L-NU AA-23-02-01-18

LYCEUM-NORTHWESTERN UNIVERSITY
Tapuac District, Dagupan City

COLLEGE OF BUSINESS EDUCATION

MIDTERM EXAMINATION – ACCTG 4 Accounting for Business Combination

1st Semester, AY 2020 – 2021
Prepared by: Amie Jane R. Miranda, CPA

Name:_____________________________________ Score:____________________

Student No.: _______________ Year/Section:___________ Date of Exam: ____________

I. MULTIPLE CHOICE. Choose the best answer from the choices and encircle your answer. Strictly “NO
ERASURES”.

1. Which of the following is a reason why a company would 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. All of the above are possible reasons that a company might choose a combination.
2. A business combination in which a new corporation is created and two or more existing
corporations are combined into the newly created corporation is called a
A. merger.
B. purchase transaction.
C. pooling-of-interests.
D. consolidation.
3. 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.
4. FASB favors consolidation of two entities when
A. one acquires less than 20% equity ownership of the other.
B. one company’s ownership interest in another gives it control of the acquired company, yet
the acquiring company does not have a majority ownership in the acquired. Typically, this is
in the 20%-50% interest range.
C. one acquires two thirds equity ownership in the other.
D. one gains control over the entity, irrespective of the equity percentage owned.
5. Michangelo Co. paid Php100,000 in fees to its accountants and lawyers in acquiring Florence
Company. Michangelo will treat the Php100,000 as
A. an expense for the current year.
B. a prior period adjustment to retained earnings.
C. additional cost to investment of Florence on the consolidated balance sheet.
D. a reduction in paid-in capital.
6. When Eagle Company has less than 50% of the voting stock of Fish Corporation which of the
following applies?
A. Only the fair value method may be used.
B. Only the equity method may be used.
C. Either the fair value method or the equity method may be used.
D. Neither the fair value method nor the equity method may be used.
7. Which one of the following items, originally recorded in the Investment in Falcon Co. account
under the equity method, would not be systematically charged to income on a periodic basis?
A. Amortization expense of goodwill.
B. Depreciation expense on the excess fair value attributed to machinery.
C. Amortization expense on the excess fair value attributed to lease agreements.
D. Interest expense on the excess fair value attributed to long-term bonds payable.
8. Which one of the following statements is correct for an investor company?
A. Once the balance in the Investment in Osprey Co. account reaches zero, it will not be
reduced any further.

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 B. Under the equity method, the balance in the Investment in Osprey Co. account can be
negative if the investee corporation operates at a loss.
C. Application of the equity method is discontinued when the investor’s share of losses
reduces the carrying amount of the investment to zero.
D. Under the equity method, any goodwill inherent or contained in the Investment in Osprey
Co. account will be amortized to the income earned from the investee.
9. Griffon Incorporated holds a 30% ownership in Duck Corporation. Griffon should use the equity
method under which of the following circumstances?
A. Griffon has surrendered significant stockholder rights by agreement between Griffon and
Duck.
B. Griffon has been unable to secure a position on the Duck Corporation Board of Directors.
C. Griffon’s ownership is temporary.
D. The ownership of Duck Corporation is diverse.
10. Swan Corporation uses the fair value method of accounting for its investment in Pond Company.
Which one of the following events would affect the Investment in Pond Co. account?
A. Investee losses
B. Investee dividend payments
C. An increase in the investee’s share price from last period.
D. all of the above would affect the Investment in Pond Co. account
11. Mudflat Corporation’s stockholder’s equity at December 31, 2004 included the following:
8% Preferred stock, Php10 par value 2,000,000
Common stock, no par 20,000,000
Additional paid-in capital 8,000,000
Retained earnings 8,000,000
38,000,000
Brolga Corporation purchased a 30% interest in Mudflat’s common stock from other
shareholders on January 1, 2005 for Php11,600,000. What was the book value of Brolga’s
investment in Mudflat?
A. Php10,800,000
B. Php11,400,000
C. Php14,240,000
D. Php14,880,000
12. Jabiru Corporation purchased a 20% interest in Fish Company common stock on January 1, 2002
for Php300,000. This investment was accounted for using the complete equity method and the
correct balance in the Investment in Fish account on December 31, 2004 was Php440,000. The
original excess purchase transaction included Php60,000 for a patent amortized at a rate of
Php6,000 per year. In 2005, Fish Corporation had net income of Php4,000 per month earned
uniformly throughout the year and paid Php20,000 of dividends in May. If Jabiru sold one-half
of its investment in Fish on August 1, 2005 for Php500,000, how much gain was recognized on
this transaction?
A. Php278,950
B. Php280,000
C. Php280,950
D. Php282,000
13. An investor uses the cost method of accounting for its investment in common stock. During the
current year, the investor received Php25,000 in dividends, an amount that exceeded the
investor’s share of the investee company’s undistributed income since the investment was
acquired. The investor should report dividend income of what amount?
A. Php25,000.
B. Php25,000 less the amount in excess of its share of undistributed income since the
investment was acquired.
C. Php25,000 less the amount that is not in excess of its share of undistributed income since
the investment was acquired.
D. None of the above is correct.
14. 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 results.
15. 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.

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 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.
16. 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.
17. Historically, much of the controversy concerning accounting requirements for business
combinations involved the ________ method.
A. purchase
B. pooling of interests
C. equity
D. acquisition
18. Pitch Co. paid Php50,000 in fees to its accountants and lawyers in acquiring Slope Company.
Pitch will treat the Php50,000 as
A. an expense for the current year.
B. a prior period adjustment to retained earnings.
C. additional cost to investment of Slope on the consolidated balance sheet.
D. a reduction in additional paid in capital.
19. Picasso Co. issued 5,000 shares of its Php1 par common stock, valued at Php100,000, to acquire
shares of Seurat Company in an all-stock transaction. Picasso paid the investment bankers
Php35,000 and will treat the investment banker fee as
A. an expense for the current year.
B. prior period adjustment to Retained Earnings.
C. additional goodwill on the consolidated balance sheet.
D. a reduction to additional paid-in capital.
20. Durer Inc. acquired Sea Corporation in a business combination and Sea Corp went out of
existence. Sea Corp developed a patent listed as an asset on Sea Corp's books at the patent
office filing cost. In recording the combination,
A. fair value is not assigned to the patent because the research and development costs have
been expensed by Sea Corp.
B. Sea Corp's prior expenses to develop the patent are recorded as an asset by Durer at
purchase.
C. the patent is recorded as an asset at fair market value.
D. the patent's market value increases goodwill.
21. In a business combination, which of the following will occur?
A. All identifiable assets and liabilities are recorded at fair value at the date of acquisition.
B. All identifiable assets and liabilities are recorded at book value at the date of acquisition.
C. Goodwill is recorded if the fair value of the net assets acquired exceeds the book value of
the net assets acquired.
D. None of the above is correct.

Use the following information to answer the question(s) below.

Polka Corporation exchanges 100,000 shares of newly issued Php1 par value common stock with
a fair market value of Php20 per share for all of the outstanding Php5 par value common stock
of Spot Inc. and Spot is then dissolved. Polka paid the following costs and expenses related to
the business combination:
Costs of special shareholders' meeting
to vote on the merger Php 12,000
Registering and issuing securities 10,000
Accounting and legal fees 18,000
Salaries of Polka's employees assigned to
the implementation of the merger 27,000
Cost of closing duplicate facilities 13,000

22. In the business combination of Polka and Spot

A. the costs of registering and issuing the securities are included as part of the purchase price
for Spot.

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 B. the salaries of Polka's employees assigned to the merger are treated as expenses.
C. all of the costs except those of registering and issuing the securities are included in the
purchase price of Spot.
D. only the accounting and legal fees are included in the purchase price of Spot.
23. In the business combination of Polka and Spot,
A. all of the items listed above are treated as expenses.
B. all of the items listed above except the cost of registering and issuing the securities are
included in the purchase price
C. the costs of registering and issuing the securities are deducted from the fair market value of
the common stock used to acquire Spot.
D. only the costs of closing duplicate facilities, the salaries of Polka's employees assigned to the
merger,and the costs of the shareholders' meeting would be treated as expenses.
24. Which of the following methods does the FASB consider the best indicator of fair values in the
evaluation of goodwill impairment?
A. Senior executive's estimates
B. Financial analyst forecasts
C. Market value
D. The present value of future cash flows discounted at the firm's cost of capital
25. Pepper Company paid Php2,500,000 for the net assets of Salt Corporation and Salt was then
dissolved.Salt had no liabilities. The fair values of Salt's assets were Php3,750,000. Salt's only
non-current assets were land and buildings with book values of Php100,000 and Php520,000,
respectively, and fair values of Php180,000 and Php730,000, respectively. At what value will the
buildings be recorded by Pepper?
A. Php730,000
B. Php520,000
C. Php210,000
D. Php0
26. According to FASB Statement No. 141, liabilities assumed in an acquisition will be valued at the
________.
A. estimated fair value
B. historical book value
C. current replacement cost
D. present value using market interest rates
27. In reference to the FASB disclosure requirements about a business combination in the period in
which the combination occurs, which of the following is correct?
A. Firms are not required to disclose the name of the acquired company.
B. Firms are not required to disclose the business purpose for a combination.
C. Firms are required to disclose the nature, terms and fair value of consideration transferred
in a business combination.
D. All of the above are correct.
28. Goodwill arising from a business combination is
A. charged to Retained Earnings after the acquisition is completed.
B. amortized over 40 years or its useful life, whichever is longer.
C. amortized over 40 years or its useful life, whichever is shorter.
D. never amortized.
29. An investor receives dividends from its investee and records those dividends as dividend income
because:
A. The investor has a controlling interest in its investee.
B. The investor has a passive interest in its investee.
C. The investor has an influential interest in its investee.
D. The investor has an active interest in its investee.
30. An investor prepares a single set of financial statements which encompasses the
financial results for both it and its investee because:
A. The investor has a controlling interest in its investee.
B. The investor has a passive interest in its investee.
C. The investor has an influential interest in its investee.
D. The investor has an active interest in its investee.
31. Consolidated financial statements are designed to provide:
A. informative information to all shareholders.
B. the results of operations, cash flow, and the balance sheet in an understandable
and informative manner for creditors.
C. the results of operations, cash flow, and the balance sheet as if the parent and subsidiary

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 were a single entity.
D. subsidiary information for the subsidiary shareholders.
32. Pagach Company purchased 100% of the voting common stock of Rage Company for
Php1,800,000. The following book and fair values are available:

Book Value Fair Value

Current assets Php150,000 Php300,000
Land and building 280,000 280,000
Machinery 400,000 700,000
Bonds payable (300,000) (250,000)
Goodwill 150,000 ?

The bonds payable will appear on the consolidated balance sheet

A. at Php300,000 (with no premium or discount shown).

B. at Php300,000 less a discount of Php50,000.
C. at Php0; assets are recorded net of liabilities.
D. at an amount less than Php250,000 since it is a bargain purchase.

33. When it purchased Sutton, Inc. on January 1, 2016, Pavin Corporation issued 500,000
shares of its Php5 par voting common stock. On that date the fair value of those shares
totaled Php4,200,000. Related to the acquisition, Pavin had payments to the attorneys
and accountants of Php200,000, and stock issuance fees of Php100,000. Immediately
prior to the purchase, the equity sections of the two firms appeared as follows:

Pavin Sutton
Common stock Php 4,000,000 Php 700,000
Paid-in capital in excess of par 7,500,000 900,000
Retained earnings 5,500,000 500,000
Total Php17,000,000 Php2,100,000
Immediately after the purchase, the consolidated balance sheet should report paid-in capital in
excess of par of
A. Php8,900,000
B. Php9,100,000
C. Php9,200,000
D. Php9,300,000
34. Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of
its Php1 par value stock. The shares have a fair value of Php15 per share. Pinehollow also
paid Php25,000 in direct acquisition costs. Prior to the transaction, the companies have the
following balance sheets:

Assets Pinehollow Stonebriar

Cash Php 150,000 Php 50,000
Accounts receivable 500,000 350,000
Inventory 900,000 600,000
Property, plant, and equipment (net) 1,850,000 900,000
Total assets Php3,400,000 Php1,900,000
Liabilities and Stockholders' Equity
Current liabilities Php 300,000 Php 100,000
Bonds payable 1,000,000 600,000
Common stock (Php1 par) 300,000 100,000
Paid-in capital in excess of par 800,000 900,000
Retained earnings 1,000,000 200,000
Total liabilities and equity Php3,400,000 Php1,900,000

The fair values of Stonebriar's inventory and plant, property and equipment are Php700,000 and
Php1,000,000, respectively.
The journal entry to record the purchase of Stonebriar would include a

A. credit to common stock for Php1,500,000.

B. credit to paid-in capital in excess of par for Php1,100,000.
C. debit to investment for Php1,500,000.
D. debit to investment for Php1,525,000.

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 35. When it purchased Sutton, Inc. on January 1, 2016, Pavin Corporation issued 500,000
shares of its Php5 par voting common stock. On that date the fair value of those shares
totaled Php4,200,000. Related to the acquisition, Pavin had payments to the attorneys
and accountants of Php200,000, and stock issuance fees of Php100,000. Immediately
prior to the purchase, the equity sections of the two firms appeared as follows:
Pavin Sutton
Common stock Php 4,000,000 Php 700,000
Paid-in capital in excess of par 7,500,000 900,000
Retained earnings 5,500,000 500,000
Total Php17,000,000 Php2,100,000
Immediately after the purchase, the consolidated balance sheet should report retained earnings
of:
A. Php6,000,000
B. Php5,800,000
C. Php5,500,000
D. Php5,300,000
36. Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of
its Php1 par value stock. The shares have a fair value of Php15 per share. Pinehollow also
paid Php25,000 in direct acquisition costs. Prior to the transaction, the companies have the
following balance sheets:

Assets Pinehollow Stonebriar

Cash Php 150,000 Php 50,000
Accounts receivable 500,000 350,000
Inventory 900,000 600,000
Property, plant, and equipment (net) 1,850,000 900,000
Total assets Php3,400,000 Php1,900,000
Liabilities and Stockholders' Equity
Current liabilities Php 300,000 Php 100,000
Bonds payable 1,000,000 600,000
Common stock (Php1 par) 300,000 100,000
Paid-in capital in excess of par 800,000 900,000
Retained earnings 1,000,000 200,000
Total liabilities and equity Php3,400,000 Php1,900,000

The fair values of Stonebriar's inventory and plant, property and equipment are Php700,000 and
Php1,000,000, respectively. What is the amount of goodwill that will be included in the
consolidated balance sheet immediately following the acquisition?

A. Php100,000
B. Php125,000
C. Php300,000
D. Php325,000
37. On April 1, 2016, Paape Company paid Php950,000 for all the issued and outstanding stock
of Simon Corporation. The recorded assets and liabilities of the Simon Corporation on April
1, 2016, follow:

Cash Php 80,000

Inventory 240,000
Property and equipment (net of accumulated depreciation of Php320,000) 480,000
Liabilities (180,000)

On April 1, 2016, it was determined that the inventory of Simon had a fair value of Php190,000,
and the property and equipment (net) had a fair value of Php560,000. What is the amount of
goodwill resulting from the business combination?
A. Php0
B. Php120,000
C. Php300,000
D. Php230,000
38. On April 1, 2016, Paape Company paid Php950,000 for all the issued and outstanding stock
of Simon Corporation. The recorded assets and liabilities of the Simon Corporation on April
1, 2016, follow:

Cash Php 80,000

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 Inventory 240,000
Property and equipment (net of accumulated depreciation of Php320,000) 480,000
Liabilities (180,000)

On April 1, 2016, it was determined that the inventory of Simon had a fair value of Php190,000,
and the property and equipment (net) had a fair value of Php560,000. The entry to distribute the
excess of fair value over book value will include:
A. A debit to inventory of Php50,000
B. A credit to the investment in Simon Corporation of Php620,000
C. A debit to goodwill of Php330,000
D. A credit to the investment in Simon Corporation of Php330,000
39. On June 30, 2016, Naeder Corporation purchased for cash at Php10 per share all 100,000
shares of the outstanding common stock of the Tedd Company. The total fair value of all
identifiable net assets of Tedd was Php1,400,000. The only noncurrent asset is property with
a fair value of Php350,000. The consolidated balance sheet of Naeder and its wholly owned
subsidiary on June 30, 2016, should report
A. a retained earnings balance that is inclusive of a gain of Php400,000.
B. goodwill of Php400,000.
C. a retained earnings balance that is inclusive of a gain of Php350,000.
D. a gain of Php400,000
40. Paro Company purchased 80% of the voting common stock of Sabon Company for
Php900,000. There are no liabilities. The following book and fair values are available for
Sabon:

Book Value Fair Value

Current assets Php100,000 Php200,000
Land and building 200,000 200,000
Machinery 300,000 600,000
Goodwill 100,000 ?
The machinery will appear on the consolidated balance sheet at .
a. Php600,000
b. Php540,000
c. Php480,000
d. Php300,000
41. Pinehollow acquired 70% of the outstanding stock of Stonebriar by issuing 70,000 shares
of its Php1 par value stock. The shares have a fair value of Php15 per share. Pinehollow
also paid Php25,000 in direct acquisition costs. Prior to the transaction, the companies
have the following balance sheets:

Assets Pinehollow Stonebriar

Cash Php 150,000 Php 50,000
Accounts receivable 500,000 350,000
Inventory 900,000 600,000
Property, plant, and equipment (net) 1,850,000 900,000
Total assets Php3,400,000 Php1,900,000
Liabilities and Stockholders' Equity
Current liabilities Php 300,000 Php 100,000
Bonds payable 1,000,000 600,000
Common stock (Php1 par) 300,000 100,000
Paid-in capital in excess of par 800,000 900,000
Retained earnings 1,000,000 200,000
Total liabilities and equity Php3,400,000 Php1,900,000
The fair values of Stonebriar's inventory and plant, property and equipment are Php700,000 and
Php1,000,000, respectively. What is the amount of the non-controlling interest that will be
included in the consolidated balance sheet immediately after the acquisition?

a. Php450,000
b. Php360,000
c. Php315,000
d. Php420,000
42. How is the non-controlling interest treated in the consolidated balance sheet?

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 A. It is included in long-term liabilities.
B. It appears between the liability and equity sections of the balance sheet.
C. It is included in total as a component of shareholders’ equity.
D. It is included in shareholders’ equity and broken down into par, paid-in capital in excess
of par and retained earnings.
43. Pinehollow acquired all of the outstanding stock of Stonebriar by issuing 100,000 shares of
its Php1 par value stock. The shares have a fair value of Php15 per share. Pinehollow also
paid Php25,000 in direct acquisition costs. Prior to the transaction, the companies have the
following balance sheets:

Assets Pinehollow Stonebriar

Cash Php 150,000 Php 50,000
Accounts receivable 500,000 350,000
Inventory 900,000 600,000
Property, plant, and equipment (net) 1,850,000 900,000
Total assets Php3,400,000 Php1,900,000
Liabilities and Stockholders' Equity
Current liabilities Php 300,000 Php 100,000
Bonds payable 1,000,000 600,000
Common stock (Php1 par) 300,000 100,000
Paid-in capital in excess of par 800,000 900,000
Retained earnings 1,000,000 200,000
Total liabilities and equity Php3,400,000 Php1,900,000

The fair values of Stonebriar's inventory and plant, property and equipment are Php700,000 and
Php1,000,000, respectively. What is the amount of property, plant and equipment that will be
included in the consolidated balance sheet immediately after the acquisition?
a. Php2,570,000
b. Php2,750,000
c. Php2,850,000
d. Php2,650,000
44. Pesto Company paid Php10 per share to acquire 80% of Sauce Company’s 100,000
outstanding shares; however the market price of the remaining shares was Php8.50. The
fair value of Sauce’s net assets at the time of the acquisition was Php850,000. In this
case, where Pesto paid a premium to achieve control:
A. The total value assigned to the NCI at the date of the acquisition may be less
than the NCI percentage of the fair value of the net assets.
B. Goodwill is assigned 80% to Pesto and 20% to the NCI.
C. The NCI share of goodwill would be reduced to zero.
D. Pesto would recognize a gain on the acquisition.
45. When a company purchases another company that has existing goodwill and the transaction
is accounted for as a stock acquisition, the goodwill should be treated in the following
manner:
A. The goodwill on the books of an acquired company should be written off.
B. Goodwill is recorded prior to recording fixed assets.
C. The fair value of the goodwill is ignored in the calculation of goodwill of the new
acquisition.
D. Goodwill is treated in a manner consistent with tangible assets.

ajmiranda
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Good luck and God bless

Reviewed and Checked by:

Dr. Genoveva Y. Reyes, CPA, FRIAcc

Dean, College of Business Education

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