BATANGAS EASTERN COLLEGES

COLLEGE DEPARTMENT
SY. 2024 – 2025

NAME: _______________________________________________
YR. & COURSE: ______
SEMESTER: 1st Sem PERIOD: ______ DATE: ________ SCORE
MIDTERM EXAMINATION IN BUSINESS COMBINATION
TEST I MULTIPLE CHOICES
Direction: Read the statement carefully and analyze the terms being described. Encircle the
letter of the correct answer.
1. It is the financial instrument or the contract that derives its value of some other
underlying asset or other instrument.
a. Derivative b. embedded derivative c. financial asset d. all of these
2. Which of the following can be an underlying for a derivative?
a. Interest or exchange rate c. temperature or climate
b. Specified price d. all of these
3. Which of the following can be a notional amount for a derivative?
a. Exchange rate b. Interest rate c. Number of currency in unit d. Share
price
4. Derivatives are obtained ______
a. As hedging instrument to hedge some kind of risk.
b. For speculation.
c. Either A of B
d. Neither A nor B
5. It is an option that gives the holder the right to buy.
a. Call option b. purchased option c. put option d. written option
6. It is option that gives the right to sell.
a. Call option b. purchased option c. put option d. written option
7. It is a contract between two parties who agree to exchange future interest payment on
a given loan amount, one set of interest payments in based on a fixed interest rate and
the other is based on the variable rate.
a. Interest rate futures c. interest rate swap
b. Interest rate option d. foreign currency swap
8. It is the risk of a possible future change in one or more of a specified interest rate,
financial instrument price, commodity price, foreign exchange rate, index of prices or
rates, credit rating or credit index or other variable, provided in the case of non-financial
variable that the variable is not specific to a party to the contract.
a. Credit risk b. Financial risk c. Insurance risk d. Operating risk
9. What type of derivative protect the holder from unfavorable movements in prices while
allowing the holder to benefits from favorable movements in prices?
a. Forward contract. b. future contract c. option d. swap
10. The accounting for fair value hedges records the derivatives at its _______
a. At amortized cost b. carrying amount. c. fair value d. historical cost
11. Ilao Company uses approximately 200,000 units of raw material in its operations. On
December 1, 2023 the entity purchased a call option to buy 200,000 units of raw
material on July 1, 2024 at a strike price of P25 per unit.
The entity paid P20,000 for the call option. The entity designated the call option as a
cash flow hedge against price fluctuation for its July purchase.

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 Market price of the raw material is P28 on December 31, 2023 and 21 on July , 2024.
What amount should be reported as derivative assets on December 31, 2023?
a. 600,000 b. 580,000 c. 20,000 d. NIL
12. What amount should be recognized as loss on call option in 2024?
a. 300,000 b. 500,000 c. 200,000 d. 20,000
13. What amount should be reported as derivative liability on July 1, 2024?
a. 800,000 b. 400,000 c. 780,000 d. NIL
14. What amount should be reported as cost of purchases on July 1, m2024?
a. 5,000,000 b. 4,980,000 c. 4,200,000 d. 4,220,000
15. It is a contract giving the owner the right but not the obligation to buy an asset at a
specified price in the future.
a. Call option b. forward contract c. future contract d. interest rate swap
16. Which terms best describes a component of hybrid instrument?
a. Financial assets at fair value through other comprehensive income
b. An embedded derivative
c. Held for collection investment
d. Financial assets held for trading
17. On January 1, 2023, ROB Company received a 5-year variable interest rate loan of
P6,000,000 with interest payment at the end of each year and the principal to be repaid
on December 31, 2027.
The interest rate for 2023 is 8% and the rate in each succeeding year is equal to market
interest rate on January 1 of each year.
On January 1, 2023, ROB Company entered into a “receive variable pay fixed” interest
rate swap agreement with the financial institution. The swap payment are made at end
of each year. This interest rate swap agreement is designated as a cash flow hedge. On
January 1, 2024, the market rate of interest is 9%. The present value of an ordinary
annuity of 1 at 9% for four period is 3.24.
On January 1, 2025, the market rate of interest is 12%. The present value of an ordinary
interest of 1 at 12% for three period is 2.40.
On December 31, 2023, what amount of interest swap receivable?
a. 300,000 b. 240,000 c. 194,400 d. 120,000
18. On December 31, 2024, what amount should be reported as interest swap receivable?
a. 720,000 b. 777,600 c. 576,000 d. 240,000
19. What amount of should be reported as interest expenses for 2024?
a. 720,000 b. 540,000 c. 480,000 d. 240,000
20. On January 1, 2023, D Company acquired 80% od B Company’s outstanding common
share. On the date, the carrying amounts of B assets and liabilities approximated their
fair values. None controlling interest was measured using proportionate share method.
During 2023, B paid 5,000 cash dividends to its stockholders. Summarized balance sheet
information for the two companies follows:

D Company B Company
Dec. 31, 2023 December 31, 2023 January 1,
2023

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 Investment in B (Equity method). 132,000
Other assets 138,000 115,000 100,000
Total Assets 270,000 115,000 100,000
Common stock 50,000 20,000 20,000
Additional paid in Capital 80,250 44,000 44,000
Retained earnings 139,750 51,000 36,000
Total Equity 270,000 115,000 100,000
What amount should D report as earnings from subsidiary, in its 2023 income
statement?
a. 12,000 b. 15,000 c. 16,000 d. 20,000
21. How much is the acquisition cost of the investment on January 1, 2023?
a. 120,000 b. 132,000 c. 150,000 d. 160,000
22. How much is the goodwill on the business combination?
a. 20,000 b. 22,000 c. 32,000 d. 40,000
23. How much is the non controlling interest in the net assets of B company on December
31, 2023?
a. 20,000 b. 23,000 c. 26,000 d. None of these
24. How much is the consolidated retained earnings?
a. 190,750 b. 139.750 c. 51,000 d. 36,000
25. How much is the total assets in the consolidated statement of financial position as of
December 31, 2023?
a. 293,000 b. 280,000 c. 270,000 d. 253,000
26. What total amount of equity attributable to the owners of the parent should be
reported in D Company’s December 31, 2023 consolidated balance sheet?
a. 270,000 b. 286,000 c. 293,000 d. 385,000
27. If non-controlling interest is measured at proportionate share ______
a. there is goodwill attributed to NCI.
b. there is no goodwill attributed to NCI.
c. there is an indirect holding adjustment.
d. the computation for goodwill would be very complex.
28. Which of the following statement is correct?
a. Consolidated begins when control is obtained and ceases when control is lost.
b. Consolidated begins at the earliest comparative period presented if business
combination occurred during the current period.
c. Consolidation begins when there is no non-controlling interest is left in the
subsidiary.
d. None of these
29. If the parent’s ownership interest in a subsidiary changes but control is not lost, the
change
a. is accounted for as a gain or loss transaction.
b. is accounted for retrospectively.
c. is accounted for as equity transaction.
d. is not accounted for.

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 O Company R. Company Consolidated
Investment in subsidiary 180,000 - -
Other assets 823,200 297,600 1,135,200
Goodwill - - 7,200
TOTAL ASSETS 1,003,200 297,600 1,142,400

Accounts payable 175,200 72,000 247,200

Share capital 564,000 120,000 564,000
Retained earnings 264,000 105,600 283,200
Equity attribute to owners of parent 847,200
Non-controlling interest 48,000
Total equity 828,000 225,600 895,200

TOTAL LIABILITY & EQUITY 1,003,200 297,600 1,142,400

30. When a parent-subsidiary relationship exists, consolidated financial statement are
prepared in recognition of the accounting concept of:
a. Economic entity b. legal entity c. materiality d. Reliability
31. O Company owns 80% interest in R company. The statement of financial position of the
entities on January 1, 2023 are shown below

32. On January 1, 2024, O Company acquired the remaining 20% interest in R Company for
P80,000. How much is the gain or loss on the acquisition to be recognized in the
consolidated financial statements?
a. 12,500 b. 12,500 c. 37,500 d. 0
33. On January 1, 2024, O Company acquired the remaining 20% interest for P100,000. Non-
controlling interest were measured using the proportionate share method. How much is
non-controlling interest in the net assets of the acquiree in the consolidated financial
statements prepared immediately after the acquisition?
a. 12,500 b. 25,000 c. 37,500 d. 0
34. On January 1, 2024, O Company acquired additional 10% interest for P100,000. Non-
controlling interests were measured using the proportionate share method. How much
is non-controlling interest in the net assets of the acquiree in the consolidated financial
statements prepared immediately after acquisition?
a. 24,000 b. 30,000 c. 37,500 d. 0
35. On January 1, 2024, O Company acquired additional 10% interest for P100,000. Non-
controlling interest were measured using the proportionate share method. How much is
consolidated retained earnings immediately after the acquisition?
a. 78,200 b. 107,200 c. 207,200 d. 237,500
36. On January 1, 2024, O Company sold 60% out of its 80% interest in R Company for
P120,000. The sale resulted to loss of control. The remaining interest is classified as held
for trading. How much is the gain or loss on the sale?
a. 39,200 b. 39,200 c. 49,200 d. 49,200
37. On January 2, 2023, P, acquired 75% of K outstanding common stock. On the acquisition
date, the book value of K assets and liabilities equaled their fair values. Non-controlling

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 interest was measured using proportionate share method. Selected balance sheet data
at December 31, 2023, is as follows:
P K
Total assets 420,000 180,000

Liabilities 120,000 60,000

Common stock 100,000 50,000
Retained earnings 200,000 70,000
Total liabilities and 420,000 180,000
equity

During 2023, P and K paid cash dividends of P25,000 and P5,000 respectively, to their
shareholders. There were no other intercompany transactions.
38. In the December 31, 2023 consolidated balance sheet, what amount should be reported
as non-controlling interest in net assets?
a. 0 b. 30,000 c. 45,000 d. 105,000
39. In the December 31, 2023 consolidated balance sheet, what amount should be reported
as common stock?
a. 50,000 b. 100,000 c. 137,500 d. 150,000
40. In the December 31, 2023 consolidated statement of retained earnings, what amount
should be reported as dividends paid?
a. 5,000 b. 25,000 c. 26,250 d. 30,000
41. P Company owns 80% od S company. During 2023, P company sold goods woth a 40%
gross profit to S company. S company sold all of the these goods in 2023. For the 2023
consolidated financial statements, how should the summation of P and S income
statement item be adjusted?
a. Sales and cost of sales should be reduced by the intercompany sales.
b. Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
c. Net income should be reduced by 80% of the gross profit on intercompany sales.
d. No adjustment is necessary.
42. W co. owns 80% of the outstanding common shares of F company. On December 31,
2023, F company sold equipment to W company at a price in excess of F company
carrying amount, but less than its original cost. On a consolidated balance sheet at
December 31, 2023, the carrying amount of the ( cost less accumulated depreciation)
equipment should be reported at:
a. W company original cost.
b. F company original cost.
c. W company original cost less F company recorded gain
d. W company original cost less 80% of F company’s recorded gain.
43. P company purchased term bonds at premium on the open market. These bonds
represented 20% of the outstanding class of bonds issued at a discount by S Co., P’s
wholly owned subsidiary. P intends to hold the bonds until maturity. In a consolidated
balance sheet, the difference between the bond carrying amounts in the two companies
would be:
a. included as a decrease to the consolidated profit or loss and retained earnings.

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 b. included as an increase to the consolidated profit or loss and retained earnings.
c. reported as a deferred debit to be amortized over the remaining life of the bonds.
d. reported as a deferred credit to be amortized over the remaining life of the bonds.
44. In it financial statement, P company uses the fair value method of accounting for the
15% ownership of S company. At December 31, 2023, P company has a receivable from
S company. How should the receivable be reported in P company December 31, 2023
balance sheet?
a. The total receivable should be reported separately.
b. The total receivable should be included as part of the investment in S company
without separate disclosure.
c. Eighty-five percent of the receivable should be reported separately, with the balance
offset against.
d. S Company payable to P company.
e. The total receivable should be offset against S company’s payable to P company,
without separate disclosure.
45. After initial recognition, goodwill arising from a business combination is______
a. amortized over its life , not exceeding 10 years.
b. not amortized but tested for impairment at least annually.
c. amortized over its useful life, not exceeding 40 years.
d. amortized and tested for impairment loss.
46. How is goodwill tested for impairment?
a. Goodwill is allocated to CGUs. The CGUs are the one tested for impairment. Any
impairment is charged first to allocated goodwill, any excess is charged to the other
assets in the CGU.
b. Goodwill is unidentifiable, cannot be seen. Therefore to test goodwill for
impairment, the accountant must use a microscope.
c. Goodwill can be tested for impairment on accountants own decision.
d. Any of these as a matter of accounting policy choice.
47. On January 1, 2023, C Company acquired 80% interest of X Company for identifiable
assets of P74,000 and a fair value of P90,000. The difference is due to the following:
Carrying Amount Fair value Fair value adjustment
Inventory 20,000 24,000 4,000
Equipment 40,000 52,000 12,000
The remaining useful life of the equipment is 6 year and NCI measured proportionate
share.
Information on December 31, 2023 as follows:
Statement of Financial Position
C Company X Company
Other assets 116,000 89,750
Inventory 97,000 10,400
Investment in Subsidiary 75,000
Equipment 140,000 30,000
Total 428,000 130,150
Liabilities 73,000 30,000

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 Share Capital 170,000 40,000
Share Premium 65,000 10,000
Retained earning 120,000 51,150
Total Liability and Capital 428,000 130,000

Income statement C Company X Company

Sales 330,000 150,750
Cost of sales 185,000 96,600
Depreciation 40,000 10,000
Expenses 35,000 18,000
Income for the year ? ?
The following intercompany transaction occurred in 2023:
a. C Company Sold goods costing P12,000 to X Company at a markup of 40% of cost on
selling price. X company sold ¾ of the goods at year end.
b. X company sold good to C Company for P12,000 with a normal markup of 25% above
cost. 1/3 of the goods remain unsold at year end.
What should be the amount of consolidated inventory at year end?
a. 104,600 b. 104,000 c. 106,000 d. 110,000
48. What amount should be the consolidated sales at year end?
a. 448,750 b. 448,000 c. 450,000 d. 447,750
49. What should be the amount of unrealized profit for ending inventory?
a. 2,000 b. 800 c. 2,800 d. 3,000
50. What amounts should be the consolidated cost of sales?
a. 256,400 b. 260,000 c. 257,400 d. 255,400
51. What should be amount of gross profit in the consolidated Income statement?
a. 192,350 b. 194,000 c. 192,650 d. 192, 750
52. What is the changes of subsidiary’s net assets?
a. 19,350 b. 19,650 c. 19,450 d. 19,750
53. What amount of goodwill should be recognized in consolidated Financial Statement?
a. 5,000 b. 7,000 c. 3,000 d. 7,500
54. What amount should be the Non-controlling Interest at year end?
a. 21,870 b. 21, 570 c. 21, 270 d. 21, 170
55. What amount should be the consolidated retained earnings?
a. 120,000 b. 170,150 c. 133,480 d. 135,480

Prepared by:
ROLAND T. TIMBAL-CPA
PRINTED NAME & SIGNATURE OF SUBJECT TEACHERS
Date: _____________________

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Checked by:

SIGNATURE OVER PRINTED NAME

Date: ______________________

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