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COLEGIO DE DAGUPAN
Arellano Street, Dagupan City
School of Business and Accountancy

PRELIMINARY EXAMINATION
Accounting for Business Combination

1. On January 1, 20x1, ABC Co. acquired 75% interest in XYZ, Inc. for ₱2,500,000 cash. ABC Co.
incurred transaction costs of ₱250,000 for legal, accounting and consultancy fees in negotiating
the business combination. ABC Co. elected to measure NCI at the NCI’s proportionate share in
XYZ, Inc.’s identifiable net assets. The carrying amounts and fair values of XYZ’s assets and
liabilities at the acquisition date were as follows:

Assets Carrying amounts Fair values

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

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

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

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

3. The method required under PFRS 3 to be used in accounting for business combinations is
a. Purchase method c. Acquisition method
b. Buy method d. Combination method
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4. Should the following costs be included in the consideration transferred in a business

combination, according to PFRS 3 Business Combinations?
I. Costs of maintaining an acquisitions department.
II. Fees paid to accountants to effect the combination.
a. No No b. No Yes c. Yes No d. Yes Yes

5. PFRS 3 requires that the contingent liabilities of the acquired entity should be recognized in the
balance sheet at fair value. The existence of contingent liabilities is often reflected in a lower
purchase price. Recognition of such contingent liabilities will
a. Decrease the value attributed to goodwill, thus decreasing the risk of impairment of
goodwill.
b. Decrease the value attributed to goodwill, thus increasing the risk of impairment of
goodwill.
c. Increase the value attributed to goodwill, thus decreasing the risk of impairment of
goodwill.
d. Increase the value attributed to goodwill, thus increasing the risk of impairment of
goodwill.

6. Are the following statements about an acquisition true or false, according to PFRS 3 Business
combinations?
I. The acquirer should recognize the acquiree's contingent liabilities if certain conditions
are met.
II. The acquirer should recognize the acquiree's contingent assets if certain conditions are
met.
a. False, False b. False, True c. True, False d. True, True

7. Given the following information, how is goodwill from a business combination computed under
PFRS 3?
A = Consideration transferred
B = Non-controlling interest in net assets of subsidiary
C = Previously held equity interest
D = Fair value of net identifiable assets of subsidiary
% = Percentage of ownership acquired by the parent in the subsidiary

a. A+B+C-D c. (A+C) – (D x %)
b. A – (D x %) d. (A+B) – [(D x %) – B]

8. In a business combination, an acquirer's interest in the fair value of the net assets acquired
exceeds the consideration transferred in the combination. Under PFRS 3 Business Combinations,
the acquirer should
a. recognize the excess immediately in profit or loss
b. recognize the excess immediately in other comprehensive income
c. reassess the recognition and measurement of the net assets acquired and the consideration
transferred, then recognize any excess immediately in profit or loss
d. reassess the recognition and measurement of the net assets acquired and the consideration
transferred, then recognize any excess immediately in other comprehensive income
9. Which one of the following reasons would not contribute to the creation of negative goodwill?
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a. Errors in measuring the fair value of the acquiree’s net identifiable assets or the cost of the
business combination.
b. A bargain purchase.
c. A requirement in an IFRS to measure net assets acquired at a value other than fair value.
d. Making acquisitions at the top of a “bull” market for shares.

10. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets,
liabilities, and contingent liabilities over cost” (formerly known as negative goodwill) should be
a. Amortized over the life of the assets acquired.
b. Reassessed as to the accuracy of its measurement and then recognized immediately in
profit or loss.
c. Reassessed as to the accuracy of its measurement and then recognized in retained earnings.
d. Carried as a capital reserve indefinitely.

11. This type of business combination occurs when, for example, a private entity decides to have
itself “acquired” by a smaller public entity in order to obtain a stock exchange listing.
a. Step acquisition c. Reverse acquisition
b. Rewind acquisition d. Stock acquisition

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

Use the following information for the next four questions:

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

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

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

If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in RASCAL, Inc., how
much is the goodwill (gain on bargain purchase) on the business combination?
a. 800,000 b. 2,060,000 c. 1,440,000 d. 1,420,000
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14. KNAVE Co. elects the option to measure non-controlling interest at fair value. An independent
consultant was engaged who determined that the fair value of the 20% non-controlling interest
in RASCAL, Inc. is ₱620,000.

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

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

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

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

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

Use the following information for the next two questions:

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

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

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

18. Case #2: As consideration for the business combination, SMUTTY Co. issued bonds with face
amount and fair value of ₱4,000,000. Transaction costs incurred in issuing the bonds amounted
to ₱200,000. How much is the goodwill (gain on bargain purchase) on the business combination?
a. 716,000 b. 556,000 c. 600,000 d. 1,200,000
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19. 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

20. On January 1, 20x1, HISTRIONAL Co. acquired all of the identifiable assets and assumed all of
the liabilities of THEATRICAL, Inc. by paying cash of ₱4,000,000. On this date, the identifiable
assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000,
respectively.

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

21. On January 1, 20x1, SUBTERFUGE Co. acquired all of the identifiable assets and assumed all of
the liabilities of DECEPTION, Inc. by paying cash of ₱4,000,000. On this date, the identifiable
assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000,
respectively.

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

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

a. 1,200,000 b. 1,280,000 c. 1,080,000 d. 1,040,000
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22. On January 1, 20x1, CHIDE Co. acquired 90% of the identifiable assets and assumed all of the
liabilities of SCOLD, Inc. by paying cash of ₱4,000,000. On this date, SCOLD’s identifiable assets
and liabilities have fair values of ₱6,400,000 and ₱3,600,000, respectively. Non-controlling
interest has a fair value of ₱320,000.

As of January 1, 20x1, SCOLD had the following which were not included in the acquisition-date fair
value measurement of liabilities:
 SCOLD has an existing contract with a customer to deliver products at a specified future date. In
accordance with the agreement, SCOLD shall pay a penalty for failure to deliver the said goods.
CHIDE determined that the fair value of the penalty is ₱40,000. However, because CHIDE
expects to comply with the agreement, it was assessed that payment of penalty is improbable.
 SCOLD has guaranteed a bank loan of a third party. CHIDE shall replace SCOLD as the
guarantor. If the third party defaults on the loan, CHIDE will be held liable for the guarantee.
CHIDE determined that the fair value of the guarantee is ₱120,000. However, both SCOLD and
CHIDE believe that the third party will not default on its loan from the bank.
 There is a pending unresolved litigation filed by a third party against SCOLD. CHIDE
determined that the fair value of settling the litigation is ₱200,000. However, because the legal
counsels of both CHIDE and SCOLD strongly believe that they will win the case, it was assessed
that payment for the settlement of the litigation is improbable.

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

a. 1,880,000 b. 1,200,000 c. 1,560,000 d. 1,520,000

23. On January 1, 20x1, PRODIGIOUS Co. acquired all of the identifiable assets and assumed all of
the liabilities of EXTRAORDINARY, Inc. by paying cash of ₱4,000,000. On this date, the
identifiable assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000,
respectively.

The terms of the business combination agreement are shown below:

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

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

a. 1,721,843 b. 1,561,843 c. 1,641,843 d. 2,320,000
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24. On January 1, 20x1, ATTAINDER Co. acquired all of the assets and assumed all of the liabilities
of DISHONOR, Inc. As of this date, the carrying amounts and fair values of the assets and
liabilities of DISHONOR acquired by ATTAINDER are shown below:
Assets Carrying amounts Fair values
Cash in bank 40,000 40,000
Receivables 800,000 480,000
Allowance for probable losses on
(120,000)
receivables
Inventory 2,080,000 1,400,000
Building – net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000

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

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

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

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

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

Liabilities
Dividends payable 400,000 400,000
Other payables 1,600,000 1,600,000
2,000,000 2,000,000
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The dividends payable pertain to dividends declared by ABSURD, Inc. on December 28, 20x0 to
shareholders of record on January 15, 20x1. The dividends will be distributed on January 31, 20x1.

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

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

Use the following information for the next five questions:

On January 1, 20x1, COLLOQUY Co. acquired all of the identifiable assets and assumed all of the
liabilities of CONVERSATION, Inc. by issuing its own ordinary shares. Information at acquisition
date is shown below:
Combined
COLLOQUY Co. CONVERSATION, Co. entity
(carrying amounts) (fair values)
Identifiable assets 9,600,000 6,400,000 16,000,000
Goodwill - - ?
Total assets 9,600,000 6,400,000 ?
Liabilities 2,800,000 3,600,000 6,400,000
Share capital 2,400,000 1,200,000 2,800,000
Share premium 1,200,000 1,000,000 4,800,000
Retained earnings 3,200,000 600,000 ?
Total liabilities & equity 9,600,000 6,400,000 ?

Additional information:
 COLLOQUY’s share capital consists of 60,000 ordinary shares with par value of ₱40 per share.
 CONVERSATION’s share capital consists of 3,000 ordinary shares with par value of ₱400 per
share.

26. How much is the fair value of consideration transferred on the business combination?
a. 4,000,000 b . 2,400,000 c. 4,400,000 d. 4,800,000

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

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

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

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

29. How much goodwill was recognized on acquisition date?

a. 980,000 b. 1,200,000 c. 1,280,000 d. 1,080,000

30. What is the retained earnings of the combined entity immediately after the business
combination?
a. 3,120,000 b. 3,320,000 c. 3,280,000 d. 3,200,000
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31. On January 1, 20x1, OBDURATE Co. acquired 30% ownership interest in STUBBORN, Inc. for
₱400,000. Because the investment gave OBDURATE significant influence over STUBBORN, the
investment was accounted for under the equity method in accordance with PAS 28.

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

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

How much is the goodwill?

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

32. OBSTREPEROUS Co. and NOISY, Inc. both engage in the same business. On January 1, 20x1,
OBSTREPEROUS and NOISY signed a contract, the terms of which resulted in OBSTREPEROUS
obtaining control over NOISY without any transfer of consideration between the parties.

The fair value of the identifiable net assets of NOISY, Inc. on January 1, 20x1 is ₱4,000,000. NOISY
chose to measure non-controlling interest at the non-controlling interest’s proportionate share of the
acquiree’s identifiable net assets.

How much is the goodwill?

a. 4,000,000 b.0 c. a or c d. This is not a business combination

Use the following information for the next three questions:

On September 30, 20x1, INNOCUOUS Co. acquired all of the identifiable assets and assumed all of
the liabilities of HARMLESS, Inc. by paying cash of ₱4,000,000. On this date, the identifiable assets
acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000, respectively.

33. INNOCUOUS engaged an independent valuer to appraise a building acquired from

HARMLESS. However, the valuation report was not received by the time INNOCUOUS
authorized for issue its financial statements for the year ended December 31, 20x1. As such, the
building was assigned a provisional amount of ₱2,800,000. Also, the building was tentatively
assigned an estimated useful life of 10 years from acquisition date. INNOCUOUS uses the
straight line method of depreciation and recognized three months’ depreciation on the building
for 20x1.

On July 1, 20x2, INNOCUOUS finally received the valuation report from the independent valuer
which shows that the fair value of the building as of September 30, 20x1 is ₱2,000,000 and remaining
useful from that date is 5 years.

How should INNOCUOUS account for the new information obtained?

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a. As a retrospective adjustment to the provisional amount of the building resulting to

increase in goodwill by ₱800,000.
b. As a retrospective adjustment to the provisional amount of the building resulting to decrease
in goodwill by ₱800,000.
c. As a retrospective restatement to the provisional amount of the building resulting to increase
in goodwill by ₱800,000. The adjustment is treated as a correction of a prior period error.
d. The new information obtained is ignored. No adjustment to goodwill is necessary.

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

How should INNOCUOUS account for the new information obtained?

a. As a retrospective adjustment to record the previously unrecorded patent resulting to
increase in goodwill by ₱400,000.
b. As a retrospective adjustment to record the previously unrecorded patent resulting to
decrease in goodwill by ₱400,000.
c. As a retrospective restatement to record the previously unrecorded patent resulting to
decrease in goodwill by ₱400,000. The adjustment is treated as a correction of a prior period
error.
d. The new information obtained is ignored. No adjustment to goodwill is necessary.

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

How should INNOCUOUS account for the new information obtained?

a. As a retrospective adjustment to record the previously unrecorded patent resulting to
increase in goodwill by ₱400,000.
b. As a retrospective adjustment to record the previously unrecorded patent resulting to
decrease in goodwill by ₱400,000.
c. As a retrospective restatement to record the previously unrecorded patent resulting to
decrease in goodwill by ₱400,000. The adjustment is treated as a correction of a prior period
error.
d. The new information obtained is ignored. No adjustment to goodwill is necessary.

36. 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.
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On April 1, 20x2, after RIBALD’s 20x1 financial statements were issued, new information was
obtained confirming that the fair value of RIBALD’s shares on September 30, 20x1 is ₱440 per share
and that the fair value of OFFENSIVE’s net identifiable assets as of September 30, 20x1 is ₱3,600,000.
On July 1, 20x2, two competitors of RIBALD have also merged which led to RIBALD believing that
the merger with OFFENSIVE is not as profitable as expected. RIBALD now wants to decrease the
amount assigned to the consideration transferred to OFFENSIVE on September 30, 20x1 to ₱360 per
share and the value of OFFENSIVE’s net identifiable assets to ₱1,600,000.

How should RIBALD account for the new information obtained on July 1, 20x2?
a. As a retrospective adjustment resulting to increase in goodwill by ₱400,000.
b. As a retrospective adjustment resulting to decrease in goodwill by ₱400,000.
c. As a retrospective restatement resulting to decrease in goodwill by ₱400,000. The adjustment
is treated as a correction of a prior period error.
d. The new information obtained is ignored. No adjustment to goodwill is necessary.

37. When consolidating the financial statements of a parent and its subsidiary, which of the
following is eliminated?
a. Goodwill c. Investment in subsidiary
b. NCI in net assets d. All of these

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

On January 1, 20x1, Entity A acquires Entity B in a business combination. The financial statements of
the combining constituents are shown below:

  Entity A Entity B
Cash in bank 12,000 6,000
Accounts receivable 36,000 14,400
Inventory 48,000 27,600
Investment in subsidiary 90,000 -
Building, net 216,000 48,000
Total assets 402,000 96,000

Accounts payable 60,000 7,200

Share capital 204,000 60,000
Share premium 78,000 -
Retained earnings 60,000 28,800
Total liabilities and equity 402,000 96,000

Additional information:
 Entity B’s assets and liabilities are stated at their acquisition-date fair values, except for the
following:
- Inventory, ₱37,200
- Building, net, ₱57,600

 The goodwill determined under PFRS 3 is ₱3,600.

 The NCI in the net assets of the subsidiary, also determined under PFRS 3, is ₱21,600.

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

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

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

a. 330,800 c. 328,600
b. 340,800 d. 363,600
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Use the following information for the next nine questions:

On January 1, 2021, Maru Corporation and Nong Corporaton and their condensed balance sheet
are as follows:

Maru Corp. Nong Corp

Current Assets P 140,000 P 40,000
Non-current Assets 180,000 80,000
Total Assets P 320,000 P 120,000
Current Liabilities P 60,000 P 20,000
Long-term Debt 100,000 -
Stockholders’ Equity 160,000 100,000
Total Liabilities & Equities P 320,000 P 120,000

On January 2, 2021, Maru Corporation borrowed P120,000 and used the proceeds to obtain 80%
of the outstanding common shares of Nong Corporation. The acquisition price was considered
proportionate to Nong’s fair value. The P120,000 debt is payable in 10 equal annual principal
payments, plus interest, beginning December 31, 2021. The excess fair value of the investment
over the underlying book value of the acquired net assets is allocated to inventory (60%) and to
goodwill (40%).

On a consolidated balance sheet as of January 2, 2021, what should be the amount for each of the
following?

41. The amount of goodwill using proportionate basis (partial):

A. P 0
B. P16,000
C. P20,000
D. P40,000

42. Using the same information above, the amount of goodwill using full fair value (full/gross
up)basis:

A. P 0
B. P16,000
C. P20,000
D. P40,000

43. Using the same information above, the amount of current assets should be:

A. P210,000
B. P204,000
C. P200,000
D. P180,000
 P a g e | 14

44. Using the same information above, the amount of non-current asset using proportionate basis
(partial) in computing goodwill should be:

A. P260,000
B. P268,000
C. P276,000
D. P280,000

45. Using the same information above, the amount of non-current asset using full fair value basis
(full/gross-up) in computing goodwill should be:

A. P260,000
B. P268,000
C. P276,000
D. P280,000

46. Using the same information above, the amount of current liabilities should be:

A. P100,000
B. P92,000
C. P80,000
D. P60,000

47. Using the same information above, the amount of non-current liabilities should be:

A. P220,000
B. P208,000
C. P 180,000
D. P 100,000

48. Using the same information in above, the amount of stockholders’ equity using proportionate
(partial goodwill) basis to determine non-controlling interest should be:

A. P 160,000
B. P 186,000
C. P 190,000
D. P 260,000

49. Using the same information above, the amount of stockholders’ equity using full fair value
(full/gross-up goodwill) basis to determine non-controlling interest should be:

A. P160,000
B. P186,000
C. P190,000
D. P260,000
 P a g e | 15

50. A business combination may be legally structured as a merger, a consolidation, an

investment in stock, or a direct acquisition of assets. Which of the following describes a
business combination that is legally structured as a merger?
A. The surviving company is one of the two combining companies
B. The surviving company is neither of the two combining companies.
C. An investor-investee is established.
D. A parent-subsidiary relationship is established.

51. Pangasinan Co. acquired 80% of the Ilocos Co. for a consideration transferred of
P100,000,000. The consideration was estimated to include a control premium of
P24,000,000. Ilocos net assets were P85,000,000 at the acquisition date. Are the following
statements TRUE or FALSE, according to IFRS 3, Business Combination?

A. Goodwill should be measured at P32,000,000 if the non-controlling interest is

measured at its share of Ilocos net assets.
B. Goodwill should be measured at P34,000,000 if the non-controlling interest is
measured at fair value.

Statement (1) Statement (2)

A. False False
B. False True
C. True False
D. True True

52. Should the following costs be included in the consideration transferred in a business
combination, according to IFRS 3, Business Combination?
1. Costs of maintaining an acquisitions department.
2. Fees paid to accountants to effect the combination.

Costs (1) Costs (2)

A. No No
B. No Yes
C. Yes No
D. Yes Yes

53. Which of the following costs should be capitalized and amortized over their estimated useful
lives?

Costs of goodwill from purchase Costs of developing goodwill

business combination internally
A. No No
B. Yes No
C. No Yes
D. Yes Yes
 P a g e | 16

54. In a purchase business combination, the direct acquisition, indirect acquisition, and security
issuance costs are accounted for as follows:

Direct acquisition Indirect acquisition Security Issuance

A. Added to price paid Added to price paid Added to price paid
B. Added to price paid Expensed Deducted from value of security issued
C. Expensed Expensed Deducted from value of security issued
D. Expensed Expensed Expensed

55. Philippine Co. acquired 100% of the outstanding common stock of Star Co. in a purchase
transaction. The cost of acquisition exceeded the fair value of the identifiable net assets and
assumed liabilities. The general guidelines for assigning amounts to the inventories acquired
provide for:
A. Raw materials to be valued at original cost.
B. Work in process to be valued at the estimated selling prices of finished goods, less
both costs to complete and costs of disposal.
C. Finished goods to be valued at replacement cost.
D. Finished goods to be valued at estimated selling prices, less both costs of disposal
and a reasonable profit allowance.

56. In a business combination, an acquirer’s interest in the fair value of the net assets acquired
exceeds the consideration transferred in the combination. Under IFRS 3, Business
Combination, the acquirer should
A. Recognize the excess immediately in profit or loss
B. Recognize the excess immediately in other comprehensive income
C. Reassess the recognition and measurement of the net assets acquired and the
consideration transferred, then recognize any excess immediately in profit or
loss.
D. Reassess the recognition and measurement of the net assets acquired and the
consideration transferred, then recognize any excess immediately in other
comprehensive income.

57. Star Corporation, operates a number of branches in Pangasinan. On June 30, 20x9, its
Lingayen branch showed a Home Office account balance of P27,350 and the Home Office
books showed a Lingayen branch account balance of P25,550. The following information
may help in reconciling both accounts:

1. A P12,000 shipment, charged by Home Office to Lingayen branch, was actually sent
to and retained by Bugallon branch.
2. A P15,000 shipment, intended and charged to Binmaley branch was shipped to
Lingayen branch and retain by the latter.
3. A P2,000 emergency cash transfer from Bugallon branch was not taken up in the
Home Office books.
4. Home Office collects Lingayen branch accounts receivable of P3,600 and fails to
notify the branch.
5. Home Office was charged for P1,200 for merchandise returned by Lingayen branch
on June 28. The merchandise is in transit.
 P a g e | 17

Home office erroneously recorded Lingayen’s net income for May, 20x9 at P16,275. The
branch reported a net income of P12,675.

What is the reconciled amount of the Home Office and Lingayen branch reciprocal accounts?
A. P21,750
B. P23,750
C. P27,350
D. P20,150

Use the following information for the next two questions:

On December 31, 2009, the Investment in Branch account on the home office’s books has a
balance of P102,000. In analyzing the activity in each of these accounts for December, you
find the following differences:

1. A P12,000 branch remittance to the home office initiated on December 27, 2009, was
recorded on the home office books on January 3, 2010.
2. A home office inventory shipment to the branch on December 28, 2009, was recorded
by the branch on January 4, 2010; the billing of P24,000 was at cost.
3. The home office incurred P14,400 of advertising expenses and allocated P6,000 of
this amount to the branch on December 15, 2009. The branch has not recorded this
transaction.
4. A branch customer erroneously remitted P3,600 to the home office. The home office
recorded this cash collection on December on December 23, 2009. Meanwhile, back
at the branch, no entry has been made yet.
5. Inventory costing P51,600 was sent to the branch by the home office on December
10, 2009. The billing was at cost, but the branch recorded the transaction at P40,800.

58. The Unadjusted Balance of the Home Office account as of December 31, 2009 is:
A. P 76,800
B. P 52,800
C. P151,200
D. P 52,000

59. The Adjusted Balance of the Reciprocal account as of December 31, 2009 is:
A. P114,000
B. P 93,600
C. P139,200
D. P 90,000
 P a g e | 18

Use the following information for the next two questions:

Gold Enterprises operates a branch in Dagupan City. At close of business on December 31,
2009, Dagupan Branch account in the home office books showed a debit balance of
P225,770. The interoffice accounts were in agreement at the beginning of the year. For
purposes of reconciling the interoffice accounts, the following facts were ascertained:

1. An office equipment costing the home office P3,500 was picked up by the branch as
P350.
2. Insurance premium of P675 charged by the home office was taken up twice by the
branch.
3. Freight charge on merchandise made by the home office for P1,125 was recorded in
the branch books as P1,215.
4. Home office credit memo representing a discount on merchandise for P800 was not
recorded by the branch.
5. The branch failed to take up a P700 debit memo from the home office representing
the share of the branch in advertising.
6. The home office inadvertently recorded a remittance for P3,000 from its Dau branch
as a remittance from its Dagupan branch.

60. The Unadjusted Balance of the Home Office account as of December 31, 2009 is:
A. P226,485
B. P228,485
C. P225,770
D. P226,400

61. The Adjusted Balance of the reciprocal account

A. P225,770
B. P228,770
C. P226,485
D. P228,000
 P a g e | 19

62. On December 31, 2009, the following data are in the records of the Dau branch of the Den
Co.:

Petty Cash P 94,500

Accounts Receivable, Dec. 31, 2008 85,200
Merchandise Inventory, Dec. 31, 2008 75,500
Accounts Receivable, Dec 31, 2009 88,800
Merchandise Inventory, Dec. 31, 2009 81,000
Sales 272,700
Sales returns
4,800
Accounts receivable written off 2,000
Shipments from Home Office 220,600
Expenses (paid by Home Office) 22,500

If all cash collections in 2009 were remitted to Home Office, the total remittance amounted
to:
A. P262,300
B. P266,800
C. P264,300
D. P267,100

63. A branch store in Dagupan was established by Mark Company on March1. Merchandise was
billed to the branch at 125% of cost. Shipments of merchandise were as follows:

March 5 P120,000 (at billed price)

March 10 50,000 (at billed price)
March 20 35,000 (at billed price)

On March 22, the branch returned defective merchandise worth P3,050. On March 31, the
branch reported a net loss of (P6,200) and merchandise inventory of P85,000.

In the home office books, the cost of merchandise sold by branch was
A. P161,560
B. P 93,560
C. P116,950
D. P161,950
 P a g e | 20

Use the following information for next two questions:

The Urdaneta branch of Panasinan Products, Inc. buys merchandise from third parties and
receives merchandise from the home office for which it is billed at 20% above cost.
Below are excerpts from the trial balances and data on the home office and Urdaneta
branch for the month just ended:

Home Office Books:

Cr. Allowance for overvaluation of branch merchandise P 740,000
Cr. Shipment to branch 1,700,000

Branch Books:
Dr. Beginning inventory P2,880,000
Shipments from home office 2,040,000
Purchases 820,000

Month-end additional data:

Ending inventory of branch P2,920,000
From home office at BP 2,340,000
From outsiders, at cost 580,000

For the month just ended:

64. Total cost of goods sold Urdaneta Branch At cost (net of overvaluation)
A. P2,820,000
B. P2,400,000
C. P2,770,000
D. P2,470,000

65. Amount of allowance for overvaluation that was realized from branch sales
A. P400,000
B. P350,000
C. P740,000
D. P390,000
 P a g e | 21

Use the following information for the next two questions:

Lovely, Philippines has two merchandise outlets, its main store in Manila and its Dagupan
City branch. For control purposes, all purchases are made by the main store, and shipments
to the Dagupan City branch are at cost plus 10%. On January 1, 2009, the inventories of the
main store and the Dagupan City branch were P13,600 and P3,960, respectively. During
2009, the main store purchased merchandise costing P40,000 and shipped 40% of these to
the Dagupan City branch.

At December 31, 2009, the following journal entry was made to prepare the Dagupan City
branch for the next accounting period:

Sales 32,000
Inventory 4,840
Inventory 3,960
Shipments from main store 17,600
Expenses 10,480
Main store 4,800

66. What was the actual branch income of 2009 on cost basis, assuming the use of the provisions
of the PAS?
A. P4,800
B. P6,320
C. P6,000
D. P6,480

67. If the main store has P11,200 worth of inventory on hand at the end of 2009, the total
inventory that should appear on the combined balance sheet at December 31, 2009 is:
A. P15,600
B. P15,160
C. P15,000
D. P16,040
 P a g e | 22

68. Lady Company had an agency in Rosales. For the period just ended, the agency transactions
showed the following:

Receipt from sales P350,000

Disbursements:
Purchases 400,000
Salaries and commissions 70,000
Rent 20,000
Advertising supplies 10,000
Other expenses 5,000

The agency had P100,000 receivables andP50,000 payables as of the end of the period. Also,
they were inventories on hand of P90,000 and unused advertising supplies of P6,000. The
agency was set up as an experiment for one period and would be closed if losses were
incurred. The agency should:
A. Review again because it was a break even operation.
B. Close with the period’s operational loss of P155,000.
C. Close with the period’s operational loss of P9,000.
D. Continue with the period’s profit of P25,000.

69. Matt Textile Company has a single branch in Baguio. On March 1, 2009, the home office
accounting records included an Allowance for Overvaluation of Inventories – Baguio Branch
ledger accountwith a credit balance of P32,000. During March, merchandise costing P36,000
was shipped to the Baguio Branch and billed at a price representing a 40% markup on the
billed price. On March 31, 2009, the branch prepared an income statement indicating a net
loss of P11,500 for March and ending inventories at billed prices of P25,000.

What is the amount of adjustment for Allowance for Overvaluation of Inventories to reflect
the true branch net income?
A. P39,257 debit
B. P46,000 credit
C. P39,333 debit
D. P46,000 debit

70. Mark Company opened its Mangaldan Branch on January 1. Merchandise shipments from
home office during the month, billed at 120% of cost, is P125,000. Branch returned
damaged merchandise worth P15,620. On January 31, the branch reported a net loss of
P2,270 and an inventory of P84,000.

What is the net income (loss) of the branch to be taken up in the books of the Home Office?
A. (P1,690)
B. P6,500
C. (P2,270)
D. P1,960

71. Rupert Corporation established its Binalonan branch in January 2009. During its first year of
 P a g e | 23

operations, home office shipped to its Binalonan branch merchandise worth P130,000 which
included a markup of 15% on cost. Sales on account totaled P250,000 while cash sales
amounted to P80,000. Binalonan reported operating expenses of P38,000 and ending
inventory of P15,000, at billed price.

In so far as the home office is concerned, the real net income of Binalonan is:
A. P177,000
B. P 82,000
C. P147,000
D. P192,000

72. The SEC requires the use of push-down accounting in some specific situations. Push-down
accounting results in:
A. goodwill be recorded in the parent company separate accounts.
B. eliminating subsidiary retained earnings and paid-in capital in excess of par.
C. reflecting fair values on the subsidiary's separate accounts.
D. changing the consolidation worksheet procedure because no adjustment is necessary
to eliminate the investment in subsidiary account.

73. Manet Corporation exchanges 150,000 shares of newly issued $1 par value common stock with a fair
market value of $25 per share for all of the outstanding $5 par value common stock of Gardner Inc and
Gardner is then dissolved. Manet paid the following costs and expenses related to the business
combination:

Costs of special shareholders’ meeting to vote on the merger $13,000

Registering and issuing securities 14,000

Accounting and legal fees 9,000

Salaries of Manet’s employees assigned to the merger 15,000

Cost of closing duplicate facilities 11,000

In the business combination of Manet and Gardner

A. all of the items listed above are treated as expenses.

B. all of the items listed above except the cost of registering and issuing the securities and accounting
and legal fees are expensed.
C. the costs of registering and issuing the securities are deducted from the fair market value of
the common stock used to acquire Gardner.
D. only the costs of closing duplicate facilities, the salaries of Manet's employees assigned to the
merger, and the costs of the shareholders' meeting would be treated as expenses

74. Separately identified intangible assets are accounted for by amortizing:

A. exclusively by using impairment testing.
B. based upon a pattern that reflects the benefits conveyed by the asset.
C. over the useful economic life less residual value using only the straight-line method.
D. amortizing over a period not to exceed a maximum of 40 years.
75. Goodwill represents the excess cost of an acquisition over the
A. sum of the fair values assigned to intangible assets less liabilities assumed.
 P a g e | 24

B. sum of the fair values assigned to tangible and intangible assets acquired less liabilities
assumed.
C. sum of the fair values assigned to intangibles acquired less liabilities assumed.
D. book value of an acquired company.
76. An economic advantage of a business combination includes
A. Utilizing duplicative assets.
B. Creating separate management teams.
C. Coordinated marketing campaigns.
D. Horizontally combining levels within the marketing chain

77. Paro Company purchased 80% of the voting common stock of Sabon Company for $900,000. There are no
liabilities. The following book and fair values are available:
Book Value Fair Value
Current assets...................... $100,000 $200,000
Land and building................... 200,000 200,000
Machinery........................... 300,000 600,000
Goodwill............................ 100,000 ?

Using the parent company concept, the machinery will appear on the consolidated balance sheet at
__________.
A. $600,000
B. $540,000
C. $480,000
D. $300,000

78. On April 1, 20x0, Carlo Corp. paid cash of P620,000 for all of the net assets of John
Company appropriately accounted for as a merger. The recorded assets and liabilities of John
Corporation on April 5, 20x0 follow:

Cash P 60,000
Inventory 180,000
Property, plant and equipment (net of acc. depreciation of P220,000) 320,000
Goodwill (net of accumulated amortization of P50,000) 100,000
Liabilities (120,000)
Net assets P540,000

On April 1, 20x0, John’s inventory had a fair value of P150,000, and the property, plant and
equipment (net) had a fair value of P380,000. The amount of goodwill recorded in the books
of Carlo as a result of the business combination should be:

A. P150,000 C. P50,000
B. P120,000 D. P 0
 P a g e | 25

79. On June 30, 2010, Moon Corporation purchased for cash at P10 per share all 100,000 shares
of the outstanding common stock of the River Company. The total fair value of all
identifiable net assets of River was P1,400,000. The only noncurrent asset is property with a
fair value of P350,000. The consolidated balance sheet of Moon and its wholly owned
subsidiary on June 30, 2010, should report:

A. A retained earnings balance that is inclusive of a gain of P400,000

B. Goodwill of P400,000
C. A retained earnings balance that is inclusive of a gain of P350,000
D. A gain of P400,000

80. Mark acquired 70% of the net assets of Ray for P1.1 million. The assets of Ray have a book
value of 1.2 million and a fair market value of P1.3 million; its liabilities are P.2 million.

What is the amount of “excess of cost over book value of subsidiary” on the consolidated
balance sheet?

A. P0 million C. P.2 million

B. P.1 million D. P.4 million

Prepared by:
____________________________
KIM JOSEPH B. VISPERAS, CPA
Instructor

Noted by:
____________________________
DANIEL T. GONZALES, CPA, MDM
Dean, SBA