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Mock-Test Abc

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Denise Ramil
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0% found this document useful (0 votes)
72 views10 pages

Mock-Test Abc

Uploaded by

Denise Ramil
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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I.

True or False

1. The objective of IFRS 3 is to improve the relevance, reliability and comparability of the
information that a reporting entity provides in its financial statements about a business
combination and its effects (IFRS 3.1)

2. IFRS 3 applies to acquisition of an asset or a group of assets that constitute an integrated set of
activities and assets that is capable of being conducted and managed for the purpose of
providing goods or services to customers, among others.

3. In identifying a business combination, if the assets acquired are not a business, the reporting
entity shall account for the transaction or other event under IFRS 9 financial instruments [IFRS
3.3]

4. An entity shall account for each business combination by applying the acquisition method which
requires the acquirer; determining the acquisition date; recognizing and measuring the
identifiable assets acquired, the liabilities assumed and any non-controlling interest in the
acquiree; or recognizing and measuring goodwill or a gain from a bargain purchase. [IFRS 3.4 to
5]

5. The date which the acquirer obtains control of the acquiree is generally the date on which the
acquirer legally transfers the consideration, acquires the assets and assumes the liabilities of the
acquiree is the measurement period.

6. As of the acquisition date, the acquirer shall recognize, separately from goodwill, the identifiable
assets acquired, the liabilities assumed and any non-controlling interest in the acquiree [IFRS
10.3]

7. At the acquisition date, the acquirer shall transfer of designate the identifiable assets acquired
and liabilities assumed as necessary to apply other IFRSs subsequently. [IFRS 3.15]

8. The acquirer shall measure the identifiable assets acquired and liabilities assumed at their
acquisition-date fair value. [IFRS 3.18]

9. Exceptions to both the recognition and measurement principles include income taxes, employee
benefits, indemnification assets, leases in which the acquiree is the lessee and reacquired rights.

10. In cases of leases in which the acquiree is the lessee, acquirer is required to recognize right-of-
use assets and lease liabilities for leases for which the lease term (as identified in IFRS 16) ends
within 12 months of acquisition date. [IFRS 3.28 A]

11. The acquirer shall measure the value of reacquired right recognized as an intangible asset at its
acquisition-date fair values. [IFRS 3.29]
12. In a business combination in which the acquirer and the acquiree (or its former owners)
exchange only equity interests, the acquisition-date fair value of the acquiree’s equity interests
may be more reliably measurable than the acquisition-date fair value of the acquirer’s equity
interests. If so, the acquirer shall determine the amount of goodwill by using the acquisition
date fair value of the acquiree’s equity interest instead of the acquisition-date fair value of
equity interests transferred. [IFRS 3.33}

13. When the acquired identifiable assets of the acquiree excess the aggregate of consideration
transferred and the amount of non-controlling interest and previously held equity interest in the
acquiree, if any, the acquirer shall recognize the resulting gain in profit or loss on the acquisition
date in profit & loss statements.

14. IFRS 3 requires the use of acquisition method in the accounting for business combination, which
includes, measuring the consideration at fair value.

15. The consideration transferred in a business combination shall be calculated as the sum of the
acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by
the acquirer to former owners of the acquiree and the equity interest issued by the acquirer
[IFRS 3.37]

16. In a business combination achieved in stages, 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, if any. [ IFRS 3.24]

17. If the initial accounting for 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 its items for which the accounting is incomplete. [IFRS 3.45]

18. Acquisition-related costs are costs the acquirer incurs to effect a business combination. The
Acquirer shall account for acquisition-related costs as expenses in the periods in which the cost
are incurred and the services are received, except for costs to issue debt or equity securities.
[IFRS 3.53]

19. If the acquirer’s controlling interest is 80%, then the non-controlling interest in the acquirer is
20%.

20. Business combination is a transaction or other event in which an acquirer obtains control of one
or more businesses.
II. Multiple Choice

Case for 1 and 2: Polka corporation exchanges 100,000 shares of newly issued P1 par value common
stock with a fair market value of P20 per share for all of the outstanding P5 par value common stock of
Spot Inc. and Spot is then dissolved. Polka paid the following costs and expenses related to the business
combination:

• Costs of special shareholder’s meeting to vote on the merge – 12,000


• Registering and issuing securities – 10,000
• Accounting and legal fees – 18,000
• Salaries of Polka’s employees assigned to the implementation of the merger – 27,000.
• Costs of closing duplicate facilities -13,000

1. In the business combination of Polka and Spot


A. The costs of registering and issuing the securities are included as [art of the purchase price
for Spot.
B. The salaries of Polka’s employees assigned to the merger are treated as expenses.
C. all of the costs except those of registering and issuing the securities are included in the
purchase price of Spot
D. only the accounting and legal fees are included in the purchase price of Spot.

2. In the business combination of Polka and Spot


A. All of the items listed above are treated as expenses.
B. All of the items listed above except the cost of registering and issuing the securities are
included in the purchase price
C. The costs of registering and issuing the securities are deducted from the fair market value of
the common stock used to acquire spot.
D. Only the costs of closing duplicate facilities, the salaries of Polka’s employees assigned to
the merger, and the costs of the shareholders’ meeting would be treated as expenses.

3. Stock given as consideration for a business combination is valued at


A. Fair market value
B. Par value
C. Historical cost
D. None of the above

4. Which of the following situations best describes a business combination to be accounted for as
statutory merger?
A. Both companies in a business combination continue to operate as separate, but related,
legal entities
B. Only one of the combining companies survives and the other loses its separate identity.
C. Two companies combine to form a new third company, and the original two companies are
dissolved.
D. One company transfers assets to another company it has created.
5. A merger between a supplier and a customer is a(n)
A. Friendly combination
B. Horizontal combination
C. Unfriendly combination
D. Vertical combination

6. Goodwill represents the excess cost of an acquisition over the


A. Sum of the fair value assigned to intangible assets less liabilities assumed
B. Sum of the fair values assigned to tangible and identifiable intangible assets acquired less
liabilities assumed
C. Sum of the fair values assigned to intangibles acquired less liabilities assumed.
D. Book value of an acquired company

7. When an acquisition of another company occurs, IASB recommend disclosing all of the following
EXCEPT:
A. Goodwill assigned to each reportable segment
B. Information concerning contingent consideration a description of the arrangements and the
range of outcomes
C. Results of operations for the current period if both companies had remained separate
D. Qualitative description of factors that make up the goodwill recognized

8. Separately identified intangible assets are accounted for by amortizing:


A. Exclusively by using impairment testing
B. Based upon a pattern that reflects the benefits conveyed by the asset
C. Over the useful economic life less residual value using only the straight-line method
D. Over a period not to exceed a maximum of 40 year

9. In reference to the IASB disclosure requirements, which of the following is correct?


A. Information related to several minor acquisition may not be combined.
B. Firms are not required to disclose the business purpose for a combination
C. Notes to the financial statements of an acquiring corporation must disclose that the
business combination was accounted for by the acquisition method.
D. All of the above

10. Which of the following income factors should not be factored into an estimation of goodwill?
A. Sales for the period
B. Income tax expense
C. Extraordinary items
D. Cost of goods sold.
III. Practical problems

1. Pepper company paid P2,500,000 for the net assets of Salt Corporation and Salt wasthen dissolved.
Salt had no liabilities. The fair values of Salt's assets were P3,750,000. Salt’s only non-current assets
were land and buildings with book values of P100,000 and P520,000, respectively, and fair values of
P180,000 and P730,000, respectively. At what value will the buildings be recorded by Pepper?

____________________

2. On January 1, 2023, CC Co. acquired the identifiable net assets of DD, Inc. On this date, the
identifiable assets acquired, and liabilities assumed have fair values of P6,680,000 and P4,320,000,
respectively. CC Co. incurred the following acquisition related costs:
• legal fees, P48,000
• due diligence costs, P480,000
• general and administrative costs of maintaining an internal acquisition, P96,000

As consideration, CC Co. transferred 9,600 of its own shares with par value and fair value per
share of P400 and P500, respectively, to DD’s former owners. Costs of registering the shares
(previously issued and newly issued) amounted to P192,000 (24,000 pertains to listing fees of
previously issued shares).

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

2.2 How much is the total amount charged to profit or loss in relation to the transaction above?

3. Ignoring the consideration and issue costs above, but instead, CC Co. issued bonds with face value
and fair value of P3,800,000 before incurring the transaction costs. Transaction costs in issuing the
bonds amounted to P240,000. How much is the goodwill (gain on bargain purchase) on the business
combination. Indicate if goodwill or gain on bargain purchase.
3. On January 1, 2023, Drei Co. acquired all of the identifiable assets and assumed all of the liabilities of
BEG, Inc. by paying cash of ₱5,000,000. On this date, the identifiable assets acquired and liabilities
assumed have fair values of ₱7,680,000 and₱4,320,000, respectively. Terms of the agreement are as
follows:
• 20% of the price shall be paid on January 1, 2023 and the balance on December 31, 2024 (the
prevailing market rate on the same date is 10%), assume the present value of the balance is
P3,173,376
• Acquirer shall also transfer its piece of land with book and fair value of P2,400,000 and
P1,440,000, respectively.

Included in the liabilities assumed is an estimated warranty liability. The carrying amount and fair
value of the warranty liability amounted to 576,000 and 468,000, respectively. The acquire
guarantees that the warranty liability would only be settled 80% of its carrying amount

How much is the goodwill (gain on bargain purchase) on the business combination. Indicate if
goodwill or gain on bargain purchase.

4. Zyxel corporation acquired all the assets and liabilities of Globe Tattoo Corporation by issuing shares
of its common stock On January 1, 2023. Partial balance sheet date for the companies prior to the
business combination and immediately following the combination is provided:
Zyxel Book Value Globe Book Value Combination
Cash 65,000 25,000 90,000
Accounts Receivable 72,000 20,000 102,000
Inventory 33,000 45,000 73,000
Building and Equipment (net) 400,000 150,000 750,000
Goodwill - -
Total Assets 570,000 240,000

Accounts payable 50,000 25,000 75,000


Bonds payable 250,000 100,000 350,000
Common Stock, P5 par 100,000 25,000 200,000
Additional paid-in capital 65,000 20,000 365,000
Retained Earnings 105,000 70,000
Total Liabilities and Equity 570,000 240,000

4.1 What number of shares did Zyxel issue for his acquisition?
4.2 At what price was Zyxel stock trading when stock was issued for this acquisition?
4.3 What was the fair value of the net assets held by Globe Tattoo at the date of combination?
4.4 What amount of goodwill will be reported by the combined entity immediately following the
combination?
4.5 What amount of retained earning will be reported by the combined entity immediately following
the combination?

5. Entity A acquires all the identifiable assets and assumes all the liabilities of Entity B for P250. Entity
B’s identifiable assets and liabilities have fair values of P200 and P120, respectively.
All items below are independent. How much is the goodwill (gain on bargain purchase) on the
business combination. Indicate of goodwill or gain on bargain purchase.

5.1 Entity B incurred legal fees of P20 and this is to be reimbursed by Entity A. entity A estimates a
liquidation cost of P40. Entity B has an intangible asset of customers and subscriber list, valued at P30
fair value, and terms include confidentiality prohibiting Entity A from selling, leasing and exchanging
information about its customers.

5.2 Entity B is renting out a property to Entity A, and the terms of the lease compared with market
terms are unfavorable with fair value differential of P10. Included in the consideration is a property
valued at P20 fair value given to Entity B which will be used in the operations after the business
combination.
5.3 Entity B’s assets and liabilities have carrying amounts of P250 and P100, respectively. Fair value
adjustments to the acquired assets and liabilities have deffered tax consequences but do not affect
their tax bases. Income tax rate is 25%

6. On July 1, 2022, ABC Co. acquired all the identifiable assets and assumed all the liabilities of YZ for
P2,000,000. On this date, XYZ’s assets and liabilities have fair value of 1,500,000 and P900,000.

The assets acquired include a building property which was assigned a provisional amount of
P800,000 because the appraisal is not yet complete by the time ABC authorized for issue its
December 31, 2022, financial statements. The building was tentatively assigned a 10-year useful life
and depreciated using straight line method.

All items below are independent. Provide what is required.

6.1 On February 1, 2023, ABC was notified by the assessor issued a report that the final valuation of the
building is no longer obtainable, and ABC has acknowledged the said report. However, on April 30, 2023,
the assessor was able to provide a valuation report for the building (FV of 600,000 on July 1, 2022) to
ABC and admitted its negligence in the previous report issued. On what date the measurement period
ended or ends?

_____________________________

6.2 On February 1, 2023, ABC received the valuation report for the building. The fair value of the
building property is P1,000,000 on July 1, 2022 and P1,200,000 on December 31, 2022. Its remaining
useful life is 5 years from business combination date.

How much is the adjustment made to Retained earnings in 2023. Indicate if debit or credit.
7. On January 1, 2021, ABC Co. acquired 15% ownership interest in XYZ, Inc for P200,000. ABC co.
classified the investment as elf for trading securities. On January 1, 2023, ACC Co. acquired
additional 65% ownership in XYZ, Inc. for 1,000,000. Relevant information follows:
• The 15% previously held interest has a carrying amount of P150,000 on December 31, 2022
and fair value of P220,000 on January 1, 2023.
• XYZ, Inc.’s identifiable assets and liabilities have fair values of P900,000 and P350,000,
respectively.
• Prior to the business combination (in 2022), ABC Co. is the defendant on a pending patent
infringement suit filed by XYZ, Inc. The fair value of settling the pending lawsuit is P100,000.
ABS recognized a provision of P130,000 for said lawsuit.
• ABC elected to measure the NCI using partial goodwill method.

7.1 How much is the total gain or loss on settlement of the lawsuit? Explain your answer.

__________________

7.2 How much is the goodwill (gain on bargain purchase) on the business combination. Indicate of
goodwill or gain on bargain purchase.

8. On January 1, 2022, ABC Co. issued 10,000 shares with P20 par value per share and fair value of P100
per share in exchange for XYZ, Inc.’s identifiable assets and liabilities having fair values of P900,000 and
P350,000 respectively. In addition, ABC agrees to issue additional 1,000 shares to the former owners of
XYZ if the market price of ABC’s share increase to P120 per share by December 31, 2022. The fair value
of the contingent consideration as of January 1, 2022, is P200,000.

8.1 If the market price of ABC’s shares on December 31, 2022, is P120, how much is the increase in share
capital of ABC Co. upon the settlement on contingent consideration?
8.2 If the market price of ABC’s shares on December 31, 2022, is P120. How much is the increase in
shareholders’ equity of ABC Co. upon the settlement on contingent consideration?

9. ABC Co. is contemplating on acquiring XYZ, Inc. The following information was gathered through a due
diligence audit:

• Actual earnings of XYZ, Inc for the past 4 years are


o 2019: 1,000,000
o 2020: 1,200,000
o 2021: 1,500,000
o 2022: 800,000
• Earnings in 2021 include an extraordinary income of P250,000
• The fair value of XYZ’s net assets as of December 31, 2022 is P10,500,000.
• The industry average rate of return is 9%

Determine the goodwill using capitalization of average excess earnings, using the capitalization rate of
25%

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