TEST BANK

ADVANCED ACCTG. 2
Fr:punzalan

1. A business combination may be legally structured as a merger, a consolidation, an investment in

stock, or a direct acquisition of assets. Which of the following describes a business combination
that is legally structured as a merger?
A. The surviving company is one of the two combining companies
B. The surviving company is neither of the two combining companies.
C. An investor-investee is established.
D. A parent-subsidiary relationship is established.

2. Business combinations are accomplished either through a direct acquisition of assets and
liabilities by a surviving corporation or by stock investment in one or more companies. A parent-
subsidiary relationship always arise from a
A. Tax-free reorganization
B. Vertical combination
C. Horizontal combination
D. Greater than 50% stock investment in another company.

3. Should the following costs be included in the consideration transferred in a business

combination, according to IFRS 3, Business Combination?
1. Costs of maintaining an acquisitions department.
2. Fees paid to accountants to effect the combination.

Costs (1) Costs (2)

A. No No
B. No Yes
C. Yes No
D. Yes Yes

4. Which of the following costs should be capitalized and amortized over their estimated useful
lives?

Costs of goodwill from purchase Costs of developing goodwill

business combination internally
A. No No
B. Yes No
C. No Yes
D. Yes Yes
5.
6. In a purchase business combination, the direct acquisition, indirect acquisition, and security
issuance costs are accounted for as follows:

Direct acquisition Indirect acquisition Security Issuance

A. Added to price paid Added to price paid Added to price paid
B. Added to price paid Expensed Deducted from value of security issued
C. Expensed Expensed Deducted from value of security issued
D. Expensed Expensed Expensed

7. A business combination is accounted for as a purchase. Which of the following expenses related
to the business combination should be included, in total, in the determination of net income of
the combined corporation for the period in which the expenses are incurred?

Fees of finders and consultants Registration fees for equity securities issued
A. Yes Yes
B. Yes No
C. No Yes
D. No No
8. On August 31, 2009, Cheese Co. issued 100,000 shares of its P20 par value common stock for
the net assets of Butter , Co, in a business combination accounted for by the purchase method.
The market value of Cheese Co.’s common stock on august 31 was P36 per share. Cheese paid a
fee of P160,000 to the consultant who arranged this acquisition. Cost of registering and issuing
the equity securities amounted to P80,000. No goodwill was involved in the purchase.

What amount should cheese capitalize as the cost of acquiring Butter’s net assets?
A. P3,600,000
B. P3,680,000
C. P3,760,000
D. P3,840,000

9. 100% of the equity share capital of the Moon Co. was acquired by the River Co. on July 30,
2009. River Co. issued 500,000 new P1 ordinary shares which had a fair value of P8 each at the
acquisition date. In addition, the acquisition resulted in River incurring fees payable to external
advisers of P200,000 and share issue costs of P180,000.

In accordance with IFRS 3, Business Combination, goodwill at the acquisition date is measured
by subtracting the identifiable assets acquired and the liabilities assumed from
A. P4,000,000
B. P4,180,000
C. P4,200,000
D. P4,380,000

10. In a business combination, Best Co purchased Foods Co. at a cost that resulted in recognition of
goodwill having an expected 10-year benefit period. However, Best plans to make additional
expenditures to maintain goodwill for a total of 40 years.

What costs should be capitalized and over how many years should they be amortized?

Costs capitalized Amortization period

A. Acquisition costs only 0 years
B. Acquisition costs only 40 years
C. Acquisition costs and maintenance costs 10 years
D. Acquisition costs and maintenance costs 40 years

11. Philippine Co. acquired 100% of the outstanding common stock of Star Co. in a purchase
transaction. The cost of acquisition exceeded the fair value of the identifiable net assets and
assumed liabilities. The general guidelines for assigning amounts to the inventories acquired
provide for:
A. Raw materials to be valued at original cost.
B. Work in process to be valued at the estimated selling prices of finished goods, less both
costs to complete and costs of disposal.
C. Finished goods to be valued at replacement cost.
D. Finished goods to be valued at estimated selling prices, less both costs of disposal and a
reasonable profit allowance.

12. In accounting for business combination, which of the following intangibles should not be
recognized as an asset apart from goodwill?
A. Trademarks
B. Lease agreements
C. Employee quality
D. Patents

13. With respect to the allocation of the cost of a business acquisition, PFRS 3 requires
A. Cost to be allocated to the assets based on their carrying values.
B. Cost to be allocated based on fair values
C. Cost to be allocated based on original costs
D. None of the above.
14. 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 IFRS 3, Business Combination,
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.

15. On April 1, 2010, Aileen Co paid P620,000 for all the issued and outstanding common stock of
Joy Co. in a transaction properly accounted as a purchase. The recorded assets and liabilities of
Joy Co. on April 1, 2010 are:

Cash P 60,000
Inventory 180,000
Property and equipment (net of accumulated depreciation
of P220,000) 320,000
Goodwill 100,000
Liabilities ( 120,000)
Net assets P540,000

On April 1, 2010, Joy’s inventory had a fair value of P150,000 and the property and equipment
(net) had a fair value of P380,000.

What is the amount of goodwill resulting from the business combination?

A. P150,000
B. P120,000
C. P 50,000
D. P 20,000

16. On January 1, 2010, Pine Corp acquired the net assets of Apple Corp. in a business combination.
At that date, the property, plant and equipment of Apple had a book value of P21,000,000 and a
fair value of P22,500,000. These assets were originally acquired at a cost of P30,000,000, but
would presently cost P12,000,000.

Using the purchase method, what amount should the combined entity report its property, plant
and equipment account?
A. P36,000,000
B. P30,000,000
C. P22,500,000
D. P21,000,000

17. Moon Co. has properly treated as expense,P200,000 of research and development costs that
resulted in a patent. When Star Co. acquired Moon Co., it was determined that the patent had a
fair value of P500,000. Which of the following statements is true?

A. On the books of Star Co., the patent should be recorded at P200,000 because that was the
cost to produce it.
B. The cost of the patent on the books of Star Co, should be P500,000
C. The cost of the patent on the books of Star Co. should be the same as on the books of Moon
Co.
D. The cost of the patent on the books of Star Co. should be represented by the legal costs
involved in the patent process.

18. An entire acquired entity is sold. The goodwill remaining from the acquisition should be
A. Included in the carrying amount of the net assets sold.
B. Charged to retained earnings of the current period.
C. Expensed in the period sold
D. Charged to retained earnings of prior periods.
19. Dole Co. had these accounts at the time it was acquired by Monte Co.:

Cash P 36,000
Accounts receivable 457,000
Inventories 120,000
Plant, property and equipment 696,400
Liabilities 350,800

Monte paid P1,400,000 for 100% of the stock of Dole Co. It was determined that fair market
values of inventories and plant, property and equipment were P133,000 and P900,000,
respectively.

In the books of Monte Co., this transaction resulted to:

A. Goodwill recorded at P441,400
B. Goodwill recorded at P224,800
C. Current assets decreased by P224,800
D. Current assets increased by P224,800

The net assets (excluding goodwill, if any) recorded in the books of the acquiring company was:
A. P1,400,000
B. P1,175,200
C. P1,309,000
D. P 958,200

Compared with the unadjusted values recorded in the books of Dole Co., this transaction resulted
to:
A. P224,800 more than recorded owners’ equity
B. P666,200 more than recorded owners’ equity
C. P441,400 more than recorded owners’ equity
D. P224,800 less than recorded owners’ equity

Assuming Monte Co. paid P1,000,000 for the net assets of Dole Co., the excess of fair market
value over cost was:
A. P152,614
B. P175,200
C. P162,200
D. P157,334

20. The Chief Executive Officer (CEO) of Noy Company is contemplating selling the business to
new interests. The cumulative earnings for the past 5 years amounted to P800,000. The annual
earnings, based on an average rate of return on investment for this industry, would have been
P145,000.

If excess earnings are to be capitalized at 8%, what would be the implied goodwill in this
transaction?
A. P937,500
B. P800,000
C. P187,500
D. P 52,400

21. On July 1, 2009, the balance sheet of Mix Co. and Mart Co. are as follows:

Mix Co. Mart Co.

Assets P4,000,000 P2,500,000
Liabilities 1,500,000 800,000
Capital stock, no par 2,000,000
Capital stock, P100 par 1,000,000
Additional paid in capital 700,000 300,000
Retained earnings (200,000) 400,000

Mix Co. on this date, agreed to acquire all the assets, and assume all the liabilities of Mart Co. in
 exchange for shares of stock that it will issue. The stock of Mix Co. is selling in the market at
P50 per share. The assets of Mart Co. are to be appraised, and Mix Co. is to issue shares of its
stock with a market value equal to that of the net assets transferred by Mart Co. The value of the
assets of Mart Co., per appraisal increased by P300,000.

On the assumption that the “purchase” method is applied, the total liabilities and stockholders’
equity of Mix Co. reflecting the combination is:
A. P6,800,000
B. P6,500,000
C. P6,200,000
D. P6,000,000

The capital stock reflecting the combination under purchase method is:
A. P3,000,000
B. P3,300,000
C. P3,500,000
D. P4,000,000

22. In a business combination accounted as purchase, Bright Corp. issued non-voting, non-
convertible preferred stock with a fair value of P8,000,000 in exchange or all of the outstanding
common stock of Dim Corp. On the acquisition date, Dim had tangible net assets with a carrying
amount of P4,000,000 and a fair value of P5,000,000. In addition, Bright issued preferred stock
valued at P800,000 to an individual as a finder’s fee in arranging the transaction.

As a result of this transaction, Bright should record an increase in net assets of

A. P4,000,000
B. P5,000,000
C. P5,800,000
D. P8,000,000

23. Pangasinan Co. acquired 80% of the Ilocos Co. for a consideration transferred of P100,000,000.
The consideration was estimated to include a control premium of P24,000,000. Ilocos net assets
were P85,000,000 at the acquisition date. Are the following statements TRUE or FALSE,
according to IFRS 3, Business Combination?

1. Goodwill should be measured at P32,000,000 if the non-controlling interest is measured at its

share of Ilocos net assets.
2. Goodwill should be measured at P34,000,000 if the non-controlling interest is measured at
fair value.

Statement (1) Statement (2)

A. False False
B. False True
C. True False
D. True True

24. Hard Co. acquired a 70% interest in the Easy co. for P1,960,000 when the fair value of Easy
Co.’s identifiable assets and liabilities was P700,000 and elected to measure the non-controlling
interest at its share of the identifiable net assets. Annual impairment reviews of goodwill have
not resulted in any impairment losses being recognized.

Easy’s current statement of financial position shows share capital of P100,000, a revaluation
reserve of P300,000 and retained earnings of P1,400,000.

Under IFRS 3, Business Combination, what figure in respect of goodwill should now be carried
in Hard’s consolidated statement of financial position?
A. P1,470,000
B. P 160,000
C. P1,260,000
D. P 700,000

25. – 26.Mars Co. acquired a 70% interest in the Saturn Co. for P1,420,000 when the fair value of
 Saturn’s identifiable assets and liabilities was P1,200,000. Also, Mars acquired a 65% interest in
the Pluto co. for P300,000 when the fair value of Pluto’s identifiable assets and liabilities was
P640,000. Mars measures non-controlling interests at the relevant share of the identifiable net
assets at the acquisition date.

Neither Saturn nor Pluto had any contingent liabilities at the acquisition date and the above fair
values were the same as carrying amounts in their financial statements. Annual impairment
reviews have not resulted in any impairment losses being recognized.

Under IFRS 3, Business Combination, what figures in respect of goodwill and of gains on
bargain purchase should be included in Mars consolidated statement of financial position?

Goodwill
A. P580,000
B. P480,000
C. P350,000
D. 0

Gain on bargain option

A. P116,000
B. P 96,000
C. P 86,000
D. 0

26. On October 1, 2009, Twin Co. acquired 100% of the Triplet Co. when the fair value of Triplet’s
net assets was P116,000,000 and their carrying amount was P120,000,000.

The consideration transferred comprised P200,000,000 in cash transferred at the acquisition date,
plus another P60,000,000 in cash to be transferred 11 months after the acquisition date if a
specified profit target was met by Triplet. At the acquisition date, there was only a low
probability of the profit target being met, so the fair value of the additional consideration liability
was P10,000,000. In the event, the profit target was met and the P60,000,000 cash was
transferred.

What amount should Twin present for goodwill in its statement of consolidated financial position
at December 31, 2010, according to IFRS 3, Business Combination?
A. P 94,000,000
B. P 80,000,000
C. P 84,000,000
D. P114,000,000

27. On July 1, 2009, Minie Co. acquired 100% of the Mickey Co. for a consideration transferred of
P160,000,000. At the acquisition date, the carrying amount of Mickey’s net assets was
P100,000,000.

At the acquisition date, a provisional fair value of P120,000,000 was attributed to the net assets.
An additional valuation received on May 31, 2010 increased this provisional fair value of
P135,000,000 and on July 30, 2010, this fair value was finalized at P140,000,000.

What amount should Minie present for goodwill in its statement of financial position at
December 31, 2010, according to IFRS 3, Business Combination?
A. P25,000,000
B. P40,000,000
C. P20,000,000
D. P60,000,000

CONSOLIDATED FINANCIAL STATEMENTS

1. A horizontal merger is a merger between

A. Two or more firms from different and unrelated markets.
B. Two or more firms at different stages of the production process.
 C. A producer and its supplier.
D. Two or more firms in the same market.

2. A subsidiary shall be excluded from consolidation when

A. The investor is a venture capital organization, mutual fund, unit trust or similar entity.
B. The business activities of the subsidiary are dissimilar from those of the other entities
within the group.
C. There is evidence that control is intended to be temporary because the subsidiary is
acquired with the intention to dispose of it within twelve months from the date of
acquisition.
E. The subsidiary is operating under severe long-term restrictions that significantly impair
its ability to transfer funds to the parent.

3. The term “control’ means ownership, directly or indirectly through subsidiaries of

A. More than one-half of the outstanding voting stock of another company.
B. At least 20% of the voting sock of another company.
C. At least 50% of the voting sock of another company.
D. At least 10% of the voting sock of another company.

4. A “group” for consolidation purposes is

A. A parent and all its subsidiaries.
B. An entity that has one or more subsidiaries.
C. An entity, including an unincorporated entity such as partnership that is controlled by another
entity.
D. An entity that obtains control over entities or businesses.

5. It is that portion of the profit or loss and net assets of a subsidiary attributable to equity interest
that
are not owned directly or indirectly through subsidiaries by the parent.
A. Non-controlling interest
B. Controlling interest
C. Residual interest
D. Subsidiary interest

6. It is the entity that has the controlling financial interest.

A. Investor
B. Parent
C. Associate
D. Affiliate

7. Which of the following terms best describes the financial statements of a parent in which the
investments are accounted for on the basis of the direct equity interest?
A. Single financial statements
B. Combined financial statements
C. Separate financial statements
D. Consolidated financial statements

8. An entity acquired an investment in a subsidiary with the view to dispose of this investment
within six months. The investment in the subsidiary has been classified as held for sale and is to
be accounted for in accordance with PFRS5. The subsidiary has never been consolidated. How
should the investment in the subsidiary be treated in the financial statements?
A. Purchase accounting should be used
B. Equity accounting should be used
C. The subsidiary should not be consolidated but PFRS 5 should be used.
D. The subsidiary should remain off balance sheet.

9. A owns 50% of B’s voting shares. The board of directors consists of 6 members. A appoints three
of them and B appoints the other three. The casting vote at meetings always lies with directors
appointed by A. Does A have control over B?
A. No, control is equally split between A and B
 B. Yes, A holds 50 of the voting power and has the casting vote at board meetings in the
event there is no majority decision.
C. No, A owns only 50% of the entity’s shares and therefore does not have control.
D. No, control can be exercised only through voting power, not through a casting vote.

10.
11.
12. Green Co., manufacturing company, owns 5% of the common stock of Meadow Co., an
investment company. Meadow owns 60% of the common stock of Bell Inc. an insurance
company. In Green’s consolidated accounting or equity method accounting be used for Meadow
and Bell?
A. Consolidation used for Meadow and equity method for Bell.
B. Consolidation used for both Meadow and Bell.
C. Equity method used Meadow and consolidation for Bell.
D. Equity method used for both Meadow and Bell.

13. A subsidiary, acquired for cash in a business combination, owned inventories with a market value
greater than the book value as of the date of combination. A consolidated balance sheet prepared
immediately after the acquisition would include this difference as part of
A. Deferred credits
B. Goodwill
C. Inventories
D. Retained earnings

14. When a parent-subsidiary relationship exists, consolidated financial statements are prepared in
recognition of the accounting concept of
A. Reliability
B. Materiality
C. Legal entity
D. Economic entity

15. A subsidiary was acquired for cash in a business combination. The purchase price exceeded the
fair value of identifiable net assets. The acquired company owned equipment with a market value
in excess of the carrying amount as of the date of combination.

A consolidated balance sheet prepared would

A. Report the unamortized portion of the excess of the market value over the carrying amount of
the equipment as part of goodwill.
B. Report the unamortized portion of the excess of the market value over the carrying
amount of the equipment as part of plant and equipment.
C. Report in excess of the market value over the carrying amount of the equipment as part of
plant and equipment.
D. Not report the excess of the market value over the carrying amount of the equipment because
it would be expressed as incurred.

45-18. TOA(PFRS 3)
1. 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

2. This is defined as an integrated set of activities and assets that is 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
 3. An acquirer might obtain control of an acquire 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

4. A business combination maybe structured in all of the following, except

A. One or more businesses become subsidiaries of an acquirer
B. One entity transfers its net assets to another entity
C. A group of former owners of one of the combining entities obtains control of the combined
entity
D. An entity acquires assets that are not a business.

5. 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 the combination and that control is
not transitory.
A. Combination of entities or businesses under common control
B. True merger
C. Merger of equals
D. Consolidation

6. 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

7. Control is the
I. Power to govern the financial and operating policies of an entity so as to obtain benefits from
its activities.
II. Power to participate in the financial and operating policy decisions of the investee.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

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

A. Acquirer
B. Investor
C. Shareholder
D. Owner

9. 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

10. An entity shall account for each business combination by applying the
A. Acquisition method only
B. Pooling method only
C. Either acquisition method or pooling method
D. Neither acquisition method nor pooling method

49-19.(PFRS 3)
1. The application of the acquisition method of accounting for a business combination requires all
of the following (choose the incorrect one)
A. Identifying the acquirer
 B. Determining the acquisition date
C. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquire
D. Not recognizing goodwill or gain from bargain purchase

2. 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 combining 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 equity interests to effect a business combination, the
new entity formed is necessarily the acquirer.

3. The following statements relate to an acquisition date of a business combination. Which

statement is incorrect?
A. The acquisition date is the date on which an acquirer obtains control over the acquire.
B. The acquisition date is normally the “closing date” meaning the date on which the acquirer
legally transfers the consideration, acquires the assets and assumes the liabilities of the
acquire.
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.

4. The following statements relate to recognition and measurement of a business combination.

Which statement is correct?
I. As of acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable
assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree.
II. The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their
acquisition date fair value.

A. I only
B. II only
C. Both I and II
D. Neither I nor II

5. It is the equity in a subsidiary not attributable directly to a parent.

A. Controlling interest
B. Subsidiary interest
C. Noncontrolling interest
D. Residual interest

6. The consideration transferred in a business combination shall be measured at

A. Fair value
B. Carrying amount
C. Fair value determined by the acquirer
D. Transaction value

7. The following statements relate to a contingent consideration in a business combination. Which

statement is correct?
I. The acquirer shall recognize the acquisition-date fair value of any contingent consideration as
part of the consideration transferred in a business combination.
II. The acquirer shall not recognize the acquisition-date fair value of any contingent
consideration as part of the consideration transferred in a business combination.
A. I only
B. II only
C. Both I and II
D. Neither I nor II