NEGROS ORIENTAL STATE UNIVERSITY M.

NAPAROTA, CPA
College of Business Administration ACCY 304 (Chapter Exam)
Accountancy Department

Name: ___________________________________ Section: ____________ Score: ___________

Instruction: Encircle the corresponding letter of the correct answer.

For items 1 and 2:

On December 1, 2022, BOW Corporation acquired all the assets and assumed all the liabilities of WAO
Corporation by issuing 1,000,000 of its own shares. The quoted share price of BOW Corporation and
WAO Corporation are P40 and P36 per share respectively. The following information were extracted
from the accounting records of the concerned companies on that day:

BOW Corporation WAO Corporation

Book Value Fair Value Book Value Fair Value
Current assets P25,000,000 P25,000,000 P8,000,000 P9,000,000
Non-current assets 26,000,000 25,000,000 22,000,000 26,000,000
Liabilities 15,500,000 15,500,000 5,000,000 5,000,000
Share Capital, (P10 par) 20,000,000 10,000,000
Share Premium 3,500,000 1,000,000
Retained Earnings 12,000,000 14,000,000

BOW Corporation incurred the following out of pocket costs related to the acquisition:
• Finder’s fees, P25,000
• Cost of SEC registration, P10,000
• Legal fees to formalize the business combination, P35,000
• Printing and issuing cost of new stock certificates, P5,000
• Indirect costs allocated to the business combination, P20,000
1. How much is the balance of retained earnings of BOW Corporation immediately after the business
combination?

A. 11,920,000
B. 11,980,000
C. 13,920,000
D. 13,980,000

2. How much is the goodwill arising from business combination?

A. 10,000,000
B. 10,025,000
C. 10,040,000
D. 10,060,000

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NEGROS ORIENTAL STATE UNIVERSITY M. NAPAROTA, CPA
College of Business Administration ACCY 304 (Chapter Exam)
Accountancy Department

For items 3 and 4:

On January 2, 2022, the statements of financial posistion of PUM CO and KIN CO prior to combination
are as follows:
PUM KIN
Cash 675,000 22,500
Inventories 450,000 45,000
PPE, net 1,125,000 157,500
Total 2,250,000 225,000

Current liabilities 135,000 22,500

Capital stock, P100 par 225,000 22,500
APIC 675,000 45,000
Retained earnings 1,215,000 135,000
Total 2,250,000 225,000

The fair value of KIN CO’s equipment is P229,500

3. Assuming PUM acquired all of the outstanding stocks of KIN resulting to a goodwill of P99,000,
contingent consideration is P54,000, how much is the price paid (consideration transferred) to acquire
the stocks?

A. 472,500
B. 427,500
C. 367,500
D. 319,500

4. Assuming PUM acquired 70% of the outstanding common stock of KIN for P157,500 and non-
controlling interest is measured at fair value of P91,500, how much is the goodwill or (gain on
acquisition)?

A. (25,500)
B. 34,650
C. 25,500
D. (34,650)

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NEGROS ORIENTAL STATE UNIVERSITY M. NAPAROTA, CPA
College of Business Administration ACCY 304 (Chapter Exam)
Accountancy Department

For items 5 and 6:

On January 1, 2022, CC Co. acquired the identifiable net asset of DD, Inc. On this date, the identifiable
assets acquired and liabilities assumed have fair values of P7,680,000 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 (P24,000 pertains to listing fees of previously issued shares).

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

A. 667,200
B. 720,000
C. 1,440,000
D. 1,300,000

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

A. 624,200
B. 648,000
C. 816,000
D. 750,000

For items 7 and 8:

On December 31, 2022, Add-On Company acquired 100 percent of Venus Corporation common stock
for P300,000. Balance sheet information of Venus just prior to the acquisitions is given here:

Cash and receivables 35,000

Inventory 75,000
Land 100,000
Buildings and Equipment (net) 220,000
Total assets 430,000
Accounts payable 65,000
Bonds payable 150,000
Common stock (P1 par) 100,000
Retained earnings 115,000
Total liabilities and equity 430,000

At the date of the acquisition, Venus’ net assets and liabilities approximated fair value, except for
inventory, which had a fair value of P60,000, land which had a fair value of P125,000, and building
and equipment (net), which had a fair value of P250,000.

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NEGROS ORIENTAL STATE UNIVERSITY M. NAPAROTA, CPA
College of Business Administration ACCY 304 (Chapter Exam)
Accountancy Department

7. What amount of inventory will be included in the consolidated balance sheet immediately following
the acquisition?

A. 15,000
B. 45,000
C. 60,000
D. 75,000

8. What amount of goodwill will be included in the consolidated balance sheet immediately following
the acquisition?

A. 15,000
B. 30,000
C. 45,000
D. 85,000

For items 9 to 11:

Loco Company bought the net assets of Coco Company by issuing 100,000 shares with P20 par value.
The fair value of the shares was P4,800,000. Immediately before the acquisition, the following balances
were ascertained for Coco Company:

Book Value Fair Value

Current assets 2,000,000 2,500,000
Noncurrent assets 3,000,000 4,400,000
Liabilities 600,000 1,700,000
Ordinary shares 4,000,000
Retained earnings 400,000

Loco Company also incurred the following costs:

• Professional fees to arrange business combination P50,000.
• SEC registration of newly issued shares P20,000.
• Printing and issuing of stock certificates P10,000.
9. What amount should Loco Company report as result of the business combination?

A. 400,000 goodwill
B. (400,000) gain on bargain purchase
C. 600,000 goodwill
D. (600,000) gain on bargain purchase

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NEGROS ORIENTAL STATE UNIVERSITY M. NAPAROTA, CPA
College of Business Administration ACCY 304 (Chapter Exam)
Accountancy Department

10. What amount should Loco Company record as additional paid in capital after acquisition?

A. 2,780,000
B. 2,800,000
C. 2,770,000
D. 2,720,000

11. What amount should Loco Company report as net increase (decrease) in the retained earnings
after acquisition?

A. 400,000
B. 320,000
C. (50,000)
D. 350,000

12. On January 1, 2022, Entity A acquired 80% of the outstanding shares of Entity B for a cash
consideration of P1,185,000. On this date, the book value of the shareholders' equity of Entity B was
P1,350,000. At the acquisition date, the inventory of Entity B was understated by P75,000 and the
equipment was understated by P150,000. The acquisition date fair value of the noncontrolling interest
was P300,000. What amount should Entity A report as result of the business combination?

A. 90,000 gain on bargain purchase

B. 90,000 goodwill
C. 75,000 gain on bargain purchase
D. 75,000 goodwill

13. On June 30, 2021, Point Co. acquired 80% of the outstanding shares of Sharp Co. for P3,125,000. On
this date Sharp Co.’s net assets had book value of P5,000,000 but with a fair value of P4,062,500. The
liabilities of Sharp Co have a book and fair value of P250,000. Point Co. paid P62,500 to a CPA-Lawyer
who facilitated the combination. The fair value of the non-controlling interest on this date was P750,000.
Compute the goodwill (gain from bargain price) arising from the above combination

A. 62,500
B. 75,000
C. (62,500)
D. (125,000)

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NEGROS ORIENTAL STATE UNIVERSITY M. NAPAROTA, CPA
College of Business Administration ACCY 304 (Chapter Exam)
Accountancy Department

14. Sam Corp acquired the identifiable assets of Prince Corp by issuing ordinary shares with par value
of P20. Sam Corp. ordinary shares are currently traded at P30 per share. Prince Corp. statement of
financial position before business combination follow:

Cash 1,000,000 Liabilities 600,000

Other current assets 2,000,000 Ordinary share 2,400,000
Property, plant and equipment 2,500,000 Share premium 600,000
Retained Earnings 1,900,000
Total 5,500,000 Total 5,500,000

Sam Corp other current assets are appraised to increase to P2,200,000; and its property plant and
equipment is undervalued by P500,000. The liabilities are fairly valued. What is the total shares issued by
Sam Corp. to acquire Prince Corp to recognize a goodwill of P400,000?

A. 200,000 shares
B. 300,000 shares
C. 260,000 shares
D. 350,000 shares

15.The Moon Company acquired a 70% interest in The Swan Company for P1,420,000 when the fair
value of Swan's identifiable assets and liabilities was P1,200,000. Moon acquired a 65% interest in The
Homer Company for P300,000 when the fair value of Homer's identifiable assets and liabilities was
P640,000. Moon measures non-controlling interests at the relevant share of the identifiable net assets
at the acquisition date. Neither Swan nor Homer had any contingent liabilities at the acquisition date
and the above fair values were the same as the carrying amounts in their financial statements. Annual
impairment reviews have not resulted in any impairment losses being recognized.

Under PFRS 3 Business combinations, what figures in respect of goodwill and of gains on bargain
purchases should be included in Moon's consolidated statement of financial position?

a. Goodwill: P580,000; Gains on the bargain purchases: P116,000

b. Goodwill: Nil or zero; Gains on the bargain purchases: P116,000
c. Goodwill: Nil or zero; Gains on the bargain purchases: Nil or zero
d. Goodwill: P580,000; Gains on the bargain purchases: Nil or zero

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NEGROS ORIENTAL STATE UNIVERSITY M. NAPAROTA, CPA
College of Business Administration ACCY 304 (Chapter Exam)
Accountancy Department

For items 16 to 18:

DJ pays P5,000,000 in cash and issues 50,000 shares of stock with a par value of P10/share and fair value
of P40/share to acquire Builder’s assets and liabilities on January 1, 2022. Balance sheets just prior to
the acquisition are as follows:
DJ Builders
Book value Book value Fair value
Current assets P 7,000,000 P 1,000,000 P2,100,000
Property, plant & equipment, net 55,000,000 5,000,000 3,000,000
Identifiable intangible assets 400,000 2,000,000 7,000,000
Total assets P62,400,000 P 8,000,000
Current liabilities P 6,500,000 P 800,000 P1,000,000
Long-term debt 30,000,000 6,000,000 5,800,000
Common stock, par value 200,000 700,000
Additional paid-in capital 22,000,000 1,800,000
Retained earnings 4,000,000 4,000,000
Accumulated other comprehensive income 100,000 ( 500,000)
Treasury stock (400,000) (4,800,000)
Total liabilities & equity P62,400,000 P 8,000,000

DJ’s consultants find these items that are not reported on Builder’s balance sheet:
Fair value
Potential contracts with new customers P 300,000
Advanced production technology 170,000
Future cost savings 100,000
Contractual obligations – long-term warranties 280,000
Non-competition agreements 70,000
Customer relationships – not contractual 100,000
Customer contract 50,000
Recent favorable press reports on a consulting firm 30,000
Long-time customer relationships 40,000

Outside consultants are paid P400,000 in cash, and registration fees to issue the new stock are P200,000.
To sweeten the deal, DJ agrees to pay the former shareholders of Builders an additional cash amount
of P4,000,000 million at the end of 2023 that depends on the 2022-23 reported net income of Builders.
DJ believes there is a 25% chance that this payment will have to be made, and the appropriate
discount rate for the earn-out is 20% (present value factor of P1 @ 20% = .69444).

16. The total assets after the acquisition:

A. P70,400,000
B. P71,284,440
C. P71,574,440
D. None of the above

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NEGROS ORIENTAL STATE UNIVERSITY M. NAPAROTA, CPA
College of Business Administration ACCY 304 (Chapter Exam)
Accountancy Department

17. The total liabilities after the acquisition:

A. P43,300,000
B. P44,274,440
C. P44,554,440
D. None of the above

18. The stockholders’/shareholders/equity holders of DJ after the acquisition:

A. P25,900,000
B. P27,300,000
C. P27,900,000
D. None of the above

For items 19 and 20:

Ping Company acquires all of Sun Corp. in an asset acquisition. Ping paid P1,000,000 more than Sun's
book value, and this excess was attributed entirely to goodwill, as all of Sun's assets and liabilities were
carried at amounts equivalent to fair value. At the time of the combination, a lawsuit was pending
against Sun, which Sun had not recorded on its books. It was felt at the time that Sun would win the
lawsuit, so no provision for it was made when Ping recorded the asset acquisition.

19. Six months after the acquisition, new information reveals that the expected value of the lawsuit at
the date of acquisition was P400,000. The appropriate entry on Ping's books to record this new
information.
a. Retained earnings. . . . . . . . . . . . . . 400,000
Estimated lawsuit liability. . . . . . . 400,000
b. Loss on lawsuit. . . . . . . . . . . . . . . 400,000
Estimated lawsuit liability. . . . . . . 400,000
c. Goodwill. . . . . . . . . . . . . . . . . . 400,000
Estimated lawsuit liability. . . . . . . 400,000
d. No entry required.

20. Assume the same information as above, except that the value change is a result of events
occurring subsequent to acquisition. The appropriate entry on Ping's books to record the new
information.
a. Retained earnings. . . . . . . . . . . . . . 400,000
Estimated lawsuit liability. . . . . . . 400,000
b. Loss on lawsuit. . . . . . . . . . . . . . . 400,000
Estimated lawsuit liability. . . . . . . 400,000
c. Goodwill. . . . . . . . . . . . . . . . . . 400,000
Estimated lawsuit liability. . . . . . . 400,000
d. No entry required.

- END OF EXAMINATION -
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