ACCOUNTING FOR BUSINESS COMBINATIONS

FINAL EXAM

NAME:______________________________ DATE:_________________

Choose the letter of the correct answer

I. Theories
1. Which of the following best illustrates the insolvency of a firm?
a. the filing of bankruptcy proceedings against the firm
b. a deficit in the firm’s retained earnings
c. the firm has more liabilities than assets
d. the firm has negative working capital

2. If the value of the pledged property is lesser than the obligation, what is the treatment of the liability?
a. partially secured
b. fully secured
c. collateralized
d. unsecured

3. The primary difference between a balance sheet and an accounting statement of affairs is:
a. a balance sheet reflects book values, while a statement of affairs emphasizes realization values
b. assets are arranged in different sequence
c. liabilities are arranged in different sequence
d. owner’s equity is not considered in the statement of affairs

4. An accounting statement of affairs of a corporation in financial difficulty indicates the unsecured

creditors would receive P0.40 on the peso. Which one of the following assets is most likely to realize the
smallest percentage of its book value?
a. Accounts receivable
b. Inventories
c. Plant and equipment
d. Goodwill

5. If a dividend of 80% is allocable to class 7 unsecured creditors based on an accounting statement of

affairs, it correctly may be concluded that
a. all unsecured claims will receive the same percentage of return
b. all unsecured claims will be paid in full
c. class 1 through 6 unsecured claims will be paid in full
d. stockholders will receive 20% of their equity
6. An arrangement for creditors to accept an amount less than the amount owed to them is referred to
as a
a. charge and discharge agreement
b. composition arrangement
c. bankruptcy agreement
d. chandler agreement

7. In a liquidation proceeding, if the proceeds on the realization of an assets exceed the lien against that
assets, the excess is assigned to
a. the holder of the lien
b. other lien holders whose assets will not be realize a sufficient mount to cover their liens
c. meet the claims of the unsecured creditors
d. the stock holders of the corporation

8. An entity will primarily generate and expend cash in one primary economic environment. According to
IAS 21, The effects of changes in foreign exchange rates, the correct term for the currency of this
primary economic environment is the
a. Presentation currency
b. Functional currency
c. Reporting currency
d. Foreign currency

9. According ‘to IAS 21, The effects of changes in foreign currency rates, at which rate should an entity’s
non-current assets be translated when its functional currency figures are being translated into different
presentation currency?
a. The historical rate
b. The closing rate
c. The average rate
d. The spot exchange rate

10. IAS, The effects of changes in foreign currency rates, requires that the initial recognition of a foreign
currency transaction be:
a. in the amount of foreign currency
b. the closing rate at the balance sheet date
c. the rate the currency is expected to be exchanged at on the settlement date for the monetary assets
or liability based on the currency market price for the relevant foreign currency
d. the spot rate at the date of the transaction

11. IAS, The effects of changes in foreign currency rates, requires that foreign currency monetary items
outstanding at reporting date must be:
a. translated at the spot rate at the transaction date
b. reported at the forward- exchange rate based on the 90-day bank bill at that date
c. translated at the spot rate at reporting date
d. translated at the spot rate at settlement date
12. On October 1, 2016 Velec Co. contracted to purchase foreign goods requiring payment in local
currency unit (LCU) one month after the receipt of the goods at Veleco’s factory. Title to the goods
passed on December 15, 2016. The goods were still in transit on December 31, 2016. Exchange rate
were open peso to 22 LCUs, 20 LCUs, and 21 LCUs on October 1, December 15, and December 31, 2016
respectively. Velec should account for the exchange rate fluctuation in 2016 as
a. An ordinary loss included in net income
b. an ordinary gain included in net income
c. an extra ordinary gain
d. an extra ordinary loss

13. In preparing consolidated financial statement of a Philippine parent company with a foreign
subsidiary, the foreign subsidiary’s functional currency is the currency
a. in which the subsidiary maintains its accounting records
b. of the country in which the subsidiary is located
c. of the country in which the parent is located
d. of the environment in which the subsidiary primarily generates and expends cash

14. Where the hedge arrangement completely eliminates the consequences of adverse exchange rate
fluctuation, the purchase of sale arrangement is considered to be:
a. partially hedged
b. positively hedged
c. perfectly hedged
d. negatively hedged

15. Which of the following items is not a required condition for applying hedge accounting?
a. the hedge is expected to be highly effective
b. the forecast transaction does not affect profit or loss
c. the effectiveness of the hedge can be reliably measured
d. the hedge is assessed on an ongoing basis

16. IFRS/ for SME’s, section 30, Foreign currency translation, provides that a foreign currency transaction
shall be recorded on initial recognition in the
a. presentation currency
b. local currency
c. foreign currency
d. functional currency

17. In Home Office and Branch merchandise transfers, the use of a Shipments to Branch account by the
Home Office and the use of a Shipments from Home office account by the branch indicate that the
inventory system employed
a. is a perpetual inventory system
b. is a periodic inventory system
c. is neither perpetual nor periodic inventory system
d. cannot be determined from the information provided
18. The Home office bills its branch for merchandise transfers at a price in excess of cost. In the home
office separate financial statements, the allowance for unrealized profit in branch inventory account
would appear in the financial statements of the home office as
a. an operating expense of the current period
b. deduction from the cost of goods sold
c. addition to the cost of goods sold
d. deduction from the investment in branch account

19. IFRS 10 defines them as the financial statements of a group in which the assets, liabilities, equity,
income, expenses and cash flows of the parent and its subsidiaries are presented as those as a single
economic unit.
a. consolidated financial statements
b. separate financial statements
c. group financial statements
d. combined financial statements

20. Under IFRS 10, parent corporation is the entity that controls one or more entities. How those IFRS 10
defines control?
a. an investor controls an investee when it is exposed, or has right to variable return from the
investment with the investee and has the ability to affect those returns through the power over the
investee
b. an investor controls an investee when it has the power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities
c. an investor controls an investee when it has the ability to influence the financial and operating policies
of an entity so as to obtain benefits from its activities
d. an investor controls an investee when it owns more than 50% of all the outstanding capital stocks,
whether common or preferred

21. Under IFRS 10, it refers to the term used to describe the ownership of the largest block of voting
rights in a situation where the remaining rights are widely dispersed even if it is less than the majority
interest thereby requiring the holder of such interest to prepare consolidated financial statements?
a. De jure control
b. De facto control
c. Legal control
d. Nominal control

22. An investee’s only business activity is to purchase receivables and service them on a day-to-day
basis. Servicing involves collection and passing on of principal and interest payments. Upon default, the
investee automatically puts the receivable to investor X. is Investor X required to consolidate Investee in
its consolidated financial statements?
a. Yes because X controls the investee’s relevant activity that is managing the receivables upon default
which significantly affects the investee’s returns.
b. No because there is no statement as regards to majority ownership of stocks.
c. Yes but only if X owns 51% or more of voting stocks of investee
d. No because there is no link of power over the investee to the exposure/right to variable returns of
investment.

23. How shall the parent corporation present the Noncontrolling Interest (NCI) in the consolidated
Statement of Financial Position?
a. It shall be presented within Consolidated Stockholder’s Equity, separately from the equity of the
owners of the parent.
b. It shall be presented as non-current liability.
c. It shall be presented as non-current asset.
d. It shall be presented as contract-equity account like treasure shares and subscription receivable.

24. IAS 27 as amended defines Separate Financial Statements as those presented by a parent or an
investor with joint control of, or significant influence over, in addition to its consolidated financial
statements. Under IAS 27 as amended, Investment in Subsidiary shall be accounted for by the parent in
its separate financial statement using
a. Equity method under IAS 28
b. Cost method
c. Fair value method under IFRS 9
d. Any of the above

25. IFRS 3 defines it a transaction or other event in which an acquirer obtains control of one or more
business.
a. Business combination
b. Consolidation
c. Merger
d. Acquisition of net assets

26. Under IFRS 3, how shall an entity (acquirer) account for each business combination?
a. Pooling of interest method
b. Proportionate consolidation method
c. Acquisition method
d. Equity method

27. Applying acquisition method for business combination requires the following steps, except
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 the acquire
d. Recognizing and measuring goodwill or a gain from a bargain purchase
e. Using equity method

28. In different types of business combination which of the following is not considered as an acquirer?
a. The newly formed corporation in case of merger
b. The absorbed corporation in case of consolidation
c. The corporation that acquires more than 50% of the other corporation’s ordinary shares
d. The corporation that controls the acquire

29. It refers to the date on which the acquirer obtains control of the acquire
a. Business combination date
b. Acquisition date
c. Control date
d. Consolidation date

30. 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 acquire. As a general rule,
the acquirer shall measure the identifiable assets acquired and liabilities assumed at their
a. Acquisition date- Fare value
b. Acquisition date- Book value
c. Acquisition date- Face value
d. Acquisition date- Carrying value

II. Problems

Problem 1
Certain balance sheet account of a foreign subsidiary of Rowan, Inc. at December 31, 2016, have been
translated into Philippine pesos as following:
Translated at
Current Rate Historical Rate
Note receivable, long-term 240,000 200,000
Prepaid rent 85,000 80,000
Patent 150,000 170,000

What total amount should be included in Rowan’s December 31, 2016, consolidated balance sheet for
the above accounts using the translation method recognized under PAS 21?
a. 450,000
b. 455,000
c. 475,000
d. 495,000

Problem 2
Paris Co., a wholly owned subsidiary of Filipino Corp. is located in France. In 2016, Filipino Corp.
borrower French francs as a partial hedge of its investment in Paris Co. on December 31, 2016, in the
preparation of consolidated financial statements, Filipino Corp.’s transaction loss on its investment in
the subsidiary amounted to P500,000, while its exchange gain on the borrowing amounted to P300,000.
What amount of gain or loss should Filipino Corp. report in consolidated income statement and balance
sheet?
Income statement Balance sheet
a. (500,000) 300,000
b. 300,000 (500,000)
c. 0 (200,000)
d. (200,000) 0

Problem 3
On September 1, 2016 Cano & Co. sold merchandise to a foreign firm for 250,000 francs. Terms of the
sale required payment in francs on February 1, 2017. On September 1, 2016 the spot exchange rate was
P1.20 per franc. At December 31, 2016, Cano’s year-end, the spot rate was P1.19, but the rate increased
to P1.22 by February 1, 2017, when payment was received. How much should Cano report as foreign
exchange transaction gain or loss in its 2017 income statement?
a. 0
b. 2,500 loss
c. 5,000 gain
d. 7,500 gain

Problem 4
Filcraft Corp sold metal craft to a US firm for $70,000 and pertinent information on exchange conversion
rates related to this transaction were as follows:

Conversion rate
Peso to US$
Nov. 4 Receipt of order P27.40
Nov. 22 Date of shipment 27.50
Dec. 31 Balance sheet date 27.60
Jan. 6 Date of collection 27.00

The sale would be appropriately recorded at:

a. 1,890,000
b. 1,918,000
c. 1,925,000
d. 1,935,000

Problem 5
A wholly owned subsidiary of Ward, Inc. has certain expense accounts for the year ended December 31,
2016 stated in local currency units (LCUs) as follows:
LCU
Depreciation of equipment 120,000
Provision for doubtful accounts 80,000
Rent 200,000
The exchange rate at various dates are as follows:
Peso
Equivalent
Of 1 LCU
December 31, 2016 P0.40
Average for year ended December 31, 2016 0.44
January 1, 2010 (Date of organization) 0.50

Using the only one method of translating the financial statements of foreign operations recognized by
PAS 21, what total peso amount should be included in Ward’s 2016 consolidated income statement to
reflect these expenses?
a. 160,000
b. 168,000
c. 176,000
d. 183,200

Problem 6
The following selected account balances were taken from the balance sheet of Quitting Corp. as of
December 31, 2017, immediately before the takeover of the trustee:

Marketable Security 300,000

Inventories 110,000
Land 150,000
Building 400,000

Additional information:
 Marketable securities have present market value of 320,000. These securities have been
pledged to secured notes payable of 280,000.
 The estimated worth of inventories is 70,000. However, inventories with book value of 50,000
have been pledge to secure notes payable of 60,000. The realizable value of inventory pledged is
estimated to be 40,000.
 Land and building are estimated to have a total realizable value of 450,000. This property is
pledged to secure the mortgage payable of 250,000.

1. What is the estimated amount available for preferred claims and unsecured creditors out of assets
pledged with fully secured creditors?
a. 840,000
b. 810,000
c. 770,000
d. 240,000
2. What is the total amount of net free assets?
a. 810,000
b. 770,000
c. 270,000
d. 240,000

Problem 7
In 2017, Camel Corp. was forced into bankruptcy and begun to liquidate. The following selected amount
balances were taken from its statement of affairs:

Assets: Book Estimated Current Value

Value
Asset pledge with partially secured creditors 80,000 50,000
Free assets 220,000 160,000

Liabilities: Book Amount Unsecured

Value
Preferred claims 16,000 0
Partially secured liabilities 75,000 25,000
Unsecured liabilities 155,000 155,000

1. What is the total amount available for payment of claims of unsecured creditors?
a. 0
b. 144,000
c. 160,000
d. 210,000

2. What is the estimated amount of liquidating dividend per peso claim (round to the nearest centavo)?
a. 0.80
b. 0.88
c. 1.03
d.1.17

3. What is the amount of deficiency to creditors?

a. 180,000
b. 160,000
c. 144,000
d. 36,000
Problem 8
Seco Corp. was forced into bankruptcy and is in the process of liquidating assets and paying claims.
Unsecured claims will be paid at the rate of P0.40 on the peso. Hale holds a P30,000 noninterest bearing
note receivable from Seco collateralized by an asset with a book value of P35,000 and a liquidation value
of P5,000. The amount to be realized by Hale on this note is
a. 5,000
b. 12,000
c. 15,000
d. 17,000

PROBLEM 9
P Company acquires all of S Company’s outstanding stock on January 1, 2020, in exchange of 20,000
shares in P Company, with a fair value of 14 per share, at acquisition date S Company has an unrecorded
Patent with a fair value of 20,000 and a contingent liability with a fair value of 15,000. This contingent
liability relates to a loan guarantee made by S Company which did not recognize a liability in its records
because it did not consider it could reliably measure the liability. The separate balance sheets of the two
companies immediately prepares before the consolidation with acquiree’s fair value were presented as
follows:
Assets P company S Company S Company
Book Value Book Value Fair Value
Cash 350,000 50,000 50,000
Accounts Receivable 75,000 50,000 50,000
Inventory 100,000 60,000 75,000
Land 175,000 40,000 100,000
Building and Equipment (net) 400,000 300,000 290,000
Total Assets 1,100,000 500,000 565,000

Liabilities and Stockholder’s Equity

Accounts Payable 100,000 100,000 100,000
Bonds Payable 200,000 100,000 135,000
Common Stock, P10 par 500,000 200,000
Paid in capital in excess of par 50,000 20,000
Retained earnings 250,000 80,000
Stockholder’s Equity 1,100,000 500,000

1. What is the amount of Bargain Purchase Gain on January 1, 2020?

a. 55,000
b. (55,000)
c. 50,000
d. (50,000)
2. What is the amount of Cash in the Consolidated Balance Sheet on January 1, 2020?
a. 400,000
b. 450,000
c. 560,000
d. 350,000

3. What is the amount of Total Assets in the Consolidated Balance Sheet on January 1, 2020?
a. 1,535,000
b. 1,425,000
c. 1,100,000
d. 1,685,000

PROBLEM 10
P Company acquires all of S Company’s outstanding stock on January 1, 2020, by paying 340,000 cash,
and immediately prepares a consolidated balance sheet. The separate balance sheets of the two
companies immediately prepares before the consolidation with acquiree’s fair value were presented as
follows:
Assets P company S Company S Company
Book Value Book Value Fair Value
Cash 350,000 50,000 50,000
Accounts Receivable 75,000 50,000 50,000
Inventory 100,000 60,000 75,000
Land 175,000 40,000 100,000
Building and Equipment (net) 400,000 300,000 290,000
Total Assets 1,100,000 500,000 565,000

Liabilities and Stockholder’s Equity

Accounts Payable 100,000 100,000 100,000
Bonds Payable 200,000 100,000 135,000
Common Stock, P10 par 500,000 200,000
Paid in capital in excess of par 50,000 20,000
Retained earnings 250,000 80,000
Stockholder’s Equity 1,100,000 500,000

1. What amount of Goodwill will be reported on January 1, 2020?

a. 10,000
b. (10,000)
c. 20,000
d. (20,000)
2. What is the amount of Cash in the Consolidated Balance Sheet on January 1, 2020?
a. 400,000
b. 50,000
c. 60,000
d. 350,000

3. What is the amount of Total Assets in the Consolidated Balance Sheet on January 1, 2020?
a. 1,335,000
b. 1,325,000
c. 1,100,000
d. 1,000,000

4. What is the amount of Non-Current Assets in the Consolidated Balance Sheet on January 1, 2020?
a. 965,000
b. 1,325,000
c. 1,195,000
d. 975,000

Problem 11
The following were found in your examination of the inter plant accounts between the Home office and
the Butuan Branch:
a. Transfer a fixed asset from Home Office amounting to P53,960 was not booked by the branch.
b. P 10,000 covering marketing expense of another branch was charged by Home Office to Butuan.
c. Butuan recorded a debit note on inventory transfers from Home Office of P75,000 twice.
d. Home Office recorded cash transfer of P65,700 from Butuan Branch as coming from Davao Branch.
e. Butuan reversed a previous debit memo from Cagayan de Oro Branch amounting to P10,500. Home
Office decided that his charge is appropriately Davao Branch’s Cost.
f. Butuan recorded a debit memo from Home Office of P4,650 as P4,560.

1. The net adjustment in the home office books related to Butuan Branch Current account is:
a. 75,700
b. 65,700
c. 86,200
d. 94,820

2. The net adjustment in Butuan’s books related to the Home Office account is:
a. 33,335
b. 31,450
c. 20,950
d. 10,450
3. Before the above discrepancies were given effect, the balance in the home office books of its Butuan
Branch Current account was debit balance of P165,920. The adjusted balance in the Butuan Branch
books of its Home Office Current account must be:
a. 92,336
b. 98,230
c. 104,500
d. 111,170

4. The adjusted balance of the reciprocal account is:

a. 84,807
b. 90,220
c. 99,200
d. 109,120