ACCOUNTING FOR BUSINESS COMBINATIONS

FINAL EXAMINATION

1. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities, and
contingent liabilities over cost” (i.e., 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.

2. The costs of issuing equity securities in a business combination are

a. expensed
b. treated as direct reduction in equity
c. included in the initial measurement of the credit to share capital account
d. b and c

3. Goodwill may be capitalized

a. only when it arises in a business combination.
b. only when it is created internally.
c. only when it is purchased
d. on any of these cases.

4. A contingent liability assumed in a business combination is recognized

a. if it is a present obligation that arises from past events and
b. if its fair value can be measured reliably.
c. even if it has an improbable outflow of resources embodying economic benefits.
d. All of these

5. The acquisition date is

a. the date on which the acquirer obtains control of the acquiree.
b. the opening date.
c. the date the acquirer transfers to the acquiree the consideration in a business combination.
d. any of these

6. On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc. for ₱2,000,000 cash. ABC Co. incurred
transaction costs of ₱100,000 in the business combination. ABC Co. elected to measure NCI at fair value.
An independent valuer assessed the NCI’s fair value at ₱1,080,000. The fair values of XYZ’s identifiable
assets and liabilities at the acquisition date were ₱6,000,000 and ₱3,500,000, respectively. How much is
the goodwill (gain on a bargain purchase)?
a. 500,000
b. (478,000)
c. (500,000)
d. 580,000

7. Contingent liabilities acquired in a business combination are initially recognized by the acquirer using the
provisions of which of the following standards?
a. PAS 37
b. PFRS 3
c. PFRS 37
d. PFRS 7
8. You are an accountant. Your client acquired another business in a business combination transaction during
the year. Your client asked you for an advice regarding the preparation of consolidated financial
statements. Your advice to your client would most likely be based on which of the following standards?
a. PFRS 3
b. PFRS 10
c. PAS 27
d. PAS 36

9. Goodwill acquired in a business combination is initially and subsequently measured using which of the
following standards?
Initial measurement Subsequent measurement
a. PFRS 3 PFRS 10
b. PAS 36 PFRS 3
c. PFRS 3 PAS 36
d. PFRS 3 PFRS 5

Use the following information for the next two questions:

Fact pattern
On January 1, 20x1, DIMINUTIVE Co. acquired all of the assets and assumed all of the liabilities of SMALL,
Inc. As of this date, the carrying amounts and fair values of the assets and liabilities of SMALL acquired by
DIMINUTIVE are shown below:

Carrying Fair
Assets amounts 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

On the negotiation for the business combination, DIMINUTIVE Co. incurred transaction costs amounting to
₱400,000 for legal, accounting, and consultancy fees.

10. Case #1: If DIMINUTIVE Co. paid ₱6,000,000 cash as consideration for the assets and liabilities of
SMALL, Inc., how much is the goodwill (gain on bargain purchase) on the business combination?
a. 1,200,000 b. 1,120,000 c. 1,280,000 d. 1,240,000

C
Solution:
Consideration transferred 6,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 6,000,000
Fair value of net identifiable assets acquired (4,720,000)
Goodwill 1,280,000
11. Case #2: If DIMINUTIVE Co. paid ₱4,000,000 cash as consideration for the assets and liabilities of
SMALL, Inc., how much is the goodwill (gain on bargain purchase) on the business combination?
a. (800,000) b. (720,000) c. (880,000) d. 1,200,000

B
Solution:
Consideration transferred 4,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired (4,720,000)
Gain on a bargain purchase (720,000)

12. 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 below:
Assets Carrying amounts Fair values
Cash 40,000 40,000
Receivables 2,760,000 1,480,000
Allowance for probable losses on receivables (400,000)
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) 1,600,000 1,800,000

In applying the recognition and measurement principles under PFRS 3, LITHE Co. has identified the following
unrecorded intangible assets:
Type of intangible asset Fair 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)?

a. 900,000 b. 600,000 c. 420,000 d. 1,680,000

B
Solution:
The fair value of net identifiable assets acquired is computed as follows:
Fair value of identifiable assets before recognition of
6,120,000
unrecorded assets, excluding recorded goodwill (6.2M – 80K)
Fair value of unrecorded identifiable intangible assets (all of
1,080,000
the items listed)
Total fair value of identifiable assets acquired 7,200,000
Fair value of liabilities assumed (1,800,000)
Fair value of net identifiable assets acquired 5,400,000

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred 6,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 6,000,000
Fair value of net identifiable assets acquired (5,400,000)
Goodwill 600,000

13. On January 1, 20x1, FORTITUDE Co. acquired 15% ownership interest in ENDURANCE, Inc. for
₱400,000. The investment was accounted for under PFRS 9. From 20x1 to the end of 20x3, FORTITUDE
recognized net fair value gains of ₱200,000.

On January 1, 20x4, FORTITUDE acquired additional 60% ownership interest in ENDURANCE, Inc. for
₱3,200,000. As of this date, FORTITUDE has identified the following:
a. The previously held 15% interest has a fair value of ₱720,000.
b. ENDURANCE’s net identifiable assets have a fair value of ₱4,000,000.
c. FORTITUDE elected to measure non-controlling interests at the non-controlling interest’s proportionate
share of ENDURANCE’s identifiable net assets.

The previously held interest was initially classified as FVPL. How much is the goodwill (gain on bargain
purchase)?
a. 200,000 b. 420,000 c. 920,000 d. 540,000

C
Solution:
Consideration transferred 3,200,000
Non-controlling interest in the acquiree (1M x 25%) 1,000,000
Previously held equity interest in the acquiree 720,000
Total 4,920,000
Fair value of net identifiable assets acquired (4,400,000)
Goodwill 920,000
14. 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 ₱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:
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 TRANSPARENT, to sell his major
holdings to DIAPHANOUS, DIAPHANOUS agreed to pay an additional ₱200,000 directly to Mr.
Numerix.
e. Included in the valuation of identifiable assets are inventories with fair value of ₱360,000. Ms. Vital
Statistix, a former major shareholder of TRANSPARENT, shall acquire title to the goods.

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

a. 1,680,000 b. 1,640,000 c. 1,760,000 d. 1,240,000

C
Solution:
The consideration transferred on the business combination is computed as follows:
Cash payment on business combination 4,000,000
Additional payment to subsidiary’s former owner 200,000
Consideration transferred on the business combination 4,200,000

The fair value of net identifiable assets acquired is computed as follows:

Fair value of identifiable assets 6,400,000
Fair value of inventory not transferred to DIAPHANOUS (360,000)
Adjusted fair value of identifiable assets acquired 6,040,000
Fair value of liabilities assumed (3,600,000)
Adjusted fair value of net identifiable assets acquired 2,440,000

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred 4,200,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,200,000
Fair value of net identifiable assets acquired (2,440,000)
Goodwill 1,760,000

15. 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
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 Entity
A 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
402,000 96,000
equity

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.

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

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

A Solution:
Entity A Entity B Consolidated
Cash in bank 12,000 6,000 18,000
Accounts rec. 36,000 14,400 50,400
Inventory 48,000 27,600 (48K + 37.2K) 85,200
Inv. in sub. 90,000 - eliminated -
Building, net 216,000 48,000 (216K + 57.6K) 273,600
Goodwill given 3,600
Total assets 402,000 96,000 430,800

Accounts payable 60,000 7,200 67,200

Share capital 204,000 60,000 parent's only 204,000
Share premium 78,000 - parent's only 78,000
Retained earnings 60,000 28,800 parent's only 60,000
NCI in net assets given 21,600
 Total liab. & equity 342,000 96,000 430,800

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

a. 330,800 c. 328,600
b. 340,800 d. 363,600

Use the following information for the next three questions:

On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. On this date, Piglet's net identifiable assets
have a carrying amount of ₱180,000, which approximates fair value.

In December 20x1, Piglet sold goods to Pig for ₱81,000. Piglet had marked up these goods by 50% based 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 1,000,000 720,000
Cost of sales (400,000) (300,000)
Gross profit 600,000 420,000
Distribution costs (200,000) (100,000)
Administrative costs (80,000) (45,000)
Profit before tax 320,000 275,000
Income tax expense (96,000) (95,000)
Profit after tax 224,000 180,000

All of Piglet’s income and expenses (including profit from intercompany sale) were earned and incurred
evenly during the year.

18. How much is the consolidated gross profit?

a. 689,000
b. 731,000
c. 798,000
d. 792,000

B Solution:

The intercompany sale transaction is upstream. The unrealized profit in ending inventory is computed as follows:

Sale price of intercompany sale 81,000

Cost of intercompany sale (₱81,000 ÷ 150%) (54,000)
Profit from intercompany sale 27,000
Multiply by: Unsold portion as of year-end 1/3
Unrealized gross profit 9,000

The consolidated sales and cost of sales are computed as follows:

Sales of Pig Co. 1,000,000
Sales of Piglet Co. from Sept. 1 to Dec. 31 only (₱720K x 4/12) 240,000
Less: Intercompany sales during the year (81,000)
Consolidated sales 1,159,000
 Cost of sales of Pig Co. 400,000
COS of Piglet Co. from Sept. 1 to Dec. 31 only (₱300K x 4/12) 100,000
Less: Intercompany sales during the year (81,000)
Add: Unrealized gross profit in ending inventory 9,000
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory -
Consolidated cost of sales 428,000

Consolidated gross profit (1,159,000 – 428,000) = 731,000

19. How much is the consolidated profit?

a. 275,000
b. 284,000
c. 295,000
d. 302,000

A Solution:
Parent Subsidiary Consolidated
a
Profits before adjustments 224,000 60,000 284,000
Consolidation adjustments:
Unrealized profit - (Reqmt. ‘a’) ( - ) (9,000) (9,000)
Net consolidation adjustments ( - ) (9,000) (9,000)
Profits before FVA 224,000 51,000 275,000
Depreciation of FVA ( - ) ( - ) ( - )
Consolidated profit 224,000 51,000 275,000
a
(₱180,000 x 4/12 = ₱60,000)

20. How much is the profit attributable to

Owners of the parent NCI
a. 262,000 13,000
b. 224,000 60,000
c. 262,250 12,750
d. 256,250 45,750

C Solution:

Owners of Consoli-
parent NCI dated
Pig's profit before FVA (Reqmt. ‘b’) 224,000 N/A 224,000
Share in Piglet’s profit before FVA (c) 38,250 12,750 51,000
Depreciation of FVA ( - ) ( - ) ( - )
Share in goodwill impairment ( - ) ( - ) ( - )
Totals 262,250 12,750 275,000

(c)
Shares in Piglet’s profit before FVA (Reqmt. ‘b’): (₱51K x 75%); (₱51K x 25%)

Consolidation begins from the date the investor obtains control of an investee. Thus, the consolidated profit
for the year includes Piglet’s results of operations from September 1 to December 31, 20x1 only (i.e., date of
acquisition to end of reporting period).

Use the following information for the next five questions:

On January 1, 20x1, Bass Co. issued equity instruments in exchange for 75% interest in Guitar Co. On
acquisition date, Bass Co. elected to measure non-controlling interest at fair value. Bass Co.’s management
believes that the fair value of the consideration transferred correlates to the fair value of the controlling interest
acquired and that the fair value of the controlling interest is proportionate to the fair value of the remaining
interest.

Guitar Co.’s net identifiable assets have carrying amount and fair value of ₱300,000 and ₱360,000,
respectively. The difference is attributable to a building with a remaining useful life of 6 years.

The December 31, 20x1 statements of financial position of Bass Co. and Guitar Co. are summarized below:

Bass Co. Guitar Co.

ASSETS
Investment in subsidiary (at cost) 300,000 -
Other assets 1,372,000 496,000
TOTAL ASSETS 1,672,000 496,000

LIABILITIES AND EQUITY

Trade and other payables 292,000 120,000
Share capital 940,000 200,000
Retained earnings 440,000 176,000
Total equity 1,380,000 376,000
TOTAL LIABILITIES AND EQUITY 1,672,000 496,000

No dividends were declared by either entity during year. There were also no inter-company transactions and
impairment in goodwill.

21. What amount of goodwill is presented in the consolidated statement of financial position on December 31,
20x1?
a. 40,000
b. 35,000
c. 20,000
d. 15,000

A
Solution:
Consideration transferred (cost of investment in sub.) 300,000
Previously held equity interest in the acquiree -
Total 300,000
Less: Parent's proportionate share in the net assets of
subsidiary (360,000 x 75%) (270,000)
Goodwill attrib. to owners of parent - acquisition date 30,000
Less: Parent's share in goodwill impairment -
Goodwill attrib. to owners of parent 30,000

Fair value of NCI [(300,000 ÷ 75%) x 25%] 100,000

Less: NCI's proportionate share in net assets
(90,000)
of subsidiary (360,000 x 25%)
Goodwill attributable to NCI - acquisition date 10,000
Less: NCI's share in goodwill impairment -
Goodwill attributable to NCI – current year 10,000

Goodwill, net – current year 40,000

22. How much is the consolidated total assets as of December 31, 20x1?
a. 1,867,000
b. 1,907,000
c. 1,958,000
d. 1,974,000

C
Solution:
Total assets of parent 1,672,000
Total assets of subsidiary 496,000
Investment in subsidiary (300,000)
Fair value adjustments – net* 50,000
Goodwill – net 40,000
Effect of intercompany transactions -
Consolidated total assets 1,958,000

*(360,000 – 300,000) = 60,000 – (60,000 ÷ 6) = 50,000

23. How much is the non-controlling interest in the net assets of the subsidiary on December 31, 20x1?
a. 106,500 c. 136,500
b. 116,500 d. 146,500

B
Solution:
Analysis of net assets
Subsidiary Acquisition date Consoli-dation date Net change
Net assets at carrying amts. 300,000 376,000
FVA at acquisition 60,000 60,000
Subsequent depn. of FVA NIL (10,000)
Unrealized profits (Upstream only) NIL -
Net assets at fair value 360,000 426,000 66,000

NCI in net assets

XYZ's net assets at fair value – Dec. 31, 20x1 426,000
Multiply by: NCI percentage 25%
Total 106,500
Add: Goodwill to NCI net (see goodwill computation above) 10,000
NCI in net assets – Dec. 31, 20x1 116,500

24. How much is the consolidated retained earnings on December 31, 20x1?
a. 489,500 c. 534,500
b. 498,500 d. 543,500

A
Solution:
Consolidated retained earnings
Parent's retained earnings – Dec. 31, 20x1 440,000
Consolidation adjustments:
Parent's share in the net change in Sub.'s net assets (a) 49,500
Unrealized profits (Downstream only) -
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable
-
to parent
Net consolidation adjustments 49,500
Consolidated ret. earnings – Dec. 31, 20x1 489,500
(a)
(66,000 net change in net assets x 75%) = 49,500

25. How much is the consolidated total equity on December 31, 20x1?
a. 1,546,000 c. 1,642,000
b. 1,564,000 d. 1,624,000

A
Solution:
Share capital of parent 940,000
Consolidated retained earnings – (see above) 489,500
Equity attributable to owners of the parent 1,429,500
Non-controlling interests - (see above) 116,500
Consolidated total equity 1,546,000

Use the following information for the next three questions:

On January 1, 20x1, SUNNY Co. issued equity instruments in exchange for 75% interest in WINDY Co.
WINDY Co.’s net identifiable assets have carrying amount and fair value of ₱300,000 and ₱360,000,
respectively. The difference is attributable to a building with a remaining useful life of 6 years.

The December 31, 20x1 statements of profit or loss of SUNNY Co. and WINDY Co. are summarized below:

Statements of profit or loss

For the year ended December 31, 20x1

SUNNY Co. WINDY Co.

Revenues 1,200,000 480,000
Operating expenses (960,000) (400,000)
Profit for the year 240,000 80,000

26. How much is the consolidated profit in 20x1?

a. 301,000 c. 320,000
b. 310,000 d. 336,000

B
Solution:
Parent Subsidiary Consolidated
Profits before adjustments 240,000 80,000 320,000
Consolidation adjustments:
Unrealized profits ( - ) ( - ) ( - )
Dividend income from subsidiary ( - ) N/A ( - )
Gain or loss on extinguishment
of bonds ( - ) ( - ) ( - )
Net consolidation adjustments ( - ) ( - ) ( - )
Profits before FVA 240,000 80,000 320,000
Depreciation of FVA* (7,500) (2,500) (10,000)
Impairment loss on goodwill ( - ) ( - ) ( - )
Consolidated profit 232,500 77,500 310,000

*(360,000 – 300,000) = 60,000 ÷ 6) = 10,000

(10,000 x 75%) = 7,500;
(10,000 x 25%) = 2,500

27. How much is the consolidated profit attributable to owners of the parent in 20x1?
a. 292,500 c. 320,000
 b. 310,000 d. 232,500

A
Solution:
Owners of Consoli-
parent NCI dated
Parent's profit before FVA 240,000 N/A 240,000
Sh. in Sub.’s profit before FVA (c) 60,000 20,000 80,000
Depreciation of FVA (7,500) (2,500) (10,000)
Share in impairment loss on goodwill ( - ) ( - ) ( - )
Totals 292,500 17,500 310,000

(c)
The shares in Subsidiary’s profit before FVA are computed as follows:

Profit of Subsidiary before fair value adjustments 80,000

Allocation:
Original’s share (80,000 x 75%) 60,000
NCI’s share (80,000 x 25%) 20,000
As allocated: 80,000

28. How much is the consolidated profit attributable to non-controlling interest in 20x1?
a. 6,500 c. 57,500
b. 17,500 d. 77,500

29. 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]

30. 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.

31. 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

32. An acquirer should at the acquisition date recognize goodwill acquired in a business combination as
an asset. Goodwill should be accounted for as follows:
a. Recognize as an intangible asset and amortize over its useful life.
b. Write off against retained earnings.
c. Recognize as an intangible asset and impairment test when a trigger event occurs.
d. Recognize as an intangible asset and annually impairment test (or more frequently if impairment
is indicated).

33. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business combination that
resulted to goodwill. By December 31, 20x1, the initial allocation of goodwill is not yet completed.
According to PAS 36, TEPID should
a. complete the initial allocation before the end of December 31, 20x1.
b. complete the initial allocation before the end of December 31, 20x2.
c. complete the initial allocation before the end of November 30, 20x1.
d. complete the initial allocation before the end of September 1, 20x2.

34. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business combination that
resulted to goodwill. By December 31, 20x1, the initial allocation of goodwill is not yet completed.
According to PAS 36, TEPID should
a. complete the initial allocation before the end of December 31, 20x1.
b. complete the initial allocation before the end of December 31, 20x2.
c. complete the initial allocation before the end of November 30, 20x1.
d. complete the initial allocation before the end of September 1, 20x2.

35. Which of the following methods must be applied in accounting for business combinations under
PFRS 3?
a. acquirer method c. purchase method
b. acquisition method d. pooling of interest

36. The company that obtains control over another company in a business combination transaction is
referred to as the
a. acquirer c. subsidiary
b. parent d. a and b

37. According to PFRS 3, which of the following transaction costs would increase the amount of
goodwill from a business combination?
a. legal fees, accounting fees and similar costs
b. issuance costs of equity securities
c. issuance costs of debt instruments
d. none of these
38. This refers to the additional consideration for a business combination to be given to the acquiree upon
the happening of a contingency which is pre-agreed at the acquisition date.
a. Contingent liability
b. Contingent asset
c. Contingent consideration
d. Additional compensation

39. Senior Inc. owns 85 percent of Junior Inc. During 20x8, Senior sold goods with a 25 percent
gross profit to Junior. Junior sold all of these goods in 20x8. How should 20x8 consolidated
income statement items be adjusted?
a. No adjustment is necessary
b. Sales and cost of goods sold should be reduced by 85 percent of the intercompany sales.
c. Net income should be reduced by 85 percent of the gross profit on intercompany sales.
d. Sales and cost of goods sold should be reduced by the intercompany sales.

40. During the year a parent makes sales of inventory at a profit to its 75 percent owned
subsidiary. The subsidiary also makes sales of inventory at a profit to its parent during the
same year. Both the parent and the subsidiary have on hand at the end of the year 20 percent
of the inventory acquired from one another. Consolidated revenues for the year should
exclude:
a. 80 percent of the total revenues from intercompany sales.
b. total revenues from intercompany sales.
c. only the revenues from the subsidiary's intercompany sales.
d. only the revenues from the parent's intercompany sales.

41. How often does the consolidation of a parent and a subsidiary occur?
a. Annually
b. When needed by the creditor
c. When financial statements are prepared
d. Monthly

42. What method normally is used to account for the ownership of a subsidiary on the parent’s
financial records?
a. Cost model/method
b. Equity method
c. Consolidation
d. Either cost model/method or equity method

43. Which of the following is not correct with regard to a parent’s ownership of 100 percent of a
subsidiary’s stock subsequent to a book value acquisition?
a. Consolidated net income equals the parent’s net income
b. Consolidated Investment in Subsidiary balance equals the parent’s Investment in
Subsidiary balance
c. Consolidated dividends equal the parent’s dividends
d. Consolidated Retained Earnings equals the parent’s Retained Earnings
44. What amount of allocated excess/purchase differential amortization is recognized in the
parent’s financial records subsequent to the subsidiary’s acquisition?
a. Allocated excess/purchase differentials are not amortized
b. The noncontrolling interest percentage ownership in the subsidiary
c. The parent percentage ownership in the subsidiary
d. 100 percent of the purchase differential amortization

45. What amount of allocated excess/purchase differential amortization is recognized in the

consolidated financial statements subsequent to the subsidiary’s acquisition?
a. Allocated excess/purchase differentials are not amortized
b. The noncontrolling interest percentage ownership in the subsidiary
c. The parent percentage ownership in the subsidiary
d. 100 percent of the purchase differential amortization

46. In which of the following situations would an investor likely account for stock ownership in
an investee using the equity method?
a. The investor owns 15 percent of the investee’s stock
b. The investor and the investee have many transactions with each other
c. The investor has significant influence over the investee’s management policies
d. The investor and investee reside in close proximity to each other

47. When the cost model/method is used to account for an investment, which of the following
would not result in an adjustment to the amount recorded in the investment account?
a. The investee declares a regular dividend
b. The investor sells some of the stock
c. The investee declares a liquidating dividend
d. The stock’s market value decreases to a point where is it below the investor’s cost

48. Which of the following is not needed to convert from the cost method of accounting for an
investment to the equity method?
a. Parent’s share of subsidiary income since investment date
b. Parent’s share of subsidiary dividends since investment date
c. Subsidiary’s book value at investment date
d. Parent’s share of purchase differential amortization since investment date

49. Which of the following is not an intercompany transaction?

a. The parent company acquires inventory from the subsidiary
b. The subsidiary purchases a machine from another subsidiary
c. The parent purchases inventory from a supplier
d. The subsidiary purchases the parent’s bond payable from an independent investor
50. The parent acquires inventory from a subsidiary. On whose financial records is this
intercompany transaction recorded?
a. The books of the subsidiary only because the subsidiary made the sale and the
consolidated financial statements are prepared for the parent company stockholders
b. The books of the parent only because the parent knows the subsidiary’s identity so the
parent knows it is an intercompany transaction
c. Neither the parent nor the subsidiary would record the transaction because it is an
intercompany transaction
d. The parent and the subsidiary both record the transaction and it is eliminated during the
consolidation process