CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

Advanced Financial Accounting GERMAN/LIM/VALIX/K. DELA CRUZ/MARASIGAN

PFRS 3: Business Combination

Part I: Theory of Accounts

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

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

3. Applying acquisition method for business combination requires the following steps, except
a. Identifying the acquirer
b. Determining the acquisition date
c. Recognising and measuring the identifiable assets acquired, the liabilities assumed and any
noncontrolling interest in the acquire
d. Recognising and measuring goodwill or a gain from a bargain purchase.
e. Using equity method

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

5. Which of the following statements concerning the identification of the acquirer in a business
combination is incorrect?
a. In business combination through merger, the acquirer is the absorbed corporation after the
business combination.
b. In business combination through consolidation, the acquirer is any of the consolidating
corporations.
c. In business combination effected primarily by transferring assets or by incurring liabilities or
issuing shares, the acquirer is usually the entity that transfers the cash, incurs the liabilities or
issues the shares.
d. In some business combination, commonly called “reverse acquisition” the issuing entity is the
acquiree while the other entity that receives the issued shares is the acquirer.

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

7. As of the acquisition date, the acquirer shall recognise, separately from goodwill, the identifiable
assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. As a general
rule, the acquirer shall measure the identifiable assets acquired and the liabilities assumed at their
a. Acquisition date-fair values
b. Acquisition date-book value
c. Acquisition date-face value
d. Acquisition date-carrying value

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8. For each business combination, the acquirer shall measure at the acquisition date components of
noncontrolling interests(NCI) in the acquiree that are present ownership interests and entitle their
holders to a proportionate share of the entity's net assets in the event of liquidation at either
a. Fair value
b. The present ownership instruments' proportionate share in the recognised amounts of the
acquiree's identifiable net assets.
c. Either A or B.
d. Neither A nor B.

9. Under PFRS 3, contrary to PAS 37, what is the recognition principle of contingent liability assumed
in a business combination?
a. The acquirer shall recognise as of the acquisition date a contingent liability assumed in a business
combination if it is a present obligation that arises from past events and its fair value can be
measured reliably even only reasonably possible.
b. The acquirer shall recognise a contingent liability assumed in a business combination at the
acquisition date only if it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation.
c. The acquirer shall recognise a contingent liability assumed in a business combination at the
acquisition date only if it is virtually certain that an outflow of resources embodying economic
benefits will be required to settle the obligation.
d. The acquirer shall recognise a contingent liability assumed in a business combination at the
acquisition date only if it is remote that an outflow of resources embodying economic benefits will
be required to settle the obligation.

10. What is the measurement of the consideration transferred or given up in a business combination?
a. Acquisition date-fair values
b. Acquisition date-book value
c. Acquisition date-face value
d. Acquisition date-carrying value

11. If the aggregate of the (a) consideration transferred measured in accordance with this IFRS, which
generally requires acquisition-date fair value; (b) the amount of any non-controlling interest in the
acquiree measured in accordance with PFRS 3; and (c) in a business combination achieved in stages,
the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree is less
than the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed measured in accordance with IFRS 3 (FVNAA), the difference shall be classified as
a. Goodwill to be presented as noncurrent asset
b. Gain on bargain purchase to be presented as part of profit or loss
c. Gain on acquisition to be presented as part of OCI
d. Share premium from issuance of shares

12. If at the date of acquisition, the aggregate of (1) the fair value of consideration transferred, (2) the
amount of NCI measured at either (a) fair value or (b) proportionate share of fair value of net assets of
acquiree, and (3) in a business combination achieved in stages, the acquisition date fair value of the
previously held equity interest, exceeds the fair value of net assets of the acquire (FVNAA), the
difference shall be treated by the acquirer as
a. Goodwill from business combination classified as non-current asset in the Consolidated Statement
of Financial Position which will not be amortized but will be subject to annual impairment test.
b. Gain on bargain purchase to be recognized at acquisition date Consolidated Statement of
Comprehensive Income as part of profit or loss but attributable to parent’s shareholders only.
c. Negative goodwill to be subject to amortization for a presumed life of 10 years.
d. Impairment loss to be recorded at acquisition date Consolidated Income Statement.

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13. How shall the acquirer account for its previously held equity interest in the acquiree upon obtaining
control of the acquiree or how shall an acquirer account for a business combination achieved in stages
a.k.a. step acquisition?
a. The acquirer shall treat the transaction as change in accounting policy to be treated retrospectively
at acquisition date.
b. The acquirer shall account the transaction as prior period error to be treated by retroactive
restatement.
c. The acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-
date fair value and recognize the resulting gain or loss in Profit/Loss.
d. The acquirer shall not include the previously held equity interest in the computation of goodwill or
gain on bargain purchase arising from business combination.

14. Under PFRS 3, what is the treatment of acquisition related costs in a business combination?
a. It shall be expensed as incurred and presented as part of profit or loss.
b. It shall be capitalized as part of consideration given up in computation of goodwill or gain on
bargain purchase.
c. It shall be debited to share premium.
d. It shall be charged directly to retained earnings.

15. If the initial accounting for a business combination is incomplete by the end of the reporting period in
which the combination occurs, the acquirer shall report in its financial statements provisional amounts
for the items for which the accounting is incomplete. What is the maximum term or period of the
measurement period?
a. One year or 12 months from the acquisition date
b. 6 months from the acquisition date
c. 3 months from the acquisition date
d. 1 month from the acquisition date

16. Some changes in the fair value of contingent consideration that the acquirer recognises after the
acquisition date may be the result of additional information that the acquirer obtained after that date
about facts and circumstances that existed at the acquisition date. These are called measurement
period adjustments that can be adjusted during the measurement period. Which of the following
transactions is considered as a measurement period adjustment that the acquirer shall retrospectively
adjust to goodwill/(gain on bargain purchase) during the measurement period which shall not exceed
one year from the acquisition date?
a. Changes in the value of contingent consideration occurring within one year from the acquisition
date as a result of events occurring after the acquisition date such as meeting an earnings target, a
specified share price or reaching milestone on a research and development project.
b. Increase in the fair value of the financial liability at fair value through profit or loss issued as
consideration for business combination due to movement of prices in the exchange market.
c. Change in the carrying amount of the financial liability at amortized cost issued as consideration
for business combination due to amortization of the premium/(discount) on financial liability.
d. Changes in the provisional amount of contingent liability or contingent consideration as a result of
new information obtained about the facts and circumstances that existed as of the acquisition date
and, if known, would have affected the measurement of the amounts recognized as of that date.

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17. How shall an acquirer in a business combination account for the changes in fair value of contingent
consideration classified as equity instrument if the changes result from events after the acquisition
date?
a. The changes in fair value of contingent consideration classified as equity shall be recognized as
gain or loss in profit or loss because they are not measurement period adjustments.
b. Contingent consideration classified as equity shall not be remeasured and its subsequent
settlement shall be accounted for within equity because they are not measurement period
adjustments.
c. The changes in fair value of contingent consideration classified as equity shall be retrospectively
restated to beginning retained earnings because they are prior period error.
d. The changes in fair value of contingent consideration classified as equity shall be retroactively
adjusted to goodwill/gain on bargain purchase because they are measurement period adjustments.

18. How shall an acquirer in a business combination account for the changes in fair value of contingent
consideration classified as financial liability if the changes result from events after the acquisition
date?
a. The changes in fair value of contingent consideration classified as financial liability shall be
recognized as gain or loss in profit or loss because they are not measurement period adjustments.
b. The changes in fair value of contingent consideration classified as financial liability shall be
retroactively adjusted to goodwill/gain on bargain purchase because they are measurement period
adjustments.
c. The changes in fair value of contingent consideration classified as financial liability shall be
retrospectively restated to beginning retained earnings because they are prior period error.
d. The changes in fair value of contingent consideration classified as financial liability shall be
retroactively applied to beginning retained earnings because they are change in accounting policy.

19. Which of the following accounting treatments for costs related to business combination is incorrect?
a. Acquisition related costs such as finder’s fees; advisory, legal, accounting, valuation and other
professional and consulting fees; and general administrative costs, including the costs of maintain
an internal acquisitions department shall be recognized as expense in the Profit/Loss in the periods
in which the costs are incurred.
b. The costs related to issuance of stocks or equity securities shall be deducted/debited from any
share premium from the issue and any excess is charged to “share issuance cost” reported as
contract-equity account against either (1) share premium from other share issuances or (2) retained
earnings.
c. The costs related to issuance of financial liability at fair value through profit or loss shall
recognized as expense while those related to issuance of financial liability at amortized cost shall
be recognized as deduction from the book value of financial liability or treated as discount on
financial liability to be amortized using effective interest method.
d. The costs related to the organization of the newly formed corporation also known as pre-
incorporation costs shall be capitalized as goodwill or deduction from gain on bargain purchase.

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Part II: Problem Solving

PROBLEM 1: Entity A acquired the net assets of Entity B by issuing 10,000 ordinary shares with par
value of P10 and bonds payable with face amount of P500,000. The bonds are classified as financial
liability at fair value through profit or loss.

At the time of acquisition, the ordinary shares are publicly quoted at P20 per share. On the other hand, the
bonds payable, classified as financial liability at fair value through profit or loss, are trading at 110.

Entity A paid P10,000 share issuance costs and P20,000 bond issue costs. Entity A also paid P40,000
acquisition related costs and P30,000 indirect costs of business combination.

Before the date of acquisition, Entity A and Entity B reported the following data:
Entity A Entity B
Current assets 1,000,000 500,000
Noncurrent assets 2,000,000 1,000,000
Current liabilities 200,000 400,000
Noncurrent liabilities 300,000 500,000
Ordinary shares 500,000 200,000
Share premium 1,200,000 300,000
Retained earnings 800,000 100,000

At the time of acquisition, the current assets of Entity A have fair value of P1,200,000 while the
noncurrent assets of Entity B have fair value of P1,500,000. On the same date, the current liabilities of
Entity B have fair value of P500,000 while the noncurrent liabilities of Entity A have fair value of
P500,000.

1. What is the goodwill or gain on bargain purchase arising from business combination?
a. 50,000 goodwill
b. 250,000 gain on bargain purchase
c. 120,000 goodwill
d. 70,000 gain on bargain purchase

2. What total amount should be expensed as incurred at the time of business combination?
a. 20,000
b. 70,000
c. 30,000
d. 90,000

3. What is Entity A’s amount of total assets after the business combination?
a. 4,900,000
b. 4,810,000
c. 4,750,000
d. 4,440,000

4. What is Entity A’s amount of total liabilities after the business combination?
a. 2,240,000
b. 2,150,000
c. 2,050,000
d. 2,130,000

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PROBLEM 2: The Statement of Financial Position of LUMINA Corporation on June 30, 2020 is
presented below:

Current assets P 195,000

Land 1,320,000
Building 660,000
Equipment 525,000
Total Assets P2,700,000

Liabilities 525,000
Ordinary shares, P5 par 900,000
Share premium 825,000
Retained earnings 450,000
Total equities P2,700,000

All the assets and liabilities of Lumina assumed to approximate their fair values except for land and
building. It is estimated that the land have a fair value of P2,100,000 and the fair value of the building
increased by P480,000. Enigma Corporation acquired 80% of Lumina’s outstanding shares for
P3,000,000. The non-controlling interest is measured at fair value.

1. Assuming the consideration paid includes control premium of P852,000, how much is the
goodwill/(gain on acquisition) on the consolidated financial statement?
a. 315,000
b. (750,000)
c. 102,000
d. 252,000

2. Assuming the consideration paid excludes control premium of P138,000 and the fair value of the
non controlling interest is P736,500, how much is the goodwill/(gain on acquisition) on the
consolidated financial statement?
a. 469,500
b.439,500
c. 301,500
d.448,500

PROBLEM 3: On January 1, 2021, Giordano, Inc. acquired most of the outstanding common stock of
Esprit Company for cash. The incomplete working paper elimination entries on that date for the
consolidated statement of financial position of Giordano, Inc. and its subsidiary are shown below:
Stockholders’ equity – Esprit 2,437,500
Investment in Esprit 1,584,375
Non-controlling interest 853,125

Inventories 62,500
Equipment 312,500
Patent 61,250
Goodwill ?
Investment in Esprit 468,750
Non-controlling interest ?
Included in the purchase price is a control premium of P68,750.

1. Assuming non-controlling interest is measured at fair value, What is the goodwill to be reported
in the consolidated statement of financial position at the date of acquisition?
a. 179,135
b. 247,885
c. 284,904
d. 185,188

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2. Assuming non-controlling interest is measured at the proportionate or relevant share, What is the
goodwill to be reported in the consolidated statement of financial position at the date of
acquisition?
a. 253,938
b. 284,904
c. 185,188
d. 179,135

3. Assuming non-controlling interest is measured at fair value in the amount of P1,150,000. What is
the goodwill to be reported in the consolidated statement of financial position at the date of
acquisition?
a. 329,375
b. 398,125
c. 260,625
d. 276,625

PROBLEM 4: On January 2, 2021, the Statement of Financial Position of Parent Company and
Subsidiary Company immediately before the combination are:
Parent Co. Subsidiary Co.
Cash P 450,000 P 15,000
Inventories 300,000 30,000
Property and equipment (net) 750,000 105,000
Total Assets P 1,500,000 P 150,000

Current Liabilities P 90,000 P 15,000

Ordinary shares, P100 par 150,000 15,000
Share premium 450,000 30,000
Retained Earnings 810,000 90,000
Total Liabilities and Stockholder’s Equity P 1,500,000 P 150,000
The fair value of Subsidiary Co.’s equipment increased by P48,000. Also, Subsidiary Co. has a contingent
liability which Parent Co. estimated to have a fair value of P10,000.

Assume the following independent cases:

1. Assuming Parent Company acquired 80% of the outstanding shares of Subsidiary Company for
P125,500 and non-controlling interest is measured at the proportionate share of Subsidiary
Company’s identifiable net assets, how much is the consolidated stockholder’s equity on the
date of acquisition?
a. 1,410,000
b. 1,419,600
c. 1,457,500
d. 1,456,200

2. Assuming Parent Company acquired 90% of the outstanding shares of Subsidiary Company for
P243,000 and non-controlling interest is measured at fair value, how much is the total
consolidated assets on the date of acquisition?
a. 1,542,000
b. 1,552,000
c. 1,795,000
d. 1,494,000

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PROBLEM 5: P Co. acquires 20% ownership interest in S Co. at January 1, 2021 for P1,750,000 cash,
which is the fair value of the investment at that date. P Co. has concluded that he does not have significant
influence over S Co. At that date the fair value of S Co.’s identifiable assets were P5,000,000 (including
Land of P4,000,000) and the carrying amount were P4,000,000 (including Land P3,000,000). S Co. has
no liabilities and contingent liabilities at that date.
For the year ended December 31, 2021, S Co. reported a profit of P3,000,000, but does not pay any
dividends. In addition the fair value of S Co.’s land increases by 1,500,000. However, the carrying
amount of the land remained unchanged at P3,000,000. Below is the statement of financial position of S
Co. together with the fair values of identifiable assets at December 31, 2021:
Carrying amount Fair value
Cash and receivables 4,000,000 4,000,000
Land 3,000,000 5,500,000
7,000,000 9,500,000
Ordinary shares (1,000,000) 2,500,000
Retained earnings 4,500,000
7,000,000
On January 1, 2022, P Co. acquired another 60% ownership interest in S Co. for P11,000,000 cash.
S Co.’s 1,000,000 ordinary shares have a quoted price at December 31, 2021 of P15 per share. Therefore
the carrying amount of P Co.’s initial 20% investment is re-measured to P3,000,000 at December 31,
2021, with the P1,250,000 increase was recognized as a component of other comprehensive income. P
Co.’s statement of financial position on December 31, 2021 before acquiring the additional 60% was as
follows:
Cash 13,250,000
Investment in S Co. 3,000,000
16,250,000
Ordinary shares 15,000,000
Unrealized gain on equity investment - FVOCI 1,250,000
16,250,000

1. Assume P Co. measures non-controlling interest using proportionate value of the net identifiable
assets acquired, what is the amount of goodwill to be recognized in the consolidated financial
statements?
a. 3,000,000
b. 1,500,000
c. 6,500,000
d. 6,400,000

2. What is the balance of P Co.’s Investment in S Co. account in the consolidated financial
statements immediately after acquiring the additional 60% interest?
a. 1,250,000
b. 2,500,000
c. 0
d. 14,000,000

3. What is the balance of the retained earnings in P Co.’s consolidated financial statements?
a. 1,250,000
b. 650,000
c. 5,500,000
d. 6,400,000

4. What is the balance of the non-controlling interest in P Co.’s consolidated financial statements?
a. 1,900,000
b. 0
c. 2,500,000
d. 1,250,000

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PROBLEM 6: Blue Co. merged into Soda Corp. on June 30, 2022. In exchange for the net assets at fair
market value of Blue Co. amounting to P2,785,800 , Soda issued 68,000 ordinary shares at P36 par value,
with at a market price of P41 per share. Relevant data on ordinary shareholders’ equity immediately
before the combination show:
Soda Blue
Share capital 8,790,000 2,030,000
Share premium 3,834,000 782,000
Retained earnings (deficit) (1,516,000) 495,000
Out of pocket costs of the combination were as follows:
o Legal fees for the contract of business combination 174,700
o Audit fee for SEC registration of stock issue 198,400
o Printing costs of stock certificates 144,900
o Broker’s fee 135,000
o Accountant’s fee for pre-acquisition audit 161,000
o Other direct cost of acquisition 90,400
o General and allocated expenses 115,300
o Listing fees in issuing new shares 172,000
 Included as part of the acquisition agreement is the additional cash consideration of P163,000 in
the event Soda Co.’s share price will reach P32 per share by year-end.
 At acquisition date, the share price is P27.50, and increased by P4.80 by December 31, 2022.
 At acquisition date, there was only a low probability of reaching the target share price, so the fair
value of the additional consideration was determined at P74,000.
What is the amount of expense to be recognized in the statement of comprehensive income for
the year ended December 31, 2022?
a. 676,400
b. 765,400
c. 848,400
d. 937,400

PROBLEM 7: On January 1, 2021, Acquirer Inc. acquired all the assets and liabilities of Acquiree Inc.
by issuing 50,000 shares. On this date the fair value of Acquirer Inc.’s shares is P50 per share and its par
value is P10 per share. On January 1, 2021, the book value of Acquiree’s total assets is P2,500,000 and its
fair value is P3,000,000 while its total liabilities book value and fair value are P1,2000,000 and
P1,000,000 respectively.
Acquirer and Acquiree agreed that Acquirer shall issue additional 2,000 shares to the former owners of
Acquiree if the market price per share of Acquirer Inc.’s shares increases to P55 per share as of December
31, 2021.
On the date of acquisition, the contingent consideration that was probable and reasonably estimated
amounted to P100,000.
On December 31, 2021, the actual market price of Acquirer Inc.’s share is P60. The contingent
consideration is settled on March 1, 2022.

1. Which of the following is incorrect?

a. Acquirer will credit ordinary share amounting to P500,000 on the date of acquisition.
b. The goodwill from business combination is P600,000.
c. On March 1, 2022, Acquirer will credit ordinary share amounting to P100,000.
d. On March 1, 2022, the total share premium will decrease by P20,000.

2. Assuming the actual market price of Acquirer share on December 31, 2021 is P52. Which of the
following statements is incorrect?
a. The goodwill from business combination is P600,000.
b. The total share premium to be recorded on the January 1, 2021 from acquiring Acquiree is
P2,100,000
c. The ordinary share to be credited on January 1, 2021 is P500,000.
d. Acquirer will credit gain on extinguishment of contingent consideration on March 1, 2022
amounting to P100,000.
END
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