ADVANCED FINANCIAL ACCOUNTING AND REPORTING

BUSINESS COMBINATION
INSTRUCTION: Select the letter of the best answer. G.C.Caiga

THEORIES
1. IFRS 3 Business Combinations does not apply to which of the following?

I.Formation of a joint arrangement.

II.Combination of entities or businesses under common control.
III.Acquisition of an asset or a group of assets that constitute a business.
IV. Acquisition by an investment entity of an investment in a subsidiary with that subsidiary not providing
services that relate to the investment entity's investment activities
V. Not-for-profit organizations.

a. I, II and III only b. I, II, and IV only c. I, II, III and V only d. I, II, III, IV and V

2. Which of the following statements is/are false about the recent amendment to the scope exceptions of IFRS 3?

I. Joint arrangements are outside the scope of IFRS 3, not just joint ventures.
II. The scope exception applies only to the accounting in the FS of the joint arrangement itself.

a. I only b. II only c. I and II d. None of the choices

3. Malcom Holdings Inc., a subsidiary of the Queen Consolidated Group, makes the following offers. Under IFRS 3,
which of the following is a business combination?

I. Malcom Holdings offers to acquire all the equity shares of Oliver Ltd. On July 1, 2014 for P10,000,000 cash
and 50,000 shares in Malcom.
II. Malcom Holdings offers to acquire all three of the manufacturing sites of Oliver Ltd. (i.e., only the building
and the machinery without workforce and inventory, for P20,000,000 cash.
III. Malcom Holdings offers to acquire 25% of the equity shares of Queen Ltd. On July 1, 2015 for P2,500,000
and P12,500 shares in Malcom.
IV. Malcom Holdings offers to acquire some brand names and trademarks of Queen Ltd. for P30,000,000.

a. I only b. I and II only c. I, II and III d. I, II, III and IV

4. Group A has acquired the following. Which of the following acquisitions are business combinations under IFRS 3?
I. Land and a vacant building from Company B. No processes, other assets or employees are acquired. Group A
does not enter into any of the contracts of Company B.
II. An operating hotel, hotels employees, the franchise agreement, inventory, reservations system and all
back office operations.
III. All of the outstanding shares of Biotech D, a development stage company that has a license for a product
candidate. Phase I clinical trials are currently being performed by Biotech D employees. Biotech Ds
administrative and accounting functions are performed by a contract employee.
a. All three acquisitions are business combinations under IFRS 3
b. I and II acquisitions are business combinations under IFRS 3
c. I and III acquisitions are business combinations under IFRS 3
d. II and III acquisitions are business combinations under IFRS 3

5. What is the first step in the acquisition method under IFRS 3?

a. determining the total consideration
b. determining the acquisition date
c. recognizing and measuring goodwill or a gain from a bargain purchase
d. identifying the acquirer
e. recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquire

6. The Voice Group acquired 60% interest in Sarah Ltd. On July 1, 2015. The consideration for the 60% interest in Sarah Ltd. Is
50,000 share in The Voice. After the acquisition, the governing body of Sarah Ltd. Will consist of 3 directors of The Voice and
5 directors of the former parent company, Bamboo Investment Ltd., which retains the remaining 40% interest. Who will
consolidate Sarah Ltd.?
a. The Voice Group, as it is the acquirer because it has issued 50,000 shares.
b. Bamboo Investment Ltd. Retain control as it can appoint the majority of the members if the governing
body. Bamboo Investment Ltd. will continue consolidating Sarah Ltd.
c. It is not possible to determine the acquirer and therefore The Voice accounts for its 60% interest in Sarah
Ltd. using the proportional consolidation method. Bamboo Investment Ltd. accounts for the remaining 40%
interest using equity method.
d. It is not possible to determine the acquirer, therefore, this is a joint venture: The Voice and Bamboo
Investment Ltd. have joint control over Sarah Ltd.
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7. Raymond Holding Inc., a sub-holding of the Lee Group, makes an offer for all the equity shares of Gel Ltd. on
July 1, 2014. The consideration for the offer is 50,000 shares in Raymond together with P10,000,000 cash. The
offer is accepted on August 1, 2014. However, the offer is conditional upon receiving the approval of the
competition authority which is obtained on September 30, 2014. In the past, the competition authority has
never rejected the application for any merger or combination. The shares are exchanged on August 10, 2014.
What is the date of acquisition?
a. July 1, 2014, the date of the offer
b. August 1, 2014, the date the offer has been accepted
c. August 10, 2014, the date the shares have been exchanged
d. September 30, 2014, the date of the approval by the competition authority

8. Which of the following is/are false about recognition and measurement of assets and liabilities under IFRS 3?
I. Contingent assets do not meet the definition of asset and are therefore not recognized.
II. As uncertainties about future cash flows are included in the fair value measure, a separate valuation
allowance is necessary at acquisition date.
a. I only b. II only c. I and II d. None of the choices

9. Entity A acquired Entity B. On the acquisition date, Entity B had an operating lease as a lessee with a remaining
period of two years out of the original four years. Due to significant changes in the market, entity B is paying less
than what you would expect to currently pay for similar lease. The value of the lease based on the current terms
is P100,000 and that of a lease based on relative market terms is P130,000. How should Entity A account for this?
a. Entity A should disregard this, as this is an operating lease of Entity B and no asset or liability is recognized
related to operating lease.
b. Entity A determines whether the terms of each operating lease in which Entity B is the lessee are favorable
or unfavorable. Entity A should account for the difference between the value of the existing terms and the
market terms in profit or loss.
c. Entity A determines whether the terms of each operating lease in which Entity B is the lessee are favorable
or unfavorable. Entity A should recognize an intangible asset separate from goodwill for the favorable
portion of the operating lease relative to market terms.
d. None of the above.

10. Which of the following statements is/are true about the recognition of NCI under IFRS 3?
I. The acquirer recognizes NCI, if any, and measures all NCI it at either fair value or at the NCIs proportionate
share of the acquirees identifiable net assets acquired.
II. The acquirer can make the choice between the 2 optional measurement of NCI for each acquisition, and is
considered an accounting policy choice.
a. I only b. II only c. I and II d. None of the choices

11. Given the following information, how is goodwill from a business combination computed under IFRS 3?
A Consideration transferred
B NCI in net identifiable asset of subsidiary
C Previously held equity interest
D Fair value of net identifiable assets of subsidiary
% Percentage of ownership by the parent/acquirer in the subsidiary
a. [(A+C)/%] less D b. (A+B+C) less D c. A or B d. None of the choices

12. Acquisition accounting requires an acquirer and an acquiree to be identified for every business combination.
Where entity (H) is created to acquire two pre-existing entities, S (larger entity than A) and A, which of these
entities will be designated as the acquirer?
a. H b. S c. A or S d. May depend on the consideration transferred by H

13. Entity A currently has two (2) businesses operated through 2 wholly-owned subsidiaries, Entity B and Entity C.
Both subsidiaries have been owned by Entity A for a number of years. On July 1, 2014, Entity A restructures the
group by transferring its investment in Entity C to Entity B, such that Entity C becomes a subsidiary of Entity B.
How should this business combination be accounted for?
a. Pooling of interest method b. Acquisition method under IFRS 3 c. A or B d. None of the choices

14. Which of the following statements about the recognition of contingent liabilities under IFRS 3 is/are false?
I. IAS 37 will apply in determining which contingent liabilities to recognize as of the acquisition date.
II. It is not necessary that an outflow of future economic benefits is probable for a contingent liability to be
recognized.
a. I only b. II only c. I and II d. None of the choices

15. Taylor Swift Co. is involved in a business acquisition on January 1, 2015. At that date deferred tax assets (DTA)
were P300,000. On January 1, 2015, the directors considered that the realization of the deferred tax assets were
not probable. What effect would this decision have on the allocation of the purchase price?
a. The unrecognized DTA would be allocated to goodwill, which would increase by P300,000.
b. The value of goodwill would decrease by P300,000.
c. There would be no effect on goodwill.
d. Negative goodwill of P300,000 would arise.

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16. Ariana Group acquired an 80% interest in Grande Corporation. The consideration for the 80% interest in Grande
was P3,600,000 in shares in Ariana and P1,200,000 cash. To issue the shares, Ariana incurred a cost of P200,000
and incurred costs of P140,000 associated with legal fees and the valuation of Grande. The fair value of the net
assets of Grande B amounted to P6,400,000. How should Ariana account for this acquisition?
a. Ariana shall book a gain through profit or loss of P320,000 related to the acquisition, recognize expenses of
P140,000 and deduct from equity P200,000 relative to the cost of issuing the shares.
b. Ariana shall book goodwill as an asset of P20,000.
c. Ariana shall book a gain through profit or loss of P120,000 and recognize the costs of legal fees of P140,000
as expenses in profit or loss.
d. Ariana shall book a gain through profit or loss of P320,000 and recognize expenses of P340,000, relative to
the costs of issuing shares, paying legal fees and performing the valuation of Grande, in profit or loss.

17. (amounts in 000) The consideration transferred in the business combination was P55,000. Transaction costs
amount of P1,000. The fair value of the acquirees net assets at the acquisition date was P63,000. The acquirer
has not yet decided whether to measure the 20% NCI in the acquire at the NCIs proportionate share of the fair
value of the acquirees net assets, which is P12,600, or at the NCIs fair value, which is P13,000. Does the choice
between the options for NCI impact the goodwill at the acquisition date?
a. No. the choice for NCI does not impact goodwill at the acquisition date.
b. Yes, it does. If the acquirer values the NCI at its proportionate share of the fair value of the acquired business,
the goodwill amounts to P4,600; while if NCI is valued at fair value, the goodwill is P5,000.
c. Yes, it does. If the acquirer values the NCI at its proportionate share of the fair value of the acquired
business, the goodwill amounts to P5,600; while if NCI is valued at fair value, the goodwill is P6,000.
d. None of the above.

18. Which of the following statements is/are true about reacquired intangible rights under IFRS 3?
I. Reacquired intangible rights are recognized as an asset and determine its fair value on the basis of the
remaining contractual term of the contract when market participants would consider potential contractual
renewals when measuring its fair value.
II. Reacquired rights are amortized over the remaining contractual period.
a. I only b. II only c. I and II d. None of the choices

19. Which of the following items are both exempted to the recognition and measurement principles of IFRS 3?
I. Asset held for sale
II. Employee benefits
III. Income taxes
IV. Indemnification assets
V. Share-based payment
a. I, II, III, IV and V b. I, II and III only c. II, III and IV only d. II, III and V only

20. Which of the following statements about IFRS 3 is/are false?

I. The acquirer cannot recognize liabilities for future losses or costs of the acquiree based on its intentions for
the future.
II. Liabilities that were existing obligations of the acquire at the acquisition date must be recognized.
a. I only b. II only c. I and II d. None of the choices

21. This type of acquisition occurs when, for example, a private entity decides to have itself acquired by a smaller
public entity in order to obtain a stock exchange listing.
a. Step acquisition b. Rewind acquisition c. Reverse acquisition d. Stock acquisition

22. The following valuations have provided to Standards Group by independent appraiser for some of the assets and
liabilities of the acquiree, Legit Ltd., which were not previously recognized in the balance sheet of Legit Ltd.
before acquisition. Which of the following must be recognized under IFRS 3?
I. Order backlog It arises from sales order already received by customers and has been valued at P5,000.
II. Licensed customer list There are no terms of confidentiality or other agreements which prohibit Legit Ltd.
from selling information about these customers. The fair value of the list is valued at P10,000.
III. Potential contracts with prospective new customers Legit. Is still in negotiation as at the acquisition date.
These potential contracts have been valued at P20,000.
IV. Rights to a number of patented products, which was a significant reason behind Standards desire to buy
the company No active market exists for these intangible assets and the chief financial officer is skeptical
about the potential development of these products because of Legit Ltd.s current poor performance. The
rights have been valued at P40,000.
a. I only b. I, II, III and IV c. I and IV only d. I, II and IV only

23. Which of the following statements is/are true about contingent consideration under the revised IFRS 3?
I. Contingent consideration in a business acquisition that is not classified as equity is subsequently measured
at fair value through profit or loss whether or not it falls within the scope of IFRS 9 Financial Instruments.
II. Contingent consideration cannot be measured at fair value through other comprehensive income.
a. I only b. II only c. I and II d. None of the choices

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24. Sofia Inc. Has completed the assessment of the fair value of the net assets of First Coompany to amount to
P19,560,000. The consideration payable for the acquisition equals P19,000,000. Additionl transaction costs
amount to P1,100,000. What must be recognized and recorded?
a. Sofia will book a gain of P560,000 through profit or loss and expense transaction costs.
b. Sofia will book a gain P560,000 through OCI and expense transaction costs.
c. Sofia will book a goodwill of P540,000.
d. Sofia will book a negative goodwill of P560,000 as a liability and expense the transaction costs.

25. Which of the following statements is/are true about impairment of goodwill under IAS 36?
I. If NCI was measured initially at its proportionate share of the net identifiable assets fair value, unrecognized
goodwill must be determined and included in the computation of the carrying amount of the net asset
before it can be compared to the recoverable amount. Hence, there is an need to allocate impairment loss
attributable to goodwill determined between those attributable to parent and NCI (which is unrecognized).
II. If NCI was measured initially at its proportionate share of the net identifiable assets fair value, impairment
loss computed under IAS 36 is attributable only to parent and must be deducted in the Parents income
from operation in full in determining net income attributable to Parent.
a. I only b. II only c. I and II d. None of the choices

26. Oporto Wines has a 15% holding in the shares of Al-Garve Ltd. In addition, one of Oporto Wines's subsidiaries,
Azores Inc., which is 60% owned, has a holding of 30% of the shares in Al-Garve. Oporto Wines's effective share
of Al-Garve Ltd. is, therefore, 33% (15% + (60% of 30%)). How should this investment be classified?
a. A subsidiary b. An associate c. A joint arrangement d. None of the choices

27. LisbonWaves has a 25% holding in Bamco Construction Company. The remaining 75% of the shares are held by
two other companies, which are parties to an agreement between themselves as to the conduct of Bamco's
business. LisbonWaves is represented on the board of Bamco, but most of the decisions are made by directors
representing the other two companies. How should this investment be classified by the LisbonWaves Group?
a. subsidiary
b. An associate
c. joint arrangement
d. Possibly an associate or just an investment
e. Probably a joint arrangement, but possibly an associate

28. Granada, Ltd. has a 49% holding in Emir Holding Company (EHC), which is located in a foreign country. EHC's
business is to import goods from the Granada Group and sell them locally. Local laws do not permit foreign
investors to hold a majority stake or to have a majority of board members on companies in that country. Thirty-
one percent is held by a local bank, whose investment is funded by a deposit of the same amount lodged by
Granada. This holding is held in trust by the bank for Granada as per trust agreement. A local entrepreneur, who
Is also the CEO, holds the remaining 20%. How should this investment be classified?
a. subsidiary
b. An associate
c. joint arrangement
d. Possibly an associate or just an investment
e. Probably a joint arrangement, but possibly an associate

29. Which of the following entities is/are subsidiaries of EBC?

I. EBC Ltd. has an interest of 52% in ABD Ltd. and signed an agreement with the shareholder B, whereby B is
responsible for the production and commercial operations of ABD Ltd., while EBC is responsible for the
marketing decisions and human resources department.
II. EBC Ltd. has direct interest in 27% of Douro Wines. At the beginning of this year, EBC Ltd. entered into an
agreement whereby it established an option to increase its holding with more than 24% of the equity
interests of Douro Wines. The exercise price of the call option is in the money and it can be exercised at any
moment.
III. EBC Ltd. has 42% of GHT Ltd. and has the right to veto in the board of directors with regard to the annual
operating budget.
a. I, II and III b. I and II only c. I and III only d. II and III only

30. Redgrapes has a 70% ownership interest in EHC, giving it control. On January 1, 2015 Redgrapes acquires an additional 15%
interest. At that date, equity of EHC is as follows: (amounts in 000) share capital P1,000; OCI 500; accumulated profits
800. On January 1, 2014, the non-controlling interest in EHC had a value of P610. Redgrapes paid 400 for the additional 15%
interest in EHC. Which of the following statements is correct?
a. Redgrapes recognizes a decrease in non-controlling interest of P400 and an increase in the parent's equity
attributable to EHC of P400.
b. Redgrapes recognizes a decrease in non-controlling interest of P305 and an increase in goodwill of 305.
The remaining P95 is recognized as a reduction of equity.
c. Redgrapes recognizes a decrease in non-controlling interest of P305 and an increase in the parent's equity
attributable to EHC of P305. The remaining 95 is recognized as goodwill.
d. Redgrapes recognizes a decrease in non-controlling interest of P305 and an increase in the parent's equity
attributable to EHC of P305. The remaining 95 is recognized as a reduction of the parent's equity.

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31. HFR Ltd. has a 12% holding in the shares of ABC Ltd. In addition, HFR has, through one of its subsidiaries, an option to buy 13%
more shares in ABC. Although the exercise price is in the money, HFR does not have the intention and the financial ability to
exercise this option.
a. A subsidiary b. An associate c. A joint arrangement d. None of the choices

32. In which of the following situations is there joint control of ASP Ltd. with other companies?
a. ASP Ltd. has 26% holding in HGP and signed a contractual agreement with Asturias Wines, which has holding
of 25% to buy its shareholding in the entity. Production and commercial activities are directed by ASP.
b. ASP Ltd. and HJP Ltd. each have 45% of equity interest of LPM, while JPM Ltd. has the remaining 10%. HJP
Ltd. signed an agreement with JPM Ltd., whereby JPM Ltd. will vote in agreement with HJP Ltd. in all the
decisions of the board of directors. The operation is directed according with the majority of voting rights.
c. ASP has a holding of 51% in Green Wines, whereas the other two shareholders have 27% and 22%.
The three entities signed a 5-year contractual agreement whereby all the decisions concerning the
production, commercial and financing activities have to be approved with 75% of the votes.
d. ASP has a holding of 52% in KLM Ltd., while JIL Ltd. and LRA Ltd. have 24% each. The contractual agreement
signed between the three parties states that ASP Ltd. is responsible for the marketing activity, JIL Ltd. for the
production and LRA Ltd. for the commercial department. Each one of them makes decisions without the
other parties' consent or approval.

33. Colorado has a 10% holding in Darweesh Establishment. Each of the seven other investors in Darweesh holds
between 10% and 20% of its equity. The Darweesh Establishment owns a fleet of ships that is used by all the
investors to transport their own products around the world. The operation of Darweesh and of its fleet is the
subject of a detailed agreement among all the investors. Colorado has a director on the board of Darweesh but,
in accordance with the agreement, the entity is directed by one of the other investors, who receives a fee for
this service.
a. A subsidiary b. An associate c. Probably a joint operation d. Probably a joint venture

34. Which of the following disclosures is/are mandatory for associates and joint ventures in accordance with IFRS 12?
I. Liberty Ltd. shall disclose the summarized financial information, the profit and loss of the non-controlling
interests and the dividends paid to non-controlling interests.
II. Liberty Ltd. shall disclose a schedule that shows the effects on the equity attributable to its owners of the
decrease of 15% in its ownership interest.
III. Liberty Ltd. shall disclose the portion of the gain or loss attributable to measuring the 85% relative to the
retained investment at its fair value and the line in profit or loss in which the gain or loss is recognized.
a.I, II and III b. I and II only c. I and III only d. II and III only

35. These are the financial statements of a group in which the assets, liabilities, equity, income and expenses and
cash flows of the parent and its subsidiaries are presented as those of a single economic entity.
a. General purpose FS b. Consolidated FS c. Individual FS d. Separate FS

36. In the separate FS of a parent entity, investments in subsidiaries that are not classified as held for sale should be
accounted for
a. at cost b. in accordance with PFRS 9 c. using equity method d. A or B

37. For purposes of Separate financial statements, which of the following items must not be capitalized as part of
the investment in Subsidiary account?
I. Indirect cost of acquiring the subsidiary
II. Direct cost of acquiring the subsidiary
III. Share issue cost
a.I, II and III b. I and II only c. I and III only d. II and III only

38. Where should NCI be presented in the consolidated statement of financial position?
a. within long-term liabilities
b. in between long-term liabilities and current liabilities
c. within parent shareholders equity
d. within equity but separate from the parent shareholders equity

39. In case of change in ownership interest without loss of control, which of the following is/are false in accordance
with IFRS 10?
I. This transaction must be treated as equity transaction.
II. This transaction has no impact in profit/loss or any impact on goodwill.
a. I only b. II only c. I and II d. None of the choices

40. Which of the following is/are true about investment entity under IFRS 10?
I. It is an entity that obtains funds from one or more investors for the purpose of providing those investor(s)
with investment management services;
II. It is an entity commits to its investor(s) that its business purpose is to invest funds solely for returns from
capital appreciation, investment income, or both;
III. It is an entity that measures & evaluates the performance of substantially all of its investments on a FV basis.
a.I, II and III b. I and II only c. I and III only d. II and III only

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 PROBLEMS

Use the following information for the next three items

On January 1, 2015, SMUTTY acquired the identifiable net asset of OBSCENE Inc. On this date, the identifiable
assets acquired and liabilities assumed have fair values of P6,400,000 and P3,600,000, respectively. SMUTTY
incurred the following acquisition-related costs: legal fees, P40,000, due diligence costs, P400,000; and general
and administrative costs of maintaining an internal acquisition, P80,000.

As consideration, SMUTTY transferred 8,000 of its own shares with par value and fair value per share of P400
and P500, respectively, to OBSCENEs former owners. Costs of registering the shares (previously issued and
newly issued) amounted to P160,000 (P20,000 pertains to fees of previously issued shares).

41. How much is the goodwill (gain on bargain purchase) on the business combination?
a. P716,000 b. P556,000 c. P600,000 d. P1,200,000

42. How much is the total amount charged to profit or loss in relation to the transaction above?
a. P520,000 b. P680,000 c. P540,000 d. P0

43. Ignoring the consideration and issue costs above, but instead, SMUTTY issued bonds with face value and fair
value of P4,000,000 before incurring the transaction costs. Transaction Costs in issuing the bonds amounted to
P200,000. How much is the goodwill (gain on bargain purchase) on the business combination
a. P716,000 b. P556,000 c. P600,000 d. P1,200,000

Use the following information for the next two items

Minor Corporation reports net assets of P300,000 at book value. These assets have an estimated market value of
P350,000. If Major Corporation buys 80 percent ownership of Minor for P275,000. Minor opted to use the most
appropriate method in measuring NCI for the said acquisition.

44. Goodwill will be reported in the consolidated balance sheet in the amount of:
a. P0 b. P25,000 c. P35,000 d. P40,000

45. The NCI will be reported in the amount of:

a. P55,000 b. P60,000 c. P70,000 d. P68,750

Use the following information for the next two items

On January 1, 2015, ENTREAT Co. acquired all of the identifiable assets and assumed all liabilities of BEG, Inc. by
paying cash of P4,000,000. On this date, identifiable assets and liabilities assumed have fair value of P6,400,000
and P3,600,000, respectively. ENTREAT has estimated restructuring provisions of P800,000 representing exit cost
of the acquirees activities, termination costs of employees of BEG and relocation costs of the said employees.
The restructuring plan is conditional until the business combination process is done. If the combination will not
happen, no restructuring will happen.

46. For purposes of computing the goodwill (gain on bargain purchase), how much is the fair value of net assets to
be deducted from the consideration transferred?
a. P3,600,000 b. P4,400,000 c. P2,800,000 d. P2,000,000

47. How much is the goodwill (gain on bargain purchase) on the business combination:
a. P400,000 b. (P400,000) c. P1,200,000 d. P2,000,000

48. On January 1, 2015, CONCEPTUAL Co. acquired all of the identifiable assets and assumed all liabilities of
BOOKISH, Inc. by paying cash of P4,000,000. On this date, identifiable assets and liabilities assumed have fair
value of P6,400,000 and P3,600,000, respectively. As of January 1, 2015, CONCEPTUAL is renting a building from
BOOKISH under operating leases. CONCEPTUAL has determined that the terms of the operating lease on the
building compared with the market terms are favorable. The fair value of the differential is estimated at
P80,000. How much is the goodwill (gain on bargain purchase) on the business combination?
a. P1,080,000 b. P1,280,000 c. P1,120,000 d. P1,200,000

49. On January 1, 2015, IFRS Co. acquired all of the identifiable assets and assumed all liabilities of VALIX, Inc. by
paying P4,000,000. On this date, identifiable assets and liabilities assumed have fair value of P6,400,000 and
P3,600,000, respectively. Terms of the agreement are as follows: (a) 20% of the price shall be paid on January 1,
2015 and the balance on December 31, 2016 (the prevailing market rate on the same date is 10%); (b) the
acquirer shall also transfer its piece of land with book and fair value of P2M and P1.20M, respectively. Included
in the liabilities assumed is an estimated warranty liability. The carrying amount and fair value of this warranty
liability amounted to P480,000 and P390,000, respectively. The acquiree guarantees that the warranty liability
would only be settled for P400,000. How much is the goodwill (gain on bargain purchase) on the business
combination?
a. P1,844,480 b. P1,754,480 c. P1,934,480 d. P1,834,480

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50. On January 1, 2015, CL Co. acquired all of the identifiable assets and assumed all liabilities of GD, Inc. by paying
P8,000,000. On this date, identifiable assets and liabilities assumed have fair value of P12,800,000 and
P7,200,000, respectively.

Additional information:

CL intends to sell immediately a factory included in the above assets. Based on the documents and
information available, this asset qualifies to be a held for sale under IFRS 5. As of January 1, 2015, the fair
value less cost to sell and book value of this factory amounted to P1,600,000 and P2,000,000, respectively.
The cost to sell deducted to the fair value amounted to P50,000.

The acquiree has an in-process research and development unrecognized on its separate books. The acquirer
does not intend to use it but it has a fair value of P400,000.

. How much is the goodwill (gain on bargain purchase) on the business combination?
a. P2,050,000 b. P2,400,000 c. P2,750,000 d. P2,800,000

Use the following information for the next three items

On January 1, 2013, Voice Company acquired 100% of the outstanding shares of Idol Company by issuing
200,000 shares of its P10 par ordinary with market price of P12 per share. The book value of Idol Companys net
assets was P2,500,000. Voice Company journalized the said acquisition as follows:

Investment in Subsidiary P2,400,000

Expenses 40,000
Ordinary share capital, P10 par 2,000,000
Share Premium 400,000
Cash 40,000

Voice Company paid direct acquisition costs and issuance/registration costs of shares of P25,000 and P15,000,
respectively (refer to the entry above).

The book value of Idol Companys net assets were the same with their fair value except for a liability item which
was understated by P3,000. For purposes of preparing the separate financial statement of Voice Company, the
auditor noted the error on the entry above.

51. The correct journal entry to record the transaction costs in The Voice books includes a debit to
a. Direct acquisition expenses of P40,000
b. Share premium P40,000
c. Investment in Subsidiary of P40,000
d. Cash P40,000

52. The correcting entry on the separate books of Voice Company includes a credit to?
a. Share premium of P15,000
b. Expenses P40,000
c. Investment in Subsidiary of P25,000
d. No entry needed

53. What is the best basis for the correcting entry related to the error above, if any?
a. IAS 8 b. IAS 27 c. IFRS 3 d. Both b and c

Use the following information for the next three items

On May 1, 2014, the Geri Inc. acquired 80% of the voting shares of JonJon Limited. The fair value of the
identifiable assets and liabilities of the acquiree as at the date of acquisition were P13,786,000 and P4,300,000,
respectively. The fair value of NCI at the date of acquisition is P1,547,000. The fair value of the NCI has been
estimated by applying a discounted earnings approach. Geri issued 2,500,000 ordinary shares as consideration
for the 80% interest in the acquiree. The fair value of the shares is the published price of the shares of Geri at
the acquisition date, which was P2.88 each (rounded off from P2.8812). The fair value of the consideration
given is therefore P7,203,000.

Transaction costs of P600,000 have been expensed and are included in administrative expenses. The attributable
costs of the issuance of the equity instruments of P32,000 have been charged directly to equity as negative
share premium. Said costs were already paid.

As part of the purchase agreement with the previous owner of JonJon Limited, a contingent consideration has
been agreed. There will be additional cash payments to the previous owner of JonJon Limited of:

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 P675,000, if the entity generates P1,000,000 of profit before tax in a 12-month period after the
acquisition date, or
P1,125,000, if the entity generates P1,500,000 of profit before tax in a 12-month period after the
acquisition date.

As at the acquisition date, the fair value of the contingent consideration was estimated at P714,000. As at
December 31, 2014, the key performance indicators of JonJon Limited show clearly that target (a) will be
achieved and the achievement of target (b) is probable due to a significant expansion of the business and
synergies implemented. Accordingly, the fair value of the contingent consideration was determined to be
P1,071,500. The entity was able to generate more than P1,500,000 of profit before tax on the settlement date,
thus, was required to pay P1,125,000.

54. In the consolidated statements of financial position, the amount of goodwill as of December 31, 2014 is
a. P328,200 b. (P22,000) c. Zero d. P335,500

55. In the consolidated financial statements, what is the net effect in equity of the above acquisition for the year
ended December 31, 2014? (disregarding any income earned from operations by both the acquirer and
acquiree)
a. P8,140,000 b. P8,110,700 c. P7,782,500 d. P8,468,200

56. In the consolidated financial statements, determine the increase in liabilities as a result of the above acquisition
for the year ended December 31, 2014?
a. P714,000 b. P4,300,000 c. P5,014,000 d. P5,371,500

57. On June 30, 2015, Precy, Inc. purchased 70% of the ordinary shares outstanding of Susan Company for P700,000.
At that date, Susan had P650,000 of ordinary share capital and accumulated profits of P250,000. All of the
purchase difference was related to a building with a book value of P175,000 and a remaining life of 10 years.
Precys accumulated profits balance at December 31, 2015 was P755,000. The income and dividend figures for
both Precy and Susan for 2015 are as follows:
Income Dividends
Precy (own operations) P 275,000 P 70,000
Susan Company: Jan. 1 to June 30 80,000 30,000
July 1 to Dec. 31 100,000 0

On December 31, 2015, the consolidated retained earnings (accumulated profits) is:
a. P 821,500 b. P 856,500 c. P 1,026,500 d. P 1,021,500

Use the following information for the next three items

On January 2, 2014, Keith Urban Corporation purchased 70% of the ordinary shares of Mimi Company for
P 4,675,000. At that date, Mimi Company had P 4,887,500 of ordinary shares outstanding and accumulated
profits of P 1,572,500. Mimis equipment with a remaining life of 5 years had a book value of P 2,380,000 and a
fair value of P 2,550,000. Mimis remaining assets had a book value equal to their fair values. All intangible assets
except goodwill are expected to have remaining lives of 10 years. Non-controlling interest shall be measured at
fair value.

The income and dividend figures for both Keith Urban and Mimi Company are as follows:
Income Dividends
Keith Urban Corporation: 2014 P 1,572,500 P 425,000
2015 1,785,000 510,000
Income Dividends
Mimi Company: 2014 P 340,000 P 55,000
2015 569,500 127,500

Keith Urbans income shown does not include any dividend income from Mimi. Keith Urbans accumulated
profits balance at the date of acquisition was P 5,958,500.

58. On December 31, 2015, determine the consolidated accumulated profits attributable to parent.
a. P 8,821,300 b. P 8,970,050 c. P 8,993,850 d. P 9,017,650

59. On December 31, 2014, determine the amount of net income attributable to parent.
a. P 2,149,650 b. P 2,159,850 c. P 1,776,500 d. P 1,786,700

60. Assume that Mimi has outstanding 6% P 100 par value cumulative preference shares with an aggregate value of
P 1,000,000 that are classified as equity and are held by non-controlling interests. What is the income
attributable to parent on December 31, 2014
a. P 1,721,500 b. P 1,716,500 c. P 1,731,700 d. P 1,744,700

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61. ABC sold 90% of GHI, a wholly-owned subsidiary, for P800,000. The net assets of GHI before the disposal were
accounted for at P570,000. The fair value of the retained investment of 10% (assume no significant influence) is
150,000. Which of the following statements is correct?

a. ABC should derecognize the investment in the subsidiary, recognize 800,000 of cash, recognize the retained
investment of 150,000 in accordance with PFRS 9 and recognize a gain on the loss of control of the subsidiary of
380,000 in profit in loss.
b. ABC should derecognize the investment in the subsidiary, recognize 800,000 of cash, recognize the retained
investment of 150,000 in accordance with PFRS 9 and recognize a gain of loss of control of the subsidiary of
380,000 in equity.
c. ABC should derecognize the investment in the subsidiary, recognize 800,000 of cash, recognize the retained
investment of 57,000 (570.000*10%) in accordance with PFRS 9 and recognize a gain of loss of control of the
subsidiary of 287,000 in profit or loss.
d. None of the above

62. Which of the following statements is/are true?

I. I seriously and honestly answer my hand-outs, books and reviewer in Advance Accounting before entering
my class and listen to the discussion of my instructor/professor.
II. I always rely with my instructor/professor to discuss the entire lesson and all the answers in the hand
outs/books and hope that it will be discussed in details for me to understand the concepts.
III. Because of item I above, I was able to answer confidently this exam. Hence, the probability of passing this is
certain.
IV. Because of item II above, I am not confident if I will pass this exam.
a. I only b. II only c. I and III only d. II and IV only

* * * END OF EXAMINATION * * *

I feel bad when students/reviewees rant about the examinations I made. But as much as I want to make it easy, I cant.
Because I admire what the Accountancy profession is all about. It is a tradition of excellence, tradition of survival and
tradition of victory. To pass the CPA exams without all of these will be less fulfilling. I say that as someone who was a
student/reviewee like you who pulled through a lot examinations. It is really hard. Exaggeration is not even close with
these examinations. But mark my word, success at the end of the road is beyond paradise. Because once you get the
diploma/license, you are a proud survivor with chosen few who lived, loved and survive - Synonymous

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