TEST BANK
ADV ACCTG (by dayag)

BUSINESS COMBINATION (20x4 Revisions)

Statutory Mergers and Statutory Consolidation

7. John Corporation concluded that the fair value of Carlo Company was P80,000and paid that

amount to of
fair value acquire all of
P98,000 anditsliabilities
net assets. Carlo
with reported
a book valueassets with
and fair a book
value value ofon
of P23,000 P6
P60,000
0,000
the and
date of
combination. John also paid P3,000 to a search firm for finder’s fees related to the acquisition.
What amount will be recorded as goodwill by John Corp.?

A.  P 0 C. P 8,000
B.  P5,000 D. P13,000

9.
1.  On April 1, 20x4, Carlo Corp. paid cash of P620,000 for all of the net assets of John Company
appropriately accounted for as a merger. The recorded assets and liabilities of John Corporation
onApril 5, 20x4 follow:

Cash P60,000
Inventory 180,000

Property,
Goodwill plant and
(net of equipment amortization
accumulated (net of accumulated depreciation of P220,000)
of P50,000) 320,000
100,000
Liabilities (120,000)
 Net assets P540,000

On April 1, 20x4,
20x4, John’s inventory had a fair value of P150,000, and the property, plant and
equipment (net) had a fair value of P380,000. The amount of goodwill recorded in the books of
Carlo as a result of the business combination should be:

A.  P150,000  C. P50,000

B.  P120,000 D. P 0

10. The Marc Company had these accounts at the time it was acquired by Francis Co.:

Cash P 72,000

Accounts receivable
Inventories 914,000
240,000
Plant, property and equipment 1,392,800
Accounts payable 701,600

Francis Co. paid P2,800,000 for net assets of Marc Company. It was dete
determined
rmined that fair market
values of inventories and plant, property, and equipment were P266,000 and P1,800,000,
respectively.

An assumed contingent liability arising from past events with a fair value amounting to P20,000
and as such amount is considered reliable measurement.

In the books of Francis Co., this transaction resulted in:

A.  Goodwill recorded at P882,800

 
B.   Goodwill
C. Goodwill recorded
recordedatatP449,600
P469,600
D.  Current assets increased by P469,600
 

 
12.
2.  On December 1, 20x4. Darlene Ltd. acquired all assets and liabilities of Shyndelle Ltd with
DarleneLtd. issuing
issuing 100,000 shares to acquire these
the se net assets. The fair value of Sh
ShyndellesLtd’s.
yndellesLtd’s.
assetsand liabilities at this date were:

Cash P 50,000
Furniture and fittings 20,000
Accounts receivable 5,000

Plant
Accounts payable 125,000
15,000
Current tax liability 8,000
Provision for annual leave 2,000

The financial year for Darlene Ltd.is January- December.

The fair value of each Darlene

Da rlene Ltd. Share at acquisition date is P
P1.90.
1.90. At acquisition date, the
acquirer could only determine a provisional fair value for the plant. On March 1, 20x5, Darlene
Ltd. received the final value from the independent appraisal, the fair value at acquisition date
 being P131,000. Assuming the plant had a further five-year life from the acquisition date.

The amount of goodwill arising from the business combination at December 1, 20x4:

A.  P15,000  C. P5,000

 
B. P13,000 D. P 0
18-27. Francis acquires assets and liabilities of Marc
Marc Company on January 1, 20x5. To obtain these
shares, Francis pays P800 (in thousands) and issues 20,000 shares of P20 par value common
co mmon
stock on this date. Francis stock had a fair value of P36 per share on that date. Francis also pa
pays
ys
P30 (in thousands) to a local investment firm for arranging the transaction. An additional P20 (in
thousands) was paid by Francis in stock issuance costs.

The book values for both Francis and Marc as of January 1, 20x5 follow. The fair value of each
of Francis and Marc accounts is also included.
include d. In addition, Marc holds a fully amortized
trademark that still retains an P80 (in thousands) value. The figures below are in thousands. Any
related question also is in thousands. 

Marc Company
Francis, Inc. Book Value Fair Value

Cash
Receivables P1,800
960 P160
360 P160
320
Inventory 1,320 520 600
Land 600 240 260
Buildings (net) 2,400 440 560
Equipment (net) 720 200 150
Accounts payable 960 120 120
Long-term liabilities 2,280 680 600
Common stock 2,400 160
Retained earnings 2,160 960

Assuming the combination is accounted for as an acquisition, immediately after the acquisition,
in the balance sheet of Francis:

What amount will be reported for goodwill?

A.  P110  C. P140

B.  P130 D. P270
 

 
Using the same information above, what amount will be reported for receivables?

A.  P1,320 C. P1,000

B.  P1,280  D. P 920

Using the same information above, what amount will be reported for inventory?

A.  P1,920  C. P1,400

 
B. P1,840 D. P1,240
Using the same information above, what amount will be reported for buildings (net)?

A.  P2,840 C. P2,280

B.  P2,520 D. P2,960 

Using the same information above, what amount will be reported for equipment (net)?

A.  P770 C. P870 

B.  P670 D. P720

Using the same information above, what amount will be reported for long-term liabilities?

 
A.  P2,880
B. P2,960   C. P2,360
D. P2,200

Using the same information above, what amount will be reported for common stock?

A.  P2,400 C. P2,800 

B.  P2,560 D. P2,960

Using the same information above, what amount will be reported for retained earnings?

A.  P2,130  C. P3,050

B.  P2,160 D. P3,120

Using the same information above, what amount will be reported for additional paid in capital?

 
A.  P300
B. P330   C. P320
D. P350

Using the same information above, what amount will be reported for cash after the purchase
transaction?

A.  P1,960 C. P1,750

B.  P1,800 D. P1,110 

29. On January 1, 20x5,

20x5, the fair values of Pia’s net assets were
assets  were as follows:

Current Asset P200,000

Equipment 300,000
Land 100,000
Buildings 600,000

Liabilities 160,000
On January 1, 20x5, Ruth Company purchased the net assets of Pia Company by issuing 200,000
 

  shares of its P1 par value stock when the fair value of the stock was P6.20. It was further agrees
that Ruth’s would pay an additional amount
amoun t on January 1, 20x7, if the average income during the
2-year period of 20x5-20x6 exceeded P160,000 per year. The expected value of this
consideration was calculated as P268,000; the measurement period is one year.

What amount will be recorded as goodwill on January 1, 20x5?

A.  Zero C. P360,000

B.  P200,000 D. P568,000 

Using the same information above, assuming that on August 1, 20x5 the contingent
consideration happens to be P340,000, what amount will then be recorded as goodwill on the
said date?

A.  Zero C. P332,000

B.  P172,000 D. P540,000 

Using the same information above, assuming that on

o n January 1, 20x7, the date of settlement of
the contingent consideration clause agreement for P350,000, the entry should be:

A.  Estimated liability for contingent consideration P340,000

Loss on estimated contingent consideration 10,000
Cash P350,000

B.  Estimated liability for contingent consideration 350,000

Cash 350,000

C.  Estimated liability for contingent consideration 368,000

Cash 350,000
Gain on estimated contingent consideration 18,000

D.  No entry required.

35. Mark Corporation acquired Ray Company through an exchange of common shares. All of the
Ray’s assets and liabilities were immediately transferred to Mark. Mark’s common stock was
trading at P20 per share at the time of exchange. Following selected information is also

available.
Before Acquisition After Acquisition
Par value of shares outstanding P200,000 P250,000
Additional paid in capital 350,000 550,000

Based on the preceding information, what number

n umber of shares was issued at the time of the
exchange?

A.  P 5,000 C. P12,500 

B.  P10,000 D. P17,500

Using the same information above, what is the par value of Mark’s common stock?
stock?  

A.  P10 C. P 4 
 
B. P 5 D. P 1
 

Using the same information above, what is the fair value of Ray’s net assets, if goodwill of
P56,000 is recorded?

A.  P194,000  C. P300,000

B.  P244,000 D. P306,000
38.
by
AB Corporation acquired all the assets and liabilities of RG Corporation b y issuing shares of its
common stock on January 1, 20x4. Partial balance sheet data for the companies prior to the
 business combination and immediately following the combination is provided:

AB Book Value RG Book Value Combination

Cash P 65,000 P 25,000 P 90,000
Accounts receivable 72,000 20,000 94,000
Inventory 33,000 45,000 88,000
Buildings and equipment (net) 400,000 150,000 650,000
Goodwill ?
Total Assets P 570,000 P 240,000 P ?

Accounts Payable P 50,000 P 25,000 P 75,000

Bonds payable 250,000 100,000 350,000
Common stock, P2 par 100,000 25,000 160,000
Additional paid-in capital 65,000 20,000 245,000
Retained earnings 105,000 70,000 ?
Total Liabilities and Equities P 570,000 P 240,000 P ?

What number of shares did AB issue for this acquisition?

A.  80,000
B.  50,000
C.  30,000
D.  17,500

39. At what price was AB stock trading when stock was issued for this acquisition?

A.  P2.00
B.  P5.63
C.  P6.00
D.  P8.00

40. What was the fair value of the net asset

assetss held by RG at the date of combination?
A.  P115,000
B.  P227,000
C.  P270,000
D.  P497,000

41. What amount of goodwill

goo dwill will be reported by the combined en
entity
tity immediately following the
combination?

A.  P 13,000
B.  P125,000
C.  P173,000
D.  P413,000

42. What balance in retained earnings will the combined entity report immediately following the
combination?
 

A.  P 35,000
B.  P 70,000
C.  P105,000
D.  P175,000

46.
1.  Companies A and B decide to consolidate. Asset and estimated annual earnings contributions
con tributions are
as follows:
Co. A Co. B Total
 Net asset contribution P300,000 P400,000 P700,000
Estimated annual earnings contribution 50,000 80,000 130,000

Stockholders of the two companies agree that a single class of stock be issued, that their
contributions be measured by net assets plus allowances for goodwill, and that 10% be
considered as a normal rate of return. Earnings in excess of the normal rate of return shall be
capitalized at 20%in calculating goodwill. It was also agreed that
tha t the authorized capital stock of
the new corporation shall be 20,000 shares with a par value of P100 a share.

The amount of goodwill credited to Co. A

A.  P120,000 C. P100,000

B.  P150,000 D. P200,000

Total contribution of Co. B (net assets plus goodwill):

A.  P400,000 C. P600,000
B.  P500,000 D. P700,000

48.
1.  DG Inc., a new corporation formed and organized because of the recent consolidation of R Inc.
and G Inc., shall issue 10% participating preferred stocks with a par value of P100 for D Inc and
G Inc. net assets contributions, and common shares with a par value of P P50
50 for the difference
 between the total shares to be issued and the preferred shares to be issued. The total shares to
to be
issued by DG shall be equivalent to average annual earnings capitalized at 10%. Relevant data on
D Inc. and G Inc. follows:

D Inc. G Inc.

Total Assets
Total Liabilities P720,000
432,000 P921,600
345,600
Annual earnings (average) 46,080 69,120

The total preferred shares to be issued by DG Inc.

A.  8,640
B.  5,760
C.  2,880
D.  7,280

The amount of goodwill to be recognized by DG Inc.

A.  P288,000
B.  P280,000
 
C.   P864,000
D. P860,000
 

CONSOLIDATED Finc’l Statement–  Stock

  Stock Acquisition

1-4 Company A acquires 80% of Company B for P5,000,000, carryingcarrying value of Company B net
assets at time of acquisition being P3,000,000 and fair value of these net identifiable assets being
P4,000,000.

Goodwill arising on consolidation is to be valued on the proportionate basis or “Partial”

Goodwill:

A. P 800,000 C. P1,800,000 
B.  P1,000,000 D. P2,250,000

Using the same information above, the amount of non-controlling interest arising on
consolidation is to be valued on the proportionate basis or “Partial” Goodwill:
Goodwill:  

A.  P600,000 C. P1,250,000

B.  P800,000  D. P1,500,000

Using the same information above, the amount of goodwill arising on consolidation is to be
valued on the full (fair value) basis or “Full/Gross-
“Full/Gross -up” Goodwill: 
Goodwill: 

A.  P800,000 C. P1,800,000

B.  P1,000,000 D. P2,250,000 

Using the same

consolidation is information
to be valuedabove,
on the the
fullamount of non-controlling
(fair value) interest
basis or “Full/Gross
“Full/Gross- arising
-up” on  
Goodwill:
Goodwill: 

A.  P600,000 C. P1,250,000 

B.  P800,000 D. P1,500,000

9-13 Pine Company acquires 15 percent of Shine Company’s commoncommon stock for P1,000,000 cash and
carries the investment using the cost method. A few months later, Pine purchases another
60 percent
percent of Shine Company’s stock for P4,320,000.
P4,320, 000. At that date, Shine Company reports
identifiable assets with a book value ofP7,800,000 and a fair value of P10,200,000, and it has
liabilities with a book value and fair value of P3,800,000. The fair value of the 25% non-
controlling interest in Shine Company is P1,800,000.

Goodwill arising on consolidation is to be valued on the proportionate basis or “Partial”

Goodwill:

A.  P168,000 C. P600,000 

B.  P200,000 D. P800,000

Using the same information above, the amount of non-controlling interest arising on
consolidation is to be valued on the proportionate basis or “Partial” Goodwill:
Goodwill:  

A.  P 600,000 C. P1,600,000 

B.  P1,000,000 D. P1,800,000

Using the same information above, the amount of goodwill arising on consolidation is to be
valued on the full (fair value) basis or “Full/Gross-
“Full/Gross -up” Goodwill: 
Goodwill: 

A.  P168,000 C. P600,000

B.  P200,000 D. P800,000

Using the same information above, the amount of non-controlling interest arising on
consolidation is to be valued on the full (fair value) basis or “Full/Gross
“Full/Gross--up” Goodwill: 
Goodwill: 
 

 
A.  P600,000 C. P1,600,000
B.  P1,000,000 D. P1,800,000 

Using the same information above, the amount of gain or loss should be recognized when the
additional shares are acquired:

A.  Zero C. P 80,000 loss

B.  P80,000 gain  D. P136,000 loss

14-17.
1.  On September 1, 20x4, Company A acquires 75% (750,000 ordinary shares) of Company B for
P7,500,000 (P10per share). In the period
p eriod around the acquisition date, Compan
Company y B’s shares are
trading at about P8 per share. Company A pays a premium over market because of the synergies
it believes it will get. It is therefore reasonable to conclude that the fair value of Company
Compan y B’s as
a whole may not be P10,000,000. In fact, an independent valuation shows that the value of
company B is P9,700,00 (fair value of Company B). Assuming that the fair value of the net
identifiable assets is P8,000,000 ( carrying value is P6,000,000).
P6 ,000,000).

Goodwill arising on consolidation is to be valued on the proportionate basis or “Partial”

Goodwill:

A.  P 200,000 C. P1,700,000

B.  P1,500,000  D. P2,000,000

15. Using the same information above, the amount of non-controlling interest arising on
consolidation is to valued on the proportionate basis or “Partial” Goodwill
Goodwill  

A.  P1,500,000 C. P2,000,000 

B.  P1,875,000 D. P2,200,000

16. Using the same information above, the amount of Goodwill arising on consolidation is to be
valued on the full (fair value) basis or “Full/Gross-
“Full/Gross -up” Goodwill: 
Goodwill: 

A.  P 200,000 C. P1,700,000

B.  P1,500,000 D. P2,000,000

17. Using the same information above, the amount of non-controlling interest arising on
consolidation is tovalued on the full (fair value) basis or “Full/Gross-
“Full/Gross-up” Goodwill: 
Goodwill: 

A.  P1,500,000 C. P2,000,000

B.  P1,875,000 D. P2,200,000

18-19. All the issued and outstanding

outstanding common stock of Dau Company were bought by Angeles
Companyon October 1, 20x4 for P700,000. The assets and liabilities of Dau Company were:

Cash P 50,000
Accounts receivable (net of P25,000 allowance for doubtful accounts) 250,000
Inventory 150,000
Property & equipment (net of P100,000 allowance for depreciation) 300,000
Accounts/ Notes Payable 130,000

On October 1, 20x4 the fair value of the following assets were as follows:
Accountsreceivable (net) P235,000

Inventory
Property & equipment (net) 130,000
400,000
 

  There is unrecorded warranty liability on prior-product sales estimated P20,000 discounted cash
flow based on estimated future cash flows.

The amount of goodwill as a result of the business combination should be:

A.  P 0
B.  P 35,000
C.  P 65,000
D.  P100,000

19. Using the same information above, the amount of goodwill in the books of Angeles Co, as a
result of the business combination should be:

A.  P 0
B.  P 35,000
C.  P 65,000
D.  P100,00

20. On January 1, 20x5, Lotto Company acquires 80% ownership in Dagupan Corporation for
P400,000. The fair value of the non-controlling interest at that time is determined to be
P100,000. It reports net assets with a book value of P400,000 and fair value of P460,000. Lotto
Company reports net assets with a book value of P1,200,000 and a fair value of P 1,300,000 at
that time, excluding its investment in Dagupan. What will be the amount of goodwill that would
 be reported immediately after the combination under current accounting practice if the option of
full-goodwill method is used?
A.  P100,000 C. P60,000
B.  P 80,000 D. P40,000 

21. Mark acquired 70% of thethe net assets of Ray for P1.1 million.
million. The assets of Ray have a book
value of 1.2 million and a fair market value of P1.3 million; its liabilities are P.2 million.

What is the amount of “excess of cost over book value of subsidiary” on the consolidated
 balance sheet?

A.  P0 million C. P.2 million

B.  P.1 million D. P.4 million 

23. Rupert Corporation issued 100,000 shares of P20 for common stock for all the outstanding stock

of Rita Corporation
common in a business
stock was selling at P30 combination consummated
per share at the on July 1,combination
time of the business 20x4. Rupert Corporation
was
consummated. Out-of-pocket costs of the business combination were as follows:
Finder’s fee 
fee  P50,000
Accountant’s fee (advisory) 
(advisory)  10,000
Legal fees (advisory) 20,000
Printing costs 5,000
SEC registration costs and fees 12,000
P97,000

The fair value of the consideration

con sideration transferred accounting will be:

A.  P3,097,000 C. P3,017,000

B.  P3,080,000 D. P3,000,000 

26. Sun Inc.

cash. Thebought
portionallofoutstanding shares transferred
the consideration
c onsideration of Shine Corporation
results in aon January allocation
fair-value 1, 20x4, for
of P700,000
P35,000 toin
 

equipment and goodwill of P88,000. At the acquisition date, Sun also agrees to pay Shine’s
 previous owners and additional P110,000 on January 1, 20x6, if Shine earns a 10 percent return
on the fair value of its assets in 20x4 and 20x5.
20x5. Sun’s profits exceed this threshold in both years.
Under which of the following is true?

A.  The additional P110,000 payment is a reduction in retained earnings.

B.  The fair value of the expected contingent payment increases goodwill at the acquisition
date.
C.  Goodwill as of January 1, 20x6, increases by P110,000.
D.  The P110,000 is recorded as an expense in 20x6.
30. On June 30, 20x4, Moon Corporation purchased for cash at P10 per share all 100,000 shares of
the outstanding common stock of the River Company. The total fair value o off all identifiable net
assets of River was P1,400,000. The only
o nly noncurrent asset is property with a fair value of
P350,000. The consolidated balance sheet of Moon and its wholly owned subsidiary on June 30,
20x4, should report:

A.  A retained earnings balance that is inclusive of a gain of P400,000

B.  Goodwill of P400,000
C.  A retained earnings balance that is inclusive of a gain of P350,000
D.  A gain of P400,000

33. Pia Co. owns 80,000 shares of Rose Corp.’s 100,000 outstanding common shares, acquired at
 book value. The December 31, 20x4, consolidated balance sheet presented by
b y Pia and Rose
included netassets of Rose in the amount of P600,000. On January 1, 20x5, Pia sells 70,000
shares of Rose for P490,000. The fair value of Pia’s remaining 10% interest in Rose is P70,000.
What amount of gainor loss, if any, should be recognized on the sale of Pia’s shares resulting in
deconsolidation, and how much of that should be attributed to Pia?

Determine the gain or loss on disposal (or deconsolidation) should be:

A.  P40,000 loss C. P10,000 gain

B.  P80,000 loss D. P80,000 gain

34. Darlene Ltd. Has an 80% investment in Syndelle Ltd. With a carrying amount of P80,000,000.
The fair value of Syndelle Ltd. Is P200,000,000. The following year, Darlene Ltd. Decided to
sell a 29% interest in Subsidiary to a third party
part y in exchange for cash.

Determine the gain or loss on disposal of shares to be recognize in the profit or loss statement:

A.  Zero C. P29,000,000 loss

B.  P29,000,000 gain  D. P3,000,000 loss

36. John company owns 80,000 shares of Carlo Corporation’s 100,000 outstanding common shares,
acquired at book value. The December 31, 20x4, consolidated balance sheet presented by John
and Carlo included net assets of Carlo in the amount of P600,000. On January 1, 20x5, John sells
10,000shares (10%) of its Carlo stock to unrelated parties for P70,000.

Determine the gain or loss on disposal of shares to be recognized in the profit or loss statement:

 
A.
B.  Zero
P10,000 gain C.
D. P10,000
P 5,000 loss
loss
 

38. Darlene, Inc. buys 60% of the outstanding stock of Shyndelle Inc. in an acquisition that resulted
in the acquisition of goodwill. Shyndelle owns a piece of land that cost P200,000 but was worth
P500,000 at the acquisition date. What value should be attributed to this land in a consolidated
 balance sheet at the date of takeover?

A.  P120,000 C. P380,000

B.  P300,000 D. P500,000

41. Jack company had common stock of P350,000 and retained earnings of P490,000. Jill Inc. had
common stock of P700,000 and retained earnings of P980,000. On January 1, 20x4, Jill issued
34,000 shares of common stock with a P12 par value and a P35 fair value for all of Jack
Company’s outstanding common stock. This combination was accounted
accou nted for as an acquisition.
an  acquisition.
Immediately after the combination, what was the consolidated net
n et asset?

A.  P2,870,000  C. P1,680,000

B.  P2,520,000 D. P1,190,000

42-43. Bea Company acquired 100 percent of the voting common shares of Ali Corporation, its bitter
rival, by issuing bonds with a par value and fair value of P300,000. Immediately prior to the
acquisition, Bea reported total assets of P1,000,000, liabilities of P560,000, and stockholders’
equity of P440,000. At that date, Ali reported total assets of P800,000, liabilities of P500,000,
andstockholders equity of P300,00. Included in Ali’s liabilities was an accounts payable to Bea
in the amount of P40,000, which Bea included in its accounts receivable.

Based on the preceding information, what amount

a mount of total assets did Bea report in its balance
sheet immediately after the acquisition?

A.  P1,000,000 C. P1,500,000

B.  P1,300,000  D. P1,800,000

Using the information above, what amount of total assets was reported in the consolidated
 balance sheet immediately after acquisition?

A.  P1,300,000 C. P1,840,000

B.  P1,760,000  D. P1,500,000

44-52. The financial statements for

for Good, Inc and Best Company for the year ended December 31,
20x5,, prior to Good’s business combination transaction regarding Best Co., follow (in
20x5
thousands):

Good Inc. BestCo.

Revenues P 1,350 P 300
Expenses 990 200
 Net income P 360 P 100

Retained earnings, 1/1 P 1,200 P 200

 Net income 360 100
Dividends ( 135) ( 0)
Retained earnings, 12/31 P 1,425 P 300

Cash P 120 P 110

Receivables and Inventory 600 170
Buildings (net) 1,350 300
Equipment (net) 1,050 600
Total Assets P 3,120 P 1,180

Liabilities P 750 P 410

Common stock 540 200
 

  Additional paid-in capital 405 270

Retained earnings 1,425 300
Total liabilities and Stockholders’ equity 
equity  P 3,120 P 1,180

On December 31, 20x5, Good Inc issued P300 in debt and 15 shares of its P10 par value
common stock to the owners of Best to purchase all of the outstanding shares of that compan
company.
y.
Good Inc. shares had a fair value of P40 per share. Good Inc. paid P12.50 to a broker for
arranging the transaction. Good Inc. paid P17.50
P17 .50 in stock issuance costs. Best
Best’s
’s equipment
 equipment was
actually worth P700 but its building were only valued at P280.

What amount is the investment recorded on Good Inc’s. books? 

books? 

A.  P770 C. P912.50

B.  P900  D. P930

Using the same information above, compute the consolidated revenues for 20x5.

A.  P1,650 C. P770

B.  P1,350  D. P360

Using the same information above, compute the consolidated expenses for 20x5.

A.  P 990 C. P1,007.5

B.  P1,002.50  D. P1,020

Using the same information above, compute the consolidated cash account at December 31,
20x5.

A.  P 230 C. P 412.50

B.  P 217.50 D. P 200 

Using the same information above, compute the consolidated buildings (net)  account at
December 31,20x5:

A.  P 1,350 C. P 1,630 

B.  P 1,685 D. P 1,650

Using the same information above, compute the consolidated goodwill account at December 31,
20x5:

A.  P 0 C. P 62.5
B.  P 50  D. P 80

Using the same information above, compute the consolidated common stock  account
 account at
December 31, 20x5:

A.  P 540 C. P 740

B.  P 690  D. P 1,140

Using the same information above, compute the consolidated additional paid-in capital 
account at December 31, 20x5:

A.  P 405 C. P 837.50 

B.  P 675 D. P 955

Using the same information above, compute the consolidated retained earnings account at
December 31, 20x5:
 

 
A.  P1,400 C. P1,425
B.  P1,412.50  D. P1,712.50

57. On January 1, 20x4, Maru Corporation and NongCorporaton and their condensed balance sheet
are as follows:

Maru Corp. Nong Corp

Current Assets P 140,000 P 40,000
 Non-current Assets 180,000 80,000
Total Assets P320,000 P 120,000
Current Liabilities P 60,000 P 20,000
Long-term Debt 100,000 -
Stockholders’ Equity 
Equity  160,000 100,000
Total Liabilities & Equities P320,000 P 120,000

On January 2, 20x4,Maru Corporation borrowed P120,000 and used the proceeds to obtain 80%
of the outstanding common shares of Nong Corporation.
Corpo ration. The acquisition price was considered
 proportionate
 proportion ate to Nong’s fair value. The P120,000
P120,000 debt is payable in 10 equal annual principal
 payments, plus interest, beginning December 31, 20x4. The excess fair value of the investment
over the underlying book value of the acquired net assets is allocated to inventory (60%) and to
goodwill (40%).

On a consolidated balance sheet as of January 2, 20x4, what should be the amount for each of the
following?
The amount of goodwill  using proportionate basis (partial):

A.  P 0
B.  P16,000
C.  P20,000
D.  P40,000

58. Using the same information above, the amount of goodwill using full fair value (full/gross-up)
 basis:

A.  P 0
B.  P16,000
C.  P20,000
D.  P40,000
59. Using the same information above, the amount of current assets should be:

A.  P210,000
B.  P204,000
C.  P200,000
D.  P180,000

60. Using the same information above, the amount of non-current asset using proportionate basis
(partial) in computing goodwill should be:

A.  P260,000
B.  P268,000
C.  P276,000
 
D. P280,000
61. Using the same information above, the amount of non-current asset using full fair value basis
 

  (full/gross-up) in computing goodwill should be:

A.  P260,000
B.  P268,000
C.  P276,000
D.  P280,000

62. Using the same information above, the amount of current liabilities should be:

A.  P100,000
B.  P92,000
C.  P80,000
D.  P60,000

63. Using the same information above, the amount of non-current liabilities should be:

A.  P220,000
B.  P208,000
C.  P 180,000
D.  P 100,000

64. Using the same information in above, the amount of stockholders’ equity using proportionate
(partial goodwill) basis to determine non-controlling interest should be:

A.  P 160,000
B.  P 186,000
C.  P 190,000
D.  P 260,000

65. Using the same information above, the amount of stockholders’ equity using full fair value
(full/gross-up goodwill) basis to determine non-controlling interest should be:

A.  P160,000
B.  P186,000
C.  P190,000
D.  P260,000

Subsequent to date of acquisition

69-71. Willie’s Inc. acquires all of the outstanding stock of Vina Corporation on January 1, 20x5. At
that date, Vina owns only three assets and has no liabilities:

Book Value Fair Value

Inventory P 80,000 P 100,000
Equipment (10-year life) 160,000 150,000
Building (20-year life) 200,000 600,000

If Willie pays P900,000 in cash for Vina, what amount would be represented as the subsidiary’s
Building in a consolidation at December 31, 20x7, assuming the book value at that date is still
P400,000?

A.  P400,000 C. P 570,000  

B.  P510,000 D. P 600,000

Using
 be the sameas
represented information above,Building
the subsidiary’s if Willieinpays P80 0,000 in at
P800,000
a consolidation cash for Vina,
December 31,what amount
amou
20x7, nt would
assuming
the book value at that date is still P400,000?
 

 
A.  P400,000 C. P570,000 
B.  P510,000 D. P600,000

Using the same information above, if Willie pays P900,000

P900,0 00 in cash for Vina, what amount would
 be represented as the subsidiary’s Equipment in a consolidation at December 31, 20x7, assuming
the book value at that date is still P160,000?

A.  P140,000 C. P135,000 

B.  P147,000 D. P160,000
76-79. Mark Company acquired 90 percent of Angel Company on January 1, 20x5, for P468,000 cash.
Angel’s stockholders’ equity consisted of common stock of P320,000
P320,00 0 and retained earnings of
P160,000. An analysis of Angel’s net assets revealed the following: 
following: 

Any excess consideration transferred over fair value is attributable to an unamortized patent with
a useful life of 5 years.

Book value Fair value

Building (10-year life) P 20,000 P16,000
Equipment (4-year life) 28,000 36,000
Land 10,000 24,000

In consolidation at January 1, 20x5,

20x5, what adjustment is necessary for Angel’s Buildings account? 
account?  

A.  P4,000 increase C. P3,600 increase

B.  P4,000 decrease  D. P3,600 decrease

In consolidation at December 31, 20x5,

20x5, what adjustment is necessary for Angel’s Buildings
account?

A.  P 3,240 increase C. P 3,600 increase

B.  P3,240 decrease D. P3,600 decrease  

In consolidation at January 1, 20x5,

20x5 , what adjustment is necessary for Angel’s Land account? 
account?  

A.  P14,000 increase  C. P12,600 increase

B.  P14,000 decrease D. P12,600 decrease

In consolidation
consolidation at December 31, 20x6,
20x6, what adjustment is necessary for Angel’s Land account?
account?  
A.  P 0 C. P12,600 increase
B.  P14,000 increase  D. P12,600 decrease

80-84. Darlene Company acquires 80% of Juanito Company for P250,000 on January 1, 20x4. Juanito
reported common stock of P150,000 and retained earnings of P100,000 on that date. Equipment
was undervalued by P15,000 and buildings were undervalued by P20,000, each having a 10-year
remaining life. Any excess consideration transferred over fair value was attributed to goodwill
  with an indefinite life. Based on an annual review, goodwill has not been impaired.

Juanito earn income and pays dividends as follows:

20x4 20x520x6
 Net income P 50,000 P 60,000 P 65,000

Dividends 20,000 25,000 30,000

Assume the initial value method (or cost method) is applied.
 

 
Compute Darlene’s Investment
Investment in Juanito at December 31, 20x4.

A.  P250,000
B.  P271,200
C.  P287,200
D.  P312,500

81. Using the same information above, compute Darlene’s

Darlene’s Investment in Juanito at December 31,
20x6?
A.  P338,000
B.  P312,500
C.  P296,200
D.  P250,000

82. Using the same information above, how much does Darlene report as Income from Juanito/
Dividend Income for the year ended December 31, 20x6?

A.  P24,000
B.  P25,200
C.  P28,000
D.  P49,200

83. Using the same information above, compute the non-controlling interest in the net income of
Juanito at December 31, 20x5?

A.  P 7,000
B.  P 9,200
C.  P11,300
D.  P12,000

84. Using the same information above, compute the non-controlling interest of Juanito using full-
goodwill method at December 31, 20x5?

A.  P 80,000
B.  P 53,900
C.  P 70,000
D.  P 80,400

86. (ICFA SY1415) On January 1, 20x4, Peter Company purchased 80% of the common stock of
Pan Company for
P316,000. On this date, Pan Company had common stock, other paid-in capital, and retained
earnings of P40,000, P120,000, and P190,000, respectively. Peter Company’s common stock
amounted to P500,000 and retained earnings of P200,000.

On January 1, 20x4, the only tangible assets of Pan that were undervalued were inventory and
 building. Inventory, for which the FIFO is used.was worth P5,000 more than cost. Building
whichwas worth P15,000 more than book value, has a remaining life of 8 years, and a straight
line depreciation is used. Any remaining excess is full goodwill with an
a n impairment for 20x4
amountingto P3,000. Pan Company reported net income of P50,000 and paid dividends of
P10,000 in 20x4,
20x4, while the parent’s reported net income amounted to P10 0,000 and paid
dividends of P20,000.

Determine the Consolidated Net Income Attributable to Controlling Interest/Profit Attributable

to Equity Holders of Parent:
 

A.  P142,000
B.  P132,125
C.  P126,500
D.  P124,100

87. Using the same information above, compute the Consolidated Net Income Attributable to
Controlling Interest/Profit Attributable to Equity Holders of Parent:

A.  P142,000
B. P132,125
C.   P126,500
D.  P124,100

88. Using the same information above, compute the non-controlling in Net Income / CNI attributable
to Non-controlling interest using Partial Goodwill:

A.  P10,000
B.  P 8,600
C.  P 8,025
D.  P 8,625

Using the same information above, compute the non-controlling in Net Income / CN
CNII attributable
to Non-controlling interest using Full Goodwill:

A.  P10,000
B.  P 8,600
C.  P 8,625
D.  P 8,025

89. Using the same information above, compute the Equity Holders of Parent – 
Parent –  Retained
 Retained Earnings /
Controlling Interest in the Consolidated Retained Earnings

A.  P200,000
B.  P304,100
C.  P324,100
D.  P342,125

90. Using the same information above, compute the Consolidated/ Group Retained Earnings on full-
goodwill approach:

A.  P200,000
B.  P304,100
C.  P324,100
D.  P342,125

91-103.On January 1, 20x5, Euro Company acquired 90% of Pacific Company in exchange for 10,800
shares of P10 par common stock having a market value of P241,200. Euro and Pacific condensed
 balance sheets were as follows:

Euro Company and Pacific Company

Balance Sheets at January 1, 20x5
(before combination)

Euro Co. Pacific Co.

Assets
Cash P61,800 P74,800
Accounts receivable (net) 68,400 18,200
 

  Inventories 45,800 32,200

Equipment (net) 358,000 80,000
Patents 20,000
Total Assets P534,000 P225,200

Liabilities and stockholders’ equity 

equity 
Accounts payable P 8,000 P 13,200
Bonds payable, 10% 200,000
Common stock, P10 par 200,000 100,000
Additional paid-in capital 30,000 30,000
Retained earnings 96,000 82,000
Total liabilities and stockholders’ equity 
equity  P534,000 P225,200

At the date of acquisition, all assets and liabilities of Pacific Company

Compan y have a book value
approximately equal to their respective market values except the following as determined by
appraisal as follows:

Inventories (FIFO method) P34,200

Equipment (net – 
(net –  remaining
 remaining life – 
life –  4 yrs.) 96,000
Patents (remaining life 10 yrs.) 26,000
Goodwill (no impairment)

Compute the amount of partial goodwill on January 1, 20x5:

A. P5,200 C. P28,800 
B.   P7,600 D. P50,400

Using the same information above, compute the non-controlling interests (in net assets) on
January 1,20x5:

A.  P21,200 C. P23,600

B.  P22,400 D. P26,180

Using the same information above, compute the Consolidated Retained Earnings, January 1,
20x5:

A.  P 96,000  C. P169,800

B.  P104,200 D. P198,000

Using the same information above, compute the Equity Holders of Parent - Retained
Earnings, January 1, 20x5:

A.  P 96,000  C. P169,800

B.  P104,200 D. P198,000

In addition to the information above, assuming that on

o n December 31, 20x5,
20x 5, the following results
were given:
Dividends Paid Net Income
Euro Company P 30,000 P60,400
Pacific Company 8,000 18,800

Using cost method to record results of operations, compute the investment balance on
December 31, 20x5:

A. P 0 C. P244,320
B.   P241,200  D. P250,920
 

Using the information above, compute Dividend Income for 20x5 using cost method:

A.  P 0 C. P 8,000
B.  P7,200  D. P16,800

Using the same information above, compute the Non-Controlling Interest in Net Income on
December 31,20x5:

A.  P 0 C. P1,220 (?) 

B.  P1,080 D. P1,880 (/)
Using the same information above, compute the Non-controlling Interests on December 31,
20x5:

A.  P21,200 C. P24,020 

B.  P22,280 D. P24,600

Using the same information above, compute the Profit for the period attributable to Equity
Holders of Parent on December 31, 20x5:

A.  P53,200 C. P72,000

B.  P64,180  D. P88,200

Using the same information above, compute the Consolidated/ Group Net Incomeon December
31, 20x5:
A.  P53,200 C. P65,400
B.  P64,180 D. P88,200

Using the same information above, compute the Consolidated Retained Earnings, December
31, 20x5:

A.  P129,520 C. P138,800 

B.  P130,180 D. P139,600

Using the same information above, compute the Equity Holders of Parent – 
Parent –  Retained
 Retained
Earnings, December 31, 20x5:

A.  P129,520 C. P138,800

B.  P130,180  D. P139,600
Using the same information above, compute the Consolidated Total Equity (Stockholders’
Equity) on December 31, 20x5:

A.  P216,180 C. P625,400

B.  P601,380 D. P634,820

104 - 105.Pete Co. acquires Dale, Inc on January 1, 20x4. The consideration transferred exceeds the fair
value of Dale’s net assets. On that date, Pete has a building with a book value of P1,200,000 and
a fair value of P1,500,000. Dale has a building with a book value of P400,000 and a fair value of
P500,000.

What amounts in the Building account appear on Dale’s separate balance sheet and on the
consolidated balance sheet immediately after acquisition?

Push-down Accounting
A.  P400,000 and P1,600,000
 

B.  P500,000 and P1,700,000

C.  P400,000 and P1,700,000
D.  P500,000 and P2,000,000

 No push-down Accounting

A.  P500,000 and P2,000,000
B.  P400,000 and P1,700,000
C.  P500,000 and P1,700,000
D.  P400,000 and P2,000,000

112. On January 2, 20x4, John Company acquired 80 percent of Carlo Corporation’s common stock
for P344,000
P344,000 in cash. At the acquisition date, the book values and fair values of Carlo’s assets
and liabilities were equal and the fair value of
o f the non-controlling interest was equal to 20
 percent of the total book value of Carlo. The stockholders’ equity accounts of the two companies
at the acquisition date are:

John Carlo
Common stock, P5 par value P 500,000 P 200,000
Additional paid – 
paid – in
in capital 300,000 80,000
Retained earnings 350,000 150,000
Total Stockholders’ Equity 
Equity  P1,150,000 P 430,000

 Non-controlling
 Non-controlling interest was assigned income of P11,000 in John’s consolidated income
statement for 20x4.
What will be the amount of net income reported by Carlo corporation in 20x4?

A.  P44,000
B.  P55,000
C.  P66,000
D.  P36,000

Using the same information above, what amount

amou nt will be assigned to the non
non-controlling
-controlling interest
on January 2, 20x4, in the consolidated balance sheet?

A.  P86,000
B.  P44,000
C.  P68,800
D.  P50,000
Using the same information above,
above , what will be the total stockholders’ equity in the consolidated
 balance sheet as of January 2, 20x4?

A.  P1,580,000
B.  P1,064,000
C.  P1,150,000
D.  P1,236,000

117. Shyn Corporation’s outstanding capital stock (paid-in

(paid -in capital) has been P200,000 since the
company was organized in 20x3.
20x3 . Shyn’s retained earnings account since 20x3 is summarized as
follows:

Retained Earnings
Debit: Credit:
Dividends December 1, 20x3 P20,000 Net income 20x3 P50,000
Dividends December 1, 20x4 20,000 Net income 20x4 70,000
 

  Dividends December 1, 20x5 30,000 Net income 20x5 10,000

Dividends December 1, 20x6 40,000 Net income 20x6 60,000

Delle Corporation purchased 20% of Shyn’s outstanding stock on January 1, 20x5, for P300,000.
During 20x6Delle’s
20x6Delle’s income, excluding its investment income from Shyn’s was P90,000. 
P90,000.  

Goodwill impairment for the year 20x3-20x6 amounted to P2,250 per year.

Compute the balance of Delle’s Investment in Shyn account at December 31, 20x6 under the cost
method:
A.  P285,000
B. P295,500
C. P300,000
D. P315,000

INTERCOMPANY SALES – 
SALES –  INVENTORY
 INVENTORY

118. Pia Corporation owns an 80% interest in Euro Corporation; and at December 31, 20x5, Pia
investment in Euro on a cost basis was equal to 80% of Euro’s stockholders equity. During 20x6,
Euro sold merchandise to Pia to P200,000 at a gross profit to Euro of P40,000. At December 31,
20x6 half of this merchandise is included in Pia’s inventory. Separate incomes for Pia and Euro
for20x6 are summarized as follows:

Pia Euro
Sales P1,000,000 P 600,000
Cost of sales 500,000 400,000
Gross profit P 500,000 P 200,000
Operating expenses 250,000 80,000
Separate incomes P 250,000 P 120,000

The income from Euro for 20x6

20x 6 is:

A.  P96,000 C. P16,000 

B.  P80,000 D. P 0

The Consolidated/Group cost of sales for 20x6 is:

A.  P920,000 C. P880,000

B.  P900,000 D. P720,000 
The Non-controlling interest in net income for 20x6
20x 6 is:

A.  P120,000 C. P24,000

B.  P 96,000 D. P20,000 

121-124. The separate incomes (which do not include investment income) of Pia Corporation and Rose
Corporation, its 80% owned subsidiary, for 20x5wee determined as follows:

Pia Rose
Sales P800,000 P200,000
Cost of sales 400,000 120,000
Gross profit P400,000 P 80,000
Other expenses 200,000 60,000
Separate incomes P200,000 P 20,000
 

  During 20x6Pia sold merchandise that cost P40,000 to Rose for P80,000, and at December 31,
20x5 half of these inventory items remained unsold by Rose.

The Minority interest in net income for 20x6:

A.  P 0 C. P16,000
B.  P4,000  D. P20,000

The Consolidated sales for 20x6:

A.  P1,000,000 C. P920,000 

B.  P 960,000 D. P800,000

The Consolidated cost of sales for 20x6:

A.  P460,000  C. P540,000

B.  P496,000 D. P600,000

The Profit attributable to Equity Holders of Parent  or NCI Contributable to controlling
interest for 20x6:

A.  P216,000 C. P196,000 

B.  P200,000 D. P160,000

125. Income statement information for the year

year 20x6 for Marc Corporation and its Francis 60%
owned subsidiary, Francis Corporation, is as follows:

Marc Francis
Sales P1,800,000 P700,000
Cost of sales 800,000 500,000
Gross Profit P1,000,000 P200,000
Operating expenses 500,000 100,000
Francis’s net income 
income  P100,000
Marc’s separate income 
income  P 500,000

Intercompany sales for 20x6 are upstream (from Francis to Marc) and total P200,000. Marc’s
December 31, 20x5 and December 31, 20x6 inventories contain unrealized profits of P10,000
and P20,000, respectively.

The consolidated sales for 20x6:

A.  P1,800,000 C. P2,380,000
B.  P2,300,000  D. P2,500,000

The consolidated cost of sales for 20x6:

A.  P1,090,000 C. P1,110,000 

B.  P1,100,000 D. P1,120,000

The Profit attributable to Equity Holders of Parent or CNI Contributable to Controlling Interests
for 20x6:

A.  P554,000  C. P564,000

B.  P560,000 D. P610,000

129. Mars Corporation owns an 80% interest Mallow Company acquired several years ago. Mallow
regularly sells merchandise to its parent at 125% of Mallow’s cost. Gross profit data of Mars and
 

  Mallows for the year 20x6 are as follows:

Mars Mallow
Sales  P500,000 P400,000
Cost of sales 400,000 320,000 
Gross Profit P100,000 P 80,000

During 20x6, Mars purchased inventory items from Mallows at a transfer price of P200,000.
Mars December 31, 20x5 and 20x6 inventories included goods acquired from Mallow of
P50,000 and P62,500, respectively.
The Consolidated sales or Mars Corporation and subsidiary for 20x6
20x 6 were:

A.  P900,000 C. P700,000 

B.  P712,500 D. P620,000

Using the same information above, the Unrealized profits in the year-end 20x5 and 20x6
inventories were:

A.  P 50,000 and P62,500, respectively

respectively
B.  P400,000 and P50,000, respectively
C.  P 10,000 and P12,500, respectively
D.  P 8,000 and P10,000, respectively

Using the same information above, the Consolidated cost of goods sold of Mars and subsidiary
subsidiar y
for 20x6 was:

A.  P512,000 C. P526,400

B.  P522,500  D. P528,000

132. Marc Co. is a manufacturer and Francis Co.., its 100%-owned subsidiary,
subsidiary, is a retailer.
retailer. The
companies are vertically integrated. Thus, Francis purchases all of its inventory from Marc. On
January 1, 20x6,
20x6, Francis’s inventory was P60,000. For the year ended December 31, 20x6, its
 purchases were P300,000, and its cost of sales was P333,000. Mar c’s
c’s sales to Francis reflect a
50% markup on cost. Francis then resells the goods to outside entities at a 100% markup on cost.

At what amount should the intercompany inventory

invento ry purchased from Marc be reported in the
consolidated balance sheet at December 31, 20x6?

A.  P 6,000 C. P27,000

B.  P18,000  D. P92,000

133. Francis Company owns 80% of Ryan Corp.’s

C orp.’s common stock. During October 20x6, Ryan sold
merchandise to Francis for P500,000. At December 31, 20x6, one-half of the merchandise
remained in Francis inventory. For 20x6, gross profit percentages were 30% for Francis and 40%
for Ryan.

The amount of unrealized intercompany profit in ending inventory at December 31,

20x6 that should be eliminated in consolidation is:

A.  P 200,000 C. P80,000

B.  P 100,000  D. P75,000

135. Rose Corp. acquired a 70% interest

interest in
in Bud Co. in 20x5. For the year
year ended December 31, 20x5
and20x6, Bud Co. reported net income of P320,000 and P360,000, respectively. During 20x5,
Bud sold merchandise to Rose Corp. for P40,000 at a profit of P8,000. The merchandise was
later resold by Rose Corp. to outsider for P60,000 during 20x6.
 

 
For consolidation purposes, what is the non-controlling
non- controlling interest’s share of Bud’s net income
income for
20x5 and 20x6, respectively?

20x5 20x6
A.  P93,600 P110,400
B.  P 96,000 P108,000
C.  P 98,000 P105,600
D.  P106,400 P100,000

INTERCOMPANY SALES – 
SALES –  DEPRECIABLE
 DEPRECIABLE AND NON-DEPRECIABLE ASSETS

Items 136-138 are based on the following information:

Income information for 20x6 taken from the separate company financial statements of Pia
Corporation and its 75% owned subsidiary, Ruth Corporation is presented as follows:.

Pia Ruth
Sales P 500,000 P230,000
Gain on sale of building 10,000
Dividend income 37,500
Cost of goods sold ( 250,000) ( 130,000)
Depreciation expense ( 50,000) ( 30,000)
Other expenses ( 100,000) ( 20,000)
 Net income P 147,500 P 50,000

Pia’s gain on sale of building relates to a building with a book value of P 20,000 and a ten-year
remaining useful life that was sold to Ruth for P30,000 on January 1, 20x6.

At what amount will the gain on sale of building appear on the consolidated/group income
statement of Pia and Ruth for the year 20x6 should be:

A.  Zero  C. P7,500

B.  P2,500 D. P10,000

The Consolidated/group depreciation expense for 20x6 should be:

A.  P79,000  (?) C. P81,000

B.  P80,000 D. P90,000
The Profit attributable to Equity Holders of Parent or CNI Contributable to Controlling Interests
for 20x6 should be:

A.  P147,500 C. P137,500

B.  P138,500(?) D. P110,000

142-145.
Marc Corporation is a 90% owned subsidiary of Francis Corporation acquired several years ago
at book value equal to fair value. For the years 20x5 and 20x6, Francis and Mark report the
following:

20x5 20x6
Francis separate income P600,000 P800,000
Marc’s net income 
income  160,000 120,000
The only intercompany transaction between Francis and Marc during 20x5 and 20x6 was the
 

  January 1, 20x5 sale of land. The land had a book value of P40,000 and was sold intercompany
for P60,000, its appraised value at the time of sale.

If the land was sold by Francis to Marc (downstream sales) and that Marc still owns the land at
December 31, 20x6, compute
compu te the Profit Attributable to Equity Holders of Parent for 20x5 and
20x6:

20x5 20x6 20x5 20x6

A. P726,000 P908,000 C. P744,000 P920,000
B. P724,000 P908,000  D. P724,000 P920,000

Using the same information above, the Consolidated/group net income for 20x5 and 20x6:

20x5 20x6 20x5 20x6

A. P724,000 P908,000 C. P740,000 P920,000 
B. P760,000 P920,000 D. P744,000 P920,000

Using the same information above, except that the land was sold by Marc to Francis (upstream
sales) and Francis still owns the land at December 31, 20x6, compute the Profit Attributable to
Equity Holders Of Parent or CNI Attributable to Controlling Interests for 20x5 and 20x6:

20x5 20x6 20x5 20x6

A. P726,000 P908,000  C. P744,000 P920,000
B. P724,000 P908,000 D. P724,000 P920,000

146. Panga Corp. owns 100% of Sinan Corp.’s common stock. On January 2, 20x5, Panga sold to
Sinan for P80,000 machinery with a carrying amount of P60,000. Sinan is depreciating the
acquired machinery over a five year life by the straight-line method. The net aadjustments
djustments to
compute20x5 and 20x6
20x 6 Profit Attributable to Equity Holders of Parent or CNI Attributable to
Controlling Interests before income tax would be an increase (decrease) of:

20x5 20x6
A. P( 8,000) P2,000
B. P( 8,000) P 0
C. P(10,000) P2,000
D. P(10,000) P 0

147. On January 1, 20x6, Pine Corp. sold machine for P1,800,000 to Shine Corp., its wholly owned
subsidiary. Pine paid P2,200,000 for this machine, which had accumulated depreciation of
P500,000. Pine estimated a P200,000 salvage value and depreciated the machine on the straight-
line method
method over 20 years, a policy which Shine continued. In Pine’s December 31, 20x5,
consolidated balance sheet, this machine should be included in cost and accumulated
depreciation as:

Cost Accumulated depreciation

A.  P2,200,000 P600,000
B.  P2,200,000 P580,000
C.  P1,800,000 P 80,000
D.  P1,700,000 P 85,000

148. On January 1, 20x6, Jhon Company purchased 90% equity of Joy Company. On January 3, 20x6.
Joy sold equipment (with original cost of P1,500,000 and carrying cost of P750,000) to Jhon for
P1,080,000. The equipment have a remaining life of three (3) years and was depreciated using
the straight-line method by both companies. In Jhon consolidated balance sheet as of December
31, 20x6,
Cost should be reported at:
 

A.  P1,500,000  C. P 750,000

B.  P1,080,000 D. P1,350,000

Accumulated depreciation should be reported at:

A.  P1,000,000 C. P 750,000
B.  P1,500,000 D. P1,000,000 

 Net Book Value should be reported at:

A. P750,000 C. P 0
B.   P735,000 D. P500,000

149. On January 1, 20x6, Josh Corporation sold equipment with a three-year

three-year remaining useful life and
a book value of P50,000 to its 70%-owned subsidiary for a price of P57,500. In the consolidation
working papers for the year ended December 31, 20x6, the elimination entry concerning this
transaction will include:

A.  A debit to equipment for P7,500.

B.  A debit to gain on equipment for P7,500.
C.  A credit to depreciation expense for P7,500.
D.  A debit to gain on equipment sale for P5,000.

150. On January 1, 20x6, Pam Corp. sold a warehouse with

with a book value of P160,000 and a 20-year
remaining useful life to its wholly-owned subsidiary, Spam Corporation, for P240,000. Both Pam
and Spam use the straight-line depreciation method. On December 31, 20x6, the separate
company financial statements contained the following balances connected with the warehouse:

Pam Spam
Gain on sale of warehouse P80,000
Depreciation expense P 12,000
Warehouse 240,000
Accumulated depreciation 12,000

A working paper entry to consolidate the financial statements of Pam and Spam on December
31, 20x6 will include:

A.  A debit to gain on sale of warehouse for P76,000.

B.  A debit to gain sale of warehouse for P80,000.
C.  A debit to accumulated depreciation for P4,000.
D.  A credit to depreciation expense for P12,000.
153. Sophie Corporation
Corporation is an 80% owned subsidiary
subsidiary of Pat Corporation. In
In 20x5, Sophie sold
sold land
net cost P15,000 to Pat for 25,000. Pat held the land for eight years before reselling it in 20x6
to Eden Company, an unrelated entity, for P55,000. The consolidated income statement for Pat
and its subsidiary in 20x6, Sophie, will show a gain on the sale of land of:.

A.  P40,000  C. P30,000

B.  P32,000 D. P24,000

154. Marc Co. owned 80% of Francis Corp. during 20x5, Marc sold to to Francis land with a book value
of P48,000. The selling price was P70,000. In its accounting records, Marc should:

A.  Not recognize a gain on the sale of the land since it was made to a related party.
B.  Recognize a gain of P17,600.
C. Defer recognition of the gain until Francis sells the land to a third party.
D.   Recognize a gain of P22,000.
 

 
INTERCOMPANY ACCOUNTS

155. Pink Corp. owns 60% of Sun Corp.’s outstanding capital stock. On May 1, 20x5, Pink advanced
P140,000 in cash, which was still outstanding at December 31, 20x6. What portion of this
advance should be eliminated in the preparation of the December 31, 20x6 consolidated balance
sheet?

A.  P140,000  C. P56,000

B.  P84,000 D. P 0

156. During 20x6, Pine Corp. sold

sold goods to its 80% owned subsidiary, Crest Corp. at December 31,
20x6, one-half
one-half (1/2) of these goods were included in Crest’s ending inventory. Reported 20x6
selling expenses were P2,200 and P400,000 for Pine and Crest,
Cre st, respectively. Pine’s selling
expenses included P100,000 in freight-out costs for goods sold to Crest. What amount of selling
expenses should be reported in Pine’s
P ine’s consolidated income statement? 
statement? 

A.  P3,000,000 C. P2,950,000

B.  P2,960,000 D. P2,900,000 

157. At December 31, 20x6, Green, Inc.

Inc. owned 90% of White
White Corp., a consolidated subsidiary, and
20% of Blue Corp., an investee
in vestee over which Green cannot ex
exercise
ercise significant influence. On the
same date, Green had receivables of P600,000 from White and P400,000 from Blue. In its
December 31, 20x6 consolidated balance sheet, Green should report accounts receivable from
affiliates of:

A.  P1,000,000 C. P460,000

B.  P 680,000 D. P400,000 

158. Nenita, Inc owns 100% of Vilma

Vilma Corporation, a consolidated subsidiary, and 80% of Willie,
Inc., an unconsolidated subsidiary at December 31.
3 1. On the same date, Nenita has receivables of
P400,000 from Vilma and P350,000
P350,00 0 from Willie. In its December 31 consolidated balance sheet,
 Nenita should report accounts receivable from investee at

A.  P 0 C. P350,000 
B.  P70,000 D. P270,000

160. Choco Company’s current receivables from affiliated companies at December

Dece mber 31, 20x5 are (1) a
P150,000 cash advance to Candy Corporation (Choco owns 30% of the voting stock of Candy
and accounts for the investment by the equity method), (2) a receivable of P520,000 from Cake
Corporation for administrative and selling services (Cake is 100%-owned by b y Choco and is
included in Choco’s consolidated financial statements), and (3) a receivable of P400,000 from
Wheat Corporation for merchandise sales on credit (Wheat is a 90%-owned, unconsolidated
subsidiary of Choco accounted for by
b y the equity method). In the ccurrent
urrent assets section of its
December 31, 20x5 consolidated balance sheet, Choco should report accounts receivable from
investee in the amount of:

A.  P360,000 C. P 550,000  

B.  P310,000 D. P1,70,000

161. Golden Corporation

Corporation owns a 70% interest in Bay Corporation, acquired several years
years ago at book
value. On December 31, 20x5, Bay mailed a check for P20,000 to Golden in part payment of a
P40,000 account with Golden. Golden had not received the check when its books were closed on
December 31. Golden Corporation had accounts receivable of P300,000 (including the P40,000
from Bay) and Bay had accounts receivable at P440,000 at year-end. In the consolidated balance
sheet of Golden Corporation and Subsidiary at December 31, 20x5, accounts receivable will be
shown in the amount of:
 

 
A.  P740,000 C. P700,000 
B.  P720,000 D. P608,000

COMMON CONTROL

165. Mr. Garcia owns four corporations. Combined financial

financial statements are being prepared for these
corporations, which have intercompany profits of P1,000,000. What amount of these
intercompany loans and profits should be included in the combined financial statements?

Intercompany
Loans Profits
A.  P400,000 P 0
B.  P400,000 P1,000,000
C.  P 0 P 0
D.  P 0 P1,000,000

TOA - VALIX
46-16.
1. Consolidated financial statements are
I. The financial statements of a group presented as those of a single economic entity.
II. The financial statements presented by a parent in which the investments are accounted for on
the basis of the direct equity interest rather than on
o n the basis of the reported results and net
assets of the subsidiary.
A.  I only
B.  II only
C.  Both I and II
D.  Neither I nor II

2. A “group” for consolidation purposes is 

is  
A.  A parent and all of its subsidiaries.
B.  An entity that has one or more subsidiaries.
C.  An entity, including an unincorporated entity such as partnership, that is controlled by
another entity.
D.  An entity that obtains control over entities or businesses.

4. The following statements relate to consolidated financial statements. Which statements is

incorrect?
A.  A parent shall present consolidated financial statements in which it consolidates its
investment in subsidiaries.
B.  Consolidated financial statements shall include all subsidiaries of the parent.
C.  A subsidiary is excluded from consolidation if the investor is a venture capital
organization, mutual fund, unit trust or similar entity.
D.  A subsidiary is not excluded from consolidation even if its business activities are dissimilar
from the other entities within the group.

5. A parent is not required to present consolidated financial statements under all of the following
conditions, except
A.  When the parent is itself a wholly-owned subsidiary, or is partially-owned subsidiary and its
owners do not object to the parent not representing consolidated financial statements.
B.  When the parent’s debt and equity
equit y instruments are not traded in public market.
market.  
C.  When the parent has filed or it is in the process of filing its financial statements with
SEC for the purpose of issuing any class of instruments in a public market.
D.  When the ultimate or any intermediate parent of the
th e parent produces consolidated financial
statements for public use that comply with PFRS.
 

7. Control is presumed to exist when the parent owns directly or indirectly through subsidiaries
A.  More than half of the equity of an entity.
B.  More than half of the ordinary shares of an entity.
C.  More than half of the preference and ordinary shares of an entity.
D.  More than half of the voting power of an entity.

8. Control exists even if the parent owns half or less of the voting power of an entity where there is
( choose the incorrect one)
A.  Power over more than half of the voting rights by virtue of an agreement with other
investors,
B.  Power to govern the financial and operating policies of the entity under a statute or an
agreement.
C.  Power to appoint or remove the key officers and employees of the entity.
D.  Power to cast the majority of votes at meetings of the board of directors or equivalent
governing body.

10. What is the initial measurement of an investment in subsidiary retained by the investor when
control is lost?
A.  Fair value at the date when control is lost.
B.  Fair value at the beginning of the reporting period
C.  Carrying amount at the date when control is lost
D.  Carrying amount at the beginning of the reporting period

12. Which statement is incorrect concerning the preparation of consolidated financial statements?
A.  The financial statements of the parent ant its subsidiaries shall be consolidated on a line by
line basis.
B.  Intragroup balances, transactions, income and expenses shall be eliminated in full.
C.  When the reporting dates of the parent and a subsidiary are different, the difference
shall be no more than six months.
D.  Consolidated financial statements shall be prepared using uniform accounting policies for
like transactions and other events in similar circumstances.

15. Which is incorrect concerning the cost method of accounting?

A.  The investment is recognized at cost.
B.  The investor recognizes income from investment only to the extent that the investor receives
distributions from accumulated profits of the investee arising after the date of acquisition.
C.  Distributions received in excess of profits after acquisition are regarded as a reduction of the
th e
cost of the investment.
D.  The investment is initially recorded at cost and any changes in value of the investment
at each reporting date are recognized in profit or loss.

45-18
10. An entity shall account for each business combination by applying the
A.  Acquisition method only
B.  Pooling method only
C.  Either acquisition method or pooling method
D.  Neither acquisition method nor pooling method

45-19.
12. In a business combination achieved in stages, the acquirer shall
A.  Not measure the previously held equity interest.
B.  Remeasure the previously held interest at fair value with any resulting gain or loss
included in profit or loss.
C.  Remeasure the previously held interest at fair value with any resulting gain or loss included
in other comprehensive income.
 

D.  Remeasure the previously held interest at fair value with the resulting gain or loss included in
retained earnings.

13. 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
a mount of any noncontrolling interest in the
acquire over the identifiable net assets acquired.
C.  The total of the consideration received and the fair value of the previously held interest in the
acquire over the identifiable net assets acquired.
D.  The total consideration received, the amount of any noncontrolling interest in the
acquiree over the identifiable net assets acquired.

46-16
6. A parent loses control of a subsidiary (choose the incorrect one)
A.  When there is a change in absolute or relative ownership level.
B.  When a subsidiary becomes subject to the control of a government, court, administrator or
regulator.
C.  When the loss of control is the result of a contractual agreement.
D.  When the subsidiary is operating under severe long-term restrictions that impair its
ability to transfer funds to the parent.

13. The noncontrolling interests shall be presented in the consolidated statement of financial position
A.  As part of the parent shareholders’ equity 
equity  
B.  As part of current liabilities
C. As part of the noncurrent liabilities
D.   Within equity, separately from the equity of the owners of the parent.

46-17
6. Which of the following terms best describes the financial statement of a parent in which the
investments are accounted for on the basis of the direct equity interest?
A.  Single financial statements
B.  Combined financial statements
C.  Separate financial statements
D.  Consolidated financial statements

45-20
7. An acquirer shall at the acquisition date recognize goodwill acquired in a business combination
as anasset. Goodwill shall be accounted for as which of the following?
A.  Recognize as an intangible asset and amortize over its useful lie.
B. Write off against retained earnings
C.   Recognize as an intangible asset and impairment test when trigger event occurs.
D.  Recognize as an intangible asset and annually impairment test or more frequently if
impairment is indicated.

10. PFRS 3 requires that the contingent consideration of the acquired entity shall be recognized at
fair value. The existence of contingent consideration
c onsideration is often reflected in a lower purchase price.
Recognition of such contingent consideration shall
A.  Decrease the value attributed to goodwill, thus decreasing
de creasing the risk of impairment of goodwill.
B.  Decrease the value attributed to goodwill, thus increasing the risk of impairment of goodwill.
C.  Increase the value attributed to goodwill, thus decreasing the risk of impairment of goodwill.
D.  Increase the value attributed to goodwill, thus increasing the risk of impairment of
goodwill.

FOREIGN CURRENCY
 

4. On September 3, 20x3, Pia placed a noncancellable purchase order with a Japanese company for
a custom-built machine. The contract price was 1,000,000 yens. The machine was delivered on
December 23, 20x3. The invoice was dated November 13, 20x3, the shipping date (FOB
shipping point). The vendor was paid on January 7, 20x4. The spot direct exchange rates for the
Japanese yenson the respective dates are as follows:

Sept. 3, 20x3 Nov.13, 20x3 Dec. 23, 20x3Dec. 31, 20x3 Jan. 7, 20x4
P.20 P.21 P.22 P.23 P.24

What amount is the capitalizable cost of the equipment?

A.  P200,000 C. P220,000
B.  P210,000  D. P230,000

5. What is the reportable foreign exchange gain or

o r loss amount in Pia’s
Pia’s20x3
20x3 income statement?
A.  P10,000 loss C. P30,000 loss
B.  P20,000 gain  D. P20,000 loss

6. What is the reported value of the payable to the vendor at December 31, 20x3?
A.  P200,000 C. P220,000
B.  P210,000  D. P230,000

7. During July 20x4, Mark Corporation had the following transactions with foreign businesses:

Vendor A
Date Nature of Transaction Billing CurrencyExchange Rate (Direct)
7/1/10 Imported merchandise costing 100,000
Rupees from Pakistan wholesaler Rupee P.82
7/10/10 Paid 40% of amount owed .83
7/31/10 Paid remaining amount owed .78

Customer A
7/15/10 Sold merchandise for 50,000 pound to
Syrian wholesaler Pound* P.95
7/20/10 Received 20% payment .90
7/30/10 Received remaining amount owed .91

*Syrian pound.

What is the capitalized cost of inventory purchase from the Pakistan wholesaler?
A.  P 0 C. P82,000 
B.  P78,000 D. P83,000

8. Using the same information in No.7 , what is the foreign exchange gain or loss on July 31, 20x4
transaction arising from the Pakistan wholesaler?
A.  P1,000 loss C. P400 gain
B.  P1,000 gain D. P400 loss

9. Using the same information in No. 7 ,what is the foreign exchange gain or loss on July 31, 20x4
transaction arising from Pakistan wholesaler?
A.  P4,000 gain C. P2,400 loss
B.  P4,000 loss D. P2,400 gain

10. Using the same information in No. ,what is the reportable sales amount in the income statement
in 20x4?
A.  P38,000 C. P45,500
B.  P45,000 D. P47,500 
 

 
11. Using the same information in No. ,what is the foreign exchange gain or loss on July 20, 20x4
transaction arising from Syrian wholesaler?
A.  P500 gain C. P2,500 gain
B.  P500 loss  D. P2,500 loss

12. Using the same information in No. ,what is the foreign exchange gain or loss on July 30, 20x4
transaction arising from Syrian wholesaler?
A.  P1,600 loss  C. P2,000 gain
B.  P1,600 gain D. P2,000 loss

13. Quezon Exports Corp. sold

sold metal
metal crafts
crafts to a US firm
firm for S70,000 dollar and pertinent information
on exchange conversion rates related to this transaction were as follows:

Conversion Rate (Peso to US Dollar)

 Nov. 04 Receipt of order P27.40
 Nov. 22 Date of shipment 27.50
Dec. 31 Balance sheet date 27.60
Jan. 06 Date of collection 27.00

The sale would be appropriately recorded at:

A.  P1,890,000 C. P1,925,000 
B.  P1,918,000 D. P1,932,000

14. On October 1, 20x3, Matt Co. purchased merchandise worth a total of 100,000 Swiss
Swiss francs from
its Swiss supplier, payable within 30 days under an open account arrangement. Matt Co. issued a
30-day, notes payable in Swiss francs. On October 31, 20x3, Matt Co. paid the note. The
following information on spot rates (P/SF) is provided:

Buying Selling
October 01, 20x3 P24.03 P24.15
October 31, 20x3 24.10 24.22

Matt Co.’s foreign exchange gain or loss on the transaction is:

is:  
A.  P5,040 loss C. P12,075 gain
B.  P7,000 loss  D. P19,110 loss

15. The accounts of Juanito International, a Philippine corporation, show P81,300 accounts
receivableand P38,900 accounts payable at December 31, 20x3, before adjusting entries are
made. In analyzing the balances reveals the following:

Accounts Receivable:
Accounts Receivable in Phil. Pesos P28,500
Receivable denominated in 20,000 foreign currency 1 11,800
Receivable denominated in 25,000 foreign currency 2 41,000
Total P81,300

Accounts Payable:
Payable denominated in Phil. Pesos P 6,950
Payable denominated in 10,000 foreign currency 3 7,600
Payable denominated in 10,000 foreign currency 2 24,450
Total P38,900

Current exchange rates for foreign currency 1, foreign currency 2, and foreign currency 3 at
December 31, 20x3 are P.66, P1.65 and P.70, respectively.
 

Determine the net exchange gain or loss that should be reflected in JJuanito’s
uanito’s income statement
for 20x3 from year-end exchange adjustments.
A.  P1,950  C. P1,650
B.  P(1,950) D. P (300)

16. Using the same information in No. , determine the amounts at which the accounts receivable
should be included in Juanito’s December 31, 20x3:

Accounts Receivable
A.  P79,332 C. P134,145
B.  P82,950  D. P 53,658

17. Using the same information in No. , determine the amounts at which the accounts payable
should be included in Juanito’s December 31, 20x3:
A.  P64,185 C. P27,230
B.  P38,600  D. P38,000

18. Exchange rate is

A.  The ratio of exchange for two currencies

B.  The spot exchange rate at balance sheet date
C.  The exchange rate for immediate delivery
D.  The difference resulting from translating a given number of units of one currency into
another currency at different exchange rates.

19. It is the currency of the primary economic environment in which the entity operates.
A.  Reporting currency C. Presentation currency
B.  Functional currencyD. Foreign currency

20. These are money held and financial assets to be received and financial liabilities to be paid in
fixed or determinable amount of money.

A.  Foreign currency loansC. Monetary items 

B.  Long-term items D. Nonmonetary items

21. Which statement is incorrect?

A.  Functional currency is the currency of the primary economic environment in which he entity
operates.
B. Foreign currency is a currency other than the functional currency of the entity.
C.   Presentation currency is the currency in which the financial statements are presented.
D.  Net investment in a foreign operation is the amount of the reporting entity’s interest in
the total assets of that operation.

22. A foreign currency transaction is a transaction which is denominated or requires settlement in a

foreign currency and includes
I. Purchase and sale
sale of goods and services whose price is denominated in a foreign currency.

II. Borrowing and lending of funds when the amounts payable or receivable are deno
denominated
minated in a
foreign currency.

A.  I only C. Both I and II 

B.  II only D. Neither I nor II

23. Initially, a foreign currency transaction shall be recorded by applying to the foreign currency
amount
 

A.  The spot exchange rate at the date of transaction

B.  The closing rate at the end of reporting period
C.  The average exchange rate during the year
D.  The spot rate at the date of the settlement of the transaction.

24. Foreign currency monetary items are subsequently translated at

A.  Closing rate C. Forward rate

B.  Historical rate D. Spot exchange rate

25. Nonmonetary items that are measured in terms of the historical cost denominated in a foreign
currency shall be reported using the

A.  Exchange rate at the date of transaction   C. Average rate

B.  Closing rate D. Spot exchange rate

26. Exchange differences arising from foreign currency transactions shall

A.  Be recognized in profit or loss of the period in which they arise

B.  Be recognized as component of other comprehensive income
C.  Be deferred and amortized over a reasonable period
D.  Not be recognized

27. Exchange differences arising on a monetary item that forms part of a reporting entity’s net 
net 
investment in a foreign operation shall be recognized
I. In profit or loss in the separate financial statements of the reporting entity or the individual
statements of the foreign operation.
II. In other comprehensive income in in the consolidated
consolidated financial statements of the reporting
entity and the foreign operation and recognized
reco gnized in profit or loss on disposal of the net
investment.

A.  I only C. Both I and II

B.  II only D. Neither I nor II

28. The following statements relate to the recognition of exchange differences in respect of foreign
currency transactions reported in an entity’s functional currency. Which statement is true? 
true? 
I. Any exchange difference on the settlement of a monetary item shall be recognized in profit or
loss.
II. Any exchange difference on the translation of a monetary item at a rate different from that
used at initial recognition shall be recognized in other comprehensive income.

A.  I only C. Both I and II 

B.  II only D. Neither I nor II

29. It is a subsidiary, associate, joint venture or a branch of a reporting entity whose activities are
 based or conducted in a country or currency other than that of the reporting entity.

A.  Multinational company C. Foreign entity

B.  Foreign operationD. Affiliated company

30. In translating financial statements of a foreign operation, assets and liabilities are translated at
A.  Closing rateC. Forward rate
B.  Spot rate D. Historical rate

31. In translating the financial statements of foreign operation, income and expenses are translated at
A.  Closing rate C. Exchange rate at the date of transaction  
 

B.  Average rate D. Forward rate

32.Exchange differences arising from the translation of financial statements of a foreign operation
op eration shall
 be accounted for as

A.  Translation gain or loss as component of other comprehensive income

B.  Translation gain or loss as component of profit or loss
C.  Translation gain or loss as component of other comprehensive
co mprehensive income
D.  Transaction gain or loss as component of profit or loss

DERIVATIVES

24-19.
1.  It is a financial instrument that derives its value from another underlying item such as a share
 price, exchange rate or interest rate.

A.  Derivative  C. Financial liability

B.  Financial asset D. Equity instrument

2. Which of the following is not a derivative?

A.  Interest rate swap agreement

B.  Futures contract
C.  Option
D.  Regular way purchase or sale

3. The characteristics of a derivative include (choose the incorrect one)

A.  The value of the derivative changes in response to the change in an “underlying” variable. 
variable.  
B.  A derivative has no notional amount.
C.  The derivative requires either no initial net investment or a little net investment than would
 be required for other types of contracts that have a similar response
response to changes in market
factors.
D.  The derivative is settled at a future date by a net cash payment.

4. An example of a notional amount is

A.  Number of barrels of oil  C. Currency swap

B.  Interest rate D. Share price

5. Which one is underlying?

A.  A credit rating C. An average daily temperature

B.  A security price D. All of the above could be underlying  

6. An agreement between two parties to exchange a specified amount of a commodity, security of

foreign currency at a specified date in the future with the price or exchange rate being set now is
referred to as

A.  Interest swap C. Futures contract

B.  Forward contract  D. Option

7. A contract, traded on an exchange, that allows a company to buy specified quantity of

commodity or a financial security at a specified price on
o n a specified future date is referred to as
A.  Interest rate swap C. Futures contract 
 

B.  Forward contract D. Option

8. A contract giving the owner the right, but not the obligation, to buy or sell an asset at a specified
 price any time during a specified period in the future is referred as

A.  Interest rate swap C. Futures contract

B.  Forward contract D. Option 

9. Which is incorrect concerning an option?

A.  A call option is the right to purchase an asset at a specified price during an indefinite period
at some future time.
B.  A put option is the right to sell an asset at a specified price during a definite period at some
future time.
C.  An option is a right and not an obligation to purchase or sell an asset.
D.  An option requires no payment.

10. Derivatives are measured at

A.  Fair value  C. Fair value less cost to sell

B.  Cost D. Higher between fair value and cost

24-20.
1.  All of the following are characteristics of a derivative except

A.  It is acquired or incurred by the entity for the purpose of generating a profit from
short-term fluctuations in market factors.
B.  Its value changes in response to the change in a specified underlying.
C.  It requires no initial investment or an initial net investment.
D.  It is settled at a future date.

2. The basic purpose of derivative financial instruments is to manage some kind of risk such as all
of the following except

A.  Share price movement C Currency fluctuations

B.  Interest rate variation D. Uncollectibilit y of accounts receivable  
Uncollectibility

3. Uncertainty that the party on the other side of an agreement will abide by the terms of the
agreement is referred to as

A.  Price risk C. Interest rate risk

B.  Credit risk   D. Exchange rate risk

4. Uncertainty about the future market value of an asset is referred to as

A.  Price risk   C. Interest rate risk

B.  Credit risk D. Exchange rate risk

5. Which of the following risk is inherent in an interest rate swap agreement?

I. The risk of exchanging a lower interest rate for a higher interest rate.
rate.
II. The risk of nonperformance by the counterparty to the agreement.

A.  I only C. Both I and II 

B.  II only D. Neither I nor II

6. In exchange for the right inherent in an option contract, the owner of the option will typically pay
a price.
 

 
A.  Only when a call option is exercised.
B.  Only when a put option is exercised.
C.  When either a call option or a put option is exercised.
D.  At the time the option is received regardless of whether the option is exercised or not.

7. Which type of contract is unique in that it protects the owner against unfavorable movement in
the price or rate while allowing the owner to benefit from favorable movement?

A.  Interest rate swap C. Futures contract

B.  Forward contract D. Option 

8. An entity enters into a call option contract with an investment bank on December 31, 20x3. This
contract gives the entity the option to purchase 10,000 shares at P100 per share. The option
expires on April 30, 20x4 the shares are trading at P100 per share on December 31, 20x3, at
which time the entity pays P40,000 for the call option. The P40,000 paid by the entity to the
investment bank is referred to as

A.  Option premium  C. Strike price

B.   Notional amount D. Intrinsic value

9. If the price of the underlying is greater than the strike or exercise price, the call option is

A.  At the money C. On the money

B.  In the money  D. Out of the money

10. Which choice best describes the information that should be disclosed related to derivative
contracts?

A.  Fair value only C. Both fair value and nominal amount 
B.   Notional amount only D. Neither fair value nor nominal amount

114. On March 1, 20x4, Cherry Corporation entered into a firm commitment to purchase
purchase specialized
equipment from the Ruby trading company for Y80,000,000 on June 1. The exchange rate on
March 1, is Y100 = P1. To reduce the exchange rate risk that could increase the cost of the
equipment in pesos, Cherry pays P20,000 for a call option contract. This contract gives Cherry
the option to purchase Y80,000,000 at an exchange rate of Y 100 = P1 on June 1. On June 1, the
exchange rate is Y105=P1. How much did Cherry save by purchasing the call option (answers
rounded to the nearest peso)?

A.  P20,000
B.  P27,619
C.  P47,619
D.  Cherry would have been better off not to have purchased the call option.