Chapter 19: Theory of Accounts Reviewer

1. The accounting for business combinations is currently prescribed

under
a. PAS 22 c. PFRS 3 – revised 2008
b. PFRS 3 d. PAS 27 – revised 2011

2. KINK Co. has acquired an investment in a subsidiary, TWIST Co.,

with the view to dispose of this investment within six months. The
investment in the subsidiary has been classified as held for sale
and is to be accounted for in accordance with PFRS 5. The
subsidiary has never been consolidated. How should the
investment in the subsidiary be treated in the financial
statements?
a. Purchase accounting should be used.
b. Equity accounting should be used.
c. The subsidiary should not be consolidated but PFRS 5
should be used.
d. The subsidiary should remain off balance
sheet. (Adapted)

3. The consolidation theory currently applied under PFRSs is

a. Proprietary theory/Proportionate consolidation theory/
b. Parent company theory
c. Entity theory/ Contemporary theory
d. Hybrid theory/ Traditional theory

4. The proprietary theory is applied under which of the following

standards?
a. PAS 31 b. PAS 36 c. PFRS 3d. PAS 27

5. What is the basis for consolidation?

a. significant influence c. control
b. joint control d. variable returns

6. FALLACIOUS Co. controls an overseas entity MISLEADING Co.

Because of exchange controls, it is difficult to transfer funds out
of the country to the parent entity. FALLACIOUS Co. owns 100% of
the voting power of MISLEADING Co. How should MISLEADING Co.
be accounted for?
 a. It should be excluded from consolidation and the equity method
should be used.
b. It should be excluded from consolidation and stated at cost.
c. It should be excluded from consolidation and accounted for in
accordance with PFRS 9.
d. It is not permitted to be excluded from consolidation
because control is not lost.
(Adapted)

7. TIPPLE has control over the composition of DRINK’s board of

directors. TIPPLE owns 49% of DRINK and is the largest
shareholder. TIPPLE has an agreement with Mr. Bartek, which
owns 10% of DRINK, whereby Mr. Bartek will always vote in the
same way as TIPPLE. Can TIPPLE exercise control over DRINK?
a. TIPPLE cannot exercise control because it owns only 49% of the
voting rights.
b. TIPPLE cannot exercise control because it can control only the
makeup of the board and not necessarily the way the directors
vote.
c. TIPPLE can exercise control solely because it has an agreement
with Mr. Bartek for the voting rights to be used in whatever
manner TIPPLE wishes.
d. TIPPLE can exercise control because it controls more
than 50% of the voting power, and it can govern the
financial and operating policies of DRINK through its
control of the board of directors.
(Adapted)

8. On January 1, 20x1, MIME Co. acquired one-third equity interest

in IMITATE Co. which resulted in MIME having significant influence
over IMITATE Co. On July 1, 20x4, MIME Co. acquired a further
one-third equity interest in IMITATE Co. which resulted in MIME
having a controlling interest over IMITATE. For financial reporting
purposes, which of the following statements is correct?
a. Goodwill shall be computed on July 1, 20x4 and the one-third
equity interest acquired in 20x1 does not affect the goodwill
computation.
b. Goodwill shall be computed on July 1, 20x4 and the one-
third equity interest acquired in 20x1 affects the
goodwill computation.
c. Goodwill shall be computed both on January 1, 20x1 and July 1,
20x4 because the transactions are considered to constitute a
‘step acquisition.’
d. Goodwill shall be computed only on January 1, 20x1. The
subsequent change in ownership interest which did not result to
loss of control is accounted for directly in equity.

9. LASSITUDE Co. owns 50% of WEARINESS Co.’s voting shares. The

board of directors consists of six members; LASSITUDE Co.
appoints three of them and WEARINESS Co. appoints the other
three. The casting vote at meetings always lies with the directors
appointed by LASSITUDE Co. Does LASSITUDE Co. have control
over WEARINESS Co.?
a. No, control is equally split between LASSITUDE Co. and FATIGUE
Co.
 b. Yes, LASSITUDE Co. holds 50% of the voting power and
has the casting vote at board meetings in the event that
there is not a majority decision.
c. No, LASSITUDE Co. owns only 50% of the entity’s shares and
therefore does not have control.
d. No, control can be exercised only through voting power, not
through a casting vote.
(Adapted)

10. VOLUBLE TALKATIVE Co. has sold all of its shares to the public.
The company was formerly a state-owned entity. The national
regulator has retained the power to appoint the board of
directors. An overseas entity acquires 55% of the voting shares,
but the regulator still retains its power to appoint the board of
directors. Who has control of the entity?
a. The national regulator.
b. The overseas entity.
c. Neither the national regulator nor the overseas entity.
d. The board of
directors. (Adapted)

11. A manufacturing group has just acquired a controlling interest

in a football club that is listed on a stock exchange. The
management of the manufacturing group wishes to exclude the
football club from the consolidated financial statements on the
grounds that its activities are dissimilar. How should the football
club be accounted for?
a. The entity should be consolidated as there is no
exemption from consolidation on the grounds of
dissimilar activities.
b. The entity should not be consolidated using the purchase
method but should be consolidated using equity accounting.
c. The entity should not be consolidated and should appear as an
investment in the group accounts.
d. The entity should not be consolidated; details should be
disclosed in the financial statements.
(Adapted)

12. On January 1, 20x1, TRICE Co. obtained control of INSTANT Co.

Subsequently, there have changes in the ownership interests
over INSTANT; however, the TRICE’s control over INSTANT was
unaffected. Which of the following statements is incorrect?
a. Once control has been achieved, further transactions whereby
the parent entity acquires further equity interests from non-
controlling interests, or disposes of equity interests but without
losing control, are accounted for as equity transactions
b. The carrying amounts of the controlling and non-controlling
interests are adjusted to reflect the changes in their relative
interests in the subsidiary.
c. Any difference between the amount by which the non-
controlling interests is adjusted and the fair value of the
consideration paid or received is recognized directly in equity
and attributed to the owners of the parent.
d. The carrying amount of any goodwill should be adjusted
and gain or loss is recognized in profit or loss.
13. Which of the following exemplifies the application of the
‘entity theory’ of consolidation?
a. Consolidated profit = Parent’s separate profit + Share of Parent
in Subsidiary’s profit
b. Consolidated profit = Profit of the group
c. Consolidated profit = Profit of the group – NCI profit
d. Consolidated profit = Parent’s separate profit + NCI profit

14. Under the ‘entity theory’ of consolidation, the consolidated

profit equals
a. Parent’s separate profit + Share of Parent in Subsidiary’s profit
b. Profit of the group – NCI profit
c. Parent’s separate profit + NCI profit
d. Profit attributable to owners of the parent + Profit
attributable to NCI

15. During the year, COMITY Co. sold equipment to its subsidiary,
MUTUAL COURTESY Co., at a gain. The equipment has a
remaining useful life of 5 years. Which of the following
statements is true in the preparation of the consolidated financial
statements?
a. The gain is recognized immediately.
b. The gain is deferred and recognized only in the period the
equipment is sold to an unrelated party.
c. The carrying amount of the asset and the related
depreciation are adjusted downwards.
d. The carrying amount of the asset and the related depreciation
are adjusted upwards.

16. During the year, BAFFLE Co. sold part of its controlling interest
in TO COFUSE Co. The sale did not affect BAFFLE’s control over
TO CONFUSE. Which of the following statements is true?
a. The equity adjustment would be larger if BAFFLE
measures NCI at the NCI’s proportionate share in the
subsidiary’s net identifiable assets rather than at fair
value.
b. The equity adjustment would be larger if BAFFLE measures NCI
at fair value rather than at the NCI’s proportionate share in the
subsidiary’s net identifiable assets.
c. There would be no equity adjustment if the net disposal
proceeds equal the original cost of the interest sold.
d. c and d

17. Which of the following terms best describes the financial

statements of a parent in which the investments are accounted
for on the basis of the direct equity interest?
a. Single financial statements
b. Combined financial statements
c. Separate financial statements
d. Consolidated financial statements

18. Are the following statements true or false?

1. Consolidated financial statements must be prepared using
uniform accounting policies.
2. The non-controlling interest in the net assets of subsidiaries
may be shown by way of note to the consolidated statement of
financial position.
a. False, False b. False, True c. True, False d. True
True

19. Which of the following is not a valid condition that will exempt
an entity from preparing consolidated financial statements?
a. The parent entity is a wholly owned subsidiary of another entity.
b. The parent entity’s debt or equity capital is not traded on the
stock exchange.
c. The ultimate parent entity produces consolidated financial
statements available for public use that comply with PFRS.
d. The parent entity is in the process of filing its financial
statements with a securities commission.
(Adapted)

20. Where should non-controlling interests be presented in the

consolidated balance sheet?
a. Within long-term liabilities.
b. In between long-term liabilities and current liabilities.
c. Within the parent shareholders’ equity.
d. Within equity but separate from the parent shareholders’
equity.
(Adapted)

Chapter 15: Theory of Accounts Reviewer

1. 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

2. 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
(Adapted)

3. 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.
(Adapted)

4. 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
(Adapted)

5. 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]

6. 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
(Adapted)

7. Which one of the following reasons would not contribute to

the creation of negative goodwill?
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. (Adapted)

8. 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.
(Adapted)

9. 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

10. 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. (Adapted)

11. The aggregate cash flows arising from acquisitions and from
disposals of subsidiaries or other business units resulting to
loss or obtaining of control are presented separately and
classified as
a. Operating activities c.
Financing activities
b. Investing activities d. Disclosed only

12. Cash flows arising from changes in ownership interests in a

subsidiary that do not result in a loss of control are classified
as cash flows from
a. Operating activities c.
Financing activities
b. Investing activities d. Disclosed only

13. PFRS 3 requires the acquirer in a business combination to

measure the acquiree’s identifiable tangible and intangible assets
and liabilities at (with some limited exceptions)
a. cost c. fair value less transaction
costs
b. acquisition-date fair value d. some other amount

14. Which of the following accounting methods must be applied to

all business combinations under PFRS 3 Business Combinations?
a. Pooling of interests method. c.
Acquisition method.
b. Equity method. d. Purchase
method. (Adapted)

15. PESTER TO ANNOY is involved in a business acquisition on

January 1, 20x1. At the date of acquisition the deferred tax assets
were ₱300,000. On January 1, 20x1, the directors considered that
realization of the deferred tax assets were not probable. What
 effect would this decision have on the allocation of the purchase
price?
a. The unrecognized deferred tax would be allocated to
goodwill, which would increase by ₱300,000.
b. The value of goodwill would decrease by ₱300,000.
c. There would be no effect on goodwill.
d. Negative goodwill of ₱300,000 would
arise. (Adapted)

16. A parent entity is acquiring a majority holding in an entity

whose shares are dealt in on a recognized market. Under PFRS 3
Business Combinations, which of the following measurement
bases may be used in measuring the non-controlling interest at
the acquisition date?
I. The nominal value of the shares in the acquiree not acquired
II. The fair value of the shares in the acquiree not acquired
III. The non-controlling interest in the acquiree's assets and
liabilities at book value
IV. The non-controlling interest in the acquiree's assets and
liabilities at fair value
a. II only b. I, II and III c. II and IV d. IV only
(Adapted)

17. ASININE STUPID Company acquired a 30% equity interest in

OBTUSE TORPID Company many years ago. In the current
accounting period it acquired a further 40% equity interest in
OBTUSE. Are the following statements true or false, according to
PFRS 3 Business Combinations?
I. ASININE's pre-existing 30% equity interest in OBTUSE should
be remeasured at fair value at the acquisition date.
II. ASININE's net assets should be remeasured at fair value at the
acquisition date.
a. False, False b. False, True c. True, False d. True,
True
(Adapted)

18. The SKEWER Company acquired 80% of PIERCE Company for a

consideration transferred of ₱100 million. The consideration was
estimated to include a control premium of ₱24 million. PIERCE's
net assets were ₱85 million at the acquisition date. Are the
following statements true or false, according to PFRS 3 Business
Combinations?
I. Goodwill should be measured at ₱32 million if the non-
controlling interest is measured at its share of PIERCE's net
assets.
II. Goodwill should be measured at ₱34 million if the non-
controlling interest is measured at fair value.
a. False, False b. False, True c. True, False d.
True,
True
(Adapted)

19. PFRS 3 requires all identifiable intangible assets of the

acquired business to be recorded at their fair values. Many
intangible assets that may have been subsumed within goodwill
must be now separately valued and identified. Under PFRS 3,
when would an intangible asset be “identifiable”?
 a. When it meets the definition of an asset in the
Conceptual Framework document only.
b. When it meets the definition of an intangible asset in PAS 38,
Intangible Assets, and its fair value can be measured reliably.
c. If it has been recognized under local generally accepted
accounting principles even though it does not meet the
definition in PAS 38.
d. Where it has been acquired in a business
combination. (Adapted)

20. Which of the following examples is unlikely to meet the

definition of an intangible asset for the purpose of PFRS 3?
a. Marketing related, such as trademarks and internet domain
names.
b. Customer related, such as customer lists and contracts.
c. Technology based, such as computer software and databases.
d. Pure research based, such as general expenditure on
research. (Adapted)

21. An intangible asset with an indefinite life is one where

a. There is no foreseeable limit on the period over which
the asset will generate cash flows.
b. The length of life is over 20 years.
c. The directors feel that the intangible asset will not lose value
in the foreseeable future.
d. There is a contractual or legal arrangement that lasts for a
period in excess of five years.
(Adapted)

22. An intangible asset with an indefinite life is accounted for as

follows:
a. No amortization but annual impairment test.
b. Amortized and impairment tests annually.
c. Amortize and impairment tested if there is a “trigger event.”
d. Amortized and no impairment
test. (Adapted)

23. 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).
(Adapted)

24. If the impairment of the value of goodwill is seen to have

reversed, then the company may
a. Reverse the impairment charge and credit income for the
period.
b. Reverse the impairment charge and credit retained earnings.
c. Not reverse the impairment charge.
 d. Reverse the impairment charge only if the original
circumstances that led to the impairment no longer exist and
credit retained earnings.
(Adapted)

25. On acquisition, all identifiable assets and liabilities, including

goodwill, will be allocated to cash-generating units within the
business combination. Goodwill impairment is assessed within the
cash-generating units. If the combined organization has cash-
generating units significantly below the level of an operating
segment, then the risk of an impairment charge against goodwill
as a result of PFRS 3 is
a. Significantly decreased because goodwill will be spread across
many cash-generating units.
b. Significantly increased because poorly performing units
can no longer be supported by those that are
performing well.
c. Likely to be unchanged from previous accounting practice.
d. Likely to be decreased because goodwill will be a smaller
amount due to the greater recognition of other intangible
assets.
(Adapted)

26. 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
postacquisition 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
postacquisition 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.
(Adapted)

27. MIME TO IMMITATE Co. initially tested its goodwill for

impairment on September 30, 20x1. When should MIME perform
its second impairment testing on its goodwill?
a. on or before September 30, 20x2
b. on or before December 31, 20x2
c. at any date not earlier than September 30, 20x2
d. at any date during 20x2

28. For purposes of impairment testing, PAS 36

a. requires goodwill acquired in a business combination to
be allocated to each of the acquirer’s cash-generating
units in the year of business combination.
b. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s corporate assets in the year
of business combination.
c. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s cash-generating units 12
months after the date of acquisition.
 d. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s operating segments 3
months after the date of acquisition.

29. 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.

30. Which of the following is incorrect regarding the accounting for

business combinations in accordance with PFRSs?
a. Any goodwill recognized on acquisition date should be
allocated to the acquirer’s CGUs prior to the end of the year of
acquisition. If allocation is incomplete prior to the end of the
year of acquisition, the allocation should be completed prior to
the end of the immediately preceding year.
b. PFRS 3 requires the use of the acquisition method in
accounting for business combination.
c. Goodwill is computed as the difference between the
consideration transferred and the acquisition-date fair
value of net identifiable assets acquired.
d. In applying the acquisition method, PFRS 3 requires that the
acquirer should be identified.

31. For purposes of impairment testing, PAS 36

a. requires goodwill acquired in a business combination to
be allocated to each of the acquirer’s cash-generating
units in the year of business combination.
b. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s corporate assets in the year
of business combination.
c. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s cash-generating units 12
months after the date of acquisition.
d. requires goodwill acquired in a business combination to be
allocated to each of the acquirer’s operating segments 3
months after the date of acquisition.

32. Goodwill must not be amortized under PFRS 3. The transitional

rules do not require restatement of previous balances written off.
If an entity is adopting PFRS for the first time, and it wishes to
restate all prior acquisitions in accordance with PFRS 3, then it
must apply the PFRS to
a. Those acquisitions selected by the entity.
b. All acquisitions from the date of the earliest.
c. Only those acquisitions since the issue of the PFRS 3 and PAS
22, Business Combinations, to the earlier ones.
 d. Only past and present acquisitions of entities that have
previously and currently prepared their financial statements
using PFRS.
(Adapted)

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. PFRS 3 is mandatory for all new acquisitions from March 31,
2004. Entities have to cease the amortization of goodwill arising
from previous acquisitions. The balance of goodwill arising from
those acquisitions is
a. Written off against retained earnings.
b. Written off against profit or loss for the year.
c. Tested for impairment from the beginning of the next
accounting year.
d. Tested for impairment on March 31,
2004. (Adapted)

35. Which of the following factors is used as multiplier of super

profits in valuation of goodwill of a business?
a. Average capital employed in the business d. Normal rate
of return
b. Simple profits e. Normal
profits.
c. Number of years’
purchase (Adapted)