Accounting for Business Combination – Finals Exam

Problem 1
Greyhoundz Co., a Philippine Corporation, sold inventory on credit to a British Company on May
1, 2030. Greyhoundz received payment of 262,500 British Pounds on October 1, 2030. The
exchange rate was P1 = 0.65 British Pounds on May 1 and P1 = 0.70 British Pounds on October
1, 2030.

1. What amount of foreign exchange gain or loss should be recognized on October 1, 2030?
a. P5,250,000 loss
b. P13,125 loss
c. P13,125 gain
d. P28,846 loss

2. What amount should be recorded as sale of inventory in the income statement of Greynhoundz
in 2030?
a. P262,500
b. P183,750
c. P170,625
d. P403,846

Problem 2
Mike Co., a Philippine Corporation, sold inventory on December 1, 2030, with payment of 32,500
British pounds to be received in sixty days. The pertinent exchange rates were as follows:

Date Spot Rate

December 1, 2030 P1.7241
December 31, 2030 P1.8182
January 30, 2031 P1.6666

3. For what amount should Sales be credited on December 1, 2030?

a. P18,850
b. P17,875
c. P59,091.50
d. P56,033.25
4. What amount of foreign exchange gain or loss should be recorded on December 31, 2020?
a. P975 loss
b. P975 gain
c. P3,058.25 gain
d. P3,058.25 loss
5. What amount of foreign exchange gain or loss should be recorded on January 30, 2031?
a. P1,625 loss
b. P1,625 gain
c. P4,927 gain
d. P4,927 loss
Problem 3
Paul Corp., entered into a forward contract to hedge a sale of inventory on October 26, 2030 to be
collected on January 24, 2031, 72,000 FC in 90 days. The relevant exchange rates are as follows:

Spot Rate Forward Rate

October 26, 2030 P52.73 P52.77
December 31, 2030 P52.82 P52.89
January 24, 2031 P52.94

6. What is the net forex gain (loss) from this transaction and hedge that will be reported in Paul’s
2030 statement of income?
a. P15,120
b. (P8,640)
c. P6,480
d. (P2,160)
7. The fair value of the forward contract on October 26, 2030:
a. P3,799,440
b. P3,808,080
c. P3,796,560
d. 0
8. The total sales to be recorded in 2030 income statement:
a. P3,803,040
b. P3,796,560
c. P3,799,440
d. P3,808,080
9. The fair value of the forward contract on December 31, 2030:
a. P8,640 liability
b. P8,640 receivable
c. P2,880 liability
d. P2,880 receivable

Problem 4
The following data applies to Velocity Company’s purchase of 45,400 Belgium francs under a
forward contract dated November 1, 2022, for delivery on January 31, 2023:

11/1/22 12/31/22 1/31/23

Spot rates P55.75 P53.90 P54.50
30-day forward rate 51.30 56.15 53.20
60-day forward rate 57,65 52.30 55.75
90-day forward rate 54.25 55.45 52.10

Velocity entered into a forward contract to speculate in the foreign currency.

10. In its income statement for the year-ended December 31, 2022, what amount of gain/loss
should Velocity Report from this forward contract?
 a. P83,990 gain
b. P83,990 loss
c. P86,260 loss
d. P86,260 gain

Problem 5
On January 1, 2033, Fred Corporation acquired all the assets and assumed all the liabilities of
Cheng Company by issuing 20,000 shares with a fair value of P67.50 per share and an obligation
to pay a contingent consideration equivalent to 50% of the earnings of the surviving company, if
the earnings of the combined entity is at least P1,000,000 during the first year after acquisition.
The fair value of the contingent consideration was determined to be P750,000 on the date of
acquisition.

In addition, the Fred paid the following acquisition related costs:

Legal fees P105,600

Audit fee for SEC registration of stock issue 320,400
Cost of stock certificates 35,000
Other direct cost of acquisition 99,000
General and allocated expenses 14,000

The Statement of Financial Position as of December 31, 2032, of Fred and Cheng, together with
the fair market value of the assets and liabilities are presented below:

Cheng Fred
Book Value Fair Value Book Value Fair Value
Cash P45,000 P45,000 P640,000 P640,000
Accounts receivable 70,000 54,000 360,000 335,000
Inventories 87,000 78,000 475,000 390,000
Prepaid expenses 13,500 5,000 25,000 -
Land 900,000 2,000,000 2,900,000
Building 723,000 768,000 800,000 900,000
Equipment 361,500 360,000 700,000 585,000
Goodwill 300,000 - - -
Total assets P2,500,000 1,310,000 P5,000,000 P5,750,000

Accounts payable 200,000 200,000 312,500 312,500

Notes payable 700,000 765,000 937,500 980,000
Share capital (P50 par) 850,000 - 2,000,000
Share premium 400,000 1,000,000
Retained earnings 350,000 750,000
Total Equities P2,500,000 P5,000,000

The acquiree’s land had no available fair market value on the date of acquisition, but it was
provisionally valued at P1,550,000 as of that date.
Compute for the balances what will be shown on the January 1, 2033 statement of financial
position of the surviving company:
11. Goodwill to be reported by the surviving company – Fred?
a. 0
b. 205,000
c. 95,000
d. 505,000
12. Cash to be reported by the surviving company – Fred?
a. 685,000
b. 66,000
c. 640,000
d. 111,000
13. What is the total amount of land and building to be reported by the surviving company?
a. 4,423,000
b. 5,423,000
c. 6,118,000
d. 5,118,000
14. What is the total amount of liabilities to be reported by the surviving company?
a. 2,215,000
b. 2,965,000
c. 1,250,000
d. 2,452,500
15. Total shareholders’ equity to be reported by the surviving company?
a. 4,526,000
b. 5,868,000
c. 6,737,500
d. 4,800,000

16. Assuming that the final value of the land was fixed at P1,300,000 on July 1, 2033, the entry to
record the adjustment will include a:
a. Debit to land of 250,000
b. Debit to loss of 250,000
c. Debit to goodwill of 250,000
d. No entry

17. Assuming that on December 31, 2033, the surviving entity reported earnings of P2,500,000,
the entry to remeasure the contingent liability will include a:
a. Debit to loss of 500,000
b. Credit to gain of 500,000
c. Debit to contingent liability of 500,000
d. Debit to goodwill of 500,000

Problem 6
On January 1, 2021, S Company acquired 90% of P Company for P120,600.
The January 1, 2021 Statement of Financial Position of Parent and Subsidiary showed the
following balances, among others:

Parent Subsidiary
Common Stock, P10 par 100,000 50,000
Share Premium 15,000 15,000
Retained Earnings 48,000 41,000

At the date of acquisition, all assets and liabilities of Subsidiary Company have book value
approximately equal to their respective market values except the following as determined by
appraisal as follows:

Book Value Fair Value

Inventories 16,100 17,100
Equipment (remaining life 4 40,000 48,000
years
Patent (remaining life 10 10,000 13,000
years)

On December 31, 2021, the following results were given:

Dividends Paid Net Income

Parent Company 15,000 30,200
Subsidiary Company 4,000 9,400

At the end of 2021, the consolidated entity determined that the Goodwill to be presented in the
consolidated financial statements should be written down by 2,000.

18. Compute for the amount of goodwill on January 1, 2021 consolidated financial statements:
a. 2,600
b. 3,800
c. 14,400
d. 16,000
19. Compute for the non-controlling interest on January 1, 2021:
a. 10,600
b. 13,400
c. 11,800
d. 89,000
20. Using cost method to record the results of operations, compute for the Investment in Subsidiary
balance to be presented on December 31, 2021 consolidated statement of financial position:
a. 0
b. 120,600
c. 122,160
d. 125,460
21. How much is the Non-controlling interest in Net Income on December 31, 2021?
 a. 0
b. 540
c. 610
d. 410
22. How much is the NCI on December 31, 2021?
a. 10,600
b. 13,410
c. 11,140
d. 12,010
23. How much is the consolidated net income attributable to Parent?
a. 26,600
b. 32,090
c. 30,290
d. 44,100
24. How much is the Consolidated Retained Earnings on December 31, 2021?
a. 63,290
b. 65,090
c. 69,400
d. 69,800
25. How much is the consolidated net income on December 31, 2021?
a. 26,600
b. 30,700
c. 32,700
d. 44,100

26. Under PAS 21, which of the following statements pertains to functional currency?
a. It refers to the currency of the primary economic environment in which the entity operates.
b. It refers to the currency in which the financial statements are presented.
c. It refers to the currency other than the functional currency of the entity.
d. It refers to the type of currency in a given jurisdiction which a creditor may be compelled
to accept.

27. Under PAS 21, monetary items are cash or elements of financial statements which are
receivable or payable in a fixed amount of cash. Which of the following is a monetary item?
a. Sales
b. Income tax payable
c. Unearned revenue
d. Inventory

28. Which of the following is a nonmonetary item?

a. Prepaid asset
b. Loan receivable
c. Accounts payable
d. Interest payable
29. Under PAS 21, what is the initial measurement of foreign currency denominated transaction?
a. Both monetary and nonmonetary items are measurement initially at transaction or historical
rate.
b. Monetary items are measured at closing rate while nonmonetary items are measured at
transaction rate.
c. Monetary items are measured at transaction rate while nonmonetary items are measured at
closing rate.
d. Both monetary and nonmonetary items are measurement initially at closing rate.

30. Under PAS 21, what is the subsequent measurement of nonmonetary items?
a. Closing rate
b. Transaction rate
c. Average rate
d. Monthly rate

31. Under PAS 21, what is the subsequent measurement of monetary items?
a. Closing rate
b. Transaction rate
c. Average rate
d. Monthly rate

32. PAS 21 provides that exchange differences/(gain/loss) arising on the settlement or translating
foreign currency transaction shall be recognized in
a. Profit or loss
b. Other comprehensive income
c. Share premium
d. Retained earnings

33. Which of the following items will result to foreign currency transaction gain/loss due to
settlement or translation?
a. Foreign currency denominated income statement accounts such as revenue, income,
expense or loss.
b. Foreign currency denominated non-monetary assets such as inventory, PPE, intangible
asset or prepaid asset.
c. Foreign currency denominated monetary items such as accounts payable, accounts
receivable, notes payable, loans receivable or interest payable.
d. Foreign currency denominated non-monetary liabilities such as unearned revenue,
warranty liability, premium liability and deferred tax liability.
e. Foreign currency denominated equity accounts such as ordinary shares, preference shares,
treasury shares and share premium.

34. IAS 21 provides that an entity may present its financial statements in any currency even
different from its functional currency. When the company translates its financial statements
 from its functional currency to its selected presentation currency, how shall the exchange
differences arising from the translation be recognized?
a. It shall be recognized in profit or loss.
b. It shall be recognized in other comprehensive income with reclassification adjustment to
profit or loss if realized.
c. It shall be recognized in other comprehensive income without reclassification adjustment
and reclassified directly to retained earnings if realized.
d. It shall be recognized directly to retained earnings.

35. When translating the financial statements of an entity from its functional currency to its
selected presentation currency, which of the following translation measurement is incorrect?
a. Assets and liabilities are translated at the closing rate at the date of statement of financial
position.
b. Income and expenses are translated at (1) exchange rates at the date of the transaction or
(2) Average rate for the period for practicality.
c. Equity accounts other than retained earnings are translated at the date of the transaction
resulting to that equity items.
d. Retained earnings are translated using the average rate during period.

36. Under PFRS 10, parent corporation is the entity that controls one or more entities. How does
PFRS 10 define control?
A. An investor controls an investee when it is exposed, or has right to variable return from the
investment with the investee and has the ability to affect those returns through the power
over the investee.
B. An investor controls an investee when it has the power to govern the financial and operating
policies of an entity so as to obtain benefits from its activities.
C. An investor controls an investee when it has the ability to influence the financial and
operating policies of an entity so as to obtain benefits from its activities.
D. An investor controls an investee when it owns more than 50% of all the outstanding capital
stocks, whether common or preferred.

37. How shall the parent corporation present the Noncontrolling Interest (NCI) in the Consolidated
Statement of Financial Position?
A. It shall be presented within 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.

38. Which of the following income items shall affect CNI to Parent/(CONSORE) only but not
NCINI/(NCINAS)?
A. Amortization of difference between the fair value and book value of the assets and
liabilities of the subsidiary.
 B. Unrealized/realized income/expense arising from upstream transactions or from subsidiary
to parent.
C. Impairment loss of goodwill from business combination initially measured using fair value
of NCI.
D. Dividend income of parent coming from subsidiary.

39. 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
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

40. AS Company acquired a 30% equity interest in OT Company many years ago. In the current
accounting period it acquired a further 40% equity interest in OT. Are the following statements
true or false, according to PFRS 3 Business Combinations?
I. AS' pre-existing 30% equity interest in OT should be remeasured at fair value at the
acquisition date.
II. AS' net assets should be remeasured at fair value at the acquisition date.

a. False, False b. False, True c. True, False d. True, True

41. 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.

a. False, False b. False, True c. True, False d. True, True

42. 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

43. Under the full goodwill approach, goodwill arising from acquisition of control thru acquisition
of stocks is recognized in the separate books of the Parent and the Subsidiary, respectively.
a. True
 b. False

44. Under the partial goodwill approach, any impairment loss on goodwill is to be recognized in
the parent’s books only.
a. True
b. False
45. The amortization of undervaluation attributable to inventories of the Subsidiary on acquisition
date will involved a working paper entry debit to Cost of Sales.
a. True
b. False
46. The working paper entry to amortize the fair value differential related to an equipment of the
subsidiary will affect both depreciation expense and accumulated depreciation.
a. True
b. False
47. Under the partial goodwill approach, the computation of the NCI in NI of Subsidiary will
include a deduction for the NCI’s share in the impairment of the goodwill.
a. True
b. False
48. The dividends to be eliminated for purposes of determining the net consolidated net income is
computed by multiplying the controlling interest by the dividends declared by the Parent during
the year.
a. True
b. False
49. All dividend income recognized by the Parent Company in its separate financial statement
should be eliminated for consolidation purposes.
a. True
b. False
50. Under the partial goodwill approach, goodwill arising from acquisition of control thru
acquisition of stocks is recognized in the separate books of the Parent only.
a. True
b. False