CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

ADVANCED FINANCIAL ACCOUNTING GERMAN/LIM/VALIX/K. DELA CRUZ/MARASIGAN

IFRS 3 BUSINESS COMBINATION MERGER

Part I - Theory of Accounts

1. It is a transaction or other event in which an acquirer obtains control of one or more

businesses.
A. Business combination
B. Merger
C. Consolidation
D. Controlling interest

2. This is defined as an integrated set of activities and assets capable of being conducted and
managed for the purpose of providing a return directly to investors or other owners,
members, or participants.
A. Business
B. Transaction
C. Isolated event
D. Undertaking

3. An acquirer might obtain control of an acquiree in all of the following, except

A. By transferring cash, cash equivalents and other assets
B. By issuing equity securities
C. By contract alone, even without consideration
D. By acquiring interest in a joint venture

4. The acquisition method of accounting for a business combination requires all of the
following, except:
A. Identifying the acquirer
B. Determining the acquisition date
C. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and
the noncontrolling interest in the acquiree at carrying amount.
D. Recognizing goodwill or gain from bargain purchase

5. Acquisition costs incurred and related to a business combination should be

A. Allocated on a prorate basis to the nonmonetary assets acquired
B. Capitalized as part of goodwill and tested annually for impairment
C. Capitalized as other asset and amortized over five years
D. Expensed as incurred in the current period

6. When does the measurement period end for a business combination in which there was
incomplete information on the date of acquisition?
A. When the acquirer receives the information or one year from the acquisition date,
whichever occurs earlier
B. On the final date when all contingencies are resolved.
C. Thirty days from the date of acquisition
D. At the end of the reporting period in the year of acquisition.

7. What is the proper treatment of measurement period adjustment?

A. Adjust to profit or loss
B. Adjusted to other comprehensive income
C. Retroactively adjusted to goodwill or gain on bargain purchase
D. Retroactively adjusted to retained earnings

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Part II - Problems

Problem 1
On December 31, 2021, Kang Corporation acquired all the assets and assumed all the liabilities
of Ravona Company by paying P400,000, issuing bonds with face amount of P300,000 at 125,
and issuing 20,000 of its own shares with a fair value of P57.50 per share. Because of the very
high profitability of Ravona, Kang further agreed to pay additional P200,000 on December 31,
2022 if the merged corporation’s earnings exceed the 2022 forecast by 30%. As of acquisition
date, it is estimated that there is a 60% chance that the condition will be met.

In addition, the Kang paid the following acquisition related costs:

Finder’s fee 50,000

Legal, accounting and other consulting fees 50,000
SEC Registration of the business combination 15,000
General and administrative cost 35,000
Cost of printing stock certificates 10,000
Accountant’s fee related to the stock issuance 20,000
SEC Registration of new shares issued 40,000
Bond Issue Cost 10,000

The Statement of Financial Position as of December 31, 2021 of Kang and Ravona, together with
the fair market value of the assets and liabilities are presented below:

Kang Ravona
Book Value Fair Value Book Value Fair Value
Cash P640,000 P640,000 P45,000 P45,000
Accounts receivable 360,000 335,000 70,000 54,000
Inventories 475,000 390,000 87,000 78,000
Prepaid expenses 25,000 - 13,500 5,000
Land 2,000,000 2,900,000 900,000 1,550,000
Building 800,000 900,000 723,000 768,000
Equipment 700,000 585,000 361,500
Goodwill - - 300,000 -
Total assets P5,000,000 P5,750,000 P2,500,000 P2,500,000

Accounts payable 312,500 312,500 200,000 200,000

Notes payable 937,500 980,000 700,000 765,000
Share capital (P50 par) 2,000,000 850,000 -
Share premium 1,000,000 400,000
Retained earnings 750,000 350,000
Total Equities P5,000,000 P2,500,000

Due to the specialized nature of the equipment owed by Ravona, it has no available fair value as
of December 31, 2021. In order to push through with the merger, it was provisionally valued at
360,000. It has remaining useful life is 5 years from the date of the merger.

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Compute for the following balances on acquisition date:

1. Goodwill (Gain) arising from acquisition

A. 510,000
B. 150,000
C. 30,000
D. 90,000

2. Total assets of the merged corporation

A. 7,020,000
B. 7,610,000
C. 7,740,000
D. 7,380,000

3. Total liabilities of the merged corporation

A. 2,580,000
B. 2,710,000
C. 2,700,000
D. 2,610,000

4. Share premium of the merged corporation

A. 1,150,000
B. 1,080,000
C. 1,000,000
D. 1,480,000

5. Retained earnings balance of the merged corporation

A. 600,000
B. 950,000
C. 520,000
D. 870,000

6. On July 1, 2022, it was determined that the probability that the condition attached to
the additional cash consideration is 75% as of acquisition date. On December 31, 2022,
it was shown that the condition has been complied with. The journal entry to record the
adjustment and the payment of additional cash of P200,000 to Ravona on December 31,
2022 will include:
A. Debit to loss of 80,000
B. Debit to loss of 50,000
C. Credit to liability of 30,000
D. Memorandum entry only

7. On December 31, 2022, the value of the equipment was finally fixed at P400,000.
Depreciation is recorded at year-end, and the depreciation of the equipment based on
the provisional value has already been recorded. Journal entries to record the
adjustment/s, if any, will include:
A. Debit to goodwill of 40,000
B. Debit to accumulated depreciation of 40,000
C. Debit to depreciation of 8,000
D. Credit to gain of 40,000

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Problem 2
On January 1, 2021, Taskmaster Co. acquired all of the assets and assumed all of the liabilities of
Natasha, Inc. by paying P5,000,000 cash. Natasha’s net asset at book value is P5,600,000 as of
January 1, 2021.

The assets and liabilities of Natasha are fairly valued, except for its building which is overvalued
by 450,000, and its inventory which, based on negotiation, should be increased by 150,000. The
parties also agreed that Natasha should record additional accounts payable of 200,000 which was
unrecorded prior to the negotiation.

In addition, Taskmaster agrees to issue 1,000 P10-par shares to the former owners of Natasha, if
the market price of Taskmaster’s shares increases to P120 per share by December 31, 2021. The
fair value of the contingent consideration as of January 1, 2021, was fixed at P90,000, based on
consideration of the vesting conditions. The additional shares, if any, are to be issued on January
15, 2022.

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

1. How much is the goodwill (gain) arising from the acquisition?

A. (210,000)
B. (100,000)
C. (610,000)
D. (10,000)

2. Assuming that the market price of Taskmaster’s shares increased to P130 per share by
December 31, 2021, the journal entry on January 15, 2022 to settle the contingent
consideration will include:
A. Credit to Share Premium – Contingent Share Consideration of 30,000
B. Credit to Share Capital of 90,000
C. Credit to cash of 120,000
D. Credit to Share Premium – of 80,000

END

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