ACCOUNTING FOR BUSINESS COMBINATIONS

Use the following information for the next five questions:

January 1, 20x1, Bass Co. issued equity instruments in exchange for 75% interest in
Guitar Co. On the 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:

No dividends were declared by either entity during the year. There were also no inter-company
transactions and impairment in goodwill.

41. 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

42. 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

43. How much is the non-controlling interest in the net assets of the subsidiary on December 31,
20x1?
a. 106,500 b. 116,500 c. 136,500 d. 146,500
44. How much is the consolidated retained earnings on December 31, 20x1?
a. 489,500 b. 498,500 c. 534,500 d. 543,500

45. How much is the consolidated total equity on December 31, 20x1?
a. 1,546,000 b. 1,564,000 c. 1,642,000 d. 1,624,000

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.’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:

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

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

47. How much is the consolidated profit attributable to owners of the parent in 20x1?
a. 292,500 b. 310,000 c. 320,000 d. 232,500

48. How much is the consolidated profit attributable to non-controlling interest in 20x1?
a. 6,500 b. 17,500 c. 57,500 d. 77,500

49. Par Company owns 60% of Sub Corp’s outstanding capital stock. On May 1,2008, Par
advanced Sub P70,000 in cash which was still outstanding at December 31, 2008. What portion
of this advance should be eliminated in the preparation of the December 31, 2008 consolidated
balance sheet?
a. 70,000 b. 0 c. 42,000 d. 28,000
50. On January 1, 2014, the fair values of Pink Conrad’s net assets were as follows:

Current Assets P100,000

Equipment 150,000
Land 50,000
Buildings 300,000
Liabilities 80,000

On January 1, 2014 Blue George Company purchased the net assets of PinkConrad by issuing
100,000 shares of its P1 par value stock when the fair value ofthe stock was P6.20. It was further
agreed the Blue George would pay an additional amount on January 1, 2016, if the average
income during the 2-year period 2014-2015 exceeded P80,000 per year. The expected value
of this consideration was calculated as P184,000; the measurement period is one year. What
amount will be recorded as goodwill on January 1, 2014?

a. 284,000 b. 180,000 c. 100,000 d. 0

ACCOUNTING FOR BUSINESS COMBINATION - PRELIM EXAMINATION

1stSemester, A. Y. 2020- 2021 BSA 3
Instruction: Choose the letter of your choice and submit your supporting computation. Each item
is worth 2 points. Answers without supporting computation will be marked as INCORRECT.
START….

Here are the pre- acquisition balance sheets of Father Company and Son Company on December
31, 20x5:

In addition to the above, Son Company has identifiable intangibles with a fair market value of P
5,000,000, not recognized on its books but appropriately capitalized by Father Company. On
January 1, 20x6, Father Company issues 400,000 shares of its stock, with a par value of P
10/share and a market value of P100/ share, to acquire Son Company’s assets and liabilities. SEC
registration fees are P 1,000,000 pain in cash.
1.How much is the goodwill on the business combination?
a.P22,500,000 b. P23,500,000 c. P24,500,000 d. P25,500,000

2.How much is the total assets after the acquisition?

a.P132,500,000 b. P103,500,000 c. P130,500,000 d. P123,500,000

3.How much is the total liabilities after the acquisition?

a.P37,500,000 b. P36,500,000 c. P38,500,000 d. P35,500,000

4.How much is the total additional paid- in capital after the acquisition?
a.P74,900,000 b. P60,000,000 c. P76,000,000 d. P75,000,000

5.How much is the total retained earnings after the acquisition?

a.P22,000,000 b. P12,000,000 c. P11,000,000 d. P21,000,000

6.How much is the total shareholders’ equity after the acquisition?

a.P 95,900,000 b. P 96,000,000 c. P 95,000,000 d. P 96,900,000

7.Assuming that Father Company issued 90,000 shares of stock at a market value of P100 per
share with contingent cash consideration amounted to P500,000 that is present obligation and
reliably measurable, expected present value of the earnout agreement of P200,000 and
probability present value of stock price contingency agreement of P300,000. SEC registration
fees are P 1,000,000 pain in cash. How much is the consideration transferred at the acquisition
date?
a.P 9,500,000 b. P 9,200,000 c. P 9,800,000 d. P 10,000,000

8.In relation to question No. 7, how much is the total goodwill after the acquisition?
a.P (8,000,000) b. P (7,000,000) c. P (6,000,000) d. P (5,000,000)

9.In relation to question No. 7, how much is the total assets after the acquisition?
a.P 111,460,000 b. P 102,000,000 c. P 80,460,000 d. P 105,000,000

10.In relation in question No.7, how much is the additional paid- in capital after the acquisition?
a.P 47,000,000 b. P 47,400,000 c. P 48,240,000 d. P 48,400,000
THEORIES
Instruction:Choose the best answer for each question. Write your answers in a separate sheet of
paper.

1.Under IAS 27, which of the following statements concerning the determination of the acquirer
in a business combination is correct?
a.The acquirer in merger is the entity that absorbed the other entity.
b.The acquirers in consolidation are the entities being consolidated.
c.The acquirer in acquisition of stocks is the subsidiary corporation.
d.The acquirer is the entity that has significant influence in the other entity.

2.Under IFRS 3, in a business combination through acquisition of less than 100% of common
stocks of the subsidiary, the noncontrolling interest in the net assets of the acquiree shall be
measured initially at
a.fair value
b.the present ownership instruments' proportionate share in the recognised amounts of the
acquiree's identifiable net assets
c.Either A or B
d.Neither A nor B

3.Under IFRS 3, what is the proper treatment of contingent liability assumed in a business
combination?
a.It shall be ignored because it is a possible obligation that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity.
b.It shall be disclosed only because it is not probable that an outflow of resources embodying
economic benefits will be required to settle the
obligation.
c.It shall be accrued or recognized as of acquisition date if it is a a present obligation that arises
from past events and its fair value can be measured reliably even it is not probable that an
outflow of resources embodying economic benefits will be required to settle the obligation.
d.None of the above.

4.Under IFRS 3, what is the proper measurement of the consideration transferred in a business
combination?
a.Acquisition-date Fair value
b.Acquisition-date Book value
c.Acquisition-date Historical cost
d.Acquisition-date Present value of cash flows
5.Under IFRS 3, what is the treatment to the excess of the aggregate of
(1) the consideration transferred measured in accordance with this IFRS, which generally
requires acquisition-date fair value;
(2) the amount of any non-controlling interest in the acquiree measured in accordance with IFRS
3; and
(3) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s
previously held equity interest in the acquiree over the fair value of the net of the acquisition-
date amounts of the identifiable assets acquired and the liabilities assumed?

a.Goodwill from business combination to be classified as non-current asset not subject to

amortization
b.Gain on bargain purchase to be presented as part of profit or loss
c.Loss on bargain purchase to be presented as part of other comprehensive income
d.Credit to retained earnings

6.Under IFRS 3, what is the treatment to the excess of the fair value of the net of the acquisition-
date amounts of the identifiable assets acquired and the liabilities assumed over the of the
aggregate of
(1) the consideration transferred measured in accordance with this IFRS, which generally
requires acquisition-date fair value;
(2) the amount of any non-controlling interest in the acquiree measured in accordance with IFRS
3; and
(3) in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s
previously held equity interest in the acquiree?

a.Goodwill from business combination to be classified as non-current asset not subject to

amortization but subject to annual impairment test
b.Gain on bargain purchase to be presented as part of profit or loss
c.Loss on bargain purchase to be presented as part of other comprehensive income
d.Credit to retained earnings

7.Under IFRS 3, what is the proper treatment to acquisition-related costs also known as direct
cost of business combination?
a.Expense as incurred presented as part of profit or loss
b.Expense as incurred presented as part of other comprehensive income
c.Part of consideration transferred in business combination
d.Debited or charged to direct cost of business combination

8.Under IFRS 3, in a business combination achieved in stages, the acquirer shall remeasure its
previously held equity interest in the acquiree at its acquisition-date fair value and recognize the
resulting gain or loss, if any, in
a.Profit or loss
b.Other comprehensive income
c.Share premium
d.Retained earnings

9.Under IFRS 3, what is the proper treatment of measurement period adjustment?

 a.It shall be adjusted to profit or loss.
b.It shall be adjusted to other comprehensive income.
c.It shall be retroactively adjusted to goodwill or gain on bargain purchase.
d.It shall be retroactively adjusted to retained earnings.

10.Under IFRS 3, which of the following is a measurement period adjustment that may be
retroactively adjusted to goodwill or gain on bargain purchase?
a.Additional assets or liabilities if new information is obtained about facts and circumstances that
existed as of the acquisition date and, if known, would have resulted in the recognition of those
assets and liabilities as of that date.
b.Changes resulting from events after the acquisition date, such as meeting an earnings target,
reaching a specified share price or reaching a milestone on a research and development project,
are not measurement period adjustments.
c.Changes in the fair market value of the financial asset at fair value issued as part of the
consideration transferred.
d.Changes in the amortized cost of the financial asset at amortized cost issued as part of the
consideration transferred.