AFAR MCQ On BUSINESS COMBINATIONS CONSOLIDATION PDF

AFAR Drills & Exercises1
Business Combinations (Part 1)
Multiple Choice – Computational

Measuring goodwill / gain on bargain purchase
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:
Assets Carrying amounts Fair values
Cash in bank 40,000 40,000
Receivables 800,000 480,000
Allowance for probable losses on
(120,000)
receivables -
Inventory 2,080,000 1,400,000
Building – net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000
Liabilities
Payables 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.
1. 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
2. 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
Non-controlling interests
Use the following information for the next four questions:
Fact pattern
On January 1, 20x1, KNAVE acquired 80% of the equity interests of RASCAL,
Inc. in exchange for cash. Because the former owners of RASCAL needed to
dispose of their investments in RASCAL by a specified date, they did not
have sufficient time to market RASCAL to multiple potential buyers.
As January 1, 20x1, RASCAL’s identifiable assets and liabilities have fair

values of ₱4,800,000 and ₱1,600,000, respectively.
Case #1: Non-controlling interest measured at fair value

3. KNAVE Co. elects the option to measure non-controlling interest at fair
value. An independent consultant was engaged who determined that the
1
From Advanced Accounting by V.Z.MILLAN
fair value of the 20% non-controlling interest in RASCAL, Inc. is
₱620,000.
If KNAVE Co. paid ₱4,000,000 cash as consideration for the 80% interest in
RASCAL, Inc., how much is the goodwill (gain on bargain purchase) on the
business combination?
a. 800,000 b. 2,060,000 c. 1,440,000 d. 1,420,000

value. An independent consultant was engaged who determined that the
fair value of the 20% non-controlling interest in RASCAL, Inc. is
₱620,000.
a. (180,000) b. (800,000) c. (160,000) d. (200,000)

value. A value of ₱1,000,000 is assigned to the 20% non-controlling
interest in RASCAL, Inc. [(₱4M ÷ 80%) x 20% = 1,000,000].
a. 200,000 b. 1,800,000 c. 2,440,000 d. 1,440,000
Case #4: Non-controlling interest’s proportionate share in net assets

6. KNAVE Co. elects the option to measure the non-controlling interest at
the non-controlling interest’s proportionate share of RASCAL, Inc.’s net
identifiable assets
RASCAL, Inc. and, how much is the goodwill (gain on bargain purchase) on
the business combination?
a. 1,440,000 b. 800,000 c. 1,400,000 c. 960,000
Transaction costs
Fact pattern
On January 1, 20x1, SMUTTY acquired all of the identifiable assets and
assumed all of the liabilities of OBSCENE, Inc. On this date, the
identifiable assets acquired and liabilities assumed have fair values of
₱6,400,000 and ₱3,600,000, respectively.
SMUTTY incurred the following acquisition-related costs: legal fees,

₱40,000, due diligence costs, ₱400,000, and general administrative costs
of maintaining an internal acquisitions department, ₱80,000.
7. Case #1: As consideration for the business combination, SMUTTY Co.

transferred 8,000 of its own equity instruments with par value per share
of ₱400 and fair value per share of ₱500 to OBSCENE’s former owners.
Costs of registering the shares amounted to ₱160,000. How much is the
goodwill (gain on bargain purchase) on the business combination?
a. 716,000 b. 556,000 c. 600,000 d. 1,200,000
8. Case #2: As consideration for the business combination, SMUTTY Co.
issued bonds with face amount and fair value of ₱4,000,000. Transaction
costs incurred in issuing the bonds amounted to ₱200,000. How much is
the goodwill (gain on bargain purchase) on the business combination?
a. 716,000 b. 556,000 c. 600,000 d. 1,200,000
Restructuring provisions
9. On January 1, 20x1, ENTREAT Co. acquired all of the identifiable assets
and assumed all of the liabilities of BEG, 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. ENTREAT Co. has estimated restructuring provisions of
₱800,000 representing costs of exiting the activity of BEG, costs of
terminating employees of BEG, and costs of relocating the terminated
employees. How much is the goodwill (gain on bargain purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000
Specific recognition principles – Operating leases

Fact pattern
On January 1, 20x1, HISTRIONAL Co. acquired all of the identifiable assets
and assumed all of the liabilities of THEATRICAL, 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.
Case #1: Acquiree is the lessee – terms are favorable

10. As of January 1, 20x1, HISTRIONAL holds a building and a patent which
are being rented out to THEATRICAL, Inc. under operating leases.
HISTRIONAL has determined that the terms of the operating lease on the
building compared with market terms are favorable. The fair value of the
differential is estimated at ₱80,000. How much is the goodwill (gain on
bargain purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000
Case #2: Acquiree is the lessee – terms are unfavorable

11. As of January 1, 20x1, HISTRIONAL holds a building and a patent which
are being rented out to THEATRICAL, Inc. under operating leases.
HISTRIONAL has determined that the terms of the operating lease on the
patent compared with market terms are unfavorable. The fair value of the
differential is estimated at ₱80,000. How much is the goodwill (gain on
bargain purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000
Case #3: Acquiree is the lessor

12. As of January 1, 20x1, HISTRIONAL is renting a building and a patent
from THEATRICAL, Inc. under operating leases. HISTRIONAL has determined
that the terms of the operating lease on the building compared with
market terms are favorable. The fair value of the differential is
estimated at ₱80,000. How much is the goodwill (gain on bargain
purchase)?
a. 1,080,000 b. 1,280,000 c. 1,120,000 d. 1,200,000
Intangible assets – separability and contractual-legal criteria

13. 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:
Cash 40,000 40,000
Receivables 2,760,000 1,480,000
(400,000)
receivables
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 1,800,000
₱1,600,000)
In applying the recognition and measurement principles under PFRS 3, LITHE

Co. has identified the following unrecorded intangible assets:
Type of intangible asset Fair 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.
 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
Other recognition and measurement principles
14. On January 1, 20x1, SUBTERFUGE Co. acquired all of the identifiable
assets and assumed all of the liabilities of DECEPTION, Inc. by paying
cash of ₱4,000,000. On this date, the identifiable assets acquired and
respectively.
 SUBTERFUGE intends to sell immediately a factory plant included in the
identifiable assets of DECEPTION. All of the “held for sale”
classification criteria under PFRS 5 are met. As of January 1, 20x1,
the factory plant has a fair value of ₱1,200,000 and a carrying amount
of ₱1,000,000 in the books of DECEPTION. Costs to sell the factory plant
is ₱80,000.
 Not included in the identifiable asset of DECEPTION is a research and
development intangible asset that SUBTERFUGE does not intend to use. The
fair value of this asset is ₱200,000.
 Also, not included in the identifiable asset of DECEPTION is a customer
list, with an estimated value of ₱40,000, in the form of a database
where the nature of the information is subject to national laws
regarding confidentiality.

a. 1,200,000 b. 1,280,000 c. 1,080,000 d. 1,040,000
Contingent liabilities
15. On January 1, 20x1, CHIDE Co. acquired 90% of the identifiable assets
and assumed all of the liabilities of SCOLD, Inc. by paying cash of
₱4,000,000. On this date, SCOLD’s identifiable assets and liabilities
have fair values of ₱6,400,000 and ₱3,600,000, respectively. Non-
controlling interest has a fair value of ₱320,000.
As of January 1, 20x1, SCOLD had the following which were not included in
the acquisition-date fair value measurement of liabilities:
 SCOLD has an existing contract with a customer to deliver products at a
specified future date. In accordance with the agreement, SCOLD shall pay
a penalty for failure to deliver the said goods. CHIDE determined that
the fair value of the penalty is ₱40,000. However, because CHIDE expects
to comply with the agreement, it was assessed that payment of penalty is
improbable.
 SCOLD has guaranteed a bank loan of a third party. CHIDE shall replace
SCOLD as the guarantor. If the third party defaults on the loan, CHIDE
will be held liable for the guarantee. CHIDE determined that the fair
value of the guarantee is ₱120,000. However, both SCOLD and CHIDE
believe that the third party will not default on its loan from the bank.
 There is a pending unresolved litigation filed by a third party against
SCOLD. CHIDE determined that the fair value of settling the litigation
is ₱200,000. However, because the legal counsels of both CHIDE and SCOLD
strongly believe that they will win the case, it was assessed that
payment for the settlement of the litigation is improbable.

a. 1,880,000 b. 1,200,000 c. 1,560,000 d. 1,520,000
Consideration transferred and indemnification asset

16. On January 1, 20x1, PRODIGIOUS Co. acquired all of the identifiable
assets and assumed all of the liabilities of EXTRAORDINARY, 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.
The terms of the business combination agreement are shown below:

 Half of the ₱4,000,000 agreed consideration shall be paid on January 1,
20x1 and the other half on December 31, 20x5. The prevailing market rate
as of January 1, 20x1 is 10%.
 In addition, PRODIGIOUS agrees to provide for the following:
a. A piece of land with a carrying amount of ₱2,000,000 and fair value
of ₱1,200,000 shall be transferred to the former owners of
EXTRAORDINARY.
b. After the combination, EXTRAORDINARY’s activities shall be continued
by PRODIGIOUS. PRODIGIOUS agrees to provide a patented technology for
use in the activities of EXTRAORDINARY. The patented technology has a
carrying amount of ₱240,000 in the books of PRODIGIOUS and a fair
value of ₱320,000.
 Included in the liabilities assumed is an estimated liability on a
pending lawsuit filed against EXTRAORDINARY by a third party with an
acquisition-date fair value of ₱400,000. The carrying amount of the
liability in EXTRAORDINARY’s books immediately before the business
combination is ₱480,000. EXTRAORDINARY guarantees to indemnify
PRODIGIOUS for any settlement amount of the liability in excess of
₱480,000.

a. 1,721,843 b. 1,561,843 c. 1,641,843 d. 2,320,000
Deferred taxes
17. On January 1, 20x1, ATTAINDER Co. acquired all of the assets and
assumed all of the liabilities of DISHONOR, Inc. As of this date, the
carrying amounts and fair values of the assets and liabilities of
DISHONOR acquired by ATTAINDER are shown below:
Cash in bank 40,000 40,000
(120,000)
receivables
Inventory 2,080,000 1,400,000
Building – net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000
Liabilities
Payables 1,600,000 1,600,000
ATTAINDER Co. paid ₱6,000,000 cash as consideration for the assets and
liabilities of DISHONOR, Inc. It was determined on acquisition date that
DISHONOR, Inc. has an unrecorded patent with a fair value of ₱120,000 and
a contingent liability with fair value of ₱80,000.
Although adjustments are to be made to the carrying amounts of the assets

and liabilities, no adjustments shall be made to their tax bases. All
adjustments to the carrying amounts of assets and liabilities result to
temporary differences. ATTAINDER’s tax rate is 30%.
How much is the goodwill (gain on bargain purchase) on the business
combination?
a. 1,148,000 b. 1,108,000 c. 1,028,000 d. 1,240,000
Consideration transferred – Dividends on

18. On January 1, 20x1, FARCICAL Co. acquired all of the assets and
liabilities of ABSURD, Inc. for ₱6.4M. As of this date, the carrying
amounts and fair values of the assets and liabilities of ABSURD are
shown below:
Cash in bank 40,000 40,000
(120,000)
receivables
Inventory 2,080,000 1,400,000
Building – net 4,000,000 4,400,000
Goodwill 400,000 80,000
Total assets 7,200,000 6,400,000
Liabilities
Dividends payable 400,000 400,000
Other payables 1,600,000 1,600,000
2,000,000 2,000,000
The dividends payable pertain to dividends declared by ABSURD, Inc. on

December 28, 20x0 to shareholders of record on January 15, 20x1. The
dividends will be distributed on January 31, 20x1.

a. 1,280,000 b. 2,080,000 c. 2,480,000 d. 1,680,000
Consideration transferred – Measurement

Use the following information for the next five questions:
On January 1, 20x1, COLLOQUY Co. acquired all of the identifiable assets
and assumed all of the liabilities of CONVERSATION, Inc. by issuing its
own ordinary shares. Information at acquisition date is shown below:
Combined
COLLOQUY Co. CONVERSATION, Co. entity
(Carrying
amounts) (Fair values)
Identifiable assets 9,600,000 6,400,000 16,000,000
Goodwill - - ?
Total assets 9,600,000 6,400,000 ?
Liabilities 2,800,000 3,600,000 6,400,000
Share capital 2,400,000 1,200,000 2,800,000
Share premium 1,200,000 1,000,000 4,800,000
Retained earnings 3,200,000 600,000 ?
Total liabilities &
9,600,000 6,400,000 ?
equity
 COLLOQUY’s share capital consists of 60,000 ordinary shares with par
value of ₱40 per share.
 CONVERSATION’s share capital consists of 3,000 ordinary shares with par
value of ₱400 per share.
1. How much is the fair value of consideration transferred on the business

combination?
a. 4,000,000 b . 2,400,000 c. 4,400,000 d. 4,800,000
2. How many shares were issued in the business combination?
a. 40,000 b. 12,000 c. 36,000 d. 10,000
3. How much is the acquisition-date fair value per share?

a. 400 b. 440 c. 280 d. 360
4. How much goodwill was recognized on acquisition date?

a. 980,000 b. 1,200,000 c. 1,280,000 d. 1,080,000
5. What is the retained earnings of the combined entity immediately after

the business combination?
a. 3,120,000 b. 3,320,000 c. 3,280,000 d. 3,200,000
Fair value of acquirer’s shares is reliably determinable

Use the following information for the next three questions:
On January 1, 20x1, CONJUNCTION Co., and UNION, Inc. entered into a
business combination effected through exchange of equity instruments. The
combination resulted to CONJUNCTION obtaining 100% interest in UNION. Both
of the combining entities are publicly listed. As of this date,
CONJUNCTION’s shares have a quoted price of ₱400 per share. CONJUNCTION
Co. recognized goodwill of ₱300,000 on the business combination. No
acquisition-related costs were incurred. Additional selected information
at acquisition date is shown below:
CONJUNCTION Co. Combined entity
(before acquisition) (after acquisition)
Share capital 2,400,000 2,800,000
Share premium 1,200,000 4,800,000
Totals 3,600,000 7,600,000
6. How many shares were issued by CONJUNCTION Co. in the business

combination?
a. 40,000 b. 20,000 c. 12,000 d. 10,000
7. What is the par value per share of the shares issued?

a. 10 b. 40 c. 12 d. 32
8. What is the acquisition-date fair value of the net identifiable assets

of UNION?
a. 3,700,000 b. 3,200,000 c. 2,800,000 d. 2,400,000
Business combination achieved in stages – from PFRS 9

Fact pattern
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.
9. Scenario #1: 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
10. Scenario #2: The previously held interest was initially classified as
FVOCI. How much is the goodwill (gain on bargain purchase)?
a. 200,000 b. 420,000 c. 920,000 d. 540,000
Business combination achieved in stages – from PAS 28

11. On January 1, 20x1, OBDURATE Co. acquired 30% ownership interest in
STUBBORN, Inc. for ₱400,000. Because the investment gave OBDURATE
significant influence over STUBBORN, the investment was accounted for
under the equity method in accordance with PAS 28.
From 20x1 to the end of 20x3, OBDURATE recognized ₱200,000 net share in
the profits of the associate and ₱40,000 share in dividends. Therefore,
the carrying amount of the investment in associate account on January 1,
20x3, is ₱560,000.
On January 1, 20x4, OBDURATE acquired additional 60% ownership interest in

STUBBORN, Inc. for ₱3,200,000. As of this date, OBDURATE has identified
the following:
b. STUBBORN’s net identifiable assets have a fair value of ₱4,000,000.
c. OBDURATE elected to measure non-controlling interests at the non-
controlling interest’s proportionate share of STUBBORN’s identifiable
net assets.
How much is the goodwill?

a. 320,000 b. 240,000 c. 280,000 d. 360,000
Business combination achieved without transfer of consideration

12. OBSTREPEROUS Co. and NOISY, Inc. both engage in the same business. On
January 1, 20x1, OBSTREPEROUS and NOISY signed a contract, the terms of
which resulted in OBSTREPEROUS obtaining control over NOISY without any
transfer of consideration between the parties.
The fair value of the identifiable net assets of NOISY, Inc. on January 1,
20x1 is ₱4,000,000. NOISY chose to measure non-controlling interest at the
non-controlling interest’s proportionate share of the acquiree’s
identifiable net assets.

a. 4,000,000 b.0 c. a or c d. This is not a business combination
Business combination achieved without transfer of consideration
13. BUCOLIC Co. owns 36,000 shares representing 40% ownership interest in
RURAL, Inc.’s 90,000 outstanding ordinary shares. BUCOLIC accounts for
the investment under the equity method.
On January 1, 20x1, RURAL reacquired 30,000 of its own shares from other
investors so that BUCOLIC shall obtain control over RURAL. The following
were determined as of acquisition date:
b. RURAL’s net identifiable assets have a fair value of ₱4,000,000.
c. BUCOLIC elected to measure non-controlling interests at the non-
controlling interest’s proportionate share of RURAL’s identifiable net
assets.

a. (1,680,000) b. (1,320,000) c. (880,000) d. 0
Provisional amounts – identifiable assets acquired

Fact pattern
On September 30, 20x1, INNOCUOUS Co. acquired all of the identifiable
assets and assumed all of the liabilities of HARMLESS, Inc. by paying cash
of ₱4,000,000. On this date, the identifiable assets acquired and
respectively.
Case #1: Identifiable asset recognized at provisional amount

14. INNOCUOUS engaged an independent valuer to appraise a building
acquired from HARMLESS. However, the valuation report was not received
by the time INNOCUOUS authorized for issue its financial statements for
the year ended December 31, 20x1. As such, the building was assigned a
provisional amount of ₱2,800,000. Also, the building was tentatively
assigned an estimated useful life of 10 years from acquisition date.
INNOCUOUS uses the straight line method of depreciation and recognized
three months’ depreciation on the building for 20x1.
On July 1, 20x2, INNOCUOUS finally received the valuation report from the
independent valuer which shows that the fair value of the building as of
September 30, 20x1 is ₱2,000,000 and remaining useful from that date is 5
years.
How should INNOCUOUS account for the new information obtained?

a. As a retrospective adjustment to the provisional amount of the
building resulting to increase in goodwill by ₱800,000.
b. As a retrospective adjustment to the provisional amount of the
building resulting to decrease in goodwill by ₱800,000.
c. As a retrospective restatement to the provisional amount of the
building resulting to increase in goodwill by ₱800,000. The
adjustment is treated as a correction of a prior period error.
d. The new information obtained is ignored. No adjustment to goodwill is
necessary.
Case #2: Unrecorded identifiable asset acquired

15. On July 1, 20x2, INNOCUOUS obtained new information that HARMLESS has
an unrecorded patent which was not identified on September 30, 20x1. It
was believed that the unrecorded patent had a fair value of ₱400,000 and
a remaining useful life of 4 years as of September 30, 20x1.

a. As a retrospective adjustment to record the previously unrecorded
patent resulting to increase in goodwill by ₱400,000.
b. As a retrospective adjustment to record the previously unrecorded
patent resulting to decrease in goodwill by ₱400,000.
c. As a retrospective restatement to record the previously unrecorded
patent resulting to decrease in goodwill by ₱400,000. The adjustment
is treated as a correction of a prior period error.
necessary.
Case #3: Information obtained beyond measurement period

16. On November 1, 20x2, the internal auditors of INNOCUOUS discovered an
error on the recorded identifiable assets acquired from HARMLESS on the
business combination. A patent with a fair value of ₱400,000 and a
remaining useful life of 4 years as of September 30, 20x1 was omitted
from the valuation listing.

a. As a retrospective adjustment to record the previously unrecorded
patent resulting to increase in goodwill by ₱400,000.
b. As a retrospective adjustment to record the previously unrecorded
patent resulting to decrease in goodwill by ₱400,000.
c. As a retrospective restatement to record the previously unrecorded
patent resulting to decrease in goodwill by ₱400,000. The adjustment
is treated as a correction of a prior period error.
necessary.
Provisional amounts – consideration transferred

17. On September 30, 20x1, RIBALD Co. acquired all of the identifiable
assets and assumed all of the liabilities of OFFENSIVE, Inc. by issuing
10,000 shares with par value of ₱20 per share.
On this date, RIBALD’s shares were assigned a provisional value of ₱400

per share. Also, because some identifiable assets acquired and liabilities
assumed have fair values that were not readily available, a provisional
amount of ₱2,800,000 was assigned to OFFENSIVE’s net identifiable assets.
On April 1, 20x2, after RIBALD’s 20x1 financial statements were issued,
new information was obtained confirming that the fair value of RIBALD’s
shares on September 30, 20x1 is ₱440 per share and that the fair value of
OFFENSIVE’s net identifiable assets as of September 30, 20x1 is
₱3,600,000.
On July 1, 20x2, two competitors of RIBALD have also merged which led to
RIBALD believing that the merger with OFFENSIVE is not as profitable as
expected. RIBALD now wants to decrease the amount assigned to the
consideration transferred to OFFENSIVE on September 30, 20x1 to ₱360 per
share and the value of OFFENSIVE’s net identifiable assets to ₱1,600,000.
How should RIBALD account for the new information obtained on July 1,
20x2?
a. As a retrospective adjustment resulting to increase in goodwill by
₱400,000.
b. As a retrospective adjustment resulting to decrease in goodwill by
₱400,000.
c. As a retrospective restatement resulting to decrease in goodwill by
₱400,000. The adjustment is treated as a correction of a prior period
error.
necessary.
Determining what is part of the business combination transaction

18. 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
respectively.
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.
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.

a. 1,680,000 b. 1,640,000 c. 1,760,000 d. 1,240,000
Settlement of pre-existing relationship - Reacquired right
19. On January 1, 20x1, THRALL Co. acquired all of the identifiable
assets and assumed all of the liabilities of SLAVE, Inc. by paying cash
of ₱4,000,000. On this date, SLAVE’s identifiable assets and liabilities
have fair values of ₱6,400,000 and ₱3,600,000, respectively.
Prior to business combination, THRALL has sold a license to SLAVE. The

licensing agreement granted SLAVE the right to use THRALL’s patented
technology for a period of 5 years. THRALL received ₱400,000 for the
license on grant date and royalty fees based on SLAVE’s sales.
THRALL recognized the license fee as deferred liability and amortized it

over 5 years. The carrying amount of the deferred liability on January 1,
20x1 is ₱240,000.
On the other hand, SLAVE recognized the license fee paid to THRALL as
prepayment and amortized it based on the number of products sold. The
carrying amount of the prepayment on January 1, 20x1 is ₱200,000.
On January 1, 20x1, THRALL has determined that the fair value of the
license agreement is ₱480,000. The fair value determined consists of
₱160,000 “at-market” (based on market participants' estimates) and
₱320,000 “off-market” (based on the excess of fair value derived from cash
flow estimates over at-market values; ₱480,000 – ₱160,000) components. The
off-market component is favorable to SLAVE and unfavorable to THRALL, as
royalty rates have increased considerably in comparable markets since the
initiation of the contract. The contract does not have any cancellation
clause or any minimum royalty payment requirements.

a. 1,200,000 b. 840,000 c. 980,000 d. 920,000
Settlement of pre-existing relationship – Not a reacquired right

20. MULIEBRITY Co. purchases raw materials from FEMINITY, Inc. under a
five-year supply contract at fixed rates. Currently, the fixed rates are
higher than the rates at which MULIEBRITY could purchase similar raw
materials from another supplier. MULIEBRITY is allowed under the supply
agreement to terminate the contract before the end of the five-year
term, but only by paying a ₱400,000 penalty.
On January 1, 20x1, with three years remaining under the supply contract,
MULIEBRITY Co. acquired all of the identifiable assets and assumed all of
the liabilities of FEMINITY, Inc. by paying cash of ₱4,000,000. On this
date, FEMINITY’s identifiable assets and liabilities have fair values of
₱6,400,000 and ₱3,600,000, respectively.
Included in the total fair value of FEMINITY is ₱640,000 related to the

fair value of the supply contract with MULIEBRITY. The ₱640,000 represents
a ₱280,000 component that is “at market” because the pricing is comparable
to pricing for current market transactions for the same or similar items
(selling effort, customer relationships and so on) and a ₱360,000
component for pricing that is unfavorable to MULIEBRITY because it exceeds
the price of current market transactions for similar items. There are no
other assets or liabilities related to the contract in either MULIEBRITY’s
or FEMINITY’s books as of acquisition date.

a. 840,000 b. 1,200,000 c. 920,000 d. 980,000
Settlement of pre-existing relationship – Non-contractual
21. On January 1, 20x1, DEMULCENT Co. acquired all of the identifiable
assets and assumed all of the liabilities of EMBARRASSING, Inc. by
paying cash of ₱4,000,000. On this date, EMBARRASSING’s identifiable
assets and liabilities have fair values of ₱6,400,000 and ₱3,600,000,
respectively.
As of January 1, 20x1, there is a pending patent infringement suit filed

by EMBARRASSING, Inc. against DEMULCENT Co. DEMULCENT recognized a
probable loss on the lawsuit amounting the ₱520,000. The patent in
question shall be transferred to DEMULCENT after the business combination.
DEMULCENT’s legal advisers determined that the fair value of the
settlement of the pending lawsuit is ₱400,000. How much is the goodwill
(gain on bargain purchase)?
a. 840,000 b. 800,000 c. 280,000 d. 920,000
Contingent consideration – Initial and subsequent measurement

22. On January 1, 20x1, VERITY FIRMNESS Co. acquired all of the
identifiable assets and assumed all of the liabilities of FIRMNESS, Inc.
by paying cash of ₱4,000,000. On this date, FIRMNESS’s identifiable
assets and liabilities have fair values of ₱6,400,000 and ₱3,600,000,
respectively.
VERITY agrees to pay an additional amount equal to 10% of the 20x1 year-
end profit that exceeds ₱1,600,000. FIRMNESS historically has reported
profits of ₱1,200,000 to ₱1,600,000 each year.
After assessing the expected level of profits for the year based on
forecasts and plans, as well as industry trends, VERITY estimated that the
fair value of the contingent consideration is ₱40,000.

a. 1,180,000 b. 1,200,000 c. 1,240,000 d. 980,000
23. Case #1: (Refer to previous problem) The actual profit for the year
is ₱2,200,000. The contingent consideration will be settled on January
15, 20x2. The entry on December 31, 20x1 includes a
a. debit to loss of ₱20,000 to be recognized in profit or loss
b. credit to gain of ₱20,000 to be recognized in profit or loss
c. debit to loss of ₱20,000 to be recognized in OCI
d. credit to gain of ₱20,000 to be recognized in OCI
24. Case #2: (Refer to previous problem) The actual profit for the year
is ₱1,200,000. The entry on December 31, 20x1 includes a
a. debit to loss of ₱40,000 to be recognized in profit or loss
b. credit to gain of ₱40,000 to be recognized in profit or loss
c. debit to loss of ₱40,000 to be recognized in OCI
d. credit to gain of ₱40,000 to be recognized in OCI
Contingent consideration – Initial and subsequent measurement

25. On January 1, 20x1, PRECIPITOUS Co. acquired all of the identifiable
assets and assumed all of the liabilities of STEEP, Inc. by issuing
10,000 of its own shares with par value of ₱40 per share. On this date,
STEEP’s identifiable assets and liabilities have fair values of
₱6,400,000 and ₱3,600,000, respectively, while PRECIPITOUS’s shares have
fair value of ₱400 per share.
In addition, PRECIPITOUS agrees to issue additional 1,000 shares to the
former owners of STEEP if the market price per share of PRECIPITOUS’s
shares increases to ₱480 per share as of December 31, 20x1. After
consideration for the vesting conditions, PRECIPITOUS estimated that the
fair value of the contingent consideration on January 1, 20x1 is ₱360,000.

a. 1,200,000 b. 840,000 c. 1,560,000 d. 980,000
26. Case #1: (Refer to previous problem) The actual market price of
PRECIPITOUS’s shares on December 31, 20x1 is ₱480. The contingent
consideration will be settled on January 15, 20x2. The entry on December
31, 20x1 includes
a. debit to loss of ₱120,000 in profit or loss
b. credit gain of ₱120,000 in profit or loss
c. debit to loss of ₱120,000 in OCI
d. no entry is required
27. Case #2: The actual market price of PRECIPITOUS’s shares on December
31, 20x1 is ₱360. The entry on December 31, 20x1 includes
a. debit to loss of ₱120,000 in profit or loss
b. credit gain of ₱120,000 in OCI
c. a reclassification within equity
d. no entry is required
Contingent payments to employees

28. On January 1, 20x1, MACABRE Co. acquired 90% of the identifiable
assets and assumed all of the liabilities of HORRIBLE, Inc. by paying
cash of ₱4,000,000. On this date, HORRIBLE’s identifiable assets and
liabilities have fair values of ₱6,400,000 and ₱3,600,000, respectively.
Non-controlling interest has a fair value of ₱320,000.
Five years ago, HORRIBLE appointed Mr. Boss as the CEO under a ten-year
contract. The contract required HORRIBLE to pay the CEO ₱400,000 if
HORRIBLE is acquired before the contract expires. On January 1, 20x1, Mr.
Boss was still employed and MACABRE assumes the obligation of paying Mr.
Boss the contracted amount. How much is the goodwill (gain on bargain
purchase)?
a. 1,200,000 b. 1,920,000 c. 1,520,000 d. 1,120,000

Applications of the Direct valuation method
UNFLEDGED Co. is contemplating on acquiring IMMATURE, Inc. The following
information was gathered through a diligence audit:
 The actual earnings of IMMATURE, Inc. for the past 5 years are shown
below:
Year Earnings
20x1 4,800,000
20x2 5,200,000
20x3 5,400,000
20x4 5,000,000
20x5 7,200,000
Total 27,600,000
 Earnings in 20x5 included an expropriation gain of ₱1,600,000.

 The fair value of IMMATURE’s net assets as of the end of 20x5 is
₱40,000,000.
 The industry average rate of return is 12%.
 Probable duration of “excess earnings” is 5 years.
1. How much is the estimated goodwill using the multiples of average excess
earnings method?
a. 1,600,000 b. 400,000 c. 920,000 d. 2,000,000
2. How much is the estimated goodwill using the capitalization of average

excess earnings method? (Assume a capitalization rate of 25%)
a. 1,600,000 b. 400,000 c. 920,000 d. 2,000,000
3. How much is the estimated goodwill using the capitalization of average

earnings method? (Assume a capitalization rate of 12.5%)
a. 1,600,000 b. 400,000 c. 920,000 d. 2,000,000
4. How much is the estimated goodwill using present value of average excess
earnings method? (Assume a discount rate of 10%)
a. 1,516,136 b. 1,428,789 c. 1,516,316 d. 1,412,308
Applications of the Direct valuation method – Purchase price

ABOMINATE Co. is estimating the goodwill in the expected purchase of
DISLIKE, Inc. in January 20x6. The following information was determined.
Year-end net
Year Earnings
assets
20x1 480,000 1,920,000
20x2 520,000 2,320,000
20x3 540,000 2,160,000
20x4 500,000 2,240,000
20x5 560,000 2,360,000
Total 2,600,000 11,000,000
Case #1: Excess earnings
5. If goodwill is to be measured by capitalizing excess earnings at 30%,
with normal return on average net assets at 10%, how much is the
purchase price in the contemplated business combination? (The year-end
net assets in 20x5 approximate fair value.)
a. 5,440,000 b. 2,360,000 c. 3,360,000 d. 3,250,000
Case #2.1: Average earnings

6. If goodwill is to be measured by capitalizing earnings at 16%, how much
is the purchase price in the contemplated business combination? (The
year-end net assets in 20x5 approximate fair value.)
a. 3,360,000 b. 3,250,000 c. 5,440,000 d. 2,360,000
Case #2.2: Average earnings

7. If goodwill is to be measured by capitalizing earnings at 16%, how much
is the goodwill? (The year-end net assets in 20x5 approximate fair
value.)
a. 890,000 b. 1,000,000 c. 3,080,000 d. 0
Applications of the Direct valuation method – Purchase price

8. CONGEAL Co. acquired the net assets of THICKEN, Inc. THICKEN has one
asset whose fair value exceeds its carrying amount by ₱4,000,000.
THICKEN’s equity is ₱36,000,000. CONGEAL estimated that THICKEN’s excess
earnings would last for 5 years and that the return on investment is
10%. THICKEN 's average earnings for negotiation purposes is ₱5,200,000
and the industry average rate of return is 12% on the fair value of net
assets.
How much is the purchase price using the "present value of average excess
earnings" approach to goodwill measurement?
a. 1,516,315 b. 3,378,901 c. 43,378,901 d. 41,516,315
Applications of the Direct valuation method – Actual earnings

9. SIBILATE Co. acquired the net assets of HISS, Inc. for ₱41.6M. The
acquisition resulted to a goodwill of ₱1,600,000 measured by
capitalizing the annual superior earnings of HISS at 25%. The normal
rate of return is 12% on net assets before recognition of goodwill. How
much is the average earnings of HISS?
a. 4,400,000 b. 4,800,000 c. 5,600,000 d. 5,200,000
Applications of the Direct valuation method

DREARY Co. and DISMAL, Inc. decided to combine and set up a new entity –
Alphabets Corporation. The individual records of the combining
constituents show the following:
DREARY DISMAL,
Co. Inc.
Net assets (at
fair values) 1,600,000 2,400,000
Average annual
earnings 320,000 480,000
Alphabets Corporation shall issue 10% preference shares with par value per
share of ₱400 for the net assets contributions of the combining
constituents and ordinary shares with par value per share of ₱200 for the
excess of total contributions (net asset contribution plus goodwill) over
net assets contributions.
It was agreed that the normal rate of return is 10% of net assets. Excess
earnings shall be capitalized at 20%.
10. How much are the total contributions by DREARY and DISMAL,
respectively?
DREARY DISMAL
a. 3,600,000 2,400,000
b. 2,400,000 3,600,000
c. 1,600,000 2,400,000
d. 1,800,000 2,200,000
11. How much is the goodwill generated by the contributions of DREARY and
DISMAL, respectively?
DREARY DISMAL
a. 800,000 1,200,000
b. 400,000 600,000
c. 200,000 800,000
d. 920,000 1,360,000
12. What is the ratio of total shares (preference and ordinary) to be

issued to DREARY and DISMAL, respectively?
DREARY DISMAL
a. 20% 20%
b. 60% 40%
c. 25% 75%
d. 40% 60%
Reverse acquisition
13. On January 1, 20x1, ZYX, Inc., an unlisted company, acquires CBA Co.,
a publicly listed entity, through an exchange of equity instruments. CBA
Co. issues 5 shares in exchange for each ordinary share of ZYX, Inc. All
of ZYX’s shareholders exchange their shares in CBA Co. Therefore, CBA
Co. issues 40,000 ordinary shares in exchange for all 8,000 ordinary
shares of ZYX, Inc.
The fair value of each ordinary share of ZYX at January 1, 20x1 is ₱800.
The quoted market price of CBA’s ordinary shares at that date is ₱160.
The statements of financial position of the combining entities immediately

before combination are shown below:
CBA Co. ZYX, Inc.
(legal subsidiary,
(legal parent, accounting
accounting acquiree) acquirer)
Identifiable assets 6,400,000 9,600,000
Total assets 6,400,000 9,600,000
Liabilities 5,200,000 2,800,000

Share capital:
10,000 ordinary shares, ₱40 par 400,000
8,000 ordinary shares, ₱400 par 3,200,000
Retained earnings 800,000 3,600,000
Total liabilities and equity 6,400,000 9,600,000
The fair value of CBA’s identifiable assets and liabilities at January 1,

20x1 are the same as their carrying amounts. How much is the goodwill
(gain on bargain purchase)?
a. (880,000) b. 400,000 c. 540,000 d. 600,000
Combination of mutual entities

14. HOMILY Coop. and SERMON Coop. are cooperative institutions. On
January 1, 20x1, the two entities combined, with HOMILY identified as
the acquirer. HOMILY shall issue member interests to SERMON. As a
result, members of SERMON become members of HOMILY. An estimated cash
flow model indicates an acquisition-date fair valuation of SERMON, as an
entity, at ₱4,000,000. The fair value of SERMON’s identifiable net
assets is ₱3,200,000. How much is the goodwill?
a. 800,000 b. (800,000) c. 3,200,000 d. 0
Theory of Accounts (BUSINESS COMBINATION)

1. The method required under PFRS 3 to be used in accounting for business
combinations is
a. Purchase method c. Acquisition method
b. Buy method d. Combination method
2. Should the following costs be included in the consideration transferred

in a business combination, according to PFRS 3 Business Combinations?
I. Costs of maintaining an acquisitions department.
II. Fees paid to accountants to effect the combination.
a. No No b. No Yes c. Yes No d. Yes Yes
3. PFRS 3 requires that the contingent liabilities of the acquired entity

should be recognized in the balance sheet at fair value. The existence
of contingent liabilities is often reflected in a lower purchase price.
Recognition of such contingent liabilities will
a. Decrease the value attributed to goodwill, thus decreasing the risk
of impairment of goodwill.
b. Decrease the value attributed to goodwill, thus increasing the risk
c. Increase the value attributed to goodwill, thus decreasing the risk
d. Increase the value attributed to goodwill, thus increasing the risk
4. Are the following statements about an acquisition true or false,

according to PFRS 3 Business combinations?
I. The acquirer should recognize the acquiree's contingent liabilities
if certain conditions are met.
II. The acquirer should recognize the acquiree's contingent assets if
certain conditions are met.
a. False, False b. False, True c. True, False d. True, True
5. Given the following information, how is goodwill from a business

combination computed under PFRS 3?
A = Consideration transferred
B = Non-controlling interest in net assets of subsidiary
C = Previously held equity interest
D = Fair value of net identifiable assets of subsidiary
% = Percentage of ownership acquired by the parent in the subsidiary
a. A+B+C-D c. (A+C) – (D x %)
b. A – (D x %) d. (A+B) – [(D x %) – B]
6. In a business combination, an acquirer's interest in the fair value of
the net assets acquired exceeds the consideration transferred in the
combination. Under PFRS 3 Business Combinations, the acquirer should
a. recognize the excess immediately in profit or loss
b. recognize the excess immediately in other comprehensive income
c. reassess the recognition and measurement of the net assets acquired
and the consideration transferred, then recognize any excess
immediately in profit or loss
d. reassess the recognition and measurement of the net assets acquired
and the consideration transferred, then recognize any excess
immediately in other comprehensive income
(Adapted)
7. Which one of the following reasons would not contribute to the creation
of negative goodwill?
a. Errors in measuring the fair value of the acquiree’s net identifiable
assets or the cost of the business combination.
b. A bargain purchase.
c. A requirement in an IFRS to measure net assets acquired at a value
other than fair value.
d. Making acquisitions at the top of a “bull” market for shares.
(Adapted)
8. The “excess of the acquirer’s interest in the net fair value of

acquiree’s identifiable assets, liabilities, and contingent liabilities
over cost” (formerly known as 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.
(Adapted)
9. 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
10. Acquisition accounting requires an acquirer and an acquiree to be

identified for every business combination. Where a new entity (H) is
created to acquire two preexisting entities, S and A, which of these
entities will be designated as the acquirer?
a. H. b. S. c. A. d. A or S.
(Adapted)
11. The aggregate cash flows arising from acquisitions and from disposals
of subsidiaries or other business units resulting to loss or obtaining
of control are presented separately and classified as
a. Operating activities c. Financing activities
b. Investing activities d. Disclosed only
12. Cash flows arising from changes in ownership interests in a

subsidiary that do not result in a loss of control are classified as
cash flows from
a. Operating activities c. Financing activities
b. Investing activities d. Disclosed only
13. PFRS 3 requires the acquirer in a business combination to measure the
acquiree’s identifiable tangible and intangible assets and liabilities
at (with some limited exceptions)
a. cost c. fair value less transaction costs
b. acquisition-date fair value d. some other amount
14. Which of the following accounting methods must be applied to all

business combinations under PFRS 3 Business Combinations?
a. Pooling of interests method. c. Acquisition method.
b. Equity method. d. Purchase method.
(Adapted)
15. PESTER TO ANNOY is involved in a business acquisition on January 1,

20x1. At the date of acquisition the deferred tax assets were ₱300,000.
On January 1, 20x1, the directors considered that realization of the
deferred tax assets were not probable. What effect would this decision
have on the allocation of the purchase price?
a. The unrecognized deferred tax would be allocated to goodwill, which
would increase by ₱300,000.
b. The value of goodwill would decrease by ₱300,000.
c. There would be no effect on goodwill.
d. Negative goodwill of ₱300,000 would arise.
(Adapted)
16. A parent entity is acquiring a majority holding in an entity whose

shares are dealt in on a recognized market. Under PFRS 3 Business
Combinations, which of the following measurement bases may be used in
measuring the non-controlling interest at the acquisition date?
I. The nominal value of the shares in the acquiree not acquired
II. The fair value of the shares in the acquiree not acquired
III. The non-controlling interest in the acquiree's assets and liabilities
at book value
IV. The non-controlling interest in the acquiree's assets and liabilities
at fair value
a. II only b. I, II and III c. II and IV d. IV only
(Adapted)
17. ASININE STUPID Company acquired a 30% equity interest in OBTUSE

TORPID Company many years ago. In the current accounting period it
acquired a further 40% equity interest in OBTUSE. Are the following
statements true or false, according to PFRS 3 Business Combinations?
I. ASININE's pre-existing 30% equity interest in OBTUSE should be
remeasured at fair value at the acquisition date.
II. ASININE's net assets should be remeasured at fair value at the
acquisition date.
a. False, False b. False, True c. True, False d. True,
True
(Adapted)
18. The SKEWER Company acquired 80% of PIERCE Company for a consideration
transferred of ₱100 million. The consideration was estimated to include
a control premium of ₱24 million. PIERCE's net assets were ₱85 million
at the acquisition date. Are the following statements true or false,
according to PFRS 3 Business Combinations?
I. Goodwill should be measured at ₱32 million if the non-controlling
interest is measured at its share of PIERCE's net assets.
II. Goodwill should be measured at ₱34 million if the non-controlling
interest is measured at fair value.
a. False, False b. False, True c. True, False d.
True, True
(Adapted)
19. PFRS 3 requires all identifiable intangible assets of the acquired

business to be recorded at their fair values. Many intangible assets
that may have been subsumed within goodwill must be now separately
valued and identified. Under PFRS 3, when would an intangible asset be
“identifiable”?
a. When it meets the definition of an asset in the Conceptual Framework
document only.
b. When it meets the definition of an intangible asset in PAS 38,
Intangible Assets, and its fair value can be measured reliably.
c. If it has been recognized under local generally accepted accounting
principles even though it does not meet the definition in PAS 38.
d. Where it has been acquired in a business combination.
(Adapted)
20. Which of the following examples is unlikely to meet the definition of

an intangible asset for the purpose of PFRS 3?
a. Marketing related, such as trademarks and internet domain names.
b. Customer related, such as customer lists and contracts.
c. Technology based, such as computer software and databases.
d. Pure research based, such as general expenditure on research.
(Adapted)
21. An intangible asset with an indefinite life is one where

a. There is no foreseeable limit on the period over which the asset will
generate cash flows.
b. The length of life is over 20 years.
c. The directors feel that the intangible asset will not lose value in
the foreseeable future.
d. There is a contractual or legal arrangement that lasts for a period
in excess of five years.
(Adapted)
22. An intangible asset with an indefinite life is accounted for as

follows:
a. No amortization but annual impairment test.
b. Amortized and impairment tests annually.
c. Amortize and impairment tested if there is a “trigger event.”
d. Amortized and no impairment test.
(Adapted)
23. An acquirer should at the acquisition date recognize goodwill

acquired in a business combination as an asset. Goodwill should be
accounted for as follows:
a. Recognize as an intangible asset and amortize over its useful life.
b. Write off against retained earnings.
c. Recognize as an intangible asset and impairment test when a trigger
event occurs.
d. Recognize as an intangible asset and annually impairment test (or
more frequently if impairment is indicated).
(Adapted)
24. If the impairment of the value of goodwill is seen to have reversed,
then the company may
a. Reverse the impairment charge and credit income for the period.
b. Reverse the impairment charge and credit retained earnings.
c. Not reverse the impairment charge.
d. Reverse the impairment charge only if the original circumstances that
led to the impairment no longer exist and credit retained earnings.
(Adapted)
25. On acquisition, all identifiable assets and liabilities, including

goodwill, will be allocated to cash-generating units within the business
combination. Goodwill impairment is assessed within the cash-generating
units. If the combined organization has cash-generating units
significantly below the level of an operating segment, then the risk of
an impairment charge against goodwill as a result of PFRS 3 is
a. Significantly decreased because goodwill will be spread across many
cash-generating units.
b. Significantly increased because poorly performing units can no longer
be supported by those that are performing well.
c. Likely to be unchanged from previous accounting practice.
d. Likely to be decreased because goodwill will be a smaller amount due
to the greater recognition of other intangible assets.
(Adapted)
26. The management of an entity is unsure how to treat a restructuring

provision that they wish to set up on the acquisition of another entity.
Under PFRS 3, the treatment of this provision will be
a. A charge in the income statement in the postacquisition period.
b. To include the provision in the allocated cost of acquisition.
c. To provide for the amount and, if the provision is overstated, to
release the excess to the income statement in the postacquisition
period.
d. To include the provision in the allocated cost of acquisition if the
acquired entity commits itself to a restructuring within a year of
acquisition.
(Adapted)
27. MIME TO IMMITATE Co. initially tested its goodwill for impairment on
September 30, 20x1. When should MIME perform its second impairment
testing on its goodwill?
a. on or before September 30, 20x2
b. on or before December 31, 20x2
c. at any date not earlier than September 30, 20x2
d. at any date during 20x2
28. For purposes of impairment testing, PAS 36

a. requires goodwill acquired in a business combination to be allocated
to each of the acquirer’s cash-generating units in the year of
business combination.
b. requires goodwill acquired in a business combination to be allocated
to each of the acquirer’s corporate assets in the year of business
combination.
c. requires goodwill acquired in a business combination to be allocated
to each of the acquirer’s cash-generating units 12 months after the
date of acquisition.
d. requires goodwill acquired in a business combination to be allocated
to each of the acquirer’s operating segments 3 months after the date
of acquisition.
29. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business
combination that resulted to goodwill. By December 31, 20x1, the initial
allocation of goodwill is not yet completed. According to PAS 36, TEPID
should
a. complete the initial allocation before the end of December 31, 20x1.
b. complete the initial allocation before the end of December 31, 20x2.
c. complete the initial allocation before the end of November 30, 20x1.
d. complete the initial allocation before the end of September 1, 20x2.
30. Which of the following is incorrect regarding the accounting for

business combinations in accordance with PFRSs?
a. Any goodwill recognized on acquisition date should be allocated to
the acquirer’s CGUs prior to the end of the year of acquisition. If
allocation is incomplete prior to the end of the year of acquisition,
the allocation should be completed prior to the end of the
immediately preceding year.
b. PFRS 3 requires the use of the acquisition method in accounting for
c. Goodwill is computed as the difference between the consideration
transferred and the acquisition-date fair value of net identifiable
assets acquired.
d. In applying the acquisition method, PFRS 3 requires that the acquirer
should be identified.
31. For purposes of impairment testing, PAS 36

a. requires goodwill acquired in a business combination to be allocated
to each of the acquirer’s cash-generating units in the year of
b. requires goodwill acquired in a business combination to be allocated
to each of the acquirer’s corporate assets in the year of business
combination.
c. requires goodwill acquired in a business combination to be allocated
to each of the acquirer’s cash-generating units 12 months after the
d. requires goodwill acquired in a business combination to be allocated
to each of the acquirer’s operating segments 3 months after the date
of acquisition.
32. Goodwill must not be amortized under PFRS 3. The transitional rules
do not require restatement of previous balances written off. If an
entity is adopting PFRS for the first time, and it wishes to restate all
prior acquisitions in accordance with PFRS 3, then it must apply the
PFRS to
a. Those acquisitions selected by the entity.
b. All acquisitions from the date of the earliest.
c. Only those acquisitions since the issue of the PFRS 3 and PAS 22,
Business Combinations, to the earlier ones.
d. Only past and present acquisitions of entities that have previously
and currently prepared their financial statements using PFRS.
(Adapted)
33. On September 1, 20x1, TEPID Co. acquired LUKEWARM Co. in a business

combination that resulted to goodwill. By December 31, 20x1, the initial
allocation of goodwill is not yet completed. According to PAS 36, TEPID
should
a. complete the initial allocation before the end of December 31, 20x1.
b. complete the initial allocation before the end of December 31, 20x2.
c. complete the initial allocation before the end of November 30, 20x1.
d. complete the initial allocation before the end of September 1, 20x2.
34. PFRS 3 is mandatory for all new acquisitions from March 31, 2004.
Entities have to cease the amortization of goodwill arising from
previous acquisitions. The balance of goodwill arising from those
acquisitions is
a. Written off against retained earnings.
b. Written off against profit or loss for the year.
c. Tested for impairment from the beginning of the next accounting year.
d. Tested for impairment on March 31, 2004.
(Adapted)
35. Which of the following factors is used as multiplier of super profits

in valuation of goodwill of a business?
a. Average capital employed in the business d. Normal rate of
return
b. Simple profits e. Normal profits.
c. Number of years’ purchase
(Adapted)
Suggested answers to theory of accounts questions (BUSINESS COMBINATION)

1. C 6. C 11. B 16. C 21. A 26. A 31. A
2. A 7. D 12. C 17. C 22. A 27. A 32. B
3. D 8. B 13. B 18. D 23. D 28. A 33. B
4. C 9. C 14. C 19. A 24. C 29. B 34. C
5. A 10. D 15. A 20. D 25. B 30. C 35. C
Consolidated Financial Statements (Part 1)
Computational
Consolidation – Date of acquisition
Fact pattern
On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by issuing
5,000 shares with fair value of ₱60 per share and par value of ₱40 per
share. The financial statements of ABC Co. and XYZ, Inc. immediately
before the acquisition are shown below:
ABC Co. XYZ, Inc.
Cash 40,000 20,000
Accounts receivable 120,000 48,000
Inventory 160,000 92,000
Equipment 800,000 200,000
Accumulated depreciation (80,000) (40,000)
Total assets 1,040,000 320,000
Accounts payable 80,000 24,000

Bonds payable 120,000 -
Share capital 480,000 200,000
Share premium 160,000 -
Retained earnings 200,000 96,000
Total liabilities and equity 1,040,000 320,000
On January 1, 20x1, the fair value of the assets and liabilities of XYZ,
Inc. were determined by appraisal, as follows:
Fair
XYZ, Inc. Carrying Fair value
amounts values increment
Cash 20,000 20,000 -
Accounts
48,000 48,000 -
receivable
Inventory 92,000 124,000 32,000
Equipment 200,000 240,000 40,000
Accumulated
(40,000) (48,000) (8,000)
depreciation
Accounts payable (24,000) (24,000) -
Net assets 296,000 360,000 64,000
The equipment has a remaining useful life as of 4 years from January 1,

20x1.
Case #1: NCI measured at proportionate share of parent

ABC Co. elects to measure non-controlling interest as its proportionate
share in XYZ’s net identifiable assets.
1. How much is the consolidated total assets as of January 1, 20x1?
a. 1,436,000 b. 1,439,000 c. 1,736,000 d. 1,376,000
2. How much is the consolidated total equity as of January 1, 20x1?

a. 1,200,000 b. 1,215,000 c. 1,212,000 d. 1,364,000
Case #2: NCI measured at fair value
ABC Co. elects the option to measure non-controlling interest at fair
value and a value of ₱75,000 is assigned to the 20% non-controlling
interest [(₱300,000 ÷ 80%) x 20% = 75,000].
3. How much is the consolidated total assets as of January 1, 20x1?
a. 1,436,000 b. 1,439,000 c. 1,736,000 d. 1,376,000
4. How much is the consolidated total equity as of January 1, 20x1?

a. 1,200,000 b. 1,215,000 c. 1,212,000 d. 1,364,000
Consolidation subsequent to date of acquisition (Proportionate share)

Fact pattern
share. On acquisition date, ABC Co. elected to measure non-controlling
interest as its proportionate share in XYZ, Inc.’s net identifiable
assets.
XYZ’s shareholders’ equity as of January 1, 20x1 comprises the following:

(at carrying
amounts)
Share capital 200,000
Retained
earnings 96,000
Total equity 296,000
On January 1, 20x1, the fair values of the assets and liabilities of XYZ,
Fair
XYZ, Inc. Carrying Fair value
Cash 20,000 20,000 -
Accounts
48,000 48,000 -
receivable
Inventory 92,000 124,000 32,000
Equipment 200,000 240,000 40,000
Accumulated
(40,000) (48,000) (8,000)
depreciation
Net assets 296,000 360,000 64,000
The remaining useful life of the equipment is 4 years.
During 20x1, no dividends were declared by either ABC or XYZ. There were
also no inter-company transactions. The group determined that there is no
goodwill impairment.
ABC’s and XYZ’s individual financial statements at year-end are shown

below:
Statements of financial position

As at December 31, 20x1
ABC Co. XYZ, Inc.
ASSETS
Cash 92,000 228,000
Inventory 420,000 60,000
Investment in subsidiary 300,000 -
Equipment 800,000 200,000
TOTAL ASSETS 1,672,000 496,000
LIABILITIES AND EQUITY

Total liabilities 292,000 120,000
Total equity 1,380,000 376,000
TOTAL LIABILITIES AND EQUITY 1,672,000 496,000
Statements of profit or loss

For the year ended December 31, 20x1
ABC Co. XYZ, Inc.
Sales 1,200,000 480,000
Cost of goods sold (660,000) (288,000)
Gross profit 540,000 192,000
Depreciation expense (160,000) (40,000)
Distribution costs (128,000) (72,000)
Interest expense (12,000) -
Profit for the year 240,000 80,000
5. How much is the consolidated profit for 20x1?

a. 208,000 b. 280,000 c. 240,000 d. 296,000
6. How much is the consolidated total assets as of December 31, 20x1?

a. 1,867,000 b. 1,907,000 c. 1,894,000 d. 1,904,000
7. How much is the consolidated total equity as of December 31, 20x1?

a. 1,492,000 b. 1,415,000 c. 1,412,000 d. 1,421,000
Consolidation subsequent to date of acquisition – NCI at Fair value

Fact pattern
share. On acquisition date, ABC Co. elected to measure non-controlling
interest at the non-controlling interest’s fair value. A value of ₱75,000
is assigned to the 20% non-controlling interest [(₱300,000 ÷ 80%) x 20% =
₱75,000].

(at carrying amounts)
Retained earnings 96,000
Carrying Fair Fair value
XYZ, Inc.
Cash 20,000 20,000 -
Accounts receivable 48,000 48,000 -
Inventory 92,000 124,000 32,000
Equipment 200,000 240,000 40,000
Accumulated
(40,000) (48,000) (8,000)
depreciation
Net assets 296,000 360,000 64,000
also no inter-company transactions. The group determined that there is no
goodwill impairment.

below:

ABC Co. XYZ, Inc.
ASSETS
Cash 92,000 228,000
Inventory 420,000 60,000
Investment in subsidiary 300,000
Equipment 800,000 200,000
TOTAL ASSETS 1,672,000 496,000

Total equity 1,380,000 376,000
ABC Co. XYZ, Inc.
Sales 1,200,000 480,000
Gross profit 540,000 192,000

a. 208,000 b. 280,000 c. 240,000 d. 296,000

a. 1,867,000 b. 1,907,000 c. 1,894,000 d. 1,904,000
a. 1,492,000 b. 1,415,000 c. 1,412,000 d. 1,495,000
Fair value decrement

Popo Co. acquired 80% of Momo Co. on January 1, 20x1 for ₱800,000. The
following information was determined at acquisition date:
Popo Co. Momo Co. Momo Co.
Carrying Carrying
amount amount Fair value
Equipment 4,000,000 2,000,000 1,600,000
Accumulated
depreciation (800,000) (400,000) ( 320,000)
Net 3,200,000 1,600,000 1,280,000
Remaining useful life – Jan. 1, 20x1 10 years 5 years 5 years
1. How much is the consolidated “equipment – net” in the December 31, 20x2
financial statements?
a. 3,968,000 b. 3,628,000 c. 3,428,000 d. 3,328,000
2. The consolidation journal entry for the depreciation of the fair value
adjustment on December 31, 20x2 includes
a. debit to accumulated depreciation for ₱128,000
b. credit to accumulated depreciation for ₱128,000
c. debit to depreciation expense for ₱64,000
d. debit to retained earnings of Popo Co. for ₱51,200
Fair value increment

3. On January 1, 20x1, Donkey Co. acquired 75% of Monkey Co. At that time,
Monkey’s equipment has a carrying amount of ₱400,000 and a fair value of
₱480,000. The equipment has a remaining useful life of 10 years. On
December 31, 20x2, Donkey and Monkey reported equipment with carrying
amounts of ₱2,000,000 and ₱1,200,000, respectively. How much is the
consolidated “equipment – net” in the December 31, 20x2 financial
statements?
a. 3,200,0000 b. 3,384,000 c. 3,264,000 d. 3,124,000
NCI in net assets

Use the following information for the next six questions:
Owl Co. paid ₱600,000 for its 75% interest in Owlet Co. Owl elected to
value NCI at fair value. Owlet’s net identifiable assets approximated
their fair values at acquisition date. The acquisition resulted in a
goodwill attributable to NCI of ₱40,000.
Since the acquisition date, Owlet has made accumulated profits of

₱800,000. There have been no changes in Owlet’s share capital since
acquisition date. The group determined that goodwill has been impaired by
₱32,000.
A summary of the individual statements of financial positions of the

entities as at the end of reporting period is shown below:
Owl Co. Owlet Co.
Total assets 4,000,000 2,000,000

Share capital 1,200,000 400,000
Retained earnings 2,000,000 1,120,000
4. How much is the fair value assigned to NCI at date of acquisition?

a. 220,000 b. 250,000 c. 268,000 d. 224,000
5. How much is the goodwill to be presented in the current-year

consolidated financial statements?
a. 72,000 b. 64,000 c. 56,000 d. 68,000
6. How much is the NCI in net assets?

a. 304,000 b. 380,000 c. 412,000 d. 426,000
7. How much is the consolidated retained earnings?

a. 2,600,000 b. 2,480,000 c. 2,576,000 d. 2,276,000
8. How much is the consolidated total assets?

a. 5,468,000 b. 6,068,000 c. 5,400,000 d. 5,620,000
9. How much is the consolidated total equity?

a. 6,188,000 b. 4,188,000 c. 4,156,000 d. 5,622,000
NCI in profit and comprehensive income

Use the following information for the next six questions:
On January 1, 20x1, Rooster Co. acquired 75% interest in Cockerel Co. for
₱600,000. At this time, Cockerel's net identifiable assets have a carrying
amount of ₱720,000 which approximates fair value. NCI was assigned a fair
value of ₱220,000.
During 20x1, Rooster sold goods to Cockerel for ₱600,000, having bought
them for ₱480,000. A quarter of these goods remain unsold at year-end.
Goodwill on acquisition of Cockerel has been tested for impairment and
found to be impaired (in total) by ₱32,000 for the current year.
The individual statements of profit or loss and other comprehensive income

of the entities for the year ended December 31, 20x1 are shown below:
Rooster Co. Cockerel Co.
Revenue 4,000,000 2,800,000
Cost of sales (1,600,000) (1,200,000)
Gross profit 2,400,000 1,600,000
Dividend income from Cockerel Co. 40,000
Administrative costs (320,000) (200,000)
Profit before tax 1,320,000 1,000,000
Income tax expense (384,000) (300,000)
Profit after tax 936,000 700,000
Other comprehensive income 296,000 100,000
Comprehensive income 1,232,000 800,000
10. How much is the consolidated sales?
a. 6,200,000 b. 6,350,000 c. 6,650,000 d. 6,180,000
11. How much is the consolidated cost of sales?

a. 2,170,000 b. 2,230,000 c. 2,770,000 d. 2,320,000
12. How much is the consolidated profit?

a. 1,574,000 b. 1,566,000 c. 1,564,000 d. 1,534,000
13. How much is the consolidated comprehensive income?

a. 1,970,000 b. 1,930,000 c. 1,962,000 d. 1,960,000
14. How much is the profit attributable to owners of the parent and NCI,
respectively?
Owners of Parent NCI
a. 1,391,000 175,000
b. 1,367,000 167,000
c. 1,391,000 173,000
d. 1,384,000 190,000
15. How much is the comprehensive income attributable to owners of the

parent and NCI, respectively?
a. 1,663,000 267,000
b. 1,778,000 192,000
c. 1,756,000 206,000
d. 1,738,000 192,000
Acquisition during the year

On September 1, 20x1, Pig Co. acquired 75% interest in Piglet Co. At this
time, Piglet's net identifiable assets have a carrying amount of ₱720,000
which approximates fair value.
During the last month of the year, Piglet sold goods to Pig for ₱324,000.
Piglet had marked up these goods by 50% 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. Piglet Co.
Revenue 4,000,000 2,880,000
Cost of sales (1,600,000) (1,200,000)
Gross profit 2,400,000 1,680,000
Distribution costs (800,000)
Administrative costs (320,000) (180,000)
Profit before tax 1,280,000 1,100,000
Income tax expense (384,000) (380,000)
Profit after tax 896,000 720,000
All of Piglet’s income and expenses (including profit from inter-company

sale) were earned and incurred evenly during the year.

a. 6,556,000 b. 4,852,000 c. 4,786,000 d. 4,636,000
a. 1,712,000 b. 2,530,000 c. 1,730,000 d. 1,876,000

a. 1,100,000 b. 1,580,000 c. 1,360,000 d. 1,420,000
19. How much is the profit attributable to owners of the parent and NCI,
respectively?
a. 1,040,000 60,000
b. 1,049,000 51,000
c. 1,036,000 544,000
d. 1,049,000 311,000
Subsidiary’s outstanding cumulative preference shares

20. Bear Co. owns 75% of Cub Co.’s ordinary shares. Cub Co. has 12%,
₱400,000 outstanding cumulative preference shares, none of which are
held by Bear Co. The carrying amount of Cub’s net identifiable assets at
acquisition date approximates fair value.
Bear and Cub reported individual profits of ₱936,000 and ₱700,000,

respectively, for the year ended December 31, 20x1. Neither company
declared dividends. There are 3-year dividends in arrears on the
outstanding cumulative preference shares of Cub Co. It was assessed that
goodwill is not impaired.
How much is the profit attributable to owners of the parent and NCI,
respectively?
a. 1,425,000 163,000
b. 1,377,000 163,000
c. 1,377,000 211,000
d. 1,425,000 211,000

Impairment of goodwill
share.

(at carrying amounts)
Retained earnings 96,000
XYZ, Inc.
Cash 20,000 20,000 -
Inventory 92,000 124,000 32,000
Equipment 200,000 240,000 40,000
Accumulated
(40,000) (48,000) (8,000)
depreciation
Net assets 296,000 360,000 64,000
also no inter-company transactions.
The group determined that goodwill is impaired by ₱4,000.

below:

ABC Co. XYZ, Inc.
ASSETS
Cash 92,000 228,000
Inventory 420,000 60,000
Investment in subsidiary 300,000 -
Equipment 800,000 200,000
TOTAL ASSETS 1,672,000 496,000

Total equity 1,380,000 376,000
TOTAL LIABILITIES AND
1,672,000 496,000
EQUITY

ABC Co. XYZ, Inc.
Sales 1,200,000 480,000
Gross profit 540,000 192,000
Case #1: On acquisition date, ABC Co. elected to measure non-controlling

interest as its proportionate share in XYZ, Inc.’s net identifiable
assets.
a. 296,000 b. 280,000 c. 208,000 d. 276,000

a. 1,900,000 b. 1,907,000 c. 1,903,000 d. 1,904,000

a. 1,492,000 b. 1,415,000 c. 1,488,000 d. 1,491,000
Case #2:
On acquisition date, ABC Co. elected to measure non-controlling interest
at fair value. A value of ₱75,000 is assigned to the non-controlling
interest.
a. 296,000 b. 280,000 c. 278,000 d. 276,000

a. 1,900,000 b. 1,907,000 c. 1,903,000 d. 1,904,000

a. 1,492,000 b. 1,415,000 c. 1,488,000 d. 1,491,000
Changes in ownership interest not resulting to loss of control

Fact pattern
share. XYZ’s net identifiable assets have a fair value of ₱360,000.
Goodwill has been computed under each of the available options under PFRS
3 as follows:
Case #1 Case #2
(proportionate) (fair value)
(1) Consideration transferred 300,000 300,000
(2) Non-controlling interest in the
72,000 75,000
acquiree
(3) Previously held equity interest
- -
in the acquire
Total 372,000 375,000
Fair value of net identifiable
(360,000) (360,000)
assets acquired
Goodwill 12,000 15,000
As of December 31, 20x1, XYZ, Inc. increased its net assets (after fair
value adjustments) by ₱40,000 to ₱400,000. The NCI in net assets is
updated as follows:
Case #1 Case #2
(proportionate) (fair value)
NCI at acquisition date – Jan. 1, 20x1 72,000 75,000
Subsequent increase (20% x ₱40,000) 8,000 8,000
Carrying amount of NCI – Jan. 1, 20x2 80,000 83,000
Scenario #1: Acquisition of all remaining NCI

On January 1, 20x2, ABC Co. acquired all of the remaining 20% NCI in XYZ
for ₱120,000.
7. If NCI is measured at “proportionate share,” how much is the gain or

loss on the transaction to be recognized in the consolidated financial
statements?
a. 80,000 b. (80,000) c. (83,000) d. 0
8. If NCI is measured at “fair value,” how much is the gain or loss on the
transaction to be recognized in the consolidated financial statements?
a. (83,000) b. 83,000 c. (80,000) d. 0
9. If NCI is measured at “proportionate share,” what is the effect of the

transaction on the consolidated financial statements?
a. ₱80,000 decrease in NCI and ₱40,000 decrease in retained earnings of
ABC Co.
b. ₱83,000 decrease in NCI and ₱37,000 decrease in retained earnings of
ABC Co.
c. either a or b
d. No effect on the consolidated financial statements
10. If NCI is measured at “fair value,” what is the effect of the

transaction on the consolidated financial statements?
a. ₱80,000 decrease in NCI and ₱40,000 decrease in retained earnings of
ABC Co.
b. ₱83,000 decrease in NCI and ₱37,000 decrease in retained earnings of
ABC Co.
c. either a or b
d. No effect on the consolidated financial statements
Scenario #2: Acquisition of part of remaining NCI

On January 1, 20x2, ABC Co. acquired additional 12% equity interest held
by non-controlling interests in XYZ for cash consideration of ₱80,000.
11. If NCI is measured at “proportionate share,” what is the direct

adjustment in equity?
a. 40,000 b. 32,000 c. 30,200 d. 38,500
12. If NCI is measured at “fair value,” what is the direct adjustment in

equity?
a. 40,000 b. 32,000 c. 30,200 d. 38,500
Scenario #3: Disposal of part of controlling interest – Control not lost

On January 1, 20x2, ABC Co. sold its 10% interest in XYZ, Inc. for
₱80,000. The 70% (80% - 10%) ownership interest retained still gives ABC
control over XYZ.

a. 40,000 b. 32,000 c. 30,200 d. 38,500

equity?
a. 40,000 b. 32,000 c. 30,200 d. 38,500
Scenario #4: Subsidiary issues additional shares – Control not lost

The 80% interest acquired by ABC in XYZ on January 1, 20x1 represents
40,000 shares of XYZ’s 50,000 outstanding shares as of that date.
On January 1, 20x2, XYZ, Inc. issues additional 10,000 shares with par
value per share of ₱4 to other investors for ₱10 per share. Although none
of the shares were purchased by ABC, it was determined that the additional
share issuance has no effect on ABC’s control over XYZ.

a. 13,333 b. 11,332 c. 13,200 d. 0

equity?
a. 13,332 b. 11,332 c. 13,200 d. 0
Loss of control – Deconsolidation

17. On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by
issuing 5,000 shares with fair value of ₱60 per share and par value of
₱40 per share. ABC elected to measure NCI as its proportionate share in
XYZ’s net identifiable assets. The acquisition resulted to goodwill of
₱12,000. There has been no impairment of goodwill.
On January 1, 20x2, ABC Co. sells 60% of its interest in XYZ, Inc. for
₱400,000. ABC’s remaining 20% interest in XYZ has a fair value of
₱100,000. The remaining investment in XYZ, Inc. gives ABC significant
influence over XYZ. The statements of financial position immediately
before the sale are shown below:

ABC Co. XYZ, Inc. Consolidated

ASSETS
Cash 92,000 228,000 320,000
Accounts receivable 300,000 88,000 388,000
Inventory 420,000 60,000 480,000
Investment in subsidiary 300,000 - -
Equipment 800,000 200,000 1,040,000
Accumulated depreciation (240,000) (80,000) (336,000)
Goodwill - - 12,000
TOTAL ASSETS 1,672,000 496,000 1,904,000

Accounts payable 172,000 120,000 292,000
Bonds payable 120,000 - 120,000
Total liabilities 292,000 120,000 412,000
Share capital 680,000 200,000 680,000
Share premium 260,000 - 260,000
Retained earnings 440,000 176,000 472,000
Non-controlling interest - - 80,000
Total equity 1,380,000 376,000 1,492,000
TOTAL LIAB. & EQTY. 1,672,000 496,000 1,904,000
How much is the gain (loss) on the disposal of controlling interest?

a. (168,000) b. 168,000 c. 156,000 d. (156,000)
Loss of control – Derecognition of OCI

18. On January 1, 20x1, ABC Co. acquired 80% interest in XYZ, Inc. by
issuing 5,000 shares with fair value of ₱60 per share and par value of
₱40 per share. XYZ’s net identifiable assets have a fair value of
₱360,000. ABC elected to measure NCI as its proportionate share in XYZ’s
net identifiable assets (i.e., ₱360,000 x 20% = ₱72,000). Accordingly,
goodwill of ₱12,000 was recognized on the business combination. There
has been no impairment of goodwill.
Subsequent to acquisition date, XYZ, Inc. increased its net assets (after
fair value adjustments) by ₱52,000 to ₱412,000. The movement in XYZ’s net
assets is shown below:
Net assets (at fair value) - Jan. 20x1 360,000

Subsequent changes:
Profit or loss after fair value adjustments 40,000
Other comprehensive income:
Gain on property revaluation 8,000
Exchange differences on translation of foreign operation 4,000
Total subsequent change in net assets 52,000
Net assets (at fair value) - Dec. 31, 20x1 412,000
The NCI in net assets is updated as follows:

NCI at acquisition date 72,000
Increase (20% x ₱52,000) 10,400
Carrying amount of NCI – Dec. 31, 20x1 82,400
Accordingly, the accumulated OCI attributable to owners of the parent

presented in the consolidated financial statements comprises the
following:
Gain on property revaluation (8,000 x 80%) 6,400
Exchange differences on translation of foreign operation (4K x 80%) 3,200
Consolidated other components of equity – Dec. 31, 20x1 9,600
On January 1, 20x2, ABC Co. sells 60% of its interest in XYZ, Inc. for
₱400,000. ABC’s remaining 20% interest in XYZ has a fair value of
₱100,000. The remaining investment in XYZ, Inc. does not give ABC
significant influence over XYZ.
How much is the gain or loss on disposal of controlling interest to be

recognized in profit or loss?
a. 152,400 b. 156,800 c. 160,200 d. 158,400
Inter-company receivables and payables

On January 1, 20x1, Dad Co. acquired 80% interest in Son Co. by issuing
bonds with fair value of ₱1,000,000. The following information was
determined immediately before the acquisition:
Dad Co. Son Co. Son Co.
Carrying amount Carrying amount Fair value
Total assets 4,000,000 1,600,000 1,720,000
Total liabilities (2,400,000) (800,000) (800,000)
Net assets 1,600,000 800,000 920,000
Included in Son’s liabilities is an account payable to Dad amounting to

₱80,000. Dad elected to measure NCI as its proportionate share in Son’s
net identifiable assets.
19. How much is the total assets in Dad’s separate financial statements
immediately after the combination?
a. 6,304,000 b. 4,000,000 c. 5,000,000 d. 4,920,000
20. How much is the total assets in the consolidated financial

statements?
a. 6,304,000 b. 5,904,000 c. 6,054,000 d. 5,984,000
Group accounting policy

On June 30, 20x1, Cockroach Co. acquired 75,000 of Nymph Co.'s 100,000
outstanding equity shares with par value per share of ₱4 for ₱16 per
share. At the time of acquisition, the retained earnings of Nymph were
₱320,000. The quoted price of Nymph's shares was ₱14 per share at
acquisition date.
 Included in the total assets of Nymph is land classified as investment
property with a cost of ₱720,000. Its fair value at acquisition date was
₱800,000 and by June 30, 20x3 this had risen to ₱1,280,000. Nymph uses
the cost model for its investment properties. However, the group's
policy for investment properties is the fair value model.
 Also at acquisition date, Nymph's building classified as property,
plant, and equipment had a fair value of ₱120,000 in excess of its
carrying amount. The building's remaining useful life is 5 years at that
date. The group's depreciation method is straight-line basis.
 The inter-company current accounts included receivables and payables of
₱40,000 on June 30, 20x3.
 An impairment test at June 30, 20x3 concluded that consolidated goodwill
was impaired by ₱80,000.
 Cockroach elected to measure NCI at the NCI's fair value. There have
been no changes in Nymph’s number of outstanding shares subsequent to
A summary of the individual statements of financial positions of the

entities as at June 30, 20x3 is shown below:
Cockroach Co. Nymph Co.
Total assets 4,000,000 2,000,000

Share capital 1,200,000 400,000
21. How much is the goodwill to be presented in the June 30, 20x3
a. 550,000 b. 620,000 c. 485,000 d. 530,000

a. 538,000 b. 584,000 c. 624,000 d. 638,000

a. 2,864,000 b. 2,924,000 c. 2,874,000 d. 2,984,000

a. 5,310,000 b. 5,942,000 c. 5,982,000 d. 5,350,000

a. 4,064,000 b. 4,684,000 c. 4,702,000 d. 4,724,000
Business combination achieved in stages (‘Step acquisition’)

On January 1, 20x1, Rabbit Co. acquired 40% of Bunny Co. for ₱160,000. At
this time, Bunny's net identifiable assets has a carrying amount of
₱400,000 which approximates fair value. The investment was classified as
“investment in associate.”
On January 1, 20x3, Rabbit Co. acquired additional 35% interest in Bunny

Co. for ₱800,000. On this date, the fair value of the existing holdings of
Rabbit in Bunny was ₱400,000. Bunny's net identifiable assets on January
1, 20x3, has a carrying amount of ₱720,000 which approximates fair value.
Bunny’s net assets comprised of share capital amounting to ₱400,000 and
retained earnings amounting to ₱320,000. Rabbit assigned a fair value of
₱220,000 to the NCI.
The group determined on Dec. 31, 20x3 that there is no impairment in
goodwill. A summary of the individual statements of financial positions of
the entities as at December 31, 20x3 is shown below:
Rabbit Co. Bunny Co.
Total assets 4,000,000 2,000,000
Share capital 1,200,000 400,000
26. How much is the goodwill to be presented in the December 31, 20x3
a. 480,000 b. 700,000 c. 300,000 d. 80,000

a. 380,000 b. 340,000 c. 480,000 d. 420,000

a. 2,600,000 b. 2,680,000 c. 2,740,000 d. 2,860,000

a. 5,460,000 b. 5,500,000 c. 4,880,000 d. 5,280,000

a. 4,180,000 b. 4,280,000 c. 4,420,000 d. 4,220,000
Reconstruction of financial information

On January 1, 20x1, Sheep Co. acquired 75% interest in Lamb Co. for
₱600,000. At this time, Lamb's net identifiable assets have a carrying
amount of ₱720,000 which approximates fair value. NCI was assigned a fair
value of ₱220,000.
There were no inter-company transactions during the year. Goodwill on
acquisition of Lamb has been tested and found to be impaired (in total) by
₱32,000 for the current year.
Sheep's separate financial statements reported profit of ₱866,000 for the

year ended December 31, 20x1. Profit attributable to NCI was appropriately
determined at ₱167,000.
31. How much is the profit of Lamb for the year ended December 31, 20x1?
a. 175,000 b. 625,000 c. 700,000 d. 225,000

a. 1,558,000 b. 1,534,000 c. 1,834,000 d. 1,526,000
33. How much is the profit attributable to owners of the parent and to
NCI, respectively?
Parent NCI
a. 1,367,000 167,000
b. 1,391,000 167,000
c. 1,359,000 167,000
d. 1,436,000 398,000
Comprehensive problem
Use the following information for the next ten questions:
On January 1, 20x1, Peter Co. acquired 90% ownership interest in Simon Co.
for ₱488,000. Peter Co. elected to measure NCI at fair value. NCI was
assigned a fair value of ₱60,000.
Simon Co.
Cash 40,000 40,000 -
Inventory 100,000 124,000 24,000
Equipment 240,000 360,000 120,000
Accumulated
(80,000) (120,000) (40,000)
depreciation
Patent 80,000 80,000
Net assets 336,000 520,000 184,000
The remaining useful life of the equipment is 5 years while the patent has
a remaining legal and useful life of 8 years. Simon’s share capital has a
balance of ₱200,000.
Among the transactions of Peter and Simon during 20x1 were the following:
 Peter's accounts receivable include a receivable from Simon amounting to
₱12,000 while Simon's accounts payable include a payable to Peter
amounting to ₱8,000. The difference was due to a check amounting to
₱4,000 deposited by Simon directly to Peter's bank account which was not
yet recorded by Peter in its books. The check has already cleared in
Simon’s bank account.
 Peter sold goods costing ₱80,000 to Simon for ₱128,000. One-third of the
inventory remains as of Dec. 31, 20x1.
 Simon sold goods costing ₱40,000 to Peter for ₱60,000. One-half of the
goods remain in inventory as of December 31, 20x1.
 On January 1, 20x1, Simon sold to Peter equipment for ₱20,000. The
equipment has a historical cost of ₱40,000 and accumulated depreciation
of ₱16,000 and a remaining useful life of 5 years on the date of sale.
 On July 1, 20x1, Simon Co. purchased 50% of the outstanding bonds of
Peter Co. from the open market for ₱240,000. The interest income
accruing on the bonds for the year was received by Simon from Peter.
 The bonds payable carry an interest rate of 10% and were originally
issued by Peter at face amount.
 Peter declared dividends of ₱160,000.
 Simon declared dividends of ₱80,000.
 Goodwill is impaired by ₱8,000.
 There have been no changes in Simon’s share capital.
The individual financial statements of the entities at December 31, 20x1

are shown below:
Peter Co. Simon Co.
ASSETS
Cash 1,448,000 85,200
Inventory 440,000 268,000
Investment in bonds 238,000
Equipment 4,020,000 200,000
Accumulated depreciation (1,444,000) (91,200)
TOTAL ASSETS 5,664,000 720,000

Share capital 3,200,000 200,000
Retained earnings 1,780,000 436,800
Total equity 4,980,000 636,800

Peter Co. Simon Co.
Sales 3,728,000 1,020,000
Cost of goods sold (1,700,000) (472,000)
Gross profit 2,028,000 548,000
Interest income 8,000
Depreciation expense (644,000)
Loss on sale of equipment - (4,000)
Dividend income 72,000 -
Profit for the year 1,160,000 380,800

a. 4,364,000 b. 4,560,000 c. 4,540,000 d. 4,650,000

a. 1,862,000 b. 2,034,000 c. 2,128,000 d. 1,934,000
36. How much is the consolidated ending inventory?

a. 708,000 b. 634,000 c. 674,000 d. 682,000
37. How much is the goodwill in the December 31, 20x1 consolidated
a. 20,000 b. 18,800 c. 22,000 d. 19,800
38. How much is the NCI in net assets as of December 31, 20x1?
a. 82,080 b. 82,720 c. 82,800 d. 82,880
39. How much is the consolidated retained earnings as of December 31,
20x1?
a. 1,939,200 b. 1,979,000 c. 1,946,400 d. 1,929,200
40. How much is the consolidated profit or loss in 20x1?

a. 1,398,000 b. 1,263,100 c. 1,470,000 d. 1,350,000
41. How much are the profit attributable to the owners of the parent and
to NCI, respectively?
Owners of parent NCI
a. 1,239,500 23,600
b. 1,326,400 71,600
c. 1,319,200 30,800
d. 1,432,600 37,400
42. How much is the total consolidated assets as of December 31, 20x1?
a. 5,781,200 b. 5,797,200 c. 5,823,200 d. 5,689,200
43. How much is the total consolidated liabilities as of December 31,

20x1?
a. 559,200 b. 567,200 c. 526,200 d. 498,600
Reverse acquisition - NCI

Fact pattern
On January 1, 20x1, Small Co. issues 2.5 shares in exchange for each
ordinary share of Big Co. The fair value of Big Co.'s shares on January 1,
20x1 is ₱480 while the fair value of Small Co.'s shares is ₱192. The
statements of financial position of the combining entities immediately
before combination show the following information:
Small Co. Big Co.
(legal parent, (legal subsidiary,
accounting acquiree) accounting acquirer)
Identifiable assets 21,600 44,400
Total assets 21,600 44,400
Liabilities 8,400 20,400

Share capital:
100 ordinary shares 3,600
Total liabilities and equity 21,600 44,400
The fair value of Small’s liabilities at January 1, 20x1 is the same as

their carrying amount; however, the fair value of Small's identifiable
assets at January 1, 20x1 is ₱24,000.
Case #1: (Refer to fact pattern) All of Big Co.’s shares were exchanged
for Small Co.’s shares.
44. How much is the goodwill?
a. 4,800 b. 6,960 c. 3,600 d. 5,733

a. 72,000 b. 49,260 c. 68,443 d. 69,600
46. How much is the consolidated total share capital?

a. 22,800 b. 25,680 c. 16,800 d. 26,400
a. 2,400 b. 3,600 c. 4,800 d. 0
48. How much is the consolidated total retained earnings?

a. 9,600 b. 16,800 c. 15,120 d. 22,240
Case #2: (Refer to fact pattern) Only 54 of Big Co.’s shares were
exchanged for Small Co.’s shares.
49. How much is the goodwill?
a. 4,800 b. 6,960 c. 3,600 d. 5,733

a. 72,000 b. 49,260 c. 68,443 d. 69,600
51. How much is the consolidated total share capital?

a. 22,800 b. 25,680 c. 16,800 d. 26,400

a. 2,400 b. 3,600 c. 4,800 d. 0
53. How much is the consolidated total retained earnings?

a. 9,600 b. 16,800 c. 15,120 d. 22,240
Acquisition date – Vertical group
Scenario #1:
1. On January 1, 20x1, S1 acquires 60% interest in S2. On January 1, 20x3,
P acquires 80% interest in S1. What is the acquisition date?
a. January 1, 20x1 for S1 only
b. January 1, 20x3 for S2 only
c. January 1, 20x1 for both S1 and S2
d. January 1, 20x3 for both S1 and S2
e. a and b
2. When is goodwill computed?

e. a and b
Scenario #2:
3. On January 1, 20x1, P acquires 80% interest is S1. On January 1, 20x3,
S1 acquires 60% interest in S2. What is the acquisition date?
e. a and b
Acquisition date – D-shaped group

Scenario #1:
4. P acquires 80% interest in S1 on January 1, 20x1. P acquires 25%
interest in S2 on January 1, 20x2. S1 acquires 30% interest in S2 on
January 1, 20x3. What is the acquisition date?
c. January 1, 20x2 for S2
d. a and c
e. a and b
Scenario #2:
5. S1 acquires 30% interest in S2 on January 1, 20x1. P acquires 25%
interest in S2 on January 1, 20x2. P acquires 80% interest in S1 on
January 1, 20x4.
d. a and c
e. a and b
Consolidation of a vertical group – Same acquisition date

Use the following information for the next seven questions:
The following transactions occurred on January 1, 20x1:
 P acquired 80% interest in S1 for ₱400,000 when the retained earnings of
S1 were ₱120,000. NCI in S1 has a fair value of ₱100,000.
 S1 acquired 60% interest in S2 for ₱200,000 when the retained earnings
of S2 were ₱40,000. NCI in S2 (direct and indirect) has a fair value of
₱160,000.
The carrying amounts of the net identifiable assets of S1 and S2
approximate their fair values on January 1, 20x1. The group determined on
December 31, 20x1 that goodwill has been impaired by 20%. There have been
no changes in the share capitals of S1 and S2 during the year.
A summary of the individual financial statements of the entities is shown

below:

P S1 S2
Investment in Subsidiary 400,000 200,000 -
Other assets 800,000 480,000 320,000
Total assets 1,200,000 680,000 320,000
Liabilities 120,000 152,000 8,000

Share capital 480,000 320,000 200,000
Total liabilities and equity 1,200,000 680,000 320,000

Revenues 720,000 408,000 192,000
Expenses (400,000) (320,000) (120,000)
Profit 320,000 88,000 72,000
6. How much is the goodwill as of December 31, 20x1?

a. 144,000 b. 132,600 c. 112,000 d. 128,000
7. How much is the total NCI in net assets as of December 31, 20x1?
a. 305,620 b. 264,320 c. 265,220 d. 236,220
8. How much is the consolidated retained earnings as of December 31, 20x1?

a. 687,680 b. 667,280 c. 698,020 d. 688,420

a. 460,320 b. 446,000 c. 484,000 d. 452,000
10. How much is the profit attributable to owners of parent and to NCI,
respectively?
Owners of parent NCI in S1 NCI in S2
a. 406,730 15,480 38,110
b. 407,680 15,200 29,120
c. 407,930 15,380 22,690
d. 408,840 15,120 60,040
a. 1,712,000 b. 1,680,000 c. 1,340,000 d. 1,722,000
a. 1,060,000 b. 1,432,000 c. 1,442,000 d. 1,400,000
Consolidation of a vertical group – Different acquisition dates
The following transactions occurred during 20x1:
 On January 1, 20x1, P acquired 80% interest in S1 for ₱400,000.
 On December 31, 20x1, S1 acquired 60% interest in S2 for ₱200,000.
The following information has been determined:

Retained earnings S1 S2
January 1, 20x1 120,000 40,000
December 31, 20x1 208,000 112,000
Fair value of NCI S1 S2

January 1, 20x1 100,000 192,000
December 31, 20x1 112,000 168,000
A summary of the individual statement of financial position of the

entities as at December 31, 20x1 is shown below:
P S1 S2
Other assets 800,000 480,000 320,000
Total assets 1,200,000 680,000 320,000
120,000 152,000
Liabilities 8,000
Share capital 480,000 320,000 200,000

P S1 S2
Revenues 720,000 408,000 192,000
Expenses (400,000) (320,000) (120,000)
Profit 320,000 88,000 72,000

approximate their fair values at their acquisition dates. The group
determined that the goodwill to S1 has been impaired by ₱40,000 as at
December 31, 20x1. There have been no changes in the share capitals of S1
and S2 during the year.
13. How much is the total goodwill as of December 31, 20x1?

a. 28,000 b. 18,240 c. 34,000 d. 36,000
a. 229,600 b. 237,600 c. 237,088 d. 232,680

20x1?
a. 638,400 b. 640,000 c. 637,780 d. 639,880

a. 368,000 b. 356,600 c. 446,000 d. 452,000
17. How much are the profit attributable to owners of parent and to the
NCIs?
Parent NCI in S1 NCI in S2
a. 348,200 8,400 0
b. 358,400 9,600 0
c. 407,680 15,200 29,120
d. 407,930 15,380 22,690
a. 1,680,000 b. 1,712,000 c. 1,636,000 . d. 1,722,000
a. 1,356,000 b. 1,432,000 c. 1,400,000 d. 1,442,000
Consolidation of a D-shaped (mixed) group

 P acquired 64,000 shares in S1 for ₱400,000 and 12,500 shares in S2 for
₱160,000.
 S1 acquired 15,000 shares in S2 for ₱200,000.
S1 S2
Retained earnings – January 1, 20x1 120,000 40,000
Fair value of NCI – January 1, 20x1 100,000 160,000

approximate their fair values on January 1, 20x1. The group determined on
December 31, 20x1 that there is no impairment of goodwill. There have been
no changes in the share capitals of S1 and S2 during the year.
A summary of the individual financial statements of the entities on

December 31, 20x1 is shown below:

P S1 S2
Other assets 800,000 480,000 320,000
Total assets 1,360,000 680,000 320,000
Liabilities 280,000 152,000 8,000

Share capital (₱4.00 par value) 480,000 320,000 200,000

Revenues 720,000 408,000 192,000
Expenses (400,000) (320,000) (120,000)
Profit 320,000 88,000 72,000
The profits above do not include inter-company investment income.
a. 280,000 b. 300,000 c. 320,000 d. 360,000
a. 232,680 b. 237,600 c. 274,320 d. 229,600

20x1?
a. 638,400 b. 705,680 c. 637,780 d. 698,480

a. 368,000 b. 356,600 c. 480,000 d. 452,000
NCIs?
Parent NCI in S1 NCI in S2
a. 324,800 15,600 27,600
b. 358,400 9,600 -0-
c. 425,680 17,600 36,720
d. 366,480 17,680 67,840
a. 1,900,000 b. 1,712,000 c. 1,636,000 d. 1,722,000
a. 1,356,000 b. 1,282,000 c. 1,460,000 d. 1,272,000
Complex group structure with Associate

Use the following information for the next eight questions:
 A acquired 80% interest in B for ₱400,000.
 A acquired 25% interest in C for ₱160,000.
 B acquired 30% interest in C for ₱200,000.
 B acquired 20% interest in E for ₱240,000.
 C acquired 40% interest in D for ₱320,000.
B C D E
Retained earnings – Jan. 1, 20x1 120,000 40,000 8,000 32,000
Fair value of NCI – Jan. 1, 20x1 100,000 160,000 72,000 192,000
The carrying amounts of the net identifiable assets of each of the

investees approximate their fair values on January 1, 20x1. The group
determined on December 31, 20x1 that there is no impairment in goodwill.
There have been no changes in the share capitals of S1 and S2 during the
year.
A summary of the individual financial statements of the entities on

December 31, 20x1 is shown below:

A B C D E
Investments 560,000 440,000 320,000 - -
Other assets 800,000 480,000 320,000 240,000 280,000
Total assets 1,360,000 920,000 640,000 240,000 280,000
Liabilities 280,000 392,000 328,000 120,000 40,000
Share capital 480,000 320,000 200,000 80,000 160,000
Retained earnings 600,000 208,000 112,000 40,000 80,000
Total liabilities and equity 1,360,000 920,000 640,000 240,000 280,000
The investment accounts pertain solely to the investment transactions

described earlier and are not adjusted for any investment income from
investees.

A B C D E
Revenues 720,000 408,000 192,000 256,000 128,000
Expenses (400,000) (320,000) (120,000) (224,000) (80,000)
Profit 320,000 88,000 72,000 32,000 48,000
Profits do not include income from investments.
27. Assuming the existence of control is based solely on shareholdings,

which of the entities above are considered subsidiaries of A Co.?
a. B and C b. B, C and D c. B only d. A, B, C,
D and E

a. 280,000 b. 300,000 c. 320,000 d. 360,000
a. 282,768 b. 237,600 c. 274,320 d. 229,600

20x1?
a. 638,400 b. 705,680 c. 719,632 d. 698,480
a. 500,560 b. 502,400 c. 489,420 d. 399,272
NCIs?
Parent NCI in B NCI in C NCI in D NCI in E
a. 439,632 19,520 43,248 0 0
b. 358,400 9,600 0 31,272 0
c. 425,680 17,600 36,720 6,890 2,530
d. 443,932 18,768 37,860 0 0
a. 1,900,000 b. 2,482,400 c. 1,636,000 d. 1,317,600
a. 1,356,000 b. 1,482,400 c. 1,460,000 d. 1,282,000
Theory of Accounts (CONSOLIDATION)
1. The accounting for business combinations is currently prescribed under
a. PAS 22 c. PFRS 3 – revised 2008
b. PFRS 3 d. PAS 27 – revised 2011
2. KINK Co. has acquired an investment in a subsidiary, TWIST Co., with the
view to dispose of this investment within six months. The investment in
the subsidiary has been classified as held for sale and is to be
accounted for in accordance with PFRS 5. The subsidiary has never been
consolidated. How should the investment in the subsidiary be treated in
the financial statements?
a. Purchase accounting should be used.
b. Equity accounting should be used.
c. The subsidiary should not be consolidated but PFRS 5 should be used.
d. The subsidiary should remain off balance sheet.
(Adapted)
3. The consolidation theory currently applied under PFRSs is

a. Proprietary theory/Proportionate consolidation theory/
b. Parent company theory
c. Entity theory/ Contemporary theory
d. Hybrid theory/ Traditional theory
4. The proprietary theory is applied under which of the following

standards?
a. PAS 31 b. PAS 36 c. PFRS 3 d. PAS 27
5. What is the basis for consolidation?

a. significant influence c. control
b. joint control d. variable returns
6. FALLACIOUS Co. controls an overseas entity MISLEADING Co. Because of

exchange controls, it is difficult to transfer funds out of the country
to the parent entity. FALLACIOUS Co. owns 100% of the voting power of
MISLEADING Co. How should MISLEADING Co. be accounted for?
a. It should be excluded from consolidation and the equity method should
be used.
b. It should be excluded from consolidation and stated at cost.
c. It should be excluded from consolidation and accounted for in
accordance with PFRS 9.
d. It is not permitted to be excluded from consolidation because control
is not lost.
(Adapted)
7. TIPPLE has control over the composition of DRINK’s board of directors.

TIPPLE owns 49% of DRINK and is the largest shareholder. TIPPLE has an
agreement with Mr. Bartek, which owns 10% of DRINK, whereby Mr. Bartek
will always vote in the same way as TIPPLE. Can TIPPLE exercise control
over DRINK?
a. TIPPLE cannot exercise control because it owns only 49% of the voting
rights.
b. TIPPLE cannot exercise control because it can control only the makeup
of the board and not necessarily the way the directors vote.
c. TIPPLE can exercise control solely because it has an agreement with
Mr. Bartek for the voting rights to be used in whatever manner TIPPLE
wishes.
d. TIPPLE can exercise control because it controls more than 50% of the
voting power, and it can govern the financial and operating policies
of DRINK through its control of the board of directors.
(Adapted)
8. On January 1, 20x1, MIME Co. acquired one-third equity interest in

IMITATE Co. which resulted in MIME having significant influence over
IMITATE Co. On July 1, 20x4, MIME Co. acquired a further one-third
equity interest in IMITATE Co. which resulted in MIME having a
controlling interest over IMITATE. For financial reporting purposes,
which of the following statements is correct?
a. Goodwill shall be computed on July 1, 20x4 and the one-third equity
interest acquired in 20x1 does not affect the goodwill computation.
b. Goodwill shall be computed on July 1, 20x4 and the one-third equity
interest acquired in 20x1 affects the goodwill computation.
c. Goodwill shall be computed both on January 1, 20x1 and July 1, 20x4
because the transactions are considered to constitute a ‘step
acquisition.’
d. Goodwill shall be computed only on January 1, 20x1. The subsequent
change in ownership interest which did not result to loss of control
is accounted for directly in equity.
9. LASSITUDE Co. owns 50% of WEARINESS Co.’s voting shares. The board of
directors consists of six members; LASSITUDE Co. appoints three of them
and WEARINESS Co. appoints the other three. The casting vote at meetings
always lies with the directors appointed by LASSITUDE Co. Does LASSITUDE
Co. have control over WEARINESS Co.?
a. No, control is equally split between LASSITUDE Co. and FATIGUE Co.
b. Yes, LASSITUDE Co. holds 50% of the voting power and has the casting
vote at board meetings in the event that there is not a majority
decision.
c. No, LASSITUDE Co. owns only 50% of the entity’s shares and therefore
does not have control.
d. No, control can be exercised only through voting power, not through a
casting vote.
(Adapted)
10. VOLUBLE TALKATIVE Co. has sold all of its shares to the public. The
company was formerly a state-owned entity. The national regulator has
retained the power to appoint the board of directors. An overseas entity
acquires 55% of the voting shares, but the regulator still retains its
power to appoint the board of directors. Who has control of the entity?
a. The national regulator.
b. The overseas entity.
c. Neither the national regulator nor the overseas entity.
d. The board of directors.
(Adapted)
11. A manufacturing group has just acquired a controlling interest in a

football club that is listed on a stock exchange. The management of the
manufacturing group wishes to exclude the football club from the
consolidated financial statements on the grounds that its activities are
dissimilar. How should the football club be accounted for?
a. The entity should be consolidated as there is no exemption from
consolidation on the grounds of dissimilar activities.
b. The entity should not be consolidated using the purchase method but
should be consolidated using equity accounting.
c. The entity should not be consolidated and should appear as an
investment in the group accounts.
d. The entity should not be consolidated; details should be disclosed in
the financial statements.
(Adapted)
12. On January 1, 20x1, TRICE Co. obtained control of INSTANT Co.

Subsequently, there have changes in the ownership interests over
INSTANT; however, the TRICE’s control over INSTANT was unaffected. Which
of the following statements is incorrect?
a. Once control has been achieved, further transactions whereby the
parent entity acquires further equity interests from non-controlling
interests, or disposes of equity interests but without losing
control, are accounted for as equity transactions
b. The carrying amounts of the controlling and non-controlling interests
are adjusted to reflect the changes in their relative interests in
the subsidiary.
c. Any difference between the amount by which the non-controlling
interests is adjusted and the fair value of the consideration paid or
received is recognized directly in equity and attributed to the
owners of the parent.
d. The carrying amount of any goodwill should be adjusted and gain or
loss is recognized in profit or loss.
13. Which of the following exemplifies the application of the ‘entity

theory’ of consolidation?
a. Consolidated profit = Parent’s separate profit + Share of Parent in
Subsidiary’s profit
b. Consolidated profit = Profit of the group
c. Consolidated profit = Profit of the group – NCI profit
d. Consolidated profit = Parent’s separate profit + NCI profit
14. Under the ‘entity theory’ of consolidation, the consolidated profit

equals
a. Parent’s separate profit + Share of Parent in Subsidiary’s profit
b. Profit of the group – NCI profit
c. Parent’s separate profit + NCI profit
d. Profit attributable to owners of the parent + Profit attributable to
NCI
15. During the year, COMITY Co. sold equipment to its subsidiary, MUTUAL
COURTESY Co., at a gain. The equipment has a remaining useful life of 5
years. Which of the following statements is true in the preparation of
the consolidated financial statements?
a. The gain is recognized immediately.
b. The gain is deferred and recognized only in the period the equipment
is sold to an unrelated party.
c. The carrying amount of the asset and the related depreciation are
adjusted downwards.
d. The carrying amount of the asset and the related depreciation are
adjusted upwards.
16. During the year, BAFFLE Co. sold part of its controlling interest in
TO COFUSE Co. The sale did not affect BAFFLE’s control over TO CONFUSE.
Which of the following statements is true?
a. The equity adjustment would be larger if BAFFLE measures NCI at the
NCI’s proportionate share in the subsidiary’s net identifiable assets
rather than at fair value.
b. The equity adjustment would be larger if BAFFLE measures NCI at fair
value rather than at the NCI’s proportionate share in the
subsidiary’s net identifiable assets.
c. There would be no equity adjustment if the net disposal proceeds
equal the original cost of the interest sold.
d. c and d
17. Which of the following terms best describes the financial statements
of a parent in which the investments are accounted for on the basis of
the direct equity interest?
a. Single financial statements
b. Combined financial statements
c. Separate financial statements
d. Consolidated financial statements
18. Are the following statements true or false?

1. Consolidated financial statements must be prepared using uniform
accounting policies.
2. The non-controlling interest in the net assets of subsidiaries may be
shown by way of note to the consolidated statement of financial
position.
a. False, False b. False, True c. True, False d. True True
19. 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 entity’s 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.
(Adapted)
20. Where should non-controlling interests be presented in the

consolidated balance sheet?
a. Within long-term liabilities.
b. In between long-term liabilities and current liabilities.
c. Within the parent shareholders’ equity.
d. Within equity but separate from the parent shareholders’ equity.
(Adapted)
Chapter 19 - Suggested answers to review theory questions

1. C 6. D 11. A 16. A
2. C 7. D 12. D 17. C
3. C 8. B 13. B 18. C
4. A 9. B 14. D 19. D
5. C 10. C 15. C 20. D
Separate Financial Statements

Separate financial statements
Bandolin Co. had the following investment transactions during 20x1:
 Acquired 80% interest in Zaskar, Inc. for ₱4,000,000 on January 1, 20x1.
Zaskar reported profit of ₱40M and declared dividends of ₱1,200,000
during 20x1. The fair value of the investment on December 31, 20x1 is
₱4.8M.
 Acquired 20% interest in Goat Co. for ₱400,000 on July 1, 20x1.
Transaction costs incurred amounted to ₱80,000. Goat reported profit of
₱8M for the six months ended December 31, 20x1 and declared year-end
dividends of ₱800,000. The fair value of the investment on December 31,
20x1 is ₱420,000.
Bandolin’s policy is to measure investments in subsidiaries at cost and

investments in associates at fair value through profit or loss in the
separate financial statements.
1. How much is the carrying amount of the investment in subsidiary in the

December 31, 20x1 consolidated financial statements?
a. 4,000,000 b. 4,800,000 c. 36,000,000 d. 0
2. How much is the carrying amount of the investment in subsidiary in the

December 31, 20x1 separate financial statements?
a. 4,000,000 b. 4,800,000 c. 36,000,000 d. 0
3. How much is the carrying amount of the investment in associate in the

December 31, 20x1 separate financial statements?
a. 480,000 b. 420,000 c. 1,920,000 d. 0
4. How much is net investment income recognized in the 20x1 separate

financial statements for the investments referred to above?
a. 100,000 b. 180,000 c. 33,600,000 d. 1,060,000
Theory of Accounts Reviewer

1. Which of the following are required under PAS 27 to produce separate
a. A listed entity with at least one wholly owned subsidiary
b. A listed entity with at least one subsidiary, whether wholly or
partially owned.
c. An entity, whether listed or unlisted, with at least one affiliate
(e.g., a subsidiary, an associate or an interest in a joint venture)
d. PAS 27 does not mandate which entities should produce separate
financial statements.
2. These are 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 of a single economic entity.
a. General purpose financial statements c. Individual financial statements
b. Consolidated financial statements d. Separate financial statements
3. These are those presented by a parent (i.e., an investor with control of

a subsidiary) or an investor with joint control of, or significant
influence over, an investee, in which the investments are accounted for
at cost or in accordance with PFRS 9 Financial Instruments.
a. General purpose financial statements c. Individual financial statements
b. Consolidated financial statements d. Separate financial statements
4. In the separate financial statements of a parent entity, investments in

subsidiaries that are not classified as held for sale should be
accounted for
a. At cost. c. Using the equity method.
b. In accordance with PFRS 9. d. a or b
Suggested answers to review theory questions

1. D
2. B
3. D
4. D

Answers at a glance:
1. C 6. A 11. B 16. B
2. B 7. D 12. D 17. B
3. D 8. D 13. B 18. D
4. A 9. D 14. C
5. B 10. C 15. A
Solutions:
1. C
Solution:
Consideration transferred 6,000,000
Non-controlling interest in the acquiree -
Previously held equity interest in the acquiree -
Total 6,000,000
Fair value of net identifiable assets acquired (4,720,000)
Goodwill 1,280,000
2. B
Solution:
Total 4,000,000
Gain on a bargain purchase (720,000)
3. D
Solution:
Non-controlling interest in the acquiree 620,000
Total 4,620,000
Goodwill 1,420,000
4. A
Solution:
Total 3,020,000
Fair value of net identifiable assets acquired (4.8M –1.6M) (3,200,000)
Gain on a bargain purchase (180,000)
5. B
Solution:
Non-controlling interest in the acquiree 1,000,000
Total 5,000,000
Goodwill 1,800,000
6. A
Solution:
Fair value of identifiable assets acquired 4,800,000
Fair value of liabilities assumed (1,600,000)
Fair value of net identifiable assets acquired 3,200,000
Multiply by: Non-controlling interest 20%
NCI’s proportionate share in net identifiable assets 640,000

Total 4,640,000
Goodwill 1,440,000
7. D
Solution:
Consideration transferred (8,000 sh. x ₱500) 4,000,000
Total 4,000,000
Fair value of net identifiable assets acquired (6.4M - 3.6M) (2,800,000)
Goodwill 1,200,000
8. D
Solution:
Consideration transferred (fair value of bonds) 4,000,000
Total 4,000,000
Goodwill 1,200,000
9. D
Solution:
Total 4,000,000
Goodwill 1,200,000
The ₱800,000 restructuring provisions are ignored because these are

post-acquisition expenses.
10. C
Solution:
Fair value of identifiable assets acquired,
including 6,480,000
intangible asset on the operating lease with
favorable terms (₱6.4M + ₱80K) (3,600,000)
Fair value of liabilities assumed 2,880,000
Fair value of net identifiable assets acquired
Goodwill (gain on bargain purchase) is computed as follows:

Total 4,000,000
Goodwill 1,120,000
11. B
Solution:
A liability shall be recognized because the terms of the operating
lease where the acquiree is the lessee is unfavorable.
The fair value of net identifiable assets acquired is computed as

follows:
Fair value of liabilities assumed, including liability on the (3,680,000)
operating lease with unfavorable terms (₱3.6M + ₱80K)

Total 4,000,000
Goodwill 1,280,000
12. D
Solution:
No intangible asset or liability is recognized, regardless of terms of
the operating lease, because the acquiree is the lessor.

Total 4,000,000
Goodwill 1,200,000
13. B
Solution:
follows:
Fair value of identifiable assets before recognition of
unrecorded assets, excluding recorded goodwill (6.2M – 80K) 6,120,000
Fair value of unrecorded identifiable intangible assets (all of
1,080,000
the items listed)
Total fair value of identifiable assets acquired 7,200,000

Total 6,000,000
Goodwill 600,000
14. C
Solution:
Fair value of identifiable assets 6,400,000
Costs to sell of the “held for sale” asset (80,000)
Fair value of unrecognized research and development 200,000
Adjusted value of identifiable assets 6,520,000

Total 4,000,000
Goodwill 1,080,000
15. A
Solution:
The adjusted fair value of net identifiable assets acquired is computed
as follows:
Total fair value of liabilities assumed:
Fair value of liabilities assumed 3,600,000
Fair value of contingent liabilities assumed:
Contractual contingent liability assumed 40,000
Contractual contingent liability assumed 120,000
Non-contractual contingent liability assumed 200,000 (3,960,000)

Total 4,320,000
Goodwill 1,880,000
Consideration transferred and indemnification asset

16. B
Solution:
The fair value of the consideration transferred is determined as follows:
Cash payment (₱4M x 50%) 2,000,000
Present value of future cash payment (Note payable) 1,241,843
(₱4M x 50% x PV of ₱1 @10%, n=5)
Land transferred to former owners of XYZ – at fair value 1,200,000
Fair value of consideration transferred 4,441,843
The fair value of the net identifiable assets acquired is computed as

follows:
Fair value of assets 6,400,000
Indemnification asset (480,000 – 400,000) 80,000
Total 6,480,000
Fair value of liabilities (3,600,000)

Total 4,441,844
Goodwill / (Gain on a bargain purchase) 1,561,843
17. B
Solution:
The deferred tax liability and asset are computed as follows:
Carrying Fair Taxable/ (Deductible)
amounts values Temporary difference
Cash in bank 40,000 40,000 -
Receivables – net 680,000 480,000 200,000
Inventory 2,080,000 1,400,000 680,000
Building – net 4,000,000 4,400,000 (400,000)
Patent - 120,000 (120,000)
Payables 1,600,000 1,600,000 -
Contingent liability - 80,000 80,000
Total taxable temporary difference (400K + 120K) 520,000

Multiply by: Tax rate 30%
Deferred tax liability 156,000
Total deductible temporary difference (200K + 680K + 80K) 960,000

Multiply by: Tax rate 30%
Deferred tax asset 288,000
The fair value of the net identifiable assets of the acquiree is

computed as follows:
Fair value of identifiable assets acquired excluding
recorded goodwill (6.4M – 80K goodwill + 120K unrecorded 6,728,000
patent + 288K deferred tax asset)
Fair value of liabilities assumed (1.6M + 80K contingent (1,836,000)
liability + 156K deferred tax liability)
Goodwill is computed as follows:

Total 6,000,000
Goodwill 1,108,000
18. D
Solution:
The consideration transferred is adjusted for the dividends purchased
as follows:
Dividends-on (Dividends purchased) (400,000)
Adjusted consideration transferred 6,000,000

Total 6,000,000
FV of net identifiable assets acquired (6.4M – 80K - 2M) (4,320,000)
Goodwill 1,680,000

1. A 6. D 11. A 16. C 21. B 26. D
2. D 7. B 12. B 17. D 22. C 27. C
3. A 8. A 13. D 18. C 23. A 28. B
4. B 9. C 14. A 19. D 24. B
5. D 10. C 15. B 20. A 25. C
Solution:
1. A
Solution:
COLLOQUY Co. Combined entity Increase
Share capital 2,400,000 2,800,000 400,000
Share premium 1,200,000 4,800,000 3,600,000
Totals 3,600,000 7,600,000 4,000,000
The fair value of the shares transferred as consideration for the

business combination is ₱4,000,000 (i.e., total increase in share
capital and share premium accounts).
2. D
Solution:
Increase in COLLOQUY’s share capital account
(see table above) 400,000
Divide by: ABC’s par value per share 40
Number of shares issued 10,000
3. A
Solution:
Divide by: Number of shares issued 10,000
Acquisition-date fair value per share 400
4. B
Solution:
Total 4,000,000
Goodwill 1,200,000
5. D 3,200,000 – COLLOQUY’s retained earnings
6. D
Solution:
COLLOQUY Co. Combined entity Increase
Share capital 2,400,000 2,800,000 400,000
Share premium 1,200,000 4,800,000 3,600,000
Totals 3,600,000 7,600,000 4,000,000
Fair value of shares transferred 4,000,000

Divide by: ABC’s fair value per share 400
Number of shares issued 10,000
7. B
Solution:
Increase in share capital account (see table above) 400,000
Divide by: Number of shares issued 10,000
Par value per share 40
8. A
Solution:
Consideration transferred (see previous computation) 4,000,000
Total 4,000,000
Fair value of net identifiable assets acquired (squeeze) (3,700,000)
Goodwill (given information) 300,000
9. C
Solution:
Non-controlling interest in the acquiree (1M x 25%) 1,000,000
Previously held equity interest in the acquiree 720,000
Total 4,920,000
Goodwill 920,000
10. C
Solution:
Total 4,920,000
Goodwill 920,000
11. A
Solution:
Non-controlling interest in the acquiree (1M x 10%) 400,000
Total 4,320,000
Goodwill 320,000
12. B
Solution:
Consideration transferred -
Total 4,000,000
Goodwill -
13. D
Solution:
Consideration transferred (4M x 60%*) 2,400,000
Non-controlling interest in the acquiree (4M x 40%*) 1,600,000
Total 4,000,000
Goodwill -
*After the business combination, the parent’s ownership interest is

increased to 60% (i.e., 36,000 ÷ 60,000). Consequently, the non-
controlling interest is 40%.
14. A
15. B
16. C
17. D
18. C
Solution:
The consideration transferred on the business combination is
Cash payment on business combination 4,000,000
Additional payment to subsidiary’s former owner 200,000
Consideration transferred on the business combination 4,200,000

follows:
Fair value of identifiable assets 6,400,000
Fair value of inventory not transferred to DIAPHANOUS (360,000)
Adjusted fair value of identifiable assets acquired 6,040,000
Adjusted fair value of net identifiable assets acquired 2,440,000

Total 4,200,000
Goodwill 1,760,000
19. D
Solution:
The settlement loss to is computed as follows:
Settlement loss before adjustment (“off-market” value) 320,000
Carrying amount of deferred liability (240,000)
Adjusted settlement loss 80,000

Cash payment 4,000,000
Payment for the settlement of pre-existing
relationship (‘off-market’ value) (320,000)

follows:
Fair value of subsidiary’s identifiable assets 6,400,000
Intangible asset – reacquired right 160,000
Carrying amount of asset related to the reacquired rights – (200,000)
prepayment
Adjusted fair value of identifiable assets acquired 6,360,000

Total 3,680,000
Goodwill 920,000
20. A
Solution:
Payment for the settlement of pre-existing relationship
(‘off-market’ value) (360,000)

Total 3,640,000
Goodwill 840,000
21. B
Solution:
The settlement gain or loss is computed as follows:
Payment for the settlement of pre-existing relationship
(fair value) 400,000
Carrying amount of estimated liability on pending lawsuit (520,000)
Settlement gain 120,000

Payment for the settlement of pre-existing relationship (400,000)
(fair value)

Total 3,600,000
Fair value of net identifiable assets acquired (1.6M - .9M) (2,800,000)
Goodwill 800,000
22. C
Solution:
Fair value of contingent consideration 40,000

Total 4,040,000
Fair value of net identifiable assets acquired (1.6M - .9M) (2,800,000)
Goodwill 1,240,000
23. A
Solution:
*The unrealized loss on change in fair value is computed as follows:
Fair value of liability on January 1, 20x1 40,000
Fair value of liability on December 31, 20x1
[(2.2M – 1.6M) x 10%]
60,000
Increase in fair value of liability (loss) (20,000)
Dec. Unrealized loss on change in fair value – P/L 20,000

31, Liability for contingent consideration 20,000
20x1 to recognize loss on change in fair value of liability
assumed for contingent consideration
24. B
Solution:
Dec. Liability for contingent consideration 40,000
31,
20x1 Gain on extinguishment of liability – P/L 40,000
25. C
Solution:
Fair value of shares issued (10,000 sh. x ₱400 per sh.) 4,000,000
Fair value of contingent consideration 360,000

Total 4,360,000
Fair value of net identifiable assets acquired (6.4M –3.6M) (2,800,000)
Goodwill 1,560,000
26. D
27. C
Solution:
Dec. Share premium – contingent consideration 360,000
31, Share premium 360,000
20x1
28. B
Solution:
The adjusted fair value of net identifiable assets acquired is computed
as follows:

Fair value of liabilities assumed 3,600,000 -
Fair value of contingent liability assumed 400,000 (4,000,000)
Fair value of net identifiable assets acquired 600,000

Total 4,320,000
Goodwill 1,920,000
1. D 6. B 11. A
2. A 7. A 12. D
3. A 8. D 13. B
4. C 9. D 14. A
5. C 10. B
Solution:
1. D
Solution:
Total earnings for the last 5 years 27,600,000
Less: Expropriation gain Normalized (1,600,000)
earnings for the last 5 years 26,000,000
Divide by: 5
(a) Average annual earnings 5,200,000
Fair value of acquiree's net assets 40,000,000
Multiply by: Normal rate of return 12%
(b) Normal earnings 4,800,000
Excess earnings (a) – (b) 400,000
Multiply by: Probable duration of excess 5
earnings
2,000,000
Goodwill
2. A
Solution:
Average earnings (27.6M – 1.6M expropriation gain) ÷ 5 yrs. 5,200,000
Normal earnings in the industry (40M x 12%) (4,800,000)
Excess earnings 400,000
Divide by: Capitalization rate 25%
Goodwill 1,600,000
3. A
Solution:
Divide by: Capitalization rate 12.5%
Estimated purchase price 41,600,000
Fair value of XYZ’s net assets (40,000,000)
Goodwill 1,600,000
4. C
Solution:
Normal earnings in the industry (40M x 12%) (4,800,000)
Multiply by: PV of an ordinary annuity @10%, n=5 3.79079
Goodwill 1,516,316
5. C
Solution:
Average earnings (2,600,000 ÷ 5 years) 520,000
Normal earnings on average net assets [10% x (11M ÷ 5)] (220,000)
Goodwill 1,000,000
Add: Fair value of net identifiable assets acquired 2,360,000
6. B
Solution:
Average earnings (2,600,000 ÷ 5 years) 520,000
Goodwill 890,000
7. A (See solution above)
8. D
Solution:
Average earnings 5,200,000
Normal earnings (12% x 40M*) (4,800,000)
Multiply by: PV of an ordinary annuity @10%, n=5 3.79079
Goodwill 1,516,316
*The fair value of XYZ’s net assets is computed as follows:

Carrying amount of equity 36,000,000
Excess of fair value of one asset over its carrying amount 4,000,000
Fair value of XYZ’s net assets 40,000,000
Purchase price (squeeze) 41,516,316
Fair value of net assets acquired (40,000,000)
Goodwill 1,516,316
9. D
Solution:
Average earnings (squeeze) 5,200,000 (squeeze)
Normal earnings on net assets [12% x 40M*] (4,800,000)
Goodwill (given) 1,600,000 (start)
*The net assets of XYZ is computed as follows:

Purchase price (given) 41,600,000
Fair value of net assets acquired (squeeze) (40,000,000)
Goodwill (given) 1,600,000
10. B
Solution:
DREARY DISMAL
Average annual earnings 320,000 480,000
Normal earnings on net assets (160,000) (240,000)
Excess earnings 160,000 240,000
Divide by: Capitalization rate 20% 20%
Goodwill 800,000 1,200,000
Total contributions are computed as follows:

DREARY DISMAL Totals
Total contributions
(squeeze) 2,400,000 3,600,000 6,000,000
Fair value of net assets (1,600,000) (2,400,000) (4,000,000)
Goodwill 800,000 1,200,000 2,000,000
12. D
Solution:
DREARY DISMAL Totals
Net asset contributions ,1600,000 2,400,000 4,000,000
Divide by: Par value per share of PS 400 400 400
Number of preference shares issued 4,000 6,000 10,000
Total contributions 2,400,000 3,600,000 6,000,000

Net asset contributions (1,600,000) (2,400,000) (4,000,000)
Excess of total contributions 800,000 1,200,000 2,000,000
Divide by: Par value per share of OS 200 200 200
Number of ordinary shares issued 4,000 6,000 10,000
Total PS and OS issued 8,000 12,000 20,000
Ratio of shares issued 40% 60% 100%
13. B
Solution:
Analyses:
™ ZYX, Inc. lets itself be acquired (legal form) for it to gain control
over the legal acquirer (substance).
Legal form of the agreement: (ZYX lets itself be acquired)

CBA Co. issues 40,000 ordinary shares to ZYX, Inc.’s shareholders in
exchange for all of ZYX, Inc.’s 8,000 shares outstanding.
Substance of the agreement: (ZYX gains control over legal acquirer)

After the combination, ZYX, Inc. gains control because it now owns
80% of CBA Co.
Accounting acquiree (CBA Co.) issues shares – Actual:

CBA's currently issued shares 10,000 20%
Shares to be issued to ZYX (5 sh. x 8,000 sh.) 40,000 80%
Total shares of CBA Co. after the combination 50,000
Accounting acquirer (ZYX, Inc.) issues shares – Reverse:

ZYX's currently issued shares 8,000 80%
Shares to be issued to CBA's shareholders to enable
them to have the same interest in ZYX, Inc.
[(8,000 ÷ 80%) x 20%] 2,000 20%
Total 10,000
The consideration transferred is computed as follows:

Shares of ZYX effectively transferred to CBA 2,000
Multiply by: Fair value per share of ZYX’s shares 800
Fair value of consideration effectively transferred 1,600,000

Total 1,600,000
Fair value of net identifiable assets acquired (6.4M –
5.2M) (1,200,000)
Goodwill 400,000
14. A
Solution:
Total 4,000,000
Goodwill 800,000
1. A 6. D
2. C 7. A
3. B 8. B
4. B 9. B
5. B 10. D
Solution:
1. A
Solution:
Total assets of parent 1,040,000
Total assets of subsidiary 320,000
Investment in subsidiary -
Fair value adjustments - net 64,000
Goodwill – net* 12,000
Effect of intercompany transactions -
Consolidated total assets 1,436,000
*Consideration transferred (5,000 sh. x 60) 300,000

Non-controlling interest in the acquiree (360,000 x 20%) 72,000
Previously held equity interest in the acquire -
Total 372,000
Fair value of net identifiable assets acquired (360,000)
Goodwill 12,000
2. C
Solution:
Share capital of parent [480,000 + (5,000sh. x 40par)] 680,000
Share premium of parent {160,000 + [5,000sh. x (60 – 40)]} 260,000
Consolidated retained earnings – (parent only) 200,000
Equity attributable to owners of the parent 1,140,000
Non-controlling interests (360,000 x 20%) 72,000
Consolidated total equity 1,212,000
3. B
Solution:
Investment in subsidiary -
Fair value adjustments - net 64,000

Total 375,000
Goodwill 15,000
4. B
Solution:
Share capital of parent [480,000 + (5,000sh. x 40par)] 680,000
Share premium of parent {160,000 + [5,000sh. x (60 – 40)]} 260,000
Consolidated retained earnings – (parent only) 200,000
Non-controlling interests 75,000
5. B
Solution:
Parent Subsidiary Consolidated
Profits before adjustments 240,000 80,000 320,000
Consolidation adjustments:
Unrealized profits ( - ) ( - ) ( - )
Dividend income from subsidiary ( - ) N/A ( - )
Gain or loss on extinguishment
of bonds ( - ) ( - ) ( - )
Net consolidation adjustments ( - ) ( - ) ( - )
Profits before FVA 240,000 80,000 320,000
Depreciation of FVA* (32,000) (8,000) (40,000)
Impairment loss on goodwill ( - ) ( - ) ( - )
Consolidated profit 208,000 72,000 280,000
*The subsequent depreciation of fair value adjustments (FVA) is
determined as follows:
Fair value Divide by Subsequent
adjustments useful life depreciation
Inventory 32,000 N/A 32,000
Equipment 40,000
Accumulated depreciation (8,000)
Equipment – net 32,000 4 8,000
Totals 64,000 40,000
Parent’s share = 40,000 x 80% = 32,000

Subsidiary’s share = 40,000 x 20% = 8,000
6. D
Solution:
Investment in subsidiary (300,000)
Fair value adjustments – net (64,000 – 40,000 dep’n.) 24,000

Non-controlling interest in the acquiree (360K x 20%) 72,000
Total 372,000
Goodwill 12,000
7. A
Solution:
Analysis of net assets
Acquisition Consoli- Net
Subsidiary date dation date change
Share capital (& Share premium) 200,000 200,000
Totals at carrying amounts 296,000 376,000
FVA at acquisition 64,000 64,000
Subsequent depn. Of FVA NIL (40,000)
Unrealized profits (Upstream only) NIL -
Net assets at fair value 360,000 400,000 40,000
NCI in net assets
XYZ's net assets at fair value – Dec. 31, 20x1 400,000
Multiply by: NCI percentage 20%
Total 80,000
Add: Goodwill to NCI net of accumulated impairment losses -
Non-controlling interest in net assets – Dec. 31, 20x1 80,000
Consolidated retained earnings

ABC's retained earnings – Dec. 31, 20x1 440,000
ABC's share in the net change in XYZ's net
(a)
assets 32,000
Unrealized profits (Downstream only) -
Gain or loss on extinguishment of bonds -
Impairment loss on goodwill attributable -
to parent
Net consolidation adjustments 32,000
Consolidated ret. earnings – Dec. 31, 20x1 472,000
(a)
(40,000 net change in net assets x 80%) = 32,000
Share capital of parent 680,000

Share premium 260,000
Consolidated retained earnings – (see above) 472,000
Non-controlling interests - (see above) 80,000
8. B
Solution:
Unrealized profits ( - ) ( - ) ( - )
Dividend income from subsidiary ( - ) N/A ( - )
of bonds ( - ) ( - ) ( - )
Net consolidation adjustments ( - ) ( - ) ( - )
Depreciation of FVA* (32,000) (8,000) (40,000)
Impairment loss on goodwill ( - ) ( - ) ( - )
*The subsequent depreciation of fair value adjustments (FVA) is
determined as follows:
Fair value Divide by Subsequent
adjustments useful life depreciation
Inventory 32,000 N/A 32,000
Equipment 40,000
Accumulated depreciation (8,000)
Equipment – net 32,000 4 8,000
Totals 64,000 40,000
9. B
Solution:
Fair value adjustments – net (64,000 – 40,000 dep’n.) 24,000
* Consideration transferred (5,000 x 60) 300,000

Previously held equity interest in the -
acquiree Total 300,000
Less: Parent's proportionate share in the net assets of
subsidiary (360,000 x 80%) (288,000)
Goodwill attrib. to owners of parent - acquisition date 12,000
Less: Parent's share in goodwill impairment -
Goodwill attrib. to owners of parent 12,000
Fair value of NCI 75,000
Less: NCI's proportionate share in net
(72,000)
assets of subsidiary (360,000 x 20%)
Goodwill attributable to NCI - acquisition date 3,000
Less: NCI's share in goodwill impairment -
Goodwill attributable to NCI – current year 3,000
Goodwill, net – current year 15,000

10. B
Solution:
Acquisition Consoli- Net
Subsidiary date dation date change
Share capital (& Share premium) 200,000 200,000
Totals at carrying amounts 296,000 376,000
FVA at acquisition 64,000 64,000
Subsequent depn. Of FVA NIL (40,000)
Net assets at fair value 360,000 400,000 40,000
NCI in net assets

XYZ's net assets at fair value – Dec. 31, 20x1 400,000
Total 80,000
Add: Goodwill to NCI net (see goodwill computation above) 3,000
NCI in net assets – Dec. 31, 20x1 83,000
Consolidated retained earnings

ABC's share in the net change in XYZ's net 32,000
assets (40,000 x 80%)
Impairment loss on goodwill attributable -
to parent
Consolidated ret. earnings – Dec. 31, 20x1 472,000
Share capital of parent 680,000

Share premium 260,000
Consolidated retained earnings – (see above) 472,000
Non-controlling interests - (see above) 83,000
1. D 6. C 11. B 16. D
2. A 7. C 12. D 17. A
3. C 8. A 13. B 18. A
4. A 9. B 14. B 19. B
5. D 10. A 15. D 20. D
Solution:
1. D
Solution:
Equipment, net – Lion Co. (800,000 x 8/10) 2,560,000
Equipment, net – Cub Co. (fair value) (1,280,000 x 3/5) 768,000
Consolidated equipment, net – Dec. 31, 20x2 3,328,000
2. A
Solution:
Dec. Accumulated depreciation (320K x 2/5) 128,000
31, Depreciation expense (320K ÷ 5) 64,000
20x2 Retained earnings – Lion Co.* 51,200
Retained earnings – Cub Co.* 12,800
*These are the shares of Lion and Cub in the depreciation of the FVA in the prior
year, i.e., 20x1 (64,000 x 80% & 20%).
3. C
Solution:
Equipment, net – Kangaroo 2,000,000
Equipment, net – Joey 1,200,000
FVA on equipment, net - increment [(480,000 – 400,000) x 8/10] 64,000
Consolidated equipment, net – Dec. 31, 20x2 3,264,000
4. A
Solution:
Acquisition Consolidation Net
Owlet Co. date date change
Retained earnings (1.12M – 800K) 320,000 1,120,000
Totals at carrying amounts 720,000 1,520,000
Fair value adjustments at acquisition date - -
Subsequent depreciation of FVA NIL -
Subsidiary's net assets at fair value 720,000 1,520,000 800,000
The fair value of NCI at acquisition date is computed as follows:

(The solution below is based on a portion of Goodwill computation Formula #2.)
Fair value of NCI 220,000 (squeeze)
a
NCI's proportionate share in net assets of subsidiary (180,000)
Goodwill attributable to NCI - acquisition date (given) 40,000 (start)
a
(₱720,000 see above x 25%) = ₱180,000
5. D
Solution:
Consideration transferred (given) 600,000
Less: Previously held equity interest in the acquiree -
Total 600,000
subsidiary (₱720,000 acquisition-date fair value x 75%) (540,000)
Goodwill attributable to owners of parent – acquisition date 60,000
Less: Parent’s share in goodwill impairment (₱32K x 75%) (24,000)
Goodwill attributable to owners of parent – current year 36,000
Fair value of NCI (see Requirement ‘a’) 220,000
Less: NCI's proportionate share in the net assets of
Goodwill attributable to NCI – acquisition date 40,000
Less: NCI’s share in goodwill impairment (₱32,000 x 25%) (8,000)
6. C
Solution:
Subsidiary’s net assets at fair value (see above) 1,520,000
Total 380,000
Add: Goodwill attributable to NCI (see above) 32,000
NCI in net assets – current year 412,000
7. C
Solution:
Parent's retained earnings – current year 2,000,000
Parent's share in the net change in
(a)
subsidiary's net assets 600,000
Parent’s share in goodwill impairment (24,000)
Consolidated retained earnings 2,576,000
(a)
Net change in subsidiary’s net assets (see above) ₱800,000 x 75% =
₱600,000.
8. A
Solution:
Total assets of Parent 4,000,000
Total assets of Subsidiary 2,000,000
Investment in subsidiary (consideration transferred) (600,000)
Fair value adjustments - net -
Goodwill – net 68,000
9. B
Solution:
Share capital of Parent 1,200,000
Share premium of Parent -
10. A
Solution:
Sales by Rooster Co. 4,000,000
Sales by Cockerel Co. 2,800,000
Less: Intercompany sales during the current period (600,000)
Consolidated sales 6,200,000
11. B
Solution:
The unrealized profit in ending inventory is computed as follows:
Sale price of intercompany sale 600,000
Cost of intercompany sale (480,000)
Profit from intercompany sale 120,000
Multiply by: Unsold portion as of yr.-end 1/4
Unrealized gross profit in ending inventory 30,000
Cost of sales of Rooster Co. 1,600,000

Cost of sales of Cockerel Co. 1,200,000
Less: Intercompany sales during the current period (600,000)
Add: Unrealized gross profit in ending inventory 30,000
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory -
Consolidated cost of sales 2,230,000
12. D
Solution:
Rooster Cockerel Consolidated
Profits before adjustments 936,000 700,000 1,636,000
Unrealized profit (Reqmt.’a’) (30,000) - (30,000)
Dividend income (given) (40,000) N/A (40,000)
Net consol. adjustments (70,000) - (70,000)
Profits before FVA 866,000 700,000 1,566,000
Depreciation of FVA - - -
(b)
Sh. in goodwill impairment (24,000) (8,000) (32,000)
Consolidated profit 842,000 692,000 1,534,000
OCI 296,000 100,000 396,000
Comprehensive income 1,138,000 792,000 1,930,000
(b)
Share in goodwill impairment: (₱32,000 x 75%); (₱32,000 x 25%)
13. B (See solution above)
14. B
Solution:
Owners Consoli-
of parent NCI dated
Rooster's profit before FVA
(see above) 866,000 N/A 866,000
(c)
Sh. in Cockerel’s profit before FVA
Sh. in goodwill impairment (see above) (24,000) (8,000) (32,000)
Profit attributable to 1,367,000 167,000 1,534,000
Rooster's OCI 296,000 N/A 296,000
(d)
Sh. in Cockerel’s OCI 75,000 25,000 100,000
Comprehensive inc. attributable to 1,738,000 192,000 1,930,000
(c)
Share in Cockerel’s profit before FVA: (₱700,000 x 75%); (₱700,000 x 25%)
(d)
Share in Cockerel’s OCI: (₱100,000 x 75%); (₱100,000 x 25%)
15. D (See solution above)
16. D
Solution:
The consolidated sales and cost of sales are computed as follows:
Consolidated sales
Sales of Pig Co. 4,000,000
Sales of Piglet Co. from Sept. 1 to Dec. 31 only (₱2.88M x4/12) 960,000
Less: Intercompany sales during the year (324,000)
17. A
Solution:
The unrealized profit in ending inventory is computed as follows:
Sale price of intercompany sale 324,000
Cost of intercompany sale (₱324,000 ÷ 150%) (216,000)
Profit from intercompany sale 108,000
Multiply by: Unsold portion as of year-end 1/3
Unrealized gross profit 36,000
Cost of sales of Pig Co. 1,600,000

COS of Piglet Co. from Sept. 1 to Dec. 31 only (₱1.2M x 4/12) 400,000
Less: Intercompany sales during the year (324,000)
Add: Unrealized gross profit in ending inventory 36,000
Less: Realized profit in beginning inventory -
Add: Depreciation of FVA on inventory -
18. A
Solution:
a
Profits before adjustments 896,000 240,000 1,136,000
Unrealized profit - (see above) ( - ) (36,000) (36,000)
Net consolidation adjustments ( - ) (36,000) (36,000)
Profits before FVA 896,000 204,000 1,100,000
Depreciation of FVA ( - ) ( - ) ( - )
a
(₱720,000 x 4/12 = ₱240,000)
19. B
Solution:
Owners Consoli-
of parent NCI dated
Pig's profit before FVA (see above) 896,000 N/A 896,000
(c)
Share in Piglet’s profit before FVA 153,000 51,000 204,000
Depreciation of FVA ( - ) ( - ) ( - )
Share in goodwill impairment ( - ) ( - ) ( - )
Totals 1,049,000 51,000 1,100,000
(c)
Shares in Piglet’s profit before FVA (see above): (₱204K x 75%); (₱204K x
25%)
20. D
Solution:
Profit or loss attributable to owners of parent and NCI
Owners Consoli-
of parent NCI dated
Bear's profit before FVA (given) 936,000 N/A 936,000
(a)
Share in Cub’s profit before FVA 489,000 163,000 652,000
Profit attributable to preference
(b) N/A 48,000 48,000
shareholders of Cub
Share in impairment loss on goodwill - - -
Totals 1,424,960 211,000 1,636,000
(a)
The shares in Cub’s profit are computed as follows:
Profit of Cub. Co. 700,000
(b)
One-year dividends on cumulative preference sh. (400K x 12%) (48,000)
Profit of Cub Co. attributable to ordinary shareholders 652,000
Allocation:
Bear's share (₱652,000 x 75%) 489,000
NCI's share (₱652,000 x 25%) 163,000
As allocated: 652,000
NOTE: Answer choice is rounded-off.

1. D 11. B 21. A 31. C 41. C
2. A 12. C 22. D 32. B 42. A
3. C 13. A 23. A 33. A 43. A
4. D 14. D 24. B 34. B 44. C
5. C 15. A 25. C 35. B 45. A
6. D 16. B 26. B 36. D 46. D
7. D 17. B 27. D 37. A 47. D
8. D 18. D 28. A 38. C 48. B
9. A 19. C 29. B 39. A 49. C
10. B 20. B 30. D 40. D 50. A
51. B
52. A
53. C
Solutions:
1. D
Solutions:
Step 1: Analysis of effects of intercompany transaction
There are no intercompany transactions in the problem.
Step 2: Analysis of net assets

XYZ, Inc. date date change
Total equity at carrying amounts 296,000 376,000
Fair value adjustments at acquisition date 64,000 64,000
Subsequent depreciation of FVA NIL (40,000)*
Subsidiary's net assets at fair value 360,000 400,000 40,000
* ₱32,000 dep’n. of FVA on inventory + ₱8,000 [(₱40,000 - ₱8,000) ÷ 4 yrs.]
dep’n. of FVA on equipment = ₱40,000
Step 3: Goodwill computation

Case #1: Formula #1 - NCI measured at proportionate share
Consideration transferred (5,000 sh. x ₱60) 300,000
Non-controlling interest in the acquiree (360K x20%) -(Step 2) 72,000
Total 372,000
Fair value of net identifiable assets acquired (Step 2) (360,000)
Goodwill at acquisition date 12,000
Accumulated impairment losses since acquisition date (4,000)
Goodwill, net – Dec. 31, 20x1 8,000
Step 4: Non-controlling interest in net assets

Case #1
XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2) 400,000
Total 80,000
Add: Goodwill attributable to NCI – Dec. 31, 20x1 (Step 3) -
Step 5: Consolidated retained earnings

Case #1
(a)
ABC's share in the net change in XYZ's net assets 32,000
Gain on extinguishment of bonds -
Impairment loss on goodwill attributable to
)
parent (Step 3) (4,000)
Consolidated retained earnings – Dec. 31, 20x1 468,000
(a)
Net change in XYZ’s net assets (Step 2) of ₱40,000 x 80% = ₱32,000.
Step 6: Consolidated profit or loss

Case #1 Parent Subsidiary Consolidated
Unrealized profits - - -
Dividend income from subsidiary - N/A -
of bonds - - -
Net consolidation adjustments - - -
(c)
Depreciation of FVA (32,000) (8,000) (40,000)
Goodwill impairment (Step 3) (4,000) - (4,000)
(c)
Shares in the depreciation of FVA: (40,000 x 80%); (40,000 x 20%)
Step 7: Profit or loss attributable to owners of parent and NCI

Owners Consoli-
Case #1 of parent NCI dated
ABC's profit before FVA (Step 6) 240,000 N/A 240,000
(d)
Share in XYZ’s profit before FVA 64,000 16,000 80,000
Depreciation of FVA (Step 6) (32,000) (8,000) (40,000)
Share in goodwill impairment (Step 3) (4,000) - (4,000)
Totals 268,000 8,000 276,000
(d)
Shares in XYZ’s profit before FVA (Step 6) – (80,000 x 80%); (80,000 x 20%)
2. A
Solution:
Case #1
(proportionate)
Total assets of ABC Co. 1,672,000
Total assets of XYZ, Inc. 496,000
FVA, net (16K - 10K) (Step 2) 24,000
Goodwill, net (Step 3) 8,000
Effect of intercompany transaction -
3. C
Solution:
Case #1
(proportionate)
Share capital of ABC Co. 680,000
Share premium of ABC Co. 260,000
Consolidated retained earnings (Step 5) 468,000
Non-controlling interests (Step 4) 80,000
4. D
Solution:
There are no intercompany transactions in the problem.
XYZ, Inc. date date change
Total equity at carrying amounts 296,000 376,000
Subsequent depreciation of FVA NIL (40,000)*
* ₱32,000 dep’n. of FVA on inventory + ₱8,000 [(₱40,000 - ₱8,000) ÷ 4 yrs.]
dep’n. of FVA on equipment = ₱40,000

Case #2: Formula #2 - NCI measured at fair value
Consideration transferred (5,000 sh. x ₱60) 300,000
Total 300,000
Goodwill attributable to owners of parent – Jan. 1, 20x1 12,000
Less: Parent’s share in goodwill impairment (₱4,000 x 80%) (3,200)
Goodwill attributable to owners of parent – Dec. 31, 20x1 8,800
Fair value of NCI (see given) 75,000
Goodwill attributable to NCI – Jan. 1, 20x1 3,000
Less: NCI’s share in goodwill impairment (₱4,000 x 20%) (800)
Goodwill attributable to NCI – Dec. 31, 20x1 2,200
-

Case #2
XYZ's net assets at fair value – Dec. 31, 20x1 (Step 2) 400,000
Total 80,000
Add: Goodwill attributable to NCI – Dec. 31, 20x1 (Step 3) 2,200
Case #2
(a)
ABC's share in the net change in XYZ's net assets 32,000
Gain on extinguishment of bonds -
Impairment loss on goodwill attributable to
(b)
parent (Step 3) (3,200)
(a)
Net change in XYZ’s net assets (Step 2) of ₱40,000 x 80% = ₱32,000.
(b)
Again, goodwill impairment is attributed only to the parent if NCI is measured at
proportionate share (Case #1) while it is shared between the parent and NCI if NCI is
measured at fair value (Case #2).

Case #2 Parent Subsidiary Consolidated
Unrealized profits - - -
Dividend income from subsidiary - N/A -
of bonds - - -
Net consolidation adjustments - - -
Goodwill impairment (Step 3) (3,200) (800) (4,000)
5. C
Solution:
Case #2
(fair value)
Total assets of ABC Co. 1,672,000
Total assets of XYZ, Inc. 496,000
FVA, net (16K - 10K) (Step 2) 24,000
Effect of intercompany transaction -
6. D
Solution:
Case #2
(fair value)
Share capital of ABC Co. 680,000
Share premium of ABC Co. 260,000
Consolidated retained earnings (Step 5) 468,800
7. D None. The transaction is accounted for as equity transaction

because it does not result to loss of control.
8. D None. The transaction is accounted for as equity transaction

because it does not result to loss of control.
9. A
Solution:
Owners Net assets
% of parent % NCI of XYZ
a
Before the transaction 80% 320,000 20% 80,000 400,000
After the transaction 100% 400,000 - - 400,000
Change – Inc./ (Decrease) 80,000 (80,000) -
a
This represents the fair value of XYZ’s net assets on December 31, 20x1
(₱360,000 fair value on acquisition date + ₱40,000 increase during the year).
Jan. NCI (the decrease computed above) 80,000

1, Retained earnings – ABC Co. (squeeze) 40,000
20x2
10. B
Solution:
Owners Net assets
b
After the transaction 100% 415,000 - - 415,000
b
When NCI is measured at fair value, the subsidiary’s net assets is grossed
up to reflect the goodwill attributable to the NCI (₱83,000 NCI ÷ 20% =
₱415,000).
Jan. NCI (the decrease computed above) 83,000

1, Retained earnings – ABC Co. (squeeze) 37,000
20x2
11. B
Solution:
Owners of Net assets
% parent % NCI of XYZ
After the transaction 92% 368,000 8% 32,000 400,000
The direct adjustment in equity is determined as follows:

Case #1
(proportionate)
Fair value of consideration 80,000
Change in NCI (see table above) (48,000)
Direct adjustment to equity 32,000
12. C
Solution:
Owners Net assets
Before the transaction 80% 332,000 20% 83,000 415,000*
*The net assets is grossed up as follows (₱20,750 NCI ÷ 20% = ₱103,750).
Case #2
(fair value)
13. A
Solution:
Owners Net assets
Change – Inc./ (Decrease) (40,000) 40,000 -
Case #1
(proportionate)
14. D
Solution:
Owners Net assets
Change – Inc./ (Decrease) (41,500) 41,500 -
*The net assets is grossed up as follows: (₱83,000 NCI ÷ 20% = ₱415,000).
Case #2
(fair value)
15. A
Solution:
The change in ABC’s ownership interest in XYZ is determined as
follows:
Before After
issuance % issuance %
Shares held by ABC 40,000 40,000
a
Outstanding shares of XYZ 50,000 80% 60,000 66.67%
a
(50,000 + 10,000 additional shares issued to NCI = 60,000)
Owners of Net assets

% parent % NCI of XYZ
b
After the transaction 66.67% 333,332 33.33% 166,668 500,000
Change – Inc./ (Decrease) 13,332 86,668 100,000
b
100,000 + 25,000 proceeds from issuance of additional shares.

Case #1
(proportionate)
16. B
Solution:
Owners Net assets
%
of parent % NCI of XYZ
c
d
After the transaction 66.67% 343,332 33.33% 171,668 515,000
Change – Inc./ (Decrease) 11,332 88,668 100,000
c
The net assets is grossed up as follows: (₱83,000 NCI ÷ 20% = ₱415,000).
d
(₱415,000 + ₱100,000 proceeds from issuance of additional shares = ₱515,000).

Case #2
(fair value)
Change in NCI (see tables above) (88,668)
17. B
Solution:
Step 1: We will identify the carrying amounts of XYZ’s assets and
liabilities in the consolidated financial statements as at the date
control was lost.

As at January 1, 20x2
Carrying amount
ABC Co. XYZ, Inc. Consoli- of XYZ’s net
dated assets
ASSETS (a) (b) (c) = (b) – (a)
Cash 92,000 228,000 320,000 228,000
Accounts receivable 300,000 88,000 388,000 88,000
Inventory 420,000 60,000 480,000 60,000
Investment in subsidiary 300,000 - -
Equipment 800,000 200,000 1,040,000 240,000
Accumulated depreciation (240,000) (80,000) (336,000) (96,000)
Goodwill - - 12,000
TOTAL ASSETS 1,672,000 496,000 1,904,000 520,000

Accounts payable 172,000 120,000 292,000 120,000
Bonds payable 120,000 - 120,000 -
Total liabilities 292,000 120,000 412,000 120,000
Share capital 680,000 200,000 680,000
Share premium 260,000 - 260,000 -
Retained earnings 440,000 176,000 472,000 -
Non-controlling interest - - 80,000 -
Total equity 1,380,000 376,000 1,492,000 400,000
TOTAL LIAB. & EQTY. 1,672,000 496,000 1,904,000 -
The consolidated retained earnings pertains to the parent only. Thus, no

retained earnings is allocated to XYZ.
Step 2: We will prepare the deconsolidation journal entries (DJE):
DJE #1: To recognize the gain or loss on the disposal of controlling interest.
Jan. Cash – ABC Co. (Consideration received) 400,000
1, Investment in associate (Investment retained) 100,000
20x2 Accounts payable – XYZ, Inc. 120,000
Accumulated depreciation – XYZ, Inc. 96,000
Non-controlling interest 80,000
Cash – XYZ, Inc. 228,000
Accounts receivable – XYZ, Inc. 88,000
Inventory – XYZ, Inc. 60,000
Equipment – XYZ, Inc. 240,000
Goodwill 12,000
Gain on disposal (squeeze) 168,000
18. D
Solution:
Jan. Cash – ABC Co. (Consideration received) 400,000
1, Held for trading securities (Investment retained) 100,000
20x2 Non-controlling interest 82,400
a
Net identifiable assets (see given) 412,000
Goodwill 12,000
Gain on disposal (squeeze) 158,400
a
Net identifiable assets is also excess of total assets over total liabilities.
19. C
Solution:
Total assets of Dad before the combination 4,000,000
Investment in subsidiary 1,000,000
Total assets of Dad after the combination 5,000,000
20. B
Solution:
Total assets of Dad after the combination (see above) 5,000,000
Total assets of Son (carrying amount) 1,600,000
Investment in subsidiary (1,000,000)
FVA on assets (430K fair value – 400K carrying amount) 120,000
Goodwill – net [1M + (920K x 20% NCI)] – 920 264,000
Effect of intercompany transactions (intercompany receivable) (80,000)
21. A
Solution:
Nymph Co. date date change
Share capital (100,000 sh. x ₱4) 400,000 400,000
a
FVA on investment property 80,000 560,000
FVA on building 120,000 120,000
b
Subsequent depreciation of FVA NIL (48,000)
Subsidiary's net assets at fair value 920,000 2,152,000 1,232,000
a
FVA on acquisition date (₱800,000 - ₱720,000 = ₱80,000); FVA on June 30,
20x3 (₱1,280,000 - ₱720,000 = ₱560,000). These FVA’s are not subsequently
depreciated because depreciation is prohibited under the fair value model.
b
The depreciation of FVA pertains only to the building (see discussion above)
(₱120,000 x 2/5 = ₱48,000).
Goodwill at current year

Formula #2:
Consideration transferred (75,000 sh. x ₱16) 1,200,000
Total 1,200,000
Goodwill attributable to owners of parent – acquisition date 510,000
Goodwill attributable to owners of parent – current year 450,000
Fair value of NCI (25,000 sh. x ₱14) 350,000
Goodwill attributable to NCI – acquisition date 120,000
Less: NCI’s share in goodwill impairment (₱80,000 x 25%) (20,000)
22. D
Solution:
Nymph's net assets at fair value – 6/30/x3 (see ‘Analysis’ above) 2,152,000
Total 538,000
Add: Goodwill attributable to NCI – 6/30/x3 (see above) 100,000
Non-controlling interest in net assets – June 30, 20x3 638,000
23. A
Solution:
Cockroach's retained earnings – 6/30/x3 2,000,000
(a)
Share in the net change in Nymph's net assets 924,000
Cockroach's share in goodwill impairment (60,000)
Consolidated retained earnings – June 30, 20x3 2,864,000
(a)
Net change in Nymph’s net assets (see ‘Analysis’) ₱1,232,000 x 75% =
₱924,000.
24. B
Solution:
Total assets of Cockroach 4,000,000
Total assets of Nymph 2,000,000
Investment in subsidiary (1,200,000)
Fair value adjustments – net (560K + 120K – 48K) see ‘Analysis’ 632,000
Effect of intercompany transactions (Intercompany receivable) (40,000)
25. C
Solution:
Share capital of Cockroach 1,200,000
Share premium of Cockroach -
26. B
Solution:
Bunny Co. date date change
(Jan. 1, 20x3) (Dec. 31, 20x3)
Fair value adjustments - -
Subsequent depreciation of FVA NIL ( - )
Subsidiary's net assets at fair value 720,000 1,520,000 800,000
Goodwill at current year
Formula #2:
Consideration transferred 800,000
Less: Previously held equity interest in the acquiree 400,000
Total 1,200,000
subsidiary (₱720,000 acquisition-date fair value x 75%*) (540,00)
Less: Parent’s share in goodwill impairment ( - )
Fair value of NCI 220,000
Less: NCI’s share in goodwill impairment ( - )
* (40% previous interest + 35% additional interest acquired on Jan. 1, 20x3)
27. D
Solution:
Bunny's net assets at fair value – 12/31/x3 (see ‘Analysis’ above) 1,520,000
Total 380,000
Add: Goodwill attributable to NCI – 6/30/x3 (see above) 40,000
28. A
Solution:
Rabbit's retained earnings – 12/31/x3 2,000,000
(a)
Rabbit’s share in the net change in Bunny's net assets 600,000
Rabbit's share in goodwill impairment ( - )
Consolidated retained earnings – Dec. 31, 20x3 2,600,000
(a)
Net change in Bunny’s net assets (see ‘Analysis’) ₱800,000 x 75% = ₱600,000.
29. B
Solution:
Total assets of Rabbit 4,000,000
Total assets of Bunny 2,000,000
Investment in subsidiary (₱800,000 + ₱400,000) (1,200,000)
Fair value adjustments – net -
30. D
Solution:
Share capital of Rabbit 1,200,000
Share premium of Rabbit -
31. C
Solution:
Owners
of parent NCI
Sheep's profit before FVA 866,000 N/A
b
Share in Lamb’s profit before FVA 525,000 175,000 squeeze
Depreciation of FVA ( - ) ( - )
a
Share in impairment of goodwill (24,000) (8,000)
Totals 1,367,000 167,000 start
a
Shares in impairment of goodwill: (₱8,000 x 75%); (₱8,000 x 25%)
b
(₱175,000 ÷ 25%) = ₱700,000 Lamb’s separate profit x 75% = ₱525,000.
32. B (1,367,000 + 167,000 ‘see computations above’) = 1,534,000
34. B (See Step 1.ii below)

The following are the intercompany transactions during the period:
i. In-transit item (Transaction ‘a’)
ii. Intercompany sale of inventory (Transactions ‘b’ and ‘c’)
iii. Intercompany sale of equipment (Transaction ‘d’)
iv. Intercompany bond transaction (Transactions ‘e’)
v. Intercompany dividend transaction (Transactions ‘f’)
i. In-transit item
The ₱4,000 check deposited to Peter’s account is a valid payment for
Simon’s account. Therefore, Simon’s ₱8,000 account payable to
Peter need not be adjusted.
However, since Peter failed to record the payment, Peter’s ₱12,000

accounts receivable from Simon must be adjusted. As to Peter, the
deposit is a bank credit memo.
The adjusting journal entry (AJE) in Peter’s books is as follows:

Dec. Cash in bank 4,000
31, Accounts receivable 4,000
20x1
Unlike CJE’s, AJE’s are recorded in the separate books. The

remaining balance of ₱8,000 in the intercompany account
receivable/account payable shall be eliminated through CJE.
Summary of effects on the consolidated financial statements:

• Cash: increased by ₱4,000.
• Accounts receivable: decreased by ₱12,000 (₱3,000 AJE + ₱8,000
CJE).
• Accounts payable: decreased by ₱8,000
ii. Intercompany sale of inventory

Transaction (b) is downstream while transaction (c) is upstream.
The unrealized profits in ending inventory are determined as follows:
Downstream Upstream Total
Sale price of intercompany sale 128,000 60,000
Cost of intercompany sale (80,000) (40,000)
Profit from intercompany sale 48,000 20,000
Multiply by: Unsold portion as of yr.-end 1/3 1/2
Unrealized gross profit 16,000 10,000 26,000
The related consolidated accounts are computed as follows:

Ending inventory of Peter Co. 440,000
Ending inventory of Simon Co. 268,000
Less: Unrealized profit in ending inventory (26,000)
Consolidated ending inventory 682,000
Sales by Peter Co. 3,728,000

Sales by Simon Co. 1,020,000
Less: Intercompany sales during 20x1 (128,000 + 60,000) (188,000)
Before we can compute for the consolidated cost of sales, we need to
determine first the depreciation of FVA in 20x1.
FVA on inventory 24,000
FVA on equipment, net (20,000 ÷ 5 years) 16,000
FVA on patent (20,000 ÷ 8 years) 10,000
Depreciation of FVA in 20x1 50,000
The consolidated cost of sales is computed as follows:

Cost of sales of Peter Co. 1,700,000
Cost of sales of Simon Co. 472,000
Less: Intercompany sales during 20x1 (188,000)
Add: Unrealized profit in ending inventory 26,000
Add: Depreciation of FVA on inventory (see computation
above) 24,000
iii. Intercompany sale of property, plant and equipment

Transaction (d) is upstream. The effects of this transaction are
analyzed as follows:
a) Unamortized balance of deferred gain (loss) on December 31, 20x1:
Sale price 20,000
Carrying amount of equipment on Jan. 1, 20x1 (24,000)
Loss on sale of equipment – Jan. 1, 20x1 (4,000)
Multiply by: Ratio of useful life at beg. and end of yr. 4/5
Unamortized balance of deferred loss – Dec. 31, 20x1 (3,200)
b) Effect on the 20x1 depreciation:

Because of the sale Had there been no sale Effect on combined FS
Peter recognized Simon should have Depreciation is
depreciation of recognized depreciation understated by ₱800.
₱4,000 in 20x1 of ₱4,800 in 20x1
(₱20,000 purchase (₱24,000 carrying
price ÷ 5 yrs.). amount ÷ 5 yrs.).
The related consolidated accounts are computed as follows:

Equipment, net – Parent 2,576,000
Equipment, net – Subsidiary 108,800
Unamortized balance of deferred loss* 3,200
FVA on equipment, net (80,000 beg. - 16,000 dep'n of FVA) 64,000
Consolidated equipment – net 2,752,000
*The deferred loss is added because both “loss” and “equipment” have a normal debit
balance. Debit and debit results to addition.
Depreciation – Peter 644,000

Depreciation – Simon 27,200
Understatement in depreciation 800
Depreciation of FVA on equipment (see computation above 16,000
Consolidated depreciation 688,000
The ₱4,000 loss on sale recognized by Simon shall be eliminated in

the consolidated statement of profit or loss.
We need to recognize also the unrecorded patent net of

accumulated amortization.
Patent (unrecognized) (see given) 80,000
Less: Amortization of FVA on patent (see computation above) (10,000)
Consolidated patent – net 70,000
A patent amortization expense of ₱10,000 shall be recognized in the

consolidated financial statements
iv. Intercompany bond transaction

The effects Transaction (e) are analyzed as follows:
a) Gain or loss on extinguishment of bonds:
Carrying amount of bonds payable acquired (400,000 x 50%) 200,000
Acquisition cost of bonds (assumed retirement price) (240,000)
Loss on extinguishment of bonds ( 40,000)
b) Intercompany interest expense and interest income:

Peter paid Simon interest of ₱10,000 (400K x 50% x 10% x 6/12). However,
Simon’s interest income is only ₱8,000 (see Statement of profit or loss above).
The ₱2,000 difference must be an amortization of the premium on the
investment in bonds. Nonetheless, both Peter’s interest expense of
₱10,000 and Simon’s interest income of ₱8,000 shall be eliminated
in the consolidated financial statements together with the related
bonds payable and investment in bonds.
Summary of effects on the consolidated financial statements:

• Loss on extinguishment of bonds: recognize ₱40,000.
• Interest expense: decreased by ₱10,000.
• Interest income: eliminated
• Investment in bonds: eliminated
• Bonds payable: decreased by ₱200,000
v. Intercompany dividend transaction – Transaction (f)

The dividends declared by Simon are allocated as follows:
Total dividends declared ₱80,000
Allocation:
Owners of the parent (80,000 x 90%) 72,000
Non-controlling interest (80,000 x 10%) 8,000
As allocated ₱80,000
Peter’s ₱72,000 dividend income shall be eliminated in the

consolidated financial statements.
No consolidation adjustment is needed for the dividends declared by

Peter because the dividends pertain solely to the owners of the parent.

Simon Co. date date change
Net assets at carrying amounts 336,000 636,800
a
Subsequent depreciation of FVA NIL (50,000)
Unrealized profit (Upstream) - (Step 1.ii) NIL (10,000)
Unamortized def. loss (Upstream) - (Step
1.ii) 3,200
Interest income (Step 1.iv) (8,000)
a
See computation in Step 1.ii.
The unrealized profit on upstream sale on inventory, unamortized
deferred loss on upstream sale of equipment and interest income on
investment in bonds were closed to Simon’s retained earnings by
year-end. These are eliminated through addition or subtraction, as
appropriate.

We will use ‘Formula #2’ because NCI is measured at fair value.
Consideration transferred (see given) 488,000
Total 488,000
c
Fair value of NCI (see given) 60,000
c
Less: NCI’s share in goodwill impairment (₱8,000 x 10%) (800)
c
The problem states that goodwill was impaired by ₱8,000. The impairment
is shared between the parent and NCI because NCI is measured at fair
value.

Simon's net assets at fair value – Dec. 31, 20x1 (Step 2) 756,000
Total 75,600
Add: Goodwill to NCI net of accumulated impairment (Step 3) 7,200

Peter's retained earnings – Dec. 31, 20x1 1,780,000
(a)
Peter's share in the net change in Simon's net assets 212,400
Unrealized profits (Downstream only) - (Step 1.ii) (16,000)
Loss on extinguishment of bonds - (Step 1.iv) (40,000)
Intercompany interest expense - (Step 1.iv) 10,000
Peter’s share in goodwill impairment - (Step 3) (7,200)
Consolidated retained earnings – Dec. 31, 20x1 1,939,200
(a)
Net change in Simon’s net assets (Step 2) of ₱236,000 x 90% = ₱212,400.
The deferred loss on the sale of equipment is not included in the

computations above because the sale is upstream.

Profits before adjustments 1,160,000 380,800 1,540,800
Unrealized profits - (Step 1.ii) (16,000) (10,000) (26,000)
Unamortized def. loss - (Step 1.iii) 3,200 3,200
Loss on bonds - (Step 1.iv) (40,000) - (40,000)
Interest exp./income - (Step 1.iv) 10,000 (8,000) 2,000
Dividend income - (Step 1.v) (72,000) N/A (72,000)
Net consolidation adjustments (118,000) (14,800) (132,800)
Profits before FVA 1,042,000 366,000 1,408,000
(b)
Impairment of goodwill - (Step 3) (7,200) (800) (8,000)
(b)
Shares in the depreciation of FVA: (50,000 x 90%); (50,000 x 10%)
Step 7: Profit or loss attributable to owners of parent and NCI
Owners Consoli-
of parent NCI dated
Peter's profit before FVA - (Step 6) 1,042,000 N/A 1,042,000
(c)
Share in Simon’s profit before FVA 329,400 36,600 366,000
Depreciation of FVA - (Step 6) (45,000) (5,000) (50,000)
Impairment of goodwill - (Step 6) (7,200) (800) (8,000)
Totals 1,319,200 30,800 1,350,000
(c)
Shares in Simon’s profit before FVA (Step 6): (366,000 x 90%); (366,000 x
10%)
The consolidated financial statements are prepared as follows:

Peter Group
Consolidated statement of financial position
As of December 31, 20x1
ASSETS
Cash (1,448,000 + 85,200 + 4,000 Step 1.i) 1,537,200
Accounts receivable (712,000 + 20,000 - 12,000 Step 1.i) 720,000
Inventory (Step 1.ii) 682,000
Investment in bonds (eliminated - Step 1.iv) -
Investment in subsidiary (eliminated) -
Equipment, net (Step 1.iii) 2,752,000
Patent (Step 1.iii) 70,000
TOTAL ASSETS 5,781,200

Accounts payable (367,200 + 284,000 - 8,000 Step 1.i) 359,200
10% Bonds payable (400,000 - 200,000 Step 1.iv) 200,000
Total liabilities 559,200
Share capital (Parent only) 3,200,000
Retained earnings (Step 5) 1,939,200
Equity attributable to owners of parent 5,139,200
Non-controlling interest (Step 4) 82,800
Total equity 5,222,000
TOTAL LIABILITIES AND EQUITY 5,781,200
Peter Group
Statement of profit or loss
Sales (Step 1.ii) 4,560,000

Cost of goods sold (Step 1.ii) (2,034,000)
Gross profit 2,526,000
Interest income (eliminated - Step 1.iv) -
Distribution costs (400,000)
Depreciation expense (Step 1.iii) (688,000)
Loss on sale of equipment (eliminated - Step 1.iv) -
Interest expense (10,000 - 2,500 Step 1.iv) (30,000)
Dividend income (eliminated - Step 1.v) -
Amortization expense on patent (Step 1.iii) (10,000)
Loss on extinguishment of bonds (Step 1.iv) (40,000)
Impairment loss on goodwill (Step 3) (8,000)
Profit for the year 1,350,000
Reconciliation using formulas:

Total assets of Peter Co. 5,664,000
Total assets of Simon Co. 720,000
Fair value adjustments, net (184,000 beg. – 50,000 depreciation) 134,000
Effects of intercompany transactions:
Current accounts (elimination of account receivable) (8,000)
Inventory transactions (unrealized profit in ending inventory) (26,000)
Equipment transaction (unamortized balance of deferred loss) 3,200
Bond transaction (carrying amount of investment in bonds) (238,000)
Total liabilities of Peter Co. 684,000

Total liabilities of Simon Co. 83,200
Fair value adjustments, net -
Effect of intercompany transactions:
Current accounts (elimination of account payable) (8,000)
Bond transaction (carrying amount of bonds payable) (200,000)
Consolidated total liabilities 559,200
Share capital of Peter Co. 3,200,000

Consolidated retained earnings (Step 5) 1,939,200
Non-controlling interest (Step 4) 82,800
35. B (See Step 1.ii above)
36. D (See Step 1.ii above)

37. A (See Step 3 above)
38. C (See Step 4 above)
40. D (See Step 6 above)
42. A (See F/S or Reconciliations above)
43. A (See F/S or Reconciliations above)
44. C
Solutions:
All of Big Co.’s shares were exchanged
The substance of the transaction is analyzed as follows:
Analyses:
Big Co. lets itself be acquired (legal form) for it to gain control
over the legal acquirer (substance).
Legal form of the agreement: (Big lets itself be acquired)

Small Co. issues 150 ordinary shares (2.5 x 60) in exchange for all of
Big’s 60 shares outstanding.
Substance of the agreement: (Big gains control over legal acquirer)

After the combination, Big gains control because it now owns 60% of
Small Co.
Accounting acquiree (Small Co.) issues shares – Actual (Legal):

Small Co.'s currently issued shares 100 40%
Shares to be issued to Big Co. (2.5 sh. x 60 sh.) 150 60%
Total shares of Small Co. after the combination 250
Accounting acquirer (Big Co.) issues shares – Reverse (Substance):

Big Co.'s currently issued shares 60 60%
Shares to be issued to Small Co.'s shareholders to
enable them to have the same interest in Big Co.
[(60 ÷ 60%) x 40%] 40 20%
Total 100
Shares of Big effectively transferred to Small 40
Multiply by: Fair value per share of Big’s shares 480
Fair value of consideration effectively transferred 19,200

Total 19,200
Fair value of net identifiable assets acquired (24,000 – 8,400) (15,600)
Goodwill 3,600
The consolidated share capital is computed as follows:

Share capital of Big Co. before the reverse acquisition 7,200
Add: Consideration transferred 19,200
Consolidated share capital 26,400
The consolidated retained earnings are computed as follows:

Retained earnings of Big Co. before the reverse acquisition 16,800
Consolidated retained earnings 16,800
The consolidated statement of financial position immediately after the

business combination is shown below:
Small Co. Big Co. Small Co.
(legal parent, (legal acquiree, (Consolidated FS
accounting accounting in the name of the
acquiree) acquirer) legal parent)
Identifiable assets 21,600 44,400 68,400*
Goodwill 3,600
Total assets 21,600 44,400 72,000
Liabilities 7,400 20,400 28,800
Share capital:
250 ordinary shares
(₱7,200 + ₱19,200) 26,400
Total liabilities and equity 21,600 44,400 72,000
*₱24,000 fair value + ₱44,400 = ₱68,400
The equity structure appearing in the consolidated financial
statements (i.e., the number and type of equity interests issued)
reflects the equity structure of Small Co. (the legal parent), including
the equity interests issued by Small Co. to effect the combination, i.e.,
100 sh. + 150 sh.

48. B (See solution above)
Case #2: (Refer to fact pattern) Only 54 of Big Co.’s shares were
exchanged for Small Co.’s shares.
49. C
Solutions:
Only 54 of Big Co.’s shares were exchanged
The substance of the transaction is analyzed as follows:
Accounting acquiree (Small Co.) issues shares – Actual (Legal):

Small Co.'s currently issued shares 100 42.55%
Shares to be issued to Big Co. (2.5 sh. x 54 sh.) 135 57.45%
Total shares of Small Co. after the combination 235
Accounting acquirer (Big Co.) issues shares – Reverse (Substance):

Big Co.'s shares exchanged for Small Co.’s shares (given) 54 57.45%
Shares to be issued to Small Co.'s shareholders to enable
them to have the same interest in Big Co.
[(54 ÷ 57.45%) x 42.55%] 40 42.55%
Total 94 100%

Shares of Big effectively transferred to Small 40
Multiply by: Fair value per share of Big’s shares 480
Fair value of consideration effectively transferred 19,200

Total 19,200
Fair value of net identifiable assets acquired (24,000 – 8,400) (15,600)
Goodwill 3,600
Notes:
 Goodwill computation is not affected if some of the accounting
acquirer’s shareholders do not exchange their shares with the
accounting acquiree’s shares.
 However, non-controlling interest arises if not all of the
accounting acquirer’s shares are exchanged.
The non-controlling interest is computed as follows:
Total shares of Big Co. before the acquisition 60
Shares of Big Co. exchanged with Small Co.'s shares (54)
Shares of Big Co. not exchanged with Small Co.'s shares 6
The controlling and NCI effective interests are computed as follows:
Controlling interest (54 sh. ÷ 60 sh.) 90%
NCI (6 sh. ÷ 60 sh.) 10%
Big Co.'s total equity before acquisition 24,000

Multiply by: NCI % 10%
The consolidated share capital is computed as follows:

Share capital of Big Co. before the reverse acquisition 7,200
Multiply by: Controlling interest % 90%
Total 6,480
Add: Consideration transferred 19,200
Consolidated share capital 25,680
The consolidated retained earnings are computed as follows:

Retained earnings of Big Co. before the reverse
acquisition 16,800
Multiply by: Controlling interest % 90%
Consolidated retained earnings 15,120
The consolidated statement of financial position immediately after the

business combination is shown below:
Small Co. Big Co. Small Co.
(legal parent, (legal acquiree, (Consolidated FS
accounting accounting in the name of the
acquiree) acquirer) legal parent)
Identifiable assets 21,600 44,400 68,400
Goodwill 3,600
Total assets 21,600 44,400 72,000
Liabilities 8,400 20,400 28,800
Share capital:
235 ordinary shares
(₱6,480 + ₱19,200) 25,680
Total liabilities and equity 21,600 44,400 72,000
50. A (See solutions above)

51. B (See solutions above)
53. C (See solutions above)

1. D 6. C 11. A 16. A 21. C 26. C 31. B
2. D 7. B 12. B 17. B 22. B 27. A 32. A
3. E 8. A 13. D 18. C 23. C 28. B 33. B
4. E 9. D 14. B 19. A 24. C 29. A 34. B
5. C 10. B 15. A 20. B 25. A 30. C
Solutions:
1. D - Since S1 already holds controlling interest in S2 when P
acquired S1, the acquisition date for both S1 and S2 is on
January 1, 20x3.
2. D
3. E - Since S1 acquires S2 only after P acquired S1, the acquisition

dates are: (a) January 1, 20x1 for S1 and (b) January 1, 20x3
for S2.
4. E
5. C
6. C (48,000 + 64,000) = 112,000 ‘See Step 3 below’

Solutions:
Step 1: Analysis of group structure
The group structure is analyzed as follows:
P’s ownership interest in S1 80%
S1’s ownership interest in S2 60%
P, S1 and S2 all belong to a vertical group.

The controlling interest and NCI percentages are calculated as
follows:
Ownership over S1
Direct holdings of P in S1 80%
NCI in S1 (squeeze) 20%
Total 100%
Ownership over S2
Indirect holdings of P in S2 (80% x 60%)* 48%
Total holdings of P in S2 48%
Total 100%
*The indirect holdings of P in S2 is computed by multiplying P’s
interest in S1 (80%) by S1’s interest in S2 (60%).
Although the computed total holdings of P is only 48%, i.e., less than
50%, it is still presumed that there is control because P controls S1,
who in turn controls S2. In substance, it is actually P who has control
over S2. This is not unusual in practice. The computation is made
only for purposes of mathematical computations during consolidation
procedures.
The NCI in S2 is reconciled as follows:
Interest in S2 held by outside shareholders in S1 (20% x 60%) 12%
Interest in S2 held by outside shareholders in S2
(100% - 60% held by S1) 40%
NCI in S2 52%
The controlling interests and NCI’s are summarized below:

S1 S2
Owners of P 80% 48%
NCI 20% 52%
Total 100% 100%

S1 S2
Acqn. Cons. Net Acqn. Cons. Net
Date Date change Date Date change
Share capital 320,000 320,000 200,000 200,000
Ret. earnings 120,000 208,000 40,000 112,000
Totals at carrying amts. 440,000 528,000 240,000 312,000
FVA at acquisition date - - - -
Depreciation of FVA NIL - NIL -
Net assets at fair value 440,000 528,000 88,000 240,000 312,000 72,000
The impairment loss on goodwill is determined as follows:
Formula #1: S1 S2 Total
Consideration transferred (given) 400,000 200,000
Indirect holding adjustment (40,000)
NCI in the acquiree – at fair values (given) 100,000 160,000
Prev. held equity interest in the acquiree - -
Total 500,000 320,000
Fair value of net assets acquired (Step 2) (440,000) (240,000)
Goodwill at acquisition date 60,000 80,000
Multiply by: Impairment (given) 20% 20%
Impairment loss on goodwill - 20x1 12,000 16,000 28,000
An indirect holding adjustment is made because the consideration

transferred to S2 is not wholly made by P but rather partly by P (80%)
and partly by S1 (20%). Only the portion effectively transferred by P
(₱200,000 x 80% = ₱160,000) enters into the computation of goodwill.
The indirect holding adjustment is computed as follows:

Total consideration transferred to S2 200,000
Multiply by: NCI in S1 20%
Indirect holding adjustment 40,000
The indirect holding adjustment affects both the computations of

goodwill and NCI.
Since the NCI’s are measured at fair value, there must be goodwill
attributable to the NCI’s. These are computed as follows:
Formula #2: S1 S2
Indirect holding adjustment (40,000)
Less: Prev. held equity interest in the acquiree - -
Total 400,000 160,000
Less: P's proportionate sh. in net assets of S1 & S2
(₱440,000 x 80%) & (₱240,000 x 48%) (352,000) (115,200)
Goodwill attributable to owners of P – Jan. 1, 20x1 48,000 44,800
Less: P’s share in goodwill impairment
(₱12,000 x 80%) & (₱16,000 x 48%) (9,600) (7,680)
Goodwill attributable to owners of P – Dec. 31, 20x1 38,400 37,120
Fair value of NCI (given) 100,000 160,000
Less: NCI's proportionate sh. in the net assets of
S1 & S2 (₱440,000 x 20%) & (₱240,000 x 52%) (88,000) (124,800)
Goodwill attributable to NCI – Jan. 1, 20x1 12,000 35,200
Less: NCI’s share in goodwill impairment
(₱12,000 x 20%) & (₱16,000 x 52%) (2,400) (8,320)
Goodwill attributable to NCI – Dec. 31, 20x1 9,600 26,880
Goodwill, net – Dec. 31, 20x1 48,000 64,000

S1 S2 Total
Net assets at fair value - 12/31x1 (Step 2) 528,000 312,000
Multiply by: NCI percentage 20% 52%
Total 105,600 162,240
Add: Goodwill to NCI - 12/31x1 (Step 3) 9,600 26,880
Indirect holding adjustment (Step 3) (40,000)
NCI - Dec. 31, 20x1 115,200 149,120 264,320
Notice that the only difference in the goodwill and NCI computations
between a simple group structure and a complex group structure is the
indirect holding adjustment.

P's retained earnings – Dec. 31, 20x1 600,000
(a)
P's share in the net change in S1's net assets 70,400
(b)
P's sh. in goodwill impairment (₱9,600 + ₱7,680) (17,280)
(Step 3)
(a)
Net change in S1’s net assets (Step 2) of ₱88,000 x 80% = ₱70,400.
(b)

P S1 S2 Consolidated
Profits before adj. 320,000 88,000 72,000 480,000
Cons. adjustments:
Unrealized profits - - - -
Dividend income - N/A N/A -
Extinguishment of bonds - - - -
Net cons. adjustments - - - -
Profits before FVA 320,000 88,000 72,000 480,000
Depreciation of FVA ( - ) ( - ) ( - ) ( - )
Goodwill impairment (17,280) (2,400) (8,320) (28,000)
Consolidated profit 302,720 85,600 63,680 452,000
Step 7: Profit or loss attributable to owners of parent and NCIs
Owners NCI NCI Consoli-
of P in S1 in S2 dated
P's profit before FVA (Step 6) (c) 320,000 N/A N/A 320,000
Share in S1’s profit before FVA 70,400 17,600 88,000
(d)
Goodwill impairment (17,280) (2,400) (8,320) (28,000)

Totals 407,680 15,200 29,120 452,000
(c)
Shares in S1’s profit before FVA (Step 6): (₱88,000 x 80%); (₱88,000 x 20%)
(d)

Other assets (800,000 + 480,000 + 320,000) 1,600,000
Goodwill (48,000 + 64,000) - (Step 3) 112,000
Total assets 1,712,000
Liabilities (120,000 + 152,000 + 8,000) 280,000
Share capital (P only) 480,000
Retained earnings - (Step 5) 687,680
Equity attributable to owners of parent 1,167,680
Non-controlling interests - (Step 4) 264,320
Total liabilities and equity 1,712,000
Consolidated statement of profit or loss
Revenues (720,000 + 408,000 + 192,000) 1,320,000
Expenses (400,000 + 320,000 + 120,000) (840,000)
Impairment loss on goodwill - (Step 3) (28,000)
Consolidated profit 452,000
Profit attributable to:
Owners of the parent - (Step 7) 407,680
Non-controlling interests (15,200 + 29,120) - (Step 7) 44,320
452,000
7. B (See Step 4 above)
9. D (See Step 6 above)

13. D (20,000 + 16,000) = 36,000 See Step 3 below

Solutions:
P’s ownership interest in S1 80%
S1’s ownership interest in S2 60%
P, S1 and S2 all belong to a vertical group.

follows:
Ownership over S1
Total 100%
Ownership over S2
Indirect holdings of P in S2 (80% x 60%) 48%
Total 100%
The acquisition dates of the subsidiaries are January 1, 20x1 for

S1 and December 31, 20x1 for S2. Goodwill and NCI on each of S1
and S2 shall be computed separately on their respective acquisition
dates. Their pre-acquisition and post-acquisition reserves are also
calculated from these dates.

S1 S2
Owners of P 80% 48%
NCI 20% 52%
Total 100% 100%
S1 S2
Share capital 320,000 320,000 200,000 200,000
Ret. earnings 120,000 208,000 112,000 112,000
Net assets at fair value 440,000 528,000 88,000 312,000 312,000 -

Formula #2: S1 S2
Indirect holding adjustment (₱200,000 x 20%) (40,000)
Total 400,000 160,000
(₱440,000 x 80%) & (₱312,000 x 48%) (352,000) (149,760)
Goodwill attributable to owners of P (acq’n. dates) 48,000 10,240
Less: P’s sh. in goodwill impairment (₱40,000 x 80%) (32,000) -
S1 & S2 (₱440,000 x 20%) & (₱312,000 x 52%) (88,000) (162,240)
Goodwill attributable to NCI (acquisition dates) 12,000 5,760
Less: NCI’s sh. in goodwill impairment (₱40,000 x 20%) (8,000) -

The fair values of the NCIs are determined on the subsidiaries’ respective
acquisition dates (i.e., Jan. 1, 20x1 for S1 and Dec. 31, 20x1 for S2).
S1 S2 Total
Total 105,600 162,240
NCI - Dec. 31, 20x1 109,600 128,000 237,600
(a)
(b)
P's share in the net change in S2's net assets -
P's sh. in goodwill impairment (Step 3) (32,000)
(a)
(b)
Net change in S2’s net assets (Step 2) of ₱0 x 48% = ₱0.

Profits before adj. 320,000 88,000 - 408,000
Cons. adjustments:
Profits before FVA 320,000 88,000 - 408,000
Goodwill impairment (32,000) (8,000) - (40,000)
Consolidated profit 288,000 80,000 - 368,000
None of S2’s profit is included in the 20x1 consolidated financial

statements because S2 was acquired only on December 31, 20x1.

Owners NCI in NCI Consoli-
of P S1 in S2 dated
(d)
Share in S2’s profit before FVA - - -
Goodwill impairment (32,000) (8,000) - (40,000)
Totals 358,400 9,600 - 368,000
(c)
(d)
Shares in S2’s profit before FVA (Step 6): (₱0 x 48%); (₱0 x 52%)
Other assets (800,000 + 480,000 + 320,000) 1,600,000
Goodwill (20,000 + 16,000) (Step 3) 36,000
Liabilities (120,000 + 152,000 + 8,000) 280,000

Retained earnings (Step 5) 638,400
Owners of parent 1,118,400

Revenues (720,000 + 408,000) 1,128,000
Expenses (400,000 + 320,000) (720,000)
Impairment loss on goodwill (Step 3) (40,000)
Owners of the parent (Step 7) 358,400
18. C (See Step solutions above)
19. A (See Step solutions above)
20. B (See Step 3 below)

Solutions:
P’s ownership interest in S1 (64,000 sh. ÷ 80,000 sh.*) 80%
P’s ownership interest in S2 (12,500 sh. ÷ 50,000 sh.*) 25%
S1’s ownership interest in S2 (15,000 sh. ÷ 50,000 sh.*) 30%
*Share capital divided by ₱1.00 par value per share.
P, S1 and S2 all belong to a D-shaped (mixed) group.

follows:
Ownership over S1
Total 100%
Ownership over S2
Indirect holdings of P through S1 (80% x 30%) 24%
Total 100%
The NCI in S2 is reconciled as follows:

Interest in S2 held by outside shareholders in 6%
S1 (20% NCI in S1 x 30% interest of S1 in S2)
Interest in S2 held by outside shareholders in
S2 (100% - 25% held by P - 30% held by S1) 45%
NCI in S2 51%

S1 S2
Owners of P 80% 49%
NCI 20% 51%
Total 100% 100%
S1 S2
Share capital 320,000 320,000 200,000 200,000
Ret. earnings 120,000 208,000 40,000 112,000

Formula #2: S1 S2
Consideration transferred (given) & (₱160K + ₱200K) 400,000 360,000
Total 400,000 320,000
(₱440,000 x 80%) & (₱240,000 x 49%) (352,000) (117,600)
Goodwill attributable to owners of P – Jan. 1, 20x1 48,000 202,400
Less: P’s share in goodwill impairment - -
S1 & S2 (₱440,000 x 20%) & (₱240,000 x 51%) (88,000) (122,400)
Less: NCI’s share in goodwill impairment - -

S1 S2 Total
Total 105,600 159,120
NCI - Dec. 31, 20x1 117,600 156,720 274,320

(a)
(b)
P's sh. in goodwill impairment -
(a)
(b)
Profits before adj. 320,000 88,000 72,000 480,000
Cons. adjustments:
Goodwill impairment ( - ) ( - ) ( - ) ( - )

Owners NCI in NCI Consoli-
of P S1 in S2 dated
(d)
Totals 425,680 17,600 36,720 480,000
(c)
(d)

Other assets (800,000 + 480,000 + 320,000) 1,600,000
Goodwill (60,000 + 240,000) (Step 3) 300,000
Liabilities (280,000 + 152,000 + 8,000) 440,000

Revenues (720,000 + 408,000 + 192,000) 1,320,000
Expenses (400,000 + 320,000 + 120,000) (840,000)
Impairment loss on goodwill -
Non-controlling interests (17,600 + 36,720) (Step 7) 54,320
480,000
26. C (See solutions above)
27. A (See analysis below)

Solutions:
A
80% 20%
25% B E
C 30%
40%
A, B and C belong to a D-shaped (mixed) group structure. Therefore,

B and C are subsidiaries of A.
C and E are associates of B while D is an associate of C.
The controlling and NCI are analyzed as follows:

Ownership over B
Direct holdings of A in B 80%
NCI (squeeze) 20%
Total 100%
Ownership over C
Direct holdings of A in C 25%
Indirect holdings of A through B (80% x 30%) 24%
Total holdings of A 49%
NCI (squeeze) 51%
Total 100%
The NCI in C is reconciled as follows:

Interest in C held by outside shareholders in 6%
B (20% NCI in B x 30% interest of B in C)
Interest in C held by outside shareholders in
C (100% - 25% held by A - 30% held by B) 45%
NCI in C 51%

B C
Owners of A 80% 49%
NCI 20% 51%
Total 100% 100%
Notice that no NCI’s are computed for the investments in associates.
Step 1A: Adjustments for the equity method

B and C’s accounts are adjusted using the equity method.
B C
Profits before share in associate's profit 88,000 72,000
Share in D's profit (₱32,000 x 40%) N/A 12,800
Share in E's profit (₱48,000 x 20%) 9,600 N/A
Adjusted profits 97,600 84,800
Although C is an associate of B, B’s share in C’s profit is not included

in the computations above because C is a member of the group,
and is therefore accounted for under the ‘acquisition method.’ Only D
and E are accounted for under the ‘equity method.’
B C Total
Investment in associate D (purchase cost) 320,000
Investment in associate E (purchase cost) 240,000
Share in associate's profits 9,600 12,800
Investments in associates (adjusted) 249,600 332,800 582,400
B C
Retained earnings - 12/31/x1 (unadjusted) 208,000 112,000
Share in associate's profits 9,600 12,800
Retained earnings - 12/31/x1 (adjusted) 217,600 124,800
B C
Share capital 320,000 320,000 200,000 200,000
Ret. earnings (Step 1A) 120,000 217,600 40,000 124,800

Formula #2: B C
Consideration transferred (given) & (₱160K + ₱200K) 400,000 360,000
Total 400,000 320,000
Less: A's proportionate sh. in net assets of B & C
(₱440,000 x 80%) & (₱240,000 x 49%) (352,000) (117,600)
Goodwill attributable to owners of A – Jan. 1, 20x1 48,000 202,400
Less: A’s share in goodwill impairment - -
Goodwill attributable to owners of A – Dec. 31, 20x1 48,000 202,400
B & C (₱440,000 x 20%) & (₱240,000 x 51%) (88,000) (122,400)
Less: NCI’s share in goodwill impairment - -

A B Total
Total 107,520 165,648
NCI - Dec. 31, 20x1 119,520 163,248 282,768
A's retained earnings – Dec. 31, 20x1 600,000
(a)
A's share in the net change in B's net assets 78,080
(b)
A's share in the net change in C's net assets 41,552
A's sh. in goodwill impairment -
(a)
Net change in B’s net assets (Step 2) of ₱97,600 x 80% = ₱78,080.
(b)
Net change in C’s net assets (Step 2) of ₱84,800 x 49% = ₱41,552.

A B C Consolidated
Profits (Step 1A) 320,000 97,600 84,800 502,400
Cons. adjustments:
Depreciation of FVA ( -) ( - ) ( - ) ( - )
Goodwill impairment ( -) ( - ) ( - ) ( - )

Owners NCI NCI Consoli-
of A in B in C dated
A's profit before FVA (Step 6)(c) 320,000 N/A N/A 320,000
Share in B’s profit before FVA 78,080 19,520 97,600
(d)
Share in C’s profit before FVA 41,552 43,248 84,800
Totals 439,632 19,520 43,248 502,400
(c)
Shares in B’s profit before FVA (Step 6): (₱97,600 x 80%); (₱97,600 x 20%)
(d)
Shares in C’s profit before FVA (Step 6): (₱84,800 x 49%); (₱84,800 x 51%)
Requirement (b): Consolidated financial statements
Investments in associates (Step 1A) 582,400
Other assets (800,000 + 480,000 + 320,000) 1,600,000
Goodwill (60,000 + 240,000) (Step 3) 300,000
Liabilities (280,000 + 392,000 + 328,000) 1,000,000
Share capital (A only) 480,000

Revenues (720,000 + 408,000 + 192,000) 1,320,000
Expenses (400,000 + 320,000 + 120,000) (840,000)
Share in profits of associates (12,800 + 9,600) (Step 1A) 22,400
Impairment loss on goodwill -
Non-controlling interests (19,520 + 43,248) (Step 7) 62,768
502,400
29. A (See Step 4 below)
30. C (See Step 5 below)
32. A (See Step 7 below)

Separate Financial Statements
1. D
2. A
3. B
4. D
Solutions:
1. D
2. A
Solution:
Investment in subsidiary (XYZ, Inc.) – at cost ₱4,000,000
3. B
Solution:
Investment in associate (Alphabets, Co.)
– at Fair value on Dec. 31, 20x1 ₱ 420,000
4. D
Solution:
Investment in subsidiary (XYZ, Inc.)
Dividend revenue (₱1,200,000 x 80%) ₱ 960,000
Investment in associate (Alphabets Co.)

Dividend revenue (₱800,000 x 20%) ₱ 40,000
Unrealized gain on change in fair value (₱420K – ₱400) 20,000
Transaction costs expensed immediately ( 80,000)
Net investment income ₱ 100,000
(960,000 + 100,000) = 1,060,000

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AFAR Drills & Exercises1

Business Combinations (Part 1)

Multiple Choice – Computational

On the negotiation for the business combination, DIMINUTIVE Co. incurred

As January 1, 20x1, RASCAL’s identifiable assets and liabilities have fair

Case #1: Non-controlling interest measured at fair value

Case #2: Non-controlling interest measured at fair value

Case #3: Non-controlling interest measured at fair value

Case #4: Non-controlling interest’s proportionate share in net assets

SMUTTY incurred the following acquisition-related costs: legal fees,

7. Case #1: As consideration for the business combination, SMUTTY Co.

Specific recognition principles – Operating leases

Case #1: Acquiree is the lessee – terms are favorable

Case #2: Acquiree is the lessee – terms are unfavorable

Case #3: Acquiree is the lessor

Intangible assets – separability and contractual-legal criteria

In applying the recognition and measurement principles under PFRS 3, LITHE

Type of intangible asset Fair value

How much is the goodwill (gain on bargain purchase)?

How much is the goodwill (gain on bargain purchase)?

How much is the goodwill (gain on bargain purchase)?

Consideration transferred and indemnification asset

The terms of the business combination agreement are shown below:

How much is the goodwill (gain on bargain purchase)?

Although adjustments are to be made to the carrying amounts of the assets

Consideration transferred – Dividends on

The dividends payable pertain to dividends declared by ABSURD, Inc. on

How much is the goodwill (gain on bargain purchase)?

Consideration transferred – Measurement

1. How much is the fair value of consideration transferred on the business

3. How much is the acquisition-date fair value per share?

4. How much goodwill was recognized on acquisition date?

5. What is the retained earnings of the combined entity immediately after

Fair value of acquirer’s shares is reliably determinable

6. How many shares were issued by CONJUNCTION Co. in the business

7. What is the par value per share of the shares issued?

8. What is the acquisition-date fair value of the net identifiable assets

Business combination achieved in stages – from PFRS 9

On January 1, 20x4, FORTITUDE acquired additional 60% ownership interest

9. Scenario #1: The previously held interest was initially classified as

Business combination achieved in stages – from PAS 28

On January 1, 20x4, OBDURATE acquired additional 60% ownership interest in

How much is the goodwill?

Business combination achieved without transfer of consideration

How much is the goodwill?

How much is the goodwill?

Provisional amounts – identifiable assets acquired

Case #1: Identifiable asset recognized at provisional amount

How should INNOCUOUS account for the new information obtained?

Case #2: Unrecorded identifiable asset acquired

How should INNOCUOUS account for the new information obtained?

Case #3: Information obtained beyond measurement period

How should INNOCUOUS account for the new information obtained?

Provisional amounts – consideration transferred

On this date, RIBALD’s shares were assigned a provisional value of ₱400

Determining what is part of the business combination transaction

How much is the goodwill (gain on bargain purchase)?

Prior to business combination, THRALL has sold a license to SLAVE. The

THRALL recognized the license fee as deferred liability and amortized it

How much is the goodwill (gain on bargain purchase)?

Settlement of pre-existing relationship – Not a reacquired right

Included in the total fair value of FEMINITY is ₱640,000 related to the

How much is the goodwill (gain on bargain purchase)?