Global Reciprocal Colleges

GRC- Junior Philippine Institute of Accountants

Examination in Business Combination
I. True or False

1. Merger happens when two or more entities consolidate into a single entity. True

2. The acquirer is usually the investor who acquires an investment or a subsidiary. True

3. The place in which the acquirer obtains control of the acquiree. False

4. All asset and liabilities are measured at acquisition date fair value. True

5. The consolidation happens when two or more entities consolidate and establish a
new customer. False

6. The acquistion method involves five steps. False

7. The first step in applying the acquisition method is to determine the acquisition
date.False

8. An acquirer is also known as an investor. True

9. Once the investor acquires a subsidiary, it has to account for each business
combination by applying the acquisition method. True

10. Business combination as a transaction or other event in which an acquirer obtains

control of one or more business. True

11. The method required under PFRS 3 to be used in accounting for business
combinations is combination method. False

12. The aggregate cash flows arising from acquisitions and from disposals of
subsidiaries or other business units resulting to loss or obtaining of control are
presented separately and classified as Investing activities. True

13. Non-controlling interest in consolidated income is never affected by upstream sale.

True

14. Under PFRS 3 Business Combination, goodwill is computed as Cost of investments

less subsidiary’s book value at the acquisition date. False

15. The non-controlling interest in net asset of subsidiary shall be presented in the
consolidated financial statement within equity, separately from the equity of the owners
of the parent. True
16. The dividends must be included when the consolidated financial statement are
prepared. False

17. Intercompany gains and losses resulting from intercompany sales of PPE are to be
eliminated in preparing consolidated financial statement. True

18. One of the consolidation procedures is to combine like items of

asset,liabilities,equity,income,expenses and cash flows of the parent with those of its
subsidiaries. True

19. Downstream sale is intercompany sales are those made from subsidiary company
to it's parent. False

20. Upstream sale is the intercompany sales which those made from parent company to
it's subsidiaries. False

II. Multiple Choice (Theories)

21. Which of the following is not a reason for a company to expand through a
combination, rather than by building new facilities?

a. A combination might provide cost advantages.

b. A combination might provide fewer operating delays.

c. A combination might provide easier access to intangible assets.

d. A combination might provide an opportunity to invest in a company without having to

take responsibility for its financial result.

22. A business merger differs from a business consolidation because

a. a merger dissolves all but one of the prior entities, but a consolidation dissolves all of
the prior entities.

b. a consolidation dissolves all but one of the prior entities, but a merger dissolves all of
the prior entities.

c. a merger is created when two entities join, but a consolidation is created when more
than two entities join.

d. a consolidation is created when two entities join, but a merger is created when more
than two entities join.
23. Following the accounting concept of a business combination, a business
combination occurs when a company acquires an equity interest in another entity and
has

a. at least 20% ownership in the entity.

b. more than 50% ownership in the entity.

c. 100% ownership in the entity.

d. control over the entity, irrespective of the percentage owned.

24. Historically, much of the controversy concerning accounting requirements for

business combinations involved the ________ method.

a. purchase

b. pooling of interests

c. equity

d. Acquisition

25. It is a transaction or other event in which an acquirer obtains control of one or more
businesses.

a. Business Combination

b. Merger

c. Consolidation

d. Controlling Interest

26. This is define as an integrated set of activities and assets capable of being
conducted and managed for the purpose of providing a return directly to investors or
other owners, members or participants.

a. Business

b. Transaction

c. Isolated event

d. Undertaking

27. An acquirer might obtain control of an acquiree in all of the following, except
a. By transferring cash, cash equivalents and other assets

b. By issuing equity interests

c. By contract alone, even without consideration

d. By acquiring interest in a joint venture

28. A business combination may be structed in all of the following, except

a. One or more businesses become subsidiaries of an acquirer

b. One entity transfers net assets to another entity

c. A group of former owners of one of the combining entities obtain control of the
combined entity

d. An entity acquires assets that are not a business

29. It is a business combination in which all of the combining entities or businesses

ultimately are controlled by the same party or parties both before and after
thecombination and that control is not transitory.

a. Combination of entities or businesses under common control

b. True merger

c. Merger of equals

d.Consolidation

30. What is the term for the business combination where all combining entities transfer
their net assets to a newly formed entity?

a. True merger

b. Legal merger

c. Roll up transaction

d. Spin off

31. Which statement best describes the term control?

a. The mutual sharing of risks and benefits

b. The power to participate in the financial and operating policy decisions of an entity

c. The holding of a significant proportion of the share capital in another entity

d. The power to govern the financial and operating policies of an entity so as to obtain
benefits from the activities

32. This is defined as the entity that obtains control of an acquiree.

a. Acquirer

b. Investor

c. Shareholder

d. Owner

33. This is defined as holders of equity interest of investor-owned entities, or members

and participants in mutual entities.

a. Shareholders

b. Investors

c. Owners

d. Participants

34. An entity shall account for all business combinations by applying

a. Acquisition method

b. Pooling method

c. Proportional consideration

d. Equity method

35. The acquisition method of accounting for a business combination requires all of the
following, except

a. Identifying the acquirer

b. Determining the acquisition date

c. Recognizing and measuring the identifiable assets acquired, the liabilities assumed
and the non-controlling interest in the acquiree at carrying amount

d. Recognizing goodwill or gain from bargain purchase

36. 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 interests, the acquirer is usually

the entity that issues the equity interests

c. The acquirer is usually the combing entity whose relative size is significantly greater
than that of the other combining entity or entities

d. If a new entity is formed to issue entity interests to effect a business combination, the
new entity formed is necessarily the acquirer

37. Which statement in relation to an acquisition date of a business combination is

incorrect?

a. The acquisition date is the date on which an acquirer obtains control over the
acquiree

b. The acquisition date is normally the closing date or the date on which the acquirer
legally transfers the consideration, acquires the assets and assumes the liabilities of the
acquiree

c. Where several dates are key to a business combination, the date on which control
passes is the acquisition date.

d. The acquisition date can never precede the closing date

38. What is the initial measurement of the identifiable assets and liabilities assumed in a
business combination?

a. Acquisition date fair value

b. Acquisition date carrying amount

c. Acquisition date present value of cash flows

d.Acquisition date historical cost

39. In a business combination, goodwill is measured as the excess of

a. The consideration transferred over the identifiable net assets acquired.

b. The total of the consideration transferred and the amount of any noncontrolling
interest in the acquiree over the identifiable net assets acquired

c. The total of the consideration received and the fair value of the previously held
interest in the acquiree over the identifiable net assets acquired
d. The total of the consideration transferred, the amount of any noncontrolling interest in
the acquiree and the fair value of previously held interest in the acquire over the
identifiable net assets acquired

40. Which statement is not true in relation to business combination?

a. The acquirer shall recognize the acquisition-date fair value of any contingent
consideration as part of the consideration transferred in a business combination

b. The acquirer shall recognize the acquiree's contingent liabilities if certain conditions
are met

c. The acquirer shall recognize acquiree's contingent assets if certain conditions are
met

d. All of the statements are not true

III. Multiple Choice (Problem Solving)

41. Cabrera Corporation paid 80,000 to acquire all of Hidalgo Company's net assets.
Hidalgo reported assets with a book value of 60,000 and fair value of 98,000 and
liabilities with a book value and fair value of 23,000 on the date of combination. Cabrera
also paid 3,000 to a search firm for finder's fees related to the acquisition. What amount
will be recorded as goodwill by Cabrera Corporation while recording its investment in
Hidalgo?
a. 0
b. 5,000
c. 8,000
d. 13,000
42. On November 30, 2021, Parlor, Inc. purchased for cash at 15 per share all 250,000
shares of the outstanding common stock of Shaw Co. On November 30, 2021, Shaw's
balance sheet showed a carrying amount of net assets of 3,000,000. On that date, the
fair value of Shaw's property, plant, and equipment exceeded its carrying amount by
400,000. In its November 30, 2021, consolidated balance sheet, what amount should
Parlor report as goodwill?
a. 750,000
b. 400,000
c. 350,000
d. 0
43. Jel Corp. paid 300,000 for the outstanding common stock of Star Co. At that time
Star had the following condensed balance sheet:

Carrying Amount
 Current Asset 40,000

Plant, equipment and net 380,000

Liabilities 200,000

Stakeholders Equity 220,000

The fair value of the plant and equipment was 60,000 more than its recorded carrying
amount. The fair values and carrying amounts were equal for all other assets and
liabilities. What amount of goodwill, related to Star's acquisition, should Penn report in
its consolidated balance sheet?
a. 20,000
b. 40,000
c. 60,000
d. 80,000

For numbers 44-50. Phoenix Company acquired a business unit of Falcon Company on
July 1, 2021. At that date, the net assets of Falcon Company comprised:

Particulars Carrying Fair value

amount

Accounts Receivable 100,000 90,000

Inventory 60,000 50,000

Motor Vehicles 40,000 50,000

Plant, Property and Equipment 500,000 610,000

Bank Overdraft (30,000) (30,000)

Accounts Payable (70,000) (70,000)

Net assets 600,000 700,000

Additional information:

1. Falcon Company was being sued by an ex-employee for workplace injury. The
expected compensation was P50,000. Phoenix Company agreed to bear the cost
in relation to this court case. Phoenix Company lawyer estimated that the
probability of losing the court case was 40%.
 2. Directly attributable acquisition costs of P100,000 were paid by Phoenix
Company on July 1, 2021.

To purchase the above business unit, Phoenix Company agreed to provide the following
consideration to Falcon Company in exchange for the net assets:

1. 100,000 ordinary shares of Phoenix Company which were valued at P5 per

share. Costs associated with the share issue were P50,000 and were paid on
July 1, 2021. Phoenix Company guaranteed its share price at P5 until May 1,
2022. There was 90% chance that share price would remain at P5, 5% chance
that it would fall to P4.8 and 5% chance that it would fall to P4.5 on May 1, 2022.
Any decrease of Phoenix Company’s share price at below P5 on May 1, 2022,
Phoenix Company agreed to pay additional cash to Falcon Company in order to
cover the shortage in payments of purchase consideration.
2. Cash of P210,000. Of that amount, P100,000 was to be paid immediately and the
remaining P110,000 was to be paid one year later i.e., July 1, 2022. Phoenix
Company’s borrowing rate was 10% per year.
3. Phoenix Company’s equipment at fair value of P20,000 was transferred to Falcon
Company’s information in Phoenix Company books reveals that cost of
equipment was P25,000, the carrying amount was P15,000 and accumulated
depreciation of equipment was P10,000.

Question:

44. How much is the total cost of the business combination (purchase
consideration)?

a. 732,600

b. 723,400

c. 723,200

d. 723,500

45. How much is the goodwill?

a. 44,500

b. 43,500

c. 44,400

d. 43,400
46. How much is the Phoenix ordinary shares?

a. 400,000

b. 450,000

c. 500,000

d. 550,000

47. Guarantee of share price is _______.

a. 3,500

b. 3,600

c. 4,890

d. 3,550

48. Provision for damages (court case) costs _______.

a. 25,000

b. 20,000

c. 15,000

d. 10,000

49. If the share price is P4.8, at what amount is the adjustment to Goodwill?

a. 17,600

b. 15,600

c. 16,500

d. 14,300

50. If the share price is P4.5, at what amount is the adjustment to Goodwill?

a. 46,500

b. 46,800

c. 56,500

d. 46,800
51-60. Erico acquires assets and liabilities of Mariel Company on January 1, 20x5. To
obtain these shares, Erico pays P800 (in thousands) and issues 20,000 shares of P20
par value common stock on this date. Erico stock had a fair value of P36 per share on
that date. Erico also paysP30 (in thousands) to a local investment firm for arranging the
transaction. An additional P20 (in thousands) was paid by Erico in stock issuance costs.

The book values for both Erico and Mariel as of January 1, 20x5 follow. The fair value of
each of Erico and Mariel accounts is also included. In addition, Mariel holds a fully
amortized trademark that still retains an P80 (in thousands) value. The figures below
are in thousands. Any related question also is in thousands.

Mariel Paderes Company

Erico Inc. Book Value Fair Value

Cash P 1,800 P 160 P 160

Receivables 960 360 320

Inventory 1,320 520 600

Land 600 240 260

Buildings (net) 2,400 440 560

Equipment (net) 720 200 150

Account Payable 960 120 120

Long-term 2,280 680 600

liabilities

Common stock 2,400 160

Retained earnings 2,160 960

Assuming the combination is accounted for as an acquisition, immediately after the

acquisition, in the balance sheet of Erico:

51. What amount will be reported for goodwill?

a. P100 c. P140
 b. P130 d. P270
52. Using the same information above, what amount will be reported for receivables?
A. P1,320 C. P1,000
B. P1,280 D. P 920
53. Using the same information above, what amount will be reported for inventory?
A. P1,920 C. P1,400
B. P1,840 D. P1,240
54. Using the same information above, what amount will be reported for buildings
(net)?
A. P2,840 C. P2,280
B. P2,520 D. P2,960
55. Using the same information above, what amount will be reported for equipment
(net)?
A. P770 C. P870

B. P670 D. P720

56. Using the same information above, what amount will be reported for long-term
liabilities?
A. P2,960 C. P2,360
B. P2,880 D. P2,200
57. Using the same information above, what amount will be reported for common
stock?
A. P2,400 C. P2,800
B. P2,560 D. P2,960
58. Using the same information above, what amount will be reported for retained
earnings?
A. P2,130 C. P3,050

B. P2,160 D. P3,120

59. Using the same information above, what amount will be reported for additional
paid in capital?
A. P330 C. P320
B. P300 D. P350
60. Using the same information above, what amount will be reported for cash after
the purchase transaction?
A. P1,960 C. P1,750
B. P1,800 D. P1,110
61-62. The Delta Company purchased an 80% interest in the Midwest Company for

$550,000 on January 1, 19X1, when Midwest had the following balance sheet: Assets

Accounts receivable. $ 50,000

Inventory.................................................... 120,000

Land......................................................... 80,000

Building..................................................... 270,000

Equipment.................................................... 80,000

Total. $600,000

========

Liabilities and Equity

Current liabilities $100,000

Common stock, $5 par. 50,000

Paid-in excess of par. 150,000

Retained earnings. 300,000

Total. $600,000

The inventory is understated by $20,000 and is sold during 19X1. The building has a
market value of $300,000 and a 10-year remaining life. The equipment has a market
value of $120,000 and a remaining life of 5 years. Any remaining excess is attributed to
goodwill with a 20-year life.

On December 31, 19X4, Midwest has the following stockholders' equity: Common stock,
$5 par. $ 50,000

Paid-in excess of par. 150,000

Retained earnings. 550,000

During 19X5, Midwest had a net income of $100,000 and paid $10,000 in dividends.

Assume that Delta uses the sophisticated equity method to record its investment in
Midwest.

61. Prepare a determination and distribution of excess schedule as of January 1,

19X1.
62. Prepare the eliminations and adjustments that would be made on the December
31, 19X5, consolidated worksheet to eliminate the investment in Midwest.
Distribute and amortize any excess.

63. In 20x5, Punco sold inventory costing P60,000 to its 100%-owned subsidiary,
Sunco, for P100,000. At 12/31/x5, P20,000 of this inventory was reported in
Sunco's balance sheet. In 20x60 Sunco resold this inventory for P30,000. What
is the unrealized intercompany profit at 12/31/x5?
a. P8,000 c. P20,000 e. None of the above

b. P10,000 d. P30,000

64. In 20x5, Pimco sold inventory costing P45,000 to its 100%-owned subsidiary,
Simco, for P75,000. At 12/31/X5, P15,000 of this inventory was reported in
Simco's balance sheet. In 20x6, Simco resold this inventory for P25,000. What is
the unrealized intercompany profit at 12/31/x5?
a. P6,000 c. P16,000 e. None of the above

b. P10,000 d. P20,000

65. ln 20x6, Semco resold for P40,000 inventory that it had acquired in 20x5 from its
parent company, Pemco, for P32,000. Pemco's cost was P25,000. In
consolidation at the end of 20x6, which of the following accounts is credited in
consolidation?
a. Intercompany Cost of Soles for P32,000.

b. Cost of Sales for P7,000

c. Inventory for P32,000.

d. Cost of Sales for P8,000

66. In 20x6, Pulco acquired inventory from its 75%-owned subsidiary, Sulco, for
P250 000. Sulco's cost was P200,000. At 12/31/X6, Pulco reported P40,000 of
intercompany-acquired inventory in its balance sheet. The amount by which the
2006 consolidated net income that accrues to the controlling will be lower as a
result of this being an intercompany transaction is
a. P6,000 c. P30,000 e. None of the above

b. P8,000 d. P40,000

67. In its consolidated 20x6 financial statements, Pozak recognized P37,000 of

intercompany profit relating to upstream inventory sales from its 75%-owned
subsidiary (Sozak). Of this amount, P7,000 pertained to intercompany profit
deferred at 12/31/0x5. During 20x6, downstream intercompany sales totaled
P100,000 (Pozak's cost was P60,000). What amount was credited to Inventory in
consolidation at 12/31/X6? (Hint: Prepare the analysis of unrealized profit for the
2006 transfers-this is possible from the information given.)
a. P0 c. P10,000 e. None of the above

b. P7,000 d. P30,000

68. In 20x6, Semco resold for P55,000 inventory that it had acquired in 20x5 from its
parent, Pemco, for P30,000. Pemco’s cost was P40,000. Which account is
credited in consolidation at 12/31/x6?
a. Intercompany Cost of Sales for P40,000

b. Cost of Sales for P10,000

c. Inventory for P10,000

d. Cost of Sales for P15,000

e. None of the above

69. On December 1, 20x4. Darlene Ltd. acquired all assets and liabilities of
Shyndelle Ltd with Darlene Ltd. issuing 100,000 shares to acquire these net
assets. The fair value of Shyndelles Ltd’s. assets and liabilities at this date were:
Cash P 50,000Furniture and fittings 20,000Accounts receivable 5,000Plant
125,000Accounts payable 15,000Current tax liability 8,000Provision for annual
leave 2,000The financial year for Darlene Ltd.is January-December. The fair
value of each Darlene Ltd. Share at acquisition date is P1.90. At acquisition date,
the acquirer could only determine a provisional fair value for the plant. On March
1, 20x5, Darlene Ltd. received the final value from the independent appraisal, the
 fair value at acquisition date being P131,000. Assuming the plant had a further
five-year life from the acquisition date. The amount of goodwill arising from the
business combination at December 1, 20x4:

A. P15,000
B. P5,000
C. P13,000
D. P 0

70. John Corporation concluded that the fair value of Carlo Company was
P80,000and paid that amount to acquire all of its net assets. Carlo reported
assets with a book value of P60,000 and fair value of P98,000 and liabilities with
a book value and fair value of P23,000 on the date of combination. John also
paid P3,000 to a search firm for finder’s fees related to the acquisition. What
amount will be recorded as goodwill by John Corp.?

A. P 0
B. P 8,000
C. P5,000
D. P13,000

71. The Marc Company had these accounts at the time it was acquired by Francis
Co.: Cash P 72,000; Accounts receivable 914,000; Inventories 240,000;Plant,
property and equipment 1,392,800Accounts payable 701,600Francis Co. paid
P2,800,000 for net assets of Marc Company. It was determined that fair market
values of inventories and plant, property, and equipment were P266,000 and
P1,800,000, respectively. An assumed contingent liability arising from past
events with a fair value amounting to P20,000and as such amount is considered
reliable measurement. In the books of Francis Co., this transaction resulted in:

A. Goodwill recorded at P882,800

B. Goodwill recorded at P449,600
C. Goodwill recorded at P469,600
D. Current assets increased by P469,600

72. On June 30, 2013 White Corporation issued 100,000 shares of its P20 par value
common stock for the net assets of Black Company. The market value of White's
common stock on June 30 was P36 per share. White paid a fee of P100,000 to the
broker who arranged this acquisition.
 Costs of SEC registration and issuance of the equity securites amounted to, P50,000.
Contingent consideration determined to be paid after acquisition amounts to P 120,000.
What amount should White capitalize as the cost of acquiring Black's net assets.
a. P3,700,000 c. P3,720,000
b. P3,65 0,000 d. P3,750,000

Guerrero 2013 Issuance of Shares of Capital

Share Issuance Cost
73. When Pedro Company acquired Sam Company's net assets by issuing its own capital
stock, it had the following expenditures:

Broker's fee P50,000

Pre-acquisition audit fee 40,000
Legal fees for merger agreement 47,000
Audit fee for SEC registration of stock issue 46,000
Printing of stock certificates 11,000

Under IFRS-3 (2008), the expenditures that should be debited to Additional Paidin Capital
(APIC) account is:
a. P57,000 c. P-0-
b. P137,000 d. P46,000 Guerrero 2013

Shares Issued
74. Sicat Co. will issue share of P10-par common stock for the net assets of Max
Co. Sicat's common stock has a current market value of P40 per share. Max balance sheet
accounts follow:

Current assets P320,000 Common stock, par P4 (80,000)

Property and 880,000 Additional paid-in- (320,000)

Equipment capital

Liabilities (400,000) Retained earnings (400,000)

Max current assets and property and equipment, respectively, are appraised at P400,000
and P1,600,000; its liabilities are fairly valued. Accordingly, Sicat Co. issued shares of its
common stock with total market value equal to that of Max net assets. To recognize
goodwill of P200,000, how many shares were issued?
a. 40,000 c. 50,000
b. 45,000 d. 55,000 Dayag 2013

75. Ruben, Inc. is to acquire James Corp. by absorbing all the assets and assuming all the
liabilities for the latter in exchange for shares of the former's stock. Below are the
 balance sheets of the two companies, with the corresponding appraised value increment
for James.
Ruben James

Assets, per books P4,000,000 P2,500,000

Assets, appraisal increase P300,000

Liabilities PI,500,000 P800,000

Common stock (No par; PI00 par) 2,000,000 1,000,000

Additional paid-in capital 700,000 300,000

Retained earnings (deficit) (200,000) 400,000

Total equities P4,000,000 P2,500,000

The parties agree to use the appraised values, against which the fair market value of the
shares will be matched. Ruben, Inc.'s common stock is currently selling at P100 per share.
The number of shares to be issued by Ruben, Inc. is:
a. 10,000 c. 17,000
b. 13,000 d 20,000 Dayag 2013

76. Red Corporation will issue common shares with a par value P10 for the net assets of
Blue Company Red's common stock has a current market value of P40 per share. Blue's
statement of financial position on the date of acquisition follow:

Current assets P320,000 Common stock, P5 par P80,000

Property and equipment 880,000 Additional paid in capital 320,000
Liabilities 400,000 Retained earnings 400,000

Blue's current assets are appraised at P400,000 and the property and equipment was also
appraised at P1,600,000. Its liabilities are fairly valued. Accordingly, Red Corporation
issued shares of its common stock with a total market value equal to that of Blue's net
assets including goodwill.
To recognize goodwill of P200,000, how many shares were to be issued by Red'.
a. 45,000 c. 50,000
b. 40,000 d. 55,000 Guerrero 2013

Income from Acquisition

77. On May 31,2013, Dear Company has assets and liabilities with the following fair values:

Current assets P180,000

Non-current assets 220,000
Liabilities 40,000
 On June 1,2013, Love Corporation purchases the net assets of Dear Company for
P310,000 cash. In the books of Love corporation, the acquisition resulted in: Guerrero
2013
a. Negative goodwill of P50,000.
b. Income from acquisition of P50,000.
c. Reduction from current assets of P50,000.
d. Deduction from non current assets of P50,000.

Purchase Consideration & Net Assets

78. Diwalwal, a private limited company, has acquired Coal, a private limited company, on
January 1,2011. The fair value of the purchase consideration was 10 million ordinary
shares of P1 of Diwalwal, and the fair value of the net assets acquired was P7 million. At
the time of the acquisition, the value of the ordinary shares of Diwalwal and the net
assets of Coal were only provisionally determined. The value of the shares of Diwalwal
(P11 million) and the net assets of Coal (P7.5 million) on January 1, 2011, were finally
determined on November 30, 2011.
However, the directors of Diwalwal have seen the value of the company decline since
January 1,2011, and as of February 1,2012, wish to change the value of the purchase
consideration to P9 million. What value should be placed on the purchase consideration
and assets of Coal as at the date of acquisition?
a. Purchase consideration P10 million, net asset value P7 million.
b. Purchase consideration P11 million, net asset value P7.5 million.
c. Purchase consideration P9 million, net asset value P7.5 million.
d. Purchase consideration P11 million, net asset value P7 million. Dayag 2013

Stock Exchange Ratio

79. Companies X, Y, and Z, parties to a consolidation, have the following data:
X Co. Y Co. Z Co.

Net assets P400,000 P600,000 PI,000,000

Average annual earnings 60,000 60,000 80,000

The parties collectively agreed that the new corporation, AA Co. will issue a single class of
stock based on the earnings ratio. What is the stock distribution ratio to companies X, Y,
and Z, respectively?
a. 20:30:50 c. 30:40:30
b. 30:30:40 d. 40:40:20 Dayag 2013

80. On 1 December 2011, Casio Ltd. acquired all the assets and liabilities of Aurora Ltd.
with Casio Ltd. issuing 100,000 shares to acquire these net assets. The fair value of
Aurora Ltd.'s assets and liabilities at this date were:

Cash P50,000
 Furniture and fittings 20,000

Accounts receivable 5,000

Plant 125,000

Accounts payable 15,000

Current tax liability 8,000

Provision for annual leave 2,000

The financial year for Casio Ltd. is January - December.

The fair value of each Casio Ltd. share at acquisition date is P1.90. At acquisition date,
the acquirer could only determine a provisional fair value for the plant. On 1 March 2012,
Casio Ltd. received the final value from the independent appraisal, the fair value at
acquisition date being P131,000. Assuming the plant had a further five-year life from the
acquisition date.
The amount of goodwill arising from the business combination at December 1,2011:
a. 15,000 c. 5,000
b. 13,000 d. 0 Dayag 2013

81. The VV Company had these accounts at the time it was acquired by Bush Co.:

Cash P36,000
Accounts receivable 457,000
Inventories 120,000
Plant, property, and equipment 696,400
Accounts payable 350,800

Bush Co. paid P1,400,000 for net assets of VV Company. It was determined that fair
market values of inventories and plant, property, and equipment were P133,000 and
P900,000, respectively.
An assumed contingent liability arising from past events with a fair value amounting to
P10,000 and such amount is considered a reliable measurement.
In the books of Bush Co., this transaction resulted in:
a. Goodwill recorded at P441,400
b. Goodwill recorded at P224,800
c. Goodwill recorded at P234,800
d. Current assets increased by P234,800 Dayag 2013
SOLUTIONS

82. Fair value of shares issued (100,000 x P36) P3,600,000

Contingent consideration 120,000
Total acquisition cost P3,720,000

83. Audit fee for SEC registration of stock issue P46,000

Printing of stock certificates '11,000
Total debit to APIC P57,000

84. (b)
Fair value of net identifiable assets acquired:
Current assets P 400,000
Property and equipment 1,600,000
Liabilities ( 400,000)
FMV of net assets P1 ,600,000
Add: Goodwill 200,000
Consideration transferred P1 ,800,000
Divided by: Current market value per share ^P 40
Number of shares issued 45,000

85.
(d)
Assets at appraised value (P2,500,000 + P300,000) P2,800,000
Less: Liabilities 800,000
Net assets at appraised values Z':. P2,000,000
Divided by: Current selling price per share ............................. P 100
Number of shares issued 20,000

86. Fair value of net identifiable assets acquired:

Current assets P 400,000
Property and equipment 1,600,000
Liabilities ( 400,000)
Net assets acquired P1,600,000
Add: Goodwill 200,000
Acquisition cost P1,800,000
Divided by market value per share P 40
Number of shares to be issued 45,000

87. Price paid P310,000

Less: Fair value of net identifiable assets

 Current assets P180,000

Non-current assets 220,000

Liabilities ( 40,000) 360,000

Income from acquisition P (50,000)

88.
(b
) Fraction

X P 60,000 6/20 = 30%

Y 60,000 6/20 = 30%
89. (b Z 80,000 8/20 = 40%
) P200,000 100%

.
90. Consideration transferred (100,000 shares P 190,000
xP 1.90) Less: Fair value of net
identifiable assets acquired:

Cash P 50,000
Furniture and fittings 20,000
Accounts receivable 5,000
Plant 125,000
Accounts payable (15,000)
Current tax liability (8,000)

Liabilities (2,000) 175,000

Goodwill P15,000

One of the problems that may arise in measuring the assets and liabilities of the acquiree
is that the initial accounting for the business combination may be incomplete by the end
of the reporting period. For example, the acquisition date may be August 18 and the end
of the reporting period may be August 31. In this situation, in accordance with par. 45, the
acquirer must report provisional amounts in its financial statements. The provisional
amounts will be best estimates and will need to be adjusted to fair values when those
amounts can be determined after the end of the reporting period. The measurement
period in which the adjustments can be made cannot exceed one year after the
acquisition date.
The carrying amount of the plant must be calculated as if its fair value at the acquisition
date had been recognized from that date, with an adjustment to goodwill.
If the plant had a 5-year life from acquisition date, Casio Ltd would have charged
depreciation for 1 month in 2011. Extra depreciation of PJ00, being 1/5 x1/12 x P6 000 is
required in 2012.

The adjusting entry at March 1, 2012 is:

(Adjustment for provisional accounting)
Plant 6,000
Goodwill 6,000
(Adjustment to depreciation due to provisional accounting)
Retained Earnings (1/1/12).. 100
Accumulated Depreciation 100
If depreciation has been calculated monthly for 2012, further adjustments would be
required.

91. (C)

Consideration transferred (fair value) P1,400,000

Less: Fair value of net identifiable assets acquired:
Cash P 36,000
Accounts receivable 457,000 Inventories :. 133,000
Property, plant and equipment 900,000
Accounts payable (350,800)
Provision for liability ( 10,000)
1,165,200
Goodwill P 234,800
PFRS 3 (2008) par. 23 requires thai the acquirer should recognize a contingent
liability assumed in a business combination as of the date of acquisition if: • it is a
present obligation that arises from past events; and
• its fair value can be measured reliably.
Therefore, contrary to PAS 37, the acquirer recognizes a contingent liability assumed in a
business combination at the acquisition date even if it not probable that an outflow of
resources embodying economic benefits will be required to settle the obligation.