Multiple Choice Problems
Multiple Choice Problems
1. c
Acquisition-related costs. Acquisition-related costs are costs the acquirer incurs to effect a
business combination. Those costs include finder’s fee; advisory, legal, accounting, valuation
and other professional or consulting fees; general administrative costs, including the costs of
maintaining an internal acquisitions department; and costs of registering and issuing debt and
equity securities. Under PFRS 3, the acquirer is required to recognize acquisition-related costs
as expenses in the periods in which the costs are incurred and the services are received, with
one exception, i.e. the costs to issue equity securities are recognized as debit to APIC/Share
premium account.
2. b -
Consideration transferred:
Cash to former shareholders P 5,000,000
Market value of stock to former shareholders 2,000,000
Earnout (Prob. PV of Cash Contingent Consideration) P4,000,000 x .25 x .69444 _____694,440
Consideration transferred/Total acquisition cost P 7,694,440
Less: MV
Current assets P 2,100,000
Property, plant & equipment 3,000,000
Identifiable intangibles on DJ’s books 7,000,000
Previously unreported intangibles- advanced
production technology 170,000
Noncompetition agreements 70,000
Customer contract 50,000
Current liabilities ( 1,000,000)
Long-term debt ( 5,800,000)
Previously unreported warranty contractual
Obligations ( 280,000) __5,310,000
Positive Excess: Goodwill P 2,384,440
3. b – refer to No. 2
4. c -
Assets:
DJ: P62,400,000 + P2,100,000 + P3,000,0000 + P7,000,000 + P170,000 + P70,000
+ P50,000 + P2,384,440 – P400,000 (direct costs) – P200,000 (costs to
issue) – P5,000,000 (cash consideration) + ( unreported intangibles:
P170,000 + P70,000, + P50,000) – P290,000 cash paid for the unreported intangibles P71,574,440
5. b -
Liabilities:
DJ: P6,500,000 + P30,000,000 + P1,000,000 + P5,800,000 + P280,000, contractual
Obligations + P694,440, PV of Cash Contingent Consideration P44,274,440
6. b -
Stockholders’ Equity:
Common stock: (P200,000 + (50,000 shares x P10, par)] P 700,000
APIC (P22,000,000 + {50,000 shares x (P40 – P10]}) - P200,000, costs to issue 23,300,000
RE [P4,000,000 – P400,000, direct costs] 3,600,000
AOCI 100,000
Treasury stock ( 400,000)
P27,300,000
Therefore:
Asset (No. 4) P71,574,440
Liabilities (No. 5) P44.274,440
SHE (No. 6) 27,300,000
Total Liabilities and SHE = Total Assets P71,574,440
7. a -
Consideration transferred:
Cash paid to Turquoise Water P 85,000,000
New stock issued, 100,000 shares, P0.50 par, fair value at acquisition 5,000,000
Earnings contingency, to be paid in three years, present value ___2,000,000
Consideration transferred/Total acquisition cost P 92,000,000
Less: MV of Assets and Liabilities:
Current assets P 800,000
Plant & equipment 10,000,000
Patents and trademarks 20,000,000
Bottlers’ franchise rights 5,000,000
Signed customer’s contracts for consulting projects 1,000,000
Internet domain names 3,000,000
Customer order backlogs 1,500,000
Employment contracts 500,000
Registered company name 1,000,000
Well-publicized internet domain name 2,000,000
Trade dress 1,200,000
Proprietary databases of industry data 800,000
Trade secrets 400,000
Current liabilities ( 400,000)
Long-term debt ( 41,000,000) __5,800,000
Positive Excess: Goodwill P 86,200,000
8. a – refer to No. 7
9. a -
Total Assets
DPSG’s Assets before acquisition P 150,000,000
Less: Cash paid for acquisition 85,000,000
Cash paid for consulting 12,000,000
Cash paid for stock registration 600,000
Add: Assets acquired, fair value
Current assets 800,000
Plant & equipment 10,000,000
Patents and trademarks 20,000,000
Bottlers’ franchise rights 5,000,000
Signed customer’s contracts for consulting projects 1,000,000
Internet domain names 3,000,000
Customer order backlogs 1,500,000
Employment contracts 500,000
Registered company name 1,000,000
Well-publicized internet domain name 2,000,000
Trade dress 1,200,000
Proprietary databases of industry data 800,000
Trade secrets 400,000
Goodwill ___86,200,000
P 185,800,000
10. c -
Total Liabilities
DPSG’s Liabilities before acquisition (P1,000,000 + P10,000,000) P 11,000,000
Earnings contingency, to be paid in three years, present value 2,000,000
Liabilities assumed:
Current liabilities 400,000
Long-term liabilities _41,000,000
P 54,400,000
11. c -
Stockholders’ Equity:
Common stock: (P77,200,000 + (100,000 x P.50)] P 77,250,000
APIC (P36,200,000 + {P5,000,000 – (100,000 x P.50)} - P600,000, costs to issue 40,550,000
RE [P20,800,000 – P12,000,000 direct costs] 8,800,000
AOCI 5,500,000
Treasury stock _( _ 700,000)
P131,400,000
14. c
Consideration transferred;
Common shares: 81,600 shares x P12 P 979,200
Add: Contingent consideration ___234,000
P1,213,200
Less: Fair value of identifiable assets acquired & liabilities assumed __ 835,740
Goodwill P 377,460
15. d - refer to No. 4 as a matter of interpretation on the term ‘expense’
Consideration transferred;
Common shares: 45,000 shares x P12 P 540,000
Add: Contingent consideration ___234,000
P 774,000
Less: Fair value of identifiable assets acquired & liabilities assumed __ 835,740
Bargain purchase gain P ( 61,740)
Since the target was met (meaning the actual net income was greater than the targeted
net income of P1,140,000), therefore the actual payment of the contingent consideration
were as follows :
Estimated liability on contingent consideration………….. 234,000
Loss/expense on contingent contingent consideration. 312,000
Cash…………………………………………………………. 546,000
17. c
Acquisition related-expenses 20,000
Accounts Receivable 180,000
Inventory 400,000
Land 50,000
Building 60,000
Equipment 70,000
Patent 20,000
Current Liabilities 70,000
Long-term Debt 160,000
Cash 520,000
Gain on Acquisition 50,000
18. c
Consideration transferred;
Common shares: 9,600 shares x P500 P4,800,000
Less: Fair value of identifiable assets acquired & liabilities assumed
(P7,680,000 – P4,320,000) 3,360,000
Positive excess - goodwill P1,440,000
19. b (P48,000 + P480,000 + P96,000 + P24,000)
20. c
Consideration transferred;
PV or FV of Bonds P4,800,000
Less: Fair value of identifiable assets acquired & liabilities assumed
(P7,680,000 – P4,320,000) 3,360,000
Positive excess - goodwill P1,440,000
21. a - Consideration transferred : FMV of shares issued by Robin (80,000 sh ×P28) = P2,240,000
22. b - P520,000
Consideration transferred P2,240,000
Less: Fair value of Hope’s net assets (P2,720,000+P200,000–P1,200,000) 1,720,000
Goodwill P 520,000
23. d
Accounts Receivable (net of P33,000 allowance) 198,000
Inventory 330,000
Land 550,000
Buildings and Equipment 1,144,000
Goodwill 848,000
Current Liabilities 275,000
Bonds Payable 450,000
Premium on Bonds Payable (P495,000 - P450,000) 45,000
Preferred Stock (15,000 x P100) 1,500,000
Common Stock (30,000 x P10) 300,000
PIC - par (P25 - P10) x 30,000 450,000
Cash 50,000
24. c
Cash 1,400
Receivables 650
Investments 1,000
Maintenance supplies 400
Flight equipment 12,000
International routes 500
Leases 800
Goodwill 450
Current liabilities 3,200
Long-term debt 6,000
Cash 8,000
24. c
Accounts Receivable (net) 220,000
Inventory 320,000
Land 1,508,000
Buildings 1,392,000
Goodwill 230,000
Accounts Payable 270,000
Note Payable 600,000
Cash 2,600,000
Estimated Liability for Contingent Consideration 200,000
Or, alternatively:
Accounts Receivable 240,000
Inventory 320,000
Land 1,508,000
Buildings 1,392,000
Goodwill 30,000
Allowance for Uncollectible Accounts 20,000
Accounts Payable 270,000
Note Payable 600,000
Cash 2,600,000
Goodwill 200,000
Estimated Liability for Contingent Consideration 200,000
1/1/20x6:
Estimated Liability for Contingent Consideration 200,000
Gain on Contingent Consideration 200,000
25. b (P7,680,000 – P4,320,000) = P3,360,000. It should be noted that possible future costs
connected with restructuring or exit activities that may be planned by the acquirer are not
part of the acquisition and are expensed in future periods, (refer to page 101 of the book No.
6)
27. b
Consideration transferred;
Cash (down payment): P4,800,000 x 20% P 960,000
Balance: PV of an annuity of P1 for 2 periods:
[0.8264 x (P4,800,000 x 80%)] 3,173,376
Land (fair value) _1,440,000
P5,573,376
Less: Fair value of identifiable assets acquired &
liabilities assumed:
Identifiable assets, fair value P7,680,000
Less: Liabilities P4,320,000
Less: Adjustment – warranty liability to
fair value/present value
P480,000 – P468,000 ___12,000 4,308,000 3,372,000
Positive excess – goodwill P2,201,376
NO. 28 – 32 – NT COMPANY – OTG INC
28. c
In accounting for the combination of NT and OTG, the fair value of the acquisition is allocated
to each identifiable asset and liability acquired with any remaining excess attributed to
goodwill.
24. d
Entry to record the acquisition on PP’s records:
Cash 85,000
Receivables and inventory 180,000
PPE 600,000
Trademarks 200,000
IPRD 100,000
Goodwill 77,500
Liabilities 180,000
Common Stock (50,000 xP5) 250,000
Paid-In Capital in excess of par (50,000 xP15) 750,000
Contingent performance obligation 62,500
Note: The following amounts will appear in the income statement and statement of retained
earnings after business combination:
PP Inc.
Revenues (1,200,000)
Expenses (P875,000 + P15,000) 890,000
Net income (310,000)
Retained earnings, 1/1 (950,000)
Dividends paid 90,000
Retained earnings, 12/31 *(1,170,000)
* or, P1,185,000 – P15,000 = P1,170,000
25. c – refer to No. 24 (P400,000 + P750,000 – P9,000 = P1,141,000)
26. d – refer to No. 24
27. b – refer to No. 24
28. b – refer to No. 24
29. d – refer to No. 24 [P77,500 + (P75,000 – P62,500)] = P90,000
30. b – refer to No. 29. It should be noted that goodwill can only be revised once or on instalment
fashion (as long as existing on the date of acquisition), since it is way past the one-year period
even though the facts and events exists on the date of acquisition have no more bearing on
the adjustment to goodwill and then it is considered as subsequent event. So, goodwill remains
at P90,000, but the liability will be adjusted to P80,000 by increasing the liability account by
P5,000, the entry would be
Loss on contingent consideration…………………………………. 5,000
Contingent performance obligation………………………. 5,000
31. a
10,000,000 x P5 x 0.20 P 10,000,000
15,000,000 x P5 x 0.10 ___7,500,000
P 17,500,000
17,500,000/(1.12)4 P 11,121,566
33. a
35. c
Fair value of Subsidiary
Consideration transferred………………………………………………………P 200 million
Add: Fair value of contingent consideration……………………………… 10 million
Fair value of subsidiary………………………………………………………… P 210 million
Less: Fair value of identifiable assets and liabilities of Homer...............… 116 million
Goodwill…………………………………………………………………………… P 94 million
Note: The consideration transferred should be compared with the fair value of the net
assets acquired, per PFRS3 par. 32. The contingent consideration should be measured at
its fair value at the acquisition date; any subsequent change in this cash liability comes
under PAS 39 Financial instruments: recognition and measurement and should be
recognized in profit or loss, even if it arises within the measurement period. See PFRS3
pars. 39, 40 and 58.
NO. 36 – AN ACQUIRER
36. b
37. b
NO. 38-41 – SALT COMPANY – PAIL COMPANY
42. c
Goodwill 400,000
Estimated lawsuit liability 400,000
43. b
Loss on lawsuit 400,000
Estimated lawsuit liability 400,000
44. b
Assets 570,000,000
Liabilities 100,000,000
Capital stock 400,000,000
Cash 50,000,000
PIC-stock contingency 20,000,000
46. c
The contingency was originally recorded in equity at the amount of P20,000,000. However,
changes in the value of stock price contingencies do not affect the acquisition price or
income. Any changes in value are adjustments in equity.
47. b
48. c
49. c
50. b – [(P47 x 12,000 shares) – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000)
= P104,000
51. d
APIC: P20,000 + [(P42 – P5) x12,000 = P464,000
Retained earnings: P160,000, parent only
52. b
Inventory: PP230,000 + P210,000 = P440,000
Land: P280,000 + P240,000 = P520,000
53. b – [P480,000 – (P70,000 + P210,000 + P240,000 + P270,000 + P90,000 – P420,000)] = P20,000
56. c
Depreciation expense:
Building, at book value (P200,000 – P100,000) / 10 years P 10,000
Building, undervaluation (P130,000, fair value
– P100,000, book value) / 10 years 3,000
Equipment, at book value (P100,000 – P50,000) / 5 years 10,000
Equipment, undervaluation (P75,000, fair value
- P50,000, book value) / 5 years 5,000
Total depreciation expense= P 28,000
NO. 57-58 – NORTH COMPANY – PRAIRIE COMPANY
59. c
A bargain purchase is a business combination in which the net fair value of the identifiable
assets acquired and liabilities assumed exceeds the aggregate of the consideration
transferred.
It should be noted that bargain purchase gain would arise only in exceptional
circumstances. Therefore, before determining that gain has arisen, the acquirer has to:
1. Reassess whether it has correctly identified all of the assets acquired and all of the
liabilities assumed. The acquirer should recognize any additional assets or liabilities
that are identified in that review.
2. Any balance should be recognized immediately in profit or loss.
62. c
The consideration transferred should be compared with the fair value of the net assets
acquired, per PFRS3 par. 32. The gain of P8 million results from a bargain purchase and should
be recognized in profit or loss, per PFRS3 par. 34.
63. c
Consideration transferred:
Shares: 2/3 x 60,000 x P3.20 128,000
Cash
Accounts payable 45,100
Mortgage and interest 44,000
Debentures and premium 52,500
Liquidation expenses 2,400
144,000
Cash held (12,000) 132,000
260,000
Less: Fair value of assets and liabilities acquired:
Accounts receivable P34,700
Inventory 39,000
Freehold land 130,000
Buildings 40,000
Plant and equipment 46,000 289,700
Bargain Purchase Gain 29,700
64. d
PFRS 3 (2008) par. 18 requires an identifiable assets and liabilities assumed are measured
at their acquisition-date fair values.
65. c
Selling price P 110,000
Less: Book value of Comb (P50,000 + P80,000 + P40,000
- P30,000) 140,000
Loss on sale of business by the acquiree (Comb) P( 30,000)
+P200,000)
72. d – P317,760
Consideration transferred;
Cash P 392,640
Less: FV of net assets acquired:
Assets, fair value (same with book value) P1,198,080
Add (deduct) adjustments:
Obsolete merchandise ( 76,800)
Unrecorded delivery van 230,400
Balancing figure (decrease in the FV of
machinery and equipment ( 96,960)
P1,254,720
Less: Liabilities __683,520 ___571,200
Negative excess – bargain purchase gain P( 178,560)
Therefore, the fair value of machinery and equipment would be P317,760, computed as
follows:
BV of machinery and equipment.................................................P 414,720
Decrease in fair value of machinery and equipment................... 96,960
FV of machinery and equipment..................................................P 317,760
73. b
Consideration transferred;
Cash P1,244,400
Less: FV of net assets acquired:
Assets, fair value (same with book value) P1,198,080
Add (deduct) adjustments:
Obsolete merchandise ( 76,800)
Unrecorded delivery van 230,400
Balancing figure (increase in the FV of
machinery and equipment _ 93,840
P1,445,520
Less: Liabilities __683,520 ___762,000
Positive excess – goodwill P 482,400
Therefore, the fair value of machinery and equipment would be P713,640, computed as
follows:
BV of machinery and equipment.................................................P 619,800
Increase in fair value of machinery and equipment.................. . 93,840
FV of machinery and equipment.................................................P 713,640
74. c
Consideration transferred;
Cash P 450,000
Shares 2,058,000
Contingent consideration __177,600
P2,685,600
Less: Fair value of identifiable assets acquired &
liabilities assumed:
Identifiable assets, fair value P2,580,000
Less: Overvaluation of furniture and fixtures ___34,800
P2,545,200
Less: Liabilities __636,000 1,909,200
Positive excess – goodwill (unidentifiable asset) P 776,400
75. c
Books of Acquirer (XX Company):
Assets of Acquirer (XX Company) at book value P5,868,000
Less: Cash paid __450,000 P5,418,000
Assets of Acquiree (YY Company) at fair value:
Book value P2,580,000
Overvaluation (refer to No. 74) ( 34,800) _2,545,200
Total Identifiable Assets P7,963,200
76. b
Increase in liabilities in the books of Acquirer:
Liabilities of acquiree (YY) P 636,000
Accrued expenses 33,600
Contingent consideration __177,600
P 847,200
77. c
Consideration transferred;
Cash P20,940,000
Contingent consideration ___561,600
P21,501,600
Less: FV of net assets acquired:
Net assets, provisional fair value P20,178,000
Less: Adjustments within the measurement period (the
term “temporary/provisional” means that there is an
existing fact on the date of acquisition and changes
in instalment or multiple fashion can be made: (1,128,000) _19,050,000
Positive excess – goodwill P 2,451,600
78. c
Par value of shares outstanding before issuance P200,000
Par value of shares outstanding after issuance 250,000
Par value of additional shares issued P 50,000
Divided by: No. of shares issued* __12,500
Par value of common stock P 4
79. a
Consideration transferred: Shares – 12,500 shares P250,000
Less: Goodwill 56,000
Fair value of identifiable net assets acquired P194,000
80. a –
Blue Town:
Stockholders’ equity before issuance of shares (P700,000 + P980,000) P1,680,000
Issued shares: 34,000 shares x P35 1,190,000
Consolidated SHE/Net Assets P2,870,000
81. d
82. c
Common stock – combined…………………………………………………………P 160,000
Common – Acquirer Zyxel………………………………….. …………………….… 100,000
Common stock issued………………………………………………………………...P 60,000
Divided by: Par value of common stock………………………………………….P 2
Number of Zyxel shares to acquire Globe Tattoo………………………….....… 30,000
83. d
Paid-in capital books of Zyxel (P100,000 + P65,000)………………………........P 165,000
Paid-in capital in the combined balance sheet
(P160,000 + P245,000)…………………………………………………….… 405,000
Paid-in capital from the shares issued to acquire Globe Tattoo…………... P 240,000
Divided by: No. of shares issued (No. 31)……………………………………..... 30,000
Fair value per share when stock was issued………………………………….... P 8
Or,
Par value of common stock of Zyxel……………………………………… P 2
Add: Share premium/APIC per share from the additional
issuance of shares (P245,000 – P65,000)/30,000…………............ 6
Fair value per share when stock was issued……………………………....... P 8
84. b
Net identifiable assets of Zyxel before acquisition:
(P65,000 + P72,000 + P33,000 + P400,000 – P50,000
- P250,000)……………………………………………………………………. P270,000
Net identifiable assets in the combined balance sheet:
(P90,000 + P94,000 + P88,000 + P650,000 – P75,000 - P350,000)….......... 497,000
Fair value of the net identifiable assets held by Globe Tattoo
at the date of acquisition..…………………………………………………….. P227,000
85. a
Consideration transferred (30,000 shares x P8)………………………………… P240,000
Less: Fair value of net identifiable assets acquired (No. 49)……………….... 227,000
Goodwill……………………………………………………………………………….. P 13,000
86. c
Retained earnings:
Acquirer – Zyxel (at book value)……………………………………….... P105,000
Acquiree– Globe Tattoo (not acquired)……………………………… __ 0
P105,000
It should be noted that, there was no bargain purchase gain and acquisition-related costs
which may affect retained earnings on the acquisition date.
87. a
II ____ _____JJ _ ____Total____
Average annual earnings P 46,080 P 69,120 P 115,200
Divided by: Capitalized at _ 10%
Total stock to be issued P1,152,000
Less: Net Assets (for P/S) 864,000
Goodwill (for Common Stock) P 288,000
Preferred stock (same with Net Assets):
864,000/P100 par 8,640 shares