Test Bank Millan

TEST BANK
Advanced
Accounting
Part 2
ZEUS VERNON B. MILLAN

ALL RIGHTS RESERVED
RESERVED
2015
No part of this work covered by the

copyright hereon may be reproduced
or used in any form or by any means -
electronic or mechanical, including
photocopying – without the written
permission of the author.
ISBN 978-621-95096-5-7
Published by:
BANDOLIN ENTERPRISE
No. 100 Montebello Village, Bakakeng Sur, Baguio City 2600, Philippines
TABLE OF CONTENTS
CHAPTER 13
BUSINESS COMBINATIONS (PART 1) ..................................... 1
OVERVIEW ON THE TOPIC ........... ERROR! BOOKMARK NOT DEFINED .
INTRODUCTION ............................
............................ERROR! BOOKMARK NOT DEFINED .
OBJECTIVE ..........................
....................................
..........ERROR! BOOKMARK NOT DEFINED .
SCOPE ..........................
.........................................
...................ERROR! BOOKMARK NOT DEFINED .
DEFINITION OF BUSINESS COMBINATION ERROR! BOOKMARK NOT DEFINED .
Essential elements in the definition of a business combination Error!
Bookmark not defined.
ACCOUNTING FOR BUSINESS COMBINATION ERROR! BOOKMARK NOT DEFINED .
IDENTIFYING THE ACQUIRER ...... ERROR! BOOKMARK NOT DEFINED .
DETERMINING THE ACQUISITION DATE ERROR! BOOKMARK NOT DEFINED .
RECOGNIZING AND MEASURING GOODWILL ERROR! BOOKMARK NOT DEFINED .
Consideration transferred Error! Bookmark not defined.
Non-controlling interest ... Error! Bookmark not defined.
Previously held equity interest in the acquiree Error! Bookmark not defined.
Net identifiable assets acquired Error! Error! Bookmark not defined.
RESTRUCTURING
ESTRUCTURING PROVISIONS .... ERROR! BOOKMARK NOT DEFINED .
SPECIFIC RECOGNITION PRINCIPLES ERROR! BOOKMARK NOT DEFINED .
1. Operating leases .......... Error! Bookmark not defined.
2. Intangible assets .......... .......... Error! Bookmark not defined.
EXCEPTION TO THE RECOGNITION PRINCIPLE – CONTINGENT LIABILITIES ERROR! BOOKMARK
NOT DEFINED .
EXCEPTIONS TO BOTH THE RECOGNITION AND MEASUREMENT PRINCIPLES ERROR!
BOOKMARK NOT DEFINED .
Additional concepts concepts on Consideration
Consideration transferred transferred Error! Error! Bookmark not
defined.
EXCEPTIONS TO THE MEASUREMENT PRINCIPLE ERROR! BOOKMARK NOT DEFINED .
CHAPTER 13: SUMMARY ............ ERROR! BOOKMARK NOT DEFINED .
CHAPTER 13: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION PURPOSES )
...........................
.........................................
............................
..............ERROR! BOOKMARK NOT DEFINED .
CHAPTER 13: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION
PURPOSES ) ............................
..........................................
............................
............................
............................
..........................
............1
CHAPTER 13: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES ) ERROR! BOOKMARK
NOT DEFINED .
CHAPTER 14
BUSINESS COMBINATIONS (PART 2) ..................................... 8
SHARE-FOR-SHARE EXCHANGES ERROR! BOOKMARK NOT DEFINED .
BUSINESS COMBINATION ACHIEVED IN STAGESERROR! BOOKMARK NOT DEFINED .
BUSINESS COMBINATION ACHIEVED WITHOUT TRANSFER OF CONSIDERATION ERROR!
MEASUREMENT PERIOD .............. ERROR! BOOKMARK NOT DEFINED .
DETERMINING WHAT IS PART OF THE BUSINESS COMBINATION TRANSACTION
TRANSACTION ERROR!
Reacquired rights ................ Error! Bookmark not defined.
Settlement of pre-existing relationships between the acquirer and acquiree
Error! Bookmark not defined.
PURPOSES ) ................................................................................................8
NOT DEFINED .
CHAPTER 15
BUSINESS COMBINATIONS (PART 3) ................................... 16
SPECIAL ACCOUNTING TOPICS FOR BUSINESS COMBINATION ERROR! BOOKMARK NOT
DEFINED.
GOODWILL ................................... ERROR! BOOKMARK NOT DEFINED .
Due diligence ......................... Error! Bookmark not defined.
Methods of estimating goodwill Error! Bookmark not defined.
REVERSE ACQUISITIONS .............. ERROR! BOOKMARK NOT DEFINED .
COMBINATION OF MUTUAL ENTITIES ERROR! BOOKMARK NOT DEFINED .
.......................................................ERROR! BOOKMARK NOT DEFINED .
PURPOSES ) ............................................................................................. 16
NOT DEFINED .
CHAPTER 15: THEORY OF ACCOUNTS REVIEWER ............................. 19
CHAPTER 15 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS 25
CHAPTER 16
CONSOLIDATED FINANCIAL STATEMENTS (PART 1) .... 26
OVERVIEW ON THE TOPIC ........... ERROR! BOOKMARK NOT DEFINED .
SCOPE ...........................................ERROR! BOOKMARK NOT DEFINED .
CONTROL ......................................ERROR! BOOKMARK NOT DEFINED .
POWER .........................................ERROR! BOOKMARK NOT DEFINED .
Administrative rights ......... Error! Bookmark not defined.
Unilateral rights ................... Error! Bookmark not defined.
Protective rights................... Error! Bookmark not defined.
Substantive rights ............... Error! Bookmark not defined.
Voting rights .......................... Error! Bookmark not defined.
Substantive removal and other rights held by other parties Error! Bookmark
not defined.
EXPOSURE OR RIGHTS TO VARIABLE RETURNSERROR! BOOKMARK NOT DEFINED .
ABILITY TO USE ITS POWER TO AFFECT INVESTOR’S RETURNSERROR! BOOKMARK NOT
DEFINED.
ACCOUNTING REQUIREMENTS .... ERROR! BOOKMARK NOT DEFINED .
Uniform accounting policies Error! Bookmark not defined.
Reporting date ...................... Error! Bookmark not defined.
Consolidation period .......... Error! Bookmark not defined.
Measurement......................... Error! Bookmark not defined.
NON-CONTROLLING INTERESTS (NCI)ERROR! BOOKMARK NOT DEFINED .
PREPARING THE CONSOLIDATED FINANCIAL STATEMENTS ERROR! BOOKMARK NOT DEFINED .
CONSOLIDATION AT DATE OF ACQUISITION ERROR! BOOKMARK NOT DEFINED .
CONSOLIDATION SUBSEQUENT TO DATE OF ACQUISITION ERROR! BOOKMARK NOT DEFINED .
Step 1: Analysis of effects of intercompany transaction Error! Bookmark not
defined.
Step 7: Profit or loss attributable to owners of parent and NCI Error!
Bookmark not defined.
SUBSIDIARY’S OUTSTANDING CUMULATIVE PREFERENCE SHARES ERROR! BOOKMARK NOT
DEFINED.
PURPOSES ) ............................................................................................. 26
NOT DEFINED .
CHAPTER 17
INTERCOMPANY TRANSACTIONS ERROR! BOOKMARK NOT DEFINED .
Intercompany sale of inventory Error! Bookmark not defined.
Intercompany sale of property, plant and equipment Error! Bookmark not
defined.
Intercompany dividends ... Error! Bookmark not defined.
Intercompany bond transaction Error! Bookmark not defined.
PURPOSES ) ............................................................................................. 31
CHAPTER 18
IMPAIRMENT OF GOODWILL. ...... ERROR! BOOKMARK NOT DEFINED .
INTERCOMPANY ITEMS IN-TRANSIT AND RESTATEMENTS ERROR! BOOKMARK NOT DEFINED .
CONTINUOUS ASSESSMENT . ........ ERROR! BOOKMARK NOT DEFINED .
Changes in ownership interest not resulting to loss of control Error! Bookmark
not defined.
Loss of control ....................... Error! Bookmark not defined.
Derecognition of other comprehensive income Error! Bookmark not defined.
IMPORTANCE OF CONSOLIDATION ERROR! BOOKMARK NOT DEFINED .
THEORIES OF CONSOLIDATION ... ERROR! BOOKMARK NOT DEFINED .
Historical background....... Error! Bookmark not defined.
Advantages and disadvantages of the entity theory Error! Bookmark not
defined.
ADDITIONAL ILLUSTRATIONS :.... ERROR! BOOKMARK NOT DEFINED .
CONSOLIDATION OF REVERSE ACQUISITION ERROR! BOOKMARK NOT DEFINED .
SPECIAL PURPOSE ENTITIES ....... ERROR! BOOKMARK NOT DEFINED .
PURPOSES ) ............................................................................................. 35
CHAPTER 19
COMPLEX GROUP STRUCTURES .. ERROR! BOOKMARK NOT DEFINED .
Identifying the acquisition date Error! Bookmark not defined.
PUSH-DOWN ACCOUNTING ......... ERROR! BOOKMARK NOT DEFINED .
PFRS 12 DISCLOSURE OF I NTERESTS IN OTHER E NTITIES ERROR! BOOKMARK NOT DEFINED .
PURPOSES ) ............................................................................................. 47
CHAPTER 19 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS 56
CHAPTER 20
SEPARATE FINANCIAL STATEMENTS .................................. 57
OBJECTIVE ....................................ERROR! BOOKMARK NOT DEFINED .
DEFINITIONS ................................ERROR! BOOKMARK NOT DEFINED .
PREPARATION OF SEPARATE FINANCIAL STATEMENTS ERROR! BOOKMARK NOT DEFINED .
COST METHOD ............................. ERROR! BOOKMARK NOT DEFINED .
FAIR VALUE METHOD .................. ERROR! BOOKMARK NOT DEFINED .
EQUITY METHOD ......................... ERROR! BOOKMARK NOT DEFINED .
DISCLOSURE .................................ERROR! BOOKMARK NOT DEFINED .
PURPOSES ) ............................................................................................. 57
NOT DEFINED .
CHAPTER 20 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS 58
CHAPTER 21
THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES 59
OBJECTIVE ....................................ERROR! BOOKMARK NOT DEFINED .
Two ways of conducting foreign activities Error! Bookmark not defined.
Two main accounting issues Error! Bookmark not defined.
FUNCTIONAL CURRENCY ............. ERROR! BOOKMARK NOT DEFINED .
CHANGE IN FUNCTIONAL CURRENCY ERROR! BOOKMARK NOT DEFINED .
FOREIGN CURRENCY TRANSACTIONS ERROR! BOOKMARK NOT DEFINED .
Initial recognition ............... Error! Bookmark not defined.
Subsequent measurement Error! Bookmark not defined.
Monetary items ..................... Error! Bookmark not defined.
Direct and indirect quotation Error! Bookmark not defined.
RECOGNITION OF EXCHANGE DIFFERENCESERROR! BOOKMARK NOT DEFINED .
ITEMS MEASURED AT OTHER THAN HISTORICAL COST ERROR! BOOKMARK NOT DEFINED .
SEVERAL EXCHANGE RATES ........ ERROR! BOOKMARK NOT DEFINED .
EXCHANGE DIFFERENCES RECOGNIZED IN OCIERROR! BOOKMARK NOT DEFINED .
FOREIGN OPERATIONS ................ ERROR! BOOKMARK NOT DEFINED .
Translation to the presentation currency Error! Bookmark not defined.
Translation procedures..... Error! Bookmark not defined.
Translation of a foreign operation Error! Bookmark not defined.
Net investment in a foreign operation Error! Bookmark not defined.
Disposal or partial disposal of a foreign operation Error! Bookmark not
defined.
incurred in issuing the bonds amounted to ₱200,000. 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
Restructuring provisions
9. 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
Specific recognition principles – Operating leases

Fact pattern
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.
Case #1: Acquiree is the lessee – terms are favorable

10. 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
Case #2: Acquiree is the lessee – terms are unfavorable

11. 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 patent compared
with market terms are unfavorable. 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
Case #3: Acquiree is the lessor

12. As of January 1, 20x1, HISTRIONAL is renting a building and a patent from
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
Intangible assets – separability and contractual-legal criteria

13. On January 1, 20x1, LITHE Co. paid cash of ₱6,000,000 in exchange for all of
the net assets of FLEXIBLE, Inc. As of this date, the carrying amounts and fair
values of the assets and liabilities of FLEXIBLE acquired by LITHE are shown
Allowance for probable losses on
(400,000)
receivables
Property, plant and equipment 4,000,000 4,400,000
Computer software 400,000 -
Patent - 200,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,200,000
Liabilities
Bonds payable (w/ face amount of
1,600,000 1,800,000
₱1,600,000)
In applying the recognition and measurement principles under PFRS 3, LITHE Co.
has identified the following unrecorded intangible assets:
Fair
Type of intangible asset value
Research and development projects 200,000
Customer list 160,000
Customer contract #1 120,000
Customer contract #2 80,000
Order (production) backlog 40,000
Internet domain name 60,000
Trademark 100,000
Trade secret processes 140,000
Mask works 180,000
Total 1,080,000
Additional information:
 The computer software is considered obsolete.
 The patent has a remaining useful life of 10 years and a remaining legal life of
12 years.
 FLEXIBLE, Inc. recognized the research and development costs as expenses
when they were incurred.
 Customer contract #1 refers to an agreement between FLEXIBLE, Inc. and
Numbers Co., a customer, wherein FLEXIBLE, Inc. is to supply goods to
Numbers Co. for a period of 5 years. As of acquisition date, the remaining
period in the agreement is 3 years. LITHE and FLEXIBLE believe that
Numbers Co. will renew the agreement at the end of the current contract. The
agreement is not separable.
 Customer contract #2 refers to FLEXIBLE’s insurance segment’s portfolio of
one-year motor insurance contracts that are cancellable by policyholders.
 FLEXIBLE, Inc. transacts with its customers solely through purchase and sales
orders. As of acquisition date, has a backlog of customer purchase orders
from 60% of its customers, all of whom are recurring customers. The other
40% of FLEXIBLE’s customers are also recurring customers. However, as of
acquisition date, FLEXIBLE has no open purchase orders or other contracts
with those customers.
 The internet domain name is registered.
How much is the goodwill (gain on bargain purchase)?

900,000 b. 600,000 420,000 d. 1,680,000
₱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.
 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.

a. 1,200,000 b. 1,280,000 c. 1,080,000 d. 1,040,000
Contingent liabilities
15. 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.

a. 1,880,000 b. 1,200,000 c. 1,560,000 d. 1,520,000
Consideration transferred and indemnification asset

16. 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
Provisional amounts – consideration transferred
17. 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

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.
₱3,6 00,000.
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
OFFENSI VE 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.
Determining what is part of the business combination transaction

18. 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
assumed have fair values of ₱6,400,000 and ₱3,600,000, respectively.
information:
In addition to the business combination transaction, the following have also
transcribed during the negotiation period:
a. After the business combination, TRANSPARENT will enter into liquidation
and DIAPHANOUS agreed to reimburse TRANSPARENT for liquidation costs
estimated at ₱80,000.
b. DIAPHANOUS agreed to reimburse TRANSPARENT for the appraisal fee of a
building included in the identifiable assets acquired. The agreed
reimbursement is ₱40,000.
c. 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.
d. To persuade, Mr. Five-six Numerix, the previous major shareholder of
a. 1,680,000 b. 1,640,000 c. 1,760,000 d. 1,240,000
Settlement of pre-existing relationship - Reacquired right

19. On January 1, 20x1, THRALL Co. acquired all of the identifiable assets and
assumed all of the liabilities of SLAVE, Inc. by paying cash of ₱ 4,000,000. On
this date, SLAVE’s identifiable assets and liabilities have fair values of
₱6,400,000 and ₱3,600,000, respectively.
Prior to business combination, THRALL has sold a license to SLAVE. The licensing
agreement granted SLAVE the right to use TH RALL’s patented technology for a
period of 5 years. THRALL received ₱400,000 for the license on grant date and
royalty fees based on SLAVE’s sales.
THRALL recognized the license fee as deferred liability and amortized it over 5
years. The carrying amount of the deferred liability on January 1, 20x1 is
₱240,000.
On the other hand, SLAVE recognized the license fee paid to THRALL as
prepayment and amortized it based on the number of products sold. The carrying
amount of the prepayment on January 1, 20x1 is ₱200,000.
On January 1, 20x1, THRALL has determined that the fair value of the license
agreement is ₱480,000. The fair value determined consists of ₱160,000 “at -
market” (based on market participants' estimates) and ₱320,000 “off -market”
(based on the excess of fair value derived from cash flow estimates over at-
market values; ₱480,000 – ₱160,000) components. The off -market
-market component is
favorable to SLAVE and unfavorable to THRALL, as royalty rates have increased
considerably in comparable markets since the initiation of the contract. The
contract does not have any cancellation clause or any minimum royalty payment
requirements.

a. 1,200,000 b. 840,000 c. 980,000 d. 920,000
Settlement of pre-existing relationship – Not a reacquired right

20. MULIEBRITY Co. purchases raw materials from FEMINITY, Inc. under a five-
year supply contract at fixed rates. Currently, the fixed rates are higher than
the rates at which MULIEBRITY could purchase similar raw materials from
another supplier. MULIEBRITY is allowed under the supply agreement to
terminate the contract before the end of the five-year
five -year term, but only by paying
a ₱400,000 penalty.
On January 1, 20x1, with three years remaining under the supply contract,
MULIEBRITY Co. acquired all of the identifiable assets and assumed all of the
liabilities of FEMINITY, Inc. by paying cash of ₱4,000,000. On this date,
FEMINITY’s identifiable assets and liabilities have fair values of ₱6,400,000 and
₱3,600,000, respectively.
Included in the total fair value of FEMINITY is ₱640,000 related to the fair value
transactions for similar items. There are no other assets or liabilities related to
the contract in either MULIEBRITY’s
MULIEBRITY’s or FEMINITY’s books as of acquisition date.

a. 840,000 b. 1,200,000 c. 920,000 d. 980,000
Settlement of pre-existing relationship – Non-contractual

Non-contractual
21. On January 1, 20x1, DEMULCENT Co. acquired all of the identifiable assets and
assumed all of the liabilities of EMBARRASSING, Inc. by paying cash of
₱4,000,000. On this date, EMBARRASSING’s identifiable assets and liabilities
have fair values of ₱6,400,000 and ₱3,600,000, respectively.
As of January 1, 20x1, there is a pending patent infringement suit filed by

EMBARRASSING, Inc. against DEMULCENT Co. DEMULCENT recognized a
probable loss on the lawsuit amounting the ₱520,000. The patent
paten t in question
shall be transferred to DEMULCENT after the business combination.
DEMULCENT’s legal advisers determined that the fair value of the settlement of
the pending lawsuit is ₱400,000. How much is the goodwill (gain on bargain
purchase)?
a. 840,000 b. 800,000 c. 280,000 d. 920,000
consideration – Initial and subsequent measurement

Contingent consideration
22. On January 1, 20x1, VERITY FIRMNESS Co. acquired all of the identifiable
assets and assumed all of the liabilities of FIRMNESS, Inc. by paying cash of
₱4,000,000. On this date, FIRMNESS’s identifiable assets and liabilities have
fair values of ₱6,400,000 and ₱3,600,000, respectively.
VERITY agrees to pay an additional amount equal to 10% of the 20x1 year-end
profit that exceeds ₱1,600,000. FIRMNESS historically has reported profits of
₱1,200,000 to ₱1,600,000 each year.
After assessing the expected level of profits for the year based on forecasts and
plans, as well as industry trends, VERITY estimated that the fair value of the
contingent consideration is ₱40,000.

a. 1,180,000 b. 1,200,000 c. 1,240,000 d. 980,000
23. Case #1: (Refer to previous problem) The actual profit for the year is
₱2,200,000. The contingent consideration will be settled on January 15, 20x2.
The entry on December 31, 20x1 includes a
a. debit to loss of ₱20,000 to be recognized in profit
profit or loss
b. credit to gain of ₱20,000 to be recognized in profit or loss
c. debit to loss of ₱20,000 to be recognized in OCI
d. credit to gain of ₱20,000 to be recognized in OCI
24. Case #2: (Refer to previous problem) The actual profit for the year is
₱1,200,000. The entry on December 31, 20x1 includes a
a. debit to loss of ₱40,000 to be recognized in profit or loss
b. credit to gain of ₱40,000 to be recognized in profit or loss
debit to loss of ₱40,000 to be recognized in OCI
shares with par value of ₱40 per share. On this date, STEEP’s identifiable
assets and liabilities have fair values of ₱6,400,000 and ₱3,600,000,
respectively, while PRECIPITOUS’s shares have fair value of ₱400 per share.
In addition, PRECIPITOUS agrees to issue additional 1,000 shares to the former

owners of STEEP if the market price per share of PRECIPITOUS’s shares increases
to ₱480 per share as of December 31, 20x1. After consideration for the vesting
conditions, PRECIPITOUS estimated that the fair value of the contingent
consideration on January 1, 20x1 is ₱360,000.

a. 1,200,000 b. 840,000 c. 1,560,000 d. 980,000
26. Case #1: (Refer to previous problem) The actual market price of
PRECIPITOUS’s shares on December 31, 20x1 is ₱480. The contingent
consideration will be settled on January 15, 20x2. The entry on December 31,
20x1 includes
a. debit to loss of ₱120,000 in profit or loss
b. credit gain of ₱120,000 in profit or loss
c. debit to loss of ₱120,000 in OCI
d. no entry is required
27. Case #2: The actual market price of PRECIPITOUS’s shares on December 31,
20x1 is ₱360. The entry on December 31, 20x1 includes
a. debit to loss of ₱120,000 in profit or loss
b. credit gain of ₱120,000 in OCI
c. a reclassification within equity
d. no entry is required
Contingent payments to employees

28. On January 1, 20x1, MACABRE Co. acquired 90% of the identifiable assets and
assumed all of the liabilities of HORRIBLE, Inc. by paying cash of ₱4,000,000.
On this date, HORRIBLE’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.
Five years ago, HORRIBLE appointed Mr. Boss as the CEO under a ten-year
contract. The contract required HORRIBLE to pay the CEO ₱400,000 if HORRIBLE
is acquired before the contract expires. On January 1, 20x1, Mr. Boss was still
employed and MACABRE assumes the obligation of paying Mr. Boss the
contracted amount. How much is the goodwill (gain on bargain purchase)?
a. 1,200,000 b. 1,920,000 c. 1,520,000 d. 1,120,000
Chapter 15
Business Combinations (Part 3)
Chapter 15: Multiple Choice – Computational (For classroom instruction

purposes)
Applications of the Direct valuation method
Use the following information for the next four questions:
UNFLEDGED Co. is contemplating on acquiring IMMATURE, Inc. The following
information was gathered through a diligence audit:
 The actual earnings of IMMATURE, Inc. for the past 5 years are shown below:
Year Earnings
20x1 4,800,000
20x2 5,200,000
20x3 5,400,000
20x4 5,000,000
20x5 7,200,000
Total 27,600,000
 Earnings in 20x5 included an expropriation gain of ₱1,600,000.

 The fair value of IMMATURE’s net assets as of the end of 20x5 is ₱40,000,000.
 The industry average rate of return is 12%.
 Probable duration of “excess earnings” is 5 years.
1. How much is the estimated goodwill using the multiples of average excess
earnings method?
a. 1,600,000 b. 400,000 c. 920,000 d. 2,000,000
2. How much is the estimated goodwill using the capitalization of average excess
earnings method? (Assume a capitalization rate of 25%)
a. 1,600,000 b. 400,000 c. 920,000 d. 2,000,000
3. How much is the estimated goodwill using the capitalization of average

earnings method? (Assume a capitalization rate of 12.5%)
a. 1,600,000 b. 400,000 c. 920,000 d. 2,000,000
4. How much is the estimated goodwill using present value of average excess
earnings method? (Assume a discount rate of 10%)
a. 1,516,136 b. 1,428,789 c. 1,516,316 d. 1,412,308
Applications of the Direct valuation method – Purchase price

Use the following information for the next three questions:
ABOMINATE Co. is estimating the goodwill in the expected purchase of DISLIKE,
Inc. in January 20x6. The following information was determined.
Year-end net
Year Earnings
assets
20x1 480,000 1,920,000
520,000 2,320,000
Case #1: Excess earnings
5. If goodwill is to be measured by capitalizing excess earnings at 30%, with
normal return on average net assets at 10%, how much is the purchase price
in the contemplated business combination? (The year-end net assets in 20x5
approximate fair value.)
a. 5,440,000 b. 2,360,000 c. 3,360,000 d. 3,250,000
Case #2.1: Average earnings

6. If goodwill is to be measured by capitalizing earnings at 16%, how much is
the purchase price in the contemplated business combination? (The year-end
net assets in 20x5 approximate fair value.)
a. 3,360,000 b. 3,250,000 c. 5,440,000 d. 2,360,000
Case #2.2: Average earnings

7. If goodwill is to be measured by capitalizing earnings at 16%, how much is
the goodwill? (The year-end net assets in 20x5 approximate fair value.)
a. 890,000 b. 1,000,000 c. 3,080,000 d. 0
Applications of the Direct valuation method – Purchase price

8. CONGEAL Co. acquired the net assets of THICKEN, Inc. THICKEN has one asset
whose fair value exceeds its carrying amount by ₱4,000,000. THICKEN’s
equity is ₱36,000,000. CONGEAL estimated that THICKEN’s excess earnings
would last for 5 years and that the return on investment is 10%. THICKEN 's
average earnings for negotiation purposes is ₱5,200,000 and the industry
average rate of return is 12% on the fair value of net assets.
How much is the purchase price using the "present value of average excess
earnings" approach to goodwill measurement?
a. 1,516,315 b. 3,378,901 c. 43,378,901 d. 41,516,315
Applications of the Direct valuation method – Actual earnings

9. SIBILATE Co. acquired the net assets of HISS, Inc. for ₱41.6M. The acquisition
resulted to a goodwill of ₱1,600,000 measured by capitalizing the ann ual
superior earnings of HISS at 25%. The normal rate of return is 12% on net
assets before recognition of goodwill. How much is the average earnings of
HISS?
a. 4,400,000 b. 4,800,000 c. 5,600,000 d. 5,200,000
Applications of the Direct valuation method

DREARY Co. and DISMAL, Inc. decided to combine and set up a new entity –
Alphabets Corporation. The individual records of the combining constituents
show the following:
DISMAL,
DREARY Co. Inc.
Net assets (at fair values) 1,600,000 2,400,000
Average annual earnings 320,000 480,000

It was agreed that the normal rate of return is 10% of net assets. Excess earnings
shall be capitalized at 20%.
10. How much are the total contributions by DREARY and DISMAL, respectively?
DREARY DISMAL
a. 3,600,000 2,400,000
b. 2,400,000 3,600,000
c. 1,600,000 2,400,000
d. 1,800,000 2,200,000
11. How much is the goodwill generated by the contributions of DREARY and
DISMAL, respectively?
DREARY DISMAL
a. 800,000 1,200,000
b. 400,000 600,000
c. 200,000 800,000
d. 920,000 1,360,000
12. What is the ratio of total shares (preference and ordinary) to be issued to
DREARY and DISMAL, respectively?
DREARY DISMAL
a. 20% 20%
b. 60% 40%
c. 25% 75%
d. 40% 60%
Reverse acquisition
13. On January 1, 20x1, ZYX, Inc., an unlisted company, acquires CBA Co., a
publicly listed entity, through an exchange of equity instruments. CBA Co.
issues 5 shares in exchange for each ordinary share of ZYX, Inc. All of ZYX’s
shareholders exchange their shares in CBA Co. Therefore, CBA Co. issues
40,000 ordinary shares in exchange for all 8,000 ordinary shares of ZYX, Inc.
The fair value of each ordinary share of ZYX at January 1, 20x1 is ₱800. The
quoted market price of CBA’s ordinary shares at that date is ₱160.
The statements of financial position of the combining entities immediately before

combination are shown below:
CBA Co. ZYX, Inc.
(legal subsidiary,
(legal parent, accounting
accounting acquiree) acquirer)
Identifiable assets 6,400,000 9,600,000
Total assets 6,400,000 9,600,000
Liabilities 5,200,000 2,800,000

Share capital:
10,000 ordinary shares, ₱40 par 400,000
8,000 ordinary shares, ₱400 par 3,200,000
The fair value of CBA’s identifiable assets and liabilities at January 1, 20x1 are the
same as their carrying amounts. How much is the goodwill (gain on bargain
purchase)?
a. (880,000) b. 400,000 c. 540,000 d. 600,000
Combination of mutual entities

14. HOMILY Coop. and SERMON Coop. are cooperative institutions. On January 1,
20x1, the two entities combined, with HOMILY identified as the acquirer.
HOMILY shall issue member interests to SERMON. As a result, members of
SERMON become members of HOMILY. An estimated cash flow model
indicates an acquisition-date fair valuation of SERMON, as an entity, at
₱4,000,000. The fair value of SERMON’s identifiable net assets is ₱3,200,000.
How much is the goodwill?
a. 800,000 b. (800,000) c. 3,200,000 d. 0
Chapter 15: Theory of Accounts Reviewer

1. 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
2. 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
(Adapted)
3. 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
c. Increase the value attributed to goodwill, thus decreasing the risk of
d. Increase the value attributed to goodwill, thus increasing the risk of
(Adapted)
4. 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
(Adapted)
Statements of financial position
position
As at December 31, 20x1
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) -
Profit for the year 240,000 80,000
5. How much is the consolidated profit for 20x1?

a. 208,000 b. 280,000 c. 240,000 d. 296,000
6. How much is the consolidated total assets as of December 31, 20x1?

a. 1,867,000 b. 1,907,000 c. 1,894,000 d. 1,904,000
7. How much is the consolidated total equity as of December 31, 20x1?

a. 1,492,000 b. 1,415,000 c. 1,412,000 d. 1,421,000
Consolidation subsequent to date of acquisition – NCI at Fair value

controlling interest’s fair
interest’s fair value.
value . A value of ₱ 75,000 is
75,000 is assigned to the 20% non-
controlling interest [(₱300,000 ÷ 80%) x 20% = ₱75,000].
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:
Carrying Fair Fair value
XYZ, Inc.
amounts values 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
(40,000) (48,000) (8,000)
depreciation
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 there is no goodwill
impairment.
ABC’s and XYZ’s individual financial statements at year -end are shown below:

position
20x1
ABC Co. XYZ, Inc.
ASSETS
Cash 92,000 228,000
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

Total equity 1,380,000 376,000

ABC Co. XYZ, Inc.
Sales 1,200,000 480,000
Gross profit 540,000 192,000

a. 208,000 b. 280,000 c. 240,000 d. 296,000

a. 1,867,000 b. 1,907,000 c. 1,894,000 d. 1,904,000
a. 1,492,000 b. 1,415,000 c. 1,412,000 d. 1,495,000
Chapter 17
Consolidated Financial Statements (Part 2)

purposes)
Fair value decrement

Use the following information for the next two questions:
Popo Co. acquired 80% of Momo Co. on January 1, 20x1 for ₱800,000. The
following information was determined at acquisition date:
Momo
Popo Co. Momo Co. Co.
Carrying Carrying Fair
amount amount value
Equipment 4,000,000 2,000,000 1,600,000
Accumulated (
depreciation (800,000) (400,000) 320,000)
Net 3,200,000 1,600,000 1,280,000
Remaining useful life – Jan. 1, 20x1 10 years 5 years 5 years
1. How much is the consolidated “equipment – net” in the December 31, 20x2
financial statements?
a. 3,968,000 b. 3,628,000 c. 3,428,000 d. 3,328,000
2. The consolidation journal entry for the depreciation of the fair value
adjustment on December 31, 20x2 includes
a. debit to accumulated depreciation for ₱128,000
b. credit to accumulated depreciation for ₱128,000
c. debit to depreciation expense for ₱64,000
d. debit to retained earnings of Popo Co. for ₱51,200
Fair value increment

3. On January 1, 20x1, Donkey Co. acquired 75% of Monkey Co. At that time,
Monkey’s equipment has a carrying amount of ₱400,000 and a fair value of
₱480,000. The equipment has a remaining useful life of 10 years. On
December 31, 20x2, Donkey and Monkey reported equipment with carrying
amounts of ₱2,000,000 and ₱1,200,000, respectively. How much is the
consolidated “equipment – net” in the December 31, 20x2 financial
statements?
a. 3,200,0000 b. 3,384,000 c. 3,264,000 d. 3,124,000
NCI in net assets

Use the following information for the next six questions:
Owl Co. paid ₱600,000 for its 75% interest in Owlet Co. Owl elected to value NCI
at fair value. Owlet’s net identifiable assets approximated their fair values at
A summary of the individual statements of financial positions of the entities as at
the end of reporting period is shown below:
Owl Co. Owlet Co.
Total assets 4,000,000 2,000,000

Share capital 1,200,000 400,000
Retained earnings 2,000,000 1,120,000
Total liabilities and
4,000,000 2,000,000
equity
4. How much is the fair value assigned to NCI at date of acquisition?

a. 220,000 b. 250,000 c. 268,000 d. 224,000
5. How much is the goodwill to be presented in the current-year consolidated

financial statements?
a. 72,000 b. 64,000 c. 56,000 d. 68,000
6. How much is the NCI in net assets?

a. 304,000 b. 380,000 c. 412,000 d. 426,000
7. How much is the consolidated retained earnings?

a. 2,600,000 b. 2,480,000 c. 2,576,000 d. 2,276,000
8. How much is the consolidated total assets?

a. 5,468,000 b. 6,068,000 c. 5,400,000 d. 5,620,000
9. How much is the consolidated total equity?

a. 6,188,000 b. 4,188,000 c. 4,156,000 d. 5,622,000
NCI in profit and comprehensive income

On January 1, 20x1, Rooster Co. acquired 75% interest in Cockerel Co. for
₱600,000. At this time, Cockerel's net identifiable assets have a carrying amount
of ₱720,000 which approximates fair value. NCI was assigned a fair value of
₱220,000.
During 20x1, Rooster sold goods to Cockerel for ₱600,000, having bought them
for ₱480,000. A quarter of these goods remain unsold at year -end. Goodwill on
acquisition of Cockerel has been tested for impairment and found to be impaired
(in total) by ₱32,000 for the current year.
The individual statements of profit or loss and other comprehensive income of

the entities for the year ended December 31, 20x1 are shown below:
Rooster Co. Cockerel Co.
Revenue 4,000,000 2,800,000
Cost of sales (1,600,000) (1,200,000)
Gross profit 2,400,000 1,600,000
Income tax expense (384,000) (300,000)
Profit after tax 936,000 700,000
Other comprehensive income 296,000 100,000
Comprehensive income 1,232,000 800,000
10. How much is the consolidated sales?

a. 6,200,000 b. 6,350,000 c. 6,650,000 d. 6,180,000
11. How much is the consolidated cost of sales?

a. 2,170,000 b. 2,230,000 c. 2,770,000 d. 2,320,000
12. How much is the consolidated profit?

a. 1,574,000 b. 1,566,000 c. 1,564,000 d. 1,534,000
13. How much is the consolidated comprehensive income?

a. 1,970,000 b. 1,930,000 c. 1,962,000 d. 1,960,000
14. How much is the profit attributable to owners of the parent and NCI,
respectively?
Owners of Parent NCI
a. 1,391,000 175,000
b. 1,367,000 167,000
c. 1,391,000 173,000
d. 1,384,000 190,000
15. How much is the comprehensive income attributable to owners of the parent
and NCI, respectively?
Owners of Parent NCI
a. 1,663,000 267,000
b. 1,778,000 192,000
c. 1,756,000 206,000
d. 1,738,000 192,000
Acquisition during the year

Use the following information for the next four questions:
On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. At this time,
Piglet's net identifiable assets have a carrying amount of ₱720,000 which
approximates fair value.
During the last month of the year, Piglet sold goods to Pig for ₱324,000. Piglet
had marked up these goods by 50% on cost. One-third of these goods remain
unsold at year-end. The group assessed that there is no impairment loss on
goodwill for the current year.
The individual statements of profit or loss of the entities for the year ended
December 31, 20x1 are shown below:
Pig Co. Piglet Co.
Revenue 4,000,000 2,880,000
Cost of sales (1,600,000) (1,200,000)
Chapter 18
Consolidated Financial Statements (Part 3)

purposes)
Impairment of goodwill
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
On January 1, 20x1, the fair values of the assets and liabilities of XYZ, Inc. were
determined by appraisal, as follows:
Carrying Fair Fair value
XYZ, Inc.
amounts values 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
(40,000) (48,000) (8,000)
depreciation
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:

ABC Co. XYZ, Inc.
ASSETS
Cash 92,000 228,000
Bonds payable 120,000 -
Share capital 680,000 200,000
Share premium 260,000 -
Total equity 1,380,000 376,000
ABC Co. XYZ, Inc.
Sales 1,200,000 480,000
Gross profit 540,000 192,000
Case #1: On acquisition date, ABC Co. elected to measure non-controlling interest
as its proportionate share in XYZ, Inc.’s net identifiable assets.
a. 296,000 b. 280,000 c. 208,000 d. 276,000

a. 1,900,000 b. 1,907,000 c. 1,903,000 d. 1,904,000

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

a. 1,900,000 b. 1,907,000 c. 1,903,000 d. 1,904,000

a. 1,492,000 b. 1,415,000 c. 1,488,000 d. 1,491,000
Changes in ownership interest not resulting to loss of control

Fact pattern
Case #1 Case #2
(proportionate) (fair value)
(1) Consideration transferred 300,000 300,000
(2) Non-controlling interest in
72,000 75,000
the acquiree
(3) Previously held equity
- -
interest in the acquire
Total 372,000 375,000
Fair value of net identifiable
(360,000) (360,000)
assets 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
Scenario #1: Acquisition of all remaining NCI

On January 1, 20x2, ABC Co. acquired all of the remaining 20% NCI in XYZ for
₱120,000.
7. 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
8. 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
9. If NCI is measured at “proportionate share,” what is the effect of the

transaction on the consolidated financial statements?
a. ₱80,000 decrease in NCI and ₱40,000 decrease in retained earnings of
ABC Co.
b. ₱83,000 decrease in NCI and ₱37,000 decrease in retained earnings of
ABC Co.
c. either a or b
d. No effect on the consolidated financial statements
10. If NCI is measured at “fair value,” what is the effect of the transaction on the
consolidated financial statements?
a. ₱80,000 decrease in NCI and ₱40,000 decrease in retained earnings of
ABC Co.
b. ₱83,000 decrease in NCI and ₱37,000 decrease in retained earnings of
1. The accounting for business combinations is currently prescribed under
a. PAS 22 c. PFRS 3 – revised 2008
b. PFRS 3 d. PAS 27 – revised 2011
2. KINK Co. has acquired an investment in a subsidiary, TWIST Co., with the
view to dispose of this investment within six months. The investment in the
subsidiary has been classified as held for sale and is to be accounted for in
accordance with PFRS 5. The subsidiary has never been consolidated. How
should the investment in the subsidiary be treated in the financial
statements?
a. Purchase accounting should be used.
b. Equity accounting should be used.
c. The subsidiary should not be consolidated but PFRS 5 should be used.
d. The subsidiary should remain off balance sheet.
(Adapted)
3. The consolidation theory currently applied under PFRSs is

a. Proprietary theory/Proportionate consolidation theory/
b. Parent company theory
c. Entity theory/ Contemporary theory
d. Hybrid theory/ Traditional theory
4. The proprietary theory is applied under which of the following standards?

a. PAS 31 b. PAS 36 c. PFRS 3 d. PAS 27
5. What is the basis for consolidation?

a. significant influence c. control
b. joint control d. variable returns
6. FALLACIOUS Co. controls an overseas entity MISLEADING Co. Because of

exchange controls, it is difficult to transfer funds out of the country to the
parent entity. FALLACIOUS Co. owns 100% of the voting power of
MISLEADING Co. How should MISLEADING Co. be accounted for?
a. It should be excluded from consolidation and the equity method should be
used.
b. It should be excluded from consolidation and stated at cost.
c. It should be excluded from consolidation and accounted for in accordance
with PFRS 9.
d. It is not permitted to be excluded from consolidation because control is
not lost.
(Adapted)
7. TIPPLE has control over the composition of DRINK’s board of directors.

TIPPLE owns 49% of DRINK and is the largest shareholder. TIPPLE has an
agreement with Mr. Bartek, which owns 10% of DRINK, whereby Mr. Bartek
will always vote in the same way as TIPPLE. Can TIPPLE exercise control over
DRINK?
a. TIPPLE cannot exercise control because it owns only 49% of the voting
rights.
b. TIPPLE cannot exercise control because it can control only the makeup of
d. TIPPLE can exercise control because it controls more than 50% of the
voting power, and it can govern the financial and operating policies of
DRINK through its control of the board of directors.
(Adapted)
8. On January 1, 20x1, MIME Co. acquired one-third equity interest in IMITATE

Co. which resulted in MIME having significant influence over IMITATE Co. On
July 1, 20x4, MIME Co. acquired a further one-third equity interest in IMITATE
Co. which resulted in MIME having a controlling interest over IMITATE. For
financial reporting purposes, which of the following statements is correct?
a. Goodwill shall be computed on July 1, 20x4 and the one-third equity
interest acquired in 20x1 does not affect the goodwill computation.
b. Goodwill shall be computed on July 1, 20x4 and the one-third equity
interest acquired in 20x1 affects the goodwill computation.
c. Goodwill shall be computed both on January 1, 20x1 and July 1, 20x4
because the transactions are considered to constitute a ‘step acquisition.’
d. Goodwill shall be computed only on January 1, 20x1. The subsequent
change in ownership interest which did not result to loss of control is
accounted for directly in equity.
9. LASSITUDE Co. owns 50% of WEARINESS Co.’s voting shares. The board of
directors consists of six members; LASSITUDE Co. appoints three of them and
WEARINESS Co. appoints the other three. The casting vote at meetings always
lies with the directors appointed by LASSITUDE Co. Does LASSITUDE Co. have
control over WEARINESS Co.?
a. No, control is equally split between LASSITUDE Co. and FATIGUE Co.
b. Yes, LASSITUDE Co. holds 50% of the voting power and has the casting
vote at board meetings in the event that there is not a majority decision.
c. No, LASSITUDE Co. owns only 50% of the entity’s shares and therefore
does not have control.
d. No, control can be exercised only through voting power, not through a
casting vote.
(Adapted)
10. VOLUBLE TALKATIVE Co. has sold all of its shares to the public. The company
was formerly a state-owned entity. The national regulator has retained the
power to appoint the board of directors. An overseas entity acquires 55% of
the voting shares, but the regulator still retains its power to appoint the board
of directors. Who has control of the entity?
a. The national regulator.
b. The overseas entity.
c. Neither the national regulator nor the overseas entity.
d. The board of directors.
(Adapted)
11. A manufacturing group has just acquired a controlling interest in a football

club that is listed on a stock exchange. The management of the manufacturing
group wishes to exclude the football club from the consolidated financial
statements on the grounds that its activities are dissimilar. How should the
football club be accounted for?
The entity should be consolidated as there is no exemption from
d. The entity should not be consolidated; details should be disclosed in the
financial statements.
(Adapted)
12. On January 1, 20x1, TRICE Co. obtained control of INSTANT Co. Subsequently,
there have changes in the ownership interests over INSTANT; however, the
TRICE’s control over INSTANT was unaffected. Which of the following
statements is incorrect?
a. Once control has been achieved, further transactions whereby the parent
entity acquires further equity interests from non-controlling interests, or
disposes of equity interests but without losing control, are accounted for
as equity transactions
b. The carrying amounts of the controlling and non-controlling interests are
adjusted to reflect the changes in their relative interests in the subsidiary.
c. Any difference between the amount by which the non-controlling interests
is adjusted and the fair value of the consideration paid or received is
recognized directly in equity and attributed to the owners of the parent.
d. The carrying amount of any goodwill should be adjusted and gain or loss
is recognized in profit or loss.
13. Which of the following exemplifies the application of the ‘entity theory’ of
consolidation?
a. Consolidated profit = Parent’s separate profit + Share of Parent in
Subsidiary’s profit
b. Consolidated profit = Profit of the group
c. Consolidated profit = Profit of the group – NCI profit
d. Consolidated profit = Parent’s separate profit + NCI profit
14. Under the ‘entity theory’ of consolidation, the consolidated profit equals
a. Parent’s separate profit + Share of Parent in Subsidiary’s profit
b. Profit of the group – NCI profit
c. Parent’s separate profit + NCI profit
d. Profit attributable to owners of the parent + Profit attributable to NCI
15. During the year, COMITY Co. sold equipment to its subsidiary, MUTUAL
COURTESY Co., at a gain. The equipment has a remaining useful life of 5 years.
Which of the following statements is true in the preparation of the
consolidated financial statements?
a. The gain is recognized immediately.
b. The gain is deferred and recognized only in the period the equipment is
sold to an unrelated party.
c. The carrying amount of the asset and the related depreciation are
adjusted downwards.
d. The carrying amount of the asset and the related depreciation are
adjusted upwards.
16. During the year, BAFFLE Co. sold part of its controlling interest in TO COFUSE
Co. The sale did not affect BAFFLE’s control over TO CONFUSE. Which of the
following statements is true?
a. The equity adjustment would be larger if BAFFLE measures NCI at the
NCI’s proportionate share in the subsidiary’s net identifiable assets rather
3. These are those presented by a parent (i.e., an investor with control of a
subsidiary) or an investor with joint control of, or significant influence over,
an investee, in which the investments are accounted for at cost or in
accordance with PFRS 9 Financial Instruments.
a. General purpose financial statements c. Individual financial statements
b. Consolidated financial statements d. Separate financial statements
4. In the separate financial statements of a parent entity, investments in

subsidiaries that are not classified as held for sale should be accounted for
a. At cost. c. Using the equity method.
b. In accordance with PFRS 9. d. a or b
Chapter 20 - Suggested answers to review theory questions

1. D
2. B
3. D
4. D
Chapter 21
The Effects of Changes in Foreign Exchange Rates

purposes)
Foreign currency transaction – Direct quotation – Purchase
On November 29, 20x1, ABC Co. placed a non-cancellable purchase order for the
importation of a machine with a purchase price of €40,000 from a company
based in France. The contract term is FOB shipping point. The machine was
shipped on December 1, 20x1 and was received by ABC on December 15, 20x1.
The purchase price was settled on January 3, 20x2.
The following are the exchange rates:

November 29, 20x1………………………………………..₱55:€1
December 1, 20x1………………………………………….₱58:€1
December 15, 20x1………………………………………..₱57:€1
December 31, 20x1………………………………………..₱60:€1
January 3, 20x2…………………………………………….₱61:€1
1. The entry on November 29, 20x1 includes

a. a debit to accounts payable for ₱2,320,000.
b. a credit to machinery for ₱2,320,000.
c. a debit to machinery for ₱2,320,000
d. none of these
2. The entry on December 1, 20x1 includes

a. a debit to accounts payable for ₱2,320,000.
b. a credit to machinery for ₱2,320,000.
c. a debit to machinery for ₱2,320,000
d. none of these
3. The total FOREX gain (loss) recognized in 20x1 is

a. 40,000 b. (80,000) c. (200,000) d. (120,000)
4. The adjustment to the machinery account on December 31, 20x1 is – increase

(decrease)
a. 80,000 b. (80,000) c. 40,000 d. 0
5. The total FOREX gain (loss) recognized in 20x2 is

a. (40,000) b. (80,000) c. (200,000) d. (120,000)
6. The net adjustment to the machinery account on January 3, 20x2 is – increase

(decrease)
a. 80,000 b. (120,000) c. (40,000) d. 0
Foreign currency transaction – Direct quotation – Sale

The following are the exchange rates:
November 29, 20x1………………………………………..₱67:£1
December 1, 20x1………………………………………….₱68:£1
December 31, 20x1………………………………………..₱70:£1
January 3, 20x2…………………………………………….₱71:£1
7. How much sale revenue is recognized in 20x1?

a. 2,680,000 b. 2,720,000 c. 2,800,000 d. 2,840,000
8. How much FOREX gain (loss) is recognized in 20x1?

a. 120,000 b. (120,000) c. 80,000 d. (80,000)
9. How much FOREX gain (loss) is recognized in 20x2?

a. 40,000 b. (40,000) c. 120,000 d. 160,000
10. How much is the total FOREX gain (loss) resulting from the sale transaction?
a. 160,000 b. 120,000 c. 80,000 d. 40,000
Foreign currency transaction – Indirect quotation

ABC Co. had the following transactions during the last month of the current
reporting period:
 Purchased raw materials from Pakistani Co., a company based in Pakistan, for
400,000 rupees on December 17, 20x1 to be settled on January 5, 20x2.
 Sold inventory to Swedish Co., a company based in Sweden, for 80,000
kroners on December 20, 20x1 to be settled on January 5, 20x2.
The exchange rates are as follows:

Rupee Kroner
Dec. 17, 20x1…………Php 1 : PKR 2.04
Dec. 20, 20x1………………………………………Php 1 : SEK 0.1667
Dec. 31, 20x1…………Php 1: PKR 2 Php 1 : SEK 0.2000
Jan. 5, 20x2…………..Php 1: PKR 2.083 Php 1 : SEK 0.2400
11. How much are the total FOREX gains/losses recognized by ABC Co. from the
purchase and sale transactions described above?
Purchase Sales
a. (4,048) 146,570
b. 4,048 (146,572)
c. 3,922 (66,667)
d. (3,922) 66,667
12. How much are the total FOREX gains/losses recognized by Pakistani Co. and
Swedish Co. from the purchase and sale transactions, respectively?
Pakistani Swedish
a. (4,048) 146,572
b. 3,922 (66,667)
c. (3,922) 66,667
d. 0 0
18. ABC Co. owns 80% of the ordinary shares of a foreign subsidiary, XYZ, Inc., a
company based in Korea. XYZ, Inc.'s functional
functional currency
currency is
is won. The
subsidiary was acquired at the start of the reporting period for 3,000,000
wons, when the subsidiary's retained earnings were 1,600,000 wons.
At the date of the acquisition the fair value of the net assets of the subsidiary
were 2,800,000 wons. This included a fair value adjustment in respect of land.
ABC Co. elected to measure non-controlling

non-controlling interest at the NCI’s proportionate
share of the fair value of the subsidiary‘s net assets. The group determined at
year-end that goodwill is not impaired. There were no changes in the share
capital of the subsidiary during the year.
The relevant exchange rates are as follows:

Date Exchange rates
Jan. 1, 20x1………………………………….₱
20x1………………………………….₱0.03: 0.03: KRW 1
Average for the year…………………….₱0.04:
year…………………….₱0.04: KRW 1
Dec. 31, 20x1………………………………..₱0.05:
20x1………………………………..₱0.05: KRW 1
A summary of the individual financial statements of the entities at the end of
reporting period are shown below:

position
20x1
ABC Co. XYZ, Inc.
ASSETS (pesos) (wons)
Investment in subsidiary 90,000
Other assets 4,000,000 2,600,000
TOTAL ASSETS 4,090,000 2,600,000

Liabilities 800,000 120,000
Share capital 2,000,000 400,000
Retained earnings 1,290,000 2,080,000
Total equity 3,290,000 2,480,000
TOTAL LIABILITIES AND EQUITY 4,090,000 2,600,000

ABC Co. XYZ, Inc.
(pesos) (wons)
Revenues 1,800,000 1,200,000
Expenses (1,080,000) (720,000)
Requirement: Prepare the consolidated statement of financial position and

consolidated statement of profit or loss and other comprehensive income.
19. On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc., a company
situated in a foreign country. The currency of this country is the Armenian
Dram (AMD). ABC elected to measure non-controlling interest as its
position
As of December 31, 20x1
20x1
ABC Co. XYZ, Inc.
₱m* ADMm*
Current assets 4,000 4,400
Investment in subsidiary 880
Property, plant and equipment 6,000 3,600
TOTAL ASSETS 10,880 8,000
Current liabilities 2,000 2,000
Noncurrent liabilities 2,400 1400
Share capital 2,000 200
Share premium 1000 400
Total equity 6,480 4,600
TOTAL LIABILITIES AND EQUITY 10,880 8,000
*Amounts in millions.

ABC Co. XYZ, Inc.
₱m ADMm
Revenue 8,000 16,000
Cost of sales (5,000) (8,000)
Gross profit 3,000 8,000
Operating expenses (1,000) (2,000)
Dividends received 120
Interest expense (200) (600)
Interest income 80 200
Profit before tax 2,000 5,600
Income tax expense (600) (2,000)
Profit after tax 1,400 3,600
Extraordinary item (400)
The movements in retained earnings during 20x1 are shown below:

Retained earnings – Jan. 1, 20x1 2,280 2,400
Dividends paid (200) (1,600)
Retained earnings – Dec. 31, 20x1 3,480 4,000
information:
a) XYZ, Inc. has applied local GAAP, but has made some attempt to adapt to IFRS
(to which PFRSs are consistent). As a result, XYZ, Inc. has written off research
previously capitalized as an extraordinary item prior period adjustment in the
sum of ADM200 million. The remainder of the extraordinary item is the
recognition of a fall in value of some plant that was damaged during the year.
b) The fair value of the net assets of XYZ, Inc. at acquisition was ADM4,000
million after taking into account the removal of capitalized research discussed
the goods on September 1 and paid on September 21. The foreign exchange
difference remains in current liabilities.
e) ABC Co. made a loan of ₱100 million to XYZ, Inc. immediately after the
acquisition on January 1. This is still outstanding at year-end. ABC Co. has
recorded the asset in current assets. The subsidiary has recorded the liability
in noncurrent liabilities at the rate ruling at year-start.
f) The dividends were declared by XYZ, Inc. at year-end and received by ABC Co.
on that day.
The following exchange rates are relevant:

ADM to ₱1.00
January 1……………………………………………………
1…………………………………………………….5 .5
September 1…………………………………………………6
1…………………………………………………6
September 21……………………………………………….6.5
21……………………………………………….6.5
December 31………………………………………………..8
31………………………………………………..8
Weight ed
ed average for year……………………………
year…………………………….7 .7
Requirements: Compute for the following (round-off amounts to nearest million):

a. Consolidated total assets.
b. Consolidated total liabilities.
c. Consolidated total equity.
d. Prepare the consolidation working paper for comprehensive income.
20. ABC Co. held 100% ownership interest of XYZ, Inc. but sold the entire
investment on August 1, 20x1 for ₱250,000.
The following information was determined as of this date:

Carrying amount of XYZ’s net identifiable assets
assets 206,000
Carrying amount of NCI (including accumulated OCI attributable to
NCI) 41,200
Goodwill 6,000
ABC Co. had previously recognized translation gains of ₱1,600 in other

comprehensive income on its investment in XYZ, Inc.
Requirement: Compute for the total gain to be recognized in profit or loss on

disposal date.
21. ABC Co., a corporation based in the Philippines, has a foreign branch that is
operating in a hyperinflationary economy. The financial statements of the
branch prior to restatement and translation are shown below:
Statement of financial position

As of December 31, 20x1
Amounts in Angolan Kwanza (AOA)
92,000
Cash
Accounts receivable 148,000
Inventory 80,000
Building 200,000
Accumulated depreciation (40,000)
Total liabilities and equity 480,000
Statement of profit or loss

Amounts in Angolan Kwanza (AOA)
Sales 240,000
Cost of sales:
Inventory - Jan. 1 120,000
Purchases 60,000
Total goods available for sale 180,000
Inventory - Dec. 31 (80,000) (100,000)
Gross profit 140,000
Depreciation expense (20,000)
Other operating expenses (80,000)
Profit for the year 40,000
 The building was acquired on January 1, 20x0.
 The share capital was issued on January 1, 20x0.
 Revenues were earned and expenses were incurred evenly during the year.
 Selected values of general price indices (CPI) are shown below:
January 1, 20x0 100
Average for 20x0 110
January 1, 20x1 120
Average for 20x1 125
December 31, 20x1 140
 The net monetary assets as of January 1, 20x1 is ₱20,000.

 The exchange rates are as follows:
January 1, 20x1 1.00 AOA : 0.45 PHP
Average for 20x1 1.00 AOA : 0.47 PHP
December 31, 20x1 1.00 AOA : 0.50 PHP
Requirement: Prepare the translated financial statements of the branch.

1. The accounting for the effects of foreign currencies on financial statements is
prescribed under which standard?
a. PAS 12 b. PFRS 21 c. PFRS 9 d. PAS 21
2. Which of the following statements is correct regarding the preparation of

financial statements in accordance with PFRSs?
a. A reporting entity is encouraged under the PFRSs to identify its functional
currency when preparing financial statements.
b. A reporting entity is required under the PFRSs to identify its functional
currency when preparing financial statements only when the entity
engages in foreign activities.
c. The functional currency must be the currency of the country in which the
3. Which of these considerations would not be relevant in determining the
entity’s functional currency?
a. The currency that influences the costs of the entity.
b. The currency in which finance is generated.
c. The currency in which receipts from operating activities are retained.
d. The currency that is the most internationally acceptable for trading.
(Adapted)
4. When translating foreign currency transactions in accordance with PAS 21, if

exchange rates fluctuate significantly,
a. the use of the average rate for a period is appropriate for as long as it
remains relevant all throughout the period.
b. the use of the average rate for a period is required under PAS 21 only if it
can be determined without undue cost and effort.
c. the use of average rate is always appropriate
d. the use of the average rate for a period is inappropriate.
5. In preparing consolidated financial statements of a U.S. parent company with

a foreign subsidiary, the foreign subsidiary's functional currency is the
currency:
a. In which the subsidiary maintains its accounting records.
b. Of the country in which the subsidiary is located.
c. Of the country in which the parent is located.
d. Of the environment in which the subsidiary primarily generates and
expends cash.
(Adapted)
6. A foreign subsidiary's functional currency is its local currency, which has not
experienced significant inflation. The weighted average exchange rate for the
current year would be the appropriate exchange rate for translating:
(Item #1) Sales to customers; (Item #2) Wages expense
a. No, no b. Yes, yes c. No, yes d. Yes, no
7. Monetary items are

a. Cash only.
b. Cash and bank balances.
c. Cash, short-term receivables, and marketable securities
d. Money held, assets receivable, and liabilities payable, in fixed or
determinable amount of cash or cash equivalents.
8. According to PAS 21, a foreign operation is:

a. an undertaking with foreigners
b. a branch, associate, joint venture or subsidiary, where the activities are
conducted in a different country to that of the parent undertaking.
c. a foreign representative where the activities are not an integral part of the
parent.
d. a parent operating in foreign shores
9. The functional currency is:

a. the currency which is functioning in the country where the parent
operates.
10. The presentation currency is:
a. the local currency of a foreign operation in which it reports.
b. used in the parent’s and in the group’s consolidated financial statements.
c. the currency which results to largest exchange gains.
d. the currency of the country where an entity’s operations are based.
11. Exchange difference is

a. the difference between two different currencies.
b. the difference between the cost and fair value of monetary item
c. the difference calculated from reporting the same number of units of a
foreign currency, in the presentation currency, at different e xchange rates.
d. the average difference between the exchange rate at the beginning and
end of a period.
12. The closing rate is:

a. The exchange rate at which all assets and liabilities are stated.
b. The average rate used in the year an entity closes its books.
c. The spot exchange rate at the end of reporting period.
d. The rate that is closed to the financial statements.
13. The net investment in a foreign operation is:

a. The parent’s share of the net assets of the undertaking.
b. The non-controlling interest’s share of the net assets of the undertaking.
c. The amount invested in the undertaking stated at cost.
d. Investments less liabilities and other costs.
14. An entity has a subsidiary that operates in a foreign country. The subsidiary
issued a legal notice of a dividend to the parent of €2.4 million, and this was
recorded in the parent entity’s financial statements. The exchange rate at that
date was €2 = $1. The functional currency of the entity is the dollar. At the
date of receipt of the dividend, the exchange rate had moved to €3 = $1. The
exchange difference arising on the dividend would be treated in which way in
the financial statements?
a. No exchange difference will arise as it will be eliminated on consolidation.
b. An exchange difference of $400,000 will be taken to equity.
c. An exchange difference of $400,000 will be taken to the parent entity’s
income statement and the group income statement.
d. An exchange difference of $400,000 will be taken to the parent entity’s
income statement only.
(Adapted)
15. Transactions and investments in foreign currencies:

I. Decrease business risk.
II. Increase business risk.
a. True, true b. True, false c. False, true d. False, false
16. The foreign operation may trade profitably, but the investment may be
adversely hit by:
a. Rise in the foreign currency against that of the parent.
b. Fall in the foreign currency against that of the parent.
Exchange rates remaining the same.
c. a and b
d. none
6. How much is the adjustment to the inventory account on December 31, 20x1?
Increase (decrease)
a. 100,000 b. (100,000) c. 80,000 d. 0
7. How much is the derivative asset (liability) as of December 31, 20x1?

a. (100,000) b. 100,000 c. (80,000) d. 80,000
8. How much is the gain (loss) on the futures contract on February 1, 20x2?
a. 0 b. (80,000) c. (200,000) d. 200,000
9. How much is the net settlement on February 1, 20x2? – Receipt (payment)

a. 120,000 b. (120,000) c. 504,000 d. 504,000
10. How much is the total net cash receipt (payment) on the two contracts?
a. 4,840,000 b. (4,840,000) c. (504,000) d. 504,000
Fair value hedge of a recognized asset – hedged item measured at lower of

cost or net realizable value (NRV)
Use the following information for the next five questions:
On December 1, 20x1, ABC Co. has a soybean inventory of 4,000 bushels carried
at a cost of ₱240 per bushel (or total cost of ₱960,000). ABC Co. measures its
inventory of soybeans at the lower of cost or net realizable value (NRV).
ABC Co. intends to sell the whole inventory by February 1, 20x1. On December 1,
20x1, ABC Co. enters into a futures contract to sell the whole inventory on
February 1, 20x1 at a price of ₱360 per bushel. The broker requires a deposit of
₱80,000.
Information on fair values is as follows:

Dec. 1, 20x1 Dec. 31, 20x1 Feb. 1, 20x2
Spot price 354 371 338
Futures price 360 374 338
11. How much is the adjustment to the inventory account on December 31, 20x1?
Increase (decrease)
a. 100,000 b. 68,000 c. (68,000) d. 0
12. How much is the derivative asset (liability) as of December 31, 20x1?
a. 0 b. (68,000) c. (56,000) d. 56,000
13. How much is the gain (loss) on the futures contract on February 1, 20x2?
a. 0 b. (56,000) c. (144,000) d. 144,000
14. How much is the net settlement on the derivative instrument on February 1,
20x2? – Receipt (payment)
a. 168,000 b. (168,000) c. 88,000 d. (88,000)
15. How much gross profit from sales is recognized on February 1, 20x2?
Fair value hedge of a firm sale commitment
Use the following information on the next five questions:
On December 1, 20x1, ABC Co. enters into a fixed-price contract to sell 4,000
ounces of silver on February 1, 20x2 for ₱210 per ounce. ABC Co. prefers to have
the sales contract settled at market value on delivery date. Therefore, on
December 1, 20x1, ABC Co. enters into a “long” futures contract to purchase
4,000 ounces of silver at ₱200 per ounce. The futures contract requires an initial
margin deposit of ₱120,000.
Information on market values is shown below:

Dec. 1, 20x1 Dec. 31, 20x1 Feb. 1, 20x2
Spot price 210 240 250
Futures price 200 235 250
16. How much is the firm commitment asset (liability) on December 31, 20x1?
a. 120,000 b. (120,000) c. (140,000) d. (100,000)
17. How much is the derivative asset (liability) on December 31, 20x1?
a. 140,000 b. (140,000) c. 120,000 d. (120,000)
18. How much is the sale revenue recognized on February 1, 20x2?

a. 1,000,000 b. 840,000 c. 800,000 d. 960,000
19. How much gain (loss) from firm commitment is recognized on February 1,
20x2?
a. 40,000 b. (40,000) c. (60,000) d. 60,000
20. How much is the net cash settlement on the derivative instrument on
February 1, 20x2?
a. 200,000 b. (200,000) c. (320,000) d. 320,000
Cash flow hedge of a forecasted purchase transaction – Assessment of

Hedge ineffectiveness
Use the following information for the next eleven questions:
On July 1, 20x1, ABC Co., a vegetable dealer, forecasts the purchase of 4,000
kilograms of broccoli in 6 months. Because ABC Co. is worried that the price of
broccoli will increase during the coming months, it enters into 10 long
cauliflower futures contracts on July 1, 20x1. Each futures contract is based on
the purchase of 400 kilograms of cauliflower at ₱92.98 per kilogram on July 1,
20x1.
Relevant prices per kilogram of commodity are shown below:

Broccoli Cauliflower
Jan. 1 93.76 92.98
Mar. 31 95.18 94.52
June 30 96.20 95.36
21. What is the percentage of effectiveness of the hedging instrument on March

31, 20x1 and June 30, 20x1, respectively?
March 31, 20x1 June 30, 20x1
a. (6,160) b. 6,160 c. (5,680) d. 5,680
23. How much is the effective portion of the change in fair value of derivative
recognized in other comprehensive income on March 31, 20x1? – Gain (loss)
a. 5,680 b. (5,680) c. 6,160 d. (6,160)
24. How much is the ineffective portion of the change in fair value of derivative
recognized in profit or loss on March 31, 20x1? – Gain (loss)
a. 0 b. 560 c. 480 d. (480)
25. As of March 31, 20x1, the effect of the futures contract is referred to as
a. overhedge b. underhedge c. middle hedge d. bottom hedge
26. How much is the debit to inventory on June 30, 20x1?

a. 375,280 b. 371,920 c. 384,800 d. 381,440
27. How much is the effective portion of the change in fair value of derivative
recognized in other comprehensive income on June 30, 20x1? – Gain (loss)
a. (3,840) b. 3,840 c. (4,321) d. 0
28. How much is the ineffective portion of the change in fair value of derivative
recognized in profit or loss on June 30, 20x1? – Gain (loss)
a. (480) b. 480 c. (960) d. 960
29. How much is the net cash settlement receipt (payment) on the derivative
instrument on June 30, 20x1?
a. 3,360 b. (3,360) c. (9,520) d. 9,520
30. How much is the total net effect of the hedging instrument on profit or loss?
Favorable (unfavorable)
a. 3,840 b. (3,840) c. (9,520) d. 9,520
31. If all of the inventory purchased were sold on July 15, 20x1, how much is the
cost of goods sold?
a. 384,800 b. 375,280 c. 381,440 d. 371,920
Fair value hedge of a recognized asset – Put option

On December 15, 20x1, ABC Co. sold goods to a Japanese firm for 4,000,000 yens.
ABC Co. was concerned about the fluctuation in the Japanese yen, so on this date,
ABC Co. purchased a foreign currency put option for ₱30,000 to sell 4,000,000
yens at ₱0.47 on January 15, 20x2.
Dec. 15, Dec. 31, Jan. 15,
20x1 20x1 20x1
Spot rate ₱0.48 ₱0.49 ₱0.46
Fair values of the foreign currency put
option 30,000 20,000 32,000
32. How much is the gain (loss) on the put option on December 31, 20x1?
a. 0 b. 40,000 c. (10,000) d. 10,000
34. Assume that the spot rate on January 15, 20x2 is ₱0.48. How much is the gain
(loss) on the put option on January 15, 20x1?
a. (20,000) b. 20,000 c. (32,000) d. (40,000)
No hedging designation – Call option

On April 1, 20x1, ABC Co. enters into a call option contract with an investment
banker which gives ABC Co. the option to purchase 4,000 XYZ, Inc. shares of
stocks at a strike price of ₱100 per share. The call option expires on July 1, 20x1.
ABC Co. pays the investment banker ₱2,400 for the call option. The market price
of the XYZ, Inc. shares on April 1, 20x1 is ₱100 per share.
April 1, 20x1 June 30, 20x1
Market price of XYZ, Inc. shares 100/sh. 106/sh.
Time value 2,400 1,600
35. How much is the gain (loss) on the call option on June 30, 20x1 arising from
change in intrinsic value?
a. 24,000 b. (24,000) c. 800 d. (800)
36. How much is the gain (loss) on the call option on June 30, 20x1 arising from
change in time value?
a. 800 b. (800) c. 24,000 d. (24,000)
37. How much is the net cash settlement receipt (payment) on the call option on
July 1, 20x1?
a. 24,000 b. (24,000) c. 23,200 d. (23,200)
Cash flow hedge of a forecasted sale transaction (Indirect quotation)

ABC Co. forecasts a sale to an Indian customer of INR 1,120,000 (Indian Rupee)
in six months. On October 1, 20x1 when the spot rate is ₱1: INR 1.40, ABC Co.
obtained an option to sell INR 1,120,000 for ₱783,216 (₱1 : INR1.43). The option
has a cost and fair value of ₱25,600 on in ception date.
ABC Co. chose to base effectiveness on the changes in the intrinsic value of the
option, as measured by the spot rate of the currency underlying the option (e.g.,
“spot” intrinsic value). Changes in the fair v alue of the option other than “intrinsic
value” (e.g., time value, impact of counterparty nonperformance risk) are
excluded from the assessment of effectiveness and will be reported in profit or
loss as they occur.
The following information was determined:

Fair
Time value of
Date Spot rate value of
option a
option a
Oct. 1, 20x1 ₱1 : INR 1.40 25,600 25,600
Dec. 31, 20x1 ₱1 : INR 1.45 13,196 24,000
Apr. 1, 20x2 ₱1 : INR 1.50 - 36,552
39. The hedging instrument is most likely designated as a
a. fair value hedge b. cash flow hedge c. a or b d. none
40. The effective portion of the hedge recognized in other comprehensive income
on December 31, 20x1 is
a. 10,802 b. 25,746 c. 13,366 d. 0
41. How much derivative asset (liability) is recognized on December 31, 20x1?
a. 13,196 b. (24,000) c. 24,000 d. 37,196
42. The effective portion of the hedge recognized in other comprehensive income
on April 1, 20x2 is
a. 10,802 b. 24,000 c. 12,404 d. 25,747
43. The adjusted sale revenue recognized on April 1, 20x2 is

a. 798,364 b. 788,312 c. 783,215 d. 776,325
Cash flow hedge of a variable-rate debt (Swap payment at maturity)

On January 1, 20x1, ABC Co. obtained a two- year, ₱4,000,000 variable-rate loan
with interest payments due at each year-end and the principal due on December
31, 20x2.
As protection from possible fluctuations in current market rates, ABC Co. enters
into an interest rate swap for the whole principal of the loan. Under the
agreement, ABC Co. shall receive variable interest and pay fixed interest based
on a fixed rate of 8%. The interest rate swap will be settled net on maturity date.
The following are the current market rates:

Jan. 1, 20x1 8%
Jan. 1, 20x2 10%
44. The hedging instrument is most likely designated as a

a. fair value hedge b. cash flow hedge c. a or b d. none
45. How much derivative asset (liability) is recognized on December 31, 20x1?
a. 80,000 b. (72,728) c. 72,728 d. 74,074
46. How much is the derivative gain (loss) recognized in profit or loss on
December 31, 20x1?
a. 74,074 b. (72,728) c. 72,728 d. 0
47. The net cash settlement on the interest rate swap on December 31, 20x2 is –
Receipt (payment)
a. 80,000 b. (80,000) c. 72,728 d. 0
48. The interest expense recognized in profit or loss in 20x2 is

a. 320,000 b. 240,000 c. 335,728 d. 0
on a fixed rate of 9%. Swap payments shall be made at each year-end .

Jan. 1, 20x1 9%
Jan. 1, 20x2 8%
Jan. 1, 20x3 12%
49. The net cash settlement on December 31, 20x1 is
a. 40,000 b. 37,037 c.36,697 d. 0
50. The derivative asset (liability) on December 31, 20x1 is

a. 37,037 b. (71,331) c. 36,697 d. 40,000
51. The net cash settlement receipt (payment) on December 31, 20x2 is
a. 36,697 b. (71,331) c. (40,000) d. 0
52. The balance of accumulated OCI recognized on the hedging instrument as of

December 31, 20x2 is – Debit (credit)
a. (67,140) b. (107,141) c. (138,472) d. 0
53. The interest expense recognized in profit or loss in 20x2 is

a. 400,000 b. 387,542 c. 421,984 d. 0
54. The derivative asset (liability) on December 31, 20x2 is

a. 107,141 b. (107,141) c. 138,472 d. (67,140)
55. How much is the derivative gain (loss) recognized in OCI on December 31,
20x2?
a. 138,472 b. (138,472) c. 107,141 d. (107,141)
56. The net cash settlement – receipt (payment) – on the interest rate swap on
December’ 31, 20x3 is
a. 50,000 b. 120,000 c. 80,000 d. (120,000)
57. The interest expense recognized in 20x3 is

a. 400,000 b. 240,000 c. 520,000 d. 320,000
Fair value hedge of a fixed-rate debt

Use the following information for the next eight questions:
On January 1, 20x1, ABC Co. obtained a three-year, ₱4,000,000, 10% fixed-rate
loan with interest payments due at each year-end and the principal due on
December 31, 20x3.
ABC Co. expects that the current interest rates will decrease in the future. Thus,
ABC Co. enters into a “receive fixed, pay variable” interest rate swap. Swap
payments shall be made at each year-end.

ABC Co. was worried about future fluctuations in interest rates. Thus, on January
1, 20x1, ABC Co. entered into an interest rate swap wherein ABC Co. shall receive
interest at whatever the current market rate of interest is at the beginning of the
year and pay fixed interest at 10%. Swap payment shall be made only at maturity
date.
Case #1:
25. If the current market rate of interest on January 1, 20x3 is 8%, how much is
the net cash settlement at maturity date? – Receipt (Payment)
a. (80,000) b. 80,000 c. (30,000) d. 0
26. If the current market rate of interest on December 31, 20x2 is 8%, how much
is the fair value of the interest rate swap? - Asset (Liability)
a. (74,072) b. 74,072 c. (80,000) d. (72,727)
Case #2:
27. If the current market rate of interest on January 1, 20x3 is 12%, how much is
the net cash settlement at maturity date? – Receipt (Payment)
a. (80,000) b. 80,000 c. (30,000) d. 0
28. If the current market rate of interest on December 31, 20x2 is 12%, how
much is the fair value of the interest rate swap? – Asset (Liability)
a. (71,432) b. 71,432 c. 80,000 d. 72,727
Interest rate swap (periodic swap payments)

On January 1, 20x1, ABC Co. obtained a five-year, ₱4,000,000 variable-rate loan
with interest payments due at each year-end and the principal due on December
31, 20x5.
on a fixed rate of 8%. Swap payments shall be made at each year-end .

Jan. 1, 20x1 8%
Jan. 1, 20x2 9%
Jan. 1, 20x3 12%
29. What is the “notional” amount of the interest rate swap agreement?
a. 4,000,000 b. 320,000 c. 4,320,000 d. 0
30. How much is the fair value of the interest rate swap on December 31, 20x1? –
Asset (Liability)
a. 40,000 b. (36,697) c. 36,697 d. 129,589
31. How much is the fair value of the interest rate swap on December 31, 20x2? –
Asset (Liability)
a. 384,292 b. 202,806 c. 143,234 d. 36,697
1. In accordance with PFRS 7, which of the following best describes the risk that
an entity will encounter if it has difficulty in meeting obligations associated
with its financial liabilities?
a. Liquidity risk b. Credit risk c. Financial risk d. Payment risk
(Adapted)
2. In accordance with PFRS 7, which of the following best describes credit risk?
a. The risk that one party to a financial instrument will cause a financial loss
for the other party by failing to discharge an obligation
b. The risk that an entity will encounter difficulty in meeting obligations
associated with financial liabilities
c. The risk that the fair value associated with an instrument will vary due to
changes in the counterparty's credit rating
d. The risk that an entity's credit facilities will be withdrawn due to cash flow
sensitivities
(Adapted)
3. Which of the following are types of hedging relationship?

I. Cash flow hedge
II. Credit risk hedge
III. Interest rate hedge
IV. Fair value hedge
a. I only b. I and II c. I and IV d. All of these
(Adapted)
4. In accordance with PFRS 7, which of the following are components of market

risk?
I. Credit risk
II. Currency risk
III. Interest rate risk
IV. Liquidity risk
a. I only b. I and II c. I and IV d. All of these
(Adapted)
5. Techniques such as hedging, forward contracts and options can:

a. Reduce risk. c. Totally eliminate risk.
b. Increase risk. d. Are purely for speculation.
6. Which of the following is the characteristic of a perfect hedge?

a. No possibility of future gain or loss
b. No possibility of future gain only
c. No possibility of future loss only
d. The possibility of future gain and no future loss
(AICPA)
7. It is a financial instrument which its return is based on the return of some

other underlying asset
a. FVPL b. FVOCI c. Amortized cost d. Derivative
8. When an entity is unable to separate an embedded derivative from its host

9. If a company having a floating-rate debt is concerned that interest rates will
rise causing interest costs to increase, it would most likely to enter into a
swap to
a. Pay-variable rate and receive-fixed rate.
b. Pay-fixed rate and receive-floating rate.
c. Swaps are not used for this purpose.
d. It would depend on whether the swap is in, at, or out-of-the money.
10. Arnold Co. purchased a call option on the rice field of Robert Co. on January 1,
200A exercisable on or before January 1, 200B. On December 31, 200A, the
fair market value of the rice field was below the call option price, making the
instrument “out of the money,” and Arnold Co. decided not to exercise the call
option. Which of the following statements is correct?
a. The call option does not meet the definition of a derivative under PFRSs
regarding settlement at a future date.
b. The call option does not meet the definition of a derivative under PFRSs
regarding the absence of initial net investment or the presence of a little
initial net investment
c. The call option meets the definition of a derivative under PFRSs regarding
settlement at a future date since expiry at maturity is a form of settlement
even though there is no additional exchange of consideration.
d. The call option meets the definition of a derivative; however, it should be
written off on December 31, 200A and a corresponding financial liability
should be recognized.
11. On January 1, 200A, Clifton Co. enters into a forward contract to purchase
10,000 shares of stock from Jane Co. on December 31, 200A at a forward price
of ₱100 per share. Clifton Co. prepays the shares at ₱100 per share which is
the current price of the shares on January 1, 200A. Which of the following is
correct?
a. The forward contract meets the definition of a derivative.
b. The forward contract fails the “underlying” test for a derivative since the
current price and forward price are equal on inception.
c. The forward contract fails the “future settlement” t est for a derivative
since Clifton Co. prepaid the shares at inception at an amount equal to
settlement price. Prepayment at an amount equal to settlement price is
tantamount to settlement.
d. The forward contract fails the “no initial net investment or an in itial net
investment that is smaller than would be required for other types of
contracts that would be expected to have a similar response to changes in
market factors” test for a derivative.
12. Which of the following may qualify as net investment in a foreign operation,
of a Philippine company, to be a hedged item for hedge accounting purposes?
a. fish ball and kikyam operations in the US
b. investment in associate on a company operating in Canada
c. joint venture with McDonalds to sell Mcbalut in retail stores all over the
world
d. investment in subsidiary on a domestic corporation selling e-load and
auto load only within the Philippines.
b. Writing a put option. d. Purchasing a put option.
(Adapted)
46. Frank Jameson is a portfolio manager with 90 percent of the large-cap

diversified mutual fund he controls invested in common stocks. Jameson is
concerned the overall market will decline by a significant amount over the
next two months due to a slowing of the general economy. Which of the
following actions will provide a hedge for the mutual fund?
a. Selling interest rate future contracts.
b. Writing put options on the S&P 500.
c. Purchasing put options on the Standard and Poor's 500 Index (S&P 500).
d. Purchasing call options on the S&P 500.
(Adapted)
47. Ron Jensen is a speculator who does not currently own GHP Corporation
common stock but believes it will increase in market value by 25 percent over
the next month. Jensen can most likely achieve the highest percentage return
on the expected stock price increase by:
a. writing GHP put options. c. buying GHP put options.
b. buying GHP call options. d. buying GHP common stock.
(Adapted)
48. Which of the following statements about derivatives is TRUE?

a. Although forwards have terms that are not standardized, the
clearinghouse of that exchange still takes the opposite position of each
trade, thereby protecting the counterparties from default risk.
b. Although minimal, arbitragers face the risk of the market value of the
underlying asset declining by an amount greater then what was protected
with the hedge.
c. When a call option on a future is exercised, the seller receives a short
position in the underlying future plus pays cash to the holder of the
option.
d. The market value of a financial derivative is primarily a function of the
relative demand and supply for that contract.
(Adapted)
49. If an oil wholesaler expects to buy some gasoline for his customers in the
future and wants to hedge his risk, he needs to:
a. sell gasoline now. c. do nothing.
b. sell crude oil futures contract. d. buy crude oil futures contract.
(Adapted)
50. Which of the following statements about forward contracts is CORRECT? A
long trader agrees to:
a. take delivery, and a short trader agrees to take delivery
b. take delivery, and a short trader agrees to make delivery.
c. take delivery, and a short trader agrees to make delivery.
d. make delivery, and a short trader agrees to take delivery.
(Adapted)
51. If a farmer expects to sell his wheat in anticipation of a harvest and wants to
hedge his risk, he needs to:
52. Which of the following statements about speculators and hedgers in the
futures market is TRUE?
a. Hedging can allow a business to guard against a price increase in a
commodity without sacrificing profit if the commodity price decreases.
b. A speculator would use futures to take a long position in a commodity if its
price is expected to decrease.
c. A speculator would use futures to take a short position in a commodity if
its price is expected to increase.
d. Hedgers guard against market price changes that would cause a reduction
in their operating profit.
(Adapted)
53. Standardized futures contracts are an aid to increased market liquidity

because:
a. standardization results in less trading activity.
b. uniformity of the contract terms broadens the market for the futures by
appealing to a greater number of traders.
c. standardization of the futures contract stabilizes the market price of the
underlying commodity.
d. non-standardized forward contracts are not allowed to trade.
(Adapted)
54. Futures have greater market liquidity than forward contracts, because futures
are:
a. developed with specific characteristics to meet the needs of the buyer.
b. standardized contracts.
c. sold only for widely traded commodities, unlike forwards.
d. written for shorter periods of time.
(Adapted)
55. Standardization features of futures contracts do not include the:

a. quality of the good that can be delivered.
b. delivery time.
c. quantity of the good to be delivered.
d. delivery price of the commodity.
(Adapted)
56. What is the primary difference between an American and a European option?
a. American and European options are never written on the same underlying
asset.
b. The European option can only be traded on overseas markets.
c. The American option can be exercised at any time on or before its
expiration date.
d. American and European options always have different strike prices when
written on the same underlying asset.
(Adapted)
57. American options are worth no less than European options with the same
maturity, exercise price, and underlying stock because:
a. purchasers of American options receive stock dividends, while purchasers
of European options do not.
b. American options are traded in U.S. exchanges where trading costs are
58. Which of the following statements about European and American options is
FALSE?
a. European options offer more flexible trading opportunities for
speculators.
b. American options can be exercised at any time on or before the expiration
date.
c. European options are easier to analyze and value than American options.
d. American options are far more common than European options.
(Adapted)
59. Which of the following statements regarding options is TRUE?

a. An American option is worth no less than a European option with the
same maturity, exercise price, and underlying stock.
b. European options are always worth the same as American options with
the same maturity, exercise price, and underlying stock.
c. European options are always worth more than American options with the
same maturity, exercise price, and underlying stock.
d. All of these choices are correct.
(Adapted)
60. The writer of the put option has the:

a. obligation to sell the underlying asset in the future under certain
conditions.
b. right to buy the underlying asset in the future under certain conditions.
c. right to sell the underlying asset in the future under certain conditions.
d. obligation to buy the underlying asset in the future under certain
conditions.
(Adapted)
61. The writer of an option has:
a. neither the right nor obligation. c. the right.
b. both the right and obligation. d. the obligation.
(Adapted)
62. John Elam has a position in an option in which Elam pays an upfront fee to
receive payments if the value of a stock is below $18 at expiration. If the stock
is not below $18 at expiration, Elam receives nothing. Elam’s position in the
option is:
a. short a put option. c. long a call option.
b. short a call option. d. long a put option.
(Adapted)
63. James Anthony has a short position in a put option with a strike price of $94.
If the stock price is below $94 at expiration, what will happen to Anthony’s
short position in the option?
a. The person who is long the put option will not exercise the put option.
b. He will have the option exercised against him at $94 by the person who is
long the put option.
c. He will exercise the option at $94.
d. He will let the option expire.
(Adapted)
a. An accrued interest receivable of ₱40,000 was not yet recorded.
b. Administrative expenses expected to be incurred during the liquidation
process is ₱120,000. This amount is not yet reflected on the statement of
financial position.
c. Accrued interest on the loan payable amounting to ₱60,000 was not reflected
in the statement of financial position.
The following are the transactions that have transcribed during the period:
a. Of the total account receivable, only ₱660,000 have been collected. The
remaining balance was written-off.
b. Only 90% of the note receivable was collected. The remaining balance was
written-off. All of the accrued interest was collected.
c. Half of the inventory was sold for ₱1,200,000. Actual costs to sell were
₱20,000.
d. The balance of the prepaid assets account was written-off.
e. The land and building were sold for ₱10,400,000, as expected.
f. The equipment was sold for ₱880,000.
g. Of the total accrued expenses, only the accrued salaries of ₱100,000 were
paid.
h. The current tax payable was paid in full.
i. The loan payable and interest payable were paid in full.
j. ₱880,000 were paid for the note payable. The lender waived payment for the
balance.
k. Actual administrative expenses paid amounted to ₱108,000.
12. The opening entry in the books of the receiver includes an estate equity
(deficit) of
a. (1,555,200) b. (684,000) c. (1,435,200) d. (1,415,200)
13. The statement of realization and liquidation will show total “assets to be
realized” of
a. 14,640,000 b. 14,800,000 c. 14,068,800 d. 14,234,200
14. The statement of realization and liquidation will show total “assets acquired”
of
a. 180,000 b. 800,000 c. 40,000 d. 0
15. The statement of realization and liquidation will show total “assets realized” of
a. 13,250,000 b. 13,540,000 c. 12,920,000 d. 13,520,000
16. The statement of realization and liquidation will show total “assets not
realized” of
a. 1,060,000 b. 820,000 c. 724,000 d. 0
17. The statement of realization and liquidation will show total “liabilities to be
liquidated” of
a. 15,664,000 b. 15,484,000 c. 15,544,000 d. 15,244,000
18. The statement of realization and liquidation will show total “liabilities
assumed” of
60,000 b. 180,000 160,000 d. 0
20. The statement of realization and liquidation will show total “liabilities not
liquidated” of
a. 4,748,000 b. 5,104,000 c. 4,784,000 d. 0
21. The statement of realization and liquidation will show net gain (loss) for the
period of
a. 220,000 b. 112,000 c. (112,000) d. 0
Recovery of claims by order of priority

The statement of affairs of Darrell Putix Co. indicates that unsecured creditors
without priority with total claims of ₱720,000 may expect to recover ₱288,000 if
all of the assets of Darrell Putix Co. were sold. Among the creditors of Darrell
Putix Co. are the following:
 Government – taxes payable of ₱400,000, inclusive of ₱80,000 assessments
and surcharges.
 XYZ bank – loan payable of ₱4,000,000 and accrued interest of ₱200,000,
backed by collateral security with realizable value of ₱4,800,000.
 Alpha Financial Co. – loan payable of ₱3,200,000 backed by collateral security
with realizable value of ₱2,000,000.
 Mr. Bombay – loan payable of ₱1,000,000 and accrued interest of ₱200,000.
No collateral security.
22. How much is the expected recovery of partially secured creditors?

a. 2,480,000 b. 2,160,000 c. 1,280,000 d. 0
23. How much is the expected recovery of Mr. Bombay?

a. 780,000 b. 480,000 c. 288,000 d. 0
Recovery of claims
Rex Toothpix Co. is undergoing liquidation. Information on Rex Toothpi x Co.’s
assets and liabilities is shown below:
Realizable
ASSETS Book value value
Assets pledged to fully secured creditors 360,000 480,000
Assets pledged to partially secured creditors 208,000 192,000
Free assets 600,000 576,000
1,168,000 1,248,000
LIABILITIES
Unsecured liabilities with priority 288,000 288,000
Fully secured creditors 384,000 384,000
Partially secured creditors 240,000 240,000
Unsecured creditors without priority 432,000 432,000
1,344,000 1,344,000
24. If the assets are sold at realizable values, how much cash is available to pay
unsecured creditors without priority?
a. 336,000 b. 384,000 c. 624,000 d. 288,000
25. What is the estimated recovery percentage of unsecured creditors without

27. How much can the partially secured creditors expect to recover from their
claims?
a. 384,000 b.234,000 c. 230,400 d. 276,000
28. How much can the “unsecured creditors without priority” expect to recover
from their claims?
a. 432,000 b. 345,600 c. 384,000 d. 348,000
Recovery percentage of shareholders

29. The following summarizes the results of the liquidation process of Rhadvix
Co.’s operations:
Gains on realization of assets 720,000
Losses on realization of assets 1,280,000
Additional assets discovered and realized during
200,000
liquidation
Additional liabilities recorded and settled during
120,000
liquidation
Share capital (at original book value) 2,800,000
Deficit (at original book value) 1,200,000
How much is the recovery percentage of shareholders?
a. 80% b. 70% c. 76% d. 75%
Recovery of shareholders’ claims

Raymund Lipstix Co. owns 80% of PH Care, Inc. During the year, PH Care, Inc.
filed for bankruptcy and is about to enter into liquidation. Raymund Lipstix Co.
has an outstanding unsecured receivable of ₱4,000,000 from PH Care, Inc.
together with an investment in subsidiary of ₱20,000,000. The statement of
affairs of PH Care, Inc. shows a 100% recovery for outside creditors and a 20%
recovery for inside creditors.
30. How much can Raymund Lipstix Co. expect to recover from its receivable?
a. 800,000 b. 4,800,000 c. 640,000 d.0
31. How much can Raymund Lipstix Co. expect to recover from its investment in
subsidiary?
a. 20,000,000 b. 4,000,000 c. 4,640,000 d. 0
Errors
32. Berns Sunog-kutix Co. has voluntarily filed petition for bankruptcy. Berns
Sunog-kutix Co.’s inexperienced accountant determined that the expected
recovery percentage of unsecured creditors without priority is 20%. The
unsecured creditors have refuted this and demanded an audit of the
accountant’s computations. The following information was determined from
the accountant’s working papers:
 Assets and liabilities immediately before the commencement of liquidation
process:
Total assets - at book value 8,000,000
Unsecured creditors with priority 1,040,000
Fully secured creditors 3,600,000
 The remaining unsold assets have the following realizable values:
Assets pledged to fully secured creditors 1,280,000
Assets pledged to partially secured creditors 560,000
All other assets 2,060,000
 Further investigations revealed the following:
a. Estimated liquidation expenses amounting to ₱160,000 were not yet
recorded.
b. Additional unsecured liability without priority of ₱200,000 should be
accrued.
What is the correct estimated recovery percentage of unsecured creditors

without priority?
a. 40% b. 42.53% c. 45.37% d. 47.33%
Receivership – journal entry

Joseph Fantastix Co. has filed a petition for insolvency. The winding up of Joseph
Fantastix Co.’s affairs will be entrusted to a receiver. The following information
was gathered:
Realizable
Book value value
Assets 1,200,000 1,000,000
Liabilities:
Unsecured liabilities with priority 80,000 80,000
Fully secured creditors 480,000 480,000
Partially secured creditors 160,000 160,000
Unsecured liabilities without priority 560,000 560,000
1,280,000 1,280,000
Unrecorded items:
Dividend receivable 20,000
Interest payable 8,000
Estimated administrative expenses 40,000
33. How much is the estate equity (deficit) in the opening journal entry made by
the receiver in its books?
a. (80,000) b. 80,000 c. (308,000) d. (68,000)
34. How much is the estimated deficiency to unsecured creditors without priority
in the statement of affairs?
a. (308,000) b. 308,000 c. (80,000) d. (280,000)
Statement of realization and liquidation

The following information was taken from the statement of realization and
liquidation of Jury and John Bombastix Co., which is undergoing liquidation:
ASSETS:
Assets to be realized 8,000,000
Assets acquired 60,000
Assets realized 4,720,000
Liabilities assumed 128,000
SUPPLEMENTARY ITEMS:
Supplementary expenses 100,000
Supplementary income 72,000
35. How much is the net gain (loss) for the period?
a. (4,132,000) b. (28,000) c. 4,160,000 d. (4,160,000)
36. If the estate deficit at end of the period is ₱3,480,000, how much is the ending
balance of cash?
a. 400,000 b. 388,000 c. 960,000 d. 460,000

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

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

Consideration transferred and indemnification asset

On April 1, 20x2, after RIBALD’s

Determining what is part of the business combination transaction

Settlement of pre-existing relationship - Reacquired right

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

Settlement of pre-existing relationship – Not a reacquired right

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

Settlement of pre-existing relationship – Non-contractual

As of January 1, 20x1, there is a pending patent infringement suit filed by

consideration – Initial and subsequent measurement

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

In addition, PRECIPITOUS agrees to issue additional 1,000 shares to the former

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

Contingent payments to employees

Chapter 15: Multiple Choice – Computational (For classroom instruction

 Earnings in 20x5 included an expropriation gain of ₱1,600,000.

3. How much is the estimated goodwill using the capitalization of average

Applications of the Direct valuation method – Purchase price

Case #2.1: Average earnings

Case #2.2: Average earnings

Applications of the Direct valuation method – Purchase price

Applications of the Direct valuation method – Actual earnings

Applications of the Direct valuation method

Net assets (at fair values) 1,600,000 2,400,000

Average annual earnings 320,000 480,000

The statements of financial position of the combining entities immediately before

Liabilities 5,200,000 2,800,000

Combination of mutual entities

Chapter 15: Theory of Accounts Reviewer

2. Should the following costs be included in the consideration transferred in a

4. Are the following statements about an acquisition true or false, according to

LIABILITIES AND EQUITY

Statements of profit or loss

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

6. How much is the consolidated total assets as of December 31, 20x1?

7. How much is the consolidated total equity as of December 31, 20x1?

Consolidation subsequent to date of acquisition – NCI at Fair value

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

Statements of financial position

LIABILITIES AND EQUITY

Statements of profit or loss

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

9. How much is the consolidated total assets as of December 31, 20x1?

Chapter 17: Multiple Choice – Computational (For classroom instruction

Fair value decrement

Remaining useful life – Jan. 1, 20x1 10 years 5 years 5 years

Fair value increment

NCI in net assets

Total liabilities 800,000 480,000

4. How much is the fair value assigned to NCI at date of acquisition?

5. How much is the goodwill to be presented in the current-year consolidated

6. How much is the NCI in net assets?

7. How much is the consolidated retained earnings?