1. B.

P19,000 of stock issue costs are treated as a reduction in the issue price
Heaven Corp paid finder's fees of P40,000, accountant's fee of P10,000, legal fees of P15,000, salaries of
Heaven's employees assigned to the implementation of the merger of P16,000, cost of closing duplicate
facilities of P12,000, cost of shareholder's meeting to vote on the merger of P14,000, cost of printing stock
certificates of P7,000, audit and accountant's fee related to the stock issuance of P3,000, SEC registration
fee of P5,000 and stock listing application fees of P4,000. Based on the preceding information, under the
acquisition method following PFRS 3, which of the following statements is true?
A. P44,000 of stock issue costs are treated as a reduction in the issue price
B. P19,000 of stock issue costs are treated as a reduction in the issue price
C. P19,000 of stock issue costs are expensed
D. P44,000 of stock issue costs are expensed
2. B. P5,000
Derek Corporation concluded that the fair value of Ellen Company was P80,000 and paid that amount to
acquire all of its net assets. Ellen reported assets with a book value of P60,000 and fair value of P98,000
and a liabilities with a book value and fair value of P23,000 on the date of combination. Derek also paid
P3,000 to a search team for finder’s fees related to the acquisition. What amount will be recorded as
goodwill by Derek Corporaion?
A. P0
B. P5,000
C. P8,000
D. P13,000
3. A. The acquirer’s Retained Earnings account balance
Following the completion of a business combination, what is the balance in the new corporation’s Retained
Earnings account?
a. The acquirer’s Retained Earnings account balance
b. The acquiree’s Retained Earnings account balance
c. The sum of acquirer and acquiree’s Retained Earnings account balance
d. Zero

4. C. Acquisition method
Under PFRS 3, Business Combinations, which method must be used to account for business combinations?
a. Purchase method
b. Pooling of interest method
c. Acquisition method
d. New entity method
5. C. Consulting fees are expensed
In recording acquisition costs, which of the following procedures is correct?
a. Registration costs are expensed, and not charged against the fair value of the securities issued.
b. Indirect costs are charged against the fair value of the securities issued
c. Consulting fees are expensed
d. None of the above procedure is correct
6. C. expensed in the period of purchase
Acquisition costs such as fees of accountants and lawyers that were necessary to negotiate and consummate
the purchase are:
a. recorded as a deferred asset and amortized over a period not to exceed 15 years
b. expensed if immaterial but capitalized and amortized if over 2% of the acquisition price
c. expensed in the period of purchase
d. included as part of the price paid for the company purchased
7. C. False, True
Statement 1: In a business combination, the investee takes control of the net assets of the investor.
Statement 2: All business combinations result in one entity taking control of the net assets of another
entity.
a. True, True
b. True, False
c. False, True
d. False, False

8. d. False, False
Statement 1: An acquisition of net assets result in one entity taking control of the net assets of another
entity while the acquisition of stock does not result in taking control of the net assets of another
entity.
Statement 2: A business combination that occurs where only one of the original entities in existence after
the combination is called a statutory consolidation.
a. True, True
b. True, False
c. False, True
d. False, False

9. C. Either acquisition of the acquiree assets or stock

Control over an acquiree can be attained through which of the following?

a. Acquisition of the acquiree assets
b. Acquisition of the acquiree stock
c. Either acquisition of the acquiree assets or stock
d. Neither acquisition of the acquiree assets or stock

10. D. The net assets may increase, decrease or remain the same
In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree), how does the value
of the acquiree net assets change?
a. The net assets increase
b. The net assets decrease
c. There is no change in net assets
d. The net assets may increase, decrease or remain the same

Straight Problems: 2 Points each

11. P46,000 = (P60,000 + P26,000, fair value) – P40,000, cash paid
12. P154,000 = (P100,000 + P54,000, fair value)
13. P7,000 = [P40,000 – (P26,000 + P54,000 – P35,000 – P12,000)]
14. P98,000 = (P90,000 + P8,000), only the stockholders’ equity of acquirer
The following data pertains to questions 11 through 14:
Mother and Child Inc had the following balance sheets on December 31, 2020:
Mother Child
Current Assets P 60,000 P10,000
Fixed Assets (net) 100,000 60,000
Total Assets P160,000 P70,000
Current Liabilities P 42,000 P35,000
Bonds Payable 20,000 12,000
Common Shares 90,000 12,000
Retained Earnings ___8,000 11,000
Total Liabilities and Equity P160,000 P70,000
On January 1, 2021 Mother purchased all of Child Inc’s Common Shares for P40,000 in cash. On that
date, Child’s Current Assets and Fixed Assets were worth P26,000 and P54,000, respectively. Assuming
that Consolidated Financial Statements were prepared on that date, answer the following:
11. The Current Assets of the combined entity should be valued at:
12. The Fixed Assets of the combined entity should be valued at:
13. The Goodwill arising from this Business Combination would be:
14. The Shareholder’s Equity section of the Consolidated Balance Sheet would show what amount?

15. [(12,000 shares x P30) – P343,200 = P16,800

P Company issued 12,000 shares of its P20 par value common stock for the net assets of Company in a
business combination under which S Company will be merged into P Company. On the date of the
combination, P Company common stock had a fair value of P30 per share. Balance sheets for P
Company and S Company immediately prior to the combination were as follows:
P S Company
Company
Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 657,000 P 96,000
Plant and Equipment (net) . . . . . . . . . . . . . . . . . . . . . . 863,000 204,000
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 450,000 P 75,000
Common Stock, P20 par value . . . . . . . . . . . . . . . . . . 825,000 120,000
Other Contributed Capital . . . . . . . . . . . . . . . . . . . . 109,000 30,000
Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . 136,000 75,000

If the business combination is treated as an acquisition and S Company’s net assets have a fair value of
P343,200, P Company’s balance sheet immediately after the combination will include goodwill of:

16. c
Consideration transferred;
Common shares: 81,600 shares x P12 P 979,200
Add: Contingent consideration ___234,000
P1,213,200
Less: Fair value of identifiable assets acquired & liabilities assumed __ 835,740
Goodwill P 377,460
17. d - refer to No. 4 as a matter of interpretation on the term ‘expense’
Consideration transferred;
Common shares: 45,000 shares x P12 P 540,000
Add: Contingent consideration ___234,000
P 774,000
Less: Fair value of identifiable assets acquired & liabilities assumed __ 835,740
Bargain purchase gain P ( 61,740)

Since the target was met (meaning the actual net income was greater than the targeted
net income of P1,140,000), therefore the actual payment of the contingent consideration
were as follows :
Estimated liability on contingent consideration………….. 234,000
Loss/expense on contingent contingent consideration. 312,000
Cash…………………………………………………………. 546,000

Therefore, total expense amounted to P620,640, computed as follows :

(P42,720 + P28,320 + P96,000 + P90,000 + P51,600 + P312,000) = P620,640

J acquired the net assets of L Corp on July 1, 2020. In exchange for net assets at fair market value of
L amounting to P835,740. J issued 81,600 shares at a market price of P12 per share (P9 par value).
Out of pocket costs of the combination were as follows:
 Legal fees for the contract of business combination P42,750
Audit fee for SEC registration of share issue 144,000
Printing costs of share certificates 24,600
Broker’s fee 28,320
Accountant’s fee for pre-acquisition audit 96,000
Other direct costs of acquisition 90,000
General and allocated expenses 51,600
J will pay additional cash consideration of P546,000 in the event that L’s net income will be equal or
greater than P1,140,000 for the period ended December 31, 2020. At acquisition, there is a high
probability of reaching the target income and the fair value of the additional consideration was
determined to be P234,000. Actual net income for the period ended December 31, 2020 amounted to
P1,500,000. The additional consideration was paid.
16. What is the amount of goodwill to be recognized in the statement of financial position as of
December 31, 2020?
17. What amount of expense is to be recognized for the year ended December 31, 2020 assuming J issued
45,000 share capital on July 1, 2020?

18. 37,500 shares

19. 45,000 shares
20. P400,000
The Lucky Company will issue shares of P10 par value common stock for all the assets and liabilities of
the Hessy Company. Lucky Company’s common stock has a current market value of P40 per share.
Below is Hessy Company’s balance sheet data:
Book Value Fair Value
Current assets P320,000 P400,000
Property, plant 880,000 1,600,000

Liabilities P400,000
Equity:
Common stock, P4 par 80,000
Additional Paid-in Capital 320,000
Retained Earnigs 400,000
18. To have an income from acquisition of P100,000, the number of shares to be issued by Lucky
Company should be:
19. Using the above data, to have a goodwill of P200,000, the number of shares to be issued by Lucky
Company is:
20. Assuming Lucky issued 50,000 shares, how much goodwill should be recognized?