Business Combinations

1. SAN SEBASTIAN COLLEGE RECOLETOS DE CAVITE
Business Combinations Midterm
Christopher C. Lim
Multiple Choice: Choose the best answer from the given choices. Make a summary of your final
answers
Test 1 Theory Questions 1 point each
1. In a business combination, how should long-term debt of the acquired company generally be
recognized on acquisition date?
a. Fair value
b. Amortized cost
c. Carrying amount
d. Fair value less costs to sell
2. In a business combination accounted for under the acquisition method, the fair value of the net
identifiable assets acquired exceeded the consideration transferred. How should the excess fair value
be reported?
a. As negative goodwill, recognized in profit or loss in the period the business combination occurred.
b. As an extraordinary gain.
c. As a reduction of the values assigned to noncurrent assets and an extraordinary gain for any
unallocated portion.
d. As positive goodwill.
3. The costs of issuing equity securities in a business combination are
a. expensed
b. treated as direct reduction in equity
c. included in the initial measurementof the credit to share capital account
d. b and c
4. The costs of issuing debt securities in a business combination are
a. expensed
b. included in the initial measurement of the debt securities issued
c. accounted for like a “discount” on liability
d. b and c
5. A business combination is accounted for properly as an acquisition. Direct costs of combination, other
than registration and issuance costs of equity securities, should be:
a. Capitalized as a deferred charge and amortized.
b. Deducted directly from the retained earnings of the combined corporation.
c. Deducted in determining the net income of the combined corporation for the period in which the
costs were incurred.
d. Included in the acquisition cost to be allocated to identifiable assets according to their fair values.
6. PDX Corp. acquired 100% of the outstanding common stock of Sea Corp. in an acquisition
transaction. The cost of the acquisition exceeded the fair value of the identifiable assets and assumed
liabilities. The general guidelines for assigning amounts to the inventories acquired provide for:
a. Raw materials to be valued at original cost.
b. Work in process to be valued at the estimated selling prices of finished goods, less both costs to
complete and costs of disposal.
c. Finished goods to be valued at replacement cost.
d. Inventories to be valued at acquisition-date fair values.

2. 7. A business combination is accounted for as an acquisition. Which of the following expenses related to
the business combination should be included, in total, in the determination of net income of the
combined corporation for the period in which the expenses are incurred?
Fees of finders and Registration fees
consultants for equity securities issued
a. Yes Yes
b. Yes No
c. No Yes
d. No No
8. Easton Company acquired Lofton Company in a business combination. Easton was able to acquire
Lofton at a bargain price. The fair value of the net identifiable assets acquired exceeded the
consideration transferred to Lofton. After revaluing noncurrent assets to zero, there was still some
"negative goodwill." Proper accounting treatment by Easton is to report the amount as
a. an extraordinary gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.
9. Goodwill may be capitalized
a. only when it arises in a business combination.
b. only when it is created internally.
c. only when it is purchased
d. on any of these cases.
10. A contingent liability assumed in a business combination is recognized
a. if it is a present obligation that arises from past events and
b. if its fair value can be measured reliably.
c. even if it has an improbable outflow of resources embodying economic benefits.
d. All of these
11. 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 c. (A+C) – (D x %)
b. A – (D x %) d. (A+B) – [(D x %) – B]
12. 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.
13. 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

3. 14. An acquirer should at the acquisition date recognize goodwill acquired in a business combination as
an asset. Goodwill should be accounted for as follows:
a. Recognize as an intangible asset and amortize over its useful life.
b. Write off against retained earnings.
c. Recognize as an intangible asset and impairment test when a trigger event occurs.
d. Recognize as an intangible asset and annually impairment test (or more frequently if impairment
is indicated).
15. 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
a. complete the initial allocation before the end of December 31, 20x1.
b. complete the initial allocation before the end of December 31, 20x2.
c. complete the initial allocation before the end of November 30, 20x1.
d. complete the initial allocation before the end of September 1, 20x2.
16. 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
a. complete the initial allocation before the end of December 31, 20x1.
b. complete the initial allocation before the end of December 31, 20x2.
c. complete the initial allocation before the end of November 30, 20x1.
d. complete the initial allocation before the end of September 1, 20x2.
17. Which of the following methods must be applied in accounting for business combinations under PFRS
3?
a. acquirer method c. purchase method
b. acquisition method d. pooling of interest
18. The company that obtains control over another company in a business combination transaction is
referred to as the
a. acquirer c. subsidiary
b. parent d. a and b
19. According to PFRS 3, which of the following transaction costs would increase the amount of goodwill
from a business combination?
a. legal fees, accounting fees and similar costs
b. issuance costs of equity securities
c. issuance costs of debt instruments
d. none of these
20. This refers to the additional consideration for a business combination to be given to the acquiree
upon the happening of a contingencywhich is pre-agreed at the acquisition date.
a. Contingent liability
b. Contingent asset
c. Contingent consideration
d. Additional compensation
Test 2Problems Solving Questions 3 points each
P Corporation acquired 80% of the outstanding common stock of S Company on July 1, 2021, for
P220,000. S Company’s stockholders’ equity on July 1, 2021, were as follows:
Common stock, P5 par P100,000
Additional paid-in capital 40,000
Retained earnings 80,000

4. P220,000
Current fair value of S Company’s identifiable net assets exceeded their book values as follows:
Excess of current fair value over book values
Inventories P10,000
Plant assets (net) (economic life 10 years) 20,000
Patents (net) (economic life 5 years) 8,000
P Corporation uses the cost method to account for its investment in S Company. Both P Corporation and
S Company include depreciation expense and amortization expense in operating expense. Both
companies use the straight line method for depreciation and amortization. No impairment of goodwill is
to be recognized. For the six-month ended December 31, 2021 and for the year-ended December 31,
2022. S Company reported net income and declared and paid dividends as follows:
Net Income Dividends
P Corp. S Co. P Corp. S Co.
2021 P40,000 P32,000 P30,000 P24,000
2022 60,000 48,000 32,000 30,000
Retained earnings, July 1, 2021 of Parent is P100,000. Also on that date, Parent Company's common
stock is P150,000; additional paid in capital is P70,000. Non Controlling Interest have a fair market value
of P55,000.
1. What is the consolidated stockholder's equity as of December 31, 2022?
a. P423,600 b. P418,400 c. P421,560 d. P418,880
2. What is the consolidated net income attributable to parent for the six-month ended December 31,
2021?
a. P35,52038,520 c. 41,000 d. P36,960
3. What is the NCI in the net assets of S Company as of December 31, 2022?
a. P53,360 b. P57,120 c. P50,840 d. P50,480
4. What is the NCI in the net income for the six-month ended December 31, 2021?
a. P4,680 b. P3,680 c. P4,400 d. P4,040
5. What is the Consolidated retained earnings as of December 31, 2022?
a. P145,040 b. P151,080 c. P146,480 d. P148,040
On January 1, 20x1, Bass Co. issued equity instruments in exchange for 75% interest in Guitar Co. On
acquisition date, Bass Co. elected to measure non-controlling interest at fair value. Bass Co.’s
management believes that the fair value of the consideration transferred correlates to the fair value of
the controlling interest acquired and that the fair value of the controlling interest is proportionate to the
fair value of the remaining interest.
Guitar Co.’s net identifiable assets have carrying amount and fair value of ₱300,000 and ₱360,000,
respectively. The difference is attributable to a building with a remaining useful life of 6 years.
The December 31, 20x1 statements of financial position of Bass Co. and Guitar Co. are summarized
below:
Bass Co. Guitar Co.
ASSETS
Investment in subsidiary (at cost) 300,000 -
Other assets 1,372,000 496,000
TOTAL ASSETS 1,672,000 496,000
LIABILITIES AND EQUITY
Trade and other payables 292,000 120,000
Share capital 940,000 200,000
Retained earnings 440,000 176,000

5. Total equity 1,380,000 376,000
TOTAL LIABILITIES AND EQUITY 1,672,000 496,000
No dividends were declared by either entity during year. There were also no inter-company transactions
and impairment in goodwill.
6. What amount of goodwill is presented in the consolidated statement of financial position on
December 31, 20x1?
a. 40,000
b. 35,000
c. 20,000
d. 15,000
7. How much is the consolidated total assets as of December 31, 20x1?
a. 1,867,000
b. 1,907,000
c. 1,958,000
d. 1,974,000
8. How much is the non-controlling interest in the net assets of the subsidiary on December 31, 20x1?
a. 106,500 c. 136,500
b. 116,500 d. 146,500
9. How much is the consolidated retained earnings on December 31, 20x1?
a. 489,500 c. 534,500
b. 498,500 d. 543,500
10.How much is the consolidated total equity on December 31, 20x1?
a. 1,546,000 c. 1,642,000
b. 1,564,000 d. 1,624,000
On January 1, 20x1, Laughter Co. issued equity instruments in exchange for 75% interest in Tears Co.
Tears Co.’s net identifiable assets have carrying amount and fair value of ₱300,000 and ₱360,000,
respectively. The difference is attributable to a building with a remaining useful life of 6 years.
The December 31, 20x1 statements of profit or loss of Laughter Co. and Tears Co. are summarized
below:
Statements of profit or loss
For the year ended December 31, 20x1
Laughter Co. Tears Co.
Revenues 1,200,000 480,000
Operating expenses (960,000) (400,000)
Profit for the year 240,000 80,000
11.How much is the consolidated profit in 20x1?
a. 301,000 c. 320,000
b. 310,000 d. 336,000
12.How much is the consolidated profit attributable to owners of the parent in 20x1?
a. 292,500 c. 320,000
b. 310,000 d. 232,500
13.How much is the consolidated profit attributable to non-controlling interest in 20x1?
a. 6,500 c. 57,500
b. 17,500 d. 77,500
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:

6. COLLOQUY Co. CONVERSATION, Co.
Combined
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 2,800,000 3,600,000 6,400,000
Share capital 2,400,000 1,200,000 2,800,000
Share premium 1,200,000 1,000,000 4,800,000
Retained earnings 3,200,000 600,000 ?
Total liabilities & equity 9,600,000 6,400,000 ?
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.
14.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
15.How many shares were issued in the business combination?
a. 40,000 b. 12,000 c. 36,000 d. 10,000
16.How much is the acquisition-date fair value per share?
a. 400 b. 440 c. 280 d. 360
17.How much goodwill was recognized on acquisition date?
a. 980,000 b. 1,200,000 c. 1,280,000 d. 1,080,000
18.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
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.
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.
19.How much is the goodwill?
a. 320,000 b. 240,000 c. 280,000 d. 360,000
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.
20.How much is the goodwill?
a. 4,000,000 b.P0 c. a or b d. This is not a business combination