AFAR (6.

0 - Accounting for Business Combination)

DRILL/ASSESSMENT

1. Which of the following types of business combinations is least similar to the others?

a. Merger
b. Consolidation
c. Acquisition of stock
d. All of the above are equally similar.

2. All business combination shall be accounted for by using:

a. acquisition method
b. uniting of interest method
c. pooling-of-interest method
d. equity method

3. The combining entity that obtains control of the other combining entities or businesses is the:

a. acquire
b. acquirer
c. parent
d. subsidiary

4. Control over investee is obtained if the investor has all of the following, EXCEPT:

a. power over the investee.

b. exposure, or rights, to variable returns from its involvement with the investee.
c. the ability to use its power over the investee to affect the amount of the investor’s returns.
d. significant influence.

5. Which of the following is not one of the criteria of control?

a. more than one – half of the voting rights is acquired.

b. power over the investee.
c. exposure, or rights, to variable returns from its involvement with the investee.
d. the ability to use its power over the investee to affect the amount of the investor’s
returns.
6. The acquirer shall, at the acquisition date, recognize the acquiree’s identifiable assets,
liabilities and contingent liabilities at their

a. Fair Values
b. Book Values
c. Salvage Values
d. Exit Values

7. When one company acquires a company in the same industry, what type of business
combination has occurred?

a. horizontal combination
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b. conglomerate combination
c. vertical combination
d. pooling combination

8. If the initial accounting for a business combination can be determined only provisionally, the
acquirer shall account for the combination using the provisional values. Adjustments to those
provisional values shall be recognized by the acquirer within
a. 3 months of the acquisition date.
b. 6 months of the acquisition date.
c. 9 months of the acquisition date.
d. 12 months of the acquisition date.

9. Using the acquisition method, when a bargain purchase occurs and the net amount of the fair
values of the separately identified assets acquired and liabilities exceed the fair value of the
consideration transferred

a. assets are recorded at amounts below their assessed fair values.

b. a gain on bargain purchase is recognized at the acquisition date.
c. a loss on bargain purchase is recognized at the acquisition date.
d. a contingent liability is recognized.
e. goodwill is recognized and tested for impairment on an annual basis.

10. Which of the following statements is not correct regarding SME accounting for business
combination?

a. Goodwill arising from business combination is amortised over its useful life and in case
the SME is unable to make a reliable estimate of the useful life of goodwill, the life shall
be presumed to be ten years.
b. Noncontrolling interest is measured initially at proportionate fair value of the acquiree’s
net assets.
c. Acquisition – related costs that are considered direct costs are expensed outright.
d. Only the parent’s goodwill is recognized.

11. On April 1, 2016, Dean Co. paid P620,000 for all net assets of James Corp. in a transaction
properly accounted for as an acquisition. The recorded assets and liabilities of James Corp.
on April 1, 2016 are as follows:

Cash P 60,000
Inventory 180,000
Property and equipment (net of accumulated
depreciation of P220,000) 320,000
Goodwill (net of accumulated amortization
of P50,000) 100,000
Liabilities (120,000)
Net assets P540,000
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DRILL/ASSESSMENT

On April 1, 2016, Jame’s inventory had a fair value of P150,000 and the property and
equipment (net) had a fair value of P380,000.

What is the amount of goodwill resulting from the business combination?

a. P150,000
b. P120,000
c. P50,000
d. P20,000

12. On December 31, 2015, Saxe Corporation was merged into Poe Corporation. In the business
combination, Poe issued 200,000 ordinary shares P10 par, with a market price of P18 a share,
for all of Saxe’s net assets. The shareholders’ equity section of each company’s balance sheet
immediately before the combination was:
Poe Saxe
Ordinary Share Capital P3,000,000 P1,500,000
Share Premium 1,300,000 150,000
Retained earnings 2,500,000 850,000
P6,800,000 P2,500,000

In the December 31, 2016, acquirer’s statement of financial position right after the combination,
share premium should be reported at:

a. P950,000
b. P1,300,000
c. P1,450,000
d. d. P2,900,000

13. On January 1, 2016, Near Co. issued 100,000 shares of its P10 par value ordinary shares in
exchange for all of Far Inc.’s net assets. The fair value of Neal’s ordinary shares on December
31, 2015 was P19 per share. The carrying amounts and fair values of Far’s assets and liabilities
on December 31, 2015, were as follows:

Carrying Amount Fair Value

Cash P 240,000 P 240,000
Receivables 270,000 270,000
Inventory 435,000 405,000
Property, plant and equipment 1,305,000 1,440,000
Liabilities (525,000) (525,000)
Net assets P1,725,000 P1,830,000

What is the amount of goodwill resulting from the business combination?

a. P175,000
b. P105,000
c. P 70,000
d. P0
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DRILL/ASSESSMENT

14. Pat Corporations issues 500,000 shares of its own P10 par ordinary for all the outstanding
stock of Sim Corporation in a merger consummated on July 1, 2016. On this date Patter stock
is quoted at P20 per share. Summary balance sheet data for the two companies at July 1, 2016,
just before combination, are as follows:
Pat Sim
Current assets P18,000,000 P1,500,000
Plant assets 22,000,000 6,500,000
Total assets P40,000,000 P8,000,000
Liabilities P12,000,000 P2,000,000
Share Capital, P10 par 20,000,000 3,000,000
Share Premium 3,000,000 1,000,000
Retained earnings 5,000,000 2,000,000
Total equities P40,000,000 P8,000,000

If the business combination is treated as an acquisition and Sim’s identifiable net assets have
a fair value of P9,000,000, Pat’s balance sheet immediately after the combination will show
goodwill of:
a. P1,000,000
b. P2,000,000
c. P3,000,000
d. P4,000,000

15. Corn Company has acquired the net assets of Coles Company on January 1, 2016. The fair
value of the purchase consideration was P 10 million ordinary shares of P1 par value of Corn,
and the fair value of the net assets acquired was P7 million. At the time of the acquisition, the
value of the ordinary shares of Corn and the net assets Coal were only provisionally
determined. The value of the shares of Corn (P11 million) and the net assets of Coal (7.5
million) on January 1, 2016 were finally determined on November 30, 2016. However, the
directors of Corn have seen the value of the company decline since January 1, 2016, and as of
February 1, 2017, wish to change the value of the purchase consideration to P9 million.

What value should be placed on the purchase consideration and net assets of Coles as at the
date of acquisition?

a. Purchase consideration P10 million, net asset value P7 million.

b. Purchase consideration P11 million, net asset value P7.5 million.
c. Purchase consideration P9 million, net asset value P7.5 million.
d. Purchase consideration P11 million, net asset value P7 million.
16. On January 1, 2015, Apple acquired a 60% interest in Cider for P80 million. Apple already
held a 10% interest which had been acquired for P12 million but which was fair valued at P15
million at January 1, 2015. The fair value of the non-controlling interest at January 1, 2015,
was P47 million and the fair value of the identifiable net assets of Cider was P130 million. A
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DRILL/ASSESSMENT

gain relating to the revaluation of the original equity interest would be recorded in the
amount of

a. P3 million.
b. P12 million.
c. P35 million.
d. P38 million.
17. Dam Company purchased the net assets of Sam Company in an acquisition by issuing 20,000
shares of its P1 par common stock that had a fair value of P10 per share and providing
contingent consideration that had a fair value of P10,000 on the acquisition date. Dam also
incurred P15,000 in direct acquisition costs. On the acquisition date, Sam had assets with a
book value of P200,000, a fair value of P350,000, and related liabilities with a book value and
fair value of P70,000. What amount of gain should Dam report related to this transaction?

a. P55,000
b. P70,000
c. P80,000
d. P250,000
18. Loyd Company purchases John Company for P800,000 cash on January 1, 2016. The book
value of John Company’s net assets, as reflected on its December 31, 2015 statement of
financial position is P620,000. An analysis by Loyd on December 31, 2015 indicates that the
fair value of John’s tangible assets exceeded the book value by P60,000, and the fair value of
identifiable intangible assets exceeded book value by P45,000. How much goodwill should
be recognized by Loyd Company when recording the purchase of John Company?

a. P0
b. P180,000
c. P120,000
d. P75,000

19. SME Corporation, small-medium-sized entity, acquired MSE Company in a purchase

business combination. SME will pay P5,500,000 cash for the net assets of MSE. SME incurred
P25,000 direct acquisition-related costs to complete the combination. There is a probable
contingent consideration with a fair of P120,000 at acquisition date. The net assets of MSE
were fair valued at P4,200,000. In recording this business combination, the amount of
goodwill is

a. P1,300,000
b. P1,325,000
c. P1,445,000
d. P1,205,000

20. SME Corporation, small-medium-sized entity, acquired MSE Company in a purchase

business combination. SME will pay P5,500,000 cash for the net assets of MSE. SME incurred
P25,000 direct acquisition-related costs to complete the combination. There is a probable
contingent consideration with a fair of P120,000 at acquisition date. The net assets of MSE
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DRILL/ASSESSMENT

were fair valued at P4,200,000. SME estimates that the goodwill could benefit the company
for 12 years. What is the carrying amount of goodwill a year after the acquisition?

a. P1,300,500
b. P1,324,583
c. P1,214,583
d. P1,325,000