Republic of the Philippines

City of Caloocan
St. Vincent de Ferrer College of Camaranin, Inc.
SVFC Compound, San Vicente de Ferrer Rd. Area D, Brgy. 179, Caloocan City
COURSE TITLE: BUSINESS COMBINATION Prof. Orland L. Adrigado, CPA

FINAL TERM EXAMINATION

1. The business enterprises that enter into a business combination are termed the
a. Merging companies
b. Joining companies
c. Constituent companies
d. Combiner companies

2. When an offer is made to acquire a company and the acquiree management supports the
offer. the offer is called which of the following?
a. Friendly takeover
b. Tender offer
c. Hostile takeover
d. Defensive measure

3. Control over an acquiree can be attained through which of the following?

a. Acquisition of the acquiree assets
b. Acquisition of the acquiree stock
c. Either acquisition of the acquiree assets or stock
d. Neither acquisition of the acquiree assets or stock

4. In an acquisition of assets, the acquirer must give up which of the following?

a. Cash
b. Other assets
c. Liabilities
d. Any of the above can be given

5. In an acquisition where there is an exchange of assets for assets, how does the value of the
acquiree net assets change?
a. The net assets increase
b. The net assets decrease
c. There is no change in net assets
d. The net assets may increase, decrease or remain the same

6. In an acquisition where there is an exchange of assets for assets, how does the ownership
structure of the acquiree change?
a. There is no change in the acquiree ownership structure
b. The acquirer stockholders become the acquiree stockholders
c. The acquirer and acquiree stockholders share ownership of the acquiree
d. It is not possible to determine if ther is a change in the acquiree ownership structure
7. In an acquisition where there is an exchange of assets for assets, how does the ownership
structure of the acquirer change?
a. There is no change in the acquirer ownership structure
b. The acquirer stockholders become the acquiree stockholders
c. The acquirer and acquiree stockholders share ownership of the acquiree
d. It is not possible to determine if there is a change in the acquiree ownership structure

8. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree), how
does the value of the acquiree net assets change?
a. The net assets increase
b. The net assets decrease
C. There is no change in net assets
d. The net assets may increase, decrease or remain the same

9. In an acquisition where there is an exchange of stock (acquirer) for assets (acquiree). how
does the ownership structure of the acquiree change?
a. There is no change in the acquiree ownership structure
b. The acquirer stockholders become the acquiree stockholders
c. The acquirer and acquiree stockholders share ownership of the acquiree
d. If is not possible to determine if there is a change in the acquiree ownership structure

10. How should the transaction costs of issuing shares in an acquisition be recognized?
a. Expensed
b. Capitalized as part of the cost of the shares
c. Deducted in total from shareholders' equity
d. Deducted from shareholders' equity, net of related income tax benefits

11. How should the cost of issuing debt in an acquisition be recognized?

a. Expensed
b. Amortized over the term of the debt
c. Deducted from the value of the debt
d. Deducted from shareholders' equity

12. How accounting fees for an acquisition should be treated?

a. Expensed in the period of acquisition
b. Capitalized as part of the acquisition cost
c. Deferred and amortized
d. Deferred until the company is disposed of or wound-up
13. Which of the following statements about a bargain purchase is true?
a. It is reported on the financial statements as an "excess of fair value over cost of assets
acquired"
b. It is reported as a deferred credit on the financial statements called negative goodwill.
c. Assets and liabilities of the acquired company are reported at net book value.
d. Assets and liabilities of the acquired company are reported at their fair value.

14. What is the most common valuation method used for intangible assets?
a. Market-based
b. Income-based
c. Cost-based
d. Amortized cost

15. How should negative goodwill be shown on the consolidated financial statements of
the acquirer?
a. As a gain on the statement of comprehensive income
b. As a loss on the statement of comprehensive income
c. As a liability on the statement of financial position
d. As a separate amount under shareholders' equity on the statement of financial
position

16. At the end of 2022, Pontillas Company's stockholders' equity includes common stock of
P500,000 and additional paid-in capital of P300,000. Pontillas purchased a 70 percent interest
in Rabuya Company on January 1, 2022, when the non-controlling interest in Rabuya had a fair
value of P90,000.No differential arose from the business combination. During 2022, Rabuya
reports net income of P20,000 and declares dividend of P5,000. The 2022 consolidated balance
sheet includes retained earnings of P630,000 (controlling interest portion). Determine the
consolidated equity on December 31,2022:
a. P1,430,000
b. 1,457,000
c. P1,524,500
d. P1,526,000

17. On July 1. 2021 Juanerio Company acquired 100% of Oraa Company for a consideration
transferred of P160 million. At the acquisition date the carrying amount of Oraa's net assets was
P100 million. At the acquisition date a provisional fair value of P120 million was attributed to the
net assets. An additional valuation received on May 31, 2022 increased this provisional fair
value to P135 million and on July 30, 2022 this fair value was finalized at P140 million. What
amount should Juanerio present for goodwill in its statement of financial position on December
31, 2022, according to PFRS 3 Business combinations?
a. P20 million
b. P25 million
c. P20 million
d. P60 million
18. On January 1, 2021, the fair values of Battaring's net assets were as follows:
..
Current Asset P 100,000
Equipment 150,000
Land 50,000
Buildings 300,000
Liabilities 80,000

On January 1, 2021, Dela Cerna Company purchased the net assets of the Battaring Company
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 Dela Cerna would pay an additional amount on January 1, 2023, if the
average income during the 2-year period of 2021-2022 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, 2021?
a. Zero.
b. P100,000
C. P180,000
D. P284,000

19. Using the same information in No. 18, assuming that on August 1, 2021 the contingent
consideration happens to be P170,000, what amount will then be recorded as goodwill on the
said date?
a. Zero.
b. 86,000
c. 166,000
d. P270,000

20. Using the same information in Nos. 18 and 19, assuming that on January 1, 2023, the date
of settlement of the 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 contingent consideration 9,000
Cash ..... 175,000

D. No entry required.
21. One Company purchased all of the net assets of another by issuing 50,000 shares of its P5
par common stock. At the time, the stock was selling at P12 per share. Other direct costs and
fees associated with the combination totaled P51,000 and stock issue costs were P4,000. At
what total amount should the net assets acquired, including goodwill be recorded by the
acquiring company?
a. P600,000
b. P651,000
c. P647,000
d. P655,000

22. Enriquez Company paid P2,500,000 for the net assets of Paguntalan Company. The
following were paid by Enriquez Company in relation to the purchase of the net assets of
Paguntalan Company
Fees paid to legal adviser 25,000
Cost of SEC registration 12,000
Stock issue cost 5,000
Indirect cost 20,000

The fair market value of the net assets of Paguntalan Company amounted to P3,000,000.
What is the amount of goodwill (income from acquisition) to be recorded by Enriquez
Company?
a. (P500,000)
b. (P475,000)
c. (P458,000)
d. (P425,000)

Sancho Company acquired the net assets of Jainar Company by issuing 600,000 shares of its
P10 par value common stock. The current fair market of the shares of Sancho Company is P50
per share. On the date of purchase Sancho Company recorded goodwill in the amount of
P6,120,000. Sancho incurred P50,000 of legal and broker’s fees and P30,000 of indirect costs.

23. What is the fair value of Janinar Company’s net assets at the date of purchase?
a. P23,880,000
b. P23,910,000
c. P23,930,000
d. P24,180,000

24. As a result of the combination, the stockholders’ equity of Sancho Company will increase
by
a. P30,000,000
b. P29,970,000
c. P29,950,000
d. P29,920,000
25. The condensed balance sheet of Abainza Corporation as of December 31, 2021 is show
below
Book Values Fair Values
Current assets P200,000 225,000
Plant assets 300,000 400,000
Total assets P500,000

Liabilities P150,000
Capital stock, P10 par 50,000
Additional paid-in capital 100,000
Retained earnings 200,000
Total equities P500,000

On January 1, 2022, Abner Company issues 10,000 shares of its P10 par value stock with a
market value of P50 per share for the net assets of Abainza Corporation.

How much is the increase in the stockholders’ equity of Abner Company due to the business
combination?
a. P100,000
b. P350,000
c. P150,000
d. P500,000

Part II

Problem 1. (3points)
Patter Corporation issues 500,000 shares of its own P10 par common stock for the net assets
of Simpson Corporation in a merger consummated on July 1, 2021. On this date, Patter stock
is quoted at P20 per share. Summary balance sheet data for the two companies at July 1,
2021, just before combination, are as follows:

Patter Simpson
Current assets P 18,000,000 P1,500,000
Plant assets 22,000,000 6,500,000
Total assets 40,000,000 8,000,000
Liabilities 12,000,000 2,000,000
Common stock- P10 par 20,000,000 3,000,000
Additional paid-in capital 3,000,000 1,000,000
Retained earnings 5,000,000 2,000,000
Total equities P 40,000,000 P8,000,000

Required: Compute for Consolidated Shareholders’ Equity

Problem 2. (3points)
Ulysses Inc. and Grant Inc. agreed to enter into a combination which meets all the
qualifications of purchase. Their condensed balance sheets before the combination follows:

Ulysses Gant
Assets P6,675,000 P2,815,000
Liabilities 2,600,000 165,000
Capital stock (par P100) 2,500,000 1,250,000
Additional paid-in capital 375,000 375,000
Retained Earnings 1,200,000 1,025,000

Ulysses shall be the surviving entity and in exchange for the net assets of Grant which had a
fair market value of P2,933,000. Ulysses shall issue 7,500 shares of its common stocks.

Required: Compute for Goodwill and Consolidated Shareholders’ Equity

Problem 3. (3points)
Juno Inc. and Kitt Inc. agree to combine. Juno acquires the net assets of Kitt in exchange for
3,125 shares of Juno’s capital stock P1,300 per share (par P1,000). The condensed balance
sheet of Kitt prior to combination show:

Current assets P1,525,000

Plant and Equipment 2,300,000
Goodwill 250,000
Total Assets 4,075,000
Liabilities 950,000
Capital Stock 2,000,000
Additional Paid-in Capital 650,000
Retained Earnings 475,000
Total Liabilities & Equity 4,075,000

An appraisal made by an independent appraiser indicated that the fair value of Kitts assets
are P1,125,000 for current assets and P2,500,000 for plant and equipment. The combination is
appropriately recorded as purchase of interests.

Required: Compute for Goodwill and Consolidated Shareholders’ Equity

Problem 5. (10points)

The balance sheet of JM Company on August 31, 2022 was as follows:

JM Company
Balance Sheet
August 31, 2022
Cash P 60,000
Other current assets 420,000
Plant assets (net) 920,000
Total assets P1,400,000

Accounts payable 180,000

Mortgage payable 250,000
Common stock, P5 par 200,000
Paid-in capital in excess of par 320,000
Retained earnings 450,000
Total liabilities & stockholders’ equity 1,400,000

An independent appraiser established the following fair market values for JM Company’s
identifiable net assets other than cash.

Other current assets P 500,000

Plant assets (net) 1,000,000

Accordingly, on August 31, 2022, Justine Corporation issued 100,000 shares of its P10 par (P15
par market value) common stock for all the net assets of JM Company in a business qualifying
for purchase accounting. Also on August 31, 2022, Justine Corporation paid the following:

Cost to register and issue the stocks 50,000

Fess paid to accountants 25,000
Fees paid to legal advisers 25,000
Fees paid to official valuers 10,000
Indirect cost 40,000

Required:
1. Entries on the books of Justine Corporation using purchase method.
2. Compute for Goodwill/Gain on BP
3. Compute for consolidated Financial Statements (Balance Sheet)
a. Assets
b. Liabilities
c. Capital