CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

BUSINESS COMBINATION, CONSOLIDATION AND FOREIGN CURRENCY

BUS. COM. - PFRS 3

(cpar)
1. It is a transaction or other event in which an acquirer obtains control of one or more businesses.
A. Business combination
B. Merger
C. Consolidation
D. Intercorporate directorship

2. This is defined as an integrated set of activities and assets that is capable of being conducted and
managed for the purpose of providing a return directly to investors or other owners, members or
participants.
A. Business
B. Transaction
C. Isolated event
D. Undertaking

3. Which of the following accounting methods must be applied to all business combinations?
A. Pooling method
B. Equity method
C. Proportionate consolidation
D. Acquisition method

4. This is defined as the entity that obtains control of the acquiree.

A. Acquirer
B. Investor
C. Parent
D. Subsidiary

5. It is the power to govern the financial and operating policies of an entity or business so as to
obtain benefits from its activities.
A. Significant influence
B. Undue influence
C. Control
D. Managerial dependence

6. An acquirer might obtain control of an acquire in all of the following, except

A. By transferring cash, cash equivalents and other assets
B. By issuing equity interests
C. By contract alone, even without consideration
D. By acquiring interest in a joint venture
7. A business combination may be structured in all of the following, except
A. One or more businesses become subsidiaries of an acquirer
B. One entity transfers its net assets to another entity
C. A group of former owners of one of the combining entities obtains control of the combined
entity
D. An entity acquires assets that are not a business.

8. It is a business combination in which all of the combining entities or businesses are ultimately
controlled by the same party or parties both before and after the combination and the control
is not transitory.
A. Business combination involving entities under common control
B. Business combination involving entities under diversified control
C. Full business combination
D. Business reorganization

9. What is the term for the business combination where all combining entities transfer their net
assets to a newly formed entity?
A. True merger
B. Legal merger
C. Roll up or put together transaction
D. Spin off

10. This is defined as holders of equity interest of investor-owned entities, or members and
participants in mutual entities.
A. Shareholders
B. Investors
C. Owners
D. Participants

11. The application of the acquisition method of accounting for a business combination requires
all of the following (choose the incorrect one)
A. Identifying the acquirer
B. Determining the acquisition date
C. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in acquiree.
D. Not recognizing goodwill or gain from bargain purchase

12. Which statement is incorrect concerning an acquirer?

A. In a business combination effected by transferring cash or other assets, the acquirer is usually
the entity that transfers the cash or other assets.
B. In a business combination effected by issuing equity interest, the acquirer is usually the entity
that issues the equity interest.
C. The acquirer is usually the combining entity whose relative size is significantly greater than
that of the combining entity or entities.
 D. If a new entity is formed to issue equity interests to effect a business combination, the
new entity formed is necessarily the acquirer.

13. The following statements relate to an acquisition date of a business combination. Which
statement is incorrect?
A. The acquisition date is the date on which an acquirer obtains control over the acquiree.
B. The acquisition date is normally the closing date, meaning the date on which the acquirer
legally transfers the consideration, acquires the assets and assumes the liabilities of the
acquire.
C. Where several dates are key to a business combination, the date on which control passes is
the acquisition date.
D. The acquisition date can never precede the closing date.

14. The following statements relate to recognition and measurement of a business combination.
Which statement is correct?
I. As of the acquisition date, the acquirer shall recognize, separately from goodwill, the
identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the
acquiree.
II. The acquirer shall measure the identifiable assets acquired and the liabilities assumed at
their acquisition-date fair value.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

15. A parent entity is acquiring a majority holding in an entity whose shares are dealt in on a
recognized market. Under PFRS 3, which of the following measurement bases may be used
in measuring the noncontrolling interest at the acquisition date?
I. Fair value of the noncontrolling interest in the acquiree
II. A proportionate share of the acquirees identifiable net assets.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

16. The consideration transferred in a business combination shall be measured at

A. Fair value
B. Carrying amount
C. Fair value determined by the acquirer
D. Transaction value

17. An acquirer holds 30% equity interest in an acquiree and subsequently purchases another 25%
equity interest in order to gain control. This transaction is known as
A. Business combination of entities under common control
B. Business combination achieved in stages
 C. Business combination by installment
D. Step by step acquisition

18. In a business combination achieved in stages, the acquirer shall

A. Not remeasure the previously held equity interest.
B. Remeasure the previously held interest at fair value with any resulting gain or loss
included in profit or loss.
C. Remeasure the previously held interest at fair value with any resulting gain or loss included
in other comprehensive income.
D. Remeasure the previously held interest at fair value with any resulting gain or loss included
in retained earnings.

19. In a business combination, goodwill is measured as the excess of

A. The consideration transferred over the identifiable net assets acquired.
B. The total of the consideration transferred and the amount of any noncontrolling interest in the
acquiree over the identifiable net assets acquired.
C. The total of the consideration received and the fair value of the previously held interest in the
acquiree over the identifiable net assets acquired.
D. The total consideration received, the amount of any noncontrolling interest in the
acquiree and the fair value of previously held interest in the acquiree over the
identifiable net assets acquired.

20. In a business combination, any gain on bargain purchase shall

A. Be recognized in profit or loss.
B. Be recognized in other comprehensive income.
C. Be recognized in retained earnings.
D. Not be recognized.

21. The acquisition-related costs in a business combination to be expensed immediately include

all of the following, except
A. Professional and consulting fees
B. Finders fees
C. Costs of maintaining an internal acquisition department
D. Costs of issuing debt securities

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45-19
5. It is the equity in a subsidiary not attributable directly to a parent.
A. Controlling interest
B. Subsidiary interest
C. Noncontrolling interest
D. Residual interest
7. The following statements relate to a contingent consideration in a business combination. Which
statement is correct?
I - The acquirer shall recognize the acquisition-date fair value of any contingent consideration
as part of the consideration transferred in a business combination.

II - The acquirer shall not recognize the acquisition-date fair value of any contingent
consideration as part of the consideration transferred in a business combination.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

8. The acquirer shall classify the obligation to pay the contingent consideration as
A. Financial liability only
B. Equity only
C. Either financial liability or equity in accordance with PAS 32
D. Neither financial liability nor equity

9. In the final settlement of the contingent consideration classified as equity, the amount
A. Shall not be remeasured but instead recognized as part of equity.
B. Shall be remeasured at fair value with any gain or loss included in profit or loss.
C. Shall be remeasured at fair value with any gain or loss included in retained earnings.
D. Shall be remeasured at fair value with any gain or loss included in other comprehensive
income.

10. In the final settlement of the contingent consideration classified as financial liability, the amount
A. Shall not be remeasured.
B. Shall be remeasured at fair value with any gain or loss included in profit or loss.
C. Shall be remeasured at fair value with any gain or loss included in retained earnings.
D. Shall be remeasured at fair value with any gain or loss included in other comprehensive
income.

CONSOLIDATION- PAS 27

22. Consolidated financial statements are

I. The financial statements of a group presented as those of a single economic entity.
II. Those presented by a parent, an investor in an associate, or a venture in jointly controlled
entity, in which the investments are accounted for on the basis of the direct equity
interest rather than on the basis of the reported results and net assets of the investee.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
23. A group for consolidation purposes is
A. A parent and all its subsidiaries.
B. An entity that has one or more subsidiaries.
C. An entity, including an unincorporated entity such as partnership that is controlled by another
entity.
D. An entity that obtains control other entities or businesses.

24. It is the entity that has one or more subsidiaries.

A. Investor
B. Parent
C. Associate
D. Affiliate

25. It is the equity in a subsidiary not attributable directly or indirectly to a parent.

A. Controlling interest
B. Subsidiary interest
C. Noncontrolling interest
D. Residual interest

26. Which of the following is not a valid condition that will exempt an entity from preparing
consolidated financial statements?
A. The parent entity is a wholly owned subsidiary of another entity.
B. The parent entitys debt or equity capital is not traded on the stock exchange.
C. The ultimate parent entity produces consolidated financial statements available for public use
that comply with PFRS.
D. The parent entity is in the process of filing its financial statements with a securities
commission.

27. A subsidiary shall be excluded from consolidation when

A. The investor is a venture capital organization, mutual fund, unit trust or similar entity.
B. The business activities of the subsidiary are dissimilar from those of the other entities within
the group.
C. The subsidiary is acquired with the intention to dispose of it within twelve months from
date of acquisition.
D. The subsidiary is operating under severe long-term restrictions that significantly impair its
ability to transfer funds to the parent.

28. Which of the following subsidiaries should be deconsolidated?

A. A subsidiary that has been previously excluded from consolidation and is not disposed of
within the 12-month period.
B. A subsidiary with severe restriction on the repatriation of dividends to the parent.
C. Two subsidiaries located in one country that are individually immaterial but collectively
material.
D. None of the subsidiaries mentioned.

29. Control is presumed to exist when the parent owns directly or indirectly through subsidiaries
 A. More than half of the equity of an entity.
B. More than half of the ordinary shares of an entity.
C. More than half of the preference and ordinary shares of an entity
D. More than half of the voting power of an entity.

30. Control exists even if the parent owns half or less of the voting power of an entity where
there is (choose the incorrect one)
A. Power over more than half of the voting rights by virtue of an agreement with other
investors.
B. Power to govern the financial and operating policies of the entity under a statute or an
agreement.
C. Power to appoint or remove the key officers an employees of the entity.
D. Power to cast the majority of votes at meetings of the board of directors or equivalent
governing body.

31. Noncontrolling interest shall be presented in the consolidated statement of financial position
A. Separately from liabilities and the parent shareholders equity.
B. Within equity, separately from the parent shareholders equity.
C. As noncurrent liability
D. As component of the parent shareholders equity

32. When a parent loses control of a subsidiary, the investment in subsidiary retained by the
investor
A. Shall continue to be accounted for a investment in subsidiary
B. Shall be accounted for an investment property
C. Shall be accounted for in accordance with PAS 39 on the measurement of financial asset
D. Shall be accounted for as nonmarketable equity security.

33. What is the initial measurement of an investment in subsidiary retained by the investor when
control is lost?
A. Fair value at the date when control is lost
B. Fair value at the beginning of the reporting period
C. Carrying amount at the date when control is lost
D. Carrying amount at the beginning of the reporting period

34. When separate financial statements are prepared, investments in subsidiaries shall be
accounted for at
A. Cost
B. In accordance with PAS 39 on measurement of financial asset
C. Either at cost or in accordance with PAS 39 on measurement of financial asset
D. Neither at cost nor in accordance with PAS 39 on measurement of financial asset
(valix)
46-16
3. The following statements relate to consolidated financial statements. Which statement is
incorrect?
A. A parent shall present consolidated financial statements in which it consolidates its
investments in subsidiaries.
B. Consolidated financial statements shall include all subsidiaries of the parent.
C. A subsidiary is excluded from consolidation if the investor is a venture capital
organization, mutual fund, unit trust or similar entity.
D. A subsidiary is not excluded from consolidation even if its business activities are dissimilar
from those of the other entities within the group.

4. A parent is not required to present consolidated financial statements under all of the following
conditions, except
A. When the parent is itself a wholly-owned subsidiary, or is partially-owned subsidiary and its
owners do not object to the parent not presenting consolidated financial statements.
B. When the parents debt and equity instruments are not traded in public market.
C. When the parent has filed or it is in the process of filing its financial statements with
SEC for the purpose of issuing any class of instruments in a public market.
D. When the ultimate or any intermediate parent of the parent produces consolidated financial
statements for public use that comply with PFRS.

6. A parent loses control of a subsidiary (choose the incorrect one)

A. When there is change in absolute or relative ownership level.
B. When a subsidiary becomes subject to the control of a government, court, administrator or
regulator.
C. When the loss of control is the result of a contractual agreement.
D. When the subsidiary is operating under severe long-term restrictions that impair its
ability to transfer funds to the parent.

9. If a parent loses control of a subsidiary (choose the incorrect one)

A. The parent shall derecognize the assets and liabilities of the subsidiary at their carrying
amounts.
B. The parent shall not derecognize the carrying amount of any noncontrolling interest in
the former subsidiary.
C. Any gain or loss arising from the recognition shall be included in profit or loss.
D. Any amounts that have been recognized in other comprehensive income in relation to the
subsidiary shall be reclassified to profit or loss or retained earnings in accordance with
relevant accounting standard.

11. Where there is a change in a parents ownership interest in a subsidiary that does not result in a
loss of control (choose the incorrect one)
A. The change shall be accounted for as an equity transaction.
B. The carrying amounts of the controlling and noncontrolling interests shall be adjusted to
reflect the change in the level of ownership.
 C. Any difference between the consideration received and the amount of adjustment of the
noncontrolling interest shall be recognized directly in equity.
D. Any difference between the consideration received and the amount of adjustment of the
noncontrolling interests shall be recognized in other comprehensive income.

12. Which is incorrect concerning the preparation of consolidated financial statements?

A. The financial statements of the parent ant 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.

15. Which is incorrect concerning the cost method of accounting?

A. The investment is recognized at cost.
B. The investor recognizes income from the investment only to the extent that the investor
receives distributions from accumulated profits of the investee arising after the date of
acquisition.
C. Distributions received in excess of profits after acquisition are regarded as a recovery of
investment and are recognized as a reduction of the cost of the investment.
D. The investment is initially recorded at cost and any changes in value of the investment
at each reporting date are recognized in profit or loss.

FOREIGN CURRENCY- PAS 21

35. It is a subsidiary, associate, joint venture or branch of a reporting entity, the activities of
which are based or conducted in a country or currency other than that of the reporting entity.
A. Foreign entity
B. Foreign operation
C. Domestic operation
D. Branch operation

36. Exchange rate is

A. The ratio of exchange for two currencies
B. The spot exchange rate at the end of reporting period
C. The exchange rate for immediate delivery
D. The difference resulting from translating a given number of units of one currency into
another currency at different exchange rates.

37. Which statement is incorrect?

A. Functional currency is the currency of the primary economic environment in which the entity
operates.
B. Foreign currency is a currency other than the functional currency of the entity.
 C. Presentation currency is the currency in which the financial statements are presented.
D. Net investment in a foreign operation is the amount of the reporting entitys interest in
the total assets of that operation.

38. An entity started trading in country A, whose currency was the dollar. After several years the
entity expanded and exported its product to country B, whose currency was the euro. The
business was conducted through a subsidiary in country B. The subsidiary is essentially an
extension of the entitys own business, and the directors of the two entities are common. The
functional currency of the subsidiary is
A. The dollar
B. The euro
C. The dollar or the euro
D. Difficult to determine

39. An entity started trading in country A, whose currency was the dollar. After several years the
entity expanded and exported its product to country B, whose currency was the euro, and
conducted business through a branch. The functional currency of the group was deemed to be
the dollar but by the end of the current year, 80% of the business was conducted in country B
using the euro. At the end of prior year, 30% of the business was conducted in the euro. The
functional currency should
A. Remain the dollar
B. Change to the euro at the beginning of the current year
C. Change to the euro at the end of the current year
D. Change to the euro at the end of the current year if it is considered that the underlying
transactions, events and conditions of business have changed.

40. Initially, a foreign currency transaction shall be recorded by applying to the foreign currency
amount
A. The spot exchange rate at the date of transaction.
B. The closing rate at the end of reporting period
C. The average exchange rate during the year
D. The spot exchange rate at the date of the settlement of the transaction.

41. Foreign currency monetary items are subsequently translated at

A. Closing rate
B. Historical rate
C. Forward rate
D. Spot exchange rate

42. Exchange differences arising from foreign currency transactions shall

A. Be recognized in profit or loss of the period in which they arise
B. Be included in other comprehensive income
C. Be deferred and amortized over a reasonable period
D. Be charged to retained earnings

43. In translating the financial statements of a foreign operation for inclusion in the reporting
 entitys financial statements, assets and liabilities are translated at
A. Closing rate
B. Historical rate
C. Weighted average rat
D. Forward rate

44. Income and expense items of a foreign operation shall be translated at

A. Exchange rate on the date of transaction (for practical purposes at average rate)
B. Spot exchange rate
C. Closing rate
D. Forward rate

45. If the foreign operation reports in the currency of a hyperinflationary economy, assets,
liabilities, income and expenses shall be translated at
A. Exchange rate on the date of transaction
B. Closing rate
C. Forward rate
D. Average rate

46. Exchange differences arising from the translation of financial statements of a foreign
operation shall be accounted for as
A. Translation gain or loss component of other comprehensive income
B. Translation gain or loss component of profit or loss
C. Transaction gain or loss component of other comprehensive income
D. Transaction gain or loss component of other comprehensive income
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47-13
2. It is the currency of the primary economic environment in which the entity operates.
A. Reporting currency
B. Functional currency
C. Presentation currency
D. Foreign currency

3. These are money held and financial assets to be received and financial liabilities to be paid in
fixed or determinable amount of money.
A. Foreign currency loans
B. Long term items
C. Monetary items
D. Nonmonetary items

5. A foreign currency transaction is a transaction which is denominated or requires settlement in a

foreign currency and includes

I - Purchase and sale of goods and services whose price is denominated in a foreign
currency.
 II- Borrowing and lending of funds when the amounts payable or receivable are
denominated in a foreign currency.

A. I only.
B. II only.
C. Both I and II
D. Neither I nor II

8. Nonmonetary items that are measured in terms of the historical cost denominated in a foreign
currency shall be reported using the
A. Exchange rate at the date of transaction
B. Closing rate
C. Average rate
D. Spot exchange rate

10. Exchange differences arising on a monetary item that forms part of a reporting entitys net
investment in a foreign operation shall be recognized

I - In profit or loss in the separate financial statements of the reporting entity or the
individual statements of the foreign operation.

II- In other comprehensive income in the consolidated financial statements of the

reporting entity and the foreign operation and recognized in profit or loss on disposal
of the net investment.
A. I only.
B. II only.
C. Both I and II
D. Neither I nor II

HOME OFFICE AND BRANCH

1. Garcia, Inc. established a branch in Quezon City to distribute part of the goods purchased by the
home office. The home office prices inventory shipped to the branch at 25% above cost. The
following account balances were taken from the ledger maintained by the home office and the
branch:

Garcia, Inc Quezon City Branch

Sales P420,000 P180,000 (80% collected)
Beginning inventory 86,250 48,000 (2/3 from outsiders)
Purchases 277,500 50,000 (70% paid)
Shipments to branch 82,500
Shipments from home office 103,125
Operating expenses 85,000 14,000 (1/5 paid)
Ending inventory 60,000 27,000 (90% from home office)
 The combined net income of the home office and the branch:
A. P121,215
B. P103,965
C. P105,625
D. P124,590

A home office bills its branch at 120% of cost. During 2009, inventory costing the home office
P320,000 was transferred to the branch. At year-end, the home office adjusted its Allowance for
Overvaluation account by debiting P72,800. The branchs year-end balance sheet shows P19,200
of inventory acquired from the home office.

How much is the beginning inventory of the branch at cost?

A. P60,000
B. P12,000
C. P72,000
D. P64,000

3. The home office transfers merchandise to Tarlac branch at a mark-up of 25% above cost during
the year 2009 and 30% above cost during the year 2008. In 2009, the reciprocal account in the
income statement of the branch is P1,487,500. The Unrealized Inventory Profit has a balance of
P84,000 at the end of last year. The branch started to acquire merchandise from outsiders during
the year in the amount of P76,000.

How much is the cost of goods available for sale of the branch at cost?
A. P1,851,500
B. P1,470,000
C. P1,927,500
D. P1,546,000

4. A home office ships inventory to its branch at 125% of cost. The required balance of the
Deferred Profit account is P236,250. During the year, the home office sent merchandise to the
branch costing P2,352,000. At the start of the year, the branchs balance sheet shows P945,000
of inventory on hand that was acquired from the home office.

By what amount is the cost of goods sold overstated?

A. P540,750
B. P777,000
C. P236,250
D. P189,000

5. In 2009, the home office transfers merchandise to Dau branch at a mark-up of 40% above cost.
The markup in 2008 is lower compared to 2009. During the year 2009, goods costing P618,750
were shipped to the branch. The account Allowance for Overvaluation has a balance of P306,000
before adjustment. The beginning inventory of the branch from the home office at cost is
P234,000; the beginning inventory of the branch from outsiders is P38,000; purchases from
outsiders is P353,250; returns to outsiders is P27,000.
Cost of goods available for sale of the branch
A. P1,217,000
B. P1,558,100
C. P1,523,000
D. P1,158,750