Page |1

NAME: Date:
Professor: Section: Score:

ACCOUNTING FOR BUSINESS COMBINATIONS

FIRST GRADING EXAMINATION

1. On January 1, 20x1, ABC Co. acquired 75% interest in XYZ, Inc. for ₱2,500,000
cash. ABC Co. incurred transaction costs of ₱250,000 for legal, accounting and
consultancy fees in negotiating the business combination. ABC Co. elected to
measure NCI at the NCI’s proportionate share in XYZ, Inc.’s identifiable net assets.
The carrying amounts and fair values of XYZ’s assets and liabilities at the
acquisition date were as follows:

Assets Carrying amounts Fair values

Cash in bank 25,000 25,000
Accounts receivable 425,000 300,000
Inventory 1,300,000 875,000
Equipment – net 2,500,000 2,750,000
Goodwill 250,000 50,000
Total assets 4,500,000 4,000,000
Liabilities
Payables 1,000,000 1,000,000

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

a. 140,000
b. 278,500
c. 287,500
d. 264,500

Solution:
Fair value of identifiable assets acquired excluding
goodwill (4,000,000 total assets – 50,000 goodwill) 3,950,000
Less: Fair value of liabilities assumed (1,000,000)
Fair value of identifiable net assets acquired 2,950,000

Fair value of identifiable net assets acquired 2,950,000

Multiply by: Non-controlling interest (100% - 75%) 25%
NCI’s proportionate share in identifiable net assets 737,500

 Goodwill (Negative goodwill) is computed as follows:

Consideration transferred 2,500,000

NCI in the acquiree 737,500
Previously held equity interest in the acquiree -
3,237,50
Total 0
(2,950,00
Less: Fair value of identifiable net assets acquired 0)
287,50
Goodwill 0
 Page |2

The ₱250,000 transaction costs are expensed. Acquisition-related costs do not

affect the measurement of goodwill.

2. 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 post-acquisition 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 post-acquisition 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.

3. 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

4. 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

5. 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.

6. 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

7. 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
 Page |3

% = 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]

8. 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

9. 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.

10. 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.

11. 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

12. 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.

Use the following information for the next four questions:

On January 1, 20x1, KNAVE acquired 80% of the equity interests of RASCAL, Inc. in
exchange for cash. Because the former owners of RASCAL needed to dispose of their
investments in RASCAL by a specified date, they did not have sufficient time to market
RASCAL to multiple potential buyers.
 Page |4

As January 1, 20x1, RASCAL’s identifiable assets and liabilities have fair values of
₱4,800,000 and ₱1,600,000, respectively.

13. KNAVE Co. elects the option to measure non-controlling interest at fair value. An
independent consultant was engaged who determined that the fair value of the 20%
non-controlling interest in RASCAL, Inc. is ₱620,000.

If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in RASCAL,
Inc., how much is the goodwill (gain on bargain purchase) on the business
combination?
a. 800,000 b. 2,060,000 c. 1,440,000 d. 1,420,000

D
Solution:
Consideration transferred 4,000,000
Non-controlling interest in the acquiree 620,000
Previously held equity interest in the acquiree -
Total 4,620,000
Fair value of net identifiable assets acquired (3,200,000)
Goodwill 1,420,000

14. KNAVE Co. elects the option to measure non-controlling interest at fair value. An
independent consultant was engaged who determined that the fair value of the 20%
non-controlling interest in RASCAL, Inc. is ₱620,000.

If KNAVE Co. paid ₱2,400,000 cash as consideration for the 80% interest in RASCAL,
Inc., how much is the goodwill (gain on bargain purchase) on the business
combination?
a. (180,000) b. (800,000) c. (160,000) d. (200,000)

A
Solution:
Consideration transferred 2,400,000
Non-controlling interest in the acquiree 620,000
Previously held equity interest in the acquiree -
Total 3,020,000
Fair value of net identifiable assets acquired (4.8M –1.6M) (3,200,000)
Gain on a bargain purchase (180,000)

15. KNAVE Co. elects the option to measure non-controlling interest at fair value. A
value of ₱1,000,000 is assigned to the 20% non-controlling interest in RASCAL, Inc.
[(₱4M ÷ 80%) x 20% = 1,000,000].

If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in RASCAL,
Inc., how much is the goodwill (gain on bargain purchase) on the business
combination?
a. 200,000 b. 1,800,000 c. 2,440,000 d. 1,440,000

B
 Page |5

Solution:
Consideration transferred 4,000,000
Non-controlling interest in the acquiree 1,000,000
Previously held equity interest in the acquiree -
Total 5,000,000
Fair value of net identifiable assets acquired (3,200,000)
Goodwill 1,800,000

16. KNAVE Co. elects the option to measure the non-controlling interest at the non-
controlling interest’s proportionate share of RASCAL, Inc.’s net identifiable assets

If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in RASCAL,
Inc. and, how much is the goodwill (gain on bargain purchase) on the business
combination?
a. 1,440,000 b. 800,000 c. 1,400,000 c. 960,000

A
Solution:
Fair value of identifiable assets acquired 4,800,000
Fair value of liabilities assumed (1,600,000)
Fair value of net identifiable assets acquired 3,200,000
Multiply by: Non-controlling interest 20%
NCI’s proportionate share in net identifiable assets 640,000

Consideration transferred 4,000,000

Non-controlling interest in the acquiree 640,000
Previously held equity interest in the acquiree -
Total 4,640,000
Fair value of net identifiable assets acquired (3,200,000)
Goodwill 1,440,000

Use the following information for the next two questions:

On January 1, 20x1, SMUTTY acquired all of the identifiable assets and assumed all of
the liabilities of OBSCENE, Inc. On this date, the identifiable assets acquired and
liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000, respectively.

SMUTTY incurred the following acquisition-related costs: legal fees, ₱40,000, due
diligence costs, ₱400,000, and general administrative costs of maintaining an internal
acquisitions department, ₱80,000.

17. Case #1: As consideration for the business combination, SMUTTY Co. transferred
8,000 of its own equity instruments with par value per share of ₱400 and fair value
per share of ₱500 to OBSCENE’s former owners. Costs of registering the shares
amounted to ₱160,000. How much is the goodwill (gain on bargain purchase) on
the business combination?
a. 716,000 b. 556,000 c. 600,000 d. 1,200,000
 Page |6

D
Solution:
Consideration transferred (8,000 sh. x ₱500) 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 (6.4M - 3.6M) (2,800,000)
Goodwill 1,200,000

18. Case #2: As consideration for the business combination, SMUTTY Co. issued bonds
with face amount and fair value of ₱4,000,000. Transaction costs incurred in
issuing the bonds amounted to ₱200,000. How much is the goodwill (gain on
bargain purchase) on the business combination?
a. 716,000 b. 556,000 c. 600,000 d. 1,200,000

D
Solution:
Consideration transferred (fair value of bonds) 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 (6.4M - 3.6M) (2,800,000)
Goodwill 1,200,000

19. On January 1, 20x1, ENTREAT Co. acquired all of the identifiable assets and
assumed all of the liabilities of BEG, 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. ENTREAT Co. has estimated
restructuring provisions of ₱800,000 representing costs of exiting the activity of
BEG, costs of terminating employees of BEG, and costs of relocating the terminated
employees. How much is the goodwill (gain on bargain purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000

D
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 (6.4M - 3.6M) (2,800,000)
Goodwill 1,200,000

The ₱800,000 restructuring provisions are ignored because these are post-acquisition expenses.

20. On January 1, 20x1, HISTRIONAL Co. acquired all of the identifiable assets and
assumed all of the liabilities of THEATRICAL, Inc. by paying cash of ₱4,000,000. On
 Page |7

this date, the identifiable assets acquired and liabilities assumed have fair values of
₱6,400,000 and ₱3,600,000, respectively.

As of January 1, 20x1, HISTRIONAL holds a building and a patent which are being
rented out to THEATRICAL, Inc. under operating leases. HISTRIONAL has
determined that the terms of the operating lease on the building compared with
market terms are favorable. The fair value of the differential is estimated at ₱80,000.
How much is the goodwill (gain on bargain purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000

C
Solution:
Fair value of identifiable assets acquired, including
intangible asset on the operating lease with favorable 6,480,000
terms (₱6.4M + ₱80K)
Fair value of liabilities assumed (3,600,000)
Fair value of net identifiable assets acquired 2,880,000

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

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 (2,880,000)
Goodwill 1,120,000

21. On January 1, 20x1, SUBTERFUGE Co. acquired all of the identifiable assets and
assumed all of the liabilities of DECEPTION, 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:
 SUBTERFUGE intends to sell immediately a factory plant included in the
identifiable assets of DECEPTION. All of the “held for sale” classification criteria
under PFRS 5 are met. As of January 1, 20x1, the factory plant has a fair value of
₱1,200,000 and a carrying amount of ₱1,000,000 in the books of DECEPTION.
Costs to sell the factory plant is ₱80,000.
 Not included in the identifiable asset of DECEPTION is a research and development
intangible asset that SUBTERFUGE does not intend to use. The fair value of this
asset is ₱200,000.
 Also, not included in the identifiable asset of DECEPTION is a customer list, with an
estimated value of ₱40,000, in the form of a database where the nature of the
information is subject to national laws regarding confidentiality.

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

a. 1,200,000 b. 1,280,000 c. 1,080,000 d. 1,040,000

C
Solution:
 Page |8

Fair value of identifiable assets 6,400,000

Costs to sell of the “held for sale” asset (80,000)
Fair value of unrecognized research and development 200,000
Adjusted value of identifiable assets 6,520,000
Fair value of liabilities assumed (3,600,000)
Fair value of net identifiable assets acquired 2,920,000

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 (2,920,000)
Goodwill 1,080,000

22. On January 1, 20x1, CHIDE Co. acquired 90% of the identifiable assets and
assumed all of the liabilities of SCOLD, Inc. by paying cash of ₱4,000,000. On this
date, SCOLD’s identifiable assets and liabilities have fair values of ₱6,400,000 and
₱3,600,000, respectively. Non-controlling interest has a fair value of ₱320,000.

As of January 1, 20x1, SCOLD had the following which were not included in the
acquisition-date fair value measurement of liabilities:
 SCOLD has an existing contract with a customer to deliver products at a specified
future date. In accordance with the agreement, SCOLD shall pay a penalty for
failure to deliver the said goods. CHIDE determined that the fair value of the
penalty is ₱40,000. However, because CHIDE expects to comply with the
agreement, it was assessed that payment of penalty is improbable.
 SCOLD has guaranteed a bank loan of a third party. CHIDE shall replace SCOLD as
the guarantor. If the third party defaults on the loan, CHIDE will be held liable for
the guarantee. CHIDE determined that the fair value of the guarantee is ₱120,000.
However, both SCOLD and CHIDE believe that the third party will not default on its
loan from the bank.
 There is a pending unresolved litigation filed by a third party against SCOLD.
CHIDE determined that the fair value of settling the litigation is ₱200,000.
However, because the legal counsels of both CHIDE and SCOLD strongly believe
that they will win the case, it was assessed that payment for the settlement of the
litigation is improbable.

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

a. 1,880,000 b. 1,200,000 c. 1,560,000 d. 1,520,000

A
Solution:
The adjusted fair value of net identifiable assets acquired is computed as follows:
Fair value of identifiable assets acquired 6,400,000
Total fair value of liabilities assumed:
Fair value of liabilities assumed 3,600,000
Fair value of contingent liabilities assumed:
Contractual contingent liability assumed 40,000
Contractual contingent liability assumed 120,000
Non-contractual contingent liability assumed 200,000 (3,960,000)
Fair value of net identifiable assets acquired 2,440,000
 Page |9

Consideration transferred 4,000,000

Non-controlling interest in the acquiree 320,000
Previously held equity interest in the acquiree -
Total 4,320,000
Fair value of net identifiable assets acquired (2,440,000)
Goodwill 1,880,000

23. On January 1, 20x1, PRODIGIOUS Co. acquired all of the identifiable assets and
assumed all of the liabilities of EXTRAORDINARY, 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.

The terms of the business combination agreement are shown below:

 Half of the ₱4,000,000 agreed consideration shall be paid on January 1, 20x1 and
the other half on December 31, 20x5. The prevailing market rate as of January 1,
20x1 is 10%.
 In addition, PRODIGIOUS agrees to provide for the following:
a. A piece of land with a carrying amount of ₱2,000,000 and fair value of
₱1,200,000 shall be transferred to the former owners of EXTRAORDINARY.
b. After the combination, EXTRAORDINARY’s activities shall be continued by
PRODIGIOUS. PRODIGIOUS agrees to provide a patented technology for use in
the activities of EXTRAORDINARY. The patented technology has a carrying
amount of ₱240,000 in the books of PRODIGIOUS and a fair value of ₱320,000.
 Included in the liabilities assumed is an estimated liability on a pending lawsuit
filed against EXTRAORDINARY by a third party with an acquisition-date fair value
of ₱400,000. The carrying amount of the liability in EXTRAORDINARY’s books
immediately before the business combination is ₱480,000. EXTRAORDINARY
guarantees to indemnify PRODIGIOUS for any settlement amount of the liability in
excess of ₱480,000.

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

a. 1,721,843 b. 1,561,843 c. 1,641,843 d. 2,320,000

B
Solution:
The fair value of the consideration transferred is determined as follows:
Cash payment (₱4M x 50%) 2,000,000
Present value of future cash payment (Note payable)
1,241,843
(₱4M x 50% x PV of ₱1 @10%, n=5)
Land transferred to former owners of XYZ – at fair value 1,200,000
Fair value of consideration transferred 4,441,843

The fair value of the net identifiable assets acquired is computed as follows:
Fair value of assets 6,400,000
Indemnification asset (480,000 – 400,000) 80,000
Total 6,480,000
Fair value of liabilities (3,600,000)
Fair value of net identifiable assets acquired 2,880,000
 P a g e | 10

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

Consideration transferred 4,441,843
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,441,844
Fair value of net identifiable assets acquired (2,880,000)
Goodwill / (Gain on a bargain purchase) 1,561,843

24. On January 1, 20x1, ATTAINDER Co. acquired all of the assets and assumed all of
the liabilities of DISHONOR, Inc. As of this date, the carrying amounts and fair
values of the assets and liabilities of DISHONOR acquired by ATTAINDER are
shown below:
Assets Carrying amounts Fair 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

ATTAINDER Co. paid ₱6,000,000 cash as consideration for the assets and liabilities of
DISHONOR, Inc. It was determined on acquisition date that DISHONOR, Inc. has an
unrecorded patent with a fair value of ₱120,000 and a contingent liability with fair
value of ₱80,000.

Although adjustments are to be made to the carrying amounts of the assets and
liabilities, no adjustments shall be made to their tax bases. All adjustments to the
carrying amounts of assets and liabilities result to temporary differences.
ATTAINDER’s tax rate is 30%.

How much is the goodwill (gain on bargain purchase) on the business combination?
a. 1,148,000 b. 1,108,000 c. 1,028,000 d. 1,240,000

B
Solution:
The deferred tax liability and asset are computed as follows:
Taxable/ (Deductible) Temporary
Carrying amounts Fair values
difference
Cash in bank 40,000 40,000 -
Receivables – net 680,000 480,000 200,000
Inventory 2,080,000 1,400,000 680,000
Building – net 4,000,000 4,400,000 (400,000)
Patent - 120,000 (120,000)
Payables 1,600,000 1,600,000 -
Contingent liability - 80,000 80,000
 P a g e | 11

Total taxable temporary difference (400K + 120K) 520,000

Multiply by: Tax rate 30%
Deferred tax liability 156,000

Total deductible temporary difference (200K + 680K + 80K) 960,000

Multiply by: Tax rate 30%
Deferred tax asset 288,000

The fair value of the net identifiable assets of the acquiree is computed as follows:
Fair value of identifiable assets acquired excluding
recorded goodwill (6.4M – 80K goodwill + 120K unrecorded 6,728,000
patent + 288K deferred tax asset)
Fair value of liabilities assumed (1.6M + 80K contingent
(1,836,000)
liability + 156K deferred tax liability)
Fair value of net identifiable assets acquired 4,892,000

Goodwill 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 (4,892,000)
Goodwill 1,108,000

25. On January 1, 20x1, FARCICAL Co. acquired all of the assets and liabilities of
ABSURD, Inc. for ₱6.4M. As of this date, the carrying amounts and fair values of
the assets and liabilities of ABSURD are shown below:
Assets Carrying amounts Fair 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
Dividends payable 400,000 400,000
Other payables 1,600,000 1,600,000
2,000,000 2,000,000

The dividends payable pertain to dividends declared by ABSURD, Inc. on December 28,
20x0 to shareholders of record on January 15, 20x1. The dividends will be distributed
on January 31, 20x1.

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

a. 1,280,000 b. 2,080,000 c. 2,480,000 d. 1,680,000
 P a g e | 12

D
Solution:
The consideration transferred is adjusted for the dividends purchased as follows:
Fair value of consideration transferred 6,400,000
Dividends-on (Dividends purchased) (400,000)
Adjusted consideration transferred 6,000,000

Goodwill 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
FV of net identifiable assets acquired (6.4M – 80K - 2M) (4,320,000)
Goodwill 1,680,000

Use the following information for the next five questions:

On January 1, 20x1, COLLOQUY Co. acquired all of the identifiable assets and assumed
all of the liabilities of CONVERSATION, Inc. by issuing its own ordinary shares.
Information at acquisition date is shown below:
CONVERSATION, Combined
COLLOQUY Co. Co. entity
(carrying amounts) (fair values)
Identifiable assets 9,600,000 6,400,000 16,000,000
Goodwill - - ?
Total assets 9,600,000 6,400,000 ?
Liabilities 2,800,000 3,600,000 6,400,000
Share capital 2,400,000 1,200,000 2,800,000
Share premium 1,200,000 1,000,000 4,800,000
Retained earnings 3,200,000 600,000 ?
Total liabilities & equity 9,600,000 6,400,000 ?

Additional information:
 COLLOQUY’s share capital consists of 60,000 ordinary shares with par value of ₱40
per share.
 CONVERSATION’s share capital consists of 3,000 ordinary shares with par value of
₱400 per share.

26. How much is the fair value of consideration transferred on the business
combination?
a. 4,000,000 b . 2,400,000 c. 4,400,000 d. 4,800,000

A
Solution:
COLLOQUY Co. Combined entity Increase
Share capital 2,400,000 2,800,000 400,000
Share premium 1,200,000 4,800,000 3,600,000
Totals 3,600,000 7,600,000 4,000,000
 P a g e | 13

The fair value of the shares transferred as consideration for the business combination is ₱4,000,000 (i.e.,
total increase in share capital and share premium accounts).

27. How many shares were issued in the business combination?

a. 40,000 b. 12,000 c. 36,000 d. 10,000

D
Solution:
Increase in COLLOQUY’s share capital account
(see table above) 400,000
Divide by: ABC’s par value per share 40
Number of shares issued 10,000

28. How much is the acquisition-date fair value per share?

a. 400 b. 440 c. 280 d. 360

A
Solution:
Fair value of consideration transferred 4,000,000
Divide by: Number of shares issued 10,000
Acquisition-date fair value per share 400

29. How much goodwill was recognized on acquisition date?

a. 980,000 b. 1,200,000 c. 1,280,000 d. 1,080,000

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 (6.4M - 3.6M) (2,800,000)
Goodwill 1,200,000

30. What is the retained earnings of the combined entity immediately after the business
combination?
a. 3,120,000 b. 3,320,000 c. 3,280,000 d. 3,200,000

D 3,200,000 – COLLOQUY’s retained earnings

31. On January 1, 20x1, OBDURATE Co. acquired 30% ownership interest in

STUBBORN, Inc. for ₱400,000. Because the investment gave OBDURATE
significant influence over STUBBORN, the investment was accounted for under the
equity method in accordance with PAS 28.

From 20x1 to the end of 20x3, OBDURATE recognized ₱200,000 net share in the
profits of the associate and ₱40,000 share in dividends. Therefore, the carrying
amount of the investment in associate account on January 1, 20x3, is ₱560,000.
 P a g e | 14

On January 1, 20x4, OBDURATE acquired additional 60% ownership interest in

STUBBORN, Inc. for ₱3,200,000. As of this date, OBDURATE has identified the
following:
a. The previously held 30% interest has a fair value of ₱720,000.
b. STUBBORN’s net identifiable assets have a fair value of ₱4,000,000.
c. OBDURATE elected to measure non-controlling interests at the non-controlling
interest’s proportionate share of STUBBORN’s identifiable net assets.

How much is the goodwill?

a. 320,000 b. 240,000 c. 280,000 d. 360,000

A
Solution:
Consideration transferred 3,200,000
Non-controlling interest in the acquiree (1M x 10%) 400,000
Previously held equity interest in the acquiree 720,000
Total 4,320,000
Fair value of net identifiable assets acquired (4,000,000)
Goodwill 320,000

32. OBSTREPEROUS Co. and NOISY, Inc. both engage in the same business. On
January 1, 20x1, OBSTREPEROUS and NOISY signed a contract, the terms of which
resulted in OBSTREPEROUS obtaining control over NOISY without any transfer of
consideration between the parties.

The fair value of the identifiable net assets of NOISY, Inc. on January 1, 20x1 is
₱4,000,000. NOISY chose to measure non-controlling interest at the non-controlling
interest’s proportionate share of the acquiree’s identifiable net assets.

How much is the goodwill?

a. 4,000,000 b.0 c. a or c d. This is not a business combination

B
Solution:
Consideration transferred -
Non-controlling interest in the acquiree (4M x 100%) 4,000,000
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired (4,000,000)
Goodwill -

Use the following information for the next three questions:

On September 30, 20x1, INNOCUOUS Co. acquired all of the identifiable assets and
assumed all of the liabilities of HARMLESS, 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.

33. INNOCUOUS engaged an independent valuer to appraise a building acquired from

HARMLESS. However, the valuation report was not received by the time
 P a g e | 15

INNOCUOUS authorized for issue its financial statements for the year ended
December 31, 20x1. As such, the building was assigned a provisional amount of
₱2,800,000. Also, the building was tentatively assigned an estimated useful life of
10 years from acquisition date. INNOCUOUS uses the straight line method of
depreciation and recognized three months’ depreciation on the building for 20x1.

On July 1, 20x2, INNOCUOUS finally received the valuation report from the
independent valuer which shows that the fair value of the building as of September 30,
20x1 is ₱2,000,000 and remaining useful from that date is 5 years.

How should INNOCUOUS account for the new information obtained?

a. As a retrospective adjustment to the provisional amount of the building
resulting to increase in goodwill by ₱800,000.
b. As a retrospective adjustment to the provisional amount of the building
resulting to decrease in goodwill by ₱800,000.
c. As a retrospective restatement to the provisional amount of the building
resulting to increase in goodwill by ₱800,000. The adjustment is treated as a
correction of a prior period error.
d. The new information obtained is ignored. No adjustment to goodwill is
necessary.

34. On July 1, 20x2, INNOCUOUS obtained new information that HARMLESS has an
unrecorded patent which was not identified on September 30, 20x1. It was believed
that the unrecorded patent had a fair value of ₱400,000 and a remaining useful life
of 4 years as of September 30, 20x1.

How should INNOCUOUS account for the new information obtained?

a. As a retrospective adjustment to record the previously unrecorded patent
resulting to increase in goodwill by ₱400,000.
b. As a retrospective adjustment to record the previously unrecorded patent
resulting to decrease in goodwill by ₱400,000.
c. As a retrospective restatement to record the previously unrecorded patent
resulting to decrease in goodwill by ₱400,000. The adjustment is treated as a
correction of a prior period error.
d. The new information obtained is ignored. No adjustment to goodwill is
necessary.

35. On November 1, 20x2, the internal auditors of INNOCUOUS discovered an error on

the recorded identifiable assets acquired from HARMLESS on the business
combination. A patent with a fair value of ₱400,000 and a remaining useful life of 4
years as of September 30, 20x1 was omitted from the valuation listing.

How should INNOCUOUS account for the new information obtained?

a. As a retrospective adjustment to record the previously unrecorded patent
resulting to increase in goodwill by ₱400,000.
b. As a retrospective adjustment to record the previously unrecorded patent
resulting to decrease in goodwill by ₱400,000.
c. As a retrospective restatement to record the previously unrecorded patent
resulting to decrease in goodwill by ₱400,000. The adjustment is treated as a
correction of a prior period error.
d. The new information obtained is ignored. No adjustment to goodwill is
necessary.
 P a g e | 16

36. On September 30, 20x1, RIBALD Co. acquired all of the identifiable assets and
assumed all of the liabilities of OFFENSIVE, Inc. by issuing 10,000 shares with par
value of ₱20 per share.

On this date, RIBALD’s shares were assigned a provisional value of ₱400 per share.
Also, because some identifiable assets acquired and liabilities assumed have fair values
that were not readily available, a provisional amount of ₱2,800,000 was assigned to
OFFENSIVE’s net identifiable assets.

On April 1, 20x2, after RIBALD’s 20x1 financial statements were issued, new
information was obtained confirming that the fair value of RIBALD’s shares on
September 30, 20x1 is ₱440 per share and that the fair value of OFFENSIVE’s net
identifiable assets as of September 30, 20x1 is ₱3,600,000.
On July 1, 20x2, two competitors of RIBALD have also merged which led to RIBALD
believing that the merger with OFFENSIVE is not as profitable as expected. RIBALD
now wants to decrease the amount assigned to the consideration transferred to
OFFENSIVE on September 30, 20x1 to ₱360 per share and the value of OFFENSIVE’s
net identifiable assets to ₱1,600,000.

How should RIBALD account for the new information obtained on July 1, 20x2?
a. As a retrospective adjustment resulting to increase in goodwill by ₱400,000.
b. As a retrospective adjustment resulting to decrease in goodwill by ₱400,000.
c. As a retrospective restatement resulting to decrease in goodwill by ₱400,000.
The adjustment is treated as a correction of a prior period error.
d. The new information obtained is ignored. No adjustment to goodwill is
necessary.

37. When consolidating the financial statements of a parent and its subsidiary, which of
the following is eliminated?
a. Goodwill c. Investment in subsidiary
b. NCI in net assets d. All of these

38. A British parent entity uses the revaluation model to measure its property, but a
Philippine subsidiary uses the cost model. The Philippine subsidiary’s directors find
the revaluation model too costly to implement. In the consolidated financial
statements, is the group allowed to measure the Philippine subsidiary’s property
under the cost model?
a. Yes, the British parent’s property shall be adjusted to conform to the
subsidiary’s accounting policy of cost model.
b. No, the Philippine subsidiary’s property shall be adjusted to conform to the
group’s accounting policy of revaluation model.
c. Yes, both models will be reflected in the consolidated financial statements, but
this fact must be disclosed in the notes.
d. None of these, the property is eliminated in the consolidated financial
statements.

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 A Entity B
Cash in bank 12,000 6,000
Accounts receivable 36,000 14,400
 P a g e | 17

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 equity 402,000 96,000

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.

39. 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

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

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

D 204,000 + 78,000 + 60,000 + 21,600 (see table above) = 363,600

 P a g e | 18

“He will have no fear of bad news; his heart is steadfast, trusting in the Lord. His heart is
secure, he will have no fear; in the end he will look in triumph on his foes.”
(Psalm 112:7-8)

- END -