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TEST BANK Advanced Accountin g Part 2 ZEUS VERNON B. MILLAN ALL RIGHTS RESERVED 2015 No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means - electronic or mechanical, including photocopying – without the written permission of the author. ISBN 978-...

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TEST BANK Advanced Accountin g Part 2

ZEUS VERNON B. MILLAN

ALL RIGHTS RESERVED 2015

No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means - electronic or mechanical, including photocopying – without the written permission of the author.

ISBN 978-621-95096-5-7

Published by:

BANDOLIN ENTERPRISE No. 100 Montebello Village, Bakakeng Sur, Baguio City 2600, Philippines

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TABLE OF CONTENTS CHAPTER 13 BUSINESS COMBINATIONS (PART 1).............1 OVERVIEW ON THE TOPIC...........................................1 INTRODUCTION........................................................1 OBJECTIVE..............................................................4 SCOPE...................................................................5 DEFINITION OF BUSINESS COMBINATION........................5 Essential elements in the definition of a business combination 5 ACCOUNTING FOR BUSINESS COMBINATION....................7 IDENTIFYING THE ACQUIRER........................................8 DETERMINING THE ACQUISITION DATE.........................10 RECOGNIZING AND MEASURING GOODWILL..................11 Consideration transferred...............................12 Non-controlling interest..................................12 Previously held equity interest in the acquiree13 Net identifiable assets acquired.....................13 RESTRUCTURING PROVISIONS....................................22 SPECIFIC RECOGNITION PRINCIPLES............................23 1. Operating leases.......................................23 2. Intangible assets.......................................26 EXCEPTION TO THE RECOGNITION PRINCIPLE – CONTINGENT LIABILITIES 32 EXCEPTIONS TO BOTH THE RECOGNITION AND MEASUREMENT PRINCIPLES 34 Additional concepts on Consideration transferred 37 EXCEPTIONS TO THE MEASUREMENT PRINCIPLE.............40 CHAPTER 13: SUMMARY..........................................43 CHAPTER 13: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)............................................................44 CHAPTER 13: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES).........................................48 CHAPTER 13: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) 55 CHAPTER 14 BUSINESS COMBINATIONS (PART 2)............63 SHARE-FOR-SHARE EXCHANGES.................................63 BUSINESS COMBINATION ACHIEVED IN STAGES..............67 BUSINESS COMBINATION ACHIEVED WITHOUT TRANSFER OF CONSIDERATION 70 MEASUREMENT PERIOD............................................73 DETERMINING WHAT IS PART OF THE BUSINESS COMBINATION TRANSACTION 79 Reacquired rights...........................................82 Settlement of pre-existing relationships between the acquirer and acquiree...................................................82 SUBSEQUENT MEASUREMENT AND ACCOUNTING...........89 DISCLOSURES........................................................96 CHAPTER 14: SUMMARY..........................................96 CHAPTER 14: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)............................................................97 CHAPTER 14: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES).........................................99 CHAPTER 14: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ........................................................................108 CHAPTER 15 BUSINESS COMBINATIONS (PART 3)..........115

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SPECIAL ACCOUNTING TOPICS FOR BUSINESS COMBINATION115 GOODWILL..........................................................115 Due diligence................................................116 Methods of estimating goodwill....................117 REVERSE ACQUISITIONS.........................................122 COMBINATION OF MUTUAL ENTITIES.........................126 CHAPTER 15: SUMMARY........................................127 CHAPTER 15: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)..........................................................127 CHAPTER 15: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES).......................................128 CHAPTER 15: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ........................................................................132 CHAPTER 15: THEORY OF ACCOUNTS REVIEWER........134 CHAPTER 15 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS QUESTIONS ........................................................................141 CHAPTER 16 CONSOLIDATED FINANCIAL STATEMENTS (PART 1) 142 OVERVIEW ON THE TOPIC.......................................142 SCOPE...............................................................143 CONTROL...........................................................143 POWER..............................................................144 Administrative rights....................................145 Unilateral rights............................................145 Protective rights...........................................145 Substantive rights........................................146 Voting rights.................................................147 Substantive removal and other rights held by other parties .....................................................................151 EXPOSURE OR RIGHTS TO VARIABLE RETURNS............151 ABILITY TO USE ITS POWER TO AFFECT INVESTOR’S RETURNS 151 ACCOUNTING REQUIREMENTS..................................152 Uniform accounting policies.........................152 Reporting date..............................................152 Consolidation period.....................................153 Measurement................................................153 NON-CONTROLLING INTERESTS (NCI).......................154 PREPARING THE CONSOLIDATED FINANCIAL STATEMENTS154 CONSOLIDATION AT DATE OF ACQUISITION.................155 CONSOLIDATION SUBSEQUENT TO DATE OF ACQUISITION162 Step 1: Analysis of effects of intercompany transaction 162 Step 2: Analysis of net assets.......................162 Step 3: Goodwill computation......................163 Step 4: Non-controlling interest in net assets164 Step 5: Consolidated retained earnings.......164 Step 6: Consolidated profit or loss................164 Step 7: Profit or loss attributable to owners of parent and NCI .....................................................................165 SUBSIDIARY’S OUTSTANDING CUMULATIVE PREFERENCE SHARES 180 CHAPTER 16: SUMMARY........................................181 CHAPTER 16: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)..........................................................184 CHAPTER 16: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES).......................................185

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CHAPTER 16: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ........................................................................190 CHAPTER 17 CONSOLIDATED FINANCIAL STATEMENTS (PART 2) 193 INTERCOMPANY TRANSACTIONS...............................193 Intercompany sale of inventory....................203 Intercompany sale of property, plant and equipment 212 Intercompany dividends...............................220 Intercompany bond transaction...................228 CHAPTER 17: SUMMARY........................................235 CHAPTER 17: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES).......................................236 CHAPTER 18 CONSOLIDATED FINANCIAL STATEMENTS (PART 3) 241 IMPAIRMENT OF GOODWILL....................................241 INTERCOMPANY ITEMS IN-TRANSIT AND RESTATEMENTS.246 CONTINUOUS ASSESSMENT.....................................255 Changes in ownership interest not resulting to loss of control .....................................................................255 Loss of control..............................................261 Derecognition of other comprehensive income266 IMPORTANCE OF CONSOLIDATION.............................269 THEORIES OF CONSOLIDATION.................................269 Historical background...................................272 Advantages and disadvantages of the entity theory 272 ADDITIONAL ILLUSTRATIONS:...................................274 CONSOLIDATION OF REVERSE ACQUISITION................288 SPECIAL PURPOSE ENTITIES....................................295 CHAPTER 18: SUMMARY........................................296 CHAPTER 18: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)..........................................................297 CHAPTER 18: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES).......................................297 CHAPTER 19 CONSOLIDATED FINANCIAL STATEMENTS (PART 4) 311 COMPLEX GROUP STRUCTURES................................311 Identifying the acquisition date....................312 Consolidation of a vertical group..................313 Consolidation of a D-shaped (mixed) group. 323 Complex group structure with Associate......327 INVESTMENT IN SUBSIDIARY MEASURED AT OTHER THAN COST 333 PUSH-DOWN ACCOUNTING.....................................338 PFRS 12 DISCLOSURE OF INTERESTS IN OTHER ENTITIES344 CHAPTER 19: SUMMARY........................................346 CHAPTER 19: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES).......................................346 CHAPTER 19: THEORY OF ACCOUNTS REVIEWER........353 CHAPTER 19 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS ........................................................................357 CHAPTER 20 SEPARATE FINANCIAL STATEMENTS..........358 OBJECTIVE..........................................................358

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SCOPE...............................................................358 DEFINITIONS........................................................358 PREPARATION OF SEPARATE FINANCIAL STATEMENTS.....359 COST METHOD.....................................................359 FAIR VALUE METHOD.............................................359 EQUITY METHOD..................................................360 DISCLOSURE........................................................361 CHAPTER 20: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)..........................................................362 CHAPTER 20: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES).......................................362 CHAPTER 20: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ........................................................................363 CHAPTER 20: THEORY OF ACCOUNTS REVIEWER........364 CHAPTER 20 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS ........................................................................364 CHAPTER 21 THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES .............................................................365 OBJECTIVE..........................................................365 Two ways of conducting foreign activities....365 Two main accounting issues.........................365 SCOPE...............................................................366 FUNCTIONAL CURRENCY.........................................366 CHANGE IN FUNCTIONAL CURRENCY.........................368 FOREIGN CURRENCY TRANSACTIONS.........................369 Initial recognition..........................................369 Subsequent measurement...........................370 Monetary items.............................................370 Direct and indirect quotation........................371 RECOGNITION OF EXCHANGE DIFFERENCES................371 ITEMS MEASURED AT OTHER THAN HISTORICAL COST...381 SEVERAL EXCHANGE RATES.....................................383 EXCHANGE DIFFERENCES RECOGNIZED IN OCI...........384 FOREIGN OPERATIONS...........................................385 Translation to the presentation currency......385 Translation procedures.................................386 Translation of a foreign operation.................393 Net investment in a foreign operation..........401 Disposal or partial disposal of a foreign operation 413 HYPERINFLATIONARY ECONOMY...............................414 Translation procedures – Hyperinflationary economy 414 DISCLOSURE........................................................419 CHAPTER 21: SUMMARY........................................419 CHAPTER 21: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)..........................................................420 CHAPTER 21: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES).......................................424 CHAPTER 21: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ........................................................................435 CHAPTER 21: THEORY OF ACCOUNTS REVIEWER........445 CHAPTER 21 - SUGGESTED ANSWERS TO REVIEW THEORY QUESTIONS ........................................................................453 CHAPTER 22

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ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 1).........................454 OVERVIEW ON THE TOPIC.......................................454 INTRODUCTION....................................................454 PURPOSE OF DERIVATIVES......................................455 Risks.............................................................455 DEFINITION OF A DERIVATIVE..................................456 COMMON TYPES OF DERIVATIVES.............................458 MEASUREMENT OF DERIVATIVES..............................461 NO HEDGING DESIGNATION....................................461 HEDGING............................................................461 Hedging instrument......................................462 Hedged items...............................................463 HEDGE ACCOUNTING.............................................464 Hedging relationships...................................466 FAIR VALUE HEDGES..............................................466 CASH FLOW HEDGES.............................................467 HEDGES OF A NET INVESTMENT IN A FOREIGN OPERATION468 CHAPTER 22: SUMMARY........................................469 CHAPTER 22: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)..........................................................470 CHAPTER 22: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ........................................................................473 CHAPTER 23 ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 2).........................475 ACCOUNTING FOR FORWARD CONTRACTS..................475 Illustration 1: Fair value hedge of a recognized asset 475 Illustration 2: No hedging designation (Held for speculation) .....................................................................478 Illustration 3: Fair value hedge of a recognized liability 479 Illustration 4: No hedging designation (Held for speculation) .....................................................................482 FAIR VALUE HEDGE OF AN UNRECOGNIZED FIRM COMMITMENT 482 Illustration 5: Fair value hedge of a firm sale commitment .....................................................................483 Illustration 6: Fair value hedge of a firm purchase commitment .....................................................................486 Illustration 7: FV hedge - firm purchase commitment (Present value)...........................................................489 Illustration 8: FV hedge - firm purchase commitment (Present value)...........................................................492 FAIR VALUE HEDGE VS. CASH FLOW HEDGE...............494 FIRM COMMITMENT VS. FORECAST TRANSACTION........495 CHOICE TO DESIGNATE AS EITHER FAIR VALUE HEDGE OR CASH FLOW HEDGE ........................................................................496 SUBSEQUENT ACCOUNTING FOR ACCUMULATED OCI IN CASH FLOW HEDGE ........................................................................496 Illustration 9: Cash flow hedge – forecasted purchase transaction .....................................................................497 Illustration 10: Cash flow hedge of a forecasted sale transaction – Present value (Indirect quotation)................501 Illustration 11: CF hedge of a recognized liability – Present value .....................................................................503

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CHAPTER 23: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)..........................................................506 CHAPTER 23: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES).......................................509 CHAPTER 23: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ........................................................................518 CHAPTER 24 ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 3).........................523 ACCOUNTING FOR FUTURES CONTRACT.....................523 Illustration 1: No hedging designation..........523 Illustration 2: FV hedge of a recognized asset measured at fair value.............................................................525 Illustration 3: FV hedge of a recognized asset measured at LOCON..........................................................527 Illustration 4: Fair value hedge of a firm sale commitment .....................................................................528 CASH FLOW HEDGE – SPECIFIC ACCOUNTING.............530 Illustration 5: CF hedge – Assessment of Hedge effectiveness .....................................................................531 ACCOUNTING FOR OPTIONS....................................535 Illustration 1: Fair value hedge of a recognized asset – Put option .....................................................................535 Illustration 2: No hedging designation – Call option 537 Illustration 3: CF hedge - forecasted transaction (Indirect quotation).....................................................539 ACCOUNTING FOR SWAPS.......................................541 Illustration 1: CF hedge - variable-rate debt (Payment at maturity)......................................................541 Illustration 2: CF hedge - variable-rate debt (Periodic payments) .....................................................................543 FAIR VALUE HEDGE – HEDGED ITEM IS MEASURED AT AMORTIZED COST ........................................................................547 Illustration 3: Fair value hedge of a fixed-rate debt547 CHAPTER 24: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES).......................................552 CHAPTER 24: EXERCISES (FOR CLASSROOM INSTRUCTION PURPOSES) ........................................................................560 CHAPTER 25 ACCOUNTING FOR DERIVATIVES AND HEDGING TRANSACTIONS (PART 4).........................569 ACCOUNTING FOR NET INVESTMENT HEDGES.............569 Illustration: Hedge of a net investment in foreign operation .....................................................................569 EMBEDDED DERIVATIVES........................................574 Hybrid contracts with financial asset hosts. .575 Separation of embedded derivative from host contract 575 ADDITIONAL ILLUSTRATIONS:...................................576 CHAPTER 25: SUMMARY........................................584 CHAPTER 25: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION PURPOSES)..........................................................585 CHAPTER 25: MULTIPLE CHOICE – COMPUTATIONAL (FOR CLASSROOM INSTRUCTION PURPOSES).......................................585 CHAPTER 25: THEORY OF ACCOUNTS REVIEWER........591

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CHAPTER 25 - SUGGESTED ANSWERS TO THEORY OF ACCOUNTS ........................................................................614

QUESTIONS

CHAPTER 26 CORPORATE LIQUIDATION AND REORGANIZATION 615 INTRODUCTION....................................................615 CORPORATE LIQUIDATION.......................................615 Measurement basis......................................615 Financial reports...........................................616 REORGANIZATION.................................................642 Types of corporate reorganization................642 CHAPTER 26: SUMMARY........................................643 CHAPTER 26: MULTIPLE CHOICE – THEORY (FOR CLASSROOM INSTRUCTION PURPOSES).............................................................