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NAME:
Professor:
Date:
Score:
Section:
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
Cash in bank
Accounts receivable
Inventory
Equipment – net
Goodwill
Total assets
Carrying amounts
25,000
425,000
1,300,000
2,500,000
250,000
4,500,000
Fair values
25,000
300,000
875,000
2,750,000
50,000
4,000,000
1,000,000
1,000,000
Liabilities
Payables
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)
Less: Fair value of liabilities assumed
Fair value of identifiable net assets acquired
Fair value of identifiable net assets acquired
Multiply by: Non-controlling interest (100% - 75%)
NCI’s proportionate share in identifiable net assets
3,950,000
(1,000,000)
2,950,000
2,950,000
25%
737,500
 Goodwill (Negative goodwill) is computed as follows:
Consideration transferred
NCI in the acquiree
Previously held equity interest in the acquiree
2,500,000
737,500
-
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Total
Less: Fair value of identifiable net assets acquired
Goodwill
3,237,500
(2,950,000)
287,500
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
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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
% = Percentage of ownership acquired by the parent in the subsidiary
a. A+B+C-D
b. A – (D x %)
c. (A+C) – (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.
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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.
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
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
4,000,000
620,000
4,620,000
(3,200,000)
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
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (4.8M –1.6M)
Gain on a bargain purchase
2,400,000
620,000
3,020,000
(3,200,000)
(180,000)
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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
Solution:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
4,000,000
1,000,000
5,000,000
(3,200,000)
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
Fair value of liabilities assumed
Fair value of net identifiable assets acquired
Multiply by: Non-controlling interest
NCI’s proportionate share in net identifiable assets
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
4,800,000
(1,600,000)
3,200,000
20%
640,000
4,000,000
640,000
4,640,000
(3,200,000)
1,440,000
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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
D
Solution:
Consideration transferred (8,000 sh. x ₱500)
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (6.4M - 3.6M)
Goodwill
4,000,000
4,000,000
(2,800,000)
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)
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (6.4M - 3.6M)
Goodwill
4,000,000
4,000,000
(2,800,000)
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)?
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a. 1,080,000
b. 1,280,000
c. 1,120,000
D
Solution:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (6.4M - 3.6M)
Goodwill
d. 1,200,000
4,000,000
4,000,000
(2,800,000)
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 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
terms (₱6.4M + ₱80K)
Fair value of liabilities assumed
Fair value of net identifiable assets acquired
Goodwill (gain on bargain purchase) is computed as follows:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
6,480,000
(3,600,000)
2,880,000
4,000,000
4,000,000
(2,880,000)
1,120,000
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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:
Fair value of identifiable assets
Costs to sell of the “held for sale” asset
Fair value of unrecognized research and development
Adjusted value of identifiable assets
Fair value of liabilities assumed
Fair value of net identifiable assets acquired
6,400,000
(80,000)
200,000
6,520,000
(3,600,000)
2,920,000
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
4,000,000
4,000,000
(2,920,000)
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:
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


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
Total fair value of liabilities assumed:
Fair value of liabilities assumed
Fair value of contingent liabilities assumed:
Contractual contingent liability assumed
Contractual contingent liability assumed
Non-contractual contingent liability assumed
Fair value of net identifiable assets acquired
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
6,400,000
3,600,000
40,000
120,000
200,000
(3,960,000)
2,440,000
4,000,000
320,000
4,320,000
(2,440,000)
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:
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
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%)
Present value of future cash payment (Note payable)
(₱4M x 50% x PV of ₱1 @10%, n=5)
Land transferred to former owners of XYZ – at fair value
Fair value of consideration transferred
The fair value of the net identifiable assets acquired is computed as follows:
Fair value of assets
Indemnification asset (480,000 – 400,000)
Total
Fair value of liabilities
Fair value of net identifiable assets acquired
Goodwill (gain on bargain purchase) is computed as follows:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill / (Gain on a bargain purchase)
2,000,000
1,241,843
1,200,000
4,441,843
6,400,000
80,000
6,480,000
(3,600,000)
2,880,000
4,441,843
4,441,844
(2,880,000)
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
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Receivables
Allowance for probable losses on
receivables
Inventory
Building – net
Goodwill
Total assets
800,000
480,000
2,080,000
4,000,000
400,000
7,200,000
1,400,000
4,400,000
80,000
6,400,000
Liabilities
Payables
1,600,000
1,600,000
(120,000)
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:
Carrying amounts
Cash in bank
Receivables – net
Inventory
Building – net
Patent
Payables
Contingent liability
40,000
680,000
2,080,000
4,000,000
1,600,000
-
Fair values
Taxable/ (Deductible) Temporary
difference
40,000
480,000
1,400,000
4,400,000
120,000
1,600,000
80,000
Total taxable temporary difference (400K + 120K)
Multiply by: Tax rate
Deferred tax liability
520,000
30%
156,000
Total deductible temporary difference (200K + 680K + 80K)
Multiply by: Tax rate
Deferred tax asset
960,000
30%
288,000
The fair value of the net identifiable assets of the acquiree is computed as follows:
200,000
680,000
(400,000)
(120,000)
80,000
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Fair value of identifiable assets acquired excluding
6,728,000
recorded goodwill (6.4M – 80K goodwill + 120K unrecorded
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
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
6,000,000
6,000,000
(4,892,000)
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
Other payables
400,000
1,600,000
2,000,000
400,000
1,600,000
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
D
Solution:
The consideration transferred is adjusted for the dividends purchased as follows:
Fair value of consideration transferred
6,400,000
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Dividends-on (Dividends purchased)
Adjusted consideration transferred
(400,000)
6,000,000
Goodwill is computed as follows:
Consideration transferred
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
FV of net identifiable assets acquired (6.4M – 80K - 2M)
Goodwill
6,000,000
6,000,000
(4,320,000)
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:
Combined
COLLOQUY Co.
CONVERSATION, 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
Share capital
Share premium
Retained earnings
Total liabilities & equity
2,800,000
2,400,000
1,200,000
3,200,000
9,600,000
3,600,000
1,200,000
1,000,000
600,000
6,400,000
6,400,000
2,800,000
4,800,000
?
?
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:
Share capital
Share premium
Totals
COLLOQUY Co.
2,400,000
1,200,000
3,600,000
Combined entity
2,800,000
4,800,000
7,600,000
Increase
400,000
3,600,000
4,000,000
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).
P a g e | 14
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)
Divide by: ABC’s par value per share
Number of shares issued
400,000
40
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
Divide by: Number of shares issued
Acquisition-date fair value per share
4,000,000
10,000
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
Non-controlling interest in the acquiree
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired (6.4M - 3.6M)
Goodwill
4,000,000
4,000,000
(2,800,000)
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.
P a g e | 15
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.
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
Non-controlling interest in the acquiree (1M x 10%)
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
3,200,000
400,000
720,000
4,320,000
(4,000,000)
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%)
Previously held equity interest in the acquiree
Total
Fair value of net identifiable assets acquired
Goodwill
4,000,000
4,000,000
(4,000,000)
-
P a g e | 16
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 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.
P a g e | 17
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.
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.
P a g e | 18
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:
Cash in bank
Accounts receivable
Inventory
Investment in subsidiary
Building, net
Total assets
Entity A
12,000
36,000
48,000
90,000
216,000
402,000
Accounts payable
Share capital
Share premium
Retained earnings
Total liabilities and equity
60,000
204,000
78,000
60,000
402,000
Entity B
6,000
14,400
27,600
48,000
96,000
7,200
60,000
28,800
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)
given
273,600
Goodwill
Total assets
402,000
96,000
3,600
430,800
P a g e | 19
Accounts payable
60,000
7,200
Share capital
204,000
60,000
parent's only
204,000
Share premium
78,000
-
parent's only
78,000
60,000
28,800
parent's only
60,000
given
21,600
Retained earnings
NCI in net assets
Total liab. & equity
342,000
96,000
67,200
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
“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)
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