Accounting for Business

Combination
QUIZ 01
AARON JAMES AGUILAR
Accounting for Business Combination
QUIZ - 01

INSTRUCTION: In a clean paper, write your answers clearly. Each page should have your name
written on the top of the page. For all problems, please provide your solutions (#s: 3, 4, 5, 8, 14, 17, 18,
19, 20)

Remember, we hold true to our own integrity. Do your best and God bless you all!

1. PFRS 3 requires a business combination to be accounted for using the

a. Purchase method
b. Acquisition method
c. Goodwill method
d. Control method

2. The objective of PFRS 3 is

a. To lend credibility to the financial statements which the users will use in making economic
decisions in investing or lending in a business undergoing business combination.
b. To improve relevance, reliability and comparability of the financial reporting of an entity in
relation to a business combination by establishing the recognition and measurement principles
and disclosure requirements.
c. To provide relevant and faithfully represented financial information which abide with the
fundamental qualitative characteristics that improves the proper recognition, measurement and
disclosure requirements in a business combination.
d. None of these

3. Pinca Company acquires all of the voting stock of Prado Company for $930,000 cash. The book
values of Prado Company’s assets are $800,000, but the fair values are $840,000 because land has a
fair value above its book value. Goodwill from the combination is computed as:
a. $130,000
b. $90,000
c. $40,000
d. $0

4. On July 1, 2019 The Domingos Company acquired 100% of The Nogpo Company for a
consideration transferred of P160,000. At the acquisition date the carrying amount of Nogpos’ net
assets was P100,000. At the acquisition date a provisional fair value of P120,000 was attributed to
the net assets. An additional valuation received on May 31, 2020 increased this provisional fair
value to P135,000 and on July 30, 2020 this fair value was finalized at P140,000. What amount
should Domingos present for goodwill in its statement of financial position at December 31, 2019,
according to IFRS3 Business combinations?
a. P20,000
b. P40,000
c. P25,000
d. P60,000
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5. Ocenar Co. acquired an 80% interest in Ojena Co. for P900,000. The carrying amounts and fair
values of Ojena Co.’s identifiable assets and liabilities at the acquisition date were as follows:
Carry amount Fair value
Tangible non-current assets 375,000 350,000
Intangible non-current assets 0 200,000
Current assets 400,000 350,000
Liabilities (300,000) (300,000)
Contingent liabilities 0 (30,000)
475,000 570,000

If Ocenar Co. has decided to measure the non-controlling interest at its share of Ojena’s identifiable
net assets, what is the amount of gain on bargain purchase?
a. P444,000
b. P555,000
c. P666,000
d. P0

6. According to PFRS 3, the acquisition date is normally the

a. Control date
b. Purchase date
c. Closing date
d. Valentine’s date

7. In a leveraged buyout, the portion of the net assets of the new corporation provided by the
management group is recorded at:
a. Appraisal value
b. Book value
c. Fair value
d. Lower of cost or market

8. On January 1, 20x1, Remapillo Co. acquired all of the identifiable assets and assumed all of the
liabilities of Revillo, Inc. by paying cash of ₱4,000,000. On this date, Revillo’s identifiable assets and
liabilities have fair values of ₱6,400,000 and ₱3,600,000, respectively. Remapillo agrees to pay an
additional amount equal to 10% of the 20x1 year-end profit that exceeds ₱1,600,000. Revillo
historically has reported profits of ₱1,200,000 to ₱1,600,000 each year. After assessing the expected
level of profits for the year based on forecasts and plans, as well as industry trends, Remapillo
estimated that the fair value of the contingent consideration is ₱40,000.

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

a. 1,180,000
b. 1,200,000
c. 1,240,000
d. 980,000
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9. Using the same problem, Remapillo Co. and Revillo, Inc. The actual profit for the year is ₱2,200,000.
The contingent consideration will be settled on January 15, 20x2. The entry on December 31, 20x1
includes a
a. debit to loss of ₱20,000 to be recognized in profit or loss
b. credit to gain of ₱20,000 to be recognized in profit or loss
c. debit to loss of ₱20,000 to be recognized in OCI
d. credit to gain of ₱20,000 to be recognized in OCI

10. Using the same problem, Remapillo Co. and Revillo, Inc. The actual profit for the year is ₱1,200,000.
The entry on December 31, 20x1 includes a
a. debit to loss of ₱40,000 to be recognized in profit or loss
b. credit to gain of ₱40,000 to be recognized in profit or loss
c. debit to loss of ₱40,000 to be recognized in OCI
d. credit to gain of ₱40,000 to be recognized in OCI

11. A business combination is accounted for properly as an acquisition. Which of the following
expenses related to effecting the business combination should enter into the determination of net
income of the combined corporation for the period in which the expenses are incurred?
a. Security issue cost, yes; overhead allocated merger, yes
b. Security issue cost, yes; overhead allocated merger, no
c. Security issue cost, no; overhead allocated merger, yes
d. Security issue cost, no; overhead allocated merger, no

12. Olanda Company and Panlibuton Company were combined in an acquisition transaction. Olanda
Company was able to acquire Panlibuton Company at a bargain price. The sum of the fair values of
identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Olanda
Company. After eliminating previously recorded goodwill, there was still some “negative
goodwill.” Proper accounting treatment by Olanda Company is to report the amount as:
a. Paid-in capital
b. A deferred credit, which is amortized
c. An ordinary gain
d. An extraordinary gain.

13. Peñaflor Corporation issued 10,000 shares of common stock with a fair value of $25 per share for all
the outstanding common stock of Pepito Company in a business combination properly accounted
for as an acquisition. The fair value of Pepito Company’s net assets on that date was $220,000.
Peñaflor Corporation also agreed to issue an additional 2,000 shares of common stock with a fair
value of $50,000 to the former stockholders of Pepito Company as an earnings contingency.
Assuming that the contingency is expected to be met, the $50,000 fair value of the additional shares
to be issued should be treated as a(n):
a. Decrease in noncurrent liabilities of Pepito Company that were assumed by Peñaflor
Corporation.
b. Decrease in consolidated retained earnings.
c. Increase in consolidated goodwill
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d. Decrease in consolidated other contributed capital

14. On May 1, 2020, the Ramos Company paid $1,200,000 for 80% of the outstanding common stock of
Regulacion Corporation in a transaction properly accounted for as an acquisition. The recorded
assets and liabilities of Regulacion Corporation on May 1, 2020, follow:
Cash 100,000
Inventory 200,000
Property & equipment (net of accumulated depreciation) 800,000
Liabilities (160,000)

On May 1, 2020, it was determined that the inventory of Sage had a fair value of $220,000 and the
property and equipment (net) has a fair value of $1,200,000. What is the amount of gain on bargain
purchase resulting from the business combination?
a. $160,000
b. $112,000
c. $140,000
d. $28,000

15. It is a statutory type of business combination which occurs when two or more companies merge
into one single entity which shall be one of the combining companies.
a. Merger
b. Consolidation
c. Stock acquisition
d. Mutual combination

16. It refers to the entity that obtains control after the business combination.
a. Acquired
b. Acquiree
c. Acquirer
d. All of these

17 – 20. Reyes Corporation acquired all the assets and liabilities of Ruiz Corporation by issuing shares
of its common stock on January 1, 20x4. Partial balance sheet data for the companies prior to the
business combination and immediately following the combination is provided:
Reyes Book Value Ruiz Book Value Combination
Cash P 65,000 P 25,000 P 90,000
Accounts receivable 72,000 20,000 94,000
Inventory 33,000 45,000 88,000
Buildings and equipment (net) 400,000 150,000 650,000
Goodwill ?
Total Assets P 570,000 P 240,000 P ?

Accounts Payable P 50,000 P 25,000 P 75,000

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Bonds payable 250,000 100,000 350,000

Common stock, P2 par 100,000 25,000 160,000
Additional paid-in capital 65,000 20,000 245,000
Retained earnings 105,000 70,000 ?
Total Liabilities and Equities P 570,000 P 240,000 P ?

17. What number of shares did Reyes issue for this acquisition?
18. At what price was Reyes’ stock trading when stock was issued for this acquisition?
19. What was the fair value of the net assets held by Ruiz at the date of combination?
20. What amount of goodwill will be reported by the combined entity immediately following the
combination?