ABC - Final Exam
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The method required under PFRS 3 to be used in accounting for business
combinations is*
Buy method
Acquisition method
Purchase method
Combination method
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.*
No, Yes
Yes, Yes
Yes, No
No, No
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*
Increase the value attributed to goodwill, thus decreasing the risk of impairment of goodwill.
Increase the value attributed to goodwill, thus increasing the risk of impairment of goodwill.
Decrease the value attributed to goodwill, thus decreasing the risk of impairment of goodwill.
Decrease the value attributed to goodwill, thus increasing the risk of impairment of goodwill.
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.*
True, False
True, True
False, False
False, True
1.
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+B+C-D
(A+C) – (D x %)
(A+B) – [(D x %) – B]
A – (D x %)
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*
reassess the recognition and measurement of the net assets acquired and the consideration
transferred, then recognize any excess immediately in other comprehensive income
reassess the recognition and measurement of the net assets acquired and the consideration
transferred, then recognize any excess immediately in profit or loss
recognize the excess immediately in other comprehensive income
recognize the excess immediately in profit or loss
Which one of the following reasons would not contribute to the creation of negative
goodwill?*
A requirement in an IFRS to measure net assets acquired at a value other than fair value.
Errors in measuring the fair value of the acquiree’s net identifiable assets or the cost of the
business combination.
A bargain purchase.
Making acquisitions at the top of a “bull” market for shares
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*
Reassessed as to the accuracy of its measurement and then recognized immediately in profit or
loss.
Reassessed as to the accuracy of its measurement and then recognized in retained earnings.
Amortized over the life of the assets acquired.
Carried as a capital reserve indefinitely.
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.*
Step acquisition
Stock acquisition
Reverse acquisition
Rewind acquisition
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
A or S
S
The aggregate cash flows arising from acquisitions and from disposals of subsidiaries
or other business units resulting to loss or obtaining of control are presented
separately and classified as*
Disclosed only
Operating activities
Financing activities
Investing activities
Cash flows arising from changes in ownership interests in a subsidiary that do not
result in a loss of control are classified as cash flows from*
Disclosed only
Operating activities
Financing activities
Investing activities
PFRS 3 requires the acquirer in a business combination to measure the acquiree’s
identifiable tangible and intangible assets and liabilities at (with some limited
exceptions)*
some other amount
acquisition-date fair value
cost
fair value less transaction costs
Which of the following accounting methods must be applied to all business
combinations under PFRS 3 Business Combinations?*
Acquisition method.
Purchase method.
Pooling of interests method.
Equity method.
PESTER TO ANNOY is involved in a business acquisition on January 1, 20x1. At the
date of acquisition the deferred tax assets were ₱300,000. On January 1, 20x1, the
directors considered that realization of the deferred tax assets were not probable.
What effect would this decision have on the allocation of the purchase price?*
Negative goodwill of ₱300,000 would arise.
There would be no effect on goodwill.
The unrecognized deferred tax would be allocated to goodwill, which would increase by
₱300,000.
The value of goodwill would decrease by ₱300,000.
A parent entity is acquiring a majority holding in an entity whose shares are dealt in on
a recognized market. Under PFRS 3 Business Combinations, which of the following
measurement bases may be used in measuring the non-controlling interest at the
acquisition date? I. The nominal value of the shares in the acquiree not acquired; II.
The fair value of the shares in the acquiree not acquired; III. The non-controlling
interest in the acquiree's assets and liabilities at book value; IV.
The non-controlling
interest in the acquiree's assets and liabilities at fair value*
II and III
II and IV
IV only
ASININE STUPID Company acquired a 30% equity interest in OBTUSE TORPID
Company many years ago. In the current accounting period it acquired a further 40%
equity interest in OBTUSE. Are the following statements true or false, according to
PFRS 3 Business Combinations? I.
ASININE's pre-existing 30% equity interest in
OBTUSE should be remeasured at fair value at the acquisition date. II. II. ASININE's
net assets should be remeasured at fair value at the acquisition date.*
True, True
False, False
False, True
True, False
The SKEWER Company acquired 80% of PIERCE Company for a consideration
transferred of ₱100 million. The consideration was estimated to include a control
premium of ₱24 million. PIERCE's net assets were ₱85 million at the acquisition date.
Are the following statements true or false, according to PFRS 3 Business
Combinations? I. Goodwill should be measured at ₱32 million if the non-controlling
interest is measured at its share of PIERCE's net assets. II. Goodwill should be
measured at ₱34 million if the non-controlling interest is measured at fair value*
True, True
False, False
True, False
False, True
PFRS 3 requires all identifiable intangible assets of the acquired business to be
recorded at their fair values. Many intangible assets that may have been subsumed
within goodwill must be now separately valued and identified. Under PFRS 3, when
would an intangible asset be “identifiable”?*
When it meets the definition of an intangible asset in PAS 38, Intangible Assets, and its fair value
can be measured reliably.
Where it has been acquired in a business combination
When it meets the definition of an asset in the Conceptual Framework document only.
If it has been recognized under local generally accepted accounting principles even though it
does not meet the definition in PAS 38.
Which of the following examples is unlikely to meet the definition of an intangible asset
for the purpose of PFRS 3?*
Marketing related, such as trademarks and internet domain names.
Customer related, such as customer lists and contracts.
Technology based, such as computer software and databases.
Pure research based, such as general expenditure on research.
An intangible asset with an indefinite life is one where*
There is no foreseeable limit on the period over which the asset will generate cash flows.
There is a contractual or legal arrangement that lasts for a period in excess of five years
The length of life is over 20 years.
The directors feel that the intangible asset will not lose value in the foreseeable future.
An intangible asset with an indefinite life is accounted for as follows:*
Amortize and impairment tested if there is a “trigger event.”
No amortization but annual impairment test.
Amortized and no impairment test.
Amortized and impairment tests annually.
An acquirer should at the acquisition date recognize goodwill acquired in a business
combination as an asset. Goodwill should be accounted for as follows*
Write off against retained earnings.
Recognize as an intangible asset and impairment test when a trigger event occurs.
Recognize as an intangible asset and amortize over its useful life.
Recognize as an intangible asset and annually impairment test (or more frequently if impairment
is indicated).
If the impairment of the value of goodwill is seen to have reversed, then the company
may*
Reverse the impairment charge and credit retained earnings.
Not reverse the impairment charge.
Reverse the impairment charge and credit income for the period.
Reverse the impairment charge only if the original circumstances that led to the impairment no
longer exist and credit retained earnings.
An acquirer might obtain control of an acquire in all of the following, except*
By transferring cash, cash equivalents and other assets
By acquiring interest in a joint venture
By contract alone, even without consideration
By issuing equity interests
A business combination maybe structured in all of the following, except*
One entity transfers its net assets to another entity
An entity acquires assets that are not a business.
A group of former owners of one of the combining entities obtains control of the combined entity
One or more businesses become subsidiaries of an acquirer
It is a business combination in which all of the combining entities or businesses
ultimately are controlled by the same party or parties both before and after the
combination and that control is not transitory.*
Combination of entities or businesses under common control
True merger
Consolidation
Merger of equals
On acquisition, all identifiable assets and liabilities, including goodwill, will be allocated
to cash-generating units within the business combination. Goodwill impairment is
assessed within the cash-generating units. If the combined organization has cashgenerating units significantly below the level of an operating segment, then the risk of
an impairment charge against goodwill as a result of PFRS 3 is*
Likely to be unchanged from previous accounting practice.
Significantly decreased because goodwill will be spread across many cash-generating units.
Likely to be decreased because goodwill will be a smaller amount due to the greater recognition
of other intangible assets.
Significantly increased because poorly performing units can no longer be supported by those that
are performing well.
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*
To provide for the amount and, if the provision is overstated, to release the excess to the income
statement in the post-acquisition period.
To include the provision in the allocated cost of acquisition if the acquired entity commits itself to
a restructuring within a year of acquisition.
To include the provision in the allocated cost of acquisition.
A charge in the income statement in the post-acquisition period.
MIME TO IMMITATE Co. initially tested its goodwill for impairment on September 30,
20x1. When should MIME perform its second impairment testing on its goodwill?*
on or before December 31, 20x2
at any date during 20x2
at any date not earlier than September 30, 20x2
on or before September 30, 20x2
For purposes of impairment testing, PAS 36*
requires goodwill acquired in a business combination to be allocated to
cash-generating units 12 months after the date of acquisition.
requires goodwill acquired in a business combination to be allocated to
corporate assets in the year of business combination.
requires goodwill acquired in a business combination to be allocated to
cash-generating units in the year of business combination.
requires goodwill acquired in a business combination to be allocated to
operating segments 3 months after the date of acquisition.
each of the acquirer’s
each of the acquirer’s
each of the acquirer’s
each of the acquirer’s
On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business
combination that resulted to goodwill. By December 31, 20x1, the initial allocation of
goodwill is not yet completed. According to PAS 36, TEPID should*
complete the initial allocation before
complete the initial allocation before
complete the initial allocation before
complete the initial allocation before
the
the
the
the
end of December 31, 20x1.
end of September 1, 20x2.
end of December 31, 20x2.
end of November 30, 20x1.
Which of the following is incorrect regarding the accounting for business combinations
in accordance with PFRSs?*
Goodwill is computed as the difference between the consideration transferred and the
acquisition-date fair value of net identifiable assets acquired.
Any goodwill recognized on acquisition date should be allocated to the acquirer’s CGUs prior to
the end of the year of acquisition. If allocation is incomplete prior to the end of the year of
acquisition, the allocation should be completed prior to the end of the immediatel y preceding
year.
PFRS 3 requires the use of the acquisition method in accounting for business combination.
In applying the acquisition method, PFRS 3 requires that the acquirer should be identified.
For purposes of impairment testing, PAS 36*
requires goodwill acquired in a business combination to be allocated to each of the acquirer’s
corporate assets in the year of business combination.
requires goodwill acquired in a business combination to be allocated to each of the acquirer’s
cash-generating units 12 months after the date of acquisition.
requires goodwill acquired in a business combination to be allocated to each of the acquirer’s
cash-generating units in the year of business combination.
requires goodwill acquired in a business combination to be allocated to each of the acquirer’s
operating segments 3 months after the date of acquisition.
Goodwill must not be amortized under PFRS 3. The transitional rules do not require
restatement of previous balances written off. If an entity is adopting PFRS for the first
time, and it wishes to restate all prior acquisitions in accordance with PFRS 3, then it
must apply the PFRS to*
All acquisitions from the date of the earliest.
Only past and present acquisitions of entities that have previously and currently prepared their
financial statements using PFRS.
Only those acquisitions since the issue of the PFRS 3 and PAS 22, Business Combinations, to
the earlier ones.
Those acquisitions selected by the entity.
On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business
combination that resulted to goodwill. By December 31, 20x1, the initial allocation of
goodwill is not yet completed. According to PAS 36, TEPID should*
complete the initial allocation before the end of December 31, 20x2.
complete the initial allocation before the end of November 30, 20x1.
complete the initial allocation before the end of September 1, 20x2.
complete the initial allocation before the end of December 31, 20x1.
Which of the following factors is used as multiplier of super profits in valuation of
goodwill of a business?*
Normal profits
Simple profits
Number of years’ purchase
Normal rate of return
Average capital employed in the business
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?*
The surviving company is neither of the two combining companies.
A parent-subsidiary relationship is established.
An investor-investee is established.
The surviving company is one of the two combining companies
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*
Greater than 50% stock investment in another company.
Vertical combination
Horizontal combination
Tax-free reorganization
Should the following costs be included in the consideration transferred in a business
combination, according to IFRS 3, Business Combination? 1. Costs of maintaining an
acquisitions department. 2. Fees paid to accountants to effect the combination.*
Yes
No
Costs of goodwill from purchase business combination
Costs of developing goodwill internally
Costs of goodwill from purchase business combination
Costs of developing goodwill internally
On August 31, 2019, Cheese Co. issued 100,000 shares of its P20 par value common
stock for the net assets of Butter , Co, in a business combination accounted for by the
purchase method. The market value of Cheese Co.’s common stock on august 31 was
P36 per share. Cheese paid a fee of P160,000 to the consultant who arranged this
acquisition. Cost of registering and issuing the equity securities amounted to P80,000.
No goodwill was involved in the purchase. What amount should cheese capitalize as
the cost of acquiring Butter’s net assets?*
P3,600,000
P3,680,000
P3,760,000
P3,840,000
100% of the equity share capital of the Moon Co. was acquired by the River Co. on
July 30, 2019. River Co. issued 500,000 new P1 ordinary shares which had a fair
value of P8 each at the acquisition date. In addition, the acquisition resulted in River
incurring fees payable to external advisers of P200,000 and share issue costs of
P180,000.In accordance with IFRS 3, Business Combination, goodwill at the
acquisition date is measured by subtracting the identifiable assets acquired and the
liabilities assumed from*
P4,000,000
P4,180,000
P4,200,000
P4,380,000
In a business combination, Best Co purchased Foods Co. at a cost that resulted in
recognition of goodwill having an expected 10-year benefit period. However, Best
plans to make additional expenditures to maintain goodwill for a total of 40 years.
What costs should be capitalized*
Acquisition costs
Maintenance cost
Acquisition costs and Maintenance Costs
None of the above
In a business combination, Best Co purchased Foods Co. at a cost that resulted in
recognition of goodwill having an expected 10-year benefit period. However, Best
plans to make additional expenditures to maintain goodwill for a total of 40 years. How
many years should the costs be amortized?*
0 years
10 years
40 years
None the above
Philippine Co. acquired 100% of the outstanding common stock of Star Co. in a
purchase transaction. The cost of acquisition exceeded the fair value of the identifiable
net assets and assumed liabilities. The general guidelines for assigning amounts to
the inventories acquired provide for:*
Raw materials to be valued at original cost.
Work in process to be valued at the estimated selling prices of finished goods, less both costs to
complete and costs of disposal.
Finished goods to be valued at estimated selling prices, less both costs of disposal and a
reasonable profit allowance.
Finished goods to be valued at replacement cost.
What is the amount of goodwill resulting from the business combination?*
P120,000
P 50,000
P150,000
P 20,000
On January 1, 2020, Pine Corp acquired the net assets of Apple Corp. in a business
combination. At that date, the property, plant and equipment of Apple had a book
value of P21,000,000 and a fair value of P22,500,000. These assets were originally
acquired at a cost of P30,000,000, but would presently cost P12,000,000.Using the
purchase method, what amount should the combined entity report its property, plant
and equipment account?*
P 36,000,000
P 21,000,000
P 30,000,000
P 22,500,000
For the next items refer to the image below
In the books of Monte Co., this transaction resulted to:*
Goodwill recorded at P441,400
Goodwill recorded at P224,800
Current assets increased by P224,800
Current assets decreased by P224,800
The net assets (excluding goodwill, if any) recorded in the books of the acquiring
company was:*
P 1,309,000
P 958,200
P 1,400,000
P 1,175,200
Compared with the unadjusted values recorded in the books of Dole Co., this
transaction resulted to:*
P224,800 more than recorded owners’ equity
P666,200 more than recorded owners’ equity
P441,400 more than recorded owners’ equity
P224,800 less than recorded owners’ equity
Assuming Monte Co. paid P1,000,000 for the net assets of Dole Co., the excess of fair
market value over cost was:*
P 175,200
P 157,334
P 162,200
P 152,614
The Chief Executive Officer (CEO) of Noy Company is contemplating selling the
business to new interests. The cumulative earnings for the past 5 years amounted to
P800,000. The annual earnings, based on an average rate of return on investment for
this industry, would have been P145,000.If excess earnings are to be capitalized at
8%, what would be the implied goodwill in this transaction?*
P937,500
P187,500
P800,000
P 52,400
Refer to the image below
On the assumption that the “purchase” method is applied, the total liabilities and
stockholders’ equity of Mix Co. reflecting the combination is:*
P6,000,000
P6,500,000
P6,800,000
P6,200,000
The capital stock reflecting the combination under purchase method is:P3,000,000*
P3,300,000
P3,500,000
P4,000,000
P3,000,000
Refer to the image Below
Based on the information provided, in Newsprint's 2018 consolidated income
statement, what amount should be included as foreign exchange loss in computing net
income, if the LCU is the functional currency and the translation method is
appropriate?*
Php 25,000
Php 8,000
Php 13,000
Php 28,000
Based on the information provided, in Newsprint's 2018 consolidated income
statement, what amount should be included as foreign exchange loss in computing net
income, if the U.S. dollar is the functional currency and the remeasurement method is
appropriate?*
Php 28,000
Php 25,000
Php 10,000
Php 15,000
Infinity Corporation acquired 80 percent of the common stock of an Egyptian company
on January 1, 2018. The goodwill associated with this acquisition was $18,350.
Exchange rates at various dates during 2018 follow: January 1, 2018 "1 E£ = $
0.1835 "December 31, 2018
"1 E£ = $ 0.1850" ; Average for 2018 "1 E£ = $
0.1840" Goodwill suffered an impairment of 20 percent during the year. If the
functional currency is the Egyptian Pound, how much goodwill impairment loss should
be reported on Infinity's consolidated statement of income for 2018?*
$3,670
$3,680
$3,690
$3,700
When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's inventory carried at cost would be converted to Philippine peso by:*
remeasurement using historical exchange rates.
remeasurement using the current exchange rate.
translation using historical exchange rates.
translation using the current exchange rate.
When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's income statement accounts would be converted to Philippine peso by:*
translation using historical exchange rates.
remeasurement using the current exchange rate at the time of statement preparation.
remeasurement using current exchange rates at the time of statement preparation.
translation using average exchange rate for the period.
If the restatement method for a foreign subsidiary involves remeasuring from the local
currency into the functional currency, then translating from functional currency to
Philippine peso, the functional currency of the subsidiary is: I. Philippines peso; II.
Local currency unit. III. A third country's currency.*
III
Either I or II
I
II
If the Philippine peso is the currency in which the foreign affiliate's books and records
are maintained, and the Philippines peso is also the functional currency*
no restatement is required.
the translation method should be used for restatement.
either translation or remeasurement could be used for restatement.
the remeasurement method should be used for restatement.
All of the following stockholders' equity accounts of a foreign subsidiary are translated
at historical exchange rates except:*
preferred stock.
retained earnings.
common stock.
additional paid-in capital.
Dividends of a foreign subsidiary are translated at:*
the exchange rate on the date of declaration.
the current exchange rate on the date of preparation of the financial statement.
the average exchange rate for the year.
the exchange rate on the record date
If the functional currency is the local currency of a foreign subsidiary, what exchange
rates should be used to translate the items below, assuming the foreign subsidiary is
in a country which has not experienced hyperinflation over three years?*
Current Rate
Historical Rate
Average Rate
Depreciation - Equipment
Equipment
Inventories
Depreciation - Equipment
Equipment
Inventories
If the functional currency is the local currency of a foreign subsidiary, what exchange
rates should be used to translate the items below, assuming the foreign subsidiary is
in a country which has not experienced hyperinflation over three years?*
Current Rate
Historical Rate
Average Rate
Premium Bond Payables
Sales
Common Stock
Premium Bond Payables
Sales
Common Stock
Which combination of accounts and exchange rates is correct for the translation of a
foreign entity's financial statements from the functional currency to Philippine peso?*
Exchange Rate: Current ----- Accounts: Salary Expense, Sales, Depreciation Expense
Exchange Rate: Weighted ----- Accounts: Retained Earnings, Land, Inventories
Exchange Rate: Current ----- Accounts: Accounts Payable, Inventories, Investments
Exchange Rate: Historical ----- Accounts: Common Stock, Dividends Payable, retained Earning
What total amount should appear for these assets on the Philippine company's
consolidated balance sheet?*
Php 960,000
Php 636,000
Php 648,000
Php 708,000
The gain or loss on the effective portion of a Philippine parent company's hedge of a
net investment in a foreign entity should be treated as:*
an adjustment to the retained earnings account in the stockholders' equity section of its balance
sheet.
an adjustment to a valuation account in the asset section of its balance sheet.
other comprehensive income.
a translation gain or loss in the computation of net income for the reporting period.
For each of the items listed below, state whether they increase or decrease the
balance in cumulative translation adjustments (assuming a credit balance at the
beginning of the year) when the foreign currency strengthened relative to the
Philippine peso during the year.*
Net Income
Dividend Declared
Decrease
Increase
Decrease
Increase
This question requires one response per row
Nichols Company owns 90% of the capital stock of a foreign subsidiary located in
Ireland. As a result of translating the subsidiary's accounts, a debit of Php 160,000
was needed in the translation adjustments account so that the foreign subsidiary's
debits and credits were equal in Philippine Peso. How should Nichols report its
translation adjustments on its consolidated financial statements?*
As a Php144,000 increase in the stockholders' equity section of the balance sheet.
As a Php144,000 reduction in consolidated comprehensive net income.
As a Php160,000 debit in stockholders' equity section of the balance sheet.
As a Php160,000 reduction in consolidated comprehensive net income.
2.
Under the temporal method, which of the following is usually used to translate
monetary amounts to the functional currency? I. The current exchange rate; II The
historical exchange rate; III. Average exchange rate*
III
I
II
Either I or II
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