PRELIMINARY EXAMINATION - BUSINESS COMBINATION

01. 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 company.
c. An investor-investee relationship is established.
d. A parent-subsidiary relationship is established.

02. Company P acquired the net assets of Company S in exchange for cash. The price paid
exceeds the fair value of the net assets acquired. How should Company P determine the
amounts to be reported for the plant and equipment and for long-term debt of the acquired
Company S?
Plant and Equipment Long-term Debt
a. Fair value S’s carrying amount
b. Fair value Fair value
c. S’s carrying amount Fair value
d. S’s carrying amount S’s carrying amount

03. In a business combination, the direct acquisition, indirect acquisition and stock issue costs are
accounted for as follows:
Direct Acquisition Indirect Acquisition Stock Issue Costs
a. Added to price paid Added to price paid Added to price paid
b. Added to price paid Expensed Deducted from share premium
c. Expensed Expensed Deducted from share
premium
d. Expensed Expensed Expensed

04. A business combination is accounted for as a purchase. Which of the following expenses
related to the business combination should be included, in total, in the determination of net
profit of the combined company for the period in which the expenses are incurred?
Fees of finders and consultants Registration fee for stock issued
a. Yes Yes
b. Yes No
c. No Yes
d. No No

05. The term “control” means ownership, directly or indirectly through subsidiaries of
a. More than one-half of the outstanding voting stock of another company.
b. At least 20% of the voting stock of another company.
c. At least 50% of the voting stock of another company.
d. At least 10% of the voting stock of another company.

06. A “group” for consolidation purposes is

a. A parent and all its subsidiaries.
b. An entity that has one or more subsidiaries.
c. An entity, including an unincorporated entity such as partnership that is controlled by
another entity.
d. An entity that obtains control over entities or business.

07. It is that portion of the profit or loss and net assets of a subsidiary attributable to equity
interest that are not owned directly or indirectly through subsidiaries by the parent.
a. Non-controlling interest c. Residual interest
b. Controlling interest d. Subsidiary interest

08. It is the entity that has the controlling financial interest.

a. Investor b. Parent c. Associated. d. Affiliate

09. A subsidiary, acquired for cash in a business combination, owned inventories with a market
value greater than the book value as of the date of combination. A consolidated statement of
financial position immediately after the acquisition would include this difference as part of
 a. Deferred credits c. Inventories
b. Goodwill d. Retained earnings
10. The National Company acquired 80% of the Local Company for a consideration transferred of
P100,000,000. The acquisition was estimated to include a control premium of P24,000,000.
Local’s net assets were P85,000,000 at the acquisition date. Are the following statements
TRUE or FALSE, according to IFRS 3?

Statement 1 – Goodwill should be measured at P32,000,000 if the non-controlling interest is

measured at its share of Local’s net assets.

Statement 2 – 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

11. When PPI Company acquired SSI Corporation’s net assets by issuing its own capital stock,
it had the following expenditures:
Broker’s fee P50,000
Pre-acquisition audit fee 40,000
Legal fees for merger agreement 47,000
Audit fee for SEC registration of stock issue 46,000
Printing of stock certificates 11,000

Under PFRS-3, the expenditures that should be debited to share premium account os
a. P57,000 b. P137,000 c. P0 d. P46,000

12. Philip Company will issue shares of its P10 par value stock for all of the outstanding stock of the
Siylay Company. Philip Company stock has a market value of P40 per share. Siylay Company’s
statement of financial position appears below:

Current assets P160,000 Current liabilities P 50,000

Property, plant and equipment 440,000 Long-term debt 150,000
Ordinary share, P4 par 40,000
Share premium 160,000
_ Retained earnings 200,000
Total P600,000 P600,000
======= =======
Philip Company estimated that the fair value of the current assets would be P200,000 and the
property, plant and equipment, P800,000; the liabilities were correctly stated. Accordingly, Philip
Company issued sufficient shares of its stock so that the market value of the stock issued equaled
the market value of Siylay Company’s net assets. Compute the stock exchange ratio for Philip
shares to Siylay shares:
a. 1 to 2 b. 2 to 1 c. 3 to 1 d. 1 to 3

13. The statement of financial position of Puree Corporation and Saline Company on December 31,
2021, are given below:
Puree Saline
Corporation Company

Cash and cash equivalents P 70,000 P 90,000

Inventory 100,000 60,000
Property and equipment (net) 500,000 250,000
Investment in Saline Company 260,000 -
Total Assets P930,000 P400,000
======= =======
Current liabilities P180,000 P 60,000
Long-term liabilities 200,000 90,000
Ordinary shares 300,000 100,000
Retained earnings 250,000 150,000
 Total Liabilities and Equity P930,000 P400,000
====== =======
Puree Corporation purchased 80% ownership of Saline Company on December 31, 2021, for
P260,000. The property and equipment of the acquired company had a fair value of P50,000 more
than the book value. All other book values approximated fair value. In the consolidated statement
of financial position on December 31, 2012:

How much goodwill (gain) is to be recognized at the time of acquisition of Saline Company?
a. P25,000 b. (P25,000) c. P75,000 d. (P75,000)

14. Using the same data in no. 13, what amount of total shareholders’ equity will be reported?
a. P550,000 b. P615,000 c. P750,000 d. P800,000

15. Using the same data in no. 13, what amount of non-controlling interest will be reported?
a. P65,000 b. P60,000 c. P110,000 d. P160,000

16. Using the same data in no. 13, what amount of total assets will be reported?
a. P1,330,000 b. P1,095,000 c. P1,120,000 d. P1,145,000

17. The condensed statement of financial position of Popper Corporation and Swatter Company
as of October 31, 2021 are presented below:
Popper Swatter
Assets P3,800,000 P850,000
======== =======

Liabilities P1,350,000 P250,000

Ordinary shares, P100 par 1,500,000 500,000
Retained earnings 950,000 100,000
Total P3,800,000 P850,000
======== =======
On October 31, 2021, Popper Corporation acquired 4,000 shares of Swatter Company at
P520,000. The market price of the 1,000 shares of Swatter on October 31, 2021 is P140
per share. In the consolidated statement of financial position on October 31, 2021, total
assets are to be reported at
a. P4,170,000 b. P4,190,000 c. P4,562,000 d. P4,652,000

18. On April 1, 2021, Parent Company acquired 90% of Subsidiary Company in exchange for
5,400 shares of P10 par ordinary shares having a market value of P120,000. Parent and
Subsidiary condensed statement of financial position prior to combination to combination
were as follows:
Parent Subsidiary
Assets
Cash P 30,900 P 37,400
Accounts receivable (net) 34,200 9,100
Inventories 22,900 16,100
Equipment (net) 179,000 40,000
Patents - 10,000
Total Assets P267,000 P112,600
======= =======
Liabilities & Equity
Accounts payable P 4,000 P 6,600
10% Bonds payable 100,000 -
Ordinary shares 100,000 50,000
Share premium 15,000 15,000
Retained earnings 48,000 41,000
Total Liabilities & Equity P267,000 P112,600
======= =======
At the date of acquisition, all assets and liabilities of Subsidiary Company have book values
approximately equal to their respective market values except the following as
determined by appraisal as follows:
Inventories P17,100
Equipment (net – remaining life – 4 years) 48,000
 Patents (remaining life – 10 years) 13,000

Compute the non-controlling interests (in net assets) on April 1, 2017

a. P10,600 b. P11,200 c. P11,800 d. P13,090

19. Using the same information in no. 18, compute the consolidated retained earnings on
April 1, 2021.
a. P48,000 b. P52,000 c. P84,900 d. P89,000

20. SMIC Corporation issued 120,000 shares of P10vpar value ordinary shares with a fair value of
P2,550,000 for all the outstanding shares of Lindale Company. In addition, SMIC incurred the
following costs:
Professional fees to arrange the business combination P27,000
Cost of SEC registration on shares to be issued 12,000
Cost of printing and issuing shares certificates 3,000

Immediately before the business combination in which Lindale was dissolved, its assets and
equities were as follows:
Carrying Value Fair Value
Current assets P1,000,000 P1,100,000
Plant assets 1,500,000 2,200,000
Liabilities 300,000 300,000
Ordinary shares 2,000,000
Retained earnings 200,000

How much share premium is to be recorded by SMIC at the time of business combination?
a. P1,350,000 b. P1,335,000 c. P1,365,000 d. P1,330,000