ACCOUNTING ON BUSINESS COMBINATION QUIZ 2

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. 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?
A) The surviving company is one of the two combining companies
B) The surviving company is neither of the two combining companies.
C) An investor-investee relationship is established
D) A parent-subsidiary relationship is established

____ 2. 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
A) Tax-free reorganization
B) Vertical combination
C) Horizontal combination
D) Greater than 50% stock investment in another company

____ 3. Should the following costs be included in the consideration transferred in business combination, according to
IFRS 3, Business Combination?
1- Costs of maintaining an acquisitions department.
2- Fees paid to accountants to effect the combination.

A) Cost(l) Cost (2)

No No

B) Cost(l) Cost (2)

No Yes
C) Cost(l) Cost (2)
Yes No
D) Cost(l) Cost (2)
Yes Yes
____ 4. 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 IFRS 3, Business Combination, 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.

____ 5. How should the transaction costs of issuing shares in an acquisition be recognized?
A) Expensed

B) Deducted from shareholders’ equity, net related income tax benefit

C) Deducted in total from sharesholders’ equity

D) Capitalized as part of the cost of the share

____ 6. Polk issues common stock to acquire all the assets of the Sam Company on January 1, 2020. There is a
contingent share agreement, which states that if the income of the Sam division exceeds a certain level duriing
2020 and 2021, additional shares will be issued on January 1, 2022. The impact of issuing the additional share
is to

A) Increase tthe price assigned to fixed assets

B) Have no effect on asset values, but to reassign the amounts assigned to equity accounts

C) Reduce retained earnings

D) Record additional goodwill

____ 7. Under PFRS 3, contrary to PAS 37, what is the recognition principle of contingent liability assumed in a
business combination?
A) The acquirer shall recognise as of the acquisition date a contingent liability assumed in a
business combination if it is a present obligation that arises from past events and its fair
value can be measured reliably even only reasonably possible
 B) The acquirer shall recognise a contingent liability assumed in a business combination at
the acquisition date only if it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation
C) The acquirer shall recognise a contingent liability assumed in a business combination at
the acquisition date only if it is virtually certain that an outflow of resources embodying
economic benefits will be required to settle the obligation
D) The acquirer shall recognise a contingent liability assumed in a business combination at
the acquisition date only if it is remote that an outflow of resources embodying economic
benefits will be required to settle the obligation

____ 8. Under PFRS 3, what is the treatment of acquisition related costs in a business combination?
A) It shall be expensed as incurred and presented as part of profit or loss
B) It shall be capitalized as part of consideration given up in computation of goodwill or gain
on bargain purchase
C) It shall be debited to share premium
D) It shall be charged directly to retained earnings

____ 9. Which of the following accounting treatments for costs related to business combination is incorrect?
A) Acquisition related costs such as finder's fees; advisory, legal, accounting, valuation and
other professional and consulting fees; and general administrative costs, including the
costs of maintain an internal acquisitions department shall be recognized as expense in the
Profit/Loss in the periods in which the cost are incurred
B) The costs related to issuance of stocks or equity securities shall be deducted/debited from
any share premium from the issue and any excess is charged to "share issuance cost"
reported as contract-equity account against either (1) share premium from other share
issuances or (2) retained earnings
C) The costs related to issuance of financial liability at fair value through profit or loss shall
recognized as expense while those related to issuance of financial liability at amortized
cost shall be recognized as deduction from the book value of financial liability or treated
as discount on financial liability to be amortized using effective interest method
D) The costs related to the organization of the newly formed corporation also knows as
pre-incorporation costs shall be capitalized as goodwill or deduction from gain on bargain
purchase

____ 10. How shall the parent corporation present the Non-controlling Interest (NCI) in the Consolidated Statement of
Financial Position?
 A) It shall be presented within the Consolidated Stockholders’ Equity, separately from the
equity of the owners of the parent
B) It shall be presented as non-current liability
C) It shall be presented as non-current asset
D) It shall be presented as contract equity account like treasure shares and subscription
receivable

____ 11. If the initial accounting for a business combination is incomplete by the end of the reporting period in which
the combination occurs, the acquirer shall report in its financial statements provisional amounts for the items
for which the accounting is incomplete. What is the maximum term or period of the measurement period?
A) One year or 12 months from the acquisition date
B) 6 months from the acquisition date
C) 3 months from the acquisition date
D) 1 month from the acquisition date

____ 12. IFRS 3 defines it as a transaction or other event in which an acquirer obtains control of one or more
businesses
A) Business combination
B) Consolidation
C) Merger
D) Acquisition of net assets

____ 13. Under IFRS 3, how shall an entity (acquirer) account for each business combination?
A) Pooling of interest method
B) Proportionate consolidation method
C) Acquisition method
D) Equity method

____ 14. IFRS 10 defines them as financial statements of a group in which the assets, liabilites, equity, income,
expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic unit
A) Consolidated financial statements
 B) Separate financial statements
C) Group financial statements
D) Combined financial statements

____ 15. Which statement is ​Incorrect ​concerning an acquirer?

A) In a business combination effected by transferring cash or other assets, the acquirer is
usually the entity that transfers the cash or other assets
B) In a business combination effected by issuing equity interest, the acquirer is usually the
entity that issues the equity interest
C) The acquirer is usually the combining entity whose relative size is significantly greater
than that of the combining entity or entities
D) If a new entity is formed to issue equity interests to effect a business combination, the new
entity formed is necessarily the acquirer

____ 16. In identifying the acquirer in a business combination, all of the following are considered, ​except
A) The terms of the exchange of equity securities
B) The relative amount of intangible assets on the individual entity financial statements
C) The relative voting rights in the combined entity after the combination
D) The composition of the governing body of the combined entity

____ 17. What date should be used as the acquisition date for a business combination?
A) The date when the acquirer signs the contract to purchase the business
B) The date when the acquirer obtains control of the acquiree
C) The date when all contingencies related to the transaction are resolved
D) The date when the acquirer purchased more than 20% of the stock of the accquiree

____ 18. When should an acquirer derecognize a contingent liability recognized as the result of an acquisition?
A) When it becomes more likely than not that the entity will not be liable
B) When the contingency is resolved
C) At the end of the year of acquisition
 D) When it is reasonably possible that the liability will not require payment

____ 19. In a business combination, goodwill is measured as

A) The consideration transferred minus the identifiable net assets acquired
B) The total of the consideration transferred plus the amount of any non-controlling interest
in the acquiree minus the identifiable net assets acquired
C) The total of the consideration received plus the fair value of the previously held interest in
the acquiree minus the identifiable net assets acquired
D) The total of the consideration transferred, plus the amount of any non-controlling interest
in the acquiree plus the fair value of previously held interest in the acquiree minus the
identifiable net assets acquired

____ 20. How should an entity account for the incomplete information in preparing the financial statements
immediately after the acquisition?
A) Do not record the uncertain items until complete information is available
B) Record a contra account to the investment account for the amounts involved
C) Record the uncertain items at the carrying amount of the acquiree
D) Record the uncertain items at a provisional amount measured at the date of acquisition

____ 21. Candy Co. purchased the net assets of Crush Co. for P 160,000. On the date of purchase, Crush had no long
term investments in marketable securities. The liabilities of the corporation amounted to P20,000. The market
values of its asset were :
Current Assets---------------P 80,000 Non-current assets----------P120,000

The non-current assets and goodwill ( income from acquisition) acquired should be recorded at
A) NCA, P120,000; GW(Income), P(20,000)
B) NCA, P100,000; GW(Income), P(100,000)
C) NCA, P140,000; GW(Income), P20,000
D) NCA, P150,000; GW(Income), P100,000

____ 22. BAB CO. had these accounts at the time it was acquired by TING INC.

Cash-----------------------------P36,000
Accounts receivable------------457,000
 Inventories-----------------------120,000
Plant, Property,and Equipment-696,000
Accounts Payable---------------350,800.

TING paid P1,400,000 for net assets of BAB CO. It was determined that the fair market value of inventories
and plant,property,equipment were P133,000 and P900,000 respectively.

An assume contingent liability with a fair value amounting to P10,000 and such amount is considered a
reliable measurement. Also a P25,000 future losses or reorganization/restructuring costs are expected to be
incurred as a result of the business combination.

In the books of TING CO., this transaction resulted in:

A) Goodwill of P441,400
B) Goodwill of P224,800
C) Goodwill of P234,800
D) Current asset increase by P234,800

____ 23. FOR NUMBERS 23-25. ​On December 31, 2020, the following figures were taken from the trial balance of
Kenshin Company and Kaoru Company:
KENSHIN KAORU
Cash 80,000.00 20,000.00
Receivables 60,000.00 60,000.00
Inventory 100,000.00 70,000.00
Property and Equipment– net 200,000.00 100,000.00
Goodwill ___ 30,000.00
Current liabilities 20,000.00 10,000.00
Long-term liabilities 70,000.00 50,000.00
Common stock 110,000.00 100,000.00
Additional paid-in capital 20,000.00 ___
Retained earnings 220,000.00 120,000.00
On December 31, 2020, Kenshin issues 10,000 shares of its P10 par value stock for all the outstanding
shares of Kaoru. Kenshin’s stock had a P25 per share fair market value. Kenshin also paid the following:
P25,000 for broker’s fee on business combination, P20,000 for pre-acquisition audit fee, P21,500 for legal
fees, P18,000 for audit fee for SEC registration of stock issue and P5,500 for printing of stock certificates.
Kaoru holds an equipment that is worth P40,000 more than is current book value. The retained earnings of
Kaoru on January 1, 2020 amounted to P70,000

How much is the consolidated assets at acquisition date?

A) P750,000
B) P620,000
C) P640,000
D) P660,000
____ 24. What is the result of business combination?
A) P20,000 gain
B) P20,000 goodwill
C) P10,000 gain
D) P30,000 goodwill

____ 25. How much is the consolidated Shareholders’ Equity?

A) P570,000
B) P510,000
C) P600,000
D) P530,000

____ 26. On July 1 , 2020, the Magic Company acquire 100% of the Nato Company for a consideration transferred of
P160 Million. At the acquisition date , the carrying amount of Nato’s assets wa P100 million. At the
acquisition date, provisional fair value of P120 million was attributed to the net assets. An additional facts and
informations on this valuation were received on May 31, 2021 increased this provisional value to P135
million and on July 30, 2021 this fair value was finalized at P140 million
What amount should Magi presented for goodwill on its statement of financial position on December
31, 2021, according to PFRS 3 Business Combination?
A) P20 million
B) P25 million
C) P30 million
D) P60 million

____ 27. P Company assigned tentatively a fair value of P 1,000,000 to land it acquired when it purchased S company.
Ten months later, P obtained ​facts and informations​ that land was worth P700,000 at the date of acquisition.
Two years after the acquisition , the land is worth 1,100,000.
How does P account for these value change?
A) Loss of P300,000 , reported on the income statement; no recognition of increase in value
to P1,100,000
B) Increase goodwill by P300,000; no recognition of increase in value to P 1,100,000
C) Decrease goodwill by net amount of P100,000
 D) Loss of P300,000 and gain of P400,000 , reported on the income statement

____ 28. FOR NUMBERS 28-29. ​On May 1,2020, Queen Corporation paid cash of P600,000 for all of the net
assets of Prince Company and Prince is dissolved. The carrying value of the assets and liabilities of
Prince on May 1,2020 follow:
Cash P60,000
Inventory 180,000
Plant and equipment (net of accumulated
Depreciation of P220,000) 320,000
Goodwill 100,000
Liabilities 120,000

On May 1,2020, Prince inventory had a fair value of P150,000, and the plant and equipment (net)
had a fair value of P380,000.

What is the amount of goodwill recorded in the books of Prince as a result of the business
combination?

A) P130,000
B) P 30,000
C) P100,000
D) P-0-

____ 29. What is the amount of total assets that acquired from Prince that will be recorded in the
books of Queen as a result of the business combination?
A) P690,000
B) P 630,000
C) P660,000
D) P590,000

____ 30. Lucky Co. is offered 200,000 shares of Pacino Inc in exchange for its net assets. Pacino Inc share capital has a
market value of P 11 per share. The offer is accepted. The statement of financial position of the two
companies (in thousand pesos) are presented below:
Pacino. Inc. Lucky Co.
Total Assets 1,097.50 1,733.25

Total Liabilities 312.50 383.25

 Ordinary share capital, P 1 par, 800,000
Shares issued and outstanding 800,000
Ordinary share capital, no par, 2,500
Shares issued and outstanding 25.00
Retained earnings (15.00) 1,325.00
Total Liabilities & shareholder’s equity 1,097.50 1,733.25

The total assets of Pacino after affecting the combination is

A) 2,950,000
B) 3,680,750
C) 3,000,000
D) 2,830,750

____ 31. Lucky Co. is offered 200,000 shares of Pacino Inc in exchange for its net assets. Pacino Inc share capital has a
market value of P 11 per share. The offer is accepted. The statement of financial position of the two
companies (in thousand pesos) are presented below:
Pacino. Inc. Lucky Co.
Total Assets 1,097.50 1,733.25

Total Liabilities 312.50 383.25

Ordinary share capital, P 1 par, 800,000
Shares issued and outstanding 800,000
Ordinary share capital, no par, 2,500
Shares issued and outstanding 25.00
Retained earnings (15.00) 1,325.00
Total Liabilities & shareholder’s equity 1,097.50 1,733.25

What is the result of business combination?

A) 850,000
B) 1,415,000
C) 875,000
D) 0

____ 32. Pula Co. issued 120,000 shares of its P25 par common stock for the net assets of Azul Corp. in a
business combination completed on March 1, 2020. Azul Corp.’s net assets worth P3,800,000 at
FMV. Out-of-pocket cost of the combination were as follows:
Legal Fees P 26,000
Contingent consideration (highly probable and measurable) 18,000
Printing costs of stock certificates 8,500
 Finder’s fees 27,000
Professional Fees paid to CPA 21,000
Fees paid to company lawyers 23,450
Fees paid to company accountants 38,900

Goodwill from this business combination is P418,000. How much is the FMV per share of Pula Co.
at March 1, 2020?
A) P25

B) P40

C) P30

D) P35

____ 33. FOR NUMBERS 33-35. ​COBRA CORP. issues 500,000 shares of its own P1 par common stock for
the net assets of DOMINANTE CO. in a merger consummated on July 1,2029. On this date,
COBRA stock is quoted at P10 per share. Balance sheet data for the two companies at July 1 just
before combination are as follows:
COBRA DOMINANTE
CURRENT ASSETS ​ 18,000,000.00 1,500,000.00
PLANT ASSETS 22,000,000.00 6,500,000.00
TOTAL ASSETS 40,000,000.00 8,000,000.00
LIABILITIES 12,000,000.00 2,000,000.00
COMMON STOCK 20,000,000.00 3,000,000.00
APIC 3,000,000.00 1,000,000.00
RETAINED EARNINGS 5,000,000.00 2,000,000.00
TOTAL LIABILITIES AND 40,000,000.00 8,000,000.00
EQUITIES

COBRA also paid finder’s fees of P50,000 and legal fees of P10,000;as well as indirect expenses of
P40,000. All assets and liabilities of Dominante were at fair values on July 1 2029.

The RETAINED EARNINGS on the combined balance sheet after the combination will be
A) P4,960,000

B) P5,900,000

C) P4,900,000

D) P7,000,000
____ 34. The total Shareholders’ Equity after the combination will be

A) P33,000,000

B) P33,900,000

C) P34,000,000

D) P32,900,000

____ 35. The total assets on the combined balance sheet after the combination will be:

A) P46,900,000

B) P47,900,000

C) P48,000,000

D) P47,000,000

Problem

36. On August 15, 2020, PANDA Company acquired 80% of SONNY Company for P3,200,000. On this date the
assets of SONNY Company have carrying value of P3,000,000 and fair value of P5,000,000 while its
liabilities have book value of P1,000,000 and fair value of P1,500,000.

If NCI measured at Fair Value, what is the amount of Goodwill/(GAIN)?

37. On August 15, 2020, PANDA Company acquired 80% of SONNY Company for P3,200,000. On this date the
assets of SONNY Company have carrying value of P3,000,000 and fair value of P5,000,000 while its
liabilities have book value of P1,000,000 and fair value of P1,500,000.

If NCI measured at Proportionate FV of Net Assets, what is the amount of Goodwill/(GAIN)?

38. On August 15, 2020, PANDA Company acquired 80% of SONNY Company for P3,200,000. On this date the
assets of SONNY Company have carrying value of P3,000,000 and fair value of P5,000,000 while its
liabilities have book value of P1,000,000 and fair value of P1,500,000.
 Assume that the fair value of the NCI is P900,000, what is the amount of the goodwill(bargain Price)? 
 
39. On August 15, 2020, PANDA Company acquired 80% of SONNY Company for P3,200,000. On this date the
assets of SONNY Company have carrying value of P5,000,000 and fair value of P6,000,000 while its
liabilities have book value of P1,000,000 and fair value of P1,500,000.

Assume that the stated fair value of the NCI is P850,000 , what is the amount of NCI that will be reflected on 
consolidated financial statement? 
 
40. On August 15, 2020, PANDA Company acquired 80% of SONNY Company for P3,200,000. On this date the
assets of SONNY Company have carrying value of P5,000,000 and fair value of P6,000,000 while its
liabilities have book value of P1,000,000 and fair value of P1,500,000.

Assume that the stated fair value of the NCI is P850,000 , ​how much goodwill/(gain) would be reflected to
consolidated financial statements?