College of Saint Lawrence, Inc.

Borol 1st, Balagtas Bulacan

ACCOUNTING FOR BUSINESS COMBINATION

MIDTERM EXAMINATION

TEST I. Multiple Choice. Answers without solutions are not valid.

1. Companies X, Y and Z, parties to a consolidation have the following data:

X Co. Y Co. Z Co.

Net assets P 400,000 P600,000 P1,000,000
Average annual earnings 60,000 60,000 80,000

The parties collectively agreed that the new corporation AA Co. will issue a single class of stock based
on the earnings ratio. What is the stock distribution ratio to companies X,Y, and Z, respectively ?

a. 20:30:50
b. 30:30:40
c. 30:40:30
d. 40:40:20

2. On January 1, 2020, the fair values of Chief Hong’s net assets were as follows:

Current Asset P100,000

Equipment 150,000
Land 50,000
Buildings 300,000
Liabilities 80,000

On January 1, 2020, Salt Co. purchased the net assets of Chief Hong Co. by issuing 100,000 shares of
its P1 par value stock when the fair value of the stock was P6.20. It was further agreed that Salt would
pay an additional amount on January 1, 2022 if the average income during the 2-year period of 2020-
2021 exceeded P80,000 per year. The expected value of this consideration was calculated as P184,000;
the measurement period is one year.

What amount will be recorded as goodwill on January 1, 2020?

a. 0
b. P100,000
c. P180,000
d. P284,000

3. Using the same information in No. 2, assuming that on August 1, 2020 the contingent consideration
happens to be P170,000, what amount will then be recorded as good will on the said date?

a. 0
b. P86,000
c. P166,000
d. P270,000

4. Using the same information in Nos. 2 & 3, assuming that on January 1, 2022, the date of settlement
of contingent consideration clause agreement for P175,000, the entry should be:

a. Estimated liability for contingent consideration 170,000

Loss on estimated contingent consideration 5,000
Cash 175,000

b. Estimated liability for contingent consideration 175,000

Cash 175,000

c. Estimated liability for contingent consideration 184,000

Gain on estimated liability for contingent consideration 9,000
Cash 175,000

d. No entry required

5. Lazada Co. acquired Shoppee Co. through an exchange of common shares. All of Shoppee’s assets and
liabilities were immediately transferred to Lazada. Lazada’s common stock was trading at P20 per
share at the time of exchange. Following selected information is also available:
 Before acquisition After acquisition
Par value of shares outstanding P200,000 P250,000
APIC P350,000 P550,000

Based on the preceding information, what number of shares was issued at the time of exchange?

a. 5,000
b. 10,000
c. 12,500
d. 17,500

6. Using the same information in No. 5, what is the par value of Lazada’s common stock?

a. P10
b. P5
c. P4
d. P1

7. Using the same information in No. 5, what is the fair value of Shoppee’s net assets, if goodwill of
P56,000 is recorded?

a. P194,000
b. P244,
c. P300,000
d. P306,000

8. Coco Co. acquired all the assets and assumed all the liabilities of Melon Co. for P400,000. Information
on Melon’s identifiable assets and liabilities as at the acquisition date is shown below:

Carrying Amounts Fair Values

Assets 5,800,000 6,100,000
Liabilities 2,100,000 2,300,000

All the fair value adjustments to the identifiable assets acquired and liabilities assumed have deferred
tax consequences, but do not affect their tax bases. The income tax rate is 30%.

What is the amount of goodwill?

a. P230,000
b. P350,000
c. P50,000
d. P170,000

9. On October 26, 2020, Pfizer Co. acquired 100% interest in Moderna Co. for P2,800,000. On this date,
Moderna’s identifiable assets and liabilities have fair values of P4,000,000 and P1,600,000,
respectively. Included in Moderna’s liabilities are cash dividends of P280,000 declared on October 1,
2020, to shareholders of record on November 1, 2020, and payable on December 1, 2020.

How much is the goodwill?

a. P400,000
b. P680,000
c. P120,000
d. 0

10. On July 1, 2021, Sinovac Biotech Co. acquired all the identifiable assets and assumed all the liabilities
of Astrazeneca Co. for P800,000. At acquisition date, Astrazeneca’s identifiable assets and liabilities
have fair values of P1,200,000 and P300,000, respectively.

Additional information:
✓ Astrazeneca has an unrecognized intangible asset for secret processes. Sinovac
assigned a provisional amount of P200,000 for this asset because its fair value is not
readily determinable on acquisition date. The provisional amount is included in the
total valuation of the assets acquired. SUV amortized the intangible asset over an
estimated useful life og 10 years using the straight line method.
✓ On February 1, 2022, an independent consultant determined that the intangible asset’s
fair value on acquisition date was P20,000 and the useful life was 4 years.

The entry to restate the goodwill includes which of the following?

a. Debit to goodwill for P180,000

b. Debit to intangible asset for P180,000
c. Debit to retained earnings for P100,000
d. Credit to goodwill for P80,000
11. On January 1, 2021, Over Co. acquired 10,000 out of the 100,000 outstanding shares of Think Co. for
P30,000. Transaction costs on the acquisition amounted to P2,000. Over classified shares as held for
trading. The shares were trading at P5 on December 31, 2021. On July 1, 2022, Over acquired
additional 50,000 shares of Think Co. at P7 per share, the quoted price on that date. The outstanding
shares of Think Co. remained at 100,000 shares. Think Co.’s net identifiable assets have a fair value of
P665,000 as of this date. Over elected to measure NCI using the proportionate share method. How
much is the goodwill?

a. 12,000
b. 18,000
c. 21,000
d. 31,000

12. On January 1, 2021, BBM Inc. acquires all the assets and liabilities of LVR Co. for P2,000,000. LVR’s
net identifiable assets and liabilities have fair values of P4,000,000 and P2,200,000, respectively.

Additional Information:
✓ Prior to business combination, LVR is a franchisee of BBM. The franchise agreement has a
remaining term of 5 years, which either party can terminate without any penalty.
✓ The franchise agreement has a fair value of P300,000, of which P100,000 is at-market value.
The off-market value is favorable to BBM but unfavorable to LVR.
✓ BBM’s related contract liability account has a carrying amount of P230,000, while LVR’s
related franchise account has a carrying amount of P150,000

How much is the goodwill?

a. P50,000
b. P250,000
c. P0 because it is a bargain purchase
d. P150,000

13. Bato Co. acquired all the assets and liabilities of Pick Co. for P2,600,000. On acquisition date, Pick’s
identifiable assets and liabilities have fair values of P5,900,000 and P3,500,000, respectively. Relevant
information follows:
• Bato is renting out a building to Pick Co. on an operating lease. The terms of the lease
compared with market terms are favorable. The fair value of differential is P90,000.
• Pick is a defendant on a pending lawsuit. No provision was recognized because Pick’s legal
counsel believes that they will successfully defend the case. The fair value of settling the
lawsuit is P10,000

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

a. 120,000
b. 140,000
c. 200,000
d. 180,000

14. On January 1, 2021, Sweet Co. acquired all the assets and assumed all the liabilities of Vanilla Co. for
P2,400,000. Relevant information follows:

Assets Carrying Amounts Fair Values

Cash 10,000 10,000
Receivables, net 400,000 280,000
Inventory 480,000 350,000
Land 2,000,000 2,200,000
Goodwill 110,000 20,000
Total Assets 3,000,000 2,860,000
Liabilities 400,000 480,000

❖ Vanilla Co. has a research and development projects with fair value of P60,000. Sweet does not
intend to use those R&Ds. However, there have been exchange transactions involving the
information generated from Vanilla’s R&D, but those transactions are infrequent.
❖ All fair values adjustments result to temporary differences but do not affect the tax bases of the
assets and liabilities. The tax rate is 30%.
❖ Sweet incurred P100,000 on general administrative costs of maintaining an internal
acquisitions department.

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

a. 12,000
b. -41,000
c. 20,000
d. 19,000
 15. Legion Inc. acquired 100% voting rights in Skt co. by contract alone. No consideration was transferred
on the arrangement. Sky’s net identifiable assets have fair value of P1,800,000. Legion measured the
NCI at proportionate share. How much is the goodwill?

a. P0
b. P50,000
c. P100,000
d. None of the above.

Test II. True or False

1. For purposes of goodwill measurement, the earnings of the acquiree are normalized, meaning earnings
are adjusted for non-recurring income and expenses.

2. Indirect valuation is a method of goodwill measurement based on expected future earnings from the
business to be acquired.

3. In a business combination accomplished through exchange of equity interests, the acquirer is usually
the entity that issues its equity interests.

4. In a business combination achieved in stages, the entity that issues securities is identified as the
acquiree for accounting purposes.

5. Impairment of goodwill is reversed in a subsequent period.

6. After initial recognition, goodwill is not amortized but rather tested for impairment at least semi-
annually.

7. The measurement period under PFRS 3 is a maximum of 12 months after the end of business
combination year.

8. A transaction that is arranged primarily for the benefit of the acquirer or the combined entity rather
than the acquiree or its former owners is likely to be a separate transaction. The transaction price is
excluded from the consideration transferred when computing for goodwill.

9. The acquirer recognizes a reacquired right in a business combination as intangible asset.

10. The acquirer recognizes a settlement gain or loss if a pre-existing relationship with the acquiree is
settled due to the business combination.

11. A contingent consideration is measured at acquisition date fair value and included in the
consideration transferred.

12. A contingent consideration that is classified as equity is not adjusted for changes in fair value
subsequent to initial recognition, except for changes in fair value that are measurement period
adjustments.

13. If the consideration transferred in a business combination is deferred, the consideration may be
measured at present value.

14. NCI is measured either at fair value or the NCI’s proportionate share in the acquirer’s net identifiable
assets.

15. Excess earnings are sometimes referred to as superior earnings.

16. Because goodwill is unidentifiable, it can be tested for impairment separately.

17. In capitalization of average excess earnings, goodwill is measured at the average excess earnings
multiplied by a predetermined capitalization rate.

18. The goodwill is measured at the average excess earnings multiplied by the probable duration of excess
earnings under multiples of average excess earnings.

19. In reverse acquisitions, the accounting acquiree is the legal acquirer and the accounting acquirer is
the legal acquiree.

20. In a business combination achieved in stages, the acquirer’s previously held equity interest in the
acquiree is remeasured to fair value and included in the computation of goodwill