University of Nueva Caceres

College of Business and Accountancy

BS Accountancy
Qualifying Examination
ACCOUNTING FOR BUSINESS COMBINATION
General instructions: Choose the correct answer.
Theory (18 points)
1. Which of the following demonstrate a full asset acquisition that will result in a recognition of
goodwill? (Easy)
a. A company acquired several assets from a liquidating company at fair values.
b. A company acquired 80% of outstanding shares of a continuing company at fair
values.
c. A company acquired all the assets of a continuing company at fair values.
d. A company acquired several assets from a continuing company at fair values.
2. On January 1, 2014, Jameson Company owned 15% in Gerald Company. On December 31,
2021, Jameson Company acquired another 15% share from Gerald Company. On January 1,
2023, the total ownership of Jameson Company in Gerald Company became 85%. When did
Jameson Company acquire control of Gerald Company? (Easy)
a. January 1, 2014
b. December 31, 2021
c. January 1, 2023
d. December 31, 2030
3. In the same situation in number 2, how should Jameson Company measure its 15%, 30%, and
85% investments, respectively? (Easy)
15% 30% 85%

a Fair value/cost Fair value/equity Fair value/equity

method/cost method/cost

b Fair value Equity method/cost Equity method/cost

c Fair value Fair value/equity Fair value/equity

method/cost method/cost

d Fair value/cost Equity method/cost Equity method/cost

4. Which of the following direct costs are deducted from the share premium? (Easy)
a. Finder’s fee
b. Professional fees
c. Maintenance
d. Cost of stock certificates
5. Which of the following is the best example of indirect quotation? (Easy)
a. P1:$0.03
b. P45:$1
c. P0:$0
d. P10:$10
6. These are money held and items to be received or paid in fixed or determinable amounts of
money? (Easy)
 a. Financial assets
b. Monetary assets
c. Money matters
d. Monetary items
7. Which of the following situations requires the use of the current rate method? (Average)
a. Mary Inc., a subsidiary of Philippine company, Alena Inc., operates in Canada during
March. Mary’s shares are traded in the Philippine stock exchange.
b. Aila Sales Outlet is a branch of a Philippine company, Eurlyn Inc. is operating in
China. The branch was established there to operate for 15 years.
c. Francisco Inc. is a Japanese company established on June 3, 1990 and its shares are
traded in Japanese stock exchange. Irlanda Inc. is a Philippine company established
on November 21, 2009 and it is registered in the Philippine Securities and Exchange
Commission. On October 4, 2014, Irlanda acquired all outstanding shares of
Francisco. Francisco sales and expenses are primarily affected by its local currency.
d. Roxanne Inc. is a Japanese company established on June 3, 1990 and its shares are
traded in Japanese stock exchange. Pamela Inc. is a Philippine company established
on November 21, 2009 and it is registered in the Philippine Securities and Exchange
Commission. On October 4, 2014, Roxanne acquired all outstanding shares of
Pamela. Due to the merger, Pamela is now only affected by its Japanese transactions.
8. Which of the following situations requires the use of the temporal method? (Average)
a. Mary Inc., a subsidiary of Philippine company Alena Inc., operates in Canada during
March. Mary’s shares are traded in the Philippine stock exchange.
b. Aila Sales Outlet is a branch of a Philippine company, Eurlyn Inc. is operating in
China. The branch was established there to operate for 15 years.
c. Francisco Inc. is a Japanese company established on June 3, 1990 and its shares are
traded in Japanese stock exchange. Irlanda Inc. is a Philippine company established
on November 21, 2009 and it is registered in the Philippine Securities and Exchange
Commission. On October 4, 2014, Irlanda acquired all outstanding shares of
Francisco. Francisco sales and expenses are primarily affected by its local currency.
d. Roxanne Inc. is a Japanese company established on June 3, 1990 and its shares are
traded in Japanese stock exchange. Pamela Inc. is a Philippine company established
on November 21, 2009 and it is registered in the Philippine Securities and Exchange
Commission. On October 4, 2014, Roxanne acquired all outstanding shares of
Pamela. Due to the merger, Pamela is now only affected by its Japanese transactions.
9. Which of the following situations would a company use a FX hedge contract? (Average)
a. A Philippine company purchased products from a foreign company and paid the
consideration on the same date.
b. A Philippine company sold products from a foreign company and paid the
consideration on the same date.
c. An increase in the denomination of pesos required for one foreign currency in relation
to the export of a Philippine company.
d. An increase in the denomination of pesos required for one foreign currency in relation
to the import of a Philippine company.
10. Consolidated financial statements are typically prepared when one entity has controlling
interest in another unless? (Average)
a. The subsidiary is a finance entity
b. The fiscal-year ends of two entities are more than three months apart
c. The investee is in bankruptcy
 d. The two entities are unrelated activities such as manufacturing and real estate.
11. A contingent liability assumed in a business combination is recognized? (Average)
a. If it is a present obligation arising from past events
b. If its fair value can be measured reliably
c. If it has an improbable outflow of resources embodying economic benefits
d. All of the above
12. Johanna Inc. is a wholly owned company of Mae Inc. On December 31, 2022, Johanna sold
Mae a fixed asset that Mae will use over a 5-year period. The asset was sold at a P5,000
profit. In the consolidated FS, this profit will? (Average)
a. Not be recorded
b. Be recognized over 5 years
c. Be recognized when the asset is resold to outsider at the end of its period of use
d. Be recognized in the year of sale
13. Under IAS 29, when should an entity recognize the effects of hyperinflation in its financial
statements? (Average)
a. When the cumulative inflation rate over three years exceeds 100%.
b. When the general price level increases by 10% or more in a single year.
c. When the entity's functional currency is different from the reporting currency.
d. When management considers the economy to be hyperinflationary.
14. According to IAS 29, how should an entity account for the effect of inflation on its financial
statements? (Average)
a. By restating all non-monetary items using the general price index.
b. By restating all monetary items using the general price index.
c. By restating all items in the financial statements using the consumer price index.
d. By restating all items in the financial statements using an appropriate price index.
15. Which of the following statements is true regarding the recognition of restructuring provisions
in a business combination? (Average)
a. Restructuring provisions are recognized at fair value at the acquisition date if they
meet the definition of a liability.
b. Restructuring provisions are recognized as contingent liabilities and disclosed in the
notes to the financial statements.
c. Restructuring provisions are recognized as part of goodwill and not separately
recognized.
d. Restructuring provisions are recognized if the conditions for recognition are met,
regardless of the timing.
16. When determining whether an investor has control over an investee under IFRS 10, which of
the following factors is not considered in the assessment? (Average)
a. Voting rights held by the investor.
b. The power to direct the activities of the investee that significantly impact its returns.
c. The potential voting rights that could be acquired by the investor.
d. The financial interest held by the investor.
17. When an entity prepares its financial statements in a currency other than its functional
currency, what is the impact on the financial statements? (Average)
a. The functional currency is used for all financial statement line items.
b. The exchange rate used for translation may affect reported amounts.
c. There is no impact on the financial statements.
d. The presentation currency must match the functional currency.
 18. Which of the following is a primary factor to consider when determining the functional
currency of an entity under IFRS? (Average)
a. The currency preferred by the majority of shareholders.
b. The currency used for day-to-day transactions.
c. The currency in which financing was obtained.
d. The currency of the country where the entity is incorporated.
Practicals (12 points)
In items 19-20: CRLN owns 80% of DLR’s common stock that was acquired at its underlying book
value. The two companies report the following information for 2021 and 2022:
2021 CRLN DLR

Sales P600,000 P320,000

Cost of sales 320,000 155,000

Operating expenses 100,000 89,000

Dividends paid 19,000 0

2022

Sales P580,000 P445,000

Cost of sales 300,000 180,000

Operating expenses 130,000 171,000

Dividends paid 16,000 5,000

19. If the sale is a downstream sale, how much should be eliminated from the inventory account
in order to reflect the correct balance as of the end of 2021? (Average)
a. P3,000
b. P10,000
c. P14,000
d. P20,000
20. If the sale is an upstream sale, how much should be the sale for the year ended 2022??
(Average)
a. P1,025,000
b. P1,900,000
c. P1,950,000
d. P2,000,000
21. Philip Inc. purchased a delivery truck with an expected useful life of 5 years on January 1,
2023. On January 1, 2025, Philip sold the truck to Nora Corporation and recorded the
following entry:
Cash P50,000
Accumulated depreciation 18,000
Truck P53,000
Gain on sale 15,000
Nora holds 60% of Philip. Philip reported net income of P55,000 in 2025 and Nora’s separate
net income excluding interest in Philip was P98,000 for the same year. Non-controlling
interest in consolidated net income for 2025 was? (Average)
 a. P18,000
b. P22,000
c. P23,000
d. P27,000
In items 22-24: Justin Dominic Inc. acquired the assets and liabilities of Jefferson Corp. on September
30, 2022, in a statutory merger. The acquisition involves the following payments:
Cash paid to Jefferson P85,000,000

Cash paid to SGV for consulting services 12,000,000

New stock issued, 100,000 shares, P0.50, fair value at acquisition 5,000,000

Stock registration fees, paid in cash 600,000

Earnings contingency, to be paid in three years, present value 2,000,000

Justin Dominic and Jefferson’s balance sheets just prior to the acquisition are provided below:
Justin Dominic Jefferson

Book value Book value Fair value

Current assets P105,000,000 P1,000,000 P800,000

PPE, net 40,000,000 41,000,000 10,000,000

Patents and trademarks 5,000,000 3,400,000 20,000,000

Current liabilities 1,000,000 400,000 400,000

Non-current liabilities 10,000,000 40,000,000 41,000,000

Ordinary shares, par value 77,200,000 500,000

Share premium 36,200,000 8,500,000

Retained earnings 20,800,000 (2,000,000)

Accumulated OCI 5,500,000 (1,400,000)

Treasury shares (700,000) (600,000)

In addition to the assets reported on Jefferson’s balance sheet, the following previously unreported
intangible assets are identified:
Fair value

Franchise rights P5,000,000

Signed customer’s contracts for consulting projects 1,000,000

Technically skilled workforce 15,000,000

Internet domain names 3,000,000

Expected expansion into new product lines 5,000,000

Customer order backlogs 1,500,000

Employment contracts 500,000

Registered company name 1,000,000

Business from prospective customers 700,000

Potential contracts with prospective customers 300,000

Well-publicized internet domain name 2,000,000

Trade dress 1,200,000

Proprietary data bases of industry data 800,000

Trade secrets 400,000

22. The total assets of Justin Dominic on September 30, 2022: (Difficult)
a. P185,800,000
b. P190,800,000
c. P191,800,000
d. None of the above
23. The total liabilities of Justin Dominic on September 30, 2022: (Average)
a. P13,000,000
b. P43,400,000
c. P54,400,000
d. None of the above
24. The total shareholders equity of Justin Dominic after acquisition: (Average)
a. P131,400,000
b. P139,000,000
c. P161,000,000
d. None of the above
25. Lea Corporation had a realized foreign exchange loss of P15,000 for the year ended
December 31, 2019 and must also determine whether the following items will require
year-end adjustment:
● Lea had an P8,000 loss resulting from the translation of the accounts of its wholly-
owned foreign subsidiary for the year ended December 31, 2019.
● Lea had an account payable to an unrelated foreign supplier payable in the supplier’s
local currency. The Philippine peso equivalent of the payable was P64,000 on the
October 31, 2014 invoice date, and it was P60,000 on December 31, 2019. The
invoice is payable on January 30, 2020.
In Lea’s 2019 consolidated income statement, what amount should be included as foreign
exchange loss? (Average)
a. P11,000
b. P15,000
c. P19,000
d. P23,000
26. On January 1, 2019, James Company acquired 80 percent ownership in Grygghnn Corp. for
P200,000. The fair value of the non-controlling interest at that time is determined to be
P50,000. It reports net assets with a book value of P200,000 and fair value of P230,000.
 James reports net assets with a book value of P600,000 and a fair value of P650,000 at that
time, excluding its investment in Grygghnn. What will be the amount of goodwill that would
be reported immediately after the combination under current accounting practice if the option
of full-goodwill method is used? (Average)
a. P50,000
b. P40,000
c. P30,000
d. P20,000
In items 27-28: Rosa Arch Inc. acquired 100% common stock of Daisy Co. on January 4, 2004. Rosa
Arch Inc. was organized on October 13, 1965 as a partnership, it was then registered in Philippine
SEC on January 1, 1990 and its shares have been traded in PSE since then. Daisy Co. was organized
and incorporated in the United States on January 1, 2001, before the acquisition, it sold products both
in the US and Korea. However, after the acquisition, Rosa Arch Inc. strategized that Daisy Co should
only sell its product in the US because Rosa Arch Inc. also has a company in Korea. The Korean
company was acquired on September 8, 2001 and was reorganized as Litonjua Inc. Although Litonjua
Inc. is a Korean company, its main line of business is mostly affected by Philippine peso due to the
fact that Rosa Arch Inc. strategized that it must import raw materials and export scrap materials from
and to the Philippines. Since acquisition, Litonjua Inc. was not able to produce good and quality
products and thus, was only able to sell scrap materials. The following are the concise and material
accounts produced by each company on December 31, 2019:
The figure is in thousands
Rosa Arch Daisy Litonjua

Cash ₱1,000 $22 ￦560

Receivables 4,470 247 1,670

Inventories, ending 2,350 100 890

PPE 8,700 907 3,450

Accumulated depreciation 2,340 245 1,450

Land 670 900 450

Accounts Payable 2,340 265 500

Employee benefits payable 456 89 678

Utilities payable 234 123 0

Bonds payable 5,000 500 0

Ordinary shares 700 450 900

Share premium 1,500 200 2,000

Retained earnings, beginning 3,120 100 492

Sales 6,670 1,250 5,180

Cost of sales 2,450 345 3,450

 Purchases 2,350 245 2,340

Depreciation expense 450 100 50

Employee’s benefit expense 1,340 107 100

Utilities expense 567 167

Interest expense 234 34

Income tax expense 129 200 240

Dividends declared 0 93 340

The following conversion rates are provided:
Average exchange rate P1:$0.0184 P22.08:W1

Historical exchange rate P1:$0.0196 P26:W1

Current exchange rate P1:$0.0178 P23.01:W1

Based on records, the beginning balance of retained earnings of Daisy is P5,000,000 in Philippine
peso and for Litonjua is P11,808,000.
27. How much is the foreign currency translation reserve gain in relation with the translation of
Daisy’s statement? Round-off the converted amount to the nearest thousand. (Difficult)
a. P4,000
b. P31,564,000
c. P4,036,000
d. (P4,000)
28. How much is the foreign currency translation reserve gain in relation with the translation of
Litonjua’s statement? Round-off the converted amount to the nearest thousand. (Difficult)
a. P5,000
b. (P5,000)
c. (P7,639,000)
d. P7,639,000
29. Baning, Inc. buys 60% of the outstanding stock of Gra, Inc. in an acquisition that resulted in
the acquisition of goodwill. Gra owns a piece of land that cost P200,000 but was worth
P500,000 at the acquisition date. What value should be attributed to this land in a
consolidated balance sheet at the date of takeover? (Average)
a. P120,000
b. P300,000
c. P380,000
d. P500,000
30. Seminarian, Inc. has 100,000 shares of P2 par value stock outstanding. Priests Corporation
acquired 30,000 shares of Seminarian’s shares on January 1, 2015 for P120,000 when
Seminarian’s net assets had a total fair value of P350,000. On July 1, 2018, Priests agreed to
buy an additional 60,000 shares of Seminarian from a single stockholder for P6 per share.
Although Seminarian’s shares were selling in the P5 range around July 1, 2018, Priests
forecasted that obtaining control of Seminarian would produce significant revenue synergies
to justify the premium price paid. If Seminarian’s net identifiable assets had a fair value of
 P500,000 on July 1, 2018, how much goodwill on full fair value basis should Priests report in
its post-combination consolidated balance sheet?
a. 0
b. P60,000
c. P90,000
d. P100,000
Nothing follows~~

Prepared by: James B. Cantorne

The questions are based on the following authors and reviewers, these are modified by the preparer:
1. Antonio Dayag
2. Angelito Punzalan
3. O. Ray Whittington
The questions are formed in parallel competency with the current preboard of the various review
centers and is answerable within 1 hour and 30 minutes. The following are coverage of this test:
1. Statutory Merger
2. Stock Acquisition
3. Elimination of Intercompany Sale of Inventory and PPE
4. Consolidation of FS
5. Foreign Currency Translation and Transaction
6. Foreign Currency Hedging