BUSINESS COMBINATION

1. It is the bringing together of separate entities or businesses into one reporting entity.

a. Business combination
b. Merger
c. Consolidation
d. Intercorporate directorship

2. It is that portion of the profit or loss and net assets of a subsidiary attributable to equity
interests that are not owned directly by the parent.

a. Controlling interest
b. Minority interest
c. Subsidiary interest
d. Residual interest

3. Which statement is correct concerning business combinations?

1. All business combinations shall be accounted for by applying the purchase method.

II. The purchase method views a business combination from the perspective of the
combining entity that is identified as the acquirer.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

4. Which statement is incorrect concerning an acquirer?

a. An acquirer shall be identified for all business combinations

b. The acquirer purchases net assets and recognizes the assets acquired and liabilities and
contingent liabilities assumed, including those not previously recognized by the acquiree.
c. Because the purchase method views a business combination from the acquirer's
perspective, it is assumed that one of the parties to the transaction can be identified as the
acquiree.
d. The acquiree is the combining entity that obtains significant influence over the other
combining entities or businesses.

5. Although sometimes it may be difficult to identify an acquirer, there are usually

indications that one exists Choose the incorrect statement.
a. If the fair value of one of the combining entities is significantly greater than that of the
other combining entity, the entity with the greater fair value is likely to be the acquirer.
b. If the business combination effected the exchange of voting equity instruments for cash
or other assets, the entity giving up cash or other assets is likely to be acquirer.
c. If the business combination results in the management of one of the combining entities
being able to dominate the selection of the management team of the resulting combined
entity, the entity whose management is able to dominate is likely to be the acquirer
d. When a new entity is formed to issue equity instruments to affect a business
combination, the new entity shall be identified as the acquirer.

6. A business combination is accounted for at cost which includes

I. The fair values at the date of exchange of assets given, liabilities incurred or assumed,
and equity instruments issued by the acquirer in exchange for control of the acquire.

II. Costs directly attributable to the business combination.

a. I only
b II only
c. Both I and II
d. Neither I nor II

7. Costs directly attributable to a business combination include

a. General administrative costs

b. Costs of arranging and issuing financial liabilities
c. Costs of issuing equity instruments
d. Professional fees paid to accountants, legal advisers, valuers and consultants to effect
the combination.

8 Which statement is correct concerning the treatment of goodwill arising from a business
combination?

a. Goodwill is carried at cost less accumulated amortization and any accumulated

impairment losses.
b. Goodwill is carried at cost less any accumulated impairment losses.
c. Goodwill is carried at cost without amortization and impairment.
d. Goodwill is not recognized as an asset.

9. A corporation is specifically organized to acquire the assets and liabilities of two or

more previously existing companies. A new corporation is formed and the original
companies are dissolved. This is known as

a. Consolidation
b. Merger
c. Acquisition method
d. None of these
10. A business combination whereby the company taking over the properties of other
companies retains its identity and continuous as larger unit and the other companies are
dissolved is known as

a. Consolidation
b. Merger
c. Acquisition method
d. None of these

11. The result of acquiring control of one or more enterprises by another enterprise of the
uniting of interest of two or more enterprises

a. Pooling interest
b. Merger
c. Business combination
d. Consolidation

12. BCD Corporation on acquired UVW Corporation through a business combination

accounted for as a purchase. The appraised or market value of the identifiable assets
acquired less liabilities assumed exceeds the acquisition price paid by BCD for UVW.
The excess appraisal or market value should be

a. Reported as a gain or income from acquisition.

b. Allocated to reduce proportionately the values assigned to current assets and deferred
credit for any unallocated portion.
c. Allocated to reduce proportionately the values assigned to noncurrent assets (except
long term investment in marketable equity securities) and a deferred credit for any
unallocated portion.
d. Allocated pro-rata to reduce proportionately the values assigned current and non-
current assets and a deferred credit for any unallocated portion.

13. Under PFRS 3, which of the following would not contribute to negative goodwill?

A. A bargain purchase.
B. Making acquisitions at the top of a "bull" market for shares.
C. Errors in measuring the fair value of the acquiree's net identifiable assets.
D. A requirement to measure net assets acquired at a value other than fair value.

14. In a business combination, what is the accounting treatment if an acquirer's interest in

the fair value of the net assets acquired exceeds the consideration transferred?

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

15. During the current year, an entity acquired another entity in a transaction properly
accounted for as a business acquisition. At the time of the acquisition, some of the
information for valuing assets was incomplete. How should the acquirer account for the
incomplete information in preparing the financial statements immediately after the
acquisition?

A. Record the uncertain item s at the carrying amount of the acquiree.

B. Do not record the uncertain items until complete information is available.
C. Record a contra account to the investment account for the amount involved.
D. Record the uncertain item at a provisional amount measured at the date of acquisiton.

16. When does the measurement period end for a business combination in which there
was incomplete accounting information on the date of acquisition?

A. Thirty days from the date of acquisition.

B. On the final date when all contingencies are resolved.
С. At the end of the reporting period in the year of acquisition.
D. When the acquirer receives the information or one year from the acquisition date,
whichever occurs earlier.

CONSOLIDATED FINANCIAL STATEMENTS

1. If the acquirer's interest in the net fair value of the identifiable assets, liabilities and
contingent liabilities exceeds the cost of the business combination, the acquirer shall

I. Reassess the identification and measurement of the acquiree's identifiable assets,

liabilities and contingent liabilities and the measurement of the cost of the combination.

II. Recognize immediately in profit or loss any excess remaining after the reassessment.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

2. Which statement is incorrect concerning the preparation of consolidated financial

statements?
a. The financial statements of the parent and its subsidiaries shall be consolidated on a
line by line basis by adding together like items of assets, liabilities, equity, income and
expenses.
b. Intragroup balances, transactions, income and expenses shall be eliminated in full.
c. When the reporting dates of the parent and a subsidiary are different, the difference
shall be no more than six months.
d. Consolidated financial statements shall be prepared using uniform accounting policies
for like transactions and other events in similar circumstances.

3. A subsidiary shall be excluded from consolidation when

I. Its business activities are dissimilar from those of the enterprise within the group.

II. Control is intended to be temporary because the subsidiary is acquired and held
exclusively with a view to its disposal within 12 months from acquisition.

III. It operates under sever long-term restrictions which significantly impair its ability to
transfer funds to the parent but the parent continues to control the subsidiary.

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

4. Minority interests shall be presented in the consolidated balance sheet

a. Separately from liabilities and the parent stockholders' equity

b. Within equity, separately from the parent shareholders' equity
c. As noncurrent liability
d. As component of the parent stockholders' equity

5. If goodwill arising from the consolidation appears among the assets on the
consolidated balance sheet of a parent company and its only subsidiary, this indicates that
the subsidiary

a. Was acquired at a price that was less than the underlying book value of its tangible
assets
b. Was accounted for as a pooling of interests
c. Already had goodwill on its books
d. Was acquired at a price in excess of the underlying fair value of its net assets.
6. Which of the following is the appropriate basis for valuing fixed assets acquired in a
business combination accounted for as a purchase carried out by exchanging cash or
common stock?

a. Historical cost
b. Book value
c. Cost plus any excess of purchase over book value of asset acquired
d. Fair value

7. When an investor uses the cost method to account for investments in common stock,
cash dividends received by the investor from the investee should normally be recorded
as:

a. Dividend income
b. An addition to the investor's share of the investee's profit
c. A deduction from the investor's share of the investee's profit
d. A deduction from the investment account

8. On October 1, X Company acquired for cash all the outstanding common stock of Y
Company. Both companies have a December 31 year-end and have been in business for
many years. Consolidated net income for the year ended December 31 should include net
income of

a. X Company for 3 months and Y Company for 3 months

b. X Company for 12 months and Y Company for 3 months
c. X Company for 12 months and Y Company for 12 months
d. X Company for 12 months but no income from Y Company distributes a dividend

9. Which of the following is correct?

a. The noncontrolling stockholders' claim on the subsidiary's net asset is based on the
book value of the subsidiary's net assets.
b. Only the parent's portion of the differences between book value and fair value of the
subsidiary's assets is assigned to those assets.
c. Goodwill represents the difference between the book value of the subsidiary's net
assets and the amount paid by the parent to buy ownership.
d. Total assets reported by the parent generally will be less than the total assets reported
on the consolidated balance sheet.

10. In the preparation of a consolidated income statement:

a. Income assigned to noncontrolling shareholders is always computed as a pro rata

portion of the reported net income of the consolidated entity.
b. Income assigned to noncontrolling shareholders is always computed as pro rata portion
of the reported net income of the subsidiary.
c. Income assigned to noncontrolling shareholders in the current period is likely to less
than a pro rata portion of the reported net income of the subsidiary in the current period if
the subsidiary had an unrealized gain on an intercorporate sale of depreciable assets in the
preceding period.
d. Income assigned to noncontrolling shareholders in the current period is likely to be
more than a pro rata portion of the reported net income of the subsidiary in the current
period if the subsidiary had an unrealized gain on an intercorporate sale of depreciable
assets in the preceding period.

11. In a consolidated balance sheet, the non-controlling (minority) interest under the
equity concept is shown

A. separately within the equity section.

B. separately within the noncurrent liabilities.
C. separately within the noncurrent investments.
D. as part of the total current liabilities of the group.

12. In the separate financial statements of a parent entity, investments in subsidiaries that
are not classified as held for sale should be accounted for

A. at cost.
B. using the equity method
C. in accordance with PAS 39/PFRS 9.
D. at cost or in accordance with PAS 39/PFRS9

13. Under PFRS 10, when a parent loses control of a subsidiary, it must recognize any
investment retained in the former subsidiary at

A. carrying amount.
B. fair value, with any gain or loss recognized in profit or loss.
C. fair value, with any gain or loss recognized in other comprehensive income.
D. original acquisition cost, adjusted for any dividend received from the subsidiary.

14. A parent is not required to present consolidated financial statements when

A. the parent is wholly owned subsidiary.

B. the parent and the subsidiary are engaged in dissimilar activities.
C. there is a three-month time lag in the fiscal periods of the parent and its subsidiary.
D. the parent is virtually wholly owned provided parent does not obtain the approval of
the owners of the minority interest.

15. Under PAS 27, which supports the ENTITY concept, the non-controlling interests in
the consolidated statement of financial position must be prepared
A. within long-term liabilities.
B. within the parent shareholders' equity.
C. within equity but separate from parent's equity.
D. between long-term liabilities and current liabilities.

16. Under PFRS 10, an investor controls an investee if the investor has all following,
except

A. The power over the investee.

B. Exposure or rights to variable returns from the involvement with the investee.
C. The ability to use the power over the investee to affect the amount of the investor's
returns.
D. All of these indicate control

17. If the investor owns 60% of the investee's outstanding ordinary shares, the investor
should generally account for this investment under the

A. consolidation method.
B. consolidation equity method.
C. cost method.
D. fair value method.

18. The noncontrolling interest should be recorded at what amount?

A. The fair value of the shares not held by the acquirer.

B. The fair value of the shares not held by the acquirer or the proportionate share of the
fair value of net identifiable assets of the acquiree.
C. The proportionate share of the carrying amount of net identifiable assets of the
acquiree.
D. The fair value of the shares held by the non-controlling interest plus goodwill.

19. Which of the following conditions are required to exclude a subsidiary from
consolidation?

A. The parent must own 100% of the subsidiary.

B. The parent makes an election not to consolidate.
C. The other owners do not object to the non-consolidation.
D. The other owners do not object to the consolidation and the subsidiary does not have
any publicly traded debt or equity instruments.

20. Investor’s investment account is affected by investor’s share of the earnings of the
investee after date of acquisition under cost method and equity method, respectively
a. No effect, Increase
b. Increase, Increase
c. Increase, No effect
d. No effect, No effect
For items 1 and 2:

On January 2, 2021, the Statement of Financial Position of Parent Company and

Subsidiary Company immediately before the combination are:
Parent Co. Subsidiary Co.
Cash P450,000 P15,000
Inventories 300,000 30,000
Property and equipment (net) 750,000 105,000
Total Assets P1,500,000 P150,000

Current Liabilities P90,000 P15,000

Ordinary shares, P100 par 150,000 15,000
Share premium 450,000 30,000
Retained earnings 810,000 90,000
Total Liabilities and Stockholders' Equity P1,500,000 P150,000

The fair value of Subsidiary Company’s equipment is P153, 000.

Assume the following independent cases:

1. Assuming Parent Company acquired 80% of the outstanding shares of Subsidiary

Company for P136, 800 and non-controlling interest is measured at the proportionate
share of Subsidiary Company’s identifiable net assets, how much is the consolidated
stockholder’s equity on the date of acquisition?

a. P1, 410,000
b. P1, 419,600
c. P1, 446,600
d. P1, 456,200

2. Assuming Parent Company acquired 90% of the outstanding shares of Subsidiary

Company for P243, 000 and non-controlling interest is measured at fair value, how much
is the total consolidated assets on the date of acquisition?

a. P1, 542,000
b. P1, 785,000
c. P1, 737,000
d. P1, 494,000
For items 3 to 6:

P Co. acquires 20% ownership in S Co. at January 1, 2020 for P1, 750,000 cash which is
the fair value of the investment at that date. P Co. has concluded that he does not have
significant influence over S Co. At that date the fair value of S Co.’s identifiable assets
were P5, 000,000 (including land of P4, 000,000) and the carrying amount were P4,
000,000 (including Land P3, 000,000). S Co. has no liabilities and contingent liabilities at
that date.

For the year ended December 31, 2020, S Co. reported a profit of P3, 000,000, but does
not pay any dividends. In addition, the fair value of S Co.’s land increases by P1,
500,000. However, the carrying amount of the land remained unchanged at P3, 000,000.
Below is the statement of financial position of S Co. together with the fair values of
identifiable assets at December 31, 2020:

Carrying
amount Fair value
Cash and receivables P4,000,000 P4,000,000
Land 3,000,000 5,500,000
P7,000,000 P9,500,000

Ordinary shares (1, 000,000) P2,500,000

Retained earnings 4,500,000
P7,000,000

On January 1, 2021, P Co. acquired another 60% ownership interest in S Co. for P11,
000,000 cash. P Co.’s initial 20% investment in S Co. was measured at its fair value at
that date of P3, 500,000. However, S Co.’s 1, 000,000 ordinary shares have a quoted
price at December 31, 2020 of P15 per share. Therefore, the carrying amount of P Co.’s
initial 20% investment is re-measured to P3, 000,000 at December 31, 2020 with P1,
250,000 increase was recognized as a component of other comprehensive income. P Co.’s
statement of financial position on December 31, 2020 before acquiring the additional
60% was as follows:

Cash P13,250,000
Investment in S Co. 3,000,000
P16,250,000

Ordinary Shares P15,000,000

Unrealized gain on equity investment - FVOCI 1,250,000
P16,250,000
3. Assume P Co. measures non-controlling interest using proportionate value of the net
identifiable assets acquired, what is the amount of goodwill to be recognized in the
consolidated financial statements?

a. P3, 000,000
b. P1, 500,000
c. P6, 500,000
d. P6, 400,000

4. What is the balance of P Co.’s Investment in S Co. account in the consolidated

financial statements immediately after acquiring the additional 60% interest?

a. P1, 250,000
b. P2, 500,000
c. P0
d. P14, 000,000

5. What is the balance of the retained earnings in P Co. consolidated financial statements?

a. P1, 250,000
b. P650, 000
c. P5, 500,000
d. P6, 400,000

6. What is the balance of the non-controlling interest in P Co.’s consolidated financial

statements?

a. P1, 900,000
b. P0
c. P2, 500,000
d. P1, 250,000

7. Blue Co. merged into Soda Corp. on June 30, 2020. In exchange for the net assets at
fair market value of Blue Co. amounting to P2, 875,800, Soda issued 68, 000 ordinary
shares at P36 par value, with at a market price of P41 per share. Relevant data on
ordinary shareholders’ equity immediately before the combination show:

Soda Blue
Share Capital P8, 790,000 P2, 030,000
Share Premium 3, 834,000 782, 000
Retained earnings (deficit) (1, 516,000) 495, 000

Out of pocket costs of the combination were as follows:

  Legal fees for the contract of business combination P174, 700
 Audit fee for SEC registration of stock issue 198, 400
 Printing costs of stock certificates 144, 900
 Broker’s fee 135, 000
 Accountant’s fee for pre-acquisition audit 161, 000
 Other direct cost of acquisition 90, 400
 General and allocated expenses 115, 300
 Listing fees in issuing new shares 172, 000

 Included as part of the acquisition agreement is the additional cash consideration

of P163, 000 in the event Soda Co.’s share price will reach P32 per share by year-
end.
 At acquisition date, the share price is P27.50, and increased by P4.80 by
December 31, 2020.
 At acquisition date, there was only a low probability of reaching the target share
price, so the fair value of the additional consideration was determined at P74, 000.

What is the amount of expense to be recognized in the statement of comprehensive

income for the year ended December 31, 2020?

a. P676, 400
b. P851, 700
c. P848, 400
d. P937, 400

For items 8 and 9:

On January 1, 2021, Parent Inc, acquired all the assets and liabilities of Subsidiary Inc. by
issuing 50,000 shares. On this date the fair value of Parent Inc.'s shares is P50 per share
and its par value is P10 per share. On January 1, 2021, the book value of Subsidiary's
total assets is P2,500,000 and its fair value is P3,000,000 while its total liabilities book
value and fair value are P1,2000,000 and P1,000,000 respectively.

Parent and Subsidiary agreed that Parent shall issue additional 2,000 shares to the former
owners of Subsidiary if the market price per share of Parent Inc.'s shares increases to P55
per share as of December 31, 2021.

On the date of acquisition, the contingent consideration that was probable and reasonably
estimated amounted to P100, 000.

On December 31, 2021, the actual market price of Parent Inc.’s shares is P60. The
contingent consideration is settled on March 1, 2022.

8. Which of the following is incorrect?

a. Parent will credit ordinary share amounting to P500, 000 on the date of acquisition.
b. The goodwill from business combination is P600, 000.
c. On March 1, 2022, Parent will credit ordinary share amounting to P100, 000.
d. On March 1, 20222, the total share premium will decrease by P20, 000.

9. Assuming the actual market price of Parent share on December 31, 2021 is P52. Which
of the following statements is incorrect?

a. The goodwill from business combination is P600, 000.

b. The total share premium to be recorded on the January 1, 2021 from the acquiring
subsidiary is P2, 100,000.
c. The ordinary share to be credited on January 1, 2021 is P500, 000.
d. Parent will credit gain on extinguishment of contingent consideration on March 1,
2022 amounting to P100,000.

10. On January 1, 2020, VECTOR acquired 90% of the equity share capital of FERN in a
share exchange in which Vector issued two new shares for every three shares it acquired
in Fern. Additionally, on December 31, 2020, Vector will pay the shareholders of Fern
P13.2 per share acquired. Vector's cost of capital is 10% per annum. At the date of
acquisition, shares in Vector and Fern had a stock market value of P48.75 and P18.75
each, respectively. Income statements for the year ended September 30, 2020:

Vector Fern
Revenue P4,845,000 P2,850,000
Cost of Sales 3,840,000 1,950,000
Gross Profit 1,005,000 900,000
Distribution cost 102,000 130,500
Administrative expense 285,000 180,000
Investment Income 37,500 -
Finance costs 31,500 -
Profit before tax 624,000 589,500
Income tax expense 210,000 120,000
Profit for the year 414,000 469,500

Equity as at October 1, 2109

Equity shares of P7.50 each P1,800,000 P562,500
Retained earnings 4,050,000 2,625,000

At the date of acquisition, the fair values of Fern's assets were equal to their carrying
amounts with the exception of Land which had a fair value of P135,000 above its
carrying amount. Also, Fern had a contingent liability which Vector estimated to have a
fair value of P337,500. This has not changed as at 30 September 2020. Fern has not
incorporated these fair value changes into its financial statements. Vector's policy is to
value the non-controlling interest at fair value at the date of acquisition. For this purpose,
Fern's share price at that date can be deemed to be representative of the fair value of the
shares held by the non-controlling interest.

Compute the goodwill (gain on acquisition) resulting on the date of acquisition.

a. (P160, 500)
b. P235, 125
c. P211, 613
d. P42, 000

CONSOLIDATED FINANCIAL STATEMENTS – SUBSEQUENT

On January 1, 2020, Entity A acquired 70% of outstanding ordinary shares of Entity B at

a price of P210,000. On the same date, the net assets of Entity B were reported at P260,
000. On January 1, 2020 Entity A reported retained earnings of P2, 000,000 while Entity
B reported retained earnings of P200, 000. All the assets and liabilities of Entity B are
fairly value except machinery which is undervalued by P80, 000 and inventory which is
overvalued by P10, 000. The said machinery has remaining useful life of four years while
40% of the said inventory remained unsold at the end of 2020.

For the year ended December 31, 2020, Entity A reported net income of P1,000,000 and
declared dividends of P150,000 in the separate financial statements while Entity B
reported net income of P150,000 and declared dividends of P20,000 in the separate
financial statements.

Entity A accounted the investment in Entity B using cost method in the separate financial
statements.

1. What is the non-controlling interest in the net assets on December 31, 2020?

a. P124, 800
b. P130, 200
c. P126, 000
d. P133, 800

2. What is the consolidated net income attributable to parent shareholders for the year
ended December 31, 2020?

a. P1, 102, 200

b. P1, 162,200
c. P1, 141,200
d. P1, 095,200

3. What is the amount of consolidated retained earnings on December 31, 2020?

a. P3, 012,200
b. P2, 991,200
c. P2, 952,200
d. P2, 945,200

CONSOLIDATED FINANCIAL STATEMENTS – INTERCOMPANY

TRANSACTIONS

For items 1 to 4:

On January 1, 2020, Entity A acquired 60% of outstanding ordinary shares of Entity B at

a gain on bargain purchase of P40, 000. For the year ended December 31, 2021, Entity A
and Entity B reported sales revenue of P2,000,000 and P1,000,000 in their respective
separate income statements. At the same year, Entity A and Entity B reported cost of
goods sold of P1, 200,000 and P700, 000 in their respective separate income statements.

During 2020, Entity A sold inventory to Entity B at a selling price of P280, 000 with
gross profit rate of 40% based on cost. On the other hand, Entity B sold inventory to
Entity A at a selling price of P400, 000 with gross profit rate of 30% based on sales
during 2021.

On December 31, 2020, 25% of the goods coming from Entity A remained in Entity B's
inventory but all were eventually sold to third persons during 2021. As of December 31,
2021, 40% of the goods coming from Entity B were eventually sold to third persons.

For the year ended December 31, 2021, Entity A reported net income of P560, 000 while
Entity B reported net income of P200, 000 and distributed dividends of P50, 000. Entity
A accounted for its inventory in Entity B using cost method in its separate financial
statements.

1. What is the consolidated sales revenue for the year ended December 31, 2021?

a. P2, 600,000
b. P2, 320,000
c. P3, 000,000
d. P2, 720,000

2. What is the consolidated gross profit for the year ended December 31, 2021?

a. P1, 120,000
b. P1, 048,000
c. P1, 028,000
d. P1, 152,000
3. What is the non-controlling interest in net income for the year ended December 31,
2021?

a. P100, 800
b. P59, 200
c. P51, 200
d. P88, 000

4. What is the consolidated net income attributable to parent shareholders for the year
ended December 31, 2021?

a. P766, 800
b. P596, 800
c. P606, 800
d. P626, 800

For items 5 to 8:

On January 1, 2020, Entity A acquired 80% of outstanding ordinary shares of Entity B at

a gain on bargain purchase of P180, 000. The following intercompany transactions
occurred for between the two entities:

 On January 1, 2020, Entity B sold a land to Entity A with a cost of P1, 000,000 at
a selling price of P1,100,000. The land was eventually sold by Entity A to third
persons during 2021.
 On January 1, 2020, Entity A sold a white machinery to Entity B with a cost of
P200,000 and accumulated depreciation of P40,000 at a selling price of P180,000.
The machinery is already 4 years old at the date of sale. The residual value of
white machinery is immaterial.
 On July 1, 2021, Entity B sold a black machinery to Entity A at with a cost of
P270,000 and accumulated depreciation of P180,000 at a selling price of P60,000.
The machinery is already 6 years old at the date of sale. The residual value of
black machinery is immaterial.

For the year ended December 31, 2021, Entity A reported net income of P800,000 while
Entity B reported net income of P500,000 and distributed dividends of P150,000. Entity
A accounted for its inventory in Entity B using cost method in its separate financial
statements.

5. What is the consolidated depreciation expense of machinery for 2021?

a. P40, 000
b. P55, 000
c. P61, 667
d. P42, 333
6. What is the consolidated carrying amount of machinery on December 31, 2021?

a. P225, 000
b. P215, 000
c. P200, 000
d. P210, 000

7. What is the non-controlling interest in net income for 2021?

a. P124, 000
b. P105, 000
c. P125, 000
d. P104, 000

8. What is the consolidated net income attributable to parent shareholders for 2021?
a. P1, 326,250
b. P1, 206,250
c. P1, 098,750
d. P1, 181,250

FOREX

Problem 1

On November 1, 2020, an entity acquired on account goods from a foreign supplier at a

cost of $1,000. The accounts payable are paid on January 30, 2021.

On December 1, 2020, an entity sold on account the said goods to a foreign customer at a
selling price of $1,500. The accounts receivable are collected on February 28, 2021.

The entity is operating in Philippine economy wherein the functional currency is the
Philippine Peso.

Buying spot rate Selling spot rate

November 1, 2020 P40 P42
December 1, 2020 39 40
December 31, 2020 45 47

1. What is the sales revenue for 2020?

a. P58, 500
b. P60, 000
c. P67, 500
d. P72, 000

2. What is the carrying amount of accounts receivable on December 31, 2020?

a. P58, 500
b. P60, 000
c. P67, 500
d. P72, 000

3. What is the carrying amount of accounts payable on December 31, 2020?

a. P40, 000
b. P42, 000
c. P45, 000
d. P47, 000

4. What is the net foreign currency gain for 2020?

a. P4, 000
b. P5, 000
c. P3, 000
d. P6, 000

Problem 2

Vector Corporation issued a promissory note denominated in foreign currency for the
purchase made from a supplier in England on December 1, for a 60-day, 18% promissory
note for 108,000 pounds, at a selling rate of IFC to P74.20. On December 31, the selling
spot rate is 1FC to P74.85. On January 30, the selling spot rate is 1FC to P75.75.

On the settlement date, how much is the foreign exchange gain/loss?

a. P172, 422 gain

b. P100, 116 loss
c. P172, 422 loss
d. P98, 658 loss

Problem 3

Uragon Company sold warehouse facilities for $8,340,000 to a customer in Oregon, USA
on November 02, 2020. Collection in US dollars was due on January 31, 2021. On the
same date, to hedge this foreign currency exposure, Uragon Company entered into a
forward contract to sell $8,340,000 to Export bank for delivery on January 31, 2021.
Indirect exchange rates on different dates were as follows:

Nov. 1 Dec. 31 Jan. 31

Spot rate 0.02387 0.02457 0.02494
30-day futures 0.02364 0.02475 0.02278
60-day futures 0.02392 0.02481 0.02437
90-day futures 0.02463 0.02403 0.02304

1. How much is the effect on earnings due to hedged item in the December 31, 2020
profit and loss statement?

a. (P10,008,000)
b. (P5,838)
c. P10,008,000
d. 5,838

2. How much is the effect on earnings due to hedging instrument in the 2021 profit and
loss statement?

a. P2, 502,000
b. P1, 585
c. (P2, 502,000)
d. (P1, 585)

Problem 4

Barako Company acquired a heavy equipment for $14,100 from a supplier in Detroit,
USA on December 1, 2020. Payment in US dollars was due on March 31, 2021. On the
same date, to hedge this foreign currency exposure, Barako entered into a forward
contract to purchase $14,100 from Citibank for delivery on March 31, 2021. Direct
exchange rates for dollars on different dates were as follows:

Spot Rates
Bid Offer
December 1, 2020 41.6 41.4
December 31, 2020 42.5 42.3
March 31, 2021 43.4 43.7

Forward Rates
Dec. 1 Dec. 31 March 31
30-day futures 42.3 41.8 43.2
60-day futures 41.8 42.2 42.6
90-day futures 40.6 42.5 43.4
120-day futures 42.2 42.8 42.9

1. What is the reported value of the liability to the vendor at December 31, 2020?
a. P596, 430
b. P599, 250
c. P596, 400
d. P599, 200

2. What is the net impact in Barako Company's income in 2020 as a result of this hedging
activity?

a. P8, 460 net gain

b. P8, 460 net loss
c. P8, 500 net gain
d. P8, 500 net loss

Problem 5

On November 2, 2020, P Corp entered into a firm commitment with Japanese firm to
acquire equipment, delivery and passage of title on March 31, 2021, at a price of 4,375
yen. On the same date, to hedge against unfavorable changes in the exchange rate of the
yen, P Corp. entered into a 150 day forward contract with BPI for 4,375 yen. The relevant
exchange rates were as follows:

11/2/2020 12/31/2020 3/31/2021

Spot Rate P37 P38 P35
Forward Rate P40 P33 P35

1. What is the foreign currency gain/(loss) due to the change in the fair value of the
underlying purchase commitment on December 31, 2020?

a. P30, 625 gain

b. P30, 625 loss
c. P4, 375 gain
d. P4, 375 loss

2. What is the amount debited to the equipment account?

a. P161, 875 on 11/2/2020

b. P175, 000 on 11/2/2020
c. P153, 125 on 3/31/2021
d. P175, 000 on 3/31/2021

Problem 6

On November 1, 2020, 7D Co, entered into a firm commitment with Toki-Toki Japanese
Company for the export of dried mangoes with a contract price of 10,000 Yen. The goods
will be delivered by 7D Co. on January 30, 2021. On the same day, in order to protect
 itself from the risk of changes in fair value of the firm commitment due to changes in
underlying foreign currency, 7D Co. entered into a forward contract with BDO for the
sale of 10,000 Yen at the forward rate on November 1, 2020. IAS 39 provides that hedge
of the foreign currency risk of a firm commitment may be accounted for as either fair
value hedge or cash flow hedge. 7D Co. elected to account for the hedge of the firm
commitment using fair value hedge. The following direct exchange rates are provided:

November 1, 2020 December 31, 2020 January 30, 2021

Buying spot rate P10 P13 P12

Selling spot rate P13 P15 P16
Forward buying 90-days P11 P14 P15
Forward selling 90-days P13 P16 P17
Forward buying 60-days P14 P17 P16
Forward selling 60-days P15 P18 P14
Forward buying 30-days P11 P15 P12
Forward selling 30-days P13 P11 P14

1. What is the foreign currency gain/(loss) due to hedged item for the year ended
December 31, 2020?

a. P40, 000 gain

b. P20, 000 loss
c. P30, 000 gain
d. P10, 000 loss

2. What is the foreign currency gain (loss) due to hedging instrument for the year ended
December 31, 2021?

a. P50, 000 loss

b. P30, 000 gain
c. P20, 000 gain
d. P20, 000 loss

Problem 7

On October 1, 2020, the company took delivery from a Bahrain firm of inventory costing
850,000 dinar. Payment is due on January 30, 2021. Concurrently the company paid P11,
700 to acquire an at-the-money call option for 850,000 Bahrain dinar. The strike price is
P9.40.
 Market Price Fair Value of the call option

October 1, 2020 9,400 11,700

December 31, 2020 9,423 23,200
January 30, 2021 9,435 29,750

1. If changes in the time value will be excluded from the assessment of hedge
effectiveness, what is the forex gain (loss) on the hedging instrument due to change in the
ineffective portion on December 31, 2020?

a. P8, 050
b. (P8, 050)
c. P19, 550
d. (P19, 550)

2. If changes in the time value will be included in the assessment of hedge effectiveness,
what is the forex gain (loss) in the hedging instrument in 2021?

a. P5, 250
b. P7, 650
c. (P4, 300)
d. P6, 550

3. If split accounting is used in the assessment of hedge effectiveness, what is the forex
gain (loss) on the option contract due to change in intrinsic value on December 31, 2021?

a. P10, 200
b. P5, 100
c. P12, 750
d. (P7, 500)

Problem 8

On October 1, 2020, 5J Inc. sold on account an inventory to a US-based company at a

price of $5,000 collectible on January 30, 2021. On November 1, 2020, 5J purchased on
account an inventory to a US-based company at a price of $8,000 payable on March 2,
2021.

On October 1, 2020, in order in hedge the foreign currency risk related to its foreign
currency denominated account receivable, 5J enquired a 120-day put option from RCBC
to sell $5,000 at a strike price of P40 by raying option premium of P500. On November 1,
2020, in order to hedge the foreign currency risk related to its foreign currency
denominated account payable, 5J acquired a 120-day call option from RCBC to buy
$8,000 at an option price of P41 by paying option premium of P600.

The following additional data are provided:

 10/01/2020 11/01/2020 12/31/2020 1/30/2021 03/02/2021
Buying spot rate P40 P38 P36 P37 P39
Selling spot rate P39 P41 P44 P41 P42
Fair value of put option ? ? P23,000 ? ?
Fair value of call option ? ? P25,000 ? ?

1. What is the net foreign currency gain or loss as a result of hedging activity to be
reported by 5J Inc. for the year end December 31, 2020?

a. P2, 900 net gain

b. P44, 000 net gain
c. P46, 900 net gain
d. P44, 000 net loss

2. What is the net foreign currency gain or loss as a result of hedging activity to be
reported by 5J Inc. for the year end December 31, 2021?

a. P4, 000 net loss

b. P21, 000 net loss
c. P25, 000 net loss
d. P21, 000 net gain

Problem 9

On September 1, 2020, 2B Co. anticipated the purchase of merchandise from a foreign

vendor at a price of $1,000. The purchase would probably occur on January 30, 2021. On
October 1, 2020, 213 Co. forecasted the sale of merchandise to a foreign customer at a
price of $3,000. The sale would probably occur on March 31, 2021.

On September 1, 2020, 2B Co. purchased a 150-day call option to buy $1,000 at an

option price of P20 by paying option premium of P200. On October 1, 2020, 2B Co.
purchased a 180-day put option to sell $3,000 at a strike price of P24 by paying option
premium of P300. The company prepares calendar year financial statements.

The forecasted purchase and sales transaction occurred on the date anticipated. For the
year ended December 31, 2021, all foreign currency receivables are collected but only
80% of purchased inventories from the foreign vendor were sold to third person. The
following additional data are provided:

9/01/2020 10/01/2020 12/31/2020 1/30/2021 03/31/2021

Buying spot rate P23 P24 P21 P22.50 P22
Selling spot rate P20 P21 P24 P23 P21
Fair value of put option ? ? P10,000 ? ?
Fair value of call option ? ? P4,500 ? ?
1. What is the net foreign currency gain or loss in Other Comprehensive Income of
Statement of Comprehensive Income for the year ended December 31, 2020?

a. P13, 000 net gain

b. P1, 000 net gain
c. P14, 000 net gain
d. P2, 800 net gain

2. What is the net foreign currency gain or loss in Other Comprehensive Income of
Statement of Comprehensive Income for the year ended December 31, 2021?

a. P4, 000 net loss

b. P1, 500 net loss
c. P5, 500 net loss
d. P5, 700 net loss

3. What is the net cumulative Other Comprehensive Income in December 31, 2021?

a. P600 cumulative credit

b. P6, 600 cumulative credit
c. P2, 400 cumulative credit
d. P9, 000 cumulative credit

JOINT ARRANGEMENT

1. It is characterized by a contractual arrangement whereby two or more parties have joint

control of the arrangement

a. Joint arrangement
b. Joint operation
c. Joint venture
d. Jointly controlled asset

2. It is the contractually agreed sharing of control of an arrangement which exists only

when decisions about relevant activities require unanimous consent of the parties sharing
control.

a. Control
b. Significant influence
c. Joint control
d. Solidary control
3. It is a type of joint arrangement whereby the parties that have joint control of the
arrangement have right to the total assets and obligations for the total liabilities relating to
the arrangement.

a. Joint venture
b. Jointly controlled asset
c. Joint operation
d. Joint business

4. It is a type of joint arrangement whereby the parties that have joint control of the
arrangement rights to the net assets of the arrangement.

a. Joint venture
b. Jointly controlled asset
c. Joint operation
d. Joint business

5. What is the classification of the joint arrangement when the arrangement is structured
without a separate vehicle such as when the rights of each party to the total assets and
obligations for total liabilities relating to the arrangement are clearly established?

a. It shall be classified as joint venture.

b. It shall be classified as joint operation.
c. Neither joint venture nor joint operation
d. It can be either a joint operation or joint venture depending on the company policy of
the parties to the joint arrangement.

6. What is the classification of the joint arrangement when the assets and liabilities
relating to the arrangement are held by a separate vehicle or when the arrangement is
established with a separate vehicle?

a. It shall be classified as joint venture.

b. It shall be classified as joint operation.
c. Neither joint venture nor joint operation.
d. It can be either a joint operation or joint venture depending on the legal form of the
separate vehicle, terms of the contractual arrangement or other relevant facts and
circumstances.

7. Under IFRS 11, how shall the joint venturer account for its Investment in Joint
Venture?

a. Equity method
b. Cost method
c. Fair value method under IFRS 9
d. Proportionate consolidation

8. Under IFRS 11, as an exception to the general rule of mandatory equity method
accounting for Investment in Joint Venture, what is alternative treatment available to joint
venturer for an investment in joint venture held or is held indirectly through an entity that
is a venture capital organization, mutual trust fund, unit trust and similar entities
including insurance liked fund?

a. It may elect to measure the investment in joint venture at fair value through profit or
loss.
b. It may elect to measure the investment in joint venture at fair value through
other comprehensive income.
c. It may elect to measure the investment in joint venture at cost method.
d. It may elect to measure the investment in joint venture at proportionate consolidation

9. Under IFRS for SMES, how shall the joint venturer account for its Investment in Joint
Venture?

a. Equity method
b. Cost method
c. Fair value method under IFRS 9
d. Any of the above

10. Under IFRS 11, how shall the joint operator account for its interest in a joint
operation?

a. The joint operator shall account for its interest under Equity Method.
b. The joint operator shall account for its interest under Cost Method.
c. The joint operator shall account for its interest using proportionate consolidation
d. The joint operator shall account for its interest by recognizing its assets, its liabilities,
its revenue, its expenses and its shares in the jointly controlled jointly incurred liabilities,
jointly earned revenue and jointly incurred expenses in accordance with the contractual
arrangement.

Problem 1

On January 1, 2018, Entity A, a public entity, and Entity B, a public entity, incorporated
Entity C which has its fiscal and operational autonomy. The contractual agreement of the
incorporating entities provided that the decisions on relevant activities of Entity C will
require the unanimous consent of both entities. Entity A and Entity B will have rights to
the net assets of Entity C.

Entity A and Entity B invested P1,000,000 and P1,500,000, respectively, equivalent to

40:60 capital interest of Entity C. The financial statements of Entity C provided the
following data for its two-year operation:
 Net income (loss) Dividends declared
2018 200, 000 100, 000
2019 (2, 000,000) -

1. What is the balance of Investment in Entity C to be reported by Entity A in its

Statement of Financial Position on December 31, 2019?

a. P1, 080,000
b. P1, 040,000
с. P240, 000
d. P200, 000

2. What is the balance of Investment in Entity C to be reported by Entity B in its

Statement of Financial Position on December 31, 2019?

a. P1, 500,000
b. P1, 620,000
c. P360, 000
d. P900, 000

Problem 2

Entity A and Entity B incorporated Entity to manufacture a microchip to be used by the

incorporating entities as component for their final products of cellular phone and tablets.

The contractual agreement of the incorporating entities provided that the decisions on
relevant activities of Entity will require the unanimous consent of both entities.

Entity A and Entity B have rights to the assets, and obligations for the liabilities, relating
to the arrangement. The ordinary shares of Entity C will be owned by Entity A and Entity
B in the ratio of 60:40. At the end of first operation of Entity C, the financial statements
provided the following data:

Inventory P1, 000,000 Accounts payable P2,

000,000
Land 3, 000,000 Note payable 1,
000,000
Building 5, 000,000 Loan payable 4,
000,000
Share capital 1,
000,000
Retained earnings 1,
000,000
Sales revenue 5,
000,000
The contractual agreement of Entity A and Entity B also provided for the following
concerning the assets and liabilities of Entity C:

 Entity A owns the land and incurs the loan payable of Entity C.
 Entity B owns the building and incurs the note payable of Entity C.
 The other assets and liabilities are owned or owed by Entity A and Entity B on the
basis of their capital interest in Entity C.
 The sales revenue of Entity C includes sales to Entity A and Entity B in the
amount of P1,000,000 and P2,000,000, respectively. As of the end of the first
year, Entity A and Entity B were able to resell 30% and 60% of the inventory
coming from Entity C to third persons.

1. What is the amount of total assets to be reported by Entity A concerning its interest in
Entity C?

a. P5, 400,000
b. P3, 000,000
c. P3, 600,000
d. P5, 000,000

2. What is the amount of total liabilities to be reported by Entity B concerning its interest
in Entity C?

a. P1, 800,000
b. P2, 200,000
c. P2, 800,000
d. P2, 400,000

3. What is the amount of sales revenue to be reported by Entity A concerning its interest
in Entity C?

a. P2, 300,000
b. P2, 100,000
c. P3, 000,000
d. P2, 500,000

Problem 3

On January 1, 2018, Entity A, a public entity, and Entity B, a public entity, incorporated
Entity C by investing P3, 000,000 and P2, 000,000 for capital interest ratio of 60:40. The
contractual agreement of the incorporating entities provided that the decisions on relevant
activities of Entity will require the unanimous consent of both entities. Entity A and
Entity B will have rights to the net assets of Entity C.

The financial statements of Entity provided the following data for 2018:
  Entity C reported net income of P1, 000,000 for 2018 and paid cash dividends of
P400, 000 on December 31, 2018.
 During 2018, Entity C sold inventory to Entity A with gross profit of P50, 000.
Eighty percent of those inventories were resold by Entity A to third persons
during 2018 and the remainder was resold to third persons during 2019.
 On July 1, 2018, Entity C sold a machinery to Entity B at a loss of P20, 000. At
the time of sale, the machinery has remaining useful life of 2 years.

1. What is the investment income to be reported by Entity A for the year ended December
31, 2018?

a. P603, 000
b. P606, 000
c. P594, 000
d. P597, 000

2. What is the balance of Investment in Entity C to be reported by Entity B on December

31, 2018?

a. P2, 246,000
b. P2, 241,000
c. P2, 238,000
d. P2, 248,000

Problem 4

On January 1, 2020, Storm Inc. invested P2M cash in the joint venture for 50% interest.
For the years ended December 31, 2020, 2021, and 2022, the venture reported the
following net income and dividend distribution:

Year Net Income (Loss) Dividend Distributions

2020 P1, 000,000 P300, 000
2021 (P6, 000,000) -
2022 P7, 000,000 P500, 000

1. What is the share in net loss or investment loss to be reported by Storm Inc. for the
year ended December 31, 2021?

a. P3, 900,000
b. P2, 500,000
c. P2, 350,000
d. P2, 000,000

2. What is the book value of Investment in Joint Venture to be reported by Storm Inc. as
of December 31, 2022?
a. P1, 600,000
b. P2, 600,000
c. P1, 250,000
d. P1, 450,000

Problem 5

On January 1, 2020, Logan Inc., a small and medium enterprise (SME), invested P500,
000 cash in a joint venture for 50% interest. For the year ended December 31, 2020, the
joint venture reported net income of P200, 000 and distributed cash dividend in the
amount of P60, 000. As of December 31, 2020, the fair value of the investment in joint
venture is P600, 000 and the estimated cost of disposal is 10% of fair value. The value in
use of the investment is estimated at P550, 000.

1. Under IFRS for SMES, what is the book value of Investment in Joint Venture to be
reported by Logan Inc. as of December 31, 2020 if the SME elects equity method?

a. P550, 000
b. P540, 000
c. P570, 000
d. P600, 000

2. Under IFRS for SMES, what is the book value of Investment in Joint Venture to be
reported by Logan Inc. as of December 31, 2020 if the SME elects cost method?

a. P550, 000
b. P540, 000
c. P570, 000
d. P500, 000

3. Under IFRS for SMEs, what is the book value of Investment in Joint Venture to be
reported by Logan Inc. as of December 31, 2020 if the SME elects fair value method?
a. P550, 000
b. P600, 000
c. P570, 000
d. P500, 000