Name: Date:

Quiz I – AC12 Score:

I. Write the uppercase letter of the correct answer in the space

provided before the number.

1. The management of an entity is unsure how to treat a restructuring

provision that they wish to set up on the acquisition of another
entity. Under PFRS 3, the treatment of this provision will be
a. A charge in the income statement in the post-acquisition period.
b. To include the provision in the allocated cost of acquisition.
c. To provide for the amount and, if the provision is overstated, to
release the excess to the income statement in the post-
acquisition period.
d. To include the provision in the allocated cost of acquisition if
the acquired entity commits itself to a restructuring within a
year of acquisition.

2. The method required under PFRS 3 to be used in accounting for

business combinations is
a. Purchase method c. Acquisition method
b. Buy method d. Combination method

3. PFRS 3 requires that the contingent liabilities of the acquired

entity should be recognized in the balance sheet at fair value. The
existence of contingent liabilities is often reflected in a lower
purchase price. Recognition of such contingent liabilities will
a. Decrease the value attributed to goodwill, thus decreasing the
risk of impairment of goodwill.
b. Decrease the value attributed to goodwill, thus increasing the
risk of impairment of goodwill.
c. Increase the value attributed to goodwill, thus decreasing the
risk of impairment of goodwill.
d. Increase the value attributed to goodwill, thus increasing the
risk of impairment of goodwill.

4. Are the following statements about an acquisition true or false,

according to PFRS 3 Business combinations?
I. The acquirer should recognize the acquiree's contingent
liabilities if certain conditions are met.
II. The acquirer should recognize the acquiree's contingent assets if
certain conditions are met.
a. False, False b. False, True c. True, False d. True, True

II. Write the numerical answer in the space provided.

On January 1, 20x1, John Co. acquired all of the identifiable assets

and assumed all of the liabilities of Matt Inc. by issuing its own
ordinary shares. Information at acquisition date is shown below:
Combined
John Co. Matt Inc. entity
(Carrying
amounts) (Fair values)
Identifiable assets 9,600,000 6,400,000 16,000,000
Goodwill - - ?
Total assets 9,600,000 6,400,000 ?
Liabilities 2,800,000 3,600,000 6,400,000
Share capital 2,400,000 1,200,000 2,800,000
Share premium 1,200,000 1,000,000 4,800,000
Retained earnings 3,200,000 600,000 ?
Total liabilities &
9,600,000 6,400,000 ?
equity
Additional information:
 John’s share capital consists of 60,000 ordinary shares with par
value of ₱40 per share.
 Matt’s share capital consists of 3,000 ordinary shares with par
value of ₱400 per share.

1. How much is the fair value of consideration transferred on the

business combination? 4,000,000

John Co. Combined entity Increase

Share capital 2,400,000 2,800,000 400,000
Share premium 1,200,000 4,800,000 3,600,000
Totals 3,600,000 7,600,000 4,000,000

2. How many shares were issued in the business combination?

10,000

Increase in John’s share capital account 400,000

Divide by: John’s par value per share 40
Number of shares issued 10,000

3. How much goodwill/(gain on bargain purchase) was recognized on

acquisition date? 1,200,000

Consideration transferred 4,000,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 4,000,000
Fair value of net identifiable assets acquired (6.4M - (2,800,000
3.6M) )
Goodwill 1,200,000

4. How much is the P/L impact of the acquisition? 0 (nil)

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 300,000 500,000
liabilities
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 (gain on bargain purchase) arising from

the business combination? 50,000
Total consideration = 200,000 (OS 10,000 x 20) + 550,000 (500,000
x 1.1) = 750,000
FVNAA = 500,000 (CA) + 1,300,000 (NCA @ FV) – 600,000 (CL @ FV) –
500,000 (NCL) = 700,000
GW = 750,000 – 700,000 = 50,000
2. What is Entity A’s amount of total assets after the business
combination? 4,750,000
Parent BV = 3,000,000
Sub FV = 1,800,000
Goodwill = 50,000
Expenses paid = (100,000)
3. What is Entity A’s amount of total liabilities after the business
combination? 2,130,000
Parent BV = 500,000
Sub FV = 1,100,000
BP issued = 550,000
BIC (discount) = (20,000)

On January 1, 2018, Entity A acquired 30,000 out of 100,000

outstanding shares of Entity B for P90,000. 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 at a price of P4 per share. Entity A paid P20,000
acquisition related costs and P10,000 indirect costs.

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 was overvalued by P30,000.

8. What is the gain (loss) on remeasurement of the existing

investment in Entity B as a result of the acquisition? 18,000
Cost of investment in associate 90,000
Share in net income (40,000 x 30%) 12,000
CA of previously held interest 102,000
FV of previously held interest (30,000 x 4) 120,000
Gain on remeasurement 18,000

9. What is the goodwill (gain on bargain purchase) as a result of

the business combination? 30,000
Consideration [(60,000 x 4) + 120,000] 360,000
NCI 50,000
Total 410,000
FVNAA (400,000 – 50,000 + 30,000) 380,000
Goodwill 30,000

10. What is the P/L impact of the acquisition of Entity B?

(12,000)
Gain on remeasurement 18,000
Acquisition related costs (20,000)
Indirect costs (10,000)
Total (12,000)

On January 1, 2018, Jom Co. acquired 70% of outstanding ordinary

shares of Genre Co. at a price of P210,000. On the same date, the net
assets of Genre Co. were reported at P260,000. On January 1, 2018, Jom
Co. reported retained earnings of P2,000,000 while Genre Co. reported
retained earnings of P200,000.

All the assets and liabilities of Genre Co. are fairly valued except
machinery which is undervalued by P80,000 and inventory which is
overvalued by P10,000. The said machinery has remaining useful life of
four years while 40% of the said inventory remained unsold at the end
of 2018.

For the year ended December 31, 2018, Jom Co. reported net income of
P1,000,000 and declared dividends of P200,000 in the separate
financial statements while Genre Co. reported net income of P150,000
and declared dividends of P20,000 in the separate financial
statements.

Jom Co. accounted the investment in Genre Co. using cost method in the
separate financial statements.

11. What is the noncontrolling interest in net assets on December

31, 2018? 133,800
FVNAA (260,000 + 80,000 – 10,000) 330,000
NCI % 30%
NCI, beginning 99,000
NCINI 40,800
Dividends (20,000 x 30%) (6,000)
NCI, end 133,800

12. What is the consolidated net income attributable to parent

shareholders for the year ended December 31, 2018? 1,102,200
Sub NI 150,000
Amortization of FVA (80,000/4) + (10,000x60%) (14,000)
Total 136,000
NCI % 30%
NCINI 40,800

Parent NI 1,000,000
Intercompany dividends (20,000 x 70%) (14,000)
Total 986,000
Sub NI attributable to parent (136,000 x 70%) 95,200
Gain on bargain purchase 21,000
Conso NI to Parent 1,102,200

13. What is the amount of consolidated retained earnings on

December 31, 2018? 2,902,200
Parent RE, beg 2,000,000
Conso NI to Parent 1,102,200
Dividends declared (200,000)
Conso RE 2,902,200

On January 1, 2019, JMT Co. acquired 60% of outstanding ordinary

shares of MEE Co. at a gain on bargain purchase of P40,000. For the
year ended December 31, 2020, JMT Co. and MEE Co. reported sales
revenue of P2,000,000 and P1,000,000 in their respective separate
income statements. At the same year, JMT Co. and MEE Co. reported cost
of goods sold of P1,200,000 and P700,000 in their respective separate
income statements.

During 2019, JMT Co. sold inventory to MEE Co. at a selling price of
P280,000 with gross profit rate of 40% based on cost. On the other
hand, MEE Co. sold inventory to JMT Co. at a selling price of P400,000
with gross profit rate of 30% based on sales during 2020.

On December 31, 2019, 25% of the goods coming from JMT Co. remained in
MEE Co.’s inventory but all were eventually sold to third persons
during 2020. As of December 31, 2020, 40% of the goods coming from MEE
Co. were eventually sold to third persons.

For the year ended December 31, 2020, JMT Co. reported net income of
P500,000 while MEE Co. reported net income of P200,000 and distributed
dividends of P50,000. JMT Co. accounted for its inventory in MEE Co.
using cost method in its separate financial statements.

14. What is the consolidated sales revenue for the year ended
December 31, 2020? 2,600,000
Parent Sales 2020 2,000,000
Sub Sales 2020 1,000,000
Elim of intercompany sale for 2020 (400,000)
Conso sales 2,600,000

15. What is the consolidated gross profit for the year ended
December 31, 2020? 1,048,000
Overstatement of inventory, beg (280/140%x40%x25%) 20,000
Overstatement of purchases 400,000
Overstatement of TGAS 420,000
Overstatement of inventory, end (400x30%x60%) (72,000)
Overstatement of COGS 348,000

Parent COGS 1,200,000

Sub COGS 700,000
Adjustment to COGS (overstatement) (348,000)
Conso COGS 1,552,000

Conso Sales 2,600,000

Conso COGS (1,552,000)
Conso Gross Profit 1,048,000

16. What is the adjusted cost of goods sold of the subsidiary for
consolidation purposes for the year ended December 31, 2020? 372,000
Sub COGS 700,000
Intercompany sale (400,000)
Unrealized profit (400x30%x60%) 72,000
Adjusted Sub COGS for Conso 372,000

17. What is the noncontrolling interest in net income for the

year ended December 31, 2020? 51,200
Sub NI 200,000
Unrealized profit (400x30%x60%) (72,000)
Adjusted NI of Sub 128,000
NCI % 40%
NCINI 51,200

18. What is the consolidated net income attributable to the

parent’s shareholders for the year ended December 31, 2020? 566,800
19. Prepare the eliminating entry to eliminate the effects of the
intercompany sale in the inventory balance as of December 31, 2020.
Cost of sales 72,000
Inventory 72,000

JJJ Co. acquired a manufacturing facility from MMM Co. for a total
consideration of P6,000,000. The facility contains 4 equipment with
fair value of P1,500,000, a building with appraisal value of
P2,500,000, and land with appraised value of P4,000,000.

20. How much is the goodwill (gain on bargain purchase) to be

recognized from the transaction. 0 (nil) this is not an acquisition of
a business, hence not accounted for under IFRS 3
21. At what value will the equipment be recognized in the
financial statements of JJJ Co.? 1,125,000 – determined by allocating
the total consideration using stand-alone FV (6,000,000 x
1,500,000/8,000,000)