Republic of the Philippines

City of Caloocan
St. Vincent de Ferrer College of Camaranin, Inc.
SVFC Compound, San Vicente de Ferrer Rd. Area D, Brgy. 179, Caloocan City

COURSE TITLE: BUSINESS COMBINATION

MIDTERM EXAMINATION

1. This distinguishes a business combination from other types on investment

transactions.
a. Acquisition of assets
b. Acquisition of stocks
c. Obtaining of control
d. All of these

2. The Entity that obtains control over another business in a business combination is
called

a. Controller
b. Acquirer
c. Acquiree
d. Controllee

3. PFRS 3 requires all business combination to be accounted for using using the
a. Purchase method
b. Acquisition method
c. Goodwill method
d. Control method

4. According to PFRS 3, the acquisition date normally the

a. Control date
b. Christmas date
c. Closing date
d. Purchase date

5. Entity A and entity B combined their businesses. The acquirer in the Business
Combination is not clearly identifiable. Which of the following is not an indicator
that Entity A is the acquirer?
a. Entity A is the initiator of the business combination
b. Entity A’s former owners received the largest portion of the
voting rights in the combined entity
c. Entity A’s former management team dominates the
management of the combined entity
d. Entity C, a new entity, is formed and entity C transfers cash to
Entity A and Entity B
6. According to PFRS 3, gain on a bargain purchase is

a. Recognized in the profit or loss in the year of acquisition

b. Amortized in profit or loss over the lower of its legal life and
estimated useful life
c. Recognized in profit or loss in the year of acquisition but only
after reassessment of the assets acquired and liabilities
assumed in the business combination.
d. Any of these

7. Cruz Corp obtain control of Morelos Inc in a business combination. When

computing for goodwill, Cruz Corp would least likely account for which of the
following?

a. Morelos Inc. Research and development projects that were

already charge as expenses, but have a fair value as at the
acquisition date.
b. Morelos Inc. unrecorded identifiable intangible assets
c. Operating lease between Cruz Corp and Morelos Inc., wherein
Morelos Inc. is the lessee.
d. Cruz Corp. Expected cost of exiting or terminating some or all
of Morelos inc. activities after the combination.

8. A contingent liability assumed in the business combination

a. Is not accounted for by the acquirer if the contingent liability
has an improbable outflow of economic resources.
b. Is recognized even if it has an improbable outflow of economic
resources for as long as there is present obligation and the fair
value of the obligation can be measured reliably.
c. Is recognized only if there is present obligation, probable
outflow of economic resources and can be measured reliably
d. Either A or C

9. Which of the following is not included in the total acquisition cost of an acquirer
in a business combination?
a. Direct acquisition cost
b. Fair value of shares issued
c. Previously held Interest of the acquirer
d. Contingent consideration that is probable and measurable on
the date of the combination.
10. Which of the following assets of an acquiree may not be included when
computing for the goodwill arising from a business combination?

a. Capitalized kitchen utensils and equipment

b. Intangible assets not previously recorded
c. Researched and development cost charged as expense
d. Goodwill

11. Identifiable assets acquired and liabilities assumed in a business combination are
generally measured at

a. Acquisition date fair value

b. Previous carrying amounts
c. Fair value less cost to sell
d. at cost

12. On July 1, 2021 the Win Company paid P800,000 for the net assets of Louie
Corporation in a transaction properly accounted for as a purchase. The recorded
assets and liabilities of Louie Corporation on July 1, 2021 as follow:
Cash 80,000
Inventory 240,000
Property and equipment, net 480,000
Liabilities (180,000)

On July 1, 2021 it was determined that the inventory of Louie had a fair value of
P190,000, and the property and equipment (net) had a fair value of P560,000.
What is the amount of Goodwill resulting from the business combination?
a. P 0
b. P 50,000
c. P150,000
d. P180,000

PROBLEMS 13- 15: The Ashley Corp had these accounts at the time it was acquired by
Justin Company.
Cash P56,000
Accounts Receivable 457,000
Inventories 150,000
Plant, property & equipment 696,400
Liabilities 350,800

Justin Company paid P1,500,000 for the net assets of Ashley Corp. It was determined
that Account receivable has an uncollectible amount of 7,000, Selling price of
inventories 200,000 and estimated cost to sell of 40,000, plant, property & equipment
fair value was P900,000.
13. In the books of Justin Company, this transaction resulted
a. Goodwill recorded at P284,800.
b. Goodwill recorded at P294,800.
c. Current Assets decreased by P4,800.
d. Current Assets increased by P4,800.

14. The net assets (excluding goodwill, if any) recorded in the books of the acquiring
company was:
a. P1,205,200
b. P1,185,200
c. P1,21,620
d. P1,008,600

15. Assuming Justin Company paid P1,000,000 for the net assets of Ashley Corp,
the income from combination was
a. P212,200
b. P205,200
c. P175,200
d. P215,200

16. Assuming Justin Company paid P1,000,000 for the net assets of Ashley Corp,
the income from combination was
a. It includes only those that are transferred to the former
owners of the acquiree
b. It includes those that are retained in the combined entity
c. it can be in a form of cash, non cash assets, the acquirer’s own
equity instruments, or a mixed of these.
d. it is measured at fair value

17. Direct costs incurred in a business combination are

a. Capitalized
b. Expensed
c. Capitalized, except for cost of issuing equity and debt
instrument
d. Expensed, except for cost of issuing equity and debt
instrument

18. According to PFRS 3, the acquirer measures non controlling interest in the
acquiree.
a. At fair value
b. At then- controlling interest’s proportionate share in the
acquiree’s net identifiable assets
c. Either A or B, whichever is higher
d. Either A or B as an accounting policy choice
The ABC Corporation on June 30, 2021 has assets with fair value of: Current Assets,
P90,000; Non-current assets P110,000. It has liabilities with fair value of P20,000. It
has no investments in marketable securities. On July 1, 2021, Corporation XYZ
purchased the net assets of ABC Corporation for P160,000.

19. How should the P20,000 difference between the fair value of the net assets
acquired and the cost be accounted for by Corporation XYZ?
a. Should be deducted from the non-current assets.
b. Should be credited to negative goodwill.
c. Should be credited to income.
d. Should be deferred and amortized to income.

20. In a business combination accounted for as a purchase, the appraised values of

the identifiable assets acquired exceeds the acquisition price. The excess appraisal
value should be reported as a
A. Deferred credit
B. Reduction of the values assigned to current assets and a
deferred credit for any unallocated portion.
C. Reduction of the values assigned to noncurrent assets and a
deferred credit for any unallocated portion.
D. Credited to income

21. A business combination where the surviving company is one of the original groups
of companies and takes over all the assets and normally assumes all the liabilities.
A. Asset acquisition
B. Stock acquisition
C. Consolidation
D. Investment in subsidiary

22. A business combination in which one company acquires a majority of the share of
another company and both companies continue to legally exist resulting to a parent-
subsidiary relationship.
A. Asset acquisition
B. Stock acquisition
C. Consolidation
D. Investment in subsidiary

23. The positive difference between the total cost of the acquiring company and the
fair market value of the net assets acquired.

A. Should be deducted from the non-current assets.

e. Should be credited to negative goodwill.
f. Should be recognized as goodwill
g. Should be recognized as income
24. The result of the acquiring of control of one or more enterprises by another
enterprise or the uniting of interests of two or more enterprises.

A. Investment in associates
B. Stock acquisition
C. Business combination
D. Investment in subsidiary

25. A stock acquisition where acquirer obtains more that 50% of acquiree’s net asset
and obtains control and significant influence over the acquiree is called as
A. Investment in associates
B. Fair value thru profit or loss
C. Business combination
D. Investment in subsidiary

PROBLEM SOLVING

Problem 1. On December 31, 2021, Bauyot Company was merged into Claro
Corporation. Both companies used the same accounting principles for assets,
liabilities, revenue and expenses and both had a December 31 fiscal. Claro issued
150,000 shares of its P10 par common stock (current fair value of P25 a share) for the
net assets of Bauyot Company. In addition paid the following out-of-pocket costs
associated with the business combination.
CPA audit fees for SEC registration statement P60,000
Legal fees:
For the business combination 10,000
For SEC registration statement 50,000
Finder’s fee 56,250
Printer’s charges for printing securities and SEC registration 23,000
SEC registration statement fee 750
Total P200,000

Immediately prior to the merger, Bauyot Company’s condensed balance sheet was as
follows:
Bauyot Company
Balance Sheet (prior to business combination)
December 31, 2021

Assets FMV
Current assets P1,000,000 P1,150,000
Plant assets (net) 3,000,000 3,400,000
Other assets 600,000
Goodwill 200,000
Total Assets P4,800,000
Liabilities & Stockholders’ Equity
Accounts payable P 500,000
 Bonds payable 1,000,000 950,000
Common stock, P10 par 1,000,000
Additional paid-in capital 700,000
Retained Earnings 1,600,000
Total Liabilities & Stockholders’ Equity P4,800,000

Requirements:
1. Compute for the goodwill or gain on bargain purchase
2. Journal entries on the books of the acquirer

Problem 2
On December 31, 2021, Dela Cerna Corporation acquired the net assets of Dadiro
Corporation for P400,000 cash, in a purchase-type business combination. Dela Cerna
paid legal fees of P40,000 in connection with the combination. The condensed
balance sheet of Dadiro, prior to the business combination, is presented below:

DADIRO CORPORATION (Combinee)

Balance Sheet (prior to business combination)
December 31, 2021

Assets Carrying Current

amount fair values
Current assets P 190,000 200,000
Investment in marketable securities 50,000 60,000
Plant assets (net) 870,000 900,000
Intangible assets (net) 90,000 100,000
Total assets P1,200,000
Liabilities and Stockholders’ Equity
Current liabilities P 240,000 240,000
Long-term debt 500,000 500,000
Common stock, P1 par 600,000
Deficit (140,000)
Total liabilities & stockholders’ equity P1,200,000

Required:
1. Compute for the goodwill/gain on bargain purchase
2. Entries on the books of the acquirer
Problem 3

The following balance sheets were prepared for the Juanerio and Jainar Corporation
on December 31, 2021.

Assets Juanerio Jainar

Current Assets 350,000 185,000
Land 80,000 25,000
Buildings (net) 325,000 250,000
Goodwill 120,000 100,000
TOTAL ASSETS 875,000 560,000
Liabilities & Equity
Accounts payable 115,000 85,000
Bonds payable 170,000 150,000
Common Stock, P10 par 150,000 75,000
Paid-in Capital in excess of par 200,000 40,000
Retained Earnings 240,000 210,000
TOTAL LIABILITIES & EQUITY 875,000 560,000

The appraised values of the Jainar Corporation land and buildings are P50,000 and
P350,000 respectively. The appraised values of the bonds payable is P170,000.
Juanerio will issue 15,000 shares of its P10 par common stock with a market value of
P20 each for the net assets of Jainar Corporation. Juanerio will also pay P15,000 in
cash for direct acquisition costs and P10,000 for indirect costs.

Required: 1. The entries on the books of Juanerio Corporation.

2. compute for the result of business combination