Final Exam

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NAME: Professor:

Section:

Date: Score:

ACCOUNTING FOR BUSINESS COMBINATIONS FINAL GRADING EXAMINATION 1. The “excess of the acquirer’s interest in the net fair value of acquiree’s identifiable assets, liabilities, and contingent liabilities over cost” (i.e., negative goodwill) should be a. Amortized over the life of the assets acquired. b. Reassessed as to the accuracy of its measurement and then recognized immediately in profit or loss. c. Reassessed as to the accuracy of its measurement and then recognized in retained earnings. d. Carried as a capital reserve indefinitely. 2. The costs of issuing equity securities in a business combination are a. expensed b. treated as direct reduction in equity c. included in the initial measurement of the credit to share capital account d. b and c 3. Goodwill may be capitalized a. only when it arises in a business combination. b. only when it is created internally. c. only when it is purchased d. on any of these cases. 4. A contingent liability assumed in a business combination is recognized a. if it is a present obligation that arises from past events and b. if its fair value can be measured reliably. c. even if it has an improbable outflow of resources embodying economic benefits. d. All of these 5. The acquisition date is a. the date on which the acquirer obtains control of the acquiree. b. the opening date. c. the date the acquirer transfers to the acquiree the consideration in a business combination. d. any of these 6. On January 1, 20x1, ABC Co. acquired 60% interest in XYZ, Inc. for ₱2,000,000 cash. ABC Co. incurred transaction costs of ₱100,000 in the business combination. ABC Co. elected to measure NCI at fair value. An independent valuer assessed the NCI’s fair value at ₱1,080,000. The fair values of XYZ’s identifiable assets and liabilities at the acquisition date were ₱6,000,000 and ₱3,500,000, respectively. How much is the goodwill (gain on a bargain purchase)? a. 500,000 b. (478,000) c. (500,000)

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d. 580,000 7. Contingent liabilities acquired in a business combination are initially recognized by the acquirer using the provisions of which of the following standards? a. PAS 37 b. PFRS 3 c. PFRS 37 d. PFRS 7 8. You are an accountant. Your client acquired another business in a business combination transaction during the year. Your client asked you for an advice regarding the preparation of consolidated financial statements. Your advice to your client would most likely be based on which of the following standards? a. PFRS 3 b. PFRS 10 c. PAS 27 d. PAS 36 9. Goodwill acquired in a business combination is initially and subsequently measured using which of the following standards? Initial measurement Subsequent measurement a. PFRS 3 PFRS 10 b. PAS 36 PFRS 3 c. PFRS 3 PAS 36 d. PFRS 3 PFRS 5 Use the following information for the next two questions: Fact pattern On January 1, 20x1, DIMINUTIVE Co. acquired all of the assets and assumed all of the liabilities of SMALL, Inc. As of this date, the carrying amounts and fair values of the assets and liabilities of SMALL acquired by DIMINUTIVE are shown below: Carrying Assets Cash in bank Receivables Allowance for receivables Inventory Building – net Goodwill Total assets Liabilities Payables

amounts 40,000 800,000 probable

losses

on

(120,000)

Fair values 40,000 480,000

2,080,000 4,000,000 400,000 7,200,000

1,400,000 4,400,000 80,000 6,400,000

1,600,000

1,600,000

On the negotiation for the business combination, DIMINUTIVE Co. incurred transaction costs amounting to ₱400,000 for legal, accounting, and consultancy fees.

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10. Case #1: If DIMINUTIVE Co. paid ₱6,000,000 cash as consideration for the assets and liabilities of SMALL, Inc., how much is the goodwill (gain on bargain purchase) on the business combination? a. 1,200,000 b. 1,120,000 c. 1,280,000 d. 1,240,000 11. Case #2: If DIMINUTIVE Co. paid ₱4,000,000 cash as consideration for the assets and liabilities of SMALL, Inc., how much is the goodwill (gain on bargain purchase) on the business combination? a. (800,000) b. (720,000) c. (880,000) d. 1,200,000 12. On January 1, 20x1, LITHE Co. paid cash of ₱6,000,000 in exchange for all of the net assets of FLEXIBLE, Inc. As of this date, the carrying amounts and fair values of the assets and liabilities of FLEXIBLE acquired by LITHE are shown below: Assets Carrying amounts Fair values Cash 40,000 40,000 Receivables 2,760,000 1,480,000 Allowance for probable losses on receivables (400,000) Property, plant and equipment 4,000,000 4,400,000 Computer software 400,000 Patent 200,000 Goodwill 400,000 80,000 Total assets 7,200,000 6,200,000 Liabilities Bonds payable (w/ face amount of ₱1,600,000) 1,600,000 1,800,000 In applying the recognition and measurement principles under PFRS 3, LITHE Co. has identified the following unrecorded intangible assets: Fair Type of intangible asset value Research and development projects 200,000 Customer list 160,000 Customer contract #1 120,000 Customer contract #2 80,000 Order (production) backlog 40,000 Internet domain name 60,000 Trademark 100,000 Trade secret processes 140,000 Mask works 180,000 Total 1,080,000 Additional information:  The computer software is considered obsolete.  The patent has a remaining useful life of 10 years and a remaining legal life of 12 years.  FLEXIBLE, Inc. recognized the research and development costs as expenses when they were incurred.

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

 



Customer contract #1 refers to an agreement between FLEXIBLE, Inc. and Numbers Co., a customer, wherein FLEXIBLE, Inc. is to supply goods to Numbers Co. for a period of 5 years. As of acquisition date, the remaining period in the agreement is 3 years. LITHE and FLEXIBLE believe that Numbers Co. will renew the agreement at the end of the current contract. The agreement is not separable. Customer contract #2 refers to FLEXIBLE’s insurance segment’s portfolio of one-year motor insurance contracts that are cancellable by policyholders. FLEXIBLE, Inc. transacts with its customers solely through purchase and sales orders. As of acquisition date, has a backlog of customer purchase orders from 60% of its customers, all of whom are recurring customers. The other 40% of FLEXIBLE’s customers are also recurring customers. However, as of acquisition date, FLEXIBLE has no open purchase orders or other contracts with those customers. The internet domain name is registered. How much is the goodwill (gain on bargain purchase)? a. 900,000 b. 600,000 c. 420,000 d. 1,680,000

13. On January 1, 20x1, FORTITUDE Co. acquired 15% ownership interest in ENDURANCE, Inc. for ₱400,000. The investment was accounted for under PFRS 9. From 20x1 to the end of 20x3, FORTITUDE recognized net fair value gains of ₱200,000. On January 1, 20x4, FORTITUDE acquired additional 60% ownership interest in ENDURANCE, Inc. for ₱3,200,000. As of this date, FORTITUDE has identified the following: a. The previously held 15% interest has a fair value of ₱720,000. b. ENDURANCE’s net identifiable assets have a fair value of ₱4,000,000. c. FORTITUDE elected to measure non-controlling interests at the non-controlling interest’s proportionate share of ENDURANCE’s identifiable net assets. The previously held interest was initially classified as FVPL. How much is the goodwill (gain on bargain purchase)? a. 200,000 b. 420,000 c. 920,000 d. 540,000 14. On January 1, 20x1, DIAPHANOUS Co. acquired all of the identifiable assets and assumed all of the liabilities of TRANSPARENT, 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: In addition to the business combination transaction, the following have also transcribed during the negotiation period: a. After the business combination, TRANSPARENT will enter into liquidation and DIAPHANOUS agreed to reimburse TRANSPARENT for liquidation costs estimated at ₱80,000. b. DIAPHANOUS agreed to reimburse TRANSPARENT for the appraisal fee of a building included in the identifiable assets acquired. The agreed reimbursement is ₱40,000. c. DIAPHANOUS entered into an agreement to retain the top management of TRANSPARENT for continuing employment. On acquisition date, DIAPHANOUS agreed to pay the key employees signing bonuses totaling ₱400,000.

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d. To persuade, Mr. Five-six Numerix, the previous major shareholder of TRANSPARENT, to sell his major holdings to DIAPHANOUS, DIAPHANOUS agreed to pay an additional ₱200,000 directly to Mr. Numerix. e. Included in the valuation of identifiable assets are inventories with fair value of ₱360,000. Ms. Vital Statistix, a former major shareholder of TRANSPARENT, shall acquire title to the goods. How much is the goodwill (gain on bargain purchase)? a. 1,680,000 b. 1,640,000 c. 1,760,000 d. 1,240,000 15. This type of business combination occurs when, for example, a private entity decides to have itself “acquired” by a smaller public entity in order to obtain a stock exchange listing. a. Step acquisition c. Reverse acquisition b. Rewind acquisition d. Stock acquisition

Use the following information for the next two questions: On January 1, 20x1, Entity A acquires Entity B in a business combination. The financial statements of the combining constituents are shown below:   Cash in bank Accounts receivable Inventory Investment in subsidiary Building, net Total assets Accounts payable Share capital Share premium Retained earnings Total liabilities and equity

Entity A 12,000 36,000 48,000

Entity B 6,000 14,400 27,600

90,000

-

216,000 402,000

48,000 96,000

60,000 204,000 78,000 60,000 402,000

7,200 60,000 28,800 96,000

Additional information:  Entity B’s assets and liabilities are stated at their acquisition-date fair values, except for the following: - Inventory, ₱37,200 - Building, net, ₱57,600  

The goodwill determined under PFRS 3 is ₱3,600. The NCI in the net assets of the subsidiary, also determined under PFRS 3, is ₱21,600.

16. How much is the consolidated total assets on January 1, 20x1? a. 430,800 c. 428,600

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b. 440,800

d. 465,800

17. How much is the consolidated total equity on January 1, 20x1? a. 330,800 c. 328,600 b. 340,800 d. 363,600 Use the following information for the next three questions: On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. On this date, Piglet's net identifiable assets have a carrying amount of ₱180,000, which approximates fair value. In December 20x1, Piglet sold goods to Pig for ₱81,000. Piglet had marked up these goods by 50% based on cost. One-third of these goods remain unsold at year-end. The group assessed that there is no impairment loss on goodwill for the current year. The individual statements of profit or loss of the entities for the year ended December 31, 20x1 are shown below: Pig Co. 1,000,000 (400,000) 600,000 (200,000) (80,000) 320,000 (96,000) 224,000

Revenue Cost of sales Gross profit Distribution costs Administrative costs Profit before tax Income tax expense Profit after tax

Piglet Co. 720,000 (300,000) 420,000 (100,000) (45,000) 275,000 (95,000) 180,000

All of Piglet’s income and expenses (including profit from intercompany sale) were earned and incurred evenly during the year. 18. How much is the consolidated gross profit? a. 689,000 b. 731,000 c. 798,000 d. 792,000 19. How much is the consolidated profit? a. 275,000 b. 284,000 c. 295,000 d. 302,000 20. How much is the profit attributable to Owners of the parent a. 262,000 b. 224,000 c. 262,250

NCI 13,000 60,000 12,750

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d. 256,250

45,750

Use the following information for the next five questions: On January 1, 20x1, Bass Co. issued equity instruments in exchange for 75% interest in Guitar Co. On acquisition date, Bass Co. elected to measure non-controlling interest at fair value. Bass Co.’s management believes that the fair value of the consideration transferred correlates to the fair value of the controlling interest acquired and that the fair value of the controlling interest is proportionate to the fair value of the remaining interest. Guitar Co.’s net identifiable assets have carrying amount and fair value of ₱300,000 and ₱360,000, respectively. The difference is attributable to a building with a remaining useful life of 6 years. The December 31, 20x1 statements of financial position of Bass Co. and Guitar Co. are summarized below: Bass Co. ASSETS Investment in subsidiary (at cost) Other assets TOTAL ASSETS

300,000 1,372,000 1,672,000

LIABILITIES AND EQUITY Trade and other payables Share capital Retained earnings Total equity TOTAL LIABILITIES AND EQUITY

292,000 940,000 440,000 1,380,000 1,672,000

Guitar Co. 496,000 496,000

120,000 200,000 176,000 376,000 496,000

No dividends were declared by either entity during year. There were also no inter-company transactions and impairment in goodwill. 21. What amount of goodwill is presented in the consolidated statement of financial position on December 31, 20x1? a. 40,000 b. 35,000 c. 20,000 d. 15,000 22. How much is the consolidated total assets as of December 31, 20x1? a. 1,867,000 b. 1,907,000 c. 1,958,000 d. 1,974,000 23. How much is the non-controlling interest in the net assets of the subsidiary on December 31, 20x1? a. 106,500 c. 136,500

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b. 116,500

d. 146,500

24. How much is the consolidated retained earnings on December 31, 20x1? a. 489,500 c. 534,500 b. 498,500 d. 543,500 25. How much is the consolidated total equity on December 31, 20x1? a. 1,546,000 c. 1,642,000 b. 1,564,000 d. 1,624,000 Use the following information for the next three questions: On January 1, 20x1, Laughter Co. issued equity instruments in exchange for 75% interest in Tears Co. Tears Co.’s net identifiable assets have carrying amount and fair value of ₱300,000 and ₱360,000, respectively. The difference is attributable to a building with a remaining useful life of 6 years. The December 31, 20x1 statements of profit or loss of Laughter Co. and Tears Co. are summarized below: Statements of profit or loss For the year ended December 31, 20x1

Revenues Operating expenses Profit for the year

Laughter Co. 1,200,000 (960,000) 240,000

Tears Co. 480,000 (400,000) 80,000

26. How much is the consolidated profit in 20x1? a. 301,000 c. 320,000 b. 310,000 d. 336,000 27. How much is the consolidated profit attributable to owners of the parent in 20x1? a. 292,500 c. 320,000 b. 310,000 d. 232,500 28. How much is the consolidated profit attributable to non-controlling interest in 20x1? a. 6,500 c. 57,500 b. 17,500 d. 77,500 29. Details of Poe Corp.'s plant assets at December 31, 20x3, are as follows: Year acquired Percent depreciated Historical cost Estimated current cost 20x1 30 200,000 280,000 20x2 20 60,000 76,000 20x3 10 80,000 88,000 Poe calculates depreciation at 10% per annum, using the straight-line method. A full year's depreciation is charged in the year of acquisition. There were no disposals of plant assets. The net

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current cost (after accumulated depreciation) of the plant assets at December 31, 20x3 should be stated as a. 364,000 b. 336,000 c. 260,000 d. 232,000 30. After restatement in accordance with PAS 29, the financial statements of an entity operating under a hyperinflationary economy are translated using which of the following procedures? a. all amounts (i.e., assets, liabilities, equity items, income and expenses, including comparatives) are translated at the closing rate. b. comparatives are not restated anymore to the purchasing power current at the end of reporting period, although they are also translated at the closing rate. c. non-monetary items are translated at the closing rate while income and expenses are translated at the average rates. d. a and b Use the following information for the next two questions: You are an auditor. ABC Philippines Co., your client, is not sure on what to disclose in its financial statements as its functional currency. Relevant information follows: ABC Philippines Co. is a branch of ABC U.S. Co. ABC Philippines operates in a Philippine Economic Zone Authority (PEZA) Special Economic Zone. ABC Philippines is engaged in the apparel business. All of its raw materials are imported from the main office in the U.S. and all of its finished products are exported directly to U.S. customers. The U.S. customers remit payments to the U.S. main office. The U.S. main office will then provide the Philippine branch its working capital needs. None of ABC Philippines Co.s’ finished products are sold in the Philippines. The raw materials imported and finished goods exported are denominated in U.S. dollars. 31. What is ABC Philippines Co.’s functional currency? a. Philippine peso b. U.S. dollar c. a or b d. none of these 32. ABC Philippines Co. is required to file audited financial statements with the Philippine Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR). What is the presentation currency for the financial statements to be filed with the said government agencies? a. Philippine peso b. U.S. dollar c. a or b d. none of these 33. These are those which do not give rise to a right to receive (or an obligation to deliver) a fixed or determinable amount of money. a. Monetary items b. Non-monetary items c. Financial items d. Non-financial items

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34. On December 1, 20x1, you imported a machine from a foreign supplier for $100,000, due for settlement on January 6, 20x2. Your functional currency is the Philippine peso. When preparing the December 31, 20x1 statement of financial position, which of the following will you translate to the closing rate? a. machine b. accounts payable c. a and b d. none of these 35. Use the information in the immediately preceding problem. The relevant exchange rates are as follows: Dec. 1, 20x1 Dec. 31, 20x1 Jan. 6, 20x2 ₱50:$1 ₱52:$1 ₱47:$1 How much foreign exchange gain (loss) will you recognize on December 31, 20x1? a. 200,000 c. 100,000 b. (200,000) d. (100,000) 36. According to the PFRS for SMEs, It is the currency of the primary economic environment in which the entity operates. a. Presentation currency c. Inflationary currency b. Functionality currency d. Functional currency 37. ABC Co. has a net investment in a foreign operation that it needs to hedge. How should ABC Co. hedge this item? a. as a fair value hedge c. a or b b. similar to a cash flow hedge d. neither a nor b 38. A highly probable forecast transaction is mostly hedged through a a. futures contract c. fair value hedge b. cash flow hedge d. any of these 39. Which of the following is not among the conditions for hedge accounting? a. formal designation and documentation at the start of the hedge b. hedge is actually highly effective as of the inception of the hedge c. for cash flow hedges, the hedged forecast transaction must be highly probable and must present an exposure to variations in cash flows that could ultimately affect profit or loss d. effectiveness can be measured reliably 40. Which of the following is included among the conditions for hedge accounting? a. formal designation and documentation at the end of the hedge b. hedge is expected to be highly effective c. for cash flow hedges, the hedged forecast transaction must be highly impossible and must present an exposure to variations in cash flows that could ultimately affect profit or loss; d. effectiveness cannot be measured reliably 41. Under fair value hedges, which of the following is measured at fair value?

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a. the hedging instrument b. the hedged item

c. both a and b d. either a or b

42. Under a cash flow hedge of a highly probable forecast transaction, the hedged item is recognized a. using other relevant PFRSs b. only on the date of actual transaction c. never recognized if settled on a net cash basis d. a and b 43. Discontinuance of hedging relationships is accounted for a. prospectively c. either a or b b. retrospectively d. partly a and partly b 44. On December 31, 199X, the end of its fiscal year, Smarti Company held a derivative instrument which it had acquired for speculative purposes during November, 199X. Since its acquisition the fair value of the derivative had increased materially. On December 31, how should the increase in fair value of the derivative instrument be reported by Smarti in its financial statements? a. Recognized as a deferred credit until the instrument is settled. b. Recognized in current net income for 199X. c. Recognized as a component of other comprehensive income for 199X. d. Disregarded until the instrument is settled. 45. Gains and losses from changes in the fair value of a derivative designated and qualified as a fair value hedge should be: a. Disregarded until the derivative is settled. b. Recognized as a deferred debit or deferred credit in the balance sheet until the derivative is settled. c. Recognized in current net income in the period in which the fair value of the derivative changes. d. Recognized as a component of other comprehensive income in the period in which the fair value of the derivative changes. 46. A derivative designated as a fair value hedge must be: I. Specifically identified to the hedged asset, liability or unrecognized firm commitment. II. Expected to be highly effective in offsetting changes in the fair value of the hedged item. a. I only. c. Both I and II. b. II only. d. Neither I nor II. 47. On January 1, 2002, Cougar Company received a two-year $500,000 loan. The loan calls for payments to made at the end of each year based on the prevailing market rate at January 1 of each year. The interest rate at January 1, 2002, was 10 percent. Aggie company also has a twoyear $500,000 loan, but Aggie's loan carries a fixed interest rate of 10 percent. Cougar Company does not want to bear the risk that interest rates may increase in year two of the loan. Aggie Company believes that rates may decrease and they would prefer to have variable debt. So the two companies enter into an interest rate swap agreement whereby Aggie agrees to make Cougar's interest payment in 2003 and Cougar likewise agrees to make Aggie's interest payment in 2003. The two companies agree to make settlement payments, for the difference only, on

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December 31, 2003. If the interest rate on January 1, 2003 is 8 percent, what will be Cougar's settlement payment to/from Aggie? a. $5,000 payment c. $10,000 payment b. $5,000 receipt d. $10,000 receipt 48. On January 1, 2002, Cougar Company received a two-year $500,000 loan. The loan calls for payments to made at the end of each year based on the prevailing market rate at January 1 of each year. The interest rate at January 1, 2002, was 10 percent. Aggie company also has a twoyear $500,000 loan, but Aggie's loan carries a fixed interest rate of 10 percent. Cougar Company does not want to bear the risk that interest rates may increase in year two of the loan. Aggie Company believes that rates may decrease and they would prefer to have variable debt. So the two companies enter into an interest rate swap agreement whereby Aggie agrees to make Cougar's interest payment in 2003 and Cougar likewise agrees to make Aggie's interest payment in 2003. The two companies agree to make settlement payments, for the difference only, on December 31, 2003. If the interest rate on January 1, 2003, is 12 percent, what will be Cougar's settlement payment to/from Aggie? a. $5,000 payment c. $10,000 payment b. $5,000 receipt d. $10,000 receipt 49. Fair value disclosure of financial instruments may be made in the: Body of financial statements Footnotes to financial statements a. No No b. No Yes c. Yes No d. Yes Yes 50. Disclosures about the following kinds of risks are required for most financial instruments. Credit risk Market risk a. Yes Yes b. Yes No c. No Yes d. No No

“It is paradoxical, yet true, to say, that the more we know, the more ignorant we become in the absolute sense, for it is only through enlightenment that we become conscious of our limitations. Precisely one of the most gratifying results of intellectual evolution is the continuous opening up of new and greater prospects.” – (Nikola Tesla)

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