Page |1

NAME: Date:
Professor: Section: Score:

ACCOUNTING FOR BUSINESS COMBINATIONS

FINAL GRADING EXAMINATION

1. The <excess of the acquirer9s interest in the net fair value of acquiree9s identifiable assets,
liabilities, and contingent liabilities over cost= (i.e., 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.

2. 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 measurement of the credit to share capital account
d. b and c

3. 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.

4. 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

5. The acquisition date is

a. the date on which the acquirer obtains control of the acquiree.
b. the opening date.
c. the date the acquirer transfers to the acquiree the consideration in a business combination.
d. any of these

6. On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc. for ₱2,000,000 cash. ABC Co.
incurred transaction costs of ₱100,000 in the business combination. ABC Co. elected to measure
NCI at fair value. An independent valuer assessed the NCI9s fair value at ₱1,080,000. The fair
values of XYZ9s identifiable assets and liabilities at the acquisition date were ₱6,000,000 and
₱3,500,000, respectively. How much is the goodwill (gain on a bargain purchase)?
a. 500,000
b. (478,000)

0 0
 Page |2

c. (500,000)
d. 580,000

D {2,000,000 + 1,080,000 – (6,000,000 – 3,500,00) = 580,000

7. Contingent liabilities acquired in a business combination are initially recognized by the acquirer
using the provisions of which of the following standards?
a. PAS 37
b. PFRS 3
c. PFRS 37
d. PFRS 7

8. You are an accountant. Your client acquired another business in a business combination
transaction during the year. Your client asked you for an advice regarding the preparation of
consolidated financial statements. Your advice to your client would most likely be based on
which of the following standards?
a. PFRS 3
b. PFRS 10
c. PAS 27
d. PAS 36

9. Goodwill acquired in a business combination is initially and subsequently measured using

which of the following standards?
Initial measurement Subsequent measurement
a. PFRS 3 PFRS 10
b. PAS 36 PFRS 3
c. PFRS 3 PAS 36
d. PFRS 3 PFRS 5

Use the following information for the next two questions:

Fact pattern
On January 1, 20x1, DIMINUTIVE Co. acquired all of the assets and assumed all of the liabilities of
SMALL, Inc. As of this date, the carrying amounts and fair values of the assets and liabilities of
SMALL acquired by DIMINUTIVE 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 receivables (120,000) -
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
Payables 1,600,000 1,600,000

0 0
 Page |3

On the negotiation for the business combination, DIMINUTIVE Co. incurred transaction costs
amounting to ₱400,000 for legal, accounting, and consultancy fees.

10. Case #1: If DIMINUTIVE Co. paid ₱6,000,000 cash as consideration for the assets and liabilities
of SMALL, Inc., how much is the goodwill (gain on bargain purchase) on the business
combination?
a. 1,200,000 b. 1,120,000 c. 1,280,000 d. 1,240,000

C
Solution:
Consideration transferred 6,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 6,000,000
Fair value of net identifiable assets acquired (4,720,000)
Goodwill 1,280,000

11. Case #2: If DIMINUTIVE Co. paid ₱4,000,000 cash as consideration for the assets and liabilities
of SMALL, Inc., how much is the goodwill (gain on bargain purchase) on the business
combination?
a. (800,000) b. (720,000) c. (880,000) d. 1,200,000

B
Solution:
Consideration transferred 4,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired (4,720,000)
Gain on a bargain purchase (720,000)

12. On January 1, 20x1, LITHE Co. paid cash of ₱6,000,000 in exchange for all of the net assets of
FLEXIBLE, Inc. As of this date, the carrying amounts and fair values of the assets and liabilities
of FLEXIBLE acquired by LITHE are shown below:
Assets Carrying amounts Fair values
Cash 40,000 40,000
Receivables 2,760,000 1,480,000
Allowance for probable losses on receivables (400,000)
Property, plant and equipment 4,000,000 4,400,000
Computer software 400,000 -
Patent - 200,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,200,000
Liabilities
Bonds payable (w/ face amount of ₱1,600,000) 1,600,000 1,800,000

0 0
 Page |4

In applying the recognition and measurement principles under PFRS 3, LITHE Co. has identified the
following unrecorded intangible assets:
Type of intangible asset Fair value
Research and development projects 200,000
Customer list 160,000
Customer contract #1 120,000
Customer contract #2 80,000
Order (production) backlog 40,000
Internet domain name 60,000
Trademark 100,000
Trade secret processes 140,000
Mask works 180,000
Total 1,080,000

Additional information:
• The computer software is considered obsolete.
• The patent has a remaining useful life of 10 years and a remaining legal life of 12 years.
• FLEXIBLE, Inc. recognized the research and development costs as expenses when they were
incurred.
• Customer contract #1 refers to an agreement between FLEXIBLE, Inc. and Numbers Co., a
customer, wherein FLEXIBLE, Inc. is to supply goods to Numbers Co. for a period of 5 years. As
of acquisition date, the remaining period in the agreement is 3 years. LITHE and FLEXIBLE
believe that Numbers Co. will renew the agreement at the end of the current contract. The
agreement is not separable.
• Customer contract #2 refers to FLEXIBLE9s insurance segment9s portfolio of one-year motor
insurance contracts that are cancellable by policyholders.
• FLEXIBLE, Inc. transacts with its customers solely through purchase and sales orders. As of
acquisition date, has a backlog of customer purchase orders from 60% of its customers, all of
whom are recurring customers. The other 40% of FLEXIBLE9s customers are also recurring
customers. However, as of acquisition date, FLEXIBLE has no open purchase orders or other
contracts with those customers.
• The internet domain name is registered.

How much is the goodwill (gain on bargain purchase)?

a. 900,000 b. 600,000 c. 420,000 d. 1,680,000

B
Solution:
The fair value of net identifiable assets acquired is computed as follows:
Fair value of identifiable assets before recognition of
6,120,000
unrecorded assets, excluding recorded goodwill (6.2M – 80K)
Fair value of unrecorded identifiable intangible assets (all of
1,080,000
the items listed)
Total fair value of identifiable assets acquired 7,200,000
Fair value of liabilities assumed (1,800,000)

0 0
 Page |5

Fair value of net identifiable assets acquired 5,400,000

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred 6,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 6,000,000
Fair value of net identifiable assets acquired (5,400,000)
Goodwill 600,000

13. On January 1, 20x1, FORTITUDE Co. acquired 15% ownership interest in ENDURANCE, Inc. for
₱400,000. The investment was accounted for under PFRS 9. From 20x1 to the end of 20x3,
FORTITUDE recognized net fair value gains of ₱200,000.

On January 1, 20x4, FORTITUDE acquired additional 60% ownership interest in ENDURANCE, Inc.
for ₱3,200,000. As of this date, FORTITUDE has identified the following:
a. The previously held 15% interest has a fair value of ₱720,000.
b. ENDURANCE9s net identifiable assets have a fair value of ₱4,000,000.
c. FORTITUDE elected to measure non-controlling interests at the non-controlling interest9s
proportionate share of ENDURANCE9s identifiable net assets.

The previously held interest was initially classified as FVPL. How much is the goodwill (gain on
bargain purchase)?
a. 200,000 b. 420,000 c. 920,000 d. 540,000

C
Solution:
Consideration transferred 3,200,000
Non-controlling interest in the acquiree (1M x 25%) 1,000,000
Previously held equity interest in the acquiree 720,000
Total 4,920,000
Fair value of net identifiable assets acquired (4,400,000)
Goodwill 920,000

14. On January 1, 20x1, DIAPHANOUS Co. acquired all of the identifiable assets and assumed all of
the liabilities of TRANSPARENT, 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:
In addition to the business combination transaction, the following have also transcribed during the
negotiation period:
a. After the business combination, TRANSPARENT will enter into liquidation and DIAPHANOUS
agreed to reimburse TRANSPARENT for liquidation costs estimated at ₱80,000.

0 0
 Page |6

b. DIAPHANOUS agreed to reimburse TRANSPARENT for the appraisal fee of a building

included in the identifiable assets acquired. The agreed reimbursement is ₱40,000.
c. DIAPHANOUS entered into an agreement to retain the top management of TRANSPARENT for
continuing employment. On acquisition date, DIAPHANOUS agreed to pay the key employees
signing bonuses totaling ₱400,000.
d. To persuade, Mr. Five-six Numerix, the previous major shareholder of TRANSPARENT, to sell
his major holdings to DIAPHANOUS, DIAPHANOUS agreed to pay an additional ₱200,000
directly to Mr. Numerix.
e. Included in the valuation of identifiable assets are inventories with fair value of ₱360,000. Ms.
Vital Statistix, a former major shareholder of TRANSPARENT, shall acquire title to the goods.

How much is the goodwill (gain on bargain purchase)?

a. 1,680,000 b. 1,640,000 c. 1,760,000 d. 1,240,000

C
Solution:
The consideration transferred on the business combination is computed as follows:
Cash payment on business combination 4,000,000
Additional payment to subsidiary’s former owner 200,000
Consideration transferred on the business combination 4,200,000

The fair value of net identifiable assets acquired is computed as follows:

Fair value of identifiable assets 6,400,000
Fair value of inventory not transferred to DIAPHANOUS (360,000)
Adjusted fair value of identifiable assets acquired 6,040,000
Fair value of liabilities assumed (3,600,000)
Adjusted fair value of net identifiable assets acquired 2,440,000

Goodwill (gain on bargain purchase) is computed as follows:

Consideration transferred 4,200,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,200,000
Fair value of net identifiable assets acquired (2,440,000)
Goodwill 1,760,000

15. 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

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:

0 0
 Page |7

Entity A Entity B
Cash in bank 12,000 6,000
Accounts receivable 36,000 14,400
Inventory 48,000 27,600
Investment in subsidiary 90,000 -
Building, net 216,000 48,000
Total assets 402,000 96,000

Accounts payable 60,000 7,200

Share capital 204,000 60,000
Share premium 78,000 -
Retained earnings 60,000 28,800
Total liabilities and equity 402,000 96,000

Additional information:
• Entity B9s 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.

16. 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) 273,600
Goodwill given 3,600
Total assets 402,000 96,000 430,800

Accounts payable 60,000 7,200 67,200

Share capital 204,000 60,000 parent's only 204,000
Share premium 78,000 - parent's only 78,000
Retained earnings 60,000 28,800 parent's only 60,000
NCI in net assets given 21,600

0 0
 Page |8

Total liab. & equity 342,000 96,000 430,800

17. 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

Use the following information for the next three questions:

On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. On this date, Piglet's net
identifiable assets have a carrying amount of ₱180,000, which approximates fair value.

In December 20x1, Piglet sold goods to Pig for ₱81,000. Piglet had marked up these goods by 50%
based on cost. One-third of these goods remain unsold at year-end. The group assessed that there is
no impairment loss on goodwill for the current year.

The individual statements of profit or loss of the entities for the year ended December 31, 20x1 are
shown below:

Pig Co. Piglet Co.

Revenue 1,000,000 720,000
Cost of sales (400,000) (300,000)
Gross profit 600,000 420,000
Distribution costs (200,000) (100,000)
Administrative costs (80,000) (45,000)
Profit before tax 320,000 275,000
Income tax expense (96,000) (95,000)
Profit after tax 224,000 180,000

All of Piglet9s income and expenses (including profit from intercompany sale) were earned and
incurred evenly during the year.

18. How much is the consolidated gross profit?

a. 689,000
b. 731,000
c. 798,000
d. 792,000

B Solution:

The intercompany sale transaction is upstream. The unrealized profit in ending inventory is computed as
follows:

Sale price of intercompany sale 81,000

Cost of intercompany sale (₱81,000 ÷ 150%) (54,000)
Profit from intercompany sale 27,000

0 0
 Page |9

Multiply by: Unsold portion as of year-end 1/3

Unrealized gross profit 9,000

The consolidated sales and cost of sales are computed as follows:

Sales of Pig Co. 1,000,000
Sales of Piglet Co. from Sept. 1 to Dec. 31 only (₱720K x 4/12) 240,000
Less: Intercompany sales during the year (81,000)
Consolidated sales 1,159,000

Cost of sales of Pig Co. 400,000

COS of Piglet Co. from Sept. 1 to Dec. 31 only (₱300K x 4/12) 100,000
Less: Intercompany sales during the year (81,000)
Add: Unrealized gross profit in ending inventory 9,000
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory -
Consolidated cost of sales 428,000

Consolidated gross profit (1,159,000 – 428,000) = 731,000

19. How much is the consolidated profit?

a. 275,000
b. 284,000
c. 295,000
d. 302,000

A Solution:
Parent Subsidiary Consolidated
Profits before adjustments 224,000 60,000a 284,000
Consolidation adjustments:
Unrealized profit - (Reqmt. 8a9) ( - ) (9,000) (9,000)
Net consolidation adjustments ( - ) (9,000) (9,000)
Profits before FVA 224,000 51,000 275,000
Depreciation of FVA ( - ) ( - ) ( - )
Consolidated profit 224,000 51,000 275,000
a (₱180,000 x 4/12 = ₱60,000)

20. How much is the profit attributable to

Owners of the parent NCI
a. 262,000 13,000
b. 224,000 60,000
c. 262,250 12,750
d. 256,250 45,750

C Solution:

0 0
 P a g e | 10

Owners Consoli-
of parent NCI dated
Pig's profit before FVA (Reqmt. 8b9) 224,000 N/A 224,000
Share in Piglet9s profit before FVA (c) 38,250 12,750 51,000
Depreciation of FVA ( - ) ( - ) ( - )
Share in goodwill impairment ( - ) ( - ) ( - )
Totals 262,250 12,750 275,000
(c) Shares in Piglet9s profit before FVA (Reqmt. 8b9): (₱51K x 75%); (₱51K x 25%)

Consolidation begins from the date the investor obtains control of an investee. Thus, the
consolidated profit for the year includes Piglet9s results of operations from September 1 to December 31,
20x1 only (i.e., date of acquisition to end of reporting period).

Use the following information for the next five questions:

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.9s
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.9s 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
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.

21. What amount of goodwill is presented in the consolidated statement of financial position on
December 31, 20x1?
a. 40,000

0 0
 P a g e | 11

b. 35,000
c. 20,000
d. 15,000

A
Solution:
Consideration transferred (cost of investment in sub.) 300,000
Previously held equity interest in the acquiree -
Total 300,000
Less: Parent's proportionate share in the net assets of
subsidiary (360,000 x 75%) (270,000)
Goodwill attrib. to owners of parent - acquisition date 30,000
Less: Parent's share in goodwill impairment -
Goodwill attrib. to owners of parent 30,000
Fair value of NCI [(300,000 ÷ 75%) x 25%] 100,000
Less: NCI's proportionate share in net assets
(90,000)
of subsidiary (360,000 x 25%)
Goodwill attributable to NCI - acquisition date 10,000
Less: NCI's share in goodwill impairment -
Goodwill attributable to NCI – current year 10,000
Goodwill, net – current year 40,000

22. 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

C
Solution:
Total assets of parent 1,672,000
Total assets of subsidiary 496,000
Investment in subsidiary (300,000)
Fair value adjustments – net* 50,000
Goodwill – net 40,000
Effect of intercompany transactions -
Consolidated total assets 1,958,000

*(360,000 – 300,000) = 60,000 – (60,000 ÷ 6) = 50,000

23. 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

B
Solution:
Analysis of net assets
Consoli-dation
Subsidiary Acquisition date Net change
date
Net assets at carrying amts. 300,000 376,000

0 0
 P a g e | 12

FVA at acquisition 60,000 60,000

Subsequent depn. of FVA NIL (10,000)
Unrealized profits (Upstream only) NIL -
Net assets at fair value 360,000 426,000 66,000

NCI in net assets

XYZ's net assets at fair value – Dec. 31, 20x1 426,000
Multiply by: NCI percentage 25%
Total 106,500
Add: Goodwill to NCI net (see goodwill computation above) 10,000
NCI in net assets – Dec. 31, 20x1 116,500

24. How much is the consolidated retained earnings on December 31, 20x1?
a. 489,500 c. 534,500
b. 498,500 d. 543,500

A
Solution:
Consolidated retained earnings
Parent's retained earnings – Dec. 31, 20x1 440,000
Consolidation adjustments:
Parent's share in the net change in Sub.'s net assets (a) 49,500
Unrealized profits (Downstream only) -
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable
-
to parent
Net consolidation adjustments 49,500
Consolidated ret. earnings – Dec. 31, 20x1 489,500
(a) (66,000 net change in net assets x 75%) = 49,500

25. 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

A
Solution:
Share capital of parent 940,000
Consolidated retained earnings – (see above) 489,500
Equity attributable to owners of the parent 1,429,500
Non-controlling interests - (see above) 116,500
Consolidated total equity 1,546,000

Use the following information for the next three questions:

On January 1, 20x1, Laughter Co. issued equity instruments in exchange for 75% interest in Tears
Co. Tears Co.9s 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:

0 0
 P a g e | 13

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

26. How much is the consolidated profit in 20x1?

a. 301,000 c. 320,000
b. 310,000 d. 336,000

B
Solution:
Parent Subsidiary Consolidated
Profits before adjustments 240,000 80,000 320,000
Consolidation adjustments:
Unrealized profits ( - ) ( - ) ( - )
Dividend income from subsidiary ( - ) N/A ( - )
Gain or loss on extinguishment
of bonds ( - ) ( - ) ( - )
Net consolidation adjustments ( - ) ( - ) ( - )
Profits before FVA 240,000 80,000 320,000
Depreciation of FVA* (7,500) (2,500) (10,000)
Impairment loss on goodwill ( - ) ( - ) ( - )
Consolidated profit 232,500 77,500 310,000

*(360,000 – 300,000) = 60,000 ÷ 6) = 10,000

(10,000 x 75%) = 7,500;
(10,000 x 25%) = 2,500

27. 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

A
Solution:
Owners Consoli-
of parent NCI dated
Parent's profit before FVA 240,000 N/A 240,000
Sh. in Sub.’s profit before FVA (c) 60,000 20,000 80,000
Depreciation of FVA (7,500) (2,500) (10,000)
Share in impairment loss on goodwill ( - ) ( - ) ( - )
Totals 292,500 17,500 310,000

(c)
The shares in Subsidiary’s profit before FVA are computed as follows:

Profit of Subsidiary before fair value adjustments 80,000

Allocation:
Original’s share (80,000 x 75%) 60,000
NCI’s share (80,000 x 25%) 20,000

0 0
 P a g e | 14

As allocated: 80,000

28. 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

B (See solution in previous question)

-

0 0