POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

STA. MARIA, BULACAN CAMPUS

ACCO 30023 – Accounting for Business Combinations

Quiz No. 1: IFRS 3 – Business Combination (under FULL PFRS)

INSTRUCTION: Refer to this pdf file for your questionnaire and use the Microsoft Forms as your answer sheet. Use a
separate paper for your solutions in the problem solving and upload it when you submit your quiz. Always observe
HONESTY during the examination. God Bless you all!

TEST I. FACT OR BLUFF. Write “FACT” if the statement is TRUE and “BLUFF” if the statement is FALSE.

1. Company T is a clothing manufacturer and has traded for a number of years. The company produces a wide range of
clothing and employs a workforce of designers, machine operators, quality checkers, and other operational, marketing
and administrative staff. It owns and operates a factory, warehouse and machinery and holds raw material inventory
and finished products. On 1 January 2020, Company A pays P520,000 to acquire 100% of the ordinary voting shares of
Company T. No other type of shares has been issued by Company T. On the same day, the three main executive
directors of Company A take on the same roles in Company T. This is an example of business combination.

2. Company D is a development stage entity that has not started revenue-generating operations. The workforce consists
mainly of research engineers who are developing a new technology that has a pending patent application. Negotiations
to license this technology to several customers are at an advanced stage. Company D requires additional funding to
complete development work and commence planned commercial production. The value of the identifiable net assets in
Company D is P7,500,000. Company A pays P6,000,000 in exchange for 60% of the equity of Company D (a
controlling interest). Company D is presumed to be a business, therefore there is a business combination.

3. Company S is a manufacturer of a wide range of products. The company’s payroll and accounting system is managed
as a separate cost center, supporting all the operating segments and the head office functions. Company A agrees to
acquire the trade, assets, liabilities and workforce of the operating segments of Company S but does not acquire the
payroll and accounting cost center or any head office functions. Company A is a competitor of Company S. Company
A should apply IFRS #3 in this transaction.

4. Company A, the ultimate parent of a large number of subsidiaries, reorganizes the retail segment of its business to
consolidate all of its retail businesses in a single entity. Under the reorganization, Company X (a subsidiary and the
biggest retail company in the group) acquires Company A’s shareholdings in its two operating subsidiaries, Companies
Y and Z by issuing its own shares to Company A. After the transaction, Company X will directly control the operating
and financial policies of Companies Y and Z. The transaction is outside the scope of PFRS #3.

5. IFRS 3 (Revised) is applied prospectively to business combinations occurring in the first accounting period beginning
on or after 1 July 2009. It can be applied early but ONLY to an accounting period beginning on or after 30 June 2007.
IFRS 3 (Revised) and IAS 27 (Revised) are applied at the same time. Retrospective application to earlier business
combinations is NOT permitted.

6. Non-controlling interest (NCI) is the equity in the acquiree not attributable, directly or indirectly, to an acquirer. NCI
arises when an acquirer owns 100% of the equity of the acquiree.

7. Company A acquires 100% of the equity and voting rights of Company P, a subsidiary of a property investment group.
Company P owns three investment properties. The properties are single-tenant industrial warehouses subject to long-
term leases. The leases oblige Company P to provide basic maintenance and security services, which have been
outsourced to third party contractors. The administration of Company P’s leases was carried out by an employee of its
former parent company on a part-time basis, but this individual does not transfer to the new owner. This is an example
of business combination.

8. Company A acquires 100% of the equity and voting rights of Company Q, which owns three investment properties.
The properties are multi-tenant residential condominiums subject to short-term rental agreements that oblige Company
Q to provide substantial maintenance and security services, which are outsourced with specialist providers. Company Q
has five employees who deal directly with the tenants and with the outsourced contractors to resolve any non-routine
security or maintenance requirements. These employees are involved in a variety of lease management tasks (e.g.

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 identification and selection of tenants; lease negotiation and rent reviews) and marketing activities to maximize the
quality of tenants and the rental income. Company Q is considered a business.

9. Company X and Company Y are each owned by three unrelated shareholders (i.e. each shareholder owns one third of
each company). The three individuals have an established pattern of voting together but there is no contractual
agreement in place that creates control or joint control for any of the shareholders. As part of the reorganization, the
shareholders incorporated a new entity, Company Z. Company Z issued shares to each of the shareholders in exchange
for 100% of the equity of Company X and Company Y. Subsequent to the share exchange, the three shareholders now
each own one third of Company Z. Consequently, this transaction is outside the scope of IFRS 3 and the
acquisition method of accounting is not applicable.

10. Gain on bargain purchase (gain on combination) is immediately recognized in the Profit or Loss of the acquirer if the
consideration transferred is less than the fair value of assets acquired.

TEST II. MULTIPLE CHOICE THEORIES (1 POINT)

11. 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 allocated based on original costs.
d. None of the above.

12. In accounting for business combination, which of the following intangibles should not be recognized as an asset apart
from goodwill?
a. Trademarks c. Employee quality
b. Lease agreements d. Patents

13. Statement 1: Contingent consideration is recognized at its fair value as part of the consideration transferred in
exchange for the acquiree.
Statement 2: Contingent consideration obligations are recognized only when the contingency was probable and could
be measured reliably.
a. Only 1st statement is true c. Both statements are true
b. Only 2nd statement is true d. Both statements are false

14. The following are examples of acquisition of a business, except

a. Company A acquires an operating hotel, the hotel’s employees, the franchise agreement, inventory, reservations
system and all “back office” operations.
b. Company A (an oil and gas exploration and production company) acquires a mineral interest from Company B.
The oil and gas production activities are in place. The target’s employees are not part of the transferred set.
Company A will take over the operations by using its own employees.
c. Biotech A acquires all of the outstanding shares in Biotech B, a development stage company that has a license for a
product candidate. Due to a loss of funding, Biotech B has no employees and no other assets. Neither clinical trials
nor development are currently being performed.
d. All of the examples are business combinations.

15. Which of the following statements is/are false about the recent amendment to the scope exceptions of IFRS 3?
Statement 1: Joint arrangements are outside the scope of IFRS 3, not just joint ventures.
Statement 2: 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 above

16. The following are true about the revised PFRS 3 – Business Combinations, except
a. A business combination could occur in the absence of a purchase transaction
b. The revised PFRS 3 provides that a transaction or other event is a business combination only if the assets acquired
and liabilities assumed constitute a business.
c. A business combination is the bringing together of separate entities or businesses into one reporting entity.
d. The revised version of PFRS 3 adopts an approach whereby the various components of a business combination are
measured at their acquisition date fair values, with a number of exceptions including that relating to the
measurement of non-controlling interests.

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 17. Which of the following statements is/are true about the recognition of NCI under IFRS 3?
Statement 1: The acquirer recognizes NCI, if any, and measures all NCI at either fair value or at the NCI’s
proportionate share of the acquiree’s identifiable net assets acquired.
Statement 2: 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

18. Which statement is incorrect concerning an acquirer?

a. If a new entity is formed to issue equity interests to effect a business combination, the new entity formed is
necessarily the acquirer.
b. In a business combination effected by transferring cash or other assets, the acquirer is usually the entity that
transfers the cash or other assets.
c. The acquirer is usually the combining entity whose relative size is significantly greater than that of the combining
entity or entities.
d. The acquirer is usually the combining entity that pays a premium over the pre-combination fair value of the equity
interests of the other combining entity or entities.

19. Raymond Holding Inc., a sub-holding of the Lee Group, makes an offer for all the equity shares of Gel Ltd. On July 01,
2019. The consideration for the offer is 50,000 shares in Raymond together with P10,000,000 cash. The offer is
accepted on August 01, 2019. However, the offer is conditional upon receiving the approval of the competition
authority which is obtained on September 30, 2019. In the past, the competition authority has never rejected the
application for any merger or combination. The shares are exchanged on August 10, 2019. What is the date of
acquisition?
a. July 01, 2019, the date of the offer
b. August 01, 2019, the date the offer has been affected
c. August 10, 2019, the date the shares have been exchanged
d. September 30, 2019, the date of the approval by the competition authority

20. Sofia Inc. has completed the assessment of the fair value of the net assets of First Company to amount to P19,560,000.
The consideration payable for the acquisition equals P19,000,000. Additional 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 of P560,000 through Other Comprehensive Income 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 transaction costs.

21. 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 of 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

22. (amounts in ‘000) The consideration transferred in the business combination was P55,000. Transaction costs amount
of P1,000. The fair value of the acquiree’s net assets at the acquisition date was P63,000. The acquirer has not yet
decided whether to measure the 20% NCI in the acquiree at the NCI’s proportionate share of the fair value of the
acquiree’s net assets, which is P12,600, or at the NCI’s 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.

23. 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

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 incurred costs of P140,000 associated with legal fees and the valuation of Grande. The fair value of the net assets of
Grande amounted to P6,400,000. How should Ariana account for this acquisition?
a. Ariana shall book goodwill as an asset of P20,000.
b. 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.
c. 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.
d. 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 costs of issuing shares.

24. What is the third step in the acquisition method under IFRS 3?
a. Determining the total consideration
b. Determining the acquisition date
c. Recognizing and measuring goodwill or gain on bargain purchase
d. Identifying the acquirer
e. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest
in the acquiree.

25. According to IFRS 3, the closing date is the date when

a. The consideration was transferred c. The acquirer registers the shares issued to the SEC
b. The acquirer obtains control over the acquiree d. The transfer tax was settled with the BIR

TEST III. PROBLEM SOLVING (2 POINTS)

26. On June 30, 2020, White Corporation issued 100,000 shares of its P20 par value ordinary share for the net assets of
Black Company. The market value of White's ordinary share on June 30 was P38 per share. White paid a fee of
P100,000 to the broker who arranged this acquisition. Costs of SEC registration and issuance of the equity securities
amounted to, P50,000. Contingent consideration determined to be paid after acquisition amounts to P150,000.

What amount should White capitalize as the cost of acquiring Black's net assets. P3,950,000

27. Phil Co. acquires a controlling interest in Sill Co. for P450,000 in the open market. The P100 par ordinary share capital
of Sill Co. at the time of acquisition is P625,000 and its Retained Earnings mounts to P225,000. Sill Co. shares are
selling at P120 per share in the open market.

The gain on bargain purchase arising from acquisition assuming NCI is measure at fair value is P100,000

28. The statement of financial position of Undertaker Corporation on June 30, 2020 is presented in picture below:

Assets Liabilities and Shareholder’s Equity

Cash P 32,500 Liabilities P 87,500
Land 220,000 Ordinary Share Premium, P 5 par 150,000
Building 110,000 Share Premium 137,500
Equipment 87,500 Retained Earnings 75,000
Total Assets P 450,000 Total Liabilities and Equity P 450,000

All assets and liabilities of Undertaker assumed to approximate their fair values except for land and building. It is
estimated that the land have a fair value of P350,000 and the fair value of the building increased by P80,000. Triple H
Corporation acquired 80% of Undertaker’s ordinary shares for P500,000.

Assuming the consideration paid excludes control premium of P23,000 and the fair value of the non-controlling interest
is P122,750, how much is the goodwill / (gain on bargain purchase) on the consolidated financial statement?
P73,250

29. Leni acquires 80% of the ordinary shares of Target for P9,500,000 in cash. The total fair value of the equity
instruments issued by Target is P11,650,000 and the fair value of its identifiable net assets is P8,500,000. The market
value of the 20% of the ordinary shares owned by non-controlling shareholders is P1,900,000.

Assuming Leni opted to measure the non-controlling interests at proportionate share of identifiable net assets, how
much is the goodwill to be recognized on the consolidated statement financial position? P2,700,000

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 30. Condensed statements of financial position of Care Corp. and Charm Corp. as of December 31, 2019 were as follows
(see picture):

Care Corp. Charm Corp.

Current Assets P 275,000 P 65,000
Non-Current Assets 625,000 425,000
Total Assets P900,000 P490,000

Liabilities 65,000 35,000

Ordinary Share Capital 549,700 296,700
Ordinary Share Premium 35,300 28,300
Retained Earnings 250,000 130,000
Total Liabilities and Equity P900,000 P490,000

On January 01, 2020, Care Corp., issued 30,000 shares with a market value of P25/share for the assets and liabilities of
Charm Corp. Care Corp. also paid P125,000 cash. The book value reflects the fair value of the assets and liabilities,
except that the non-current assets of Charm Corp., have fair value of P630,000 and the non-current assets of Care Inc.
are overstated by P30,000. Contingent consideration, which is determinable, is equal to P15,000. Care paid for the
share issuance costs only amounting to P74,000 and incurred other acquisition costs amounting to P19,000.

As a result of acquiring the net assets of Charm Corp., compute the amount of goodwill. P230,000

31. Refer to No. 31, compute the consolidated equity of Care Corp. P1,492,000

32. On January 01, 2020, ALLAN acquired the identifiable net asset of WALKER Inc.. On this date, the identifiable assets
acquired and liabilities assumed have fair values of P6,400,000 and P3,600,000, respectively. ALLAN incurred the
following acquisition-related costs: legal fees, P40,000; due diligence costs, P400,000; and general & administrative
costs of maintaining an internal acquisition, P80,000.

As consideration, ALLAN issued bonds with face value and fair value of P4,000,000 before incurring transaction costs.
Transaction costs in issuing the bonds amounting to P200,000. How much is the goodwill (gain on bargain purchase)
on business combination? P1,200,000

33. SAN JOSE CORP acquired SR. GENO ‘s net assets by issuing its own P14 par value ordinary shares totaling 50,000
shares at market price of P 14.50 per share. SAN JOSE CORP had the following expenditures incurred and paid:

Finder s fee paid P 50,000

Pre-acquisition audit fee, 30% was paid 40,000
General Admin costs 15,000
Legal fees for the combination paid 32,000
Audit fees for SEC registration of share issue 46,000
SEC registration for the share issue paid 10,000
Share issuance cost paid (exclusive of any tax) 10,000
Other indirect cost 16,000
DST paid on the issuance for the combination 3,500

What is the total amount to be debited to expense / retained earnings account of SAN JOSE CORP? P197,500

34. On July 01, 2020, G Corp acquired most of the outstanding common stock of SANJO Corp for cash. The incomplete
working paper elimination entries on the date of the consolidated statement of financial position of G Corp and its
subsidiary are shown below:

Stockholders Equity-SANJO 2,437,500.00

Investment in Subsidiary 1,584,375.00
Non - Controlling interest 853,125.00

Inventories 62,500.00
Equipment 312,500.00
Patent 61,250.00
Goodwill ????
Investment in Subsidiary 468,750.00
Non - Controlling interest ???

Included in the purchase price is the control premium of P 68,750.00

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 What is the amount of goodwill to be recognized in consolidated financial position on July 01, 2020 assuming NCI is
measured at fair value and the fair value is P 1,150,000.00? P329,375.00

35. Corinthians Company acquired all of Hebrews Corporation's assets and liabilities on January 2, 2020, in a business
combination, at that date, Hebrews reported assets with a book value of P624,000 and liabilities of P356,000.
Corinthians noted that Hebrews had P40,000 of research and development costs on its books at the acquisition date that
did not appear to be of value. Corinthians also determined that patents developed by Hebrews had a fair value of
P120,000 but had not been recorded by Hebrews. Except for building and equipment, Corinthians determined the fair
value of all other assets and liabilities reported by Hebrews approximated the recorded amounts. In recording the
transfer of assets and liabilities to its books, Corinthians recorded goodwill of P93,000. Corinthians paid P517,000 to
acquire Hebrews' assets and liabilities. If the book value of Hebrews' buildings and equipment was P341,000 at the date
of acquisition, what was their fair value? P417,000

36. In December 01 2019, LO COMPANY started negotiating for the acquisition of DI COMPANY. The offer was for
shareholders of DI to receive one share from LO with a market value of P125 for every four shares held in
exchange for the net assets of DI Company (except cash and shares in listed companies). In addition to the shares, LO
will transfer its shares in listed companies which has a fair market value of P750,000. LO will also pay DI P3,000,000
cash. The shareholders of DI COMPANY accepted the offer. The statement of financial position on December 31, 2019
is given below:

LO DI
Cash 7,250,000 260,000
Accounts Receivable 1,700,000 1,065,000
Inventory 2,800,000 1,500,000
Shares in Listed Company 800,000 1,100,000
Land and Building 3,500,000 2,000,000
Property, Plant and Equipment 6,500,000 5,250,000
Accounts Payable 3,250,000 2,000,000
Mortgage Payable 7,500,000 1,500,000
Share Capital, P50 par 10,000,000 7,500,000
Retained Earnings 1,800,000 175,000

The assets of DI are reflected at their fair values except for the following:
 Inventory, P1,300,000 fair market value.
 Land and building, P4,000,000 fair market value.
 Shares in listed companies, P900,000 fair market value.
 Property, Plant and Equipment is overdepreciated by P150,000.

LO COMPANY also incurred the following in the business combination: Legal fees - P50,000; Finder’s fees - P25,000;
CPA audit fees - P50,000 and Printing of stock certificates - P65,000. How much is the total assets of LO COMPANY
after the business combination? P30,497,500

37. On July 01, 2018, PARA COMPANY acquired 100% of SAYO COMPANY for a consideration transferred of
P1,200,000. At the acquisition date, the carrying amount of the net assets of SAYO was P1,000,000 with provisional
fair value of P800,000. An additional valuation received on May 1, 2019 increased this provisional valuation by
P250,000 and on July 30, 2019 this fair value was finalized at P750,000. What amount of goodwill should be presented
on December 31, 2019? P150,000

38. On January 2, 2018, PERRY COMPANY purchased the net asset of SISSY COMPANY (excluding cash) by paying
P850,000 cash and issuing 10,000 shares with a fair value of P1,110,000. The par value of PERRY shares is P100 per
share. The book values and fair values of the net assets of SISSY are as follows:

Book Value Fair Value

Cash 300,000 300,000
Accounts Receivable 980,000 980,000
Inventory 710,000 600,000
Property, Plant and Equipment 1,610,000 1,144,000
Accounts Payable 570,000
Share Capital, P100 par 600,000
Share Premium 960,000
Retained Earnings 1,470,000

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 At this date, PERRY COMPANY has the following equity: Share Capital – P1,600,000; Share Premium – P900,000
and Retained Earnings – P540,000. PERRY incurred and paid legal and brokerage fees of P25,000 for business
combination; share issue costs of P25,000 and P12,000 indirect acquisition costs. It is determinable that contingency
fee of P118,000 would be paid within the year. How much is the total retained earnings after business combination?
P579,000

39. Maynard Corporation reports net assets of P300,000 at book value. These assets have an estimated market value of
P350,000. Jim Corporation buys 80% ownership of Maynard for P300,000; there is a control premium of P15,000
included in the purchase price.

Of the Goodwill reported in the consolidated balance sheet (as of date of acquisition), how much is attributable to the
non-controlling interest? P1,250

40. The Boy George Company acquired the net assets of the Girl Conrad Company on January 01, 2020, and made the
following entry to record the purchase:

Current Assets 100,000

Equipment 150,000
Land 50,000
Buildings 300,000
Goodwill 100,000
Liabilities 80,000
Common stock, P1 par 100,000
Paid-in capital in excess of par 520,000

Assuming that additional shares on January 01, 2022 would be issued on that date to compensate for any fall in the
value of Boy George common stock below P16 per share. The settlement would be to cure the deficiency by issuing
added shares based on their fair value on January 01, 2022. The fair price of the shares on January 01, 2022 was P10.

What is the additional number of shares issued on January 1, 2022 to compensate for any fall in the value of the stock?
60,000 shares

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