BUSINESS COMBINATION Quiz 2

Test I Use the date column of your worksheet. Identify for nos. 1 to 10, Multiple choice for 11
to 20. Nos 11 to 16 are answerable based on the following:
A. Only the first statement is correct C. both statements are correct
B. Only the second statement is correct. D. both statements are false.
1. A type of business combination between San Miguel Brewery and San Miguel Bottling
Company.
2. This standard sets the guidelines for the proper approach in business combination.
3. When acquirer does not take over the net assets of the acquire but takes control over
it by acquiring a majority of its shares, it must prepare consolidated reports and use
the guidelines and procedures described in this standard.
4. This standard sets the guidelines in the preparation of separate financial statements
by all constituent companies being merged as described in no. 3.
5. The power to govern the financial and operating activities of another entity leads to a
presumption that this exists between the investor (parent) and the
investee(subsidiary)
6. This is a form of business combination where acquirer buys the assets and the
liabilities of the acquiree which is then dissolved.
7. This is an economic event or transaction in which an acquirer obtains control over one
or more businesses.
8. This represents a set of integrated activities, where inputs are used to process outputs
with the objective of increasing its resources.
9. This is an asset representing the future economic benefits that is brought about by
the expected synergies acquirer will achieve as a result of the business combination.
10. This is recognized when the collective fair values of the net identifiable assets acquired
and liabilities assumed is greater than the consideration given by acquirer.
11. In a business combination under statutory consolidation, the identity of the acquired
entities must be combined into a single entity which will manage and operate the
business.
Both the consideration of the acquirer and the net assets transferred by the acquiree
should be measured using fair value except the contingent consideration.
12. Aboitiz Shipping Lines acquiring Cargo Forwarders is a type of business combination
called diversification.
If PLDT is purchased by First Pacific, PLDT need not prepare separate financial
statements as First Pacific has taken over its net assets.
13. Post combination expenses must also constitute part of the acquirer’s consideration
even if it is due to reorganization of the constituent companies as a result of the
business combination.
A business combination has two elements: business and control.
14. Synergy is an advantage that occurs when greater productivity results out of the
combination of two or more entities, (example 2,000,000 units) as compared to the
sum of productivity from each entity working separately (example 750,000 each
entity).
Economies of scale, another advantage of combining businesses, tends to increase
production efficiency resulting from the increase in production volume which in turn
will decrease costs and expenses per unit of product such as materials, labor and
overhead.
15. Acquirer is required to measure acquired receivables including loans at their
acquisition-date fair values less a separate valuation allowance for the contractual cash
flows that are deemed to be uncollectible at that date.
In situations where one entity has the power to govern another entity’s policies, but
derives no benefits from its activities, there is a presumption that control does not
exist.
16. Change in fair value of assets received or consideration given if recognized during the
measurement period should be treated retrospectively with an adjustment on the
goodwill or gain account.
After the measurement period adjustments changes should be accounted for
prospectively in equity, in profit or loss or in other comprehensive income.

1
 17. Acquirer’s consideration is in the form of plant assets which book value is P500,000
and market value of P750,000. The entry of the acquirer in its book will include,
among others,
A. Credit to land of P500,000 and gain on disposal of P250,000
B. Credit to land P750,000
C. Credit to land P500,000
D. Credit to land of P500,000 and appraisal capital of P250,000.
18. The measurement period is within
A. one year from the inception of the combination
B. one year from the closing date
C. one year from the acquisition date
D. three months from the acquisition date.
19. You are given the following business combinations:
1.Ayala Corp acquired ) for P5.63 billion 51.06% shares in Prime Orion Phil Inc. (owner
of tutuban shopping center a retail complex in Divisoria carryu8bg varioyus
concpets from wholesale and bargain stalls, to regular rteail and food outlets.
2.Phoenix Petroleum Phil acquired 100% of PEPI (Petronas energy Phil Inc) makers of
liquefied petroleum gas and other related businesses such as autogas
3.AC Industrials (a subsidiary of Ayala Corp, which existing businesses include
manufacturing services and vehicle distribution and dealerships) acquired MT
Misselbeck Technologies, a German based supplier of models, tools and plastic
parts to automotive original equipment manufactures.
4. Dennis Uy who controls Phoenix Petroleum acquired the culinary school Enderun
College of Davao for P2 billion.
Which of the above are not horizontal types of integration?
A. 1 and 2 B. 4 only C. 3 only D. 3 and 4
20. Boeing of US and Embraer of France are close to an agreement to combine their
businesses. The combination will yield a 90% control by Boeing when they combine
into a new company.
Which of the following statements is true?
A. Boeing is the acquirer
B. The combination typifies a parent subsidiary relationship
C. The integration is vertical
D. The combination is deemed a stock acquisition.
TEST II- PRACTICAL
A. The following Corporations, makers of jewelries, are parties to a proposed combination
on Jan 1, 2017. On this date their financial position including some other relevant
information showed:
Shine Sun Star
Cash P 125,000 P 250,000 P 320,000
Other Current Assets 175,000 100,000 200,000
Land 300,000 500,000 250,000
Equipment, net 500,000 1,500,000 500,000
Goodwill 100,000
P1,200,000 P2,350,000 P1,270,000
Liabilities 300,000 1,100,000 350,000
Share Capital (par value P50/100/50) 800,000 1,000,000 400,000
Share Premium 120,000 300,000
Retained Earnings (20,000) 250,000 250,000
Treasury Stock (500 shares) (30,000)
P1,200,000 P2,350,000 P1,270,000
Fair Market Value: stocks P 120 P 160 P 80
land 300,000 1,000,000 500,000
equipment 400,000 2,200,000 300,000
Estimated Liability on pending lawsuit, 50,0
reliably measured but may be 00
improbable.
Patent, legal life of 5 years, but acquirer
may not be able to use this. 80,000

2
Situation 3:

To finance its expansion, Sun borrowed P500,000 from PNB and issued a 12% P500,000 note
payable every year for 5 years. Sun decides to acquire the nets identifiable assets of Star by
issuing shares of its own stock on a half is to one basis plus cash in consideration of the
market value of Star’s stock. Sun paid P50,000 for broker’s fee and P10,000 for registration,
filing and cost of certificates.
a) 4 Entries in the books of Sun with a table for goodwill/gain.
b) List the current assets, non-current assets, liabilities, and shareholders’
equity of Sun post combination.
c) Bella, Star shareholder, owns 500 shares, How much liquidating dividend
will she receive?

Star outstanding shares of 7,500 x .5 = 3,750 Sun shares x P160= 600,000

Consideration (600,000 +600,000)= P1,200,000
Net Assets (1,320,000 -400,000) = 920,000
Goodwill 280,040

Cash 500,000
Notes Payable 500,000

Investment in Star 1,200,000

Share Capital (3,750 x 100) 375,000
Share Premium (3750 x 60) 225,000
Cash (7,500 x 80) 600,000

Business Combination Expenses 50,000

Share Premium 10,000
Cash 60,000

Cash 320,000
Other Current Assets 200,000
Land 500,000
Equipment 300,000
Goodwill 280,000
Liabilities 400,000
Investment in Star 1,200,000

3.
Cash 250 + 500-600-60+320 410,000
Other Current Assets 300,000
Total 710,000
Land 1,000,000
Equpment 1,800,000
Goodwill 280,000
Total 3,080,000
Liabilities (1,100 + 500+ 400) 2,000,000
Share Capital 1,375,000
Share Premium 215,000
Retained Earnings 200,000
Total 1,790,000

4. Cash= 600,000/7,500 x 500 = P40,000

Stocks= 3,750/7,500 x 500= 250 shares x P160= P40,000

3
4