post-acquisition period.
b. To include the provision in the allocated cost of acquisition.
c. To provide for the amount and, if the provision is overstated, to release the excess to the income statement
in the post-acquisition period.
d. To include the provision in the allocated cost of acquisition if the acquired entity commits itself to a
restructuring within a year of acquisition.

3. The method required under PFRS 3 to be used in accounting for business combinations is
a. Purchase method c. Acquisition method
b. Buy method d. Combination method

4. Should the following costs be included in the consideration transferred in a business combination, according to
PFRS 3 Business Combinations?
I. Costs of maintaining an acquisitions department.
II. Fees paid to accountants to effect the combination.
a. No No b. No Yes c. Yes No d. Yes Yes

Prelim Examination for Buscom by Mr Victor D. Dorongon, LPT,CPA, DBA

BUSINESS COMBINATION

5. 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.

6. 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 b. False, True c. True, False d. True, True

7. 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]

8. In a business combination, an acquirer's interest in the fair value of the net assets acquired exceeds the
consideration transferred in the combination. Under PFRS 3 Business Combinations, the acquirer should
a. recognize the excess immediately in profit or loss
b. recognize the excess immediately in other comprehensive income
c. reassess the recognition and measurement of the net assets acquired and the consideration transferred, then
recognize any excess immediately in profit or loss
d. reassess the recognition and measurement of the net assets acquired and the consideration transferred, then
recognize any excess immediately in other comprehensive income

9. Which one of the following reasons would not contribute to the creation of negative goodwill?
a. Errors in measuring the fair value of the acquiree’s net identifiable assets or the cost of the business
combination.
b. A bargain purchase.
c. A requirement in an IFRS to measure net assets acquired at a value other than fair value.
d. Making acquisitions at the top of a “bull” market for shares.

10. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities, and
contingent liabilities over cost” (formerly known as 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.

11. 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

12. Acquisition accounting requires an acquirer and an acquiree to be identified for every business combination.
Where a new entity (H) is created to acquire two preexisting entities, S and A, which of these entities will be
designated as the acquirer?
a. H. b. S. c. A. d. A or S.

Prelim Examination for Buscom by Mr Victor D. Dorongon, LPT,CPA, DBA 2

BUSINESS COMBINATION

Use the following information for the next four questions:

On January 1, 20x1, KNAVE acquired 80% of the equity interests of RASCAL, Inc. in exchange for cash. Because the
former owners of RASCAL needed to dispose of their investments in RASCAL by a specified date, they did not
have sufficient time to market RASCAL to multiple potential buyers.

As January 1, 20x1, RASCAL’s identifiable assets and liabilities have fair values of ₱4,800,000 and ₱1,600,000,
respectively.

13. KNAVE Co. elects the option to measure non-controlling interest at fair value. An independent consultant was
engaged who determined that the fair value of the 20% non-controlling interest in RASCAL, Inc. is ₱620,000.

If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in RASCAL, Inc., how much is the
goodwill (gain on bargain purchase) on the business combination?
a. 800,000 b. 2,060,000 c. 1,440,000 d. 1,420,000

14. KNAVE Co. elects the option to measure non-controlling interest at fair value. An independent consultant was
engaged who determined that the fair value of the 20% non-controlling interest in RASCAL, Inc. is ₱620,000.

If KNAVE Co. paid ₱2,400,000 cash as consideration for the 80% interest in RASCAL, Inc., how much is the
goodwill (gain on bargain purchase) on the business combination?
a. (180,000) b. (800,000) c. (160,000) d. (200,000)

15. KNAVE Co. elects the option to measure non-controlling interest at fair value. A value of ₱1,000,000 is assigned
to the 20% non-controlling interest in RASCAL, Inc. [(₱4M ÷ 80%) x 20% = 1,000,000].

If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in RASCAL, Inc., how much is the
goodwill (gain on bargain purchase) on the business combination?
a. 200,000 b. 1,800,000 c. 2,440,000 d. 1,440,000

16. KNAVE Co. elects the option to measure the non-controlling interest at the non-controlling interest’s
proportionate share of RASCAL, Inc.’s net identifiable assets

If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in RASCAL, Inc. and, how much is the
goodwill (gain on bargain purchase) on the business combination?
a. 1,440,000 b. 800,000 c. 1,400,000 c. 960,000

Use the following information for the next two questions:

On January 1, 20x1, SMUTTY acquired all of the identifiable assets and assumed all of the liabilities of OBSCENE,
Inc. On this date, the identifiable assets acquired and liabilities assumed have fair values of ₱6,400,000 and
₱3,600,000, respectively.

SMUTTY incurred the following acquisition-related costs: legal fees, ₱40,000, due diligence costs, ₱400,000, and
general administrative costs of maintaining an internal acquisitions department, ₱80,000.

17. Case #1: As consideration for the business combination, SMUTTY Co. transferred 8,000 of its own equity
instruments with par value per share of ₱400 and fair value per share of ₱500 to OBSCENE’s former owners.
Costs
18. of registering the shares amounted to ₱160,000. How much is the goodwill (gain on bargain purchase) on the
business combination?
a. 716,000 b. 556,000 c. 600,000 d. 1,200,000

19. Case #2: As consideration for the business combination, SMUTTY Co. issued bonds with face amount and fair
value of ₱4,000,000. Transaction costs incurred in issuing the bonds amounted to ₱200,000. How much is the
goodwill (gain on bargain purchase) on the business combination?
Prelim Examination for Buscom by Mr Victor D. Dorongon, LPT,CPA, DBA 3
BUSINESS COMBINATION
a. 716,000 b. 556,000 c. 600,000 d. 1,200,000

20. On January 1, 20x1, ENTREAT Co. acquired all of the identifiable assets and assumed all of the liabilities of
BEG, 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. ENTREAT Co. has estimated restructuring
provisions of ₱800,000 representing costs of exiting the activity of BEG, costs of terminating employees of BEG,
and costs of relocating the terminated employees. How much is the goodwill (gain on bargain purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000

21. On January 1, 20x1, HISTRIONAL Co. acquired all of the identifiable assets and assumed all of the liabilities of
THEATRICAL, 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.

As of January 1, 20x1, HISTRIONAL holds a building and a patent which are being rented out to THEATRICAL,
Inc. under operating leases. HISTRIONAL has determined that the terms of the operating lease on the building
compared with market terms are favorable. The fair value of the differential is estimated at ₱80,000. How much is
the goodwill (gain on bargain purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000

22. On January 1, 20x1, SUBTERFUGE Co. acquired all of the identifiable assets and assumed all of the liabilities of
DECEPTION, 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:
● SUBTERFUGE intends to sell immediately a factory plant included in the identifiable assets of DECEPTION. All
of the “held for sale” classification criteria under PFRS 5 are met. As of January 1, 20x1, the factory plant has a
fair value of ₱1,200,000 and a carrying amount of ₱1,000,000 in the books of DECEPTION. Costs to sell the
factory plant is ₱80,000.
● Not included in the identifiable asset of DECEPTION is a research and development intangible asset that
SUBTERFUGE does not intend to use. The fair value of this asset is ₱200,000.
● Also, not included in the identifiable asset of DECEPTION is a customer list, with an estimated value of ₱40,000,
in the form of a database where the nature of the information is subject to national laws regarding
confidentiality.

How much is the goodwill (gain on bargain purchase)?

a. 1,200,000 b. 1,280,000 c. 1,080,000 d. 1,040,000

23. On January 1, 20x1, CHIDE Co. acquired 90% of the identifiable assets and assumed all of the liabilities of
SCOLD, Inc. by paying cash of ₱4,000,000. On this date, SCOLD’s identifiable assets and liabilities have fair
values of ₱6,400,000 and ₱3,600,000, respectively. Non-controlling interest has a fair value of ₱320,000.

As of January 1, 20x1, SCOLD had the following which were not included in the acquisition-date fair value
measurement of liabilities:
● SCOLD has an existing contract with a customer to deliver products at a specified future date. In accordance
with the agreement, SCOLD shall pay a penalty for failure to deliver the said goods. CHIDE determined that the
fair value of the penalty is ₱40,000. However, because CHIDE expects to comply with the agreement, it was
assessed that payment of penalty is improbable.
● SCOLD has guaranteed a bank loan of a third party. CHIDE shall replace SCOLD as the guarantor. If the third
party defaults on the loan, CHIDE will be held liable for the guarantee. CHIDE determined that the fair value of
the guarantee is ₱120,000. However, both SCOLD and CHIDE believe that the third party will not default on its
loan from the bank.

● There is a pending unresolved litigation filed by a third party against SCOLD. CHIDE determined that the fair
value of settling the litigation is ₱200,000. However, because the legal counsels of both CHIDE and SCOLD
strongly believe that they will win the case, it was assessed that payment for the settlement of the litigation is
improbable.

How much is the goodwill (gain on bargain purchase)?

Prelim Examination for Buscom by Mr Victor D. Dorongon, LPT,CPA, DBA 4
BUSINESS COMBINATION
a. 1,880,000 b. 1,200,000 c. 1,560,000 d. 1,520,000

24. On January 1, 20x1, PRODIGIOUS Co. acquired all of the identifiable assets and assumed all of the liabilities of
EXTRAORDINARY, 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.

The terms of the business combination agreement are shown below:

● Half of the ₱4,000,000 agreed consideration shall be paid on January 1, 20x1 and the other half on December 31,
20x5. The prevailing market rate as of January 1, 20x1 is 10%.
● In addition, PRODIGIOUS agrees to provide for the following:
a. A piece of land with a carrying amount of ₱2,000,000 and fair value of ₱1,200,000 shall be transferred to the
former owners of EXTRAORDINARY.
b. After the combination, EXTRAORDINARY’s activities shall be continued by PRODIGIOUS. PRODIGIOUS
agrees to provide a patented technology for use in the activities of EXTRAORDINARY. The patented
technology has a carrying amount of ₱240,000 in the books of PRODIGIOUS and a fair value of ₱320,000.
● Included in the liabilities assumed is an estimated liability on a pending lawsuit filed against
EXTRAORDINARY by a third party with an acquisition-date fair value of ₱400,000. The carrying amount of the
liability in EXTRAORDINARY’s books immediately before the business combination is ₱480,000.
EXTRAORDINARY guarantees to indemnify PRODIGIOUS for any settlement amount of the liability in excess
of ₱480,000.

How much is the goodwill (gain on bargain purchase)?

a. 1,721,843 b. 1,561,843 c. 1,641,843 d. 2,320,000

25. On January 1, 20x1, ATTAINDER Co. acquired all of the assets and assumed all of the liabilities of DISHONOR,
Inc. As of this date, the carrying amounts and fair values of the assets and liabilities of DISHONOR acquired by
ATTAINDER are shown below:
Assets Carrying amounts Fair values
Cash in bank 40,000 40,000
Receivables 800,000 480,000
Allowance for probable losses on
(120,000)
receivables
Inventory 2,080,000 1,400,000
Building – net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000

Liabilities
Payables 1,600,000 1,600,000

ATTAINDER Co. paid ₱6,000,000 cash as consideration for the assets and liabilities of DISHONOR, Inc. It was
determined on acquisition date that DISHONOR, Inc. has an unrecorded patent with a fair value of ₱120,000 and a
contingent liability with fair value of ₱80,000.

Although adjustments are to be made to the carrying amounts of the assets and liabilities, no adjustments shall be
made to their tax bases. All adjustments to the carrying amounts of assets and liabilities result to temporary
differences. ATTAINDER’s tax rate is 30%.

How much is the goodwill (gain on bargain purchase) on the business combination?
a. 1,148,000 b. 1,108,000 c. 1,028,000 d. 1,240,000

Prelim Examination for Buscom by Mr Victor D. Dorongon, LPT,CPA, DBA 5

BUSINESS COMBINATION

26. On January 1, 20x1, FARCICAL Co. acquired all of the assets and liabilities of ABSURD, Inc. for ₱6.4M. As of
this date, the carrying amounts and fair values of the assets and liabilities of ABSURD are shown below:
Assets Carrying amounts Fair values
Cash in bank 40,000 40,000
Receivables 800,000 480,000
Allowance for probable losses on
(120,000)
receivables
Inventory 2,080,000 1,400,000
Building – net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000

Liabilities
Dividends payable 400,000 400,000
Other payables 1,600,000 1,600,000
2,000,000 2,000,000

The dividends payable pertain to dividends declared by ABSURD, Inc. on December 28, 20x0 to shareholders of
record on January 15, 20x1. The dividends will be distributed on January 31, 20x1.

How much is the goodwill (gain on bargain purchase)?

a. 1,280,000 b. 2,080,000 c. 2,480,000 d. 1,680,000

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.

27. 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

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

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

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

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

30. How much goodwill was recognized on acquisition date?

a. 980,000 b. 1,200,000 c. 1,280,000 d. 1,080,000
Prelim Examination for Buscom by Mr Victor D. Dorongon, LPT,CPA, DBA 6
BUSINESS COMBINATION

31. 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

32. On January 1, 20x1, OBDURATE Co. acquired 30% ownership interest in STUBBORN, Inc. for ₱400,000. Because
the investment gave OBDURATE significant influence over STUBBORN, the investment was accounted for
under the equity method in accordance with PAS 28.

From 20x1 to the end of 20x3, OBDURATE recognized ₱200,000 net share in the profits of the associate and ₱40,000
share in dividends. Therefore, the carrying amount of the investment in associate account on January 1, 20x3, is
₱560,000.

On January 1, 20x4, OBDURATE acquired additional 60% ownership interest in STUBBORN, Inc. for ₱3,200,000. As
of this date, OBDURATE has identified the following:
a. The previously held 30% interest has a fair value of ₱720,000.
b. STUBBORN’s net identifiable assets have a fair value of ₱4,000,000.
c. OBDURATE elected to measure non-controlling interests at the non-controlling interest’s proportionate share of
STUBBORN’s identifiable net assets.

How much is the goodwill?

a. 320,000 b. 240,000 c. 280,000 d. 360,000

33. 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

Use the following information for the next three questions:

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.

34. 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.

Prelim Examination for Buscom by Mr Victor D. Dorongon, LPT,CPA, DBA 7

BUSINESS COMBINATION

35. On July 1, 20x2, INNOCUOUS obtained new information that HARMLESS has an unrecorded patent which was
not identified on September 30, 20x1. It was believed that the unrecorded patent had a fair value of ₱400,000 and
a remaining useful life of 4 years as of September 30, 20x1.

How should INNOCUOUS account for the new information obtained?

a. As a retrospective adjustment to record the previously unrecorded patent resulting to increase in goodwill
by ₱400,000.
b. As a retrospective adjustment to record the previously unrecorded patent resulting to decrease in goodwill
by ₱400,000.
c. As a retrospective restatement to record the previously unrecorded patent resulting to decrease in goodwill
by ₱400,000. 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.

36. On November 1, 20x2, the internal auditors of INNOCUOUS discovered an error on the recorded identifiable
assets acquired from HARMLESS on the business combination. A patent with a fair value of ₱400,000 and a
remaining useful life of 4 years as of September 30, 20x1 was omitted from the valuation listing.

How should INNOCUOUS account for the new information obtained?

a. As a retrospective adjustment to record the previously unrecorded patent resulting to increase in goodwill
by ₱400,000.
b. As a retrospective adjustment to record the previously unrecorded patent resulting to decrease in goodwill
by ₱400,000.
c. As a retrospective restatement to record the previously unrecorded patent resulting to decrease in goodwill
by ₱400,000. 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.

37. On September 30, 20x1, RIBALD Co. acquired all of the identifiable assets and assumed all of the liabilities of
OFFENSIVE, Inc. by issuing 10,000 shares with par value of ₱20 per share.

On this date, RIBALD’s shares were assigned a provisional value of ₱400 per share. Also, because some identifiable
assets acquired and liabilities assumed have fair values that were not readily available, a provisional amount of
₱2,800,000 was assigned to OFFENSIVE’s net identifiable assets.

On April 1, 20x2, after RIBALD’s 20x1 financial statements were issued, new information was obtained confirming
that the fair value of RIBALD’s shares on September 30, 20x1 is ₱440 per share and that the fair value of
OFFENSIVE’s net identifiable assets as of September 30, 20x1 is ₱3,600,000.
On July 1, 20x2, two competitors of RIBALD have also merged which led to RIBALD believing that the merger with
OFFENSIVE is not as profitable as expected. RIBALD now wants to decrease the amount assigned to the
consideration transferred to OFFENSIVE on September 30, 20x1 to ₱360 per share and the value of OFFENSIVE’s
net identifiable assets to ₱1,600,000.

How should RIBALD account for the new information obtained on July 1, 20x2?
a. As a retrospective adjustment resulting to increase in goodwill by ₱400,000.
b. As a retrospective adjustment resulting to decrease in goodwill by ₱400,000.
c. As a retrospective restatement resulting to decrease in goodwill by ₱400,000. 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.

38. 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

Prelim Examination for Buscom by Mr Victor D. Dorongon, LPT,CPA, DBA 8

BUSINESS COMBINATION

39. A British parent entity uses the revaluation model to measure its property, but a Philippine subsidiary uses the
cost model. The Philippine subsidiary’s directors find the revaluation model too costly to implement. In the
consolidated financial statements, is the group allowed to measure the Philippine subsidiary’s property under
the cost model?
a. Yes, the British parent’s property shall be adjusted to conform to the subsidiary’s accounting policy of cost
model.
b. No, the Philippine subsidiary’s property shall be adjusted to conform to the group’s accounting policy of
revaluation model.
c. Yes, both models will be reflected in the consolidated financial statements, but this fact must be disclosed in
the notes.
d. None of these, the property is eliminated in the consolidated financial statements.

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.

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

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

- END -

Prelim Examination for Buscom by Mr Victor D. Dorongon, LPT,CPA, DBA 9