COLLEGE OF ACCOUNTANCY

FIRST GRADING EXAMINATION

ACCOUNTING 157
INSTRUCTION:
o Make a summary of answers.
o Show your solutions for problem solving. No solution no points.
o Submit to my messenger account the picture of the summary of answer and solutions.
PART 1: Multiple Choice Theory
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. Should the following costs be included in the consideration transferred in a business combination,
according to PFRS 3 Business Combinations?
I. Costs of maintaining an acquisitions department.
II. Fees paid to accountants to effect the combination.
a. No No b. No Yes c. Yes No d. Yes Yes
4. 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.
5. 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
6. Given the following information, how is goodwill from a business combination computed under PFRS 3?
A = Consideration transferred
B = Non-controlling interest in net assets of subsidiary
C = Previously held equity interest
D = Fair value of net identifiable assets of subsidiary
% = Percentage of ownership acquired by the parent in the subsidiary
a. A+B+C-D c. (A+C) – (D x %)
b. A – (D x %) d. (A+B) – [(D x %) – B]
7. 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 PFRS 3 Business Combinations, 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, then recognize any excess immediately in profit or loss
d. reassess the recognition and measurement of the net assets acquired and the consideration
transferred, then recognize any excess immediately in other comprehensive income
8. Which one of the following reasons would not contribute to the creation of negative goodwill?
a. Errors in measuring the fair value of the acquiree’s net identifiable assets or the cost of the
business combination.
b. A bargain purchase.
c. A requirement in an IFRS to measure net assets acquired at a value other than fair value.
d. Making acquisitions at the top of a “bull” market for shares.
9. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities,
and contingent liabilities over cost” (formerly known as negative goodwill) should be
a. Amortized over the life of the assets acquired.
b. Reassessed as to the accuracy of its measurement and then recognized immediately in profit or
loss.
c. Reassessed as to the accuracy of its measurement and then recognized in retained earnings.
d. Carried as a capital reserve indefinitely.
10. This type of business combination 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 c. Reverse acquisition
b. Rewind acquisition d. Stock acquisition
11. Acquisition accounting requires an acquirer and an acquiree to be identified for every business
combination. Where a new entity (H) is created to acquire two preexisting entities, S and A, which of
these entities will be designated as the acquirer?
a. H.
b. S.
c. A.
d. A or S.
12. When consolidating the financial statements of a parent and its subsidiary, which of the following is
eliminated?
a. Goodwill
b. Investment in subsidiary
c. NCI in net assets
d. All of these
13. A British parent entity uses the revaluation model to measure its property, but a Philippine subsidiary
uses the cost model. The Philippine subsidiary’s directors find the revaluation model too costly to
implement. In the consolidated financial statements, is the group allowed to measure the Philippine
subsidiary’s property under the cost model?
a. Yes, the British parent’s property shall be adjusted to conform to the subsidiary’s accounting policy
of cost model.
b. No, the Philippine subsidiary’s property shall be adjusted to conform to the group’s accounting
policy of revaluation model.
c. Yes, both models will be reflected in the consolidated financial statements, but this fact must be
disclosed in the notes.
d. None of these, the property is eliminated in the consolidated financial statements.
14. In a business combination accounted for under the acquisition method, the fair value of the net
identifiable assets acquired exceeded the consideration transferred. How should the excess fair value
be reported?
a. As negative goodwill, recognized in profit or loss in the period the business combination occurred.
b. As an extraordinary gain.
c. As a reduction of the values assigned to noncurrent assets and an extraordinary gain for any
unallocated portion.
d. As positive goodwill.
15. The costs of issuing equity securities in a business combination are
a. expensed
b. treated as direct reduction in equity
c. included in the initial measurement of the credit to share capital account
d. b and c
16. The costs of issuing debt securities in a business combination are
a. expensed
b. included in the initial measurement of the debt securities issued
c. accounted for like a “discount” on liability
d. b and c
17. A business combination is accounted for as an acquisition. 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
consultants for equity securities issued
a. Yes Yes
b. Yes No
c. No Yes
d. No No
18. Easton Company acquired Lofton Company in a business combination. Easton was able to acquire
Lofton at a bargain price. The fair value of the net identifiable assets acquired exceeded the
consideration transferred to Lofton. After revaluing noncurrent assets to zero, there was still some
"negative goodwill." Proper accounting treatment by Easton is to report the amount as
a. an extraordinary gain.
b. part of current income in the year of combination.
c. a deferred credit and amortize it.
d. paid-in capital.
19. Goodwill may be capitalized
a. only when it arises in a business combination.
b. only when it is created internally.
c. only when it is purchased
d. on any of these cases.
20. A contingent liability assumed in a business combination is recognized
a. if it is a present obligation that arises from past events and
b. if its fair value can be measured reliably.
c. even if it has an improbable outflow of resources embodying economic benefits.
d. All of these

21. Given the following information, how is goodwill from a business combination computed under PFRS 3?
 A = Consideration transferred
B = Non-controlling interest in net assets of subsidiary
C = Previously held equity interest
D = Fair value of net identifiable assets of subsidiary
% = Percentage of ownership acquired by the parent in the subsidiary
a. A+B+C-D c. (A+C) – (D x %)
b. A – (D x %) d. (A+B) – [(D x %) – B]
22. 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.
23. Are the following statements about an acquisition true or false, according to PFRS 3 Business
combinations?
III. The acquirer should recognize the acquiree's contingent liabilities if certain conditions are met.
IV. 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
24. An acquirer should at the acquisition date recognize goodwill acquired in a business combination as an
asset. Goodwill should be accounted for as follows:
a. Recognize as an intangible asset and amortize over its useful life.
b. Write off against retained earnings.
c. Recognize as an intangible asset and impairment test when a trigger event occurs.
d. Recognize as an intangible asset and annually impairment test (or more frequently if impairment is
indicated).
25. The company that obtains control over another company in a business combination transaction is
referred to as the
a. acquirer c. subsidiary
b. parent d. a and b
26. According to PFRS 3, which of the following transaction costs would increase the amount of goodwill
from a business combination?
a. legal fees, accounting fees and similar costs
b. issuance costs of equity securities
c. issuance costs of debt instruments
d. none of these
27. This refers to the additional consideration for a business combination to be given to the acquiree upon
the happening of a contingency which is pre-agreed at the acquisition date.
a. Contingent liability
b. Contingent asset
c. Contingent consideration
d. Additional compensation
28. Which of the following factors is used as multiplier of super profits in valuation of goodwill of a
business?
a. Average capital employed in the business
b. Normal rate of return
c. Simple profits
d. Normal profits.
e. Number of years’ purchase
29. The costs of issuing debt securities in a business combination are
a. expensed
b. included in the initial measurement of the debt securities issued
c. accounted for like a “discount” on liability
d. b and c
30. A business combination is accounted for properly as an acquisition. Direct costs of combination, other
than registration and issuance costs of equity securities, should be:
a. Capitalized as a deferred charge and amortized.
b. Deducted directly from the retained earnings of the combined corporation.
c. Deducted in determining the net income of the combined corporation for the period in which the
costs were incurred.
d. Included in the acquisition cost to be allocated to identifiable assets according to their fair values.

PART 2: Multiple Choice Problem

INSTRUCTION: SHOW YOUR SOLUTIONS. NO SOLUTION NO POINTS
On January 1, 2021, ABC Co. acquired 75% interest in XYZ, Inc. for P2,500,000 cash. ABC Co. incurred
transaction costs of P250,000 for legal, accounting and consultancy fees in negotiating the business
combination. ABC Co. elected to measure NCI at the NCI’s proportionate share in XYZ, Inc.’s identifiable
net assets. The carrying amounts and fair values of XYZ’s assets and liabilities at the acquisition date were
as follows:
Assets Carrying amounts Fair values
Cash in bank 25,000 25,000
Accounts receivable 425,000 300,000
Inventory 1,300,000 875,000
Equipment – net 2,500,000 2,750,000
Goodwill 250,000 50,000
Total assets 4,500,000 4,000,000
Liabilities
Payables 1,000,000 1,000,000
31. How much is the goodwill (gain on a bargain purchase)?
a. 140,000 c. 287,500
b. 278,500 d. 264,500
On January 1, 2021, Entity A acquires Entity B in a business combination. The financial statements of the
combining constituents are shown below:
  Entity A Entity B
Cash in bank 12,000 6,000
Accounts receivable 36,000 14,400
Inventory 48,000 27,600
Investment in subsidiary 90,000 -
Building, net 216,000 48,000
Total assets 402,000 96,000

Accounts payable
60,000 7,200
Share capital 204,000 60,000
Share premium 78,000 -
Retained earnings 60,000 28,800
Total liabilities and equity 402,000 96,000

Additional information:
 Entity B’s assets and liabilities are stated at their acquisition-date fair values, except for the
following:
- Inventory, P37,200, -Building, net, P57,600
 The goodwill determined under PFRS 3 is P3,600.
 The NCI in the net assets of the subsidiary, also determined under PFRS 3, is P21,600.
32. How much is the consolidated total assets on January 1, 2021?
a. 430,800
b. 428,600
c. 440,800
d. 465,800
33. How much is the consolidated total equity on January 1, 2021?
a. 330,800
b. 328,600
c. 340,800
d. 363,600
ABC Corporation concluded that the fair value of S Company was P80,000 and paid that amount to acquire
all of its net assets. S reported assets with a book value of P60,000 and fair value of P98,000 and
liabilities with a book value and fair value of P23,000 on the date of combination. ABC also paid P3,000 to
a search firm for finder's fees related to the acquisition.
34. What amount will be recorded as goodwill by ABC Corporation while recording its investment in S? 
a. P0
b. P5,000
c. P8,000
d. P13,000
On January 1, 2011, ABC Company acquires 80 percent ownership in Mad Company for P200,000. The
fair value of the non-controlling interest at that time is determined to be P50,000. Mad Company reports
net assets with a book value of P200,000 and fair value of P230,000. ABC Company reports net assets
with a book value of P600,000 and a fair value of P650,000 at that time, excluding its investment in
Madonna Company.
35. What will be the amount of goodwill that would be reported immediately after the combination?
a. 4,000
b. 16,000
c. 20,000
d. 25,000.
West, Inc. holds 100 percent of the common stock of Coast Company, an investment acquired for
P680,000. Immediately following the combination, West's net assets have a book value of P1,150,000 and
a fair value of P1,390,000. The book value and the fair value of Coast's net assets on the date of
combination are P400,000 and P550,000, respectively. Immediately following the combination, a
consolidated balance sheet is prepared.
36. Based on the information above, goodwill will be reported in the amount of: 
a. P240,000.
b. P130,000.
c. P150,000.
d. P270,000.
37. Based on the information given above, what will be the amount of total consolidated stockholders'
equity be reported in the consolidated balance sheet prepared immediately following the combination? 
A. P1,390,000
B. P1,550,000
C. P1,700,000
D. P1,150,000
P Corporation purchased a 10% interest in S Company on January 1, 2006 as FVOCI investment for a
price of P40, 000.
On January 1, 2011, P purchased 7, 000 additional shares of S from existing stockholders for P315, 000.
This purchased increased P’s interest to 80%. S company had the following statement of financial position
just prior to P’s purchase:
Current asset 165, 000 Liabilities 65, 000
Building net 140, 000 Common stock, P10 par 100, 000
Equipment 100, 000 Retained earnings 240, 000
Total assets 405, 000 total liab and equity 405, 000
On the date of second purchased, P determines that the equipment of S was understated by P50, 000 and
had 5-year remaining life. All other book values approximate their fair values. Any excess is attributable to
goodwill.
38. What is the implied fair value of NCI to be reported on January 1, 2011?
a. 90, 000
b. 42, 000
c. 88, 750
d. 83, 500
39. On January 1, 2011 consolidated statement of financial position, what is the amount of goodwill to be
reported?
a. 60, 000
b. 15, 000
c. 25, 000
d. 40, 000

On January 1, 2021, Parent Co. issued equity instruments in exchange for 75% interest in Subsidiary Co.
Subsidiary Co.’s net identifiable assets have carrying amount and fair value of P300,000 and P360,000,
respectively. The difference between carrying amount and fair value of net asset is attributable to an
undervalued building with a remaining useful life of 6 years.
The December 31, 2021 statements of profit or loss of Parent Co. and Subsidiary Co. are summarized
below:
Statements of profit or loss
For the year ended December 31, 2021
Parent Co. Subsidiary Co.
Revenues 1,200,000 480,000
Operating expenses (960,000) (400,000)
Profit for the year 240,000 80,000
40. How much is the consolidated profit in 2021?
a. 240,000 c. 320,000 e. none of these
b. 310,000 d. 330,000
41. How much is the profit attributable to owners of the parent in 2021?
a. 292,500 c. 320,000 e. 300,000
b. 310,000 d. 232,500
42. How much is the profit attributable to non-controlling interest in 2021?
a. 6,500 c. 57,500 e. 20,000
b. 17,500 d. 77,500
43. How much is the consolidated operating expenses for the year ended December 31, 2021?
a. 1,360,000 c. 960,000 e. none of these
b. 1,350,000 d. 1,370,000
On January 1, 2021, ABC Co. issued equity instruments in exchange for 75% interest in Sub Co. On
acquisition date, ABC Co. elected to measure non-controlling interest at fair value. ABC Co.’s management
believes that the fair value of the consideration transferred correlates to the fair value of the controlling
interest acquired. Non-controlling interest is measured at fair value.

Sub Co.’s net identifiable assets have carrying amount and fair value of ₱300,000 and ₱360,000,
respectively. The difference is attributable to a building with a remaining useful life of 6 years.

The December 31, 2021 statements of financial position of ABC Co. and Sub Co. are summarized below:
ABC Co. Sub Co.
ASSETS
Investment in subsidiary (at cost) 300,000 -
Other assets 1,372,000 496,000
TOTAL ASSETS 1,672,000 496,000
LIABILITIES AND EQUITY
Trade and other payables 292,000 120,000
Share capital 940,000 200,000
Retained earnings 440,000 176,000
Total equity 1,380,000 376,000
TOTAL LIABILITIES AND EQUITY 1,672,000 496,000
No dividends were declared by either entity during year. There were also no inter-company transactions
and impairment in goodwill.
44. What amount of goodwill is presented in the consolidated statement of financial position on December
31, 2021?
a. 40,000 c. 20,000
b. 35,000 d. 15,000
45. How much is the goodwill attributable to subsidiary?
a. 30,000 c. 15,000
b. 0 d. 10,000
46. How much is the consolidated total assets as of December 31, 2021?
a. 1,867,000 c. 1,958,000
b. 1,907,000 d. 1,974,000
47. How much is the consolidated total liabilities as of December 31, 2021?
a. 292,000 c. 120,000
b. 412,000 d. None of these
48. How much is the non-controlling interest in the net assets of the subsidiary on December 31, 2021?
a. 106,500 c. 136,500
b. 116,500 d. 146,500
49. How much is the consolidated retained earnings on December 31, 2021?
a. 489,500 c. 534,500
b. 498,500 d. 543,500
50. How much is the consolidated total equity on December 31, 2021?
a. 1,546,000 c. 1,642,000
b. 1,564,000 d. 1,624,000

The statement of financial position of S. Company as of December 31, 2013 is as follows:

Assets Liabilities and Shareholders’ Equity
Cash P 175,000 Current liabilities P 250,000
Accounts receivable 250,000 Mortgage payable 450,000
Inventories 725,000 Ordinary share capital 200,000
Property, plant and 950,000 Share premium 400,000
equipment
________ Retained earnings 800,000
P 2,100,000 P 2,100,000
On December 31, 2013 the ABC Inc. bought all of the outstanding shares of S. Company for P 1,800,000
cash. On the date of acquisition, the fair market value of S.’s inventories were P 675,000, while the fair
value of S.’s property, plant equipment was P 1,100,000.
The fair value of all other assets and liabilities of S. were equal to their book values. In addition, not
included above were costs in-process research and development of S Company amounting to P 100,000.
51. Goodwill amounted to:
a. P 400,000
b. P 300,000
c. P 200,000
d. P -0-
The financial statement for Gold Corporation and Core Company for the year ended December 31, 2011,
prior to Gold business combination transaction regarding Core:
GOLD CORE
REVENUE 2, 700, 000 600, 000
Expenses 1, 980, 000 400, 000
Net income 720, 000 200, 000

Retained earnings, 1/1 2, 400, 000 400, 000

Net income 720, 000 200, 000
Dividends (270, 000)
Retained earnings, 12/31 2, 850, 000 600, 000

Cash 240, 000 220, 000

Receivable and inventory 1, 200, 000 340, 000
Building net 2, 200, 000 600, 000
Equipment net 2, 100, 000 1, 200, 000
Total assets 6, 240, 000 2, 360, 000

Liabilities 1, 500, 000 820, 000

Common stock 1, 080, 000 400, 000
APIC 810, 000 540, 000
Retained earnings 2, 850, 000 600, 000
Total liab and equity 6, 240, 000 2, 360, 000
On December 31, 2011 Gold issued P600, 000 in debt and 30, 000 shares of its P10 par value common
stocks to the owners of Core to purchase all of the outstanding shares of that company. Gold shares have
fair value of P40 per share. Gold’s paid P25, 000 to broker for arranging the transaction. Gold paid P35,
000 stock issuance costs. Core Equipment was actually worth P1400, 000 but its buildings were only
valued at P560, 000.
52. What amount is the investment recorded on Gold Books?
a. 1, 540, 000 c. 1, 825, 000
b. 1, 800, 000 d. 1, 840, 000
53. Compute the consolidated expense for 2011:
a. 1, 980, 000 c. 2, 015, 000
b. 2, 005, 000 d. 2, 040, 000
54. Compute the consolidated cash account on December 31, 2011:
a. 460, 000 c. 425, 000
b. 435, 000 d. 400, 000
55. Compute the consolidated building account on December 31, 2011:
a. 2, 700, 000 c. 3, 260, 000
b. 3, 370, 000 d. 3, 300, 000
56. Compute the goodwill on December 31, 2011:
a. 0 c. 125, 000
b. 100, 000 d. 160, 000
57. Compute the consolidated common stock on December 31, 2011:
a. 1, 080, 000 c. 1, 480, 000
b. 1, 380, 000 d. 2, 280, 000
58. The consolidated APIC on December 31, 2011:
a. 810, 000 c. 1, 675, 000
b. 1, 350, 000 d. 1, 910, 000
59. Compute the consolidated retained earnings on December 31, 2011:
a. 2, 800, 000 c. 2, 850, 000
b. 2, 825, 000 d. 3, 425, 000
60. Compute the consolidated revenue for 2011:
a. 3, 300, 000 c. 1, 540, 000
b. 2, 700, 000 d. 720, 000
“There are two kinds of people in this world: those who want to get things done and
those who don’t want to make mistakes”.
– John Maxwell
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