INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC

Alimannao Hills, Peñablanca, Cagayan 3502 Philippines

Telefax No: (+63) (078) 304-1010
Website: www.isap.edu.ph E-Mail Address: [email protected]

C OLLEGE OF B USINESS E DUCATION AND M ANAGEMENT

ACCOUNTANCY DEPARTMENT
Subject Code : PRE7
Subject Title : ACCOUNTING FOR BUSINESS COMBINATIONS
Term : Midterm Examination
Semester : Second Fiscal Year: 2020 – 2021
Platform Used : INSTRUCTIONAL LEARNING GUIDE or LEARNING
MANAGEMENT SYSTEM

Name: ______________________________Year and section: ____________________

Proctor: _____________________________________ Score: _____________________

DIRECTIONS: Read and analyze the questions carefully.

1. Ensure you have a strong and stable internet connection.
2. Do not open your notes during the exam. Scanning your notes during the exam will
make you lose time, remember the exam is time-bounded. Instead, review your
lesson thoroughly ahead of time.
3. Make sure you have viewed all your lessons in the learning management system or in
your instructional learning guide.
4. Ensure to finish your exam in the allotted time.
5. Keep the following in mind:
• Attempt – You have only one attempt to take on this exam
• Timing - You will need to complete your attempt in one sitting, as you are
allotted 2 hours for 50 points to finish the entirety of the exam.

Materials Needed:
 Desktop PC or Laptop or Smart Phone or Tablet PC

-------------------------START OF EXAMINATION-------------------------
TEST 1: Morse Type: Refer to the table below for your answers. Write the letter of your
answer on your answer sheet. All forms of erasing, altering or tampering of your answers or
the answer sheet will render your answer void. Each item is worth 2 points.

Statement 1(S1) Statement 2(S2) Statement 3(S3)

A TRUE TRUE TRUE
B TRUE TRUE FALSE
C TRUE FALSE FALSE
D FALSE FALSE FALSE
E FALSE FALSE TRUE
F FALSE TRUE TRUE
G FALSE TRUE FALSE
H TRUE FALSE TRUE

1. S1: In an acquisition of assets for assets, the ownership structure of the acquirer changes.
S2: There is an increase in the total capitalization of an acquirer when the acquirer issues stock for
acquiree assets.
S3: In an exchange of stock (acquirer) for assets (acquiree), the ownership structure of the acquiree does
not change.

2. S1: In an exchange of stock (acquirer) for assets (acquiree), the acquiree stockholders become
acquirer stockholders.
S2: Control over the acquiree assets is directly achieved in an asset for asset exchange but indirectly
achieved in an assets (acquirer) for stock (acquiree) exchange.
 INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC
Alimannao Hills, Peñablanca, Cagayan 3502 Philippines
Telefax No: (+63) (078) 304-1010
Website: www.isap.edu.ph E-Mail Address: [email protected]

C OLLEGE OF B USINESS E DUCATION AND M ANAGEMENT

ACCOUNTANCY DEPARTMENT
S3: A business combination that occurs where only one of the original entities in existence after the
combination is called a statutory consolidation.

3. S1: The acquiree entity is liquidated in a statutory merger.

S2: For a business combination to qualify as a statutory consolidation, a new corporation must be formed.
S3: In a statutory consolidation form of business combination, the Retained Earnings account of the newly
formed corporation has a balance of zero immediately after the combination.

4. S1: After completing a business combination in the form of statutory merger or statutory consolidation,
there is only one legal entity in existence.
S2: In a business combination accomplished as a stock acquisition normally two companies exist after the
combination.
S3: A business combination accomplished as a stock acquisition must be accomplished with a stock for
stock exchange.

5. S1: For business combinations to qualify as reorganizations(for tax purposes), the acquiree
stockholders must receive voting common stock of the acquirer.
S2: There are different required levels of stock ownership in the acquiree for the three different types of
reorganizations for tax purposes.
S3: One important benefit in a business combination is any net operating loss carryforward that might
exist and be available to the acquirer.

Problem Solving: Solve the following problems on your separate answer sheet. Emphasize
your final answers and please don’t write at the back portion of your paper. Each
requirement is 3 points

PROBLEM 1: Entity A acquired the net assets of Entity B by issuing 10,000 ordinary shares
with par value of P10 and bonds payable with face amount of P500,000. The bonds are classified
as financial liability at amortized cost.

At the time of acquisition, the ordinary shares are publicly quoted at P20 per share. On the other
hand, the bonds payable are trading at 110.

Entity A paid P10,000 share issuance costs and P20,000 bond issue costs. Entity A also paid
P40,000 acquisition related costs and P30,000 indirect costs of business combination.

Before the date of acquisition, Entity A and Entity B reported the following data:

Entity A Entity B
Current assets 1,000,000 500,000
Noncurrent assets 2,000,000 1,000,000
Current liabilities 200,000 400,000
Noncurrent liabilities 300,000 500,000
Ordinary shares 500,000 200,000
Share premium 1,200,000 300,000
Retained earnings 800,000 100,000

At the time of acquisition, the current assets of Entity A have fair value of P1,200,000 while the
noncurrent assets of Entity B have fair value of P1,300,000. On the same date, the current
liabilities of Entity B have fair value of P600,000 while the noncurrent liabilities of Entity A
have fair value of P500,000.

1. What is the goodwill or gain on bargain purchase arising from business combination?
2. What total amount should be expensed as incurred at the time of business combination?
 INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC
Alimannao Hills, Peñablanca, Cagayan 3502 Philippines
Telefax No: (+63) (078) 304-1010
Website: www.isap.edu.ph E-Mail Address: [email protected]

C OLLEGE OF B USINESS E DUCATION AND M ANAGEMENT

ACCOUNTANCY DEPARTMENT
3. What is Entity A’s amount of total assets after the business combination?
4. What is Entity A’s amount of total liabilities after the business combination?

PROBLEM 2: Entity A acquired 80,000 out of 100,000 outstanding ordinary shares of Entity B
which enabled the former to obtain control of the latter at an acquisition price of P1,000,000.
Entity A paid P100,000 acquisition related costs and P50,000 indirect costs of business
combination.

At the date of acquisition, the net assets of Entity B are reported at P1,600,000. An asset of
Entity B is overvalued by P60,000 while one liability is undervalued by P40,000.

5. What is the initial measurement of noncontrolling interest in net assets in the

consolidated statement of financial position?
6. What is the goodwill or gain on bargain purchase arising from business combination?

PROBLEM 3: On January 1, 2018, Entity A acquired 30,000 out of 100,000 outstanding

ordinary shares of Entity B for P90,000 or 30% interest. For the six months ended June 30, 2018,
Entity B reported net income of P40,000.

On July 1, 2018, Entity A acquired additional 60,000 ordinary shares of Entity B or 60% interest
at a price of P4 per share or total cost of P240,000. Entity A paid P20,000 acquisition related
costs and P10,000 indirect costs of business combination.

The acquisition price per share of the additional shares clearly reflected the fair value of the
existing interest of Entity A in Entity B. It is the policy of Entity A to initially measure the
noncontrolling interest in net assets of the acquiree at fair value. The fair value of the
noncontrolling interest in net assets of the acquiree is reliably measured at P50,000.

At the acquisition date, the net assets of Entity B were reported at P400,000. An asset of Entity B
was overvalued by P50,000 while one liability wass overvalued by P30,000.

7. What is the gain on remeasurement of the existing Investment in Entity B as a result of

step acquisition?
8. What is the goodwill or gain on bargain purchase as a result of the business
combination?

PROBLEM 4: Pham Company acquired the assets (except for cash) and assumed the liabilities of Senn
Company on January 1, 20x4, paying P 720,000 cash. Senn Company’s December 31,20x3, balance sheet, reflecting
both book values and fair values, showed:
Book Value Fair Value
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . P 72,000 P 65,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,000 99,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000 162,000
Buildings (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 369,000 450,000
Equipment (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237,000 288,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 874,000 P1,064,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 83,000 P 83,000
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000 180,000
Common stock, P2 par value . . . . . . . . . . . . . . . . . . 153,000
 INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC
Alimannao Hills, Peñablanca, Cagayan 3502 Philippines
Telefax No: (+63) (078) 304-1010
Website: www.isap.edu.ph E-Mail Address: [email protected]

C OLLEGE OF B USINESS E DUCATION AND M ANAGEMENT

ACCOUNTANCY DEPARTMENT
Other contributed capital . . . . . . . . . . . . . . . . . . . . . . 229,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 874,000
As part of the negotiations, Pham Company agreed to pay the former stockholders of Senn Company P 135,000 cash
if the post combination earnings of the combined company (Pham) reached certain levels during 20x4 and 20x5.
Required:
9. Determine the amount of goodwill/gain on acquisition on January 1, 20x4 if it is expected that the earnings
target is likely to be met. 3 points
10. Assuming the earnings contingent is met, prepare the journal entry on Pham Company’s books to settle the
contingency on January 2, 20x6.
11. Assuming the earnings contingency is not met, prepare the necessary journal entry on Pham Company’s
books on January 2, 20x6.

PROBLEM 5: On December 31, 20x4, Pure Corporation enters into a business combination by acquiring the
assets and assumed the liabilities of Saint Corporation in which Saint Corporation will be dissolved. Pure
consideration transferred consists of the following:

a. 30,000 unissued shares of its P10 par common stock, with a market value of P25 per share.;
b. P180,000 in long-term 8% notes payable, and
c. A contingent payment of P120,000 cash on January 1, 20x7, if the average income of during the 2-year
period of 20x5 – 20x6 exceeds P300,000 per year. Pure estimates that there is a 30 percent chance or
probability that the P120,000 payment will be required.

In addition, Pure pays the following at the time of the merger:

 Finders’ fee P12,000

 Accounting fees, P24,000
 Legal fees to arrange the business combination P42,000
 Cost of SEC registration, including accounting and legal fees P18,000
 Cost of printing and issuing stock certificates P14,400
 Indirect costs of combining, including allocated overhead and executive salaries P27,600

Balance sheet and fair value information for the two companies on December 31, 20x4, immediately before the
merger, is as follows:

Pure Saint

Book Value Fair Value Book Value Fair Value

Cash . . . . . . . . . . . . . . . . . . . . P 276,000 P 276,000 P 24,000 P 24,000

Receivables – net . . . . . . . . . . 96,000 96,000 48,000 48,000

Inventories . . . . . . . . . . . . . . . . 288,000 360,000 120,000 72,000

Land . . . . . . . . . . . . . . . . . . . . 108,000 240,000 72,000 240,000

Buildings – net (10-year life). . . . 480,000 720,000 240,000 360,000

Equipment – net (5-year life) . . . . 432,000 588,000 216,000 300,000

In-process research and

Development . . . . . . . . . . . . . . _________0 _________0 _________0 60,000

Total Assets . . . . . . . . . . . . . . P1,680,000 P2,280,000 P 720,000 P 1,104,000

Accounts payable . . . . . . . . . . P 216,000 P216,000 P 72,000 P 72,000

Other liabilities . . . . . . . . . . . . . . 240,000 216,000 144,000 168,000

 INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC
Alimannao Hills, Peñablanca, Cagayan 3502 Philippines
Telefax No: (+63) (078) 304-1010
Website: www.isap.edu.ph E-Mail Address: [email protected]

C OLLEGE OF B USINESS E DUCATION AND M ANAGEMENT

ACCOUNTANCY DEPARTMENT

Common stock, P10 par . . . . . . 720,000 240,000

Additional paid-in capital . . . . . . 240,000 192,000

Retained earnings . . . . . . . . . . 264,000 72,000

Total Liabilities and Equities . . P1,680,000 P 720,000

On December 31, 20x4:

12. Determine the amount of goodwill
13. Assume that the value of the buildings was provisionally determined on December 31, 20x4. On August 1,
20x5, Pure Corporation received the final value from the independent appraisal, the fair value at acquisition
date being P384,000. Determine the amount of goodwill.
14. Assuming that if Saint Corporation will generates cash flows from operations of P360,000 or more in 20x5.
Saint estimates that there is a 35% chance that the P120,000 will be required. Determine the amount of
goodwill.
15. Assuming that if Saint Corporation will generates cash flows from operations of P360,000 or more in 20x5.
Saint estimates that there is a 35% chance that the P120,000 will be required. Determine the amount of
goodwill. Prepare the required entry to reflect the adjustment, if any.
-----------------------end of examination----------------------

Prepared by:

ROMMEL ROYCE V. CADAPAN, CPA, LPT, MAT, MBA

Instructor

Checked and Reviewed by:

ROMAR A. PIGA, CPA

Program Coordinator

CB RONIE E. SUGAROL, MPBM

Dean, College of Business Education and Management

Approved by:

WINNIE T. CANCEJO, RRT, MPH

OIC, Vice President for Academic Affairs