MULTIPLE CHOICE QUESTIONS (Show your solutions.

PROB. 4-1 (AICPA)

A business combination may legally structure 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 structure as a merger?

a. The surviving company is one of the combining companies.

b. The surviving company is neither of the two combining companies
c. An investor-investee relationship is established.
d. A parent- subsidiary relationship is established

. PROB. 4-2 (AICPA)

Business combinations are accomplished either through a direct acquisition of assets and
liabilities by a surviving corporation or by stock 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.

PROB. 4-3 (IFRS 3)

Should the following cost be include in the consideration transferred in a business

combination, according to IFRS 3, Business Combination?

1- Cost of maintaining an acquisitions department

2- Fees paid to accountants to effect the combination.

Cost(1) Cost(2)
a. No No
b. No Yes
c. Yes No
d. Yes Yes
PROB. 4-4 (AICPA)

Which of the following cost should be a capitalized and amortized over their estimated
useful lives?

Cost of good will

from purchase
business Cost of developing
combination good will internally
a. No No
b. Yes No
c. No Yes
d. Yes Yes

PROB. 4-5 (AICPA)

Company P acquired the assets (net of liabilities) of company S in exchange for cash. The
acquisition price exceeds the fair value of the net assets acquired. How should Company P
determine the amounts to be reported for the plant and equipment, and for long-term debt of the
acquired Company S?
Plant and Equipment Long-term Debt
a. Fair value S’s carrying amount
b. Fair value Fair value
c. S’s carrying amount Fair value
d. S’s carrying amount S’s carrying amount

PROB. 4-6 (Adapted)

In a purchase business combination, the direct acquisition, indirect acquisition, and security
issuance cost are accounted for as follows:

Direct Acquisition Indirect Acquisition Security Insurance

a. Added to price paid Added to price paid Added to price paid
b. Added to price paid Expensed Deducted from the value
Of security issued
c. Expensed Expensed Deducted from value
Of security issued
d. Expensed Expensed Expensed
PROB. 4-7 (Adapted)

A business combination is accounted for as 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 Registration fees for
Consultant’s equity securities issued
a. Yes Yes
b. Yes No
c. No Yes
d. No No

PROB. 4-8 (Adapted)

On August 31, 2009, Wood Corp. issued 100,000 shares of its P20 par value common stock
for the net assets of Pine, Inc., in a business combination accounted for by the purchase method.
The market value of Wood’s common stock on August 31 was P36 per share. Wood paid a fee of
P160, 000 to the consultant who arranged this acquisition. Cos of registering and issuing the equity
securities amounted to P80, 000. No goodwill was involved in the purchase. What amount should
Wood capitalize as the cost of acquiring Pine’s net assets?
a. 3,600,000
b. 3,680,000
c. 3,760,000
d. 3,840,000

PROB. 4-9 (IFRS)

100% of the he equity share capital of the Roman Co. was acquired by the Sweet Co. on
July 30, 2009. Sweet 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 Sweet incurring fees payable to
external advisers of P200, 000 and share issue cost of P80, 000. In accordance with IFRS3,
Business Combination, goodwill at the acquisition date is measured by subtracting the identifiable
assets acquired and the liabilities assumed from
a. 4,000,000
b. 4,180,000
c. 4,200,000
 d. 4,380,000
PROB. 4-10 (AICPA)

In a business combination, Dire Co. purchased Wall Co. at a cost that result in recognition
of goodwill having an expected 10-year benefit period. However, Dire plans to make additional
expenditure to maintain goodwill for a total of 40 years. What cost should be capitalized and over
how many years should they be amortized?
Cost capitalized Amortization period
a. Acquisition cost only 0 years
b. Acquisition cost only 40 years
c. Acquisition cost and
Maintenance cost 10 years
d. Acquisition cost and
Maintenance cost 40 years

PROB. 4-11 (AICPA)

PDX Corp. acquired 100% of the outstanding common stock. Of Sea Corp. in a purchase
transaction. The cost of the acquisition exceeded the fair value of the identifiable 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 cost of disposal.
c. Finished goods to be valued at replacement cos.
d. Finished to be valued at estimated selling prices, less both cost of disposal and a
reasonable profit allowance.

PROB. 4-12 (AICPA)

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
PROB. 4-13 (AICPA)

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 allocate based on original cost
d. None of the above

PROB. 4-14 (IFRS 3)

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, and then recognize any excess immediately in profit or loss.
d. Reassess the recognition and measurement of the net assets acquired and the
consideration transferred, and then recognize any excess immediately in other
comprehensive income.

PROB. 4-16 (Adapted)

On April 7, 2009, Dart Co. paid P620,000 for all the issued and outstanding common stock
of Wall Corp. in a transaction properly accounted as a purchase. The recorded assets and liabilities
of Wall Corp. on April 1, 2009 are:

Cash 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 540,000
On April 1, 2009, Wall’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. 150,000
b. 120,000
c. 50,000
d. 20,000

PROB. 4-16 (Adapted)

On January 1, 2009, Dragons Corp. acquired the net assets of Blue Marlins Corp. in a
business combination. At the date, the property, plant and equipment of Blue Marlins 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 be combined entity report its property. Plant, and equipment account?
a. 36,000,000
b. 30,000,000
c. 22,500,000
d. 21,000,000

PROB. 4-17 (Adapted)

Star Co. has property treated as expense, P200,000 of research and development cost that
resulted in a patent. When Victory Co. acquired Star Co., it was determined that the patent had a
fair value of P500,000. Which of the following statement is true?
a. On the book of Victory Co., the patent should be recorded at P200,000 because that was
the cost to produce it.
b. The cost of the patent of the book of Victory Co. should be P500,000
c. The cost of the patent of the book of Victory Co. should be the same as on the book of Star
Co.
d. The cost of the patent of the book of Victory Co. should be represented by the legal cost
involved in the patent process.

PROB. 4-18 (Adapted)

An entire acquired quantity is sold. The goodwill remaining from the acquisition should
be
a. Including the carrying amount of the net assets sold.
 b. Charge to retained earnings of the current period.
c. Expensed in the periodic sold
d. Charge to retained earnings of prior periods.

PROB. 4-19 (RPCPA)

The Dub Co. had these accounts at the time it was acquired by Bush Co.

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

Bush paid P1,400,000 for 100% of the stock of Dub Co. it was determined that fair market values
of inventories and plant, property and equipment were P133,000 and P900,000, respectively.
a. In the books of Bush Co., this transaction resulted to:
a. Goodwill recorded at P441,4000
b. Goodwill recorded at P224,800
c. Current asset decreased by P224,800
d. Current assets increased by P224,800

b. The net assets (excluding goodwill, if any) recorded in the books of the acquiring company was:
a. 1,400,000
b. 1,175,200
c. 1,309,000
d. 958,200

c. Compared with the unadjusted values recorded in the books if Dub Co. this transaction resulted
for.
a. P224,800 more than recorded owner’s equity
b. P666,200 more than recorded owner’s equity
c. P441,400 more than recorded owner’s equity
d. P224,800 less than recorded owner’s equity

d. Assuming Bush Co. paid P1000,000 for the net assets of Dub Co. the excess of fair market value
over cost was:
a. 152,614
b. 175,200
c. 162,200
 d. 157,334

PROB. 4-20 (AICPA)

The Chief Executive Officer (CEO) of buy- It Company is contemplating selling the
business to new interest. The cumulative earnings for the past 5 years amounted to P800,000. The
annual earnings, based on an average rate of return of 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. Ock,937,500
b. 800,000
c. 187,500
d. 52,400

PROB. 4-21 (RPCPA)

On July 1, 2009, the balance sheet of Com Co. and Pol Co. are as follows:

Com Co. Pol Co.

Assets P4,000,000 P2,500,000
Liabilities 1,500,000 800,000
Capital stock, no par 2,000,000
Capital stock, 100 par 1,000,000
Additional paid in capital 700,000 300,000
Retained earnings (200,000) 400,000

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

a. On the assumption that the “purchase” method is applied, the total liabilities and stockholders
equity of Com Co. reflecting the combination is:
a. 6,800,000
b. 6,500,000
c. 6,200,000
d. 6,000,000
b. The capital stock reflecting the combination under purchase method is:
a. 3,000,000
b. 3,300,000
c. 3,500,000
d. 4,000,000

PROB. 4-22 (Adapted)

In a business combination accounted as purchased, Major Corp. issued non-voting, non-

convertible preferred stock a fair value of P800,000,000 in exchange for all the outstanding
common stock of Minor Co. on the acquisition date, Minor had tangible net assets with a carrying
amount of P4,000,000 and a fair value of P,5,000,000. In addition, Major issued preferred stock
valued at P800,000 to an individual as finder’s fee in arranging the transaction. As a result of this
transaction, Major should record an increase in net assets of
a. 4,000,000
b. 5,000,000
c. 5,800,000
d. 8,000,000

PROB. 4-23 (IFRS)

The National Co. acquired 80% of the Local Co. for a consideration transferred of
P1000,000,000. The consideration was estimated to include a control premium of P24,000,000.
Local’s 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 as it

share of Local’s 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
PROB. 4-24 (IFRS)

The Lamp Co. acquired a 70% interest in the Ohau Co. for P1,960,000 when the fair value of
Ohau’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.

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

Under IFRS 3, Business Combination, what figure is respect of goodwill should be carried in
Lamp’s consolidated statement of financial position?
a. 1,470,000
b. 160,000
c. 1,260,000
d. 700,000

PROB. 4-25 (IFRS 3)

The Moon Co. acquired a 70% percent interest in the Swain Co. for P1,420,000 when the fair value
of Swain’s identifiable assets and liabilities was P1,200,000, Also Moon acquired a 65% interest
in the Hadji Co. for P300,000 when the fair value of Hadji’s identifiable assets and liabilities was
P640,000 Moon Co. measures non-controlling interest at the relevant share of the identifiable net
assets at the acquisition date.

Neither Swain nor Hadji had any contingent liabilities at the acquisition date and the above fair
values were the same as the 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 Moon’s consolidated statements of financial position.
a. Goodwill: P580,000
Gain on bargain purchased :P116,000
b. Goodwill: None
Gain on bargain purchased :P116,000
c. Goodwill: None
Gain or bargain purchased: None
d. Goodwill: P580,000
 Gain on bargain purchased :None

PROB. 4-26 (IFRS 3)

On October 1, 2009, the Tingling Co. acquired a 100% of the Green Co. when the
fair value of Green’s net assets was P116,000,000 and their carrying amount was
P120,000,000. The consideration transferred comprises of 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 specified profit target was meet by Green. At the
acquisition date, there was only a low probability of the profit target being meet, so the fair
value of the additional consideration liability was P100,000,000. In the event, the profit
target was met and the P60,000,000 cash was transferred.

What amount should Tingling present for goodwill in its statement of consolidated
financial position at December 31, 2010, according to IFRS 3, Business Comination.
a. 94,000,000
b. 80,000,000
c. 84,000,000
d. 114,000,000

PROB. 4-27 (IFRS)

On July 9, 2009, the Magna Co. acquired 100% of the Natural Co. for a consideration transferred
of P160,000,000. At the acquisition date, the carrying amount of Natural’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 receive on May 31, 2010 increased this provisional fair value to
P135,000,000 and on July 30, 2010, this fair value was finalized at P140,000,000

What amount should Magna present for goodwill in its statement of financial position at December
31, 2010, according to IFRS 3, Business Combination?
a. 25,000,000
b. 40,000,000
c. 20,000,000
d. 60,000,000
PROB. 4-28 (IFRS)

The Germ Corp. acquired 100% of the Koala Co. for a consideration transferred of P112,000,000.
At the acquisition date, the carrying amount of the Koala’s net assets was P100,000,000 and their
fair value was P120,000,000. How should the difference between the consideration transferred and
the net assets acquired be presented in Germ’s financial statements, according to IFRS 3, Business
Combination?
a. Gain on bargain purchased of P8,000,000 recognized in other comprehensive income.
b. Gain on bargain purchased of P8,000,000 deducted from other intangible assets.
c. Gain on bargain purchased of P8,000,000 recognized on profit or loss.
d. Goodwill of P12,000,000 as an intangible asset.

PROB. 4-29 (IFRS 3)

on July 1, 2010, Centre Co. acquired Asia Corp. the resulted to goodwill in the amount of
P4,800,000. By December 31, 2010, the end of its 2010 reporting period, Centre Co. had
provisional fair values for the following items:

 Trademarks effective in certain foreign of P400,000. These had an average remaining

useful life of 5 years at the acquisition date.
The acquisition date fair value was finalized at P500,000 on March 31, 2011.

 Trading rights in other foreign territories of P600,000. These had an average remaining
useful life of 5 years at the acquisition date.
The acquisition date fair value was finalized at P300,000 on September 30, 2011.

By what amount the 2010 net income, be increased or decreased by the provisional fair
values of trademarks and trading rights.
a. No effect to 2010 net income, since the finalization acquired in 2011
b. Decreased by P5,000
c. Increased by P25,000
d. Increased by P30,000