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PRE-TEST Business Combination
BS Accountancy (Misamis University)
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PRE-TEST: ACCOUNTING FOR BUSINESS COMBINATION
1. The non-controlling interest shall be presented in the consolidated statement of financial position as part of equity:
a. At the fair value of the shares
b. At its proportionate share in the recognized net assets of the acquiree
c. Either A or B
d. Neither A nor B
2. In the event of a step-acquisition, the previously held shares that will form part of the investment in subsidiary
account will be:
a. Its book value on the date of acquisition.
b. Its fair value on the date of acquisition.
c. Zero.
d. Equal to the arising goodwill or gain on bargain purchase.
3. The purpose of the working paper entries is to be able to
a. Adjust the values in the separate books of the parents only.
b. Adjust the values in the separate books of the subsidiary only.
c. Present the correct amounts in the consolidated FS without changing the amounts in the separate FS of the parent
and subsidiary.
d. Present the correct amounts in the consolidated FS by changing the amounts in the separate FS of the parent and
subsidiary.
4. Statement 1: A parent shall present non-controlling interests in the consolidated statement of financial position
within equity, combined with the equity of the owners of the parent.
Statement 2: An entity that controls one or more entities is called a subsidiary.
a. Both statements are TRUE.
c. Statement 1 is TRUE and statement 2 is FALSE.
b. Both statements are FALSE.
d. Statement 1 is FALSE and statement 2 is TRUE.
4. Which of the following will affect both the consolidated net income attributable to controlling interest and
non-controlling interest net income?
a. Amortization of excess of fair value over book value of a depreciable asset.
b. Impairment loss and it is partial goodwill.
c. Intercompany dividends.
d. Gain on acquisition.
5. Which of the following will increase the consolidated net income attributable to controlling interest?
a. Amortization of excess of fair value over book value of a depreciable asset.
b. Impairment loss and the non-controlling interest is measured at fair value.
c. Intercompany dividends.
d. Amortization of excess of book value over fair value of an inventory.
6. The non-controlling interest in profit when the selling affiliate is an 80% owned subsidiary is calculated by
multiplying the non-controlling ownership percentage by the subsidiary's reported net income
a. Plus unrealized profit in ending inventory less unrealized profit in beginning inventory.
b. Plus realized profit in ending inventory less realized profit in beginning inventory.
c. Less unrealized profit in ending inventory plus realized profit in beginning inventory.
d. Less realized profit in ending inventory plus realized profit in beginning inventory.
7. The sale of inventory items by a parent company to an affiliated company:
a. Enters the consolidated revenue computation only if the transfer was the result of arm's length bargaining.
b. Affects consolidated net income under a periodic inventory system but not under a perpetual inventory system.
c. Does not result in consolidated income until the merchandise is sold to outside parties.
d. Does not require a working paper adjustment if the merchandise was transferred at cost.
8. In determining controlling interest in the consolidated income on the consolidated financial statements, unrealized
intercompany profit on inventory acquired by a parent from its subsidiary should:
a. Not be eliminated.
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b. Be eliminated in full.
c. Be eliminated to the extent of the parent company's controlling interest in subsidiary.
d. Be eliminated to the extent of the non-controlling interest in the subsidiary.
9. Statement 1: the working paper entries to eliminate the effects of an intercompany sale of fixed asset will be the
same for both downstream and upstream sale.
Statement 2: the working paper entries to eliminate the gain on sale from an intercompany sale of fixed asset will be
the same as the working paper entries to eliminate the loss on sale from an intercompany sale of fixed asset.
a. Both statements are true.
c. Statement 1 is true, statement 2 is false.
b. Both statements are false.
d. Statement 2 is true, statement 1 is false.
10. A depreciable asset was sold by a parent company to its subsidiary during the previous year. This depreciable
asset was not sold by the subsidiary to a third party for 2 years. During the current year, which of the following will
most likely be affected by the working paper entries?
a. Depreciation Expense
c. Loss on sale of depreciable asset.
b. Gain on sale of depreciable asset.
d. Cash.
11. On July 26, 2023 HDHC acquired 75% of the outstanding voting shares of WWLC gaining control over the
acquiree in the process. On this day immediately before the business combination, the separate books of HDHC and
WWLC had the following data:
HDHC
WWLC
Cash
P 10,000,000
P 500,000
Receivables
3,000,000
600,000
Inventory
4,000,000
450,000
PPE, net
14,000,000
1,200,000
Intangible asset, net
2,500,000
250,000
Goodwill
1,000,000
100,000
Short-term liabilities
5,000,000
700,000
Long-term liabilities
12,000,000
700,000
Ordinary shares (P10 par)
6,000,000
1,000,000
Share premium
5,500,000
200,000
Retained earnings
6,000,000
500,000
On the date of acquisition, the receivables of HDHC and WWLC are both overstated by P500,000 and P100,000
respectively. The fair value of the PPE of HDHC is higher than its book value by P1,000,000 while the book value of
the PPE of WWLC is higher than its fair value by P200,000. Assuming that HDHC paid P1,300,000 cash to acquire
the shares, that the fair value of the non-controlling interest is P400,000, and that the full goodwill method was opted,
how much is the consolidated assets on the date of acquisition.
a. P 34,900,000
c. P 36,300,000
b. P 35,300,000
d. P 36,800,000
12. On January 1, 2023, Entity A acquired 60% of the outstanding shares of stocks of Entity B for P3,000,000. The
book value of the net assets of Entity A at the date of acquisition consisted of Ordinary shares in the amount of
P1,000,000; Additional paid in capital in the amount of P2,500,000; retained earnings in the amount of P2,400,000.
On the other hand, the book value of the net assets of Entity B at the date of acquisition was P2,200,000 including a
goodwill in the amount of P250,000. The non-controlling interest is measured at fair value in the amount of
P1,300,000.
The book value of the assets and liabilities of Entity B equal the fair values except an inventory which was overstated
in the amount of P45,000 and a machine which was understated by P200,000
The machine had a remaining life of 8 years. If the result of the business combination was goodwill, it was impaired in
the amount of P75,000 in the current year. The net income of Entity A was P700,000 and the net income of Entity B
was P430,000 at the end of the year. Dividends declared by Entity A were P220,000, but only P200,000 was paid. On
the other hand, dividends declared by Entity B were P130,000, but only P100,000 was paid. What is the consolidated
net income attributable to Entity A on December 31, 2023?
a. P 832,649
c. P 847,000
b. P 808,649
d. P 910,649
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13. Refer to ITEM 12, what is the non-controlling interest in net income on December 31, 2023?
a. P 150,000
c. P 164,351
b. P 148,351
d. P 134,000
14. Refer to ITEM 12, what is the non-controlling interest in net assets on December 31, 2023?
a. P 1,398,000
c. P 1,395,351
b. P 1,464,351
d. P 1,412,351
15. Refer to ITEM 12, what is the consolidated retained earnings on December 31, 2023?
a. P 3,027,000
c. P 3,032,649
b. P 3,012,649
d. P 2,988,649
16. On January 1, 2022, Entity QRS acquired 60% of outstanding ordinary shares of Entity LMN at a gain from a
bargain purchase of P320,000. For the year ended December 31, 2023, Entity QRS and Entity LMN reported sales
revenue of P16,000,000 and P8,000,000 in their respective separate Statement of Comprehensive Income. In the
same year, Entity QRS and Entity LMN reported the cost of goods sold of P9,600,000 and P5,600,000 in their
respective separate Statement of Comprehensive Income.
During 2022, there was a downstream sale of merchandise on account at a selling price of P2,240,000 with a gross
profit rate of 40% based on cost. On the other hand, there was an upstream sale of merchandise on account at a
selling price of P3,200,000 with a gross profit rate of 30% based on sales during 2023. On December 31, 2022, 25%
of the goods coming from the selling affiliate remained in the buying affiliate's inventory but all were eventually sold to
third persons during 2023. As of December 31, 2023, 40% of the goods coming from Entity LMN were sold to third
persons.
For the year ended December 31, 2023, the acquirer reported net income of P4,480,000 while the acquired company
reported net income of P1,600,000 and distributed dividends of P400,000. Entity QRS accounted for its investment in
Entity LMN using cost method in its separate financial statements. Compute the consolidated sales revenue for the
year ended December 31, 2023.
a. P 20,800,000
c. P 18,560,000
b. P 21,760,000
d. P 24,000,000
17. Refer to ITEM 16, compute the consolidated gross profit for the year ended December 31, 2023.
a. P 8,960,000
c. P 8,384,000
b. P 9,216,000
d. P 8,224,000
18. Refer to ITEM 16, compute the non-controlling interest in net income for the year ended December 31, 2023.
a. P 806,400
c. P 473,600
b. P 704,000
d. P 409,600
19. Refer to ITEM 16, compute the consolidated net income attributable to parent’s shareholder for the year ended
December 31, 2023.
a. P 4,854,000
c. P 5,014,000
b. P 6,134,000
d. P 4,774,000
19. STC is an 80% owned subsidiary by RLIC. On January 2, 2014, STC paid P 100,000 for a truck with an expected
economic life of 10 years and no anticipated residual value. STC sold the truck to RLIC on January 1, 2020. During
preparation of the consolidation workpaper 2020, the following workpaper entry was made to eliminate the effects of
the intercompany truck sale:
Truck
48,000
Gain on Sale of Truck
12,000
Depreciation Expense
3,000
Accumulated Depreciation
57,000
What amount of depreciation was recorded by RLIC during 2020?
a. P 13,000
c. P 3,000
b. P 10,000
d. P 16,000
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20. Refer to ITEM 19, If STC reports net income of P50,000 in 2020, what amount of income will be assigned to the
non-controlling interest in the 2020 consolidated income statement?
a. P 8,200
c. P 10,000
b. P 11,800
d. P 10,600
21. The statement of financial position of THE COMPANY as of December 31, 2020 is as follows:
ASSETS
LIABILITIES & SHAREHOLDER’S EQUITY
Cash
P 175,000 Current Liabilities
P 250,000
Accounts Receivable
250,000 Mortgage Payable
450,000
Inventories
725,000 Ordinary Shares
200,000
PPE
950,000 Share Premium
400,000
Retained Earnings
800,000
P 2,100,000
P 2,100,000
On December 31, 2020, A COMPANY bought all the outstanding shares of THE COMPANY for P 1,800,000 cash.
On the date of purchase, the fair value of THE COMPANY’s inventories was P 675,000, while the fair value of THE
COMPANY’s property, plant and equipment was P 1,100,000. The fair values of all other assets and liabilities of THE
COMPANY were equal to their book values. Compute the amount of goodwill in the book of A COMPANY and in the
consolidated statement of financial position, respectively.
a. P 300,000; P 300,000
c. P 0; P 0
b. P 300,000, P 0
d. P 0; P 300,000
22. On January 1, 2020, THE CORPORATION acquired 90% of the outstanding ordinary shares of A
CORPORATION.
THE CORPORATION
A CORPORATION
Carrying amount
Carrying amount
Fair value
Cash
P 50,000
P 25,000
P 25,000
Receivables
95,000
45,000
45,000
Inventories
90,000
40,000
45,000
Land
200,000
90,000
100,000
Building – net
190,000
95,000
90,000
Investment in A Corporation
190,000
TOTAL
?
?
?
Accounts Payable
P 100,000
P 90,000
P 90,000
Other Liabilities
30,000
60,000
50,000
Ordinary Shares, P 10 par
600,000
130,000
Retained Earnings
85,000
15,000
TOTAL
?
?
If NCI is measured at the present ownership instruments’ proportionate share in the recognized amount of the
acquirees identifiable net assets, how much is the total assets on January 1, 2020?
a. P 955,000
c. P 971,500
b. P 969,500
d. P 953,500
23. THE CORPORATION and A CORPORATION have announced terms of an exchange agreement under which,
THE CORPORATION will pay P 60,000 cash and will issue 8,000 shares of its P 10 par value common stock to
acquire all the assets of A CORPORATION. THE COPRORATION’s share is currently trading at P 50, and A
CORPORATION’s P 5 par value shares are trading at P 18 each. Book value and fair value statement of financial
position data on January 1 prior to acquisition are as follows:
THE CORPORATION
A CORPORATION
Book Value
Fair Value
Book Value
Fair Value
Cash and Receivables
P 150,000
P 150,000
P 40,000
P 40,000
Land
100,000
170,000
50,000
85,000
Building and Equipment
300,000
400,000
160,000
230,000
TOTAL ASSETS
P 550,000
P 720,000
P 250,000
P 355,000
Ordinary Shares
P 200,000
P 100,000
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Share Premium
Accumulated Profits
TOTAL EQUITIES
20,000
330,000
P 550,000
10,000
140,000
P 250,000
In addition, THE COMPANY incurred and paid the following costs:
▪ Legal fees to arrange the business combination – P 5,000
▪ Other professional fees – P 6,000
▪ Cost of SEC registration and other stock issuance costs – P 12,000
▪ Indirect costs – P 17,000
Determine the following adjusted amounts to be reported on THE CORPORATION’s statement of financial position
after the acquisition.
a. Cash and Receivables – P 90,000; Goodwill – P 105,000; Share Premium – P 308,000; Accumulated Profits – P
313,000
b. Cash and Receivables – P 90,000; Goodwill – P 105,000; Share Premium – P 328,000; Accumulated Profits – P
302,000
c. Cash and Receivables – P 90,000; Goodwill – P 116,000; Share Premium – P 328,000; Accumulated Profits – P
313,000
d. Cash and Receivables – P 150,000; Goodwill – P 116,000; Share Premium – P 308,000; Accumulated Profits – P
302,000
24. Which of the following statements is not correct about recognizing and measuring the assets, liabilities,
contingent liabilities, and non-controlling interest according to PFRS 3?
a. For intangible assets, fair value must be reliably measurable, but the probability of the outflow of future economic
benefits need not be tested.
b. The acquirer can recognize liabilities for future losses or costs based on its intentions for the future.
c. Liabilities that were existing obligations of the acquiree at the acquisition date shall be recognized.
d. The exception for non-current assets held for sale comes from PFRS 5: these items are to be valued at fair value
minus costs to sell, not simply at fair value.
25. Which of the following statements is in accordance with PFRS3 Business combinations with regards to
acquisition?
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. I only
c. Both I and II
b. II only
d. Neither I nor II
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