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Business Combination Midterm Exam

Bachelor of Science in Accountancy (Philippine School of Business Administration)

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ADVANCE ACCOUNTING
EXAM 1 – ONLINE

TEST 1 – THEORIES

1. In identifying the acquirer in a business combination, all of the following are considered except:
a. The terms of the exchange of the securities
b. The relative amount of intangible assets on the individual entity financial assets
c. The relative voting rights in the combined entity after the combination

d. The composition of the governing body of the combined entity

2. Under IFRS, how shall an entity (acquirer) account for each business combination?
a. Acquisition method
b. Pooling of interest method
c. Proportionate consolidation method
d. Equity method

3. Which of the following accounting treatments for costs related to business combination is
incorrect?
a. The costs related to issuance of stocks or equity securities shall be deducted/debited from
any share premium from the issue and any excess is charged to "share issuance cost"
reported as contract-equity account against either (1) share premium from other share
issuances or (2) retained earnings.

b. Acquisition related costs such as finder's fees; advisory, legal, accounting, valuation and
other professional and consulting fees; and general administrative costs, including the costs
of maintain an internal acquisitions department shall be recognized as expense in the
Profit/Loss in the periods in which the cost are incurred.
.
c. The costs related to issuance of financial liability at fair value through profit or loss shall
recognized as expense while those related to issuance of financial liability at amortized cost
shall be recognized as deduction from the book value of financial liability or treated as
discount on financial liability to be amortized using effective interest method.

d. The costs related to the organization of the newly formed corporation also knows as pre-
incorporation costs shall be capitalized as goodwill or deduction from gain on bargain
purchase

4. Which statement is Incorrect concerning an acquirer?

a. In a business combination effected by issuing equity interest, the acquirer is usually the
entity that issues the equity interest

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b. The acquirer is usually the combining entity whose relative size is significantly greater than
that of the combining entity or entities

c. If a new entity is formed to issue equity interests to effect a business combination, the
new entity formed is necessarily the acquirer

d. In a business combination effected by transferring cash or other assets, the acquirer is

usually the entity that transfers the cash or other assets

5. If the initial accounting for a business combination is incomplete by the end of the reporting
period in which the combination occurs, the acquirer shall report in its financial statements
provisional amounts for the items for which the accounting is incomplete. What is the maximum
term or period of the measurement period?
a. 6 months from the acquisition date

b. 1 month from the acquisition date

c. 3 months from the acquisition date
d. One year or 12 months from the acquisition date

6. What date should be used as the acquisition date for a business combination?
a. The date when the acquirer signs the contract to purchase the business
b. The date when all contingencies related to the transaction are resolved
c. The date when the acquirer purchased more than 20% of the stock of the acquiree
d. The date when the acquirer obtains control of the acquiree

7. How shall the parent corporation present the Non-controlling Interest (NCI) in the Consolidated
Statement of Financial Position?
a. It shall be presented within the Consolidated Stockholders’ Equity, separately from the
equity of the owners of the parent
b. It shall be presented as contra equity account like treasury shares and subscription
receivable
c. It shall be presented as non-current asset
d. It shall be presented as non-current liability

8. Business combinations are accomplished either through a direct acquisition of assets and
liabilities by a surviving corporation or by stock investment in one or more companies. A parent-
subsidiary relationship always arise from a
a. Vertical combination.
b. Horizontal combination
c. Tax-free reorganization
d. Greater than 50% stock investment in another company

9. How should the transaction costs of issuing shares in an acquisition be recognized?

a. Deducted in total from shareholders’ equity

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b. Capitalized as part of the cost of the share

c. Expensed
d. Deducted from shareholders’ equity, net related income tax benefit
10. IFRS 10 defines them as financial statements of a group in which the assets, liabilities, equity,
income, expenses and cash flows of the parent and its subsidiaries are presented as those of a
single economic unit
a. Group financial statements
b. Consolidated financial statements
c. Separate financial statements
d. Combined financial statements

11. In a business combination, goodwill is measured as

a. The total of the consideration transferred plus the amount of any non-controlling interest in
the acquiree minus the identifiable net assets acquired
b. The total of the consideration received plus the fair value of the previously held interest in
the acquiree minus the identifiable net assets acquired
c. The total of the consideration transferred, plus the amount of any non-controlling interest
in the acquiree plus the fair value of previously held interest in the acquiree minus the
identifiable net assets acquired
d. The consideration transferred minus the identifiable net assets acquired

12. Should the following costs be included in the consideration transferred in

business combination, according to IFRS 3, Business Combination?
1- Costs of maintaining an acquisitions department.
2- Fees paid to accountants to effect the combination.
a. Cost(l) Cost (2)
Yes Yes
b. Cost(l) Cost (2)
No Yes
c. Cost(l) Cost (2)
Yes No
d. Cost(l) Cost (2)
No No

13. How should an entity account for the incomplete information in preparing the financial
statements immediately after the acquisition?
a. Record the uncertain items at a provisional amount measured at the date of acquisition
b. Record a contra account to the investment account for the amounts involved
c. Record the uncertain items at the carrying amount of the acquiree
d. Do not record the uncertain items until complete information is available

14. When should an acquirer derecognize a contingent liability recognized as the result of an
acquisition?
a. When it is reasonably possible that the liability will not require payment
b. When it becomes more likely than not that the entity will not be liable

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c. When the contingency is resolved

d. At the end of the year of acquisition

15. 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 IFRS 3, Business Combination,
the acquirer should
a. Recognize the excess immediately in other comprehensive income.
b. Reassess the recognition and measurement of the net assets acquired and the
consideration transferred, then recognize any excess immediately in profit or loss
c. Recognize the 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.

16. A business combination may be legally structured as a merger, a consolidation, an investment in

stock, or a direct acquisition of assets. Which of the following describes a business combination
that is legally structured as a merger?
a. An investor-investee relationship is established
b. A parent-subsidiary relationship is established
c. The surviving company is one of the two combining companies
d. The surviving company is neither of the two combining companies.

17. Polk issues common stock to acquire all the assets of the Sam Company on January 1, 2020.
There is a contingent share agreement, which states that if the income of the Sam division
exceeds a certain level during 2020 and 2021, additional shares will be issued on January 1,
2022. The impact of issuing the additional share is to
a. Have no effect on asset values, but to reassign the amounts assigned to equity accounts
b. Record additional goodwill
c. Increase the price assigned to fixed assets
d. Reduce retained earnings

18. Under PFRS 3, what is the treatment of acquisition related costs in a business combination?
a. It shall be debited to share premium
b. It shall be charged directly to retained earnings
c. It shall be expensed as incurred and presented as part of profit or loss
d. It shall be capitalized as part of consideration given up in computation of goodwill or gain on
bargain purchase

19. When cost of investment exceeds the prorated aggregate fair values of identifiable net assets ,
the residual is accounted for as
a. Excess of implied over fair value
b. A deferred credit
c. Goodwill to controlling interest

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d. Difference between implied and fair value

20. There is a measurement period of two years in reference for contingent consideration liability.
FALSE

TEST II – PROBLEM SOLVING

Problem 1

Candy Co. purchased the net assets of Crush Co. for P 160,000. On the date of purchase, Crush had no
long-term investments in marketable securities. The liabilities of the corporation amounted to P20,000.
The market values of its assets were:
Current Assets---------------P 80,000 Non-current assets----------P120,000

21. The non-current assets and goodwill (income from acquisition) acquired should be recorded at
a. NCA, P120,000; GW(Income), P(20,000)
b. NCA, P150,000; GW(Income), P100,000
c. NCA, P100,000; GW(Income), P(100,000)
d. NCA, P140,000; GW(Income), P20,000

Problem 2

On December 31, 2020, the following figures were taken from the trial balance of Kenshin Company and
Kaoru Company:
KENSHIN KAORU

Cash 80,000.00 20,000.00

Receivables 60,000.00 60,000.00
Inventory 100,000.00 70,000.00
Property and Equipment– net 200,000.00 100,000.00
Goodwill ___ 30,000.00
Current liabilities 20,000.00 10,000.00
Long-term liabilities 70,000.00 50,000.00
Common stock 110,000.00 100,000.00
Additional paid-in capital 20,000.00 ___
Retained earnings 220,000.00 120,000.00

On December 31, 2020, Kenshin issues 10,000 shares of its P10 par value stock for all the outstanding
shares of Kaoru. Kenshin’s stock had a P25 per share fair market value. Kenshin also paid the following:
P25,000 for broker’s fee on business combination, P20,000 for pre-acquisition audit fee, P21,500 for
legal fees, P18,000 for audit fee for SEC registration of stock issue and P5,500 for printing of stock
certificates. Kaoru holds an equipment that is worth P40,000 more than is current book value. The
retained earnings of Kaoru on January 1, 2020 amounted to P70,000.

22. How much is the consolidated assets at acquisition date?

a. 660,000
b. 750,000
c. 640,000

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d. 620,000

23. What is the result of business combination?

a. 20,000 goodwill
b. 20,000 gain
c. 30,000 goodwill
d. 10,000 gain

24. How much is the consolidated shareholders’ equity?

a. 570,000
b. 510,000
c. 530,000
d. 600,000

Problem 3

Lucky Co. is offered 200,000 shares of Pacino Inc in exchange for its net assets. Pacino Inc share capital
has a market value of P 11 per share. The offer is accepted. The statement of financial position of the
two companies (in thousand pesos) are presented below:
Pacino. Inc. Lucky Co.
Total Assets 1,097.50 1,733.25

Total Liabilities 312.50 383.25

Ordinary share capital, P 1 par, 800,000
Shares issued and outstanding 800.00
Ordinary share capital, no par, 2,500
Shares issued and outstanding 25.00
Retained earnings (15.00) 1,325.00
Total Liabilities & shareholder’s equity 1,097.50 1,733.25

25. The total assets of Pacino after affecting the combination is

a. 2,830,750
b. 2,950,000
c. 3,680,750
d. 3,000,000

Problem 4

On May 1,2020, Queen Corporation paid cash of P600,000 for all of the net assets of Prince Company
and Prince is dissolved. The carrying value of the assets and liabilities of Prince on May 1,2020 follow:
Cash P60,000
Inventory 180,000
Plant and equipment (net of accumulated
Depreciation of P220,000) 320,000
Goodwill 100,000
Liabilities 120,000

On May 1,2020, Prince inventory had a fair value of P150,000, and the plant and equipment (net) had a

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fair value of P380,000.

26. What is the amount of goodwill recorded in the books of Prince as a result of the business
combination?
a. 100,000
b. 30,000
c. 0
d. 130,000

27. What is the amount of total assets acquired from Prince that will be recorded in the books of Queen
as a result of the business combination?
a. 630,000
b. 690,000
c. 660,000
d. 590,000

Problem 5

Pula Co. issued 120,000 shares of its P25 par common stock for the net assets of Azul Corp. in a business
combination completed on March 1, 2020. Azul Corp.’s net assets worth P3,800,000 at FMV. Out-of-
pocket cost of the combination were as follows:
Legal Fees P 26,000
Contingent consideration (highly probable and measurable) 18,000
Printing costs of stock certificates 8,500
Finder’s fees 27,000
Professional Fees paid to CPA 21,000
Fees paid to company lawyers 23,450
Fees paid to company accountants 38,900

Goodwill from this business combination is P418,000.

28. How much is the FMV per share of Pula Co. at March 1, 2020?
a. 25
b. 35
c. 30
d. 40

Problem 6

Lucky Co. is offered 200,000 shares of Pacino Inc in exchange for its net assets. Pacino Inc share capital
has a market value of P 11 per share. The offer is accepted. The statement of financial position of the
two companies (in thousand pesos) are presented below:
Pacino. Inc. Lucky Co.
Total Assets 1,097.50 1,733.25

Total Liabilities 312.50 383.25

Ordinary share capital, P 1 par, 800,000
Shares issued and outstanding 800.00
Ordinary share capital, no par, 2,500

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Shares issued and outstanding 25.00

Retained earnings (15.00) 1,325.00
Total Liabilities & shareholder’s equity 1,097.50 1,733.25

29. What is the result of business combination?

a. 0
b. 850,000
c. 875,000
d. 1,145,000

Problem 7

BAB CO. had these accounts at the time it was acquired by TING INC.

Cash----------------------------- P36,000
Accounts receivable------------ 457,000
Inventories----------------------- 120,000
Plant, Property, and Equipment- 696,000
Accounts Payable--------------- 350,800

TING paid P1,400,000 for net assets of BAB CO. It was determined that the fair market value of
inventories and plant, property, equipment were P133,000 and P900,000 respectively.

An assumed contingent liability with a fair value amounting to P10,000 and such amount is considered a
reliable measurement. Also, a P25,000 future losses or reorganization/restructuring costs are expected
to be incurred as a result of the business combination.

30. In the books of TING CO., this transaction resulted in:

a. Current assets increased by P234,800
b. Goodwill of P441,400
c. Goodwill of P224,800
d. Goodwill of P234,800

Problem 8

COBRA CORP. issues 500,000 shares of its own P1 par common stock for the net assets of DOMINANTE
CO. in a merger consummated on July 1, 2029. On this date, COBRA’s stock is quoted at P10 per share.
Balance sheet data for the two companies at July 1 just before combination are as follows:

COBRA DOMINANTE
CURRENT ASSETS 18,000,000.00 1,500,000.00
PLANT ASSETS 22,000,000.00 6,500,000.00
TOTAL ASSETS 40,000,000.00 8,000,000.00
LIABILITIES 12,000,000.00 2,000,000.00
COMMON STOCK 20,000,000.00 3,000,000.00
APIC 3,000,000.00 1,000,000.00

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RETAINED EARNINGS 5,000,000.00 2,000,000.00

TOTAL LIABILITIES AND EQUITIES 40,000,000.00 8,000,000.00

COBRA also paid finder’s fees of P50,000 and legal fees of P10,000; as well as indirect expenses of
P40,000. All assets and liabilities of Dominante were at fair values on July 1 2029.
The total assets on the combined balance sheet after the combination will be:

31. What is the total amount of retained earnings on the combined balance sheet after the
combination?
a. 4,900,000
b. 7,000,000
c. 4,960,000
d. 5,900,000

32. What is the total assets on the combined balance sheet after the combination?
a. 48,000,000
b. 47,900,000
c. 47,000,000
d. 46,900,000

33. What is the total shareholders’ equity after the combination?

a. 33,000,000
b. 34,000,000
c. 32,900,000
d. 33,900,000

Problem 9

P Company assigned tentatively a fair value of P 1,000,000 to land it acquired when it purchased S
company. Ten months later, P obtained an improved information regarding facts and circumstances that
existed on the date of acquisition that land was worth P700,000 at the date of acquisition. Two years
after the acquisition, the land is worth P1,100,000.

34. How does P account for these value change?

a. Decrease goodwill by net amount of P100,000
b. Increase goodwill by P300,000; no recognition of increase in value to P1,100,000
c. Loss of P300,000, reported on the income statement; no recognition of increase in value to
P1,100,000
d. Loss of P300,00 and gain of P400,000, reported on the income statement

Problem 10

On August 15, 2020, PANDA Company acquired 80% of SONNY Company for P3,200,000. On this date the
assets of SONNY Company have carrying value of P3,000,000 and fair value of P5,000,000 while its
liabilities have book value of P1,000,000 and fair value of P1,500,000.

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35. If NCI measured at Proportionate FV of Net Assets, what is the amount of Goodwill/(GAIN)? 400k

Problem 11

On August 15, 2020, PANDA Company acquired 80% of SONNY Company for P3,200,000. On this date the
assets of SONNY Company have carrying value of P5,000,000 and fair value of P6,000,000 while its
liabilities have book value of P1,000,000 and fair value of P1,500,000.

36. Assume that the stated fair value of the NCI is P850,000, how much goodwill/(gain) would be
reflected to consolidated financial statements? (450k) (400k)

Problem 12

On August 15, 2020, PANDA Company acquired 80% of SONNY Company for P3,200,000. On this date the
assets of SONNY Company have carrying value of P5,000,000 and fair value of P6,000,000 while its
liabilities have book value of P1,000,000 and fair value of P1,500,000 .

37. Assume that the stated fair value of the NCI is P850,000, what is the amount of NCI that will be
reflected on consolidated financial statement? 850k 900k

Problem 13

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2020, for P3,800 cash.
As of that date Hurley has the following trial balance:

DEBIT CREDIT
CASH P 500.00
ACCOUNTS RECEIVABLE 600.00
INVENTORY 800.00
BUILDING-NET (5 YEAR REMAINING LIFE) 1,500.00
EQUIPMENT 1,000.00
LAND 900.00
ACCOUNTS PAYABLE P 400.00
LONG TERM LIABILITIES (DUE TO 12/31/2023) 1,800.00
COMMON STOCK 1,000.00
APIC 600.00
RETAINED EARNINGS 1,500.00
TOTAL P 5,300.00 P 5,300.00

Net income and dividends reported by Hurley for 2020 and 2021 follow:
2020 2021
NET INCOME 100.00 120.00

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DIVIDENDS 30.00 40.00

The fair value of Hurley’s net assets that differ from their book values
are listed below:
FAIR VALUES
Buildings 1,200.00
Equipment 1,250.00
Land 1,300.00
Long Term Liabilities 1,700.00

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill.

38. Compute the amount of Hurley's long-term liabilities that would be reported in a December 31,
2020, consolidated balance sheet. (Use straight line for amortization of excess.) P1,725 (1,700 + [100
excess of book value over fair value divided by 4 years])

Problem 14

Papa Company acquires 15 percent of Sese Company’s common stock for P600,000 cash and carries the
investment using the cost model. A few months later, Papa purchases another 60 percent of Sese
Company’s stock for P2,592,000 which includes P 200,000 control premium. At that date, Sese Company
reports identifiable assets with a book value of P4,680,000 and a fair value of P6,120,000, and it has
liabilities with a book value and fair value of P2,280,000. The fair value of the 25% non-controlling
interest in Sese Company is P1,080,000.

39. What is the amount of goodwill if NCI is measured at proportionate share? P360,000

Consideration transferred 2,592,000

NCI (3,840,000 x 25%) 960,000
FV of previously held interest (2,592,000/60%) x 15% 648,000
Less: FVNIA (3,840,000)
Goodwill 360,000

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