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Quiz No. ACCO 30023 – Accounting for Business CombinationInstructions: Refer to this pdf file for your questionnaire and use the Microsoft Forms as your answer sheet. Use a separate paper for your solutions in the problem solving and upload it when you submit your quiz. Always observe HONESTY during...

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Quiz No. ACCO 30023 – Accounting for Business Combination Instructions: Refer to this pdf file for your questionnaire and use the Microsoft Forms as your answer sheet. Use a separate paper for your solutions in the problem solving and upload it when you submit your quiz. Always observe HONESTY during the examination. God Bless you all! 1. Company T is a clothing manufacturer and has traded for a number of years. The company produces a wide range of clothing and employs a workforce of designers, machine operators, quality checkers, and other operational, marketing and administrative staff. It owns and operates a factory, warehouse and machinery and holds raw material inventory and finished products. On 1 January 2020, Company A pays P520,000 to acquire 100% of the ordinary voting shares of Company T. No other type of shares has been issued by Company T. On the same day, the three main executive directors of Company A take on the same roles in Company T. This is NOT a business combination. 2. Company D is a development stage entity that has not started revenue-generating operations. The workforce consists mainly of research engineers who are developing a new technology that has a pending patent application. Negotiations to license this technology to several customers are at an advanced stage. Company D requires additional funding to complete development work and commence planned commercial production. The value of the identifiable net assets in Company D is P7,500,000. Company A pays P6,000,000 in exchange for 60% of the equity of Company D (a controlling interest). Company D is presumed to be a business, therefore there is a business combination. 3. Company A acquires 100% of the equity and voting rights of Company P, a subsidiary of a property investment group. Company P owns three investment properties. The properties are single-tenant industrial warehouses subject to long-term leases. The leases oblige Company P to provide basic maintenance and security services, which have been outsourced to third party contractors. The administration of Company P’s leases was carried out by an employee of its former parent company on a part-time basis, but this individual does not transfer to the new owner. This is outside the scope of IFRS 3. 4. Company A acquires 100% of the equity and voting rights of Company Q, which owns three investment properties. The properties are multi-tenant residential condominiums subject to shortterm rental agreements that oblige Company Q to provide substantial maintenance and security services, which are outsourced with specialist providers. Company Q has five employees who deal directly with the tenants and with the outsourced contractors to resolve any non-routine security or maintenance requirements. These employees are involved in a variety of lease management tasks (e.g. identification and selection of tenants; lease negotiation and rent reviews) and marketing activities to maximize the quality of tenants and the rental income. Company Q is NOT considered a business. 5. Company S is a manufacturer of a wide range of products. The company’s payroll and accounting system is managed as a separate cost center, supporting all the operating segments and the head office functions. Company A agrees to acquire the trade, assets, liabilities and workforce of the operating segments of Company S but does not acquire the payroll and accounting cost center or any head office functions. Company A is a competitor of Company S. This is outside the scope of IFRS 3.

6. Company A, the ultimate parent of a large number of subsidiaries, reorganizes the retail segment of its business to consolidate all of its retail businesses in a single entity. Under the reorganization, Company X (a subsidiary and the biggest retail company in the group) acquires Company A’s shareholdings in its two operating subsidiaries, Companies Y and Z by issuing its own shares to Company A. After the transaction, Company X will directly control the operating and financial policies of Companies Y and Z. The transaction is outside the scope of PFRS #3. 7. Company Q has a wholly owned subsidiary, Company R, and a 30% owned associate, Company S. During the year, Company R acquired Company Q’s shares in Company S by issuing its own shares and purchased the remaining shares of Company S held by other shareholders for cash. After these transactions, Company S became a wholly owned subsidiary of Company R. The acquisition method will not apply in this transaction because this will not qualify as business combination. 8. Company X and Company Y are each owned by three unrelated shareholders (i.e. each shareholder owns one third of each company). The three individuals have an established pattern of voting together but there is no contractual agreement in place that creates control or joint control for any of the shareholders. As part of the reorganization, the shareholders incorporated a new entity, Company Z. Company Z issued shares to each of the shareholders in exchange for 100% of the equity of Company X and Company Y. Subsequent to the share exchange, the three shareholders now each own one third of Company Z. Consequently, this transaction is within the scope of IFRS 3 and the acquisition method of accounting is applicable. 9. The closing date always precede the acquisition date. 10. According to PFRS #3: Revised, cost directly attributable in effecting the business combination (e.g. finders’ fee and other direct cost) must be “expensed as incurred”. 11. Non-controlling interest (NCI) is the equity in the acquiree not attributable, directly or indirectly, to an acquirer. NCI arises when an acquiree is a partially-owned subsidiary. 12. IFRS 3 (Revised) is applied prospectively to business combinations occurring in the first accounting period beginning on or after 1 July 2009. It can be applied early but ONLY to an accounting period beginning on or after 30 June 2007. IFRS 3 (Revised) and IAS 27 (Revised) are applied at the same time. Retrospective application to earlier business combinations is NOT permitted. 13. Transaction costs directly related to the issue of debt instruments are deducted from the fair value of the debt on initial recognition and are amortized over the life of the debt as part of the effective interest rate. Directly attributable transaction costs incurred issuing equity instruments are deducted from equity. 14. Gain on bargain purchase (gain on combination) is immediately recognized in the Profit or Loss of the acquirer if the consideration transferred is less than the fair value of assets acquired. 15. Measurement of non-controlling interest is a policy choice.

16. Star Co. has properly treated as expense, P200,000 of research and development costs that resulted in a patent. When Victory Co. acquired Star Co., It was determined that the patent had a fair value of P500,000. Which of the following I statements is true? a. On the books of Victory Co., the patent should be recorded at P200,000 because that was the cost to produce it. b. The cost of the patent on the books of Victory Co. should be P500,000. c. The cost of the patent on the books of Victory Co. should be the same as on the books of Star Co. d. The cost of the patent on the books of Victory Co. should be represented by the legal costs involved in the patent process. 17. With respect to the allocation of the cost of a business acquisition, PFRS 3 requires a. Cost to be allocated to the assets based on their carrying values. b. Cost to be allocated based on fair values. c. Cost to be allocated based on original costs. d. None of the above. 18. In accounting for business combination, which of the following intangibles should not be recognized as an asset apart from goodwill? a. Trademarks b. Lease agreements c. Employee quality d. Patents 19. An entire acquired entity is sold. The goodwill remaining from the acquisition should be a. Included in the carrying amount of the net assets sold. b. Charged to retained earnings of the current period. c. Expensed in the period sold. d. Charged to retained earnings of prior periods. 20. Remeasurement gain or loss of the previous interest in the acquiree in a step acquisition is: a. Disposed in the current year P/L of the acquirer b. Disposed in the current year P/L of the acquired company c. Disposed in the balance sheet and amortize over a maximum period of 10 years d. Ignored, since remeasurement is not allowed e. Presented as part of the OCI after re-assessment 21. Which of the following statements is/are TRUE? a. The acquirer shall measure the identifiable assets acquired and the liabilities assumed at their acquisition-date fair value. b. In net asset acquisition, gain on bargain purchase is recognized in the Profit or Loss of the acquirer (after reassessment) if the consideration transferred is less than the fair value of net assets acquired. c. Transaction costs directly related to the issue of debt instruments are deducted from the fair value of the debt on initial recognition and are amortized over the life of the debt as part of the effective interest rate. Directly attributable transaction costs incurred issuing equity instruments are deducted from share premium. d. According to IFRS #3: Revised, cost directly attributable in effecting the business combination (e.g. finders’ fee and other direct cost) must be “expensed as incurred”. e. All of the above.

22. Consideration in a business combination will most likely includes: a. Fixed number of shares to be issued in the future after certain conditions were met. b. Variable number of shares to be issued in the future after certain conditions were met. c. Additional cash payment that is dependent upon the occurrence of future event, deemed possible only and not probable. d. All the above. e. None of the above. 23. Provisional amounts recognized in a business combination is: a. Adjusted retrospectively for the information obtained during the measurement period. b. Adjusted prospectively for the information obtained during the measurement period. c. Not adjusted, unless there is an error on initial accounting. d. Ignored, because IFRS 3 prohibit provisional valuation. 24. If initial accounting for business combination is incomplete by the end of the reporting period in which the combination has occurred, the acquirer a. Shall be exempted from preparing consolidated financial statements until the business combination is completed. b. Shall prepare financial statement as if there is no business combination that occurred since the information is still incomplete. c. Shall report in its financial statement provisional amounts for the item for which accounting is incomplete and finalized the accounting for a maximum period of one year form the date of combination. d. Shall report in its financial statement provisional amounts for the item for which accounting is incomplete and finalized the accounting whenever data are available, even beyond one year from the date of combination. 25. According to IFRS 3, the closing date is the date when a. The consideration was transferred b. The acquirer obtains control over the acquiree c. The acquirer registers the shares issued to the SEC d. The transfer tax was settled with the BIR 26. On June 30, 2020, White Corporation issued 100,000 shares of its P20 par value ordinary share for the net assets of Black Company. The market value of White's ordinary share on June 30 was P38 per share. White paid a fee of P100,000 to the broker who arranged this acquisition. Costs of SEC registration and issuance of the equity securities amounted to, P50,000. Contingent consideration determined to be paid after acquisition amounts to P100,000. What amount should White capitalize as the cost of acquiring Black's net assets.

27. Phil Co. acquires a controlling interest in Sill Co. for P450,000 in the open market. The P100 par ordinary share capital of Sill Co. at the time of acquisition is P625,000 and its Retained Earnings mounts to P225,000. Sill Co. shares are selling at P120 per share in the open market. The gain on bargain purchase arising from acquisition assuming NCI is measure at fair value is: 28. The interest acquired by Phil Co. over Sill Co. is: (refer to #27)

29. Red Corporation will issue ordinary shares with a par value P10 for the net assets of Blue Company. Red's ordinary share has a current market value of P30 per share. Blue's statement of financial position on the date of acquisition follow: Current assets Property and equipment Liabilities

P320,000 880,000 400,000

Common stock, P5 par Additional paid in capital Retained earnings

P80,000 320,000 400,000

Blue's current assets are appraised at P400,000 and the property and equipment were appraised at P1,600,000. Its liabilities are fairly valued. Accordingly, Red Corporation issued shares of its common stock with a total market value equal to that of Blue's net assets including goodwill. To recognize goodwill of P200,000, how many shares were to be issued by Red? 30. Pantene Company acquired a 70% interest in Sun-silk Company for P 1,420,000 when the fair value of Silk’s identifiable net assets was P1,200,000. Pantene acquired 65% interest in Dove Company for P 300,000 when the fair value of Dove’s identifiable assets was P 640,000. Pantene measures non-controlling interest at the relevant share of the identifiable net assets at the acquisition date. Neither Sun-silk nor Dove had any contingent liabilities at the acquisition date and the above fair values were the same as the carrying amounts in their financial statements. Annual impairment reviews have not resulted in any impairment losses being recognized. Under PFRS 3: Business Combinations, what figures in respect to gain on bargain on bargain purchase should be included in Consolidated Statement of Financial Position? 31. Blue C-o. merged into Soda Corp. on June 30, 2020. In exchange for the net assets at fair market value of Blue Co. amounting to P2,785,800, Soda issued 68,000 ordinary shares at P36 par value, then going at a market price of P41 per share. Relevant data on stockholder’s equity immediately before the combination show: Soda Corp Blue Company Ordinary Share Capital P8,790,000.00 P2,030,000.00 APIC 3,834,000.00 782,000.00 Retained Earnings / Deficit (1,516,000.00) 495,000.00 Total SHE P11,108,000.00 P3,307,000.00 Out of pocket costs of the combination were as follows: Legal fees for the contract of bus. Combination Audit fees for SEC registration of share issue Printing Cost of Stock Certificates Broker’s Fee Accountant’s fee for pre-acquisition audit Other direct cost of acquisition General and allocated expenses Listing fees in issuing new shares

P 187,300 198,400 144,900 135,000 161,000 90,400 115,300 172,000

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 and 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? 32. Corinthians Company acquired all of Hebrews Corporation's assets and liabilities on January 2, 2020, in a business combination, at that date, Hebrews reported assets with a book value of P624,000 and liabilities of P356,000. Corinthians noted that Hebrews had P40,000 of research and development costs on its books at the acquisition date that did not appear to be of value. Corinthians also determined that patents developed by Hebrews had a fair value of P120,000 but had not been recorded by Hebrews. Except for building and equipment, Corinthians determined the fair value of all other assets and liabilities reported by Hebrews approximated the recorded amounts. In recording the transfer of assets and liabilities to its books, Corinthians recorded goodwill of P93,000. Corinthians paid P517,000 to acquire Hebrews' assets and liabilities. If the book value of Hebrews' buildings and equipment was P341,000 at the date of acquisition, what was their fair value? 33. Maynard Corporation reports net assets of P300,000 at book value. These assets have an estimated market value of P350,000. Jim Corporation buys 80% ownership of Maynard for P300,000; there is a control premium of P15,000 included in the purchase price. Of the Goodwill reported in the consolidated balance sheet (as of date of acquisition), how much is attributable to the non-controlling interest? 34. On July 1,2019 The Magi Company acquired 100% of The Natto Company for a consideration transferred of P160 million. At the acquisition date the carrying amount of Natto’s net assets was P100 million. At the acquisition date a provisional fair value of P120 million was attributed to the net assets. An additional valuation received on May 31, 2020 increased this provisional fair value to P135 million and on July 30, 2020 this fair value was finalized at P140 million. What amount should Magi present for goodwill in its statement of financial position on December 31, 2020, according to PFRS 3 Business combinations? 35. On October 1, 2019, the Tingling Co. acquired 100% of the Green Co. when the fair value of Green's net assets was P116,000,000 and their carrying amount was P120,000,000 The consideration transferred comprised P200,000,000 in cash transferred at the acquisition date, plus another P60,000,000 in cash to be transferred 11 months after the acquisition date if a specified profit target was met by Green. At the acquisition date, there was only a low probability of the profit target being met, so the fair value of the additional consideration liability was P10,000,000. In the event, the profit target was met and the P60,000,000 cash was transferred. What amount should Tingling present for goodwill in its statement of consolidated financial position at December Business Combination?

36. Rock Corporation was merged into Horse Company in a combination properly accounted for as an acquisition. Their condensed statement of financial position before the combination are: Rook Horse Current assets P3,288,000 P1,627,600 Property and equipment, net 4,654,000 1,040,000 Patents 260,000 Total assets P7,942,000 P2,927,000 Liabilities P3,704,000 P171,600 Capital stock, Par P100 2,600,000 1,300,000 Additional paid in capital 390,000 350,000 Retained earnings 1,248,000 1,106,000 Total liabilities and equity P7,942,000 P2,927,600 Per appraisal's report, Horse assets have fair values of: Current assets P1,653,600 Property and equipment 1,248,000 Patents 338,000 Rook Corporation purchases the net assets of Horse for P3,168,000 cash. What is the total asset of Rook Corporation after the combination? 37. The stockholders' equities of Par Corporation and Son Company at July 1, 2020 were as follows:

Capital stock, P100 par Additional paid in capital Retained earnings

Par P15,000,000 2,000,000 6,000,000

Son P8,000,000 4,000,000 3,000,000

On July 2, 2020, Par issued 150,000 of its shares with a market value of PI 20 per share for the assets and liabilities of Son, and Son was dissolved. On the same day, Par paid P50,000 for professional fees and P 100,000 for SEC registration of equity securities. After the combination, what is the total stockholders' equity of Par Corporation? 38. Pete Corporation and Sol Company agreed to combine their businesses, with Pete Corporation as the surviving entity. Pete will issue 48,000 shares of its capital stock, with a par value of PI00 per share, and a fair market value of P175 per share. Pete incurred the following additional acquisition-related costs: Professional fees P120,000 Broker's fees 80,000 Costs to register and issue stock 50,000 Before combination, their respective statement of financial position showed stockholders' equity accounts as follows:

Capital stock Additional paid in capital Retained earnings

Pete Sol P7,200,000 P3,600,000 3,120,000 360,000 6,000,000 2,040,000

The total stockholder's equity of Pete Corporation after ...