Accounting Review 3

Advanced Financial Accounting and Reporting

Direction: Choose the letter of the best answer.
1. A business combination whereby the company taking over the properties of other companies retains its
identity and continues operations as a larger unit and the other companies are dissolved is known as a
a. Stock Acquisition c. Business Combination
b. Merger d. Consolidation
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2. Under PFRS 3, how should an entity (acquirer) account for each business combination?
a. Fair Value method c. Acquisition method
b. Proportionate consolidation method d. Equity method
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3. The acquisition method of accounting for a business combination requires all of the following, except
a. Identifying the acquirer
b. Determining the acquisition date
c. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and the
noncontrolling interest in the acquiree at carrying amount
at fair value, not carrying amount
d. Recognizing goodwill or gain from bargain purchase
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4. In a business combination, goodwill is measured as the excess of
a. The consideration transferred over the identifiable net assets acquired
b. The total of the consideration transferred and the amount of any non-controlling interest in the acquiree
over the identifiable assets acquired
c. The total of the consideration received and the fair value of the previously held interest in the acquiree
over the identifiable net assets acquired
d. The total of the consideration transferred, the amount of any non-controlling interest in the
acquiree and the fair value of previously held interest in the acquiree over the identifiable net assets
acquired
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5. The main difference between the net income reported in the separate income statement of the branch
and the net income reported by the home office for the branch’s operation is the
a. Overstatement of beginning and ending inventory reported by the branch
b. Overstatement of total goods available for sale reported by the branch
c. Overstatement of costs of goods sold reported by the branch
d. Overstatement of shipment from home office reported by the branch
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When the Home office ships inventory to Branch, it has Allowance for overvaluation or mark up.
Thus, when the branch receives the inventory, it appears to be overvalued. And when they sell it
to customers, the COGS will be overstated.

COGS is an expense account. Overvaluation in expense results to undervaluation of net income.

6. It is a type of joint arrangement whereby the parties that have joint control of the arrangement have
rights to the net assets of the arrangement
a. Joint venture c. Joint operation
b. Jointly controlled asset d. Joint business
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7. What is the classification of the joint arrangement when the assets and liabilities relating to the
arrangement are held by a separate vehicle or when the arrangement is established with a separate vehicle?
a. It shall be classified as joint venture
b. It shall be classified as joint operation
c. Neither joint venture nor joint operation
d. It can be either a joint operation or joint venture depending on the legal form of the separate
vehicle, terms of the contractual arrangement or other relevant facts and circumstances
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ABC Co. paid P110,000 for the net assets of Comp Corp. At the time of the acquisition, the following
information was available related to Comb’s balance sheet:
Book Value Fair Value
Current Assets 50,000 50,000
Goodwill shall not be included in FVINA
Goodwill 30,000 30,000
Building 80,000 100,000 CA 50k
Equipment 40,000 50,000 Bldg 100k
Liabilities 30,000 30,000 Equip 50k
Liab (30k)
8. What is the amount recorded by A for the building?
a. 110,000 FVNIA 170k
b. 20,000
c. 80,000
d. 100,000
Fair Value
9. What amount of goodwill or gain should be recognized?
a. Gain of 30,000
b. Gain of 60,000
c. Goodwill of 30,000
d. Goodwill of 60,000
Aggregate 110,000
FVINA 170,000
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10. Parent Co. issued 200,000 shares of 10 par value common stock to acquire Subsidiary Co. in an
acquisition-business combination. The market value of Parent's common stock is P24 per share. Legal and
consulting fees incurred in relation to the acquisition are P220,000 paid in cash. Registration and issuance
costs for the common stock are P70,000.
What should be recorded in Parent's additional paid-in capital account for this business combination?
a. 3,090,000 Stock Issuance Cost (70k) shall be deducted to Share Premium or Retained
b. 2,800,000 Earnings, depending on the priorities. While the Acquisition Related Costs
c. 2,730,000 (220k) is expensed)
d. 2,510,000
200,000 x (24-10) = 2,800,000 less SIC 70,000
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11. Under IFRS for SMEs, the income of the SME-venturer for its investment in joint venture under fair
value model consists of
a. Share in net income of joint venture
b. Dividend income
c. Gain on changes in fair value of investment
d. Dividend income and gain on changes in a fair value of investment
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Entity A and Entity B agreed to a business combination. Their condensed statement of financial position
before combination show:
Entity A Entity B
Book Value Fair Value
ASSETS P 7,000,000 P 10,500,000 P9,950,000
Liabilities 4,987,500 2,932,000
Ordinary shares, P100 par 2,625,000 2,187,500
Share premium 918,000
Retained earnings/(deficit) (612,500) 4,462,500
LIABILITIES & SHE P 7,000,000 P 10,500,000
It was agreed that Entity A will be the continuing entity and shall issue 64,980 shares to Entity B. Market
value of A’s share on the date of business combination is P102.
12. Immediately after the business combination, what is the increase in stockholders' equity?
a. 6,237,920
b. 9,030,500
c. 7,018,000
d. 6,627,960
Aggregate (64,980 x 102) = 6,627,960
FVINA A-L = 7,018,000 = Gain 390,040
Increase in SHE = Common shares + SP + Gain

13. How much is the total liabilities after the business combination?
a. 4,987,500
b. 6,627,960
c. 7,919,500
d. 0
Liabilities 4,987,500 + 2,932,000
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The Home Office in Manila established a branch in Bacolod. At the end of the year the reciprocal account
in the books of Manila was P350,000, however, the following transactions were not recorded by the
receiving party:
not recorded by the receiving
a) A debit memo in the amount of P10,000 was sent by Bacolod party, hence, adjustment of
b) A credit memo in the amount of P20,000 was sent by Manila amounts must reflect also to the
c) A credit memo in the amount of P30,000 was sent by Bacolod receiving party.
14. What is the adjusted balance of the reciprocal account at the end of the year?
a. 350,000
b. 370,000
c. 330,000
d. 390,000
HO - Manila Branch – Bacolod
Unadjusted 350,000
A -10,000
B -20,000 Refer to items 19-20 for explanations
C 30,000 about memos.

Adjusted 370,000 370,000

15. What is the unadjusted balance of Home Office Current account at the end of the year?
a. 350,000
b. 370,000
c. 330,000
d. 390,000
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16. Under IFRS for SMEs, the income of the SME-venturer for its investment in a joint venture under the
cost method consists of
a. Share in net income of joint venture
b. Dividend income
c. Gain on changes in fair value of investment
d. Both B and C
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On March 1, 2024, SME X and SME Y acquired 25% (each) of the ordinary shares that carry voting rights
at a general meeting of shareholders of Entity C for P68,000. Transaction cost is 6% of the transaction
price. SME X and SME Y immediately agreed to share control over Entity C. For the year ended December
31, 2024, Entity C recognized a profit of P75,000. On December 30, 2024, Entity C declared and paid a
dividend of P32,000 for the year 2024. On December 31, 2024, the fair value of each venturers’ investment
in Entity C was P84,000. Cost to sell is 4% of the fair value. Value in use amounts to 80,000. However,
there is no published price quotation for Entity C.
17. Compute the balance of Investment in Entity C on Dec. 31, 2024 using the cost model
a. 80,640 Since the ending balance is higher than the beginning balance, the
b. 84,000 investment is not impaired and shall still be measured at 72,080.
c. 72,080
d. 80,000
Beg 72,080
Profit 18,750
Dividend (8,000)
End 82,830
Recoverable amount:
FVLCTS 80,640
VIU 80,000

18. Under IFRS for SMEs, what amount will affect the current earnings of SME X for the year ended
December 31, 2024 if the SME elects the equity method?
a. 18,750 The share in Net Income only since there is no impairment loss
b. 8,000
c. 3,920
d. 9,440
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19. If the home office receives debit memo from the branch, the home office shall record it in its separate
statement of financial position by
Debit memo is a notification that the sender of the
a. Increasing the investment in branch account memo debited the reciprocal account. In this case, it
b. Decreasing the investment in branch account means that the Branch (sender) debited the HO-
c. Debiting the investment in branch account Current account (Equity).
d. Disclosure
When an equity account is debited, the balance
--- decreases. Thus, the home office must decrease its
account as well.
20. Which of the following transactions will increase the home office account in the branch’s separate
statement of financial position?
a. Net loss of the branch When the home office sends a debit memo, it
b. Collection by the home office of branch’s receivable means that they debited the Investment in Branch
c. Debit memo received from the home office account (asset). Debit in asset = increase in asset
d. Payment by the branch of home office’s liability
Therefore, the HO-Current account of the branch
--- will increase as well.
21. Under full PFRS, what method shall the venturer utilize in accounting for its investment in a joint
venture?
a. Cost method
b. Equity method
c. Fair Value method
d. Any of the choices
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22. TT Corporation acquired 100% of the outstanding capital stock of SS Corporation for 198,000 on
December 31, 2022. Balance sheet data for the two companies immediately following the acquisition
follow:
Item TT SS
Cash 49,000 30,000
Accounts receivable 110,000 45,000
Inventory 130,000 70,000
Land 80,000 25,000
Buildings and Equipment 500,000 400,000
Less: Accum. Depreciation (223,000) (165,000)
Investment in SS 198,000
Total Assets 844,000 405,000
Accounts payable 61,500 28,000
Taxes payable 95,000 37,000
Bonds payable 280,000 200,000
Common stock 150,000 50,000
Retained earnings 257,500 90,000
Total liabilities and SHE 844,000 405,000
At the date of the business combination, the book values of SS’s net assets and liabilities approximated
fair value except for inventory, which had a fair value of P85,000 and land, which had a fair value of
45,000. In the consolidated balance sheet immediately after the acquisition:
What amount of gain on bargain purchase will be reported?
a. 0
b. 23,000
c. 43,000
d. 58,000
Aggregate 198,000
FVINA A-L = 175,000 = Goodwill 23,000
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23. Statement 1: Parties in a joint arrangement are bound by a contractual arrangement
Statement 2: The contractual arrangement of a joint arrangement gives two or more of those parties joint
control of the arrangement
a. Only statement 1 is true
b. Only statement 2 is true
c. Both statements are true
d. Both statements are false
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LH has joint control over AMG Incorporated based on contractual agreement. LH owns 60% of AMG
Incorporated, while the rest is owned by another party. This investment is qualified to be accounted for as
an investment in joint venture in the books of LH.
At the beginning of 2022, the investment in joint venture account of LH had a balance of P44,000. AMG
reported a net loss of P120,000 for 2022, and a net income of P200,000 for 2023.
24. How much is the balance of the investment in joint venture account of LH as of December 31, 2022?
a. 28,000
b. 76,000
c. 116,000
d. 0
Beg 44,000
Loss 60% 72,000 (44,000) 28,000 loss to be disclosed in notes
2022 Balance 0
NI 60% 120,000 – 28,888
25. How much is the balance of the investment in joint venture account of LH as of December 31, 2023?
a. 120,000
b. 92,000
c. 44,000
d. 124,000
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Name: _______________________________

1. 6. 11. 16. 21.

2. 7. 12. 17. 22.
3. 8. 13. 18. 23.
4. 9. 14. 19. 24.
5. 10. 15. 20. 25.