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1. Statement 1(S1):A business combination occurs when one entity gains control over the net assets of another entity.
Statement 2 (S2):The only way to attain control over the net assets of another entity is to purchase the net assets.
a. S1-True:S2-True
b. S1-True:S2-False
c. S1-False:S2-True
d.S1-False:S2-False

2. Statement 1 (SI):in an acquisition where the acquirer pays cash for the acquired assets. The book value of the
acquirer increases.
Statement 2 (S2);in an acquisition of assets for assets, the ownership structure of the acquiree does not change.
a.S1-True:S2-True
b.S1-True:52-False
c. S1-False:S2-True
d. S1-False:S2-False

3. Statement 1 (S1) :In an acquisition of assets tor assets, the ownership structure of
the acquirer changes.
Statement 2(S2):There is an increase in the total capitalization of an acquirer when the acquirer issues stock for
acquired assets.
a. S1-True:S2-True
b. S1-True:S2-False
c. S1-False:S2-True
d. S1-False;S2-False

4. Statement 1(S1):in an exchange of stock (acquirer) for assets (acquiree), the ownership structure of the acquiree
does not change.
Statement 2(S2):In an exchange ol stock (acquirer) for assets (acquiree),the acquiree stockholders become acquirer
stockholders.
a. S1-True:S2-True
b. S1-True:S2-False
c. S1-False:S2-True
d. S1-False;S2-False

5. Statement 1 (S1):Control over the acquiree assets is directly achieved in an asset for asset exchange but indirectly
achieved in an asset (acquirer) for stock (acquiree) exchange.
Statement 2 (S2):A business combination that occurs where only one of the original entities in existence after the
combination is called a statutory consolidation. – should be merger
a. S1-True:S2-True
b. S1-True:S2-False
c. S1-False:S2-True

6. One reason for conglomerate combinations is that management has become more aware that it helps accomplish
which of the following?
a. It helps increase income stability provided by diversifying the asset base of an entity
b. It helps increase market share in the Industry
c. It helps assure a constant supply of raw materials
d. A conglomerate combination helps accomplish all three

7. Control over an acquiree can be attained through which of the following?

a. Acquisition of acquiree asset
b. Acquisition of the acquiree stock
c. Either acquisition of the acquiree assets or stock
d. Neither acquisition of the acquiree assets or stock

8. In an acquisition of assets the acquirer must give up which of the following?

a. Cash
b. Other assets
c. liabilities
d. Any of the above can be given
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9. Which of the following is not a true statement with regard to a statutory merger?
a. One entity continues to exist
b. One entity ceases to exist
c. The name of the new entity is not the same as either of the entities - consolidation
d. All of the above one true statements with regard to a statutory merger

10. Which of the following is not true with regard to the statutory consolidation form of business combination?
a. new corporation must be formed
b. Control of the net assets of the combining entities must be acquired by the new entity
c. The net assets of the combining entities must be acquired with assets of the new corporation
d. The combining entities both cease to exist after the combination

11. Following the completion of a business combination in the form of a statutory consolidation. What is the balance in
the new corporation's Retained Earnings account?
a. The acquirer Retained Earnings account balance
b. The acquiree Retained Earnings account balance
c. Zero
d. The sum of the acquirer and acquiree Retained Earnings account balances

12. Under PFRS 3.Business Combinations, which method must be used to account for business combinations?
0. Purchase method
0. Pooling-of-interests method
0. Acquisition method
0. New entity method

13. How should accounting fees for an acquisition be treated?

0. Expensed in the period of acquisition
0. Capitalized as part of the acquisition cost
0. Deferred and amortized
0. Deferred until the company is disposed of or wound-up

14. Which of the following is not a reason why a private enterprise may be acquired as a bargain purchase?
0. It is a family business and the next generation does not want to continue the business.
0. The owner has health problems and does not have a successor.
0. The business only has equity financing and has no debt financing.
0. The owner is no longer interested in the business.

15. How should negative goodwill be shown on the consolidated financial statements of the acquirer?
0. As a gain on the statement of comprehensive income
0. As a loss on the statement of comprehensive income
0. As o liability on the statement of financial position
0. As a separate amount under shareholders' equity on the statement of financial position.

16. Statement 1(S1 In a business combination accomplished as a stock acquisition normally two companies exist alter
the combination.
Statement 2 (S2): A business combination accomplished as a stock acquisition must be accomplished with a stock for
stock exchange.
a. S1-True:S2-True
b. S1-True:S2-False
c. S1-False:S2-True
d. S1-False;S2-False

17. In an acquisition where there is on exchange of assets lor assets. how does the ownership structure of the acquiree
change?
a. There is no change in the acquiree ownership structure
b. The acquirer stockholders become the acquiree stockholders
c. The acquirer and acquiree stockholders share ownership of the acquiree
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d. It is not possible to determine if there is a change in the acquiree ownership structure

18. In an acquisition where there is an exchange of assets for assets. how does the ownership structure of the acquirer
change?
a. There is no change in the acquirer ownership structure
b. The acquirer stockholders become the acquiree stockholders
c. The acquirer and acquiree stockholders share ownership of the acquiree
d. It is not possible to determine if there is a change in the acquiree ownership structure

19. Control over acquiree assets is attained in a business combination, Indirect control is attained in which type of
exchange?
0. Assets for assets
0. Stock (acquires) for asset (acquiree)
0. Stocks for stock
0. Either b or c

20. After initial recognition, goodwill arising from a business combination is (use 'full PFRSs')
a. amortized over its useful life, not exceeding 10 years.
b. not amortized but tested for impairment at least annually.
c. amortized over its useful life, not exceeding 40 years.
d. amortized and tested for impairment.

21. How is goodwill tested for impairment?

a. Goodwill is allocated to CGUs. The CGUs are the ones tested for impairment. Any impairment is charged first to
the allocated goodwill, and any excess is charged to the other assets in the CGU.
b. Goodwill is unidentifiable, i.e., cannot be seen. Therefore, to test goodwill for impairment, the accountant must
use a microscope.
c. Goodwill can be tested for impairment on its own - the accountant smells it, if it is bad, the goodwill is impaired!
d. Any of these as a matter of accounting policy choice.

Part ll: Problem

Use the following information for the next two questions:

On January 1,20x1, Sit Co. acquired 75% controlling interest in Stand Co. For P1,000,000. On this date,
the fair value of Stand's net identifiable assets is P800,000. Sit Co. Incurred transaction costs of P100,000
on the acquisition.
22. How much is the goodwill if Sit Co. uses the full PFRSs and Sit opts to measure NCI using proportionate
share method?
a. 380,000 c.460,000
b.400,000 d.500,000
Consideration transferred 1,000,000
NCI in the acquiree 200,000
Previously held equity interest in the acquiree -
1,200,00
Total
0
Fair value of net identifiable assets acquired (800,000)
Goodwill 400,000

23. How much is the goodwill if Sit Co. Uses the PFRS for SMEs?
a. 380,000 c.460,000
b. 400,000 d.500,000
Purchase cost 1,000,000
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Acquisition-related costs 100,000

1,100,00
Total 0
Interest in net identifiable assets
acquired
(600,000)
(800K x 75%)
Goodwill 500,000

24. On January 1, 20x1, HISTRIONAL Co. acquired all of the identifiable assets and assumed all of the liabilities of
THEATRICAL, Inc. by paying cash of ₱4,000,000. On this date, the identifiable assets acquired and liabilities assumed
have fair values of ₱6,400,000 and ₱3,600,000, respectively.

As of January 1, 20x1, HISTRIONAL holds a building and a patent which are being rented out to THEATRICAL, Inc.
under operating leases. HISTRIONAL has determined that the terms of the operating lease on the building compared
with market terms are favorable. The fair value of the differential is estimated at ₱80,000. How much is the goodwill
(gain on bargain purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000

25. On January 1, 20x1, SUBTERFUGE Co. acquired all of the identifiable assets and assumed all of the liabilities of
DECEPTION, Inc. by paying cash of ₱4,000,000. On this date, the identifiable assets acquired and liabilities assumed
have fair values of ₱6,400,000 and ₱3,600,000, respectively.

Additional information:
● SUBTERFUGE intends to sell immediately a factory plant included in the identifiable assets of DECEPTION. All of the
“held for sale” classification criteria under PFRS 5 are met. As of January 1, 20x1, the factory plant has a fair value of
₱1,200,000 and a carrying amount of ₱1,000,000 in the books of DECEPTION. Costs to sell the factory plant is
₱80,000.
● Not included in the identifiable asset of DECEPTION is a research and development intangible asset that
SUBTERFUGE does not intend to use. The fair value of this asset is ₱200,000.
● Also, not included in the identifiable asset of DECEPTION is a customer list, with an estimated value of ₱40,000, in
the form of a database where the nature of the information is subject to national laws regarding confidentiality.

How much is the goodwill (gain on bargain purchase)?

a. 1,200,000 b. 1,280,000 c. 1,080,000 d. 1,040,000

Use the following information for the next two questions:

On January 1, 20x1, SMUTTY acquired all of the identifiable assets and assumed all of the liabilities of OBSCENE, Inc.
On this date, the identifiable assets acquired and liabilities assumed have fair values of ₱6,400,000 and ₱3,600,000,
respectively.

SMUTTY incurred the following acquisition-related costs: legal fees, ₱40,000, due diligence costs, ₱400,000, and
general administrative costs of maintaining an internal acquisitions department, ₱80,000.

26. Case #1: As consideration for the business combination, SMUTTY Co. transferred 8,000 of its own equity instruments
with par value per share of ₱400 and fair value per share of ₱500 to OBSCENE’s former owners. Costs of registering
the shares amounted to ₱160,000. How much is the goodwill (gain on bargain purchase) on the business
combination?
a. 716,000 b. 556,000 c. 600,000 d. 1,200,000

27. Case #2: As consideration for the business combination, SMUTTY Co. issued bonds with face amount and fair value
of ₱4,000,000. Transaction costs incurred in issuing the bonds amounted to ₱200,000. How much is the goodwill
(gain on bargain purchase) on the business combination?
a. 716,000 b. 556,000 c. 600,000 d. 1,200,000

28. On January 1, 20x1, ENTREAT Co. acquired all of the identifiable assets and assumed all of the liabilities of BEG, Inc.
by paying cash of ₱4,000,000. On this date, the identifiable assets acquired and liabilities assumed have fair values of
₱6,400,000 and ₱3,600,000, respectively. ENTREAT Co. has estimated restructuring provisions of ₱800,000
representing costs of exiting the activity of BEG, costs of terminating employees of BEG, and costs of relocating the
terminated employees. How much is the goodwill (gain on bargain purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000
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29. Cloudy Co. plans to acquire all the assets and liabilities of Day Co. Cloudy expects that it will need to pay a
premium equal to the discounted amount of Day's excess average annual earnings in order to. Effect the
transaction. The appropriate discount rate is 10%.

● Day's earnings in the past 5 years:

Year Earnings
20x1 120,000
20x2 130,000
20x3 135,000
20x4 125,000
20x5 140,000
Total 650,000

● The 20x4 earnings include an expropriation loss of P40,000.

● Day's net assets have a current fair value of P590,000.
● The industry average rate of return on net assets is 12%.
● The probable duration of "excess earnings" is 5 years.

How much is the estimated purchase price?

a.932,432 b.844,741 c.817,447 d.798,324
Average annual earnings (650K + 40K expropriation loss) ÷ 5 yrs. 138,000
Normal earnings (590K x 12%) (70,800)
Excess earnings 67,200
Multiply by: PV of ordinary annuity of 1 @10%, n=5 3.79079
254,74
Goodwill 1
Estimated purchase price
844,741
(squeeze)
Less: Fair value of Day’s net assets (590,000)
Goodwill 254,741

30. Sunday Co., a publicly listed entity, and Monday Co. a private company, exchange equity interests in a
business combination.

● Sunday Co. issues 12 shares for all the outstanding shares of Monday.
● Sunday's shares are quoted at P60 per share, while Monday's shares have a fair value of P200 per share.
● The net assets of the entities immediately before the combination are shown below: (The amounts
approximate the acquisition-date fair values)
EQUITY Sunday Co. Monday Co.
Share capital:
12,000 ordinary shares, P10 par 120,000 900,000
9,000 ordinary shares, P100 par
Retained earnings 10,000 800000
Total equity, 130,000 1,700,000

How much is the goodwill?

a. 50,000 b.60,000 c.70,000 d.90,000
Legal form: Sunday issues shares to Monday
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Sunday’s currently issued shares 12,000 10%

Shares issued to XYZ (12 sh. x 90
9,000) 108,000 %
Total shares after the combination 120,000

Substance: Reverse – Monday issues shares to Sunday

Share
s %
Monday’s currently issued shares 9,000 90%
Shares issued to Sunday [(9,000 ÷ 90%) x
10%] 1,000 10%
Total shares after the combination 10,000

Consideration transferred (1,000 sh. x ₱200) 200,000

Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 200,000
Fair value of Sunday’s net assets (130,000)
Goodwill 70,000